[Federal Register Volume 74, Number 165 (Thursday, August 27, 2009)]
[Rules and Regulations]
[Pages 43754-44236]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-18663]



[[Page 43753]]

-----------------------------------------------------------------------

Part II





Department of Health and Human Services





-----------------------------------------------------------------------



Centers for Medicare & Medicaid Services



-----------------------------------------------------------------------



42 CFR Parts 412, 413, 415, et al.



Medicare Program; Changes to the Hospital Inpatient Prospective Payment 
Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; and 
Changes to the Long Term Care Hospital Prospective Payment System and 
Rate Years 2010 and 2009 Rates; Final Rule

Federal Register / Vol. 74, No. 165 / Thursday, August 27, 2009 / 
Rules and Regulations

[[Page 43754]]


-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, 415, 485, and 489

[CMS-1406-F and IFC; CMS-1493-F; CMS-1337-F]
RIN 0938-AP33; RIN 0938-AP39; RIN 0938-AP76


Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems for Acute Care Hospitals and Fiscal Year 2010 Rates; 
and Changes to the Long-Term Care Hospital Prospective Payment System 
and Rate Years 2010 and 2009 Rates

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

ACTION: Final rules and interim final rule with comment period.

-----------------------------------------------------------------------

SUMMARY: We are revising the Medicare hospital inpatient prospective 
payment systems (IPPS) for operating and capital-related costs of acute 
care hospitals to implement changes arising from our continuing 
experience with these systems, and to implement certain provisions made 
by the TMA, Abstinence Education, and QI Program Extension Act of 2007, 
the Medicare Improvements for Patients and Providers Act of 2008, and 
the American Recovery and Reinvestment Act of 2009. In addition, in the 
Addendum to this final rule, we describe the changes to the amounts and 
factors used to determine the rates for Medicare acute care hospital 
inpatient services for operating costs and capital-related costs. These 
changes are applicable to discharges occurring on or after October 1, 
2009. We also are setting forth the update to the rate-of-increase 
limits for certain hospitals excluded from the IPPS that are paid on a 
reasonable cost basis subject to these limits. The updated rate-of-
increase limits are effective for cost reporting periods beginning on 
or after October 1, 2009.
    Second, we are updating the payment policy and the annual payment 
rates for the Medicare prospective payment system (PPS) for inpatient 
hospital services provided by long-term care hospitals (LTCHs) for rate 
year (RY) 2010, including responding to public comments received on a 
June 3, 2009 supplemental proposed rule relating to the proposed RY 
2010 Medicare Severity Long-Term Care Diagnosis-Related Groups (MS-LTC-
DRG) relative weights and the proposed RY 2010 high-cost outlier (HCO) 
fixed-loss amount. In the Addendum to this final rule, we also set 
forth the changes to the payment rates, factors, and other payment rate 
policies under the LTCH PPS for RY 2010. These changes are applicable 
to discharges occurring on or after October 1, 2009. In addition, we 
are responding to public comments received on and finalizing a June 3, 
2009 interim final rule with comment period that revised the MS-LTC-DRG 
relative weights for payments under the LTCH PPS for the remainder of 
FY 2009 (that is, from June 3, 2009, through September 30, 2009).
    Third, in this final rule, we are responding to public comments we 
received on, and finalizing, two May 2008 interim final rules with 
comment period that implemented certain provisions of section 114 of 
the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA, Pub. L. 
110-173) relating to payments to LTCHs and LTCH satellite facilities, 
the establishment of LTCHs and LTCH satellite facilities, and increases 
in beds in existing LTCHs and LTCH satellite facilities under the LTCH 
PPS.
    Fourth, through an interim final rule with comment period as part 
of this document, we are implementing those provisions of the ARRA that 
amended certain provisions of section 114 of the MMSEA relating to 
payments to LTCHs and LTCH satellite facilities and increases in beds 
in existing LTCHs and LTCH satellite facilities under the LTCH PPS.

DATES: Effective Dates: These final rules are effective on October 1, 
2009, with the following exceptions:
    The provisions of Sec. Sec.  412.534(c) through (e) and (h) and 
412.536(a)(2) are effective for cost reporting periods beginning on or 
after July 1, 2007, or October 1, 2007, as applicable. In accordance 
with sections 1871(e)(1)(A)(i) and (ii) of the Social Security Act, the 
Secretary has determined that retroactive application of the provisions 
of Sec. Sec.  412.534(c) through (e) and (h) and 412.5536(a)(2) is 
necessary to comply with the statute and that failure to apply the 
changes retroactively would be contrary to public interest.
    Comment Period: To be assured consideration, comments on the 
interim final rule with comment period (CMS-1406-IFC) that appears as 
section XI. of the preamble of this document must be received at one of 
the addresses provided below, no later than 5 p.m. E.S.T. on October 
26, 2009.

ADDRESSES: When commenting on issues presented in the interim final 
rule with comment period, please refer to file code CMS-1406-IFC. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation at http://www.regulations.gov. Follow the instructions for 
``Comment or Submission'' and enter the file code CMS-1406-IFC to 
submit comments on this interim final rule.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address only: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1406-IFC, P.O. Box 8011, Baltimore, MD 21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address only: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1406-IFC, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to either of the following addresses: a. 
Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC 20201.

    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.) b. 7500 
Security Boulevard, Baltimore, MD 21244-1850.

    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

[[Page 43755]]


FOR FURTHER INFORMATION, CONTACT: Tzvi Hefter, (410) 786-4487, and Ing-
Jye Cheng, (410) 786-4548, Operating Prospective Payment, MS-DRGs, Wage 
Index, New Medical Service and Technology Add-On Payments, Hospital 
Geographic Reclassifications, Capital Prospective Payment, Excluded 
Hospitals, Direct and Indirect Graduate Medical Education Payments, 
Disproportionate Share Hospital (DSH), Critical Access Hospital (CAH), 
EMTALA Hospital Emergency Services, and Hospital-within-Hospital 
Issues.
    Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590, 
Long-Term Care Hospital Prospective Payment System and MS-LTC-DRG 
Relative Weights for FYs 2009 and 2010 Issues.
    Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Program Issues.
    James Poyer, (410) 786-2261, Quality Data for Annual Payment Update 
Issues.
    Lisa Grabert, (410) 786-6827, Hospital-Acquired Conditions.

SUPPLEMENTARY INFORMATION: 
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions at that Web site to 
view public comments.
    Comments received timely will also be available for public 
inspection, generally beginning approximately 3 weeks after publication 
of a document, at the headquarters of the Centers for Medicare & 
Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, 
Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule 
an appointment to view public comments, phone 1-800-743-3951.

Electronic Access

    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. Free public access is available on a Wide 
Area Information Server (WAIS) through the Internet and via 
asynchronous dial-in. Internet users can access the database by using 
the World Wide Web, (the Superintendent of Documents' home Web page 
address is http://www.gpoaccess.gov/), by using local WAIS client 
software, or by telnet to swais.access.gpo.gov, then login as guest (no 
password required). Dial-in users should use communications software 
and modem to call (202) 512-1661; type swais, then login as guest (no 
password required).

Acronyms

3M 3M Health Information System
AAHKS American Association of Hip and Knee Surgeons
AAMC Association of American Medical Colleges
ACGME Accreditation Council for Graduate Medical Education
AHA American Hospital Association
AHIC American Health Information Community
AHIMA American Health Information Management Association
AHRQ Agency for Healthcare Research and Quality
ALOS Average length of stay
ALTHA Acute Long Term Hospital Association
AMA American Medical Association
AMGA American Medical Group Association
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ARRA American Recovery and Reinvestment Act of 2009, Public Law 111-
5
ASC Ambulatory surgical center
ASCA Administrative Simplification Compliance Act of 2002, Public 
Law 107-105
ASITN American Society of Interventional and Therapeutic 
Neuroradiology
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999, Public 
Law 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Public Law 106-554
BLS Bureau of Labor Statistics
CAH Critical access hospital
CARE [Medicare] Continuity Assessment Record & Evaluation 
[Instrument]
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CCR Cost-to-charge ratio
CDAC [Medicare] Clinical Data Abstraction Center
CDAD Clostridium difficile-associated disease
CIPI Capital input price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 
99-272
COLA Cost-of-living adjustment
CoP [Hospital] condition of participation
CPI Consumer price index
CY Calendar year
DPP Disproportionate patient percentage
DRA Deficit Reduction Act of 2005, Public Law 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EMR Electronic medical record
EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law 
99-272
FAH Federation of Hospitals
FDA Food and Drug Administration
FFY Federal fiscal year
FHA Federal Health Architecture
FIPS Federal information processing standards
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HACs Hospital-acquired conditions
HCAHPS Hospital Consumer Assessment of Healthcare Providers and 
Systems
HCFA Health Care Financing Administration
HCO High-cost outlier
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HPMP Hospital Payment Monitoring Program
HSA Health savings account
HSCRC [Maryland] Health Services Cost Review Commission
HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
HwH Hospital-within-a-hospital
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-CM International Classification of Diseases, Tenth Revision, 
Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Revision, 
Procedure Coding System
ICR Information collection requirement
IHS Indian Health Service
IME Indirect medical education
I-O Input-Output
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS [Acute care hospital] inpatient prospective payment system
IRF Inpatient rehabilitation facility
LAMCs Large area metropolitan counties
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MA Medicare Advantage
MAC Medicare Administrative Contractor

[[Page 43756]]

MCC Major complication or comorbidity
MCE Medicare Code Editor
MCO Managed care organization
MCV Major cardiovascular condition
MDC Major diagnostic category
MDH Medicare-dependent, small rural hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare Provider Analysis and Review File
MEI Medicare Economic Index
MGCRB Medicare Geographic Classification Review Board
MIEA-TRHCA Medicare Improvements and Extension Act, Division B of 
the Tax Relief and Health Care Act of 2006, Public Law 109-432
MIPPA Medicare Improvements for Patients and Providers Act of 2008, 
Public Law 110-275
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Public Law 108-173
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110-173
MPN Medicare provider number
MRHFP Medicare Rural Hospital Flexibility Program
MRSA Methicillin-resistant Staphylococcus aureus
MSA Metropolitan Statistical Area
MS-DRG Medicare severity diagnosis-related group
MS-LTC-DRG Medicare severity long-term care diagnosis-related group
NAICS North American Industrial Classification System
NALTH National Association of Long Term Hospitals
NCD National coverage determination
NCHS National Center for Health Statistics
NCQA National Committee for Quality Assurance
NCVHS National Committee on Vital and Health Statistics
NECMA New England County Metropolitan Areas
NQF National Quality Forum
NTIS National Technical Information Service
NTTAA National Technology Transfer and Advancement Act of 1991 (Pub. 
L. 104-113)
NVHRI National Voluntary Hospital Reporting Initiative
OACT [CMS'] Office of the Actuary
OBRA 86 Omnibus Budget Reconciliation Act of 1996, Public Law 99-509
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting [System]
PIP Periodic interim payment
PLI Professional liability insurance
PMSAs Primary metropolitan statistical areas
POA Present on admission
PPI Producer price index
PPS Prospective payment system
PRM Provider Reimbursement Manual
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PSF Provider-Specific File
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RCE Reasonable compensation equivalent
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious nonmedical health care institution
RPL Rehabilitation psychiatric long-term care (hospital)
RRC Rural referral center
RTI Research Triangle Institute, International
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248
TEP Technical expert panel
TMA TMA [Transitional Medical Assistance], Abstinence Education, and 
QI [Qualifying Individuals] Programs Extension Act of 2007, Public 
Law 110-90
TJA Total joint arthroplasty
UHDDS Uniform hospital discharge data set

Table of Contents

I. Background
    A. Summary
    1. Acute Care Hospital Inpatient Prospective Payment System 
(IPPS)
    2. Hospitals and Hospital Units Excluded From the IPPS
    3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    4. Critical Access Hospitals (CAHs)
    5. Payments for Graduate Medical Education (GME)
    B. Provisions of the Medicare Improvements for Patients and 
Providers Act of 2008 (MIPPA)
    C. Provisions of the American Recovery and Reinvestment Act of 
2009 (ARRA)
    D. Issuance of a Notice of Proposed Rulemaking
    1. Proposed Changes to MS-DRG Classifications and Recalibrations 
of Relative Weights
    2. Proposed Changes to the Hospital Wage Index for Acute Care 
Hospitals
    3. Proposed Rebasing and Revision of the Hospital Market Baskets 
for Acute Care Hospitals
    4. Other Decisions and Proposed Changes to the IPPS for 
Operating Costs and GME Costs
    5. FY 2010 Policy Governing the IPPS for Capital-Related Costs
    6. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    7. Proposed Changes to the LTCH PPS
    8. Determining Proposed Prospective Payment Operating and 
Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals
    9. Determining Proposed Prospective Payments Rates for LTCHs
    10. Impact Analysis
    11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    12. Discussion of Medicare Payment Advisory Commission 
Recommendations
    E. Finalization of an Interim Final Rule With Comment Period 
That Revised the MS-LTC-DRG Relative Weights for FY 2009 (for June 
3, 2009 Through September 30, 2009)
    F. Finalization of Two LTCH PPS Interim Final Rules With Comment 
Period Issued in May 2008
    G. Interim Final Rule With Comment Period That Implements 
Certain Provisions of the ARRA Relating to Payments to LTCHs and 
LTCH Satellite Facilities
II. Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) 
Classifications and Relative Weights
    A. Background
    B. MS-DRG Reclassifications
    1. General
    2. Yearly Review for Making MS-DRG Changes
    C. Adoption of the MS-DRGs in FY 2008
    D. FY 2010 MS-DRG Documentation and Coding Adjustment, Including 
the Applicability to the Hospital-Specific Rates and the Puerto 
Rico-Specific Standardized Amount
    1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    2. Prospective Adjustment to the Average Standardized Amounts 
Required by Section 7(b)(1)(A) of Public Law 110-90
    3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 
Required by Public Law 110-90
    4. Retrospective Evaluation of FY 2008 Claims Data
    5. Adjustments for FY 2010 and Subsequent Years Authorized by 
Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) 
of the Act
    6. Additional Adjustment for FY 2010 Authorized by Section 
7(b)(1)(B) of Public Law 110-90
    7. Background on the Application of the Documentation and Coding 
Adjustment to the Hospital-Specific Rates
    8. Documentation and Coding Adjustment to the Hospital-Specific 
Rates for FY 2010 and Subsequent Years
    9. Background on the Application of the Documentation and Coding 
Adjustment to the Puerto Rico-Specific Standardized Amount
    10. Documentation and Coding Adjustment to the Puerto Rico-
Specific Standardized Amount
    E. Refinement of the MS-DRG Relative Weight Calculation
    1. Background
    a. Summary of the RTI Study of Charge Compression and CCR 
Refinement
    b. Summary of the Rand Corporation Study of Alternative Relative 
Weight Methodologies

[[Page 43757]]

    2. Summary of FY 2009 Changes and Discussion for FY 2010
    3. Timeline for Revising the Medicare Cost Report
    F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections
    1. Statutory Authority
    2. HAC Selection Process
    3. Collaborative Process
    4. Selected HAC Categories
    5. Public Input Regarding Selected and Potential Candidate HACs
    6. POA Indicator Reporting
    7. Additional Considerations Addressing the HAC and POA Payment 
Provision
    G. Changes to Specific MS-DRG Classifications
    1. MDC 5 (Diseases and Disorders of the Circulatory System): 
Intraoperative Fluorescence Vascular Angiography (IFVA)
    2. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue): Infected Hip and Knee Replacements
    3. Medicare Code Editor (MCE) Changes
    a. Diagnoses Allowed for Males Only Edit
    b. Manifestation Codes as Principal Diagnosis Edit
    c. Invalid Diagnosis or Procedure Code
    d. Unacceptable Principal Diagnosis
    e. Creation of New Edit Titled ``Wrong Procedure Performed''
    f. Procedures Allowed for Females Only Edit
    4. Surgical Hierarchies
    5. Complication or Comorbidity (CC) Exclusions List
    a. Background
    b. CC Exclusions List for FY 2010
    6. Review of Procedure Codes in MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-
DRGs 987 Through 989 to MDCs
    b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    c. Adding Diagnosis or Procedure Codes to MDCs
    7. Changes to the ICD-9-CM Coding System
    8. Other Issues Not Addressed in the Proposed Rule
    a. Administration of Tissue Plasminogen Activator (tPA) (rtPA)
    b. Coronary Artery Bypass Graft (CABG) With Intraoperative 
Angiography
    c. Insertion of Gastrointestinal Stent
    H. Recalibration of MS-DRG Weights
    I. Add-On Payments for New Services and Technologies
    1. Background
    2. Public Input Before Publication of a Notice of Proposed 
Rulemaking on Add-On Payments
    3. FY 2010 Status of Technologies Approved for FY 2009 Add-On 
Payments
    4. FY 2010 Applications for New Technology Add-On Payments
    a. The AutoLITT <SUP>TM</SUP> System
    b. CLOLAR[supreg] (clofarabine) Injection
    c. LipiScan<SUP>TM</SUP> Coronary Imaging System
    d. Spiration[supreg] IBV[supreg] Valve System
    e. TherOx Downstream[supreg] System
    5. Technical Correction
III. Changes to the Hospital Wage Index for Acute Care Hospitals
    A. Background
    B. Requirements of Section 106 of the MIEA-TRHCA
    1. Wage Index Study Required Under the MIEA-TRHCA
    a. Legislative Requirement
    b. Interim and Final Reports on Results of Acumen's Study
    2. FY 2009 Policy Changes in Response to Requirements Under 
Section 106(b) of the MIEA-TRHCA
    a. Reclassification Average Hourly Wage Comparison Criteria
    b. Within-State Budget Neutrality Adjustment for the Rural and 
Imputed Floors
    C. Core-Based Statistical Areas for the Hospital Wage Index
    D. Occupational Mix Adjustment to the FY 2010 Wage Index
    1. Development of Data for the FY 2010 Occupational Mix 
Adjustment Based on the 2007-2008 Occupational Mix Survey
    2. Calculation of the Occupational Mix Adjustment for FY 2010
    E. Worksheet S-3 Wage Data for the FY 2010 Wage Index
    1. Included Categories of Costs
    2. Excluded Categories of Costs
    3. Use of Wage Index Data by Providers Other Than Acute Care 
Hospitals Under the IPPS
    F. Verification of Worksheet S-3 Wage Data
    G. Method for Computing the FY 2010 Unadjusted Wage Index
    H. Analysis and Implementation of the Occupational Mix 
Adjustment and the FY 2010 Occupational Mix Adjusted Wage Index
    I. Revisions to the Wage Index Based on Hospital Redesignations
    1. General
    2. Effects of Reclassification/Redesignation
    3. FY 2010 MGCRB Reclassifications
    4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of 
the Act
    5. Reclassifications Under Section 1886(d)(8)(B) of the Act
    6. Reclassifications Under Section 508 of Public Law 108-173
    J. FY 2010 Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees
    K. Process for Requests for Wage Index Data Corrections
IV. Rebasing and Revision of the Hospital Market Baskets for Acute 
Care Hospitals
    A. Background
    B. Rebasing and Revising the IPPS 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. Employment Benefits
    c. Fuel, Oil, and Gasoline
    d. Electricity
    e. Water and Sewage
    f. Professional Liability Insurance
    g. Pharmaceuticals
    h. Food: Direct Purchase
    i. Food: Contract Services
    j. Chemicals
    k. Blood and Blood Products
    l. Medical Instruments
    m. Photographic Supplies
    n. Rubber and Plastics
    o. Paper and Printing Products
    p. Apparel
    q. Machinery and Equipment
    r. Miscellaneous Products
    s. Professional Fees: Labor-Related
    t. Administrative and Business Support Services
    u. All Other: Labor-Related Services
    v. Professional Fees: Nonlabor-Related
    w. Financial Services
    x. Telephone Services
    y. Postage
    z. All Other: Nonlabor-Related Services
    4. Labor-Related Share
    C. Separate Market Basket for Certain Hospitals Presently 
Excluded From the IPPS
    D. Rebasing and Revising the Capital Input Price Index (CIPI)
V. Other Decisions and Changes to the IPPS for Operating Costs and 
GME Costs
    A. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update
    1. Background
    a. Overview
    b. Hospital Quality Data Reporting Under Section 501(b) of 
Public Law 108-173
    c. Hospital Quality Data Reporting Under Section 5001(a) of 
Public Law 109-171
    2. Retirement of RHQDAPU Program Measures
    3. Quality Measures for the FY 2011 Payment Determination and 
Subsequent Years
    a. Considerations in Expanding and Updating Quality Measures 
Under the RHQDAPU Program
    b. RHQDAPU Program Quality Measures for the FY 2011 Payment 
Determination
    4. Possible New Quality Measures for the FY 2012 Payment 
Determination and Subsequent Years
    5. Form, Manner, and Timing of Quality Data Submission
    a. RHQDAPU Program Procedures for the FY 2011 Payment 
Determination
    b. RHQDAPU Program Disaster Extensions and Waivers
    c. HACHPS Requirements for the FY 2011 Payment Determination
    6. Chart Validation Requirements
    a. Chart Validation Requirements and Methods for the FY 2011 
Payment Determination
    b. Chart Validation Requirements and Methods for the FY 2012 
Payment Determination and Subsequent Years
    c. Possible Supplements to the Chart Validation Process for the 
FY 2013 Payment Determination and Subsequent Years
    7. Data Accuracy and Completeness Acknowledgement Requirements 
for the FY 2011 Payment Determination and Subsequent Years
    8. Public Display Requirements for the FY 2011 Payment 
Determination and Subsequent Years

[[Page 43758]]

    9. Reconsideration and Appeal Procedures for the FY 2010 Payment 
Determination
    10. RHQDAPU Program Withdrawal Deadlines
    11. Electronic Health Records
    a. Background
    b. EHR Testing of Quality Measures Submission
    c. HITECH Act EHR Provisions
    B. Medicare-Dependent, Small Rural Hospitals (MDHs): Budget 
Neutrality Adjustment Factors for FY 2002-Based Hospital-Specific 
Rate
    1. Background
    2. FY 2002-Based Hospital-Specific Rate
    C. Rural Referral Centers (RRCs)
    1. Case-Mix Index
    2. Discharges
    D. Indirect Medical Education (IME) Adjustment
    1. Background
    2. IME Adjustment Factor for FY 2010
    3. IME-Related Changes in Other Sections of this Final Rule
    E. Payment Adjustment for Medicare Disproportionate Share 
Hospitals (DSHs)
    1. Background
    2. Policy Change Relating to the Inclusion of Labor and Delivery 
Patient Days in the Medicare DSH Calculation
    a. Background
    b. Proposed and Final Policy Change
    3. Policy Change Relating to Calculation of Inpatient Days in 
the Medicaid Fraction in the Medicare DSH Calculation
    a. Background
    b. Proposed and Final Policy Change
    4. Policy Change Relating to the Exclusion of Observation Beds 
and Patient Days from the Medicare DSH Calculation
    a. Background
    b. Proposed and Final Policy Change
    5. Public Comments Received Out of the Scope of the Proposed 
Rule
    F. Technical Correction to Regulations on Payments for 
Anesthesia Services Furnished by Hospital or CAH Employed 
Nonphysician Anesthetists or Obtained Under Arrangements
    G. Payments for Direct Graduate Medical Education (GME) Costs
    1. Background
    2. Clarification of Definition of New Medical Residency Training 
Program
    3. Participation of New Teaching Hospitals in Medicare GME 
Affiliated Groups
    4. Technical Corrections to Regulations
    H. Hospital Emergency Services Under EMTALA
    1. Background
    2. Changes Relating to Applicability of Sanctions Under EMTALA
    I. Rural Community Hospital Demonstration Program
    J. Technical Correction to Regulations Relating to Calculation 
of the Federal Rate Under the IPPS
VI. Changes to the IPPS for Capital-Related Costs
    A. Overview
    B. Exception Payments
    C. New Hospitals
    D. Hospitals Located in Puerto Rico
    E. Proposed and Final Changes
    1. FY 2010 MS-DRG Documentation and Coding Adjustment
    a. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009
    b. Prospective MS-DRG Documentation and Coding Adjustment to the 
National Capital Federal Rate for FY 2010 and Subsequent Years
    c. Documentation and Coding Adjustment to the Puerto Rico-
Specific Capital Rate
    2. Revision to the FY 2009 IME Adjustment Factor
    3. Other Changes for FY 2010
VII. Changes for Hospitals Excluded From the IPPS
    A. Excluded Hospitals
    B. Criteria for Satellite Facilities of Hospitals
    C. Critical Access Hospitals (CAHs)
    1. Background
    2. Payment for Clinical Diagnostic Laboratory Tests Furnished by 
CAHs
    3. CAH Optional Method of Payment for Outpatient Services
    4. Continued Participation by CAHs in Counties Redesignated as 
Urban
    D. Provider-Based Status of Facilities and Organizations: Policy 
Changes
    1. Background
    2. Changes to the Scope of the Provider-Based Status Regulations 
for CAHs
    a. CAH-Based Clinical Diagnostic Laboratory Facilities
    b. CAH-Based Ambulance Services
    3. Technical Correction to Regulations
    E. Report of Adjustment (Exceptions) Payments
VIII. Changes to the Long-Term Care Hospital Prospective Payment 
System (LTCH PPS) for RY 2010
    A. Background of the LTCH PPS
    1. Legislative and Regulatory Authority
    2. Criteria for Classification as a LTCH
    a. Classification as a LTCH
    b. Hospitals Excluded From the LTCH PPS
    3. Limitation on Charges to Beneficiaries
    4. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
    B. Medicare Severity Long-Term Care Diagnosis-Related Group (MS-
LTC-DRG) Classifications and Relative Weights
    1. Background
    2. Patient Classifications Into MS-LTC-DRGs
    a. Background
    b. Changes to the MS-LTC-DRGs for RY 2010
    3. Development of the RY 2010 MS-LTC-DRG Relative Weights
    a. General Overview of the Development of the MS-LTC-DRG 
Relative Weights
    b. Data
    c. Hospital-Specific Relative Value (HSRV) Methodology
    d. Treatment of Severity Levels in Developing the MS-LTC-DRG 
Relative Weights
    e. Low-Volume MS-LTC-DRGs
    f. Steps for Determining the RY 2010 MS-LTC-DRG Relative Weights
    C. Changes to the LTCH Payment Rates and Other Changes to the RY 
2010 LTCH PPS
    1. Overview of Development of the LTCH Payment Rates
    2. Market Basket for LTCHs Reimbursed Under the LTCH PPS
    a. Overview
    b. Market Basket Under the LTCH PPS for RY 2010
    c. Market Basket Update for LTCHs for RY 2010
    d. Labor-Related Share Under the LTCH PPS for RY 2010
    3. Adjustment for Changes in LTCHs' Case-Mix Due to Changes in 
Documentation and Coding Practices That Occurred in a Prior Period
    a. Background
    b. Evaluation of FY 2007 Claims Data
    c. Evaluation of FY 2008 Claims Data
    d. RY 2010 Documentation and Coding Adjustment
    D. Technical Corrections of LTCH PPS Regulations
IX. Revisions to the FY 2009 Medicare Severity Long-Term Care 
Diagnosis-Related Group (MS-LTC-DRG) Relative Weights: Finalization 
of an Interim Final Rule With Comment Period
    A. Overview
    B. Changes to the FY 2009 MS-LTC-DRG Relative Weights
    C. Summary of Public Comments Received on the June 3, 2009 
Interim Final Rule With Comment Period and Our Responses
    D. Finalization of the June 3, 2009 Interim Final Rule With 
Comment Period
    E. Regulatory Impact Analysis for the June 3, 2009 Interim Final 
Rule With Comment Period
X. Finalization of Two Interim Final Rules With Comment Period That 
Implemented Certain Provisions of Section 114 of the Medicare, 
Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173) Relating 
to Payments to LTCHs and LTCH Satellite Facilities
    A. Background
    B. May 6, 2008 Interim Final Rule With Comment Period Provisions 
Implementing Section 114(c)(3) of the MMSEA Regarding Certain Short-
Stay Outlier Cases
    1. Background
    2. Public Comments Received on the May 6, 2008 Interim Final 
Rule With Comment Period Provisions Implementing Section 114(c)(3) 
of the MMSEA
    C. May 6, 2008 Interim Final Rule With Comment Period Provisions 
Implementing Sections 114(e)(1) and (e)(2) of the MMSEA Regarding 
the Standard Federal Rate for the 2008 LTCH PPS Rate Year
    1. Background
    2. Public Comments Received on the May 6, 2008 Interim Final 
Rule With Comment Period Provisions Implementing Sections 114(e)(1) 
and (e)(2) of the MMSEA
    D. May 22, 2008 Interim Final Rule With Comment Period Provision 
Implementing Sections 114(c)(1) and (c)(2) of the MMSEA Regarding 
Payment Adjustment to LTCHs and LTCH Satellite Facilities
    1. Background

[[Page 43759]]

    2. Payment Adjustment to LTCHs and LTCH Satellite Facilities 
Specified by Section 114(c) of the MMSEA
    3. Public Comments Received on the May 22, 2008 Interim Final 
Rule With Comment Period Implementing Section 114(c)(1) and (c)(2) 
of the MMSEA Regarding Payment Adjustment to LTCHs and LTCH 
Satellite Facilities
    E. May 22, 2008 Interim Final Rule With Comment Period 
Provisions Implementing Section 114(b) of the MMSEA Regarding 
Moratorium on the Establishment of LTCHs, LTCH Satellite Facilities 
and on the Increase in Number of Beds in Existing LTCHs or LTCH 
Satellite Facilities
    1. Background
    2. Provisions of the May 22, 2008 Interim Final Rule With 
Comment Period Implementing Section 114(d) of the MMSEA That 
Established Moratoria on New LTCHs and LTCH Satellite Facilities and 
on Bed Increases in Existing LTCHs and LTCH Satellite Facilities
    3. Public Comments Received on the on the May 22, 2008 Interim 
Final Rule With Comment Period Provisions Implementing the Exception 
to the Moratorium on the Increase in Number of LTCHs Beds in 
Existing LTCHs and LTCH Satellite Facilities
XI. Interim Final Rule with Comment Period Implementing Section 4302 
of the American Recovery and Reinvestment Act of 2009 (Pub. L. 111-
5) Relating to Payments to LTCHs and LTCH Satellite Facilities
    A. Background
    B. Amendments Relating to Payment Adjustment to LTCHs and LTCH 
Satellite Facilities Made by Section 4302 of the ARRA
    C. Amendments to the Moratorium on the Increase in Number of 
Beds in Existing LTCHs or LTCH Satellite Facilities Made by Section 
4302 of the ARRA
    D. Response to Comments
    E. Waiver of Proposed Rulemaking
    F. Collection of Information Requirements
    G. Regulatory Impact Analysis
XII. MedPAC Recommendations
XIII. Other Required Information
    A. Requests for Data From the Public
    B. Collection of Information Requirements
    C. Additional Information Collection Requirements
    1. Present on Admission (POA) Indicator Reporting
    2. Add-On Payments for New Services and Technologies
    3. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update
    4. Occupational Mix Adjustment to the FY 2010 Index (Hospital 
Wage Index Occupational Mix Survey)
    5. Hospital Applications for Geographic Reclassifications by the 
MGCRB

Regulation Text

Addendum--Schedule of Standardized Amounts, Update Factors, and Rate-
of-Increase Percentages Effective With Cost Reporting Periods Beginning 
on or after October 1, 2009

I. Summary and Background
II. Changes to the Prospective Payment Rates for Hospital Inpatient 
Operating Costs for Acute Care Hospitals for FY 2010
    A. Calculation of the Adjusted Standardized Amount
    B. Adjustments for Area Wage Levels and Cost-of-Living
    C. MS-DRG Relative Weights
    D. Calculation of the Prospective Payment Rates
III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2010
    A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update
    B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2010
    C. Capital Input Price Index
IV. Changes to Payment Rates for Certain Excluded Hospitals: Rate-
of-Increase Percentages
V. Changes to the Payment Rates for the LTCH PPS for RY 2010
    A. LTCH PPS Standard Federal Rate for RY 2010
    B. Adjustment for Area Wage Levels Under the LTCH PPS for RY 
2010
    C. Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases
    D. Computing the Adjusted LTCH PPS Federal Prospective Payments 
for RY 2010
VI. Tables
    Table 1A.--National Adjusted Operating Standardized Amounts, 
Labor/Nonlabor (68.8 Percent Labor Share/31.2 Percent Nonlabor Share 
If Wage Index Is Greater Than 1)
    Table 1B.--National Adjusted Operating Standardized Amounts, 
Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If 
Wage Index Is Less Than or Equal to 1)
    Table 1C.--Adjusted Operating Standardized Amounts for Puerto 
Rico, Labor/Nonlabor
    Table 1D.--Capital Standard Federal Payment Rate
    Table 1E.--LTCH Standard Federal Prospective Payment Rate
    Table 2.--Acute Care Hospitals Case-Mix Indexes for Discharges 
Occurring in Federal Fiscal Year 2008; Hospital Wage Indexes for 
Federal Fiscal Year 2010; Hospital Average Hourly Wages for Federal 
Fiscal Years 2008 (2004 Wage Data), 2009 (2005 Wage Data), and 2010 
(2006 Wage Data); and 3-Year Average of Hospital Average Hourly 
Wages
    Table 3A.--FY 2010 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Urban Areas by CBSA
    Table 3B.--FY 2010 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Rural Areas by CBSA
    Table 4A.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Acute Care Hospitals in Urban Areas by CBSA and by State--
FY 2010
    Table 4B.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Acute Care Hospitals in Rural Areas by CBSA and by State--
FY 2010
    Table 4C.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Acute Care Hospitals That Are Reclassified by CBSA and by 
State--FY 2010
    Table 4D-1.--Rural Floor Budget Neutrality Factors for Acute 
Care Hospitals--FY 2010
    Table 4D-2.--Urban Areas With Acute Care Hospitals Receiving the 
Statewide Rural Floor or Imputed Floor Wage Index--FY 2010
    Table 4E.--Urban CBSAs and Constituent Counties for Acute Care 
Hospitals--FY 2010
    Table 4F.--Puerto Rico Wage Index and Capital Geographic 
Adjustment Factor (GAF) for Acute Care Hospitals by CBSA--FY 2010
    Table 4J.--Out-Migration Adjustment for Acute Care Hospitals--FY 
2010
    Table 5.--List of Medicare Severity Diagnosis-Related Groups 
(MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic 
Mean Length of Stay--FY 2010
    Table 6A.--New Diagnosis Codes
    Table 6B.--New Procedure Codes
    Table 6C.--Invalid Diagnosis Codes
    Table 6D.--Invalid Procedure Codes
    Table 6E.--Revised Diagnosis Code Titles
    Table 6F.--Revised Procedure Code Titles
    Table 6G.--Additions to the CC Exclusions List (Available 
Through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 6H.--Deletions from the CC Exclusions List (Available 
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 6I.--Complete List of Complication and Comorbidity (CC) 
Exclusions (Available only through the Internet on the CMS Web site 
at: http:/www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 6J.--Major Complication and Comorbidity (MCC) List 
(Available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 6K.--Complication and Comorbidity (CC) List (Available 
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 7A.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2008 MedPAR Update--March 2009 
GROUPER V26.0 MS-DRGs
    Table 7B.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2008 MedPAR Update--March 2009 
GROUPER V27.0 MS-DRGs
    Table 8A.--Statewide Average Operating Cost-to-Charge Ratios 
(CCRs) for Acute Care Hospitals--July 2009
    Table 8B.--Statewide Average Capital Cost-to-Charge Ratios 
(CCRs) for Acute Care Hospitals--July 2009

[[Page 43760]]

    Table 8C.--Statewide Average Total Cost-to-Charge Ratios (CCRs) 
for LTCHs--July 2009
    Table 9A.--Hospital Reclassifications and Redesignations--FY 
2010
    Table 9C.--Hospitals Redesignated as Rural Under Section 
1886(d)(8)(E) of the Act--FY 2010
    Table 10.--Geometric Mean Plus the Lesser of .75 of the National 
Adjusted Operating Standardized Payment Amount (Increased to Reflect 
the Difference Between Costs and Charges) or .75 of One Standard 
Deviation of Mean Charges by Medicare Severity Diagnosis-Related 
Groups (MS-DRGs)--July 2009
    Table 11.--MS-LTC-DRGs, Relative Weights, Geometric Average 
Length of Stay, and Short-Stay Outlier Threshold for Discharges 
Occurring From October 1, 2009 Through September 30, 2010 under the 
LTCH PPS
    Table 12A.--LTCH PPS Wage Index for Urban Areas for Discharges 
Occurring From October 1, 2009 Through September 30, 2010
    Table 12B.--LTCH PPS Wage Index for Rural Ares for Discharges 
Occurring From October 1, 2009 Through September 30, 2010

Appendix A--Regulatory Impact Analysis

I. Overall Impact
II. Objectives of the IPPS
III. Limitations of Our Analysis
IV. Hospitals Included in and Excluded From the IPPS
V. Effects on Hospitals Excluded From the IPPS
VI. Quantitative Effects of the Policy Changes Under the IPPS for 
Operating Costs
    A. Basis and Methodology of Estimates
    B. Analysis of Table I
    C. Effects of the Changes to the MS-DRG Reclassifications and 
Relative Cost-Based Weights (Column 1)
    D. Effects of the Application of Recalibration Budget Neutrality 
(Column 2)
    E. Effects of Wage Index Changes (Column 3)
    F. Application of the Wage Budget Neutrality Factor (Column 4)
    G. Combined Effects of MS-DRG and Wage Index Changes (Column 5)
    H. Effects of MGCRB Reclassifications (Column 6)
    I. Effects of the Rural Floor and Imputed Floor, Including the 
Transition to Apply Budget Neutrality at the State Level (Column 7)
    J. Effects of the Wage Index Adjustment for Out-Migration 
(Column 8)
    K. Effects of All Changes (Column 9)
    L. Effects of Policy on Payment Adjustments for Low-Volume 
Hospitals
    M. Impact Analysis of Table II
VII. Effects of Other Policy Changes
    A. Effects of Policy on HACs, Including Infections
    B. Effects of Policy Changes Relating to New Medical Service and 
Technology Add-On Payments
    C. Effects of Requirements for Hospital Reporting of Quality 
Data for Annual Hospital Payment Update
    D. Effects of Correcting the FY 2002-Based Hospital-Specific 
Rates for MDHs
    E. Effects of Policy Changes Relating to the Payment Adjustment 
to Disproportionate Share Hospitals
    F. Effects of Policy Revisions Related to Payments to Hospitals 
for Direct GME
    G. Effects of Policy Changes Relating to Hospital Emergency 
Services under EMTALA
    H. Effects of Implementation of Rural Community Hospital 
Demonstration Program
    I. Effects of Policy Changes Relating to Payments to Satellite 
Facilities
    J. Effects of Policy Changes Relating to Payments to CAHs
    K. Effects of Policy Changes Relating to Provider-Based Status 
of Facilities and Organizations
VIII. Effects of Changes in the Capital IPPS
    A. General Considerations
    B. Results
IX. Effects of Payment Rate Changes and Policy Changes Under the 
LTCH PPS
    A. Introduction and General Considerations
    B. Impact on Rural Hospitals
    C. Anticipated Effects of LTCH PPS Payment Rate Change and 
Policy Changes
    D. Effect on the Medicare Program
    E. Effect on Medicare Beneficiaries
X. Alternatives Considered
XI. Overall Conclusion
    A. Acute Care Hospitals
    B. LTCHs
XII. Accounting Statements
    A. Acute Care Hospitals
    B. LTCHs
XIII. Executive Order 12866

Appendix B--Recommendation of Update Factors for Operating Cost Rates 
of Payment for Inpatient Hospital Services

I. Background
II. Inpatient Hospital Update for FY 2010
III. Secretary's Final Recommendation
IV. MedPAC Recommendation for Assessing Payment Adequacy and 
Updating Payments in Traditional Medicare

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
    Section 1886(d) of the Social Security Act (the Act) sets forth a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively set rates. Section 1886(g) of the Act requires the 
Secretary to pay for the capital-related costs of hospital inpatient 
stays under a prospective payment system (PPS). Under these PPSs, 
Medicare payment for hospital inpatient operating and capital-related 
costs is made at predetermined, specific rates for each hospital 
discharge. Discharges are classified according to a list of diagnosis-
related groups (DRGs).
    The base payment rate is comprised of a standardized amount that is 
divided into a labor-related share and a nonlabor-related share. The 
labor-related share is adjusted by the wage index applicable to the 
area where the hospital is located. If the hospital is located in 
Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-
living adjustment factor. This base payment rate is multiplied by the 
DRG relative weight.
    If the hospital treats a high percentage of low-income patients, it 
receives a percentage add-on payment applied to the DRG-adjusted base 
payment rate. This add-on payment, known as the disproportionate share 
hospital (DSH) adjustment, provides for a percentage increase in 
Medicare payments to hospitals that qualify under either of two 
statutory formulas designed to identify hospitals that serve a 
disproportionate share of low-income patients. For qualifying 
hospitals, the amount of this adjustment may vary based on the outcome 
of the statutory calculations.
    If the hospital is an approved teaching hospital, it receives a 
percentage add-on payment for each case paid under the IPPS, known as 
the indirect medical education (IME) adjustment. This percentage 
varies, depending on the ratio of residents to beds.
    Additional payments may be made for cases that involve new 
technologies or medical services that have been approved for special 
add-on payments. To qualify, a new technology or medical service must 
demonstrate that it is a substantial clinical improvement over 
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG 
payment.
    The costs incurred by the hospital for a case are evaluated to 
determine whether the hospital is eligible for an additional payment as 
an outlier case. This additional payment is designed to protect the 
hospital from large financial losses due to unusually expensive cases. 
Any eligible outlier payment is added to the DRG-adjusted base payment 
rate, plus any DSH, IME, and new technology or medical service add-on 
adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid in whole or in part based on their hospital-specific rate based on 
their costs in a base year. For example, sole community hospitals 
(SCHs) receive the higher of a hospital-specific rate based on their 
costs in a base year (the highest of FY 1982, FY 1987, FY 1996, or FY 
2006) or the IPPS Federal rate based on the

[[Page 43761]]

standardized amount. Through and including FY 2006, a Medicare-
dependent, small rural hospital (MDH) received the higher of the 
Federal rate or the Federal rate plus 50 percent of the amount by which 
the Federal rate is exceeded by the higher of its FY 1982 or FY 1987 
hospital-specific rate. As discussed below, for discharges occurring on 
or after October 1, 2007, but before October 1, 2011, an MDH will 
receive the higher of the Federal rate or the Federal rate plus 75 
percent of the amount by which the Federal rate is exceeded by the 
highest of its FY 1982, FY 1987, or FY 2002 hospital-specific rate. 
SCHs are the sole source of care in their areas, and MDHs are a major 
source of care for Medicare beneficiaries in their areas. Specifically, 
section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that 
is located more than 35 road miles from another hospital or that, by 
reason of factors such as isolated location, weather conditions, travel 
conditions, or absence of other like hospitals (as determined by the 
Secretary), is the sole source of hospital inpatient services 
reasonably available to Medicare beneficiaries. In addition, certain 
rural hospitals previously designated by the Secretary as essential 
access community hospitals are considered SCHs. Section 
1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is 
located in a rural area, has not more than 100 beds, is not an SCH, and 
has a high percentage of Medicare discharges (not less than 60 percent 
of its inpatient days or discharges in its cost reporting year 
beginning in FY 1987 or in two of its three most recently settled 
Medicare cost reporting years). Both of these categories of hospitals 
are afforded this special payment protection in order to maintain 
access to services for beneficiaries.
    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient hospital services ``in accordance 
with a prospective payment system established by the Secretary.'' The 
basic methodology for determining capital prospective payments is set 
forth in our regulations at 42 CFR 412.308 and 412.312. Under the 
capital IPPS, payments are adjusted by the same DRG for the case as 
they are under the operating IPPS. Capital IPPS payments are also 
adjusted for IME and DSH, similar to the adjustments made under the 
operating IPPS. In addition, hospitals may receive outlier payments for 
those cases that have unusually high costs.
    The existing regulations governing payments to hospitals under the 
IPPS are located in 42 CFR part 412, subparts A through M.
2. Hospitals and Hospital Units Excluded From the IPPS
    Under section 1886(d)(1)(B) of the Act, as amended, certain 
hospitals and hospital units are excluded from the IPPS. These 
hospitals and units are: Rehabilitation hospitals and units; long-term 
care hospitals (LTCHs); psychiatric hospitals and units; children's 
hospitals; and cancer hospitals. Religious nonmedical health care 
institutions (RNHCIs) are also excluded from the IPPS. Various sections 
of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-33), the Medicare, 
Medicaid and SCHIP [State Children's Health Insurance Program] Balanced 
Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113), and the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act 
of 2000 (BIPA, Pub. L. 106-554) provide for the implementation of PPSs 
for rehabilitation hospitals and units (referred to as inpatient 
rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and 
units (referred to as inpatient psychiatric facilities (IPFs)). (We 
note that the annual updates to the LTCH PPS are now included as part 
of the IPPS annual update document (for RY 2010, in this final rule). 
Updates to the IRF PPS and IPF PPS are issued as separate documents.) 
Children's hospitals, cancer hospitals, and RNHCIs continue to be paid 
solely under a reasonable cost-based system subject to a rate-of-
increase ceiling on inpatient operating costs per discharge.
    The existing regulations governing payments to excluded hospitals 
and hospital units are located in 42 CFR parts 412 and 413.
3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    The Medicare prospective payment system (PPS) for LTCHs applies to 
hospitals described in section 1886(d)(1)(B)(iv) effective for cost 
reporting periods beginning on or after October 1, 2002. The LTCH PPS 
was established under the authority of sections 123(a) and (c) of 
Public Law 106-113 and section 307(b)(1) of Public Law 106-554. During 
the 5-year (optional) transition period, a LTCH's payment under the PPS 
was based on an increasing proportion of the LTCH Federal rate with a 
corresponding decreasing proportion based on reasonable cost 
principles. Effective for cost reporting periods beginning on or after 
October 1, 2006, all LTCHs are paid 100 percent of the Federal rate. 
The existing regulations governing payment under the LTCH PPS are 
located in 42 CFR part 412, subpart O. Beginning with RY 2010, we are 
issuing the annual updates to the LTCH PPS in the same documents that 
update the IPPS (73 FR 26797 through 26798).
4. Critical Access Hospitals (CAHs)
    Under sections 1814(l), 1820, and 1834(g) of the Act, payments are 
made to critical access hospitals (CAHs) (that is, rural hospitals or 
facilities that meet certain statutory requirements) for inpatient and 
outpatient services are generally based on 101 percent of reasonable 
cost. Reasonable cost is determined under the provisions of section 
1861(v)(1)(A) of the Act and existing regulations under 42 CFR parts 
413 and 415.
5. Payments for Graduate Medical Education (GME)
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of inpatient hospital 
services. Hospitals with approved graduate medical education (GME) 
programs are paid for the direct costs of GME in accordance with 
section 1886(h) of the Act. The amount of payment for direct GME costs 
for a cost reporting period is based on the hospital's number of 
residents in that period and the hospital's costs per resident in a 
base year. The existing regulations governing payments to the various 
types of hospitals are located in 42 CFR part 413.

B. Provisions of the Medicare Improvements for Patients and Providers 
Act of 2008 (MIPPA)

    Section 148 of the MIPPA (Pub. L. 110-275) changes the payment 
rules regarding outpatient clinical diagnostic laboratory tests 
furnished by a CAH. The statutory change applies to services furnished 
on or after July 1, 2009. In section VII.C.2. of the preamble of the 
proposed rule, we discussed our proposal to codify policies in the 
Medicare regulations to implement this provision. In section VII.C.2. 
of this final rule, we finalize our policies in the Medicare 
regulations to implement this provision.

C. Provisions of the American Recovery and Reinvestment Act of 2009 
(ARRA)

    Section 4301(b) of the American Recovery and Reinvestment Act of 
2009 (AARA), Pub. Law 111-5, enacted on February 17, 2009, requires 
that the phase-out of the capital IPPS teaching adjustment at Sec.  
412.322(c) (that is, the 50-percent reduction for FY 2009) shall be 
applied, as if such paragraph had not been in effect. That is, 
discharges occurring on or after October 1, 2008,

[[Page 43762]]

through September 30, 2009, receive the full capital IPPS teaching 
adjustment as determined under Sec.  412.322(b) of the regulations. We 
note that, in this final rule, in response to public comments on our 
proposed implementation of section 4301(b) of the ARRA, we are deleting 
Sec.  412.322(d) of the existing regulations which currently eliminates 
the teaching adjustment beginning in FY 2010. We discuss the 
implementation of these provisions in sections VI.A. and E.2. of the 
preamble of this final rule.
    Section 4302 of the ARRA included several amendments to provisions 
of section 114 of the MMSEA relating to: (1) The 3-year delay in the 
application of certain provisions of the payment adjustments for short-
stay outliers and revision to the RY 2008 standard Federal rate for 
LTCHs; and (2) the 3-year moratorium on the establishment of new LTCHs 
and LTCH satellite facilities and on increases in beds in existing 
LTCHs and LTCH satellite facilities. We discuss the final 
implementation of these provisions in sections I.E., VIII., and XI. of 
the preamble of this final rule.

D. Issuance of a Notice of Proposed Rulemaking

    On May 22, 2009, we published in the Federal Register (74 FR 24080) 
a proposed rule that set forth proposed changes to the Medicare IPPS 
for operating costs and for capital-related costs of acute care 
hospitals in FY 2010. We also set forth proposed changes relating to 
payments for IME costs and payments to certain hospitals and units that 
continue to be excluded from the IPPS and paid on a reasonable cost 
basis. In addition, we set forth proposed changes to the payment rates, 
factors, and other payment rate policies under the LTCH PPS for RY 
2010. On June 3, 2009, we published in the Federal Register (74 FR 
26600) a supplemental proposed rule (hereafter referred to as the ``RY 
2010 LTCH PPS supplemental proposed rule'') that presented both 
proposed RY 2010 MS-LTC-DRG relative weights and a proposed RY 2010 
high-cost outlier (HCO) fixed-loss amount based on the revised FY 2009 
MS-LTC-DRG relative weights presented in an interim final rule with 
comment period published also on June 3, 2009 in the Federal Register 
(74 FR 26546).
    Below is a summary of the major changes that we proposed to make:
1. Proposed Changes to MS-DRG Classifications and Recalibrations of 
Relative Weights
    In section II. of the preamble of this final rule, we included--
    <bullet> Proposed changes to MS-DRG classifications based on our 
yearly review.
    <bullet> Proposed application of the documentation and coding 
adjustment to hospital-specific rates for FY 2010 resulting from 
implementation of the MS-DRG system.
    <bullet> A discussion of the Research Triangle International, Inc. 
(RTI) and RAND Corporation reports and recommendations relating to 
charge compression, including a solicitation of public comments on the 
``over'' standardization of hospital charges.
    <bullet> Proposed recalibrations of the MS-DRG relative weights.
    We also presented a listing and discussion of hospital-acquired 
conditions (HACs), including infections, that are subject to the 
statutorily required quality adjustment in MS-DRG payments for FY 2010.
    We presented our evaluation and analysis of the FY 2010 applicants 
for add-on payments for high-cost new medical services and technologies 
(including public input, as directed by Pub. L. 108-173, obtained in a 
town hall meeting).
2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals
    In section III. of the preamble to the proposed rule, we proposed 
revisions to the wage index for acute care hospitals and the annual 
update of the wage data. Specific issues addressed include the 
following:
    <bullet> Second year of the 3-year transition from national to 
within-State budget neutrality for the rural floor and imputed floor.
    <bullet> Final year of the 2-year transition for changes in the 
average hourly wage criterion for geographic reclassifications.
    <bullet> Changes to the CBSA designations.
    <bullet> The proposed FY 2010 wage index update using wage data 
from cost reporting periods that began during FY 2007.
    <bullet> Analysis and implementation of the proposed FY 2010 
occupational mix adjustment to the wage index for acute care hospitals, 
including the use of data from the 2007-2008 occupational mix survey.
    <bullet> Proposed revisions to the wage index for acute care 
hospitals based on hospital redesignations and reclassifications.
    <bullet> The proposed adjustment to the wage index for acute care 
hospitals for FY 2010 based on commuting patterns of hospital employees 
who reside in a county and work in a different area with a higher wage 
index.
    <bullet> The timetable for reviewing and verifying the wage data 
used to compute the proposed FY 2010 wage index for acute care 
hospitals.
3. Proposed Rebasing and Revision of the Hospital Market Baskets for 
Acute Care Hospitals
    In section IV. of the preamble of the proposed rule, we proposed to 
rebase and revise the acute care hospital operating and capital market 
baskets to be used in developing the FY 2010 update factor for the 
operating and capital prospective payment rates and the FY 2010 update 
factor for the excluded hospital rate-of-increase limits. We also set 
forth the data sources used to determine the proposed revised market 
basket relative weights.
4. Other Decisions and Proposed Changes to the IPPS for Operating Costs 
and GME Costs
    In section V. of the preamble of the proposed rule, we discussed a 
number of the provisions of the regulations in 42 CFR parts 412, 413, 
and 489, including the following:
    <bullet> The reporting of hospital quality data as a condition for 
receiving the full annual payment update increase.
    <bullet> Discussion of applying the correct budget neutrality 
adjustment for the FY 2002-based hospital-specific rates for MDHs.
    <bullet> The proposed updated national and regional case-mix values 
and discharges for purposes of determining RRC status.
    <bullet> The statutorily-required IME adjustment factor for FY 
2010.
    <bullet> Proposed changes to the policies governing payments to 
Medicare disproportionate share hospitals, including proposed policies 
relating to the inclusion of labor and delivery patient days in the 
calculation of the DSH payment adjustment, calculation of inpatient 
days in the Medicaid fraction for the Medicare DSH calculation, and 
exclusion of observation beds and patient days from the Medicare DSH 
calculation and from the bed count for the IME adjustment.
    <bullet> Proposed changes to the policies governing payment for 
direct GME.
    <bullet> Proposed changes to policies on hospital emergency 
services under EMTALA relating to the applicability of sanctions under 
EMTALA.
    <bullet> Discussion of the implementation of the Rural Community 
Hospital Demonstration Program in FY 2010.
    <bullet> Proposed technical correction to the regulations governing 
the calculation of the Federal rate under the IPPS.

[[Page 43763]]

5. FY 2010 Policy Governing the IPPS for Capital-Related Costs
    In section VI. of the preamble to the proposed rule, we discussed 
the payment policy requirements for capital-related costs and capital 
payments to hospitals for FY 2010. We also proposed to remove a section 
of the regulations relating to the phase-out of the capital IME 
adjustment for FY 2009 to implement the provisions of section 4301(b) 
of the ARRA.
6. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    In section VII. of the preamble of the proposed rule, we 
discussed--
    <bullet> Proposed changes to payments to excluded hospitals.
    <bullet> Proposed changes to the regulations governing satellite 
facilities of hospitals.
    <bullet> Proposed changes relating to payments to CAHs, including 
payment for clinical laboratory tests furnished by CAHs and payment for 
outpatient facility services when a CAH elects the optional payment 
method.
    <bullet> Proposed changes to the rules governing provider-based 
status of facilities and a proposed technical correction to the 
regulations governing provider-based entities.
7. Proposed Changes to the LTCH PPS
    In section VIII.A. through C. and F. of the preamble of the 
proposed rule, we set forth proposed changes to the payment rates, 
factors, and other payment rate policies under the LTCH PPS for RY 
2010, including the annual update of the MS-LTC-DRG classifications and 
relative weights for use under the LTCH PPS for RY 2010, the proposed 
use of the FY 2002-based RPL market basket for LTCHs, and proposed 
technical corrections to the LTCH PPS regulations.
    In section VIII.D. of the preamble of the proposed rule, we 
discussed our ongoing monitoring protocols under the LTCH PPS. In 
section VIII.E. of the preamble of the proposed rule, we discussed the 
Research Triangle Institute, International (RTI) Phase III Report on 
its evaluation of the feasibility of establishing facility and patient 
criteria for LTCHs, as recommended by MedPAC in its June 2004 Report to 
Congress.
    We note that, because we did not propose any policy changes 
relating to our present activities in monitoring and updates on the RTI 
contract, we are not republishing these section discussions in this 
final rule. We did receive several public comments on specific aspects 
of the summary of RTI's most recent work. These commenters urged CMS 
not to finalize any proposals based on RTI's Phase III report until the 
public has had the opportunity to review the report and comment on its 
findings. We regret that RTI's Phase III report was not posted on the 
CMS Web site, as we had indicated in our proposed rule. The report will 
be available in the near future at http://www.cms.hhs.gov/LongTermCareHopitalPPS/02a_RTIReports.asp#TopOfPage. Although we did 
not propose any policies based on that report, we can assure the 
readers that any policies that we believe are appropriate for 
implementation would be subject to the notice-and-comment rulemaking 
process.
8. Determining Proposed Prospective Payment Operating and Capital Rates 
and Rate-of-Increase Limits for Acute Care Hospitals
    In the Addendum to the proposed rule, we set forth proposed changes 
to the amounts and factors for determining the proposed FY 2010 
prospective payment rates for operating costs and capital-related costs 
for acute care hospitals. We also established the proposed threshold 
amounts for outlier cases. In addition, we addressed the proposed 
update factors for determining the rate-of-increase limits for cost 
reporting periods beginning in FY 2010 for hospitals excluded from the 
IPPS.
9. Determining Proposed Prospective Payment Rates for LTCHs
    In the Addendum to the proposed rule, we set forth proposed changes 
to the amounts and factors for determining the proposed RY 2010 
prospective standard Federal rate. We also established the proposed 
adjustments for wage levels, the labor-related share, the cost-of-
living adjustment, and high-cost outliers, including the fixed-loss 
amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH PPS.
10. Impact Analysis
    In Appendix A of the proposed rule, we set forth an analysis of the 
impact that the proposed changes would have on affected acute care 
hospitals and LTCHs.
11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    In Appendix B of the proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provided our recommendations of 
the appropriate percentage changes for FY 2010 for the following:
    <bullet> A single average standardized amount for all areas for 
hospital inpatient services paid under the IPPS for operating costs of 
acute care hospitals (and hospital-specific rates applicable to SCHs 
and MDHs).
    <bullet> Target rate-of-increase limits to the allowable operating 
costs of hospital inpatient services furnished by certain hospitals 
excluded from the IPPS.
    <bullet> The standard Federal rate for hospital inpatient services 
furnished by LTCHs.
12. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, MedPAC is required to submit a 
report to Congress, no later than March 1 of each year, in which MedPAC 
reviews and makes recommendations on Medicare payment policies. 
MedPAC's March 2008 recommendations concerning hospital inpatient 
payment policies address the update factor for hospital inpatient 
operating costs and capital-related costs under the IPPS, for hospitals 
and distinct part hospital units excluded from the IPPS, and for LTCHs. 
We addressed these recommendations in Appendix B of the proposed rule. 
For further information relating specifically to the MedPAC March 2008 
report or to obtain a copy of the report, contact MedPAC at (202) 220-
3700 or visit MedPAC's Web site at: http://www.medpac.gov.
    We received approximately 525 timely pieces of correspondence from 
the public in response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule and the supplemental proposed rule. We summarize these public 
comments and present our responses under the specific subject areas of 
this final rule.

E. Finalization of Interim Final Rule With Comment Period That Revised 
the FY 2009 MS-LTC-DRG Relative Weights

    On June 3, 2009, we issued in the Federal Register an interim final 
rule with comment period that revised the MS-LTC-DRG relative weights 
for payments under the LTCH PPS. We revised the MS-LTC-DRG relative 
weights for FY 2009 due to the misapplication of our established 
methodology in the calculation of the budget neutrality factor. The 
revised relative weights are effective for the remainder of FY 2009 
(that is, from June 3, 2009 through September 30, 2009). We received 11 
timely pieces of correspondence from the public in response to this 
interim final rule with comment period. In section IX. of the preamble 
of this final rule, we summarize these public comments, present our 
responses, and finalize the

[[Page 43764]]

provisions of the interim final rule with comment period.

F. Finalization of Two LTCH PPS Interim Final Rules With Comment Period 
Issued in May 2008

    On May 6, 2008 and May 22, 2008, we issued in the Federal Register 
two interim final rules with comment period relating to the LTCH PPS 
(73 FR 24871 and 73 FR 29699, respectively), which implement section 
114 of Public Law 110-173 (MMSEA). The May 6, 2008 interim final rule 
with comment period implemented provisions of section 114 of Public Law 
110-173 relating to a 3-year delay in the application of certain 
provisions of the payment adjustment for short-stay outliers and 
revisions to the RY 2008 standard Federal rate for LTCHs. The May 22, 
2008 interim final rule with comment period implemented certain 
provisions of section 114 of Public Law 110-173 relating to a 3-year 
moratorium on the establishment of new LTCHs and LTCH satellite 
facilities and on increases in beds in existing LTCHs and LTCH 
satellite facilities. The May 22, 2008 interim final rule with comment 
period also implemented a 3-year delay in the application of certain 
payment policies that apply to payment adjustments for discharges from 
LTCHs and LTCH satellite facilities that were admitted from certain 
referring hospitals in excess of various percentage thresholds.
    We received six timely pieces of correspondence from the public in 
response to the May 6, 2008 interim final rule with comment period. We 
received 30 timely pieces of correspondence from the public in response 
to the May 22, 2008 interim final rule with comment period. In section 
X. of the preamble of this final rule, we summarize these public 
comments, present our responses, and finalize the provisions of both 
interim final rules with comment period, as appropriate.

G. Interim Final Rule With Comment Period That Implements Certain 
Provisions of the ARRA Relating to Payments to LTCHs and LTCH Satellite 
Facilities

    Section 4302 of the American Recovery and Reinvestment Act of 2009 
(ARRA, Pub. L. 111-5) included several amendments to section 114 of 
Public Law 110-173 (MMSEA) relating to payments to LTCHs and LTCH 
satellite facilities that are discussed under section X. of the 
preamble of this final rule. These amendments are effective as if they 
were enacted as part of section 114 of Public Law 110-173 (MMSEA). We 
issued instructions to the fiscal intermediaries and Medicare 
administrative contractors (MACs) to interpret these amendments (Change 
Request 6444). In section XI. of this document, we implement the 
provisions of section 4302 of Public Law 111-5 through an interim final 
rule with comment period. Comments on this interim final rule with 
comment period may be submitted as specified in the DATES and Comment 
Period sections of this document.

II. Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) 
Classifications and Relative Weights

A. Background

    Section 1886(d) of the Act specifies that the Secretary shall 
establish a classification system (referred to as DRGs) for inpatient 
discharges and adjust payments under the IPPS based on appropriate 
weighting factors assigned to each DRG. Therefore, under the IPPS, we 
pay for inpatient hospital services on a rate per discharge basis that 
varies according to the DRG to which a beneficiary's stay is assigned. 
The formula used to calculate payment for a specific case multiplies an 
individual hospital's payment rate per case by the weight of the DRG to 
which the case is assigned. Each DRG weight represents the average 
resources required to care for cases in that particular DRG, relative 
to the average resources used to treat cases in all DRGs.
    Congress recognized that it would be necessary to recalculate the 
DRG relative weights periodically to account for changes in resource 
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires 
that the Secretary adjust the DRG classifications and relative weights 
at least annually. These adjustments are made to reflect changes in 
treatment patterns, technology, and any other factors that may change 
the relative use of hospital resources.

B. MS-DRG Reclassifications

1. General
    As discussed in the preamble to the FY 2008 IPPS final rule with 
comment period (72 FR 47138), we focused our efforts in FY 2008 on 
making significant reforms to the IPPS consistent with the 
recommendations made by MedPAC in its ``Report to the Congress, 
Physician-Owned Specialty Hospitals'' in March 2005. MedPAC recommended 
that the Secretary refine the entire DRG system by taking severity of 
illness into account and applying hospital-specific relative value 
(HSRV) weights to DRGs.\1\ We began this reform process by adopting 
cost-based weights over a 3-year transition period beginning in FY 2007 
and making interim changes to the DRG system for FY 2007 by creating 20 
new CMS DRGs and modifying 32 other DRGs across 13 different clinical 
areas involving nearly 1.7 million cases. As described in more detail 
below, these refinements were intermediate steps towards comprehensive 
reform of both the relative weights and the DRG system as we undertook 
further study. For FY 2008, we adopted 745 new Medicare Severity DRGs 
(MS-DRGs) to replace the CMS DRGs. We refer readers to section II.D. of 
the FY 2008 IPPS final rule with comment period for a full detailed 
discussion of how the MS-DRG system, based on severity levels of 
illness, was established (72 FR 47141).
---------------------------------------------------------------------------

    \1\ Medicare Payment Advisory Commission: Report to the 
Congress, Physician-Owned Specialty Hospitals, March 2005, page 
viii.
---------------------------------------------------------------------------

    Currently, cases are classified into MS-DRGs for payment under the 
IPPS based on the following information reported by the hospital: the 
principal diagnosis, up to eight additional diagnoses, and up to six 
procedures performed during the stay. In a small number of MS-DRGs, 
classification is also based on the age, sex, and discharge status of 
the patient. The diagnosis and procedure information is reported by the 
hospital using codes from the International Classification of Diseases, 
Ninth Revision, Clinical Modification (ICD-9-CM).
    The process of developing the MS-DRGs was begun by dividing all 
possible principal diagnoses into mutually exclusive principal 
diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The 
MDCs were formulated by physician panels to ensure that the DRGs would 
be clinically coherent. The diagnoses in each MDC correspond to a 
single organ system or etiology and, in general, are associated with a 
particular medical specialty. Thus, in order to maintain the 
requirement of clinical coherence, no final MS-DRG could contain 
patients in different MDCs. For example, MDC 6 is Diseases and 
Disorders of the Digestive System. This approach is used because 
clinical care is generally organized in accordance with the organ 
system affected. However, some MDCs are not constructed on this basis 
because they involve multiple organ systems (for example, MDC 22 
(Burns)). For FY 2009, cases are assigned to one of 746 MS-DRGs in 25 
MDCs. The table below lists the 25 MDCs.

[[Page 43765]]



                   Major Diagnostic Categories (MDCs)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
 1.....................................  Diseases and Disorders of the
                                          Nervous System.
 2.....................................  Diseases and Disorders of the
                                          Eye.
 3.....................................  Diseases and Disorders of the
                                          Ear, Nose, Mouth, and Throat.
 4.....................................  Diseases and Disorders of the
                                          Respiratory System.
 5.....................................  Diseases and Disorders of the
                                          Circulatory System.
 6.....................................  Diseases and Disorders of the
                                          Digestive System.
 7.....................................  Diseases and Disorders of the
                                          Hepatobiliary System and
                                          Pancreas.
 8.....................................  Diseases and Disorders of the
                                          Musculoskeletal System and
                                          Connective Tissue.
 9.....................................  Diseases and Disorders of the
                                          Skin, Subcutaneous Tissue and
                                          Breast.
10.....................................  Endocrine, Nutritional and
                                          Metabolic Diseases and
                                          Disorders.
11.....................................  Diseases and Disorders of the
                                          Kidney and Urinary Tract.
12.....................................  Diseases and Disorders of the
                                          Male Reproductive System.
13.....................................  Diseases and Disorders of the
                                          Female Reproductive System.
14.....................................  Pregnancy, Childbirth, and the
                                          Puerperium.
15.....................................  Newborns and Other Neonates
                                          with Conditions Originating in
                                          the Perinatal Period.
16.....................................  Diseases and Disorders of the
                                          Blood and Blood Forming Organs
                                          and Immunological Disorders.
17.....................................  Myeloproliferative Diseases and
                                          Disorders and Poorly
                                          Differentiated Neoplasms.
18.....................................  Infectious and Parasitic
                                          Diseases (Systemic or
                                          Unspecified Sites).
19.....................................  Mental Diseases and Disorders.
20.....................................  Alcohol/Drug Use and Alcohol/
                                          Drug Induced Organic Mental
                                          Disorders.
21.....................................  Injuries, Poisonings, and Toxic
                                          Effects of Drugs.
22.....................................  Burns.
23.....................................  Factors Influencing Health
                                          Status and Other Contacts with
                                          Health Services.
24.....................................  Multiple Significant Trauma.
25.....................................  Human Immunodeficiency Virus
                                          Infections.
------------------------------------------------------------------------

    In general, cases are assigned to an MDC based on the patient's 
principal diagnosis before assignment to an MS-DRG. However, under the 
most recent version of the Medicare GROUPER (Version 26.0), there are 
13 MS-DRGs to which cases are directly assigned on the basis of ICD-9-
CM procedure codes. These MS-DRGs are for heart transplant or implant 
of heart assist systems; liver and/or intestinal transplants; bone 
marrow transplants; lung transplants; simultaneous pancreas/kidney 
transplants; pancreas transplants; and tracheostomies. Cases are 
assigned to these MS-DRGs before they are classified to an MDC. The 
table below lists the 13 current pre-MDCs.

               Pre-Major Diagnostic Categories (Pre-MDCs)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
MS-DRG 001............................  Heart Transplant or Implant of
                                         Heart Assist System with MCC.
MS-DRG 002............................  Heart Transplant or Implant of
                                         Heart Assist System without
                                         MCC.
MS-DRG 003............................  ECMO or Tracheostomy with
                                         Mechanical Ventilation 96+
                                         Hours or Principal Diagnosis
                                         Except for Face, Mouth, and
                                         Neck Diagnosis with Major O.R.
MS-DRG 004............................  Tracheostomy with Mechanical
                                         Ventilation 96+ Hours or
                                         Principal Diagnosis Except for
                                         Face, Mouth, and Neck Diagnosis
                                         with Major O.R.
MS-DRG 005............................  Liver Transplant with MCC or
                                         Intestinal Transplant.
MS-DRG 006............................  Liver Transplant without MCC.
MS-DRG 007............................  Lung Transplant.
MS-DRG 008............................  Simultaneous Pancreas/Kidney
                                         Transplant.
MS-DRG 009............................  Bone Marrow Transplant.
MS-DRG 010............................  Pancreas Transplant.
MS-DRG 011............................  Tracheostomy for Face, Mouth,
                                         and Neck Diagnoses with MCC.
MS-DRG 012............................  Tracheostomy for Face, Mouth,
                                         and Neck Diagnoses with CC.
MS-DRG 013............................  Tracheostomy for Face, Mouth,
                                         and Neck Diagnoses without CC/
                                         MCC.
------------------------------------------------------------------------

    Once the MDCs were defined, each MDC was evaluated to identify 
those additional patient characteristics that would have a consistent 
effect on hospital resource consumption. Because the presence of a 
surgical procedure that required the use of the operating room would 
have a significant effect on the type of hospital resources used by a 
patient, most MDCs were initially divided into surgical DRGs and 
medical DRGs. Surgical DRGs are based on a hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. Medical DRGs generally are differentiated on the 
basis of diagnosis and age (0 to 17 years of age or greater than 17 
years of age). Some surgical and medical DRGs are further 
differentiated based on the presence or absence of a complication or 
comorbidity (CC) or a major complication or comorbidity (MCC).
    Generally, nonsurgical procedures and minor surgical procedures 
that are not usually performed in an operating room are not treated as 
O.R. procedures. However, there are a few non-O.R. procedures that do 
affect MS-DRG assignment for certain principal diagnoses. An example is 
extracorporeal shock wave lithotripsy for patients with a principal 
diagnosis of urinary stones. Lithotripsy procedures are not routinely 
performed in an operating room. Therefore, lithotripsy codes are not 
classified as O.R. procedures. However, our clinical advisors believe 
that patients with urinary stones who undergo extracorporeal shock wave 
lithotripsy should be considered similar to other patients who undergo 
O.R. procedures. Therefore, we treat this group of patients similar to 
patients undergoing O.R. procedures.
    Once the medical and surgical classes for an MDC were formed, each 
diagnosis class was evaluated to determine if complications or 
comorbidities would consistently affect hospital resource consumption. 
Each diagnosis was categorized into one of three severity levels. These 
three levels include a major complication or comorbidity (MCC), a 
complication or comorbidity (CC), or a non-CC. Physician panels 
classified each diagnosis code based on a highly iterative process 
involving a combination of statistical results from test data as well 
as clinical judgment. As stated earlier, we refer readers to section 
II.D. of the FY 2008 IPPS final rule with comment period for a full 
detailed discussion of how the MS-DRG system was established based on 
severity levels of illness (72 FR 47141).
    A patient's diagnosis, procedure, discharge status, and demographic 
information is entered into the Medicare claims processing systems and 
subjected to a series of automated screens called

[[Page 43766]]

the Medicare Code Editor (MCE). The MCE screens are designed to 
identify cases that require further review before classification into 
an MS-DRG.
    After patient information is screened through the MCE and any 
further development of the claim is conducted, the cases are classified 
into the appropriate MS-DRG by the Medicare GROUPER software program. 
The GROUPER program was developed as a means of classifying each case 
into an MS-DRG on the basis of the diagnosis and procedure codes and, 
for a limited number of MS-DRGs, demographic information (that is, sex, 
age, and discharge status).
    After cases are screened through the MCE and assigned to an MS-DRG 
by the GROUPER, the PRICER software calculates a base MS-DRG payment. 
The PRICER calculates the payment for each case covered by the IPPS 
based on the MS-DRG relative weight and additional factors associated 
with each hospital, such as IME and DSH payment adjustments. These 
additional factors increase the payment amount to hospitals above the 
base MS-DRG payment.
    The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible MS-DRG 
classification changes and to recalibrate the MS-DRG weights. However, 
in the FY 2000 IPPS final rule (64 FR 41500), we discussed a process 
for considering non-MedPAR data in the recalibration process. In order 
for us to consider using particular non-MedPAR data, we must have 
sufficient time to evaluate and test the data. The time necessary to do 
so depends upon the nature and quality of the non-MedPAR data 
submitted. Generally, however, a significant sample of the non-MedPAR 
data should be submitted by mid-October for consideration in 
conjunction with the next year's proposed rule. This date allows us 
time to test the data and make a preliminary assessment as to the 
feasibility of using the data. Subsequently, a complete database should 
be submitted by early December for consideration in conjunction with 
the next year's proposed rule.
    As we indicated above, for FY 2008, we made significant 
improvements in the DRG system to recognize severity of illness and 
resource usage by adopting MS-DRGs that were reflected in the FY 2008 
GROUPER, Version 25.0, and were effective for discharges occurring on 
or after October 1, 2007. Our MS-DRG analysis for the FY 2009 final 
rule was based on data from the March 2008 update of the FY 2007 MedPAR 
file, which contained hospital bills received through March 31, 2008, 
for discharges occurring through September 30, 2007. For this final 
rule, for FY 2010, our MS-DRG analysis is based on data from the March 
2009 update of the FY 2008 MedPAR file, which contains hospital bills 
received through September 30, 2008, for discharges occurring through 
September 30, 2008.
2. Yearly Review for Making MS-DRG Changes
    Many of the changes to the MS-DRG classifications we make annually 
are the result of specific issues brought to our attention by 
interested parties. We encourage individuals with comments about MS-DRG 
classifications to submit these comments no later than early December 
of each year so they can be carefully considered for possible inclusion 
in the annual proposed rule and, if included, may be subjected to 
public review and comment. Therefore, similar to the timetable for 
interested parties to submit non-MedPAR data for consideration in the 
MS-DRG recalibration process, comments about MS-DRG classification 
issues should be submitted no later than early December in order to be 
considered and possibly included in the next annual proposed rule 
updating the IPPS.
    The actual process of forming the MS-DRGs was, and will likely 
continue to be, highly iterative, involving a combination of 
statistical results from test data combined with clinical judgment. In 
the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described 
in detail the process we used to develop the MS-DRGs that we adopted 
for FY 2008. In addition, in deciding whether to make further 
modification to the MS-DRGs for particular circumstances brought to our 
attention, we considered whether the resource consumption and clinical 
characteristics of the patients with a given set of conditions are 
significantly different than the remaining patients in the MS-DRG. We 
evaluated patient care costs using average charges and lengths of stay 
as proxies for costs and relied on the judgment of our medical advisors 
to decide whether patients are clinically distinct or similar to other 
patients in the MS-DRG. In evaluating resource costs, we considered 
both the absolute and percentage differences in average charges between 
the cases we selected for review and the remainder of cases in the MS-
DRG. We also considered variation in charges within these groups; that 
is, whether observed average differences were consistent across 
patients or attributable to cases that were extreme in terms of charges 
or length of stay, or both. Further, we considered the number of 
patients who will have a given set of characteristics and generally 
preferred not to create a new MS-DRG unless it would include a 
substantial number of cases.

C. Adoption of the MS-DRGs in FY 2008

    In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed 
a number of recommendations made by MedPAC regarding revisions to the 
DRG system used under the IPPS (70 FR 47473 through 47482; 71 FR 47881 
through 47939; and 72 FR 47140 through 47189). As we noted in the FY 
2006 IPPS final rule, we had insufficient time to complete a thorough 
evaluation of these recommendations for full implementation in FY 2006. 
However, we did adopt severity-weighted cardiac DRGs in FY 2006 to 
address public comments on this issue and the specific concerns of 
MedPAC regarding cardiac surgery DRGs. We also indicated that we 
planned to further consider all of MedPAC's recommendations and 
thoroughly analyze options and their impacts on the various types of 
hospitals in the FY 2007 IPPS proposed rule.
    For FY 2007, we began this process. In the FY 2007 IPPS proposed 
rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 
2008 (if not earlier). Based on public comments received on the FY 2007 
IPPS proposed rule, we decided not to adopt the CS DRGs. In the FY 2007 
IPPS final rule (71 FR 47906 through 47912), we discussed several 
concerns raised by commenters regarding the proposal to adopt CS DRGs. 
We acknowledged the many comments suggesting the logic of Medicare's 
DRG system should continue to remain in the public domain as it has 
since the inception of the PPS. We also acknowledged concerns about the 
impact on hospitals and software vendors of moving to a proprietary 
system. Several commenters suggested that CMS refine the existing DRG 
classification system to preserve the many policy decisions that were 
made over the last 20 years and were already incorporated into the DRG 
system, such as complexity of services and new device technologies. 
Consistent with the concerns expressed in the public comments, this 
option had the advantage of using the existing DRGs as a starting point 
(which was already familiar to the public) and retained the benefit of 
many DRG decisions that were made in recent years. We stated our belief 
that the suggested approach of incorporating severity measures into the

[[Page 43767]]

existing DRG system was a viable option that would be evaluated.
    Therefore, we decided to make interim changes to the existing DRGs 
for FY 2007 by creating 20 new DRGs involving 13 different clinical 
areas that would significantly improve the CMS DRG system's recognition 
of severity of illness. We also modified 32 DRGs to better capture 
differences in severity. The new and revised DRGs were selected from 40 
existing CMS DRGs that contained 1,666,476 cases and represented a 
number of body systems. In creating these 20 new DRGs, we deleted 8 
existing DRGs and modified 32 existing DRGs. We indicated that these 
interim steps for FY 2007 were being taken as a prelude to more 
comprehensive changes to better account for severity in the DRG system 
by FY 2008.
    In the FY 2007 IPPS final rule (71 FR 47898), we indicated our 
intent to pursue further DRG reform through two initiatives. First, we 
announced that we were in the process of engaging a contractor to 
assist us with evaluating alternative DRG systems that were raised as 
potential alternatives to the CMS DRGs in the public comments. Second, 
we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes 
as part of making further refinements to the current CMS DRGs to better 
recognize severity of illness based on the work that CMS (then HCFA) 
did in the mid-1990's in connection with adopting severity DRGs. We 
describe below the progress we have made on these two initiatives and 
our actions for FYs 2008, 2009, and 2010 based on our continued 
analysis of reform of the DRG system. We note that the adoption of the 
MS-DRGs to better recognize severity of illness has implications for 
the outlier threshold, the application of the postacute care transfer 
policy, the measurement of real case-mix versus apparent case-mix, and 
the IME and DSH payment adjustments. We discuss these implications for 
FY 2010 in other sections of this preamble and in the Addendum to this 
final rule.
    In the FY 2007 IPPS proposed rule, we discussed MedPAC's 
recommendations to move to a cost-based HSRV weighting methodology 
using HSRVs beginning with the FY 2007 IPPS proposed rule for 
determining the DRG relative weights. Although we proposed to adopt the 
HSRV weighting methodology for FY 2007, we decided not to adopt the 
proposed methodology in the final rule after considering the public 
comments we received on the proposal. Instead, in the FY 2007 IPPS 
final rule, we adopted a cost-based weighting methodology without the 
HSRV portion of the proposed methodology. The cost-based weights were 
adopted over a 3-year transition period in \1/3\ increments between FY 
2007 and FY 2009. In addition, in the FY 2007 IPPS final rule, we 
indicated our intent to further study the HSRV-based methodology as 
well as other issues brought to our attention related to the cost-based 
weighting methodology adopted in the FY 2007 final rule. There was 
significant concern in the public comments that our cost-based 
weighting methodology does not adequately account for charge 
compression--the practice of applying a higher percentage charge markup 
over costs to lower cost items and services and a lower percentage 
charge markup over costs to higher cost items and services. Further, 
public commenters expressed concern about potential inconsistencies 
between how costs and charges are reported on the Medicare cost reports 
and charges on the Medicare claims. In the FY 2007 IPPS final rule, we 
used costs and charges from the cost report to determine departmental 
level cost-to-charge ratios (CCRs) which we then applied to charges on 
the Medicare claims to determine the cost-based weights. The commenters 
were concerned about potential distortions to the cost-based weights 
that would result from inconsistent reporting between the cost reports 
and the Medicare claims. After publication of the FY 2007 IPPS final 
rule, we entered into a contract with RTI International (RTI) to study 
both charge compression and to what extent our methodology for 
calculating DRG relative weights is affected by inconsistencies between 
how hospitals report costs and charges on the cost reports and how 
hospitals report charges on individual claims. Further, as part of its 
study of alternative DRG systems, the RAND Corporation analyzed the 
HSRV cost-weighting methodology. We refer readers to section II.E. of 
the preamble of this final rule for discussion of the issue of charge 
compression and the cost-weighting methodology for FY 2010.
    We believe that revisions to the DRG system to better recognize 
severity of illness and changes to the relative weights based on costs 
rather than charges are improving the accuracy of the payment rates in 
the IPPS. We agree with MedPAC that these refinements should be 
pursued. Although we continue to caution that any prospective payment 
system based on grouping cases will always present some opportunities 
for providers to specialize in cases they believe have higher margins, 
we believe that the changes we have adopted and the continuing reforms 
we are adoptimg in this final rule for FY 2010 will improve payment 
accuracy and reduce financial incentives to create specialty hospitals.
    We refer readers to section II.D. of the FY 2008 IPPS final rule 
with comment period for a full discussion of how the MS-DRG system was 
established based on severity levels of illness (72 FR 47141).

D. FY 2010 MS-DRG Documentation and Coding Adjustment, Including the 
Applicability to the Hospital-Specific Rates and the Puerto Rico-
Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    As we discussed earlier in this preamble, we adopted the MS-DRG 
patient classification system for the IPPS, effective October 1, 2007, 
to better recognize severity of illness in Medicare payment rates for 
acute care hospitals. The adoption of the MS-DRG system resulted in the 
expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008 
(currently, 746 DRGs, which include 1 additional MS-DRG created in FY 
2009). By increasing the number of DRGs and more fully taking into 
account patients' severity of illness in Medicare payment rates for 
acute care hospitals, the use of MS-DRGs encourage hospitals to improve 
their documentation and coding of patient diagnoses. In the FY 2008 
IPPS final rule with comment period (72 FR 47175 through 47186), we 
indicated that we believe the adoption of the MS-DRGs had the potential 
to lead to increases in aggregate payments without a corresponding 
increase in actual patient severity of illness due to the incentives 
for additional documentation and coding. In that final rule with 
comment period, we exercised our authority under section 
1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget 
neutrality by adjusting the national standardized amount to eliminate 
the estimated effect of changes in coding or classification that do not 
reflect real changes in case-mix. Our actuaries estimated that 
maintaining budget neutrality required an adjustment of -4.8 percent to 
the national standardized amount. We phased in this -4.8 percent 
adjustment over 3 years. Specifically, we established prospective 
documentation and coding adjustments of -1.2 percent for FY 2008, -1.8 
percent for FY 2009, and -1.8 percent for FY 2010.

[[Page 43768]]

    On September 29, 2007, Congress enacted the TMA [Transitional 
Medical Assistance], Abstinence Education, and QI [Qualifying 
Individuals] Programs Extension Act of 2007, Public Law 110-90. Section 
7(a) of Public Law 110-90 reduced the documentation and coding 
adjustment made as a result of the MS-DRG system that we adopted in the 
FY 2008 IPPS final rule with comment period to -0.6 percent for FY 2008 
and -0.9 percent for FY 2009. Section 7(a) of Public Law 110-90 did not 
adjust the FY 2010 -1.8 percent documentation and coding adjustment 
promulgated in the FY 2008 IPPS final rule with comment period. To 
comply with section 7(a) of Public Law 110-90, we promulgated a final 
rule on November 27, 2007 (72 FR 66886) that modified the IPPS 
documentation and coding adjustment for FY 2008 to -0.6 percent, and 
revised the FY 2008 payment rates, factors, and thresholds accordingly. 
These revisions were effective on October 1, 2007.
    For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -1.8 
percent adjustment established in the FY 2008 IPPS final rule with 
comment period. As discussed in the FY 2009 IPPS final rule (73 FR 
48447) and required by statute, we applied a documentation and coding 
adjustment of -0.9 percent to the FY 2009 IPPS national standardized 
amount. The documentation and coding adjustments established in the FY 
2008 IPPS final rule with comment period, as amended by Public Law 110-
90, are cumulative. As a result, the -0.9 percent documentation and 
coding adjustment for FY 2009 was in addition to the -0.6 percent 
adjustment for FY 2008, yielding a combined effect of -1.5 percent.
2. Prospective Adjustment to the Average Standardized Amounts Required 
by Section 7(b)(1)(A) of Public Law 110-90
    Section 7(b)(1)(A) of Public Law 110-90 requires that if the 
Secretary determines that implementation of the MS-DRG system resulted 
in changes in documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2008 or FY 2009 
that are different than the prospective documentation and coding 
adjustments applied under section 7(a) of Public Law 110-90, the 
Secretary shall make an appropriate adjustment under section 
1886(d)(3)(A)(vi) of the Act. Section 1886(d)(3)(A)(vi) of the Act 
authorizes adjustments to the average standardized amounts for 
subsequent fiscal years in order to eliminate the effect of such coding 
or classification changes. These adjustments are intended to ensure 
that future annual aggregate IPPS payments are the same as the payments 
that otherwise would have been made had the prospective adjustments for 
documentation and coding applied in FY 2008 and FY 2009 reflected the 
change that occurred in those years.
3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 
Required by Public Law 110-90
    If, based on a retroactive evaluation of claims data, the Secretary 
determines that implementation of the MS-DRG system resulted in changes 
in documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FY 2008 or FY 2009 that are 
different from the prospective documentation and coding adjustments 
applied under section 7(a) of Public Law 110-90, section 7(b)(1)(B) of 
Public Law 110-90 requires the Secretary to make an additional 
adjustment to the standardized amounts under section 1886(d) of the 
Act. This adjustment must offset the estimated increase or decrease in 
aggregate payments for FYs 2008 and 2009 (including interest) resulting 
from the difference between the estimated actual documentation and 
coding effect and the documentation and coding adjustment applied under 
section 7(a) of Public Law 110-90. This adjustment is in addition to 
making an appropriate adjustment to the standardized amounts under 
section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) 
of Public Law 110-90. That is, these adjustments are intended to recoup 
(or repay) spending in excess of (or less than) spending that would 
have occurred had the prospective adjustments for changes in 
documentation and coding applied in FY 2008 and FY 2009 precisely 
matched the changes that occurred in those years. Public Law 110-90 
requires that the Secretary make these recoupment or repayment 
adjustments for discharges occurring during FYs 2010, 2011, and 2012.
4. Retrospective Evaluation of FY 2008 Claims Data
    In order to implement the requirements of section 7 of Public Law 
110-90, we indicated in the FY 2009 IPPS final rule (73 FR 48450) that 
we planned a thorough retrospective evaluation of our claims data. We 
stated that the results of this evaluation would be used by our 
actuaries to determine any necessary payment adjustments to the 
standardized amounts under section 1886(d) of the Act beginning in FY 
2010 to ensure the budget neutrality of the MS-DRGs implementation for 
FY 2008 and FY 2009, as required by law. In the FY 2009 IPPS proposed 
rule (73 FR 23541 through 23542), we described our preliminary plan for 
a retrospective analysis of inpatient hospital claims data and invited 
public input on our proposed methodology.
    In that proposed rule, we indicated that we intended to measure and 
corroborate the extent of the overall national average changes in case-
mix for FY 2008 and FY 2009. We expected that the two largest parts of 
this overall national average change would be attributable to 
underlying changes in actual patient severity and to documentation and 
coding improvements under the MS-DRG system. In order to separate the 
two effects, we planned to isolate the effect of shifts in cases among 
base DRGs from the effect of shifts in the types of cases within base 
DRGs.
    The MS-DRGs divide the base DRGs into three severity levels (with 
MCC, with CC and without CC); the previously used CMS DRGs had only two 
severity levels (with CC and without CC). Under the CMS DRG system, the 
majority of hospital discharges had a secondary diagnosis which was on 
the CC list, which led to the higher severity level. The MS-DRGs 
significantly changed the code lists of what was classified as an MCC 
or a CC. Many codes that were previously classified as a CC are no 
longer included on the MS-DRG CC list because the data and clinical 
review showed these conditions did not lead to a significant increase 
in resource use. The addition of a new level of high severity 
conditions, the MCC list, also provided a new incentive to code more 
precisely in order to increase the severity level. We anticipated that 
hospitals would examine the MS-DRG MCC and CC code lists and then work 
with physicians and coders on documentation and coding practices so 
that coders could appropriately assign codes from the highest possible 
severity level. We note that there have been numerous seminars and 
training sessions on this particular coding issue. The topic of 
improving documentation practices in order to code conditions on the 
MCC list was also discussed extensively by participants at the March 
11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting. 
Participants discussed their hospitals' efforts to encourage physicians 
to provide more precise documentation so that coders could 
appropriately assign codes that would lead to a higher

[[Page 43769]]

severity level. Because we expected most of the documentation and 
coding changes under the MS-DRG system would occur in the secondary 
diagnoses, we believed that the shifts among base DRGs were less likely 
to be the result of the MS-DRG system and the shifts within base DRGs 
were more likely to be the result of the MS-DRG system. We also 
anticipated evaluating data to identify the specific MS-DRGs and 
diagnoses that contributed significantly to the documentation and 
coding payment effect and to quantify their impact. This step entailed 
analysis of the secondary diagnoses driving the shifts in severity 
within specific base DRGs.
    In that same proposed rule, we also stated that, while we believe 
that the data analysis plan described previously will produce an 
appropriate estimate of the extent of case-mix changes resulting from 
documentation and coding changes, we might decide, if feasible, to use 
historical data from our Hospital Payment Monitoring Program (HPMP) to 
corroborate the within-base DRG shift analysis. The HPMP is supported 
by the Medicare Clinical Data Abstraction Center (CDAC).
    In the FY 2009 IPPS proposed rule, we solicited public comments on 
the analysis plans described above, as well as suggestions on other 
possible approaches for performing a retrospective analysis to identify 
the amount of case-mix changes that occurred in FY 2008 and FY 2009 
that did not reflect real increases in patients' severity of illness.
    A few commenters, including MedPAC, expressed support for the 
analytic approach described in the FY 2009 IPPS proposed rule. A number 
of other commenters expressed concerns about certain aspects of the 
approach and/or suggested alternate analyses or study designs. In 
addition, one commenter recommended that any determination or 
retrospective evaluation by the actuaries of the impact of the MS-DRGs 
on case-mix be open to public scrutiny prior to the implementation of 
the payment adjustments beginning in FY 2010.
    We took these comments into consideration as we developed our 
proposed analysis plan (described in greater detail below) and in the 
FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24092 through 24101) 
solicited public comment on our methodology and analysis. For the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a retrospective 
evaluation of the FY 2008 data for claims paid through December 2008. 
Based on this evaluation, our actuaries determined that implementation 
of the MS-DRG system resulted in a 2.5 percent change due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2008. In the FY 2010 IPPS/RY 2010 
LTCH proposed rule, we also stated that we would update the results 
from the proposed analysis plan with data extracted from FY 2008 
Medicare claims that were paid through March 2008 [sic] for the FY 2010 
IPPS final rule. (We note that the March 2008 date for the updated data 
that appeared in the proposed rule should have been March 2009.)
    In performing the analysis for the proposed rule, we first divided 
the case-mix index (CMI) obtained by grouping the FY 2008 claims data 
through the FY 2008 GROUPER (Version 25.0) by the CMI obtained by 
grouping these same FY 2008 claims through the FY 2007 GROUPER (Version 
24.0). This resulted in a value of 1.028. Because these cases are the 
same FY 2008 cases grouped using Versions 24.0 and 25.0 of the GROUPER, 
we attribute this increase primarily to two factors: (1) The effect of 
changes in documentation and coding under the MS-DRG system; and (2) 
the measurement effect from the calibration of the GROUPER. We 
estimated the measurement effect from the calibration of the GROUPER by 
dividing the CMI obtained by grouping cases in the FY 2007 claims data 
through the FY 2008 GROUPER by the CMI obtained by grouping cases in 
these same claims through the FY 2007 GROUPER. This resulted in a value 
of 1.003. In order to isolate the documentation and coding effect, we 
then divided the combined effect of the changes in documentation and 
coding and measurement (1.028) by the measurement effect (1.003) to 
yield 1.025. Therefore, our estimate of the documentation and coding 
increase was 2.5 percent.
    We then sought to corroborate this 2.5 percent estimate by 
examining the increases in the within-base DRGs as compared to the 
increases in the across base DRGs as described earlier in our analysis 
plan. In other words, we looked for improvements in code selection that 
would lead to a secondary diagnosis increasing the severity level to 
either a CC or an MCC level.
    In the analysis of data for the proposed rule, we found that the 
within-base DRG increases were almost entirely responsible for the 
case-mix change, supporting our conclusion that the 2.5 percent 
estimate was an accurate reflection of the FY 2008 effect of changes in 
documentation and coding under the MS-DRG system. In fact, almost every 
base DRG that was split into different severity levels under the MS-DRG 
system experienced increases in the within-base DRGs.
    We then further analyzed the changes in the within-base DRGs to 
determine which MS-DRGs had the highest contributions to this increase. 
Consistent with the expectations of our medical coding experts 
concerning areas with potential for documentation and coding 
improvements, the top contributors were heart failure, chronic 
obstructive pulmonary disease, and simple pneumonia and pleurisy. In 
fact, the coding of heart failure was discussed extensively at the 
March 11-12, 2009 ICD-9-CM Coordination and Maintenance Committee 
meeting. Heart failure is a very common secondary diagnosis among 
Medicare hospital admissions. The heart failure codes are assigned to 
all three severity levels. Some codes are classified as non-CCs, while 
other codes are on the CC and MCC lists. By changing physician 
documentation to more precisely identify the type of heart failure, 
coders are able to appropriately change the severity level of cases 
from the lowest level (non-CC) to a higher severity level (CC or MCC). 
This point was stressed repeatedly at the March 11-12, 2009 ICD-9-CM 
Coordination and Maintenance Committee meeting as coders discussed 
their work with physicians on this coding issue. Many of the 
participants indicated that additional work was still needed with their 
physicians in order to document conditions in the medical record more 
precisely.
    The results of the analysis for the proposed rule provided 
additional support for our conclusion that the proposed 2.5 percent 
estimate accurately reflected the FY 2008 increases in documentation 
and coding under the MS-DRG system.
    While we attempted to use the CDAC data to distinguish real 
increase in case-mix growth from documentation and coding in the 
overall case-mix number, we found aberrant data and significant 
variation across the FY 1999-FY 2007 analysis period. It was not 
possible to distinguish changes in documentation and coding from 
changes in real case-mix in the CDAC data. Therefore, we concluded that 
the CDAC data would not support analysis of real case-mix growth that 
could be used in our retrospective evaluation of the FY 2008 claims 
data.
    Although we could not use the CDAC data, we did examine the overall 
growth in case-mix using the FY 2007 claims data in which we grouped 
cases using the FY 2007 GROUPER and the FY 2008 data in which we 
grouped cases using

[[Page 43770]]

the FY 2008 GROUPER. We found the overall growth in case-mix was 1.9 
percent. The implication of overall FY 2008 case-mix growth of 1.9 
percent relative to our estimate of the FY 2008 documentation and 
coding effect and the GROUPER measurement effect is that real case-mix 
declined between FY 2007 and FY 2008. After additional data analysis, 
our actuaries determined that the 1.9 percent growth in overall case-
mix was consistent with our 2.5 percent estimate of the FY 2008 
documentation and coding effect for reasons that included: (1) Our 
mathematical model for determining the 2.5 percent documentation and 
coding effect was corroborated by the amount of case-mix growth 
attributed to within-DRG improvements in secondary coding of MCCs and 
CCs; (2) our data analysis confirmed the substitution of specified 
diagnosis for unspecified diagnoses for such common conditions as heart 
failure and chronic obstructive pulmonary disease; and (3) there was a 
relative decline in above average cost short-stay surgical cases that 
can be performed on an outpatient basis, such as certain high volume 
pacemaker procedures.
    We also examined the differences in case-mix between the FY 2008 
claims data in which cases were grouped through the FY 2008 GROUPER 
(Version 25.0) and the FY 2009 GROUPER (Version 26.0). This was to help 
inform analysis of the potential for increase in the documentation and 
coding effect in FY 2009. In FY 2008, we were transitioning to the 
fully implemented MS-DRG relative weights and the fully implemented 
cost-based weights. We found that the use of the transition weights 
mitigated the FY 2008 documentation and coding effect on expenditures. 
Using the FY 2009 relative weights, the documentation and coding effect 
would have been an estimated 3.2 percent in FY 2008 instead of our 
estimated 2.5 percent. Even assuming no continued improvement in 
documentation and coding in FY 2009, we estimated that the use of the 
FY 2009 relative weights would result in an additional 0.7 percent 
documentation and coding effect in FY 2009. After taking into account 
the results of our FY 2008 analysis and the expertise of our coding 
staff, our actuaries continue to estimate that the cumulative overall 
effect of documentation and coding improvements under the MS-DRG system 
will be 4.8 percent. However, our actuaries estimate that these 
improvements will be substantially complete by the end of FY 2009. 
Therefore, our estimate of the FY 2009 MS-DRG documentation and coding 
effect for the proposed rule was 2.3 percent.
    As in prior years, the FY 2008 MedPAR files were available to the 
public to allow independent analysis of the FY 2008 documentation and 
coding effect. Interested individuals may still order these files by 
going to the Web site at http://www.cms.hhs.gov/LimitedDataSets/ and 
clicking on MedPAR Limited Data Set (LDS)-Hospital (National). This Web 
page describes the file and provides directions and further detailed 
instructions for how to order.
    Persons placing an order must send the following: a Letter of 
Request, the LDS Data Use Agreement and Research Protocol (refer to the 
Web site for further instructions), the LDS Form, and a check for 
$3,655 to:

Mailing address if using the U.S. Postal Service: Centers for Medicare 
& Medicaid Services, RDDC Account, Accounting Division, P.O. Box 7520, 
Baltimore, MD 21207-0520.
Mailing address if using express mail: Centers for Medicare & Medicaid 
Services, OFM/Division of Accounting--RDDC, 7500 Security Boulevard, 
C3-07-11, Baltimore, MD 21244-1850.

    Comment: MedPAC commented that its analysis of 2008 claims 
confirmed the CMS finding that documentation and coding improvements 
increased case-mix by 2.5 percent in 2008, which resulted in 
overpayments of 1.9 percent. With regard to CMS' projection that by the 
end of 2009, hospitals' documentation and coding improvements will have 
increased case-mix by a cumulative total of 4.8 percent, MedPAC stated 
that, while all documentation and coding improvement projections are 
subject to uncertainty, 4.8 percent appears to be a reasonable 
estimate, given MedPAC's own examination of recent experience in 
Maryland.
    Response: We agree with MedPAC's comment that changes in 
documentation and coding increased case-mix by 2.5 percent in FY 2008. 
Using more recent FY 2008 claims data updated through March 2009, our 
actuaries' estimate of the effect of changes in documentation and 
coding continues to be 2.5 percent. Our actuaries also continue to 
estimate that by the end of FY 2009, changes in documentation and 
coding will have increased case-mix by 4.8 percent, consistent with 
MedPAC's comment.
    Comment: Most commenters questioned CMS' methodology for the 
retrospective evaluation of FY 2008 claims data and CMS' finding that 
real case-mix growth in FY 2008 was negative. These comments were 
generally similar to the comments from the AHA, which read:
    ``In its analysis of documentation and coding changes, CMS 
concludes that from FY 2007 to FY 2008, there was a decline in real 
case mix; in contrast, our analysis found that there is a historical 
pattern of steady annual increases of 1.2 to 1.3 percent in real case 
mix and we are concerned that CMS' conclusion is incorrect. Further, 
because CMS' conclusion that real case-mix declined is an inference 
based on its analysis of documentation and coding-related increases, we 
are concerned that the 1.9 percent proposed cut also is inaccurate and 
overstated.''
    The commenters also raised concerns that CMS' estimate did not 
fully consider other potential causes of increased case-mix, such as 
patients requiring less complex services receiving care in other 
settings and ``healthier'' patients enrolling in Medicare Advantage 
plans in increasing numbers. Other commenters indicated that factors 
such as the changes in the CC/MCC definitions, limitations on the 
number of codes used by CMS for payment and ratesetting, resequencing 
of secondary diagnoses, the transition to the cost-based weights, less 
use of ``not otherwise specified'' codes, and increases in real case-
mix due to health reform efforts also resulted in an inaccurate 
documentation and coding analysis. One commenter indicated that, of the 
overall case-mix increase, 1.0 percent to 1.5 percent is ``real'' case-
mix increase, while 1.0 percent to 1.5 percent is due to documentation 
and coding or other increases.
    Response: The assertion that there is a historical pattern of 
steady annual increases of 1.2 to 1.3 percent in real case-mix is 
predicated on the assumption that there was little documentation and 
coding effect in those historical years. In considering these comments 
concerning historical real case-mix, we calculated overall increases in 
case-mix for the period from FY 2000 to FY 2007 using the cases from 
each year and the GROUPER and relative weights applicable for each 
year. The results are shown in the following chart:

[[Page 43771]]



            Overall Case-Mix Increases for FY 2000 to FY 2007
------------------------------------------------------------------------
                                                           Overall case-
                                                            mix change
                          Year                              from prior
                                                             year (in
                                                             percent)
------------------------------------------------------------------------
FY 2000.................................................            -0.7
FY 2001.................................................            -0.4
FY 2002.................................................             1.0
FY 2003.................................................             1.4
FY 2004.................................................             1.0
FY 2005.................................................             0.9
FY 2006.................................................             1.2
FY 2007.................................................            -0.2
------------------------------------------------------------------------

    Overall case-mix growth is predominately comprised of three 
factors: real case-mix growth; a documentation and coding effect; and a 
measurement effect. Under the reasonable assumption that there has been 
a relatively small measurement effect in those years, the assertion 
that there is a historical pattern of steady annual increases of 1.2 to 
1.3 percent in real case-mix implies that the documentation and coding 
effect in many of those years was negative. For example, as described 
earlier, we estimated a recent measurement effect of +0.3 percent. The 
overall case-mix growth of -0.2 percent in FY 2007 net of a measurement 
effect of +0.3 percent results in growth of +0.1 percent. A real case-
mix growth of +1.2 percent in FY 2007, therefore, implies a negative 
documentation and coding effect of approximately -1.1 percent. It is 
not obvious why documentation and coding would have had such a large 
negative effect in FY 2007, or in any other year where the overall 
case-mix change is significantly less than the commenter's claimed 
average annual trend, calling into question the assertion that real 
case-mix growth is a steady 1.2 to 1.3 percent per year.
    Our current estimate of the overall case-mix growth for FY 2008 
based on more recent data than the data used in the proposed rule is 
2.0 percent, still less than our actuaries' estimate of a 2.5 percent 
documentation and coding increase. With respect to the concerns raised 
by commenters about our finding of negative real case-mix growth in FY 
2008, a finding of negative real case-mix growth is consistent with the 
fact that, in some years, overall case-mix growth has been negative, as 
shown in the chart presented above in this response. Some commenters 
were particularly focused on our statement in the proposed rule 
regarding a relative decline in above average cost short-stay surgical 
cases. We did not state that the decline in real case-mix was entirely 
attributable to the relative decline in above average cost short-stay 
outliers. We stated that--
    ``After additional data analysis, our actuaries determined that the 
1.9 percent growth in overall case-mix was consistent with our 2.5 
percent estimate of the FY 2008 documentation and coding effect for 
reasons that included: (1) Our mathematical model for determining the 
2.5 percent documentation and coding effect was corroborated by the 
amount of case-mix growth attributed to within-DRG improvements in 
secondary coding of MCCs and CCs; (2) our data analysis confirmed the 
substitution of specified diagnosis for unspecified diagnoses for such 
common conditions as heart failure and chronic obstructive pulmonary 
disease; and (3) there was a relative decline in above average cost 
short-stay surgical cases that can be performed on an outpatient basis, 
such as certain high-volume pacemaker procedures.''
    The decline in above average cost short-stay surgical cases was one 
factor in our actuaries' determination that the 1.9 percent growth in 
overall case-mix was consistent with our 2.5 percent documentation and 
coding estimate. It was not the only factor. Our current estimate of 
the overall case-mix growth between FY 2007 and FY 2008 based on more 
recent data than the data used in the proposed rule is 2.0 percent. We 
observed numerous small changes for a number of base DRGs that drive 
the difference between this overall case mix growth estimate of 2.0 
percent and our documentation and coding estimate of 2.5 percent, 
including the relative decline in above average cost surgical stay 
cases that can be performed on an outpatient basis that we cited in the 
proposed rule. These other base DRGs include MS-DRGs 193, 194, and 195 
(Simple Pneumonia and Pleurisy with MCC, with CC, and without CC or 
MCC, respectively); MS-DRGs 246 and 247 (Percutaneous Cardiovascular 
Procedure with Drug-Eluting Stent with MCC or Four or More (4+) 
Vessels/Stents and without MCC, respectively); MS-DRGs 233 and 234 
(Coronary Bypass with Cardiac Catheterization with MCC and without MCC, 
respectively); MS-DRGs 235 and 236 (Coronary Bypass without Cardiac 
Catheterization with MCC and without MCC, respectively); MS-DRGs 252, 
253, and 254 (Other Vascular Procedures with MCC, with CC, and without 
CC or MCC, respectively); MS-DRGs 291, 292, and 293 (Heart Failure and 
Shock with MCC, with CC, and without CC or MCC, respectively); MS-DRG 
313 (Chest Pain); and MS-DRGs 391 and 392 (Esophagitis, Gastroenteritis 
and Miscellaneous Digestive Disorders with MCC and without MCC, 
respectively). It is reasonable that the cumulative impact of small 
changes across a number of base DRGs could result in a difference of 
0.5 percentage points between the overall growth in case-mix and our 
documentation and coding estimate.
    With respect to the commenters who raised concerns that our 
estimate did not fully consider other potential causes of increased 
real case-mix, such as patients requiring less-complex services 
receiving care in other settings, ``healthier'' patients enrolling in 
MA plans in increasing numbers, and health reform efforts, we note that 
our methodology for estimating documentation and coding does not, by 
definition, include real case-mix, regardless of the actual real case-
mix level. As MedPAC stated in its comment:
    ``Our analysis of hospital claims for fiscal year 2008 confirms 
CMS's findings. To see how much the aggregate CMI and payments 
increased in 2008 due solely to hospitals' DCI, we used fiscal year 
2008 claims--from the December 2008 update of the 2008 MedPAR file--to 
calculate the national aggregate CMI based on the 2008 MS-DRGs and 
weights. Using the same claims, we also calculated the aggregate CMI 
based on the 2007 DRGs and weights. The difference between the two CMIs 
is 2.8 percent. By definition, this change in reported case mix is not 
real because the cases are the same.''
    The question is how much of the 2.8 percent increase is due to a 
documentation and coding effect and how much is due to a measurement 
effect. Both MedPAC and our actuaries, based on prior year data, 
estimate the measurement effect to be 0.3 percent, yielding our 2.5 
percent FY 2008 documentation and coding effect.
    With respect to the commenter who indicated that real case-mix 
growth was 1.0 percent to 1.5 percent, the primary reason cited was the 
interaction of the resequencing of secondary diagnoses, changes in MS-
DRG definitions, and limitations on the number of codes used by CMS for 
payment and ratesetting. There is a yearly review for making MS-DRG 
changes. As we note in section II.B.2. of this preamble, the actual 
process of forming MS-DRGs is highly iterative and involves statistical 
results from test data and clinical judgment. In addition, while 
hospitals may submit up to 25 diagnosis codes and 25 procedure codes on 
the claim, our payment system uses only the first 9 diagnosis code 
positions and the first 6 procedure code positions for payment 
purposes. The commenter observed that the

[[Page 43772]]

combination of this system limitation with the yearly review of MS-DRGs 
has a sequencing effect. The commenter did not believe that the 
resequencing of secondary diagnoses was a documentation and coding 
effect. We disagree. Resequencing is merely a change in the hospital's 
ordering of the codes that will be used for payment purposes. It causes 
a payment change unrelated to any change in the underlying condition of 
a patient. As we have stated on numerous occasions, we do not believe 
that these types of documentation and coding changes are the result of 
inappropriate behavior on the part of hospitals. However, to the extent 
resequencing occurs, it is appropriately included in our documentation 
and coding increase.
    Comment: Multiple commenters were disappointed that CMS was unable 
to obtain relevant findings based on CDAC data to quantify real case-
mix change.
    Response: As we stated in the proposed rule, when we attempted to 
use the CDAC data to distinguish increase in real case-mix growth from 
increases due to documentation and coding in the overall case-mix 
number, we found aberrant data and significant inconsistency across the 
FY 1999-FY 2007 analysis period. It was not possible to distinguish 
changes in documentation and coding from changes in real case-mix in 
the CDAC data. Therefore, we concluded that the CDAC data would not 
support analysis of real case-mix growth that could be used in our 
retrospective evaluation of the FY 2008 claims data. While we 
acknowledge the disappointment of the commenters, we note that we did 
not receive any alternative analysis directly measuring real case-mix 
growth that did not rely on assumptions with respect to the other 
factors that influence overall case-mix growth.
    Comment: Some commenters suggested that rural providers are 
typically presented with less complex cases and have fewer 
opportunities to benefit from improved coding opportunities.
    Response: As MedPAC stated in its comment, ``In addition, we 
estimated the 2008 DCI effect using the same methods for various 
subgroups of hospitals. Although the DCI estimates varied somewhat 
among the groups, the variation was generally small. Thus, the DCI 
response appears to be widely consistent among all types of 
hospitals.'' Our own analyses confirm MedPAC's finding that the 
documentation and coding response appears to be generally consistent 
among different types of hospitals, including urban and rural 
hospitals. Using the same methodology described earlier, the difference 
in the DCI response between urban and rural hospitals was not 
significant, similar to our findings discussed elsewhere that the 
differences for MDHs and SCHs were not significant.
    We also note that we discussed the issue of a uniform adjustment 
for DCI response in the FY 2008 IPPS final rule (72 FR 47184), 
published prior to the TMA, Abstinence Education, and QI Programs 
Extension Act of 2007. In that discussion, we noted that ``While 
improvements in documentation and coding that increase case mix may be 
variable, section 1886(d)(3)(A)(vi) of the Act only allows us to apply 
the adjustments that are a result of changes in the coding or 
classification of discharges that do not reflect real changes in case 
mix to the standardized amounts.''
    Section 7 of the TMA, Abstinence Education, and QI Programs 
Extension Act of 2007 specifically references section 
1886(d)(3)(A)(vi), stating that the Secretary shall ``make an 
appropriate adjustment under paragraph (3)(A)(vi) of such section 
1886(d).'' Section 1886(d)(3)(A)(iv)(II) of the Act directed CMS to 
eliminate separate standardized amounts for large urban areas and other 
areas beginning in FY 2004, creating the current uniform standardized 
amount that is applicable to all hospitals. Therefore, even if the data 
did indicate a different DCI response for urban and rural hospitals, 
the law continues to only allow us to apply the prospective adjustments 
that are a result of changes in the coding or classification of 
discharges that do not reflect real changes in case-mix to the 
standardized amount.
5. Adjustments for FY 2010 and Subsequent Years Authorized by Section 
7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of the Act
    Based on our most current evaluation of FY 2008 Medicare claims 
data, the estimated 2.5 percent change in FY 2008 case-mix due to 
changes in documentation and coding that did not reflect real changes 
in case-mix for discharges occurring during FY 2008 exceeds the -0.6 
percent prospective documentation and coding adjustment applied under 
section 7(a) of Public Law 110-90 by 1.9 percentage points. Under 
section 7(b)(1)(A) of Public Law 119-90, the Secretary is required to 
make an appropriate adjustment under section 1886(d)(3)(A)(vi) of the 
Act to the average standardized amounts for subsequent fiscal years in 
order to eliminate the full effect of the documentation and coding 
changes on future payments. In addition, we note that the Secretary has 
the authority to make this prospective adjustment in FY 2010 under 
section 1886(d)(3)(A)(vi) of the Act. As we have consistently stated 
since the initial implementation of the MS-DRG system, we do not 
believe it is appropriate for expenditures to increase due to MS-DRG-
related changes in documentation and coding that do not reflect real 
changes in case-mix.
    We also estimate that the additional change in case-mix due to 
changes in documentation and coding that do not reflect real changes in 
case-mix for discharges occurring during FY 2009 will be 2.3 percent, 
which would exceed by 1.4 percentage points the -0.9 percent 
prospective documentation and coding adjustment for FY 2009 applied 
under section 7(a) of Public Law 100-90. We have the statutory 
authority to adjust the FY 2010 rates for this estimated 1.4 percentage 
point increase. However, given that Public Law 100-90 requires a 
retrospective claims evaluation for the additional adjustments 
described in section II.D.6. of this preamble, we stated in the 
proposed rule that we believed our evaluation of the extent of the 
overall national average changes in case-mix for FY 2009 should also be 
based on a retrospective evaluation of all FY 2009 claims data. Because 
we do not receive all FY 2009 claims data prior to publication of this 
final rule, we indicated we would address any difference between the 
additional increase in FY 2009 case-mix due to changes in documentation 
and coding that did not reflect real changes in case-mix for discharges 
occurring during FY 2009 and the -0.9 percent prospective documentation 
and coding adjustment applied under section 7(a) of Public Law 110-90 
in the FY 2011 rulemaking cycle.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), 
we solicited public comment on the proposed -1.9 percent prospective 
adjustment to the standardized amounts under section 1886(d) of the Act 
to address the effects of documentation and coding changes unrelated to 
changes in real case-mix in FY 2008. In addition, we solicited public 
comments on addressing in the FY 2011 rulemaking cycle any differences 
between the increase in FY 2009 case-mix due to changes in 
documentation and coding changes that do not reflect real changes in 
case-mix for discharges occurring during FY 2009 and the -0.9 percent 
prospective documentation and coding adjustment applied under section 
7(a) of Public Law 110-90. We present below a summation of the

[[Page 43773]]

public comments we received on these issues and our responses.
    Comment: MedPAC summarized its comments on when CMS should reduce 
payment rates to prevent further overpayments and to recover 
overpayments occurring in 2008 and 2009 as follows: ``We support CMS's 
proposal to reduce IPPS payments in 2010 by 1.9 percent to prevent 
further overpayments. While we and the CMS actuaries believe that a 1.9 
percent reduction will not fully prevent overpayments from continuing 
in 2010, this is a reasonable first step toward reducing 
overpayments.''
    Response: While we agree with MedPAC's comment that our proposed -
1.9 percent adjustment would be a reasonable first step with respect to 
the documentation and coding increases associated with the 
implementation of the MS-DRGs, nevertheless, as discussed below, we 
believe that it would be more prudent to delay implementation of the 
documentation and coding adjustment to allow for a more complete 
analysis of FY 2009 claims data. If the estimated documentation and 
coding effect determined based on a full analysis of FY 2009 claims 
data is more or less than our current estimates, it would change, 
possibly lessen, the anticipated cumulative adjustments that we 
currently estimate we would have to make for FY 2008 and FY 2009 
combined adjustment.
    Comment: Most commenters opposed the proposed -1.9 percent 
prospective FY 2010 adjustment for FY 2008 documentation and coding 
increases, but supported the proposal not to apply a FY 2010 
prospective adjustment for estimated FY 2009 documentation and coding 
increases. The commenters expressed concern over the financial impact 
of the proposed -1.9 percent adjustment and the methodology for 
calculating the adjustment. The comments on the financial impact were 
generally similar to those contained in the comment from the AHA, which 
stated that ``The proposed rule includes a 1.9 percent cut to both 
operating and capital payments in FY 2010 and beyond--$23 billion over 
10 years--to correct the base rate for payments made in FY 2008 that 
CMS claims are the effect of documentation and coding changes that do 
not reflect real changes in case mix. In combination with other policy 
changes, this cut results in hospitals being paid $1 billion less in FY 
2010 than in FY 2009 * * * We recognize that CMS could have taken 
action to reduce payments more than proposed in this rule. We 
appreciate that CMS did not propose cuts for documentation and coding 
changes in FY 2009 or cuts to recoup the estimated documentation and 
coding overpayments in FY 2008. However, given the severity of the 1.9 
percent proposed cut, and in light of the fact that our analysis shows 
real increases in patient severity, we ask that the agency 
significantly mitigate its proposed documentation and coding cut.''
    Other commenters recommended that CMS seek to extend the timeframe 
beyond 2 years to phase in the estimated -6.6 percent adjustment to the 
standardized amount.
    Response: Our actuaries have determined, and MedPAC has confirmed, 
that the implementation of the MS-DRG system resulted in changes in 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2008. The impact of these changes 
exceeds the -0.6 percent prospective documentation and coding 
adjustments applied under section 7(a) of Public Law 110-90. As 
described earlier, analysis of more recent claims data confirms that 
the difference is -1.9 percent. We addressed the comments on our 
methodology in the section II.D.4. of this preamble.
    We fully understand that our proposed adjustment of -1.9 percent 
would reduce the increase in payments that affected hospitals would 
have received in FY 2009 in the absence of the adjustment. Although we 
are required to make a prospective adjustment to eliminate the full 
effect of coding or classification changes that did not reflect real 
changes in case-mix for discharges occurring during FY 2008, we believe 
we have some discretion regarding when to implement this adjustment. 
Section 7(b)(1)(A) of Public Law 110-90 requires that if the Secretary 
determines that implementation of the MS-DRG system resulted in changes 
in documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FY 2008 or FY 2009 that are 
different than the prospective documentation and coding adjustments 
applied under section 7(a) of Public Law 110-90, the Secretary shall 
make an ``appropriate'' adjustment under section 1886(d)(3)(A)(vi) of 
the Act.
    After consideration of the public comments we received on these 
issues, we have determined that it would be appropriate to postpone 
adopting documentation and coding adjustments as authorized under 
section 7(a) of Public Law 110-90 and section 1886(d)(3)(A)(vi) of the 
Act until a full analysis of case-mix changes can be completed. While 
we have the statutory authority to make this 1.9 percent prospective 
adjustment entirely in FY 2010, we believe it would be prudent to wait 
until we have complete data on the magnitude of the documentation and 
coding effect in FY 2009. If the documentation and coding effect were 
less in FY 2009 than our current estimates, it could lessen the 
anticipated adjustment that we currently estimate we would have to make 
for FY 2008 and FY 2009 combined. In future rulemaking, we will 
consider applying a prospective adjustment based upon a complete 
analysis of FY 2008 and FY 2009 claims data over an extended time 
period, such as 5 years, beginning in FY 2011. During this phase-in 
period, we intend to address any difference between the increase in FY 
2009 case-mix due to changes in documentation and coding that did not 
reflect real changes in case-mix for discharges occurring during FY 
2009 and the -0.9 percent prospective documentation and coding 
adjustment applied under section 7(a) of Public Law 110-90 in the FY 
2011 rulemaking cycle.
    We appreciate the commenters' support of our decision not to apply 
a FY 2010 prospective adjustment for estimated FY 2009 documentation 
and coding increases until we have performed a retrospective evaluation 
of the FY 2009 claims data.
6. Additional Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) 
of Public Law 110-90
    As indicated above, the estimated 2.5 percent change (estimated 
from analysis of more recent data than the data used for the proposed 
rule) due to documentation and coding that did not reflect real changes 
in case-mix for discharges occurring during FY 2008 exceeds the -0.6 
percent prospective documentation and coding adjustment applied under 
section 7(a) of Public Law 110-90 by 1.9 percentage points. Our 
actuaries currently estimate that this 1.9 percentage point increase 
resulted in an increase in aggregate payments of approximately $2.2 
billion. As described earlier, section 7(b)(1)(B) of Public Law 110-90 
requires an additional adjustment for discharges occurring in FYs 2010, 
2011, and/or 2012 to offset the estimated amount of this increase in 
aggregate payments (including interest).
    Although section 7(b)(1)(B) of Public Law 110-90 requires us to 
make this adjustment in FYs 2010, 2011, and/or 2012, we have discretion 
as to when during this 3 year period we will apply the adjustment. For 
example, we could make adjustments to the standardized amounts under 
section 1886(d) of the

[[Page 43774]]

Act in FY 2010, 2011, and 2012. Alternatively, we could delay 
offsetting the increase in FY 2008 aggregate payments by applying the 
adjustment required under section 7(b)(1)(B) of Public Law 110-90 only 
to FYs 2011 and 2012.
    We did not propose to make an adjustment to the FY 2010 average 
standardized amounts to offset, in whole or in part, the estimated 
increase in aggregate payments for discharges occurring in FY 2008, but 
stated in the proposed rule that we intended to address this issue in 
future rulemaking for FYs 2011 and 2012. That is, we stated we would 
address recouping the additional expenditures that occurred in FY 2008 
as a result of the 1.9 percentage point difference between the actual 
changes in documentation and coding that do not reflect real changes in 
case-mix, or 2.5 percent, and the -0.6 percent adjustment applied under 
Public Law 110-90 in FY 2011 and/or FY 2012, as required by law. We 
indicated that, while we have the statutory authority to make this -1.9 
percent recoupment adjustment entirely in FY 2010, we are delaying the 
adjustment until FY 2011 and FY 2012 because we do not have any data 
yet on the magnitude of the documentation and coding effect in FY 2009. 
If the documentation and coding effect were less in FY 2009 than our 
current estimates, it could lessen the anticipated recoupment 
adjustment that we currently estimate we would have to make for FY 2008 
and FY 2009 combined. As we have the authority to recoup the aggregate 
effect of this 1.9 percentage point difference in FY 2008 IPPS payments 
in FY 2011 or FY 2012 (with interest), delaying this adjustment would 
have no effect on Federal budget outlays. In the proposed rule, we 
indicated that we intended to wait until we have a complete year of 
data on the FY 2009 documentation and coding effect before applying a 
recoupment adjustment for IPPS spending that occurred in FY 2008 or we 
estimate will occur in FY 2009.
    As discussed above, section 7(b)(1)(B) of Public Law 110-90 
requires the Secretary to make an additional adjustment to the 
standardized amounts under section 1886(d) of the Act to offset the 
estimated increase or decrease in aggregate payments for FY 2009 
(including interest) resulting from the difference between the 
estimated actual documentation and coding effect and the documentation 
and coding adjustments applied under section 7(a) of Public Law 110-90. 
This determination must be based on a retrospective evaluation of 
claims data. Because we will not receive all FY 2009 claims data prior 
to publication of this final rule, as we indicate in the proposed rule, 
we intend to address any increase or decrease in FY 2009 payments in 
future rulemaking for FY 2011 and 2012 after we perform a retrospective 
evaluation of the FY 2009 claims data. Our actuaries currently estimate 
that this adjustment will be approximately -3.3 percent. This reflects 
the difference between the estimated 4.8 percent cumulative actual 
documentation and coding changes for FY 2009 (2.5 percent for FY 2008 
and an additional 2.3 percent for FY 2009) and the cumulative -1.5 
percent documentation and coding adjustments applied under section 7(a) 
of Public Law 110-90 (-0.6 percent in FY 2008 and -0.9 percent in FY 
2009). We note that the actual adjustments are multiplicative and not 
additive. This more recent estimated 4.8 percent cumulative actual 
documentation and coding changes for FY 2009 includes the impact of the 
changes in documentation and coding first occurring in FY 2008 because 
we believe hospitals will continue these changes in documentation and 
coding in subsequent fiscal years. Consequently, these documentation 
and coding changes will continue to impact payments under the IPPS 
absent a prospective adjustment to account for the effect of these 
changes.
    We note that, unlike the -1.9 adjustment to the standardized 
amounts under section 7(b)(1)(A) of Public Law 110-90 described 
earlier, any adjustment to the standardized amounts under section 
7(b)(1)(B) of Public Law 110-90 would not be cumulative, but would be 
removed for subsequent fiscal years once we have offset the increase in 
aggregate payments for discharges for FY 2008 expenditures and FY 2009 
expenditures, if any.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), 
we solicited public comment on our proposal not to offset the 1.9 
percent increase in aggregate payments (including interest) for 
discharges occurring in FY 2008 resulting from the adoption of the MS-
DRGs, but to instead address this issue in future rulemaking for FYs 
2011 and 2012.
    Comment: MedPAC stated in its comments on the adjustment to the 
standardized amounts under section 7(b)(1)(B) of Public Law 110-90: 
``In addition, it would be desirable for CMS to minimize year-to-year 
changes in payment adjustments it must make to recover overpayments 
that were made in 2008 and 2009. To achieve this goal, CMS should 
consider spreading the recovery of 2008 overpayments over 3 years, 
beginning in 2010.''
    Response: We appreciate MedPAC's comment that it would be desirable 
to minimize year-to-year changes in payment adjustments due to the 
recoupment adjustments. However, as we stated in the proposed rule, we 
continue to believe it would be more appropriate to examine the FY 2009 
claims data fully before making a determination as to the appropriate 
timing of the FY 2008 recoupment adjustment. Postponing this adjustment 
until a retrospective evaluation of the claims data from both FY 2008 
and FY 2009 are available would allow us to make annual adjustments 
more appropriately in FY 2011 and FY 2012.
    Comment: As noted above, some commenters recommended that CMS seek 
to extend the timeframe beyond 2 years to phase in the estimated -6.6 
percent adjustment to the standardized amount. The commenters asked CMS 
to seek necessary legislative action to accommodate such a policy.
    Response: As discussed in the proposed rule, we are required under 
section 7(b)(1)(B) of Public Law 110-90 to recapture the difference of 
actual documentation and coding effect in FY 2008 and FY 2009 that is 
greater than the prior adjustments. This retrospective recoupment 
process must be completed by the end of FY 2012. The large majority of 
the remaining adjustment to the standardized amount reflects 
retrospective adjustment. At this time, we have no plans to seek 
legislative action to change the time period for this adjustment.
    Comment: Most commenters expressed concern with the significant 
negative financial impacts that would be incurred by providers if CMS 
adopted that proposed -1.9 percent documentation and coding adjustment 
in FY 2010. The commenters cited providers' already small or negative 
margins for Medicare payments, and requested that CMS not further 
reduce payments during the current period of economic instability and 
reduced State funding. Other commenters indicated that it would be 
appropriate to delay any adjustment to the standardized amounts under 
section 7(b)(1)(B) of Public Law 110-90 until after CMS has the 
opportunity to fully examine the FY 2009 claims data.
    Response: We recognize that any adjustment to account for the 
documentation and coding effect observed in the FY 2008 and FY 2009 
claims data may result in significant future payment reduction for 
providers. However, as discussed in the proposed rule, we are required 
under section

[[Page 43775]]

7(b)(1)(B) of Public Law 110-90 to recapture the difference of actual 
documentation and coding effect in FY 2008 and FY 2009 that is greater 
than the prior adjustments. We agree with the commenters who requested 
that CMS delay any adjustment and, for the reasons stated above, expect 
to address this issue through the FY 2011 rulemaking.
7. Background on the Application of the Documentation and Coding 
Adjustment to the Hospital-Specific Rates
    Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on 
whichever of the following rates yields the greatest aggregate payment: 
The Federal rate; the updated hospital-specific rate based on FY 1982 
costs per discharge; the updated hospital-specific rate based on FY 
1987 costs per discharge; the updated hospital-specific rate based on 
FY 1996 costs per discharge; or the updated hospital-specific rate 
based on FY 2006 costs per discharge. Under section 1886(d)(5)(G) of 
the Act, MDHs are paid based on the Federal national rate or, if 
higher, the Federal national rate plus 75 percent of the difference 
between the Federal national rate and the updated hospital-specific 
rate based on the greatest of the FY 1982, FY 1987, or FY 2002 costs 
per discharge. In the FY 2008 IPPS final rule with comment period (72 
FR 47152 through 47188), we established a policy of applying the 
documentation and coding adjustment to the hospital-specific rates. In 
that final rule with comment period, we indicated that because SCHs and 
MDHs use the same DRG system as all other hospitals, we believe they 
should be equally subject to the budget neutrality adjustment that we 
are applying for adoption of the MS-DRGs to all other hospitals. In 
establishing this policy, we relied on section 1886(d)(3)(A)(vi) of the 
Act, which provides us with the authority to adjust ``the standardized 
amount'' to eliminate the effect of changes in coding or classification 
that do not reflect real change in case-mix.
    However, in the final rule that appeared in the Federal Register on 
November 27, 2007 (72 FR 66886), we rescinded the application of the 
documentation and coding adjustment to the hospital-specific rates 
retroactive to October 1, 2007. In that final rule, we indicated that, 
while we still believe it would be appropriate to apply the 
documentation and coding adjustment to the hospital-specific rates, 
upon further review, we decided that the application of the 
documentation and coding adjustment to the hospital-specific rates is 
not consistent with the plain meaning of section 1886(d)(3)(A)(vi) of 
the Act, which only mentions adjusting ``the standardized amount'' 
under section 1886(d) of the Act and does not mention adjusting the 
hospital-specific rates.
    In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that 
we continued to have concerns about this issue. Because hospitals paid 
based on the hospital-specific rate use the same MS-DRG system as other 
hospitals, we believe they have the potential to realize increased 
payments from documentation and coding changes that do not reflect real 
increases in patients' severity of illness. In section 
1886(d)(3)(A)(vi) of the Act, Congress stipulated that hospitals paid 
based on the standardized amount should not receive additional payments 
based on the effect of documentation and coding changes that do not 
reflect real changes in case-mix. Similarly, we believe that hospitals 
paid based on the hospital-specific rates should not have the potential 
to realize increased payments due to documentation and coding changes 
that do not reflect real increases in patients' severity of illness. 
While we continue to believe that section 1886(d)(3)(A)(vi) of the Act 
does not provide explicit authority for application of the 
documentation and coding adjustment to the hospital-specific rates, we 
believe that we have the authority to apply the documentation and 
coding adjustment to the hospital-specific rates using our special 
exceptions and adjustment authority under section 1886(d)(5)(I)(i) of 
the Act. The special exceptions and adjustment provision authorizes us 
to provide ``for such other exceptions and adjustments to [IPPS] 
payment amounts * * * as the Secretary deems appropriate.'' In the FY 
2009 IPPS final rule (73 FR 48448 through 48449), we indicated that, 
for the FY 2010 rulemaking, we planned to examine our FY 2008 claims 
data for hospitals paid based on the hospital-specific rate. We further 
indicated that if we found evidence of significant increases in case-
mix for patients treated in these hospitals that do not reflect real 
changes in case-mix, we would consider proposing application of the 
documentation and coding adjustments to the FY 2010 hospital-specific 
rates under our authority in section 1886(d)(5)(I)(i) of the Act.
    In response to public comments received on the FY 2009 IPPS 
proposed rule, we stated in the FY 2009 IPPS final rule that we would 
consider whether such a proposal is warranted for FY 2010. To gather 
information to evaluate these considerations, we indicated that we 
planned to perform analyses on FY 2008 claims data to examine whether 
there has been a significant increase in case-mix for hospitals paid 
based on the hospital-specific rate. If we found that application of 
the documentation and coding adjustment to the hospital-specific rates 
for FY 2010 is warranted, we indicated that we would include a proposal 
to do so in the FY 2010 IPPS proposed rule.
8. Documentation and Coding Adjustment to the Hospital-Specific Rates 
for FY 2010 and Subsequent Fiscal Years
    In the FY 2010 IPPS/RY 2010 LTCH proposed rule (74 FR 24098 through 
24100), we discussed our performance of a retrospective evaluation of 
the FY 2008 claims data for SCHs and MDHs using the same methodology 
described earlier for other IPPS hospitals. We found that, 
independently for both SCHs and MDHs, the change due to documentation 
and coding that did not reflect real changes in case-mix for discharges 
occurring during FY 2008 slightly exceeded the proposed 2.5 percent 
result discussed earlier, but did not significantly differ from that 
result.
    Again, for the proposed rule, we found that the within-base DRG 
increases were almost entirely responsible for the case-mix change. In 
the proposed rule, we presented two Figures to display our results.
    Therefore, consistent with our statements in prior IPPS rules, we 
proposed to use our authority under section 1886(d)(5)(I)(i) of the Act 
to prospectively adjust the hospital-specific rates by the proposed -
2.5 percent in FY 2010 to account for our estimated documentation and 
coding effect in FY 2008 that does not reflect real changes in case-
mix. We proposed to leave this adjustment in place for subsequent 
fiscal years in order to ensure that changes in documentation and 
coding resulting from the adoption of the MS-DRGs do not lead to an 
increase in aggregate payments for SCHs and MDHs not reflective of an 
increase in real case-mix. The proposed -2.5 percent adjustment to the 
hospital-specific rates exceeded the -1.9 percent adjustment to the 
national standardized amount under section 7(b)(1)(A) of Public Law 
110-90 because, unlike the national standardized rates, the FY 2008 
hospital-specific rates were not previously reduced in order to account 
for anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24100), 
we

[[Page 43776]]

solicited public comment on the proposed -2.5 percent prospective 
adjustment to the hospital-specific rates under section 
1886(d)(5)(I)(i) of the Act and our proposal to address in the FY 2011 
rulemaking cycle any changes in FY 2009 case-mix due to changes in 
documentation and coding that do not reflect real changes in case-mix 
for discharges occurring during FY 2009. We also indicated that we 
intended to update our analysis with FY 2008 data on claims paid 
through March 2008 [sic] for the FY 2010 IPPS final rule. (We note that 
the March 2008 update claims paid data date in the proposed rule should 
have been March 2009.)
    Consistent with our approach for IPPS hospitals discussed earlier, 
we are also delaying adoption of a documentation and coding adjustment 
to the hospital-specific rate until FY 2011. Similar to our approach 
for IPPS hospitals, we will consider, through future rulemaking, 
phasing in the documentation and coding adjustment over an appropriate 
period. As we indicated earlier, we also will address, through future 
rulemaking, any changes in documentation and coding that do not reflect 
real changes in case-mix for discharges occurring during FY 2009. We 
noted that, unlike the national standardized rates, the FY 2009 
hospital-specific rates were not previously reduced in order to account 
for anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs. 
However, as we note earlier with regard to IPPS hospitals, if the 
estimated documentation and coding effect determined based on a full 
analysis of FY 2009 claims data is more or less than our current 
estimates, it would change, possibly lessen, the anticipated cumulative 
adjustments that we currently estimate we would have to make for the FY 
2008 and FY 2009 combined adjustment. Therefore, we believe that it 
would be more prudent to delay implementation of the documentation and 
coding adjustment to allow for a more complete analysis of FY 2009 
claims data for hospitals receiving hospital-specific rates.
    Comment: One commenter request that CMS rescind the documentation 
and coding adjustment for SCHs and MDHs. The commenter contended that, 
due to the special recognition and protection afforded to these 
provider types by the Medicare program, CMS should more closely 
reexamine any negative payment adjustment that may threaten the 
viability of these providers. Commenters also questioned the statutory 
authority to apply this adjustment to SCHs and MDHs. The commenters 
argued that because Congress included specific statutory authority to 
adjust the standardized amount in section 1886(d)(3)(A)(vi) of the Act, 
CMS is precluded from using the broader ``adjustments'' language in 
section 1886(d)(5)(I)(i) of the Act to apply those same adjustments to 
the hospital-specific rate.
    Response: We disagree with the commenter that the Secretary's broad 
authority to make exceptions and adjustment to payment amounts under 
section 1886(d)(3)(A)(vi) of the Act cannot be applied in this 
instance. We have discussed the basis for applying such an adjustment 
in prior rules (in the FY 2009 proposed rule (73 FR 23540), the FY 2009 
final rule (73 FR 48448), and the FY 2010 proposed rule (74 FR 24098)) 
and do not agree that the language in section 1886(d)(3)(A)(vi) of the 
Act limits our authority under section 1886(d)(5)(I)(i) of the Act to 
make such an adjustment. We recognize that SCHs and MDHs are entitled 
through legislation to receive the hospital-specific rate in order to 
compensate for their unique service requirements in the provider 
community. Similar to our approach with IPPS hospitals, through future 
rulemaking, we will consider a phase-in of the documentation and coding 
adjustment over an appropriate period, beginning in FY 2011, and will 
continue to separately analyze SCH and MDH claims data to assure that 
any future adjustment is appropriate for these provider types.
9. Background on the Application of the Documentation and Coding 
Adjustment to the Puerto Rico-Specific Standardized Amount
    Puerto Rico hospitals are paid based on 75 percent of the national 
standardized amount and 25 percent of the Puerto Rico-specific 
standardized amount. As noted previously, the documentation and coding 
adjustment we adopted in the FY 2008 IPPS final rule with comment 
period relied upon our authority under section 1886(d)(3)(A)(vi) of the 
Act, which provides the Secretary the authority to adjust ``the 
standardized amounts computed under this paragraph'' to eliminate the 
effect of changes in coding or classification that do not reflect real 
changes in case-mix. Section 1886(d)(3)(A)(vi) of the Act applies to 
the national standardized amounts computed under section 1886(d)(3) of 
the Act, but does not apply to the Puerto Rico-specific standardized 
amount computed under section 1886(d)(9)(C) of the Act. In calculating 
the FY 2008 payment rates, we made an inadvertent error and applied the 
FY 2008 -0.6 percent documentation and coding adjustment to the Puerto 
Rico-specific standardized amount, relying on our authority under 
section 1886(d)(3)(A)(vi) of the Act. However, section 
1886(d)(3)(A)(vi) of the Act authorizes application of a documentation 
and coding adjustment to the national standardized amount and does not 
apply to the Puerto Rico specific standardized amount. In the FY 2009 
IPPS final rule (73 FR 48449), we corrected this inadvertent error by 
removing the -0.6 percent documentation and coding adjustment from the 
FY 2008 Puerto Rico-specific rates.
    While section 1886(d)(3)(A)(vi) of the Act is not applicable to the 
Puerto Rico-specific standardized amount, we believe that we have the 
authority to apply the documentation and coding adjustment to the 
Puerto Rico-specific standardized amount using our special exceptions 
and adjustment authority under section 1886(d)(5)(I)(i) of the Act. 
Similar to SCHs and MDHs that are paid based on the hospital-specific 
rate, we believe that Puerto Rico hospitals that are paid based on the 
Puerto Rico-specific standardized amount should not have the potential 
to realize increased payments due to documentation and coding changes 
that do not reflect real increases in patients' severity of illness. 
Consistent with the approach described for SCHs and MDHs, in the FY 
2009 IPPS final rule (73 FR 48449), we indicated that we planned to 
examine our FY 2008 claims data for hospitals in Puerto Rico. We 
indicated in the FY 2009 IPPS proposed rule (73 FR 23541) that if we 
found evidence of significant increases in case-mix for patients 
treated in these hospitals, we would consider proposing application of 
the documentation and coding adjustments to the FY 2010 Puerto Rico-
specific standardized amount under our authority in section 
1886(d)(5)(I)(i) of the Act.
10. Documentation and Coding Adjustment to the Puerto Rico-Specific 
Standardized Amount
    For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a 
retrospective evaluation of the FY 2008 claims data for Puerto Rico 
hospitals using the same methodology described earlier for IPPS 
hospitals paid under the national standardized amounts under section 
1886(d) of the Act. We found that, for Puerto Rico hospitals, the 
increase in payments for discharges occurring during FY 2008 due to 
documentation and coding that did not reflect real changes in case-mix 
for

[[Page 43777]]

discharges occurring during FY 2008 was approximately 1.1 percent. When 
we calculated the within-base DRG changes and the across-base DRG 
changes for Puerto Rico hospitals, we found that responsibility for the 
case-mix change between FY 2007 and FY 2008 is much more evenly shared. 
Across-base DRG shifts accounted for 44 percent of the changes, and 
within-base DRG shifts accounted for 56 percent. Thus, the change in 
the percentage of discharges with an MCC was not as large as that for 
other IPPS hospitals. In Figure 4 in the proposed rule, we showed that, 
for Puerto Rico hospitals, there was a 3 percentage point increase in 
the discharges with an MCC from 22 percent to 25 percent and a 
corresponding decrease of 3 percentage points from 58 percent to 55 
percent in discharges without a CC or an MCC.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24101), 
we solicited public comment on the proposed -1.1 percent prospective 
adjustment to the hospital-specific rates under section 
1886(d)(5)(I)(i) of the Act and our intent to address in the FY 2011 
rulemaking cycle any changes in FY 2009 case-mix due to changes in 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2009. We also stated that we 
intended to update our analysis with FY 2008 data on claims paid 
through March 2009 for the FY 2010 IPPS final rule.
    Given these documentation and coding increases, consistent with our 
statements in prior IPPS rules, we will use our authority under section 
1886(d)(5)(I)(i) of the Act to adjust the Puerto Rico-specific rate. 
However, in parallel to our decision to postpone adjustments to the 
Federal standardized amount, we are adopting a similar policy for the 
Puerto Rico-specific rate and will consider the phase-in of this 
adjustment over an appropriate time period through future rulemaking. 
The adjustment would be applied to the Puerto Rico-specific rate that 
accounts for 25 percent of payments to Puerto Rico hospitals, with the 
remaining 75 percent based on the national standardized amount. 
Consequently, the overall reduction to the payment rates for Puerto 
Rico hospitals to account for documentation and coding changes will be 
slightly less than the reduction for IPPS hospitals paid based on 100 
percent of the national standardized amount. We note that, as with the 
hospital-specific rates, the Puerto Rico-specific standardized amount 
had not previously been reduced based on estimated changes in 
documentation and coding associated with the adoption of the MS-DRGs. 
However, as we note earlier for IPPS hospitals and hospitals receiving 
hospital-specific rates, if the estimated documentation and coding 
effect determined based on a full analysis of FY 2009 claims data is 
more or less than our current estimates, it would change, possibly 
lessen, the anticipated cumulative adjustments that we currently 
estimate we would have to make for the FY 2008 and FY 2009 combined 
adjustment. Therefore, we believe that it would be more prudent to 
delay implementation of the documentation and coding adjustment to 
allow for a more complete analysis of FY 2009 claims data for Puerto 
Rico hospitals.
    Consistent with our approach for IPPS hospitals discussed above, we 
will address in the FY 2011 rulemaking cycle any change in FY 2009 
case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2009. We note 
that, unlike the national standardized rates, the FY 2009 hospital-
specific rates were not previously reduced in order to account for 
anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs.

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background
    In the FY 2009 IPPS final rule (73 FR 48450), we continued to 
implement significant revisions to Medicare's inpatient hospital rates 
by completing our 3-year transition from charge-based relative weights 
to cost-based relative weights. Beginning in FY 2007, we implemented 
relative weights based on cost report data instead of based on charge 
information. We had initially proposed to develop cost-based relative 
weights using the hospital-specific relative value cost center (HSRVcc) 
methodology as recommended by MedPAC. However, after considering 
concerns expressed in the public comments we received on the proposal, 
we modified MedPAC's methodology to exclude the hospital-specific 
relative weight feature. Instead, we developed national CCRs based on 
distinct hospital departments and engaged a contractor to evaluate the 
HSRVcc methodology for future consideration. To mitigate payment 
instability due to the adoption of cost-based relative weights, we 
decided to transition cost-based weights over 3 years by blending them 
with charge-based weights beginning in FY 2007. (We refer readers to 
the FY 2007 IPPS final rule for details on the HSRVcc methodology and 
the 3-year transition blend from charge-based relative weights to cost-
based relative weights (71 FR 47882 through 47898).)
    In FY 2008, we adopted severity-based MS-DRGs, which increased the 
number of DRGs from 538 to 745. Many commenters raised concerns as to 
how the transition from charge-based weights to cost-based weights 
would continue with the introduction of new MS-DRGs. We decided to 
implement a 2-year transition for the MS-DRGs to coincide with the 
remainder of the transition to cost-based relative weights. In FY 2008, 
50 percent of the relative weight for each DRG was based on the CMS DRG 
relative weight and 50 percent was based on the MS-DRG relative weight.
    In FY 2009, the third and final year of the transition from charge-
based weights to cost-based weights, we calculated the MS-DRG relative 
weights based on 100 percent of hospital costs. We refer readers to the 
FY 2007 IPPS final rule (71 FR 47882) for a more detailed discussion of 
our final policy for calculating the cost-based DRG relative weights 
and to the FY 2008 IPPS final rule with comment period (72 FR 47199) 
for information on how we blended relative weights based on the CMS 
DRGs and MS-DRGs.
a. Summary of the RTI Study of Charge Compression and CCR Refinement
    As we transitioned to cost-based relative weights, some commenters 
raised concerns about potential bias in the weights due to ``charge 
compression,'' which is the practice of applying a higher percentage 
charge markup over costs to lower cost items and services, and a lower 
percentage charge markup over costs to higher cost items and services. 
As a result, the cost-based weights would undervalue high-cost items 
and overvalue low-cost items if a single CCR is applied to items of 
widely varying costs in the same cost center. To address this concern, 
in August 2006, we awarded a contract to RTI to study the effects of 
charge compression in calculating the relative weights and to consider 
methods to reduce the variation in the CCRs across services within cost 
centers. RTI issued an interim draft report in January 2007 with its 
findings on charge compression (which was posted on the CMS Web site 
at: http://www.cms.hhs.gov/reports/downloads/Dalton.pdf). In that 
report, RTI found that a number of factors contribute to charge 
compression and affect the accuracy of the relative weights. RTI's 
findings demonstrated that charge compression exists in

[[Page 43778]]

several CCRs, most notably in the Medical Supplies and Equipment CCR.
    In its interim draft report, RTI offered a number of 
recommendations to mitigate the effects of charge compression, 
including estimating regression-based CCRs to disaggregate the Medical 
Supplies Charged to Patients, Drugs Charged to Patients, and Radiology 
cost centers, and adding new cost centers to the Medicare cost report, 
such as adding a ``Devices, Implants and Prosthetics'' line under 
``Medical Supplies Charged to Patients'' and a ``CT Scanning and MRI'' 
subscripted line under ``Radiology-Diagnostics''. (For more details on 
RTI's findings and recommendations, we refer readers to the FY 2009 
IPPS final rule (73 FR 48452).) Despite receiving public comments in 
support of the regression-based CCRs as a means to immediately resolve 
the problem of charge compression, particularly within the Medical 
Supplies and Equipment CCR, we did not adopt RTI's recommendation to 
create additional regression-based CCRs for several reasons. We were 
concerned that RTI's analysis was limited to charges on hospital 
inpatient claims, while typically hospital cost report CCRs combine 
both inpatient and outpatient services. Further, because both the IPPS 
and the OPPS rely on cost-based weights, we preferred to introduce any 
methodological adjustments to both payment systems at the same time. 
RTI's analysis of charge compression has since been expanded to 
incorporate outpatient services. RTI evaluated the cost estimation 
process for the OPPS cost-based relative weights, including a 
reassessment of the regression-based CCR models using both outpatient 
and inpatient charge data. This interim report was made available in 
April 2008 during the public comment period on the FY 2009 IPPS 
proposed rule and can be found on RTI's Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200804.pdf. The IPPS-specific chapters, which were 
separately displayed in the April 2008 interim report, as well as the 
more recent OPPS chapters, were included in the July 3, 2008 RTI final 
report entitled, ``Refining Cost-to-Charge Ratios for Calculating APC 
[Ambulatory Payment Classification] and DRG Relative Payment Weights,'' 
that became available at the time of the development of the FY 2009 
IPPS final rule. The RTI final report can be found on RTI's Web site 
at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf.
    RTI's final report distinguished between two types of research 
findings and recommendations: those pertaining to the accounting or 
cost report data and those related to statistical regression analysis. 
Importantly, RTI found that, under the IPPS and the OPPS, accounting 
improvements to the cost reporting data reduce some of the sources of 
aggregation bias without having to use regression-based adjustments. In 
general, with respect to the regression-based adjustments, RTI 
confirmed the findings of its March 2007 report that regression models 
are a valid approach for diagnosing potential aggregation bias within 
selected services for the IPPS and found that regression models are 
equally valid for setting payments under the OPPS. RTI also suggested 
that regression-based CCRs could provide a short-term correction until 
accounting data could be sufficiently refined to support more accurate 
CCR estimates under both the IPPS and the OPPS.
    RTI also noted that cost-based weights are only one component of a 
final prospective payment rate. There are other rate adjustments (wage 
index, IME, and DSH) to payments derived from the revised cost-based 
weights and the cumulative effect of these components may not improve 
the ability of final payment to reflect resource cost. With regard to 
APCs and MS-DRGs that contain substantial device costs, RTI cautioned 
that the other rate adjustments largely offset the effects of charge 
compression among hospitals that receive these adjustments. RTI 
endorsed short-term regression-based adjustments, but also concluded 
that more refined and accurate accounting data are the preferred long-
term solution to mitigate charge compression and related bias in 
hospital cost-based weights.
    As a result of this research, RTI made 11 recommendations. For a 
more detailed summary of RTI's findings, recommendations, and public 
comments we received on the report, we refer readers to the FY 2009 
IPPS final rule (73 FR 48452 through 48453).
b. Summary of the RAND Corporation Study of Alternative Relative Weight 
Methodologies
    One of the reasons that we did not implement regression-based CCRs 
at the time of the FY 2008 IPPS final rule with comment period was our 
inability to investigate how regression-based CCRs would interact with 
the implementation of MS-DRGs. In the FY 2008 final rule with comment 
period (72 FR 47197), we stated that we engaged the RAND Corporation as 
the contractor to evaluate the HSRV methodology in conjunction with 
regression-based CCRs, and that we would consider its analysis as we 
prepared for the FY 2009 IPPS rulemaking process. In the FY 2009 IPPS 
final rule (73 FR 48453 through 48457), we provided a summary of the 
RAND report and the public comments we received in response to the FY 
2009 IPPS proposed rule. The report may be found on RAND's Web site at: 
http://www.rand.org/pubs/working_papers/WR560/.
    RAND evaluated six different methods that could be used to 
establish relative weights, CMS' current relative weight methodology of 
15 national CCRs and 5 alternatives, including a method in which the 15 
national CCRs are disaggregated using the regression-based methodology, 
and a method using hospital-specific CCRs for the 15 cost center 
groupings. In addition, RAND analyzed our standardization methodologies 
that account for systematic cost differences across hospitals. The 
purpose of standardization is to eliminate systematic facility-specific 
differences in cost so that these cost differences do not influence the 
relative weights. The three standardization methodologies analyzed by 
RAND include: The ``hospital payment factor'' methodology currently 
used by CMS, under which a hospital's wage index factor, and IME and/or 
DSH factor, are divided out of its estimated DRG cost; the HSRV 
methodology, which standardizes the cost for a given discharge by the 
hospital's own costliness rather than by the effect of the systematic 
cost differences across groups of hospitals; and the HSRVcc 
methodology, which removes hospital-level cost variation by calculating 
hospital-specific charge-based relative values for each DRG at the cost 
center level and standardizing them for differences in case-mix. Under 
the HSRVcc methodology, a national average charge-based relative weight 
is calculated for each cost center.
    Overall, RAND found that none of the alternative methods of 
calculating the relative weights represented a marked improvement in 
payment accuracy over the current method, and there was little 
difference across methods in their ability to predict cost at either 
the discharge-level or the hospital-level. In their regression 
analysis, RAND found that after controlling for hospital payment 
factors, the relative weights are compressed (that is, understated). 
However, RAND also found that the hospital payment factors are 
overstated and increase more rapidly than cost.

[[Page 43779]]

Therefore, while the relative weights are compressed, these payment 
factors offset the compression such that total payments to hospitals 
increase more rapidly than hospitals' costs.
    RAND found that relative weights using the 19 national 
disaggregated regression-based CCRs result in significant 
redistributions in payments among hospital groupings. However, RAND did 
not believe the regression-based charge compression adjustments 
significantly improve payment accuracy. With regard to standardization 
methodologies, while RAND found that there is no clear advantage to the 
HSRV method or the HSRVcc method of standardizing cost compared to the 
current hospital payment factor standardization method, its analysis 
did reveal significant limitations of CMS' current hospital payment 
factor standardization method. The current standardization method has a 
larger impact on the relative weights and payment accuracy than any of 
the other alternatives that RAND analyzed because the method ``over-
standardizes'' by removing more variability for hospitals receiving a 
payment factor than can be empirically supported as being cost-related 
(particularly for IME and DSH). RAND found that instead of increasing 
proportionately with cost, the payment factors CMS currently uses (some 
of which are statutory), increase more rapidly than cost, thereby 
reducing payment accuracy. RAND concluded that further analysis is 
needed to isolate the cost-related component of the IPPS payment 
adjustments (some of which has already been done by MedPAC), use them 
to standardize cost, and revise the analysis of payment accuracy to 
reflect only the cost-related component.
2. Summary of FY 2009 Changes and Discussion for FY 2010
    In the FY 2009 IPPS final rule (73 FR 48458 through 48467), in 
response to the RTI's recommendations concerning cost report 
refinements, and because of RAND's finding that regression-based 
adjustments to the CCRs do not significantly improve payment accuracy, 
we discussed our decision to pursue changes to the cost report to split 
the cost center for Medical Supplies Charged to Patients into one line 
for ``Medical Supplies Charged to Patients'' and another line for 
``Implantable Devices Charged to Patients.'' We acknowledged, as RTI 
had found, that charge compression occurs in several cost centers that 
exist on the Medicare cost report. However, as we stated in the final 
rule, we focused on the CCR for Medical Supplies and Equipment because 
RTI found that the largest impact on the MS-DRG relative weights could 
result from correcting charge compression for devices and implants. In 
determining what should be reported in these respective cost centers, 
we adopted the commenters' recommendation that hospitals should use 
revenue codes established by AHA's National Uniform Billing Committee 
to determine what should be reported in the ``Medical Supplies Charged 
to Patients'' and the ``Implantable Devices Charged to Patients'' cost 
centers.
    When we developed the FY 2009 IPPS final rule, we considered all of 
the public comments we received both for and against adopting 
regression-based CCRs. Also noteworthy is RAND's belief that 
regression-based CCRs may not significantly improve payment accuracy, 
and that it is equally, if not more, important to consider revisions to 
the current IPPS hospital payment factor standardization method in 
order to improve payment accuracy. We continue to believe that, 
ultimately, improved and more precise cost reporting is the best way to 
minimize charge compression and improve the accuracy of the cost 
weights. Accordingly, we did not propose to adopt regression-based CCRs 
for the calculation of the FY 2010 IPPS relative weights.
    However, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 
24103), we expressed our concern about RAND's finding that there are 
significant limitations of CMS' current hospital payment factor 
standardization method. As summarized above, RAND found that the 
current standardization method ``over-standardizes'' by removing more 
variability for hospitals receiving a payment factor than can be 
empirically supported as being cost-related (particularly for IME and 
DSH). RAND found that instead of increasing proportionately with cost, 
the payment factors CMS currently uses (some of which are statutory), 
increase more rapidly than cost, thereby reducing payment accuracy. 
Further analysis is needed to isolate the cost-related component of the 
IPPS payment adjustments, use them to standardize cost, and revise the 
analysis of payment accuracy to reflect only the cost-related 
component. However, RAND cautioned that ``re-estimating'' these payment 
factors ``raises important policy issues that warrant additional 
analyses'' (page 49 of RAND's report, which is available on the Web 
site at: http://www.rand.org/pubs/working_papers/WR560/), particularly 
to ``determine the analytically justified levels using the MS-DRGs'' 
(page 86 of the RAND report). In addition, we noted that RTI, in its 
July 2008 final report, also observed that the adjustment factors under 
the IPPS (the wage index, IME, and DSH adjustments) complicate the 
determination of cost and these factors ``within the rate calculation 
may offset the effects of understated weights due to charge 
compression'' (page 109 of RTI's final report, which is available at 
the Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf). While it 
may be more accurate to standardize using the empirically justified 
levels of the IME and DSH adjustments, consideration needs to be given 
to the extent to which these payment factors offset the compression of 
the relative weights.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24103 and 
24104), we stated that we understood that MedPAC performed an analysis 
to identify empirically justifiable formulas for determining 
appropriate IME and DSH adjustments. For example, in its March 2007 
report (and reiterated in its March 2009 report), MedPAC asserts that 
the current level of the IME adjustment factor, 5.5 percent for every 
10 percent increase in resident-to-bed ratio, overstates IME payments 
by more than twice the empirically justified level, resulting in 
approximately $3 billion in overpayments. The empirical level of the 
IME adjustment is estimated to be 2.2 percent for every 10 percent 
increase in the resident-to-bed ratio. We stated that we cannot propose 
to change the IME and DSH factors used for actual payment under the 
IPPS because these factors are mandated by law. However, under section 
1886(d)(4) of the Act, we have the authority to determine the 
appropriate weighting factor for each MS-DRG (including which factors 
or method we will employ in making annual adjustments to the MS-DRGs so 
as to reflect changes in the relative use of hospital resources). In 
addition, section 1886(d)(7)(B) of the Act precludes judicial review of 
our methodology for determining the appropriate weighting factors. 
Therefore, we do have some flexibility in what factors may be used for 
standardization purposes. For purposes of standardization only, we 
stated that one option may be for CMS to use the empirically justified 
IME adjustment of 2.2 percent, such that only the cost-related 
component of teaching hospitals is removed from the claim charges prior 
to calculating the relative weights. Similarly, for the DSH adjustment, 
in its March 2007 report, MedPAC found that costs per case increase 
about 0.4 percent

[[Page 43780]]

for each 10 percent increase in the low-income patient percentage. This 
is significantly less than the percentage increase expressed by the 
current factors used in the DSH payment formulas. (According to MedPAC, 
in FY 2004, about $5.5 billion in DSH payments were made above the 
empirically justified level.) In looking only at urban hospitals with 
greater than 100 beds, which manifest the strongest positive 
correlation between cost and low income patient share, MedPAC found 
that costs increase about 1.4 percent for every 10 percent increment of 
the low-income patient percentage. MedPAC did not find a positive cost 
relationship between low-income patient percentage and costs per case 
for urban hospitals with less than 100 beds and/or for rural hospitals. 
Therefore, for purposes of standardizing for the DSH adjustment, we 
stated that an option we may consider is to incorporate an adjustment 
factor of 1.4 percent for urban hospitals with greater than 100 beds, 
and to remove the DSH payment adjustment altogether for other hospitals 
that otherwise currently qualify for DSH payment. We also noted that 
while we cannot predict the effect of using the empirical factors for 
IME and DSH in the standardized methodology on the relative weights 
without further analysis, dividing out (that is, excluding) reduced IME 
and DSH payment factors from a hospital's total payment would result in 
a greater share of teaching and DSH hospitals' costs used in 
calculating the relative weights. With respect to the wage index, 
because there are multiple wage index factors, one for each geographic 
area, determining the true cost associated with geographic location and 
standardizing for those costs is much more challenging. While we did 
not propose changes for FY 2010, in light of the previous discussion of 
the current IME and DSH adjustments in the standardization process, we 
solicited public comments as to how the standardization process can be 
improved to more precisely remove cost differences across hospitals, 
thereby improving the accuracy of the relative weights in subsequent 
fiscal years.
Charge Compression
    Comment: Commenters continue to oppose the regression-based CCR 
approach to calculate the relative weights. The commenters cited the 
results of the RAND report on alternative relative weight methodologies 
in which RAND found that ``none of the alternative weight methodologies 
represent a marked improvement over the current system.'' In addition, 
the commenters noted the RTI study, which concluded that more refined 
and accurate accounting data would be the preferred long-term solution 
to mitigate charge compression.
    Some commenters also continue to support our policy finalized in 
the FY 2009 IPPS final rule to address charge compression (that is, the 
creation of separate cost centers for Implantable Devices Charged to 
Patients and Medical Supplies Charged to Patients).
    Response: We appreciate the comments with respect to regression-
based CCRs and the use of refined cost report data. However, we note 
that we have not proposed any changes to the existing cost-based 
relative weight methodology for FY 2010.
    Comment: Some commenters sought clarification on which revenue 
codes should be used to report various implantable devices. Some 
commenters disagreed with the definition of a high-cost device that 
only applied to implantables because the commenters believed that there 
are other high-cost devices that are not implantable, but should be 
included in the device cost center.
    Response: We did not propose any policy changes with respect to the 
use of revenue codes or alternative ways for identifying high-cost 
devices. Therefore, we are not responding to these comments at this 
time. We refer readers to the discussion in the FY 2009 IPPS final rule 
concerning our current policy on these matters (73 FR 48462 and 48462).
    Comment: Commenters responded to our solicitation for options on 
possibly revising the current standardization methodology. MedPAC 
supported the option of standardizing hospitals' service charges using 
the empirical estimates of DSH and IME rather than their actual payment 
amounts. MedPAC also expressed support for the use of the HSRV 
methodology for calculating relative weights because it would obviate 
the need to standardize hospitals' charges and it would allow for costs 
to be comparable across hospitals. Other commenters continue to oppose 
the HSRV methods of standardization. These commenters believe that the 
HSRV methodology is inappropriate for a cost-based methodology and only 
applicable in charge-based systems that account for mark-up practices. 
Some of these commenters expressed general concern about revising the 
current standardization methodology because CMS has implemented 
numerous changes to the relative weights and DRGs in recent years, 
including moving to cost-based relative weights and to MS-DRGs, making 
it difficult for hospitals to predict their payments. Commenters 
suggested that, because hospitals have been dealing with other Medicare 
payment changes, such as quality reporting, and in light of health 
reform legislation, CMS wait before modifying the relative weight 
methodology to allow payments under the cost-based relative weights to 
stabilize and to allow hospitals to better predict their payments.
    Response: In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we 
expressed our concerns regarding RAND's finding that there are 
significant limitations of CMS' current hospital payment factor 
standardization method. As summarized above, RAND found that the 
current standardization method ``over-standardizes'' by removing more 
variability for hospitals receiving a payment factor than can be 
empirically supported as being cost-related (particularly for IME and 
DSH). We further stated that given MedPAC's analysis that identifies 
empirically justifiable formulas for determining appropriate IME and 
DSH adjustments, perhaps one option for improving the accuracy of the 
standardization process is to use the empirically justified IME and DSH 
factors. We did not propose any changes for FY 2010, although we 
solicited public comments as to how the standardization process can be 
changed to improve the accuracy of the relative weights in subsequent 
fiscal years. Therefore, the commenters need not be concerned that we 
are introducing yet another significant change to the calculation of 
the relative weights or the MS-DRGs for FY 2010. We appreciate the 
public comments received, and we will consider the commenters' concerns 
as we continue to study the issue.
    Comment: One commenter expressed concern regarding the effects of 
standardizing the relative weights by only removing the empirical costs 
of DSH and IME, rather than removing the entire effects of DSH and IME. 
The commenter was concerned that, by removing the empirical costs of 
DSH and IME in setting the relative weights, the non-DSH and 
nonteaching hospitals would be adversely affected by lower relative 
weights and a lower standardized amount. The commenter requested that 
thorough analysis be done and shared with the industry before CMS 
proposed any changes to the standardization method.
    Response: As we stated in the proposed rule, we cannot predict the 
effect of using the empirical factors for IME and DSH in the 
standardized methodology on the relative weights without further 
analysis. We

[[Page 43781]]

acknowledge that dividing out (that is, excluding) reduced IME and DSH 
payment factors from a hospital's total payment would result in a 
greater share of teaching and DSH hospitals' payments being 
characterized as costs that would then be used in calculating the 
relative weights. We also are unsure as to whether a change in the 
relative weights would affect the standardized amount. In any case, 
should we propose changes to the current standardization process, we 
will make our analysis and impacts available to the public for comment, 
in accordance with our general practice.
3. Timeline for Revising the Medicare Cost Report
    As mentioned in the FY 2009 IPPS final rule (73 FR 48467), we are 
currently in the process of comprehensively reviewing the Medicare 
hospital cost report, and the finalized policy from the FY 2009 IPPS 
final rule to split the current cost center for Medical Supplies 
Charged to Patients into one line for ``Medical Supplies Charged to 
Patients'' and another line for ``Implantable Devices Charged to 
Patients,'' as part of our initiative to update and revise the hospital 
cost report. Under an effort initiated by CMS to update the Medicare 
hospital cost report to eliminate outdated requirements in conjunction 
with provisions of the Paperwork Reduction Act (PRA), we stated that we 
have been planning to propose the actual changes to the cost reporting 
form, the attending cost reporting software, and the cost reporting 
instructions in Chapter 40 of the Medicare Provider Reimbursement 
Manual (PRM), Part II. Under the effort to update the cost report and 
eliminate outdated requirements in conjunction with the provisions of 
the PRA, we stated that changes to the cost reporting form and cost 
reporting instructions would be made available to the public for 
comment. Thus, the public would have an opportunity to suggest 
comprehensive reforms (which they had advocated in the FY 2009 IPPS 
final rule in response to our proposals), and would similarly be able 
to make suggestions for ensuring that these reforms are made in a 
manner that is not disruptive to hospitals' billing and accounting 
systems, and are first and foremost within the guidelines of GAAP, 
which are consistent with the Medicare principles of reimbursement, and 
sound accounting practices.
    In the FY 2009 IPPS final rule (73 FR 48468), we stated that we 
expect the revised cost reporting forms that reflect one cost center 
for ``Medical Supplies Charged to Patients'' and one cost center for 
``Implantable Devices Charged to Patients'' would not be available 
until cost reporting periods beginning after the Spring of 2009. At the 
time the proposed rule was issued, we anticipated that the transmittal 
to create this new cost center would be issued in June 2009. Because 
there is approximately a 3-year lag between the availability of cost 
report data for IPPS and OPPS ratesetting purposes in a given fiscal 
year or calendar year, we stated that we may be able to derive two 
distinct CCRs, one for medical supplies and one for devices, for use in 
calculating the FY 2013 IPPS relative weights and the CY 2013 OPPS 
relative weights. Until the revised cost reporting forms are published, 
we stated that hospitals must include costs and charges of separately 
chargeable medical supplies and implantable medical devices in the cost 
center for ``Medical Supplies Charged to Patients'' (section 2202.8 of 
the PRM-I), and effective for cost reporting periods specified in the 
revised cost reporting forms, hospitals must include costs and charges 
of separately chargeable medical supplies in the cost center for 
``Medical Supplies Charged to Patients'' and of separately chargeable 
implantable medical devices in the new ``Implantable Devices Charged to 
Patients'' cost center.
    Comment: A number of commenters addressed the new cost reporting 
forms in which implantable device costs that had been reported on 
Medical Supplies Charged to Patients under the current cost reporting 
forms will now be reported on a new line for ``Implantable Devices 
Charged to Patients''. The commenters recommended that CMS specifically 
mandate in the cost reporting instructions that hospitals report their 
medical supplies and implantable devices separately to ensure that 
hospitals will report their costs in both cost centers.
    Response: In the revised Form CMS-2552-96 and the new Form CMS-
2552-10 cost reporting instructions, we will clearly indicate that low 
cost medical supplies should be reported on the line for Medical 
Supplies Charged to Patients, and that high cost medical devices should 
be reported on the Implantable Devices Charged to Patients line. The 
cost reporting instructions will provide further guidance on 
differentiating between high cost items and low cost items.
    Comment: Several commenters urged CMS to work with the hospital 
industry as CMS revises the Medicare hospital cost report. The 
commenters expressed disappointment that CMS has not worked with the 
hospital industry at the outset of revising the Medicare hospital cost 
report. The commenters urged CMS not to make piecemeal changes to the 
Medicare hospital cost report; rather, CMS should make changes that 
align with hospitals' protocols and payment methodologies to improve 
the accuracy of the cost-based MS-DRG relative weights. The commenters 
requested that the public have the opportunity to comment on cost 
reporting forms and instructions before they are implemented. In 
addition, the commenters urged that CMS work with the National Uniform 
Billing Committee (NUBC) to develop standards for the use of revenue 
codes and to mandate standardized cost centers.
    Response: In the FY 2009 IPPS proposed and final rules (73 FR 23546 
and 73 FR 48461), we stated that we began a comprehensive review of the 
Medicare hospital cost report, and splitting the current cost center 
for Medical Supplies Charged to Patients into one line for ``Medical 
Supplies Charged to Patients'' and another line for ``Implantable 
Devices Charged to Patients'' is part of that initiative to update and 
revise the cost report. We also stated that under the effort to update 
the cost report and eliminate outdated requirements in conjunction with 
the PRA, changes to the cost report form and cost report instructions 
would be made available to the public for comment. Thus, the public 
would have an opportunity to suggest the more comprehensive reforms 
that they are advocating, and would similarly be able to make 
suggestions for ensuring that these reforms are made in a manner that 
is not disruptive to hospitals' billing and accounting systems, and are 
within the guidelines of GAAP, which are consistent with the Medicare 
principles of reimbursement, and sound accounting practices. In fact, 
the new draft hospital cost report Form CMS-2552-10 went on public 
display through the Federal Register on July 2, 2009, for a 60-day 
review and comment period, which ends August 31, 2009. Those wishing to 
review and comment on the document can do so at http://www.cms.hhs.gov/PaperworkReductionActof1995. We are willing to work with and consider 
comments from finance and cost report experts from the hospital 
community as we work to improve and modify the hospital cost report and 
standardize the use of revenue codes. The cost center for Implantable 
Devices Charged to Patients will be available for use for cost 
reporting periods beginning on or after May 1, 2009. The revised 
hospital cost report Form CMS-2552-10 will be

[[Page 43782]]

available for cost reporting periods beginning on or after February 1, 
2010.
    Comment: Some comments that expressed concerns with the delay of 
the cost reporting changes which would, in turn, delay the ability to 
use supply and device CCRs in the ratesetting process. The commenters 
stated that, in the FY 2009 IPPS final rule, CMS had anticipated using 
the revised CCR for the FY 2012 rule. However, due to delays in the 
issuance of instructions on cost reporting, CMS now believes that new 
CCRs for Medical Supplies Charged to Patients and Implantable Devices 
Charged to Patients may be used in the FY 2013 IPPS proposed and final 
rules. The commenters urged CMS to issue instructions to hospitals on a 
timely basis so that the new cost centers may be implemented as quickly 
as possible for FY 2013 ratesetting purposes. The commenters also 
suggested that, if CMS anticipates further delays in implementing the 
new cost centers, CMS implement regression-based CCRs as a short-term 
solution to address charge compression until data from the new cost 
centers become available. The commenters were also concerned that the 
new cost center may not be implemented consistently across hospitals 
and urged CMS to use analytical methods to test and supplement hospital 
cost center data in rate setting. For example, the commenters suggested 
that CMS use regression-based CCRs to measure the accuracy of the 
device cost center for the FY 2013 relative weights.
    Response: We are sympathetic to the commenters' concerns and regret 
the delay in the issuance of the revised cost reporting forms. However, 
we are making progress on this front. As we stated in response to a 
previous comment, the new draft hospital cost report Form CMS-2552-10 
went on display at the Federal Register on July 2, 2009, for a 60-day 
review and comment period, which ends August 31, 2009. Those wishing to 
review and comment on the document can do so at http://www.cms.hhs.gov/PaperworkReductionActof1995. After the revised cost report is available 
for use by all hospitals, and we begin to use the data to create CCRs 
for use in the calculation of the relative weights, we will analyze and 
monitor how hospitals are reporting their data and what effect the data 
are having on the separate CCRs for medical supplies and implantable 
devices. Comparison of the CCRs derived from the revised cost report to 
regression-based CCRs might be one method of gauging the accuracy and 
effectiveness of the separate cost centers for Medical Supplies Charged 
to Patients and Implantable Devices Charged to Patients.
    Comment: Several commenters asked for clarification on the new 
``Implantable Devices Charged to Patients'' cost center that was 
finalized in the FY 2009 IPPS final rule and will be part of the new 
Medicare Hospital Cost Report form. The commenters asked that CMS 
clarify the statement in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule that ``hospitals must include costs and charges of separately 
chargeable medical supplies and implantable medical devices in the cost 
center for `Medical Supplies Charged to Patients' '' as referenced in 
PRM-I Section 2202.8. The commenters were confused by the reference to 
PRM-I Section 2202.8 because that section defines ancillary services, 
with no mention of medical supplies. In addition, one commenter noted 
the hospitals are currently testing their systems to report costs and 
charges for implantable devices and asked whether it would be 
acceptable for hospitals to establish a cost center for ``Implantable 
Devices Charged to Patients'' at line 55.01 of the current cost report 
until the revised cost report is available. The commenter understood 
that the subscripted cost center would be rolled up into Line 55 for 
the purposes of calculating the relative weights until the new cost 
report is available.
    Response: We included the reference to Section 2202.8 of the PRM-I, 
which defines ancillary services, to remind hospitals that any items 
reported in the Medical Supplies Charged to Patients cost center are 
items (high cost or low cost) that are separately chargeable ancillary 
services. In accordance with Section 2202.8 of the PRM-I, ancillary 
services are those services for which a separate charge is customarily 
made in addition to the routine service charge. With respect to 
subscripting Line 55 to establish a cost center for Implantable Devices 
Charged to Patients, we have provided Line 55.30 to report Implantable 
Devices Charged to Patients on Form CMS-2552-96 and Line 69 on the 
proposed new Form CMS-2552-10.
    Comment: Some commenters suggested that CMS engage in outreach and 
educational activities to hospitals on the changes to the cost report 
and reporting of charges with respect to the medical device and medical 
supply cost centers so that hospitals can appropriately report data. 
The commenters recommended that the outreach activities go beyond the 
``distribution of bulletins that are used to inform providers about 
changes to the Medicare program.''
    Response: Although it is a bit early to plan specific outreach 
activities at this point, given that the proposed rule for the revised 
cost reporting forms has only been released on July 2, 2009, we agree 
that such educational activities are important, and we have been 
considering some options for educating the provider community involving 
the fiscal intermediaries and MACs and the cost report vendors. We look 
forward to working with the provider community in these initiatives.
    Accordingly, we are not implementing any changes to the relative 
weight calculation for FY 2010. We will continue to focus on possible 
ways to improve the weights through cost reporting and look forward to 
reviewing the comments received on the draft revised cost reporting 
forms. In addition, we will continue to think about possible ways to 
refine the standardization process as a means to improve the accuracy 
of the relative weights. As stated above, any further changes we decide 
to make to any portion of the relative weights calculation will be 
promulgated first through notice and comment rulemaking, which will 
allow the public sufficient opportunity to review relevant analyses and 
impacts of such potential changes.

F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections

1. Statutory Authority
    Section 1886(d)(4)(D) of the Act addresses certain hospital-
acquired conditions (HACs), including infections. By October 1, 2007, 
the Secretary was required to select, in consultation with the Centers 
for Disease Control (CDC), at least two conditions that: (a) are high 
cost, high volume, or both; (b) are assigned to a higher paying MS-DRG 
when present as a secondary diagnosis (that is, conditions under the 
MS-DRG system that are CCs or MCCs); and (c) could reasonably have been 
prevented through the application of evidence-based guidelines. The 
list of conditions can be revised, again in consultation with CDC, from 
time to time as long as the list contains at least two conditions.
    Medicare continues to assign a discharge to a higher paying MS-DRG 
if a selected HAC is present on admission (POA). However, since October 
1, 2008, Medicare no longer assigns an inpatient hospital discharge to 
a higher paying MS-DRG if a selected condition is not POA. Thus, if a 
selected HAC that was not present on admission manifests during the 
hospital stay, the case is paid as though the secondary diagnosis was 
not present. However, if any

[[Page 43783]]

nonselected CC/MCC appears on the claim, the claim will be paid at the 
higher MS-DRG rate; to cause a lower MS-DRG payment, all CCs/MCCs on 
the claim must be selected conditions for the HAC payment provision.
    Since October 1, 2007, hospitals have been required to submit 
information on Medicare claims specifying whether diagnoses were POA. 
The POA indicator reporting requirement and the HAC payment provision 
apply to IPPS hospitals only. Non-IPPS hospitals, including CAHs, 
LTCHs, IRFs, IPFs, cancer hospitals, children's hospitals, hospitals in 
Maryland operating under waivers, rural health clinics, federally 
qualified health centers, RNHCIs, and Department of Veterans Affairs/
Department of Defense hospitals, are exempt from POA reporting and the 
HAC payment provision. Throughout this section, the term ``hospital'' 
refers to an IPPS hospital.
2. HAC Selection Process
    In the FY 2007 IPPS proposed rule (71 FR 24100), we sought public 
input regarding conditions with evidence-based prevention guidelines 
that should be selected in implementing section 1886(d)(4)(D) of the 
Act. The public comments we received were summarized in the FY 2007 
IPPS final rule (71 FR 48051 through 48053).
    In the FY 2008 IPPS proposed rule (72 FR 24716 through 24726), we 
sought public comment on conditions that we proposed to select. In the 
FY 2008 IPPS final rule with comment period (72 FR 47200 through 
47218), we selected 8 categories to which the HAC payment provisions 
would apply.
    In the FY 2009 IPPS proposed rule (73 FR 23547), we proposed 
several additional candidate HACs as well as refinements to the 
previously selected HACs. In the FY 2009 IPPS final rule (73 FR 48471), 
we expanded and refined several of the previously selected HACs, and we 
selected 2 additional categories of HACs. A complete list of the 10 
current categories of HACs is included in section II.F.4. of this 
preamble.
3. Collaborative Process
    CMS experts have worked closely with public health and infectious 
disease professionals from across the Department of Health and Human 
Services, including CDC, AHRQ, and the Office of Public Health and 
Science, to identify the candidate preventable HACs, review comments, 
and select HACs. CMS and CDC have also collaborated on the process for 
hospitals to submit a POA indicator for each diagnosis listed on IPPS 
hospital Medicare claims and on the payment implications of the various 
POA reporting options.
    On December 17, 2007, CMS and CDC hosted a jointly-sponsored HAC 
and POA Listening Session to receive input from interested 
organizations and individuals. On December 18, 2008, CMS, CDC, and AHRQ 
hosted a second jointly-sponsored HAC and POA Listening Session to 
receive input from interested organizations and individuals. The 
agenda, presentations, audio file, and written transcript of the 
December 18, 2008 Listening Session are available on the CMS Web site 
at: http://www.cms.hhs.gov/HospitalAcqCond/07_EducationalResources.asp#TopOfPage.
4. Selected HAC Categories
    The following table lists the current HACs.

 
------------------------------------------------------------------------
                  HAC                         CC/MCC (ICD-9-CM code)
------------------------------------------------------------------------
Foreign Object Retained After Surgery..  998.4 (CC), 998.7 (CC).
Air Embolism...........................  999.1 (MCC).
Blood Incompatibility..................  999.6 (CC).
Pressure Ulcer Stages III & IV.........  707.23 (MCC), 707.24 (MCC).
Falls and Trauma:                        Codes within these ranges on
                                          the CC/MCC list:
    --Fracture.........................  800-829.
    --Dislocation......................  830-839.
    --Intracranial Injury..............  850-854.
    --Crushing Injury..................  925-929.
    --Burn.............................  940-949.
    --Electric Shock...................  991-994.
Catheter-Associated Urinary Tract        996.64 (CC).
 Infection (UTI).
                                         Also excludes the following
                                          from acting as a CC/MCC: 112.2
                                          (CC), 590.10 (CC), 590.11
                                          (MCC), 590.2 (MCC), 590.3
                                          (CC), 590.80 (CC), 590.81
                                          (CC), 595.0 (CC), 597.0 (CC),
                                          599.0 (CC).
Vascular Catheter-Associated Infection.  999.31 (CC).
Manifestations of Poor Glycemic Control  250.10-250.13 (MCC), 250.20-
                                          250.23 (MCC), 251.0 (CC),
                                          249.10-249.11 (MCC), 249.20-
                                          249.21 (MCC).
------------------------------------------------------------------------
                        Surgical Site Infections
------------------------------------------------------------------------
 
Surgical Site Infection, Mediastinitis,  519.2 (MCC).
 Following Coronary Artery Bypass Graft  And one of the following
 (CABG).                                  procedure codes: 36.10-36.19.
Surgical Site Infection Following        996.67 (CC), 998.59 (CC).
 Certain Orthopedic Procedures.          And one of the following
                                          procedure codes: 81.01-81.08,
                                          81.23-81.24, 81.31-81.38,
                                          81.83, 81.85.
Surgical Site Infection Following        Principal Diagnosis--278.01,
 Bariatric Surgery for Obesity.           998.59 (CC)
                                         And one of the following
                                          procedure codes: 44.38, 44.39,
                                          or 44.95.
Deep Vein Thrombosis and Pulmonary       415.11 (MCC), 415.19 (MCC),
 Embolism Following Certain Orthopedic    453.40-453.42 (CC).
 Procedures.                             And one of the following
                                          procedure codes: 00.85-00.87,
                                          81.51-81.52, or 81.54.
------------------------------------------------------------------------

    We refer readers to section II.F.6. of the FY 2008 IPPS final rule 
with comment period (72 FR 47202 through 47218) and to section II.F.7. 
of the FY 2009 IPPS final rule (73 FR 48474 through 48486) for detailed 
analyses

[[Page 43784]]

supporting the selection of each of these HACs.
    The list of selected HAC categories is dependent upon CMS' list of 
diagnoses designated as CC/MCCs. As changes and/or new diagnosis codes 
are proposed and finalized to the list of CC/MCCs, these changes need 
to be reflected in the list of selected HAC categories. In the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106), we proposed the 
addition of ICD-9-CM codes 813.46 (Torus fracture of ulna) and 813.47 
(Torus fracture of radius and ulna) to more precisely define the 
previously selected HAC category of falls and trauma. We refer readers 
to Table 6A in the Addendum to this final rule for the adoption of ICD-
9-CM codes 813.46 and 813.47 as CCs.
    Comment: Commenters supported the addition of ICD-9-CM codes 813.46 
and 813.47 to more precisely define the falls and trauma HAC category.
    Response: We appreciate the commenters' support of a more precise 
definition of the falls and trauma category. We are finalizing the 
addition of ICD-9-CM codes 813.46 and 813.47 to more precisely define 
the falls and trauma HAC category.
5. Public Input Regarding Selected and Potential Candidate HACs
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24104 
through 24106), we did not propose to add or remove categories of HACs. 
However, we indicated that we continue to encourage public dialogue 
about refinements to the HAC list. During and after the December 18, 
2008 Listening Session, we received many oral and written stakeholder 
comments about both previously selected and potential candidate HACs. 
In response to the Listening Session, commenters strongly supported 
using information gathered from early experience with the HAC payment 
provision to inform maintenance of the HAC list and consideration of 
future potential candidate HACs. Further, commenters emphasized the 
need for a robust program evaluation prior to modifying the HAC list. 
Strong support was also expressed for a program evaluation in response 
to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106).
    Comment: Commenters overwhelmingly expressed strong support for a 
robust program evaluation before modifying the HAC list. Many 
commenters stated that CMS' approach to employ a studied program 
analysis during FY 2010 allows hospitals additional time to develop 
processes for improving performance on previously selected HACs.
    Response: We appreciate the support we have received for our 
decision to undertake a program evaluation. The Medicare HAC policy 
aims to ensure patients are receiving high quality care, and the 
program evaluation will enable us to understand the impact of the 
program.
    Comment: Several commenters made specific suggestions for the 
program evaluation. A number of commenters suggested that the program 
evaluation should consider assessing the policy's impact on patient 
treatment and potential unintended consequences. Some commenters 
indicated that CMS should validate POA indicator data and explore how 
information learned from POA coding could be used to better understand 
and prevent certain HACs. Commenters encouraged CMS to examine the 
extent to which the program is increasing adherence to evidence-based 
guidelines. Commenters also encouraged CMS to ensure transparency in 
the development of its program evaluation and to allow for public 
comment at various stages of the evaluation. Some commenters requested 
that the final program evaluation results be shared publicly.
    Response: We appreciate the specific suggestions provided regarding 
the program evaluation. These recommendations will be taken into 
consideration as the program evaluation is developed. We agree with 
commenters that monitoring unintended consequences and assessing 
adherence to evidence-based guidelines should be a priority for the 
program evaluation. We also agree that validation of POA coding, as 
well as examining each POA indicator, are areas of critical importance 
for the program evaluation. We appreciate the public's interest in the 
program evaluation and plan to include updates and findings from the 
evaluation on CMS' Hospital-Acquired Conditions and Present on 
Admission Indicator Web site available at: http://www.cms.hhs.gov/HospitalAcqCond/.
6. POA Indicator Reporting
    Collection of POA indicator data is necessary to identify which 
conditions were acquired during hospitalization for the HAC payment 
provision as well as for broader public health uses of Medicare data. 
Through Change Request No. 5679 (released on June 20, 2007), CMS issued 
instructions requiring IPPS hospitals to submit POA indicator data for 
all diagnosis codes on Medicare claims. CMS also issued Change Request 
No. 6086 (released on June 13, 2008) regarding instructions for 
processing non-IPPS claims. Specific instructions on how to select the 
correct POA indicator for each diagnosis code are included in the ICD-
9-CM Official Guidelines for Coding and Reporting, available on the CDC 
Web site at: http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/icdguide07.pdf (the POA reporting guidelines begin on page 92). 
Additional information regarding POA indicator reporting and 
application of the POA reporting options is available on the CMS Web 
site at: http://www.cms.hhs.gov/HospitalAcqCond. CMS has historically 
not provided coding advice. Rather, CMS collaborates with the American 
Hospital Association (AHA) through the Coding Clinic for ICD-9-CM. CMS 
has been collaborating with the AHA to promote the Coding Clinic for 
ICD-9-CM as the source for coding advice about the POA indicator.
    There are five POA indicator reporting options, as defined by the 
ICD-9-CM Official Guidelines for Coding and Reporting:

------------------------------------------------------------------------
         Indicator                            Descriptor
------------------------------------------------------------------------
Y..........................  Indicates that the condition was present on
                              admission.
W..........................  Affirms that the hospital has determined
                              based on data and clinical judgment that
                              it is not possible to document when the
                              onset of the condition occurred.
N..........................  Indicates that the condition was not
                              present on admission.
U..........................  Indicates that the documentation is
                              insufficient to determine if the condition
                              was present at the time of admission.
1..........................  Signifies exemption from POA reporting. CMS
                              established this code as a workaround to
                              blank reporting on the electronic 4010A1.
                              A list of exempt ICD-9-CM diagnosis codes
                              is available in the ICD-9-CM Official
                              Guidelines for Coding and Reporting.
------------------------------------------------------------------------

    In the FY 2009 IPPS final rule (73 FR 48486 through 48487), we 
adopted as final our proposal to: (1) Pay the CC/MCC MS-DRGs for those 
HACs coded with ``Y'' and ``W'' indicators; and (2) not pay the CC/MCC 
MS-DRGs for those

[[Page 43785]]

HACs coded with ``N'' and ``U'' indicators. Though we did not make any 
proposals regarding the HAC POA payment determinations in the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule, commenters addressed this aspect 
of the HAC payment provision.
    Comment: Commenters suggested that CMS should consider paying for 
HACs coded with the ``U'' indicator.
    Response: We adopted a policy of not paying for the ``U'' option 
because we believe that this approach encourages documentation and will 
ensure more accurate public health data. We refer readers to the FY 
2009 IPPS final rule (73 FR 48486 through 48487) for further discussion 
of our coding policy. In addition, as part of CMS' program evaluation 
of the HAC payment provision, we intend to analyze the ``U'' POA 
reporting options (section II.F.4. of this preamble).
    In addition to providing specific suggestions on what CMS should 
consider for the program evaluation, commenters also offered 
suggestions on how to address POA data beyond the program evaluation.
    Comment: A few commenters recommended that AHRQ continue to develop 
strategies to improve the accuracy of documenting POA.
    Response: Through the collaborative partnership that CMS has 
developed with AHRQ around the program evaluation, we will continue to 
work with AHRQ to identify strategies to improve the accuracy of 
documenting POA reporting.
    Comment: Some comments suggested that CMS consider publicly 
releasing aggregate POA data to decrease the incidence of preventable 
HACs. The commenters indicated that one effective approach for 
decreasing the incidence of preventable HACs would be to provide each 
hospital with aggregate POA rates based on peer comparisons.
    Response: We agree with the suggestion that the public release of 
aggregate POA data should be considered as one prong in a multi-pronged 
strategy to decrease the incidence of preventable HACs. We refer 
readers to the FY 2009 IPPS final rule (73 FR 48488) for a detailed 
discussion regarding public reporting of POA indicator data.
7. Additional Considerations Addressing the HAC and POA Payment 
Provision
    In addition to receiving comments on the program evaluation 
(II.F.5) and uses of POA indicator data (II.F.6), we also received 
comments addressing many other topics related to HAC and POA. This 
section summarizes those topics and provides responses.
    Comment: Commenters suggested that CMS consider the evaluation of 
new technologies that detect, prevent, and treat HACs as a research 
priority.
    Response: We agree with commenters that evaluating all methods to 
reduce preventable HACs, including new technologies, is a top priority 
for CMS. We refer readers to section II.I. of this preamble for 
additional information on CMS' new technology add-on payment policy.
    Comment: Some commenters addressed expansion of the principles 
behind the HAC payment provision to other settings of care and other 
entitlement benefits, beyond fee-for-service Medicare. One commenter 
specifically expressed concern that the Medicare HAC policy may have 
unintended consequences for the pediatric population, as similar 
policies are being adopted by State Medicaid agencies. The commenter 
suggested that these Medicaid policies may discourage physicians from 
treating complicated pediatric patients for whom the risk of certain 
HACs cannot be eliminated using evidence-based guidelines.
    Response: The Medicare HAC policy applies only to hospitals that 
are subject to the IPPS. While CMS does not develop or implement 
individual State Medicaid policies, we do endorse alignment of 
incentives across all systems of care and between the Medicare and 
Medicaid programs.
    Comment: Commenters recommended that CMS clarify how hospitals may 
appeal a HAC payment determination for a particular patient who is not 
eligible for higher payment through assignment to the higher CC/MCC 
level of the MS-DRG.
    Response: We thank the commenters for seeking clarification 
regarding appeals and the HAC payment provision. We refer readers to 
the FY 2008 IPPS final rule with comment period (72 FR 47216) for 
further information on existing procedures for review of HAC payment 
adjustments.
    Comment: Several commenters believed that some of CMS' selected 
HACs may not be fully preventable and recommended that CMS' payment 
methodology include risk adjustment.
    Response: We agree with the commenters that a risk adjustment 
methodology may lead to greater precision of HAC payment determinations 
and refer readers to the FY 2009 IPPS final rule (73 FR 48487 through 
48488) for a detailed discussion of HACs and risk adjustment at both 
the individual and population levels.
    Comment: A few commenters urged CMS to focus on more global 
hospital-wide assessments of harm, such as rate-based measurement of 
HACs, rather than targeting individual HAC events.
    Response: We agree with the commenters that capturing rates of HACs 
may more accurately assess the level of harm within a given institution 
and refer readers to the FY 2009 IPPS final rule (73 FR 48488) for a 
detailed discussion of the advantages and disadvantages of rate-based 
measurement of HACs.
    Comment: Commenters expressed support for expansion of the HAC list 
to include categories such as ventilator-associated pneumonia, failure 
to rescue, surgical site infection following implantation of devices, 
Clostridium difficile-associated disease, and malnutrition.
    Response: We thank the commenters for their continued engagement 
and monitoring of candidate HACs. We will continue to monitor these 
conditions as an aspect of the program evaluation and may consider 
discussion of these candidate HACs in future rulemaking.
    Comment: A few commenters encouraged CMS to adopt a pay-for-
performance initiative that is complementary to the current HAC program 
and incorporates specific initiatives outlined in the HHS Action Plan 
to Prevent Healthcare-Associated Infections. One commenter suggested 
that mandatory reporting of case rates should be incorporated into pay-
for-performance initiatives.
    Response: We agree with the commenters that pay-for-performance and 
value-based purchasing (VBP) programs may be one of several payment 
tools for reducing preventable HACs and refer readers to the FY 2009 
IPPS final rule (73 FR 48487 through 48488) for a detailed discussion 
of how VBP initiatives such as the Hospital VBP Plan Report to Congress 
can address preventable HACs.

G. Changes to Specific MS-DRG Classifications

1. MDC 5 (Diseases and Disorders of the Circulatory System): 
Intraoperative Fluorescence Vascular Angiography (IFVA)
    As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24106 through 24107) we received a request to reassign cases 
reporting the use of intraoperative fluorescence vascular angiography 
(IFVA) with coronary artery bypass graft (CABG) procedures from MS-DRGs 
235 and 236 (Coronary Bypass without Cardiac Catheterization with and 
without MCC,

[[Page 43786]]

respectively) into MS-DRG 233 (Coronary Bypass with Cardiac 
Catheterization with MCC) and MS-DRG 234 (Coronary Bypass with Cardiac 
Catheterization without MCC). Effective October 1, 2007, procedure code 
88.59 (Intra-operative fluorescence vascular angiography (IFVA)) 
describes this technology.
    IFVA technology consists of a mobile device imaging system with 
software. The technology is used to test cardiac graft patency and 
technical adequacy at the time of coronary artery bypass grafting 
(CABG). While this system does not involve fluoroscopy or cardiac 
catheterization, it has been suggested by the manufacturer and clinical 
studies that it yields results that are similar to those achieved with 
selective coronary arteriography and cardiac catheterization. 
Intraoperative coronary angiography provides information about the 
quality of the anastomosis, blood flow through the graft, distal 
perfusion and durability. For additional detailed information regarding 
IFVA technology, we refer readers to the September 28-29, 2006 ICD-9-CM 
Coordination and Maintenance Committee meeting handout at the following 
Web site: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopOfPage.
    We examined data on cases identified by procedure code 88.59 in MS-
DRGs 233, 234, 235, and 236 in the FY 2008 MedPAR file. As shown in the 
table below, for both MS-DRGs 235 and 236, the cases utilizing IFVA 
technology identified by procedure code 88.59 have a shorter length of 
stay and lower average costs compared to all cases in MS-DRGs 235 and 
236. There were a total of 10,312 cases in MS-DRG 235 with an average 
length of stay of 11.12 days with average costs of $33,846. There were 
88 cases in MS-DRG 235 identified by procedure code 88.59 with an 
average length of stay of 9.82 days with average costs of $29,258. In 
MS-DRG 236, there were a total of 24,799 cases with an average length 
of stay of 6.52 days and average costs of $22,329. There were 159 cases 
in MS-DRG 236 identified by procedure code 88.59 with an average length 
of stay of 6.30 days and average costs of $20,404. The data clearly 
demonstrate that the IFVA cases identified by procedure code 88.59 are 
assigned appropriately to MS-DRGs 235 and 236. We also examined data on 
cases identified by procedure code 88.59 in MS-DRGs 233 and 234. 
Similarly, in MS-DRGs 233 and 234, cases identified by procedure code 
88.59 reflect shorter lengths of stay and lower average costs compared 
to all of the other cases in those MS-DRGs. There were a total of 
17,453 cases in MS-DRG 233 with an average length of stay of 13.65 days 
with average costs of $41,199. There were 60 cases in MS-DRG 233 
identified by procedure code 88.59 with an average length of stay of 
12.82 days and average costs of $38,842. In MS-DRG 234, there were a 
total of 27,003 cases with an average length of stay of 8.70 days and 
average costs of $28,327. There were 69 cases in MS-DRG 234 identified 
by procedure code 88.59 with an average length of stay of 8.75 days and 
average costs of $25,308. As a result of our analysis, the data 
demonstrate that the IFVA cases identified by procedure code 88.59 are 
appropriately assigned to MS-DRGs 233 and 234.

 
----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average cost*
----------------------------------------------------------------------------------------------------------------
235--All cases..................................................          10,312           11.12         $33,846
235--Cases with code 88.59......................................              88            9.82          29,258
235--Cases without code 88.59...................................          10,224           11.14          33,886
236--All cases..................................................          24,799            6.52          22,329
236--Cases with code 88.59......................................             159            6.30          20,404
236--Cases without code 88.59...................................          24,640            6.52          22,341
----------------------------------------------------------------------------------------------------------------


 
----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average cost*
----------------------------------------------------------------------------------------------------------------
233--All cases..................................................          17,453           13.65          41,199
233--Cases with code 88.59......................................              60           12.82          38,842
233--Cases without code 88.59...................................          17,393           13.65          41,207
234--All cases..................................................          27,003            8.70          28,327
234--Cases with code 88.59......................................              69            8.75          25,308
234--Cases without code 88.59...................................          26,934            8.70          28,334
----------------------------------------------------------------------------------------------------------------
* In the FY 2007 IPPS final rule (71 FR 47882), we adopted a cost-based weighting methodology. The cost-based
  weights were adopted over a 3-year transition period in \1/3\ increments between FY 2007 and FY 2009. The
  average cost represents the average standardized charges on the claims reduced to cost using the cost center-
  specific CCRs for a specific DRG. The standardization process includes adjustments for IME, DSH, and wage
  index as applied to individual hospitals. This estimation of cost is the same method used in the computation
  of the relative weights. We are using cost-based data instead of our historical charge-based data to evaluate
  proposed MS-DRG classification changes.

    We believe that if the cases identified by procedure code 88.59 
were proposed to be reassigned from MS-DRGs 235 and 236 to MS-DRGs 233 
and 234, they would be significantly overpaid. In addition, because the 
cases in MS-DRGs 235 and 236 did not actually have a cardiac 
catheterization performed, a proposal to reassign cases identified by 
procedure code 88.59 would result in lowering the relative weights of 
MS-DRGs 233 and 234 where a cardiac catheterization is truly performed.
    In summary, the data do not support moving IFVA cases identified by 
procedure code 88.59 from MS-DRGs 235 and 236 into MS-DRGs 233 and 234.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited the 
public to submit comments on our proposal not to make any MS-DRG 
modifications for cases reporting procedure code 88.59 for FY 2010. 
Below, we provide a summation of the public comments we received and 
our responses.

[[Page 43787]]

    Comment: A number of commenters believed that the use of IFVA in 
conjunction with CABG procedures leads to positive outcomes. Many of 
the commenters stated that they had performed IFVA and that, by using 
IFVA along with the CABG procedure, they were able to reduce their 
patients' lengths of stay and reduce complications, which in turn 
reduced hospitals costs. The commenters stated that the CMS published 
data indicated that patients who undergo a CABG procedure along with 
IFVA ``showed consistently shortened length of stay and the resulting 
cost savings.'' The commenters stated that, despite cost savings from 
the routine treatment of CABG patients with IFVA, their facilities were 
not prepared to purchase this technology unless there were additional 
Medicare payments.
    The commenters did not dispute the fact that the CMS data showed 
IFVA cases used considerably less resources than cases undergoing a 
cardiac catheterization. However, the commenters expressed concern that 
CMS did not suggest a mechanism to encourage hospitals to invest in the 
IFVA equipment by providing additional payment for the utilization of 
IFVA.
    Some commenters urged CMS to explore alternative methods of payment 
to facilities for utilizing the IFVA technology.
    Another commenter representing a specialty society indicated that 
several of its members, who are cardiothoracic surgeons, had differing 
opinions on the value of IFVA as an adjunctive procedure to CABG 
surgery. This commenter stated that, due to a lack of information 
regarding the efficacy of IFVA within its cardiac surgery database, the 
commenter was unable to appropriately assess the effectiveness of the 
technology.
    Response: We appreciate and acknowledge the commenters' concerns. 
We would like to point out that the costs associated with the IFVA 
technology, when utilized with coronary artery bypass (CABG) 
procedures, are already accounted for within the MS-DRGs for the CABG 
procedure. In other words, cases reporting procedure code 88.59, when 
performed with a CABG procedure, are currently grouped to one of the 
MS-DRGs describing a CABG procedure. Our claims data indicate that IFVA 
cases have average costs very similar to other cases within the MS-DRGs 
to which they are currently assigned. Our data do not support 
classifying code 88.59 as a cardiac catheterization so that all cases 
where IFVA is performed would be assigned to the CABG DRGs with cardiac 
catheterization (MS-DRGs 233 and 234). The cardiac catheterization 
cases have consistently higher costs than cases that only utilize IFVA 
with CABG.
    In response to concerns that CMS did not provide an alternative for 
facilities to account for costs associated with IFVA use in conjunction 
with CABG surgery, in our evaluation of data for possible proposals for 
modifications to the MS-DRGs, we did not find data to support a MS-DRG 
change for IFVA. The request we received was to reassign cases 
reporting the use of IFVA with CABG procedures from MS-DRGs 235 and 236 
into MS-DRG 233 and MS-DRG 234. To make this change, we would have to 
add the IFVA procedure to the list of cardiac catheterization 
procedures listed under MS-DRGs 233 and 234. As the commenters noted in 
its own submitted comments, the data presented in the FY 2010 proposed 
rule (74 FR 24107), for cases where IFVA (code 88.59) was reported with 
a CABG procedure, demonstrated that these cases resulted in shorter 
lengths of stay and lower average costs compared to all cases within 
the specified CABG MS-DRGs. As such, it would be inappropriate to 
reassign cases reporting the use of IFVA to higher weighted MS-DRGs 
merely as an incentive for hospitals to invest in the IFVA technology.
    With regards to the commenter's suggestion that CMS give 
consideration to the utilization of the cardiac surgery database to 
analyze IFVA, we refer the commenter and readers to section V.A.1-5 of 
the FY 2010 proposed rule (74 FR 24165 through 24176) for a discussion 
of CMS' Hospital Value-Based Purchasing (VBP) Plan, a policy that 
strives to align payment incentives with the quality of care as well as 
the resources used to deliver care to encourage high-value health care.
    In conclusion, many commenters expressed support for the limited 
MS-DRG changes proposed for FY 2010, given the major changes that took 
place with the recent implementation of the MS-DRG system. Our analysis 
of claims data indicates that IFVA cases have average costs very 
similar to other cases within the MS-DRGs to which they are currently 
assigned, and the data do not support the request to classify IFVA as a 
cardiac catheterization at this time. Therefore, as final policy for FY 
2010, we are finalizing our proposal to not make any changes to MS-DRGs 
233, 234, 235, or 236 for cases reporting the use of intraoperative 
fluorescence vascular angiography (IFVA), procedure code 88.59.
2. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue): Infected Hip and Knee Replacements
    As discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 
FR 24107 through 24109), we received a request that we examine the 
issue of patients who have undergone hip or knee replacement procedures 
that have subsequently become infected and who are then admitted for 
inpatient services for removal of the prosthesis. The requestor stated 
that these patients are presented with devastating complications and 
require extensive resources to treat. The infection often results in 
the need for multiple re-operations, prolonged use of intravenous and 
oral antibiotics, extended rehabilitation, and frequent followups. 
Furthermore, the requestor stated that, even with extensive treatment, 
the outcomes can still be poor for some of these patients. The 
requestor stated that patients who are admitted for inpatient services 
with an infected hip or knee prosthesis must first undergo a procedure 
to remove the prosthesis and to insert an antibiotic spacer to treat 
the infection and maintain a space for the new prosthesis. The new 
prosthesis cannot be inserted until after the infection has been 
treated. Patients who are admitted for inpatient services with a hip or 
knee infection and then undergo a removal of the prosthesis are 
captured by the following procedure codes:

    <bullet> 80.05 (Arthrotomy for removal of prosthesis, hip)
    <bullet> 80.06 (Arthrotomy for removal of prosthesis, knee)
    In addition, code 84.56 (Insertion or replacement of (cement) 
spacer)) would be used for any insertion of a spacer that would be 
reported if an antibiotic spacer were inserted.
    The issue of hip and knee infections and revisions was discussed in 
the FY 2009 IPPS final rule (73 FR 48498 through 48507) in response to 
a more complicated request that we received involving the creation and 
modification of several joint DRGs. Because data did not support the 
requestor's suggested changes, we did not make any modifications to the 
joint DRGs at that time.
    The current requestor asked that we move cases involving the 
removal of hip and knee prostheses (procedure codes 80.05 and 80.06) 
from their current assignment in MS-DRGs 480, 481, and 482 (Hip and 
Femur Procedures Except Major Joint with MCC, with CC, without CC/MCC, 
respectively) and in MS-DRGs 495, 496, and 497 (Local Excision of

[[Page 43788]]

Internal Fixation Device Except Hip and Femur with MCC, with CC, and 
with CC/MCC, respectively) and assign them to MS-DRGs 463, 464, and 465 
(Wound Debridement and Skin Graft Except Hand, for Musculo-Connective 
Tissue Disease with MCC, with CC, without CC/MCC, respectively). MS-
DRGs 463, 464, and 465 include cases that are treated with a 
debridement for infection. The requestor stated that these cases are 
clinically similar to those captured by procedure codes 80.05 and 80.06 
where the prosthesis is removed and a new prosthesis is not inserted 
because of an infection.
    The requestor specifically asked that we remove the hip arthrotomy 
code 80.05 from MS-DRGs 480, 481, and 482, and assign it to MS-DRGs 
463, 464, and 465. The requestor also recommended that we remove the 
knee arthrotomy code 80.06 from MS-DRGs 495, 496, and 497 and assign it 
to MS-DRGs 463, 464, and 465.
    If we were to accept the requestor's suggestion, joint replacement 
cases in which the patients were admitted for inpatient services to 
remove the prosthesis because of an infection would be assigned to the 
higher paying debridement MS-DRGs (MS-DRGs 463, 464, and 465). As 
mentioned earlier, these MS-DRGs contain other cases involving 
treatment for infections.
    For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we examined 
hip replacement cases identified by procedure code 80.05 in MS-DRGs 
480, 481, and 482, and knee replacement cases identified by procedure 
code 80.06 in MS-DRGs 495, 496, and 497 using the FY 2008 MedPAR file. 
Our data from the FY 2008 MedPAR file support the requestor's 
suggestion that these cases have similar costs to those in MS-DRGs 463, 
464, and 465, and that they are significantly more expensive to treat 
than those in their current MS-DRG assignments. The following table 
summarizes those findings:

 
----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length
                             MS-DRG                                    cases          of stay      Average cost*
----------------------------------------------------------------------------------------------------------------
463--All Cases..................................................           4,834           16.59         $26,696
464--All Cases..................................................           4,934            9.52          15,065
465--All Cases..................................................           1,696            5.45           9,041
480--All Cases..................................................          31,181            8.89          17,168
480--Cases with code 80.05......................................             643           13.35          26,053
480--Cases without code 80.05...................................          30,538            8.80          16,981
481--All Cases..................................................          72,406            5.68          11,259
481--Cases with code 80.05......................................             871            8.34          17,202
481--Cases without code 80.05...................................          71,535            5.65          11,187
482--All Cases..................................................          37,443            4.65           9,320
482--Cases with code 80.05......................................             282            6.82          13,718
482--Cases without code 80.05...................................          37,161            4.63           9,287
495--All Cases..................................................           2,140           10.40          18,729
495--Cases with code 80.06......................................             513           11.53          23,508
495--Cases without code 80.06...................................           1,627           10.04          17,432
496--All Cases..................................................           5,518            5.73          10,827
496--Cases with code 80.06......................................           1,346            6.67          14,454
496--Cases without code 80.06...................................           4,172            5.42           9,657
497--All Cases..................................................           5,856            2.84           7,148
497--Cases with code 80.06......................................             688            5.08          12,234
497--Cases without code 80.06...................................           5,168            2.54           6,470
----------------------------------------------------------------------------------------------------------------
* In the FY 2007 IPPS final rule (71 FR 47882), we adopted a cost-based weighting methodology. The cost-based
  weights were adopted over a 3-year transition period in \1/3\ increments between FY 2007 and FY 2009. The
  average cost represents the average standardized charges on the claims reduced to cost using the cost center-
  specific CCRs for a specific DRG. The standardization process includes adjustments for IME, DSH, and wage
  index as applied to individual hospitals. This estimation of cost is the same method used in the computation
  of the relative weights. We are using cost-based data instead of our historical charge-based data to evaluate
  proposed MS-DRG classification changes.

    The data show that hip replacement cases with procedure code 80.05 
in MS-DRGs 480, 481, and 482 have average costs of $26,053, $17,202, 
and $13,718, respectively, compared to overall average costs of $17,168 
in MS-DRG 480; $11,259 in MS-DRG 481; and $9,320 in MS-DRG 482. The 
data also show that knee replacement cases with procedure code 80.06 in 
MS-DRGs 495, 496, and 497 have average costs of $23,508, $14,454, and 
$12,234, respectively, compared to average costs of all cases of 
$18,729 in MS-DRG 495, $10,827 in MS-DRG 496, and $7,148 in MS-DRG 497. 
All cases in MS-DRGs 463, 464, and 465 had average costs of $26,696, 
$15,065, and $9,041, respectively.
    The results of this analysis of data support the reassignment of 
procedure codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465. 
Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 
24107 through 24109), we proposed to move procedure codes 80.05 and 
80.06 from their current assignments in MS-DRGs 480, 481, and 482 and 
495, 496, and 497, and assign them to MS-DRGs 463, 464, and 465. We 
also proposed to revise the code title of procedure code 80.05 to read 
``Arthrotomy for removal of prosthesis without replacement, hip'' and 
the title of procedure code 80.06 to read ``Arthrotomy for removal of 
prosthesis without replacement, knee'', effective October 1, 2009, as 
in shown in Table 6F of the Addendum to the FY 2010 IPPS/RY 2010 LTCH 
PPS proposed rule.
    Comment: A number of commenters supported our recommendation to 
move codes 80.05 and 80.06 from their current assignments in MS-DRGs 
480, 481, and 482 and 495, 496, and 497 and assign them to MS-DRGs 463, 
464, and 465. The commenters also supported the proposed changes to the 
code titles for both codes 80.05 and 80.06, effective October 1, 2009.
    One commenter supported this MS-DRG change for the treatment of 
infection following hip and knee arthroplasty patients because, 
according to the commenter, considerable resources are required to care 
for these patients whose deep infections are one of the most 
devastating complications

[[Page 43789]]

associated with hip and knee arthroplasty. The commenter further stated 
that the current hospital payment rate provides a disincentive for 
hospitals to admit patients with infected total joint replacements and 
creates an economic burden on tertiary care referral centers treating 
these patients. Several other commenters also agreed that these cases 
are significantly more expensive to treat than other cases in the 
current MS-DRG assignments. One commenter stated that this reassignment 
will more accurately reflect the costs associated with treating the 
removal of hip and knee prostheses.
    Some of the commenters who supported the proposed changes stated 
that, given the recent major changes to the MS-DRGs, it was appropriate 
for CMS to propose a limited number of MS-DRG classification changes 
for FY 2010. The commenters had no objections to the proposal to move 
codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465.
    Response: We appreciate the support of the commenters and agree 
that it is appropriate to move codes 80.05 and 80.06 to MS-DRGs 463, 
464, and 465.
    Comment: Several commenters who supported this proposed MS-DRG 
assignment change also recommended that CMS consider revising the 
titles for MS-DRGs 463, 464, and 465 to reflect the proposed 
reassignment change. The commenters suggested the following MS-DRG 
titles for MS-DRGs 463, 464, and 465: ``Wound Debridement, Skin Graft, 
and/or Removal of Infected Prosthesis Except hand for Musculoskeletal-
Connective Tissue Disease with MCC, with CC, or without CC/MCC,'' 
respectively.
    Response: The MS-DRG titles are general in nature and usually do 
not describe all the diagnoses and procedure codes included in each MS-
DRG. We do not use the full MS-DRG titles within the IPPS. Rather, we 
use abbreviated titles, as is shown in Table 5 of the Addendum to this 
FY 2010 IPPS/RY 2010 LTCH PPS final rule. Our abbreviated titles are 
constrained by the fact that they must be 68 characters long. The 
current abbreviated title for MS-DRG 465 is already 68 characters long. 
The MS-DRG 465 abbreviated title is as follows: Wnd debrid & skn graft 
exc hand, for musculo-conn tiss dis w/o CC/MM. As a result, we are 
unable to accommodate the commenter's suggestion by making a clear MS-
DRG abbreviated title that includes all of the recommended language 
within our 68 character limitation. We also note that not all 
prosthesis removals are being moved to MS-DRGs 463, 364, and 465. We 
are only moving knee and hip prosthesis removals to these MS-DRGs. 
Therefore, we believe that the suggested new title may be misleading 
because it implies all types of prosthesis removals are in these MS-
DRGs. Therefore, we are maintaining the current titles for MS-DRGs 463, 
464, and 465.
    After consideration of the public comments we received, we are 
finalizing our proposal to move procedure codes 80.05 and 80.06 to MS-
DRGs 463, 464, and 465. We are also finalizing our proposal to revise 
the titles of procedure codes 80.05 and 80.06. The revised title for 
procedure code 80.05 is ``Arthrotomy for removal of prosthesis without 
replacement, hip''. The revised title for procedure code 80.06 is 
``Arthrotomy for removal of prosthesis without replacement, knee''. 
These modifications and revisions are effective October 1, 2009, as 
reflected in Table 6F of the Addendum to this final rule.
3. Medicare Code Editor (MCE) Changes
    As explained under section II.B.1. of the preamble of this final 
rule, the Medicare Code Editor (MCE) is a software program that detects 
and reports errors in the coding of Medicare claims data. Patient 
diagnoses, procedure(s), and demographic information are entered into 
the Medicare claims processing systems and are subjected to a series of 
automated screens. The MCE screens are designed to identify cases that 
require further review before classification into a DRG. In the FY 2020 
IPPS/LTCH PPS proposed rule (74 FR 24109 through 24110), for FY 2010, 
we proposed to make the following changes to the MCE edits:
a. Diagnoses Allowed for Males Only Edit
    There are four diagnosis codes that were inadvertently left off of 
the MCE edit titled ``Diagnoses Allowed for Males Only.'' These codes 
are located in the chapter of the ICD-9-CM diagnosis codes entitled 
``Diseases of Male Genital Organs.'' In the FY 2009 IPPS final rule, we 
indicated that we were adding the following four codes to this MCE 
edit:

<bullet> 603.0 (Encysted hydrocele)
<bullet> 603.1 (Infected hydrocele)
<bullet> 603.8 (Other specified types of hydrocele)
<bullet> 603.9 (Hydrocele, unspecified).

    We had no reported problems or confusion with the omission of these 
codes from this section of the MCE, but in order to have an accurate 
product, we indicated that we were adding these codes for FY 2009. 
However, through an oversight, we failed to implement the indicated FY 
2009 changes to the MCE by adding codes 603.0, 603.1, 603.8, and 603.9 
to the MCE edit of diagnosis allowed for males only. In the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule, we acknowledged this omission and 
again proposed to make the changes.
    We did not receive any public comments on the proposed changes to 
the edit for Diagnosis Allowed for Males Only. Therefore, we are 
finalizing our proposal to add diagnosis codes 603.0, 603.1, 603.8, and 
603.9 to this MCE edit for FY 2010.
b. Manifestation Codes as Principal Diagnosis Edit
    Manifestation codes describe the manifestation of an underlying 
disease, not the disease itself. Therefore, manifestation codes should 
not be used as a principal diagnosis. The National Center for Health 
Statistics (NCHS) has removed the advice ``code first associated 
disorder'' from three codes, thereby making them acceptable principal 
diagnosis codes. These codes are:
    <bullet> 365.41 (Glaucoma associated with chamber angle anomalies)
    <bullet> 365.42 (Glaucoma associated with anomalies of iris)
    <bullet> 365.43 (Glaucoma associated with other anterior segment 
anomalies)

    In order to make conforming changes to the MCE, in the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24109), we proposed to 
remove codes 365.41, 365.42, and 365.43 from the Manifestation Code as 
Principal Diagnosis Edit.
    We did not receive any public comments on the proposed changes to 
the edit for Manifestation Codes as Principal Diagnosis. Therefore, we 
are finalizing our proposal to remove manifestation codes 365.41, 
365.42, and 365.43 from the principal diagnosis edit. These codes will 
be acceptable as principal diagnosis, effective October 1, 2010.
c. Invalid Diagnosis or Procedure Code
    The MCE checks each diagnosis, including the admitting diagnosis, 
and each procedure against a table of valid ICD-9-CM codes. If an 
entered code does not agree with any code on the list, it is assumed to 
be invalid or that the 4th or 5th digit of the code is invalid or 
missing.
    An error was discovered in this edit. ICD-9-CM code 00.01 
(Therapeutic ultrasound of vessels of head and neck) was inadvertently 
left out of the MCE tables. The inclusion of this code in the MCE 
tables would have generated an error message at the Medicare contractor 
level, but we had instructed the

[[Page 43790]]

Medicare contractors to override this edit for discharges on or after 
October 1, 2008. To make a conforming change to the MCE, in the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24109), we proposed to add 
code 00.01 to the table of valid codes.
    We did not receive any public comments on our proposed changes to 
the edit for Invalid Diagnosis or Procedure Codes. Therefore, we are 
finalizing our proposal to add code 00.01 to the table of valid codes 
for FY 2010.
d. Unacceptable Principal Diagnosis
    There are selected codes that describe a circumstance that 
influences an individual's health status but not a current illness or 
injury and codes that are not specific manifestations but may describe 
illnesses due to an underlying cause. These codes are considered 
unacceptable as a principal diagnosis.
    For FY 2008, a series of diagnostic codes were created at 
subcategory 209, Neuroendocrine Tumors. An instructional note under 
this subcategory stated that coders were to ``Code first any associated 
multiple endocrine neoplasia syndrome (258.01-258.03)''. Medicare 
contractors had interpreted this note to mean that none of the codes in 
subcategory 209 were acceptable principal diagnoses and had entered 
these codes on the MCE edit for unacceptable principal diagnoses. We 
later deemed this interpretation to be incorrect. We had not intended 
that the series of codes at subcategory 209 were only acceptable as 
secondary diagnoses.
    To avoid future misinterpretation, in the FY 2010 IPPS/RY 2919 LTCH 
PPS proposed rule (74 FR 24109 through 24110), we proposed to remove 
the following codes from the MCE edit for unacceptable principal 
diagnoses.

<bullet> 209.00 (Malignant carcinoid tumor of the small intestine, 
unspecified portion)
<bullet> 209.01 (Malignant carcinoid tumor of the duodenum)
<bullet> 209.02 (Malignant carcinoid tumor of the jejunum)
<bullet> 209.03 (Malignant carcinoid tumor of the ileum)
<bullet> 209.10 (Malignant carcinoid tumor of the large intestine, 
unspecified portion)
<bullet> 209.11 (Malignant carcinoid tumor of the appendix)
<bullet> 209.12 (Malignant carcinoid tumor of the cecum)
<bullet> 209.13 (Malignant carcinoid tumor of the ascending colon)
<bullet> 209.14 (Malignant carcinoid tumor of the transverse colon)
<bullet> 209.15 (Malignant carcinoid tumor of the descending colon)
<bullet> 209.16 (Malignant carcinoid tumor of the sigmoid colon)
<bullet> 209.17 (Malignant carcinoid tumor of the rectum)
<bullet> 209.20 (Malignant carcinoid tumor of unknown primary site)
<bullet> 209.21 (Malignant carcinoid tumor of the bronchus and lung)
<bullet> 209.22 (Malignant carcinoid tumor of the thymus)
<bullet> 209.23 (Malignant carcinoid tumor of the stomach)
<bullet> 209.24 (Malignant carcinoid tumor of the kidney)
<bullet> 209.25 (Malignant carcinoid tumor of foregut, not otherwise 
specified)
<bullet> 209.26 (Malignant carcinoid tumor of midgut, not otherwise 
specified)
<bullet> 209.27 (Malignant carcinoid tumor of hindgut, not otherwise 
specified)
<bullet> 209.29 (Malignant carcinoid tumor of other sites)
<bullet> 209.30 (Malignant poorly differentiated neuroendocrine 
carcinoma, any site)
<bullet> 209.40 (Benign carcinoid tumor of the small intestine, 
unspecified portion)
<bullet> 209.41 (Benign carcinoid tumor of the duodenum)
<bullet> 209.42 (Benign carcinoid tumor of the jejunum)
<bullet> 209.43 (Benign carcinoid tumor of the ileum)
<bullet> 209.50 (Benign carcinoid tumor of the large intestine, 
unspecified portion)
<bullet> 209.51 (Benign carcinoid tumor of the appendix)
<bullet> 209.52 (Benign carcinoid tumor of the cecum)
<bullet> 209.53 (Benign carcinoid tumor of the ascending colon)
<bullet> 209.54 (Benign carcinoid tumor of the transverse colon)
<bullet> 209.55 (Benign carcinoid tumor of the descending colon)
<bullet> 209.56 (Benign carcinoid tumor of the sigmoid colon)
<bullet> 209.57 (Benign carcinoid tumor of the rectum)
<bullet> 209.60 (Benign carcinoid tumor of unknown primary site)
<bullet> 209.61 (Benign carcinoid tumor of the bronchus and lung)
<bullet> 209.62 (Benign carcinoid tumor of the thymus)
<bullet> 209.63 (Benign carcinoid tumor of the stomach)
<bullet> 209.64 (Benign carcinoid tumor of the kidney)
<bullet> 209.65 (Benign carcinoid tumor of foregut, not otherwise 
specified)
<bullet> 209.66 (Benign carcinoid tumor of midgut, not otherwise 
specified)
<bullet> 209.67 (Benign carcinoid tumor of hindgut, not otherwise 
specified)
<bullet> 209.69 (Benign carcinoid tumor of other sites)

    In the meantime, CMS has issued instructions in the form of an 
internal working document called a joint signature memorandum to the 
Medicare contractors to override this edit and process claims 
containing codes from the subcategory 209 series as acceptable 
principal diagnoses.
    We acted quickly to negate the effects of this edit, as it was an 
erroneous edit to the MCE resulting in unintended consequences. We did 
not receive any public comments on the proposed change to the edit for 
Unacceptable Principal Diagnosis. Therefore, we are finalizing our 
proposal to remove the codes listed above (that is, codes 209.00 
through 209.69) from the MCE edit for Unacceptable Principal Diagnosis.
e. Creation of New Edit Titled ``Wrong Procedure Performed''
    On January 15, 2009, CMS issued three National Coverage Decision 
memoranda on the coverage of erroneous surgeries on Medicare patients: 
Wrong Surgical or Other Invasive Procedure Performed on a Patient (CAG-
00401N); Surgical or Other Invasive Procedure Performed on the Wrong 
Body Part (CAG-00402N); and Surgical or Other Invasive Procedure 
Performed on the Wrong Patient (CAG-00403N). We refer readers to the 
following CMS Web sites to view the memoranda in their entirety: For 
the decision memorandum on surgery on the wrong body part: https://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=222. For the decision 
memorandum on surgery on the wrong patient: https://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=221. For the decision memorandum on the 
wrong surgery performed on a patient: https:[sol][sol]www.cms.hhs.gov/
mcd/viewdecisionmemo.asp?id=223.
    To conform to these new coverage decisions, in the FY 2010 IPPS/RY 
2010 LTCH PPS proposed rule (74 FR 24110), we proposed to create a new 
edit to identify cases in which wrong surgeries occurred. The NCHS has 
revised the title of one E-code and created two new E-codes to identify 
cases in which incorrect surgeries have occurred. The revised E-code 
title is:
    <bullet> E876.5 (Performance of wrong operation (procedure) on 
correct patient).
    The two new E-codes are as follows:
    <bullet> E876.6 (Performance of operation (procedure) on patient 
not scheduled for surgery).
    <bullet> E876.7 (Performance of correct operation (procedure) on 
wrong side/body part).
    For the benefit of the reader, we are providing the following brief 
background information on external causes of injury and poisoning codes 
(E-

[[Page 43791]]

codes). E-codes are intended to provide data for injury research and 
evaluation of injury prevention strategies. E-codes capture how the 
injury or poisoning happened (cause), the intent (unintentional or 
accidental; or intentional, such as suicide or assault), and the place 
where the event occurred. The use of E-codes is supplemental to the 
ICD-9-CM diagnosis codes. The National Center for Health Statistics 
(NCHS)/CDC has created and maintains the ICD-9-CM Official Guidelines 
for Coding and Reporting, including instructions concerning E-codes, 
and has made these guidelines available on the Web site at: http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/icdguide08.pdf. The guidelines 
are a national HIPAA standard. The guidelines are being updated 
effective October 1, 2009, to recognize the fact that CMS requires the 
reporting of E-codes as part of its wrong procedure performed national 
coverage decision. The fourth quarter issue of Coding Clinic for ICD-9-
CM will also include information on the new wrong surgery codes as well 
as the updated Coding Guidelines.
    A complete list of all of the E-codes that will be implemented on 
October 1, 2009, can be found on the CMS Web site home page at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/07_summarytables.asp#TopOfPage in the download titled ``New, Deleted, and 
Invalid Diagnosis and Procedure Codes.''
    Currently, an E-code used as a principal diagnosis will receive the 
MCE Edit ``E-code as principal diagnosis''. This edit will remain in 
effect. However, we proposed a change to the MCE so that E-codes E876.5 
through E876.7, whether they are in the principal or secondary 
diagnosis position, will trigger the ``Wrong Procedure Performed'' 
edit. Any claim with this edit will be rejected.
    Comment: Several commenters requested that CMS clarify its policy 
on reporting of E-codes, stating that CMS has never required the 
reporting of these codes prior to the proposed rule. The commenters 
also stated that an edit for codes E876.5 through E876.7 should not be 
applied to claims in which one of these E-codes was listed as the 
principal diagnosis as there is already an MCE edit that addresses E-
codes in this position. One commenter agreed that eliminating the ``E-
code as Principal Diagnosis'' edit that is currently in place will 
address many issues for reporting E-codes as principal diagnosis.
    Response: The commenters are correct that the reporting of E-codes 
has not previously been required for reporting to CMS. However, as 
noted above, the E-codes are used for many purposes and are often 
required by institutions in order to describe a complete patient 
encounter with health services. We believe that any of the three 
aforementioned wrong surgery situations presents such an egregious 
scenario that hospitals will capture this information through the use 
of the applicable E-codes.
    The commenters are correct that E-codes in the principal diagnosis 
position on the claim will trigger an edit in which claims will be 
returned to the provider. However, we did not propose to delete this 
edit; this edit will remain in place along with the Wrong Procedure 
Performed edit. Claims with E-codes other than codes E876.5 through 
E876.7 reported in the principal diagnosis position will be subject to 
the longstanding Principal Diagnosis edit. Claims with codes E876.5 
through E876.7 reported in either the principal or secondary diagnosis 
position will be subject to the Wrong Procedures Performed edit. These 
claims will be rejected.
    Comment: Commenters suggested that the Wrong Procedure Performed 
edit should be triggered if the E-code is reported in either the E-code 
position on the claim or in the secondary diagnosis position.
    Response: We agree that the edit should be triggered no matter in 
what position it is reported. However, we encourage reporting of the E-
codes in the secondary diagnosis position.
    Comment: One commenter suggested that if codes E876.5 through 
E876.7 were to be reported in the principal diagnosis position, the 
``E-code as Principal Diagnosis'' edit should be invoked and the claim 
returned to the provider so that the claim could then be resubmitted 
listing the codes in the correct sequence. The commenter further 
suggested that the Wrong Procedure Performed edit should only be 
triggered when the E-codes are reported in the correct position on the 
claim.
    Response: We do not believe this suggestion is in the best interest 
of the hospital industry. Performance of the wrong surgery is not a 
reasonable and necessary treatment for the Medicare beneficiary, and 
these claims will be rejected. To cause the Medicare contractor (the 
fiscal intermediary or the A/B MAC) to return the claim to the 
provider, have the provider correct the sequencing of the codes on the 
claim and return it to the contractor, only to ultimately have the 
claim be rejected, add steps to a process that results in the same 
outcome.
    Comment: One commenter suggested that updated coding guidance 
should address the definition of operation/procedure, and [define] what 
constitutes a wrong procedure for consistent assignment [of the codes] 
to coincide with industry definitions.
    Response: We take this opportunity to point out that the definition 
of an operation or procedure is a longstanding description, dating from 
the Uniform Hospital Discharge Data Set promulgated by the Secretary of 
the U.S. Department of Health, Education, and Welfare in 1974. In 
addition, with regard to the suggestion that there need to be 
guidelines regarding the performance of a wrong surgery in any of the 
three cases described by these codes, we believe that any of these 
three scenarios are so flagrant that the average individual could 
determine that a wrong surgery had taken place. Therefore, we do not 
believe we should wait for a determination by the industry of what 
constitutes the definition of a wrong surgery.
    Comment: One commenter urged CMS to work closely with the other 
Cooperating Parties for ICD-9-CM to provide guidance for coding, 
reporting, and sequencing of codes E876.5 through E876.7. Several 
commenters suggested that CMS begin processing all of the reported 
diagnosis and procedure codes.
    Response: We acknowledge the current CMS system limitations that 
allow us to process only the first nine diagnosis codes and six 
procedure codes reported on the hospital bills and that do not allow us 
to process codes from the external cause of injury field when making an 
MS-DRG assignment. We have discussed these internal CMS system 
limitations in previous rules. In anticipation of the implementation of 
ICD-10 on October 1, 2013, CMS is undertaking extensive efforts to 
update its systems. These system updates include plans to begin 
processing up to 25 diagnosis codes and 25 procedure codes as well as 
the ability to process codes reported in the external cause of injury 
field. With these system updates, we believe the concerns expressed by 
commenters concerning CMS' limited processing of reported codes will be 
resolved. In the meantime, hospitals should continue their current and 
longstanding practice of reporting the ICD-9-CM diagnosis and procedure 
codes which affect the MS-DRG assignment among the first nine diagnosis 
and first six procedure coding fields.
    As stated below, CMS will implement a wrong surgery (Wrong 
Procedure Performed) coverage edit in the MCE on October 1, 2009, that 
will lead to any

[[Page 43792]]

claim with a wrong surgery E-code triggering this edit to be rejected.
    Should hospitals perform any of the three wrong surgeries and 
submit claims on which the E-code is omitted or is listed in a field 
that we do not currently process for the MS-DRG assignment (the code is 
not reported among the first nine diagnosis codes or the code is 
reported in the External Cause of Injury field), the case may be 
subject to retrospective review by the Recovery Audit Contractor (RAC) 
and then subsequently denied. Patterns of apparent coding abuse may be 
referred to the Office of Inspector General for HHS for additional 
investigation.
    We also have referred this new Wrong Procedure Performed national 
coverage decision to the Cooperating Parties for ICD-9-CM who update 
and maintain the Official ICD-9-CM Coding Guidelines. These guidelines 
are a national HIPAA standard. The guidelines are being updated 
effective October 1, 2009, to recognize the fact that CMS requires the 
reporting of E-codes as part of its wrong procedure performed national 
coverage decision. The fourth quarter issue of Coding Clinic for ICD-9-
CM will also include information on the new wrong surgery codes as well 
as the updated Coding Guidelines. We believe the clarity provided by 
the national coverage decisions, the MCE edits, the updated Official 
ICD-9-CM Coding Guidelines, and the Fourth Quarter Coding Clinic 
article on the new wrong surgery codes should make clear how the codes 
are to be used and reported.
    After consideration of the public comments we received, we are 
finalizing our proposal to change the MCE so the E-codes E876.5 through 
E876.7, whether they are in the principal or secondary diagnosis 
position, will trigger the ``Wrong Procedure Performed'' edit. 
Therefore, any claim with this edit will be rejected, effective October 
1, 2009.
f. Procedures Allowed for Females Only Edit
    It has come to our attention that code 75.37 (Amnioinfusion) and 
code 75.38 (Fetal pulse oximetry) were inadvertently omitted from the 
MCE edit ``Procedures Allowed for Females Only.'' In order to correct 
this omission, in the FY 2010 IPPS/RY 2010 LTCH proposed rule (74 FR 
24110 through 24111), we proposed to add codes 75.37 and 75.38 to the 
edit for procedures allowed for females only.
    We did not receive any public comments on our proposal. Therefore, 
for FY 2010, we are adding codes 75-37 and 75.38 to the Procedures 
Allowed for Females Only edit.
4. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one 
of which, occurring by itself, could result in assignment of the case 
to a different MS-DRG within the MDC to which the principal diagnosis 
is assigned. Therefore, it is necessary to have a decision rule within 
the GROUPER by which these cases are assigned to a single MS-DRG. The 
surgical hierarchy, an ordering of surgical classes from most resource-
intensive to least resource-intensive, performs that function. 
Application of this hierarchy ensures that cases involving multiple 
surgical procedures are assigned to the MS-DRG associated with the most 
resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of MS-DRG reclassification and recalibrations, we 
reviewed the surgical hierarchy of each MDC, as we have for previous 
reclassifications and recalibrations, to determine if the ordering of 
classes coincides with the intensity of resource utilization.
    A surgical class can be composed of one or more MS-DRGs. For 
example, in MDC 11, the surgical class ``kidney transplant'' consists 
of a single MS-DRG (MS-DRG 652) and the class ``major bladder 
procedures'' consists of three MS-DRGs (MS-DRGs 653, 654, and 655). 
Consequently, in many cases, the surgical hierarchy has an impact on 
more than one MS-DRG. The methodology for determining the most 
resource-intensive surgical class involves weighting the average 
resources for each MS-DRG by frequency to determine the weighted 
average resources for each surgical class. For example, assume surgical 
class A includes MS-DRGs 1 and 2 and surgical class B includes MS-DRGs 
3, 4, and 5. Assume also that the average costs of MS-DRG 1 is higher 
than that of MS-DRG 3, but the average costs of MS-DRGs 4 and 5 are 
higher than the average costs of MS-DRG 2. To determine whether 
surgical class A should be higher or lower than surgical class B in the 
surgical hierarchy, we would weight the average costs of each MS-DRG in 
the class by frequency (that is, by the number of cases in the MS-DRG) 
to determine average resource consumption for the surgical class. The 
surgical classes would then be ordered from the class with the highest 
average resource utilization to that with the lowest, with the 
exception of ``other O.R. procedures'' as discussed below.
    This methodology may occasionally result in assignment of a case 
involving multiple procedures to the lower-weighted MS-DRG (in the 
highest, most resource-intensive surgical class) of the available 
alternatives. However, given that the logic underlying the surgical 
hierarchy provides that the GROUPER search for the procedure in the 
most resource-intensive surgical class, in cases involving multiple 
procedures, this result is sometimes unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a 
few instances when a surgical class with a lower average cost is 
ordered above a surgical class with a higher average cost. For example, 
the ``other O.R. procedures'' surgical class is uniformly ordered last 
in the surgical hierarchy of each MDC in which it occurs, regardless of 
the fact that the average costs for the MS-DRG or MS-DRGs in that 
surgical class may be higher than those for other surgical classes in 
the MDC. The ``other O.R. procedures'' class is a group of procedures 
that are only infrequently related to the diagnoses in the MDC, but are 
still occasionally performed on patients in the MDC with these 
diagnoses. Therefore, assignment to these surgical classes should only 
occur if no other surgical class more closely related to the diagnoses 
in the MDC is appropriate.
    A second example occurs when the difference between the average 
costs for two surgical classes is very small. We have found that small 
differences generally do not warrant reordering of the hierarchy 
because, as a result of reassigning cases on the basis of the hierarchy 
change, the average costs are likely to shift such that the higher-
ordered surgical class has a lower average costs than the class ordered 
below it.
    For FY 2010, we did not propose any revisions to the surgical 
hierarchy.
    We did not receive any public comments on our proposal not to make 
any revisions to the surgical hierarchy and, therefore, are finalizing 
our proposed decision in this final rule.
5. Complications or Comorbidity (CC) Exclusions List
a. Background
    As indicated earlier in the preamble of this final rule, under the 
IPPS DRG classification system, we have developed a standard list of 
diagnoses that are considered CCs. Historically, we developed this list 
using physician panels that classified each diagnosis code based on 
whether the diagnosis, when present as a secondary condition, would be 
considered a substantial

[[Page 43793]]

complication or comorbidity. A substantial complication or comorbidity 
was defined as a condition that, because of its presence with a 
specific principal diagnosis, would cause an increase in the length of 
stay by at least 1 day in at least 75 percent of the patients. We refer 
readers to section II.D.2. and 3. of the preamble of the FY 2008 IPPS 
final rule with comment period for a discussion of the refinement of 
CCs in relation to the MS-DRGs we adopted for FY 2008 (72 FR 47121 
through 47152).
b. CC Exclusions List for FY 2010
    In the September 1, 1987 final notice (52 FR 33143) concerning 
changes to the DRG classification system, we modified the GROUPER logic 
so that certain diagnoses included on the standard list of CCs would 
not be considered valid CCs in combination with a particular principal 
diagnosis. We created the CC Exclusions List for the following reasons: 
(1) To preclude coding of CCs for closely related conditions; (2) to 
preclude duplicative or inconsistent coding from being treated as CCs; 
and (3) to ensure that cases are appropriately classified between the 
complicated and uncomplicated DRGs in a pair. As we indicated above, we 
developed a list of diagnoses, using physician panels, to include those 
diagnoses that, when present as a secondary condition, would be 
considered a substantial complication or comorbidity. In previous 
years, we have made changes to the list of CCs, either by adding new 
CCs or deleting CCs already on the list.
    In the May 19, 1987 proposed notice (52 FR 18877) and the September 
1, 1987 final notice (52 FR 33154), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
    <bullet> Chronic and acute manifestations of the same condition 
should not be considered CCs for one another.
    <bullet> Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for the same condition should not be considered 
CCs for one another.
    <bullet> Codes for the same condition that cannot coexist, such as 
partial/total, unilateral/bilateral, obstructed/unobstructed, and 
benign/malignant, should not be considered CCs for one another.
    <bullet> Codes for the same condition in anatomically proximal 
sites should not be considered CCs for one another.
    <bullet> Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. We have continued to review the remaining 
CCs to identify additional exclusions and to remove diagnoses from the 
master list that have been shown not to meet the definition of a CC.\2\
---------------------------------------------------------------------------

    \2\ See the FY 1989 final rule (53 FR 38485, September 30, 
1988), for the revision made for the discharges occurring in FY 
1989; the FY 1990 final rule (54 FR 36552, September 1, 1989), for 
the FY 1990 revision; the FY 1991 final rule (55 FR 36126, September 
4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR 
43209, August 30, 1991) for the FY 1992 revision; the FY 1993 final 
rule (57 FR 39753, September 1, 1992), for the FY 1993 revision; the 
FY 1994 final rule (58 FR 46278, September 1, 1993), for the FY 1994 
revisions; the FY 1995 final rule (59 FR 45334, September 1, 1994), 
for the FY 1995 revisions; the FY 1996 final rule (60 FR 45782, 
September 1, 1995), for the FY 1996 revisions; the FY 1997 final 
rule (61 FR 46171, August 30, 1996), for the FY 1997 revisions; the 
FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998 
revisions; the FY 1999 final rule (63 FR 40954, July 31, 1998), for 
the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August 
1, 2000), for the FY 2001 revisions; the FY 2002 final rule (66 FR 
39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final 
rule (67 FR 49998, August 1, 2002), for the FY 2003 revisions; the 
FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004 
revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004), 
for the FY 2005 revisions; the FY 2006 final rule (70 FR 47640, 
August 12, 2005), for the FY 2006 revisions; the FY 2007 final rule 
(71 FR 47870) for the FY 2007 revisions; the FY 2008 final rule (72 
FR 47130) for the FY 2008 revisions, and the FY 2009 final rule (73 
FR 48510). In the FY 2000 final rule (64 FR 41490, July 30, 1999, we 
did not modify the CC Exclusions List because we did not make any 
changes to the ICD-9-CM codes for FY 2000.
---------------------------------------------------------------------------

    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24111 
through 24112), we proposed to make limited revisions to the CC 
Exclusions List for FY 2010 to take into account the changes made in 
the ICD-9-CM diagnosis coding system effective October 1, 2009. (We 
refer readers to section II.G.7. of the preamble of this final rule for 
a discussion of ICD-9-CM changes.) We proposed to make these changes in 
accordance with the principles established when we created the CC 
Exclusions List in 1987. In addition, we indicated on the CC Exclusions 
List some changes as a result of updates to the ICD-9-CM codes to 
reflect the exclusion of codes from being MCCs under the MS-DRG system 
that we adopted in FY 2008.
    Comment: One comment asked CMS if it would be reasonable to 
consider modifying future GROUPER logic so that patients with multiple 
secondary diagnoses classified as CCs would be assigned to the MCC 
level. In other words, the commenter stated, multiple CCs would be 
considered the same as having an MCC.
    Response: We believe this comment is outside the scope of the 
proposed rule because we did not propose significant revisions to the 
MS-DRGs. Moreover, as discussed earlier, we made significant 
refinements to the inpatient payment system when we implemented the MS-
DRG system in FY 2008. We refer readers to section II.D. of the FY 2008 
IPPS final rule with comment period for a full discussion of how the 
MS-DRG system was established based on severity levels of illness (72 
FR 47141). As we noted earlier, we received a number of comments 
recognizing the recent major changes to the MS-DRGs. The commenters 
stated that, given these recent major changes, it is appropriate for 
CMS to make only a limited number of MS-DRG classification changes for 
FY 2010. We believe that reclassifying a case with two or more CCs as 
an MCC would have a major impact on the MS-DRG system because 51 
percent of the cases in the MedPAR file have more than one CC 
(5,980,824 of 11,801,371 cases in FY 2008). Therefore, we have decided 
not to modify the GROUPER logic to classify a case with multiple CCs as 
an MCC for FY 2010.
    Comment: Several commenters recommended that CMS consider making 
further adjustments to the MS-DRG assignments based on obesity. The 
commenters stated that higher Body Mass Index (BMI) ratings add to the 
complexity of care for patients, such as those patients undergoing 
orthopedic procedures. The commenters recommended the following changes 
to the list of MCCs and CCs.
    One commenter recommended that CMS add the following codes to the 
CC list. Another commenter recommended that CMS add these same codes to 
the MCC list.

<bullet> 731.3 (Major osseous defects)
<bullet> V85.35 (Body mass index 35.0-35.9, adult)
<bullet> V85.36 (Body mass index 36.0-36.9, adult)
<bullet> V85.37 (Body mass index 37.0-37.9, adult)

    Both commenters recommended that CMS add the following codes to the 
MCC list:

<bullet> V85.38 (Body mass index 38.0-38.9, adult)
<bullet> V85.39 (Body mass index 39.0-39.9, adult)
<bullet> V85.40 (Body mass index 40 and over, adult)

    Response: We believe this comment is outside the scope of the 
specific proposal in the proposed rule because we did not propose 
significant revisions to the MS-DRGs. In the FY 2010 IPPS/RY 2010 LTCH 
PPS proposed rule (74 FR 24091), we stated that we were encouraging 
individuals with comments about MS-DRG classifications to submit these 
comments no later than early December of each year so they can be 
carefully considered for possible

[[Page 43794]]

inclusion in the annual proposed rule and, if included, may be 
subjected to public review and comment. Therefore, we are not adding 
these codes to the MCC list or the CC list for FY 2010. We may consider 
their appropriateness for inclusion in next year's annual IPPS proposed 
rule.
    After consideration of the public comments received, we are 
adopting the proposed limited revisions to the CC Exclusion List as 
final for FY 2010 without change.
    Tables 6G and 6H, Additions to and Deletions from the CC Exclusion 
List, respectively, which are effective for discharges occurring on or 
after October 1, 2009, are not being published in this final rule 
because of the length of the two tables. Instead, we are making them 
available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Each of these principal diagnoses 
for which there is a CC exclusion is shown in Tables 6G and 6H with an 
asterisk, and the conditions that will not count as a CC, are provided 
in an indented column immediately following the affected principal 
diagnosis.
    A complete updated MCC, CC, and Non-CC Exclusions List is also 
available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Beginning with discharges on or 
after October 1, 2009, the indented diagnoses will not be recognized by 
the GROUPER as valid CCs for the asterisked principal diagnosis.
    To assist readers in identifying the changes to the MCC and CC 
lists that occurred as a result of updates to the ICD-9-CM codes, as 
described in Tables 6A, 6C, and 6E of the Addendum to this final rule, 
we are providing the following summaries of those MCC and CC changes.

         Summary of Additions to the MS-DRG MCC List--Table 6I.1
------------------------------------------------------------------------
             Code                             Description
------------------------------------------------------------------------
277.88.......................  Tumor lysis syndrome.
670.22.......................  Puerperal sepsis, delivered, with mention
                                of postpartum complication.
670.24.......................  Puerperal sepsis, postpartum condition or
                                complication.
670.32.......................  Puerperal septic thrombophlebitis,
                                delivered, with mention of postpartum
                                complication.
670.34.......................  Puerperal septic thrombophlebitis,
                                postpartum condition or complication.
670.80.......................  Other major puerperal infection,
                                unspecified as to episode of care or not
                                applicable.
670.82.......................  Other major puerperal infection,
                                delivered, with mention of postpartum
                                complication.
670.84.......................  Other major puerperal infection,
                                postpartum condition or complication.
756.72.......................  Omphalocele.
756.73.......................  Gastroschisis.
768.73.......................  Severe hypoxic-ischemic encephalopathy.
779.32.......................  Bilious vomiting in newborn.
------------------------------------------------------------------------


        Summary of Deletions From the MS-DRG MCC List--Table 6I.2
------------------------------------------------------------------------
             Code                             Description
------------------------------------------------------------------------
768.7........................  Hypoxic-ischemic encephalopathy (HIE).
------------------------------------------------------------------------


         Summary of Additions to the MS-DRG CC List--Table 6J.1
------------------------------------------------------------------------
             Code                             Description
------------------------------------------------------------------------
209.71.......................  Secondary neuroendocrine tumor of distant
                                lymph nodes.
209.72.......................  Secondary neuroendocrine tumor of liver.
209.73.......................  Secondary neuroendocrine tumor of bone.
209.74.......................  Secondary neuroendocrine tumor of
                                peritoneum.
209.79.......................  Secondary neuroendocrine tumor of other
                                sites.
416.2........................  Chronic pulmonary embolism.
453.50.......................  Chronic venous embolism and thrombosis of
                                unspecified deep vessels of lower
                                extremity.
453.51.......................  Chronic venous embolism and thrombosis of
                                deep vessels of proximal lower
                                extremity.
453.52.......................  Chronic venous embolism and thrombosis of
                                deep vessels of distal lower extremity.
453.6........................  Venous embolism and thrombosis of
                                superficial vessels of lower extremity.
453.71.......................  Chronic venous embolism and thrombosis of
                                superficial veins of upper extremity.
453.72.......................  Chronic venous embolism and thrombosis of
                                deep veins of upper extremity.
453.73.......................  Chronic venous embolism and thrombosis of
                                upper extremity, unspecified.
453.74.......................  Chronic venous embolism and thrombosis of
                                axillary veins.
453.75.......................  Chronic venous embolism and thrombosis of
                                subclavian veins.
453.76.......................  Chronic venous embolism and thrombosis of
                                internal jugular veins.
453.77.......................  Chronic venous embolism and thrombosis of
                                other thoracic veins.
453.79.......................  Chronic venous embolism and thrombosis of
                                other specified veins.
453.81.......................  Acute venous embolism and thrombosis of
                                superficial veins of upper extremity.
453.82.......................  Acute venous embolism and thrombosis of
                                deep veins of upper extremity.
453.83.......................  Acute venous embolism and thrombosis of
                                upper extremity, unspecified.
453.84.......................  Acute venous embolism and thrombosis of
                                axillary veins.
453.85.......................  Acute venous embolism and thrombosis of
                                subclavian veins.
453.86.......................  Acute venous embolism and thrombosis of
                                internal jugular veins.
453.87.......................  Acute venous embolism and thrombosis of
                                other thoracic veins.
453.89.......................  Acute venous embolism and thrombosis of
                                other specified veins.
569.71.......................  Pouchitis.
569.79.......................  Other complications of intestinal pouch.
670.10.......................  Puerperal endometritis, unspecified as to
                                episode of care or not applicable.

[[Page 43795]]

 
670.12.......................  Puerperal endometritis, delivered, with
                                mention of postpartum complication.
670.14.......................  Puerperal endometritis, postpartum
                                condition or complication.
670.20.......................  Puerperal sepsis, unspecified as to
                                episode of care or not applicable.
670.30.......................  Puerperal septic thrombophlebitis,
                                unspecified as to episode of care or not
                                applicable.
768.70.......................  Hypoxic-ischemic encephalopathy,
                                unspecified.
768.71.......................  Mild hypoxic-ischemic encephalopathy.
768.72.......................  Moderate hypoxic-ischemic encephalopathy.
813.46.......................  Torus fracture of ulna (alone).
813.47.......................  Torus fracture of radius and ulna.
------------------------------------------------------------------------


        Summary of Deletions From the MS-DRG CC List--Table 6J.2
------------------------------------------------------------------------
             Code                             Description
------------------------------------------------------------------------
453.8........................  Other venous embolism and thrombosis of
                                other specified veins.
------------------------------------------------------------------------

    These summary lists are the same as those lists included in the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24111 through 24112).
    Comment: One commenter supported the CC designations for new codes 
813.46 (Torus fracture of ulna (alone)) and 813.47 (Torus fracture of 
radius and ulna).
    Response: We appreciate the commenter's support.
    Alternatively, the complete documentation of the GROUPER logic, 
including the current CC Exclusions List, is available from 3M/Health 
Information Systems (HIS), which, under contract with CMS, is 
responsible for updating and maintaining the GROUPER program. The 
current MS-DRG Definitions Manual, Version 26.0, is available for 
$250.00, which includes shipping and handling. Version 26.0 of the 
manual is also available on a CD for $200.00; a combination hard copy 
and CD is available for $400.00. Version 27.0 of this manual, which 
will include the final FY 2010 MS-DRG changes, will be available in CD 
only for $225.00. These manuals may be obtained by writing 3M/HIS at 
the following address: 100 Barnes Road, Wallingford, CT 06492; or by 
calling (203) 949-0303, or by obtaining an order form at the Web site: 
http://www.3MHIS.com. Please specify the revision or revisions 
requested.
6. Review of Procedure Codes in MS DRGs 981 Through 983; 984 Through 
986; and 987 Through 989
    Each year, we review cases assigned to former CMS DRG 468 
(Extensive O.R. Procedure Unrelated to Principal Diagnosis), CMS DRG 
476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and 
CMS DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal 
Diagnosis) to determine whether it would be appropriate to change the 
procedures assigned among these CMS DRGs. Under the MS-DRGs that we 
adopted for FY 2008, CMS DRG 468 was split three ways and became MS-
DRGs 981, 982, and 983 (Extensive O.R. Procedure Unrelated to Principal 
Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 476 became 
MS-DRGs 984, 985, and 986 (Prostatic O.R. Procedure Unrelated to 
Principal Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 477 
became MS-DRGs 987, 988, and 989 (Nonextensive O.R. Procedure Unrelated 
to Principal Diagnosis with MCC, with CC, and without CC/MCC).
    MS-DRGs 981 through 983, 984 through 986, and 987 through 989 
(formerly CMS DRGs 468, 476, and 477, respectively) are reserved for 
those cases in which none of the O.R. procedures performed are related 
to the principal diagnosis. These DRGs are intended to capture atypical 
cases, that is, those cases not occurring with sufficient frequency to 
represent a distinct, recognizable clinical group. MS-DRGs 984 through 
986 (previously CMS DRG 476) are assigned to those discharges in which 
one or more of the following prostatic procedures are performed and are 
unrelated to the principal diagnosis:
    <bullet> 60.0, Incision of prostate
    <bullet> 60.12, Open biopsy of prostate
    <bullet> 60.15, Biopsy of periprostatic tissue
    <bullet> 60.18, Other diagnostic procedures on prostate and 
periprostatic tissue
    <bullet> 60.21, Transurethral prostatectomy
    <bullet> 60.29, Other transurethral prostatectomy
    <bullet> 60.61, Local excision of lesion of prostate
    <bullet> 60.69, Prostatectomy, not elsewhere classified
    <bullet> 60.81, Incision of periprostatic tissue
    <bullet> 60.82, Excision of periprostatic tissue
    <bullet> 60.93, Repair of prostate
    <bullet> 60.94, Control of (postoperative) hemorrhage of prostate
    <bullet> 60.95, Transurethral balloon dilation of the prostatic 
urethra
    <bullet> 60.96, Transurethral destruction of prostate tissue by 
microwave thermotherapy
    <bullet> 60.97, Other transurethral destruction of prostate tissue 
by other thermotherapy
    <bullet> 60.99, Other operations on prostate
    All remaining O.R. procedures are assigned to MS-DRGs 981 through 
983 and 987 through 989, with MS-DRGs 987 through 989 assigned to those 
discharges in which the only procedures performed are nonextensive 
procedures that are unrelated to the principal diagnosis.\3\
---------------------------------------------------------------------------

    \3\ The original list of the ICD-9-CM procedure codes for the 
procedures we consider nonextensive procedures, if performed with an 
unrelated principal diagnosis, was published in Table 6C in section 
IV. of the Addendum to the FY 1989 final rule (53 FR 38591). As part 
of the FY 1991 final rule (55 FR 36135), the FY 1992 final rule (56 
FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final 
rule (58 FR 46279), the FY 1995 final rule (59 FR 45336), the FY 
1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173), 
and the FY 1998 final rule (62 FR 45981), we moved several other 
procedures from DRG 468 to DRG 477, and some procedures from DRG 477 
to DRG 468. No procedures were moved in FY 1999, as noted in the 
final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65 
FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule 
(67 FR 49999) we did not move any procedures from DRG 477. However, 
we did move procedure codes from DRG 468 and placed them in more 
clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365), 
we moved several procedures from DRG 468 to DRGs 476 and 477 because 
the procedures are nonextensive. In the FY 2005 final rule (69 FR 
48950), we moved one procedure from DRG 468 to 477. In addition, we 
added several existing procedures to DRGs 476 and 477. In the FY 
2006 (70 FR 47317), we moved one procedure from DRG 468 and assigned 
it to DRG 477. In FY 2007, we moved one procedure from DRG 468 and 
assigned it to DRGs 479, 553, and 554. In FYs 2008 and 2009, no 
procedures were moved, as noted in the FY 2008 final rule with 
comment period (72 FR 46241), and in the FY 2009 final rule (73 FR 
48513).

---------------------------------------------------------------------------

[[Page 43796]]

    For FY 2010, we did not propose to change the procedures assigned 
among these MS-DRGs. We did not receive any public comments on our 
proposal not to change the procedures assigned among the cited MS-DRGs 
and, therefore, are adopting it as final for FY 2010 in this final 
rule.
a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 
Through 989 to MDCs
    We annually conduct a review of procedures producing assignment to 
MS-DRGs 981 through 983 (formerly CMS DRG 468) or MS-DRGs 987 through 
989 (formerly CMS DRG 477) on the basis of volume, by procedure, to see 
if it would be appropriate to move procedure codes out of these MS-DRGs 
into one of the surgical MS-DRGs for the MDC into which the principal 
diagnosis falls. The data are arrayed in two ways for comparison 
purposes. We look at a frequency count of each major operative 
procedure code. We also compare procedures across MDCs by volume of 
procedure codes within each MDC.
    We identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical DRGs for the MDC in which the diagnosis falls. For 
FY 2010, we did not propose to remove any procedures from MS-DRGs 981 
through 983 or MS-DRGs 987 through 989. We did not receive any public 
comments on our proposal and, therefore, are adopting it as final for 
FY 2010 in this final rule.
b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    We also annually review the list of ICD-9-CM procedures that, when 
in combination with their principal diagnosis code, result in 
assignment to MS-DRGs 981 through 983, 984 through 986, and 987 through 
989 (formerly, CMS DRGs 468, 476, and 477, respectively), to ascertain 
whether any of those procedures should be reassigned from one of these 
three MS-DRGs to another of the three MS-DRGs based on average charges 
and the length of stay. We look at the data for trends such as shifts 
in treatment practice or reporting practice that would make the 
resulting MS-DRG assignment illogical. If we find these shifts, we 
would propose to move cases to keep the MS-DRGs clinically similar or 
to provide payment for the cases in a similar manner. Generally, we 
move only those procedures for which we have an adequate number of 
discharges to analyze the data.
    For FY 2010, we did not propose to move any procedure codes among 
these MS-DRGs. We did not receive any public comments on our proposal 
and, therefore, are adopting it as final for FY 2010 in this final 
rule.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on our review this year, we did not propose to add any 
diagnosis codes to MDCs for FY 2010. We did not receive any public 
comments on this subject.
7. Changes to the ICD-9-CM Coding System
    As described in section II.B.1. of the preamble of this final rule, 
the ICD-9-CM is a coding system used for the reporting of diagnoses and 
procedures performed on a patient. In September 1985, the ICD-9-CM 
Coordination and Maintenance Committee was formed. This is a Federal 
interdepartmental committee, co-chaired by the National Center for 
Health Statistics (NCHS), the Centers for Disease Control and 
Prevention, and CMS, charged with maintaining and updating the ICD-9-CM 
system. The Committee is jointly responsible for approving coding 
changes, and developing errata, addenda, and other modifications to the 
ICD-9-CM to reflect newly developed procedures and technologies and 
newly identified diseases. The Committee is also responsible for 
promoting the use of Federal and non-Federal educational programs and 
other communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The Official Version of the ICD-9-CM contains the list of valid 
diagnosis and procedure codes. (The Official Version of the ICD-9-CM is 
available from the Government Printing Office on CD-ROM for $19.00 by 
calling (202) 512-1800.) Complete information on ordering the CD-ROM is 
also available at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/05_CDROM.asp#TopOfPage. The Official Version of the ICD-9-CM is no 
longer available in printed manual form from the Federal Government; it 
is only available on CD-ROM. Users who need a paper version are 
referred to one of the many products available from publishing houses.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has lead responsibility for the ICD-9-CM procedure codes included 
in the Tabular List and Alphabetic Index for Procedures.
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding field, such 
as the American Health Information Management Association (AHIMA), the 
American Hospital Association (AHA), and various physician specialty 
groups, as well as individual physicians, health information management 
professionals, and other members of the public, to contribute ideas on 
coding matters. After considering the opinions expressed at the public 
meetings and in writing, the Committee formulates recommendations, 
which then must be approved by the agencies.
    The Committee presented proposals for coding changes for 
implementation in FY 2010 at a public meeting held on September 24-25, 
2008 and finalized the coding changes after consideration of comments 
received at the meetings and in writing by December 5, 2008. Those 
coding changes are announced in Tables 6A through 6F in the Addendum to 
this final rule. The Committee held its 2009 meeting on March 11-12, 
2009. New codes for which there was a consensus of public support and 
for which complete tabular and indexing changes are made by May 2009 
will be included in the October 1, 2009 update to ICD-9-CM. Code 
revisions that were discussed at the March 11-12, 2009 Committee 
meeting but that could not be finalized in time to include them in the 
Addendum to the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule are 
included in Tables 6A through 6F of this final rule and are marked with 
an asterisk (*).
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 24-25, 2008 meeting and March 11-12, 2009 meeting 
can be obtained from the CMS Web site at: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the 
diagnosis codes discussions at the September 24-25, 2008 meeting and 
March 11-12, 2009 meeting are found at: http://www.cdc.gov/nchs/icd9.htm. Paper copies of these minutes are no longer available and the 
mailing list has been discontinued. These Web sites also provide 
detailed information about the Committee, including information on

[[Page 43797]]

requesting a new code, attending a Committee meeting, and timeline 
requirements and meeting dates.
    We encourage commenters to address suggestions on coding issues 
involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM 
Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo 
Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: 
<a href="/cdn-cgi/l/email-protection#e98d8f99dda98a8d8ac78e869f"><span class="__cf_email__" data-cfemail="6501031551250601064b020a13">[email protected]</span></a>.
    Questions and comments concerning the procedure codes should be 
addressed 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, C4-08-06, 
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent 
by E-mail to: <a href="/cdn-cgi/l/email-protection#4c3c2d383e252f252d622e3e2323273f7e0c2f213f6224243f622b233a"><span class="__cf_email__" data-cfemail="16667762647f757f7738746479797d652456757b65387e7e6538717960">[email protected]</span></a>.
    The ICD-9-CM code changes that have been approved will become 
effective October 1, 2009. The new ICD-9-CM codes are listed, along 
with their MS-DRG classifications, in Tables 6A and 6B (New Diagnosis 
Codes and New Procedure Codes, respectively) in the Addendum to this 
final rule. As we stated above, the code numbers and their titles were 
presented for public comment at the ICD-9-CM Coordination and 
Maintenance Committee meetings. Both oral and written comments were 
considered before the codes were approved.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24114), 
we solicited comments on the proposed classification of these new 
codes. We did not receive any public comments on the proposed MS-DRG 
assignments for the new diagnosis and procedure codes. Therefore, in 
this final rule, we are adopting as final without modification the MS-
DRG classifications for the new codes for FY 2010 that were included in 
the proposed rule and the new codes that were discussed at the spring 
but were not finalized in time to be included in the proposed rule.
    For codes that have been replaced by new or expanded codes, the 
corresponding new or expanded diagnosis codes are included in Table 6A 
in the Addendum to this final rule. New procedure codes are shown in 
Table 6B in the Addendum to this final rule. Diagnosis codes that have 
been replaced by expanded codes or other codes or have been deleted are 
in Table 6C (Invalid Diagnosis Codes) in the Addendum to this final 
rule. These invalid diagnosis codes will not be recognized by the 
GROUPER beginning with discharges occurring on or after October 1, 
2009. Table 6D in the Addendum to this final rule contains invalid 
procedure codes. These invalid procedure codes will not be recognized 
by the GROUPER beginning with discharges occurring on or after October 
1, 2009. Revisions to diagnosis code titles are in Table 6E (Revised 
Diagnosis Code Titles) in the Addendum to this final rule, which also 
includes the MS-DRG assignments for these revised codes. Table 6F in 
the Addendum to this final rule includes revised procedure code titles 
for FY 2010.
    In the September 7, 2001 final rule implementing the IPPS new 
technology add-on payments (66 FR 46906), we indicated we would attempt 
to include proposals for procedure codes that would describe new 
technology discussed and approved at the Spring meeting as part of the 
code revisions effective the following October. As stated previously, 
ICD-9-CM codes discussed at the March 11-12, 2009 Committee meeting 
that receive consensus and that were finalized by May 2009 are included 
in Tables 6A through 6F in the Addendum to this final rule.
    Section 503(a) of Public Law 108-173 included a requirement for 
updating ICD-9-CM codes twice a year instead of a single update on 
October 1 of each year. This requirement was included as part of the 
amendments to the Act relating to recognition of new technology under 
the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by 
adding a clause (vii) which states that the ``Secretary shall provide 
for the addition of new diagnosis and procedure codes on April 1 of 
each year, but the addition of such codes shall not require the 
Secretary to adjust the payment (or diagnosis-related group 
classification) * * * until the fiscal year that begins after such 
date.'' This requirement improves the recognition of new technologies 
under the IPPS system by providing information on these new 
technologies at an earlier date. Data will be available 6 months 
earlier than would be possible with updates occurring only once a year 
on October 1.
    While section 1886(d)(5)(K)(vii) of the Act states that the 
addition of new diagnosis and procedure codes on April 1 of each year 
shall not require the Secretary to adjust the payment, or DRG 
classification, under section 1886(d) of the Act until the fiscal year 
that begins after such date, we have to update the DRG software and 
other systems in order to recognize and accept the new codes. We also 
publicize the code changes and the need for a mid-year systems update 
by providers to identify the new codes. Hospitals also have to obtain 
the new code books and encoder updates, and make other system changes 
in order to identify and report the new codes.
    The ICD-9-CM Coordination and Maintenance Committee holds its 
meetings in the spring and fall in order to update the codes and the 
applicable payment and reporting systems by October 1 of each year. 
Items are placed on the agenda for the ICD-9-CM Coordination and 
Maintenance Committee meeting if the request is received at least 2 
months prior to the meeting. This requirement allows time for staff to 
review and research the coding issues and prepare material for 
discussion at the meeting. It also allows time for the topic to be 
publicized in meeting announcements in the Federal Register as well as 
on the CMS Web site. The public decides whether or not to attend the 
meeting based on the topics listed on the agenda. Final decisions on 
code title revisions are currently made by March 1 so that these titles 
can be included in the IPPS proposed rule. A complete addendum 
describing details of all changes to ICD-9-CM, both tabular and index, 
is published on the CMS and NCHS Web sites in May of each year. 
Publishers of coding books and software use this information to modify 
their products that are used by health care providers. This 5-month 
time period has proved to be necessary for hospitals and other 
providers to update their systems.
    A discussion of this timeline and the need for changes are included 
in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance 
Committee minutes. The public agreed that there was a need to hold the 
fall meetings earlier, in September or October, in order to meet the 
new implementation dates. The public provided comment that additional 
time would be needed to update hospital systems and obtain new code 
books and coding software. There was considerable concern expressed 
about the impact this new April update would have on providers.
    In the FY 2005 IPPS final rule, we implemented section 
1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Public Law 
108-173, by developing a mechanism for approving, in time for the April 
update, diagnosis and procedure code revisions needed to describe new 
technologies and medical services for purposes of the new technology 
add-on payment process. We also established the following process for 
making these determinations. Topics considered during the Fall ICD-9-CM 
Coordination and Maintenance Committee meeting are considered for

[[Page 43798]]

an April 1 update if a strong and convincing case is made by the 
requester at the Committee's public meeting. The request must identify 
the reason why a new code is needed in April for purposes of the new 
technology process. The participants at the meeting and those reviewing 
the Committee meeting summary report are provided the opportunity to 
comment on this expedited request. All other topics are considered for 
the October 1 update. Participants at the Committee meeting are 
encouraged to comment on all such requests. There were no requests 
approved for an expedited April 1, 2009 implementation of an ICD-9-CM 
code at the September 24-25, 2008 Committee meeting. Therefore, there 
were no new ICD-9-CM codes implemented on April 1, 2009.
    Current addendum and code title information is published on the CMS 
Web site at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along 
with the Official ICD-9-CM Coding Guidelines, can be found on the Web 
site at: http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, 
and deleted ICD-9-CM codes is also provided to the AHA for publication 
in the Coding Clinic for ICD-9-CM. AHA also distributes information to 
publishers and software vendors.
    CMS also sends copies of all ICD-9-CM coding changes to its 
Medicare contractors for use in updating their systems and providing 
education to providers.
    These same means of disseminating information on new, revised, and 
deleted ICD-9-CM codes will be used to notify providers, publishers, 
software vendors, contractors, and others of any changes to the ICD-9-
CM codes that are implemented in April. The code titles are adopted as 
part of the ICD-9-CM Coordination and Maintenance Committee process. 
Thus, although we publish the code titles in the IPPS proposed and 
final rules, they are not subject to comment in the proposed or final 
rules. We will continue to publish the October code updates in this 
manner within the IPPS proposed and final rules. For codes that are 
implemented in April, we will assign the new procedure code to the same 
DRG in which its predecessor code was assigned so there will be no DRG 
impact as far as DRG assignment. Any midyear coding updates will be 
available through the Web sites indicated above and through the Coding 
Clinic for ICD-9-CM. Publishers and software vendors currently obtain 
code changes through these sources in order to update their code books 
and software systems. We will strive to have the April 1 updates 
available through these Web sites 5 months prior to implementation 
(that is, early November of the previous year), as is the case for the 
October 1 updates.
    Comment: A number of commenters addressed concerns regarding the 
implementation of ICD-10 and the processing more than nine diagnosis 
and six procedure codes in anticipation of the implementation of ICD-
10. Several commenters recommended that CMS begin processing all 
reported diagnosis and procedure codes on claims, even before the 
planned implementation of ICD-10-CM and ICD-10-PCS on October 1, 2013. 
Other commenters recommended that CMS be transparent during all steps 
of ICD-10 implementation and make provisions for stakeholder comments 
and input during the transition. One commenter recommended that the 
final ICD-10 version of MS-DRGs be adopted using notice and comment 
rulemaking.
    Response: We did not address the planned implementation of ICD-10 
in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and, therefore, 
consider these comments beyond the scope of the proposed rule. 
Therefore, we will not address them in this final rule. We refer 
readers to the separate CMS final rule published in the Federal 
Register that announced the implementation of modifications to medical 
data code set standards to adopt ICD-10-CM and ICD-10-PCS (74 FR 3328 
through 3362). CMS is currently undergoing extensive efforts to update 
its Medicare payment systems as part of the move to ICD-10. Part of 
these system efforts will involve the expansion of our ability to 
process more diagnosis and procedure codes. Information on ICD-10 can 
be found on the CMS Web site at: http://www.cms.hhs.gov/ICD10. The 
final ICD-10 version of MS-DRGs will be adopted under the formal 
rulemaking process as part of our annual IPPS updates.
8. Other Issues Not Addressed in the Proposed Rule
    We received a number of public comments on issues that were not the 
subject of proposals in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule.
    a. Administration of Tissue Plasminogen Activator (tPA) (rtPA)
    We received a public comment requesting that CMS conduct an 
analysis of diagnosis code V45.88 (Status post administration of tPA 
(rtPA) in a different facility within the last 24 hours prior to 
admission to current facility) under MDC 1 (Diseases and Disorders of 
the Nervous System). This code was created for use beginning October 1, 
2008, and the commenter believes that the use of this code during FY 
2009 and FY 2010 could potentially result in a new MS-DRG or set of MS-
DRGs in FY 2011. The commenter believed that an expedited analysis 
would help show if the code is being used.
    This comment is outside the scope of the proposed rule, as we did 
not propose any MS-DRG changes based on data analysis of cases 
including diagnosis code V45.88. Therefore, we will not undertake an 
evaluation of code V45.88 at this time for FY 2010. As we stated in FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24091), we encourage 
individuals with comments about MS-DRG classifications to submit these 
comments no later than early December of each year so they can be 
carefully considered for possible inclusion in the annual proposed rule 
and, if included, may be subjected to public review and comment.
b. Coronary Artery Bypass Graft (CABG) With Intraoperative Angiography
    We received a number of comments that recommended creating new MS-
DRGs to separately identify the use of intraoperative angiography, by 
any method, in CABG surgery under MDC 5 (Diseases and Disorders of the 
Circulatory System). Intraoperative angiography is used to assess 
bypass graft patency. The commenters acknowledged that imaging in the 
operating room is a fairly new concept. However, the commenters stated 
that there is a movement to encourage greater use of this technology in 
conjunction with CABG procedures to identify and correct any technical 
issues with the graft(s) at the time of surgery. According to the 
commenters, intraoperative angiography would reduce graft failure 
complications and hospital readmissions while improving patient care 
outcomes.
    The commenters expressed concern that the costs related to 
intraoperative angiography are not fully realized in the current 
structure of the MS-DRGs. One commenter suggested creating four new MS-
DRGs to identify the use of intraoperative angiography when performed 
with CABG surgery. The commenter stated that in the current MS-DRG 
scheme, there is not a mechanism to determine when intraoperative 
angiography is performed. Angiography is commonly performed as a 
separate procedure in a catheterization laboratory and the ICD-9-CM 
procedure codes do not distinguish between preoperative,

[[Page 43799]]

intraoperative, and postoperative angiography. Procedure code 88.59 
(Intraoperative fluorescence vascular angiography (IFVA)), is one 
intraoperative angiography technique that allows visualization of the 
coronary vasculature. The commenter proposed four new MS-DRGs in 
addition to the existing MS-DRGs for CABG in an attempt to 
differentiate the utilization of resources between intraoperative 
angiography and IFVA when utilized with CABG.
    Another commenter suggested that CMS should consider completely 
separating CABG procedures from cardiac catheterization. This commenter 
indicated that the concept is ``worthy of serious consideration because 
of its relationship to much larger issues in management of coronary 
artery disease.'' Other commenters recommended that CMS assign IFVA 
cases to the ``Other Cardiovascular MS-DRGs,'' MS-DRGs 228, 229, and 
230.
    We believe the requests to create new MS-DRGs in FY 2010 for CABG 
cases with intraoperative angiography and IFVA are outside the scope of 
the issues addressed in the proposed rule. The recommendation to move 
IFVA cases to Other Cardiovascular MS-DRGs 228, 229, and 230 is also 
out of scope issues addressed in the proposed rule. Therefore, we are 
not providing responses to these public comments in this final rule. We 
will consider the requests for new MS-DRGs regarding this topic during 
the FY 2011 rulemaking process.
c. Insertion of Gastrointestinal Stent
    We received a public comment requesting that CMS analyze the need 
to create new MS-DRGs in FY 2011 to better capture patients who undergo 
the insertion of a gastrointestinal stent under MDC 6 (Diseases and 
Disorders of the Digestive System). The stents are inserted in the 
esophagus, duodenum, biliary tract, or the colon in order to 
reestablish or maintain patency of these vessels to allow swallowing, 
drainage, or passage of waste. The commenter requested that the new MS-
DRGs be subdivided into three severity levels (with MCC, with CC, and 
without CC/MCC). The commenter stated it had data that showed cases 
with gastrointestinal stent insertions have higher costs than other 
cases within the same MS-DRGs. The commenter also stated that there are 
a small number of these cases, and acknowledged that there may be some 
concern about the need to establish new DRGs for such a small number of 
cases.
    This comment relating to a request to create new MS-DRGs in FY 2011 
for cases with gastrointestinal stents is outside the scope of the FY 
2010 proposed rule. We will consider this request alone with other 
timely received requests for updates to the FY 2011 MS-DRGs during the 
FY 2011 rulemaking process. As we stated above, we encourage 
individuals with comments about MS-DRG classifications to submit these 
comments no later than early December of each year so they can be 
carefully considered for possible inclusion in the annual proposed rule 
and, if included, may be subjected to public review and comment.

H. Recalibration of MS-DRG Weights

    In section II.E. of the preamble of this final rule, we state that 
we fully implemented the cost-based DRG relative weights for FY 2009, 
which was the third year in the 3-year transition period to calculate 
the relative weights at 100 percent based on costs. In the FY 2008 IPPS 
final rule with comment period (72 FR 47267), as recommended by RTI, 
for FY 2008, we added two new CCRs for a total of 15 CCRs: one for 
``Emergency Room'' and one for ``Blood and Blood Products,'' both of 
which can be derived directly from the Medicare cost report.
    As we proposed, in developing the FY 2010 system of weights, we 
used two data sources: claims data and cost report data. As in previous 
years, the claims data source is the MedPAR file. This file is based on 
fully coded diagnostic and procedure data for all Medicare inpatient 
hospital bills. The FY 2008 MedPAR data used in this final rule include 
discharges occurring on October 1, 2007, through September 30, 2008, 
based on bills received by CMS through March 31, 2009, from all 
hospitals subject to the IPPS and short-term, acute care hospitals in 
Maryland (which are under a waiver from the IPPS under section 
1814(b)(3) of the Act). The FY 2008 MedPAR file used in calculating the 
relative weights includes data for approximately 11,283,982 Medicare 
discharges from IPPS providers. Discharges for Medicare beneficiaries 
enrolled in a Medicare Advantage managed care plan are excluded from 
this analysis. The data exclude CAHs, including hospitals that 
subsequently became CAHs after the period from which the data were 
taken. The second data source used in the cost-based relative weighting 
methodology is the FY 2007 Medicare cost report data files from HCRIS 
(that is, cost reports beginning on or after October 1, 2006, and 
before October 1, 2007), which represents the most recent full set of 
cost report data available. We used the March 31, 2009 update of the 
HCRIS cost report files for FY 2007 in setting the relative cost-based 
weights.
    The methodology we used to calculate the DRG cost-based relative 
weights from the FY 2008 MedPAR claims data and FY 2007 Medicare cost 
report data is as follows:
    <bullet> To the extent possible, all the claims were regrouped 
using the FY 2010 MS-DRG classifications discussed in sections II.B. 
and G. of the preamble of this final rule.
    <bullet> The transplant cases that were used to establish the 
relative weights for heart and heart-lung, liver and/or intestinal, and 
lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively) 
were limited to those Medicare-approved transplant centers that have 
cases in the FY 2008 MedPAR file. (Medicare coverage for heart, heart-
lung, liver and/or intestinal, and lung transplants is limited to those 
facilities that have received approval from CMS as transplant centers.)
    <bullet> Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it is necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition 
charges before computing the average cost for each MS-DRG and before 
eliminating statistical outliers.
    <bullet> Claims with total charges or total lengths of stay less 
than or equal to zero were deleted. Claims that had an amount in the 
total charge field that differed by more than $10.00 from the sum of 
the routine day charges, intensive care charges, pharmacy charges, 
special equipment charges, therapy services charges, operating room 
charges, cardiology charges, laboratory charges, radiology charges, 
other service charges, labor and delivery charges, inhalation therapy 
charges, emergency room charges, blood charges, and anesthesia charges 
were also deleted.
    <bullet> At least 95.9 percent of the providers in the MedPAR file 
had charges for 10 of the 15 cost centers. Claims for providers that 
did not have charges greater than zero for at least 10 of the 15 cost 
centers were deleted.
    <bullet> Statistical outliers were eliminated by removing all cases 
that were beyond 3.0 standard deviations from the mean of the log 
distribution of both the total charges per case and the total charges 
per day for each MS-DRG.
    <bullet> Effective October 1, 2008, because hospital inpatient 
claims include a POA indicator field for each diagnosis

[[Page 43800]]

present on the claim, the POA indicator field was reset to ``Y'' for 
``Yes'' just for relative weight-setting purposes for all claims that 
otherwise have an ``N'' (No) or a ``U'' (documentation insufficient to 
determine if the condition was present at the time of inpatient 
admission) in the POA field.
    Under current payment policy, the presence of specific HAC codes, 
as indicated by the POA field values, can generate a lower payment for 
the claim. Specifically, if the particular condition is present on 
admission (that is, a ``Y'' indicator is associated with the diagnosis 
on the claim), then it is not a ``HAC,'' and the hospital is paid with 
the higher severity (and, therefore, the higher weighted MS-DRG). If 
the particular condition is not present on admission (that is, an ``N'' 
indicator is associated with the diagnosis on the claim) and there are 
no other complicating conditions, the DRG GROUPER assigns the claim to 
a lower severity (and, therefore, the lower weighted MS-DRG) as a 
penalty for allowing a Medicare inpatient to contract a ``HAC.'' While 
this meets policy goals of encouraging quality care and generates 
program savings, it presents an issue for the relative weight-setting 
process. Because cases identified as HACs are likely to be more complex 
than similar cases that are not identified as HACs, the charges 
associated with HACs are likely to be higher as well. Thus, if the 
higher charges of these HAC claims are grouped into lower severity MS-
DRGs prior to the relative weight-setting process, the relative weights 
of these particular MS-DRGs would become artificially inflated, 
potentially skewing the relative weights. In addition, we want to 
protect the integrity of the budget neutrality process by ensuring 
that, in estimating payments, no increase to the standardized amount 
occurs as a result of lower overall payments in a previous year that 
stem from using weights and case-mix that are based on lower severity 
MS-DRG assignments. If this would occur, the anticipated cost savings 
from the HAC policy would be lost.
    To avoid these problems, in the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24116), we proposed to reset the POA indicator 
field to ``Y'' just for relative weight-setting purposes for all claims 
that otherwise have an ``N'' or a ``U'' in the POA field. This 
``forces'' the more costly HAC claims into the higher severity MS-DRGs 
as appropriate, and the relative weights calculated for each MS-DRG 
more closely reflect the true costs of those cases.
    We did not receive any public comments on our proposal to reset the 
POA indicator field to ``Y'' for relative weight-setting purposes for 
all claims that otherwise have an ``N'' or a ``U'' in the POA field. We 
are finalizing this proposal for FY 2010 accordingly.
    Once the MedPAR data were trimmed and the statistical outliers were 
removed, the charges for each of the 15 cost groups for each claim were 
standardized to remove the effects of differences in area wage levels, 
IME and DSH payments, and for hospitals in Alaska and Hawaii, the 
applicable cost-of-living adjustment. Because hospital charges include 
charges for both operating and capital costs, we standardized total 
charges to remove the effects of differences in geographic adjustment 
factors, cost-of-living adjustments, and DSH payments under the capital 
IPPS as well. Charges were then summed by MS-DRG for each of the 15 
cost groups so that each MS-DRG had 15 standardized charge totals. 
These charges were then adjusted to cost by applying the national 
average CCRs developed from the FY 2007 cost report data.
    The 15 cost centers that we used in the relative weight calculation 
are shown in the following table. The table shows the lines on the cost 
report and the corresponding revenue codes that we used to create the 
15 national cost center CCRs.
BILLING CODE 4120-01-P

[[Page 43801]]

[GRAPHIC] [TIFF OMITTED] TR27AU09.000


[[Page 43802]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.001


[[Page 43803]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.002


[[Page 43804]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.003


[[Page 43805]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.004


[[Page 43806]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.005


[[Page 43807]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.006

BILLING CODE 4120-01-C

    We developed the national average CCRs as follows:
    Taking the FY 2007 cost report data, we removed CAHs, Indian Health 
Service hospitals, all-inclusive rate hospitals, and cost reports that 
represented time periods of less than 1 year (365 days). We included 
hospitals located in Maryland as we are including their charges in our 
claims database. We then created CCRs for each provider for each cost 
center (see prior table for line items used in the calculations) and 
removed any CCRs that were greater than 10 or less than 0.01. We 
normalized the departmental CCRs by dividing the CCR for each 
department by the total CCR for the hospital for the purpose of 
trimming the data. We then took the logs of the normalized cost center 
CCRs and removed any cost center CCRs where the log of the cost center 
CCR was greater or less than the mean log plus/minus 3 times the 
standard deviation for the log of that cost center CCR. Once the cost 
report data were trimmed, we calculated a Medicare-specific CCR. The 
Medicare-specific CCR was determined by taking the Medicare charges for 
each line item from Worksheet D-4 and deriving the Medicare-specific 
costs by applying the hospital-specific departmental CCRs to the 
Medicare-specific charges for each line item from Worksheet D-4. Once 
each hospital's Medicare-specific costs were established, we summed the 
total Medicare-specific costs and divided by the sum of the total 
Medicare-specific charges to produce national average, charge-weighted 
CCRs.
    After we multiplied the total charges for each MS-DRG in each of 
the 15 cost centers by the corresponding national average CCR, we 
summed the 15 ``costs'' across each MS-DRG to produce a total 
standardized cost for the MS-DRG. The average standardized cost for 
each MS-DRG was then computed as the total standardized cost for the 
MS-DRG divided by the transfer-adjusted case count for the MS-DRG. The 
average cost for each MS-DRG was then divided by the national average 
standardized cost per case to determine the relative weight.
    The new cost-based relative weights were then normalized by an 
adjustment factor of 1.54381 so that the average case weight after 
recalibration was equal to the average case weight before 
recalibration. The normalization adjustment is intended to ensure that 
recalibration by itself neither increases nor decreases total payments 
under the IPPS, as required by section 1886(d)(4)(C)(iii) of the Act.
    The 15 national average CCRs for FY 2010 are as follows:

------------------------------------------------------------------------
                             Group                                 CCR
------------------------------------------------------------------------
Routine Days...................................................    0.553
Intensive Days.................................................    0.480
Drugs..........................................................    0.200
Supplies & Equipment...........................................    0.348
Therapy Services...............................................    0.415
Laboratory.....................................................    0.163
Operating Room.................................................    0.282
Cardiology.....................................................    0.181
Radiology......................................................    0.161
Emergency Room.................................................    0.278
Blood and Blood Products.......................................    0.424
Other Services.................................................    0.426
Labor & Delivery...............................................    0.462
Inhalation Therapy.............................................    0.201
Anesthesia.....................................................    0.136
------------------------------------------------------------------------

    As we explained in section II.E. of the preamble of this final 
rule, we have completed our 2-year transition to the MS-DRGs. For FY 
2008, the first year of the transition, 50 percent of the relative 
weight for an MS-DRG was based on the two-thirds cost-based weight/one-
third charge-based weight calculated using FY 2006 MedPAR data grouped 
to the Version 24.0 (FY 2007) DRGs. The remaining 50 percent of the FY 
2008 relative weight for an MS-DRG was based on the two-thirds cost-
based weight/one-third charge-based weight calculated using FY 2006 
MedPAR grouped to the Version 25.0 (FY 2008) MS-DRGs. In FY 2009, the 
relative weights were based on 100 percent cost weights computed using 
the Version 26.0 (FY 2009) MS-DRGs.
    When we recalibrated the DRG weights for previous years, we set a 
threshold of 10 cases as the minimum number of cases required to 
compute a reasonable weight. In the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24123), we proposed to use that same case 
threshold in recalibrating the MS-DRG weights for FY 2010. Using the FY 
2008 MedPAR data set, there are 8 MS-DRGs that contain fewer than 10 
cases. Under the MS-DRGs, we have fewer low-volume DRGs than under the 
CMS DRGs because we no longer have separate DRGs for patients age 0 to 
17 years. With the exception of newborns, we previously separated some 
DRGs based on whether the patient was age 0 to 17 years or age 17 years 
and older. Other than the age split, cases grouping to these DRGs are 
identical. The DRGs for patients age 0 to 17 years generally have very 
low volumes because children are typically ineligible for Medicare. In 
the past, we have found that the low volume of cases for the pediatric 
DRGs could lead to significant year-to-year instability in their 
relative weights. Although we have always encouraged non-Medicare 
payers to develop weights applicable to their own patient populations, 
we have heard frequent complaints from providers about the use of the 
Medicare relative weights in the pediatric population. We believe that 
eliminating this age split in the MS-DRGs will provide more stable 
payment for pediatric cases by determining their payment using adult 
cases that are much higher in total volume. Newborns are unique and 
require separate MS-DRGs that are not mirrored in the adult population. 
Therefore, it remains necessary to retain separate MS-DRGs for 
newborns. All of the low-volume MS-DRGs listed below are for newborns. 
In FY 2010, because we do not have sufficient MedPAR data to set 
accurate and stable cost weights for these low-volume MS-DRGs, we 
proposed to compute weights for the

[[Page 43808]]

low-volume MS-DRGs by adjusting their FY 2009 weights by the percentage 
change in the average weight of the cases in other MS-DRGs. The 
crosswalk table is shown below:

------------------------------------------------------------------------
 Low[dash]volume MS-DRG        MS-DRG title         Crosswalk to MS-DRG
------------------------------------------------------------------------
768.....................  Vaginal Delivery with   FY 2009 FR weight
                           O.R. Procedure Except   (adjusted by percent
                           Sterilization and/or    change in average
                           D&C.                    weight of the cases
                                                   in other MS-DRGs).
789.....................  Neonates, Died or       FY 2009 FR weight
                           Transferred to          (adjusted by percent
                           Another Acute Care      change in average
                           Facility.               weight of the cases
                                                   in other MS-DRGs).
790.....................  Extreme Immaturity or   FY 2009 FR weight
                           Respiratory Distress    (adjusted by percent
                           Syndrome, Neonate.      change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
791.....................  Prematurity with Major  FY 2009 FR weight
                           Problems.               (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
792.....................  Prematurity without     FY 2009 FR weight
                           Major Problems.         (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
793.....................  Full-Term Neonate with  FY 2009 FR weight
                           Major Problems.         (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
794.....................  Neonate with Other      FY 2009 FR weight
                           Significant Problems.   (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
795.....................  Normal Newborn........  FY 2009 FR weight
                                                   (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
------------------------------------------------------------------------

    Comment: Some commenters questioned whether Medicare Advantage 
claims were used to calculate the MS-DRG relative weights for FY 2010 
in the proposed rule. The commenters noted that CMS' policy has been to 
exclude Medicare Advantage claims from the relative weights 
calculation, but believed that CMS may have inadvertently included 
those claims in the calculation in the proposed rule. The commenters 
believed that if the Medicare Advantage claims were included, the 
amount paid under the IPPS will be overstated. The commenters 
recommended that CMS ensure that Medicare Advantage claims are excluded 
from the relative weights calculation. However, the commenters 
requested that CMS continue to include the Medicare Advantage claims in 
the MedPAR dataset for analysis purposes.
    Response: Historically, we have excluded data from Medicare 
Advantage claims from the calculation of the relative weights. As has 
been stated in the preamble of previous IPPS rules and, most recently, 
in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24115), 
``Discharges for Medicare beneficiaries enrolled in a Medicare 
Advantage managed care plan are excluded from this analysis.'' 
Consistent with this language, in the FY 2010 proposed rule, we 
intended to exclude Medicare Advantage claims from the calculation of 
the relative weights for FY 2010 as well. However, the December 2008 
update of the FY 2008 MedPAR data that was used as the source for 
calculating the relative weights contained a significant number of 
Medicare Advantage claims. This inclusion is a result of hospitals 
being required to submit informational only claims for all Medicare 
Advantage patients they treated for discharges occurring on or after 
October 1, 2006, under Change Request 5647, Transmittal 1311. As a 
result, we inadvertently included claims from discharges of patients 
enrolled in Medicare Advantage plans in the calculation of the proposed 
FY 2010 relative weights. We have corrected this oversight in the 
calculation of the final FY 2010 relative weights and, therefore, no 
Medicare Advantage claims data are included in the calculations in this 
final rule. Specifically, we added an edit to the relative weight 
calculation to remove any claims that have a GHO--Paid indicator value 
of ``1,'' which effectively removes Medicare Advantage claims from the 
relative weights calculations. We are continuing to include Medicare 
Advantage claims in the Expanded Modified MedPAR file that is available 
to researchers for purchase under a data use agreement with CMS.
    We did not receive any public comments on this section. Therefore, 
we are adopting the national average CCRs as proposed, with the MS-DRG 
weights recalibrated based on these CCRs.

I. Add-On Payments for New Services and Technologies

1. Background
    Sections 1886(d)(5)(K) and (L) of the Act establish a process of 
identifying and ensuring adequate payment for new medical services and 
technologies (sometimes collectively referred to in this section as 
``new technologies'') under the IPPS. Section 1886(d)(5)(K)(vi) of the 
Act specifies that a medical service or technology will be considered 
new if it meets criteria established by the Secretary after notice and 
opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act 
specifies that the process must apply to a new medical service or 
technology if, ``based on the estimated costs incurred with respect to 
discharges involving such service or technology, the DRG prospective 
payment rate otherwise applicable to such discharges under this 
subsection is inadequate.'' We note that beginning with FY 2008, CMS 
transitioned from CMS-DRGs to MS-DRGs.
    The regulations implementing these provisions specify three 
criteria for a new medical service or technology to receive an 
additional payment: (1) The medical service or technology must be new; 
(2) the medical service or technology must be costly such that the DRG 
rate otherwise applicable to discharges involving the medical service 
or technology is determined to be inadequate; and (3) the service or 
technology must demonstrate a substantial clinical improvement over 
existing services or technologies. These three criteria are explained 
below in the ensuing paragraphs in further detail.
    Under the first criterion, as reflected in 42 CFR 412.87(b)(2), a 
specific medical service or technology will be considered ``new'' for 
purposes of new medical service or technology add-on payments until 
such time as Medicare data are available to fully reflect the cost of 
the technology in the MS-DRG weights through recalibration. Typically, 
there is a lag of 2 to 3 years from the point a new medical service or 
technology is first introduced on the market (generally on the date 
that the technology receives FDA approval/clearance) and when data 
reflecting the use of the medical service or technology

[[Page 43809]]

are used to calculate the MS-DRG weights. For example, data from 
discharges occurring during FY 2008 are used to calculate the FY 2010 
MS-DRG weights in this final rule. Section 412.87(b)(2) of the 
regulations therefore provides that ``a medical service or technology 
may be considered new within 2 or 3 years after the point at which data 
begin to become available reflecting the ICD-9-CM code assigned to the 
new medical service or technology (depending on when a new code is 
assigned and data on the new medical service or technology become 
available for DRG recalibration). After CMS has recalibrated the DRGs, 
based on available data to reflect the costs of an otherwise new 
medical service or technology, the medical service or technology will 
no longer be considered `new' under the criterion for this section.''
    The 2-year to 3-year period during which a medical service or 
technology can be considered new would ordinarily begin on the date on 
which the medical service or technology received FDA approval or 
clearance. (We note that, for purposes of this section of the final 
rule, we generally refer to both FDA approval and FDA clearance as FDA 
``approval.'') However, in some cases, initially there may be no 
Medicare data available for the new service or technology following FDA 
approval. For example, the newness period could extend beyond the 2-
year to 3-year period after FDA approval is received in cases where the 
product initially was generally unavailable to Medicare patients 
following FDA approval, such as in cases of a national noncoverage 
determination or a documented delay in bringing the product onto the 
market after that approval (for instance, component production or drug 
production has been postponed following FDA approval due to shelf life 
concerns or manufacturing issues). After the MS-DRGs have been 
recalibrated to reflect the costs of an otherwise new medical service 
or technology, the medical service or technology is no longer eligible 
for special add-on payment for new medical services or technologies (as 
specified under Sec.  412.87(b)(2)). For example, an approved new 
technology that received FDA approval in October 2008 and entered the 
market at that time may be eligible to receive add-on payments as a new 
technology for discharges occurring before October 1, 2011 (the start 
of FY 2012). Because the FY 2012 MS-DRG weights would be calculated 
using FY 2010 MedPAR data, the costs of such a new technology would be 
fully reflected in the FY 2012 MS-DRG weights. Therefore, the new 
technology would no longer be eligible to receive add-on payments as a 
new technology for discharges occurring in FY 2012 and thereafter.
    Under the second criterion, Sec.  412.87(b)(3) further provides 
that, to be eligible for the add-on payment for new medical services or 
technologies, the MS-DRG prospective payment rate otherwise applicable 
to the discharge involving the new medical services or technologies 
must be assessed for adequacy. Under the cost criterion, to assess the 
adequacy of payment for a new technology paid under the applicable MS-
DRG prospective payment rate, we evaluate whether the charges for cases 
involving the new technology exceed certain threshold amounts. In the 
FY 2004 IPPS final rule (68 FR 45385), we established the threshold at 
the geometric mean standardized charge for all cases in the MS-DRG plus 
75 percent of 1 standard deviation above the geometric mean 
standardized charge (based on the logarithmic values of the charges and 
converted back to charges) for all cases in the MS-DRG to which the new 
medical service or technology is assigned (or the case-weighted average 
of all relevant MS-DRGs, if the new medical service or technology 
occurs in more than one MS-DRG).
    However, section 503(b)(1) of Public Law 108-173 amended section 
1886(d)(5)(K)(ii)(I) of the Act to provide that, beginning in FY 2005, 
CMS will apply ``a threshold * * * that is the lesser of 75 percent of 
the standardized amount (increased to reflect the difference between 
cost and charges) or 75 percent of one standard deviation for the 
diagnosis-related group involved.'' (We refer readers to section IV.D. 
of the preamble to the FY 2005 IPPS final rule (69 FR 49084) for a 
discussion of the revision of the regulations to incorporate the change 
made by section 503(b)(1) of Pub. L. 108-173.) Table 10 that was 
included in the notice published in the Federal Register on October 3, 
2008, contains the final thresholds that are being used to evaluate 
applications for new technology add-on payments for FY 2010 (73 FR 
57888).
    We note that section 124 of Public Law 110-275 extended, through FY 
2009, wage index reclassifications under section 508 of Public Law 108-
173 (the MMA) and special exceptions contained in the final rule 
promulgated in the Federal Register on August 11, 2004 (69 FR 49105 and 
49107) and extended under section 117 of Public Law 110-173 (the 
MMSEA). The wage data affect the standardized amounts (as well as the 
outlier offset and budget neutrality factors that are applied to the 
standardized amounts), which we use to compute the cost criterion 
thresholds. Therefore, the thresholds reflected in Table 10 in the 
Addendum to the FY 2009 IPPS final rule were tentative. As noted 
earlier, on October 3, 2008, we published a Federal Register notice (73 
FR 57888) that contained a new Table 10 with revised thresholds that 
reflect the wage index rates for FY 2009 as a result of implementation 
of section 124 of Public Law 110-275. The revised thresholds also were 
published on the CMS Web site. The revised thresholds published in 
Table 10 in the October 3, 2008 Federal Register notice were used to 
determine if an applicant for new technology add-on payments discussed 
in this FY 2010 final rule met the cost criterion threshold for new 
technology add-on payments for FY 2010.
    In the September 7, 2001 final rule that established the new 
technology add-on payment regulations (66 FR 46917), we discussed the 
issue of whether the HIPAA Privacy Rule at 45 CFR parts 160 and 164 
applies to claims information that providers submit with applications 
for new technology add-on payments. Specifically, we explained that 
health plans, including Medicare, and providers that conduct certain 
transactions electronically, including the hospitals that would be 
receiving payment under the FY 2001 IPPS final rule, are required to 
comply with the HIPAA Privacy Rule. We further explained how such 
entities could meet the applicable HIPAA requirements by discussing how 
the HIPAA Privacy Rule permitted providers to share with health plans 
information needed to ensure correct payment, if they had obtained 
consent from the patient to use that patient's data for treatment, 
payment, or health care operations. We also explained that, because the 
information to be provided within applications for new technology add-
on payment would be needed to ensure correct payment, no additional 
consent would be required. The HHS Office for Civil Rights has since 
amended the HIPAA Privacy Rule, but the results remain. The HIPAA 
Privacy Rule no longer requires covered entities to obtain consent from 
patients to use or disclose protected health information for treatment, 
payment, or health care operations, and expressly permits such entities 
to use or to disclose protected health information for any of these 
purposes. (We refer readers to 45 CFR 164.502(a)(1)(ii), and 
164.506(c)(1) and (c)(3), and the Standards for Privacy of Individually

[[Page 43810]]

Identifiable Health Information published in the Federal Register on 
August 14, 2002, for a full discussion of changes in consent 
requirements.)
    Under the third criterion, Sec.  412.87(b)(1) of our existing 
regulations provides that a new technology is an appropriate candidate 
for an additional payment when it represents ``an advance that 
substantially improves, relative to technologies previously available, 
the diagnosis or treatment of Medicare beneficiaries.'' For example, a 
new technology represents a substantial clinical improvement when it 
reduces mortality, decreases the number of hospitalizations or 
physician visits, or reduces recovery time compared to the technologies 
previously available. (We refer readers to the September 7, 2001 final 
rule for a complete discussion of this criterion (66 FR 46902).)
    The new medical service or technology add-on payment policy under 
the IPPS provides additional payments for cases with relatively high 
costs involving eligible new medical services or technologies while 
preserving some of the incentives inherent under an average-based 
prospective payment system. The payment mechanism is based on the cost 
to hospitals for the new medical service or technology. Under Sec.  
412.88, if the costs of the discharge (determined by applying cost to 
charge ratios (``CCRs'') as described in Sec.  412.84(h)) exceed the 
full DRG payment (including payments for IME and DSH, but excluding 
outlier payments), Medicare will make an add-on payment equal to the 
lesser of: (1) 50 percent of the estimated costs of the new technology 
(if the estimated costs for the case including the new technology 
exceed Medicare's payment); or (2) 50 percent of the difference between 
the full DRG payment and the hospital's estimated cost for the case. 
Unless the discharge qualifies for an outlier payment, Medicare payment 
is limited to the full MS-DRG payment plus 50 percent of the estimated 
costs of the new technology.
    Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments 
to annual MS-DRG classifications and relative weights must be made in a 
manner that ensures that aggregate payments to hospitals are not 
affected. Therefore, in the past, we accounted for projected payments 
under the new medical service and technology provision during the 
upcoming fiscal year, while at the same time estimating the payment 
effect of changes to the MS-DRG classifications and recalibration. The 
impact of additional payments under this provision was then included in 
the budget neutrality factor, which was applied to the standardized 
amounts and the hospital-specific amounts. However, section 503(d)(2) 
of Public Law 108-173 provides that there shall be no reduction or 
adjustment in aggregate payments under the IPPS due to add-on payments 
for new medical services and technologies. Therefore, following section 
503(d)(2) of Public Law 108-173, add-on payments for new medical 
services or technologies for FY 2005 and later years have not been 
subjected to budget neutrality.
    In the FY 2009 IPPS final rule (73 FR 48561 through 48563), we 
modified our regulations at Sec.  412.87 to codify our current practice 
of how CMS evaluates the eligibility criteria for new medical service 
or technology add-on payment applications. We also amended Sec.  
412.87(c) to specify that all applicants for new technology add-on 
payments must have FDA approval for their new medical service or 
technology by July 1 of each year prior to the beginning of the fiscal 
year that the application is being considered.
    Applicants for add-on payments for new medical services or 
technologies for FY 2011 must submit a formal request, including a full 
description of the clinical applications of the medical service or 
technology and the results of any clinical evaluations demonstrating 
that the new medical service or technology represents a substantial 
clinical improvement, along with a significant sample of data to 
demonstrate that the medical service or technology meets the high-cost 
threshold. Complete application information, along with final deadlines 
for submitting a full application, will be posted as it becomes 
available on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. To allow interested parties to identify the new 
medical services or technologies under review before the publication of 
the proposed rule for FY 2011, the Web site also will list the tracking 
forms completed by each applicant.
    The Council on Technology and Innovation (CTI) at CMS oversees the 
agency's cross-cutting priority on coordinating coverage, coding and 
payment processes for Medicare with respect to new technologies and 
procedures, including new drug therapies, as well as promoting the 
exchange of information on new technologies between CMS and other 
entities. The CTI, composed of senior CMS staff and clinicians, was 
established under section 942(a) of Public Law 108-173. The Council is 
co-chaired by the Director of the Office of Clinical Standards and 
Quality (OCSQ) and the Director of the Center for Medicare Management 
(CMM), who is also designated as the CTI's Executive Coordinator.
    The specific processes for coverage, coding, and payment are 
implemented by CMM, OCSQ, and the local claims-payment contractors (in 
the case of local coverage and payment decisions). The CTI supplements, 
rather than replaces, these processes by working to assure that all of 
these activities reflect the agency-wide priority to promote high-
quality, innovative care. At the same time, the CTI also works to 
streamline, accelerate, and improve coordination of these processes to 
ensure that they remain up to date as new issues arise. To achieve its 
goals, the CTI works to streamline and create a more transparent coding 
and payment process, improve the quality of medical decisions, and 
speed patient access to effective new treatments. It is also dedicated 
to supporting better decisions by patients and doctors in using 
Medicare-covered services through the promotion of better evidence 
development, which is critical for improving the quality of care for 
Medicare beneficiaries.
    CMS plans to continue its Open Door forums with stakeholders who 
are interested in CTI's initiatives. In addition, to improve the 
understanding of CMS' processes for coverage, coding, and payment and 
how to access them, the CTI has developed an ``innovator's guide'' to 
these processes. The intent is to consolidate this information, much of 
which is already available in a variety of CMS documents and in various 
places on the CMS Web site, in a user-friendly format. This guide was 
published in August 2008 and is available on the CMS Web site at: 
http://www.cms.hhs.gov/CouncilonTechInnov/Downloads/InnovatorsGuide8_25_08.pdf.
    As we indicated in the FY 2009 IPPS final rule (73 FR 48554), we 
invite any product developers or manufacturers of new medical 
technologies to contact the agency early in the process of product 
development if they have questions or concerns about the evidence that 
would be needed later in the development process for the agency's 
coverage decisions for Medicare.
    The CTI aims to provide useful information on its activities and 
initiatives to stakeholders, including Medicare beneficiaries, 
advocates, medical product manufacturers, providers, and health policy 
experts. Stakeholders with further questions about Medicare's coverage, 
coding, and payment processes, or who want further

[[Page 43811]]

guidance about how they can navigate these processes, can contact the 
CTI at <a href="/cdn-cgi/l/email-protection#5a190e131a39372974323229743d352c"><span class="__cf_email__" data-cfemail="b3f0e7faf3d0dec09ddbdbc09dd4dcc5">[email protected]</span></a> or from the ``Contact Us'' section of the CTI 
home page (http://www.cms.hhs.gov/CouncilonTechInnov/).
    Comment: One commenter recommended that CMS deem a device to be a 
substantial clinical improvement ``* * * if it has been granted a 
humanitarian device exemption or priority review based on the fact that 
it represents breakthrough technologies, that offer significant 
advantages over existing approved alternatives, for which no 
alternatives exist, or the availability of which is in the best 
interests of the patients.''
    Response: As stated in the FY 2008 IPPS final rule (72 FR 47302), 
the FDA provides a number of different types of approvals to devices, 
drugs and other medical products. At this time, we do not believe that 
any particular type of FDA approval alone would automatically 
demonstrate a substantial clinical improvement for the Medicare 
population. However, as noted in previous final rules, we do take FDA 
approval into consideration in our evaluation of new technology 
applications. We note that a Humanitarian Device Exemption (HDE) 
approval only requires that ``the probable benefit outweighs the risk 
of injury or illness'' as opposed to the safety and effectiveness 
standard that exists for pre-market approval (PMA). Among other 
requirements, the labeling of a humanitarian use device must state that 
the effectiveness of the device for the specific indication has not 
been demonstrated. While an HDE approval certainly does not preclude us 
from considering a technology for an add-on payment, neither does it 
suggest that the product automatically meets the requirement to be 
judged a substantial clinical improvement. Under the substantial 
clinical improvement criterion, we will continue to evaluate a 
technology with an HDE approval by measuring it against the specific 
criteria we listed for determining substantial clinical improvement at 
66 FR 46914.
    Comment: A number of commenters addressed topics relating to the 
marginal cost factor for the new technology add-on payment, the 
potential implementation of ICD-10-CM, the use of external data in 
determining the cost threshold, paying new technology add-on payments 
for two to three years, mapping new technologies to the appropriate MS-
DRG and the use of the date that a ICD-9-CM code is assigned to a 
technology or the FDA approval date (whichever is later) as the start 
of the newness period.
    Response: We did not request public comments nor propose to make 
any changes to any of the issues summarized above. Because these 
comments are outside of the scope of the provisions included in the 
proposed rule, we are not providing a complete summary of the comments 
or responding to them in this final rule.
2. Public Input Before Publication of a Notice of Proposed Rulemaking 
on Add-On Payments
    Section 1886(d)(5)(K)(viii) of the Act, as amended by section 
503(b)(2) of Public Law 108-173, provides for a mechanism for public 
input before publication of a notice of proposed rulemaking regarding 
whether a medical service or technology represents a substantial 
clinical improvement or advancement. The process for evaluating new 
medical service and technology applications requires the Secretary to--
    <bullet> Provide, before publication of a proposed rule, for public 
input regarding whether a new service or technology represents an 
advance in medical technology that substantially improves the diagnosis 
or treatment of Medicare beneficiaries;
    <bullet> Make public and periodically update a list of the services 
and technologies for which applications for add-on payments are 
pending;
    <bullet> Accept comments, recommendations, and data from the public 
regarding whether a service or technology represents a substantial 
clinical improvement; and
    <bullet> Provide, before publication of a proposed rule, for a 
meeting at which organizations representing hospitals, physicians, 
manufacturers, and any other interested party may present comments, 
recommendations, and data regarding whether a new medical service or 
technology represents a substantial clinical improvement to the 
clinical staff of CMS.
    In order to provide an opportunity for public input regarding add-
on payments for new medical services and technologies for FY 2010 prior 
to publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we 
published a notice in the Federal Register on November 28, 2008 (73 FR 
72490), and held a town hall meeting at the CMS Headquarters Office in 
Baltimore, MD, on February 17, 2009. In the announcement notice for the 
meeting, we stated that the opinions and alternatives provided during 
the meeting would assist us in our evaluations of applications by 
allowing public discussion of the substantial clinical improvement 
criterion for each of the FY 2010 new medical service and technology 
add-on payment applications before the publication of the FY 2010 IPPS 
proposed rule.
    Approximately 90 individuals registered to attend the town hall 
meeting in person, while additional individuals listened over an open 
telephone line. Each of the five FY 2010 applicants presented 
information on its technology, including a discussion of data 
reflecting the substantial clinical improvement aspect of the 
technology. We considered each applicant's presentation made at the 
town hall meeting, as well as written comments submitted on each 
applicant's application, in our evaluation of the new technology add-on 
applications for FY 2010 in the FY 2010 proposed rule and in this final 
rule.
    In response to the published notice and the new technology town 
hall meeting, we received two written comments regarding applications 
for FY 2010 new technology add-on payments. We summarized these 
comments or, if applicable, indicated that there were no comments 
received, at the end of each discussion of the individual applications 
in the FY 2010 IPPS/RY LTCH PPS proposed rule. We did not receive any 
general comments about the application of the substantial clinical 
improvement criterion.
    A further discussion of our evaluation of the applications and the 
documentation for new technology add-on payments submitted for FY 2010 
approval is provided under the specified areas under this section.
3. FY 2010 Status of Technologies Approved for FY 2009 Add-On Payments
    We approved one application for new technology add-on payments for 
FY 2009: CardioWest\TM\ Temporary Total Artificial Heart System 
(CardioWest\TM\ TAH-t).
    SynCardia Systems, Inc. submitted an application for approval of 
the CardioWest\TM\ temporary Total Artificial Heart system (TAH-t). The 
TAH-t is a technology that is used as a bridge to heart transplant 
device for heart transplant-eligible patients with end-stage 
biventricular failure. The TAH-t pumps up to 9.5 liters of blood per 
minute. This high level of perfusion helps improve hemodynamic function 
in patients, thus making them better heart transplant candidates.
    The TAH-t was approved by the FDA on October 15, 2004, for use as a 
bridge to transplant device in cardiac transplant-eligible candidates 
at risk of imminent death from biventricular failure. The TAH-t is 
intended to be

[[Page 43812]]

used in hospital inpatients. One of the FDA's post-approval 
requirements is that the manufacturer agrees to provide a post-approval 
study demonstrating success of the device at one center can be 
reproduced at other centers. The study was to include at least 50 
patients who would be followed up to 1 year, including (but not limited 
to) the following endpoints: survival to transplant; adverse events; 
and device malfunction.
    In the past, Medicare did not cover artificial heart devices, 
including the TAH-t. However, on May 1, 2008, CMS issued a final 
national coverage determination (NCD) expanding Medicare coverage of 
artificial hearts when they are implanted as part of a study that is 
approved by the FDA and is determined by CMS to meet CMS' Coverage with 
Evidence Development (CED) clinical research criteria. (The final NCD 
is available on the CMS Web site at: http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=211.)
    We indicated in the FY 2009 IPPS final rule (73 FR 48555) that, 
because Medicare's previous coverage policy with respect to this device 
had precluded payment from Medicare, we did not expect the costs 
associated with this technology to be currently reflected in the data 
used to determine the relative weights of MS-DRGs. As we have indicated 
in the past, and as we discussed in the FY 2009 IPPS final rule, 
although we generally believe that the newness period would begin on 
the date that FDA approval was granted, in cases where the applicant 
can demonstrate a documented delay in market availability subsequent to 
FDA approval, we would consider delaying the start of the newness 
period. This technology's situation represented such a case. We also 
noted that section 1886(d)(5)(K)(ii)(II) of the Act requires that we 
provide for the collection of cost data for a new medical service or 
technology for a period of at least 2 years and no more than 3 years 
``beginning on the date on which an inpatient hospital code is issued 
with respect to the service or technology.'' Furthermore, the statute 
specifies that the term ``inpatient hospital code'' means any code that 
is used with respect to inpatient hospital services for which payment 
may be made under the IPPS and includes ICD-9-CM codes and any 
subsequent revisions. Although the TAH-t has been described by the ICD-
9-CM code(s) since the time of its FDA approval, because the TAH-t had 
not been covered under the Medicare program (and, therefore, no 
Medicare payment had been made for this technology), this code could 
not be ``used with respect to inpatient hospital services for which 
payment'' is made under the IPPS, and thus we assumed that none of the 
costs associated with this technology would be reflected in the 
Medicare claims data used to recalibrate the MS-DRG relative weights 
for FY 2009. For this reason, as discussed in the FY 2009 IPPS final 
rule, despite the FDA approval date of the technology, we determined 
that TAH-t would still be eligible to be considered ``new'' for 
purposes of the new technology add-on payment because the TAH-t met the 
newness criterion on the date that Medicare coverage began, consistent 
with issuance of the final NCD, effective on May 1, 2008.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology add-on payments for the TAH-t 
and consideration of the public comments we received on the FY 2009 
IPPS proposed rule, we approved the TAH-t for new technology add-on 
payments for FY 2009 (73 FR 48557). We indicated that we believed the 
TAH-t offered a new treatment option that previously did not exist for 
patients with end-stage biventricular failure. However, we indicated 
that we recognized that Medicare coverage of the TAH-t is limited to 
approved clinical trial settings. The new technology add-on payment 
status does not negate the restrictions under the NCD nor does it 
obviate the need for continued monitoring of clinical evidence for the 
TAH-t. We remain interested in seeing whether the clinical evidence 
demonstrates that the TAH-t continues to be effective. If evidence is 
found that the TAH-t may no longer offer a substantial clinical 
improvement, we reserve the right to discontinue new technology add-on 
payments, even within the 2 to 3 year period that the device may still 
be considered to be new.
    The new technology add-on payment for the TAH-t for FY 2009 is 
triggered by the presence of ICD-9-CM procedure code 37.52 
(Implantation of total heart replacement system), condition code 30, 
and the diagnosis code reflecting clinical trial--V70.7 (Examination of 
participant in clinical trial). For FY 2009, we finalized a maximum 
add-on payment of $53,000 (that is, 50 percent of the estimated 
operating costs of the device of $106,000) for cases that involve this 
technology. As noted above, the TAH-t is still eligible to be 
considered ``new'' for purposes of the new technology add-on payment 
because the TAH-t met the newness criterion on the date that Medicare 
coverage began, consistent with issuance of the final NCD, effective on 
May 1, 2008.
    We did not receive any public comments on our proposal to continue 
new technology add-on payments for the TAH-t for FY 2010. Therefore, as 
we proposed, for FY 2010, we are continuing the new technology add-on 
payments for cases involving the TAH-t in FY 2010 with a maximum add-on 
payment of $53,000.
4. FY 2010 Applications for New Technology Add-On Payments
    We received six applications to be considered for new technology 
add-on payment for FY 2010. However, one applicant, Emphasys Medical, 
withdrew its application for the Zephyr[supreg] Endobronchial Valve 
(Zephyr[supreg] EBV) prior to the publication of the FY 2010 IPPS/RY 
2010 LTCH PPS proposed rule. Since the Zephyr[supreg] EBV application 
was withdrawn prior to the town hall meeting and publication of the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule, we did not discuss the 
application in the proposed rule and also will not discuss it in this 
final rule.
    During the public comment period, three additional applicants 
withdrew their applications from further consideration for FY 2010 new 
technology add-on payments. A discussion and final determination of the 
remaining two applications is presented below.
a. The AutoLITT\TM\ System
    Monteris Medical submitted an application for new technology add-on 
payments for FY 2010 for the AutoLITT\TM\. However, the applicant 
withdrew its application for new technology add-on payments during the 
public comment period.
    Comment: One commenter supported the AutoLITT\TM\ application. The 
commenter stated that AutoLITT\TM\ represented an advance because it 
provides the ability to ``steer and rotate the beam to the size and 
shape of the tumor'' and that such ability is a significant advance 
from the current non-directional systems. The commenter noted that it 
had ``no longitudinal or systemic studies to verify precisely the 
degree of improvement in patient care,'' but that use of the 
AutoLITT\TM\ had led to a quicker recovery time and fewer complications 
in its experience with the device. Specifically, the commenter stated 
that it was able to discharge patients within 24 to 48 hours which is 
faster than with traditional therapies.
    Response: We appreciate the commenter's response to the proposed

[[Page 43813]]

rule. We note again that the applicant withdrew its application from 
consideration for new technology add-on payments for FY 2010. 
Accordingly, we are not providing a response to the comment.
    b. CLOLAR[supreg] (Clofarabine) Injection
    Genzyme Oncology submitted an application for new technology add-on 
payments for FY 2010 for CLOLAR[supreg] (clofarabine) injection. 
However, the applicant withdrew its application for new technology add-
on payments during the public comment period. In the FY 2010 IPPS/RY 
2010 LTCH PPS proposed rule in section II.I.4.b. of the preamble, we 
included a detailed discussion relating to our policy for determining 
whether a new technology is substantially similar to an existing 
technology in our analysis of whether CLOLAR would meet the newness 
criterion. Because the CLOLAR application has been withdrawn, we will 
not make a determination regarding substantially similarity to 
determine newness for that application. Instead, we have provided our 
discussion of substantial similarity below and have summarized and 
responded to comments received on that topic.
Substantial Similarity Discussion
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that 
the newness criterion is intended to apply to technologies that have 
been available to Medicare beneficiaries for no more than 2 to 3 years. 
Therefore, a technology that applies for a supplemental FDA approval 
must demonstrate that the new approval is not substantially similar to 
the prior approval.
    As discussed above, the new technology add-on payment is available 
to new medical services or technologies that satisfy the three criteria 
set forth in our regulations at Sec.  412.87(b) (that is, newness, 
high-costs, and substantial clinical improvement). Typically, we begin 
our analysis with an evaluation of whether an applicant's technology 
meets what we refer to as the ``newness criterion'' under Sec.  
412.87(b)(2) (that is, whether Medicare data are available to fully 
reflect the cost of the technology in the MS-DRG weights through 
recalibration). Generally, we believe that the costs of a technology 
begin to be reflected in the hospital charge data used to recalibrate 
the MS-DRG relative weights when the technology becomes available on 
the market, usually on or soon after the date on which it receives FDA 
approval.
    Congress provided for the new technology add-on payment in order to 
ensure that Medicare beneficiaries have access to new technologies. As 
discussed previously, there often is a lag time of 2 to 3 years before 
the costs of new technologies are reflected in the recalibration of the 
relevant MS-DRGs. Because a new technology often has higher costs than 
existing technologies, during this lag time the current MS-DRG payment 
may not adequately reflect the costs of the new technology. The new 
technology add-on payment addresses this concern by ensuring that 
hospitals receive an add-on payment under the IPPS for costly new 
technologies that represent a substantial clinical improvement over 
existing technologies until such time when the cost of the technology 
is reflected within the MS-DRG relative weights. When an existing 
technology receives FDA approval for a new indication, similar concerns 
may arise. If, prior to the FDA approval for the new indication, the 
technology has not been used to treat Medicare patients for purposes 
consistent with the new indication, the relevant MS-DRGs may not 
reflect the cost of the technology. Consequently, Medicare 
beneficiaries may not have adequate access to the technology when used 
for purposes consistent with the new indication. Allowing the new 
technology add-on payment for the technology when used for the new 
indication would address this concern. For these reasons, we believe 
that treating an existing technology as ``new'' when approved by the 
FDA for a new indication may be warranted under certain circumstances.
    In the September 7, 2001 final rule (66 FR 46915), we stated that a 
new use of an existing technology may be eligible for the new 
technology add-on payment under certain conditions. In the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule, we stated that we believe it is 
appropriate to consider an existing technology for the new technology 
add-on payments when its new use is not substantially similar to 
existing uses of the technology. In the FY 2006 IPPS final rule (70 FR 
47351), we explained our policy regarding substantial similarity in 
detail and its relevance for assessing if the hospital charge data used 
in the development of the relative weights for the relevant DRGs 
reflect the costs of the technology. In that final rule, we stated 
that, for determining substantial similarity, we consider (1) whether a 
product uses the same or a similar mechanism of action to achieve a 
therapeutic outcome, and (2) whether a product is assigned to the same 
or a different DRG. We indicated that both of the above criteria should 
be met in order for a technology to be considered ``substantially 
similar'' to an existing technology. However, in that same final rule, 
we also noted that, due to the complexity of issues regarding the 
substantial similarity component of the newness criterion, it may be 
necessary to exercise flexibility when considering whether technologies 
are substantially similar to one another. Specifically, we stated that 
we may consider additional factors depending on the circumstances 
specific to each application.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that 
we believe that in determining whether a new use of an existing 
technology is substantially similar to existing uses of the technology, 
it may be relevant to consider not only the two criteria discussed in 
the FY 2006 IPPS final rule, but also certain additional factors. 
Specifically, we stated that it may also be appropriate to analyze 
whether, as compared to existing uses of the technology, the new use 
involves the treatment of the same or similar type of disease and the 
same or similar patient population. Accordingly, we proposed to add a 
third factor of consideration to our analysis of whether a new 
technology is substantially similar to one or more existing 
technologies. Specifically, we proposed to consider whether the new use 
of the technology involves the treatment of the same or similar type of 
disease and the same or similar patient population (74 FR 24130) in 
addition to considering the already established factors described in 
the FY 2006 IPPS final rule. We explained that if all three components 
are present and the new use is deemed substantially similar to one or 
more of the existing uses of the technology (that is beyond the newness 
period), we would conclude that the technology is not new and, 
therefore, is not eligible for the new technology add-on payment. In 
the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we noted that we 
considered, but rejected, the inclusion of the third factor in the FY 
2006 IPPS final rule on the grounds that we believed that it was more 
relevant to analyze whether the costs of the technology were already 
reflected in the relative weights of the MS-DRGs. However, in the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule, we stated that upon further 
consideration, we believe that both the type of disease and patient 
population for which a technology is used are also relevant in 
determining whether one indication of a technology is ``substantially 
similar'' to another.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we noted that 
the discussion of substantial similarity in the FY 2006 IPPS final rule 
related to

[[Page 43814]]

comparing two separate technologies made by different manufacturers. 
Nevertheless, we stated that the criteria discussed in the FY 2006 IPPS 
final rule also are relevant when comparing the similarity between a 
new use and existing uses of the same technology (or a very similar 
technology manufactured by the same manufacturer). In other words, we 
stated that it is necessary to establish that the new indication for 
which the technology has received FDA approval is not substantially 
similar to that of the prior indication. We explained that such a 
distinction is necessary to determine the appropriate start date of the 
newness period in evaluating whether the technology would qualify for 
add-on payments (that is, the date of the ``new'' FDA approval or that 
of the prior approval), or whether the technology could qualify for 
separate new technology add-on payments under each indication.
    Comment: Several commenters supported our proposal to add a third 
factor of consideration to our analysis of whether a technology is 
substantially similar to another technology or to a previous version of 
the same technology with a new FDA indication. The commenters commended 
CMS for proposing to add the third factor and encouraged CMS to apply 
all three factors to future decisions regarding proposed new 
technologies. One commenter encouraged CMS to consider codifying all 
three substantial similarity factors in the regulations. Another 
commenter asked that CMS clarify whether the proposed criterion applied 
both to products that receive a second or follow-on indication as well 
as to separate and distinct products that have the same or similar 
mechanism of action, but are intended to treat a separate disease or 
patient population. The commenter also noted that, in FY 2006, it 
recommended that CMS include an additional factor when determining 
whether products were substantially similar, specifically, whether the 
products conferred the same level of substantial clinical improvement. 
The commenter asserted that the addition of this would ``ensure that 
products found to represent a true advancement in clinical care--even 
if they utilize a similar mechanism of action, could be eligible for 
new technology add-on payments.''
    Response: We thank the commenters for their support of our 
proposal.
    In response to the comment asking for clarification about whether 
the proposed additional factor under substantial similarity would apply 
solely to a technology approved for a new indication or to two separate 
and distinct products, we refer the commenter to our discussion above 
in which we stated, ``the discussion of substantial similarity in the 
FY 2006 IPPS final rule related to comparing two separate technologies 
made by different manufacturers. Nevertheless, we believe the criteria 
discussed in the FY 2006 IPPS final rule also are relevant when 
comparing the similarity between a new use and existing uses of the 
same technology (or a very similar technology manufactured by the same 
manufacturer). In other words, we believe that it is necessary to 
establish that the new indication for which the technology has received 
FDA approval is not substantially similar to that of the prior 
indication.'' Therefore, all three factors of substantial similarity 
will apply in both scenarios.
    In response to the comment that suggested we analyze whether two 
products (or one product with two different indications) confer the 
same level of substantial clinical improvement, we note that 
substantial similarity is considered under the newness criterion (that 
is, to determine if a technology may still be considered ``new'' for 
purposes of the new technology add-on payment). As we stated in FY 2006 
final IPPS rule, we base our decisions about new technology add-on 
payments on a logical sequence of determinations moving from the 
newness criterion to the cost criterion and finally to the substantial 
clinical improvement criterion. Specifically, we do not make 
determinations about substantial clinical improvement unless a product 
has already been determined to be new and to meet the cost criterion. 
Therefore, we are reluctant to import substantial clinical improvement 
considerations into the logical prior decision about whether 
technologies are new. Furthermore, while we make separate 
determinations about whether similar products meet the substantial 
clinical improvement criterion, we do not believe that it would be 
appropriate to make determinations about whether one product or another 
is clinically superior.
    In response to the comment that suggested that we codify the 
factors we use to evaluate substantial similarity, we note that we did 
not propose to amend the new technology add-on regulations in the 
proposed rule. However, we will consider making such a proposal in a 
future rulemaking period.
    We are finalizing our proposal to add a third factor of 
consideration to our analysis of whether a new technology is 
substantially similar to one or more existing technologies. 
Specifically, in making a determination of whether a new technology is 
substantially similar to an existing technology, we will consider 
whether the new use of the technology involves the treatment of the 
same or similar type of disease and the same or similar patient 
population (74 FR 24130), in addition to considering the already 
established factors described in the FY 2006 IPPS final rule (that is, 
(1) whether a product uses the same or a similar mechanism of action to 
achieve a therapeutic outcome; and (2) whether a product is assigned to 
the same or a different DRG).
c. LipiScan\TM\ Coronary Imaging System
    InfraReDx, Inc. submitted an application for new technology add-on 
payments for FY 2010 for the LipiScan\TM\ Coronary Imaging System 
(LipiScan\TM\). The LipiScan\TM\ device is a diagnostic tool that uses 
Intravascular Near Infrared Spectroscopy (INIRS) during a cardiac 
catheterization to scan the artery wall in order to determine coronary 
plaque composition. The purpose of the device is to identify lipid-rich 
areas in the artery because such areas have been shown to be more prone 
to rupture. The procedure does not require flushing or occlusion of the 
artery. INIRS identifies the chemical content of plaque by focusing 
near infrared light at the vessel wall and measuring reflected light at 
different wavelengths (that is, spectroscopy). The LipiScan\TM\ system 
collects approximately 1,000 measurements per 12.5 mm of pullback, with 
each measurement interrogating an area of 1 to 2 mm\2\ of lumen surface 
perpendicular to the longitudinal axis of the catheter. When the 
catheter is in position, the physician activates the pullback and 
rotation device and the scan is initiated providing 360 degree images 
of the length of the artery. The rapid acquisition speed for the image 
freezes the motion of the heart and permits scanning of the artery in 
less than 2 minutes. When the catheter pullback is completed, the 
console displays the scan results, which are referred to as a 
``chemogram'' image. The chemogram image requires reading by a trained 
user, but, according to the applicant, was designed to be simple to 
interpret.
    With regard to the newness criterion, the LipiScan<SUP>TM</SUP> 
received a 510K FDA clearance for a new indication on April 25, 2008, 
and was available on the market immediately thereafter. On June 23, 
2006, InfraReDx, Inc. was granted a 510K FDA clearance for the 
``InfraReDx Near Infrared (NIR) Imaging System.'' Both devices are 
under the common

[[Page 43815]]

name of ``Near Infrared Imaging System'' according to the 510K summary 
document from the FDA. However, the InfraReDx NIR Imaging System device 
that was approved by the FDA in 2006 was approved ``for the near 
infrared imaging of the coronary arteries,'' whereas the 
LipiScan<SUP>TM</SUP> device cleared by the FDA in 2008 is for a 
modified indication. The modified indication specified that 
LipiScan<SUP>TM</SUP> is ``intended for the near-infrared examination 
of coronary arteries * * *, the detection of lipid-core-containing 
plaques of interest * * * [and] for the assessment of coronary artery 
lipid core burden.''
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24132), 
we expressed our concerns regarding whether LipiScan<SUP>TM</SUP> is 
substantially similar to its predicate device that was approved by FDA 
in 2006. Specifically, it appears that the two devices, which are 
manufactured by the same company, do not differ in either design or 
functionality, according to the approval order documents from the FDA. 
In the 2008 approval order, the FDA stated, ``The LipiScan Coronary 
Imaging System utilizes the same basic catheter design as the 
predicate, the InfraReDx NIR Imaging System (June 23, 2006). These 
devices have a similar intended use, use the same operating principal, 
incorporate the same basic catheter design, have the same shelf life, 
and are packaged using the same materials and processes. The 
modifications from the InfraReDx NIR Imaging System to the LipiScan 
Coronary Imaging System are the improved catheter design, improved user 
interface (including PBR and console), and the additional testing 
required to support an expanded indication for use.'' Therefore, it 
appears that the only difference between the two approvals may be a 
modification of the intended use.
    As mentioned earlier in our discussion of substantial similarity in 
section II.I.4.b. of this final rule, our policy regarding substantial 
similarity discussed in the FY 2006 final rule (70 FR 47351 through 
47532) outlined two criteria as it relates to two separate technologies 
that are made by different manufacturers that were used to guide our 
determination of whether two technologies were substantially similar to 
one another. Although the LipiScan<SUP>TM</SUP> is a diagnostic device 
and not a therapeutic device we believe that the substantial similarity 
component of the newness criterion still applies.
    Both the prior and the new FDA indications for 
LipiScan<SUP>TM</SUP> use the same or a similar mechanism of action to 
achieve a desired therapeutic outcome, and both treat patients that 
would generally be assigned to the same MS-DRG. Similarly, both 
indications of LipiScan<SUP>TM</SUP> are intended to treat the same 
disease in the same patient population. Consequently, in the 2010 IPPS/
RY 2010 LTCH PPPS proposed rule, we stated that we have concerns as to 
whether or not the two intended uses are substantially similar, 
especially considering that the technologies appear essentially 
identical. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we 
welcomed public comment on whether or not the latest 510K FDA clearance 
should be considered ``substantially similar'' to its predicate 
technology approved by the FDA in 2006 (74 FR 24133).
    Comment: One commenter, the manufacturer, gave comments regarding 
whether LipiScan<SUP>TM</SUP> was substantially similar to its 
predicate device and whether it met the newness criterion for new 
technology add-on payments. The manufacturer included the following 
table to illustrate the differences between the version of the device 
that was approved in 2006 and the version that was approved in 2008:

------------------------------------------------------------------------
                         2006 NIRS device        Marketed 2008 LipiScan
------------------------------------------------------------------------
Console...........  No display of results of   Results displayed
                     scan.                      immediately.
Catheter..........  Saline-filled with         Air-filled with no
                     microbubble problem        microbubble problem.
                     obscuring many scans.
Algorithm.........  No algorithmic processing  Algorithm validated in
                     of NIR signals--no means   over 1,000 autopsy
                     of certifying that lipid   measurements proving
                     core plaque is present.    that NIRS can detect
                                                lipid core plaque, and
                                                providing diagnosis of
                                                lipid core plaque to the
                                                MD during the case.
------------------------------------------------------------------------

    In addition, the commenter asserted that the version of the device 
that was approved by the FDA in 2006 was ``never marketed, donated or 
sold to hospitals because it had numerous shortcomings that were not 
overcome until [the date of its second FDA clearance, April 25, 
2008].'' Finally, the commenter noted that Medicare claims do not 
contain any charge for LipiScan<SUP>TM</SUP> prior to that date.
    Response: Because the manufacturer has provided statements that 
LipiScan<SUP>TM</SUP> was not marketed until after its second FDA 
clearance, we believe that it is no longer necessary to determine 
whether the version of the device that was cleared by the FDA in 2008 
is substantially similar to that which was cleared in 2006. As noted by 
the applicant, CMS uses the date of FDA approval or the date that a 
technology is marketed (if the manufacturer can document there was a 
delay in bringing the technology to market after FDA approval) and thus 
available to Medicare beneficiaries as the start of the newness period. 
In this case, the manufacturer has provided such documentation. 
Therefore, we believe that based on the evidence that supports that 
LipiScan<SUP>TM</SUP> was not marketed or otherwise available to 
Medicare beneficiaries until April 25, 2008, LipiScan<SUP>TM</SUP> 
meets the newness criterion.
    We note that the LipiScan<SUP>TM</SUP> technology is identified by 
ICD-9-CM procedure code 38.23 (Intravascular spectroscopy), which 
became effective October 1, 2008, and cases involving the use of this 
device generally map to MS-DRG 246 (Percutaneous Cardiovascular 
Procedures with Drug-Eluting Stent(s) with MCC or 4+ Vessels/Stents); 
MS-DRG 247 (Percutaneous Cardiovascular Procedures with Drug-Eluting 
Stent(s) without MCC); MS-DRG 248 (Percutaneous Cardiovascular 
Procedures with Non-Drug-Eluting Stent(s) with MCC or 4+ Vessels/
Stents); MS-DRG 249 (Percutaneous Cardiovascular Procedures with Non-
Drug-Eluting Stent(s) without MCC); MS-DRG 250 (Percutaneous 
Cardiovascular Procedures without Coronary Artery Stent with MCC); and 
MS-DRG 251 (Percutaneous Cardiovascular Procedures without Coronary 
Artery Stent without MCC).
    In an effort to demonstrate that the technology meets the cost 
criterion, the applicant used the FY 2009 After Outliers Removed (AOR) 
file (posted on the CMS Web site) for cases potentially eligible for 
LipiScan<SUP>TM</SUP>. The applicant believes that every case within 
DRGs 246, 247, 248, 249, 250, and 251 are eligible for 
LipiScan<SUP>TM</SUP>. In addition, the applicant believes that 
LipiScan<SUP>TM</SUP> will be evenly distributed across patients in 
each of the six MS-DRGs (16.6 percent within each MS-DRG). Using data 
from the AOR file, the applicant found the average standardized charge 
per case for MS-DRGs 246, 247, 248, 249, 250, and

[[Page 43816]]

251 was $65,364, $42,162, $58,754, $37,048, $61,016, and $35,878 
respectively, equating to an average standardized charge per case of 
$50,037. The applicant indicated that the average standardized charge 
per case does not include charges related to LipiScan<SUP>TM</SUP>; 
therefore, it is necessary to add the charges related to the device to 
the average standardized charge per case in evaluating the cost 
threshold criterion. Although the applicant submitted data related to 
the estimated cost of LipiScan<SUP>TM</SUP> per case, the applicant 
noted that the cost of the device was proprietary information. Based on 
a sampling of two hospitals that have used the device, the applicant 
used a markup of 120 percent of the costs and estimates $5,280 in 
charges related to LipiScan<SUP>TM</SUP>. Because the applicant lacked 
a significant sample of cases to determine the charges associated with 
the device, we expressed our concerns in the proposed rule as to 
whether or not the estimate of $5,280 in charges related to the device 
was a valid estimate (74 FR 24133).
    Adding the estimated charges related to the drug to the average 
standardized charge per case (based on the case distribution from the 
applicant's 2009 AOR analysis) results in a case-weighted average 
standardized charge per case of $55,317 ($50,037 plus $5,280). Using 
the FY 2010 thresholds published in Table 10 (73 FR 58008), the case-
weighted threshold for MS-DRGs 246, 247, 248, 249, 250, and 251 was 
$53,847 (all calculations above were performed using unrounded 
numbers). Because the case-weighted average standardized charge per 
case for the applicable MS-DRGs exceed the case-weighted threshold 
amount, the applicant maintains that LipiScan<SUP>TM</SUP> would meet 
the cost criterion. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, 
we invited public comment on whether or not LipiScan<SUP>TM</SUP> meets 
the cost criterion.
    Comment: One commenter, the applicant, submitted comments regarding 
whether LipiScan<SUP>TM</SUP> meets the cost criterion. The commenter 
noted that LipiScan<SUP>TM</SUP> is now used in 11 hospitals, 10 of 
which are non-Department of Veterans Affairs (VA) hospitals. This 
represented an increase from the two hospitals it noted in its 
application when the applicant submitted it in November 2008. Based on 
a sampling of all 10 non-VA hospitals that are actively using the 
device, the applicant determined that the average charge for the device 
was $7,497. Using the same methodology from the proposed rule and the 
AOR file from the FY 2010 proposed rule (posted on the CMS Web site) 
instead of the FY 2009 final rule AOR file, the applicant determined a 
case-weighted average standardized charge of $47,059 for MS-DRGs 246-
251. Based on charge data from these 10 hospitals, the applicant 
determined a mean charge of $7,497 for the LipiScan<SUP>TM</SUP> 
device. The applicant added the average charge of the device to the 
charge per case and determined an average case-weighted charge per case 
of $54,556 ($47,059 plus $7,497). Based on the Table 10 thresholds 
published in the proposed rule (74 FR 24570), the case-weighted 
threshold for MS-DRGs 246-251 was $52,881. Because the case-weighted 
average standardized charge per case for the applicable MS-DRGs exceed 
the case-weighted threshold amount, the applicant maintains that based 
on this analysis the LipiScan<SUP>TM</SUP> would meet the cost 
criterion.
    In addition, the applicant stated that it analyzed Hospital Cost 
Report Information System (``HCRIS'') data from 2007. Specifically, the 
applicant searched for the 100 cardiac catheterization labs that had 
the highest volume of cases in the United States. Based on the HCRIS 
data from these 100 labs, the applicant determined the mean cost-to-
charge ratio was 0.204 with a mark-up of 490 percent yielding a charge 
of $11,760 for LipiScan<SUP>TM</SUP>. Assuming that the 
LipiScan<SUP>TM</SUP> device was marked-up 490 percent, the case-
weighted average standardized charge per case for cases involving the 
use of LipiScan<SUP>TM</SUP> would be $58,819 ($47,059 plus $11,760) 
across MS-DRGs 246-251. Similar to the above computation, based on the 
Table 10 thresholds published in the proposed rule (74 FR 24570), the 
case-weighted threshold for MS-DRGs 246-251 was $52,881. Because the 
case-weighted average standardized charge per case for the applicable 
MS-DRGs exceed the case-weighted threshold amount, the applicant 
maintains that based on this analysis the LipiScan<SUP>TM</SUP> would 
also meet the cost criterion.
    Response: We thank the commenter for the updated analyses. As noted 
above in its comment, the applicant determined the case-weighted 
threshold using Table 10 thresholds from the proposed rule. The 
thresholds in Table 10 published in the proposed rule are for 
applicants for new technology add-on payments for FY 2011. The correct 
case-weighted threshold to be used to evaluate FY 2010 proposals is the 
same threshold ($53,847) that the applicant used in its analysis from 
the proposed rule, which is based on Table 10 thresholds for FY 2010 
applicants (as noted in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule). Nevertheless, under the applicant's updated analysis using the 
Table 10 threshold for FY 2010 applicants, the case-weighted average 
standardized charge per case in either of the two analyses above (in 
the applicant's comment) would exceed the case-weighted Table 10 
threshold of $53,847.
    We reviewed all three analyses that the applicant submitted (one in 
the proposed rule and two in its comment) and, based on all three 
analyses, we agree that the applicant meets the cost criterion.
    With regard to substantial clinical improvement, the applicant 
maintains that the device meets this criterion for the following 
reasons. The applicant noted that the September 1, 2001 final rule 
states that one facet of the criterion for substantial clinical 
improvement is ``the device offers the ability to diagnose a medical 
condition in a patient population where the medical condition is 
currently undetectable or offers the ability to diagnose a medical 
condition earlier in a patient population than allowed by currently 
available methods. There must also be evidence that use of the device 
to make a diagnosis affects the management of the patient'' (66 FR 
46914). The applicant believes that LipiScan<SUP>TM</SUP> meets all 
facets of this criterion. The applicant asserted that the device is 
able to detect a condition that is not currently detectable. The 
applicant explained that LipiScan<SUP>TM</SUP> is the first device of 
its kind to be able to detect lipid-core-containing plaques and to 
assess coronary artery lipid core burden. The applicant further noted 
that FDA, in its approval documentation, has indicated that ``This is 
the first device that can help assess the chemical makeup of coronary 
artery plaques and help doctors identify those of particular concern.''
    In addition, the applicant stated that the LipiScan<SUP>TM</SUP> 
chemogram permits a clinician to detect lipid-core-containing plaques 
in the coronary arteries compared to other currently available devices 
that do not have this ability. The applicant explained that the 
angiogram, the conventional test for coronary atherosclerosis, shows 
only minimal coronary narrowing. However, the applicant indicated that 
the LipiScan<SUP>TM</SUP> chemogram has the ability to reveal when an 
artery contains extensive lipid-core-containing plaque at an earlier 
stage.
    The applicant also noted that the device has the ability to allow 
providers to make a diagnosis that better affects the management of the 
patient. Specifically, the applicant explained that the chemogram 
results are available to the interventional cardiologist during

[[Page 43817]]

the PCI procedure, and have been found to be useful in decision-making. 
In their application, the applicant stated that physicians have 
reported changes in therapy based on LipiScan<SUP>TM</SUP> findings in 
20 to 50 percent of patients. The applicant further stated in their 
application that the most common use of LipiScan<SUP>TM</SUP> results 
has been for selection of the length of artery to be stented. In some 
cases a longer stent has been used when there is a lipid-core-
containing plaque adjacent to the area that is being stented because a 
flow-limiting stenosis is present. Therefore, the applicant contends 
that the use of LipiScan<SUP>TM</SUP> by clinicians to select the 
length of artery to be stented and as an aid in selection of intensity 
of lipid-altering therapy, demonstrates that LipiScan<SUP>TM</SUP> 
affects the management of patients.
    The applicant also submitted commentary from Interventional 
Cardiologists (a group of clinicians who currently utilize the 
LipiScan<SUP>TM</SUP> device) explaining the clinical benefits of the 
device. The applicant further noted that the device may have other 
potential uses that would be of clinical benefit, and studies are 
currently being conducted to investigate these other potential uses. 
The applicant explained that LipiScan<SUP>TM</SUP> offers promise as a 
means to enhance progress against the two leading problems in coronary 
disease management: (1) The unacceptably high rate of second events 
that occur even after catheterization, revascularization, and the 
institution of optimal medical therapy; and (2) the failure to diagnose 
coronary disease early, which results in sudden death or myocardial 
infarction being the first sign of the disease in most patients. The 
applicant further stated that the identification of coronary lipid-
core-containing plaques, which can most readily be done in those 
already undergoing catheterization, is likely to be of benefit in the 
prevention of second events. In the longer term, the applicant stated 
that the identification of lipid-core-containing plaques by 
LipiScan<SUP>TM</SUP> may contribute to the important goal of primary 
prevention of coronary events, which, in the absence of adequate 
diagnostic methods, continue to cause extensive morbidity, mortality 
and health care expenditures in Medicare beneficiaries and the general 
population.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we noted that 
while we recognize that the identification of lipid-rich plaques in the 
coronary vasculature holds promise in the management of coronary artery 
disease, we were concerned that statements in the FDA approval 
documents, as well as statements made by investigators in the 
literature, suggest that the clinical implications of identifying these 
lipid-rich plaques are not yet certain and that further studies need to 
be done to understand the clinical implications of this information (74 
FR 24134). We also noted that we were concerned that there are no 
outcome data regarding the use of the LipiScan<SUP>TM</SUP> technology.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we welcomed 
public comment regarding whether or not the LipiScan<SUP>TM</SUP> 
technology represents a substantial clinical improvement in the 
Medicare population.
    Comment: Two commenters submitted comments regarding whether 
LipiScan<SUP>TM</SUP> represented a substantial clinical improvement. 
One commenter supported approving LipiScan<SUP>TM</SUP> for new 
technology add-on payments and noted that the statute indicated that 
either a ``diagnostic device or a therapy should be eligible for the 
add-on payment.'' (emphasis provided) The commenter stated that the 
device had been studied in detail by the FDA and that the FDA concluded 
that the device identified lipid core plaques with ``accuracy suitable 
for clinical use.'' Additionally, the commenter stated that the device 
``has already started changing the therapeutic decisionmaking process 
and has the potential to provide additional benefits in the struggle 
against the leading cause of death in the United States.''
    The applicant stated that it believed that LipiScan<SUP>TM</SUP> is 
a ``substantial clinical improvement'' over existing technologies 
because it enables the physician to choose the length of artery to be 
stented as well as the intensity of lipid lowering medical therapy that 
should be used. The applicant asserted that the detection of lipid core 
plaque could ultimately be helpful to physicians in managing patient 
care and improving clinical outcomes because such plaques are prone to 
sudden rupture. Additionally, the applicant asserted that there were 
three ways in which it met CMS' regulatory standard for a substantial 
clinical improvement including:
    1. It detects ``a condition that is not currently detectable'' 
because it is the only device approved to identify the lipid core 
content in coronary arteries.
    2. It ``enables the patient to be diagnosed earlier'' because other 
available diagnostic tests (including exercise testing and coronary 
angiography) do not identify lipid core plaque; whereas without this 
technology, the first sign that a lipid-rich plaque is present may be 
an acute myocardial infarction.
    3. It affects the management of the patient by:
    <bullet> Affecting the selection of the length of the artery to be 
stented;
    <bullet> Affecting the selection of the appropriate target levels 
for lipid altering pharmacologic therapy;
    <bullet> The chance that it may eventually be linked to the 
prevention of peri-stenting myocardial infarction.
    As an attachment to its comment, the applicant submitted a legal 
analysis that stated that neither the statute nor the regulations 
require that a diagnostic device be linked to improved clinical 
outcomes; rather, an improvement in diagnosis alone is the only 
requirement. The legal memorandum also noted that the statute 
``references technology that improves either diagnosis or treatment'' 
and that a new technology ``need not improve both, nor does the statute 
specify that the diagnostic must be linked to a treatment that improves 
outcomes.'' Additionally, the legal analysis stated that 
LipiScan<SUP>TM</SUP> has submitted evidence in accord with both the 
statute and the regulations that it ``provides an improvement in 
diagnosis of coronary artery disease by identifying the presence of the 
lipid core plaque'' and asserts that this point is further evidenced by 
the FDA which stated that the device ``is the first device that can 
help assess the chemical make-up of coronary artery plaques and help 
physicians identify those plaques with lipid cores, which may be of 
particular concern.'' The legal analysis also stated that CMS should 
not require new diagnostics to be judged by the same criteria that have 
been applied to judge new therapeutics because ``such an approach would 
not be in accord with the plain language of the regulation and that 
statue, both of which envision distinct clinical benefits associated 
with either a diagnostic or a therapy.''
    Finally, the applicant summarized an article that considered the 
``effect of diagnostic imaging on decisionmaking.'' Specifically, the 
applicant summarized the hierarchy of six levels of diagnostic efficacy 
presented in the article:
    ``Level 1: Technical efficacy, the physics are appropriate for the 
target of the diagnostic;
    Level 2: Diagnostic accuracy, the sensitivity and specificity for 
the diagnostic target are appropriate;
    Level 3: Diagnostic thing efficacy, the physician accepts the 
diagnostic as capable of identifying the target;
    Level 4: Therapeutic efficacy, the physician selects or does not 
select a given therapy on the basis of the diagnostic outcome;

[[Page 43818]]

    Level 5: Therapeutic outcome efficacy, the therapy selected on the 
basis of the results of the diagnostic outcome provides an improvement 
in the health outcome of the patient;
    Level 6: Cost-effectiveness, the benefits to society have a 
favorable relationship to the costs of the diagnostic.''
    The applicant claimed that, applying the analysis from the article, 
the FDA approval established that Levels 1 and 2 were met which it 
believed to be consistent with the requirement under 42 CFR 
412.87(b)(1). Further, the applicant asserted that the testimony 
provided by physicians who are using LipiScan demonstrates that 
physicians are accepting the results to identify lipid core plaque 
(Level 3) and are utilizing the device to guide therapy (Level 4).
    Response: We disagree with the commenters who stated that the 
statute and regulations require that a diagnostic technology need only 
``improve'' diagnosis and that the FDA approval of a diagnostic 
technology in and of itself meets the regulatory criteria under Sec.  
412.87(b)(1). The commenter correctly notes that section 
1886(d)(5)(K)(viii) of the Act requires us to provide for public input 
on whether a new technology ``substantially improves the diagnosis or 
treatment'' of Medicare beneficiaries. Section 1886(d)(5)(K)(vi) of the 
Act also authorizes the Secretary to establish through notice-and-
comment rulemaking the criteria that a new medical service or 
technology must meet in order to be eligible for the new technology 
add-on patient. Under this authority, we established three criteria 
through notice and comment rulemaking--the newness criterion, the cost 
criterion, and the substantial clinical improvement criterion (66 FR 
46924). Specifically, Sec.  412.87(b)(1) of the regulations provides 
that a new medical service or technology must ``represent an advance 
that substantially improves, relating to technologies previously 
available, the diagnosis or treatment of Medicare beneficiaries.''
    As we explained in that rule, we will consider a diagnostic 
technology to meet the substantial clinical improvement criterion if 
the technology not only ``offers the ability to diagnose a medical 
condition in a patient population where that medical condition is 
currently undetectable or offers the ability to diagnose a medical 
condition earlier in a patient population than allowed by currently 
available methods,'' but also if ``use of the device to make a 
diagnosis affects the management of the patient'' (66 FR 46914). Under 
the commenter's analysis, a diagnostic technology effectively would 
only need to receive FDA approval and be the only technology approved 
for a particular diagnostic capability in order to be deemed a 
``substantial improvement'' for purposes of new technology add-on 
payments, regardless of its ability to positively affect patient 
management. This approach would deem a device leading to the 
identification of new information (in this case, whether plaques 
contain a lipid core) as a substantial improvement in diagnosis even if 
such detection has not been ``demonstrated to represent a substantial 
improvement in caring for Medicare beneficiaries'' and is not linked to 
evidence-based, significant, and positive changes in the management of 
patients or, ultimately, to changes in clinical outcomes. We do not 
believe this rationale is consistent with our prior statements 
regarding the substantial clinical improvement criterion of the new 
technology add-on payment provision. Nor do we believe it would be 
appropriate to provide additional payments for new diagnostic tools 
that fail to significantly change the management of patients, thereby 
improving clinical outcomes.
    As to whether LipiScan\TM\ represents a substantial improvement in 
diagnosis, we considered first, whether LipiScan\TM\ ``offers the 
ability to diagnose a medical condition in a patient population where 
that medical condition is currently undetectable or offers the ability 
to diagnose a medical condition earlier in a patient population than 
allowed by currently available methods,'' and second whether ``use of 
the device to make a diagnosis affects the management of the patient'' 
(66 FR 46914). In the case of LipiScan\TM\, the applicant has stated 
that it believes that LipiScan\TM\ offers the ability to diagnose a 
condition that is previously undetectable because it allows the 
detection of lipid-rich plaques in patients with coronary artery 
disease (CAD). We agree with the applicant that existing technologies 
may not be able to adequately identify lipid-rich plaques. However, we 
disagree that use of LipiScan\TM\ affects the management of the patient 
at this time.
    To qualify for the new technology add-on payment, a diagnostic 
capability must also be linked to ``evidence that use of the device to 
make a diagnosis affects the management of the patient.'' We believe 
that this evidence is necessary to determine whether the new technology 
affords a ``clear improvement over the use of previously available 
technologies.'' We do not consider any particular type of evidence to 
be dispositive; instead, we will consider all information presented for 
each application to determine whether there is evidence to support a 
conclusion that ``use of the device to make a diagnosis affects the 
management of the patient'' (in the case of a diagnostic technology). 
Consequently, we do not consider merely anecdotal claims that a device 
affects the management of the patient as sufficient evidence to 
demonstrate that a new diagnostic device affects the management of the 
patient, particularly where the device could be used for a relatively 
large patient population. Rather, we will consider whether the peer-
reviewed medical literature supports or clinical studies indicate that 
the diagnostic device should generally be used by providers in guiding 
the management of their patients. In addition, we will consider 
evidence demonstrating clinically accepted use of the device in a 
manner that actually affects the management of patients.
    In the case of LipiScan\TM\, we note that other methods exist for 
diagnosing CAD, including intravascular ultrasound (IVUS) and optical 
coherence tomography (OCT). In addition, the evidence available to CMS 
at the time of making a final rule determination consisted of anecdotal 
claims made by the applicant and one other commenter, that the 
identification of such plaques affects the management of the patient. A 
review of the literature yielded no additional evidence to support the 
applicant's claim. Furthermore, we believe that the prognostic 
implications of detecting lipid-rich plaque are not yet sufficiently 
well enough understood and documented in the peer-reviewed evidence to 
conclude that such identification will lead to significant and 
evidence-based changes in the management of CAD. In addition, we note 
that there are relatively few cases in which LipiScan\TM\ has been used 
relative to the patient population in which it could potentially be 
used. Specifically, the applicant claims that the device could 
potentially be used in every patient who undergoes coronary 
angiography. To date, the device is only in use in 11 hospitals total, 
and there have been no data published to indicate that management of 
patients has changed, even in the hospitals where the device has been 
used. Given the size of the patient population that the manufacturer 
claims stands to benefit from use of LipiScan\TM\, the fact that so few 
hospitals are using the technology raises significant concerns 
regarding whether use of LipiScan\TM\ actually

[[Page 43819]]

affects the management of patients in a meaningful manner.
    Therefore, while we recognize that LipiScan\TM\ provides the 
ability to detect lipid-rich plaque which is currently undetectable by 
any other means, we are nonetheless still concerned that there is 
significant uncertainty within the clinical community regarding the 
prognostic implications of obtaining this information. We note that we 
did not receive any public comment during the public comment period 
from physicians who may be using the device. We believe the evidence 
supplied by the applicant that the device is affecting the management 
of the patient is not able to be validated broadly and is still 
anecdotal. Further, the discussions of the technology in the scientific 
studies submitted by the applicant acknowledge the possible potential 
of the technology to affect treatment in the future, but all stated 
that additional studies are necessary to determine its actual clinical 
utility. Specifically, in an editorial published in 2008, the author 
wrote, ``In conclusion, further studies are warranted to determine if 
detection of [lipid core plaque of interest] by [near infrared 
spectroscopy] imaging will contribute to enhanced prediction of 
outcomes in patients with known CAD.'' (Young, 2008) Also, in a letter 
to the editor in the Journal of the College of Cardiology, another 
author wrote about his experience with three patients over a period of 
three weeks to share his ``initial observations.'' The author wrote 
that ``* * * preliminary results suggest that intravascular 
investigation of chemical composition of a coronary plaque has become a 
clinical reality [but] it remains to be seen whether chemograms would 
perform better than the ultrasound of whether they will be able to 
predict adverse events and faciltate development of clinically 
effective strategies for management of vulnerable plaques before it is 
too late.'' (Maini, 2008) (emphasis added).
    We believe that these conclusions, and others, as stated in the 
literature further support our previously stated view that the 
prognostic implications of detecting lipid-rich plaque are not well 
enough understood and therefore the detection of such plaque cannot be 
reasonably assumed to lead to evidence-based, significant, and positive 
medical management of patients with CAD that is generally accepted by 
clinicians, much less lead to improved clinical outcomes. We agree with 
the commenter and applicant that the identification of lipid-rich 
plaques may hold promise and ultimately lead to changes in the 
management of CAD and that LipiScan\TM\ ``has the potential to provide 
additional benefits in the struggle against the leading cause of death 
in the United States.'' However, we do not believe the evidence and 
information available at this time allows us to determine that it meets 
the substantial clinical improvement criterion.
    For these reasons, we are not approving LipiScan\TM\ for new 
technology add-on payments for FY 2010.
d. Spiration[supreg] IBV[supreg] Valve System
    Spiration, Inc. submitted an application for new technology add-on 
payments for FY 2010 for the Spiration[supreg] IBV[supreg] Valve System 
(Spiration[supreg] IBV[supreg]). The Spiration[supreg] IBV[supreg] is a 
device that is used to place, via bronchoscopy, small, one-way valves 
into selected small airways in the lung in order to limit airflow into 
selected portions of lung tissue that have prolonged air leaks 
following surgery while still allowing mucus, fluids, and air to exit, 
thereby reducing the amount of air that enters the pleural space. The 
device is intended to control prolonged air leaks following three 
specific surgical procedures: lobectomy; segmentectomy; or lung volume 
reduction surgery. According to the applicant, an air leak that is 
present on postoperative day 7 is considered ``prolonged'' unless 
present only during forced exhalation or cough. In order to help 
prevent valve migration, there are five anchors with tips that secure 
the valve to the airway. The implanted valves are intended to be 
removed no later than 6 weeks after implantation.
    With regard to the newness criterion, the Spiration[supreg] 
IBV[supreg] received a Humanitarian Device Exemption (HDE) approval 
from the FDA on October 24, 2008. We are unaware of any previously FDA-
approved predicate devices, or otherwise similar devices, that could be 
considered substantially similar to the Spiration[supreg] IBV[supreg]. 
However, the applicant asserted that the FDA has precluded the device 
from being used in the treatment of any patients until Institutional 
Review Board (IRB) approvals regarding its study sites. Therefore, it 
would appear that the Spiration[supreg] IBV[supreg] would meet the 
newness criterion once it has obtained at least one IRB approval 
because the device would then be available on the market to treat 
Medicare beneficiaries. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule, we welcomed public comments about the date on which the newness 
period should begin for this technology should it meet the other 
criteria to be approved for new technology add-on payments (74 FR 
24135).
    We also noted that the Spiration[supreg] IBV[supreg] is currently 
described by ICD-9-CM procedure code 33.71 (Endoscopic insertion or 
replacement of bronchial valve(s)). At the September 2008 ICD-9-CM 
Coordination and Maintenance Committee meeting, we discussed a proposal 
to revise the existing code and create a new code for endoscopic 
bronchial valve insertion in single and multiple lobes. In the proposed 
rule, we included the revised title of procedure code 33.71 to 
``Endoscopic insertion or replacement of bronchial valve(s), single 
lobes'' and also the new procedure code 33.73 (Endoscopic insertion or 
replacement of bronchial valve(s), multiple lobes) in order to 
distinguish between single and multiple lobes (Table 6F and 6B in the 
Addendum to the proposed rule (74 FR 24501 and 24494, respectively)).
    Comment: The applicant commented that nine hospitals have confirmed 
receipt of the Spiration[supreg] IBV[supreg] and the first IRB approval 
for the Spiration[supreg] IBV[supreg] was March 12, 2009. The applicant 
believes that this would confirm that the technology meets the newness 
criteria.
    Another commenter commented that the IRB at the commenter's 
hospital has made pending approval of the Spiration[supreg] IBV[supreg] 
and expects to be able to use the Spiration[supreg] IBV[supreg] within 
the next month.
    Response: We thank the commenters for providing this information on 
when the newness period should begin for the Spiration[supreg] 
IBV[supreg]. Based on the information above from the applicant, the 
Spiration[supreg] IBV[supreg] meets the newness criterion and the 
newness period for the Spiration[supreg] IBV[supreg] begins on March 
12, 2009.
    In an effort to demonstrate that the technology meets the cost 
criterion, the applicant searched the FY 2007 MedPAR file for cases 
potentially eligible for use of the Spiration[supreg] IBV[supreg]. 
Specifically, the applicant searched for cases with one of the 
following procedure codes: 32.4 (Lobectomy of lung); 32.3 (Segmental 
resection of lung); or 32.22 (Long volume reduction surgery). The 
applicant found 4,225 cases (or 21.6 percent of all cases) in MS-DRG 
163 (Major Chest Procedure with MCC), 8,960 cases (or 45.8 percent of 
all cases) in MS-DRG 164 (Major Chest Procedure with CC), and 6,358 
cases (or 32.5 percent of all cases) in MS-DRG 165 (Major Chest 
Procedure without CC/MCC). The average standardized charge per case was 
$88,326 for MS-DRG 163, $48,494 for MS-DRG 164, and $38,463 for MS-DRG

[[Page 43820]]

165, equating to a case-weighted average standardized charge per case 
of $53,842.
    The average standardized charge per case does not include charges 
related to the Spiration[supreg] IBV[supreg]; therefore, it is 
necessary to add the charges related to the device to the average 
standardized charge per case in evaluating the cost threshold 
criterion. Although the applicant submitted data related to the 
estimated cost of the Spiration[supreg] IBV[supreg] per case, the 
applicant noted that the cost of the device was proprietary 
information. The applicant estimates $21,450 in charges related to the 
Spiration[supreg] IBV[supreg] (based on a 100-percent charge markup of 
the cost of the device). The applicant based this amount on seven 
actual cases that received the device. Because the applicant lacked a 
significant sample of cases to determine the charges associated with 
the device, we expressed our concerns in the proposed rule as to 
whether or not the $21,450 in charges related to the device is a valid 
estimate. In addition, based on the seven cases, the applicant 
determined an estimate of the number of valves used per case (the 
applicant noted that the number of valves used per case is 
proprietary). We also expressed concerns that the applicant lacked a 
significant sample of cases to determine a valid estimate of the number 
of valves per case. Adding the estimated charges related to the device 
to the average standardized charge per case (based on the case 
distribution from the applicant's FY 2007 MedPAR claims data analysis) 
resulted in a case-weighted average standardized charge per case of 
$75,292 ($53,842 plus $21,450). Using the FY 2010 thresholds published 
in Table 10 (73 FR 58008), the case-weighted threshold for MS-DRGs 163, 
164, and 165 was $54,715 (all calculations above were performed using 
unrounded numbers). Because the case-weighted average standardized 
charge per case for the applicable MS-DRGs exceed the case-weighted 
threshold amount, the applicant maintains that the Spiration[supreg] 
IBV[supreg] would meet the cost criterion.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited 
public comment on whether or not the Spiration[supreg] IBV[supreg] 
meets the cost criterion.
    Comment: In response to our concerns in the proposed rule, the 
applicant commented and cited a recent study in Chest,\4\ prepublished 
on line on April 6, 2009 (Travaline 2009). The study reports on use of 
bronchial valves (not necessarily made by the applicant) for air leaks 
from a number of etiologies. From December 2002 through January 2007, 
40 patients were treated with bronchial valves in 17 centers. The mean 
number of valves per case was 2.9 for all patients in the study. The 
mean number of valves was 2.28 for the subset of seven post surgical 
air leak cases in the study.
---------------------------------------------------------------------------

    \4\ Travaline JM et al. Treatment of persistent pulmonary air 
leaks using endobronchial valves. Chest; Prepublished online; April 
6, 2009.
---------------------------------------------------------------------------

    We note that the applicant informed us that the information in the 
proposed rule was incorrect and the number of actual cases where the 
Spiration[supreg] IBV[supreg] was used was not seven. The applicant 
informed CMS that the correct number of actual cases that used the 
Spiration[supreg] IBV[supreg] was eight cases. In the proposed rule, 
the applicant determined an average of 3.9 valves per case (or $21,450 
in charges related to the device) for the Spiration[supreg] IBV[supreg] 
based on these eight actual cases. However, the applicant explained 
that if we were to remove one case that they considered to be outlier 
because it used 10 valves, the average number of valves per case would 
be 3.0, which is similar to the average amount of valves per case from 
the Travaline study. The commenter also noted that the lower number of 
valves used in the Travaline study for post surgical leaks compared to 
the Spiration[supreg] IBV[supreg] data can be attributed to the design 
of the Spiration[supreg] IBV[supreg] compared to the valve used in the 
study that limits the sub segmental treatment. The commenter believes 
that this newly published data supports the conclusion that it is 
typical to insert multiple valves per case in prolonged air leak cases.
    The applicant also commented that since the proposed rule, two 
additional cases were performed using the Spiration[supreg] IBV[supreg] 
(making a total of 10 cases). The applicant included these two 
additional cases in its revised estimate of the average amount of 
valves per case. In addition to removing the outlier case above, the 
applicant also removed an additional case they considered to be an 
outlier that used four valves and determined an average of 2.5 valves 
per case (or $13,750 in charges related to the Spiration[supreg] 
IBV[supreg]).
    The applicant also noted that the case-weighted threshold was 
$54,715 which is slightly higher than the case-weighted average 
standardized charge per case of $53,842 (which does not include charges 
related to the device). The commenter explained that even if we added a 
charge of $5,550 for only one Spiration[supreg] IBV[supreg] to the 
case-weighted average standardized charge per case (for a total case-
weighted average standardized charge per case of $59,392), the 
Spiration[supreg] IBV[supreg] would still meet the cost criterion since 
the case-weighted average standardized charge per case ($59,392) 
exceeds the case-weighted threshold ($53,842).
    The commenter also stated the following to strengthen confidence in 
its MedPAR analysis. The commenter explained that its MedPAR analysis 
profiled cases identified by the relevant surgical codes since specific 
ICD-9-CM procedure and diagnosis are not available to identify cases of 
prolonged air leaks within the FY 2007 MedPAR. The applicant cited peer 
reviewed clinical literature that was submitted as part of its new 
technology add-on payment application to demonstrate that patients with 
prolonged air leaks had a greater length of stay and complication rates 
compared to patients who did not have a prolonged air leak. 
Specifically, the applicant noted that one study \5\ with 91 post 
operative patients after pulmonary resection demonstrated that patients 
with air leaks after 3 days had a greater length of stay (mean of 9.4 
days vs. 5.4 days with a p value of p<0.0001). The commenter also noted 
that a study of 552 post operative patients after LVRS in the National 
Emphysema Treatment Trial \6\ demonstrated that patients with air leaks 
had more complications (57 percent versus 30 percent with a p value of 
p=0.0004) and longer length of stay (11.8 days vs. 7.6 days with a p 
value of p=0.0005). The commenter also cited a retrospective study \7\ 
of 100 patients from a single center that showed the median length of 
stay for patients with prolonged air leak after radical upper lobectomy 
procedure was 11 days versus the median of 7 days for patients without 
prolonged air leak. Based on these clinical data, the applicant 
concluded that prolonged air leak cases are costlier than cases without 
prolonged air leak. As a result, the commenter believes that its MedPAR 
analysis was conservative in evaluating charges for surgical procedures 
as a whole, without being able to uniquely identify costlier prolonged 
air leak cases.
---------------------------------------------------------------------------

    \5\ Bardell T, Petiskas D Can Respir J 2003 March, Vol. 10, No 
2.
    \6\ Decamp MM, Ann Thorac Surg. 2006 July; Vol. 82, No. 1.
    \7\ Abolhoda A et al. Chest 1998; 113:1507-10.
---------------------------------------------------------------------------

    Response: We thank the applicant for submitting additional data to 
determine the amount of charges related to the Spiration[supreg] 
IBV[supreg]. In order to determine that the applicant met the cost 
criteria, in addition to the applicant's analysis, we searched the 
March update of the FY 2008 MedPAR for the same procedure codes that 
the applicant searched in their MedPAR analysis. We found 5,501 cases 
in MS-DRG 163 (or 23.9 percent

[[Page 43821]]

of all cases), 11,151 cases in MS-DRG 164 (or 48.4 percent of all 
cases), and 6,380 cases in MS-DRG 165 (or 27.7 percent of all cases). 
The average standardized charge per case was $85,958 for MS-DRG 163, 
$48,731 for MS-DRG 164, and $37,586 for MS-DRG 165, equating to a case-
weighted average standardized charge per case of $54,535. Adding the 
revised estimate of charges of $13,750 (2.5 valves x $5,550) related to 
the device to the average standardized charge per case (based on the 
case distribution from out FY 2008 MedPAR claims data analysis) 
resulted in a case-weighted average standardized charge per case of 
$68,285. Using the FY 2010 thresholds published in Table 10 (73 FR 
58008), the case-weighted threshold for MS-DRGs 163, 164 and 165 was 
$55,952 (all calculations above were performed using unrounded 
numbers). Based on this analysis, the case-weighted average 
standardized charge per case for the applicable MS-DRGs exceeds the 
case-weighted threshold amount. Additionally, similar to what the 
applicant stated above, if we only included the amount of charges for 
one valve, the case-weighted average standardized charge per case of 
$60,035 ($54,535 plus $5,550) would still exceed the case-weighted 
threshold of $55,952. Therefore, we believe that the applicant meets 
the cost criterion.
    Additionally, the applicant submitted supplemental data from 
multiple sources in an effort to determine the average amount of valves 
that would be used per case. We note that the average number of valves 
from actual cases involving the Spiration[supreg] IBV[supreg] (2.5 
valves per case) is higher than the average amount of valves (2.28 
valves per case) from the seven post surgical air leak cases from the 
Traveline study (not the Spiration[supreg] IBV[supreg]). However, we 
prefer to rely on actual case data when available and the actual case 
data is a more conservative estimate of the average amount of valves 
per case compared to those cases in the studies that did not use the 
Spiration[supreg] IBV[supreg].
    With respect to how the device would meet the substantial clinical 
improvement criterion, the applicant submitted information that was 
based on the Summary of Safety and Probable Benefit (SSPB) from the 
FDA's HDE approval order for the device. The clinical results indicate 
the Spiration[supreg] IBV[supreg] can be deployed in the intended 
airway reasonably safely with a minimally invasive bronchoscopy 
procedure. There have been a limited number of device complications and 
no occurrences of device erosion or migration. The Spiration[supreg] 
IBV[supreg] can be removed using a bronchoscope. Laboratory results 
indicate that the Spiration[supreg] IBV[supreg] significantly reduces 
airflow to the lung tissue beyond the treated airway, and a significant 
reduction in distal airflow is anticipated to augment the resolution of 
air leaks of the lung. Therefore, the applicant asserts, it is 
reasonable to conclude that the probable benefit to health associated 
with using the device for the target population outweighs the risk of 
illness or injuries, taking into account the probable risks and 
benefits of currently available devices or alternative forms of 
treatment when used as indicated in accordance with the directions for 
use.
    We recognize that prolonged air leaks after these types of lung 
surgery can be a significant problem, and that Spiration[supreg] 
IBV[supreg] therapy may represent a new alternative in treating 
properly selected patients. However, we emphasized our concerns in the 
proposed rule that the outcome data presented are from a sample set of 
only seven patients, and the FDA HDE did not require demonstration of 
either safety or effectiveness. Therefore, in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule, we welcomed public comment as to whether or not 
the Spiration[supreg] IBV[supreg] represents a substantial clinical 
improvement for Medicare beneficiaries.
    We did not receive any written public comments regarding this 
application for new technology add-on payments concerning the new 
technology town hall meeting.
    Comment: A number of commenters agreed with the applicant that the 
Spiration[supreg] IBV[supreg] meets the substantial clinical 
improvement criteria. The commenters also recommended the approval of 
the Spiration[supreg] IBV[supreg] for new technology add-on payments in 
FY 2010. One commenter, an association of thoracic surgeons, expressed 
support for approving the Spiration[supreg] IBV[supreg] for new 
technology add-on payments. The commenter explained that the 
Spiration[supreg] IBV[supreg] offers a less invasive treatment of the 
prolonged air leak, whereas the alternative treatment would be a major 
re-operation which costs more money and poses a greater risk to the 
patient.
    The remaining commenters were physicians who had experience using 
bronchial valves or had actual experience using the Spiration[supreg] 
IBV[supreg]. These commenters noted that excluding the 
Spiration[supreg] IBV[supreg], current treatments for prolonged air 
leaks include chest tube drainage, occlusion of airways with fibrin 
``glue'', and/or re-operation. One of the commenters explained that 
endobronchial valves offer a unique method for treating prolonged air 
leaks by temporarily preventing air from flowing into the segment of 
the lung with the air leak. The commenter noted that the efficacy of 
the valve can be predicted effectively by occluding the lobe or segment 
involved with a balloon catheter to determine if the air leak can be 
stopped. If a balloon is effective in stopping the leak, then a valve 
can also be effective in stopping the leak. The commenter explained 
that the advantage of this treatment is that after the leak has 
completely healed, the valves can be removed with a minimally invasive 
fiber-optic bronchoscopy. The commenter concluded that the 
Spiration[supreg] IBV[supreg] represents a substantial improvement 
since it offers a valuable, new, unique treatment option for prolonged 
post thoracotomy air leak and is the only bronchial valve with FDA 
approval (HDE).
    Another commenter stated that using a bronchial valve to treat an 
air leak, resulted in the air leak ceasing at the end of the procedure. 
The commenter noted that for safety reasons, chest tubes are left in 
for 48 hours and patients in its care have been discharged 72 hours 
after the procedure. The bronchial valve was typically removed within 
4-6 weeks after the procedure. The commenter further stated that it was 
not aware of any randomized clinical trials that prove that bronchial 
valves make air leaks stop. However, the commenter maintained that 
based on their experience, air leaks that lasted 14 days or longer 
which suddenly ceased upon use of a bronchial valve would be strong 
circumstantial evidence that the therapy works and can shorten 
hospitalization in appropriately selected patients. The commenter also 
believes that using a bronchial valve for air leaks still present after 
five days following surgery would likely result in an overall cost 
savings since the duration of hospitalization is usually dependent on 
air leak cessation. The commenter concluded that the Spiration[supreg] 
IBV[supreg] represents a substantial clinical improvement and CMS 
should approve Spiration[supreg] IBV[supreg] for new technology add-on 
payments in FY 2010.
    One of the commenters noted that in its experience using 
endobronchial valves, patients with prolonged air leaks who were in the 
hospital for many weeks with chest tubes in place were discharged and 
had the chest tubes removed within days upon use of an endobronchial 
valve. The commenter cited an example of a patient currently treated by 
the commenter who has undergone numerous procedures with anesthesia in 
the operating room and requires another two procedures. The commenter 
believed that this patient

[[Page 43822]]

would have been able to be managed in a bronchoscopy suite under 
moderate sedation with use of an endobronchial valve. As the only 
bronchial valve with FDA approval (HDE), the commenter believed the 
Spiration[supreg] IBV[supreg] represents a substantial clinical 
improvement and recommended that CMS make new technology add-on 
payments for the Spiration[supreg] IBV[supreg] in FY 2010.
    Another commenter noted that conservative management of air leaks 
results in prolonged hospitalization and limited mobilization of 
patients with a much higher risk of additional complications such as 
pneumonia, empyema, deep venous thrombosis and pulmonary embolism, and 
progressive deconditioning. These complications take a toll on patients 
with prolonged air leaks and result in a significantly worse overall 
outcomes, prolonged hospital stay, and substantial increase in costs.
    The commenter also noted its extensive experience using the 
Spiration[supreg] IBV[supreg] valve in clinical trials as a potential 
therapy for palliation of severe emphysema. Specifically, the commenter 
stated that the valves are easy to place in desired segments and 
effectively block distal airflow with a high safety profile in 
published studies. The commenter further stated that the valves are 
stable with no incidence of valve migration in over 600 valves placed 
in emphysema patients with follow-up that included endoscopic and 
radiologic surveillance. The commenter also noted their extensive 
experience in valve removal, which is part of the intended therapy for 
patients that have valve treatment for air leaks (since once the air 
leaks are resolved the valves will no longer be necessary). The 
commenter disclosed that it did not have any personal experience in 
using the Spiration[supreg] IBV[supreg] for patients with air leaks, 
but are familiar with the existing literature on similar treatments as 
well as the case series using the Spiration[supreg] IBV[supreg] for 
this indication. With this background, the commenter believed that the 
Spiration[supreg] IBV[supreg] has a high likelihood of helping to 
resolve prolonged postsurgical air leaks and therefore minimizes the 
duration of chest tube drainage and hospitalization for patients (with 
an attendant decrease in the risk of complications that accompany 
prolonged hospitalization). The commenter also believed that the high 
safety profile and effectiveness of the Spiration[supreg] IBV[supreg] 
for occluding segmental airways suggests a very high likelihood of 
clinical benefit in this group of patients with the indication of 
prolonged air leak. The commenter concluded that it believed that the 
Spiration[supreg] IBV[supreg] represents a substantial improvement to 
currently available treatment options for patients who have post-
surgical prolonged air leaks. The commenter recommended that CMS 
approve the Spiration[supreg] IBV[supreg] for new technology add 
payments so that hospitals are appropriately reimbursed for this new 
important technology.
    Response: We appreciate the commenters submitting their comments in 
support of the Spiration[supreg] IBV[supreg]. Many of the commenters 
described their positive experiences using the Spiration[supreg] 
IBV[supreg] or other bronchial valves that resolved cases of air leaks, 
which improved the clinical outcome of the patient. Furthermore, the 
commenters suggested that most, if not all, of the cases treated using 
the Spiration[supreg] IBV[supreg] and other bronchial valves would have 
had to have undergone further invasive treatments had the 
Spiration[supreg] IBV[supreg] or other bronchial valves not have been 
available to resolve the air leak. Additionally, the Spiration[supreg] 
IBV[supreg] and other bronchial valve provided a quick resolution to 
these cases of prolonged air leaks. We considered the commenters' 
positive experiences using the Spiration[supreg] IBV[supreg] in our 
determination (below) on whether the Spiration[supreg] IBV[supreg] 
represents a substantial clinical improvement.
    Comment: The applicant commented that providers have few treatment 
options for effectively controlling prolonged air leaks. The applicant 
noted that aside from the Spiration[supreg] IBV[supreg], no other 
bronchoscopic treatments have been clinically accepted or approved by 
the FDA. Therefore, management of prolonged air leaks due to persistent 
bronchopleural fistula involves chest drainage and occasionally 
pleurodesis, with more difficult cases requiring pleurectomy and 
surgical repair. The applicant further noted that current treatment 
options for air leaks are associated with risks and complications such 
as prolonged use of chest tubes which increases the risk of pneumonia, 
deep venous thrombosis, pulmonary embolus, atelectasis, subcutaneous 
emphysema and empyema; restricted ambulation due to chest tube which 
increases the risks associated with inactivity; prolonged requirements 
for pain medication and extended post operative length of stay which 
increases the potential for hospital acquired infections.
    In response to our concerns in the proposed rule, the applicant 
acknowledged that there are limited outcomes data associated with the 
use of the Spiration[supreg] IBV[supreg] for prolonged air leaks. 
However, the applicant cited that additional data has been published 
since the proposed rule regarding the use of a bronchial valve for 
prolonged air leaks. Specifically, the applicant cited the following 
clinical benefit data from the Traveline 2009 study for patients who 
received a bronchial valve for air leaks from multiple causes: 
following valve placement, the air leaks resolved or decreased in 37 of 
40 patients (92.5 percent); 19 patients (47.5 percent) had complete 
resolution of the air leak acutely, 18 patients (45 percent) had 
reduction, two patients (5 percent) had no change in air leak status, 
and one patient (2.5 percent) the immediate change in air leak was not 
reported.
    Additionally, the applicant reported that all 10 procedures 
performed with the Spiration[supreg] IBV[supreg] resulted in air leak 
decrease and/or resolution. The applicant concluded that these results 
demonstrated the following: Valve placement may reduce or avoid 
complications associated with current treatments of prolonged air 
leaks; patients who received bronchial valves experienced air leak 
resolution or decrease unlike a situation absent bronchial valves where 
a patient may need to remain in the hospital; patients with a bronchial 
valve are able to be discharged with the valve thus avoiding risks, 
complications and costs associated with prolonged lengths of 
hospitalizations. The applicant believed that these conclusions from 
the newly published data together with Spiration[supreg] data 
demonstrate that the Spiration[supreg] IBV[supreg] meets the 
substantial clinical improvement criteria.
    Response: We thank the applicant for providing additional clinical 
data to demonstrate that the Spiration[supreg] IBV[supreg] meets the 
substantial clinical improvement criteria. With respect to substantial 
clinical improvement, we considered all the case specific clinical 
information presented by the applicant and the public to determine 
whether there is evidence to support a conclusion that use of the 
Spiration[supreg] IBV[supreg] represents a substantial clinical 
improvement. Specifically, we considered the peer-reviewed medical 
literature, clinical studies, and the clinically accepted use of the 
device. We remain concerned that no prospective comparative data exists 
to help understand the benefit of the technology versus other 
modalities. We also do not know what the outcome would have been for 
the cases presented as examples in the Traveline study (that is, if or 
when those air leaks might have resolved on their own). Additionally, 
many of the cases in that study were not for the indicated use (post-
operative prolonged air leak management). However, we agree that the 
Spiration[supreg]

[[Page 43823]]

IBV[supreg] can improve clinical outcomes by providing an alternative 
treatment that is effective and often a less invasive method of 
treating prolonged air leaks in a small patient population that is 
properly and carefully selected (as required by the FDA). Additionally, 
we received positive comments from a major thoracic society and from 
physicians who indicated that the Spiration[supreg] IBV[supreg] and 
other bronchial valves produced positive clinical outcomes by resolving 
air leaks. Also, the comments we received from the physicians 
demonstrated a change to the clinical therapy for cases of air leaks by 
using a bronchial valve such as the Spiration[supreg] IBV[supreg] 
instead of other alternative treatments such as an invasive surgery to 
resolve the air leak. Furthermore, the Spiration[supreg] IBV[supreg] is 
the only device currently approved for the purpose of treating 
prolonged air leaks following lobectomy, segmentectomy, and LVRS 
patients in the United States. Without the availability of this device, 
patients with prolonged air leaks (following lobectomy, segmentectomy, 
and LVRS) might otherwise remain inpatients in the hospital (and have a 
longer length of stay than they might otherwise have without the 
Spiration[supreg] IBV[supreg]) or might even require additional 
invasive surgeries to resolve the air leak. We also note that use of 
the Spiration[supreg] IBV[supreg] may lead to more rapid beneficial 
resolution of prolonged air leaks and reduce recovery time following 
the three lung surgeries mentioned above. Therefore, after reviewing 
the totality of the evidence, we have determined that the 
Spiration[supreg] IBV[supreg] represents a substantial clinical 
improvement over existing therapies for prolonged air leaks for 
carefully selected patients.
    Accordingly, after consideration of the clinical evidence received, 
we are approving the Spiration[supreg] IBV[supreg] for new technology 
add-on payments in FY 2010. However, we remain interested in seeing 
whether the clinical evidence continues to find it to be effective. 
This approval is on the basis of using the Spiration[supreg] 
IBV[supreg] consistent with the FDA approval (HDE), and we emphasize 
the need for appropriate patient selection accordingly. Therefore, we 
intend to limit the add-on payment to cases involving prolonged air 
leaks following lobectomy, segmentectomy and LVRS in MS-DRGs 163, 164, 
and 165. Cases involving the Spiration[supreg] IBV[supreg] that are 
eligible for the new technology add-on payment will be identified by 
assignment to MS-DRGs 163, 164, and 165 with procedure code 33.71 or 
33.73 in combination with one of the following procedure codes: 32.22, 
32.30, 32.39, 32.41, or 32.49.
    The average cost of the Spiration[supreg] IBV[supreg] is reported 
as $2,750. Based on the applicant's revised data, the average amount of 
valves per case is 2.5. Therefore, the total maximum cost for the 
Spiration[supreg] IBV[supreg] is expected to be $6,875 per case ($2,750 
x 2.5). Under section 412.88(a)(2), new technology add-on payments are 
limited to the lesser of 50 percent of the average cost of the device 
or 50 percent of the costs in excess of the MS-DRG payment for the 
case. As a result, the maximum add-on payment for a case involving the 
Spiration[supreg] IBV[supreg] is $3,437.50.
e. TherOx Downstream[supreg] System
    TherOx, Inc. submitted an application for new technology add-on 
payments for FY 2010 for the TherOx Downstream[supreg] System. However, 
the applicant withdrew its application for new technology add-on 
payments during the public comment period.
    We did not receive any public comments on this application.
5. Technical Correction to the Regulations
    In the FY 2009 IPPS final rule, when we revised the regulations at 
Sec.  412.87 to incorporate changes relating to the announcement of 
determinations and deadline for consideration of new medical service or 
technology applications, we made a change to paragraph (b)(1) (73 FR 
48755). In paragraph (b)(1), we inadvertently used the incorrect word 
``relating'' in the provision that read ``A new medical service or 
technology represents an advance that substantially improves, relating 
to technologies previously available, the diagnosis or treatment of 
Medicare beneficiaries'' (emphasis added). The correct word should have 
been ``relative.'' We proposed to make a technical correction to Sec.  
412.87(b)(1), replacing the word ``relating'' with the word 
``relative'' (74 FR 24137). We did not receive any public comments on 
this proposal. Accordingly, we are finalizing this proposed correction.

III. Changes to the Hospital Wage Index for Acute Care Hospitals

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the 
methodology for determining prospective payments to hospitals, the 
Secretary must adjust the standardized amounts ``for area differences 
in hospital wage levels by a factor (established by the Secretary) 
reflecting the relative hospital wage level in the geographic area of 
the hospital compared to the national average hospital wage level.'' In 
accordance with the broad discretion conferred under the Act, we 
currently define hospital labor market areas based on the definitions 
of statistical areas established by the Office of Management and Budget 
(OMB). A discussion of the FY 2010 hospital wage index based on the 
statistical areas, including OMB's revised definitions of Metropolitan 
Areas, appears under section III.C. of this preamble.
    Beginning October 1, 1993, section 1886(d)(3)(E) of the Act 
requires that we update the wage index annually. Furthermore, this 
section of the Act provides that the Secretary base the update on a 
survey of wages and wage-related costs of short-term, acute care 
hospitals. The survey must exclude the wages and wage-related costs 
incurred in furnishing skilled nursing services. This provision also 
requires us to make any updates or adjustments to the wage index in a 
manner that ensures that aggregate payments to hospitals are not 
affected by the change in the wage index. The adjustment for FY 2010 is 
discussed in section II.B. of the Addendum to this final rule.
    As discussed below in section III.I. of this preamble, we also take 
into account the geographic reclassification of hospitals in accordance 
with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating 
IPPS payment amounts. Under section 1886(d)(8)(D) of the Act, the 
Secretary is required to adjust the standardized amounts so as to 
ensure that aggregate payments under the IPPS after implementation of 
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the 
Act are equal to the aggregate prospective payments that would have 
been made absent these provisions. The budget neutrality adjustment for 
FY 2010 is discussed in section II.A.4.b. of the Addendum to this final 
rule.
    Section 1886(d)(3)(E) of the Act also provides for the collection 
of data every 3 years on the occupational mix of employees for short-
term, acute care hospitals participating in the Medicare program, in 
order to construct an occupational mix adjustment to the wage index. A 
discussion of the occupational mix adjustment that we are applying 
beginning October 1, 2009 (the FY 2010 wage index) appears under 
section III.D. of this preamble.

[[Page 43824]]

B. Requirements of Section 106 of the MIEA-TRHCA

1. Wage Index Study Required Under the MIEA-TRHCA
a. Legislative Requirement
    Section 106(b)(1) of the MIEA-TRHCA (Pub. L. 109-432) required 
MedPAC to submit to Congress, not later than June 30, 2007, a report on 
the Medicare wage index classification system applied under the 
Medicare IPPS. Section 106(b) of MIEA-TRHCA required the report to 
include any alternatives that MedPAC recommends to the method to 
compute the wage index under section 1886(d)(3)(E) of the Act.
    In addition, section 106(b)(2) of the MIEA-TRHCA instructed the 
Secretary of Health and Human Services, taking into account MedPAC's 
recommendations on the Medicare wage index classification system, to 
include in the FY 2009 IPPS proposed rule one or more proposals to 
revise the wage index adjustment applied under section 1886(d)(3)(E) of 
the Act for purposes of the IPPS. The Secretary was also to consider 
each of the following:
    <bullet> Problems associated with the definition of labor markets 
for the wage index adjustment.
    <bullet> The modification or elimination of geographic 
reclassifications and other adjustments.
    <bullet> The use of Bureau of Labor of Statistics (BLS) data or 
other data or methodologies to calculate relative wages for each 
geographic area.
    <bullet> Minimizing variations in wage index adjustments between 
and within MSAs and statewide rural areas.
    <bullet> The feasibility of applying all components of CMS' 
proposal to other settings.
    <bullet> Methods to minimize the volatility of wage index 
adjustments while maintaining the principle of budget neutrality.
    <bullet> The effect that the implementation of the proposal would 
have on health care providers on each region of the country.
    <bullet> Methods for implementing the proposal(s), including 
methods to phase in such implementations.
    <bullet> Issues relating to occupational mix such as staffing 
practices and any evidence on quality of care and patient safety 
including any recommendation for alternative calculations to the 
occupational mix.
    In the FY 2009 IPPS final rule (73 FR 48563 through 48567), we 
discussed the MedPAC's study and recommendations, the CMS contract with 
Acumen, L.L.C. for assistance with impact analysis and study of wage 
index reform, and public comments we received on the MedPAC 
recommendations and the CMS/Acumen study and analysis.
b. Interim and Final Reports on Results of Acumen's Study
(1) Interim Report on Impact Analysis of Using MedPAC's Recommended 
Wage Index
    In the FY 2009 IPPS final rule (73 FR 48566 through 48567), we 
discussed the analysis conducted by Acumen comparing use of the MedPAC 
recommended wage indices to the current CMS wage index. We refer 
readers to section III.B.1.e. of that final rule for a full discussion 
of the impact analysis as well as to Acumen's interim report available 
on the Web site: http://www.acumenllc.com/reports/cms.
(2) Acumen's Final Report on Analysis of the Wage Index Data and 
Methodology
    Acumen's final report addressing the issues in section 106(b)(2) of 
the MIEA-TRHCA is divided into two parts. The first part analyzes the 
strengths and weaknesses of the data sources used to construct the 
MedPAC and CMS indexes. The first part of Acumen's study is complete 
and was published on Acumen's Web site after the publication of the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule. The second part of Acumen's 
study, which is expected to be released on Acumen's Web site after the 
publication of this FY 2010 IPPS/RY 2010 LTCH PPS final rule, will 
focus on the methodology of wage index construction and covers issues 
related to the definition of wage areas and methods of adjusting for 
differences among neighboring wage areas, as well as reasons for 
differential impacts of shifting to a new index.
    The following is a description of the analyses for both parts of 
Acumen's final report.
Part I: Wage Data Analysis
    <bullet> Differences between the BLS data and the CMS wage data--
Acumen assessed the strengths and weaknesses of the data used to 
construct the CMS wage index and the MedPAC compensation index by 
examining the differences between the BLS and the CMS wage data. Acumen 
also evaluated the importance of accounting for self-employed workers, 
part-time workers, and industry wage differences.
    <bullet> Employee benefit (wage-related) cost--Acumen considered 
whether benefit costs need to be included in the hospital wage index 
and discussed the differences between Worksheet A benefits data 
(proposed by MedPAC to use with BLS wage data) and Worksheet S-3 
benefit data. Acumen also analyzed the possibility of using BLS' 
Employer Costs for Employee Compensation (ECEC) series as an 
alternative to Worksheet A or Worksheet S-3 benefits data that would 
pose less of a data collection burden for providers.
    <bullet> Impact of the fixed national occupational weights--Acumen 
assessed MedPAC's and CMS' methods for adjusting for occupational mix 
differences. While the proposed MedPAC compensation index uses fixed 
weights for occupations representative of the hospital industry 
nationally, the CMS wage index incorporates an occupational mix 
adjustment (OMA) from a separate data collection.
    <bullet> Year-to-year volatility in the CMS and BLS wage data--
Acumen calculated the extent of volatility in the CMS and BLS wage 
indexes using several measures of volatility. Acumen also explored 
potential causes of volatility, such as the number of hospitals and the 
annual change in the number of hospitals in a wage area. Finally, 
Acumen evaluated the impact on annual volatility of using a 2-year 
rolling average of CMS wage index values.
    In the first part of its final report, Acumen suggests that 
MedPAC's recommended methods for revising the wage index represent an 
improvement over the existing methods, and that the BLS data should be 
used so that the MedPAC approach can be implemented.
    Comment: Several commenters reiterated their concerns regarding the 
use of the BLS data for computing the Medicare wage index that they had 
expressed in public comments on the FY 2009 IPPS final rule (73 FR 
48564). The commenters stated that they still have significant concerns 
about the shortcomings of the BLS data, and they urged CMS to move 
cautiously in considering MedPAC's and Acumen's findings. Other 
commenters expressed support for MedPAC's and Acumen's findings and 
recommendations, although some commenters cautioned that a few 
refinements may still be needed before adopting these recommendations. 
MedPAC commented that they look forward to the completion of the Acumen 
study and to working with CMS on improving the hospital wage index.
    Response: As Acumen's study is incomplete at the time of 
preparation of this final rule, we are making no assessments or 
conclusions in this rule with regards to Acumen's findings in Part I of 
its final report. As we mention below, we will consider both of 
Acumen's final reports and public comments in assessing MedPAC's

[[Page 43825]]

recommendations and making future proposals for changes in the wage 
index.
Part II: Wage Index Construction
    <bullet<ls-thn-eq> Alternative wage area definitions--Acumen will 
explore the conceptual basis for defining wage areas and investigate 
alternative wage area definitions that have been considered in prior 
literature to reduce differences between areas.
    <bullet<ls-thn-eq> Differences between and within contiguous wage 
areas--Acumen will estimate different methods for smoothing wage index 
values between geographically proximate areas and examine the 
justification for and sensitivity to assumptions used by MedPAC in its 
smoothing method.
    <bullet> Reasons for differential impacts of shifting to a new 
index--Acumen will analyze the impact on hospitals if CMS were to adopt 
MedPAC's proposed compensation index, with a focus on hospitals that 
would no longer qualify for exceptions such as geographic 
reclassification and the rural floor. Acumen will also determine if 
there are identifiable reasons for the different impacts.
    As mentioned above, Acumen is expected to complete and publish its 
analysis for the second part of its final report after the publication 
date of this final rule.
    We indicated in the FY 2009 IPPS final rule that, in developing any 
proposal(s) for additional wage index reform that may be included in 
the FY 2010 IPPS proposed rule, we would consider all of the public 
comments on the MedPAC recommendations that we had received in that 
proposed rulemaking cycle, along with the interim and final reports to 
be submitted to us by Acumen. As Acumen's study was not complete at the 
time of issuance of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we 
did not propose any additional changes to the hospital wage index for 
acute care hospitals for the FY 2010 IPPS.
2. FY 2009 Policy Changes in Response to Requirements Under Section 
106(b) of the MIEA-TRHCA
    To implement the requirements of section 106(b) of the MIEA-TRHCA 
and respond to MedPAC's recommendations in its June 2007 report to 
Congress, in the FY 2009 IPPS final rule (73 FR 48567 through 48574), 
we made the following policy changes relating to the hospital wage 
index. (We refer readers to the FY 2009 IPPS final rule for a full 
discussion of the basis for the proposals, the public comments 
received, and the FY 2009 final policy.)
a. Reclassification Average Hourly Wage Comparison Criteria
    In the FY 2009 IPPS final rule, we adopted the policy to adjust the 
reclassification average hourly wage standard, comparing a 
reclassifying hospital's (or county hospital group's) average hourly 
wage relative to the average hourly wage of the area to which it seeks 
reclassification. We provided for a phase-in of the adjustment over 2 
years. For applications for reclassification for the first transitional 
year, FY 2010, the average hourly wage standards were set at 86 percent 
for urban hospitals and group reclassifications and 84 percent for 
rural hospitals. For applications for reclassification for FY 2011 (for 
which the application deadline is September 1, 2009) and for subsequent 
fiscal years, the average hourly wage standards will be 88 percent for 
urban and group reclassifications and 86 percent for rural hospitals 
(Sec. Sec.  412.230, 412.232, and 412.234 of the regulations). As 
stated above, these policies were adopted in the FY 2009 IPPS final 
rule.
    In response to our summary of the FY 2009 policy changes in the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24139), we received 
several public comments, which are summarized below.
    Comment: Several commenters opposed raising the average hourly wage 
thresholds to 88 percent for urban and group reclassifications and 86 
percent for rural hospitals for applications for FY 2011 and subsequent 
years.
    Response: As we discussed in the FY 2009 IPPS proposed and final 
rules, section 106(b) of the MIEA-TRHCA required the Secretary to make 
one or more proposals to revise the wage index adjustment for FY 2009. 
In the FY 2009 IPPS proposed rule (73 FR 48567 through 48574), we 
indicated that while we had limited authority to make changes to the 
nine specific areas of the wage index that the law required us to 
study, we did carefully review the criteria established in regulations 
for allowing a hospital to geographically reclassify. Specifically, in 
the FY 2009 IPPS final rule, we updated the geographic reclassification 
criteria based on a review of the statistical metrics that were used to 
establish the original standards in 1993. The original individual 
standards were set using a methodology that calculated a percentile 
range of one standard deviation from the mean in which a typical 
hospital's average hourly wage would be expected to fall relative to 
its combined labor market average hourly wage. In short, we found that 
the average hospital average hourly wage as a percentage of its area's 
wage had increased from approximately 96 percent in FY 1993 to 98 
percent in the most recent 3 fiscal years. Further, the standard 
deviation had been reduced from approximately 12 percent to 10 percent 
over the same time period. The original criteria were set equal to the 
average less the standard deviation (96 percent less 12 percentage 
points). The revised reclassification criteria based on these same 
statistical metrics led us to change the standard to 88 percent (98 
percent less 10 percentage points). By refining our standards, we found 
that the number of hospitals that are able to reclassify despite not 
demonstrating average hourly wage levels that truly justify a higher 
wage index will be reduced.
    We considered public comments received in response to the FY 2009 
IPPS proposed rule before making this change final in the FY 2009 IPPS 
final rule (73 FR 48567 through 48574). The change in policy did not 
affect any 3-year geographic reclassifications that went into effect 
beginning in FY 2009. Further, in response to public comments on the FY 
2009 IPPS proposed rule, we decided to adopt the revised 
reclassification criteria over a 2-year transitional period. Hospitals 
will be subject to the 88 percent criteria for urban and group 
reclassifications (86 percent for rural areas) for 3-year geographic 
reclassifications beginning for FY 2011 applications due to the MGCRB 
no later than 5 p.m. (EST) on September 1, 2009.
    Finally, in the FY 2009 IPPS final rule and in section III.B.1.b. 
of the preamble of this final rule, we discuss our contract with Acumen 
to assist us in studying the wage index and the MedPAC recommendations, 
and also to assist us in developing other proposals for reforming the 
wage index. At this time, the study is still in progress and Acumen 
intends to issue its final report this year. We will consider possible 
additional changes to the wage index through the formal rulemaking 
process after our review of Acumen's final report and recommendations.
b. Within-State Budget Neutrality Adjustment for the Rural and Imputed 
Floors
    In the FY 2009 IPPS final rule, we adopted State level budget 
neutrality (rather than the national budget neutrality adjustment) for 
the rural and imputed floors, to be effective beginning with the FY 
2009 wage index. The transition from the national budget neutrality 
adjustment to the State level budget neutrality adjustment is being

[[Page 43826]]

phased in over a 3-year period. In FY 2009, hospitals received a 
blended wage index that was 20 percent of a wage index with the State 
level rural and imputed floor budget neutrality adjustment and 80 
percent of a wage index with the national budget neutrality adjustment. 
In FY 2010, the blended wage index reflects 50 percent of the State 
level adjustment and 50 percent of the national adjustment. In FY 2011, 
the adjustment will be completely transitioned to the State level 
methodology.
    In the FY 2009 IPPS final rule, we incorporated this policy in our 
regulation at Sec.  412.64(e)(4). Specifically, we provided that CMS 
makes an adjustment to the wage index to ensure that aggregate payments 
after implementation of the rural floor under section 4410 of the 
Balanced Budget Act of 1997 (Pub. L. 105-33) and the imputed rural 
floor under Sec.  412.64(h)(4) are made in a manner that ensures that 
aggregate payments to hospitals are not affected and that, beginning 
October 1, 2008, CMS would transition from a nationwide adjustment to a 
statewide adjustment, with a statewide adjustment fully in place by 
October 1, 2010. We note that the imputed floor expires on September 
30, 2011 (as discussed in section III.H. of this preamble).
    Comment: Several commenters requested that CMS repeal its decision 
to apply a State level budget neutrality adjustment for the rural and 
imputed floors. The commenters cited the disparity between the severe 
negative economic consequences of the policy for States with hospitals 
receiving a floor payment, compared to the relatively minor benefits 
received by nonfloor States. Multiple commenters pointed out that, 
because numerous other aspects of the Medicare wage index either cross 
State lines (CBSAs), or are modeled on national budget neutrality 
(geographic reclassification and outlier payments), they were concerned 
that a State-specific adjustment establishes a poor precedent and 
violates the intent of the legislation that established the rural 
floor.
    Response: We disagree that a State level budget neutrality 
adjustment establishes a poor precedent. Unlike geographic 
reclassification or outlier payment budget neutrality adjustments, the 
construction of the rural and imputed floors requires that wage index 
comparisons be made between labor market areas within a specific State. 
Analysis in the FY 2009 IPPS final rule demonstrated how, at a State-
by-State level, the rural and imputed floors create a benefit for a 
minority of States that is then funded by a majority of States, 
including States that are overwhelmingly rural in character. In the FY 
2009 IPPS final rule, we also explained that because the imputed and 
rural floor comparisons occur at the State level, we believed it would 
be sound policy to make the budget neutrality adjustment specific to 
the State, redistributing payments among hospitals within the State, 
rather than adjusting payments to hospitals in other States. In the FY 
2009 IPPS final rule, we adopted a 3-year phase-in to address the 
concerns that such a transition in policy may lead to sudden decreases 
in payments for certain providers. FY 2010 will mark the second year of 
this transition, with a 50-percent national, 50-percent within-State 
budget neutrality adjustment. We believe that this transition period 
will continue to mitigate any negative impacts on affected hospitals 
while we proceed towards the planned adoption of 100-percent within-
State budget neutrality in FY 2011.
    In addition, we do not believe the legislative history demonstrates 
an intent for a particular type of budget neutrality adjustment. The 
Conference Report for the rural floor states: ``The Secretary would be 
required to make any adjustments in the wage index in a budget neutral 
manner.'' (H.R. Conf. Rep. No. 105-217, 105th Cong., 1st Sess. at 712) 
However, the report does not reference a national budget neutrality 
adjustment, as compared to a statewide budget neutrality adjustment. 
Both the legislative history and the plain language of the rural floor 
provision anticipate that the Secretary would have administrative 
discretion regarding the ``manner'' of the budget neutrality 
adjustment. Section 4410(b) of the BBA of 1997 (Pub. L. 105-33) 
requires that the Secretary adjust wage indices ``in a manner which 
assures that the aggregate payments made under section 1886(d) of the 
Social Security Act * * * in a fiscal year for the operating costs of 
inpatient hospital services are not greater or less than those which 
would be made in the year if this section did not apply.'' Thus, 
Congress provided discretion to the Secretary to determine the manner 
of ensuring that the rural floor did not increase costs above what they 
would have been in the absence of the rural floor, and the Secretary 
has exercised such discretion through the adoption of a statewide 
adjustment.
    Comment: A number of commenters in an all-urban State urged CMS to 
make the imputed floor a permanent provision. The commenters explained 
that their State is geographically disadvantaged because it is bordered 
by two of the five largest cities in the United States, and the 
hospitals in the State have to compete with those larger cities for 
labor resources and patients. The commenters noted that, when CMS 
adopted the imputed floor policy in the FY 2005 IPPS final rule (69 FR 
49109), CMS acknowledged a concern by some individuals that hospitals 
in all-urban States are financially and competitively disadvantaged in 
the absence of an imputed floor wage index. The commenters stated that 
CMS has provided no rationale for discontinuing the imputed floor after 
FY 2011 and has provided no documentation to support that the 
``anomalous'' situation, as it was described by CMS in the FY 2005 IPPS 
final rule, has changed for all-urban States.
    Response: We appreciate the commenter's concern about the imputed 
floor. However, we made no proposals regarding the imputed floor in the 
FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. Therefore, we are making 
no decisions in this final rule regarding any future extension of the 
imputed floor. We will address the imputed floor policy in the FY 2011 
IPPS proposed rule, which will allow for opportunity for public 
comment.
    Comment: One commenter requested clarification as to the 
discrepancy between rural and imputed floor budget neutrality factors 
referenced in the proposed rule (1.00016 referenced at 74 FR 24243 (the 
Addendum to the proposed rule) and 1.000017 referenced at 74 FR 24663 
(Appendix A to the proposed rule)).
    Response: We have included an updated budget neutrality factor in 
section I.A.4.c. of the Addendum to this final rule, along with an 
explanation in section VI.I of Appendix A to this final rule of why the 
adjustment amounts varied in the proposed rule.
    Comment: One commenter requested CMS to explain how the rural floor 
budget neutrality adjustment is performed so that it can be certified 
and compared to prior years. The commenter also expressed concerns 
about how State level budget neutrality may complicate a hospital's 
geographic reclassification application process, may result in rural 
hospitals with high wage indices being significantly disadvantaged, and 
may cause deviations in payments between hospital reclassifications 
into a labor market from an adjoining State.
    Response: We provided ample details of the iterative rural floor 
budget neutrality calculation process in the FY 2008 IPPS final rule 
with comment period (72 FR 47325 through 4733). In the FY 2009 IPPS 
final rule (73 FR 48574), we further explained how the

[[Page 43827]]

same calculation process will be used to phase in a State level budget 
neutrality adjustment.
    In response to the commenter's other concerns, the specific 
scenarios presented may occur regardless of how rural and imputed floor 
budget neutrality is achieved. The application of the rural floor 
itself, despite a national or a State level budget neutrality 
adjustment, may result in situations where hospitals classified or 
reclassified to the same labor market area may receive differing wage 
indices. Hospitals always must evaluate multiple scenarios when 
determining whether to apply for a reclassification or withdraw a 
geographic reclassification request. We provide the best information 
available in the IPPS proposed rule to facilitate these decisions and 
allow hospitals a 45-day period following publication of the proposed 
rule to evaluate their options.

C. Core-Based Statistical Areas for the Hospital Wage Index

    The wage index is calculated and assigned to hospitals on the basis 
of the labor market area in which the hospital is located. In 
accordance with the broad discretion under section 1886(d)(3)(E) of the 
Act, beginning with FY 2005, we define hospital labor market areas 
based on the Core-Based Statistical Areas (CBSAs) established by OMB 
and announced in December 2003 (69 FR 49027). For a discussion of OMB's 
revised definitions of CBSAs and our implementation of the CBSA 
definitions, we refer readers to the preamble of the FY 2005 IPPS final 
rule (69 FR 49026 through 49032).
    As with the FY 2009 final rule, in the FY 2010 IPPS/RY 2010 LTCH 
PPS proposed rule (74 FR 24139), we proposed to provide that hospitals 
receive 100 percent of their wage index based upon the CBSA 
configurations. Specifically, for each hospital, we proposed to 
determine a wage index for FY 2010 employing wage index data from 
hospital cost reports for cost reporting periods beginning during FY 
2006 and using the CBSA labor market definitions. We consider CBSAs 
that are MSAs to be urban, and CBSAs that are Micropolitan Statistical 
Areas as well as areas outside of CBSAs to be rural. In addition, it 
has been our longstanding policy that where an MSA has been divided 
into Metropolitan Divisions, we consider the Metropolitan Division to 
comprise the labor market areas for purposes of calculating the wage 
index (69 FR 49029) (regulations at Sec.  412.64(b)(1)(ii)(A)).
    On November 20, 2008, OMB announced three Micropolitan Statistical 
Areas that now qualify as MSAs (OMB Bulletin No. 09-01). The new urban 
CBSAs are as follows:
    <bullet> Cape Girardeau-Jackson, Missouri-Illinois (CBSA 16020). 
This CBSA is comprised of the principal cities of Cape Girardeau and 
Jackson, Missouri in Alexander County, Illinois; Bollinger County, 
Missouri, and Cape Girardeau County, Missouri.
    <bullet> Manhattan, Kansas (CBSA 31740). This CBSA is comprised of 
the principal city of Manhattan, Kansas in Geary County, Pottawatomie 
County, and Riley County.
    <bullet> Mankato-North Mankato, Minnesota (CBSA 31860). This CBSA 
is comprised of the principal cities of Mankato and North Mankato, 
Minnesota in Blue Earth County and Nicollet County.
    OMB also changed the principal cities and titles of a number of 
CBSAs and a Metropolitan Division, as follows:
    <bullet> Broomfield, Colorado qualifies as a new principal city of 
the Denver-Aurora, Colorado CBSA. The new title is Denver-Aurora-
Broomfield, Colorado CBSA.
    <bullet> Chapel Hill, North Carolina qualifies as a new principal 
city of the Durham, North Carolina CBSA. The new title is Durham-Chapel 
Hill, North Carolina CBSA.
    <bullet> Chowchilla, California qualifies as a new principal city 
of the Madera, California CBSA. The new title is Madera-Chowchilla, 
California CBSA.
    <bullet> Panama City Beach, Florida qualifies as a new principal 
city of the Panama City-Lynn Haven, Florida CBSA. The new title is 
Panama City-Lynn Haven-Panama City Beach, Florida CBSA.
    <bullet> East Wenatchee, Washington qualifies as a new principal 
city of the Wenatchee, Washington CBSA. The new title is Wenatchee-East 
Wenatchee, Washington CBSA.
    <bullet> Rockville, Maryland replaces Gaithersburg, Maryland as the 
third most populous city of the Bethesda-Frederick-Gaithersburg, 
Maryland Metropolitan Division. The new title is Bethesda-Frederick-
Rockville, Maryland Metropolitan Division.
    The OMB bulletin is available on the OMB Web site at http://www.whitehouse.gov/OMB--go to ``Bulletins'' or ``Statistical Programs 
and Standards.'' CMS will apply these changes to the IPPS beginning 
October 1, 2009.
    We note that several public commenters who responded to the 
proposed rule expressed their concerns that CAHs in the new MSAs will 
lose their CAH status and be forced to convert to IPPS hospitals 
because the areas will be designated as urban instead of rural. The 
commenters recalled that the same situation occurred in FY 2005 when 
CMS adopted OMB's CBSA definitions. At that time, CMS allowed CAHs 
located in rural counties that became urban to maintain their CAH 
status for 2 years (69 FR 49221). If these CAHs were unable in 2 years 
to obtain rural status under Sec.  412.103, they were required to 
convert to IPPS status. A more detailed discussion of the public 
comments and our response is included in section VII.C. of the preamble 
of this final rule.

D. Occupational Mix Adjustment to the FY 2010 Wage Index

    As stated earlier, section 1886(d)(3)(E) of the Act provides for 
the collection of data every 3 years on the occupational mix of 
employees for each short-term, acute care hospital participating in the 
Medicare program, in order to construct an occupational mix adjustment 
to the wage index, for application beginning October 1, 2004 (the FY 
2005 wage index). The purpose of the occupational mix adjustment is to 
control for the effect of hospitals' employment choices on the wage 
index. For example, hospitals may choose to employ different 
combinations of registered nurses, licensed practical nurses, nursing 
aides, and medical assistants for the purpose of providing nursing care 
to their patients. The varying labor costs associated with these 
choices reflect hospital management decisions rather than geographic 
differences in the costs of labor.
1. Development of Data for the FY 2010 Occupational Mix Adjustment 
Based on the 2007-2008 Occupational Mix Survey
    As provided for under section 1886(d)(3)(E) of the Act, we collect 
data every 3 years on the occupational mix of employees for each short-
term, acute care hospital participating in the Medicare program. For 
the FY 2009 hospital wage index, we used data from the 2006 Medicare 
Wage Index Occupational Mix Survey (the 2006 survey) to calculate the 
occupational mix adjustment. In the 2006 survey, we included several 
modifications to the original occupational mix survey, the 2003 survey, 
including (1) allowing hospitals to report their own average hourly 
wage rather than using BLS data; (2) extending the prospective survey 
period; and (3) reducing the number of occupational categories but 
refining the subcategories for registered nurses.
    The 2006 survey provided for the collection of hospital-specific 
wages and hours data, a 6-month prospective

[[Page 43828]]

reporting period (that is, January 1, 2006, through June 30, 2006), the 
transfer of each general service category that comprised less than 4 
percent of total hospital employees in the 2003 survey to the ``all 
other occupations'' category (the revised survey focused only on the 
mix of nursing occupations), additional clarification of the 
definitions for the occupational categories, an expansion of the 
registered nurse category to include functional subcategories, and the 
exclusion of average hourly rate data associated with advance practice 
nurses. The 2006 survey included only two general occupational 
categories: Nursing and ``all other occupations.'' The nursing category 
had four subcategories: Registered nurses, licensed practical nurses, 
aides, orderlies, attendants, and medical assistants. The registered 
nurse subcategory included two functional subcategories: Management 
personnel and staff nurses or clinicians. As indicated above, the 2006 
survey provided for a 6-month data collection period, from January 1, 
2006 through June 30, 2006. To allow flexibility for the reporting 
period beginning and ending dates to accommodate some hospitals' 
biweekly payroll and reporting systems, we modified the 6-month data 
collection period for the 2006 survey from January 1, 2006, through 
June 30, 2006, to a 6-month reporting period that began on or after 
December 25, 2005, and ended before July 9, 2006. OMB approved the 
revised 2006 occupational mix survey (Form CMS-10079 (2006)) on April 
25, 2006. The original timelines for the collection, review, and 
correction of the 2006 occupational mix data were discussed in detail 
in the FY 2007 IPPS final rule (71 FR 48008).
    As we proposed, for the FY 2010 hospital wage index, we used 
occupational mix data collected on a revised 2007-2008 Medicare Wage 
Index Occupational Mix Survey (the 2007-2008 survey) to compute the 
occupational mix adjustment for FY 2010. In the FY 2008 IPPS final rule 
with comment period (72 FR 47315), we discussed how we modified the 
2006 occupational mix survey. The revised 2007-2008 occupational mix 
survey provided for the collection of hospital-specific wages and hours 
data for the 1-year period of July 1, 2007, through June 30, 2008, 
additional clarifications to the survey instructions, the elimination 
of the registered nurse subcategories, some refinements to the 
definitions of the occupational categories, and the inclusion of 
additional cost centers that typically provide nursing services.
    On February 2, 2007, we published in the Federal Register a notice 
soliciting comments on the proposed revisions to the 2006 occupational 
mix survey (72 FR 5055). The comment period for the notice ended on 
April 3, 2007. After considering the comments we received, we made a 
few minor editorial changes and published the final 2007-2008 
occupational mix survey on September 14, 2007 (72 FR 52568). OMB 
approved the survey without change on February 1, 2008 (OMB Control 
Number 0938-0907). The 2007-2008 Medicare occupational mix survey (Form 
CMS-10079 (2008)) is available on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage, and through 
the fiscal intermediaries/MACs. Hospitals were required to submit their 
completed surveys to their fiscal intermediaries/MACs by September 2, 
2008. The preliminary, unaudited 2007-2008 occupational mix survey data 
were released in early October 2008, along with the FY 2006 Worksheet 
S-3 wage data, for the FY 2010 wage index review and correction 
process.
2. Calculation of the Occupational Mix Adjustment for FY 2010
    For FY 2010 (as we did for FY 2009), we are calculating the 
occupational mix adjustment factor using the following steps:
    Step 1--For each hospital, determine the percentage of the total 
nursing category attributable to a nursing subcategory by dividing the 
nursing subcategory hours by the total nursing category's hours. Repeat 
this computation for each of the four nursing subcategories: Registered 
nurses; licensed practical nurses; nursing aides, orderlies, and 
attendants; and medical assistants.
    Step 2--Determine a national average hourly rate for each nursing 
subcategory by dividing a subcategory's total salaries for all 
hospitals in the occupational mix survey database by the subcategory's 
total hours for all hospitals in the occupational mix survey database.
    Step 3--For each hospital, determine an adjusted average hourly 
rate for each nursing subcategory by multiplying the percentage of the 
total nursing category (from Step 1) by the national average hourly 
rate for that nursing subcategory (from Step 2). Repeat this 
calculation for each of the four nursing subcategories.
    Step 4--For each hospital, determine the adjusted average hourly 
rate for the total nursing category by summing the adjusted average 
hourly rate (from Step 3) for each of the nursing subcategories.
    Step 5--Determine the national average hourly rate for the total 
nursing category by dividing total nursing category salaries for all 
hospitals in the occupational mix survey database by total nursing 
category hours for all hospitals in the occupational mix survey 
database.
    Step 6--For each hospital, compute the occupational mix adjustment 
factor for the total nursing category by dividing the national average 
hourly rate for the total nursing category (from Step 5) by the 
hospital's adjusted average hourly rate for the total nursing category 
(from Step 4).
    If the hospital's adjusted average hourly rate is less than the 
national average hourly rate (indicating the hospital employs a less 
costly mix of nursing employees), the occupational mix adjustment 
factor is greater than 1.0000. If the hospital's adjusted average 
hourly rate is greater than the national average hourly rate, the 
occupational mix adjustment factor is less than 1.0000.
    Step 7--For each hospital, calculate the occupational mix adjusted 
salaries and wage-related costs for the total nursing category by 
multiplying the hospital's total salaries and wage-related costs (from 
Step 5 of the unadjusted wage index calculation in section III.G. of 
this preamble) by the percentage of the hospital's total workers 
attributable to the total nursing category (using the occupational mix 
survey data, this percentage is determined by dividing the hospital's 
total nursing category salaries by the hospital's total salaries for 
``nursing and all other'') and by the total nursing category's 
occupational mix adjustment factor (from Step 6 above).
    The remaining portion of the hospital's total salaries and wage-
related costs that is attributable to all other employees of the 
hospital is not adjusted by the occupational mix. A hospital's all 
other portion is determined by subtracting the hospital's nursing 
category percentage from 100 percent.
    Step 8--For each hospital, calculate the total occupational mix 
adjusted salaries and wage-related costs for a hospital by summing the 
occupational mix adjusted salaries and wage-related costs for the total 
nursing category (from Step 7) and the portion of the hospital's 
salaries and wage-related costs for all other employees (from Step 7).
    To compute a hospital's occupational mix adjusted average hourly 
wage, divide the hospital's total occupational mix adjusted salaries 
and wage-related costs by the hospital's total hours (from Step 4 of 
the unadjusted wage index calculation in section III.G. of this 
preamble).

[[Page 43829]]

    Step 9--To compute the occupational mix adjusted average hourly 
wage for an urban or rural area, sum the total occupational mix 
adjusted salaries and wage-related costs for all hospitals in the area, 
then sum the total hours for all hospitals in the area. Next, divide 
the area's occupational mix adjusted salaries and wage-related costs by 
the area's hours.
    Step 10--To compute the national occupational mix adjusted average 
hourly wage, sum the total occupational mix adjusted salaries and wage-
related costs for all hospitals in the Nation, then sum the total hours 
for all hospitals in the Nation. Next, divide the national occupational 
mix adjusted salaries and wage-related costs by the national hours. The 
FY 2010 occupational mix adjusted national average hourly wage is 
$33.5268.
    Step 11--To compute the occupational mix adjusted wage index, 
divide each area's occupational mix adjusted average hourly wage (Step 
9) by the national occupational mix adjusted average hourly wage (Step 
10).
    Step 12--To compute the Puerto Rico specific occupational mix 
adjusted wage index, follow Steps 1 through 11 above. The FY 2010 
occupational mix adjusted Puerto Rico-specific average hourly wage is 
$14.2555.
    The table below is an illustrative example of the occupational mix 
adjustment.
BILLING CODE 4120-01-P

[[Page 43830]]

[GRAPHIC] [TIFF OMITTED] TR27AU09.007


[[Page 43831]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.008

BILLING CODE 4120-01-C

[[Page 43832]]

    Because the occupational mix adjustment is required by statute, all 
hospitals that are subject to payments under the IPPS, or any hospital 
that would be subject to the IPPS if not granted a waiver, must 
complete the occupational mix survey, unless the hospital has no 
associated cost report wage data that are included in the proposed FY 
2010 wage index. For the FY 2007-2008 survey, the response rate was 89 
percent.
    In computing the FY 2010 wage index, if a hospital did not respond 
to the occupational mix survey, or if we determined that a hospital's 
submitted data were too erroneous to include in the wage index, we 
assigned the hospital the average occupational mix adjustment for the 
labor market area. We believed this method had the least impact on the 
wage index for other hospitals in the area. For areas where no hospital 
submitted data for purposes of calculating the proposed occupational 
mix adjustment, we applied the national occupational mix factor of 
1.0000 in calculating the area's FY 2010 occupational mix adjusted wage 
index. (We indicated in the FY 2008 and FY 2009 IPPS final rules that 
we reserve the right to apply a different approach in future years, 
including potentially penalizing nonresponsive hospitals (72 FR 
47314).) In addition, if a hospital submitted a survey, but that survey 
data cannot be used because we determine it to be aberrant, we also 
assigned the hospital the average occupational mix adjustment for its 
labor market area. For example, if a hospital's individual nurse 
category average hourly wages were out of range (that is, unusually 
high or low), and the hospital did not provide sufficient documentation 
to explain the aberrancy, or the hospital did not submit any registered 
nurse salaries or hours data, we assigned the hospital the average 
occupational mix adjustment for the labor market area in which it is 
located.
    In calculating the average occupational mix adjustment factor for a 
labor market area, we replicated Steps 1 through 6 of the calculation 
for the occupational mix adjustment. However, instead of performing 
these steps at the hospital level, we aggregated the data at the labor 
market area level. In following these steps, for example, for CBSAs 
that contain providers that did not submit occupational mix survey 
data, the occupational mix adjustment factor ranged from a low of 
0.9252 (CBSA 17780, College Station-Bryan, TX), to a high of 1.0933 
(CBSA 29700, Laredo, TX). Also, in computing a hospital's occupational 
mix adjusted salaries and wage-related costs for nursing employees 
(Step 7 of the calculation), in the absence of occupational mix survey 
data, we multiplied the hospital's total salaries and wage-related 
costs by the percentage of the area's total workers attributable to the 
area's total nursing category. For FY 2010, there are 7 CBSAs (that 
include 15 hospitals) for which we did not have occupational mix data 
for any of its hospitals. The CBSAs are:

<bullet> CBSA 21940--Fajardo, PR (one hospital)
<bullet> CBSA 22140--Farmington, NM (one hospital)
<bullet> CBSA 25020--Guayama, PR (three hospitals)
<bullet> CBSA 36140--Ocean City, NJ (one hospital)
<bullet> CBSA 38660--Ponce, PR (six hospitals)
<bullet> CBSA 41900--San German-Cabo Rojo, PR (two hospitals)
<bullet> CBSA 49500--Yauco, PR (one hospital)

    Since the FY 2007 IPPS final rule, we have periodically discussed 
applying a hospital-specific penalty to hospitals that fail to submit 
occupational mix survey data. (71 FR 48013 through 48014; 72 FR 47314 
through 47315; and 73 FR 48580). During the FY 2008 rulemaking cycle, 
some commenters suggested a penalty equal to a 1- to 2-percent 
reduction in the hospital's wage index value or a set percentage of the 
standardized amount. During the FY 2009 rulemaking cycle, several 
commenters reiterated their view that full participation in the 
occupational mix survey is critical, and that CMS should develop a 
methodology that encourages hospitals to report occupational mix survey 
data but does not unfairly penalize neighboring hospitals. However, to 
date, we have not adopted a penalty for hospitals that fail to submit 
occupational mix data.
    After review of the data for the proposed FY 2010 wage index, we 
became concerned about the increasing number of hospitals that fail to 
submit occupational mix data and the impact it may have on area wage 
indices. The survey response rate has dropped significantly from 93.8 
percent for the 2003 survey to 90.7 percent for the 2006 survey and 
90.3 percent for the 2007-2008 survey. In 40 CBSAs, the response rate 
was under 70 percent. In addition, for 50 areas, including New York-
White Plains-Wayne, New York-New Jersey (35644), Oklahoma City, 
Oklahoma (36420), Rural Georgia (11), Rural Oklahoma (37), Dallas-
Plano-Irving, TX (19124), Newark-Union, NJ-PA (35084), and Fort Worth-
Arlington, TX (23104), the area response rate decreased 15 percent or 
more between the 2006 survey and the 2007-2008 survey. In all of Puerto 
Rico, only 21.6 percent of hospitals submitted 2007-2008 survey data. 
If we had proposed to apply a penalty for nonresponsive hospitals for 
the FY 2010 wage index, Puerto Rico hospitals would have been 
significantly adversely affected in both the proposed national and 
Puerto Rico-specific wage indices. We indicated in the FY 2010 IPPS/RY 
2010 LTCH PPS proposed rule that, while we were not proposing a penalty 
at that time, we would consider the public comments we previously 
received, as well as any public comments on the proposed rule, as we 
develop the proposed FY 2011 wage index. One approach that we will 
explore is to assign any nonresponsive hospital the occupational mix 
factor deriving from the survey that would result in the greatest 
negative adjustment to the hospital's wage index. We also will consider 
applying the same penalty to hospitals that submit unusable 
occupational mix data. Although we would apply this penalty factor in 
establishing the hospital's payment rate, we would not use this factor 
in computing the area's wage index. Rather, in computing the area wage 
index, we would apply the same methodology as described above (that is, 
assign the nonresponsive hospital the average occupational mix 
adjustment factor for the labor market area) so that other hospitals in 
the area are minimally impacted by the hospital's failure to submit 
occupational mix data. Again, we note that we reserve the right to 
penalize nonresponsive hospitals in the future. In the FY 2010 IPPS/RY 
2010 LTCH PPS proposed rule, we welcomed public comments on this matter 
and indicated that we would address this issue in next year's IPPS 
proposed rule.
    Comment: Several commenters indicated that they share CMS' concerns 
about the increasing number of hospitals that fail to submit 
occupational mix data. The commenters contended that accuracy and 
fairness in the occupational mix adjustment will only be achieved 
through 100 percent hospital participation and agreed that CMS should 
consider a penalty for hospitals that do not participate. The 
commenters suggested that CMS should not simply substitute unfavorable 
occupational mix data for noncompliant hospitals because it could 
unfairly penalize other neighboring hospitals that are diligent in 
reporting their data. Some commenters recommended that CMS apply a 
percentage adjustment to the standardized rate or to the wage index 
that would reduce Medicare

[[Page 43833]]

payment to nonparticipating hospitals, similar to the slight payment 
differential for hospitals failing to provide quality data. One 
commenter added that the penalty should be applied in a budget neutral 
manner. Another commenter suggested that the penalty should be applied 
to inpatient and outpatient payments. The commenters also recommended 
an appeal process that would allow hospitals to rectify the situation 
when the Medicare contractor or CMS determines that a hospital's data 
were not submitted, not acceptable, or unusable.
    Response: We appreciate all of the comments and suggestions we 
received regarding a penalty for hospitals that do not participate in 
the occupational mix survey. We will consider these comments and other 
methods in developing a proposal for the FY 2011 IPPS proposed rule.
    Comment: Several commenters gave suggestions for improving the next 
update of the occupational mix survey. (The 2007-2008 survey will 
expire with the FY 2012 wage index.) Suggestions included the 
following:
    <bullet> Use calendar year 2010 instead of the 12 months ending 
June 30, 2011.
    <bullet> Add unit secretaries because their duties are similar to 
the administrative functions of nurses and medical assistants.
    <bullet> Add an ``all other nursing'' category to capture all 
employees in the specified cost centers who are not in the specific 
categories (for example, emergency medical technicians and instrument 
technicians). This will help CMS and others to quantify the percent of 
nursing cost center employees that are not covered under the survey 
categories.
    <bullet> Revise the Medicare cost report to include the 
occupational mix survey data.
    Response: Although we made no proposals in the FY 2010 proposed 
rule regarding the next update of the occupational mix survey, we 
appreciate receiving these comments and will consider them as we plan 
and develop the new survey. As with prior updates to the occupational 
mix survey, we will publish a notice of proposed data collection with a 
comment period, through the Paperwork Reduction Act process, in a 
future Federal Register.

E. Worksheet S-3 Wage Data for the FY 2010 Wage Index

    The FY 2010 wage index values are based on the data collected from 
the Medicare cost reports submitted by hospitals for cost reporting 
periods beginning in FY 2006 (the FY 2009 wage index was based on FY 
2005 wage data).
1. Included Categories of Costs
    The FY 2010 wage index includes the following categories of data 
associated with costs paid under the IPPS (as well as outpatient 
costs):
    <bullet> Salaries and hours from short-term, acute care hospitals 
(including paid lunch hours and hours associated with military leave 
and jury duty).
    <bullet> Home office costs and hours.
    <bullet> Certain contract labor costs and hours (which include 
direct patient care, certain top management, pharmacy, laboratory, and 
nonteaching physician Part A services, and certain contract indirect 
patient care services (as discussed in the FY 2008 final rule with 
comment period (72 FR 47315)).
    <bullet> Wage-related costs, including pensions and other deferred 
compensation costs. We note that, on March 28, 2008, CMS published a 
technical clarification to the cost reporting instructions for pension 
and deferred compensation costs (sections 2140 through 2142.7 of the 
Provider Reimbursement Manual, Part I). These instructions are used for 
developing pension and deferred compensation costs for purposes of the 
wage index, as discussed in the instructions for Worksheet S-3, Part 
II, Lines 13 through 20 and in the FY 2006 IPPS final rule (70 FR 
47369).
    Comment: Several commenters addressed our policy for determining 
pension costs for the wage index. The commenters acknowledged that they 
have raised many of their arguments, such as arguments regarding 
retroactivity, before the Provider Reimbursement Review Board (PRRB).
    Response: First, we did not propose to make any changes to, nor 
request public comments on, reporting pension costs for the wage index. 
Therefore, we consider the public comments received on this issue 
outside of the scope of this rulemaking. Further, we already discussed 
our policies for reporting pension costs in the FY 2006 IPPS final rule 
(70 FR 47369). We note that the policy for reporting pension costs for 
the wage index currently can be found in section 3605.2 of the Provider 
Reimbursement Manual (PRM), Part II, and section 2142 of PRM, Part I. 
We expect that purely legal arguments, such as arguments on 
retroactivity, will be addressed through the adjudication process.
2. Excluded Categories of Costs
    Consistent with the wage index methodology for FY 2009, the wage 
index for FY 2010 also excludes the direct and overhead salaries and 
hours for services not subject to IPPS payment, such as SNF services, 
home health services, costs related to GME (teaching physicians and 
residents) and certified registered nurse anesthetists (CRNAs), and 
other subprovider components that are not paid under the IPPS. The FY 
2010 wage index also excludes the salaries, hours, and wage-related 
costs of hospital-based rural health clinics (RHCs), and Federally 
qualified health centers (FQHCs) because Medicare pays for these costs 
outside of the IPPS (68 FR 45395). In addition, salaries, hours, and 
wage-related costs of CAHs are excluded from the wage index, for the 
reasons explained in the FY 2004 IPPS final rule (68 FR 45397).
3. Use of Wage Index Data by Providers Other Than Acute Care Hospitals 
Under the IPPS
    Data collected for the IPPS wage index are also currently used to 
calculate wage indices applicable to other providers, such as SNFs, 
home health agencies (HHAs), and hospices. In addition, they are used 
for prospective payments to IRFs, IPFs, and LTCHs, and for hospital 
outpatient services. We note that, in the IPPS rules, we do not address 
comments pertaining to the wage indices for non-IPPS providers, other 
than for LTCHs. (Beginning with this final rule, for the RY 2010, we 
are including in the same document updates to the LTCH PPS.) Such 
comments should be made in response to separate proposed rules for 
those providers.

F. Verification of Worksheet S-3 Wage Data

    The wage data for the FY 2010 wage index were obtained from 
Worksheet S-3, Parts II and III of the FY 2006 Medicare cost reports. 
Instructions for completing Worksheet S-3, Parts II and III are in the 
Provider Reimbursement Manual (PRM), Part II, sections 3605.2 and 
3605.3. The data file used to construct the wage index includes FY 2006 
data submitted to us as of March 2, 2009. As in past years, we 
performed an intensive review of the wage data, mostly through the use 
of edits designed to identify aberrant data.
    We asked our fiscal intermediaries/MACs to revise or verify data 
elements that resulted in specific edit failures. For the proposed FY 
2010 wage index, we identified and excluded 34 providers with data that 
were too aberrant to include in the proposed wage index, although we 
stated that if data elements for some of these providers were 
corrected, we intended to include some of these providers in the FY 
2010 final wage index. We instructed fiscal intermediaries/MACs to 
complete their

[[Page 43834]]

data verification of questionable data elements and to transmit any 
changes to the wage data no later than April 15, 2009. The data for 2 
of the hospitals identified in the proposed rule were resolved; 
however, the data for 8 additional hospitals were identified as too 
aberrant to include in the final wage index. Therefore, we determined 
that the data for 40 hospitals (that is, 34 - 2 + 8 = 40) should not be 
included in the FY 2010 final wage index.
    In constructing the FY 2010 wage index, we included the wage data 
for facilities that were IPPS hospitals in FY 2006, inclusive of those 
facilities that have since terminated their participation in the 
program as hospitals, as long as those data did not fail any of our 
edits for reasonableness. We believe that including the wage data for 
these hospitals is, in general, appropriate to reflect the economic 
conditions in the various labor market areas during the relevant past 
period and to ensure that the current wage index represents the labor 
market area's current wages as compared to the national average of 
wages. However, we excluded the wage data for CAHs as discussed in the 
FY 2004 IPPS final rule (68 FR 45397). For this final rule, we removed 
17 hospitals that converted to CAH status between February 18, 2008, 
the cut-off date for CAH exclusion from the FY 2009 wage index, and 
February 16, 2009, the cut-off date for CAH exclusion from the FY 2010 
wage index. After removing hospitals with aberrant data and hospitals 
that converted to CAH status, the FY 2010 wage index is calculated 
based on 3,519 hospitals.
    In the FY 2008 final rule with comment period (72 FR 47317) and the 
FY 2009 IPPS final rule (73 FR 48582), we discussed our policy for 
allocating a multicampus hospital's wages and hours data, by full-time 
equivalent (FTE) staff, among the different labor market areas where 
its campuses are located. During the FY 2010 wage index desk review 
process, we requested fiscal intermediaries/MACs to contact multicampus 
hospitals that had campuses in different labor market areas to collect 
the data for the allocation. As we proposed, the FY 2010 wage index in 
this final rule includes separate wage data for campuses of three 
multicampus hospitals.
    For FY 2010, we are again allowing hospitals to use FTE or 
discharge data for the allocation of a multicampus hospital's wage data 
among the different labor market areas where its campuses are located. 
The Medicare cost report was updated in May 2008 to provide for the 
reporting of FTE data by campus for multicampus hospitals. Because the 
data from cost reporting periods that begin in FY 2008 will not be used 
in calculating the wage index until FY 2012, a multicampus hospital 
will still have the option, through the FY 2011 wage index, to use 
either FTE or discharge data for allocating wage data among its 
campuses by providing the information from the applicable cost 
reporting period to CMS through its fiscal intermediary/MAC. Two of the 
three multicampus hospitals chose to have their wage data allocated by 
their Medicare discharge data for the FY 2010 wage index. One of the 
hospitals provided FTE staff data for the allocation. The average 
hourly wage associated with each geographical location of a multicampus 
hospital is reflected in Table 2 of the Addendum to this final rule.

G. Method for Computing the FY 2010 Unadjusted Wage Index

    The method used to compute the FY 2010 wage index without an 
occupational mix adjustment follows:
    Step 1--As noted above, we are basing the FY 2010 wage index on 
wage data reported on the FY 2006 Medicare cost reports. We gathered 
data from each of the non-Federal, short-term, acute care hospitals for 
which data were reported on the Worksheet S-3, Parts II and III of the 
Medicare cost report for the hospital's cost reporting period beginning 
on or after October 1, 2005, and before October 1, 2006. In addition, 
we included data from some hospitals that had cost reporting periods 
beginning before October 2005 and reported a cost reporting period 
covering all of FY 2005. These data are included because no other data 
from these hospitals would be available for the cost reporting period 
described above, and because particular labor market areas might be 
affected due to the omission of these hospitals. However, we generally 
describe these wage data as FY 2005 data. We note that, if a hospital 
had more than one cost reporting period beginning during FY 2006 (for 
example, a hospital had two short cost reporting periods beginning on 
or after October 1, 2005, and before October 1, 2006), we included wage 
data from only one of the cost reporting periods, the longer, in the 
wage index calculation. If there was more than one cost reporting 
period and the periods were equal in length, we included the wage data 
from the later period in the wage index calculation.
    Step 2--Salaries--The method used to compute a hospital's average 
hourly wage excludes certain costs that are not paid under the IPPS. 
(We note that, beginning with FY 2008 (72 FR 47315), we include Lines 
22.01, 26.01, and 27.01 of Worksheet S-3, Part II for overhead services 
in the wage index. However, we note that the wages and hours on these 
lines are not incorporated into Line 101, Column 1 of Worksheet A, 
which, through the electronic cost reporting software, flows directly 
to Line 1 of Worksheet S-3, Part II. Therefore, the first step in the 
wage index calculation for FY 2010 is to compute a ``revised'' Line 1, 
by adding to the Line 1 on Worksheet S-3, Part II (for wages and hours 
respectively) the amounts on Lines 22.01, 26.01, and 27.01.) In 
calculating a hospital's average salaries plus wage-related costs, we 
subtract from Line 1 (total salaries) the GME and CRNA costs reported 
on Lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3, 
5 and 5.01, home office salaries reported on Line 7, and exclude 
salaries reported on Lines 8 and 8.01 (that is, direct salaries 
attributable to SNF services, home health services, and other 
subprovider components not subject to the IPPS). We also subtract from 
Line 1 the salaries for which no hours were reported. To determine 
total salaries plus wage-related costs, we add to the net hospital 
salaries the costs of contract labor for direct patient care, certain 
top management, pharmacy, laboratory, and nonteaching physician Part A 
services (Lines 9 and 10), home office salaries and wage-related costs 
reported by the hospital on Lines 11 and 12, and nonexcluded area wage-
related costs (Lines 13, 14, and 18).
    We note that contract labor and home office salaries for which no 
corresponding hours are reported are not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are 
excluded if no corresponding salaries are reported for those employees 
on Line 4.
    Step 3--Hours--With the exception of wage-related costs, for which 
there are no associated hours, we compute total hours using the same 
methods as described for salaries in Step 2.
    Step 4--For each hospital reporting both total overhead salaries 
and total overhead hours greater than zero, we then allocate overhead 
costs to areas of the hospital excluded from the wage index 
calculation. First, we determine the ratio of excluded area hours (sum 
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours 
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 
7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts 
of overhead salaries and hours to be allocated to excluded areas by 
multiplying the above ratio by the total overhead salaries and hours 
reported on

[[Page 43835]]

Line 13 of Worksheet S-3, Part III. Next, we compute the amounts of 
overhead wage-related costs to be allocated to excluded areas using 
three steps: (1) We determine the ratio of overhead hours (Part III, 
Line 13 minus the sum of lines 22.01, 26.01, and 27.01) to revised 
hours excluding the sum of lines 22.01, 26.01, and 27.01 (Line 1 minus 
the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 8.01, 22.01, 
26.01, and 27.01). (We note that for the FY 2008 and subsequent wage 
index calculations, we are excluding the sum of lines 22.01, 26.01, and 
27.01 from the determination of the ratio of overhead hours to revised 
hours because hospitals typically do not provide fringe benefits (wage-
related costs) to contract personnel. Therefore, it is not necessary 
for the wage index calculation to exclude overhead wage-related costs 
for contract personnel. Further, if a hospital does contribute to wage-
related costs for contracted personnel, the instructions for Lines 
22.01, 26.01, and 27.01 require that associated wage-related costs be 
combined with wages on the respective contract labor lines.); (2) we 
compute overhead wage-related costs by multiplying the overhead hours 
ratio by wage-related costs reported on Part II, Lines 13, 14, and 18; 
and (3) we multiply the computed overhead wage-related costs by the 
above excluded area hours ratio. Finally, we subtract the computed 
overhead salaries, wage-related costs, and hours associated with 
excluded areas from the total salaries (plus wage-related costs) and 
hours derived in Steps 2 and 3.
    Step 5--For each hospital, we adjust the total salaries plus wage-
related costs to a common period to determine total adjusted salaries 
plus wage-related costs. To make the wage adjustment, we estimate the 
percentage change in the employment cost index (ECI) for compensation 
for each 30-day increment from October 14, 2003, through April 15, 
2005, for private industry hospital workers from the BLS' Compensation 
and Working Conditions. We use the ECI because it reflects the price 
increase associated with total compensation (salaries plus fringes) 
rather than just the increase in salaries. In addition, the ECI 
includes managers as well as other hospital workers. This methodology 
to compute the monthly update factors uses actual quarterly ECI data 
and assures that the update factors match the actual quarterly and 
annual percent changes. We also note that, since April 2006 with the 
publication of March 2006 data, the BLS' ECI uses a different 
classification system, the North American Industrial Classification 
System (NAICS), instead of the Standard Industrial Codes (SICs), which 
no longer exist. We have consistently used the ECI as the data source 
for our wages and salaries and other price proxies in the IPPS market 
basket and, as we proposed, we are not making any changes to the usage 
for FY 2010. The factors used to adjust the hospital's data were based 
on the midpoint of the cost reporting period, as indicated below.

                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
                                                             Adjustment
                    After                        Before        factor
------------------------------------------------------------------------
10/14/2005..................................    11/15/2005       1.04966
11/14/2005..................................    12/15/2005       1.04632
12/14/2005..................................    01/15/2006       1.04296
01/14/2006..................................    02/15/2006       1.03955
02/14/2006..................................    03/15/2006       1.03610
03/14/2006..................................    04/15/2006       1.03269
04/14/2006..................................    05/15/2006       1.02936
05/14/2006..................................    06/15/2006       1.02613
06/14/2006..................................    07/15/2006       1.02298
07/14/2006..................................    08/15/2006       1.01990
08/14/2006..................................    09/15/2006       1.01688
09/14/2006..................................    10/15/2006       1.01391
10/14/2006..................................    11/15/2006       1.01098
11/14/2006..................................    12/15/2006       1.00808
12/14/2006..................................    01/15/2007       1.00526
01/14/2007..................................    02/15/2007       1.00257
02/14/2007..................................    03/15/2007       1.00000
03/14/2007..................................    04/15/2007       0.99745
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 2006, and ending December 31, 2006, is June 30, 2006. An 
adjustment factor of 1.02298 would be applied to the wages of a 
hospital with such a cost reporting period. In addition, for the data 
for any cost reporting period that began in FY 2006 and covered a 
period of less than 360 days or more than 370 days, we annualize the 
data to reflect a 1-year cost report. Dividing the data by the number 
of days in the cost report and then multiplying the results by 365 
accomplishes annualization.
    Step 6--Each hospital is assigned to its appropriate urban or rural 
labor market area before any reclassifications under section 
1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the 
Act. Within each urban or rural labor market area, we add the total 
adjusted salaries plus wage-related costs obtained in Step 5 for all 
hospitals in that area to determine the total adjusted salaries plus 
wage-related costs for the labor market area.
    Step 7--We divide the total adjusted salaries plus wage-related 
costs obtained under both methods in Step 6 by the sum of the 
corresponding total hours (from Step 4) for all hospitals in each labor 
market area to determine an average hourly wage for the area.
    Step 8--We add the total adjusted salaries plus wage-related costs 
obtained in Step 5 for all hospitals in the Nation and then divide the 
sum by the national sum of total hours from Step 4 to arrive at a 
national average hourly wage. Using the data as described above, the 
national average hourly wage (unadjusted for occupational mix) is 
$33.5491.
    Step 9--For each urban or rural labor market area, we calculate the 
hospital wage index value, unadjusted for occupational mix, by dividing 
the area average hourly wage obtained in Step 7 by the national average 
hourly wage computed in Step 8.
    Step 10--Following the process set forth above, we develop a 
separate Puerto Rico-specific wage index for purposes of adjusting the 
Puerto Rico standardized amounts. (The national Puerto Rico 
standardized amount is adjusted by a wage index calculated for all 
Puerto Rico labor market areas based on the national average hourly 
wage as described above.) We add the total adjusted salaries plus wage-
related costs (as calculated in Step 5) for all hospitals in Puerto 
Rico and divide the sum by the total hours for Puerto Rico (as 
calculated in Step 4) to arrive at an overall average hourly wage 
(unadjusted for occupational mix) of $14.2462 for Puerto Rico. For each 
labor market area in Puerto Rico, we calculate the Puerto Rico-specific 
wage index value by dividing the area average hourly wage (as 
calculated in Step 7) by the overall Puerto Rico average hourly wage.
    Step 11--Section 4410 of Public Law 105-33 provides that, for 
discharges on or after October 1, 1997, the area wage index applicable 
to any hospital that is located in an urban area of a State may not be 
less than the area wage index applicable to hospitals located in rural 
areas in that State. The areas affected by this provision are 
identified in Table 4D-2 of the Addendum to this final rule.
    In the FY 2005 IPPS final rule (69 FR 49109), we adopted the 
``imputed'' floor as a temporary 3-year measure to address a concern by 
some individuals that hospitals in all-urban States were disadvantaged 
by the absence of rural hospitals to set a wage index floor in those 
States. The imputed floor was originally set to expire in FY 2007, but 
we extended it an additional year in the FY 2008 IPPS final rule with 
comment period (72 FR 47321). In the FY 2009 IPPS final rule (73 FR 
48570 through 48574 and 48584), we extended the imputed floor for an 
additional 3 years, through FY 2011.

[[Page 43836]]

H. Analysis and Implementation of the Occupational Mix Adjustment and 
the FY 2010 Occupational Mix Adjustment Wage Index

    As discussed in section III.D. of this preamble, for FY 2010, we 
apply the occupational mix adjustment to 100 percent of the FY 2010 
wage index. We calculated the occupational mix adjustment using data 
from the 2007-2008 occupational mix survey data, using the methodology 
described in section III.D.3. of this preamble.
    Using the occupational mix survey data and applying the 
occupational mix adjustment to 100 percent of the FY 2010 wage index 
results in a national average hourly wage of $33.5268 and a Puerto 
Rico-specific average hourly wage of $14.2555. After excluding data of 
hospitals that either submitted aberrant data that failed critical 
edits, or that do not have FY 2006 Worksheet S-3 cost report data for 
use in calculating the FY 2010 wage index, we calculated the FY 2010 
wage index using the occupational mix survey data from 3,178 hospitals. 
Using the Worksheet S-3 cost report data of 3,519 hospitals and 
occupational mix survey data from 3,178 hospitals represents a 90.3 
percent survey response rate. The FY 2010 national average hourly wages 
for each occupational mix nursing subcategory as calculated in Step 2 
of the occupational mix calculation are as follows:

------------------------------------------------------------------------
                                                        Average hourly
        Occupational mix nursing subcategory                 wage
------------------------------------------------------------------------
National RN.........................................       $36.071788464
National LPN and Surgical Technician................        20.882610908
National Nurse Aide, Orderly, and Attendant.........        14.619113985
National Medical Assistant..........................        16.486068445
National Nurse Category.............................        30.482374867
------------------------------------------------------------------------

    The national average hourly wage for the entire nurse category as 
computed in Step 5 of the occupational mix calculation is 
$30.482374867. Hospitals with a nurse category average hourly wage (as 
calculated in Step 4) of greater than the national nurse category 
average hourly wage receive an occupational mix adjustment factor (as 
calculated in Step 6) of less than 1.0. Hospitals with a nurse category 
average hourly wage (as calculated in Step 4) of less than the national 
nurse category average hourly wage receive an occupational mix 
adjustment factor (as calculated in Step 6) of greater than 1.0.
    Based on the July 2007 through June 2008 occupational mix survey 
data, we determined (in Step 7 of the occupational mix calculation) 
that the national percentage of hospital employees in the nurse 
category is 44.31 percent, and the national percentage of hospital 
employees in the all other occupations category is 55.69 percent. At 
the CBSA level, the percentage of hospital employees in the nurse 
category ranged from a low of 29.08 percent in one CBSA, to a high of 
70.76 percent in another CBSA.
    We compared the FY 2010 occupational mix adjusted wage indices for 
each CBSA to the unadjusted wage indices for each CBSA. As a result of 
applying the occupational mix adjustment to the wage data, the wage 
index values for 205 (52.4 percent) urban areas and 32 (68.1 percent) 
rural areas will increase. One hundred and six (27.1 percent) urban 
areas will increase by 1 percent or more, and 5 (1.3 percent) urban 
areas will increase by 5 percent or more. Nineteen (40.4 percent) rural 
areas will increase by 1 percent or more, and no rural areas will 
increase by 5 percent or more. However, the wage index values for 186 
(47.6 percent) urban areas and 14 (29.8 percent) rural areas will 
decrease. Eighty-eight (22.5 percent) urban areas will decrease by 1 
percent or more, and no urban area will decrease by 5 percent or more. 
Seven (14.9 percent) rural areas will decrease by 1 percent or more, 
and no rural areas will decrease by 5 percent or more. The largest 
positive impacts are 7.83 percent for an urban area and 2.97 percent 
for a rural area. The largest negative impacts are 3.90 percent for an 
urban area and 2.32 percent for a rural area. One rural area is 
unaffected. These results indicate that a larger percentage of rural 
areas (68.1 percent) benefit from the occupational mix adjustment than 
do urban areas (52.4 percent). While these results are more positive 
overall for rural areas than under the previous occupational mix 
adjustment that used survey data from 2006, approximately one-third 
(29.8 percent) of rural CBSAs will still experience a decrease in their 
wage indices as a result of the occupational mix adjustment.
    We also compared the FY 2010 wage data adjusted for occupational 
mix from the 2007-2008 survey to the FY 2010 wage data adjusted for 
occupational mix from the 2006 survey. This analysis illustrates the 
effect on area wage indices of using the 2007-2008 survey data compared 
to the 2006 survey data; that is, it shows whether hospitals' wage 
indices are increasing or decreasing under the current survey data as 
compared to the prior survey data. Our analysis shows that the FY 2010 
wage index values for 185 (47.3 percent) urban areas and 19 (40.4 
percent) rural areas will increase. Sixty-two (15.9 percent) urban 
areas will increase by 1 percent or more, and no urban areas will 
increase by 5 percent or more. One (2.1 percent) rural area will 
increase by 1 percent or more, and no rural areas will increase by 5 
percent or more. However, the wage index values for 202 (51.7 percent) 
urban areas and 28 (59.6 percent) rural areas will decrease using the 
2007-2008 data. Fifty-five (14.1 percent) urban areas will decrease by 
1 percent or more, and one (0.26 percent) urban area will decrease by 5 
percent or more. Three (6.4 percent) rural areas will decrease by 1 
percent or more, and no rural areas will decrease by 5 percent or more. 
The largest positive impacts using the 2007-2008 data compared to the 
2006 data are 4.32 percent for an urban area and 2.34 percent for a 
rural area. The largest negative impacts are 6.46 percent for an urban 
area and 4.40 percent for a rural area. Four urban areas and no rural 
areas will be unaffected. These results indicate that a larger 
percentage of urban areas (47.3 percent) will benefit from the 2007-
2008 occupational mix survey as compared to the 2006 survey than will 
rural areas (40.4 percent). Further, the wage indices of more CBSAs 
overall (52.5 percent) will be decreasing due to application of the 
2007-2008 occupational mix survey data as compared to the 2006 survey 
data to the wage index. However, as noted in the analysis above, a 
greater percentage of rural areas (68.1 percent) will benefit from the 
application of the occupational mix adjustment than will urban areas.
    The wage index values for FY 2010 (except those for hospitals 
receiving wage index adjustments under section 1886(d)(13) of the Act) 
included in Tables 4A, 4B, 4C, and 4F of the

[[Page 43837]]

Addendum to this final rule include the occupational mix adjustment.
    Tables 3A and 3B in the Addendum to this final rule list the 3-year 
average hourly wage for each labor market area before the redesignation 
of hospitals based on FYs 2008, 2009, and 2010 cost reporting periods. 
Table 3A lists these data for urban areas and Table 3B lists these data 
for rural areas. In addition, Table 2 in the Addendum to this final 
rule includes the adjusted average hourly wage for each hospital from 
the FY 2004 and FY 2005 cost reporting periods, as well as the FY 2006 
period used to calculate the FY 2010 wage index. The 3-year averages 
are calculated by dividing the sum of the dollars (adjusted to a common 
reporting period using the method described previously) across all 3 
years, by the sum of the hours. If a hospital is missing data for any 
of the previous years, its average hourly wage for the 3-year period is 
calculated based on the data available during that period. The average 
hourly wages in Tables 2, 3A, and 3B in the Addendum to this final rule 
include the occupational mix adjustment. The wage index values in 
Tables 4A, 4B, 4C, and 4D-1 also include the State-specific rural floor 
and imputed floor budget neutrality adjustments.

I. Revisions to the Wage Index Based on Hospital Redesignations

1. General
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. Hospitals must apply to the MGCRB to 
reclassify 13 months prior to the start of the fiscal year for which 
reclassification is sought (generally by September 1). Generally, 
hospitals must be proximate to the labor market area to which they are 
seeking reclassification and must demonstrate characteristics similar 
to hospitals located in that area. The MGCRB issues its decisions by 
the end of February for reclassifications that become effective for the 
following fiscal year (beginning October 1). The regulations applicable 
to reclassifications by the MGCRB are located in 42 CFR 412.230 through 
412.280.
    Section 1886(d)(10)(D)(v) of the Act provides that, beginning with 
FY 2001, a MGCRB decision on a hospital reclassification for purposes 
of the wage index is effective for 3 fiscal years, unless the hospital 
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of 
the Act provides that the MGCRB must use average hourly wage data from 
the 3 most recently published hospital wage surveys in evaluating a 
hospital's reclassification application for FY 2003 and any succeeding 
fiscal year.
    Section 304(b) of Public Law 106-554 provides that the Secretary 
must establish a mechanism under which a statewide entity may apply to 
have all of the geographic areas in the State treated as a single 
geographic area for purposes of computing and applying a single wage 
index, for reclassifications beginning in FY 2003. The implementing 
regulations for this provision are located at 42 CFR 412.235.
    Section 1886(d)(8)(B) of the Act requires the Secretary to treat a 
hospital located in a rural county adjacent to one or more urban areas 
as being located in the labor market area to which the greatest number 
of workers in the county commute, if the rural county would otherwise 
be considered part of an urban area under the standards for designating 
MSAs and if the commuting rates used in determining outlying counties 
were determined on the basis of the aggregate number of resident 
workers who commute to (and, if applicable under the standards, from) 
the central county or counties of all contiguous MSAs. In light of the 
CBSA definitions and the Census 2000 data that we implemented for FY 
2005 (69 FR 49027), we undertook to identify those counties meeting 
these criteria. Eligible counties are discussed and identified under 
section III.I.5. of this preamble.
2. Effects of Reclassification/Redesignation
    Section 1886(d)(8)(C) of the Act provides that the application of 
the wage index to redesignated hospitals is dependent on the 
hypothetical impact that the wage data from these hospitals would have 
on the wage index value for the area to which they have been 
redesignated. These requirements for determining the wage index values 
for redesignated hospitals are applicable both to the hospitals deemed 
urban under section 1886(d)(8)(B) of the Act and hospitals that were 
reclassified as a result of the MGCRB decisions under section 
1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) 
of the Act, the wage index values were determined by considering the 
following:
    <bullet> If including the wage data for the redesignated hospitals 
would reduce the wage index value for the area to which the hospitals 
are redesignated by 1 percentage point or less, the area wage index 
value determined exclusive of the wage data for the redesignated 
hospitals applies to the redesignated hospitals.
    <bullet> If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the area wage index 
determined inclusive of the wage data for the redesignated hospitals 
(the combined wage index value) applies to the redesignated hospitals.
    <bullet> If including the wage data for the redesignated hospitals 
increases the wage index value for the urban area to which the 
hospitals are redesignated, both the area and the redesignated 
hospitals receive the combined wage index value. Otherwise, the 
hospitals located in the urban area receive a wage index excluding the 
wage data of hospitals redesignated into the area.
    Rural areas whose wage index values would be reduced by excluding 
the wage data for hospitals that have been redesignated to another area 
continue to have their wage index values calculated as if no 
redesignation had occurred (otherwise, redesignated rural hospitals are 
excluded from the calculation of the rural wage index). The wage index 
value for a redesignated rural hospital cannot be reduced below the 
wage index value for the rural areas of the State in which the hospital 
is located.
    CMS also has adopted the following policies:
    <bullet> The wage data for a reclassified urban hospital is 
included in both the wage index calculation of the urban area to which 
the hospital is reclassified (subject to the rules described above) and 
the wage index calculation of the urban area where the hospital is 
physically located.
    <bullet> In cases where hospitals have reclassified to rural areas, 
such as urban hospitals reclassifying to rural areas under 42 CFR 
412.103, the hospital's wage data are: (a) included in the rural wage 
index calculation, unless doing so would reduce the rural wage index; 
and (b) included in the urban area where the hospital is physically 
located. The effect of this policy, in combination with the statutory 
requirement at section 1886(d)(8)(C)(ii) of the Act, is that rural 
areas may receive a wage index based upon the highest of: (1) Wage data 
from hospitals geographically located in the rural area; (2) wage data 
from hospitals geographically located in the rural area, but excluding 
all data associated with hospitals reclassifying out of the rural area 
under section 1886(d)(8)(B) or section 1886(d)(10) of the Act; or (3) 
wage data associated with hospitals geographically located in the area 
plus all hospitals reclassified into the rural area.

[[Page 43838]]

    In addition, in accordance with the statutory language referring to 
``hospitals'' in the plural under sections 1886(d)(8)(C)(i) and 
1886(d)(8)(C)(ii) of the Act, our longstanding policy is to consider 
reclassified hospitals as a group when deciding whether to include or 
exclude them from both urban and rural wage index calculations.
3. FY 2010 MGCRB Reclassifications
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. The specific procedures and rules that apply 
to the geographic reclassification process are outlined in 42 CFR 
412.230 through 412.280.
    At the time this final rule was constructed, the MGCRB had 
completed its review of FY 2010 reclassification requests. Based on 
such reviews, there were 292 hospitals approved for wage index 
reclassifications by the MGCRB for FY 2010. Because MGCRB wage index 
reclassifications are effective for 3 years, for FY 2010, hospitals 
reclassified during FY 2008 or FY 2009 are eligible to continue to be 
reclassified to a particular labor market area based on such prior 
reclassifications. There were 313 hospitals approved for wage index 
reclassifications in FY 2008 and 271 hospitals approved for wage index 
reclassifications in FY 2009. Of all of the hospitals approved for 
reclassification for FY 2008, FY 2009, and FY 2010, based upon the 
review at the time of this final rule, 861 hospitals are in a 
reclassification status for FY 2010.
    Under 42 CFR 412.273, hospitals that have been reclassified by the 
MGCRB are permitted to withdraw their applications within 45 days of 
the publication of a proposed rule. Generally stated, the request for 
withdrawal of an application for reclassification or termination of an 
existing 3-year reclassification that would be effective in FY 2010 had 
to be received by the MGCRB within 45 days of the publication of the FY 
2010 IPPS proposed rule. Hospitals may also cancel prior 
reclassification withdrawals or terminations in certain circumstances. 
For further information about withdrawing, terminating, or canceling a 
previous withdrawal or termination of a 3-year reclassification for 
wage index purposes, we refer the reader to 42 CFR 412.273, as well as 
the FY 2002 IPPS final rule (66 FR 39887) and the FY 2003 IPPS final 
rule (67 FR 50065).
    Changes to the wage index that result from withdrawals of requests 
for reclassification, wage index corrections, appeals, and the 
Administrator's review process for FY 2010 are incorporated into the 
wage index values published in this FY 2010 IPPS/RY 2010 LTCH PPS final 
rule. These changes affect not only the wage index value for specific 
geographic areas, but also the wage index value redesignated hospitals 
receive; that is, whether they receive the wage index that includes the 
data for both the hospitals already in the area and the redesignated 
hospitals. Further, the wage index value for the area from which the 
hospitals are redesignated may be affected.
    Applications for FY 2011 reclassifications are due to the MGCRB by 
September 1, 2009 (the first working day of September 2009). We note 
that this is also the deadline for canceling a previous wage index 
reclassification withdrawal or termination under 42 CFR 412.273(d). 
Applications and other information about MGCRB reclassifications may be 
obtained, beginning in mid-July 2009, via the CMS Internet Web site at: 
http://cms.hhs.gov/MGCRB/02_instructions_and_applications.asp, or by 
calling the MGCRB at (410) 786-1174. The mailing address of the MGCRB 
is: 2520 Lord Baltimore Drive, Suite L, Baltimore, MD 21244-2670.
    Comment: Several commenters suggested that CMS lower the employment 
interchange measure (EIM) from 15 percent to 7.5 percent. EIM is a 
measure of ties between two adjacent entities, used when defining 
Combined Statistical Areas (CSAs). The EIM is calculated as the sum of 
the percentage of employed residents commuting from the smaller area to 
the larger area and the percentage of employment in the smaller area 
accounted for by workers residing in the larger area. Hospitals seeking 
a group reclassification from one urban area to another must be located 
in the same CSA (or CBSA where relevant) as the urban area to which 
they seek redesignation, as stated in Sec.  412.234(a)(3)(iv) of the 
regulations.
    Response: We are not adopting the commenters' recommendation. 
First, we have a longstanding policy of using OMB's statistical area 
definitions to set our labor market areas, and OMB does not modify the 
statistical area definitions to meet the requirements of any 
nonstatistical program. Second, such a change in the EIM could 
significantly reduce the wage indices of some reclassified hospitals. 
In analyzing the implications of the EIM change suggested by the 
commenters, we reviewed 31 of 127 CSAs (these are the 31 areas for 
which the Office of Personnel Management uses a 7.5 percent EIM in 
determining locality payment adjustments under the general schedule for 
Federal employees). The result was that the change would allow a total 
of at least 57 hospitals in 21 counties to reclassify, and while a 
national budget neutrality adjustment would affect all hospitals 
equally, the additional reclassifications could significantly reduce 
the wage index applied to reclassified hospitals in certain areas--in 
some cases, by as much as 10 percent as a result of the additional 
reclassifications. These effects could be even more significant were 
the EIM changed for all counties nationally.
4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act
    Section 1886(d)(8)(B) of the Act requires us to treat a hospital 
located in a rural county adjacent to one or more urban areas as being 
located in the MSA if certain criteria are met. Effective beginning FY 
2005, we use OMB's 2000 CBSA standards and the Census 2000 data to 
identify counties in which hospitals qualify under section 
1886(d)(8)(B) of the Act to receive the wage index of the urban area. 
Hospitals located in these counties have been known as ``Lugar'' 
hospitals and the counties themselves are often referred to as 
``Lugar'' counties. We provide the FY 2010 chart below with the listing 
of the rural counties containing the hospitals designated as urban 
under section 1886(d)(8)(B) of the Act. For discharges occurring on or 
after October 1, 2009, hospitals located in the rural county in the 
first column of this chart will be redesignated for purposes of using 
the wage index of the urban area listed in the second column.

 Rural Counties Containing Hospitals Redesignated as Urban Under Section
                        1886(d)(8)(B) of the Act
                  [Based on CBSAs and Census 2000 data]
------------------------------------------------------------------------
                  Rural county                             CBSA
------------------------------------------------------------------------
Cherokee, AL....................................  Rome, GA.

[[Page 43839]]

 
Macon, AL.......................................  Auburn-Opelika, AL.
Talladega, AL...................................  Anniston-Oxford, AL.
Hot Springs, AR.................................  Hot Springs, AR.
Windham, CT.....................................  Hartford-West Hartford-
                                                   East Hartford, CT.
Bradford, FL....................................  Gainesville, FL.
Hendry, FL......................................  West Palm Beach-Boca
                                                   Raton-Boynton, FL.
Levy, FL........................................  Gainesville, FL.
Walton, FL......................................  Fort Walton Beach-
                                                   Crestview-Destin, FL.
Banks, GA.......................................  Gainesville, GA.
Chattooga, GA...................................  Chattanooga, TN-GA.
Jackson, GA.....................................  Atlanta-Sandy Springs-
                                                   Marietta, GA.
Lumpkin, GA.....................................  Atlanta-Sandy Springs-
                                                   Marietta, GA.
Morgan, GA......................................  Atlanta-Sandy Springs-
                                                   Marietta, GA.
Peach, GA.......................................  Macon, GA.
Polk, GA........................................  Atlanta-Sandy Springs-
                                                   Marietta, GA.
Talbot, GA......................................  Columbus, GA-AL.
Bingham, ID.....................................  Idaho Falls, ID.
Christian, IL...................................  Springfield, IL.
DeWitt, IL......................................  Bloomington-Normal,
                                                   IL.
Iroquois, IL....................................  Kankakee-Bradley, IL.
Logan, IL.......................................  Springfield, IL.
Mason, IL.......................................  Peoria, IL.
Ogle, IL........................................  Rockford, IL.
Clinton, IN.....................................  Lafayette, IN.
Henry, IN.......................................  Indianapolis-Carmel,
                                                   IN.
Spencer, IN.....................................  Evansville, IN-KY.
Starke, IN......................................  Gary, IN.
Warren, IN......................................  Lafayette, IN.
Boone, IA.......................................  Ames, IA.
Buchanan, IA....................................  Waterloo-Cedar Falls,
                                                   IA.
Cedar, IA.......................................  Iowa City, IA.
Allen, KY.......................................  Bowling Green, KY.
Assumption Parish, LA...........................  Baton Rouge, LA.
St. James Parish, LA............................  Baton Rouge, LA.
Allegan, MI.....................................  Holland-Grand Haven,
                                                   MI.
Montcalm, MI....................................  Grand Rapids-Wyoming,
                                                   MI.
Oceana, MI......................................  Muskegon-Norton
                                                   Shores, MI.
Shiawassee, MI..................................  Lansing-East Lansing,
                                                   MI.
Tuscola, MI.....................................  Saginaw-Saginaw
                                                   Township North, MI.
Fillmore, MN....................................  Rochester, MN.
Dade, MO........................................  Springfield, MO.
Pearl River, MS.................................  Gulfport-Biloxi, MS.
Caswell, NC.....................................  Burlington, NC.
Davidson, NC....................................  Greensboro-High Point,
                                                   NC.
Granville, NC...................................  Durham, NC.
Harnett, NC.....................................  Raleigh-Cary, NC.
Lincoln, NC.....................................  Charlotte-Gastonia-
                                                   Concord, NC-SC.
Polk, NC........................................  Spartanburg, SC.
Los Alamos, NM..................................  Santa Fe, NM.
Lyon, NV........................................  Carson City, NV.
Cayuga, NY......................................  Syracuse, NY.
Columbia, NY....................................  Albany-Schenectady-
                                                   Troy, NY.
Genesee, NY.....................................  Rochester, NY.
Greene, NY......................................  Albany-Schenectady-
                                                   Troy, NY.
Schuyler, NY....................................  Ithaca, NY.
Sullivan, NY....................................  Poughkeepsie-Newburgh-
                                                   Middletown, NY.
Wyoming, NY.....................................  Buffalo-Niagara Falls,
                                                   NY.
Ashtabula, OH...................................  Cleveland-Elyria-
                                                   Mentor, OH.
Champaign, OH...................................  Springfield, OH.
Columbiana, OH..................................  Youngstown-Warren-
                                                   Boardman, OH-PA.
Cotton, OK......................................  Lawton, OK.
Linn, OR........................................  Corvallis, OR.
Adams, PA.......................................  York-Hanover, PA.
Clinton, PA.....................................  Williamsport, PA.
Greene, PA......................................  Pittsburgh, PA.
Monroe, PA......................................  Allentown-Bethlehem-
                                                   Easton, PA-NJ.
Schuylkill, PA..................................  Reading, PA.
Susquehanna, PA.................................  Binghamton, NY.
Clarendon, SC...................................  Sumter, SC.

[[Page 43840]]

 
Lee, SC.........................................  Sumter, SC.
Oconee, SC......................................  Greenville, SC.
Union, SC.......................................  Spartanburg, SC.
Meigs, TN.......................................  Cleveland, TN.
Bosque, TX......................................  Waco, TX.
Falls, TX.......................................  Waco, TX.
Fannin, TX......................................  Dallas-Plano-Irving,
                                                   TX.
Grimes, TX......................................  College Station-Bryan,
                                                   TX.
Harrison, TX....................................  Longview, TX.
Henderson, TX...................................  Dallas-Plano-Irving,
                                                   TX.
Milam, TX.......................................  Austin-Round Rock, TX.
Van Zandt, TX...................................  Dallas-Plano-Irving,
                                                   TX.
Willacy, TX.....................................  Brownsville-Harlingen,
                                                   TX.
Buckingham, VA..................................  Charlottesville, VA.
Floyd, VA.......................................  Blacksburg-
                                                   Christiansburg-
                                                   Radford, VA.
Middlesex, VA...................................  Virginia Beach-Norfolk-
                                                   Newport News, VA.
Page, VA........................................  Harrisonburg, VA.
Shenandoah, VA..................................  Winchester, VA-WV.
Island, WA......................................  Seattle-Bellevue-
                                                   Everett, WA.
Mason, WA.......................................  Olympia, WA.
Wahkiakum, WA...................................  Longview, WA.
Jackson, WV.....................................  Charleston, WV.
Roane, WV.......................................  Charleston, WV.
Green, WI.......................................  Madison, WI.
Green Lake, WI..................................  Fond du Lac, WI.
Jefferson, WI...................................  Milwaukee-Waukesha-
                                                   West Allis, WI.
Walworth, WI....................................  Milwaukee-Waukesha-
                                                   West Allis, WI.
------------------------------------------------------------------------

    As in the past, hospitals redesignated under section 1886(d)(8)(B) 
of the Act are also eligible to be reclassified to a different area by 
the MGCRB. Affected hospitals were permitted to compare the 
reclassified wage index for the labor market area in Table 4C in the 
Addendum to the proposed rule into which they would be reclassified by 
the MGCRB to the wage index for the area to which they are redesignated 
under section 1886(d)(8)(B) of the Act. Hospitals could have withdrawn 
from an MGCRB reclassification within 45 days of the publication of the 
FY 2010 proposed rule.
    Comment: Several commenters suggested that CMS allow Lugar 
hospitals the ability to waive their Lugar status once and have the 
waiver be effective until the hospital chooses to withdraw.
    Response: Section 1886(d)(8)(B) of the Act required us to treat a 
hospital located in a rural county adjacent to one or more urban areas 
as being located in the MSA to which the greatest number of workers in 
the county commute. Hospitals satisfying the criteria under section 
1886(d)(8)(B) of the Act are treated as urban hospitals and are also 
eligible for reclassification through the MGCRB or may waive their 
Lugar status if eligible to receive the out-migration adjustment. Once 
a hospital is listed as a Lugar hospital under section 1886(d)(8)(B) of 
the Act, it is treated as such until the hospital waives its Lugar 
status. Hospitals can only waive Lugar status if they are in a county 
that is eligible to receive an out-migration adjustment. A rural 
hospital that is redesignated as Lugar, or urban, that wishes to stay 
rural can apply to be reclassified back to rural status under Sec.  
412.103 of the regulations. Otherwise, hospitals that are redesignated 
as Lugar can only waive Lugar status if they are eligible for the out-
migration adjustment.
    The wage index is updated annually and, as such, hospitals wishing 
to waive their Lugar redesignation in order to receive the rural area 
wage index plus the out-migration adjustment must request the waiver 
annually. Each year, the preamble of the IPPS proposed rule is specific 
that hospitals redesignated under section 1886(d)(8) of the Act or 
reclassified under section 1886(10) of the Act will be deemed to have 
chosen to retain their redesignation or reclassification, and that 
hospitals redesignated under section 1886(d)(8) of the Act will be 
deemed to have waived the out-migration adjustment, unless they 
explicitly notify CMS within 45 days from the publication of the 
proposed rule that they elect to receive the out-migration adjustment 
instead. For example, we refer readers to the FY 2009 IPPS proposed 
rule (73 FR 23635). The introductory text of Table 4J in the Addendum 
to the rule also reminds hospitals of the annual process.
    If a hospital chooses to waive its Lugar status within 45 days of 
the proposed rule, each year it must send a written request to CMS at 
the following address: Division of Acute Care, Center for Medicare 
Management, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244, 
Attn: Brian Slater; and must send a copy to the MGCRB. The mailing 
address for the MGCRB is: 2520 Lord Baltimore Drive, Suite L, 
Baltimore, MD 21244-2670.
5. Reclassifications Under Section 1886(d)(8)(B) of the Act
    As discussed in the FY 2009 IPPS final rule (73 FR 48588), Lugar 
hospitals are treated like reclassified hospitals for purposes of 
determining their applicable wage index and receive the reclassified 
wage index for the urban area to which they have been redesignated. 
Because Lugar hospitals are treated like reclassified hospitals, when 
they are seeking reclassification by the MGCRB, they are subject to the 
rural reclassification rules set forth at 42 CFR 412.230. The 
procedural rules set forth at Sec.  412.230 list the criteria that a 
hospital must meet in order to reclassify as a rural hospital. Lugar 
hospitals are

[[Page 43841]]

subject to the proximity criteria and payment thresholds that apply to 
rural hospitals. Specifically, the hospital must be no more than 35 
miles from the area to which it seeks reclassification (Sec.  
412.230(b)(1)); and the hospital must show that its average hourly wage 
is at least 106 percent of the average hourly wage of all other 
hospitals in the area in which the hospital is located (Sec.  
412.230(d)(1)(iii)(C)). In accordance with policy adopted in the FY 
2009 IPPS final rule (73 FR 48568 and 48569), beginning with 
reclassifications for the FY 2010 wage index, a Lugar hospital must 
also demonstrate that its average hourly wage is equal to at least 84 
percent (for FY 2010 reclassifications) and 86 percent (for 
reclassifications for FY 2011 and subsequent fiscal years) of the 
average hourly wage of hospitals in the area to which it seeks 
redesignation (Sec.  412.230(d)(1)(iv)(C)).
    Hospitals not located in a Lugar county seeking reclassification to 
the urban area where the Lugar hospitals have been redesignated are not 
permitted to measure to the Lugar county to demonstrate proximity (no 
more than 15 miles for an urban hospital, and no more than 35 miles for 
a rural hospital or the closest urban or rural area for RRCs or SCHs) 
in order to be reclassified to such urban area. These hospitals must 
measure to the urban area exclusive of the Lugar County to meet the 
proximity or nearest urban or rural area requirement. We treat New 
England deemed counties in a manner consistent with how we treat Lugar 
counties. (We refer readers to FY 2008 IPPS final rule with comment 
period (72 FR 47337) for a discussion of this policy.)
6. Reclassifications Under Section 508 of Public Law 108-173
    Section 508 of Public Law 108-173 allowed certain qualifying 
hospitals to receive wage index reclassifications and assignments that 
they otherwise would not have been eligible to receive under the law. 
Although section 508 originally was scheduled to expire after a 3-year 
period, Congress extended the provision several times, as well as 
certain special exceptions that would have otherwise expired. For a 
discussion of the original section 508 provision and its various 
extensions, we refer readers to the FY 2009 IPPS final rule (73 FR 
48588). The most recent extension of the provision was included in 
section 124 of Public Law 110-275 (MIPPA). Section 124 extended, 
through FY 2009, section 508 reclassifications as well as certain 
special exceptions. Because the latest extension of these provisions 
expires on September 30, 2009, and will not be applicable in FY 2010, 
we are not making any changes related to these provisions in this final 
rule.

J. FY 2010 Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees

    In accordance with the broad discretion under section 1886(d)(13) 
of the Act, as added by section 505 of Public Law 108-173, beginning 
with FY 2005, we established a process to make adjustments to the 
hospital wage index based on commuting patterns of hospital employees 
(the ``out-migration'' adjustment). The process, outlined in the FY 
2005 IPPS final rule (69 FR 49061), provides for an increase in the 
wage index for hospitals located in certain counties that have a 
relatively high percentage of hospital employees who reside in the 
county but work in a different county (or counties) with a higher wage 
index. Such adjustments to the wage index are effective for 3 years, 
unless a hospital requests to waive the application of the adjustment. 
A county will not lose its status as a qualifying county due to wage 
index changes during the 3-year period, and counties will receive the 
same wage index increase for those 3 years. However, a county that 
qualifies in any given year may no longer qualify after the 3-year 
period, or it may qualify but receive a different adjustment to the 
wage index level. Hospitals that receive this adjustment to their wage 
index are not eligible for reclassification under section 1886(d)(8) or 
section 1886(d)(10) of the Act. Adjustments under this provision are 
not subject to the budget neutrality requirements under section 
1886(d)(3)(E) of the Act.
    Hospitals located in counties that qualify for the wage index 
adjustment are to receive an increase in the wage index that is equal 
to the average of the differences between the wage indices of the labor 
market area(s) with higher wage indices and the wage index of the 
resident county, weighted by the overall percentage of hospital workers 
residing in the qualifying county who are employed in any labor market 
area with a higher wage index. Beginning with the FY 2008 wage index, 
we use post-reclassified wage indices when determining the out-
migration adjustment (72 FR 47339).
    For the FY 2010 wage index, we calculated the out-migration 
adjustment using the same formula described in the FY 2005 IPPS final 
rule (69 FR 49064), with the addition of using the post-reclassified 
wage indices, to calculate the out-migration adjustment. This 
adjustment is calculated as follows:
    Step 1--Subtract the wage index for the qualifying county from the 
wage index of each of the higher wage area(s) to which hospital workers 
commute.
    Step 2--Divide the number of hospital employees residing in the 
qualifying county who are employed in such higher wage index area by 
the total number of hospital employees residing in the qualifying 
county who are employed in any higher wage index area. For each of the 
higher wage index areas, multiply this result by the result obtained in 
Step 1.
    Step 3--Sum the products resulting from Step 2 (if the qualifying 
county has workers commuting to more than one higher wage index area).
    Step 4--Multiply the result from Step 3 by the percentage of 
hospital employees who are residing in the qualifying county and who 
are employed in any higher wage index area.
    These adjustments will be effective for each county for a period of 
3 fiscal years. For example, hospitals that received the adjustment for 
the first time in FY 2009 will be eligible to retain the adjustment for 
FY 2010. For hospitals in newly qualified counties, adjustments to the 
wage index are effective for 3 years, beginning with discharges 
occurring on or after October 1, 2009.
    Hospitals receiving the wage index adjustment under section 
1886(d)(13)(F) of the Act are not eligible for reclassification under 
sections 1886(d)(8) or (d)(10) of the Act unless they waive the out-
migration adjustment. Consistent with our FY 2005, 2006, 2007, 2008, 
and 2009 IPPS final rules, we are specifying that hospitals 
redesignated under section 1886(d)(8) of the Act or reclassified under 
section 1886(d)(10) of the Act will be deemed to have chosen to retain 
their redesignation or reclassification. Section 1886(d)(10) hospitals 
that wished to receive the out-migration adjustment, rather than their 
reclassification adjustment, had to follow the termination/withdrawal 
procedures specified in 42 CFR 412.273 and section III.I.3. of the 
preamble of the proposed rule. Otherwise, they were deemed to have 
waived the out-migration adjustment. Hospitals redesignated under 
section 1886(d)(8) of the Act were deemed to have waived the out-
migration adjustment unless they explicitly notified CMS within 45 days 
from the publication of the proposed rule that they elected to receive 
the out-migration adjustment instead.
    Table 4J in the Addendum to this final rule lists the out-migration 
wage index adjustments for FY 2010.

[[Page 43842]]

Hospitals that are not otherwise reclassified or redesignated under 
section 1886(d)(8) or section 1886(d)(10) of the Act will automatically 
receive the listed adjustment. In accordance with the procedures 
discussed above, redesignated/reclassified hospitals will be deemed to 
have waived the out-migration adjustment unless CMS was otherwise 
notified within the necessary timeframe. In addition, hospitals 
eligible to receive the out-migration wage index adjustment and that 
withdrew their application for reclassification will automatically 
receive the wage index adjustment listed in Table 4J in the Addendum to 
this final rule.
    Comment: One commenter requested that CMS allow hospitals to submit 
their own commuting data to apply for the out-migration adjustment.
    Response: First, we did not propose any changes on commuting data 
for purposes of calculating the out-migration adjustment. Therefore, we 
believe this comment is outside the scope of the proposed rule. In 
addition, as we stated in the FY 2005 IPPS final rule (69 FR 49063), 
because the adjustment is based on the number of hospital workers in a 
county who commute to other higher wage areas, we believe it would be 
extremely problematic for individual hospitals to track and submit the 
data necessary for determining the out-migration adjustment. A hospital 
could not simply survey its own employees to obtain these necessary 
data, but would have to survey all hospital workers who live in the 
county where the hospital is located and commute to hospitals in other 
higher wage index areas.

K. Process for Requests for Wage Index Data Corrections

    The preliminary, unaudited Worksheet S-3 wage data and occupational 
mix survey data files for the FY 2010 wage index were made available on 
October 6, 2008, through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    In the interest of meeting the data needs of the public, beginning 
with the proposed FY 2009 wage index, we post an additional public use 
file on our Web site that reflects the actual data that are used in 
computing the proposed wage index. The release of this new file does 
not alter the current wage index process or schedule. We notified the 
hospital community of the availability of these data as we do with the 
current public use wage data files through our Hospital Open Door 
forum. We encouraged hospitals to sign up for automatic notifications 
of information about hospital issues and the scheduling of the Hospital 
Open Door forums at: http://www.cms.hhs.gov/OpenDoorForums/.
    In a memorandum dated October 6, 2008, we instructed all fiscal 
intermediaries/MACs to inform the IPPS hospitals they service of the 
availability of the wage index data files and the process and timeframe 
for requesting revisions (including the specific deadlines listed 
below). We also instructed the fiscal intermediaries/MACs to advise 
hospitals that these data were also made available directly through 
their representative hospital organizations.
    If a hospital wished to request a change to its data as shown in 
the October 6, 2008 wage and occupational mix data files, the hospital 
was to submit corrections along with complete, detailed supporting 
documentation to its fiscal intermediary/MAC by December 8, 2008. 
Hospitals were notified of this deadline and of all other possible 
deadlines and requirements, including the requirement to review and 
verify their data as posted on the preliminary wage index data files on 
the Internet, through the October 6, 2008 memorandum referenced above.
    In the October 6, 2008 memorandum, we also specified that a 
hospital requesting revisions to its first and/or second quarter 
occupational mix survey data was to copy its record(s) from the CY 
2007-2008 occupational mix preliminary files posted to our Web site in 
October, highlight the revised cells on its spreadsheet, and submit its 
spreadsheet(s) and complete documentation to its fiscal intermediary/
MAC no later than December 8, 2008.
    The fiscal intermediaries/MACs notified the hospitals by mid-
February 2009 of any changes to the wage index data as a result of the 
desk reviews and the resolution of the hospitals' early-December 
revision requests. The fiscal intermediaries/MACs also submitted the 
revised data to CMS by mid-February 2009. CMS published the proposed 
wage index public use files that included hospitals' revised wage index 
data on February 23, 2009. In a memorandum also dated February 23, 
2009, we instructed fiscal intermediaries/MACs to notify all hospitals 
regarding the availability of the proposed wage index public use files 
and the criteria and process for requesting corrections and revisions 
to the wage index data. Hospitals had until March 10, 2009, to submit 
requests to the fiscal intermediaries/MACs for reconsideration of 
adjustments made by the fiscal intermediaries/MACs as a result of the 
desk review, and to correct errors due to CMS's or the fiscal 
intermediary's (or, if applicable, the MAC's) mishandling of the wage 
index data. Hospitals also were required to submit sufficient 
documentation to support their requests.
    After reviewing requested changes submitted by hospitals, fiscal 
intermediaries/MACs were required to transmit any additional revisions 
resulting from the hospitals' reconsideration requests by April 15, 
2009. The deadline for a hospital to request CMS intervention in cases 
where the hospital disagrees with the fiscal intermediary's (or, if 
applicable, the MAC's) policy interpretations was April 22, 2009.
    Hospitals were given the opportunity to examine Table 2 in the 
Addendum to the proposed rule. Table 2 in the Addendum to the proposed 
rule contained each hospital's adjusted average hourly wage used to 
construct the wage index values for the past 3 years, including the FY 
2006 data used to construct the proposed FY 2010 wage index. We noted 
that the hospital average hourly wages shown in Table 2 only reflect 
changes made to a hospital's data and transmitted to CMS by March 2, 
2009.
    We released the final wage index data public use files in early May 
2009 on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage. The May 2009 public use files were made available 
solely for the limited purpose of identifying any potential errors made 
by CMS or the fiscal intermediary/MAC in the entry of the final wage 
index data that resulted from the correction process described above 
(revisions submitted to CMS by the fiscal intermediaries/MACs by April 
15, 2009). If, after reviewing the May 2009 final files, a hospital 
believed that its wage or occupational mix data were incorrect due to a 
fiscal intermediary/MAC or CMS error in the entry or tabulation of the 
final data, the hospital had to send a letter to both its fiscal 
intermediary/MAC and CMS that outlined why the hospital believed an 
error existed and that provided all supporting information, including 
relevant dates (for example, when it first became aware of the error). 
CMS and the fiscal intermediaries (or, if applicable, the MACs) had to 
receive these requests no later than June 8, 2009.
    Each request also had to be sent to the fiscal intermediary/MAC. 
The fiscal intermediary/MAC reviewed requests upon receipt and 
contacted CMS immediately to discuss any findings.

[[Page 43843]]

    At this point in the process, that is, after the release of the May 
2009 wage index data files, changes to the wage and occupational mix 
data were only made in those very limited situations involving an error 
by the fiscal intermediary/MAC or CMS that the hospital could not have 
known about before its review of the final wage index data files. 
Specifically, neither the fiscal intermediary/MAC nor CMS approved the 
following types of requests:
    <bullet> Requests for wage index data corrections that were 
submitted too late to be included in the data transmitted to CMS by 
fiscal intermediaries or the MACs on or before April 15, 2009.
    <bullet> Requests for correction of errors that were not, but could 
have been, identified during the hospital's review of the February 23, 
2009 wage index public use files.
    <bullet> Requests to revisit factual determinations or policy 
interpretations made by the fiscal intermediary or the MAC or CMS 
during the wage index data correction process.
    Verified corrections to the wage index data received timely by CMS 
and the fiscal intermediaries or the MACs (that is, by June 8, 2009) 
were incorporated into the final wage index in this FY 2010 IPPS/RY 
2010 LTCH PPS final rule, which will be effective October 1, 2009.
    We created the processes described above to resolve all substantive 
wage index data correction disputes before we finalize the wage and 
occupational mix data for the FY 2010 payment rates. Accordingly, 
hospitals that did not meet the procedural deadlines set forth above 
will not be afforded a later opportunity to submit wage index data 
corrections or to dispute the fiscal intermediary's (or, if applicable 
the MAC's) decision with respect to requested changes. Specifically, 
our policy is that hospitals that do not meet the procedural deadlines 
set forth above will not be permitted to challenge later, before the 
Provider Reimbursement Review Board, the failure of CMS to make a 
requested data revision. (See W. A. Foote Memorial Hospital v. Shalala, 
No. 99-CV-75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. 
Thompson, No. 99-1230 (D.D.C. 2003).) We refer readers also to the FY 
2000 IPPS final rule (64 FR 41513) for a discussion of the parameters 
for appealing to the PRRB for wage index data corrections.
    Again, we believe the wage index data correction process described 
above provides hospitals with sufficient opportunity to bring errors in 
their wage and occupational mix data to the fiscal intermediary's (or, 
if applicable, the MAC's) attention. Moreover, because hospitals had 
access to the final wage index data by early May 2009, they had the 
opportunity to detect any data entry or tabulation errors made by the 
fiscal intermediary or the MAC or CMS before the development and 
publication of the final FY 2010 wage index by August 2009, and the 
implementation of the FY 2010 wage index on October 1, 2009. If 
hospitals availed themselves of the opportunities afforded to provide 
and make corrections to the wage and occupational mix data, the wage 
index implemented on October 1 should be accurate. Nevertheless, in the 
event that errors are identified by hospitals and brought to our 
attention after June 8, 2009, we retain the right to make midyear 
changes to the wage index under very limited circumstances.
    Specifically, in accordance with 42 CFR 412.64(k)(1) of our 
existing regulations, we make midyear corrections to the wage index for 
an area only if a hospital can show that: (1) the fiscal intermediary 
or the MAC or CMS made an error in tabulating its data; and (2) the 
requesting hospital could not have known about the error or did not 
have an opportunity to correct the error, before the beginning of the 
fiscal year. For purposes of this provision, ``before the beginning of 
the fiscal year'' means by the June 8 deadline for making corrections 
to the wage data for the following fiscal year's wage index. This 
provision is not available to a hospital seeking to revise another 
hospital's data that may be affecting the requesting hospital's wage 
index for the labor market area. As indicated earlier, because CMS 
makes the wage index data available to hospitals on the CMS Web site 
prior to publishing both the proposed and final IPPS rules, and the 
fiscal intermediaries or the MAC notify hospitals directly of any wage 
index data changes after completing their desk reviews, we do not 
expect that midyear corrections will be necessary. However, under our 
current policy, if the correction of a data error changes the wage 
index value for an area, the revised wage index value will be effective 
prospectively from the date the correction is made.
    In the FY 2006 IPPS final rule (70 FR 47385), we revised 42 CFR 
412.64(k)(2) to specify that, effective on October 1, 2005, that is, 
beginning with the FY 2006 wage index, a change to the wage index can 
be made retroactive to the beginning of the Federal fiscal year only 
when: (1) The fiscal intermediary (or, if applicable, the MAC) or CMS 
made an error in tabulating data used for the wage index calculation; 
(2) the hospital knew about the error and requested that the fiscal 
intermediary (or if applicable the MAC) and CMS correct the error using 
the established process and within the established schedule for 
requesting corrections to the wage index data, before the beginning of 
the fiscal year for the applicable IPPS update (that is, by the June 8, 
2009 deadline for the FY 2010 wage index); and (3) CMS agreed that the 
fiscal intermediary (or if applicable, the MAC) or CMS made an error in 
tabulating the hospital's wage index data and the wage index should be 
corrected.
    In those circumstances where a hospital requested a correction to 
its wage index data before CMS calculates the final wage index (that 
is, by the June 8, 2009 deadline), and CMS acknowledges that the error 
in the hospital's wage index data was caused by CMS' or the fiscal 
intermediary's (or, if applicable, the MAC's) mishandling of the data, 
we believe that the hospital should not be penalized by our delay in 
publishing or implementing the correction. As with our current policy, 
we indicated that the provision is not available to a hospital seeking 
to revise another hospital's data. In addition, the provision cannot be 
used to correct prior years' wage index data; and it can only be used 
for the current Federal fiscal year. In other situations where our 
policies would allow midyear corrections, we continue to believe that 
it is appropriate to make prospective-only corrections to the wage 
index.
    We note that, as with prospective changes to the wage index, the 
final retroactive correction will be made irrespective of whether the 
change increases or decreases a hospital's payment rate. In addition, 
we note that the policy of retroactive adjustment will still apply in 
those instances where a judicial decision reverses a CMS denial of a 
hospital's wage index data revision request.

IV. Rebasing and Revision of the Hospital Market Baskets for Acute Care 
Hospitals

A. Background

    Effective for cost reporting periods beginning on or after July 1, 
1979, we developed and adopted a hospital input price index (that is, 
the hospital market basket for operating costs). 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''

[[Page 43844]]

as used in this document refers to the hospital input price index.
    The percentage change in the market basket reflects the average 
change in the price of goods and services hospitals purchase in order 
to provide inpatient care. We first used the market basket to adjust 
hospital cost limits by an amount that reflected the average increase 
in the prices of the goods and services used to provide hospital 
inpatient care. This approach linked the increase in the cost limits to 
the efficient utilization of resources.
    Since the inception of the IPPS, the projected change in the 
hospital market basket has been the integral component of the update 
factor by which the prospective payment rates are updated every year. 
An explanation of the hospital market basket used to develop the 
prospective payment rates was published in the Federal Register on 
September 1, 1983 (48 FR 39764). We also refer readers to the FY 2006 
IPPS final rule (70 FR 47387) in which we discussed the most recent 
previous rebasing of the hospital input price index.
    The hospital market basket is a fixed-weight, Laspeyres-type price 
index that is constructed in three steps. 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 2006) and 
total base period expenditures are estimated for a set of mutually 
exclusive and exhaustive spending categories based upon type of 
expenditure. Then the proportion of total operating costs that each 
category represents is determined. 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 price levels 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.
    The market basket is described as a fixed-weight index because it 
represents the change in price over time of the same mix (quantity and 
intensity) of goods and services purchased to provide hospital services 
in a base period. 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, shifting a traditionally 
inpatient type of care to an outpatient setting might affect the volume 
of inpatient goods and services purchased by the hospital, but would 
not be factored into the price change measured by a fixed-weight 
hospital market basket. In this manner, the market basket measures pure 
price change only. Only when the index is rebased would changes in the 
quantity and intensity be captured 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. We 
last rebased the hospital market basket cost weights effective for FY 
2006 (70 FR 47387), with FY 2002 data used as the base period for the 
construction of the market basket cost weights.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24154), 
we invited public comments on our proposed methodological changes to 
both the IPPS operating market basket and the capital input price index 
(CIPI). We note that this section addresses only the rebasing and 
revision of the IPPS market basket and CIPI for acute care hospitals 
and for children's and cancer hospitals and RNHCIs, which are excluded 
from the IPPS. We address the market basket that will be applicable to 
LTCHs in section VIII.C.2. of the preamble of this final rule. Separate 
documents will address the market basket for other hospitals that are 
excluded from the IPPS.

B. Rebasing and Revising the IPPS Market Basket

    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 IPPS hospital index from FY 2002 to FY 2006). 
``Revising'' means changing data sources, or price proxies, used in the 
input price index. As published in the FY 2006 IPPS final rule (70 FR 
47387), in accordance with section 404 of Public Law 108-173, CMS 
determined a new frequency for rebasing the hospital market basket. We 
established a rebasing frequency of every 4 years and, therefore, for 
the FY 2010 IPPS update, as we proposed, we are rebasing and revising 
the IPPS market basket and the CIPI.
1. Development of Cost Categories and Weights
a. Medicare Cost Reports
    The major source of expenditure data for developing the rebased and 
revised hospital market basket cost weights is the FY 2006 Medicare 
cost reports. As was done in previous rebasings, these cost reports are 
from IPPS hospitals only (hospitals excluded from the IPPS and CAHs are 
not included) and are based on IPPS Medicare-allowable operating costs. 
IPPS Medicare-allowable operating costs are costs that are eligible to 
be paid for under the IPPS. For example, the IPPS market basket 
excludes home health agency (HHA) costs as these costs would be paid 
under the HHA PPS and, therefore, these costs are not IPPS Medicare-
allowable costs.
    The IPPS cost reports yield seven major expenditure or cost 
categories--the same as in the FY 2002-based hospital market basket: 
Wages and salaries, employee benefits, contract labor, pharmaceuticals, 
professional liability insurance (malpractice), blood and blood 
products, and a residual ``all other.'' The cost weights that were 
obtained directly from the Medicare cost reports are reported in Chart 
1. These Medicare cost report cost weights are then supplemented with 
information obtained from other data sources to derive the IPPS market 
basket cost weights.

 Chart 1--Major Cost Categories and Their Respective Cost Weights Found
                      in the Medicare Cost Reports
------------------------------------------------------------------------
                                        FY 2002-based     FY 2006-based
        Major cost categories           market basket     market basket
------------------------------------------------------------------------
Wages and salaries..................            45.590            45.156

[[Page 43845]]

 
Employee benefits...................            11.189            11.873
Contract labor......................             3.214             2.598
Professional Liability Insurance                 1.589             1.661
 (Malpractice)......................
Pharmaceuticals.....................             5.855             5.380
Blood and blood products............             1.082             1.078
All other...........................            31.481            32.254
------------------------------------------------------------------------

b. Other Data Sources
    In addition to the Medicare cost reports, the other data source we 
used to develop the IPPS market basket cost weights was the Benchmark 
Input-Output (I-O) Tables created by the Bureau of Economic Analysis 
(BEA), U.S. Department of Commerce. 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 2006 market 
basket rebasing, we used the 1997 Benchmark I-O data. In the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24155), we proposed to use 
the 2002 Benchmark I-O data in the FY 2006-based IPPS market basket, to 
be effective for FY 2010. Instead of using the less detailed, less 
accurate Annual I-O data, we aged the 2002 Benchmark I-O data forward 
to FY 2006. 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 repeat this practice for each year.
    The ``all other'' cost category obtained directly from the Medicare 
cost reports is divided into other hospital expenditure category shares 
using the 2002 Benchmark I-O data. Therefore, the ``all other'' cost 
category expenditure shares are proportional to their relationship to 
``all other'' totals in the 2002 Benchmark I-O data. For instance, if 
the cost for telephone services was to represent 10 percent of the sum 
of the ``all other'' Benchmark I-O (see below) hospital expenditures, 
then telephone services would represent 10 percent of the IPPS market 
basket's ``all other'' cost category. Following publication of the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule, and in an effort to provide 
greater transparency, we posted on the CMS market basket Web page at: 
http://www.cms.hhs.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp#TopOfPage an illustrative spreadsheet that 
shows how the detailed cost weights in the proposed rule (that is, 
those not calculated using Medicare cost reports) were determined using 
the 2002 Benchmark I-O data.
2. Final Cost Category Computation
    As stated previously, for this rebasing we used the Medicare cost 
reports to derive seven major cost categories. As we proposed, the FY 
2006-based IPPS market basket includes three additional cost categories 
that were not broken out separately in the FY 2002-based IPPS market 
basket. The first is lifted directly from the Medicare cost reports: 
Blood and blood products. The remaining two are derived using the 
Benchmark I-O data: Administrative and business support services and 
financial services. As we proposed, we broke out the latter two 
categories so we can better match their respective expenses with price 
proxies. A thorough discussion of our rationale for each of these cost 
categories is provided in section IV.B.3. of the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule (74 FR 24155) and this final rule. Also, the FY 
2006-based IPPS 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 IPPS 
market basket. Therefore, as we proposed, we include the photo supplies 
costs in the chemical cost category weight with other similar chemical 
products (74 FR 24155).
    As we proposed, we are not changing our definition of the labor-
related share. However, we rename our aggregate cost categories from 
``labor-intensive'' and ``non-labor-intensive'' services to ``labor-
related'' and ``nonlabor-related'' services (74 FR 24155). As discussed 
in more detail below and similar to the previous rebasing, we classify 
a cost category as labor-related and include it in the labor-related 
share if the cost category is defined as being labor-intensive and its 
cost varies with the local labor market. In previous regulations, we 
grouped cost categories that met both of these criteria into labor-
intensive services. We believe the new labels more accurately reflect 
the concepts that they are intended to convey. We are not changing 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 2006 cost weights for the rebased hospital 
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, 
all the proxies are based on Bureau of Labor Statistics (BLS) data and 
are grouped into one of the following BLS categories:
    <bullet> 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.
    <bullet> 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

[[Page 43846]]

purchased away from home is used as a proxy for contracted food 
services.
    <bullet> 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.
    Comment: Several commenters stated that although the MMA requires 
CMS to rebase the weights used in the hospital market basket more 
frequently than every 5 years to reflect the most current data 
available, it does not require CMS to modify or revise the price 
proxies used in the market basket calculation. The commenters 
discouraged CMS from incorporating any new price proxies, particularly 
the new blended price proxy associated with the Chemicals cost 
category, and indicated that such a change was not preferred at this 
time. They pointed out that the methodology and data sources used by 
CMS to derive the proposed 2006-based IPPS market basket yield a 
projected 2.1 percent increase in the hospital market basket update, 
while the historical methodology and data sources used to derive the FY 
2002-based IPPS market basket yield a projected update of 2.3 percent. 
Several commenters pointed to the current status and volatility of the 
economy as a basis for maintaining the same price proxies going 
forward. Those comments included the following:
    <bullet> Maintaining the current proxies will result in a more 
stable market basket increase and will demonstrate forbearance, given 
the current economic volatility that has occurred or may be yet to 
come.
    <bullet> The country has recently experienced a period of very low 
inflation. The funds from the ARRA (Pub. L. 111-5) are beginning to 
work their way into the economy, possibly resulting in a period of 
higher inflation that could substantially affect the market basket 
estimate.
    <bullet> The new price proxies selected by CMS are not responsive 
to the inflationary effects of the President's FY 2010 Budget and the 
inflationary stimulus effect of the Troubled Asset Relief Program 
(TARP), which is demonstrated by the modest market basket increases in 
FY 2010 and FY 2011.
    <bullet> The traditional approach taken in developing the annual 
market basket forecast is inadequate, given the severe downturn in the 
economy and the potential for inflation to pick up at a pace quicker 
than we have seen for many years. Following several years of updates 
between 3 percent and 3.5 percent, a lower forecast may well 
underestimate hospital input costs, particularly nursing labor, as 
hospitals will not benefit from swelling labor markets due to the fact 
that it is unlikely that newly-unemployed workers possess the 
specialized skills required by hospitals.
    As a result of these issues, multiple commenters urged CMS only to 
rebase the data and weights used in the market basket calculation, and 
not to revise the price proxies.
    Response: We continuously monitor the technical appropriateness of 
all of CMS' market baskets (including the hospital market basket) 
whether or not the market basket is being rebased. However, whenever a 
market basket is rebased, it is a matter of practice for CMS to 
scrutinize all of its aspects, including the data sources that are used 
to construct it, the selection of its exhaustive and mutually exclusive 
cost categories, the weights associated with those categories, and the 
price proxies that are applied. We are revising the hospital market 
basket to make technical improvements that we believe results in more 
accurate payment updates.
    We believe that revising four new price proxies for existing cost 
categories and including three additional price proxies for the new 
cost categories in the FY 2006-based hospital market basket represents 
a significant technical improvement to the market basket.
    As many of the commenters stated, we proposed (and are adopting as 
final) a new blended chemical price proxy for the Chemicals cost weight 
in the FY 2006-based IPPS market basket. The FY 2002-based IPPS market 
basket used the PPI for industrial chemicals (WPI061) to proxy the 
chemicals cost category. In evaluating the technical merit of the 
continuing use of that proxy, we compared the 2002 BEA Benchmark I-O 
expenditure weights with the composition of the PPI for industrial 
chemicals. Using a commodity-to-industry crosswalk, we were able to 
identify the industry expenses classified by North American Industrial 
Classification System (NAICS) that comprise the commodity-based PPI for 
industrial chemicals.
    We found that the relative PPI weights for each of the NAICS 
expense categories were not always consistent with the expense weights 
for the hospital industry, as indicated by the 2002 Benchmark I-O data. 
For example, hospital spending for NAICS 325120 (Industrial Gas 
Manufacturing)--the hospital industry's largest chemical expense 
category (accounting for 29 percent of the hospital industry's total 
chemical expenses)--is not found in the PPI for industrial chemicals. 
In addition, hospital spending attributable to NAICS 325190 (Other 
Basic Organic Chemical Manufacturing) accounts for just 26 percent of 
the hospital industry's total chemical expenses. However, NAICS 325190 
accounts for 41 percent of the PPI for industrial chemicals.
    Given these findings, we proposed using a blended chemical price 
index that reflects the relative weights of the hospital industry's 
chemical expenses as indicated by the 2002 Benchmark I-O data. This 
blended index is composed of the PPI for industrial gases (NAICS 
325120), the PPI for other basic inorganic chemical manufacturing 
(NAICS 325180), the PPI for other basic organic chemical manufacturing 
(NAICS 325190), and the PPI for soap and cleaning compound 
manufacturing (NAICS 325610). The expenses for these NAICS industries 
account for approximately 90 percent of the hospital industry's 
chemical expenses, excluding NAICS 324110--Petroleum Refineries, which 
we proposed to include with other petroleum-related expenses classified 
in the fuel, oil, and gas cost category. We believe this new blended 
proxy represents a more accurate reflection of the price pressures 
associated with hospital chemical expenses.
    With respect to the state of the economy, we are attentive to the 
recent downturn and the fact that this year's update is lower relative 
to historical market basket updates. We also recognize the commenters' 
uncertainty regarding future inflationary pressures, given the 
activities undertaken in the last several months to aid the economy. 
However, the most recent forecast of the rebased and revised FY 2006-
based IPPS market basket FY 2010 update factor reflects the current 
expectations regarding the performance of the economy during FY 2010, 
including the inflation expectations associated with the economic 
stimulus plans. Moreover,

[[Page 43847]]

this forecast also reflects our most recent expectations regarding 
price pressures associated with the labor market for hospital workers.
    Comment: One commenter stated that CMS' proposal to rebase and 
revise the market basket appears to be directed at reducing the rate of 
increase in future market basket increases.
    Response: When selecting the price proxies for the IPPS market 
basket, we do not evaluate the resulting market basket update as a 
criterion in selecting these proxies, but rather choose the most 
technically appropriate measures of the price pressures faced by the 
hospital industry. We believe the proxies that were articulated in the 
FY 2010 proposed rule reflect that approach.
    Comment: Several commenters supported CMS' proposed use of the PPI 
for blood and organ banks for measuring changes in the cost of blood 
and blood products. The commenters expressed appreciation for CMS' 
responsiveness to the need for greater accuracy in the calculation of 
price changes attributable to blood and blood products in the IPPS 
market basket.
    Response: We appreciate the commenters' support for our proposed 
price proxy for the blood and blood products cost category. We agree 
with the commenters that the implementation of this price proxy 
represents a technical improvement to the IPPS market basket.
    After consideration of the public comments received, we are 
adopting as final the price proxies that we proposed in the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24155-24159).
    Chart 2 sets forth the FY 2006-based IPPS market basket, including 
cost categories, weights, and price proxies. For comparison purposes, 
the corresponding FY 2002-based IPPS market basket is listed as well. A 
summary outlining the choice of the various proxies follows the chart.

  Chart 2--FY 2006-Based IPPS Hospital Market-Basket Cost Categories, Weights, and Price Proxies With FY 2002-
                                Based IPPS Market Basket Included for Comparison
----------------------------------------------------------------------------------------------------------------
                                                      FY          Rebased FY
                                               2002[dash]based    2006-based
               Cost Categories                 hospital market     hospital      Rebased FY 2006-based hospital
                                                 basket cost     market basket     market basket price proxies
                                                   weights       cost weights
----------------------------------------------------------------------------------------------------------------
1. Compensation..............................           59.993          59.627
    A. Wages and Salaries \1\................           48.171          47.213  ECI for Wages and Salaries,
                                                                                 Civilian Hospital Workers.
    B. Employee Benefits \1\.................           11.822          12.414  ECI for Benefits, Civilian
                                                                                 Hospital Workers.
2. Utilities.................................            1.251           2.180
    A. Fuel, Oil, and Gasoline...............            0.206           0.418  PPI for Petroleum Refineries.
    B. Electricity...........................            0.669           1.645  PPI for Commercial Electric
                                                                                 Power.
    C. Water and Sewage......................            0.376           0.117  CPI-U for Water & Sewerage
                                                                                 Maintenance.
3. Professional Liability Insurance..........            1.589           1.661  CMS Professional Liability
                                                                                 Insurance Premium Index.
4. All Other.................................           37.167          36.533
    A. All Other Products....................           20.336          19.473
     (1.) Pharmaceuticals....................            5.855           5.380  PPI for Pharmaceutical
                                                                                 Preparations (Prescriptions).
     (2.) Food: Direct Purchases.............            1.664           3.982  PPI for Processed Foods & Feeds.
     (3.) Food: Contract Services............            1.180           0.575  CPI-U for Food Away From Home.
     (4.) Chemicals \2\......................            2.096           1.538  Blend of Chemical PPIs.
     (5.) Blood and Blood Products \3\.......  ...............           1.078  PPI for Blood and Organ Banks.
     (6.) Medical Instruments................            1.932           2.762  PPI for Medical, Surgical, and
                                                                                 Personal Aid Devices.
     (7.) Photographic Supplies..............            0.183
     (8.) Rubber and Plastics................            2.004           1.659  PPI for Rubber & Plastic
                                                                                 Products.
     (9.) Paper and Printing Products........            1.905           1.492  PPI for Converted Paper &
                                                                                 Paperboard Products.
     (10.) Apparel...........................            0.394           0.325  PPI for Apparel.
     (11.) Machinery and Equipment...........            0.565           0.163  PPI for Machinery & Equipment.
     (12.) Miscellaneous Products \3\........            2.558           0.519  PPI for Finished Goods Less Food
                                                                                 and Energy.
    B. Labor-related Services................            9.738           9.175
     (1.) Professional Fees: Labor-related               5.510           5.356  ECI for Compensation for
     \4\.                                                                        Professional and Related
                                                                                 Occupations.
     (2.) Administrative and Business Support              n/a           0.626  ECI for Compensation for Office
     Services \5\.                                                               and Administrative Services.
     (3.) All Other: Labor-Related Services              4.228           3.193  ECI for Compensation for Private
     \5\.                                                                        Service Occupations.
    C. Nonlabor-Related Services.............            7.093           7.885
     (1.) Professional Fees: Nonlabor-Related              n/a           4.074  ECI for Compensation for
     \4\.                                                                        Professional and Related
                                                                                 Occupations.
     (2.) Financial Services \6\.............              n/a           1.281  ECI for Compensation for
                                                                                 Financial Activities.
     (3.) Telephone Services.................            0.458           0.627  CPI-U for Telephone Services.
     (4.) Postage............................            1.300           0.963  CPI-U for Postage.
     (5.) All Other: Nonlabor-Related                    5.335           0.940  CPI-U for All Items Less Food
     Services \6\.                                                               and Energy.
                                              ------------------------------------------------------------------
    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.
\2\ To 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.B.3.j. of the preamble of this final rule.
\3\ The ``blood and blood products'' cost category was contained within ``miscellaneous products'' cost category
  in the FY 2002-based IPPS market basket.

[[Page 43848]]

 
\4\ The ``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 IPPS market basket. For more
  detail about how these new categories were derived, we refer readers to sections IV.B.3.s. and v. of the
  preamble of this final rule, on the labor-related share.
\5\ The ``administrative and business support services'' cost category was contained within ``all other: Labor-
  intensive services'' cost category in the FY 2002-based IPPS market basket. The ``all other: Labor-intensive
  services'' cost category is renamed the ``all other: Labor-related services'' cost category for the FY 2006-
  based IPPS market basket.
\6\ The ``financial services'' cost category was contained within the ``all other: Non-labor intensive
  services'' cost category in the FY 2002-based IPPS market basket. The ``all other: Nonlabor intensive
  services'' cost category is renamed the ``all other: Nonlabor-related services'' cost category for the FY 2006-
  based IPPS market basket.

    As we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24156 through 24159), for this final rule, we use the following 
choices with respect to the various proxies:
a. Wages and Salaries
    We use the ECI for wages and salaries for hospital workers (all 
civilian) (series code <greek-i>CIU1026220000000I) to measure the price 
growth of this cost category. This same proxy was used in the FY 2002-
based IPPS 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 IPPS market basket.
c. Fuel, Oil, and Gasoline
    For the FY 2002-based 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 (series code <greek-i>WPU0552). For the FY 2006-
based market basket, we add 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 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 (series code 
<greek-i>PCU324110) as the proxy for this cost category.
d. Electricity
    We use the PPI for commercial electric power (series code 
<greek-i>WPU0542) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based IPPS market basket.
e. Water and Sewage
    We use the CPI for water and sewerage maintenance (all urban 
consumers) (series code <greek-i>CUUR0000SEHG01) to measure the price 
growth of this cost category. This same proxy was used in the FY 2002-
based IPPS 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 also is used to proxy PLI price changes in 
the Medicare Economic Index (68 FR 63244). This same proxy was used in 
the FY 2002-based IPPS market basket.
g. Pharmaceuticals
    We use the PPI for pharmaceutical preparations (prescription) 
(series code <greek-i>PCU32541DRX) to measure the price growth of this 
cost category. This is a special index produced by BLS and is the same 
proxy used in the FY 2002-based IPPS market basket.
h. Food: Direct Purchases
    We use the PPI for processed foods and feeds (series code 
<greek-i>WPU02) to measure the price growth of this cost category. This 
same proxy was used in the FY 2002-based IPPS market basket.
i. Food: Contract Services
    We use the CPI for food away from home (all urban consumers) 
(series code <greek-i>CUUR0000SEFV) to measure the price growth of this 
cost category. This same proxy was used in the FY 2002-based IPPS 
market basket.
j. Chemicals
    We use a blended PPI composed of the PPI for industrial gases 
(NAICS 325120), the PPI for other basic inorganic chemical 
manufacturing (NAICS 325180), the PPI for other basic organic chemical 
manufacturing (NAICS 325190), and the PPI for soap and cleaning 
compound manufacturing (NAICS 325610). 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 (series code <greek-i>WPU061), 
the proxy used in the FY 2002-based IPPS market basket. Chart 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.

                  Chart 3--Blended Chemical PPI Weights
------------------------------------------------------------------------
                                         Weights (in
                Name                      percent)            NAICS
------------------------------------------------------------------------
PPI for Industrial Gases............                35            325120
PPI for Other Basic Inorganic                       25            325180
 Chemical Manufacturing.............
PPI for Other Basic Organic Chemical                30            325190
 Manufacturing......................
PPI for Soap and Cleaning Compound                  10            325610
 Manufacturing......................
------------------------------------------------------------------------

k. Blood and Blood Products
    In the FY 2002-based IPPS market basket, we classified blood and 
blood products into the miscellaneous products category and used the 
PPI for finished goods less food and energy to proxy the price changes 
associated with these expenses. At the time of the rebasing of the FY 
2002-based IPPS market basket, we noticed an apparent divergence 
between the PPI for blood

[[Page 43849]]

and blood derivatives, the price proxy used in the FY 1997-based IPPS 
market basket, and blood costs faced by hospitals over the recent time 
period. A thorough discussion of this analysis is found in the FY 2006 
IPPS final rule (70 FR 47390).
    Since the last rebasing of the market basket, BLS began collecting 
data and publishing an industry PPI for blood and organ banks (NAICS 
621991). For the FY 2006-based IPPS market basket, as we proposed, we 
incorporate this series (series code <greek-i>PCU621991) into the 
market basket and use it to proxy the blood and blood products cost 
category.
l. Medical Instruments
    We use the PPI for medical, surgical, and personal aid devices 
(series code <greek-i>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. Thus, we used the PPI for surgical and medical instruments 
and equipment (series code <greek-i>WPU1562) to proxy this category in 
the FY 2002-based IPPS market basket. The 2002 Benchmark I-O data show 
that this category now represents only 33 percent of these expenses and 
the largest expense category is surgical appliance and supplies 
manufacturing (corresponding to series code <greek-i>WPU1563). Due to 
this reallocation of costs over time, we are changing the price proxy 
for this cost category to the more aggregated PPI for medical, 
surgical, and personal aid devices.
m. Photographic Supplies
    We are eliminating the cost category specific to photographic 
supplies for the proposed FY 2006-based IPPS market basket. These costs 
will now be 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 
will still be accounted for within the IPPS market basket.
n. Rubber and Plastics
    We use the PPI for rubber and plastic products (series code 
<greek-i>WPU07) to measure price growth of this cost category. This 
same proxy was used in the FY 2002-based IPPS market basket.
o. Paper and Printing Products
    We use the PPI for converted paper and paperboard products (series 
code <greek-i>WPU0915) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based IPPS market 
basket.
p. Apparel
    We use the PPI for apparel (series code <greek-i>WPU0381) to 
measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based IPPS market basket.
q. Machinery and Equipment
    We use the PPI for machinery and equipment (series code 
<greek-i>WPU11) to measure the price growth of this cost category. This 
same proxy was used in the FY 2002-based IPPS market basket.
r. Miscellaneous Products
    We use the PPI for finished goods less food and energy (series code 
<greek-i>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 IPPS market basket.
s. Professional Fees: Labor-Related
    We use the ECI for compensation for professional and related 
occupations (private industry) (series code <greek-i>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 IPPS market basket.
t. Administrative and Business Support Services
    We use the ECI for compensation for office and administrative 
support services (private industry) (series code 
<greek-i>CIU2010000220000I) to measure the price growth of this 
category. Previously these costs were included in the ``all other: 
labor-intensive cost'' category (now renamed the ``all other: labor-
related cost'' 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.
u. All Other: Labor-Related Services
    We use the ECI for compensation for service occupations (private 
industry) (series code <greek-i>CIU2010000300000I) to measure the price 
growth of this cost category. This same proxy was used in the FY 2002-
based IPPS market basket.
v. Professional Fees: Nonlabor-Related
    We use the ECI for compensation for professional and related 
occupations (private industry) (series code <greek-i>CIS2020000120000I) 
to measure the price growth of this category. This is the same price 
proxy that we use for the professional fees: labor-related cost 
category.
w. Financial Services
    We use the ECI for compensation for financial activities (private 
industry) (series code <greek-i>CIU201520A000000I) to measure the price 
growth of this cost category. Previously these costs were included in 
the ``all other: nonlabor-intensive cost'' category (now renamed the 
``all other: nonlabor-related cost'' 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.
x. Telephone Services
    We use the CPI for telephone services (series code 
<greek-i>CUUR0000SEED) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based IPPS market 
basket.
y. Postage
    We use the CPI for postage (series code <greek-i>CUUR0000SEEC01) to 
measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based IPPS market basket.
z. All Other: Nonlabor-Related Services
    We use the CPI for all items less food and energy (series code 
<greek-i>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 IPPS market basket. We believe that using the CPI 
for all items less food and energy will remove any double-counting of 
food and energy prices, which 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.
    Chart 4 compares both the historical and forecasted percent changes 
in the FY 2002-based IPPS market basket and the FY 2006-based IPPS 
market basket.

[[Page 43850]]



  Chart 4--FY 2002-Based and FY 2006-Based Prospective Payment Hospital
         Operating Index Percent Change, FY 2004 Through FY 2012
------------------------------------------------------------------------
                                        FY 2002-based     FY 2006-based
                                         IPPS market       IPPS market
          Fiscal year (FY)            basket operating  basket operating
                                        index percent     index percent
                                           change            change
------------------------------------------------------------------------
Historical data:
    FY 2004.........................               4.0               4.0
    FY 2005.........................               4.3               3.9
    FY 2006.........................               4.3               4.0
    FY 2007.........................               3.4               3.6
    FY 2008.........................               4.3               4.0
    Average FYs 2004-2008...........               4.1               3.9
Forecast:
    FY 2009.........................               2.1               2.6
    FY 2010.........................               2.3               2.1
    FY 2011.........................               2.8               2.7
    FY 2012.........................               3.0               2.9
    Average FYs 2009-2012...........               2.6               2.6
------------------------------------------------------------------------
Source: IHS Global Insight, Inc., 2nd Quarter 2009, USMACRO/
  CONTROL0609@CISSIM/TL0509.SIM.

    The differences between the FY 2002-based and the FY 2006-based 
IPPS market basket increases are mostly stemming from the revision the 
proxy used for the chemicals cost category. As stated earlier, we are 
adopting a blended chemical index that is comprised of four industry-
based chemical price proxies that represent approximately 90 percent of 
the hospital industry's chemical expenses. The FY 2002-based IPPS 
market basket used the PPI for industrial chemicals. The PPI for 
industrial chemicals attributes more weight to direct petroleum 
expenses, which is not consistent with a hospital's most recent 
purchasing pattern according to the 2002 Benchmark I-O data. The lower 
weight for direct petroleum expenses in the blended chemical index 
results in less volatile price movements. We believe the blended index 
represents a technical improvement because it better reflects the 
purchasing patterns of hospitals.
    Also contributing to the differences between the FY 2002-based and 
the FY 2006-based IPPS market basket increases is 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 IPPS market basket is 5.5 percent compared to 9.4 
percent in the FY 2006-based IPPS market basket.
4. Labor-Related Share
    Under section 1886(d)(3)(E) of the Act, the Secretary estimates 
from time to time the proportion of payments that are labor-related. 
``The Secretary shall adjust the proportion (as estimated by the 
Secretary from time to time) of hospitals' costs which are attributable 
to wages and wage-related costs of the DRG prospective payment rates * 
* *.'' We refer to the proportion of hospitals' costs that are 
attributable to wages and wage-related costs as the ``labor-related 
share.''
    The labor-related share is used to determine the proportion of the 
national PPS base payment rate to which the area wage index is applied. 
We include a cost category in the labor-related share if the costs are 
labor intensive and vary with the local labor market. Given this, as we 
proposed, we are including in the labor-related share the national 
average proportion of operating costs that are attributable to wages 
and salaries, employee benefits, contract labor, the labor-related 
portion of professional fees, administrative and business support 
services, and all other: labor-related services (previously referred to 
in the FY 2002-based IPPS market basket as labor-intensive) (74 FR 
24159). 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 labor-intensive 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.
    For the rebasing of the FY 2002-based IPPS market basket in the FY 
2006 IPPS final rule, we included in the labor-related share the 
national average proportion of operating costs that are attributable to 
wages and salaries, employee benefits, contract labor, professional 
fees, and labor-intensive services (70 FR 47393). For the FY 2006-based 
IPPS market basket rebasing, the inclusion of the administrative and 
business support services cost category into the labor-related share 
remains consistent with the current labor-related share because this 
cost category was previously included in the labor-intensive cost 
category. As previously stated, we are establishing 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 IPPS 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

[[Page 43851]]

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 OMB, we contacted the industry and received 
responses to our survey from 108 hospitals. 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:
    <bullet> 34 percent of accounting and auditing services;
    <bullet> 30 percent of engineering services;
    <bullet> 33 percent of legal services; and
    <bullet> 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 2006-based IPPS 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.
    Comment: Several commenters disagreed with the proposed methodology 
to apportion home offices costs into the labor-related share.
    Response: Our proposed methodology was primarily based on data from 
the Medicare cost reports, as well as a CMS database of Home Office 
Medicare Records (HOMER) (a database that provides city and state 
information (addresses) for home offices). 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 hospital with 
the location of the hospital's home office. We then proposed to 
determine the proportion of costs that should be allocated to the 
labor-related share based on the percent of hospitals that had home 
offices located in their respective local labor markets--defined as 
being in the same MSA. Using this proposed methodology, we had 
determined that 27 percent of hospitals that had home offices had those 
home offices located in their respective local labor markets, and 
therefore, we proposed to allocate 27 percent of NAICS 55 expenses to 
the labor-related share.
    In response to the public comments submitted, we have revisited the 
home office cost allocation method and determined that a revision of 
the approach is appropriate. As an alternative to using provider counts 
(where each provider counts evenly) as the means by which home office 
costs are apportioned to the labor-related share, or deemed nonlabor-
related, for this final rule, we are weighting the providers by home 
office compensation costs as reported in Worksheet S-3, part II, line 
11 of the hospital MCR. (The Medicare cost report includes, but does 
not explicitly itemize, all home office costs. However, it does contain 
a line item for home office compensation costs.) We believe that this 
revised methodology of weighting the providers based on home office 
compensation costs provides a more technically appropriate estimate of 
the proportion of NAICS 55 expenses that should be allocated to the 
labor-related share.
    As proposed, we are still continuing to use the same data sources 
and methodology to determine whether a hospital's home office is 
located in their respective MSA. Once we determined whether the 
hospital's home office is located in their respective MSA, we used 
additional data on home office compensation costs from the Medicare 
cost report to assign weights to the providers. Using this revised 
methodology, we determined that 57 percent of hospitals' home office 
costs are paid into their respective local labor markets--defined as 
being in the same MSA.
    As was published in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24159 through 24161), below is a more detailed explanation on 
our methodology used to determine whether a hospital's home office was 
located in their respective MSA. In addition to the number of providers 
that appeared in the proposed rule, we have also included our weighted 
results.
    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 hospital with the location of the hospital's home 
office. We then placed hospitals into one of the following three 
groups:
    <bullet> Group 1--Hospital and home office are located in different 
States;
    <bullet> Group 2--Hospital and home office are located in the same 
State and same city; and
    <bullet> Group 3--Hospital and home office are located in the same 
State and different city.
    We found that 59 percent of the hospitals with home offices (34 
percent of total home office compensation costs for hospitals with home 
offices) were classified into Group 1 (that is, different State) and, 
thus, these hospitals were determined to not be located in the same 
local labor market as their home office.
    We found that 12 percent of all hospitals with home offices (35 
percent of total home office compensation costs for hospitals with home 
offices) were classified into Group 2 (that is, same State and same 
city and, therefore, the same MSA). Consequently, these hospitals were 
determined to be located in the same local labor market as their home 
offices.
    We found that 29 percent of all hospitals with home offices (30 
percent of total home office compensation costs for hospitals 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 hospital and its home office, we found that 
16 percent of all hospitals with home offices (22 percent of total home 
office compensation costs for hospitals 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 
28 percent of hospitals with home offices (57 percent of total home 
office compensation costs for hospitals with home offices) had home 
offices located within their local labor market (that is, 12 percent of 
hospitals with home offices (35 percent of total home office 
compensation costs for hospitals with home offices) had their home 
offices in the same State and city (and, thus, the same MSA), and 16 
percent of hospitals with home offices (22 percent of total

[[Page 43852]]

home office compensation costs for hospitals with home offices) had 
their home offices in the same State, a different city, but the same 
MSA). We note that due to data anomalies associated with home office 
compensation cost data on the Medicare cost report, we trimmed the data 
and, thus, the number of providers classified in each of the groups is 
slightly different than we had published in the proposed regulation. 
The aforementioned trim resulted in excluding hospitals whose home 
office costs as a percent of total hospital costs were in the top and 
bottom five percent of that ratio. In the proposed rule, we had 
determined that 27 percent of providers had a home office located in 
their respective MSA. Applying our trimming method resulted in 28 
percent of providers having a home office located in their respective 
MSA. Therefore, using the results of our weighting methodology, we are 
classifying 57 percent of the NAICS 55 costs into the professional 
fees: labor-related cost category and the remaining 43 percent into the 
professional fees: nonlabor-related cost category.
    Comment: Several commenters suggested that CMS maintain the labor-
related share from the FY 2002-based market basket (69.7 percent) for 
hospitals with an area wage index greater than 1.0 until a 
statistically valid approach for changing the labor-related share can 
be implemented. In addition, some commenters stated that, although CMS 
is required to rebase the hospital market basket, the proposal to 
revise the labor-related share is not required by statute and, thus, 
represents a discretionary decision by CMS.
    Response: As a matter of practice, CMS typically rebases and 
revises the market basket and the labor-related share simultaneously. 
We believe that doing so results in a more technically accurate market 
basket that has the effect of more precisely updating payments to 
Medicare's providers. We believe that revising the labor-related share 
is based on empirical research and relies on more recent data, 
representing a technical improvement to the construction of the market 
basket. The methodology relies, in part, on the results of a survey of 
professional fees that was nationally representative and inclusive of 
large, urban-based hospitals and whose results were estimated using 
widely accepted survey estimation techniques. It also is dependent on 
data from the Medicare cost reports and the HOMER database that showed 
43 percent of total home office compensation costs for hospitals with 
home offices had home offices located in different MSAs. Therefore, we 
disagree with the commenter's suggestion to continue to use a labor-
related share of 69.7 percent.
    Comment: Several commenters disagreed with the proposal to only 
allocate a portion of home office costs to the labor-related share 
based on whether these costs were incurred in the local labor market. 
One commenter stated that it is generally understood that there is a 
significant degree of correlation between the location of a 
multihospital system and the geographic locations of its member 
hospitals. All systems except the limited number of truly national 
hospital chains tend to be clustered in subareas of the country. 
Therefore, the commenters claimed that an assumption that 73 percent of 
home office labor costs more closely resemble national versus regional 
wage patterns is not necessarily supported by the methodology CMS 
proposed. Second, the commenter stated that it is generally the case 
that home office operations of multihospital systems and chains tend to 
be located in urban areas, even if the hospitals in the system or chain 
are nonurban or rural. The commenter further stated that this implies 
that average wage costs in these system headquarters may be 
systematically higher than the national average wage cost, making a 
national pricing proxy suspect in this case, as well.
    Response: In rebasing the labor-related share, we have identified 
new methodologies and newly available empirical evidence to estimate 
the portion of the standardized payment amount that is subject to the 
hospital area wage index. In determining what proportion of that amount 
should be apportioned to the labor-related share and what proportion 
should be deemed nonlabor-related, we referenced the following:
    Section 1886(d)(3)(E)(i) of the Act states that ``in general.--
Except as provided in clause (ii), the Secretary shall adjust the 
proportion (as estimated by the Secretary from time to time) of 
hospitals' costs which are attributable to wages and wage-related 
costs, of the DRG prospective payment rates computed under subparagraph 
(D) for area differences in hospital wage levels by a factor 
(established by the Secretary) reflecting the relative hospital wage 
level in the geographic area of the hospital compared to the national 
average hospital wage level.''
    Because the labor-related share determined through the market 
basket is linked to the hospital area wage index, for this rebasing, we 
have identified new methodologies and newly available empirical 
evidence to determine a labor-related share that more precisely 
reflects the wage and wage-related proportion of activities purchased 
where the individual hospital is located. Services purchased beyond the 
boundaries of the local labor market of the individual hospital are 
thereby excluded from the labor-related share.
    In order to distribute the appropriate proportion of home office 
costs to the labor-related share, we constructed a methodology that is 
similar to that undertaken to determine the area wage index. That is, 
we analyzed the locations of the individual hospitals and their 
respective home offices (at the MSA-level) as well as the home office 
compensation costs of the individual hospitals. The proportion of home 
office costs that we do not include in the labor-related share was not 
based on assumption, but rather it was based on Medicare cost report 
data and the HOMER database. Those data showed 43 percent of home 
office compensation costs were purchased from a different MSA than 
where the individual hospital is located and, thus, that proportion of 
home office costs are excluded from the labor-related share. The 
remaining 57 percent of home office compensation costs were purchased 
in the same MSA as the hospital; therefore, that proportion of home 
office costs is included in the labor-related share.
    Based on data published by the BEA, we determined that the share of 
total hospital costs attributable to home office costs in 2006 was 5.8 
percent. Applying the aforementioned shares to the 5.8 percent figure, 
we determined that 2.494 percentage points of total costs represent 
home office costs that are not incurred in the same local labor market 
as the hospital itself and, thus, are removed from the labor-related 
share. The remaining 3.306 percentage points remain in the labor-
related share.
    Comment: Several commenters addressed the survey CMS conducted 
regarding certain professional fees purchased by hospitals, stating 
that CMS used this survey to impute a 2.631 percentage point reduction 
in the labor-related share. These commenters stated that CMS failed to 
share data on the characteristics of the hospitals that responded, 
possible selection bias, or survey methodology. They also cited that 
the survey only received 108 respondents, which could lead to a high 
margin of error. The commenters stated that CMS provides no indication 
that it assessed for response bias in its survey nor did it explain how 
(or whether) it assured that the survey respondents were representative 
of all hospitals or of hospitals in wage areas greater than 1.0. 
Another commenter stated that the CMS survey assumed that such 
professional

[[Page 43853]]

services should be available in the local labor market and ignored some 
hospital's unavoidable need to incur those costs in order to comply 
with Federal and State requirements. The commenters requested CMS not 
remove a portion of professional fees from the labor-related share 
based on the results of this survey.
    Response: We disagree with the commenters' suggestion that we 
ignore the survey results and continue to assign 100 percent of 
nonmedical professional fees to the labor-related share, as has been 
done historically. We believe a method that distributes these fees 
based on empirical research and data represents a technical improvement 
to the construction of the market basket. Our intent to survey for this 
purpose was announced in the Federal Register on December 9, 2005 (70 
FR 73250). We received no public comment at that time.
    Although several commenters indicated that the professional fees 
survey was used to decrease the labor-related share by 2.631 percentage 
points, that indication is not correct. In the FY 2006-based IPPS 
market basket, nonmedical professional fees that were subject to 
allocation based on the survey results represent 2.114 percent of total 
costs (and are limited to those fees related to Accounting & Auditing, 
Legal, Engineering, and Management Consulting services). Based on our 
survey results, we are apportioning 1.335 percentage points of the 
2.114 percentage point figure into the labor-related share and 
designating the remaining 0.779 percentage point as nonlabor-related.
    The survey's methods unfolded in the following manner: A small 
sample of 12 hospitals was 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, urban-based 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:

 
------------------------------------------------------------------------
                                                           Responding
                                        All hospitals       hospitals
                                           percent           percent
                                       distribution &    distribution &
                                      average FTE size  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 post-stratified 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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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 for each of the four types of professional 
services surveyed.
    We do not assume that access to professional services such as those 
included in this survey should be available to all hospitals within 
their respective local labor market and we understand that, in some 
cases, hospitals may have to obtain these services from vendors beyond 
those boundaries. However, for purposes of estimating the labor-related 
share of the market basket, in accordance with the

[[Page 43854]]

aforementioned section 1886(d)(3)(E)(i) of the Act, we have used the 
newly available empirical evidence to determine the wage and wage-
related costs in the labor-related share that are incurred within the 
geographic location of the hospital itself.
    Comment: Several commenters questioned why CMS chose to conduct a 
survey to determine which proportion of professional fees is purchased 
in the local labor market when they could have conducted a study of 
Medicare cost reports for hospitals which, on line 22.01 of Worksheet 
S-3, part II, contains hospitals' average annual wage for professional 
services. In addition, one commenter suggested that instead of a 
survey, CMS should have proposed a change to the cost report in order 
to collect accurate data for all facilities.
    Response: The Medicare cost report data do provide an average 
hourly wage for administrative and general (A&G) services (including 
those professional services included in the CMS survey) under contract. 
However, the data do not distinguish whether these services were 
purchased in the local labor market. In addition, a comparison of the 
average hourly wage for A&G services performed by hospital staff (as 
reported in line 22 of Worksheet S-3, part II) and the average hourly 
wage for A&G services under contract (as reported on line 22.01 of 
Worksheet S-3, part II) would not be sufficient to determine whether 
the contracted services were purchased in the local or national labor 
market. The reason for this is that the average A&G wages reported for 
hospital staff could represent a different occupational mix than the 
average A&G wages under contract. For example, a hospital could choose 
to employ staff to perform their bookkeeping and tax preparation 
services, but contract out their legal services. The higher average 
annual wage rate for the contracted A&G services compared to the in-
house A&G services would not necessarily be a result of purchasing 
services in differing geographic areas, but rather a reflection of the 
different skill-mix represented in each group.
    At the time this survey was initiated, it was not a viable option 
to alter the Medicare cost report in such a way as to collect this 
information due to the long periods of time between when the Medicare 
cost report questions are updated.
    Comment: One commenter stated that it is inappropriate to restrict 
the wage index adjustment to labor-related costs that vary with the 
local labor market without recognizing that there are significant 
nonlabor costs that vary with the local market, of which professional 
liability insurance is but one obvious example. The commenter cited a 
regression analysis which showed that 85 percent of the variation in 
the estimated total unit costs of Medicare fee-for-service cases was 
explained by local input prices.
    Response: For purposes of estimating the labor-related share of the 
market basket, in accordance with the aforementioned section 
1886(d)(3)(E)(i) of the Act, we include only wage and wage-related 
costs in that proportion. The law does not call for the inclusion of 
nonlabor-related costs to be included in the labor-related share.
    As described in the FY 2006 IPPS final rule (70 FR 47394), we 
previously performed regression analyses to reevaluate the assumptions 
used in determining the labor-related share. Using several regression 
specifications, we attempted to determine the proportion of costs that 
are influenced by the area wage index. We note that the results 
obtained for the relevant coefficients (roughly equivalent to the labor 
share) using the various specifications were less than 85 percent.
    Comment: Many commenters disagreed with CMS removing any portion of 
professional fees from the labor-related share. The commenters stated 
that CMS did not appear to take into account the prevailing wages of 
areas from which hospitals typically purchase professional fees. They 
believe that it is uncommon for hospitals to purchase professional 
services from firms located in areas with lower prevailing wages than 
their own wage area. Therefore, they claimed that CMS failed to 
recognize the premium that hospitals must pay professionals from 
similar or higher prevailing wage areas.
    Several commenters also believed that CMS' assertion that a portion 
of professional fees is nonlabor-related is invalid because 
professional fees do, in fact, vary across regions and localities. The 
commenters indicated that even if a professional services firm is not 
based in the local area, professional fees are modified in response to 
local market factors. They added that rates and fees are set in a 
competitive market and must reflect the conditions of that market. In 
addition, several commenters stated that professional services are 
highly labor-intensive and constitute a necessary business expense. 
Finally, one commenter indicated that even though these services may be 
purchased from another entity, they represent substitutes for hospital-
employed staff and, thus, should be regarded by CMS as labor-related.
    Response: We disagree with the commenters' assertion that CMS 
should include all professional fees in the labor-related share. We 
recognize that hospitals may often purchase professional services from 
geographic areas with higher prevailing wages than their own. We 
further recognize that the prices for these services vary across 
regions and localities and that the services themselves are labor-
intensive. However, because we now have empirical evidence we can use 
to establish what portion of these professional fees are actually 
incurred in the local labor market, in accordance with section 
1886(d)(3)(E)(i) of the Act, we are including only such wage and wage-
related costs in the labor-related share. To the extent the evidence 
shows that the fees paid do not vary with, or are not influenced by, 
the local labor market, we are not including them in the labor-related 
share and are not subjecting them to the wage index adjustment.
    Comment: Several commenters stated that the proposed change to the 
labor-related share will only affect hospitals in areas with a wage 
index over 1.0. However, the commenters claimed that these higher-wage 
hospitals are much more likely to hire professional firms that are 
actually located in their local labor market and, thus, are paying 
higher wages. The commenters stated that most urban areas have an 
excellent supply of professional services firms, thereby enabling urban 
hospitals to purchase such services from a local or regional market 
rather than a national market. In addition, some commenters claimed 
that this proposal will have an adverse effect on urban hospitals in 
general. One commenter stated that the proposed labor-related share 
reduction would most seriously affect large urban teaching hospitals.
    One commenter stated that CMS' proposed change to the labor-related 
share is counter-intuitive to CMS's policy goal and would actually 
dampen the sensitivity of the IPPS payment methodology to area wage 
variations. The commenter cited that academic medical centers located 
in large urban markets are the most likely hospitals to be in markets 
with substantial local competition for professional services--markets 
in which professional services fees are most likely to be influenced by 
local labor market conditions. The commenter stated that the proposed 
methodology premised on the assumption that 73 percent of home office 
costs reflect national average wage patterns produces a substantial 
downward payment bias for teaching hospitals. Thus, the commenter urged 
CMS to only use more recent data and hold all other aspects constant, 
which

[[Page 43855]]

would result in a labor-related share of 72.1 percent. The commenter 
stated that, at a minimum, the current labor-related share of 69.7 
percent should be retained, pending further study and analysis.
    Response: We recognize that many hospitals could be affected 
differently by a change in the labor-related share. However, we believe 
the law calls for this proportion to be based on a national average and 
does not distinguish between types of hospitals for purposes of 
estimating or applying the labor-related share.
    We disagree with the suggestions that the FY 2006-based market 
basket's labor-related share should be set to 72.1 percent (as a result 
of holding all other aspects constant from the FY 2002-based market 
basket) or that it should be held to its current 69.7 percent level. We 
believe that incorporating more recent data, as well as the results of 
our research, represents a technical improvement to the accuracy of the 
market basket.
    Comment: One commenter stated that in order for hospitals to become 
more efficient and cost effective, they often use contract employees. 
The commenter further stated that in order to obtain the best price and 
service, these employees are located outside the local labor market. 
The commenter claimed that disallowing these services to be included in 
the wage index survey would reduce their labor-related payment rate and 
not adequately reimburse for care of Medicare patients.
    Response: We do include direct patient contract labor expenses in 
the labor-related share of the IPPS market basket. These costs are 
included in the Wages & Salaries and Benefits cost weights. We only 
exclude from the labor-related share those contract labor costs 
associated with professional fees and home office costs that were 
purchased outside of the local labor market. As stated previously, the 
purpose of the labor-related share is to determine which portion of the 
standardized payment amount that is subject to the hospital wage index. 
Therefore, we define the labor-related share as those expenses that are 
labor-intensive and vary with, or are influenced by, the local labor 
market.
    Comment: One commenter stated that without survey detail, they were 
unsure of CMS' treatment of professional fees paid for by a home 
office. The commenter stated that currently CMS excludes this expense 
for wage index purposes as the ``home office cost center is not 
included in the current definition of contract services for the wage 
index.'' The commenter believed that this created an inconsistency 
among the independent hospitals, which can include the professional fee 
costs/hours while health systems cannot. The commenter asked CMS to 
comment on its treatment of professional fees paid for by a home office 
and its use of such data in its survey.
    Response: The CMS survey asked the responding hospitals to share 
what proportion of their professional services were purchased from 
vendors located beyond their local labor market. We expected that, 
irrespective of the mechanism of the purchase (that is, purchased 
directly by the hospital or purchased by the hospital's home office on 
the hospital's behalf), the approach to answering the questions remains 
the same. Therefore, we believe independent hospitals, as well as 
hospital groups, were captured appropriately.
    Comment: One commenter questioned the conclusion from CMS' 
methodology, which implicitly assumes that the labor costs associated 
with ``non-local'' services, or those that are not adjusted at all for 
area wage variations, more closely reflects the national average than 
labor market conditions in the local area of the hospital receiving the 
services. The commenter described the market for professional services 
provided to hospitals as those that can be divided into the following 
categories: (1) Truly local firms whose clientele is comprised of the 
hospitals in a specific geographic area; (2) local offices of regional 
or national firms that will staff local assignments with some mix of 
local and non-local professionals; (3) firms that are ``regional'' in 
the sense of serving multiple geographic markets from a centralized 
location; and (4) truly national firms that operate nationwide from a 
single headquarters office and that serve local hospitals without 
assistance from locally based practitioners. The commenter claimed that 
CMS implicitly assumed that any firm that does not fall into the first 
category would experience labor costs indistinguishable from those that 
fall in the last category. However, the commenter stated that, in 
reality all such firms compete against each other in each local market. 
Therefore, the commenter added, local labor market conditions drive the 
prices local hospitals will pay for professional services even if those 
services wind up being rendered by professionals from out of town. The 
commenter stated that there is substantial regional variation in 
salaries paid to entry-level and early-career professionals who 
represent the lion's share of the cost that will be billed to 
hospitals. The commenter concluded that a payment methodology premised 
on the notion of a national professional services market with uniform 
prices fails to reflect the reality of what hospitals pay for 
professional services. The commenter also states that CMS did not 
disclose how professional services firms were identified as being 
``national'' firms in its survey. The commenter believed that 
determining the location of a contract based on the mailing address of 
the contractor could materially understate the volume of services 
rendered by national or regional firms with a local presence, which 
would be fully subject to local labor market conditions. Thus, the 
commenter concluded the effect of reducing the labor-related share 
would be to dampen the sensitivity of the IPPS payment methodology to 
area wage variations.
    Response: We recognize that fees paid for professional services 
provided by firms not located in the same local labor market as the 
hospital may be purchased in local labor markets and not always in a 
national market. However, given that we now have empirical evidence 
that can be used to estimate the portion of costs that varies based on 
the local labor market, we believe it is in keeping with section 
1886(d)(3)(E)(i) of the Act to only assign that portion that does vary 
to the labor-related share. Section 1886(d)(3)(E)(i) of the Act states 
that ``in general.--Except as provided in clause (ii), the Secretary 
shall adjust the proportion (as estimated by the Secretary from time to 
time) of hospitals' costs which are attributable to wages and wage-
related costs, of the DRG prospective payment rates computed under 
subparagraph (D) for area differences in hospital wage levels by a 
factor (established by the Secretary) reflecting the relative hospital 
wage level in the geographic area of the hospital compared to the 
national average hospital wage level.''
    Comment: One commenter stated that the treatment of contract labor 
has a direct influence on the labor-related share, which in turn 
affects the area wage index adjusted portion of the payments. 
Conversely, the commenter stated, because the labor-related share now 
includes accounting and auditing services, it is not clear whether the 
data currently used to develop the area wage index are inclusive of the 
costs for accounting and auditing because consideration of these costs 
for area wage index purposes is only a current CMS wage data policy 
convention. Therefore, the commenter added, there could be a mismatch 
between the data CMS is using for the labor-related share

[[Page 43856]]

determination and the data CMS utilizes for developing the area wage 
index.
    Response: We are not changing our methodology on how contract labor 
costs are included in the IPPS market basket. As has been done 
historically, the market basket includes all contract labor services 
purchased by the hospital. Direct patient contract labor costs are 
included in the Wage & Salaries and Benefits cost weights, whereas 
other nondirect patient contract labor costs are represented in the 
other cost weights.
    Also, we interpret the commenter's statement to imply that 
accounting and auditing services were previously excluded from the 
labor-related share. Historically, 100 percent of the accounting and 
auditing services expenses were included in the labor-related share. We 
proposed to only include 66 percent of the accounting and auditing 
costs in the labor-related share because the remaining 34 percent of 
these costs were determined to have been purchased outside of the local 
labor market.
    With respect to a possible mismatch between the labor-related share 
and the area wage index, data from Worksheet S-3, part II, of the 
Medicare cost report are used to estimate both. Those data provide 
information on wage and wage-related costs incurred by the hospital but 
are not detailed enough to distinguish between costs incurred via 
purchase and costs incurred via direct hire. In estimating the labor-
related share, we incorporate data from other data sources to 
supplement the Medicare cost report data to more accurately capture and 
apportion wage and wage-related costs that are purchased.
    Comment: One commenter questioned whether the proposed revision of 
the labor-related share of the operating IPPS rates would affect the 
capital IPPS geographic adjustment factor (GAF), which is derived from 
the hospital wage index. The commenter requested that CMS review 
whether the formula used to determine the capital GAF should be revised 
based on the update of the operating IPPS labor-related share.
    Response: In determining payments under the capital IPPS, the 
capital rate is adjusted for differences in local cost variations by a 
factor (the GAF) that is equal to the hospital's applicable wage index 
raised to the 0.6848 power (Sec.  412.316(a) of our regulations). The 
formula for the GAF was developed using a regression analysis and the 
exponential form of this factor is used in order to apply a single 
factor to the entire capital rate rather than splitting the capital 
rate into labor-related share and nonlabor-related share (56 FR 43375). 
The formula for the GAF is independent of the operating IPPS labor-
related share and, therefore, requires no adjustment based on the 
revision of the operating IPPS labor-relate share. The GAF will 
continue to be computed as the hospital's applicable wage index raised 
to the 0.6848 power.
    After consideration of the public comments received, in this final 
rule, we are revising our labor-related share that we proposed in the 
FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24159-24161) to 
incorporate a revision to our methodology for allocating NAICS 55 
expenses to the labor-related share.
    Below is a chart comparing the FY 2006-based labor-related share 
and the FY 2002-based labor-related share.

 Chart 5--Comparison of the FY 2006-Based Labor-Related Share and the FY
                     2002-Based Labor-Related Share
------------------------------------------------------------------------
                                        FY 2002-based     FY 2006-based
                                        market basket     market basket
                                        cost weights      cost weights
------------------------------------------------------------------------
Wages and Salaries..................            48.171            47.213
Employee Benefits...................            11.822            12.414
Professional Fees: Labor-Related....             5.510             5.356
Administrative and Business Support   ................             0.626
 Services...........................
All Other: Labor-Related Services...             4.228             3.193
                                     -----------------------------------
    Total Labor-Related Share.......            69.731            68.802
------------------------------------------------------------------------

    Using the cost category weights from the FY 2006-based IPPS market 
basket, we calculated a labor-related share of 68.802 percent, 
approximately 0.9 percentage points lower than the current labor-
related share of 69.731.
    We continue to believe, as we have stated in the past, that these 
operating cost categories are related to, influenced by, or vary with 
the local markets. Therefore, our definition of the labor-related share 
continues to be consistent with section 1886(d)(3) of the Act.
    Using the cost category weights that we determined in section 
IV.B.1. of this preamble, we calculated a labor-related share of 68.802 
percent, using the FY 2006-based IPPS market basket. Accordingly, we 
are implementing a labor-related share of 68.8 percent for discharges 
occurring on or after October 1, 2009. We note that section 403 of 
Public Law 108-173 amended sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) 
of the Act to provide that the Secretary must employ 62 percent as the 
labor-related share unless this employment ``would result in lower 
payments than would otherwise be made.''
    As we proposed, we also are updating the labor-related share for 
Puerto Rico. Consistent with our methodology for determining the 
national labor-related share, we add the Puerto Rico-specific relative 
weights for wages and salaries, employee benefits, and contract labor. 
Because there are no Puerto Rico-specific relative weights for 
professional fees and labor intensive services, we use the national 
weights.
    Below is a chart comparing the FY 2006-based Puerto Rico-specific 
labor-related share and the FY 2002-based Puerto Rico-specific labor-
related share.

[[Page 43857]]



  Chart 6--Comparison of the FY 2006-Based Puerto Rico-Specific Labor-
Related Share and FY 2002-Based Puerto Rico-Specific Labor-Related Share
------------------------------------------------------------------------
                                        FY 2002-based     FY 2006-based
                                        market basket     market basket
                                        cost weights      cost weights
------------------------------------------------------------------------
Wages and Salaries..................            40.201            44.221
Benefits............................             8.782             8.691
Professional Fees: Labor-Related....             5.510             5.356
Administrative and Business Support   ................             0.626
 Services...........................
All Other: Labor-Related Services...             4.228             3.193
                                     -----------------------------------
    Total Labor-Related Share.......            58.721            62.087
------------------------------------------------------------------------

    Using the FY 2006-based Puerto Rico cost category weights, we 
calculated a labor-related share of 62.087 percent, approximately 3.4 
percentage points higher than the current Puerto-Rico specific labor-
related share of 58.721. Accordingly, we are adopting an updated Puerto 
Rico labor-related share of 62.1 percent.

C. Separate Market Basket for Certain Hospitals Presently Excluded from 
the IPPS

    In the FY 2006 IPPS final rule (70 FR 47396), we adopted the use of 
the FY 2002-based IPPS operating market basket to update the target 
amounts for children's and cancer hospitals and religious nonmedical 
health care institutions (RNHCIs). Children's and cancer hospitals and 
RNHCIs are still reimbursed solely under the reasonable cost-based 
system, subject to the rate-of-increase limits. Under these limits, an 
annual target amount (expressed in terms of the inpatient operating 
cost per discharge) is set for each hospital based on the hospital's 
own historical cost experience trended forward by the applicable rate-
of-increase percentages.
    As we proposed (74 FR 24161), under the broad authority in sections 
1886(b)(3)(A) and (B), 1886(b)(3)(E), and 1871 of the Act and section 
4454 of the BBA, consistent with our use of the IPPS operating market 
basket percentage increase to update target amounts, we are using the 
FY 2006-based IPPS operating market basket percentage increase to 
update the target amounts for children's and cancer hospitals and 
RNHCIs.
    Due to the small number of children's and cancer hospitals and 
RNHCIs that receive, in total, less than 1 percent of all Medicare 
payments to hospitals and because these hospitals provide limited 
Medicare cost report data, we are unable to create a separate market 
basket specifically for these hospitals. Based on the limited data 
available, we believe that the FY 2006-based IPPS operating market 
basket most closely represents the cost structure of children's and 
cancer hospitals and RNHCIs. Therefore, we believe that the percentage 
change in the FY 2006-based IPPS operating market basket is the best 
available measure of the average increase in the prices of the goods 
and services purchased by cancer and children's hospitals and RNHCIs in 
order to provide care.
    We did not receive any public comments on the provisions of this 
section.

D. Rebasing and Revising the Capital Input Price Index (CIPI)

    The CIPI was originally described in the FY 1993 IPPS final rule 
(57 FR 40016). There have been subsequent discussions of the CIPI 
presented in the IPPS proposed and final payment rules. The FY 2006 
IPPS final rule (70 FR 47387) discussed the most recent rebasing and 
revision of the CIPI to a FY 2002 base year, which reflected the 
capital cost structure of the hospital industry in that year.
    As we proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24161), we are rebasing and revising the CIPI to a FY 2006 base 
year to reflect the more current structure of capital costs in 
hospitals. As with the FY 2002-based index, we developed two sets of 
weights in order to calculate the FY 2006-based CIPI. The first set of 
weights identifies the proportion of hospital capital expenditures 
attributable to each expenditure category, while the second set of 
weights is a set of relative vintage weights for depreciation and 
interest. The set of vintage weights is used to identify the proportion 
of capital expenditures within a cost category that is attributable to 
each year over the useful life of the capital assets in that category. 
A more thorough discussion of vintage weights is provided later in this 
section.
    Both sets of weights are developed using the best data sources 
available. In reviewing source data, we determined that the Medicare 
cost reports provided accurate data for all capital expenditure cost 
categories. We used the FY 2006 Medicare cost reports for IPPS 
hospitals to determine weights for all three cost categories: 
depreciation, interest, and other capital expenses.
    Lease expenses are unique in that they are not broken out as a 
separate cost category in the CIPI, but rather are proportionally 
distributed among 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 
previous rebasings of the CIPI, we first assumed 10 percent of lease 
expenses represents overhead and assigned them to the other capital 
expenses cost 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 and fixed 
equipment; and (2) movable equipment. The apportionment between 
building and fixed equipment and movable equipment was determined using 
the Medicare cost reports. This methodology was also used to compute 
the apportionment used in the FY 2002-based index.
    The total interest expense cost category is split between 
government/nonprofit interest and for-profit interest. The FY 2002-
based CIPI 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 for-profit interest and was 
proxied by the average yield on Moody's Aaa bonds (70 FR 47387).
    For this rebasing, we derived the split using the relative FY 2006 
Medicare cost report data on interest expenses for government/nonprofit 
and for-profit hospitals. Based on these data, we calculated an 85/15 
split between

[[Page 43858]]

government/nonprofit and for-profit interest. We believe it is 
important that this split reflects the latest relative cost structure 
of interest expenses.
    Chart 7 presents a comparison of the FY 2006-based CIPI cost 
weights and the FY 2002-based CIPI cost weights.

  Chart 7--FY 2006-Based CIPI Cost Categories, Weights, and Price Proxies With FY 2002-Based CIPI Included for
                                                   Comparison
----------------------------------------------------------------------------------------------------------------
                                                  FY 2002      FY 2006
                Cost categories                   weights      weights                  Price proxy
----------------------------------------------------------------------------------------------------------------
Total.........................................      100.00       100.00   ......................................
Total depreciation............................       74.583       75.154  ......................................
Building and fixed equipment depreciation.....       36.234       35.789  BEA chained price index for
                                                                           nonresidential construction for
                                                                           hospitals and special care
                                                                           facilities--vintage weighted (25
                                                                           years).
Movable equipment depreciation................       38.349       39.365  PPI for machinery and equipment--
                                                                           vintage weighted (12 years).
Total interest................................       19.863       17.651  ......................................
Government/nonprofit interest.................       14.896       15.076  Average yield on domestic municipal
                                                                           bonds (Bond Buyer 20 bonds)--vintage-
                                                                           weighted (25 years).
For-profit interest...........................        4.967        2.575  Average yield on Moody's Aaa bonds--
                                                                           vintage-weighted (12 years).
Other.........................................        5.554        7.195  CPI-U for residential rent.
----------------------------------------------------------------------------------------------------------------

    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 CIPI 
is intended to capture the long-term consumption of capital, using 
vintage weights for 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 and fixed equipment, movable equipment, and interest. We used 
the vintage weights to compute vintage-weighted price changes 
associated with depreciation and interest expense. Following 
publication of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, and in 
order to provide greater transparency, we posted on the CMS market 
basket Web page at: http://www.cms.hhs.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp#TopOfPage an illustrative spreadsheet 
that contains an example of how the vintage-weighted price indexes are 
calculated.
    Vintage weights are an integral part of the CIPI. 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 CIPI accurately 
reflects the annual price changes associated with capital costs, and is 
a useful simplification of the actual capital investment process. By 
accounting for the vintage nature of capital, we are able to provide an 
accurate, 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 CIPI reflects 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 and 
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 2006.
    In order to estimate capital purchases using data on depreciation 
expenses, the expected life for each cost category (building and fixed 
equipment, movable equipment, and interest) is needed to calculate 
vintage weights. We used FY 2006 Medicare cost reports to determine the 
expected life of building and fixed equipment and of movable equipment. 
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. From the FY 
2006 Medicare cost reports, the expected life of building and fixed 
equipment was determined to be 25 years, and the expected life of 
movable equipment was determined to be 12 years. The FY 2002-based CIPI 
was based on an expected life of building and fixed equipment of 23 
years. It used 11 years as the expected life for movable equipment.
    As we proposed, we used the building and fixed equipment and 
movable equipment weights derived from FY 2006 Medicare cost reports to 
separate the depreciation expenses into annual amounts of building and 
fixed equipment depreciation and movable equipment depreciation (74 FR 
24162). Year-end asset costs for building and fixed equipment and 
movable equipment were determined by multiplying the annual 
depreciation amounts by the expected life calculations from the FY 2006 
Medicare cost reports. 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 and 
fixed equipment and for movable equipment. Each of these sets of 
vintage weights is explained in more detail below.
    For building and fixed equipment vintage weights, we used the real 
annual capital purchase amounts for building and 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 and fixed equipment was produced by deflating the nominal 
annual purchase amount by

[[Page 43859]]

the building and fixed equipment price proxy, BEA's chained price index 
for nonresidential construction for hospitals and special care 
facilities. Because building and fixed equipment have an expected life 
of 25 years, the vintage weights for building and fixed equipment are 
deemed to represent the average purchase pattern of building and fixed 
equipment over 25-year periods. With real building and fixed equipment 
purchase estimates available back to 1963, we averaged nineteen 25-year 
periods to determine the average vintage weights for building and fixed 
equipment that are representative of average building and fixed 
equipment purchase patterns over time. Vintage weights for each 25-year 
period are calculated by dividing the real building and fixed capital 
purchase amount in any given year by the total amount of purchases in 
the 25-year period. This calculation is done for each year in the 25-
year period, and for each of the nineteen 25-year periods. We used the 
average of each year across the nineteen 25-year periods to determine 
the average building and fixed equipment vintage weights for the FY 
2006-based CIPI.
    For 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. Based on our 
determination that movable equipment has an expected life of 12 years, 
the vintage weights for movable equipment represent the average 
expenditure for movable equipment over a 12-year period. With real 
movable equipment purchase estimates available back to 1963, thirty-two 
12-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 12-year 
period are calculated by dividing the real movable capital purchase 
amount for any given year by the total amount of purchases in the 12-
year period. This calculation was done for each year in the 12-year 
period and for each of the thirty-two 12-year periods. We used the 
average of each year across the thirty-two 12-year periods to determine 
the average movable equipment vintage weights for the FY 2006-based 
CIPI.
    For interest vintage weights, the nominal annual capital purchase 
amounts for total equipment (building and 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 25 years, the 
vintage weights for interest are deemed to represent the average 
purchase pattern of total equipment over 25-year periods. With nominal 
total equipment purchase estimates available back to 1963, nineteen 25-
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 25-year period are calculated by 
dividing the nominal total capital purchase amount for any given year 
by the total amount of purchases in the 25-year period. This 
calculation is done for each year in the 25-year period and for each of 
the nineteen 25-year periods. We used the average of each year across 
the nineteen 25-year periods to determine the average interest vintage 
weights for the FY 2006-based CIPI.
    The vintage weights for the FY 2002-based CIPI and the FY 2006-
based CIPI are presented in Chart 8.

                             Chart 8--FY 2002 Vintage Weights and FY 2006 Vintage Weights for Capital-Related Price Proxies
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Building and fixed equipment          Movable equipment                   Interest
                                                         -----------------------------------------------------------------------------------------------
                          Year                              FY 2002 23      FY 2006 25      FY 2002 11      FY 2006 12      FY 2002 23      FY 2006 25
                                                               years           years           years           years           years           years
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................           0.021           0.021           0.065           0.063           0.010           0.010
2.......................................................           0.022           0.023           0.071           0.067           0.012           0.012
3.......................................................           0.025           0.025           0.077           0.071           0.014           0.014
4.......................................................           0.027           0.027           0.082           0.075           0.016           0.016
5.......................................................           0.029           0.029           0.086           0.079           0.019           0.018
6.......................................................           0.031           0.031           0.091           0.082           0.023           0.020
7.......................................................           0.033           0.032           0.095           0.085           0.026           0.023
8.......................................................           0.035           0.033           0.100           0.086           0.029           0.025
9.......................................................           0.038           0.036           0.106           0.090           0.033           0.028
10......................................................           0.040           0.038           0.112           0.093           0.036           0.031
11......................................................           0.042           0.040           0.117           0.102           0.039           0.034
12......................................................           0.045           0.042  ..............           0.106           0.043           0.038
13......................................................           0.047           0.044  ..............  ..............           0.048           0.041
14......................................................           0.049           0.045  ..............  ..............           0.053           0.044
15......................................................           0.051           0.046  ..............  ..............           0.056           0.047
16......................................................           0.053           0.047  ..............  ..............           0.059           0.050
17......................................................           0.056           0.048  ..............  ..............           0.062           0.053
18......................................................           0.057           0.050  ..............  ..............           0.064           0.057
19......................................................           0.058           0.050  ..............  ..............           0.066           0.059
20......................................................           0.060           0.050  ..............  ..............           0.070           0.060
21......................................................           0.060           0.048  ..............  ..............           0.071           0.060
22......................................................           0.061           0.048  ..............  ..............           0.074           0.062
23......................................................           0.061           0.047  ..............  ..............           0.076           0.063
24......................................................  ..............           0.049  ..............  ..............  ..............           0.068
25......................................................  ..............           0.048  ..............  ..............  ..............           0.069
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................           1.000           1.000           1.000           1.000           1.000           1.000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Detail may not add to total due to rounding.


[[Page 43860]]

    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 we proposed, in this final 
rule, we used the same price proxies for the FY 2006-based CIPI that 
were used in the FY 2002-based CIPI, with the exception of the Boeckh 
Construction Index (74 FR 24164). 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 rationale for selecting the price proxies, excluding 
the building and fixed equipment price proxy, was explained more fully 
in the FY 1997 IPPS final rule (61 FR 46196).
    The price proxies are presented in Chart 7.
    Chart 9 below compares both the historical and forecasted percent 
changes in the FY 2002-based CIPI and the FY 2006-based CIPI.

  Chart 9--Comparison of FY 2002-Based and FY 2006-Based Capital Input
          Price Index, Percent Change, FY 2004 Through FY 2012
------------------------------------------------------------------------
                                                   CIPI, FY    CIPI, FY
                   Fiscal year                    2002-based  2006-based
------------------------------------------------------------------------
FY 2004.........................................         0.5         0.8
FY 2005.........................................         0.6         0.9
FY 2006.........................................         0.9         1.1
FY 2007.........................................         1.2         1.3
FY 2008.........................................         1.4         1.4
Forecast:
  FY 2009.......................................         1.7         1.5
  FY 2010.......................................         1.5         1.2
FY 2011.........................................         1.4         1.3
FY 2012.........................................         1.6         1.4
Average:
  FYs 2004-2008.................................         0.9         1.1
  FYs 2009-2012.................................         1.6         1.4
------------------------------------------------------------------------
Source: IHS Global Insight, Inc, 2nd Quarter 2009; USMACRO/
  CONTROL0609@CISSIM/TL0509.SIM.

    IHS Global Insight, Inc. forecasts a 1.2 percent increase in the FY 
2006-based CIPI for FY 2010, as shown in Chart 9. The underlying 
vintage-weighted price increases for depreciation (including building 
and fixed equipment and movable equipment) and interest (including 
government/nonprofit and for-profit) are included in Chart 10.

  Chart 10--CMS Capital Input Price Index Percent Changes, Total and Depreciation and Interest Components, FYs
                                                2004 Through 2012
----------------------------------------------------------------------------------------------------------------
                           Fiscal year                                 Total       Depreciation      Interest
----------------------------------------------------------------------------------------------------------------
FY 2004.........................................................             0.8             1.5            -2.6
FY 2005.........................................................             0.9             1.7            -3.1
FY 2006.........................................................             1.1             2.0            -3.2
FY 2007.........................................................             1.3             2.1            -3.4
FY 2008.........................................................             1.4             2.1            -2.6
Forecast:
    FY 2009.....................................................             1.5             2.1            -2.0
    FY 2010.....................................................             1.2             1.8            -2.1
    FY 2011.....................................................             1.3             1.7            -1.4
    FY 2012.....................................................             1.4             1.7            -0.7
----------------------------------------------------------------------------------------------------------------
Source: IHS Global Insight, Inc, 2nd Quarter 2009; USMACRO/CONTROL0609@CISSIM/TL0509.SIM.

    Rebasing the CIPI from FY 2002 to FY 2006 decreased the percent 
change in the FY 2010 forecast by 0.3 percentage point, from 1.5 to 
1.2, as shown in Chart 9. The difference in the forecast of the FY 2010 
market basket increase is primarily due to the proposed change in the 
price proxy for building and fixed equipment as well as the proposed 
change in the vintage weights applied to the price proxy for interest. 
As mentioned above, we are changing the price proxy used for building 
and fixed equipment to BEA's chained price index for nonresidential 
construction for hospitals and special care facilities. We believe this 
change represents a technical improvement as the BEA price index is an 
index that is more representative of the hospital industry. For the FY 
2010 update, the result of this change is a forecasted price change in 
total depreciation of 1.8 percent in the FY 2006-based CIPI compared to 
2.0 percent in the FY 2002-based CIPI. The other primary factor 
contributing to the difference is the change in the vintage weights 
used to calculate the vintage-weighted price proxy for interest. The 
forecasted price change in total interest is -2.1 percent in the FY 
2006-based CIPI compared to -1.5 percent in the FY 2002-based CIPI. 
This is a result of changing the expected life of hospital debt 
instruments from 23 years to 25 years. We did not receive any public 
comments on our proposed methodological changes to the capital input 
price index published in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule (74 FR 24154). Therefore, we are adopting as final, without 
modification, the proposed FY 2006-based CIPI for FY 2010 in this final 
rule.

V. Other Decisions and Changes to the IPPS for Operating Costs and GME 
Costs

A. Reporting of Hospital Quality Data for Annual Hospital Payment 
Update

1. Background
a. Overview
    CMS is seeking to promote higher quality and more efficient health 
care for Medicare beneficiaries. This effort is supported by the 
adoption of an increasing number of widely-agreed upon quality 
measures. CMS has worked with relevant stakeholders to define measures 
of quality in almost every setting and currently measures some aspect 
of care for almost all Medicare beneficiaries. These measures assess 
structural aspects of care, clinical processes, patient experiences 
with care, and, increasingly, outcomes.

[[Page 43861]]

    CMS has implemented quality measure reporting programs for multiple 
settings of care. The Reporting Hospital Quality Data for Annual 
Payment Update (RHQDAPU) program implements a quality reporting program 
for hospital inpatient services. In addition, CMS has implemented 
quality reporting programs for hospital outpatient services, the 
Hospital Outpatient Quality Data Reporting Program (HOP QDRP), and for 
physicians and other eligible professionals, the Physician Quality 
Reporting Initiative (PQRI). CMS has also implemented quality reporting 
programs for home health agencies and skilled nursing facilities that 
are based on conditions of participation, and an end-stage renal 
disease quality reporting program that is based on conditions for 
coverage.
b. Hospital Quality Data Reporting Under Section 501(b) of Public Law 
108-173
    Section 501(b) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA), Public Law 108-173, added section 
1886(b)(3)(B)(vii) to the Act. This section established the authority 
for the RHQDAPU program and revised the mechanism used to update the 
standardized payment amount for inpatient hospital operating costs. 
Specifically, section 1886(b)(3)(B)(vii)(I) of the Act, before it was 
amended by section 5001(a) of Public Law 109-171, provided for a 
reduction of 0.4 percentage points to the update percentage increase 
(also known as the market basket update) for FY 2005 through FY 2007 
for any subsection (d) hospital that did not submit data on a set of 10 
quality indicators established by the Secretary as of November 1, 2003. 
It also provides that any reduction would apply only to the fiscal year 
involved, and would not be taken into account in computing the 
applicable percentage increase for a subsequent fiscal year. The 
statute thereby established an incentive for IPPS hospitals to submit 
data on the quality measures established by the Secretary, and also 
built upon the previously established Voluntary Hospital Quality Data 
Reporting Program that we described in the FY 2009 IPPS final rule (73 
FR 48598).
    We implemented section 1886(b)(3)(B)(vii) of the Act in the FY 2005 
IPPS final rule (69 FR 49078) and codified the applicable percentage 
change in Sec.  412.64(d) of our regulations. We adopted additional 
requirements under the RHQDAPU program in the FY 2006 IPPS final rule 
(70 FR 47420).
c. Hospital Quality Data Reporting under Section 5001(a) of Public Law 
109-171
    Section 5001(a) of the Deficit Reduction Act of 2005 (DRA), Public 
Law 109-171, further amended section 1886(b)(3)(B) of the Act to revise 
the mechanism used to update the standardized payment amount for 
hospital inpatient operating costs, in particular, by adding new 
section 1886(b)(3)(B)(viii) to the Act. Specifically, sections 
1886(b)(3)(B)(viii)(I) and (II) of the Act provide that the payment 
update for FY 2007 and each subsequent fiscal year be reduced by 2.0 
percentage points for any subsection (d) hospital that does not submit 
quality data in a form and manner, and at a time, specified by the 
Secretary. Section 1886(b)(3)(B)(viii)(I) of the Act also provides that 
any reduction in a hospital's payment update will apply only with 
respect to the fiscal year involved, and will not be taken into account 
for computing the applicable percentage increase for a subsequent 
fiscal year. In the FY 2007 IPPS final rule (71 FR 48045), we amended 
our regulations at Sec.  412.64(d)(2) to reflect the 2.0 percentage 
point reduction in the payment update for FY 2007 and subsequent fiscal 
years for subsection (d) hospitals that do not comply with requirements 
for reporting quality data, as provided for under section 
1886(b)(3)(B)(viii) of the Act.
(1) Quality Measures
    Section 1886(b)(3)(B)(viii)(III) of the Act requires that the 
Secretary expand the ``starter set'' of 10 quality measures that was 
established by the Secretary as of November 1, 2003, as the Secretary 
determines to be appropriate for the measurement of the quality of care 
furnished by a hospital in inpatient settings. In expanding this set of 
measures, section 1886(b)(3)(B)(viii)(IV) of the Act requires that, 
effective for payments beginning with FY 2007, the Secretary begin to 
adopt the baseline set of performance measures as set forth in a report 
issued by the Institute of Medicine (IOM) of the National Academy of 
Sciences under section 238(b) of Public Law 108-173.\8\
---------------------------------------------------------------------------

    \8\ Institute of Medicine, ``Performance Measurement: 
Accelerating Improvement,'' December 1, 2005, available at: http://www.iom.edu/CMS/3809/19805/31310.aspx. IOM set forth these baseline 
measures in a November 2005 report. However, the IOM report was not 
released until December 1, 2005 on the IOM Web site.
---------------------------------------------------------------------------

    The IOM measures include: 21 Hospital Quality Alliance (HQA) 
quality measures (including the ``starter set'' of 10 quality 
measures); the Hospital Consumer Assessment of Health Providers and 
Systems (HCAHPS) patient experience of care survey; and 3 structural 
measures.\9\ The structural measures are: (1) Adoption of computerized 
provider order entry for prescriptions; (2) staffing of intensive care 
units with intensivists; and (3) evidence-based hospital referrals. 
These structural measures constitute the Leapfrog Group's original 
``three leaps,'' and are part of the National Quality Forum's (NQF's) 
30 Safe Practices for Better Healthcare. The HCAHPS survey is part of 
the Consumer Assessment of Healthcare Providers and Systems (CAHPS) 
program, which develops and supports the use of a comprehensive and 
evolving family of standardized surveys that ask consumers and patients 
to report on and evaluate their experiences with health care. These 
surveys cover topics that are important to consumers, such as the 
communication skills of providers and the accessibility of services. 
CAHPS originally stood for the Consumer Assessment of Health Plans 
Study, but as the products have evolved beyond health plans, the name 
has evolved as well to capture the full range of survey products and 
tools.
---------------------------------------------------------------------------

    \9\ Structural measures assess characteristics linked to the 
capacity of the provider to deliver quality healthcare. Institute of 
Medicine: Division of Health Care Services. Measuring the Quality of 
Health Care: A Statement by the National Roundtable on Healthcare 
Quality. National Academy Press; Washington, DC 1999.
---------------------------------------------------------------------------

    Section 1886(b)(3)(B)(viii)(V) of the Act requires that, effective 
for payments beginning with FY 2008, the Secretary add other quality 
measures that reflect consensus among affected parties, and to the 
extent feasible and practicable, have been set forth by one or more 
national consensus building entities. The NQF is a voluntary consensus 
standard-setting organization with a diverse representation of 
consumer, purchaser, provider, academic, clinical, and other health 
care stakeholder organizations. The NQF was established to standardize 
health care quality measurement and reporting through its consensus 
development process. We have generally adopted NQF-endorsed measures. 
However, we believe that consensus among affected parties also can be 
reflected by other means, including consensus achieved during the 
measure development process, consensus shown through broad acceptance 
and use of measures, and consensus through public comment.
    Section 1886(b)(3)(B)(viii)(VI) of the Act authorizes the Secretary 
to replace any quality measures or indicators in

[[Page 43862]]

appropriate cases, such as where all hospitals are effectively in 
compliance with a measure, or the measures or indicators have been 
subsequently shown to not represent the best clinical practice. Thus, 
the Secretary is granted broad discretion to replace measures that are 
no longer appropriate for the RHQDAPU program.
    In the FY 2007 IPPS final rule, we began to expand the RHQDAPU 
program measures by adding 11 quality measures to the 10-measure 
starter set to establish an expanded set of 21 quality measures for the 
FY 2007 payment determination (71 FR 48033 through 48037, 48045).
    In the CY 2007 OPPS/ASC final rule (71 FR 68201), we adopted six 
additional quality measures for the FY 2008 payment determination, for 
a total of 27 measures. Two of these measures (30-Day Risk Standardized 
Mortality Rates for Heart Failure and 30-Day Risk Standardized 
Mortality Rates for AMI) were calculated using existing administrative 
Medicare claims data; thus, no additional data submission by hospitals 
was required for these two measures. The measures used for the FY 2008 
payment determination included, for the first time, the HCAHPS patient 
experience of care survey.
    In the FY 2008 IPPS final rule (72 FR 47348 through 47358) and the 
CY 2008 OPPS/ASC final rule with comment period (72 FR 66875 through 
66877), we added three additional process measures to the RHQDAPU 
program measure set. (These three measures are SCIP-Infection-4: 
Cardiac Surgery Patients with Controlled 6AM Postoperative Serum 
Glucose, SCIP-Infection-6: Surgery Patients with Appropriate Hair 
Removal, and Pneumonia 30-day mortality (Medicare patients).) The 
addition of these 3 measures brought the total number of RHQDAPU 
program measures to be used for the FY 2009 payment determination to 30 
(72 FR 66876). The 30 measures used for the FY 2009 annual payment 
determination are listed in the FY 2009 IPPS final rule (73 FR 48600 
through 48601).
    For the FY 2010 payment determination, we added 15 new measures to 
the RHQDAPU program measure set and retired one. Of the new measures, 
13 were adopted in the FY 2009 IPPS final rule (73 FR 48602 through 
48611) and two additional measures were finalized in the CY 2009 OPPS/
ASC final rule with comment period (73 FR 68780 through 68781). This 
resulted in an expansion of the RHQDAPU program measures from 30 
measures for the FY 2009 payment determination to 44 measures for the 
FY 2010 payment determination. The RHQDAPU program measures for the FY 
2010 payment determination consist of: 26 chart-abstracted process 
measures, which measure care provided for Acute Myocardial Infarction 
(AMI), Heart Failure (HF), Pneumonia (PN), or Surgical Care Improvement 
(SCIP); 6 claims-based measures, which evaluate 30-day mortality or 30-
day readmission rates for AMI, HF, or PN; 9 AHRQ claims-based patient 
safety/inpatient quality indicator measures; 1 claims-based nursing 
sensitive measure; 1 structural measure that assesses participation in 
a systematic database for cardiac surgery; and the HCAHPS patient 
experience of care survey. The measures are listed below.

------------------------------------------------------------------------
                                             RHQDAPU program quality
                 Topic                       measures for the FY 2010
                                              payment determination
------------------------------------------------------------------------
Acute Myocardial Infarction (AMI)......  <bullet> AMI-1 Aspirin at
                                          arrival.
                                         <bullet> AMI-2 Aspirin
                                          prescribed at discharge.
                                         <bullet> AMI-3 Angiotensin
                                          Converting Enzyme Inhibitor
                                          (ACE-I) or Angiotensin II
                                          Receptor Blocker (ARB) for
                                          left ventricular systolic
                                          dysfunction.
                                         <bullet> AMI-4 Adult smoking
                                          cessation advice/counseling.
                                         <bullet> AMI-5 Beta blocker
                                          prescribed at discharge.
                                         <bullet> AMI-6 Beta blocker at
                                          arrival.
                                         <bullet> AMI-7a Fibrinolytic
                                          (thrombolytic) agent received
                                          within 30 minutes of hospital
                                          arrival.
                                         <bullet> AMI-8a Timing of
                                          Receipt of Primary
                                          Percutaneous Coronary
                                          Intervention (PCI).
Heart Failure (HF).....................  <bullet> HF-1 Discharge
                                          instructions.
                                         <bullet> HF-2 Left ventricular
                                          function assessment.
                                         <bullet> HF-3 Angiotensin
                                          Converting Enzyme Inhibitor
                                          (ACE-I) or Angiotensin II
                                          Receptor Blocker (ARB) for
                                          left ventricular systolic
                                          dysfunction.
                                         <bullet> HF-4 Adult smoking
                                          cessation advice/counseling.
Pneumonia (PN).........................  <bullet> PN-2 Pneumococcal
                                          vaccination status.
                                         <bullet> PN-3b Blood culture
                                          performed before first
                                          antibiotic received in
                                          hospital.
                                         <bullet> PN-4 Adult smoking
                                          cessation advice/counseling.
                                         <bullet> PN-5c Timing of
                                          receipt of initial antibiotic
                                          following hospital arrival.
                                         <bullet> PN-6 Appropriate
                                          initial antibiotic selection.
                                         <bullet> PN-7 Influenza
                                          vaccination status.
Surgical Care Improvement Project        <bullet> SCIP-1 Prophylactic
 (SCIP).                                  antibiotic received within 1
                                          hour prior to surgical
                                          incision.
                                         <bullet> SCIP-3 Prophylactic
                                          antibiotics discontinued
                                          within 24 hours after surgery
                                          end time.
                                         <bullet> SCIP-VTE-1: Venous
                                          thromboembolism (VTE)
                                          prophylaxis ordered for
                                          surgery patients.
                                         <bullet> SCIP-VTE-2: VTE
                                          prophylaxis within 24 hours
                                          pre/post surgery.
                                         <bullet> SCIP-Infection-2:
                                          Prophylactic antibiotic
                                          selection for surgical
                                          patients.
                                         <bullet> SCIP-Infection-4:
                                          Cardiac Surgery Patients with
                                          Controlled 6AM Postoperative
                                          Serum Glucose.
                                         <bullet> SCIP-Infection-6:
                                          Surgery Patients with
                                          Appropriate Hair Removal.

[[Page 43863]]

 
                                         <bullet> SCIP-Cardiovascular-2:
                                          Surgery Patients on a Beta
                                          Blocker Prior to Arrival Who
                                          Received a Beta Blocker During
                                          the Perioperative Period.
Mortality Measures (Medicare Patients).  <bullet> MORT-30-AMI: Acute
                                          Myocardial Infarction 30-day
                                          mortality-Medicare patients.
                                         <bullet> MORT-30-HF: Heart
                                          Failure 30-day mortality--
                                          Medicare patients.
                                         <bullet> MORT-30-PN: Pneumonia
                                          30-day mortality --Medicare
                                          patients.
Patients' Experience of Care...........  <bullet> HCAHPS survey.
Readmission Measures (Medicare           <bullet> READ-30-HF: Heart
 Patients).                               Failure 30[dash]Day Risk
                                          Standardized Readmission
                                          Measure (Medicare patients).
                                         <bullet> READ-30-AMI: Acute
                                          Myocardial Infarction
                                          30[dash]Day Risk Standardized
                                          Readmission Measure (Medicare
                                          patients).
                                         <bullet> READ-30-PN: Pneumonia
                                          30[dash]Day Risk Standardized
                                          Readmission Measure (Medicare
                                          patients).
AHRQ Patient Safety Indicators (PSIs),   <bullet> PSI 04: Death among
 Inpatient Quality Indicators (IQIs)      surgical patients with
 and Composite Measures.                  treatable serious
                                          complications.
                                         <bullet> PSI 06: Iatrogenic
                                          pneumothorax, adult.
                                         <bullet> PSI 14: Postoperative
                                          wound dehiscence.
                                         <bullet> PSI 15: Accidental
                                          puncture or laceration.
                                         <bullet> IQI 11: Abdominal
                                          aortic aneurysm (AAA)
                                          mortality rate (with or
                                          without volume).
                                         <bullet> IQI 19: Hip fracture
                                          mortality rate.
                                         <bullet> Mortality for selected
                                          surgical procedures
                                          (composite).
                                         <bullet> Complication/patient
                                          safety for selected indicators
                                          (composite).
                                         <bullet> Mortality for selected
                                          medical conditions
                                          (composite).
Nursing Sensitive......................  <bullet> Failure to Rescue
                                          (Medicare claims only).
Cardiac Surgery........................  <bullet> Participation in a
                                          Systematic Database for
                                          Cardiac Surgery.
------------------------------------------------------------------------

    On December 31, 2008, CMS advised hospitals that they would no 
longer be required to submit data for the RHQDAPU program measure AMI-
6-Beta blocker at arrival, beginning with discharges occurring on April 
1, 2009. This change was based on the evolving evidence regarding AMI 
patient care, as well as changes in the American College of Cardiology/
American Heart Association (ACC/AHA) practice guidelines for ST-segment 
elevation myocardial infarction and non-ST segment elevation myocardial 
infarction, upon which AMI-6 is based. The new guideline recommends 
that early intravenous beta-blockers specifically should be avoided in 
certain patient populations due to increased mortality risk. These 
patients are identified by a complex set of contraindications that we 
believe would make revision of the measure impractical and might result 
in unintended consequences, including harm to patients based on 
misinterpretation of an overly complex measure in the clinical setting. 
Based on the new studies, the ACC/AHA Task Force on Performance 
Measures removed this measure from the set of AMI performance measures 
as of November 10, 2008, and did not replace the measure. CMS took 
action to remove the measure from reporting initiatives based on the 
lack of support by the measure developer and the considerations 
identified above.
    We discussed considerations relating to retiring or replacing 
measures in the FY 2008 IPPS final rule with comment period and the FY 
2009 IPPS final rule, including the ``topping out'' of hospitals' 
performance under a measure (72 FR 47358 through 47359 and 73 FR 48603 
through 48604, respectively). However, in this instance, the measure no 
longer ``represent[s] the best clinical practice,'' an additional basis 
under section 1886(b)(3)(B)(viii)(VI) of the Act for retiring a 
measure. For the FY 2010 payment determination and subsequent payment 
determinations, we have formally retired the AMI-6 measure from the 
RHQDAPU program. Therefore, hospitals participating in the RHQDAPU 
program are not required to submit data on the AMI-6 measure beginning 
with discharges occurring on April 1, 2009. However, in the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24167), we sought public 
comment on the retirement of the AMI-6 measure.
    Comment: Many commenters supported immediate retirement of quality 
measures, including AMI-6, for which evolving clinical evidence 
suggests potential patient safety concerns. Other commenters suggested 
that CMS seek public input when it is considering immediate retirement 
of a measure. These commenters also indicated that measure retirement 
for other reasons should be conducted through the rulemaking process. 
One commenter indicated that formal retirement through rulemaking 
following immediate retirement is confusing.
    Response: We believe that immediate retirement of quality measures 
should occur when the clinical evidence suggests that continued 
collection of the data may result in harm to patients. Under such 
circumstances, we may not be able to wait until the annual rulemaking 
cycle or until we have had the opportunity to obtain input from the 
public to retire the measure because of the necessity to discourage 
potentially harmful practices which may result from continued 
collection of the measure. We agree with the commenters that retirement 
of measures for reasons other than potential patient safety concerns 
should occur through the rulemaking process allowing for public 
comment. Because we generally adopt and retire RHQDAPU program quality 
measures through the rulemaking process (except for the immediate 
retirement exception we are adopting in this final rule), we believe 
that it is appropriate to use the rulemaking process to confirm the 
retirement of measures that were the subject of recent immediate 
retirement activity.
(2) Maintenance of Technical Specifications for Quality Measures
    The technical specifications for each RHQDAPU program measure are 
listed in the CMS/The Joint Commission Specifications Manual for 
National Hospital Inpatient Quality Measures (Specifications Manual). 
This

[[Page 43864]]

Specifications Manual is posted on the CMS QualityNet Web site at 
https://www.QualityNet.org/. We maintain the technical specifications 
by updating this Specifications Manual semiannually, or more frequently 
in unusual cases, and include detailed instructions and calculation 
algorithms for hospitals to use when collecting and submitting data on 
required measures. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24167), we invited public comment on our process of notifying 
the public about the technical specifications for RHQDAPU program 
quality measures and whether it can be improved to enable more 
meaningful public comment on our proposed measures. We also invited 
public comment on whether the information posted on the https://www.QualityNet.org Web site, including the frequency with which this 
information is updated, provides hospitals enough information and time 
to implement the collection of data necessary for these required 
quality measures.
    Comment: Commenters agreed that timely updates to quality measures 
are necessary for maintaining comparable and credible measurement 
results and supported our process for posting changes to the 
Specifications Manual on the QualityNet Web site, and issuing 
notifications regarding updates issued. Some commenters suggested 
adding other methods to notify stakeholders as to technical 
specifications updates. These suggestions included utilizing a Real 
Simple Syndication (RSS) to send e-mail alerts to stakeholders, 
providing links to specifications not on the QualityNet Web site, 
listserv notifications, sharing the draft technical specifications with 
hospitals and data vendors 30 days prior to their release so that 
errors and omissions can be identified and corrected before the final 
version of the specifications is released, and not releasing the 
Specifications Manual until all revisions and updates are complete, 
thereby reducing the number of addenda. One commenter requested that 
the Specifications Manual be released with all relevant changes once a 
year.
    Response: We will consider these suggestions for other methods to 
notify stakeholders as to technical specifications updates. The 
Specifications Manual is updated in two scheduled releases a year 
occurring at 6 month intervals in order to incorporate updates to the 
code sets used in the measure specifications, add or remove measures, 
and to provide vendors with adequate notice of changes. The 
Specifications Manual contains specifications for measures that have 
been adopted into the RHQDAPU program. However, we may include 
specifications for some of the proposed measures or measures under 
consideration for preview purposes only. Specifications for measures 
that are under development are not included in the Specifications 
Manual.
(3) Public Display of Quality Measures
    Section 1886(b)(3)(B)(viii)(VII) of the Act requires that the 
Secretary establish procedures for making quality data available to the 
public after ensuring that a hospital has the opportunity to review its 
data before these data are made public. Data from the RHQDAPU program 
are included on the Hospital Compare Web site, https://www.hospitalcompare.hhs.gov. The RHQDAPU program currently includes 
process of care measures, risk adjusted outcome measures, the HCAHPS 
patient experience of care survey, and a structural measure regarding 
cardiac surgery registry participation. This Web site assists 
beneficiaries and the general public by providing information on 
hospital quality of care to consumers who need to select a hospital. It 
further serves to encourage consumers to work with their doctors and 
hospitals to discuss the quality of care hospitals provide to patients, 
thereby providing an additional incentive to hospitals to improve the 
quality of care that they furnish.
    Comment: Several commenters submitted suggestions for improving 
public reporting of RHQDAPU program measures on the Hospital Compare 
Web site. A number of commenters stated that the Hospital Compare Web 
site is cumbersome to navigate and that data are displayed in a rigid 
fashion. The commenters suggested that CMS give end users the 
flexibility to create customized reports or tailor the data display to 
the end user's needs. Some commenters also suggested that hospitals 
would benefit from examining how well they are performing if they had 
access to reports that show performance on the care processes that take 
place during discharge. Other commenters stated that the display of 
data on the Hospital Compare Web site for the public may be interpreted 
as encouraging performance at 100 percent on the measures even though 
lower levels of performance on measures may be appropriate, and 
requested that CMS remove the current wording under the ``Learn how to 
use the information from this site'' link on the Hospital Compare Web 
site because it misrepresents to the public what the appropriate 
quality benchmarks are for certain measures. Several commenters 
supported the adoption of a more consumer-friendly star rating system 
for hospitals that would allow consumers to make decisions about where 
to receive care based on a composite ``score'' for the facility, rather 
than minor performance differences on individual measures. Another 
commenter disagreed with posting results on the Hospital Compare Web 
site when a hospital has fewer than 25 eligible cases in a reporting 
period for a measure, stating that the results may not be statistically 
valid or understood by most health care consumers. Another commenter 
stated that all reporting formats should be tested with consumers 
before being publicly displayed.
    Response: Section 1886(b)(3)(B)(viii)(VII) of the Act requires that 
the Secretary establish procedures for making the data reported under 
the RHQDAPU program available to the public. We appreciate these 
suggestions regarding potential improvements to the Hospital Compare 
Web site. We continue to conduct consumer focus groups and work to 
identify areas for improvement, and will make changes that we believe 
are beneficial. In terms of a report that focuses upon care provided at 
discharge, hospitals can use their quarterly Hospital Compare preview 
reports, the downloadable Hospital Compare data sets, and other 
QualityNet reports to examine their performance on measures that relate 
to care provided at discharge. Although we do not believe that the 
current wording in the ``Learn how to use the information from this 
site'' is misleading, we will re-examine the language and determine 
whether it would be appropriate to make changes. We are also working on 
condition-specific (AMI, HF, PN, SCIP and HCAHPS) composites for the 
Hospital Compare Web site in the future to make it more consumer-
friendly.
    On the Hospital Compare Web site, we employ a footnote for rates 
based upon fewer than 25 cases: ``The number of cases is too small 
(<25) to reliably tell how well a hospital is performing,'' but display 
the rate so that consumers can decide whether and how to consider the 
information.
2. Retirement of RHQDAPU Program Measures
    As stated above, we retired the AMI-6 measure from the RHQDAPU 
program measure set beginning with discharges occurring on April 1, 
2009, because we believed, based on new evidence, that the continued 
use of the measure raised specific patient safety concerns. In 
situations such as this, we do not

[[Page 43865]]

believe that it is appropriate to wait for the annual rulemaking cycle. 
Rather, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 
24168), we proposed to promptly retire the measure and notify hospitals 
and the public of the retirement of the measure and the reasons for its 
retirement through the usual hospital and QIO communication channels 
used for the RHQDAPU program, which include e-mail blasts to hospitals 
and the dissemination of Standard Data Processing System (SDPS) 
memoranda to QIOs, as well as posting the information on the QualityNet 
Web site. We proposed to confirm the retirement of the measure in the 
next IPPS rulemaking. In other circumstances where we do not believe 
that continued use of a measure raises specific patient safety 
concerns, we intend to use the regular rulemaking process to retire a 
measure.
    We invited public comment on whether any other RHQDAPU program 
measures should be retired from the RHQDAPU program, as well as on the 
criteria that should be used in retiring measures. To the extent that 
performance has improved because of the collection and public display 
of quality measures, we also invited public comment on how performance 
could be maintained on the ``topped out'' measures once they are 
retired. We note that many of the measures in the existing program have 
experienced improved performance rates over the years. On our Web site, 
https://www.cms.hhs.gov/HospitalQualityInits/, we have posted the 
performance rates for the existing measures over the years that they 
have been collected through the RHQDAPU program. However, thus far, 
only one measure, the pneumonia oxygenation assessment measure, has 
reached such a high level of compliance (nearly 100 percent for the 
vast majority of hospitals) that we retired the measure.
    Comment: Some commenters recommended 11 measures for retirement for 
varying reasons. Seven of these measures were recommended for 
retirement based on their performance being uniformly high nationwide, 
with little variability among hospitals. These seven measures are:
    <bullet> AMI-1 Aspirin at arrival
    <bullet> AMI-3 ACEI/ARB for left ventricular systolic dysfunction
    <bullet> AMI-4 Adult smoking cessation advice/counseling
    <bullet> AMI-5 Beta-blocker prescribed at discharge
    <bullet> HF-4 Adult smoking cessation advice/counseling
    <bullet> PN-4 Adult smoking cessation advice/counseling
    <bullet> SCIP-Infection-6: Surgery patients with appropriate hair 
removal
    Commenters also recommended that CMS implement an ongoing 
surveillance mechanism for measures that are retired due to unvarying 
high performance rates nationwide in order to prevent deterioration of 
performance.
    Four of the 11 measures recommended for retirement from the RHQDAPU 
program were recommended for reasons other than high unvarying 
performance. These four measures are:
    <bullet> HF-1 Discharge instructions
    <bullet> PN-3b Blood culture performed before first antibiotic 
received in hospital
    <bullet> SCIP-Infection-2: Prophylactic antibiotic selection for 
surgical patients
    <bullet> SCIP-Infection-4: Cardiac Surgery Patients with Controlled 
6AM Postoperative Serum Glucose
    With regard to the HF-1 Discharge instructions measure, a commenter 
stated that while high quality discharge instructions are important for 
better outcomes, this measure neither measures nor affects the quality 
of the discharge instruction. Another commenter stated that the 
complexity of the data collection guidelines for this measure outweighs 
its value.
    Several commenters recommended retirement of measure PN-3b, Blood 
culture performed before first antibiotic received in hospital, because 
they believe that it does not align with current clinical guidelines.
    Some commenters also suggested retirement of the SCIP-Infection-2: 
Prophylactic antibiotic selection for surgical patients measure because 
the measure is overly complicated and confusing, and the SCIP-
Infection-4: Cardiac Surgery Patients with Controlled 6AM Postoperative 
Serum Glucose measure because of a perceived risk of complications due 
to extended insulin drips. Several commenters suggested that CMS 
develop a process for determining when process measures should be 
retired to accommodate the inclusion of broad outcome measures on a 
topic, and that CMS retire measures when negative unintended 
consequences result.
    Response: We will consider these suggestions for measures to retire 
in a future rulemaking. We note that we will continue to retire 
measures based on reasons other than potential harm to patients by 
using the rulemaking process, and we believe it is important to weigh 
all relevant factors and consequences related to retirement of a 
measure with affected parties before proposing retirement. We agree 
that high levels of unvarying performance across hospitals should be 
among the factors considered in measure retirement. Such measures do 
not afford opportunities for improvements in care, nor do they allow 
consumers to discern meaningful differences in performance among 
hospitals.
    We currently do not have mechanisms available to conduct continued 
surveillance of retired measures, but will explore options for 
monitoring whether the performance on retired measures deteriorates 
following their retirement. We also agree that quality measures should 
relate to high quality care processes, should be related to better 
patient outcomes, should align with current clinical guidelines when 
possible, and should not be overly burdensome to collect. We will 
consider these factors when evaluating current RHQDAPU program measures 
for retirement. We agree that outcome measures are useful indicators of 
quality, and in recent years have added outcome measures for mortality, 
readmission, and patient safety indicators to the RHQDAPU program. 
However, we do not believe that outcome measures necessarily render 
process measures incompatible or redundant.
    Also, we agree that measures should be evaluated for negative 
unintended consequences, and that this should be a consideration for 
measure retirement. We strive to stay informed about measure support in 
current scientific literature, the continuing ability of measures to 
assess quality of care, and evolving unintended consequences. Some 
negative unintended consequences (such as patient harm) may warrant 
immediate action while other consequences (such as increased burden on 
the hospital) may need to be weighed against the utility of continuing 
to collect and publicly post the measure.
    Comment: One commenter indicated that there are no further measures 
that needed to be retired because there are no other ``topped out'' 
measures.
    Response: We have observed and other commenters have pointed out 
that there may be a number of RHQDAPU program measures that have high 
levels of unvarying performance. However, as we stated in the response 
to a previous comment, we also believe that there are other criteria 
that we must additionally consider before we propose to retire a 
measure from the RHQDAPU program.

[[Page 43866]]

3. Quality Measures for the FY 2011 Payment Determination and 
Subsequent Years
a. Considerations in Expanding and Updating Quality Measures Under the 
RHQDAPU Program
    In the FY 2009 IPPS proposed rule, we solicited public comment on 
several considerations related to expanding and updating quality 
measures, including how to reduce the burden on the hospitals 
participating in the RHQDAPU program and which approaches to 
measurement and collection would be most useful while minimizing burden 
(73 FR 23653 through 23654).
    In the FY 2009 IPPS final rule, we responded to the public comments 
we received on these issues (73 FR 48613 through 48616). We also stated 
that in future expansions and updates to the RHQDAPU program measure 
set, we would be taking into consideration several important goals. 
These goals include: (a) Expanding the types of measures beyond process 
of care measures to include an increased number of outcome measures, 
efficiency measures, and patients' experience-of-care measures; (b) 
expanding the scope of hospital services to which the measures apply; 
(c) considering the burden on hospitals in collecting chart-abstracted 
data; (d) harmonizing the measures used in the RHQDAPU program with 
other CMS quality programs to align incentives and promote coordinated 
efforts to improve quality; (e) seeking to use measures based on 
alternative sources of data that do not require chart abstraction or 
that utilize data already being reported by many hospitals, such as 
data that hospitals report to clinical data registries, or all-payer 
claims data bases; and (f) weighing the relevance and utility of the 
measures compared to the burden on hospitals in submitting data under 
the RHQDAPU program. Specifically, we give priority to quality measures 
that assess performance on: (a) Conditions that result in the greatest 
mortality and morbidity in the Medicare population; (b) conditions that 
are high volume and high cost for the Medicare program; and (c) 
conditions for which wide cost and treatment variations have been 
reported, despite established clinical guidelines. We have used and 
continue to use these criteria to guide our decisions regarding what 
measures to add to the RHQDAPU program measure set.
    Although RHQDAPU program payment decisions were initially based 
solely on a hospital's submission of chart-abstracted quality measure 
data, in recent years we have adopted measures, including structural 
and claims-based quality measures that do not require a hospital to 
submit chart-abstracted clinical data. This supports our stated goal to 
expand the measures for the RHQDAPU program while minimizing the burden 
on hospitals and, in particular, without significantly increasing the 
chart abstraction burden.
    In addition to claims-based measures, we are considering registries 
\10\ and electronic health records (EHRs) as alternative ways to 
collect data from hospitals. Many hospitals submit data to and 
participate in existing registries. In addition, registries often 
capture outcome information and provide ongoing quality improvement 
feedback to registry participants. Instead of requiring hospitals to 
submit the same data to CMS that they are already submitting to 
registries, we believe that we could collect the data directly from the 
registries, thereby enabling us to expand the RHQDAPU program measure 
set without increasing the burden of data collection for those 
hospitals participating in the registries. Examples of registries 
actively used by hospitals include the Society of Thoracic Surgeons 
(STS) Cardiac Surgery Registry (with approximately 90 percent 
participation by cardiac surgery programs), the AHA Stroke Registry 
(with approximately 1200 hospitals participating), and the American 
Nursing Association (ANA) Nursing Sensitive Measures Registry (with 
approximately 1400 hospitals participating). In the FY 2009 IPPS final 
rule (73 FR 48608 through 48609), we adopted the first RHQDAPU program 
measure related to registries: Participation in a Systematic Database 
for Cardiac Surgery. We continue to evaluate whether it is feasible to 
adopt measures that rely on one or more registries as a source for data 
collection.
---------------------------------------------------------------------------

    \10\ A registry is a collection of clinical data for purposes of 
assessing clinical performance, quality of care, and opportunities 
for quality improvement.
---------------------------------------------------------------------------

    We also stated our intention to explore mechanisms for data 
submission using EHRs (73 FR 48614). Establishing such a system will 
require interoperability between EHRs and CMS data collection systems, 
additional infrastructure development on the part of hospitals and CMS, 
and the adoption of standards for the capturing, formatting, and 
transmission of data elements that make up the measures. However, once 
these activities are accomplished, the adoption of measures that rely 
on data obtained directly from EHRs will enable us to expand the 
RHQDAPU program measure set with less cost and burden to hospitals.
    In the FY 2009 IPPS final rule, we adopted nine AHRQ measures for 
the RHQDAPU program. Although we stated that we would initially 
calculate the measures using Medicare claims data (73 FR 48608), we 
also stated that we remained interested in using all-payer claims data 
to calculate them and that we might propose to collect such data in the 
future. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 
24169), we invited input and suggestions on how all-payer claims data 
can be collected and used by CMS to calculate these measures, as well 
as on additional AHRQ measures that we should consider adopting for 
future RHQDAPU program payment determinations.
    We noted that we continue to use these criteria to guide our 
decisions on what measures to propose for the RHQDAPU program measure 
set. Therefore, we invited comments on the new quality measures we have 
proposed to include in future payment years and on the criteria we 
should use to retire measures.
    Comment: Several commenters supported the concept of EHR-based data 
collection. One commenter expressed concern that the process to 
implement electronic data collection may delay the adoption of 
measures, in particular the stroke measures, for the RHQDAPU program. 
Another commenter applauded CMS for considering EHRs as an alternative 
way to collect data, but suggested that no new quality measures be 
introduced for 2 years while the industry implements EHRs, and that 
some consideration be given to small rural hospitals that may not be 
able to adopt EHRs as soon as larger urban hospitals. One commenter 
believed that infrastructure development for establishing 
interoperability will be challenging and asked that CMS consider a 
phase-in period of 5 years, with reasonable benchmarks for every 6 
months to 1 year.
    Response: We appreciate these supportive comments regarding EHR-
based data collection as an alternative data source for quality 
measures. We encourage adoption of EHRs, and we also acknowledge the 
challenges that must be met both by hospitals and CMS to establish the 
infrastructure and interoperability necessary to collect data on 
quality measures via EHRs. In determining whether to adopt new quality 
measures for the RHQDAPU program, we weigh the potential benefit of 
improvement that would result from reporting a given measure against 
the potential resource burden associated with reporting a measure. For 
purposes

[[Page 43867]]

of the RHQDAPU program, EHR-based data submission may provide an 
alternative means of submitting quality data that would benefit 
hospitals by reducing their chart abstraction burden. However, because 
of the challenges noted above, we do not plan to make EHR-based data 
submission the only means by which hospitals can submit quality data 
for the RHQDAPU program in the near future.
    Comment: Several commenters opposed the direct collection of data 
from EHRs for quality measures, stating that quality data produced in 
this manner is unlikely to be useful or valid either for quality 
measurement or for research, and that programming software is incapable 
of interpreting and deciding between discrepant documentation in a 
single medical record.
    Response: We disagree with the comment that quality data produced 
from EHRs is not likely to be useful for quality measurement and 
research. The data collected from the EHR would essentially be the same 
data that hospitals would otherwise have to manually abstract from a 
medical chart. These data are what we currently use for quality measure 
reporting and for research. We acknowledge that additional programming 
work may need to be completed to enable current EHR systems to collect 
and submit quality measure data. We are currently working with the 
Healthcare Information Technology Standards Panel (HITSP), a public-
private partnership working to establish Health IT interoperability 
standards under contract to the DHHS Office of the National Coordinator 
on Health IT, to standardize the specifications of data elements used 
in stroke, VTE, and emergency department measures so that they may be 
collected and reported via EHRs. Standardization of the specifications 
allows software to convert clinical data of different types into a form 
that can be analyzed for quality measurement. We encourage 
collaboration between standards setting organizations and measure 
developers on the creation of standards for electronic collection of 
data elements for other quality measures as well, particularly those 
used in our quality data reporting programs.
    Comment: A number of commenters supported the use of registries as 
an alternative source of hospital-specific data on quality measures and 
as a means to reduce hospital burden. Several commenters indicated that 
the use of registries to collect hospital-level data would reduce 
administrative burden and ensure appropriate risk-adjustment for 
quality improvement and public reporting purposes, as well as other 
benefits, including the identification of opportunities for quality 
improvement, improvements in patient safety practices and coordination 
of care, and improved patient outcomes.
    However, several commenters expressed concern regarding the 
possibility that they may be required to participate in proprietary 
registries in the future, and requested clarity regarding alternatives 
for data submission should some hospitals (for example, small 
hospitals, rural hospitals) not have the resources to participate in 
registry-based data collection initiatives. These commenters saw 
registry-based data collection as costly and labor intensive because 
many registries require chart abstraction. Other commenters saw 
registries as useful for monitoring quality, but indicated that many 
data fields collected by registries are not related to quality 
measures, and preferred that if such a mechanism were to be used for 
data collection, CMS only receive data relevant to the quality measures 
of interest, and that the data be limited to the Medicare population 
only.
    Response: We are interested in reducing the burden associated with 
quality measurement. If hospitals are participating in registries and 
submit the same data to those registries that they would otherwise have 
to submit for measures that are part of the RHQDAPU program, we believe 
that the registry data would be an efficient alternative source from 
which to collect the data, and that this would prevent the hospital 
from having to report the same data twice. Many hospitals are currently 
participating in a number of registries that collect data on quality 
measures that are topics of interest to us. However, we acknowledge the 
commenters' concern regarding the cost associated with participation in 
certain registries which may make this alternative mechanism for data 
submission less feasible for some hospitals. We anticipate that 
registry-based data collection may be one means, but not an exclusive 
means, of submitting data for quality measures. We will take these 
considerations into account when selecting measures and potential data 
submission mechanisms for those measures for the RHQDAPU program in the 
future.
    Comment: A number of commenters indicated that it would not be 
feasible for hospitals to implement all-payer claims reporting for the 
AHRQ measures while trying to adopt a standardized EHR at the same 
time. Another commenter indicated that, for all-payer data to be 
transmitted to the QIO Clinical Warehouse, data vendors that currently 
collect and submit most of the clinical data for the RHQDAPU program 
would need to develop the capability to process and submit all-payer 
administrative data to the QIO Clinical Warehouse, and that the current 
CMS Abstraction & Reporting Tool (CART) would need to be modified to 
collect these additional data. One commenter urged CMS to develop a 
national all-payer claims database.
    Response: We thank the commenters for these comments. While we are 
interested in collecting all-payer claims data from hospitals in the 
future, we currently do not have a data collection mechanism in place 
to receive these claims. We will continue to explore the feasibility of 
collecting all-payer claims data in the future.
    Comment: Several commenters encouraged CMS to look to the National 
Priorities Partnership goals as a framework for the types of measures 
that should be included in the RHQDAPU program. Some commenters believe 
that some of the measures proposed are not NQF-endorsed. Some 
commenters suggested that CMS consider adopting the criteria for 
measure selection developed by The Joint Commission.
    Response: The National Priorities Partnership is a 28 member 
organization convened by the NQF for the purpose of identifying 
improvement goals and action steps for the U.S. healthcare system. We 
are a member of the National Priorities Partnership and participate in 
its framework-setting activity. Our measure selection activity for the 
RHQDAPU program is informed by this framework. The SCIP--Infection-9 
and -10 measures and the two measures of registry participation 
included in the proposed rule address the National Priorities 
Partnership goals of increasing patient safety and population health. 
The proposed SCIP--Infection-9 and -10 measures are NQF-endorsed, and 
the two structural measures regarding registry participation are 
inpatient applications of an NQF-endorsed measure of registry 
participation (NQF <greek-i>0493). We regularly communicate with The 
Joint Commission regarding the aligned measures and participate in 
measure maintenance workgroups with The Joint Commission.
    Comment: Several commenters stated that measures selected for the 
RHQDAPU program should be both endorsed by the NQF and adopted by the 
HQA. Some commenters suggested that these steps were required by the 
DRA. One commenter stated that the standard for consensus for selection 
of

[[Page 43868]]

quality measures should be consistent with the National Technology 
Transfer and Advancement Act of 1995 (Pub. L. 104-113) (NTTAA) 
standards.
    Response: Section 1886(b)(3)(B)(viii)(V) of the Act requires, 
effective for payments beginning with FY 2008, that the Secretary add 
quality measures that reflect consensus among affected parties and, to 
the extent feasible and practicable, have been set forth by one or more 
national consensus building entities. This provision does not require 
that the measures we adopt for the RHQDAPU program be endorsed by any 
particular entity, and we believe that consensus among affected parties 
can be reflected by means other than endorsement by a voluntary 
consensus organization, including consensus achieved during the measure 
development process, consensus shown through broad acceptance and use 
of measures, and consensus through public comment (74 FR 24165 through 
24166). Nevertheless, we have stated on numerous occasions that we 
prefer to adopt quality measures that have been endorsed by the NQF. 
The NQF uses a formal consensus development process. As the NQF notes 
on its Web site at: http://www.qualityforum.org/Measuring_Performance/Consensus_Development_Process.aspx, it has been recognized as a 
voluntary consensus standards-setting organization as defined by the 
NTTAA and Office of Management and Budget Circular A-119.
    In contrast, the HQA has a limited membership and its current 
policy is to limit measures that it selects for adoption to a subset of 
NQF-endorsed measures. In selecting measures for the RHQDAPU program we 
consider a variety of factors that we have discussed both in this final 
rule and in previous final rules and take into consideration input 
received from the public including but not limited to members of the 
HQA.
    Comment: One commenter supported the measure selection criteria 
that CMS stated in the proposed rule and suggested that emphasis in 
measure selection be placed upon the following: results of cost-benefit 
analyses; opportunities to leverage data reported to State health 
agencies and State hospital associations; alignment of measures and 
incentives across providers and settings through the application of 
care coordination measures and measures of quality across episodes of 
care that increase providers' clinical and financial accountability; 
and measurement of ambulatory care sensitive and preventable hospital 
admissions and readmissions for beneficiaries with chronic conditions. 
The commenter also suggested that CMS avoid selecting measures that 
allow hospitals to be rewarded for providing marginally effective care 
or care that is already routinely furnished.
    Response: We thank the commenter for these suggestions. In general, 
we agree with these suggested considerations for measure selection. We 
adopt measures of high relevance to the Medicare population for which 
the benefit of public reporting and improvement justifies the 
collection burden, and intend to reduce the collection burden by 
utilizing data sources such as administrative data, registries, and 
EHRs. We strive to align measures across settings whenever possible and 
will continue to do so. The current and proposed RHQDAPU program 
measure set contains measures of readmission for beneficiaries with 
certain acute and chronic conditions, and we intend to expand 
measurement in this area. We also intend to adopt measures of care 
coordination suitable for inclusion in the RHQDAPU program when such 
measures are developed. We also agree with the commenter that quality 
measures should emphasize effective care for which there is evidence of 
wide variability despite the presence of established guidelines. With 
regard to measurement of quality across episodes of care, the current 
RHQDAPU program process measures focus on topics of acute care quality. 
However, we believe that the 30-day mortality and 30-day readmission 
measures adopted for the RHQDAPU program also touch on the issue of 
quality across the continuum of care because other providers in the 
larger community share responsibility with the hospital for mortality 
and readmission during the 30-day period measured, as the quality of 
ambulatory follow up care or postacute care after discharge affects the 
likelihood of these events occurring.
    Comment: Two commenters supported the RHQDAPU program in general. 
One of these commenters attributed great improvements in performance 
and benefits to patients to the reporting of quality data and indicated 
that the reporting program allows hospitals to see comparative 
information that they otherwise might not see.
    Response: We agree with and appreciate these supportive comments.
    Comment: One commenter opposed quality data reporting and stated 
that decreasing payments via incentive programs leads to decreases in 
quality and safety of care for patients.
    Response: We disagree with this statement. The IOM, in its 2005 
volume titled Performance Measurement: Accelerating Improvement (part 
of the IOM series on ``Pathways to Quality Health Care'') credits 
performance measurement as the cornerstone of quality improvement in 
healthcare. Analyses of Hospital Compare data over time indicates 
improvement trends in most of the measures since reporting began in 
2004.
    In summary, we will continue to pursue goals regarding the 
expansion and updating of quality measures under the RHQDAPU program 
while minimizing burden. We will take into account the public comments 
we received on the possible uses of EHRs, registries, and all-payer 
claims data in the RHQDAPU program. We also will consider the measure 
selection criteria suggested by various commenters in prioritizing and 
selecting quality measures for the future.
b. RHQDAPU Program Quality Measures for the FY 2011 Payment 
Determination
(1) Retention of Existing RHQDAPU Program Quality Measures
    For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule (74 FR 24169), we proposed to retain 41 RHQDAPU 
program quality measures that we are using for the FY 2010 payment 
determination. We refer readers to the table in the proposed rule (74 
FR 24169 through 24170) for a complete list of the measures we proposed 
to retain.
    As we discussed in section V.A.1.c.(1) of this final rule, we 
retired the AMI-6 Beta blocker at arrival measure from the RHQDAPU 
program measure set for the FY 2010 payment determination and 
subsequent years.
    We discussed above the public comments we received regarding the 
retirement of measures that are proposed for the FY 2011 payment 
determination. We did not receive any other public comments regarding 
our proposal to retain for the FY 2011 payment determination the 41 
measures that we are using for the FY 2010 payment determination. 
Therefore, we are adopting as final, without change, our proposal to 
retain the 41 quality measures used for the FY 2010 payment update.
(2) NQF Harmonization of Two Existing RHQDAPU Program Measures
    In May 2008, the NQF reviewed the specifications for two of the 
RHQDAPU program measures that we adopted for the FY 2010 payment 
determination: PSI 04--Death among surgical patients with treatable 
serious complications;

[[Page 43869]]

and Nursing Sensitive--Failure to rescue (Medicare claims only). This 
was part of an NQF project titled ``National Voluntary Consensus 
Standards for Hospital Care 2007: Performance Measures.'' As a result 
of this project by the NQF, these two measures now have the same name: 
``Death among surgical inpatients with serious, treatable 
complications'' and share a single set of measure specifications.
    In order to maintain consistency with national voluntary consensus 
standards with respect to referencing the measure, in the FY 2010 IPPS/
RY 2010 LTCH PPS proposed rule (74 FR 24170), we proposed to combine 
PSI 04--Death among surgical patients with treatable serious 
complications; and Nursing Sensitive--Failure to rescue (Medicare 
claims only) into a single measure, Death among surgical inpatients 
with serious, treatable complications, and to list the measure under 
proposed topic name--AHRQ PSI and Nursing Sensitive Care. This measure, 
as well as its specifications, would replace, for purposes of hospital 
reporting, the two RHQDAPU program measures that we adopted for the FY 
2010 payment determination: PSI 04: Death among surgical patients with 
treatable serious complications; and Nursing Sensitive--Failure to 
rescue (Medicare claims only). However, we indicated that we may 
continue to publicly report the measure in two different topics areas 
on the Hospital Compare Web site--Nursing Sensitive Care and AHRQ PSIs, 
IQIs and Composite Measures. We invited public comment on this 
proposal.
    Comment: Several commenters supported harmonization of the Failure 
to Rescue measure and PSI 04: Death among surgical inpatients with 
serious, treatable complication in accordance with consensus standards. 
However, a number of commenters questioned the possible display of the 
harmonized measure in more than one topic area on the Hospital Compare 
Web site, stating this may be unnecessary, redundant, and result in 
confusion. One commenter indicated that continuing to report the 
measure under the two separate topic areas is beneficial.
    Response: We thank the commenters for their support of our use of 
the single harmonized measure and measure specification for the RHQDAPU 
program. The harmonized measure addresses two areas of topical 
significance, patient safety and nursing sensitive care. Therefore, we 
believe that publicly displaying the measure results in more than one 
topic area on the Hospital Compare Web site will give end-users a 
richer picture of a hospital's performance in both of these topic 
areas. We will conduct consumer testing to ensure that display of the 
measure on the Hospital Compare Web site does not appear redundant or 
confusing to consumers.
    After consideration of the public comments we received, we have 
decided to adopt as final our proposal to harmonize these two measures 
for the FY 2011 payment determination.
(3) New Chart-Abstracted Measures
    For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule (74 FR 24170), we proposed to add two new chart-
abstracted measures. These proposed new measures, SCIP-Infection-9 
Postoperative Urinary Catheter Removal on Post Operative Day 1 or 2 and 
SCIP-Infection-10: Perioperative Temperature Management, are additions 
to the existing SCIP measure set. The SCIP Infection measures are 
designed to assess practices that reduce the risk of infections that 
surgical patients could acquire in the hospital. They have high 
relevance to the Medicare population, and address the growing concern 
regarding hospital-acquired infections.\11\
---------------------------------------------------------------------------

    \11\ U.S. Government Accountability Office. Health-Care 
Associated Infections in Hospitals: An Overview of State Reporting 
Programs and Individual Hospital Initiatives to Reduce Certain 
Infections. September 2008.
---------------------------------------------------------------------------

    Although these two measures require that hospitals abstract data 
from medical records, they add to the scope of the existing SCIP 
measure set. Hospitals currently collect and report data elements for 
eight SCIP measures. Additional data elements required for these two 
proposed new SCIP measures are minimal, and would be abstracted from 
the same records hospitals use to abstract data for the other SCIP 
measures. Therefore, we expect the additional burden on hospitals to be 
minimal. The two measures are NQF-endorsed. We invited public comment 
on our proposal to include SCIP-Infection-9 and SCIP-Infection-10 as 
RHQDAPU program measures to be used for the FY 2011 payment 
determination.
    Comment: Several commenters supported CMS' recognition of the 
burden associated with collection of chart-abstracted measures and 
limiting the number of chart-abstracted measures proposed this year.
    Response: We appreciate these comments and will continue to 
carefully consider the potential burden associated with the collection 
of chart-abstracted measures for the RHQDAPU program relative to 
potential benefit of public reporting and quality improvement.
    Comment: Several commenters supported the two proposed new chart-
abstracted measures. The commenters indicated that these measures have 
the potential to reduce hospital-acquired infections while minimizing 
burden, as the data elements would come from the same records hospitals 
are using to abstract data for the other SCIP measures.
    Response: We appreciate these supportive comments. We believe that 
these measures address areas of topical importance to the Medicare 
program because they measure quality of surgical care and practices 
associated with reduction of hospital-acquired infections, and thus, 
ensure better patient outcomes.
    Comment: A few commenters opposed the inclusion of both SCIP-
Infection-9 and SCIP-Infection-10 in the RHQDAPU program solely because 
they are not HQA adopted.
    Response: As we discussed more fully in our response to a prior 
comment, we do not believe that HQA endorsement is a required 
prerequisite for quality measure selection under the RHQDAPU program.
    Comment: One commenter expected a moderate increase in the 
administrative burden related to abstraction. Another commenter asked 
CMS to consider whether it should adopt SCIP-Infection-9 if it is 
considering implementing the Nursing Sensitive/HAI measure, Catheter 
Associated Urinary Tract Infection (CA UTI), in FY 2012. The commenter 
stated that the two measures work toward the same goal of reduced UTIs, 
and ultimately, a broader outcome measure should supplant the related 
process measure that is more likely to become outdated as science 
evolves.
    Response: Both SCIP-Infection-9 and SCIP-Infection-10 impose 
minimal additional abstraction burden as they build upon an existing 
measurement set for a population for which charts are already being 
pulled for abstraction. We acknowledge that the process measured by 
SCIP-Infection-9 is related to the outcome measured by the CA UTI 
measure being considered among measures for future adoption in FY 2012 
and beyond. Though CA UTI is being considered for the future, SCIP-
Infection-9 was proposed for the FY 2011 payment determination because 
there is widespread variation in practice for the processes measured, 
and the practices associated with the measure improve patient outcomes. 
The processes measured in SCIP-Infection-9 may be related to the CA UTI 
measure, but the process measure is not

[[Page 43870]]

supplanted by the outcome measure. The processes SCIP-Infection-9 is 
intended to measure are of clinical relevance to the Medicare 
population and have the potential to improve patient care outcomes.
    After consideration of the public comments we received, we have 
decided to finalize our proposal, without change, to adopt SCIP-
Infection-9: Postoperative Urinary Catheter Removal on Post Operative 
Day 1 or 2 and SCIP-Infection-10: Perioperative Temperature Management 
as quality measures under the RHQDAPU program for the FY 2011 payment 
determination. As we stated in the proposed rule, the collection of the 
new chart-abstracted measures for the FY 2011 payment determination 
will begin with 1st calendar quarter 2010 discharges, for which the 
submission deadline will be August 15, 2010.
(4) New Structural Measures
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24170), 
we also proposed to adopt two additional structural measures for the FY 
2011 payment determination. Structural measures assess the 
characteristics and capacity of the provider to deliver quality health 
care. We proposed to add two additional registry participation 
measures. The two structural measures are: (1) Participation in a 
Systematic Clinical Database Registry for Stroke Care; and (2) 
Participation in a Systematic Clinical Database Registry for Nursing 
Sensitive Care. These measures are specific applications for the 
inpatient setting of a structural measure entitled ``Participation by a 
physician or other clinician in a systematic clinical database registry 
that includes consensus endorsed measures,'' which received NQF 
endorsement under a project titled ``National Voluntary Consensus 
Standards for Health IT: Structural Measures 2008.'' The proposed 
measures are appropriate applications of the NQF-endorsed measure 
because the NQF has endorsed measures for Stroke Care and Nursing 
Sensitive Care which are currently being collected by widely used 
stroke and nursing sensitive care registries. Therefore, we believe 
that the proposed Stroke Registry Participation structural measure and 
Nursing Sensitive Care Registry Participation structural measure meet 
the consensus requirement in section 1886(b)(3)(B)(viii)(V) of the Act.
    As we have previously stated, we also believe that participation in 
registries reflects a commitment to assessing the quality of care 
provided and identifying opportunities for improvement. Many registries 
also collect outcome data and provide feedback to hospitals about their 
performance. Moreover, registries offer a potential future data source 
from which we can collect quality data.
    The Participation in a Systematic Clinical Database Registry for 
Stroke structural measure would require each hospital that participates 
in the RHQDAPU program to indicate whether it is participating in a 
systematic qualified clinical database registry for inpatient stroke 
care and, if so, to identify the registry.
    The Participation in a Systematic Clinical Database Registry for 
Nursing Sensitive Care structural measure would similarly require each 
hospital participating in the RHQDAPU program to indicate whether it is 
participating in a systematic qualified clinical database registry 
measuring nursing sensitive care quality for inpatient care and, if so, 
to identify the registry.
    We solicited public comment on these registry structural measures. 
Specifically, we invited public comment on whether ``systematic 
qualified clinical database registry'' is adequately defined and, if 
not, how it should be defined. In defining ``systematic qualified 
clinical database registry,'' should registries that do not collect 
outcome measures and/or do not provide feedback to hospitals about 
their performance be excluded? Are there other registries that we 
should consider in future rulemakings, beyond stroke and nursing 
sensitive registries, particularly for conditions where there is high 
mortality/morbidity in the Medicare population, high cost to the health 
care system, and widespread treatment variations despite established 
clinical guidelines? Finally, we welcomed more precise data on what 
percentage of hospitals already participate in a stroke registry or a 
nursing sensitive registry.\12\ Because we also retire measures when 
performance has reached a sufficiently high level, we invited public 
comment on whether reporting on stroke registry and nursing sensitive 
care registry structural measures has sufficient relevance and utility 
to justify the reporting burden, if a substantial proportion of 
hospitals already participate in these registries.
---------------------------------------------------------------------------

    \12\ Examples of registries that we are aware of that are being 
actively used by hospitals include the Society of Thoracic Surgeons 
(STS) Cardiac Surgery Registry (with approximately 90 percent 
participation by cardiac surgery programs), the AHA Stroke Registry 
(with approximately 1200 hospitals participating), and the American 
Nursing Association (ANA) Nursing Sensitive Measures Registry (with 
approximately 1400 hospitals participating).
---------------------------------------------------------------------------

    Both proposed structural measures can be submitted using a Web-
based collection tool that we will make available on the QualityNet Web 
site. We invited public comment on our proposal to adopt these two 
structural measures for the FY 2011 payment determination.
    Comment: Several commenters indicated that the two structural 
measures of clinical registry participation should not be included in 
the RHQDAPU program. They indicated that the measures had not been 
endorsed by the NQF or adopted by the HQA and there appears to be no 
established connection between whether a hospital answers ``yes'' or 
``no'' to the registry participation measures and the quality of the 
care that hospital provides. Some commenters expressed concern that 
these measures contain an implicit encouragement by the Medicare 
program for hospitals to participate in clinical data registries 
designed and operated by external organizations, which can be costly. 
Others commenters applauded the use of registries to promote quality 
improvement.
    Response: The proposed structural measures are specific 
applications for the inpatient setting of NQF-endorsed measure 
``participation by a physician or other clinician in a systematic 
clinical database registry that includes consensus endorsed measures.'' 
Therefore, we believe that they meet the requirement for consensus in 
section 1886(b)(3)(B)(viii)(V) of the Act. The measure as endorsed by 
the NQF is an indicator of quality, because it measures adoption of 
technology that has the capacity to improve quality of care. We believe 
that registries can play an important role in providing hospitals with 
information and services for internal quality improvement by providing 
performance benchmarking information, continuous feedback, and 
opportunities to learn best practices. Our intent with these structural 
measures is to assess the degree of current participation in registries 
collecting NQF-endorsed measures on the topics of stroke and nursing 
sensitive quality measures among hospitals participating in the RHQDAPU 
program. We note that hospitals are not required to actually 
participate in the registries in order to meet the RHQDAPU program 
requirements. We also note that in the public comments we received, 
many hospitals indicated that registry participation afforded them with 
valuable insights for improving quality and patient outcomes.
    Comment: Several commenters supported the structural measure 
``Participation in a systematic clinical database registry for 
stroke.'' The

[[Page 43871]]

commenters agreed that stroke measurement should be a priority for the 
RHQDAPU program because strokes cause significant mortality and 
morbidity in the Medicare population, and are treated with wide 
variation despite established guidelines. The commenters also stated 
that participation in such registries has resulted in improvements in 
the quality of care delivered to stroke patients. Commenters 
recommended that the Massachusetts Department of Public Health's acute 
stroke registry, the American Stroke Association (ASA) Get With the 
Guidelines-Stroke registry, and the CDC Paul Coverdell stroke registry 
should be recognized as qualifying registries for the Systematic 
Clinical Database Registry for Stroke measures. A few commenters 
indicated that quarterly submission of registry participation, while 
not overly burdensome, is unnecessary because hospitals tend to 
participate for an entire year, and not on an intermittent basis.
    Response: We agree that strokes cause high morbidity and mortality 
in the Medicare population, and we believe that stroke registries can 
play an important role in providing hospitals with information and 
services for internal quality improvement by providing performance 
benchmarking information, continuous feedback, and opportunities to 
learn best practices. We understand that hospitals that participate in 
registries tend to participate continuously for an entire year, rather 
than intermittently. Based on the feedback, we are modifying our 
proposal to require that hospitals only report whether they participate 
in a stroke and/or nursing sensitive care registry once annually. We 
also are modifying our submission requirement with respect to the 
cardiac surgery registry participaton measure to be consistent with the 
annual submisssion requirement for the stroke and nursing sensitive 
care registry participation measures.
    Comment: A number of commenters indicated that participation in 
stroke registries should not be mandated due to perceived burden, and 
that hospitals should be allowed to report the measures to CMS without 
a vendor. One commenter asked whether and how CMS would determine 
volume thresholds for participation in a stroke registry, and 
specifically whether there would be an expectation that hospitals 
having a low volume of stroke cases participate in a registry.
    Response: We acknowledge that registry participation may be 
burdensome for some hospitals, and we note that the proposed structural 
measures do not mandate that hospitals actually participate in either a 
stroke or nursing sensitive care registry. We also note that there is 
no requirement under the RHQDAPU program that hospitals use a vendor to 
report measures to the QIO Clinical Warehouse, the structural measures 
can be reported directly by hospitals using a Web-based tool.
    Comment: Commenters suggested criteria for a qualified systematic 
clinical database registry for stroke care. One commenter suggested a 
data collection system that supports real-time data collection 
concurrent with patient care, that collects at a minimum all data 
required to support the NQF-endorsed stroke measures, and that uses the 
data to guide improvement in stroke care within an organized program of 
quality improvement. Another commenter suggested that registries should 
be required to include the following services and information: (1) A 
feedback component; (2) the intended use (that is, plan of action/care) 
of the information; (3) potential intervention actions; (4) evaluation; 
and (5) the outcome measure intended to impact (this could be either a 
process-outcome link supported by literature, intermediate outcome, or 
long-term outcome). Commenters also suggested that the risk adjustment 
methodologies employed must be explained if a hospital is collecting 
outcome data, and the feedback provided should be ``systematic,'' which 
requires coordination of the feedback and dissemination of that 
feedback to the defined stroke team (not just the statement feedback to 
hospital).
    Response: We appreciate these suggestions and will consider these 
for future measure refinement. We note that the current NQF-endorsed 
measure <greek-i>0493, upon which the stroke and nursing sensitive 
registry participation structural measures are based, contains the 
following definition for systematic clinical database registry:
    ``c. Registry measures shall include at least two (2) 
representative NQF consensus endorsed measures for registry's clinical 
topic(s) and report on all patients eligible for the selected measures.
    ``d. Registry provides calculated measures results, benchmarking, 
and quality improvement information to individual physicians and 
clinicians.
    ``e. Registry must receive data from more than 5 separate practices 
and may not be located (warehoused) at an individual group's practice. 
Participation in a national or state-wide registry is encouraged for 
this measure.
    ``f. Registry may provide feedback directly to the provider's local 
registry if one exists.''
    This definition of systematic clinical database registry is part of 
the specification for measure <greek-i>0493 shown in NQF's 2008 
Consensus Report regarding National Voluntary Consensus Standards for 
Health Information Technology. We will modify this definition to apply 
to inpatient hospitals, and to the specific topics of stroke and 
nursing sensitive care registries.
    Comment: Some commenters supported the structural measure for 
``Participation in a Systematic Clinical Database Registry for Nursing 
Sensitive Care.'' One commenter suggested that the Patients First 
nursing sensitive measure project be recognized as a qualifying 
registry under the measure. Another commenter suggested that the 
National Database of Nursing Quality Indicators (NDNQI) be considered a 
qualifying registry.
    Response: We appreciate these supportive comments. Participation in 
a particular registry is not required in order for a hospital to 
properly report the Participation in a Systematic Clinical Database 
Registry for Nursing Sensitive Care measure, or any of the other 
structural measures we have, to date, adopted for the RHQDAPU program. 
A hospital can successfully report this structural measure simply by 
indicating whether they participate in a systematic clinical database 
registry for nursing sensitive care and, if so, which registry.
    Comment: A number of commenters indicated that participation in a 
nursing sensitive care registry, though currently widespread, may not 
be feasible for smaller hospitals due to the cost and the need for 
additional staff for data abstraction and reporting.
    Response: We understand the cost implications of participating in 
such registries. However, as we have stated above, actual participation 
in a nursing sensitive care registry is not required under the RHQDAPU 
program.
    Comment: Commenters suggested that CMS consider three additional 
registry topics for measuring hospital participation:
    <bullet> Sepsis Survival
    <bullet> Surgical Quality Improvement
    <bullet> Healthcare Safety and Healthcare Acquired Infections
    Response: We thank the commenters for these suggestions and will 
consider these registry topics in the future.
    After consideration of the public comments we received, we are 
adopting as final the two proposed structural measures: Participation 
in a Systematic

[[Page 43872]]

Clinical Database Registry for Stroke Care; and Participation in a 
Systematic Clinical Database Registry for Nursing Sensitive Care under 
the RHQDAPU program for the FY 2011 payment determination. Based on 
public comments, we will collect these structural measures once 
annually rather than quarterly as originally proposed. Annual data 
submission for these structural measures via a Web-based collection 
tool will begin in July 2010 with respect to the time period January 1, 
2010, through June 30, 2010.
    In summary, after consideration of the public comments we received, 
for the FY 2011 payment determination, we are adopting as final our 
proposals to retain 41 of the measures we adopted for the FY 2010 
payment determination. In addition, we are adopting as final our 
proposal to harmonize an AHRQ measure and a Nursing Sensitive measure 
by combining these measures into a single measure entitled Death among 
surgical inpatients with serious, treatable complications for the 
RHQDAPU program measure set for FY 2011 payment determination. Finally, 
we are adopting as final our proposal to add an additional four 
measures to the RHQDAPU program measure set for the FY 2011 payment 
determination: SCIP-Infection-9: Postoperative Urinary Catheter Removal 
on Post Operative Day 1 or 2; SCIP-Infection-10: Perioperative 
Temperature Management; Participation in a Systematic Clinical Database 
Registry for Stroke Care; and Participation in a Systematic Clinical 
Database Registry for Nursing Sensitive Care.
    Set out below are the 46 RHQDAPU program quality measures we are 
adopting for the FY 2011 payment determination:

------------------------------------------------------------------------
                                             RHQDAPU Program quality
                 Topic                       measures for the FY 2011
                                              payment determination
------------------------------------------------------------------------
Acute Myocardial Infarction (AMI)......  <bullet> AMI-1 Aspirin at
                                          arrival.
                                         <bullet> AMI-2 Aspirin
                                          prescribed at discharge.
                                         <bullet> AMI-3 Angiotensin
                                          Converting Enzyme Inhibitor
                                          (ACE-I) or Angiotensin II
                                          Receptor Blocker (ARB) for
                                          left ventricular systolic
                                          dysfunction.
                                         <bullet> AMI-4 Adult smoking
                                          cessation advice/counseling.
                                         <bullet> AMI-5 Beta blocker
                                          prescribed at discharge.
                                         <bullet> AMI-7a Fibrinolytic
                                          (thrombolytic) agent received
                                          within 30 minutes of hospital
                                          arrival.
                                         <bullet> AMI-8a Timing of
                                          Receipt of Primary
                                          Percutaneous Coronary
                                          Intervention (PCI).
Heart Failure (HF).....................  <bullet> HF-1 Discharge
                                          instructions.
                                         <bullet> HF-2 Left ventricular
                                          function assessment.
                                         <bullet> HF-3 Angiotensin
                                          Converting Enzyme Inhibitor
                                          (ACE-I) or Angiotensin II
                                          Receptor Blocker (ARB) for
                                          left ventricular systolic
                                          dysfunction.
                                         <bullet> HF-4 Adult smoking
                                          cessation advice/counseling.
Pneumonia (PN).........................  <bullet> PN-2 Pneumococcal
                                          vaccination status.
                                         <bullet> PN-3b Blood culture
                                          performed before first
                                          antibiotic received in
                                          hospital.
                                         <bullet> PN-4 Adult smoking
                                          cessation advice/counseling.
                                         <bullet> PN-5c Timing of
                                          receipt of initial antibiotic
                                          following hospital arrival.
                                         <bullet> PN-6 Appropriate
                                          initial antibiotic selection.
                                         <bullet> PN-7 Influenza
                                          vaccination status.
Surgical Care Improvement Project        <bullet> SCIP-1 Prophylactic
 (SCIP).                                  antibiotic received within 1
                                          hour prior to surgical
                                          incision.
                                         <bullet> SCIP-3 Prophylactic
                                          antibiotics discontinued
                                          within 24 hours after surgery
                                          end time.
                                         <bullet> SCIP-VTE-1: Venous
                                          thromboembolism (VTE)
                                          prophylaxis ordered for
                                          surgery patients.
                                         <bullet> SCIP-VTE-2: VTE
                                          prophylaxis within 24 hours
                                          pre/post surgery.
                                         <bullet> SCIP-Infection-2:
                                          Prophylactic antibiotic
                                          selection for surgical
                                          patients.
                                         <bullet> SCIP-Infection-4:
                                          Cardiac Surgery Patients with
                                          Controlled 6AM Postoperative
                                          Serum Glucose.
                                         <bullet> SCIP-Infection-6:
                                          Surgery Patients with
                                          Appropriate Hair Removal.
                                         <bullet> SCIP-Infection-9:
                                          Postoperative Urinary Catheter
                                          Removal on Post Operative Day
                                          1 or 2 *.
                                         <bullet> SCIP-Infection-10:
                                          Perioperative Temperature
                                          Management *.
                                         <bullet> SCIP-Cardiovascular-2:
                                          Surgery Patients on a Beta
                                          Blocker Prior to Arrival Who
                                          Received a Beta Blocker During
                                          the Perioperative Period.
Mortality Measures (Medicare Patients).  <bullet> MORT-30-AMI: Acute
                                          Myocardial Infarction 30-day
                                          mortality -Medicare patients.
                                         <bullet> MORT-30-HF: Heart
                                          Failure 30-day mortality
                                          Medicare patients.
                                         <bullet> MORT-30-PN: Pneumonia
                                          30-day mortality -Medicare
                                          patients.
Patients' Experience of Care...........  <bullet> HCAHPS survey.
Readmission Measure (Medicare Patients)  <bullet> READ-30-HF: Heart
                                          Failure 30[dash]Day Risk
                                          Standardized Readmission
                                          Measure (Medicare patients).
                                         <bullet> READ-30-AMI: Acute
                                          Myocardial Infarction
                                          30[dash]Day Risk Standardized
                                          Readmission Measure (Medicare
                                          patients).
                                         <bullet> READ-30-PN: Pneumonia
                                          30[dash]Day Risk Standardized
                                          Readmission Measure (Medicare
                                          patients).
AHRQ Patient Safety Indicators (PSIs),   <bullet> PSI 06: Iatrogenic
 Inpatient Quality Indicators (IQIs)      pneumothorax, adult.
 and Composite Measures.

[[Page 43873]]

 
                                         <bullet> PSI 14: Postoperative
                                          wound dehiscence.
                                         <bullet> PSI 15: Accidental
                                          puncture or laceration.
                                         <bullet> IQI 11: Abdominal
                                          aortic aneurysm (AAA)
                                          mortality rate (with or
                                          without volume).
                                         <bullet> IQI 19: Hip fracture
                                          mortality rate.
                                         <bullet> Mortality for selected
                                          surgical procedures
                                          (composite).
                                         <bullet> Complication/patient
                                          safety for selected indicators
                                          (composite).
                                         <bullet> Mortality for selected
                                          medical conditions
                                          (composite).
AHRQ PSI and Nursing Sensitive Care **.  <bullet> Death among surgical
                                          inpatients with serious,
                                          treatable complications.
Cardiac Surgery........................  <bullet> Participation in a
                                          Systematic Database for
                                          Cardiac Surgery.
Stroke Care............................  <bullet> Participation in a
                                          Systematic Clinical Database
                                          Registry for Stroke Care *.
Nursing Sensitive Care.................  <bullet> Participation in a
                                          Systematic Clinical Database
                                          Registry for Nursing Sensitive
                                          Care *.
------------------------------------------------------------------------
* New measure for FY 2011 payment determination.
** Harmonized measure. This measure may be publicly reported under two
  topics--the AHRQ PSIs and the Nursing Sensitive Care topic.

4. Possible New Quality Measures for the FY 2012 Payment Determination 
and Subsequent Years
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24172), 
we invited public comment on the following quality measures and topics 
that we might consider adopting beginning with the FY 2012 payment 
determination. We also sought suggestions and rationales to support the 
adoption of measures and topics for the RHQDAPU program that are not 
included in this list.

------------------------------------------------------------------------
             Measure topic                     Measure description
------------------------------------------------------------------------
AMI....................................  Statin at discharge.
ED--Throughput.........................  Median time from admit decision
                                          time to time of departure from
                                          the emergency department for
                                          emergency department patients
                                          admitted to inpatient status.
ED--Throughput.........................  Median time from emergency
                                          department arrival to time of
                                          departure from the emergency
                                          room for patients admitted to
                                          the facility from the
                                          emergency department.
Complications..........................  Lower Extremity Bypass
                                          Complications.
Complications..........................  Comorbidity Adjusted
                                          Complication Index.
PCI....................................  PCI mortality rate for patients
                                          without ST segment elevation
                                          myocardial infarction (STEMI)
                                          and without cardiogenic shock.
Stroke.................................  Patients with an ischemic
                                          stroke or a hemorrhagic stroke
                                          and who are non-ambulatory
                                          should start receiving DVT
                                          prophylaxis by end of hospital
                                          day two.
Stroke.................................  Patients with an ischemic
                                          stroke prescribed
                                          antithrombotic therapy at
                                          discharge.
Stroke.................................  Patients with an ischemic
                                          stroke with atrial
                                          fibrillation discharged on
                                          anticoagulation therapy.
Stroke.................................  Acute ischemic stroke patients
                                          who arrive at the hospital
                                          within 120 minutes (2 hours)
                                          of time last known well and
                                          for whom IV t-PA was initiated
                                          at this hospital within 180
                                          minutes (3 hours) of time last
                                          known well.
Stroke.................................  Patients with ischemic stroke
                                          who receive antithrombotic
                                          therapy by the end of hospital
                                          day two.
Stroke.................................  Ischemic stroke patients with
                                          LDL >/= 100 mg/dL, or LDL not
                                          measured, or, who were on
                                          cholesterol reducing therapy
                                          prior to hospitalization are
                                          discharged on a statin
                                          medication.
Stroke.................................  Patients with ischemic or
                                          hemorrhagic stroke or their
                                          caregivers who were given
                                          education or educational
                                          materials during the hospital
                                          stay addressing all of the
                                          following: personal risk
                                          factors for stroke, warning
                                          signs for stroke, activation
                                          of emergency.
Stroke.................................  Patients with an ischemic
                                          stroke or hemorrhagic stroke
                                          who were assessed for
                                          rehabilitation services.
VTE....................................  This measure assesses the
                                          number of patients that
                                          receive VTE prophylaxis or
                                          have documentation why no VTE
                                          prophylaxis was given within
                                          24 hours after the initial
                                          admission (or transfer) to the
                                          Intensive Care Unit (ICU) or
                                          surgery end time.
VTE....................................  Patients who received
                                          parenteral and warfarin
                                          therapy (overlap therapy): (1)
                                          For at least 5 days, with an
                                          INR greater than or equal to 2
                                          prior to discontinuation of
                                          parenteral therapy OR (2) For
                                          more than 5 days, with an INR
                                          less than 2, but were
                                          discharged on overlap therapy
                                          OR (3) Who were discharged in
                                          less than five days on overlap
                                          therapy.

[[Page 43874]]

 
VTE....................................  This measure assesses the
                                          number of patients receiving
                                          intravenous (IV) UFH therapy
                                          with documentation that the
                                          dosages and platelet counts
                                          are monitored by protocol (or
                                          nomogram).
VTE....................................  This measure assesses the
                                          number of VTE patients that
                                          are discharged home, home
                                          care, or home hospice on
                                          warfarin with written
                                          discharge instructions that
                                          addresses all four criteria:
                                          Follow-up Monitoring;
                                          Compliance Issues; Dietary
                                          Restrictions; and, Potential
                                          for Adverse Drug Reactions/
                                          Interactions.
VTE....................................  This measure assesses the
                                          number of patients that were
                                          diagnosed with VTE during
                                          hospitalization (not present
                                          at admission) that did not
                                          receive VTE prophylaxis.
Cardiac Surgery........................  Post-operative Renal Failure.
Cardiac Surgery........................  Surgical Re-exploration.
Cardiac Surgery........................  Anti-Platelet Medication at
                                          Discharge.
Cardiac Surgery........................  Beta Blockade at Discharge.
Cardiac Surgery........................  Anti-Lipid Treatment Discharge.
Cardiac Surgery........................  Risk-Adjusted Operative
                                          Mortality for Coronary Artery
                                          Bypass Graft CABG.
Cardiac Surgery........................  Risk-Adjusted Operative
                                          Mortality for Aortic Valve
                                          Replacement (AVR).
Cardiac Surgery........................  Risk-Adjusted Operative
                                          Mortality for Mitral Valve
                                          Replacement/Repair (MVR).
Cardiac Surgery........................  Risk-Adjusted Operative
                                          Mortality MVR+CABG Surgery.
Cardiac Surgery........................  Risk-Adjusted Operative
                                          Mortality for AVR+CABG.
Cardiac Surgery........................  Pre-Operative Beta Blockade.
Cardiac Surgery........................  Duration of Prophylaxis for
                                          Cardiac Surgery Patients.
Cardiac Surgery........................  Prolonged Intubation
                                          (ventilation).
Cardiac Surgery........................  Deep Sternal Wound Infection
                                          Rate.
Cardiac Surgery........................  Stroke/Cerebrovascular
                                          Accident.
Nursing Sensitive......................  Patient Falls: All documented
                                          falls with or without injury,
                                          experienced by patients on an
                                          eligible unit in a calendar
                                          month.
Nursing Sensitive......................  Falls with Injury: All
                                          documented patient falls with
                                          an injury level of minor or
                                          greater.
Nursing Sensitive/HAI..................  Catheter Associated Urinary
                                          Tract Infection.
Nursing Sensitive/HAI..................  Central Line Associated Blood
                                          Stream Infection in the ICU
                                          and high risk neonatal
                                          intensive care unit.
Nursing Sensitive/HAI..................  Ventilator Associated Pneumonia
                                          in the ICU.
Nursing Sensitive......................  Pressure Ulcer Prevalence.
Nursing Sensitive......................  Restraint Prevalence (vest and
                                          limb).
Nursing Sensitive......................  Skill Mix: Percentage of hours
                                          worked by: RN, LPN/LVN, UAP,
                                          Contract/Agency.
Nursing Sensitive......................  Hours per patient day worked by
                                          RN, LPN, and UAP.
Nursing Sensitive......................  Practice Environment Scale-
                                          Nursing Work Index.
Nursing Sensitive......................  Voluntary turnover for RN, APN,
                                          LPN, UAP.
Outcomes...............................  PSI 03: Decubitus Ulcer.
Outcomes...............................  PSI 07: Infection Due to
                                          Medical Care.
Outcomes...............................  PSI 08: Post Operative Hip
                                          Fracture.
Outcomes...............................  PSI 09: Post Operative
                                          Hemorrhage or Hematoma *.
Outcomes...............................  PSI 10: Post Operative
                                          Physiologic Metabolic
                                          Derangement *.
Outcomes...............................  PSI 11: Post Operative
                                          Respiratory Failure.
Outcomes...............................  PSI 12: Post Operative PE or
                                          DVT.
Outcomes...............................  PSI 13: Post Operative Sepsis.
Outcomes...............................  IQI 08: In-hospital Mortality
                                          for Esophageal Resection.
Outcomes...............................  IQI 09: In-hospital Mortality
                                          for Pancreatic Resection.
Outcomes...............................  IQI 12: In-hospital Mortality
                                          for Coronary Artery Bypass
                                          Graft CABG.
Outcomes...............................  IQI 13: In-hospital Mortality
                                          for Craniotomy *.
Outcomes...............................  IQI 14: In-hospital Mortality
                                          for Hip Replacement.
Outcomes...............................  IQI 15: In-hospital Mortality
                                          for AMI.
Outcomes...............................  IQI 16: In-hospital Mortality
                                          for CHF.
Outcomes...............................  IQI 17: In-hospital Mortality
                                          for Stroke.
Outcomes...............................  IQI 18: In-hospital Mortality
                                          for GI Hemorrhage *.
Outcomes...............................  IQI 20: In-hospital Mortality
                                          for Pneumonia.
SCIP...................................  Short Half-Life prophylactic
                                          administered preoperatively
                                          redosed within 4 hours after
                                          preoperative dose.
PCI Readmission........................  Hospital-specific 30-day risk-
                                          standardized readmission rate
                                          following Percutaneous
                                          Coronary Intervention (PCI)
                                          among patients aged 18 years
                                          or older.
PCI Mortality..........................  PCI Mortality for STEMI/shock
                                          patients: Hospital-specific 30-
                                          day all-cause risk-
                                          standardized mortality rate
                                          following Percutaneous
                                          Coronary Intervention (PCI)
                                          among patients aged 18 years
                                          or older with ST segment
                                          elevation myocardial
                                          infarction (STEMI) or
                                          cardiogenic shock at the time
                                          of procedure.

[[Page 43875]]

 
                                         PCI Mortality for non-STEMI/non-
                                          shock patients: Hospital-
                                          specific 30-day all-cause risk-
                                          standardized mortality rate
                                          following Percutaneous
                                          Coronary Intervention (PCI)
                                          among patients aged 18 years
                                          or older without ST segment
                                          elevation myocardial
                                          infarction (STEMI) and without
                                          cardiogenic shock at the time
                                          of procedure.
ICD Complications......................  Hospital-specific risk-
                                          standardized complication rate
                                          following implantable
                                          cardioverter defibrillator
                                          (ICD) implantation among
                                          patients aged 18 years or
                                          older.
Hospital Acquired Infections...........  Methicillin[dash]Resistant
                                          Staphylococcus Aureus (MRSA).
Hospital Acquired Infections...........  Clostridium Difficile
                                          Associated Diseases (CDAD).
------------------------------------------------------------------------
* AHRQ is currently working with to improve and refine these measures,
  after which they will be updated to reflect the most current evidence
  learned as a result of validation efforts and empirical analyses.

    We invited public comment on these measures for potential future 
use in the RHQDAPU program, as well as suggestions and supporting 
rationales for additional measures to consider using in the program at 
a future time.
<bullet> General Comments
    Comment: Several commenters expressed concern over the number of 
measures listed as being under consideration for FY 2012 and subsequent 
years in the proposed rule. Commenters believed that a large increase 
in measures in future years would compete with other critical 
initiatives that would be occurring (such as HIT adoption for incentive 
payments and transitioning to ICD-10-CM and ICD-10-PCS implementation). 
The commenters recommended that CMS give consideration to the number 
and burden associated with the measures particularly as many are not 
EHR-based or registry-based measures. The commenters also suggested 
that CMS prioritize the measures, avoid redundancy by adopting measures 
that add information not captured in other measures, and consider 
measures that are closest in relation to desired outcomes for patients. 
One commenter also suggested that CMS assess the feasibility of 
constructing measures from data contained in the typical hospital 
electronic health record.
    Response: We listed an array of measures that we are considering 
for the future. We will carefully weigh the burden associated with the 
adoption of measures against the benefit of publicly reporting that 
data. We anticipate limited adoption of chart-abstracted measures in 
the future because we wish to minimize the burden associated with 
quality measurement during a time when hospitals will be implementing 
new technologies and systems. We also will continue to assess the 
feasibility of alternative data sources for measures, such as 
registries and EHRs.
    Comment: Commenters recommended that CMS provide clarity on the 
status of the proposed measures regarding NQF endorsement, information 
about the data abstraction burden, and a central location for 
specifications for measures under consideration. Another commenter also 
suggested that for measures under consideration, CMS provide 
information on benchmarking, potential use, affect on patient care, and 
development.
    Response: We understand the commenters' desire to have more 
information about the measures being considered for the future. We 
provide some additional information in our responses to comments below, 
and we will endeavor to provide more detailed information about 
measures under consideration in the future.
<bullet> Comment on Measure Topic: AMI
    Comment: One commenter indicated that the Statin at Discharge 
measure for AMI would be better suited as a physician measure rather 
than a hospital measure.
    Response: We will take this into consideration in determining 
whether to adopt this measure for the RHQDAPU program in the future. 
However discharge medications, such as aspirin at discharge, form the 
basis for other measures which we have implemented in the RHQDAPU 
program.
<bullet> Comments on Measure Topic: ED-Throughput
    Comment: Several commenters supported the concept of the ED-
Throughput measures. Some commenters made suggestions for refinements 
to the specifications for ``Median time from admit decision time to 
time of departure from the emergency room for patients admitted to the 
facility from the ED'' measure. They suggested using the time when an 
admit order is written, and the time of departure from the emergency 
department to calculate the median times for this measure. Other 
commenters suggested stratification by population type.
    Response: We appreciate the supportive comments. These suggestions 
are in keeping with the current measure specifications as endorsed by 
NQF. These ED-Throughput measure specifications are available in the 
Specifications Manual on http://www.QualityNet.org.
    Comment: One commenter opposed the ED-Throughput measures because 
the commenter believed that they measured utilization.
    Response: The ED-Throughput measures are NQF-endorsed quality 
measures. The ED-Throughput measures reflect not only the processes of 
care that occur while the patient is in the emergency department, but 
also reflect the coordination of care, communication, and efficiency of 
service provision beyond the walls of the emergency department. They 
address ED overcrowding, which has been identified as a major quality 
issue by the IOM.
<bullet> Comment on Measure Topic: Complications
    Comment: One commenter stated that global measures such the 
Comorbidity Adjusted Complication Index are useful to hospitals in 
quality improvement efforts.
    Response: We agree that global measures can provide useful quality 
improvement information to hospitals. We also believe that the topic of 
complications is an important one for consumers. This measure is 
currently undergoing evaluation as part of the NQF consensus 
development project entitled Hospital Care: Outcomes and Efficiency 
Measures Phase II. We will take this comment into consideration in 
determining whether to adopt such measures in the future.
<bullet> Comments on Measure Topic: Stroke
    Comment: Numerous commenters encouraged CMS to adopt the stroke 
measures, which they see as evidence-based measures that accurately 
measure evidence-based care of the stroke patient to minimize secondary 
strokes and other complications, have been thoroughly researched, and 
are widely recognized. Several commenters cited firsthand

[[Page 43876]]

experience with dramatic quality improvements resulting from the 
collection and reporting of these measures to a registry.
    Response: We appreciate and agree with these supportive statements. 
Stroke is a topic of great relevance to the Medicare population due to 
its impact on morbidity and mortality, and an area of great potential 
improvement for hospitals.
    Comment: Two commenters supported the stroke measures under 
consideration but recommended limiting the measures in scope to 
``Certified Stroke Centers'' in order to minimize the possibility that 
patients will suffer from unintended consequences due to a provider's 
lack of expertise with stroke. One commenter supported all but the STK-
10 Assessed for Rehabilitation stroke measure and recommended that CMS 
establish eligibility criteria for the Assessment of Rehabilitation 
measure instead of including the entire stroke population as currently 
defined in the Specifications Manual.
    Response: We will consider these comments in deciding whether to 
adopt these measures in the future. We note that we adopt measures for 
the RHQDAPU program that are broadly applicable to all participating 
hospitals, and that acute care for stroke is not given only by 
hospitals that have attained specific certifications. Regarding the 
measure on stroke assessment, the scope of the NQF-endorsed measure 
includes the entire stoke population. However, the measure allows for 
variation in the extent/degree of the assessment based on clinical 
indications. Specifications for the stroke measures are available in 
the Specifications Manual at https://www.QualityNet.org.
    Comment: Several commenters generally opposed the future adoption 
of one or more of the stroke measures into the RHQDAPU program. One 
commenter stated that the abstraction rules for stroke are in need of 
greater refinement as they currently allow too much room for subjective 
interpretation. One commenter had concerns regarding inclusion of the 
anticoagulation measure because falls in the elderly population can be 
a significant problem with the risk of intracranial bleeding surpassing 
the benefit of anticoagulation therapy for atrial fibrillation. A few 
commenters opposed ``Thrombolysis therapy'' for stroke, stating that 
this therapy is not yet the standard of care for community or rural 
hospitals and that administering thrombolytic therapy to stroke 
patients has a high risk of complications.
    Response: We appreciate these comments and will take them into 
consideration. Most of the comments we received overwhelmingly 
supported the adoption of these measures for the RHQDAPU program in the 
future. We believe that the stroke topic is of great clinical relevance 
to the Medicare population because of its impact on morbidity and 
mortality, as well a stroke's debilitating effect on the quality of 
life among Medicare beneficiaries. All of the measures in the stroke 
set under consideration are important to the overall outcome of the 
patient. The stroke measures are based on current AHA and ASA 
guidelines. We believe that current guidelines for stroke care apply 
across hospital types. The measure ``Patients with an ischemic stroke 
with atrial fibrillation discharged on anticoagulation therapy'' 
currently excludes patients for whom risks associated with treatment 
with an anticoagulant would outweigh potential benefits. Providing 
timely thrombolytic therapy has shown to greatly reduce complications, 
mortality and morbidity related to stroke. The measures are intended 
for public reporting, and are not intended to encourage a particular 
treatment when it is not warranted.
<bullet> Comments on Measure Topic: VTE
    Comment: Two commenters supported CMS adding measures VTE-1, -2 and 
-3 as shown in the inpatient measure specification manual in FY 2012, 
but did not support measures VTE-4, -5, and -6. The commenters stated 
that the measures shown in the table do not seem to align with the VTE 
measures included in the Specifications Manual effective with October 
1, 2009 discharges. The commenters also recommended that the measure 
``VTE-1: prophylaxis in medical and non-SCIP-VTE surgical patients'', 
which we proposed in the FY 2009 IPPS proposed rule (73 FR 23648) but 
did not adopt, be considered for future adoption into the RHQDAPU 
program.
    Response: The VTE measures we listed in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule are the same as the VTE measures in the aligned 
Specifications Manual. VTE-1 appears in the aligned Specifications 
Manual, and we will include VTE-1 on the list of measures to be 
considered for FY 2012 and beyond.
    Comment: One commenter supported all but VTE-3 and -4 as shown in 
the inpatient measure specification manual, and suggested that the 
measure descriptions be clarified.
    Response: The formal specifications can be found in the aligned 
Specifications Manual on the QualityNet Web site: https://www.QualityNet.org.
<bullet> Comments on Measure Topic: Cardiac Surgery
    Comment: One commenter supported adopting the Cardiac Surgery 
measures for the RHQDAPU program because these measures are appropriate 
and useful for quality improvement and public reporting purposes. 
Another commenter indicated that the data element specifications for 
the Cardiac Surgery topic need more rigor and standardization.
    Response: Cardiac surgery is a topic of high relevance to the 
Medicare program because of its high volume among Medicare 
beneficiaries. We note that the cardiac surgery measures that are under 
consideration for adoption in future years, as well as their 
specifications, are NQF-endorsed and are available at http://www.qualityforum.org/.
<bullet> Comments on Measure Topics: Nursing Sensitive and Nursing 
Sensitive/HAI
    Comment: Several commenters supported the Central Line [catheter] 
Associated Blood Stream Infection in the ICU and high risk neonatal 
intensive care unit measure, and the CA UTI infection measure. Several 
commenters urged CMS to consider adopting a Center for Disease Control 
measure of Surgical Site Infection that is not listed in the table of 
measures under consideration for future years (Table--above) but which 
was listed in the future measure table in the 2009 IPPS rule at 73 FR 
48611. The commenters stated that the Central Line Associated Blood 
Stream Infection, Catheter Associated Urinary Tract Infection, and 
Surgical Site Infection measures are thoroughly specified, are 
currently used in other reporting initiatives, are relevant to 
consumers, and reveal important information that hospitals can use for 
their quality improvement programs. One commenter supported adoption of 
these measures if hospitals do not have to join a registry to report 
the information.
    Response: We thank the commenters for these suggestions and will 
add Surgical Site Infection to the list of measures being considered 
for FY 2012 and beyond because it addresses the high priority topical 
area of hospital-acquired infections. The Central Line [catheter] 
Associated Blood Stream Infection in the ICU and high risk neonatal 
intensive care unit measure and the Catheter Associated UTI measure are 
currently being collected by the CDC's National Healthcare Safety 
Network (NHSN) database as

[[Page 43877]]

surveillance measures. We are supportive of these measures as they 
address hospital-acquired infections. We are exploring the possibility 
of receiving data, with permission from participating hospitals, from 
the CDC to avoid duplicative reporting of information by hospitals that 
participate in NHSN. Furthermore, we are exploring the development of 
electronic specifications for the collection of these measures from 
EHRs.
    Comment: Several commenters indicated that more specificity, 
information, and clear expectations are needed for the following 
Nursing Sensitive measures: Patient Falls: All documented falls with or 
without injury, experienced by patients on an eligible unit in a 
calendar month; Falls with Injury: All documented patient falls with an 
injury level of minor or greater; CA UTI; Pressure Ulcer Prevalence; 
and Restraint Prevalence (vest and limb). In particular, the commenters 
believe that definitions for falls and CA UTI are needed. Two 
commenters indicated that the Pressure Ulcer Prevalence measure needs 
more specificity regarding the stage of the ulcer and whether the 
pressure ulcer was present on admission or hospital-acquired. One 
commenter indicated that, at times, pressure ulcers may not be 
preventable (for example, cases where patients experience multisystem 
organ failure, malnutrition, when vasopressors or fluid resuscitation 
have been employed, or when the patient cannot be turned due to traumas 
requiring surgery to be performed).
    Response: The Nursing Sensitive measures are currently the subject 
of an NQF reevaluation project. We anticipate that considerations such 
as these will be brought forth and addressed as necessary during the 
reevaluation process prior to the time we would propose to adopt the 
measures.
    Comment: A few commenters indicated that they would not be able to 
calculate the voluntary turnover measure unless this was manually 
tracked, making the collection of data necessary for this measure 
resource intensive. Another commenter indicated that the measures in 
the Nursing Sensitive measure set that rely on administrative data 
(such as voluntary turnover and skill mix) are of questionable validity 
for quality improvement.
    Response: We appreciate these comments and will take them into 
consideration in deciding whether to adopt these measures in the 
future. Our understanding is that most hospitals are currently 
collecting the data elements for the voluntary turnover and skill mix 
measures. Registries of Nursing Sensitive Care quality measures 
currently feature these administrative-based measures in hospital 
feedback reports for quality improvement purposes.
    Comment: Two commenters criticized the Ventilator Associated 
Pneumonia [VAP] in the ICU measure. One commenter noted that a recent 
HHS National Action Plan to Prevent Healthcare-Associated Infections 
indicated that ``no valid outcome or process metric had been identified 
for VAP.'' Another commenter indicated that, while VAP in the ICU is 
frequently tracked for State reporting purposes, it is a poor measure 
for quality improvement or for external comparison because of the 
challenges with diagnosis and definitions.
    Response: Healthcare-associated infections are a high priority area 
for us because they increase complications and treatment costs, and we 
are looking to this as an area for future measurement. We agree that 
the definition of VAP should undergo further standardization. 
Therefore, we will not consider adopting this measure for the RHQDAPU 
program until such a definition has been determined.
<bullet> Comments on Measure Topic: Outcomes
    Comment: Several commenters supported adoption of the AHRQ patient 
safety indicators and inpatient quality indicators, but many commenters 
suggested limiting adoption to two or three AHRQ measures annually 
because collection of more than three may present a burden to 
hospitals. A few commenters suggested reporting one or more of the AHRQ 
indicators separately from the composite measures.
    Response: We agree that these are important patient safety and 
outcome measures for the inpatient setting. These would be claims-based 
measures. Therefore, because we currently calculate claims-based 
measures using only Medicare claims, there would be no additional 
reporting burden associated with these measures. To the extent that the 
measures focus on quality of care issues, we believe that hospitals 
will benefit from the information these measures reveal. We will 
consider the suggestion for separate public reporting of selected 
indicators. However, if any of these individual measures are adopted, 
we will engage in consumer testing regarding how best to display the 
measures on the Hospital Compare Web site. The measure specifications 
for the AHRQ inpatient quality indicators and patient safety indicators 
are available at http://www.qualityindicators.ahrq.gov/.
    Comment: One commenter stated that, while AHRQ patient safety 
measures may have value to hospitals for internal quality improvement 
purposes, they currently lack the sensitivity and specificity required 
for use as comparative, publicly reported measures, especially the 
research-oriented PSI measures. Because they are derived from 
administrative data, one commenter suggested that they are less 
sensitive than measures derived from clinical chart abstraction at 
identifying relevant patients and excluding other patients. One 
commenter indicated that some of the AHRQ indicators have very high 
false positive rates and that extensive field testing and 
respecification would be needed. One commenter suggested that the risk 
adjustment seems unfairly advantageous to larger volume hospitals.
    Response: We appreciate these comments and will take them into 
consideration in determining which measures to adopt for the RHQDAPU 
program in the future. We are aware of and encourage current validation 
projects involving positive predictive value and sensitivity being 
performed on these measures as they will lead to improvements in the 
measure specifications.
    Comment: One commenter expressed concern that traditional risk 
adjustment would not be appropriate for IQI 17: In-hospital Mortality 
for Stroke. The commenter suggested that a proper risk adjustment model 
for in-hospital stroke mortality should account for stroke severity on 
presentation and stroke type (hemorrhagic versus ischemic stroke). The 
commenter suggested stratification of stroke mortality by type and 
suggested use of a well-established stroke severity scale in risk 
adjustment models for stroke mortality.
    Response: We appreciate this suggestion. However, we note that the 
current risk adjustment model for the in-hospital stroke mortality 
measure has been endorsed by the NQF as appropriate for this measure, 
and we also believe the model is appropriate because it underwent a 
rigorous consensus development process.
<bullet> Comments on Measure Topics: PCI Readmission and PCI Mortality
    Comment: Two commenters supported the PCI 30-day mortality and 30-
day readmission rates and requested that CMS consider adopting the PCI 
measure set for FY 2011 payment determination. One commenter also 
stated that it is imperative that the outcome findings are drilled down 
far

[[Page 43878]]

enough that hospital-specific results can be obtained and patients can 
view hospital results based upon the condition or procedure they are 
undergoing. One commenter recommended that that the PCI Readmission and 
PCI Mortality measure related to STEMI/Shock be defined to include the 
base population as defined in the AMI Core Measure in order to reduce 
additional abstraction burden in identifying and defining shock.
    Response: We thank the commenters for their support for the PCI 
mortality and readmission measures and will consider adopting these 
measures for the RHQDAPU program. Before we add them to the RHQDAPU 
program measure set, however, we will propose to adopt them as part of 
the rulemaking process. The current outcomes and readmissions measures 
are all calculated at the hospital level for various conditions, 
allowing patients to view hospital level results. Future outcomes and 
readmission measures, including the PCI 30-day mortality and 30-day 
readmission rates, if adopted for the RHQDAPU program, would be 
calculated in this manner as well. These measures are specified as 
claims-based measures for which there is no chart abstraction. These 
measures are currently undergoing evaluation as part of an NQF 
consensus development project entitled Hospital Care: Outcomes and 
Efficiency Measures Phase II.
<bullet> Comment on Measure Topic: ICD Complications
    Comment: One commenter recommended that CMS follow definitions 
established by the ICD Registry to assure standardization of the ICD 
Complications measure.
    Response: We intend to use standardized measure specifications for 
measures that are adopted into the RHQDAPU program and seek to adopt 
measures that have been endorsed by the NQF. Therefore, when available, 
we adopt NQF-endorsed measures for a particular topic and utilize the 
measure specifications that were endorsed by the NQF.
<bullet> Comment on Measure Topic: Hospital-Acquired Infections
    Comment: One commenter indicated that, because of increased 
screening, there is a need to distinguish between healthcare-acquired 
MRSA infections and community-associated infections, and that all 
multi-drug resistant infections should be reported in order to focus 
efforts on reducing these infections, rather than one in particular.
    Response: We agree that the distinction between the sources of MRSA 
infections is important. The MRSA measure under consideration for the 
RHQDAPU program focuses only on hospital-acquired infections. As for 
the reporting of other multi-drug resistant infections, we will take 
this comment into account as we develop future measures.
<bullet> Comments on Measure Topic: Topics and Measures Suggested by 
Commenters
    Comment: Commenters suggested seven additional topics and measures 
to consider for future adoption into the RHQDAPU program:
    <bullet> Surgical site infection rate
    <bullet> Dysphagia screening for stroke
    <bullet> Pediatric Quality Indicators
    <bullet> Chronic Obstructive Pulmonary Disease (COPD)
    <bullet> Inpatient Resource Use and Efficiency
    <bullet> Global smoking cessation measure
    <bullet> Inpatient Psychiatric Measures
    Commenters noted that two of these topics (Surgical Site Infection 
and Chronic Obstructive Pulmonary Disease (COPD) were discussed in the 
future measure section of the FY 2009 IPPS proposed rule but not in the 
current proposed rule for FY 2010.
    Response: We will consider these suggestions when selecting 
measures for the RHQDAPU program in the future. We agree that surgical 
site infection, dysphagia screening for stroke, and COPD are 
appropriate areas for the RHQDAPU program because they address 
conditions that are of high prevalence and cost to the Medicare 
program.
    CMS currently includes several indicators of Pediatric Quality on 
the Hospital Compare Web site based on the submission of the data as 
part of other voluntary quality reporting initiatives. While we 
publicly report these measures, we are not currently considering 
requiring these indicators or other Pediatric Quality indicators for 
the RHQDAPU program because pediatric conditions affect a very small 
number of Medicare beneficiaries.
    In summary, we appreciate the public comments we received and will 
consider them as we develop proposals for new quality measures for the 
FY 2012 payment determination and subsequent years.
5. Form, Manner, and Timing of Quality Data Submission
    Section 1886(b)(3)(B)(viii)(I) of the Act requires that subsection 
(d) hospitals submit data on measures selected under that clause with 
respect to the applicable fiscal year. In addition, section 
1886(b)(3)(B)(viii)(II) of the Act requires that each subsection (d) 
hospital submit data on measures selected under that clause to the 
Secretary in a form and manner, and at a time, specified by the 
Secretary. The data submission requirements, Specifications Manual, and 
submission deadlines are posted on the QualityNet Web site at: https://www.QualityNet.org. CMS requires that hospitals submit data in 
accordance with the specifications for the appropriate discharge 
periods.
    Hospitals submit quality data through the secure portion of the 
QualityNet Web site (formerly known as QualityNet Exchange) (https://www.QualityNet.org). This Web site meets or exceeds all current Health 
Insurance Portability and Accountability Act requirements for security 
of protected health information.
a. RHQDAPU Program Procedures for the FY 2011 Payment Determination
    For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule (74 FR 24174), we proposed that the following 
procedures would apply to hospitals participating in the RHQDAPU 
program. These procedures are, for the most part, the same as the 
procedures that apply to the FY 2010 payment determination. We identify 
below where we proposed to modify a procedure.
    <bullet> Register with QualityNet, before participating hospitals 
initially begin reporting data, regardless of the method used for 
submitting data.
    <bullet> Identify a QualityNet Administrator who follows the 
registration process located on the QualityNet Web site (https://www.QualityNet.org).
    <bullet> Notice of Participation. New subsection (d) hospitals and 
existing hospitals that wish to participate in the RHQDAPU program for 
the first time must complete a revised ``Reporting Hospital Quality 
Data for Annual Payment Update Notice of Participation'' form (Notice 
of Participation form) that includes the name and address of each 
hospital campus that shares the same CMS Certification Number (CCN).
    We proposed that any hospital that receives a new CCN on or after 
October 15, 2009 (including new subsection (d) hospitals and hospitals 
that have merged) that wishes to participate in the RHQDAPU program and 
has not otherwise submitted a Notice of Participation form using that 
CCN must submit a completed Notice of Participation form no later than 
180 days from the date identified as the open date (that is, the 
Medicare acceptance date) on the approved CMS Online System 
Certification and Reporting (OSCAR) system. We believe that this 
deadline will give these

[[Page 43879]]

hospitals a sufficient amount of time to get their operations up and 
running while simultaneously providing CMS with clarity regarding 
whether they intend to participate in the RHQDAPU program for FY 2011.
    We also proposed that hospitals having an open date (or Medicare 
acceptance date) (as noted on the approved CMS OSCAR system) before 
October 15, 2009, that did not participate in the RHQDAPU program in FY 
2010 but that wish to participate in the RHQDAPU program for the FY 
2011 payment determination must submit completed Notice of 
Participation forms to CMS on or before December 31, 2009. These 
hospitals, unlike hospitals that receive a new CCN, do not need to get 
their operations up and running. Therefore, we believe this is a 
reasonable deadline that will enable these hospitals to decide whether 
they want to participate in the RHQDAPU program while also enabling CMS 
to collect enough data from them to make an accurate FY 2011 payment 
determination.
    We note that under our current requirements, hospitals must begin 
submitting RHQDAPU program data starting with the first day of the 
quarter following the date when the hospital registers to participate 
in the program. For purposes of meeting this requirement, we interpret 
the registration date to be the date that the hospital submits a 
completed Notice of Participation form. As proposed previously in this 
section, hospitals must also register with QualityNet and identify a 
QualityNet Administrator who follows the QualityNet registration 
process before submitting RHQDAPU program data.
    <bullet> Collect and report data for each of the quality measures 
under the topic areas that require chart abstraction. For the FY 2011 
payment determination, these topic areas are AMI, HF, PN, and SCIP. 
Hospitals must report these data by each quarterly deadline. Hospitals 
must submit the data to the QIO Clinical Warehouse using the CART, The 
Joint Commission ORYX [supreg] Core Measures Performance Measurement 
System, or another third-party vendor tool that meets the measurement 
specification requirements for data transmission to QualityNet. All 
submissions will be executed through My QualityNet, the secure part of 
the QualityNet Web site. Because the information in the QIO Clinical 
Warehouse is considered QIO information, it is subject to the stringent 
QIO confidentiality regulations in 42 CFR part 480. The QIO Clinical 
Warehouse will submit the data to CMS on behalf of the hospitals.
    <bullet> Submit complete data for each quality measure that 
requires chart abstraction in accordance with the joint CMS/The Joint 
Commission sampling requirements located on the QualityNet Web site. 
These requirements specify that hospitals must submit a random sample 
or complete population of cases for each of the topics covered by the 
quality measures. Hospitals must meet the sampling requirements for 
these quality measures for discharges in each quarter.
    <bullet> Submit to CMS on a quarterly basis aggregate population 
and sample size counts for Medicare and non-Medicare discharges for the 
topic areas for which chart-abstracted data must be submitted 
(currently AMI, HF, PN, and SCIP). However, in order to reduce the 
burden on hospitals that treat a low number of patients in a RHQDAPU 
program topic area, a hospital that has five or fewer discharges 
(Medicare and non-Medicare combined) in a topic area during a quarter 
in which data must be submitted is not required to submit patient-level 
data for that topic area for the quarter. The hospital must still 
submit its aggregate population and sample size counts for Medicare and 
non-Medicare discharges for the four topic areas each quarter. We also 
note that hospitals meeting the five or fewer patient discharge 
exception may voluntarily submit these data.
    <bullet> Continuously collect and submit HCAHPS data in accordance 
with the HCAHPS Quality Assurance Guidelines, V4.0 (the most current 
version of the guidelines), located at the Web site http://www.hcahpsonline.org. The QIO Clinical Warehouse will accept zero 
HCAHPS-eligible discharges. However, in order to reduce the burden on 
hospitals that treat a low number of patients that would be otherwise 
covered by the HCAHPS submission requirements, a hospital that has five 
or fewer HCAHPS-eligible discharges during a month is not required to 
submit HCAHPS surveys for that month. However, hospitals that meet this 
exception may voluntarily submit this data. The hospital must still 
submit its total number of HCAHPS-eligible cases for that month as part 
of its quarterly HCAHPS data submission.
    <bullet> The quarterly data submission deadline for hospitals to 
submit patient level data for the proposed measures that require chart 
abstraction is 4 months following the last discharge date in the 
calendar quarter. CMS will post the quarterly submission deadline 
schedule on the QualityNet Web site (https://www.QualityNet.org). The 
collection of new chart-abstracted measures for the FY 2011 payment 
determination would begin with 1st calendar quarter 2010 discharges, 
for which the submission deadline would be August 15, 2010.
    <bullet> The data submission deadline for hospitals to submit 
aggregate population and sample size count data for the measures 
requiring chart abstraction is four months following the last discharge 
date in the calendar quarter. This requirement allows CMS to advise 
hospitals regarding their submission status in enough time for them to 
make appropriate revisions before the data submission deadline. We will 
post the aggregate population and sample size count data submission 
deadlines on the QualityNet Web site (https://www.QualityNet.org).
    <bullet> CMS strongly recommends that hospitals review the QIO 
Clinical Warehouse Feedback Reports and the RHQDAPU Program Provider 
Participation Reports that are available after patient level data are 
submitted to the QIO Clinical Warehouse. CMS generally updates these 
reports on a daily basis to provide accurate information to hospitals 
about their submissions. These reports enable hospitals to ensure that 
their data were submitted on time and accepted into the QIO Clinical 
Warehouse.
    Hospitals are encouraged to regularly check the QualityNet Web 
site, https://www.QualityNet.org, for program updates and information.
    <bullet> We also proposed that the following RHQDAPU program 
claims-based measures would be calculated using Medicare claims:

------------------------------------------------------------------------
                                FY 2011 payment determination: proposed
            Topic                  claims-based quality measures (no
                                   hospital data submission required)
------------------------------------------------------------------------
Mortality Measures (Medicare Patients)..................................
------------------------------------------------------------------------
                               <bullet> MORT-30-AMI Acute Myocardial
                                Infarction 30-day mortality--Medicare
                                patients.
                               <bullet> MORT-30-HF Heart Failure 30-day
                                mortality--Medicare patients.

[[Page 43880]]

 
                               <bullet> MORT-30-PN Pneumonia 30-day
                                mortality--Medicare patients.
------------------------------------------------------------------------
Readmission Measures (Medicare Patients)................................
------------------------------------------------------------------------
                               <bullet> READ-30-HF Heart Failure (HF)
                                30[dash]Day Risk Standardized
                                Readmission Measure (Medicare patients).
                               <bullet> READ-30-AMI Acute Myocardial
                                Infarction (AMI) 30[dash]Day Risk
                                Standardized Readmission Measure
                                (Medicare patients).
                               <bullet> READ-30-PN Pneumonia (PN)
                                30[dash]Day Risk Standardized
                                Readmission Measure (Medicare patients).
------------------------------------------------------------------------
AHRQ Patient Safety Indicators (PSIs), Inpatient Quality Indicators
 (IQIs) and Composite Measures.
------------------------------------------------------------------------
                               <bullet> PSI 06: Iatrogenic pneumothorax,
                                adult.
                               <bullet> PSI 14: Postoperative wound
                                dehiscence.
                               <bullet> PSI 15: Accidental puncture or
                                laceration.
                               <bullet> IQI 11: Abdominal aortic
                                aneurysm (AAA) mortality rate (with or
                                without volume).
                               <bullet> IQI 19: Hip fracture mortality
                                rate.
                               <bullet> Mortality for selected surgical
                                procedures (composite).
                               <bullet> Complication/patient safety for
                                selected indicators (composite).
                               <bullet> Mortality for selected medical
                                conditions (composite).
------------------------------------------------------------------------
AHRQ Patient Safety Indicator (PSI) and Nursing Sensitive Care..........
------------------------------------------------------------------------
                               <bullet> Death among surgical inpatients
                                with serious, treatable complications.
------------------------------------------------------------------------

    For the claims-based RHQDAPU program measures listed in the table 
above, hospitals are not required to submit the data to the QIO 
Clinical Warehouse. CMS uses the existing Medicare fee-for-service 
claims to calculate the measures. For the FY 2011 payment 
determination, CMS will use 3 years of discharges from July 1, 2006, 
through June 30, 2009, for the 30-day mortality and 30-day readmission 
measures. For the AHRQ PSI, IQI and Composite measures (including the 
AHRQ PSI and Nursing Sensitive Care measure, Death among surgical 
inpatients with serious, treatable complications), we will use 1 year 
of claims from July 1, 2008, through June 30, 2009, to calculate these 
measures.
    <bullet> We proposed that hospitals report the information needed 
to calculate the three proposed structural measures directly onto the 
QualityNet Web site on a quarterly basis starting with 1st calendar 
quarter 2010. The quarterly submission deadline for reporting these 
measures will be 4\1/2\ months following the last date in the quarter 
covered by the data report. For example, the reporting deadline for 
these structural measures covering 1st calendar quarter 2010 is August 
15, 2010. The 4\1/2\ month lag between the end of the quarter and the 
reporting deadline is intended to provide hospitals with sufficient 
time to collect the information needed to accurately report the 
proposed structural measures, and aligns with the quarterly submission 
deadlines for the measures for which chart-abstraction is required. As 
noted above in section V.A.3.b.(4). of this final rule, after 
consideration and review of public comments, we are modifying our 
proposal that the two new structural measures be reported quarterly and 
instead, we are finalizing a requirement that hospitals report these 
data annually. We also are requiring annual reporting for the existing 
cardiac surgery structural requirement for the FY 2011 payment 
determination. Annual data submission for the structural measures via a 
Web-based collection tool will begin in July 2010 with respect to the 
time period of January 1, 2010 through June 30, 2010.
    Below is the list of three structural measures we are adopting for 
the FY 2011 payment determination:

------------------------------------------------------------------------
                               FY 2011 payment determination: structural
            Topic                               measures
------------------------------------------------------------------------
Cardiac Surgery.........................................................
------------------------------------------------------------------------
                               <bullet> Participation in a Systematic
                                Database for Cardiac Surgery.
------------------------------------------------------------------------
Stroke Care.............................................................
------------------------------------------------------------------------
                               <bullet> Participation in a Systematic
                                Clinical Database Registry for Stroke
                                Care.
------------------------------------------------------------------------
Nursing Sensitive Care..................................................
------------------------------------------------------------------------
                               <bullet> Participation in a Systematic
                                Clinical Database Registry for Nursing
                                Sensitive Care.
------------------------------------------------------------------------

    We indicated that we would add a link on the QualityNet Web site to 
the Web page(s) that hospitals can use to report the structural 
measures after we issued this final rule.
    Comment: Several commenters supported our proposal to allow 
hospitals with five or fewer heart failure, pneumonia, or surgical care 
patients in a calendar quarter to not submit quality measure data for 
that quarter. However, the commenters suggested that should a hospital 
wish to voluntarily report such data, it should be permitted to do so. 
This will reduce the burden on small hospitals with a very small number 
of cases.
    Response: We currently allow hospitals treating five or fewer 
patients in a calendar quarter in a topic area that do not otherwise 
have to submit data for that topic area to voluntarily report data for 
that topic. We believe that this

[[Page 43881]]

allowance is consistent with the intent of the RHQDAPU program to 
promote public reporting and hospital quality improvement through 
measuring quality of care. Currently, many hospitals to which the 
RHQDAPU program does not apply (including CAHs and hospitals located in 
Maryland and Puerto Rico) report these data on a voluntary basis as 
part of their quality improvement efforts.
    We note that we will publicly report the measure rates for all data 
submitted by RHQDAPU program participating hospitals, including data 
voluntarily reported by RHQDAPU program participating hospitals 
treating five or fewer cases in a topic in a calendar quarter, because 
we expect that a portion of these hospitals will have variable 
quarterly caseloads and will submit data on a sufficient number of 
cases (that is, more than 25) across all four posted quarters to make 
their overall measure rates generally reliable. However, we also will 
continue to include a footnote on the Hospital Compare Web site in the 
event that some of these hospitals do not have data for at least 25 
cases combined over the four quarters. That footnote states that ``The 
number of cases is too small (<25) to reliably tell how well a hospital 
is performing.'' We believe that this footnote adequately addresses 
hospital concerns about data reliability.
    Comment: One commenter stated that the proposed rule does not 
address the issue of data resubmission when a hospital or its vendor 
becomes aware of an error in the data that was sent for posting on the 
Hospital Compare Web site. The commenter urged immediate adoption of an 
effective mechanism that allows hospitals and their vendors to resubmit 
quality measure data if they discover an error. The commenter stated 
that the point of public reporting is to put accurate and useful 
information into the hands of the public, and this is facilitated by 
allowing known mistakes to be corrected.
    Response: Although we understand the commenter's concern, the 
quarterly validation sample selection is reliant on a locked final data 
file of hospital submitted cases. Allowing resubmission after the 
quarterly deadline would delay the final lockdown date of the quarterly 
data file, and CMS would have to delay the validation process or simply 
not validate resubmitted data. We believe that both of these options 
would adversely impact data quality.
    We remind the commenter that hospitals can correct information and 
resubmit cases until the quarterly submission deadline, which generally 
occurs 4\1/2\; months following the last discharge date in a calendar 
quarter. We also encourage hospitals to submit data early in the 
submission schedule, so that they can identify errors and resubmit data 
before the quarterly submission deadline. Generally, hospitals can 
submit cases from the first discharge date in a quarter until the 
quarterly submission deadline.
    After consideration of the public comments we received, we are 
adopting as final our proposals regarding RHQDAPU program procedures 
for the FY 2011 payment determination.
b. RHQDAPU Program Disaster Extensions and Waivers
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24176), 
we solicited public comment about rules we could adopt that would 
enable hospitals to request either an extension or a waiver of various 
RHQDAPU program requirements in the event of a disaster (such as a 
hurricane that damages or destroys the hospital).
    Specifically, we welcomed public comment on the following issues:
    <bullet> Recommendations for rules that we could follow when 
considering whether to grant an extension or waiver of RHQDAPU program 
requirements in the event of a disaster, including suggested criteria 
that we should take into account (for example, specific hospital 
infrastructure damage, hospital closure time period, degree of 
destruction of medical records, impact on data vendors, and long-term 
evacuation of discharged patients impacting HCAHPS survey 
participation).
    <bullet> The role that QIOs and QIO support contractors should play 
in the event of a disaster, including communicating with affected 
hospitals, communicating with State hospital associations, and 
collecting information directly from hospitals.
    <bullet> How CMS extension or waiver decisions should be 
communicated to affected hospitals.
    <bullet> Any other issues commenters deem relevant to a hospital's 
request for an extension or waiver of RHQDAPU program requirements in 
the event of a disaster.
    Comment: One commenter appreciated CMS recognizing that hospitals 
facing certain disasters, such as a hurricane, should be granted an 
extension or waiver of the RHQDAPU program requirements. Commenters 
suggested that, although the decision to grant an extension or waiver 
is best made on a case-by-case basis depending on each hospital's 
unique situation, CMS develop some general criteria for when such 
extensions or waivers would be granted. Commenters reminded CMS that 
when a hospital is damaged or destroyed, CMS' usual means of 
communicating to the hospital, such as by QualityNet or the mail, may 
be impossible. Commenters urged CMS to develop a creative and flexible 
approach to communicating with hospitals in these situations to ensure 
that such hospitals are aware that they may receive waivers during 
difficult times.
    Response: We will consider these comments as we develop program 
procedures for disaster extensions or waivers. We are mindful that many 
hospitals operating in these adverse situations cannot access the 
Internet or mail service. We note that we currently use a variety of 
means to communicate with hospitals in these circumstances, including 
utilizing our State QIOs and national/state hospital associations, and 
we will continue to do so.
    Comment: One commenter supported CMS and QIOs contacting both 
hospitals in affected areas and their data vendors in the event of 
disaster. The commenter also supported using e-mail first to 
communicate this information, followed by a phone call (if phone 
service is available) from a QIO, then a follow-up letter to the 
hospital administrator and hospital QualityNet Administrator. The 
commenter believed that the reasons for providing a waiver as outlined 
in the proposed rule were fair, but suggested that when a hospital 
response is requested by State or local government for any reason, then 
a waiver or extension should also be considered. The commenter 
recommended that, if a vendor is impacted, that should be should also 
be grounds for a hospital extension or waiver.
    Response: We will consider these recommendations when considering 
disaster extension/waiver communications and reasons for granting 
extensions or waivers. We interpret the comment about ``when a hospital 
response is requested by a State or local government'' to mean that the 
governmental entity has asked the hospital to continue or cease certain 
operations. Since hospital resources might be redirected from 
activities related to hospital quality data reporting to providing 
critical services in disaster situations, we will also consider State 
and local government requirements for hospitals providing critical 
services to the public while continuing to operate in disaster 
situations. We believe that if a hospital is required to provide 
critical public health services during a disaster or pandemic, this 
should be a factor that we consider when deciding whether to grant a 
waiver or extension. We will also consider the impact a disaster

[[Page 43882]]

might have had on a vendor when developing our policy on this issue.
    Comment: One commenter supported granting extensions and waivers of 
RHQDAPU program requirements in the event of a disaster and agreed with 
some of the criteria we requested comment on in the proposed rule. The 
commenter also supported CMS' interest in the role that QIOs would play 
in the event of a disaster and believes that they should be as 
proactive as possible in providing support to hospitals.
    Response: We thank the commenter for the feedback as we further 
develop our policy for disaster extensions/waivers. We also acknowledge 
the important service that QIOs provide to hospitals in their support 
of inpatient quality data reporting and will incorporate this comment 
into our future plans for operating the RHQDAPU program.
c. HCAHPS Requirements for the FY 2011 Payment Determination
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24176), 
we proposed that, for the FY 2011 payment determination, the RHQDAPU 
program HCAHPS requirements we adopted for FY 2010 would continue to 
apply. Under these requirements, a hospital must continuously collect 
and submit HCAHPS data in accordance with the current HCAHPS Quality 
Assurance Guidelines and the quarterly data submission deadlines, both 
of which are posted at http://www.hcahpsonline.org. In order for a 
hospital to participate in the collection of HCAHPS data, a hospital 
must either: (1) Contract with an approved HCAHPS survey vendor that 
will conduct the survey and submit data on the hospital's behalf to the 
QIO Clinical Warehouse; or (2) self-administer the survey without using 
a survey vendor provided that the hospital attends HCAHPS training and 
meets Minimum Survey Requirements as specified on the Web site at: 
https://www.hcahpsonline.org. A current list of approved HCAHPS survey 
vendors can be found on the HCAHPS Web site at: https://www.hcahpsonline.org.
    Every hospital choosing to contract with a survey vendor should 
provide the sample frame of HCAHPS-eligible discharges to its survey 
vendor with sufficient time to allow the survey vendor to begin 
contacting each sampled patient within 6 weeks of discharge from the 
hospital. (We refer readers to the Quality Assurance Guidelines located 
at https://www.hcahpsonline.org for details about HCAHPS eligibility 
and sample frame creation.) In addition, the hospital must authorize 
the survey vendor to submit data via My QualityNet, the secure part of 
the QualityNet Web site, on the hospital's behalf.
    After the survey vendor submits the data to the QIO Clinical 
Warehouse, we strongly recommend that hospitals employing a survey 
vendor promptly review the two HCAHPS Feedback Reports (the Provider 
Survey Status Summary Report and the Data Submission Detail Report) 
that are available. These reports enable a hospital to ensure that its 
survey vendor has submitted the data on time and the data has been 
accepted into the QIO Clinical Warehouse.
    As we stated above, any hospital that has five or fewer HCAHPS-
eligible discharges in any month is no longer required to submit HCAHPS 
surveys for that month, although the hospital may voluntarily choose to 
submit these data. However, the hospital must still submit its total 
number of HCAHPS-eligible cases for that month as part of its quarterly 
HCAHPS data submission.
    In order to ensure compliance with HCAHPS survey and administration 
protocols, hospitals and survey vendors must participate in all 
oversight activities. As part of the oversight process, during the 
onsite visits or conference calls, the HCAHPS Project Team will review 
the hospital's or survey vendor's survey systems and assess protocols 
based upon the most recent HCAHPS Quality Assurance Guidelines. All 
materials relevant to survey administration will be subject to review. 
The systems and program review includes, but is not limited to: (a) 
Survey management and data systems; (b) printing and mailing materials 
and facilities; (c) telephone and IVR materials and facilities; (d) 
data receipt, entry and storage facilities; and (e) written 
documentation of survey processes. Organizations will be given a 
defined time period in which to correct any problems and provide 
follow-up documentation of corrections for review. As needed, hospitals 
and survey vendors will be subject to follow-up site visits or 
conference calls. If CMS determines that a hospital is not compliant 
with HCAHPS program requirements, CMS may determine that the hospital 
is not submitting HCAHPS data that meet the requirements of the RHQDAPU 
program.
    We continue to strongly recommend that each new hospital 
participate in an HCAHPS dry run, if feasible, prior to beginning to 
collect HCAHPS data on an ongoing basis to meet RHQDAPU program 
requirements. New hospitals can conduct a dry run in the last month of 
a calendar quarter. We refer readers to the Web site at https://www.hcahpsonline.org for a schedule of upcoming dry runs. The dry run 
will give newly participating hospitals the opportunity to gain first-
hand experience collecting and transmitting HCAHPS data without the 
public reporting of results. Using the official survey instrument and 
the approved modes of administration and data collection protocols, 
hospitals/survey vendors will collect HCAHPS data and submit the data 
to My QualityNet, the secure portion of QualityNet.
    For FY 2011, we are again encouraging hospitals to regularly check 
the HCAHPS Web site at https://www.hcahpsonline.org for program updates 
and information.
    We did not receive any public comments regarding our HCAHPS 
proposals. Therefore, we are adopting as final our proposals regarding 
HCAHPS requirements for the FY 2011 payment determination.
6. Chart Validation Requirements
a. Chart Validation Requirements and Methods for the FY 2011 Payment 
Determination
    For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule (74 FR 24177), we proposed to generally continue 
using the following existing requirements implemented in previous 
years. We note below where we proposed to modify a requirement. These 
requirements, as well as additional information on these requirements, 
will be posted on the QualityNet Web site after we issue this FY 2010 
IPPS final rule.
    <bullet> The Clinical Data Abstraction Center (CDAC) contractor 
will, each quarter, ask every participating hospital to submit five 
randomly selected medical charts from which the hospital previously 
abstracted and submitted data to the QIO Clinical Warehouse.
    We proposed the following timeline with respect to CDAC contractor 
requests for paper medical records for the purpose of validating 
RHQDAPU program data. Beginning with CDAC contractor requests for 
second calendar quarter 2009 paper medical records, the CDAC contractor 
will request paper copies of the randomly selected medical charts from 
each hospital via certified mail, and the hospital will have 45 days 
from the date of the request (as documented on the request letter) to 
submit the requested records to the CDAC contractor. If the hospital 
does not comply within 30 days, the CDAC contractor will send a second 
certified letter to the hospital, reminding the hospital that it must 
return paper copies

[[Page 43883]]

of the requested medical records within 45 calendar days following the 
date of the initial CDAC contractor medical record request. If the 
hospital still does not comply, then the CDAC contractor will assign a 
``zero'' score to each data element in each missing record.
    We proposed this timeline to provide hospitals with transparent and 
documented correspondence about RHQDAPU program validation paper 
medical record requests. Hospitals have submitted numerous questions to 
CMS about this process, and we believe this timeline will provide 
hospitals with adequate notice and time to submit paper copies of 
requested medical records to the CDAC contractor. We also believe that 
this timeline does not unduly burden hospitals. We remind hospitals 
that CMS reimburses up to 12 cents per copied page to copy the 
requested medical records, and CMS also pays United States Postal 
Service fees for hospitals to mail back a paper copy of the requested 
medical records.
    <bullet> Once the CDAC contractor receives the charts, it will re-
abstract the same data submitted by the hospitals and calculate the 
percentage of matching RHQDAPU program data element values for all of 
that data.
    <bullet> The hospital must pass our validation requirement of a 
minimum of 80 percent reliability. We use appropriate confidence 
intervals to determine if a hospital has achieved 80 percent 
reliability. The use of confidence intervals allows us to establish an 
appropriate range below the 80 percent reliability threshold that 
demonstrates a sufficient level of reliability to allow the data to 
still be considered validated. We estimate the percent reliability 
based upon a review of the sampled charts, and then calculate the upper 
95 percent confidence limit for that estimate. If this upper limit is 
above the required 80 percent reliability, the hospital data are 
considered validated.
    <bullet> We will pool the quarterly validation estimates for the 
four most recently validated quarters (except for the SCIP-
Cardiovascular-2 measure discussed below). For the FY 2011 payment 
update, we proposed to validate 4th quarter CY 2008 through 3rd quarter 
2009 discharge data for the following measures:

------------------------------------------------------------------------
                                Quality measures
                              validated using data
                               from 4th quarter CY
            Topic               2008 through 3rd       Measure ID No.
                                 quarter CY 2009
                                   discharges
------------------------------------------------------------------------
AMI (Acute Myocardial         Aspirin at Arrival..  AMI-1.
 Infarction).
                              Aspirin Prescribed    AMI-2.
                               at Discharge.
                              ACEI or ARB for LVSD  AMI-3.
                              Adult Smoking         AMI-4.
                               Cessation Advice/
                               Counseling.
                              Beta-Blocker          AMI-5.
                               Prescribed at
                               Discharge.
                              Fibrinolytic Therapy  AMI-7a.
                               Received Within 30
                               Minutes of Hospital
                               Arrival.
                              Primary PCI Received  AMI-8a.
                               Within 90 Minutes
                               of Hospital Arrival.
HF (Heart Failure)..........  Discharge             HF-1.
                               Instructions.
                              Evaluation of LVS     HF-2.
                               Function.
                              ACEI or ARB for LVSD  HF-3.
                              Adult Smoking         HF-4.
                               Cessation Advice/
                               Counseling.
PN (Pneumonia)..............  Pneumococcal          PN-2.
                               Vaccination.
                              Blood Cultures        PN-3b.
                               Performed in the
                               Emergency
                               Department Prior to
                               Initial Antibiotic
                               Received in
                               Hospital.
                              Adult Smoking         PN-4.
                               Cessation Advice/
                               Counseling.
                              Initial Antibiotic    PN-5c.
                               Received Within 6
                               Hours of Hospital
                               Arrival.
                              Initial Antibiotic    PN-6.
                               Selection for
                               Community-Acquired
                               Pneumonia (CAP) in
                               Immunocompetent
                               Patients.
                              Influenza             PN-7.
                               Vaccination.
SCIP (Surgical Care           Prophylactic          SCIP-Inf-1.
 Improvement Project)--named   Antibiotic Received
 SIP for discharges prior to   Within One Hour
 July 2006 (3Q06).             Prior to Surgical
                               Incision.
                              Prophylactic          SCIP-Inf-2.
                               Antibiotic
                               Selection for
                               Surgical Patients.
                              Prophylactic          SCIP-Inf-3.
                               Antibiotics
                               Discontinued Within
                               24 Hours After
                               Surgery End Time.
                              Cardiac Surgery       SCIP-Inf-4.
                               Patients With
                               Controlled 6 A.M.
                               Postoperative Blood
                               Glucose.
                              Surgery Patients      SCIP-Inf-6.
                               with Appropriate
                               Hair Removal.
                              Surgery Patients      SCIP-VTE-1.
                               with Recommended
                               Venous
                               Thromboembolism
                               Prophylaxis Ordered.
                              Surgery Patients Who  SCIP-VTE-2.
                               Received
                               Appropriate Venous
                               Thromboembolism
                               Prophylaxis Within
                               24 Hours Prior to
                               Surgery to 24 Hours
                               After Surgery.
------------------------------------------------------------------------

    <bullet> SCIP-Cardiovascular-2 will be validated using data from 
2nd and 3rd calendar quarter 2009 discharges. CMS adopted this measure 
in the FY 2009 IPPS final rule and hospitals began submitting data for 
this measure starting with 1st calendar quarter 2009 discharges (73 FR 
48605). However, because we generally strive to provide hospitals with 
ample notice before we add a new measure to the list of measures for 
which we will validate data, we believe that 2nd quarter discharge data 
is an appropriate validation starting point for this measure (these 
data are not due to the QIO Clinical Warehouse until November 15, 
2009).
    <bullet> We will continue using the design-specific estimate of the 
variance for the confidence interval calculation, which, in this case, 
is a stratified single stage cluster sample, with unequal cluster 
sizes. (For reference, see Cochran, William G.: Sampling Techniques, 
John Wiley & Sons, New York, chapter 3, section 3.12 (1977); and Kish, 
Leslie: Survey Sampling, John Wiley & Sons, New York, chapter 3, 
section 3.3 (1964).) Each quarter is treated as a stratum for variance 
estimation purposes.
    Comment: Several commenters supported CMS' proposal to document the 
validation contact process. Specifically, the commenters supported CMS' 
plans to send two certified letter requests for medical records for 
data validation in case the hospital does not receive the first letter. 
The commenters suggested that CMS contractors also place phone calls to 
any hospital that does not respond to the first letter to ensure that 
every effort is made to

[[Page 43884]]

communicate the request to the appropriate staff in the hospital.
    Response: We thank the commenters and agree that certified letters 
provide hospitals with multiple written documented notification and 
reminder attempts. We did not propose supplementing this notification 
with telephone calls because the CDAC contractor already attempts to 
call hospitals as current practice at least three times about 30 
calendar days after it sends the initial medical record request. As a 
practice, we intend to continue attempting to call hospitals at least 
three times around the 30th calendar day following the initial request, 
in addition to sending written certified letters. We believe that these 
attempted calls at different time periods around the 30th calendar day 
following the initial request demonstrate our commitment to notify 
hospitals using multiple communication modes.
    Comment: Two commenters indicated that under the current process, 
the validation does not incorporate skip logic, despite The Joint 
Commission and CMS measure specifications and algorithms that clearly 
call for skip logic. The commenters stated that as a result, charts 
that are appropriately abstracted do not pass validation with the 
contractor. The commenters noted that this can be a challenge for some 
hospitals because the CDAC contractor's decision could affect the 
cumulative annual results and cause a hospital to fail the validation 
requirement for the year.
    Response: The Specifications Manual contains instructions regarding 
the use of skip logic by hospitals. Starting with discharges on or 
after April 1, 2008, and continuing to the most current update of the 
Specifications Manual, CMS and The Joint Commission have included the 
following text in the Missing and Invalid Data appendix of the 
Specifications Manual (currently under the heading ``Abstraction 
Software Skip Logic and Missing Data''):
    ``Skip logic allows hospitals and vendors to minimize abstraction 
burden by using vendor software edit logic to bypass abstraction of 
data elements not utilized in the measure algorithm. However, these 
bypassed elements also negatively impact data quality and the 
hospital's CMS chart audit validation results when elements are 
incorrectly abstracted and subsequent data elements are bypassed and 
left blank.''
    ``The use of skip logic by hospitals and ORYX vendors is optional 
and not required by CMS and The Joint Commission. Hospitals should be 
aware of the potential impact of skip logic on data quality, 
abstraction burden, and CMS chart audit validation scores. Vendors and 
hospitals utilizing skip logic should closely monitor the accuracy rate 
of abstracted data elements, particularly data elements placed higher 
in the algorithm flow (for example, Comfort Measures data element).''
    ``Historically, CMS chart audit validation results have been used 
in previous payment years as one of many requirements in the Reporting 
Hospital Quality for Annual Payment Update (RHQDAPU) program. We refer 
readers to the Federal Register and the QualityNet Web site for the 
current payment year's proposed and final requirements for acute care 
IPPS hospitals.''
    The CDAC contractor abstracts all data elements necessary to 
calculate a sampled case's measure status. The CDAC contractor uses 
skip logic only when it abstracts a data element value resulting in no 
additional data necessary to calculate a measure status. When it re-
abstracts the data elements, the CDAC contractor also uses the CART 
tool provided by CMS free of charge to hospitals. Under the current 
validation process, hospitals are at risk when utilizing skip logic, if 
they incorrectly abstract data elements and do not abstract subsequent 
data elements for the measure.
    We do recognize that the use of skip logic has been an issue for 
some hospitals, and we believe that our proposal for FY 2012 to change 
the methodology for calculating the validation score from data element 
counts to a measure match basis will reduce the likelihood that the use 
of skip logic will create validation problems for hospitals.
    After consideration of the public comments we received, we have 
decided to adopt as final, without change, our proposals regarding 
chart validation requirements and methods for the FY 2011 payment 
determination.
    b. Chart Validation Requirements and Methods for the FY 2012 
Payment Determination and Subsequent Years
    RHQDAPU program data are currently validated by re-abstracting on a 
quarterly basis a random sample of five medical records for each 
hospital. This quarterly sample generally results in an annual combined 
sample of 20 patient records across four calendar quarters per 
hospital, but because each sample is random, it might not include 
medical records from each of the measure topics (for example, AMI, 
SCIP, etc.). As a result, data submitted by a hospital for one or more 
measure topics might not be validated for a given quarter or, in some 
cases, for an entire year or longer.
    In the FY 2009 IPPS proposed rule (73 FR 23658), we solicited 
public comments on the impact of adding measures to the validation 
process, as well as on modifications to the current validation process 
that could improve the reliability and validity of the methodology. We 
specifically requested input concerning the following:
    <bullet> Which of the measures or measure sets should be included 
in the chart validation process for subsequent years?
    <bullet> What validation challenges are posed by the RHQDAPU 
program measures and measure sets? What improvements could be made to 
validation or reporting that might offset or otherwise address those 
challenges?
    <bullet> Should CMS switch from its current quarterly validation 
sample of five charts per hospital to randomly selecting a sample of 
hospitals, and selecting more charts on an annual basis to improve the 
reliability of hospital level validation estimates?
    <bullet> Should CMS select the validation sample by clinical topic 
to ensure that all publicly reported measures are covered by the 
validation sample?
    In the FY 2009 IPPS final rule, we summarized and responded to 
commenters' views on these issues and stated that we will consider the 
issues raised by these commenters if we decide to make changes to the 
RHQDAPU program chart validation methodology.
    Our objective is to validate the accuracy of RHQDAPU program data 
collected by hospitals using medical record abstraction. Accurate data 
provide consumers with objective publicly reported information about 
hospital quality for more informed decision making. Consistent with the 
public comments we received in response to the FY 2009 IPPS proposed 
rule (73 FR 23658-9) and discussed in the FY 2009 IPPS final rule (73 
FR 48623), we believe that the methodology recommended in the CMS 
Hospital Value-Based Purchasing Report to Congress is a promising 
approach worth consideration in the RHQDAPU program. This approach is 
designed to validate the accuracy of hospital reported quality measure 
data, and is also directly applicable to validating RHQDAPU program 
chart-abstracted quality data.
    We recognize that hospitals need ample notification regarding 
proposed changes to the current RHQDAPU program validation process. We 
believe that the FY 2012 RHQDAPU program annual payment determination 
is the earliest opportunity to make significant modifications to our 
validation process.
    Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 
FR

[[Page 43885]]

24178), we proposed modifications to the RHQDAPU program validation 
methodology beginning with the FY 2012 payment determination. 
Specifically, we proposed to do the following:
    <bullet> Randomly select on an annual basis 800 participating 
hospitals that submitted chart-abstracted data for at least 100 
discharges combined in the measure topics to be validated. To determine 
whether a hospital meets this ``100-case threshold,'' we will look to 
the discharge data submitted by the hospital during the calendar year 
three years prior to the fiscal year of the relevant payment 
determination. For example, if the 100-case threshold applied for the 
FY 2011 payment determination (which it will not), the applicable 
measure topics would be AMI, HF, PN, and SCIP, and we would choose 800 
hospitals that submitted discharge data for at least 100 cases combined 
in these topics during calendar year 2008. If a hospital did not submit 
discharge data for at least 100 cases in these topics during CY 2008, 
we would not select the hospital for validation. We will announce the 
topic areas that apply for the FY 2012 payment determination at a later 
date, and we plan to select the first 800 hospitals in July 2010. We 
will select hospitals for the FY 2012 validation if they meet the 100-
case threshold during CY 2009. We have proposed this 100-case threshold 
because we believe that it strikes the appropriate balance between 
ensuring that the selected hospitals have a large enough patient 
population to be able to submit sufficient data to allow us to complete 
an accurate validation, while not requiring validation for hospitals 
with a low number of submitted quarterly cases and relatively 
unreliable measure estimates. Based on previously submitted data, we 
estimate that 98 percent of participating RHQDAPU program hospitals 
will meet this threshold and, thus, be eligible for validation. As 
noted below, we solicited comments and suggestions on how we might be 
able to target the remaining 2 percent of hospitals for validation.
    <bullet> We validate for each of the 800 hospitals a randomly 
selected stratified sample for each quarter of the validation period. 
Each quarterly sample will include 12 cases, with at least one but no 
more than three cases per topic for which chart-abstracted data was 
submitted by the hospital. However, we recognize that some selected 
hospitals might not have enough cases in all of the applicable topics 
to submit data (for example, if they have 5 or fewer discharges in a 
topic area in a quarter). For those hospitals, we would validate 
measures in only those topic areas for which they have submitted data. 
For the FY 2012 payment determination, we will validate 1st calendar 
quarter 2010 through 3rd calendar quarter 2010 discharge data. We 
proposed to validate 3 quarters of data for FY 2012 in order to provide 
hospitals with enough time to assess their medical record documentation 
and abstraction practices, and to take necessary corrective actions to 
improve these practices, before documenting their 1st calendar quarter 
2010 discharges into medical records that may be sampled as part of 
this proposed validation process.
    Beginning with the FY 2013 payment determination, we proposed to 
validate data submitted by hospitals during the four quarters that make 
up the fiscal year that occurs two years prior to the year that applies 
to the payment determination. For example, for FY 2013, we would 
validate 4th calendar quarter 2010 through 3rd quarter 2011 discharge 
data. This lag between the time a hospital submits data and the time we 
can validate that data is necessary because data is not due to the QIO 
Clinical Warehouse until 4[frac12] months after the end of each 
quarter, and we need additional time to select hospitals and complete 
the validation process.
    <bullet> We proposed that the CDAC contractor will, each quarter 
that applies to the validation, ask each of the 800 selected hospitals 
to submit 12 randomly selected medical charts from which data was 
abstracted and submitted by the hospital to the QIO Clinical Warehouse. 
We note that, under our current requirements, hospitals must begin 
submitting RHQDAPU program data starting with the first day of the 
quarter following the date when the hospital registers to participate 
in the program. For purposes of meeting this requirement, we interpret 
the registration date to be the date that the hospital submits a 
completed Notice of Participation form. As proposed previously in this 
section, hospitals must also register with QualityNet and identify a 
QualityNet Administrator who follows the QualityNet registration 
process before submitting RHQDAPU program data.
    In addition, we proposed to continue the following timeline with 
respect to CDAC contractor requests for paper medical records for the 
purpose of validating RHQDAPU program data. Beginning with CDAC 
contractor requests for second calendar quarter 2009 paper medical 
records, the CDAC contractor will request paper copies of the randomly 
selected medical charts from each hospital via certified mail, and the 
hospital will have 45 days from the date of the request (as documented 
on the request letter) to submit the requested records to the CDAC 
contractor. If the hospital does not comply within 30 days, the CDAC 
contractor will send a second certified letter to the hospital, 
reminding the hospital that it must return paper copies of the 
requested medical records within 45 calendar days following the date of 
the initial CDAC contractor medical record request. If the hospital 
still does not comply, then the CDAC contractor will assign a ``zero'' 
score to each measure in each missing record.
    <bullet> Once the CDAC contractor receives the charts, it will re-
abstract the same data submitted by the hospitals and calculate the 
percentage of matching RHQDAPU program measure numerators and 
denominators for each measure within each chart submitted by the 
hospital. Specifically, we will estimate the accuracy by calculating a 
match rate percent agreement for all of the variables submitted in all 
of the charts. For any selected record, a measure's numerator and 
denominator can have two possible states, included or excluded, 
depending on whether the hospital accurately included the cases in the 
measure numerator(s) and denominator(s). We will count each measure in 
a selected record as a match if the hospital-submitted measure 
numerator and denominator sets match the measure numerator and 
denominator states independently abstracted by our contractor. For 
example, one heart failure case from which data has been abstracted for 
four RHQDAPU program chart-abstracted measures (that is, HF-1, HF-2, 
HF-3, and HF-4) would receive a 75 percent match if three out of four 
of the hospital-reported heart failure measure numerator and 
denominator states matched the re-abstracted numerator and denominator 
states. This proposed scoring approach is the same as recommended in 
the CMS Hospital Value-Based Purchasing Report to Congress, and is 
illustrated in further detail using an example in pages 83-84 of the 
report which can be found on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/downloads/HospitalVBPPlanRTCFINALSUBMITTED2007.pdf. 
We believe that this approach is appropriate, and was supported by many 
commenters when we requested comment in the FY 2009 IPPS final rule for 
input about the RHQDAPU program validation process (73 FR 48622 and 
48623).
    <bullet> Use, as we currently do, each selected case as a cluster 
comprising

[[Page 43886]]

one or multiple measures utilized in a validation score estimate. Each 
selected case will have multiple measures included in the validation 
score (for example, for the FY 2011 payment determination, a heart 
failure record will include 4 heart failure measures). Specifically, we 
propose to continue using the design-specific estimate of the variance 
for the confidence interval calculation, which, in this case, is a 
stratified single-stage cluster sample, with unequal cluster sizes. 
(For reference, see Cochran, William G.: Sampling Techniques, John 
Wiley & Sons, New York, chapter 3, section 3.12 (1977); and Kish, 
Leslie: Survey Sampling, John Wiley & Sons, New York, chapter 3, 
section 3.3 (1964).) Each quarter and clinical topic is treated as a 
stratum for variance estimation purposes.
    In the proposed rule, we indicated that we believe that the 
proposed clustering approach is a statistically appropriate technique 
for calculating the annual validation confidence interval. Because CMS 
will not be validating all hospital records, we need to calculate a 
confidence interval that incorporates a potential sampling error. Our 
clustering approach incorporates the degree of correlation at the 
individual data record level, because our previous validation 
experience indicates that hospital data mismatch errors tend to be 
clustered in individual data records. We have used this clustering 
since the inception of the RHQDAPU program validation requirement to 
calculate variability estimates needed for calculating confidence 
intervals (70 FR 47423).
    <bullet> Use the upper bound of a one-tailed 95 percent confidence 
interval to estimate the validation score; and
    <bullet> Require all RHQDAPU program participating hospitals 
selected for validation to attain at least a 75 percent validation 
score per quarter to pass the validation requirement.
    We believe that this proposal incorporates many of the principles 
supported by the vast majority of commenters in response to our 
solicitation for public comments in the FY 2009 IPPS proposed rule (73 
FR 23658 through 23659). Specifically, we believe that the increased 
annual sample size per hospital will provide more reliable estimates of 
validation accuracy. The proposed sample size of 12 records per quarter 
would provide a total of 36 records across the three sampled quarters 
for the FY 2012 payment determination, and 48 records in subsequent 
years. This estimate would improve the reliability of our validation 
estimate, as compared to the current RHQDAPU program annual validation 
sample of 20 cases per year. We also believe that modifying the 
validation score to reflect measure numerator and denominator accuracy 
will ensure that accurate data are posted on the Hospital Compare Web 
site.
    In addition, we believe that stratified quarterly samples by topic 
will improve the feedback provided to hospitals. CMS would provide 
validation feedback to hospitals about all sampled topics submitted by 
the hospitals each quarter. Because all relevant data elements 
submitted by the hospital must match the independently re-abstracted 
data elements to count as a match, we have proposed to reduce the 
passing threshold from 80 percent to 75 percent. We proposed to use an 
one-tail confidence interval to calculate the validation score because 
we strongly believe that a one-tail test most appropriately reflects 
the pass or fail dichotomous nature of the statistical test regarding 
whether the confidence interval includes or is completely above the 75 
percent passing validation score.
    We also proposed to continue to allow hospitals that fail to meet 
the passing threshold for the quarterly validation an opportunity to 
appeal the validation results to their State QIO. QIOs are currently 
tasked by CMS to provide education and technical assistance about 
RHQDAPU program data abstraction and measures to hospitals, and the 
quarterly validation appeals process will provide hospitals with an 
opportunity to both appeal their quarterly results and receive 
education free of charge from their State QIO. This State QIO quarterly 
validation appeals process is independent of the proposed RHQDAPU 
program reconsideration procedures for hospital reconsideration 
requests involving validation for the FY 2010 payment update proposed 
below in section V.A.9. of this final rule.
    Comment: Several commenters supported setting a slightly lower 
validation threshold for the beginning years of the new validation 
process as hospitals and CMS gain experience with the new system. These 
commenters were generally pleased with CMS' proposal for the changes to 
the data validation process and urged CMS to continue to refine the 
plan put forward in the proposed rule.
    Response: We agree with the commenters that the proposed 75 percent 
threshold provides a reasonable passing threshold for the proposed 
validation process. We will evaluate the new validation process after 
initial implementation through data analysis of validation results. 
Based on the results of this data analysis, we may consider proposing 
modifications in future years to further refine the validation process.
    Comment: Several commenters stated that the burden to hospitals 
will be reduced if they do not have to submit records for validation 
every year. However, because hospitals will be selected at random each 
year and there is no guarantee that a hospital selected in one year 
will not be selected in the following year as well, some commenters 
urged CMS to refine the validation selection process so that hospitals 
selected for validation in one year are not eligible for selection 
again until 2 years later. Alternatively, the commenters suggested that 
CMS could ensure that no hospital is selected more than two times 
within a 5-year period, arguing that this would help guarantee that a 
particular hospital is not disproportionately burdened by the selection 
process. In addition, the commenters suggested that CMS should consider 
allowing hospitals that pass validation with a very high score to 
receive a ``pass'' from the validation process for several years. The 
commenters believed that such a policy would encourage hospitals to 
ensure their data are as accurate as possible and reward those 
hospitals with high accuracy rates.
    Response: We appreciate these comments and understand the concern 
about being selected multiple times during a short timeframe. We also 
appreciate the recommendation that hospitals receiving a high 
validation score be exempt from validation for two years. We must weigh 
this burden relative to the policy objective to ensure that we receive 
accurate data, and believe that using a truly random selection process 
strikes the appropriate balance. We considered options such as 
providing hospitals achieving high validation scores with a ``free 
pass'' for a certain period, and using a 4 to 5 year rotating panel of 
hospitals to lessen burden. However, we believe that using a truly 
random sample on an annual basis is fair to all hospitals included in 
the sample and will encourage all hospitals to take steps to ensure 
that their data are consistently accurate. We believe that providing 
hospitals with automatic exemptions from our validation requirement 
could detract from this policy objective, because hospitals receiving 
these exemptions would know in advance of data abstraction that CMS 
would not be validating their data.
    Comment: Commenters agreed that it is appropriate to focus on the 
hospital's measure rate, as opposed to individual data elements, 
because the measure rate captures the information that is

[[Page 43887]]

important to patient care. Commenters noted that for data validation in 
the current program, there have been several instances in which a 
mismatch between single data elements unrelated to the quality of care 
provided by a hospital, such as the patient's birth date, has caused 
hospitals to fail validation. Comments believe that validating the 
hospital's measure rate should eliminate these unfortunate incidents.
    Response: The proposed validation process focuses on validating 
whether hospital abstracted data results in accurate measure rates and 
denominator inclusion. We wish to clarify that the proposed validation 
process would measure the accuracy of each measure rate and measure 
denominator count posted on the Hospital Compare Web site. We will 
continue to use the data elements used in the current validation 
process to calculate the validation scores. We also note that all data 
used as part of the validation process (both the current process and 
the process proposed for FY 2012 and beyond) is protected under the 
Business Associate provisions of HIPAA and the QIO regulations.
    Comment: Commenters stated that CMS' proposed process for 
validating hospitals' quality data beginning in FY 2012 holds promise 
as a reasonable approach to ensure the accuracy of the quality data and 
improve upon the deficiencies in the current validation process.
    Response: We agree with the commenters that the proposed new 
validation process is an improved approach for the validation process. 
We will evaluate the new validation process after initial 
implementation and may consider proposing modifications in future years 
to further refine it.
    Comment: Several commenters stated that the current CMS validation 
sample of five charts per quarter does not provide a reliable estimate 
and advocated increasing the sample size.
    Response: We agree that the proposed requirement to increase the 
quarterly sample size from 5 records to 12 records will provide a more 
reliable annual validation estimate.
    Comment: One commenter objected to the proposal to randomly sample 
hospitals in the proposed validation process, as all hospitals would 
not be held equally accountable via a valid sample across all measures.
    Response: We believe that the proposed approach is equitable 
because all hospitals meeting the 100-case threshold will have an equal 
probability of being selected in the random sample. As we stated in the 
proposed rule (74 FR 24180), we are considering ways to include 
hospitals that do not meet the 100 case threshold in the validation 
process, such as by developing targeting criteria that would focus on 
these hospitals.
    Comment: One commenter asked for clarity on how CMS plans to 
address validation for hospitals with low numbers. While the commenter 
agreed that it is appropriate to ease the burden on hospitals with a 
very small number of cases, the commenter also believed that hospitals 
should always be able to voluntarily report on quality measures if they 
wish and should be held equally accountable for their participation and 
reported data.
    Response: As we stated in the proposed rule (74 FR 24180), we are 
considering ways to include hospitals that do not meet the 100-case 
threshold in the validation process, such as by developing targeting 
criteria that would focus on these hospitals. One possible approach 
would be to randomly sample these hospitals as part of the targeted 
sample, thereby ensuring that data from some of these hospitals also 
would be validated.
    Comment: One commenter urged that State QIOs be supportive not only 
during the validation appeals process but also proactively during data 
collection and reporting.
    Response: We agree with the commenter. CMS currently requires QIOs 
under their contract to improve or maintain consistently high levels of 
RHQDAPU program participation to meet all RHQDAPU program requirements, 
not solely validation appeals.
    Comment: Several commenters asked CMS to consider sending formal 
notification to hospitals not selected as part of the random sample. 
The commenters believe that this notification will aid hospitals with 
recordkeeping and internal operating procedures. The commenters were 
concerned that the lack of a consistent validation could cause internal 
processes within the hospitals to break down in the event that a 
hospital is not selected as part of the data validation sample for 
multiple years.
    Response: We will consider this comment and will consider using our 
QIOs to provide outreach to both selected and non-selected hospitals. 
We understand that hospitals must receive ample and clear communication 
about the requirements, and we recognize that the absence of quarterly 
medical record requests for all hospitals under the proposed validation 
process could affect the hospital's knowledge and ability to 
efficiently comply with the validation requirement.
    Comment: One commenter supported keeping validation standardized to 
a quarterly process that includes all hospitals. The commenter objected 
to excluding hospitals submitting fewer than 100 records.
    Response: We appreciate the comment but believe that the improved 
reliability of the validation estimate under the proposed new 
validation process will outweigh the benefit of validating a smaller 
number of records for all hospitals. As hospitals have improved their 
abstraction methods over time, we believe that the benefit of every 
hospital receiving quarterly feedback on their hospital's data has 
lessened over time. Regardless of whether a hospital was included in 
our annual validation sample, we plan to continue providing validation 
feedback on highly mismatching data elements and measures to all 
hospitals by providing aggregate validation information to all 
hospitals that submit quality data.
    Comment: Commenters stated that the lack of timely quarterly 
validation feedback is a huge problem. Some commenters did not believe 
that the 2,500 hospitals not selected for annual validation under the 
proposed new validation process would incorporate feedback provided to 
other selected hospitals, and data errors would increase over time due 
to the lack of hospital-specific feedback.
    Response: We interpret the comment to mean that hospitals that are 
not selected under the proposed, new validation process would not 
incorporate aggregate feedback information because they would not 
believe that the aggregate information would be relevant to them; and 
that their failure to incorporate supplied feedback would cause these 
hospitals' data errors to increase over time. However, we believe that 
the improved reliability of the validation estimate under the proposed 
new validation process will outweigh the benefit of validating a 
smaller number of records for all hospitals. As hospitals have improved 
their abstraction over time, we believe that the benefit of every 
hospital receiving quarterly feedback has lessened over time. As we 
noted in an earlier response, we plan to continue providing aggregate 
validation feedback at a State and national level on highly mismatching 
data elements and measures to all hospitals regardless of whether they 
were included in the annual validation sample.
    Comment: One commenter requested that CMS clarify that, under the 
proposed validation process, only those hospitals that are selected for 
validation

[[Page 43888]]

would have their payment at risk, and that the remaining hospitals 
would not be affected in any way by the validation results of the 
selected hospitals for that given year.
    Response: Only hospitals randomly selected for the proposed new 
annual validation process would have to meet the validation requirement 
for the applicable payment year. We note, however, that hospitals that 
are not selected for validation in a given year may nonetheless not 
receive the full annual payment update if they fail to meet other 
RHQDAPU program requirements, or if they withdraw from the program.
    Comment: One commenter supported a randomized selection of 200 
hospitals per quarter for validation with a minimum number of 20 charts 
reviewed. The commenter believes that hospitals should not be selected 
for validation any more frequently than one time per year. The 
commenter expressed concern that if validation occurred more than one 
time per year, hospitals may become complacent in their validation 
processes and this may lead to issues with data integrity. The 
commenter urged CMS to reduce the current administrative burden of 
quarterly validation and supported random selection of hospitals one 
per quarter per year with more charts reviewed.
    Response: We appreciate the commenter's concern and the suggestion 
to reduce the burden on the hospitals through validating one quarter of 
data per year. However, we believe that our proposed approach will 
enable hospitals to incorporate feedback learned earlier in the year 
and make improvements if necessary. The increased annual sample size 
from the current 20 records per year to 48 records per year also 
provides a more reliable validation estimate for sampled hospitals.
    Comment: One commenter urged continued attention to the data 
element level in order to increase the denominator and minimize the 
impact of a small number of errors.
    Response: We understand this comment and remind hospitals that they 
must continue to monitor their data element level validation processes 
because we use individual data elements as a combined set to calculate 
quality measures. The proposed validation score serves as a composite 
score of all data elements used to calculate quality measures, so it is 
critical that hospitals continue to ensure that data elements are 
abstracted accurately because inaccurately abstracted data elements can 
result in inaccurate measure rates and denominators.
    Comment: One commenter urged CMS to extend the turnaround time for 
chart selection to 60 days. The commenter suggested that CMS give 
hospitals the option to submit validation cases electronically rather 
than by mailing printed copies because such submissions would avoid 
shipping delays and allow faster turn around time.
    Response: We understand the commenter's concern about the deadline 
for hospitals to return requested medical records but note that under 
the current quarterly validation process, it takes 5 to 6 months from 
the initial medical record request until the CDAC contractor completes 
the validation process each quarter and the QIO completes its review of 
an appeal (if so requested by the hospital). We are concerned that 
adding time to this process would adversely impact hospitals' ability 
to incorporate validation feedback into future abstraction work.
    We will consider accepting electronic submission of validation 
cases using compact disc and electronic health record submission in 
future years. We must consider both the cost to accept and review these 
submissions, and the added benefit to the hospitals using electronic 
methods to store medical record information.
    Comment: Several commenters recommended that any changes to the 
validation process be tested before CMS imposes a payment penalty 
against the hospitals. These commenters also recommended that no 
hospital be penalized in terms of its annual payment update if it fails 
the validation requirement for only a single quarter.
    Response: We believe that the proposed changes represent a small 
relative change to the overall validation process. We have assessed the 
impact by calculating revised scores using the proposed new validation 
method. Preliminary results indicate that our proposal would not 
adversely impact the number of hospitals failing to meet our annual 
validation requirement. We will continue to assess the impact of this 
change in the near future, and consider changes in future years.
    Comment: One commenter recommended allowing all hospitals passing 
quarterly validation to appeal individual mismatches and adjust the 
score on a quarterly basis based upon a successful appeal.
    Response: Our proposal, which we discuss below, to require all 
hospitals failing our annual validation requirement to submit all 
mismatched data elements partially addresses this concern because 
hospitals failing our annual validation requirement would be able to 
appeal all data elements classified as mismatches by the CDAC 
contractor. We understand the desire of the commenter to correct 
mismatches on a quarterly basis; however, we do not currently have a 
mechanism in place to accommodate this need. We will investigate a 
possible solution to addrress mismatches on a quarterly basis for the 
future.
    Comment: One commenter suggested that CMS and CMS contractors 
return case detail reports in Excel file format rather than using 
portable document format (pdf).
    Response: We believe that this is an excellent suggestion, and we 
will consider the feasibility of implementing this suggestion for 
future years.
    Comment: One commenter asked whether hospitals would be selected 
from each State.
    Response: In order to maximize the overall sampling efficiency, the 
random sample would not be stratified by State. The intent of the 
random sample is to provide all participating hospitals that meet the 
100-case threshold with an equal probability of selection.
    Comment: Commenters asked whether hospitals not selected for 
validation would be considered for VBP. Commenters stated that 
hospitals use the validation process to learn and educate their staff 
about abstraction and documentation in the medical record.
    Response: We interpret the comment ``considered for VBP'' to mean 
eligible to receive payment under a proposed VBP methodology, as 
outlined in the 2007 CMS Hospital Value-Based Purchasing Report to 
Congress. As of the date of this final rule, value-based purchasing for 
hospitals has not been legislatively authorized. The proposed 
validation requirements would apply only for purposes of the RHQDAPU 
program.
    Comment: Commenters asked what would be the incentive for hospitals 
submitting fewer than 100 cases to continue abstracting and reporting 
data.
    Response: We remind the commenter that all RHQDAPU program 
participating hospitals must continue to meet the data submission and 
other requirements. We also note that we are considering developing 
targeting criteria that would enable us to also validate data submitted 
by hospitals that do not meet the 100-case threshold.
    Comment: Commenters noted that both hospitals and QIOs will have 
difficulty allocating resources for staffing when they do not know, 
from year to year, what hospitals will be selected for validation.
    Response: We understand that hospitals selected for validation will

[[Page 43889]]

need to allocate staffing for this effort and that hospitals that are 
not selected will not need to do so. However, the additional, minimal 
burden would be to submit the documentation for the requested medical 
records; a maximum of 12 records 4 times spaced over a year. Therefore, 
we do not believe that there will be a need for a large allocation of 
resources to meet this validation requirement.
    Comment: One commenter asked how CMS can compare all hospitals when 
different measure evaluations are being used, if some hospitals are 
using the new validation process and their measure score is based on 
this process.
    Response: We interpret the comment to be asking how we would 
validate all publicly reported data through a random sample of 
hospitals. We believe that a random sample of 800 hospitals provides a 
reliable estimate of accuracy for both sampled hospitals and national 
measure rates, since the sample is random and of sufficient size. We 
proposed stratifying the validation sample to ensure that all hospital-
submitted data are validated for selected hospitals. The validation 
sample for all sampled hospitals would be similar in sample size by 
clinical topic to ensure that the sample is representative of each 
hospital's population of submitted cases.
    After consideration of the public comments we received, we have 
decided to adopt as final our proposal regarding chart validation 
requirements and methods for the FY 2012 payment determination and 
subsequent years.
    c. Possible Supplements to the Chart Validation Process for the FY 
2013 Payment Determination and Subsequent Years
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24180), 
we also solicited public comment about criteria we could use to target 
hospitals for validation in the future. These targeting criteria could 
include abnormal data patterns identified by analyzing hospital-
submitted measure rates and counts for RHQDAPU program measures. For 
example:
    <bullet> A high number of years a hospital was not randomly 
selected for annual validation (for example, at least 5 years);
    <bullet> Consistently high measure denominator exclusion rates 
resulting in unexpectedly low denominator counts;
    <bullet> Consistently high measure rates, relative to national 
averages;
    <bullet> Small annual submission in the number of cases in previous 
years resulting in hospital exclusion from RHQDAPU program validation 
sample.
    Comment: One commenter recommended that CMS not implement targeting 
criteria for the FY 2013 validation. The commenter indicated that it 
does not appear to be random, and CMS would not provide all hospitals 
with feedback on their abstraction accuracy. The commenter believed 
that because hospitals widely vary in their abstraction accuracy, 
feedback to all hospitals is more important than lessening burden 
through targeted validation.
    Response: We recognize that providing feedback to hospitals is an 
important part of the validation process. We will continue to work with 
State QIOs to provide data element and measure-specific feedback to all 
participating hospitals, regardless of inclusion in the random sample. 
Additionally, our targeting criteria would not be random; they would be 
designed to select hospitals based on specific criteria. The increased 
annual sample size and stratification is designed to provide hospitals 
selected for validation with reliable information about all of their 
abstracted data.
    Comment: With regard to the reconsideration process, several 
commenters supported CMS' proposal to require hospitals to submit their 
paper medical records for re-abstraction when they submit a request for 
reconsideration involving data validation. The commenters believe that 
this process will give hospitals that believe the results of their data 
validation testing were inaccurate an opportunity to have their data 
re-abstracted.
    Response: We agree with the commenters that hospitals should be 
able to seek reconsideration of all validation mismatched data elements 
and measures throughout the year if the hospital fails to meet the 
annual validation requirement.
    Comment: Some commenters recommended continuing with the process of 
random selection of five charts per quarter for hospitals having fewer 
than 100 discharges.
    Response: We appreciate the recommendation that we continue 
validating hospital data for hospitals having fewer than 100 
discharges. As we discussed above, we are considering developing 
targeting criteria that would focus on these hospitals.
    We appreciate the public comments we received and will take them 
into consideration as we consider possible supplements to the chart 
validation process for the FY 2013 payment determination and subsequent 
years. Specifically, CMS plans to propose the following targeting 
criteria for FY 2013:
    <bullet> Validating hospital data when the hospital failed the 
previous year's RHQDAPU program validation;
    <bullet> Validating a sample of hospitals not included in the 
previous year's RHQDAPU program validation random sample for submitting 
fewer than 100 cases; and
    <bullet> Validating hospital data when the hospital was not 
selected in 3 previous years' RHQDAPU program random validation 
samples.
    We will also consider other targeting criteria for FY 2013 and 
future years.
7. Data Accuracy and Completeness Acknowledgement Requirements for the 
FY 2011 Payment Determination and Subsequent Years
    For the FY 2011 payment determination and subsequent years, in the 
FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24180), we proposed 
to require hospitals to electronically acknowledge on an annual basis 
the completeness and accuracy of the data submitted for the RHQDAPU 
program payment determination. Hospitals will be able to submit this 
acknowledgement on the same Web page that they use to submit data 
necessary to calculate the structural measures, and we believe that 
this Web page will provide a secure vehicle for hospitals to directly 
acknowledge that their information is complete and accurate to the best 
of their knowledge. A single annual electronic acknowledgement will 
provide us with explicit documentation acknowledging that the 
hospital's data is accurate and complete, but will not unduly burden 
hospitals. We noted that commenters generally supported the idea of 
electronic attestation in the FY 2009 IPPS final rule (73 FR 48625) at 
the point of data submission to the QIO Clinical Warehouse.
    In addition, the Government Accountability Office (GAO) recommended 
in a 2006 report (GAO-06-54) that hospitals self-report that their data 
are complete and accurate. Therefore, for the FY 2011 payment 
determination, we proposed to require hospitals to electronically 
acknowledge their data accuracy and completeness once between January 
1, 2010, and August 15, 2010. Hospitals will acknowledge that all 
information that is, or will be, submitted as required by the RHQDAPU 
program for the FY 2011 payment determination is complete and accurate 
to the best of their knowledge.
    Comment: Several commenters commended CMS for proposing to collect 
data accuracy and completeness acknowledgements using an electronic 
method.

[[Page 43890]]

    Response: We thank the commenters, and believe that this proposed 
requirement imposes a minimal burden for hospitals.
    Comment: A number of commenters questioned the benefit of the 
proposed electronic data accuracy and completeness acknowledgement, and 
believed that data quality would not be improved. The commenters 
believed that requiring hospitals to attest to the accuracy of their 
data will not increase the reliability of the data collected for the 
RHQDAPU program and noted that historically, almost all hospitals have 
passed the data validation requirements, meaning that their data are 
found to be accurate and complete.
    Response: We believe that this proposed requirement will ensure 
that hospitals continue implementing procedures for ensuring data 
completeness and accuracy. This proposed requirement is intended to 
supplement our existing submission and validation requirements.
    After consideration of the public comments we received, we are 
adopting as final, without modification, our proposal to require 
hospitals to electronically acknowledge on an annual basis the 
completeness and accuracy of the data submitted for the RHQDAPU program 
payment determination.
8. Public Display Requirements for the FY 2011 Payment Determination 
and Subsequent Years
    For the FY 2011 payment determination, in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule (74 FR 24180), we proposed to generally continue 
using the following existing requirements implemented in previous 
years. Our continued goal for the chart validation requirements is to 
validate the reliability of RHQDAPU program chart-abstracted data. 
Accurate data are needed to calculate accurate publicly reported 
quality measures that are posted on the Hospital Compare Web site. We 
added the validation requirement in the FY 2006 IPPS final rule (70 FR 
47421 through 47422) to ensure that hospitals submit reliable data for 
RHQDAPU program chart-abstracted measures, based on our experience in 
FY 2005 that hospitals vastly differed in their data reliability. We 
modified the validation requirements in the FY 2008 IPPS final rule 
with comment period (72 FR 47366 and 47367) to update the RHQDAPU 
program list of validated measures for FY 2008, and pooled multiple 
quarterly validation estimates into a single annual estimate to improve 
reliability. We modified these requirements to reflect the changing 
RHQDAPU program list of chart-abstracted measures and validate all 
available RHQDAPU program data.
    We proposed to update the list of validated RHQDAPU program 
measures for the FY 2011 payment determination to incorporate changes 
to our list of required chart-abstracted RHQDAPU program measures for 
CY 2009 discharges. These requirements, as well as additional 
information on these requirements, will be posted on the QualityNet Web 
site after we issue this final rule.
    Section 1886(b)(3)(B)(viii)(VII) of the Act provides that the 
Secretary shall establish procedures for making data submitted under 
the RHQDAPU program available to the public. The RHQDAPU program 
quality measures are posted on the Hospital Compare Web site (https://www.hospitalcompare.hhs.gov). We require that hospitals sign a Notice 
of Participation form when they first register to participate in the 
RHQDAPU program. Once a hospital has submitted a form, the hospital is 
considered to be an active RHQDAPU program participant until such time 
as the hospital submits a withdrawal form to CMS (72 FR 47360). 
Hospitals signing this form agree that they will allow CMS to publicly 
report the quality measures included in the RHQDAPU program.
    We will continue to display quality information for public viewing 
as required by section 1886(b)(3)(B)(viii)(VII) of the Act. Before we 
display this information, hospitals will be permitted to review their 
information as recorded in the QIO Clinical Warehouse.
    Currently, hospital campuses that share the same CCN must combine 
data collection and submission across their multiple campuses (for both 
clinical measures and HCAHPS). These measures are then publicly 
reported on the Hospital Compare Web site as if they apply to a single 
hospital. We estimate that approximately 5 to 10 percent of the 
hospitals reported on the Hospital Compare Web site share CCNs. To 
increase transparency in public reporting and improve the usefulness of 
the Hospital Compare Web site, we plan to note on the Web site 
instances where publicly reported measures combine results from two or 
more hospitals.
    We did not receive any public comments on our proposals and are 
adopting them as final in this final rule.
9. Reconsideration and Appeal Procedures for the FY 2010 Payment 
Determination
    The general deadline for submitting a request for reconsideration 
in connection with the FY 2010 payment determination is November 1, 
2009. As discussed more fully below, in the FY 2010 IPPS/RY 2010 LTCH 
PPS proposed rule (74 FR 24181), we proposed that all hospitals submit 
a request for reconsideration and receive a decision on that request 
before they can file an appeal with the Provider Reimbursement Review 
Board (PRRB).
    For the FY 2010 payment determination, in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule (74 FR 24181), we proposed to continue utilizing 
most of the same procedures that we utilized in FY 2009. Under these 
proposed procedures, the hospital must--
    <bullet> Submit to CMS, via QualityNet, a Reconsideration Request 
form (available on the QualityNet Web site) containing the following 
information:

--Hospital CMS Certification number (CCN).
--Hospital Name.
--CMS-identified reason for failure (as provided in the CMS 
notification of failure letter to the hospital).
--Hospital basis for requesting reconsideration. This must identify the 
hospital's specific reason(s) for believing it met the RHQDAPU program 
requirements and should receive the full FY 2010 IPPS annual payment 
update.
--CEO contact information, including name, e-mail address, telephone 
number, and mailing address (must include the physical address, not 
just the post office box). We proposed to no longer require that the 
hospital's CEO sign the RHQDAPU program reconsideration request. We 
have found that this requirement increases the burden for hospitals 
because it prevents them from electronically submitting the RHQDAPU 
program reconsideration request forms. In addition, to the extent that 
a hospital can submit a request for reconsideration on-line, the burden 
on our staff is reduced and, as a result, we can more quickly review 
the request.
--QualityNet System Administrator contact information, including name, 
e-mail address, telephone number, and mailing address (must include the 
physical address, not just the post office box).
--Paper medical record requirement for reconsideration requests 
involving validation. We proposed that if a hospital asks us to 
reconsider an adverse RHQDAPU program payment decision made because the 
hospital failed the validation requirement, the hospital must submit 
paper copies of all the medical records that it

[[Page 43891]]

submitted to the CDAC contractor each quarter for purposes of the 
validation. Hospitals must submit this documentation to a CMS 
contractor, which will redact all patient identifying information and 
forward the redacted copies to CMS. The contractor will be a QIO 
support contractor, which has authority to review patient level 
information under 42 CFR part 480. We will post the address where 
hospitals can ship the paper charts on the QualityNet Web site after we 
issue the FY 2010 IPPS/RY 2010 LTCH PPS final rule. Hospitals 
submitting a RHQDAPU program validation reconsideration request will 
have all mismatched data reviewed by CMS, and not their State QIO. (As 
discussed in section V.A.6.b. of this final rule, the State QIO is 
available to conduct a quarterly validation appeal if so requested by a 
hospital.)

    For the FY 2010 payment determination, the RHQDAPU program data 
that will be validated is 4th calendar quarter 2007 through 3rd quarter 
calendar year 2008 discharge data, except for SCIP-Infection-4 and 
Infection-6, which will be validated using 2nd and 3rd calendar quarter 
2008 discharges (73 FR 48621 through 48622). Hospitals must provide a 
written justification for each appealed data element classified during 
the validation process as a mismatch. We will review the data elements 
that were labeled as mismatched, as well as the written justifications 
provided by the hospitals, and make a decision on the reconsideration 
request. As we mentioned above, we proposed that all hospitals submit a 
reconsideration request to CMS and receive a decision on that request 
prior to submitting a PRRB appeal. We believe that the reconsideration 
process is less costly for both CMS and hospitals, and that this 
requirement will decrease the number of PRRB appeals by resolving 
issues earlier in the appeals process.
    Following receipt of a request for reconsideration, we will--
    <bullet> Provide an e-mail acknowledgement, using the contact 
information provided in the reconsideration request, to the CEO and the 
QualityNet Administrator that the request has been received.
    <bullet> Provide written notification to the hospital CEO, using 
the contact information provided in the reconsideration request, 
regarding our decision. We expect the process to take approximately 60 
to 90 days from the reconsideration request due date of November 1, 
2009.
    If a hospital is dissatisfied with the result of a RHQDAPU program 
reconsideration decision, the hospital may file a claim under 42 CFR 
part 405, Subpart R (a PRRB appeal). We solicited public comments on 
the extent to which these proposed procedures will be less costly for 
hospitals, and whether they will lead to fewer PRRB appeals.
    Comment: One commenter agreed that CMS should no longer require the 
CEO to sign the RHQDAPU program reconsideration request so that the 
request does not get held up for a signature, and can be submitted 
electronically. The commenter believed that use of the PRRB is less 
cost efficient, and should be the last resort. The commenter requested 
that the reconsideration process provide both written notification to 
the hospital CEO and QualityNet notification to the QualityNet 
Administrator working at the hospital.
    Response: We appreciate the comment and recognize the additional 
burden to hospitals associated with the requirement of a CEO signature.
    Comment: Several commenters supported CMS' proposal to require 
hospitals to submit their paper medical records for re-abstraction when 
they submit an appeal involving data validation. The commenters 
indicated that this process will give hospitals that believe the 
results of the data validation were inaccurate an opportunity to have 
their data re-abstracted again as part of the reconsideration process.
    Response: In the proposed rule, we proposed that hospitals must 
provide a written justification for each appealed data element 
classified during the validation process as a mismatch. We stated that 
we would review the data elements that were labeled as mismatched, as 
well as the written justifications provided by the hospitals, and make 
a decision on the reconsideration request. However, we wish to clarify 
that this would not be a re-abstraction, but a review of the hospital's 
justification and the medical record for each appealed mismatching data 
element. The intent of this proposal is for us to have all of the 
information necessary to review a request for reconsideration based on 
the hospital's validation results.
    Comment: One commenter asked for clarification about two possible 
situations that could arise under CMS' proposal to review paper medical 
records as part of the reconsideration process (when the issue is 
validation):
    1. Hospital fails to return one or more medical records to the CDAC 
contractor for the quarterly validation request within the 45 calendar 
day timeframe. There are no CDAC contractor-abstracted data elements 
for the reconsideration contractor to review, except for medical 
records returned after the 45 calendar day deadline. Would the hospital 
be allowed to submit medical records during reconsideration to receive 
credit for information submitted to the CDAC contractor after the 
quarterly validation 45 day deadline? If not, would the reconsideration 
contractor's review be limited in scope to the CDAC contractor's 
original documentation that verifies contact with the hospital as 
outlined in this regulation, and documents that the CDAC contractor did 
not receive the requested medical records in the required timeframe 
(for example, reconsideration limited to data and hospital receipt of 
CDAC contractor's request for medical records, written reminder notes, 
and CDAC contractor's non-receipt of medical records).
    2. Hospital receives one or more ``invalid record selection'' zero 
scores for failing to provide the correct medical record for the 
requested episode of care. Invalid record selections occur when the 
hospital submits medical record(s) that do not match the requested 
patient episode of care's admission date, discharge date, name or other 
hospital submitted identification information, and/or birthdate/birth 
year. Would the reconsideration contractor abstract medical records for 
these ``invalid records,'' or would the reconsideration contractor and 
CMS simply review the electronic submitted data, relative to the 
hospital submitted data to the CDAC contractor in response to the 
original medical record request?
    In both scenarios, the commenter argued that hospitals would 
attempt to circumvent the CDAC contractor validation process and submit 
medical records to the reconsideration process. The commenter 
recommended that CMS limit the scope of RHQDAPU program reconsideration 
review for validation to verification of CDAC contractor processing, 
and not circumventing the validation process to allow reconsideration 
contractor abstraction of these nonreturned and ``invalid record 
selection'' cases that receive zero validation scores. The commenter 
indicated that CMS should spend its dollars wisely and create processes 
that do not allow hospitals to bypass existing and expensive quarterly 
validation processes.
    Response: We appreciate the comment. Our intent is to provide 
hospitals a process to request our reconsideration review of mismatched 
data elements abstracted by the CDAC

[[Page 43892]]

contractor affecting the hospitals' validation scores. Hospitals must 
submit a copy of the entire requested medical record to the CDAC 
contractor during the quarterly validation process for the requested 
case to be eligible for reconsideration of mismatched data elements. 
Our review of medical records that we classify as not matching what was 
requested by the CDAC contractor (called ``invalid record selections'') 
will initially be limited to ascertaining whether the copy of the 
record submitted to the CDAC contractor was actually an entire copy of 
the requested medical record. If we determine during reconsideration 
that the hospital did submit the entire copy of the requested medical 
record to the CDAC contractor, then we would abstract data elements 
from the medical record submitted by the hospital along with its 
reconsideration request.
    We would also review the hospital's justification for medical 
records not returned in a timely manner to ascertain whether the CDAC 
contractor received the requested record within 45 calendar days, and 
whether the hospital received the initial medical record request and 
reminder notice as specified in this regulation. If we determine during 
reconsideration that the CDAC contractor did receive a paper copy of 
the requested medical record within 45 calendar days, then we would 
abstract data elements from the medical record submitted by the 
hospital along with its reconsideration request.
    After reviewing the public comments we received, we are adopting as 
final the proposed RHQDAPU program reconsideration requirements for FY 
2010. However, we wish to clarify the following regarding the scope of 
our review when a hospital requests reconsideration because it failed 
our validation requirements:
    1. Hospital requests reconsideration for CDAC contractor-abstracted 
data elements classified as mismatches affecting validation scores. 
Hospitals must timely submit a copy of the entire requested medical 
record to the CDAC contractor during the quarterly validation process 
for the requested case to be eligible to request reconsideration of 
mismatched data elements.
    2. Hospital requests reconsideration for medical record copies 
submitted during the quarterly validation process and classified as 
invalid record selections. Invalid record selections are defined as 
medical records submitted by hospitals during the quarterly validation 
process that do not match the patient's episode of care information as 
determined by the CDAC contractor (in other words, the contractor 
determines that the hospital returned a medical record that is 
different from that which was requested). If the CDAC contractor 
determines that the hospital has submitted an invalid record selection 
case, it awards a zero validation score for the case because the 
hospital did not submit the entire copy of the medical record for that 
requested case. During the reconsideration process, our review of 
invalid record selections will initially be limited to determining 
whether the record submitted to the CDAC contractor was actually an 
entire copy of the requested medical record. If we determine during 
reconsideration that the hospital did submit the entire copy of the 
requested medical record, then we would abstract data elements from the 
medical record submitted by the hospital along with its reconsideration 
request.
    3. Hospital requests reconsideration for medical records not 
submitted to the CDAC contractor within the 45 calendar day deadline. 
Our review will initially be limited to determining whether the CDAC 
contractor received the requested record within 45 calendar days, and 
whether the hospital received the initial medical record request and 
reminder notice as specified in this regulation. If we determine during 
reconsideration that the CDAC contractor did receive a paper copy of 
the requested medical record within 45 calendar days, then we would 
abstract data elements from the medical record submitted by the 
hospital along with its reconsideration request.
    In sum, we are initially limiting the scope of our reconsideration 
reviews involving validation to information already submitted by the 
hospital during the quarterly validation process, and we will not 
abstract medical records that were not submitted to the CDAC contractor 
during the quarterly validation process. We will expand the scope of 
our review only if we find during the initial review that the hospital 
correctly and timely submitted the requested medical records. In that 
case, then we would abstract data elements from the medical record 
submitted by the hospital along with its reconsideration request.
    After consideration of the public comments we received, we are 
adopting as final, with the clarifications outlined in this final rule, 
our proposals regarding reconsideration and appeals procedures for the 
FY 2010 payment determination.
10. RHQDAPU Program Withdrawal Deadlines
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24181), 
we proposed to accept RHQDAPU program withdrawal forms for the FY 2011 
payment determination from hospitals until August 15, 2010. We proposed 
this deadline so that we would have sufficient time to update the FY 
2011 payment to hospitals starting on October 1, 2010. If a hospital 
withdraws from the program for the FY 2011 payment determination, it 
will receive a 2.0 percentage point reduction in its FY 2011 annual 
payment update. We noted that once a hospital has submitted a Notice of 
Participation form, it is considered to be an active RHQDAPU program 
participant until such time as the hospital submits a withdrawal form 
to CMS.
    We did not receive any public comments about our proposal. 
Therefore, we are adopting as final our proposal to accept RHQDAPU 
program withdrawal forms for the FY 2011 payment determination from 
hospitals until August 15, 2010.
11. Electronic Health Records
a. Background
    Starting with the FY 2006 IPPS final rule, we have encouraged 
hospitals to take steps toward the adoption of EHRs (also referred to 
in previous rulemaking documents as electronic medical records) that 
will allow for reporting of clinical quality data from the EHRs 
directly to a CMS data repository (70 FR 47420 through 47421). We 
encouraged hospitals that are implementing, upgrading, or developing 
EHR systems to ensure that the technology obtained, upgraded, or 
developed conforms to standards adopted by HHS. We suggested that 
hospitals also take due care and diligence to ensure that the EHR 
systems accurately capture quality data and that, ideally, such systems 
provide point-of-care decision support that promotes optimal levels of 
clinical performance.
    In the FY 2008 IPPS final rule with comment period (72 FR 47366), 
we responded to comments we received on EHRs and noted that CMS planned 
to continue participating in the American Health Information Community 
(which has now sunset and is replaced by the National eHealth 
Collaborative) and other entities to explore processes through which an 
EHR could speed the collection of data and minimize the resources 
necessary for quality reporting.
    Recently, we initiated work directed toward enabling EHR submission 
of quality measures through EHR standards development and adoption. We 
are working under an inter-agency agreement between CMS and the Office

[[Page 43893]]

of the National Coordinator for Healthcare Information Technology (ONC) 
to identify and harmonize standards for the EHR-based submission of 
Emergency Department Throughput measures, Stroke measures, and Venous 
Thromboembolism measures. These measures have received NQF endorsement 
and are potential measures for future inclusion in the RHQDAPU program. 
Pursuant to this agreement, the Healthcare Information Technology 
Standards Panel (HITSP) has been tasked with harmonizing the EHR data 
element standards for the measure sets. The work for these three 
measure sets began in September 2008 and is due to be completed in a 
little more than 1 year. It is expected that interoperable standards 
will be developed and fully vetted by October 2009. When HITSP posts 
the standards, we anticipate that EHR vendors will be able to code 
their EHR systems with the new specifications and begin collecting this 
data electronically. We expect that these standards will be provided to 
its Certification Commission for Healthcare Information Technology 
(CCHIT) for inclusion in the criteria for certification of inpatient 
EHRs.
b. EHR Testing of Quality Measures Submission
    As we have previously stated, we are interested in the reporting of 
quality measures using EHRs, and we continue to encourage hospitals to 
adopt and use EHRs that conform to industry standards. We believe that 
the testing of EHR submission is an important and necessary step to 
establish the ability of EHRs to report clinical quality measures and 
the capacity of CMS to receive such data.
    Through CMS' interagency agreement with ONC previously described, 
the interoperable standards for EHR-based submission of the Emergency 
Department (ED) Throughput, Stroke, and Venous Thromboembolism (VTE) 
measures are scheduled to be finalized in late 2009 and will be 
available for review and testing. We anticipate testing the components 
required for the submission of clinical quality data extracted from 
EHRs for these measures, and are exploring different mechanisms and 
formats that will aid the submission process, as well as ensure that 
the summary measure results extracted from the EHRs are reliable. When 
the interoperable EHR-based submission standards become available, EHR 
vendors will be able to employ them in EHR systems and begin testing 
how they facilitate the electronic collection of these data. We intend 
to follow similar processes and procedures to those we are using for 
the PQRI EHR testing being conducted as described in the CY 2009 
Medicare Physician Fee Schedule final rule with comment period (73 FR 
69828 through 69830).
    We anticipate moving forward with testing CMS' technical ability to 
accept data from EHRs for the ED, Stroke, and VTE measures as early as 
July 1, 2010. Pursuant to the Paperwork Reduction Act, prior to the 
beginning of testing EHR-based data submission, we will publish a 
Federal Register notice seeking public comments on the process we 
intend to follow to select EHR vendors/hospitals and the methodology we 
plan to use for testing EHR-based data submissions.
    The test measures described above are not currently required under 
the RHQDAPU program. As long as that remains the case, EHR test data 
that is received for these measures will not be used to make RHQDAPU 
program payment decisions. In addition, the posting of the electronic 
specifications for any particular measure should not be interpreted as 
a signal that we intend to select the measure for inclusion in the 
RHQDAPU program measure set.
    We intend to select several EHR vendors/hospitals to develop and 
test EHR clinical quality data submission. EHR vendors/hospitals that 
wish to participate in the development and testing process will be able 
to self-nominate by sending a letter of interest to: ``RHQDAPU Program 
IT Testing Nomination'', Centers for Medicare and Medicaid Services, 
Office of Clinical Standards and Quality, Quality Measurement and 
Health Assessment Group, 7500 Security Boulevard, Mail Stop S3-02-01, 
Baltimore, MD 21244-8532. The letter must be received by CMS by 6 p.m., 
E.S.T. on December 31, 2009. Vendors/hospitals will be selected based 
on the following criteria: (1) They are able to submit clinical EHR 
data using interoperability standards such as Cross Document Sharing 
(XDS), Cross Community Access (XCA), Clinical Data Architecture (CDA), 
and Health Level 7 Version 3 to a CMS-designated clinical data 
repository; and (2) they have established or have applied for a 
QualityNet account. More information regarding these capabilities will 
be made available on the Hospital Quality Initiative section of the CMS 
Web site at: https://www.cms.hhs.gov/HospitalQualityInits/. Preference 
may be given to EHR vendors/hospitals that utilize EHRs that are 
currently certified by the CCHIT, use the National Health Information 
Network (NHIN), and/or utilize Health Information Technology Standards 
Panel (HITSP)/Integrating the Healthcare Environment (IHE) standards.
    EHR vendors/hospitals that would like to test the submission of 
inpatient EHR data to the CMS-designated clinical data repository 
should update their EHR products or otherwise ensure that those 
products can capture and submit the necessary data elements identified 
for an EHR-based submission once the standardized format has been 
determined. We suggest that these entities begin submitting EHR data 
promptly after CMS announces that the clinical data repository is ready 
to accept such data so that problems that may complicate or preclude a 
successful quality measure data submission can be corrected.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24182), 
we welcomed comments on this discussion of EHR-based data submission 
testing.
    Comment: A number of commenters supported voluntary EHR testing, 
the creation of uniform data content standards, and the concept of 
reducing the burden to hospitals through automated data transmission 
via EHR products. The commenters applauded CMS for EHR testing and for 
working to expand quality data submission to include electronic 
formats. The commenters also commended CMS for working with ONC to 
establish electronic standards for ED, Stroke and VTE quality measures. 
The commenters urged CMS to ensure the scientific integrity of the 
electronic standards and resulting measures, and encouraged CMS to work 
closely with NQF's Health IT Expert Panel (HITEP) and to incorporate 
HITSP standards for measures. Some commenters urged CMS to conduct EHR 
testing for measures that have already been adopted into the RHQDAPU 
program as well. However, one commenter stated that the timelines 
suggested in the proposed rule do not take into account the realities 
faced by hospitals.
    Response: We appreciate these supportive comments regarding 
voluntary EHR testing, and acknowledge the challenges faced by many 
hospitals in adopting EHRs at this time. We will continue to work with 
standard setting organizations toward standardization of data elements 
for quality measures in EHRs. A voluntary EHR-based data submission 
testing process would be initiated at such time as CMS systems are able 
to support it. Hospitals would not be required to participate in this 
testing process, but would do so voluntarily. We decided to begin EHR 
testing with non-implemented measures. However, we plan to create 
electronic formats for measures already

[[Page 43894]]

adopted for the RHQDAPU program as well.
    We thank the commenters for their suggestions and will take these 
comments into consideration as we move forward with voluntary EHR 
testing. We will announce further details regarding this voluntary 
testing program in a separate Federal Register notice.
c. HITECH Act EHR Provisions
    On February 17, 2009, the President signed into law the ARRA, 
Public Law 111-5. The HITECH Act (Title IV of Division B of the ARRA, 
together with Title XIII of Division A of the ARRA) authorizes payment 
incentives under Medicare for the adoption and use of certified EHR 
technology beginning in FY 2011. Hospitals are eligible for these 
payment incentives if they meet the following three requirements: 
Meaningful use of certified EHR technology; electronic exchange of 
health information; and reporting on measures using certified EHR 
technology (provided the Secretary has the capacity to receive such 
information electronically). With respect to this requirement, under 
section 1886(n)(3)(A)(ii) of the Act, as added by section 4102 of the 
HITECH Act, the Secretary shall select measures, including clinical 
quality measures, that hospitals must provide to CMS in order to be 
eligible for the EHR incentive payments. With respect to the clinical 
quality measures, section 1886(n)(3)(B)(i) of the Act requires the 
Secretary to give preference to those clinical quality measures that 
have been selected for the RHQDAPU program under section 
1886(b)(3)(B)(viii) of the Act or that have been endorsed by the entity 
with a contract with the Secretary under section 1890(a) of the Act. 
Any measures must be proposed for public comment prior to their 
selection, except in the case of measures previously selected for the 
RHQDAPU program under section 1886(b)(3)(B)(viii) of the Act.
    Thus, the RHQDAPU program and the HITECH Act have important areas 
of overlap and synergy with respect to the reporting of quality 
measures using EHRs. We believe the financial incentives under the 
HITECH Act for the adoption and meaningful use of certified EHR 
technology by hospitals will encourage the adoption and use of 
certified EHRs for the reporting of clinical quality measures under the 
RHQDAPU program. Further, these efforts to test the submission of 
quality data through EHRs may provide a foundation for establishing the 
capacity of hospitals to send, and for CMS to receive, quality measures 
via hospital EHRs for future RHQDAPU program measures. We again note 
that the provisions in this final rule do not implicate or implement 
any HITECH statutory provisions. Those provisions will be implemented 
in a future rulemaking.

B. Medicare-Dependent, Small Rural Hospitals (MDHs): Budget Neutrality 
Adjustment Factors for FY 2002-Based Hospital-Specific Rate (Sec.  
412.79(i))

1. Background
    Under the IPPS, special payment protections are provided to a sole 
community hospital (SCH). Section 1886(d)(5)(D)(iii) of the Act defines 
an SCH as a hospital that, by reason of factors such as isolated 
location, weather conditions, travel conditions, or absence of other 
like hospitals (as determined by the Secretary) is the sole source of 
inpatient hospital services reasonably available to Medicare 
beneficiaries. The regulations that set forth the criteria that a 
hospital must meet to be classified as an SCH are located at 42 CFR 
412.92. Section 1886(d)(5)(D)(iii)(III) of the Act and the regulations 
at Sec.  412.109 also provide that certain essential access community 
hospitals (EACHs) will be treated as an SCH for payment purposes under 
the IPPS.
    Under the IPPS, separate special payment protections also are 
provided to a Medicare-dependent, small rural hospital (MDH). Section 
1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is 
located in a rural area, has not more than 100 beds, is not an SCH, and 
has a high percentage of Medicare discharges (not less than 60 percent 
of its inpatient days or discharges in its 1987 cost reporting year or 
in two of its most recent three settled Medicare cost reporting years). 
The regulations that set forth the criteria that a hospital must meet 
to be classified as an MDH are located at 42 CFR 412.108.
    Although SCHs and MDHs are paid under special payment 
methodologies, they are still paid under section 1886(d) of the Act. 
Like all IPPS hospitals paid under section 1886(d) of the Act, SCHs and 
MDHs are paid for their discharges based on the DRG weights calculated 
under section 1886(d)(4) of the Act.
    For SCHs, effective with hospital cost reporting periods beginning 
prior to January 1, 2009, section 1886(d)(5)(D)(i) of the Act (as 
amended by section 6003(e) of Public Law 101-239 (OBRA 1989)) and 
section 1886(b)(3)(I) of the Act (as added by section 405 of Public Law 
106-113 (BBRA 1999) and further amended by section 213 of Public Law 
106-554 (BIPA 2000) provide that SCHs are paid based on whichever of 
four statutorily specified rates (listed below) yields the greatest 
aggregate payment to the hospital for the cost reporting period. For 
cost reporting periods beginning on or after January 1, 2009, section 
122 of Public Law 110-275 (MIPPA 2008) further amended the Act to 
specify that SCHs will be paid based on a FY 2006 hospital-specific 
rate (that is, based on their updated costs per discharge from their 
12-month cost reporting period beginning during Federal fiscal year 
2006), if this results in the greatest payment to the SCH. Therefore, 
currently, SCHs are paid based on whichever of the following rates 
yields the greatest aggregate payment to the hospital for the cost 
reporting period:
    <bullet> The Federal rate applicable to the hospital;
    <bullet> The updated hospital-specific rate based on FY 1982 costs 
per discharge;
    <bullet> The updated hospital-specific rate based on FY 1987 costs 
per discharge;
    <bullet> The updated hospital-specific rate based on FY 1996 costs 
per discharge; or
    <bullet> The updated hospital-specific rate based on FY 2006 costs 
per discharge.
    For purposes of payment to SCHs for which the FY 1996 hospital-
specific rate yields the greatest aggregate payment, payments for 
discharges during FYs 2001, 2002, and 2003 were based on a blend of the 
FY 1996 hospital-specific rate and the greater of the Federal rate or 
the updated FY 1982 or FY 1987 hospital-specific rate. For discharges 
during FY 2004 and subsequent fiscal years, payments based on the FY 
1996 hospital-specific rate are based on 100 percent of the updated FY 
1996 hospital-specific rate.
    Through and including FY 2006, under section 1886(d)(5)(G) of the 
Act, MDHs are paid based on the Federal rate or, if higher, the Federal 
rate plus 50 percent of the amount by which the Federal rate is 
exceeded by the updated hospital-specific rates based on FY 1982 or FY 
1987 costs per discharge, whichever of these hospital-specific rates is 
higher. Section 5003(b) of Public Law 109-171 (DRA 2005) amended 
section 1886(d)(5)(G) of the Act to provide that, for discharges 
occurring on or after October 1, 2006, MDHs are paid based on the 
Federal rate or, if higher, the Federal rate plus 75 percent of the 
amount by which the Federal rate is exceeded by the updated hospital-
specific rate based on FY 1982, FY 1987, or FY 2002 costs per 
discharge, whichever of these hospital-specific rates is the highest. 
Unlike SCHs, MDHs

[[Page 43895]]

do not have the option to use their FY 1996 hospital-specific rate.
    For each cost reporting period, the fiscal intermediary or MAC 
determines which of the payment options will yield the highest 
aggregate payment. Interim payments are automatically made at the 
highest rate using the best data available at the time the fiscal 
intermediary or MAC makes the determination. However, it may not be 
possible for the fiscal intermediary or MAC to determine in advance 
precisely which of the rates will yield the highest aggregate payment 
by year's end. In many instances, it is not possible to forecast the 
outlier payments, or the amount of the DSH adjustment or the IME 
adjustment, all of which are applicable only to payments based on the 
Federal rate and not to payments based on the hospital-specific rate. 
The fiscal intermediary or MAC makes a final adjustment at the close of 
the cost reporting period after it determines precisely which of the 
payment rates would yield the highest aggregate payment to the 
hospital.
    If a hospital disagrees with the fiscal intermediary's or the MAC's 
determination regarding the final amount of program payment to which it 
is entitled, it has the right to appeal the fiscal intermediary's or 
the MAC's decision in accordance with the procedures set forth in 42 
CFR part 405, Subpart R, which govern provider payment determinations 
and appeals.
2. FY 2002-Based Hospital-Specific Rate
    Acute care hospitals, including MDHs and SCHs, are subsection (d) 
hospitals paid under the IPPS. As mentioned earlier, under the special 
payment methodologies for MDHs and SCHs, Medicare payments per 
discharge are made based on DRG weights, as with all other acute care 
hospitals paid under the IPPS. (We note that effective beginning in FY 
2008, the MS-DRGs are used under the IPPS.) As discussed above, 
although the specific payment formulas for MDHs and SCHs differ, it is 
common to both types of hospitals that they may be paid based on an 
updated hospital-specific rate determined from their costs per 
discharge in a specified base year.
    Section 1886(d)(4)(C)(iii) of the Act requires that aggregate IPPS 
payments be projected to neither increase nor decrease as a result of 
the annual changes to the DRG classifications and weighting factors. 
Beginning in FY 1994, in applying the current year's budget neutrality 
adjustment factor to both the standard Federal rate and hospital-
specific rates, we do not remove the prior years' budget neutrality 
adjustment factors when applying the current year budget neutrality 
adjustment factor to assure that estimated aggregate payments after the 
DRG changes are equal to estimated aggregate payments prior to the 
changes (48 FR 46345). If we were to remove the prior year 
adjustment(s), we would not satisfy this requirement. As we have 
previously explained (for example, in the FY 2006 IPPS final rule (70 
FR 47429)), all section 1886(d) hospitals, including hospitals that are 
paid based on a hospital-specific rate, are subject to a DRG budget 
neutrality adjustment factor. As is the case for all other IPPS 
hospitals, these hospitals are paid based on DRG classifications and 
weighting factors that must be considered when we determine whether 
aggregate IPPS payments are projected to increase or decrease as a 
result of the annual changes to the DRG classifications and weighting 
factors.
    In order to comply with the statutory requirement that the DRG 
changes be budget neutral, we compute a budget neutrality adjustment 
factor based on a comparison of estimated aggregate payments using the 
current year's relative weights and factors to aggregate payments using 
the prior year's relative weights and factors. This budget neutrality 
adjustment factor is then applied to the standardized per discharge 
payment amounts (that is, the Federal rates and the hospital-specific 
rates). Cumulative budget neutrality factors, beginning with the 
adjustment factor for FY 1993, apply to all hospital-specific rates 
including rebased hospital-specific rate amounts derived from base 
years later than FY 1993. As discussed in the FY 2001 IPPS proposed 
rule (55 FR 19466), in setting updated DRG weights, each year we 
normalize DRG weights by an adjustment factor in order to first ensure 
that the average case weight after recalibration is equal to the 
average case weight prior to recalibration. While this adjustment is 
intended to ensure that recalibration does not affect total payments to 
hospitals under section 1886(d) of the Act, our analysis has indicated 
that the normalization adjustment does not usually achieve budget 
neutrality with respect to aggregate payments to hospitals under 
section 1886(d) of the Act. Thus, in order to comply with the 
requirement of section 1886(d)(4)(C)(iii) of the Act that the annual 
DRG reclassification changes and recalibration of the relative weights 
be budget neutral, we also compute a budget neutrality adjustment 
factor that is applied to both the standardized amounts and the 
hospital-specific rates. This budget neutrality adjustment ensures that 
the recalibration process neither increases nor decreases total 
payments to hospitals. If we were to remove this budget neutrality 
adjustment factor for years prior to the base year, the normalized DRG 
weights applied to the hospital-specific amounts would result in higher 
aggregate payments than permitted under the statute.
    Section 1886(b)(3)(I) of the Act (as added by section 405 of Public 
Law 106-113 (BBRA 1999) and further amended by section 213 of Public 
Law 106-554 (BIPA 2000)) contains a provision for SCHs to rebase their 
hospital-specific rate using the hospital's FY 1996 cost per discharge 
data. Specifically, beginning in FY 2001, SCHs can also use their 
reasonable and allowable FY 1996 operating costs for inpatient hospital 
services as the basis for their hospital-specific rate rather than only 
their FY 1982 or FY 1987 costs, if using FY 1996 costs would result in 
higher payments. Effective for cost reporting periods beginning on or 
after January 1, 2009, SCHs will be paid based on their hospital-
specific rate using FY 2006 costs, if this rate yields higher payments 
(as provided for under section 122 of Public Law 110-275 (MIPPA 2008)). 
For the reasons explained above, the instructions for implementing both 
the FY 1996 and FY 2006 SCH rebasing provisions direct the fiscal 
intermediary or MAC to apply cumulative budget neutrality adjustment 
factors to account for DRG changes since FY 1993 in determining an 
SCH's hospital-specific rate based on either FY 1996 or FY 2006 cost 
data. (The FY 1996 SCH rebasing provision was implemented in 
Transmittal A-00-66 (Change Request 1331) dated September 18, 2000, and 
the FY 2006 SCH rebasing provision was implemented in a Joint Signature 
Memorandum (JSM/TDL-09052), dated November 17, 2008.)
    As stated previously, section 5003(b) of Public Law 109-171 (DRA 
2005) allows MDHs to use the hospital's FY 2002 costs per discharge 
(that is, the FY 2002 updated hospital-specific rate) for discharges 
occurring on or after October 1, 2006, if that results in a higher 
payment. As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule (74 FR 24183 through 24185), to implement this provision, CMS 
issued Transmittal 1067 (Change Request 5276 dated September 25, 2006) 
with instructions to fiscal intermediaries to determine and update the 
FY 2002 hospital-specific rate for qualifying MDHs. To calculate an 
MDH's FY 2002 hospital-specific rate and update it to FY 2007, the 
instructions directed fiscal

[[Page 43896]]

intermediaries to apply cumulative budget adjustment factors for FYs 
2003 through 2007. However, the instructions did not include the 
cumulative budget neutrality adjustment factor to account for changes 
in the DRGs from FYs 1993 through 2002. As a result, effective 
beginning in FY 2007, any MDH that was paid based on its FY 2002 
hospital-specific rate (calculated in accordance with the instructions 
provided in Transmittal 1067) has been paid based on a hospital-
specific rate that failed to include a cumulative budget neutrality 
adjustment factor to account for DRG changes from FYs 1993 through 2002 
(a cumulative budget neutrality adjustment factor of 0.982557 (or about 
-1.74 percent)), in addition to the cumulative budget neutrality 
adjustment factors applied for FYs 2003 through 2007 that have already 
been applied as specified in the implementing instructions. As we 
discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, in order 
to conduct a meaningful comparison between payments under the Federal 
rate, which is adjusted by the cumulative budget neutrality factor, and 
payments based on the hospital-specific rate, consistent with our 
established policy of applying a cumulative budget neutrality 
adjustment factor to account for DRG changes since FY 1993, for 
discharges beginning on or after October 1, 2009, we stated our 
intention to include the cumulative budget neutrality adjustment 
factors for the DRG changes from FYs 1993 through 2002, in addition to 
the cumulative budget neutrality adjustment factors for FYs 2003 
forward. The cumulative budget neutrality adjustment factor of 0.982557 
is calculated as the product of the following budget neutrality 
adjustment factors to account for DRG changes from FYs 1993 through 
2002: 0.999851 for FY 1993; 0.999003 for FY 1994; 0.998050 for FY 1995; 
0.999306 for FY 1996; 0.998703 for FY 1997; 0.997731 for FY 1998; 
0.998978 for FY 1999; 0.997808 for FY 2000; 0.997174 for FY 2001; and 
0.995821 for FY 2002.
    We considered applying a factor of 0.982557 to any MDH's FY 2002 
hospital-specific rate to account for the cumulative budget neutrality 
adjustment for DRG changes from FYs 1993 through 2002, either effective 
for discharges occurring on or after October 1, 2006 (the initial 
effective date of the FY 2002 rebasing) or, alternatively, effective 
upon the issuance of the correction. However, consistent with the 
prospective nature of the rates under the IPPS, we are applying the 
adjustment on a prospective basis only, effective for discharges 
occurring on or after October 1, 2009 (FY 2010). This effective date 
would give affected MDHs sufficient notice of the change to their 
hospital-specific rate. We estimate that approximately 50 MDHs will be 
affected by the application of the cumulative budget neutrality 
adjustment for DRG changes from FYs 1993 through 2002. Based on the 
current cumulative budget neutrality adjustment factor of 0.982557 to 
account for DRG changes from FYs 1993 through 2002, we estimate that, 
in some instances, application of the cumulative budget neutrality 
adjustment factor will lower the hospital-specific rate to the point 
that the Federal rate would result in higher payments.
    Comment: Some commenters asserted that the application of a 
cumulative budget neutrality adjustment factor for the DRG changes from 
FYs 1993 through 2002 doubles the impact of this adjustment on the 
hospital-specific rates. The commenters believed that the average case 
weight from FYs 1993 through 2002 increased and that the cumulative 
budget neutrality adjustment built into the Federal rates and hospital-
specific rates for this time period offsets this average case weight 
increase. The commenters believed, therefore, that this budget 
neutrality adjustment is already being accounted for when the fiscal 
intermediary divides the MDH's FY 2002 average cost per discharge by 
the hospital's case mix index for FY 2002, because the case-mix index 
reflects the higher average case weight increase.
    Response: As described in section II.H. of the preamble of this 
final rule, the recalibrated DRG weights are normalized each year by an 
adjustment factor so that the national average case weight after DRG 
recalibration is equal to the national average case weight before 
recalibration. The normalization process is designed to offset any 
increase or decrease in the national average case weight due to 
recalibration. Because the weights are normalized, they do not reflect 
national average case weight change due to recalibration. Therefore, 
the hospital's case-mix index for FY 2002, which is calculated using 
DRG weights after normalization, do not reflect national average case 
weight change. We disagree with commenter's assertions that the average 
case weight from FYs 1993 through 2002 increased due to recalibration 
and that the cumulative budget neutrality adjustment built into the 
Federal rates and hospital specific rates for this time period offsets 
an average case weight increase due to recalibration. The cumulative 
budget neutrality adjustment is not already being accounted for when 
the fiscal intermediary divides the FY 2002 average cost per discharge 
for a hospital by the hospital's case-mix index for FY 2002.
    Comment: One commenter stated that even if a cumulative budget 
neutrality factor should be applied, it is wrongly calculated, pointing 
to a change made by CMS, effective FY 2006 and forward, to no longer 
apply the wage index budget neutrality adjustment factor to the 
hospital-specific rate of SCHs and MDHs, but rather only a DRG 
recalibration budget neutrality adjustment factor (70 FR 47430). The 
budget neutrality adjustment factor applied to the hospital-specific 
rate prior to FY 2006 was a composite of both the budget neutrality 
adjustment to account for redistribution of cases among DRGs and the 
budget neutrality adjustment to account for changes to the wage index. 
The commenter took issue that the cumulative budget neutrality 
adjustment factor continues to include factors that adjust for wage 
index changes prior to FY 2006, and stated that the adjustment factors 
prior to FY 2006 that are included in the cumulative budget neutrality 
factor should be only the DRG recalibration budget neutrality 
adjustment factors, consistent with the change made for FY 2006 
forward.
    Response: Regarding the application of combined wage index and DRG 
recalibration budget neutrality adjustment factors for FYs 1993 through 
2005, in the FY 2006 IPPS final rule (70 FR 47430), we stated that we 
believe that our former policy of applying both a combined wage and DRG 
budget neutrality adjustment factor is still valid. Therefore, we do 
not believe it is necessary or appropriate to change the applicable 
budget neutrality adjustment factors to only DRG recalibration budget 
neutrality adjustment factors for that period. We also note that those 
factors, the cumulative budget neutrality adjustment factors for the 
hospital-specific rates, which included both the wage index and DRG 
recalibration budget neutrality adjustment factors for FYs 1993 through 
2005, were established as a result of a notice-and-comment rulemaking 
process, and we would not retroactively recalculate these factors.
    Comment: One commenter stated that the cumulative budget neutrality 
adjustment factor for FYs 1993 through 2005 is incorrect because two 
factors within it, the FY 1999 and the FY 2003 budget neutrality 
adjustment factors, are incorrect; that is, they are not those

[[Page 43897]]

presented in the applicable Federal Register notice.
    Response: Although the FY 1999 budget neutrality adjustment factor 
was initially published in the FY 1999 IPPS final rule, in the February 
25, 1999 final notice (64 FR 9381), the budget neutrality adjustment 
factor for FY 1999 was subsequently revised to 0.998978, in conjunction 
with subsequent revisions to the wage index, effective March 1, 1999 
through September 30, 1999. Consistent with our policy of applying DRG 
budget neutrality in a cumulative manner, the revised factor is carried 
permanently in both the standardized rate and the hospital-specific 
rates.
    Similarly, for FY 2003, the original budget neutrality adjustment 
factor initially published in the FY 2003 IPPS final rule was 
subsequently revised. In conjunction with the implementation of the 
temporary equalization of the IPPS standardized amounts required by 
section 402(b) of Public Law 108-7, the budget neutrality adjustment 
factor was again revised based on wage index corrections.
    We note that we received a number of public comments of issues that 
were outside of the scope of the provisions of the proposed rule, and 
therefore, we are not responding to them in this final rule. These 
public comments related to the SCH FY 2006 hospital-specific rate, the 
SCH volume decrease adjustment, and the application of DSH payments to 
the hospital-specific rate.
    After considering the public comments we received and our findings 
regarding those comments, we are finalizing the policy discussed in the 
proposed rule to apply a cumulative budget neutrality adjustment factor 
to MDHs' FY 2002 hospital-specific rates to adjust for each fiscal year 
from 1993 forward, as is done for the Federal rate.

C. Rural Referral Centers (RRCs) (Sec.  412.96)

    Under the authority of section 1886(d)(5)(C)(i) of the Act, the 
regulations at Sec.  412.96 set forth the criteria that a hospital must 
meet in order to qualify under the IPPS as an RRC. For discharges that 
occurred before October 1, 1994, RRCs received the benefit of payment 
based on the other urban standardized amount rather than the rural 
standardized amount (as discussed in the FY 1993 IPPS final rule (59 FR 
45404 through 45409). Although the other urban and rural standardized 
amounts are the same for discharges occurring on or after October 1, 
1994, RRCs continue to receive special treatment under both the DSH 
payment adjustment and the criteria for geographic reclassification.
    Section 402 of Public Law 108-173 raised the DSH adjustment for 
RRCs such that they are not subject to the 12-percent cap on DSH 
payments applicable to other rural hospitals. RRCs are also not subject 
to the proximity criteria when applying for geographic 
reclassification. In addition, they do not have to meet the requirement 
that a hospital's average hourly wage must exceed, by a certain 
percentage, the average hourly wage of the labor market area where the 
hospital is located.
    Section 4202(b) of Public Law 105-33 states, in part, ``[a]ny 
hospital classified as an RRC by the Secretary * * * for fiscal year 
1991 shall be classified as such an RRC for fiscal year 1998 and each 
subsequent year.'' In the August 29, 1997 IPPS final rule with comment 
period (62 FR 45999), CMS reinstated RRC status for all hospitals that 
lost the status due to triennial review or MGCRB reclassification. 
However, CMS did not reinstate the status of hospitals that lost RRC 
status because they were now urban for all purposes because of the OMB 
designation of their geographic area as urban. Subsequently, in the 
August 1, 2000 IPPS final rule (65 FR 47089), we indicated that we were 
revisiting that decision. Specifically, we stated that we would permit 
hospitals that previously qualified as an RRC and lost their status due 
to OMB redesignation of the county in which they are located from rural 
to urban, to be reinstated as an RRC. Otherwise, a hospital seeking RRC 
status must satisfy all of the other applicable criteria. We use the 
definitions of ``urban'' and ``rural'' specified in Subpart D of 42 CFR 
part 412. One of the criteria under which a hospital may qualify as an 
RRC is to have 275 or more beds available for use (Sec.  
412.96(b)(1)(ii)). A rural hospital that does not meet the bed size 
requirement can qualify as an RRC if the hospital meets two mandatory 
prerequisites (a minimum CMI and a minimum number of discharges), and 
at least one of three optional criteria (relating to specialty 
composition of medical staff, source of inpatients, or referral 
volume). (We refer readers to Sec.  412.96(c)(1) through (c)(5) and the 
September 30, 1988 Federal Register (53 FR 38513).) With respect to the 
two mandatory prerequisites, a hospital may be classified as an RRC 
if--
    <bullet> The hospital's CMI is at least equal to the lower of the 
median CMI for urban hospitals in its census region, excluding 
hospitals with approved teaching programs, or the median CMI for all 
urban hospitals nationally; and
    <bullet> The hospital's number of discharges is at least 5,000 per 
year, or, if fewer, the median number of discharges for urban hospitals 
in the census region in which the hospital is located. (The number of 
discharges criterion for an osteopathic hospital is at least 3,000 
discharges per year, as specified in section 1886(d)(5)(C)(i) of the 
Act.)
1. Case-Mix Index (CMI)
    Section 412.96(c)(1) provides that CMS establish updated national 
and regional CMI values in each year's annual notice of prospective 
payment rates for purposes of determining RRC status. The methodology 
we used to determine the national and regional CMI values is set forth 
in the regulations at Sec.  412.96(c)(1)(ii). The national median CMI 
value for FY 2010 includes data from all urban hospitals nationwide, 
and the regional values for FY 2010 are the median CMI values of urban 
hospitals within each census region, excluding those hospitals with 
approved teaching programs (that is, those hospitals that train 
residents in an approved GME program as provided in Sec.  413.75). 
These values are based on discharges occurring during FY 2008 (October 
1, 2007 through September 30, 2008), and include bills posted to CMS' 
records through March 2009.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24185), 
we proposed that, in addition to meeting other criteria, if rural 
hospitals with fewer than 275 beds are to qualify for initial RRC 
status for cost reporting periods beginning on or after October 1, 
2009, they must have a CMI value for FY 2008 that is at least--
    <bullet> 1.4667; or
    <bullet> The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  413.75) calculated by CMS for the census region in 
which the hospital is located.
    Based on the latest available data (FY 2008 bills received through 
March 2009), in addition to meeting other criteria, if rural hospitals 
with fewer than 275 beds are to qualify for initial RRC status for cost 
reporting periods beginning on or after October 1, 2009, they must have 
a CMI value for FY 2008 that is at least--
    <bullet> 1.4669; or
    <bullet> The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  413.75) calculated by CMS for the census region in 
which the hospital is located.

[[Page 43898]]

    The final median CMI values by region are set forth in the 
following table:

------------------------------------------------------------------------
                                                               Case-mix
                           Region                            index value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)....................       1.2612
2. Middle Atlantic (PA, NJ, NY)............................       1.3011
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).....       1.4212
4. East North Central (IL, IN, MI, OH, WI).................       1.3994
5. East South Central (AL, KY, MS, TN).....................       1.3311
6. West North Central (IA, KS, MN, MO, NE, ND, SD).........       1.4045
7. West South Central (AR, LA, OK, TX).....................       1.4692
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)...............       1.5217
9. Pacific (AK, CA, HI, OR, WA)............................       1.4298
------------------------------------------------------------------------

    A hospital seeking to qualify as an RRC should obtain its hospital-
specific CMI value (not transfer-adjusted) from its fiscal intermediary 
or MAC. Data are available on the Provider Statistical and 
Reimbursement (PS&R) System. In keeping with our policy on discharges, 
the CMI values are computed based on all Medicare patient discharges 
subject to the IPPS MS-DRG-based payment.
2. Discharges
    Section 412.96(c)(2)(i) provides that CMS set forth the national 
and regional numbers of discharges in each year's annual notice of 
prospective payment rates for purposes of determining RRC status. As 
specified in section 1886(d)(5)(C)(ii) of the Act, the national 
standard is set at 5,000 discharges. In the FY 2010 IPPS/RY 2010 LTCH 
PPS proposed rule (74 FR 24186) we proposed to update the regional 
standards based on discharges for urban hospitals' cost reporting 
periods that began during FY 2007 (that is, October 1, 2006 through 
September 30, 2007), which were the latest cost report data available 
at the time the proposed rule was developed.
    Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we 
proposed that, in addition to meeting other criteria, a hospital, if it 
is to qualify for initial RRC status for cost reporting periods 
beginning on or after October 1, 2009, must have as the number of 
discharges for its cost reporting period that began during FY 2007 a 
figure that is at least--
    <bullet> 5,000 (3,000 for an osteopathic hospital); or
    <bullet> The median number of discharges for urban hospitals in the 
census region in which the hospital is located. (We refer readers to 
the table set forth in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
at 74 FR 24186.)
    Based on the latest discharge data available at this time, that is, 
for cost reporting periods that began during FY 2007, the final median 
number of discharges for urban hospitals by census region are set forth 
in the following table.

------------------------------------------------------------------------
                                                              Number of
                           Region                             Discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)....................        8,347
2. Middle Atlantic (PA, NJ, NY)............................       10,729
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).....       10,725
4. East North Central (IL, IN, MI, OH, WI).................        9,282
5. East South Central (AL, KY, MS, TN).....................        7,281
6. West North Central (IA, KS, MN, MO, NE, ND, SD).........        8,636
7. West South Central (AR, LA, OK, TX).....................        7,254
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)...............        9,823
9. Pacific (AK, CA, HI, OR, WA)............................        8,715
------------------------------------------------------------------------

    We note that the median number of discharges for hospitals in each 
census region is greater than the national standard of 5,000 
discharges. Therefore, 5,000 discharges is the minimum criterion for 
all hospitals.
    We reiterate that, if an osteopathic hospital is to qualify for RRC 
status for cost reporting periods beginning on or after October 1, 
2009, the hospital would be required to have at least 3,000 discharges 
for its cost reporting period that began during FY 2007.

D. Indirect Medical Education (IME) Adjustment (Sec.  412.105)

1. Background
    Section 1886(d)(5)(B) of the Act provides for an additional payment 
amount under the IPPS for hospitals that have residents in an approved 
graduate medical education (GME) program in order to reflect the higher 
indirect patient care costs of teaching hospitals relative to 
nonteaching hospitals. The regulations regarding the calculation of 
this additional payment, known as the indirect medical education (IME) 
adjustment, are located at Sec.  412.105.
    Public Law 105-33 (BBA 1987) established a limit on the number of 
allopathic and osteopathic residents that a hospital may include in its 
full-time equivalent (FTE) resident count for direct GME and IME 
payment purposes. Under section 1886(h)(4)(F) of the Act, for cost 
reporting periods beginning on or after October 1, 1997, a hospital's 
unweighted FTE count of residents for purposes of direct GME may not 
exceed the hospital's unweighted FTE count for its most recent cost 
reporting period ending on or before December 31, 1996. Under section 
1886(d)(5)(B)(v) of the Act, a similar limit on the FTE resident count 
for IME purposes is effective for discharges occurring on or after 
October 1, 1997.
2. IME Adjustment Factor for FY 2010
    The IME adjustment to the MS-DRG payment is based in part on the 
applicable IME adjustment factor. The IME adjustment factor is 
calculated by using a hospital's ratio of residents to beds, which is 
represented as r, and a formula multiplier, which is represented as c, 
in the following equation: c x [{1 + r{time}  \.405\-1]. The formula is 
traditionally described in terms of a certain percentage increase in 
payment for every 10-percent increase in the resident-to-bed ratio.
    Section 502(a) of Public Law 108-173 modified the formula 
multiplier (c) to be used in the calculation of the IME adjustment. 
Prior to the enactment of Public Law 108-173, the formula multiplier 
was fixed at 1.35 for discharges occurring during FY 2003 and 
thereafter. In the FY 2005 IPPS final rule, we announced the schedule 
of formula multipliers to be used in the calculation of the IME 
adjustment and incorporated the schedule in our regulations at Sec.  
412.105(d)(3)(viii) through (d)(3)(xii). Section 502(a) modified the 
formula multiplier beginning midway through FY 2004 and provided for a 
new schedule of formula multipliers for FYs 2005 and thereafter as 
follows:
    <bullet> For discharges occurring on or after April 1, 2004, and 
before October 1, 2004, the formula multiplier is 1.47.
    <bullet> For discharges occurring during FY 2005, the formula 
multiplier is 1.42.
    <bullet> For discharges occurring during FY 2006, the formula 
multiplier is 1.37.
    <bullet> For discharges occurring during FY 2007, the formula 
multiplier is 1.32.
    <bullet> For discharges occurring during FY 2008 and fiscal years 
thereafter, the formula multiplier is 1.35.
    Accordingly, for discharges occurring during FY 2010, the formula 
multiplier is 1.35. We estimate that application of this formula 
multiplier for the FY 2010 IME adjustment will result in an increase in 
IPPS payment of 5.5 percent for every approximately 10-percent increase 
in the hospital's resident-to-bed ratio.
    We did not receive any public comments specifically on the IME 
adjustment factor.

[[Page 43899]]

3. IME-Related Changes in Other Sections of This Final Rule
    We refer readers to section V.E.2. and 4. of the preamble of this 
final rule for a discussion of changes to the policies for counting 
beds and patient days in relation to the calculations for the IME 
adjustment at Sec.  412.105(b) and the DSH payment adjustment at Sec.  
412.106(a)(1)(ii). We also address the public comments we received in 
section V.E.2. and 4. of this preamble. The regulations relating to the 
DSH payment adjustment at Sec.  412.106(a)(1)(i) cross-reference the 
IME regulation at Sec.  412.105(b), which specifies how the number of 
beds in a hospital is determined for purposes of calculating a teaching 
hospital's IME adjustment. Specifically, as we proposed, we are 
changing our policies with respect to counting bed days for patients 
receiving observation services.
    We also refer readers to section V.G.2. of the preamble of this 
final rule for a discussion of our clarification of the definition of a 
new medical residency training program for purposes of Medicare direct 
GME payment and the public comments that we received on our proposed 
clarification and our responses. This clarification also will apply for 
purposes of IME payment and could affect IME FTE resident cap 
adjustments for new medical residency training programs. We also 
address any public comments that we received on this clarification in 
section V.G.2. of this preamble.

E. Payment Adjustment for Medicare Disproportionate Share Hospitals 
(DSHs) (Sec.  412.106)

1. Background
    Section 1886(d)(5)(F) of the Act provides for additional Medicare 
payments to subsection (d) hospitals that serve a significant 
disproportionate number of low-income patients. The Act specifies two 
methods by which a hospital may qualify for the Medicare 
disproportionate share hospital (DSH) adjustment. Under the first 
method, hospitals that are located in an urban area and have 100 or 
more beds may receive a Medicare DSH payment adjustment if the hospital 
can demonstrate that, during its cost reporting period, more than 30 
percent of its net inpatient care revenues are derived from State and 
local government payments for care furnished to needy patients with low 
incomes. This method is commonly referred to as the ``Pickle method.'' 
The second method for qualifying for the DSH adjustment, which is the 
most common, is based on a complex statutory formula under which the 
DSH payment adjustment is based on the hospital's geographic 
designation, the number of beds in the hospital, and the level of the 
hospital's disproportionate patient percentage (DPP). A hospital's DPP 
is the sum of two fractions: The ``Medicare fraction'' and the 
``Medicaid fraction.'' The Medicare fraction is computed by dividing 
the number of the hospital's inpatient days that are furnished to 
patients who were entitled to both Medicare Part A (including patients 
who are enrolled in a Medicare Advantage (Part C) plan) and 
Supplemental Security Income (SSI) benefits by the hospital's total 
number of patient days furnished to patients entitled to benefits under 
Medicare Part A (including patients who are enrolled in a Medicare 
Advantage (Part C) plan). The Medicaid fraction is computed by dividing 
the hospital's number of inpatient days furnished to patients who, for 
such days, were eligible for Medicaid, but were not entitled to 
benefits under Medicare Part A, by the hospital's total number of 
inpatient days in the same period.
    Because the DSH payment adjustment is part of the IPPS, the DSH 
statutory references (under section 1886(d)(5)(F) of the Act) to 
``days'' apply only to inpatient days. Regulations located at 42 CFR 
412.106 govern the Medicare DSH payment adjustment and specify how the 
DPP is calculated as well as how beds and patient days are counted in 
determining the Medicare DSH payment adjustment. Under Sec.  
412.106(a)(1)(i), the number of beds for the Medicare DSH payment 
adjustment is determined in accordance with bed counting rules for the 
IME adjustment under Sec.  412.105(b).
    In section V.E.4. of this preamble, we are combining our discussion 
of changes to the policies for counting beds in relation to the 
calculations for the IME adjustment at Sec.  412.105(b) and the DSH 
payment adjustment at Sec.  412.106(a)(1) because the underlying 
concepts are similar and we believe they should generally be 
interpreted in a consistent manner for both purposes. Specifically, as 
we proposed, we are changing our Medicare DSH policies with respect to 
counting patient days and bed days, as well as IME bed counting policy, 
for patients receiving observation services.
2. Policy Change Relating to the Inclusion of Labor and Delivery 
Patient Days in the Medicare DSH Calculation
a. Background
    As discussed in the FY 2004 IPPS final rule (68 FR 45419 through 
45420), prior to December 1991, Medicare's policy on counting days for 
purposes of allocating costs on the cost report and for purposes of the 
DSH payment adjustment for maternity patients was to count an inpatient 
day for an admitted maternity patient in a labor and delivery room at 
the census-taking hour. This pre-December 1991 policy is consistent 
with current Medicare policy for counting days for admitted patients in 
any other ancillary department at the census-taking hour. However, 
based on decisions in a number of Federal Courts of Appeal, including 
the United States Court of Appeals for the District of Columbia 
Circuit, relating to Medicare's policy for allocating costs, the policy 
regarding the counting of inpatient days for maternity patients was 
revised to reflect our existing policy for purposes of both cost 
allocation and the DSH calculation.
    Under the existing regulations at Sec.  412.106(a)(1)(ii)(B), 
patient days associated with beds used for ancillary labor and delivery 
are excluded from the Medicare DSH calculation. This policy, in part, 
is based on cost allocation rules (that is, rules for counting days for 
admitted patients in ancillary and routine cost centers for purposes of 
allocating costs on the Medicare cost report). In particular, section 
2205.2 of the Provider Reimbursement Manual (PRM) provides the 
following: ``A maternity patient in the labor/delivery room ancillary 
area at midnight is included in the census of the inpatient routine 
(general or intensive) care area only if the patient has occupied an 
inpatient routine bed at some time since admission. No days of 
inpatient routine care are counted for a maternity inpatient who is 
discharged (or dies) without ever occupying an inpatient routine bed. 
However, once a maternity patient has occupied an inpatient routine 
bed, at each subsequent census the patient is included in the census of 
the inpatient routine care area to which assigned even if the patient 
is located in an ancillary area (labor/delivery room or another 
ancillary area) at midnight. In some cases, a maternity patient may 
occupy an inpatient bed only on the day of discharge, where the day of 
discharge differs from the day of admission. For purposes of 
apportioning the cost of inpatient routine care, this single day of 
routine care is counted as the day of admission (to routine care) and 
discharge and, therefore, is counted as one day of inpatient routine 
care.''
    In applying the rules discussed above, if, for example, a Medicaid 
patient is in the labor room at the census-taking hour and has not yet 
occupied a routine inpatient bed, the day would not be counted as an 
inpatient day in the

[[Page 43900]]

numerator or the denominator of the Medicaid fraction of the Medicare 
DPP. If, instead, the same patient were in the labor room at the 
census-taking hour, but had first occupied a routine inpatient bed, the 
day would be counted as an inpatient patient day in both the numerator 
and the denominator of the Medicaid fraction of the Medicare DPP for 
purposes of the DSH payment adjustment (and for apportioning the cost 
of routine care on the Medicare cost report).
    We further clarified this policy in the FY 2004 IPPS final rule (68 
FR 45419 through 45420), given that hospitals had increasingly begun 
redesigning their maternity areas from separate labor and delivery 
rooms and postpartum rooms to single multipurpose labor, delivery, and 
postpartum (LDP) rooms. In order to appropriately track the days and 
costs associated with LDP rooms under our existing Medicare DSH policy, 
we stated that it was necessary to apportion them between the labor and 
delivery cost center, which is an ancillary cost center, and the 
routine adults and pediatrics cost center (68 FR 45420). This is done 
by determining the proportion of a patient's stay in the LDP room that 
is associated with the patient receiving ancillary services (labor and 
delivery), as opposed to routine adult and pediatric services 
(postpartum).
    Therefore, under the current policy, days associated with labor and 
delivery services furnished to patients who did not occupy a routine 
bed prior to occupying an ancillary labor and delivery bed before the 
census-taking hour are not included as inpatient days for purposes of 
the DSH calculation. This policy is applicable whether the hospital 
maintains separate labor and delivery rooms and postpartum rooms, or 
whether it maintains ``maternity suites'' in which labor, delivery, and 
postpartum services all occur in the same bed. However, in the latter 
case, patient days are counted proportionally based on the proportion 
of (routine/ancillary) services furnished. (We refer readers to the 
example provided in the FY 2004 IPPS final rule (68 FR 45420) that 
describes how routine and ancillary days are allocated under this 
policy.)
b. Proposed and Final Policy Change
    As we indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24188), upon further examination of our existing policy on 
counting patient days, we no longer believe that it is appropriate to 
apply the cost allocation rules for purposes of counting labor and 
delivery patient days in the Medicare DSH calculation. That is, we 
believe that even if a particular labor and delivery patient day is not 
included in the inpatient routine care census-taking for purposes of 
apportioning routine costs, it may still reasonably be considered to be 
an inpatient day for purposes of determining the DPP, provided that the 
unit or ward in which the labor and delivery bed is located is 
generally providing services that are payable under the IPPS. In 
general, we believe the costs associated with labor and delivery 
patient days (regardless of whether they are associated with patients 
who occupied a routine bed prior to occupying an ancillary labor and 
delivery bed) are generally payable under the IPPS. Therefore, we 
believe that such patient days should be included in the DPP as 
inpatient days once the patient has been admitted to the hospital an as 
inpatient. Accordingly, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule, for cost reporting periods beginning on or after October 1, 2009, 
we proposed to change our existing policy regarding patient days to 
include, in the DPP calculation, patient days associated with maternity 
patients who were admitted as inpatients and were receiving ancillary 
labor and delivery services at the time the inpatient routine census is 
taken, regardless of whether the patient occupied a routine bed prior 
to occupying a bed in a distinct ancillary labor and delivery room and 
regardless of whether the patient occupied a routine bed prior to 
occupying an ancillary labor and delivery bed and regardless of whether 
the patient occupies a ``maternity suite'' in which labor, delivery, 
recovery, and postpartum care all take place in the same room. We 
believed that this proposed policy would be consistent with our 
existing policy under section 2205 of the PRM-I regarding counting 
patient days associated with other ancillary areas (such as surgery and 
postanesthesia).
    We note that we did not propose to change our policy on patient 
days for labor and delivery patients who are not admitted to the 
hospital as inpatients. For example, if a woman presents at a hospital 
for labor and delivery services, but is determined by medical staff to 
be in false labor and is sent home without ever being admitted to the 
hospital as an inpatient, any days associated with such services 
furnished by the hospital would not be included in the DPP for purposes 
of the Medicare DSH calculation. That is, because the patient would be 
considered an outpatient, the day (or days) associated with the 
hospital visit would not be counted for purposes of the Medicare DSH 
calculation because such days would not be considered inpatient days. 
In addition, we indicated that the proposed policy would not affect 
existing policies relating to the allocation of costs for Medicare cost 
reporting purposes or for determining the number of available beds 
under Sec.  412.105(b)(4) or Sec.  412.106(a)(1)(i). In other words, 
our hospital instructions in the PRM-I for those purposes remain 
unchanged and unaffected by the proposed policy.
    Comment: Several commenters supported the proposal. Specifically, 
the commenters asserted that they agreed with CMS' statement that, 
because inpatient labor and delivery days are generally payable under 
the IPPS, they should be included in the DSH calculation. Some 
commenters commended CMS for revisiting its policy.
    Response: We thank the commenters for their support.
    Comment: One commenter opposed the proposal. The commenter stated 
that CMS should continue to exclude labor and delivery patient days 
associated with patients who did not occupy a routine bed prior to 
occupying a labor and delivery bed. The commenter asserted that 
``historical litigation has already resulted in a conclusion that labor 
and delivery days should be excluded from the cost allocation rules 
[and that] this recognition of the different nature of labor and 
delivery days is inconsistent with CMS' proposal to now treat those 
days exactly the same as routine days for all patients who are 
admitted.''
    Response: As we stated in the proposed rule (74 FR 24188), upon 
further examination of our existing policy on counting patient days, we 
no longer believe that it is appropriate to apply the cost allocation 
rules for purposes of counting labor and delivery patient days in the 
Medicare DSH calculation. That is, we believe that even if a particular 
labor and delivery patient day is not included in the inpatient routine 
care census-taking for purposes of apportioning routine costs, it may 
still reasonably be considered to be an inpatient day for purposes of 
determining the DPP, provided that the unit or ward in which the labor 
and delivery bed is located is generally providing services that are 
payable under the IPPS. We disagree that the rules for patient days 
included for purposes of cost allocation must mirror those included for 
purposes of Medicare DSH. We note that we did not propose to change the 
cost allocation rules and that to the extent that labor and delivery 
patient days are excluded for cost

[[Page 43901]]

allocation purposes, that policy is unaffected by our proposed policy 
for Medicare DSH purposes.
    Comment: One commenter requested clarification that labor and 
delivery patient days will be counted only for DSH purposes and not for 
other patient day allocation purposes. The commenter asked that CMS 
confirm that a separate line would be added to Worksheet S-3 of the 
Medicare cost report to accommodate the reporting.
    Response: As we indicated in the proposed rule, the proposed policy 
would not change existing underlying policies relating to the 
allocation of costs for Medicare cost reporting purposes. We will 
provide cost reporting instructions (at a later time) to reflect the 
revised policy.
    Comment: Several commenters requested additional clarification of 
how the proposed policy would be applied. Specifically, the commenters 
asked how cost reports that had appealed the exclusion of labor and 
delivery days and cost reports that were either still open or 
``reopenable'' would be treated. Some commenters referenced a recent 
Administrator's decision (``QRS CHW DSH Labor Room Days Groups vs. Blue 
Cross Blue Shield Association/United Government Services LLC-CA'' 
signed April 13, 2009) that allowed the inclusion of patient days 
associated with labor, delivery, and postpartum beds for a group of 
hospitals located in the Ninth Circuit Court of Appeals for fiscal 
years prior to FY 2004. One commenter asked whether hospitals located 
in the Ninth Circuit would be treated differently with respect to the 
inclusion of labor and delivery days for periods prior to October 1, 
2009. Other commenters noted that there were several appeals pending on 
the issue of the exclusion of labor and delivery days currently pending 
at the Provider Review and Reimbursement Board (PRRB) and stated that 
it would be equitable to allow all hospitals with open cost reports and 
or appeals on this issue to count all labor and delivery inpatient days 
because it would be CMS' policy to include the days going forward. One 
commenter noted that, in the FY 2004 IPPS final rule, when CMS provided 
guidance for apportioning day in labor-delivery-postpartum rooms, the 
policy was applied to all currently open and future cost reports and 
suggested that the FY 2010 proposed policy also be applied to all open 
cost reports.
    Response: In response to the commenters who asked how the proposed 
policy would affect previous cost reporting periods, our proposal to 
include labor and delivery days in the DSH calculation for cost 
reporting periods beginning on or after October 1, 2009, is a change in 
policy that stemmed from a reevaluation of the existing policy. We 
believe that both the existing policy and the proposed new policy, 
although different, are permissible and reasonable interpretations of 
the law. Accordingly, we are applying the new policy prospectively to 
future cost reporting periods. Prior cost reporting periods would be 
covered under the policies that existed in those corresponding periods. 
With regard to the above-referenced Administrator's decision, we 
believe it is beyond the scope of this rule, as the decision was not 
based on the underlying labor and delivery policy but turned instead 
upon the 9th Circuit's interpretation of the regulation governing the 
counting of patient days prior to 2004. Consequently, that decision 
addresses only cost reporting years prior to 2004 for hospitals located 
in the 9th Circuit. Therefore, the Administrator's decision does not 
affect the proposed policy that we are adopting in this final rule. In 
response to the comment regarding hospitals that filed appeals on the 
exclusion of labor and delivery patient days, we note that such cases 
will continue to be handled through the administrative appeals process.
    In response to the commenters who suggested that the proposed 
policy apply to all open cost reports, similar to the FY 2004 final 
IPPS policy relating to labor-delivery-postpartum rooms (68 FR 45420), 
we remind the commenter that the FY 2004 policy was a clarification of 
existing policy; whereas this year's proposed policy is a new policy. 
Accordingly, we cannot apply a new policy to prior cost reporting 
periods.
    Comment: One commenter noted that the proposed policy would 
continue to apply only to individuals who were admitted as inpatients. 
The commenter asked whether a patient who was not admitted as an 
inpatient at the time she began receiving labor and delivery ancillary 
services, but was later admitted as an inpatient, would have all days 
counted for purposes of the Medicare DSH adjustment or only the days 
subsequent to the admission as an inpatient. The commenter also noted 
that some hospitals use the term ``admitted'' loosely and sometimes 
consider any patient that presents to the hospital to be admitted 
either as an inpatient or an outpatient; the commenter asked whether 
CMS could develop a specific definition of when a patient is admitted.
    Response: Because the Medicare DSH adjustment is an add-on payment 
to the IPPS payment rate, only the days for individuals who are 
admitted as inpatients may be included in the DSH calculation. Days 
prior to admission as an inpatient may not be included. We note that 
standards for inpatient admission already exist, but that the 
determination to admit a patient is made by the physician who signs the 
admitting orders. We do not believe it is necessary to create a new 
standard for inpatient admissions.
    Comment: One commenter stated that CMS posited a link between 
available days for determining the IME payment adjustment and days that 
are used for calculation the disproportionate patient percentage for 
DSH. The commenter stated that available days used to calculate IME 
payment adjustments are unrelated to the Medicare statute that 
discusses days for DSH purposes and asked that CMS clarify how days for 
the IME and DSH calculations are related.
    Response: We note that the Medicare DSH proposal relating to 
patient days associated with labor and delivery services specifically 
referenced patient days and that the IME adjustment was not mentioned 
in the context of this proposal. The IME adjustment was addressed, 
however, in the Medicare DSH proposal related to available bed days 
(and patient days) associated with observation services. As we have 
noted, under Sec.  412,106(a)(1)(i), the number of beds for the 
Medicare DSH payment adjustment is determined in accordance with bed 
counting rules for the IME adjustment under Sec.  412.105(b). 
Accordingly, we combined our discussion of proposed changes to the 
policies for counting beds with regard to observation services for both 
the IME and DSH payment adjustments. Both IME and DSH adjustments are 
additional payments under the IPPS system. Therefore, to the extent 
that both adjustments include available bed day counts, we believe that 
the available bed day count generally should be consistent for both 
adjustments.
    After consideration of the public comments received, we are 
finalizing our proposed policy, without modification, to include 
patient days associated with patients occupying labor and delivery beds 
in the disproportionate patient percentage of the Medicare DSH 
adjustment for cost reporting periods beginning on or after October 1, 
2009, under Sec.  412.106(a)(1)(ii).

[[Page 43902]]

3. Policy Change Relating to Calculation of Inpatient Days in the 
Medicaid Fraction in the Medicare DSH Calculation
a. Background
    As stated under section V.E.1. of this preamble, a hospital can 
qualify for the Medicare DSH payment adjustment based on its Medicare 
DPP, which is equal to the sum of the percentage of total Medicare 
inpatient days attributable to patients entitled to both Medicare Part 
A (including patients enrolled in Medicare Advantage (Part C)) and SSI 
and the percentage of total inpatient days attributable to patients 
eligible for Medicaid, but not entitled for Medicare Part A.
[GRAPHIC] [TIFF OMITTED] TR27AU09.191

    Our existing policy of aggregating days for the Medicare fraction 
of the DSH calculation is to count days by the date of discharge. This 
policy, which is specified in the regulations at Sec.  
412.106(b)(2)(i)(A), applies to how days are counted in both the 
numerator and denominator of the Medicare fraction.
    Under the existing Medicare DSH payment adjustment policy, a 
hospital is required to report its Medicaid inpatient days (that is, 
the ``numerator'' of the Medicaid fraction) in the cost reporting 
period in which the patient was discharged. However, despite our 
existing policy to count the days in the numerator of the Medicaid 
fraction based on the date of discharge, we believe that there may have 
been confusion about the existing policy that may have led hospitals to 
vary in the methodology they use to aggregate days in the numerator of 
the Medicaid fraction for patients who were eligible for Medicaid. In 
many cases, we have found that hospitals are reporting these days to 
their fiscal intermediary or MAC based on the method by which their 
respective State Medicaid agencies have chosen to collect and report 
Medicaid-eligible days to the hospital. We understand that State 
Medicaid agencies differ in how they collect and report Medicaid-
eligible days. As a result, hospitals may be counting Medicaid-eligible 
days in the numerator of the Medicaid fraction of the DPP based on one 
of several possible methodologies, rather than consistently counting 
days based on the date of discharge, as required under the existing 
policy. The various methodologies being used by State Medicaid agencies 
include date of discharge, date of admission, date of Medicaid payment, 
and dates of service. As we indicated in the FY 2010 IPPS/RY 2010 LTCH 
PPS proposed rule (74 FR 24188 through 24189), with the exception of 
the methodology that accumulates days in the numerator of the Medicaid 
fraction by the date of Medicaid payment, we believe that any of these 
methodologies could appropriately capture all inpatient days in which 
an individual was Medicaid-eligible for a hospital for the purpose of 
counting days in the numerator of the Medicaid fraction used in the 
DPP. We do not believe that the date of Medicaid payment is appropriate 
because our policy is to include inpatient days for which the patient 
was eligible for Medicaid, regardless of whether Medicaid paid for the 
days. Therefore, we believe that the date of Medicaid payment 
methodology may not capture all of the days that a hospital would be 
allowed to include in the numerator of its Medicaid fraction. With 
respect to the other possible alternatives to counting days in the 
numerator of the Medicaid fraction, we believe that it becomes 
problematic when hospitals change the methodology they use to count 
days in the numerator of the Medicaid fraction from one cost reporting 
period to the next. Such changes in the methodology of counting days 
may result in ``double counting'' of the same patient days in more than 
one cost reporting period for a hospital.
b. Proposed and Final Policy Change
    To address the issue of hospitals reporting days in the numerator 
for the Medicaid fraction of the DPP in the Medicare DSH calculation 
based on data they receive from their respective State Medicaid agency 
and the fact that the State Medicaid agency may report such days based 
on one of several different methodologies, in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule (74 FR 24188 through 24189), we proposed to 
revise our existing policy by adding a new paragraph (iv) to Sec.  
412.106(b)(4) to allow hospitals to report days in the numerator of the 
Medicaid fraction of the DPP based on one of three methodologies. 
Specifically, we proposed that, effective for cost reporting periods 
beginning on or after October 1, 2009, a hospital may report Medicaid-
eligible days in the numerator of the Medicaid fraction of the DPP of a 
cost reporting period based on date of admission, date of discharge, or 
dates of service. However, we indicated that under the proposed revised 
policy, a hospital would be required to notify CMS (through the fiscal 
intermediary or MAC) in writing if the hospital chooses to change its 
methodology of counting days in the numerator of the Medicaid fraction 
of the DPP. We proposed to require that the written notification be 
submitted at least 30 days prior to the beginning of the cost reporting 
period to which the requested change would apply. The written 
notification must specify the changed methodology the hospital wishes 
to use and the cost reporting period to which the requested change 
would apply. We proposed that a hospital would only be able to make 
such a change effective on the first day of the beginning of a cost 
reporting period and the change would have to be effective for the 
entire cost reporting period; that is, a hospital would not be 
permitted to change its methodology in the middle of a cost reporting 
period. This change would also be effective for all subsequent cost 
reporting periods unless the hospital submits a subsequent notification 
to change its methodology for a future cost reporting period. We noted 
that we would expect that a hospital would rarely decide to change the 
methodology it uses to count days in the numerator of the Medicaid 
fraction of the DPP and that such a change would be prompted out of 
necessity (for example, the State Medicaid agency changes the 
methodology it uses to provide patient Medicaid eligibility information 
to hospitals). In addition, we proposed that if a hospital changes its 
methodology for counting days in the numerator of the Medicaid 
fraction, CMS, or the fiscal intermediary or MAC, would have the 
authority to adjust the inpatient days reported by the hospital in a 
cost reporting period to prevent ``double counting'' of days in the 
numerator of the Medicaid fraction of the DPP of the Medicare DSH 
calculation reported in another cost reporting period.
    Comment: Several commenters supported the proposed change to allow

[[Page 43903]]

hospitals to choose one of three methodologies to report Medicaid-
eligible days in the numerator of the Medicaid fraction of the DPP. The 
commenters stated that they supported the flexibility that the proposed 
change afforded to hospitals. They noted that a rigid methodology of 
aggregating inpatient days is an administrative burden for hospitals if 
the methodology differs from that used by the hospital's State Medicaid 
agency to verify Medicaid eligibility. The commenters stated that the 
proposal could alleviate the administrative burden on hospitals.
    Response: We thank the commenters for their support.
    Comment: Several commenters requested that CMS confirm that the 
choice of methodology as addressed by the proposed change to Sec.  
412.106(b)(4)(iv) is determined by the hospitals and not the fiscal 
Intermediary and/or MAC. One commenter asked that CMS modify the 
proposed regulatory text to say that the choice of methodology for 
accumulating inpatient days be ``at the hospital's discretion.'' 
Another commenter stated that, under the existing policy, ``there have 
been instances in which the hospital has reported Medicaid inpatient 
days based on discharge but the FI/MAC changed that method to reflect 
days on and admission basis upon audit'' and asked that CMS clarify 
that date of discharge be used for prior periods, consistent with 
existing Medicare policy. The commenter also stated that the choice of 
methodology is ``not a change that can be made by the FI/MAC upon 
settlement.''
    Response: We reiterate and confirm that the proposed policy would 
allow hospitals to report Medicaid-eligible days in the numerator of 
the Medicaid fraction of the DPP of a cost reporting period based on 
date of admission, date of discharge, or dates of service, effective 
for cost reporting periods beginning on or after October 1, 2009. We 
disagree that additional regulatory language is needed to clarify this 
provision.
    The proposed policy also provides CMS and the fiscal intermediary 
or MAC the authority to adjust the inpatient days reported by the 
hospital in a cost reporting period to prevent ``double counting'' of 
days in the numerator of the Medicaid fraction of the DPP of the 
Medicare DSH calculation reported in another cost reporting period if a 
hospital changes its methodology. In response to the request for 
clarification that the choice of methodology is to be made by the 
hospital, not the fiscal intermediary or MAC, we reiterate that under 
the proposed policy, the provider may choose one of the three 
methodologies proposed. The fiscal intermediary or MAC would not choose 
a methodology for the hospital, but would have the authority to make an 
adjustment to ensure that no inpatient days are counted more than once 
in any cost reporting period. This adjustment would not affect the 
methodology chosen by the hospital for that or any subsequent cost 
reporting periods.
    In response to the commenters question about existing Medicare 
policy with respect to aggregating inpatient days for the numerator of 
the Medicaid fraction of the DPP, we agree with the commenters' 
statement that the fiscal intermediary or MAC should not revise cost 
reports to reflect any methodology other than date of discharge under 
the existing policy.
    Comment: Several commenters expressed concern that ``hospitals 
would be allowed to manipulate calculations from year to year'' and 
that there was a need to ``avoid hospitals `gaming' the system.'' These 
commenters stressed the importance of consistency in the calculations 
over time. One commenter suggested that CMS should not allow hospitals 
to change methodologies, but insist that hospitals make a one-time 
election of methodology. Another commenter recommended that, instead of 
allowing hospitals to choose a methodology, CMS should select the 
methodology that hospitals should use to accumulate inpatient days in 
the numerator of the Medicaid fraction of the DPP of the Medicare DSH 
calculation. Another comment recommended that CMS should require 
hospitals to follow its State Medicaid agency's methodology. The 
commenter stated that this would be ``easier in terms of administration 
and verification of days,'' particularly for hospitals that serve 
Medicaid patient populations from multiple States. Another commenter 
suggested that CMS ask hospitals to submit their choice of methodology 
each year with the rationale for their choice to ensure that the 
decision to change their methodology is based on necessity. In 
addition, they asserted that the onus should rest on the hospitals to 
ensure that they are not ``double counting'' or claiming days to which 
they are not entitled.
    Response: We agree that consistency in the calculations so that no 
``double counting'' of days occurs from one cost reporting period to 
the next is important. In light of public comments supporting our 
proposal, we disagree that CMS should select the methodology for 
counting days in the numerator of the Medicaid fraction of the DPP, or 
require a hospital to follow its State Medicaid agency's methodology, 
or only allow hospitals to make a one-time election. We continue to 
believe in the appropriateness of providing hospitals with the 
flexibility to report Medicaid-eligible days in the numerator of the 
Medicaid fraction of the DPP of a cost reporting period based on date 
of admission, date of discharge, or dates of service, effective for 
cost reporting periods beginning on or after October 1, 2009. For 
example, if CMS were to select a methodology that differed from a 
hospital's current methodology and there was no ``double counting'' by 
the hospital because it had been using one methodology consistently, 
this would not improve the accuracy of the patient days reported in the 
numerator of the Medicaid fraction of the DPP but could potentially 
introduce an administrative burden on the hospital. Another example 
relates to if a State Medicaid agency were to change the method of 
verification they currently use. If CMS were to require a hospital to 
make a one-time election, and the hospital made an election that was 
identical to the State Medicaid agency's methodology, and the State 
Medicaid agency changed its methodology, the hospital would no longer 
have the flexibility to accumulate these days based on the State 
Medicaid agency's methodology to ensure the accuracy of the Medicaid 
fraction of the DPP calculation. We reaffirm that, under the proposed 
policy, hospitals would be permitted to change the methodology they 
employ from one cost reporting period to the next, to be effective on 
the first day of their cost reporting period for the entire period, so 
long as they notify the fiscal intermediary or MAC in writing at least 
30 days before the beginning of their cost reporting period for which 
the change would take effect.
    We note that other commenters supported the proposed policy in that 
it would provide hospitals with the flexibility to choose one of three 
methodologies to report Medicaid-eligible days. Allowing hospitals the 
flexibility to use date of discharge, date of admission, or dates of 
service but precluding ``double counting'' of days from year to year 
should a hospital choose to change methodologies will assure accuracy 
in the calculation. This would allow hospitals the ability to 
accommodate a State Medicaid agency's methodology but not necessarily 
require them to change their current methodology. The burden to report 
the correct number of patient days on its cost report remains with the 
hospital. In addition, under Sec.  412.106(b)(4)(iii) of

[[Page 43904]]

the regulations, we specify that, with respect to the Medicaid 
fraction, ``the hospital has the burden of furnishing data adequate to 
prove eligibility for each Medicaid patient day claimed under this 
paragraph, and of verifying with the State that a patient was eligible 
for Medicaid during each claimed patient hospital day.'' This 
responsibility for verification exists without regard to how a State 
Medicaid agency may accumulate information. In other words, if a 
hospital were to accept its State Medicaid agency's methodology, it 
would still be required to verify with the State the patient's 
eligibility during each claimed patient day. Finally, while we agree 
that there could be merit to collecting information from hospitals 
regarding their choice of methodology and rationale for such choice, we 
seek to be reasonable about the administrative burden placed on both 
hospitals and the fiscal intermediaries or MACs.
    As we indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24188 through 24189), we believe that date of discharge, date of 
admission, or date of service will appropriately capture all inpatient 
days in which an individual was Medicaid-eligible for a hospital for 
the purpose of counting days in the numerator of the Medicaid fraction 
used in the DPP. Because we believe all three methodologies could 
appropriately capture all relevant days, and our focus is generally 
only when ``double-counting'' occurs because hospitals change the 
methodology they use to count days in the numerator of the Medicaid 
fraction from one cost reporting period to the next, we do not believe 
that it is necessary for hospitals to submit to CMS the rationale for 
their change should they change methodologies.
    We also agree that the burden remains on the hospital to ensure 
that the hospital is not ``double counting'' days and reporting the 
correct number of patient days on their cost report. We believe that 
ensuring that hospitals are not double counting days should they choose 
to change methodologies is supported by existing DSH regulations as 
well as cost reporting requirements which state that hospitals must 
attest to the accuracy of the data that they submit on the cost report. 
However, we reiterate that the fiscal intermediary or MAC still has the 
authority to make any necessary adjustments to the number of days that 
the hospitals submitted on its cost report, to the extent that such 
days were already counted in another cost reporting period. Because 
existing policy with respect to accumulating days in the numerator of 
the Medicaid fraction of the DPP requires that the days be accumulated 
based on the date of discharge, if a hospital does not send the fiscal 
intermediary or MAC a written notice at least 30 days prior to the 
start of its next cost reporting period, CMS and the fiscal 
intermediary or MAC may presume that the hospital will accumulate 
inpatient days in the numerator of the Medicaid proxy of the Medicare 
DPP using the date of discharge.
    Comment: Several commenters asked for clarification about when a 
hospital must notify CMS and what the hospital must provide in that 
notification. In particular, one commenter noted that, in a May 6, 2009 
Hospital Open Door Forum, it was stated that hospitals should provide 
notification to CMS if they used a methodology other than date of 
discharge.
    Response: We reiterate that our proposed policy would require 
hospitals to submit the written notification to the fiscal intermediary 
or MAC at least 30 days prior to the beginning of the cost reporting 
period in which the requested change would apply. If a hospital is not 
changing the methodology that it uses, it is not required to notify the 
fiscal intermediary or MAC. Should a hospital choose to change its 
methodology, we require the hospital to provide written notification 
that specifies the new methodology the hospital wishes to use and the 
cost reporting period to which the requested change would apply. 
Because our current policy is that hospitals must report these days in 
the numerator of the Medicaid fraction by date of discharge, in the 
absence of such written notification, the fiscal intermediary or MAC 
may determine that the hospital is reporting these days using date of 
discharge and act accordingly to ensure that Medicaid patient days are 
not ``double counted'' in the numerator of the Medicaid fraction of the 
DPP for cost reporting periods beginning on or after October 1, 2009.
    Comment: Some commenters asked that CMS further clarify the 
methodology for determining total patient days in the denominator of 
the Medicaid proxy for the Medicare DSH calculation.
    Response: Our proposal made no changes to the way in which CMS 
requires hospitals to accumulate total patient days for the denominator 
of the Medicaid fraction of the DPP for the Medicare DSH calculation.
    After consideration of the public comments we received, we are 
finalizing, without modification, our proposal to revise our existing 
policy by adding a new paragraph (iv) to Sec.  412.106(b)(4) to allow 
hospitals to report days in the numerator of the Medicaid fraction of 
the DPP of the Medicare DSH calculation based on one of three 
methodologies. Specifically, we are finalizing our proposal that a 
hospital may report Medicaid-eligible days in the numerator of the 
Medicaid fraction of the DPP of a cost reporting period based on date 
of admission, date of discharge, or dates of service. The policy change 
is effective for cost reporting periods beginning on or after October 
1, 2009. A hospital is required to notify CMS (through the fiscal 
intermediary or MAC) in writing if the hospital chooses to change its 
methodology of counting days in the numerator of the Medicaid fraction 
of the DPP of the Medicare DSH calculation and must submit its written 
notification at least 30 days prior to the beginning of the cost 
reporting period to which the requested change would apply. The written 
notification must specify the changed methodology the hospital wishes 
to use and the cost reporting period to which the requested change 
would apply. As of the effective date of this policy, in the absence of 
such written notification, we clarify that CMS, the fiscal 
intermediary, or the MAC will determine a hospital to be using date of 
discharge and act accordingly to ensure that Medicaid patient days are 
not `double counted' in the numerator of the Medicaid fraction of the 
DPP for cost reporting periods beginning on or after October 1, 2009. 
In addition, we proposed that if a hospital changes its methodology for 
counting days in the numerator of the Medicaid fraction, CMS, or the 
fiscal intermediary or MAC, would have the authority to adjust the 
inpatient days reported by the hospital in a cost reporting period to 
prevent ``double counting'' of days in the numerator of the Medicaid 
fraction of the DPP of the Medicare DSH calculation reported in another 
cost reporting period. Further, we are finalizing our proposed policy 
that a hospital would only be permitted to make such a change effective 
on the first day of the beginning of a cost reporting period and the 
change would be effective for the entire cost reporting period; that 
is, a hospital would not be permitted to change its methodology in the 
middle of a cost reporting period. This change would also be effective 
for all subsequent cost reporting periods unless the hospital submits a 
subsequent notification to change its methodology for a future cost 
reporting period following the procedures discussed above.

[[Page 43905]]

4. Policy Change Relating to the Exclusion of Observation Beds and 
Patient Days From the Medicare DSH Calculation
a. Background
    Observation services are defined in the Medicare Benefit Policy 
Manual (Publication No. 100-02, Chapter 6, section 20.6A) as a ``well-
defined set of specific, clinically appropriate services, which include 
ongoing short-term treatment, assessment, and reassessment before a 
decision can be made regarding whether patients will require further 
treatment.'' Observation services are furnished by a hospital and 
include the use of a bed and periodic monitoring by a hospital's 
nursing or other staff in order to evaluate an outpatient's condition 
and/or to determine the need for a possible admission to the hospital 
as an inpatient. As discussed in section 20.6A of the Medicare Benefit 
Policy Manual, when a physician orders that a patient be placed under 
observation care but has not formally admitted him or her as an 
inpatient, the patient initially is treated as an outpatient. 
Consequently, the costs incurred for patients receiving observation 
services are not generally recognized under the IPPS as part of the 
inpatient operating costs of the hospital. In some circumstances, 
observation services, although furnished to outpatients, are paid as 
part of an MS-DRG under the IPPS. In particular, section 1886(d) of the 
Act sets forth the payment system, based on prospectively determined 
rates, for the operating costs of inpatient hospital services, which 
are defined under section 1886(a)(4) of the Act to include ``the costs 
of all services for which payment may be made under this title that are 
provided by the hospital (or by an entity wholly owned or operated by 
the hospital) to the patient during the 3 days immediately preceding 
the date of the patient's admission if such services are diagnostic 
services (including clinical diagnostic laboratory tests) or are other 
services related to the admission (as defined by the Secretary).'' As 
further explained in section 40.3 of Chapter 3 of the Medicare Claims 
Processing Manual (Publication 100-04), if a hospital outpatient 
receives diagnostic preadmission services that are related to a 
patient's hospital admission such that there is an exact match between 
the principal diagnosis for both the hospital outpatient claim and the 
inpatient stay, there is no payment for the diagnostic preadmission 
services under the hospital OPPS. Rather, these preadmission outpatient 
services are rolled into the particular MS-DRG and paid under the IPPS.
    Our policy prior to October 1, 2003, as discussed in the FY 2004 
IPPS final rule (68 FR 45418), had been to exclude all observation days 
from the available bed and the patient day counts. CMS clarified that 
if a hospital provides observation services in beds that are generally 
used to provide hospital inpatient services, the days that those beds 
are used for observation services are to be excluded from the bed day 
count (even if the patient is ultimately admitted as an acute 
inpatient).
    In the FY 2004 IPPS proposed rule (68 FR 27205 through 27206), we 
also proposed to amend our policy with respect to observation days for 
patients who are ultimately admitted for inpatient acute care. 
Specifically, we proposed that if a patient is admitted as an acute 
inpatient subsequent to receiving outpatient observation services, the 
days associated with the observation services would be included in the 
available bed and patient day counts. We did not finalize this policy 
until the FY 2005 IPPS final rule (69 FR 49096 through 49098) when we 
revised our regulations at Sec.  412.105(b)(4) and Sec.  
412.106(a)(1)(ii) to specify that observation days are to be excluded 
from the counts of both available beds and patient days, unless a 
patient who receives outpatient observation services is ultimately 
admitted for acute inpatient care, in which case the bed days and 
patient days would be included in those counts. In implementing this 
policy, we revised Worksheet S-3, Part I of the Medicare hospital cost 
report by subscripting columns 5 and 6 to create columns 5.01 and 5.02, 
and 6.01 and 6.02, to allow for separate reporting of observation days 
for patients who are subsequently admitted as inpatients and a separate 
line for observation days for patients not admitted. This policy change 
applied to all cost reporting periods beginning on or after October 1, 
2004.
b. Proposed and Final Policy Change
    As we previously indicated, a patient who is receiving observation 
services is a hospital outpatient, and the costs associated with those 
services are paid under the OPPS in most circumstances. If, however, a 
patient receives observation services from a hospital and the 
outpatient observation care that he or she receives is related to the 
admission such that there is an exact match between the principal 
diagnosis for both the hospital outpatient claim and the inpatient 
stay, a payment is not made to the hospital under the OPPS, as 
explained in section 40.3-C of Chapter 3 of the Medicare Claims 
Processing Manual. According to section 40.3-C of the Medicare Claims 
Processing Manual, these preadmission outpatient diagnostic and 
nondiagnostic services are ``deemed to be inpatient services, and 
included in the inpatient payment, unless there is no Part A 
coverage.'' By this, we mean that such preadmission services are 
considered operating costs of hospital inpatient services for payment 
purposes only, as described in section 1886(a)(4) of the Act. That is 
to say, payment for these preadmission services, which can include 
services furnished while a hospital outpatient is under observation who 
is later admitted as an inpatient, is included within the per case 
inpatient payment if the services meet the statutory criteria described 
in section 1886(a)(4) of the Act. However, these services are still 
services furnished to patients who are outpatients of the hospital at 
the time those services are furnished. We note that although these 
preadmission services may be considered operating costs for hospital 
inpatient services for payment purposes, such services are not 
furnished to an inpatient because these services are furnished prior to 
the patient being formally admitted and, therefore, the associated day 
is not considered to be an inpatient day. Thus, even if payment for 
these preadmission services is included in the inpatient payment, the 
admission date for the inpatient stay begins when the patient is 
formally admitted. Because observation services are services furnished 
to outpatients of the hospital, in the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24189 through 24191), we proposed that the patient 
days during which observation services are furnished are not included 
in the DSH calculation, regardless of whether the patients under 
observation are later admitted. We believe that patient days during 
which observation services are furnished, like the days during which 
preadmission diagnostic and nondiagnostic services are furnished, are 
not inpatient days and, therefore, we proposed to exclude such patient 
days from the DPP of the Medicare DSH calculation.
    In accordance with section 1812(a) of the Act, for a patient day to 
be considered part of a beneficiary's spell of illness, the patient 
must have had ``inpatient hospital services furnished to him during 
such spell.'' In addition, section 1861(a) of the Act defines a ``spell 
of illness'' as beginning on the first day on which such ``individual 
is furnished inpatient hospital services.'' Section 1861(b) of the Act 
defines

[[Page 43906]]

``inpatient hospital services'' as ``services furnished to an inpatient 
of the hospital.'' Thus, with respect to a spell of illness, even if 
observation services are eventually bundled into the inpatient payment, 
the patient is not admitted as an inpatient while he or she remains 
under observation and the days under observation are not considered to 
be inpatient days that count toward a beneficiary's spell of illness. 
In addition, with respect to the 3-day inpatient stay requirement for 
patients to secure Medicare coverage of SNF benefits, section 20.1 of 
Chapter 8 of the Medicare Benefit Policy Manual (Publication No. 100-
02) states: ``Time spent in observation status or in the emergency room 
prior to (or in lieu of) an inpatient admission to the hospital does 
not count toward the 3-day qualifying inpatient hospital stay, as a 
person who appears at a hospital's emergency room seeking examination 
or treatment or is placed on observation has not been admitted to the 
hospital as an inpatient; instead, the person receives outpatient 
services. For purposes of the SNF benefit's qualifying hospital stay 
requirement, inpatient status commences with the calendar day of 
hospital admission.'' Other Medicare policies do not consider 
observation days to be inpatient days because observation services are 
outpatient services furnished to outpatients of the hospital. While 
other Medicare policies do not necessarily dictate how we treat patient 
days for DSH payment purposes, we believe it is important that patient 
days be treated consistently among the various Medicare policies. As we 
stated in the proposed rule, we believe that because observation days 
are not considered inpatient days for a beneficiary's spell of illness 
or for qualifying for SNF benefits, this policy provides additional 
support for our proposal to no longer include any observation day as an 
inpatient day in the calculation of the DPP of the Medicare DSH 
calculation, nor should the associated observation bed days be included 
in determining the number of available inpatient beds used for purposes 
of determining a hospital's IME and DSH payment adjustments.
    As we indicated above, the DSH regulations at Sec.  412.106 explain 
how the DPP is calculated. Specifically, the DPP is based on the 
hospital's patient days where patient days apply only to inpatient 
days. Because a patient under observation in the hospital is considered 
to be an outpatient of the hospital and receives services prior to 
being admitted as an inpatient, we believe that observation days, even 
for a patient who is subsequently admitted, should not be considered 
inpatient days. Accordingly, in the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24190), we proposed to revise the regulations at 
Sec.  412.106(a)(1)(ii) to exclude patient days associated with beds 
used for outpatient observation services, even if the patient is later 
admitted as an inpatient. We proposed to exclude all observation 
patient days from the DPP of the Medicare DSH calculation. We proposed 
that this proposed provision would be effective for cost reporting 
periods beginning on or after October 1, 2009.
    For the same reasons, we also proposed to eliminate counting 
observation bed days for patients who are subsequently admitted as 
inpatients for purposes of both the DSH payment adjustment and the IME 
payment adjustment. The rules for counting hospital beds for the 
purposes of the IME payment adjustment are codified in the IME 
regulations at Sec.  412.105(b), which is cross-referenced in Sec.  
412.106(a)(1)(i) for purposes of the DSH payment adjustment. We believe 
it is important to apply a consistent definition for counting bed days 
for both the IME and DSH payment adjustments. Therefore, we proposed to 
revise Sec.  412.105(b)(4) to state that observation days are excluded 
from the counts of available beds, regardless of whether or not the 
patient under observation is ultimately admitted for acute inpatient 
care.
    As we stated earlier, when we implemented the policy to include 
observation days for admitted patients for DSH payment adjustment 
purposes for FY 2005, we revised the Medicare hospital cost report to 
include columns for hospitals to report their observation days for 
patients admitted as inpatients and observation days for patients not 
admitted. Under the proposal in the proposed rule, hospitals would no 
longer be required to distinguish on the cost report between 
observation bed days and patient days for patients who are ultimately 
admitted and observation bed days and patient days for patients who are 
not admitted because none of these bed days and patient days would be 
included in the DSH payment adjustment. We proposed that, effective for 
cost reporting periods beginning on or after October 1, 2009, hospitals 
would be required to report their total observation bed days so that 
the total observation bed days can be deducted from the total bed day 
count for IME and DSH payment adjustment purposes.
    In summary, we proposed to exclude observation patient days for 
admitted patients from the patient day count in Sec.  412.106(a)(1)(ii) 
(for DSH) and the bed day count at Sec.  412.105(b) (for IME), as a 
cross-reference at Sec.  412.106(a)(1)(i) (for DSH), because 
observation services are defined as outpatient services furnished to 
outpatients of the hospital, regardless of whether or not the patient 
under observation is subsequently admitted.
    Comment: Several commenters opposed the proposal to exclude 
observation patient days for admitted patients from the DSH adjustment 
and observation bed days for admitted patients from the DSH and IME 
adjustment. Some commenters argued that because observation services 
for admitted patients are payable as part of the IPPS bundle, these 
observation patient days are part of the IPPS payment system and should 
be counted in the DSH adjustment. Some commenters contended that 
``inpatient observation days are currently payable as part of the IPPS 
bundle, irrespective of whether the observation stay was immediately 
preceding the non-observation patient stay.'' Some commenters also 
believed that all observation days, regardless of whether the 
observation stay precedes an inpatient admission, should be included in 
the DSH adjustment. In addition, some commenters disagreed with CMS' 
reliance on other Medicare policies (for example, SNF 3-day stay, spell 
of illness) to justify excluding observation days from the DSH 
adjustment. Rather, they asserted that CMS should rely on the inpatient 
payment rules to determine whether days associated with observation 
services should be included in the DSH adjustment.
    Another commenter disagreed with the proposal to exclude 
observation days and beds for admitted patient from the DSH adjustment, 
citing that it goes against Congressional intent. The commenter 
asserted that when Congress developed the Medicaid ratio for DSH, there 
was no distinction of observation days. Rather, according to the 
commenter, all days were considered inpatient days although the 
services the patient received were what we now consider to be 
observation services. The commenter believed that the proposal to 
exclude observation days for admitted patients from the DSH adjustment 
will discourage the use of observation services, which the commenter 
believed is an effective and efficient way to deliver health care.
    One commenter believed that the proposal to exclude observation 
days from the DSH adjustment was contradictory. The commenter contended 
that it is a contradiction that observation services furnished prior to 
admission can be considered as

[[Page 43907]]

inpatient operating costs for payment purposes, but the observation 
days and beds are not considered an inpatient day or available 
inpatient bed for the purposes of IME or DSH payment adjustment.
    Response: We disagree with the commenters that patient days and 
beds associated with observation services should continue to be 
included in the Medicare DSH adjustment. According to the DSH 
regulations at Sec.  412.106, the DPP is based on the hospital's 
inpatient days. Observation services, as described above, are, by 
definition, outpatient services. Because a patient under observation in 
the hospital is considered to be an outpatient of the hospital and can 
receive services prior to being admitted as an inpatient, we believe 
that observation days, even for a patient who is subsequently admitted, 
should not be considered inpatient days and should not be included in 
the DPP.
    Our policy to exclude observation patient days and observation bed 
days from the DSH adjustment is not intended to discourage the use of 
observation services. Rather, it is to ensure that our DSH adjustments 
are appropriately including only inpatient days and inpatient beds. 
Because DSH and IME policies use the same methodologies and reference 
the same regulation to count beds (Sec.  412.105(b)), and because we 
are excluding all observation beds from the DSH adjustment, they would 
be excluded from the IME adjustment. We do not believe that excluding 
observation bed days and observation patient days from the DSH 
adjustment (and, because of the cross-referencing of Sec.  412.105(b) 
under Sec.  412.106(a)(1)(i), excluding observation bed days from the 
IME payment adjustment) goes against Congressional intent. Because the 
DSH payment adjustment is part of the IPPS, it is our interpretation 
that under section 1886(d)(5)(F) of the Act, DSH statutory references 
of ``days'' apply only to inpatient days. Thus, we do not believe that 
patient days associated with observation services, defined as 
outpatient services, should be counted as an inpatient day and included 
in the DPP of the Medicare DSH calculation. Furthermore, we generally 
treat inpatient bed days in the DSH adjustment and the IME adjustment 
consistently; therefore, because we are excluding observation bed days 
from the DSH adjustment, we are excluding observation bed days from the 
IME adjustment.
    We also disagree with the commenters' assertion that the proposal 
to exclude observation patient days and bed days from the DSH 
adjustment has solely been based on the treatment of observation days 
under other Medicare payment policies. In our discussion in the 
proposed rule that we believed patient days associated with observation 
services were not inpatient days for purposes of the Medicare DSH 
adjustment, we found that other Medicare policies also did not treat 
days associated with observation services as inpatient days. 
Specifically, we found that a Medicare beneficiary's ``spell of 
illness'' is defined under section 1812(a) of the Act as beginning on 
the first day on which such ``individual is furnished inpatient 
hospital services'' and days under observation do not count towards a 
beneficiary's spell of illness. In addition, days associated with 
patients who are under observation do not count toward the 3-day 
inpatient stay requirement for patients to secure Medicare coverage of 
SNF benefits as described in this preamble. We did not solely rely on 
these other Medicare policies to determine that observation days are 
not inpatient days, but we believe that patient days should generally 
be treated consistently across Medicare payment policies when possible 
and appropriate.
    Finally, we do not believe it is contradictory that observation 
services can be bundled in the IPPS payment while the patient days 
associated with observation services are not considered inpatient days. 
As described above, the patient receiving the observation services 
(which are not unlike any other preadmission service) is receiving an 
outpatient service and, therefore, the patient is considered an 
outpatient of the hospital. Accordingly, given that the patient days 
associated with such observation services (or any preadmission service) 
are not considered inpatient days, we now believe that such days should 
not be included in the Medicare DSH adjustment.
    Comment: Several commenters supported the proposal to exclude 
observation patient days and bed days from the DSH adjustment and 
observation bed days from the IME payment adjustment. One commenter 
supported the proposal because the commenter believed that patients who 
receive observation services are hospital outpatients, and therefore 
their patient days should not be included in the DSH payment 
adjustment. Other commenters expressed support of the proposal because 
it would simplify reporting for hospitals.
    Response: We thank the commenters for their support of our 
proposal. We agree that patients receiving observation services, which 
occur prior to the patient being admitted as an inpatient to the 
hospital, are outpatients of the hospital, and therefore, we now 
believe that these patient days should not be considered inpatient days 
and included in the DSH payment adjustment. We are finalizing our 
policy to exclude all observation patient days and bed days from the 
DSH adjustment and observation bed days from the IME adjustment as 
proposed, without modification.
    Comment: One commenter supported the proposal to exclude 
observation beds and patient days for admitted patients from the 
Medicare DSH calculation because reporting the data was burdensome on 
hospitals. The commenter recommended that CMS apply this policy change 
to prior years.
    Response: We thank the commenter for its support of our proposal to 
no longer include observation patient days and bed days for admitted 
patients from the DSH payment adjustment calculation. We cannot apply 
this policy change to prior years because we do not apply policy 
changes retroactively. The effective date of the policy change is for 
cost reporting periods beginning on or after October 1, 2009.
    Comment: One commenter questioned how the observation beds and 
patient days would be excluded from the IME and DSH payment adjustment 
calculations. The commenter cited the proposed rule in which we stated: 
``We are proposing that, effective for cost reporting periods beginning 
on or after October 1, 2009, hospitals would be required to report 
their observation bed days so that total observation days can be 
deducted from the bed day count for IME and DSH payment adjustment 
purposes''. The commenter requested clarification on this statement 
because patient days reported on the cost report on Worksheet S-3, 
Lines 1-12, Columns 4, 5, and 6 do not include observation days and 
that Medicaid patient days and total patient days used in the Medicaid 
DPP of the Medicare DSH calculation exclude observation bed days. In 
addition, the commenter stated that observation bed days reported on 
Worksheet S-3, Line 26 should not be included in the DSH calculation 
and that it would be incorrect to deduct total observation days from 
Medicaid patient days or total patient days.
    Response: Currently, we include observation patient days for 
admitted patients in the Medicare DSH DPP. Hospitals currently report 
total hospital observation bed patient days, observation patient days 
for patients who are admitted, and observation patient days for 
patients who are not admitted on the Medicare hospital cost

[[Page 43908]]

report. In addition, hospitals report on the Medicare hospital cost 
report total Medicaid observation patient days, Medicaid observation 
patient days for patients who are admitted, and Medicaid observation 
patient days for patients who are not admitted. This information is 
reported on Worksheet S-3, Part I, Line 26, Columns 5, 5.01, 5.02, 6, 
6.01 and 6.02. Currently, we add Medicaid observation patient days for 
admitted patients to the numerator of the Medicaid fraction of the DPP, 
and we add total observation patient days for admitted patients to the 
denominator of the Medicaid fraction of the DPP. The commenter is 
correct that observation patient days for admitted patients would not 
be deducted from the numerator or denominator of the Medicaid fraction; 
rather, we would no longer include observation patient days for 
admitted patients in the patient day counts in the DPP of the Medicare 
DSH calculation for cost reporting periods beginning on or after 
October 1, 2009.
    However, to determine available bed days for DSH and IME purposes, 
observation bed days would need to be deducted from total available bed 
days. Currently, total bed days available (reported on Worksheet S-3, 
Part I, Line 12, Column 2) include all observation bed days (for both 
admitted and nonadmitted patients). Under the current policy where we 
include observation bed days for admitted patients, we deduct 
observation bed days for patients not admitted from the total available 
bed day count. However, effective for cost reporting periods beginning 
on or after October 1, 2009, to ensure that we no longer include any 
observation bed days in the bed day count for IME and DSH purposes, we 
would deduct all observation bed days (reported on Worksheet S-3, Part 
I, Line 26, Column 6) from the total bed days available (reported on 
Worksheet S-3, Part I, Line 12, Column 2).
    Finally, the cost report will be changed to accommodate this policy 
change once this final rule is published.
    After consideration of the public comments we received, we are 
finalizing our proposal, without modification, to exclude observation 
patient days for admitted patients from the patient day count at Sec.  
412.106(a)(1)(ii) (for DSH) and the bed day count at Sec.  412.105(b) 
(for IME), as cross-referenced at Sec.  412.106(a)(1)(i) (for DSH). The 
policy change is effective for cost reporting periods beginning on or 
after October 1, 2009.
5. Public Comments That Are Out of the Scope of the Proposed Rule
    We received a number of public comments on DSH-related issues 
regarding appeals or pending litigation on the Medicare fraction and 
the inclusion of Medicare managed care patient days in the Medicare DSH 
calculation, for which we did not include any proposed changes in the 
proposed rule. We are not summarizing these comments in detail nor 
providing responses to the comments because we consider them to be out 
of the scope of the provisions of the proposed rule.

F. Technical Correction to Regulations on Payments for Anesthesia 
Services Furnished by Hospital or CAH Employed Nonphysician 
Anesthetists or Obtained Under Arrangements (Sec.  412.113)

    Section 412.113(c) of the regulations contains our rules governing 
payments for anesthesia services furnished by a hospital or CAH by 
qualified nonphysician anesthetists employed by the hospital or CAH or 
obtained under arrangements. We have discovered that, under paragraph 
(c)(2)(i)(B) of Sec.  412.113, there is an incorrect cross-reference to 
``Sec.  410.66'' for the definition of a qualified nonphysician 
anesthetist. The correct cross-reference for the definition of a 
qualified nonphysician anesthetist is ``Sec.  410.69''. As we proposed 
in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24191), we 
are correcting the cross-reference in Sec.  412.113(c)(2)(i)(B) to 
refer to ``Sec.  410.69''. We did not receive any public comments on 
this proposal.

G. Payments for Direct Graduate Medical Education (GME) (Sec. Sec.  
413.75 and 413.79)

1. Background
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of hospital inpatient 
services. Section 1886(h) of the Act, as implemented in regulations at 
Sec.  413.75 through Sec.  413.83, establishes a methodology for 
determining payments to hospitals for the direct costs of approved GME 
programs. Section 1886(h)(2) of the Act sets forth a methodology for 
the determination of a hospital-specific, base-period per resident 
amount (PRA) that is calculated by dividing a hospital's allowable 
direct costs of GME for a base period by its number of residents in the 
base period. The base period is, for most hospitals, the hospital's 
cost reporting period beginning in FY 1984 (that is, the period of 
October 1, 1983, through September 30, 1984). Medicare direct GME 
payments are calculated by multiplying the PRA times the weighted 
number of full-time equivalent (FTE) residents working in all areas of 
the hospital complex (and nonhospital sites, when applicable), and the 
hospital's Medicare share of total inpatient days. The base year PRA is 
updated annually for inflation.
    Section 1886(h)(4)(F) of the Act established a limit on the number 
of allopathic and osteopathic FTE residents that a hospital may include 
in its FTE resident count for purposes of calculating direct GME 
payments. For most hospitals, the limit, or cap, is the unweighted 
number of allopathic and osteopathic FTE residents training in the 
hospital's most recent cost reporting period ending on or before 
December 31, 1996.
2. Clarification of Definition of New Medical Residency Training 
Program
    For purposes of determining direct GME and IME payments, the 
Medicare statute establishes a cap on the number of allopathic and 
osteopathic FTE residents a hospital may count, which, for most 
hospitals, is based on the number of allopathic and osteopathic FTE 
residents the hospital was training in its most recent cost reporting 
period ending on or before December 31, 1996. Section 1886(h)(4)(H)(i) 
of the Act requires the Secretary to prescribe rules for the 
application of the FTE resident cap in the case of medical residency 
programs that are established on or after January 1, 1995. This 
provision is applicable for purposes of the IME adjustment under the 
IPPS through section 1886(d)(5)(B)(viii) of the Act. The provision 
specifies that such rules must be consistent with the principles of the 
statutory provisions regarding the establishment of the FTE resident 
caps and regarding application of a 3-year rolling average count of FTE 
residents. The statute also requires the Secretary to give special 
consideration in such rules to facilities that meet the needs of 
underserved rural areas. Accordingly, we issued regulations to permit 
adjustments to the FTE resident caps, under certain circumstances, for 
hospitals that establish new medical residency training programs on or 
after January 1, 1995. Section 413.79(e)(1) of the regulations state 
that if a hospital had no allopathic or osteopathic residents in the 
base year, the hospital may receive an adjustment to its FTE resident 
cap (which otherwise would be zero) if it establishes one or more new 
medical residency training programs, but only for new programs 
established within 3 academic years after residents begin training in 
the first new program.

[[Page 43909]]

(Rural hospitals may receive FTE cap adjustments for newly established 
programs at any time under the regulations at Sec.  413.79(e)(1)(iii)). 
Under Sec.  413.79(e)(2), hospitals that had allopathic or osteopathic 
residents in the base year were permitted to receive an adjustment for 
new programs, but only if the new programs were established on or after 
January 1, 1995, and before August 5, 1997. Section 413.79(l) defines a 
new medical residency training program as ``a medical residency that 
receives initial accreditation by the appropriate accrediting body or 
begins training residents on or after January 1, 1995.'' These 
regulations concerning cap adjustments for newly established medical 
residency training programs also apply for IME purposes as stated at 
Sec.  412.105(f)(1)(vii).
    As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24191), it has come to our attention that there has been some 
misinterpretation or misunderstanding of these regulations among some 
hospitals and Medicare contractors despite previous discussions of the 
topic in the Federal Register. Specifically, some hospitals or 
contractors took the regulations to mean that, as long as the relevant 
accrediting body (either the Accreditation Council on Graduate Medical 
Education (ACGME) for allopathic programs or the American Osteopathic 
Association (AOA) for osteopathic programs) grants an ``initial'' 
accreditation or reaccredits a program as ``new,'' the hospital may 
receive an FTE cap adjustment for that program, regardless of whether 
that program may have been accredited previously at another hospital. 
In other words, some hospitals and contractors appear to have read our 
regulations to mean that the Secretary would defer, in all 
circumstances, to the relevant accrediting body's identification of a 
particular accreditation as a ``new'' or ``initial'' accreditation of a 
medical residency training program.
    In the FY 1998 IPPS final rule that established Sec.  413.79(1) of 
the regulations, we discussed both the meaning of this regulation and 
the rationale for establishing it:
    ``For purposes of this provision, a `program' will be considered 
newly established if it is accredited for the first time, including 
provisional accreditation on or after January 1, 1995, by the 
accrediting body. Although the Secretary of the Department of Health 
and Human Services has broad authority to prescribe rules for counting 
residents in new programs, the Conference Report for Public Law 105-33 
[House Conference Report No. 105-217, pp. 821-822] indicates concern 
that the aggregate number of FTE residents should not increase over 
current levels.'' (62 FR 46006)
    Similarly, in the FY 2000 IPPS final rule (64 FR 41519), we 
responded to a public comment suggesting that CMS include within the 
definition of ``new residency program'' a residency program that may 
have been in existence at other clinical sites in the past. We replied 
that ``the language `begins training residents on or after January 1, 
1995' [in the regulation at Sec.  413.79(1)] means that the program may 
have been accredited by the appropriate accrediting body prior to 
January 1, 1995, but did not begin training in the program until on or 
after January 1, 1995. The language does not mean that it is the first 
time a particular hospital began training residents in a program on or 
after January 1, 1995, but that program was in existence at another 
hospital prior to January 1, 1995, as the commenter suggests.'' 
(Emphasis added.)
    Accordingly, as we have suggested in discussions in our previous 
rules, rather than relying solely on the accrediting body's 
characterization of whether a program is new, we continue to believe it 
is appropriate that CMS require a hospital to evaluate whether a 
particular program is a newly established one for Medicare GME purposes 
by considering whether a program was initially accredited ``for the 
first time,'' and is not a program that existed previously at another 
hospital. In evaluating whether a program is truly new, as opposed to 
an existing program that is relocated to a new site, it is important to 
consider not only the characterization by the accrediting body, but 
also supporting factors such as (but not limited to) whether there are 
new program directors, new teaching staff, and whether there are only 
new residents training in the program(s) at the different site. In 
determining whether a particular program is a newly established one, it 
may also be necessary to consider factors such as the relationship 
between hospitals (for example, common ownership or a shared medical 
school or teaching relationship) and the degree to which the hospital 
with the original program continues to operate its own program in the 
same specialty. (Although this discussion of new programs is framed in 
the context of a hospital operating a program, we note that many 
programs are operated or sponsored by schools of medicine or other 
nonhospital entities. This section is intended to address all GME 
programs that were previously accredited at one operating entity, and 
that entity ceases to operate the program, but the program is then 
opened and operated at another entity, even if it is accredited as a 
new program at the second entity. Such a program may not be treated as 
new at the second entity.) In any case, we believe it is appropriate to 
be deliberate in the determinations regarding FTE resident cap 
adjustments relating to residents in new programs. The statute clearly 
requires that our rules regarding adjustments to hospitals' FTE 
resident caps for newly established programs must adhere to the 
principles of the statutory provision limiting the count of FTE 
residents for direct GME and IME payments to the count for the most 
recent cost reporting period ending on or before December 31, 1996. In 
addition, as we indicated in our final rule establishing FTE cap 
adjustments for ``new programs,'' the Conference Report for the BBA 
explicitly indicates that the aggregate number of FTE residents should 
be held to the ``current'' levels at the time the BBA was enacted 
(House Conference Report No. 105-217, pp. 821-822).
    If we were to find that a program at one hospital is a newly 
established program merely because it was relocated from another 
hospital, the result would be that an FTE resident cap adjustment would 
be granted based on the same program at two different hospitals. 
Furthermore, if both hospitals continue to operate, the FTE resident 
cap slots that were vacated from the program at the first hospital 
could potentially be filled with residents from that hospital's other 
residency training programs. We do not believe such an increase in the 
aggregate number of FTE residents and the potential duplication of the 
FTE resident cap adjustment would be consistent with the statutory 
mandate to adhere to the principles of the base-year FTE resident caps 
when devising rules to account for newly established medical residency 
training programs. Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24192), we proposed to clarify our policy that a 
new medical residency program is one that receives initial 
accreditation for the first time, as opposed to reaccreditation of a 
program that existed previously at the same or another hospital. 
Furthermore, we indicated that we believe it is appropriate and 
necessary that CMS expect a hospital that wishes to claim an adjustment 
to its direct GME and IME FTE caps based on residents training in a 
medical residency program to first evaluate whether the program is 
``new'' for Medicare purposes, rather

[[Page 43910]]

than to rely exclusively on the characterization of a particular 
program by the relevant accrediting body.
    Comment: Several commenters were hospitals that have been notified 
by CMS, through their fiscal intermediaries, that their residency 
training programs were not new and, therefore, the hospitals' FTE 
resident caps should not have been adjusted under Sec.  413.79(e)(1). 
These programs were continuations of residency programs that existed at 
other hospitals. One commenter maintained that its program is separate 
and distinct from the program that existed and closed at the other 
hospital. The commenter had provided CMS with evidence to support its 
belief. Another commenter had already taken steps to address the 
problem posed by its continuation of existing programs by creating a 
consortium model for new residency programs that differs greatly from 
the original models. The commenters also stated that funding from 
Medicare is vital to the success of the programs and is necessary for 
combating the shortage of primary care physicians. They urged CMS to 
reverse its initial position and retroactively restore the hospital's 
direct GME and IME payments.
    Response: If the hospitals disagree with our decision, they may 
appeal these determinations through the administrative appeals process. 
Rather than discuss the specifics of these determinations in this 
response, we will address the commenters' concerns in general, in the 
context of the policy clarification. In determining whether a 
particular residency training program is new, the relevant fiscal 
intermediary/MAC and CMS review the characteristics of the residency 
program in question, considering all of the relevant criteria discussed 
earlier to determine whether there has been a transfer of a previously 
existing program to another hospital. Where we find that the facts 
point to the conclusion that a program is not a new program, we 
determine that the hospital does not qualify for the FTE cap increase 
for new medical residency programs. We understand that in some cases 
external factors unrelated to the medical school or hospital may 
contribute to this transfer of a program to another hospital, and we 
are also very aware of the fact that hospitals rely on Medicare funding 
for residency programs. However, as discussed above, we wish to ensure 
that FTE cap increases for new programs are only awarded to programs 
that are truly new.
    Comment: Some commenters asked about the proper course of action 
for a provider to follow if it has received payment relating to 
residents in a ``new program,'' even though those residents would not 
be considered to be training in new programs based on factors detailed 
in the proposed rule, and the cost reports are within the 3-year 
reopening period, the issue is under appeal, or the cost report is 
currently being reopened.
    Response: If a fiscal intermediary or MAC identifies a teaching 
hospital that has received IME and direct GME payments relating to 
residents in a program that is treated as new, but the program is, in 
fact, a transfer of an existing program in accordance with the factors 
outlined in this final rule, the fiscal intermediary or MAC may reopen 
cost reports that are still within the 3-year reopening period and 
recover overpayments accordingly. If the issue is already under appeal, 
the appeal may proceed according to normal procedures.
    Comment: Several commenters stated that CMS' proposed clarification 
of the definition of a new residency program is, in fact, not a 
clarification, but a ``major change to longstanding agency policy.'' 
The commenters expressed concern that CMS is retroactively imposing its 
new interpretation of ``supporting factors,'' which was never 
previously published in agency guidance, to deny hospitals an 
adjustment to their FTE resident caps for new programs when they 
followed the existing regulations in good faith. The commenters 
asserted that residency programs will no longer be able to qualify as 
new based on what the commenters argued is the literal, simple meaning 
of the regulatory phrase (that is, ``initial accreditation by the 
appropriate accrediting body'') but, instead, they will have to meet 
``new and ambiguous criteria in the form of `supporting factors.' '' 
The commenters argued that the new policy will result in more confusion 
because the ``supporting factors'' will lead to subjective 
determinations, particularly if a hospital's program meets some, but 
not all, of the factors. Several commenters urged CMS to withdraw the 
``confusing, arbitrary, retrospective `clarification' '' regarding what 
constitutes a new residency program, and instead establish a 
prospective, definitive process that is consistent with the prospective 
payment system under which hospitals should know up front what 
qualifies as a ``new'' program for purposes of direct GME and IME 
payments.
    Commenters also remarked that there is no legal authority for the 
proposal in relevant statutes and legislative history, and that no 
change in law or regulation has prompted these clarifications. The 
commenters stated that the proposal is inconsistent with regulations at 
Sec.  413.79(e) and (l), and that the changes are self-serving and 
``intended to support CMS's position in currently pending litigation.'' 
Another commenter expressed concern that CMS is shifting the 
responsibility for determining what constitutes a new program to a 
hospital without giving the hospital a way to receive formal approval 
before the hospital begins to operate the program and potentially is 
subject to disallowances or overpayments. The commenter believed the 
current practice of allowing the accrediting body to make a formal 
determination beforehand is appropriate, but if CMS chooses to finalize 
this ``new'' policy, the commenter recommended that CMS establish a 
more definitive process that allows prior approvals to minimize 
uncertainty among hospitals.
    Response: We disagree with the commenters that the policy discussed 
in the proposed rule is not a clarification but instead is a ``major'' 
policy change. A significant principle that we must consider in 
implementing a policy on what constitutes a new medical residency 
program for purposes of establishing new FTE resident caps is that the 
aggregate number of FTE residents should not increase unnecessarily 
over the numbers of residents being trained at the time the BBA was 
passed. To that end, it is important to ensure that FTE cap adjustments 
are not made for programs that are not actually new, that is, programs 
that have existed previously at another hospital. As discussed above, 
we articulated this point in the Federal Register at least as early as 
the FY 2000 IPPS final rule (64 FR 41519).
    Further, while we acknowledge that it would be simple to rely 
solely on the accrediting body's determination as to whether a program 
is ``new,'' as we have explained above, we also recognize that the 
accrediting body may have very different reasons from CMS for 
designating a program as ``new.'' We continue to believe it is 
appropriate to look at factors in addition to the accrediting body's 
characterization of its accreditation to determine whether a particular 
program constitutes a new program. Certainly, a program that maintains 
the same program director, teaching staff, and residents but has only 
been moved to a different participating institution would not be 
considered a new program for Medicare purposes. We also do not believe 
that there is anything subjective about making determinations based on 
several ``supporting factors,'' as the commenter

[[Page 43911]]

suggests. On the contrary, we believe that taking a more thorough look 
at the characteristics of a program using an approach that considers 
multiple factors is more objective and ensures that FTE cap 
adjustments, which could increase the number of Medicare-funded 
training slots in the aggregate, will only be granted to qualifying 
teaching hospitals when warranted. The academic medical community will 
be able to consider these factors before making decisions related to 
opening, closing, or expanding programs. Through proper planning and 
consideration of these factors, teaching hospitals should be able to 
determine whether programs that have commonalities with previously 
existing programs may or may not qualify for FTE cap increases and 
associated Medicare IME and direct GME funding.
    We also disagree with the commenter's suggestion that we lack the 
legal authority to implement this policy. The BBA and our regulations 
provide that hospitals are permitted to receive an FTE cap increase in 
order to start new programs, and CMS is the agency charged with 
administering these provisions. As such, it is our responsibility to 
provide guidance when we believe clarification is needed. Because it 
appears there has been some recent confusion surrounding this policy, 
we proposed to clarify our definition of a new program in the FY 2010 
IPPS proposed rule. We believe the fact that there are pending 
reopenings, disallowances, and litigation relating to the definition of 
a new program only supports the need to clarify the policy at this 
time.
    Comment: One commenter argued that because the phrase ``initial 
accreditation'' is a term of art used by the ACGME, it has a ``well 
understood meaning'' in the academic medical community, and the ``law 
is clear that the term as used in the regulation has the same meaning 
as is generally understood in the regulated community.'' The commenter 
believed that CMS likely was aware of the use of this term by the ACGME 
when CMS first promulgated the definition of a new medical residency 
program in the regulations, and CMS cannot decide after the fact that 
it was ``unwise to have adopted an industry term'' without complying 
with the APA's [Administrative Procedure Act's] directive for notice 
and comment rulemaking.
    Response: We understand that ``initial accreditation'' is a term 
that is used by the ACGME and that the term was used by the ACGME 
before the time that the BBA was passed. Specifically, the ACGME 
describes ``initial accreditation'' as follows:
    ``Accreditation is conferred initially when a Review Committee 
determines that a proposal for a new program or sponsoring institution 
substantially complies with the requirements.
    ``(a) This initial cycle is considered a developmental stage during 
which the proposal for the new program or sponsoring institution will 
be fully developed and implemented * * *.
    ``(b) Initial accreditation may be granted to a new program or 
sponsoring institution or a previously-accredited program or sponsoring 
institution, which had had its accreditation withheld or withdrawn or 
has voluntarily withdrawn and has subsequently applied for re-
accreditation * * *.''
    We first provided a definition in the regulations for ``new medical 
residency training program'' in the final rule with comment period 
published in the Federal Register published on August 29, 1997, shortly 
following the passage of the BBA on August 5, 1997. We stated that a `` 
`program' will be considered newly established if it is accredited for 
the first time, including provisional accreditation on or after January 
1, 1995'' (emphasis added, 62 FR 46006). In the regulatory text, we 
defined ``new medical residency training program'' as ``a medical 
residency training program that receives initial accreditation by the 
appropriate accrediting body on or after July [sic] 1, 1995'' (emphasis 
added, 62 FR 46035). Because we used the phrase ``for the first time'' 
in the preamble, and the term ``initial accreditation'' in the 
regulations text, we believed it would be obvious that CMS did not rely 
on the definition of initial program as used by the ACGME. As defined 
by the ACGME, initial accreditation can be given to a program that was 
accredited previously. We did not give any indication that we were 
using the term ``initial accreditation'' as a term of art as used by 
the ACGME.
    We next discussed new medical residency training programs in the 
May 12, 1998 final rule responding to public comments on the August 29, 
1997 final rule with comment period (63 FR 263359). In response to 
public comments, we revised the definition of a ``new medical residency 
training program'' to mean ``a medical residency that receives initial 
accreditation by the appropriate accrediting body or begins training 
residents on or after January 1, 1995.'' The purpose of the revision 
was not to revise the definition of the word ``initial'' but, rather, 
to include the situation of residency training that begins on or after 
January 1, 1995, because we recognized that hospitals usually do not 
begin training residents immediately upon receiving an accreditation 
letter. The definition has not been revised since then. Thus, this is 
the definition that is currently in the regulations at Sec.  413.79(l).
    Furthermore, it would not be appropriate for CMS to use a term of 
art if that term is unique to only one of the organizations that 
accredit GME programs. The graduate medical education community 
consists not just of the ACGME, but also includes the AOA (and the 
Commission on Dental Accreditation and the Council on Podiatric Medical 
Education). We believe that if, in fact, the term ``initial 
accreditation'' is an industry standard whose meaning is clearly 
understood by the academic medical community, we would expect it to be 
used by the AOA as well. However, we understand that the AOA does not 
use ``initial accreditation'' as a formal term with respect to 
identifying programs as new. In fact, we understand the AOA only uses 
the term ``accreditation'' with respect to approvals of sponsoring 
institutions (such as Osteopathic Postdoctoral Training Institutions 
(OPTIs)), while the term ``approval'' is the term that is applied to a 
new program when it is first recognized by the AOA.
    Accordingly, given that the ACGME and the AOA use different 
terminology for accreditation status, we disagree with the commenter 
that the ``law is clear that the term as used in the regulation has the 
same meaning as is generally understood in the regulated community.'' 
We believe it is appropriate for us to use the term ``initial 
accreditation'' in our regulations and interpret it in a manner that 
reflects CMS' priorities. Unlike the ACGME which, based on its 
definition quoted above, may grant ``initial'' accreditation to a 
previously accredited program or to a program that applies for 
reaccreditation, we continue to interpret ``initial'' with respect to 
Medicare GME payment to mean ``for the first time.'' That is, as we 
stated in the August 29, 1997 final rule, a `` `program' will be 
considered newly established if it is accredited for the first time, 
including provisional accreditation, on or after January 1, 1995'' 
(emphasis added, 62 FR 46006), and we continue to believe that FTE cap 
increases should be awarded to programs that are accredited ``for the 
first time,'' and not to programs for which granting new program status 
would create duplicate FTE slots.
    Comment: One commenter remarked that hospitals already evaluate 
whether their teaching programs are sufficiently

[[Page 43912]]

new when they receive an initial letter of accreditation from the 
relevant accrediting body, as instructed by Sec.  413.79(e)(1). The 
commenter also stated that those accrediting bodies are best positioned 
to determine whether or not a program is new; and a conflict of 
interest inherently exists when Medicare, which is not an expert in 
this area, makes that determination. Some commenters disagreed with 
CMS' statement in the proposed rule that CMS has provided this 
definition of new programs in previous regulations; and asserted that, 
if so, this proposal would not have been necessary. In addition, the 
commenters claimed that while the BBA indicated that Congress did not 
want the national cap level to increase above the levels at the time 
the BBA was passed, Congress did not require that CMS enact barriers to 
the creation of new residency programs, and CMS should recognize that 
the concern that there was a surplus of physicians at the time the BBA 
was passed is no longer relevant today.
    Response: We recognize that the accrediting bodies are expert in 
identifying and ensuring programs that meet minimum standards for 
medical education. In fact, we recognize their expertise in our 
regulations regarding Medicare-approved residency training programs. 
However, accrediting bodies have different goals than CMS and may 
consider different factors when evaluating whether a particular 
residency training program is new. CMS is charged to protect the 
Medicare Trust Fund and carry out the relevant Medicare statutory 
provisions. Therefore, we must ensure that only appropriate cap 
increases are granted. Because our goals are not necessarily consistent 
with the goals of accrediting bodies, our perspective on the status of 
a program as ``new'' may sometimes differ from the accrediting bodies' 
assessment. In addition, we do not believe that a conflict of interest 
exists when we determine a residency program's new status. We are not 
dictating curricula requirements; rather, we simply wish to ensure that 
a program is truly new from Medicare's perspective before granting the 
hospital an increase in its FTE resident caps and the additional IME 
and GME funding that accompanies the increase.
    We also disagree with the contention that our clarification will 
pose barriers to the establishment of new residency programs. Our 
proposal was intended to clarify Medicare policy with respect to the 
treatment of residency training programs when a previously existing 
program is involved. We continue to encourage the development of new 
training programs, and will continue to adjust hospitals' FTE resident 
caps for new programs in accordance with our regulations. However, we 
will only allow a hospital's FTE caps to be adjusted for programs that 
are truly new. In addition, as long as a national aggregate cap on FTE 
resident positions is in place, we continue to believe our policies 
should work to maintain that cap level.
    Comment: One commenter expressed concern that CMS' criteria for 
identifying a new program could impinge on the quality of new programs 
by restricting their ability to hire experienced program directors and 
faculty, while also limiting the freedom of these individuals to teach 
and practice where they choose. The commenter argued that the ``mere 
presence'' of a program director or faculty member who worked for 
another residency training program does not make the second program 
identical to the first program; rather, the residents will have a 
different experience based on the clinical setting, regardless of who 
the director or teaching staff may be.
    Response: It is not our intent to interfere with the direction of a 
medical education program or to inhibit the career choices of 
physicians. However, we disagree with the commenter that the ``mere 
presence'' of the same program director does not contribute to the 
similarity in a program that was operated at two sites. While it is 
true that each hospital setting provides somewhat of a different 
training experience, simply because no two hospitals are exactly the 
same, the implementation of the curriculum and the approach to teaching 
are very much influenced by the program director and the teaching 
staff. Moreover, when a program director (or faculty members) moves 
from a program that was in operation at one hospital to a program that 
is in operation at another hospital, we believe this strongly suggests 
that the second program is not a new one, but is the continuation of 
the first program. Therefore, in determining whether a program is new, 
we believe it is logical and appropriate to look at numerous factors, 
including whether the programs have in common the program directors and 
teaching staff.
    Comment: Some commenters noted that, in the proposed rule, CMS used 
the term ``and/or'' in the list of supporting factors. Specifically, a 
residency program with a new program director and new residents, but 
also with some teaching staff who had taught at the ``original'' 
program, may or may not be considered ``new.'' The commenter argued 
that such rules are unclear, and may result in a situation where a 
hospital invests significant time and financial resources into what it 
believes is the creation of a new program, only to find out several 
years later that CMS does not believe the program is new. The 
commenters stated that if CMS believes that it must use the 
``supporting criteria'' set forth in the proposed rule, then CMS should 
replace each use of the term ``and/or'' with the word ``and,'' and it 
should be added after each criterion, not just the first two. One 
commenter further stated that a determination of whether a program is 
``new'' cannot be based on one single factor alone (such as the 
presence of a single program director from an ``original'' program). 
Instead, the commenter recommended that a program that is not new 
should be defined as one where, at a minimum, all of its program 
directors and faculty, and residents came from the ``original'' 
program, while still allowing the Secretary discretion to determine 
that such a program may still be new as a result of other 
circumstances. Another commenter asked whether a hospital must answer 
``no'' to each of the supporting criteria or to just half of the 
criteria in order for the program to be considered new. Other 
commenters pointed out that medical schools can, and often do, support 
more than one program in the same specialty in different geographic 
areas of a State and with more than one hospital simultaneously. 
Therefore, the commenters added, CMS cannot assume that a second 
program in the same specialty is not a ``new medical residency training 
program.''
    Response: We agree that the use of ``and/or'' in the list of 
supporting criteria could be confusing. Therefore, we are removing the 
``or'' and only using ``and.'' Thus, the supporting factors to be 
considered in determining whether a program is new are (but not limited 
to) as follows:

--Is the program director new, and
--Is the teaching staff new, and
--Are there new residents?

    We understand the commenters' concerns that these factors do not 
provide a test that is as clear as relying solely on a determination 
from the accrediting body. However, as explained earlier, we believe 
that our mission and goals are different from those of the accrediting 
bodies; and the ramifications of a determination as to whether a 
program is new for Medicare purposes are less significant to the 
accrediting bodies than they are to us. We also understand that, at 
least with the ACGME, a hospital has a fair

[[Page 43913]]

amount of latitude in requesting that an accrediting body accredits a 
program as a new program. We are wary of situations where one program 
has literally been moved in its entirety from one hospital to another, 
and is accredited as ``new'' in the second hospital. We believe that we 
must ensure that FTE cap increases are only made under appropriate 
circumstances. By employing these supporting factors, we will be able 
to gain a fuller picture of the program, and to make a determination 
based on case-specific evidence as to whether there are new program 
directors, new teaching staff, and new residents.
    With respect to the comment that schools of medicine often sponsor 
residency programs in more than one geographic area and with more than 
one hospital at the same time, we do not believe that will necessarily 
affect whether a program is considered to meet the new program 
definition. As we stated in the proposed rule, we will consider the 
degree to which, and the way in which, two programs continue to operate 
simultaneously at the original hospital and the subsequent hospital. We 
understand that a medical school may sponsor two separate programs in 
the same specialty with different program directors, staff, and 
residents, but that is very different from the situation where a 
sponsoring school of medicine closes a program in one hospital and 
moves the program to another hospital. In the former situation, the 
fact that there are two separate programs operating simultaneously and 
continually is evidence that could support a determination that the two 
programs are, in fact, separate and distinct. However, in the latter 
situation, the closure of one program and the movement of the program 
director, faculty, and residents to another hospital are indicative of 
the relocation of an existing program for which no FTE cap increase is 
warranted. Accordingly, despite the commenters' concerns, we believe we 
should use the list of supporting factors to determine what constitutes 
a new program, rather than relying solely on the determination of an 
accrediting body.
    Comment: One commenter opined that imposing more stringent 
standards for identifying new programs does not actually address CMS' 
concern that there could be an inappropriate increase in the aggregate 
total number of residency slots funded by Medicare when one hospital 
shifts an existing program to another hospital, and then the original 
hospital uses the open slots to count other residents (when the 
hospital had previously trained a number of residents that exceeded its 
FTE resident caps). The commenter noted that, just as a hospital may 
decide at any time to close one program and use those slots to count 
residents that were previously in excess of its caps, a nonteaching 
hospital may decide at any time to become a new teaching hospital and 
participate in training residents in its own new programs, thereby 
increasing the aggregate number of Medicare-funded positions.
    Several commenters also mentioned alternative methods by which CMS 
can preserve the national aggregate cap without implementing the 
provisions of the proposed rule. One commenter suggested that the cap 
number can be kept neutral by removing old cap slots and reassigning 
them to new programs. Other commenters stated that, among other 
solutions, one way to maintain the national cap level is to promulgate 
rules stating that a hospital loses the caps attached to a closed 
teaching program, but that those caps can be added back into the system 
when a program opens in a new hospital. One commenter suggested that 
CMS work together with accrediting bodies to use the ``existing 
infrastructure'' to create a clear, unambiguous method for determining 
the criteria for a new program. Another commenter suggested creating a 
formal process by which hospitals can apply for and receive the ``new 
program'' designation.
    Response: We disagree with the commenter's assertion that the rules 
regarding new programs do not address the underlying concern that the 
aggregate number of Medicare-funded positions should not, in general, 
increase over the levels in place when the BBA was passed. First, we 
believe caution is warranted to ensure that any increase in the 
aggregate level of resident slots relates only to truly new programs. 
Second, if a hospital that is training residents in excess of its FTE 
resident caps closes one of its programs and, as a result, the number 
of FTE residents the hospital is training equals its caps, there will 
be no increase in the number of FTE residents the hospital is permitted 
to count for IME and direct GME purposes, and no increase in the 
aggregate number of FTE resident positions. In other words, the closure 
of a program does not, by itself, allow for an increase in the 
aggregate levels of Medicare-funded resident slots. However, we do not 
believe it is appropriate for an increase to the aggregate FTE resident 
caps to occur as a result of a program that moves from one hospital to 
another, allowing the first hospital to receive the same amount of 
Medicare funding by filling the vacated slots, and allowing the second 
hospital to receive a ``new program'' increase in its FTE caps for that 
same residency program. In such a case, we do not believe it would be 
appropriate for the Medicare program to bear the additional costs 
associated with the transfer of an existing program to another 
hospital. Third, we believe that an implicit assumption in the BBA 
conference report language is that, while new teaching hospitals and 
new programs may open over time, some existing teaching hospitals and 
programs would close. Accordingly, this ``offset'' of resident slots 
would, to a certain extent, limit the growth in the levels of Medicare-
funded residency positions in years subsequent to the BBA. Therefore, 
we believe it is appropriate to take a rigorous approach to determining 
whether a program is new for Medicare purposes, and whether an increase 
in the hospital's FTE resident caps is appropriate and consistent with 
the statutory FTE caps.
    Nevertheless, we have considered the comments we received and 
whether the use of a list of ``supporting factors'' included in the 
proposed rule is the best approach to determine whether a program is 
actually new for purposes of Medicare IME and direct GME payments. We 
find compelling the comment that there may be alternative methods to 
preserve the national aggregate cap, while allowing for some 
flexibility in the application of the ``factors.'' We also considered 
the suggestion that the aggregate national cap could remain neutral by 
removing existing cap slots and reassigning them to new programs. One 
situation is of particular concern to us; when a teaching hospital 
closes a program but the hospital itself remains open, and that program 
is relocated to a hospital that may qualify for an FTE cap increase 
under Sec.  413.79(e)(1) or (3) and applies for and receives new 
accreditation for the program. Because the first hospital continues to 
operate and retains the FTE cap positions relating to the program, 
there is the potential for Medicare to recognize the same residency cap 
positions twice--once for the program at the original hospital and 
again for the ``new'' program at the second hospital. Thus, there could 
be a form of ``double counting'' when the first hospital fills the same 
FTE slots that were vacated from the program that closed at the first 
hospital, while the new teaching hospital is permitted to count FTE 
residents in the ``new'' program as well. We do not believe such an 
increase in the aggregate number of FTE residents and the potential 
duplication of the FTE

[[Page 43914]]

resident cap adjustment would be consistent with the statutory mandate 
to adhere to the principles of the base-year FTE resident caps when 
devising rules to account for newly established medical residency 
training programs. However, in the instance where the first hospital 
actually closes (that is, its Medicare provider agreement and its FTE 
caps are retired and not used by another hospital), and its residency 
program(s) transition to another hospital(s) that qualifies for an FTE 
cap increase under Sec.  413.79(e)(1) or (3), there would be no threat 
of duplicative FTE slots relating to the same program. Rather, the 
national aggregate FTE cap would remain approximately the same.
    After considering the public comments concerning other means to 
maintain a steady national aggregate cap, we have decided that another 
important ``supporting factor'' to consider is whether the hospital 
from which the program was relocated has closed (terminated its 
provider agreement and its FTE caps are not being used by another 
hospital) prior to the transfer of the program. The fact that a program 
originated from a hospital that closed, where no other hospital 
retained the FTE caps, suggests that it would be appropriate to 
consider the program to be new for purposes of establishing IME and 
direct GME FTE caps.
    Because our intent is to ensure that no duplicative FTE resident 
slots are created by virtue of an inappropriate ``new program'' 
adjustment, a hospital that is considering starting such a ``new'' 
program should ask several questions:
    1. Has this program been relocated from a hospital that closed?
    2. If so, was this program part of the closed hospital's FTE cap 
determination?
    3. More generally, is this program part of any existing hospital's 
FTE cap determination?
    Our goal in prompting hospitals to ask these questions is to have 
them assess whether the positions continue to be incorporated into the 
aggregate national FTE caps. If the answer to the first two questions 
is yes, and the answer to the third question is no, the FTE caps 
associated with the previous program had already been incorporated into 
the national aggregate cap (prior to the hospital's closure); and 
because the FTE caps associated with the previous program are no longer 
available for use at any other hospital, there is ``room'' under the 
national aggregate caps for a ``new program'' adjustment for the 
hospital with the successor program. Consequently, there would be no 
danger that an FTE cap adjustment to reflect a new program would result 
in duplicative FTE caps. Thus, even if there are significant 
similarities between the program in terms of the program director, 
teaching staff, or residents, we could consider the program that was 
transferred from the closed hospital to be new for Medicare direct GME 
and IME purposes without concern for undermining the national aggregate 
FTE caps. To determine whether the FTE residents associated with a 
program are part of the closed hospital's FTE cap determination, the 
hospital that seeks an adjustment to its FTE caps would refer to the 
closed hospital's FTE documentation associated with its cost reporting 
period ending on or before December 31, 1996, or, if applicable, the 
cost report for other permanent cap adjustments permissible under the 
regulations.
    However, the same cannot be said of the situation where there are 
significant similarities between programs, and the first hospital 
remains open or the first hospital closes but the FTE caps remain 
available for use by another hospital (for example, the answer to the 
third question is yes). We do not believe it would be appropriate to 
consider a program that is substantially the same as a previous program 
at another hospital to be a new program where the first hospital 
remains open, or where the FTE cap slots for the previous program 
remain available for use by another hospital (for example, as a result 
of a merger).
    Up to this point, we have discussed the situation where one 
hospital closes and a program that was part of the closed hospital's 
FTE cap determination transfers to a new teaching hospital. We have 
indicated that we would add to the list of supporting factors the 
condition under which the program in question originated at a hospital 
that closed because there would be no duplicative FTE caps due to the 
closure of the first hospital. However, because our primary concern in 
this instance is that there should be no duplicative FTE resident cap 
slots, our intent would be to ensure, to the extent possible, that no 
FTE cap increases are granted in instances where another ``active'' FTE 
cap still exists, of which the transferred program was a part. As we 
stated above, the hospital to which the program transfers would need to 
assess whether this program was part of any other hospital's FTE cap 
determination and, if so, whether this program is still reflected in 
the FTE caps of any existing hospital.
    For example, we can envision a scenario where two teaching 
hospitals, Hospitals A and B, merge; Hospital B's Medicare provider 
agreement is retired (that is, it closes), and their respective FTE 
caps are combined under Hospital A's single Medicare provider 
agreement. Sometime subsequent to the merger, the merged facility 
decides that it no longer wishes to operate one of the programs that 
was part of Hospital B's FTE cap determination, and the program is 
transferred along with its program director, teaching staff, and 
residents to a new teaching Hospital C. In this case, it would not be 
appropriate to consider the program at Hospital C to be a new program 
because, although the program originated from Hospital B which closed, 
the FTE caps of which this program was a part are still in effect and 
available for use by the merged facility. Thus, if we were to adjust 
Hospital C's FTE caps for the transferred program, the adjustment would 
result in duplicative FTE resident slots relating to the same program. 
Similarly, there could be historical situations where a closed 
hospital's FTE caps were absorbed by another hospital through a 
termination clause in a Medicare GME affiliated group (prior to October 
1, 2002) (67 FR 50070). In such a case, a third hospital might seek an 
adjustment to its FTE caps for a new program that is substantially the 
same as a program formerly operated by the closed hospital. However, it 
would not be appropriate for that hospital to receive FTE cap increases 
relating to that program because, again, the FTE caps of which the 
transferred program was originally a part still exist, and, therefore, 
an adjustment to the third hospital's FTE resident caps would result in 
duplicative FTE residents caps relating to the same program.
    With respect to the commenter's suggestion that we could consider 
promulgating rules that would remove the slots from a hospital's FTE 
resident cap when it closes a program, but the hospital itself remains 
open, in addition to our concern about duplicative FTE caps, we do not 
believe we have the statutory authority to do this under section 
1886(h)(4) of the Act. Each hospital's FTE resident cap is equal to the 
FTE count in a base year, which is usually the hospital's most recent 
cost reporting period ending on or before December 31, 1996, as 
adjusted for new programs under Sec.  413.79(e) and other provisions, 
as applicable. Furthermore, each hospital's FTE cap is based on a total 
count of its allopathic and osteopathic residents, that is, a hospital-
specific cap, and is not generally associated with any particular 
program or specialty. We have tried, to the extent possible, to 
implement our policies in a

[[Page 43915]]

way to maintain the fungibility of FTE slots within a hospital's caps 
in order to maximize a hospital's flexibility to modify the mix and 
type of residents it trains. Accordingly, it is acceptable for a 
hospital to decide to close one program to make room within its FTE 
resident caps for additional numbers of residents in another program. 
Furthermore, the focus of the clarification in the proposed rule was 
not that a hospital may close a program and fill those vacated slots 
with residents from another specialty, which, by itself, is acceptable, 
but rather, it was to address the point that an FTE cap increase should 
only be awarded to a hospital for starting a genuinely new program, not 
one that was merely transferred from another hospital.
    Comment: Several commenters expressed surprise that CMS initiated a 
proposal that will have a ``chilling effect on primary care 
production'' at a time when the President has been so outspoken in his 
support for primary care. Other commenters similarly voiced their 
concerns regarding what they believed the detrimental and 
disproportionate effect the proposed rule may have on primary care 
residencies, which are already too few in aggregate number and which 
serve as the basis of America's healthcare system. One commenter noted 
that the shortage of primary care physicians extends to the available 
faculty for primary care residency programs, and this proposal would 
force closed primary care programs to find new faculty when they wish 
to reopen. Commenters also believed that the proposed rule is 
unrealistic for similar reasons, as it is unreasonable to suggest that 
the director, faculty, and residents in a closed residency program with 
Medicare-funded resident slots should relocate in order to continue 
their careers. The commenters stated that, by forcing closed primary 
care residency programs to relocate, the proposed rule will harm 
communities who are served by those residents. Another commenter 
specifically mentioned the retrospective nature of the proposed rule as 
posing a threat to primary care residencies that started after 1995, 
while other commenters mentioned the retrospective provision of the 
proposed rule as another example of its unreasonable nature.
    Several commenters mentioned that primary care residencies are more 
costly to hospitals than other specialty programs and, thus, would be 
the first to close if hospitals were forced to cut GME costs. The 
commenters also noted that residents are increasingly training in 
``newer, more community-based environments,'' specifically in the 
primary care field of family medicine, and CMS should attempt to 
regulate towards that new training style ``rather than continue to keep 
fitting training into the hospital.'' One commenter echoed the above 
statements by explaining that primary care residencies are often housed 
in community hospitals, which are prone to ``being rebuilt, bought and 
sold at a regular pace'' and, as such, would require their teaching 
programs to frequently switch locations. Another commenter remarked 
that CMS' previous efforts to enforce this clarification of its ``new 
program'' definition have already caused family medicine programs to 
spend much time and effort proving their new status to CMS, and such 
situations have even led to program closings.
    In a similar vein, some commenters believed that the proposed rule 
expressly harmed teaching hospitals in underserved areas. One commenter 
explained that many teaching hospitals serve a disproportionate number 
of ``indigent and underinsured/uninsured patients,'' and thus many are 
forced to close due to financial strain. This commenter believed that 
those residency programs, which ``serve those who need health care the 
most,'' should not be penalized for having to relocate. Another 
commenter stated that the proposed rule is unnecessary and unfair to 
hospitals that ``have acted in good faith'' by establishing new 
programs where they are needed.
    Response: We do not understand why the commenters viewed the 
proposed clarification regarding the definition of new programs as 
hindering the growth of primary care residency programs or residencies 
in underserved areas in particular. Neither of these types of 
residencies was specifically targeted in the proposed rule, nor were 
they mentioned at all. CMS had no intention of inappropriately 
inhibiting the growth of primary care residencies, or of ``harming'' 
teaching programs in underserved areas, with the proposed clarification 
of the definition of a new program. The supporting factors we 
identified as indicative of new programs, as described in the proposal, 
are meant to serve as general guidelines to hospitals for establishing 
new programs in all specialties. Furthermore, we believe that our 
revised policy allowing a hospital to receive FTE cap increases in the 
instance where it operates a program that is transferred from another 
hospital that closed should help provide some flexibility in situations 
where hospitals are closing and the community is struggling to maintain 
an adequate teaching presence and ensure sufficient access to care.
    Comment: One commenter noted that the proposal states that ``the 
statute clearly requires [emphasis added by commenter] that our rules 
regarding adjustments to the hospitals FTE caps for newly established 
programs must adhere to the principles of the statutory provision 
limiting the count of FTE residents for direct GME and IME payments to 
the count for the most recent cost reporting period ending on or before 
December 31, 1996.'' The commenter observed that the statute says: 
``(i) NEW FACILITIES--The Secretary shall, consistent with the 
principles [emphasis added by commenter] of subparagraphs (F) and (G), 
prescribe rules for the application of such subparagraphs in the case 
of medical residency training programs established on or after January 
1, 1995. In promulgating such rules for purposes of subparagraph (F), 
the Secretary shall give special consideration to facilities that meet 
the needs of underserved rural areas.'' This commenter believed that 
the Secretary has not given special consideration to underserved rural 
areas, despite a ``mandate'' to do so, and ``it seems disingenuous to 
strongly assert one provision of law while not following other 
statutory requirements.''
    Response: We disagree with the commenter that we are selectively 
focusing on certain aspects of the statute and the BBA conference 
report language, to the exclusion of others. It is clear that an 
overarching concern of Congress with respect to GME funding at the time 
that the BBA was passed was that a cap should be placed on the number 
of Medicare-funded resident positions, in an attempt to control 
spending while still addressing the needs of those areas of the country 
or those specialties where physicians were in shorter supply. 
Specifically, the BBA conference agreement includes ``* * * a 
requirement that the Secretary prescribe rules for limiting and 
counting the number of interns and residents in training programs 
established on or after January 1, 1995. In promulgating such rules, 
the Secretary would be required to give special consideration to 
facilities that meet the needs of underserved rural areas* * *. Among 
the specific issues that concerned the Conferees was application of a 
limit to new facilities, that is, hospitals or other entities which 
established programs after January 1, 1995. The Conferees understand 
that there are a sizeable number of hospitals that elect to initiate 
such programs (as well as terminate such programs) over any period of 
time, and the Conferees are concerned that within the principles

[[Page 43916]]

of the cap that there is proper flexibility to respond to such changing 
needs, including the period of time such programs would be permitted to 
receive an increase in payments before a cap was applied. Nonetheless, 
the Secretary's flexibility is limited by the conference agreement that 
the aggregate number of FTE residents should not increase over current 
levels. The Conferees are also concerned about the application of the 
limit on the number of residents to programs established to serve rural 
underserved areas, which the Conferees believe have special importance 
in easing physician shortages in such areas. The conference agreement 
provides the Secretary with statutory direction to provide special 
consideration to such programs.'' (House Conference Rept. No. 105-217, 
pp. 821-822)
    Accordingly, in promulgating regulations implementing the statutory 
caps, we allowed those urban hospitals that did not have residents in 
the most recent cost reporting period ending on or before December 31, 
1996, to adjust their caps for new programs only during a period of 3 
years after the first new program began training residents (Sec.  
413.79(e)(1)(iii)). Rural hospitals were not so limited. For those 
urban hospitals that had residents in the most recent cost reporting 
period ending on or before December 31, 1996, we allowed cap 
adjustments only for new programs established between January 1, 1995 
and August 5, 1997 (Sec.  413.79(e)(2)). However, we allowed rural 
hospitals, even ones that already had FTE caps during the base period 
(that is, the most recent cost reporting period ending on or before 
December 31, 1996), to receive an increase to their FTE resident cap at 
any time for starting new programs (Sec.  413.79(e)(3)). Therefore, 
contrary to the commenter's assertion, we have given ``special 
consideration'' to programs established to serve underserved areas.
    Comment: One commenter asked CMS for direction regarding a closed 
teaching program in a rural facility. The commenter desired to start 
another training program in that same specialty at a second facility 
and asked if this would meet the definition of a new program under the 
proposed clarification.
    Response: The hospital should evaluate the circumstances relating 
to the second program by assessing the factors as described above and 
in our proposed rule in order to be considered a new program. It 
appears from the comment that the rural hospital itself remains open, 
and only the program closed. Thus, the hospital that is considering 
opening a program in the same specialty should focus its assessment on 
the other supporting factors (whether there is a new program director, 
new faculty, and new residents).
    Comment: One commenter that represents dental residency programs 
stated that a number of dental programs were closed in the 1980s and 
1990s, and there is interest in reopening the programs in the same 
hospitals and nonhospital dental school clinics in which they were 
previously operated. The commenter noted that a hospital may be 
associated with the same dental school, program director, and teaching 
staff that were involved in operation of the old program, even though 
about 10 years may have passed since the previous program closed. The 
commenter believed that programs that open after being closed for 
several years and that require accreditation by the Council on Dental 
Accreditation as a new program should be treated by CMS as new.
    Response: We agree with the commenter that if a hospital wishes to 
begin training residents in a particular program in which it trained 
residents in the past, but the program has not trained residents for 
the past 10 years, the program could subsequently be considered a new 
program. We believe that a program that is closed for several years and 
then reopens is separate and distinct from the previous program, and 
would likely not involve any residents that had trained in the previous 
program, even though, as the commenter indicated, the directors and 
teaching staff may be the same. (However, we note that it may be 
necessary to determine whether the program director and the teaching 
staff have been training dental residents during the past 10 years at 
another training site in order to determine whether the program at the 
hospital that is beginning to train residents after a 10-year hiatus is 
truly a new program.)
    Comment: One commenter found it ``interesting'' that CMS provided 
several supporting factors for identifying a new program, but did not 
propose to change the actual text of the regulation.
    Response: Section 413.79(l) currently defines a new medical 
residency training program as ``a medical residency that receives 
initial accreditation by the appropriate accrediting body or begins 
training residents on or after January 1, 1995.'' We did not propose to 
revise the language of the regulations text because we believe the 
existing language is sufficient in that it conveys the important point 
that a program must be ``initially'' accredited for the first time as 
new by the accrediting body. The supporting factors that we have 
provided for determining whether a program is to be considered as new 
by CMS further clarify and support the concept of ``initial'' 
accreditation.
    Comment: One commenter was concerned that its hospital was 
negatively affected by an unfavorable interpretation of the statute 
related to training in nonprovider settings in cases where the program 
is jointly funded by two or more hospitals.
    One commenter asked CMS to clarify the statement ``may count 
towards board certification'' in Sec.  413.75 (b), and give specific 
examples of when a nonapproved program may count towards certification 
and when the interns and residents should be included in the FTE count.
    Response: We appreciate the submission of these comments. However, 
because they are outside the scope of the proposed rule, we are not 
responding to them in this final rule.
    In summary, in this final rule, we are clarifying our existing 
policy regarding the definition of a new medical residency training 
program. Under existing policy, to determine whether a program is new 
and whether, as a result, a hospital qualifies for an FTE cap 
adjustment, the supporting factors that a hospital should consider are 
(but not limited to) as follows:

--Is the program director new, and
--Is the teaching staff new, and
--Are there new residents?

    In determining whether a particular program is a newly established 
one, it may also be necessary to consider factors such as the 
relationship between hospitals (for example, common ownership or a 
shared medical school or teaching relationship) and the degree to which 
the hospital with the original program continues to operate its own 
program in the same specialty. In addition, the following factors could 
also be considered:

--Has this program been relocated from a hospital that closed?
--If so, was this program part of the closed hospital's FTE cap 
determination?
--More generally, is this program part of any existing hospital's FTE 
cap determination?

    We would not consider a transferred program to be new in the case 
where the program director, teaching staff, and residents are the same 
as another program that closed in another hospital and the first 
hospital remains open, or when an FTE cap that was associated

[[Page 43917]]

with the first program is still available for use by an existing 
provider.
3. Participation of New Teaching Hospitals in Medicare GME Affiliation 
Groups
    Sections 1886(h)(4)(F) and 1886(d)(5)(B)(v) of the Act establish 
limits on the number of allopathic and osteopathic residents that 
hospitals may count for purposes of calculating direct GME payments and 
the IME adjustment, respectively. Accordingly, effective October 1, 
1997, we established hospital-specific direct GME and IME FTE resident 
caps. Furthermore, under the authority granted by section 
1886(h)(4)(H)(ii) of the Act, the Secretary issued rules to allow 
institutions that are members of the same affiliated group to elect to 
apply their direct GME and IME FTE resident caps on an aggregate basis. 
Accordingly, as specified in the regulations at Sec. Sec.  413.79(f) 
and 412.105(f)(1)(vi), hospitals that are part of the same Medicare GME 
affiliated group are permitted to apply their direct GME and IME FTE 
resident caps on an aggregate basis, and to temporarily adjust each 
hospital's caps to reflect the rotation of residents among affiliated 
hospitals during an academic year. Under Sec.  413.75(b), a Medicare 
GME affiliated group can be formed by two or more hospitals if they are 
under common ownership, or if they are jointly listed as program 
sponsors or major participating institutions in the same program. 
Furthermore, the existing regulations at Sec.  413.79(f)(1) specify 
that each hospital in a Medicare GME affiliated group must submit a 
Medicare GME affiliation agreement (as defined under Sec.  413.75(b)) 
to the CMS fiscal intermediary or MAC servicing the hospital and send a 
copy to CMS' Central Office no later than July 1 of the residency 
program year during which the Medicare GME affiliation agreement will 
be in effect. For example, in order for a hospital to receive a 
temporary adjustment to its FTE resident caps to reflect participation 
in a Medicare GME affiliated group for the academic year beginning July 
1, 2009, through June 30, 2010, each hospital in the affiliated group 
is required to submit a Medicare GME affiliation agreement to the 
fiscal intermediary or MAC servicing the hospital and to CMS' Central 
Office no later than July 1, 2009.
    As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24193), it has recently come to CMS' attention that flexibility 
in the submission deadline for Medicare GME affiliation agreements due 
to an unanticipated need is warranted in situations where a hospital 
opens after July 1 and begins training residents for the first time 
prior to the following July 1. That is, the new hospital, because it 
did not train residents in the FTE cap base year, would have FTE 
resident caps of zero. Currently, if a new hospital begins training 
residents from another hospital's existing program, the new hospital 
would not be able to receive a temporary FTE resident cap adjustment 
through participation in a Medicare GME affiliated group because the 
existing regulations do not provide flexibility for a hospital that 
begins training residents after the start of an academic year to enter 
into and submit a Medicare GME affiliation agreement after the July 1 
submission deadline. That is, a new hospital that opens after July 1 
would not be able to enter into a Medicare GME affiliation agreement 
because the hospital did not exist before the submission deadline. We 
understand that the new hospital is likely to incur GME costs during 
the first year of training residents, and we believe it is reasonable 
to permit the new hospital that receives a new Medicare provider 
agreement and begins training residents for the first time after July 1 
of an academic year to receive an adjustment to its FTE resident caps 
for IME and direct GME payments through participation in a Medicare GME 
affiliated group during its first year of training residents, even if 
the hospital completes and submits the Medicare GME affiliation 
agreement to CMS after July 1 of the academic year. Accordingly, in the 
FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we proposed to amend Sec.  
413.79(f) by revising paragraph (f)(1) and adding a new paragraph 
(f)(6) (the existing paragraph (f)(6) would be redesignated as 
paragraph (f)(7)). In the proposed new paragraph (f)(6), we proposed to 
provide that a hospital that is new after July 1 and that begins 
training residents for the first time prior to the following July 1 
would be permitted to receive a temporary adjustment to its FTE 
resident caps to reflect its participation in an existing Medicare GME 
affiliated group if the new hospital submits a Medicare GME affiliation 
agreement the earlier of June 30 of the residency program year during 
which the Medicare GME affiliation agreement will be in effect or the 
end of the first cost reporting period during which the hospital begins 
training residents. For this purpose, a new hospital is one for which a 
new Medicare provider agreement takes effect in accordance with Sec.  
489.13. We proposed to require that the Medicare GME affiliation 
agreement specify the effective period for the agreement, which in any 
case would begin no earlier than the date the affiliation agreement is 
submitted to CMS. Furthermore, we proposed that each of the other 
hospitals participating in the Medicare GME affiliated group with the 
new hospital would be required to submit an amended Medicare GME 
affiliation agreement that reflects the participation of the new 
hospital to the CMS contractor servicing the hospital and send a copy 
to the CMS Central Office no later than June 30 of the residency 
program year during which the Medicare GME affiliation agreement will 
be in effect.
    Comment: A number of commenters applauded CMS' efforts to provide 
flexibility in the Medicare GME affiliation agreement regulation. 
However, the majority of the commenters believed the regulations, even 
with the addition of the proposed policy, remain unduly narrow and 
urged CMS to create further flexibility. For example, several 
commenters suggested that CMS add a fourth criterion for affiliations, 
specifying that hospitals that are members of the same GME consortium 
may enter into a Medicare GME affiliation agreement. Specifically, as 
an example of GME consortia, the commenters cited Osteopathic 
Postdoctoral Training Institutions (OPTIs), which are community-based 
training consortia comprised of at least one college of osteopathic 
medicine and one or more teaching hospitals as well as community-based 
facilities such as ambulatory care centers, rehabilitation centers, or 
surgicenters. The commenters believed that OPTIs ``provide a natural 
basis for affiliations among teaching hospitals and other training 
venues'' and therefore members of the same OPTI should be allowed to 
adjust their FTE resident caps within an aggregate cap. Another 
commenter requested that CMS allow hospitals that are members of the 
same health system to enter into a Medicare GME affiliation agreement 
and adjust their FTE resident caps within an aggregate cap, 
``irrespective of whether the hospital is designated as `new' or 
whether the FTE resident cap at any given hospital is new since 1995.''
    One commenter provided comments on our policy on counting FTE 
residents training in the nonhospital setting.
    Response: We appreciate the commenters' support of the proposed 
change and the additional suggestions on creating further flexibility 
in the regulations for Medicare GME affiliated groups. In the May 12, 
1998 final rule (63 FR 26336 through 26341), we

[[Page 43918]]

established the definition of a Medicare GME affiliated group and 
discussed the requirement for the timely submission of Medicare GME 
affiliation agreements. Specifically, the regulation at Sec.  413.75(b) 
defines Medicare GME affiliated group to mean (1) two or more hospitals 
that are located in the same urban or rural area (as defined in subpart 
D of Part 412 of this chapter) or in a contiguous area, (2) two or more 
hospitals that are not located in the same or in a contiguous urban or 
rural area * * * and are jointly listed as the sponsor, primary 
clinical site, or major participating institution for one or more 
programs, or (3) two or more hospitals that are under common ownership. 
Furthermore, the regulations specify that hospitals in an affiliated 
group are required to have a shared rotational arrangement. These 
provisions permit hospitals that are members of the same affiliated 
group to elect to apply their FTE resident caps on an aggregate basis. 
To respond to the commenters' suggestion that we expand the definition 
of affiliated group to allow hospitals and other entities involved in a 
GME consortium, for example OPTIs, to affiliate as a Medicare GME 
affiliated group, we note that the regulations specifically only refer 
to hospitals as members of an affiliated group. The sole benefit gained 
from participating in a Medicare GME affiliated group is the ability to 
count FTE residents under an aggregate FTE resident cap for GME payment 
purposes. That is, by aggregating FTE resident caps in a Medicare GME 
affiliated group, a hospital that is currently training above its own 
FTE resident cap can receive a temporary cap adjustment from another 
hospital that is training below its own FTE resident cap. The training 
venues cited by the commenters (community-based facilities such as 
ambulatory care centers, rehabilitation centers, or surgicenters) 
typically are either already a part of the hospital, which means they 
would be included in the affiliated group, or are nonhospital training 
sites in which case there are separate rules for counting FTE residents 
training in the nonhospital setting. There would be no additional 
benefit for a nonprovider to be included as a member of an affiliated 
group because a nonprovider would not have FTE resident caps to share 
in an affiliated group. Furthermore, we note that the hospitals in an 
OPTI currently do have the ability to form an affiliated group under 
the current definition of Medicare GME affiliated group at Sec.  
413.75(b). In addition to the ability to qualify through geographic 
proximity, all hospitals that meet the rotation requirement and are 
listed as sponsors or listed under ``affiliations and outside 
rotations'' for a program in operation in Opportunities, Directory of 
Osteopathic Postdoctoral Education Programs also qualify to participate 
in an affiliated group.
    In response to the commenter who suggested CMS allow hospitals that 
are members of the same health system to enter into a Medicare GME 
affiliation agreement and adjust their FTE resident caps within an 
aggregate cap, ``irrespective of whether the hospital is designated as 
`new' or whether the FTE resident cap at any given hospital is new 
since 1995,'' we note first that hospitals under common ownership 
already qualify to form an affiliated group because, as we noted in the 
May 12, 1998 final rule, ``these systems functionally operate 
coordinated and centrally controlled GME programs and often rotate 
their residents among various facilities, depending on training needs 
and other considerations'' (63 FR 26337). In addition, the commenter 
suggested that hospitals in an affiliated group be allowed to 
temporarily give away as well as receive FTE caps ``whether the FTE 
resident cap at any given hospital is new since 1995.'' The regulations 
at Sec.  413.79(e)(1)(iv) specify that a new urban teaching hospital 
that qualifies for an adjustment to its FTE caps for a newly approved 
program may enter into a Medicare GME affiliation agreement, but only 
if the resulting adjustments to its direct GME and IME caps are 
``positive adjustments.'' ``Positive adjustment'' means, for the 
purpose of this policy, that there is an increase in the new teaching 
hospital's caps as a result of the affiliation agreement. At no time 
would the caps of a hospital located in an urban area that qualifies 
for adjustment to its FTE caps for a new program under Sec.  
413.79(e)(1) be allowed to decrease as a result of a Medicare GME 
affiliation agreement. In the FY 2006 IPPS final rule (70 FR 47453), we 
stated that we established this policy ``because of our concern that 
hospitals with existing medical residency training programs could 
otherwise, with the cooperation of new teaching hospitals, circumvent 
the statutory FTE resident caps by establishing new medical residency 
programs in the new teaching hospitals solely for the purpose of 
affiliating with the new teaching hospitals to receive an upward 
adjustment to their FTE cap under an affiliation agreement. This would 
effectively allow existing teaching hospitals to achieve an increase in 
their FTE resident caps beyond the number allowed by their statutory 
caps.''
    Finally, we note that each hospital in an affiliated group is 
required to cross-train residents through a shared rotational 
arrangement with at least one other hospital in the affiliated group 
because the criteria for being members of the same affiliated group are 
intended to recognize that hospitals that have relationships for 
training their residents need flexibility to adjust their FTE resident 
cap. Hospitals that are geographically near each other, or operating as 
training sites under the same program, or are under common ownership 
have the greatest likelihood of being able to fulfill the cross-
training requirement. Accordingly, we believe that the current 
definition of Medicare GME affiliated group is sufficiently broad to 
include hospitals that have relationships for training residents and 
are in need of the flexibility afforded under an aggregate FTE resident 
cap.
    We consider the comment on the policy on counting FTE residents in 
the nonhospital setting to be outside the scope of the proposed rule; 
we did not propose any change in policy in this area. Therefore, we are 
not responding to it in this final rule.
    After consideration of the public comments we received, we are 
adopting as final, without modification, our proposal to revise 
paragraph (f)(1) of Sec.  413.79 and adding a new paragraph (f)(6) (the 
existing paragraph (f)(6) is redesignated as paragraph (f)(7)). In the 
new paragraph (f)(6), we provide that a hospital that is new after July 
1 and that begins training residents for the first time prior to the 
following July 1 is permitted to receive a temporary adjustment to its 
FTE resident caps to reflect its participation in an existing Medicare 
GME affiliated group if the new hospital submits a Medicare GME 
affiliation agreement the earlier of June 30 of the residency program 
year during which the Medicare GME affiliation agreement will be in 
effect, or the end of the first cost reporting period during which the 
hospital begins training residents. For this purpose, a new hospital is 
one for which a new Medicare provider agreement takes effect in 
accordance with Sec.  489.13. We are requiring that the Medicare GME 
affiliation agreement specify the effective period for the agreement, 
which in any case would begin no earlier than the date the affiliation 
agreement is submitted to CMS. Furthermore, each of the other hospitals 
participating in the Medicare GME affiliated group with the new 
hospital is required to submit an amended Medicare GME affiliation 
agreement that

[[Page 43919]]

reflects the participation of the new hospital to the CMS contractor 
servicing the hospital and send a copy to the CMS Central Office no 
later than June 30 of the residency program year during which the 
Medicare GME affiliation agreement will be in effect.
4. Technical Corrections to Regulations
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24193), 
we indicated that we had discovered that in the existing Sec.  
413.79(k), under the provision on residents training in rural track 
programs, paragraph (k)(7) incorrectly appears as regulation text after 
paragraph (l) of Sec.  413.79. To correct this error, we proposed to 
move paragraph (l) so that it appears as the last paragraph of the 
section after paragraph (k)(7).
    We did not receive any public comments on this proposal and, 
therefore, we are adopting the proposed change as final.
    In addition, the regulations at Sec.  413.75(b), paragraph (1), 
define an ``approved medical residency program'' as a program that is 
``approved by one of the national organizations listed in Sec.  
415.152''. Under Sec.  415.152, in the definition of an ``approved 
graduate medical education (GME) program'', we reference a residency 
program approved by the ``Committee on Hospitals of the Bureau of 
Professional Education of the American Osteopathic Association'' (AOA). 
In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24193), we 
indicated that it has come to our attention that the structure of the 
AOA has changed and that we should merely refer to a residency program 
approved by the AOA. Therefore, we proposed to make a technical change 
to paragraph (1) of the definition of an ``approved graduate medical 
education (GME) program'' under Sec.  415.152, to remove the phrase 
``the Committee on Hospitals of the Bureau of Professional Education 
of''. We did not receive any public comments on this proposal and 
therefore are adopting the proposed change as final.

H. Hospital Emergency Services Under EMTALA (Sec.  489.24)

1. Background
    Sections 1866(a)(1)(I), 1866(a)(1)(N), and 1867 of the Act impose 
specific obligations on certain Medicare-participating hospitals and 
CAHs. (Throughout this section of this proposed rule, when we reference 
the obligation of a ``hospital'' under these sections of the Act and in 
our regulations, we mean to include CAHs as well.) These obligations 
concern an individual who comes to a hospital emergency department and 
requests examination or treatment for a medical condition, and apply to 
all individuals, regardless of whether they are beneficiaries of any 
program under the Act.
    The statutory provisions cited above are frequently referred to as 
the Emergency Medical Treatment and Labor Act (EMTALA), also known as 
the patient antidumping statute. Section 9121 of the Consolidated 
Omnibus Budget Reconciliation Act of 1985 (COBRA), Public Law 99-272, 
incorporated the responsibilities of Medicare hospitals in emergency 
cases into the Social Security Act. Congress incorporated these 
antidumping provisions within the Act as a part of the hospital's 
provider agreement to ensure that any individual with an emergency 
medical condition is not denied essential lifesaving services. Under 
section 1866(a)(1)(I)(i) of the Act, a hospital that fails to fulfill 
its EMTALA obligations under these provisions may be subject to 
termination of its Medicare provider agreement, which would result in 
loss to the hospital of all Medicare and Medicaid payments.
    Section 1867 of the Act sets forth requirements for medical 
screening examinations for individuals who come to the hospital and 
request examination or treatment for a medical condition. The section 
further provides that if a hospital finds that such an individual has 
an emergency medical condition, it is obligated to provide that 
individual with either necessary stabilizing treatment or with an 
appropriate transfer to another medical facility.
    The regulations implementing section 1867 of the Act are found at 
42 CFR 489.24. The regulations at 42 CFR 489.20(l), (m), (q), and (r) 
also refer to certain EMTALA requirements outlined in section 1866 of 
the Act. The Interpretive Guidelines concerning EMTALA are found at 
Appendix V of the CMS State Operations Manual.
2. Changes Relating to Applicability of Sanctions Under EMTALA
    Section 1135 of the Act authorizes the Secretary to temporarily 
waive or modify the application of several requirements of titles 
XVIII, XIX, or XXI of the Act (the Medicare, Medicaid, and Children's 
Health Insurance Program provisions), and their implementing 
regulations in an emergency area during an emergency period. Section 
1135(g)(1) of the Act defines an ``emergency area'' as the geographical 
area in which there exists an emergency or disaster declared by the 
President pursuant to the National Emergencies Act or the Robert T. 
Stafford Disaster Relief and Emergency Assistance Act (subsection A) 
and a public health emergency declared by the Secretary pursuant to 
section 247d of Title 42 of the United States Code. Section 1135(g)(1) 
of the Act also defines an ``emergency period'' as the period during 
which such a disaster or emergency exists. Section 1135(b) of the Act 
lists the categories of otherwise applicable statutory and regulatory 
requirements that may be waived or modified. Included among these are 
the waiver of sanctions under EMTALA for, in subparagraph (b)(3)(A), a 
transfer of an individual who has not been stabilized (if the transfer 
is necessitated by the circumstances of the declared emergency in the 
emergency area during the emergency period) in violation of the EMTALA 
requirements governing transfer of an individual whose emergency 
medical condition has not been stabilized (section 1867(c) of the Act) 
and, in subparagraph (b)(3)(B), the direction or relocation of an 
individual to receive medical screening in an alternate location, 
pursuant to an appropriate State emergency preparedness plan. Section 
1135(b) of the Act further states that, except for certain emergencies 
involving pandemic infectious disease (described in further detail 
below), a waiver or modification provided for under section 1135(b)(3) 
of the Act shall be limited to a 72-hour period beginning upon 
implementation of a hospital disaster protocol.
    Section 302(b) of the Pandemic and All-Hazards Preparedness Act, 
Public Law 109-417, made two specific changes that affect EMTALA 
implementation in instances where the Secretary has invoked the section 
1135 waiver authority in an emergency area during an emergency period. 
Section 302(b)(1)(A) of Public Law 109-417 amended section 
1135(b)(3)(B) of the Act to state that sanctions for the direction or 
relocation of an individual for screening may be waived where, in the 
case of a public health emergency that involves a pandemic infectious 
disease, that direction or relocation occurs pursuant to a State 
pandemic preparedness plan, or to an appropriate State emergency 
preparedness plan. In addition, sections 302(b)(1)(B) and (b)(1)(C) of 
Public Law 109-417 amended section 1135(b) of the Act to further state 
that ``if a public health emergency involves a pandemic infectious 
disease (such as pandemic influenza), the duration of a waiver or 
modification for such emergency shall be determined in accordance with 
section 1135(e) of the Act as such

[[Page 43920]]

subsection applies to public health emergencies.''
    In the FY 2008 IPPS final rule with comment period (72 FR 47413), 
we amended the regulations at Sec.  489.24(a)(2) (which refers to the 
nonapplicability of certain EMTALA provisions in an emergency area 
during an emergency period) to incorporate the changes made to section 
1135 of the Act by the Pandemic and All-Hazards Preparedness Act. We 
amended the regulations to specify that, under a section 1135 waiver, 
the sanctions that do not apply are either those for the inappropriate 
transfer of an individual who has not been stabilized or those for the 
direction or relocation of an individual to receive medical screening 
at an alternate location. We also added a second sentence to paragraph 
(a)(2) to state that a waiver of these sanctions for EMTALA violations 
is limited to a 72-hour period beginning upon the implementation of a 
hospital disaster protocol, except that if a public health emergency 
involves a pandemic infectious disease (such as pandemic influenza), 
the duration of the waiver will be determined in accordance with 
section 1135(e) of the Act as it applies to public health emergencies. 
In the FY 2009 IPPS final rule (73 FR 28667), we made a technical 
change to the regulations at Sec.  489.24(a)(2) by adding section 1135 
language we had inadvertently left out when we made changes to the 
regulations at Sec.  489.24(a)(2) in the FY 2008 IPPS final rule with 
comment period. Specifically, we added the phrases ``pursuant to an 
appropriate State emergency preparedness plan or, in the case of a 
public health emergency that includes a pandemic infectious disease, 
pursuant to a State pandemic preparedness plan'' and ``during an 
emergency period,'' to make the regulatory language consistent with the 
statutory text. Existing Sec.  489.24(a)(2) states that ``Sanctions 
under this section for an inappropriate transfer during a national 
emergency or for the direction or relocation of an individual to 
receive medical screening at an alternate location pursuant to an 
appropriate State emergency preparedness plan or, in the case of a 
public health emergency that involves a pandemic infectious disease, 
pursuant to a State pandemic preparedness plan do not apply to a 
hospital with a dedicated emergency department located in an emergency 
area during an emergency period, as specified in section 1135(g)(1) of 
the Act. A waiver of these sanctions is limited to a 72-hour period 
beginning upon the implementation of a hospital disaster protocol, 
except that, if a public health emergency involves a pandemic 
infectious disease (such as pandemic influenza), the waiver will 
continue in effect until the termination of the applicable declaration 
of a public health emergency, as provided for by section 1135(e)(1)(B) 
of the Act.''
    As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24194 through 24195), after further review of the revised 
regulatory language as compared to the statutory language at section 
1135 of the Act, we believe that further revisions to the language of 
Sec.  489.24(a)(2) are necessary to make the language conform more 
closely to the language of section 1135 of the Act and better reflect 
how the section 1135 authority has been used in practice. Specifically, 
we stated that we believe that the regulatory language should be 
revised to be more consistent with the language in the statute to state 
that EMTALA sanctions for an inappropriate transfer may be waived only 
if the inappropriate transfer arises out of the circumstances of the 
emergency. We further proposed to amend the regulations to provide that 
the sanctions waived for both an inappropriate transfer and the 
redirection or relocation of an individual to receive a medical 
screening examination at an alternate location are only applicable if 
the hospital does not discriminate on the basis of an individual's 
source of payment or ability to pay. These additional requirements 
(which are underlined) are currently not included in the regulations 
text at Sec.  489.24(a)(2). To ensure that the language of the 
regulations is fully consistent with the statutory language at section 
1135 of the Act, we stated that we believe the regulations need to be 
clarified to include these provisions.
    In addition, as we stated in the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule, we believe the existing regulations do not adequately 
reflect the Secretary's authority under section 1135 of the Act to 
waive or modify requirements for a single health care provider, a class 
of health care providers, or a geographic subset of health care 
providers located within an emergency area during an emergency period. 
The language at section 1135(b) of the Act states:
    ``To the extent necessary to accomplish the purpose specified in 
subsection (a), the Secretary is authorized, subject to the provisions 
of this section, to temporarily waive or modify the application of, 
with respect to health care items and services furnished by a health 
care provider (or classes of health care providers) in any emergency 
area (or portion of such an area) during any portion of an emergency 
period, the requirements of titles XVIII, XIX, or XXI, or any 
regulation thereunder (and the requirements of this title other than 
this section, and regulations thereunder, insofar as they relate to 
such titles), pertaining to--'' (emphases added).
    Thus, it is clear from the emphasized text that waivers under the 
section 1135 authority may be tailored and applied to one or more 
hospitals in the emergency area (or portion thereof) during some or all 
of the emergency period, as necessary. However, the existing 
regulations may inadvertently imply, contrary to the flexibility 
clearly contemplated in the statute, that all hospitals in all portions 
of an emergency area during an entire emergency period automatically 
receive a waiver of EMTALA sanctions. In the proposed rule, we proposed 
revisions to the regulation text to clarify this issue.
    We proposed to revise the regulations to further clarify that the 
Secretary has the authority to implement a section 1135 waiver as 
necessary to ensure that the purpose of section 1135(a) of the Act can 
be achieved. That is, the Secretary is authorized to apply a section 
1135 waiver, for example, to one or more hospitals in the emergency 
area (or portion thereof) during some or all of the emergency period, 
as necessary. The Secretary may delegate implementation of a waiver of 
EMTALA sanctions to CMS (as the Secretary has done in every instance in 
which the section 1135 waiver authority has been invoked thus far.)
    In summary, we proposed to revise the regulations at Sec.  
489.24(a)(2) to state that a waiver of EMTALA sanctions pursuant to an 
inappropriate transfer only applies if the transfer arises out of the 
circumstances of the emergency. We also proposed to revise the 
regulations to provide that the sanctions waived for an inappropriate 
transfer or for the relocation or redirection of an individual to 
receive a medical screening examination at an alternate location are 
only in effect if the hospital to which the waiver applies does not 
discriminate on the source of an individual's payment or ability to 
pay. In addition, we proposed to revise the regulations to state that 
the Secretary has the authority to apply the waiver of EMTALA sanctions 
to one or more hospitals in a portion of an emergency area or a portion 
of an emergency period.
    Comment: Several commenters supported the proposed changes to the 
regulations to make them conform more closely to the statutory text. 
The

[[Page 43921]]

commenters agreed with the addition to the regulations stating that a 
waiver of EMTALA sanctions would only apply if the hospital does not 
discriminate on an individual's insurance status or ability to pay. The 
commenters also stated that revising the regulations to clarify that 
the Secretary has the authority to waive EMTALA sanctions for a portion 
of hospitals in an emergency area during a portion of an emergency 
period will enable the Secretary to waive EMTALA sanctions in a more 
expeditious manner when a public health emergency is declared.
    Response: We thank the commenters for their support of the 
proposals and are finalizing the provisions regarding a waiver of 
EMTALA sanctions only if the hospital does not discriminate based on an 
individual's source of payment and ability to pay and the Secretary's 
authority to waive EMTALA sanctions for a portion of an emergency area 
and during a portion of an emergency period.
    Comment: One commenter supported the intent of the law that a 
waiver of sanctions under EMTALA only applies if the transfer does not 
discriminate based on insurance status. However, the commenter 
questioned whether the regulations need to be revised to include this 
provision because the law is already quite clear. The commenter 
questioned the involvement of the Secretary in declaring a public 
health emergency in order to invoke the waiver. Specifically, the 
commenter stated that ``It is not evident to us that the government is 
in a position to be able to determine which hospitals within a public 
health emergency declaration should be granted a waiver from the EMTALA 
requirements and which ones should not.'' The commenter further stated 
that emergency situations tend to be chaotic and it may be difficult to 
gather information. The commenter believed that efforts should be 
focused on patient care and not the applicability of waivers to 
specific hospitals. Therefore, the commenter requested that the waiver 
be granted to an entire area. The commenter also asked for 
clarification on the timeliness of the declaration of a public health 
emergency. Specifically, the commenter stated that ``We have an 
additional concern regarding the timeliness of a Secretary's 
declaration of a public health emergency, when in fact events are 
likely to be ahead of any such decision. We understand that such 
declarations can be retroactive to an earlier date, but this still begs 
the question of timeliness.'' The commenter requested information on 
how to obtain an extension of a waiver of EMTALA sanctions past 72 
hours. The commenter stated that the rule is not clear and asked for 
simplicity and clarity on how, at the local level, the request for an 
extension or designation of a public health emergency can be 
communicated to the authorities.
    Another commenter supported the proposed provision, which 
acknowledges the Secretary's authority to apply the waiver to 
particular hospitals because, for example, level I and II trauma 
centers may be better equipped to handle a public health emergency. The 
commenter further stated that ``We do have concerns with the process 
for the Secretary, DHHS to declare a public health emergency 
expeditiously enough to allow for emergency department readiness * * *. 
We ask CMS to be aware of this and enforce the law and regulations 
judiciously.''
    Response: We believe that our proposal to amend the regulations to 
state that a waiver of sanctions can only be applied if the hospital 
does not discriminate on the basis of an individual's source of payment 
or ability to pay is necessary to ensure that the regulations reflect 
the entirety of statutory constraints related to a waiver of EMTALA 
sanctions under section 1135 of the Act and that hospitals are aware of 
the requirements they must meet in order to receive a waiver. 
Furthermore, we emphasize that the requirement not to discriminate on 
an individual's source of payment or ability to pay in order for a 
waiver of sanctions to be granted applies to both the waiver of 
sanctions governing an inappropriate transfer and the waiver of 
sanctions for the direction or relocation of an individual to receive a 
medical screening at an alternate location. In response to the 
involvement of the Secretary in declaring a public health emergency, 
the statute requires the Secretary to declare a public health emergency 
under 42 U.S.C. 247d in order to invoke the section 1135 waiver 
authority. In response to the comment regarding extending a waiver of 
EMTALA sanctions beyond 72 hours, section 1135(b) of the Act expressly 
limits the duration of the waiver to 72 hours (beginning with the 
implementation of a hospital disaster protocol) unless the public 
health emergency involves a pandemic infectious disease. Permitting a 
waiver of sanctions beyond that 72-hour period (except in the case of a 
pandemic infectious disease) would require a change in the law. We will 
continue to work with State and local officials to improve the 
communication that is needed to provide for timely and appropriate 
patient care during declared emergencies. We further note that a waiver 
of EMTALA sanctions can be implemented retroactive to the beginning of 
the emergency period.
    Comment: The majority of commenters disagreed with the proposed 
language at Sec.  489.24(a)(2)(i)(A) which specifies that ``If relating 
to an inappropriate transfer, the transfer arises out of the 
circumstances of the emergency.'' The commenters stated that this 
language is not consistent with the statute and could be interpreted 
too narrowly and misconstrued as only providing a waiver of sanctions 
if the individual's ``* * * emergency medical condition is the direct 
result of the public health emergency.'' The commenters stated that 
Congress' intent was not to provide a waiver of sanctions in scenarios 
where the individual's emergency medical condition was related to the 
declared emergency but to provide for a waiver of sanctions in cases 
where the hospital had to transfer the individual in a manner that is 
inconsistent with an appropriate transfer under EMTALA because of 
circumstance of the emergency. The commenters recommended that CMS 
revise the proposed regulation text at Sec.  489.24(a)(2)(i)(A) so that 
it reads ``If relating to an inappropriate transfer, the transfer is 
necessitated by the circumstances of the declared emergency.''
    Another commenter opposed the inclusion of the language ``If 
relating to an inappropriate transfer, the transfer arises out of the 
circumstances of the emergency'' ``* * * on the grounds that it is 
vague, likely to be arbitrary in its application, and not required by 
the language of the Act.'' The commenter further stated that such a 
regulatory requirement would necessitate that the hospital, its legal 
counsel, CMS, and the courts be able to determine the difference 
between the transfers that are due to the underlying disaster or 
emergency in the geographic area and those transfers that are not the 
result of the underlying disaster or emergency. The commenter stated 
that ``To distinguish between situations that do and do not arise out 
of the circumstances is likely to be arbitrary at best. Also the 
administrative and litigation proceedings that will result from adding 
such a vague condition will only hamper the purpose and requirements of 
the Act.''
    Response: We agree with the commenters that the intent of the 
statute is to provide flexibility in cases where an inappropriate 
transfer may arise out of conditions relating to the declared emergency 
and that it is not a requirement that an individual's

[[Page 43922]]

emergency medical condition be a direct result of the public health 
emergency in order for sanctions to be waived. To address the 
commenters' concerns and minimize confusion regarding applicability of 
the policy described at Sec.  489.24(a)(2)(i)(A), in this final rule, 
we are revising the regulatory text to state: ``The transfer is 
necessitated by the circumstances of the declared emergency in the 
emergency area during the emergency period.'' We are removing the 
phrase ``If relating to'' under both paragraphs (a)(2)(i)(A) and 
(a)(2)(i)(B) of Sec.  489.24 to provide for further consistency with 
the statutory language and clarify that sanctions can only be waived 
for an inappropriate transfer and for the direction or relocation of an 
individual to receive a medical screening and not for any action 
``related to'' these events. In response to the commenter who stated 
that including language pertaining to an inappropriate transfer would 
result in administrative and litigation proceedings, currently the 
statute limits the waiver related to inappropriate transfers to 
transfers necessitated by the circumstances of the declared emergency 
in the emergency area during the emergency period. This is not a new 
requirement under the law. Therefore, we do not believe that reflecting 
the statutory requirement in the regulations will have any effect on 
the likelihood of administrative and litigation proceedings.
    Comment: One commenter stated that regulations governing the 
application of sanctions should be as flexible as possible because of 
the innumerable types of emergency situations that may occur and the 
varied hospital and State responses that may result. The commenter 
stated that emergency situations are unpredictable and that there may 
be ``* * * state or hospital actions that are critical for an effective 
emergency response, but may technically violate EMTALA.'' Therefore, 
the commenter requested that CMS adopt the EMTALA Technical Advisory 
Group's (TAG) high priority recommendation with respect to expansion of 
EMTALA waivers, which is referred to as recommendation number 18 of the 
final TAG report.
    Response: The commenter is referring to the following 
recommendation made by the EMTALA TAG: ``The TAG recommends that HHS 
pursue statutory and regulatory changes, as well as changes to the 
Interpretive Guidelines, addressing waiving EMTALA obligations in an 
emergency as declared by a Federal, State, county, or city government 
or by an individual hospital.''
    The EMTALA TAG report containing this recommendation can be found 
at the following Web site: http://www.cms.hhs.gov/EMTALA/03_emtalatag.asp#TopOfPage. The recommendation made by the EMTALA TAG 
would require a statutory change. Because implementing this 
recommendation would require Congressional action, based on existing 
statutory language, we are not revising the regulation in this final 
rule.
    Comment: Several commenters stated that ``* * * lessons learned 
from recent disasters make it clear that changes to the law are needed 
in order to provide additional flexibility in regulatory enforcement 
and payment policy so that hospitals can maximize their ability to 
quickly and safely respond to the needs of their communities and 
patients in disasters.'' The commenters stated that they have developed 
examples of where changes and additional flexibilities are necessary 
and would be willing to work with CMS and the Secretary on legislative 
proposals to address these changes.
    Response: We appreciate the commenters' interest in continuing to 
improve access to patient care during emergency situations and the 
commenters' offer to work with CMS and the Secretary on legislative 
changes and future rulemaking to address the need for increased 
flexibility for hospitals during emergency situations.
    After consideration of the public comments we received, we are 
adopting as final the proposed change to Sec.  489.24(a)(2) of the 
regulations, except that we are changing the language under paragraphs 
(a)(2)(i)(A) and (a)(2)(i)(B) as noted above. The revised Sec.  
489.24(a)(2) reads as follows:
    ``(i) When a waiver has been issued in accordance with section 1135 
of the Act that includes a waiver under section 1135(b)(3) of the Act, 
sanctions under this section for an inappropriate transfer or for the 
direction or relocation of an individual to receive medical screening 
at an alternate location do not apply to a hospital with a dedicated 
emergency department if the following conditions are met:
    (A) The transfer is necessitated by the circumstances of the 
declared emergency in the emergency area during the emergency period.
    (B) The direction or relocation of an individual to receive medical 
screening at an alternate location is pursuant to an appropriate State 
emergency preparedness plan or, in the case of a public health 
emergency that involves a pandemic infectious disease, pursuant to a 
State pandemic preparedness plan.
    (C) The hospital does not discriminate on the basis of an 
individual's source of payment or ability to pay.
    (D) The hospital is located in an emergency area during an 
emergency period, as those terms are defined in section 1135(g)(1) of 
the Act.
    (E) There is a determination that a waiver of sanctions is 
necessary.
    (ii) A waiver of these sanctions is limited to a 72-hour period 
beginning upon the implementation of a hospital disaster protocol, 
except that, if a public health emergency involves a pandemic 
infectious disease (such as pandemic influenza), the waiver will 
continue in effect until the termination of the applicable declaration 
of a public health emergency, as provided under section 1135(e)(1)(B) 
of the Act.''

I. Rural Community Hospital Demonstration Program

    In accordance with the requirements of section 410A(a) of Public 
Law 108-173, the Secretary has established a 5-year demonstration 
program (beginning with selected hospitals' first cost reporting period 
beginning on or after October 1, 2004) to test the feasibility and 
advisability of establishing ``rural community hospitals'' for Medicare 
payment purposes for covered inpatient hospital services furnished to 
Medicare beneficiaries. A rural community hospital, as defined in 
section 410A(f)(1), is a hospital that--
    <bullet> Is located in a rural area (as defined in section 
1886(d)(2)(D) of the Act) or is treated as being located in a rural 
area under section 1886(d)(8)(E) of the Act;
    <bullet> Has fewer than 51 beds (excluding beds in a distinct part 
psychiatric or rehabilitation unit) as reported in its most recent cost 
report;
    <bullet> Provides 24-hour emergency care services; and
    <bullet> Is not designated or eligible for designation as a CAH.
    Section 410A(a)(4) of Public Law 108-173 states that no more than 
15 such hospitals may participate in the demonstration program.
    As we indicated in the FY 2005 IPPS final rule (69 FR 49078), in 
accordance with sections 410A(a)(2) and (a)(4) of Public Law 108-173 
and using 2002 data from the U.S. Census Bureau, we identified 10 
States with the lowest population density from which to select 
hospitals: Alaska, Idaho, Montana, Nebraska, Nevada, New Mexico, North 
Dakota, South Dakota, Utah, and Wyoming (Source: U.S. Census Bureau 
Statistical Abstract of the United States: 2003). Eleven rural 
community hospitals located within these States are currently 
participating in the demonstration program. (Of the 13

[[Page 43923]]

hospitals that participated in the first 2 years of the demonstration 
program, 4 hospitals located in Nebraska became CAHs and withdrew from 
the program.) In a notice published in the Federal Register on February 
6, 2008 (73 FR 6971 through 6973), we announced a solicitation for up 
to six additional hospitals to participate in the demonstration 
program. The February 6, 2008 notice specified the eligibility 
requirements for the demonstration program. Four additional hospitals 
were selected to participate under this solicitation. These four 
additional hospitals began under the demonstration payment methodology 
with the hospital's first cost reporting period starting on or after 
July 1, 2008. The end date of participation for these hospitals is 
September 30, 2010. Two hospitals among the hospitals that began the 
demonstration at the project's inception withdrew from the 
demonstration between April and June 2009. These two hospitals stated 
that they preferred being paid under the SCH provision of the MIPPA 
(Pub. L. 110-275) instead of participating in the demonstration.
    Under the demonstration program, participating hospitals are paid 
the reasonable costs of providing covered inpatient hospital services 
(other than services furnished by a psychiatric or rehabilitation unit 
of a hospital that is a distinct part), applicable for discharges 
occurring in the first cost reporting period beginning on or after the 
October 1, 2004 implementation date of the demonstration program (or 
the July 1, 2008 date for the newly selected hospitals). Payments to 
the participating hospitals will be the lesser amount of the reasonable 
cost or a target amount in subsequent cost reporting periods. The 
target amount in the second cost reporting period is defined as the 
reasonable costs of providing covered inpatient hospital services in 
the first cost reporting period, increased by the inpatient prospective 
payment update factor (as defined in section 1886(b)(3)(B) of the Act) 
for that particular cost reporting period. The target amount in 
subsequent cost reporting periods is defined as the preceding cost 
reporting period's target amount, increased by the inpatient 
prospective payment update factor (as defined in section 1886(b)(3)(B) 
of the Act) for that particular cost reporting period.
    Covered inpatient hospital services are inpatient hospital services 
(defined in section 1861(b) of the Act), and include extended care 
services furnished under an agreement under section 1883 of the Act.
    Section 410A of Public Law 108-173 requires that, ``in conducting 
the demonstration program under this section, the Secretary shall 
ensure that the aggregate payments made by the Secretary do not exceed 
the amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' Generally, when CMS 
implements a demonstration program on a budget neutral basis, the 
demonstration program is budget neutral in its own terms; in other 
words, the aggregate payments to the participating hospitals do not 
exceed the amount that would be paid to those same hospitals in the 
absence of the demonstration program. This form of budget neutrality is 
viable when, by changing payments or aligning incentives to improve 
overall efficiency, or both, a demonstration program may reduce the use 
of some services or eliminate the need for others, resulting in reduced 
expenditures for the demonstration program's participants. These 
reduced expenditures offset increased payments elsewhere under the 
demonstration program, thus ensuring that the demonstration program as 
a whole is budget neutral or yields savings. However, the small scale 
of this demonstration program, in conjunction with the payment 
methodology, makes it extremely unlikely that this demonstration 
program could be viable under the usual form of budget neutrality. 
Specifically, cost-based payments to participating small rural 
hospitals are likely to increase Medicare outlays without producing any 
offsetting reduction in Medicare expenditures elsewhere. Therefore, a 
rural community hospital's participation in this demonstration program 
is unlikely to yield benefits to the participant if budget neutrality 
were to be implemented by reducing other payments for these hospitals.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24196), 
we proposed two measures to achieve budget neutrality for the 
demonstration program for FY 2010, which, when combined, would lead to 
an adjustment in the national inpatient PPS rates. We proposed to 
adjust the national inpatient PPS rates by an amount sufficient to 
account for the added costs of this demonstration program. We proposed 
to apply budget neutrality across the payment system as a whole rather 
than merely across the participants in this demonstration program. As 
we discussed in the FY 2005, FY 2006, FY 2007, FY 2008, and FY 2009 
IPPS final rules (69 FR 49183; 70 FR 47462; 71 FR 48100; 72 FR 47392; 
and 73 FR 48670), we believe that the language of the statutory budget 
neutrality requirements permits the agency to implement the budget 
neutrality provision in this manner.
    First, in the proposed rule, we estimated the cost of the 
demonstration program for FY 2010 for the 13 participating hospitals. 
We stated that the estimate of the portion of the budget neutrality 
adjustment that accounts for the costs of the demonstration for FY 2010 
for 9 of the 13 hospitals (that is, the 9 hospitals that had 
participated in the demonstration since its inception and that were 
continuing to participate in the demonstration) was based on data from 
their first and second year cost reports--that is, cost reporting 
periods beginning in CY 2005 and CY 2006. We proposed to use these cost 
reports because they were the most recent complete cost reports and 
thus we believed they enabled us to estimate FY 2010 costs as 
accurately as possible. In addition, we estimated the cost of the 
demonstration for FY 2010 for the 4 hospitals that joined the 
demonstration in 2008 based on data for their cost reporting periods 
beginning October 1, 2005, through July 1, 2006 (that is, cost 
reporting periods that include CY 2006). When we added together the 
estimated costs of the demonstration for FY 2010 for the 9 hospitals 
that had participated in the demonstration since its inception and the 
4 new hospitals selected in 2008, the proposed total estimated cost was 
$14,613,632. This proposed estimated amount reflected the difference 
between the participating hospitals' estimated costs under the 
methodology set forth in Public Law 108-173 and the estimated amount 
the hospitals would have been paid under the IPPS.
    Second, for the proposed rule, because the cost reports of all 
hospitals participating in the demonstration in its first year (that 
is, FY 2005) had been finalized, we were able to determine how much the 
cost of the demonstration program exceeded the amount that was offset 
by the budget neutrality adjustment for FY 2005. For all 13 hospitals 
that participated in the demonstration in FY 2005, the amount was 
$7,179,461. The total proposed budget neutrality offset amount to be 
applied for the demonstration for the demonstration for FY 2010 was the 
sum of these two amounts, or $21,793,093. In addition, we stated in the 
FY 2010 IPPS/RY 2010 LTCH PPS proposed rule that the budget neutrality 
offset amount may be different in the IPPS final rule to the extent 
that we have more recent data.
    We did not receive any public comments on our proposal.

[[Page 43924]]

    For this final rule, based on more recent data, we are estimating 
the cost of the demonstration program for FY 2010 for the 11 currently 
participating hospitals. (As indicated previously, two hospitals 
recently withdrew from the demonstration, and we are adjusting the 
estimation of the cost of the demonstration for FY 2010 for this final 
rule to reflect this.) The estimate of the portion of the budget 
neutrality adjustment that accounts for the costs of the demonstration 
for FY 2010 for 7 of the 11 currently participating hospitals (that is, 
the 7 hospitals that have participated in the demonstration since its 
inception and that continue to participate in the demonstration) is 
based on data from their second year cost reports--that is, cost 
reporting periods beginning in CY 2006. We used these cost reports 
because they are the most recent complete cost reports and, thus, we 
believe they enable us to estimate FY 2010 costs for this final rule as 
accurately as possible. (We note that, at the time of the proposed 
rule, we had completed cost reports for cost reporting periods 
beginning in CY 2005 for all of the hospitals that had participated in 
the demonstration since its inception and that were continuing to 
participate, and complete cost reports for cost reporting periods 
beginning in CY 2006 for most, but not all, such hospitals. Because we 
did not have all cost reports for cost reporting periods beginning in 
CY 2006, we used data from CYs 2005 and 2006 to best estimate FY 2010 
costs for these hospitals. For this final rule, we had complete cost 
reports for cost reporting periods beginning in CY 2006 for all 7 
currently participating hospitals. Therefore, we used these most recent 
data to estimate costs.) In addition, we estimate the cost of the 
demonstration for FY 2010 for the 4 hospitals that joined the 
demonstration in 2008. For 3 of the 4 hospitals that joined the 
demonstration in 2008, we estimate the cost of the demonstration for FY 
2010 based on data for their cost reporting periods beginning January 
1, 2007, through July 1, 2007. Similarly, we used these cost reports 
because they are the most recent cost reports and, thus, we believe 
they enable us to estimate FY 2010 costs for these 3 hospitals as 
accurately as possible. We believe that the estimates obtained from the 
Medicare inpatient cost amounts on these cost reports allow for the 
most accurate estimation of the cost of the program in FY 2010. The 
remaining hospital of the 4 that began in 2008 is an Indian Health 
Service (IHS) provider. Historically, the hospital has not filed 
standard Medicare cost reports. In order to estimate its costs, we used 
an analysis of Medicare inpatient costs and payments submitted by the 
hospital for the cost reporting period of October 1, 2005, through 
September 30, 2006. The Medicare cost amount from this analysis for the 
IHS provider is identical to that used in the proposed rule. We chose 
this approach because it is consistent with our overall methodology. 
When we add together the estimated costs of the demonstration for FY 
2010 for the 7 hospitals that have participated in the demonstration 
since its inception and the 4 new hospitals selected in 2008 based on 
the more recent data, the total estimated cost is $15,081,251. This 
estimated amount reflects the difference between the participating 
hospitals' estimated costs under the methodology set forth in Public 
Law 108-173 and the estimated amount the hospitals would have been paid 
under the IPPS.
    Second, for this final rule, because the FYs 2005 and 2006 cost 
reports of all hospitals participating in the demonstration in its 
first and second years have been finalized, we are able to determine 
how much the cost of the demonstration program exceeded the amount that 
was offset by the budget neutrality adjustment for FY 2005 and FY 2006. 
For all 13 hospitals that participated in the demonstration in FY 2005, 
the amount is $7,856,617. For the 10 hospitals with cost reporting 
periods that began in FY 2006, the amount is $4,203,947. The sum of 
these amounts, or the amount by which the cost of the demonstration 
program exceeded the offset of the budget neutrality adjustment for FY 
2005 and FY 2006, is $12,060,564.
    The total budget neutrality offset amount applied for the 
demonstration for FY 2010 is the sum of these two amounts, or 
$27,141,815. We discuss the payment rate adjustment that is required to 
ensure the budget neutrality of the demonstration program for FY 2010 
in section II.A.4. of the Addendum to this final rule. This amount 
differs from that proposed in the proposed rule because we used more 
recent data, including the finalized FY 2006 cost reports of the 
hospitals that participated in the second year of the demonstration 
(these finalized reports enabled us to now include the amount by which 
the cost of the demonstration exceeded the amount that was offset by 
the FY 2006 budget neutrality adjustment).

J. Technical Correction to Regulations Relating to Calculation of the 
Federal Rate Under the IPPS

    Section 412.63 of the regulations specifies the procedures for 
determining the standardized amounts for inpatient operating costs for 
Federal fiscal years 1984 through 2004. These standardized amounts 
included a ``large urban area'' standardized amount for large urban 
hospitals and an ``other area'' standardized amount for hospitals 
located in other areas. In the FY 1989 IPPS final rule, we established 
Sec.  412.63(c)(5). Consistent with section 1886(d)(3)(C)(ii) of the 
Act, Sec.  412.63(c)(5) states that, for FYs 1987 through 2004, CMS 
calculated the average standardized amounts by excluding an estimate 
for IME payments. Accordingly, beginning in FY 1989, we updated the 
standardized amounts using an IME adjustment factor that excludes an 
estimate of IME payments. For a complete discussion on this adjustment 
factor for IME, we refer readers to the FY 1989 IPPS final rule (53 FR 
38538 through 38539).
    Section 1886(d)(3)(A)(iv) of the Act, as amended by section 401(a) 
of Public Law 108-173, requires that, beginning with FY 2004 and 
thereafter, we compute the standardized amount for all hospitals in any 
area equal to the standardized amount for the previous fiscal year for 
large urban hospitals, updated by the applicable percentage update 
under section 1886(b)(3)(B)(i) of the Act. In other words, beginning in 
FY 2004, we no longer computed a ``large urban area'' standardized 
amount and a separate ``other area'' standardized amount. As a result 
of this statutory change, we established new regulations at Sec.  
412.64 to specify the computation of the single standardized amount for 
FY 2005 and subsequent fiscal years (69 FR 49077). With the exception 
of removing a separate standardized amount for non-large urban 
hospitals, the regulation text at Sec.  412.64 virtually mirrors the 
regulation text at Sec.  412.63. For FY 2005 and subsequent fiscal 
years, we excluded an estimate for IME payments from the calculation of 
the standardized amount in accordance with section 1886(d)(3)(A)(iv) of 
the Act. However, we inadvertently omitted from Sec.  412.64 the 
language under paragraph (c)(5) of Sec.  412.63 that implements the 
exclusion of an estimate for IME payments from the calculation of the 
standardized amount in accordance with section 1886(d)(3)(A)(iv) of the 
Act. Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 
FR 24196 through 24197), we proposed to revise Sec.  412.64(c) to 
include this language so that Sec.  412.64(c) reflects the statutory 
requirement under section 1886(d)(3)(A)(iv) of the Act that calculation 
of the standardized amount excludes IME payments.
    We did not receive public comment on this technical correction; 
therefore,

[[Page 43925]]

we are adopting our proposal without modification.

VI. Changes to the IPPS for Capital-Related Costs

A. Overview

    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient acute hospital services ``in 
accordance with a prospective payment system established by the 
Secretary.'' Under the statute, the Secretary has broad authority in 
establishing and implementing the IPPS for acute care hospital 
inpatient capital-related costs. We initially implemented the IPPS for 
capital-related costs in the Federal fiscal year (FY) 1992 IPPS final 
rule (56 FR 43358), in which we established a 10-year transition period 
to change the payment methodology for Medicare hospital inpatient 
capital-related costs from a reasonable cost-based methodology to a 
prospective methodology (based fully on the Federal rate).
    FY 2001 was the last year of the 10-year transition period 
established to phase in the IPPS for hospital inpatient capital-related 
costs. For cost reporting periods beginning in FY 2002, capital IPPS 
payments are based solely on the Federal rate for almost all acute care 
hospitals (other than hospitals receiving certain exception payments 
and certain new hospitals). (We refer readers to the FY 2002 IPPS final 
rule (66 FR 39910 through 39914) for additional information on the 
methodology used to determine capital IPPS payments to hospitals both 
during and after the transition period.) The basic methodology for 
determining capital prospective payments using the Federal rate is set 
forth in Sec.  412.312 of the regulations. For the purpose of 
calculating payments for each discharge, currently the standard Federal 
rate is adjusted as follows:
    (Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment 
Factor (GAF)) x (COLA for hospitals located in Alaska and Hawaii) x (1 
+ Capital DSH Adjustment Factor + Capital IME Adjustment Factor, if 
applicable).

B. Exception Payments

    The regulations at Sec.  412.348(f) provide that a hospital may 
request an additional payment if the hospital incurs unanticipated 
capital expenditures in excess of $5 million due to extraordinary 
circumstances beyond the hospital's control. This policy was originally 
established for hospitals during the 10-year transition period, but as 
we discussed in the FY 2003 IPPS final rule (67 FR 50102), we revised 
the regulations at Sec.  412.312 to specify that payments for 
extraordinary circumstances are also made for cost reporting periods 
after the transition period (that is, cost reporting periods beginning 
on or after October 1, 2001). Additional information on the exception 
payment for extraordinary circumstances in Sec.  412.348(f) can be 
found in the FY 2005 IPPS final rule (69 FR 49185 and 49186).
    During the transition period, under Sec. Sec.  412.348(b) through 
(e), eligible hospitals could receive regular exception payments. These 
exception payments guaranteed a hospital a minimum payment percentage 
of its Medicare allowable capital-related costs depending on the class 
of the hospital (Sec.  412.348(c)), but were available only during the 
10-year transition period. After the end of the transition period, 
eligible hospitals can no longer receive this exception payment. 
However, even after the transition period, eligible hospitals receive 
additional payments under the special exceptions provisions at Sec.  
412.348(g), which guarantees all eligible hospitals a minimum payment 
of 70 percent of its Medicare allowable capital-related costs provided 
that special exceptions payments do not exceed 10 percent of total 
capital IPPS payments. Special exceptions payments may be made only for 
the 10 years from the cost reporting year in which the hospital 
completes its qualifying project, and the hospital must have completed 
the project no later than the hospital's cost reporting period 
beginning before October 1, 2001. Thus, an eligible hospital may 
receive special exceptions payments for up to 10 years beyond the end 
of the capital IPPS transition period. Hospitals eligible for special 
exceptions payments are required to submit documentation to the fiscal 
intermediary or MAC indicating the completion date of their project. 
(For more detailed information regarding the special exceptions policy 
under Sec.  412.348(g), we refer readers to the FY 2002 IPPS final rule 
(66 FR 39911 through 39914) and the FY 2003 IPPS final rule (67 FR 
50102).)

C. New Hospitals

    Under the IPPS for capital-related costs, Sec.  412.300(b) of the 
regulations defines a new hospital as a hospital that has operated 
(under current or previous ownership) for less than 2 years. For 
example, the following hospitals are not considered new hospitals: (1) 
A hospital that builds new or replacement facilities at the same or 
another location, even if coincidental with a change of ownership, a 
change in management, or a lease arrangement; (2) a hospital that 
closes and subsequently reopens; (3) a hospital that has been in 
operation for more than 2 years but has participated in the Medicare 
program for less than 2 years; and (4) a hospital that changes its 
status from a hospital that is excluded from the IPPS to a hospital 
that is subject to the capital IPPS. For more detailed information, we 
refer readers to the FY 1992 IPPS final rule (56 FR 43418). During the 
10-year transition period, a new hospital was exempt from the capital 
IPPS for its first 2 years of operation and was paid 85 percent of its 
reasonable costs during that period. Originally, this provision was 
effective only through the transition period and, therefore, ended with 
cost reporting periods beginning in FY 2002. Because, as discussed in 
the FY 2003 IPPS final rule (67 FR 50101), we believe that special 
protection to new hospitals is also appropriate even after the 
transition period, we revised the regulations at Sec.  412.304(c)(2) to 
provide that, for cost reporting periods beginning on or after October 
1, 2002, a new hospital (defined under Sec.  412.300(b)) is paid 85 
percent of its Medicare allowable capital-related costs through its 
first 2 years of operation, unless the new hospital elects to receive 
full prospective payment based on 100 percent of the Federal rate. (We 
refer readers to the FY 2003 IPPS final rule (67 FR 50101 through 
50102) for a detailed discussion of the special payment provisions for 
new hospitals under the capital IPPS after the 10-year transition 
period.)

D. Hospitals Located in Puerto Rico

    Section 412.374 of the regulations provides for the use of a 
blended payment amount for prospective payments for capital-related 
costs to hospitals located in Puerto Rico. Accordingly, under the 
capital IPPS, we compute a separate payment rate specific to Puerto 
Rico hospitals using the same methodology used to compute the national 
Federal rate for capital-related costs. In general, hospitals located 
in Puerto Rico are paid a blend of the applicable capital IPPS Puerto 
Rico rate and the applicable capital IPPS Federal rate.
    Prior to FY 1998, hospitals in Puerto Rico were paid a blended 
capital IPPS rate that consisted of 75 percent of the capital IPPS 
Puerto Rico-specific rate and 25 percent of the capital IPPS Federal 
rate. However, effective October 1, 1997 (FY 1998), in conjunction with 
the change to the operating IPPS blend percentage for hospitals located 
in Puerto Rico required by section 4406 of Public Law 105-33, we 
revised the methodology for computing capital IPPS

[[Page 43926]]

payments to hospitals in Puerto Rico to be based on a blend of 50 
percent of the capital IPPS Puerto Rico rate and 50 percent of the 
capital IPPS Federal rate. Similarly, in conjunction with the change in 
operating IPPS payments to hospitals located in Puerto Rico for FY 2005 
required by section 504 of Public Law 108-173, we again revised the 
methodology for computing capital IPPS payments to hospitals located in 
Puerto Rico to be based on a blend of 25 percent of the capital IPPS 
Puerto Rico rate and 75 percent of the capital IPPS Federal rate 
effective for discharges occurring on or after October 1, 2004.

E. Proposed and Final Changes

1. FY 2010 MS-DRG Documentation and Coding Adjustment
a. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009
    In the FY 2008 IPPS final rule with comment period (72 FR 47175 
through 47186), we adopted the MS-DRG patient classification system for 
the IPPS, effective October 1, 2007, to better recognize patients' 
severity of illness in Medicare payment rates. Adoption of the MS-DRGs 
resulted in the expansion of the number of DRGs from 538 in FY 2007 to 
745 in FY 2008 (currently 746, including one additional MS-DRG created 
in FY 2009). By increasing the number of DRGs and more fully taking 
into account patients' severity of illness in Medicare payment rates, 
the MS-DRGs encourage hospitals to change their documentation and 
coding of patient diagnoses. In that same final rule with comment 
period (72 FR 47183), we indicated that we believe the adoption of the 
MS-DRGs had the potential to lead to increases in aggregate payments 
without a corresponding increase in actual patient severity of illness 
due to the incentives for changes in documentation and coding. 
Accordingly, we established adjustments to both the national operating 
standardized amount and the national capital Federal rate to eliminate 
the estimated effect of changes in documentation and coding resulting 
from the adoption of the MS-DRGs that do not reflect real changes in 
case-mix. Specifically, we established prospective documentation and 
coding adjustments of -1.2 percent for FY 2008, -1.8 percent for FY 
2009, and -1.8 percent for FY 2010. However, to comply with section 
7(a) of Public Law 110-90, enacted on September 29, 2007, in a final 
rule published in the Federal Register on November 27, 2007 (72 FR 
66886 through 66888), we modified the documentation and coding 
adjustment for FY 2008 to -0.6 percent, and consequently revised the FY 
2008 IPPS operating and capital payment rates, factors, and thresholds 
accordingly, with these revisions effective October 1, 2007.
    For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -1.8 
percent adjustment established in the FY 2008 IPPS final rule with 
comment period. As discussed in the FY 2008 IPPS final rule with 
comment period (72 FR 48447 and 48733 through 48774), we applied a 
documentation and coding adjustment of -0.9 percent to the FY 2009 IPPS 
national standardized amounts and the capital Federal rate. The 
documentation and coding adjustments established in the FY 2009 IPPS 
final rule, as amended by Public Law 110-90, are cumulative. As a 
result, the -0.9 percent documentation and coding adjustment in FY 2009 
was in addition to the -0.6 percent adjustment in FY 2008, yielding a 
combined effect of -1.5 percent. (For additional details on the 
development and implementation of the documentation and coding 
adjustments for FY 2008 and FY 2009, we refer readers to section II.D. 
of this preamble and the following rules published in the Federal 
Register: August 22, 2007 (72 FR 47175 through 47186 and 47431 through 
47432); November 27, 2007 (72 FR 66886 through 66888); and August 19, 
2008 (73 FR 48447 through 48450 and 48773 through 48775).)
b. Prospective MS-DRG Documentation and Coding Adjustment to the 
National Capital Federal Rate for FY 2010 and Subsequent Years
    As discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 
FR 24199 through 24200), consistent with the prospective adjustment to 
the national average operating IPPS standardized amounts (discussed in 
section II.D. of this preamble), under the capital IPPS we also 
continue to believe that it is appropriate to make adjustments to the 
capital IPPS rates to eliminate the effect of any documentation and 
coding changes as a result of the implementation of the MS-DRGs. These 
adjustments are intended to ensure that future annual aggregate IPPS 
payments are the same as payments that otherwise would have been made 
had the prospective adjustments for documentation and coding applied in 
FY 2008 and FY 2009 accurately reflected the change due to 
documentation and coding that occurred in those years. As noted above 
in section VI.A. of this preamble, under section 1886(g) of the Act, 
the Secretary has broad authority in establishing and implementing the 
IPPS for acute care hospital inpatient capital-related costs (that is, 
the capital IPPS). We have consistently stated since the initial 
implementation of the MS-DRG system that we do not believe it is 
appropriate for Medicare expenditures under the capital IPPS to 
increase due to MS-DRG related changes in documentation and coding. 
Accordingly, we believe that it is appropriate under the Secretary's 
broad authority under section 1886(g) of the Act, in conjunction with 
section 1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 
110-90, to make adjustments to the capital Federal rate to eliminate 
the full effect of the documentation and coding changes resulting from 
the adoption of the MS-DRGs. We believe that this is appropriate 
because, in absence of such adjustments, the effect of the 
documentation and coding changes resulting from the adoption of the MS-
DRGs results in inappropriately high capital IPPS payments because that 
portion of the increase in aggregate payments is not due to an increase 
in patient severity (and costs).
    We have performed a thorough retrospective evaluation of the most 
recent available claims data, and the results of this evaluation were 
used by our actuaries to determine any necessary payment adjustments 
beyond the cumulative -1.5 percent adjustment applied in determining 
the FY 2009 capital Federal rate to ensure budget neutrality for the 
implementation of MS-DRGs. Specifically, as discussed in greater detail 
in section II.D.4. of the preamble of this final rule, for the proposed 
rule, we performed a retrospective evaluation of the FY 2008 claims 
data updated through December 2008. We updated that analysis for this 
final rule based on the FY 2008 claims data updated through March 2009, 
which confirmed our original analysis. Based on this evaluation, which 
is described in greater detail in section II.D.4. of this preamble, our 
actuaries have determined that the implementation of the MS-DRG system 
resulted in a 2.5 percent change in case-mix due to documentation and 
coding that did not reflect real changes in case-mix for discharges 
occurring during FY 2008.
    The 2.5 percent change in FY 2008 case-mix due to documentation and 
coding changes that did not reflect real changes in case-mix for 
discharges occurring during FY 2008 exceeds the -0.6 percent 
prospective documentation and coding adjustment applied to the FY 2008 
capital Federal rate (as established in the final rule

[[Page 43927]]

published in the Federal Register on November 27, 2007 (72 FR 66886 
through 66888)) by 1.9 percentage points (2.5 percent minus 0.6 
percent). Therefore, in the proposed rule, under the Secretary's broad 
authority under section 1886(g) of the Act, in conjunction with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, we 
proposed to reduce the capital Federal rate in FY 2010 by -1.9 percent 
to account for the amount by which the 2.5 percent change in FY 2008 
exceeds the established -0.6 percent adjustment. Furthermore, 
consistent with our proposal under the operating IPPS, we proposed to 
leave that proposed -1.9 percent adjustment in place for subsequent 
fiscal years to account for the effect in FY 2010 and subsequent years 
of the amount by which the 2.5 percent change in FY 2008 exceeds the 
established -0.6 percent adjustment.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we sought 
public comment on the proposed -1.9 percent prospective adjustments to 
address the effect of documentation and coding changes unrelated to 
changes in real case-mix in FY 2008. In addition, as we discussed in 
section II.D. of the preamble of the proposed rule, we sought public 
comment on addressing in the FY 2011 rulemaking cycle any differences 
between the increase in FY 2009 case-mix due to documentation and 
coding changes that do not reflect real changes in case-mix for 
discharges occurring during FY 2009 and the -0.9 percent prospective 
documentation and coding adjustment applied in determining the FY 2009 
capital Federal rate established in the FY 2009 IPPS final rule.
    Comment: One commenter sought clarification whether or not the 
estimate of case-mix change related to documentation and coding fully 
considers the estimate of real case-mix change for FYs 2009 and 2010 
under the capital IPPS.
    Response: Our actuaries' estimate of real case-mix change under 
capital IPPS for FYs 2009 and FY 2010 represents a long-term projection 
of real case-mix growth. In contrast, as described above, our actuaries 
estimate of case-mix change related to documentation and coding changes 
in FY 2008 of 2.5 percent is based on a retrospective evaluation of 
actual FY 2008 claims data. Our estimate of case-mix change related to 
documentation and coding in FY 2008 does not require the consideration 
of real case-mix changes since the methodology for estimating the FY 
2008 documentation and coding effect does not, by definition, include 
real case-mix, regardless of the actual real case-mix level because it 
uses only FY 2008 claims, as discussed in more detail in the comment 
responses in section II.D.4. of this preamble.
    Comment: In addition to the comments on the methodology and 
economic impact of the proposed -1.9 percent documentation and coding 
adjustment discussed in section II.D.4. and section II.D.5. of this 
preamble, a few commenters specifically opposed the application of the 
proposed -1.9 percent adjustment to the capital Federal rate. The 
commenters noted that such a reduction in capital IPPS payments, 
coupled with the reductions to capital IPPS payments over the past few 
years, would be difficult to sustain in the current national economic 
environment and would affect hospitals' ability to fund much needed 
capital projects. Accordingly, the commenters recommended that the 
proposed adjustment for documentation and coding for FY 2010 not be 
applied to the capital Federal rate.
    Response: As explained above, we believe that it is appropriate to 
make adjustments to the capital Federal rate to eliminate the full 
effect of the documentation and coding changes resulting from the 
adoption of the MS-DRGs, which in the absence of such adjustments, 
results in inappropriately high capital IPPS payments because that 
portion of the increase in aggregate payments is not due to an increase 
in patient severity of illness (and costs). Our actuaries have 
determined, and MedPAC has confirmed, that the implementation of the 
MS-DRG system resulted in a change of 2.5 percent, which represents the 
documentation and coding effect that does not reflect real changes in 
case-mix for discharges occurring during FY 2008. The impact of these 
changes is greater than the -0.6 percent prospective documentation and 
coding adjustments applied to the FY 2008 capital Federal rate. 
Therefore, as described in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule, we proposed to adjust the FY 2010 capital Federal rate by -1.9 
percent.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we also 
discussed our examination of the differences in case-mix between the FY 
2008 claims data in which cases were grouped through the FY 2008 
GROUPER (Version 25.0) and the FY 2009 GROUPER (Version 26.0). As 
discussed in section II.D.5. of this preamble, this was to help inform 
our analysis of the potential for increase in the documentation and 
coding effect in FY 2009. In FY 2008, we were transitioning to the 
fully implemented MS-DRG relative weights and the fully implemented 
cost-based weights. We found that the use of the transition weights 
(that is, weights that were based on a 50/50 blend of the MS-DRG 
relative weights and the CMS DRG relative weights (72 FR 47276) 
mitigated the FY 2008 documentation and coding effect on expenditures. 
Specifically, our analysis of FY 2008 claims data shows that, even 
assuming no additional changes in documentation and coding in FY 2009, 
the use of the FY 2009 MS-DRG relative weights (which no longer were 
based on a blend of the MS-DRGs and the CMS DRGs) results in an 
additional 0.7 percent documentation and coding effect in FY 2009. 
Based on these analyses and other factors, our actuaries continue to 
estimate that the cumulative overall effect of documentation and coding 
changes under the MS-DRG system will be 4.8 percent. Our actuaries also 
estimate that these changes will be substantially complete by the end 
of FY 2009. Therefore, our current estimate of the MS-DRG documentation 
and coding effect is 2.3 percent for discharges occurring during FY 
2009 (that is, the 4.8 percent total increase minus the 2.5 percent 
increase from FY 2008). Consistent with the national operating 
standardized amounts presented in section II.D.4. of this preamble, we 
proposed to address any differences between the increase in FY 2009 
case-mix due to documentation and coding that do not reflect real 
changes in case-mix for discharges occurring during FY 2009 and the -
0.9 percent prospective documentation and coding adjustment applied to 
the FY 2009 capital Federal rate in a future rulemaking after a full 
evaluation of the overall national average changes in case-mix for FY 
2009 can be completed.
    We continue to believe it is appropriate to make adjustments to the 
capital Federal rate to eliminate the full effect of the documentation 
and coding changes resulting from the adoption of the MS-DRGs. However, 
after consideration of the public comments, consistent with the 
application of the documentation and coding adjustment to the operating 
IPPS standardized amounts discussed in section II.D.5. of this 
preamble, we have determined that it would be appropriate to postpone 
the adoption of any additional documentation and coding adjustments to 
the capital IPPS rates until a full analysis of FY 2009 case-mix 
changes can be completed. Although we only proposed to make a -1.9 
percent adjustment to account for the portion of the estimated 2.5 
percent change in FY

[[Page 43928]]

2008 case-mix due to documentation and coding changes that exceeds the 
-0.6 percent prospective documentation and coding adjustment applied to 
the FY 2008 capital Federal rate (that is, 2.5 percent minus 0.6 
percent = 1.9 percent), as noted above, our current estimate of the MS-
DRG documentation and coding effect for FY 2009 is 2.3 percent (that 
is, the 4.8 percent total increase minus the 2.5 percent increase from 
FY 2008). If the estimated documentation and coding effect determined 
based on a full analysis of FY 2009 claims data is more or less than 
our current estimates, it would change the anticipated cumulative 
adjustments that we currently estimate we would have to make for FY 
2008 and FY 2009 combined. In future rulemaking, we will consider 
applying a prospective documentation and coding adjustment to the 
capital IPPS rates based on a complete analysis of FY 2008 and FY 2009 
claims data.
c. Documentation and Coding Adjustment to the Puerto Rico-Specific 
Capital Rate
    As discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, 
under Sec.  412.74, Puerto Rico hospitals are currently paid based on 
75 percent of the national capital Federal rate and 25 percent of the 
Puerto Rico-specific capital rate. In the FY 2009 IPPS final rule (73 
FR 48775), consistent with our development of the FY 2009 Puerto Rico-
specific operating standardized amount, we did not apply the additional 
-0.9 percent documentation and coding adjustment (or the cumulative -
1.5 percent adjustment) to the FY 2009 Puerto Rico-specific capital 
rate. However, we discussed that the statute gives broad authority to 
the Secretary under section 1886(g) of the Act, with respect to the 
development of and adjustments to a capital PPS, and therefore we would 
not be outside the authority of section 1886(g) of the Act in applying 
the documentation and coding adjustment to the Puerto Rico-specific 
portion of the capital payment rate. As we explained in that same final 
rule, to date we had not yet applied a documentation and coding 
adjustment to the Puerto Rico-specific capital rate because we have 
historically made changes to the capital IPPS consistent with those 
changes made to the operating IPPS. We also stated that we may propose 
to apply such an adjustment to the Puerto Rico capital rates in the 
future.
    As discussed in section II.D.10. of the preamble of the proposed 
rule and in this final rule, when we performed a retrospective 
evaluation of the FY 2008 claims data of hospitals located in Puerto 
Rico using the same methodology discussed above, we found that the 
change in case-mix due to documentation and coding that did not reflect 
real changes in case-mix for discharges occurring during FY 2008 from 
hospitals located in Puerto Rico was approximately 1.1 percent. Given 
this case-mix increase due to changes in documentation and coding under 
the MS-DRGs, consistent with our proposal to adjust the FY 2010 capital 
Federal rate presented above and consistent with our proposed 
adjustment to the FY 2010 Puerto Rico-specific standardized amount 
discussed in section II.D.10. of the preamble of the proposed rule, in 
the proposed rule, under the Secretary's broad authority under section 
1886(g) of the Act, we proposed to adjust the Puerto Rico-specific 
capital rate by -1.1 percent in FY 2010 for the FY 2008 increase in 
case-mix due to changes in documentation and coding under the MS-DRGs. 
In addition, consistent with our other proposals concerning prospective 
MS-DRG documentation and coding adjustments to the capital Federal rate 
and operating IPPS standardized amounts presented in the proposed rule, 
we proposed to leave that proposed -1.1 percent adjustment in place for 
subsequent fiscal years in order to ensure that changes in 
documentation and coding resulting from the adoption of the MS-DRGs do 
not lead to an increase in aggregate payments not reflective of an 
increase in real case-mix. We proposed that the proposed 1.1 percent 
adjustment would be applied to the capital Puerto Rico-specific rate 
that accounts for 25 percent of payments to hospitals located in Puerto 
Rico, with the remaining 75 percent based on the national capital 
Federal rate, which we proposed to adjust as described above. 
Consequently, the proposed overall reduction to the FY 2010 payment 
rates for hospitals located in Puerto Rico to account for documentation 
and coding changes would be slightly less than the reduction for IPPS 
hospitals paid based on 100 percent of the national capital Federal 
rate. As noted above, the Puerto Rico-specific capital rate was not 
adjusted for the effects of documentation and coding changes in FY 2008 
or FY 2009 as were the FY 2008 and FY 2009 national capital Federal 
rates.
    As stated in section II.D.10. of the preamble of the proposed rule, 
we sought public comment on the proposed -1.1 percent prospective 
adjustment to the Puerto Rico-specific IPPS rates in FY 2010 for the FY 
2008 documentation and coding effect, including the methodology for 
determining these adjustments. In addition, we sought public comment on 
addressing in the FY 2011 rulemaking cycle any increase in FY 2009 
case-mix due to documentation and coding changes that did not reflect 
real changes in case-mix for discharges occurring during FY 2009. We 
did not receive any public comments on the proposed -1.1 percent 
prospective adjustment to the Puerto Rico-specific IPPS rates in FY 
2010 for the FY 2008 documentation and coding effect. However, as 
discussed in greater detail above, in this final rule, we have 
determined that it would be appropriate to postpone the adoption of any 
documentation and coding adjustments to the capital IPPS rates at this 
time until a full analysis of FY 2009 case-mix changes can be 
completed. Any future documentation and coding adjustment to the 
capital Puerto Rico-specific IPPS rates based on a complete analysis of 
FY 2008 and FY 2009 claims data for Puerto Rico hospitals would be 
established through the notice and comment rulemaking process.
2. Revision to the FY 2009 IME Adjustment Factor
    In the FY 2008 IPPS final rule, we established a policy to phase 
out the capital IPPS teaching adjustment over a 3-year period because 
of the high positive aggregate capital IPPS Medicare margins for 
teaching hospitals. Under the regulations, as established at Sec.  
412.322(b), (c), and (d), teaching hospitals would receive the full 
capital IME adjustment for FY 2008, but the adjustment would be reduced 
by 50 percent in FY 2009, and there would be no capital IME adjustment 
for FY 2010 and thereafter.
    As noted in section VI.A. of this preamble, section 4301(b)(1) of 
Public Law 111-5 requires that the phase-out of the capital IPPS 
teaching adjustment specified at Sec.  412.322(c) of the regulations 
(that is, the 50-percent reduction for FY 2009) shall not be applied, 
and the Secretary shall apply Sec.  412.322 without regard to paragraph 
(c) of that section. Furthermore, section 4301(b)(2) of the Public Law 
111-5 specifies that the law has no effect on Sec.  412.322(d), which 
eliminates the capital IPPS teaching adjustment for FY 2010 and 
thereafter. Therefore, in order to reflect the current statutory 
requirements as specified in section 4301(b)(1) of Public Law 111-5, in 
the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we proposed to delete 
Sec.  412.322(c) of the existing regulations.

[[Page 43929]]

In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we solicited public 
comments on our proposed implementation of section 4301(b) of Public 
Law 111-5 concerning capital IME payments.
    Comment: Numerous commenters addressed the proposal to implement 
section 4301(b) of Pub. L. 111-5. Specifically, the commenters 
unanimously opposed the elimination of the capital IME adjustment for 
FY 2010. Many commenters discussed the financial impact that 
eliminating the capital teaching adjustment would have on teaching 
hospitals across the country or in their States and for a particular 
hospital. Some commenters pointed out that the level of capital 
payments to hospitals is already projected to decrease in FY 2010 
compared to FY 2009. The commenters advised that if CMS reversed the 
cut to the capital IME adjustment, it would mitigate what the 
commenters believed to be a substantial decrease in capital payments. A 
large number of commenters also believed any margin analysis should 
include both the operating and capital payment systems. They stated 
that IPPS is the only Medicare payment system that does not provide a 
single payment for total cost (operating and capital), and that 
hospitals have always used their operating and capital payments as if 
they were one payment. Therefore, margin analysis, as well, should 
include both payment systems.
    The commenters indicated that teaching hospitals are the main 
providers of uncompensated care and often act as the community safety 
net and added that these responsibilities increase costs to teaching 
hospitals in addition to the more traditional sources of higher costs 
such as for training purposes. They also stated that these safety net 
teaching hospitals rely heavily upon Medicare capital payments as a 
source of stable revenue for capital improvements because it is often 
difficult for these types of hospitals to access affordable funding. 
One commenter indicated that Medicare capital payments are critical to 
safety net type hospitals as uncompensated costs have increased and 
that looking at capital margins in isolation is not indicative of the 
overall health of a hospital.
    Some commenters also found CMS' proposed elimination of payment 
that supports medical education contradictory to CMS' emphasis on 
quality, preventive measures and improved clinical outcomes as a method 
of reducing cost. Several commenters also mentioned that CMS' proposal 
is at odds with Congress' intent when they established special payments 
for teaching hospitals as a means of Medicare supporting medical 
education until other insurers fill that role. This has not occurred, 
according to commenters; therefore, the requisite teaching adjustment 
allows Medicare to continue in this necessary role.
    Response: We recognize the importance of hearing the opinions of 
the health care industry and other stakeholders, and we have found it 
valuable to review the many comments we received on this issue. We 
carefully considered our approach to eliminating the capital teaching 
adjustment and were aware of the reaction such an action would garner. 
As operators of the Medicare program, we not only have a responsibility 
to ensure quality of and access to care for Medicare beneficiaries, we 
also have a financial responsibility to the program to create policies 
that are not a detriment to its financial viability as well as to 
change or eliminate those policies that have a negative financial 
effect to the program. Consequently, we developed the policy to 
eliminate the capital teaching adjustment after conducting numerous 
analyses with particular attention given to capital Medicare costs and 
payments under the capital IPPS. It is never our intent to create 
financial hardship for hospitals, nor is it our purpose to enable some 
hospitals to experience consistently large positive margins. As we have 
discussed in previous rulemakings (72 FR 47393; 73 FR 48672), the 
statutory history of the capital IPPS suggests that the system in the 
aggregate should not provide for continuous, large positive margins. 
Our analyses indicated that the adjustments for teaching hospitals have 
been a contributor to the excessive capital payment levels in previous 
years.
    While we continue to believe our margin analyses are accurate, we 
also acknowledge that the analyses covered the period from 1996 through 
2006, using the most recently available data at the time that we 
proposed and adopted the 3-year phase-out of the capital IME 
adjustment. In consideration of numerous comments regarding the capital 
expenditure cycle, as well as commenters referencing other margin 
analyses by outside sources that indicated a decline in capital 
margins, we conducted further capital margin analysis given the 
availability of more recent data. Specifically, we looked at capital 
Medicare margins for FY 2007. Our analysis indicates that while 
teaching hospitals continue to experience positive capital margins, 
there is a decline in these margins in comparison to the last year in 
our previous analyses (2006). Accordingly, we do not believe 
eliminating the capital teaching adjustment is prudent at this time. As 
we stated in the FY 2008 IPPS final rule (72 FR 47397), we will 
continue to analyze the data concerning the adequacy of payments under 
the capital IPPS, and may propose adjustments in the future if our 
analysis indicates such adjustments are warranted. However, in light of 
our most recent analysis, and in consideration of some of the comments 
received, we are deleting the requirement at Sec.  412.322(d) of the 
regulations, which eliminates the IPPS capital teaching adjustment for 
FY 2010.
    We are adopting, as final, our proposal to delete Sec.  412.322(c) 
of the existing regulations. In the absence of existing Sec.  
412.322(c), the capital IPPS teaching adjustment for FY 2009 will not 
be reduced by 50 percent but will be as determined under Sec.  
412.322(b) (that is, the full capital IME teaching adjustment). We also 
are deleting Sec.  412.322(d) of the existing regulations, which 
eliminates the teaching adjustment for FY 2010. Therefore, the full 
capital IME teaching adjustment is restored for FY 2010 and will be 
determined under Sec.  412.322(b). We note that we have issued 
instructions (Change Request 6444, dated March 27, 2009) to fiscal 
intermediaries and MACs to implement the change to the capital teaching 
adjustment for FY 2009, as specified in section 4301(b)(1) of Public 
Law 111-5.
    In summary, as noted above, in this final rule, as we proposed, we 
are revising the existing regulations at Sec.  412.322 by deleting the 
language of paragraph (c). In addition, as discussed above, we are 
deleting the language of paragraph (d) in Sec.  412.322. Both 
paragraphs (c) and (d) will be labeled ``Repealed.''
3. Other Changes for FY 2010
    The proposed and final annual update to the capital IPPS national 
and Puerto Rico-specific rates, as provided for at Sec.  412.308(c), 
for FY 2010 is discussed in section III. of the Addendum to this final 
rule.

VII. Changes for Hospitals Excluded From the IPPS

A. Excluded Hospitals

    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to a 
rate-of-increase ceiling. An annual per discharge limit (the target 
amount as defined in

[[Page 43930]]

Sec.  413.40(a)) was set for each hospital or hospital unit based on 
the hospital's own cost experience in its base year. The target amount 
was multiplied by the Medicare discharges and applied as an aggregate 
upper limit (the ceiling as defined in Sec.  413.40(a)) on total 
inpatient operating costs for a hospital's cost reporting period. Prior 
to October 1, 1997, these payment provisions applied consistently to 
all categories of excluded providers, which included rehabilitation 
hospitals and units (now referred to as IRFs), psychiatric hospitals 
and units (now referred to as IPFs), LTCHs, children's hospitals, and 
cancer hospitals.
    Payment to children's hospitals and cancer hospitals that are 
excluded from the IPPS continues to be subject to the rate-of-increase 
ceiling based on the hospital's own historical cost experience. (We 
note that, in accordance with Sec.  403.752(a) of the regulations, 
RNHCIs are also subject to the rate-of-increase limits established 
under Sec.  413.40 of the regulations.)
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24201), 
we proposed that the percentage increase in the rate-of-increase limits 
for cancer and children's hospitals and RNHCIs was the percentage 
increase in the proposed FY 2010 IPPS operating market basket. In 
compliance with section 404 of the MMA, in the proposed rule, we 
proposed to replace the FY 2002-based IPPS operating and capital market 
baskets with the revised and rebased FY 2006-based IPPS operating and 
capital market baskets for FY 2010. Therefore, consistent with the 
current law, based on IHS Global Insight, Inc.'s 2009 first quarter 
forecast, with historical data through the 2008 fourth quarter, we 
proposed that the FY 2010 update to the IPPS operating market basket 
would be 2.1 percent (that is, the current estimate of the market 
basket rate-of-increase).
    Consistent with our historical approach, we calculated the proposed 
IPPS operating market basket for FY 2010 using the most recent data 
available. However, we proposed that if more recent data became 
available for the final rule, we would use them to calculate the IPPS 
operating market basket for FY 2010. Therefore, based on IHS Global 
Insight, Inc.'s 2009 second quarter forecast, with historical data 
through the 2009 first quarter, the IPPS operating market basket update 
factor for FY 2010 is 2.1 percent. Moreover, consistent with our 
proposal that the percentage increase in the rate-of-increase limits 
for cancer and children's hospitals and RNHCIs would be the percentage 
increase in the FY 2010 IPPS operating market basket, the FY 2010 rate-
of-increase percentage that is applied to FY 2009 target amounts in 
order to calculate the FY 2010 target amounts for cancer and children's 
hospitals and RNHCIs is 2.1 percent, in accordance with the applicable 
regulations in 42 CFR 413.40.
    We note that IRFs, IPFs, and LTCHs, which were paid previously 
under the reasonable cost methodology, now receive payment under their 
own prospective payment systems, in accordance with changes made to the 
statute. In general, the prospective payment systems for IRFs, IPFs, 
and LTCHs provided transition periods of varying lengths during which 
time a portion of the prospective payment was based on cost-based 
reimbursement rules under Part 413. (However, certain providers do not 
receive a transition period or may elect to bypass the transition 
period as applicable under 42 CFR Part 412, Subparts N, O, and P.) We 
note that the various transition periods provided for under the IRF 
PPS, the IPF PPS, and the LTCH PPS have ended.
    The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. We 
refer readers to section IV. of the Addendum to this final rule for the 
specific update changes to the Federal payment rates for LTCHs under 
the LTCH PPS for RY 2010. The annual updates for the IRF PPS and the 
IPF PPS are issued by the agency in separate Federal Register 
documents.

B. Criteria for Satellite Facilities of Hospitals

    The regulations at 42 CFR 412.22(e) specify the criteria that a 
hospital that occupies space in a building also used by another 
hospital or in one or more separate buildings located on the same 
campus as buildings used by another hospital (also known as a hospital-
within-hospital (HwH)) must meet in order to be excluded from the IPPS. 
Section 412.22(e)(1)(i) specifies that the HwH must have a governing 
body that is separate from the governing body of the hospital occupying 
space in the same building or on the same campus. The HwH's governing 
body must not be under the control of the hospital with which it shares 
space in a building or on a campus, nor can it be under the control of 
any third entity that controls both hospitals.
    As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24201 through 24202), it has come to our attention that there is 
an inadvertent inconsistency between the governance and control 
criteria at Sec.  412.22(h)(2)(iii)(A) that satellite facilities must 
meet in order to be excluded from the IPPS and the separate governing 
body criteria at Sec.  412.22(e)(1)(i) that HwHs must meet in order to 
be excluded from the IPPS. Specifically, the separate governing body 
requirement for satellite facilities at Sec.  412.22(h)(2)(iii)(A) 
mistakenly omits language regarding a third entity. In particular, it 
fails to indicate that the governing body of the hospital of which the 
satellite facility is a part cannot be under the control of any third 
entity that controls both the hospital of which the satellite facility 
is a part and the hospital with which the satellite facility is co-
located.
    As explained in past rulemaking, we believe satellite facilities 
are similar enough to HwHs to warrant application of more closely 
related criteria to both types of facilities (67 FR 49982 and 50105 
through 50106). Specifically, satellite facilities are like HwHs in 
that the satellite facilities are also physically located in acute care 
hospitals that are paid for inpatient services they furnish under the 
acute care IPPS. Moreover, both satellite facilities and HwHs provide 
hospital inpatient services that are generally paid for at higher rates 
than would apply if the facilities were treated by Medicare as part of 
the acute care hospitals. In view of these facts, we continue to 
believe that it is important to establish clear criteria for ensuring 
that a satellite facility is not merely a unit of the acute care 
hospital with which it is co-located, but rather is organizationally 
and functionally separate from the hospital. Therefore, we believe the 
separate governing body requirements for satellite facilities should 
include requirements that are similar to those we included at Sec.  
412.22(e)(1)(i) for HwHs; that is, that the governing body of the 
hospital of which the satellite facility is a part cannot be under the 
control of any third entity that controls both the hospital of which 
the satellite facility is a part and the hospital with which the 
satellite facility is co-located. Accordingly, in the FY 2010 IPPS/RY 
2010 LTCH PPS proposed rule, we proposed to amend the criteria for 
satellite facilities at Sec.  412.22(h)(2)(iii)(A) by adding language 
under paragraph (1) to state that, except as provided in proposed 
paragraph (h)(2)(iii)(A)(2), the governing body of the hospital of 
which the satellite facility is a part cannot be under the control of 
any third entity that controls both the hospital of which the satellite 
facility is a part and the hospital with which the satellite facility 
is co-located. We proposed that the revised criteria would be effective 
with cost reporting periods beginning on or after October 1, 2009.

[[Page 43931]]

    In addition, we proposed to add a ``grandfathering'' provision to 
the regulations at Sec.  412.22(h)(2)(iii)(A)(2). Currently, an IPPS-
excluded hospital with a satellite facility that has its governing body 
under the control of a third entity that controls the hospital of which 
the satellite facility is a part and the hospital with which the 
satellite facility is co-located can retain its IPPS-excluded status. 
An IPPS-excluded hospital that currently has a satellite facility 
already has its organizational structure and financial systems in 
place. We indicated that to require now that a hospital that currently 
has a satellite facility must meet the proposed new separate governance 
criteria with respect to that satellite facility could create undue 
financial and organizational difficulties. This could further result in 
the closure of the satellite facility and the discontinuation of 
services because of the inability of the hospital and its satellite 
facility to meet the proposed new separate governance criteria. 
Therefore, in proposed Sec.  412.22(h)(2)(iii)(A)(2), we proposed the 
following: ``If a hospital and its satellite facility were excluded 
from the inpatient prospective payment system under the provisions of 
this section for the most recent cost reporting period beginning prior 
to October 1, 2009, the hospital does not have to meet the requirements 
of paragraph (h)(2)(iii)(A)(1) of this section, with respect to that 
satellite facility, in order to retain its IPPS-excluded status.'' 
However, we note that the corresponding preamble discussion of this 
proposed provision included an inadvertent error. Specifically, we 
stated that ``if a hospital and its satellite facility were excluded 
from the IPPS under the provision of Sec.  412.22(h) for the most 
recent cost reporting period beginning before October 1, 2009, the 
hospital would be required to meet the new separate governance criteria 
at Sec.  412.22(h)(2)(iii)(A)(1) with respect to that satellite 
facility in order to retain its IPPS-excluded status (proposed Sec.  
412.22(h)(2)(iii)(A)(2))'' (74 FR 24202). We inadvertently omitted the 
word ``not'' in the quoted sentence; therefore, the latter portion of 
the sentence should have read ``* * * the hospital would not be 
required to meet the new separate governance criteria at Sec.  
412.22(h)(2)(iii)(A)(1) with respect to that satellite facility in 
order to retain its IPPS-excluded status'' (emphasis added). We note 
that the regulation text presented accurately our proposed policy.
    In addition, because we proposed that the proposed new separate 
governance criteria would be effective for cost reporting periods 
beginning on or after October 1, 2009, we indicated that a hospital 
that establishes an additional satellite facility in a cost reporting 
period beginning on or after October 1, 2009, will have knowledge of 
the requirements that must be met in order to retain its IPPS-excluded 
status prior to establishing the additional satellite facility, and it 
will be able to plan accordingly. Furthermore, no organizational or 
financial relationship would already be in place with respect to the 
additional satellite facility. Thus, there would not be a need for the 
hospital and its additional satellite facility to be grandfathered. 
This situation is distinguishable from a hospital with a satellite 
facility established in the most recent cost reporting period beginning 
prior to October 1, 2009, as discussed above.
    Therefore, in proposed Sec.  412.22(h)(2)(iii)(A)(3), we stated the 
following: ``A hospital described in paragraph (h)(2)(iii)(A)(2) of 
this section that establishes an additional satellite facility in a 
cost reporting period beginning on or after October 1, 2009, must meet 
the criteria in this section, including the provisions of paragraph 
(h)(2)(iii)(A)(1) of this section with respect to the additional 
satellite facility, in order to be excluded from the inpatient 
prospective payment system.'' Although the proposed regulation text, 
the preamble discussion of our rationale for not ``grandfathering'' 
such facilities, and the example set forth in the preamble (74 FR 
24202) accurately captured the proposed policy, we note that a sentence 
in the preamble describing the proposed policy included an error. 
Specifically, the sentence indicated that if a hospital and its 
satellite facility were excluded from the IPPS under the provision of 
Sec.  412.22(h) for the most recent cost reporting period prior to 
October 1, 2009, and the hospital establishes an additional satellite 
facility in a cost reporting period beginning on or after October 1, 
2009, the hospital would not [sic] be required to meet the proposed new 
separate governance criteria at Sec.  412.22(h)(2)(iii)(A)(1), with 
respect to the additional satellite facility, in order to be excluded 
from the IPPS. We note that there was an inadvertent inclusion of the 
word ``not'' in this sentence as the sentence was printed in the 
Federal Register. The latter portion of the sentence should have read 
``* * * the hospital would be required to meet the new separate 
governance criteria at Sec.  412.22(h)(2)(iii)(A)(1) with respect to 
that satellite facility in order to retain its IPPS-excluded status''; 
that is, the hospital and the new additional satellite facility would 
be required to meet the new separate governance criteria as well as the 
other applicable requirements in Sec.  412.22(h), consistent with our 
longstanding policies.
    In addition, we gave the following example of how the amended 
regulations at Sec.  412.22(h)(2)(iii)(A)(2) and (h)(2)(iii)(A)(3) 
would work. Hospital A established a satellite facility (s-B) at 
Hospital B in a cost reporting period beginning prior to October 1, 
2009, under the applicable criteria for hospitals and satellite 
facilities at Sec.  412.22(h), and, therefore, the hospital and that 
satellite facility were excluded from the IPPS in the most recent cost 
reporting period beginning prior to October 1, 2009. If Hospital A 
establishes an additional satellite facility (s-C) at Hospital C in a 
cost reporting period beginning on or after October 1, 2009, Hospital A 
and its satellite facility at Hospital C must meet the applicable 
hospital and satellite facility criteria at Sec.  412.22(h), including 
the new separate governance criteria at paragraph (h)(2)(iii)(A)(1), in 
order to be excluded from the IPPS. Thus, the governing body of 
Hospital A cannot be under the control of any third entity that 
controls both Hospital A and Hospital C. However, Hospital A and s-B 
must continue to meet the other applicable criteria in Sec.  412.22(h) 
to be excluded from the IPPS.
    Comment: One commenter pointed out that the language in the 
preamble of the proposed rule is contradictory to the proposed 
regulation text with respect to a hospital with an existing satellite 
facility for the most recent cost reporting period prior to October 1, 
2009. The preamble text stated that if a hospital and its satellite 
facility were excluded from the IPPS for the most recent cost reporting 
period prior to October 1, 2009, and the hospital establishes an 
additional satellite after that date, the hospital would not be 
required to meet the proposed new separate governance criteria with 
respect to the new satellite(s) (emphasis added). However, in the 
proposed regulation text, we state that this hospital would be required 
to meet the new separate governance criteria. The commenter believed 
the error was made in the preamble language and that CMS' intent is 
correctly stated in the regulation text.
    Response: The commenter is correct. We appreciate the commenter 
bringing the error to our attention. As the language in the proposed 
regulation text at Sec.  412.22(h)(2)(iii)(A)(2) stated, ``If a 
hospital and its satellite facility were

[[Page 43932]]

excluded from the inpatient prospective payment system under the 
provisions of this section for the most recent cost reporting period 
beginning prior to October 1, 2009, the hospital does not have to meet 
the requirements of paragraph (h)(2)(iii)(A)(1) of this section, with 
respect to that satellite facility, in order to retain its IPPS-
excluded status.'' However, as the proposed regulation text at Sec.  
412.22(h)(2)(iii)(A)(3) stated, ``A hospital described in paragraph 
(h)(2)(iii)(A)(2) of this section that establishes an additional 
satellite facility in a cost reporting period beginning on or after 
October 1, 2009, must meet the criteria in this section, including the 
provisions of paragraph (h)(2)(iii)(A)(1) of this section with respect 
to the additional satellite facility, in order to be excluded from the 
inpatient prospective payment system.''
    Comment: Two commenters recommended that CMS withdraw the proposed 
change in the satellite facility requirements until CMS produces 
evidence that the proposed requirement is necessary in terms of the 
impact on the Medicare program or the provision of services to Medicare 
beneficiaries. The commenters stated that CMS considered this issue 
when the agency established the current ``separateness criteria,'' and 
that the language adopted was sufficient for the purpose. The 
commenters believed that the proposed language is unnecessary and adds 
complexity to an already complex regulation.
    Response: As we discussed in the preamble of the proposed rule (74 
FR 24201) and in other past rulemaking, we believe satellite facilities 
are similar enough to HwHs to warrant similar regulatory criteria that 
must be met for exclusion from the IPPS. Both satellite facilities and 
HwHs occupy space in, or are on the same campus as, another hospital. 
As IPPS-excluded providers, satellite facilities and HwHs receive 
Medicare payments that, in general, are higher than Medicare payments 
to IPPS providers. Clearly, there is an effect on the Medicare program 
if Medicare is making higher payments to a provider that is a satellite 
facility in name only. Therefore, to avoid the HwH or satellite 
facility from being, in reality, a unit of the hospital in which it is 
located, while being paid as an IPPS-excluded provider, we established 
the separateness and control criteria. Our intent was that the criteria 
for satellite facilities should be similar to the criteria for HwHs. 
The fact that the language regarding control by a third entity was not 
originally included in the satellite facility criteria was an oversight 
that we are now correcting.
    Comment: Two commenters urged CMS to exempt children's hospitals 
from the proposed separate governance criteria for satellite 
facilities. They believed that exempting children's hospitals is 
appropriate because, unlike other IPPS-excluded types of providers, 
children's hospitals serve a small proportion of Medicare patients that 
would otherwise be patients in an acute care hospital. Therefore, the 
commenters stated that the concern over shifting patients to maximize 
reimbursement is not an issue.
    In addition, according to the commenters, the proposed criteria 
would inhibit the ability of children's hospitals to expand in an 
efficient and effective manner when responding to community needs. The 
commenters stated that an exemption from the proposed separate 
governance criteria would allow children's hospitals to expand into 
space of an affiliated hospital for children's hospitals that are part 
of large integrated health care systems. They believed this would be 
the most ``efficacious patient-centric'' way of expansion as opposed to 
opening and operating a pediatric unit in another acute care hospital, 
which the commenters claimed is ``very challenging'' and makes it 
unlikely that community needs would be met.
    The commenters suggested that CMS consider restrictions on 
referrals from the hospital in which the satellite facility is located 
as a means of alleviating the issues that the proposed separate 
governance criteria is intended to address. They believed this would be 
a better approach to restrict patient shifting without compromising 
expansion opportunities.
    Response: While it is accurate that exempting children's hospitals 
from the proposed separate governance criteria would have little effect 
on Medicare costs because there are few Medicare patients in children's 
hospitals, we believe that it would have some effect on Medicare costs 
because, in general, Medicare payment for a discharge in an IPPS-
excluded hospital is greater than Medicare payment for a discharge in 
an acute care hospital under IPPS. In addition, there are certainly 
ramifications on payments under the Medicaid program if CMS were to 
exempt children's hospitals from the proposed criteria. CMS administers 
the Medicare program and oversees the Medicaid program, and therefore, 
the agency needs to be concerned about inappropriate patient shifting 
to maximize payment. In regard to the commenters' portrayal that the 
patients in children's hospitals are predominantly very young--an 
illustration uses ``under age 2''--and, therefore, have different 
health care needs and facilities, we point out that children's 
hospitals are hospitals in which inpatients are predominantly 
individuals under the age of 18. Contrary to the commenters' assertion, 
this wide span of age makes it more conducive to patient shifting from 
an acute care hospital to a children's satellite facility, when that 
satellite facility has an affiliation with the host hospital. 
Furthermore, even without patient shifting, it would be inappropriate 
for Medicare and Medicaid to pay a hospital differently for treating 
patients in what in essence is a pediatric unit of an acute care 
hospital, rather than a ``separate'' children's hospital.
    The commenters contend that creating and operating a children's 
satellite facility in an unrelated acute care hospital is so 
challenging that community needs could be compromised, but that this 
would not be the case if the children's satellite facility could 
operate in an acute care hospital with which it was affiliated. 
Further, the commenters believed the proposed criteria would inhibit 
the ability of children's hospitals to expand. We believe that 
establishing a satellite facility in an affiliated hospital would most 
likely be less challenging than in an unrelated acute care hospital. 
However, the ease or difficulty of establishing a children's satellite 
facility is not the issue. Regardless of whether a children's hospital 
could establish a satellite facility with more ease in an affiliated 
hospital, we believe the rules we have promulgated to demonstrate 
separateness, including the change to the separate governance criteria, 
are necessary to demonstrate that the co-located facility is not 
actually a department of the host hospital.
    We also do not agree with the commenters who suggested that putting 
restrictions on referrals from the host hospital to the satellite will 
alleviate our concerns regarding patient shifting. This idea was 
previously discussed in the FY 2000 proposed rule (64 FR 24743) where 
we indicated that the hospital of which the satellite facility is a 
part could meet the referral restrictions, even though all of the 
satellite facility's patients could have been referred from the 
hospital in which it is located.
    After consideration of the public comments received, we are 
adopting as final, with one change, the proposed additional separate 
governance criteria at Sec.  412.22(h)(2)(iii)(A)(1), (2), and (3). We 
are correcting an inadvertent error

[[Page 43933]]

in the language of the provision under Sec.  412.22(h)(2)(iii)(A)(1) by 
deleting the phrase ``the governing body of'' directly after the word 
``both'' in the provision in order to conform the regulation text to 
the preamble. (Throughout the proposed rule preamble discussion at 74 
FR 24201 through 24202, we articulated the provision correctly. 
However, the regulation text included an inadvertent repeat of the 
phrase ``the governing body of''.) Consequently, Sec.  
412.22(h)(2)(iii)(A)(1) will provide the following: ``Except as 
provided in paragraph (h)(2)(iii)(A)(2) of this section, effective for 
cost reporting periods beginning on or after October 1, 2009, the 
governing body of the hospital of which the satellite facility is a 
part is not under the control of any third party entity that controls 
both the hospital of which the satellite facility is a part and the 
hospital with which the satellite facility is co-located.''

C. Critical Access Hospitals (CAHs)

1. Background
    Section 1820 of the Act provides for the establishment of Medicare 
Rural Hospital Flexibility Programs (MRHFPs) under which individual 
States may designate certain facilities as critical access hospitals 
(CAHs). Facilities that are so designated and that meet the CAH 
conditions of participation under 42 CFR part 485, Subpart F, will be 
certified as CAHs by CMS. Regulations governing payments to CAHs for 
services to Medicare beneficiaries are located in 42 CFR part 413.
2. Payment for Clinical Diagnostic Laboratory Tests Furnished by CAHs
    Section 1834(g)(1) of the Act states that payment for outpatient 
services furnished by a CAH will be made at 101 percent of the 
reasonable costs to the CAH in providing those services, except for 
those CAHs that elect the optional reimbursement method outlined at 
section 1834(g)(2) of the Act. We refer to payment under the elective 
methodology described in section 1834(g)(2) of the Act as the 
``optional method.'' (We discuss changes to the CAH optional method of 
payment regulations below in section VII.C.3. of this preamble.) 
Section 1834(g)(4) of the Act provides that there is no beneficiary 
cost-sharing for ``clinical diagnostic laboratory services furnished as 
an outpatient critical access hospital service.''
    Section 148 of Public Law 110-275 (MIPPA) amended section 
1834(g)(4) of the Act, effective for services furnished on or after 
July 1, 2009. Specifically, section 148(a)(1) of Public Law 110-275 
changed the heading of section 1834(g)(4) of the Act to read 
``Treatment of Clinical Diagnostic Laboratory Services.'' Section 
148(a)(2) of Public Law 110-275 amended section 1834(g)(4) of the Act 
by adding, in relevant part, that ``* * * clinical diagnostic 
laboratory services furnished by a critical access hospital shall be 
treated as being furnished as part of outpatient critical access 
services without regard to whether the individual with respect to whom 
such services are furnished is physically present in the critical 
access hospital, or in a skilled nursing facility or a clinic 
(including a rural health clinic) that is operated by a critical access 
hospital, at the time the specimen is collected.''
    Regulations implementing section 1834(g) of the Act are set forth 
at Sec.  413.70. Currently, the regulations at Sec.  413.70(b)(2)(iii) 
state that payment to a CAH for clinical diagnostic laboratory services 
is made at 101 percent of reasonable cost ``only if the individuals 
[for whom the tests are performed] are outpatients of the CAH, as 
defined in Sec.  410.2 * * * and are physically present in the CAH, at 
the time the specimens are collected.'' Clinical diagnostic laboratory 
tests performed for individuals who are not physically present in the 
CAH when the specimen is collected generally are paid on the basis of 
the Clinical Laboratory Fee Schedule (CLFS) in accordance with the 
provisions of sections 1833(a)(1)(D) and 1833(a)(2)(D) of the Act.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24202 
through 24203), we proposed to amend the regulations at Sec.  413.70(b) 
in order to implement the changes made by section 148(a)(2) of Public 
Law 110-275. Section 148(a)(2) of Public Law 110-275 mandates that, 
effective for services furnished on or after July 1, 2009, individuals 
are no longer required to be physically present in the CAH at the time 
the specimen is collected in order for the CAH to receive payment based 
on reasonable cost for furnishing outpatient clinical diagnostic 
laboratory tests. Specifically, we believe the use of the phrase 
``without regard to whether the individual with respect to whom such 
services are furnished is physically present in the critical access 
hospital'' means that as long as the tests are performed for 
individuals who are CAH outpatients as defined in Sec.  410.2, payment 
based on reasonable cost must be made regardless of where the specimen 
is collected, even if the patient is not physically present in the CAH 
at the time the specimen is collected. Accordingly, we proposed to 
implement section 148(a)(2) by revising the existing regulations to 
reflect our interpretation of the statutory change.
    We proposed to amend the regulations at Sec.  413.70(b) by deleting 
existing Sec.  413.70(b)(2)(iii) and adding a new Sec.  413.70(b)(7) to 
state that, for services furnished on or after July 1, 2009, in order 
for a CAH to be paid based on reasonable cost for outpatient clinical 
diagnostic laboratory tests, a CAH outpatient is no longer required to 
be physically present in the CAH at the time the specimen is collected. 
However, we proposed that if the individual is not physically present 
in the CAH at the time the specimen is collected, the individual must 
continue to be an outpatient of the CAH, as defined at Sec.  410.2. We 
stated that we consider an individual to be an outpatient of the CAH if 
the individual is receiving services directly from the CAH. This 
requirement is consistent with our definition of a CAH outpatient at 
Sec.  410.2, which states that outpatient ``means a person who has not 
been admitted as an inpatient but who is registered on the hospital or 
CAH records as an outpatient and receives services (rather than 
supplies alone) directly from the hospital or CAH.'' Consistent with 
section 1834(g)(4) of the Act, we proposed to amend the regulations to 
provide that, in order to be receiving services directly from the CAH, 
either the individual must be receiving outpatient services in the CAH 
on the same day the specimen is collected, or the specimen must be 
collected by an employee of the CAH. Accordingly, where the individual 
is an outpatient of the CAH as defined above, the individual would not 
be required to be physically present in the CAH at the time the 
specimen is collected.
    In addition, we stated that we do not believe that the enactment of 
section 148 of Public Law 110-275 has any effect on the applicability 
of the requirements at section 1862(a)(18) of the Act and the 
implementing regulations at Sec.  411.15(p), which set forth 
requirements for payment of services furnished to SNF patients. 
Accordingly, we proposed that in cases where Medicare rules otherwise 
require consolidated billing or bundling of payments (for example, for 
services furnished to SNF patients during a Medicare Part A covered 
stay), the CAH laboratory payment provision would only provide for 
separate payment to the CAH once consolidated billing no longer 
applies. Where consolidated billing is required by Medicare rules, a 
separate payment for bundled services furnished by another provider, 
including a CAH, is prohibited. For example, for purposes of payment to 
a

[[Page 43934]]

CAH for performing a clinical laboratory test on a specimen collected 
from a SNF patient, the proposed new CAH payment rules would apply only 
once the consolidated billing rules for SNF payments no longer apply. 
Coverage under Medicare Part A for services furnished to a SNF patient 
is limited to 100 days in a benefit period. During that period, the 
collection of a specimen by a CAH employee in the SNF and the CAH's 
performance of a laboratory test on the specimen would be bundled into 
the SNF payment. Once the SNF patient has exhausted his or her Medicare 
Part A SNF days (that is, after 100 days), payment for the specimen 
collection by a CAH employee and the test performance by the CAH would 
no longer be bundled into the SNF payment and the CAH could receive a 
reasonable cost-based payment for the collection of a specimen by a CAH 
employee and the performance of the laboratory test by the CAH.
    In summary, we proposed that a CAH may receive reasonable cost-
based payment for outpatient clinical diagnostic laboratory tests 
furnished to an individual who is an outpatient of the CAH (and 
therefore receiving services directly from the CAH) even if the 
individual with respect to whom the laboratory services are furnished 
is not physically present in the CAH at the time the specimen is 
collected. In order for the individual to be determined to be receiving 
services directly from the CAH, we proposed that either the individual 
must have received outpatient services in the CAH on the same day the 
specimen is collected or the specimen must be collected by an employee 
of the CAH. In either case, the individual would not need to be 
physically present in the CAH at the time the specimen is collected. We 
also noted that if the individual is physically present in the CAH or a 
facility that is provider-based to the CAH when the specimen is 
collected, the CAH would also receive a reasonable cost-based payment. 
In this case, the specimen would not need to be collected by an 
employee of the CAH. (We refer readers to section VII.D. of this 
preamble for further discussion of CAH provider-based facilities.)
    Comment: The majority of commenters supported the proposal 
implementing section 148 of the MIPPA. One commenter stated that the 
proposal will provide assistance to less mobile elderly patients in 
rural communities. Another commenter stated that the proposed rule will 
have a positive impact on Nebraska's 65 CAHs and CAH patients. A third 
commenter fully supported recognizing that laboratory services provided 
by a CAH department should be paid on the same basis as the other 
departments.
    However, many commenters, in addition to supporting the proposed 
policy, asked for clarification on two aspects of the proposal. 
Specifically, the commenters requested that CMS clarify: (1) That if a 
patient for whom laboratory services are performed is in a facility 
that is not provider-based to the CAH, the CAH will still receive 101 
percent of the reasonable cost for these services as long as the 
patient receives outpatient services in the CAH on the same day the 
specimen is collected or an employee of the CAH collects the specimen; 
and (2) whether employees of a CAH's provider-based facility (including 
a provider-based rural health clinic (RHC)) are considered CAH 
employees for purposes of this policy, such that CAHs will receive 
payment at 101 percent of the reasonable cost for furnishing outpatient 
clinical diagnostic laboratory services if the specimen is collected by 
an employee of a CAH's provider-based facility.
    Another commenter requested clarification on what it means to be an 
employee for CAHs that ``contract for laboratory services under 
arrangement or hire laboratory personnel on contract.'' The commenter 
requested that CMS clarify the definition of employee so that it 
includes individuals employed by the CAH or those who are under 
contract to provide laboratory services ``either personally or under 
arrangement with an independent laboratory.''
    Another commenter agreed with CMS' efforts to ``establish 
applicable limits and controls to avoid `gaming' and inequitable 
payments.'' However, the commenter suggested adding language to the 
employee provision so that it reads ``* * * or the specimen must be 
collected by an employee of the CAH or an agent of the CAH through 
contractual arrangement with the CAH.''
    Response: We appreciate the commenters' support of the proposed 
policy, and we agree that it provides increased flexibility to CAHs in 
furnishing outpatient clinical diagnostic laboratory tests. We would 
like to clarify that not all services furnished by entities that are 
provider-based to a CAH are eligible to be paid based on reasonable 
cost. For example, psychiatric and rehabilitation distinct part units 
are paid under their prospective payment systems. We stated in the 
proposed rule that we believe the use of the statutory phrase ``* * * 
without regard to whether the individual with respect to whom such 
services are furnished is physically present in the critical access 
hospital * * *'' means that as long as the individual from whom the 
specimen is collected is an outpatient of the CAH, as outpatient is 
defined at 42 CFR 410.2, payment based on reasonable cost must be made, 
regardless of where the specimen is collected, even if the patient is 
not physically present in the CAH at the time the specimen is 
collected. We further stated that ``we also note that if the individual 
is physically present in the CAH or a facility that is provider-based 
to the CAH when the specimen is collected, the CAH would also receive a 
reasonable cost-based payment. In this case, the specimen would not 
need to be collected by an employee of the CAH'' (74 FR 24203).
    In this final rule, we are clarifying that the individual does not 
need to be physically present in the CAH or a facility that is 
provider-based to the CAH at the time the specimen is collected for the 
CAH to receive payment based on reasonable cost as long as either: (1) 
the individual receives an outpatient service in the CAH (or facility 
that is provider-based to the CAH, including a provider-based RHC) on 
the same day the specimen is collected; or (2) the specimen collection 
is performed by a CAH employee. In cases where the individual is in the 
CAH or facility that is provider-based to the CAH when the specimen is 
collected, the individual does not need to receive another outpatient 
service on that same day nor does the specimen collection need to be 
performed by a CAH employee in order for the CAH to be paid based on 
reasonable cost.
    Furthermore, we are clarifying in this final rule that we consider 
an employee of a CAH's provider-based department, but not an employee 
of a provider-based entity, to be an employee of the CAH for purposes 
of implementing section 148 of MIPPA. A provider-based department is 
integrated with the main provider and would not function as a 
freestanding provider of health care services, whereas a provider-based 
entity is paid differently than an entity that is not CAH-based. For 
example, a CAH-based RHC with 50 or more beds is a provider-based 
entity because it is paid based on the RHC payment methodology at 42 
CFR 405.2462. Furthermore, as defined at Sec.  413.65 of the 
regulations, a provider-based department furnishes the same type of 
health care services as the main provider, while a provider-based 
entity furnishes health care services of a different type than those 
furnished by the main provider. Because the health care services 
furnished by an individual employee at a provider-based

[[Page 43935]]

department are directly related to the health care services furnished 
by an individual employed at the same campus, those employees working 
in a CAH's provider-based department will be considered CAH employees 
for purposes of this provision. Therefore, the CAH can meet the 
requirement that the specimen collection be performed by a CAH 
employee, if the individual collecting the specimen is an employee of a 
department that is provider-based to the CAH.
    In response to the commenters who suggested CMS allow for 
contracted employees to be considered employees of the CAH for purposes 
of this policy, we agree that if the individual performing the specimen 
collection is not employed by any other entity to provide services at 
the location where the specimen collection is taking place, that 
individual, even if a contracted employee, could be considered a CAH 
employee for purposes of this provision. However, if the individual 
collecting the specimen is employed at the facility where the specimen 
collection is being performed, other than by the CAH, to provide other 
services in addition to being contracted by the CAH to perform the 
specimen collection, the CAH cannot consider this individual an 
employee of the CAH for purposes of implementing section 148 of MIPPA. 
For example, if a SNF employee is employed at the SNF and is contracted 
as a CAH employee to collect blood samples from SNF patients, that 
individual could not be considered a CAH employee for purposes of this 
provision. We are not adopting the commenter's proposed language 
because we believe such a provision would enable a CAH to bypass the 
requirement that laboratory specimens be collected by an employee of 
the CAH simply by entering into contractual arrangements with the 
employees of other entities. Such a policy would be contrary to our 
determination that an individual must be an outpatient of the CAH, 
receiving services directly from the CAH, in order for laboratory 
services furnished by the CAH to be paid based on reasonable cost.
    Comment: Several commenters asked for clarification on how specimen 
collection is defined and how the proposed policy is applied to 
different types of specimen collection. One commenter stated that, 
generally, a blood or sputum sample can be collected by a CAH 
laboratory employee, but the SNF nursing staff member or the patient 
usually performs the collection of a wound, urine, stool, or throat 
culture. The commenters asked which of these tests would be paid under 
reasonable cost-based payment. One commenter asked whether, in the 
situation where a CAH sends a CAH employee to a SNF to collect a blood 
specimen and then the CAH employee is also given a urine sample to 
test, would both the venipuncture and blood work be included on an 851 
type of bill and the urine specimen put on a 141 type of bill or would 
both the blood and urine specimens be included on an 851 type of bill.
    Another commenter asserted that although the MIPPA provided that 
all laboratory tests performed in the CAH laboratory department should 
be paid based on reasonable cost, the proposed rule has drawn a line 
whereby a CAH has to establish whether it meets the definition of 
collecting the specimen. The commenter stated that a patient may bring 
a urine specimen to a CAH on a doctor's orders: For example, while the 
CAH patient is in the emergency department, he or she may be told to 
collect a urine specimen and return it to the CAH the next day. The 
commenter asked whether, in this case, the CAH or RHC employee would 
meet the requirements of collecting the urine specimen. Commenters 
asked under what circumstances can a specimen collected in an outside 
HHA or SNF be paid on a reasonable cost basis.
    One commenter asked would a Medicare beneficiary have to exhaust 
his or her Part A coverage before a specimen collected by a CAH 
employee for a home health patient qualified for reasonable cost-based 
payment. The commenter also stated that allowing the CAH to receive 
reasonable cost-based payment only for SNF patients who have exhausted 
their Part A services and billing the specimen collection on a separate 
bill under Part B will require more tracking and paperwork.
    Response: We believe that the intent of section 148 of MIPPA is to 
pay CAHs on a reasonable cost basis for furnishing outpatient clinical 
diagnostic laboratory tests as long as the patient is an outpatient of 
a CAH. An outpatient is defined in the regulations at 42 CFR 410.2 as 
receiving services (rather than supplies alone) directly from the CAH. 
We do not believe that instances where the specimen is ``picked up'' by 
an employee of the CAH rather than collected by an employee of the CAH, 
and the individual does not also receive an outpatient service in the 
CAH on the same day, qualify as receiving services directly from the 
CAH. Rather, if the individual is not physically present in the CAH and 
the individual does not also receive an outpatient service in the CAH 
on the same day the specimen is collected, a CAH employee would need to 
physically perform the specimen collection in order for the CAH to 
receive payment based on reasonable cost.
    To address the commenter's question on how to bill for a blood 
specimen that is collected by a CAH employee from a SNF patient 
(assuming consolidated billing no longer applies) and then the CAH 
employee is given the urine specimen, the individual could be 
considered an outpatient for purposes of billing for the analysis of 
the blood specimen, but would be considered a nonpatient for purposes 
of billing the urine specimen in the case where he or she does not also 
receive an outpatient service in the CAH on the same day the urine 
specimen is collected. Even though collection of a specimen may be 
performed by an individual (not a CAH employee) outside of the CAH 
based on a doctor's orders, the CAH would not receive reasonable cost-
based payment for the analysis of the specimen unless the specimen is 
collected on the same day the individual received an outpatient service 
from the CAH. Therefore, if the individual comes to the CAH the day 
after the specimen collection, the CAH would not be paid for the 
analysis of the specimen based on reasonable cost. We emphasize that in 
instances where the CAH does not qualify to receive payment based on 
reasonable cost, the CAH still will receive payment for these services, 
but instead of receiving reasonable cost-based payment, it will be paid 
for the service under the CLFS.
    In the proposed rule, we stated how the policy would apply in cases 
where an individual is located in a facility where consolidated billing 
rules apply. We stated: ``Accordingly, we are proposing that, in cases 
where Medicare rules otherwise require consolidated billing or bundling 
of payments (for example, for services furnished to SNF patients during 
a Medicare Part A covered stay), the CAH laboratory payment provision 
would only provide for separate payment to the CAH once consolidated 
billing no longer applies. Where consolidated billing is required by 
Medicare rules, a separate payment for bundled services furnished by 
another provider, including a CAH, is prohibited'' (74 FR 24203). 
Therefore, in cases where a CAH employee performs a laboratory service 
for a SNF patient, the CAH would only receive reasonable cost-based 
payment once the SNF patient has exhausted his or her Part A SNF days. 
For purposes of receiving reasonable cost-based payment for an 
individual receiving home health services, we understand that home 
health consolidated billing rules do not

[[Page 43936]]

apply to the provision of laboratory tests. Therefore, if a CAH 
employee performs the specimen collection from a patient who is 
receiving home health services, the CAH would not be limited by the 
consolidated billing rules from billing for that service.
    In response to the commenter who stated that application of the 
policy to SNF patients would require more tracking and paperwork, the 
policy permitting CAHs to receive payment based on reasonable cost when 
a CAH employee collects a specimen from a patient of a SNF cannot be 
used to circumvent the statutory requirements for consolidated billing 
of SNF services. Therefore, a CAH must take SNF consolidated billing 
rules into consideration when it bills for specimen collection of a SNF 
patient.
    Comment: One commenter argued that section 148 of MIPPA clearly 
states that regardless of whether or not the individual is physically 
present in the CAH, all laboratory services provided in a CAH's 
laboratory are to be viewed as outpatient CAH services. The commenter 
asserted that CMS' proposed policy would unnecessarily complicate 
billing procedures. The commenter stated that the intent of the 
legislation is that a CAH should receive payment based on reasonable 
cost for all laboratory services performed at the CAH as was the case 
when the CAH program was first implemented and that the MIPPA 
legislation was requested by CAHs to revert back to the former policy 
in which all laboratory services performed in the CAH laboratory would 
be paid based on reasonable cost. The commenter stated that section 148 
of the MIPPA did not include any language pertaining to specimen 
collection by CAH employees or receiving another outpatient service on 
the same day or anything similar to the language that is being used in 
CMS Change Request 6395, Transmittal 1729. The commenter requested that 
CMS revise the proposed rule to state that all laboratory services 
performed in the CAH are paid based on reasonable cost and not based on 
the CLFS.
    One commenter stated that the proposed policy concerning provider-
based status of CAH laboratories would impact the policy implementing 
section 148 of the MIPPA. The commenter stated, ``We also understand 
that the proposed change in the regulations regarding the treatment of 
a clinical diagnostic laboratory of a CAH under the provider-based 
status of facilities and organizations would likewise impact this 
determination.'' The commenter also stated that ``conversely, with 
regard to reasonable cost payment to the CAH for the clinical 
diagnostic laboratory service(s), it would not matter where or by whom 
a specimen is collected if it is collected on the same date as a 
patient receives outpatient services at a CAH.'' Another commenter 
stated that the proposed rule adds complexity and confusion for CAHs 
and the commenter supported ``keeping CAHs intact and consistent with 
what we believe was the original congressional intent.'' In general, 
one commenter also stated that ``if you want to improve healthcare, you 
must consider access and cost. Most of the rules limit access and 
increase cost.''
    Response: As stated previously, we believe our proposal provides 
for increased flexibility for CAHs to receive payment based on 
reasonable cost for furnishing outpatient clinical diagnostic 
laboratory tests because existing regulations require that an 
individual be physically present in the CAH to receive reasonable cost-
based payment; otherwise, the CAH is paid on the basis of the CLFS. 
Section 148 of the MIPPA states ``* * * clinical diagnostic laboratory 
services furnished by a critical access hospital shall be treated as 
being furnished as part of outpatient critical access services without 
regard to whether the individual with respect to whom such services are 
furnished is physically present in the critical access hospital * * *'' 
(emphasis added). Therefore, we believe it is appropriate to require 
that an individual still has to be an outpatient of a CAH, that is, 
receiving services directly from the CAH, to be paid based on 
reasonable cost.
    We would not consider an individual to be an outpatient of a CAH if 
the only relationship the individual has with the CAH is that his or 
her specimen is processed by the CAH. We do not believe the intent of 
section 148 of MIPPA was, for example, to allow a CAH in one State to 
process a laboratory specimen it receives from an individual in a 
distant State and receive payment on a reasonable cost basis for this 
service without the individual being physically present in the CAH or 
having any other direct relationship with the CAH. Allowing such a 
scenario to occur would convert a CAH into a reference laboratory and 
subvert the statutory laboratory fee schedule used to pay for clinical 
laboratory services. Our policy allows CAHs to be paid for outpatient 
clinical diagnostic laboratory tests where the individual is not 
physically present in the CAH at the time the specimen is being 
collected, consistent with the purpose of the provision, and avoids the 
problems that would result from a broader interpretation of the 
statutory language. Therefore, we stated if the individual is not 
physically present in a CAH when the specimen is collected, in order 
for the CAH to receive payment based on reasonable cost, either the 
individual has to receive other outpatient services in the CAH on the 
same day the specimen is collected or the specimen collection has to be 
performed by a CAH employee. If providers have questions about whether 
specific scenarios would qualify for reasonable cost-based payment, we 
encourage them to contact CMS or their Medicare contractor.
    A commenter referenced Change Request 6395, Transmittal 1729. This 
document can be accessed at the following link: http://www.cms.hhs.gov/Transmittals/downloads/R1729CP.pdf. The purpose of this instruction was 
to implement section 148 of MIPPA on the statutory effective date of 
July 1, 2009. Because we are finalizing the policy as proposed, the 
instruction will continue to apply for purposes of payment to CAHs for 
clinical diagnostic laboratory tests after the effective date of this 
final rule. If we believe further instructions are needed, we will 
issue another change request. We stated in the proposed rule that we 
believe it will be important to develop a modifier that could assist 
CMS in tracking laboratory services paid to CAHs under this provision. 
We reiterate that when a modifier is developed, we will issue guidance 
regarding its use.
    In regard to the comment concerning the impact of the proposed 
policy on provider-based status of CAH laboratories, we do not believe 
this policy has a direct impact on the policy implementing section 148 
of the MIPPA because the individual does not need to be physically 
present in a facility that is provider-based to the CAH in order for 
the CAH to receive payment based on reasonable cost.
    In summary, in this final rule, we are finalizing our proposed 
policy that a CAH can receive payment based on reasonable cost for 
furnishing clinical diagnostic laboratory tests even if the individual 
is not physically present in the CAH at the time the specimen is 
collected, provided either (1) the individual receives an outpatient 
service in the CAH on the same day the specimen is collected, or (2) 
the specimen collection is performed by a CAH employee. For purposes of 
section 148 of the MIPPA, a facility that is provider-based to the CAH 
is considered a CAH for purposes of determining where the specimen is 
collected. If the individual is in a facility or receiving services 
under which Medicare consolidated billing rules apply when

[[Page 43937]]

the specimen is collected, the CAH will receive reasonable cost-based 
payment only once the consolidated billing rules no longer apply.
3. CAH Optional Method of Payment for Outpatient Services
    Section 1834(g) of the Act establishes the payment rules for 
outpatient services furnished by a CAH. Section 403(d) of Public Law 
106-113 (BBRA) amended section 1834(g) of the Act to provide for two 
methods of payment for outpatient services furnished by a CAH. 
Specifically, section 1834(g)(1) of the Act, as amended by Public Law 
106-113, provided that the amount of payment for outpatient services 
furnished by a CAH is equal to the reasonable cost of providing such 
services, unless the CAH made an election, under section 1834(g)(2) of 
the Act, to receive amounts that were equal to the reasonable cost of 
the CAH for facility services plus, with respect to the professional 
services, the amount otherwise paid for professional services under 
Medicare, less the applicable Medicare deductible and coinsurance 
amount. The election made under section 1834(g)(2) of the Act is 
sometimes referred to as ``Method II.'' Throughout this section of this 
preamble, we refer to this election as the ``optional method.''
    Section 202 of Public Law 106-554 (BIPA) amended section 
1834(g)(2)(B) of the Act to increase the payment for professional 
services under the optional method to 115 percent of the amount 
otherwise paid for professional services under Medicare. In addition, 
section 405(a)(1) of Public Law 108-173 (MMA) amended section 
1834(g)(l) of the Act by inserting the phrase ``equal to 101 percent 
of'' before the phrase ``the reasonable costs''. However, section 
405(a)(1) of Public Law 108-173 did not amend the phrase ``reasonable 
costs'' under the optional method at section 1834(g)(2)(A) of the Act.
    Accordingly, section 1834(g) of the Act currently provides for two 
methods of payment for outpatient CAH services. Under the first method, 
as specified at section 1834(g)(1) of the Act, a CAH will be paid 101 
percent of reasonable costs, unless it elects to be paid under the 
methodology specified at section 1834(g)(2) of the Act. Under the 
method specified at section 1834(g)(1) of the Act, facility services 
are paid at 101 percent of reasonable costs to the CAH through the 
Medicare fiscal intermediary or the Medicare Part A/B MAC, while 
payments for physician and other professional services are made to the 
physician under the Medicare Physician Fee Schedule (MPFS) through the 
Medicare carriers. However, under section 1834(g)(2) of the Act (the 
optional method), a CAH submits bills for both the facility and the 
professional services to its Medicare fiscal intermediary or its 
Medicare Part A/B MAC. If a CAH chooses this optional method for 
outpatient services, the physician or other practitioner must reassign 
his or her billing rights to the CAH to bill the Medicare program for 
those services. In accordance with section 1834(g)(2)(A) of the Act, 
under this optional method, the CAH receives reasonable cost payment 
for its facility costs and, with respect to the professional services, 
115 percent of the amount otherwise paid for professional services 
under Medicare.
    Regulations implementing section 1834(g) of the Act are set forth 
at Sec.  413.70(b). Section 413.70(b) states that, unless a CAH elects 
the optional method, payment for outpatient CAH services is 101 percent 
of the reasonable costs of the CAH in providing CAH services to its 
outpatients. However, existing Sec.  413.70(b)(3)(ii)(A) states that a 
CAH may elect, under the optional method, to be paid at 101 percent of 
the reasonable costs for facility services. As a result, we believe 
that the existing regulation is not consistent with the plain reading 
of section 1834(g)(2) of the Act, which provides for payment under the 
optional method of reasonable cost for facility services.
    In order to ensure that the regulations are consistent with the 
plain reading of section 1834(g)(2)(A) of the Act, in the FY 2010 IPPS/
RY 2010 LTCH PPS proposed rule (74 FR 24203 through 24204), we proposed 
to revise Sec.  413.70(b)(3)(ii)(A) to state that CAHs that elect the 
optional method will receive payment based on reasonable cost for 
outpatient facility services. We indicated that the proposed change 
would not affect payment for the professional component as set forth 
under Sec.  413.70(b)(3)(ii)(B).
    Comment: Commenters opposed CMS' proposal to change payment for 
outpatient facility services for CAHs that elect the optional method of 
payment from 101 percent of reasonable cost to 100 percent of 
reasonable cost. Many commenters argued that the proposal to reduce 
payments to CAHs for outpatient facility services under the optional 
method is not in accordance with the intent of Congress. The commenters 
stated that section 405(a) of the MMA actually increased CAH payment to 
101 percent of reasonable cost for outpatient facility services, 
regardless of whether or not a CAH elects the optional method. The 
commenters stated that while the statutory language of the MMA 
erroneously did not specify that CAHs that elect the optional method 
should be paid at 101 percent of reasonable cost, the proposed change 
goes against the intent of Congress as expressed in the conference 
report. Commenters stated that ``the conference report references both 
types of payment methods, stating that CAHs may elect either `cost-
based hospital outpatient service reimbursement or an all-inclusive 
rate, which is equal to reasonable cost reimbursement for facility 
services plus 115 percent of the fee schedule payment for professional 
services.' '' The commenters also stated that ``In summarizing the 
conference agreement, the report more generally refers to CAH payments, 
stating that `outpatient * * * services provided by a CAH will be 
reimbursed at 101 percent of reasonable cost'.'' Furthermore, the 
commenters asserted that the summary of present law in the conference 
report distinguishes between the traditional method of payment and the 
optional method, but the summary of the conference agreement does not 
make this distinction, which the commenters believe makes it clear that 
the conference agreement applies to both methods.
    Response: We have reviewed and have taken into consideration the 
commenters' concerns regarding our proposal to revise the regulatory 
text to be consistent with the plain reading of section 1834(g)(2)(A) 
of the Act. Despite the commenters' contentions that the statutory 
language of the MMA is erroneous, we continue to believe that the 
statutory text takes precedent over Conference report language. While 
the conference agreement does state that CAHs should be paid at 101 
percent of reasonable cost for inpatient, outpatient, and covered SNF 
services, we believe the language in the conference agreement could be 
read not as an explicit expression of policy for CAHs that elect the 
optional method, but rather as a summary of CAH payment policy. We 
acknowledge the concerns raised by the commenters regarding the 
potential financial impact the proposal may have on CAHs. However, we 
are required to conform our payment policy to the statutory language 
and must revise the regulatory text to ensure it is consistent with the 
plain reading of the statute. If Congress makes a legislative change to 
allow CAHs that elect the optional payment method to receive 101 
percent of reasonable cost for outpatient facility services, we will 
revise the regulations accordingly to implement such a change.

[[Page 43938]]

    Comment: Many commenters urged CMS to perform a detailed and 
thorough impact analysis on the effect the proposal may have on CAHs 
before moving forward. The commenters stated that CMS could have 
obtained information on which CAHs elect the optional method in a 
timely manner from its Medicare contractors and performed a thorough 
impact analysis. The commenters stated that, on behalf of the AHA, 
State hospital associations contacted Medicare contractors once the 
proposed rule was released and requested from them a list of CAHs that 
elect the optional method in each State. One commenter stated that the 
information received from the Medicare contractors ``indicates that the 
vast majority of CAHs elect Method 2 payment. For example, 88 percent 
of the CAHs in Iowa, 71 percent of the CAHs in Kansas, and 86 percent 
of the CAHs in North Dakota have elected to be paid under Method 2.'' 
Many of the commenters believed the current proposal to reduce payment 
for outpatient facility services for CAHs that elect the optional 
method may have a significant financial impact for these small 
hospitals. Several commenters estimated that the proposal may cut 
payments to CAHs nationwide by $22 million in FY 2010. Several 
commenters noted estimated impacts for CAHs located in specific States 
for FY 2010: $2.4 million for CAHs in Iowa; $1.7 million for CAHs in 
Illinois; $700,000 for CAHs in Nebraska; $779,783 for CAHs in Kansas; 
and more than $1 million for CAHs in Kentucky. Another commenter stated 
that changing the payment under the optional method for outpatient 
facility services would cause its facility to lose $33,350 in payments 
for outpatient services. The commenter stated ``while not a huge amount 
of money, for a rural distressed facility, any cut in reimbursement may 
be catastrophic.'' The commenters urged that, because a detailed impact 
analysis was not performed, CMS should withdraw the proposed policy 
change.
    Several commenters expressed concern over the misinterpretation the 
proposed policy change may have among Medicare contractors. One 
commenter stated that the cost report, as currently written, does not 
specifically designate which costs are outpatient facility costs for 
services provided under the optional method. The commenter expressed 
concern that Medicare contractors may interpret the change in payment 
for outpatient facility services under the optional method from 101 
percent of reasonable cost to 100 percent of reasonable cost to apply 
to all outpatient facility services. The commenter also stated that 
such an interpretation would eliminate any benefit gained from the 
additional payment for professional services under the optional method. 
In addition, the commenter stated that making the change would defeat a 
CAH's incentive to elect the optional payment method and discourage 
medical providers and CAHs from working together. The commenter stated 
that ``Even if the intent of the proposed rule is to eliminate the 
additional 1% reimbursement on only the costs associated with the 
Method II outpatient facility charges, the loss of the 1% reimbursement 
via the cost report would cut our benefit of Method II billing by 
approximately 40%.'' The commenter stated that CAHs in Illinois ``* * * 
operate at negative operating margins'' and the average operating 
margin is only at about 1.25 percent.'' The commenter asserted that the 
smallest amount change in Medicare's payment policy for CAHs can 
adversely impact CAHs and recommended that the proposed rule language 
read as follows:
    ``Facility Fee 1834(g)(2)(A) With respect to facility services, 
101% of the reasonable costs of the critical access hospital in 
providing such services.
    ``Fee Schedule for Professional Services 1834(g)(2)(B) With respect 
to professional services, 115 percent of such amounts.''
    Another commenter stated that because the Medicare cost report does 
not provide for separate facility payment under the optional method, 
the commenter is concerned that Medicare contractors will apply 100 
percent reasonable cost payment to all outpatient CAH services.
    Response: With respect to the financial impact of the proposal, we 
did not conduct an in-depth impact analysis because our proposal is a 
revision to regulatory text that currently is contrary to the plain 
language of the statute. That is, we did not have a choice as to 
whether we would change payment for outpatient facility costs for CAHs 
that elect the optional method. Furthermore we do not believe we could 
necessarily estimate the impact of the proposed provision because 
election of the optional method is not permanent; CAHs are only 
required to make the election 30 days prior to the start of the cost 
reporting period for which it is effective. Therefore, we cannot 
estimate how many CAHs will choose to retain the optional method of 
payment if facility services are only paid at 100 percent of reasonable 
cost. Furthermore, the optional method is physician-specific. That is, 
for some physicians' outpatient services, a CAH may elect to be paid 
under the optional method and for other physicians' outpatient 
services, it may opt to be paid only at 101 percent of reasonable costs 
for facility services. The CAH's election is contingent on whether the 
physician is willing to reassign his or her billing rights to the CAH. 
Therefore, because it is the physician's decision as to whether he or 
she chooses to reassign billing rights to the CAH, we believe we cannot 
accurately determine which physicians would choose to opt out of the 
optional method upon implementation of the proposed provision.
    To address the commenters' concerns regarding possible 
misinterpretation of the proposed regulatory change by Medicare 
contractors, we intend to issue instructions to ensure that contractors 
properly update the Fiscal Intermediary Share System (FISS). The 
instructions will include full and complete details to clarify that the 
regulatory text change is only applicable to services for which the CAH 
has elected to use the optional method. We are not adopting the 
commenter's proposed regulatory language because, as stated previously, 
the regulations pertaining to payment for outpatient facility services 
for CAHs that elect the optional method need to conform to the 
statutory text at section 1834(g)(2)(A) of the Act that references 
reasonable cost payment instead of ``101 percent of reasonable cost'' 
payment.
    Comment: Many commenters requested that if the proposed policy is 
finalized, CMS specify an effective date for the proposed change. The 
commenters urged CMS to allow CAHs adequate time to evaluate their 
circumstances and make an informed decision as to whether or not to 
elect the optional method going forward. Several commenters recommended 
that, if the proposed policy is finalized, the effective date should be 
no earlier than cost reporting periods beginning on or after January 1, 
2010.
    Response: We believe we cannot delay implementation of this 
proposed policy as the regulation as currently written is not 
consistent with the plain reading of section 1834(g)(2)(A) of the Act. 
However, we recognize that it may be unfair to apply this change in the 
middle of an existing cost reporting period, when CAHs made their 
decision to elect the optional method under the existing regulatory 
text. Therefore, while we are finalizing the revisions to the 
regulations as proposed, the change will be effective for cost 
reporting periods beginning on or after October 1, 2009, and not in the 
middle of any CAH's cost reporting period. If a CAH

[[Page 43939]]

determines that, based on the percentage revision in the regulation, 
the CAH no longer wants to elect to use the optional method, the CAH 
may change its election beginning with its next cost reporting period 
that begins on or after October 1, 2009.
    Comment: Commenters expressed concern that reducing payment for 
outpatient facility services for CAHs that elect the optional method 
from 101 percent of reasonable cost to 100 percent of reasonable cost 
would limit access to patient care. One commenter stated that ``* * * 
the option to use Method 2 billing was intended to be an additional 
incentive to attract physicians to provide services in communities 
where their services might not otherwise be available. Method 2 billing 
is meant to be an enhancement to what a CAH would otherwise receive as 
reimbursement, not a choice between what is received for professional 
services versus what is received for facility services.'' The commenter 
stated that if CMS believes the language describing payment for CAHs 
that elect the optional method is ambiguous, CMS should request 
clarification from Congress so that Congress' drafting error can be 
corrected, rather than proposing a rule that would prove harmful to the 
provision of physician services in the local community. Another 
commenter stated that ``This increased payment for physician services 
helps bring physicians to our areas. It would be counterproductive to 
then take away the add-on the hospital gets.'' One commenter stated 
that it would make more sense to reduce payment under the optional 
method for professional services and leave payment for facility 
services at 101 percent of reasonable cost. The commenter stated that 
using the optional method for physician services has allowed its CAH to 
simplify Medicare billing for providers' services. The commenter also 
asserted that using the optional method for physician services has made 
it easier for the patient to understand the bill he or she receives 
because the CAH can combine the facility service and the physician 
service onto one bill to the Medicare contractor. The commenter stated 
that, for example, the CAH can combine an X ray and the radiologist 
reading fee charges onto one bill to the Medicare contractor. However, 
the commenter indicated, under the proposed rule, it would have to bill 
the X ray to the Medicare contractor and the radiologist reading fee to 
the Medicare carrier. Under this scenario, the patient would receive 
two explanations of benefit forms as opposed to the one the patient 
receives under the current rules. In addition, under the proposed 
provision, the CAH would have increased billing costs because it would 
have to provide two explanations of benefits.
    Response: We emphasize that the proposed provision to reduce 
payment for outpatient facility services for CAHs that elect the 
optional method from 101 percent of reasonable cost to 100 percent of 
reasonable cost does not affect payment to CAHs for professional 
services under the optional method. As a result, it would not be 
appropriate to change payment for professional services under the 
optional method of payment because the statute clearly states that 
payment for these services is 115 percent of the physician fee schedule 
amount. CAHs will continue to receive payment at 115 percent of the 
applicable physician fee schedule amount for professional services. 
Therefore, we do not agree that reducing payment for outpatient 
facility services will necessarily limit the provision of physician 
services. Furthermore, as stated previously, if Congress makes a 
legislative change to allow CAHs that elect the optional payment method 
to receive 101 percent of reasonable cost for outpatient facility 
services, CMS will revise the regulations accordingly to implement such 
a change.
    In response to the commenter's concern regarding the billing 
process, we encourage the commenter to work with its Medicare 
contractor to resolve those concerns.
    In summary, in order to ensure that the regulations are consistent 
with the plain reading of section 1834(g)(2)(A) of the Act, we are 
finalizing our proposal to revise the regulatory text at Sec.  
413.70(b)(3)(ii)(A) to state that CAHs that elect the optional method 
will receive payment at 100 percent of reasonable cost for outpatient 
facility services. The change is effective for cost reporting periods 
beginning on or after October 1, 2009. The change does not affect the 
existing policy for payment for the professional component as set forth 
under Sec.  413.70(b)(3)(ii)(B).
4. Continued Participation by CAHs Located in Counties Redesignated as 
Urban
    Under section 1820(c)(2)(B)(i) of the Act, a facility is eligible 
for designation as a CAH only if it is located in a county or 
equivalent unit of local government in a rural area (as defined in 
section 1886(d)(2)(D) of the Act), or is being treated as being located 
in a rural area pursuant to section 1886(d)(8)(E) of the Act. The 
regulations implementing this location requirement are located at 42 
CFR 485.610(b). Currently, several CAHs are located in counties that 
were designated as ``rural areas'' in FY 2009 under section 
1886(d)(2)(D) of the Act but will, as of October 1, 2009, be considered 
to be located in urban areas due to the redesignation of three 
Micropolitan Statistical Areas announced by the Office of Management 
and Budget (OMB) on November 20, 2008. (We refer readers to section 
III.C. of this preamble for a discussion of the changes in the three 
Micropolitan Statistical Areas that now qualify as MSAs that were 
announced in OMB Bulletin No. 09-01.) A facility that is located in an 
urban area cannot remain a CAH, unless it has been deemed rural under 
42 CFR 412.103. In response to the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule in which we discussed the OMB changes for purposes of 
determining the hospital wage index for FY 2010 (74 FR 24139), we 
received a number of public comments on this issue.
    Comment: Many commenters urged CMS to exercise the same executive 
discretion that was applied in the FY 2005 IPPS final rule (69 FR 
49221), in which CMS provided for special treatment for CAHs that were 
affected by OMB redesignations of MSAs by amending the regulations at 
Sec.  412.103 and Sec.  485.610 to allow CAHs that were located in 
counties that were considered rural in FY 2004, but urban in FY 2005, 
to maintain their CAH status through either the earlier of FY 2006 or 
when the CAH obtained a rural designation under Sec.  412.103. The 
commenters stated that, under the amendment, CAHs were allowed to 
continue participation as a CAH for 2 years and were not required to 
convert to PPS hospitals unless they were not able to obtain a rural 
designation under Sec.  412.103.
    The commenters also requested that CMS not only take the same 
approach as it did in FY 2005, but also recommended that CMS make the 
regulation change permanent so that the agency does not have to address 
this issue each time the redesignation or creation of MSAs affects CAH 
status. To do so, the commenters recommended that CMS revise Sec.  
485.610(b)(3) to delete references to specific dates and instead 
incorporate general language to allow CAHs that have CAH status in one 
year, but are located in counties that will be considered urban in the 
next year, to retain their CAH status for a 2-year period. The 
commenters also suggested that CMS also revise Sec.  412.103(a)(4) to 
delete references to specific dates and instead incorporate general 
language allowing CAHs that are located in counties that are 
reclassified from rural

[[Page 43940]]

to urban to have 2 years to obtain a rural designation under Sec.  
412.103.
    Several commenters stated that if CMS is unwilling to take the same 
approach as it afforded CAHs in FY 2005, CAHs located mainly in Kansas 
and Missouri, as an unintended consequence, will lose their CAH status 
and will be forced to revert back to a PPS hospital. The commenters 
stated that if CAH participation were terminated, these facilities 
would likely need to seek State licensure and Medicare participation as 
hospitals in order to be able to continue operations. However, the 
commenters argued that this would have a profound effect on the 
communities that CAHs service and would place these facilities at 
significant financial risk in excess of more than $1 million per 
hospital per year.
    Response: We understand the commenters' concerns and agree that 
providing a transition period for the CAHs that are located in counties 
that are reclassified from rural to urban to obtain a rural 
redesignation will mitigate the disruptive impact of this change. 
Accordingly, we believe it is appropriate to revise Sec.  485.610 by 
adding a new paragraph (b)(4) and to revise Sec.  412.103 by adding a 
new paragraph (a)(5) to provide special treatment for such facilities, 
as was done in FY 2005. Under the revision made to Sec.  485.610(b) and 
Sec.  412.103(a), a CAH that is located in a county that, in FY 2009, 
was not part of an MSA, as defined by the OMB, but as of FY 2010 was 
included as part of an MSA as a result of the most recent census data 
and implementation of the new MSA definitions announced by OMB on 
November 20, 2008, would nevertheless be considered to meet the rural 
location requirement and, therefore, could continue participating 
without interruption as a CAH from October 1, 2009 through the earlier 
of the date on which the CAH obtains a rural designation under Sec.  
412.103, or September 30, 2011. Such a facility would be allowed to 
continue participating as a CAH and would not be required to convert 
back to being a PPS hospital unless it was not able to obtain rural 
designation under that section. We also will consider whether it is 
appropriate to propose, in future IPPS rulemaking, to revise Sec.  
485.610 and Sec.  412.103 to provide for a transition period any time a 
CAH that was formerly considered to be located in a rural area is 
designated as being located in an urban area as a result of the 
redesignation of its county from rural to urban.

D. Provider-Based Status of Facilities and Organizations: Policy 
Changes

1. Background
    Since the beginning of the Medicare program, some providers, which 
we refer to as ``main providers,'' have functioned as a single entity 
while owning and operating multiple provider-based departments, 
locations, and facilities that were treated as part of the main 
provider for Medicare purposes. Therefore, we have maintained that 
having clear criteria for provider-based status is important because by 
failing to properly distinguish between a provider-based facility and a 
freestanding facility, we risk additional program payments and 
increased beneficiary coinsurance liability with no commensurate 
benefit to the Medicare program or its beneficiaries. In addition, we 
jeopardize the delivery of safe and appropriate health care services to 
beneficiaries.
    The Medicare policies regarding provider-based status of facilities 
and organizations are set forth at 42 CFR 413.65. The regulations at 
Sec.  413.65 have been revised and updated on numerous occasions since 
they were originally issued on April 7, 2000 (65 FR 18504). We note 
that the implementation of the April 7, 2000 regulations was delayed by 
Public Law 106-554 (BIPA) for many providers. Public Law 106-554 also 
made changes in the criteria for determining provider-based status, 
which we implemented in a final rule published in the Federal Register 
on November 30, 2001 (66 FR 59956). The most recent revisions of Sec.  
413.65 were included in the FY 2006 IPPS final rule (70 FR 47457 
through 47461 and 47487 through 47488) when we updated the rules with 
respect to the facilities for which provider-based determinations will 
not be made and clarified some of the provider-based definitions and 
requirements.
    Currently, Sec.  413.65(a) specifies the facilities and 
organizations for which provider-based status may be sought and lists 
those facilities for which determinations of provider-based status for 
Medicare payment purposes are not made. Section 413.65(b) describes the 
procedures for making provider-based determinations, and Sec.  
413.65(c) explains the requirements for reporting material changes in 
relationships between main providers and provider-based facilities and 
organizations. In Sec.  413.65(d), we specify all of the requirements 
that any facility or organization for which provider-based status is 
sought must meet, whether located on or off the campus of a potential 
main provider. Section 413.65(e) specifies additional requirements 
applicable to off-campus facilities or organizations. These 
requirements include: Operation under the ownership and control of the 
main provider; administration and supervision; and location. Sections 
413.65(f) through (o) set forth the policies regarding provider-based 
status for joint ventures, obligations of hospital outpatient 
departments and hospital-based entities, management contracts, 
furnishing of all services under arrangement, inappropriate treatment 
of a facility or organization as provider-based, temporary treatment as 
provider-based, correction of errors, status of Indian Health Service 
and Tribal facilities and organizations, FQHCs and ``look alikes,'' and 
effective dates of provider-based status.
2. Changes to the Scope of the Provider-Based Status Regulations for 
CAHs
(a) CAH-Based Clinical Diagnostic Laboratory Facilities
    As we discussed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24204 through 24205), the provider-based status rules generally 
apply to situations where there is a financial incentive for a facility 
or organization to claim affiliation with a main provider. The 
provider-based status rules establish criteria for a facility or 
organization to demonstrate that it is integrated with the main 
provider for payment purposes. However, the regulation at Sec.  
413.65(a)(1)(ii) lists specific types of facilities and organizations 
for which CMS will not make provider-based determinations. Included on 
this list of facilities exempt from provider-based determinations are 
facilities that furnish only clinical diagnostic laboratory services 
(Sec.  413.65(a)(1)(ii)(G)).
    As we have stated previously (that is, the FY 2006 IPPS final rule 
(70 FR 47457)), the list at Sec.  413.65(a)(1)(ii) was created after we 
had concluded that ``provider-based determinations should not be made 
for these facilities because the outcome of the determination (that is, 
whether a facility, unit, or department is found to be freestanding or 
provider-based) would not affect the methodology used to make Medicare 
or Medicaid payment, the scope of benefits available to a Medicare 
beneficiary in or at the facility, or the deductible or coinsurance 
liability of a Medicare beneficiary in or at the facility.'' We note 
that we included a facility that furnishes only clinical diagnostic 
laboratory services in the list of facilities for which a determination 
of provider-based status is not made in Sec.  413.65(a)(1)(ii)(G) 
because these

[[Page 43941]]

facilities are generally paid under the Clinical Laboratory Fee 
Schedule (CLFS), regardless of the setting in which the services are 
furnished. Consequently, we believed that whether a clinical diagnostic 
laboratory was freestanding or provider-based would not affect the 
amount of Medicare payment.
    However, upon further review of existing Sec.  413.65(a)(1)(ii), we 
believe that a clinical diagnostic laboratory, when operated as part of 
a CAH, generates a higher Medicare payment than when operating as a 
freestanding facility. When a clinical diagnostic laboratory is part of 
a CAH, the services furnished by the laboratory are generally paid 101 
percent of reasonable cost. Otherwise, clinical diagnostic laboratory 
services provided by a freestanding diagnostic laboratory are paid 
under the CLFS. Currently, because the services of a clinical 
diagnostic laboratory of a CAH are paid at a higher rate by virtue of 
being provided by a CAH department, we believe they should be subject 
to the rules under the provider-based status regulations at Sec.  
413.65.
    Therefore, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 
FR 24205), we proposed to exclude a clinical diagnostic laboratory 
facility that operates as part of a CAH from the list of facilities for 
which we do not make provider-based determinations. That is, we 
proposed to revise the regulations to require facilities furnishing 
only clinical diagnostic laboratory tests that operate as part of CAHs 
to meet the applicable provider-based criteria in Sec.  413.65 in order 
for the CAHs to receive payments for the services furnished at those 
facilities based on reasonable cost. Specifically, we proposed to 
revise the language of Sec.  413.65(a)(1)(ii)(G) to state that CMS will 
not make a determination of provider-based status for payment purposes 
as to whether the following facilities are provider-based: 
``Independent diagnostic testing facilities that furnish only services 
paid under a fee schedule, such as facilities that furnish only 
screening mammography services, facilities that furnish only clinical 
diagnostic laboratory tests, other than those clinical diagnostic 
laboratory facilities operating as parts of CAHs, or facilities that 
furnish only some combination of these services'' (emphasis added). In 
addition, we proposed to specify that ``Clinical diagnostic 
laboratories operating as parts of CAHs must meet the applicable 
provider-based requirements.''
    Comment: One commenter questioned whether there is a financial 
incentive for a clinical diagnostic laboratory facility to be part of a 
CAH compared to a freestanding clinical diagnostic laboratory facility 
or a clinical diagnostic laboratory facility that is part of a 
hospital. The commenter questioned whether payment under reasonable 
cost for clinical diagnostic laboratory services is higher than payment 
under the CLFS. The commenter requested that CMS provide data that 
demonstrate that there is, in fact, a payment differential between a 
freestanding clinical diagnostic laboratory facility and a CAH-owned 
clinical diagnostic laboratory facility.
    Response: CAHs are, by definition, limited-service facilities 
located in rural areas. CAH services are paid under 101 percent of 
reasonable cost (or, in some cases, reasonable cost) in order to ensure 
that these isolated, high-cost, rural hospitals are able to furnish 
critical health care services. Thus, it is reasonable to assume that 
the reasonable cost-based payment for clinical diagnostic laboratory 
services is, in some cases, higher than payment under the CLFS. As 
such, we believe that there is a financial incentive for clinical 
diagnostic laboratory facilities to be part of a CAH rather than a 
freestanding facility or a part of a hospital. Because of this 
financial incentive, we believe that a CAH-owned clinical diagnostic 
laboratory facility should demonstrate integration with the CAH under 
the provider-based status rules in order to receive the higher CAH 
payment rate.
    Comment: Several commenters opposed the proposal to require that 
facilities that furnish only clinical diagnostic laboratory services as 
part of a CAH meet the provider-based status rules. The commenters were 
opposed to the proposal because they believed that CAH-based clinical 
diagnostic laboratory facilities would be unable to meet all of the 
provider-based rules at Sec.  413.65. In addition, the commenters were 
concerned that these facilities would not be able to meet the distance 
requirement applicable to CAHs that requires that CAHs and their 
provider-based locations established after January 1, 2008, must be 
more than 35 miles from a hospital or another CAH (or more than 15 
miles in areas with mountainous terrain or only secondary roads) in 
accordance with Sec.  485.610(e). Another commenter requested that 
currently operating CAH-based clinical diagnostic laboratory facilities 
or those under development should be grandfathered to have provider-
based status. Another commenter suggested that currently operating CAH-
based clinical diagnostic laboratory facilities or those under 
development should be granted provider-based status if they meet the 
applicable provider-based status rules with the exception of the 
distance requirement.
    Response: The intent of the provider-based status rules is to 
ensure that higher levels of Medicare payment are limited to situations 
where the facility or organization is clearly an integral and 
subordinate part of the main provider. Therefore, we believe it is 
reasonable for a CAH-owned clinical diagnostic laboratory facility to 
meet the provider-based status rules to demonstrate that the facility 
is fully integrated with the main provider in order for the clinical 
diagnostic laboratory services provided in the facility to be paid 
based on reasonable cost.
    We understand the commenters' concerns that clinical diagnostic 
facilities that are currently operating as part of CAHs may not be able 
to meet the provider-based status rules. However, we do not agree that, 
because existing facilities cannot meet the provider-based rules, they 
should be exempt from those rules. We believe that these facilities 
should meet all of the requirements, including the provider-based 
status location requirement at Sec.  413.65(e)(3) under which an off-
campus provider-based department must be within 35 miles of the main 
provider or must meet other location requirements. In addition, under 
this policy, CAH-owned clinical diagnostic laboratory facilities would 
be required to meet the requirement at Sec.  485.610(e)(2) that 
specifies that, for a CAH or a necessary provider CAH that operates an 
off-campus provider-based location that was created or acquired by the 
CAH on or after January 1, 2008, the off-campus provider-based location 
must be more than a 35-mile drive from a hospital or another CAH (or 
more than a 15-mile drive, in areas with mountainous terrain or only 
secondary roads). This regulation applies to the off-campus provider-
based locations of CAHs created or acquired on or after January 1, 
2008. If a CAH-owned clinical diagnostic laboratory facility cannot 
meet the location requirement, we believe the CAH-owned clinical 
diagnostic laboratory facility does not warrant the higher CAH payment 
rate. Accordingly, we are not amending the proposal to grandfather 
existing arrangements of CAH-owned clinical diagnostic laboratory 
facilities. However, in this final rule, we are allowing additional 
time, until October 1, 2010, for CAH-owned clinical diagnostic 
laboratory facilities to meet the provider-based status rules. If the 
CAH-based clinical diagnostic laboratory facility cannot meet the

[[Page 43942]]

provider-based status rules by that date, the clinical diagnostic 
laboratory services furnished at the facility will be paid under the 
CLFS.
    Comment: One commenter believed that the proposal to require a 
clinical diagnostic laboratory facility that is part of the four walls 
of the CAH to meet the provider-based status rules was illogical. The 
commenter believed the proposal would be similar to requiring a 
radiology department of a CAH to meet the provider-based status rules 
so that the CAH could receive reasonable cost-based payment.
    Response: The provider-based status rules were established to 
address main providers that function as a single entity while owning 
and operating multiple departments, locations, and facilities. We do 
not agree with the assertion that just because a department is within 
the four walls of a hospital or CAH, that the department should be 
exempt from the provider-based status rules. Hospitals can and have 
leased space on their campuses to physicians and other providers or 
suppliers of health services, and these providers or suppliers may have 
no connection to or integration with the hospital's operations other 
than a lease agreement and physical proximity. For example, under our 
existing regulations, a CAH can lease some of its space to a clinical 
diagnostic laboratory facility, and that facility could be paid more 
significantly for services as a provider-based department to the CAH 
than as a freestanding facility. Because of this payment difference, we 
believe that a clinical diagnostic laboratory facility must meet the 
provider-based status rules at Sec.  413.65, even if it is located 
within the CAH, to demonstrate that it is fully integrated with the 
operations of the CAH and warrants the higher CAH payment rate. 
Therefore, in order for services to be paid under reasonable cost, a 
clinical diagnostic laboratory facility that is part of a CAH must meet 
the appropriate provider-based status rules, regardless of whether it 
is on or off the campus of the CAH.
    Comment: Some commenters expressed concern about how the proposal 
would affect ``necessary provider'' CAHs. The commenters believed that 
clinical diagnostic laboratory facilities that are part of CAHs that 
received the ``necessary provider'' designation would not be able to 
meet the provider-based status rules. The commenters stated that 
necessary provider CAHs did not have to meet the mileage requirement; 
therefore, by requiring their clinical diagnostic laboratory facilities 
to meet the provider-based status rules, the facilities would not meet 
the distance requirement which would threaten the CAHs' status. The 
commenters were concerned that, as a result of this proposal, 
facilities may close, decreasing beneficiary access to these essential 
services.
    Response: Under Sec.  485.610(c) of the regulations, CAHs with the 
necessary provider designation are CAHs that, before January 1, 2006, 
were ``certified by the State as being a necessary provider of health 
care services to residents in the area'' and are exempt from the 
distance requirement that it is more than a 35-mile drive (or in the 
case of mountainous terrain or in areas with only secondary roads 
available, more than a 15-mile drive) from a hospital or another CAH. 
Designations for necessary provider CAHs were made until December 31, 
2005, and these necessary provider CAHs were grandfathered and allowed 
to maintain that designation after January 1, 2006. Section 485.610(e) 
of the regulations requires that an off-campus provider-based location 
of a CAH or a necessary provider CAH that is created or acquired on or 
after January 1, 2008, must be more than a 35-mile drive (or in the 
case of mountainous terrain or in areas with only secondary roads 
available, more than a 15-mile drive) from another CAH or hospital. 
Because the regulation at Sec.  485.610(e) did not exempt provider-
based departments of necessary provider CAHs from the distance 
requirement, we do not believe that necessary provider CAHs that own 
off-campus clinical diagnostic laboratory facilities should be exempt 
from the distance requirement now that these clinical diagnostic 
laboratory facilities must meet the provider-based status rules. We 
note that Sec.  485.610(e)(2) only applies the distance requirement to 
CAH-based, off-campus provider-based locations created or acquired on 
or after January 1, 2008. Therefore, only CAH-based, off-campus 
facilities furnishing clinical diagnostic laboratory services acquired 
or created on or after January 1, 2008, must meet the distance 
requirement at Sec.  485.610(e)(2), which requires the off-campus 
provider-based location to be more than a 35-mile drive from another 
hospital or CAH. In contrast, CAH-based clinical diagnostic laboratory 
facilities acquired or created prior to January 1, 2008, must meet the 
location requirements at Sec.  413.65 to be considered provider-based 
to the CAH, but are exempt from the distance requirement at Sec.  
485.610(e)(2).
    Regarding the concern that clinical diagnostic laboratory 
facilities may close, decreasing beneficiary access to these essential 
services as a result of this policy, we believe this is an incorrect 
assumption. If a CAH owns a clinical diagnostic laboratory facility 
that does not meet the provider-based status rules at Sec.  413.65 or 
the CAH distance requirements at Sec.  485.610, the services provided 
in the clinical diagnostic laboratory facility will still be paid under 
the CLFS.
    Comment: Commenters requested that CMS specify an effective date 
for the proposal to require CAH-owned facilities furnishing diagnostic 
laboratory tests to meet the provider-based rules. The commenters 
requested that CMS set an effective date no earlier than October 1, 
2010, so that CAHs have adequate time to ensure that their clinical 
diagnostic laboratory facilities meet provider-based status rules and 
to allow for CAHs to attest to obtaining provider-based status.
    Response: We agree with the commenters that CAHs may require time 
to ensure that their clinical diagnostic laboratory facilities meet the 
provider-based status rules at Sec.  413.65 in order for services 
furnished in those facilities to be paid under reasonable cost. In 
addition, we understand that CAHs may want to file an attestation, 
although voluntary, with their CMS Regional Office to get a provider-
based status determination. We encourage CAHs to work with their CMS 
Regional Office and contractor on how to file an attestation and 
request a provider-based determination. To allow CAHs the time they 
need to make organizational changes, if necessary, to comply with the 
provider-based status rules and to ensure that the CMS Regional Offices 
and contractors are able to process requests for provider-based 
determinations, we are delaying the effective date of our policy so 
that clinical diagnostic laboratory facilities that are part of a CAH 
will have to meet the provider-based status rules as of October 1, 
2010. Beginning October 1, 2010, a clinical diagnostic laboratory 
facility will be considered as provider-based to a CAH only if it meets 
all of the requirements at Sec.  413.65, and if, on that date, it 
either has a written determination from CMS that it is provider-based 
or is billing and being paid as a provider-based department or entity 
of the CAH. In this final rule, we are modifying our proposal to revise 
Sec.  413.65(a)(1)(ii)(G) to reflect an effective date of October 1, 
2010. In addition, the CAH distance requirement at Sec.  485.610(e)(2) 
provides that off-campus provider-based locations of a CAH or a 
necessary provider CAH that were created or acquired on or after 
January 1, 2008, must be more than a 35-mile drive from a hospital or 
another

[[Page 43943]]

CAH as of October 1, 2010. Existing CAH-based clinical diagnostic 
laboratory facilities that were created on or after January 1, 2008, 
will also have to satisfy the CAH distance requirements for the CAH to 
retain its CAH certification, as well as meet the provider-based status 
rules in order to be paid based on reasonable cost.
    Comment: One commenter asked whether the policy to require CAH-
owned clinical diagnostic laboratory facilities to meet the provider-
based rules would apply to open cost reports. In addition, the 
commenter asked whether Medicare contractors had to audit the 
facilities to determine provider-based status.
    Response: As discussed above, we are specifying that the CAH-owned 
clinical diagnostic laboratory facilities must meet the provider-based 
status rules by October 1, 2010, in order for their services to be paid 
at reasonable cost. The policy will not apply to open cost reports; 
rather, CAH-based clinical diagnostic laboratory facilities will have 
to meet the provider-based status rules by October 1, 2010. Medicare 
contractors should use their standard audit procedures to review CAH 
cost reports for periods beginning on or after October 1, 2010, to 
ensure that their facilities furnishing clinical diagnostic laboratory 
tests meet the provider-based rules and are billing appropriately. In 
addition, Medicare contractors and CMS Regional Offices can expect to 
receive attestations for provider-based determinations of CAH-based 
clinical diagnostic laboratory facilities.
    In adopting this change to the provider-based status rules, we 
recognize that there may be confusion between this provision that a 
clinical diagnostic laboratory facility that is part of a CAH must meet 
provider-based status rules in order to receive the higher reasonable 
cost-based payment and the provision discussed in section VII.C.2. of 
this preamble to implement section 148 of Public Law 110-275. In 
section VII.C.2. of this preamble, we are adopting as final our 
proposal to revise the regulations at Sec.  413.70 to specify that CAHs 
can bill for outpatient clinical diagnostic laboratory services 
furnished to patients who are outpatients of the CAH, regardless of 
whether they are physically present in the CAH at the time the specimen 
is collected. Under the revision to Sec.  413.70, in order for a CAH to 
bill based on the reasonable costs of outpatient clinical diagnostic 
laboratory services furnished to an individual, the individual must be 
an outpatient of the CAH, as defined at Sec.  410.2, that is, be 
receiving services directly from the CAH. As a result, either the 
individual must be receiving outpatient services in the CAH on the same 
day that the specimen is collected or the specimen must be collected by 
an employee of the CAH. Under the final policy changes to the provider-
based status rules under Sec.  413.65 in this section of this final 
rule, if a CAH operates a provider-based clinical diagnostic laboratory 
facility, the facility must meet the provider-based status requirements 
under Sec.  413.65 in order for the facility to be considered part of 
the CAH and in order for the CAH to be eligible to be paid based on 
reasonable cost for the clinical diagnostic laboratory services 
furnished by the laboratory facility. According to our finalized policy 
in section VII.C.2. of the preamble of this final rule, a CAH will have 
the option to bill for outpatient clinical diagnostic laboratory 
services based on reasonable cost for patients where the specimen was 
collected at non-CAH-based facilities as long as the patients are 
outpatients of the CAH, as defined above, and therefore, either the 
specimen is collected by an employee of the CAH or the individual is 
receiving outpatient services in the CAH on the same day that the 
specimen is collected. In addition, under our provider-based status 
finalized policy in this final rule, a CAH can also bill for clinical 
diagnostic laboratory services on a reasonable cost basis for patients 
who are furnished services in a clinical diagnostic laboratory facility 
that is owned and operated by the CAH as long as the clinical 
diagnostic laboratory facility meets the provider-based status 
requirements at Sec.  413.65.
    In summary, after consideration of the public comments we received, 
we still believe that clinical diagnostic laboratory facilities could 
generate an increase in Medicare payments when they are part of a CAH 
compared to when they are freestanding. Therefore, we are finalizing 
our proposal that these facilities, which are currently exempt from 
provider-based determinations, must meet the applicable provider-based 
status requirements at Sec.  413.65 in order for the CAH to receive 
payment for their clinical diagnostic laboratory services based on 
reasonable cost. This requirement will apply to facilities that furnish 
clinical diagnostic laboratory services beginning on or after October 
1, 2010. It is important to note that, in addition to meeting the 
provider-based status requirements at Sec.  413.65, these provider-
based facilities will also have to meet other requirements for 
provider-based facilities operated by CAHs, including the distance 
requirements under Sec.  485.610(e). Generally, the regulations at 
Sec.  485.610(e)(2) provide that off-campus provider-based locations of 
a CAH that were created or acquired on or after January 1, 2008, must 
be more than a 35-mile drive from a hospital or another CAH if the CAH 
is to continue meeting the location requirements under Sec.  
485.610(e)(2).
b. CAH-Based Ambulance Services
    The existing regulations at Sec.  413.70(b)(5) provide that 
ambulance services are paid at reasonable cost if the services are 
furnished by a CAH or by an entity owned and operated by a CAH, but 
only if the CAH or entity is the only supplier or provider of ambulance 
service within a 35-mile drive of the CAH or entity. In the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24205 and 24206), we 
solicited public comments regarding whether an ambulance service that 
is owned and operated by a CAH, and is eligible to receive reasonable 
cost-based payment, should be required to meet the provider-based 
status rules. It is important to consider that the regulation at Sec.  
413.70(b)(5) already specifies the proximity criteria that CAH-owned 
and operated ambulance services must meet in order to be paid at 
reasonable cost. However, these proximity requirements are used to 
ensure that CAH-owned and operated ambulance services do not receive 
higher payments in relation to a competing ambulance service that is 
not owned and operated by a CAH. It can be argued that CAH-owned and 
operated ambulance suppliers or providers should also be required to 
meet the provider-based status requirements to demonstrate that the 
ambulance services are integrated with the CAH because the CAH 
ambulance services are paid at a higher Medicare payment level when 
they are owned and operated by a CAH compared to when they are 
freestanding.
    Comment: Several commenters disagreed that CAH-owned and operated 
ambulance services that are eligible to be paid at reasonable cost 
should be required to meet applicable provider-based rules. The 
commenters generally cited the unique role that CAHs serve in regions 
with limited medical service options. The commenters claimed that 
requiring ambulance services to meet provider-based status rules would 
result in an unnecessary administrative burden and would result in the 
loss of service in some areas. The commenters specifically cited the 
cases of ``necessary provider CAHs,'' which would be unable to meet the 
requirements that provider-based departments or facilities be located 
beyond 35 miles (15 miles if

[[Page 43944]]

located in mountainous terrain) from another CAH or hospital.
    Response: While commenters may be concerned that an ambulance 
service based to a necessary provider CAH may not be able to meet the 
requirements set forth in Sec.  485.610(e)(2) if we required CAH-based 
ambulances to meet the provider-based status rules, we point out that 
there are existing regulations at Sec.  413.70(b)(5) that prohibit CAHs 
from receiving a cost-based payment for ambulance services if another 
provider or supplier of ambulance services is located within a 35-mile 
drive of the CAH. The main campus of a necessary provider CAH is not 
subject to CAH distance requirements and may be within 35 miles of 
another CAH or hospital. However, that distance exception does not 
apply to off-campus provider-based departments of necessary provider 
CAHs that were created or acquired on or after January 1, 2008. Under 
Sec.  485.610(e)(2), off-campus, provider-based locations of CAHs and 
necessary provider CAHs that were created or acquired on or after 
January 1, 2008, must be more than a 35-mile drive from another CAH or 
hospital. We agree that a proposal to subject CAH-based ambulance 
services paid based on reasonable cost to provider-based determinations 
may result in some ambulance services not being able to meet the CAH 
distance requirements for provider-based facilities at Sec.  485.610(e) 
and, as a result, ambulance services provided by the necessary provider 
CAH could not be paid under reasonable cost.
    With respect to the unnecessary administrative burden that may be 
placed upon CAH-owned and operated ambulance services, we reiterate 
that any regulatory proposal would only apply to those ambulance 
services that are eligible to receive a reasonable cost payment, in 
accordance with Sec.  413.70(b)(5); that is, ambulance services 
furnished by a CAH or an entity that is owned and operated by a CAH, 
where the CAH or the entity is the only provider or supplier of 
ambulance services within a 35-mile radius. Ambulance services that are 
paid under the fee schedule would not be subject to provider-based 
determinations. Furthermore, we are aware that some of the provider-
based requirements at Sec.  413.65 include required provisions that may 
not be applicable to ambulance services (for example, clinical 
privileges for professional staff, medical record retrieval system 
integration, among others). If, in the future, we propose to require 
that CAH-owned and operated ambulance services meet the provider-based 
status rules, we would propose the applicable provider-based status 
requirements that the ambulance services would need to meet for 
provider-based status.
    In summary, while we still believe that it may be appropriate to 
require any part of a CAH to meet the provider-based rules in order to 
be paid at reasonable cost, we are not at this time proposing or 
adopting any changes to the regulations at Sec.  413.65 to require CAH-
owned and operated ambulance services that are eligible to be paid at 
reasonable cost to meet the provider-based status rules. We thank those 
commenters that responded to our solicitation of public comments.
3. Technical Correction to Regulations
    Section 413.65(a)(1)(ii)(H) of the regulations specifies, among the 
facilities for which CMS does not make provider-based determinations 
for payment purposes, ``Facilities, other than those operating as parts 
of CAHs, furnishing only physical, occupational, or speech therapy to 
ambulatory patients, for as long as the $1,500 annual cap on coverage 
of physical, occupational, or speech therapy, as described in section 
1833(g)(2) of the Act, remains suspended by the action of the 
subsequent legislation.'' In the FY 2010 IPPS/RY 2010 LTCH proposed 
rule (74 FR 24206), we proposed to make two basic changes to the 
language of Sec.  413.65(a)(1)(ii)(H). First, we proposed to delete the 
phrase ``$1,500 annual cap'' and replace it with the generic phrase 
``annual financial cap amount''. We proposed to make this change 
because we need to update our regulations to reflect that the $1,500 
annual financial cap is no longer applicable and has been replaced with 
the cap amount described in section 1833(g)(2)(B) of the Act. 
Specifically, the $1,500 cap amount described in section 1833(g)(2)(A) 
of the Act was limited to 3 years (1999 through 2001). For years after 
2001, in general, the amount of the annual cap on payment of physical, 
occupational, or speech therapy is the amount specified in the 
preceding year increased by the percentage increase in the Medicare 
economic index for the current year (section 1833(g)(2)(B) of the Act). 
However, we note that the annual cap amount did not apply to expenses 
incurred with respect to such therapy services during various years as 
set forth in the statute.
    Second, we proposed to replace the phrase ``for as long as'' with 
the phrase ``throughout any period during which'' and to replace the 
phrase ``remains suspended by the action of subsequent legislation'' 
with the phrase ``is suspended by legislation''. We proposed to make 
this change because Sec.  413.65(a)(1)(ii)(H), as currently written, 
may incorrectly suggest that the annual financial cap amounts on the 
therapy services described in sections 1833(g)(1) and 1833(g)(3) of the 
Act continue to be suspended. Although the financial caps on such 
services were suspended when the provision was added originally, they 
ceased to be suspended for a portion of 2003 and then beginning January 
1, 2006. We indicated that we believe the proposed change would 
eliminate any confusion about whether the therapy caps were or were not 
currently suspended, as well as accomplish our goal of exempting 
facilities, other than those operating as parts of CAHs, that furnish 
only physical, occupational, or speech therapy to ambulatory patients 
from complying with the provider-based status requirements any time the 
annual financial cap amount as described in section 1883(g)(2) of the 
Act is suspended by legislation. In conclusion, we maintain that we 
would not make provider-based determinations for non-CAH operated 
facilities furnishing only physical, occupational, or speech therapy to 
ambulatory patients when the therapy cap is suspended.
    We also are further clarifying a proposed regulation text change 
not fully detailed in the proposed rule. The term ``payment for'' was 
inserted between ``annual financial cap amount on'' and ``coverage of 
physical, occupational, or speech therapy'' in the regulatory text to 
more accurately describe the referenced financial cap on therapy 
services.
    We did not receive any public comments on our proposals for 
correction of the regulatory language. Therefore, in this final rule, 
we are adopting the proposals as final.

E. Report of Adjustment (Exceptions) Payment

    Section 4419(b) of Public Law 105-33 requires the Secretary to 
publish annually in the Federal Register a report describing the total 
amount of adjustment payments made to excluded hospitals and units, by 
reason of section 1886(b)(4) of the Act, during the previous fiscal 
year.
    The process of requesting, adjudicating, and awarding an adjustment 
payment is likely to occur over a 2-year period or longer. First, 
generally, an excluded hospital or excluded unit of a hospital must 
file its cost report for a fiscal year in accordance with Sec.  
413.24(f)(2). The fiscal intermediary or MAC reviews the cost report 
and issues a Notice of

[[Page 43945]]

Reimbursement (NPR). Once the hospital receives the NPR, if its 
operating costs are in excess of the ceiling, the hospital may file a 
request for an adjustment payment. After the fiscal intermediary or MAC 
receives the hospital's request in accordance with applicable 
regulations, the fiscal intermediary or MAC or CMS, depending on the 
type of adjustment requested, reviews the request and determines if an 
adjustment payment is warranted. This determination is sometimes not 
made until more than 6 months after the date the request is filed 
because there are times when the applications are incomplete and 
additional information must be requested in order to have a completed 
application. However, in an attempt to provide interested parties with 
data on the most recent adjustments for which we do have data, we are 
publishing data on adjustment payments that were processed by the 
fiscal intermediary or CMS during FY 2008.
    The table below includes the most recent data available from the 
fiscal intermediaries or MACs and CMS on adjustment payments that were 
adjudicated during FY 2008. As indicated above, the adjustments made 
during FY 2008 only pertain to cost reporting periods ending in years 
prior to FY 2007. Total adjustment payments given to excluded hospitals 
and units during FY 2008 are $9,780,846. The table depicts for each 
class of hospitals, in the aggregate, the number of adjustment requests 
adjudicated, the excess operating cost over ceiling, and the amount of 
the adjustment payments.

----------------------------------------------------------------------------------------------------------------
                                                                                    Excess cost     Adjustment
                        Class of hospital                             Number       over ceiling      payments
----------------------------------------------------------------------------------------------------------------
Psychiatric.....................................................              14     $12,585,567      $3,429,244
Children's......................................................               3       1,326,989       1,183,486
Cancer..........................................................               3      28,656,569       5,136,202
Religious Nonmedical Health Care Institution....................               1          40,961          31,914
                                                                 -----------------------------------------------
    Total.......................................................  ..............  ..............       9,780,846
----------------------------------------------------------------------------------------------------------------

VIII. Changes to the Long-Term Care Hospital Prospective Payment System 
(LTCH PPS) for RY 2010

A. Background of the LTCH PPS

1. Legislative and Regulatory Authority
    Section 123 of the Medicare, Medicaid, and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provides for payment for both the operating 
and capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals that are described in section 1886(d)(1)(B)(iv) of the 
Social Security Act (the Act), effective for cost reporting periods 
beginning on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in FY 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a ``per 
discharge'' system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs.
    Section 307(b)(1) of the BIPA, among other things, mandates that 
the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In the August 30, 2002 Federal Register, we issued a final rule 
that implemented the LTCH PPS authorized under the BBRA and BIPA (67 FR 
55954). This system currently uses information from LTCH patient 
records to classify patients into distinct MS-long-term care diagnosis-
related groups (MS-LTC-DRGs) based on clinical characteristics and 
expected resource needs. Payments are calculated for each MS-LTC-DRG 
and provisions are made for appropriate payment adjustments. Payment 
rates under the LTCH PPS are updated annually and published in the 
Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) 
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. For each cost reporting period, a hospital-specific 
ceiling on payments was determined by multiplying the hospital's 
updated target amount by the number of total current year Medicare 
discharges. (Generally, in section VIII. of this preamble, when we 
refer to discharges, the intent is to describe Medicare discharges.) 
The August 30, 2002 final rule further details the payment policy under 
the TEFRA system (67 FR 55954).
    In the August 30, 2002 final rule, we provided for a 5-year 
transition period. During this 5-year transition period, a LTCH's total 
payment under the PPS was based on an increasing percentage of the 
Federal rate with a corresponding decrease in the percentage of the 
LTCH PPS payment that is based on reasonable cost concepts. However, 
effective for cost reporting periods beginning on or after October 1, 
2006, total LTCH PPS payments are based on 100 percent of the Federal 
rate.
    In addition, in the August 30, 2002 final rule, we presented an in-
depth discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates,

[[Page 43946]]

additional payments, and the budget neutrality requirements mandated by 
section 123 of the BBRA. The same final rule that established 
regulations for the LTCH PPS under 42 CFR part 412, Subpart O also 
contained LTCH provisions related to covered inpatient services, 
limitation on charges to beneficiaries, medical review requirements, 
furnishing of inpatient hospital services directly or under 
arrangement, and reporting and recordkeeping requirements. We refer 
readers to the August 30, 2002 final rule for a comprehensive 
discussion of the research and data that supported the establishment of 
the LTCH PPS (67 FR 55954).
    In the June 6, 2003 Federal Register, we published a final rule 
that set forth the FY 2004 annual update of the payment rates for the 
Medicare PPS for inpatient hospital services furnished by LTCHs (68 FR 
34122). It also changed the annual period for which the payment rates 
were to be effective, such that the annual updated rates were effective 
from July 1 through June 30 instead of from October 1 through September 
30. We refer to the July through June time period as a ``long-term care 
hospital rate year'' (LTCH PPS rate year). In addition, we changed the 
publication schedule for the annual update to allow for an effective 
date of July 1. The payment amounts and factors used to determine the 
annual update of the LTCH PPS Federal rate are based on a LTCH PPS rate 
year. While the LTCH payment rate updates were to be effective July 1, 
the annual update of the DRG classifications and relative weights for 
LTCHs continued to be linked to the annual adjustments of the acute 
care hospital inpatient DRGs and were effective each October 1.
    As discussed in detail in section VIII.A.1. of the May 9, 2008 RY 
2009 LTCH PPS final rule (73 FR 26788), we again changed the schedule 
for the annual updates of the LTCH PPS Federal payment rates beginning 
with RY 2010. We consolidated the rulemaking cycle for the annual 
update of the LTCH PPS Federal payment rates and description of the 
methodology and data used to calculate these payment rates with the 
annual update of the MS-LTC-DRG classifications and associated 
weighting factors for LTCHs so that the updates to the rates and the 
weights now occur on the same schedule and appear in the same 
publication. As a result, the updates to the rates and the weights are 
now effective on October 1 (on a Federal fiscal year schedule), and the 
annual updates to the LTCH PPS Federal rates will no longer be 
published with a July 1 effective date (73 FR 26797 through 26798).
    Public Law 110-173 (MMSEA), enacted on December 29, 2007, included 
provisions that have various effects on the LTCH PPS. In addition to 
amending section 1861 of the Act to add a subsection (ccc) which 
provided an additional definition of LTCHs and facility criteria, 
Public Law 110-173 also required that no later than 18 months after the 
date of enactment of the law, the Secretary conduct a study and submit 
a report to Congress that included ``recommendations for such 
legislation and administrative actions, including timelines for the 
implementation of LTCH patient criteria or other actions, as the 
Secretary determines appropriate.'' The payment policy provisions under 
Public Law 110-173 also have varying timeframes of applicability. 
First, we note that certain provisions of Public Law 110-173 provided 
that the Secretary shall not apply, for cost reporting periods 
beginning on or after the date of the enactment of Public Law 110-173 
(December 29, 2007) for a 3-year period: The extension of payment 
adjustments at Sec.  412.534 to ``grandfathered LTCHs'' (a long-term 
care hospital identified by the amendment made by section 4417(a) of 
Pub. L. 105-33); and the payment adjustment at Sec.  412.536 to 
``freestanding'' LTCHs. In addition, Public Law 110-173 provided that 
the Secretary shall not apply, for the 3-year period beginning on the 
date of enactment of the Act, the revision to the short-stay outlier 
(SSO) policy that was finalized in the RY 2008 LTCH PPS final rule (72 
FR 26904 and 26992) and the one-time adjustment to the payment rates 
provided for in Sec.  412.523(d)(3). The statute also provided that the 
base rate for RY 2008 be the same as the base rate for RY 2007 (the 
revised base rate, however, does not apply to discharges occurring on 
or after July 1, 2007, and before April 1, 2008); for a 3-year 
moratorium (with specified exceptions) on the establishment of new 
LTCHs, LTCH satellites, and on the increase in the number of LTCH beds. 
Public Law 110-173 also revised the threshold percentages for certain 
co-located LTCHs and LTCH satellites governed under Sec.  412.534. 
Finally, Public Law 110-173 provided for an expanded review of medical 
necessity for admission and continued stay at LTCHs.
    In the RY 2009 LTCH PPS final rule (73 FR 26801 through 26812), we 
established the applicable Federal rates for RY 2009 consistent with 
section 1886(m)(2) of the Act as amended by Public Law 110-173. We also 
revised the regulations at Sec.  412.523(d)(3) to change the 
methodology for the one-time budget neutrality adjustment and to comply 
with section 114(c)(4) of Public Law 110-173. Other policy revisions 
necessitated by the statutory changes of Public Law 110-173 were 
addressed in separate interim final rulemaking documents with comment 
periods (73 FR 24871 and 73 FR 29699).
    First, in the May 6, 2008 interim final rule with comment period 
(73 FR 24871), we implemented changes made by section 114(c)(3) and (e) 
of the MMSEA that affected payments to LTCHs for inpatient hospital 
services as follows:
    <bullet> Modification of payment adjustments to certain SSO cases. 
Section 114(c)(3) of the MMSEA specified that the refinement of the SSO 
policy implemented in RY 2008 shall not apply for a 3-year period 
beginning with discharges occurring on or after December 29, 2007. 
Specifically, the fourth SSO payment option under Sec.  
412.529(c)(3)(i) shall not apply for a 3-year period.
    <bullet> Revision to the RY 2008 payment rate provision. Section 
114(e)(1) of the MMSEA provided that the base rate for RY 2008 ``shall 
be the same as the base rate for discharges for the hospital occurring 
during the rate year ending in 2007.'' Furthermore, in accordance with 
section 114(e)(2) of the MMSEA, the revised payment rate will not be 
applicable to discharges occurring on or after July 1, 2007 and before 
April 1, 2008.
    The May 22, 2008 interim final rule with comment (73 FR 29699) 
implemented changes made by section 114(c)(1) and (c)(2) and section 
114(d) of the MMSEA as follows:
    <bullet> Modification of payment adjustments to LTCHs and LTCH 
satellite facilities for discharges of patients who were admitted from 
specific referring hospitals and that exceed various percentage 
thresholds. Sections 114(c)(1) and (c)(2) of the MMSEA mandated 
specific changes for 3 years, beginning with cost reporting periods 
beginning on or after December 29, 2007, with respect to Sec.  412.534 
in existence as that time, which governs the ``25 percent threshold'' 
payment adjustment to LTCH hospitals-within-hospitals (HwHs) and LTCH 
satellite facilities for discharges of patients who were admitted from 
their co-located hosts (established in the FY 2005 IPPS final rule and 
amended in the RY 2008 LTCH PPS final rule), and Sec.  412.536 in 
existence at that time, which applies a payment adjustment policy (that 
was in transition to 25 percent prior to the enactment of this law) to 
LTCH and LTCH satellite facilities for discharges of

[[Page 43947]]

patients who were admitted from any individual hospital not co-located 
with the LTCH or LTCH satellite facility (established in the RY 2008 
LTCH PPS final rule).
    <bullet> Moratorium on new LTCHs, LTCH satellite facilities, and on 
increase in beds in existing LTCHs and LTCH satellite facilities. 
Section 114(d) of the MMSEA established a 3-year moratorium, beginning 
on December 29, 2007, on the establishment and classification of new 
LTCHs, LTCH satellite facilities, and on any increase in beds in 
existing LTCHs and LTCH satellite facilities, with certain exceptions.
    We received 6 timely pieces of correspondence in response to the 
May 6, 2008 interim final rule with comment period and 30 timely pieces 
of correspondence on the May 22, 2008 interim final rule with comment 
period. We are finalizing these two interim final rules with comment 
period in this Federal Register document and addressing the public 
comments that we received under section X. of the preamble of this 
document.
    Section 4302 of the ARRA, Public Law 111-5, enacted on February 17, 
2009, included several amendments to the provisions set forth in 
section 114 of Public Law 110-173 (the MMSEA). We have issued 
instructions to the fiscal intermediaries and MACs interpreting the 
provisions of section 4302 of Public Law 111-5 (Change Request 6444). 
As we stated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we are 
implementing the provisions of section 4302 of Public Law 111-5 through 
an interim final rule with comment period in this Federal Register 
document under section XI. of this preamble.
2. Criteria for Classification as a LTCH
a. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient length of 
stay (LOS) of greater than 25 days. Alternatively, Sec.  
412.23(e)(2)(ii) states that for cost reporting periods beginning on or 
after August 5, 1997, a hospital that was first excluded from the PPS 
in 1986 and can demonstrate that at least 80 percent of its annual 
Medicare inpatient discharges in the 12-month cost reporting period 
ending in FY 1997 have a principal diagnosis that reflects a finding of 
neoplastic disease must have an average inpatient length of stay for 
all patients, including both Medicare and non-Medicare inpatients, of 
greater than 20 days.
b. Hospitals Excluded From the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c), and therefore, are not subject to the 
LTCH PPS rules:
    <bullet> Veterans Administration hospitals.
    <bullet> Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
    <bullet> Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of the Social 
Security Amendments of 1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or 
section 222(a) of the Social Security Amendments of 1972 (Pub. L. 92-
603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer systems, subject 
to the rate-of-increase test at section 1814(b) of the Act).
    <bullet> Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.
3. Limitation on Charges to Beneficiaries
    In the August 30, 2002 final rule, we presented an in-depth 
discussion of beneficiary liability under the LTCH PPS (67 FR 55974 
through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we 
clarified that the discussion of beneficiary liability in the August 
30, 2002 final rule was not meant to establish rates or payments for, 
or define Medicare-eligible expenses. Under Sec.  412.507, if the 
Medicare payment to the LTCH is the full LTC-DRG payment amount, as 
consistent with other established hospital prospective payment systems, 
a LTCH may not bill a Medicare beneficiary for more than the deductible 
and coinsurance amounts as specified under Sec.  409.82, Sec.  409.83, 
and Sec.  409.87 and for items and services as specified under Sec.  
489.30(a). However, under the LTCH PPS, Medicare will only pay for days 
for which the beneficiary has coverage until the SSO threshold is 
exceeded. Therefore, if the Medicare payment was for a SSO case (Sec.  
412.529) that was less than the full LTC-DRG payment amount because the 
beneficiary had insufficient remaining Medicare days, the LTCH could 
also charge the beneficiary for services delivered on those uncovered 
days (Sec.  412.507).
4. Administrative Simplification Compliance Act (ASCA) and Health 
Insurance Portability and Accountability Act (HIPAA) Compliance
    Claims submitted to Medicare must comply with both the 
Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), 
and the Health Insurance Portability and Accountability Act of 1996 
(HIPAA) (Pub. L. 104-191). Section 3 of the ASCA requires that the 
Medicare Program deny payment under Part A or Part B for any expenses 
incurred for items or services ``for which a claim is submitted other 
than in an electronic form specified by the Secretary.'' Section 
1862(h) of the Act (as added by section 3(a) of the ASCA) provides that 
the Secretary shall waive such denial in two specific types of cases 
and may also waive such denial ``in such unusual cases as the Secretary 
finds appropriate'' (68 FR 48805). Section 3 of the ASCA operates in 
the context of the HIPAA regulations, which include, among other 
provisions, the transactions and code sets standards requirements 
codified as 45 CFR parts 160 and 162, subparts A and I through R 
(generally known as the Transactions Rule). The Transactions Rule 
requires covered entities, including covered health care providers, to 
conduct certain electronic healthcare transactions according to the 
applicable transactions and code sets standards.

B. Medicare Severity Long-Term Care Diagnosis-Related Group (MS-LTC-
DRG) Classifications and Relative Weights

1. Background
    Section 123 of the BBRA requires that the Secretary implement a PPS 
for LTCHs (that is, a per discharge system with a diagnosis-related 
group (DRG)-based patient classification system reflecting the 
differences in patient resources and costs). Section 307(b)(1) of the 
BIPA modified the requirements of section 123 of the BBRA by requiring 
that the Secretary examine ``the feasibility and the impact of basing 
payment under such a system [the long-term care hospital (LTCH) PPS] on 
the use of existing (or refined) hospital DRGs that have been modified 
to account for different resource use of LTCH patients, as well as the 
use of the most recently available hospital discharge data.''
    When the LTCH PPS was implemented for cost reporting periods 
beginning on or after October 1, 2002, we adopted the same DRG patient 
classification system (that is, the CMS DRGs) that was utilized at that 
time

[[Page 43948]]

under the IPPS. As a component of the LTCH PPS, we refer to this 
patient classification system as the ``long-term care diagnosis-related 
groups (LTC-DRGs).'' As discussed in greater detail below, although the 
patient classification system used under both the LTCH PPS and the IPPS 
are the same, the relative weights are different. The established 
relative weight methodology and data used under the LTCH PPS result in 
relative weights under the LTCH PPS that reflect ``the differences in 
patient resource use * * *'' of LTCH patients (section 123(a)(1) of the 
BBRA (Pub. L. 106-113)).
    As part of our efforts to better recognize severity of illness 
among patients, in the FY 2008 IPPS final rule with comment period (72 
FR 47130), the MS-DRGs and the Medicare severity long-term care 
diagnosis-related groups (MS-LTC-DRGs) were adopted under the IPPS and 
the LTCH PPS, respectively, effective beginning October 1, 2007 (FY 
2008). For a full description of the development and implementation of 
the MS-DRGs and MS-LTC-DRGs, we refer readers to the FY 2008 IPPS final 
rule with comment period (72 FR 47141 through 47175 and 47277 through 
47299). (We note that, in that same final rule, we revised the 
regulations at Sec.  412.503 to specify that for LTCH discharges 
occurring on or after October 1, 2007, when applying the provisions of 
42 CFR part 412, Subpart O applicable to LTCHs for policy descriptions 
and payment calculations, all references to LTC-DRGs would be 
considered a reference to MS-LTC-DRGs. For the remainder of this 
section, we present the discussion in terms of the current MS-LTC-DRG 
patient classification system unless specifically referring to the 
previous LTC-DRG patient classification system that was in effect 
before October 1, 2007.) We believe the MS-DRGs (and by extension, the 
MS-LTC-DRGs) represent a substantial improvement over the previous CMS 
DRGs in their ability to differentiate cases based on severity of 
illness and resource consumption.
    The MS-DRGs adopted in FY 2008 represent an increase in the number 
of DRGs by 207 (that is, from 538 to 745) (72 FR 47171). In FY 2009, an 
additional MS-DRG was adopted for a total of 746 distinct groupings (73 
FR 48497). In addition to improving the DRG system's recognition of 
severity of illness, we believe the MS-DRGs are responsive to the 
public comments that were made on the FY 2007 IPPS proposed rule with 
respect to how we should undertake further DRG reform. The MS-DRGs use 
the CMS DRGs as the starting point for revising the DRG system to 
better recognize resource complexity and severity of illness. We have 
generally retained all of the refinements and improvements that have 
been made to the base DRGs over the years that recognize the 
significant advancements in medical technology and changes to medical 
practice.
    Consistent with section 123 of the BBRA, as amended by section 
307(b)(1) of the BIPA, and Sec.  412.515, we use information derived 
from LTCH PPS patient records to classify LTCH discharges into distinct 
MS-LTC-DRGs based on clinical characteristics and estimated resource 
needs. We then assign an appropriate weight to the MS-LTC-DRGs to 
account for the difference in resource use by patients exhibiting the 
case complexity and multiple medical problems characteristic of LTCHs.
    In a departure from the IPPS, and as discussed in greater detail 
below in section VIII.B.3.e. of this preamble, we use low-volume MS-
LTC-DRGs (that is, MS-LTC-DRGs with less than 25 LTCH cases) in 
determining the MS-LTC-DRG relative weights because LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
For purposes of determining the relative weights for the large number 
of low-volume MS-LTC-DRGs, we group all of the low-volume MS-LTC-DRGs 
into five quintiles based on average charge per discharge. (A detailed 
discussion of the application of the Lewin Group ``quintile'' model 
that was used to develop the LTC-DRGs appears in the August 30, 2002 
LTCH PPS final rule (67 FR 55978).) We also account for adjustments to 
payments for SSO cases (that is, cases where the covered LOS at the 
LTCH is less than or equal to five-sixths of the geometric ALOS for the 
MS-LTC-DRG). Furthermore, we make adjustments to account for 
nonmonotonically increasing weights, when necessary. That is, 
theoretically, cases under the MS-LTC-DRG system that are more severe 
require greater expenditure of medical care resources and will result 
in higher average charges such that, in the severity levels within a 
base MS-LTC-DRG, the weights should increase monotonically with 
severity from the lowest to highest severity level. (We discuss 
nonmonotonicity in greater detail and our methodology to adjust the RY 
2010 MS-LTC-DRG relative weights to account for nonmonotonically 
increasing relative weights in section VIII.B.3.f. (Step 6) of this 
preamble.)
2. Patient Classifications Into MS-LTC-DRGs
a. Background
    The MS-DRGs (used under the IPPS) and the MS-LTC-DRGs (used under 
the LTCH PPS) are based on the CMS DRG structure. As noted above in 
this section, we refer to the DRGs under the LTCH PPS as MS-LTC-DRGs 
although they are structurally identical to the DRGs used under the 
IPPS.
    The MS-DRGs are organized into 25 major diagnostic categories 
(MDCs), most of which are based on a particular organ system of the 
body; the remainder involve multiple organ systems (such as MDC 22, 
Burns). Within most MDCs, cases are then divided into surgical DRGs and 
medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy 
that orders operating room (O.R.) procedures or groups of O.R. 
procedures by resource intensity. The GROUPER software program does not 
recognize all ICD-9-CM procedure codes as procedures affecting DRG 
assignment. That is, procedures that are not surgical (for example, 
EKG), or minor surgical procedures (for example, biopsy of skin and 
subcutaneous tissue (code 86.11)) do not affect the MS-LTC-DRG 
assignment based on their presence on the claim.
    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge and that payment varies 
by the MS-LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into MS-LTC-DRGs for payment based on the following six data 
elements:
    <bullet> Principal diagnosis.
    <bullet> Up to eight additional diagnoses.
    <bullet> Up to six procedures performed.
    <bullet> Age.
    <bullet> Sex.
    <bullet> Discharge status of the patient.
    Upon the discharge of the patient from an LTCH, the LTCH must 
assign appropriate diagnosis and procedure codes from the most current 
version of the International Classification of Diseases, Ninth 
Revision, Clinical Modification (ICD-9-CM). HIPAA Transactions and Code 
Sets Standards regulations at 45 CFR parts 160 and 162 require that no 
later than October 16, 2003, all covered entities must comply with the 
applicable requirements of Subparts A and I through R of Part 162. 
Among other requirements, those provisions direct covered entities to 
use the ASC X12N 837 Health Care Claim: Institutional, Volumes 1 and 2, 
Version 4010, and the applicable standard medical data code sets for 
the institutional health care claim or

[[Page 43949]]

equivalent encounter information transaction (45 CFR 162.1002 and 45 
CFR 162.1102). For additional information on the ICD-9-CM Coding 
System, we refer readers to the FY 2008 IPPS final rule with comment 
period (72 FR 47241 through 47243 and 47277 through 47281). We also 
refer readers to the detailed discussion on correct coding practices in 
the August 30, 2002 LTCH PPS final rule (67 FR 55981 through 55983). 
Additional coding instructions and examples are published in the Coding 
Clinic for ICD-9-CM, a product of the American Hospital Association.
    To create the MS-DRGs (and by extension, the MS-LTC-DRGs), 
individual DRGs were subdivided according to the presence of specific 
secondary diagnoses designated as complications or comorbidities (CCs) 
into three, two, or one level, depending on the impact of the CCs on 
resources used for those cases. Specifically, there are sets of MS-DRGs 
that are split into 2 or 3 subgroups based on the presence or absence 
of a CC or a major complication and comorbidity (MCC). The original 
discussion about the creation of MS-DRGs and their severity levels is 
described in detail in the FY 2008 IPPS final rule with comment period 
(72 FR 47169). However, to reiterate the development of the CCs and 
MCCs, two of our major goals were to create DRGs that would more 
accurately reflect the severity of the cases assigned to them and to 
create groups that would have sufficient volume so that meaningful and 
stable payment weights could be developed. In designating an MS-DRG as 
one that will be divided into subgroups based on the presence of a CC 
or MCC, we developed a set of criteria to facilitate the decisionmaking 
process. The subgroup was required to meet all criteria, which are 
described in detail in the FY 2008 IPPS final rule with comment period 
(72 FR 47169). As a first step, each of the base MS-DRGs was subdivided 
into three subgroups: Non-CC, CC, and MCC. Each subgroup was then 
analyzed in relation to the other two subgroups, and the criteria were 
applied in the following hierarchical manner.
    <bullet> If a three-way subdivision met the criteria, we divided 
the base MS-DRG into three CC subgroups.
    <bullet> If only one type of two-way subdivisions met the criteria, 
we subdivided the base MS-DRG into two CC subgroups based on the type 
of two-way subdivision that met the criteria.
    <bullet> If both types of two-way subdivisions met the criteria, we 
subdivided the base MS-DRG into two CC subgroups based on the type of 
two-way subdivision with the highest R\2\ (most explanatory power to 
explain the difference in average charges).
    <bullet> Otherwise, we did not subdivide the base MS-DRG into CC 
subgroups.
    For any given base MS-DRG, our evaluation in some cases showed that 
a subdivision between a non-CC and a combined CC/MCC subgroup was all 
that was warranted (that is, there was not a sufficient difference 
between the CC and MCC subgroups to justify separate CC and MCC 
subgroups). Conversely, in some cases, even though an MCC subgroup was 
warranted, there was not a sufficient difference between the non-CC and 
CC subgroups to justify separate subgroups.
    Based on this methodology, a base MS-DRG may be subdivided 
according to the following three alternatives:
    <bullet> DRGs with three subgroups (MCC, CC, and non-CC).
    <bullet> DRGs with two subgroups consisting of an MCC subgroup but 
with the CC and non-CC subgroups combined. These are referred to as 
``with MCC'' and ``without MCC.''
    <bullet> DRGs with two subgroups consisting of a non-CC subgroup 
but with the CC and MCC subgroups combined. We refer to these two 
groups as ``with CC/MCC'' and ``without CC/MCC.''
    For example, under the MS-LTC-DRG system, multiple sclerosis and 
cerebellar ataxia with MCC is MS-LTC-DRG 58; multiple sclerosis and 
cerebellar ataxia with CC is MS-LTC-DRG 59; and multiple sclerosis and 
cerebellar ataxia without CC/MCC is MS-LTC-DRG 60. For purposes of 
discussion in this section, the term ``base DRG'' is used to refer to 
the DRG category that encompasses all levels of severity for that DRG. 
For example, when referring to the entire DRG category for multiple 
sclerosis and cerebellar ataxia, which includes the above three 
severity levels, we would use the term ``base DRG.'' (As noted above in 
this section, further information on the development and implementation 
of the MS-DRGs and MS-LTC-DRGs can be found in the FY 2008 IPPS final 
rule with comment period (72 FR 47138 through 47175 and 47277 through 
47299).)
    In developing the first MS-DRG GROUPER program (that is, Version 
25.0 effective for FY 2008), the diagnoses comprising the CC list were 
completely redefined. The revised CC list is primarily comprised of 
significant acute disease, acute exacerbations of significant chronic 
diseases, advanced or end stage chronic diseases, and chronic diseases 
associated with extensive debility. In general, most chronic diseases 
were not included on the revised CC list. For a patient with a chronic 
disease, a significant acute manifestation of the chronic disease was 
required to be present and coded for the patient to be assigned a CC. 
In addition to the revision of the CC list, each CC was also 
categorized as an MCC or a CC based on relative resource use. 
Approximately 12 percent of all diagnoses codes were classified as an 
MCC, 24 percent as a CC, and 64 percent as a non-CC. Diagnoses closely 
associated with mortality (ventricular fibrillation, cardiac arrest, 
shock, and respiratory arrest) were assigned as an MCC if the patient 
lived, but as a non-CC if the patient died. The MCC, CC, and non-CC 
categorization was used to subdivide the surgical and medical DRGs into 
up to three levels, with a case being assigned to the most resource 
intensive level (for example, a case with two secondary diagnoses that 
are categorized as an MCC and a CC is assigned to the MCC level).
    Medicare contractors (that is, fiscal intermediaries and MACs) 
enter the clinical and demographic information submitted by LTCHs into 
their claims processing systems and subject this information to a 
series of automated screening processes called the Medicare Code Editor 
(MCE). These screens are designed to identify cases that require 
further review before assignment into a MS-LTC-DRG can be made. During 
this process, the following types of cases are selected for further 
development:
    <bullet> Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.69 (Other and unspecified radical abdominal hysterectomy) would be 
an inappropriate code for a male.)
    <bullet> Cases including surgical procedures not covered under 
Medicare. (For example, organ transplant in a nonapproved transplant 
center.)
    <bullet> Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262 
(Other severe protein-calorie malnutrition) contains all appropriate 
digits, but if it is reported with either fewer or more than 3 digits, 
the claim will be rejected by the MCE as invalid.)
    After screening through the MCE, each claim is classified into the 
appropriate MS-LTC-DRG by the Medicare LTCH GROUPER software on the 
basis of diagnosis and procedure codes and other demographic 
information (age, sex, and discharge status). The GROUPER software used 
under the LTCH PPS is the same

[[Page 43950]]

GROUPER software program used under the IPPS. Following the MS-LTC-DRG 
assignment, the Medicare contractor determines the prospective payment 
amount by using the Medicare PRICER program, which accounts for 
hospital-specific adjustments. Under the LTCH PPS, we provide an 
opportunity for LTCHs to review the MS-LTC-DRG assignments made by the 
Medicare contractor and to submit additional information within a 
specified timeframe as provided in Sec.  412.513(c).
    The GROUPER software is used both to classify past cases to measure 
relative hospital resource consumption to establish the MS-LTC-DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the MedPAR file. The data in this file are used to 
evaluate possible MS-DRG and MS-LTC-DRG classification changes and to 
recalibrate the MS-DRG and MS-LTC-DRG relative weights during our 
annual update under both the IPPS (Sec.  412.60(e)) and the LTCH PPS 
(Sec.  412.517), respectively.
    Although the LTCH PPS RYs 2004 through 2009 annual payment rate 
update cycles were effective July 1 through June 30 instead of October 
1 through September 30 (with the exception of the 15-month RY 2009 
payment rate update cycle, which is effective July 1, 2008 through 
September 30, 2009), because the patient classification system utilized 
under the LTCH PPS uses the same DRGs as those used under the IPPS for 
acute care hospitals, the annual update of the LTC-DRG classifications 
and relative weights continued to remain linked to the annual 
reclassification and recalibration of the DRGs used under the IPPS. 
Therefore, the payment rate update to the MS-LTC-DRG classifications 
and relative weights are effective for discharges occurring on or after 
October 1 through September 30 of each year (RYs 2004 through 2009), 
and we published the annual proposed and final update of the MS-LTC-
DRGs in the same notice as the proposed and final update for the IPPS 
(69 FR 34122 through 34125).
    In the RY 2009 LTCH PPS final rule, we amended the regulations at 
Sec.  412.503 and Sec.  412.535 in order to consolidate the rate year 
and fiscal year rulemaking cycles, effective October 1, 2009 (73 FR 
26797 through 26798). Specifically, we revised the regulations to shift 
the payment rate update from a July 1 through June 30 cycle to an 
October 1 through September 30 cycle. We extended the 2009 rate year 
period to September 30, 2009, so that RY 2009 is 15 months; that is, 
July 1, 2008, through September 30, 2009. Consequently, after the 
conclusion of the 15-month RY 2009, both the annual update of the LTCH 
PPS payment rates (and the description of the methodology and data used 
to calculate these payment rates) and the annual update of the MS-LTC-
DRG classifications and associated weighting factors for LTCHs will be 
updated on an October 1 through September 30 cycle and, thus, be 
effective on October 1 of each Federal fiscal year beginning October 1, 
2009. Beginning with the RY 2010 LTCH PPS update, both the annual 
update of the LTCH PPS payment rate, including the annual update of the 
MS-LTC-DRGs, and policy changes will be presented along with the annual 
IPPS payment rate and policy changes in a single combined rulemaking 
document published in the Federal Register as was done in the proposed 
rule and in this final rule.
    Prior to FY 2004, the annual update to the DRGs used under the IPPS 
had been based on the annual revisions to the ICD-9-CM codes and was 
effective each October 1. As discussed in past LTCH PPS and IPPS 
proposed and final rules (most recently in the FY 2009 IPPS final rule 
(73 FR 48530)), section 503(a) of Public Law 108-173 amended section 
1886(d)(5)(K) of the Act by adding a new clause (vii) which states that 
``the Secretary shall provide for the addition of new diagnosis and 
procedure codes in [sic] April 1 of each year, but the addition of such 
codes shall not require the Secretary to adjust the payment (or 
diagnosis-related group classification) * * * until the fiscal year 
that begins after such date.'' This requirement improves the 
recognition of new technologies under the IPPS by accounting for those 
ICD-9-CM codes in the MedPAR claims data earlier than the agency had 
accounted for new technology in the past. In implementing the statutory 
change, the agency has provided that ICD-9-CM diagnosis and procedure 
codes for new medical technology may be created and assigned to 
existing DRGs in the middle of the Federal fiscal year, on April 1. 
Therefore, there is the possibility that one feature of the GROUPER 
software program may be updated twice during a Federal fiscal year 
(that is, October 1 and April 1). However, we note that, as the statute 
permits, the DRG relative weights in effect for that fiscal year will 
continue to be updated only once a year (October 1).
    The patient classification system used under the LTCH PPS is the 
same patient classification system that is used under the IPPS. 
Therefore, the ICD-9-CM codes currently used under both the IPPS and 
the LTCH PPS have the potential of being updated twice a year due to 
the implementation of section 503(a) of Public Law 108-173 for the IPPS 
(as explained above). Because we do not publish a midyear IPPS rule, 
any April 1 ICD-9-CM coding update will not be published in the Federal 
Register. Rather, consistent with the policy under the IPPS (discussed 
in section II.G.7. of the preamble of this final rule), we assign any 
new diagnosis or procedure codes to the same DRG in which its 
predecessor code was assigned, so that there is no impact on the DRG 
assignments. Any coding updates will be available through the Web sites 
provided in section II.G.7. of the preamble of this final rule and 
through the Coding Clinic for ICD-9-CM. Publishers and software vendors 
currently obtain code changes through these sources in order to update 
their code books and software system. If new codes are implemented on 
April 1, revised code books and software systems, including the GROUPER 
software program, will be necessary because the most current ICD-9-CM 
codes must be reported. Therefore, for purposes of the LTCH PPS, 
because each ICD-9-CM code must be included in the GROUPER algorithm to 
classify each case under the correct LTCH PPS, the GROUPER software 
program used under the LTCH PPS would need to be revised to accommodate 
any new codes.
    In implementing section 503(a) of Public Law 108-173, there will 
only be an April 1 update if new technology diagnosis and procedure 
code revisions are requested and approved. We note that any new codes 
created for April 1 implementation will be limited to those primarily 
needed to describe new technologies and medical services. However, we 
reiterate that the process of discussing updates to the ICD-9-CM is an 
open process through the ICD-9-CM Coordination and Maintenance 
Committee. Requestors will be given the opportunity to present the 
merits for a new code and to make a clear and convincing case for the 
need to update ICD-9-CM codes for purposes of the IPPS new technology 
add-on payment process through an April 1 update (as also discussed in 
section II.G.7. of the preamble of this final rule).
    There were no mid-year codes added to the ICD-9-CM coding system as 
a result of the September 24-25, 2008 meeting of the ICD-9-CM 
Coordination and Maintenance Committee. The next update to the ICD-9-CM 
coding system will occur on October 1, 2009 (FY 2010), and the ICD-9-CM 
coding set implemented on October 1, 2009, will

[[Page 43951]]

continue through September 30, 2010 (FY 2010). The ICD-9-CM 
Coordination and Maintenance Committee met again on March 11-12, 2009. 
Because this meeting was for the purpose of informing the public of 
proposed changes to the ICD-9-CM code set as well as for requesting 
comment from the public, no decisions regarding coding changes were 
made at this meeting. Commenters were requested to submit comments by 
April 3, 2009, concerning the proposed code revisions discussed at the 
March 11-12, 2009 meeting. Any new codes or other revisions created as 
a result of this meeting were not included in the proposed rule because 
of the short turnaround time required for the publication of the 
proposed rule. However, new codes and any other revisions appear in 
this final rule in Tables 6A through 6F of the Addendum. The codes 
appearing for the first time in this final rule are identified with an 
asterisk leading to the following notation: ``These codes were 
discussed at the March 11-12, 2009 ICD-9-CM Coordination and 
Maintenance Committee meeting and were not finalized in time to include 
in the proposed rule. However, they will be implemented on October 1, 
2009.'' The update to the ICD-9-CM coding system that is effective on 
October 1, 2009, is discussed in section II.G.7. of the preamble of 
this final rule.
b. Changes to the MS-LTC-DRGs for RY 2010
    As we proposed, consistent with our historical practice of using 
the same patient classification system under the LTCH PPS as is used 
under the IPPS, in this final rule, we are modifying and revising the 
MS-LTC-DRG classifications effective October 1, 2009, through September 
30, 2010 (RY 2010) consistent with the changes to specific MS-DRG 
classifications presented above in section II.G. of this final rule 
(that is, GROUPER Version 27.0). Therefore, the MS-LTC-DRGs for RY 2010 
presented in this final rule are the same as the MS-DRGs that will be 
used under the IPPS for FY 2010 (that is, GROUPER Version 27.0 as 
described in section II.G. of the preamble of this final rule). In 
addition, because the MS-LTC-DRGs for RY 2010 are the same as the MS-
DRGs for FY 2010, the other changes that will affect MS-DRG (and by 
extension MS-LTC-DRG) assignments under Version 27.0 of the GROUPER 
discussed in section II.G. of the preamble of this final rule, 
including the changes to the MCE software and changes to the ICD-9-CM 
coding system, will also be applicable under the LTCH PPS for RY 2010.
    Comment: A few commenters supported the proposed revisions to the 
MS-DRG classifications and, by extension, the MS-LTC-DRG 
classifications that would apply under the LTCH PPS for RY 2010.
    Response: We appreciate the commenters' support as we continue to 
refine the MS-DRG classifications and, by extension, the MS-LTC-DRG 
classifications. As stated above, in this final rule, we are adopting 
Version 27.0 of the MS-DRG GROUPER (as described in section II.G. of 
the preamble of this final rule) for use under the LTCH PPS for RY 
2010.
3. Development of the RY 2010 MS-LTC-DRG Relative Weights
a. General Overview of the Development of the MS-LTC-DRG Relative 
Weights
    As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 
55984), one of the primary goals for the implementation of the LTCH PPS 
is to pay each LTCH an appropriate amount for the efficient delivery of 
medical care to Medicare patients. The system must be able to account 
adequately for each LTCH's case-mix in order to ensure both fair 
distribution of Medicare payments and access to adequate care for those 
Medicare patients whose care is more costly. To accomplish these goals, 
we have annually adjusted the LTCH PPS standard Federal prospective 
payment system rate by the applicable relative weight in determining 
payment to LTCHs for each case. (As we have noted above, we adopted the 
MS-LTC-DRGs for the LTCH PPS beginning in FY 2008. However, this change 
in the patient classification system does not affect the basic 
principles of the development of relative weights under a DRG-based 
prospective payment system.)
    Although the adoption of the MS-LTC-DRGs resulted in some 
modifications of existing procedures for assigning weights in cases of 
zero volume and/or nonmonotonicity, as discussed in the FY 2008 IPPS 
final rule with comment period (72 FR 47289 through 47295) and the FY 
2009 IPPS final rule (73 FR 48542 through 48550) and as detailed in the 
following sections, the basic methodology for developing the RY 2010 
MS-LTC-DRG relative weights in this final rule continues to be 
determined in accordance with the general methodology established in 
the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991). 
Under the LTCH PPS, relative weights for each MS-LTC-DRG are a primary 
element used to account for the variations in cost per discharge and 
resource utilization among the payment groups (Sec.  412.515). To 
ensure that Medicare patients classified to each MS-LTC-DRG have access 
to an appropriate level of services and to encourage efficiency, we 
calculate a relative weight for each MS-LTC-DRG that represents the 
resources needed by an average inpatient LTCH case in that MS-LTC-DRG. 
For example, cases in an MS-LTC-DRG with a relative weight of 2 will, 
on average, cost twice as much to treat as cases in an MS-LTC-DRG with 
a weight of 1.
b. Development of the Proposed MS-LTC-DRG Relative Weights for RY 2010
    Beginning with the FY 2008 update, we established a budget neutral 
requirement for the annual update to the MS-LTC-DRG classifications and 
relative weights at 42 CFR 412.517(b) (in conjunction with Sec.  
412.503), such that estimated aggregate LTCH PPS payments would be 
unaffected, that is, would be neither greater than nor less than the 
estimated aggregate LTCH PPS payments that would have been made without 
the classification and relative weight changes. (See the May 11, 2007 
LTCH PPS final rule (72 FR 26882 through 26884).)
    Consistent with Sec.  412.517(b), we apply a two-step budget 
neutrality methodology, which is based on the current year MS-LTC-DRG 
classifications and relative weights. (For additional information on 
the established two-step budget neutrality methodology, refer to the FY 
2008 IPPS final rule (72 FR 47295 through 47296).) Thus, the annual 
update to the MS-LTC-DRG classifications and relative weights for RY 
2010 is based on the FY 2009 MS-LTC-DRG classifications and relative 
weights. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 
24218 through 24227), we proposed RY 2010 MS-LTC-DRG relative weights 
based on the FY 2009 MS-LTC-DRG relative weights published in the FY 
2009 IPPS final rule (73 FR 48528 through 48551 and 49041 through 
49062). Through an interim final rule with comment period published in 
the Federal Register on June 3, 2009 (74 FR 26546 through 26569), we 
revised the published FY 2009 MS-LTC-DRG relative weights based on the 
appropriate application of the FY 2009 budget neutrality factor 
determined consistent with our established methodology. In section IX. 
of the preamble of this final rule, we respond to the public comments 
we received on that interim final rule with comment period and finalize 
the revised FY 2009 MS-LTC-DRG relative weights that are applicable for 
the period of June 3, 2009

[[Page 43952]]

through September 30, 2009. Based on the revised FY 2009 MS-LTC-DRG 
relative weights published in the June 3, 2009 interim final rule with 
comment period, in the RY 2010 LTCH PPS supplemental proposed rule 
published in the Federal Register on June 3, 2009 (74 FR 26600 through 
26635), we presented both proposed RY 2010 MS-LTC-DRG relative weights 
and a proposed RY 2010 high-cost outlier (HCO) fixed-loss amount.
    Comment: In response to the RY 2010 LTCH PPS supplemental proposed 
rule, a few commenters asserted that CMS did not establish good cause 
for deviating from the required ``notice and comment'' rulemaking 
procedures required by the Social Security Act (the Act) and the 
Administrative Procedures Act (APA). The commenters stated that, in 
order to submit meaningful comments, the public should have been given 
the full 60 days to evaluate the proposals contained in the RY 2010 
LTCH PPS supplemental proposed rule, and asserted that there was 
sufficient time before the October 1, 2009 effective date to provide 
for the full 60-day comment period.
    Response: We do not agree with the commenters that we did not 
establish good cause for deviating from the ``notice and comment'' 
rulemaking procedures required by section 1871 of the Act and section 
553(d) of the APA. As discussed in the RY 2010 LTCH PPS supplemental 
proposed rule (74 FR 26603), we ordinarily publish a proposed rule and 
provide a 60-day period for public comment in accordance with section 
1871(b)(1) of the Act and section 553(d) of the APA. However, section 
1871(b)(2)(C) of the Act provides that this period may be shortened 
when the Secretary, for good cause, finds that such a comment period 
would be impracticable, unnecessary, or contrary to the public interest 
and incorporates a statement of the finding and its reasons in the 
notice issued. In this instance, we believe that a 60-day comment 
period would have been both impracticable and contrary to the public 
interest because it would not have allowed for coordinated 
consideration of the public comments on the RY 2010 LTCH PPS 
supplemental proposed rule with those on the FY 2010 IPPS/RY 2010 LTCH 
PPS proposed rule. Because the proposals presented in the RY 2010 LTCH 
PPS supplemental proposed rule were integral to our consideration of 
public comments on certain other LTCH PPS proposals presented in the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule, we believe that it was 
necessary and appropriate to review public comments received on the 
proposals presented in the RY 2010 LTCH PPS supplemental proposed rule 
in conjunction with the public comments received on the FY 2010 IPPS/RY 
2010 LTCH PPS proposed rule.
    With respect to the commenters' assertion that there was sufficient 
time before the October 1, 2009 effective date of the RY 2010 LTCH PPS 
annual update to provide for the full 60-day comment period, as we 
stated in the RY 2010 LTCH PPS supplemental proposed rule (74 FR 
26603), a 60-day comment period would have been both impracticable and 
contrary to the public interest because it would not allow for 
coordinated consideration of the public comments on the RY 2010 LTCH 
PPS supplemental proposed rule with those on the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule. Because the proposals contained in the RY 2010 
LTCH PPS supplemental proposed rule were integral to our consideration 
of public comments on certain proposals in the FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule, we do not believe it would have been 
appropriate to review public comments on the proposals contained in the 
RY 2010 LTCH PPS supplemental proposed rule in isolation from the 
public comments received on the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule. We also do not agree that the less than 60-day comment period 
deprived the public of an opportunity to submit meaningful comments on 
the proposals presented in the RY 2010 LTCH PPS supplemental proposed 
rule. We note that the proposed RY 2010 MS-LTC-DRG relative weights and 
the RY 2010 HCO fixed-loss threshold amount presented in the RY 2010 
LTCH PPS supplemental proposed rule were developed consistent with the 
methodology described in the original FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24080), which had been available to the public for 
over 3 weeks at the time the supplemental proposed rule was published. 
For the reasons set forth above, we believe we provided the necessary 
and required timeframes for meaningful public comment on the proposals 
presented in the RY 2010 LTCH PPS supplemental proposed rule.
c. Data
    In this final rule, to calculate the MS-LTC-DRG relative weights 
for RY 2010, we obtained total Medicare allowable charges from FY 2008 
Medicare LTCH bill data from the March 2009 update of the MedPAR file, 
which are the best available data at this time, and used the finalized 
Version 27.0 of the GROUPER to classify LTCH cases (as discussed 
above). For the proposed rule, we used data from the December 2008 
update of the MedPAR file, which was the best available we had at the 
time of publication of the proposed rule.
    Consistent with our historical methodology, we excluded the data 
from LTCHs that are all-inclusive rate providers and LTCHs that are 
reimbursed in accordance with demonstration projects authorized under 
section 402(a) of Public Law 90-248 or section 222(a) of Public Law 92-
603. (We refer readers to the FY 2009 IPPS final rule (73 FR 48532).) 
Therefore, in the development of the RY 2010 MS-LTC-DRG relative 
weights in this final rule, we excluded the data of 15 all-inclusive 
rate providers and the 2 LTCHs that are paid in accordance with 
demonstration projects that had claims in the FY 2008 MedPAR file.
c. Hospital-Specific Relative Value (HSRV) Methodology
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
This nonrandom distribution of cases with relatively high (or low) 
charges in specific MS-LTC-DRGs has the potential to inappropriately 
distort the measure of average charges. As we proposed, to account for 
the fact that cases may not be randomly distributed across LTCHs, in 
this final rule, we used a hospital-specific relative value (HSRV) 
methodology to calculate the MS-LTC-DRG relative weights instead of the 
methodology used to determine the MS-DRG relative weights under the 
IPPS described in section II.H. of the preamble of this final rule. We 
believe this method removed this hospital-specific source of bias in 
measuring LTCH average charges. Specifically, we reduced the impact of 
the variation in charges across providers on any particular MS-LTC-DRG 
relative weight by converting each LTCH's charge for a case to a 
relative value based on that LTCH's average charge.
    Under the HSRV methodology, we standardized charges for each LTCH 
by converting its charges for each case to hospital-specific relative 
charge values and then adjusted those values for the LTCH's case-mix. 
The adjustment for case-mix is needed to rescale the hospital-specific 
relative charge values (which, by definition, average 1.0 for each 
LTCH). The average relative weight for a LTCH is its case-mix, so it is 
reasonable to scale each LTCH's average relative charge value by its 
case-mix. In

[[Page 43953]]

this way, each LTCH's relative charge value is adjusted by its case-mix 
to an average that reflects the complexity of the cases it treats 
relative to the complexity of the cases treated by all other LTCHs (the 
average case-mix of all LTCHs).
    Comment: One commenter believes that it is inconsistent to utilize 
the HSRV methodology under the LTCH PPS when it is not utilized under 
the IPPS and recommended that the HSRV methodology not be used under 
either the LTCH PPS or the IPPS.
    Response: Because different types of LTCH cases may not be randomly 
distributed across all LTCHs due to the specialized nature of LTCHs, as 
discussed above, we believe the HSRV methodology is appropriate to use 
under the LTCH PPS in order to remove this hospital-specific source of 
bias in measuring the LTCH average charges that are used in determining 
the relative weights for the MS-LTC-DRGs under the LTCH PPS. Therefore, 
we are not adopting the commenter's recommendation and, as proposed, 
have continued to utilize the HSRV methodology under the LTCH PPS to 
determine the MS-LTC-DRG relative weights for RY 2010. As discussed 
above in sections II.C. and II.E. of this preamble, we have evaluated 
the use of the HSRV methodology under the IPPS for future consideration 
and continue to explore refinement to the relative weight methodology 
used under the IPPS.
    In accordance with the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 55989 through 55991), we continue to 
standardize charges for each case by first dividing the adjusted charge 
for the case (adjusted for SSOs under Sec.  412.529 as described in 
section VIII.B.3.f. (step 3) of the preamble of this final rule) by the 
average adjusted charge for all cases at the LTCH in which the case was 
treated. SSO cases are cases with a length of stay that is less than or 
equal to five-sixths the average length of stay of the MS-LTC-DRG 
(Sec.  412.529 and Sec.  412.503). The average adjusted charge reflects 
the average intensity of the health care services delivered by a 
particular LTCH and the average cost level of that LTCH. The resulting 
ratio is multiplied by that LTCH's case-mix index to determine the 
standardized charge for the case.
    Multiplying by the LTCH's case-mix index accounts for the fact that 
the same relative charges are given greater weight at a LTCH with 
higher average costs than they would at a LTCH with low average costs, 
which is needed to adjust each LTCH's relative charge value to reflect 
its case-mix relative to the average case-mix for all LTCHs. Because we 
standardize charges in this manner, we count charges for a Medicare 
patient at a LTCH with high average charges as less resource intensive 
than they would be at a LTCH with low average charges. For example, a 
$10,000 charge for a case at a LTCH with an average adjusted charge of 
$17,500 reflects a higher level of relative resource use than a $10,000 
charge for a case at a LTCH with the same case-mix, but an average 
adjusted charge of $35,000. We believe that the adjusted charge of an 
individual case more accurately reflects actual resource use for an 
individual LTCH because the variation in charges due to systematic 
differences in the markup of charges among LTCHs is taken into account.
d. Treatment of Severity Levels in Developing the MS-LTC-DRG Relative 
Weights
    For purposes of determining the MS-LTC-DRG relative weights, as we 
discussed in the FY 2009 IPPS final rule (73 FR 48532 through 48533), 
there are three different categories of DRGs based on volume of cases 
within specific MS-LTC-DRGs. MS-LTC-DRGs with at least 25 cases are 
each assigned a unique relative weight; low-volume MS-LTC-DRGs (that 
is, MS-LTC-DRGs that contain between 1 and 24 cases based on a given 
year's claims data) are grouped into quintiles (as described below) and 
assigned the relative weight of the quintile. No-volume MS-LTC-DRGs 
(that is, no cases in the given year's claims data were assigned to 
those MS-LTC-DRGs) are crosswalked to other MS-LTC-DRGs based on the 
clinical similarities and assigned the relative weight of the 
crosswalked MS-LTC-DRG (as described in greater detail below). (We 
provide in-depth discussions of our policy regarding weight-setting for 
low-volume MS-LTC-DRGs in section VIII.B.3.e. of the preamble of this 
final rule and for no-volume MS-LTC-DRGs, under Step 5 in section 
VIII.B.3.f. of the preamble of this final rule.)
    As noted above, in response to the need to account for severity and 
pay appropriately for cases, we developed a severity-adjusted patient 
classification system that we adopted for both the IPPS and the LTCH 
PPS in FY 2008. As described in greater detail above, the MS-LTC-DRG 
system can accommodate three severity levels: ``with MCC'' (most 
severe); ``with CC,'' and ``without CC/MCC'' (the least severe), with 
each level assigned an individual MS-LTC-DRG number. In cases with two 
subdivisions, the levels are either ``with CC/MCC'' and ``without CC/
MCC'' or ``with MCC'' and ``without MCC.'' For example, under the MS-
LTC-DRG system, multiple sclerosis and cerebellar ataxia with MCC is 
MS-LTC-DRG 58; multiple sclerosis and cerebellar ataxia with CC is MS-
LTC-DRG 59; and multiple sclerosis and cerebellar ataxia without CC/MCC 
is MS-LTC-DRG 60. For purposes of discussion in this section, the term 
``base DRG'' is used to refer to the DRG category that encompasses all 
levels of severity for that DRG. For example, when referring to the 
entire DRG category for multiple sclerosis and cerebellar ataxia, which 
includes the above three severity levels, we would use the term ``base 
DRG.''
    As also noted above, while the LTCH PPS and the IPPS use the same 
patient classification system, the methodology that is used to set the 
DRG relative weights for use in each payment system differs because the 
overall volume of cases in the LTCH PPS is much less than in the IPPS. 
As a general rule, consistent with the methodology established when we 
adopted the MS-LTC-DRGs in the FY 2008 IPPS final rule with comment 
period (72 FR 47278 through 47281), we determined the RY 2010 relative 
weights for the MS-LTC-DRGs using the following steps: (1) If an MS-
LTC-DRG had at least 25 cases, it was assigned its own relative weight; 
(2) if an MS-LTC-DRG had between 1 and 24 cases, it was assigned to a 
quintile for which we computed a relative weight for all of the MS-LTC-
DRGs assigned to that quintile; and (3) if an MS-LTC-DRG had no cases, 
it was crosswalked to another MS-LTC-DRG based upon clinical 
similarities to assign an appropriate relative weight (as described 
below in detail in Step 5 of section VIII.B.3.f. of this preamble). 
Furthermore, in determining the RY 2010 MS-LTC-DRG relative weights, 
when necessary, we made adjustments to account for nonmonotonicity, as 
explained in greater detail below in Step 6 of section VIII.B.3.f. of 
this preamble.
    Our methodology for determining relative weights for the MS-LTC-
DRGs included an adjustment for nonmonotonicity because, theoretically, 
cases under the MS-LTC-DRG system that are more severe require greater 
expenditure of medical care resources and will result in higher average 
charges. Therefore, in the three severity levels, weights should 
increase with severity, from lowest to highest. If the weights do not 
increase (that is, if based on the relative weight methodology outlined 
above, the MS-LTC-DRG with MCC would have a lower relative weight than 
one with CC, or the MS-LTC-DRG without CC/MCC would have a higher 
relative weight than either of

[[Page 43954]]

the others), there is a problem with monotonicity. Since the start of 
the LTCH PPS for FY 2003 (67 FR 55990), when determining the LTC-DRG 
relative weights, we have made adjustments in order to maintain 
monotonicity by grouping both sets of cases together and establishing a 
new relative weight for both LTC-DRGs. We continue to believe that 
utilizing nonmonotonic relative weights to adjust Medicare payments 
would result in inappropriate payments because, in a nonmonotonic 
system, cases that are more severe and require greater expenditure of 
medical care resources would be paid based on a lower relative weight 
than cases that are less severe and require lower resource use. The 
adopted methodology for making adjustments because of nonmonotonicity 
in determining the RY 2010 MS-LTC-DRG relative weights is discussed in 
greater detail below in section VIII.B.3.f. (Step 6) of the preamble of 
this final rule.
e. Low-Volume MS-LTC-DRGs
    In order to account for MS-LTC-DRGs with low volume (that is, with 
fewer than 25 LTCH cases), consistent with the methodology we 
established when we implemented the LTCH PPS (67 FR 55984 through 
55995) and the methodology that we established when we implemented the 
MS-LTC-DRGs in the FY 2008 IPPS final rule with comment period (72 FR 
47283 through 47288), for purposes of determining the MS-LTC-DRG 
relative weights, we group those ``low-volume MS-LTC-DRGs'' (that is, 
MS-LTC-DRGs that contained between 1 and 24 cases annually) into one of 
five categories (quintiles) based on average charges. In determining 
the RY 2010 MS-LTC-DRG relative weights in this final rule, consistent 
with the methodology described above and the methodology we used to 
establish the FY 2009 MS-LTC-DRG relative weights in the FY 2009 IPPS 
final rule (73 FR 48533 through 48540), we continue to employ this 
quintile methodology for low-volume MS-LTC-DRGs. In addition, in cases 
where the initial assignment of a low-volume MS-LTC-DRG to quintiles 
results in nonmonotonicity within a base-DRG, in order to ensure 
appropriate Medicare payments, consistent with our historical 
methodology, we made adjustments to the treatment of low-volume MS-LTC-
DRGs to preserve monotonicity, as discussed in detail below in section 
VIII.B.3.f. (Step 6) in this preamble.
    In this final rule, using LTCH cases from the March 2009 update of 
the FY 2008 MedPAR file, we identified 281 MS-LTC-DRGs that contained 
between 1 and 24 cases. This list of MS-LTC-DRGs was then divided into 
one of the 5 low-volume quintiles, each containing a minimum of 56 MS-
LTC-DRGs (281/5 = 56 with 1 MS-LTC-DRG as the remainder). We assigned a 
low-volume MS-LTC-DRG to a specific low-volume quintile by sorting the 
low-volume MS-LTC-DRGs in ascending order by average charge in 
accordance with our established methodology. Furthermore, because the 
number of MS-LTC-DRGs with less than 25 cases was not evenly divisible 
by 5, the average charge of the low-volume quintile was used to 
determine which of the low-volume quintiles would contain the 1 
additional low-volume MS-LTC-DRG. Specifically, after sorting the 281 
low-volume MS-LTC-DRGs by ascending order by average charge, we 
assigned the first fifth (1st through 56th) of low-volume MS-LTC-DRGs 
(with the lowest average charge) into Quintile 1. The MS-LTC-DRGs with 
the highest average charge cases were assigned into Quintile 5. Because 
the average charge of the 57th low-volume MS-LTC-DRG in the sorted list 
was closer to the average charge of the 56th low-volume MS-LTC-DRG 
(assigned to Quintile 1) than to the average charge of the 58th low-
volume MS-LTC-DRG (assigned to Quintile 2), we placed it into Quintile 
1 (such that Quintile 1 contains 57 low-volume MS-LTC-DRGs before any 
adjustments for nonmonotonicity, as discussed below). This process was 
repeated through the remaining low-volume MS-LTC-DRGs so that 1 of the 
5 low-volume quintiles contain 57 MS-LTC-DRGs (Quintile 1) and the 
other 4 low-volume quintiles contain 56 MS-LTC-DRGs (Quintiles 2, 3, 4, 
and 5).
    Accordingly, in order to determine the RY 2010 relative weights for 
the MS-LTC-DRGs with low volume, we used the five low-volume quintiles 
described above. The composition of each of the five low-volume 
quintiles shown in the chart below was used in determining the RY 2010 
MS-LTC-DRG relative weights (as shown in Table 11 of the Addendum to 
this final rule). We determined a relative weight and (geometric) 
average length of stay for each of the 5 low-volume quintiles using the 
methodology that we applied to the MS-LTC-DRGs (25 or more cases), as 
described in section VIII.B.3.f. of the preamble of this final rule. We 
assigned the same relative weight and average length of stay to each of 
the low-volume MS-LTC-DRGs that make up an individual low-volume 
quintile. We note that, as this system is dynamic, it is possible that 
the number and specific type of MS-LTC-DRGs with a low volume of LTCH 
cases will vary in the future. We use the best available claims data in 
the MedPAR file to identify low-volume MS-LTC-DRGs and to calculate the 
relative weights based on our methodology.

             Composition of Low-Volume Quintiles for RY 2010
------------------------------------------------------------------------
                   MS-LTC-DRG                     MS-LTC-DRG description
------------------------------------------------------------------------
                               Quintile 1
------------------------------------------------------------------------
26..............................................  Craniotomy &
                                                   endovascular
                                                   intracranial
                                                   procedures w CC.
53..............................................  Spinal disorders &
                                                   injuries w/o CC/MCC.
60..............................................  Multiple sclerosis &
                                                   cerebellar ataxia w/o
                                                   CC/MCC.
66..............................................  Intracranial
                                                   hemorrhage or
                                                   cerebral infarction w/
                                                   o CC/MCC.
68..............................................  Nonspecific cva &
                                                   precerebral occlusion
                                                   w/o infarct w/o MCC.
69..............................................  Transient ischemia.
72..............................................  Nonspecific
                                                   cerebrovascular
                                                   disorders w/o CC/MCC.
78..............................................  Hypertensive
                                                   encephalopathy w CC.
81..............................................  Nontraumatic stupor &
                                                   coma w/o MCC.
89..............................................  Concussion w CC.
90..............................................  Concussion w/o CC/MCC.
93..............................................  Other disorders of
                                                   nervous system w/o CC/
                                                   MCC.
103.............................................  Headaches w/o MCC.
115.............................................  Extraocular procedures
                                                   except orbit.
139.............................................  Salivary gland
                                                   procedures.

[[Page 43955]]

 
149.............................................  Dysequilibrium.
184.............................................  Major chest trauma w
                                                   CC.
198.............................................  Interstitial lung
                                                   disease w/o CC/MCC.
201.............................................  Pneumothorax w/o CC/
                                                   MCC.
203.............................................  Bronchitis & asthma w/
                                                   o CC/MCC.
284.............................................  Circulatory disorders
                                                   w AMI, expired w CC.*
310.............................................  Cardiac arrhythmia &
                                                   conduction disorders
                                                   w/o CC/MCC.
313.............................................  Chest pain.
350.............................................  Inguinal & femoral
                                                   hernia procedures w
                                                   MCC.
370.............................................  Major esophageal
                                                   disorders w/o CC/MCC.
376.............................................  Digestive malignancy w/
                                                   o CC/MCC.
387.............................................  Inflammatory bowel
                                                   disease w/o CC/MCC.
437.............................................  Malignancy of
                                                   hepatobiliary system
                                                   or pancreas w/o CC/
                                                   MCC.
440.............................................  Disorders of pancreas
                                                   except malignancy w/o
                                                   CC/MCC.
443.............................................  Disorders of liver
                                                   except malig, cirr,
                                                   alc hepa w/o CC/MCC.
446.............................................  Disorders of the
                                                   biliary tract w/o CC/
                                                   MCC.
534.............................................  Fractures of femur w/o
                                                   MCC.
536.............................................  Fractures of hip &
                                                   pelvis w/o MCC.
544.............................................  Pathological fractures
                                                   & musculoskelet &
                                                   conn tiss malig w/o
                                                   CC/MCC.
547.............................................  Connective tissue
                                                   disorders w/o CC/MCC.
556.............................................  Signs & symptoms of
                                                   musculoskeletal
                                                   system & conn tissue
                                                   w/o MCC.
578.............................................  Skin graft &/or debrid
                                                   exc for skin ulcer or
                                                   cellulitis w/o CC/
                                                   MCC.
601.............................................  Non-malignant breast
                                                   disorders w/o CC/MCC.
645.............................................  Endocrine disorders w/
                                                   o CC/MCC.
667.............................................  Prostatectomy w/o CC/
                                                   MCC.
694.............................................  Urinary stones w/o esw
                                                   lithotripsy w/o MCC.
696.............................................  Kidney & urinary tract
                                                   signs & symptoms w/o
                                                   MCC.
725.............................................  Benign prostatic
                                                   hypertrophy w MCC.
726.............................................  Benign prostatic
                                                   hypertrophy w/o MCC.
730.............................................  Other male
                                                   reproductive system
                                                   diagnoses w/o CC/MCC.
746.............................................  Vagina, cervix & vulva
                                                   procedures w CC/MCC.
816.............................................  Reticuloendothelial &
                                                   immunity disorders w/
                                                   o CC/MCC.
869.............................................  Other infectious &
                                                   parasitic diseases
                                                   diagnoses w/o CC/MCC.
880.............................................  Acute adjustment
                                                   reaction &
                                                   psychosocial
                                                   dysfunction.
881.............................................  Depressive neuroses.
883.............................................  Disorders of
                                                   personality & impulse
                                                   control.*
895.............................................  Alcohol/drug abuse or
                                                   dependence w
                                                   rehabilitation
                                                   therapy.
897.............................................  Alcohol/drug abuse or
                                                   dependence w/o
                                                   rehabilitation
                                                   therapy w/o MCC.
918.............................................  Poisoning & toxic
                                                   effects of drugs w/o
                                                   MCC.
964.............................................  Other multiple
                                                   significant trauma w
                                                   CC.
965.............................................  Other multiple
                                                   significant trauma w/
                                                   o CC/MCC.
976.............................................  HIV w major related
                                                   condition w/o CC/MCC.
------------------------------------------------------------------------
                               Quintile 2
------------------------------------------------------------------------
032.............................................  Ventricular shunt
                                                   procedures w CC.
033.............................................  Ventricular shunt
                                                   procedures w/o CC/
                                                   MCC.
042.............................................  Periph & cranial nerve
                                                   & other nerv syst
                                                   proc w/o CC/MCC.
067.............................................  Nonspecific cva &
                                                   precerebral occlusion
                                                   w/o infarct w MCC.
080.............................................  Nontraumatic stupor &
                                                   coma w MCC.
083.............................................  Traumatic stupor &
                                                   coma, coma >1 hr w
                                                   CC.*
087.............................................  Traumatic stupor &
                                                   coma, coma <1 hr w/o
                                                   CC/MCC.***
088.............................................  Concussion w MCC.
096.............................................  Bacterial &
                                                   tuberculous
                                                   infections of nervous
                                                   system w/o CC/MCC.
102.............................................  Headaches w MCC.
125.............................................  Other disorders of the
                                                   eye w/o MCC.
156.............................................  Nasal trauma &
                                                   deformity w/o CC/
                                                   MCC.***
159.............................................  Dental & Oral Diseases
                                                   w/o CC/MCC.
182.............................................  Respiratory neoplasms
                                                   w/o CC/MCC.***
183.............................................  Major chest trauma w
                                                   MCC.
188.............................................  Pleural effusion w/o
                                                   CC/MCC.
257.............................................  Upper limb & toe
                                                   amputation for circ
                                                   system disorders w/o
                                                   CC/MCC.
259.............................................  Cardiac pacemaker
                                                   device replacement w/
                                                   o MCC.
282.............................................  Circulatory disorders
                                                   w AMI, discharged
                                                   alive w/o CC/MCC.***
284.............................................  Circulatory disorders
                                                   w AMI, expired w
                                                   CC.**
285.............................................  Circulatory disorders
                                                   w AMI, expired w/o CC/
                                                   MCC.
294.............................................  Deep vein
                                                   thrombophlebitis w CC/
                                                   MCC.
311.............................................  Angina pectoris.
379.............................................  G.I. hemorrhage w/o CC/
                                                   MCC.***
384.............................................  Uncomplicated peptic
                                                   ulcer w/o MCC.
386.............................................  Inflammatory bowel
                                                   disease w CC.
390.............................................  G.I. obstruction w/o
                                                   CC/MCC.

[[Page 43956]]

 
418.............................................  Laparoscopic
                                                   cholecystectomy w/o
                                                   c.d.e. w CC.
433.............................................  Cirrhosis & alcoholic
                                                   hepatitis w CC.
436.............................................  Malignancy of
                                                   hepatobiliary system
                                                   or pancreas w CC.
479.............................................  Biopsies of
                                                   musculoskeletal
                                                   system & connective
                                                   tissue w/o CC/MCC.
497.............................................  Local excision &
                                                   removal int fix
                                                   devices exc hip &
                                                   femur w/o CC/MCC.
517.............................................  Other musculoskelet
                                                   sys & conn tiss O.R.
                                                   proc w/o CC/MCC.
535.............................................  Fractures of hip &
                                                   pelvis w MCC.
553.............................................  Bone diseases &
                                                   arthropathies w MCC.
598.............................................  Malignant breast
                                                   disorders w CC.
600.............................................  Non-malignant breast
                                                   disorders w CC/MCC.
644.............................................  Endocrine disorders w
                                                   CC.
663.............................................  Minor bladder
                                                   procedures w CC.
675.............................................  Other kidney & urinary
                                                   tract procedures w/o
                                                   CC/MCC.
685.............................................  Admit for renal
                                                   dialysis.
697.............................................  Urethral stricture.
700.............................................  Other kidney & urinary
                                                   tract diagnoses w/o
                                                   CC/MCC.
722.............................................  Malignancy, male
                                                   reproductive system w
                                                   MCC.
723.............................................  Malignancy, male
                                                   reproductive system w
                                                   CC.
747.............................................  Vagina, cervix & vulva
                                                   procedures w/o CC/
                                                   MCC.
759.............................................  Infections, female
                                                   reproductive system w/
                                                   o CC/MCC.
803.............................................  Other O.R. proc of the
                                                   blood & blood forming
                                                   organs w CC.
808.............................................  Major hematol/immun
                                                   diag exc sickle cell
                                                   crisis & coagul w
                                                   MCC.***
815.............................................  Reticuloendothelial &
                                                   immunity disorders w
                                                   CC.
837.............................................  Chemo w acute leukemia
                                                   as sdx or w high dose
                                                   chemo agent w MCC.
842.............................................  Lymphoma & non-acute
                                                   leukemia w/o CC/MCC.
864.............................................  Fever of unknown
                                                   origin.
882.............................................  Neuroses except
                                                   depressive.
894.............................................  Alcohol/drug abuse or
                                                   dependence, left ama.
922.............................................  Other injury,
                                                   poisoning & toxic
                                                   effect diag w MCC.*
986.............................................  Prostatic O.R.
                                                   procedure unrelated
                                                   to principal
                                                   diagnosis w/o CC/MCC.
023.............................................  Craniotomy w major
                                                   device implant or
                                                   acute complex CNS PDX
                                                   w MCC.
029.............................................  Spinal procedures w
                                                   CC.
030.............................................  Spinal procedures w/o
                                                   CC/MCC.
058.............................................  Multiple sclerosis &
                                                   cerebellar ataxia w
                                                   MCC.
075.............................................  Viral meningitis w CC/
                                                   MCC.
083.............................................  Traumatic stupor &
                                                   coma, coma >1 hr w
                                                   CC.**
084.............................................  Traumatic stupor &
                                                   coma, coma >1 hr w/o
                                                   CC/MCC.**
099.............................................  Non-bacterial infect
                                                   of nervous sys exc
                                                   viral meningitis w/o
                                                   CC/MCC.***
121.............................................  Acute major eye
                                                   infections w CC/MCC.
124.............................................  Other disorders of the
                                                   eye w MCC.
158.............................................  Dental & Oral Diseases
                                                   w CC.
241.............................................  Amputation for circ
                                                   sys disorders exc
                                                   upper limb & toe w/o
                                                   CC/MCC.
290.............................................  Acute & subacute
                                                   endocarditis w/o CC/
                                                   MCC.
327.............................................  Stomach, esophageal &
                                                   duodenal proc w CC.
331.............................................  Major small & large
                                                   bowel procedures w/o
                                                   CC/MCC.
348.............................................  Anal & stomal
                                                   procedures w CC.
381.............................................  Complicated peptic
                                                   ulcer w CC.
382.............................................  Complicated peptic
                                                   ulcer w/o CC/MCC.
383.............................................  Uncomplicated peptic
                                                   ulcer w MCC.
424.............................................  Other hepatobiliary or
                                                   pancreas O.R.
                                                   procedures w CC.
472.............................................  Cervical spinal fusion
                                                   w CC.
476.............................................  Amputation for
                                                   musculoskeletal sys &
                                                   conn tissue dis w/o
                                                   CC/MCC.
493.............................................  Lower extrem & humer
                                                   proc except hip,
                                                   foot, femur w CC.
499.............................................  Local excision &
                                                   removal int fix
                                                   devices of hip &
                                                   femur w/o CC/MCC.
511.............................................  Shoulder, elbow or
                                                   forearm proc, exc
                                                   major joint proc w
                                                   CC.
555.............................................  Signs & symptoms of
                                                   musculoskeletal
                                                   system & conn tissue
                                                   w MCC.
562.............................................  Fx, sprn, strn & disl
                                                   except femur, hip,
                                                   pelvis & thigh w MCC.
563.............................................  Fx, sprn, strn & disl
                                                   except femur, hip,
                                                   pelvis & thigh w/o
                                                   MCC.
581.............................................  Other skin, subcut
                                                   tiss & breast proc w/
                                                   o CC/MCC.
582.............................................  Mastectomy for
                                                   malignancy w CC/MCC.
584.............................................  Breast biopsy, local
                                                   excision & other
                                                   breast procedures w
                                                   CC/MCC.
597.............................................  Malignant breast
                                                   disorders w MCC.
620.............................................  O.R. procedures for
                                                   obesity w CC.
643.............................................  Endocrine disorders w
                                                   MCC.
656.............................................  Kidney & ureter
                                                   procedures for
                                                   neoplasm w MCC.
660.............................................  Kidney & ureter
                                                   procedures for non-
                                                   neoplasm w CC.
666.............................................  Prostatectomy w CC.
668.............................................  Transurethral
                                                   procedures w MCC.
669.............................................  Transurethral
                                                   procedures w CC.
687.............................................  Kidney & urinary tract
                                                   neoplasms w CC.
693.............................................  Urinary stones w/o esw
                                                   lithotripsy w MCC.
695.............................................  Kidney & urinary tract
                                                   signs & symptoms w
                                                   MCC.

[[Page 43957]]

 
749.............................................  Other female
                                                   reproductive system
                                                   O.R. procedures w CC/
                                                   MCC.
755.............................................  Malignancy, female
                                                   reproductive system w
                                                   CC.
760.............................................  Menstrual & other
                                                   female reproductive
                                                   system disorders w CC/
                                                   MCC.
781.............................................  Other antepartum
                                                   diagnoses w medical
                                                   complications.
809.............................................  Major hematol/immun
                                                   diag exc sickle cell
                                                   crisis & coagul w
                                                   CC.***
821.............................................  Lymphoma & leukemia w
                                                   major O.R. procedure
                                                   w CC.
835.............................................  Acute leukemia w/o
                                                   major O.R. procedure
                                                   w CC.
843.............................................  Other myeloprolif dis
                                                   or poorly diff neopl
                                                   diag w MCC.***
858.............................................  Postoperative or post-
                                                   traumatic infections
                                                   w O.R. proc w/o CC/
                                                   MCC.
866.............................................  Viral illness w/o MCC.
896.............................................  Alcohol/drug abuse or
                                                   dependence w/o
                                                   rehabilitation
                                                   therapy w MCC.
903.............................................  Wound debridements for
                                                   injuries w/o CC/MCC.
905.............................................  Skin grafts for
                                                   injuries w/o CC/MCC.
906.............................................  Hand procedures for
                                                   injuries.
933.............................................  Extensive burns or
                                                   full thickness burns
                                                   w MV 96+ hrs w/o skin
                                                   graft.
941.............................................  O.R. proc w diagnoses
                                                   of other contact w
                                                   health services w/o
                                                   CC/MCC.
028.............................................  Spinal procedures w
                                                   MCC.
077.............................................  Hypertensive
                                                   encephalopathy w MCC.
082.............................................  Traumatic stupor &
                                                   coma, coma >1 hr w
                                                   MCC.
084.............................................  Traumatic stupor &
                                                   coma, coma >1 hr w/o
                                                   CC/MCC.*
131.............................................  Cranial/facial
                                                   procedures w CC/MCC.
133.............................................  Other ear, nose, mouth
                                                   & throat O.R.
                                                   procedures w CC/MCC.
157.............................................  Dental & Oral Diseases
                                                   w MCC.
168.............................................  Other resp system O.R.
                                                   procedures w/o CC/
                                                   MCC.
237.............................................  Major cardiovascular
                                                   procedures w MCC.
243.............................................  Permanent cardiac
                                                   pacemaker implant w
                                                   CC.
244.............................................  Permanent cardiac
                                                   pacemaker implant w/o
                                                   CC/MCC.
254.............................................  Other vascular
                                                   procedures w/o CC/
                                                   MCC.***
286.............................................  Circulatory disorders
                                                   except AMI, w card
                                                   cath w MCC.
287.............................................  Circulatory disorders
                                                   except AMI, w card
                                                   cath w/o MCC.
304.............................................  Hypertension w MCC.
338.............................................  Appendectomy w
                                                   complicated principal
                                                   diag w MCC.
344.............................................  Minor small & large
                                                   bowel procedures w
                                                   MCC.
347.............................................  Anal & stomal
                                                   procedures w MCC.
353.............................................  Hernia procedures
                                                   except inguinal &
                                                   femoral w MCC.
354.............................................  Hernia procedures
                                                   except inguinal &
                                                   femoral w CC.
369.............................................  Major esophageal
                                                   disorders w CC.***
380.............................................  Complicated peptic
                                                   ulcer w MCC.
423.............................................  Other hepatobiliary or
                                                   pancreas O.R.
                                                   procedures w MCC.
466.............................................  Revision of hip or
                                                   knee replacement w
                                                   MCC.*
469.............................................  Major joint
                                                   replacement or
                                                   reattachment of lower
                                                   extremity w MCC.*
471.............................................  Cervical spinal fusion
                                                   w MCC.
480.............................................  Hip & femur procedures
                                                   except major joint w
                                                   MCC.*
487.............................................  Knee procedures w pdx
                                                   of infection w/o CC/
                                                   MCC.
488.............................................  Knee procedures w/o
                                                   pdx of infection w CC/
                                                   MCC.
490.............................................  Back & neck procedures
                                                   except spinal fusion
                                                   w CC/MCC or disc
                                                   devices.
502.............................................  Soft tissue procedures
                                                   w/o CC/MCC.***
503.............................................  Foot procedures w MCC.
505.............................................  Foot procedures w/o CC/
                                                   MCC.***
510.............................................  Shoulder, elbow or
                                                   forearm proc, exc
                                                   major joint proc w
                                                   MCC.
513.............................................  Hand or wrist proc,
                                                   except major thumb or
                                                   joint proc w CC/MCC.
514.............................................  Hand or wrist proc,
                                                   except major thumb or
                                                   joint proc w/o CC/
                                                   MCC.
516.............................................  Other musculoskelet
                                                   sys & conn tiss O.R.
                                                   proc w CC.
537.............................................  Sprains, strains, &
                                                   dislocations of hip,
                                                   pelvis & thigh w CC/
                                                   MCC.
624.............................................  Skin grafts & wound
                                                   debrid for endoc,
                                                   nutrit & metab dis w/
                                                   o CC/MCC.***
642.............................................  Inborn errors of
                                                   metabolism.
671.............................................  Urethral procedures w
                                                   CC/MCC.
691.............................................  Urinary stones w esw
                                                   lithotripsy w CC/MCC.
711.............................................  Testes procedures w CC/
                                                   MCC.
800.............................................  Splenectomy w CC.
814.............................................  Reticuloendothelial &
                                                   immunity disorders w
                                                   MCC.
829.............................................  Myeloprolif disord or
                                                   poorly diff neopl w
                                                   other O.R. proc w CC/
                                                   MCC.
834.............................................  Acute leukemia w/o
                                                   major O.R. procedure
                                                   w MCC.
844.............................................  Other myeloprolif dis
                                                   or poorly diff neopl
                                                   diag w CC.***
855.............................................  Infectious & parasitic
                                                   diseases w O.R.
                                                   procedure w/o CC/MCC.
909.............................................  Other O.R. procedures
                                                   for injuries w/o CC/
                                                   MCC.
917.............................................  Poisoning & toxic
                                                   effects of drugs w
                                                   MCC.
927.............................................  Extensive burns or
                                                   full thickness burns
                                                   w MV 96+ hrs w skin
                                                   graft.
928.............................................  Full thickness burn w
                                                   skin graft or inhal
                                                   inj w CC/MCC.
958.............................................  Other O.R. procedures
                                                   for multiple
                                                   significant trauma w
                                                   CC.
963.............................................  Other multiple
                                                   significant trauma w
                                                   MCC.
983.............................................  Extensive O.R.
                                                   procedure unrelated
                                                   to principal
                                                   diagnosis w/o CC/MCC.

[[Page 43958]]

 
011.............................................  Tracheostomy for face,
                                                   mouth & neck
                                                   diagnoses w MCC.
025.............................................  Craniotomy &
                                                   endovascular
                                                   intracranial
                                                   procedures w MCC.
031.............................................  Ventricular shunt
                                                   procedures w MCC.
037.............................................  Extracranial
                                                   procedures w MCC.
038.............................................  Extracranial
                                                   procedures w CC.
135.............................................  Sinus & mastoid
                                                   procedures w CC/MCC.
148.............................................  Ear, nose, mouth &
                                                   throat malignancy w/o
                                                   CC/MCC.***
164.............................................  Major chest procedures
                                                   w CC.
222.............................................  Cardiac defib implant
                                                   w cardiac cath w AMI/
                                                   HF/shock w MCC.
226.............................................  Cardiac defibrillator
                                                   implant w/o cardiac
                                                   cath w MCC.
227.............................................  Cardiac defibrillator
                                                   implant w/o cardiac
                                                   cath w/o MCC.
242.............................................  Permanent cardiac
                                                   pacemaker implant w
                                                   MCC.
245.............................................  AICD generator
                                                   procedures.
250.............................................  Perc cardiovasc proc w/
                                                   o coronary artery
                                                   stent or AMI w MCC.
260.............................................  Cardiac pacemaker
                                                   revision except
                                                   device replacement w
                                                   MCC.
326.............................................  Stomach, esophageal &
                                                   duodenal proc w MCC.
330.............................................  Major small & large
                                                   bowel procedures w
                                                   CC.
335.............................................  Peritoneal
                                                   adhesiolysis w MCC.
405.............................................  Pancreas, liver &
                                                   shunt procedures w
                                                   MCC.
406.............................................  Pancreas, liver &
                                                   shunt procedures w
                                                   CC.
414.............................................  Cholecystectomy except
                                                   by laparoscope w/o
                                                   c.d.e. w MCC.
417.............................................  Laparoscopic
                                                   cholecystectomy w/o
                                                   c.d.e. w MCC.
420.............................................  Hepatobiliary
                                                   diagnostic procedures
                                                   w MCC.
453.............................................  Combined anterior/
                                                   posterior spinal
                                                   fusion w MCC.
454.............................................  Combined anterior/
                                                   posterior spinal
                                                   fusion w CC.
456.............................................  Spinal fusion exc cerv
                                                   w spinal curv, malig
                                                   or 9+ fusions w MCC.
457.............................................  Spinal fusion exc cerv
                                                   w spinal curv, malig
                                                   or 9+ fusions w CC.
459.............................................  Spinal fusion except
                                                   cervical w MCC.
466.............................................  Revision of hip or
                                                   knee replacement w
                                                   MCC.**
467.............................................  Revision of hip or
                                                   knee replacement w
                                                   CC.
469.............................................  Major joint
                                                   replacement or
                                                   reattachment of lower
                                                   extremity w MCC.**
470.............................................  Major joint
                                                   replacement or
                                                   reattachment of lower
                                                   extremity w/o MCC.
480.............................................  Hip & femur procedures
                                                   except major joint w
                                                   MCC.**
481.............................................  Hip & femur procedures
                                                   except major joint w
                                                   CC.
485.............................................  Knee procedures w pdx
                                                   of infection w MCC.
486.............................................  Knee procedures w pdx
                                                   of infection w CC.
492.............................................  Lower extrem & humer
                                                   proc except hip,
                                                   foot, femur w MCC.
498.............................................  Local excision &
                                                   removal int fix
                                                   devices of hip &
                                                   femur w CC/MCC.
507.............................................  Major shoulder or
                                                   elbow joint
                                                   procedures w CC/MCC.
619.............................................  O.R. procedures for
                                                   obesity w MCC.
659.............................................  Kidney & ureter
                                                   procedures for non-
                                                   neoplasm w MCC.
662.............................................  Minor bladder
                                                   procedures w MCC.
709.............................................  Penis procedures w CC/
                                                   MCC.
713.............................................  Transurethral
                                                   prostatectomy w CC/
                                                   MCC.
717.............................................  Other male
                                                   reproductive system
                                                   O.R. proc exc
                                                   malignancy w CC/MCC.
776.............................................  Postpartum & post
                                                   abortion diagnoses w/
                                                   o O.R. procedure.
802.............................................  Other O.R. proc of the
                                                   blood & blood forming
                                                   organs w MCC.
823.............................................  Lymphoma & non-acute
                                                   leukemia w other O.R.
                                                   proc w MCC.
824.............................................  Lymphoma & non-acute
                                                   leukemia w other O.R.
                                                   proc w CC.
827.............................................  Myeloprolif disord or
                                                   poorly diff neopl w
                                                   maj O.R. proc w CC.
848.............................................  Chemotherapy w/o acute
                                                   leukemia as secondary
                                                   diagnosis w/o CC/
                                                   MCC.***
876.............................................  O.R. procedure w
                                                   principal diagnoses
                                                   of mental illness.
922.............................................  Other injury,
                                                   poisoning & toxic
                                                   effect diag w MCC.**
923.............................................  Other injury,
                                                   poisoning & toxic
                                                   effect diag w/o MCC.
957.............................................  Other O.R. procedures
                                                   for multiple
                                                   significant trauma w
                                                   MCC.
969.............................................  HIV w extensive O.R.
                                                   procedure w MCC.
970.............................................  HIV w extensive O.R.
                                                   procedure w/o MCC.
984.............................................  Prostatic O.R.
                                                   procedure unrelated
                                                   to principal
                                                   diagnosis w MCC.
985.............................................  Prostatic O.R.
                                                   procedure unrelated
                                                   to principal
                                                   diagnosis w CC.
989.............................................  Non-extensive O.R.
                                                   proc unrelated to
                                                   principal diagnosis w/
                                                   o CC/MCC.***
------------------------------------------------------------------------
* One of the original 281 low-volume MS-LTC-DRGs initially assigned to
  this low-volume quintile but moved to a different low-volume quintile
  in addressing nonmonotonicity (refer to step 6 in section VIII.B.3.f.
  of the preamble of this final rule).
** One of the original 281 low-volume MS-LTC-DRGs initially assigned to
  a different low-volume quintile but moved to this low-volume quintile
  in addressing nonmonotonicity (refer to step 6 in section VIII.B.3.f.
  of the preamble of this final rule).
*** One of the original 281 low-volume MS-LTC-DRGs initially assigned to
  this low-volume quintile, but removed from this low-volume quintile in
  addressing nonmonotonicity (refer to step 6 in section VIII.B.3.f.of
  the preamble of this final rule).

    We note that we will continue to monitor the volume (that is, the 
number of LTCH cases) in the low-volume quintiles to ensure that our 
quintile assignments used in determining the MS-LTC-DRG relative 
weights result in appropriate payment for such cases and do not result 
in an unintended financial

[[Page 43959]]

incentive for LTCHs to inappropriately admit these types of cases.
f. Steps for Determining the RY 2010 MS-LTC-DRG Relative Weights
    In general, as we proposed, we determined the RY 2010 MS-LTC-DRG 
relative weights based on the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 55989 through 55995) and consistent 
with the methodology we used to determine the FY 2009 MS-LTC-DRG 
relative weights in the FY 2009 IPPS final rule (73 FR 48540 through 
48551). (We note that, for FY 2009, we made a modification to our 
methodology for determining relative weights for MS-LTC-DRGs with no 
LTCH cases (73 FR 48542 through 48543), which is reflected in the 
adopted methodology for determining the RY 2010 MS-LTC-DRG relative 
weights presented below.)
    In summary, for RY 2010, we grouped LTCH cases to the appropriate 
MS-LTC-DRG, while taking into account the low-volume MS-LTC-DRGs (as 
described above), in order to determine the RY 2010 MS-LTC-DRG relative 
weights. After grouping the cases to the appropriate MS-LTC-DRG (or 
low-volume quintile), we calculated the relative weights for RY 2010 by 
first removing statistical outliers and cases with a length of stay of 
7 days or less (as discussed in greater detail below). Next, we 
adjusted the number of cases in each MS-LTC-DRG (or low-volume 
quintile) for the effect of SSO cases (as also discussed in greater 
detail below). The SSO adjusted discharges and corresponding charges 
are then used to calculate ``relative adjusted weights'' for each MS-
LTC-DRG (or low-volume quintile) using the HSRV method (described 
above).
    Below we discuss in detail the steps for calculating the RY 2010 
MS-LTC-DRG relative weights. We note that, as we stated above in 
section VIII.B.3.c. of the preamble of this final rule, we excluded the 
data of all-inclusive rate LTCHs and LTCHs that are paid in accordance 
with demonstration projects that had claims in the FY 2008 MedPAR file.
    Step 1--Remove statistical outliers.
    The first step in the calculation of the RY 2010 MS-LTC-DRG 
relative weights is to remove statistical outlier cases. Consistent 
with our historical relative weight methodology, we continue to define 
statistical outliers as cases that are outside of 3.0 standard 
deviations from the mean of the log distribution of both charges per 
case and the charges per day for each MS-LTC-DRG. These statistical 
outliers are removed prior to calculating the relative weights because 
we believe that they may represent aberrations in the data that distort 
the measure of average resource use. Including those LTCH cases in the 
calculation of the relative weights could result in an inaccurate 
relative weight that does not truly reflect relative resource use among 
the MS-LTC-DRGs.
    Step 2--Remove cases with a length of stay of 7 days or less.
    The MS-LTC-DRG relative weights reflect the average of resources 
used on representative cases of a specific type. Generally, cases with 
a length of stay of 7 days or less do not belong in a LTCH because 
these stays do not fully receive or benefit from treatment that is 
typical in a LTCH stay, and full resources are often not used in the 
earlier stages of admission to a LTCH. If we were to include stays of 7 
days or less in the computation of the RY 2010 MS-LTC-DRG relative 
weights, the value of many relative weights would decrease and, 
therefore, payments would decrease to a level that may no longer be 
appropriate. We do not believe that it would be appropriate to 
compromise the integrity of the payment determination for those LTCH 
cases that actually benefit from and receive a full course of treatment 
at a LTCH by including data from these very short-stays. Therefore, 
consistent with our historical relative weight methodology, in 
determining the RY 2010 MS-LTC-DRG relative weights, we removed LTCH 
cases with a length of stay of 7 days or less.
    Step 3--Adjust charges for the effects of SSOs.
    After removing cases with a length of stay of 7 days or less, we 
are left with cases that have a length of stay of greater than or equal 
to 8 days. As the next step in the calculation of the RY 2010 MS-LTC-
DRG relative weights, consistent with our historical relative weight 
methodology, we adjusted each LTCH's charges per discharge for those 
remaining cases for the effects of SSOs (as defined in Sec.  412.529(a) 
in conjunction with Sec.  412.503).
    We made this adjustment by counting an SSO case as a fraction of a 
discharge based on the ratio of the length of stay of the case to the 
average length of stay for the MS-LTC-DRG for non-SSO cases. This has 
the effect of proportionately reducing the impact of the lower charges 
for the SSO cases in calculating the average charge for the MS-LTC-DRG. 
This process produces the same result as if the actual charges per 
discharge of an SSO case were adjusted to what they would have been had 
the patient's length of stay been equal to the average length of stay 
of the MS-LTC-DRG.
    Counting SSO cases as full discharges with no adjustment in 
determining the RY 2010 MS-LTC-DRG relative weights would lower the RY 
2010 MS-LTC-DRG relative weight for affected MS-LTC-DRGs because the 
relatively lower charges of the SSO cases would bring down the average 
charge for all cases within an MS-LTC-DRG. This would result in an 
``underpayment'' for non-SSO cases and an ``overpayment'' for SSO 
cases. Therefore, we adjusted for SSO cases under Sec.  412.529 in this 
manner because it results in more appropriate payments for all LTCH 
cases.
    Step 4--Calculate the RY 2010 MS-LTC-DRG relative weights on an 
iterative basis.
    Consistent with our historical relative weight methodology, we 
calculate the RY 2010 MS-LTC-DRG relative weights using the HSRV 
methodology, which is an iterative process. First, for each LTCH case, 
we calculate a hospital-specific relative charge value by dividing the 
SSO adjusted charge per discharge (see Step 3) of the LTCH case (after 
removing the statistical outliers (see Step 1)) and LTCH cases with a 
length of stay of 7 days or less (see Step 2) by the average charge per 
discharge for the LTCH in which the case occurred. The resulting ratio 
is then multiplied by the LTCH's case-mix index to produce an adjusted 
hospital-specific relative charge value for the case. An initial case-
mix index value of 1.0 is used for each LTCH.
    For each MS-LTC-DRG, the RY 2010 relative weight was calculated by 
dividing the average of the adjusted hospital-specific relative charge 
values (from above) for the MS-LTC-DRG by the overall average hospital-
specific relative charge value across all cases for all LTCHs. Using 
these recalculated MS-LTC-DRG relative weights, each LTCH's average 
relative weight for all of its cases (that is, its case-mix) was 
calculated by dividing the sum of all the LTCH's MS-LTC-DRG relative 
weights by its total number of cases. The LTCHs' hospital-specific 
relative charge values above was multiplied by these hospital-specific 
case-mix indexes. These hospital-specific case-mix adjusted relative 
charge values were then used to calculate a new set of MS-LTC-DRG 
relative weights across all LTCHs. This iterative process was continued 
until there was convergence between the weights produced at adjacent 
steps, for example, when the maximum difference was less than 0.0001.
    Step 5--Determine a RY 2010 relative weight for MS-LTC-DRGs with no 
LTCH cases.

[[Page 43960]]

    As we stated above, we determined the RY 2010 relative weight for 
each MS-LTC-DRG using total Medicare allowable charges reported in the 
best available LTCH claims data (that is, the March 2009 update of the 
FY 2008 MedPAR file for this final rule). Of the RY 2010 MS-LTC-DRGs, 
we identified a number of MS-LTC-DRGs for which there were no LTCH 
cases in the database. That is, based on data from the FY 2008 MedPAR 
file used for this final rule, no patients who would have been 
classified to those MS-LTC-DRGs were treated in LTCHs during FY 2008 
and, therefore, no charge data were available for these MS-LTC-DRGs. 
Thus, in the process of determining the MS-LTC-DRG relative weights, we 
were unable to calculate relative weights for the MS-LTC-DRGs with no 
LTCH cases using the methodology described in Steps 1 through 4 above. 
However, because patients with a number of the diagnoses under these 
MS-LTC-DRGs may be treated at LTCHs, consistent with our historical 
methodology, we assigned a relative weight to each of the no-volume MS-
LTC-DRGs based on clinical similarity and relative costliness (with the 
exception of ``transplant'' MS-LTC-DRGs and ``error'' MS-LTC-DRGs, as 
discussed below). In general, we determined RY 2010 relative weights 
for the MS-LTC-DRGs with no LTCH cases in the FY 2008 MedPAR file used 
in this final rule (that is, ``no-volume'' MS-LTC-DRGs) by crosswalking 
each no-volume MS-LTC-DRG to another MS-LTC-DRG with a calculated 
relative weight (determined in accordance with the methodology 
described above). Then, the ``no-volume'' MS-LTC-DRG was assigned the 
same relative weight of the MS-LTC-DRG to which it was crosswalked (as 
described in greater detail below).
    Specifically, in this final rule, as stated above, we determined 
the relative weight for each MS-LTC-DRG using total Medicare allowable 
charges reported in the March 2009 update of the FY 2008 MedPAR file. 
Of the 746 MS-LTC-DRGs for RY 2010, we identified 218 MS-LTC-DRGs for 
which there were no LTCH cases in the database (including the 8 
``transplant'' MS-LTC-DRGs and 2 ``error'' MS-LTC-DRGs). As stated 
above, we assigned relative weights for each of the 218 no-volume MS-
LTC-DRGs (with the exception of the 8 ``transplant'' MS-LTC-DRGs and 
the 2 ``error'' MS-LTC-DRGs, which are discussed below) based on 
clinical similarity and relative costliness to one of the remaining 528 
(746 - 218 = 528) MS-LTC-DRGs for which we were able to determine 
relative weights based on FY 2008 LTCH claims data using the steps 
described above. (For the remainder of this discussion, we refer to one 
of the 528 MS-LTC-DRGs for which we were able to determine a relative 
weight as the ``crosswalked'' MS-LTC-DRG.) Then, we assigned the no-
volume MS-LTC-DRG the relative weight of the crosswalked MS-LTC-DRG. 
(As explained below in Step 6, when necessary, we made adjustments to 
account for nonmonotonicity.)
    In this final rule, as proposed, we used the following methodology 
for determining the RY 2010 relative weights for the no-volume MS-LTC-
DRGs: We crosswalked the no-volume MS-LTC-DRG to an MS-LTC-DRG for 
which there were LTCH cases in the FY 2008 MedPAR file and to which it 
was similar clinically in intensity of use of resources and relative 
costliness as determined by criteria such as care provided during the 
period of time surrounding surgery, surgical approach (if applicable), 
length of time of surgical procedure, postoperative care, and length of 
stay. As we explained in the FY 2009 IPPS final rule (73 FR 48543), we 
evaluated the relative costliness in determining the applicable MS-LTC-
DRG to which a no-volume MS-LTC-DRG was crosswalked in order to assign 
an appropriate relative weight for the no-volume MS-LTC-DRGs in RY 
2010. In general, most of the no-volume MS-LTC-DRGs historically have 
not had any cases in the LTCH claims data. Therefore, we typically are 
unable to evaluate relative costliness based on prior years' LTCH 
claims data. In evaluating the relative costliness for most of the no-
volume MS-LTC-DRGs, a group of CMS medical officers who have extensive 
knowledge and familiarity with both the IPPS and LTCH DRG-based payment 
systems used their DRG experience to evaluate the relative costliness 
of the no-volume MS-LTC-DRGs. Specifically, the relative costliness of 
each of the no-volume MS-LTC-DRGs for RY 2010 was assessed by taking 
into consideration factors such as relative resource use, clinical 
cohesiveness, and the comparableness of services provided based on the 
collective IPPS and LTCH PPS experience of those medical officers. We 
also note, as discussed above, the no-volume MS-LTC-DRG crosswalks are 
based on both clinical similarity and relative costliness, including 
such factors as care provided during the period of time surrounding 
surgery, surgical approach (if applicable), length of time of surgical 
procedure, postoperative care, and length of stay. We believe in the 
rare event that there would be a few LTCH cases grouped to one of the 
no-volume MS-LTC-DRGs in RY 2010, the relative weights assigned based 
on the crosswalked MS-LTC-DRGs will result in an appropriate LTCH PPS 
payment because the crosswalks, which are based on similar clinical 
similarity and relative costliness, generally require equivalent 
relative resource use.
    We then assigned the relative weight of the crosswalked MS-LTC-DRG 
as the relative weight for the no-volume MS-LTC-DRG such that both of 
these MS-LTC-DRGs (that is, the no-volume MS-LTC-DRG and the 
crosswalked MS-LTC-DRG) would have the same relative weight for RY 
2010. We note that if the crosswalked MS-LTC-DRG had 25 cases or more, 
its relative weight, which was calculated using the methodology 
described in Steps 1 through 4 above, was assigned to the no-volume MS-
LTC-DRG as well. Similarly, if the MS-LTC-DRG to which the no-volume 
MS-LTC-DRG was crosswalked had 24 or less cases and, therefore, was 
designated to one of the low-volume quintiles for purposes of 
determining the relative weights, we assigned the relative weight of 
the applicable low-volume quintile to the no-volume MS-LTC-DRG such 
that both of these MS-LTC-DRGs (that is, the no-volume MS-LTC-DRG and 
the crosswalked MS-LTC-DRG) have the same relative weight for RY 2010. 
(As we noted above, in the infrequent case where nonmonotonicity 
involving a no-volume MS-LTC-DRG results, additional measures as 
described in Step 6 are required in order to maintain monotonically 
increasing relative weights.)
    For this final rule, a list of the no-volume MS-LTC-DRGs and the 
MS-LTC-DRG to which it was crosswalked (that is, the crosswalked MS-
LTC-DRG) for RY 2010 is shown in the chart below.

[[Page 43961]]



               No-Volume MS-LTC-DRG Crosswalk for RY 2010
------------------------------------------------------------------------
                                                         Crosswalked MS-
          MS-LTC-DRG            MS-LTC-DRG description       LTC-DRG
------------------------------------------------------------------------
9.............................  Bone marrow transplant               823
12............................  Tracheostomy for face,               146
                                 mouth & neck
                                 diagnoses w CC.
13............................  Tracheostomy for face,               146
                                 mouth & neck
                                 diagnoses w/o CC/MCC.
20............................  Intracranial vascular                 31
                                 procedures w PDX
                                 hemorrhage w MCC.
21............................  Intracranial vascular                 32
                                 procedures w PDX
                                 hemorrhage w CC.
22............................  Intracranial vascular                 32
                                 procedures w PDX
                                 hemorrhage w/o CC/MCC.
24............................  Craniotomy w major                    23
                                 device implant or
                                 acute complex CNS PDX
                                 w/o MCC.
27............................  Craniotomy &                          26
                                 endovascular
                                 intracranial
                                 procedures w/o CC/MCC.
34............................  Carotid artery stent                  37
                                 procedure w MCC.
35............................  Carotid artery stent                  38
                                 procedure w CC.
36............................  Carotid artery stent                  38
                                 procedure w/o CC/MCC.
39............................  Extracranial                          38
                                 procedures w/o CC/MCC.
61............................  Acute ischemic stroke                 70
                                 w use of thrombolytic
                                 agent w MCC.
62............................  Acute ischemic stroke                 71
                                 w use of thrombolytic
                                 agent w CC.
63............................  Acute ischemic stroke                 72
                                 w use of thrombolytic
                                 agent w/o CC/MCC.
76............................  Viral meningitis w/o                  75
                                 CC/MCC.
79............................  Hypertensive                         305
                                 encephalopathy w/o CC/
                                 MCC.
113...........................  Orbital procedures w                 146
                                 CC/MCC.
114...........................  Orbital procedures w/o               147
                                 CC/MCC.
116...........................  Intraocular procedures               125
                                 w CC/MCC.
117...........................  Intraocular procedures               125
                                 w/o CC/MCC.
122...........................  Acute major eye                      125
                                 infections w/o CC/MCC.
123...........................  Neurological eye                     125
                                 disorders.
129...........................  Major head & neck                    146
                                 procedures w CC/MCC
                                 or major device.
130...........................  Major head & neck                    148
                                 procedures w/o CC/MCC.
132...........................  Cranial/facial                       133
                                 procedures w/o CC/MCC.
134...........................  Other ear, nose, mouth               133
                                 & throat O.R.
                                 procedures w/o CC/MCC.
136...........................  Sinus & mastoid                      133
                                 procedures w/o CC/MCC.
137...........................  Mouth procedures w CC/               133
                                 MCC.
138...........................  Mouth procedures w/o                 133
                                 CC/MCC.
150...........................  Epistaxis w MCC.......               152
151...........................  Epistaxis w/o MCC.....               153
165...........................  Major chest procedures               254
                                 w/o CC/MCC.
185...........................  Major chest trauma w/o               184
                                 CC/MCC.
215...........................  Other heart assist                   254
                                 system implant.
216...........................  Cardiac valve & oth                  237
                                 maj cardiothoracic
                                 proc w card cath w
                                 MCC.
217...........................  Cardiac valve & oth                  253
                                 maj cardiothoracic
                                 proc w card cath w CC.
218...........................  Cardiac valve & oth                  254
                                 maj cardiothoracic
                                 proc w card cath w/o
                                 CC/MCC.
219...........................  Cardiac valve & oth                  237
                                 maj cardiothoracic
                                 proc w/o card cath w
                                 MCC.
220...........................  Cardiac valve & oth                  254
                                 maj cardiothoracic
                                 proc w/o card cath w
                                 CC.
221...........................  Cardiac valve & oth                  254
                                 maj cardiothoracic
                                 proc w/o card cath w/
                                 o CC/MCC.
223...........................  Cardiac defib implant                243
                                 w cardiac cath w AMI/
                                 HF/shock w/o MCC.
224...........................  Cardiac defib implant                242
                                 w cardiac cath w/o
                                 AMI/HF/shock w MCC.
225...........................  Cardiac defib implant                243
                                 w cardiac cath w/o
                                 AMI/HF/shock w/o MCC.
228...........................  Other cardiothoracic                 252
                                 procedures w MCC.
229...........................  Other cardiothoracic                 253
                                 procedures w CC.
230...........................  Other cardiothoracic                 254
                                 procedures w/o CC/MCC.
231...........................  Coronary bypass w PTCA               237
                                 w MCC.
232...........................  Coronary bypass w PTCA               254
                                 w/o MCC.
233...........................  Coronary bypass w                    237
                                 cardiac cath w MCC.
234...........................  Coronary bypass w                    254
                                 cardiac cath w/o MCC.
235...........................  Coronary bypass w/o                  237
                                 cardiac cath w MCC.
236...........................  Coronary bypass w/o                  254
                                 cardiac cath w/o MCC.
238...........................  Major cardiovascular                 254
                                 procedures w/o MCC.
246...........................  Percutaneous                         252
                                 cardiovascular proc w
                                 drug-eluting stent w
                                 MCC.
247...........................  Percutaneous                         253
                                 cardiovascular proc w
                                 drug-eluting stent w/
                                 o MCC.
248...........................  Percutaneous                         252
                                 cardiovasc proc w non-
                                 drug-eluting stent w
                                 MCC.
249...........................  Percutaneous                         253
                                 cardiovasc proc w non-
                                 drug-eluting stent w/
                                 o MCC.
251...........................  Perc cardiovasc proc w/              250
                                 o coronary artery
                                 stent or AMI w/o MCC.
258...........................  Cardiac pacemaker                    259
                                 device replacement w
                                 MCC.
261...........................  Cardiac pacemaker                    259
                                 revision except
                                 device replacement w
                                 CC.
262...........................  Cardiac pacemaker                    259
                                 revision except
                                 device replacement w/
                                 o CC/MCC.
263...........................  Vein ligation &                      301
                                 stripping.
265...........................  AICD lead procedures..               259
295...........................  Deep vein                            294
                                 thrombophlebitis w/o
                                 CC/MCC.
296...........................  Cardiac arrest,                      283
                                 unexplained w MCC.
297...........................  Cardiac arrest,                      284
                                 unexplained w CC.
298...........................  Cardiac arrest,                      284
                                 unexplained w/o CC/
                                 MCC.
328...........................  Stomach, esophageal &                327
                                 duodenal proc w/o CC/
                                 MCC.
332...........................  Rectal resection w MCC               356
333...........................  Rectal resection w CC.               357

[[Page 43962]]

 
334...........................  Rectal resection w/o                 357
                                 CC/MCC.
336...........................  Peritoneal                           335
                                 adhesiolysis w CC.
337...........................  Peritoneal                           335
                                 adhesiolysis w/o CC/
                                 MCC.
339...........................  Appendectomy w                       372
                                 complicated principal
                                 diag w CC.
340...........................  Appendectomy w                       373
                                 complicated principal
                                 diag w/o CC/MCC.
341...........................  Appendectomy w/o                     371
                                 complicated principal
                                 diag w MCC.
342...........................  Appendectomy w/o                     372
                                 complicated principal
                                 diag w CC.
343...........................  Appendectomy w/o                     373
                                 complicated principal
                                 diag w/o CC/MCC.
345...........................  Minor small & large                  344
                                 bowel procedures w CC.
346...........................  Minor small & large                  344
                                 bowel procedures w/o
                                 CC/MCC.
349...........................  Anal & stomal                        348
                                 procedures w/o CC/MCC.
351...........................  Inguinal & femoral                   350
                                 hernia procedures w
                                 CC.
352...........................  Inguinal & femoral                   350
                                 hernia procedures w/o
                                 CC/MCC.
355...........................  Hernia procedures                    354
                                 except inguinal &
                                 femoral w/o CC/MCC.
358...........................  Other digestive system               357
                                 O.R. procedures w/o
                                 CC/MCC.
407...........................  Pancreas, liver &                    406
                                 shunt procedures w/o
                                 CC/MCC.
408...........................  Biliary tract proc                   424
                                 except only cholecyst
                                 w or w/o c.d.e. w MCC.
409...........................  Biliary tract proc                   424
                                 except only cholecyst
                                 w or w/o c.d.e. w CC.
410...........................  Biliary tract proc                   424
                                 except only cholecyst
                                 w or w/o c.d.e. w/o
                                 CC/MCC.
411...........................  Cholecystectomy w                    418
                                 c.d.e. w MCC.
412...........................  Cholecystectomy w                    418
                                 c.d.e. w CC.
413...........................  Cholecystectomy w                    418
                                 c.d.e. w/o CC/MCC.
415...........................  Cholecystectomy except               418
                                 by laparoscope w/o
                                 c.d.e. w CC.
416...........................  Cholecystectomy except               418
                                 by laparoscope w/o
                                 c.d.e. w/o CC/MCC.
419...........................  Laparoscopic                         418
                                 cholecystectomy w/o
                                 c.d.e. w/o CC/MCC.
421...........................  Hepatobiliary                        424
                                 diagnostic procedures
                                 w CC.
422...........................  Hepatobiliary                        424
                                 diagnostic procedures
                                 w/o CC/MCC.
425...........................  Other hepatobiliary or               424
                                 pancreas O.R.
                                 procedures w/o CC/MCC.
434...........................  Cirrhosis & alcoholic                433
                                 hepatitis w/o CC/MCC.
455...........................  Combined anterior/                   457
                                 posterior spinal
                                 fusion w/o CC/MCC.
458...........................  Spinal fusion exc cerv               457
                                 w spinal curv, malig
                                 or 9+ fusions w/o CC/
                                 MCC.
460...........................  Spinal fusion except                 459
                                 cervical w/o MCC.
461...........................  Bilateral or multiple                480
                                 major joint procs of
                                 lower extremity w MCC.
462...........................  Bilateral or multiple                480
                                 major joint procs of
                                 lower extremity w/o
                                 MCC.
468...........................  Revision of hip or                   480
                                 knee replacement w/o
                                 CC/MCC.
473...........................  Cervical spinal fusion               472
                                 w/o CC/MCC.
482...........................  Hip & femur procedures               480
                                 except major joint w/
                                 o CC/MCC.
483...........................  Major joint & limb                   480
                                 reattachment proc of
                                 upper extremity w CC/
                                 MCC.
484...........................  Major joint & limb                   480
                                 reattachment proc of
                                 upper extremity w/o
                                 CC/MCC.
489...........................  Knee procedures w/o                  488
                                 pdx of infection w/o
                                 CC/MCC.
491...........................  Back & neck procedures               490
                                 except spinal fusion
                                 w/o CC/MCC.
494...........................  Lower extrem & humer                 493
                                 proc except hip,
                                 foot, femur w/o CC/
                                 MCC.
506...........................  Major thumb or joint                 514
                                 procedures.
508...........................  Major shoulder or                    507
                                 elbow joint
                                 procedures w/o CC/MCC.
509...........................  Arthroscopy...........               505
512...........................  Shoulder, elbow or                   511
                                 forearm proc, exc
                                 major joint proc w/o
                                 CC/MCC.
533...........................  Fractures of femur w                 480
                                 MCC.
538...........................  Sprains, strains, &                  537
                                 dislocations of hip,
                                 pelvis & thigh w/o CC/
                                 MCC.
583...........................  Mastectomy for                       582
                                 malignancy w/o CC/MCC.
585...........................  Breast biopsy, local                 584
                                 excision & other
                                 breast procedures w/o
                                 CC/MCC.
599...........................  Malignant breast                     598
                                 disorders w/o CC/MCC.
614...........................  Adrenal & pituitary                  629
                                 procedures w CC/MCC.
615...........................  Adrenal & pituitary                  629
                                 procedures w/o CC/MCC.
618...........................  Amputat of lower limb                617
                                 for endocrine,
                                 nutrit, & metabol dis
                                 w/o CC/MCC.
621...........................  O.R. procedures for                  620
                                 obesity w/o CC/MCC.
625...........................  Thyroid, parathyroid &               628
                                 thyroglossal
                                 procedures w MCC.
626...........................  Thyroid, parathyroid &               629
                                 thyroglossal
                                 procedures w CC.
627...........................  Thyroid, parathyroid &               629
                                 thyroglossal
                                 procedures w/o CC/MCC.
630...........................  Other endocrine,                     629
                                 nutrit & metab O.R.
                                 proc w/o CC/MCC.
653...........................  Major bladder                        660
                                 procedures w MCC.
654...........................  Major bladder                        660
                                 procedures w CC.
655...........................  Major bladder                        660
                                 procedures w/o CC/MCC.
657...........................  Kidney & ureter                      656
                                 procedures
                                 forneoplasm w CC.
658...........................  Kidney & ureter                      656
                                 procedures for
                                 neoplasm w/o CC/MCC.
661...........................  Kidney & ureter                      660
                                 procedures for non-
                                 neoplasm w/o CC/MCC.
664...........................  Minor bladder                        663
                                 procedures w/o CC/MCC.
665...........................  Prostatectomy w MCC...               669
670...........................  Transurethral                        669
                                 procedures w/o CC/MCC.
672...........................  Urethral procedures w/               671
                                 o CC/MCC.
688...........................  Kidney & urinary tract               687
                                 neoplasms w/o CC/MCC.
692...........................  Urinary stones w esw                 694
                                 lithotripsy w/o CC/
                                 MCC.

[[Page 43963]]

 
707...........................  Major male pelvic                    660
                                 procedures w CC/MCC.
708...........................  Major male pelvic                    660
                                 procedures w/o CC/MCC.
710...........................  Penis procedures w/o                 709
                                 CC/MCC.
712...........................  Testes procedures w/o                711
                                 CC/MCC.
714...........................  Transurethral                        669
                                 prostatectomy w/o CC/
                                 MCC.
715...........................  Other male                           717
                                 reproductive system
                                 O.R. proc for
                                 malignancy w CC/MCC.
716...........................  Other male                           717
                                 reproductive system
                                 O.R. proc for
                                 malignancy w/o CC/MCC.
718...........................  Other male                           717
                                 reproductive system
                                 O.R. proc exc
                                 malignancy w/o CC/MCC.
724...........................  Malignancy, male                     722
                                 reproductive system w/
                                 o CC/MCC.
734...........................  Pelvic evisceration,                 717
                                 rad hysterectomy &
                                 rad vulvectomy w CC/
                                 MCC.
735...........................  Pelvic evisceration,                 717
                                 rad hysterectomy &
                                 rad vulvectomy w/o CC/
                                 MCC.
736...........................  Uterine & adnexa proc                754
                                 for ovarian or
                                 adnexal malignancy w
                                 MCC.
737...........................  Uterine & adnexa proc                755
                                 for ovarian or
                                 adnexal malignancy w
                                 CC.
738...........................  Uterine & adnexa proc                755
                                 for ovarian or
                                 adnexal malignancy w/
                                 o CC/MCC.
739...........................  Uterine, adnexa proc                 628
                                 for non-ovarian/
                                 adnexal malig w MCC.
740...........................  Uterine, adnexa proc                 755
                                 for non-ovarian/
                                 adnexal malig w CC.
741...........................  Uterine, adnexa proc                 755
                                 for non-ovarian/
                                 adnexal malig w/o CC/
                                 MCC.
742...........................  Uterine & adnexa proc                755
                                 for non-malignancy w
                                 CC/MCC.
743...........................  Uterine & adnexa proc                755
                                 for non-malignancy w/
                                 o CC/MCC.
744...........................  D&C, conization,                     749
                                 laparascopy & tubal
                                 interruption w CC/MCC.
745...........................  D&C, conization,                     749
                                 laparascopy & tubal
                                 interruption w/o CC/
                                 MCC.
748...........................  Female reproductive                  749
                                 system reconstructive
                                 procedures.
750...........................  Other female                         749
                                 reproductive system
                                 O.R. procedures w/o
                                 CC/MCC.
756...........................  Malignancy, female                   755
                                 reproductive system w/
                                 o CC/MCC.
761...........................  Menstrual & other                    760
                                 female reproductive
                                 system disorders w/o
                                 CC/MCC.
765...........................  Cesarean section w CC/               629
                                 MCC.
766...........................  Cesarean section w/o                 629
                                 CC/MCC.
767...........................  Vaginal delivery w                   629
                                 sterilization &/or
                                 D&C.
768...........................  Vaginal delivery w                   629
                                 O.R. proc except
                                 steril &/or D&C.
769...........................  Postpartum & post                    629
                                 abortion diagnoses w
                                 O.R. procedure.
770...........................  Abortion w D&C,                      629
                                 aspiration curettage
                                 or hysterotomy.
774...........................  Vaginal delivery w                   629
                                 complicating
                                 diagnoses.
775...........................  Vaginal delivery w/o                 629
                                 complicating
                                 diagnoses.
777...........................  Ectopic pregnancy.....               629
778...........................  Threatened abortion...               759
779...........................  Abortion w/o D&C......               759
780...........................  False labor...........               759
782...........................  Other antepartum                     781
                                 diagnoses w/o medical
                                 complications.
789...........................  Neonates, died or                    781
                                 transferred to
                                 another acute care
                                 facility.
790...........................  Extreme immaturity or                781
                                 respiratory distress
                                 syndrome, neonate.
791...........................  Prematurity w major                  781
                                 problems.
792...........................  Prematurity w/o major                781
                                 problems.
793...........................  Full term neonate w                  781
                                 major problems.
794...........................  Neonate w other                      781
                                 significant problems.
795...........................  Normal newborn........               781
799...........................  Splenectomy w MCC.....               800
801...........................  Splenectomy w/o CC/MCC               800
804...........................  Other O.R. proc of the               803
                                 blood & blood forming
                                 organs w/o CC/MCC.
810...........................  Major hematol/immun                  812
                                 diag exc sickle cell
                                 crisis & coagul w/o
                                 CC/MCC.
820...........................  Lymphoma & leukemia w                823
                                 major O.R. procedure
                                 w MCC.
822...........................  Lymphoma & leukemia w                821
                                 major O.R. procedure
                                 w/o CC/MCC.
825...........................  Lymphoma & non-acute                 824
                                 leukemia w other O.R.
                                 proc w/o CC/MCC.
826...........................  Myeloprolif disord or                827
                                 poorly diff neopl w
                                 maj O.R. proc w MCC.
828...........................  Myeloprolif disord or                827
                                 poorly diff neopl w
                                 maj O.R. proc w/o CC/
                                 MCC.
830...........................  Myeloprolif disord or                829
                                 poorly diff neopl w
                                 other O.R. proc w/o
                                 CC/MCC.
836...........................  Acute leukemia w/o                   835
                                 major O.R. procedure
                                 w/o CC/MCC.
838...........................  Chemo w acute leukemia               837
                                 as sdx or w high dose
                                 chemo agent w CC.
839...........................  Chemo w acute leukemia               837
                                 as sdx or w high dose
                                 chemo agent w/o CC/
                                 MCC.
845...........................  Other myeloprolif dis                844
                                 or poorly diff neopl
                                 diag w/o CC/MCC.
887...........................  Other mental disorder                881
                                 diagnoses.
915...........................  Allergic reactions w                 918
                                 MCC.
916...........................  Allergic reactions w/o               918
                                 MCC.
929...........................  Full thickness burn w                934
                                 skin graft or inhal
                                 inj w/o CC/MCC.
955...........................  Craniotomy for                        26
                                 multiple significant
                                 trauma.
956...........................  Limb reattachment, hip               480
                                 & femur proc for
                                 multiple significant
                                 trauma.
959...........................  Other O.R. procedures                958
                                 for multiple
                                 significant trauma w/
                                 o CC/MCC.
------------------------------------------------------------------------


[[Page 43964]]

    To illustrate this methodology for determining the relative weights 
for the RY 2010 MS-LTC-DRGs with no LTCH cases, we are providing the 
following example, which refers to the no-volume MS-LTC-DRGs crosswalk 
information for RY 2010 provided in the chart above.
    Example: There were no cases in the FY 2008 MedPAR file used for 
this final rule for MS-LTC-DRG 61 (Acute Ischemic Stroke with Use of 
Thrombolytic Agent with MCC). We determined that MS-LTC-DRG 70 
(Nonspecific Cebrovascular Disorders with MCC) was similar clinically 
and based on resource use to MS-LTC-DRG 61. Therefore, we assigned the 
same relative weight of MS-LTC-DRG 70 of 0.8439 for RY 2010 to MS-LTC-
DRG 61 (we refer readers to Table 11 of the Addendum to this final 
rule).
    Furthermore, for RY 2010, consistent with our historical relative 
weight methodology, we established MS-LTC-DRG relative weights of 
0.0000 for the following transplant MS-LTC-DRGs: Heart Transplant or 
Implant of Heart Assist System with MCC (MS-LTC-DRG 1); Heart 
Transplant or Implant of Heart Assist System without MCC (MS-LTC-DRG 
2); Liver Transplant with MCC or Intestinal Transplant (MS-LTC-DRG 5); 
Liver Transplant without MCC (MS-LTC-DRG 6); Lung Transplant (MS-LTC-
DRG 7); Simultaneous Pancreas/Kidney Transplant (MS-LTC-DRG 8); 
Pancreas Transplant (MS-LTC-DRG 10); and Kidney Transplant (MS-LTC-DRG 
652). This is because Medicare will only cover these procedures if they 
are performed at a hospital that has been certified for the specific 
procedures by Medicare and presently no LTCH has been so certified. 
Based on our research, we found that most LTCHs only perform minor 
surgeries, such as minor small and large bowel procedures, to the 
extent any surgeries are performed at all. Given the extensive criteria 
that must be met to become certified as a transplant center for 
Medicare, we believe it is unlikely that any LTCHs will become 
certified as a transplant center. In fact, in the more than 20 years 
since the implementation of the IPPS, there has never been a LTCH that 
even expressed an interest in becoming a transplant center.
    If, in the future, a LTCH applies for certification as a Medicare-
approved transplant center, we believe that the application and 
approval procedure would allow sufficient time for us to determine 
appropriate weights for the MS-LTC-DRGs affected. At the present time, 
we only include these eight transplant MS-LTC-DRGs in the GROUPER 
program for administrative purposes only. Because we use the same 
GROUPER program for LTCHs as is used under the IPPS, removing these MS-
LTC-DRGs would be administratively burdensome. Again, we note that, as 
this system is dynamic, it is entirely possible that the number of MS-
LTC-DRGs with no volume of LTCH cases based on the system will vary in 
the future. We used the most recent available claims data in the MedPAR 
file to identify no-volume MS-LTC-DRGs and to determine the relative 
weights in this final rule.
    Step 6--Adjust the RY 2010 MS-LTC-DRG relative weights to account 
for nonmonotonically increasing relative weights.
    As discussed above in this section, the MS-DRGs (used under the 
IPPS) and the MS-LTC-DRGs (used under the LTCH PPS) provide a 
significant improvement in the DRG system's recognition of severity of 
illness and resource usage. The MS-DRGs contain base DRGs that have 
been subdivided into one, two, or three severity levels. Where there 
are three severity levels, the most severe level has at least one code 
that is referred to as an MCC (that is, major complication or 
comorbidity). The next lower severity level contains cases with at 
least one code that is a CC (that is, complication or comorbidity). 
Those cases without an MCC or a CC are referred to as ``without CC/
MCC.'' When data do not support the creation of three severity levels, 
the base DRG is subdivided into either two levels or the base DRG is 
not subdivided. The two-level subdivisions could consist of the with 
CC/MCC and the without CC/MCC. Alternatively, the other type of two-
level subdivision may consist of the MCC and without MCC.
    In those base MS-LTC-DRGs that are split into either two or three 
severity levels, cases classified into the ``without CC/MCC'' MS-LTC-
DRG are expected to have a lower resource use (and lower costs) than 
the ``with CC/MCC'' MS-LTC-DRG (in the case of a two-level split) or 
both the ``with CC'' and the ``with MCC'' MS-LTC-DRGs (in the case of a 
three-level split). That is, theoretically, cases that are more severe 
typically require greater expenditure of medical care resources and 
will result in higher average charges. Therefore, in the three severity 
levels, relative weights should increase by severity, from lowest to 
highest. If the relative weights decrease as severity decreased (that 
is, if within a base MS-LTC-DRG, an MS-LTC-DRG with CC has a higher 
relative weight than one with MCC, or the MS-LTC-DRG without CC/MCC has 
a higher relative weight than either of the others), they are 
nonmonotonic. We continue to believe that utilizing nonmonotonic 
relative weights to adjust Medicare payments would result in 
inappropriate payments because the payment for the cases in the higher 
severity level in a base MS-LTC-DRG (which are generally expected to 
have higher resource use and costs) would be lower than the payment for 
cases in a lower severity level within the same base MS-LTC-DRG (which 
are generally expected to have lower resource use and costs). 
Consequently, in general, consistent with our historical methodology, 
we combined MS-LTC-DRG severity levels within a base MS-LTC-DRG for the 
purpose of computing a relative weight when necessary to ensure that 
monotonicity was maintained. Specifically, in determining the RY 2010 
MS-LTC-DRG relative weights in this final rule, we used the same 
methodology to adjust for nonmonotonicity that we used to determine the 
RY 2009 MS-LTC-DRG relative weights in the FY 2009 IPPS final rule (73 
FR 48549 through 48550). In determining the RY 2010 MS-LTC-DRG relative 
weights in this final rule, under each of the example scenarios 
provided below, we combined severity levels within a base MS-LTC-DRG as 
follows:
    The first example of nonmonotonically increasing relative weights 
for an MS-LTC-DRG pertains to a base MS-LTC-DRG with a three-level 
split and each of the three levels has 25 or more LTCH cases and, 
therefore, none of those MS-LTC-DRGs were assigned to one of the five 
low-volume quintiles. In this final rule, if nonmonotonicity was 
detected in the relative weights of the MS-LTC-DRGs in adjacent 
severity levels (for example, the relative weight of the ``with MCC'' 
(the highest severity level) was less than the ``with CC'' (the middle 
level), or the relative weight ``with CC'' was less than the ``without 
CC/MCC'' (lowest severity level)), we combined the nonmonotonic 
adjacent MS-LTC-DRGs and redetermined a relative weight based on the 
case-weighted average of the combined LTCH cases of the nonmonotonic 
MS-LTC-DRGs. The case-weighted average charge was calculated by 
dividing the total charges for all LTCH cases in both severity levels 
by the total number of LTCH cases for both MS-LTC-DRGs. The same 
relative weight was assigned to both affected levels of the base MS-
LTC-DRG. If nonmonotonicity remained an issue because the above process 
resulted in a relative weight that was still nonmonotonic to the 
relative weight of the remaining MS-LTC-DRG within the base MS-LTC-DRG, 
we combined all three of the severity levels to

[[Page 43965]]

redetermine the relative weights based on the case-weighted average 
charge of the combined severity levels. This same relative weight was 
then assigned to each of the MS-LTC-DRGs in that base MS-LTC-DRG.
    A second example of nonmonotonically increasing relative weights 
for a base MS-LTC-DRG pertains to the situation where there are three 
severity levels and one or more of the severity levels within a base 
MS-LTC-DRG has less than 25 LTCH cases (that is, low volume). If 
nonmonotonicity occurred in the case where either the highest or lowest 
severity level (``with MCC'' or ``without CC/MCC'') had 25 LTCH cases 
or more and the other two severity levels were low volume (and, 
therefore, the other two severity levels were otherwise assigned the 
relative weight of the applicable low-volume quintile(s)), we combined 
the data for the cases in the two adjacent low-volume MS-LTC-DRGs for 
the purpose of determining a relative weight. If the combination 
resulted in at least 25 cases, we redetermined one relative weight 
based on the case-weighted average charge of the combined severity 
levels and assigned this same relative weight to each of the severity 
levels. If the combination resulted in less than 25 cases, based on the 
case-weighted average charge of the combined low-volume MS-LTC-DRGs, 
both MS-LTC-DRGs were assigned to the appropriate low-volume quintile 
(discussed above in section VIII.B.3.e. of this preamble) based on the 
case-weighted average charge of the combined low-volume MS-LTC-DRGs. 
Then the relative weight of the affected low-volume quintile was 
redetermined and that relative weight was assigned to each of the 
affected severity levels (and all of the MS-LTC-DRGs in the affected 
low-volume quintile). If nonmonotonicity persisted, we combined all 
three severity levels and redetermined one relative weight based on the 
case-weighted average charge of the combined severity levels and this 
same relative weight was assigned to each of the three levels within 
that base MS-LTC-DRG.
    Similarly, in nonmonotonic cases where the middle level had 25 
cases or more but either or both of the lowest or highest severity 
level had less than 25 cases (that is, low volume), we combined the 
nonmonotonic low-volume MS-LTC-DRG with the middle severity-level MS-
LTC-DRG (the ``with CC'') of the base MS-LTC-DRG. We redetermined one 
relative weight based on the case-weighted average charge of the 
combined severity levels, and assigned this same relative weight to 
each of the affected MS-LTC-DRGs. If nonmonotonicity persisted, we 
combined all three levels for the purpose of redetermining a relative 
weight based on the case-weighted average charge of the combined 
severity levels, and assigned that relative weight to each of the three 
severity levels within the base MS-LTC-DRG.
    In the case where all three severity levels in the base-MS-LTC-DRGs 
were low-volume MS-LTC-DRGs and two of the severity levels were 
nonmonotonic in relation to each other, we combined the two adjacent 
nonmonotonic severity levels. If that combination resulted in less than 
25 cases, both low-volume MS-LTC-DRGs were assigned to the appropriate 
low-volume quintile (discussed above in section VIII.B.3.e. of this 
preamble) based on the case-weighted average charge of the combined 
low-volume MS-LTC-DRGs. Then the relative weight of the affected low-
volume quintile was redetermined, and that relative weight was assigned 
to each of the affected severity levels (and all of the MS-LTC-DRGs in 
the affected low-volume quintile). If the nonmonotonicity persisted, we 
combined all three levels of that base MS-LTC-DRG for the purpose of 
redetermining a relative weight based on the case-weighted average 
charge of the combined severity levels, and assigned that relative 
weight to each of the three severity levels. If that combination of all 
three severity levels resulted in less than 25 cases, we assigned that 
``combined'' base MS-LTC-DRG to the appropriate low-volume quintile 
based on the case-weighted average charge of the combined low-volume 
MS-LTC-DRGs. Then the relative weight of the affected low-volume 
quintile was redetermined, and that relative weight was assigned to 
each of the affected severity levels (and all of the MS-LTC-DRGs in the 
affected low-volume quintile). If the combination of all three severity 
levels resulted in 25 or more cases, we redetermined one relative 
weight based on the case-weighted average charge of the combined 
severity levels, and assigned this same relative weight to all three of 
the severity levels within the base MS-LTC-DRG.
    Similarly, in the case where all three severity levels in the base 
MS-LTC-DRGs were low-volume MS-LTC-DRGs and two of the severity levels 
were nonmonotonic in relation to each other, we combined the two 
adjacent nonmonotonic severity levels. If the combination resulted in 
at least 25 cases, we then redetermined one relative weight based on 
the case-weighted average charge of the combined severity levels, and 
assigned this same relative weight to both of the affected adjacent 
severity levels within the base MS-LTC-DRG. If the nonmonotonicity 
persisted, we combined all three levels of that base MS-LTC-DRG for the 
purpose of redetermining a relative weight based on the case-weighted 
average charge of the combined severity levels, and assigned that 
relative weight to each of the three severity levels within the base 
MS-LTC-DRG.
    Another example of nonmonotonicity involved a base MS-LTC-DRG with 
three severity levels where at least one of the severity levels had no 
LTCH cases. As discussed above in Step 5, we crosswalked a no-volume 
MS-LTC-DRG to an MS-LTC-DRG that had at least one case based on 
resource use intensity and clinical similarity. The no-volume MS-LTC-
DRG was assigned the same relative weight as the MS-LTC-DRG to which it 
was crosswalked. For many no-volume MS-LTC-DRGs, as shown in the chart 
above in Step 5, the application of our methodology resulted in a 
crosswalked MS-LTC-DRG that was the adjacent severity level in the same 
base MS-LTC-DRG. Consequently, in most instances, the no-volume MS-LTC-
DRG and the adjacent MS-LTC-DRG to which it was crosswalked did not 
result in nonmonotonicity because both of these severity levels would 
have the same relative weight. (In this final rule, under our 
methodology for the treatment of no-volume MS-LTC-DRGs, in the case 
where the no-volume MS-LTC-DRG was either the highest or lowest 
severity level, the crosswalked MS-LTC-DRG was typically the middle 
level (``with CC'') within the same base MS-LTC-DRG, and, therefore, 
the no-volume MS-LTC-DRG (either the ``with MCC'' or the ``without CC/
MCC'') and the crosswalked MS-LTC-DRG (the ``with CC'') have the same 
relative weight. Consequently, no adjustment for monotonicity was 
necessary.) However, if our methodology for determining relative 
weights for no-volume MS-LTC-DRGs resulted in nonmonotonicity with the 
third severity level in the base MS-LTC-DRG, all three severity levels 
were combined in order to redetermine one relative weight based on the 
case-weighted average charge of the combined severity levels. This same 
relative weight was assigned to each of the three severity levels in 
the base MS-LTC-DRG.
    Thus far in the discussion, we have presented examples of 
nonmonotonicity in a base MS-LTC-DRG that has three severity levels. 
Under our methodology for the treatment of nonmonotonicity,

[[Page 43966]]

we applied the same process where the base MS-LTC-DRG contained only 
two severity levels. For example, if nonmonotonicity occurred in a base 
MS-LTC-DRG with two severity levels (that is, the relative weight of 
the higher severity level was less than the lower severity level), 
where both of the MS-LTC-DRGs had at least 25 cases or where one or 
both of the MS-LTC-DRGs were low volume (that is, less than 25 cases), 
we combined the two MS-LTC-DRGs of that base MS-LTC-DRG for the purpose 
of redetermining a relative weight based on the combined case-weighted 
average charge for both severity levels. This same relative weight was 
assigned to each of the two severity levels in the base MS-LTC-DRG. 
Specifically, if the combination of the two severity levels resulted in 
at least 25 cases, we redetermined one relative weight based on the 
case-weighted average charge, and assigned that relative weight to each 
of the two MS-LTC-DRGs. If the combination resulted in less than 25 
cases, we assigned both MS-LTC-DRGs to the appropriate low-volume 
quintile (discussed above in section VIII.B.3.e. of this preamble) 
based on their combined case-weighted average charge. Then the relative 
weight of the affected low-volume quintile was redetermined, and that 
relative weight was assigned to each of the two severity levels within 
the base MS-LTC-DRG (and all of the MS-LTC-DRGs in the affected low-
volume quintile).
    Step 7--Calculate the RY 2010 budget neutrality factor.
    As we established in the RY 2008 LTCH PPS final rule (72 FR 26882), 
under the broad authority conferred upon the Secretary under section 
123 of Public Law 106-113, as amended by section 307(b) of Public Law 
106-554, to develop the LTCH PPS, beginning with the MS-LTC-DRG update 
for FY 2008, the annual update to the MS-LTC-DRG classifications and 
relative weights is done in a budget neutral manner such that estimated 
aggregate LTCH PPS payments would be unaffected, that is, would be 
neither greater than nor less than the estimated aggregate LTCH PPS 
payments that would have been made without the MS-LTC-DRG 
classification and relative weight changes. Specifically, in that same 
final rule, we established a requirement under Sec.  412.517(b) that 
the annual update to the MS-LTC-DRG classifications and relative 
weights be done in a budget neutral manner. (For a detailed discussion 
on the establishment of the budget neutrality requirement to update the 
MS-LTC-DRG classifications and relative weights, we refer readers to 
the RY 2008 LTCH PPS final rule (72 FR 26880 through 26884).) The MS-
LTC-DRG classifications and relative weights are updated annually based 
on the most recent available LTCH claims data to reflect changes in 
relative LTCH resource use. Under the budget neutrality requirement, 
for each annual update, the MS-LTC-DRG relative weights are uniformly 
adjusted to ensure that estimated aggregate payments under the LTCH PPS 
would not be affected (that is, decreased or increased). Consistent 
with that provision, we updated the MS-LTC-DRG classifications and 
relative weights for RY 2010 based on the most recent available LTCH 
data, and included a budget neutrality adjustment that was applied in 
determining the RY 2010 MS-LTC-DRG relative weights.
    To ensure budget neutrality in the update to the MS-LTC-DRG 
classifications and relative weights under Sec.  412.517(b), consistent 
with the budget neutrality methodology we established in the FY 2008 
IPPS final rule with comment period (72 FR 47295 through 47296), in 
determining the budget neutrality adjustment for RY 2010 in this final 
rule, as we proposed, we used a method that is similar to the 
methodology used under the IPPS. Specifically, for RY 2010, after 
recalibrating the MS-LTC-DRG relative weights as we do under the 
methodology as described in detail in Steps 1 through 6 above, we 
calculated and applied a normalization factor to those recalibrated 
relative weights to ensure that estimated payments were not influenced 
by changes in the composition of case types or the changes to the 
classification system. That is, the normalization adjustment is 
intended to ensure that the recalibration of the MS-LTC-DRG relative 
weights (that is, the process itself) neither increases nor decreases 
the average CMI.
    To calculate the normalization factor for RY 2010, we used the 
following steps: (1) We used the most recent available LTCH claims data 
(FY 2008) and grouped them using the RY 2010 GROUPER (Version 27.0) and 
the RY 2010 MS-LTC-DRG relative weights (determined above in Steps 1 
through 6 above) to calculate the average CMI; (2) we grouped the same 
LTCH claims data (FY 2008) using the FY 2009 GROUPER (Version 26.0) and 
FY 2009 MS-LTC-DRG relative weights (presented in Table 11 of the 
interim final rule with comment period published on June 3, 2009 in the 
Federal Register (74 FR 26550 through 26569)) and calculated the 
average CMI; and (3) we computed the ratio of these average CMIs by 
dividing the average CMI for FY 2009 (determined in Step 2) by the 
average CMI for RY 2010 (determined in Step 1). In determining the MS-
LTC-DRG relative weights for RY 2010, each recalibrated MS-LTC-DRG 
relative weight is multiplied by 1.07341 in the first step of the 
budget neutrality methodology, which produces ``normalized relative 
weights.''
    In the second step of the proposed RY 2010 budget neutrality 
methodology, we determined a budget neutrality factor to ensure that 
estimated aggregate LTCH PPS payments (based on the most recent 
available LTCH claims data) after reclassification and recalibration 
(the RY 2010 MS-LTC-DRG classifications and relative weights) are equal 
to estimated aggregate LTCH PPS payments (for the same most recent 
available LTCH claims data) before reclassification and recalibration 
(the RY 2009 MS-LTC-DRG classifications and relative weights). 
Therefore, similar to the methodology used to determine the IPPS DRG 
reclassification and recalibration budget neutrality factor discussed 
in section II.A.4.a. of the Addendum to this final rule, we used FY 
2008 discharge data to simulate payments and compared estimated 
aggregate LTCH PPS payments using the FY 2009 MS-LTC-DRGs and relative 
weights to estimate aggregate LTCH PPS payments using the RY 2010 MS-
LTC-DRGs and relative weights. Consistent with our historical policy of 
using the best available data, we used the most recently available 
claims data (that is, LTCH claims data from the March 2009 update of 
the FY 2008 MedPAR file) for determining the budget neutrality 
adjustment factor in this final rule.
    Specifically, we determined the RY 2010 budget neutrality 
adjustment factor in this final rule using the following steps: (1) We 
simulated estimated total LTCH PPS payments using the normalized 
relative weights for RY 2010 and GROUPER Version 27.0 (as described 
above in this section); (2) we simulated estimated total LTCH PPS 
payments using the FY 2009 GROUPER (Version 26.0) and the revised FY 
2009 MS-LTC-DRG relative weights shown in Table 11 of the June 3, 2009 
interim final rule with comment period (74 FR 26550 through 26569)); 
and (3) we calculated the ratio of these estimated total LTCH PPS 
payments by dividing the estimated total LTCH PPS payments using the FY 
2009 GROUPER (Version 26.0) and the revised FY 2009 MS-LTC-DRG relative 
weights (determined in Step 2) by the estimated total LTCH PPS payments 
using the RY 2010 GROUPER (Version 27.0) and the normalized MS-LTC-DRG 
relative weights for RY 2010 (determined in Step 1). In determining

[[Page 43967]]

the final RY 2010 MS-LTC-DRG relative weights, each normalized relative 
weight was multiplied by a budget neutrality factor of 0.9940041 in the 
second step of the budget neutrality methodology to determine the final 
budget neutral RY 2010 relative weight for each MS-LTC-DRG.
    Accordingly, in determining the RY 2010 MS-LTC-DRG relative weights 
in this final rule, we applied a normalization factor of 1.07341 and a 
budget neutrality factor of 0.9940041, as described above. The final RY 
2010 MS-LTC-DRG relative weights in Table 11 in the Addendum to this 
final rule reflect both the normalization factor of 1.07341 and the 
budget neutrality factor of 0.9940041. Table 11 in the Addendum to this 
final rule lists the MS-LTC-DRGs and their respective relative weights, 
geometric mean length of stay, and five-sixths of the geometric mean 
length of stay (used in determining SSO payments under Sec.  412.529) 
for RY 2010.

C. Changes to the LTCH Payment Rates and Other Changes to the RY 2010 
LTCH PPS

1. Overview of Development of the LTCH Payment Rates
    The LTCH PPS was effective beginning with a LTCH's first cost 
reporting period beginning on or after October 1, 2002. Effective 
beginning with that cost reporting period, LTCHs were paid, during a 5-
year transition period, a total LTCH prospective payment that is 
comprised of an increasing proportion of the LTCH PPS Federal rate and 
a decreasing proportion based on reasonable cost-based principles, 
unless the hospital makes a one-time election to receive payment based 
on 100 percent of the Federal rate, as specified in Sec.  412.533. New 
LTCHs (as defined at Sec.  412.23(e)(4)) are paid based on 100 percent 
of the Federal rate, with no phase-in transition payments.
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth at Sec.  412.515 through Sec.  412.536. In 
this section, we discuss the factors that were used to update the LTCH 
PPS standard Federal rate for the 2010 LTCH PPS rate year that will be 
effective for LTCH discharges occurring on or after October 1, 2009 
through September 30, 2010.
    For further details on the development of the FY 2003 standard 
Federal rate, we refer readers to the August 30, 2002 LTCH PPS final 
rule (67 FR 56027 through 56037), and for subsequent updates to the 
LTCH PPS Federal rate we refer readers to the following final rules: RY 
2004 LTCH PPS final rule (68 FR 34134 through 34140), RY 2005 LTCH PPS 
final rule (69 FR 25682 through 25684), RY 2006 LTCH PPS final rule (70 
FR 24179 through 24180), RY 2007 LTCH PPS final rule (71 FR 27819 
through 27827), RY 2008 LTCH PPS final rule (72 FR 26870 through 
27029), and RY 2009 LTCH PPS final rule (73 FR 26800 through 26804). 
The update to the LTCH PPS standard Federal rate for RY 2010 is 
presented in section V.A. of the Addendum to this final rule. Two of 
the components of the update to the LTCH PPS standard Federal rate for 
RY 2010 are discussed below.
2. Market Basket for LTCHs Reimbursed Under the LTCH PPS
a. Overview
    Historically, the Medicare program has used a market basket to 
account for price increases in the services furnished by providers. The 
market basket used for the LTCH PPS includes both operating and 
capital-related costs of LTCHs because the LTCH PPS uses a single 
payment rate for both operating and capital-related costs. The 
development of the initial LTCH PPS standard Federal rate for FY 2003, 
using the excluded hospital with capital market basket, is discussed in 
further detail in the August 30, 2002 LTCH PPS final rule (67 FR 56027 
through 56033).
    In that final rule (67 FR 56016 through 56017 and 56030), which 
implemented the LTCH PPS, we established the use of the excluded 
hospital with capital market basket as the LTCH PPS market basket. The 
excluded hospital with capital market basket was also used to update 
the limits on LTCHs' operating costs for inflation under the TEFRA 
reasonable cost-based payment system. We explained that we believe the 
use of the excluded hospital with capital market basket to update 
LTCHs' payments for inflation was appropriate because the excluded 
hospital market basket (with a capital component) measures price 
increases of the services furnished by excluded hospitals, including 
LTCHs. For further details on the development of the excluded hospital 
with capital market basket, we refer readers to the RY 2004 LTCH PPS 
final rule (68 FR 34134 through 34137).
    As discussed in the RY 2007 LTCH PPS final rule (71 FR 27810), 
based on our research, we did not develop a market basket specific to 
LTCH services. We were unable to create a separate market basket 
specifically for LTCHs at that time due to the small number of 
facilities and the limited amount of data that was reported (for 
instance, only approximately 15 percent of LTCHs reported contract 
labor cost data for 2002). In that same final rule, under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of the BIPA, we adopted the rehabilitation, 
psychiatric, long-term care (RPL) market basket as the appropriate 
market basket of goods and services under the LTCH PPS for discharges 
occurring on or after July 1, 2006. Specifically, beginning with the 
2007 LTCH PPS rate year, for the LTCH PPS, we adopted the use of the 
RPL market basket which is based on FY 2002 cost report data. We chose 
to use the FY 2002 Medicare cost report data because those data were 
the most recent, relatively complete cost data for IRFs, IPFs, and 
LTCHs available at the time of rebasing.
    The RPL market basket was determined based on the operating and 
capital costs of freestanding IRFs, freestanding IPFs, and LTCHs. As we 
explained in the RY 2007 LTCH PPS final rule, we believed a market 
basket based on the data of IRFs, IPFs, and LTCHs was appropriate to 
use under the LTCH PPS because those data were the best available data 
that reflect the cost structures of LTCHs. For further details on the 
development of the RPL market basket, including the methodology for 
determining the operating and capital portions of the RPL market 
basket, we refer readers to the RY 2007 LTCH PPS final rule (71 FR 
27810 through 27817).
b. Market Basket Under the LTCH PPS for RY 2010
    When we initially created the FY 2002-based RPL market basket, we 
were unable to create a separate market basket specifically for LTCHs 
due, in part, to the small number of facilities and the limited data 
that were provided in the Medicare cost reports. Over the last several 
years, however, the number of LTCH facilities submitting valid Medicare 
cost report data has increased. Based on this development, as well as 
our desire to move from one RPL market basket to three stand-alone and 
provider-specific market baskets (for IRFs, IPFs, and LTCHs, 
respectively), we plan to begin exploring the viability of creating 
these market baskets for future use. However, as we discussed in the FY 
2010 IRF PPS proposed rule, we are conducting further research to 
assist us in understanding the reasons for the variations in costs and 
cost structure between freestanding IRFs and hospital-based IRFs. We 
also are researching the reasons for similar variations in costs and 
cost structure between freestanding IPFs and hospital-based IPFs. 
Therefore, as we continue to explore the

[[Page 43968]]

development of stand-alone market baskets for LTCHs, IRFs and IPFs, 
respectively, we believe that it is appropriate to continue to use the 
FY 2002-based RPL market basket for LTCHs, IRFs and IPFs under their 
respective PPSs. Accordingly, as we proposed in the FY 2010 IPPS/RY 
2010 LTCH PPS proposed rule (74 FR 24228), in this final rule, we are 
continuing to use the FY 2002-based RPL market basket under the LTCH 
PPS for RY 2010 because we continue to believe it is the best available 
data that reflect the cost structure of LTCHs. We are hopeful that 
progress can be made in the near future with respect to creating stand-
alone market baskets for LTCHs, IRFs, and IPFs and, as a result, may 
propose to rebase the appropriate market basket(s) for subsequent 
updates in the future.
    Comment: Several commenters agreed with the original application of 
the RPL market basket due to the lack of data available for LTCHs. 
However, the commenters now believe that there are sufficient LTCH-
specific cost data to develop a separate LTCH market basket that will 
accurately reflect the costs of providing LTCH goods and services. One 
commenter stated that a stand-alone LTCH market basket is necessary and 
warranted due to the unique nature of the patient populations served by 
LTCHs and the differences in care settings among LTCHs, IRFs, and IPFs.
    Response: We appreciate the commenters' thoughts concerning the 
possible development of a stand-alone LTCH market basket. While the 
number of LTCHs submitting cost report data has increased, we believe 
that further research is required to determine the feasibility of 
developing stand-alone market baskets for LTCHs, IRFs, and IPFs. 
Therefore, we believe that it is appropriate to continue to use the FY 
2002-based RPL market basket for LTCHs for RY 2010. However, as stated 
above, we will be exploring the viability and technical appropriateness 
of a stand-alone LTCH market basket.
c. Market Basket Update for LTCHs for RY 2010
    Consistent with our historical practice, we estimate the RPL market 
basket update based on IHS Global Insight, Inc.'s forecast using the 
most recent available data. IHS Global Insight, Inc. is a nationally 
recognized economic and financial forecasting firm that contracts with 
CMS to forecast the components of the hospital market baskets. Based on 
IHS Global Insight, Inc.'s first quarter 2009 forecast, we proposed 
that the RY 2010 market basket estimate for the LTCH PPS using the FY 
2002-based RPL market basket was 2.4 percent. Consistent with our 
historical practice of using market basket estimates based on the most 
recent available data, for this final rule, we used IHS Global Insight, 
Inc.'s second quarter 2009 forecast of the RY 2010 market basket 
estimate for the LTCH PPS using the FY 2002-based RPL market basket, 
which is 2.5 percent. This includes increases in both the operating 
section and the capital section of the FY 2002-based RPL market basket. 
(As discussed in greater detail in section V. of the Addendum to this 
final rule, for RY 2010, we updated the LTCH PPS standard Federal rate 
by 2.0 percent. The update reflects an adjustment based on the most 
recent market basket estimate (currently 2.5 percent as discussed 
above) and adjustments to account for the increase in case-mix in the 
prior periods (FYs 2007 through 2009) that resulted from changes in 
documentation and coding practices rather than increases in patients' 
severity of illness.)
d. Labor-Related Share Under the LTCH PPS for RY 2010
    As discussed in section V.B. of the Addendum to this final rule, 
under the authority of section 123 of the BBRA as amended by section 
307(b) of the BIPA, we established an adjustment to the LTCH PPS 
Federal rate to account for differences in LTCH area wage levels at 
Sec.  412.525(c). The labor-related portion of the LTCH PPS Federal 
rate, hereafter referred to as the labor-related share, is adjusted to 
account for geographic differences in area wage levels by applying the 
applicable LTCH PPS wage index.
    The labor-related share is determined by identifying the national 
average proportion of operating and capital costs that are related to, 
influenced by, or vary with the local labor market. We continue to 
classify a cost category as labor-related if the costs are labor-
intensive and vary with the local labor market. In addition, as 
discussed above, we continued to use the FY 2002-based RPL market 
basket under the LTCH PPS for RY 2010. Given this, we continue to 
define the labor-related share as the national average proportion of 
operating costs that are attributable to wages and salaries, employee 
benefits, contract labor, professional fees, labor-intensive services, 
and a labor-related portion of capital based on the FY 2002-based RPL 
market basket. (Additional information on the development of the FY 
2002-based RPL market basket used under the LTCH PPS can be found in 
the RY 2007 LTCH PPS final rule (71 FR 27809 through 27818).)
    As we proposed (74 FR 24228 through 24229), the labor-related share 
for RY 2010 is the sum of the RY 2010 relative importance of each 
labor-related cost category, and reflects the different rates of price 
change for these cost categories between the base year (FY 2002) and RY 
2010. Based on IHS Global Insight, Inc.'s first quarter 2009 forecast 
of the RY 2010 relative importance, we proposed that the RY 2010 labor-
related share using the FY 2002-based RPL market basket would be 75.904 
percent. For this final rule, we used more recent data, the IHS Global 
Insight, Inc.'s second quarter 2009 forecast of the RY 2010 relative 
importance, to determine the labor-related share. The sum of the 
relative importance for RY 2010 for operating costs (wages and 
salaries, employee benefits, professional fees, and all other labor-
intensive services) is 71.841 percent. The portion of capital that is 
influenced by the local labor market is estimated to be 46 percent. 
Because the relative importance for capital in RY 2010 is 8.560 percent 
of the FY 2002-based RPL market basket, we took 46 percent of 8.560 
percent to determine the labor-related share of capital for RY 2010. 
The result is 3.938 percent, which we added to 71.841 percent for the 
operating cost amount to determine the total labor-related share for RY 
2010. Thus, the labor-related share that we are using for the LTCH PPS 
in RY 2010 is 75.779 percent.
    The chart below shows the RY 2010 relative importance labor-related 
share using the FY 2002-based RPL market basket.

RY 2010 Labor-Related Share Based on the FY 2002-Based RPL Market Basket
------------------------------------------------------------------------
                                                       FY 2002-based RPL
                                                         market basket
                                                      labor[dash]related
                    Cost category                       share relative
                                                          importance
                                                       (percent) RY 2010
------------------------------------------------------------------------
Wages and Salaries..................................            52.892
Employee Benefits...................................            13.949
Professional Fees:..................................             2.873
  All Other Labor-Intensive Services................             2.127
                                                     -------------------
    Subtotal........................................            71.841
Labor-Related Share of Capital Costs (46 percent)...             3.938
                                                     -------------------
    Total Labor-Related Share.......................            75.779
------------------------------------------------------------------------

    We did not receive any public comments on the proposed labor-
related share for the LTCH PPS for RY 2010.

[[Page 43969]]

3. Adjustment for Changes in LTCHs' Case-Mix Due to Changes in 
Documentation and Coding Practices That Occurred in a Prior Period
a. Background
    Beginning in RY 2007, in updating the standard Federal rate for the 
LTCH PPS, we have accounted for increases in payments from a past 
period that were due to changes in documentation and coding practices. 
Specifically, in the RY 2007 LTCH PPS final rule (71 FR 27820), we 
explained that rather than solely using the most recent estimate of the 
LTCH PPS market basket increase as the basis of the update factor for 
the standard Federal rate for RY 2007, we believed that based on our 
ongoing monitoring of LTCHs' case mix, it was appropriate to also 
adjust the standard Federal rate to account for the changes in 
documentation and coding practices (rather than patients' severity of 
illness), in addition to the estimated increase in the LTCH PPS market 
basket. Accordingly, we established at Sec.  412.523(c)(3)(iii) of the 
regulations that the update to the standard Federal rate for the 2007 
LTCH PPS rate year was zero percent, based on the most recent estimate 
of the LTCH PPS market basket increase of 3.4 percent and an equivalent 
negative adjustment to account for changes in case-mix due to changes 
in documentation and coding practices in a prior period (FY 2004).
    In the RY 2008 LTCH PPS final rule (72 FR 26880 through 26890), we 
continued to monitor and analyze LTCHs' case-mix and applied an update 
to the standard Federal rate of 0.71 percent, based on the most recent 
estimate of the market basket increase (3.2 percent) and an adjustment 
to account for changes in documentation and coding practices (-2.49 
percent) in a prior period (FY 2005). Similarly, for RY 2009, as 
discussed in the RY 2009 final rule (73 FR 26805 through 26812), the 
standard Federal rate was updated using an update factor of 2.7 
percent, based on the most recent estimate of the market basket 
increase (3.6 percent) and an adjustment to account for changes in 
case-mix due to documentation and coding practices (-0.9 percent) in a 
prior period (FY 2006).
b. Evaluation of FY 2007 Claims Data
    For RY 2010, we continue to believe that changes in the LTCH PPS 
payment rates should accurately reflect changes in LTCHs' true cost of 
treating patients, and should not be influenced by changes in 
documentation and coding that do not reflect increases in patients' 
severity of illness. Accordingly, consistent with previous years, and 
as we stated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 
24229 through 24230), we analyzed LTCHs' case-mix index (CMI) changes 
in the prior period, FY 2007, and if applicable, determined an 
appropriate adjustment to account for changes in documentation and 
coding practices. As we explained in the RY 2007 final rule (71 FR 
27819 through 27823), an LTCH's CMI is defined as its case-weighted 
average LTC-DRG relative weight for all its discharges in a given 
period. Changes in CMI consist of two components: ``real'' CMI changes 
and ``apparent'' CMI changes. Real CMI increase is defined as the 
increase in the average LTC-DRG relative weights resulting from the 
hospital's treatment of more resource intensive patients. Apparent CMI 
increase is defined as the increase in CMI due to changes in 
documentation and coding practices (including better documentation of 
the medical record, for example, by physicians and more complete coding 
of the medical record by coders). In previous years, analysis of the 
most recent available LTCH CMI data focused on quantifying the portion 
of CMI change in a prior period that is attributable to apparent CMI 
change. However, beginning in RY 2010, we proposed to revise our 
methodology to determine the documentation and coding adjustment, 
consistent with the proposed methodology for case-mix analysis under 
the IPPS, which is discussed in detail in section II.D.4 of the 
preamble of this final rule. We note that section II.D.4 of the 
preamble of this final rule discusses the analysis in the context of 
the MS-DRG documentation and coding adjustments for FY 2008 and FY 2009 
authorized by Public Law 110-90 for the IPPS, and we note that the 
requirements of Public Law 110-90 do not apply to the LTCH PPS. 
However, section 123(a)(1) of Public Law 106-113 (BBRA), as amended by 
section 307(b) of Public Law 106-554 (BIPA), provides broad authority 
to the Secretary in developing the LTCH PPS, including the authority 
for establishing appropriate adjustments. The stated purpose of the CMI 
analysis for the IPPS is to measure and corroborate the extent of the 
overall national average changes in case-mix since the adoption of the 
MS-DRGs, which we believe is also relevant in determining appropriate 
adjustments to account for changes in documentation and coding under 
the LTCH PPS because, as stated above, the same DRG-based patient 
classification system is used under both the LTCH PPS and the IPPS 
(referred to as the MS-LTC-DRGs and MS-DRGs, respectively). 
Accordingly, under the broad authority afforded by the statute to make 
appropriate adjustments for the LTCH PPS, we believe it is appropriate 
to use the same methodology under the LTCH PPS that we use under the 
IPPS as described in section II.D.4. of the preamble of this final rule 
and which is discussed in further detail below in this section.
    Accordingly, consistent with the IPPS CMI analysis methodology, we 
conducted a thorough evaluation of LTCH claims data in order to assess 
the case-mix changes that do not reflect real changes in patients' 
severity of illness. The results of this evaluation were used by our 
actuaries to determine if any payment adjustments are necessary to 
ensure appropriate payments under the LTCH PPS. Specifically, to 
evaluate the FY 2007 LTCH claims data, for the proposed rule, we 
performed the analysis in the following manner. We first divided the 
CMI obtained by grouping the FY 2007 LTCH claims data from the December 
2007 update of the MedPAR files through the FY 2007 GROUPER (Version 
24.0) by the CMI obtained by grouping these same FY 2007 LTCH claims 
through the FY 2006 GROUPER (Version 23.0). This resulted in a value of 
0.974. Because these are the same FY 2007 LTCH cases grouped using the 
two GROUPERs, we attributed this change primarily to two factors: (1) 
The effect of changes in documentation and coding; and (2) the 
measurement effect from the calibration of the GROUPER. We estimated 
the measurement effect from the calibration of the GROUPER by dividing 
the CMI obtained by grouping the FY 2006 LTCH claims through the FY 
2007 GROUPER by the CMI obtained by grouping these same LTCH claims 
through the FY 2006 GROUPER. This resulted in a value of 0.969. In 
order to isolate the documentation and coding effect, we then divided 
the combined effect of the changes in documentation and coding and 
measurement (0.974) by the measurement effect (0.969) to yield 1.005. 
Therefore, our estimate of the documentation and coding increase that 
occurred in FY 2007 is 0.5 percent. We now have data available from the 
March 2009 update of the MedPAR files. Applying this analytical 
methodology to the FY 2008 LTCH claims data from the March 2009 update 
of the MedPAR files confirms the documentation and coding increase that 
occurred in FY 2007 was 0.5 percent.
    As in prior years, the FY 2006 and FY 2007 MedPAR files are 
available to the public to allow independent analysis of the 
documentation and coding effect in

[[Page 43970]]

FY 2007. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we invited 
public comment on our proposed methodology and analysis. A summary of 
the public comments we received on the proposed adjustment for changes 
in LTCHs' CMI due to changes in documentation and coding practices that 
occurred in a prior period based on our evaluation of FY 2007 LTCH 
claims data, including any public comments on our proposed methodology 
and analysis, and our responses, as well as a statement of our final 
policy can be found in section VIII.C.3.d. of this preamble.
c. Evaluation of FY 2008 Claims Data
    In prior years, we based documentation and coding adjustments on an 
analysis of the most recent available LTCH data and have established 
the adjustments in a timely manner, as the data became available, to 
account for each prior period where LTCHs were paid based on case-mix 
changes that do not reflect increased patients' severity of illness. 
Most recently, in updating the LTCH PPS payment rates for RY 2009, we 
accounted for the effects of documentation and coding improvements that 
occurred in FY 2006. Due to the change in the LTCH update cycle in RY 
2010, we now have data available to analyze case-mix changes for FY 
2008, as well as FY 2007. Accordingly, analogous to our evaluation of 
the FY 2007 LTCH claims data as discussed above, for the proposed rule 
(74 FR 24230), we analyzed the FY 2008 LTCH claims data from the 
December 2008 update of the MedPAR files as well. That is, we first 
divided the CMI obtained by grouping the FY 2008 LTCH claims through 
the FY 2008 GROUPER (Version 25.0) by the CMI obtained by grouping 
these same FY 2008 LTCH claims through the FY 2007 GROUPER (Version 
24.0). This resulted in a value of 1.011. We estimated the measurement 
effect from the calibration of the GROUPER by dividing the CMI obtained 
by grouping the FY 2007 LTCH claims through the FY 2008 GROUPER by the 
CMI obtained by grouping these same LTCH claims through the FY 2007 
GROUPER. This resulted in a value of 0.999. We then divided the 
combined effect of the changes in documentation and coding measurement 
(1.011) by the measurement effect (0.999) to yield 1.013. Therefore, 
based on the results of the analysis discussed in the proposed rule, 
the documentation and coding increase that occurred in FY 2008 was 1.3 
percent. We now have data available from the March 2009 update of the 
MedPAR files. Applying this analytical methodology to the FY 2008 LTCH 
claims data from the March 2009 update of the MedPAR files confirms the 
documentation and coding increase that occurred in FY 2008 is 1.3 
percent.
    As noted above, the FY 2007 and FY 2008 MedPAR files are available 
to the public to allow independent analysis of the documentation and 
coding effect in FY 2008. In the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule, we invited public comment on our methodology and analysis. A 
summary of the public comments we received on the proposed adjustment 
for changes in LTCHs' CMI due to changes in documentation and coding 
practices that occurred in a prior period based on our evaluation of FY 
2008 LTCH claims data, including any public comments on our proposed 
methodology and analysis, and our responses, as well as a statement of 
our final policy can be found in section VIII.C.3.d. of this preamble.
d. RY 2010 Documentation and Coding Adjustment
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, based on 
analysis of the most recent available LTCH claims data as described 
above, we proposed to apply a cumulative adjustment for changes in 
documentation and coding that do not reflect an increase in patients' 
severity of illness of -1.8 percent (that is, -0.5 percent for FY 2007 
plus -1.3 percent for FY 2008). Accordingly, as discussed in section 
V.A.2. of the Addendum to that proposed rule, we proposed to update the 
RY 2010 LTCH PPS standard Federal rate by 0.6 percent based on the most 
recent estimate of the market basket increase at that time (2.4 
percent) and an adjustment to account for changes in documentation and 
coding practices (-1.8 percent). We note that an analysis of data from 
the March 2009 update of the FY 2007 and FY 2008 MedPAR files confirmed 
the cumulative effect of changes in documentation and coding that do 
not reflect an increase in patients' severity of illness of 1.8 percent 
(that is, 0.5 percent for FY 2007 and 1.3 percent for FY 2008.). In 
this final rule, as we discuss in greater detail below in this section, 
in determining the RY 2010 update to the LTCH PPS standard Federal 
rate, we are applying an adjustment for changes in documentation and 
coding that do not reflect an increase in patients' severity of illness 
of -0.5 percent. That is, we are are finalizing our proposal to apply 
an adjustment of -0.5 percent to account for the documentation and 
coding increase that occurred in FY 2007. However, after consideration 
of the public comments, and consistent with the decision to postpone 
the application of the prospective adjustment for estimated FY 2008 
documentation and coding increases under the IPPS (discussed in section 
II.D.5. of this preamble), we have decided to delay the application of 
the FY 2008 documentation and coding adjustment of -1.3 percent that 
was proposed under the LTCH PPS for RY 2010. We intend to address any 
future documentation and coding adjustment to the LTCH PPS standard 
Federal rate based on our analysis of the FY 2008 LTCH claims data in 
the FY 2011 rulemaking cycle through the notice-and-comment rulemaking 
process. Below we present a summary of the public comments received on 
our proposed documentation and coding adjustment for RY 2010 and our 
responses to those comments.
    Comment: Some commenters stated that section 7(b)(1) of Pub. L. 
110-90 provides authority for CMS to impose adjustments for 
documentation and coding changes for hospitals subject to the IPPS but 
does not specifically refer to hospitals under the LTCH PPS. The 
commenters argued that the absence of any reference to the LTCH PPS in 
Public Law 110-90 suggests that CMS does not have the authority to make 
such adjustments, despite the broad authority under section 123(a)(1) 
of Pub. L. 106-113, as amended by section 307(b) of Public Law 1106-
554.
    Response: As we noted in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule (74 FR 24229 through 24230), beginning in RY 2007 and for every 
annual update to the LTCH PPS standard Federal rate since RY 2007, we 
have accounted for increases in payments from a past period due to 
changes in documentation and coding practices that have occurred since 
we first implemented the LTCH PPS in 2003. As we have stated 
previously, section 123(a)(1) of Public Law 106-113 (BBRA), as amended 
by section 307(b) of Public Law 106-554 (BIPA), provides broad 
authority to the Secretary in developing the LTCH PPS, including the 
authority for establishing appropriate adjustments. Consequently, we 
did not need additional authority provided under Public Law 110-90 in 
order to make these adjustments for documentation and coding practices. 
In the discussion in the proposed rule, we included a reference to 
Public Law 110-90, which specifies the MS-DRG documentation and coding 
adjustments for the IPPS for FY 2008, FY 2009, and FY 2010. However, we 
did not apply the documentation and coding adjustments as prescribed in 
Public Law 110-90 to the LTCH PPS for RY 2009 and RY 2010

[[Page 43971]]

because we believed Public Law 110-90 did not apply to the LTCH PPS. 
Instead, we adhered to our historical practice of basing documentation 
and coding adjustments on an analysis of the most recent available LTCH 
data to account for each prior period where LTCHs were paid, based on 
case-mix changes that do not reflect increased patients' severity of 
illness. We noted in the proposed rule that due to the change in the 
LTCH update cycle in RY 2010, the data to analyze case-mix changes for 
FY 2008 as well as FY 2007 were available to us at the time we were 
proposing LTCH PPS rates for RY 2010 (74 FR 24230).
    Comment: Several commenters questioned the proposed methodology for 
the evaluation of the FY 2007 and FY 2008 claims data which resulted in 
the adjustments due to documentation and coding changes. The commenters 
raised concerns that the calculations of the documentation and coding 
effect were unsupported and did not fully consider other potential 
causes for the observed increases in CMI. Specifically, the commenters 
noted that the methodology used in the proposed rule assumed that the 
calculated CMI contains both a measurement effect from calibrating the 
GROUPER and the effect of coding and documentation changes. That is, to 
derive the coding and documentation effect, the proposed rule 
subtracted (1) the measurement effect from (2) the combined effects of 
measurement and coding and documentation.
    One commenter protested that the methodology assumed that real 
case-mix changes are not included in the calculated CMI. In addition, 
the commenter asserted that the methodology assumed that no real case-
mix changes occurred during the period prior to the implementation of 
the MS-LTC-DRG in FY 2008. The commenter commissioned an analysis of 
the period prior to the implementation of MS-LTC-DRGs, stating that 
``expanding the years of reviewed claims data is important because it 
expands the period of time analyzed during which there was, by CMS' own 
admission, no incentive for LTCHs to improve the coding of claims.'' In 
referring to this study that employed a different methodology to 
consider coding behavior over a longer period of time, the commenter 
believed this study was able to capture real case mix changes before 
and after the introduction of the MS-LTC-DRG. Specifically, the 
commenter stated that the study applied two different GROUPERs for 
claims data from 2005 through 2008 and observed that in the pre-
implementation period (2005 through 2007) ``the [CMI] rate of increase 
for the 2005-2007 period using v25 [Version 25] GROUPER is sharper than 
the rate of increase for these years derived from running claims data 
through the v24 [Version 24] GROUPER.'' From this observation, the 
commenter concluded that ``the two GROUPERs measure claims data 
differently, which is what one would expect due to implementation of a 
newer, more refined GROUPER.''
    Response: Although the commenters argued that the methodology made 
assumptions that were unsupported, we note that the methodology was 
also validated by MedPAC's independent analysis of claims data. In 
response to the commenter who protested that the methodology assumed 
that real case-mix changes was not included in the calculated CMI, we 
note that, although overall case-mix growth is predominately comprised 
of three factors (real case-mix growth, a documentation and coding 
effect, and a measurement effect), the methodology we have used to 
quantify the documentation and coding adjustment negates the need to 
consider the confounding effect of real case-mix growth in the 
calculated CMI differences. Because the same year of claims data is 
utilized in the comparisons, there is no component of real case-mix 
that needs to be identified. That is, there can be no case-mix growth 
measured if the same year's claims are used. We note that while 
commenters disagreed with the use of the more refined methodology for 
deriving the documentation and coding effect presented in the proposed 
rule, the commenters did not provide specific alternatives to use in 
the final rule.
    Instead, one commenter attempted to compare the effects of applying 
the Version 24 (FY 2007) and Version 25 (FY 2008) GROUPERs to claims 
data from 2005 through 2008, believing that this methodology would show 
real case-mix changes over the years. Using this methodology, the 
commenter observed that, in the period before MS-LTC-DRGs were 
implemented (2005-2007), ``the [CMI] rate of increase for the 2005-2007 
period using v25 GROUPER is sharper than the rate of increase for these 
years derived from running claims data through the v24 GROUPER.'' We 
believe what the commenter is actually observing is the measurement 
effect between grouping claims in the two different GROUPERs, which is 
accounted for in our more refined methodology that was presented in the 
proposed rule. Indeed, we do not disagree with the commenters' 
conclusion that ``the two GROUPERs measure claims data differently, 
which is what one would expect due to implementation of a newer, more 
refined GROUPER [that is, Version 25],'' and we believe this supports 
our implementation of the MS-LTC-DRG classification system because it 
better captures patient severity of illness.
    Contrary to the commenters' statement that we have asserted that 
there were no financial incentives for documentation and coding 
improvements prior to the change to MS-LTC-DRGs, CMS never asserted 
that LTCHs had no financial incentives to improve documentation and 
coding prior the introduction of the MS-LTC-DRGs in 2008. In fact, to 
the contrary, analyses conducted by both CMS and MedPAC have found 
evidence of apparent case-mix increases during this period. It is for 
this reason that we have historically adjusted for CMI increases due to 
documentation and coding changes, including adjustments to account for 
apparent CMI increases that were found in FY 2004 (4.0 percent), FY 
2005 (2.49 percent), and 2006 (0.9 percent). Consequently, we believe 
that the evidence does not support the commenters' assumption that the 
increases in CMI found when claims were grouped to Version 25 GROUPER 
were due solely to real case-mix increases. We continue to believe that 
the CMI increases over that period are attributable to both real case-
mix changes due to increased patient severity of illness and 
documentation and coding changes and that the more refined methodology 
utilized in the proposed rule, and finalized in this final rule, 
accurately and appropriately quantifies the appropriate documentation 
and coding adjustments that should be applied to account for the 
effects of documentation and coding that occurred in FY 2007 and FY 
2008.
    Comment: Many commenters were disappointed that CMS was unable to 
obtain relevant findings based on CDAC data to quantify real case-mix 
change.
    Response: As we stated in the proposed rule, when we attempted to 
use the CDAC data to distinguish real increase in case-mix growth from 
documentation and coding in the overall case-mix number, we found 
aberrant data and significant variation across the FY 1999 through FY 
2007 analysis period. It was not possible to distinguish changes in 
documentation and coding from changes in real case-mix in the CDAC 
data. Therefore, we concluded that the CDAC data would not support 
analysis of real case-mix growth that could be used in our 
retrospective evaluation of the FY 2008 claims data. While we 
acknowledge the disappointment of the commenters, we

[[Page 43972]]

note that we did not receive any public comments suggesting an 
alternative analysis directly measuring real case-mix growth that did 
not rely on assumptions with respect to the other factors that 
influence overall case-mix growth.
    Comment: Several commenters stated that CMS premised the 
documentation and coding adjustment on the existence of changes in 
severity level within each MS-LTC-DRG family. The commenters indicated 
that two-thirds of the case-mix change was attributable to changes 
across MS-LTC-DRGs. The commenters believed that these across MS-LTC-
DRG changes refute CMS' documentation and coding analysis.
    Response: Neither our MS-DRG nor our MS-LTC-DRG documentation and 
coding analysis was premised on the existence of changes in severity 
level within each DRG family. For the MS-DRGs, the analysis of changes 
in severity level was supplemental to the primary analysis and 
methodology described in the proposed rule. As we stated in the 
proposed rule concerning the MS-DRG analysis: ``We sought to 
corroborate (emphasis added) this 2.5 percent estimate by examining the 
increases in the within-base DRGs as compared to the increases in the 
across base DRGs * * *'' (74 FR 24094).
    The fact that within MS-DRG changes are supportive of the MS-DRG 
documentation and coding analysis does not mean that lesser within MS-
LTC-DRG changes refute the MS-LTC-DRG documentation and coding 
analysis. Across MS-LTC-DRG changes can occur for a variety of reasons, 
including documentation and coding. A higher proportion of across MS-
LTC-DRG changes does not imply that documentation and coding increases 
were nonexistent. We note that the FY 2008 documentation and coding 
estimate for MS-LTC-DRGs was less than half of the FY 2008 estimate for 
MS-DRGs. This is entirely consistent with the differences in within and 
across base DRG changes observed under the two systems. Furthermore, we 
note that our analysis has found examples of across MS-LTC-DRG changes 
that would contribute to the documentation and coding increases. For 
example, documentation and coding changes that involve moving 
respiratory failure, pneumonia, and complicated heart failure from 
principal to secondary diagnosis slots would result in higher payments 
because each of these would serve as an MCC and would be assigned to 
the highest severity group. That is, this resequencing will not only 
change the base DRG assignment, but it will also frequently change the 
Major Diagnosis Category (MDC) assignment. Accordingly, given that 
across MS-LTC-DRG changes can occur for a variety of reasons, including 
documentation and coding, we disagree with commenters that the across 
MS-LTC-DRG changes observed between FY 2007 and FY 2008 refute our 
documentation and coding analysis.
    Comment: Several commenters noted that the proposed rule did not 
account for DRG validations performed by CMS agents, such as QIOs, 
MACs, and RACs. During the validation process, these agents can make 
revisions to coding and recover funds. The commenters also expressed 
concerns that the proposed adjustments for coding and documentation 
would subject LTCHs to additional recovery of funds in cases where the 
DRG validation process resulted in a redesignation of the case to a 
lower MS-LTC-DRG severity level.
    Response: We recognize that DRG validation reviews by the CMS 
contractors can identify cases that require changes in DRG assignment, 
which may ultimately reduce a hospital's average case-mix. However, 
these validations are performed on a sample basis and are not done for 
all LTCH claims. More significantly, they are done primarily to capture 
fraudulent coding activities, not to address changes in documentation 
and coding practices that skew the data, resulting in increases in the 
average MS-LTC-DRG relative weights that are not reflective of 
hospitals' treatment of more resource intensive patients. As we have 
noted previously, apparent CMI increase is defined as the increase in 
CMI due to changes in documentation and coding practices (including 
better documentation of the medical record by physicians and more 
complete coding of the medical record by coders). These types of 
changes in documentation and coding practices would not be addressed in 
the validations performed by the CMS contractors.
    Comment: A number of commenters presented concern, in general, with 
the proposal to apply a documentation and coding adjustment in 
determining the update to the LTCH PPS rate for RY 2010. The commenters 
expressed concern that such an adjustment would reduce LTCH PPS 
payments and compound the economic woes that LTCHs are experiencing in 
the current economy.
    Response: As discussed above, we fully understand that this 
documentation and coding adjustment would reduce the increased level of 
LTCH PPS payments that affected LTCHs are receiving in absence of the 
adjustment. As discussed above, we believe that it is appropriate to 
make adjustments to the LTCH PPS standard Federal rate to account for 
the changes in documentation and coding practices (rather than 
patients' severity of illness and costs). Therefore, we are finalizing 
our proposal to apply an adjustment of -0.5 percent in determining the 
RY 2010 update to the LTCH PPS standard Federal rate to account for the 
documentation and coding increase that occurred in FY 2007. In FY 2007, 
the CMS LTC-DRGs was the patient classification system used under the 
LTCH PPS. Making an adjustment to account for the documentation and 
coding increase that occurred in FY 2007 is consistent with our 
historical approach in accounting for increases in payments from a past 
period due to changes in documentation and coding practices that have 
occurred under the CMS LTC-DRGs since we first implemented the LTCH PPS 
in 2003.
    After consideration of the public comments received and consistent 
with the decision to postpone the application of the prospective 
adjustment for estimated FY 2008 documentation and coding increases 
under the IPPS (discussed in section II.D.5. of this preamble), we have 
decided to delay the application of the FY 2008 documentation and 
coding adjustment that was proposed under the LTCH PPS for RY 2010. We 
intend to address any future documentation and coding adjustment to the 
LTCH PPS standard Federal rate based on our analysis of the FY 2008 
LTCH claims data in the FY 2011 rulemaking cycle through the notice-
and-comment rulemaking process.
    In this final rule, we are applying an adjustment for changes in 
documentation and coding that do not reflect an increase in patients' 
severity of illness of -0.5 percent to account for the documentation 
and coding increase that occurred in FY 2007. Accordingly, as discussed 
in section V.A.2. of the Addendum to this final rule, we are updating 
the RY 2010 LTCH PPS standard Federal rate by 2.0 percent, which is 
based on the most recent estimate of the market basket increase (2.5 
percent) and an adjustment to account for changes in documentation and 
coding practices (-0.5 percent).

D. Technical Corrections of LTCH PPS Regulations

    While we did not propose any new payment policy changes in the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule, we took the opportunity to 
propose two technical corrections to regulation text that we believe 
will clarify our existing policy at Sec.  412.525 relating to

[[Page 43973]]

adjustments to the Federal prospective payment to LTCHs (74 FR 24232).
    First, at Sec.  412.525(a)(2), the regulations currently state that 
``The fixed-loss amount is determined for the long-term care hospital 
rate year using the LTC-DRG relative weights that are in effect on July 
1 of the rate year.'' As stated earlier, in the RY 2009 LTCH PPS final 
rule, we revised the LTCH PPS payment rate update cycle in order to 
consolidate the timing of the annual update of the payment rates with 
the update of the MS-LTC-DRG classifications to October 1, beginning 
October 1, 2009 (73 FR 26792 through 26798). At that time, at Sec.  
412.503, we specified a new definition for ``long-term care hospital 
prospective payment system rate year.'' Under Sec.  412.503, the term 
``long-term care hospital prospective payment system rate year'' means: 
(1) From July 1, 2003, and ending on or before June 30, 2008, the 12-
month period of July 1 through June 30; (2) from July 1, 2008, and 
ending on September 30, 2009, the 15-month period of July 1, 2008, 
through September 30, 2009; and (3) beginning on or after October 1, 
2009, the 12-month period of October 1 through September 30. At 
Sec. Sec.  412.535(b) and (c), we described the resulting new 
publication schedule of Federal prospective payment rates. However, we 
neglected to make a conforming change to the regulations at Sec.  
412.525(a)(2) to reflect this new schedule. Currently, the language of 
Sec.  412.525(a)(2) still links the determination of the fixed-loss 
amount to a July 1 effective date. The annual calculation of the fixed-
loss amount, which is the amount used to limit the loss that a hospital 
will incur under the outlier policy for a case with unusually high 
costs, is directly linked to the calculation of the annual update of 
the Federal prospective payment rate (73 FR 26821). When we changed the 
annual update of the LTCH PPS rate year to coincide with the update in 
the MS-LTC-DRG relative weights to October 1, we should have changed 
the language at Sec.  412.525(a)(2) regarding the calculation of the 
fixed-loss amount to conform with this new schedule.
    We did not receive any public comments on our proposal to make this 
technical correction. Therefore, we are finalizing, without 
modification, our proposal to revise Sec.  412.525(a)(2) to accurately 
reflect the basis (effective LTC-DRG relative weights) for calculating 
the annual fixed-loss amount for high-cost outlier payments, in order 
to cover the various update cycles that have been in effect under the 
LTCH PPS. Specifically, we are revising Sec.  412.525(a)(2) to specify 
that the fixed-loss amount is determined for the LTCH rate year using 
the MS-LTC-DRG relative weights that are in effect at the start of the 
applicable LTCH PPS rate year, as defined in Sec.  412.503. (We note 
that the regulation text at Sec.  412.525(a)(2) uses the term ``LTC-
DRG'' rather than ``MS-LTC-DRG'' because the term ``LTC-DRG'' includes 
``MS-LTC-DRG'' generally applicable to any year. Specifically, in our 
regulations at Sec.  412.503, we state that ``[a]ny reference to the 
term `LTC-DRG' shall be considered a reference to the term `MS-LTC-DRG' 
when applying the provisions of this subpart for policy descriptions 
and payment calculations for discharges from a long-term care hospital 
occurring on or after October 1, 2007.'')
    We also proposed in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
a clarification of our existing policy at Sec.  412.525(d) that would 
more accurately reflect existing policy regarding payment adjustments 
under the LTCH PPS. In paragraph (d) of Sec.  412.525, we provide that 
CMS adjusts the Federal prospective payment to account for--(1) short-
stay outliers at Sec.  412.529; (2) a 3-day or less interruption of 
stay and a greater than 3-day interruption of stay, as provided for in 
Sec.  412.531; (3) patients who are transferred to onsite providers and 
readmitted to a LTCH as provided for in Sec.  412.532; and (4) long-
term care HwHs and satellite facilities of LTCHs as provided in Sec.  
412.534.
    We finalized the policy at Sec.  412.525(d)(4), which refers to the 
percentage threshold payment adjustment for co-located long-term care 
HwHs and satellite facilities in the FY 2005 IPPS final rule (69 FR 
49191 through 49214), and it was codified in the FY 2007 IPPS final 
rule (71 FR 48122). We adopted a similar policy in the RY 2008 LTC PPS 
final rule (72 FR 26910 through 26944) that provides for an adjustment 
to the LTCH PPS payment for LTCHs and satellite facilities of LTCHs 
that discharge Medicare patients admitted from hospitals not located in 
the same building or on the same campus as the LTCH or the satellite 
facility of the LTCH, as specified at Sec.  412.536. We inadvertently 
omitted the inclusion of this policy in the regulation text at Sec.  
412.525(d).
    We did not receive any public comments on our proposed 
clarification. Therefore, in order to ensure that the applicable 
regulatory text reflects existing policy, we are finalizing, without 
modification, our proposal to make this technical correction by adding 
a paragraph (d)(5) to Sec.  412.525 to specifically provide that CMS 
adjusts the Federal LTCH PPS payment amount for LTCHs and satellite 
facilities of LTCHs that discharged Medicare patients admitted from a 
hospital not located in the same building or on the same campus as the 
LTCH or the satellite facility of the LTCH, as provided in Sec.  
412.536.

IX. Revisions to the FY 2009 Medicare Severity-Long-Term Care 
Diagnosis-Related Group (MS-LTC-DRG) Relative Weights: Finalization of 
an Interim Final Rule With Comment Period

A. Overview

    On June 3, 2009, we published in the Federal Register (74 FR 
26546), an interim final rule with comment period that implemented 
revised MS-LTC-DRG relative weights for payment under the LTCH PPS for 
FY 2009. We revised the MS-LTC-DRG relative weights for FY 2009 due to 
the misapplication of our established methodology in the calculation of 
the budget neutrality factor. The revised FY 2009 MS-LTC-DRG relative 
weights are effective for the remainder of FY 2009 (that is, from June 
3, 2009, through September 30, 2009). Below we summarize the provisions 
of the June 3, 2009 interim final rule with comment period, present a 
summary of the public comments received on the interim final rule with 
comment period and our responses, and state our final policy.

B. Changes to the FY 2009 MS-LTC-DRG Relative Weights

    Beginning with the FY 2008 update, we established a budget 
neutrality requirement for the annual update to the MS-LTC-DRG 
classifications and relative weights at Sec.  412.517(b) of our 
regulations (in conjunction with Sec.  412.503), such that estimated 
aggregate LTCH PPS payments would be unaffected, that is, would be 
neither greater than nor less than the estimated aggregate LTCH PPS 
payments that would have been made without the classification and 
relative weight changes. (We refer readers to the May 11, 2007 LTCH PPS 
final rule (72 FR 26882 through 26884).)
    Consistent with Sec.  412.517(b), in the FY 2009 IPPS final rule 
(73 FR 48550 through 48551), using the most recent data available at 
that time (FY 2007 LTCH claims data from the March 2008 update of the 
MedPAR files), we established the MS-LTC-DRG classifications and 
relative weights for FY 2009 based on the application of budget 
neutrality adjustment factors determined using the two-step methodology 
of calculating and applying a normalization factor and a

[[Page 43974]]

budget neutrality factor, as initially established in the FY 2008 IPPS 
final rule (August 22, 2007, (72 FR 47295 through 47296)). 
Specifically, for FY 2009, under the first step of the established two-
step budget neutrality methodology, after recalibrating the MS-LTC-DRG 
relative weights, we calculated and applied a normalization factor of 
1.03887 to those relative weights to ensure that the average case-mix 
index (CMI) is not influenced by changes in the composition of case 
types or the changes to the classification system, such that the 
recalibration process itself neither increases nor decreases the 
average CMI. In doing so, each (recalibrated) MS-LTC-DRG relative 
weight was multiplied by 1.03887 to produce ``normalized relative 
weights.''
    Under the second step of the established two-step budget neutrality 
methodology, we calculated and applied a ``budget neutrality adjustment 
factor'' to ensure that estimated aggregate LTCH PPS payments after 
reclassification and recalibration would be equal to estimated 
aggregate LTCH PPS payments before reclassification and recalibration. 
Specifically, as described in the FY 2009 IPPS final rule (73 FR 
48551), we calculated a budget neutrality factor of 1.04186 by 
comparing estimated total payments using the normalized FY 2009 
relative weights under GROUPER Version 26.0 to estimated total payments 
using the FY 2008 GROUPER (Version 25.0) and FY 2008 MS-LTC-DRG 
relative weights. Then, each of the normalized relative weights was 
multiplied by that budget neutrality factor to determine the budget 
neutral relative weight for each MS-LTC-DRG for FY 2009. Thus, the FY 
2009 MS-LTC-DRG relative weights established in Table 11 of the 
Addendum of the FY 2009 IPPS final rule reflect the application of both 
the normalization factor of 1.03887 and the budget neutrality factor of 
1.04186.
    As we stated in the June 3, 2009 interim final rule with comment 
period, we discovered that, in determining the published FY 2009 MS-
LTC-DRG relative weights, we did not properly apply the established 
methodology for calculating the budget neutrality factor (the second 
step of the budget neutrality methodology, as set forth in the FY 2009 
IPPS final rule (73 FR 48550 through 48551). Specifically, upon recent 
review of the calculation of the budget neutrality factor of 1.04186, 
we found that it was determined using the unadjusted recalibrated 
relative weights rather than using the normalized relative weights. 
This is inconsistent with our stated methodology for the calculation of 
the FY 2009 budget neutrality factor (that is, the second step of the 
budget neutrality methodology). As described above and as we stated in 
the FY 2009 IPPS final rule (73 FR 48551), the FY 2009 budget 
neutrality factor is to be determined based on estimated total payments 
using the normalized (recalibrated) relative weights under GROUPER 
Version 26.0 (not the unadjusted recalibrated relative weights as were 
used in calculating the budget neutrality factor of 1.04186 published 
in the FY 2009 IPPS final rule). This misapplication of the rule's 
established methodology for calculating the budget neutrality factors 
resulted in relative weights that are higher, by approximately 3.9 
percent. We estimate aggregate annualized LTCH PPS payments in FY 2009 
(that is, for discharges occurring on or after October 1, 2008 through 
September 30, 2009) based on the MS-LTC-DRG relative weights published 
in the FY 2009 IPPS final rule to be approximately $130 million greater 
than what the increase would have been had the FY 2009 budget 
neutrality factor been calculated consistent with the established 
methodology described in that final rule. Thus, the FY 2009 MS-LTC-DRG 
relative weights shown in Table 11 of the FY 2009 IPPS final rule (73 
FR 49041 through 49062) were inconsistent with the established budget 
neutrality methodology used for the annual update to the MS-LTC-DRG 
classifications and relative weights.
    Consistent with our general and longstanding policy in PPS 
contexts, we do not make retroactive changes to correct past errors in 
PPS ratesetting, regardless of whether an error resulted in higher 
payments to providers (as in this situation) or lower payments to 
providers. We also do not make prospective adjustments to PPS rates to 
account for errors that occurred in prior periods, regardless of 
whether an error resulted in higher payments or lower payments to 
providers. In this instance, in the June 3, 2009 interim final rule 
with comment period, we revised the FY 2009 MS-LTC-DRG relative weights 
to ensure proper application of the established budget neutrality 
methodology in updating the FY 2008 MS-LTC-DRG relative weights to FY 
2009 during the fiscal year that will be effective for the remainder of 
the fiscal year. We note that this prospective revision to the FY 2009 
MS-LTC-DRG relative weights does not reflect a change in the 
established budget neutrality methodology itself but, rather, reflects 
the proper calculation of the relative weights under the rule's stated 
methodology.
    In the June 3, 2009 interim final rule with comment period, we 
calculated revised FY 2009 MS-LTC-DRG relative weights (effective 
prospectively for the remainder of FY 2009) based on the proper 
application of the established budget neutrality methodology. 
Specifically, using the same data (FY 2007 LTCH claims data from the 
March 2008 update of the MedPAR files) and methodology presented in the 
FY 2009 IPPS final rule (73 FR 48551) described above, we determined a 
budget neutrality factor of 1.0030401, which was applied to the 
normalized relative weights (that is, the recalibrated relative weights 
adjusted by the normalization factor of 1.03887, as described above). 
As a result, we established revised FY 2009 MS-LTC-DRG relative weights 
(shown in Table 11 of the June 3, 2009 interim final rule with comment 
period) that are effective for LTCH PPS discharges occurring on or 
after June 3, 2009, through September 30, 2009. The revised FY 2009 MS-
LTC-DRG relative weights in Table 11 of the June 3, 2009 interim final 
rule with comment period reflect the application of the revised FY 2009 
budget neutrality factor 1.0030401 and the FY 2009 normalization factor 
of 1.03887 (established in the FY 2009 IPPS final rule (73 FR 48551)). 
(For the convenience of the reader, in addition to the revised budget 
neutral FY 2009 MS-LTC-DRG relative weights effective June 3, 2009 
through September 30, 2009, we also included in Table 11 the geometric 
mean length of stay and five-sixths of the geometric mean length of 
stay (SSO threshold for payments under Sec.  412.529) for each MS-LTC-
DRG for FY 2009. The revision to the FY 2009 budget neutrality factor 
did not affect the calculations of the geometric mean length of stay 
and the SSO threshold for FY 2009 that were presented in Table 11 of 
the FY 2009 IPPS final rule.) (As noted previously in section VII.C. of 
this preamble, the revisions to the published FY 2009 MS-LTC-DRG 
relative weights discussed in the June 3, 2009 interim final rule with 
comment period affected the determination of the proposed RY 2010 MS-
LTC-DRG relative weights and the proposed RY 2010 HCO fixed-loss amount 
that were presented in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule. 
Therefore, we also presented proposed RY 2010 MS-LTC-DRG relative 
weights and the proposed RY 2010 HCO fixed-loss amount in the RY 2010 
LTCH PPS supplemental proposed rule published in the Federal Register 
on June 3, 2009 (74 FR 26600 through 26635).)

[[Page 43975]]

C. Summary of Public Comments Received on the June 3, 2009 Interim 
Final Rule With Comment Period and Our Responses

    We received 11 timely pieces of correspondence in response to the 
June 3, 2009 interim final rule with comment period. A summary of those 
public comments and our responses follow:
    Comment: Several commenters objected to our revision of the FY 2009 
MS-LTC-DRG relative weights. The commenters asserted that the revision 
that CMS made to the MS-LTC-DRG relative weights for the remainder of 
RY 2009 (June 3, 2009 through September 30, 2009) constituted 
``impermissible retroactive rulemaking'' which is contrary to the 
principles underlying prospective payments as well as to quoted 
preamble language in the 1983 and 2007 IPPS final rules. One commenter 
questioned CMS' authority in establishing a ``retrospective evaluation 
and correction to a LTCH-PPS rate year,'' citing case law from the D.C. 
Circuit that the commenter suggested restricts CMS from making 
``retroactive'' correction to published rates because of the 
prospective nature of a PPS.
    Response: First, the revision to the FY 2009 MS-LTC-DRG relative 
weights is not retroactive in application. Rather, the revision is 
effective prospectively, based on the date of publication of the 
interim final rule with comment period in the Federal Register, that 
is, June 3, 2009 through September 30, 2009. Moreover, the revision 
does not reflect a correction to LTCH PPS payment rates in a previous 
year. Second, as provided for in section 1886(m) of the Act (discussing 
the statutory authority for the LTCH PPS), CMS has broad legal 
authority with respect to the LTCH PPS. We note that, as explained in 
the interim final rule with comment period, the prospective revision of 
the FY 2009 MS-LTC-DRG relative weights does not reflect a change in 
the established budget neutrality methodology itself, but rather 
reflects the proper calculation of the relative weights under the 
established methodology set forth in the FY 2009 IPPS final rule (73 FR 
48550 through 48551).
    Third, the principles underlying prospective payment systems often 
reflect competing considerations (for example, prospectivity, finality, 
certainty, and accuracy). We agree that, generally, mid-year revisions 
should be disfavored in a PPS. However, balancing the competing 
considerations under the unique circumstances presented in this 
situation, we believe that a mid-year prospective revision to the FY 
2009 MS-LTC-DRG relative weights to ensure the proper application of 
the established budget neutrality methodology in updating the FY 2009 
MS-LTC-DRG classifications and relative weights to FY 2009 is 
appropriate. For these reasons, we believe that the court decisions 
cited by the commenter are not on point.
    Comment: Several commenters questioned CMS' use of the March 2008 
update of the FY 2007 data in our recalculation of the budget 
neutrality factor to determine the revised FY 2009 MS-LTC-DRG relative 
weights. Citing section 307(b) of the BIPA of 2000, the commenters 
stated that CMS was required by statute to use ``the best available 
data'' and that because newer hospital discharge data, from the 
December 2008 update of the FY 2008 claims data, were available for our 
revised calculations, CMS was in violation of the statutory mandate by 
continuing to use the March 2008 update of the FY 2007 data. Data from 
FY 2008, the commenters asserted, capture changes in case-mix that 
occurred in 2008 and, therefore, more accurately reflect increases in 
patient resource use related to an increase in patient case-mix 
severity. Moreover, the commenters noted that use of the more recent 
data would result in estimated RY 2009 LTCH payments ``not 
significantly different than what RY 2009 LTCH payments are estimated 
to be without correcting the budget neutrality error'' for the 
remainder of FY 2009. The commenters state that using these FY 2008 
data, therefore, would render the revision to the FY 2009 MS-LTC-DRG 
relative weights presented in the June 3, 2009 interim final rule with 
comment period unnecessary.
    Response: We do not agree that we are violating section 307(b) of 
the BIPA of 2000 in using the March 2008 update of the FY 2007 MedPAR 
files in our revised calculation of the FY 2009 MS-LTC-DRG relative 
weights when FY 2008 claims data from the December 2008 update of the 
LTCH files were available at the time the misapplication of our 
established budget neutrality methodology was discovered. Section 
307(b) of the BIPA of 2000 did indeed require that in developing the 
LTCH PPS system, in addition to accounting for ``different resource use 
of long-term care hospital patients,'' in setting DRG weights, we use 
the ``most recently available hospital discharge data.'' Consistent 
with our historical policy of using the best available data, our annual 
updates to each data-driven element of the LTCH PPS, such as relative 
weights, payment rates, market basket percentages, and HCO thresholds, 
are based on the most recently available hospital discharge data at the 
time those elements are developed. Thus, when we revised the FY 2009 
MS-LTC-DRG relative weights in the interim final rule with comment 
period, the calculations were based on the specific data set used at 
the time the FY 2009 MS-LTC-DRG relative weights were initially 
established (73 FR 48550 through 48551). As noted in the interim final 
rule with comment period, we failed to follow our established 
methodology at that time, and we believe it is appropriate in revising 
the FY 2009 MS-LTC-DRG relative weights prospectively, to apply the 
correct methodology to the same data set. Therefore, we are not 
adopting the commenters' suggestion to utilize the December 2008 update 
of the FY 2008 MedPAR claims in determining the revised FY 2009 MS-LTC-
DRG relative weights, as that was not the most recently available set 
of data used at the time the FY 2009 MS-LTC-DRG relative weights were 
established. However, we note that any changes in patient resource that 
may exist based on the FY 2008 LTCH claims data will be reflected in 
the RY 2010 MS-LTC-DRG relative weights, which were determined based 
upon those data, as discussed in section VIII.B.3. of this final rule.
    Comment: Several commenters asserted that the June 3, 2009 interim 
final rule with comment period violated ``notice and comment'' 
rulemaking procedures as required by the Social Security Act and the 
Administrative Procedure Act (APA). A number of these commenters 
maintained that without notice and comment rulemaking, the public has 
not been given a sufficient opportunity to review the new methodology 
and determine if CMS' most recent effort to calculate budget neutrality 
for FY 2009 is correct. The commenters disagreed with the waiver of 
proposed rulemaking, the delay of the effective date, and the 60-day 
comment period and were not convinced that good cause was present in 
order to justify the use of emergency rulemaking procedures. In light 
of these concerns, two commenters suggested that CMS withdraw the 
interim final rule with comment period or at least convert it to a 
proposed rule which would serve as appropriate ``notice and comment.''
    Response: We do not agree with the commenters that we have violated 
the ``notice and comment'' rulemaking requirements of section 553(d) of 
the APA and section 1871 of the Social Security Act. As we noted in the 
June 3, 2009 interim final rule with comment period, we ordinarily 
publish a proposed rule and provide a period for

[[Page 43976]]

public comment before the effective date of the rule. We also typically 
provide a 30-day delay in the effective date of a rule in accordance 
with section 553(d) of the APA, and section 1871 of the Act. However, 
both the prior notice-and-comment procedure and the delay in the 
effective date can be waived if the Secretary, for good cause, finds 
that it is impracticable, unnecessary, or contrary to the public 
interest and incorporates a statement of the finding and its reasons in 
the notice issued. In the instant case, we believe that it was 
unnecessary to undertake prior notice-and-comment rulemaking or provide 
a delay in the effective date because the June 3, 2009 interim final 
rule with comment simply reflected the appropriate application of the 
established methodology set forth in the FY 2009 IPPS final rule (73 FR 
48550 through 48551). Because section 307(b)(1) of the BIPA of 2000 
authorizes the Secretary to provide for an annual update of the LTCH 
PPS MS-LTC-DRG relative weights, and the methodology used to update the 
MS-LTC-DRG relative weights have been previously subject to public 
comment, we do not believe that an additional comment period or a delay 
in the effective date was necessary. (We also note that, historically, 
our annual proposed update of the LTCH PPS proposed payment rates and 
MS-LTC-DRG relative weights are based upon established methodology, and 
it is expected that these numbers will be updated in the final rule 
based on more recent data, without being subject to additional public 
comment.) We continue to believe that an interim final rule with 
comment period was the appropriate vehicle for establishing the revised 
FY 2009 MS-LTC-DRG relative weights.
    As noted in earlier responses, our revision of these relative 
weights was necessitated by a recently discovered misapplication of our 
established budget neutrality methodology. In response to the 
commenters who express concern that the absence of a 60-day comment 
period deprived them of an opportunity to review the new application of 
the methodology to determine if CMS' most recent effort to calculate 
the budget neutral FY 2009 MS-LTC-DRG relative weights is correct, we 
note that the methodology used to calculate budget neutrality for the 
MS-LTC-DRGs was originally established in the FY 2008 IPPS final rule 
(72 FR 26882 through 26884).
    In addition, we continue to believe that it is impracticable to 
undertake prior notice-and-comment rulemaking or provide a delay in the 
effective date because, as stated above, the June 3, 2009 interim final 
rule with comment period makes a prospective revision to the FY 2009 
MS-LTC-DRG relative weights to reflect proper application of the 
applicable established methodology and, therefore, should be applied in 
as timely a manner as possible. Therefore, we believe that we have good 
cause to waive notice-and-comment rulemaking procedures, as well as the 
30-day delay in the effective date.
    Comment: One commenter requested that CMS consider phasing in the 
revised MS-LTC-DRG relative weights over a 3-year period, given the 
anticipated impact on LTCHs of the estimated reduction in Medicare 
payments.
    Response: We do not believe that a phase-in of the revised FY 2009 
MS-LTC-DRG relative weights is either necessary or appropriate. For the 
first two-thirds of FY 2009, Medicare payments to LTCHs were higher 
than what they would have been had the misapplication of the budget 
neutrality methodology not occurred. In revising the FY 2009 MS-LTC-DRG 
relative weights, Medicare payments will be based on our established 
methodology and data analysis, and we believe that we will be properly 
making payments reflecting the actual LTCH resource use for LTCH cases 
for each MS-LTC-DRG. Therefore, we are not adopting the commenters' 
suggestion to phase in the revised MS-LTC-DRG relative weights.
    We note that the public comments that we received on the RY 2010 
LTCH PPS supplemental proposed rule, which was published on June 3, 
2009 in the Federal Register, regarding the proposed RY 2010 MS-LTC-DRG 
relative weights and the proposed HCO fixed-loss amount for RY 2010 are 
addressed in section VIII.C.3 of the preamble and section V. of the 
Addendum to this final rule.

D. Finalization of the June 3, 2009 Interim Final Rule With Comment 
Period

    After consideration of the public comments we received on the June 
3, 2009 interim final rule with comment period, we are finalizing, 
without modification, the FY 2009 MS-LTC-DRG relative weights presented 
in that interim final rule with comment period, which are currently in 
effect.

E. Regulatory Impact Analysis for the June 3, 2009 Interim Final Rule 
With Comment Period

    As we stated in the June 3, 2009 interim final rule with comment 
period, we examined the impacts of that interim final rule with comment 
period as required by Executive Order 12866 (September 1993, Regulatory 
Planning and Review), the Regulatory Flexibility Act (RFA) (September 
19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive 
Order 13132 on Federalism, and the Congressional Review Act (5 U.S.C. 
804 (2)).
    The regulatory impact analysis presented in the June 3, 2009 
interim final rule with comment period remains the same. Therefore, we 
are not reprinting it in this document. We refer readers to that 
interim final rule with comment period (74 FR 26549 through 24950) for 
the details of that analysis.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

X. Finalization of Two Interim Final Rules With Comment Period That 
Implemented Certain Provisions of Section 114 of the Medicare, 
Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173) Relating to 
Payments to LTCHs and LTCH Satellite Facilities

A. Background

    On May 6, 2008, we published in the Federal Register (73 FR 24871) 
an interim final rule with comment period to implement certain 
provisions of section 114 of the Medicare, Medicaid, and SCHIP 
Extension Act of 2007 (MMSEA) (Pub. L. 110-173) relating to LTCHs. 
Specifically, the May 6, 2008 interim final rule with comment period 
(CMS-1493-IFC) implemented section 114(c)(3) and sections 114(e)(1) and 
(e)(2) of the MMSEA. Section 114(c)(3) of the MMSEA established a 3-
year delay in the application of certain provisions regarding the 
payment adjustment for short-stay outliers. Sections 114(e)(1) and 
(e)(2) of the MMSEA made revisions to the RY 2008 standard Federal 
rate.
    On May 22, 2008, we published in the Federal Register (73 FR 29699) 
another interim final rule with comment period to implement other 
provisions of section 114 of the MMSEA relating to LTCHs and LTCH 
satellite facilities. Specifically, the May 22, 2008 interim final rule 
with comment period (CMS-1493-IFC2) implemented sections 114(c)(1) and 
(c)(2) and section 114(d) of the MMSEA. Sections 114(c)(1) and (c)(2) 
of the MMSEA established a 3-year delay in the application of certain 
payment policies that apply payment adjustments for discharges from 
LTCHs and LTCH satellites that were admitted from certain referring 
hospitals in excess of various percentage thresholds. Section 114(d) of 
the MMSEA

[[Page 43977]]

established a 3-year moratorium on the establishment of new LTCHs and 
LTCH satellite facilities; and on increases in beds in existing LTCHs 
and LTCH satellite facilities, with certain exceptions.
    The American Recovery and Reinvestment Act of 2009 (ARRA) (Pub. L. 
111-5) modified several of the LTCH-related provisions set forth in 
sections 114(c) and (d) of the MMSEA implemented in the May 22, 2008 
interim final rule with comment period. Specifically, section 4302 of 
the ARRA amended sections 114(c)(1), (c)(2), and (d)(3) of the MMSEA. 
We have issued instructions to the fiscal intermediaries and MACs 
interpreting the ARRA amendments (Change Request 6444). Section XI. of 
this document contains an interim final rule that addresses the 
specific modifications that section 4302 of the ARRA made to sections 
114(c)(1), (c)(2) and (d)(3) of the MMSEA.
    In this section of this final rule, we respond to comments and 
finalize policies implemented in the May 6 and the May 22, 2008 interim 
final rules with comment period relating to those provisions of 
sections 114(c), (d), and (e) of the MMSEA that were not otherwise 
modified by section 4302 of the ARRA.

B. May 6, 2008 Interim Final Rule With Comment Period Provisions 
Implementing Section 114(c)(3) of the MMSEA Regarding Certain Short-
Stay Outlier Cases

1. Background
    In the RY 2003 LTCH PPS final rule (67 FR 55995), we established at 
Sec.  412.529 a special payment policy for short-stay outlier (SSO) 
cases. SSO cases are cases with a covered LOS that is less than or 
equal to five-sixths of the geometric average LOS for each LTC-DRG (67 
FR 55995 through 56000). Under the SSO policy, we adjusted the per 
discharge payment for SSO cases under the LTCH PPS by the least of the 
following three options: (1) 120 percent of the estimated cost of the 
case; (2) 120 percent of the LTC-DRG specific per diem amount 
multiplied by the covered LOS of that discharge; or (3) the full LTC-
DRG payment. Since the implementation of the LTCH PPS, we have 
continued to collect and evaluate data from the LTCH PPS claims, which 
revealed that a large percentage of SSO cases had a covered LOS of 14 
days or less. Based on these findings, we further revised our payment 
policy for SSO cases in the RY 2007 LTCH PPS final rule for LTCHs 
defined by section 1886(d)(1)(B)(iv)(I) of the Act. (We refer the 
reader to the LTCH PPS final rule for RY 2007 (71 FR 27845 through 
27870) for a detailed description of the revisions to our SSO policy 
for RY 2007.)
    In the RY 2008 LTCH PPS final rule, we further revised the SSO 
policy based upon additional analysis of FY 2005 MedPAR data. At that 
time, we stated that LTCH SSO cases with LOS that are equal to or less 
than the IPPS average LOS plus one standard deviation for the same DRGs 
under the IPPS appeared to be comparable to typical stays at acute care 
hospitals (72 FR 26904 through 26918). Accordingly, in the RY 2008 LTCH 
PPS final rule we established an additional payment option for SSO 
cases under the LTCH PPS for discharges occurring on or after July 1, 
2007. Specifically, the covered LOS of a SSO case which has been 
assigned to a particular MS-LTC-DRG is compared to the average LOS plus 
one standard deviation for the same DRG under the IPPS, which we call 
the ``IPPS comparable threshold'' (72 FR 26870 and 26906). Thus, for a 
LTCH SSO case that is within the ``IPPS comparable threshold,'' we 
added an additional payment option based on an amount comparable to the 
hospital IPPS per diem amount determined under Sec.  412.529(d)(4). 
(For a detailed discussion of the RY 2008 revision to the SSO policy, 
we refer the reader to the RY 2008 LTCH PPS final rule (72 FR 26904 
through 26918).
    In summary, as established in Sec.  412.529, for LTCH discharges 
occurring on or after July 1, 2008 from a LTCH defined under section 
1886(d)(1)(B)(iv)(I), Medicare pays the least of the following:
    <bullet> 100 percent of the estimated cost of the case;
    <bullet> 120 percent of the LTC-DRG specific per diem amount 
multiplied by the covered LOS of the particular case;
    <bullet> The full LTC-DRG payment; or by
    <bullet> Comparing the covered LOS for a SSO case and the ``IPPS 
comparable threshold'' in one of the following manners:
    <bullet> The blend of the 120 percent of the LTC-DRG specific per 
diem amount and an amount comparable to the IPPS per diem amount 
specified in Sec.  412.529(c)(2)(iv) for cases where the covered LOS 
for a SSO case is greater than the ``IPPS comparable threshold''; or
    <bullet> An amount comparable to the hospital IPPS per diem amount 
determined under Sec.  412.529(d)(4) for cases where the covered LOS 
for a SSO is less than or equal to the ``IPPS comparable threshold.''
    Revisions to the SSO policy payment options that were finalized in 
RY 2007 and RY 2008 were not applied to the unique situation of a 
hospital designated as a LTCH by Congress under section 
1886(d)(1)(B)(iv)(II) of the Act, that is, (a ``subclause (II)'' LTCH) 
(71 FR 27863 and 72 FR 26907).
2. Public Comments Received on the May 6, 2008 Interim Final Rule With 
Comment Period Provisions Implementing Sections 114(e)(1) and (e)(2) of 
the MMSEA
    Section 114(c)(3) of the MMSEA provides that ``[t]he Secretary 
shall not apply, for the 3-year period beginning on the date of the 
enactment of this Act, the amendments finalized on May 11, 2007 (72 FR 
26904, 26992) made to the short-stay outlier payment provision for 
long-term care hospitals contained in section 412.529(c)(3)(i) of title 
42, Code of Federal Regulations, or any similar provision.'' 
Accordingly, we stated in the May 6, 2008 interim final with comment 
period that, ``for discharges beginning on or after December 29, 2007 
and before December 29, 2010, the fourth SSO payment option based on 
the `IPPS comparable threshold' as discussed above shall not apply'' 
(73 FR 24875).
    Specifically, in that interim final with comment period we noted 
that, ``during the 3-year period specified above, for each SSO case 
treated as a LTCH defined under section 1886(d)(1)(B)(iv)(I) of the 
Act, Medicare will pay the least of: (1) 100 percent of the estimated 
cost of the case; (2) 120 percent of the LTC-DRG specific per diem 
amount multiplied by the covered LOS of the particular case; (3) the 
full LTC-DRG payment; or (4) the blend of the 120 percent of the LTC-
DRG specific per diem amount and an amount comparable to the IPPS per 
diem amount specified in Sec.  412.529(c)(2)(iv)'' (73 FR 24875).
    Comment: All of the commenters strongly supported our 
implementation of the modification to the SSO policy required by 
section 114(c)(3) of the MMSEA.
    Response: We appreciate these comments.
    Accordingly, we are finalizing our changes at Sec. Sec.  412.529(c) 
and (f) of the regulations pertaining to the payment of SSO cases that 
implemented section 114(c)(3) of the MMSEA. Specifically, we are 
finalizing the following changes to our regulation text made in the May 
6, 2008 interim final rule with comment period: revising paragraphs 
(c)(1) through (c)(3), redesignating paragraph (c)(4) as paragraph (f), 
and revising newly redesignated paragraph (f).
    In the May 6, 2008 interim final rule with comment period, we also 
noted that we had not made any substantive

[[Page 43978]]

changes to the policy for reconciliation of SSO payment (other than 
those associated with implementing section 114(c)(3) of the MMSEA) and 
that the redesignation of the paragraph (c)(4) as paragraph (f), in 
addition the heading changes, are simply reorganizational changes 
intended to make the regulations in this section more accessible.
    In the May 6, 2008 interim final rule with comment period, we also 
noted that in amending the regulations, we discovered that several 
citations under existing paragraph (c)(4) were incorrect, originating 
from the RY 2008 final rule when we redesignated this paragraph from 
(c)(3) to (c)(4) (which was also an organizational change and not a 
substantive policy change to the policy on reconciliation of SSO 
payment) but inadvertently did not change the citations to correspond 
to the redesignation. We are therefore finalizing the corrected 
citations in the redesignated paragraph (f) (73 FR 24875).

C. May 6, 2008 Interim Final Rule With Comment Period Provisions 
Implementing Sections 114(e)(1) and (e)(2) of the MMSEA Regarding the 
Standard Federal Rate for the 2008 LTCH PPS Rate Year

1. Background
    Section 114(e)(1) of the MMSEA provides that the base rate for RY 
2008 ``shall be the same as the base rate for discharges for the 
hospital occurring during the rate year ending in 2007.'' Furthermore, 
section 114(e)(2) of the MMSEA provides that section 1886(m)(2) shall 
not be applicable to discharges occurring on or after July 1, 2007, and 
before April 1, 2008. We implemented this provision in the May 6, 2008 
interim final rule with comment period at which time we also solicited 
public comments.
    In the RY 2009 LTCH PPS proposed rule (73 FR 5362), we noted that 
consistent with our historical practice, we proposed to update the 
standard Federal rate for RY 2009 from the previous year based on our 
interpretation of section 114(e) of the MMSEA, as discussed in the 
interim final rule with comment period (73 FR 24871 through 24875). 
This proposed rate was finalized in the RY 2009 LTCH PPS final rule (73 
FR 26804 through 26807). (For a description and chronology of our 
ratesetting policy under the LTCH PPS, we refer readers to section 
V.A.1. of the Addendum to this final rule.)
    Section 114(e)(1) of the MMSEA revises the base rate for RY 2008. 
Specifically, section 114(e)(1) of the MMSEA adds a new section 
1886(m)(2) to the Act, which provides that the base rate for RY 2008 
``shall be the same as the base rate for discharges for the hospital 
occurring during the rate year ending in 2007.'' In addition, section 
114(e)(2) of the MMSEA indicates that section 1886(m)(2) of the Act 
``shall not apply to discharges occurring on or after July 1, 2007, and 
before April 1, 2008'' (that is, the first 9 months of RY 2008). In the 
May 6, 2008 interim final rule with comment period, we noted that the 
statute uses the term ``base rate,'' which is not a defined term in 
either section 1886(m) of the Act or in 42 CFR part 412, Subpart O. As 
we explained in the LTCH PPS RY 2009 final rule (73 FR 26805), we 
interpret that term to refer to the standard Federal rate.
    Under this interpretation, the standard Federal rate for RY 2008 
would be the same as the standard Federal rate for RY 2007, that is, 
the 0.71 percent update finalized in the RY 2008 LTCH PPS final rule 
would be reversed. (In the RY 2008 LTCH PPS final rule (72 FR 26887 
through 26890), we established (at Sec.  412.523(c)(3)(iv) of the 
regulations) the revised standard Federal rate for RY 2008 at 
$38,086.04, the same as it had been for RY 2007.) As specified by 
section 114(e)(2) of the MMSEA, Medicare payments beginning on and 
after July 1, 2007, and before April 1, 2008 would be calculated based 
on the standard Federal rate that we established, in the RY 2008 LTCH 
PPS final rule, effective from July 1, 2007, through June 30, 2008, at 
$38,356.45 (72 FR 26890).
    As we stated in the May 6, 2008 interim final rule with comment 
period, we do not believe that the term ``base rate'' could refer to 
the ``unadjusted rate'' because the unadjusted rate for RY 2008 would 
be updated by the current year's update factor in order to determine 
the standard Federal rate for RY 2008 (that is, to determine the 
standard Federal rate for any given rate year, the previous year's 
standard Federal rate, which we refer to as the ``unadjusted rate,'' is 
updated by the current year's update factor), and doing so would result 
in the same Federal rate for RY 2008 as was adopted in the RY 2008 LTCH 
PPS final rule. To illustrate this scenario mathematically, if ``base 
rate'' is interpreted to mean ``unadjusted rate,'' the ``unadjusted 
rate'' for RY 2008 ($38,086.04) would be the same as the RY 2007 
``unadjusted rate'' ($38,086.04). The RY 2008 ``unadjusted rate'' of 
$38,086.04 would subsequently be updated by the 0.71 percent update 
factor finalized in the RY 2008 final rule, resulting in a standard 
Federal rate for RY 2008 of $38,356.45, which is the same standard 
Federal rate that was originally finalized in the RY 2008 final rule. 
If we adopted this interpretation, we believe that LTCH PPS payments 
would be unaffected by section 114(e)(1) of the MMSEA. Therefore, we 
believe that the term ``base rate'' used in section 114(e)(1) of the 
MMSEA refers to the standard Federal rate.
    In the RY 2008 LTCH PPS final rule (72 FR 26890), we originally 
established a standard Federal rate of $38,356.45 for the 2008 LTCH PPS 
rate year that was based on the best available data and policies 
established in that final rule. As discussed above, section 114(e) of 
the MMSEA revised the standard Federal rate for RY 2008. Specifically, 
section 114(e)(1) of the MMSEA provides that under the new section 
1886(m)(2) of the Act, the standard Federal rate for RY 2008 shall be 
the same as the standard Federal rate for RY 2007. The standard Federal 
rate for RY 2007 was $38,086.04 (71 FR 27818). Thus, to implement 
114(e)(1) of the MMSEA, in the May 6, 2008 interim final rule with 
comment period, we established that the RY 2008 standard Federal rate 
is $38,086.04 (the same as the standard Federal rate for 2007).
    However, section 114(e)(2) of the MMSEA expressly delays the 
application of the revised RY 2008 standard Federal rate. Specifically, 
section 114(e)(2) of the MMSEA states that the revised RY 2008 standard 
Federal rate ``shall not apply to discharges occurring on or after July 
1, 2007, and before April 1, 2008.'' Therefore, we stated that LTCH 
payments for discharges occurring on or after July 1, 2007 through 
March 31, 2008, would continue to include an adjustment of 0.71 
percent, that is, payments would be based on the standard Federal rate 
in Sec.  412.523(c)(3)(iii), updated by 0.71 percent. Accordingly, for 
discharges occurring on or after April 1, 2008 through June 30, 2008, 
we would apply the revised RY 2008 standard Federal rate of $38,086.04, 
while payments for discharges occurring from July 1, 2007, through 
March 31, 2008 would be determined based on the standard Federal rate 
in Sec.  412.523(c)(3)(iii) increased by 0.71 percent, that is, 
$38,356.45. In the May 6, 2008 interim final rule with comment period, 
we revised Sec.  412.523(c)(iv) to conform to the revision of the 
standard Federal rate for RY 2008 under section 114(e) of the MMSEA and 
to specify how payments are determined during RY 2008.
    In the May 6, 2008 interim final rule with comment period, we also 
noted that section 114(e) of the MMSEA

[[Page 43979]]

affected the HCO fixed-loss amount currently in effect since it revises 
the standard Federal rate for RY 2008 and the standard Federal rate is 
used to determine the fixed-loss amount. Specifically, the fixed-loss 
amount that was applied when the MMSEA was enacted (December 29, 2007) 
was determined based on a standard Federal rate of $38,356.45. (See the 
RY 2008 LTCH PPS final rule (72 FR 26896 through 26899), as amended by 
the RY 2008 correction notice (72 FR 36613) for a discussion of the 
methodology and data used to determine the current fixed-loss amount 
for RY 2008.) In that interim final rule with comment period, we stated 
that since payment for discharges occurring on or after April 1, 2008, 
through June 30, 2008, will be based on the revised RY 2008 standard 
Federal rate of $38,086.04, consistent with the existing regulations at 
Sec.  412.525(a), in order to maintain estimated total payments for HCO 
cases at 8 percent of the estimated total payments, we were also 
revising the HCO fixed-loss amount. Accordingly, under the broad 
authority conferred upon the Secretary by section 123 of the BBRA, as 
amended by section 307(b) of the BIPA, to make appropriate adjustments 
to the LTCH PPS, the revised HCO fixed-loss amount effective for 
discharges occurring on or after April 1, 2008, through June 30 2008, 
was set at $20,707. This revised fixed-loss amount was determined using 
the same data and methodology presented in the RY 2008 LTCH PPS final 
rule and takes into account the revised RY 2008 standard Federal rate 
as provided for in the MMSEA (discussed above).
2. Public Comments Received on the May 6, 2008 Interim Final Rule With 
Comment Period Provisions
    Comment: Several commenters disagreed with our interpretation of 
section 114(e)(2) of the MMSEA, which specifies that ``for discharges 
occurring during the rate year ending in 2008 for a hospital, the base 
rate for such discharges for the hospital shall be the same as the base 
rate for discharges for the hospital occurring during the rate year 
ending in 2007.'' The commenters urged CMS to base the RY 2009 standard 
Federal rate update on the original RY 2008 rate when it finalizes the 
MMSEA provisions. The commenters further noted that section 114(e) of 
the MMSEA provides that the RY 2007 base rate only be utilized for the 
last three months of RY 2008, and that the initial RY 2008 base rate be 
utilized for July 1, 2007, through April 1, 2008. The commenters 
asserted that there is no statutory requirement that the RY 2009 
standard Federal rate be calculated based on the RY 2007 rate. In fact, 
the commenters noted, that the language of the provision indicates that 
the RY 2007 standard Federal rate is to be applied only to ``discharges 
occurring during the rate year ending in 2008.'' They contended that 
when CMS used the ``revised'' RY 2008 standard Federal rate, this 
policy determination affected not only the RY 2009 standard Federal 
rate but every rate year thereafter and that Congress did not intend 
this. Therefore, the commenters asserted that our interpretation of 
section 114(e)(1) of the MMSEA constitutes retroactive rulemaking. 
Furthermore, the commenters stated that our interpretation of section 
114(e)(2) of the MMSEA violates our existing regulations at Sec. Sec.  
412.523(a)(1) and (a)(2) that state that CMS uses the ``best Medicare 
data available'' to adjust the ``most recent estimate'' of increases in 
the market basket when computing the standard Federal rate, which is 
based on using data from the previous rate year.
    Response: We disagree with the commenters that updating the RY 2008 
standard Federal rate based on the MMSEA revised RY 2008 standard 
Federal rate of $38,086.04 represents a misinterpretation of section 
114(e)(1) of the MMSEA. As we noted in response to similar comments 
that we received on this issue after we published the RY 2009 LTCH PPS 
proposed rule (73 FR 3560 through 3562), we continue to believe that 
the approach that we finalized in the RY 2009 LTCH PPS final rule (73 
FR 26805) for calculating the RY 2009 standard Federal rate is 
appropriate, and consistent with a plain reading of the statute and our 
historic methodology for calculating the standard Federal rate.
    Section 114(e)(1) of the MMSEA adds section 1886(m)(2) to the Act, 
which specifies the standard Federal rate for RY 2008. Specifically, 
section 1886(m)(2) provides that ``for discharges occurring during the 
rate year ending in 2008 for a hospital, the base rate for such 
discharges for the hospital shall be the same as the base rate for 
discharges for the hospital occurring during the rate year ending in 
2007.'' Section 1886(m)(2) of the Act, on its face, explicitly provides 
for a single revised RY 2008 standard Federal rate. With respect to 
section 114(e)(2) of the MMSEA, this section provides that section 
1886(m)(2) of the Act shall not apply to discharges occurring on or 
after July 1, 2007, and before April 1, 2008. When read together, we 
believe that section 1886(m)(2) of the Act and section 114(e)(2) of the 
MMSEA provide that the revised RY 2008 standard Federal rate (which is 
the same as the RY 2007 standard Federal rate) is the standard Federal 
rate for all of RY 2008. However, for payment purposes, discharges 
occurring on or after July 1, 2007, and before April 1, 2008 simply 
will not be paid based on that revised RY 2008 standard Federal rate.
    In contrast to the commenters' belief that section 114(e)(2) of the 
MMSEA limits the reduced standard Federal rate in section 1886(m)(2) of 
the Act to merely a 3-month period (that is, the part of RY 2008 not 
included in ``on or after July 1, 2007, and before April 1, 2008''), 
this section provides that the standard Federal rate specified in 
section 1886(m)(2) of the Act ``shall not apply to discharges occurring 
on or after July 1, 2007, and before April 1, 2008.'' To the extent the 
MMSEA directs that the revised standard Federal rate in section 
1886(m)(2) of the Act shall not apply during a specified period, it 
also necessarily means that the standard Federal rate in section 
1886(m)(2) of the Act would otherwise apply for the entire RY 2008. We 
note that section 1886(m)(2) of the Act could have been explicitly 
revised to state this result. However, the actual structure of section 
114(e) of the MMSEA contained two distinct provisions: at section 
1886(m)(1) of the Act, an express indication of the statutory authority 
that established and implemented the LTCH PPS; and at section 
1886(m)(2) of the Act, the establishment of the ``Update for Rate Year 
2008'', which the statute specifically mandates ``shall be the same as 
the base rate for discharges for the hospital occurring during the rate 
year ending 2007.'' Following that statutory amendment at sections 
1886(m)(1) and (m)(2) of the Act, specified in section 114(e)(1) of the 
MMSEA, section 114(e)(2) of the MMSEA (not included in the new 
subsection (m) of the Act) merely prohibits application of the revised 
RY 2008 standard Federal rate to discharges occurring prior to April 1, 
2008. Therefore, contrary to the commenters' assertion, we believe a 
plain reading of the statute provides that the standard Federal rate 
for the long-term care hospital prospective payment system rate year 
beginning July 1, 2007 and ending June 30, 2008 (that is, RY 2008) is 
the same as the standard Federal rate for the previous long-term care 
hospital prospective payment system rate year updated by zero percent 
(that is, the same as the standard Federal rate for RY 2007).
    In addition, Congress is aware that we determine the standard 
Federal rate for a given year by taking the standard Federal rate from 
the previous year and updating it. Our calculation of the

[[Page 43980]]

proposed (and final) RY 2009 standard Federal rate is consistent with 
our long-standing practice of calculating the standard Federal rate. 
Since Congress did not expressly direct us to deviate from that 
historical practice, the natural presumption is that we would take the 
revised RY 2008 standard Federal rate specified in section 1886(m)(2) 
of the Act and update it in order to calculate the RY 2009 standard 
Federal rate. In response to the comment that the MMSEA did not 
specifically grant CMS the authority to update the RY 2009 standard 
Federal rate based on the revised RY 2008 standard Federal rate 
specified in the MMSEA, we note that granting such authority was 
unnecessary. Congress had already conferred broad discretionary 
authority to the Secretary under Sec.  307(b)(1) of Public Law 106-554 
(also referenced under new section 1886(m)(1) of the Act) to provide 
for appropriate adjustment to the LTCH PPS, including updates.
    We also disagree with commenters' assertions that the proposed RY 
2009 standard Federal rate would produce a retroactive effect and is 
tantamount to retroactive rulemaking. We note that the RY 2009 standard 
Federal rate will be prospectively applied to discharges beginning on 
July 1, 2008.
    In response to the commenters' statements that we are violating our 
own existing regulations at Sec.  412.523(a)(1) which sets forth the 
methodology for calculating the annual Federal prospective payment 
rates based on the ``best Medicare data available,'' and utilizing 
``the most recent estimate of increases in the prices of an appropriate 
market basket * * *,'' we note that the revised RY 2008 standard 
Federal rate, which we are required to use under section 1886(m)(2) of 
the Act for ``discharges occurring during the rate year ending in 
2008'' was originally calculated based on those regulatory principles. 
Furthermore, the determination of $39,114.36 as the RY 2009 standard 
Federal rate was also established in full compliance with the 
established methodology set forth in our regulations at Sec.  412.523, 
using, as Congress required, a RY 2008 rate which is ``* * * the same 
as the base rate for discharges * * * occurring during the rate year 
ending in 2007'' as set forth in the RY 2009 LTCH PPS final rule (73 FR 
26812).
    After consideration of these comments, we are finalizing the 
regulatory changes implementing sections 114(e)(1) and (e)(2) of the 
MMSEA made in the May 6, 2008 interim final rule with comment period 
without modification. Specifically, we are amending Sec.  412.500 by 
revising paragraph (a) and Sec.  412.523 by revising paragraph (c)(3).

D. May 22, 2008 Interim Final Rule With Comment Period Implementing 
Sections 114(c)(1) and (c)(2) of the MMSEA Regarding Payment Adjustment 
to LTCHs and LTCH Satellite Facilities

1. Background
    Our regulations at Sec.  412.534, implemented for cost reporting 
periods beginning on or after FY 2005, address our concern that the co-
location of LTCHs with other hospital-level providers (in particular, 
acute care hospitals) as HwHs and as satellites provide an incentive 
for early discharges from the acute care hospital immediately followed 
by admissions to the on-site LTCH, resulting in two Medicare payments 
for what was essentially one episode of treatment.
    Specifically, at Sec.  412.534 of the regulations, we established 
the percentage threshold payment adjustment under which Medicare 
payments for discharges of patients from LTCHs who are admitted from 
the LTCHs' co-located hosts that exceeded a specified percentage would 
be paid the lesser of the amount otherwise payable under the LTCH PPS 
or an amount payable under the LTCH PPS that was equivalent to the 
amount that would be otherwise determined under the IPPS. At that time 
we provided for a 4-year transition to the full percentage payment 
threshold and also established higher percentage thresholds for certain 
LTCHs, that is, those located with rural, MSA-dominant or urban single 
hospitals. (For a thorough discussion of the regulations at Sec.  
412.534, see the FY 2005 IPPS final rule (69 FR 49292 through 49214).)
    In the LTCH PPS RY 2008 final rule, we extended the percentage 
threshold payment adjustment to all LTCHs that had not already been 
governed under the original policy at Sec.  412.534 (72 FR 26919 
through 26944), including grandfathered LTCH HwHs and LTCH satellites 
at Sec.  412.534(h), and non-co-located LTCHs. The policy also governed 
Medicare discharges from LTCH HwHs and satellites that were admitted 
from referral sources other than their co-located hosts at Sec.  
412.536(a)(1)(ii) and (iii). When we extended the policy in Sec.  
412.534 to grandfathered LTCH HwHs and LTCH satellite facilities in the 
RY 2008 LTCH PPS final rule, we provided for a parallel 3-year 
transition to the full percentage threshold for cost reporting periods 
beginning on or after July 1, 2007 at Sec.  412.534(h) for 
``grandfathered'' LTCHs and LTCH satellite facilities discharging 
patients admitted from their host hospitals and at Sec.  412.536(f) for 
discharges that were admitted to a LTCH or LTCH satellite facility from 
any referring hospital with which they were not co-located (72 FR 
26944).
2. Payment Adjustment to LTCHs and LTCH Satellite Facilities Specified 
by Section 114(c) of the MMSEA
    The enactment of section 114(c) of the MMSEA required several 
modifications to payment provisions applicable to various types of 
LTCHs under the regulations at Sec. Sec.  412.534 and 412.536. 
(Throughout this section, ``LTCH'' or ``LTCH satellite facility'' 
refers exclusively to ``subclause (I)'' LTCHs and LTCH satellite 
facilities, that is, LTCHs defined by section 1886(d)(1)(B)(iv)(I) of 
the Act. This is the case because the policies established at 
Sec. Sec.  412.534 and 412.536 do not apply to a ``subclause (II)'' 
LTCH defined under section 1886(d)(1)(B)(iv)(II) (69 FR 49205 and 72 FR 
26924).)
    In the May 22, 2008 interim final rule with comment period, we 
revised our regulations at Sec. Sec.  412.534 and 412.536 to implement 
the requirements of sections 114(c)(1) and (c)(2) of the MMSEA (73 FR 
29699 through 29704).
    On February 17, 2009, the ARRA of 2009 was enacted, which affected 
several of the policies established by the MMSEA that we implemented in 
the May 22, 2008 interim final rule with comment period. In the 
following discussion, we review the policies that we implemented in the 
May 22, 2008 interim final with comment period, note changes made by 
section 4302 of the ARRA, and respond to public comments that we 
received on our implementation of the MMSEA provisions that were not 
otherwise revised by the ARRA. In section XI. of this document, we have 
implemented the amendments made by section 4302 of the ARRA to certain 
provisions of section 114(c) and (d) of the MMSEA in an interim final 
rule with comment period.
    We note that the modifications to our regulations at Sec. Sec.  
412.534 and 412.536 made by section 114(c) of the MMSEA were originally 
effective for cost reporting periods beginning on or after December 29, 
2007, for a 3-year period. As discussed in greater detail in the 
interim final rule with comment period for the ARRA in section XI. of 
this document, sections 4302 (a)(1)(B) and (a)(2)(B) of the ARRA 
changed this effective date to cost reporting periods beginning on July 
1, 2007 or October 1, 2007, as applicable. Therefore, the discussion 
below focuses on policy changes made by section 114(c) of the

[[Page 43981]]

MMSEA to our regulations at Sec. Sec.  412.534 and 412.536, implemented 
in the May 22, 2008 interim final rule with comment period, that were 
otherwise unaffected by the amendments in section 4302 of the ARRA. 
(For a detailed description of each provision originally promulgated in 
section 114(c) of the MMSEA, the reader is directed to the May 22, 2008 
interim final rule with comment period (73 FR 29699, 29701 through 
29704).)
    Section 114(c) of the MMSEA provided the following changes 
affecting our regulations at Sec. Sec.  412.534 and 412.536:
    <bullet> Section 114(c)(1)(A) of the MMSEA generally exempted 
``freestanding'' LTCHs (that is, as newly defined in Sec.  
412.23(e)(5), from the percentage threshold payment adjustment at 
412.536 (or any similar provision) for a 3-year period;
    <bullet> Section 114(c)(1)(B) of the MMSEA exempted 
``grandfathered'' LTCH HwHs (that is, ``a long-term care hospital 
identified by the amendment made by section 4417(a) of the Balanced 
Budget Act of 1997 (Pub L. 105-33)'') from the applicable percentage 
threshold policy established at Sec.  412.536 or Sec.  412.534, or any 
similar provision for a 3-year period;
    <bullet> Section 114(c)(2)(A) of the MMSEA exempts certain LTCH 
HwHs and LTCH satellite facilities located in a rural area or which are 
co-located with an urban single or MSA-dominant hospital under Sec.  
412.534(d)(1), (e)(1), and (e)(4) that meet the definition of an 
``applicable long-term care hospital or satellite facility,'' from 
certain payment adjustments if no more than 75 percent of the 
hospital's Medicare discharges (other than discharges described in 
Sec.  412.534(d)(2) or (e)(3), for example, HCO cases at the referring 
hospital) are admitted from a co-located hospital for a 3-year period; 
and
    <bullet> Section 114(c)(2)(B)(i) of the MMSEA exempts an applicable 
long-term care hospital or satellite facility which is co-located with 
another hospital from certain payment adjustments under Sec.  412.534, 
if no more than 50 percent of the hospital's Medicare discharges (other 
than discharges described in paragraph (c)(3) of such section, for 
example, HCO cases at the referring hospital) are admitted from a co-
located hospital. Section 114(c)(2)(B)(ii) defined an ``applicable 
long-term care hospital or satellite facility'' as a hospital or 
satellite facility that is subject to the transition rules under Sec.  
412.534(g). We direct the reader to the May 22, 2008 interim final rule 
with comment period, which included a detailed description of those 
aspects of our regulations at Sec. Sec.  412.534 and 412.536 that were 
unaffected by the MMSEA changes and specifies which LTCHs and LTCH 
satellites remain subject to the existing regulations (73 FR 29701 
through 29704). (We note, however, that this description predated the 
amendments made by section 4302 of the ARRA to section 114(c) of the 
MMSEA, discussed in section XI. of this document.)
    As noted above, section 4302(a)(1)(B) of the ARRA modified this 
provision by separating the establishment of the 3-year exemption from 
the implementation of the percentage threshold payment adjustments at 
Sec.  412.534 and Sec.  412.536 from the date of enactment of the 
MMSEA, that is, December 19, 2007. Specifically, section 4302(a)(1)(B) 
strikes ``the date of enactment of this Act * * *'' from section 
114(c)(1) of the MMSEA, and inserts ``* * * July 1, 2007.'' This change 
is discussed in greater detail in the interim final rule with comment 
period on section 4302 of the ARRA, at section XI. of this document. 
Therefore, while regulations describing the 3-year delay in application 
of the 25 percent patient threshold payment adjustment for 
``freestanding'' LTCHs and ``grandfathered'' LTCH HwHs implemented in 
the May 22, 2008 interim final rule with comment period are being 
finalized at this time, the change in the effective date of this 
provision is being implemented through the mechanism of the interim 
final rule with comment period found in section XI. of this document.
3. Public Comments Received on the May 22, 2008 Interim Final Rule With 
Comment Period Implementing Section 114(c)(1) and (c)(2) of the MMSEA 
Regarding Payment Adjustment to LTCHs and LTCH Satellite Facilities
    We received a number of comments on the provisions of the May 22, 
2008 interim final rule with comment period implementing sections 
114(c)(1) and (c)(2) of the MMSEA, some of which were mooted by the 
subsequent enactment of the ARRA. For example, we received several 
public comments expressing concern that linking the MMSEA modifications 
to the percentage threshold payment adjustment (both the exemption from 
the policy at section 114(c)(1) of the MMSEA and the percentage 
increase at 114(c)(2) of the MMSEA) to cost reporting periods beginning 
on or after the December 29, 2007 date of enactment of the MMSEA 
forestalled relief to a significant number of LTCHs. Specifically, 
freestanding LTCHs and ``grandfathered'' LTCH HwHs with cost reporting 
periods beginning between October 1, 2007 and December 29, 2007 and to 
``applicable'' LTCH HwHs and satellites with cost reporting periods 
beginning between July 1, 2007 and December 29, 2007 would become 
eligible for the MMSEA relief at only the start of their next cost 
reporting period. Sections 4302(a)(1)(B) and (a) (2)(B) of the ARRA 
amended sections 114(c)(1) and (c)(2) of the MMSEA, respectively, 
modifying the effective dates of the changes to the percentage 
threshold payment adjustment. Therefore, comments on this issue and 
others noted throughout this section that were addressed by the ARRA 
modifications of the MMSEA will not be addressed in this final rule. 
The ARRA provisions will be discussed and implemented through the 
interim final rule with comment period in section XI. of this document.
    Comment: MedPAC indicated that it was aware that the percentage 
threshold payment policy was established ``to help ensure that LTCHs do 
not function as units of acute care hospitals, and that decisions about 
admission, treatment, and discharge in both acute care hospitals and 
LTCHs are made for clinical rather than financial reasons.'' MedPAC 
continued: ``[s]ome LTCHs--both freestanding and those with formal ties 
to other hospitals--may function as de facto step-down units of acute 
care hospitals. Research by MedPAC and others has found that patients 
who use LTCHs have shorter acute care hospital lengths of stay than 
similar patients who do not use these facilities, suggesting that LTCHs 
substitute for at least part of the acute care hospital stay.'' The 
Commission expressed concerns about the impact of such behavior on 
Medicare costs. Describing the percentage threshold policy as a 
``useful but blunt tool'' until criteria can be developed, the 
commenter further stated that ``MedPAC favors using criteria to define 
the level of care typically furnished in LTCHs (as well as in step-down 
units of many acute-care hospitals, and some specialized skilled 
nursing and inpatient rehabilitation facilities) and to help ensure 
that beneficiaries receive appropriate, high-quality care in the least 
costly setting consistent with their clinical conditions.''
    Response: We thank MedPAC for their clear description of the 
rationale for our development of the percentage threshold payment 
adjustment and for endorsing its underlying principle. We also 
appreciate MedPAC's restatement of our two-fold mandate: our 
responsibility both to establish payment systems to pay providers for 
appropriate and high quality beneficiary care as well

[[Page 43982]]

as to ensure that Medicare funds are spent wisely and appropriately. In 
establishing payment adjustments, such as the ``25 percent'' threshold 
policy, we are responding to the same data cited by the commenter above 
regarding the phenomenon of shortened acute care hospital stays 
followed by admissions to on-site or near-by LTCHs, resulting in two 
separate Medicare payments for what, in effect, was one episode of 
treatment.
    We are aware that MedPAC recommended the development of criteria 
for LTCH patients and facilities, as a more effective way to ensure 
that LTCHs meeting certain criteria treat a particular level of 
patients, specifically as set forth in its June 2004 Report to 
Congress. In response to MedPAC's recommendations, we awarded a 
contract to Research Triangle International (RTI) for a comprehensive 
evaluation of the feasibility of developing patient and facility level 
criteria for LTCHs that could distinguish LTCH patients from those 
treated in other hospitals. (Reports on this research are posted on our 
Web site at http://www.cms.hhs.gov/LongTerm Care Hospital PPS/02a_
RTIReports.asp#TopOfPage.)
    We also refer readers to the comment that MedPAC submitted on the 
RY 2009 LTCH PPS proposed rule which explained the rationale behind its 
June 2004 recommendation--``beneficiaries treated in LTCHs cost 
Medicare more than those treated in alternative settings; however, the 
cost differences narrowed considerably if LTCH care was targeted to 
patients who appeared most suitable for this level of care. That leads 
us to conclude that Medicare should ensure that LTCHs treat only 
appropriate patients.'' At that time, MedPAC took the significant step 
of amending its June 2004 recommendation by stating that:
    ``The types of cases treated by LTCHs can be (and are) treated in 
other settings, particularly in step-down units of many acute-care 
hospitals. Therefore, it is not possible (nor desirable) to develop 
criteria defining patients who can be cared for exclusively in LTCHs. 
Rather, CMS should seek to define the level of care typically furnished 
in LTCHs, step-down units of many acute-care hospitals, and some 
specialized skilled nursing facilities (SNFs) and inpatient 
rehabilitation facilities (IRFs).'' (73 FR 26829)
    A review of the annual proposed and final rules since 2005 
indicates that RTI's research led it to similar conclusions (71 FR 4704 
through 4726, 71 FR 27884, 72 FR 4818, 72 FR 4884 through 4886, 72 FR 
26947 through 26948, 73 FR 5374 through 5376, 73 FR 26829). In this 
light, we would also note that section 114(b) of the MMSEA directs the 
Secretary to conduct a study and submit a report to the Congress on the 
establishment of national LTCH facility and patient criteria. The 
statute stipulates that in conducting the study and preparing the 
report, the Secretary shall consider the recommendations made by MedPAC 
in its June 2004 report as well as ongoing work by the Secretary to 
evaluate and determine the feasibility of such recommendations. In 
accord with this requirement, a report to Congress which takes into 
consideration MedPAC's original recommendations as well as both RTI's 
and the Commission's further analyses and findings is being prepared 
for submission by our Office of Research, Development, and Information 
by early Fall.
    Comment: Six commenters challenged our implementation of the MMSEA 
changes to the percentage payment threshold policy presented in the May 
22, 2008 interim final rule with comment period. A number of the 
commenters argued that we have interpreted the statutory language in 
the ``narrowest way possible'' with the result being the creation of 
``different classes of LTCHs,'' only some of which benefit from the 
MMSEA provisions. Three commenters urged the Secretary to use 
discretion to apply both elements of sections 114(c)(1)(A) and 
(c)(2)(B) of the MMSEA to all LTCHs such that there would be a 3-year 
delay in any application of the regulations at Sec.  412.536 to any 
type of LTCH and that for 3 years the percentage threshold increase 
would apply to all co-located LTCHs and LTCH satellites governed under 
the regulations at Sec.  412.534. Several commenters urged CMS to use 
its discretionary authority to extend the percentage increase policy 
established by section 114(c)(2) to ``grandfathered'' satellites as 
described in our regulations at Sec.  412.22(h)(3)(i). One commenter 
opined that the establishment of different classes of LTCHs by section 
114(c) of the MMSEA was both inequitable and administratively 
burdensome for CMS. This commenter suggested that if CMS believed that 
the Secretary did not have the authority to interpret the relief 
provided by section 114(c) of the MMSEA to other LTCHs not addressed by 
the statute, that a legislative proposal be submitted to Congress 
urging passage of a more equitable and administratively reasonable 
policy. Two commenters also recommended that after 3 years the 
regulations at Sec.  412.536 should not be ``reimposed'' and that Sec.  
412.534 should also be retired once criteria were developed. One of 
these commenters further suggested that once the 3-year exemption for 
LTCH HwHs and ``freestanding'' LTCHs sunsets, even if we reinstate the 
percentage threshold payment policy, we should also reinstate the 3-
year transition period to the full 25 percent threshold for these 
groups.
    Response: We believe that the regulations that we published in the 
May 22, 2008 interim final rule with comment period represented an 
accurate reading and appropriate interpretation of section 114(c) of 
the MMSEA. In that provision, Congress targeted specific types of LTCHs 
for particular sorts of relief. Specifically, the language at section 
114(c)(1) of the MMSEA clearly provided a 3-year delay in application 
of Sec. Sec.  412.534 and 412.536 to only two categories of LTCHs in 
section 114(c)(1)(A) of the MMSEA to freestanding LTCHs; and in section 
114(c)(1)(B) to ``grandfathered'' LTCH HwHs.
    Similarly, the 3-year relief from the full implementation of Sec.  
412.534 that Congress granted in section 114(c)(2) in the form of 
increased thresholds from 50 percent to 75 percent for LTCHs or LTCH 
satellites co-located with a rural, urban single, or MSA-dominant 
hospital and from 25 percent to 50 percent for LTCHs and LTCH 
satellites was narrowly targeted to only those ``applicable'' LTCHs and 
LTCH satellites, that is, those ``subject to the transition rules under 
section Sec.  412.534(g) of title 42 Code of Federal Regulations.'' The 
percentage threshold payment adjustment policies were established to 
provide disincentives for LTCH and LTCH satellites to admit patients 
from referring hospitals with which they were either co-located in the 
case of Sec.  412.534 or separate from, as in the case of Sec.  
412.536, for financial rather than clinical benefit. We continue to 
believe that it is inappropriate for Medicare to generate two payments, 
one to the referring (typically) acute care hospital and one to the 
LTCH, for what is essentially one episode of treatment. Congress was 
specific in providing areas and timeframes for relief. We have 
implemented those statutory provisions based on the plain language of 
the statute. The statutory directives parallel our existing policies.
    In addition, section 4302 of the ARRA amended section 114(c) of the 
MMSEA. These amendments extended both types of relief, that is, the 3-
year delay in implementation and the increase in the percentage 
threshold, to two additional specific categories of LTCHs. 
Specifically, section 4302(a)(1)(C) of the ARRA amended section 
114(c)(1)(A) of

[[Page 43983]]

the MMSEA to provide a 3-year delay in the application of Sec.  412.536 
of the regulations, that is the 25 percent patient threshold payment 
adjustment to ``* * * a long-term care hospital, or satellite facility, 
that as of December 29, 2007, was co-located with an entity that is a 
provider-based, off-campus location of a subsection (d) hospital which 
did not provide services payable under section 1886(d) of the Social 
Security Act at the off-campus location * * *,'' as well as 
freestanding LTCHs. Additionally, section 4302(a)(2)(A) of the ARRA 
specifies that section 114(c)(2) of the MMSEA, regarding the increase 
of the percentage threshold established by the regulations at Sec.  
412.534, shall also apply to a hospital or satellite facility described 
in Sec.  412.22(h)(3)(i) of the regulations (that is, grandfathered 
satellites). (Section 4302 of the ARRA is being implemented through the 
interim final rule with comment period in section XI. of this 
document.) These amendments to the MMSEA once again demonstrated 
Congress' ability to act in a clear and deliberate manner in providing 
relief for particular categories of LTCHs and LTCH satellites while 
leaving other aspects of Sec. Sec.  412.534 and 412.536 in place.
    For these reasons, we do not believe that a legislative proposal to 
Congress urging further expansion of either the 3-year delay in 
implementation or the 3-year increase in the percentage threshold is 
either necessary or appropriate. Furthermore, at present, we do not 
believe that the MMSEA policy changes or the ARRA amendments constitute 
an additional administrative burden for us. In response to the 
commenters' recommendations that both Sec. Sec.  412.534 and 412.536 be 
retired once LTCH criteria are established, we are not considering such 
an action at this time. As noted above, the study on ``the 
establishment of national long-term care hospital facility and patient 
criteria * * *'' and the resulting report to Congress required by 
section 114(b) of the MMSEA is presently under way by our Office of 
Research, Development, and Information.
    Finally, with regard to the suggestion that once the 3-year 
exemption from Sec. Sec.  412.534 and 412.536 sunsets, that we 
reinstate the 3-year transition period to the full 25 percent threshold 
payment adjustment for freestanding LTCHs and ``grandfathered'' LTCH 
HwHs, we would note that we typically provide phase-ins or transitions 
to the full implementation of new or revised payment policies in order 
to give providers more time than the 60-day (or in some cases, 30-day) 
period between publication of our final rule and the implementation 
date of the new policies in order to fully understand them and to make 
whatever administrative and financial adjustments that are required. 
``Freestanding'' LTCHs and ``grandfathered'' LTCH HwHs have had notice 
of our policies at Sec.  412.534(h) and Sec.  412.536 of the 
regulations since they were implemented for cost reporting periods 
beginning on or after July 1, 2007. Despite the fact that these 
policies were suspended for these types of LTCHs until cost reporting 
periods beginning on or after July 1, 2010 (resulting from the 
amendments made by section 4302(a)(1)(B) of the ARRA to section 
114(c)(1) of the MMSEA), the LTCH industry has full knowledge and 
understanding of the percentage threshold payment adjustment. 
Therefore, we do not intend to propose such an action as we do not 
believe it is either necessary or appropriate.
    Comment: Two commenters asserted that we incorrectly interpreted 
the increase in percentage thresholds for LTCHs or LTCH satellites co-
located with MSA-dominant hospitals in section 114(c)(2)(A) of the 
MMSEA. The commenters argued that the statute sets the threshold 
percentage at 75 percent, but that under the policy that we set forth 
in the May 22, 2008 interim final rule with comment period, we inserted 
the 75 percent specified by the statute into the existing payment 
formula for LTCHs or LTCH satellites co-located with MSA-dominant 
hospitals in the regulations at Sec.  412.534. In the interim final 
rule with comment period, we revised Sec.  412.534(e)(2)(ii), which 
stated:
    ``(ii) Payments for long-term care hospitals and long-term care 
hospital satellite facilities subject to paragraph (g) of this section 
are determined using the methodology specified in paragraph (e)(1) of 
this section except that 75 percent is substituted for 50 percent.''
    The methodology for setting the threshold for LTCHs HwHs or LTCH 
satellites co-located with MSA-dominant hospitals, as set forth in the 
regulations at Sec.  412.534(e)(1), states, in pertinent part:
    ``(ii) For purposes of paragraph (e)(1)(i) of this paragraph, the 
percentage used is the percentage of total Medicare discharges in the 
Metropolitan Statistical Area in which the hospital is located that are 
from the co-located hospital for the cost reporting period for which 
the adjustment was made, but in no case is less than 25 percent or more 
than 50 percent.''
    The commenters urged us to revisit our interpretation of section 
114(c)(2)(A) of the MMSEA and to revise our regulations at Sec.  
412.534(e)(1)(ii) accordingly.
    Response: We agree with the commenters' reading of the statute. The 
way in which we revised the regulations would appear to indicate that 
establishing the appropriate percentage threshold for LTCHs HwH or LTCH 
satellites co-located with a MSA-dominant hospitals set by the 
regulatory language at Sec.  412.534 (e)(2)(ii) of the regulations 
referencing (e)(1)(ii) after the enactment of the MMSEA, would be based 
on the percentage ``* * * of total Medicare discharges in the 
Metropolitan Statistical Area in which the hospital is located that are 
from the co-located hospital for the cost reporting period for which 
the adjustment was made, but in no case is less than 25 percent or more 
than 50 percent.'' We agree that the section 114(c)(2)(A) of the MMSEA 
establishes the threshold for such LTCH facilities at 75 percent for 3-
years, and we are making an appropriate technical correction to the 
regulations at Sec.  412.534(e)(2)(ii). (We also note that section 
4302(a)(2)(B) of the ARRA, discussed in our interim final rule with 
comment period in section XI. of this document, modified the effective 
date of this provision from cost reporting periods beginning on or 
after December 29, 2007, to cost reporting periods beginning on or 
after October 1, 2007, or July 1, 2007 in the case of satellite 
facilities described in Sec.  412.22(h)(3)(i) of the regulations, that 
is grandfathered satellite facilities.)
    Comment: Two commenters challenged our interpretation of section 
114(c)(1)(A) of the MMSEA, which suspends the application of the 
percentage threshold payment adjustment at Sec.  412.536 of the 
regulations (or any similar provision) to ``freestanding'' LTCHs for 3 
years. The commenters asserted that this provision should also apply to 
discharges from LTCHs and LTCH satellites that were admitted from 
hospitals which are co-located with another LTCH or LTCH satellite. One 
commenter additionally rejects ``CMS' assertion'' that a LTCH located 
on a different campus from a referring hospital is functioning as a 
step-down unit. This commenter argues that our regulations at Sec.  
412.534 were directed at movement of patients between co-located LTCHs 
admitted from their host hospitals and our regulations at Sec.  412.536 
were developed to address the relationship between LTCH hospitals that 
were ``freestanding'' and their referring hospitals. This commenter 
additionally rejects ``CMS' assertion'' that a LTCH located on a 
different campus from a referring hospital can function as ``a

[[Page 43984]]

step-down unit'' of the referring hospital. One of the commenters 
requested that even if CMS does not exempt LTCH facilities co-located 
with a different host from the regulations at Sec.  412.536 for 3 
years, that CMS include LTCHs that are located on hospital campuses 
where there is no inpatient acute care hospital in the 3-year exemption 
from the regulations under Sec.  412.536. Another commenter urged CMS 
to revisit our definition of ``freestanding'' at Sec.  412.23(e)(5) of 
our regulations so that a LTCH or LTCH satellite that was co-located 
with a provider that did not offer inpatient care in the building or 
campus where the LTCH was located, could still be considered 
``freestanding'', and therefore, covered by the 3-year exemption from 
the regulations at Sec.  412.536, maintaining that this was Congress' 
intent in section 114(c)(1)(A) of the MMSEA.
    Response: We disagree with the commenters' assertion that LTCH HwHs 
that are co-located with another hospital, as defined in our 
regulations at Sec.  412.22(e) should be considered ``freestanding'' 
regarding patients admitted from referring hospitals with which they 
are not co-located. We believe that our existing regulations at Sec.  
412.22(e) which identify a HwH as ``* * * a hospital that occupies 
space in a building also used by another hospital, or in one or more 
separate buildings located on the same campus as buildings used by 
another hospital * * *'' are clear and unambiguous. Section 
114(c)(1)(A) of the MMSEA is directed at ``freestanding long-term care 
hospitals,'' and is equally clear and unambiguous. Although we 
initially focused on the movement of patients between ``host'' acute 
care hospitals and the co-located LTCH HwHs or satellites when we 
implemented the regulations at Sec.  412.534 in the FY 2005 IPPS final 
rule (69 FR 48916), a comment that we received from MedPAC at that 
time, discussed previously in this section, identified similar problems 
between acute care hospitals and LTCHs with which they were not co-
located (69 FR 49211).
    We first expressed our concerns in the RY 2006 LTCH PPS final rule 
(71 FR 27798) that some LTCHs and referring hospitals (typically, acute 
care hospitals) with which they were not co-located had 
``arrangements'' that, in effect, allowed both facilities to benefit 
financially from an early acute care discharge and admission to the 
LTCH. We recognized that these ``arrangements'' were strikingly similar 
to what we knew occurred between a ``host'' acute care hospital and its 
on-site LTCH, that is, as a step-down unit (71 FR 27878). At that time, 
we noted that we ``* * * had become increasingly aware that the intent 
of our existing policy is being thwarted by creative patient-shifting 
in some communities where there is more than one LTCH HwH or LTCH 
satellite. We have come to understand, based upon specific inquiries 
from LTCHs, and their attorneys or agents, and also from questions 
posed by our fiscal intermediaries (FIs), that some host hospitals 
within the same community are arranging to cross-refer to another's co-
located LTCH * * *.'' (71 FR 27878). It was with these concerns in 
mind, that in the RY 2008 LTCH PPS proposed and final rules, our 
preamble discussion was entitled ``Expansion of Special Payment 
Provisions for LTCH Hospitals Within Hospitals (HwHs) and LTCH 
Satellites: Expansion of the 25 Percent Rule to Certain Situations Not 
Currently Covered Under Existing Sec.  412.534'' (72 FR 4809; 72 FR 
26919). Furthermore, when we developed our regulation at Sec.  412.536 
in the RY 2007 LTCH PPS final rule (72 FR 26870), we entitled the 
regulation, ``Special payment provisions for long-term care hospitals 
and satellites of long-term care hospitals that discharged Medicare 
patients admitted from a hospital not located in the same building or 
on the same campus as the long-term care hospital or satellite of the 
long-term care hospital.'' Clearly, it was always our intention for 
Sec.  412.536 to apply the percentage threshold payment adjustment to 
patient shifting between LTCHs and LTCH satellites and referring 
hospitals with which they were not co-located, a fact that further 
supports our implementation of section 114(c)(1) of the MMSEA.
    In response to the commenter who requested that even if we were not 
willing to exempt LTCHs co-located with a different host from the 
percentage threshold payment adjustment at Sec.  412.536, we should 
include co-located LTCHs that are situated on hospital campuses where 
there is no inpatient acute care hospital in the 3-year exemption from 
regulation under Sec.  412.536, we would note section 4302(a)(1)(C) of 
the ARRA addressed this concern and amended section 114(c)(1)(A) of the 
MMSEA to specify that LTCHs and LTCH satellites meeting this 
description be exempted from the percentage threshold payment 
adjustment at Sec.  412.536 or any similar provision. (We discuss this 
provision in the interim final rule with comment period for section 
4203 of the ARRA, in section XI. of this document.)
    Finally, in response to the commenter that urged us to revisit our 
definition of ``freestanding'' at Sec.  412.23(e)(5) so that a LTCH or 
LTCH satellite facility that was co-located with a provider that did 
not offer inpatient care in the building or campus where the LTCH was 
located, could still be considered ``freestanding,'' so that it would 
be exempted from compliance with Sec.  412.536, we would note that such 
a change would directly contradict our long-standing, existing 
definitions of HwHs and satellites at Sec.  412.22(e) and Sec.  
412.22(h), respectively. At Sec.  412.22(e), we define a HwH as ``* * * 
a hospital that occupies space in a building also used by another 
hospital, or in one or more separate buildings located on the same 
campus as buildings used by another hospital * * *'' At Sec.  
412.22(h),we define a satellite as ``* * * a part of a hospital that 
provides inpatient services in a building also used by another 
hospital, or in one or more entire buildings located on the same campus 
as buildings used by another hospital.'' Neither of these definitions 
limits the buildings with which a HwH or a satellite is co-located to 
solely providing inpatient services.
    When Congress enacted the ARRA, it amended section 114(a)(1)(A) of 
the MMSEA to delay the application of the percentage threshold payment 
adjustments at Sec. Sec.  412.534 and 412.536 to certain LTCHs for 3-
years. Specifically, at section 4302(a)(1)(C), the statute includes the 
following type of facility: ``* * *. a LTCH or satellite facility, that 
as of December 29, 2007, was co-located with an entity that is a 
provider-based, off campus location of a subsection (d) hospital which 
did not provide services payable under section 1886(d) of the Social 
Security Act at the off-campus location * * *'' The statute expressly 
targets ``services payable under section 1886(d) of the Act,'' not 
``inpatient services,'' in general and the plain language of the 
statute does not indicate that such a LTCH or satellite facility would 
be considered ``freestanding.'' Rather, the amendment identifies 
another category of LTCH or satellite facility that would be exempt 
from the percentage threshold payment adjustment for 3 years. 
Therefore, we believe that, in amending section 114(c)(1)(A) of the 
MMSEA through section 4302(a)(1)(C) of the ARRA, Congress expanded the 
3-year exemption from the percentage threshold payment adjustment to a 
narrow category of LTCHs, while still maintaining the policy for LTCHs 
otherwise meeting the definition of either a HwH at Sec.  412.22(e) or 
a satellite at Sec.  412.22(h) of the regulations. Because Congress did 
not further

[[Page 43985]]

expand this exemption by way of statutory amendment, we do not believe 
that it would be appropriate for us to do so through the regulatory 
process.
    Comment: Several commenters requested guidance regarding the 
procedures that CMS has in place to implement the changes to the 
percentage threshold payment adjustment required by the MMSEA. In 
particular, some of these commenters asked how CMS would recommend that 
they get information regarding the discharge percentages of MSA-
dominant referring hospitals if the LTCH is serviced by a different 
fiscal intermediary/MAC than the referring hospital.
    Response: We have provided our fiscal intermediaries/MACs with 
guidance on the actual implementation of this payment adjustment, which 
takes place upon cost report settlement, when all of the LTCHs data 
from a particular cost reporting period has been submitted and is being 
evaluated. Regarding the question of how a LTCH or satellite can 
acquire information about its MSA-dominant referring hospital's 
``market share'' of Medicare patients if the facilities are serviced by 
a different fiscal intermediary/MAC, we have been informed that portals 
to communicate this figure, and much more, are typically open on an 
ongoing basis among hospitals that have referral arrangements, and 
therefore, we would encourage the sharing of such information for the 
benefit of both the discharging and the admitting hospitals.
    In compliance with section 114(c) of the MMSEA and section 4302 of 
the ARRA, we have revised Sec. Sec.  412.534 and 412.536 of the 
regulations to implement the 3-year delay in the application of the 
percentage patient threshold payment adjustment to ``freestanding and 
grandfathered LTCHs'' and the 3-year revision in the percentage payment 
thresholds adjustments for ``applicable'' LTCHs and satellite 
facilities. We have also revised the regulations at Sec.  412.534(b) in 
order to clarify the effective dates of the percentage patient 
threshold policy for discharges from a LTCH HwH or from a LTCH 
satellite that were admitted from the hospital with which it is co-
located.
    We are finalizing the regulatory changes made in the May 22, 2008 
interim final rule with comment period at Sec. Sec.  412.534 and 
412.536, which implemented the provisions of section 114(c) of the 
MMSEA that were otherwise unchanged by section 4302 of the ARRA. We 
also are implementing section 4302 of the ARRA through an interim final 
rule with comment period in section XI. of this document.

E. May 22, 2008 Interim Final Rule With Comment Period Implementing 
Section 114(d) of the MMSEA Regarding Moratorium on the Establishment 
of LTCHs, LTCH Satellite Facilities, and on the Increase in Number of 
Beds in Existing LTCHs or LTCH Satellite Facilities

1. Background
    Section 114(d) of the MMSEA provides a 3-year moratorium with two 
distinct aspects, one regarding the establishment of new LTCHs and LTCH 
satellite facilities, and the other regarding the increase of hospital 
beds in existing LTCHs and LTCH satellite facilities. Specifically, 
section 114(d)(1)(A) of the MMSEA provides that the Secretary shall 
impose a moratorium ``subject to paragraph (2), on the establishment 
and classification of a long-term care hospital or satellite facility, 
other than an existing long-term care hospital or facility.'' Section 
114(d)(1)(B) of the MMSEA provides that, the Secretary shall impose a 
moratorium ``subject to paragraph (3), on an increase of long-term care 
hospital beds in existing long-term care hospitals or satellite 
facilities.''
    Sections 114(d)(2) and (d)(3) of the MMSEA provide for exceptions 
to both moratoria imposed by section 114(d)(1) of the MMSEA. The three 
exceptions specified in section 114(d)(2) of the MMSEA apply 
exclusively to the establishment and classification of certain LTCHs or 
LTCH satellite facilities while the exception at section 114(d)(3)(A) 
of the MMSEA only applies to the moratorium on increases in beds at 
certain existing LTCHs or LTCH satellites facilities. In the May 22, 
2008 interim final rule with comment period, we implemented section 
114(d) of the MMSEA.
    Section 4302(b) of the ARRA amended section 114(d)(3)(A) of the 
MMSEA to establish an additional exception to the moratorium on 
increases in beds at LTCHs and LTCH satellite facilities at section 
114(d)(3)(A) by stating that ``* * * if the hospital or facility 
obtained a certificate of need for an increase in beds that is in a 
State for which certificate of need is required and that was issued on 
or after April 1, 2005, and before December 29, 2007''. This additional 
exception is being implemented through the interim final rule with 
comment period that is found in section XI. of this document.
2. Provisions of the May 22, 2008 Interim Final Rule With Comment 
Period Implementing Section 114(d) of the MMSEA That Established 
Moratoria on New LTCHs and LTCH Satellite Facilities and on Bed 
Increases in Existing LTCHs and LTCH Satellite Facilities
    Section 114(d)(1)(A) of the MMSEA provides for a 3-year moratorium 
effective beginning on the date of enactment of the MMSEA, December 29, 
2007, through December 28, 2010, on the establishment and 
classification of a long-term care hospital or satellite facility, 
other than an existing LTCH or facility. (The term ``existing,'' with 
respect to a hospital or satellite facility, is defined in section 
114(d)(4) of the MMSEA as ``a hospital or satellite facility that 
received payment under the provisions of subpart O of part 412 of title 
42, Code of Federal Regulations, as of the date of the enactment of 
this Act.'') Section 114(d)(2) of the MMSEA specified that the 
moratorium on the establishment and classification of a LTCH or LTCH 
satellite facility does not apply to a LTCH that, as of December 29, 
2007, met one of the following three exceptions:
    <bullet> The LTCH began ``its qualifying period for payment as a 
long-term care hospital under section 412.23(e) of title 42, Code of 
Federal regulations, on or before the date of enactment of this Act'' 
(section 114(d)(2)(A) of the MMSEA).
    <bullet> The LTCH has a binding written agreement with an outside, 
unrelated party for the actual construction, renovation, lease, or 
demolition for a LTCH and has expended before December 29, 2007, at 
least 10 percent of the estimated cost of the project or, if less, 
$2,500,000 (section 114(d)(2)(B) of the MMSEA).
    <bullet> The LTCH has obtained an approved certificate of need in a 
State where one is required on or before December 29, 2007 (section 
114(d)(2)(C) of the MMSEA).
    In the May 22, 2008 interim final rule with comment period, we 
noted that in implementing the provisions of section 114(d) of the 
MMSEA, we found that, in light of the unique nature of LTCHs as a 
category of Medicare providers, some of the terminology in the 
provision was internally inconsistent. Therefore, in that interim final 
rule with comment period, we included a comprehensive description of 
inconsistent terminology and our interpretations of the provisions in a 
way we believed reasonably reconciled seemingly inconsistent provisions 
and that resulted in an application of the provisions that is logical 
and workable and we would

[[Page 43986]]

direct the reader to that discussion (73 FR 29705).
    The first exception to the moratorium at section 114(d)(2)(A) of 
the MMSEA addressed the circumstance of an existing hospital that was 
already in its qualifying period for LTCH designation, as governed by 
our regulations at Sec.  412.23(e) on or before December 29, 2007 (73 
FR 29705).
    At section 114(d)(2)(B) of the MMSEA, a second exception to the 
moratorium was made for a long-term care hospital that, as of the date 
of the enactment of the MMSEA (December 29, 2007), satisfied the two 
prongs of the exception: (1) it has a binding written agreement with an 
outside, unrelated party for the actual construction, renovation, 
lease, or demolition for a long-term care hospital; and (2) it has 
expended, before the date of enactment of this Act, at least 10 percent 
of the estimated cost of the project (or, if less, $2,500,000).''
    In the May 22, 2008 interim final rule with comment period, we 
implemented this provision in the following manner: With regard to the 
first prong, we believe that the use of the term ``actual'' in the 
context of the, ``actual construction, renovation, lease, or 
demolition,'' indicates that the provision focused only on the specific 
accomplishments cited in the MMSEA and did not include those that were 
contemplated or had not yet been executed. We noted that, although we 
were aware that a hospital or entity could have entered into binding 
written agreements regarding services and items (for example, 
feasibility studies or land purchase) and incur costs for those 
services and items prior to actual construction, renovation, lease or 
demolition, Congress did not include those services or items in the 
statute as a basis for the exception (73 FR 29706).
    With respect to the second prong, we understood the statute to 
specify that the hospital or entity must have expended before December 
29, 2007, at least 10 percent of the estimated cost of the project (or, 
if less, $2.5 million). By ``cost of the project,'' we believe the 
statute refers to the activities enumerated in the first prong: ``The 
actual construction, renovation, lease, or demolition for a long-term 
care hospital.'' The statute requires that the hospital or entity spend 
the amount specified in the statute on the actual construction, 
renovation, lease, or demolition for the contemplated LTCH.
    Furthermore, because the statute uses the phrase ``has expended'' 
we believe that the statute required that a hospital or entity would 
have actually transferred funds as payment for the project as opposed 
to merely obligating capital and posting the cost of the project on its 
books as of December 29, 2007. We believe that the provision addressed 
the concept of ``obligate'' in the first prong of the test where the 
statute specifies ``a binding written agreement * * * for the actual 
construction, renovation, lease, or demolition of the long-term care 
hospital* * *'' and there is no reason to believe that the second prong 
of the test, which requires the ``expenditure'' of 10 percent of the 
project or if less, $2,500,000, was intended as a redundancy. We noted 
that the ability to post the expense on the hospital's or entity's 
books could be satisfied by merely having a binding written agreement 
under the first prong of section 114(d)(2)(B) of the MMSEA. The fact 
that a second requirement was included that involved an expenditure 
indicated to us that an additional threshold had to be met.
    Finally, in the May 22, 2008 interim final rule with comment 
period, we stated that we believed that section 114(d)(2)(C) of the 
MMSEA provided an exception for a long-term care hospital that, as of 
the date of the enactment of the MMSEA, ``has obtained an approved 
certificate of need, in a State where one is required, on or before the 
date of the enactment of this Act.'' We do not believe that the 
provision limited the exception to only an existing long-term care 
hospital that had obtained an approved certificate of need to create a 
new satellite of the LTCH. We noted that in many instances, prior to 
being classified as a LTCH, a hospital is built by an entity with the 
express intention of making it into a LTCH as soon as possible. In 
those instances, it is not uncommon for the entity to obtain a 
certificate of need from the State prior to the development of the 
hospital (73 FR 29706).
    We understood the certificate of need exception to apply to a 
hospital or entity that was actively engaged in developing a LTCH, as 
evidenced by the fact that either an entity that wanted to create a 
LTCH but did not exist as a hospital as of December 29, 2007, had 
obtained a certificate of need for a hospital by the date of enactment, 
or that an existing hospital had obtained a certificate of need to 
convert the hospital into a new LTCH by that date. However, this 
exception would not apply to a hospital that was already in existence 
prior to the date of enactment and that had previously obtained an 
approved certificate of need for a hospital (other than a LTCH) on or 
before December 29, 2007. The fact that a hospital may have had a 
certificate of need issued to it years before December 29, 2007, to 
operate a hospital (other than a LTCH) would not be a reason to grant 
it an exception, unless that certificate of need was specifically for a 
LTCH. Since the certificate of need process is controlled at the State 
level, in determining whether the hospital or entity has obtained an 
approved certificate of need on or before December 29, 2007, we stated 
that we would look to the State for that determination (73 FR 29706).
3. Public Comments Received on the May 22, 2008 Interim Final Rule With 
Comment Period Provisions Implementing the Exception to the Moratorium 
on the Increase in Number of LTCHs Beds in Existing LTCHs and LTCH 
Satellite Facilities
    In the May 22, 2008 interim final rule with comment period, we 
implemented section 114(d)(1)(B) of the MMSEA, which imposed a 
moratorium on existing LTCHs or LTCH satellite facilities for the 3-
year period beginning December 29, 2007, through December 28, 2010. The 
moratorium was on an increase of LTCH beds in existing LTCHs or LTCH 
satellite facilities. Therefore, during the 3-year moratorium, an 
existing LTCH or LTCH satellite facility would not be able to increase 
the number of beds in excess of the number of Medicare-certified beds 
at the hospital on December 29, 2007. Section 114(d)(3) of the MMSEA 
provided one exception to the moratorium on an increase of beds. 
Specifically, section 114(d)(3)(A) of the MMSEA states that the 
moratorium on an increase in beds shall not apply if an existing LTCH 
or LTCH satellite facility is ``located in a State where there is only 
one other long-term care hospital; and requests an increase in beds 
following the closure or the decrease in the number of beds of another 
long-term care hospital in the State.''
    Section 114(d)(3)(B) of the MMSEA also specified that the exception 
to the moratorium on the increase in bed numbers for existing LTCHs or 
LTCH satellite facilities did not apply to the existing limit on the 
number of beds in ``grandfathered'' LTCH HwHs as specified at Sec.  
412.22(f), and LTCH satellite facilities, as specified at Sec.  
412.22(h)(3) of the regulations. Under Sec.  412.22(f) and Sec.  
412.22(h)(3), respectively, ``grandfathered'' LTCH HwHs and LTCH 
satellite facilities, (that is, HwHs that were in existence on or 
before September 30, 1995, and LTCH satellite facilities that were in 
existence on or before September 30, 1999, and that meet certain 
specified conditions) are exempted from compliance with ``separateness 
and control'' policies as

[[Page 43987]]

long as they do not increase their bed numbers. (See the FY 2007 IPPS 
final rule (71 FR 48106 through 48115).) Therefore, even if a 
``grandfathered'' LTCH HwH or LTCH satellite facility was located in a 
State where there was only one other LTCH and it requests an increase 
in beds following the closure or the decrease in the number of beds of 
another long-term care hospital in the State, it would not be able to 
maintain its grandfathered status if it would increase the number of 
beds at the LTCH under this exception.
    We noted in the May 22, 2008 interim final rule with comment period 
that decisions regarding whether a specific situation would be 
considered to meet the exceptions to the establishment and 
classification of new LTCHs or new LTCH satellite facilities or the 
exceptions on increasing the number of beds in existing LTCHs or LTCH 
satellite facilities will be made on a case-by-case basis by the 
applicant's fiscal intermediary/MAC and the CMS Regional Office (RO). 
After the publication of the May 22, 2008 interim final rule with 
comment period, we issued specific instructions on implementing the 
moratorium in the form of memoranda to State Survey Agency Directors, 
CMS ROs, and fiscal intermediaries/MACs, the policy was added to the 
manual in Pub. 100-20 as change request (CR) 6172, and we provided 
specific policy interpretations and guidance to the regional offices.
    As discussed more fully in section XI. of this document, section 
4302(b) of the ARRA amended section 114(d)(3)(A) of the MMSEA by 
establishing an additional exception to the moratorium on the increase 
in beds at certain LTCHs and LTCH satellites. Specifically, this 
exception allows an existing LTCH to expand the number of beds at the 
hospital or satellite facility if it had obtained a certificate of need 
(CON) for an increase in beds in a State for which such a certificate 
of need is required and that was issued on or after April 1, 2005, and 
before December 29, 2007. This additional exception is being 
implemented through the interim final rule with comment period in 
section XI. of this document by amending Sec.  412.23(e)(7) of the 
regulations. Accordingly, we will not address those comments that urged 
us to establish this exception through regulation.
    In the May 22, 2008 interim final rule with comment period, we 
revised our regulations at Sec.  412.23 to include a description of the 
moratorium on the establishment of new LTCHs and LTCH satellites and 
the moratorium on increasing the number of beds in existing LTCHs and 
existing LTCH satellites and statutory exceptions at Sec. Sec.  
412.23(e)(5) and (e)(6). Additionally, in Sec.  412.23(e)(5), we 
defined a freestanding LTCH.
    Comment: Two commenters requested that CMS clarify its 
interpretation of section 114(d)(2)(C) of the MMSEA, which allowed the 
CON exception to apply to the development of a satellite. The 
particular circumstance described by the commenters involved issues of 
relocation of a planned satellite, for which a CON had been issued 
prior to December 29, 2007, but the planned host hospital had since 
been closed. Since the original CON had been issued prior to the 
enactment of the MMSEA, the commenters asked for an advance 
determination to allow the development of the planned satellite located 
in a hospital that has not as yet been determined.
    Response: In the May 22, 2008 interim final rule with comment 
period, regarding the CON exception for the establishment of new LTCHs 
and LTCH satellites we stated ``[s]ince the certificate of need process 
is controlled at the State level, in determining whether the hospital 
or entity has obtained an approved certificate of need on or before 
December 29, 2007, we will look to the State for that determination'' 
(73 FR 29706). Regarding the specific situation presented by the 
commenters, we would note that when we were first made aware of this 
problem, we were in contact with the State agency and were informed 
that the LTCH that had obtained the CON for the planned satellite had 
not yet found a new ``host'' for its planned satellite. We have 
evaluated the situation that the commenters described in concert with 
the State agency responsible for issuing the CON and have instructed 
State agencies that if a CON has been modified, revised, amended or 
otherwise altered, the State Survey Agency would need to indicate to 
CMS whether it considered this modified, revised, amended or otherwise 
altered CON to be the ``same'' CON for purposes of meeting the 
requirements for the exception to the moratorium. The CMS RO will 
review and evaluate the CON documentation and determine whether it 
qualifies for the exception.
    Comment: Two commenters endorsed CMS' interpretation of the 
statutory language in section 114(d) of the MMSEA, which included 
applying the provisions of the section to satellite facilities and/or 
to ``an entity that will develop a hospital that will ultimately become 
a LTCH.''
    Response: We thank the commenters for their support.
    Comment: One commenter stated that the exception to the moratorium 
stipulated in section 114(d)(2)(A) of the MMSEA for a LTCH in `` * * * 
qualifying period for payment under section 412.23(e) * * * on or 
before the date of enactment of this Act'' should be extended to 
include satellite facilities if it can be demonstrated that the 
satellite was under development prior to December 29, 2007.
    Response: The exception to the moratorium specified at section 
114(d)(2)(A) of the MMSEA is not applicable to a LTCH satellite because 
there is no qualifying period for the establishment of a satellite (73 
FR 29705). Although there are delineated requirements that a LTCH must 
meet regarding the establishment of a satellite at Sec.  412.22(h)(2) 
of the regulations, the ``qualifying period'' for a LTCH, is 
established in our regulations at Sec.  412.23(e). Specifically, in 
order for to be designated as a LTCH, a facility must have a ``provider 
agreement under Part 489 [of the Medicare regulations] to participate 
as a hospital'' and the hospital must have a Medicare average length of 
stay greater than 25 days based on data for the hospital's most recent 
complete cost report. Once length of stay data are submitted to the 
hospital's fiscal intermediary or MAC and verified, (unless the 
hospital is co-located with another hospital, and then it must also 
meet the HwH criteria at Sec.  412.22(e) of the regulations), it will 
be designated as a LTCH and paid under the LTCH PPS beginning with its 
next cost reporting period. The period of time beginning when a 
hospital begins participation in the Medicare program as a hospital and 
when it is designated as an LTCH is the ``qualifying'' period. A LTCH 
(or other excluded hospital) may establish a satellite if it 
demonstrates to its fiscal intermediary/MAC that it independently meets 
the regulatory requirements for the provider-type of the hospital of 
which it is a part at Sec.  412.22(h)(ii) and also meets the 
separateness and control requirements set forth in Sec.  
412.22(h)(iii). Because the LTCH of which the satellite is a part has 
met the regulatory requirements at Sec.  412.23(e), there would be no 
``qualifying period'' for a LTCH satellite.
    A new LTCH satellite, however, could qualify for an exception to 
the moratorium if it meets either of the exceptions established at 
section 114(d)(2)(B) or section 114(d)(2)(C) of the MMSEA and 
implemented in our regulations at Sec. Sec.  412.23(e)(6)(ii)(B) and 
412.23(e)(6)(ii)(C), respectively. Either of these exceptions could be 
applicable to a LTCH satellite. The regulations at Sec.  
412.23(e)(6)(ii)(B) specify that the

[[Page 43988]]

moratorium is not applicable if on or before December 29, 2007, the 
LTCH ``[h]as a binding written agreement with an outside, unrelated 
party for the actual construction, renovation, lease or demolition for 
a long-term care hospital; and [h]as expended, before December 29, 
2007, at least 10 percent (or, if less, $2.5 million) of the estimated 
cost of the project specified in paragraph (ii)(B)(1) of this 
paragraph.'' At Sec.  412.23(e)(6)(ii)(C) of our regulations, we 
specify that the moratorium is not applicable if on or before December 
29, 2007, the LTCH ``[h]ad obtained an approved certificate of need 
from the State, when required by State law.'' Therefore, although the 
``qualifying period'' exception at section 114(d)(2)(A) to the 
moratorium is not relevant to the development of a LTCH satellite, it 
is possible that a new satellite could be completed under the 
moratorium if either of the above described exceptions were met.
    Comment: Five commenters disagreed with CMS' interpretation of 
section 114(d)(2)(B) of the MMSEA. This section provides for an 
exception to the moratorium that specifies that the moratorium shall 
not apply to a LTCH (or satellite) that as of the date of enactment of 
the MMSEA (December 29, 2007) ``has a binding written agreement with an 
outside, unrelated party for the actual construction, renovation, 
lease, or demolition for a long-term care hospital, and has expended 
before the date of the enactment of this Act, at least 10 percent of 
the estimated cost of the project (or if less, $2,500,000). * * *'' 
Three commenters argued that the sentence structure indicates that the 
two prongs of this exception are separate and that the second prong is 
not dependent upon the first. Under their interpretation, the ``binding 
contract'' clause is entirely separate from the ``has expended'' 
clause. Furthermore, the commenters stated that when Congress chose the 
term ``expended'' to describe the level of financial commitment 
required on the ``project'' in order to meet the second prong's test, 
the commenters believed that Congress meant to use the word 
``obligated.'' Additionally, the five commenters stated that under 
their ``correct'' interpretation, Congress intended that the ``* * * at 
least 10 percent of the estimated cost of the project (or, if less, 
$2,500,000)'' refers to the entire costs of developing the planned 
LTCH, not the four activities specified in the first prong, that is, 
``the actual construction, renovation, lease, or demolition for a long-
term care hospital * * *.'' Several commenters argued that feasibility 
studies, land purchase, architectural fees, attorneys fees, appraisals, 
purchase of right-of-way, as well as other activities that occur during 
the development of a hospital, should be included in this definition. 
Several members of Congress urged CMS to extend the moratorium 
exceptions to several LTCHs in their districts that would otherwise not 
meet the second prong of the exception under our interpretation and 
note that opening these additional LTCHs is in the public interest. Two 
hospitals in a partnership to develop a LTCH and their Congressional 
representatives stated that, unless CMS revises its interpretation to 
include the purchase of land, these partnered hospitals would be 
subject to a great financial burden and their community would be 
deprived of a needed service.
    Response: We continue to believe that our interpretation of section 
114(d)(2)(B) of the MMSEA, as implemented in the May 22, 2008 interim 
final rule with comment period, accurately implements the statute in 
establishing an exception to the moratorium on new LTCHs and 
satellites. The policy takes into consideration, as of the date of 
enactment of the statute, the ``actual'' level of financial 
expenditures on the four specific, verifiable activities taken in 
preparation of the development of a LTCH or satellite that are cited in 
the statute. This exception states that the moratorium shall not apply 
to ``a long-term care hospital that as of the date of the enactment of 
this Act--* * *. (B) has a binding written agreement with an outside, 
unrelated party for the actual construction, renovation, lease, or 
demolition for a long-term care hospital, and has expended, before the 
date of the enactment of this Act, at least 10 percent of the estimated 
cost of the project (or, if less, $2,500,000).* * *''
    We described this exception in the May 22, 2008 interim final rule 
with comment period, as having two prongs. The first prong is the 
clause prior to the ``and,'' that is, the ``binding written agreement 
with an outside, unrelated party for the `actual' construction, 
renovation, lease, or demolition * * *.'' The second prong is the ``has 
expended'' clause and its limit, following the term ``and.'' We 
disagree with the commenters' assertions that in the second prong the 
``has expended'' clause (following the ``and'' in the above statutory 
text) is separate from the first prong and not dependent upon it. The 
conjunctive ``and'' clearly makes meeting both prongs a requirement to 
qualify for this exception to the moratorium. We further disagree with 
the commenters' hypothetical arguments that the ``cost of the project'' 
in the second prong does not refer to the cost of the four activities 
Congress specified in the first prong (``actual construction, 
renovation, lease, or demolition * * *'').
    We note again that Congress expressly specified only four 
``actual'' activities in the statute. We also believe, as we stated in 
the May 22, 2008 interim final rule with comment period, that that the 
use of the term ``actual'' in the context of the phrase, ``actual 
construction, renovation, lease, or demolition,'' limited the 
activities that Congress considered to represent a significant 
benchmark in that particular project of developing a LTCH or a LTCH 
satellite facility.
    With respect to the second prong, we also continue to understand 
the statute to specify that the hospital or entity must have expended 
before December 29, 2007, at least 10 percent of the estimated cost of 
the project (or, if less, $2,500,000). By ``cost of the project,'' we 
believe the statute refers to the activities enumerated in the first 
prong: ``the actual construction, renovation, lease, or demolition for 
a long-term care hospital.'' We believe the statute requires that the 
hospital or entity ``* * * has expended * * *;'' the amount specified 
in the statute on the actual construction, renovation, lease, or 
demolition for the contemplated LTCH, not just that both prongs are 
met, with no intended interdependence. In other words, we believe that 
the two prongs of the exception at section 114(d)(2)(B) of the MMSEA 
are linked together, with the second clause detailing the conditions 
under which the first one would qualify.
    Furthermore, because the statute uses the phrase ``has expended'' 
we continue to believe, as we indicated in the May 22, 2008 interim 
final rule with comment period, that the statute requires that a 
hospital or entity would have actually transferred funds as payment for 
the project as opposed to merely obligating capital and posting the 
cost of the project on its books as of December 29, 2007. As we noted, 
the ability to post the expense on the hospital's or entity's books 
could be satisfied by merely having a binding written agreement under 
the first prong of section 114(d)(2)(B) of the MMSEA. Had Congress 
allowed merely ``obligated'' funds to be included in the calculation of 
the 10 percent of the estimated cost of the project (or, if less, 
$2,500,000) we believe that the term ``obligated'' would have been 
chosen rather than the term ``expended.''
    We understand the concerns expressed by several commenters,

[[Page 43989]]

including Congressional representatives, that our interpretation of the 
exception to the moratorium at section 114(d)(2)(B) may cause hardship 
to LTCHs under development that could not meet the ``expenditure'' 
prong unless cost of the purchase of land is included. However, as 
explained earlier, we continue to believe the statute clearly indicates 
what costs may be included. Furthermore, we note that the ARRA made 
several changes to the language in section 114 of the MMSEA. If 
Congress intended that other costs, such as the cost of the land should 
be considered, it could have amended the MMSEA accordingly.
    Comment: One commenter urged CMS to use its discretion to authorize 
its fiscal intermediaries and MACs to evaluate and potentially approve 
other LTCH projects that do not fit perfectly within one of the 
enumerated exceptions to the moratorium but that ``meet the intent of 
the moratorium.''
    Response: When we implemented the moratorium provision in the May 
22, 2008 interim final rule with comment period, we noted that Congress 
was very specific in enumerating the conditions under which it granted 
exceptions to the moratorium on the development of new LTCHs and LTCH 
satellites and on the increase in the number of beds in existing LTCHs, 
in sections 114(d)(2) and (d)(3) of the MMSEA. The ARRA amended section 
114(d)(3)(A) of the MMSEA, and established an additional CON exception 
for bed increases in LTCHs and LTCH satellites. (We discuss this 
amendment in detail in an interim final rule with comment period in 
section XI. of this document.) Congress made only the single change 
specified in the ARRA when it amended the moratorium provision in 
section 114(d) of the MMSEA. Because this was the sole change made by 
Congress in the exceptions to the moratorium established under section 
114(d) of the MMSEA, we do not believe that it is appropriate for us to 
further interpret these exceptions through the regulatory process.
    Comment: Several commenters asked us to clarify what activities on 
the part of either an existing LTCH or an existing satellite would 
continue to be permissible under section 114(d)(1) of the MMSEA. 
Specifically, the commenters asked the following questions: (1) Is an 
existing LTCH or an existing satellite permitted to relocate; (2) may a 
LTCH under development that meets the moratorium exception at section 
114(d)(2)(A), (B), or (C) undergo a change in ownership without 
imperiling the exception; (3) may an existing LTCH merge with another 
LTCH; (4) are two satellites of the same LTCH permitted to consolidate; 
(5) how does the moratorium affect a remote location of a LTCH; (6) is 
a LTCH permitted to reduce its bed numbers and open a remote location 
(not a satellite) with those beds so that there is no increase in bed 
numbers under the LTCH's provider number; and (7) does the moratorium 
have any impact on the ability of a new IRF or IPF to co-locate with an 
existing LTCH without affecting its Medicare certification?
    Response: In response the commenters' specific concerns regarding 
our implementation of section 114(d) of the MMSEA, we will take this 
opportunity to set forth the policy determinations on permissible 
actions by LTCHs and satellites during the moratorium that we have 
given individually to a number of targeted inquiries from LTCHs, trade 
associations, consultants, and attorneys. Specifically, following the 
numbering of the questions in the comment above, our responses are 
below:
    (1) An existing LTCH or an existing LTCH satellite may relocate in 
accordance with State survey agency policies as long as there is no 
increase in the number of beds in the LTCH or in the satellite at the 
new site. For example, if the State surveyors would typically allow 
LTCH ``A'' with 100 beds to move to a building 8 miles away and it 
maintains the same provider agreement, the moratorium would not 
preclude the re-opening of the 100 bed LTCH in the new location. 
However if the LTCH has a new provider agreement at the new location, 
it would be a new LTCH and therefore subject to the moratorium.
    (2) A new LTCH that meets one (or more of) the exceptions at 
sections 114(d)(2)(A), (B) and (C) of the MMSEA, may undergo a change 
of ownership and may still qualify for the exception, if certain 
requirements are met. Specifically, if meeting the ``qualifying 
period'' exception at section 114(d)(2)(A) of the MMSEA is the 
exception being claimed, a change of ownership where the new owner 
takes over the original provider agreement would not affect the 
hospital's qualification for an exception. If the hospital or entity is 
claiming that it meets the exception set forth at section 114(d)(2)(B), 
that is, that it has a ``binding written agreement * * * and * * * has 
expended * * * at least 10 percent of the estimated cost of the project 
(or if less, $2,500,000) * * *,'' but the developing entity was sold, 
eligibility for the exception can be granted to the original owner. 
However, a determination would be made by the CMS RO which initially 
granted the exception as to whether it is still the same LTCH or entity 
that would meet the requirements of section 114(c)(2)(B) of the MMSEA. 
Finally, if the hospital or entity that is developing the LTCH is 
basing its exception on section 114(c)(2)(C) of the MMSEA, that is, 
that a CON was obtained in a State where one was required on or before 
December 29, 2007, a determination would need to be made by the State 
Agency on whether the CON that was originally issued was transferable 
to a new owner or whether a new CON would be required in order to 
proceed. If a new CON is required, the hospital or entity would not 
meet the statutory December 29, 2007 deadline and therefore, would not 
qualify for an exception to the moratorium.
    (3) We would apply CMS' longstanding policy regarding hospital 
mergers so that the merger of two LTCHs would result in one LTCH's 
provider number being voluntarily terminated and the other serving as 
the provider number for the new entity. The moratorium on the increase 
in hospital beds would apply to the sum of the beds that existed in 
both LTCHs as of December 29, 2007. This determination parallels our 
approach to determining appropriate caps on the number of residents 
under our GME payment adjustment when hospitals merge so that any 
additional statutory or regulatory limit on residency positions in the 
merged entity would be imposed on top of the sum of the positions that 
had been available in each hospital prior to the merger (64 FR 26329).
    (4) Two satellites of the same LTCH would not be permitted to 
consolidate during the 3-year moratorium. The reason for this is that 
the result of the satellites consolidating would be an increase in the 
number of beds in one satellite, which is precluded by section 
114(d)(1)(B) of the MMSEA.
    (5) Section 114(d) of the MMSEA does not subject remote locations 
of a LTCH to the moratorium, but we emphasize that it would be 
essential to determine that the facility in question is actually a 
``remote location'' and not a satellite of a LTCH. If the ``remote 
location'' is located on the campus of another hospital, it is defined 
as a satellite, under Sec.  412.22(h) of the regulations, and, 
therefore, subject to the moratorium. A remote location of a LTCH that 
was not a satellite, because it is provider-based and not co-located 
with another hospital, however, would operate under the provider number 
of its main LTCH. Therefore, where establishing a remote location adds 
beds under that provider number, in the

[[Page 43990]]

aggregate, it is subject to the moratorium.
    (6) If a LTCH adds a provider-based location that does not increase 
the aggregate number of beds at the LTCH, because it has decreased the 
number of beds at the main campus by at least an equivalent number of 
beds, the LTCH would not have violated the moratorium.
    (7) The moratorium provision at section 114(d) of the MMSEA would 
have no impact on whether an IRF or an IPF could co-locate with an 
existing LTCH. All providers that would be affected by the co-location, 
however, would be required to comply with ``separateness and control'' 
regulations at Sec.  412.22(e) and the existing LTCH would be required 
to meet the notification requirements at Sec.  412.22(e)(3).
    Comment: One commenter requested that CMS view ``obtaining a new 
provider number'' under circumstances where there is an acquisition of 
another facility as the same as when there is an assumption of an 
existing number and, therefore, covered by the exemption from the 
moratorium.
    Response: As we stated in the previous response, under our existing 
regulations at Sec.  489.18, which govern change of ownership and its 
effect on provider agreements, there is a significant difference 
between whether a LTCH is acquired and it functions under the same 
provider agreement as prior to the acquisition compared to a situation 
where a new provider agreement is sought when a hospital changes 
ownership. Since the cessation of service under an existing provider 
agreement is considered a termination of the provider agreement for the 
duration of the moratorium, obtaining a new provider agreement for a 
LTCH would be tantamount to developing a new LTCH, an activity that is 
precluded unless one of the statutory exceptions, discussed in detail 
above, was met. We encourage the commenter to review our regulations at 
42 CFR part 489 Subpart E. These regulations address the distinction 
between these two alternatives and specify the requirements and 
consequences of both.
    Comment: Three commenters stated that it is their understanding 
that an increase in ``non-Medicare certified beds'' is permitted under 
the moratorium established under section 114(d)(3) of the MMSEA.
    Response: The commenters' understanding is incorrect. All beds in a 
LTCH with an agreement to participate in the Medicare program must be 
available to Medicare beneficiaries. We used the term ``Medicare 
certified beds'' in the May 22, 2008 interim final rule with comment 
period in order to specify how we would count the actual number of beds 
in an existing LTCH or satellite after the MMSEA was enacted. At that 
time, we noted that we were using the number of beds certified by 
Medicare, because this number could be verified by CMS and its 
contractors and this was currently referenced in our regulations at 
Sec.  412.22(h)(2)(i), and similarly referenced in Sec.  412.22(f)(1) 
(73 FR 29706 and 29707). We did not mean to imply that there could be 
some hospital beds that would be available for non-Medicare patients 
but would not be available for use by Medicare beneficiaries.
    After considering the public comments we received, we are 
finalizing the regulatory changes at Sec. Sec.  412.22.(e)(5) and 
(e)(6) implementing section 114(d) of the MMSEA that we included in the 
May 22, 2008 interim final rule with comment period.
    We once again note that the amendments to both section 114(c) and 
(d) of the MMSEA made by the ARRA are being implemented in an interim 
final rule with comment period in section XI. of this document.

XI. Interim Final Rule With Comment Period Implementing Section 4302 of 
the American Recovery and Reinvestment Act of 2009 (Pub. L. 111-5) 
Relating to Payments to LTCHs and LTCH Satellite Facilities

A. Background

    Section 4302 of the American Recovery and Reinvestment Act (ARRA) 
(Pub. L. 111-5) affects several of the provisions of section 114 of the 
MMSEA (Pub. L. 110-173) that are discussed in section X. of the 
preamble of this document. Specifically, section 4302 of the ARRA 
amended several of the provisions of section 114 of the MMSEA, to be 
effective and applicable as if the amendments had been included in the 
MMSEA. Some of the ARRA amendments address issues raised by commenters 
regarding our May 22, 2008 interim final rule with comment period (73 
FR 29699). (In section X. of the preamble of the final rule in this 
document, we respond to comments received on the May 22, 2008 interim 
final rule with comment period, and finalize the policies implementing 
section 114(c) of the MMSEA that were not amended by the ARRA.)

B. Amendments Relating to Payment Adjustment to LTCHs and LTCH 
Satellite Facilities Made by Section 4302 of the ARRA

    Sections 114(c)(1)(A) and (B) of the MMSEA established a 3-year 
delay, for cost reporting periods beginning on or after December 29, 
2007, for freestanding LTCHs (defined at Sec.  412.23(e)(5) of the 
regulations) and ``grandfathered'' long-term care HwHs, from the 
application of the percentage threshold payment adjustment established 
under Sec.  412.536 or Sec.  412.534, respectively, or any similar 
provision. Section 4302(a)(1) of the ARRA amended the provisions of 
sections 114(c)(1)(A) and (B) of the MMSEA as follows:
    First, under section 4302(a)(1)(A) of the ARRA, the heading of 
section 114(c)(1) is changed to ``Delay in Application of 25 Percent 
Patient Threshold Payment Adjustment'' from the original ``No 
Application of 25 Percent Patient Threshold Payment Adjustment to 
Freestanding and Grandfathered LTCHs.''
    Second, under section 4302(a)(1)(B) of the ARRA, the effective date 
of the delay in application of the 25 percent patient threshold payment 
adjustment found in section 114(c)(1) of the MMSEA is changed from the 
date of enactment of the MMSEA (that is, December 29, 2007) to July 1, 
2007. As a result, a ``grandfathered'' long-term care HwH or a 
``freestanding'' LTCH with a cost reporting period beginning before 
December 29, 2007, would no longer be subject to the applicable payment 
adjustments at Sec.  412.534(h) and Sec.  412.536 until the start of 
its next cost reporting period. This is the case because our 
regulations at Sec.  412.534(h), with respect to ``grandfathered'' 
LTCHs, and Sec.  412.536 with respect to all LTCHs, were implemented 
for cost reporting periods beginning on or after July 1, 2007. 
Therefore, the amendment made by section 4302(a)(1)(B) of the ARRA to 
section 114(c)(1) of the MMSEA results in a uniform start of the 
application of the statutory 3-year relief from the 25 percentage 
threshold payment adjustment.
    Third, section 4302(a)(1)(C) of the ARRA adds, for 3 years, a third 
category of LTCHs that will not be subject to Sec. Sec.  412.534 and 
412.536 of the regulations, or any similar provision of the regulations 
for a 3-year period for cost reporting periods beginning on or after 
July 1, 2007. Specifically, section 4302(a)(1)(C) of the ARRA extends 
the 3-year exemption from the percentage threshold payment adjustments 
at Sec. Sec.  412.534 and 412.536 to include

[[Page 43991]]

``* * * a long-term care hospital, or satellite facility, that as of 
December 29, 2007, was co-located with an entity that is a provider-
based, off-campus location of a subsection (d) hospital which did not 
provide services payable under section 1886(d) of the Social Security 
Act at the off-campus location * * *.'' Therefore, no percentage 
threshold (and therefore, no payment adjustment) will be applied for 
patients discharged from an acute care hospital who are admitted to a 
LTCH or LTCH satellite facility that is co-located with an entity that 
is a provider-based, off-campus location of an acute care hospital (as 
set forth in our regulations at Sec.  413.65) as long as there are no 
inpatient acute care hospital services payable under section 1886(d) of 
the Act offered at that off-campus location. For example, this would 
apply to a situation where an acute care hospital, that Medicare pays 
under the IPPS, is located on the main campus of a multicampus entity 
and, on a second campus of that acute care hospital, the LTCH shares a 
building with an IRF unit or an outpatient clinic that is provider-
based to the acute care hospital but there are no services payable 
under the IPPS hospital provided at that second campus.
    Section 114(c)(2) of the MMSEA provided, for a 3-year period, 
increases in the percentage thresholds (``payment adjustments'') 
established under Sec.  412.534 of the regulations for ``applicable'' 
LTCHs or satellite facilities for cost reporting periods beginning on 
or after December 29, 2007. Specifically, if the threshold percentage 
would have been 25 percent, for 3 years it will increase to 50 percent; 
and if the threshold would have been 50 percent prior to the enactment 
of the MMSEA, it will increase to 75 percent. The term ``applicable'' 
was defined as ``* * * a hospital or satellite facility that is subject 
to the transition rules under section 412.534(g) of title 42 of the 
Code of Federal Regulations.'' The revisions made by section 114(c)(2) 
of the MMSEA were limited to a hospital or a satellite subject to the 
transition rules at Sec.  412.534(g) of the regulations. Because 
``grandfathered'' LTCH satellite facilities were subject to the 
transition at Sec.  412.534(h) of the regulations, not at Sec.  
412.534(g), the percentage increase resulting from the application of 
section 114(c)(2) did not apply to them (73 FR 29703).
    Section 4302(a)(2)(A) of the ARRA modified the definition of 
``applicable long term care hospital or satellite facility.'' This 
provision amended section 114(c)(2)(B)(ii) of the MMSEA by specifying 
that those ``grandfathered satellites'' described in Sec.  
412.22(h)(3)(i) of the regulations were to be included in the 
definition. (Under Sec.  412.22(h)(3)(i), ``grandfathered'' satellites 
were exempted from compliance with the ``separateness and control'' 
rules specified in Sec.  412.22(h) if they had been structured as a 
satellite facility on or before September 30, 1999.) However, we note 
that ``grandfathered satellites'' under Sec.  412.22(h)(3) of the 
regulations continue to be subject to the applicable percentage 
thresholds outlined in Sec.  412.536 for patients admitted from any 
individual hospital with which they were not co-located because there 
were no exceptions for such entities for purposes of payment as 
described at Sec.  412.536 of the regulations.
    Section 114(c)(2)(C) of the MMSEA applied the 3-year increase in 
the percentage thresholds at Sec.  412.534 of the regulations for cost 
reporting periods beginning on or after the date of enactment of the 
MMSEA (December 29, 2007). Section 4302(a)(2)(B) of the ARRA revised 
the effective date of the MMSEA provisions to increase the applicable 
percentages to cost reporting periods beginning on or after October 1, 
2007, for LTCHs and LTCH satellite facilities that were subject to the 
transition rules under Sec.  412.534(g) and also established the 
effective date as cost reporting periods beginning on or after July 1, 
2007, ``* * * in the case of a satellite facility described in section 
412.22(h)(3)(i) of title 42 of the Code of Federal Regulations.'' 
(Different dates are applicable because the effective date for the 25 
percent threshold payment adjustment policy for LTCHs and LTCH 
satellite facilities governed under Sec.  412.534(g) of the regulations 
was October 1, 2005, while the percent threshold for ``grandfathered'' 
LTCH satellite facilities policy was effective for cost reporting 
periods beginning on or after July 1, 2007.)
    The result of this modification in the effective date of the 3-year 
increase in the percentage threshold for ``applicable'' LTCHs and LTCH 
satellite facilities (now including ``grandfathered satellites'') is 
that LTCHs and LTCH satellite facilities will not have the fully 
phased-in 25 percentage threshold payment adjustment applied for cost 
reporting periods beginning on or after October 1, 2007, and 
``grandfathered'' satellite facilities will not be subject to the 
transition to the 25 percentage threshold for cost reporting periods 
beginning on or after July 1, 2007.
    To implement the provisions of section 4302 of the ARRA, in this 
interim final rule with comment period, we are revising our regulations 
at Sec. Sec.  412.534 and 412.536 to reflect the statutory revisions 
described above.

C. Amendment to the Moratorium on the Increase in Number of Beds in 
Existing LTCHs or LTCH Satellite Facilities Made by Section 4302 of the 
ARRA

    Section 114(d) of the MMSEA provided a 3-year moratorium on the 
increase of hospital beds in existing LTCHs and LTCH satellite 
facilities. (The definition of an existing LTCH and LTCH satellite 
facility for purposes of this policy is codified at Sec.  
412.23(e)(7)(i) of our regulations.) Section 114(d) of the MMSEA 
includes exceptions to the moratorium on the increase in hospital beds 
in existing LTCHs and LTCH satellite facilities. Specifically, section 
114(d)(3)(A) of the MMSEA provided that the moratorium on the increase 
in beds in an existing LTCH or LTCH satellite facility would not apply 
to an increase in beds if an existing LTCH or LTCH satellite facility 
is ``located in a State where there is only one other long-term care 
hospital; and requests an increase in beds following the closure or the 
decrease in the number of beds of another long-term care hospital in 
the State.''
    Section 4302(b) of the ARRA added an additional exception to the 
bed-increase moratorium in an existing LTCH or LTCH satellite facility 
``* * * if the hospital or facility obtained a certificate of need for 
an increase in beds that is in a State for which such certificate of 
need is required and that was issued on or after April 1, 2005, and 
before December 29, 2007.''
    Accordingly, in this interim final rule with comment period, we are 
revising our regulations at Sec.  412.23(e)(7)(B) to include this new 
exception to the moratorium on an increase in the number of beds in 
existence in an existing LTCH or LTCH satellite facility beyond those 
in existence on December 29, 2007. In the May 22, 2008 interim final 
rule with comment period, in our discussion of the original exception 
to the moratorium on bed increases at section 114(d)(3)(A) of the 
MMSEA, and in our regulations at Sec. Sec.  412.23(e)(7)(ii)(A) and 
(e)(7)(ii)(B)(2) added in that interim final rule with comment period, 
we noted that the baseline number of beds that existed on December 29, 
2007, was the number of Medicare-certified beds because this number can 
be verified by CMS and its contractors and this is currently referenced 
in our regulations at Sec.  412.22(h)(2)(i), and in a similar reference 
in Sec.  412.22(f)(1) (73 FR 29706 and 29707). However, we emphasize 
that, in employing the term ``Medicare-

[[Page 43992]]

certified beds,'' we are not implying that there is distinction between 
``Medicare-certified beds'' and some additional group of beds in the 
hospital that are reserved for non-Medicare patients and, therefore, 
not included in this total. A hospital participates in the Medicare 
program in its entirety; that is, all beds in a hospital with a 
provider agreement with the Medicare program are available for use by 
Medicare beneficiaries.
    As we specified in our discussion in the May 22, 2008 interim final 
rule with comment period regarding implementation of the certificate of 
need exception to the development of new LTCHs and LTCH satellite 
facilities provided in section 114(d)(2)(C) of the MMSEA and codified 
at Sec.  412.23(e)(6)(ii)(C) of our regulations, decisions regarding 
whether a specific situation will be considered to meet the certificate 
of need exception established by the section 4302(b) of the ARRA, which 
modifies section 114(d)(3)(A) of the MMSEA, on the increase in the 
number of beds in existing LTCHs or LTCH satellite facilities, will be 
determined on a case-by-case basis by the applicant's State agency, 
which will make recommendations to the CMS regional office. (The ARRA 
included no amendments to section 114(d) of the MMSEA regarding the 
moratorium on the development of new LTCHs and LTCH satellite 
facilities. Therefore, we have finalized our regulations regarding this 
provision at Sec.  412.23(e)(6) as discussed in section X. of the 
preamble of the final rule in this document.)
    Finally, section 4302(c) of the ARRA specifies that the ``* * * 
effective date of the amendments made by this section shall be 
effective and apply as if included in the enactment of the Medicare, 
Medicaid, and SCHIP Extension Act of 2007'' (Pub. L. 110-173).
    Accordingly, in this interim final rule with comment period, we are 
revising our regulations at Sec.  412.23 to include a description of 
the additional exception to the moratorium on the establishment of new 
beds in existing LTCHs and LTCH satellite facilities.

D. Responses to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge and 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this document, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble of that document.

E. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking and invite 
public comment on a proposed rule in accordance with 5 U.S.C. 553(b) of 
the Administrative Procedure Act (APA). In addition, section 1871(b)(1) 
of the Act provides that the Secretary shall provide for notice of the 
proposed regulation in the Federal Register and a period of not less 
than 60 days for public comment thereon. Section 1871(b)(2) of the Act 
provides for an exception to the requirement that the Secretary provide 
for notice of a proposed rulemaking and a period of not less than 60 
days for public comment. Specifically, section 1871(b)(2)(B) of the Act 
provides an exception to these requirements when a law establishes a 
specific deadline for the implementation of a provision and the 
deadline is less than 150 days after the date of the enactment of the 
statute in which the deadline is contained. Section 4302 of the ARRA 
amended sections 114(c) and (d) of the MMSEA and changed existing LTCH 
PPS policies. It affected the adjustment policies in Sec.  412.534 and 
Sec.  412.536 of our regulations. It also revised a moratorium on bed 
increases in existing LTCHs and LTCH satellite facilities affecting 
policies in Sec.  412.23 of our regulations. These changes were 
required to be implemented as if included in the enactment of the MMSEA 
2007, that is, December 29, 2007. Accordingly, these changes are 
required to be implemented: (1) Effective December 29, 2007 (section 
4302(c) of the ARRA); (2) beginning with cost reporting periods 
beginning on or after December 29, 2007 (section 4302(b) of the ARRA); 
or beginning with cost reporting periods beginning on or after July 1, 
2007, or October 1, 2007, as applicable (sections 4302(a)(1)(B) and 
(a)(2)(B) of the ARRA). The ARRA was enacted on February 17, 2009. 
Thus, section 4302 of the ARRA's deadlines for implementation of the 
MMSEA-related policies contained in this interim final rule with 
comment period were less than 150 days after the date of the enactment 
of the statute in which the deadlines were contained.
    Therefore, under the authority of section 1871(b)(2)(B) of the Act, 
we are waiving notice and comment procedures for the AARA amendments to 
the MMSEA policy changes pertaining to Sec. Sec.  412.534 and 412.536 
of our regulations as well as the moratorium on increasing beds at an 
existing LTCH and an existing satellite facility of a LTCH in Sec.  
412.23.
    We also find good cause to waive the requirement for publication of 
a notice of proposed rulemaking and comment on the grounds that it is 
unnecessary, impracticable and contrary to the public interest under 
the authority of 5 U.S.C. 553(b)(B). In general, this interim final 
rule with comment period sets forth nondiscretionary provisions of the 
amendments made by section 4302 of the ARRA to section 114 of the MMSEA 
with respect to a moratorium on the increase of long-term care hospital 
beds in existing LTCHs or LTCH satellite facilities, and payment 
policies pertaining to Sec. Sec.  412.534 and 412.536 of our 
regulations. Therefore, we believe pursuing notice and comment is 
unnecessary.
    Moreover, because that process would prevent timely implementation 
of congressionally mandated policy changes that are to be effective, as 
described previously in this section, we believe notice and comment 
procedures are impracticable and contrary to the public interest.
    In addition, notice and comment would delay significantly the 
issuance of essential guidance to the public which is necessary to 
assist them in making complex, time-sensitive business decisions of 
significant financial consequence with respect to their efforts to 
comply with section 114 of the MMSEA as amended by section 4302 of the 
ARRA. Failure to provide this guidance would impede such business 
decisions.
    Section 1871(e)(1)(A) of the Act provides that a substantive change 
in regulations, manual instructions, interpretative rules, statements 
of policy, or guidelines of general applicability under this title 
shall not be applied (by extrapolation or otherwise) retroactively to 
items and services furnished before the effective date of the change 
unless the Secretary determines that (i) such retroactive application 
is necessary to comply with statutory requirements; or (ii) failure to 
apply the change retroactively would be contrary to the public 
interest. As explained above, the amendments made by section 4302 of 
the ARRA to section 114 of the MMSEA requires the Secretary to 
implement various policy changes beginning with cost reporting periods 
beginning on or after July 1, 2007, October 1, 2007, or December 29, 
2007 as applicable.
    Therefore, under the authority of section 1871(e)(1)(A)(i) of the 
Act, we are making the provisions of this interim final rule with 
comment period that implement section 4302 of the ARRA effective for 
cost reporting periods beginning on or after July 1, 2007, October 1, 
2007, or December 29, 2007, as applicable. Additionally, as

[[Page 43993]]

explained previously, the Secretary also finds that it would be 
contrary to the public interest if these provisions were not made 
effective on December 29, 2007 or for cost reporting periods beginning 
on or after July 1, 2007, October 1, 2007, or December 29, 2007, as 
indicated above. Therefore, under the authority of section 
1871(e)(1)(A)(ii) of the Act, we are making these changes effective 
under the timeframes noted above.
    For the same reasons noted above, we find good cause under section 
553(d)(3) of the APA to waive the 30-day delay in the effective date of 
this interim final rule with comment period.

F. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995.

G. Regulatory Impact Analysis

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on 
Federalism, and the Congressional Review Act (5 U.S.C. 804(2)).
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more in any 1 year).
    The enactment of section 4302 of the ARRA, which amended provisions 
of sections 114(c) and (d) of the MMSEA, requires several modifications 
to the regulations at Sec. Sec.  412.534 and 412.536, which, as 
discussed in section XI.C. of this interim final rule with comment 
period, exempts an additional category of LTCHs and LTCH satellites 
from the applicability of the regulations at Sec. Sec.  412.534 and 
412.536 for 3 years and for the same 3 years, adds ``grandfathered'' 
LTCH satellites to those ``applicable'' LTCHs that, under the MMSEA, 
have an increase in the threshold percentage of patients that may be 
admitted from co-located referring hospitals (typically acute care 
hospitals) without a payment adjustment. The effective date of these 
MMSEA provisions was also amended by sections 4302(a)(1)(B) and 
(a)(2)(B) of the ARRA so that, rather than December 29, 2007, the 
effective dates for the section 114 of the MMSEA changes to the 
regulations at Sec. Sec.  412.534 and 412.536 are set respectively, at 
July 1, 2007, or October 1, 2007, as applicable.
    In the May 22, 2008 interim final rule with comment period, we 
estimated that the implementation of the MMSEA provisions pertaining to 
Sec. Sec.  412.534 and 412.536 would result in a projected increase of 
approximately $30 million in estimated aggregate LTCH PPS payments for 
RY 2008 (73 FR 29708). Although we are unable to quantify the impact of 
the ARRA amendments to the MMSEA provisions, we believe that there will 
be a small increase in the number of LTCHs and LTCH satellites that 
will now be included in the 3-year delay in the application of 
Sec. Sec.  412.534 and 412.536 and also the percentage threshold 
increase. We also believe that setting back the effective dates for 
those MMSEA provisions from December 29, 2007 to either July 1, 2007 or 
October 1, 2007, as applicable, will not, in the aggregate, have a 
significant impact on Medicare payments under the LTCH PPS.
    Section 4302(b) of the ARRA amended section 114(d) of the MMSEA, 
which provided for a moratorium on the establishment of LTCHs, LTCH 
satellite facilities, and on the increase of LTCH beds in existing 
LTCHs or satellite facilities for a period of 3 years, by adding 
another exception to the 3-year moratorium. In the May 22, 2008 interim 
final with comment period, we noted that, in regard to section 114(d) 
of the MMSEA, we were unable to provide an estimate of the impact of 
the moratorium provisions because we had no way of determining how many 
LTCHs would have opened in the absence of the moratorium, nor did we 
have sufficient information at that time to determine how many new 
LTCHs will meet the exceptions criteria provided for in the statute (73 
FR 29708). For the same reason, we are unable to provide an estimate of 
the impact of section 4302(b) of the ARRA, which added an additional 
exception to the moratorium on an increase in beds in existing LTCHs 
and LTCH satellites. However, we do not believe that distributional 
effects and estimated changes to the Medicare program payments 
resulting from section 4302 of the ARRA, which amended sections 114(c) 
and (d) of the MMSEA, would be greater than $100 million. Therefore, we 
have determined that this interim final rule with comment period would 
not be considered a major economic rule, as defined in this section.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals 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 1 year. (For further information, 
see the Small Business Administration's regulation at 70 FR 72577, 
December 6, 2005.) Individuals and States are not included in the 
definition of a small entity. Because we lack data on individual 
hospital receipts, we cannot determine the number of small proprietary 
LTCHs. Therefore, we assume that all LTCHs are considered small 
entities for the purpose of this impact discussion. Medicare fiscal 
intermediaries and MACs are not considered to be small entities. As we 
discuss in detail throughout the preamble of this interim final rule 
with comment period, we believe that the provisions specified by the 
MMSEA presented in this interim final rule with comment period would 
result in an increase in estimated aggregate LTCH PPS payments. 
Accordingly, the Secretary certifies that this interim final rule with 
comment period would not have a significant economic impact on a 
substantial number of small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area for Medicare payment regulations and has fewer than 
100 beds. As stated above, implementing the provisions specified by the 
ARRA that are discussed in this interim final rule with comment period 
will result in an increase in estimated aggregate LTCH PPS payments. 
Therefore, we believe this rule will not have a significant impact on 
small rural hospitals. Accordingly, the Secretary certifies that this 
interim final rule with comment period would not have a significant 
economic impact on the operations of a substantial number of small 
rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also

[[Page 43994]]

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 2009, that 
threshold level is currently approximately $133 million. This interim 
final rule with comment period would not mandate any requirements for 
State, local, or tribal governments, nor would it result in 
expenditures by the private sector of $133 million or more in any 1 
year.
    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. Because this regulation does not impose any costs on 
State or local governments, the requirements of Executive Order 13132 
are not applicable.
    In accordance with the provisions of Executive Order 12866, this 
interim final rule with comment period was reviewed by the Office of 
Management and Budget.

XI. MedPAC Recommendations

    Under section 1886(e)(4)(B) of the Act, the Secretary must consider 
MedPAC's recommendations regarding hospital inpatient payments. Under 
section 1886(e)(5) of the Act, the Secretary must publish in the annual 
proposed and final IPPS rules the Secretary's recommendations regarding 
MedPAC's recommendations. We have reviewed MedPAC's March 2009 ``Report 
to the Congress: Medicare Payment Policy'' and have given the 
recommendations in the report careful consideration in conjunction with 
the policies set forth in this final rule.
    MedPAC's Recommendation 2A-1 states that ``[t]he Congress should 
increase payment rates for the acute inpatient and outpatient 
prospective payment systems in 2010 by the projected rate of increase 
in the hospital market basket index, concurrent with implementation of 
a quality incentive payment program.'' This recommendation is discussed 
in Appendix B to this final rule.
    MedPAC's Recommendation 2A-2 states that ``[t]he Congress should 
reduce the indirect medical education adjustment in 2010 by 1 
percentage point to 4.5 percent per 10 percent increment in the 
resident-to-bed ratio. The funds obtained by reducing the indirect 
medical education adjustment should be used to fund a quality incentive 
payment program.''
    Response to Recommendation 2A-2: Redirecting funds obtained by 
reducing the IME adjustment to fund a quality incentive payment program 
is consistent with the value-based purchasing initiatives to improve 
the quality of care. However, section 502(a) of Public Law 108-173 
modified the formula multiplier (c) to be used in the calculation of 
the IME adjustment beginning midway through FY 2004 and provided for a 
new schedule of formula multipliers for FYs 2005 and thereafter. 
Consequently, given the existing statutory requirement regarding the 
IME formula multiplier, CMS does not have the authority to implement 
MedPAC's recommendation to reduce the IME adjustment in FY 2010.
    Comment: One commenter objected to MedPAC's recommendation 2A-2, 
although the commenter acknowledged that CMS does not have the 
authority to implement the recommendation. The commenter believed that 
it is ``highly inappropriate'' to reduce payments to teaching hospitals 
in order to fund a quality incentive program for all hospitals. The 
commenter stated that the impropriety of the recommendation is 
highlighted by MedPAC's own analysis of margin variation in hospitals, 
which the commenter believed supported the assertion that teaching 
hospitals are ``the class of hospitals least able to afford a 
reduction.'' While the commenter commended this margin analysis by 
MedPAC, the commenter remained disappointed that MedPAC restated its 
recommendation 2A-2 from 2008.
    Response: We appreciate the commenter's input regarding MedPAC's 
recommendations. We remind the public that, as stated in the proposed 
rule, CMS does not have the authority to implement the changes to IME 
payments as recommended by MedPAC.
    For further information relating specifically to the MedPAC reports 
or to obtain a copy of the reports, contact MedPAC at (202) 653-7226, 
or visit MedPAC's Web site at: http://www.medpac.gov.

XII. Other Required Information

A. Requests for Data From the Public

    In order to respond promptly to public requests for data related to 
the prospective payment system, we have established a process under 
which commenters can gain access to raw data on an expedited basis. 
Generally, the data are now available on compact disc (CD) format. 
However, many of the files are available on the Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS. We listed the data files and the 
cost for each file, if applicable, in the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24233 through 24234).
    Commenters interested in discussing any data used in constructing 
the proposed rule or this final rule should contact Nisha Bhat at (410) 
786-5320.

B. Collection of Information Requirements

1. Legislative Requirement for Solicitation of Comments
    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
2. Requirements in Regulation Text
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24234 
through 24236), we solicited public comments on each of the issues 
listed in section XII.B.1. of this preamble for the following sections 
of this document that contain information collection requirements 
(ICRs). We discuss and respond to any public comments we received in 
each individual section.
a. ICRs Regarding Payment Adjustment for Medicare DSHs (Sec.  412.106)
    As discussed in section V.E. of the preamble of this final rule, 
Sec.  412.106(b)(4)(iv) permits hospitals to count Medicaid eligible 
inpatient days in the numerator of the Medicaid fraction of the DPP in 
the DSH payment adjustment calculation by one of the following 
methodologies, as long as no such days are counted more than once for 
any hospital in a cost reporting period: date of discharge; date of 
admission; or dates of service. To avoid ``double counting,'' a 
hospital is required to report to CMS any changes to the methodology it 
uses to count days in the numerator of the Medicaid fraction of the 
DPP. The burden

[[Page 43995]]

associated with this requirement is the time and effort necessary for a 
hospital to report to CMS changes to the methodology it uses to count 
days in the numerator of its Medicaid fraction of the DPP.
    This requirement is subject to the PRA. While we believe the burden 
is minimal, we are unable to accurately quantify the burden because we 
cannot estimate the number of expected submissions from hospitals 
reporting changes to their respective methodology for counting days in 
the numerator of the Medicaid fraction of the DPP for the Medicare DSH 
payment adjustment calculation.
    We did not receive any public comments on this ICR. While we are 
still not able to accurately quantify the burden associated with this 
ICR, because we cannot estimate the number of expected submissions from 
hospitals, we will review each submission on a case-by-case basis. If 
we determine that the number of submissions may exceed the threshold of 
10 or more persons in a 12-month period, as defined in 5 CFR 
1320.3(c)(4), we will develop an information collection request as part 
of the formal OMB approval process.
b. ICRs Regarding Payments for GME (Sec.  413.75)
    Existing regulations at Sec.  413.75(b) permit hospitals that share 
residents to elect to form a Medicare GME affiliated group if they are 
in the same or contiguous urban or rural areas, if they are under 
common ownership, or if they are jointly listed as program sponsors or 
major participating institutions in the same program. The purpose of a 
Medicare GME affiliated group is to provide flexibility to hospitals in 
structuring rotations under an aggregate FTE resident cap when they 
share residents. The existing regulations at Sec.  413.79(f)(1) specify 
that each hospital in a Medicare GME affiliated group must submit a 
Medicare GME affiliation agreement (as defined under Sec.  413.75(b)) 
to the Medicare fiscal intermediary or MAC servicing the hospital and 
send a copy to CMS' Central Office no later than July 1 of the 
residency program year during which the Medicare GME affiliation 
agreement will be in effect.
    In section V.G.3. of the preamble of this final rule, we discuss 
our proposed and final policy to amend the regulations to specify that 
a hospital that is new after July 1 and that begins training residents 
for the first time after the July 1 start date of that academic year is 
permitted to submit a Medicare GME affiliation agreement prior to the 
end of its cost reporting period in order to participate in an existing 
Medicare GME affiliated group for the remainder of the academic year. 
The burden associated with this requirement is the time and effort it 
would take for the new hospital to develop and submit the Medicare GME 
affiliation agreement. It is difficult for us to estimate the annual 
burden associated with this requirement because we cannot estimate the 
additional number of hospitals that will be permitted to submit 
Medicare GME affiliation agreements in any given year as a result of 
the change. However, we believe the number of affected hospitals will 
be very small because, under the change, a hospital will not only have 
to start training residents after July 1, but will also need to be a 
new hospital after July 1. We note that this requirement will merely 
apply established procedures to provide increased flexibility to a new 
hospital to join an existing GME affiliated group such that, in its 
first year, it may train and receive IME and direct GME payments 
relating to FTE for residents that could otherwise be counted for 
purposes of IME and direct GME at another hospital. We believe the 
expansion of the existing policy regarding the submission of Medicare 
GME affiliation agreements for hospitals that are new after July 1 and 
that begin to train residents after July 1 will amount to a minimal 
paperwork burden.
    We did not receive any public comments on this ICR. While we are 
still not able to accurately quantify the burden because we cannot 
estimate the number of expected submissions from hospitals, we will 
review each submission on a case-by-case basis. If we determine that 
the number of submissions may exceed the threshold of 10 or more 
persons in a 12-month period, as defined in 5 CFR 1320.3(c)(4), we will 
develop an information collection request as part of the formal OMB 
approval process.

C. Additional Information Collection Requirements

    This final rule imposes collection of information requirements as 
outlined in the regulation text and specified above. However, this 
final rule also makes reference to several associated information 
collections that are not discussed in the regulation text contained in 
this document. The following is a discussion of these information 
collections, some of which have already received OMB approval.
1. Present on Admission (POA) Indicator Reporting
    Section II.F.6. of the preamble of this final rule discusses the 
POA indicator reporting program. As stated earlier, collection of POA 
indicator data is necessary to identify which conditions were acquired 
during hospitalization for the HAC payment provision and for broader 
public health uses of Medicare data. Through Change Request 5499 dated 
May 11, 2007, CMS issued instructions that require IPPS hospitals to 
submit POA indicator data for all diagnosis codes on Medicare claims. 
The burden associated with this requirement is the time and effort 
necessary to place the appropriate POA indicator codes on Medicare 
claims. This requirement is subject to the PRA; however, the associated 
burden is currently approved under OMB control number 0938-0997 with an 
expiration date of August 31, 2009.
2. Add-On Payments for New Services and Technologies
    Section II.I.1. of the preamble of this final rule discusses add-on 
payments for new services and technologies. Specifically, this section 
states that applicants for add-on payments for new medical services or 
technologies for FY 2011 must submit a formal request. A formal request 
includes a full description of the clinical applications of the medical 
service or technology and the results of any clinical evaluations 
demonstrating that the new medical service or technology represents a 
substantial clinical improvement. In addition, the request must contain 
a significant sample of the data to demonstrate that the medical 
service or technology meets the high-cost threshold. We detailed the 
burden associated with this requirement in the September 7, 2001, IPPS 
final rule (66 FR 46902). As stated in that final rule, collection of 
the information for this requirement is conducted on an individual 
case-by-case basis. We believe the associated burden is thereby exempt 
from the PRA as stipulated under 5 CFR 1320.3(h)(6). Similarly, we also 
believe the burden associated with this requirement is exempt from the 
PRA under 5 CFR 1320.3(c), which defines the agency collection of 
information subject to the requirements of the PRA as information 
collection imposed on 10 or more persons within any 12-month period. 
This information collection does not impact 10 or more entities in a 
12-month period. In FYs 2008, 2009, and 2010, we received 1, 4, and 5 
applications, respectively.
    We did not receive any public comments on this ICF.
3. Reporting of Hospital Quality Data for Annual Hospital Payment 
Update
    As discussed in section V.A. of the preamble of this final rule, 
the

[[Page 43996]]

RHQDAPU program was originally established to implement section 501(b) 
of Public Law 108-173, thereby expanding our voluntary Hospital Quality 
Initiative (HQI). The RHQDAPU program originally consisted of a 
``starter set'' of 10 quality measures. OMB approved the collection of 
data associated with the original starter set of quality measures under 
OMB control number 0938-0918, with a current expiration date of January 
31, 2010.
    As part of our implementation of section 5001(a) of the DRA, we 
expanded the number of quality measures reported in the RHQDAPU 
program. Specifically, section 1886(b)(3)(B)(viii)(III) of the Act, 
added by section 5001(a) of the DRA, requires that the Secretary expand 
the ``starter set'' of 10 quality measures that were established by the 
Secretary as of November 1, 2003, to include measures ``that the 
Secretary determines to be appropriate for the measurement of the 
quality of care furnished by hospitals in inpatient settings.'' Under 
this provision, we established additional program measures to bring the 
total number of measures to 30. The burden associated with these 
reporting requirements is currently approved under OMB control number 
0938-1022, with a current expiration date of June 30, 2011.
    In the FY 2009 IPPS proposed rule (73 FR 23527), we solicited 
public comments on several considerations for expanding and updating 
quality measures. We responded to the public comments received in the 
FY 2009 IPPS final rule (73 FR 48433). We also expanded and finalized 
the RHQDAPU program measure set for FY 2010. As part of the expansion 
effort, two measures were finalized in the CY 2009 OPPS/ASC final rule 
with comment period (73 FR 68781). In this FY 2010 IPPS final rule, as 
we proposed, we are adding a total of four new measures, to harmonize 
two existing measures, and to retire one measure, which will increase 
the total number of measures in the RHQDAPU program from 42 in FY 2010 
to 46 in FY 2011. Specifically, we are adding four new measures, two 
new chart abstracted measures, and two new structural measures. The new 
chart abstracted measures include the addition of SCIP-Infection-9: 
Postoperative Urinary Catheter Removal on Postoperative Day 1 or 2, and 
SCIPInfection-10: Perioperative Temperature Management to the existing 
SCIP measure set. As stated in V.A.3. of the preamble of this final 
rule, the new structural measures include (1) Participation in a 
Systematic Clinical Database Registry for Stroke Care; and (2) 
Participation in a Systematic Clinical Database Registry for Nursing 
Sensitive Care. We are submitting a revised version of the information 
collection request approved under OMB control number 0938-1022, to 
obtain approval for the new measures.
    Section V.A.9. of the preamble of the proposed rule and this final 
rule addresses the reconsideration and appeal procedures for a hospital 
that we believe did not meet the RHQDAPU program requirements. If a 
hospital disagrees with our determination, it may submit a written 
request to CMS to reconsider our decision. The hospital's letter must 
explain the reasons why it believes it did meet the RHQDAPU program 
requirements. While this is a reporting requirement, the burden 
associated with it is not subject to the PRA under 5 CFR 1320.4(a)(2). 
The burden associated with information collection requirements imposed 
subsequent to an administrative action is not subject to the PRA.
4. Occupational Mix Adjustment to the FY 2010 Index (Hospital Wage 
Index Occupational Mix Survey)
    Section II.D. of the preamble of this final rule discusses the 
occupational mix adjustment to the FY 2010 wage index. While the 
preamble does not contain any new ICRs, it is important to note that 
there is an OMB approved information collection request associated with 
the hospital wage index. Section 304(c) of Public Law 106-554 amended 
section 1886(d)(3)(E) of the Act to require CMS to collect data at 
least once every 3 years on the occupational mix of employees for each 
short-term, acute care hospital participating in the Medicare program 
in order to construct an occupational mix adjustment to the wage index. 
We collect the data via the occupational mix survey.
    The burden associated with this information collection requirement 
is the time and effort required to collect and submit the data in the 
Hospital Wage Index Occupational Mix Survey to CMS. The aforementioned 
burden is subject to the PRA; however, it is currently approved under 
OMB control number 0938-0907, with an expiration date of February 28, 
2011.
    We did not receive any public comments of this provision in the 
proposed rule.
5. Hospital Applications for Geographic Reclassifications by the MGCRB
    Section III.I.3. of the preamble of this final rule discusses 
revisions to the wage index based on hospital redesignations. As stated 
in that section, under section 1886(d)(10) of the Act, the MGCRB has 
the authority to accept short-term IPPS hospital applications 
requesting geographic reclassification for wage index or standardized 
payment amounts and to issue decisions on these requests by hospitals 
for geographic reclassification for purposes of payment under the IPPS. 
The burden associated with this application process is the time and 
effort necessary for an IPPS hospital to complete and submit an 
application for reclassification to the MGCRB. While this requirement 
is subject to the PRA, it is currently approved under OMB control 
number 0938-0573, with an expiration date of December 31, 2011.
    We did not receive any public comments on the ICR for this 
provision in the proposed rule.

List of Subjects

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 415

    Health facilities, Health professions, Medicare, Reporting and 
recordkeeping requirements.

42 CFR Part 485

    Grant programs--health, Health facilities, Medicaid, Medicare, 
Reporting and recordkeeping requirements.

42 CFR Part 489

    Health facilities, Medicare, Reporting and recordkeeping 
requirements.

0
For the reasons stated in the preamble of this final rule, the Centers 
for Medicare & Medicaid Services is amending 42 CFR Chapter IV as 
follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

0
1. The authority citation for Part 412 continues to read as follows:

    Authority:  Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh), and sec. 124 of Public Law 106-113 (113 
Stat. 1501A-332).


0
2. Section 412.22 is amended by revising paragraph (h)(2)(iii)(A) to 
read as follows:


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

* * * * *

[[Page 43997]]

    (h) * * *
    (2) * * *
    (iii) * * *
    (A) Effective for cost reporting periods beginning on or after 
October 1, 2002, it is not under the control of the governing body or 
chief executive officer of the hospital in which it is located, and it 
furnishes inpatient care through the use of medical personnel who are 
not under the control of the medical staff or chief medical officer of 
the hospital in which it is located.
    (1) Except as provided in paragraph (h)(2)(iii)(A)(2) of this 
section, effective for cost reporting periods beginning on or after 
October 1, 2009, the governing body of the hospital of which the 
satellite facility is a part is not under the control of any third 
entity that controls both the hospital of which the satellite facility 
is a part and the hospital with which the satellite facility is co-
located.
    (2) If a hospital and its satellite facility were excluded from the 
inpatient prospective payment system under the provisions of this 
section for the most recent cost reporting period beginning prior to 
October 1, 2009, the hospital does not have to meet the requirements of 
paragraph (h)(2)(iii)(A)(1) of this section, with respect to that 
satellite facility, in order to retain its IPPS-excluded status.
    (3) A hospital described in paragraph (h)(2)(iii)(A)(2) of this 
section that establishes an additional satellite facility in a cost 
reporting period beginning on or after October 1, 2009, must meet the 
criteria in this section, including the provisions of paragraph 
(h)(2)(iii)(A)(1) of this section with respect to the additional 
satellite facility, in order to be excluded from the inpatient 
prospective payment system.
* * * * *

0
3. Section 412.23 is amended by revising paragraph (e)(7)(ii) to read 
as follows:


Sec.  412.23  Excluded hospitals: Classifications.

* * * * *
    (e) * * *
    (7) Moratorium on increasing the number of beds in existing long-
term care hospitals and existing long-term care hospital satellite 
facilities.
* * * * *
    (ii) Effective for the period beginning December 29, 2007 and 
ending December 28, 2010--
    (A) Except as specified in paragraph (e)(7)(ii)(B) and (C) of this 
section, the number of Medicare-certified beds in an existing long-term 
care hospital or an existing long-term care hospital satellite facility 
as defined in paragraph (e)(7)(i) of this section must not be increased 
beyond the number of Medicare-certified beds on December 29, 2007.
    (B) Except as specified in paragraph (e)(7)(ii)(C) of this section, 
the moratorium specified in paragraph (e)(7)(ii)(A) of this section is 
not applicable to--
    (1) An existing long-term care hospital or existing long-term care 
hospital satellite facility as defined in paragraph (e)(7)(i) of this 
section that meets both of the following requirements:
    (i) Is located in a State where there is only one other long-term 
care hospital that meets the criteria specified in Sec.  412.23(e) of 
this subpart.
    (ii) Requests an increase in the number of Medicare-certified beds 
after the closure or decrease in the number of Medicare-certified beds 
of another long-term care hospital in the State; or
    (2) An existing long-term care hospital or existing long-term care 
hospital satellite facility as defined in paragraph (e)(7)(i) of this 
section that obtained a certificate of need for an increase in beds and 
that meets both of the following requirements:
    (i) Is in a State for which such certificate of need is required, 
and
    (ii) Such certificate was issued on or after April 1, 2005, and 
before December 29, 2007.
    (C) The exceptions specified in paragraph (e)(7)(ii)(B) of this 
section do not affect the limitation on increasing beds under Sec.  
412.22(f) and Sec.  412.22(h)(3) of subpart.
* * * * *

0
4. Section 412.64 is amended by revising paragraph (c) to read as 
follows:


Sec.  412.64  Federal rates for inpatient operating costs for Federal 
fiscal year 2005 and subsequent fiscal years.

* * * * *
    (c) Computing the standardized amount. CMS computes an average 
standardized amount that is applicable to all hospitals located in all 
areas, updated by the applicable percentage increase specified in 
paragraph (d) of this section. CMS standardizes the average 
standardized amount by excluding an estimate of indirect medical 
education payments.
* * * * *


Sec.  412.87  [Amended]

0
5. In Sec.  412.87, paragraph (b)(1), remove the word ``relating'' and 
add in its place the word ``relative''.

0
6. Section 412.103 is amended by adding a new paragraph (a)(5) to read 
as follows:


Sec.  412.103  Special treatment: Hospitals located in urban areas and 
that apply for reclassification as rural.

    (a) * * *
    (5) For any period after September 30, 2009, and before October 1, 
2011, a CAH in a county that, in FY 2009, was not part of an MSA as 
defined by the Office of Management and Budget, but, as of FY 2010, was 
included as part of an MSA as a result of the most recent census data 
and implementation of the new MSA definitions announced by OMB on 
November 20, 2008, may be reclassified as being located in a rural area 
for purposes of meeting the rural location requirement in Sec.  
485.610(b) of this chapter if it meets any of the requirements under 
paragraph (a)(1), (a)(2), or (a)(3) of this section.
* * * * *

0
7. Section 412.105 is amended by revising paragraph (b)(4) to read as 
follows:


Sec.  412.105  Special treatment: Hospitals that incur indirect costs 
for graduate medical education programs.

* * * * *
    (b) * * *
    (4) Beds otherwise countable under this section used for outpatient 
observation services or skilled nursing swing-bed services, or 
ancillary labor/delivery services;
* * * * *

0
8. Section 412.106 is amended by--
0
a. Revising paragraph (a)(1)(ii)(B).
0
b. Adding a new paragraph (b)(4)(iv).
    The revision and addition read as follows:


Sec.  412.106  Special treatment: Hospitals that service a 
disproportionate share of low-income patients.

    (a) * * *
    (1) * * *
    (ii) * * *
    (B) Beds otherwise countable under this section used for outpatient 
observation services or skilled nursing swing-bed services;
* * * * *
    (b) * * *
    (4) * * *
    (iv) For cost reporting periods beginning on or after October 1, 
2009, the hospital must report the days in the numerator of the 
fraction in the second computation in a cost reporting period based on 
the date of discharge, the date of admission, or the dates of service. 
If a hospital seeks to change its methodology for reporting days in the 
numerator of the fraction in the second computation, the hospital must 
notify CMS, through its fiscal intermediary or MAC, in writing at least 
30 days before the beginning of the cost reporting

[[Page 43998]]

period in which the change would apply. The written notification must 
specify the methodology the hospital will use, the cost reporting 
period to which the requested change would apply, and the current 
methodology being used. Such a change will be effective only on the 
first day of a cost reporting period. If a hospital changes its 
methodology for reporting such days, CMS or the fiscal intermediary or 
MAC may adjust the number of days reported for a cost reporting period 
if it determines that any of those days have been counted in a prior 
cost reporting period.
* * * * *


Sec.  412.113  [Amended]

0
9. In paragraph (c)(2)(i)(B) of Sec.  412.113, the cross-reference 
``Sec.  410.66'' is removed and the cross-reference ``Sec.  410.69'' is 
added in its place.


Sec.  412.322  [Amended]

0
10. Section 412.322 is amended by removing and reserving paragraphs (c) 
and (d) to read as follows:

0
11. Section 412.523 is amended by adding a new paragraph (c)(3)(vi) to 
read as follows:


Sec.  412.523  Methodology for calculating the Federal prospective 
payment rates.

* * * * *
    (c) * * *
    (3) * * *
    (vi) For long-term care hospital prospective payment system rate 
year beginning October 1, 2009 and ending September 30, 2010. The 
standard Federal rate for long-term care hospital prospective payment 
system rate year beginning October 1, 2009 and ending September 30, 
2010 is the standard Federal rate for the previous long-term care 
hospital prospective payment system rate year updated by 2.0 percent. 
The standard Federal rate is adjusted, as appropriate, as described in 
paragraph (d) of this section.
* * * * *

0
12. Section 412.525 is amended by--
0
a. Revising paragraph (a)(2).
0
b. Revising paragraph (d)(1).
0
c. Adding a new paragraph (d)(5).
    The revisions and addition read as follows:


Sec.  412.525  Adjustments to the Federal prospective payment.

    (a) * * *
    (2) The fixed-loss amount is determined for the long-term care 
hospital rate year using the LTC-DRG relative weights that are in 
effect on the start of the applicable long-term care hospital 
prospective payment system rate year, as defined in Sec.  412.503.
* * * * *
    (d) * * *
    (1) Short-stay outliers, as provided for in Sec.  412.529.
* * * * *
    (5) Long-term care hospitals and satellites of long-term care 
hospitals that discharged Medicare patients admitted from a hospital 
not located in the same building or on the same campus as the long-term 
care hospital or satellite of the long-term care hospital, as provided 
in Sec.  412.536.

0
13. Section 412.534 is amended by revising paragraphs (c) through (e), 
and (h) to read as follows:


Sec.  412.534  Special payment provisions for long-term care hospitals 
within hospitals and satellites of long-term care hospitals.

* * * * *
    (c) Patients admitted from the hospital located in the same 
building or on the same campus as the long-term care hospital or 
satellite facility. Except for a long-term care hospital or a long-term 
care hospital satellite facility that meets the requirements of 
paragraphs (d) or (e) of this section, payments to the long-term care 
hospital for patients admitted to it or to its long-term care hospital 
satellite facility from the co-located hospital are made under either 
of the following:
    (1) For cost reporting periods beginning on or after October 1, 
2004 and before October 1, 2007 and for cost reporting periods 
beginning on or after October 1, 2010. (i) Except as provided in 
paragraphs (g) and (h) of this section, for any cost reporting period 
beginning on or after October 1, 2004 and before October 1, 2007 and 
for cost reporting periods beginning on or after October 1, 2010 in 
which the long-term care hospital or its satellite facility has a 
discharged Medicare inpatient population of whom no more than 25 
percent were admitted to the hospital or its satellite facility from 
the co-located hospital, payments are made under the rules at 
Sec. Sec.  412.500 through 412.541 in this subpart with no adjustment 
under this section.
    (ii) Except as provided in paragraph (g) or (h) of this section, 
for any cost reporting period beginning on or after October 1, 2004 and 
before October 1, 2007 and for cost reporting periods beginning on or 
after October 1, 2010 in which the long-term care hospital or satellite 
facility has a discharged Medicare inpatient population of whom more 
than 25 percent were admitted to the hospital or satellite facility 
from the co-located hospital, payments for the patients who are 
admitted from the co-located hospital and who cause the long-term care 
hospital or satellite facility to exceed the 25 percent threshold for 
discharged patients who have been admitted from the co-located hospital 
are the lesser of the amount otherwise payable under this subpart or 
the amount payable under this subpart that is equivalent, as set forth 
in paragraph (f) of this section, to the amount that would be 
determined under the rules at Sec.  412.1(a). Payments for the 
remainder of the long-term care hospital's or satellite facility's 
patients are made under the rules in this subpart at Sec. Sec.  412.500 
through 412.541 with no adjustment under this section.
    (iii) In determining the percentage of patients admitted to the 
long-term care hospital or its satellite from the co-located hospital 
under paragraphs (c)(1)(i) and (c)(1)(ii) of this section, patients on 
whose behalf an outlier payment was made to the co-located hospital are 
not counted towards the 25 percent threshold.
    (2) For cost reporting periods beginning on or after October 1, 
2007 and before October 1, 2010. (i) Except for a long-term care 
hospital or a long-term care hospital satellite facility subject to 
paragraph (g) or (h) of this section, payments are determined using the 
methodology specified in paragraph (c)(1) of this section.
    (ii) Payments for a long-term care hospital or long-term care 
hospital satellite facility subject to paragraph (g) of this section 
are determined using the methodology specified in paragraph (c)(1) of 
this section except that 25 percent is substituted with 50 percent.
    (3) For cost reporting periods beginning on or after July 1, 2007 
and before July 1, 2010. Payments for a long-term care hospital 
satellite facility described in Sec.  412.22(h)(3)(i) are determined 
using the methodology specified in paragraph (c)(1) of this section 
except that 25 percent is substituted with 50 percent.
    (d) Special treatment of rural hospitals. (1) For cost reporting 
periods beginning on or after October 1, 2004 and before October 1, 
2007 and for cost reporting periods beginning on or after October 1, 
2010. (i) Subject to paragraphs (g) and (h) of this section, in the 
case of a long-term care hospital or satellite facility that is located 
in a rural area as defined in Sec.  412.503 and is co-located with 
another hospital for any cost reporting period beginning on or after 
October 1, 2004 and before October 1, 2007 and for any cost reporting 
period beginning on or after October 1, 2010 in which the long-term 
care hospital or long-term care satellite

[[Page 43999]]

facility has a discharged Medicare inpatient population of whom more 
than 50 percent were admitted to the long-term care hospital or 
satellite facility from the co-located hospital, payments for the 
patients who are admitted from the co-located hospital and who cause 
the long-term care hospital or satellite facility to exceed the 50 
percent threshold for discharged patients who were admitted from the 
co-located hospital are the lesser of the amount otherwise payable 
under this subpart or the amount payable under this subpart that is 
equivalent, as set forth in paragraph (f) of this section, to the 
amount that were otherwise payable under Sec.  412.1(a). Payments for 
the remainder of the long-term care hospital's or long-term care 
hospital satellite facility's patients are made under the rules in this 
subpart at Sec. Sec.  412.500 through 412.541 with no adjustment under 
this section.
    (ii) In determining the percentage of patients admitted from the 
co-located hospital under paragraph (d)(1)(i) of this section, patients 
on whose behalf outlier payment was made at the co-located hospital are 
not counted toward the 50 percent threshold.
    (2) For cost reporting periods beginning on or after October 1, 
2007, and before October 1, 2010. (i) Except for a long-term care 
hospital or a long-term care hospital satellite facility subject to 
paragraph (g) or (h) of this section, payments are determined using the 
methodology specified in paragraph (d)(1) of this section.
    (ii) Payments for long-term care hospitals and long-term care 
hospital satellite facilities subject to paragraph (g) of this section 
are determined using the methodology specified in paragraph (d)(1) of 
this section except that 50 percent is substituted with 75 percent.
    (3) For cost reporting periods beginning on or after July 1, 2007 
and before July 1, 2010. Payments for a long-term care hospital 
satellite facility described in Sec.  412.22(h)(3)(i) are determined 
using the methodology specified in paragraph (d)(1) of this section 
except that 50 percent is substituted with 75 percent.
    (e) Special treatment of urban single or MSA-dominant hospitals. 
(1) For cost reporting periods beginning on or after October 1, 2004 
and before October 1, 2007 and for cost reporting periods beginning on 
or after October 1, 2010. (i) Subject to paragraphs (g) and (h) of this 
section, in the case of a long-term care hospital or a long-term care 
hospital satellite facility that is co-located with the only other 
hospital in the MSA or with a MSA-dominant hospital as defined in 
paragraph (e)(1)(iv) of this section, for any cost reporting period 
beginning on or after October 1, 2004, and before October 1, 2007 and 
for any cost reporting periods beginning on or after October 1, 2010, 
in which the long-term care hospital or long-term care hospital 
satellite facility has a discharged Medicare inpatient population of 
whom more than the percentage calculated under paragraph (e)(1)(ii) of 
this section were admitted to the hospital from the co-located 
hospital, payments for the patients who are admitted from the co-
located hospital and who cause the long-term care hospital to exceed 
the applicable threshold for discharged patients who have been admitted 
from the co-located hospital are the lesser of the amount otherwise 
payable under this subpart or the amount under this subpart that is 
equivalent, as set forth in paragraph (f) of this section, to the 
amount that otherwise would be determined under Sec.  412.1(a). 
Payments for the remainder of the long-term care hospital's or 
satellite facility's patients are made under the rules in this subpart 
with no adjustment under this section.
    (ii) For purposes of paragraph (e)(1)(i) of this section, the 
percentage used is the percentage of total Medicare discharges in the 
Metropolitan Statistical Area in which the hospital is located that are 
from the co-located hospital for the cost reporting period for which 
the adjustment was made, but in no case is less than 25 percent or more 
than 50 percent.
    (iii) In determining the percentage of patients admitted from the 
co-located hospital under paragraph (e)(1)(i) of this section, patients 
on whose behalf outlier payment was made at the co-located hospital are 
not counted toward the applicable threshold.
    (iv) For purposes of this paragraph, an ``MSA-dominant hospital'' 
is a hospital that has discharged more than 25 percent of the total 
hospital Medicare discharges in the MSA in which the hospital is 
located.
    (2) For cost reporting periods beginning on or after October 1, 
2007 and before October 1, 2010. (i) Except for a long-term care 
hospital or a long-term care hospital satellite facility subject to 
paragraph (g) or (h) of this section, payments are determined using the 
methodology specified in paragraph (e)(1) of this section.
    (ii) Payments for a long-term care hospital or long-term care 
hospital satellite facilities subject to paragraph (g) of this section 
are determined using the methodology specified in paragraph (e)(1) of 
this section except that the percentage of Medicare discharges that may 
be admitted from the co-located hospital without being subject to the 
payment adjustment at paragraph (e)(1) of this section is 75 percent.
    (3) For cost reporting periods beginning on or after July 1, 2007 
and before July 1, 2010. Payments for a long-term care hospital 
satellite facility described in Sec.  412.22(h)(3)(i), are determined 
using the methodology specified in paragraph (d)(1) of this section 
except that the payment adjustment under paragraph (e)(1) of this 
section is 75 percent.
* * * * *
    (h) Effective date of policies in this section for certain co-
located LTCH hospitals and satellites of LTCHs. The policies set forth 
in this section apply to Medicare patient discharges that were admitted 
from a hospital located in the same building or on the same campus as a 
long-term care hospital described in Sec.  412.23(e)(2)(i) that meets 
the criteria in Sec.  412.22(f) and a satellite facility of a long-term 
care hospital as described under Sec.  412.22(h)(3)(i) for discharges 
occurring in cost reporting periods beginning on or after July 1, 2007.
    (1) Except as specified in paragraph (h)(4) of this section, in the 
case of a long-term care hospital or long-term care hospital satellite 
facility that is described under this paragraph (h), the thresholds 
applied at paragraphs (c), (d), and (e) of this section are not less 
than the following percentages:
    (i) For cost reporting periods beginning on or after July 1, 2007 
and before July 1, 2008, the lesser of 75 percent of the total number 
of Medicare discharges that were admitted to the long-term care 
hospital or long-term care hospital satellite facility from its co-
located hospital during the cost reporting period or the percentage of 
Medicare discharges that had been admitted to the long-term care 
hospital or satellite from that co-located hospital during the long-
term care hospital's or satellite's RY 2005 cost reporting period.
    (ii) For cost reporting periods beginning on or after July 1, 2008 
and before July 1, 2009, the lesser of 50 percent of the total number 
of Medicare discharges that were admitted to the long-term care 
hospital or the long-term care hospital satellite facility from its co-
located hospital or the percentage of Medicare discharges that had been 
admitted from that co-located hospital during the long-term care 
hospital's or satellite's RY 2005 cost reporting period.
    (iii) For cost reporting periods beginning on or after July 1, 
2009, 25 percent of the total number of Medicare discharges that were 
admitted to the long-term care hospital or satellite from its co-
located hospital during the cost reporting period.

[[Page 44000]]

    (2) In determining the percentage of Medicare discharges admitted 
from the co-located hospital under this paragraph, patients on whose 
behalf a Medicare high cost outlier payment was made at the co-located 
referring hospital are not counted toward this threshold.
    (3) Except as specified in paragraph (h)(4) of this section, for 
cost reporting periods beginning on or after July 1, 2007, payments to 
long term care hospitals described in Sec.  412.23(e)(2)(i) that meet 
the criteria in Sec.  412.22(f) and satellite facilities of long-term 
care hospitals described at Sec.  412.22(h)(3)(i) are subject to the 
provisions of Sec.  412.536 for discharges of Medicare patients who are 
admitted from a hospital not located in the same building or on the 
same campus as the LTCH or LTCH satellite facility.
    (4) For a long-term care hospital described in Sec.  
412.23(e)(2)(i) that meets the criteria in Sec.  412.22(f), the 
policies set forth in this paragraph and in Sec.  412.536 of this part 
do not apply for discharges occurring in cost reporting periods 
beginning on or after July 1, 2007 and before July 1, 2010.
    (5) For a long-term care hospital or satellite facility that, as of 
December 29, 2007, was co-located with an entity that is a provider-
based, off-campus location of a subsection (d) hospital which did not 
provide services payable under section 1886(d) of the Act at the off-
campus location, the policies set forth in this paragraph and in Sec.  
412.536 of this part do not apply for discharges occurring in cost 
reporting periods beginning on or after July 1, 2007 and before July 1, 
2010.

0
14. Section 412.536 is amended by revising paragraph (a)(2) to read as 
follows:


Sec.  412.536  Special payment provisions for long-term care hospitals 
and satellites of long-term care hospitals that discharged Medicare 
patients admitted from a hospital not located in the same building or 
on the same campus as the long-term care hospital or satellite of the 
long-term care hospital.

    (a) Scope. * * *
    (2) For cost reporting periods beginning on or after July 1, 2007 
and before July 1, 2010, the policies set forth in this section are not 
applicable to discharges from:
    (i) A long-term care hospital described in Sec.  412.23(e)(5) of 
this part; or
    (ii) A long-term care hospital described in Sec.  412.23(e)(2)(i) 
of this part and that meet the criteria specified in Sec.  412.22(f) of 
this part; or
    (iii) A long-term care hospital or satellite facility, that as of 
December 29, 2007, was co-located with an entity that is a provider-
based, off-campus location of a subsection (d) hospital which did not 
provide services payable under section 1886(d) of the Act at the off-
campus location.
* * * * *

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

0
15. The authority citation for Part 413 continues to read as follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and 
(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act 
(42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of 
Public Law 106-133 (113 Stat. 1501A-332).


0
16. Section 413.65 is amended by--
0
a. Revising paragraph (a)(1)(ii)(G).
0
b. Revising paragraph (a)(1)(ii)(H).
    The revisions read as follows:


Sec.  413.65  Requirements for a determination that a facility or an 
organization has provider-based status.

    (a) * * *
    (1) * * *
    (ii) * * *
    (G) Independent diagnostic testing facilities furnishing only 
services paid under a fee schedule, such as facilities that furnish 
only screening mammography services (as defined in section 1861(jj) of 
the Act), facilities that furnish only clinical diagnostic laboratory 
tests, other than those clinical diagnostic laboratories operating as 
parts of CAHs on or after October 1, 2010, or facilities that furnish 
only some combination of these services.
    (H) Facilities, other than those operating as parts of CAHs, 
furnishing only physical, occupational, or speech therapy to ambulatory 
patients, throughout any period during which the annual financial cap 
amount on payment for coverage of physical, occupational, or speech 
therapy, as described in section 1833(g)(2) of the Act, is suspended by 
legislation.
* * * * *

0
17. Section 413.70 is amended by--
0
a. Revising paragraph (b)(1)(i).
0
b. Removing paragraph (b)(2)(iii).
0
c. Revising the heading of paragraph (b)(3).
0
d. Revising paragraph (b)(3)(ii)(A).
0
e. Adding a new paragraph (b)(7).
    The revisions and addition read as follows:


Sec.  413.70  Payment for services of a CAH.

* * * * *
    (b) * * *
    (1) * * *
    (i) Unless the CAH elects to be paid for services to its 
outpatients under the method specified in paragraph (b)(3) of this 
section, the amount of payment for outpatient services of a CAH is 
determined under paragraph (b)(2) of this section.
* * * * *
    (3) Election to be paid reasonable costs for facility services plus 
fee schedule for professional services. * * *
    (ii) * * *
    (A) For cost reporting periods beginning on or after October 1, 
2009, for facility services not including any services for which 
payment may be made under paragraph (b)(3)(ii)(B) of this section, the 
reasonable costs of the services as determined in accordance with the 
provisions of section 1861(v)(1)(A) of the Act and the applicable 
principles of cost reimbursement specified in this part and in Part 415 
of this subchapter, except that the lesser of costs or charges 
principle and the RCE payment principle are excluded when determining 
payment for CAH outpatient services; and
* * * * *
    (7) Payment for clinical diagnostic laboratory tests included as 
outpatient CAH services. (i) Payment for clinical diagnostic laboratory 
tests is not subject to the Medicare Part B deductible and coinsurance 
amounts.
    (ii) Subject to the provisions of paragraphs (b)(7)(iii) through 
(b)(7)(vi) of this section, payment to a CAH for clinical diagnostic 
laboratory tests will be made at 101 percent of reasonable costs of the 
services as determined in accordance paragraph (b)(2)(i) of this 
section.
    (iii) For services furnished before July 1, 2009, payment to a CAH 
for clinical diagnostic laboratory tests will be made under paragraph 
(b)(7)(ii) of this section only if the individual is an outpatient of 
the CAH, as defined in Sec.  410.2 of this chapter, and is physically 
present in the CAH at the time the specimen is collected.
    (iv) Except as provided in paragraphs (b)(7)(iii) and (b)(7)(v) of 
this section, payment to a CAH for clinical diagnostic laboratory tests 
will be made under paragraph (b)(7)(ii) of this section only if the 
individual is an outpatient of the CAH, as defined in Sec.  410.2 of 
this chapter, without regard to whether the individual is physically 
present in the CAH at the time the specimen is

[[Page 44001]]

collected and at least one of the following conditions is met:
    (A) The individual is receiving outpatient services in the CAH on 
the same day the specimen is collected; or
    (B) The specimen is collected by an employee of the CAH.
    (v) Notwithstanding paragraph (b)(7)(iv) of this section, payment 
for outpatient clinical diagnostic laboratory tests will not be made 
under paragraph (b)(7)(ii) of this section if the billing rules under 
Sec.  411.15(p) of this chapter apply.
    (vi) Payment for clinical diagnostic laboratory tests for which 
payment may not be made under paragraph (b)(7)(iii) or paragraph 
(b)(7)(iv) of this section will be made in accordance with the 
provisions of sections 1833(a)(1)(D) and 1833(a)(2)(D) of the Act.
* * * * *

0
18. Section 413.79 is amended by--
0
a. Revising paragraph (f)(1).
0
b. Redesignating paragraph (f)(6) and paragraph (f)(7).
0
c. Adding a new paragraph (f)(6).
0
d. Moving paragraph (l), currently incorrectly placed between 
paragraphs (k)(6) and (7), so that it appears after paragraph (k)(7) 
and is the last paragraph in the section.
    The revisions and addition read as follows:


Sec.  413.79  Direct GME payments: Determination of the weighted number 
of FTE residents.

* * * * *
    (f) * * *
    (1) Except as provided in paragraph (f)(6) of this section, each 
hospital in the Medicare GME affiliated group must submit the Medicare 
GME affiliation agreement, as defined under Sec.  413.75(b) of this 
section, to the CMS fiscal intermediary or MAC servicing the hospital 
and send a copy to the CMS Central Office no later than July 1 of the 
residency program year during which the Medicare GME affiliation 
agreement will be in effect.
* * * * *
    (6) Effective October 1, 2009, a hospital that is new after July 1 
and begins training residents for the first time after the July 1 start 
date of an academic year may receive a temporary adjustment to its FTE 
resident cap to reflect its participation in an existing Medicare GME 
affiliated group by submitting the Medicare GME affiliation agreement, 
as defined under Sec.  413.75(b), to the CMS fiscal intermediary or MAC 
servicing the hospital and sending a copy to the CMS Central Office by 
the earlier of June 30 of the residency program year during which the 
Medicare GME affiliation agreement will be in effect or the end of the 
first cost reporting period during which the hospital begins training 
residents. The Medicare GME affiliation agreement must specify the 
effective period for the agreement, which may begin no earlier than the 
date the affiliation agreement is submitted to CMS. Each of the other 
hospitals participating in the Medicare GME affiliated group must 
submit an amended Medicare GME affiliation agreement that reflects the 
participation of the new hospital to the CMS fiscal intermediary or MAC 
servicing the hospital and send a copy to the CMS Central Office no 
later than June 30 of the residency program year during which the 
Medicare GME affiliation agreement will be in effect. For purposes of 
this paragraph, a new hospital is one for which a new Medicare provider 
agreement takes effect in accordance with Sec.  489.13 of this chapter.
* * * * *

PART 415--SERVICES FURNISHED BY PHYSICIANS IN PROVIDERS, 
SUPERVISING PHYSICIANS IN TEACHING SETTINGS, AND RESIDENTS IN 
CERTAIN SETTINGS

0
19. The authority citation for Part 415 continues to read as follows:

    Authority:  Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).


Sec.  415.152  [Amended]

0
20. In Sec.  415.152, under paragraph (1) of the definition of 
``Approved graduate medical education (GME) program'', remove the 
phrase ``the Committee on Hospitals of the Bureau of Professional 
Education of''.

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

0
21. The authority citation for part 485 continues to read as follows:

    Authority:  Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395(hh)).


0
22. Section 485.610 is amended by--
0
a. Revising paragraph (b)(3).
0
b. Adding a new paragraph (b)(4).
    The addition and revision read as follows:


Sec.  485.610  Condition of participation: Status and location.

* * * * *
    (b) * * *
    (3) Effective for October 1, 2004 through September 30, 2006, the 
CAH does not meet the location requirements in either paragraph (b)(1) 
or (b)(2) of this section and is located in a county that, in FY 2004, 
was not part of a Metropolitan Statistical Area as defined by the 
Office of Management and Budget, but as of FY 2005 was included as part 
of such a Metropolitan Statistical Area as a result of the most recent 
census data and implementation of the new Metropolitan Statistical Area 
definitions announced by the Office of Management and Budget on June 3, 
2003.
    (4) Effective for October 1, 2009 through September 30, 2011, the 
CAH does not meet the location requirements in either paragraph (b)(1) 
or (b)(2) of this section and is located in a county that, in FY 2009, 
was not part of a Metropolitan Statistical Area as defined by the 
Office of Management and Budget, but, as of FY 2010, was included as 
part of such a Metropolitan Statistical Area as a result of the most 
recent census data and implementation of the new Metropolitan 
Statistical Area definitions announced by the Office of Management and 
Budget on November 20, 2008.
* * * * *

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

0
23. The authority citation for Part 489 continues to read as follows:

    Authority:  Secs. 1102, 1819, 1820(e), 1861, 1864(m), 1866, 
1869, and 1871 of the Social Security Act (42 U.S.C. 1302, 1395i-3, 
1395x, 1395aa(m), 1395cc, 1395ff, and 1395hh).


0
24. Section 489.24 is amended by revising paragraph (a)(2) to read as 
follows:


Sec.  489.24  Special responsibilities of Medicare hospitals in 
emergency cases.

    (a) * * *
    (2)(i) When a waiver has been issued in accordance with section 
1135 of the Act that includes a waiver under section 1135(b)(3) of the 
Act, sanctions under this section for an inappropriate transfer or for 
the direction or relocation of an individual to receive medical 
screening at an alternate location do not apply to a hospital with a 
dedicated emergency department if the following conditions are met:
    (A) The transfer is necessitated by the circumstances of the 
declared emergency in the emergency area during the emergency period.
    (B) The direction or relocation of an individual to receive medical 
screening at an alternate location is pursuant to an appropriate State 
emergency preparedness plan or, in the case of a public health 
emergency that involves a

[[Page 44002]]

pandemic infectious disease, pursuant to a State pandemic preparedness 
plan.
    (C) The hospital does not discriminate on the basis of an 
individual's source of payment or ability to pay.
    (D) The hospital is located in an emergency area during an 
emergency period, as those terms are defined in section 1135(g)(1) of 
the Act.
    (E) There has been a determination that a waiver of sanctions is 
necessary.
    (ii) A waiver of these sanctions is limited to a 72-hour period 
beginning upon the implementation of a hospital disaster protocol, 
except that, if a public health emergency involves a pandemic 
infectious disease (such as pandemic influenza), the waiver will 
continue in effect until the termination of the applicable declaration 
of a public health emergency, as provided under section 1135(e)(1)(B) 
of the Act.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: July 27, 2009.
Charlene Frizzera,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Dated: July 29, 2009.
Kathleen Sebelius,
Secretary.
    [Editorial Note: The following Addendum and appendixes will not 
appear in the Code of Federal Regulations.]

Addendum--Schedule of Standardized Amounts, Update Factors, and Rate-
of-Increase Percentages Effective With Cost Reporting Periods Beginning 
On or After October 1, 2009

I. Summary and Background

    In this Addendum, we are setting forth a description of the 
methods and data we used to determine the prospective payment rates 
for Medicare hospital inpatient operating costs and Medicare 
hospital inpatient capital-related costs for FY 2010 for acute care 
hospitals. We also are setting forth the rate-of-increase 
percentages for updating the target amounts for certain hospitals 
excluded from the IPPS for FY 2010. We note that, because certain 
hospitals excluded from the IPPS are paid on a reasonable cost basis 
subject to a rate-of-increase ceiling (and not by the IPPS), these 
hospitals are not affected by the figures for the standardized 
amounts, offsets, and budget neutrality factors. Therefore, in this 
final rule, we are establishing the rate-of-increase percentages for 
updating the target amounts for certain hospitals excluded from the 
IPPS that are effective for cost reporting periods beginning on or 
after October 1, 2009.
    In addition, we are setting forth a description of the methods 
and data we used to determine the standard Federal rate that will be 
applicable to Medicare LTCHs for RY 2010.
    In general, except for SCHs, MDHs, and hospitals located in 
Puerto Rico, each hospital's payment per discharge under the IPPS is 
based on 100 percent of the Federal national rate, also known as the 
national adjusted standardized amount. This amount reflects the 
national average hospital cost per case from a base year, updated 
for inflation.
    Currently, SCHs are paid based on whichever of the following 
rates yields the greatest aggregate payment: the Federal national 
rate; the updated hospital-specific rate based on FY 1982 costs per 
discharge; the updated hospital-specific rate based on FY 1987 costs 
per discharge; the updated hospital-specific rate based on FY 1996 
costs per discharge; or for cost reporting periods beginning on or 
after January 1, 2009, the updated hospital-specific rate based on 
the FY 2006 costs per discharge.
    Under section 1886(d)(5)(G) of the Act, MDHs historically have 
been paid based on the Federal national rate or, if higher, the 
Federal national rate plus 50 percent of the difference between the 
Federal national rate and the updated hospital-specific rate based 
on FY 1982 or FY 1987 costs per discharge, whichever was higher. 
(MDHs did not have the option to use their FY 1996 hospital-specific 
rate.) However, section 5003(a)(1) of Public Law 109-171 extended 
and modified the MDH special payment provision that was previously 
set to expire on October 1, 2006, to include discharges occurring on 
or after October 1, 2006, but before October 1, 2011. Under section 
5003(b) of Public Law 109-171, if the change results in an increase 
to an MDH's target amount, we must rebase an MDH's hospital-specific 
rates based on its FY 2002 cost report. Section 5003(c) of Public 
Law 109-171 further required that MDHs be paid based on the Federal 
national rate or, if higher, the Federal national rate plus 75 
percent of the difference between the Federal national rate and the 
updated hospital-specific rate. Further, based on the provisions of 
section 5003(d) of Pub. L. 109-171, MDHs are no longer subject to 
the 12-percent cap on their DSH payment adjustment factor.
    For hospitals located in Puerto Rico, the payment per discharge 
is based on the sum of 25 percent of an updated Puerto Rico-specific 
rate based on average costs per case of Puerto Rico hospitals for 
the base year and 75 percent of the Federal national rate. (We refer 
readers to section II.D.3. of this Addendum for a complete 
description.)
    As discussed below in section II. of this Addendum, we are 
making changes in the determination of the prospective payment rates 
for Medicare inpatient operating costs for acute care hospitals for 
FY 2010. In section III. of this Addendum, we discuss our policy 
changes for determining the prospective payment rates for Medicare 
inpatient capital-related costs for FY 2010. In section IV. of this 
Addendum, we are setting forth our changes for determining the rate-
of-increase limits for certain hospitals excluded from the IPPS for 
FY 2010. In section V. of this Addendum, we are making changes in 
the determination of the standard Federal rate for LTCHs under the 
LTCH PPS for RY 2010. The tables to which we refer in the preamble 
of this final rule are presented in section VI. of this Addendum.

II. Changes to Prospective Payment Rates for Hospital Inpatient 
Operating Costs for Acute Care Hospitals for FY 2010

    The basic methodology for determining prospective payment rates 
for hospital inpatient operating costs for acute care hospitals for 
FY 2005 and subsequent fiscal years is set forth at Sec.  412.64. 
The basic methodology for determining the prospective payment rates 
for hospital inpatient operating costs for hospitals located in 
Puerto Rico for FY 2005 and subsequent fiscal years is set forth at 
Sec. Sec.  412.211 and 412.212. Below we discuss the factors used 
for determining the prospective payment rates for FY 2010.
    In summary, the standardized amounts set forth in Tables 1A, 1B, 
and 1C of section VI. of this Addendum reflect--
    <bullet> Equalization of the standardized amounts for urban and 
other areas at the level computed for large urban hospitals during 
FY 2004 and onward, as provided for under section 
1886(d)(3)(A)(iv)(II) of the Act, updated by the applicable 
percentage increase required under sections 1886(b)(3)(B)(i)(XX) and 
1886(b)(3)(B)(viii) of the Act.
    <bullet> The labor-related share that is applied to the 
standardized amounts and Puerto Rico-specific standardized amounts 
to give the hospital the highest payment, as provided for under 
sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act.
    <bullet> Updates of 2.1 percent for all areas (that is, the 
estimated full market basket percentage increase of 2.1 percent), as 
required by section 1886(b)(3)(B)(i)(XX) of the Act, as amended by 
section 5001(a)(1) of Public Law 109-171, and reflecting the 
requirements of section 1886(b)(3)(B)(viii) of the Act, as added by 
section 5001(a)(3) of Public Law 109-171, to reduce the applicable 
percentage increase by 2.0 percentage points for a hospital that 
fails to submit data, in a form and manner, and at the time 
specified by the Secretary, relating to the quality of inpatient 
care furnished by the hospital.
    <bullet> An update of 2.1 percent to the Puerto Rico-specific 
standardized amount (that is, the full estimated rate-of-increase in 
the hospital market basket for IPPS hospitals), as provided for 
under Sec.  412.211(c), which states that we update the Puerto Rico-
specific standardized amount using the percentage increase specified 
in Sec.  412.64(d)(1), or the percentage increase in the market 
basket index for prospective payment hospitals for all areas.
    <bullet> An adjustment to the standardized amount to ensure 
budget neutrality for DRG recalibration and reclassification, as 
provided for under section 1886(d)(4)(C)(iii) of the Act.
    <bullet> An adjustment to ensure the wage index and labor share 
update and changes are budget neutral, as provided for under section 
1886(d)(3)(E)(i) of the Act. We note that section 1886(d)(3)(E)(i) 
of the Act requires that we do not consider the labor-related share 
of 62 percent to compute wage index budget neutrality.
    <bullet> An adjustment to ensure the effects of geographic 
reclassification are budget neutral, as provided for in section

[[Page 44003]]

1886(d)(8)(D) of the Act, by removing the FY 2009 budget neutrality 
factor and applying a revised factor.
    <bullet> An adjustment to remove the FY 2009 outlier offset and 
apply an offset for FY 2010, as provided for in section 
1886(d)(3)(B) of the Act.
    <bullet> An adjustment to ensure the effects of the rural 
community hospital demonstration required under section 410A of 
Public Law 108-173 are budget neutral, as required under section 
410A(c)(2) of Public Law 108-173.
    We note that in this final rule, as discussed below and in 
section II. of the preamble to this final rule, we are opting to 
postpone adopting documentation and coding adjustments to the 
national standardized amount, as authorized under section 7(a) of 
Public Law 110-90 and section 1886(d)(3)(A)(vi) of the Act, and to 
the hospital-specific rates and Puerto Rico-specific standardized 
amount under our special exceptions and adjustment authority under 
section 1886(d)(5)(I)(i) of the Act until a full analysis of FY 2009 
case-mix changes can be completed.
    We note that, beginning in FY 2008, we applied the budget 
neutrality adjustment for the rural floor to the hospital wage 
indices rather than the standardized amount. As we did for FY 2009, 
for FY 2010, we are continuing to apply the rural floor budget 
neutrality adjustment to hospital wage indices rather than the 
standardized amount. In addition, instead of applying the budget 
neutrality adjustment for the imputed floor adopted under section 
1886(d)(3)(E) of the Act to the standardized amount, for FY 2010, we 
are continuing to apply the imputed floor budget neutrality 
adjustment to the wage indices. As we did for FY 2009, we also are 
continuing to apply the budget neutrality adjustments for the rural 
floor and imputed rural floor at the State level rather than the 
national level. For a complete discussion of the budget neutrality 
changes concerning the rural floor and the imputed floor, including 
the within-State budget neutrality adjustment, we refer readers to 
section III.B.2.b. of the preamble of the FY 2009 IPPS final rule 
and this final rule.

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts

    In general, the national standardized amount is based on per 
discharge averages of adjusted hospital costs from a base period 
(section 1886(d)(2)(A) of the Act), updated and otherwise adjusted 
in accordance with the provisions of section 1886(d) of the Act. For 
Puerto Rico hospitals, the Puerto Rico-specific standardized amount 
is based on per discharge averages of adjusted target amounts from a 
base period (section 1886(d)(9)(B)(i) of the Act), updated and 
otherwise adjusted in accordance with the provisions of section 
1886(d)(9) of the Act. The September 1, 1983 interim final rule (48 
FR 39763) contained a detailed explanation of how base-year cost 
data (from cost reporting periods ending during FY 1981) were 
established for urban and rural hospitals in the initial development 
of standardized amounts for the IPPS. The September 1, 1987 final 
rule (52 FR 33043 and 33066) contains a detailed explanation of how 
the target amounts were determined and how they are used in 
computing the Puerto Rico rates.
    Sections 1886(d)(2)(B) and 1886(d)(2)(C) of the Act require us 
to update base-year per discharge costs for FY 1984 and then 
standardize the cost data in order to remove the effects of certain 
sources of cost variations among hospitals. These effects include 
case-mix, differences in area wage levels, cost-of-living 
adjustments for Alaska and Hawaii, IME costs, and costs to hospitals 
serving a disproportionate share of low-income patients.
    In accordance with section 1886(d)(3)(E) of the Act, the 
Secretary estimates, from time-to-time, the proportion of hospitals' 
costs that are attributable to wages and wage-related costs. In 
general, the standardized amount is divided into labor-related and 
nonlabor-related amounts; only the proportion considered to be the 
labor-related amount is adjusted by the wage index. Section 
1886(d)(3)(E) of the Act requires that 62 percent of the 
standardized amount be adjusted by the wage index, unless doing so 
would result in lower payments to a hospital than would otherwise be 
made. (Section 1886(d)(9)(C)(iv)(II) of the Act extends this 
provision to the labor-related share for hospitals located in Puerto 
Rico.)
    For FY 2010, we are rebasing and revising the national and 
Puerto Rico-specific labor-related and nonlabor-related shares from 
the percentages established for FY 2009. Specifically, under section 
1886(d)(3)(E) of the Act, the Secretary estimates from time to time 
the proportion of payments that are labor-related: ``The Secretary 
shall adjust the proportion (as estimated by the Secretary from time 
to time) of hospitals' costs which are attributable to wages and 
wage-related costs of the DRG prospective payment rates. * * *'' We 
refer to the proportion of hospitals' costs that are attributable to 
wages and wage-related costs as the ``labor-related share.'' For FY 
2010, as discussed in section IV.B.4. of the preamble of this final 
rule, we are establishing a labor-related share of 68.8 percent for 
the national standardized amounts and 62.1 percent for the Puerto 
Rico-specific standardized amount. Consistent with section 
1886(d)(3)(E) of the Act, we are applying the wage index to a labor-
related share of 62 percent for all non-Puerto Rico hospitals whose 
wage indexes are less than or equal to 1.0000. For all non-Puerto 
Rico hospitals whose wage indices are greater than 1.0000, we are 
applying the wage index to a labor-related share of 68.8 percent of 
the national standardized amount. For hospitals located in Puerto 
Rico whose Puerto Rico-specific wage index values are greater than 
1.0000, we are applying a labor-related share of 62.1 percent. For 
hospitals located in Puerto Rico, we are applying a labor-related 
share of 62 percent if its Puerto Rico-specific wage index is less 
than or equal to 1.0000.
    The standardized amounts for operating costs appear in Tables 
1A, 1B, and 1C of the Addendum to this final rule.

2. Computing the Average Standardized Amount

    Section 1886(d)(3)(A)(iv)(II) of the Act requires that, 
beginning with FY 2004 and thereafter, an equal standardized amount 
be computed for all hospitals at the level computed for large urban 
hospitals during FY 2003, updated by the applicable percentage 
update. Section 1886(d)(9)(A)(ii)(II) of the Act equalizes the 
Puerto Rico-specific urban and rural area rates. Accordingly, we are 
calculating the FY 2010 national and Puerto Rico standardized 
amounts irrespective of whether a hospital is located in an urban or 
rural location.

3. Updating the Average Standardized Amount

    In accordance with section 1886(d)(3)(A)(iv)(II) of the Act, we 
are updating the equalized standardized amount for FY 2010 by the 
full estimated market basket percentage increase for hospitals in 
all areas, as specified in section 1886(b)(3)(B)(i)(XX) of the Act, 
as amended by section 5001(a)(1) of Public Law 109-171. The 
percentage increase in the market basket reflects the average change 
in the price of goods and services comprising routine, ancillary, 
and special care unit hospital inpatient services. The most recent 
forecast of the hospital market basket increase for FY 2010 is 2.1 
percent. Thus, for FY 2010, the update to the average standardized 
amount is 2.1 percent for hospitals in all areas. The estimated 
market basket increase of 2.1 percent is based on Global Insight, 
Inc.'s 2009 first quarter forecast of the hospital market basket 
increase (as discussed in Appendix B of this final rule).
    Section 1886(b)(3)(B) of the Act specifies the mechanism to be 
used to update the standardized amount for payment for inpatient 
hospital operating costs. Section 1886(b)(3)(B)(viii) of the Act, as 
added by section 5001(a)(3) of Public Law 109-171, provides for a 
reduction of 2.0 percentage points from the update percentage 
increase (also known as the market basket update) for FY 2007 and 
each subsequent fiscal year for any ``subsection (d) hospital'' that 
does not submit quality data, as discussed in section V.A. of the 
preamble of this final rule. The standardized amounts in Tables 1A 
through 1C of section VI. of this Addendum reflect these 
differential amounts.
    Section 412.211(c) states that we update the Puerto Rico-
specific standardized amount using the percentage increase specified 
in Sec.  412.64(d)(1), or the percentage increase in the market 
basket index for prospective payment hospitals for all areas. We are 
applying the full rate-of-increase in the hospital market basket for 
IPPS hospitals to the Puerto Rico-specific standardized amount. 
Therefore, the update to the Puerto Rico-specific standardized 
amount is 2.1 percent.
    Although the update factors for FY 2010 are set by law, we are 
required by section 1886(e)(4) of the Act to recommend, taking into 
account MedPAC's recommendations, appropriate update factors for FY 
2010 for both IPPS hospitals and hospitals and hospital units 
excluded from the IPPS. Section 1886(e)(5)(A) of the Act requires 
that

[[Page 44004]]

we publish our proposed recommendations in the Federal Register for 
public comment. Our recommendation on the update factors is set 
forth in Appendix B of this final rule.

4. Other Adjustments to the Average Standardized Amount

    As in the past, we are adjusting the FY 2010 standardized amount 
to remove the effects of the FY 2009 geographic reclassifications 
and outlier payments before applying the FY 2010 updates. We then 
apply budget neutrality offsets for outliers and geographic 
reclassifications to the standardized amount based on FY 2010 
payment policies.
    We do not remove the prior year's budget neutrality adjustments 
for reclassification and recalibration of the DRG weights and for 
updated wage data because, in accordance with sections 
1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act, estimated aggregate 
payments after updates in the DRG relative weights and wage index 
should equal estimated aggregate payments prior to the changes. If 
we removed the prior year's adjustment, we would not satisfy these 
conditions.
    Budget neutrality is determined by comparing aggregate IPPS 
payments before and after making changes that are required to be 
budget neutral (for example, changes to DRG classifications, 
recalibration of the DRG relative weights, updates to the wage 
index, and different geographic reclassifications). We include 
outlier payments in the simulations because they may be affected by 
changes in these parameters.
    In section II. of the preamble of this final rule, we discussed 
that we received some comments on whether Medicare Advantage claims 
were used in the FY 2010 IPPS proposed rule to calculate the MS-DRG 
relative weights. We responded to those comments by explaining that, 
historically, we have excluded data from Medicare Advantage claims 
from the calculation of the relative weights. However, the December 
31, 2008 update of the FY 2008 MedPAR data that was used as the 
source for calculating the proposed FY 2010 relative weights 
contained a significant number of Medicare Advantage claims. This is 
because hospitals were required to submit informational only claims 
for all Medicare Advantage patients they treated for discharges 
occurring on or after October 1, 2006, under Change Request 5647 
(Transmittal 1311). As a result, we inadvertently included claims 
from discharges of patients enrolled in Medicare Advantage plans in 
the calculation of the proposed FY 2010 relative weights. For this 
final rule, we have excluded the discharges of patients enrolled in 
Medicare Advantage plans in the calculation of the FY 2010 relative 
weights.
    Similarly, in the proposed rule, we inadvertently included 
Medicare Advantage claims in the budget neutrality calculations. 
Thus, we unintentionally included the estimated full IPPS payments 
for the Medicare Advantage claims in the budget neutrality 
calculations and outlier payment estimates for the proposed rule. 
Although we are excluding Medicare Advantage claims from the 
relative weight calculations in this final rule, it is necessary to 
include IME payments for Medicare Advantage enrollees in the budget 
neutrality calculations (except for computing the outlier threshold, 
which we explain in section II.A.4.e. of this Addendum). Under Sec.  
412.105(g) of the regulations and as implemented in Transmittal A-
98-21 (Change Request 332), hospitals that are paid under the IPPS 
and train residents in approved GME programs may submit claims 
associated with Medicare Advantage enrollees to the fiscal 
intermediary/MAC for the purpose of receiving an IME payment. No 
IPPS MS-DRG payments (or other add-on payment, such as DSH or 
outliers) are made for these Medicare Advantage enrollees.
    As described in detail below, we make various budget neutrality 
adjustments to the standardized amount. Specifically, the budget 
neutrality adjustment under section 1886(d)(4)(C)(iii) of the Act 
requires that we ensure that the recalibration of the relative 
weights does not increase aggregate payments made under section 
1886(d) of the Act. Similarly, section 1886(d)(3)(E) of the Act 
requires that the adjustment to the wage index shall be made in a 
manner that does not increase or decrease aggregate payments under 
section 1886(d) of the Act (subject to the requirement, explained 
below, that we must assume a uniform labor-related share). In 
addition, we make an adjustment to the wage index to ensure that 
aggregate payments after implementation of the rural floor under 
section 4410 of the BBA (Pub. L. 105-33) and the imputed floor under 
Sec.  412.64(h)(4) of the regulations are made in a manner that 
ensures that aggregate payments to hospitals are not affected. Under 
section 1886(d)(8)(D) of the Act, the Secretary is required to 
adjust the standardized amount to ensure that aggregate payments 
under the IPPS after implementation of the provisions for certain 
geographic reclassification under sections 1886(d)(8)(B) and (C) and 
1886(d)(10) of the Act are equal to the aggregate prospective 
payments that would have been made absent these provisions. As 
discussed below, we also are adjusting the standardized amount for 
FY 2010 by an estimated amount to ensure that aggregate payments 
made by the Secretary under section 1886(d) of the Act do not exceed 
the amount of payments that would have been made in the absence of 
the rural community hospital demonstration program, consistent with 
section 410A of Public Law 108-173. Because IME Medicare Advantage 
payments are made to IPPS hospitals under section 1886(d) of the 
Act, we believe these payments must be part of these budget 
neutrality calculations. However, we note that it is not necessary 
to include Medicare Advantage IME payments in the outlier threshold 
calculation or the outlier offset to the standardized amount because 
the statute requires that outlier payments be not less than 5 
percent nor more than 6 percent of total ``operating DRG payments,'' 
which does not include IME and DSH payments.
    In order to account for these Medicare Advantage IME payments in 
determining the budget neutrality adjustments for this final rule, 
we identified Medicare Advantage claims from IPPS teaching hospitals 
in the MedPAR data. The GHO Paid indicator with a value of ``1'' on 
the MedPAR file indicates that the claim was paid by a Medicare 
Advantage plan (other than the IPPS IME payment specified at Sec.  
412.105(g)). For these Medicare Advantage claims from IPPS teaching 
hospitals, we computed a transfer-adjusted CMI by provider based on 
the FY 2009 MS-DRG GROUPER Version 26.0 assignment and relative 
weights. We also computed a transfer-adjusted CMI for these Medicare 
Advantage claims from IPPS teaching hospitals based on the FY 2010 
MS-DRG GROUPER Version 27.0 assignments and relative weights. These 
transfer-adjusted CMIs (and corresponding case counts) were used to 
calculate an IME teaching add-on payment in accordance with Sec.  
412.105(g). The total Medicare Advantage IME payment amount was then 
added to the total Federal payment amount for each provider (where 
applicable) in order to account for the Medicare Advantage IME 
payment in determining the budget neutrality adjustments. We note 
that we did not include Medicare Advantage IME claims when 
estimating outlier payments for providers because Medicare Advantage 
claims are not eligible for outlier payments under the IPPS.
    We also are adjusting the standardized amount for FY 2010 by an 
estimated amount to ensure that aggregate payments made by the 
Secretary do not exceed the amount of payments that would have been 
made in the absence of the rural community hospital demonstration 
program, as required under section 410A of Public Law 108-173. This 
demonstration is required to be budget neutral under section 
410A(c)(2) of Public Law 108-173. For FY 2010, we are not applying 
budget neutrality for the imputed floor to the standardized amount, 
but instead are applying it to the wage index, as discussed in 
section III.B.2. of the preamble of this final rule.
    Comment: One commenter requested that CMS completely and 
adequately describe the FY 2010 methods and data elements used in 
each budget neutrality adjustment calculation to allow a 
determination that the proposed budget neutrality adjustments and 
methodologies are appropriate and are not duplicated across the 
various budget neutrality adjustments. The commenter specifically 
requested clarification on whether the pre- or post-labor share 
adjusted rate is used in the budget neutrality calculations. The 
commenter also urged CMS to assure that any data necessary for 
commenters are available during the comment period (such as the data 
used to develop the CCR adjustment factors).
    Response: In the discussion below, we explain our methodology 
for computing each individual budget neutrality adjustment. In 
addition, as stated above, budget neutrality is determined by 
comparing aggregate IPPS payments before and after making changes 
that are required to be budget neutral (for example, changes to MS-
DRG classifications, recalibration of the MS-DRG relative weights, 
updates to the wage index, and different geographic 
reclassifications). We include outlier payments in the simulations 
because they may be affected by changes in these parameters. We also 
take extra caution to ensure that all variables are correctly

[[Page 44005]]

inputted in our budget neutrality calculations in order that the 
various budget neutrality adjustments are not duplicated. In 
addition, because the commenter's remarks are very general, we are 
not sure where the inadequacy lies that the commenter references. 
However, we did clarify in the budget neutrality calculations below 
in which instances we used FY 2009 or FY 2010 pre- and post-
reclassified wage indices, FY 2009 or FY 2010 relative weights, and 
FY 2009 or FY 2010 labor-related share percentages. We believe the 
discussions above and below adequately describe the methodology for 
budget neutrality.
    In reference to the comment on assuring that any data necessary 
for the commenters are available during the comment period, we 
strive to ensure that all files are available to the public. Most 
data files are available on the CMS Web site, as we specified in the 
proposed. In addition, we have reorganized the IPPS Web site to make 
it easier for the end user to locate relevant data files for the 
proposed rule and this final rule in one central location.

a. Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment

    Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning 
in FY 1991, the annual DRG reclassification and recalibration of the 
relative weights must be made in a manner that ensures that 
aggregate payments to hospitals are not affected. As discussed in 
section II. of the preamble of this final rule, we normalized the 
recalibrated DRG weights by an adjustment factor so that the average 
case weight after recalibration is equal to the average case weight 
prior to recalibration. However, equating the average case weight 
after recalibration to the average case weight before recalibration 
does not necessarily achieve budget neutrality with respect to 
aggregate payments to hospitals because payments to hospitals are 
affected by factors other than average case weight. Therefore, as we 
have done in past years, we are making a budget neutrality 
adjustment to ensure that the requirement of section 
1886(d)(4)(C)(iii) of the Act is met.
    Section 1886(d)(3)(E)(i) of the Act requires us to update the 
hospital wage index on an annual basis beginning October 1, 1993. 
This provision also requires us to make any updates or adjustments 
to the wage index in a manner that ensures that aggregate payments 
to hospitals are not affected by the change in the wage index. In 
addition, under section 1886(d)(3)(E)(i) of the Act, as we 
established in the FY 2006 IPPS final rule (70 FR 47395), we are 
implementing the revised and rebased labor share in a budget neutral 
manner. Specifically, section 1886(d)(3)(E)(i) of the Act directs us 
to determine a labor-related share that reflects the ``proportion * 
* * of hospitals' costs which are attributable to wages and wage-
related costs.'' In addition, section 1886(d)(3)(E)(i) of the Act 
requires that we implement the wage index adjustment in a budget 
neutral manner. However, section 1886(d)(3)(E)(ii) of the Act sets 
the labor-related share at 62 percent for hospitals with a wage 
index less than or equal to 1.0, and section 1886(d)(3)(E)(i) of the 
Act provides that the Secretary shall calculate the budget 
neutrality adjustment for the adjustments or updates made under that 
provision as if section 1886(d)(3)(E)(ii) of the Act had not been 
enacted. In other words, these two sections of the statute require 
that we implement the revision of the labor-related share of 68.8 
percent (compared to 69.7 percent for FY 2009) (as well as the wage 
index updates) in a budget neutral manner, but that our budget 
neutrality adjustment should not take into account the requirement 
that we set the labor-related share for hospitals with indices less 
than or equal to 1.0 at the more advantageous level of 62 percent. 
Therefore, for purposes of this budget neutrality adjustment, 
section 1886(d)(3)(E)(i) of the Act prohibits us from taking into 
account the fact that hospitals with a wage index less than or equal 
to 1.0 are paid using a labor-related share of 62 percent. 
Consistent with current policy, for FY 2010, we are adjusting 100 
percent of the wage index factor for occupational mix. We describe 
the occupational mix adjustment in section III.D. of the preamble of 
this final rule.
    For FY 2010, to comply with the requirement that DRG 
reclassification and recalibration of the relative weights be budget 
neutral for the Puerto Rico standardized amount and the hospital-
specific rates, we used FY 2008 discharge data to simulate payments 
and compared aggregate payments using the FY 2009 labor-related 
share percentages, the FY 2009 relative weights, and the FY 2009 
pre-reclassified wage data to aggregate payments using the FY 2009 
labor-related share percentages, the FY 2010 relative weights, and 
the FY 2009 pre-reclassified wage data. Based on this comparison, we 
computed a budget neutrality adjustment factor equal to 0.997941. As 
discussed in section IV. of this Addendum, we would also apply the 
DRG reclassification and recalibration budget neutrality factor of 
0.997941 to the hospital-specific rates that are to be effective for 
cost reporting periods beginning on or after October 1, 2009.
    In order to meet the statutory requirements that we do not take 
into account the labor-related share of 62 percent when computing 
wage index budget neutrality and that we budget neutralize any 
changes in payments as a result of the FY 2010 rebased and revised 
labor-related share, it was necessary to use a three-step process to 
comply with the requirements that DRG reclassification and 
recalibration of the relative weights and the updated wage index and 
labor-related share have no effect on aggregate payments for IPPS 
hospitals. We first determined a DRG reclassification and 
recalibration budget neutrality factor of 0.997941 by using the same 
methodology described above to determine the DRG reclassification 
and recalibration budget neutrality factor for the Puerto Rico 
standardized amount and hospital-specific rates. Secondly, to 
compute a budget neutrality factor for wage index and labor-related 
share changes, we used FY 2008 discharge data to simulate payments 
and compared aggregate payments using FY 2010 relative weights and 
FY 2009 pre-reclassified wage indices, and applied the FY 2009 
labor-related share of 69.7 percent to all hospitals (regardless of 
whether the hospital's wage index was above or below 1.0) to 
aggregate payments using the FY 2010 relative weights and the FY 
2010 pre-reclassified wage indices, and applied the rebased and 
revised labor-related share for FY 2010 of 68.8 percent to all 
hospitals (regardless of whether the hospital's wage index was above 
or below 1.0). In addition, we applied the DRG reclassification and 
recalibration budget neutrality factor (derived in the first step) 
to the rates that were used to simulate payments for this comparison 
of aggregate payments from FY 2009 to FY 2010. By applying this 
methodology, we determined a budget neutrality factor for the wage 
index and labor-related share changes of 1.000407. Finally, we 
multiplied the DRG reclassification and recalibration budget 
neutrality factor of 0.997941 (derived in the first step) by the 
budget neutrality factor for wage index changes of 1.000407 (derived 
in the second step) to determine the DRG reclassification and 
recalibration and updated wage index and labor-related share budget 
neutrality factor of 0.998347.
    Comment: One commenter requested that CMS explain why it has 
made changes to the budget neutrality calculation to segment various 
aspects of those calculations.
    Response: As discussed above, in order to meet the statutory 
requirements of section 1886(d)(3)(E)(i) of the Act that we do not 
take into account the labor-related share of 62 percent when 
computing wage index budget neutrality and that we budget neutralize 
any changes in payments as a result of the FY 2010 rebased and 
revised labor-related share, it was necessary to use a three-step 
process (or segment various aspects of the calculation) to comply 
with the requirements for DRG reclassification and recalibration, 
wage index and labor-related share budget neutrality.

b. Reclassified Hospitals--Budget Neutrality Adjustment

    Section 1886(d)(8)(B) of the Act provides that, effective with 
discharges occurring on or after October 1, 1988, certain rural 
hospitals are deemed urban. In addition, section 1886(d)(10) of the 
Act provides for the reclassification of hospitals based on 
determinations by the MGCRB. Under section 1886(d)(10) of the Act, a 
hospital may be reclassified for purposes of the wage index.
    Under section 1886(d)(8)(D) of the Act, the Secretary is 
required to adjust the standardized amount to ensure that aggregate 
payments under the IPPS after implementation of the provisions of 
sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal 
to the aggregate prospective payments that would have been made 
absent these provisions. We note that the wage index adjustments 
provided under section 1886(d)(13) of the Act are not budget 
neutral. Section 1886(d)(13)(H) of the Act provides that any 
increase in a wage index under section 1886(d)(13) shall not be 
taken into account ``in applying any budget neutrality adjustment 
with respect to such index'' under section 1886(d)(8)(D) of the Act. 
To calculate the budget neutrality factor for FY 2010, we used FY 
2008 discharge data to simulate payments and compared total IPPS 
payments with FY 2010 relative weights, FY 2010 labor share 
percentages, and FY 2010

[[Page 44006]]

wage data prior to any reclassifications under sections 
1886(d)(8)(B) and (C) and 1886(d)(10) of the Act to total IPPS 
payments with FY 2010 relative weights, FY 2010 labor share 
percentages, and FY 2010 wage data after such reclassifications. 
Based on these simulations, we calculated an adjustment factor of 
0.991297 to ensure that the effects of these provisions are budget 
neutral, consistent with the statute.
    The FY 2010 budget neutrality adjustment factor is applied to 
the standardized amount after removing the effects of the FY 2009 
budget neutrality adjustment factor. We note that the FY 2010 budget 
neutrality adjustment reflects FY 2010 wage index reclassifications 
approved by the MGCRB or the Administrator.

c. Rural Floor and Imputed Floor Budget Neutrality Adjustment

    CMS makes an adjustment to the wage index to ensure that 
aggregate payments after implementation of the rural floor under 
section 4410 of the BBA (Pub. L. 105-33) and the imputed floor under 
Sec.  412.64(h)(4) of the regulations are made in a manner that 
ensures that aggregate payments to hospitals are not affected. As 
discussed in section III.B. of the preamble of the FY 2009 IPPS 
final rule (73 FR 48570 through 48574), we adopted as final State-
level budget neutrality for the rural and imputed floors, effective 
beginning with the FY 2009 wage index. In response to the public's 
concerns and taking into account the potentially significant payment 
cuts that could occur to hospitals in some States if we implemented 
this change with no transition, we decided to phase in, over a 3-
year period, the transition from the national rural floor budget 
neutrality adjustment on the wage index to the State-level rural 
floor budget neutrality adjustment on the wage index. In FY 2009, 
hospitals received a blended wage index that was comprised of 20 
percent of the wage index adjusted by applying the State-level rural 
and imputed floor budget neutrality adjustment and 80 percent of the 
wage index adjusted by applying the national budget neutrality 
adjustment. For FY 2010, the blended wage index is determined by 
adding 50 percent of the wage index adjusted by applying the State-
level rural and imputed floor budget neutrality adjustment and 50 
percent of the wage index adjusted by applying the national budget 
neutrality adjustment. In FY 2011, the adjustment will be completely 
transitioned to the State-level methodology, such that the wage 
index will be determined by applying 100 percent of the State-level 
budget neutrality adjustment. As stated earlier, we note that the 
rural floor budget neutrality adjustment is applied to the wage 
index and not the standardized amount. However, because these 
blended wage indices reflecting the 50 percent State-level rural and 
imputed floor budget neutrality adjustment and the 50 percent 
national rural and imputed floor budget neutrality adjustment are 
used in calculating the FY 2010 outlier threshold (as discussed 
below), we are explaining our calculation of the rural floor budget 
neutrality adjustments (in this section) below.
    In order to compute a budget neutral wage index that is a blend 
of 50 percent of the wage index adjusted by the State-level rural 
and imputed floor budget neutrality adjustment and 50 percent of the 
wage index adjusted by the national rural and imputed floor budget 
neutrality adjustment, similar to our calculation of the FY 2009 
wage index (73 FR 48570 through 48574), we used FY 2008 discharge 
data with FY 2010 relative weights, FY 2010 labor share percentages, 
and FY 2010 post reclassified wage indices to simulate IPPS 
payments. First, we compared the national simulated payments without 
the rural and imputed floors applied to national simulated payments 
with the rural and imputed floors applied to determine the national 
rural and imputed floor budget neutrality adjustment factor of 
0.996705. This national adjustment was then applied to the FY 2010 
post reclassified wage indices to produce a national rural and 
imputed floor budget neutral wage index, which was used in 
determining the FY 2010 blended post reclassified wage indices for 
the second year of the transition (as described below). We then used 
the same methodology to determine each State's rural or imputed 
floor budget neutrality adjustment by comparing each State's total 
simulated payments with and without the rural or imputed floor 
applied. These State-level rural and imputed floor budget neutrality 
factors were then applied to the wage indices to produce a State-
level rural and imputed floor budget neutral wage index, which was 
used in determining the FY 2010 blended wage indices for the second 
year of the transition (as described below).
    To determine the FY 2010 wage indices for the second year of the 
transition, we then blended the national and State-level post 
reclassified wage index values (computed above) by taking 50 percent 
of the national rural and imputed floor budget neutral post 
reclassified wage index and 50 percent of the State-level rural and 
imputed floor budget neutral post reclassified wage index. Because 
of interactive effects between the payment factors applied under the 
IPPS and/or rounding issues, the blended post reclassified wage 
index calculated above does not necessarily result in overall budget 
neutrality. That is, aggregate IPPS payments simulated using the 
blended budget neutral post reclassified wage index may not be equal 
to aggregate IPPS payments simulated using the post reclassified 
wage index prior to the application of the rural and imputed floors. 
Therefore, in order to ensure that national payments overall remain 
budget neutral after application of the rural and imputed floors, an 
additional adjustment factor of 0.999995 must be applied to the 
blended post reclassified wage indices calculated as described 
above.
    Comment: Several commenters pointed out that in the proposed 
rule CMS stated on page 24243 of the rule that it applied an 
additional budget neutrality factor of 1.00016 to the blended wage 
indexes, while on page 24663 of the rule CMS stated that this same 
additional budget-neutrality factor was 1.000017. The commenter 
requested that CMS clarify which factor is the correct additional 
budget neutrality factor related to the rural floor.
    Response: We thank the commenter for pointing out the two 
different factors that were published in the proposed rule. The 
correct factor for the proposed rule is 1.00016. For this final 
rule, as described above, we applied an adjustment factor of 
0.999995 to the blended wage indices calculated.

d. Case-Mix Budget Neutrality Adjustment

(1) Adjustment to the FY 2010 IPPS Standardized Amount

    As stated earlier, beginning in FY 2008, we adopted the MS-DRG 
patient classification system for the IPPS to better recognize 
patients' severity of illness in Medicare payment rates. In the FY 
2008 IPPS final rule with comment period (73 FR 47175 through 
47186), we indicated that we believe the adoption of the MS-DRGs had 
the potential to lead to increases in aggregate payments without a 
corresponding increase in actual patient severity of illness due to 
the incentives for changes in documentation and coding. In that 
final rule, using the Secretary's authority under section 
1886(d)(3)(A)(vi) of the Act to maintain budget neutrality by 
adjusting the national standardized amounts to eliminate the effect 
of changes in documentation and coding that do not reflect real 
change in case-mix, we established prospective documentation and 
coding adjustments of -1.2 percent for FY 2008, -1.8 percent for FY 
2009, and -1.8 percent for FY 2010 (for a total adjustment of -4.8 
percent). On September 29, 2007, Public Law 110-90 was enacted. 
Section 7 of Public Law 110-90 included a provision that reduces the 
documentation and coding adjustment for the MS-DRG system that we 
adopted in the FY 2008 IPPS final rule with comment period to -0.6 
percent for FY 2008 and -0.9 percent for FY 2009. To comply with the 
provision of section 7(a) of Public Law 110-90, in a final rule that 
appeared in the Federal Register on November 27, 2007 (72 FR 66886), 
we changed the IPPS documentation and coding adjustment for FY 2008 
to -0.6 percent, and revised the FY 2008 national standardized 
amounts (as well as other payment factors and thresholds) 
accordingly, with these revisions being effective as of October 1, 
2007. For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -
1.8 percent adjustment specified in the FY 2008 IPPS final rule with 
comment period. As required by statute, we applied a documentation 
and coding adjustment of -0.9 percent to the FY 2009 IPPS national 
standardized amounts. The documentation and coding adjustments 
established in the FY 2008 IPPS final rule with comment period are 
cumulative. As a result, the -0.9 percent documentation and coding 
adjustment in FY 2009 was in addition to the -0.6 percent adjustment 
in FY 2008, yielding a combined effect of -1.5 percent.
    In the proposed rule, we discussed our analysis of FY 2008 
claims data which shows an increase in case-mix of 2.5 percent due 
to changes in documentation and coding that do not reflect real 
changes in case-mix for discharges occurring during FY 2008. For FY 
2010, we proposed to reduce the average standardized amounts under 
section 1886(d) of the Act in FY 2010 by -1.9 percent,

[[Page 44007]]

which represents the difference between changes in documentation and 
coding that do not reflect real changes in case-mix for discharges 
occurring during FY 2008 and the prospective adjustment applied 
under Public Law 110-90. As discussed in section II.D. of the 
preamble of this final rule, after consideration of the public 
comments we received on our analysis and proposals presented in the 
proposed rule, we have decided to postpone adopting documentation 
and coding adjustments as authorized under section 7(a) of Public 
Law 110-90 and section 1886(d)(3)(A)(vi) of the Act until a full 
analysis of FY 2009 case-mix changes can be completed. Accordingly, 
in this final rule, for FY 2010, we did not apply any additional 
documentation and coding adjustments to the average standardized 
amounts under section 1886(d) of the Act.

(2) Adjustment to the FY 2010 Hospital-Specific Rates for SCHs and MDHs

    As discussed in section II.D. of the preamble of the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule and this final rule, because 
hospitals (SCHs and MDHs) paid based in whole or in part on the 
hospital-specific rate use the same MS-DRG system as other 
hospitals, we believe they have the potential to realize increased 
payments from documentation and coding changes that do not reflect 
real increases in patients' severity of illness. Under section 
1886(d)(3)(A)(vi) of the Act, Congress stipulated that hospitals 
paid based on the standardized amount should not receive additional 
payments based on the effect of documentation and coding changes 
that do not reflect real changes in case-mix. Similarly, we believe 
that hospitals paid based on the hospital-specific rate should not 
have the potential to realize increased payments due to 
documentation and coding changes that do not reflect real increases 
in patients' severity of illness. While we continue to believe that 
section 1886(d)(3)(A)(vi) of the Act does not provide explicit 
authority for application of the documentation and coding adjustment 
to the hospital-specific rates, we believe that we have the 
authority to apply the documentation and coding adjustment to the 
hospital-specific rates using our special exceptions and adjustment 
authority under section 1886(d)(5)(I)(i) of the Act.
    As discussed in the proposed rule, we found that, independently 
for both SCHs and MDHs, the change due to documentation and coding 
that did not reflect real changes in case-mix for discharges 
occurring during FY 2008 slightly exceeded the 2.5 percent result 
discussed earlier, but did not significantly differ from that 
result.
    Therefore, we proposed to use our authority under section 
1886(d)(5)(I)(i) of the Act to prospectively adjust the hospital-
specific rates by -2.5 percent in FY 2010 for our estimated 
documentation and coding effect in FY 2008 that does not reflect 
real changes in case-mix. We also noted that, unlike the national 
standardized rates, the FY 2009 hospital-specific rates were not 
previously reduced in order to account for anticipated changes in 
documentation and coding that do not reflect real changes in case-
mix resulting from the adoption of the MS-DRGs.
    Consistent with our approach for determining the national 
average standardized amounts discussed earlier, after consideration 
of the public comments we received on our analysis and proposals 
presented in the proposed rule, we also are postponing adoption of a 
documentation and coding adjustment to the hospital-specific rate 
until a full analysis of FY 2009 case-mix changes can be completed. 
Accordingly, in this final rule, for FY 2010, we will not apply a 
documentation and coding adjustment to the hospital-specific rates.

(3) Adjustment to the FY 2010 Puerto Rico Standardized Amount

    As stated in section II.D. of the preamble of this final rule, 
we believe that we have the authority to apply the documentation and 
coding adjustment to the Puerto Rico-specific standardized amount 
using our special exceptions and adjustment authority under section 
1886(d)(5)(I)(i) of the Act. Similar to SCHs and MDHs that are paid 
based on the hospital-specific rate, we believe that Puerto Rico 
hospitals that are paid based on the Puerto Rico-specific 
standardized amount should not have the potential to realize 
increased payments due to documentation and coding changes that do 
not reflect real increases in patients' severity of illness. In the 
proposed rule, we discussed our analysis of FY 2008 claims data for 
Puerto Rico hospitals, which shows that, for Puerto Rico hospitals, 
the increase in payments for discharges occurring during FY 2008 due 
to documentation and coding changes that did not reflect real 
changes in case-mix for discharges occurring during FY 2008 was 
approximately 1.1 percent. We note that, unlike the national 
standardized rates, the FY 2009 Puerto Rico-specific standardized 
amount was not previously reduced in order to account for 
anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs. 
Therefore, we proposed to use our authority under section 
1886(d)(5)(I)(i) of the Act to adjust the Puerto Rico-specific 
standardized amount by -1.1 percent in FY 2010 to account for the FY 
2008 documentation and coding changes that are not due to changes in 
real case-mix and to leave that adjustment in place for subsequent 
fiscal years.
    Consistent with our approach for determining the national 
average standardized amounts and hospital-specific rates of SCHs and 
MDHs discussed above, after consideration of the public comments we 
received on our analysis and proposals presented in the proposed 
rule, we also are postponing adoption of a documentation and coding 
adjustment to the Puerto Rico-specific rates until a full analysis 
of FY 2009 case-mix changes can be completed. Accordingly, in this 
final rule, for FY 2010, we will not apply a documentation and 
coding adjustment to the Puerto Rico-specific rates.

e. Outlier Payments

    Section 1886(d)(5)(A) of the Act provides for payments in 
addition to the basic prospective payments for ``outlier'' cases 
involving extraordinarily high costs. To qualify for outlier 
payments, a case must have costs greater than the sum of the 
prospective payment rate for the DRG, any IME and DSH payments, any 
new technology add-on payments, and the ``outlier threshold'' or 
``fixed-loss'' amount (a dollar amount by which the costs of a case 
must exceed payments in order to qualify for an outlier payment). We 
refer to the sum of the prospective payment rate for the DRG, any 
IME and DSH payments, any new technology add-on payments, and the 
outlier threshold as the outlier ``fixed-loss cost threshold.'' To 
determine whether the costs of a case exceed the fixed-loss cost 
threshold, a hospital's CCR is applied to the total covered charges 
for the case to convert the charges to estimated costs. Payments for 
eligible cases are then made based on a marginal cost factor, which 
is a percentage of the estimated costs above the fixed-loss cost 
threshold. The marginal cost factor for FY 2010 is 80 percent, the 
same marginal cost factor we have used since FY 1995 (59 FR 45367).
    In accordance with section 1886(d)(5)(A)(iv) of the Act, outlier 
payments for any year are projected to be not less than 5 percent 
nor more than 6 percent of total operating DRG payments plus outlier 
payments. We note that the statute requires outlier payments to be 
not less than 5 percent nor more than 6 percent of total ``operating 
DRG payments'' (which does not include IME and DSH payments) plus 
outlier payments. When setting the outlier threshold, we compute the 
5.1 percent target by dividing the total operating outlier payments 
by the total operating DRG payments plus outlier payments. We do not 
include any other payments such as IME and DSH within the outlier 
target amount. Therefore, it is not necessary to include Medicare 
Advantage IME payments in the outlier threshold calculation. Section 
1886(d)(3)(B) of the Act requires the Secretary to reduce the 
average standardized amount by a factor to account for the estimated 
proportion of total DRG payments made to outlier cases. Similarly, 
section 1886(d)(9)(B)(iv) of the Act requires the Secretary to 
reduce the average standardized amount applicable to hospitals 
located in Puerto Rico to account for the estimated proportion of 
total DRG payments made to outlier cases. More information on 
outlier payments may be found on the CMS Web site at http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage.

(1) FY 2010 Outlier Fixed-Loss Cost Threshold

    For FY 2010, we proposed to continue to use the same methodology 
used for FY 2009 (73 FR 48763 through 48766) to calculate the 
outlier threshold. Similar to the methodology used in the FY 2009 
IPPS final rule, for FY 2010, we proposed to apply an adjustment 
factor to the CCRs to account for cost and charge inflation (as 
explained below). As we have done in the past, to calculate the 
proposed FY 2010 outlier threshold we simulated payments by applying 
FY 2010 rates and policies using cases from the FY 2008 MedPAR 
files. Therefore, in order to determine the proposed FY 2010 outlier 
threshold, we inflated the charges on the MedPAR claims by 2 years, 
from FY 2008 to FY 2010.
    We proposed to continue to use a refined methodology that takes 
into account the

[[Page 44008]]

lower inflation in hospital charges that are occurring as a result 
of the outlier final rule (68 FR 34494), which changed our 
methodology for determining outlier payments by implementing the use 
of more current CCRs. Our refined methodology uses more recent data 
that reflect the rate-of-change in hospital charges under the new 
outlier policy.
    Using the most recent data available, we calculated the 1-year 
average annualized rate-of-change in charges-per-case from the last 
quarter of FY 2007 in combination with the first quarter of FY 2008 
(July 1, 2007 through December 31, 2007) to the last quarter of FY 
2008 in combination with the first quarter of FY 2009 (July 1, 2008 
through December 31, 2008). This rate of change was 7.29 percent 
(1.0729) or 15.11 percent (1.1511) over 2 years.
    As we have done in the past, we established the proposed FY 2010 
outlier threshold using hospital CCRs from the December 2008 update 
to the Provider-Specific File (PSF)--the most recent available data 
at the time of the proposed rule. This file includes CCRs that 
reflect implementation of the changes to the policy for determining 
the applicable CCRs that became effective August 8, 2003 (68 FR 
34494).
    As discussed in the FY 2007 IPPS final rule (71 FR 48150), we 
worked with the Office of Actuary to derive the methodology 
described below to develop the CCR adjustment factor. For FY 2010, 
we proposed to continue to use the same methodology to calculate the 
CCR adjustment by using the FY 2008 operating cost per discharge 
increase in combination with the actual FY 2008 operating market 
basket percentage increase determined by IHS Global Insight, Inc., 
as well as the charge inflation factor described above to estimate 
the adjustment to the CCRs. (We note that the FY 2008 actual 
(otherwise referred to as ``final'') operating market basket 
percentage increase reflects historical data, whereas the published 
FY 2008 operating market basket update factor was based on IHS 
Global Insight, Inc.'s 2007 third quarter forecast with historical 
data through the first quarter of 2008.) By using the operating 
market basket percentage increase and the increase in the average 
cost per discharge from hospital cost reports, we are using two 
different measures of cost inflation. For FY 2010, we determined the 
adjustment by taking the percentage increase in the operating costs 
per discharge from FY 2006 to FY 2007 (1.0460) from the cost report 
and dividing it by the final operating market basket percentage 
increase from FY 2007 (1.0360). This operation removes the measure 
of pure price increase (the market basket) from the percentage 
increase in operating cost per discharge, leaving the nonprice 
factors in the cost increase (for example, quantity and changes in 
the mix of goods and services). We repeated this calculation for 2 
prior years to determine the 3-year average of the rate of adjusted 
change in costs between the operating market basket percentage 
increase and the increase in cost per case from the cost report (the 
FY 2004 to FY 2005 percentage increase of operating costs per 
discharge of 1.0584 divided by the FY 2005 final operating market 
basket percentage increase of 1.0390, the FY 2005 to FY 2006 
percentage increase of operating costs per discharge of 1.0578 
divided by FY 2006 final operating market basket percentage increase 
of 1.0400). For FY 2010, we averaged the differentials calculated 
for FY 2005, FY 2006, and FY 2007, which resulted in a mean ratio of 
1.0151. We multiplied the 3-year average of 1.0151 by the FY 2008 
final operating market basket percentage increase of 1.0400, which 
resulted in an operating cost inflation factor of 5.56 percent or 
1.056. We then divided the operating cost inflation factor by the 1-
year average change in charges (1.072893) and applied an adjustment 
factor of 0.9840 to the operating CCRs from the PSF.
    As stated in the FY 2009 IPPS final rule (73 FR 48763), we 
continue to believe it is appropriate to apply only a 1-year 
adjustment factor to the CCRs. On average, it takes approximately 9 
months for a fiscal intermediary or MAC to tentatively settle a cost 
report from the fiscal year end of a hospital's cost reporting 
period. The average ``age'' of hospitals' CCRs from the time the 
fiscal intermediary or the MAC inserts the CCR in the PSF until the 
beginning of FY 2009 is approximately 1 year. Therefore, as stated 
above, we believe a 1-year adjustment factor to the CCRs is 
appropriate.
    We used the same methodology for the capital CCRs and determined 
the adjustment by taking the percentage increase in the capital 
costs per discharge from FY 2006 to FY 2007 (1.0488) from the cost 
report and dividing it by the final capital market basket percentage 
increase from FY 2007 (1.0130). We repeated this calculation for 2 
prior years to determine the 3-year average of the rate of adjusted 
change in costs between the capital market basket percentage 
increase and the increase in cost per case from the cost report (the 
FY 2004 to FY 2005 percentage increase of capital costs per 
discharge of 1.0329 divided by the FY 2005 final capital market 
basket percentage increase of 1.0090, the FY 2005 to FY 2006 
percentage increase of capital costs per discharge of 1.0467 divided 
by the FY 2006 final capital market basket percentage increase of 
1.0110). For FY 2010, we averaged the differentials calculated for 
FY 2005, FY 2006, and FY 2007, which resulted in a mean ratio of 
1.0314. We multiplied the 3-year average of 1.0314 by the FY 2008 
final capital market basket percentage increase of 1.0140, which 
resulted in a capital cost inflation factor of 4.59 percent or 
1.0459. We then divided the capital cost inflation factor by the 1-
year average change in charges (1.072893) and applied an adjustment 
factor of 0.9748 to the capital CCRs from the PSF. We are using the 
same charge inflation factor for the capital CCRs that was used for 
the operating CCRs. The charge inflation factor is based on the 
overall billed charges. Therefore, we believe it is appropriate to 
apply the charge factor to both the operating and capital CCRs.
    As stated above, for FY 2010, we applied the proposed FY 2010 
rates and policies using cases from the FY 2008 MedPAR files in 
calculating the proposed outlier threshold. Therefore, for purposes 
of estimating the proposed outlier threshold for FY 2010, it is 
necessary to take into account the remaining projected case-mix 
growth when calculating the outlier threshold that results in 
outlier payments being 5.1 percent of total payments for FY 2010. As 
discussed above and in section II.D. of the preamble of this final 
rule, our actuaries estimate that maintaining budget neutrality for 
changes in case-mix due to the adoption of the MS-DRGs requires an 
adjustment of -4.8 percent to the national standardized amount. For 
FY 2008, our estimate of the case-mix increase due to documentation 
and coding in FY 2008 is 2.5 percent, which is already included 
within the claims data (FY 2008 MedPAR files) used to calculate the 
proposed FY 2010 threshold. In addition, we stated that, even with 
our assumption that there will be no continued changes in 
documentation and coding in FY 2009, the use of the FY 2009 relative 
weights will result in an additional 0.7 percent case-mix increase 
due to the documentation and coding effect in FY 2009. Therefore, we 
projected that an additional 1.6 percent case-mix growth occurred 
since 2008 (4.8 percent -2.5 percent (case-mix growth in FY 2008) -
0.7 percent (FY 2009 relative weights effect) = 1.6 percent). As a 
result, we inflated the FY 2008 claims data by an additional 1.6 
percent for the additional case-mix growth projected to have 
occurred since FY 2008. If we did not take into account the 
remaining 1.6 percent projected case-mix growth, our estimate of 
total FY 2010 payments would be too low, and as a result, our 
proposed outlier threshold would be too high, such that estimated 
outlier payments would be less than our projected 5.1 percent of 
total payments. While we assume 1.6 percent case-mix growth for IPPS 
hospitals in our outlier threshold calculations, the FY 2010 
national standardized amounts used to calculate the proposed outlier 
threshold reflect the proposed cumulative adjustment of -3.4 percent 
(as described above in this section above).
    Using this methodology, we proposed an outlier fixed-loss cost 
threshold for FY 2010 equal to the prospective payment rate for the 
DRG, plus any IME and DSH payments, and any add-on payments for new 
technology, plus $24,240.
    In the proposed rule, we stated that as we did in establishing 
the FY 2009 outlier threshold (73 FR 57891), in our projection of FY 
2010 outlier payments, we did not make any adjustments for the 
possibility that hospitals' CCRs and outlier payments may be 
reconciled upon cost report settlement. We continue to believe that, 
due to the policy implemented in the June 9, 2003 outlier final rule 
(68 FR 34494), CCRs will no longer fluctuate significantly and, 
therefore, few hospitals will actually have these ratios reconciled 
upon cost report settlement. In addition, it is difficult to predict 
the specific hospitals that will have CCRs and outlier payments 
reconciled in any given year. We also noted that reconciliation 
occurs because hospitals' actual CCRs for the cost reporting period 
are different than the interim CCRs used to calculate outlier 
payments when a bill is processed. Our simulations assume that CCRs 
accurately measure hospital costs based on information available to 
us at the time we set the outlier threshold. For these reasons, we 
proposed not to make any

[[Page 44009]]

assumptions about the effects of reconciliation on the outlier 
threshold calculation.
    We also noted in the proposed rule that there were some factors 
that contributed to a higher proposed fixed loss outlier threshold 
for FY 2010 compared to FY 2009. First, as stated below in section 
II.A.4.e.(3) of this Addendum, we are currently projecting 5.4 
percent of total IPPS payment will be paid as outliers in FY 2009 or 
0.3 percentage points greater than the 5.1 percent originally 
estimated. If we do not increase the FY 2009 threshold in FY 2010, 
we would continue to make outlier payments in excess of the 5.1 
percent target. In addition, because overall payments are projected 
to be lower in FY 2010 compared to FY 2009, even more cases would 
qualify for outlier payments. In order to maintain outlier payments 
at 5.1 percent, the outlier threshold must be further increased to 
decrease the amount of cases that would qualify as outliers. 
Together, we believe that the above factors cumulatively contributed 
to a higher proposed fixed-loss outlier threshold in FY 2010 
compared to FY 2009.
    Comment: Some commenters stated that it appears CMS is making 
conservative estimates and assumptions in the numbers and cost of 
outlier cases in order to be within or materially below the 5.1 
percent target. Another commenter stated that CMS should not use FY 
2009 projections to determine the FY 2010 threshold and instead CMS 
should use FY 2008 actual payments. The commenter further stated 
that underpayment in FY 2008 indicates that the proposed increase in 
the FY 2010 threshold is overstated.
    One commenter objected to CMS' proposal to raise the outlier 
threshold in FY 2010 (compared to FY 2009). The commenter explained 
that it does not understand why CMS is proposing to raise the 
threshold if the FY 2009 threshold has clearly achieved Congress' 
stated goal. The commenter believed that raising the threshold will 
jeopardize CMS' ability to meet the outlier target for FY 2010. The 
commenter also noted that because there is a planned reduction to 
the rate for documentation and coding, CMS should lower the outlier 
threshold.
    Response: As explained above, we use the most recent data 
available to set the outlier threshold. Specifically, to calculate 
the FY 2010 outlier threshold, we simulated payments by applying FY 
2010 rates and policies using cases from the FY 2008 MedPAR files. 
Therefore, we did not use the FY 2009 projection in the modeling of 
the outlier threshold. In our discussion in the proposed rule of why 
we believe the threshold increased from FY 2009 to FY 2010, we 
observed from our analysis that the threshold we set in FY 2009 is 
currently projecting an outlier estimate of 5.4 percent for FY 2009. 
Based on this observation, it would seem if we maintained the FY 
2009 threshold for FY 2010, we would continue to miss the 5.1 
percent target and overpay outliers. Upon modeling the proposed 
outlier threshold using FY 2008 MedPAR claims and the methodology 
described above (not including the FY 2009 projection of the outlier 
estimate), the result was indeed an increased outlier threshold for 
FY 2010.
    We note that in the proposed rule we proposed to reduce the 
proposed standardized amount by 1.9 percent due to documentation and 
coding. As stated above, the proposed FY 2010 national standardized 
amounts used to calculate the proposed outlier threshold reflected 
the proposed cumulative adjustment of -3.4 percent. We believe that 
the proposed cumulative documentation and coding adjustment applied 
to the proposed FY 2010 national standardized amounts to calculate 
the proposed outlier threshold also contributed to an increase in 
the proposed FY 2010 outlier threshold from FY 2009. Specifically, 
as a result of the reduction to the standardized amount for 
documentation and coding in the proposed rule, more cases would 
qualify for outliers. Therefore, it was necessary to increase the 
outlier threshold in the proposed rule to maintain outlier payments 
at 5.1 percent of overall payments. However, as stated below, for 
this final rule, the FY 2010 national standardized amounts used to 
calculate the final outlier threshold reflect the cumulative 
adjustment of -1.5 percent (from FY 2008 and FY 2009) with no 
further documentation and coding adjustment for FY 2010. Because we 
are no longer applying additional documentation and coding 
adjustments for FY 2010, fewer cases will qualify for outlier 
payments. Therefore, for this final rule, our use of a FY 2010 
national standardized amount that reflects a cumulative adjustment 
of -1.5 percent rather than -3.4 percent resulted in a lower outlier 
threshold from the proposed rule in order to maintain outlier 
payments at 5.1 percent of overall payments.
    Comment: One commenter recommended that CMS make a mid-year 
change to the outlier threshold if it appears that the 5.1 percent 
target will not be met. The commenter suggested that CMS use more 
recent CCR data for a mid-year correction to the outlier threshold 
and use thresholds such as if outlier payments less than 95 percent 
or greater than 105 percent of the 5.1 percent target to trigger a 
mid-year adjustment.
    Response: We responded to a similar comment in the FY 2006 IPPS 
final rule (70 FR 47495). We refer readers to that final rule.
    Comment: One commenter recommended that CMS use a multiyear 
trend analysis using actual outlier payments rather than estimating 
payments based a portion of payments from FY 2009 to determine the 
FY 2010 outlier threshold. The commenter noted that actual outlier 
payments for hospitals in its city do not match CMS' projections. 
The commenter opposed the increase to the outlier threshold and 
requested that CMS develop a methodology that better predicts the 
outlier threshold with less variability.
    Response: The commenter did not provide an explanation on how to 
use actual payments to determine the outlier threshold for the 
coming fiscal year. Also, considering actual outlier payments in the 
modeling of the outlier threshold would result in our modeling the 
threshold based on high cost cases that are not relevant to the 
upcoming fiscal year. In addition, we use the latest data available 
(that is, the FY 2008 MedPAR) to model the FY 2010 outlier threshold 
as if we were making payments within FY 2010. We believe our outlier 
policies are consistent with the statute and the goals of the IPPS.
    In response to the comments that actual outlier payments for 
hospitals in the commenter's city do not match CMS' projections, 
when we compute the outlier threshold, we set the threshold to meet 
the 5.1 percent target in the aggregate (on a national basis) and 
not on an individual hospital basis. It is possible that some 
hospitals may treat sicker patients than others, thus resulting in 
an individual outlier percentage that is higher than 5.1 percent, 
while other hospitals may treat more healthy patients, which results 
in an outlier percentage that is less than 5.1 percent. Our goal is 
to set an outlier threshold that meets the 5.1 percent target on a 
national level. In addition, for FY 2009, we are currently 
projecting outlier payment to be 5.4 percent of total payments, 
which is greater than the 5.1 percent target. We believe that the 
current methodology, which also adjusts the CCRs, has led to better 
accuracy in determining the outlier threshold in order to maintain 
outlier payments at 5.1 percent.
    Comment: Many commenters stated that CMS currently estimates 
outlier payments in FY 2008 at 4.8 percent of total payments. The 
commenters commended CMS for making refinements such as applying an 
adjustment factor to CCRs when computing the outlier threshold but 
noted that, because CMS is still not reaching the 5.1 percent 
target, there is still room for improvement. The commenters further 
stated that although CMS currently projects outlier payments in FY 
2009 to be estimated at 5.4 percent of total payments, which exceeds 
the 5.1 percent target, this estimate is based on discharges from a 
prior year and will likely not reflect the actual result. The 
commenters noted that in prior years when CMS provided its projected 
estimate of outlier payments for a given fiscal year, once the 
actual claims were available to determine the actual outlier payment 
(in the following fiscal year), the estimate declined between 0.2 
percent and 0.3 percent from the projection. The commenters 
suggested that the methodology to develop the adjustment factor to 
the CCRs is unnecessarily complicated and does not lead to a more 
accurate result. The commenters urged CMS to adopt a methodology 
that uses recent historical industry wide average rate of change, 
similar to the methodology used to develop the charge inflation 
factor. Further, in addition to applying an adjustment to the CCRs 
based on historical data, the commenters suggested that the CCRs 
should be projected over different periods of time, some less or 
more than one year, based on variations in hospital fiscal year 
ends. The commenters believed this methodology would more accurately 
project the decline in CCRs. The commenters also compared its method 
and CMS' method to the actual FY 2008 rate of change in CCRs and 
found a variance of 0.6 percent (for the commenters' methodology) 
compared to 1.6 percent (CMS' methodology).
    Response: For this final rule, similar to our response in the FY 
2008 final rule (72 FR 47418), in response to the comment that CCRs 
should be projected over different periods of time, it is possible 
that some of the

[[Page 44010]]

CCRs in the March PSF will be used in FY 2009 for actual outlier 
payments, while other CCRs may be one year old. Therefore, we apply 
a 1-year adjustment to the CCRs. With respect to the comment on our 
methodology used to adjust the CCRs, as we stated in the FY 2008 
IPPS final rule with comment period (72 FR 47418), we continue to 
believe this calculation of an adjustment to the CCRs is more 
accurate and stable than the commenter's methodology because it 
takes into account the costs per discharge and the market basket 
percentage increase when determining a cost adjustment factor. There 
are times where the market basket and the cost per discharge will be 
constant, while other times these values will differ from each 
other, depending on the fiscal year. Therefore, as mentioned above, 
using the market basket in conjunction with the cost per discharge 
takes into account two sources that measure potential cost inflation 
and ensures a more accurate and stable cost adjustment factor.
    In addition, as stated below, we are currently projecting FY 
2009 payments at an estimate of 5.4 percent of overall payments. As 
the commenters noted, however, in the past, once actual data is 
available to determine actual outlier payment, actual outlier 
payments tend to decline by 0.2 percent or 0.3 percent from CMS' 
original projection. If this trend holds for FY 2009, actual FY 2009 
outlier payments would be very close to our target of 5.1 percent of 
overall payments. Therefore, we continue to believe that our 
methodology for adjusting the CCRs is an appropriate method for use 
in determining the outlier threshold.
    Comment: One commenter was concerned that CMS did not include 
outlier reconciliations in developing the outlier threshold. The 
commenter requested that CMS disclose in the final rule and future 
proposed and final IPPS rules the amount of money it has recovered 
through reconciliation. The commenter explained that this 
information will allow others to comment specifically on how this 
provision would impact the threshold.
    Response: We thank the commenter for the concern regarding not 
including outlier reconciliation within the development of the 
outlier threshold. However, as stated above, we continue to believe 
that, due to the policy implemented in the June 9, 2003 outlier 
final rule (68 FR 34494), CCRs will no longer fluctuate 
significantly and, therefore, few hospitals will actually have these 
ratios reconciled upon cost report settlement. In addition, it is 
difficult to predict the specific hospitals that will have CCRs and 
outlier payments reconciled in any given year. We also noted that 
reconciliation occurs because hospitals' actual CCRs for the cost 
reporting period are different than the interim CCRs used to 
calculate outlier payments when a bill is processed. Our simulations 
assume that CCRs accurately measure hospital costs based on 
information available to us at the time we set the outlier 
threshold. For these reasons, we proposed and are finalizing our 
policy not to make any assumptions about the effects of 
reconciliation on the outlier threshold calculation.
    Comment: Commenters questioned whether CMS Medicare Advantage 
claims were used in the FY 2010 IPPS proposed rule to calculate the 
outlier threshold. Commenters also questioned if the charges for 
organ acquisition costs and anti-hemophilic blood factor were 
excluded from the modeling of the outlier threshold.
    Response: As stated above, we inadvertently included Medicare 
Advantage claims in the budget neutrality calculations. For this 
final rule, we have corrected this oversight in the calculation of 
the FY 2010 final relative weights.
    In addition, in the proposed rule, we inadvertently included 
charges for organ acquisition costs within the budget neutrality 
calculations and the calculation of the outlier threshold. For the 
final rule, we excluded charges for organ acquisition costs within 
the budget neutrality calculations and the calculation of the 
outlier threshold.
    Finally, charges for anti-hemophilic blood factor were included 
in the proposed budget neutrality calculations and the calculation 
of the outlier threshold. We examined the MedPAR file and have 
determined that charges for anti-hemophilic blood factor are 
contained within the pharmacy charges. Unfortunately, we are 
currently unable to break out charges for anti-hemophilic blood 
factor from the pharmacy charges within MedPAR. We will explore the 
possibility of identifying for anti-hemophilic blood factor charges 
in future fiscal years.
    Because we are not making any changes to our methodology for 
this final rule, for FY 2010, we are using the same methodology we 
proposed to calculate the outlier threshold. We used the blended 
wage indices (as discussed above) when we simulated payments in our 
outlier modeling to determine the final outlier threshold for FY 
2010. Using the most recent data available, we calculated the 1-year 
average annualized rate-of-change in charges per case from the first 
quarter of FY 2008 in combination with the second quarter of FY 2008 
(October 1, 2007 through March 31, 2008) to the first quarter of FY 
2009 in combination with the second quarter of FY 2009 (October 1, 
2008 through March 31, 2009). This rate of change was 6.8570 percent 
(1.068570) or 14.184 percent (1.14184) over 2 years.
    As we have done in the past, we established the final FY 2010 
outlier threshold using hospital CCRs from the March 2009 update to 
the PSF--the most recent available data at the time of this final 
rule. This file includes CCRs that reflected implementation of the 
changes to the policy for determining the applicable CCRs that 
became effective August 8, 2003 (68 FR 34494).
    For FY 2009, we calculated the CCR adjustment by using the 
operating cost per discharge increase in combination with the market 
basket increase determined by IHS Global Insight, Inc., as well as 
the charge inflation factor described above to estimate the 
adjustment to the CCRs. We determined the operating CCR adjustment 
by taking the percentage increase in the operating costs per 
discharge from FY 2006 to FY 2007 (1.0463) from the cost report and 
dividing it by the final market basket increase from FY 2007 
(1.036). This operation removes the measure of pure price increase 
(the market basket) from the percentage increase in operating cost 
per discharge, leaving the non-price factors in the cost increase 
(that is, quantity and changes in the mix of goods and services) to 
increase the projected market basket for estimating the future cost 
increase. We repeated this calculation for 2 prior years to 
determine the 3-year average of the rate of adjusted change in costs 
between the market basket rate-of-increase and the increase in cost 
per case from the cost report (FY 2004 to FY 2005 percentage 
increase of operating costs per discharge of 1.0585 divided by FY 
2005 final market basket increase of 1.039, FY 2005 to FY 2006 
percentage increase of operating costs per discharge of 1.0574 
divided by FY 2006 final market basket increase of 1.04). For FY 
2010, we averaged the differentials calculated for FY 2005, FY 2006, 
and FY 2007 which resulted in a mean ratio of 1.0151. We multiplied 
the 3-year average of 1.0151 by the FY 2008 final market basket 
percentage increase of 1.04, which resulted in an operating cost 
inflation factor of 5.58 percent or 1.0558. We then divided the 
operating cost inflation factor by the 1-year average change in 
charges (1.068570) and applied an adjustment factor of 0.988 to the 
operating CCRs from the PSF.
    We used the same methodology for the capital CCRs and determined 
the adjustment by taking the percentage increase in the capital 
costs per discharge from FY 2006 to FY 2007 (1.0502) from the cost 
report and dividing it by the final capital market basket increase 
from FY 2007 (1.013). We repeated this calculation for 2 prior years 
to determine the 3-year average of the rate of adjusted change in 
costs between the capital market basket rate-of-increase and the 
increase in cost per case from the cost report (FY 2004 to FY 2005 
percentage increase of capital costs per discharge of 1.0323 divided 
by FY 2005 final capital market basket increase of 1.009, FY 2005 to 
FY 2006 percentage increase of capital costs per discharge of 1.0464 
divided by FY 2006 final capital market basket increase of 1.0110). 
For FY 2010, we averaged the differentials calculated for FY 2005, 
FY 2006, and FY 2007, which resulted in a mean ratio of 1.0316. We 
multiplied the 3-year average of 1.0316 by the FY 2008 final capital 
market basket percentage increase of 1.0140, which resulted in a 
capital cost inflation factor of 4.61 percent or 1.0461. We then 
divided the capital cost inflation factor by the 1-year average 
change in charges (1.068570) and applied an adjustment factor of 
0.9789 to the capital CCRs from the PSF. We are using the same 
charge inflation factor for the capital CCRs that was used for the 
operating CCRs. The charge inflation factor is based on the overall 
billed charges. Therefore, we believe it is appropriate to apply the 
charge factor to both the operating and capital CCRs.
    As stated above, for FY 2010, we applied the final FY 2010 rates 
and policies using cases from the FY 2008 MedPAR files in 
calculating the outlier threshold. Therefore, for purposes of 
estimating the outlier threshold for FY 2010, it is necessary to 
take into account the remaining projected case-mix growth when 
calculating the outlier threshold that results in outlier payments 
being 5.1 percent of total payments for FY

[[Page 44011]]

2010. As discussed above and in section II.D. of the preamble of 
this final rule, our actuaries estimate that maintaining budget 
neutrality for changes in case-mix due to the adoption of the MS-
DRGs requires an adjustment of -4.8 percent to the national 
standardized amount. For FY 2008, our estimate of the case-mix 
increase due to documentation and coding in FY 2008 is 2.5 percent, 
which is already included within the claims data (FY 2008 MedPAR 
files) used to calculate the proposed FY 2010 threshold. Based on 
the updated data used for this final rule (the March 2009 update to 
the FY 2008 MedPAR), even with our assumption that there will be no 
continued changes in documentation and coding in FY 2009, we now 
estimate that the use of the FY 2009 relative weights will result in 
an additional 0.76 percent case-mix increase due to the 
documentation and coding effect in FY 2009. (In the proposed rule, 
we estimated an additional 0.7 percent case-mix increase due to the 
documentation and coding effect in FY 2009). Therefore, for this 
final rule, we are projecting an additional 1.54 percent case-mix 
growth to have occurred since 2008 (4.8 percent -2.5 percent (case-
mix growth in FY 2008) -0.76 percent (FY 2009 relative weights 
effect) = 1.54 percent). As a result, we inflated the FY 2008 claims 
data by an additional 1.54 percent for the additional case-mix 
growth projected to have occurred since FY 2008. If we did not take 
into account the remaining 1.54 percent projected case-mix growth, 
our estimate of total FY 2010 payments would be too low, and as a 
result, our outlier threshold would be too high, such that estimated 
outlier payments would be less than our projected 5.1 percent of 
total payments. While we assume 1.54 percent case-mix growth for 
IPPS hospitals in our outlier threshold calculations, as stated 
above, we are opting to postpone adopting documentation and coding 
adjustments as authorized under section 7(a) of Public Law 110-90 
and section 1886(d)(3)(A)(vi) of the Act until a full analysis of FY 
2009 case-mix changes can be completed. Therefore, the FY 2010 
national standardized amounts used to calculate the final outlier 
threshold reflect the cumulative adjustment of -1.5 percent (from FY 
2008 and FY 2009) with no further documentation and coding 
adjustment for FY 2010.
    Using this methodology, we calculated a final outlier fixed-loss 
cost threshold for FY 2010 equal to the prospective payment rate for 
the DRG, plus any IME and DSH payments, and any add-on payments for 
new technology, plus $23,140. With this threshold, we project that 
outlier payments will equal 5.1 percent of total IPPS payments.
    As we stated above and as we established the FY 2009 outlier 
threshold (72 FR 47419), in our projection of FY 2010 outlier 
payments, we are not making any adjustments for the possibility that 
hospitals' CCRs and outlier payments may be reconciled upon cost 
report settlement. We continue to believe that, due to the policy 
implemented in the outlier final rule (68 FR 34494, June 9, 2003), 
CCRs will no longer fluctuate significantly and, therefore, few 
hospitals will actually have these ratios reconciled upon cost 
report settlement. In addition, it is difficult to predict the 
specific hospitals that will have CCRs and outlier payments 
reconciled in any given year. We also noted that reconciliation 
occurs because hospitals' actual CCRs for the cost reporting period 
are different than the interim CCRs used to calculate outlier 
payments when a bill is processed. Our simulations assume that CCRs 
accurately measure hospital costs based on information available to 
us at the time we set the outlier threshold. For these reasons, we 
are not making any assumptions about the effects of reconciliation 
on the outlier threshold calculation.
    We also note that the final threshold for FY 2010 is lower than 
the FY 2010 proposed outlier threshold. As stated above, we are 
opting to postpone adopting documentation and coding adjustments as 
authorized under section 7(a) of Public Law 110-90 and section 
1886(d)(3)(A)(vi) of the Act until a full analysis of FY 2009 case-
mix changes can be completed. Because we are not further reducing 
the standardized amount for documentation and coding in FY 2010, 
fewer cases will qualify for outlier payments thus requiring us to 
lower the threshold from the proposed rule to this final rule.

(2) Other Changes Concerning Outliers

    As stated in the FY 1994 IPPS final rule (58 FR 46348), we 
establish an outlier threshold that is applicable to both hospital 
inpatient operating costs and hospital inpatient capital-related 
costs. When we modeled the combined operating and capital outlier 
payments, we found that using a common threshold resulted in a lower 
percentage of outlier payments for capital-related costs than for 
operating costs. We project that the thresholds for FY 2010 will 
result in outlier payments that will equal 5.1 percent of operating 
DRG payments and 5.2 percent of capital payments based on the 
Federal rate.
    In accordance with section 1886(d)(3)(B) of the Act, we are 
reducing the FY 2010 standardized amount by the same percentage to 
account for the projected proportion of payments paid as outliers.
    The outlier adjustment factors that will be applied to the 
standardized amount for the FY 2010 outlier threshold are as 
follows:

------------------------------------------------------------------------
                                                 Operating     Capital
                                               standardized    Federal
                                                  amounts        rate
------------------------------------------------------------------------
National.....................................      0.948994     0.947689
Puerto Rico..................................      0.957524     0.935958
------------------------------------------------------------------------

    We are applying the outlier adjustment factors to the FY 2010 
rates after removing the effects of the FY 2009 outlier adjustment 
factors on the standardized amount.
    To determine whether a case qualifies for outlier payments, we 
apply hospital-specific CCRs to the total covered charges for the 
case. Estimated operating and capital costs for the case are 
calculated separately by applying separate operating and capital 
CCRs. These costs are then combined and compared with the outlier 
fixed-loss cost threshold.
    The June 9, 2003 outlier final rule (68 FR 34494) eliminated the 
application of the statewide average CCRs for hospitals with CCRs 
that fell below 3 standard deviations from the national mean CCR. 
However, for those hospitals for which the fiscal intermediary or 
MAC computes operating CCRs greater than 1.179 or capital CCRs 
greater than 0.148, or hospitals for whom the fiscal intermediary or 
MAC is unable to calculate a CCR (as described at Sec.  412.84(i)(3) 
of our regulations), we still use statewide average CCRs to 
determine whether a hospital qualifies for outlier payments.\13\ 
Table 8A in this Addendum contains the statewide average operating 
CCRs for urban hospitals and for rural hospitals for which the 
fiscal intermediary or MAC is unable to compute a hospital-specific 
CCR within the above range. Effective for discharges occurring on or 
after October 1, 2009, these statewide average ratios will replace 
the ratios published in the IPPS final rule for FY 2009 (73 FR 48994 
through 48995). Table 8B in this Addendum contains the comparable 
statewide average capital CCRs. Again, the CCRs in Tables 8A and 8B 
will be used during FY 2010 when hospital-specific CCRs based on the 
latest settled cost report are either not available or are outside 
the range noted above. For an explanation of Table 8C, we refer 
readers to section V. of this Addendum.
---------------------------------------------------------------------------

    \13\ These figures represent 3.0 standard deviations from the 
mean of the log distribution of CCRs for all hospitals.
---------------------------------------------------------------------------

    We finally note that we published a manual update (Change 
Request 3966) to our outlier policy on October 12, 2005, which 
updated Chapter 3, Section 20.1.2 of the Medicare Claims Processing 
Manual. The manual update covered an array of topics, including 
CCRs, reconciliation, and the time value of money. We encourage 
hospitals that are assigned the statewide average operating and/or 
capital CCRs to work with their fiscal intermediary or MAC on a 
possible alternative operating and/or capital CCR as explained in 
Change Request 3966. Use of an alternative CCR developed by the 
hospital in conjunction with the fiscal intermediary or MAC can 
avoid possible overpayments or underpayments at cost report 
settlement, thus ensuring better accuracy when making outlier 
payments and negating the need for outlier reconciliation. We also 
note that a hospital may request an alternative operating or capital 
CCR ratio at any time as long as the guidelines of Change Request 
3966 are followed. To download and view the manual instructions on 
outlier and CCRs, we refer readers to CMS Web site: http://www.cms.hhs.gov/manuals/downloads/clm104c03.pdf.

(3) FY 2008 and FY 2009 Outlier Payments

    In the FY 2009 IPPS final rule (73 FR 48766), we stated that, 
based on available data, we estimated that actual FY 2008 outlier 
payments would be approximately 4.7 percent of actual total DRG 
payments. This estimate was computed based on simulations using the 
FY 2007 MedPAR file (discharge data for FY 2007 claims). That is, 
the estimate of actual outlier payments did not reflect actual FY 
2008 claims, but instead reflected the application of FY 2008 rates 
and policies to available FY 2007 claims.

[[Page 44012]]

    Our current estimate, using available FY 2008 claims data, is 
that actual outlier payments for FY 2008 were approximately 4.8 
percent of actual total DRG payments. Thus, the data indicate that, 
for FY 2008, the percentage of actual outlier payments relative to 
actual total payments is higher than we projected before FY 2008. 
Consistent with the policy and statutory interpretation we have 
maintained since the inception of the IPPS, we do not plan to make 
retroactive adjustments to outlier payments to ensure that total 
outlier payments for FY 2008 are equal to 5.1 percent of total DRG 
payments.
    We currently estimate that actual outlier payments for FY 2009 
will be approximately 5.4 percent of actual total DRG payments, 0.3 
percentage points higher than the 5.1 percent we projected in 
setting the outlier policies for FY 2009. This estimate is based on 
simulations using the FY 2008 MedPAR file (discharge data for FY 
2008 claims). We used these data to calculate an estimate of the 
actual outlier percentage for FY 2009 by applying FY 2009 rates and 
policies, including an outlier threshold of $20,045 to available FY 
2008 claims.
    Comment: One commenter simulated CMS' estimate of the FY 2008 
outlier payment and determined an outlier payment percentage of 4.57 
percent. The commenter noted that it is has consistently determined 
different actual outlier payout percentages for the last couple of 
years. The commenter requested that CMS revisit its calculations and 
publish an explanation to explain the discrepancy in FY 2008.
    Response: We are not sure why there is a discrepancy between our 
estimate of the FY 2008 outlier payment and the commenter's estimate 
of the FY 2008 outlier payment. Perhaps the commenter used different 
data trims than we used when computing the FY 2008 outlier estimate. 
Without knowing the specifics of how the commenter computed their 
estimate, it is possible that CMS and the commenter can reach two 
different estimates. We invite the commenter to share its analysis 
in detail with us so we can distinguish any differences between CMS' 
calculation of the outlier estimate and the commenter's calculation 
of the outlier estimate.

f. Rural Community Hospital Demonstration Program Adjustment (Section 
410A of Pub. L. 108-173)

    Section 410A of Public Law 108-173 requires the Secretary to 
establish a demonstration that will modify reimbursement for 
inpatient services for up to 15 small rural hospitals. Section 
410A(c)(2) of Public Law 108-173 requires that ``[i]n conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' As discussed in 
section V.I. of the preamble of this final rule, we have satisfied 
this requirement by making an adjustment to the national IPPS rates 
by a factor that is sufficient to account for the added costs of 
this demonstration. We estimate that the average additional annual 
payment that will be made to each participating hospital under the 
demonstration will be approximately $1,371,023. We based this 
estimate on the recent historical experience of the difference 
between inpatient cost and payment for hospitals that are 
participating in the demonstration program. For 11 participating 
hospitals, the projected total annual impact of the demonstration 
program for FY 2010 is $15,081,251. In addition, because the cost 
reports of all hospitals participating in the demonstration in its 
first and second years (that is, FY 2005 and FY 2006) have been 
finalized, we are able to determine how much the cost of the 
demonstration program exceeded the amount that was offset by the 
budget neutrality adjustment for FY 2005 and FY 2006. For all 13 
hospitals that participated in the demonstration in FY 2005, the 
amount is $7,856,617. For the 10 hospitals that participated in the 
demonstration in FY 2006, the amount is $4,203,947. Therefore, the 
projected total annual impact of the demonstration program for FY 
2010 is $27,141,815. The budget neutrality adjustment factor applied 
to the Federal rate to calculate Medicare inpatient prospective 
payments as a result of the demonstration is 0.999739.
    In order to achieve budget neutrality, we are adjusting the 
national IPPS rates by an amount sufficient to account for the added 
costs of this demonstration. In other words, we are applying budget 
neutrality across the payment system as a whole rather than merely 
across the participants of this demonstration, consistent with past 
practice. We believe that the language of the statutory budget 
neutrality requirement permits the agency to implement the budget 
neutrality provision in this manner. The statutory language requires 
that ``aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration * * 
* was not implemented,'' but does not identify the range across 
which aggregate payments must be held equal.

5. FY 2010 Standardized Amount

    The adjusted standardized amount is divided into labor-related 
and nonlabor-related portions. Tables 1A and 1B of this Addendum 
contain the national standardized amounts that we are applying to 
all hospitals, except hospitals located in Puerto Rico, for FY 2010. 
The Puerto Rico-specific amounts are shown in Table 1C of this 
Addendum. The amounts shown in Tables 1A and 1B differ only in that 
the labor-related share applied to the standardized amounts in Table 
1A is the revised labor-related share of 68.8 percent, and Table 1B 
is 62 percent. In accordance with sections 1886(d)(3)(E) and 
1886(d)(9)(C)(iv) of the Act, we are applying a labor-related share 
of 62 percent, unless application of that percentage would result in 
lower payments to a hospital than would otherwise be made. In 
effect, the statutory provision means that we will apply a labor-
related share of 62 percent for all hospitals (other than those in 
Puerto Rico) whose wage indices are less than or equal to 1.0000.
    In addition, Tables 1A and 1B include standardized amounts 
reflecting the full 2.1 percent update for FY 2010, and the 
standardized amounts reflecting the 2.0 percentage point reduction 
to the update (a 0.1 percent update) applicable for hospitals that 
fail to submit quality data consistent with section 
1886(b)(3)(B)(viii) of the Act.
    Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion 
of the Puerto Rico payment rate is based on the discharge-weighted 
average of the national large urban standardized amount (this amount 
is set forth in Table 1A). The labor-related and nonlabor-related 
portions of the national average standardized amounts for Puerto 
Rico hospitals for FY 2010 are set forth in Table 1C of this 
Addendum. This table also includes the Puerto Rico standardized 
amounts. The labor-related share applied to the Puerto Rico specific 
standardized amount is the labor-related share of 62.1 percent, or 
62 percent, depending on which provides higher payments to the 
hospital. (Section 1886(d)(9)(C)(iv) of the Act, as amended by 
section 403(b) of Pub. L. 108-173, provides that the labor-related 
share for hospitals located in Puerto Rico be 62 percent, unless the 
application of that percentage would result in lower payments to the 
hospital.)
    The following table illustrates the changes from the FY 2009 
national standardized amount. The second column shows the changes 
from the FY 2009 standardized amounts for hospitals that satisfy the 
quality data submission requirement for receiving the full update 
(2.1 percent). The third column shows the changes for hospitals 
receiving the reduced update (0.1 percent). The first row of the 
table shows the updated (through FY 2009) average standardized 
amount after restoring the FY 2008 offsets for outlier payments, 
demonstration budget neutrality and the geographic reclassification 
budget neutrality. The DRG reclassification and recalibration wage 
index budget neutrality factors are cumulative. Therefore, the FY 
2009 factor is not removed from this table. Additionally, the 
documentation and coding adjustments for FY 2008 and FY 2009 are 
cumulative. Therefore, the FY 2008 and FY 2009 adjustment factors 
are not removed from this table. We also have added separate rows to 
this table to reflect the different labor-related shares that apply 
to hospitals.

[[Page 44013]]



   Comparison of FY 2009 Standardized Amounts to the FY 2010 Standardized Amount With Full and Reduced Update
----------------------------------------------------------------------------------------------------------------
                                                                            Reduced update      Reduced update
                                   Full update (2.1    Full update (2.1     (0.1 percent);      (0.1 percent);
                                    percent); wage      percent); wage       wage index is    wage index is less
                                   index is greater   index is less than     greater than      than or equal to
                                      than 1.0000     or equal to 1.0000        1.0000              1.0000
----------------------------------------------------------------------------------------------------------------
FY 2009 Base Rate, after          Labor: $3,748.52..  Labor: $3,378.40..  Labor: $3,748.52..  Labor: $3,378.03.
 removing geographic              Nonlabor:           Nonlabor:           Nonlabor:           Nonlabor:
 reclassification budget           $1,699.91.          $2,070.40.          $1,699.91.          $2,070.40.
 neutrality, demonstration
 budget neutrality and outlier
 offset (based on the
 labor[dash]related share
 percentage for FY 2010).
FY 2010 Update Factor...........  1.021.............  1.021.............  1.001.............  1.001.
FY 2010 DRG Recalibration and     0.998347..........  0.998347..........  0.998347..........  0.998347.
 Wage Index Budget Neutrality
 Factor.
FY 2010 Reclassification Budget   0.991297..........  0.991297..........  0.991297..........  0.991297.
 Neutrality Factor.
FY 2010 Outlier Factor..........  0.948994..........  0.948994..........  0.948994..........  0.948994.
Rural Demonstration Budget        0.999739..........  0.999739..........  0.999739..........  0.999739.
 Neutrality Factor.
Rate for FY 2010................  Labor: $3,593.52..  Labor: $3,238.35..  Labor: $3,523.13..  Labor: $3,174.91.
                                  Nonlabor:           Nonlabor:           Nonlabor:           Nonlabor:
                                   $1,629.62.          $1,984.79.          $1,597.70.          $1,945.92.
----------------------------------------------------------------------------------------------------------------

    Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion 
of the Puerto Rico payment rate is based on the discharge-weighted 
average of the national standardized amount (as set forth in Table 
1A of this Addendum). The labor-related and nonlabor-related 
portions of the national average standardized amounts for Puerto 
Rico hospitals are set forth in Table 1C of this Addendum. This 
table also includes the Puerto Rico standardized amounts. The labor-
related share applied to the Puerto Rico standardized amount is 62.1 
percent, or 62 percent, depending on which results in higher 
payments to the hospital. (Section 1886(d)(9)(C)(iv) of the Act, as 
amended by section 403(b) of Pub. L. 108-173, provides that the 
labor-related share for hospitals in Puerto Rico will be 62 percent, 
unless the application of that percentage would result in lower 
payments to the hospital.)

B. Adjustments for Area Wage Levels and Cost-of-Living

    Tables 1A through 1C, as set forth in this Addendum, contain the 
labor-related and nonlabor-related shares that we are using to 
calculate the prospective payment rates for hospitals located in the 
50 States, the District of Columbia, and Puerto Rico for FY 2010. 
This section addresses two types of adjustments to the standardized 
amounts that are made in determining the proposed prospective 
payment rates as described in this Addendum.

1. Adjustment for Area Wage Levels

    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require 
that we make an adjustment to the labor-related portion of the 
national and Puerto Rico prospective payment rates, respectively, to 
account for area differences in hospital wage levels. This 
adjustment is made by multiplying the labor-related portion of the 
adjusted standardized amounts by the appropriate wage index for the 
area in which the hospital is located. In section III. of the 
preamble of this final rule, we discuss the data and methodology for 
the FY 2010 wage index.

2. Adjustment for Cost-of-Living in Alaska and Hawaii

    Section 1886(d)(5)(H) of the Act authorizes the Secretary to 
make an adjustment to take into account the unique circumstances of 
hospitals in Alaska and Hawaii. Higher labor-related costs for these 
two States are taken into account in the adjustment for area wages 
described above. For FY 2010, we are adjusting the payments for 
hospitals in Alaska and Hawaii by multiplying the nonlabor-related 
portion of the standardized amount by the applicable adjustment 
factor contained in the table below. These factors were obtained 
from the U.S. Office of Personnel Management (OPM) and are currently 
also used under the IPPS.

 Table of Cost-of-Living Adjustment Factors: Alaska and Hawaii Hospitals
------------------------------------------------------------------------
                                                          Cost of living
                          Area                              adjustment
                                                              factor
------------------------------------------------------------------------
Alaska:
    City of Anchorage and 80-kilometer (50-mile) radius             1.23
     by road............................................
    City of Fairbanks and 80-kilometer (50-mile) radius             1.23
     by road............................................
    City of Juneau and 80-kilometer (50-mile) radius by             1.23
     road...............................................
    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.)

C. MS-DRG Relative Weights

    As discussed in section II.H. of the preamble of this final 
rule, we have developed relative weights for each MS-DRG that 
reflect the resource utilization of cases in each MS-DRG relative to 
Medicare cases in other MS-DRGs. Table 5 of this Addendum contains 
the relative weights that we will apply to discharges occurring in 
FY 2010. These factors have been recalibrated as explained in 
section II. of the preamble of this final rule.

[[Page 44014]]

D. Calculation of the Prospective Payment Rates

General Formula for Calculation of the Prospective Payment Rates for FY 
2010

    In general, the operating prospective payment rate for all 
hospitals paid under the IPPS located outside of Puerto Rico, except 
SCHs and MDHs, for FY 2010 equals the Federal rate.
    Currently, SCHs are paid based on whichever of the following 
rates yields the greatest aggregate payment: the Federal national 
rate; the updated hospital-specific rate based on FY 1982 costs per 
discharge; the updated hospital-specific rate based on FY 1987 costs 
per discharge; the updated hospital-specific rate based on FY 1996 
costs per discharge; or for cost reporting periods beginning on or 
after January 1, 2009, the updated hospital-specific rate based on 
the FY 2006 costs per discharge to determine the rate that yields 
the greatest aggregate payment.
    The prospective payment rate for SCHs for FY 2010 equals the 
higher of the applicable Federal rate, or the hospital-specific rate 
as described below. The prospective payment rate for MDHs for FY 
2010 equals the higher of the Federal rate, or the Federal rate plus 
75 percent of the difference between the Federal rate and the 
hospital-specific rate as described below. The prospective payment 
rate for hospitals located in Puerto Rico for FY 2010 equals 25 
percent of the Puerto Rico rate plus 75 percent of the applicable 
national rate.

1. Federal Rate

    The Federal rate is determined as follows:
    Step 1--Select the applicable average standardized amount 
depending on whether the hospital submitted qualifying quality data 
(full update for qualifying hospitals, update minus 2.0 percentage 
points for nonqualifying hospitals).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located or the area to which the hospital is 
reclassified.
    Step 3--For hospitals in Alaska and Hawaii, multiply the 
nonlabor-related portion of the standardized amount by the 
applicable cost-of-living adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related 
portion of the standardized amount (adjusted, if applicable, under 
Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative 
weight corresponding to the applicable MS-DRG (see Table 5 of this 
Addendum).
    The Federal rate as determined in Step 5 may then be further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment. In addition, for hospitals that qualify for a low-volume 
payment adjustment under section 1886(d)(12) of the Act and 42 CFR 
412.101(b), the payment in Step 5 would be increased by 25 percent.

2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)

a. Calculation of Hospital-Specific Rate

    Section 1886(b)(3)(C) of the Act provides that, for cost 
reporting periods beginning prior to January 1, 2009, SCHs are paid 
based on whichever of the following rates yields the greatest 
aggregate payment: the Federal rate; the updated hospital-specific 
rate based on FY 1982 costs per discharge; the updated hospital-
specific rate based on FY 1987 costs per discharge; the updated 
hospital-specific rate based on FY 1996 costs per discharge; or for 
cost reporting periods beginning on or after January 1, 2009, the 
updated hospital-specific rate based on the FY 2006 costs per 
discharge to determine the rate that yields the greatest aggregate 
payment.
    As discussed previously, we are required to rebase MDHs 
hospital-specific rates to their FY 2002 cost reports if doing so 
results in higher payments. In addition, effective for discharges 
occurring on or after October 1, 2006, MDHs are to be paid based on 
the Federal national rate or, if higher, the Federal national rate 
plus 75 percent (changed from 50 percent) of the difference between 
the Federal national rate and the greater of the updated hospital-
specific rates based on either FY 1982, FY 1987 or FY 2002 costs per 
discharge. Further, MDHs are no longer subject to the 12-percent cap 
on their DSH payment adjustment factor.
    Hospital-specific rates have been determined for each of these 
hospitals based on the FY 1982 costs per discharge, the FY 1987 
costs per discharge, or, for SCHs, the FY 1996 costs per discharge 
or the FY 2006 costs per discharge, and for MDHs, the FY 2002 cost 
per discharge. For a more detailed discussion of the calculation of 
the hospital-specific rates, we refer the reader to the FY 1984 IPPS 
interim final rule (48 FR 39772); the April 20, 1990 final rule with 
comment period (55 FR 15150); the FY 1991 IPPS final rule (55 FR 
35994); and the FY 2001 IPPS final rule (65 FR 47082). In addition, 
for both SCHs and MDHs, the hospital-specific rate is adjusted by 
the budget neutrality adjustment factor as discussed in section III. 
of this Addendum. The resulting rate will be used in determining the 
payment rate an SCH or MDH will receive for its discharges beginning 
on or after October 1, 2009.

b. Updating the FY 1982, FY 1987, FY 1996, FY 2002, and FY 2006 
Hospital-Specific Rates for FY 2010

    We are increasing the hospital-specific rates by 2.1 percent 
(the hospital market basket percentage increase) for FY 2010 for 
those SCHs and MDHs that submit qualifying quality data and by 0.1 
percent for SCHs and MDHs that fail to submit qualifying quality 
data. Section 1886(b)(3)(C)(iv) of the Act provides that the update 
factor applicable to the hospital-specific rates for SCHs is equal 
to the update factor provided under section 1886(b)(3)(B)(iv) of the 
Act, which, for SCHs in FY 2009, is the market basket percentage 
increase for hospitals that submit qualifying quality data and the 
market basket percentage increase minus 2 percent for hospitals that 
fail to submit qualifying quality data. Section 1886(b)(3)(D) of the 
Act provides that the update factor applicable to the hospital-
specific rates for MDHs also equals the update factor provided for 
under section 1886(b)(3)(B)(iv) of the Act, which, for FY 2009, is 
the market basket percentage increase for hospitals that submit 
qualifying quality data and the market basket percentage increase 
minus 2 percent for hospitals that fail to submit qualifying quality 
data.

3. General Formula for Calculation of Prospective Payment Rates for 
Hospitals Located in Puerto Rico Beginning On or After October 1, 2009, 
and Before October 1, 2010

    Section 1886(d)(9)(E)(iv) of the Act provides that, effective 
for discharges occurring on or after October 1, 2004, hospitals 
located in Puerto Rico are paid based on a blend of 75 percent of 
the national prospective payment rate and 25 percent of the Puerto 
Rico-specific rate.

a. Puerto Rico Rate

    The Puerto Rico prospective payment rate is determined as 
follows:
    Step 1--Select the applicable average standardized amount 
considering the applicable wage index (Table 1C of this Addendum).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable Puerto Rico-specific wage index.
    Step 3--Add the amount from Step 2 and the nonlabor-related 
portion of the standardized amount.
    Step 4--Multiply the amount from Step 3 by the applicable MS-DRG 
relative weight (Table 5 of this Addendum).
    Step 5--Multiply the result in Step 4 by 25 percent.

b. National Rate

    The national prospective payment rate is determined as follows:
    Step 1--Select the applicable average standardized amount.
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located or the area to which the hospital is 
reclassified.
    Step 3--Add the amount from Step 2 and the nonlabor-related 
portion of the national average standardized amount.
    Step 4--Multiply the amount from Step 3 by the applicable MS-DRG 
relative weight (Table 5 of this Addendum).
    Step 5--Multiply the result in Step 4 by 75 percent.
    The sum of the Puerto Rico rate and the national rate computed 
above equals the prospective payment for a given discharge for a 
hospital located in Puerto Rico. This rate would then be further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment.

III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2010

    The PPS for acute care hospital inpatient capital-related costs 
was implemented for cost reporting periods beginning on or after 
October 1, 1991. Effective with that cost reporting period, 
hospitals were paid during a 10-year transition period (which 
extended through FY 2001) to change the payment methodology for 
Medicare acute care hospital inpatient capital-related costs from a 
reasonable cost-based methodology to a prospective methodology 
(based fully on the Federal rate).
    The basic methodology for determining Federal capital 
prospective rates is set forth

[[Page 44015]]

in the regulations at 42 CFR 412.308 through 412.352. Below we 
discuss the factors that we used to determine the capital Federal 
rate for FY 2010, which will be effective for discharges occurring 
on or after October 1, 2009.
    The 10-year transition period ended with hospital cost reporting 
periods beginning on or after October 1, 2001 (FY 2002). Therefore, 
for cost reporting periods beginning in FY 2002, all hospitals 
(except ``new'' hospitals under Sec.  412.304(c)(2)) are paid based 
on the capital Federal rate. For FY 1992, we computed the standard 
Federal payment rate for capital-related costs under the IPPS by 
updating the FY 1989 Medicare inpatient capital cost per case by an 
actuarial estimate of the increase in Medicare inpatient capital 
costs per case. Each year after FY 1992, we update the capital 
standard Federal rate, as provided at Sec.  412.308(c)(1), to 
account for capital input price increases and other factors. The 
regulations at Sec.  412.308(c)(2) provide that the capital Federal 
rate be adjusted annually by a factor equal to the estimated 
proportion of outlier payments under the capital Federal rate to 
total capital payments under the capital Federal rate. In addition, 
Sec.  412.308(c)(3) requires that the capital Federal rate be 
reduced by an adjustment factor equal to the estimated proportion of 
payments for (regular and special) exceptions under Sec.  412.348. 
Section 412.308(c)(4)(ii) requires that the capital standard Federal 
rate be adjusted so that the effects of the annual DRG 
reclassification and the recalibration of DRG weights and changes in 
the geographic adjustment factor (GAF) are budget neutral.
    For FYs 1992 through 1995, Sec.  412.352 required that the 
capital Federal rate also be adjusted by a budget neutrality factor 
so that aggregate payments for inpatient hospital capital costs were 
projected to equal 90 percent of the payments that would have been 
made for capital-related costs on a reasonable cost basis during the 
respective fiscal year. That provision expired in FY 1996. Section 
412.308(b)(2) describes the 7.4 percent reduction to the capital 
Federal rate that was made in FY 1994, and Sec.  412.308(b)(3) 
describes the 0.28 percent reduction to the capital Federal rate 
made in FY 1996 as a result of the revised policy for paying for 
transfers. In FY 1998, we implemented section 4402 of Public Law 
105-33, which required that, for discharges occurring on or after 
October 1, 1997, the budget neutrality adjustment factor in effect 
as of September 30, 1995, be applied to the unadjusted capital 
standard Federal rate and the unadjusted hospital-specific rate. 
That factor was 0.8432, which was equivalent to a 15.68 percent 
reduction to the unadjusted capital payment rates. An additional 2.1 
percent reduction to the rates was effective from October 1, 1997 
through September 30, 2002, making the total reduction 17.78 
percent. As we discussed in the FY 2003 IPPS final rule (67 FR 
50102) and implemented in Sec.  412.308(b)(6), the 2.1 percent 
reduction was restored to the unadjusted capital payment rates 
effective October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor 
and the regular exceptions payment adjustment during the 10-year 
transition period, we developed a dynamic model of Medicare 
inpatient capital-related costs; that is, a model that projected 
changes in Medicare inpatient capital-related costs over time. With 
the expiration of the budget neutrality provision, the capital cost 
model was only used to estimate the regular exceptions payment 
adjustment and other factors during the transition period. As we 
explained in the FY 2002 IPPS final rule (66 FR 39911), beginning in 
FY 2002, an adjustment for regular exception payments is no longer 
necessary because regular exception payments were only made for cost 
reporting periods beginning on or after October 1, 1991, and before 
October 1, 2001 (see Sec.  412.348(b)). Because payments are no 
longer made under the regular exception policy effective with cost 
reporting periods beginning in FY 2002, we discontinued use of the 
capital cost model. The capital cost model and its application 
during the transition period are described in Appendix B of the FY 
2002 IPPS final rule (66 FR 40099).
    Section 412.374 provides for blended payments to hospitals 
located in Puerto Rico under the IPPS for acute care hospital 
inpatient capital-related costs. Accordingly, under the capital PPS, 
we compute a separate payment rate specific to hospitals located in 
Puerto Rico using the same methodology used to compute the national 
Federal rate for capital-related costs. In accordance with section 
1886(d)(9)(A) of the Act, under the IPPS for acute care hospital 
operating costs, hospitals located in Puerto Rico are paid for 
operating costs under a special payment formula. Prior to FY 1998, 
hospitals located in Puerto Rico were paid a blended operating rate 
that consisted of 75 percent of the applicable standardized amount 
specific to Puerto Rico hospitals and 25 percent of the applicable 
national average standardized amount. Similarly, prior to FY 1998, 
hospitals located in Puerto Rico were paid a blended capital rate 
that consisted of 75 percent of the applicable capital Puerto Rico-
specific rate and 25 percent of the applicable capital Federal rate. 
However, effective October 1, 1997, in accordance with section 4406 
of Public Law 105-33, the methodology for operating payments made to 
hospitals located in Puerto Rico under the IPPS was revised to make 
payments based on a blend of 50 percent of the applicable 
standardized amount specific to Puerto Rico hospitals and 50 percent 
of the applicable national average standardized amount. In 
conjunction with this change to the operating blend percentage, 
effective with discharges occurring on or after October 1, 1997, we 
also revised the methodology for computing capital payments to 
hospitals located in Puerto Rico to be based on a blend of 50 
percent of the Puerto Rico capital rate and 50 percent of the 
national capital Federal rate.
    As we discussed in the FY 2005 IPPS final rule (69 FR 49185), 
section 504 of Public Law 108-173 increased the national portion of 
the operating IPPS payments for hospitals located in Puerto Rico 
from 50 percent to 62.5 percent and decreased the Puerto Rico 
portion of the operating IPPS payments from 50 percent to 37.5 
percent for discharges occurring on or after April 1, 2004 through 
September 30, 2004 (refer to the March 26, 2004 One-Time 
Notification (Change Request 3158)). In addition, section 504 of 
Public Law 108-173 provided that the national portion of operating 
IPPS payments for hospitals located in Puerto Rico is equal to 75 
percent and the Puerto Rico-specific portion of operating IPPS 
payments is equal to 25 percent for discharges occurring on or after 
October 1, 2004. Consistent with that change in operating IPPS 
payments to hospitals located in Puerto Rico, for FY 2005 (as we 
discussed in the FY 2005 IPPS final rule), we revised the 
methodology for computing capital payments to hospitals located in 
Puerto Rico to be based on a blend of 25 percent of the Puerto Rico-
specific capital rate and 75 percent of the national capital Federal 
rate for discharges occurring on or after October 1, 2004.

A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update

    In the Federal Register notice setting out the final wage 
indices for FY 2009 (73 FR 57892), we established the final capital 
Federal rate of $424.17 for FY 2009. In the discussion that follows, 
we explain the factors that we used to determine the capital Federal 
rate for FY 2010. In particular, we explain why the FY 2010 capital 
Federal rate will increase approximately 1.4 percent, compared to 
the FY 2009 capital Federal rate. Furthermore, we estimate that 
aggregate capital payments will increase during this same period 
(approximately $171 million), primarily due to the increase in the 
capital Federal rate. Total payments to hospitals under the IPPS are 
relatively unaffected by changes in the capital prospective 
payments. Because capital payments constitute about 10 percent of 
hospital payments, a 1-percent change in the capital Federal rate 
yields only about a 0.1 percent change in actual payments to 
hospitals.

1. Projected Capital Standard Federal Rate Update

a. Description of the Update Framework

    Under Sec.  412.308(c)(1), the capital standard Federal rate is 
updated on the basis of an analytical framework that takes into 
account changes in a capital input price index (CIPI) and several 
other policy adjustment factors. Specifically, we have adjusted the 
projected CIPI rate-of-increase as appropriate each year for case-
mix index-related changes, for intensity, and for errors in previous 
CIPI forecasts. The update factor for FY 2010 under that framework 
is 1.40 percent based on the best data available at this time. The 
update factor under that framework is based on a projected 1.4 
percent increase in the CIPI, a 0.0 percent adjustment for 
intensity, a 0.0 percent adjustment for case-mix, a 0.0 percent 
adjustment for the FY 2008 DRG reclassification and recalibration, 
and a forecast error correction of 0.0 percent. As discussed below 
in section III.C. of this Addendum, we continue to believe that the 
CIPI is the most appropriate input price index for capital costs to 
measure capital price changes in a given year. We also explain the 
basis for the FY 2010 CIPI

[[Page 44016]]

projection in that same section of this Addendum. We note, as 
discussed in section VI.E.1. of the preamble of this final rule, we 
are not applying any additional adjustments to the capital rates in 
FY 2010 to account for changes in documentation and coding under the 
MS-DRGs that do not correspond to changes in real increases in 
patients' severity of illness. Below we describe the policy 
adjustments that we applied in the update framework for FY 2010.
    The case-mix index is the measure of the average DRG weight for 
cases paid under the IPPS. Because the DRG weight determines the 
prospective payment for each case, any percentage increase in the 
case-mix index corresponds to an equal percentage increase in 
hospital payments.
    The case-mix index can change for any of several reasons:
    <bullet> The average resource use of Medicare patients changes 
(``real'' case-mix change);
    <bullet> Changes in hospital documentation and coding of patient 
records result in higher weight DRG assignments (``coding 
effects''); and
    <bullet> The annual DRG reclassification and recalibration 
changes may not be budget neutral (``reclassification effect'').
    We define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients as opposed to changes in 
documentation and coding behavior that result in assignment of cases 
to higher weighted DRGs but do not reflect higher resource 
requirements. The capital update framework includes the same case-
mix index adjustment used in the former operating IPPS update 
framework (as discussed in the May 18, 2004 IPPS proposed rule for 
FY 2005 (69 FR 28816)). (We no longer use an update framework to 
make a recommendation for updating the operating IPPS standardized 
amounts as discussed in section II. of Appendix B in the FY 2006 
IPPS final rule (70 FR 47707).)
    Absent the projected increase in case-mix resulting from changes 
in documentation and coding due to the adoption of the MS-DRGs, for 
FY 2010, we projected a 1.0 percent total increase in the case-mix 
index. We estimated that the real case-mix increase will also equal 
1.0 percent for FY 2010. The net adjustment for change in case-mix 
is the difference between the projected real increase in case-mix 
and the projected total increase in case-mix. Therefore, the net 
adjustment for case-mix change in FY 2010 is 0.0 percentage points.
    The capital update framework also contains an adjustment for the 
effects of DRG reclassification and recalibration. This adjustment 
is intended to remove the effect on total payments of prior year's 
changes to the DRG classifications and relative weights, in order to 
retain budget neutrality for all case-mix index-related changes 
other than those due to patient severity. Due to the lag time in the 
availability of data, there is a 2-year lag in data used to 
determine the adjustment for the effects of DRG reclassification and 
recalibration. For example, we have data available to evaluate the 
effects of the FY 2008 DRG reclassification and recalibration as 
part of our update for FY 2010. To adjust for reclassification and 
recalibration effects, under our historical methodology, we run the 
FY 2008 cases through the FY 2007 GROUPER and through the FY 2008 
GROUPER. The resulting ratio of the case-mix indices should equate 
to 1.0. If not, under our historical methodology, in the update 
framework for FY 2010, we would make an adjustment to adjust for the 
reclassification and recalibration effects in FY 2008. As discussed 
in detail in section II.B. of the preamble of this final rule, 
however, when we adopted the MS-DRGs for FY 2008 to better recognize 
severity of illness in Medicare payment rates, we also recognized 
that changes in documentation and coding could potentially lead to 
increases in aggregate payments without a corresponding increase in 
patients' severity of illness (that is, increased case-mix index 
other than real case-mix index increase). To maintain budget 
neutrality for the adoption of the MS-DRGs, in the proposed rule, we 
proposed to apply a -1.9 percent adjustment to the capital Federal 
rate in FY 2010 to account for the effect of documentation and 
coding changes unrelated to changes in real case-mix in FY 2008. 
Therefore, in that same proposed rule, we proposed not to adjust for 
reclassification and recalibration effects from FY 2008 in the 
update framework for FY 2010 because it was already accounted for in 
the proposed documentation and coding adjustment to the capital 
Federal rates for FY 2010.
    As discussed in greater detail in section II.D. of the preamble 
of this final rule, we are delaying any additional documentation and 
coding adjustment to the capital Federal rates until a full analysis 
of case-mix changes can be completed (as noted in section VI.E.1. of 
the preamble of this final rule, the capital Federal rate has 
already been adjusted by -0.6 percent and -0.9 percent to account 
for the effects of documentation and coding in FY 2008 and FY 2009, 
respectively, for a cumulative adjustment of -1.5 percent). 
Therefore, as proposed, we are not making any adjustment for the 
effects of FY 2008 DRG reclassification and recalibration in the 
update framework for FY 2010 because we will be accounting for it 
when an adjustment to the capital Federal rates for the additional 
documentation and coding effect that occurred in FY 2008 is made in 
future rulemaking.
    The capital update framework also contains an adjustment for 
forecast error. The input price index forecast is based on 
historical trends and relationships ascertainable at the time the 
update factor is established for the upcoming year. In any given 
year, there may be unanticipated price fluctuations that may result 
in differences between the actual increase in prices and the 
forecast used in calculating the update factors. In setting a 
prospective payment rate under the framework, we make an adjustment 
for forecast error only if our estimate of the change in the capital 
input price index for any year is off by 0.25 percentage points or 
more. There is a 2-year lag between the forecast and the 
availability of data to develop a measurement of the forecast error. 
A forecast error of 0.1 percentage point was calculated for the FY 
2010 update. That is, current historical data indicate that the 
forecasted FY 2008 CIPI (1.3 percent) used in calculating the FY 
2008 update factor slightly understated the actual realized price 
increases (1.4 percent) by 0.1 percentage point. This slight 
underprediction was mostly due to the incorporation of newly 
available source data for fixed asset prices and moveable asset 
prices into the market basket. However, because this estimation of 
the change in the CIPI is less than 0.25 percentage points, it is 
not reflected in the update recommended under this framework. 
Therefore, we made a 0.0 percent adjustment for forecast error in 
the update for FY 2010.
    Under the capital IPPS update framework, we also make an 
adjustment for changes in intensity. We calculate this adjustment 
using the same methodology and data that were used in the past under 
the framework for operating IPPS. The intensity factor for the 
operating update framework reflects how hospital services are 
utilized to produce the final product, that is, the discharge. This 
component accounts for changes in the use of quality-enhancing 
services, for changes within DRG severity, and for expected 
modification of practice patterns to remove noncost-effective 
services.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CIPI 
for hospital and related services) and changes in real case-mix. The 
use of total charges in the calculation of the intensity factor 
makes it a total intensity factor; that is, charges for capital 
services are already built into the calculation of the factor. 
Therefore, we have incorporated the intensity adjustment from the 
operating update framework into the capital update framework. 
Without reliable estimates of the proportions of the overall annual 
intensity increases that are due, respectively, to ineffective 
practice patterns and the combination of quality-enhancing new 
technologies and complexity within the DRG system, we assume that 
one-half of the annual increase is due to each of these factors. The 
capital update framework thus provides an add-on to the input price 
index rate of increase of one-half of the estimated annual increase 
in intensity, to allow for increases within DRG severity and the 
adoption of quality-enhancing technology.
    We have developed a Medicare-specific intensity measure based on 
a 5-year average. Past studies of case-mix change by the RAND 
Corporation (Has DRG Creep Crept Up? Decomposing the Case Mix Index 
Change Between 1987 and 1988 by G. M. Carter, J. P. Newhouse, and D. 
A. Relles, R-4098-HCFA/ProPAC (1991)) suggest that real case-mix 
change was not dependent on total change, but was usually a fairly 
steady increase of 1.0 to 1.5 percent per year. However, we used 1.4 
percent as the upper bound because the RAND study did not take into 
account that hospitals may have induced doctors to document medical 
records more completely in order to improve payment.
    As we noted above, in accordance with Sec.  412.308(c)(1)(ii), 
we began updating the capital standard Federal rate in FY 1996 using 
an update framework that takes into account, among other things, 
allowable changes in the intensity of hospital services.

[[Page 44017]]

For FYs 1996 through 2001, we found that case-mix constant intensity 
was declining, and we established a 0.0 percent adjustment for 
intensity in each of those years. For FYs 2002 and 2003, we found 
that case-mix constant intensity was increasing, and we established 
a 0.3 percent adjustment and 1.0 percent adjustment for intensity, 
respectively. For FYs 2004 and 2005, we found that the charge data 
appeared to be skewed (as discussed in greater detail below) as a 
result of hospitals attempting to maximize outlier payments, while 
lessening costs, and we established a 0.0 percent adjustment in each 
of those years. Furthermore, we stated that we would continue to 
apply a 0.0 percent adjustment for intensity until any increase in 
charges can be tied to intensity rather than attempts to maximize 
outlier payments.
    On June 9, 2003, we published in the Federal Register revisions 
to our outlier policy for determining the additional payment for 
extraordinarily high-cost cases (68 FR 34494 through 34515). These 
revised policies were effective on August 8, 2003, and October 1, 
2003. While it does appear that a response to these policy changes 
is beginning to occur, that is, the increase in charges for FYs 2004 
and 2005 are somewhat less than the previous 4 years, they still 
show a significant annual increase in charges without a 
corresponding increase in hospital case-mix. Specifically, the 
percent change in hospitals' charges in FY 2004 is approximately 12 
percent, which is similar in magnitude to the large increases in 
charges that we found in the 4 years prior to FY 2004 and before our 
revisions to the outlier policy in FY 2003. For FY 2005, there is 
approximately an 8 percent change in charges, which is somewhat 
lower than the percent change in FY 2004. Nevertheless, the percent 
change in charges in both FYs 2004 and 2005 are still relatively 
high as compared to the change in charges prior to FY 2001. 
Moreover, the percent change in hospitals' case-mix in those years 
is not in proportion to the higher charges. The remaining 3 years in 
the 5-year average indicate that the change in hospitals' charges 
appears to be slightly moderating, and is lower than FYs 2004 and 
2005. (We refer readers to a discussion regarding the intensity 
factor in the FY 2004 IPPS final rule (68 FR 45482), the FY 2005 
IPPS final rule (69 FR 49285), the FY 2006 IPPS final rule (70 FR 
47500), the FY 2007 IPPS final rule (72 FR 47500), the FY 2008 IPPS 
final rule with comment period (72 FR 47426), and the FY 2009 IPPS 
final rule (73 FR 48771.)
    Our intensity measure is based on a 5-year average, and 
therefore, the intensity adjustment for FY 2010 is based on data 
from the 5-year period beginning with FY 2004 and extending through 
FY 2008. Based on the increases in charges for FYs 2004 through 2005 
that remain in the 5-year average used for the intensity adjustment, 
we believe residual effects of hospitals' charge practices prior to 
the implementation of the outlier policy revisions established in 
the June 9, 2003 final rule continue to appear in the data, as it 
may have taken hospitals some time to adopt changes in their 
behavior in response to the new outlier policy. Thus, we believe 
that the FY 2004 and possibly the FY 2005 charge data may still be 
skewed.
    The change in hospitals' charges for FY 2004 and to a somewhat 
lesser extent, FY 2005, remains similar to the considerable increase 
in hospitals' charges that we found when examining hospitals' charge 
data in determining the intensity factor in the update 
recommendations for the past few years. If hospitals were treating 
new or different types of cases, which would result in an 
appropriate increase in charges per discharge, then we would expect 
hospitals' case-mix to increase proportionally, and it did not.
    Although it appears that the change in hospitals' charges is 
more reasonable compared to data used in recent past rulemaking, 
using a 5-year average of the data tends to smooth out what might 
otherwise be more obvious effects of particular years such as FYs 
2004 and 2005. Therefore, notwithstanding the gradual effect of the 
outlier policy over time, we believe the effect from hospitals 
attempting to maximize outlier payments prior to the implementation 
of the outlier policy continues, albeit to a smaller degree, to skew 
the charge data used in determining the intensity adjustment.
    As we discussed most recently in the FY 2009 IPPS final rule (73 
FR 48771), because our intensity calculation relies heavily upon 
charge data and we believe that these charge data for at least 1 if 
not 2 years of the 5-year average may be inappropriately skewed, as 
we proposed, we are establishing a 0.0 percent adjustment for 
intensity for FY 2010, as we did for FYs 2004 through 2009.
    In the past (FYs 1996 through 2001) when we found intensity to 
be declining, we believed a zero (rather than negative) intensity 
adjustment was appropriate. Similarly, we believe that it is 
appropriate to apply a zero intensity adjustment for FY 2010 until 
any increase in charges during the 5-year period upon which the 
intensity adjustment is based can be tied to intensity rather than 
to attempts to maximize outlier payments.
    Above, we described the basis of the components used to develop 
the 1.4 percent capital update factor under the capital update 
framework for FY 2010 as shown in the table below.

          CMS FY 2010 Update Factor to the Capital Federal Rate
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Capital Input Price Index......................................      1.4
Intensity......................................................      0.0
Case-Mix Adjustment Factors:
  Real Across DRG Change.......................................     -1.0
  Projected Case-Mix Change....................................      1.0
                                                                --------
    Subtotal...................................................      1.4
Effect of FY 2008 Reclassification and Recalibration...........      0.0
Forecast Error Correction......................................      0.0
                                                                --------
    Total Update...............................................      1.4
------------------------------------------------------------------------

b. Comparison of CMS and MedPAC Update Recommendation

    In its March 2009 Report to Congress, MedPAC did not make a 
specific update recommendation for capital IPPS payments for FY 
2010. (MedPAC's Report to the Congress: Medicare Payment Policy, 
March 2009, Section 2A.)

2. Outlier Payment Adjustment Factor

    Section 412.312(c) establishes a unified outlier payment 
methodology for inpatient operating and inpatient capital-related 
costs. A single set of thresholds is used to identify outlier cases 
for both inpatient operating and inpatient capital-related payments. 
Section 412.308(c)(2) provides that the standard Federal rate for 
inpatient capital-related costs be reduced by an adjustment factor 
equal to the estimated proportion of capital-related outlier 
payments to total inpatient capital-related PPS payments. The 
outlier thresholds are set so that operating outlier payments are 
projected to be 5.1 percent of total operating IPPS DRG payments.
    In the Federal Register notice setting out the final wage 
indices for FY 2009 (73 FR 57891), we estimated that outlier 
payments for capital will equal 5.35 percent of inpatient capital-
related payments based on the capital Federal rate in FY 2009. Based 
on the thresholds as set forth in section II.A. of this Addendum, we 
estimate that outlier payments for capital-related costs will equal 
5.23 percent for inpatient capital-related payments based on the 
capital Federal rate in FY 2010. Therefore, we applied an outlier 
adjustment factor of 0.9477 in determining the capital Federal rate. 
Thus, we estimate that the percentage of capital outlier payments to 
total capital standard payments for FY 2010 will be lower than the 
percentage for FY 2009. This decrease in capital outlier payments is 
primarily due to the increase in estimated aggregate capital IPPS 
payments. That is, because overall payments are projected to be 
higher in FY 2010 compared to FY 2009, as discussed in section VIII. 
of Appendix A to this final rule, fewer cases will qualify for 
outlier payments.
    The outlier reduction factors are not built permanently into the 
capital rates; that is, they are not applied cumulatively in 
determining the capital Federal rate. The FY 2010 outlier adjustment 
of 0.9477 is a 0.13 percent change from the FY 2009 outlier 
adjustment of 0.9465. Therefore, the net change in the outlier 
adjustment to the capital Federal rate for FY 2010 is 1.0013 
(0.9477/0.9465). Thus, the outlier adjustment increases the FY 2010 
capital Federal rate by 0.13 percent compared with the FY 2009 
outlier adjustment.

3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the GAF

    Section 412.308(c)(4)(ii) requires that the capital Federal rate 
be adjusted so that aggregate payments for the fiscal year based on 
the capital Federal rate after any changes resulting from the annual 
DRG reclassification and recalibration and changes in the GAF are 
projected to equal aggregate payments that would have been made on 
the basis of the capital Federal rate without such changes. Because 
we implemented a separate GAF for Puerto Rico, we apply separate 
budget neutrality adjustments for the national GAF and the Puerto 
Rico GAF. We apply the same budget neutrality factor for

[[Page 44018]]

DRG reclassifications and recalibration nationally and for Puerto 
Rico. Separate adjustments were unnecessary for FY 1998 and earlier 
because the GAF for Puerto Rico was implemented in FY 1998.
    In the past, we used the actuarial capital cost model (described 
in Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to 
estimate the aggregate payments that would have been made on the 
basis of the capital Federal rate with and without changes in the 
DRG classifications and weights and in the GAF to compute the 
adjustment required to maintain budget neutrality for changes in DRG 
weights and in the GAF. During the transition period, the capital 
cost model was also used to estimate the regular exception payment 
adjustment factor. As we explain in section III.A. of this Addendum, 
beginning in FY 2002, an adjustment for regular exception payments 
is no longer necessary. Therefore, we no longer use the capital cost 
model. Instead, we are using historical data based on hospitals' 
actual cost experiences to determine the exceptions payment 
adjustment factor for special exceptions payments.
    To determine the factors for FY 2010, we compared (separately 
for the national capital rate and the Puerto Rico capital rate) 
estimated aggregate capital Federal rate payments based on the FY 
2009 MS-DRG classifications and relative weights and the FY 2009 GAF 
to estimated aggregate capital Federal rate payments based on the FY 
2010 MS-DRG classifications and relative weights and the FY 2010 
GAFs. In making the comparison, we set the exceptions reduction 
factor to 1.00. To achieve budget neutrality for the changes in the 
national GAFs, based on calculations using updated data, we applied 
an incremental budget neutrality adjustment of 0.9995 for FY 2010 to 
the previous cumulative FY 2009 adjustment of 0.9917, yielding an 
adjustment of 0.9912, through FY 2010. For the Puerto Rico GAFs, we 
applied an incremental budget neutrality adjustment of 1.0014 for FY 
2010 to the previous cumulative FY 2009 adjustment of 0.9960, 
yielding a cumulative adjustment of 0.9974 through FY 2010.
    We then compared estimated aggregate capital Federal rate 
payments based on the FY 2009 DRG relative weights and the FY 2010 
GAFs to estimated aggregate capital Federal rate payments based on 
the cumulative effects of the FY 2010 MS-DRG classifications and 
relative weights and the FY 2010 GAFs. The incremental adjustment 
for DRG classifications and changes in relative weights is 0.9995 
both nationally and for Puerto Rico. The cumulative adjustments for 
MS-DRG classifications and changes in relative weights and for 
changes in the GAFs through FY 2010 are 0.9907 nationally and 0.9969 
for Puerto Rico. The following table summarizes the adjustment 
factors for each fiscal year:

                     Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         National                                                    Puerto Rico
                             ---------------------------------------------------------------------------------------------------------------------------
                                          Incremental adjustment                                         Incremental adjustment
         Fiscal year         -----------------------------------------------                -----------------------------------------------
                               Geographic          DRG                         Cumulative     Geographic          DRG                        Cumulative
                               adjustment   Reclassifications    Combined                     adjustment   Reclassifications    Combined
                                 factor     and recalibration                                   factor     and recalibration
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992........................  ............  .................  ............        1.00000   ............  .................  ............  ............
1993........................  ............  .................       0.99800        0.99800   ............  .................  ............  ............
1994........................  ............  .................       1.00531        1.00330   ............  .................  ............  ............
1995........................  ............  .................       0.99980        1.00310   ............  .................  ............  ............
1996........................  ............  .................       0.99940        1.00250   ............  .................  ............  ............
1997........................  ............  .................       0.99873        1.00123   ............  .................  ............  ............
1998........................  ............  .................       0.99892        1.00015   ............  .................  ............       1.00000
1999........................       0.99944          1.00335         1.00279        1.00294        0.99898          1.00335         1.00233       1.00233
2000........................       0.99857          0.99991         0.99848        1.00142        0.99910          0.99991         0.99901       1.00134
2001 \1\....................       0.99782          1.00009         0.99791        0.99933        1.00365          1.00009         1.00374       1.00508
\2\ 2001....................   \3\ 0.99771      \3\ 1.00009     \3\ 0.99780        0.99922    \3\ 1.00365      \3\ 1.00009     \3\ 1.00374       1.00508
2002........................   \4\ 0.99666      \4\ 0.99668     \4\ 0.99335        0.99268    \4\ 0.98991      \4\ 0.99668     \4\ 0.99662       0.99164
2003 \5\....................       0.99915          0.99662         0.99577        0.98848        1.00809          0.99662         1.00468       0.99628
2003 \6\....................   \7\ 0.99896      \7\ 0.99662     \7\ 0.99558        0.98830        1.00809          0.99662         1.00468       0.99628
2004 \8\....................   \9\ 1.00175      \9\ 1.00081     \9\ 1.00256        0.99083        1.00028          1.00081         1.00109       0.99736
2004 \10\...................   \9\ 1.00164      \9\ 1.00081     \9\ 1.00245        0.99072        1.00028          1.00081         1.00109       0.99736
2005 \11\...................  \12\ 0.99967          1.00094    \12\ 1.00061        0.99137        0.99115          1.00094         0.99208       0.98946
2005 \13\...................  \13\ 0.99946          1.00094    \12\ 1.00040        0.99117        0.99115          1.00094         0.99208       0.98946
2006........................  \14\ 1.00185          0.99892    \14\ 1.00076        0.99198        1.00762          0.99892         1.00653       0.99592
2007........................       1.00000          0.99858         0.99858        0.99057        1.00234          0.99858         1.00092       0.99683
2008........................       1.00172          0.99792         0.99963        0.99021        1.00079          0.99792         0.99870       0.99554
\15\........................       1.00206          0.99945         1.00150        0.99170        1.00097          0.99945         1.00041       0.99595
2010 \16\...................       0.99950          0.99953         0.99902        0.99073        1.00141          0.99953         1.00094       0.99688
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Factors effective for the first half of FY 2001 (October 2000 through March 2001).
\2\ Factors effective for the second half of FY 2001 (April 2001 through September 2001).
\3\ Incremental factors are applied to FY 2000 cumulative factors.
\4\ Incremental factors are applied to the cumulative factors for the first half of FY 2001.
\5\ Factors effective for the first half of FY 2003 (October 2002 through March 2003).
\6\ Factors effective for the second half of FY 2003 (April 2003 through September 2003).
\7\ Incremental factors are applied to FY 2002 cumulative factors.
\8\ Factors effective for the first half of FY 2004 (October 2003 through March 2004).
\9\ Incremental factors are applied to the cumulative factors for the second half of FY 2003.
\10\ Factors effective for the second half of FY 2004 (April 2004 through September 2004).
\11\ Factors effective for the first quarter of FY 2005 (September 2004 through December 2004).
\12\ Incremental factors are applied to average of the cumulative factors for the first half (October 1, 2003 through March 31, 2004) and second half
  (April 1, 2004 through September 30, 2004) of FY 2004.
\13\ Factors effective for the last three quarters of FY 2005 (January 2005 through September 2005).
\14\ Incremental factors are applied to average of the cumulative factors for 2005.
\15\ Final factors for FY 2009, including the implementation of section 124 of Public Law 110-275, which affects wage indices and GAFs for FY 2009, as
  discussed above in this section.
\16\ Final factors for FY 2010.


[[Page 44019]]

    The methodology used to determine the recalibration and 
geographic adjustment factor (DRG/GAF) budget neutrality adjustment 
is similar to the methodology used in establishing budget neutrality 
adjustments under the IPPS for operating costs. One difference is 
that, under the operating IPPS, the budget neutrality adjustments 
for the effect of geographic reclassifications are determined 
separately from the effects of other changes in the hospital wage 
index and the DRG relative weights. Under the capital IPPS, there is 
a single DRG/GAF budget neutrality adjustment factor (the national 
capital rate and the Puerto Rico capital rate are determined 
separately) for changes in the GAF (including geographic 
reclassification) and the DRG relative weights. In addition, there 
is no adjustment for the effects that geographic reclassification 
has on the other payment parameters, such as the payments for DSH or 
IME.
    For FY 2009, we calculated a final GAF/DRG budget neutrality 
factor of 1.0015 (73 FR 57892). For FY 2010, we established a GAF/
DRG budget neutrality factor of 0.9990. The GAF/DRG budget 
neutrality factors are built permanently into the capital rates; 
that is, they are applied cumulatively in determining the capital 
Federal rate. This follows the requirement that estimated aggregate 
payments each year be no more or less than they would have been in 
the absence of the annual DRG reclassification and recalibration and 
changes in the GAFs. The incremental change in the adjustment from 
FY 2009 to FY 2010 is 0.9990. The cumulative change in the capital 
Federal rate due to this adjustment is 0.9907 (the product of the 
incremental factors for FYs 1995 though 2009 and the incremental 
factor of 0.9990 for FY 2010). (We note that averages of the 
incremental factors that were in effect during FYs 2005 and 2006, 
respectively, were used in the calculation of the cumulative 
adjustment of 0.9907 for FY 2010.)
    The factor accounts for the MS-DRG reclassifications and 
recalibration and for changes in the GAFs. It also incorporates the 
effects on the GAFs of FY 2010 geographic reclassification decisions 
made by the MGCRB compared to FY 2009 decisions. However, it does 
not account for changes in payments due to changes in the DSH and 
IME adjustment factors.

4. Exceptions Payment Adjustment Factor

    Section 412.308(c)(3) of our regulations requires that the 
capital standard Federal rate be reduced by an adjustment factor 
equal to the estimated proportion of additional payments for both 
regular exceptions and special exceptions under Sec.  412.348 
relative to total capital PPS payments. In estimating the proportion 
of regular exception payments to total capital PPS payments during 
the transition period, we used the actuarial capital cost model 
originally developed for determining budget neutrality (described in 
Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to 
determine the exceptions payment adjustment factor, which was 
applied to both the Federal and hospital-specific capital rates.
    An adjustment for regular exception payments is no longer 
necessary in determining the FY 2010 capital Federal rate because, 
in accordance with Sec.  412.348(b), regular exception payments were 
only made for cost reporting periods beginning on or after October 
1, 1991 and before October 1, 2001. Accordingly, as we explained in 
the FY 2002 IPPS final rule (66 FR 39949), in FY 2002 and subsequent 
fiscal years, no payments are made under the regular exceptions 
provision. However, in accordance with Sec.  412.308(c), we still 
need to compute a budget neutrality adjustment for special exception 
payments under Sec.  412.348(g). We describe our methodology for 
determining the exceptions adjustment used in calculating the FY 
2010 capital Federal rate below.
    Under the special exceptions provision specified at Sec.  
412.348(g)(1), eligible hospitals include SCHs, urban hospitals with 
at least 100 beds that have a disproportionate share percentage of 
at least 20.2 percent or qualify for DSH payments under Sec.  
412.106(c)(2), and hospitals with a combined Medicare and Medicaid 
inpatient utilization of at least 70 percent. An eligible hospital 
may receive special exceptions payments if it meets the following 
criteria: (1) a project need requirement as described at Sec.  
412.348(g)(2), which, in the case of certain urban hospitals, 
includes an excess capacity test as described at Sec.  
412.348(g)(4); (2) an age of assets test as described at Sec.  
412.348(g)(3); and (3) a project size requirement as described at 
Sec.  412.348(g)(5).
    Based on information compiled from our fiscal intermediaries and 
MACs, six hospitals have qualified for special exceptions payments 
under Sec.  412.348(g). One of these hospitals closed in May 2005. 
Because we have cost reports ending in FY 2007 for four of these 
five hospitals, we calculated the adjustment based on actual cost 
experience. (We note that the one hospital for which we do not have 
FY 2007 cost report data has had zero special exception payments for 
all available past cost reports. Consequently, we expect that this 
hospital would not have any special exceptions payments in FY 2007, 
and the lack of this hospital's FY 2007 cost report data would not 
distort the calculation of the adjustment.) Using data from cost 
reports ending in FY 2007 from the June 2009 update of the HCRIS 
data, we divided the capital special exceptions payment amounts for 
the four available hospitals that qualified for special exceptions 
by the total capital PPS payment amounts (including special 
exception payments) for all hospitals. Based on the data from cost 
reports ending in FY 2007, this ratio is rounded to 0.0002. We also 
computed the ratio for FYs 2005 and 2006, which rounds to 0.0002. 
Based on these data, we are making an adjustment of 0.0002. Because 
special exceptions are budget neutral, we offset the capital Federal 
rate by 0.02 percent for special exceptions payments for FY 2010. 
Therefore, the exceptions adjustment factor is equal to 0.9998 (1--
0.0002) to account for special exceptions payments in FY 2010.
    In the FY 2009 IPPS final rule (73 FR 48773), we estimated that 
total (special) exceptions payments for FY 2009 would equal 0.01 
percent of aggregate payments based on the capital Federal rate. 
Therefore, we applied an exceptions adjustment factor of 0.9999 (1-
0.0001) to determine the FY 2009 capital Federal rate. As we stated 
above, we are applying an exceptions payment adjustment factor of 
0.9998 (1-0.0002) to the capital Federal rate for FY 2010 based on 
our estimate that exceptions payments in FY 2010 will equal 0.02 
percent of aggregate payments based on the FY 2010 capital Federal 
rate. The exceptions reduction factors are not built permanently 
into the capital rates; that is, the factors are not applied 
cumulatively in determining the capital Federal rate. Therefore, the 
net change in the exceptions adjustment factor used in determining 
the FY 2010 capital Federal rate is 0.9999 (0.9998/0.9999).

5. Capital Standard Federal Rate for FY 2010

    For FY 2009, we established a final capital Federal rate of 
$424.17 (73 FR 57891). We are establishing an update of 1.4 percent 
in determining the FY 2010 capital Federal rate for all hospitals. 
As a result of the 1.4 percent update and other budget neutrality 
factors discussed above, we are establishing a national capital 
Federal rate of $430.15 for FY 2010. The national capital Federal 
rate for FY 2010 was calculated as follows:
    <bullet> The FY 2010 update factor is 1.0140, that is, the 
update is 1.4 percent.
    <bullet> The FY 2010 budget neutrality adjustment factor that is 
applied to the capital standard Federal payment rate for changes in 
the MS-DRG classifications and relative weights and changes in the 
GAFs is 0.9990.
    <bullet> The FY 2010 outlier adjustment factor is 0.9477.
    <bullet> The FY 2010 (special) exceptions payment adjustment 
factor is 0.9998.
    Because the capital Federal rate has already been adjusted for 
differences in case-mix, wages, cost-of-living, indirect medical 
education costs, and payments to hospitals serving a 
disproportionate share of low-income patients, we did not make 
additional adjustments in the capital standard Federal rate for 
these factors, other than the budget neutrality factor for changes 
in the MS-DRG classifications and relative weights and for changes 
in the GAFs.
    We are providing the following chart that shows how each of the 
factors and adjustments for FY 2010 affected the computation of the 
FY 2010 national capital Federal rate in comparison to the FY 2009 
national capital Federal rate. The FY 2010 update factor has the 
effect of increasing the capital Federal rate by 1.4 percent 
compared to the FY 2009 capital Federal rate. The GAF/DRG budget 
neutrality factor has the effect of decreasing the capital Federal 
rate by 0.10 percent. The FY 2010 outlier adjustment factor has the 
effect of increasing the capital Federal rate by 0.13 percent 
compared to the FY 2009 capital Federal rate. The FY 2010 exceptions 
payment adjustment factor has the effect of decreasing the capital 
Federal rate by 0.01 percent compared to the FY 2009 capital Federal 
rate. (As discussed in section VI.E.1. of the preamble of this final 
rule, we are not applying an additional adjustment to the FY 2010 
capital Federal rate for changes in documentation and coding that do 
not reflect real changes in patients' severity of illness. A 
permanent cumulative adjustment

[[Page 44020]]

of -1.5 percent (that is, a factor of 0.985) was applied in 
determining the FY 2009 capital Federal rate for changes in 
documentation and coding that do not reflect real changes in 
patients' severity of illness.) The combined effect of all the 
changes will increase the national capital Federal rate by 
approximately 1.4 percent compared to the FY 2009 national capital 
Federal rate.

      Comparison of Factors and Adjustments: FY 2009 Capital Federal Rate and FY 2010 Capital Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                      FY 2009         FY 2010         Change      Percent change
----------------------------------------------------------------------------------------------------------------
Update Factor \1\...............................          1.0090          1.0140          1.0140            1.40
GAF/DRG Adjustment Factor \1\...................          1.0015          0.9990          0.9990           -0.10
Outlier Adjustment Factor \2\...................          0.9465          0.9477          1.0012            0.13
Exceptions Adjustment Factor \2\................          0.9999          0.9998          0.9999           -0.01
MS-DRG Documentation and Coding Adjustment                 0.985          1.0000          1.0000             0.0
 Factor.........................................
Capital Federal Rate............................         $424.17         $430.20          1.0142            1.42
----------------------------------------------------------------------------------------------------------------
\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates.
  Thus, for example, the incremental change from FY 2009 to FY 2010 resulting from the application of the 0.9990
  GAF/DRG budget neutrality factor for FY 2010 is 0.9990.
\2\ The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital
  rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for
  example, the net change resulting from the application of the FY 2010 outlier adjustment factor is 0.9477/
  0.9465, or 1.0013.

    We also are providing the following chart that shows how the 
final FY 2010 capital Federal rate differs from the proposed FY 2010 
capital Federal rates as presented in the FY 2010 IPPS/RY 2010 LTCH 
PPS proposed rule (74 FR 24258).

 Comparison of Factors and Adjustments: Proposed FY 2010 Capital Federal Rate and Final FY 2010 Capital Federal
                                                      Rate
----------------------------------------------------------------------------------------------------------------
                                                   Proposed  FY
                                                       2010        Final FY 2010      Change      Percent Change
----------------------------------------------------------------------------------------------------------------
Update Factor...................................          1.0120          1.0140          1.0020            0.20
GAF/DRG Adjustment Factor.......................          0.9994          0.9990          0.9996           -0.04
Outlier Adjustment Factor.......................          0.9454          0.9477           1.002            0.24
Exceptions Adjustment Factor....................          0.9999          0.9998          0.9999           -0.01
MS-DRG Upcoding Adjustment Factor...............          0.9670          1.0000          1.0341            3.41
Capital Federal Rate............................         $420.67         $430.20          1.0227            2.27
----------------------------------------------------------------------------------------------------------------

6. Special Capital Rate for Puerto Rico Hospitals

    Section 412.374 provides for the use of a blended payment system 
for payments to hospitals located in Puerto Rico under the PPS for 
acute care hospital inpatient capital-related costs. Accordingly, 
under the capital PPS, we compute a separate payment rate specific 
to hospitals located in Puerto Rico using the same methodology used 
to compute the national Federal rate for capital-related costs. 
Under the broad authority of section 1886(g) of the Act, as 
discussed in section VI. of the preamble of this final rule, 
beginning with discharges occurring on or after October 1, 2004, 
capital payments to hospitals located in Puerto Rico are based on a 
blend of 25 percent of the Puerto Rico capital rate and 75 percent 
of the capital Federal rate. The Puerto Rico capital rate is derived 
from the costs of Puerto Rico hospitals only, while the capital 
Federal rate is derived from the costs of all acute care hospitals 
participating in the IPPS (including Puerto Rico).
    To adjust hospitals' capital payments for geographic variations 
in capital costs, we apply a GAF to both portions of the blended 
capital rate. The GAF is calculated using the operating IPPS wage 
index, and varies depending on the labor market area or rural area 
in which the hospital is located. We use the Puerto Rico wage index 
to determine the GAF for the Puerto Rico part of the capital-blended 
rate and the national wage index to determine the GAF for the 
national part of the blended capital rate.
    Because we implemented a separate GAF for Puerto Rico in FY 
1998, we also apply separate budget neutrality adjustments for the 
national GAF and for the Puerto Rico GAF. However, we apply the same 
budget neutrality factor for DRG reclassifications and recalibration 
nationally and for Puerto Rico. As we stated in section III.A.4. of 
this Addendum, both the national GAF budget neutrality factor and 
the DRG adjustment are 0.9995, for a combined cumulative adjustment 
of 0.9990.
    In computing the payment for a particular Puerto Rico hospital, 
the Puerto Rico portion of the capital rate (25 percent) is 
multiplied by the Puerto Rico-specific GAF for the labor market area 
in which the hospital is located, and the national portion of the 
capital rate (75 percent) is multiplied by the national GAF for the 
labor market area in which the hospital is located (which is 
computed from national data for all hospitals in the United States 
and Puerto Rico). In FY 1998, we implemented a 17.78 percent 
reduction to the Puerto Rico capital rate as a result of Public Law 
105-33. In FY 2003, a small part of that reduction was restored.
    For FY 2009, before application of the GAF, the special capital 
rate for hospitals located in Puerto Rico is $198.77 for discharges 
occurring on or after October 1, 2008, through September 30, 2009 
(73 FR 57893). Consistent with our development of the FY 2009 Puerto 
Rico-specific operating standardized amount, we did not apply the 
additional -0.9 percent documentation and coding adjustment (or the 
cumulative -1.5 percent adjustment) to the FY 2009 Puerto Rico-
specific capital rate. We also noted in the FY 2009 IPPS final rule 
(73 FR 48449 through 48550) that we may propose to apply such an 
adjustment to the Puerto Rico operating and capital rates in the 
future.
    With the changes we made to the other factors used to determine 
the capital rate, the FY 2010 special capital rate for hospitals in 
Puerto Rico is $204.01. As noted above and discussed in greater 
detail in section VI.E.1. of the preamble of this final rule, 
consistent with our development of the Puerto Rico-specific 
operating standardized amount, we are not applying an adjustment to 
account for changes in documentation and coding that resulted from 
the adoption of the MS-DRGs in determining the FY 2010 Puerto Rico-
specific capital rate.

B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2010

    Because the 10-year capital PPS transition period ended in FY 
2001, all hospitals (except ``new'' hospitals under Sec.  412.324(b) 
and under Sec.  412.304(c)(2)) are paid based on 100 percent of the 
capital Federal rate in FY 2010.
    For purposes of calculating payments for each discharge during 
FY 2010, the capital standard Federal rate is adjusted as follows: 
(Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for hospitals 
located in Alaska and Hawaii) x (1 + DSH Adjustment Factor + IME 
Adjustment Factor, if

[[Page 44021]]

applicable). The result is the adjusted capital Federal rate. (As 
discussed in section VI.E.1. of this preamble of this final rule, at 
this time, we are no longer eliminating the IME adjustment under the 
capital IPPS.)
    Hospitals also may receive outlier payments for those cases that 
qualify under the thresholds established for each fiscal year. 
Section 412.312(c) provides for a single set of thresholds to 
identify outlier cases for both inpatient operating and inpatient 
capital-related payments. The outlier thresholds for FY 2010 are in 
section II.A. of this Addendum. For FY 2010, a case will qualify as 
a cost outlier if the cost for the case plus the (operating) IME and 
DSH payments is greater than the prospective payment rate for the 
MS-DRG plus the fixed-loss amount of $23,140.
    An eligible hospital may also qualify for a special exceptions 
payment under Sec.  412.348(g) up through the 10th year beyond the 
end of the capital transition period if it meets the following 
criteria: (1) A project need requirement described at Sec.  
412.348(g)(2), which in the case of certain urban hospitals includes 
an excess capacity test as described at Sec.  412.348(g)(4); and (2) 
a project size requirement as described at Sec.  412.348(g)(5). 
Eligible hospitals include SCHs, urban hospitals with at least 100 
beds that have a DSH patient percentage of at least 20.2 percent or 
qualify for DSH payments under Sec.  412.106(c)(2), and hospitals 
that have a combined Medicare and Medicaid inpatient utilization of 
at least 70 percent. Under Sec.  412.348(g)(8), the amount of a 
special exceptions payment is determined by comparing the cumulative 
payments made to the hospital under the capital PPS to the 
cumulative minimum payment level. This amount is offset by: (1) Any 
amount by which a hospital's cumulative capital payments exceed its 
cumulative minimum payment levels applicable under the regular 
exceptions process for cost reporting periods beginning during which 
the hospital has been subject to the capital PPS; and (2) any amount 
by which a hospital's current year operating and capital payments 
(excluding 75 percent of operating DSH payments) exceed its 
operating and capital costs. Under Sec.  412.348(g)(6), the minimum 
payment level is 70 percent for all eligible hospitals.
    Currently, as provided in Sec.  412.304(c)(2), we pay a new 
hospital 85 percent of its reasonable costs during the first 2 years 
of operation unless it elects to receive payment based on 100 
percent of the capital Federal rate. Effective with the third year 
of operation, we pay the hospital based on 100 percent of the 
capital Federal rate (that is, the same methodology used to pay all 
other hospitals subject to the capital PPS).

C. Capital Input Price Index

1. Background

    Like the operating input price index, the capital input price 
index (CIPI) is a fixed-weight price index that measures the price 
changes associated with capital costs during a given year. The CIPI 
differs from the operating input price index in one important 
aspect--the CIPI reflects the vintage nature of capital, which is 
the acquisition and use of capital over time. Capital expenses in 
any given year are determined by the stock of capital in that year 
(that is, capital that remains on hand from all current and prior 
capital acquisitions). An index measuring capital price changes 
needs to reflect this vintage nature of capital. Therefore, the CIPI 
was developed to capture the vintage nature of capital by using a 
weighted-average of past capital purchase prices up to and including 
the current year.
    We periodically update the base year for the operating and 
capital input price indexes to reflect the changing composition of 
inputs for operating and capital expenses. In this final rule, we 
rebased and revised the CIPI to a FY 2006 base year to reflect the 
more current structure of capital costs in hospitals. A complete 
discussion of this rebasing is provided in section IV.D. of the 
preamble of this final rule. The CIPI was last rebased to FY 2002 in 
the FY 2006 IPPS final rule (70 FR 47387).

2. Forecast of the CIPI for FY 2010

    Based on the latest forecast by IHS Global Insight, Inc. (second 
quarter of 2009), we forecast the FY 2006-based CIPI to increase 1.4 
percent in FY 2010. This reflects a projected 1.8 percent increase 
in vintage-weighted depreciation prices (building and fixed 
equipment, and movable equipment), and a 2.0 percent increase in 
other capital expense prices in FY 2010, partially offset by 2.1 
percent decline in vintage-weighted interest expenses in FY 2010. 
The weighted average of these three factors produces the 1.4 percent 
increase for the FY 2006-based CIPI as a whole in FY 2010.

IV. Changes to Payment Rates for Excluded Hospitals: Rate-of-Increase 
Percentages

    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to 
a rate-of-increase ceiling. An annual per discharge limit (the 
target amount as defined in Sec.  413.40(a)) was set for each 
hospital or hospital unit based on the hospital's own cost 
experience in its base year. The target amount was multiplied by the 
Medicare discharges and applied as an aggregate upper limit (the 
ceiling as defined in Sec.  413.40(a)) on total inpatient operating 
costs for a hospital's cost reporting period. Prior to October 1, 
1997, these payment provisions applied consistently to all 
categories of excluded providers (rehabilitation hospitals and units 
(now referred to as IRFs), psychiatric hospitals and units (now 
referred to as IPFs), LTCHs, children's hospitals, and cancer 
hospitals).
    Payments for services furnished in children's hospitals and 
cancer hospitals that are excluded from the IPPS continue to be 
subject to the rate-of-increase ceiling based on the hospital's own 
historical cost experience. (We note that, in accordance with Sec.  
403.752(a), RNHCIs are also subject to the rate-of-increase limits 
established under Sec.  413.40 of the regulations.)
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we proposed 
that the FY 2010 rate-of-increase percentage for cancer and 
children's hospitals and RNHCIs was the percentage increase in the 
FY 2010 IPPS operating market basket, estimated to be 2.1 percent, 
in accordance with applicable regulations at Sec.  413.40. We also 
proposed to use more recent data when determining the estimated 
percentage increase for the FY 2010 IPPS market basket for the final 
rule, to the extent these data were available. For this final rule, 
we are using the most recent data available to determine the FY 2010 
IPPS operating market basket. Based on IHS Global Insight, Inc.'s 
second quarter 2009 forecast, with historical data through the 2009 
first quarter, the IPPS operating market basket increase is 2.1 
percent for FY 2010. Therefore, for cancer and children's hospitals 
and RNHCIs, the FY 2010 rate-of-increase percentage that is applied 
to the FY 2009 target amounts in order to determine the FY 2010 
target amounts is 2.1 percent.
    IRFs, IPFs, and LTCHs were previously paid under the reasonable 
cost methodology. However, the statute was amended to provide for 
the implementation of prospective payment systems for IRFs, IPFs, 
and LTCHs. In general, the prospective payment systems for IRFs, 
IPFs, and LTCHs provide transitioning periods of varying lengths of 
time during which a portion of the prospective payment is based on 
cost-based reimbursement rules under 42 CFR part 413 (certain 
providers do not receive a transitioning period or may elect to 
bypass the transition as applicable under 42 CFR part 412, Subparts 
N, O, and P.) We note that all of the various transitioning periods 
provided for under the IRF PPS, the IPF PPS, and the LTCH PPS have 
ended.
    The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. 
We refer readers to section VIII. of the preamble and section V. of 
the Addendum to this final rule for the update changes to the 
Federal payment rates for LTCHs under the LTCH PPS for RY 2010. The 
annual updates for the IRF PPS and the IPF PPS are issued by the 
agency in separate Federal Register documents.

V. Changes to the Payment Rates for the LTCH PPS for RY 2010

A. LTCH PPS Standard Federal Rate for FY 2010

1. Background

    In section VIII. of the preamble of this final rule, we discuss 
our changes to the payment rates, factors, and specific policies 
under the LTCH PPS for RY 2010. At Sec.  412.523(c)(3)(ii) of the 
regulations, for LTCH PPS rate years beginning RY 2004 through RY 
2006, we updated the standard Federal rate by a rate increase factor 
to adjust for the most recent estimate of the increases in prices of 
an appropriate market basket of goods and services for LTCHs. We 
established that policy of annually updating the standard Federal 
rate because, at that time, we believed that was the most 
appropriate method for updating the LTCH PPS standard Federal rate 
annually for years after the initial implementation of the LTCH PPS 
in FY 2003. When we moved the date of the annual update of the LTCH 
PPS from October 1 to July 1 in the RY 2004 LTCH PPS final rule (68 
FR 34138), we revised Sec.  412.523(c)(3) to specify that, for LTCH 
PPS rate years beginning on or after July 1, 2003, the annual

[[Page 44022]]

update to the standard Federal rate for the LTCH PPS would be equal 
to the previous rate year's Federal rate updated by the most recent 
estimate of increases in the appropriate market basket of goods and 
services included in covered inpatient LTCH services. At that time, 
we believed that was the most appropriate method for updating the 
LTCH PPS standard Federal rate annually for years after RY 2004.
    In the RY 2007 LTCH PPS final rule (71 FR 27818), we explained 
that rather than solely using the most recent estimate of the LTCH 
PPS market basket as the basis of the update factor for the standard 
Federal rate for RY 2007, we believed that, based on our ongoing 
monitoring activity, it was appropriate to adjust the standard 
Federal rate to account for the changes in documentation and coding 
practices (rather than patient severity of illness). We established 
regulations at Sec.  412.523(c)(3)(iii) to specify that the update 
to the standard Federal rate for the 2007 LTCH PPS rate year is zero 
percent. This was based on the most recent estimate of the LTCH PPS 
market basket at the time, which was offset by an adjustment to 
account for changes in case-mix in prior periods due to changes in 
documentation and coding rather than increased patient severity of 
illness in FY 2004. For the following year, we also considered 
changes in documentation and coding practices rather than patient 
severity of illness in establishing the update to the standard 
Federal rate for the 2008 LTCH PPS rate year. In the RY 2008 LTCH 
PPS final rule (72 FR 26887 through 27890), we adjusted the standard 
Federal rate based on the most recent estimate of the increase in 
the market basket (3.2 percent) and an adjustment to account for 
changes in documentation and coding practices (2.49 percent) in FY 
2005. Accordingly, we established regulations at Sec.  
412.523(c)(3)(iv) to specify that the update to the standard Federal 
rate for RY 2008 was 0.71 percent.
    However, Public Law 110-173 (MMSEA), enacted on December 29, 
2007, contained a provision that addressed the standard Federal rate 
for RY 2008. Specifically, section 114(e)(1) of Public Law 110-173 
provided that under the added section 1886(m)(2) of the Act, the 
standard Federal rate for RY 2008 shall be the same as the standard 
Federal rate for RY 2007. In addition, section 114(e)(2) of Public 
Law 110-173 specifically stated that the revised standard Federal 
rate provided for under section 114(e)(1) ``shall not apply to 
discharges occurring on or after July 1, 2007, and before April 1, 
2008,'' effectively resulting in a delay of the application of the 
updated standard Federal rate for RY 2007 established in the LTCH 
PPS RY 2008 final rule (72 FR 26890). We implemented these statutory 
provisions in an interim final rule with comment period (73 FR 24875 
through 24877), as discussed in further detail in section IX. of the 
preamble of this final rule. Accordingly, we revised Sec.  
412.523(c)(iv) to provide that: (1) the standard Federal rate for 
the LTCH PPS RY 2008 is the same as the standard Federal rate for 
the previous LTCH PPS RY, which is RY 2007; and (2) for discharges 
occurring on or after July 1, 2007, and before April 1, 2008, 
payments are based on the standard Federal rate for LTCH PPS RY 
2007, updated by 0.71 percent. Thus, effectively, the standard 
Federal rate used to determine LTCH PPS payments for discharges 
occurring on or after July 1, 2007, through March 31, 2008, is the 
standard Federal rate for RY 2007 updated by 0.71 percent, while 
LTCH PPS payments for discharges occurring from April 1, 2008, 
through June 30, 2008, are determined based on the standard Federal 
rate set forth in section 114(e)(1) of Public Law 110-173 (that is, 
the same standard Federal rate as the previous rate year (RY 2007)).
    Consistent with our historical practice, in the RY 2009 LTCH PPS 
final rule (73 FR 26806), we updated the standard Federal rate from 
the previous year (that is, the standard Federal rate for RY 2008 as 
established by section 1886(m)(2) of the Act) to determine the 
standard Federal rate for RY 2009. In that same final rule, under 
the broad authority conferred upon the Secretary by section 123 of 
the BBRA as amended by section 307(b) of the BIPA, we established an 
annual update to the standard Federal rate for RY 2009 based on the 
most recent estimate of the increase in the LTCH PPS market basket 
of 3.6 percent (for the 15-month rate year, which was based on the 
best available data at that time) and an adjustment of -0.9 percent 
to account for the increase in case-mix in a prior period (FY 2006) 
due to changes in documentation and coding practices rather than an 
increase in patient severity of illness. (As noted above, we 
established a 15-month period for RY 2009 (July 1, 2008 through 
September 30, 2009) in order to move the LTCH PPS annual rate update 
to an October 1 effective date beginning October 1, 2009. We refer 
readers to 73 FR 26797 through 26798). Accordingly, we established 
regulations at Sec.  412.523(c)(3)(v) to specify that the update to 
the standard Federal rate for the 2009 LTCH PPS rate year is 2.7 
percent.

2. Development of the RY 2010 LTCH PPS Standard Federal Rate

    As we stated in the FY 2010 IPPS/RY 2010 proposed rule (74 FR 
24261), while we continue to believe that an update to the LTCH PPS 
standard Federal rate should be based on the most recent estimate of 
the increase in the LTCH PPS market basket, we also believe it is 
appropriate that the standard Federal rate be offset by an 
adjustment to account for any changes in documentation and coding 
practices that do not reflect increased patient severity of illness. 
Such an adjustment protects the integrity of the Medicare Trust 
Funds by ensuring that the LTCH PPS payment rates better reflect the 
true costs of treating LTCH patients. Furthermore, as we discussed 
most recently in the RY 2009 LTCH final rule (73 FR 26805), we did 
not establish a case-mix budget neutrality factor (that is, a 
documentation and coding adjustment for changes in case-mix that are 
not due to changes in patient severity of illness) for the adoption 
of the severity adjusted MS-LTC-DRG patient classification system. 
Rather, we noted that, consistent with past LTCH payment policy, we 
would continue to monitor LTCH data and we could propose to make 
adjustments when updating the LTCH PPS standard Federal rate in the 
future to account for changes in documentation and coding that do 
not reflect any real changes in case-mix during these years that we 
are implementing MS-LTC-DRGs.
    As we discussed in greater detail in section VIII.C.3. of the 
preamble of this final rule, we performed a CMI analysis using the 
most recent available LTCH claims data under both the current MS-
LTC-DRG and former CMS LTC-DRG patient classification systems. Based 
on this evaluation, in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule (74 FR 24229 through 24230), we determined that there was a 
total increase in LTCH CMI of 1.8 percent due to changes in 
documentation and coding that did not reflect real changes in 
patient severity of illness for LTCH discharges occurring in FY 2007 
and FY 2008. Specifically, our analysis showed an increase in CMI of 
0.5 percent in FY 2007 and 1.3 percent in FY 2008 due to changes in 
documentation and coding that did not reflect increased patient 
severity of illness (or costs). As we discuss in section VIII.C.3. 
of the preamble of this final rule, we are applying a -0.5 percent 
adjustment to account for the increase in case-mix in FY 2007. 
However, we are delaying the application of the -1.3 percent 
adjustment to account for the increase in case-mix in FY 2008.
    At this time, the most recent estimate of the increase in the 
LTCH PPS market basket (that is, the FY 2002-based RPL market 
basket) for RY 2010 is 2.5 percent, as discussed in section 
VIII.B.2. of the preamble of this final rule (compared to a proposed 
increase of 2.4 percent in the proposed rule). Consistent with our 
historical practice, in this final rule, as proposed, we are 
updating the LTCH PPS standard Federal rate for RY 2010 based on the 
full LTCH PPS market basket increase estimate of 2.5 percent and an 
adjustment to account for the increase in case-mix in a prior 
periods (FY 2007) that resulted from changes in documentation and 
coding practices of 0.5 percent. Therefore, the update factor to the 
standard Federal rate for RY 2010 is 2.0 percent (that is, we are 
applying a factor of 1.020 in determining the LTCH PPS standard 
Federal rate for RY 2010, calculated as 1.025 x 1 divided by 1.005 = 
1.020 or 2.0 percent). That is, under the broad authority conferred 
upon the Secretary under the BBRA and the BIPA to determine 
appropriate updates under the LTCH PPS, we are specifying under 
Sec.  412.523(c)(3)(vi) that, for LTCH discharges occurring on or 
after October 1, 2009, and on or before September 30, 2010, the 
standard Federal rate from the previous year will be updated by 2.0 
percent. Accordingly, we are amending Sec.  412.523 to add a new 
paragraph (c)(3)(vi) to specify that the standard Federal rate for 
RY 2010 is the standard Federal rate for the previous rate year 
updated by 2.0 percent. In determining the standard Federal rate for 
RY 2010, we applied the 1.020 update factor to the RY 2009 Federal 
rate of $39,114.36 (as established in the RY 2009 LTCH PPS final 
rule (73 FR 26812)). Consequently, the standard Federal rate for RY 
2010 is $39,896.65.

[[Page 44023]]

B. Adjustment for Area Wage Levels Under the LTCH PPS for RY 2010

1. Background

    Under the authority of section 123 of the BBRA as amended by 
section 307(b) of the BIPA, we established an adjustment to the LTCH 
PPS standard Federal rate to account for differences in LTCH area 
wage levels at Sec.  412.525(c). The labor-related share of the LTCH 
PPS standard Federal rate (discussed in greater detail in section 
VIII.C.2. of the preamble of this final rule), is adjusted to 
account for geographic differences in area wage levels by applying 
the applicable LTCH PPS wage index. The applicable LTCH PPS wage 
index is computed using wage data from inpatient acute care 
hospitals without regard to reclassification under section 
1886(d)(8) or section 1886(d)(10) of the Act.
    As we discussed in the August 30, 2002 LTCH PPS final rule (67 
FR 56015), when we implemented the LTCH PPS, we established a 5-year 
transition to the full wage index adjustment. The wage index 
adjustment was completely phased-in for cost reporting periods 
beginning in FY 2007. Therefore, for cost reporting periods 
beginning on or after October 1, 2006, the applicable LTCH wage 
index values are the full (five-fifths) LTCH PPS wage index values 
calculated based on acute care hospital inpatient wage index data 
without taking into account geographic reclassification under 
section 1886(d)(8) and section 1886(d)(10) of the Act. For 
additional information on the phase-in of the wage index adjustment 
under the LTCH PPS, we refer readers to the August 30, 2002 LTCH PPS 
final rule (67 FR 56017 through 56019) and the RY 2008 LTCH PPS 
final rule (72 FR 26891).

2. Updates to the Geographic Classifications/Labor Market Area 
Definitions

a. Background

    As discussed in the August 30, 2002 LTCH PPS final rule, which 
implemented the LTCH PPS (67 FR 56015 through 56019), in 
establishing an adjustment for area wage levels under Sec.  
412.525(c), the labor-related portion of a LTCH's Federal 
prospective payment is adjusted by using an appropriate wage index 
based on the labor market area in which the LTCH is located. In the 
RY 2006 LTCH PPS final rule (70 FR 24184 through 24185), in 
regulations at Sec.  412.525(c), we revised the labor market area 
definitions used under the LTCH PPS effective for discharges 
occurring on or after July 1, 2005, based on the Executive OMB's 
CBSA designations, which are based on 2000 Census data. We made this 
revision because we believe that the CBSA-based labor market area 
definitions will ensure that the LTCH PPS wage index adjustment most 
appropriately accounts for and reflects the relative hospital wage 
levels in the geographic area of the hospital as compared to the 
national average hospital wage level. We note that these are the 
same CBSA-based designations implemented for acute care hospitals 
under the IPPS at Sec.  412.64(b), effective October 1, 2004 (69 FR 
49026 through 49034). (For further discussion of the CBSA-based 
labor market area (geographic classification) definitions currently 
used under the LTCH PPS, we refer readers to the RY 2006 LTCH PPS 
final rule (70 FR 24182 through 24191).)
    In the RY 2009 LTCH PPS final rule (73 FR 26814), we codified 
the definitions of ``urban'' and ``rural'' in 42 CFR part 412, 
Subpart O (the subpart of the regulations specific to the LTCH PPS). 
Prior to this codification, the application of the wage index 
adjustment under Sec.  412.525(c)(2) was made on the basis of the 
location of the facility in either an urban area or a rural area as 
defined in Sec.  412.64(b)(1)(ii)(A) through (C) of the regulations, 
which apply specifically to the IPPS. Under that regulatory 
construction, the then existing Sec.  412.525(c) indicated that the 
terms ``rural area'' and ``urban area'' were defined according to 
the definitions of those terms under the IPPS in 42 CFR part 412, 
Subpart D. In that same final rule, we revised Sec.  412.525(c) to 
specify that the application of the LTCH PPS wage index adjustment 
is made on the basis of the location of the LTCH in either an urban 
area or a rural area as defined in Sec.  412.503 because we believe 
it is administratively simpler to have the LTCH PPS urban and rural 
labor market area definitions self-contained in the regulations of 
the subpart specific to the LTCH PPS (Sec.  412.503) rather than 
specifying a cross-reference to the definitions of urban area and 
rural area in the IPPS regulations in 42 CFR part 412, Subpart D. 
Thus, under Sec.  412.503, for discharges occurring on or after July 
1, 2008, an ``urban area'' under the LTCH PPS is defined as a 
Metropolitan Statistical Area, as defined by OMB and a ``rural 
area'' is defined as any area outside of an urban area.
    In addition, in the RY 2009 LTCH PPS final rule (73 FR 26813 
through 26814), we clarified the change regarding the treatment of 
Litchfield County, Connecticut (CT), and Merrimack County, New 
Hampshire (NH) CBSA-based labor market area definitions. 
Specifically, we discussed that, effective for LTCH PPS discharges 
occurring on or after July 1, 2008, Litchfield County, CT, and 
Merrimack County, NH, are considered ``rural'' and are no longer 
considered as being part of urban CBSA 25540 (Hartford-West 
Hartford-East Hartford, CT) and urban CBSA 31700 (Manchester-Nashua, 
NH), respectively, as these areas had been in the past as a result 
of a change to the regulations at Sec.  412.64(b)(1)(ii)(B) 
established in the FY 2008 IPPS final rule with comment period (72 
FR 47337 through 47338). In making this clarification, we noted that 
this policy is consistent with our policy of not taking into account 
IPPS geographic reclassifications in determining payments under the 
LTCH PPS.

b. Update to the CBSA-Based Labor Market Area Definitions

    The CBSA-based labor market area definitions used under the LTCH 
PPS were last updated in the RY 2009 LTCH PPS final rule (73 FR 
26812 through 26813) based on the most recent OMB bulletin available 
at that time (December 18, 2006; OMB Bulletin No. 07-01). As 
discussed in the proposed rule (74 FR 24262 through 24263), since 
that time, there have been two OMB bulletins announcing revisions to 
the CBSA designations, and under the broad authority conferred upon 
the Secretary by section 123 of the BBRA, as amended by section 
307(b) of BIPA, to determine appropriate adjustments under the LTCH 
PPS, we proposed to apply the changes from those two OMB bulletins 
to the current CBSA-based labor market area definitions and 
geographic classifications used under the LTCH PPS, effective for 
discharges occurring on or after October 1, 2009.
    We did not receive any public comments on our proposed update to 
the CBSA-based labor market area definitions used under the LTCH PPS 
for RY 2010. Therefore, we are adopting those proposed changes as 
final in this final rule. Specifically, for RY 2010, we are 
establishing the following updates to the LTCH PPS CBSA-based labor 
market area definitions and geographic classifications:
    First, on November 20, 2007, OMB announced the revision of 
titles for eight urban areas (OMB Bulletin No. 08-01). This OMB 
bulletin is available on the OMB Web site at: http://www.whitehouse.gov/omb/assets/omb/bulletins/fy2008/b08-01.pdf. The 
revised titles are as follows:
    <bullet> Hammonton, New Jersey qualifies as a new principal city 
of the Atlantic City, New Jersey CBSA. The new title is Atlantic 
City-Hammonton, New Jersey CBSA (CBSA 12100).
    <bullet> New Brunswick, New Jersey, located in the Edison, New 
Jersey Metropolitan Division, qualifies as a new principal city of 
the New York- Northern New Jersey-Long Island, New York, New Jersey, 
Pennsylvania CBSA. The new title for the Metropolitan Division is 
Edison-New Brunswick, New Jersey CBSA (CBSA 20764).
    <bullet> Summerville, South Carolina qualifies as a new 
principal city of the Charleston-North Charleston, South Carolina 
CBSA. The new title is Charleston-North Charleston-Summerville, 
South Carolina (CBSA 16700).
    <bullet> Winter Haven, Florida qualifies as a new principal city 
of the Lakeland, Florida CBSA. The new title is Lakeland-Winter 
Haven, Florida (CBSA 29460).
    <bullet> Bradenton, Florida replaces Sarasota, Florida as the 
most populous principal city of the Sarasota-Bradenton-Venice, 
Florida CBSA (currently CBSA 42260). The new title is Bradenton-
Sarasota-Venice, Florida. The new CBSA code is 14600.
    <bullet> Frederick, Maryland replaces Gaithersburg, Maryland as 
the second most populous principal city in the Bethesda-
Gaithersburg-Frederick, Maryland CBSA. The new title is Bethesda-
Frederick-Gaithersburg, Maryland (CBSA 13644).
    <bullet> North Myrtle Beach, South Carolina replaces Conway, 
South Carolina as the second most populous principal city of the 
Myrtle Beach-Conway-North Myrtle Beach, South Carolina CBSA. The new 
title is Myrtle Beach-North Myrtle Beach-Conway, South Carolina 
(CBSA 34820).
    <bullet> Pasco, Washington replaces Richland, Washington as the 
second most populous principal city of the Kennewick-Richland-Pasco, 
Washington CBSA. The new title is Kennewick-Pasco-Richland, 
Washington (CBSA 28420).
    In this final rule, under the broad authority conferred upon the 
Secretary by section 123 of the BBRA, as amended by section 307(b) 
of BIPA, to determine appropriate adjustments under the LTCH PPS, as

[[Page 44024]]

proposed, we are applying these changes to the current CBSA-based 
labor market area definitions and geographic classifications used 
under the LTCH PPS, effective for discharges occurring on or after 
October 1, 2009 (to the extent that they are not changed by the 
later OMB Bulletin No. 90-1 discussed below). We believe these 
revisions to the LTCH PPS CBSA-based labor market area definitions, 
which are based on the most recent available data, will ensure that 
the LTCH PPS wage index adjustment most appropriately accounts for 
and reflects the relative hospital wage levels in the geographic 
area of the hospital as compared to the national average hospital 
wage level. Accordingly, the RY 2010 LTCH PPS wage index values 
presented in Tables 12A and 12B in the Addendum of this final rule 
reflect the revisions to the CBSA-based labor market area 
definitions described above. We note that the eight CBSA title 
revisions announced in OMB Bulletin No. 08-01 do not change the 
composition (constituent counties) of the affected CBSAs; they only 
revise the CBSA titles (and do not change the CBSA codes with the 
exception of the change in CBSA code 42260 to 14600). We also note 
that these revisions were applicable under the IPPS beginning 
October 1, 2008 (73 FR 48575).
    Second, on November 20, 2008, OMB announced three Micropolitan 
Statistical Areas that now qualify as MSAs and changed the principal 
cities and titles of a number of CBSAs and a Metropolitan Division 
(OMB Bulletin No. 09-01). This OMB bulletin is available on the OMB 
Web site at: http://www.whitehouse.gov/omb/assets/omb/bulletins/fy2009/09-01.pdf. The new urban CBSAs are as follows:
    <bullet> Cape Girardeau-Jackson, Missouri-Illinois (CBSA 16020). 
This CBSA is comprised of the principal cities of Cape Girardeau and 
Jackson, Missouri in Alexander County, Illinois; Bollinger County, 
Missouri, and Cape Girardeau County, Missouri.
    <bullet> Manhattan, Kansas (CBSA 31740). This CBSA is comprised 
of the principal city of Manhattan, Kansas in Geary County, 
Pottawatomie County, and Riley County.
    <bullet> Mankato-North Mankato, Minnesota (CBSA 31860). This 
CBSA is comprised of the principal cities of Mankato and North 
Mankato, Minnesota in Blue Earth County and Nicollet County.
    The changes in the principal cities and the revised titles are 
as follows:
    <bullet> Broomfield, Colorado qualifies as a new principal city 
of the Denver-Aurora, Florida CBSA. The new title is Denver-Aurora-
Broomfield, Colorado (CBSA 19740).
    <bullet> Chapel Hill, North Carolina qualifies as a new 
principal city of the Durham, North Carolina CBSA. The new title is 
Durham-Chapel Hill, North Carolina (CBSA 20500).
    <bullet> Chowchilla, California qualifies as a new principal 
city of the Madera, California CBSA. The new title is Madera-
Chowchilla, California (CBSA 31460).
    <bullet> Panama City Beach, Florida qualifies as a new principal 
city of the Panama City-Lynn Haven, Florida CBSA. The new title is 
Panama City-Lynn Haven-Panama City Beach, Florida (CBSA 37460).
    <bullet> East Wenatchee, Washington qualifies as a new principal 
city of the Wenatchee, Washington CBSA. The new title is Wenatchee-
East Wenatchee, Washington (CBSA 48300).
    <bullet> Rockville, Maryland replaces Gaithersburg, Maryland as 
the third most populous city of the Bethesda-Frederick-Gaithersburg, 
Maryland Metropolitan Division. The new title is Bethesda-Frederick-
Rockville, Maryland Metropolitan Division (CBSA 13644).
    In this final rule, under the broad authority conferred upon the 
Secretary by section 123 of the BBRA, as amended by section 307(b) 
of BIPA, to determine appropriate adjustments under the LTCH PPS, as 
proposed, we are applying these changes to the current CBSA-based 
labor market area definitions and geographic classifications used 
under the LTCH PPS effective for discharges occurring on or after 
October 1, 2009. We believe these revisions to the LTCH PPS CBSA-
based labor market area definitions, which are based on the most 
recent available data, would ensure that the LTCH PPS wage index 
adjustment most appropriately accounts for and reflects the relative 
hospital wage levels in the geographic area of the hospital as 
compared to the national average hospital wage level. Accordingly, 
the RY 2010 LTCH PPS wage index values presented in Tables 12A and 
12B in the Addendum of this final rule reflect the revisions to the 
CBSA-based labor market area definitions described above. We note 
that the six CBSA title revisions noted above do not change the 
composition (constituent counties) of the affected CBSAs; they only 
revise the CBSA titles (and do not change the CBSA codes). We also 
note that we are currently aware of only one LTCH located in one of 
the three new CBSAs (CBSA 16020). As discussed in section III.C. of 
the preamble of this final rule, the revisions to the CBSA-based 
designations are also adopted under the IPPS effective beginning 
October 1, 2009.

3. LTCH PPS Labor-Related Share

    As noted above in this section, under the adjustment for 
difference in area wage levels at Sec.  412.525(c), the labor-
related share of a LTCH's PPS payment is adjusted by the applicable 
wage index for the labor market area in which the LTCH is located. 
Specifically, as discussed in section VIII.C.2.d. of the preamble of 
this final rule, the LTCH PPS labor-related share is determined by 
our actuaries and is based on data for the labor-related share of 
operating costs and capital costs of the FY 2002-based RPL market 
basket. (Additional background information on the historical 
development of the labor-related share under the LTCH PPS can be 
found in the RY 2009 LTCH PPS final rule (73 FR 26815). In the RY 
2007 final rule (71 FR 27829 through 27830), we established a labor-
related share based on the relative importance of the labor-related 
share of operating costs (wages and salaries, employee benefits, 
professional fees, postal services, and all other labor-intensive 
services) and capital costs of the RPL market basket based on FY 
2002 data, as they are the best available data that reflect the cost 
structure of LTCHs. For the past 2 years (RYs 2008 and 2009), we 
updated the LTCH PPS labor-related share annually based on the 
latest available data for the RPL market basket. For RY 2009, the 
labor-related share is 75.662 percent, as established in the RY 2009 
LTCH PPS final rule (73 FR 26815 through 26816), based on the sum of 
the relative importance of the labor-related share of operating 
costs (wages and salaries, employee benefits, professional fees, and 
all other labor-intensive services) and a labor-related portion of 
capital costs of the FY 2002-based RPL market basket from the first 
quarter of 2008 forecast (the most recent available data at that 
time).
    As discussed in section VIII.C. of the preamble of this final 
rule and as we proposed, we are continuing to use the FY 2002-based 
RPL market basket used under the LTCH PPS for RY 2010. Furthermore, 
for RY 2010, we are continuing to define the LTCH PPS labor-related 
share as the national average proportion of operating costs (wages 
and salaries, employee benefits, professional fees, and all other 
labor-intensive services) and a labor-related portion of capital 
costs based on the FY 2002-based RPL market basket. (As noted above, 
additional information on the development of the FY 2002-based RPL 
market basket used under the LTCH PPS can be found in the RY 2007 
LTCH PPS final rule (71 FR 27808 through 27818).) Accordingly, 
consistent with our historical practice of using the best available 
data, we used IHS Global Insight, Inc.'s second quarter 2009 
forecast of the FY 2002-based RPL market basket for RY 2010 (in the 
proposed rule, we used IHS Global Insight, Inc's first quarter 2009 
forecast) to determine the labor-related share for the LTCH PPS for 
RY 2010 that will be effective for discharges occurring on or after 
October 1, 2009, and through September 30, 2010, as these are the 
most recent available data. As shown in the chart in section 
VIII.C.2.d. of the preamble of this final rule, based on the latest 
available data (and the authority set forth in section 123 of the 
BBRA as amended by section 307(b) of the BIPA, we are establishing a 
labor-related share of 75.779 percent under the LTCH PPS for the RY 
2010.

4. LTCH PPS Wage Index for RY 2010

    Historically, under the LTCH PPS, we have established LTCH PPS 
wage index values calculated from acute care IPPS hospital wage data 
without taking into account geographic reclassification under 
sections 1886(d)(8) and 1886(d)(10) of the Act. As we discussed in 
the August 30, 2002 LTCH PPS final rule (67 FR 56019), hospitals 
that are excluded from the IPPS are not required to provide wage-
related information on the Medicare cost report. Therefore, we would 
need to establish instructions for the collection of these LTCH data 
as well as develop some type of application and determination 
process before a geographic reclassification adjustment under the 
LTCH PPS could be implemented. The wage adjustment established under 
the LTCH PPS is based on a LTCH's actual location without regard to 
the urban or rural designation of any related or affiliated 
provider. Acute care hospital inpatient wage index data are also 
used to establish the wage index adjustment used in other Medicare 
PPSs, such as the IRF

[[Page 44025]]

PPS, the IPF PPS, the HHA PPS, and the SNF PPS.
    In the RY 2009 LTCH PPS final rule (73 FR 26816 through 26817), 
we established LTCH PPS wage index values for RY 2009 calculated 
from the same data collected from cost reports submitted by IPPS 
hospitals for cost reporting periods beginning during FY 2004 that 
were used to compute the FY 2008 acute care hospital inpatient wage 
index data without taking into account geographic reclassification 
under sections 1886(d)(8) and 1886(d)(10) of the Act because these 
were the best available data at that time. The LTCH PPS wage index 
values applicable for discharges occurring on or after July 1, 2008, 
through September 30, 2009, were shown in Table 1 (for urban areas) 
and Table 2 (for rural areas) in the Addendum to the RY 2009 LTCH 
PPS final rule (73 FR 26840 through 26863).
    In this final rule, under the broad authority conferred upon the 
Secretary by section 123 of the BBRA, as amended by section 307(b) 
of BIPA, to determine appropriate adjustments under the LTCH PPS for 
RY 2010, as we proposed, we used the same data collected from cost 
reports submitted by IPPS hospitals for cost reporting periods 
beginning during FY 2006 that are being used to compute the FY 2010 
acute care hospital inpatient wage index data without taking into 
account geographic reclassification under sections 1886(d)(8) and 
1886(d)(10) of the Act to determine the applicable wage index values 
under the LTCH PPS in RY 2010 because these data (FY 2006) are the 
most recent complete data available at this time. (We note that due 
to the change in the annual LTCH PPS rate year update cycle from 
July 1 to October 1, effective October 1, 2009, established in the 
RY 2009 LTCH PPS final rule, there is no longer a lag-time in the 
availability of the IPPS hospital wage data used to develop the 
respective wage indices used under the IPPS and LTCH PPS. 
Consequently, because the annual update to the LTCH PPS and the IPPS 
now occurs on October 1 of each year, we are able to calculate wage 
index values using the same wage data to develop the LTCH wage index 
as is used to develop the IPPS wage index in a given year. Under the 
previous July 1 annual LTCH PPS rate year update cycle, due to the 
lag-time in the availability of data, there was a 1-year lag-time in 
the best available IPPS wage data to develop the LTCH PPS wage index 
each year (for example, as noted above, we established RY 2009 LTCH 
PPS wage index values from the same data collected from FY 2004 IPPS 
hospital cost reports that were used to compute the FY 2008 IPPS 
wage index). We are continuing to use IPPS wage data as a proxy to 
determine the LTCH wage index values for RY 2010 because both LTCHs 
and acute care hospitals are required to meet the same certification 
criteria set forth in section 1861(e) of the Act to participate as a 
hospital in the Medicare program and they both compete in the same 
labor markets and, therefore, experience similar wage-related 
costs.)
    We also note that using the IPPS wage data to determine the RY 
2010 LTCH wage index values reflects our policy under the IPPS 
beginning in FY 2008 that apportions the wage data for multicampus 
hospitals that are located in different labor market areas (CBSAs) 
to each CBSA where the campuses are located. (For additional 
information, we refer readers to the FY 2008 IPPS final rule with 
comment (72 FR 47317 through 47320), the FY 2009 IPPS final rule (73 
FR 48582), and section III.C. of the preamble of this final rule.) 
Specifically, for the RY 2010 LTCH PPS wage index values, which are 
computed from IPPS wage data submitted by hospitals for cost 
reporting periods beginning in FY 2006 (which are used to determine 
the FY 2010 IPPS wage index discussed in section III.F. of the 
preamble of this final rule), we allocated salaries and hours to the 
campuses of three multicampus hospitals with campuses that are 
located in different labor areas that are located in the following 
States: Massachusetts, Illinois, and Michigan. Thus, consistent with 
the FY 2010 IPPS wage index, the RY 2010 LTCH PPS wage index values 
for the following CBSAs will be affected by this policy: Boston-
Quincy, MA (CBSA 14484); Providence-New Bedford-Falls River, RI-MA 
(CBSA 39300); Chicago-Naperville-Joliet, IL (CBSA 16974); Lake 
County-Kenosha County, IL-WI (CBSA 29404); Detroit-Livonia-Dearborn, 
MI (CBSA 19804); and Warren-Troy-Farmington-Hills, MI (CBSA 47644) 
(reflected in Tables 12A and 12B in the Addendum of this final 
rule).
    The RY 2010 LTCH PPS wage index values were computed consistent 
with the urban and rural geographic classifications (labor market 
areas) discussed in section V.B.2. of the Addendum of this final 
rule and consistent with the pre-reclassified IPPS wage index policy 
(that is, our historical policy of not taking into account IPPS 
geographic reclassifications in determining payments under the LTCH 
PPS). The RY 2010 wage index values also reflect our methodology for 
establishing wage index values in urban and rural areas in which 
there are no IPPS wage data from which to compute a wage index value 
(as described above in this section).
    As previously noted, in the RY 2009 LTCH PPS final rule (73 FR 
26817 through 26818), we established a methodology for determining a 
LTCH PPS wage index value for areas that have no IPPS wage data. 
Under this methodology, we stated that each year we would determine 
a wage index value for any area in which there is no IPPS wage data 
based on the methodologies described in that final rule. We believe 
it is appropriate to establish a methodology for determining LTCH 
PPS wage index values for areas with no IPPS wage data, if 
necessary, because IPPS hospitals may open or close at any time, and 
therefore the number of areas without any IPPS wage data may change 
from year to year. Even when an IPPS hospital opens in an area where 
there are currently no IPPS hospitals, there is a lag-time between 
the time a hospital opens or becomes an IPPS provider and when the 
hospital's cost report wage data are available to include in 
calculating the area wage index. The policies established for 
determining LTCH PPS wage index values for areas with no IPPS 
hospital wage data are consistent with the methodologies that have 
been established under other Medicare postacute care PPSs, such as 
SNF and HHA, as well as the IPPS. Below we discuss the application 
of our established methodology for determining a LTCH PPS wage index 
value for RY 2010 for any areas in which there is no IPPS wage data 
for cost reporting periods beginning during FY 2006 (that is, for 
the areas in which there is no data in the IPPS wage data that we 
used to compute the RY 2010 LTCH PPS wage index).
    In this final rule, as we proposed, we determined RY 2010 LTCH 
PPS wage index values for labor market areas in which there is no 
IPPS hospital wage data from which to compute a wage index value 
consistent with the methodology we established in the RY 2009 LTCH 
PPS final rule (73 FR 26817). As was the case in RY 2009, there are 
no LTCHs located in labor areas where there is no IPPS hospital wage 
data (or IPPS hospitals) for RY 2010. However, we continue to 
believe it is appropriate to calculate LTCH PPS wage index values 
for these areas using our established methodology in the event that 
in the future a LTCH should open in one of those areas.
    Therefore, we will continue to determine a LTCH PPS wage index 
value for urban CBSAs with no IPPS wage data by using an average of 
all of the urban areas within the State to serve as a reasonable 
proxy for determining the LTCH PPS wage index for an urban area 
without specific IPPS hospital wage index data. We believe that an 
average of all of the urban areas within the State is a reasonable 
proxy for determining the LTCH PPS wage index for an urban area in 
the State with no wage data because it is based on pre-reclassified 
IPPS wage data, it is easy to evaluate, and it uses the most 
geographically similar relative wage-related costs data available. 
Furthermore, as noted above, this methodology has been adopted by 
other Medicare PPSs, such as the SNF PPS and the HHA PPS.
    Based on the FY 2006 IPPS wage data that we used to determine 
the RY 2010 LTCH PPS wage index values, there are no IPPS wage data 
for the urban area of Hinesville-Fort Stewart, GA (CBSA 25980). 
Consistent with our methodology for determining a LTCH PPS wage 
index value for urban areas with no IPPS wage data (discussed 
above), in this final rule, we calculated the RY 2010 wage index 
value for CBSA 25980 as the average of the wage index values for all 
of the other urban areas within the State of Georgia (that is, CBSAs 
10500, 12020, 12060, 12260, 15260, 16860, 17980, 19140, 23580, 
31420, 40660, 42340, 46660 and 47580) (reflected in Table 12A of the 
Addendum of this final rule). (As noted above, there are currently 
no LTCHs located in CBSA 25980.) As discussed in the RY 2009 final 
rule (73 FR 26817), as IPPS wage data are dynamic, it is possible 
that urban areas without IPPS wage data will vary in the future.
    As we proposed, we also are continuing to determine a LTCH PPS 
wage index value for rural areas with no IPPS wage data using the 
unweighted average of the wage indices from all of the CBSAs that 
are contiguous to the rural counties of the State to serve as a 
reasonable proxy in determining the LTCH PPS wage index for a rural 
area without

[[Page 44026]]

specific IPPS hospital wage index data. For this purpose, we are 
defining ``contiguous'' as sharing a border. We are not able to 
apply an averaging in rural areas with no wage data similar to what 
we are doing for urban areas with no wage data because there is no 
rural hospital data available for averaging on a statewide basis. We 
believe that using an unweighted average of the wage indices from 
all of the CBSAs that are contiguous to the rural counties of the 
State is a reasonable proxy for determining the wage index for rural 
areas in a State with no wage data because it is based on pre-
reclassified IPPS wage data, it is easy to evaluate, and it uses the 
most geographically similar relative wage-related costs data 
available.
    Based on the FY 2006 IPPS wage data that we used to determine 
the RY 2010 LTCH PPS wage index values, there are no IPPS wage data 
for the rural area of Massachusetts (CBSA code 11). Consistent with 
our methodology for determining a LTCH PPS wage index value for 
rural areas with no IPPS wage data (discussed above), in this final 
rule, as we proposed, we calculated the RY 2010 wage index value for 
rural Massachusetts by computing the unweighted average of the wage 
indices from all of the CBSAs that are contiguous to the rural 
counties in that State. Specifically, in the case of Massachusetts, 
the entire rural area consists of Dukes and Nantucket counties. We 
determined that the borders of Dukes and Nantucket counties are 
``contiguous'' with Barnstable County, MA, and Bristol County, MA. 
Therefore, the RY 2010 LTCH PPS wage index value for rural 
Massachusetts is computed as the unweighted average of the RY 2010 
wage indexes for Barnstable County and Bristol County (reflected in 
Tables 12A and 12B in the Addendum of this final rule). (There are 
currently no LTCHs located in rural Massachusetts.) As discussed in 
the RY 2009 final rule (73 FR 26817), as IPPS wage data are dynamic, 
it is possible that rural areas without IPPS wage data will vary in 
the future.
    The RY 2010 LTCH wage index values that are applicable for LTCH 
discharges occurring on or after October 1, 2009, through September 
30, 2010, are presented in Table 12A (for urban areas) and Table 12B 
(for rural areas) in the Addendum of this final rule.
    We did not receive any public comments on our proposals for 
calculating the LTCH PPS wage index for RY 2010. Therefore, we are 
adopting those proposals in this final rule as described above.

5. LTCH PPS Cost-of-Living Adjustment for LTCHs Located in Alaska and 
Hawaii

    In the August 30, 2002 final rule (67 FR 56022), we established, 
under Sec.  412.525(b), a cost-of-living adjustment (COLA) for LTCHs 
located in Alaska and Hawaii to account for the higher costs 
incurred in those States. In the RY 2009 LTCH PPS final rule (73 FR 
26819) (under the broad authority conferred upon the Secretary by 
section 123 of the BBRA as amended by section 307(b) of BIPA to 
determine appropriate adjustments under the LTCH PPS), for RY 2009, 
we applied a COLA to payments to LTCHs located in Alaska and Hawaii 
by multiplying the standard Federal payment rate by the factors 
listed in Table III of that same rule.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 
24266), under the broad authority conferred upon the Secretary by 
section 123 of the BBRA, as amended by section 307(b) of BIPA, to 
determine appropriate adjustments under the LTCH PPS, we proposed to 
apply a COLA to payments to LTCHs located in Alaska and Hawaii by 
multiplying the standard Federal payment rate by the most recent 
available factors listed in that same proposed rule. We did not 
receive any public comments on our proposed COLA to payments to 
LTCHs located in Alaska and Hawaii and, therefore, are adopting that 
proposal in this final rule. Therefore, for RY 2010, under the broad 
authority conferred upon the Secretary by section 123 of the BBRA, 
as amended by section 307(b) of BIPA, to determine appropriate 
adjustments under the LTCH PPS, we are applying a COLA to payments 
to LTCHs located in Alaska and Hawaii by multiplying the standard 
Federal payment rate by the factors listed in the chart below 
because they are the most recent available data at this time. These 
factors were obtained from the U.S. Office of Personnel Management 
(OPM) and are also used under the IPPS effective October 1, 2009 
(section II.B.2. of the Addendum of this final rule).

  Cost-of-Living Adjustment Factors for Alaska and Hawaii Hospitals for
                       the 2010 LTCH PPS Rate Year
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Alaska:
    City of Anchorage and 80-kilometer (50[dash]mile) radius        1.23
     by road.................................................
    City of Fairbanks and 80-kilometer (50[dash]mile) radius        1.23
     by road.................................................
    City of Juneau and 80-kilometer (50[dash]mile) radius by        1.23
     road....................................................
    All other areas 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
------------------------------------------------------------------------

C. Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases

1. Background

    Under the broad authority conferred upon the Secretary by 
section 123 of the BBRA as amended by section 307(b) of BIPA, in the 
regulations at Sec.  412.525(a), we established an adjustment for 
additional payments for outlier cases that have extraordinarily high 
costs relative to the costs of most discharges. We refer to these 
cases as high cost outliers (HCOs). Providing additional payments 
for outliers strongly improves the accuracy of the LTCH PPS in 
determining resource costs at the patient and hospital level. These 
additional payments reduce the financial losses that would otherwise 
be incurred when treating patients who require more costly care and, 
therefore, reduce the incentives to underserve these patients. We 
set the outlier threshold before the beginning of the applicable 
rate year so that total estimated outlier payments are projected to 
equal 8 percent of total estimated payments under the LTCH PPS.
    Under Sec.  412.525(a) in the regulations (in conjunction with 
the revised definition of ``LTC-DRG'' at Sec.  412.503), we make 
outlier payments for any discharges if the estimated cost of a case 
exceeds the adjusted LTCH PPS payment for the MS-LTC-DRG plus a 
fixed-loss amount. Specifically, in accordance with Sec.  
412.525(a)(3) (in conjunction with the revised definition of ``LTC-
DRG'' at Sec.  412.503), we pay outlier cases 80 percent of the 
difference between the estimated cost of the patient case and the 
outlier threshold, which is the sum of the adjusted Federal 
prospective payment for the MS-LTC-DRG and the fixed-loss amount. 
The fixed-loss amount is the amount used to limit the loss that a 
hospital will incur under the outlier policy for a case with 
unusually high costs. This results in Medicare and the LTCH sharing 
financial risk in the treatment of extraordinarily costly cases. 
Under the LTCH PPS HCO policy, the LTCH's loss is limited to the 
fixed-loss amount and a fixed percentage of costs above the outlier 
threshold (MS-LTC-DRG payment plus the fixed-loss amount). The fixed 
percentage of costs is called the marginal cost factor. We calculate 
the estimated cost of a case by multiplying the Medicare allowable 
covered charge by the hospital's overall hospital CCR.
    Under the LTCH PPS, we determine a fixed-loss amount, that is, 
the maximum loss that a LTCH can incur under the LTCH PPS for a case 
with unusually high costs before the LTCH will receive any 
additional payments. We calculate the fixed-loss amount by 
estimating aggregate payments with and without an outlier policy. 
The fixed-loss amount results in estimated total outlier payments 
being projected to be equal to 8 percent of projected total LTCH PPS 
payments. Currently, MedPAR claims data and CCRs based on data from 
the most recent provider specific file (PSF) (or from the applicable 
statewide average CCR if a LTCH's CCR data are faulty or 
unavailable) are used

[[Page 44027]]

to establish a fixed-loss threshold amount under the LTCH PPS.

2. Determining LTCH CCRs Under the LTCH PPS

a. Background

    The following is a discussion of CCRs that are used in 
determining payments for HCO and SSO cases under the LTCH PPS, at 
Sec.  412.525(a) and Sec.  412.529, respectively. Although this 
section is specific to HCO cases, because CCRs and the policies and 
methodologies pertaining to them are used in determining payments 
for both HCO and SSO cases (to determine the estimated cost of the 
case at Sec.  412.529(d)(2), we are discussing the determination of 
CCRs under the LTCH PPS for both of these types of cases 
simultaneously.
    In determining both HCO payments (at Sec.  412.525(a)) and SSO 
payments (at Sec.  412.529), we calculate the estimated cost of the 
case by multiplying the LTCH's overall CCR by the Medicare allowable 
charges for the case. In general, we use the LTCH's overall CCR, 
which is computed based on either the most recently settled cost 
report or the most recent tentatively settled cost report, whichever 
is from the latest cost reporting period, in accordance with Sec.  
412.525(a)(4)(iv)(B) and Sec.  412.529(c)(4)(iv)(B) for HCOs and 
SSOs, respectively. (We note that, in some instances, we use an 
alternative CCR, such as the statewide average CCR in accordance 
with the regulations at Sec.  412.525(a)(4)(iv)(C) and Sec.  
412.529(c)(4)(iv)(C), or a CCR that is specified by CMS or that is 
requested by the hospital under the provisions of the regulations at 
Sec.  412.525(a)(4)(iv)(A) and Sec.  412.529(c)(4)(iv)(A).) Under 
the LTCH PPS, a single prospective payment per discharge is made for 
both inpatient operating and capital-related costs. Therefore, we 
compute a single ``overall'' or ``total'' LTCH-specific CCR based on 
the sum of LTCH operating and capital costs (as described in Chapter 
3, section 150.24, of the Medicare Claims Processing Manual (CMS 
Pub. 100-4)) as compared to total charges. Specifically, a LTCH's 
CCR is calculated by dividing a LTCH's total Medicare costs (that 
is, the sum of its operating and capital inpatient routine and 
ancillary costs) by its total Medicare charges (that is, the sum of 
its operating and capital inpatient routine and ancillary charges).

b. LTCH Total CCR Ceiling

    Generally, a LTCH is assigned the applicable statewide average 
CCR if, among other things, a LTCH's CCR is found to be in excess of 
the applicable maximum CCR threshold (that is, the LTCH CCR 
ceiling). This is because CCRs above this threshold are most likely 
due to faulty data reporting or entry, and, therefore, CCRs based on 
erroneous data should not be used to identify and make payments for 
outlier cases. Thus, under our established policy, generally, if a 
LTCH's calculated CCR is above the applicable ceiling, the 
applicable LTCH PPS statewide average CCR is assigned to the LTCH 
instead of the CCR computed from its most recent (settled or 
tentatively settled) cost report data.
    In the FY 2009 IPPS final rule (73 FR 48682), in accordance with 
Sec.  412.525(a)(4)(iv)(C)(2) for HCOs and Sec.  
412.529(c)(4)(iv)(C)(2) for SSOs, using our established methodology 
for determining the LTCH total CCR ceiling, based on IPPS total CCR 
data from the December 2007 update of the Provider Specific File 
(PSF), we established a total CCR ceiling of 1.262 under the LTCH 
PPS, effective October 1, 2008, through September 30, 2009. (For 
further detail on our current methodology for annually determining 
the LTCH total CCR ceiling, we refer readers to the FY 2007 IPPS 
final rule (71 FR 48119 through 48121).)
    In this final rule, in accordance with Sec.  
412.525(a)(4)(iv)(C)(2) for HCOs and Sec.  412.529(c)(4)(iv)(C)(2) 
for SSOs, using our established methodology for determining the LTCH 
total CCR ceiling (described above), based on IPPS total CCR data 
from the March 2009 update of the PSF, we are establishing a total 
CCR ceiling of 1.232 under the LTCH PPS that will be effective for 
discharges occurring on or after October 1, 2009, and on or before 
September 30, 2010.

c. LTCH Statewide Average CCRs

    Our general methodology established for determining the 
statewide average CCRs used under the LTCH PPS is similar to our 
established methodology for determining the LTCH total CCR ceiling 
(described above) because it is based on ``total'' IPPS CCR data. 
Under the LTCH PPS HCO policy at Sec.  412.525(a)(4)(iv)(C) and the 
SSO policy at Sec.  412.529(c)(4)(iv)(C), the fiscal intermediary 
may use a statewide average CCR, which is established annually by 
CMS, if it is unable to determine an accurate CCR for an LTCH in one 
of the following circumstances: (1) New LTCHs that have not yet 
submitted their first Medicare cost report (for this purpose, 
consistent with current policy, a new LTCH is defined as an entity 
that has not accepted assignment of an existing hospital's provider 
agreement in accordance with Sec.  489.18); (2) LTCHs whose CCR is 
in excess of the LTCH CCR ceiling (as discussed above); and (3) 
other LTCHs for whom data with which to calculate a CCR are not 
available (for example, missing or faulty data). (Other sources of 
data that the fiscal intermediary may consider in determining an 
LTCH's CCR include data from a different cost reporting period for 
the LTCH, data from the cost reporting period preceding the period 
in which the hospital began to be paid as an LTCH (that is, the 
period of at least 6 months that it was paid as a short-term acute 
care hospital), or data from other comparable LTCHs, such as LTCHs 
in the same chain or in the same region.)
    In Table 8C of the Addendum to the FY 2009 IPPS final rule (73 
FR 48998), in accordance with the regulations at Sec.  
412.525(a)(4)(iv)(C) for HCOs and Sec.  412.529(c)(4)(iv)(C) for 
SSOs, using our established methodology for determining the LTCH 
statewide average CCRs, based on using the most recent complete IPPS 
total CCR data from the March 2008 update of the PSF, we established 
the LTCH PPS statewide average total CCRs for urban and rural 
hospitals effective for discharges occurring on or after October 1, 
2008, and on or before September 30, 2009. (For further detail on 
our current methodology for annually determining the LTCH statewide 
average CCRs, we refer readers to the FY 2007 IPPS final rule (71 FR 
48119 through 48121).)
    In this final rule, using our established methodology for 
determining the LTCH statewide average CCRs, based on the most 
recent complete IPPS total CCR data from the March 2009 update of 
the PSF, we are establishing LTCH PPS statewide average total CCRs 
for urban and rural hospitals that will be effective for discharges 
occurring on or after October 1, 2009, and through September 30, 
2010, in Table 8C of the Addendum to this final rule.
    We also note that all areas in the District of Columbia, New 
Jersey, Puerto Rico, and Rhode Island are classified as urban; 
therefore, there are no rural statewide average total CCRs listed 
for those jurisdictions in Table 8C of the Addendum to this final 
rule. This policy is consistent with the policy that we established 
when we revised our methodology for determining the applicable LTCH 
statewide average CCRs in the FY 2007 IPPS final rule (71 FR 48119 
through 48121) and is the same as the policy applied under the IPPS. 
In addition, although Massachusetts has areas that are designated as 
rural, there are no short-term acute care IPPS hospitals or LTCHs 
located in those areas as of March 2009. Therefore, for this final 
rule, there is no rural statewide average total CCR listed for rural 
Massachusetts in Table 8C of the Addendum of this final rule.
    In addition, as we established when we revised our methodology 
for determining the applicable LTCH statewide average CCRs in the FY 
2007 IPPS final rule (71 FR 48120 through 48121), in determining the 
urban and rural statewide average total CCRs for Maryland LTCHs paid 
under the LTCH PPS, in this final rule, we used, as a proxy, the 
national average total CCR for urban IPPS hospitals and the national 
average total CCR for rural IPPS hospitals, respectively. We used 
this proxy because we believe that the CCR data on the PSF for 
Maryland hospitals may not be entirely accurate (as discussed in 
greater detail in that same final rule (71 FR 48120)).

d. Reconciliation of LTCH HCO and SSO Payments

    We note, under the LTCH PPS HCO policy at Sec.  
412.525(a)(4)(iv)(D) and the LTCH PPS SSO policy at Sec.  
412.529(c)(4)(iv)(D), the payments for HCO and SSO cases, 
respectively, are subject to reconciliation. Specifically, any 
reconciliation of outlier payments is based on the CCR that is 
calculated based on a ratio of CCRs computed from the relevant cost 
report and charge data determined at the time the cost report 
coinciding with the discharge is settled. For additional 
information, we refer readers to the RY 2009 LTCH PPS final rule (73 
FR 26820 through 26821).

3. Establishment of the LTCH PPS Fixed-Loss Amount for RY 2010

    When we implemented the LTCH PPS, as discussed in the August 30, 
2002 LTCH PPS final rule (67 FR 56022 through 56026), under the 
broad authority of section 123 of the BBRA as amended by section 
307(b) of BIPA, we established a fixed-loss amount so

[[Page 44028]]

that total estimated outlier payments are projected to equal 8 
percent of total estimated payments under the LTCH PPS. To determine 
the fixed-loss amount, we estimate outlier payments and total LTCH 
PPS payments for each case using claims data from the MedPAR files. 
Specifically, to determine the outlier payment for each case, we 
estimate the cost of the case by multiplying the Medicare covered 
charges from the claim by the applicable CCR. Under Sec.  
412.525(a)(3) (in conjunction with the revised definition of ``LTC-
DRG'' at Sec.  412.503), if the estimated cost of the case exceeds 
the outlier threshold (the sum of the adjusted Federal prospective 
payment for the MS-LTC-DRG and the fixed-loss amount), we pay an 
outlier payment equal to 80 percent of the difference between the 
estimated cost of the case and the outlier threshold (the sum of the 
adjusted Federal prospective payment for the MS-LTC-DRG and the 
fixed-loss amount).
    In the RY 2009 LTCH PPS final rule (73 FR 26823), we used claims 
data from the December 2007 update of the FY 2007 MedPAR claims data 
and CCRs from the December 2007 update of the PSF to determine a 
fixed-loss amount that would result in estimated outlier payments 
projected to be equal to 8 percent of total estimated payments for 
the 2009 LTCH PPS rate year. We determined the RY 2009 fixed-loss 
amount using the MS-LTC-DRG classifications and relative weights 
from the version of the GROUPER that was to be in effect as of the 
beginning of the 2009 LTCH PPS rate year (July 1, 2008), that is, 
Version 25.0 of the GROUPER (as established in the FY 2008 IPPS 
final rule (72 FR 47278). Furthermore, in using CCRs from the 
December 2007 update of the PSF to determine the RY 2009 fixed-loss 
amount, we used the FY 2008 applicable LTCH ``total'' CCR ceiling of 
1.284 and LTCH statewide average ``total'' CCRs established in the 
FY 2008 IPPS final rule (72 FR 47404 and 48126 through 48127) such 
that the current applicable Statewide average CCR was assigned if, 
among other things, a LTCH's CCR exceeded the current ceiling 
(1.284).
    Therefore, based on the data and policies described under the 
broad authority of section 123(a)(1) of the BBRA and section 
307(b)(1) of BIPA, in the RY 2009 LTCH PPS final rule, we 
established a fixed-loss amount of $22,960 for RY 2009. Accordingly, 
for RY 2009, we currently pay an outlier case 80 percent of the 
difference between the estimated cost of the case and the outlier 
threshold (the sum of the adjusted Federal LTCH payment for the MS-
LTC-DRG and the fixed-loss amount of $22,960).
    We note that in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule 
(74 FR 24268 through 24269), we proposed an HCO fixed-loss amount of 
$16,059 for RY 2010 to maintain that total estimated HCO payments 
are projected to equal 8 percent of total estimated payments under 
the LTCH PPS, as required under Sec.  412.523(d)(1). This proposed 
HCO fixed-loss amount of $16,059 for RY 2010 was calculated based, 
in part, on the proposed RY 2010 MS-LTC-DRG relative weights 
presented in Table 11 of that same proposed rule (74 FR 24589 
through 24608). However, in the RY 2010 LTCH PPS supplemental 
proposed rule published in the Federal Register on June 3, 2009 (74 
FR 26600 through 26635), we presented both proposed RY 2010 MS-LTC-
DRG relative weights and a proposed RY 2010 HCO outlier fixed-loss 
amount based on the revised FY 2009 MS-LTC-DRG relative weights 
presented in an interim final rule with comment period also 
published in the Federal Register on June 3, 3009 (74 FR 26546 
through 26569). Accordingly, based on the proposed RY 2010 MS-LTC-
DRG relative weights presented in Table 11 (Amended) of the RY 2010 
LTCH PPS supplemental proposed rule and on the data and policies 
described under the broad authority of section 123(a)(1) of the BBRA 
and section 307(b)(1) of BIPA, we proposed a fixed-loss amount of 
$18,868 for RY 2010 in order to maintain that total estimated HCO 
payments are projected to equal 8 percent of total estimated 
payments under the LTCH PPS in RY 2010.
    In this final rule, we use the same methodology that we used in 
the RY 2009 LTCH PPS final rule and which was proposed in the RY 
2010 LTCH PPS supplemental proposed rule, to calculate the fixed-
loss amount for RY 2010 (using updated data and the rates and 
policies established in this final rule) in order to maintain 
estimated HCO payments at the projected 8 percent of total estimated 
LTCH PPS payments. Consistent with our historical practice of using 
the best data available, in determining the fixed-loss amount for RY 
2010, we used the most recent available LTCH claims data and CCR 
data. Specifically, for this final rule, we used LTCH claims data 
from the March 2009 update of the FY 2008 MedPAR files and CCRs from 
the March 2009 update of the PSF to determine a fixed-loss amount 
that will result in estimated outlier payments projected to be equal 
to 8 percent of total estimated payments in RY 2010 because these 
data are the most recent complete LTCH data currently available. We 
determined the RY 2010 fixed-loss amount based on the MS-LTC-DRG 
classifications and relative weights from the version of the GROUPER 
that will be in effect as of the beginning of the 2010 LTCH PPS rate 
year (October 1, 2009), that is, Version 27.0 of the GROUPER 
(discussed in section VIII.B. of the preamble of this final rule). 
Furthermore, in determining the RY 2010 fixed-loss amount using CCRs 
from the March 2009 update of the PSF, we used the RY 2010 LTCH 
``total'' CCR ceiling of 1.232 and the applicable LTCH statewide 
average ``total'' CCRs presented in Table 8C in the Addendum of this 
final rule such that the applicable statewide average CCR was 
assigned if, among other things, an LTCH's CCR exceeded the ceiling 
(1.232).
    In this final rule, based on the data and policies described 
earlier in this final rule under the broad authority of section 
123(a)(1) of the BBRA and section 307(b)(1) of BIPA, we are 
establishing a fixed-loss amount of $18,425 for RY 2010. Thus, we 
will pay an outlier case 80 percent of the difference between the 
estimated cost of the case and the outlier threshold (the sum of the 
adjusted Federal LTCH payment for the MS-LTC-DRG and the fixed-loss 
amount of $18,425).
    The fixed-loss amount for RY 2010 of $18,425 is significantly 
lower than the RY 2009 fixed-loss amount of $22,960. The decrease in 
the fixed-loss amount for RY 2010 is primarily due to the projected 
3.3 percent increase in LTCH PPS payments from RY 2009 to RY 2010 
(discussed in greater detail in section IX. of the Appendix A (the 
regulatory impact analysis) to this final rule), which includes our 
current estimate that we are paying less than the required 8 percent 
of total estimated LTCH PPS payments as HCO payments in RY 2009 (as 
discussed below). Specifically, an analysis of the most recent 
available LTCH PPS claims data (that is, FY 2008 claims from the 
March 2009 update of the MedPAR files) indicates that the RY 2009 
fixed-loss amount of $22,960 may result in LTCH PPS HCO payments 
that fall below the estimated 8 percent requirement. Specifically, 
we currently estimate that HCO payments are approximately 6.8 
percent of estimated total LTCH PPS payments in RY 2009.
    In addition to the estimated increase in LTCH PPS payments in RY 
2010 as compared to RY 2009 due to the projected increase in HCO 
payments, as we discuss in section IX. of Appendix A to this final 
rule, we estimate an increase in LTCH PPS payments in RY 2010 due to 
the update to the standard Federal rate and a projected increase in 
the payments for SSO cases that are paid based on the estimated cost 
of the case. For these reasons, we believe that establishing a lower 
fixed-loss amount is appropriate and necessary to maintain that 
estimated outlier payments will equal 8 percent of estimated total 
LTCH PPS payments as required under Sec.  412.523(d)(1). Maintaining 
the fixed-loss amount at the current level would result in HCO 
payments that are significantly less than the current regulatory 
requirement that estimated outlier payments be projected to equal 8 
percent of estimated total LTCH PPS payments. As we explained in 
past LTCH PPS rules (such as the RY 2006 LTCH PPS final rule (70 FR 
24195 through 24196)), using a lower fixed-loss amount results in 
more cases qualifying as outlier cases as well as increases the 
amount of the additional payment for an HCO case because the maximum 
loss that an LTCH must incur before receiving an HCO payment (that 
is, the fixed-loss amount) would be smaller. Thus, in order to 
maintain that estimated HCO payments in RY 2010 will be equal to 8 
percent of estimated total RY 2010 LTCH PPS payments, we believe it 
is appropriate to lower the fixed-loss amount.
    In the August 30, 2002 final rule (67 FR 56022 through 56024), 
based on our regression analysis, we established the outlier 
``target'' at 8 percent of estimated total LTCH PPS payments to 
allow us to achieve a balance between the ``conflicting 
considerations of the need to protect hospitals with costly cases, 
while maintaining incentives to improve overall efficiency.'' We 
continue to believe that an HCO target of 8 percent is appropriate, 
as discussed in greater detail below. However, in the FY 2010 IPPS/
RY 2010 LTCH PPS proposed rule, we solicited public comments on 
whether we should revisit the regression analysis noted above in 
this section that was

[[Page 44029]]

used to establish the existing 8 percent outlier target, using the 
most recent available data to evaluate whether the current outlier 
target of 8 percent should be adjusted, and which therefore may 
mitigate the magnitude of the proposed change in the fixed-loss 
amount for RY 2010. Below we provide a summation of the public 
comments we received and our applicable responses.
    Comment: Several comments noted that the proposed fixed-loss 
amount of $18,868 that was presented in the RY 2010 LTCH PPS 
supplemental proposed rule was significantly higher than the 
originally proposed fixed-loss amount of $16,059 included in the FY 
2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24268 through 
24269). The commenters expressed concern that the proposed fixed-
loss amount presented in the RY 2010 LTCH PPS supplemental proposed 
rule will have a significant impact on the LTCH PPS payments to HCO 
cases, and believe that CMS should have provided for a full 60-day 
comment period to give the public time to conduct a meaningful study 
of the changes and submit meaningful comments for CMS to consider.
    Response: As we stated in the RY 2010 LTCH PPS supplemental 
proposed rule, while we ordinarily publish a notice of proposed 
rulemaking in the Federal Register and permit a 60-day comment 
period, this period may be shortened when the Secretary finds good 
cause that a 60-day comment period would be impracticable, 
unnecessary, or contrary to the public interest and incorporates a 
statement of the finding and its reasons in the rule issued. We 
further stated:
    ``Ordinarily, we begin our preparations for issuing an LTCH PPS 
proposed rule early so that our proposals may be on public display 
by May 1 of that year. This schedule allows for a 60-day comment 
period closing within a sufficient amount of time to also allow for 
a 1- to 2-month period to consider all comments received and 
appropriately respond to them. In this case, elsewhere in this 
Federal Register an interim final rule with public comment is issued 
that provides for revised FY 2009 MS-LTC-DRG relative weights. The 
revised MS-LTC-DRG relative weights affect some of the proposals 
contained in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, which 
went on display on May 1, 2009, and was published in the Federal 
Register on May 22, 2009. Therefore, we need to immediately replace 
those affected proposals. A 60-day comment period on this 
supplemental proposed rule would be both impracticable and contrary 
to the public interest because it would not allow for coordinated 
consideration of the comments on this supplemental proposed rule 
with those on the FY 2010 IPPS and RY 2010 LTCH PPS proposed rule. 
Because the issues raised in this supplemental proposed rule are 
integral to our consideration of comments on certain proposals in 
the FY 2010 IPPS and RY 2010 LTCH PPS proposed rule, we do not 
believe it would be appropriate to review comments on the issues 
raised in this supplemental proposed rule in isolation from the 
comments received on the FY 2010 IPPS and RY 2010 LTCH PPS proposed 
rule. We further note that a full 60-day comment period would end on 
a date that would not allow the agency sufficient time to process 
the comments and respond to them in a meaningful manner by the 
August 1, 2009 date for issuing the final rule. Timely filed 
comments would receive a shorter period of time for consideration by 
the agency, and the agency would be left with insufficient time to 
properly respond to comments and appropriately resolve whether any 
of the proposed policies should be modified in light of comments 
received. For all of these reasons, we find good cause to waive the 
60-day comment period for this rule of proposed rulemaking, and we 
are instead providing for a comment period that coincides with the 
comment period provided for on the FY 2010 IPPS and RY 2010 LTCH PPS 
proposed rule (74 FR 24080).''
    Finally, we note that while the proposed fixed-loss amount that 
was presented in the RY 2010 LTCH PPS supplemental proposed rule was 
significantly higher than the originally proposed fixed-loss amount 
included in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 
24268 through 24269), the methodology applied to determine the 
proposed fixed-loss amount in both rules is identical. That is, for 
each rule, we proposed the appropriate high cost outlier fixed-loss 
amount for RY 2010 that would maintain that total estimated HCO 
payments are projected to equal 8 percent of total estimated 
payments under the LTCH PPS as required under Sec.  412.523(d)(1). 
We note that we received no comments on our historical methodology 
to determine a fixed-loss amount that results in estimated total 
outlier payments being projected to be equal to 8 percent of 
projected total LTCH PPS payments.
    As an alternative to using a lower fixed-loss amount for RY 
2010, we also examined adjusting the marginal cost factor (that is, 
the percentage that Medicare will pay of the estimated cost of a 
case that exceeds the sum of the adjusted Federal prospective 
payment for the MS-LTC-DRG and the fixed-loss amount for LTCH PPS 
HCO cases as specified in Sec.  412.525(a)(3)), as a means of 
ensuring that estimated outlier payments will be projected to equal 
8 percent of estimated total LTCH PPS payments. As we established in 
the August 30, 2002 final rule (67 FR 56022 through 56026), under 
the LTCH PPS HCO policy at Sec.  412.525(a)(3), the marginal cost 
factor is currently equal to 80 percent. As discussed in the RY 2007 
LTCH PPS final rule (71 FR 4677 through 4678), a marginal cost 
factor equal to 80 percent means that, for an outlier case, we pay 
the LTCH 80 percent of the difference between the estimated cost of 
the case and the outlier threshold (the sum of the adjusted Federal 
rate for the MS-LTC-DRG PPS payment and the fixed-loss amount). In 
addition, as we discussed in the August 30, 2002 final rule (67 FR 
56023) that implemented the LTCH PPS, the marginal cost factor is 
designed to ensure ``a balance between the need to protect LTCHs 
financially, while encouraging them to treat expensive patients and 
maintaining the incentives of a prospective payment system to 
improve the efficient delivery of care.''
    Increasing the marginal cost factor from the established 80 
percent, without reducing the current fixed-loss amount, would 
increase total estimated outlier payments because we would pay a 
larger percentage of the estimated costs that exceed the outlier 
threshold (the sum of the adjusted Federal rate for the MS-LTC-DRG 
and the fixed-loss amount). For example, if we were to increase the 
marginal cost factor to 90 percent instead of lowering the fixed-
loss amount, we could maintain HCO payments at 8 percent of 
estimated total LTCH PPS payments. However, while this alternative 
may ensure that outlier payments are projected to equal 8 percent of 
estimated total LTCH PPS payments by increasing estimated aggregate 
HCO payments, it may not maintain the existing balance between 
providing an incentive for LTCHs to treat expensive patients and 
improving the efficient delivery of care because a policy such as 
this would reduce the incentive to provide cost efficient care that 
is in effect under the current HCO policy (with an 80 percent 
marginal cost factor). Such a result would be inconsistent with the 
intent of the LTCH PPS HCO policy (noted above) as stated when we 
implemented the LTCH PPS in the August 30, 2002 final rule (67 FR 
56025). As we discussed in that same final rule (67 FR 56023 through 
56024), our analysis of payment-to-cost ratios for HCO cases showed 
that a marginal cost factor of 80 percent appropriately addresses 
cases that are significantly more expensive than nonoutlier cases, 
while simultaneously maintaining the integrity of the LTCH PPS. 
Accordingly, we did not propose to adjust the marginal cost factor 
under the LTCH PPS HCO policy in the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule. However, as previously stated, in the FY 2010 IPPS/RY 
2010 LTCH PPS proposed rule, we solicited public comments on whether 
we should revisit the regression analysis that was used to establish 
the existing 80 percent marginal cost factor, using the most recent 
available data to evaluate whether the current marginal cost factor 
of 8 percent in the current HCO policy should be adjusted, and 
therefore may mitigate the proposed change in the fixed-loss amount 
for RY 2010. In response to the solicitation, we did not receive any 
public comments in support of any option to revisit the regression 
analysis that was used to establish the existing 80 percent marginal 
cost factor and existing outlier target of 8 percent. The commenters 
agreed that keeping the marginal cost factor at 80 percent and the 
outlier pool at 8 percent better identifies LTCH patients that are 
unusually costly cases, and that this policy appropriately addresses 
HCO cases that are significantly more expensive than nonoutlier 
cases.
    After consideration of the public comments we received, in this 
final rule, we are establishing a fixed-loss amount of $18,425 for 
RY 2010 based on the best available LTCH data and the policies 
presented in this final rule because we believe a decrease in the 
fixed-loss amount for RY 2010 is appropriate and necessary to 
maintain estimated outlier payments equal to 8 percent of estimated 
total LTCH PPS payments, as required under Sec.  412.525(a). As 
explained above in this section, in section IX of Appendix A to this 
final rule, we project an increase in total

[[Page 44030]]

LTCH PPS payments systemwide. In accordance with Sec.  
412.523(d)(1), we reduced the standard Federal rate by 8 percent for 
the estimated proportion of LTCH PPS HCO payments. Because we 
estimate an increase in the average payment per discharge, thereby 
increasing total estimated LTCH PPS payments, and because we are 
currently estimating that HCO payments in RY 2009 may fall below the 
8 percent target, we believe the fixed-loss amount must be lowered 
in order to maintain total outlier payments that are projected to 
equal 8 percent of total payments under the LTCH PPS, in accordance 
with Sec.  412.525(a).

4. Application of Outlier Policy to SSO Cases

    As we discussed in the August 30, 2002 final rule (67 FR 56026), 
under some rare circumstances, a LTCH discharge could qualify as a 
SSO case (as defined in the regulations at Sec.  412.529 in 
conjunction with the regulations at Sec.  412.503) and also as a HCO 
case. In this scenario, a patient could be hospitalized for less 
than five-sixths of the geometric average length of stay for the 
specific MS-LTC-DRG, and yet incur extraordinarily high treatment 
costs. If the costs exceeded the HCO threshold (that is, the SSO 
payment plus the fixed-loss amount), the discharge is eligible for 
payment as a HCO. Thus, for a SSO case in the 2010 LTCH PPS rate 
year, the HCO payment will be 80 percent of the difference between 
the estimated cost of the case and the outlier threshold (the sum of 
the fixed-loss amount of $18,425 and the amount paid under the SSO 
policy as specified in Sec.  412.529).

D. Computing the Adjusted LTCH PPS Federal Prospective Payments for 
RY 2010

    In accordance with Sec.  412.525, the standard Federal rate is 
adjusted to account for differences in area wages by multiplying the 
labor-related share of the standard Federal rate by the appropriate 
LTCH PPS wage index (as shown in Tables 12A and 12B of the Addendum 
of this final rule). The standard Federal rate was also adjusted to 
account for the higher costs of hospitals in Alaska and Hawaii by 
multiplying the nonlabor-related share of the standard Federal rate 
by the appropriate cost-of-living factor (shown in the chart in 
section V.C.5. of the Addendum of this final rule). In this final 
rule, we are establishing a standard Federal rate for the 2010 LTCH 
PPS rate year of $39,896.65, as discussed in section V.A.2. of the 
Addendum of this final rule. We illustrate the methodology to adjust 
the Federal rate for the 2010 LTCH PPS rate year in the following 
example:
    Example:
    During the 2010 LTCH PPS rate year, a Medicare patient is in a 
LTCH located in Chicago, Illinois (CBSA 16974). The RY 2010 LTCH PPS 
wage index value for CBSA 16974 is 1.0471 (Table 12A of the Addendum 
of this final rule). The Medicare patient is classified into MS-LTC-
DRG 28 (Spinal Procedures with MCC), which has a relative weight for 
RY 2010 of 1.0933 (Table 11 of the Addendum of this final rule).
    To calculate the LTCH's total adjusted Federal prospective 
payment for this Medicare patient, we computed the wage-adjusted 
Federal prospective payment amount by multiplying the unadjusted 
standard Federal rate ($39,896.65) by the labor-related share 
(75.779 percent) and the wage index value (1.0471). This wage-
adjusted amount was then added to the nonlabor-related portion of 
the unadjusted standard Federal rate (24.221 percent; adjusted for 
cost of living, if applicable) to determine the adjusted Federal 
rate, which was then multiplied by the MS-LTC-DRG relative weight 
(1.0933) to calculate the total adjusted Federal prospective payment 
for the 2010 LTCH PPS rate year ($45,175.85). The table below 
illustrates the components of the calculations in this example.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Unadjusted Standard Federal Prospective Payment Rate.         $39,896.65
Labor-Related Share..................................          x 0.75779
Labor-Related Portion of the Federal Rate............       = $30,233.28
Wage Index (CBSA 16974)..............................           x 1.0471
Wage-Adjusted Labor Share of Federal Rate............       = $31,657.27
Nonlabor-Related Portion of the Federal Rate                 + $9,663.37
 ($39,896.65 x 0.24221)..............................
Adjusted Federal Rate Amount.........................       = $41,320.64
MS-LTC-DRG 28 Relative Weight........................           x 1.0933
                                                      ------------------
    Total Adjusted Federal Prospective Payment.......       = $45,175.85
------------------------------------------------------------------------

VI. Tables

    This section contains the tables referred to throughout the 
preamble to this final rule and in this Addendum. Tables 1A, 1B, 1C, 
1D, 1E, 2, 3A, 3B, 4A, 4B, 4C, 4D-1, 4D-2, 4F, 4J, 5, 7A, 7B, 8A, 
8B, 8C, 9A, 9C, 10, 11, 12A, and 12B are presented below. Table 
6G.--Additions to the CC Exclusions List, Table 6H.--Deletions from 
the CC Exclusions List, Table 6I.--Complete List of Complication and 
Comorbidity (CC) Exclusions, Table 6J.--Major Complication and 
Comorbidity (MCC) List, and Table 6K.--Complications and Comorbidity 
(CC) List are available only through the Internet on the CMS Web 
site at: http://www.cms.hhs.gov/AcuteInpatientPPS/. The tables 
presented below are as follows:

Table 1A.--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (68.8 Percent Labor Share/31.2 Percent Nonlabor Share If 
Wage Index Is Greater Than 1)
Table 1B.--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage 
Index Is Less Than or Equal To 1)
Table 1C.--Adjusted Operating Standardized Amounts for Puerto Rico, 
Labor/Nonlabor
Table 1D.--Capital Standard Federal Payment Rate
Table 1E.--LTCH Standard Federal Prospective Payment Rate
Table 2.--Acute Care Hospitals Case-Mix Indexes for Discharges 
Occurring in Federal Fiscal Year 2008; Hospital Wage Indexes for 
Federal Fiscal Year 2010; Hospital Average Hourly Wages for Federal 
Fiscal Years 2008 (2004 Wage Data), 2009 (2005 Wage Data), and 2010 
(2006 Wage Data); and 3-Year Average of Hospital Average Hourly 
Wages
Table 3A.--FY 2010 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Urban Areas by CBSA
Table 3B.--FY 2010 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Rural Areas by CBSA
Table 4A.--Wage Index and Capital Geographic Adjustment Factor (GAF) 
for Acute Care Hospitals in Urban Areas by CBSA and by State--FY 
2010
Table 4B.--Wage Index and Capital Geographic Adjustment Factor (GAF) 
for Acute Care Hospitals in Rural Areas by CBSA and by State--FY 
2010
Table 4C.--Wage Index and Capital Geographic Adjustment Factor (GAF) 
for Acute Care Hospitals That Are Reclassified by CBSA and by 
State--FY 2010
Table 4D-1.--Rural Floor Budget Neutrality Factors for Acute Care 
Hospitals--FY 2010
Table 4D-2.--Urban Areas with Acute Care Hospitals Receiving the 
Statewide Rural Floor or Imputed Floor Wage Index--FY 2010
Table 4E.--Urban CBSAs and Constituent Counties for Acute Care 
Hospitals--FY 2010
Table 4F.--Puerto Rico Wage Index and Capital Geographic Adjustment 
Factor (GAF) for Acute Care Hospitals by CBSA--FY 2010
Table 4J.--Out-Migration Adjustment for Acute Care Hospitals--FY 
2010
Table 5.--List of Medicare Severity Diagnosis-Related Groups (MS-
DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean 
Length of Stay
Table 6A.--New Diagnosis Codes
Table 6B.--New Procedure Codes
Table 6C.--Invalid Diagnosis Codes
Table 6D.--Invalid Procedure Codes
Table 6E.--Revised Diagnosis Code Titles
Table 6F.--Revised Procedure Code Titles
Table 7A.--Medicare Prospective Payment System Selected Percentile 
Lengths of

[[Page 44031]]

Stay: FY 2008 MedPAR Update--March 2009 GROUPER V26.0 MS-DRGs
Table 7B.--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2008 MedPAR Update--March 2009 GROUPER V27.0 MS-
DRGs
Table 8A.--Statewide Average Operating Cost-to-Charge Ratios (CCRs) 
for Acute Care Hospitals--July 2009
Table 8B.--Statewide Average Capital Cost-to-Charge Ratios (CCRs) 
for Acute Care Hospitals--July 2009
Table 8C.--Statewide Average Total Cost-to-Charge Ratios (CCRs) for 
LTCHs--July 2009
Table 9A.--Hospital Reclassifications and Redesignations--FY 2010
Table 9C.--Hospitals Redesignated as Rural under Section 
1886(d)(8)(E) of the Act--FY 2010
Table 10.--Geometric Mean Plus the Lesser of .75 of the National 
Adjusted Operating Standardized Payment Amount (Increased to Reflect 
the Difference Between Costs and Charges) or .75 of One Standard 
Deviation of Mean Charges by Medicare Severity Diagnosis-Related 
Group (MS-DRG)--July 2009
Table 11.--MS-LTC-DRGs, Relative Weights, Geometric Average Length 
of Stay, and Short-Stay Outlier (SSO) Threshold for Discharges 
Occurring from October 1, 2009 through September 30, 2010 under the 
LTCH PPS
Table 12A.--LTCH PPS Wage Index for Urban Areas for Discharges 
Occurring from October 1, 2009 through September 30, 2010
Table 12B.--LTCH PPS Wage Index for Rural Areas for Discharges 
Occurring from October 1, 2009 through September 20, 2010

   Table 1A--National Adjusted Operating Standardized Amounts, Labor/
 Nonlabor (68.8 Percent Labor Share/31.2 Percent Nonlabor Share If Wage
                        Index Is Greater Than 1)
------------------------------------------------------------------------
    Full update (2.1 percent)          Reduced update (1.1 percent)
------------------------------------------------------------------------
                      Nonlabor-
   Labor-related       related       Labor-related     Nonlabor-related
------------------------------------------------------------------------
       $3,593.52    $1,629.62            $3,523.13           $1,597.70
------------------------------------------------------------------------


   Table 1B--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index
                       Is Less Than or Equal to 1)
------------------------------------------------------------------------
    Full update (2.1 percent)          Reduced update (1.1 percent)
------------------------------------------------------------------------
                      Nonlabor-
   Labor-related       related       Labor-related     Nonlabor-related
------------------------------------------------------------------------
       $3,238.35    $1,984.79            $3,174.91           $1,945.92
------------------------------------------------------------------------


                Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor
----------------------------------------------------------------------------------------------------------------
                                                       Rates if wage index is   Rates if wage index is less than
                                                           greater than 1                 or equal to 1
                                                     -----------------------------------------------------------
                                                           Labor      Nonlabor       Labor           Nonlabor
----------------------------------------------------------------------------------------------------------------
National............................................       $3,593.52  $1,629.6       $3,238.35        $1,984.79
                                                                         2
Puerto Rico.........................................        1,542.72  941.52          1,540.23           944.01
----------------------------------------------------------------------------------------------------------------


             Table 1D--Capital Standard Federal Payment Rate
------------------------------------------------------------------------
                                                                 Rate
------------------------------------------------------------------------
National...................................................      $430.20
Puerto Rico................................................       204.01
------------------------------------------------------------------------


        Table 1E--LTCH Standard Federal Prospective Payment Rate
------------------------------------------------------------------------
                                                                 Rate
------------------------------------------------------------------------
Standard Federal Rate......................................   $39,896.65
------------------------------------------------------------------------

BILLING CODE 4120-01-P

[[Page 44032]]

[GRAPHIC] [TIFF OMITTED] TR27AU09.009


[[Page 44033]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.010


[[Page 44034]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.011


[[Page 44035]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.012


[[Page 44036]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.013


[[Page 44037]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.014


[[Page 44038]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.015


[[Page 44039]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.016


[[Page 44040]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.017


[[Page 44041]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.018


[[Page 44042]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.019


[[Page 44043]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.020


[[Page 44044]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.021


[[Page 44045]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.022


[[Page 44046]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.023


[[Page 44047]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.024


[[Page 44048]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.025


[[Page 44049]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.026


[[Page 44050]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.027


[[Page 44051]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.028


[[Page 44052]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.029


[[Page 44053]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.030


[[Page 44054]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.031


[[Page 44055]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.032


[[Page 44056]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.033


[[Page 44057]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.034


[[Page 44058]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.035


[[Page 44059]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.036


[[Page 44060]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.037


[[Page 44061]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.038


[[Page 44062]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.039


[[Page 44063]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.040


[[Page 44064]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.041


[[Page 44065]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.042


[[Page 44066]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.043


[[Page 44067]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.044


[[Page 44068]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.045


[[Page 44069]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.046


[[Page 44070]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.047


[[Page 44071]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.048


[[Page 44072]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.049


[[Page 44073]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.050


[[Page 44074]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.051


[[Page 44075]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.052


[[Page 44076]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.053


[[Page 44077]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.054


[[Page 44078]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.055


[[Page 44079]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.056


[[Page 44080]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.057


[[Page 44081]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.058


[[Page 44082]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.059


[[Page 44083]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.060


[[Page 44084]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.061


[[Page 44085]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.062


[[Page 44086]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.063


[[Page 44087]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.064


[[Page 44088]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.065


[[Page 44089]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.066


[[Page 44090]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.067


[[Page 44091]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.068


[[Page 44092]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.069


[[Page 44093]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.070


[[Page 44094]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.071


[[Page 44095]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.072


[[Page 44096]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.073


[[Page 44097]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.074


[[Page 44098]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.075


[[Page 44099]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.076


[[Page 44100]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.077


[[Page 44101]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.078


[[Page 44102]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.079


[[Page 44103]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.080


[[Page 44104]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.081


[[Page 44105]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.082


[[Page 44106]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.083


[[Page 44107]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.084


[[Page 44108]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.085


[[Page 44109]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.086


[[Page 44110]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.087


[[Page 44111]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.088


[[Page 44112]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.089


[[Page 44113]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.090


[[Page 44114]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.091


[[Page 44115]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.092


[[Page 44116]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.093


[[Page 44117]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.094


[[Page 44118]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.095


[[Page 44119]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.096


[[Page 44120]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.097


[[Page 44121]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.098


[[Page 44122]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.099


[[Page 44123]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.100


[[Page 44124]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.101


[[Page 44125]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.102


[[Page 44126]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.103


[[Page 44127]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.104


[[Page 44128]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.105


[[Page 44129]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.106


[[Page 44130]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.107


[[Page 44131]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.108


[[Page 44132]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.109


[[Page 44133]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.110


[[Page 44134]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.111


[[Page 44135]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.112


[[Page 44136]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.113


[[Page 44137]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.114


[[Page 44138]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.115


[[Page 44139]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.116


[[Page 44140]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.117


[[Page 44141]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.118


[[Page 44142]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.119


[[Page 44143]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.120


[[Page 44144]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.121


[[Page 44145]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.122


[[Page 44146]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.123


[[Page 44147]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.124


[[Page 44148]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.125


[[Page 44149]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.126


[[Page 44150]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.127


[[Page 44151]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.128


[[Page 44152]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.129


[[Page 44153]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.130


[[Page 44154]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.131


[[Page 44155]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.132


[[Page 44156]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.133


[[Page 44157]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.134


[[Page 44158]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.135


[[Page 44159]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.136


[[Page 44160]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.137


[[Page 44161]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.138


[[Page 44162]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.139


[[Page 44163]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.140


[[Page 44164]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.141


[[Page 44165]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.142


[[Page 44166]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.143


[[Page 44167]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.144


[[Page 44168]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.145


[[Page 44169]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.146


[[Page 44170]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.147


[[Page 44171]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.148


[[Page 44172]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.149


[[Page 44173]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.150


[[Page 44174]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.151


[[Page 44175]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.152


[[Page 44176]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.153


[[Page 44177]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.154


[[Page 44178]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.155


[[Page 44179]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.156


[[Page 44180]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.157


[[Page 44181]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.158


[[Page 44182]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.159


[[Page 44183]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.160


[[Page 44184]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.161


[[Page 44185]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.162


[[Page 44186]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.163


[[Page 44187]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.164


[[Page 44188]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.165


[[Page 44189]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.166


[[Page 44190]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.167


[[Page 44191]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.168


[[Page 44192]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.169


[[Page 44193]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.170


[[Page 44194]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.171


[[Page 44195]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.172


[[Page 44196]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.173


[[Page 44197]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.174


[[Page 44198]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.175


[[Page 44199]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.176


[[Page 44200]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.177


[[Page 44201]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.178


[[Page 44202]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.179


[[Page 44203]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.180


[[Page 44204]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.181


[[Page 44205]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.182


[[Page 44206]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.183


[[Page 44207]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.184


[[Page 44208]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.185


[[Page 44209]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.186


[[Page 44210]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.187


[[Page 44211]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.188


[[Page 44212]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.189


[[Page 44213]]


[GRAPHIC] [TIFF OMITTED] TR27AU09.190

Appendix A: Regulatory Impact Analysis

I. Overall Impact

    We have examined the impacts of this final rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and 
Review) and the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive 
Order 13132 on Federalism, and the Congressional Review Act (5 
U.S.C. 804(2)).
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net 
benefits (including potential economic, environmental, public health 
and safety effects, distributive impacts, and equity). A regulatory 
impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 
year).
    We have determined that this final rule is a major rule as 
defined in 5 U.S.C. 804(2). We estimate that the changes for FY 2010 
acute care hospital operating and capital payments will redistribute 
in excess of $100 million among different types of inpatient cases. 
The changes to rebase and revise the market basket for purposes of 
the market basket update to the IPPS rates required by the statute, 
in conjunction with other payment changes in this final rule, will 
result in an estimated $1.73 billion increase in FY 2010 operating 
payments (or 1.6 percent increase), and $171 million increase in FY 
2010 capital payments (or 1.9 percent increase). The impacts 
analysis of the capital payments can be found in section VIII. of 
this Appendix. In addition, as described in section IX. of this 
Appendix, LTCHs are expected to experience an increase in payments 
by $153 million (or 3.3 percent).
    Our operating impact estimate includes the 2.1 percent market 
basket update to the standardized amount. Though we had proposed a -
2.5 percent documentation and coding adjustment applied to the 
hospital-specific rates, the -1.1 percent documentation and coding 
adjustment applied to the Puerto Rico-specific rates and the -1.9 
percent adjustment for documentation and coding changes to the IPPS 
standardized amounts, we are not applying any documentation and 
coding adjustments to any of the rates in this final rule. The 
estimates of IPPS operating payments to acute care hospitals do not 
reflect any changes in hospital admissions or real case-mix 
intensity, which would also affect overall payment changes.
    The RFA requires agencies to analyze options for regulatory 
relief of small businesses. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
government jurisdictions. Most hospitals and most other providers 
and suppliers are considered to be small entities, either by being 
nonprofit organizations or by meeting the Small Business 
Administration definition of a small business (having revenues of 
$34.5 million or less in any 1 year). (For details on the latest 
standards for heath care providers, we refer readers to the Table of 
Small Business Size Standards for NAIC 622 found on the Small 
Business Administration Office of Size Standards Web site at: http://www.sba.gov/contractingopportunities/officials/size/GC-SMALL-BUS-SIZE-STANDARDS.html.) For purposes of the RFA, all hospitals and 
other providers and suppliers are considered to be small entities. 
Individuals and States are not included in the definition of a small 
entity. We believe that the provisions of this final rule relating 
to acute care hospitals would have a significant impact on small 
entities as explained in this Appendix. Because we lack data on 
individual hospital receipts, we cannot determine the number of 
small proprietary LTCHs. Therefore, we are assuming that all LTCHs 
are considered small entities for the purpose of the analysis in 
section IX. of this Appendix. Medicare fiscal intermediaries and 
MACs are not considered to be small entities. Because we acknowledge 
that many of the affected entities are small entities, the analysis 
discussed throughout the preamble of this final rule constitutes our 
final regulatory flexibility analysis. We address any public 
comments that we received on the impact of these changes we are 
finalizing in the applicable sections of this Appendix.
    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA), Public Law 104-121, as amended by section 8302 of Public 
Law 110-28, requires an agency to provide compliance guides for each 
rule or group of related rules for which an agency is required to 
prepare a final regulatory flexibility analysis. The compliance 
guides associated with this final rule are available on the CMS IPPS 
Web page at http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. We also note that the Hospital Center Web page at 
http://www.cms.hhs.gov/center/hospital.asp was developed to assist 
hospitals in understanding and adapting to changes in Medicare 
regulations and in billing and payment procedures. This Web page 
provides hospitals with substantial downloadable explanatory 
materials.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis for any proposed or final rule that may 
have a significant impact on the operations of a substantial number 
of small rural hospitals. This analysis must conform to the 
provisions of section 603 of the RFA. With the exception of 
hospitals located in certain New England counties, for purposes of 
section 1102(b) of the Act, we now define a small rural hospital as 
a hospital that is located outside of an urban area and has fewer 
than 100 beds. Section 601(g) of the Social Security Amendments of 
1983 (Pub. L. 98-21) designated hospitals in certain New England 
counties as belonging to the adjacent urban area. Thus, for purposes 
of the IPPS and the LTCH PPS, we continue to classify these 
hospitals as urban hospitals. (We refer readers to Table 1 and 
section VI. of this Appendix for the quantitative effects of the 
policy changes under the IPPS for operating costs.)
    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any rule whose mandates require spending in 
any 1 year of $100 million in 1995 dollars, updated annually for 
inflation. That threshold level is currently approximately $133 
million. This

[[Page 44214]]

final rule will not mandate any requirements for State, local, or 
tribal governments, nor would it affect private sector costs.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on 
State and local governments, preempts State law, or otherwise has 
Federalism implications. As stated above, this final rule will not 
have a substantial effect on State and local governments.
    The following analysis, in conjunction with the remainder of 
this document, demonstrates that this final rule is consistent with 
the regulatory philosophy and principles identified in Executive 
Order 12866, the RFA, and section 1102(b) of the Act. The final rule 
will affect payments to a substantial number of small rural 
hospitals, as well as other classes of hospitals, and the effects on 
some hospitals may be significant.

II. Objectives of the IPPS

    The primary objective of the IPPS is to create incentives for 
hospitals to operate efficiently and minimize unnecessary costs 
while at the same time ensuring that payments are sufficient to 
adequately compensate hospitals for their legitimate costs. In 
addition, we share national goals of preserving the Medicare 
Hospital Insurance Trust Fund.
    We believe the changes in this final rule will further each of 
these goals while maintaining the financial viability of the 
hospital industry and ensuring access to high quality health care 
for Medicare beneficiaries. We expect that these changes will ensure 
that the outcomes of the prospective payment systems are reasonable 
and equitable while avoiding or minimizing unintended adverse 
consequences.

III. Limitations of Our Analysis

    The following quantitative analysis presents the projected 
effects of our policy changes, as well as statutory changes 
effective for FY 2010, on various hospital groups. We estimate the 
effects of individual policy changes by estimating payments per case 
while holding all other payment policies constant. We use the best 
data available, but, generally, we do not attempt to make 
adjustments for future changes in such variables as admissions, 
lengths of stay, or case-mix. However, in the FY 2008 IPPS final 
rule with comment period, we indicated that we believe that 
implementation of the MS-DRGs would lead to increases in case-mix 
that do not reflect actual increases in patients' severity of 
illness as a result of more comprehensive documentation and coding. 
As explained in section II.D. of the preamble of this final rule, 
the FY 2008 IPPS final rule with comment period established a 
documentation and coding adjustment of -1.2 percent for FY 2008, -
1.8 percent for FY 2009, and -1.8 percent for FY 2010 to maintain 
budget neutrality for the transition to the MS-DRGs. Subsequently, 
Congress enacted Public Law 110-90. Section 7 of Public Law 110-90 
reduced the IPPS documentation and coding adjustment from -1.2 
percent to -0.6 percent for FY 2008 and from -1.8 percent to -0.9 
percent for FY 2009. For FY 2010, we had proposed to reduce the 
national standardized amount. However, we have decided to postpone 
the documentation and coding adjustment to the national standardized 
amount until FY 2011 and will not apply the adjustment to the 
national standardized amount for FY 2010.
    Furthermore, we believe that hospitals that are paid under the 
hospital-specific payment rate, specifically SCHs and MDHs, 
experience similar increases in case-mix due to documentation and 
coding changes that do not reflect real changes in case-mix. Our 
actuarial office estimates that hospitals paid under the hospital-
specific rate experienced a 4.8 percent increase in payments due to 
documentation and coding changes in FY 2008 and FY 2009. We did not 
apply a documentation and coding adjustment to the hospital-specific 
rates when we first implemented the MS-DRG system. For FY 2010, we 
had proposed to reduce the hospital-specific rate by -2.5 percent in 
FY 2010 to account for the case-mix increase that occurred in FY 
2008 due to changes in documentation and coding under the adoption 
of MS-DRGs that do not reflect real changes in case-mix. However, we 
have decided to postpone the documentation and coding adjustment to 
the hospital-specific rate until FY 2011 and will not apply an 
adjustment to the hospital-specific rate for FY 2010.
    Our analysis, as described in II.D. of the preamble, shows that 
Puerto Rico hospitals experienced an increase in case-mix by 1.1 
percent in FY 2008 due to changes in documentation and coding. We 
did not apply a documentation and coding adjustment to the Puerto 
Rico-specific rate when we first implemented the MS-DRG system. 
Consistent with our decision to postpone documentation and coding 
adjustments for the hospital-specific rate and the Federal 
standardized amount, we also are postponing the documentation and 
coding adjustment to the Puerto-Rico specific rate until FY 2011.
    The impacts shown below illustrate the impact of the FY 2010 
IPPS changes on acute care hospital operating payments. As we have 
done in the previous rules, we solicited comments and information 
about the anticipated effects of the proposed changes on hospitals 
and our methodology for estimating them.
    Comment: Several comments questioned whether Medicare Advantage 
claims were used in the impacts analysis. The commenters suggested 
that CMS reevaluate its calculations and data to ensure that 
Medicare Advantage claims are not used in the impacts analysis.
    Response: The three primary data sources for the impacts 
analyses are the MedPAR claims file, the Medicare hospital cost 
report, and the Provider-Specific File. Historically, we have 
excluded data from Medicare Advantage claims from the impacts 
analysis. However, for the FY 2010 IPPS proposed rule, the December 
31, 2008 update of the FY 2008 MedPAR data that was used as the 
source for the impact analysis contained a significant number of 
Medicare Advantage claims. Under Change Request 5647, Transmittal 
1311, hospitals were required to submit informational only claims 
for all Medicare Advantage patients they treated for discharges 
occurring on or after October 1, 2006. As a result, we inadvertently 
included claims from discharges enrolled in Medicare Advantage plans 
in the impact analysis in the proposed rule.
    We generally have excluded Medicare Advantage claims from the 
impact analysis. However, as described in section II.A.4. of the 
Addendum to this final rule, we have used the Medicare Advantage 
claims information to determine the IME payment made on Medicare 
Advantage claims. Because IME Medicare Advantage payments are made 
to IPPS hospitals under section 1886(d) of the Act, we believe these 
payments must be part of these budget neutrality calculations and in 
the operating impact analysis.
    The methodology for calculating the IME payment made on Medicare 
Advantage claims is described in section II.A.4. of the Addendum to 
this final rule.

IV. Hospitals Included in and Excluded From the IPPS

    The prospective payment systems for hospital inpatient operating 
and capital-related costs of acute care hospitals encompass most 
general short-term, acute care hospitals that participate in the 
Medicare program. There were 33 Indian Health Service hospitals in 
our database, which we excluded from the analysis due to the special 
characteristics of the prospective payment methodology for these 
hospitals. Among other short-term, acute care hospitals, only the 46 
such hospitals in Maryland remain excluded from the IPPS pursuant to 
the waiver under section 1814(b)(3) of the Act.
    As of July 2009, there are 3,517 IPPS acute care hospitals to be 
included in our analysis. This represents about 58 percent of all 
Medicare-participating hospitals. The majority of this impact 
analysis focuses on this set of hospitals. There are also 
approximately 1,330 CAHs. These small, limited service hospitals are 
paid on the basis of reasonable costs rather than under the IPPS. 
(We refer readers to section VII. of this Appendix for a further 
description of the impact of CAH-related policy changes.) There are 
also 1,251 IPPS-excluded hospitals and 2,188 IPPS-excluded hospital 
units. These IPPS-excluded hospitals and units include IPFs, IRFs, 
LTCHs, RNHCIs, children's hospitals, and cancer hospitals, which are 
paid under separate payment systems. Changes in the prospective 
payment systems for IPFs and IRFs are made through separate 
rulemaking. Payment impacts for these IPPS-excluded hospitals and 
units are not included in this final rule. The impact of the update 
and policy changes to the LTCH PPS for RY 2010 are discussed in 
section IX. of this Appendix.

V. Effects on Hospitals Excluded From the IPPS

    As of July 2009, there were 1,251 hospitals excluded from the 
IPPS. Of these 1,251 hospitals, 78 children's hospitals, 11 cancer 
hospitals, and 16 RNHCIs are being paid on a reasonable cost basis 
subject to the rate-of-

[[Page 44215]]

increase ceiling under Sec.  413.40. The remaining providers, 225 
IRFs and 421 LTCHs, are paid the Federal prospective per discharge 
rate under the IRF PPS and the LTCH PPS, respectively, and 1,224 
IPFs are paid the Federal per diem amount under the IPF PPS. As 
stated above, IRFs and IPFs are not affected by rate updates in this 
final rule. The impacts of the changes to LTCHs are discussed in 
section IX. of this Appendix. In addition, there are 1,224 IPF units 
located in hospitals otherwise subject to the IPPS. There are 964 
IRFs (paid under the IRF PPS) located in hospitals otherwise subject 
to the IPPS.
    In the past, certain hospitals and units excluded from the IPPS 
have been paid based on their reasonable costs subject to limits as 
established by the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA). Cancer and children's hospitals continue to be paid on a 
reasonable cost basis subject to TEFRA limits for FY 2010. For these 
hospitals (cancer and children's hospitals), consistent with the 
authority provided in section 1886(b)(3)(B)(ii) of the Act, the 
update is the percentage increase in the FY 2010 IPPS operating 
market basket. In compliance with section 404 of the MMA, in this 
final rule, we are replacing the FY 2002-based IPPS operating and 
capital market baskets with the revised and rebased FY 2006-based 
IPPS operating and capital market baskets for FY 2010. Therefore, 
consistent with current law, based on IHS Global Insight, Inc.'s 
2009 second quarter forecast, with historical data through the 2009 
first quarter, we are estimating that the FY 2010 update to the IPPS 
operating market basket will be 2.1 percent (that is, the current 
estimate of the market basket rate-of-increase). In addition, in 
accordance with Sec.  403.752(a) of the regulations, RNHCIs are paid 
under Sec.  413.40, which also uses section 1886(b)(3)(B)(ii) of the 
Act to update target amounts by the rate-of-increase percentage. For 
RNHCIs, the update is the percentage increase in the FY 2010 IPPS 
operating market basket increase, which is estimated to be 2.1 
percent, based on IHS Global Insight, Inc.'s 2009 second quarter 
forecast of the IPPS operating market basket increase, with 
historical data through the 2009 first quarter.
    The impact of the update in the rate-of-increase limit on those 
excluded hospitals depends on the cumulative cost increases 
experienced by each excluded hospital since its applicable base 
period. For excluded hospitals that have maintained their cost 
increases at a level below the rate-of-increase limits since their 
base period, the major effect is on the level of incentive payments 
these excluded hospitals receive. Conversely, for excluded hospitals 
with per-case cost increases above the cumulative update in their 
rate-of-increase limits, the major effect is the amount of excess 
costs that will not be reimbursed.
    We note that, under Sec.  413.40(d)(3), an excluded hospital 
that continues to be paid under the TEFRA system, whose costs exceed 
110 percent of its rate-of-increase limit receives its rate-of-
increase limit plus 50 percent of the difference between its 
reasonable costs and 110 percent of the limit, not to exceed 110 
percent of its limit. In addition, under the various provisions set 
forth in Sec.  413.40, cancer and children's hospitals can obtain 
payment adjustments for justifiable increases in operating costs 
that exceed the limit.

VI. Quantitative Effects of the Policy Changes Under the IPPS for 
Operating Costs

A. Basis and Methodology of Estimates

    In this final rule, we are announcing policy changes and payment 
rate updates for the IPPS for operating costs of acute care 
hospitals. Updates to the capital payments to acute care hospitals 
are discussed in section VIII. of this Appendix.
    Based on the overall percentage change in payments per case 
estimated using our payment simulation model, we estimate that total 
FY 2010 operating payments will increase by 1.6 percent compared to 
FY 2009, largely due to the statutorily mandated update to the IPPS 
rates. The impacts do not illustrate changes in hospital admissions 
or real case-mix intensity, which will also affect overall payment 
changes.
    We have prepared separate impact analyses of the changes to each 
system. This section deals with changes to the operating prospective 
payment system for acute care hospitals. Our payment simulation 
model relies on the most recent available data to enable us to 
estimate the impacts on payments per case of certain changes in this 
final rule. However, there are other changes for which we do not 
have data available that would allow us to estimate the payment 
impacts using this model. For those changes, we have attempted to 
predict the payment impacts based upon our experience and other more 
limited data.
    The data used in developing the quantitative analyses of changes 
in payments per case presented below are taken from the FY 2008 
MedPAR file and the most current Provider-Specific File that is used 
for payment purposes. Although the analyses of the changes to the 
operating PPS do not incorporate cost data, data from the most 
recently available hospital cost report were used to categorize 
hospitals. Our analysis has several qualifications. First, in this 
analysis, we do not make adjustments for future changes in such 
variables as admissions, lengths of stay, or underlying growth in 
real case-mix. Second, due to the interdependent nature of the IPPS 
payment components, it is very difficult to precisely quantify the 
impact associated with each change. Third, we use various sources 
for the data used to categorize hospitals in the tables. In some 
cases, particularly the number of beds, there is a fair degree of 
variation in the data from different sources. We have attempted to 
construct these variables with the best available source overall. 
However, for individual hospitals, some miscategorizations are 
possible.
    Using cases from the FY 2008 MedPAR file, we simulated payments 
under the operating IPPS given various combinations of payment 
parameters. Any short-term, acute care hospitals not paid under the 
IPPS (Indian Health Service hospitals and hospitals in Maryland) 
were excluded from the simulations. The impact of payments under the 
capital IPPS, or the impact of payments for costs other than 
inpatient operating costs, are not analyzed in this section. 
Estimated payment impacts of the capital IPPS for FY 2010 are 
discussed in section VIII. of this Appendix.
    The changes discussed separately below are the following:
    <bullet> The effects of the annual reclassification of diagnoses 
and procedures, full implementation of the MS-DRG system and 100 
percent cost-based MS-DRG relative weights.
    <bullet> The effects of the changes in hospitals' wage index 
values reflecting wage data from hospitals' cost reporting periods 
beginning during FY 2006, compared to the FY 2005 wage data.
    <bullet> The effects of the changes to the hospital labor-
related share, where the hospital labor-related share for hospitals 
with a wage index greater than 1 has been rebased from 69.7 percent 
to 68.8 percent. Hospitals with a wage index less than or equal to 1 
will continue to have a hospital labor-related share of 62 percent.
    <bullet> The effects of the recalibration of the DRG relative 
weights as required by section 1886(d)(4)(C) of the Act, including 
the wage and recalibration budget neutrality factors.
    <bullet> The effects of geographic reclassifications by the 
MGCRB that will be effective in FY 2010.
    <bullet> The effects of the second year of the 3-year transition 
to apply rural floor budget neutrality adjustment at the State 
level. In FY 2010, hospitals will receive a blended wage index that 
is 50 percent of a wage index with the State level rural and imputed 
floor budget neutrality adjustment and 50 percent of a wage index 
with the national budget neutrality adjustment.
    <bullet> The effects of section 505 of Public Law 108-173, which 
provides for an increase in a hospital's wage index if the hospital 
qualifies by meeting a threshold percentage of residents of the 
county where the hospital is located who commute to work at 
hospitals in counties with higher wage indexes.
    <bullet> The total estimated change in payments based on the FY 
2010 policies relative to payments based on FY 2009 policies that 
include the market basket update of 2.1 percent.
    To illustrate the impacts of the FY 2010 changes, our analysis 
begins with a FY 2009 baseline simulation model using: the FY 2010 
market basket update of 2.1 percent; the FY 2009 MS-DRG GROUPER 
(Version 26.0); the most current CBSA designations for hospitals 
based on OMB's MSA definitions; the FY 2009 wage index; and no MGCRB 
reclassifications. Outlier payments are set at 5.1 percent of total 
operating DRG and outlier payments.
    Section 1886(b)(3)(B)(viii) of the Act, as added by section 
5001(a) of Public Law 109-171, provides that, for FY 2007 and 
subsequent years, the update factor will be reduced by 2.0 
percentage points for any hospital that does not submit quality data 
in a form and manner and at a time specified by the Secretary. At 
the time this impact was prepared, 94 hospitals did not receive the 
full market basket rate-of-increase for FY 2009 because they failed 
the quality data submission process. For purposes of the simulations 
shown below, we modeled the

[[Page 44216]]

payment changes for FY 2010 using a reduced update for these 94 
hospitals. However, we do not have enough information at this time 
to determine which hospitals will not receive the full market basket 
rate-of-increase for FY 2010.
    Each policy change, statutorily or otherwise, is then added 
incrementally to this baseline, finally arriving at an FY 2010 model 
incorporating all of the changes. This simulation allows us to 
isolate the effects of each change.
    Our final comparison illustrates the percent change in payments 
per case from FY 2009 to FY 2010. Three factors not discussed 
separately have significant impacts here. The first factor is the 
update to the standardized amount. In accordance with section 
1886(b)(3)(B)(i) of the Act, we are updating the standardized 
amounts for FY 2010 using the most recently forecasted hospital 
market basket increase for FY 2010 of 2.1 percent. (Hospitals that 
fail to comply with the quality data submission requirements to 
receive the full update will receive an update reduced by 2.0 
percentage points from 2.1 percent to 0.1 percent.) Under section 
1886(b)(3)(B)(iv) of the Act, the updates to the hospital-specific 
amounts for SCHs and for MDHs are also equal to the market basket 
percentage increase, or 2.1 percent.
    A second significant factor that affects the changes in 
hospitals' payments per case from FY 2010 to FY 2010 is the change 
in a hospital's geographic reclassification status from one year to 
the next. That is, payments may be reduced for hospitals 
reclassified in FY 2009 that are no longer reclassified in FY 2010. 
Conversely, payments may increase for hospitals not reclassified in 
FY 2009 that are reclassified in FY 2010. In addition, section 508 
of Public Law 108-173, the special reclassification provision, is 
set to expire in FY 2010. The section 508 reclassification is a 
nonbudget neutral provision, so overall payments will be reduced as 
a result of the expiration of this provision. In the impact analysis 
for this final rule, the expiration of certain special exceptions as 
well as section 508 of Public Law 108-173 resulted in substantial 
impacts for a relatively small number of hospitals in a particular 
category because those providers have lost their reclassification 
status resulting in a percentage change in payments for the category 
to be below the national mean.
    A third significant factor is that we currently estimate that 
actual outlier payments during FY 2009 will be 5.4 percent of total 
DRG payments. When the FY 2008 final rule was published, we 
projected FY 2009 outlier payments would be 5.1 percent of total DRG 
plus outlier payments; the average standardized amounts were offset 
correspondingly. The effects of the higher than expected outlier 
payments during FY 2009 (as discussed in the Addendum to this final 
rule) are reflected in the analyses below comparing our current 
estimates of FY 2009 payments per case to estimated FY 2010 payments 
per case (with outlier payments projected to equal 5.1 percent of 
total DRG payments).

B. Analysis of Table I

    Table I displays the results of our analysis of the changes for 
FY 2010. The table categorizes hospitals by various geographic and 
special payment consideration groups to illustrate the varying 
impacts on different types of hospitals. The top row of the table 
shows the overall impact on the 3,517 acute care hospitals included 
in the analysis.
    The next four rows of Table I contain hospitals categorized 
according to their geographic location: all urban, which is further 
divided into large urban and other urban; and rural. There are 2,525 
hospitals located in urban areas included in our analysis. Among 
these, there are 1,377 hospitals located in large urban areas 
(populations over 1 million), and 1,148 hospitals in other urban 
areas (populations of 1 million or fewer). In addition, there are 
992 hospitals in rural areas. The next two groupings are by bed-size 
categories, shown separately for urban and rural hospitals. The 
final groupings by geographic location are by census divisions, also 
shown separately for urban and rural hospitals.
    The second part of Table I shows hospital groups based on 
hospitals' FY 2010 payment classifications, including any 
reclassifications under section 1886(d)(10) of the Act. For example, 
the rows labeled urban, large urban, other urban, and rural show 
that the numbers of hospitals paid based on these categorizations 
after consideration of geographic reclassifications (including 
reclassifications under section 1886(d)(8)(B) and section 
1886(d)(8)(E) of the Act that have implications for capital 
payments) are 2,593, 1,422, 1,171 and 924, respectively.
    The next three groupings examine the impacts of the changes on 
hospitals grouped by whether or not they have GME residency programs 
(teaching hospitals that receive an IME adjustment) or receive DSH 
payments, or some combination of these two adjustments. There are 
2,475 nonteaching hospitals in our analysis, 804 teaching hospitals 
with fewer than 100 residents, and 238 teaching hospitals with 100 
or more residents.
    In the DSH categories, hospitals are grouped according to their 
DSH payment status, and whether they are considered urban or rural 
for DSH purposes. The next category groups together hospitals 
considered urban or rural, in terms of whether they receive the IME 
adjustment, the DSH adjustment, both, or neither.
    The next five rows examine the impacts of the changes on rural 
hospitals by special payment groups (SCHs, RRCs, and MDHs). There 
were 187 RRCs, 337 SCHs, 186 MDHs, and 106 hospitals that are both 
SCHs and RRCs, and 15 hospitals that are both an MDH and an RRC.
    The next series of groupings are based on the type of ownership 
and the hospital's Medicare utilization expressed as a percent of 
total patient days. These data were taken from the FY 2007 or FY 
2006 Medicare cost reports.
    The next two groupings concern the geographic reclassification 
status of hospitals. The first grouping displays all urban hospitals 
that were reclassified by the MGCRB for FY 2010. The second grouping 
shows the MGCRB rural reclassifications. The final category shows 
the impact of the policy changes on the 20 cardiac hospitals in our 
analysis.

                                                         Table I--Impact Analysis of Changes to the IPPS for Operating Costs for FY 2010
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                           FY 2010 DRG,                     Transitional
                                                                                                                            rel. wts.,                      \1/2\ within
                                                                                                                            wage index                       state rural
                                                                        FY 2010    Application     FY 2010   Application     changes,                       floor budget    FY 2010
                                                           Number of   Weights &        of        Wage data    of wage    labor-related    FY 2010 MGCRB     neutrality      Out-       All FY
                                                                          DRG     recalibration  and labor-     budget      share with   reclassifications    and \1/2\    migration     2010
                                                           hospitals    changes       budget       related    neutrality     wage and                         national    adjustment    changes
                                                                                    neutrality      share                 recalibration                      rural floor
                                                                                                                              budget                           budget
                                                                                                                            neutrality                       neutrality
                                                           .........       (1)           (2)          (3)          (4)           (5)              (6)             (7)          (8)         (9)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
All Hospitals............................................      3,517         0.2           0            0            0             0                0               0            0           1.6
By Geographic Location:
    Urban hospitals......................................      2,525         0.2           0            0            0             0               -0.2             0            0           1.6
    Large urban areas....................................      1,377         0.2           0            0            0             0               -0.3             0            0           1.7
    Other urban areas....................................      1,148         0.2           0           -0.1          0            -0.1              0               0.1          0           1.5
    Rural hospitals......................................        992         0            -0.2         -0.2         -0.1          -0.3              1.8            -0.1          0.1         1.6
Bed Size (Urban):
    0-99 beds............................................        634         0.4           0.1          0.1          0.2           0.2             -0.5             0            0           1.8
    100-199 beds.........................................        808         0.2           0            0            0             0               -0.1             0.1          0           1.6
    200-299 beds.........................................        466         0.2           0            0            0             0               -0.1             0            0           1.7
    300-499 beds.........................................        426         0.2           0           -0.1         -0.1          -0.1             -0.2             0            0           1.5

[[Page 44217]]

 
    500 or more beds.....................................        191         0.2           0            0            0.1           0.1             -0.3            -0.1          0           1.7
Bed Size (Rural):
    0-49 beds............................................        349        -0.1          -0.3         -0.2         -0.1          -0.5              0.5            -0.1          0.2         2.2
    50-99 beds...........................................        370         0            -0.2         -0.2         -0.1          -0.4              0.9            -0.1          0.1         1.5
    100-149 beds.........................................        164         0            -0.2         -0.3         -0.2          -0.4              2.3            -0.1          0           1.5
    150-199 beds.........................................         62         0.1          -0.2         -0.2         -0.1          -0.3              2.4            -0.1          0.1         1.6
    200 or more beds.....................................         42         0.1          -0.1         -0.1         -0            -0.2              2.6            -0.1          0           1.5
Urban by Region:
    New England..........................................        120         0.2           0            1            0.8           0.8              0.7             0.3          0           2.2
    Middle Atlantic......................................        344         0.1           0            0           -0.1          -0.1              0.2             0.1          0           1.5
    South Atlantic.......................................        388         0.2           0           -0.3         -0.2          -0.2             -0.4            -0.1          0           1.5
    East North Central...................................        397         0.2           0           -0.4         -0.3          -0.2             -0.3            -0.1          0           1.3
    East South Central...................................        160         0.2           0           -0.3         -0.1          -0.1             -0.3             0            0           1.6
    West North Central...................................        165         0.3           0            0.3          0.2           0.2             -0.6            -0.1          0           1.8
    West South Central...................................        346         0.2           0           -0.3         -0.2          -0.2             -0.6            -0.1          0           1.7
    Mountain.............................................        163         0.3           0.1          0.9          0.8           0.8             -0.4             0            0           2.9
    Pacific..............................................        391         0.3           0            0.3          0.2           0.1             -0.2             0.1          0           1.4
    Puerto Rico..........................................         51         0            -0.2         -0.1          0.2          -0.2             -0.8            -0.1          0           1.6
Rural by Region:
    New England..........................................         24         0.1          -0.2         -0.5         -0.5          -0.7              2              -0.2          0           0.2
    Middle Atlantic......................................         70        -0.1          -0.3          0.2          0.2          -0.1              1.7             0            0           0.9
    South Atlantic.......................................        171         0            -0.2         -0.3         -0.2          -0.4              1.7            -0.1          0.1         2.1
    East North Central...................................        122         0            -0.2         -0.2         -0.2          -0.4              1.5            -0.1          0           1
    East South Central...................................        176         0            -0.2         -0            0.1          -0.2              2.8            -0.1          0.1         1.9
    West North Central...................................        101         0            -0.2         -0.2         -0.2          -0.4              0.6             0            0           1.3
    West South Central...................................        224         0            -0.2         -0.4         -0.3          -0.5              2.1            -0.1          0.1         1.3
    Mountain.............................................         72         0.2           0            0.2          0.2           0.2              0.2             0            0           3.7
    Pacific..............................................         32         0.1          -0.2         -0.3         -0.2          -0.5              1.8            -0.1          0           2.8
By Payment Classification:
    Urban hospitals......................................      2,593         0.2           0            0            0             0               -0.2             0            0           1.6
    Large urban areas....................................      1,422         0.2           0            0            0             0               -0.3             0            0           1.7
    Other urban areas....................................      1,171         0.2           0           -0.1          0            -0.1              0               0.1          0           1.5
    Rural areas..........................................        924        -0            -0.2         -0.2         -0.1          -0.3              1.6             0            0.1         1.6
Teaching Status:
    Nonteaching..........................................      2,475         0.2           0           -0.1         -0.1          -0.1              0.3             0            0           1.6
    Fewer than 100 residents.............................        804         0.2           0           -0.1          0             0               -0.2             0            0           1.6
    100 or more residents................................        238         0.2           0            0.1          0.1           0.1             -0.2             0            0           1.7
Urban DSH:
    Non-DSH..............................................        845         0.2           0           -0.1         -0.1          -0.2              0.1             0            0           1.3
    100 or more beds.....................................      1,538         0.2           0            0            0             0               -0.2             0            0           1.7
    Less than 100 beds...................................        346         0.1          -0.1          0.1          0.1           0               -0.2             0            0           1.9
Rural DSH:
    SCH..................................................        397        -0.2          -0.3         -0.1         -0.1          -0.4              0.3             0            0.1         2.1
    RRC..................................................        207         0.1          -0.1         -0.2         -0.1          -0.3              2.7            -0.1          0           1.5
    100 or more beds.....................................         34         0.1          -0.2          0.3          0.3           0.1              0.9             0.4          0.2         1.5
    Less than 100 beds...................................        150         0.1          -0.1         -0.4         -0.2          -0.4              1.4            -0.1          0.3         1.2
Urban teaching and DSH:
    Both teaching and DSH................................        802         0.2           0            0            0.1           0.1             -0.3             0            0           1.7
    Teaching and no DSH..................................        178         0.2           0           -0.2         -0.2          -0.3              0.2             0.1          0           1.3
    No teaching and DSH..................................      1,082         0.2           0           -0.1         -0.1          -0.1              0               0.1          0           1.6
    No teaching and no DSH...............................        531         0.3           0            0            0            -0.1             -0.2             0            0           1.4
Special Hospital Types:
    RRC..................................................        187         0.1           0            0            0.1          -0                3.3            -0.1          0           1.6
    SCH..................................................        337        -0.1          -0.3         -0.1         -0            -0.4              0.2             0            0           2.1
    MDH..................................................        186        -0.2          -0.4         -0.2         -0.1          -0.5              0.5            -0.1          0.2         2.2
    SCH and RRC..........................................        106         0            -0.2          0            0            -0.2              0.7             0            0           1.7
    MDH and RRC..........................................         15        -0.2          -0.4         -0.2         -0.2          -0.6              0.4             0            0           0.2
Type of Ownership:
    Voluntary............................................      2,014         0.2           0            0            0            -0.1              0               0            0           1.6
    Proprietary..........................................        860         0.3           0.1         -0.1          0             0                0              -0.1          0           1.7
    Government...........................................        583         0.1           0            0.1          0.1           0                0               0.1          0           1.9
Medicare Utilization as a Percent of Inpatient Days:
    0-25.................................................        317         0.2           0.1          0.4          0.4           0.4             -0.4            -0.1          0           2.2
    25-50................................................      1,433         0.2           0            0            0             0               -0.3             0            0           1.7
    50-65................................................      1,331         0.1          -0.1         -0.2         -0.1          -0.2              0.6             0            0           1.4
    Over 65..............................................        308         0            -0.1         -0.3         -0.2          -0.4              0.2             0.1          0.1         1.4
FY 2010 Reclassifications by the Medicare Geographic
 Classification Review Board:

[[Page 44218]]

 
    All Reclassified Hospitals...........................        807         0.2           0           -0.2         -0.1          -0.2              2              -0.1          0           1.6
    Non-Reclassified Hospitals...........................      2,710         0.2           0            0            0             0               -0.7             0            0           1.6
    Urban Hospitals Reclassified.........................        456         0.2           0           -0.2         -0.1          -0.2              1.7            -0.1          0           1.6
    Urban Nonreclassified Hospitals, FY 2010:                  2,045         0.2           0            0            0             0               -0.7             0            0           1.6
    All Rural Hospitals Reclassified FY 2010:                    351         0.1          -0.1         -0.2         -0.1          -0.3              2.8            -0.1          0           1.7
    Rural Nonreclassified Hospitals FY 2010:                     579        -0.1          -0.3         -0.2         -0.1          -0.4             -0.3            -0.1          0.2         1.6
    All Section 401 Reclassified Hospitals:                       32        -0.1          -0.3          0.2          0.2          -0.2             -0.4             0.4          0           0.3
    Other Reclassified Hospitals (Section 1886(d)(8)(B)).         62        -0.1          -0.3         -0.2         -0.1          -0.5              3.1            -0.2          0           0.9
Specialty Hospitals:
    Cardiac specialty Hospitals..........................         20        -0.1          -0.2          0            0.1          -0.2             -0.8             0            0           1.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Because data necessary to classify some hospitals by category were missing, the total number of hospitals in each category may not equal the national total. Discharge data are from FY
  2008, and hospital cost report data are from reporting periods beginning in FY 2007 and FY 2006.
\2\ This column displays the payment impact of the changes to the Version 27 GROUPER and the recalibration of the DRG weights based on FY 2008 MedPAR data in accordance with section
  1886(d)(4)(C)(iii) of the Act.
\3\ This column displays the application of the recalibration budget neutrality factor of 0.997941, in accordance with section 1886(d)(4)(C)(iii) of the Act.
\4\ This column displays the payment impact of the update to wage index data using FY 2006 cost report data and the update to the labor-related share for providers with a wage index greater
  than 1. Based on FY 2006 data, the labor related share, or the proportion of the standardized amount that the wage index is applied to, is being reduced from 69.7 percent to 68.8 percent.
\5\This column displays the payment impact of the application of the wage budget neutrality factor, which from now on will be calculated separately from the recalibration budget neutrality
  factor, and will be calculated in accordance with section 1886(d)(3)(E)(i) of the Act. The wage budget neutrality factor is 1.000407.
\6\ This column displays the combined payment impact of the changes in Columns 2 through 5 and the cumulative budget neutrality factor for DRG and wage changes in accordance with section
  1886(d)(4)(C)(iii) of the Act and section 1886(d)(3)(E) of the Act. The cumulative wage and recalibration budget neutrality factor of 0.998347 is the product of the wage budget neutrality
  factor and the recalibration budget neutrality factor.
\7\ Shown here are the effects of geographic reclassifications by the Medicare Geographic Classification Review Board (MGCRB). The effects demonstrate the FY 2010 payment impact of going from
  no reclassifications to the reclassifications scheduled to be in effect for FY 2009. Reclassification for prior years has no bearing on the payment impacts shown here. This column reflects
  the geographic budget neutrality factor of 0.991297.
\8\ This column displays the effects of the rural floor and the imputed floor, including the transition to the rural floor budget neutrality adjustment at the State level. Under the
  transition, hospitals will receive a blended wage index that is 50 percent of a wage index with the State level rural and imputed floor budget neutrality adjustment and 50 percent of a wage
  index with the national budget neutrality adjustment.
\9\ This column displays the impact of section 505 of Public Law 108-173, which provides for an increase in a hospital's wage index if the hospital qualifies by meeting a threshold percentage
  of residents of the county where the hospital is located who commute to work at hospitals in counties with higher wage indexes.
\10\ This column shows the changes in payments from FY 2009 to FY 2010. It incorporates all of the changes displayed in Columns 5, 6, 7, and 8 (the changes displayed in Columns 2, 4 are
  included in Column 5). It also reflects the impact of the FY 2010 market basket update, and changes in hospitals' reclassification status in FY 2010 compared to FY 2009. The sum of these
  impacts may be different from the percentage changes shown here due to rounding and interactive effects.

C. Effects of the Changes to the MS-DRG Reclassifications and 
Relative Cost-Based Weights (Column 1)

    In Column 1 of Table I, we present the effects of the DRG 
reclassifications, as discussed in section II. of the preamble to 
this final rule. Section 1886(d)(4)(C)(i) of the Act requires us 
annually to make appropriate classification changes in order to 
reflect changes in treatment patterns, technology, and any other 
factors that may change the relative use of hospital resources.
    As discussed in the preamble of this final rule, the FY 2010 DRG 
relative weights will be 100 percent cost-based and 100 percent MS-
DRGs. For FY 2010, the MS-DRGs are calculated using the FY 2008 
MedPAR data grouped to the Version 27.0 (FY 2010) DRGs. The methods 
of calculating the relative weights and the reclassification changes 
to the GROUPER are described in more detail in section II.H. of the 
preamble to this final rule. The changes to the relative weights and 
MS-DRGs shown in Column 2 are prior to any offset for budget 
neutrality. Overall, hospitals will experience a 0.2 percent 
increase in payments due to the changes in the MS-DRGs and relative 
weights prior to budget neutrality. Urban hospitals will experience 
a 0.2 percent increase in payments under the updates to the relative 
weights and DRGs, while rural hospitals will not experience a change 
in payments. Under the MS-DRG system, rural hospitals generally will 
not experience an increase in payments from recalibration due to the 
lower acuity of services provided.

D. Effects of the Application of Recalibration Budget Neutrality 
(Column 2)

    Column 2 shows the effects of the changes to the MS-DRGs and 
relative weights with the application of the recalibration budget 
neutrality factor to the standardized amounts. Consistent with 
section 1886(d)(4)(C)(iii) of the Act, we are calculating a 
recalibration budget neutrality factor to account for the changes in 
MS-DRGs and relative weights to ensure that the overall payment 
impact is budget neutral. Beginning in FY 2010, we are calculating a 
budget neutrality factor to account for changes in MS-DRGs and 
relative weights separately from the budget neutrality factor to 
account for changes in wage data. In addition, as described in 
section II.A.4. of the Addendum to this final rule, we are including 
IME payments made on Medicare Advantage claims to IPPS hospitals in 
order to calculate budget neutrality.
    The ``All Hospitals'' line in Column 1 indicates that changes 
due to MS-DRGs and relative weights will increase payments by 0.2 
percent before application of the budget neutrality factor. The 
recalibration budget neutrality factor is 0.997941, which is applied 
to the standardized amount. Thus, the impact after accounting only 
for budget neutrality for changes to the MS-DRG relative weights and 
classification is

[[Page 44219]]

somewhat lower than the figures shown in Column 1 (approximately 0.2 
percent). Consequentially, urban hospitals will not experience a 
change in payments when recalibration budget neutrality is applied, 
while rural hospitals will experience a 0.2 percent decrease in 
payments due to the lower acuity of services provided.

E. Effects of Wage Index Changes (Column 3)

    Section 1886(d)(3)(E) of the Act requires that, beginning 
October 1, 1993, we annually update the wage data used to calculate 
the wage index. In accordance with this requirement, the wage index 
for acute care hospitals for FY 2010 is based on data submitted for 
hospital cost reporting periods beginning on or after October 1, 
2005 and before October 1, 2006. The estimated impact of the updated 
wage data and labor share on hospital payments is isolated in Column 
3 by holding the other payment parameters constant in this 
simulation. That is, Column 3 shows the percentage change in 
payments when going from a model using the FY 2009 wage index, based 
on FY 2005 wage data, the current labor-related share and having a 
100-percent occupational mix adjustment applied, to a model using 
the FY 2010 pre-reclassification wage index with the labor-related 
share, also having a 100-percent occupational mix adjustment 
applied, based on FY 2006 wage data (while holding other payment 
parameters such as use of the Version 26.0 DRG GROUPER constant). 
The occupational mix adjustment is based on the FY 2007/2008 
occupational mix survey. The wage data collected on the FY 2006 cost 
report include overhead costs for contract labor that were not 
collected on FY 2005 and earlier cost reports. The impacts below 
incorporate the effects of the FY 2006 wage data collected on 
hospital cost reports, including additional overhead costs for 
contract labor compared to the wage data from FY 2005 cost reports 
that were used to calculate the FY 2009 wage index.
    As discussed in section III. of this final rule, under section 
1886(d)(3)(E) of the Act, the Secretary estimates from time to time 
the proportion of payments that are labor-related. ``The Secretary 
shall adjust the proportion (as estimated by the Secretary from time 
to time) of hospitals' costs which are attributable to wages and 
wage-related costs of the DRG prospective payment rates * * *.'' We 
refer to the proportion of hospitals' costs that are attributable to 
wages and wage-related costs as the ``labor-related share.''
    The labor-related share is used to determine the proportion of 
the national IPPS base payment rate to which the area wage index is 
applied. In this final rule, we describe our updated methodology and 
data sources to calculate the national labor-related share. In the 
proposed rule, using the cost category weights from the FY 2006-
based IPPS market basket, we proposed a labor-related share of 67.1 
percent. In this final rule, based on updated data, we have 
determined a labor-related share of 68.8 percent, approximately 0.9 
percentage points lower than the current labor-related share of 69.7 
percent. Accordingly, in this final rule, we are implementing a 
national labor-related share of 68.8 percent for discharges 
occurring on or after October 1, 2009. This updated calculation only 
affects hospitals with a wage index greater than 1. According to 
section 1886(d)(3)(E)(ii) of the Act, hospitals with a wage index 
less than or equal to 1 have their wage index adjusted to 62 percent 
of the national standardized amount; therefore, these hospitals 
remain unaffected by the updated labor-related share. In addition, 
we are updating the labor-related share for Puerto Rico. Using FY 
2006-based Puerto Rico cost category weights, we calculated a labor-
related share of 62.1 percent, approximately 3 percentage points 
higher than the current Puerto Rico specific labor-related share of 
58.721. Accordingly, for FY 2010, we are adopting an updated Puerto 
Rico labor-related share of 62.1 percent for hospitals with a wage 
index greater than 1.
    Column 3 shows the impacts of updating the wage data using FY 
2006 cost reports and the updated labor-related share. The payment 
changes simulated in this column are used to calculate the wage 
budget neutrality. Beginning in FY 2010, we are calculating separate 
wage budget neutrality and recalibration budget neutrality factors, 
in accordance with section 1886(d)(3)(E) of the Act, which specifies 
that budget neutrality to account for wage changes or updates made 
under that subparagraph must be made without regard to the 62 
percent labor-related share guaranteed under section 
1886(d)(3)(E)(ii) of the Act. Therefore, for FY 2010, we are 
calculating the wage budget neutrality factor to ensure that 
payments under updated wage data and the labor-related share are 
budget neutral without regard to the lower labor-related share of 62 
percent applied to hospitals with a wage index less than or equal to 
1. In other words, the wage budget neutrality is calculated under 
the assumption that all hospitals receive the higher labor-related 
share of the standardized amount. Column 3 shows the effects of the 
new wage data and new labor share before budget neutrality under the 
assumption that all providers have their wage index adjusted by the 
same labor-related share. Overall, the new wage data will lead to a 
0.0 percent change for all hospitals before being combined with the 
wage budget neutrality adjustment shown in Column 5. Thus, the 
figures in this column are estimated to be the same as what they 
otherwise would be if they also illustrated a budget neutrality 
adjustment solely for changes to the wage index and labor-related 
share. Among the regions, the largest increase is in the urban New 
England region, which experiences a 1.0 percent increase before 
applying an adjustment for budget neutrality. The largest decline 
from updating the wage data is seen in rural New England (-0.5 
percent decrease).
    In looking at the wage data itself, the national average hourly 
wage increased 4.0 percent compared to FY 2009. Therefore, the only 
manner in which to maintain or exceed the previous year's wage index 
was to match or exceed the national 4.0 percent increase in average 
hourly wage. Of the 3,467 hospitals with wage data for both FYs 2009 
and 2010, 1,662, or 47.9 percent, experienced an average hourly wage 
increase of 4.0 percent or more.
    The following chart compares the shifts in wage index values for 
hospitals for FY 2010 relative to FY 2009. Among urban hospitals, 36 
will experience an increase of more than 5 percent and less than 10 
percent and 8 will experience an increase of more than 10 percent. 
Among rural hospitals, 7 will experience an increase of more than 5 
percent and less than 10 percent, and none will experience an 
increase of more than 10 percent. However, 952 rural hospitals will 
experience increases or decreases of less than 5 percent, while 
2,421 urban hospitals will experience increases or decreases of less 
than 5 percent. Thirty-seven urban hospitals will experience 
decreases in their wage index values of more than 5 percent and less 
than 10 percent. Six urban hospitals will experience decreases in 
their wage index values of greater than 10 percent. No rural 
hospitals will experience decreases of more than 5 percent. These 
figures reflect changes in the wage index which is an adjustment to 
either 68.8 percent or 62 percent of a hospital's standardized 
amount, depending upon whether its wage index is greater than 1.0 or 
less than or equal to 1.0. Therefore, these figures are illustrating 
a somewhat larger change in the wage index than will occur to the 
hospital's total payment.
    The following chart shows the projected impact for urban and 
rural hospitals.

------------------------------------------------------------------------
                                                   Number of hospitals
  Percentage change in area wage index values  -------------------------
                                                   Urban        Rural
------------------------------------------------------------------------
Increase more than 10 percent.................            8            0
Increase more than 5 percent and less than 10            36            7
 percent......................................
Increase or decrease less than 5 percent......        2,421          952
Decrease more than 5 percent and less than 10            37            0
 percent......................................
Decrease more than 10 percent.................            6            0
------------------------------------------------------------------------


[[Page 44220]]

F. Application of the Wage Budget Neutrality Factor (Column 4)

    Column 4 shows the impact of the new wage data, new labor share 
with the application of the wage budget neutrality factor. For FY 
2010, we will calculate the wage budget neutrality factor without 
regard to the lower labor share of 62 percent for hospitals with a 
wage index less than or equal to 1, in accordance with section 
1886(d)(3)(E)(i) of the Act. In other words, the wage budget 
neutrality is calculated under the assumption that all hospitals 
receive the labor-related share of 68.8 percent of the standardized 
amount compared to the current labor-related share of 69.7 percent 
of the standardized amount. In addition, as described in section 
II.A.4. of the Addendum to this final rule, we are including IME 
payments made on Medicare Advantage claims to IPPS hospitals in 
order to calculate budget neutrality. Because the wage data changes 
did not change overall payments (displayed in Column 3), the wage 
budget neutrality factor is minimal at 1.000407, and the overall 
payment change is 0.0 percent.

G. Combined Effects of MS-DRG and Wage Index Changes (Column 5)

    Section 1886(d)(4)(C)(iii) of the Act requires that changes to 
MS-DRG reclassifications and the relative weights cannot increase or 
decrease aggregate payments. In addition, section 1886(d)(3)(E) of 
the Act specifies that any updates or adjustments to the wage index 
are to be budget neutral. We computed a wage budget neutrality 
factor of 1.000411, and a recalibration budget neutrality factor of 
0.997926 (which is applied to the Puerto Rico specific standardized 
amount and the hospital-specific rates). The product of the two 
budget neutrality factors is the cumulative wage and recalibration 
budget neutrality factor. The cumulative wage and recalibration 
budget neutrality adjustment is 0.998347 or approximately -0.2 
percent which is applied to the national standardized amounts. 
Because the wage budget neutrality and the recalibration budget 
neutrality are calculated under different methodologies according to 
the statute, when the two budget neutralities are combined and 
applied to the standardized amount, the overall payment impact is 
not necessarily budget neutral. However, in this final rule, we are 
estimating that the changes in the DRG, relative weights and updated 
wage data and rebased labor-related share with wage and budget 
neutrality applied will result in a 0.0 change in payments. The 
estimated changes shown in this column reflect the combined effects 
of the changes in Columns 2, 3, and 4 and the budget neutrality 
factors discussed previously.
    We estimate that the combined impact of the changes to the 
relative weights and DRGs, the updated wage data and changes to the 
labor share with budget neutrality applied will result in no change 
in payments for urban hospitals. Rural hospitals will generally 
experience a decrease in payments (-0.3 percent) primarily due to 
payment decreases under the MS-DRGs and wage data. Among the rural 
hospital categories, rural New England hospitals will experience the 
greatest decline in payment (-0.7 percent) primarily due to the 
changes to MS-DRGs and the relative cost weights.

H. Effects of MGCRB Reclassifications (Column 6)

    Our impact analysis to this point has assumed acute care 
hospitals are paid on the basis of their actual geographic location 
(with the exception of ongoing policies that provide that certain 
hospitals receive payments on other bases than where they are 
geographically located). The changes in Column 6 reflect the per 
case payment impact of moving from this baseline to a simulation 
incorporating the MGCRB decisions for FY 2010 which affect 
hospitals' wage index area assignments. By Spring of each year, the 
MGCRB makes reclassification determinations that will be effective 
for the next fiscal year, which begins on October 1. The MGCRB may 
approve a hospital's reclassification request for the purpose of 
using another area's wage index value. Hospitals may appeal denials 
of MGCRB decisions to the CMS Administrator. Further, hospitals have 
45 days from publication of the IPPS rule in the Federal Register to 
decide whether to withdraw or terminate an approved geographic 
reclassification for the following year. This column reflects all 
MGCRB decisions, Administrator appeals and decisions of hospitals 
for FY 2010 geographic reclassifications. The overall effect of 
geographic reclassification is required by section 1886(d)(8)(D) of 
the Act to be budget neutral. Therefore, for the purposes of this 
impact analysis, we are applying an adjustment of 0.991297 to ensure 
that the effects of the section 1886(d)(10) reclassifications are 
budget neutral. (See section II.A. of the Addendum to this final 
rule.) Geographic reclassification generally benefits hospitals in 
rural areas. We estimate that geographic reclassification will 
increase payments to rural hospitals by an average of 1.8 percent.
    Table 9A of the Addendum to this final rule reflects the 
approved reclassifications for FY 2010.

I. Effects of the Rural Floor and Imputed Floor, Including the 
Transition To Apply Budget Neutrality at the State Level (Column 7)

    As discussed in section III.B. of the preamble of the FY 2009 
IPPS final rule and this final rule, section 4410 of Public Law 105-
33 established the rural floor by requiring that the wage index for 
a hospital in any urban area cannot be less than the wage index 
received by rural hospitals in the same State. In FY 2008, we 
changed how we applied budget neutrality to the rural floor. Rather 
than applying a budget neutrality adjustment to the standardized 
amount, a uniform budget neutrality adjustment is applied to the 
wage index. In the FY 2009 final rule, we finalized the policy to 
apply the rural floor budget neutrality at the State level with a 3-
year transition. In FY 2009, hospitals received a blended wage index 
that is 20 percent of a wage index with the State level rural and 
imputed floor budget neutrality adjustment and 80 percent of a wage 
index with the national budget neutrality adjustment. As described 
in FY 2009 IPPS final rule (73 FR 48570), in FY 2010, hospitals will 
receive a blended wage index that is 50 percent of a wage index with 
the State level rural and imputed floor budget neutrality and 50 
percent of a wage index with the national budget neutrality 
adjustment. The national rural floor budget neutrality applied to 
the wage index is 0.996705. The blended rural floor budget 
neutrality factors applied to the wage index are shown in Table 4D-1 
in the Addendum to this final rule. After the wage index is blended, 
an additional adjustment of 0.999995 is applied to the wage index to 
ensure that payments before the application of the rural floor are 
equivalent to the payments under the blended budget neutral rural 
floor wage index.
    Furthermore, the FY 2005 IPPS final rule (69 FR 49109) 
established a temporary imputed floor for all urban States from FY 
2005 to FY 2007. The rural floor requires that an urban wage index 
cannot be lower than the wage index for any rural hospital in that 
State. Therefore, an imputed floor was established for States that 
do not have rural areas or rural IPPS hospitals. In the FY 2008 IPPS 
final rule with comment period (72 FR 47321), we finalized our 
proposal to extend the imputed floor for 1 additional year. In the 
FY 2009 IPPS final rule (73 FR 48573), we extended the imputed floor 
for an additional 3 years through FY 2011. Furthermore, in that 
final rule, we provided for a 3-year transition to the rural floor 
budget neutrality adjustment at the State level. Therefore, we also 
apply the imputed floor budget neutrality adjustment at the State 
level through a 3-year transition, so that wage indices adjusted for 
the imputed floor will be blended where 50 percent of the wage index 
will have the national rural and imputed floor budget neutrality 
factor applied and 50 percent of the wage index will have the 
within-State rural and imputed budget neutrality factor applied. The 
national rural floor budget neutrality factor listed also 
incorporates the imputed floor in its adjustment to the wage index.
    Column 7 shows the projected impact of the rural floor and the 
imputed floor, including the application of the transition to 
within-State rural and imputed floor budget neutrality. The column 
compares the post-reclassification FY 2010 wage index of providers 
before the rural floor adjustment and the post-reclassification FY 
2010 wage index of providers with the rural floor and imputed floor 
adjustment. Only urban hospitals can benefit from the rural floor 
provision. Because the provision is budget neutral, in prior years, 
all other hospitals (that is, all rural hospitals and those urban 
hospitals to which the adjustment is not made) had experienced a 
decrease in payments due to the budget neutrality adjustment applied 
nationally. However, because, for FY 2010, the rural floor adjusted 
wage index is based on a blend where 50 percent of the wage index 
will have a within-State budget neutrality factor applied and 50 
percent of the wage index will have a national rural floor budget 
neutrality factor applied, rural hospitals and urban hospitals that 
do not benefit from the rural floor will

[[Page 44221]]

continue to see decreases in payments, to a lesser extent. 
Conversely, all hospitals in States with hospitals receiving a rural 
floor will have their wage indices only partly downwardly adjusted 
to achieve budget neutrality within the State.
    We project that, in aggregate, rural hospitals will experience a 
0.1 percent decrease in payments as a result of the application of 
rural floor budget neutrality because these hospitals do not benefit 
from the rural floor, but have their wage indexes downwardly 
adjusted to ensure that the application of the rural floor is budget 
neutral overall. We project hospitals located in other urban areas 
(populations of 1 million or fewer) will experience a 0.1 percent 
increase in payments because those providers benefit from the rural 
floor. The rural floor in Connecticut has increased significantly 
resulting in increased payments to urban hospitals in Connecticut 
that qualify for the rural floor. Because the rural floor is a 
budget neutral provision, rural hospitals located in Connecticut and 
non-rural floor urban providers will have their wage index 
downwardly adjusted by a rural floor budget neutrality factor of 
0.978887 (or -2.1 percent). As a result, rural New England hospitals 
can expect decreases in payments by 0.2 percent while urban New 
England hospitals can expect increases in payments of 0.3 percent. 
Urban Middle Atlantic hospitals can expect a payment increase of 0.1 
percent primarily due to payment increases among urban hospitals in 
New Jersey, which is the only State that benefits from the imputed 
floor.

J. Effects of the Wage Index Adjustment for Out-Migration (Column 
8)

    Section 1886(d)(13) of the Act, as added by section 505 of 
Public Law 108-173, provides for an increase in the wage index for 
hospitals located in certain counties that have a relatively high 
percentage of hospital employees who reside in the county, but work 
in a different area with a higher wage index. Hospitals located in 
counties that qualify for the payment adjustment are to receive an 
increase in the wage index that is equal to a weighted average of 
the difference between the wage index of the resident county, post-
reclassification and the higher wage index work area(s), weighted by 
the overall percentage of workers who are employed in an area with a 
higher wage index. With the out-migration adjustment, small rural 
providers DSH providers with less than 100 beds will experience a 
0.3 percent increase in payments in FY 2010 relative to no 
adjustment at all. We included these additional payments to 
providers in the impact table shown above, and we estimate the 
impact of these providers receiving the out-migration increase to be 
approximately $20 million.

K. Effects of All Changes (Column 9)

    Column 9 shows our estimate of the changes in payments per 
discharge from FY 2009 and FY 2010, resulting from all changes 
reflected in this final rule for FY 2010 (including statutory 
changes). In the IPPS proposed rule, we had proposed to apply FY 
2010 documentation and coding adjustment of -1.9 percent on the 
national standardized amount, -2.5 percent on the hospital-specific 
amount and -1.1 percent on the Puerto Rico-specific rate. However in 
this final rule, we have decided to postpone the application of the 
documentation and coding adjustments. Because the hospital payment 
projections are based on FY 2008 Medicare claims data and we believe 
that case-mix was expected to increase an additional 1.54 percent in 
FY 2009 and in FY 2010, the payment models reflect a case-mix growth 
of 1.54 percent in FY 2009 and in FY 2010.
    Column 9 reflects the impact of all FY 2010 changes relative to 
FY 2009, including those shown in Columns 1 through 8. The average 
increase in payments under the IPPS for all hospitals is 
approximately 1.6 percent. This average increase includes the 
effects of the 2.1 percent market basket update, the -0.3 percentage 
point difference between the projected outlier payments in FY 2009 
(5.1 percent of total DRG payments), the current estimate of the 
percentage of actual outlier payments in FY 2009 (5.4 percent), and 
a 0.2 percent decrease in payments due to the expiration of section 
508 reclassification.
    There might also be interactive effects among the various 
factors comprising the payment system that we are not able to 
isolate. For these reasons, the values in Column 9 may not equal the 
sum of the percentage changes described above.
    The overall change in payments per discharge for hospitals paid 
under the IPPS in FY 2010 is estimated to increase by 1.6 percent. 
The payment increases among the hospital categories are largely due 
to the market basket update. Hospitals in urban areas will 
experience an estimated 1.6 percent increase in payments per 
discharge in FY 2010 compared to FY 2009. Hospitals in large urban 
areas will experience an estimated 1.7 percent increase and 
hospitals in other urban areas will experience an estimated 1.5 
percent increase in payments per discharge in FY 2010 as compared to 
FY 2009. Hospital payments per discharge in rural areas are 
estimated to increase by 1.6 percent in FY 2010 as compared to FY 
2009.
    Among urban census divisions, the largest estimated payment 
increases will be 2.2 percent in the New England region and 2.9 
percent in the Mountain region. Among the rural regions, the 
providers in the Mountain region will experience the largest 
increase in payments (3.7 percent) because several rural SCHs 
located in this region will benefit from rebasing to the 2006 
hospital-specific rate under section 112 of Public Law 110-275 
(MIPPA). The rural providers in the New England region will have the 
smallest increase among rural regions at 0.2 percent due to 
decreases associated with the application of the rural floor budget 
neutrality on their wage index.
    Among special categories of rural hospitals, MDHs will receive 
an estimated payment increase of 2.2 percent. MDHs are paid the 
higher of the IPPS rate based on the national standardized amount, 
that is, the Federal rate, or, if the hospital-specific rate exceeds 
the Federal rate, the Federal rate plus 75 percent of the difference 
between the Federal rate and the hospital-specific rate. This 
payment impact accounts for the corrected wage and recalibration 
budget neutrality factor, described in section V.B.2. of the 
preamble of this final rule, applied to the hospital-specific rates 
for MDHs that are paid based on their FY 2002 hospital-specific 
rate. Overall, SCHs will experience an estimated increase in 
payments by 2.1 percent. The increase in payments to SCHs can be 
largely attributed to the implementation of section 112 of Pub. L. 
110-275 (MIPPA), which allowed for SCHs to be paid based on a FY 
2006 hospital-specific rate (that is, based on their updated costs 
per discharge from their 12-month cost reporting period beginning 
during Federal FY 2006), if this results in the greatest payment to 
the SCH, effective for cost reporting periods beginning on or after 
January 1, 2009. We estimated the FY 2006 hospital-specific rate for 
SCHs that we believed will benefit from the rebased rate and 
included those rates in our analysis.
    Rural hospitals reclassified for FY 2010 are anticipated to 
receive a 1.7 percent payment increase, and rural hospitals that are 
not reclassifying are estimated to receive a payment increase of 1.6 
percent.
    Cardiac hospitals are expected to experience a payment increase 
of 1.6 percent in FY 2010 relative to FY 2009.

L. Effects of Policy on Payment Adjustments for Low-Volume 
Hospitals

    For FY 2010, we are proposing to continue to apply the volume 
adjustment criteria we specified in the FY 2005 IPPS final rule (69 
FR 49099). We expect that two providers will receive the low-volume 
adjustment for FY 2010. We estimate that low-volume hospitals will 
experience an increase of $82,000 in payments due to the low volume 
payment adjustment.

M. Impact Analysis of Table II

    Table II presents the projected impact of the changes for FY 
2010 for urban and rural hospitals and for the different categories 
of hospitals shown in Table I. It compares the estimated average 
payments per discharge for FY 2009 with the payments per discharge 
for FY 2010, as calculated under our models. Thus, this table 
presents, in terms of the average dollar amounts paid per discharge, 
the combined effects of the changes presented in Table I. The 
estimated percentage changes shown in the last column of Table II 
equal the estimated percentage changes in average payments per 
discharge from Column 9 of Table I.

[[Page 44222]]



    Table II--Impact Analysis of Changes for FY 2010 Acute Care Hospital Operating Prospective Payment System
                                            [Payments per discharge]
----------------------------------------------------------------------------------------------------------------
                                                                            Average FY   Average FY
                                                                               2009         2010
                                                               Number of   payment per  payment per  All FY 2010
                                                               hospitals    discharge    discharge   changes (4)
                                                                             \1\ (2)      \1\ (3)
                                                              ...........  ...........  ...........  ...........
----------------------------------------------------------------------------------------------------------------
All hospitals...............................................        3,517       $9,996      $10,158          1.6
By Geographic Location:
    Urban hospitals.........................................        2,525       10,435       10,605          1.6
    Large urban areas (populations over 1 million)..........        1,377       11,003       11,192          1.7
    Other urban areas (populations of 1 million or fewer)...        1,148        9,749        9,895          1.5
    Rural hospitals.........................................          992        7,397        7,516          1.6
Bed Size (Urban):
    0-99 beds...............................................          634        7,867        8,008          1.8
    100-199 beds............................................          808        8,798        8,935          1.6
    200-299 beds............................................          466        9,660        9,825          1.7
    300-499 beds............................................          426       10,886       11,048          1.5
    500 or more beds........................................          191       12,925       13,149          1.7
Bed Size (Rural):
    0-49 beds...............................................          349        5,996        6,128          2.2
    50-99 beds..............................................          370        6,900        7,005          1.5
    100-149 beds............................................          164        7,333        7,445          1.5
    150-199 beds............................................           62        8,116        8,246          1.6
    200 or more beds........................................           42        9,225        9,363          1.5
Urban by Region:
    New England.............................................          120       10,821       11,055          2.2
    Middle Atlantic.........................................          344       11,479       11,651          1.5
    South Atlantic..........................................          388        9,769        9,920          1.5
    East North Central......................................          397        9,825        9,954          1.3
    East South Central......................................          160        9,337        9,491          1.6
    West North Central......................................          165       10,016       10,198          1.8
    West South Central......................................          346        9,697        9,863          1.7
    Mountain................................................          163       10,539       10,846          2.9
    Pacific.................................................          391       12,821       13,004          1.4
    Puerto Rico.............................................           51        5,044        5,126          1.6
Rural by Region:
    New England.............................................           24        9,791        9,810          0.2
    Middle Atlantic.........................................           70        7,802        7,872          0.9
    South Atlantic..........................................          171        7,197        7,349          2.1
    East North Central......................................          122        7,601        7,677            1
    East South Central......................................          176        6,704        6,831          1.9
    West North Central......................................          101        7,836        7,939          1.3
    West South Central......................................          224        6,663        6,747          1.3
    Mountain................................................           72        8,038        8,337          3.7
    Pacific.................................................           32        9,815       10,088          2.8
By Payment Classification:
    Urban hospitals.........................................        2,593       10,408       10,578          1.6
    Large urban areas (populations over 1 million)..........        1,422       10,977       11,165          1.7
    Other urban areas (populations of 1 million or fewer)...        1,171        9,719        9,865          1.5
    Rural areas.............................................          924        7,465        7,583          1.6
Teaching Status:
    Non-teaching............................................        2,475        8,402        8,536          1.6
    Fewer than 100 Residents................................          804        9,952       10,112          1.6
    100 or more Residents...................................          238       14,838       15,091          1.7
Urban DSH:
    Non-DSH.................................................          845        8,811        8,930          1.3
    100 or more beds........................................        1,538       10,962       11,146          1.7
    Less than 100 beds......................................          346        7,393        7,532          1.9
Rural DSH:
    SCH.....................................................          397        6,777        6,922          2.1
    RRC.....................................................          207        8,203        8,326          1.5
    100 or more beds........................................           34        7,022        7,124          1.5
    Less than 100 beds......................................          150        5,772        5,841          1.2
Urban teaching and DSH:
    Both teaching and DSH...................................          802       12,012       12,217          1.7
    Teaching and no DSH.....................................          178        9,663        9,788          1.3
    No teaching and DSH.....................................        1,082        8,976        9,122          1.6
    No teaching and no DSH..................................          531        8,383        8,503          1.4
Rural Hospital Types:
    RRC.....................................................          187        8,320        8,458          1.6

[[Page 44223]]

 
    SCH.....................................................          337        7,680        7,842          2.1
    MDH.....................................................          186        6,144        6,279          2.2
    SCH and RRC.............................................          106        9,298        9,459          1.7
    MDH and RRC.............................................           15        8,292        8,310          0.2
Type of Ownership:
    Voluntary...............................................        2,014       10,151       10,308          1.6
    Proprietary.............................................          860        9,004        9,158          1.7
    Government..............................................          583       10,402       10,601          1.9
Medicare Utilization as a Percent of Inpatient Days:
    0-25....................................................          317       14,046       14,358          2.2
    25-50...................................................        1,433       11,102       11,293          1.7
    50-65...................................................        1,331        8,476        8,593          1.4
    Over 65.................................................          308        7,442        7,549          1.4
Hospitals Reclassified by the Medicare Geographic
 Classification Review Board:
FY 2010 Reclassifications:
    All Reclassified Hospitals FY 2010......................          807        9,612        9,765          1.6
    All Non-Reclassified Hospitals FY 2010..................        2,710       10,137       10,302          1.6
    Urban Reclassified Hospitals FY 2010....................          456       10,314       10,476          1.6
    Urban Non-reclassified Hospitals FY 2010................        2,045       10,474       10,646          1.6
    Rural Reclassified Hospitals FY 2010....................          351        7,989        8,122          1.7
    Rural Nonreclassified Hospitals FY 2010.................          579        6,559        6,665          1.6
    All Section 401 Reclassified Hospitals..................           32        9,306        9,335          0.3
    Other Reclassified Hospitals (Section 1886(d)(8)(B))....           62        7,267        7,333          0.9
Specialty Hospitals:
    Cardiac Hospitals.......................................           20       11,461       11,645          1.6
----------------------------------------------------------------------------------------------------------------
\1\These payment amounts per discharge reflect estimates of case-mix increase of 1.54 percent in FY 2009 and FY
  2010. Using FY 2008 claims data to model payments for FY 2009 and FY 2010, we estimate case-mix will increase
  an additional 1.54 percent from FY 2008 to FY 2009 and from FY 2008 to FY 2010 due to the adoption of MS-DRGs.

VII. Effects of Other Policy Changes

    In addition to those policy changes discussed above that we are 
able to model using our IPPS payment simulation model, we are making 
various other changes in this final rule. Generally, we have limited 
or no specific data available with which to estimate the impacts of 
these changes. Our estimates of the likely impacts associated with 
these other changes are discussed below.

A. Effects of Policy on HACs, Including Infections

    In section II.F. of the preamble of this final rule, we discuss 
our implementation of section 1886(d)(4)(D) of the Act, which 
requires the Secretary to identify conditions that are: (1) High 
cost, high volume, or both; (2) result in the assignment of a case 
to an MS-DRG that has a higher payment when present as a secondary 
diagnosis; and (3) could reasonably have been prevented through 
application of evidence-based guidelines. For discharges occurring 
on or after October 1, 2008, hospitals will not receive additional 
payment for cases in which one of the selected conditions was not 
present on admission, unless based on data and clinical judgment, it 
cannot be determined at the time of admission whether a condition is 
present. That is, the case will be paid as though the secondary 
diagnosis were not present. However, the statute also requires the 
Secretary to continue counting the condition as a secondary 
diagnosis that results in a higher IPPS payment when doing the 
budget neutrality calculations for MS-DRG reclassifications and 
recalibration. Therefore, we will perform our budget neutrality 
calculations as though the payment provision did not apply, but 
Medicare will make a lower payment to the hospital for the specific 
case that includes the secondary diagnosis. Thus, the provision 
results in cost savings to the Medicare program.
    We note that the provision will only apply when one or more of 
the selected conditions are the only secondary diagnosis or 
diagnoses present on the claim that will lead to higher payment. 
Medicare beneficiaries will generally have multiple secondary 
diagnoses during a hospital stay, such that beneficiaries having one 
MCC or CC will frequently have additional conditions that also will 
generate higher payment. Only a small percentage of the cases will 
have only one secondary diagnosis that would lead to a higher 
payment. Therefore, if at least one nonselected secondary diagnosis 
that leads to higher payment is on the claim, the case will continue 
to be assigned to the higher paying MS-DRG and there will be no 
Medicare savings from that case.
    The HAC payment provision went into effect on October 1, 2008. 
Our savings estimates for the next 5 fiscal years are shown below:

------------------------------------------------------------------------
                                                             Savings (in
                            Year                              millions)
------------------------------------------------------------------------
FY 2010....................................................          $21
FY 2011....................................................           21
FY 2012....................................................           22
FY 2013....................................................           22
FY 2014....................................................           22
------------------------------------------------------------------------

B. Effects of Policy Change Relating to New Medical Service and 
Technology Add-On Payments

    In the proposed rule, we discussed the five applications for 
add-on payments for new medical services and technologies for FY 
2010. After the publication of the proposed rule and prior to 
publication of this final rule, three of the applicants withdrew 
their application for consideration of new technology add-on 
payments in FY 2010. In section II.I. of the preamble to this final 
rule, we discuss the remaining two applications 
(LipiScan<SUP>TM</SUP> Coronary Imaging System and the 
Spiration[supreg] IBV[supreg] Valve System) for add-on payments for 
new medical services and technologies for FY 2010, as well as the 
status of the new technology that was approved to receive new 
technology add-on payments in FY 2009. As explained in that section, 
add-on payments for new technology

[[Page 44224]]

under section 1886(d)(5)(K) of the Act are not required to be budget 
neutral. However, we are providing an estimate of additional 
payments for new technology add-on payments because such payments 
will have an impact on total operating IPPS payments in FY 2010. For 
FY 2010 we are continuing to make new technology add-on payments for 
the Cardiowest<SUP>TM</SUP> Temporary Total Artificial Heart System 
(TAH-t). In addition, we are approving the Spiration[supreg] 
IBV[supreg] Valve System for new technology add-on payments in FY 
2010. We note that new technology add-on payments per case are 
limited to the lesser of (1) 50 percent of the costs of the new 
technology or (2) 50 percent of the amount by which the costs of the 
case exceed the standard MS-DRG payment for the case. Because it is 
difficult to predict the actual new technology add-on payment for 
each case, our estimate below is based on the increase in add-on 
payments for FY 2010 as if every claim that would qualify for a new 
technology add-on payments would receive the maximum add-on payment. 
Therefore, we currently estimate that payments for the TAH-t will 
increase overall FY 2010 payments by $9.54 million. For the 
Spiration[supreg] IBV[supreg] Valve System, the applicant estimates 
that approximately 2,286 Medicare beneficiaries will be eligible for 
the Spiration[supreg] IBV[supreg] Valve System. Therefore, we 
currently estimate that payments for the Spiration[supreg] 
IBV[supreg] Valve System will increase overall FY 2010 payments by 
$7.80 million.

C. Effects of Requirements for Hospital Reporting of Quality Data 
for Annual Hospital Payment Update

    In section V.A. of the preamble of this final rule, we discuss 
our requirements for hospitals to report quality data under the 
RHQDAPU program in order to receive the full payment update for FY 
2010 and FY 2011. We estimate that 96 hospitals may not receive the 
full payment update for FY 2010 and that 96 hospitals may not 
receive the full payment update for FY 2011. Most of these hospitals 
are either small rural or small urban hospitals. However, at this 
time, information is not available to determine how many hospitals 
will not meet the requirements to receive the full hospital market 
basket increase for services furnished in FY 2010 and FY 2011.
    For the FY 2010 payment update, hospitals must pass our 
validation requirement of a minimum of 80 percent reliability based 
upon our chart-audit validation process. For all but two measures 
(SCIP-Infection-4 and SCIP-Infection-6), this process uses four 
quarters of data from FY 2008. These data were due to the QIO 
Clinical Warehouse by May 15, 2008 (fourth quarter CY 2007 
discharges), August 15, 2008 (first quarter CY 2008 discharges), 
November 15, 2008 (second quarter CY 2008 discharges), and February 
15, 2009 (third quarter CY 2008 discharges). For the SCIP-Infection-
4 and SCIP-Infection-6 measures, the validation process will be 
based on two quarters of data from FY 2008. These data were due to 
the QIO Clinical Warehouse by November 15, 2008 (second quarter CY 
2008 discharges) and February 15, 2009 (third quarter CY 2008 
discharges).
    In section V.A.9. of the preamble of this final rule, we state 
that if we determine that a hospital is not entitled to receive the 
full FY 2010 payment update because it failed to satisfy the 
validation requirement, and the hospital asks for a reconsideration 
of that decision, the hospital must submit complete copies of the 
medical records that it submitted to the CDAC contractor for 
purposes of the validation. We estimate that no more than 20 
hospitals will fail the validation requirement for the FY 2010 
payment update. We estimate that this policy will cost hospitals 
approximately 12 cents per page for copying and approximately $4.00 
per chart for postage. We have found, based on experience, that an 
average sized medical chart is approximately 150 pages. Hospitals 
will be required to return all 20 sampled medical records for the 
four quarters of data from FY 2008. We estimate that the total cost 
to the 20 impacted hospitals will be approximately $8,800, or $440 
per hospital. We believe that this cost is minimal, compared with 
the 2.0 percentage point RHQDAPU program component of the annual 
payment update at risk. This requirement is necessary so that CMS 
has all the information it needs to fairly and timely make a 
decision on the hospital's reconsideration request. We also 
anticipate that this requirement will benefit hospitals seeking 
reconsiderations because it will enable us to resolve potential 
issues earlier in the appeals process, obviating the need for a 
hearing before the Provider Reimbursement Review Board (PRRB). We 
believe that this benefit will greatly outweigh the burden of 
copying and mailing the requested records.
    For the FY 2011 payment update, hospitals must pass our 
validation requirement of a minimum of 80 percent reliability based 
upon our chart-audit validation process. For all but one measure 
(SCIP-Cardiovascular-2), this process will use four quarters of data 
from FY 2009. These data are due to the QIO Clinical Warehouse by 
May 15, 2009 (fourth quarter CY 2008 discharges), August 15, 2009 
(first quarter CY 2009 discharges), November 15, 2009 (second 
quarter CY 2009 discharges), and February 15, 2010 (third quarter CY 
2009 discharges). For the SCIP-Cardiovascular-2 measure, the 
validation process will be based on two quarters of data from FY 
2009. SCIP-Cardiovascular-2 data are due to the QIO Clinical 
Warehouse by November 15, 2009 (second quarter CY 2009 discharges) 
and February 15, 2010 (third quarter CY 2009 discharges).
    We have continued our efforts to ensure that QIOs provide 
assistance to all hospitals that wish to participate in the RHQDAPU 
program. The requirement of 5 charts per hospital will result in 
approximately 21,500 charts per quarter being submitted to CMS for 
the FY 2010 payment update and for the FY 2011 payment update. We 
reimburse hospitals for the cost of sending charts to the CDAC 
contractor at the rate of 12 cents per page for copying and 
approximately $4.00 per chart for postage. Our experience shows that 
the average chart received by the CDAC contractor is approximately 
150 pages. Thus, CMS will have expenditures of approximately 
$597,600 per quarter to collect the charts. Because we reimburse 
hospitals for the data collection effort, we believe that a 
requirement for five charts per hospital per quarter represents a 
minimal burden to the participating hospital.
    We are modifying our validation process for the FY 2012 payment 
update. We believe that our decision to validate data submitted by 
800 hospitals for the FY 2012 RHQDAPU payment determination will not 
change the number of hospitals that fail the validation requirement 
for the FY 2012 payment update. We have changed the way we calculate 
the validation matches (that is, all relevant data elements 
submitted by the hospital must match the independently re-abstracted 
data elements to count as a match), which will make it more 
difficult for hospitals to satisfy the validation requirement. 
However, we will also validate data for a much smaller number of 
hospitals each year and we have reduced the validation score needed 
to satisfy the validation requirement. In combination, we believe 
that these revisions will counterbalance each other and result in no 
change to the number of hospitals failing our validation requirement 
for the FY 2012 payment update.

D. Effects of Correcting the FY 2002-Based Hospital-Specific Rates 
for MDHs

    In section V.B. of the preamble of this final rule, we are 
correcting the calculation of the FY 2002 hospital-specific rates 
for MDHs and applying a cumulative budget neutrality adjustment 
factor for DRG changes for FYs 1993 through 2002, in addition to the 
cumulative budget neutrality adjustment factors for FYs 2003 forward 
(which have already been applied). The cumulative budget neutrality 
adjustment factor of 0.982557 is calculated as the product of the 
following budget neutrality adjustment factors for FYs 1993 through 
2002: 0.999851 for FY 1993; 0.999003 for FY 1994; 0.998050 for FY 
1995; 0.999306 for FY 1996; 0.998703 for FY 1997; 0.997731 for FY 
1998; 0.998978 for FY 1999; 0.997808 for FY 2000; 0.997174 for FY 
2001; and 0.995821 for FY 2002. We estimate that there are currently 
about 195 MDHs. We estimate that approximately 60 percent of MDHs 
qualified for the rebasing to a FY 2002 hospital-specific rate (that 
is, their FY 2002 hospital-specific rate was higher than the other 
hospital-specific rates (FY 1982 or FY 1987)), of which about 46 
percent of those MDHs were paid based on their FY 2002 hospital-
specific rate because it was higher than the Federal rate. The 
remaining 54 percent of those MDHs are estimated to have been paid 
based solely on the Federal rate because the Federal rate was higher 
than their FY 2002 hospital-specific rate. We estimate that 
correcting the FY 2002 hospital-specific rate to ensure cumulative 
budget neutrality for FY 1993 though FY 2002 will result in a 
decrease in operating IPPS payments in FY 2010 of approximately $5 
million. However, this figure may be lower because application of 
the cumulative budget neutrality adjustment factor will, in some 
cases, lower the FY 2002 hospital-specific rate to below the Federal 
rate, thus creating a floor to the potential reduction.

[[Page 44225]]

E. Effect of Policy Changes Relating to the Payment Adjustments to 
Disproportionate Share Hospitals

1. Change Relating to Inclusion of Labor and Delivery Days in DSH 
Calculation

    In section V.E.2. of the preamble of this final rule, we discuss 
our decision to amend the regulations so that patient days 
associated with labor and delivery services furnished in an 
ancillary labor and delivery bed will always be included in both the 
Medicaid and Medicare fractions of the DPP used for calculating the 
DSH payment adjustment regardless of whether the patient previously 
occupied a routine bed. We believe that the impact of the inclusion 
of these days in the Medicare fraction of the DPP will be negligible 
because, generally, there are not many labor and delivery patient 
days among the Medicare population. With respect to the Medicaid 
fraction, we do not believe the impact will be substantial, since it 
will only recategorize ancillary labor and delivery bed days that 
did not follow a routine bed day, and will affect both the numerator 
and the denominator of the Medicaid fraction. We are not able to 
provide a detailed analysis of the potential of this policy change 
because the impact will depend on both the number of days associated 
with Medicaid-eligible patients who occupied an ancillary labor and 
delivery bed at some point after being admitted as an inpatient, but 
prior to occupying a routine bed, and the number of such days 
associated with similarly situated non-Medicaid-eligible patients. 
We do not have data on either of these numbers either in the 
aggregate or for individual hospitals. Furthermore, the impact would 
depend on the proportion of Medicaid to the total of such days for 
each hospital. We expect that the Medicaid fraction for some 
hospitals will increase while it will decrease for other hospitals. 
Therefore, we estimate that the overall impact of this policy change 
will be negligible.
    Comment: One comment stated that ``nearly all hospital will see 
there [sic] DSH payment go up and by a substantial amount.'' The 
commenter stated that overall utilization is ``substantially 
higher'' than overall hospital utilization as the result of a 
Medicaid law that requires Medicaid coverage for labor and delivery 
services for patients who would not normally have full-scope 
Medicaid. The commenter stated that it is important that the 
financial impact of this policy is not understated and that 
hospitals need to be able to budget for the increase in Medicare DSH 
funding from this policy. Finally, the commenter stated that if the 
proposed policy was applied retroactively, it would result in large 
payment increases for thousands of cost reports for many years as 
well as the administrative costs to reopen and revise the cost 
reports. The commenter stated that there are many appeals and 
requests for cost report reopenings based on the proposed policy and 
that the costs and potential payments should be identified and 
quantified in the final rule.
    Response: It appears that the commenter is concerned with the 
potential financial impact of the proposed policy because the 
commenter believed that the policy will necessarily increase the 
Medicaid fraction of the Medicare DSH calculation for all hospitals 
and thereby increase overall DSH payment adjustments. The commenter 
appeared particularly concerned with the ``Emergency Medicaid'' laws 
under section 1903(v) of the Act that requires that an alien who is 
not lawfully admitted for permanent residence or otherwise 
permanently residing in the United states under the color of the law 
be covered under Medicaid for the treatment of an ``emergency 
medical condition'' as defined by the statute. We disagree with the 
commenter that the adoption of the proposed policy will necessarily 
increase overall Medicare DSH payments for the reasons discussed 
below.
    First, we reiterate that this policy change relates only to 
labor and delivery days when a patient was (1) admitted as an 
inpatient to the hospital and (2) occupied an ancillary labor and 
delivery bed prior to occupying a routine bed. Patients who occupied 
a routine bed upon admission or prior to occupying an ancillary 
labor and delivery bed were already counted in the DPP. In most 
cases, there would only be one day (i.e., the day that the patient 
occupied the ancillary labor and delivery bed prior to occupying the 
routine bed) that would be added to the DPP under the new policy 
that was not already included under the previous policy. Under both 
the previous and new policy all days that a patient occupied a 
routine bed are already included in the DPP. Therefore, the new 
policy would potentially only add one day in most cases to the DPP 
per maternity patient to the extent the hospital placed such 
patients in an ancillary labor and delivery bed after admission as 
an inpatient to the hospital, but prior to placing the patient in a 
routine bed. To the extent that the maternity patient was a 
Medicaid-eligible patient, the day would be added to both the 
numerator and denominator of the Medicaid fraction of the DPP; to 
the extent that the patient was not eligible for Medicaid, one day 
would be added just to the denominator of the Medicaid fraction of 
the DPP (thereby lowering the Medicaid ratio).
    Second, we note that the population of aliens, as defined under 
section 1903(v) of the Act, varies from State to State and that, 
even in an area with a relatively high proportion of aliens, the 
potential effect on the Medicaid fractions is limited to the number 
of aliens who are (1) female, (2) pregnant and in the hospital for 
labor and delivery services, and (3) admitted as an inpatient, but 
do not occupy a routine bed prior to occupying a labor and delivery 
bed. Therefore, we do not expect that, even for areas with a large 
population of aliens, there will be a material impact on a 
hospital's Medicare DSH payment adjustments as a result of this 
policy.
    Third, we note that an increase in the Medicaid fraction does 
not necessarily correlate to a proportional increase in the actual 
Medicare DSH adjustment (that is, payment). Rather, the actual 
amount of the adjustment will depend on a number of factors, 
including the Medicare fraction, the hospital's geographic 
designation, the hospital's number of available beds, and, 
ultimately, the hospital's number of Medicare discharges because, by 
definition, the Medicare DSH adjustment is a percentage add-on to 
the hospital's Medicare payments.
    In addition, as we stated in the proposed FY 2010 IPPS/RY 2010 
LTCH PPS proposed rule, with regard to the Medicaid fraction, we are 
not able to provide a detailed analysis of the potential of this 
policy change because the impact will depend on the proportion of 
days associated with Medicaid-eligible patients who occupied an 
ancillary labor and delivery bed at some point after being admitted 
as an inpatient, but prior to occupying a routine bed, to days 
associated with similarly situated non-Medicaid-eligible patients 
relative to a hospital's current Medicaid-to-total-days ratio (which 
would not have included the types of days we proposed to include in 
this policy). We expect that the Medicaid fraction for some 
hospitals will increase while it will decrease for other hospitals. 
Therefore, we estimate that the overall impact of this policy change 
will be negligible.
    In response to the comment concerning the potential impact that 
this policy would have if applied retroactively, we note that the 
change in policy is only effective prospectively, for cost reporting 
periods beginning on or after October 1, 2009. Therefore, it is not 
necessary to estimate payments for prior periods.

2. Change Relating to Calculation of Inpatient Days in Medicaid 
Fraction

    In section V.E.3. of the preamble of this final rule, we discuss 
our decision to allow a hospital to change its methodology of 
reporting days in the numerator of the Medicaid fraction of the DPP 
used in the DSH payment adjustment calculation. Under the change, we 
will allow a hospital to report the Medicaid days in the numerator 
of the Medicaid fraction of the DPP based on one of the following: 
date of discharge; date of admission; or dates of service. Hospitals 
will be permitted to use only one basis for all of the Medicaid days 
for the entire cost reporting period. In addition, under the policy, 
CMS, or its fiscal intermediaries or MACs, has the authority to make 
adjustments to the number of Medicaid days reported to avoid 
counting Medicaid days in one cost reporting period of a hospital 
that may have been reported in a hospital's previous cost reporting 
period. We do not believe that the change in the methodology of 
counting days in the numerator of the Medicaid fraction of the DPP 
will result in any increase in aggregate DSH payments.

3. Change Relating to Exclusion of Observation Beds and Patient Days 
From DSH Calculation

    In section V.E.4. of the preamble of this final rule, we discuss 
our decision to amend the regulations so that patient days 
associated with beds used for observation services for patients who 
are subsequently admitted as an inpatient are no longer included in 
the DPP for calculating the DSH payment adjustment or in the 
available bed day count for calculating the DSH payment adjustment 
and IME payments. Some hospitals may receive increased DSH payment 
adjustments and other hospitals may expect to receive lower DSH 
payment

[[Page 44226]]

adjustments, depending on how the exclusion of observation patient 
days affects the hospital's overall DPP. Overall, we estimate the 
DSH savings associated with this policy will be $10 million for FY 
2010. For IME payment purposes, a decrease in a hospital's number of 
available beds results in an increase in the resident-to-bed ratio. 
The exclusion of observation bed days from the available bed count 
for IME will reduce the available beds, increase the resident-to-bed 
ratio, and, consequently, increase IME payments to teaching 
hospitals. We estimate that Medicare spending for IME will increase 
by approximately $7 million as a result of this policy. As a result, 
we believe that any savings associated with changes in DSH payment 
adjustments will be offset by additional spending for IME payments. 
Therefore, we anticipate the impact of these policy changes will be 
negligible.

F. Effects of Policy Revisions Related to Payment to Hospitals for 
Direct GME

    In section V.G. of the preamble of this final rule, we discuss 
our decision to clarify the definition of a new medical residency 
training program in the regulations by specifying that a new medical 
residency program is one that receives initial accreditation for the 
first time, as opposed to a reaccreditation of a program that 
existed previously at the same or another hospital. When considering 
whether a particular program is a new medical residency training 
program and whether an accreditation is an initial one, we identify 
several supporting factors (such as whether the program director, 
teaching staff, and residents are the same). We will also consider 
whether there previously was a program in the same specialty at a 
hospital that closed and, more generally, whether that program is 
part of the FTE caps of any existing hospital. With respect to GME 
policy regarding Medicare GME affiliation agreements, we discuss our 
addition of a provision to the regulations relating to Medicare GME 
affiliation agreements to specify that a hospital that is new after 
July 1 and that begins training residents for the first time after 
the July 1start date of that academic year will be permitted to 
submit a Medicare GME affiliation agreement prior to the end of its 
cost reporting period in order to participate in an existing 
Medicare GME affiliated group for the remainder of the academic 
year.
    With respect to the first policy regarding a new medical 
residency training program, there is no financial impact on the 
Medicare program because this is a clarification of existing policy 
and is not a policy revision or addition of a new policy. In the 
clarification, we identify and explain the characteristics of a 
medical residency training program that would be indicative of a new 
program rather than one that has been merely relocated from another 
hospital. We also explain that there would be no net increase in the 
national aggregate FTE caps, and therefore, no financial impact, if 
a hospital received a new program adjustment to its FTE cap for a 
program in the same specialty as one that was located at another 
hospital that closed. Further, there is no financial impact related 
to the second policy concerning Medicare GME affiliated groups 
because it does not provide for an increase in the aggregate number 
of resident FTEs. Rather, it merely provides increased flexibility 
for a hospital that is new after July 1 and that begins training 
residents for the first time after the start date of that academic 
year to enter into an existing Medicare GME affiliation agreement 
after July 1, so that, in that academic year, it may train and 
receive IME and direct GME payments relating to FTE for residents 
that will otherwise be counted for IME and direct GME at another 
hospital.

G. Effects of Policy Changes Relating to Hospital Emergency 
Services Under EMTALA

    In section V.H. of the preamble of this final rule, we discuss 
our decision to amend the regulations pertaining to the waiver of 
EMTALA sanctions in an emergency area during an emergency period to 
make the regulations consistent with the statutory language of 
section 1135 of the Act. Specifically, we are revising the existing 
regulations to reflect the Secretary's authority under section 1135 
of the Act to waive or modify requirements for a single health care 
provider, a class of health care providers, or a geographic subset 
of health care providers located within an emergency area during an 
emergency period or portion of an emergency period. We are amending 
the regulations to clarify that, in cases where the Secretary has 
delegated implementation of a waiver of EMTALA sanctions to CMS, CMS 
is also authorized to apply a section 1135 waiver to a subset of the 
emergency area and some or all of the emergency period, as 
necessary. We also are making the regulations consistent with 
section 1135 of the Act by stating in the regulations that a waiver 
of EMTALA sanctions pursuant to an inappropriate transfer only 
applies if the transfer is necessitated by the circumstances of the 
declared emergency. Finally, we are making the regulation text 
consistent with section 1135 of the Act to provide that the 
sanctions waived for an inappropriate transfer or for the relocation 
or redirection of an individual to receive a medical screening 
examination at an alternate location are only in effect if the 
hospital to which the waiver applies does not discriminate on the 
source of an individual's payment or ability to pay. We estimate 
that these changes will have no impact on Medicare expenditures and 
no significant impact on hospitals with emergency departments.

H. Effects of Implementation of Rural Community Hospital 
Demonstration Program

    In section V.I. of the preamble to this final rule, we discuss 
our implementation of section 410A of Public Law 108-173 that 
required the Secretary to establish a demonstration that will modify 
reimbursement for inpatient services for up to 15 small rural 
hospitals. Section 410A(c)(2) requires that ``[i]n conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' There are 
currently 11 hospitals participating in the demonstration; 4 of 
these hospitals were selected to participate in the demonstration as 
of July 1, 2008, as a result of our February 6, 2008 solicitation 
(73 FR 6971).
    As discussed in section V.I. of the preamble to this final rule, 
we will satisfy this budget neutrality requirement by adjusting the 
national IPPS rates by a factor that is sufficient to account for 
the added costs of this demonstration. For this final rule, based on 
more recent data than we had for the proposed rule, we are 
estimating the cost of the demonstration program for FY 2010 for the 
11 currently participating hospitals. (Two hospitals recently 
withdrew from the demonstration, and we are adjusting the estimation 
of the cost of the demonstration for FY 2010 for this final rule to 
reflect this.) The estimated cost of the demonstration for FY 2010 
for 7 of the 11 currently participating hospitals (specifically, the 
7 hospitals that have participated in the demonstration since its 
inception and that still are participating in the demonstration) is 
based on data from their second year cost reports--that is, cost 
reporting periods beginning in CY 2006. We used these cost reports 
because they are the most recent complete cost reports and, thus, we 
believe they enable us to estimate FY 2010 costs for this final rule 
as accurately as possible. In addition, we estimated the cost of the 
demonstration for FY 2010 for the 4 hospitals that joined the 
demonstration in 2008. For 3 of the 4 hospitals that joined the 
demonstration in 2008, we estimate the cost of the demonstration for 
FY 2010 based on data from their cost reports for cost reporting 
periods beginning January 1, 2007 through July 1, 2007. Similarly, 
we used these cost reports because they are the most recent cost 
reports and, thus, we believe they enable us to estimate FY 2010 
costs for these 3 hospitals as accurately as possible. The remaining 
hospital of the 4 that began in 2008 is an Indian Health Service 
provider. Historically, the hospital has not filed standard Medicare 
cost reports. In order to estimate its costs, we used an analysis of 
Medicare inpatient costs and payments submitted by the hospital for 
the cost reporting period of October 1, 2005, through September 30, 
2006. The Medicare cost amount from this analysis for the IHS 
provider is identical to that used in the proposed rule. When we add 
together the estimated costs of the demonstration for FY 2010 for 
the 7 hospitals that have participated in the demonstration since 
its inception and the 4 new hospitals selected in 2008 based on the 
more recent data, the total estimated cost is $15,081,251. This 
estimated amount reflects the difference between the participating 
hospitals' estimated costs under the methodology set forth in Public 
Law 108-173 and the estimated amount the hospitals would have been 
paid under the IPPS.
    Second, because the FY 2005 and FY 2006 cost reports of all 
hospitals participating in the demonstration in its first and second 
years have been finalized, we are able to determine how much the 
cost of the demonstration program exceeded the amount that was 
offset by the budget neutrality

[[Page 44227]]

adjustment for FY 2005 and FY 2006. We note that, for this final 
rule, we had updated data that enabled us to now include the amount 
by which the cost of the demonstration exceeded the amount that was 
offset by the FY 2006 budget neutrality adjustment. For all 13 
hospitals that participated in the demonstration in FY 2005, the 
amount is $7,856,617. For the 10 hospitals with cost reporting 
periods that began in FY 2006, the amount is $4,203,947. The sum of 
these amounts, or the amount by which the cost of the demonstration 
program exceeded the offset of the budget neutrality adjustment for 
FY 2005 and FY 2006, is $12,060,564.
    The budget neutrality adjustment factor applied to the IPPS 
Federal rate to account for the total $27,141,815 in costs for the 
demonstration is 0.999739.

I. Effects of Policy Changes Relating to Payments to Satellite 
Facilities

    In section VII.B. of the preamble of this final rule, we discuss 
our policy change that requires, effective for cost reporting 
periods beginning on or after October 1, 2009, in addition to 
meeting the other criteria in the regulations, that in order to be 
excluded from the IPPS, the governing body of the hospital of which 
the satellite facility is a part cannot be under the control of any 
third entity that controls both the hospital of which the satellite 
facility is a part and the hospital with which the satellite 
facility is co-located. We also are adopting a policy that if a 
hospital and its satellite facility were excluded from the IPPS 
under Sec.  412.22(h) for the most recent cost reporting period 
beginning prior to October 1, 2009, the hospital does not have to 
meet the requirements of Sec.  412.22(h)(2)(iii)(A)(1) with respect 
to that satellite facility in order to retain its IPPS-excluded 
status. However, the creation of any satellite facility that will 
trigger the hospital of which it is a part to comply with the 
additional policies will occur at some point in the future. 
Therefore, we are unable to quantify the impact of the policy 
changes.

J. Effects of Policy Changes Relating to Payments to CAHs

    In section VII.C.2. of the preamble of this final rule, we 
discuss our implementation of section 148 of Public Law 110-275 
(MIPPA). Under our policy, a CAH may receive payment based on 
reasonable cost for outpatient clinical diagnostic laboratory tests 
furnished to an individual who is an outpatient of the CAH (that is, 
receiving outpatient services directly from the CAH) even if the 
individual with respect to whom the laboratory services are 
furnished is not physically present in the CAH at the time the 
specimen is collected. In order for an individual who is not 
physically present in the CAH at the time the specimen is collected 
to be determined to be receiving services directly from the CAH, we 
are requiring that the individual must either receive an outpatient 
service in the CAH or a provider-based facility of the CAH on the 
same day the specimen is collected or the specimen collection must 
be performed by an employee of the CAH. We anticipate that, for FY 
2009 through FY 2016, the cost of implementing section 148 of Public 
Law 110-275 will be less than $50 million per year.
    In section VII.C.3. of the preamble of this final rule, we 
discuss our decision to amend the regulations to make them 
consistent with the plain reading of section 1834(g)(2)(A) of the 
Act. Section 1834(g)(2)(A) of the Act requires that CAHs that select 
the optional method of payment receive payment at 100 percent of 
reasonable cost instead of 101 percent of reasonable cost for 
outpatient facility services. It is difficult for us to quantify the 
payment impact of these changes because we cannot estimate the 
number of CAHs that will be affected by this provision because 
election of the optional method is not permanent; CAHs are only 
required to make the election 30 days prior to the cost reporting 
period for which it is effective. Therefore, we cannot estimate how 
many CAHs will choose to retain the optional method of payment once 
the provision is finalized. Furthermore, the optional method of 
payment is physician-specific. If the physician has not reassigned 
his or her billing rights, the CAH will be paid for that outpatient 
service under the traditional method. We believe we cannot 
accurately estimate the number of physicians who will decide to 
continue to reassign their billing rights to the CAH once the 
provision is finalized. We note that one commenter estimated that 
the CMS proposal will cut payments to CAHs by $22 million in FY 
2010.
    In section VII.C.4. of the preamble of this final rule, we 
discuss the effect CBSA changes made by OMB on CAHs located in areas 
that have been reclassified from rural to urban in FY 2010. We are 
revising the regulations (in the same manner as the revisions that 
were made in FY 2005) to allow CAHs that are located in areas that 
were designated rural in FY 2009 but as a result of implementation 
of the new MSA definitions announced by OMB on November 20, 2008, 
will be located in an MSA effective for FY 2010, 2 years to obtain a 
rural redesignation under Sec.  412.103 in order to retain their CAH 
status. We believe that because virtually all of these facilities 
will be granted rural status by the State, they will retain their 
CAH status. We estimate that these changes will have little or no 
impact on Medicare expenditures.

K. Effects of Policy Changes Relating to Provider-Based Status of 
Entities and Organizations

    In section VII.D. of the preamble of this final rule, we discuss 
our decision to amend the regulations to require facilities that 
furnish only clinical diagnostic laboratory tests and operate as 
part of a CAH to meet the provider-based status rules currently in 
the regulations at Sec.  413.65. If a facility that is part of a CAH 
and furnishes only clinical diagnostic laboratory tests meets the 
provider-based status rules, the CAH will be paid for services 
furnished by the laboratory facility on a reasonable cost basis. If 
a facility that furnishes only clinical diagnostic laboratory tests 
does not meet the provider-based status rules, the services 
furnished in the facility will be paid under the CLFS, unless the 
laboratory specimen is collected from an outpatient of the CAH as 
described in VII.C.2. of the preamble of this final rule. It is 
difficult for us to quantify the payment impact of these changes 
because we cannot estimate the number of CAHs that will be affected 
by this policy. In the FY 2010 IPPS proposed rule, we solicited 
public comments on the impact of this proposed change to our 
provider-based status rules. We did not receive any public comments 
as to how to quantify the payment impact of this policy. We are 
finalizing our policy as proposed, with one modification. In 
response to public comments, we are delaying the effective date of 
the policy until October 1, 2010.

VIII. Effects of Changes in the Capital IPPS

A. General Considerations

    Fiscal year (FY) 2001 was the last year of the 10-year 
transition period established to phase in the PPS for hospital 
capital-related costs. During the transition period, hospitals were 
paid under one of two payment methodologies: fully prospective or 
hold harmless. Under the fully prospective methodology, hospitals 
were paid a blend of the capital Federal rate and their hospital-
specific rate (see Sec.  412.340). Under the hold-harmless 
methodology, unless a hospital elected payment based on 100 percent 
of the capital Federal rate, hospitals were paid 85 percent of 
reasonable costs for old capital costs (100 percent for SCHs) plus 
an amount for new capital costs based on a proportion of the capital 
Federal rate (see Sec.  412.344). As we state in section VI. of the 
preamble of this final rule, with the 10-year transition period 
ending with hospital cost reporting periods beginning on or after 
October 1, 2001 (FY 2002), beginning in FY 2002 capital prospective 
payment system payments for most hospitals are based solely on the 
capital Federal rate. Therefore, we no longer include information on 
obligated capital costs or projections of old capital costs and new 
capital costs, which were factors needed to calculate payments 
during the transition period, for our impact analysis.
    The basic methodology for determining a capital IPPS payment is 
set forth at Sec.  412.312. The basic methodology for calculating 
capital IPPS payments in FY 2010 is as follows:
    (Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for 
hospitals located in Alaska and Hawaii) x (1 + DSH Adjustment Factor 
+ IME adjustment factor, if applicable).
    As discussed in section VI.E.2. of the preamble of this final 
rule, we are deleting Sec.  412.322(d) of the regulations that 
eliminated the IME adjustment factor for FY 2010, the third year of 
a 3-year transition period. Therefore, the IME adjustment factor has 
been restored for FY 2010. We also note that the 50-percent 
reduction to capital IME adjustments for FY 2009 was repealed by 
section 4301(b)(1) of the ARRA. Thus, the full IME adjustment was 
restored for FY 2009, as well. In addition to the other adjustments, 
hospitals may also receive outlier payments for those cases that 
qualify under the threshold established for each fiscal year.
    The data used in developing the impact analysis presented below 
are taken from the

[[Page 44228]]

March 2009 update of the FY 2008 MedPAR file and the March 2009 
update of the Provider-Specific File (PSF) that is used for payment 
purposes. Although the analyses of the changes to the capital 
prospective payment system do not incorporate cost data, we used the 
March 2009 update of the most recently available hospital cost 
report data (FYs 2006 and 2007) to categorize hospitals. Our 
analysis has several qualifications. We use the best data available 
and make assumptions about case-mix and beneficiary enrollment as 
described below. In addition, as discussed in section III. of the 
Addendum to this final rule, we established for FY 2008 (-0.6 
percent) and for FY 2009 (-0.9 percent) a cumulative permanent 
adjustment of -1.5 percent to the national capital rate to account 
for improvements in documentation and coding under the MS-DRGs in FY 
2010. Furthermore, due to the interdependent nature of the IPPS, it 
is very difficult to precisely quantify the impact associated with 
each change. In addition, we draw upon various sources for the data 
used to categorize hospitals in the tables. In some cases (for 
instance, the number of beds), there is a fair degree of variation 
in the data from different sources. We have attempted to construct 
these variables with the best available sources overall. However, 
for individual hospitals, some miscategorizations are possible.
    Using cases from the March 2009 update of the FY 2008 MedPAR 
file, we simulated payments under the capital PPS for FY 2009 and FY 
2010 for a comparison of total payments per case. Any short-term, 
acute care hospitals not paid under the general IPPS (Indian Health 
Service hospitals and hospitals in Maryland) are excluded from the 
simulations. The final capital rates and factors for FY 2009 were 
published in a subsequent notice in the Federal Register (73 FR 
57891).
    As we explain in section III.A.4. of the Addendum to this final 
rule, payments are no longer made under the regular exceptions 
provision under Sec. Sec.  412.348(b) through (e). Therefore, we no 
longer use the actuarial capital cost model (described in Appendix B 
of the August 1, 2001 proposed rule (66 FR 40099)). We modeled 
payments for each hospital by multiplying the capital Federal rate 
by the GAF and the hospital's case-mix. We then added estimated 
payments for indirect medical education, disproportionate share, and 
outliers, if applicable. For purposes of this impact analysis, the 
model includes the following assumptions:
    <bullet> We estimate that the Medicare case-mix index will 
increase by 1.0 percent in both FYs 2009 and 2010.
    <bullet> We estimate that the Medicare discharges will be 
approximately 13 million in both FY 2009 and FY 2010.
    <bullet> The capital Federal rate was updated beginning in FY 
1996 by an analytical framework that considers changes in the prices 
associated with capital-related costs and adjustments to account for 
forecast error, changes in the case-mix index, allowable changes in 
intensity, and other factors. As discussed in section III.1.a. of 
the Addendum to this final rule, the FY 2010 update is 1.4 percent.
    <bullet> In addition to the FY 2010 update factor, the FY 2010 
capital Federal rate was calculated based on a GAF/DRG budget 
neutrality factor of 0.9990, an outlier adjustment factor of 0.9477, 
and a (special) exceptions adjustment factor of 0.9998.
    <bullet> For FY 2010, as discussed in section VI.E.1.of the 
preamble of this final rule, we are not applying an additional 
adjustment to the FY 2010 national capital rate for changes in 
documentation and coding that are expected to increase case-mix 
under the MS-DRGs. In the FY 2008 IPPS final rule with comment 
period (72 FR 47186), we established adjustments to the IPPS rates 
based on the Office of the Actuary projected case-mix growth 
resulting from improved documentation and coding of 1.2 percent for 
FY 2008, 1.8 percent for FY 2009, and 1.8 percent for FY 2010. 
However, we reduced the documentation and coding adjustment to -0.6 
percent for FY 2008. For FY 2009, we applied an adjustment of 0.9 
percent, consistent with section 7 of Public Law 110-90, for a 
permanent cumulative adjustment of -1.5 percent (that is, a factor 
of 0.985).

B. Results

    We used the actuarial model described above to estimate the 
potential impact of our changes for FY 2010 on total capital 
payments per case, using a universe of 3517 hospitals. As described 
above, the individual hospital payment parameters are taken from the 
best available data, including the March 2009 update of the FY 2008 
MedPAR file, the March 2009 update to the PSF, and the most recent 
cost report data from the March 2009 update of HCRIS. In Table III, 
we present a comparison of estimated total payments per case for FY 
2009 compared to FY 2010 based on the FY 2010 payment policies. 
Column 2 shows estimates of payments per case under our model for FY 
2009. Column 3 shows estimates of payments per case under our model 
for FY 2010. Column 4 shows the total percentage change in payments 
from FY 2009 to FY 2010. The change represented in Column 4 includes 
the proposed 1.4 percent update to the capital Federal rate, other 
changes in the adjustments to the capital Federal rate (for example, 
the restoration of the teaching adjustment for FY 2010). The 
comparisons are provided by: (1) Geographic location; (2) region; 
and (3) payment classification.
    The simulation results show that, on average, capital payments 
per case in FY 2010 are expected to increase as compared to capital 
payments per case in FY 2009. The capital rate for FY 2010 will 
increase 1.4 percent as compared to the FY 2009 capital rate. The 
changes to the GAFs are expected to result in a slight decrease in 
capital payments largely due to the expiration of section 508 of 
Public Law 108-173. We also are estimating a decrease in outlier 
payments from FY 2009 to FY 2010 due primarily to an increase in the 
fixed-loss amount. Our impact analysis includes actuarial 
assumptions of growth from FY 2009 to FY 2010 resulting in an 
increase in aggregate capital payments. The net result of these 
changes is an estimated 1.9 percent change in capital payments per 
discharge from FY 2009 to FY 2010 for all hospitals (as shown below 
in Table III).
    The geographic comparison shows that, on average, all urban 
hospitals are expected to experience a 2.0 percent increase in 
capital IPPS payments per case in FY 2010 as compared to FY 2009, 
while hospitals in large urban areas are expected to experience a 
2.1 percent increase in capital IPPS payments per case in FY 2010 as 
compared to FY 2009. Capital IPPS payments per case for rural 
hospitals are expected to increase 1.5 percent.
    All regions are estimated to experience an increase in total 
capital payments per case from FY 2009 to FY 2010. These increases 
vary by region and range from a 0.7 percent increase in the New 
England rural region to a 2.8 percent increase in the Mountain urban 
region.
    By type of ownership, voluntary and proprietary hospitals each 
are estimated to experience an increase of 1.9 percent. Government 
hospitals are projected to have a slightly larger increase of 2.0 
percent in capital payments per case.
    Section 1886(d)(10) of the Act established the MGCRB. Before FY 
2005, hospitals could apply to the MGCRB for reclassification for 
purposes of the standardized amount, wage index, or both. Section 
401(c) of Public Law 108-173 equalized the standardized amounts 
under the operating IPPS. Therefore, beginning in FY 2005, there is 
no longer reclassification for the purposes of the standardized 
amounts; however, hospitals still may apply for reclassification for 
purposes of the wage index for FY 2010. Reclassification for wage 
index purposes also affects the GAFs because that factor is 
constructed from the hospital wage index.
    To present the effects of the hospitals being reclassified for 
FY 2010, we show the average capital payments per case for 
reclassified hospitals for FY 2009. All classifications of 
reclassified hospitals are expected to experience an increase in 
capital payments in FY 2010 as compared to FY 2009. Both urban 
reclassified and urban non-reclassified hospitals are expected to 
have an increase in capital payments of 2.0 percent, while capital 
payments for rural reclassified and rural non-reclassified hospitals 
are estimated to increase 1.7 percent and 1.1 percent, respectively. 
Other reclassified hospitals (that is, hospitals reclassified under 
section 1886(d)(8)(B) of the Act) are expected to experience an 
increase of 1.9 percent in capital payment from FY 2009 to FY 2010.

[[Page 44229]]



                                Table III--Comparison of Total Payments Per Case
                                 [FY 2009 Payments Compared to FY 2010 Payments]
----------------------------------------------------------------------------------------------------------------
                                                                            Average FY   Average FY
                                                               Number of       2009         2010
                                                               hospitals    payments/    payments/      Change
                                                                               case         case
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
    All hospitals...........................................        3,517          788          803          1.9
    Large urban areas (populations over 1 million)..........        1,377          869          887          2.1
    Other urban areas (populations of 1 million or fewer)...        1,148          780          794          1.8
    Rural areas.............................................          992          546          554          1.5
    Urban hospitals.........................................        2,525          829          845          2.0
        0-99 beds...........................................          634          654          665          1.7
        100-199 beds........................................          808          712          724          1.8
        200-299 beds........................................          466          779          794          2.0
        300-499 beds........................................          426          858          874          1.9
        500 or more beds....................................          191        1,003        1,024          2.1
    Rural hospitals.........................................          992          546          554          1.5
        0-49 beds...........................................          349          437          444          1.6
        50-99 beds..........................................          370          507          514          1.5
        100-149 beds........................................          164          552          561          1.5
        150-199 beds........................................           62          600          610          1.6
        200 or more beds....................................           42          671          680          1.3
By Region:
    Urban by Region.........................................        2,525          829          845          2.0
        New England.........................................          120          857          879          2.6
        Middle Atlantic.....................................          344          885          902          1.9
        South Atlantic......................................          388          787          801          1.8
        East North Central..................................          397          807          820          1.6
        East South Central..................................          160          742          756          1.9
        West North Central..................................          165          815          833          2.2
        West South Central..................................          346          772          787          1.9
        Mountain............................................          163          842          866          2.8
        Pacific.............................................          391          978          998          2.1
        Puerto Rico.........................................           51          370          377          2.0
    Rural by Region.........................................          992          546          554          1.5
        New England.........................................           24          728          733          0.7
        Middle Atlantic.....................................           70          558          572          2.5
        South Atlantic......................................          171          539          547          1.5
        East North Central..................................          122          568          576          1.4
        East South Central..................................          176          496          505          1.8
        West North Central..................................          101          567          574          1.1
        West South Central..................................          224          508          512          0.8
        Mountain............................................           72          547          559          2.3
        Pacific.............................................           32          693          701          1.2
By Payment Classification:
    All hospitals...........................................        3,517          788          803          1.9
        Large urban areas (populations over 1 million)......        1,422          867          885          2.1
        Other urban areas (populations of 1 million of              1,171          779          793          1.8
         fewer).............................................
        Rural areas.........................................          924          545          553          1.4
    Teaching Status:
        Non-teaching........................................        2,475          672          684          1.8
        Fewer than 100 Residents............................          804          793          808          1.9
        100 or more Residents...............................          238        1,123        1,147          2.1
        Urban DSH:
            100 or more beds................................        1,538          856          873          2.0
            Less than 100 beds..............................          346          585          596          1.8
        Rural DSH:
            Sole Community (SCH/EACH).......................          397          476          484          1.6
            Referral Center (RRC/EACH)......................          207          602          611          1.5
            Other Rural:
                100 or more beds............................           34          540          548          1.5
                Less than 100 beds..........................          150          450          457          1.4
    Urban teaching and DSH:
        Both teaching and DSH...............................          802          929          948          2.1
        Teaching and no DSH.................................          178          810          823          1.6
        No teaching and DSH.................................        1,082          715          729          2.0
        No teaching and no DSH..............................          531          733          745          1.7
    Rural Hospital Types:
        Non special status hospitals........................        2,467          832          848          1.9
        RRC/EACH............................................           62          725          743          2.5
        SCH/EACH............................................           38          682          693          1.6
        Medicare-dependent hospitals (MDH)..................           10          481          488          1.4
        SCH, RRC and EACH...................................           16          792          809          2.2

[[Page 44230]]

 
Hospitals Reclassified by the Medicare Geographic
 Classification Review Board:
    FY2010 Reclassifications:
        All Urban Reclassified..............................          456          825          841          2.0
        All Urban Non-Reclassified..........................        2,045          831          847          2.0
        All Rural Reclassified..............................          351          591          601          1.7
        All Rural Non-Reclassified..........................          579          479          485          1.1
        Other Reclassified Hospitals (Section 1886(d)(8)(B))           54          559          569          1.9
    Type of Ownership:
        Voluntary...........................................        2,014          804          819          1.9
        Proprietary.........................................          860          722          736          1.9
        Government..........................................          583          784          800          2.0
    Medicare Utilization as a Percent of Inpatient Days:
        0-25................................................          317        1,005        1,032          2.6
        25-50...............................................        1,433          869          886          2.0
        50-65...............................................        1,331          686          697          1.6
        Over 65.............................................          308          598          608          1.7
----------------------------------------------------------------------------------------------------------------

IX. Effects of Payment Rate Changes and Policy Changes Under the LTCH 
PPS

A. Introduction and General Considerations

    In section VIII. of the preamble of this final rule, we are 
setting forth the annual update to the payment rates for the LTCH 
PPS for RY 2010. In the preamble, we specify the statutory authority 
for the provisions that are presented, identify those policies where 
discretion has been exercised, and present rationale for our 
decisions as well as alternatives that were considered. In this 
section of Appendix A to this final rule, we discuss the impact of 
the changes to the payment rates, factors, and other payment rate 
policies related to the LTCH PPS that are presented in the preamble 
of this final rule in terms of their estimated fiscal impact on the 
Medicare budget and on LTCHs.
    Currently, our database of 399 LTCHs includes the data for 81 
nonprofit (voluntary ownership control) LTCHs and 267 proprietary 
LTCHs. Of the remaining 51 LTCHs, 12 LTCHs are government-owned and 
operated and the ownership type of the other 39 LTCHs is unknown. In 
the impact analysis, we are using the rates, factors, and policies 
presented in this final rule, including updated wage index values 
and the labor-related share, and the best available claims and CCR 
data to estimate the change in payments for the 2010 LTCH PPS rate 
year. The standard Federal rate for RY 2009 is $39,114.36. As 
discussed in section V.A.2. of the Addendum to this final rule, 
consistent with our historical practice, we are updating the 
standard Federal rate for RY 2009 by 2.0 percent in order to 
establish the RY 2010 standard Federal rate at $39,896.65. Based on 
the best available data for the 399 LTCHs in our database, we 
estimate that the update to the standard Federal rate for RY 2010 
(discussed in section VIII. of the preamble of this final rule) and 
the changes to the area wage adjustment (discussed in section V.A. 
of the Addendum to this final rule) for the 2010 LTCH PPS rate year, 
in addition to an estimated increase in HCO payments and an 
estimated increase in SSO payments, will result in an increase in 
estimated payments from the 2009 LTCH PPS rate year of approximately 
$153 million (or about 3.3 percent). Based on the 399 LTCHs in our 
database, we estimate RY 2009 LTCH PPS payments to be approximately 
$4.609 billion and RY 2010 LTCH PPS payments to be approximately 
$4.762 billion. Because the combined distributional effects and 
estimated changes to the Medicare program payments would be greater 
than $100 million, this final rule is considered a major economic 
rule, as defined in this section. We note the approximately $153 
million for the projected increase in estimated aggregate LTCH PPS 
payments from RY 2009 to RY 2010 does not reflect changes in LTCH 
admissions or case-mix intensity in estimated LTCH PPS payments, 
which also would affect overall payment changes.
    The projected 3.3 percent increase in estimated payments per 
discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate 
year is attributable to several factors, including the 2.0 percent 
increase to the standard Federal rate and projected increases in 
estimated HCO and SSO payments. As Table IV shows, the change 
attributable solely to the standard Federal rate is projected to 
result in an increase of 1.8 percent in estimated payments per 
discharge from RY 2009 to RY 2010, on average, for all LTCHs, while 
the changes to the area wage adjustment are projected to result in a 
slight decrease in estimated payments, on average, for all LTCHs 
(Columns 6 and 7 of Table IV, respectively). We note that because 
payments for cost-based SSO cases and a portion of payments for SSO 
cases that are paid based on the ``blend'' option (that is, SSO 
cases paid under Sec.  412.529(c)(2)(iv)) are not affected by the 
update to the standard Federal rate, we estimate that the effect of 
the 2.0 percent update to the standard Federal rate will result in a 
1.8 percent increase (as shown in Column 6 of Table IV) on estimated 
aggregate LTCH PPS payments for all LTCH PPS cases, including SSO 
cases.
    While the effects of the estimated increase in SSO and HCO 
payments and the change to the standard Federal rate are projected 
to increase estimated payments from RY 2009 to RY 2010, the changes 
to the area wage adjustment from RY 2009 to RY 2010 are expected to 
result in a slight decrease in estimated aggregate LTCH PPS payments 
from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year 
(Column 7 of Table IV). As discussed in section V.B. of the Addendum 
to this final rule, we are updating the wage index values for FY 
2010 based on the most recent available data. In addition, we are 
increasing the labor-related share slightly from 75.662 percent to 
75.779 percent under the LTCH PPS for RY 2010 based on the most 
recent available data on the relative importance of the labor-
related share of operating and capital costs of the RPL market 
basket (also discussed in section VIII.C.2. of this final rule).
    We note that the overall percent change in estimated LTCH 
payments from RY 2009 to RY 2010 for all changes (shown in Column 8) 
cannot be determined by adding the incremental effect of the 
standard Federal rate (Column 6) and the area wage adjustment 
changes (Column 7) on estimated aggregate LTCH PPS payments because 
each of those two columns are intended to show the isolated impact 
of the respective change (that is, the change to the standard 
Federal rate or the change to the area wage adjustment) on estimated 
payments for RY 2010 as compared to RY 2009, but the interactive 
effects resulting from both the change to the standard Federal rate 
and the change to the area wage adjustment, as well as estimated 
changes to HCO and SSO payments, are not reflected in each of these 
columns. However, the interactive effects of all changes, including 
the change in estimated HCO and SSO payments, are reflected in the 
estimated change in payments for all changes for RY 2010 as compared 
to RY 2009 (shown in Column 8 of Table IV).
    Notwithstanding this limitation, the projected increase in 
payments per discharge from RY 2009 to RY 2010 is 3.3 percent

[[Page 44231]]

(shown in Column 8). This projected increase in payments is 
attributable to the impacts of the change to the standard Federal 
rate (1.8 percent in Column 6) and the change due to the area wage 
adjustment (-0.1 percent in Column 7), and is also due to the effect 
of the estimated increase in payments for HCO cases and SSO cases in 
RY 2010 as compared to RY 2009. That is, estimated total HCO 
payments are projected to increase from RY 2009 to RY 2010 in order 
to ensure that estimated HCO payments will be 8 percent of total 
estimated LTCH PPS payments in RY 2010. As discussed in detail in 
section V. of the Addendum to this final rule, an analysis of the 
most recent available LTCH PPS claims data (that is, FY 2008 claims 
from the March 2009 update of the MedPAR files) indicates that the 
RY 2009 HCO threshold of $22,960 may result in HCO payments in RY 
2009 that fall below the estimated 8 percent. Specifically, we 
currently estimate that HCO payments will be approximately 6.8 
percent of estimated total LTCH PPS payments in RY 2009. 
Consequently, it is necessary to decrease the HCO threshold for RY 
2010 in order to ensure that estimated HCO payments will be 8 
percent of total estimated LTCH PPS payments in RY 2010. We estimate 
that the impact of the increase in HCO payments would result in 
approximately a 1.2 percent increase in estimated payments from RY 
2009 to RY 2010 on average for all LTCHs. Furthermore, in 
calculating the estimated increase in payments from RY 2009 to RY 
2010 for HCO and SSO cases, we increased estimated costs by the 
applicable market basket percentage increase as projected by our 
actuaries. We note that estimated payments for all SSO cases 
comprise approximately 15 percent of estimated total LTCH PPS 
payments, and estimated payments for HCO cases comprise 
approximately 8 percent of estimated total LTCH PPS payments. 
Payments for HCO cases are based on 80 percent of the estimated cost 
above the HCO threshold, while the majority of the payments for SSO 
cases (over 67 percent) are based on the estimated cost of the SSO 
case. A thorough discussion of the regulatory impact analysis for 
the changes presented in this final rule can be found below in 
section V. of the Addendum to this final rule.
    As we discuss in detail throughout this final rule, based on the 
most recent available data, we believe that the provisions of this 
final rule relating to the LTCH PPS will result in an increase in 
estimated aggregate LTCH PPS payments and that the resulting LTCH 
PPS payment amounts result in appropriate Medicare payments.

B. Impact on Rural Hospitals

    For purposes of section 1102(b) of the Act, we define a small 
rural hospital as a hospital that is located outside of a 
Metropolitan Statistical Area and has fewer than 100 beds. As shown 
in Table IV, we are projecting a 4.2 percent increase in estimated 
payments per discharge for the 2010 LTCH PPS rate year as compared 
to the 2009 LTCH PPS rate year for rural LTCHs that will result from 
the changes presented in this final rule (that is, the update to the 
standard Federal rate discussed in section V.A. of the Addendum to 
this final rule and the changes to the area wage adjustment as 
discussed in section V.B. of the Addendum to this final rule) as 
well as the effect of estimated changes to HCO and SSO payments. 
This estimated impact is based on the data for the 26 rural LTCHs in 
our database of 399 LTCHs, for which complete data were available.
    The estimated increase in LTCH PPS payments from the 2009 LTCH 
PPS rate year to the 2010 LTCH PPS rate year for rural LTCHs is 
primarily due to the higher than average impacts from the change to 
the standard Federal rate (1.9 percent) and changes to the area wage 
adjustment (0.4 percent). We believe that the changes to the area 
wage adjustment presented in this final rule (that is, the use of 
updated wage data and the change in the labor-related share) would 
result in accurate and appropriate LTCH PPS payments in RY 2010 
because they are based on the most recent available data. Such 
updated data appropriately reflect national differences in area wage 
levels and appropriately identifies the portion of the standard 
Federal rate that should be adjusted to account for such differences 
in area wages, thereby resulting in accurate and appropriate LTCH 
PPS payments. Furthermore, rural LTCHs are projected to experience a 
higher than average increase in estimated HCO payments in RY 2010, 
which also contributes to the estimated higher than average percent 
change in payments per discharge from RY 2009 to RY 2010. That is, 
our current estimate shows that, for rural LTCHs, the increase in 
HCO payments in RY 2010 will be higher than the average increase 
when compared to all hospitals.

C. Anticipated Effects of LTCH PPS Payment Rate Change and Policy 
Changes

    We discuss the impact of the changes to the payment rates, 
factors, and other payment rate policies under the LTCH PPS for RY 
2010 (in terms of their estimated fiscal impact on the Medicare 
budget and on LTCHs) in section VIII. of the preamble of this final 
rule.

1. Budgetary Impact

    Section 123(a)(1) of the BBRA requires that the PPS developed 
for LTCHs ``maintain budget neutrality.'' We believe that the 
statute's mandate for budget neutrality applies only to the first 
year of the implementation of the LTCH PPS (that is, FY 2003). 
Therefore, in calculating the FY 2003 standard Federal rate under 
Sec.  412.523(d)(2), we set total estimated payments for FY 2003 
under the LTCH PPS so that estimated aggregate payments under the 
LTCH PPS were estimated to equal the amount that would have been 
paid if the LTCH PPS had not been implemented.
    As discussed in section IX.A. of this Appendix A, we project an 
increase in aggregate LTCH PPS payments in RY 2010 of approximately 
$153 million (or 3.3 percent) based on the 399 LTCHs in our 
database.

2. Impact on Providers

    The basic methodology for determining a per discharge LTCH PPS 
payment is set forth in Sec.  412.515 through Sec.  412.536. In 
addition to the basic MS-LTC-DRG payment (standard Federal rate 
multiplied by the MS-LTC-DRG relative weight), we make adjustments 
for differences in area wage levels, COLA for Alaska and Hawaii, and 
SSOs. Furthermore, LTCHs may also receive HCO payments for those 
cases that qualify based on the threshold established each rate 
year.
    To understand the impact of the changes to the LTCH PPS payments 
presented in this final rule on different categories of LTCHs for 
the 2010 LTCH PPS rate year, it is necessary to estimate payments 
per discharge for the 2009 LTCH PPS rate year using the rates, 
factors and policies established in the RY 2009 LTCH PPS final rule 
(73 FR 26788 through 26874) and the FY 2009 GROUPER (Version 26.0) 
and relative weights established in the FY 2009 IPPS final rule (73 
FR 23537 through 23617). It is also necessary to estimate the 
payments per discharge that would be made under the LTCH PPS rates, 
factors, policies, and GROUPER for the 2010 LTCH PPS rate year (as 
discussed in VIII. of the preamble and section V. of the Addendum to 
this final rule). These estimates of RY 2009 and RY 2010 LTCH PPS 
payments are based on the best available LTCH claims data and other 
factors, such as the application of inflation factors to estimate 
costs for SSO and HCO cases in each year. We also evaluated the 
change in estimated 2009 LTCH PPS rate year payments to estimated 
2010 LTCH PPS rate year payments (on a per discharge basis) for each 
category of LTCHs.
    Hospital groups were based on characteristics provided in the 
OSCAR data, FY 2004 through FY 2006 cost report data in HCRIS, and 
PSF data. Hospitals with incomplete characteristics were grouped 
into the ``unknown'' category. Hospital groups include the 
following:
    <bullet> Location: large urban/other urban/rural.
    <bullet> Participation date.
    <bullet> Ownership control.
    <bullet> Census region.
    <bullet> Bed size.
    To estimate the impacts of the payment rates and policy changes 
among the various categories of existing providers, we used LTCH 
cases from the FY 2008 MedPAR file to estimate payments for RY 2009 
and to estimate payments for RY 2010 for 399 LTCHs. While currently 
there are just under 400 LTCHs, the most recent growth is 
predominantly in for-profit LTCHs that primarily provide respiratory 
and ventilator-dependent patient care. We believe that the 
discharges based on the FY 2008 MedPAR data for the 399 LTCHs in our 
database, which includes 267 proprietary LTCHs, provide sufficient 
representation in the MS-LTC-DRGs containing discharges for patients 
who received LTCH care for the most commonly treated LTCH patients' 
diagnoses.

3. Calculation of Prospective Payments

    For purposes of this impact analysis, to estimate per discharge 
payments under the LTCH PPS, we simulated payments on a case-by-case 
basis using LTCH claims from the FY 2008 MedPAR files. For modeling 
estimated LTCH PPS payments for RY 2009, we applied the RY 2009 
standard Federal rate (that is, $39,114.36, which is effective for 
LTCH discharges occurring on or after July 1, 2008, and through 
September 30, 2009). For modeling estimated LTCH PPS payments for

[[Page 44232]]

RY 2010, we applied the RY 2010 standard Federal rate of $39,896.65, 
which will be effective for LTCH discharges occurring on or after 
October 1, 2009, and through September 30, 2010).
    Furthermore, in modeling estimated LTCH PPS payments for both RY 
2009 and RY 2010 in this impact analysis, we applied the RY 2009 and 
RY 2010 adjustments for area wage differences and the COLA for 
Alaska and Hawaii. Specifically, we adjusted for area wage 
differences for estimated 2009 LTCH PPS rate year payments using the 
current LTCH PPS labor-related share of 75.662 percent (73 FR 
26815), the wage index values established in the Tables 1 and 2 of 
the Addendum to the RY 2009 final rule (73 FR 26840 through 26863) 
and the COLA factors established in Table III of the preamble of the 
RY 2009 final rule (73 FR 26819). Similarly, we adjusted for area 
wage differences for estimated 2010 LTCH PPS rate year payments 
using the LTCH PPS RY 2010 labor-related share of 75.779 percent 
(section VIII.C.2. of the preamble of this final rule), the RY 2010 
wage index values presented in Tables 12A and 12B of the Addendum to 
this final rule, and the RY 2010 COLA factors shown in the table in 
section V. of the Addendum to this final rule.
    As discussed above, our impact analysis reflects an estimated 
change in payments for SSO cases as well as an estimated increase in 
payments for HCO cases (as described in section V.C. of the Addendum 
to this final rule). In modeling payments for SSO and HCO cases in 
RY 2009, we applied an inflation factor of 1.025 percent (determined 
by OACT) to the estimated costs of each case determined from the 
charges reported on the claims in the FY 2008 MedPAR files and the 
best available CCRs from the March 2009 update of the PSF. In 
modeling payments for SSO and HCO cases in RY 2010, we applied an 
inflation factor of 1.051 (determined by OACT) to the estimated 
costs of each case determined from the charges reported on the 
claims in the FY 2008 MedPAR files and the best available CCRs from 
the March 2009 update of the PSF.
    These impacts reflect the estimated ``losses'' or ``gains'' 
among the various classifications of LTCHs from the 2009 LTCH PPS 
rate year to the 2010 LTCH PPS rate year based on the payment rates 
and policy changes presented in this final rule. Table IV 
illustrates the estimated aggregate impact of the LTCH PPS among 
various classifications of LTCHs.
    <bullet> The first column, LTCH Classification, identifies the 
type of LTCH.
    <bullet> The second column lists the number of LTCHs of each 
classification type.
    <bullet> The third column identifies the number of LTCH cases.
    <bullet> The fourth column shows the estimated payment per 
discharge for the 2009 LTCH PPS rate year (as described above).
    <bullet> The fifth column shows the estimated payment per 
discharge for the 2010 LTCH PPS rate year (as described above).
    <bullet> The sixth column shows the percentage change in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year for changes to the standard Federal rate 
(as discussed in section V. of the Addendum to this final rule).
    <bullet> The seventh column shows the percentage change in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year for changes to the area wage adjustment 
at Sec.  412.525(c) (as discussed in section V.B.4. of the Addendum 
to this final rule).
    <bullet> The eighth column shows the percentage change in 
estimated payments per discharge from the 2009 LTCH PPS rate year 
(Column 4) to the 2010 LTCH PPS rate year (Column 5) for all changes 
(and includes the effect of estimated changes to HCO and SSO 
payments).

                            Table IV--Impact of Payment Rate and Payment Rate Policy Changes to LTCH PPS Payments for RY 2010
                          [Estimated 2009 LTCH PPS Rate Year Payments Compared to Estimated 2010 LTCH PPS Rate Year Payments*]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 Percent
                                                                                                                   Percent      change in
                                                                                                                  change in     estimated      Percent
                                                                                                                  estimated   payments per    change in
                                                                                     Average RY    Average RY   payments per    discharge   payments per
                                                          Number of     Number of     2009 LTCH     2010 LTCH     discharge   from RY 2009    discharge
                  LTCH classification                       LTCHs       LTCH PPS      PPS rate      PPS rate    from RY 2009   to RY 2010   from RY 2009
                                                                          cases     year payment  year payment   to RY 2010    for changes   to RY 2010
                                                                                    per case \1\  per case \2\   for changes   to the area     for all
                                                                                                                   to the         wage       changes \5\
                                                                                                                federal rate   adjustment
                                                                                                                     \3\           \4\
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1)                                                              (2)           (3)           (4)           (5)           (6)           (7)           (8)
--------------------------------------------------------------------------------------------------------------------------------------------------------
ALL PROVIDERS.........................................           399       131,214       $35,127       $36,293           1.8          -0.1           3.3
BY LOCATION:
    RURAL.............................................            26         5,844        30,336        31,597           1.9           0.4           4.2
    URBAN.............................................           373       125,370        35,350        36,512           1.7          -0.1           3.3
        LARGE.........................................           191        75,370        36,748        37,979           1.7             0           3.4
        OTHER.........................................           182        50,000        33,244        34,301           1.8          -0.2           3.2
BY PARTICIPATION DATE:
    BEFORE OCT. 1983..................................            17         6,666        31,248        32,535           1.7           0.6           4.1
    OCT. 1983--SEPT. 1993.............................            44        18,426        35,496        36,829           1.7           0.2           3.8
    OCT. 1993--SEPT. 2002.............................           191        66,503        34,699        35,791           1.8          -0.1           3.1
    AFTER OCTOBER 2002................................           140        38,506        36,290        37,474           1.8          -0.2           3.3
    UNKNOWN PARTICIPATION DATE........................             7         1,113        37,590        39,155           1.7           0.4           4.2
BY OWNERSHIP TYPE:
    VOLUNTARY.........................................            81        21,655        35,546        36,810           1.7          -0.2           3.6
    PROPRIETARY.......................................           267        99,479        34,738        35,839           1.8             0           3.2
    GOVERNMENT........................................            12         1,904        41,093        42,674           1.6          -0.3           3.9
    UNKNOWN OWNERSHIP TYPE............................            39         8,176        37,364        38,969           1.8           0.2           4.3
BY REGION:
    NEW ENGLAND.......................................            15         7,916        30,685        32,030           1.7           0.8           4.4
    MIDDLE ATLANTIC...................................            29         8,180        36,267        37,172           1.7          -0.4           2.5
    SOUTH ATLANTIC....................................            49        13,555        39,848        41,175           1.7          -0.3           3.3
    EAST NORTH CENTRAL................................            67        19,630        38,943        39,870           1.7          -0.8           2.4
    EAST SOUTH CENTRAL................................            31         8,345        35,513        36,739           1.8          -0.2           3.5
    WEST NORTH CENTRAL................................            21         5,199        36,847        38,094           1.7           0.2           3.4
    WEST SOUTH CENTRAL................................           138        50,413        30,454        31,420           1.8          -0.3           3.2
    MOUNTAIN..........................................            25         5,988        37,769        39,415           1.7           0.8           4.4

[[Page 44233]]

 
    PACIFIC...........................................            24        11,988        43,014        44,977           1.7           1.3           4.6
BY BED SIZE:
    BEDS: 0-24........................................            41         5,455        31,273        32,442           1.8          -0.1           3.7
    BEDS: 25-49.......................................           191        44,459        35,502        36,581           1.8          -0.2             3
    BEDS: 50-74.......................................            82        27,914        34,978        36,160           1.8             0           3.4
    BEDS: 75-124......................................            49        24,540        37,266        38,562           1.7           0.1           3.5
    BEDS: 125-199.....................................            23        16,598        33,752        34,892           1.7          -0.1           3.4
    BEDS: 200 +.......................................            13        12,248        33,400        34,622           1.7           0.4           3.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimated 2009 LTCH PPS rate year payments based on the rates, factors and policies established in the RY 2009 LTCH PPS final rule (73 FR 26788) and
  the FY 2009 GROUPER (Version 26.0) and relative weights established in the FY 2009 IPPS final rule (73 FR 23537 through 23617).
\2\ Estimated 2010 LTCH PPS rate year payments based on the payment rates and policy changes presented in the preamble and the Addendum of this final
  rule.
\3\ Percent change in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for the changes to the standard
  Federal rate, as discussed in section V.A. of the Addendum to this final rule.
\4\ Percent change in estimated payments per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for changes to the area wage
  adjustment at Sec.   412.525(c) (as discussed in section V.B.4. of the Addendum to this final rule).
\5\ Percent change in estimated payments per discharge from the 2009 LTCH PPS rate year (shown in Column 4) to the 2010 LTCH PPS rate year (shown in
  Column 5), including all of the changes presented in the preamble of this final rule. Note, this column, which shows the percent change in estimated
  payments per discharge for all changes, does not equal the sum of the percent changes in estimated payments per discharge for changes to the standard
  Federal rate (column 6) and the changes to the area wage adjustment (Column 7) due to the effect of estimated changes in both payments to SSO cases
  that are paid based on estimated costs and aggregate HCO payments (as discussed in this impact analysis), as well as other interactive effects that
  cannot be isolated.

4. Results

    Based on the most recent available data (as described previously 
for 399 LTCHs), we have prepared the following summary of the impact 
(as shown in Table IV) of the LTCH PPS payment rate and policy 
changes presented in this final rule. The impact analysis in Table 
IV shows that estimated payments per discharge are expected to 
increase approximately 3.3 percent, on average, for all LTCHs from 
the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year as a 
result of the payment rate and policy changes presented in this 
final rule as well as estimated increases in HCO and SSO payments. 
We note that we are adopting a 2.0 percent increase to the standard 
Federal rate for RY 2010, based on the latest market basket estimate 
(2.5 percent) and the adjustment for documentation and coding in 
2007 (-0.5 percent). We noted earlier in this section that for most 
categories of LTCHs, as shown in Table IV (Column 6), the impact of 
the increase of 2.0 percent to the standard Federal rate is 
projected to result in approximately a 1.8 percent increase in 
estimated payments per discharge for all LTCHs from the 2009 LTCH 
PPS rate year to the 2010 LTCH PPS rate year. In addition to the 2.0 
percent increase to the standard Federal rate for RY 2010, the 
projected percent increase in estimated payments per discharge from 
the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year of 3.3 
percent shown in Table IV (Column 8) reflects the effect of 
estimated increases in HCO and SSO payments, as discussed 
previously. Furthermore, as discussed previously in this regulatory 
impact analysis, the average increase in estimated payments per 
discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate 
year for all LTCHs of approximately 3.3 percent (as shown in Table 
IV) was determined by comparing estimated RY 2010 LTCH PPS payments 
(using the rates and policies discussed in this final rule) to 
estimated RY 2009 LTCH PPS payments (as described above in section 
IX.C. of this regulatory impact analysis).

a. Location

    Based on the most recent available data, the vast majority of 
LTCHs are located in urban areas. Only approximately 7 percent of 
the LTCHs are identified as being located in a rural area, and 
approximately 4 percent of all LTCH cases are treated in these rural 
hospitals. The impact analysis presented in Table IV shows that the 
average percent increase in estimated payments per discharge from 
the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for all 
hospitals is 3.3 percent for all changes. For rural LTCHs, the 
percent change for all changes is estimated to be 4.16 percent, 
while for urban LTCHs, we estimate the increase to be 3.3 percent. 
Large urban LTCHs are projected to experience an average increase, 
3.4 percent, in estimated payments per discharge from the 2009 LTCH 
PPS rate year to the 2010 LTCH PPS rate year, while other urban 
LTCHs are projected to experience a nearly average increase (3.2 
percent) in estimated payments per discharge from the 2009 LTCH PPS 
rate year to the 2010 LTCH PPS rate year, as shown in Table IV.

b. Participation Date

    LTCHs are grouped by participation date into four categories: 
(1) Before October 1983; (2) between October 1983 and September 
1993; (3) between October 1993 and September 2002; and (4) after 
October 2002. Based on the most recent available data, the majority 
(approximately 51 percent) of the LTCH cases are in hospitals that 
began participating between October 1993 and September 2002, and are 
projected to experience nearly the average increase (3.1 percent) in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year, as shown in Table IV.
    In the participation category where LTCHs began participating in 
Medicare before October 1983, LTCHs are projected to experience a 
higher than average percent increase (4.1) in estimated payments per 
discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate 
year, as shown in Table IV, due to changes in the wage index

[[Page 44234]]

and an estimated increase in HCO payments. Approximately 4 percent 
of LTCHs began participating in Medicare before October 1983. The 
LTCHs in this category are projected to experience a higher than 
average increase in estimated payments because 65 percent of these 
LTCHs are located in areas where the RY 2010 wage index value is 
greater than the RY 2009 wage index value, and also because the 
majority of these LTCHs have a wage index value of greater than 1.0. 
Approximately 11 percent of LTCHs began participating in Medicare 
between October 1983 and September 1993. These LTCHs are projected 
to experience a slightly higher than average increase (3.8 percent) 
in estimated payments. The majority of LTCHs, that is, those that 
began participating in Medicare since October 1993, are projected to 
experience near average increases in estimated payments per 
discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate 
year, as shown in Table IV.

c. Ownership Control

    Other than LTCHs whose ownership control type is unknown, LTCHs 
are grouped into three categories based on ownership control type: 
voluntary, proprietary, and government. Based on the most recent 
available data, approximately 20 percent of LTCHs are identified as 
voluntary (Table IV). We expect that, for these LTCHs in the 
voluntary category, estimated 2010 LTCH PPS rate year payments per 
discharge will increase slightly higher than the average (3.6 
percent) in comparison to estimated payments in the 2009 LTCH PPS 
rate year, as shown in Table IV, primarily because the change in 
estimated HCO payments is projected to be higher than the average 
for these LTCHs. The majority (67 percent) of LTCHs are identified 
as proprietary and these LTCHs are projected to experience a near 
average increase (3.2 percent) in estimated payments per discharge 
from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year. 
Finally, government-owned and operated LTCHs (3 percent) are 
expected to experience a slightly higher than the average increase 
(3.9 percent) in estimated payments primarily due to larger than the 
average increase in estimated HCO payments.

d. Census Region

    Estimated payments per discharge for the 2010 LTCH PPS rate year 
are projected to increase for LTCHs located in all regions in 
comparison to the 2009 LTCH PPS rate year. Of the 9 census regions, 
we project that the increase in estimated payments per discharge 
will have the largest positive impact on LTCHs in the New England, 
Mountain, and Pacific regions (4.4 percent, 4.4 percent, and 4.6 
percent, respectively, as shown in Table IV). As explained in 
greater detail above in section XV.B.4. of this Appendix, the 
estimated percent increase in payments per discharge from the 2009 
LTCH PPS rate year to the 2010 LTCH PPS rate year for these regions 
is largely attributable to the projected increase in estimated HCO 
and SSO payments, in addition to the increase in the standard 
Federal rate and the changes to the area wage adjustment. 
Specifically, for the New England region, all the LTCHs located in 
this region have a wage index value of greater than 1.0; and the 
majority (87 percent) of these LTCHs are located in areas where the 
RY 2010 wage index value is greater than the RY 2009 wage index 
value. The projected increase in estimated payments per discharge 
from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year for 
LTCHs in the Mountain and Pacific regions is 4.4 percent and 4.6 
percent respectively. These projected increases in payments are due 
to both the estimated increase in HCO payments and the significantly 
higher than average estimated impact from the changes to the area 
wage adjustment. That is, the majority (60 percent) of the LTCHs 
located in the Mountain region have a wage index value of greater 
than 1.0, and in addition, most of these LTCHs (76 percent) are 
located in areas where the RY 2010 wage index value is greater than 
the RY 2009 wage index value. Furthermore, all the LTCHs located in 
the Pacific region have a wage index value of greater than 1.0 and 
they are all located in areas where the RY 2010 wage index value is 
greater than the RY 2009 wage index value.
    In contrast, LTCHs located in the Middle Atlantic and East North 
Central regions are projected to experience a lower than average 
increase in estimated payments per discharge from the 2009 LTCH PPS 
rate year to the 2010 LTCH PPS rate year. The projected increase in 
payments of 2.5 percent for LTCHs in the Middle Atlantic region is 
primarily due to the 55 percent of LTCHs located in areas where the 
RY 2010 wage index value would be less than the RY 2009 wage index 
value. In addition, 62 percent of the LTCHs in this category are 
projected to have a RY 2010 wage index value of greater than 1.0. 
Similarly, the lower than average increase in payments per discharge 
for LTCHs in the East North Central region is largely due to the 
majority of LTCHs in this region that are expected to experience a 
decrease in estimated payments per discharge due to the changes in 
the area wage adjustment. However, we note that the projected 
increase in estimated HCO payments for LTCHs in this region in 
addition to the increase in the standard Federal rate results in an 
overall estimated increase, albeit less than the average increase, 
in estimated payments per discharge from the 2009 LTCH PPS rate year 
to the 2010 LTCH PPS rate year. The remaining regions, South 
Atlantic, East South Central, West North Central, and West South 
Central, are expected to experience near the average increases in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year.

e. Bed Size

    LTCHs were grouped into six categories based on bed size: 0-24 
beds; 25-49 beds; 50-74 beds; 75-124 beds; 125-199 beds; and greater 
than 200 beds.
    We are projecting an average or near average increase in 
estimated 2010 LTCH PPS rate year payments per discharge in 
comparison to the 2009 LTCH PPS rate year for all bed size 
categories.

D. Effect on the Medicare Program

    As noted previously, we project that the provisions of this 
final rule will result in an increase in estimated aggregate LTCH 
PPS payments in RY 2010 of approximately $153 million (or about 3.3 
percent) for the 399 LTCHs in our database.

E. Effect on Medicare Beneficiaries

    Under the LTCH PPS, hospitals receive payment based on the 
average resources consumed by patients for each diagnosis. We do not 
expect any changes in the quality of care or access to services for 
Medicare beneficiaries under the LTCH PPS, but we expect that paying 
prospectively for LTCH services would enhance the efficiency of the 
Medicare program.

X. Alternatives Considered

    This final rule contains a range of policies. The preamble of 
this final rule provides descriptions of the statutory provisions 
that are addressed, identifies implementing policies where 
discretion has been exercised, and presents rationales for our 
decisions and, where relevant, alternatives that were considered.

XI. Overall Conclusion

A. Acute Care Hospitals

    Table I of section VI. of this Appendix demonstrates the 
estimated distributional impact of the IPPS budget neutrality 
requirements for the MS-DRG and wage index changes, and for the wage 
index reclassifications under the MGCRB. Table I also shows an 
overall increase of 1.6 percent in operating payments. We estimate 
that operating payments will increase by approximately $1.73 billion 
in FY 2010. This accounts for the projected savings associated with 
the HACs policy, which has an estimated savings of $21 million, and 
the additional spending of $17.4 million due to new technology add-
on payments. In addition, this estimate includes the reporting of 
hospital quality data program costs of $2.4 million, and all 
operating payment policies as described in section VII. of this 
Appendix. We estimate that capital payments will increase by 2.1 
percent per case, as shown in Table III of section VIII. of this 
Appendix. Therefore, we project that the increase in capital 
payments in FY 2010 compared to FY 2009 will be approximately $171 
million. The cumulative operating and capital payments should result 
in a net increase of $1.899 billion to IPPS providers. The 
discussions presented in the previous pages, in combination with the 
rest of this final rule, constitute a regulatory impact analysis.

B. LTCHs

    Overall, LTCHs are projected to experience an increase in 
estimated payments per discharge in RY 2010. In the impact analysis, 
we are using the rates, factors, and policies presented in this 
final rule, including updated wage index values, and the best 
available claims and CCR data to estimate the change in payments for 
the 2010 LTCH PPS rate year. Accordingly, based on the best 
available data for the 399 LTCHs in our database, we estimate that 
RY 2010 LTCH PPS payments will increase approximately $153 million 
(or about 3.3 percent).

[[Page 44235]]

XII. Accounting Statements

A. Acute Care Hospitals

    As required by OMB Circular A-4 (available at http://www.whitehousegov/omb/circulars/a004/a-4.pdf), in Table V below, we 
have prepared an accounting statement showing the classification of 
the expenditures associated with the provisions of this final rule 
as they relate to acute care hospitals. This table provides our best 
estimate of the change in Medicare payments to providers as a result 
of the changes to the IPPS presented in this final rule. All 
expenditures are classified as transfers to Medicare providers.

 Table V--Accounting Statement: Classification of Estimated Expenditures
                 Under the IPPS From FY 2009 to FY 2010
------------------------------------------------------------------------
                Category                            Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers.........  $1.899 billion.
From Whom to Whom......................  Federal Government to IPPS
                                          Medicare Providers.
                                        --------------------------------
    Total..............................  $1.899 billion.
------------------------------------------------------------------------

B. LTCHs

    As discussed in section IX. of this Appendix, the impact 
analysis for the changes under the LTCH PPS for this final rule 
projects an increase in estimated aggregate payments of 
approximately $153 million (or about 3.3 percent) for the 399 LTCHs 
in our database that are subject to payment under the LTCH PPS. 
Therefore, as required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table VI below, 
we have prepared an accounting statement showing the classification 
of the expenditures associated with the provisions of this final 
rule as they relate to changes to the LTCH PPS. Table VI provides 
our best estimate of the increase in Medicare payments under the 
LTCH PPS as a result of the provisions presented in this final rule 
based on the data for the 399 LTCHs in our database. All 
expenditures are classified as transfers to Medicare providers (that 
is, LTCHs).

Table VI--Accounting Statement: Classification of Estimated Expenditures
     From the 2009 LTCH PPS Rate Year to the 2010 LTCH PPS Rate Year
------------------------------------------------------------------------
                Category                            Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers.........  Positive transfer--Estimated
                                          increase in expenditures: $153
                                          million.
From Whom to Whom......................  Federal Government to LTCH PPS
                                          Medicare Providers.
                                        --------------------------------
    Total..............................  $153 million.
------------------------------------------------------------------------

XIII. Executive Order 12866

    In accordance with the provisions of Executive Order 12866, the 
Executive Office of Management and Budget reviewed this final rule.

Appendix B: Recommendation of Update Factors for Operating Cost Rates 
of Payment for Inpatient Hospital Services

I. Background

    Section 1886(e)(4)(A) of the Act requires that the Secretary, 
taking into consideration the recommendations of the MedPAC, 
recommend update factors for inpatient hospital services for each 
fiscal year that take into account the amounts necessary for the 
efficient and effective delivery of medically appropriate and 
necessary care of high quality. Under section 1886(e)(5) of the Act, 
we are required to publish update factors recommended by the 
Secretary in the proposed and final IPPS rules, respectively. 
Accordingly, this Appendix provides the recommendations for the 
update factors for the IPPS national standardized amount, the Puerto 
Rico-specific standardized amount, the hospital-specific rates for 
SCHs and MDHs, and the rate-of-increase limits for certain hospitals 
excluded from the IPPS, as well as LTCHs, IPFs, and IRFs. We also 
discuss our response to MedPAC's recommended update factors for 
inpatient hospital services.

II. Inpatient Hospital Update for FY 2010

    Section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 
5001(a) of Public Law 109-171, sets the FY 2010 percentage increase 
in the operating cost standardized amount equal to the rate-of-
increase in the hospital market basket for IPPS hospitals in all 
areas, subject to the hospital submitting quality information under 
rules established by the Secretary in accordance with section 
1886(b)(3)(B)(viii) of the Act. For hospitals that do not provide 
these data, the update is equal to the market basket percentage 
increase less 2.0 percentage points.
    In compliance with section 404 of the MMA, as we proposed in the 
FY 2010 IPPS/LTCH PPS proposed rule (74 FR 24685), in section IV. of 
the preamble of this final rule, we are replacing the FY 2002-based 
IPPS operating and capital market baskets with the revised and 
rebased FY 2006-based IPPS operating and capital market baskets for 
FY 2010. In addition to updating the base year to reflect more 
recent data, we also are making several changes to the structure of 
the market basket, including three new expense categories and 
revising several price proxies.
    As we proposed, we also are rebasing the labor-related share to 
reflect the more recent base year. The current labor-related share, 
which is based on the FY 2002-based IPPS market basket, is 69.7. We 
are adopting a labor-related share of 68.8, which is based on the 
rebased and revised FY 2006-based IPPS market basket. For a complete 
discussion on the rebasing of the market basket and labor share, we 
refer readers to section IV. of the preamble to this final rule.
    Consistent with current law, based on IHS Global Insight, Inc.'s 
first quarter 2009 forecast of the FY 2010 market basket increase, 
we stated in the proposed rule that we are estimating that the FY 
2010 update to the standardized amount will be 2.1 percent (that is, 
the then current estimate of the market basket rate-of-increase) for 
hospitals in all areas, provided the hospital submits quality data 
in accordance with our rules. For hospitals that do not submit 
quality data, we stated in the proposed rule that we are estimating 
that the update to the standardized amount will be 0.1 percent (that 
is, the then current estimate of the market basket rate-of-increase 
minus 2.0 percentage points). Therefore, we are adopting in this 
final rule, based on IHS Global Insight, Inc.'s second quarter 2009 
forecast of the FY 2010 market basket increase, a FY 2010 update to 
the standardized amount of 2.1 percent (that is, the current 
estimate of the market basket rate-of-increase) for hospitals in all 
areas, provided the hospital submits quality data in accordance with 
our rules. For hospitals that do not submit quality data, the update 
to the standardized amount will be 0.1 percent (that is, the current 
estimate of the market basket rate-of-increase minus 2.0 percentage 
points).
    Section 1886(d)(9)(C)(1) of the Act is the basis for determining 
the percentage increase to the Puerto Rico-specific standardized 
amount. In the proposed rule, we proposed to apply the full rate-of-
increase in the hospital market basket for IPPS hospitals to the 
Puerto Rico-specific standardized amount. Because we did not receive 
any public comments on this proposal, for FY 2010, we are applying 
the full rate-of-increase in the hospital market basket for IPPS 
hospitals to the Puerto Rico-specific standardized amount. 
Therefore, the update to the Puerto Rico-specific standardized 
amount is 2.1 percent.
    Section 1886(b)(3)(B)(iv) of the Act sets the FY 2010 percentage 
increase in the hospital-specific rates applicable to SCHs and MDHs 
equal to the rate set forth in section 1886(b)(3)(B)(i) of the Act 
(that is, the same update factor as for all other hospitals subject 
to the IPPS, or the rate-of-increase in the market basket). 
Therefore, the update to the hospital-specific rates applicable to 
SCHs and MDHs is 2.1 or 0.1 percent, depending upon whether the 
hospital submits quality data.
    Section 1886(b)(3)(B)(ii) of the Act is used for purposes of 
determining the percentage increase in the rate-of-increase limits 
for children's and cancer hospitals. Section 1886(b)(3)(B)(ii) of 
the Act sets the percentage increase in the rate-of-increase limits 
equal to the market basket percentage increase. In accordance with 
Sec.  403.752(a) of the regulations, RNHCIs are paid under Sec.  
413.40, which also uses section 1886(b)(3)(B)(ii) of the Act to 
update the percentage increase in the rate-of-increase limits. 
Section 1886(j)(3)(C) of the Act addresses the increase factor for 
the Federal prospective payment rate of IRFs. Section 123 of Public 
Law 106-113, as amended by section 307(b) of Public Law 106-554, 
provides the statutory authority for updating payment rates under 
the LTCH PPS. In addition, section 124 of Public Law 106-113 
provides the statutory authority for updating all aspects of the 
payment rates for IPFs.

[[Page 44236]]

    Currently, children's hospitals, cancer hospitals, and RNHCIs 
are the remaining three types of hospitals still reimbursed under 
the reasonable cost methodology. We are providing our current 
estimate of the FY 2010 IPPS operating market basket percentage 
increase (2.1 percent) to update the target limits for children's 
hospitals, cancer hospitals, and RNHCIs.
    For RY 2010, as discussed in section VIII. of the preamble to 
this final rule, we are establishing an update of 2.0 percent to the 
LTCH PPS Federal rate, which is based on a market basket increase of 
2.5 percent (based on IHS Global Insight, Inc.'s second quarter 2009 
forecast of the FY 2002-based RPL market basket increase for RY 
2010) and an adjustment of -0.5 percent to account for the increase 
in case-mix in a prior year that resulted from changes in coding 
practices rather than an increase in patient severity.
    Effective for cost reporting periods beginning on or after 
January 1, 2005, IPFs are paid under the IPF PPS. IPF PPS payments 
are based on a Federal per diem rate that is derived from the sum of 
the average routine operating, ancillary, and capital costs for each 
patient day of psychiatric care in an IPF, adjusted for budget 
neutrality.
    IRFs are paid under the IRF PPS for cost reporting periods 
beginning on or after January 1, 2002. For cost reporting periods 
beginning on or after October 1, 2002 (FY 2003), and thereafter, the 
Federal prospective payments to IRFs are based on 100 percent of the 
adjusted Federal IRF prospective payment amount, updated annually 
(69 FR 45721).
    We refer readers to section IV. of the preamble to this final 
rule for a summary of the public comments we received on the 
rebasing and revising of the market basket and labor-related share.

III. Secretary's Final Recommendations

    MedPAC is recommending an inpatient hospital update equal to the 
market basket rate of increase for FY 2010. MedPAC's rationale for 
this update recommendation is described in more detail below. Based 
on IHS Global Insight, Inc.'s 2009 second quarter forecast, with 
historical data through the 2009 first quarter, of the rebased and 
revised FY 2006-based IPPS market basket, we are recommending an 
update to the standardized amount of 2.1 percent. We are 
recommending that this same update factor apply to SCHs and MDHs.
    Section 1886(d)(9)(C)(i) of the Act is the basis for determining 
the percentage increase to the Puerto Rico-specific standardized 
amount. For FY 2010, we are applying the full rate-of-increase in 
the hospital market basket for IPPS hospitals to the Puerto Rico-
specific standardized amount. Therefore, the update to the Puerto 
Rico-specific standardized amount is 2.1 percent.
    In addition to making a recommendation for IPPS hospitals, in 
accordance with section 1886(e)(4)(A) of the Act, we also are 
recommending update factors for all other types of hospitals. Using 
IHS Global Insight, Inc.'s 2009 second quarter forecast, with 
historical data through the 2009 first quarter, of the rebased and 
revised FY 2006-based IPPS market basket, we are recommending an 
update based on the IPPS market basket increase for children's 
hospitals, cancer hospitals, and RNHCIs of 2.1 percent.
    In the IPF PPS RY 2010 notice (74 FR 20365), we implemented an 
update to the IPF PPS Federal rate for RY 2010 of 2.1 percent for 
the Federal per diem payment amount. Similar to the update we 
implemented in the IPF PPS RY 2010 notice, we are recommending an 
update to the IPF PPS Federal rate for RY 2010 of 2.1 percent for 
the Federal per diem payment amount.
    For RY 2010, similar to our approach in section VIII. of the 
preamble of this final rule, we are recommending an update of 2.0 
percent to the LTCH PPS Federal rate, which is based on a market 
basket increase of 2.5 percent (based on IHS Global Insight, Inc.'s 
second quarter 2009 forecast of the FY 2002-based RPL market basket 
increase for RY 2010) and an adjustment of -0.5 percent to account 
for the increase in case-mix in a prior year that resulted from 
changes in coding practices rather than an increase in patient 
severity.
    Finally, in the FY 2010 IRF PPS final rule scheduled to publish 
in the August 7, 2009, issue of the Federal Register, we are 
recommending the update factor that will be applied to the FY 2010 
IRF PPS Federal rate.

IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating 
Payments in Traditional Medicare

    In its March 2009 Report to Congress, MedPAC assessed the 
adequacy of current payments and costs, and the relationship between 
payments and an appropriate cost base, utilizing an established 
methodology used by MedPAC in the past several years.
    MedPAC recommended an update to the hospital inpatient rates 
equal to the increase in the hospital market basket in FY 2010, 
concurrent with implementation of a quality incentive program. 
Similar to last year, MedPAC also recommended that CMS put pressure 
on hospitals to control their costs rather than accommodate the 
current rate of cost growth, which is, in part, caused by a lack of 
pressure from private payers.
    MedPAC noted that indicators of payment adequacy are almost 
uniformly positive. MedPAC expects Medicare margins to remain low in 
2010. At the same time though, MedPAC's analysis finds that 
hospitals with low non-Medicare profit margins have below average 
standardized costs and most of these facilities have positive 
overall Medicare margins.
    Response: Similar to our response last year, we agree with 
MedPAC that hospitals should control costs rather than accommodate 
the current rate of growth. An update equal to less than the market 
basket will motivate hospitals to control their costs, consistent 
with MedPAC's recommendation. As MedPAC noted, the lack of financial 
pressure at certain hospitals can lead to higher costs and in turn 
bring down the overall Medicare margin for the industry.
    As discussed in section II. of the preamble of this final rule, 
CMS implemented the MS-DRGs in FY 2008 to better account for 
severity of illness under the IPPS and is basing the DRG weights on 
costs rather than charges. We continue to believe that these 
refinements will better match Medicare payment of the cost of care 
and provide incentives for hospitals to be more efficient in 
controlling costs.
    We note that, because the operating and capital prospective 
payment systems remain separate, we are continuing to use separate 
updates for operating and capital payments. The update to the 
capital rate is discussed in section III. of the Addendum to this 
final rule.
    Comment: One commenter reiterated that MedPAC reported that 
Medicare margins are growing increasingly negative and that MedPAC 
recommended that hospitals be given a positive update of 2.7 percent 
in FY 2010 concurrent with implementation of a quality incentive 
program. The commenter supported MedPAC's recommendation of a full 
update to the market basket concurrent with implementation of a 
quality incentive program.
    Response: We thank the commenter for their comments. As 
discussed above, section 1886(b)(3)(B)(i)(XX) of the Act, as amended 
by section 5001(a) of Public Law 109-171, sets the FY 2010 
percentage increase in the operating cost standardized amount equal 
to the rate-of-increase in the hospital market basket for IPPS 
hospitals in all areas. Under section 1886(b)(3)(B)(viii) of the 
Act, for hospitals that do not provide quality data, the update is 
equal to the market basket percentage increase less 2.0 percentage 
points. In this final rule, based on IHS Global Insight, Inc.'s 
second quarter 2009 forecast of the FY 2010 market basket increase, 
we are adopting a FY 2010 update to the standardized amount of 2.1 
percent.
[FR Doc. E9-18663 Filed 7-31-09; 4:15 pm]
BILLING CODE 4120-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>