Vol. 76 Thursday, 

No. 18 January 27, 2011 

Part II 

Department of Health and Human Services 

Centers for Medicare & Medicaid Services 

42 CFR Part 412 

Medicare Program; Inpatient Psychiatric Facilities Prospective Payment 

System—Update for Rate Year Beginning July 1, 2011 (RY 2012); 

Proposed Rule 


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4998 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 412 

[CMS–1346–P] 

RIN 0938–AQ23 

Medicare Program; Inpatient 

Psychiatric Facilities Prospective 

Payment System—Update for Rate 

Year Beginning July 1, 2011 (RY 2012) 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

update the prospective payment rates 

for Medicare inpatient hospital services 

provided by inpatient psychiatric 

facilities (IPFs) for discharges occurring 

during the rate year beginning July 1, 

2011 through September 30, 2012. The 

proposed rule would also change the 

IPF prospective payment system (PPS) 

payment rate update period to a rate 

year (RY) that coincides with a fiscal 

year (FY). In addition, the rule proposes 

policy changes affecting the IPF PPS 

teaching adjustment. It would also 

rebase and revise the Rehabilitation, 

Psychiatric, and Long-Term Care (RPL) 

market basket, and make some 

clarifications and corrections to 

terminology and regulations text. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided in the 

ADDRESSES section no later than 5 p.m. 

EST on March 22, 2011. 

ADDRESSES: In commenting, please refer 

to file code CMS–1346–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (please choose only one of the 

ways listed): 

1. Electronically. You may submit 

electronic comments on this regulation 

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

the instructions under the ‘‘More Search 

Options’’ tab. 

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–1346– 

P, P.O. Box 8010, Baltimore, MD 21244– 

1850. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments to the 

following address ONLY: Centers for 

Medicare & Medicaid Services, 

Department of Health and Human 

Services, Attention: CMS–1346–P, Mail 

Stop C4–26–05, 7500 Security 

Boulevard, Baltimore, MD 21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments before the close 

of the comment period to either of the 

following addresses: 

a. For delivery in Washington, DC— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Room 445–G, Hubert 

H. Humphrey Building, 200 

Independence Avenue, SW., 

Washington, DC 20201. 

(Because access to the interior of the 

Hubert H. Humphrey Building is not 

readily available to persons without 

Federal government identification, 

commenters are encouraged to leave 

their comments in the CMS drop slots 

located in the main lobby of the 

building. A stamp-in clock is available 

for persons wishing to retain a proof of 

filing by stamping in and retaining an 

extra copy of the comments being filed.) 

b. For delivery in Baltimore, MD— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, 7500 Security 

Boulevard, Baltimore, MD 21244–1850. 

If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

9994 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. 

FOR FURTHER INFORMATION CONTACT: 

Dorothy Myrick or Jana Lindquist, (410) 

786–4533 (for general information). 

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

Bridget Dickensheets, (410) 786–8670, 

(for information regarding the market 

basket and labor-related share). Theresa 

Bean, (410) 786–2287 (for information 

regarding the regulatory impact 

analysis). 

SUPPLEMENTARY INFORMATION: Inspection 

of Public Comments: All comments 

received before the close of the 

comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http:// 

www.regulations.gov. Follow the search 

instructions on that Web site to view 

public comments. 

Comments received timely will also 

be available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

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

appointment to view public comments, 

phone 1–800–743–3951. 

Table of Contents 

To assist readers in referencing 

sections contained in this document, we 

are providing the following table of 

contents. 

I. Background 

A. Annual Requirements for Updating the 

IPF PPS 

B. Overview of the Legislative 

Requirements of the IPF PPS 

C. IPF PPS–General Overview 

D. Transition Period for Implementation of 

the IPF PPS 

II. Proposal to Revise the IPF PPS Payment 

Rate Update Period from a Rate Year to 

a Fiscal Year 

III. Proposed Rebasing and Revising of the 

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

Inpatient Psychiatric Facilities 

A. Background 

B. Overview of the Proposed FY 2008– 

Based RPL Market Basket 

C. Proposed Rebasing and Revising of the 

RPL Market Basket 

1. Development of Cost Categories and 

Weights 

a. Medicare Cost Reports 

b. Other Data Sources 

2. Final Cost Category Computation 

3. Selection of Price Proxies 

a. Wages and Salaries 

b. Employee Benefits 

c. Electricity 

d. Fuel, Oil, and Gasoline 

e. Water and Sewage 

f. Professional Liability Insurance 

g. Pharmaceuticals 

h. Food: Direct Purchases 

i. Food: Contract Services 

j. Chemicals 

k. Medical Instruments 

l. Photographic Supplies 

m. Rubber and Plastics 

n. Paper and Printing Products 

o. Apparel 

p. Machinery and Equipment 

q. Miscellaneous Products 

r. Professional Fees: Labor-Related 

s. Administrative and Business Support 

Services 

t. All Other: Labor-Related Services 

u. Professional Fees: Nonlabor-Related 

v. Financial Services 

w. Telephone Services 

x. Postage 

y. All Other: Nonlabor-Related Services 


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4. Proposed Methodology for Capital 

Portion of the RPL Market Basket 

5. Proposed RY 2012 Market Basket Update 

6. Proposed Labor-Related Share 

IV. Updates to the IPF PPS for RY Beginning 

July 1, 2011 

A. Determining the Standardized BudgetNeutral Federal Per Diem Base Rate 

1. Standardization of the Federal Per Diem 

Base Rate and Electroconvulsive Therapy 

(ECT) Rate 

2. Calculation of the Budget Neutrality 

Adjustment 

a. Outlier Adjustment 

b. Stop-Loss Provision Adjustment 

c. Behavioral Offset 

B. Proposed Update of the Federal Per 

Diem Base Rate and Electroconvulsive 

Therapy Rate 

V. Proposed Update of the IPF PPS 

Adjustment Factors 

A. Overview of the IPF PPS Adjustment 

Factors 

B. Proposed Patient-Level Adjustments 

1. Proposed Adjustment for MS–IPF–DRG 

Assignment 

2. Proposed Payment for Comorbid 

Conditions 

3. Proposed Patient Age Adjustments 

4. Proposed Variable Per Diem 

Adjustments 

C. Facility-Level Adjustments 

1. Proposed Wage Index Adjustment 

a. Background 

b. Proposed Wage Index for RY 2012 

c. OMB Bulletins 

2. Proposed Adjustment for Rural Location 

3. Proposed Teaching Adjustment 

a. Proposed Temporary Adjustment to FTE 

Cap to Reflect Residents Affected by 

Hospital Closure 

b. Proposed Temporary Adjustment to FTE 

Cap to Reflect Residents Affected By 

Residency Program Closure 

4. Proposed Cost of Living Adjustment for 

IPFs Located in Alaska and Hawaii 

5. Proposed Adjustment for IPFs with a 

Qualifying Emergency Department (ED) 

D. Other Payment Adjustments and 

Policies 

1. Proposed Outlier Payments 

a. Proposed Update to the Outlier Fixed 

Dollar Loss Threshold Amount 

b. Proposed Statistical Accuracy of Cost-toCharge Ratios 

2. Expiration of the Stop-Loss Provision 

3. Future Refinements 

VI. Proposed Regulations Text Corrections 

VII. Provisions of the Proposed Regulations 

VIII. Collection of Information Requirements 

IX. Regulatory Impact Analysis 

Regulations Text 

Addenda 

Acronyms 

Because of the many terms to which 

we refer by acronym in this proposed 

rule, we are listing the acronyms used 

and their corresponding meanings in 

alphabetical order below: 

BBRA Medicare, Medicaid and SCHIP 

[State Children’s Health Insurance 

Program] Balanced Budget Refinement 

Act of 1999, (Pub. L. 106–113) 

CBSA Core-Based Statistical Area 

CCR Cost-to-charge ratio 

CAH Critical access hospital 

DSM–IV–TR Diagnostic and Statistical 

Manual of Mental Disorders Fourth 

Edition—Text Revision 

DRGs Diagnosis-related groups 

FY Federal fiscal year (October 1 through 

September 30) 

ICD–9–CM International Classification of 

Diseases, 9th Revision, Clinical 

Modification 

IPFs Inpatient psychiatric facilities 

IRFs Inpatient rehabilitation facilities 

LTCHs Long-term care hospitals 

MedPAR Medicare provider analysis and 

review file 

RPL Rehabilitation, Psychiatric, and LongTerm Care 

RY Rate Year (July 1 through June 30) 

TEFRA Tax Equity and Fiscal 

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

248) 

I. Background 

A. Annual Requirements for Updating 

the IPF PPS 

In November 2004, we implemented 

the inpatient psychiatric facilities (IPF) 

prospective payment system (PPS) in a 

final rule that appeared in the 

November 15, 2004 Federal Register (69 

FR 66922). In developing the IPF PPS, 

in order to ensure that the IPF PPS is 

able to account adequately for each 

IPF’s case-mix, we performed an 

extensive regression analysis of the 

relationship between the per diem costs 

and certain patient and facility 

characteristics to determine those 

characteristics associated with 

statistically significant cost differences 

on a per diem basis. For characteristics 

with statistically significant cost 

differences, we used the regression 

coefficients of those variables to 

determine the size of the corresponding 

payment adjustments. 

In that final rule, we explained that 

we believe it is important to delay 

updating the adjustment factors derived 

from the regression analysis until we 

have IPF PPS data that includes as 

much information as possible regarding 

the patient-level characteristics of the 

population that each IPF serves. 

Therefore, we indicated that we did not 

intend to update the regression analysis 

and recalculate the Federal per diem 

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

that analysis. Until that analysis is 

complete, we stated our intention to 

publish a notice in the Federal Register 

each spring to update the IPF PPS (71 

FR 27041). We are proposing to change 

the payment rate update period to a RY 

that coincides with a FY. If we finalize 

this proposal, future update notices 

would be published in the Federal 

Register in the summer. See section II. 

of this proposed rule. 

Updates to the IPF PPS as specified in 

42 CFR 412.428 include the following: 

• A description of the methodology 

and data used to calculate the updated 

Federal per diem base payment amount. 

• The rate of increase factor as 

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

is based on the Excluded Hospital With 

Capital market basket under the update 

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

of the Social Security Act (the Act) for 

each year (effective from the 

implementation period until June 30, 

2006). 

• For discharges occurring on or after 

July 1, 2006, the rate of increase factor 

for the Federal portion of the IPF’s 

payment, which is based on the 

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

• The best available hospital wage 

index and information regarding 

whether an adjustment to the Federal 

per diem base rate is needed to maintain 

budget neutrality. 

• Updates to the fixed dollar loss 

threshold amount in order to maintain 

the appropriate outlier percentage. 

• Description of the International 

Classification of Diseases, 9th Revision, 

Clinical Modification (ICD–9–CM) 

coding and diagnosis-related groups 

(DRGs) classification changes discussed 

in the annual update to the hospital 

inpatient prospective payment system 

(IPPS) regulations. 

• Update to the electroconvulsive 

therapy (ECT) payment by a factor 

specified by CMS. 

• Update to the national urban and 

rural cost-to-charge ratio medians and 

ceilings. 

• Update to the cost of living 

adjustment factors for IPFs located in 

Alaska and Hawaii, if appropriate. 

Our most recent IPF PPS annual 

update occurred in the April 30, 2010 

Federal Register notice (75 FR 23106) 

(hereinafter referred to as the April 2010 

IPF PPS notice) that set forth updates to 

the IPF PPS payment rates for RY 2011. 

This notice updated the IPF PPS per 

diem payment rates that were published 

in the May 2009 IPF PPS notice in 

accordance with our established 

policies. 

Since implementation of the IPF PPS, 

we have explained that we believe it is 

important to delay updating the 

adjustment factors derived from the 

regression analysis until we have IPF 

PPS data that include as much 

information as possible regarding the 

patient-level characteristics of the 

population that each IPF serves. Now 

that we are approximately 5 years into 

the system, we believe that we have 

enough data to begin that process. 

Therefore, we have begun the necessary 


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analysis in order to make future 

refinements. While we are not 

proposing to make refinements in this 

rulemaking, as explained in section 

V.D.3 below, we believe that in the next 

rulemaking, for RY 2013, we will be 

ready to propose potential refinements. 

B. Overview of the Legislative 

Requirements of the IPF PPS 

Section 124 of the Medicare, 

Medicaid, and SCHIP (State Children’s 

Health Insurance Program) Balanced 

Budget Refinement Act of 1999, (Pub. L. 

106–113) (BBRA) required 

implementation of the IPF PPS. 

Specifically, section 124 of the BBRA 

mandated that the Secretary develop a 

per diem PPS for inpatient hospital 

services furnished in psychiatric 

hospitals and psychiatric units that 

includes an adequate patient 

classification system that reflects the 

differences in patient resource use and 

costs among psychiatric hospitals and 

psychiatric units. 

Section 405(g)(2) of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173) extended the IPF PPS to 

distinct part psychiatric units of critical 

access hospitals (CAHs). 

To implement these provisions, we 

published various proposed and final 

rules in the Federal Register. For more 

information regarding these rules, see 

the CMS Web sites http:// 

www.cms.hhs.gov/ 

InpatientPsychFacilPPS/ and http:// 

www.cms.hhs.gov/ 

InpatientpsychfacilPPS/ 

02_regulations.asp. 

Section 3401(f) of the Patient 

Protection and Affordable Care Act 

(Pub. L. 111–148) as amended by 

section 10319(e) of that Act and by 

section 1105(d) of the Health Care and 

Education Reconciliation Act of 2010 

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

as ‘‘The Affordable Care Act’’) added 

subsection (s) to section 1886 of the Act. 

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

to Establishment and Implementation of 

System’’ and it refers to section 124 of 

the Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 

1999, which relates to the establishment 

of the IPF PPS. 

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

requires the application of the 

productivity adjustment described in 

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

IPF PPS for the rate year beginning in 

2012 and each subsequent rate year. 

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

requires the application of an ‘‘other 

adjustment’’ that reduces any update to 

an IPF PPS base rate by percentages 

specified in section 1886(s)(3) of the Act 

for rate years beginning in 2010 through 

the rate year beginning in 2019. For the 

rate year beginning in 2011, the 

reduction is 0.25 percentage point. We 

are proposing to implement that 

provision for RY 2012 in this proposed 

rule. 

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

the establishment of a quality data 

reporting program for the IPF PPS 

beginning in RY 2014. 

C. IPF PPS–General Overview 

The November 2004 IPF PPS final 

rule (69 FR 66922) established the IPF 

PPS, as authorized under section 124 of 

the BBRA and codified at subpart N of 

part 412 of the Medicare regulations. 

The November 2004 IPF PPS final rule 

set forth the per diem Federal rates for 

the implementation year (the 18-month 

period from January 1, 2005 through 

June 30, 2006), and it provided payment 

for the inpatient operating and capital 

costs to IPFs for covered psychiatric 

services they furnish (that is, routine, 

ancillary, and capital costs, but not costs 

of approved educational activities, bad 

debts, and other services or items that 

are outside the scope of the IPF PPS). 

Covered psychiatric services include 

services for which benefits are provided 

under the fee-for-service Part A 

(Hospital Insurance Program) Medicare 

program. 

The IPF PPS established the Federal 

per diem base rate for each patient day 

in an IPF derived from the national 

average daily routine operating, 

ancillary, and capital costs in IPFs in FY 

2002. The average per diem cost was 

updated to the midpoint of the first year 

under the IPF PPS, standardized to 

account for the overall positive effects of 

the IPF PPS payment adjustments, and 

adjusted for budget neutrality. 

The Federal per diem payment under 

the IPF PPS is comprised of the Federal 

per diem base rate described above and 

certain patient- and facility-level 

payment adjustments that were found in 

the regression analysis to be associated 

with statistically significant per diem 

cost differences. 

The patient-level adjustments include 

age, DRG assignment, comorbidities, 

and variable per diem adjustments to 

reflect higher per diem costs in the early 

days of an IPF stay. Facility-level 

adjustments include adjustments for the 

IPF’s wage index, rural location, 

teaching status, a cost of living 

adjustment for IPFs located in Alaska 

and Hawaii, and presence of a 

qualifying emergency department (ED). 

The IPF PPS provides additional 

payment policies for: outlier cases; stoploss protection (which was applicable 

only during the IPF PPS transition 

period); interrupted stays; and a per 

treatment adjustment for patients who 

undergo ECT. 

A complete discussion of the 

regression analysis appears in the 

November 2004 IPF PPS final rule (69 

FR 66933 through 66936). 

Section 124 of BBRA does not specify 

an annual update rate strategy for the 

IPF PPS and is broadly written to give 

the Secretary discretion in establishing 

an update methodology. Therefore, in 

the November 2004 IPF PPS final rule, 

we implemented the IPF PPS using the 

following update strategy: 

• Calculate the final Federal per diem 

base rate to be budget neutral for the 18- 

month period of January 1, 2005 

through June 30, 2006. 

• Use a July 1 through June 30 annual 

update cycle. 

• Allow the IPF PPS first update to be 

effective for discharges on or after July 

1, 2006 through June 30, 2007. 

D. Transition Period for Implementation 

of the IPF PPS 

In the November 2004 IPF PPS final 

rule, we provided for a 3-year transition 

period. During this 3-year transition 

period, an IPF’s total payment under the 

PPS was based on an increasing 

percentage of the Federal rate with a 

corresponding decreasing percentage of 

the IPF PPS payment that is based on 

reasonable cost concepts. However, 

effective for cost reporting periods 

beginning on or after January 1, 2008, 

IPF PPS payments are based on 100 

percent of the Federal rate. 

II. Proposal To Revise the IPF PPS 

Payment Rate Update Period From a 

Rate Year to a Fiscal Year 

In this proposed rule, we are 

proposing a change to the current period 

for the annual updates of the IPF PPS 

Federal payment rates. We propose to 

revise the IPF PPS payment rate update 

period by switching from a RY that 

begins on July 1 and goes through June 

30 to a period that coincides with a 

fiscal year (FY), that is, October 1 

through September 30. We would also 

refer to the update period as a FY 

beginning with the update period that 

begins in 2012, that is, FY 2013. This 

change in the annual update period 

would allow us to consolidate Medicare 

publications by aligning the IPF PPS 

update with the annual update of the 

ICD–9–CM codes, which are effective on 

October 1 of each year. Currently, in 

addition to our annual proposed and 

final rulemaking documents, we publish 

a change request transmittal every 

August updating the ICD–9–CM codes 

related to the DRG and comorbidity 

adjustments. By aligning the IPF PPS 


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with the same update period as the ICD– 

9–CM codes, we will eliminate the need 

to publish a transmittal off-cycle. 

We maintain the same diagnostic 

coding and DRG classification for IPFs 

that are used under the IPPS for 

providing the psychiatric care. When 

the IPF PPS was implemented, we 

adopted the same diagnostic code set 

and DRG patient classification systems 

(that is, the CMS DRGs) that were 

utilized at the time under the hospital 

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

CM coding system are addressed in the 

IPPS proposed and final rules. These 

changes are effective October 1 of each 

year and must be used by acute care 

hospitals as well as other providers to 

report diagnostic and procedure 

information. The IPF PPS has always 

incorporated ICD–9–CM coding changes 

made in the annual IPPS update. This 

proposed change to the annual payment 

rate update period would allow the 

annual update to the rates and the ICD– 

9–CM coding update to occur on the 

same schedule and appear in the same 

Federal Register document. 

Our intent in making the change in 

the payment rate update schedule is to 

place the IPF PPS on the same update 

cycle as other PPSs, making it 

administratively efficient. In order to 

smoothly transition to a payment update 

period that runs from October 1 through 

September 30, we propose that the RY 

2012 period run from July 1, 2011 to 

September 30, 2012 such that RY 2012 

would be 15 months. Under this 

proposal, after RY 2012, the rate update 

period for the IPF PPS payment rates 

and other policy changes would begin 

on October 1 and go through September 

30. The next update to the IPF PPS rates 

after RY 2012 would be the FY 2013 

update cycle, which would begin on 

October 1, 2012 and go through 

September 30, 2013. In addition, we are 

proposing to make a change to the 

regulations at § 412.402 to add the term 

‘‘IPF Prospective Payment System Rate 

Year’’ which would mean October 1 

through September 30. We are 

proposing that the RY would be referred 

to as a FY. The discussion of the 

proposed 15-month market basket 

update for the proposed 2012 rate year 

can be found in section III.C.5. of this 

proposed rule. 

III. Proposed Rebasing and Revising of 

the Rehabilitation, Psychiatric, and 

Long-Term Care (RPL) Market Basket 

for Inpatient Psychiatric Facilities 

A. Background 

The input price index (that is, the 

market basket) that was used to develop 

the IPF PPS was the Excluded Hospital 

with Capital market basket. This market 

basket was based on 1997 Medicare cost 

report data and included data for 

Medicare participating IPFs, inpatient 

rehabilitation facilities (IRFs), long-term 

care hospitals (LTCHs), cancer 

hospitals, and children’s hospitals. 

Although ‘‘market basket’’ technically 

describes the mix of goods and services 

used in providing hospital care, this 

term is also commonly used to denote 

the input price index (that is, cost 

category weights and price proxies 

combined) derived from that market 

basket. Accordingly, the term ‘‘market 

basket’’ as used in this document refers 

to a hospital input price index. 

Beginning with the May 2006 IPF PPS 

final rule (71 FR 27046 through 27054), 

IPF PPS payments were updated using 

a FY 2002-based market basket 

reflecting the operating and capital cost 

structures for IRFs, IPFs, and LTCHs 

(hereafter referred to as the 

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

We excluded cancer and children’s 

hospitals from the RPL market basket 

because their payments are based 

entirely on reasonable costs subject to 

rate-of-increase limits established under 

the authority of section 1886(b) of the 

Act, which are implemented in 

regulations at § 413.40. They are not 

reimbursed through a PPS. Also, the FY 

2002 cost structures for cancer and 

children’s hospitals are noticeably 

different than the cost structures of the 

IRFs, IPFs, and LTCHs. A complete 

discussion of the FY 2002-based RPL 

market basket appears in the May 2006 

IPF PPS final rule (71 FR 27046 through 

27054). 

In the May 1, 2009 IPF PPS notice (74 

FR 20362), we expressed our interest in 

exploring the possibility of creating a 

stand-alone IPF market basket that 

reflects the cost structures of only IPF 

providers. We note that, of the available 

options, one would be to join the 

Medicare cost report data from 

freestanding IPF providers (presently 

incorporated into the FY 2002-based 

RPL market basket) with data from 

hospital-based IPF providers. We 

indicated that an examination of the 

Medicare cost report data comparing 

freestanding and hospital-based IPFs 

revealed considerable differences 

between the two with respect to cost 

levels and cost structures. At that time, 

we were unable to fully understand the 

differences between these two types of 

IPF providers. As a result, we felt that 

further research was required and we 

solicited public comment for additional 

information that might help us to better 

understand the reasons for the 

variations in costs and cost structures, 

as indicated by the cost report data, 

between freestanding and hospitalbased IPFs (74 FR 20376). 

We summarized the public comments 

we received and our responses in the 

April 2010 IPF PPS notice (75 FR 23111 

through 23113). Despite receiving 

comments from the public on this issue, 

we remain unable to sufficiently 

understand the observed differences in 

costs and cost structures between 

hospital-based and freestanding IPFs, 

and therefore we do not feel it is 

appropriate at this time to incorporate 

data from hospital-based IPFs with 

those of freestanding IPFs to create a 

stand-alone IPF market basket. 

Although we do not feel it would be 

appropriate to propose a stand-alone IPF 

market basket, we are currently 

exploring the viability of creating two 

separate market baskets from the current 

RPL, one of which would include 

freestanding IPFs and freestanding IRFs 

and would be used to update payments 

under both the IPF and IRF payment 

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

on the outcome of our research, we 

anticipate the possibility of proposing a 

rehabilitation and psychiatric (RP) 

market basket in the next update cycle. 

We welcome public comment on the 

possibility of using this type of market 

basket to update IPF payments in the 

future. 

For this update cycle, we are 

proposing to rebase and revise the FY 

2002-based RPL market basket by 

creating a proposed FY 2008-based RPL 

market basket as described below. In the 

following discussion, we provide an 

overview of the market basket and 

describe the methodologies we propose 

to use for purposes of determining the 

operating and capital portions of the 

proposed FY 2008-based RPL market 

basket. 

B. Overview of the Proposed FY 2008– 

Based RPL Market Basket 

The proposed FY 2008-based RPL 

market basket is a fixed weight, 

Laspeyres-type price index. A Laspeyres 

price index measures the change in 

price, over time, of the same mix of 

goods and services purchased in the 

base period. Any changes in the 

quantity or mix of goods and services 

(that is, intensity) purchased over time 

are not measured. 

The index itself is constructed in 

three steps. First, a base period is 

selected (in this proposed rule, the base 

period is FY 2008) and total base period 

expenditures are estimated for a set of 

mutually exclusive and exhaustive 

spending categories with the proportion 

of total costs that each category 


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represents being calculated. These 

proportions are called cost or 

expenditure weights. Second, each 

expenditure category is matched to an 

appropriate price or wage variable, 

referred to as a price proxy. In nearly 

every instance, these price proxies are 

derived from publicly available 

statistical series that are published on a 

consistent schedule (preferably at least 

on a quarterly basis). Finally, the 

expenditure weight for each cost 

category is multiplied by the level of its 

respective price proxy. The sum of these 

products (that is, the expenditure 

weights multiplied by their price levels) 

for all cost categories yields the 

composite index level of the market 

basket in a given period. Repeating this 

step for other periods produces a series 

of market basket levels over time. 

Dividing an index level for a given 

period by an index level for an earlier 

period produces a rate of growth in the 

input price index over that timeframe. 

As noted above, the market basket is 

described as a fixed-weight index 

because it represents the change in price 

over time of a constant mix (quantity 

and intensity) of goods and services 

needed to furnish hospital services. The 

effects on total expenditures resulting 

from changes in the mix of goods and 

services purchased subsequent to the 

base period are not measured. For 

example, a hospital hiring more nurses 

to accommodate the needs of patients 

would increase the volume of goods and 

services purchased by the hospital, but 

would not be factored into the price 

change measured by a fixed-weight 

hospital market basket. Only when the 

index is rebased would changes in the 

quantity and intensity be captured, with 

those changes being reflected in the cost 

weights. Therefore, we rebase the 

market basket periodically so the cost 

weights reflect recent changes in the 

mix of goods and services that hospitals 

purchase (hospital inputs) to furnish 

inpatient care between base periods. 

C. Proposed Rebasing and Revising of 

the RPL Market Basket 

We are inviting public comments on 

our proposed methodological changes to 

the RPL 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 proposed rule, we are 

proposing to shift the base year cost 

structure for the RPL market basket from 

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

changing data sources, price proxies, or 

methods, used to derive the input price 

index. We propose to rebase and revise 

the market basket used to update the IPF 

PPS. 

1. Development of Cost Categories and 

Weights 

a. Medicare Cost Reports 

The proposed FY 2008-based RPL 

market basket consists of several major 

cost categories derived from the FY 

2008 Medicare cost reports for 

freestanding IRFs, freestanding IPFs, 

and LTCHs including wages and 

salaries, pharmaceuticals, professional 

liability insurance, capital, and a 

residual. These FY 2008 cost reports 

include providers whose cost report 

begin date is on or between October 1, 

2007 and September 30, 2008. We 

choose to use FY 2008 as the base year 

because we believe that the Medicare 

cost reports for this year represent the 

most recent, complete set of Medicare 

cost report data available for IRFs, IPFs, 

and LTCHs. However, there is an issue 

with obtaining data specifically for 

benefits and contract labor from this set 

of FY 2008 Medicare cost reports since 

IRFs, IPFs, and LTCHs were not 

required to complete the Medicare cost 

report worksheet from which these data 

were collected (Worksheet S–3, part II). 

As a result, only a small number of 

providers (less than 30 percent) reported 

data for these categories, and we do not 

expect these FY 2008 data to improve 

over time. Furthermore, since IRFs, 

IPFs, and LTCHs were not required to 

submit data for Worksheet S–3, part II 

in previous cost reporting years, we 

have always had this issue of 

incomplete Medicare cost report data for 

benefits and contract labor (including 

when we finalized the FY 2002-based 

RPL market basket). Due to the 

incomplete benefits and contract labor 

data for IRFs, IPFs, and LTCHs, we 

propose to develop these cost weights 

using FY 2008 Medicare cost report data 

for IPPS hospitals (similar to the method 

that was used for the FY 2002-based 

RPL market basket). Additional detail is 

provided later in this section. 

Since our goal is to measure cost 

shares that are reflective of case mix and 

practice patterns associated with 

providing services to Medicare 

beneficiaries, we are proposing to limit 

our selection of Medicare cost reports to 

those from hospitals that have a 

Medicare average length of stay (LOS) 

that is within a comparable range of 

their total facility average LOS. We 

believe this provides a more accurate 

reflection of the structure of costs for 

Medicare covered days. We propose to 

use the cost reports of IRFs and LTCHs 

with Medicare average LOS within 15 

percent (that is, 15 percent higher or 

lower) of the total facility average LOS 

for the hospital. This is the same edit 

applied to derive the FY 2002-based 

RPL market basket and generally 

includes those LTCHs and IRFs with 

Medicare LOS within approximately 5 

days of the facility average LOS of the 

hospital. 

We are proposing to use a less 

stringent measure of Medicare LOS for 

IPFs. For this provider-type, and in 

order to produce a robust sample size, 

we propose to use those facilities’ 

Medicare cost reports whose average 

LOS is within 30 or 50 percent 

(depending on the total facility average 

LOS) of the total facility average LOS. 

This is the same edit applied to derive 

the FY 2002-based RPL market basket. 

We applied these LOS edits to first 

obtain a set of cost reports for facilities 

that have a Medicare LOS within a 

comparable range of their total facility 

LOS. Using this set of Medicare cost 

reports, we then calculated cost weights 

for four cost categories directly from the 

FY 2008 Medicare cost reports for 

freestanding IRFs, freestanding IPFs, 

and LTCHs (found in Table 1 below). 

These Medicare cost report cost weights 

were then supplemented with 

information obtained from other data 

sources (explained in more detail 

below) to derive the proposed FY 2008- 

based RPL market basket cost weights. 

TABLE 1—MAJOR COST CATEGORIES

AND THEIR RESPECTIVE COST

WEIGHTS AS CALCULATED DIRECTLY

FROM FY 2008 MEDICARE COST

REPORTS

Major cost categories 

Proposed FY 

2008-based 

RPL market 

basket 

(percent) 

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

Professional liability insurance (Malpractice) ............ 0.764 

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

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

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

b. Other Data Sources 

In addition to the IRF, IPF and LTCH 

Medicare cost reports for freestanding 

IRFs and freestanding IPFs, and LTCHs, 

the other data sources we used to 

develop the proposed FY 2008-based 

RPL market basket cost weights were the 

FY 2008 IPPS Medicare cost reports and 

the Benchmark Input-Output (I–O) 

Tables created by the Bureau of 

Economic Analysis (BEA), U.S. 

Department of Commerce. The FY 2008 

Medicare cost reports include providers 

whose cost report begin date is on or 


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between October 1st, 2007 and 

September 30, 2008. 

As noted above, the proposed FY 

2008-based RPL cost weights for 

benefits and contract labor were derived 

using FY 2008-based IPPS Medicare cost 

reports. We used these Medicare cost 

reports to calculate cost weights for 

Wages and Salaries, Benefits, and 

Contract Labor for IPPS hospitals for FY 

2008. For the proposed Benefits cost 

weight for the FY 2008-based RPL 

market basket, the ratio of the FY 2008 

IPPS Benefits cost weight to the FY 2008 

IPPS Wages and Salaries cost weight 

was applied to the RPL Wages and 

Salaries cost weight. Similarly, the ratio 

of the FY 2008 IPPS Contract Labor cost 

weight to the FY 2008 IPPS Wages and 

Salaries cost weight was applied to the 

RPL Wages and Salaries cost weight to 

derive a Contract Labor cost weight for 

the proposed FY 2008-based RPL market 

basket. 

The All Other cost category is divided 

into other hospital expenditure category 

shares using the 2002 BEA Benchmark 

I–O data following the removal of the 

portions of the All Other cost category 

provided in Table 1 that are attributable 

to Benefits and Contract Labor. The BEA 

Benchmark I–O data are scheduled for 

publication every 5 years. The most 

recent data available are for 2002. BEA 

also produces Annual I–O estimates; 

however, the 2002 Benchmark I–O data 

represent a much more comprehensive 

and complete set of data that are derived 

from the 2002 Economic Census. The 

Annual I–O is simply an update of the 

Benchmark I–O tables. For the FY 2002- 

based RPL market basket, we used the 

1997 Benchmark I–O data. We are 

proposing to use the 2002 Benchmark I– 

O data in the FY 2008-based RPL market 

basket. Instead of using the less detailed 

Annual I–O data, we aged the 2002 

Benchmark I–O data forward to 2008. 

The methodology we used to age the 

data forward involves applying the 

annual price changes from the 

respective price proxies to the 

appropriate cost categories. We repeat 

this practice for each year. 

The All Other cost category 

expenditure shares are determined as 

being equal to each category’s 

proportion to total ‘‘all other’’ in the 

aged 2002 Benchmark I–O data. For 

instance, if the cost for telephone 

services represented 10 percent of the 

sum of the ‘‘all other’’ Benchmark I–O 

hospital expenditures, then telephone 

services would represent 10 percent of 

the RPL market basket’s All Other cost 

category. 

2. Final Cost Category Computation 

As stated previously, for this rebasing 

we are proposing to use the FY 2008 

Medicare cost reports for IRFs, IPFs, and 

LTCHs to derive four major cost 

categories. The proposed FY 2008-based 

RPL market basket includes two 

additional cost categories that were not 

broken out separately in the FY 2002- 

based RPL market basket: 

‘‘Administrative and Business Support 

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

inclusion of these two additional cost 

categories, which are derived using the 

Benchmark I–O data, is consistent with 

the addition of these two cost categories 

to the FY 2006-based IPPS market 

basket (74 FR 43845). We are proposing 

to break out both categories so we can 

better match their respective expenses 

with more appropriate price proxies. A 

thorough discussion of our rationale for 

each of these cost categories is provided 

in the section III.C.3.s. of this proposed 

rule. Also, the proposed FY 2008-based 

RPL market basket excludes one cost 

category: Photo Supplies. The 2002 

Benchmark I–O weight for this category 

is considerably smaller than the 1997 

Benchmark I–O weight, presently 

accounting for less than one-tenth of 

one percentage point of the RPL market 

basket. Therefore, we are proposing to 

include the photo supplies costs in the 

Chemical cost category weight with 

other similar chemical products. 

We are not proposing to change our 

definition of the labor-related share. 

However, we are proposing to rename 

our aggregate cost categories from 

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

and ‘‘nonlabor-related’’ services. This is 

consistent with the FY 2006-based IPPS 

market basket (74 FR 43845). As 

discussed in more detail below and 

similar to the FY 2002-based RPL 

market basket, we classify a cost 

category as labor-related and include it 

in the labor-related share if the cost 

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

local labor market. In previous 

regulations, we grouped cost categories 

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

proposed new labels more accurately 

reflect the concepts that they are 

intended to convey. We are not 

proposing to change our definition of 

the labor-related share because we 

continue to classify a cost category as 

labor-related if the costs are laborintensive and vary with the local labor 

market. 

3. Selection of Price Proxies 

After computing the FY 2008 cost 

weights for the proposed rebased RPL 

market basket, it was necessary to select 

appropriate wage and price proxies to 

reflect the rate of price change for each 

expenditure category. With the 

exception of the proxy for Professional 

Liability Insurance, all of the proxies for 

the operating portion of the proposed 

FY 2008-based RPL market basket are 

based on Bureau of Labor Statistics 

(BLS) data and are grouped into one of 

the following BLS categories: 

Producer Price Indexes—Producer 

Price Indexes (PPIs) measure price 

changes for goods sold in markets other 

than the retail market. PPIs are 

preferable price proxies for goods and 

services that hospitals purchase as 

inputs because these PPIs better reflect 

the actual price changes faced by 

hospitals. For example, we use a special 

PPI for prescription drugs, rather than 

the Consumer Price Index (CPI) for 

prescription drugs, because hospitals 

generally purchase drugs directly from a 

wholesaler. The PPIs that we use 

measure price changes at the final stage 

of production. 

Consumer Price Indexes—Consumer 

Price Indexes (CPIs) measure change in 

the prices of final goods and services 

bought by the typical consumer. 

Because they may not represent the 

price faced by a producer, we used CPIs 

only if an appropriate PPI was not 

available, or if the expenditures were 

more similar to those faced by retail 

consumers in general rather than by 

purchasers of goods at the wholesale 

level. For example, the CPI for food 

purchased away from home is used as 

a proxy for contracted food services. 

Employment Cost Indexes— 

Employment Cost Indexes (ECIs) 

measure the rate of change in employee 

wage rates and employer costs for 

employee benefits per hour worked. 

These indexes are fixed-weight indexes 

and strictly measure the change in wage 

rates and employee benefits per hour. 

Appropriately, they are not affected by 

shifts in employment mix. 

We evaluated the price proxies using 

the criteria of reliability, timeliness, 

availability, and relevance. Reliability 

indicates that the index is based on 

valid statistical methods and has low 

sampling variability. Timeliness implies 

that the proxy is published regularly, 

preferably at least once a quarter. 

Availability means that the proxy is 

publicly available. Finally, relevance 

means that the proxy is applicable and 

representative of the cost category 

weight to which it is applied. The 


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5004 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 

proposed CPIs, PPIs, and ECIs selected 

meet these criteria. 

Table 2 sets forth the proposed FY 

2008-based RPL market basket including 

cost categories, and their respective 

weights and price proxies. For 

comparison purposes, the 

corresponding FY 2002-based RPL 

market basket cost weights are listed, as 

well. For example, Wages and Salaries 

are 49.447 percent of total costs in the 

proposed FY 2008-based RPL market 

basket compared to 52.895 percent for 

the FY 2002-based RPL market basket. 

Employee Benefits are 12.831 percent in 

the proposed FY 2008-based RPL market 

basket compared to 12.982 percent for 

the FY 2002-based RPL market basket. 

As a result, compensation costs (Wages 

and Salaries plus Employee Benefits) for 

the proposed FY 2008-based RPL market 

basket are 62.278 percent of total costs 

compared to 65.877 percent for the FY 

2002-based RPL market basket. 

Following Table 2 is a summary 

outlining the choice of the proxies we 

propose to use for the operating portion 

of the FY 2008-based RPL market 

basket. The price proxies proposed for 

the capital portion are described in 

more detail in the capital methodology 

section (see section III.C.4. of this 

proposed rule). 

We note that the proxies for the 

operating portion of the FY 2008-based 

RPL market basket are the same as those 

used for the FY 2006-based IPPS 

operating market basket. Because these 

proxies meet our criteria of reliability, 

timeliness, availability, and relevance, 

we believe they are the best measures of 

price changes for the cost categories. For 

further discussion on the FY 2006-based 

IPPS market basket, see the IPPS final 

rule published in the Federal Register 

on August 27, 2009 (74 FR 43843). 

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

FY 2002-BASED RPL MARKET BASKET COST WEIGHTS INCLUDED FOR COMPARISON

Cost categories 

FY 

2002-based 

RPL market 

basket cost 

weights 

Proposed FY 

2008-based 

RPL market 

basket cost 

weights 

Proposed FY 2008-based RPL market basket price 

proxies 

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

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

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

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

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

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

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

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

Premium Index. 

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

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

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

(Prescriptions). 

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

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

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

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

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

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

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

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

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

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

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

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

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

Occupations. 

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

Services. 

(c.) All Other: Labor-Related Services 5 ................ 2.219 2.145 ECI for Compensation for Private Service Occupations. 

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

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

Occupations. 

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

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

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

(e.) All Other: Nonlabor-Related Services 6 .......... 2.800 0.623 CPI–U for All Items less Food and Energy. 

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

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

(1.) Fixed Assets ................................................... 4.250 3.286 BEA chained price index for nonresidential construction for hospitals and special care facilities—vintage 

weighted (26 years). 

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

(11 years). 

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

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

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


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

FY 2002-BASED RPL MARKET BASKET COST WEIGHTS INCLUDED FOR COMPARISON—Continued 

Cost categories 

FY 

2002-based 

RPL market 

basket cost 

weights 

Proposed FY 

2008-based 

RPL market 

basket cost 

weights 

Proposed FY 2008-based RPL market basket price 

proxies 

(2.) For Profit ......................................................... 0.694 1.301 Average yield on Moody’s Aaa bonds—vintageweighted (26 years). 

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

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

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

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

Chemical Manufacturing, the PPI for Other Basic Organic Chemical Manufacturing, and the PPI for Soap and Cleaning Compound Manufacturing. For more detail about this proxy, see section III.C.3.j. of the preamble of this proposed rule. 2To proxy the Chemicals cost category, we used a blended PPI composed of the PPI for Industrial Gases, the PPI for Other Basic Inorganic 

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

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

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

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

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

for the FY 2008-based RPL market basket. 

a. Wages and Salaries 

We are proposing to use the ECI for 

Wages and Salaries for Hospital Workers 

(All Civilian) (BLS series code 

CIU1026220000000I) to measure the 

price growth of this cost category. This 

same proxy was used in the FY 2002- 

based RPL market basket. 

b. Employee Benefits 

We are proposing to use the ECI for 

Employee Benefits for Hospital Workers 

(All Civilian) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

c. Electricity 

We are proposing to use the PPI for 

Commercial Electric Power (BLS series 

code WPU0542). This same proxy was 

used in the FY 2002-based RPL market 

basket. 

d. Fuel, Oil, and Gasoline 

For the FY 2002-based RPL market 

basket, this category only included 

expenses classified under North 

American Industry Classification 

System (NAICS) 21 (Mining). We 

proxied this category using the PPI for 

Commercial Natural Gas (BLS series 

code WPU0552). For the proposed FY 

2008-based market basket, we are 

proposing to 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 are proposing to use the PPI for 

Petroleum Refineries (BLS series code 

PCU324110324110) as the proxy for this 

cost category. 

e. Water and Sewage 

We are proposing to use the CPI for 

Water and Sewerage Maintenance (All 

Urban Consumers) (BLS series code 

CUUR0000SEHG01) to measure the 

price growth of this cost category. This 

same proxy was used in the FY 2002- 

based RPL market basket. 

f. Professional Liability Insurance 

We are proposing to proxy price 

changes in hospital professional liability 

insurance premiums (PLI) using 

percentage changes as estimated by the 

CMS Hospital Professional Liability 

Index. To generate these estimates, we 

collect commercial insurance premiums 

for a fixed level of coverage while 

holding nonprice factors constant (such 

as a change in the level of coverage). 

This method is also used to proxy PLI 

price changes in the Medicare Economic 

Index (75 FR 73268). This same proxy 

was used in the FY 2002-based RPL 

market basket. 

g. Pharmaceuticals 

We are proposing to use the PPI for 

Pharmaceuticals for Human Use, 

Prescription (BLS series code 

WPUSI07003) to measure the price 

growth of this cost category. We note 

that we are not making a change to the 

PPI that is used to proxy this cost 

category. There was a recent change to 

the BLS naming convention for this 

series; however this is the same proxy 

that was used in the FY 2002-based RPL 

market basket. 

h. Food: Direct Purchases 

We are proposing to use the PPI for 

Processed Foods and Feeds (BLS series 

code WPU02) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

i. Food: Contract Services 

We are proposing to use the CPI for 

Food Away From Home (All Urban 

Consumers) (BLS series code 

CUUR0000SEFV) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

j. Chemicals 

We are proposing to use a blended PPI 

composed of the PPI for Industrial Gas 

Manufacturing (NAICS 325120) (BLS 

series code PCU325120325120P), the 

PPI for Other Basic Inorganic Chemical 

Manufacturing (NAICS 325180) (BLS 

series code PCU32518–32518-), the PPI 

for Other Basic Organic Chemical 

Manufacturing (NAICS 325190) (BLS 


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series code PCU32519–32519-), and the 

PPI for Soap and Cleaning Compound 

Manufacturing (NAICS 325610) (BLS 

series code PCU32561–32561-). Using 

the 2002 Benchmark I–O data, we found 

that these NAICS industries accounted 

for approximately 90 percent of the 

hospital industry’s chemical expenses. 

Therefore, we are proposing to use 

this blended index because we believe 

its composition better reflects the 

composition of the purchasing patterns 

of hospitals than does the PPI for 

Industrial Chemicals (BLS series code 

WPU061), the proxy used in the FY 

2002-based RPL market basket. Table 3 

below shows the weights for each of the 

four PPIs used to create the blended PPI, 

which we determined using the 2002 

Benchmark I–O data. 

TABLE 3—BLENDED CHEMICAL PPI WEIGHTS

Name Weights 

(in percent) NAICS 

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

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

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

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

k. Medical Instruments 

We are proposing to use the PPI for 

Medical, Surgical, and Personal Aid 

Devices (BLS series code WPU156) to 

measure the price growth of this cost 

category. In the 1997 Benchmark I–O 

data, approximately half of the expenses 

classified in this category were for 

surgical and medical instruments. 

Therefore, we used the PPI for Surgical 

and Medical Instruments and 

Equipment (BLS series code WPU1562) 

to proxy this category in the FY 2002- 

based RPL market basket. The 2002 

Benchmark I–O data show that surgical 

and medical instruments now represent 

only 33 percent of these expenses and 

that the largest expense category is 

surgical appliance and supplies 

manufacturing (corresponding to BLS 

series code WPU1563). Due to this 

reallocation of costs over time, we are 

proposing to change the price proxy for 

this cost category to the more aggregated 

PPI for Medical, Surgical, and Personal 

Aid Devices. 

l. Photographic Supplies 

We are proposing to eliminate the cost 

category specific to photographic 

supplies for the proposed FY 2008- 

based RPL market basket. These costs 

would now be included in the 

Chemicals cost category because the 

costs are presently reported as all other 

chemical products. Notably, although 

we would be eliminating the specific 

cost category, these costs would still be 

accounted for within the RPL market 

basket. 

m. Rubber and Plastics 

We are proposing to use the PPI for 

Rubber and Plastic Products (BLS series 

code WPU07) to measure price growth 

of this cost category. This same proxy 

was used in the FY 2002-based RPL 

market basket. 

n. Paper and Printing Products 

We are proposing to use the PPI for 

Converted Paper and Paperboard 

Products (BLS series code WPU0915) to 

measure the price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

o. Apparel 

We are proposing to use the PPI for 

Apparel (BLS series code WPU0381) to 

measure the price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

p. Machinery and Equipment 

We are proposing to use the PPI for 

Machinery and Equipment (BLS series 

code WPU11) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

q. Miscellaneous Products 

We are proposing to use the PPI for 

Finished Goods Less Food and Energy 

(BLS series code WPUSOP3500) to 

measure the price growth of this cost 

category. Using this index would 

remove the double-counting of food and 

energy prices, which would already be 

captured elsewhere in the market 

basket. This same proxy was used in the 

FY 2002-based RPL market basket. 

r. Professional Fees: Labor-Related 

We are proposing to use the ECI for 

Compensation for Professional and 

Related Occupations (Private Industry) 

(BLS series code CIS2020000120000I) to 

measure the price growth of this 

category. It includes occupations such 

as legal, accounting, and engineering 

services. This same proxy was used in 

the FY 2002-based RPL market basket. 

s. Administrative and Business Support 

Services 

We are proposing to use the ECI for 

Compensation for Office and 

Administrative Support Services 

(Private Industry) (BLS series code 

CIU2010000220000I) to measure the 

price growth of this category. Previously 

these costs were included in the All 

Other: Labor-intensive category (now 

renamed the All Other: Labor-related 

Services category), and were proxied by 

the ECI for Compensation for Service 

Occupations. We believe that this 

compensation index better reflects the 

changing price of labor associated with 

the provision of administrative services 

and its incorporation represents a 

technical improvement to the market 

basket. 

t. All Other: Labor-Related Services 

We are proposing to use the ECI for 

Compensation for Service Occupations 

(Private Industry) (BLS series code 

CIU2010000300000I) to measure the 

price growth of this cost category. This 

same proxy was used in the FY 2002- 

based RPL market basket. 

u. Professional Fees: Nonlabor-Related 

We are proposing to use the ECI for 

Compensation for Professional and 

Related Occupations (Private Industry) 

(BLS series code CIS2020000120000I) to 

measure the price growth of this 

category. This is the same price proxy 

that we are proposing to use for the 

Professional Fees: Labor-related cost 

category. 

v. Financial Services 

We are proposing to use the ECI for 

Compensation for Financial Activities 

(Private Industry) (BLS series code 

CIU201520A000000I) to measure the 

price growth of this cost category. 

Previously these costs were included in 

the All Other: Nonlabor-intensive 

category (now renamed the All Other: 

Nonlabor-related Services category), and 

were proxied by the CPI for All Items. 

We believe that this compensation 

index better reflects the changing price 

of labor associated with the provision of 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 5007 

financial services and its incorporation 

represents a technical improvement to 

the market basket. 

w. Telephone Services 

We are proposing to use the CPI for 

Telephone Services (BLS series code 

CUUR0000SEED) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

x. Postage 

We are proposing to use the CPI for 

Postage (BLS series code 

CUUR0000SEEC01) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

y. All Other: Nonlabor-Related Services 

We are proposing to use the CPI for 

All Items Less Food and Energy (BLS 

series code CUUR0000SA0L1E) to 

measure the price growth of this cost 

category. Previously these costs were 

proxied by the CPI for All Items in the 

FY 2002-based RPL market basket. We 

believe that using the CPI for All Items 

Less Food and Energy would remove the 

double counting of changes in food and 

energy prices, as they are already 

captured elsewhere in the market 

basket. Consequently, we believe that 

the incorporation of this proxy would 

represent a technical improvement to 

the market basket. 

4. Proposed Methodology for Capital 

Portion of the RPL Market Basket 

In the FY 2002-based RPL market 

basket, we did not have IRF, IPF, and 

LTCH 2002 Medicare cost report data 

for the capital cost weights, due to a 

change in the 2002 reporting 

requirements. Therefore, we used these 

hospitals’ 2001 expenditure data for the 

capital cost categories of depreciation, 

interest, and other capital expenses, and 

aged the data to a 2002 base year using 

relevant price proxies. 

For the proposed FY 2008-based RPL 

market basket, we are proposing to 

calculate weights for the proposed RPL 

market basket capital costs using the 

same set of FY 2008 Medicare cost 

reports used to develop the operating 

share for IRFs, IPFs, and LTCHs. To 

calculate the proposed total capital cost 

weight, we first apply the same LOS 

edits as applied prior to calculating the 

operating cost weights as described 

above in section III.C.3. The resulting 

proposed capital weight for the FY 2008 

base year is 8.392 percent. 

Lease expenses are unique in that 

they are not broken out as a separate 

cost category in the RPL market basket, 

but rather are proportionally distributed 

amongst the cost categories of 

Depreciation, Interest, and Other, 

reflecting the assumption that the 

underlying cost structure of leases is 

similar to that of capital costs in general. 

As was done in the FY 2002-based RPL 

market basket, we first assumed 10 

percent of lease expenses represents 

overhead and assigned those costs to the 

Other Capital-Related Costs category 

accordingly. The remaining lease 

expenses were distributed across the 

three cost categories based on the 

respective weights of depreciation, 

interest, and other capital not including 

lease expenses. 

Depreciation contains two 

subcategories: (1) Building & Fixed 

Equipment; and (2) Movable Equipment. 

The apportionment between building & 

fixed equipment and movable 

equipment was determined using the FY 

2008 Medicare cost reports for 

freestanding IRFs, IPFs, and LTCHs. 

This methodology was also used to 

compute the apportionment used in the 

FY 2002-based RPL market basket (70 

FR 47912). 

The total Interest expense cost 

category is split between government/ 

nonprofit interest and for-profit interest. 

The FY 2002-based RPL market basket 

allocated 75 percent of the total Interest 

cost weight to government/nonprofit 

interest and proxied that category by the 

average yield on domestic municipal 

bonds. The remaining 25 percent of the 

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

average yield on Moody’s Aaa bonds (70 

FR 47912). This was based on the FY 

2002-based IPPS capital input price 

index (70 FR 23406) due to insufficient 

Medicare cost report data for IPFs, IRFs, 

and LTCHs. For the proposed FY 2008- 

based RPL market basket, we are 

proposing to derive the split using the 

relative FY 2008 Medicare cost report 

data on interest expenses for 

government/nonprofit and for-profit 

IRFs, IPFs, and LTCHs. Based on these 

data, we calculated a proposed 33/67 

split between government/nonprofit and 

for-profit interest. We believe it is 

important that this split reflects the 

latest relative cost structure of interest 

expenses for RPL providers. As stated 

above, we first apply the LOS edits (as 

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

calculating this split. Therefore, we are 

using cost reports that are reflective of 

case mix and practice patterns 

associated with providing services to 

Medicare beneficiaries. Using data 

specific to government/nonprofit and 

for-profit IRFs, IPFs, and LTCHs as well 

as the application of these LOS edits are 

the primary reasons for the difference in 

this split relative to the FY 2002-based 

RPL market basket. 

Because capital is acquired and paid 

for over time, capital expenses in any 

given year are determined by both past 

and present purchases of physical and 

financial capital. The vintage-weighted 

capital portion of the FY 2008-based 

RPL market basket is intended to 

capture the long-term consumption of 

capital, using vintage weights for 

depreciation (physical capital) and 

interest (financial capital). These 

vintage weights reflect the proportion of 

capital purchases attributable to each 

year of the expected life of building & 

fixed equipment, movable equipment, 

and interest. We are proposing to use 

the vintage weights to compute vintageweighted price changes associated with 

depreciation and interest expense. 

Vintage weights are an integral part of 

the proposed FY 2008-based RPL market 

basket. Capital costs are inherently 

complicated and are determined by 

complex capital purchasing decisions, 

over time, based on such factors as 

interest rates and debt financing. In 

addition, capital is depreciated over 

time instead of being consumed in the 

same period it is purchased. The capital 

portion of the proposed FY 2008-based 

RPL market basket would reflect the 

annual price changes associated with 

capital costs, and would be a useful 

simplification of the actual capital 

investment process. By accounting for 

the vintage nature of capital, we are able 

to provide an accurate and stable annual 

measure of price changes. Annual 

nonvintage price changes for capital are 

unstable due to the volatility of interest 

rate changes and, therefore, do not 

reflect the actual annual price changes 

for Medicare capital-related costs. The 

capital component of the proposed FY 

2008-based RPL market basket would 

reflect the underlying stability of the 

capital acquisition process and provides 

hospitals with the ability to plan for 

changes in capital payments. 

To calculate the vintage weights for 

depreciation and interest expenses, we 

needed a time series of capital 

purchases for building & fixed 

equipment and movable equipment. We 

found no single source that provides a 

uniquely best time series of capital 

purchases by hospitals for all of the 

above components of capital purchases. 

The early Medicare cost reports did not 

have sufficient capital data to meet this 

need. Data we obtained from the 

American Hospital Association (AHA) 

do not include annual capital 

purchases. However, AHA does provide 

a consistent database back to 1963. We 

used data from the AHA Panel Survey 

and the AHA Annual Survey to obtain 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
5008 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 

a time series of total expenses for 

hospitals. We then used data from the 

AHA Panel Survey supplemented with 

the ratio of depreciation to total hospital 

expenses obtained from the Medicare 

cost reports to derive a trend of annual 

depreciation expenses for 1963 through 

2008. 

In order to estimate capital purchases 

using data on depreciation expenses, the 

expected life for each cost category 

(building & fixed equipment, movable 

equipment, and interest) is needed to 

calculate vintage weights. For the FY 

2002-based RPL market basket, due to 

insufficient Medicare cost report data 

for IRFs, IPFs, and LTCHs, we used 

2001 Medicare Cost Reports for IPPS 

hospitals to determine the expected life 

of building & fixed equipment and 

movable equipment (70 FR 47913). The 

FY 2002-based RPL market basket was 

based on an expected life of building & 

fixed equipment of 23 years. It used 11 

years as the expected life for movable 

equipment. We believed that this data 

source reflected the latest relative cost 

structure of depreciation expenses for 

hospitals at the time and was analogous 

to IRFs, IPFs, and LTCHs. 

The expected life of any piece of 

equipment can be determined by 

dividing the value of the asset 

(excluding fully depreciated assets) by 

its current year depreciation amount. 

This calculation yields the estimated 

useful life of an asset if depreciation 

were to continue at current year levels, 

assuming straight-line depreciation. 

Following a similar method to what was 

applied for the FY 2002-based RPL 

market basket, we are proposing to use 

the expected life of building & fixed 

equipment to be equal to 26 years, and 

the expected life of movable equipment 

to be 11 years. These expected lives are 

calculated using FY 2008 Medicare cost 

reports for IPPS hospitals since we are 

currently unable to obtain robust 

measures of the expected lives for 

building & fixed equipment and 

movable equipment using the Medicare 

cost reports from IRFs, IPFs, and LTCHs. 

We also propose to use the building 

& fixed equipment and movable 

equipment weights derived from FY 

2008 Medicare cost reports for IRFs, 

IPFs, and LTCHs to separate the 

depreciation expenses into annual 

amounts of building & fixed equipment 

depreciation and movable equipment 

depreciation. Year-end asset costs for 

building & fixed equipment and 

movable equipment were determined by 

multiplying the annual depreciation 

amounts by the expected life 

calculations. We then calculated a time 

series, back to 1963, of annual capital 

purchases by subtracting the previous 

year asset costs from the current year 

asset costs. From this capital purchase 

time series, we were able to calculate 

the vintage weights for building & fixed 

equipment and for movable equipment. 

Each of these sets of vintage weights is 

explained in more detail below. 

For the proposed building & fixed 

equipment vintage weights, we used the 

real annual capital purchase amounts 

for building & fixed equipment to 

capture the actual amount of the 

physical acquisition, net of the effect of 

price inflation. This real annual 

purchase amount for building & fixed 

equipment was produced by deflating 

the nominal annual purchase amount by 

the building & fixed equipment price 

proxy, BEA’s chained price index for 

nonresidential construction for 

hospitals and special care facilities. 

Because building & fixed equipment 

have an expected life of 26 years, the 

vintage weights for building & fixed 

equipment are deemed to represent the 

average purchase pattern of building & 

fixed equipment over 26-year periods. 

With real building & fixed equipment 

purchase estimates available from 2008 

back to 1963, we averaged twenty 26- 

year periods to determine the average 

vintage weights for building & fixed 

equipment that are representative of 

average building & fixed equipment 

purchase patterns over time. Vintage 

weights for each 26-year period are 

calculated by dividing the real building 

& fixed capital purchase amount in any 

given year by the total amount of 

purchases in the 26-year period. This 

calculation is done for each year in the 

26-year period, and for each of the 

twenty 26-year periods. We used the 

average of each year across the twenty 

26-year periods to determine the average 

building & fixed equipment vintage 

weights for the FY 2008-based RPL 

market basket. 

For the proposed movable equipment 

vintage weights, the real annual capital 

purchase amounts for movable 

equipment were used to capture the 

actual amount of the physical 

acquisition, net of price inflation. This 

real annual purchase amount for 

movable equipment was calculated by 

deflating the nominal annual purchase 

amounts by the movable equipment 

price proxy, the PPI for Machinery and 

Equipment. This is the same proxy used 

for the FY 2002-based RPL market 

basket. Based on our determination that 

movable equipment has an expected life 

of 11 years, the vintage weights for 

movable equipment represent the 

average expenditure for movable 

equipment over an 11-year period. With 

real movable equipment purchase 

estimates available from 2008 back to 

1963, thirty-five 11-year periods were 

averaged to determine the average 

vintage weights for movable equipment 

that are representative of average 

movable equipment purchase patterns 

over time. Vintage weights for each 11- 

year period are calculated by dividing 

the real movable capital purchase 

amount for any given year by the total 

amount of purchases in the 11-year 

period. This calculation was done for 

each year in the 11-year period and for 

each of the thirty-five 11-year periods. 

We used the average of each year across 

the thirty-five 11-year periods to 

determine the average movable 

equipment vintage weights for the FY 

2008-based RPL market basket. 

For the proposed interest vintage 

weights, the nominal annual capital 

purchase amounts for total equipment 

(building & fixed, and movable) were 

used to capture the value of the debt 

instrument. Because we have 

determined that hospital debt 

instruments have an expected life of 26 

years, the vintage weights for interest 

are deemed to represent the average 

purchase pattern of total equipment 

over 26-year periods. With nominal total 

equipment purchase estimates available 

from 2008 back to 1963, twenty 26-year 

periods were averaged to determine the 

average vintage weights for interest that 

are representative of average capital 

purchase patterns over time. Vintage 

weights for each 26-year period are 

calculated by dividing the nominal total 

capital purchase amount for any given 

year by the total amount of purchases in 

the 26-year period. This calculation is 

done for each year in the 26-year period 

and for each of the twenty 26-year 

periods. We used the average of each 

year across the twenty 26-year periods 

to determine the average interest vintage 

weights for the FY 2008-based RPL 

market basket. The vintage weights for 

the capital portion of the FY 2002-based 

RPL market basket and the FY 2008- 

based RPL market basket are presented 

in Table 4. 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 5009 

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

Year 

Building and fixed equipment Movable equipment Interest 

FY 2002 

23 years 

FY 2008 

26 years 

FY 2002 

11 years 

FY 2008 

11 years 

FY 2002 

23 years 

FY 2008 

26 years 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

After the capital cost category weights 

were computed, it was necessary to 

select appropriate price proxies to 

reflect the rate-of-increase for each 

expenditure category. We are proposing 

to use the same price proxies for the 

capital portion of the proposed FY 2008- 

based RPL market basket that were used 

in the FY 2002-based RPL market basket 

with the exception of the Boeckh 

Construction Index. We replaced the 

Boeckh Construction Index with BEA’s 

chained price index for nonresidential 

construction for hospitals and special 

care facilities. The BEA index represents 

construction of facilities such as 

hospitals, nursing homes, hospices, and 

rehabilitation centers. Although these 

price indices move similarly over time, 

we believe that it is more technically 

appropriate to use an index that is more 

specific to the hospital industry. We 

believe these are the most appropriate 

proxies for hospital capital costs that 

meet our selection criteria of relevance, 

timeliness, availability, and reliability. 

The price proxies (prior to any vintage 

weighting) for each of the capital cost 

categories are the same as those used for 

the FY 2006-based CIPI as described in 

the IPPS FY 2010 final rule (74 FR at 

43857). 

5. Proposed RY 2012 Market Basket 

Update 

For the proposed RY 2012 (that is, 

beginning July 1, 2011 and ending 

September 30, 2012), we are proposing 

to use a 15-month (that is July 1, 2011 

through September 30, 2012) estimate of 

the proposed FY 2008-based RPL market 

basket based on the best available data. 

Consistent with historical practice, we 

estimate the RPL market basket update 

for the IPF PPS based on IHS Global 

Insight’s forecast using the most recent 

available data. IHS Global Insight, Inc. 

is a nationally recognized economic and 

financial forecasting firm that contracts 

with CMS to forecast the components of 

the market baskets. 

To determine a 15-month market 

basket update for RY 2012, we calculate 

the 5-quarter moving average index 

level for July 1, 2011 through September 

30, 2012 and the 4-quarter moving 

average index level for July 1, 2010 

through June 30, 2011. The percent 

change in these two values represents 

the proposed 15-month market basket 

update. 

Based on IHS Global Insight’s 4th 

quarter 2010 forecast with history 

through the 3rd quarter of 2010, the 

projected 15-month market basket 

update for the proposed 15-month RY 

2012 (July 1, 2011 through September 

30, 2012) is 3.0 percent. Therefore, 

consistent with our historical practice of 

estimating market basket increases 

based on the best available data, we are 

proposing a market basket update of 3.0 

percent for the proposed 15-month RY 

2012. Furthermore, because the 

proposed RY 2012 update is based on 

the most recent market basket estimate 

for the 15-month period (currently 3.0 

percent), we are also proposing that if 

more recent data are subsequently 

available (for example, a more recent 

estimate of the market basket), we 

would use such data, if appropriate, to 

determine the RY 2012 update in the 

final rule. 

We note that the most recent estimate 

of the FY 2008-based RPL market basket 

update for July 1, 2011 through June 30, 

2012, based on IHS Global Insight’s 4th 

quarter 2010 forecast with history 

through the 3rd quarter of 2010, is 2.6 

percent. We determine this 12-month 

market basket update by calculating the 

4-quarter moving average index level for 

July 1, 2011 through June 30, 2012 and 

the 4-quarter moving average index 

level for July 1, 2010 through June 30, 

2011. The percent change in these two 

values represents the proposed 12- 

month market basket update. Consistent 

with our historical practice of using 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
5010 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 

market basket estimates based on the 

most recent available data, if we were 

not proposing to extend the 2012 IPF 

PPS rate year by 3 months, we would 

have proposed a market basket update 

for a 12-month RY 2012 of 2.6 percent, 

based on the most recent estimate of the 

12-month RPL market basket update for 

July 1, 2011 through June 30, 2012. 

Using the current FY 2002-based RPL 

market basket and IHS Global Insight’s 

4th quarter 2010 forecast for the market 

basket components, the 15-month RY 

2012 update would also be 3.0 percent. 

The 12-month RY 2012 update would be 

2.6 percent. Table 5 below compares the 

proposed FY 2008-based RPL market 

basket and the FY 2002-based RPL 

market basket percent changes. 

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

THROUGH FY 2014 

Rate Year (RY) or Fiscal Year (FY) 

FY 2002-Based 

RPL Market 

Basket Index 

Percent Change 

FY 2008-Based 

Proposed RPL 

Market Basket 

Index Percent 

Change 

Historical data: 

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

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

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

RY 2009 1 ............................................................................................................................................. 3.2 3.3 

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

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

Forecast: 

RY 2011 1 ............................................................................................................................................. 2.2 2.3 

RY 2012 2 ............................................................................................................................................. 3.0 3.0 

FY 2013 3 .............................................................................................................................................. 3.0 2.9 

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

Average 2011–2014 ............................................................................................................................. 2.8 2.8 

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

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

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

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

Source: IHS Global Insight, Inc. 4th quarter 2010 forecast. 

For the RY 2012 proposed market 

basket update, there is no difference 

between the 15-month top-line FY 2002- 

based and the proposed FY 2008-based 

RPL market basket increases due to 

offsetting factors. The lower total 

compensation weight in the proposed 

FY 2008-based RPL market basket 

(62.278 percent) relative to the FY 2002- 

based RPL market basket (65.877 

percent), absent other factors, would 

have resulted in a slightly lower market 

basket update using the FY 2008-based 

RPL market basket. This impact, 

however, is offset by the larger weight 

associated with the Professional Fees 

category. In both market baskets, these 

expenditures are proxied by the ECI for 

Compensation for Professional and 

Related Services. The weight for 

Professional Fees in the FY 2002-based 

RPL market basket is 2.892 percent 

compared to 6.325 percent in the 

proposed FY 2008-based RPL market 

basket. 

6. Proposed Labor-Related Share 

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

proposed rule, due to the variations in 

costs and geographic wage levels, we are 

proposing that payment rates under the 

IPF PPS continue to be adjusted by a 

geographic wage index. This wage index 

would apply to the labor-related portion 

of the proposed Federal per diem base 

rate, hereafter referred to as the laborrelated share. 

The labor-related share is determined 

by identifying the national average 

proportion of total costs that are related 

to, influenced by, or vary with the local 

labor market. We continue to classify a 

cost category as labor-related if the costs 

are labor-intensive and vary with the 

local labor market. Given this, based on 

our definition of the labor-related share, 

we are proposing to include in the 

labor-related share the sum of the 

relative importance of Wages and 

Salaries, Employee Benefits, 

Professional Fees: Labor-related, 

Administrative and Business Support 

Services, All Other: Labor-related 

Services (previously referred to in the 

FY 2002-based RPL market basket as 

labor-intensive), and a portion of the 

Capital-Related cost weight. 

Consistent with previous rebasings, 

the All Other: Labor-related Services 

cost category is mostly comprised of 

building maintenance and security 

services (including, but not limited to, 

commercial and industrial machinery 

and equipment repair, nonresidential 

maintenance and repair, and 

investigation and security services). 

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

the hospital facility (and, therefore, 

unlikely to be purchased in the national 

market), we believe that they meet our 

definition of labor-related services. 

As stated in the April 2010 IPF PPS 

notice (75 FR 23110), the labor-related 

share was defined as the sum of the 

relative importance of Wages and 

Salaries, Fringe Benefits, Professional 

Fees, Labor-intensive Services, and a 

portion of the capital share from an 

appropriate market basket. Therefore, to 

determine the labor-related share for the 

IPF PPS for RY 2011, we used the FY 

2002-based RPL market basket cost 

weights relative importance to 

determine the labor-related share for the 

IPF PPS. 

For the proposed FY 2008-based RPL 

market basket rebasing, the proposed 

inclusion of the Administrative and 

Business Support Services cost category 

into the labor-related share remains 

consistent with the current labor-related 

share because this cost category was 

previously included in the Laborintensive cost category. As previously 

stated, we are proposing to establish 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. 


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For the FY 2002-based RPL market 

basket, we assumed that all nonmedical 

professional services (including 

accounting and auditing services, 

engineering services, legal services, and 

management and consulting services) 

were purchased in the local labor 

market and, therefore, all of their 

associated fees varied with the local 

labor market. As a result, we previously 

included 100 percent of these costs in 

the labor-related share. In an effort to 

more accurately determine the share of 

professional fees that should be 

included in the labor-related share, we 

surveyed hospitals regarding the 

proportion of those fees that go to 

companies that are located beyond their 

own local labor market (the results are 

discussed below). 

We continue to look for ways to refine 

our market basket approach to more 

accurately account for the proportion of 

costs influenced by the local labor 

market. To that end, we conducted a 

survey of hospitals to empirically 

determine the proportion of contracted 

professional services purchased by the 

industry that are attributable to local 

firms and the proportion that are 

purchased from national firms. We 

notified the public of our intent to 

conduct this survey on December 9, 

2005 (70 FR 73250) and received no 

comments (71 FR 8588). 

With approval from the Office of 

Management and Budget (OMB), we 

contacted a sample of IPPS hospitals 

and received responses to our survey 

from 108 hospitals. We believe that 

these data serve as an appropriate proxy 

for the purchasing patterns of 

professional services for IPFs as they are 

also institutional providers of health 

care services. Using data on FTEs to 

allocate responding hospitals across 

strata (region of the country and urban/ 

rural status), we calculated 

poststratification weights. Based on 

these weighted results, we determined 

that hospitals purchase, on average, the 

following portions of contracted 

professional services outside of their 

local labor market: 

• 34 percent of accounting and 

auditing services. 

• 30 percent of engineering services. 

• 33 percent of legal services. 

• 42 percent of management 

consulting services. 

We applied each of these percentages 

to its respective Benchmark I–O cost 

category underlying the professional 

fees cost category. This is the 

methodology that we used to separate 

the FY 2008-based RPL market basket 

professional fees category into 

Professional Fees: Labor-related and 

Professional Fees: Nonlabor-related cost 

categories. In addition to the 

professional services listed above, we 

also classified expenses under NAICS 

55, Management of Companies and 

Enterprises, into the Professional Fees 

cost category as was done in previous 

rebasings. The NAICS 55 data are 

mostly comprised of corporate, 

subsidiary, and regional managing 

offices, or otherwise referred to as home 

offices. Formerly, all of the expenses 

within this category were considered to 

vary with, or be influenced by, the local 

labor market and were thus included in 

the labor-related share. Because many 

hospitals are not located in the same 

geographic area as their home office, we 

analyzed data from a variety of sources 

in order to determine what proportion 

of these costs should be appropriately 

included in the labor-related share. 

Using data primarily from the 

Medicare cost reports and a CMS 

database of Home Office Medicare 

Records (HOMER) (a database that 

provides city and state information 

(addresses) for home offices), we were 

able to determine that 19 percent of the 

total number of freestanding IRFs, IPFs, 

and LTCHs that had home offices had 

those home offices located in their 

respective local labor markets—defined 

as being in the same Metropolitan 

Statistical Area (MSA). 

The Medicare cost report requires 

hospitals to report their home office 

provider numbers. Using the HOMER 

database to determine the home office 

location for each home office provider 

number, we compared the location of 

the provider with the location of the 

hospital’s home office. We then placed 

providers into one of the following three 

groups: 

• Group 1—Provider and home office 

are located in different States. 

• Group 2—Provider and home office 

are located in the same State and same 

city. 

• Group 3—Provider and home office 

are located in the same State and 

different city. 

We found that 63 percent of the 

providers with home offices were 

classified into Group 1 (that is, different 

State) and, thus, these providers were 

determined to not be located in the 

same local labor market as their home 

office. Although there were a very 

limited number of exceptions (that is, 

providers located in different States but 

the same MSA as their home office), the 

63 percent estimate was unchanged. 

We found that 9 percent of all 

providers with home offices were 

classified into Group 2 (that is, same 

State and same city and, therefore, the 

same MSA). Consequently, these 

providers were determined to be located 

in the same local labor market as their 

home offices. 

We found that 27 percent of all 

providers with home offices were 

classified into Group 3 (that is, same 

State and different city). Using data 

from the Census Bureau to determine 

the specific MSA for both the provider 

and its home office, we found that 10 

percent of all providers with home 

offices were identified as being in the 

same State, a different city, but the same 

MSA. 

Pooling these results, we were able to 

determine that approximately 19 

percent of providers with home offices 

had home offices located within their 

local labor market (that is, 9 percent of 

providers with home offices had their 

home offices in the same State and city 

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

percent of providers with home offices 

had their home offices in the same State, 

a different city, but the same MSA). We 

are proposing to apportion the NAICS 

55 expense data by this percentage. 

Thus, we are proposing to classify 19 

percent of these costs into the 

Professional Fees: Labor-related cost 

category and the remaining 81 percent 

into the Professional Fees: Nonlaborrelated Services cost category. 

Table 6 below shows the proposed RY 

2012 relative importance labor-related 

share using the proposed FY 2008-based 

RPL market basket and the FY 2002- 

based RPL market basket. 


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5012 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 

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

FY 2002-BASED RPL MARKET BASKET AND THE PROPOSED RY 2012 (15-MONTH) RELATIVE IMPORTANCE LABORRELATED SHARE BASED ON THE PROPOSED FY 2008-BASED RPL MARKET BASKET

RY 2011 Relative 

importance laborrelated share 

Proposed RY 

2012 relative 

importance laborrelated share 

Wages and Salaries .................................................................................................................................... 52.600 49.248 

Employee Benefits ....................................................................................................................................... 13.935 12.988 

Professional Fees: Labor-Related ............................................................................................................... 2.853 2.085 

Administrative and Business Support Services ........................................................................................... .............................. 0.417 

All Other: Labor-Related Services ............................................................................................................... 2.118 2.104 

Subtotal ........................................................................................................................................................ 71.506 66.842 

Labor-Related Portion of Capital Costs (46%) ............................................................................................ 3.894 3.657 

Total Labor-Related Share ................................................................................................................... 75.400 70.499 

The proposed labor-related share for 

RY 2012 is the sum of the proposed RY 

2012 relative importance of each laborrelated cost category, and would reflect 

the different rates of price change for 

these cost categories between the base 

year (FY 2008) and RY 2012. The sum 

of the proposed relative importance for 

RY 2012 for operating costs (Wages and 

Salaries, Employee Benefits, 

Professional Fees: Labor-Related, 

Administrative and Business Support 

Services, and All Other: Labor-related 

Services) would be 66.842 percent, as 

shown in Table 6 above. We are 

proposing that the portion of Capital 

that is influenced by the local labor 

market is estimated to be 46 percent, 

which is the same percentage applied to 

the FY 2002-based RPL market basket. 

Since the relative importance for 

Capital-Related Costs would be 7.950 

percent of the proposed FY 2008-based 

RPL market basket in RY 2012, we are 

proposing to take 46 percent of 7.950 

percent to determine the proposed 

labor-related share of Capital for RY 

2012. The result would be 3.657 

percent, which we propose to add to 

66.842 percent for the operating cost 

amount to determine the total proposed 

labor-related share for RY 2012. 

Therefore, the labor-related share that 

we propose to use for IPF PPS in RY 

2012 would be 70.499 percent. This 

proposed labor-related share is 

determined using the same methodology 

as employed in calculating all previous 

IPF labor-related shares (69 FR 66952). 

The wage index and the labor-related 

share are adjusted for budget neutrality. 

IV. Updates to the IPF PPS for RY 

Beginning July 1, 2011 

The IPF PPS is based on a 

standardized Federal per diem base rate 

calculated from IPF average per diem 

costs and adjusted for budget-neutrality 

in the implementation year. The Federal 

per diem base rate is used as the 

standard payment per day under the IPF 

PPS and is adjusted by the patient- and 

facility-level adjustments that are 

applicable to the IPF stay. A detailed 

explanation of how we calculated the 

average per diem cost appears in the 

November 2004 IPF PPS final rule (69 

FR 66926). 

A. Determining the Standardized 

Budget-Neutral Federal Per Diem Base 

Rate 

Section 124(a)(1) of the BBRA 

requires that we implement the IPF PPS 

in a budget neutral manner. In other 

words, the amount of total payments 

under the IPF PPS, including any 

payment adjustments, must be projected 

to be equal to the amount of total 

payments that would have been made if 

the IPF PPS were not implemented. 

Therefore, we calculated the budgetneutrality factor by setting the total 

estimated IPF PPS payments to be equal 

to the total estimated payments that 

would have been made under the Tax 

Equity and Fiscal Responsibility Act of 

1982 (TEFRA) (Pub. L. 97–248) 

methodology had the IPF PPS not been 

implemented. 

Under the IPF PPS methodology, we 

calculated the final Federal per diem 

base rate to be budget neutral during the 

IPF PPS implementation period (that is, 

the 18-month period from January 1, 

2005 through June 30, 2006) using a July 

1 update cycle. We updated the average 

cost per day to the midpoint of the IPF 

PPS implementation period (that is, 

October 1, 2005), and this amount was 

used in the payment model to establish 

the budget-neutrality adjustment. 

A step-by-step description of the 

methodology used to estimate payments 

under the TEFRA payment system 

appears in the November 2004 IPF PPS 

final rule (69 FR 66926). 

1. Standardization of the Federal Per 

Diem Base Rate and Electroconvulsive 

Therapy (ECT) Rate 

In the November 2004 IPF PPS final 

rule, we describe how we standardized 

the IPF PPS Federal per diem base rate 

in order to account for the overall 

positive effects of the IPF PPS payment 

adjustment factors. To standardize the 

IPF PPS payments, we compared the IPF 

PPS payment amounts calculated from 

the FY 2002 Medicare Provider Analysis 

and Review (MedPAR) file to the 

projected TEFRA payments from the FY 

2002 cost report file updated to the 

midpoint of the IPF PPS 

implementation period (that is, October 

2005). The standardization factor was 

calculated by dividing total estimated 

payments under the TEFRA payment 

system by estimated payments under 

the IPF PPS. The standardization factor 

was calculated to be 0.8367. 

As described in detail in the May 

2006 IPF PPS final rule (71 FR 27045), 

in reviewing the methodology used to 

simulate the IPF PPS payments used for 

the November 2004 IPF PPS final rule, 

we discovered that due to a computer 

code error, total IPF PPS payments were 

underestimated by about 1.36 percent. 

Since the IPF PPS payment total should 

have been larger than the estimated 

figure, the standardization factor should 

have been smaller (0.8254 vs. 0.8367). In 

turn, the Federal per diem base rate and 

the ECT rate should have been reduced 

by 0.8254 instead of 0.8367. 

To resolve this issue, in RY 2007, we 

amended the Federal per diem base rate 

and the ECT payment rate 

prospectively. Using the standardization 

factor of 0.8254, the average cost per day 

was effectively reduced by 17.46 

percent (100 percent minus 82.54 

percent = 17.46 percent). 


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2. Calculation of the Budget Neutrality 

Adjustment 

To compute the budget neutrality 

adjustment for the IPF PPS, we 

separately identified each component of 

the adjustment, that is, the outlier 

adjustment, stop-loss adjustment, and 

behavioral offset. 

A complete discussion of how we 

calculate each component of the budget 

neutrality adjustment appears in the 

November 2004 IPF PPS final rule (69 

FR 66932 through 66933) and in the 

May 2006 IPF PPS final rule (71 FR 

27044 through 27046). 

a. Outlier Adjustment 

Since the IPF PPS payment amount 

for each IPF includes applicable outlier 

amounts, we reduced the standardized 

Federal per diem base rate to account 

for aggregate IPF PPS payments 

estimated to be made as outlier 

payments. The outlier adjustment was 

calculated to be 2 percent. As a result, 

the standardized Federal per diem base 

rate was reduced by 2 percent to 

account for projected outlier payments. 

b. Stop-Loss Provision Adjustment 

As explained in the November 2004 

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

cost-based reimbursement to the per 

diem payment system to ensure that an 

IPF’s total PPS payments were no less 

than a minimum percentage of their 

TEFRA payment, had the IPF PPS not 

been implemented. We reduced the 

standardized Federal per diem base rate 

by the percentage of aggregate IPF PPS 

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

standardized Federal per diem base rate 

was reduced by 0.39 percent to account 

for stop-loss payments. Since the 

transition was completed in RY 2009, 

the stop-loss provision is no longer 

applicable, and for cost reporting 

periods beginning on or after January 1, 

2008, IPFs were paid 100 percent PPS. 

c. Behavioral Offset 

As explained in the November 2004 

IPF PPS final rule, implementation of 

the IPF PPS may result in certain 

changes in IPF practices, especially with 

respect to coding for comorbid medical 

conditions. As a result, Medicare may 

make higher payments than assumed in 

our calculations. Accounting for these 

effects through an adjustment is 

commonly known as a behavioral offset. 

Based on accepted actuarial practices 

and consistent with the assumptions 

made in other PPSs, we assumed in 

determining the behavioral offset that 

IPFs would regain 15 percent of 

potential ‘‘losses’’ and augment 

payment increases by 5 percent. We 

applied this actuarial assumption, 

which is based on our historical 

experience with new payment systems, 

to the estimated ‘‘losses’’ and ‘‘gains’’ 

among the IPFs. The behavioral offset 

for the IPF PPS was calculated to be 

2.66 percent. As a result, we reduced 

the standardized Federal per diem base 

rate by 2.66 percent to account for 

behavioral changes. As indicated in the 

November 2004 IPF PPS final rule, we 

do not plan to change adjustment factors 

or projections until we analyze IPF PPS 

data. 

If we find that an adjustment is 

warranted, the percent difference may 

be applied prospectively to the 

established PPS rates to ensure the rates 

accurately reflect the payment level 

intended by the statute. In conducting 

this analysis, we will be interested in 

the extent to which improved coding of 

patients’ principal and other diagnoses, 

which may not reflect real increases in 

underlying resource demands, has 

occurred under the PPS. 

B. Update of the Federal Per Diem Base 

Rate and Electroconvulsive Therapy 

Rate 

As described in the November 2004 

IPF PPS final rule (69 FR 66931), the 

average per diem cost was updated to 

the midpoint of the implementation 

year. This updated average per diem 

cost of $724.43 was reduced by 17.46 

percent to account for standardization to 

projected TEFRA payments for the 

implementation period, by 2 percent to 

account for outlier payments, by 0.39 

percent to account for stop-loss 

payments, and by 2.66 percent to 

account for the behavioral offset. The 

Federal per diem base rate in the 

implementation year was $575.95. The 

increase in the per diem base rate for RY 

2009 included the 0.39 percent increase 

due to the removal of the stop-loss 

provision. We indicated in the 

November 2004 IPF PPS final rule (69 

FR 66932) that we would remove this 

0.39 percent reduction to the Federal 

per diem base rate after the transition. 

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

May 2008 IPF PPS notice, we increased 

the Federal per diem base rate and the 

ECT base rate by 0.39 percent in RY 

2009. Therefore for RY 2009 and 

beyond, the stop-loss provision has 

ended and is no longer a part of budget 

neutrality. 

In accordance with section 

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

requires the application of an ‘‘other 

adjustment,’’ described in section 

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

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

2012) that reduces the update to the IPF 

PPS base rate for the rate year beginning 

in Calendar Year (CY) 2011, we are 

proposing to adjust the IPF PPS update 

by 0.25 percentage point for rate year 

2012. We are proposing to apply the 15- 

month 2008-based RPL market basket 

increase of 3.0 percent, as adjusted by 

the ‘‘other adjustment’’ of ¥0.25 

percentage point, and the wage index 

budget neutrality factor of 0.9995 to the 

RY 2011 Federal per diem base rate of 

$665.71 yielding a proposed Federal per 

diem base rate of $683.68 for RY 2012. 

Similarly, we propose applying the 

market basket increase, as adjusted by 

the ‘‘other adjustment’’, and the wage 

index budget neutrality factor to the RY 

2011 ECT base rate, yielding a proposed 

ECT base rate of $294.33 for RY 2012. 

V. Proposed Update of the IPF PPS 

Adjustment Factors 

A. Overview of the IPF PPS Adjustment 

Factors 

The IPF PPS payment adjustments 

were derived from a regression analysis 

of 100 percent of the FY 2002 MedPAR 

data file, which contained 483,038 

cases. For this proposed rule, we used 

the same results of the regression 

analysis used to implement the 

November 2004 IPF PPS final rule. For 

a more detailed description of the data 

file used for the regression analysis, see 

the November 2004 IPF PPS final rule 

(69 FR 66935 through 66936). While we 

have since used more recent claims data 

to set the fixed dollar loss threshold 

amount, we used the same results of this 

regression analysis to update the IPF 

PPS for RY 2011 and we are proposing 

to use these same results for RY 2012. 

Now that we are approximately 5 years 

into the IPF PPS, we believe that we 

have enough data to begin looking at the 

process of refining the IPF PPS as 

appropriate. We believe that in the next 

rulemaking, for FY 2013, we will be 

ready to propose potential refinements 

to the system. 

As we stated previously, we do not 

plan to update the regression analysis 

until we are able to analyze IPF PPS 

claims and cost report data. However, 

we continue to monitor claims and 

payment data independently from cost 

report data to assess issues, to determine 

whether changes in case-mix or 

payment shifts have occurred among 

freestanding governmental, non-profit 

and private psychiatric hospitals, and 

psychiatric units of general hospitals, 

and CAHs and other issues of 

importance to IPFs. 

B. Proposed Patient-Level Adjustments 

In the April 2010 IPF PPS notice (75 

FR 23113 through 23117), we 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
5014 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 

announced payment adjustments for the 

following patient-level characteristics: 

Medicare Severity diagnosis related 

groups (MS–DRGs) assignment of the 

patient’s principal diagnosis, selected 

comorbidities, patient age, and the 

variable per diem adjustments. 

1. Proposed Adjustment for MS–IPF– 

DRG Assignment 

The IPF PPS includes payment 

adjustments for the psychiatric DRG 

assigned to the claim based on each 

patient’s principal diagnosis. The IPF 

PPS recognizes the MS–DRGs. The DRG 

adjustment factors were expressed 

relative to the most frequently reported 

psychiatric DRG in FY 2002, that is, 

DRG 430 (psychoses). The coefficient 

values and adjustment factors were 

derived from the regression analysis. 

In accordance with § 412.27(a), 

payment under the IPF PPS is 

conditioned on IPFs admitting ‘‘only 

patients whose admission to the unit is 

required for active treatment, of an 

intensity that can be provided 

appropriately only in an inpatient 

hospital setting, of a psychiatric 

principal diagnosis that is listed in 

Chapter Five (‘‘Mental Disorders’’) of 

the International Classification of 

Diseases, Ninth Revision, Clinical 

Modification (ICD–9–CM)’’ or in the 

Fourth Edition, Text Revision of the 

American Psychiatric Association’s 

Diagnostic and Statistical Manual, 

(DSM–IV–TR). IPF claims with a 

principal diagnosis included in Chapter 

Five of the ICD–9–CM or the DSM–IV– 

TR are paid the Federal per diem base 

rate under the IPF PPS and all other 

applicable adjustments, including any 

applicable DRG adjustment. Psychiatric 

principal diagnoses that do not group to 

one of the designated DRGs still receive 

the Federal per diem base rate and all 

other applicable adjustments, but the 

payment would not include a DRG 

adjustment. 

The Standards for Electronic 

Transaction final rule published in the 

Federal Register on August 17, 2000 (65 

FR 50312), adopted the ICD–9–CM as 

the designated code set for reporting 

diseases, injuries, impairments, other 

health related problems, their 

manifestations, and causes of injury, 

disease, impairment, or other health 

related problems. Therefore, we use the 

ICD–9–CM as the designated code set 

for the IPF PPS. 

We believe that it is important to 

maintain the same diagnostic coding 

and DRG classification for IPFs that are 

used under the IPPS for providing 

psychiatric care. Therefore, when the 

IPF PPS was implemented for cost 

reporting periods beginning on or after 

January 1, 2005, we adopted the same 

diagnostic code set and DRG patient 

classification system (that is, the CMS 

DRGs) that were utilized at the time 

under the hospital inpatient prospective 

payment system (IPPS). Since the 

inception of the IPF PPS, the DRGs used 

as the patient classification system 

under the IPF PPS have corresponded 

exactly with the CMS DRGs applicable 

under the IPPS for acute care hospitals. 

Every year, changes to the ICD–9–CM 

coding system are addressed in the IPPS 

proposed and final rules. The changes to 

the codes are effective October 1 of each 

year and must be used by acute care 

hospitals as well as other providers to 

report diagnostic and procedure 

information. The IPF PPS has always 

incorporated ICD–9–CM coding changes 

made in the annual IPPS update. We 

publish coding changes in a 

Transmittal/Change Request, similar to 

how coding changes are announced by 

the IPPS and LTCH PPS. Those ICD–9– 

CM coding changes are also published 

in the following IPF PPS RY update, in 

either the IPF PPS proposed and final 

rules, or in an IPF PPS update notice. 

In the May 2008 IPF PPS notice (73 

FR 25709), we discussed CMS’ effort to 

better recognize resource use and the 

severity of illness among patients. CMS 

adopted the new MS–DRGs for the IPPS 

in the FY 2008 IPPS final rule with 

comment period (72 FR 47130). We 

believe by better accounting for patients’ 

severity of illness in Medicare payment 

rates, the MS–DRGs encourage hospitals 

to improve their coding and 

documentation of patient diagnoses. 

The MS–DRGs, which are based on the 

CMS DRGs, represent a significant 

increase in the number of DRGs (from 

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

full description of the development and 

implementation of the MS–DRGs, see 

the FY 2008 IPPS final rule with 

comment period (72 FR 47141 through 

47175). 

In the May 2008 IPF PPS notice, the 

IPF PPS recognized the MS–DRGs. A 

crosswalk, to reflect changes that were 

made to the DRGs under the IPF PPS to 

the new MS–DRGs was provided (73 FR 

25716). Since then, we have referred to 

the IPF PPS DRGs as MS–DRGs. In this 

proposed rule, we are proposing that all 

references to the MS–DRGs used for the 

IPF PPS, would be to MS–IPF–DRGs. 

This would only be a change in 

terminology. We are proposing to revise 

§ 412.402 to add the definition of MS– 

IPF–DRG. 

All of the ICD–9–CM coding changes 

are reflected in the FY 2011 GROUPER, 

Version 28.0, effective for IPPS 

discharges occurring on or after October 

1, 2010 through September 30, 2011. 

The GROUPER Version 28.0 software 

package assigns each case to an MS– 

DRG on the basis of the diagnosis and 

procedure codes and demographic 

information (that is, age, sex, and 

discharge status). The Medicare Code 

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

CM codes to validate coding for IPPS 

discharges on or after October 1, 2010. 

For additional information on the 

GROUPER Version 28.0 and MCE 27.0, 

see Transmittal 2060 (Change Request 

7134), dated October 1, 2010. The IPF 

PPS has always used the same 

GROUPER and Code Editor as the IPPS. 

Therefore, the ICD–9–CM changes, 

which were reflected in the GROUPER 

Version 28.0 and MCE 27.0 on October 

1, 2010, also became effective for the 

IPF PPS for discharges occurring on or 

after October 1, 2010. 

The impact of the new MS–DRGs on 

the IPF PPS was negligible. Mapping to 

the MS–DRGs resulted in the current 17 

MS–DRGs, instead of the original 15, for 

which the IPF PPS provides an 

adjustment. Although the code set is 

updated, the same associated 

adjustment factors apply now that have 

been in place since implementation of 

the IPF PPS, with one exception that is 

unrelated to the update to the codes. 

When DRGs 521 and 522 were 

consolidated into MS–DRG 895, we 

carried over the adjustment factor of 

1.02 from DRG 521 to the newly 

consolidated MS–DRG. This was done 

to reflect the higher claims volume 

under DRG 521, with more than eight 

times the number of claims than billed 

under DRG 522. The updates are 

reflected in Tables 7 and 8. For a 

detailed description of the mapping 

changes from the original DRG 

adjustment categories to the current 

MS–DRG adjustment categories we refer 

readers to the May 2008 IPF PPS notice 

(73 FR 25714). 

The official version of the ICD–9–CM 

is available on CD–ROM from the U.S. 

Government Printing Office. The FY 

2009 version can be ordered by 

contacting the Superintendent of 

Documents, U.S. Government Printing 

Office, Department 50, Washington, DC 

20402–9329, telephone number (202) 

512–1800. Questions concerning the 

ICD–9–CM should be directed to 

Patricia E. Brooks, Co-Chairperson, ICD– 

9–CM Coordination and Maintenance 

Committee, CMS, Center for Medicare 

Management, Hospital and Ambulatory 

Policy Group, Division of Acute Care, 

Mailstop C4–08–06, 7500 Security 

Boulevard, Baltimore, Maryland 21244– 

1850. 

Further information concerning the 

official version of the ICD–9–CM can be 

found in the IPPS final rule with 


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comment period, ‘‘Changes to Hospital 

Inpatient Prospective Payment System 

and Fiscal Year 2011 Rates’’ in the 

August 16, 2010 Federal Register (75 FR 

50042) and at Tables 7 and 8 below list 

the FY 2011 new and revised ICD–9–CM 

diagnosis codes that group to one of the 

17 MS–DRGs for which the IPF PPS 

provides an adjustment. These tables are 

only a listing of FY 2011 changes and 

do not reflect all of the currently valid 

and applicable ICD–9–CM codes 

classified in the MS–DRGs. When coded 

as a principal code or diagnosis, these 

codes receive the correlating MS–DRG 

adjustment. 

TABLE 7—FY 2011 NEW DIAGNOSIS CODES

Diagnosis code MS–DRG descriptions MS–DRG 

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

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

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

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

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

TABLE 8—FY 2011 REVISED DIAGNOSIS CODE

Diagnosis code Description MS–DRG 

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

Because we do not plan to update the 

regression analysis until we are able to 

analyze IPF PPS data, we propose that 

the MS–IPF–DRG adjustment factors (as 

shown in Table 9) would continue to be 

paid for discharges occurring in RY 

2012. 

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

MS–DRG MS–IPF–DRG Descriptions Adjustment 

Factor 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2. Proposed Payment for Comorbid 

Conditions 

The intent of the comorbidity 

adjustments is to recognize the 

increased costs associated with 

comorbid conditions by providing 

additional payments for certain 

concurrent medical or psychiatric 

conditions that are expensive to treat. In 

the April 2010 IPF PPS notice (75 FR 

23114), we explained that the IPF PPS 

includes 17 comorbidity categories and 

identified the new, revised, and deleted 

ICD–9–CM diagnosis codes that generate 

a comorbid condition payment 

adjustment under the IPF PPS for RY 

2011 (75 FR 23115). 

Comorbidities are specific patient 

conditions that are secondary to the 

patient’s principal diagnosis and that 

require treatment during the stay. 

Diagnoses that relate to an earlier 

episode of care and have no bearing on 

the current hospital stay are excluded 

and must not be reported on IPF claims. 

Comorbid conditions must exist at the 

time of admission or develop 

subsequently, and affect the treatment 

received, length of stay (LOS), or both 

treatment and LOS. 

For each claim, an IPF may receive 

only one comorbidity adjustment per 

comorbidity category, but it may receive 

an adjustment for more than one 

comorbidity category. Billing 

instructions require that IPFs must enter 

the full ICD–9–CM codes for up to 8 

additional diagnoses if they co-exist at 

the time of admission or develop 

subsequently and impact the treatment 

provided. 

The comorbidity adjustments were 

determined based on the regression 

analysis using the diagnoses reported by 

IPFs in FY 2002. The principal 

diagnoses were used to establish the 

DRG adjustments and were not 

accounted for in establishing the 

comorbidity category adjustments, 

except where ICD–9–CM ‘‘code first’’ 

instructions apply. As we explained in 

the April 2010 IPF PPS notice (75 FR 

23115), the code first rule applies when 


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a condition has both an underlying 

etiology and a manifestation due to the 

underlying etiology. For these 

conditions, the ICD–9–CM has a coding 

convention that requires the underlying 

conditions to be sequenced first 

followed by the manifestation. 

Whenever a combination exists, there is 

a ‘‘use additional code’’ note at the 

etiology code and a code first note at the 

manifestation code. 

As discussed in the MS–IPF–DRG 

section (where we are proposing that all 

references to MS–DRGs used for the IPF 

PPS be to MS–IPF–DRGs, as detailed 

above), it is our policy to maintain the 

same diagnostic coding set for IPFs that 

is used under the IPPS for providing the 

same psychiatric care. Although the 

ICD–9–CM code set has been updated, 

the same adjustment factors have been 

in place since the implementation of the 

IPF PPS. 

Table 10 below lists the FY 2011 new 

ICD diagnosis codes that impact the 

comorbidity adjustments under the IPF 

PPS. Table 10 is not a list of all 

currently valid ICD codes applicable for 

the IPF PPS comorbidity adjustments. 

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

Diagnosis code Description Comorbidity 

category 

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

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

For RY 2012, we are applying the 

seventeen comorbidity categories for 

which we are providing an adjustment, 

their respective codes, including the 

new FY 2011 ICD–9–CM codes, and 

their respective adjustment factors in 

Table 11 below. 

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

Description of comorbidity Diagnoses codes Adjustment 

factor 

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

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

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

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

6383, 6393, 66932, 66934, 9585.

1.11 

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

5854, 5855, 5856, 5859, 586, V451, V560, V561, and V562.

1.11 

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

chemotherapy code 99.25.

1.07 

Uncontrolled Diabetes-Mellitus with or without complications.25002, 25003, 25012, 25013, 25022, 25023, 25032, 25033, 25042, 

25043, 25052, 25053, 25062, 25063, 25072, 25073, 25082, 25083, 

25092, and 25093.

1.05 

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

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

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

05449, 0550 through 0770, 0782 through 07889, and 07950 

through 07959.

1.07 

Drug and/or Alcohol Induced Mental Disorders ......... 2910, 2920, 29212, 2922, 30300, and 30400 ........................................ 1.03 

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

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

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

V4614.

1.12 

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

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

through 73029.

1.09 

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

9809, 9830 through 9839, 986, 9890 through 9897.

1.11 

3. Proposed Patient Age Adjustments 

As explained in the November 2004 

IPF PPS final rule (69 FR 66922), we 

analyzed the impact of age on per diem 

cost by examining the age variable (that 

is, the range of ages) for payment 

adjustments. 

In general, we found that the cost per 

day increases with age. The older age 

groups are more costly than the under 

45 age group, the differences in per 

diem cost increase for each successive 

age group, and the differences are 

statistically significant. 

We do not plan to update the 

regression analysis until we are able to 

analyze IPF PPS data. Therefore, for RY 

2012, we are proposing to continue to 

use the patient age adjustments 

currently in effect as shown in Table 12 

below. 

TABLE 12—AGE GROUPINGS AND

ADJUSTMENT FACTORS

Age Adjustment factor 

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

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

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

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

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

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

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

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

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


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4. Proposed Variable Per Diem 

Adjustments 

We explained in the November 2004 

IPF PPS final rule (69 FR 66946) that the 

regression analysis indicated that per 

diem cost declines as the LOS increases. 

The variable per diem adjustments to 

the Federal per diem base rate account 

for ancillary and administrative costs 

that occur disproportionately in the first 

days after admission to an IPF. 

We used a regression analysis to 

estimate the average differences in per 

diem cost among stays of different 

lengths. As a result of this analysis, we 

established variable per diem 

adjustments that begin on day 1 and 

decline gradually until day 21 of a 

patient’s stay. For day 22 and thereafter, 

the variable per diem adjustment 

remains the same each day for the 

remainder of the stay. However, the 

adjustment applied to day 1 depends 

upon whether the IPF has a qualifying 

ED. If an IPF has a qualifying ED, it 

receives a 1.31 adjustment factor for day 

1 of each stay. If an IPF does not have 

a qualifying ED, it receives a 1.19 

adjustment factor for day 1 of the stay. 

The ED adjustment is explained in more 

detail in section IV.C.5 of this proposed 

rule. 

For RY 2012, we are proposing to 

continue to use the variable per diem 

adjustment factors currently in effect as 

shown in Table 13 below. A complete 

discussion of the variable per diem 

adjustments appears in the November 

2004 IPF PPS final rule (69 FR 66946). 

TABLE 13—VARIABLE PER DIEM

ADJUSTMENTS

Day-of-Stay Adjustment factor 

Day 1—IPF Without a 

Qualifying ED ................ 1.19 

Day 1—IPF With a Qualifying ED ........................ 1.31 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

C. Facility-Level Adjustments 

The IPF PPS includes facility-level 

adjustments for the wage index, IPFs 

located in rural areas, teaching IPFs, 

cost of living adjustments for IPFs 

located in Alaska and Hawaii, and IPFs 

with a qualifying ED. 

1. Proposed Wage Index Adjustment 

a. Background 

As discussed in the May 2006 IPF PPS 

final rule and in the May 2008 and May 

2009 IPF PPS notices, in providing an 

adjustment for geographic wage levels, 

the labor-related portion of an IPF’s 

payment is adjusted using an 

appropriate wage index. Currently, an 

IPF’s geographic wage index value is 

determined based on the actual location 

of the IPF in an urban or rural area as 

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

§ 412.64(C). 

b. Proposed Wage Index for RY 2012 

Since the inception of the IPF PPS, we 

have used hospital wage data in 

developing a wage index to be applied 

to IPFs. We are continuing that practice 

for RY 2012. We apply the wage index 

adjustment to the labor-related portion 

of the Federal rate, which is 70.499 

percent. This percentage reflects the 

labor-related relative importance of the 

proposed FY 2008-based RPL market 

basket for RY 2012 (see section III.C.6 of 

this proposed rule). The IPF PPS uses 

the pre-floor, pre-reclassified hospital 

wage index. Changes to the wage index 

are made in a budget neutral manner so 

that updates do not increase 

expenditures. 

For RY 2012, we are proposing to 

apply the most recent hospital wage 

index (that is, the FY 2011 pre-floor, 

pre-reclassified hospital wage index 

because this is the most appropriate 

index as it best reflects the variation in 

local labor costs of IPFs in the various 

geographic areas) using the most recent 

hospital wage data (that is, data from 

hospital cost reports for the cost 

reporting period beginning during FY 

2007), and applying an adjustment in 

accordance with our budget neutrality 

policy. This policy requires us to 

estimate the total amount of IPF PPS 

payments in RY 2011 using the 

applicable wage index value divided by 

the total estimated IPF PPS payments in 

RY 2012 using the most recent wage 

index. The estimated payments are 

based on FY 2009 IPF claims, inflated 

to the appropriate RY. This quotient is 

the wage index budget neutrality factor, 

and it is applied in the update of the 

Federal per diem base rate for RY 2012 

in addition to the market basket 

described in section III.C.5 of this 

proposed rule. The wage index budget 

neutrality factor for RY 2012 is 0.9995. 

The wage index applicable for RY 

2012 appears in Table 1 and Table 2 in 

Addendum B of this proposed rule. As 

explained in the May 2006 IPF PPS final 

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

PPS applies the hospital wage index 

without a hold-harmless policy, and 

without an out-commuting adjustment 

or out-migration adjustment because the 

statutory authority for these policies 

applies only to the IPPS. 

Also in the May 2006 IPF PPS final 

rule for RY 2007 (71 FR 27061), we 

adopted the changes discussed in the 

Office of Management and Budget 

(OMB) Bulletin No. 03–04 (June 6, 

2003), which announced revised 

definitions for Metropolitan Statistical 

Areas (MSAs), and the creation of 

Micropolitan Statistical Areas and 

Combined Statistical Areas. In adopting 

the OMB Core-Based Statistical Area 

(CBSA) geographic designations, since 

the IPF PPS was already in a transition 

period from TEFRA payments to PPS 

payments, we did not provide a separate 

transition for the CBSA-based wage 

index. 

As was the case in RY 2011, for RY 

2012 we are proposing to continue to 

use the CBSA-based wage index values 

as presented in Tables 1 and 2 in 

Addendum B of this proposed rule. A 

complete discussion of the CBSA labor 

market definitions appears in the May 

2006 IPF PPS final rule (71 FR 27061 

through 27067). 

In summary, for RY 2012 we are 

proposing to use the FY 2011 wage 

index data (collected from cost reports 

submitted by hospitals for cost reporting 

periods beginning during FY 2007) to 

adjust IPF PPS payments beginning July 

1, 2011. 

c. OMB Bulletins 

The Office of Management and Budget 

(OMB) publishes bulletins regarding 

CBSA changes, including changes to 

CBSA numbers and titles. In the May 

2008 IPF PPS notice, we incorporated 

the CBSA nomenclature changes 

published in the most recent OMB 

bulletin that applies to the hospital 

wage data used to determine the current 

IPF PPS wage index (73 FR 25721). We 

will continue to do the same for all such 

OMB CBSA nomenclature changes in 

future IPF PPS rules and notices, as 

necessary. The OMB bulletins may be 

accessed online at http:// 

www.whitehouse.gov/omb/bulletins/ 

index.html. 


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5018 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 

2. Proposed Adjustment for Rural 

Location 

In the November 2004 IPF PPS final 

rule, we provided a 17 percent payment 

adjustment for IPFs located in a rural 

area. This adjustment was based on the 

regression analysis, which indicated 

that the per diem cost of rural facilities 

was 17 percent higher than that of urban 

facilities after accounting for the 

influence of the other variables included 

in the regression. For RY 2012, we are 

proposing to apply a 17 percent 

payment adjustment for IPFs located in 

a rural area as defined at 

§ 412.64(b)(1)(ii)(C). As stated in the 

November 2004 IPF PPS final rule, we 

do not intend to update the adjustment 

factors derived from the regression 

analysis until we are able to analyze IPF 

PPS data. A complete discussion of the 

adjustment for rural locations appears in 

the November 2004 IPF PPS final rule 

(69 FR 66954). 

3. Proposed Teaching Adjustment 

In the November 2004 IPF PPS final 

rule, we implemented regulations at 

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

part of, teaching hospitals. The teaching 

adjustment accounts for the higher 

indirect operating costs experienced by 

hospitals that participate in graduate 

medical education (GME) programs. The 

payment adjustments are made based on 

the number of full-time equivalent (FTE) 

interns and residents training in the IPF 

and the IPF’s average daily census. 

Medicare makes direct GME payments 

(for direct costs such as resident and 

teaching physician salaries, and other 

direct teaching costs) to all teaching 

hospitals including those paid under a 

PPS, and those paid under the TEFRA 

rate-of-increase limits. These direct 

GME payments are made separately 

from payments for hospital operating 

costs and are not part of the PPSs. The 

direct GME payments do not address the 

estimated higher indirect operating 

costs teaching hospitals may face. 

For teaching hospitals paid under the 

TEFRA rate-of-increase limits, Medicare 

does not make separate payments for 

indirect medical education costs 

because payments to these hospitals are 

based on the hospitals’ reasonable costs 

which already include these higher 

indirect costs that may be associated 

with teaching programs. 

The results of the regression analysis 

of FY 2002 IPF data established the 

basis for the payment adjustments 

included in the November 2004 IPF PPS 

final rule. The results showed that the 

indirect teaching cost variable is 

significant in explaining the higher 

costs of IPFs that have teaching 

programs. We calculated the teaching 

adjustment based on the IPF’s ‘‘teaching 

variable,’’ which is one plus the ratio of 

the number of FTE residents training in 

the IPF (subject to limitations described 

below) to the IPF’s average daily census 

(ADC). 

We established the teaching 

adjustment in a manner that limited the 

incentives for IPFs to add FTE residents 

for the purpose of increasing their 

teaching adjustment. We imposed a cap 

on the number of FTE residents that 

may be counted for purposes of 

calculating the teaching adjustment. The 

cap limits the number of FTE residents 

that teaching IPFs may count for the 

purpose of calculating the IPF PPS 

teaching adjustment, not the number of 

residents teaching institutions can hire 

or train. We calculated the number of 

FTE residents that trained in the IPF 

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

resident number as the cap. An IPF’s 

FTE resident cap is ultimately 

determined based on the final 

settlement of the IPF’s most recent cost 

report filed before November 15, 2004 

(that is, the publication date of the IPF 

PPS final rule). 

In the regression analysis, the 

logarithm of the teaching variable had a 

coefficient value of 0.5150. We 

converted this cost effect to a teaching 

payment adjustment by treating the 

regression coefficient as an exponent 

and raising the teaching variable to a 

power equal to the coefficient value. We 

note that the coefficient value of 0.5150 

was based on the regression analysis 

holding all other components of the 

payment system constant. 

As with other adjustment factors 

derived through the regression analysis, 

we do not plan to rerun the regression 

analysis until we analyze IPF PPS data. 

Therefore, for RY 2012, we are 

proposing to retain the coefficient value 

of 0.5150 for the teaching adjustment to 

the Federal per diem base rate. 

A complete discussion of how the 

teaching adjustment was calculated 

appears in the November 2004 IPF PPS 

final rule (69 FR 66954 through 66957) 

and the May 2008 IPF PPS notice (73 FR 

25721). 

Proposed FTE Intern and Resident Cap 

Adjustment 

CMS has been asked to reconsider the 

current IPF teaching policy and permit 

a temporary increase in the FTE resident 

cap when the IPF increases the number 

of FTE residents it trains due to the 

acceptance of displaced residents 

(residents that are training in an IPF or 

a program before the IPF or program 

closed) when another IPF closes or 

closes its medical residency training 

program. 

To help us assess how many IPFs 

have been, or expect to be adversely 

affected by their inability to adjust their 

caps under § 412.424(d)(1) and under 

these situations, we specifically 

requested public comment from IPFs in 

the May 1, 2009 IPF PPS notice (74 FR 

20376 through 20377). A summary of 

the comments and our response can be 

reviewed in the April 30, 2010 IPF PPS 

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

commenters recommended that CMS 

modify the IPF PPS teaching adjustment 

policy, supporting a policy change that 

would permit the IPF PPS residency cap 

to be temporarily adjusted when that 

IPF trains displaced residents due to 

closure of an IPF or closure of an IPF’s 

medical residency training program(s). 

The commenters recommended a 

temporary resident cap adjustment 

policy similar to such policies applied 

in similar contexts for acute care 

hospitals. 

We agree with the commenters that, 

when a hospital temporarily takes on 

residents because another hospital 

closes or discontinues its program, a 

temporary adjustment to the cap would 

be appropriate for rotation that occurs in 

an IPF setting (freestanding or units). In 

these situations, residents may have 

partially completed a medical residency 

training program at the hospital that has 

closed its training program and may be 

unable to complete their training at 

another hospital that is already training 

residents up to or in excess of its cap. 

We believe that it is appropriate to 

allow temporary adjustments to the FTE 

caps for an IPF that provides residency 

training to medical residents who have 

partially completed a residency training 

program at an IPF that closes or at an 

IPF that discontinues training residents 

in a residency training program(s) (also 

referred to as a ‘‘closed’’ program 

throughout this preamble). For this 

reason, we are proposing to adopt the 

following temporary resident cap 

adjustment policies, similar to the 

temporary adjustments to the FTE cap 

used for acute care hospitals. We are 

proposing that the cap adjustment 

would be temporary because it is 

resident specific and would only apply 

to the displaced resident(s) until the 

resident(s) completes training in that 

specialty. We propose that, as under the 

IPPS policy for displaced residents, the 

IPF PPS temporary cap adjustment 

would apply only to residents that were 

still training at the IPF at the time the 

IPF closed or at the time the IPF ceased 

training residents in the residency 

training program(s). Residents who 

leave the IPF, for whatever reason, 


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Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 5019 

before the closure of the IPF hospital or 

medical residency training program 

would not be considered displaced 

residents for purposes of the IPF 

temporary cap adjustment policy. 

Similarly, as under the IPPS policy, we 

are proposing that medical students 

who match to a program at an IPF but 

the IPF or medical residency training 

program closes before the individual 

begins training at that IPF are also not 

considered displaced residents for 

purposes of the IPF temporary cap 

adjustments. For detailed information 

on these acute care hospital GME/IME 

payment policies, see 66 FR 39899 

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

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

We note that although we are proposing 

to adopt a policy under the IPF PPS that 

is consistent with the policy applicable 

under the IPPS, the actual caps under 

the two payment systems may not be 

commingled. 

a. Proposed Temporary Adjustment to 

the FTE Cap To Reflect Residents 

Added Due to Hospital Closure 

We are proposing to allow an IPF to 

receive a temporary adjustment to the 

FTE cap to reflect residents added 

because of another IPF’s closure. This 

adjustment is intended to account for 

medical residents who would have 

partially completed a medical residency 

training program at the hospital that has 

closed and may be unable to complete 

their training at another hospital 

because that hospital is already training 

residents up to or in excess of its cap. 

We are proposing this change because 

IPFs have indicated a reluctance to 

accept additional residents from a 

closed IPF without a temporary 

adjustment to their caps. For purposes 

of this policy on IPF closure, we are 

proposing to adopt the IPPS definition 

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

§ 413.79(h) to mean the IPF terminates 

its Medicare provider agreement as 

specified in 42 CFR § 489.52. Therefore, 

we are proposing to add a new 

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

temporary adjustment to an IPF’s FTE 

cap to reflect residents added because of 

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

to be effective for cost reporting periods 

beginning on or after July 1, 2011. We 

would allow an adjustment to an IPF’s 

FTE cap if the IPF meets the following 

criteria: (a) The IPF is training displaced 

residents from an IPF that closed on or 

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

is training the displaced residents from 

the closed IPF submits a request for a 

temporary adjustment to its FTE cap to 

its Medicare contractor no later than 60 

days after the hospital first begins 

training the displaced residents, and 

documents that the IPF is eligible for 

this temporary adjustment to its FTE 

cap by identifying the residents who 

have come from the closed IPF and have 

caused the IPF to exceed its cap, (or the 

IPF may already be over its cap), and 

specifies the length of time that the 

adjustment is needed. After the 

displaced residents leave the IPF’s 

training program or complete their 

residency program, the IPF’s cap would 

revert to its original level. This means 

that the temporary adjustment to the 

FTE cap would be available to the IPF 

only for the period of time necessary for 

the displaced residents to complete 

their training. Further, as under the 

IPPS policy, we are also proposing that 

the total amount of temporary cap 

adjustment that can be distributed to all 

receiving hospitals cannot exceed the 

cap amount of the IPF that closed. 

We also note that section 5506 of the 

Affordable Care Act, ‘‘Preservation of 

Resident Cap Positions from Closed 

Hospitals,’’ does not apply to IPFs that 

closed. Section 5506 only amends 

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

respect to direct GME and IPPS IME 

payments. Therefore, the IME FTE cap 

redistributions under section 5506 only 

apply to ‘‘subsection (d)’’ IPPS 

hospitals. Section 5506 has no 

applicability to the IME teaching 

adjustments under the IPF PPS (or the 

IRF PPS, for that matter). 

b. Proposed Temporary Adjustment to 

FTE Cap To Reflect Residents Affected 

by Residency Program Closure 

We are proposing that if an IPF that 

ceases training residents in a residency 

training program(s) agrees to 

temporarily reduce its FTE cap, another 

IPF may receive a temporary adjustment 

to its FTE cap to reflect residents added 

because of the closure of another IPF’s 

residency training program. For 

purposes of this policy on closed 

residency programs, we are proposing to 

adopt the IPPS definition of ‘‘closure of 

a hospital residency training program’’ 

to mean that the hospital ceases to offer 

training for residents in a particular 

approved medical residency training 

program as specified in § 413.79(h). The 

methodology for adjusting the caps for 

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

closed its program’’ is described below. 

i. Receiving IPF 

We are proposing that an IPF(s) may 

receive a temporary adjustment to its 

FTE cap to reflect residents added 

because of the closure of another IPF’s 

residency training program for cost 

reporting periods beginning on or after 

July 1, 2011 if— 

• The IPF is training additional 

residents from the residency training 

program of an IPF that closed its 

program on or after July 1, 2011; and 

• No later than 60 days after the IPF 

begins to train the residents, the IPF 

submits to its Medicare Contractor a 

request for a temporary adjustment to its 

FTE cap, documents that the IPF is 

eligible for this temporary adjustment 

by identifying the residents who have 

come from another IPF’s closed program 

and have caused the IPF to exceed its 

cap, (or the IPF may already be in excess 

of its cap), specifies the length of time 

the adjustment is needed, and, as 

explained in more detail below, submits 

to its Medicare contractor a copy of the 

FTE cap reduction statement by the IPF 

closing the residency training program. 

In general, the proposed temporary 

adjustment criteria established for 

closed medical residency training 

programs at IPFs is similar to the criteria 

established for closed IPFs. We are 

proposing that more than one IPF may 

be eligible to apply for the temporary 

adjustment because residents from one 

closed program may migrate to different 

IPFs, or they may complete their 

training at more than one IPF. Also, 

only to the extent to which an IPF 

would exceed its FTE cap by training 

displaced residents would it be eligible 

for the temporary adjustment. 

Finally, we are proposing that IPFs 

that meet the proposed criteria would be 

eligible to receive temporary 

adjustments to their FTE caps for cost 

reporting periods beginning on or after 

July 1, 2011. 

ii. IPF That Closed Its Program(s) 

We are proposing that an IPF that 

agrees to train residents who have been 

displaced by the closure of another IPF’s 

resident teaching program may receive a 

temporary FTE cap adjustment only if 

the IPF with the closed program meets 

the following criteria— 

• Temporarily reduces its FTE cap by 

the number of FTE residents in each 

program year training in the program at 

the time of the program’s closure. The 

yearly reduction would be determined 

by deducting the number of those 

residents who would have been training 

in the program during the year of the 

closure, had the program not closed; 

and 

• No later than 60 days after the 

residents who were in the closed 

program begin training at another IPF, 

submits to its Medicare contractor a 

statement signed and dated by its 

representative that specifies that it 

agrees to the temporary reduction in its 

FTE cap to allow the IPF training the 

displaced residents to obtain a 


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temporary adjustment to its cap; 

identifies the residents who were 

training at the time of the program’s 

closure; identifies the IPFs to which the 

residents are transferring once the 

program closes; and specifies the 

reduction for the applicable program 

years. 

Unlike the proposed closed IPF policy 

at § 412.424(d)(1)(iii)(F)(1), we propose 

under this closed program policy that in 

order for the receiving IPF(s) to qualify 

for a temporary adjustment to their FTE 

cap, the IPFs that are closing their 

programs would need to reduce their 

FTE cap for the duration of time the 

displaced residents would need to 

finish their training. We are proposing 

this because the IPF that closes the 

program still retains the FTE slots in its 

cap, even if the IPF chooses not to fill 

the slots with residents. We believe it is 

inappropriate to allow an increase to the 

receiving IPF’s cap without an attendant 

decrease to the cap of the IPF with the 

closed program, because the IPF that 

closed a program(s) could fill these slots 

with residents from other programs even 

if the increase and related decrease is 

only temporary. 

We are proposing that the cap 

reduction for the IPF with the closed 

program would be based on the number 

of FTE residents in each program year 

who were in the program at the IPF at 

the time of the program’s closure, and 

who begin training at another IPF. 

In summary we are proposing to 

revise § 412.424(d)(1)(iii) and to 

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

implement policies related to temporary 

adjustments to FTE caps to reflect 

residents added due to closure of an IPF 

or an IPFs medical residency training 

program. 

4. Proposed Cost of Living Adjustment 

for IPFs Located in Alaska and Hawaii 

The IPF PPS includes a payment 

adjustment for IPFs located in Alaska 

and Hawaii based upon the county in 

which the IPF is located. As we 

explained in the November 2004 IPF 

PPS final rule, the FY 2002 data 

demonstrated that IPFs in Alaska and 

Hawaii had per diem costs that were 

disproportionately higher than other 

IPFs. Other Medicare PPSs (for example, 

the IPPS and LTCH PPS) have adopted 

a cost of living adjustment (COLA) to 

account for the cost differential of care 

furnished in Alaska and Hawaii. 

We analyzed the effect of applying a 

COLA to payments for IPFs located in 

Alaska and Hawaii. The results of our 

analysis demonstrated that a COLA for 

IPFs located in Alaska and Hawaii 

would improve payment equity for 

these facilities. As a result of this 

analysis, we provided a COLA in the 

November 2004 IPF PPS final rule. 

A COLA adjustment for IPFs located 

in Alaska and Hawaii is made by 

multiplying the nonlabor-related 

portion of the Federal per diem base rate 

by the applicable COLA factor based on 

the COLA area in which the IPF is 

located. 

As previously stated in the November 

2004 IPF PPS final rule, we will update 

the COLA factors according to updates 

established by the U.S. Office of 

Personnel Management (OPM), which 

issued a final rule, May 28, 2008 to 

change COLA rates. 

The COLA factors are published on 

the OPM Web site at (http:// 

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

We note that the COLA areas for 

Alaska are not defined by county as are 

the COLA areas for Hawaii. In 5 CFR 

591.207, the OPM established the 

following COLA areas: 

(a) City of Anchorage, and 80- 

kilometer (50-mile) radius by road, as 

measured from the Federal courthouse; 

(b) City of Fairbanks, and 80- 

kilometer (50-mile) radius by road, as 

measured from the Federal courthouse; 

(c) City of Juneau, and 80-kilometer 

(50-mile) radius by road, as measured 

from the Federal courthouse; 

(d) Rest of the State of Alaska. 

For RY 2012, we are proposing that 

IPFs located in Alaska and Hawaii will 

continue to receive the updated COLA 

factors based on the COLA area in 

which the IPF is located as shown in 

Table 14 below. 

TABLE 14—PROPOSED COLA FACTORS FOR ALASKA AND HAWAII IPFS

Location COLA 

Alaska ............ Anchorage ............ 1.19 

Fairbanks ............. 1.19 

Juneau ................. 1.19 

Rest of Alaska ...... 1.21 

Hawaii ............ Honolulu County .. 1.21 

Hawaii County ...... 1.14 

Kauai County ....... 1.21 

Maui County ......... 1.21 

Kalawao County ... 1.21 

5. Proposed Adjustment for IPFs With a 

Qualifying Emergency Department (ED) 

Currently, the IPF PPS includes a 

facility-level adjustment for IPFs with 

qualifying EDs. We provide an 

adjustment to the Federal per diem base 

rate to account for the costs associated 

with maintaining a full-service ED. The 

adjustment is intended to account for 

ED costs incurred by a freestanding 

psychiatric hospital with a qualifying 

ED or a distinct part psychiatric unit of 

an acute hospital or a CAH for 

preadmission services otherwise 

payable under the Medicare Outpatient 

Prospective Payment System (OPPS) 

furnished to a beneficiary during the 

day immediately preceding the date of 

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

and the overhead cost of maintaining 

the ED. This payment is a facility-level 

adjustment that applies to all IPF 

admissions (with one exception 

described below), regardless of whether 

a particular patient receives 

preadmission services in the hospital’s 

ED. 

The ED adjustment is incorporated 

into the variable per diem adjustment 

for the first day of each stay for IPFs 

with a qualifying ED. That is, IPFs with 

a qualifying ED receive an adjustment 

factor of 1.31 as the variable per diem 

adjustment for day 1 of each stay. If an 

IPF does not have a qualifying ED, it 

receives an adjustment factor of 1.19 as 

the variable per diem adjustment for day 

1 of each patient stay. 

The ED adjustment is made on every 

qualifying claim except as described 

below. As specified in 

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

is not made where a patient is 

discharged from an acute care hospital 

or critical access hospital (CAH) and 

admitted to the same hospital’s or 

CAH’s psychiatric unit. An ED 

adjustment is not made in this case 

because the costs associated with ED 

services are reflected in the DRG 

payment to the acute care hospital or 

through the reasonable cost payment 

made to the CAH. If we provided the ED 

adjustment in these cases, the hospital 

would be paid twice for the overhead 

costs of the ED, as stated in the 

November 2004 IPF PPS final rule (69 

FR 66960). 

Therefore, when patients are 

discharged from an acute care hospital 

or CAH and admitted to the same 

hospital’s or CAH’s psychiatric unit, the 

IPF receives the 1.19 adjustment factor 

as the variable per diem adjustment for 

the first day of the patient’s stay in the 

IPF. 

For RY 2012, we are proposing to 

retain the 1.31 adjustment factor for 

IPFs with qualifying EDs. A complete 

discussion of the steps involved in the 

calculation of the ED adjustment factor 

appears in the November 2004 IPF PPS 

final rule (69 FR 66959 through 66960) 

and the May 2006 IPF PPS final rule (71 

FR 27070 through 27072). 

D. Other Payment Adjustments and 

Policies 

For RY 2012, the IPF PPS includes an 

outlier adjustment to promote access to 

IPF care for those patients who require 

expensive care and to limit the financial 


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risk of IPFs treating unusually costly 

patients. In this section, we also explain 

the reason for ending the stop-loss 

provision that was applicable during the 

transition period. 

1. Proposed Outlier Payments 

In the November 2004 IPF PPS final 

rule, we implemented regulations at 

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

payment for IPF stays that are 

extraordinarily costly. Providing 

additional payments to IPFs for 

extremely costly cases strongly 

improves the accuracy of the IPF PPS in 

determining resource costs at the patient 

and facility level. These additional 

payments reduce the financial losses 

that would otherwise be incurred in 

treating patients who require more 

costly care and, therefore, reduce the 

incentives for IPFs to under-serve these 

patients. 

We make outlier payments for 

discharges in which an IPF’s estimated 

total cost for a case exceeds a fixed 

dollar loss threshold amount 

(multiplied by the IPF’s facility-level 

adjustments) plus the Federal per diem 

payment amount for the case. 

In instances when the case qualifies 

for an outlier payment, we pay 80 

percent of the difference between the 

estimated cost for the case and the 

adjusted threshold amount for days 1 

through 9 of the stay (consistent with 

the median LOS for IPFs in FY 2002), 

and 60 percent of the difference for day 

10 and thereafter. We established the 80 

percent and 60 percent loss sharing 

ratios because we were concerned that 

a single ratio established at 80 percent 

(like other Medicare PPSs) might 

provide an incentive under the IPF per 

diem payment system to increase LOS 

in order to receive additional payments. 

After establishing the loss sharing ratios, 

we determined the current fixed dollar 

loss threshold amount of $6,372 through 

payment simulations designed to 

compute a dollar loss beyond which 

payments are estimated to meet the 2 

percent outlier spending target. 

a. Proposed Update to the Outlier Fixed 

Dollar Loss Threshold Amount 

In accordance with the update 

methodology described in § 412.428(d), 

we are proposing to update the fixed 

dollar loss threshold amount used under 

the IPF PPS outlier policy. Based on the 

regression analysis and payment 

simulations used to develop the IPF 

PPS, we established a 2 percent outlier 

policy which strikes an appropriate 

balance between protecting IPFs from 

extraordinarily costly cases while 

ensuring the adequacy of the Federal 

per diem base rate for all other cases 

that are not outlier cases. 

We believe it is necessary to update 

the fixed dollar loss threshold amount 

because an analysis of the latest 

available data (that is, FY 2009 IPF 

claims) and rate increases indicates that 

adjusting the fixed dollar loss amount is 

necessary in order to maintain an outlier 

percentage that equals 2 percent of total 

estimated IPF PPS payments. 

In the May 2006 IPF PPS final rule (71 

FR 27072), we describe the process by 

which we calculate the outlier fixed 

dollar loss threshold amount. We are 

proposing to continue to use this 

process for RY 2012. We begin by 

simulating aggregate payments with and 

without an outlier policy, and applying 

an iterative process to determine an 

outlier fixed dollar loss threshold 

amount that will result in outlier 

payments being equal to 2 percent of 

total estimated payments under the 

simulation. Based on this process, using 

the FY 2009 claims data, we estimate 

that IPF outlier payments as a 

percentage of total estimated payments 

are approximately 2.2 percent in RY 

2010. Thus, we are proposing to update 

the RY 2012 IPF outlier threshold 

amount to ensure that estimated RY 

2012 outlier payments are 

approximately 2 percent of total 

estimated IPF payments. We are 

proposing to change the outlier fixed 

dollar loss threshold amount of $6,372 

for RY 2011 to $7,316 for RY 2012 to 

reduce estimated outlier payments and 

thereby maintain estimated outlier 

payments at 2 percent of total estimated 

aggregate IPF payments for RY 2012. 

b. Proposed Statistical Accuracy of Costto-Charge Ratios 

As previously stated, under the IPF 

PPS, an outlier payment is made if an 

IPF’s cost for a stay exceeds a fixed 

dollar loss threshold amount. In order to 

establish an IPF’s cost for a particular 

case, we multiply the IPF’s reported 

charges on the discharge bill by its 

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

approach to determining an IPF’s cost is 

consistent with the approach used 

under the IPPS and other PPSs. In FY 

2004, we implemented changes to the 

IPPS outlier policy used to determine 

CCRs for acute care hospitals because 

we became aware that payment 

vulnerabilities resulted in inappropriate 

outlier payments. Under the IPPS, we 

established a statistical measure of 

accuracy for CCRs in order to ensure 

that aberrant CCR data did not result in 

inappropriate outlier payments. 

As we indicated in the November 

2004 IPF PPS final rule, because we 

believe that the IPF outlier policy is 

susceptible to the same payment 

vulnerabilities as the IPPS, we adopted 

an approach to ensure the statistical 

accuracy of CCRs under the IPF PPS (69 

FR 66961). Therefore, we adopted the 

following procedure in the November 

2004 IPF PPS final rule: 

• We calculated two national ceilings, 

one for IPFs located in rural areas and 

one for IPFs located in urban areas. We 

computed the ceilings by first 

calculating the national average and the 

standard deviation of the CCR for both 

urban and rural IPFs. 

To determine the rural and urban 

ceilings, we multiplied each of the 

standard deviations by 3 and added the 

result to the appropriate national CCR 

average (either rural or urban). We 

estimated a proposed upper threshold 

CCR for IPFs in RY 2012 of 1.8522 for 

rural IPFs, and 1.7619 for urban IPFs, 

based on CBSA-based geographic 

designations. If an IPF’s CCR is above 

the applicable ceiling, the ratio is 

considered statistically inaccurate and 

we assign the appropriate national 

(either rural or urban) median CCR to 

the IPF. 

We apply the national CCRs to the 

following situations: 

++ New IPFs that have not yet 

submitted their first Medicare cost 

report. 

++ IPFs whose overall CCR is in 

excess of 3 standard deviations above 

the corresponding national geometric 

mean (that is, above the ceiling). 

++ Other IPFs for which the Medicare 

contractor obtains inaccurate or 

incomplete data with which to calculate 

a CCR. 

For new IPFs, we are using these 

national CCRs until the facility’s actual 

CCR can be computed using the first 

tentatively or final settled cost report. 

We are not making any changes to the 

procedures for ensuring the statistical 

accuracy of CCRs in RY 2012. However, 

we are proposing to update the national 

urban and rural CCRs (ceilings and 

medians) for IPFs for RY 2012 based on 

the CCRs entered in the latest available 

IPF PPS Provider Specific File. 

Specifically, for RY 2012, and to be 

used in each of the three situations 

listed above, we estimate a proposed 

national average CCR of 0.6480 for rural 

IPFs and a proposed national average 

CCR of 0.5140 for urban IPFs. These 

calculations are based on the IPF’s 

location (either urban or rural) using the 

CBSA-based geographic designations. 

A complete discussion regarding the 

national median CCRs appears in the 

November 2004 IPF PPS final rule (69 

FR 66961 through 66964). 


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2. Expiration of the Stop-Loss Provision 

In the November 2004 IPF PPS final 

rule, we implemented a stop-loss policy 

that reduced financial risk to IPFs 

projected to experience substantial 

reductions in Medicare payments 

during the period of transition to the IPF 

PPS. This stop-loss policy guaranteed 

that each facility received total IPF PPS 

payments that were no less than 70 

percent of its TEFRA payments had the 

IPF PPS not been implemented. This 

policy was applied to the IPF PPS 

portion of Medicare payments during 

the 3-year transition. 

In the implementation year, the 70 

percent of TEFRA payment stop-loss 

policy required a reduction in the 

standardized Federal per diem and ECT 

base rates of 0.39 percent in order to 

make the stop-loss payments budget 

neutral. As described in the May 2008 

IPF PPS notice for RY 2009, we 

increased the Federal per diem base rate 

and ECT rate by 0.39 percent because 

these rates were reduced by 0.39 percent 

in the implementation year to ensure 

stop-loss payments were budget neutral. 

The stop-loss provision ended during 

RY 2009 (that is for discharges occurring 

on or after July 1, 2008 through June 30, 

2009). The stop-loss policy is no longer 

applicable under the IPF PPS. 

3. Future Refinements 

As we have noted throughout this 

proposed rule, we have delayed making 

refinements to the IPF PPS until we 

have adequate IPF PPS data on which to 

base those decisions. Now that we are 

approximately 5 years into the system, 

we believe that we have enough data to 

begin that process. We have begun the 

necessary analysis to better understand 

IPF industry practices so that we may 

refine the IPF PPS as appropriate. While 

we are not proposing to make the 

following refinements in this 

rulemaking, we believe that in the 

rulemaking for FY 2013 we will be 

ready to present the results of our 

analysis. 

Specifically, with the change from 

ICD–9–CM to ICD–10–CM coming in 

2013, we are analyzing the comorbidity 

categories and related codes for 

utilization and continued suitability. 

While we would continue to provide for 

comorbidity adjustments, we are 

analyzing whether the current groupings 

and codes continue to be warranted and 

whether other appropriate codes should 

be added. Also, we are analyzing our 

current policies for interrupted stays, 

readmissions, same-day transfers, and 

length of stays in order to assess 

whether these policies continue to be 

appropriate. Additionally, in 

accordance with section 1886(s)(4) of 

the Act, which was added by section 

10322 of the Affordable Care Act, IPFs 

must submit data on quality measures, 

as specified by the Secretary, for each 

RY beginning in RY 2014. If data is not 

submitted, any annual update to a 

Federal base rate for discharges for the 

payments shall be reduced by 2 

percentage points. Quality measures are 

currently being developed to effectuate 

this requirement. Lastly, for the first 

time MedPAC will become involved in 

evaluating facility margins and will 

likely make recommendations regarding 

the appropriate payment update to IPFs 

based on their findings. CMS is 

interested in gaining feedback on these 

areas for future refinements and 

therefore we invite comments on these 

issues described in this section at this 

time. 

VI. Proposed Regulations Text 

Corrections 

We are proposing several minor 

corrections to the regulations text to 

address typographical errors. We note 

that these proposed changes do not 

impact policy. We are proposing to 

correct typographical errors at 

§ 412.404, ‘‘Conditions for payment 

under the prospective payment system 

for inpatient hospital services of 

psychiatric facilities; § 412.422, ‘‘Basis 

of payment;’’ and § 412.426, ‘‘Transition 

period.’’ In addition to these 

corrections, we are proposing to add 

clarifying language at § 412.426 and 

§ 412.432(d), ‘‘Method of payment 

under the inpatient psychiatric facility 

prospective payment system.’’ The 

proposed revisions are described below. 

Section 412.404(a)(1) 

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

‘‘General requirements,’’ we are 

proposing to delete the word ‘‘in’’ 

between the words ‘‘furnished’’ and ‘‘to 

Medicare’’. 

Section 412.422(b)(2) 

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

we are proposing to correct the 

reference to § 413.80 to § 413.89. The 

regulations covered at § 413.89 include 

bad debts, charity, and courtesy 

allowances. 

Section 412.426(a) 

Under § 412.426, in paragraph (a), 

‘‘Duration of transition period and 

composition of the blended transition 

payment,’’ we are proposing to replace 

‘‘Except as provided in paragraph (d) of 

this section’’ with ‘‘Except as provided 

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

is no paragraph (d); this exception 

should refer to paragraph (c), 

‘‘Treatment of new inpatient psychiatric 

facilities.’’ 

Also in paragraph (a), we are 

proposing to add the words ‘‘of this 

part’’ after ‘‘as specified in § 412.424(d)’’ 

and ‘‘of this section’’ after ‘‘as specified 

under paragraph (b).’’ This regulatory 

language is required by the Federal 

Register. 

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

through (a)(3), we are proposing to 

delete the words ‘‘on or’’ directly before 

the words ‘‘before January’’. For 

example, paragraph (a)(1) currently 

states, ‘‘For cost reporting periods 

beginning on or after January 1, 2005 

and on or before January 1, 2006* * *’’ 

We are proposing that this statement 

read: ‘‘For cost reporting periods 

beginning on or after January 1, 2005 

and before January 1, 2006 * * * ’’ This 

correction does not represent a change 

in policy. Rather, it is a correction to 

conform the regulation text to our 

policy, which was established in our 

final rule that appeared in the Federal 

Register on November 15, 2004 (69 FR 

66980) (which was subsequently 

corrected on April 1, 2005 (70 FR 

16729)). It is clear that the current 

regulation text is incorrect. The same 

January date (for example, January 1, 

2007) cannot be both the date on which 

a new transition period begins and the 

date on which the previous transition 

period ends. Our policy, since we 

established the transition, has been to 

begin a transition period on or after a 

January 1 date and to end that transition 

period before the next transition period 

begins. Because our regulation text does 

not accurately reflect our actual policy, 

we are proposing this correction. 

At § 412.426(a)(4), we are proposing 

to replace the statement, ‘‘For cost 

reporting periods beginning on or after 

July 1, 2008, payment is based entirely 

on the Federal per diem payment 

amount’’ with the following statement: 

‘‘For cost reporting periods beginning 

on or after January 1, 2008, payment is 

based entirely on the Federal per diem 

payment amount.’’ The transition period 

during which payment was based on a 

combination of the Federal per diem 

payment amount and TEFRA payments, 

ended on January 1, 2008, not July 1, 

2008. 

Section 412.432(d) 

Under § 412.432, in paragraph (d), 

‘‘Outlier payments,’’ we are proposing 

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

‘‘subject to the cost report settlement 

specified in § 412.84(i) and 

§ 412.84(m).’’ This regulatory language 

is required by the Federal Register and 

clarifies that § 412.84(i) and § 412.84(m) 

refer to 42 CFR part 412, ‘‘Prospective 


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Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 5023 

Payment Systems for Inpatient Hospital 

Services.’’ 

VII. Provisions of the Proposed 

Regulations 

In this proposed rule, we are 

proposing to update the IPF PPS 

payment rates for RY 2012. We are also 

proposing to revise the IPF PPS 

payment update period and make other 

policy changes and clarifications. The 

following is a summary of the areas that 

we are addressing in this proposed rule: 

• We are proposing to switch the 

annual update period for the IPF PPS 

from a rate year that begins on July 1 

and goes through June 30 to one that 

coincides with a FY, that is, that begins 

on October 1 and goes through 

September 30. For the update period 

that begins in 2012, and thereafter, we 

would refer to the update period as a 

FY. In order to make this switch, we are 

proposing that rate year 2012 be a 15- 

month period, from July 1, 2011 through 

September 30, 2012. This change in the 

payment update period would allow us 

to have one consolidated annual update 

to both the rates and the ICD–9–CM 

coding changes (MS–DRG and 

comorbidities). The coding changes will 

continue to be effective October 1 of 

each year. 

• We are proposing to rebase and 

revise the FY 2002-based RPL market 

basket to a FY 2008-based RPL market 

basket. We are proposing a 3.0 percent 

market basket update to the IPF PPS for 

RY 2012 based on the most recent 

estimate of the market basket update for 

the proposed 15-month 2012 IPF PPS 

rate year, with a 0.25 percentage point 

reduction as required by section 1886 

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

• We are proposing to adopt IPF 

policies similar to such IPPS GME 

policies providing for temporary 

adjustments to an IPF’s FTE cap to 

reflect residents added due to the 

closure of an IPF or an IPF’s residency 

training program. 

• We are proposing to update the 

fixed dollar loss threshold amount in 

order to maintain the appropriate outlier 

percentage. 

• We are proposing to update the ECT 

adjustment by a factor specified by 

CMS. 

• We are proposing to update the 

national urban and rural cost-to-charge 

ratio medians and ceilings. 

• We are proposing to update the cost 

of living adjustment factors for IPFs 

located in Alaska and Hawaii, if 

appropriate. 

• We are proposing to describe the 

ICD–9–CM and MS–DRG classification 

changes discussed in the annual update 

to the hospital inpatient prospective 

payment system regulations. 

• We are proposing the best available 

hospital wage index and information 

regarding whether an adjustment to the 

Federal per diem base rate is needed to 

maintain budget neutrality. 

• We are proposing to retain the 17 

percent adjustment for IPFs located in 

rural areas, the 1.31 adjustment for IPFs 

with a qualifying ED, the 0.5150 

teaching adjustment to the Federal per 

diem rate, and the MS–DRG adjustment 

factor currently being paid to IPFs for 

RY 2011. 

• We are proposing to update the 

MS–DRG listing and comorbidity 

categories to reflect the ICD–9–CM 

revisions effective October 1, 2010. 

VIII. Collection of Information 

Requirements 

This document does not impose any 

information collection and 

recordkeeping requirements. 

Consequently, it need not be reviewed 

by the Office of Management and 

Budget under the authority of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 35). 

IX. Regulatory Impact Analysis 

A. Statement of Need 

This proposed rule would update the 

prospective payment rates for Medicare 

inpatient hospital services provided by 

inpatient psychiatric facilities for 

discharges occurring during the rate 

year beginning July 1, 2011 through 

September 30, 2012. We propose to 

apply the 15-month FY2008-based RPL 

market basket increase of 3.0 percent, 

adjusted by the 0.25 percentage point 

reduction, as required by section 

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

rule proposes policy changes affecting 

the IPF PPS teaching adjustment, as 

well as makes some clarifications and 

corrections to terminology and 

regulations text. 

B. Overall Impact 

We have examined the impacts of this 

proposed rule as required by Executive 

Order 12866 (September 1993, 

Regulatory Planning and Review), the 

September 19, 1980 Regulatory 

Flexibility Act (RFA) (Pub. L. 96–354), 

section 1102(b) of the 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). This proposed rule is a 

major rule as defined in Title 5, United 

States Code, section 804(2), because we 

estimate that the impact to the Medicare 

program, and the annual effects to the 

economy, will be more than $100 

million. We estimate that the total 

impact of these proposed changes for 

estimated RY 2012 payments compared 

to estimated RY 2011 payments would 

be an increase of approximately $110 

million (this reflects a $120 million 

increase from the update to the payment 

rates and a $10 million decrease due to 

the proposed update to the outlier 

threshold amount to decrease estimated 

outlier payments from approximately 

2.2 percent in RY 2011 to 2.0 percent in 

RY 2012). 

The RFA requires agencies to analyze 

options for regulatory relief of small 

entities, if a rule has a significant impact 

on a substantial number of small 

entities. For purposes of the RFA, small 

entities include small businesses, 

nonprofit organizations, and small 

governmental jurisdictions. Most IPFs 

and most other providers and suppliers 

are small entities, either by nonprofit 

status or by having revenues of $7 

million to $34.5 million in any one year 

(for details, refer to the SBA Small 

Business Size Standards found at http:// 

ecfr.gpoaccess.gov/cgi/t/text/text-idx?

c=ecfr&sid=2465b064ba6965cc1fbd2

eae60854b11&rgn=div8&view=text&

node=13:1.0.1.1.16.1.266.9&idno=13). 

Because we lack data on individual 

hospital receipts, we cannot determine 

the number of small proprietary IPFs or 

the proportion of IPFs’ revenue that is 

derived from Medicare payments. 

Therefore, we assume that all IPFs are 

considered small entities. The 

Department of Health and Human 

Services generally uses a revenue 

impact of 3 to 5 percent as a significance 

threshold under the RFA. As shown in 

Table 15, we estimate that the revenue 

impact of this proposed rule on all IPFs 

is to increase estimated Medicare 

payments by about 2.54 percent, with 

rural IPFs estimated to receive an 

increase in estimated Medicare 

payments greater than 3 percent (an 

aggregate 3.56 percent). Since Medicare 

payments do not necessarily constitute 

total revenue for all IPFs, the overall 

total revenue impact to IPFs would be 

less than the significant threshold of 3 


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to 5 percent under the RFA. As a result, 

the Secretary has determined that this 

proposed rule will not have a significant 

impact on a substantial number of small 

entities. Medicare fiscal intermediaries, 

Medicare Administrative Contractors, 

and carriers are not considered to be 

small entities. Individuals and States are 

not included in the definition of a small 

entity. We solicit comment on the above 

analysis. 

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 603 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a metropolitan statistical area and has 

fewer than 100 beds. As discussed in 

detail below, the rates and policies set 

forth in this proposed rule will not have 

an adverse impact on the rural hospitals 

based on the data of the 387 rural units 

and 67 rural hospitals in our database of 

1,653 IPFs for which data were 

available. Therefore, we are not 

preparing an analysis for section 1102(b) 

of the Act because the Secretary has 

determined that this proposed rule will 

not have a significant impact on the 

operations of a substantial number of 

small rural hospitals. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

also requires that agencies assess 

anticipated costs and benefits before 

issuing any rule whose mandates 

require spending in any 1 year of $100 

million in 1995 dollars, updated 

annually for inflation. In 2010, that 

threshold is approximately $135 

million. This proposed rule will not 

impose spending costs on State, local, or 

tribal governments in the aggregate, or 

by the private sector, of $135 million. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

As stated above this proposed rule 

would not have a substantial effect on 

State and local governments. 

C. Anticipated Effects of the Proposed 

Rule 

We discuss below the historical 

background of the IPF PPS and the 

impact of this proposed rule on the 

Federal Medicare budget and on IPFs. 

1. Budgetary Impact 

As discussed in the November 2004 

and May 2006 IPF PPS final rules, we 

applied a budget neutrality factor to the 

Federal per diem and ECT base rates to 

ensure that total estimated payments 

under the IPF PPS in the 

implementation period would equal the 

amount that would have been paid if the 

IPF PPS had not been implemented. The 

budget neutrality factor includes the 

following components: outlier 

adjustment, stop-loss adjustment, and 

the behavioral offset. As discussed in 

the May 2008 IPF PPS notice (73 FR 

25711), the stop-loss adjustment is no 

longer applicable under the IPF PPS. 

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

we indicated that we would evaluate the 

accuracy of the budget neutrality 

adjustment within the first 5 years after 

implementation of the payment system. 

We may make a one-time prospective 

adjustment to the Federal per diem and 

ECT base rates to account for differences 

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

budget neutrality adjustment) and 

estimates of TEFRA payments based on 

actual data from the first year of the IPF 

PPS. As part of that process, we will 

reassess the accuracy of all of the factors 

impacting budget neutrality. In 

addition, as discussed in section III.C.6 

of this proposed rule, we are using the 

wage index and labor-related share in a 

budget neutral manner by applying a 

wage index budget neutrality factor to 

the Federal per diem and ECT base 

rates. Therefore, the budgetary impact to 

the Medicare program of this proposed 

rule will be due to the 15-month market 

basket update for RY 2012 of 3.0 percent 

(see section III.C.5 of this proposed rule) 

as adjusted by the ‘‘other adjustment’’ of 

¥0.25 percentage point according to 

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

proposed update to the outlier fixed 

dollar loss threshold amount. 

We estimate that the RY 2012 impact 

would be a net increase of $110 million 

in payments to IPF providers. This 

reflects a $120 million increase from the 

update to the payment rates and a $10 

million decrease due to the proposed 

update to the outlier threshold amount 

to decrease estimated outlier payments 

from approximately 2.2 percent in RY 

2011 to 2.0 percent in RY 2012. 

2. Impacts on Providers 

To understand the impact of the 

changes to the IPF PPS on providers, 

discussed in this proposed rule, it is 

necessary to compare estimated 

payments under the IPF PPS rates and 

factors for RY 2012 versus those under 

RY 2011. The estimated payments for 

RY 2011 and RY 2012 will be 100 

percent of the IPF PPS payment, since 

the transition period has ended and 

stop-loss payments are no longer paid. 

We determined the percent change of 

estimated RY 2012 IPF PPS payments to 

estimated RY 2011 IPF PPS payments 

for each category of IPFs. In addition, 

for each category of IPFs, we have 

included the estimated percent change 

in payments resulting from the 

proposed update to the outlier fixed 

dollar loss threshold amount, the laborrelated share and wage index changes 

for the RY 2012 IPF PPS, and the 15- 

month market basket update for RY 

2012, as adjusted by the ‘‘other 

adjustment’’ according to section 

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

To illustrate the impacts of the RY 

2012 changes in this proposed rule, our 

analysis begins with a RY 2011 baseline 

simulation model based on FY 2009 IPF 

payments inflated to the midpoint of RY 

2011 using IHS Global Insight’s most 

recent forecast of the market basket 

update (see section III.C.5 of this 

proposed rule); the estimated outlier 

payments in RY 2011; the CBSA 

designations for IPFs based on OMB’s 

MSA definitions after June 2003; the FY 

2010 pre-floor, pre-reclassified hospital 

wage index; the RY 2011 labor-market 

share; and the RY 2011 percentage 

amount of the rural adjustment. During 

the simulation, the total estimated 

outlier payments are maintained at 2 

percent of total estimated IPF PPS 

payments. 

Each of the following proposed 

changes is added incrementally to this 

baseline model in order for us to isolate 

the effects of each change: 

• The update to the outlier fixed 

dollar loss threshold amount. 

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

2012 labor-related share. 

• The 15-month market basket update 

for RY 2012 of 3.0 percent adjusted by 

0.25 percentage point reduction in 

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

the Act. 

Our final comparison illustrates the 

percent change in payments from RY 

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

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

to September 30, 2012) including all the 

changes in this proposed rule. 

BILLING CODE 4210–01–P 


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BILLING CODE 4120–01–C 

3. Results 

Table 15 above displays the results of 

our analysis. The table groups IPFs into 

the categories listed below based on 

characteristics provided in the Provider 

of Services (POS) file, the IPF provider 

specific file, and cost report data from 

HCRIS: 

• Facility Type. 

• Location. 


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• Teaching Status Adjustment. 

• Census Region. 

• Size. 

The top row of the table shows the 

overall impact on the 1,653 IPFs 

included in this analysis. 

In column 3, we present the effects of 

the proposed update to the outlier fixed 

dollar loss threshold amount. We 

estimate that IPF outlier payments as a 

percentage of total estimated IPF 

payments are 2.2 percent in RY 2011. 

Thus, we are proposing to adjust the 

outlier threshold amount from $6,372 in 

RY 2011 to $7,316 in RY 2012 in order 

to set total estimated outlier payments 

equal to 2 percent of total estimated 

payments in RY 2012. The estimated 

change in total IPF payments for RY 

2012, therefore, includes an 

approximate 0.2 percent decrease in 

payments because the estimated outlier 

portion of total payments is estimated to 

decrease from approximately 2.2 

percent to 2 percent. 

The overall aggregate effect of this 

proposed outlier adjustment updates (as 

shown in column 3 of table 15), across 

all hospital groups, is to decrease total 

estimated payments to IPFs by about 

0.21 percent. We do not estimate that 

any group of IPFs will experience an 

increase in payments from this 

proposed update. We estimate the 

largest decrease in payments to be a 1.57 

percent decrease in estimated payments 

to urban, government IPF units located 

in CAHs which is due to the small 

number of IPFs of that type and the high 

volume of outlier payments made to 

those IPFs. 

In column 4, we present the effects of 

the proposed budget-neutral update to 

the labor-related share and the wage 

index adjustment under the CBSA 

geographic area definitions announced 

by OMB in June 2003. This is a 

comparison of the simulated RY 2012 

payments under the FY 2011 hospital 

wage index under CBSA classification 

and associated labor-related share to the 

simulated RY 2011 payments under the 

FY 2010 hospital wage index under 

CBSA classifications and associated 

labor-related share. We note that there is 

no projected change in aggregate 

payments to IPFs, as indicated in the 

first row of column 4. However, there 

would be distributional effects among 

different categories of IPFs. For 

example, we estimate a 0.98 percent 

increase in overall payments to rural 

IPFs, with the largest increase in 

estimated payments of 2.2 percent for 

rural, for-profit freestanding psychiatric 

hospitals. In addition, we estimate the 

largest decrease in estimated payments 

to be a 0.89 percent decrease for IPFs in 

the New England region. 

Column 5 shows the estimated effect 

of the proposed update to the IPF PPS 

payment rates, which includes a 3.0 

percent 15-month market basket update 

with the 0.25 percentage point 

reduction in accordance with section 

1886(s)(3)(A). 

Column 6 compares our estimates of 

the changes reflected in this proposed 

rule for RY 2012, to our estimates of 

payments for RY 2011 (without these 

changes). This column reflects all RY 

2012 changes relative to RY 2011. The 

average estimated increase for all IPFs is 

approximately 2.54 percent. This 

estimated net increase includes the 

effects of the 3.0 percent 15-month 

market basket update adjusted by the 

‘‘other adjustment’’ of ¥0.25 percentage 

point, as required by section 

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

the approximate 0.2 percent overall 

estimated decrease in estimated IPF 

outlier payments from the proposed 

update to the outlier fixed dollar loss 

threshold amount. Since we are making 

the updates to the IPF labor-related 

share and wage index in a budgetneutral manner, they will not affect total 

estimated IPF payments in the 

aggregate. However, they will affect the 

estimated distribution of payments 

among providers. 

Overall, no IPFs are estimated to 

experience a net decrease in payments 

as a result of the proposed updates in 

this rule. IPFs in urban areas will 

experience a 2.37 percent increase and 

IPFs in rural areas will experience a 

3.56 percent increase. The largest 

payment increase is estimated at 4.98 

percent for rural, for-profit freestanding 

psychiatric hospitals. This is due to the 

larger than average positive effect of the 

FY 2011 CBSA wage index and laborrelated share updates for rural IPFs in 

this category. 

4. Effect on the Medicare Program 

Based on actuarial projections 

resulting from our experience with other 

PPSs, we estimate that Medicare 

spending (total Medicare program 

payments) for IPF services over the next 

5 years would be as shown in Table 16 

below. 

TABLE 16—ESTIMATED PAYMENTS

Rate year Dollars in 

millions 

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

July 1, 2012 to June 30, 2013 4,938 

July 1, 2013 to June 30, 2014 5,320 

July 1, 2014 to June 30, 2015 5,750 

July 1, 2015 to June 30, 2016 6,235 

These estimates are based on the 

current forecast of the increases in the 

RPL market basket, including an 

adjustment for productivity, for the rate 

year beginning in 2012 and each 

subsequent rate year, as required by 

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

follows: 

• 2.6 percent for rate years beginning 

in 2011 (RY 2012). 

• 1.7 percent for rate years beginning 

in 2012 (RY 2013). 

• 1.9 percent for rate years beginning 

in 2013 (RY 2014). 

• 2.1 percent for rate years beginning 

in 2014 (RY 2015). 

• 2.3 percent for rate years beginning 

in 2015 (RY 2016). 

The estimates in Table 14 also include 

the application of the ‘‘other 

adjustment,’’ as required by section 

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

• ¥0.25 percent for rate years 

beginning in 2011. 

• ¥0.1 percent for rate years 

beginning in 2012. 

• ¥0.1 percent for rate years 

beginning in 2013. 

• ¥0.3 percent for rate years 

beginning in 2014. 

• ¥0.2 percent for rate years 

beginning in 2015. 

We estimate that there would be a 

change in fee-for-service Medicare 

beneficiary enrollment as follows: 

• 3.3 percent in RY 2012. 

• 3.7 percent in RY 2013. 

• 4.3 percent in RY 2014. 

• 4.9 percent in RY 2015. 

• 5.6 percent in RY 2016. 

5. Effect on Beneficiaries 

Under the IPF PPS, IPFs would 

receive payment based on the average 

resources consumed by patients for each 

day. We do not expect changes in the 

quality of care or access to services for 

Medicare beneficiaries under the RY 

2012 IPF PPS. In fact, we believe that 

access to IPF services will be enhanced 

due to the patient- and facility-level 

adjustment factors, all of which are 

intended to adequately reimburse IPFs 

for expensive cases. Finally, the outlier 

policy is intended to assist IPFs that 

experience high-cost cases. 

D. Alternatives Considered 

The statute does not specify an update 

strategy for the IPF PPS and is broadly 

written to give the Secretary discretion 

in establishing an update methodology. 

Therefore, we are updating the IPF PPS 

using the methodology published in the 

November 2004 IPF PPS final rule. 

We note that this proposed rule 

initiates policy changes with regard to 

the IPF PPS, and it also provides an 

update to the rates for RY 2012. We 

considered making refinements to the 

IPF PPS in this proposed rule. However, 


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we decided that we needed more time 

to assess the data and would therefore 

once again delay running the regression 

analysis until we have adequate IPF PPS 

data. We have initiated the necessary 

analysis to better understand IPF 

industry practices. We did not consider 

rebasing the IPF PPS for concerns that 

rebasing would be too costly (recalculate the cost-per-day) and time 

consuming. 

E. Accounting Statement 

As required by OMB Circular A–4 

(available at http://www.whitehouse.

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

Table 17 below, we have prepared an 

accounting statement showing the 

classification of the expenditures 

associated with the provisions of this 

proposed rule. This table provides our 

best estimate of the increase in Medicare 

payments under the IPF PPS as a result 

of the proposed changes presented in 

this proposed rule and based on the data 

for 1,653 IPFs in our database. All 

expenditures are classified as transfers 

to Medicare providers (that is, IPFs). 

TABLE 17—ACCOUNTING STATEMENT: 

CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM THE 2011 IPF 

PPS RY TO THE 2012 IPF PPS RY 

[In millions] 

Category Transfers 

Annualized Monetized 

Transfers.

$110 

From Whom To 

Whom? 

Federal Government 

To IPF Medicare 

Providers. 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects in 42 CFR Part 412 

Administrative practice and 

procedure, Health facilities, Medicare, 

Puerto Rico, Reporting and 

recordkeeping requirements. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services proposes to amend 

42 CFR chapter IV as set forth below: 

PART 412—PROSPECTIVE PAYMENT 

SYSTEMS FOR INPATIENT HOSPITAL 

SERVICES 

1. The authority citation for part 412 

continues to read as follows: 

Authority: Secs. 1102, 1862, and 1871 of 

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

1395y, and 1395hh). 

Subpart N—Prospective payment 

system for inpatient hospital services 

of inpatient psychiatric facilities 

2. In § 412.402, new definitions of 

‘‘IPF prospective payment system rate 

year’’ and ‘‘MS–IFP–DRG’’ are added in 

alphabetical order to read as follows: 

§ 412.402 Definitions. 

* * * * * 

IPF prospective payment system rate 

year means — 

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

month period of July 1 through June 30. 

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

month period of July 1, 2011 through 

September 30, 2012. 

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

month period of October 1 through 

September 30, referred to as Fiscal Year 

(FY). 

* * * * * 

MS–IFP–DRG means the severity 

adjusted diagnosis groups used to 

classify IPF patients. For IPF discharges 

occurring on or after July 1, 2008, all 

reference to MS–DRGs used for the IPF 

PPS are to MS–IPF–DRGs. 

* * * * * 

3. Section 412.404 is amended by 

revising paragraph (a)(1) to read as 

follows: 

§ 412.404 Conditions for payment under 

the prospective payment system for 

inpatient hospital services of psychiatric 

facilities. 

(a) General requirements. (1) Effective 

for cost reporting periods beginning on 

or after January 1, 2005, an inpatient 

psychiatric facility must meet the 

conditions of this section to receive 

payment under the prospective payment 

system described in this subpart for 

inpatient hospital services furnished to 

Medicare Part A fee-for-service 

beneficiaries. 

* * * * * 

4. Section 412.422 is amended by 

revising paragraph (b)(2) to read as 

follows: 

§ 412.422 Basis of payment. 

* * * * * 

(b) * * * 

(2) In addition to the Federal per diem 

payment amounts, inpatient psychiatric 

facilities receive payment for bad debts 

of Medicare beneficiaries, as specified 

in § 413.89 of this chapter. 

5. Section 412.424 is amended by 

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

read as follows: 

§ 412.424 Methodology for calculating the 

Federal per diem payment amount. 

* * * * * 

(d) * * * 

(1) * * * 

(iii) * * * 

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

reporting periods beginning on or after 

July 1, 2011, an IPF may receive a 

temporary adjustment to its FTE cap to 

reflect residents added because of 

another IPF’s closure if the IPF meets 

the following criteria: 

(i) The IPF is training additional 

residents from an IPF that closed on or 

after July 1, 2011. 

(ii) No later than 60 days after the IPF 

begins to train the residents, the IPF 

submits a request to its Medicare 

contractor for a temporary adjustment to 

its cap, documents that the IPF is 

eligible for this temporary adjustment 

by identifying the residents who have 

come from the closed IPF and have 

caused the IPF to exceed its cap, and 

specifies the length of time the 

adjustment is needed. 

(2) Closure of an IPF’s residency 

training program. If an IPF that closes 

its residency training program agrees to 

temporarily reduce its FTE cap 

according to the criteria specified in 

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

section, another IPF(s) may receive a 

temporary adjustment to its FTE cap to 

reflect residents added because of the 

closure of the residency training 

program if the criteria specified in 

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

section are met. 

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

periods beginning on or after July 1, 

2001, an IPF may receive a temporary 

adjustment to its FTE cap to reflect 

residents added because of the closure 

of another IPF’s residency training 

program if the IPF is training additional 

residents from the residency training 

program of an IPF that closed a program; 

and if no later than 60 days after the IPF 

begins to train the residents, the IPF 

submits to its Medicare Contractor a 

request for a temporary adjustment to its 

FTE cap, documents that it is eligible for 

this temporary adjustment by 

identifying the residents who have come 

from another IPF’s closed program and 

have caused the IPF to exceed its cap, 

specifies the length of time the 

adjustment is needed, and submits to its 

Medicare contractor a copy of the FTE 

reduction statement by the hospital that 

closed its program, as specified in 

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

section. 

(ii) IPF that closed its program. An 

IPF that agrees to train residents who 

have been displaced by the closure of 

another IPF’s program may receive a 

temporary FTE cap adjustment only if 

the hospital with the closed program 

temporarily reduces its FTE cap based 

on the FTE residents in each program 

year training in the program at the time 


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of the program’s closure. This yearly 

reduction in the FTE cap will be 

determined based on the number of 

those residents who would have been 

training in the program during that year 

had the program not closed. No later 

than 60 days after the residents who 

were in the closed program begin 

training at another hospital, the hospital 

with the closed program must submit to 

its Medicare contractor a statement 

signed and dated by its representative 

that specifies that it agrees to the 

temporary reduction in its FTE cap to 

allow the IPF training the displaced 

residents to obtain a temporary 

adjustment to its cap; identifies the 

residents who were in training at the 

time of the program’s closure; identifies 

the IPFs to which the residents are 

transferring once the program closes; 

and specifies the reduction for the 

applicable program years. 

* * * * * 

6. Section 412.426 is amended by 

revising paragraph (a) to read as follows: 

§ 412.426 Transition period. 

(a) Duration of transition period and 

composition of the blended transition 

payment. Except as provided in 

paragraph (c) of this section, for cost 

reporting periods beginning on or after 

January 1, 2005 through January 1, 2008, 

an inpatient psychiatric facility receives 

a payment comprised of a blend of the 

estimated Federal per diem payment 

amount, as specified in § 412.424(d) of 

this subpart and a facility-specific 

payment as specified under paragraph 

(b) of this section. 

(1) For cost reporting periods 

beginning on or after January 1, 2005 

and before January 1, 2006, payment is 

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

based on the Federal per diem payment 

amount. 

(2) For cost reporting periods 

beginning on or after January 1, 2006 

and before January 1, 2007, payment is 

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

based on the Federal per diem payment 

amount. 

(3) For cost reporting periods 

beginning on or after January 1, 2007 

and before January 1, 2008, payment is 

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

based on the Federal per diem payment 

amount. 

(4) For cost reporting periods 

beginning on or after January 1, 2008, 

payment is based entirely on the Federal 

per diem payment amount. 

* * * * * 

7. Section 412.432 is amended by 

revising paragraph (d) to read as 

follows: 

§ 412.432 Method of payment under the 

inpatient psychiatric facility prospective 

payment system. 

* * * * * 

(d) Outlier payments. Additional 

payments for outliers are not made on 

an interim basis. Outlier payments are 

made based on the submission of a 

discharge bill and represents final 

payment subject to the cost report 

settlement specified in § 412.84(i) and 

§ 412.84(m) of this part. 

* * * * * 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: January 13, 2011. 

Donald Berwick, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: January 20, 2011. 

Kathleen Sebelius, 

Secretary. 

[Note: The following Addendums will not 

appear in the Code of Federal Regulations]. 

Addendum A—Rate and Adjustment 

Factors 


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5038 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 


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5040 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 


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5042 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 


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Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 5043 


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5044 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 


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Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 5045 


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5046 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 


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Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 5047 


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5048 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 


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Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 5049 


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5050 Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 


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Federal Register / Vol. 76, No. 18 / Thursday, January 27, 2011 / Proposed Rules 5051 

[FR Doc. 2011–1507 Filed 1–21–11; 4:15 pm] 

BILLING CODE 4120–01–P 


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