DEPARTMENT OF HEALTH AND HUMAN SERVICES 

Centers for Medicare & Medicaid Services 

42 CFR Parts 412, 413, and 476 

[CMS-1518-P] 

RIN 0938-AQ24 

Medicare Program; Proposed Changes to the Hospital Inpatient Prospective 

Payment Systems for Acute Care Hospitals and the Long-Term Care Hospital 

Prospective Payment System and Fiscal Year 2012 Rates 

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

ACTION: Proposed rule. 

SUMMARY: We are proposing to revise the Medicare hospital inpatient prospective 

payment systems (IPPS) for operating and capital-related costs of acute care hospitals to 

implement changes arising from our continuing experience with these systems and to 

implement certain statutory provisions contained in the Patient Protection and Affordable 

Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively 

known as the Affordable Care Act) and other legislation. These changes would be 

applicable to discharges occurring on or after October 1, 2011. We also are setting forth 

the proposed update to the rate-of-increase limits for certain hospitals excluded from the 

IPPS that are paid on a reasonable cost basis subject to these limits. The proposed 

updated rate-of-increase limits would be effective for cost reporting periods beginning on 

or after October 1, 2011. 

 We are proposing to update the payment policy and the annual payment rates for 

the Medicare prospective payment system (PPS) for inpatient hospital services provided 
CMS-1518-P 2 

by long-term care hospitals (LTCHs) and implement certain statutory changes made by 

the Affordable Care Act. These changes would be applicable to discharges occurring on 

or after October 1, 2011. 

DATES: Comment Period: To be assured consideration, comments must be received at 

one of the addresses provided below, no later than 5 p.m. EDT on June 20, 2011. 

ADDRESSES: When commenting, please refer to file code CMS-1518-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 at 

http://www.regulations.gov. Follow the instructions for “Comment or Submission” and 

enter the file code CMS-1518-P to submit comments on this proposed rule. 

 2. By regular mail. You may mail written comments (one original and two 

copies) to the following address ONLY: 

Centers for Medicare & Medicaid Services, 

 Department of Health and Human Services, 

 Attention: CMS-1518-P, 

 P.O. Box 8011, 

 Baltimore, MD 21244-1850. 

 Please allow sufficient time for mailed comments to be received before the close 

of the comment period. 
CMS-1518-P 3 

 3. By express or overnight mail. You may send written comments (one original 

and two copies) to the following address ONLY: 

Centers for Medicare & Medicaid Services, 

 Department of Health and Human Services, 

 Attention: CMS-1518-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 (one original and two copies) before the close of the comment period 

to either of the following addresses: 

 a. Room 445-G, Hubert H. Humphrey Building, 

 200 Independence Avenue, SW, 

 Washington, DC 20201 

(Because access to the interior of the HHH Building is not readily available to 

persons without Federal Government identification, commenters are encouraged to leave 

their comments in the CMS drop slots located in the main lobby of the building. A 

stamp-in clock is available for persons wishing to retain a proof of filing by stamping in 

and retaining an extra copy of the comments being filed.) 

b. 7500 Security Boulevard, 

Baltimore, MD 21244-1850. 
CMS-1518-P 4 

 If you intend to deliver your comments to the Baltimore address, please call 

telephone number (410) 786-7195 in advance to schedule your arrival with one of our 

staff members. 

 Comments mailed to the addresses indicated as appropriate for hand or courier 

delivery may be delayed and received after the comment period. 

 For information on viewing public comments, see the beginning of the 

Supplementary Information section. 

FOR FURTHER INFORMATION CONTACT: 

Tzvi Hefter, (410) 786-4487, and Ing-Jye Cheng, (410) 786 4548, Operating 

Prospective Payment, MS-DRGs, Hospital Acquired Conditions (HAC), Wage Index, 

New Medical Service and Technology Add-On Payments, Hospital Geographic 

Reclassifications, Capital Prospective Payment, Excluded Hospitals, Medicare 

Disproportionate Share Hospital (DSH), and Postacute Care Transfer Issues. 

Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590, 

Long-Term Care Hospital Prospective Payment System and MS-LTC-DRG Relative 

Weights Issues. 

Bridget Dickensheets, (410-786-8670), Rebasing and Revising of the Market 

Basket for LTCHs Issues. 

Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 

Demonstration Program Issues. 

 James Poyer, (410) 786-2261, Inpatient Quality Reporting--Program 

Administration, Validation, and Reconsideration Issues. 
CMS-1518-P 5 

 Shaheen Halim, (410) 786-0641, Inpatient Quality Reporting--Measures Issues 

Except Hospital Consumer Assessment of Healthcare Providers and Systems Issues; and 

Readmission Measures for Hospitals Issues. 

Elizabeth Goldstein, (410) 786-6665, Inpatient Quality Reporting--Hospital 

Consumer Assessment of Healthcare Providers and Systems Measures Issues. 

Mary Pratt, (410) 786-6867), LTCH Quality Data Reporting Issues. 

Kim Spaulding Bush, (410) 786-3232), Hospital Value-Based Purchasing 

Efficiency Measures Issues. 

SUPPLEMENTARY INFORMATION: 

Inspection of Public Comments: All comments received before the close of the 

comment period are available for viewing by the public, including any personally 

identifiable or confidential business information that is included in a comment. We post 

all comments received before the close of the comment period on the following Web site 

as soon as possible after they have been received: http://www.regulations.gov. Follow 

the search instructions at that Web site to view public comments. 

Comments received timely will also be available for public inspection, generally 

beginning approximately 3 weeks after publication of a document, at the headquarters of 

the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, 

Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4:00 p.m. To 

schedule an appointment to view public comments, phone 1-800-743-3951.
CMS-1518-P 6 

Electronic Access

 This Federal Register document is also available from the Federal Register

online database through GPO Access, a service of the U.S. Government Printing Office. 

Free public access is available on a Wide Area Information Server (WAIS) through the 

Internet and via asynchronous dial-in. Internet users can access the database by using the 

World Wide Web, (the Superintendent of Documents' home Web page address is 

http://www.gpoaccess.gov/), by using local WAIS client software, or by telnet to 

swais.access.gpo.gov, then login as guest (no password required). Dial-in users should 

use communications software and modem to call (202) 512-1661; type swais, then login 

as guest (no password required). 

Tables Available Only through the Internet on the CMS Web Site 

 In the past, a majority of the tables referred to throughout this preamble and in the 

Addendum to this proposed rule were published in the Federal Register as part of the 

annual proposed and final rules. However, beginning in FY 2012, some of the IPPS 

tables and LTCH PPS tables will no longer be published as part of the annual 

IPPS/LTCH PPS proposed and final rules. Instead, these tables will be available only 

through the Internet. The IPPS tables for this proposed rule are available only through 

the Internet on the CMS Web site at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. Click on the link on the 

left side of the screen titled, “FY 2012 IPPS Proposed Rule Home Page” or “Acute 

Inpatient – Files for Download”. The LTCH PPS tables for this FY 2012 proposed rule 

are available only through the Internet on the CMS Web site at: 
CMS-1518-P 7 

http://www.cms.gov/LongTermCareHospitalPPS/LTCHPPSRN/list.asp under the list 

item for Regulation Number CMS-1518-P. For complete details on the availability of the 

tables referenced in this proposed rule, we refer readers to section VI. of the Addendum 

to this proposed rule. Readers who experience any problems accessing any of the tables 

that are posted on the CMS Web sites identified above should contact Nisha Bhat 

at (410) 786-4487. 

Acronyms 

3M 3M Health Information System 

AAMC Association of American Medical Colleges 

ACGME Accreditation Council for Graduate Medical Education 

AHA American Hospital Association 

AHIC American Health Information Community 

AHIMA American Health Information Management Association 

AHRQ Agency for Healthcare Research and Quality 

ALOS Average length of stay 

ALTHA Acute Long Term Hospital Association 

AMA American Medical Association 

AMGA American Medical Group Association 

AOA American Osteopathic Association 

APR DRG All Patient Refined Diagnosis Related Group System 

ARRA American Recovery and Reinvestment Act of 2009, Pub. L. 111-5 

ASC Ambulatory surgical center 
CMS-1518-P 8 

ASCA Administrative Simplification Compliance Act of 2002, Pub. L. 107-105 

ASITN American Society of Interventional and Therapeutic Neuroradiology 

BBA Balanced Budget Act of 1997, Pub. L. 105-33 

BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance 

 Program] Balanced Budget Refinement Act of 1999, Pub. L. 106-113 

BIPA Medicare, Medicaid, and SCHIP [State Children’s Health Insurance 

Program] Benefits Improvement and Protection Act of 2000, 

Pub. L. 106-554 

BLS Bureau of Labor Statistics 

CAH Critical access hospital 

CARE [Medicare] Continuity Assessment Record & Evaluation [Instrument] 

CART CMS Abstraction & Reporting Tool 

CBSAs Core-based statistical areas 

CC Complication or comorbidity 

CCR Cost-to-charge ratio 

CDAC [Medicare] Clinical Data Abstraction Center 

CDAD Clostridium difficile-associated disease 

CIPI Capital input price index 

CMI Case-mix index 

CMS Centers for Medicare & Medicaid Services 

CMSA Consolidated Metropolitan Statistical Area 

COBRA Consolidated Omnibus Reconciliation Act of 1985, Pub. L. 99-272 
CMS-1518-P 9 

COLA Cost-of-living adjustment 

CoP [Hospital] condition of participation 

CPI Consumer price index 

CRNA Certified Registered Nurse Anesthetist 

CY Calendar year 

DPP Disproportionate patient percentage 

DRA Deficit Reduction Act of 2005, Pub. L. 109-171 

DRG Diagnosis-related group 

DSH Disproportionate share hospital 

ECI Employment cost index 

EDB [Medicare] Enrollment Database 

EHR Electronic health record 

EMR Electronic medical record 

FAH Federation of Hospitals 

FDA Food and Drug Administration 

FFY Federal fiscal year 

FQHC Federally qualified health center 

FTE Full-time equivalent 

FY Fiscal year 

GAAP Generally Accepted Accounting Principles 

GAF Geographic Adjustment Factor 

GME Graduate medical education 
CMS-1518-P 10 

HACs Hospital-acquired conditions 

HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems 

HCFA Health Care Financing Administration 

HCO High-cost outlier 

HCRIS Hospital Cost Report Information System 

HHA Home health agency 

HHS Department of Health and Human Services 

HICAN Health Insurance Claims Account Number 

HIPAA Health Insurance Portability and Accountability Act of 1996, 

Pub. L. 104-191 

HIPC Health Information Policy Council 

HIS Health information system 

HIT Health information technology 

HMO Health maintenance organization 

HPMP Hospital Payment Monitoring Program 

HSA Health savings account 

HSCRC [Maryland] Health Services Cost Review Commission 

HSRV Hospital-specific relative value 

HSRVcc Hospital-specific relative value cost center 

HQA Hospital Quality Alliance 

HQI Hospital Quality Initiative 

ICD-9-CM International Classification of Diseases, Ninth Revision, 
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Clinical Modification 

ICD-10-CM International Classification of Diseases, Tenth Revision, 

 Clinical Modification 

ICD-10-PCS International Classification of Diseases, Tenth Revision, Procedure 

 Coding System 

ICR Information collection requirement 

IGI IHS Global Insight, Inc. 

IHS Indian Health Service 

IME Indirect medical education 

I-O Input-Output 

IOM Institute of Medicine 

IPF Inpatient psychiatric facility 

IPPS [Acute care hospital] inpatient prospective payment system 

IRF Inpatient rehabilitation facility 

IQR Inpatient Quality Reporting 

LAMCs Large area metropolitan counties 

LOS Length of stay 

LTC-DRG Long-term care diagnosis-related group 

LTCH Long-term care hospital 

MA Medicare Advantage 

MAC Medicare Administrative Contractor 

MCC Major complication or comorbidity 
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MCE Medicare Code Editor 

MCO Managed care organization 

MCV Major cardiovascular condition 

MDC Major diagnostic category 

MDH Medicare-dependent, small rural hospital 

MedPAC Medicare Payment Advisory Commission 

MedPAR Medicare Provider Analysis and Review File 

MEI Medicare Economic Index 

MGCRB Medicare Geographic Classification Review Board 

MIEA-TRHCA Medicare Improvements and Extension Act, Division B of 

 the Tax Relief and Health Care Act of 2006, Pub. L. 109-432 

MIPPA Medicare Improvements for Patients and Providers Act of 2008, 

 Pub. L. 110-275 

MMA Medicare Prescription Drug, Improvement, and Modernization Act 

of 2003, Pub. L. 108-173 

MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Pub. L. 110-173 

MRHFP Medicare Rural Hospital Flexibility Program 

MRSA Methicillin-resistant Staphylococcus aureus

MSA Metropolitan Statistical Area 

MS-DRG Medicare severity diagnosis-related group 

MS-LTC-DRG Medicare severity long-term care diagnosis-related group 

NAICS North American Industrial Classification System 
CMS-1518-P 13 

NALTH National Association of Long Term Hospitals 

NCD National coverage determination 

NCHS National Center for Health Statistics 

NCQA National Committee for Quality Assurance 

NCVHS National Committee on Vital and Health Statistics 

NECMA New England County Metropolitan Areas 

NQF National Quality Forum 

NTIS National Technical Information Service 

NTTAA National Technology Transfer and Advancement Act of 1991 

 (Pub. L. 104-113) 

NVHRI National Voluntary Hospital Reporting Initiative 

OACT [CMS'] Office of the Actuary 

OBRA 86 Omnibus Budget Reconciliation Act of 1996, Pub. L. 99-509 

OES Occupational employment statistics 

OIG Office of the Inspector General 

OMB Executive Office of Management and Budget 

OPM U.S. Office of Personnel Management 

O.R. Operating room 

OSCAR Online Survey Certification and Reporting [System] 

PMSAs Primary metropolitan statistical areas 

POA Present on admission 

PPACA Patient Protection and Affordable Care Act, Pub. L. 111-148 
CMS-1518-P 14 

PPI Producer price index 

PPS Prospective payment system 

PRM Provider Reimbursement Manual 

ProPAC Prospective Payment Assessment Commission 

PRRB Provider Reimbursement Review Board 

PRTFs Psychiatric residential treatment facilities 

PSF Provider-Specific File 

PS&R Provider Statistical and Reimbursement (System) 

QIG Quality Improvement Group, CMS 

QIO Quality Improvement Organization 

RCE Reasonable compensation equivalent 

RHC Rural health clinic 

RHQDAPU Reporting hospital quality data for annual payment update 

RNHCI Religious nonmedical health care institution 

RPL Rehabilitation psychiatric long-term care (hospital) 

RRC Rural referral center 

RTI Research Triangle Institute, International 

RUCAs Rural-urban commuting area codes 

RY Rate year 

SAF Standard Analytic File 

SCH Sole community hospital 

SFY State fiscal year 
CMS-1518-P 15 

SIC Standard Industrial Classification 

SNF Skilled nursing facility 

SOCs Standard occupational classifications 

SOM State Operations Manual 

SSO Short-stay outlier 

TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248 

TEP Technical expert panel 

TMA TMA [Transitional Medical Assistance], Abstinence Education, and QI 

[Qualifying Individuals] Programs Extension Act of 2007, Pub. L. 110-90 

UHDDS Uniform hospital discharge data set 

Table of Contents 

I. Background 

 A. Summary 

 1. Acute Care Hospital Inpatient Prospective Payment System (IPPS) 

 2. Hospitals and Hospital Units Excluded from the IPPS 

 3. Long-Term Care Hospital Prospective Payment System (LTCH PPS) 

 4. Critical Access Hospitals (CAHs) 

 5. Payments for Graduate Medical Education (GME) 

 B. Provisions of the Patient Protection and Affordable Care Act 

(Pub. L. 111-148) and the Health Care and Education Reconciliation Act of 2010 (Pub. L. 

111-152) Applicable to FY 2012 

 C. Major Contents of This Proposed Rule 
CMS-1518-P 16 

 1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative 

Weights 

 2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals 

 3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and 

GME Costs 

 4. Proposed FY 2012 Policy Governing the IPPS for Capital-Related Costs 

 5. Proposed Changes to the Payment Rates for Certain Excluded Hospitals: 

Rate-of-Increase Percentages 

 6. Proposed Changes to the LTCH PPS 

 7. Proposed Changes to the Electronic Prescribing (eRx) Incentive Program 

8. Determining Proposed Prospective Payment Operating and Capital Rates and 

Rate-of-Increase Limits for Acute Care Hospitals 

 9. Determining Proposed Prospective Payments Rates for LTCHs 

 10. Impact Analysis 

 11. Recommendation of Update Factors for Operating Cost Rates of Payment for 

Hospital Inpatient Services 

 12. Discussion of Medicare Payment Advisory Commission Recommendations 

 II. Proposed Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) 

Classifications and Relative Weights 

 A. Background 

 B. MS-DRG Reclassifications 

 1. General 
CMS-1518-P 17 

 2. Yearly Review for Making MS-DRG Changes 

 C. Adoption of the MS-DRGs in FY 2008 

 D. Proposed FY 2012 MS-DRG Documentation and Coding Adjustment, 

Including the Applicability to the Hospital-Specific Rates and the Puerto Rico-Specific 

Standardized Amount 

1. Background on the Prospective MS-DRG Documentation and Coding 

Adjustments for FY 2008 and FY 2009 Authorized by Pub. L. 110-90 

2. Prospective Adjustment to the Average Standardized Amounts Required by 

Section 7(b)(1)(A) of Pub. L. 110-90 

3. Recoupment or Repayment Adjustments in FYs 2010 through 2012 Required 

by Pub. L. 110-90 

4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data 

5. Prospective Adjustment for FY 2010 and Subsequent Years Authorized by 

Section 7(b)(1)(A) of Pub. L. 110-90 and Section 1886(d)(3)(vi) of the Act 

6. Recoupment or Repayment Adjustment for FY 2010 Authorized by Section 

7(b)(1)(B) of Pub. L. 110-90 

7. Background on the Application of the Documentation and Coding Adjustment 

to the Hospital-Specific Rates 

8. Documentation and Coding Adjustment to the Hospital-Specific Rates for FY 

2011 and Subsequent Fiscal Years 

9. Application of the Documentation and Coding Adjustment to the Puerto RicoSpecific Standardized Amount 
CMS-1518-P 18 

 E. Refinement of the MS-DRG Relative Weight Calculation 

 1. Background 

 2. Summary of the RTI Study of Charge Compression and CCR Refinement 

3. Summary of Policy Changes Made in FY 2011 

4. Discussion for FY 2012 

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

 1. Background 

 a. Statutory Authority 

 b. HAC Selection 

c. Collaborative Process 

 d. Application of HAC Payment Policy to MS-DRG Classifications 

 e. Public Input Regarding Selected and Potential Candidate HACs 

 f. POA Indicator Reporting 

 2. Proposed Additions and Revisions to the HAC Policy for FY 2012 

 a. Contrast-Induced Acute Kidney Injury 

 b. New Diagnosis Codes Proposed to be Added to Existing HACs 

 c. Revision to HAC Subcategory Title 

 d. Conclusion 

 3. RTI Program Evaluation Summary 

 a. Background 

 b. FY 2009 Data Analysis 

 c. FY 2010 Data Analysis 
CMS-1518-P 19 

 G. Proposed Changes to Specific MS-DRG Classifications 

 1. Pre-Major Diagnostic Categories (Pre-MDCs) 

 a. Noninvasive Mechanical Ventilation 

 b. Debridement with Mechanical Ventilation Greater than 96 Hours with Major 

Operating Room (O.R.) Procedure 

 c. Autologous Bone Marrow Transplant 

 2. MDC 1 (Diseases and Disorders of the Nervous System): Rechargeable Dual 

Array Deep Brain Stimulation System 

 3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat): Skull 

Based Surgeries 

 4. MDC 5 (Diseases and Disorders of the Circulatory System) 

 a. Percutaneous Mitral Valve Repair with Implant 

 b. Aneurysm Repair Procedure Codes 

 5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 

Connective Tissue) 

 a. Artificial Discs 

 b. Major Joint Replacement or Reattachment of Lower Extremities 

 c. Combined Anterior/Posterior Spinal Fusion 

 6. MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue, and 

Breast): Excisional Debridement of Wound, Infection, or Burn 

 7. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and Disorders) 

 a. Nutritional and Metabolic Diseases: Update of MS-DRG Titles 
CMS-1518-P 20 

 b. Sleeve Gastrectomy Procedure for Morbid Obesity 

 8. MDC 15 (Newborns and Other Neonates with Conditions Originating in the 

Perinatal Period): Discharge Status Code 66 (Discharged/Transferred to Critical Access 

Hospital (CAH)) 

 9. Proposed Medicare Code Editor (MCE) Changes 

 10. Surgical Hierarchies 

 11. Complications or Comorbidity (CC) Exclusions List 

 a. Background 

 b. Proposed CC Exclusions List for FY 2012 

 12. Review of Procedure Codes in MS-DRGs 981 through 983, 984 through 986, 

and 987 through 989 

 a. Moving Procedure Codes from MS-DRGs 981 through 983 or MS-DRGs 987 

through 989 into MDCs 

b. Reassignment of Procedures among MS-DRGs 981 through 983, 984 through 

986, and 987 through 989 

c. Adding Diagnosis or Procedure Codes to MDCs 

 13. Changes to the ICD-9-CM Coding System, Including Discussion of the 

Replacement of the ICD-9-CM System with the ICD-10-CM and ICD-10-PCS Systems 

in FY 2014 

 a. ICD-9-CM Coding System 

 b. Code Freeze 
CMS-1518-P 21 

 c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on Hospital 

Inpatient Claims 

 d. ICD-10 MS-DRGs 

 14. Other Issues 

 a. O.R./Non-O.R. Status of Procedures 

 b. IPPS Recalled Device Policy Clarification 

H. Recalibration of MS-DRG Weights 

I. Proposed Add-On Payments for New Services and Technologies 

 1. Background 

 2. Public Input Before Publication of a Notice of Proposed Rulemaking on 

Add-On Payments 

 3. FY 2012 Status of Technologies Approved for FY 2011 Add-On Payments 

 a. Spiration® IBV Valve System 

 b. Cardio WestTM Temporary Artificial Heart System (Cardio WestTM TAH-t) 

 c. Auto Laser Interstitial Thermal Therapy (AutoLITTTM) System 

 4. FY 2012 Applications for New Technology Add-On Payments 

 a. AxiaLIF® 2L+TM System 

 b. ChampionTM HF Monitoring System 

 c. PerfectCLEAN with Micrillon®

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

 A. Background 

 B. Core-Based Statistical Areas for the Hospital Wage Index 
CMS-1518-P 22 

 C. Proposed Occupational Mix Adjustment to the FY 2012 Wage Index 

 1. Development of Data for the Proposed FY 2012 Occupational Mix Adjustment 

Based on the 2007-2008 Occupational Mix Survey 

 2. New 2010 Occupational Mix Survey for the FY 2013 Wage Index 

 3. Calculation of the Proposed Occupational Mix Adjustment for FY 2012 

 D. Worksheet S-3 Wage Data for the Proposed FY 2012 Wage Index 

 1. Included Categories of Costs 

 2. Proposal for Changes to the Reporting Requirements for Pension Costs for the 

Medicare Wage Index 

 a. Background 

 b. Proposal for Allowable Pension Cost for the Medicare Wage Index 

 3. Excluded Categories of Costs 

 4. Use of Wage Index Data by Providers Other Than Acute Care Hospitals under 

the IPPS 

 E. Verification of Worksheet S-3 Wage Data 

 F. Method for Computing the Proposed FY 2012 Unadjusted Wage Index 

 1. Steps for Computation 

 2. Expiration of the Imputed Floor Policy 

 3. Proposed FY 2012 Puerto Rico Wage Index 

 G. Analysis and Implementation of the Proposed Occupational Mix Adjustment 

and the Proposed FY 2012 Occupational Mix Adjusted Wage Index 
CMS-1518-P 23 

 H. Revisions to the Wage Index Based on Hospital Redesignations and 

Reclassifications 

 1. General 

 2. Effects of Reclassification/Redesignation 

 3. FY 2012 MGCRB Reclassifications 

 a. FY 2012 Reclassification Requirements and Approvals 

 b. Applications for Reclassifications for FY 2013 

 4. Redesignations of Hospitals under Section 1886(d)(8)(B) of the Act 

 5. Reclassifications under Section 1886(d)(8)(B) of the Act 

 6. Reclassifications under Section 508 of Pub. L. 108-173 

 7. Waiving Lugar Redesignation for the Out-Migration Adjustment 

 8. Other Geographic Reclassification Issues 

 a. Requested Reclassification for Single Hospital MSAs

 b. Requests for Exceptions to Geographic Reclassification Rules 

 I. Proposed FY 2012 Wage Index Adjustment Based on Commuting Patterns of 

Hospital Employees 

 J. Process for Requests for Wage Index Data Corrections 

 K. Labor-Related Share for the Proposed FY 2012 Wage Index 

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

Costs 

 A. Hospital Inpatient Quality Reporting Program 

 1. Background 
CMS-1518-P 24 

 a. Overview 

 b. Statutory History and History of Measures Adopted for the Hospital IQR 

Program 

 c. Maintenance of Technical Specifications for Quality Measures 

 d. Public Display of Quality Measures 

 2. Retirement of Hospital IQR Program Measures 

 a. Considerations in Retiring Quality Measures from the Hospital IQR Program 

 b. Proposed Retirement of Quality Measures under the Hospital IQR Program for 

the FY 2014 Payment Determination and Subsequent Years 

 3. Proposed Quality Measures for the FY 2014 and FY 2015 Payment 

Determinations 

 a. Considerations in Expanding and Updating Quality Measures under the 

Hospital IQR Program 

 b. Proposed Hospital IQR Program Quality Measures for the FY 2014 Payment 

Determination 

 c. Proposed Hospital IQR Program Quality Measures for the FY 2015 Payment 

Determination 

 4. Possible New Quality Measures and Measure Topics for Future Years 

 5. Form, Manner, and Timing of Quality Data Submission 

 a. Background 

 b. Proposed Procedural Requirements for FY 2013 and Subsequent Years 

 c. Proposed General Data Collection and Submission Requirements 
CMS-1518-P 25 

 d. Proposed Data Submission Requirements for Chart-Abstracted Measures 

 e. Proposed Sampling and Case Thresholds 

 f. Proposed HCAHPS Requirements for the FY 2013, FY 2014, and FY 2015 

Payment Determinations 

 g. Proposed Procedures for Claims-Based Measures 

 h. Proposed Data Submission Requirements for Structural Measures 

 i. Proposed Data Submission and Reporting Requirements for 

Healthcare-Associated Infection (HAI) Measures Reported via NHSN 

 6. Proposed Chart Validation Requirements for Chart-Abstracted Measures 

 a. Proposed Chart Validation Requirements and Methods for the FY 2012 

Payment Determination 

 b. Proposed Supplements to the Chart Validation Process for the FY 2013 

Payment Determination and Subsequent Years 

 7. Proposed QIO Regulation Changes for Provider Medical Record Deadlines 

Possibly Including Serious Reportable Events 

 8. Proposed Data Accuracy and Completeness Acknowledgement Requirements 

for the FY 2012 Payment Determination and Subsequent Years 

 9. Proposed Public Display Requirements for the FY 2013 Payment 

Determination and Subsequent Years 

 10. Proposed Reconsideration and Appeal Procedures for the FY 2012 Payment 

Determination 

 11. Proposed Hospital IQR Program Disaster Waivers 
CMS-1518-P 26 

 12. Electronic Health Records 

 a. Background 

 b. HITECH Act EHR Provisions 

 B. Hospital Value-Based Purchasing (VBP) Program 

 1. Background 

 2. Overview of the Hospital VBP Program Proposed Rule 

 3. Proposed FY 2014 Hospital VBP Program Measures 

 a. Background 

 b. Proposed Efficiency Measure - Medicare Spending Per Beneficiary Measure - 

for the FY 2014 Hospital VBP Program 

4. Proposed Efficiency Domain (Medicare Spending per Beneficiary Measure) 

Performance Period and Baseline Period 

 C. Hospital Readmission Reduction Program 

 1. Background 

 a. Overview 

 b. Statutory Basis for the Hospital Readmission Reduction Program 

 2. Implementation of the Hospital Readmission Reduction Program 

 a. Overview 

 b. Proposed Provisions in the FY 2012 IPPS/LTCH PPS Rulemaking 

 c. Proposed Provisions to be Included in the FY 2013 IPPS/LTCH PPS Proposed 

Rule 
CMS-1518-P 27 

 d. Proposed Expansion of the Applicable Conditions to be Included in the Future 

Rulemaking 

 3. Proposed Provisions of the Hospital Readmission Reduction Program 

 a. Proposed Applicable Conditions for FY 2013 Hospital Readmission Reduction 

Program 

 b. Proposed Definition of “Readmissions” 

 c. Proposed Readmission Measures and Related Methodology 

 D. Rural Referral Centers (RRCs) (§412.96) 

 1. Case-Mix Index (CMI) 

 2. Discharges 

 E. Payment Adjustment for Low-Volume Hospitals (§412.101) 

1. Background 

2. Temporary Changes for FYs 2011 and 2012 

 3. Proposed Discharge Data Source to Identify Qualifying Low-Volume 

Hospitals and Calculate the Payment Adjustment (Percentage Increase) for FY 2012 

 F. Indirect Medical Education (IME) Adjustment 

1. Background 

 2. IME Adjustment Factor for FY 2012 

G. Payment Adjustment for Medicare Disproportionate Share Hospitals (DSHs) 

and Indirect Medical Education (IME) (§§412.105 and 412.106) 

 1. Background 
CMS-1518-P 28 

 2. Proposed Policy Change Relating to Exclusion of Hospice Beds and Patient 

Days from the Medicare DSH Calculation 

 H. Medicare-Dependent, Small Rural Hospitals (MDHs) (§412.108) 

 1. Background 

 2. Extension of the MDH Program 

 I. Certified Register Nurse Anesthetists (CRNA) Services Furnished in Rural 

Hospitals and CAHs (§412.113) 

J. Additional Payments for Qualifying Hospitals with Lowest Per Enrollee 

Medicare Spending 

1. Background 

2. Method for Identifying Qualifying Hospitals and Eligible Counties 

3. Determination of Annual Payment Amounts 

4. Eligible Counties and Qualifying Hospitals 

5. Payment Determination and Distributions for FY 2011 and FY 2012 

K. Proposed Changes in the Inpatient Hospital Update 

1. FY 2012 Inpatient Hospital Update 

2. FY 2012 Puerto Rico Hospital Update 

3. Productivity Adjustment

L. Additional Payments to Hospitals with High Percentage of End-Stage Renal 

Disease (ESRD) Discharges (§412.104) 

M. Proposal for Changes to the Reporting Requirements for Pension Costs for 

Medicare Cost-Finding Purposes 
CMS-1518-P 29 

1. Background 

2. Proposal for Allowable Defined Benefit Pension Plan Cost for Medicare 

Cost-Finding Purposes 

N. Rural Community Hospital Demonstration Program 

1. Background 

2. Changes to the Demonstration Program Made by the Affordable Care Act 

3. Proposed FY 2012 Budget Neutrality Adjustment 

a. Component of the Proposed FY 2012 Budget Neutrality Adjustment that 

Accounts for Estimated Demonstration Program Costs of the “Pre-Expansion” 

Participating Hospitals 

b. Portion of the Proposed FY 2012 Budget Neutrality Adjustment That Accounts 

for Estimated FY 2012 Demonstration Program Costs for Hospitals Newly Selected to 

Participate in the Demonstration Program 

c. Portion of the Proposed FY 2012 Budget Neutrality Adjustment to Offset the 

Amount by Which the Costs of the Demonstration Program in FYs 2007 and 2008 

Exceeded the Amount That was Identified in the FYs 2007 and 2008 IPPS Final Rules as 

the Budget Neutrality Offset for FYs 2007 and 2008 

 O. Bundling of Payments for Services Provided to Outpatients Who Later Are 

Admitted as Inpatients: 3-Day Payment Window 

 1. Background 

2. Establishment of Condition Code 51 (Attestation of Unrelated Outpatient 

Nondiagnostic Services) 
CMS-1518-P 30 

3. Applicability of the Payment Window Policy to Services Furnished at 

Physicians’ Practices 

P. Proposed Changes to MS-DRGs Subject to the Postacute Care Transfer Policy 

Q. Hospital Services Furnished under Arrangements 

V. Proposed Changes to the IPPS for Capital-Related Costs 

 A. Overview 

 B. Exception Payments 

 C. New Hospitals 

 D. Hospitals Located in Puerto Rico 

 E. Proposed Changes for FY 2012: MS-DRG Documentation and Coding 

Adjustment 

 F. Other Proposed Changes for FY 2012 

VI. Proposed Changes for Hospitals Excluded from the IPPS 

 A. Excluded Hospitals 

 B. Critical Access Hospital (CAH) Payment for Ambulance Services 

 1. Background 

 2, Requirement for CAH Ambulance within a 35-Mile Location of a CAH or 

Entity 

VII. Proposed Changes to the Long-Term Care Hospital Prospective Payment System 

(LTCH PPS) for FY 2012 

 A. Background of the LTCH PPS 

 1. Legislative and Regulatory Authority 
CMS-1518-P 31 

 2. Criteria for Classification as a LTCH 

 a. Classification as a LTCH 

 b. Hospitals Excluded from the LTCH PPS 

 3. Limitation on Charges to Beneficiaries 

 4. Administrative Simplification Compliance Act (ASCA) and Health Insurance 

Portability and Accountability Act (HIPAA) Compliance 

 B. Proposed Medicare Severity Long-Term Care Diagnosis-Related Group 

(MS-LTC-DRG) Classifications and Relative Weights 

 1. Background 

 2. Patient Classifications into MS-LTC-DRGs 

 a. Background 

 b. Proposed Changes to the MS-LTC-DRGs for FY 2012 

 3. Development of the Proposed FY 2012 MS-LTC-DRG Relative Weights 

 a. General Overview of the Development of the MS-LTC-DRG Relative Weights 

 b. Development of the Proposed MS-LTC-DRG Relative Weights for FY 2012 

 c. Data 

 d. Hospital-Specific Relative Value (HSRV) Methodology 

 e. Proposed Treatment of Severity Levels in Developing the MS-LTC-DRG 

Relative Weights 

 f. Proposed Low-Volume MS-LTC-DRGs--Steps for Determining the Proposed 

FY 2012 MS-LTC-DRG Relative Weights 

 C. Proposed Quality Reporting Program for LTCHs 
CMS-1518-P 32 

 1. Background and Statutory Authority 

 2. Proposed Quality Measures for the LTCH Quality Reporting Program for 

FY 2014 

 a. Considerations in the Selection of the Proposed Quality Measures 

 b. Proposed LTCH Quality Measures for FY 2014 Payment Determination 

 3. Possible LTCH Quality Measures under Consideration for Future Years 

 4. Proposed Data Submission Methods and Timelines 

 a. Proposed Method of Data Submission for HAIs 

 b. Proposed Timeline for Data Reporting Related to HAIs 

 c. Proposed Method of Data Collection and Submission for the Pressure Ulcer 

Measure Data 

 d. Proposed Timeline for Data Reporting Related to Pressure Ulcers 

 5. Public Reporting and Availability of Data Submitted 

 D. Proposed Rebasing and Revising of the Market Basket Used under the LTCH 

PPS 

 1. Background 

 2. Overview of the Proposed FY 2008-Based RPL Market Basket 

 3. Proposed Rebasing and Revising of the RPL Market Basket 

 a. Development of Cost Categories 

 b. Final Cost Category Computation 

 c. Selection of Price Proxies 

 d. Proposed Methodology for Capital Portion of the RPL Market Basket 
CMS-1518-P 33 

 e. Proposed FY 2012 Market Basket Update for LTCHs 

 f. Proposed Labor-Related Share 

 E. Proposed Changes to the LTCH Payment Rates and Other Proposed Changes 

to the FY 2012 LTCH PPS 

 1. Overview of Development of the LTCH Payment Rates 

 2. Proposed FY 2012 LTCH PPS Annual Market Basket Update 

 a. Overview 

 b. Revision of Certain Market Basket Updates as Required by the Affordable 

Care Act 

 c. Proposed Market Basket under the LTCH PPS for FY 2012 

 d. Productivity Adjustment 

 e. Proposed Annual Market Basket Update for LTCHs for FY 2012 

 3. Proposed Budget Neutrality Adjustment for the Changes to the Area Wage 

Level Adjustment 

 4. Proposed Budget Neutrality Adjustment for the Changes to the Area Wage 

Level Adjustment 

 5. Greater than 25 Day Average Length of Stay Requirement for LTCHs 

 a. Determining the Average Length of Stay When There is a Change of 

Ownership 

 b. Inclusion of Medicare Advantage (MA) Days in the Average Length of Stay 

Calculation 
CMS-1518-P 34 

F. Proposed Application of LTCH Moratorium on the Increase in Beds at 

Section 114(d)(1)(B) of Pub. L. 110-173 (MMSEA) to LTCHs and LTCH Satellite 

Facilities Established or Classified as such under Section 114(d)(2) of Pub. L. 110-173 

VIII. MedPAC Recommendations 

IX. Other Required Information 

 A. Requests for Data from the Public 

 B. Collection of Information Requirements 

 1. Legislative Requirement for Solicitation of Comments 

 2. ICRs for Add-On Payments for New Services and Technologies 

 3. ICRs for the Hospital Inpatient Quality Reporting (IQR) Program 

 4. ICRs for the Occupational Mix Adjustment to the Proposed FY 2012 Index 

(Hospital Wage Index Occupational Mix Survey) 

 5. Hospital Applications for Geographic Reclassifications by the MGCRB 

 6. ICRs for the Proposed Quality Reporting Program for LTCHs 

 C. Response to Public Comments 

Regulation Text 

Addendum—Proposed Schedule of Standardized Amounts, Update Factors, and 

Rate-of-Increase Percentages Effective with Cost Reporting Periods Beginning on or 

after October 1, 2011 

I. Summary and Background 

II. Proposed Changes to the Prospective Payment Rates for Hospital Inpatient Operating 

Costs for Acute Care Hospitals for FY 2012 
CMS-1518-P 35 

 A. Calculation of the Proposed Adjusted Standardized Amount 

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

 C. Proposed MS-DRG Relative Weights 

 D. Calculation of the Proposed Prospective Payment Rates 

III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient 

Capital-Related Costs for FY 2012 

 A. Determination of Federal Hospital Inpatient Capital-Related Prospective 

Payment Rate Update 

 B. Calculation of the Proposed Inpatient Capital-Related Prospective Payments 

for FY 2012 

 C. Capital Input Price Index 

IV. Proposed Changes to Payment Rates for Certain Excluded Hospitals: 

Rate-of-Increase Percentages for FY 2012 

V. Proposed Changes to the Payment Rates for the LTCH PPS for FY 2012 

 A. Proposed LTCH PPS Standard Federal Rate for FY 2012 

 B. Proposed Adjustment for Area Wage Levels under the LTCH PPS for 

FY 2012 

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

 D. Computing the Proposed Adjusted LTCH PPS Federal Prospective Payments 

for FY 2012 

VI. Tables Referenced in this Proposed Rulemaking and Available through the Internet 

on the CMS Web Site 
CMS-1518-P 36 

Appendix A--Regulatory Impact Analysis

I. Overall Impact 

II. Objectives of the IPPS 

III. Limitations of Our Analysis 

IV. Hospitals Included in and Excluded From the IPPS 

V. Effects on Hospitals and Hospital Units Excluded from the IPPS 

VI. Quantitative Effects of the Proposed Policy Changes under the IPPS for Operating 

Costs 

 A. Basis and Methodology of Estimates 

 B. Analysis of Table I 

 C. Impact Analysis of Table II 

VII. Effects of Other Proposed Policy Changes 

 A. Effects of Proposed Policy on HACs, Including Infections 

 B. Effects of Proposed Policy Changes Relating to New Medical Service and 

Technology Add-On Payments 

 C. Effects of Requirements for Hospital Inpatient Quality Reporting (IQR) 

Program 

 D. Effects of Additional Proposed Hospital Value-Based Purchasing (VBP) 

Program Requirements 

 E. Effects of Proposed Requirements for Hospital Readmissions Reduction 

Program 
CMS-1518-P 37 

F. Effects of Proposed Policy Changes Relating to Payment Adjustments for 

Medicare Disproportionate Share Hospitals (DSHs) and Indirect Medical Education 

(IME) 

G. Effects of the FY 2012 Low-Volume Hospital Payment Adjustment 

H. Effects of Proposed Changes Relating to MDHs 

I. Effects of Proposed Policy Relating to CRNA Services Furnished in Rural 

Hospitals and CAHs 

J. Effects of Proposed Changes Relating to ESRD Add-On Payment 

K. Effects of Proposed Changes Relating to the Reporting Requirements for 

Pension Costs for Medicare Cost-Finding and Wage Reporting Purposes 

L. Effects of Implementation of Rural Community Hospital Demonstration 

Program 

M. Effects of Proposed Changes to List of MS-DRGs subject to the Postacute 

Care Transfer and DRG Special Pay Policy 

N. Effects of Proposed Changes Relating to Hospital Services Furnished under 

Arrangements 

O. Effects of Proposed Change Relating to CAH Payment for Ambulance 

Services 

VIII. Effects of Proposed Changes in the Capital IPPS 

 A. General Considerations 

 B. Results 
CMS-1518-P 38 

IX. Effects of Proposed Payment Rate Changes and Policy Changes under the LTCH 

PPS 

 A. Introduction and General Considerations 

 B. Impact on Rural Hospitals 

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

Changes 

 D. Effect on the Medicare Program 

 E. Effect on Medicare Beneficiaries 

X. Alternatives Considered 

XI. Overall Conclusion 

 A. Acute Care Hospitals 

 B. LTCHs 

XII. Accounting Statements 

 A. Acute Care Hospitals 

 B. LTCHs 

XIII. Executive Order 12866 

Appendix B: Recommendation of Update Factors for Operating Cost Rates of 

Payment for Inpatient Hospital Services 

 I. Background 

 II. Inpatient Hospital Update for FY 2012 

 A. Proposed FY 2012 Inpatient Hospital Update 

 B. Proposed Update for SCHs and MDHs for FY 2012 
CMS-1518-P 39 

 C. Proposed FY 2012 Puerto Rico Hospital Update 

 D. Proposed Update for Hospitals Excluded from the IPPS 

 III. Secretary's Recommendation 

 IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating 

Payments in Traditional Medicare 

I. Background 

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS) 

 Section 1886(d) of the Social Security Act (the Act) sets forth a system of 

payment for the operating costs of acute care hospital inpatient stays under Medicare 

Part A (Hospital Insurance) based on prospectively set rates. Section 1886(g) of the Act 

requires the Secretary to pay for the capital-related costs of hospital inpatient stays under 

a prospective payment system (PPS). Under these PPSs, Medicare payment for hospital 

inpatient operating and capital-related costs is made at predetermined, specific rates for 

each hospital discharge. Discharges are classified according to a list of diagnosis-related 

groups (DRGs). 

 The base payment rate is comprised of a standardized amount that is divided into 

a labor-related share and a nonlabor-related share. The labor-related share is adjusted by 

the wage index applicable to the area where the hospital is located. If the hospital is 

located in Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-living 

adjustment factor. This base payment rate is multiplied by the DRG relative weight. 
CMS-1518-P 40 

 If the hospital treats a high percentage of certain low-income patients, it receives a 

percentage add-on payment applied to the DRG-adjusted base payment rate. This add-on 

payment, known as the disproportionate share hospital (DSH) adjustment, provides for a 

percentage increase in Medicare payments to hospitals that qualify under either of two 

statutory formulas designed to identify hospitals that serve a disproportionate share of 

low-income patients. For qualifying hospitals, the amount of this adjustment varies based 

on the outcome of the statutory calculations. 

 If the hospital is an approved teaching hospital, it receives a percentage add-on 

payment for each case paid under the IPPS, known as the indirect medical education 

(IME) adjustment. This percentage varies, depending on the ratio of residents to beds. 

 Additional payments may be made for cases that involve new technologies or 

medical services that have been approved for special add-on payments. To qualify, a new 

technology or medical service must demonstrate that it is a substantial clinical 

improvement over technologies or services otherwise available, and that, absent an 

add-on payment, it would be inadequately paid under the regular DRG payment. 

 The costs incurred by the hospital for a case are evaluated to determine whether 

the hospital is eligible for an additional payment as an outlier case. This additional 

payment is designed to protect the hospital from large financial losses due to unusually 

expensive cases. Any eligible outlier payment is added to the DRG-adjusted base 

payment rate, plus any DSH, IME, and new technology or medical service add-on 

adjustments. 
CMS-1518-P 41 

 Although payments to most hospitals under the IPPS are made on the basis of the 

standardized amounts, some categories of hospitals are paid in whole or in part based on 

their hospital-specific rate, which is determined from their costs in a base year. For 

example, sole community hospitals (SCHs) receive the higher of a hospital-specific rate 

based on their costs in a base year (the highest of FY 1982, FY 1987, FY 1996, or FY 

2006) or the IPPS Federal rate based on the standardized amount. Through and including 

FY 2006, a Medicare-dependent, small rural hospital (MDH) received the higher of the 

Federal rate or the Federal rate plus 50 percent of the amount by which the Federal rate is 

exceeded by the higher of its FY 1982 or FY 1987 hospital-specific rate. As discussed 

below, for discharges occurring on or after October 1, 2007, but before October 1, 2012, 

an MDH will receive the higher of the Federal rate or the Federal rate plus 75 percent of 

the amount by which the Federal rate is exceeded by the highest of its FY 1982, FY 1987, 

or FY 2002 hospital-specific rate. SCHs are the sole source of care in their areas, and 

MDHs are a major source of care for Medicare beneficiaries in their areas. Specifically, 

section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that is located more 

than 35 road miles from another hospital or that, by reason of factors such as isolated 

location, weather conditions, travel conditions, or absence of other like hospitals (as 

determined by the Secretary), is the sole source of hospital inpatient services reasonably 

available to Medicare beneficiaries. In addition, certain rural hospitals previously 

designated by the Secretary as essential access community hospitals are considered 

SCHs. Section 1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is located 

in a rural area, has not more than 100 beds, is not an SCH, and has a high percentage of 
CMS-1518-P 42 

Medicare discharges (not less than 60 percent of its inpatient days or discharges in its 

cost reporting year beginning in FY 1987 or in two of its three most recently settled 

Medicare cost reporting years). Both of these categories of hospitals are afforded this 

special payment protection in order to maintain access to services for beneficiaries. 

 Section 1886(g) of the Act requires the Secretary to pay for the capital-related 

costs of inpatient hospital services “in accordance with a prospective payment system 

established by the Secretary.” The basic methodology for determining capital 

prospective payments is set forth in our regulations at 42 CFR 412.308 and 412.312. 

Under the capital IPPS, payments are adjusted by the same DRG for the case as they are 

under the operating IPPS. Capital IPPS payments are also adjusted for IME and DSH, 

similar to the adjustments made under the operating IPPS. In addition, hospitals may 

receive outlier payments for those cases that have unusually high costs. 

 The existing regulations governing payments to hospitals under the IPPS are 

located in 42 CFR Part 412, Subparts A through M. 

2. Hospitals and Hospital Units Excluded from the IPPS 

 Under section 1886(d)(1)(B) of the Act, as amended, certain hospitals and 

hospital units are excluded from the IPPS. These hospitals and units are: rehabilitation 

hospitals and units; long-term care hospitals (LTCHs); psychiatric hospitals and units; 

children's hospitals; and cancer hospitals. Religious nonmedical health care institutions 

(RNHCIs) are also excluded from the IPPS. Various sections of the Balanced Budget 

Act of 1997 (BBA, Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children's 

Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA, 
CMS-1518-P 43 

Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and 

Protection Act of 2000 (BIPA, Pub. L. 106-554) provide for the implementation of PPSs 

for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities 

(IRFs)), LTCHs, and psychiatric hospitals and units (referred to as inpatient psychiatric 

facilities (IPFs)). (We note that the annual updates to the LTCH PPS are now included as 

part of the IPPS annual update document. Updates to the IRF PPS and IPF PPS are 

issued as separate documents.) Children's hospitals, cancer hospitals, and RNHCIs 

continue to be paid solely under a reasonable cost-based system subject to a 

rate-of-increase ceiling on inpatient operating costs per discharge. 

 The existing regulations governing payments to excluded hospitals and hospital 

units are located in 42 CFR Parts 412 and 413. 

3. Long-Term Care Hospital Prospective Payment System (LTCH PPS) 

 The Medicare prospective payment system (PPS) for LTCHs applies to hospitals 

described in section 1886(d)(1)(B)(iv) effective for cost reporting periods beginning on 

or after October 1, 2002. The LTCH PPS was established under the authority of sections 

123(a) and (c) of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554 (as codified 

under section 1886(m)(1) of the Act). During the 5-year (optional) transition period, a 

LTCH’s payment under the PPS was based on an increasing proportion of the LTCH 

Federal rate with a corresponding decreasing proportion based on reasonable cost 

principles. Effective for cost reporting periods beginning on or after October 1, 2006, all 

LTCHs are paid 100 percent of the Federal rate. The existing regulations governing 

payment under the LTCH PPS are located in 42 CFR Part 412, Subpart O. Beginning 
CMS-1518-P 44 

October 1, 2009, we issue the annual updates to the LTCH PPS in the same documents 

that update the IPPS (73 FR 26797 through 26798). 

4. Critical Access Hospitals (CAHs) 

 Under sections 1814(l), 1820, and 1834(g) of the Act, payments are made to 

critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain 

statutory requirements) for inpatient and outpatient services are generally based on 101 

percent of reasonable cost. Reasonable cost is determined under the provisions of section 

1861(v)(1)(A) of the Act and existing regulations under 42 CFR Parts 413 and 415. 

5. Payments for Graduate Medical Education (GME) 

 Under section 1886(a)(4) of the Act, costs of approved educational activities are 

excluded from the operating costs of inpatient hospital services. Hospitals with approved 

graduate medical education (GME) programs are paid for the direct costs of GME in 

accordance with section 1886(h) of the Act. The amount of payment for direct GME 

costs for a cost reporting period is based on the hospital's number of residents in that 

period and the hospital’s costs per resident in a base year. The existing regulations 

governing payments to the various types of hospitals are located in 42 CFR Part 413. 

B. Provisions of the Patient Protection and Affordable Care Act (Pub. L. 111-148) and 

the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152) Applicable 

to FY 2012

 The Patient Protection and Affordable Care Act (Pub. L. 111-148), enacted on 

March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 (Pub. L. 

111-152), enacted on March 30, 2010, made a number of changes that affect the IPPS and 
CMS-1518-P 45 

the LTCH PPS. (Pub. L. 111-148 and Pub. L. 111-152 are collectively referred to as the 

“Affordable Care Act.”) A number of the provisions of the Affordable Care Act affect 

the updates to the IPPS and the LTCH PPS and providers and suppliers. The provisions 

of the Affordable Care Act that were applicable to the IPPS and the LTCH PPS for FYs 

2010 and 2011 were implemented in the following documents: 

 On June 2, 2010, we issued in the Federal Register a notice (75 FR 31118) that 

contained the final wage indices, hospital reclassifications, payment rates, impacts, and 

other related tables, effective for the FY 2010 IPPS and the RY 2010 LTCH PPS, which 

were required by or directly resulted from implementation of provisions of the Affordable 

Care Act. 

 On August 16, 2010, we issued in the Federal Register a final rule 

(75 FR 50042) that implemented provisions of the Affordable Care Act applicable to the 

IPPS and LTCH/PPS for FY 2011. 

 In this proposed rule, we are proposing to implement the following provisions (or 

portions of the following provisions) of the Affordable Care Act that are applicable to the 

IPPS and LTCH PPS for FY 2012: 

● Section 3001 of Pub. L. 111-148, which provides for establishment of a 

hospital value-based purchasing program and applicable measures for value-based 

incentive payments with respect to discharges occurring during FY 2013. 

● Section 3004 of Pub. L. 111-148, which provides for the submission of quality 

data for LTCHs in order to receive the full annual update to the payment rates and the 

establishment of quality data measures. 
CMS-1518-P 46 

● Section 3025 of Pub. L. 111-148, which provides for a hospital readmissions 

reduction program and related quality data reporting measures. 

● Section 3124 of Pub. L. 111-148, which provides for extension of the 

Medicare-dependent, small rural hospital (MDH) program through FY 2012. 

● Section 3401 of Pub. L. 111-148, which provides for the incorporation of 

productivity improvements into the market basket updates for IPPS hospitals and LTCHs. 

 In addition, we are proposing to continue in FY 2012 to implement the following 

provisions, which were initiated in FY 2011: 

● Section 10324 of Pub. L. 111-148, which provided for a wage adjustment for 

hospitals located in frontier States. 

● Sections 3401 and 10319 of Pub. L. 111-148 and section 1105 of Pub. L. 

111-152, which revise certain market basket update percentages for IPPS and LTCH PPS 

payment rates for FY 2012. 

● Sections 3125 and 10314 of Pub. L. 111-148, which provides for temporary 

percentage increases in payment adjustments to low-volume hospitals for discharges 

occurring in FY 2012. 

● Section 1109 of Pub. L. 111-152, which provides for additional payments in 

FY 2012 for qualifying hospitals in the lowest quartile of per capita Medicare spending. 

C. Major Contents of This Proposed Rule

 In this proposed rule, we are setting forth proposed changes to the Medicare IPPS 

for operating costs and for capital-related costs of acute care hospitals in FY 2012. We 

also are setting forth proposed changes relating to payments for IME costs and payments 
CMS-1518-P 47 

to certain hospitals that continue to be excluded from the IPPS and paid on a reasonable 

cost basis. 

 In addition, in this proposed rule, we are setting forth proposed changes to the 

payment rates, factors, and other payment rate policies under the LTCH PPS for 

FY 2012. 

 Below is a summary of the major changes that we are proposing to make: 

1. Proposed Changes to MS-DRG Classifications and Recalibrations of Relative Weights 

 In section II. of the preamble of the proposed rule, we include-- 

● Proposed changes to MS-DRG classifications based on our yearly review. 

● Proposed application of the documentation and coding adjustment for FY 2012 

resulting from implementation of the MS-DRG system. 

● A discussion of the Research Triangle International, Inc. (RTI) reports and 

recommendations relating to charge compression. 

● Proposed recalibrations of the MS-DRG relative weights. 

● Proposed changes to hospital-acquired conditions (HACs) and a listing and 

discussion of HACs, including infections, that would be subject to the statutorily required 

quality adjustment in MS-DRG payments for FY 2012. 

 We discussed the FY 2012 status of new technologies approved for add-on 

payments for FY 2011 and present our evaluation and analysis of the FY 2012 applicants 

for add-on payments for high-cost new medical services and technologies (including 

public input, as directed by Pub. L. 108-173, obtained in a town hall meeting). 
CMS-1518-P 48 

2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals 

 In section III. of the preamble to this proposed rule, we are proposing revisions to 

the wage index for acute care hospitals and the annual update of the wage data. Specific 

issues addressed include the following: 

● The proposed FY 2012 wage index update using wage data from cost reporting 

periods beginning in FY 2008. 

● Analysis and implementation of the proposed FY 2012 occupational mix 

adjustment to the wage index for acute care hospitals, including discussion of the 2010 

occupational mix survey. 

● A proposal to change the reporting requirements for pension costs for the 

Medicare wage index. 

● Proposed revisions to the wage index for acute care hospitals based on hospital 

redesignations and reclassifications. 

● The proposed adjustment to the wage index for acute care hospitals for 

FY 2012 based on commuting patterns of hospital employees who reside in a county and 

work in a different area with a higher wage index. 

● The timetable for reviewing and verifying the wage data used to compute the 

proposed FY 2012 hospital wage index. 

● Determination of the labor-related share for the proposed FY 2012 wage index. 
CMS-1518-P 49 

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

Costs 

 In section IV. of the preamble of this proposed rule, we discuss a number of the 

provisions of the regulations in 42 CFR Parts 412, 413, and 476, including the following: 

● The reporting of hospital quality data under the Hospital Inpatient Quality 

Reporting (IQR) Program as a condition for receiving the full annual payment update 

increase. 

● The proposed implementation of the Hospital Value-Based Purchasing 

Program measures. 

● The proposed establishment of hospital readmisssion measures for reporting of 

hospital quality data. 

● The proposed updated national and regional case-mix values and discharges for 

purposes of determining RRC status. 

● The statutorily required IME adjustment factor for FY 2012. 

● Proposed payment adjustment for low-volume hospitals. 

● Proposal for counting hospice days in the formula for determining the payment 

adjustment for disproportionate share hospitals. 

● Proposal for making additional payments for qualifying hospitals with lowest 

per enrollee Medicare spending for FY 2012. 

● Proposal to clarify ESRD add-on payment requirements based on cost report 

requirements. 
CMS-1518-P 50 

● Proposal relating to changes to the reporting requirements for pension costs for 

Medicare cost-finding purposes. 

● Proposal to implement statutory change to the hospital payment update, 

including incorporation of a productivity adjustment. 

● Discussion of the Rural Community Hospital Demonstration Program and a 

proposal for making a budget neutrality adjustment for the demonstration program. 

● Discussion of August 2010 interim final rule with comment period and further 

proposed changes relating to the 3-day payment window for payments for services 

provided to outpatients who are later admitted as inpatients. 

4. Proposed FY 2012 Policy Governing the IPPS for Capital-Related Costs 

 In section V. of the preamble to this proposed rule, we discuss the proposed 

payment policy requirements for capital-related costs and capital payments to hospitals 

for FY 2012 and the proposed MS-DRG documentation and coding adjustment for 

FY 2012. 

5. Proposed Changes to the Payment Rates for Certain Excluded Hospitals: 

Rate-of-Increase Percentages 

 In section VI. of the preamble of this proposed rule, we discuss proposed changes 

to payments to certain excluded hospitals. In addition, we discuss proposed changes 

relating to payment for TEFRA services furnished under arrangements and payment for 

ambulance services furnished by CAH-owned and operated entities. 
CMS-1518-P 51 

6. Proposed Changes to the LTCH PPS 

 In section VII. of the preamble of this proposed rule, we set forth proposed 

changes to the payment rates, factors, and other payment rate policies under the LTCH 

PPS for FY 2012, including the annual update of the MS-LTC-DRG classifications and 

relative weights for use under the LTCH PPS for FY 2012, the proposed documentation 

and coding adjustment under the LTCH PPS for FY 2012, and the proposed rebasing and 

revising of the market basket for LTCHs. In addition, we are setting forth proposals for 

implementing the quality data reporting program for LTCHs. We also are proposing to 

clarify two policies regarding the calculation of the average length of stay requirement 

for LTCHs, and proposing a policy to address a LTCH moratorium issue. 

7. Determining Proposed Prospective Payment Operating and Capital Rates and 

Rate-of-Increase Limits for Acute Care Hospitals 

 In the Addendum to this proposed rule, we set forth proposed changes to the 

amounts and factors for determining the proposed FY 2012 prospective payment rates for 

operating costs and capital-related costs for acute care hospitals. We also are proposing 

to establish the threshold amounts for outlier cases. In addition, we address the proposed 

update factors for determining the rate-of-increase limits for cost reporting periods 

beginning in FY 2012 for certain hospitals excluded from the IPPS. 

8. Determining Proposed Prospective Payment Rates for LTCHs 

 In the Addendum to this proposed rule, we set forth proposed changes to the 

amounts and factors for determining the proposed FY 2012 prospective standard Federal 

rate. We also are proposing to establish the proposed adjustments for wage levels, the 
CMS-1518-P 52 

labor-related share, the cost-of-living adjustment, and high-cost outliers, including the 

fixed-loss amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH PPS. 

9. Impact Analysis 

 In Appendix A of this proposed rule, we set forth an analysis of the impact that 

the proposed changes would have on affected acute care hospitals and LTCHs. 

10. Recommendation of Update Factors for Operating Cost Rates of Payment for 

Hospital Inpatient Services 

 In Appendix B of this proposed rule, as required by sections 1886(e)(4) and (e)(5) 

of the Act, we provide our recommendations of the appropriate percentage changes for 

FY 2012 for the following: 

● A single average standardized amount for all areas for hospital inpatient 

services paid under the IPPS for operating costs of acute care hospitals (and 

hospital-specific rates applicable to SCHs and MDHs). 

● Target rate-of-increase limits to the allowable operating costs of hospital 

inpatient services furnished by certain hospitals excluded from the IPPS. 

● The standard Federal rate for hospital inpatient services furnished by LTCHs. 

11. Discussion of Medicare Payment Advisory Commission Recommendations 

 Under section 1805(b) of the Act, MedPAC is required to submit a report to 

Congress, no later than March 1 of each year, in which MedPAC reviews and makes 

recommendations on Medicare payment policies. MedPAC’s March 2011 

recommendations concerning hospital inpatient payment policies address the update 

factor for hospital inpatient operating costs and capital-related costs under the IPPS, for 
CMS-1518-P 53 

hospitals and distinct part hospital units excluded from the IPPS. We address these 

recommendations in Appendix B of this proposed rule. For further information relating 

specifically to the MedPAC March 2011 report or to obtain a copy of the report, contact 

MedPAC at (202) 220-3700 or visit MedPAC's Web site at: http://www.medpac.gov. 

II. Proposed Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) 

Classifications and Relative Weights 

A. Background

 Section 1886(d) of the Act specifies that the Secretary shall establish a 

classification system (referred to as DRGs) for inpatient discharges and adjust payments 

under the IPPS based on appropriate weighting factors assigned to each DRG. Therefore, 

under the IPPS, Medicare pays for inpatient hospital services on a rate per discharge basis 

that varies according to the DRG to which a beneficiary's stay is assigned. The formula 

used to calculate payment for a specific case multiplies an individual hospital's payment 

rate per case by the weight of the DRG to which the case is assigned. Each DRG weight 

represents the average resources required to care for cases in that particular DRG, relative 

to the average resources used to treat cases in all DRGs. 

 Congress recognized that it would be necessary to recalculate the DRG relative 

weights periodically to account for changes in resource consumption. Accordingly, 

section 1886(d)(4)(C) of the Act requires that the Secretary adjust the DRG 

classifications and relative weights at least annually. These adjustments are made to 

reflect changes in treatment patterns, technology, and any other factors that may change 

the relative use of hospital resources. 
CMS-1518-P 54 

B. MS-DRG Reclassifications

1. General 

 As discussed in the preamble to the FY 2008 IPPS final rule with comment period 

(72 FR 47138), we focused our efforts in FY 2008 on making significant reforms to the 

IPPS consistent with the recommendations made by MedPAC in its "Report to the 

Congress, Physician-Owned Specialty Hospitals" in March 2005. MedPAC 

recommended that the Secretary refine the entire DRG system by taking severity of 

illness into account and applying hospital-specific relative value (HSRV) weights to 

DRGs.1 We began this reform process by adopting cost-based weights over a 3-year 

transition period beginning in FY 2007 and making interim changes to the DRG system 

for FY 2007 by creating 20 new CMS DRGs and modifying 32 other DRGs across 

13 different clinical areas involving nearly 1.7 million cases. As described in more detail 

below, these refinements were intermediate steps towards comprehensive reform of both 

the relative weights and the DRG system as we undertook further study. For FY 2008, 

we adopted 745 new Medicare Severity DRGs (MS-DRGs) to replace the CMS DRGs. 

We refer readers to section II.D. of the FY 2008 IPPS final rule with comment period for 

a full detailed discussion of how the MS-DRG system, based on severity levels of illness, 

was established (72 FR 47141). 

 Currently, cases are classified into MS-DRGs for payment under the IPPS based 

on the following information reported by the hospital: the principal diagnosis, up to eight 

 

1

 Medicare Payment Advisory Commission: Report to the Congress, Physician-Owned 

Specialty Hospitals, March 2005, page viii. 
CMS-1518-P 55 

additional diagnoses, and up to six procedures performed during the stay. (We refer 

readers to section II.G.11.c. of this proposed rule for a discussion of our efforts to 

increase our internal systems capacity to process diagnosis and procedures on hospital 

claims to 25 diagnosis codes and 25 procedure codes prior to the use of the International 

Classification of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) for 

diagnosis coding and the International Classification of Diseases, 10th Revision, 

Procedure Coding System (ICD-10 PCS) for inpatient hospital procedure coding, 

effective October 1, 2013.) In a small number of MS-DRGs, classification is also based 

on the age, sex, and discharge status of the patient. The diagnosis and procedure 

information is reported by the hospital using codes from the International Classification 

of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) prior to October 1, 2013. 

We refer readers to section II.G.11.b. of this proposed rule for a reference to the 

replacement of ICD-9-CM, Volumes 1 and 2, including the Official ICD-9-CM 

Guidelines for Coding and Reporting, Volume 3, with the ICD-10-CM and ICD-10-PCS, 

including the Official ICD-10-CM and ICD-10-PCS Guidelines for Coding and 

Reporting, effective October 1, 2013 (FY 2014). 

 The process of developing the MS-DRGs was begun by dividing all possible 

principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major 

Diagnostic Categories (MDCs). The MDCs were formulated by physician panels to 

ensure that the DRGs would be clinically coherent. The diagnoses in each MDC 

correspond to a single organ system or etiology and, in general, are associated with a 

particular medical specialty. Thus, in order to maintain the requirement of clinical 
CMS-1518-P 56 

coherence, no final MS-DRG could contain patients in different MDCs. For example, 

MDC 6 is Diseases and Disorders of the Digestive System. This approach is used 

because clinical care is generally organized in accordance with the organ system affected. 

However, some MDCs are not constructed on this basis because they involve multiple 

organ systems (for example, MDC 22 (Burns)). For FY 2011, cases were assigned to one 

of 747 MS-DRGs in 25 MDCs. The table below lists the 25 MDCs. 

 Major Diagnostic Categories (MDCs) 

1 Diseases and Disorders of the Nervous System 

2 Diseases and Disorders of the Eye 

3 Diseases and Disorders of the Ear, Nose, Mouth, and Throat 

4 Diseases and Disorders of the Respiratory System 

5 Diseases and Disorders of the Circulatory System 

6 Diseases and Disorders of the Digestive System 

7 Diseases and Disorders of the Hepatobiliary System and Pancreas 

8 Diseases and Disorders of the Musculoskeletal System and Connective Tissue 

9 Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast 

10 Endocrine, Nutritional and Metabolic Diseases and Disorders 

11 Diseases and Disorders of the Kidney and Urinary Tract 

12 Diseases and Disorders of the Male Reproductive System 

13 Diseases and Disorders of the Female Reproductive System 

14 Pregnancy, Childbirth, and the Puerperium 

15 Newborns and Other Neonates with Conditions Originating in the Perinatal Period 

16 Diseases and Disorders of the Blood and Blood Forming Organs and 

Immunological Disorders 

17 Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms 

18 Infectious and Parasitic Diseases (Systemic or Unspecified Sites) 

19 Mental Diseases and Disorders 

20 Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders 

21 Injuries, Poisonings, and Toxic Effects of Drugs 

22 Burns 

23 Factors Influencing Health Status and Other Contacts with Health Services 

24 Multiple Significant Trauma 

25 Human Immunodeficiency Virus Infections 
CMS-1518-P 57 

 In general, cases are assigned to an MDC based on the patient's principal 

diagnosis before assignment to an MS-DRG. However, under the most recent version of 

the Medicare GROUPER (Version 28.0), there are 13 MS-DRGs to which cases are 

directly assigned on the basis of ICD-9-CM procedure codes. These MS-DRGs are for 

heart transplant or implant of heart assist systems; liver and/or intestinal transplants; bone 

marrow transplants; lung transplants; simultaneous pancreas/kidney transplants; pancreas 

transplants; and tracheostomies. Cases are assigned to these MS-DRGs before they are 

classified to an MDC. The table below lists the 13 current pre-MDCs. 

Pre-Major Diagnostic Categories (Pre-MDCs) 

MS-DRG 001 Heart Transplant or Implant of Heart Assist System with MCC 

MS-DRG 002 Heart Transplant or Implant of Heart Assist System without MCC 

MS-DRG 003 ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours 

or Principal Diagnosis Except for Face, Mouth, and Neck 

Diagnosis with Major O.R. 

MS-DRG 004 Tracheostomy with Mechanical Ventilation 96+ Hours or 

Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis 

with Major O.R. 

MS-DRG 005 Liver Transplant with MCC or Intestinal Transplant 

MS-DRG 006 Liver Transplant without MCC 

MS-DRG 007 Lung Transplant 

MS-DRG 008 Simultaneous Pancreas/Kidney Transplant 

MS-DRG 009 Bone Marrow Transplant 

MS-DRG 010 Pancreas Transplant 

MS-DRG 011 Tracheostomy for Face, Mouth, and Neck Diagnoses with MCC 

MS-DRG 012 Tracheostomy for Face, Mouth, and Neck Diagnoses with CC 

MS-DRG 013 Tracheostomy for Face, Mouth, and Neck Diagnoses without 

CC/MCC 

 Once the MDCs were defined, each MDC was evaluated to identify those 

additional patient characteristics that would have a consistent effect on hospital resource 

consumption. Because the presence of a surgical procedure that required the use of the 

operating room would have a significant effect on the type of hospital resources used by a 
CMS-1518-P 58 

patient, most MDCs were initially divided into surgical DRGs and medical DRGs. 

Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or 

groups of O.R. procedures by resource intensity. Medical DRGs generally are 

differentiated on the basis of diagnosis and age (0 to 17 years of age or greater than 

17 years of age). Some surgical and medical DRGs are further differentiated based on 

the presence or absence of a complication or comorbidity (CC) or a major complication 

or comorbidity (MCC). 

 Generally, nonsurgical procedures and minor surgical procedures that are not 

usually performed in an operating room are not treated as O.R. procedures. However, 

there are a few non-O.R. procedures that do affect MS-DRG assignment for certain 

principal diagnoses. An example is extracorporeal shock wave lithotripsy for patients 

with a principal diagnosis of urinary stones. Lithotripsy procedures are not routinely 

performed in an operating room. Therefore, lithotripsy codes are not classified as O.R. 

procedures. However, our clinical advisors believe that patients with urinary stones who 

undergo extracorporeal shock wave lithotripsy should be considered similar to other 

patients who undergo O.R. procedures. Therefore, we treat this group of patients similar 

to patients undergoing O.R. procedures. 

 Once the medical and surgical classes for an MDC were formed, each diagnosis 

class was evaluated to determine if complications or comorbidities would consistently 

affect hospital resource consumption. Each diagnosis was categorized into one of three 

severity levels. These three levels include a major complication or comorbidity (MCC), a 

complication or comorbidity (CC), or a non-CC. Physician panels classified each 
CMS-1518-P 59 

diagnosis code based on a highly iterative process involving a combination of statistical 

results from test data as well as clinical judgment. As stated earlier, we refer readers to 

section II.D. of the FY 2008 IPPS final rule with comment period for a full detailed 

discussion of how the MS-DRG system was established based on severity levels of 

illness (72 FR 47141). 

 A patient’s diagnosis, procedure, discharge status, and demographic information 

is entered into the Medicare claims processing systems and subjected to a series of 

automated screens called the Medicare Code Editor (MCE). The MCE screens are 

designed to identify cases that require further review before classification into an 

MS-DRG. 

 After patient information is screened through the MCE and further development 

of the claim is conducted, the cases are classified into the appropriate MS-DRG by the 

Medicare GROUPER software program. The GROUPER program was developed as a 

means of classifying each case into an MS- DRG on the basis of the diagnosis and 

procedure codes and, for a limited number of MS-DRGs, demographic information (that 

is, sex, age, and discharge status). 

 After cases are screened through the MCE and assigned to an MS-DRG by the 

GROUPER, the PRICER software calculates a base MS-DRG payment. The PRICER 

calculates the payment for each case covered by the IPPS based on the MS-DRG relative 

weight and additional factors associated with each hospital, such as IME and DSH 

payment adjustments. These additional factors increase the payment amount to hospitals 

above the base MS-DRG payment. 
CMS-1518-P 60 

 The records for all Medicare hospital inpatient discharges are maintained in the 

Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to 

evaluate possible MS-DRG classification changes and to recalibrate the MS-DRG 

weights. However, in the FY 2000 IPPS final rule (64 FR 41499 and 41500), we 

discussed a process for considering non-MedPAR data in the recalibration process. We 

stated that for use of non-MedPAR data to be feasible for purposes of DRG recalibration 

and reclassification, the data must, among other things: (1) be independently verified; 

(2) reflect a complete set of cases (or a representative sample of cases); and (3) enable us 

to calculate appropriate DRG relative weights and ensure that cases are classified to the 

“correct” DRG, and to one DRG only, in the recalibration process. Further, in order for 

us to consider using particular non-MedPAR data, we must have sufficient time to 

evaluate and test the data. The time necessary to do so depend upon the nature and 

quality of the non-MedPAR data submitted. Generally, however, a significant sample of 

the non-MedPAR data should be submitted by mid-October for consideration in 

conjunction with the next year's proposed rule. This date allows us time to test the data 

and make a preliminary assessment as to the feasibility of using the data. Subsequently, a 

complete non-MedPAR database should be submitted by early December for 

consideration in conjunction with the next year’s proposed rule. 

As we indicated above, for FY 2008, we made significant improvements in the 

DRG system to recognize severity of illness and resource usage by adopting MS-DRGs 

that were reflected in the FY 2008 GROUPER, Version 25.0, and were effective for 

discharges occurring on or after October 1, 2007. Our MS-DRG analysis for this 
CMS-1518-P 61 

FY 2012 proposed rule is based on data from the September 2010 update of the FY 2010 

MedPAR file, which contained hospital bills received through September 30, 2010, for 

discharges occurring through September 30, 2010. 

2. Yearly Review for Making MS-DRG Changes 

 Many of the changes to the MS-DRG classifications we make annually are the 

result of specific issues brought to our attention by interested parties. We encourage 

individuals with comments about MS-DRG classifications to submit these comments no 

later than early December of each year so they can be carefully considered for possible 

inclusion in the annual proposed rule and, if included, may be subjected to public review 

and comment. Therefore, similar to the timetable for interested parties to submit 

non-MedPAR data for consideration in the MS-DRG recalibration process, comments 

about MS-DRG classification issues should be submitted no later than early December in 

order to be considered and possibly included in the next annual proposed rule updating 

the IPPS. 

The actual process of forming the MS-DRGs was, and will likely continue to be, 

highly iterative, involving a combination of statistical results from test data combined 

with clinical judgment. In the FY 2008 IPPS final rule (72 FR 47140 through 47189), we 

described in detail the process we used to develop the MS-DRGs that we adopted for 

FY 2008. In addition, in deciding whether to make further modification to the MS-DRGs 

for particular circumstances brought to our attention, we considered whether the resource 

consumption and clinical characteristics of the patients with a given set of conditions are 

significantly different than the remaining patients in the MS-DRG. We evaluated patient 
CMS-1518-P 62 

care costs using average charges and lengths of stay as proxies for costs and relied on the 

judgment of our medical advisors to decide whether patients are clinically distinct or 

similar to other patients in the MS-DRG. In evaluating resource costs, we considered 

both the absolute and percentage differences in average charges between the cases we 

selected for review and the remainder of cases in the MS-DRG. We also considered 

variation in charges within these groups; that is, whether observed average differences 

were consistent across patients or attributable to cases that were extreme in terms of 

charges or length of stay, or both. Further, we considered the number of patients who 

will have a given set of characteristics and generally preferred not to create a new 

MS-DRG unless it would include a substantial number of cases. 

C. Adoption of the MS-DRGs in FY 2008

 In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed a number 

of recommendations made by MedPAC regarding revisions to the DRG system used 

under the IPPS (70 FR 47473 through 47482; 71 FR 47881 through 47939; and 

72 FR 47140 through 47189). As we noted in the FY 2006 IPPS final rule, we had 

insufficient time to complete a thorough evaluation of these recommendations for full 

implementation in FY 2006. However, we did adopt severity-weighted cardiac DRGs in 

FY 2006 to address public comments on this issue and the specific concerns of MedPAC 

regarding cardiac surgery DRGs. We also indicated that we planned to further consider 

all of MedPAC’s recommendations and thoroughly analyze options and their impacts on 

the various types of hospitals in the FY 2007 IPPS proposed rule. 
CMS-1518-P 63 

For FY 2007, we began this process. In the FY 2007 IPPS proposed rule, we 

proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 2008 (if not earlier). 

Based on public comments received on the FY 2007 IPPS proposed rule, we decided not 

to adopt the CS DRGs. In the FY 2007 IPPS final rule (71 FR 47906 through 47912), we 

discussed several concerns raised by public commenters regarding the proposal to adopt 

CS DRGs. We acknowledged the many public comments suggesting the logic of 

Medicare's DRG system should continue to remain in the public domain as it has since 

the inception of the PPS. We also acknowledged concerns about the impact on hospitals 

and software vendors of moving to a proprietary system. Several commenters suggested 

that CMS refine the existing DRG classification system to preserve the many policy 

decisions that were made over the last 20 years and were already incorporated into the 

DRG system, such as complexity of services and new device technologies. Consistent 

with the concerns expressed in the public comments, this option had the advantage of 

using the existing DRGs as a starting point (which was already familiar to the public) and 

retained the benefit of many DRG decisions that were made in recent years. We stated 

our belief that the suggested approach of incorporating severity measures into the existing 

DRG system was a viable option that would be evaluated. 

Therefore, we decided to make interim changes to the existing DRGs for FY 2007 

by creating 20 new DRGs involving 13 different clinical areas that would significantly 

improve the CMS DRG system’s recognition of severity of illness. We also modified 

32 DRGs to better capture differences in severity. The new and revised DRGs were 

selected from 40 existing CMS DRGs that contained 1,666,476 cases and represented a 
CMS-1518-P 64 

number of body systems. In creating these 20 new DRGs, we deleted 8 existing DRGs 

and modified 32 existing DRGs. We indicated that these interim steps for FY 2007 were 

being taken as a prelude to more comprehensive changes to better account for severity in 

the DRG system by FY 2008. 

In the FY 2007 IPPS final rule (71 FR 47898), we indicated our intent to pursue 

further DRG reform through two initiatives. First, we announced that we were in the 

process of engaging a contractor to assist us with evaluating alternative DRG systems 

that were raised as potential alternatives to the CMS DRGs in the public comments. 

Second, we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes as part 

of making further refinements to the current CMS DRGs to better recognize severity of 

illness based on the work that CMS (then HCFA) did in the mid-1990’s in connection 

with adopting severity DRGs. We describe below the progress we have made on these 

two initiatives and our actions for FYs 2008, 2009, 2010, and 2011, and our proposed 

actions for FY 2012 based on our continued analysis of reform of the DRG system. We 

note that the adoption of the MS-DRGs to better recognize severity of illness has 

implications for the outlier threshold, the application of the postacute care transfer policy, 

the measurement of real case-mix versus apparent case-mix, and the IME and DSH 

payment adjustments. We discuss these implications for FY 2012 in other sections of 

this preamble and in the Addendum to this proposed rule. 

In the FY 2007 IPPS proposed rule, we discussed MedPAC’s recommendations to 

move to a cost-based HSRV weighting methodology using HSRVs beginning with the 

FY 2007 IPPS proposed rule for determining the DRG relative weights. Although we 
CMS-1518-P 65 

proposed to adopt the HSRV weighting methodology for FY 2007, we decided not to 

adopt the proposed methodology in the final rule after considering the public comments 

we received on the proposal. Instead, in the FY 2007 IPPS final rule, we adopted a 

cost-based weighting methodology without the HSRV portion of the proposed 

methodology. The cost-based weights were adopted over a 3-year transition period in 

1/3 increments between FY 2007 and FY 2009. In addition, in the FY 2007 IPPS final 

rule, we indicated our intent to further study the HSRV-based methodology as well as 

other issues brought to our attention related to the cost-based weighting methodology 

adopted in the FY 2007 final rule. There was significant concern in the public comments 

that our cost-based weighting methodology does not adequately account for charge 

compression--the practice of applying a higher percentage charge markup over costs to 

lower cost items and services and a lower percentage charge markup over costs to higher 

cost items and services. Further, public commenters expressed concern about potential 

inconsistencies between how costs and charges are reported on the Medicare cost reports 

and charges on the Medicare claims. In the FY 2007 IPPS final rule, we used costs and 

charges from the cost reports to determine departmental level cost-to-charge ratios 

(CCRs) which we then applied to charges on the Medicare claims to determine the costbased weights. The commenters were concerned about potential distortions to the 

cost-based weights that would result from inconsistent reporting between the cost reports 

and the Medicare claims. After publication of the FY 2007 IPPS final rule, we entered 

into a contract with RTI International (RTI) to study both charge compression and the 

extent, if any, to which our methodology for calculating DRG relative weights is affected 
CMS-1518-P 66 

by inconsistencies between how hospitals report costs and charges on the cost reports and 

how hospitals report charges on individual claims. Further, as part of its study of 

alternative DRG systems, the RAND Corporation analyzed the HSRV cost-weighting 

methodology. We refer readers to section II.E. of the preamble of this proposed rule for a 

discussion of the issue of charge compression and the cost-weighting methodology for 

FY 2012. 

We believe that revisions to the DRG system to better recognize severity of 

illness and changes to the relative weights based on costs rather than charges are 

improving the accuracy of the payment rates in the IPPS. We agree with MedPAC that 

these refinements should be pursued. Although we continue to caution that any 

prospective payment system based on grouping cases will always present some 

opportunities for providers to specialize in cases they believe have higher margins, we 

believe that the changes we have adopted and the continuing reforms we are proposing to 

make in this proposed rule for FY 2012 will improve payment accuracy and reduce 

financial incentives to create specialty hospitals. 

We refer readers to section II.D. of the FY 2008 IPPS final rule with comment 

period for a full discussion of how the MS-DRG system was established based on 

severity levels of illness (72 FR 47141). 

D. Proposed FY 2012 MS-DRG Documentation and Coding Adjustment, Including the 

Applicability to the Hospital-Specific Rates and the Puerto Rico-Specific Standardized 

Amount
CMS-1518-P 67 

1. Background on the Prospective MS-DRG Documentation and Coding Adjustments for 

FY 2008 and FY 2009 Authorized by Pub. L. 110-90 

 As we discussed earlier in this preamble, we adopted the MS-DRG patient 

classification system for the IPPS, effective October 1, 2007, to better recognize severity 

of illness in Medicare payment rates for acute care hospitals. The adoption of the 

MS-DRG system resulted in the expansion of the number of DRGs from 538 in FY 2007 

to 745 in FY 2008. (Currently, there are 747 MS-DRGs, and we are proposing 4 

additional MS-DRGs for FY 2012.) By increasing the number of MS-DRGs and more 

fully taking into account patient severity of illness in Medicare payment rates for acute 

care hospitals, MS-DRGs encourage hospitals to improve their documentation and coding 

of patient diagnoses. 

 In the FY 2008 IPPS final rule with comment period (72 FR 47175 through 

47186), we indicated that the adoption of the MS-DRGs had the potential to lead to 

increases in aggregate payments without a corresponding increase in actual patient 

severity of illness due to the incentives for additional documentation and coding. In that 

final rule with comment period, we exercised our authority under 

section 1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget neutrality 

by adjusting the national standardized amount, to eliminate the estimated effect of 

changes in coding or classification that do not reflect real changes in case-mix. Our 

actuaries estimated that maintaining budget neutrality required an adjustment of 

-4.8 percent to the national standardized amount. We provided for phasing in this 

-4.8 percent adjustment over 3 years. Specifically, we established prospective 
CMS-1518-P 68 

documentation and coding adjustments of -1.2 percent for FY 2008, -1.8 percent for 

FY 2009, and -1.8 percent for FY 2010. 

 On September 29, 2007, Congress enacted the TMA [Transitional Medical 

Assistance], Abstinence Education, and QI [Qualifying Individuals] Programs Extension 

Act of 2007, Pub. L. 110-90. Section 7(a) of Pub. L. 110-90 reduced the documentation 

and coding adjustment made as a result of the MS-DRG system that we adopted in the 

FY 2008 IPPS final rule with comment period to -0.6 percent for FY 2008 and 

-0.9 percent for FY 2009. Section 7(a) of Pub. L. 110-90 did not adjust the FY 2010 

-1.8 percent documentation and coding adjustment promulgated in the FY 2008 IPPS 

final rule with comment period. To comply with section 7(a) of Pub. L. 110-90, we 

promulgated a final rule on November 27, 2007 (72 FR 66886) that modified the IPPS 

documentation and coding adjustment for FY 2008 to -0.6 percent, and revised the 

FY 2008 payment rates, factors, and thresholds accordingly. These revisions were 

effective on October 1, 2007. 

 For FY 2009, section 7(a) of Pub. L. 110-90 required a documentation and coding 

adjustment of -0.9 percent instead of the -1.8 percent adjustment established in the 

FY 2008 IPPS final rule with comment period. As discussed in the FY 2009 IPPS final 

rule (73 FR 48447) and required by statute, we applied a documentation and coding 

adjustment of -0.9 percent to the FY 2009 IPPS national standardized amount. The 

documentation and coding adjustments established in the FY 2008 IPPS final rule with 

comment period, as amended by Pub. L. 110-90, are cumulative. As a result, the 
CMS-1518-P 69 

-0.9 percent documentation and coding adjustment for FY 2009 was in addition to the 

-0.6 percent adjustment for FY 2008, yielding a combined effect of -1.5 percent. 

2. Prospective Adjustment to the Average Standardized Amounts Required by 

Section 7(b)(1)(A) of Pub. L. 110-90 

 Section 7(b)(1)(A) of Pub. L. 110-90 requires that, if the Secretary determines 

that implementation of the MS–DRG system resulted in changes in documentation and 

coding that did not reflect real changes in case-mix for discharges occurring during 

FY 2008 or FY 2009 that are different than the prospective documentation and coding 

adjustments applied under section 7(a) of Pub. L. 110-90, the Secretary shall make an 

appropriate adjustment under section 1886(d)(3)(A)(vi) of the Act. Section 

1886(d)(3)(A)(vi) of the Act authorizes adjustments to the average standardized amounts 

for subsequent fiscal years in order to eliminate the effect of such coding or classification 

changes. These adjustments are intended to ensure that future annual aggregate IPPS 

payments are the same as the payments that otherwise would have been made had the 

prospective adjustments for documentation and coding applied in FY 2008 and FY 2009 

reflected the change that occurred in those years. 

3. Recoupment or Repayment Adjustments in FYs 2010 through 2012 Required by 

Pub. L. 110-90 

 If, based on a retroactive evaluation of claims data, the Secretary determines that 

implementation of the MS–DRG system resulted in changes in documentation and coding 

that did not reflect real changes in case-mix for discharges occurring during FY 2008 or 

FY 2009 that are different from the prospective documentation and coding adjustments 
CMS-1518-P 70 

applied under section 7(a) of Pub. L. 110-90, section 7(b)(1)(B) of Pub. L. 110-90 

requires the Secretary to make an additional adjustment to the standardized amounts 

under section 1886(d) of the Act. This adjustment must offset the estimated increase or 

decrease in aggregate payments for FYs 2008 and 2009 (including interest) resulting 

from the difference between the estimated actual documentation and coding effect and 

the documentation and coding adjustment applied under section 7(a) of Pub. L. 110-90. 

This adjustment is in addition to making an appropriate adjustment to the standardized 

amounts under section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) of 

Pub. L. 110-90. That is, these adjustments are intended to recoup (or repay, in the case of 

underpayments) spending in excess of (or less than) spending that would have occurred 

had the prospective adjustments for changes in documentation and coding applied in FY 

2008 and FY 2009 precisely matched the changes that occurred in those years. Pub. L. 

110-90 requires that the Secretary make these recoupment or repayment adjustments for 

discharges occurring during FYs 2010, 2011, and 2012. 

4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data 

 In order to implement the requirements of section 7 of Pub. L. 110-90, we 

indicated in the FY 2009 IPPS final rule (73 FR 48450) that we planned a thorough 

retrospective evaluation of our claims data. We stated that the results of this evaluation 

would be used by our actuaries to determine any necessary payment adjustments to the 

standardized amounts under section 1886(d) of the Act to ensure the budget neutrality of 

the MS-DRGs implementation for FY 2008 and FY 2009, as required by law. In the 

FY 2009 IPPS proposed rule (73 FR 23541 through 23542), we described our preliminary 
CMS-1518-P 71 

plan for a retrospective analysis of inpatient hospital claims data and invited public input 

on our proposed methodology. 

 In that proposed rule, we indicated that we intended to measure and corroborate 

the extent of the overall national average changes in case-mix for FY 2008 and FY 2009. 

We expected that the two largest parts of this overall national average change would be 

attributable to underlying changes in actual patient severity of illness and to 

documentation and coding improvements under the MS-DRG system. In order to 

separate the two effects, we planned to isolate the effect of shifts in cases among base 

DRGs from the effect of shifts in the types of cases within base DRGs. 

 The MS-DRGs divide the base DRGs into three severity levels (with MCC, with 

CC, and without CC); the previously used CMS DRGs had only two severity levels (with 

CC and without CC). Under the CMS DRG system, the majority of hospital discharges 

had a secondary diagnosis which was on the CC list, which led to the higher severity 

level. The MS-DRGs significantly changed the code lists of what was classified as an 

MCC or a CC. Many codes that were previously classified as a CC are no longer 

included on the MS-DRG CC list because the data and clinical review showed these 

conditions did not lead to a significant increase in resource use. The addition of a new 

level of high severity conditions, the MCC list, also provided a new incentive to code 

more precisely in order to increase the severity level. We anticipated that hospitals 

would examine the MS-DRG MCC and CC code lists and then work with physicians and 

coders on documentation and coding practices so that coders could appropriately assign 

codes from the highest possible severity level. We note that there have been numerous 
CMS-1518-P 72 

seminars and training sessions on this particular coding issue. The topic of improving 

documentation practices in order to code conditions on the MCC list was also discussed 

extensively by participants at the March 11-12, 2009 ICD-9-CM Coordination and 

Maintenance Committee meeting. Participants discussed their hospitals’ efforts to 

encourage physicians to provide more precise documentation so that coders could 

appropriately assign codes that would lead to a higher severity level. Because we 

expected most of the documentation and coding changes under the MS-DRG system 

would occur in the secondary diagnoses, we believed that the shifts among base DRGs 

were less likely to be the result of the MS-DRG system and the shifts within base DRGs 

were more likely to be the result of the MS-DRG system. We also anticipated evaluating 

data to identify the specific MS-DRGs and diagnoses that contributed significantly to the 

documentation and coding payment effect and to quantify their impact. This step entailed 

analysis of the secondary diagnoses driving the shifts in severity within specific base 

DRGs 

 In the FY 2009 IPPS proposed rule, we solicited public comments on the analysis 

plans described above, as well as suggestions on other possible approaches for 

performing a retrospective analysis to identify the amount of case-mix changes that 

occurred in FY 2008 and FY 2009 that did not reflect real increases in patient severity of 

illness. 

 A few commenters, including MedPAC, expressed support for the analytic 

approach described in the FY 2009 IPPS proposed rule. A number of other commenters 

expressed concerns about certain aspects of the approach and/or suggested alternate 
CMS-1518-P 73 

analyses or study designs. In addition, one commenter recommended that any 

determination or retrospective evaluation by the actuaries of the impact of the MS-DRGs 

on case-mix be open to public scrutiny prior to the implementation of the payment 

adjustments beginning in FY 2010. 

 We took these comments into consideration as we developed our proposed 

analysis plan, and in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24092 

through 24101), we solicited public comment on our methodology and analysis. For the 

FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a retrospective 

evaluation of the FY 2008 data for claims paid through December 2008. Based on this 

evaluation, our actuaries determined that implementation of the MS–DRG system 

resulted in a 2.5 percent change due to documentation and coding that did not reflect real 

changes in case-mix for discharges occurring during FY 2008. In the FY 2010 IPPS/RY 

2010 LTCH PPS final rule (74 FR 43768 through 43772), we responded to comments on 

our methodology for the retrospective evaluation of FY 2008 claims data. We refer 

readers to that final rule for a detailed description of our analysis and prior responses to 

comments. 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50057 through 50068), we 

performed the same analysis for FY 2009 claims data using the same methodology as we 

did for FY 2008 claims. We note that, in the FY 2011 IPPS/LTCH PPS proposed rule, 

we performed this analysis using FY 2009 claims paid through December 2009. In the 

FY 2011 IPPS/LTCH PPS final rule, we updated the analysis with FY 2009 claims paid 

through March 2010, as we discussed in the proposed rule. We note that, for all IPPS 
CMS-1518-P 74 

hospitals, other than those in Puerto Rico, the estimates were unchanged from those in the 

proposed rule. We refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50057 

through 50068) for a detailed description of our analysis and prior responses to 

comments. The results of the analysis for the FY 2011 proposed and final rules provided 

additional support for our conclusion that the proposed 5.4 percent estimate accurately 

reflected the FY 2009 increases in documentation and coding under the MS-DRG system. 

 As in prior years, the FY 2008 and FY 2009 MedPAR files are available to the 

public to allow independent analysis of the FY 2008 and FY 2009 documentation and 

coding effect. Interested individuals may still order these files through the Web site at: 

http://www.cms.hhs.gov/LimitedDataSets/ by clicking on MedPAR Limited Data Set 

(LDS)-Hospital (National). This Web page describes the file and provides directions and 

further detailed instructions for how to order. 

 Persons placing an order must send the following: a Letter of Request, the LDS 

Data Use Agreement and Research Protocol (refer to the Web site for further 

instructions), the LDS Form, and a check for $3,655 to: 

 Mailing address if using the U.S. Postal Service: 

 Centers for Medicare & Medicaid Services, 

 RDDC Account, 

 Accounting Division, 

 P.O. Box 7520, 

 Baltimore, MD 21207-0520. 

 Mailing address if using express mail: 
CMS-1518-P 75 

 Centers for Medicare & Medicaid Services, 

 OFM/Division of Accounting – RDDC, 

 7500 Security Boulevard, C3-07-11, 

 Baltimore. MD 21244-1850. 

5. Prospective Adjustment for FY 2010 and Subsequent Years Authorized by Section 

7(b)(1)(A) of Pub. L. 110-90 and Section 1886(d)(3)(vi) of the Act 

Based on our evaluation of FY 2008 Medicare claims data that were most current 

at the time of the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, the estimated 

2.5 percent change in FY 2008 case-mix due to changes in documentation and coding 

that did not reflect real changes in case-mix for discharges occurring during FY 2008 

exceeded the -0.6 percent prospective documentation and coding adjustment applied 

under section 7(a) of Pub. L. 110-90 by 1.9 percentage points. In the FY 2010 IPPS/RY 

2010 LTCH PPS proposed rule (74 FR 24096), we solicited public comment on our 

proposal to make a -1.9 percent prospective adjustment to the standardized amounts 

under section 1886(d) of the Act to address the effects of documentation and coding 

changes unrelated to changes in real case-mix in FY 2008. In the FY 2010 IPPS/RY 

2010 LTCH PPS final rule, in response to public comments, we indicated that we fully 

understood that our proposed adjustment of -1.9 percent would reduce the increase in 

payments that affected hospitals would have received in FY 2009 in the absence of the 

adjustment, and we determined that it would be appropriate to postpone adopting 

documentation and coding adjustments as authorized under section 7(a) of Pub. L. 110-90 

and section 1886(d)(3)(A)(vi) of the Act until a full analysis of case-mix changes could 
CMS-1518-P 76 

be completed. We refer readers to the FY 2010 IPPS/LTCH PPS final rule (74 FR 43767 

through 43777) for a detailed description of our proposal, responses to comments, and 

finalized policy. 

 After analysis of the FY 2009 claims data for the FY 2011 IPPS/LTCH PPS final 

rule (75 FR 50057 through 50073), we found a total prospective documentation and 

coding effect of 1.054. After accounting for the -0.6 percent and the -0.9 percent 

documentation and coding adjustments in FYs 2008 and 2009, we found a remaining 

documentation and coding effect of 3.9 percent. As we have discussed, an additional 

cumulative adjustment of -3.9 percent would be necessary to meet the requirements of 

section 7(b)(1)(A) of Pub. L. 110-90 to make an adjustment to the average standardized 

amounts in order to eliminate the full effect of the documentation and coding changes on 

future payments. Unlike section 7(b)(1)(B) of Pub. L. 110-90, section 7(b)(1)(A) does 

not specify when we must apply the prospective adjustment, but merely requires us to 

make an “appropriate” adjustment. Therefore, as we stated in the FY 2011 IPPS/LTCH 

PPS final rule (75 FR 50061), we believe we have some discretion as to the manner in 

which we apply the prospective adjustment of -3.9 percent. We indicated that applying 

the full prospective adjustment of -3.9 percent for FY 2011, in combination with the 

proposed recoupment adjustment of -2.9 percent in FY 2011 (discussed below) would 

require an aggregate adjustment of -6.8 percent. As we discuss elsewhere in this section 

II.D., and more extensively in the FY 2011 IPPS/LTCH PPS final rule, it has been our 

practice to moderate payment adjustments when necessary to mitigate the effects of 

significant downward adjustments on hospitals, to avoid what could be widespread, 
CMS-1518-P 77 

disruptive effects of such adjustments on hospitals. As we also discuss below in this 

section II.D., we are required to implement the remaining adjustment in section 

7(b)(1)(B) of Pub. L. 110-90 no later than the FY 2012 rulemaking period, and 

accordingly, in the FY 2011 IPPS/LTCH PPS proposed rule, we proposed a recoupment 

adjustment under section 7(b)(1)(B) of -2.9 percent for FY 2011 (75 FR 23870 and 

23871). Therefore, we stated that we believed it was appropriate to not implement any or 

all of the -3.9 percent prospective adjustment in FY 2011. Accordingly, we did not 

propose a prospective adjustment under section 7(b)(1)(A) of Pub. L. 110-90 for FY 2011 

(75 FR 23868 through 23870) for FY 2011. We note that, as a result, payments in 

FY 2011 (and in each future year until we implement the requisite adjustment) would be 

3.9 percent higher than they would have been if we had implemented an adjustment 

under section 7(b)(1)(A) of Pub. L. 110-90. Our actuaries estimate that this 3.9 

percentage point increase will result in an aggregate payment of approximately $4 billion. 

We also noted that payments in FY 2010 were also expected to be 3.9 percent higher than 

they would have been if we had implemented an adjustment under section 7(b)(1)(A) of 

Pub. L. 110-90, which our actuaries estimated increased aggregate payments by 

approximately $4 billion in FY 2010. 

 Because further delay of this prospective adjustment will result in a continued 

accrual of unrecoverable overpayments, it is imperative that we propose a prospective 

adjustment for FY 2012, while recognizing CMS’ continued desire to mitigate the effects 

of any significant downward adjustments to hospitals. Therefore, we are proposing a 

-3.15 percent prospective adjustment to the standardized amount to partially eliminate the 
CMS-1518-P 78 

full effect of the documentation and coding changes on future payments. Due to the 

offsetting nature of the remaining recoupment adjustment under section 7(b)(1)(B) of 

Pub. L. 110-90 (described below in section II.D.6. of this preamble), and after 

considering other payment adjustments to FY 2012 rates proposed elsewhere within this 

proposed rule, we believe that the proposed -3.15 percent adjustment will allow for a 

significant reduction in potential unrecoverable overpayments, yet will maintain a 

comparable adjustment level between FY 2011 and FY 2012, reflecting the applicable 

percentage increase with a documentation and coding adjustment. We recognize that an 

additional adjustment of - 0.75 (3.9 minus 3.15) percent will be required in future rule 

making to complete the necessary -3.9 adjustment to meet CMS’ statutory requirement 

under section 7(b)(1)(A) of Pub. L. 110-90. We are not at this time proposing a timeline 

to implement the remainder of this prospective adjustment. 

6. Recoupment or Repayment Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) 

of Pub. L. 110-90 

 As discussed in section II.D.1. of this preamble, section 7(b)(1)(B) of Pub. L. 

110-90 requires the Secretary to make an adjustment to the standardized amounts under 

section 1886(d) of the Act to offset the estimated increase or decrease in aggregate 

payments for FY 2008 and FY 2009 (including interest) resulting from the difference 

between the estimated actual documentation and coding effect and the documentation and 

coding adjustments applied under section 7(a) of Pub. L. 110-90. This determination 

must be based on a retrospective evaluation of claims data. 
CMS-1518-P 79 

 In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43773), we estimated 

a 2.5 percent change due to documentation and coding that did not reflect real changes in 

case-mix for discharges occurring during FY 2008, exceeding the -0.6 percent 

prospective documentation and coding adjustment applied under section 7(a) of Pub. L. 

110-90 by 1.9 percentage points. We stated that our actuaries had estimated that this 1.9 

percentage point increase resulted in an increase in aggregate payments of approximately 

$2.2 billion in FY 2008. We did not propose to make an adjustment to the FY 2010 

average standardized amounts to offset, in whole or in part, the estimated increase in 

aggregate payments for discharges occurring in FY 2008, but stated in the proposed rule 

that we intended to address this issue in future rulemaking. In the FY 2010 IPPS/RY 

2010 LTCH PPS final rule (74 FR 43774), we stated that because we would not receive 

all FY 2009 claims data prior to publication of the final rule, we would address any 

increase or decrease in FY 2009 payments in future rulemaking for FY 2011 and 2012 

after we performed a retrospective evaluation of the FY 2009 claims data. In response to 

public comments in FY 2010, we indicated that we recognized that any adjustment to 

account for the documentation and coding effect observed in the FY 2008 and FY 2009 

claims data may result in significant future payment reductions for providers. However, 

we indicated that we are required under section 7(b)(1)(B) of Pub. L. 110-90 to recover 

the difference of actual documentation and coding effect in FY 2008 and FY 2009 that is 

greater than the prior adjustments. We agreed with the commenters who requested that 

CMS delay any adjustment and, for the reasons stated above, indicated that we expected 

to address this issue in the FY 2011 rulemaking. We refer readers to the FY 2010 
CMS-1518-P 80 

IPPS/RY 2010 LTCH PPS final rule (74 FR 43767 through 43777) for a detailed 

description of our proposal, responses to comments, and finalized policy. 

 As we indicated in the FY 2011 IPPS/LTCH PPS final rule, the change due to 

documentation and coding that did not reflect real changes in case-mix for discharges 

occurring during FY 2008 and FY 2009 exceeded the -0.6 and -0.9 percent prospective 

documentation and coding adjustments applied under section 7(a) of Pub. L. 110-90 for 

those 2 years, respectively, by 1.9 percentage points in FY 2008 and 3.9 percentage 

points in FY 2009. In total, this change exceeded the cumulative prospective adjustments 

by 5.8 (1.9 plus 3.9) percentage points. Our actuaries estimated that this 5.8 percentage 

point increase resulted in an increase in aggregate payments of approximately $6.9 

billion. In the FY 2011 IPPS/LTCH PPS final rule, we noted that there may be a need to 

actuarially adjust the recoupment adjustment to accurately reflect accumulated interest. 

Therefore, we determined that an aggregate adjustment of -5.8 percent in FYs 2011 and 

2012, subject to actuarial adjustment to reflect accumulated interest, would be necessary 

in order to meet the requirements of section 7(b)(1)(B) of Pub. L. 110-90 to adjust the 

standardized amounts for discharges occurring in FYs 2010, 2011, and/or 2012 to offset 

the estimated amount of the increase in aggregate payments (including interest) in 

FYs 2008 and 2009. In the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 23871), we 

stated that we intended to take into account the need to reflect accumulated interest in 

proposing a recoupment adjustment under section 7(b)(1)(B) of Pub. L. 110-90 for 

FY 2012. 
CMS-1518-P 81 

 It is often our practice to phase in rate adjustments over more than one year in 

order to moderate the effect on rates in any one year. Therefore, consistent with the 

policies that we have adopted in many similar cases, in the FY 2011 IPPS/LTCH PPS 

proposed rule, we proposed to make an adjustment to the standardized amount of 

-2.9 percent, representing approximately half of the aggregate adjustment required under 

section 7(b)(1)(B) of Pub. L. 110-90, for FY 2011. An adjustment of this magnitude 

would allow us to moderate the effects on hospitals in one year while simultaneously 

making it possible to implement the entire adjustment within the timeframe required 

under section 7(b)(1)(B) of Pub. L. 110-90 (that is, no later than FY 2012). 

 Unlike the permanent prospective adjustment to the standardized amounts under 

section 7(b)(1)(A) of Pub. L. 110-90 described earlier, the recoupment adjustment to the 

standardized amounts under section 7(b)(1)(B) of Pub. L. 110-90 is not cumulative, and, 

therefore, would be removed for subsequent fiscal years once we have completely offset 

the increase in aggregate payments for discharges for FY 2008 and FY 2009 

expenditures. In keeping with our practice of moderating payment adjustments when 

necessary, we stated that we anticipated that the proposal of phasing in the recoupment 

adjustment will have an additional, and significant, moderating effect on implementing 

the requirements of section 7(b)(1)(B) of Pub. L. 110-90 for FY 2012. 

 In the FY 2011 IPPS/LTCH PPS proposed rule, we sought public comment on our 

proposal to offset part of the total 5.8 percent increase in aggregate payments (including 

interest) for discharges occurring in FY 2008 and FY 2009 resulting from the adoption of 

the MS-DRGs in FY 2011, noting that this proposal would result in a -2.9 percent 
CMS-1518-P 82 

adjustment to the standardized amount. We received numerous comments on our 

proposal, especially from national and regional hospital associations, hospital systems, 

and individual hospitals. MedPAC also commented on our proposal. We refer readers to 

the FY 2011 IPPS/LTCH PPS final rule (75 FR 50055 through 50073) for a detailed 

description of our analysis and prior responses to comments, and finalized policy. 

 In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50062 through 50068), we 

finalized the proposed adjustment to the standardized amount of -2.9 percent, which 

represented approximately half of the aggregate recoupment adjustment required under 

section 7(b)(1)(B) of Pub. L. 110-90, for FY 2011. We were persuaded by both 

MedPAC’s analysis, and our own review of the methodologies recommended by various 

commenters, that the methodology we employed to determine the required recoupment 

adjustment was sound. Since the statute required that we implement the entire 

recoupment adjustment no later than FY 2012, we have sought, as we commonly do, to 

moderate the potential impact on hospitals by phasing in the required adjustment over 

more than one year. As we stated in prior rulemaking, a major advantage of making the 

-2.9 percent adjustment to the standardized amount in FY 2011 was that, because the 

required recoupment adjustment is not cumulative, we anticipated removing the FY 2011 

-2.9 percent adjustment from the rates (in other words, making a positive 2.9 percent 

adjustment to the rates) in FY 2012, at the same time that the law required us to apply the 

remaining approximately -2.9 percent adjustment required by section 7(b)(1)(B) of 

Pub. L. 110-90. These two steps in FY 2012, restoring the FY 2011 -2.9 percent 

adjustment and then applying the remaining adjustment of approximately -2.9 percent, 
CMS-1518-P 83 

would effectively cancel each other out. The result of these two steps would be an 

aggregate adjustment of approximately 0.0 percent. While we stated in the FY 2011 

IPPS/LTCH PPS final rule the need to potentially adjust the remaining -2.9 percent 

estimate to account for accumulated interest, our actuaries have determined that there has 

been no significant interest accumulation and that no additional adjustment will be 

required. Therefore, for FY 2012, pursuant to the timeframes set forth by section 

7(b)(1)(B) of Pub. L. 110-90, and consistent with the discussion in the FY 2011 

IPPS/LTCH PPS final rule, we are proposing to complete the recoupment adjustment by 

implementing the remaining -2.9 percent adjustment, in addition to removing the effect of 

the -2.9 percent adjustment to the standardized amount finalized for FY 2011. Because 

these adjustments will, in effect, balance out, there will be no year-to-year change in the 

standardized amount due to this recoupment adjustment. As this adjustment will 

complete the required recoupment for overpayments due to documentation and coding 

effects on discharges occurring in FYs 2008 and 2009, we anticipate removing the effect 

of this adjustment by adding 2.9 percent to the standardized amount in FY 2013. We 

continue to believe that this is a reasonable and fair approach that satisfies the 

requirements of the statute while substantially moderating the financial impact on 

hospitals. 

FY 2012 MS-DRG Documentation and Coding Adjustment 

 

Required 

Prospective 

Adjustment 

for FYs 

2008-2009 

Remaining 

Required 

Recoupment 

Adjustment 

for FYs 

2008-2009 

Total 

Remaining 

Adjustment 

Proposed 

Prospective 

Adjustment 

for 

FY 2012 

Proposed 

Recoupment 

Adjustment 

to FY 2012 

Payments 

Remaining 

Prospective 

Adjustment 

If proposals 

are 

Finalized 
CMS-1518-P 84 

Level of 

Adjustments -3.9% -2.9% -6.8% -3.15% -2.9% -0.75% 

The table above summarizes the proposed adjustments for FY 2012 for 

documentation and coding for IPPS hospitals. 

7. Background on the Application of the Documentation and Coding Adjustment to the 

Hospital-Specific Rates 

 Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on whichever of 

the following rates yields the greatest aggregate payment: the Federal rate; the updated 

hospital-specific rate based on FY 1982 costs per discharge; the updated hospital-specific 

rate based on FY 1987 costs per discharge; the updated hospital-specific rate based on 

FY 1996 costs per discharge; or the updated hospital-specific rate based on FY 2006 

costs per discharge. Under section 1886(d)(5)(G) of the Act, MDHs are paid based on 

the Federal national rate or, if higher, the Federal national rate plus 75 percent of the 

difference between the Federal national rate and the updated hospital-specific rate based 

on the greatest of the FY 1982, FY 1987, or FY 2002 costs per discharge. In the FY 2008 

IPPS final rule with comment period (72 FR 47152 through 47188), we established a 

policy of applying the documentation and coding adjustment to the hospital-specific 

rates. In that final rule with comment period, we indicated that because SCHs and MDHs 

use the same DRG system as all other hospitals, we believe they should be equally 

subject to the budget neutrality adjustment that we are applying for adoption of the 

MS-DRGs to all other hospitals. In establishing this policy, we relied on section 

1886(d)(3)(A)(vi) of the Act, which provides us with the authority to adjust “the 
CMS-1518-P 85 

standardized amount” to eliminate the effect of changes in coding or classification that do 

not reflect real change in case-mix. 

 However, in the final rule that appeared in the Federal Register on 

November 27, 2007 (72 FR 66886), we rescinded the application of the documentation 

and coding adjustment to the hospital-specific rates retroactive to October 1, 2007. In 

that final rule, we indicated that, while we still believe it would be appropriate to apply 

the documentation and coding adjustment to the hospital-specific rates, upon further 

review, we decided that the application of the documentation and coding adjustment to 

the hospital-specific rates is not consistent with the plain meaning of section 

1886(d)(3)(A)(vi) of the Act, which only mentions adjusting “the standardized amount” 

under section 1886(d) of the Act and does not mention adjusting the hospital-specific 

rates. 

 In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that we 

continued to have concerns about this issue. Because hospitals paid based on the 

hospital-specific rate use the same MS-DRG system as other hospitals, we believe they 

have the potential to realize increased payments from documentation and coding changes 

that do not reflect real increases in patient severity of illness. In section 

1886(d)(3)(A)(vi) of the Act, Congress stipulated that hospitals paid based on the 

standardized amount should not receive additional payments based on the effect of 

documentation and coding changes that do not reflect real changes in case-mix. 

Similarly, we believe that hospitals paid based on the hospital-specific rates should not 

have the potential to realize increased payments due to documentation and coding 
CMS-1518-P 86 

changes that do not reflect real increases in patient severity of illness. While we continue 

to believe that section 1886(d)(3)(A)(vi) of the Act does not provide explicit authority for 

application of the documentation and coding adjustment to the hospital-specific rates, we 

believe that we have the authority to apply the documentation and coding adjustment to 

the hospital-specific rates using our special exceptions and adjustment authority under 

section 1886(d)(5)(I)(i) of the Act. The special exceptions and adjustment provision 

authorizes us to provide “for such other exceptions and adjustments to [IPPS] payment 

amounts ... as the Secretary deems appropriate.” In the FY 2009 IPPS final rule (73 FR 

48448 through 48449), we indicated that, for the FY 2010 rulemaking, we planned to 

examine our FY 2008 claims data for hospitals paid based on the hospital-specific rate. 

We further indicated that if we found evidence of significant increases in case-mix for 

patients treated in these hospitals that do not reflect real changes in case-mix, we would 

consider proposing application of the documentation and coding adjustments to the FY 

2010 hospital-specific rates under our authority in section 1886(d)(5)(I)(i) of the Act. 

 In response to public comments received on the FY 2009 IPPS proposed rule, we 

stated in the FY 2009 IPPS final rule that we would consider whether such a proposal 

was warranted for FY 2010. To gather information to evaluate these considerations, we 

indicated that we planned to perform analyses on FY 2008 claims data to examine 

whether there has been a significant increase in case-mix for hospitals paid based on the 

hospital-specific rate. If we found that application of the documentation and coding 

adjustment to the hospital-specific rates for FY 2010 was warranted, we indicated that we 

would propose to make such an adjustment in the FY 2010 IPPS proposed rule. 
CMS-1518-P 87 

8. Documentation and Coding Adjustment to the Hospital-Specific Rates for FY 2011 

and Subsequent Fiscal Years 

 In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and final rule 

(74 FR 24098 through 24100 and 74 FR 43775 through 43776, respectively), we 

discussed our retrospective evaluation of the FY 2008 claims data for SCHs and MDHs 

using the same methodology described earlier for other IPPS hospitals. We found that, 

independently for both SCHs and MDHs, the change due to documentation and coding 

that did not reflect real changes in case-mix for discharges occurring during FY 2008 

slightly exceeded the proposed 2.5 percent result discussed earlier for other IPPS 

hospitals, but did not significantly differ from that result. We refer readers to those rules 

for a more complete discussion. 

 Therefore, consistent with our statements in prior IPPS rules, we proposed to use 

our authority under section 1886(d)(5)(I)(i) of the Act to prospectively adjust the 

hospital-specific rates by the proposed -2.5 percent in FY 2010 to account for our 

estimated documentation and coding effect in FY 2008 that does not reflect real changes 

in case-mix. We proposed to leave this adjustment in place for subsequent fiscal years in 

order to ensure that changes in documentation and coding resulting from the adoption of 

the MS-DRGs do not lead to an increase in aggregate payments for SCHs and MDHs not 

reflective of an increase in real case-mix. The proposed -2.5 percent adjustment to the 

hospital-specific rates exceeded the -1.9 percent adjustment to the national standardized 

amount under section 7(b)(1)(A) of Pub. L. 110-90 because, unlike the national 

standardized rates, the FY 2008 hospital-specific rates were not previously reduced in 
CMS-1518-P 88 

order to account for anticipated changes in documentation and coding that do not reflect 

real changes in case-mix resulting from the adoption of the MS-DRGs. 

 In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24100), we 

solicited public comment on this proposal. Consistent with our approach for IPPS 

hospitals discussed earlier, in the FY 2010 IPPS/RY 2010 LTCH PPS final rule, we also 

delayed adoption of a documentation and coding adjustment to the hospital-specific rate 

until FY 2011. We refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule for 

a more detailed discussion of our proposal, responses to comments, and finalized policy. 

As we have noted previously, because SCHs and MDHs use the same MS-DRG 

system as all other IPPS hospitals, we believe they have the potential to realize increased 

payments from documentation and coding changes that do not reflect real increases in 

patient severity of illness. Therefore, we believe they should be equally subject to a 

prospective budget neutrality adjustment that we are applying for adoption of the 

MS-DRGs to all other hospitals. We believe the documentation and coding estimates for 

all subsection (d) hospitals should be the same. While the findings for the documentation 

and coding effect for all IPPS hospitals are similar to the effect for SCHs and slightly 

different to the effect for MDHs, we continue to believe that this is the appropriate policy 

so as to neither advantage or disadvantage different types of providers. As we discuss in 

section II.D.4. of this preamble, our best estimate, based on the most recently available 

data, is that a cumulative adjustment of -5.4 percent is required to eliminate the full effect 

of the documentation and coding changes on future payments to SCHs and MDHs. 

Unlike the case of standardized amounts paid to IPPS hospitals, prior to FY 2011, we had 
CMS-1518-P 89 

not made any previous adjustments to the hospital-specific rates paid to SCHs and MDHs 

to account for documentation and coding changes. Therefore, the entire -5.4 percent 

recoupment adjustment needed to be made, as opposed to a -3.9 percent remaining 

adjustment for IPPS hospitals. 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50068 through 50071), we 

made an adjustment to the standardized amount for IPPS hospitals of -2.9 percent under 

section 7(b)(1)(B) of Pub. L. 110-90, for FY 2011. As we noted in the FY 2011 

IPPS/LTCH PPS final rule, in determining the level and pace of adjustments to account 

for such documentation and coding changes, we believe that it is important to maintain, 

as much as possible, both consistency and equity among these classes of hospitals. 

Therefore, we finalized a prospective adjustment of -2.9 percent to the hospital-specific 

rates paid to SCHs and MDHs. We refer readers to the FY 2011 IPPS/LTCH PPS final 

rule for a more detailed discussion of our proposal, responses to comments, and finalized 

policy. 

As discussed earlier in this section II.D., we are proposing a net -3.15 percent 

documentation and coding adjustment for IPPS hospitals in FY 2012 (-3.15 percent 

prospective adjustment plus a -2.9 percent recoupment adjustment in FY 2012, offset by 

the removal of the -2.9 percent recoupment adjustment for FY 2010). The proposed IPPS 

adjustment exceeds the remaining -2.5 percent documentation and coding adjustment for 

hospitals receiving a hospital-specific rate (that is, the entire -5.4 percent adjustment, 

minus the -2.9 percent adjustment finalized for FY 2011). As we indicated in the 

FY 2011 IPPS/LTCH PPS proposed rule and final rule, we are continuing, as much as 
CMS-1518-P 90 

possible, consistent with section 7(b)(1) of Pub. L. 110-90 and section 1886(d)(5)(I)(i) of 

the Act, to take such consistency and equity into account in developing future proposals 

for implementing documentation and coding adjustments. We believe that any 

adjustment to the hospital-specific rate due to documentation and coding effect should be 

as similar as possible to adjustments to the IPPS rate. Accordingly, we are proposing a 

-2.5 percent payment adjustment to the hospital-specific rate. We believe that proposing 

the entire remaining prospective adjustment of -2.5 percent allows CMS to maintain, to 

the extent possible, similarity and consistency in payment rates for different IPPS 

hospitals paid using the MS-DRG. As discussed below, we took a similar approach in 

finalizing an adjustment to the Puerto-Rico specific rate in FY 2011. 

9. Application of the Documentation and Coding Adjustment to the Puerto Rico-Specific 

Standardized Amount 

a. Background 

 Puerto Rico hospitals are paid based on 75 percent of the national standardized 

amount and 25 percent of the Puerto Rico-specific standardized amount. As noted 

previously, the documentation and coding adjustment we adopted in the FY 2008 IPPS 

final rule with comment period relied upon our authority under section 1886(d)(3)(A)(vi) 

of the Act, which provides the Secretary the authority to adjust “the standardized amounts 

computed under this paragraph'' to eliminate the effect of changes in coding or 

classification that do not reflect real changes in case-mix. Section 1886(d)(3)(A)(vi) of 

the Act applies to the national standardized amounts computed under section 1886(d)(3) 

of the Act, but does not apply to the Puerto Rico-specific standardized amount computed 
CMS-1518-P 91 

under section 1886(d)(9)(C) of the Act. In calculating the FY 2008 payment rates, we 

made an inadvertent error and applied the FY 2008 -0.6 percent documentation and 

coding adjustment to the Puerto Rico-specific standardized amount, relying on our 

authority under section 1886(d)(3)(A)(vi) of the Act. However, section 

1886(d)(3)(A)(vi) of the Act authorizes application of a documentation and coding 

adjustment to the national standardized amount and does not apply to the Puerto 

Rico specific standardized amount. In the FY 2009 IPPS final rule (73 FR 48449), we 

corrected this inadvertent error by removing the -0.6 percent documentation and coding 

adjustment from the FY 2008 Puerto Rico-specific rates (that is, we made a positive 

0.6 percent adjustment, increasing the Puerto Rico-specific rates). 

 While section 1886(d)(3)(A)(vi) of the Act is not applicable to the Puerto 

Rico-specific standardized amount, we believe that we have the authority to apply the 

documentation and coding adjustment to the Puerto Rico-specific standardized amount 

using our special exceptions and adjustment authority under section 1886(d)(5)(I)(i) of 

the Act. Similar to SCHs and MDHs that are paid based on the hospital-specific rate, we 

believe that Puerto Rico hospitals that are paid based on the Puerto Rico-specific 

standardized amount should not have the potential to realize increased payments due to 

documentation and coding changes that do not reflect real increases in patient severity of 

illness. Consistent with the approach described for SCHs and MDHs, in the FY 2009 

IPPS final rule (73 FR 48449), we indicated that we planned to examine our FY 2008 

claims data for hospitals in Puerto Rico. We indicated in the FY 2009 IPPS proposed 

rule (73 FR 23541) that if we found evidence of significant increases in case-mix for 
CMS-1518-P 92 

patients treated in these hospitals, we would consider proposing to apply documentation 

and coding adjustments to the FY 2010 Puerto Rico-specific standardized amount under 

our authority in section 1886(d)(5)(I)(i) of the Act. 

b. Documentation and Coding Adjustment to the Puerto Rico-Specific Standardized 

Amount 

 For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a 

retrospective evaluation of the FY 2008 claims data for Puerto Rico hospitals using the 

same methodology described earlier for IPPS hospitals paid under the national 

standardized amounts under section 1886(d) of the Act. We found that, for Puerto Rico 

hospitals, the increase in payments for discharges occurring during FY 2008 due to 

documentation and coding that did not reflect real changes in case-mix for discharges 

occurring during FY 2008 was approximately 1.1 percent. However, as we note earlier 

for IPPS hospitals and hospitals receiving hospital-specific rates, if the estimated 

documentation and coding effect determined based on a full analysis of FY 2009 claims 

data was more or less than our then current estimates, it would change, possibly lessen, 

the anticipated cumulative adjustments that we had estimated we would have to make for 

the FY 2008 and FY 2009 combined adjustment. Therefore, we believed that it would be 

more prudent to delay implementation of the documentation and coding adjustment to 

allow for a more complete analysis of FY 2009 claims data for Puerto Rico hospitals. 

 In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43777), we indicated 

that, given these documentation and coding increases, consistent with our statements in 

prior IPPS rules, we would use our authority under section 1886(d)(5)(I)(i) of the Act to 
CMS-1518-P 93 

adjust the Puerto Rico-specific rate and solicited public comment on the proposed 

-1.1 percent prospective adjustment. However, in parallel to our decision to postpone 

adjustments to the Federal standardized amount, we also indicated that we were adopting 

a similar policy for the Puerto Rico-specific rate for FY 2010 and would consider the 

phase-in of this adjustment over an appropriate time period through future rulemaking. 

We noted that, as with the hospital-specific rates, the Puerto Rico-specific standardized 

amount had not previously been adjusted based on estimated changes in documentation 

and coding associated with the adoption of the MS-DRGs. 

 Consistent with our approach for IPPS hospitals for FY 2010, we indicated that 

we would address in the FY 2011 rulemaking cycle any change in FY 2009 case-mix due 

to documentation and coding that did not reflect real changes in case-mix for discharges 

occurring during FY 2009. 

As we have noted above, similar to SCHs and MDHs, hospitals in Puerto Rico use 

the same MS-DRG system as all other hospitals and we believe they have the potential to 

realize increased payments from documentation and coding changes that do not reflect 

real increases in patient severity of illness. Therefore, we believe they should be equally 

subject to the prospective budget neutrality adjustment that we intend to apply to 

prospective payment rates for IPPS hospitals, including SCHs and MDHs, in order to 

eliminate the full effect of the documentation and coding changes associated with 

implementation of the MS-DRG system. 

As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 through 

50073), using the same methodology we applied to estimate documentation and coding 
CMS-1518-P 94 

changes under IPPS for non-Puerto Rico hospitals, our best estimate, based on the then 

most recently available data (FY 2009 claims paid through March 2010), was that, for 

documentation and coding that occurred over FY 2008 and FY 2009, a cumulative 

adjustment of -2.6 percent was required to eliminate the full effect of the documentation 

and coding changes on future payments from the Puerto Rico-specific rate. As we stated 

above, we believe it important to maintain both consistency and equity among all 

hospitals paid on the basis of the same MS-DRG system. At the same time, however, we 

recognize that the estimated cumulative impact on aggregate payment rates resulting 

from implementation of the MS-DRG system was smaller for Puerto Rico hospitals as 

compared to IPPS hospitals and SCHs and MDHs. Therefore, in the FY 2011 IPPS 

LTCH PPS proposed rule (75 FR 23876), we proposed an adjustment to eliminate the full 

effect of the documentation and coding changes on the portion of future payments to 

Puerto Rico hospitals based on the Puerto Rico-specific rate. We stated that we believed 

that a full prospective adjustment was the most appropriate means to take into full 

account the effect of documentation and coding changes on payments, while maintaining 

equity as much as possible between hospitals paid on the basis of different prospective 

rates. We noted that our updated data analysis in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50072 through 50073) final rule showed that this adjustment would be 

-2.6 percent. The previous estimate in the proposed rule was a -2.4 percent adjustment. 

 One reason we proposed the full prospective adjustment for the Puerto 

Rico-specific rate in FY 2011 was to maintain equity as much as possible in the 

documentation and coding adjustments applied to various hospital rates in FY 2011. 
CMS-1518-P 95 

Because our proposal was to make an adjustment that represents the full adjustment that 

is warranted for the Puerto Rico-specific rate, we indicated that we did not anticipate 

proposing any additional adjustments to the this rate for documentation and coding 

effects. 

 Therefore, because the Puerto Rico-specific rate received a full prospective 

adjustment of -2.6 percent in FY 2011, we are proposing no further adjustment in this 

proposed rule for FY 2012. 

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background 

In the FY 2009 IPPS final rule (73 FR 48450), we continued to implement 

significant revisions to Medicare’s inpatient hospital rates by completing our 3-year 

transition from charge-based relative weights to cost-based relative weights. Beginning 

in FY 2007, we implemented relative weights based on cost report data instead of based 

on charge information. We had initially proposed to develop cost-based relative weights 

using the hospital-specific relative value cost center (HSRVcc) methodology as 

recommended by MedPAC. However, after considering concerns expressed in the public 

comments we received on the proposal, we modified MedPAC’s methodology to exclude 

the hospital-specific relative weight feature. Instead, we developed national CCRs based 

on distinct hospital departments and engaged a contractor to evaluate the HSRVcc 

methodology for future consideration. To mitigate payment instability due to the 

adoption of cost-based relative weights, we decided to transition cost-based weights over 

3 years by blending them with charge-based weights beginning in FY 2007. (We refer 
CMS-1518-P 96 

readers to the FY 2007 IPPS final rule for details on the HSRVcc methodology and the 

3-year transition blend from charge-based relative weights to cost-based relative weights 

(71 FR 47882 through 47898).) 

 In FY 2008, we adopted severity-based MS-DRGs, which increased the number 

of DRGs from 538 to 745. Many commenters raised concerns as to how the transition 

from charge-based weights to cost-based weights would continue with the introduction of 

new MS-DRGs. We decided to implement a 2-year transition for the MS-DRGs to 

coincide with the remainder of the transition to cost-based relative weights. In FY 2008, 

50 percent of the relative weight for each DRG was based on the CMS DRG relative 

weight and 50 percent was based on the MS-DRG relative weight. 

 In FY 2009, the third and final year of the transition from charge-based weights to 

cost-based weights, we calculated the MS-DRG relative weights based on 100 percent of 

hospital costs. We refer readers to the FY 2007 IPPS final rule (71 FR 47882) for a more 

detailed discussion of our final policy for calculating the cost-based DRG relative 

weights and to the FY 2008 IPPS final rule with comment period (72 FR 47199) for 

information on how we blended relative weights based on the CMS DRGs and 

MS-DRGs. 

2. Summary of the RTI Study of Charge Compression and CCR Refinement 

 As we transitioned to cost-based relative weights, some public commenters raised 

concerns about potential bias in the weights due to “charge compression,” which is the 

practice of applying a higher percentage charge markup over costs to lower cost items 

and services, and a lower percentage charge markup over costs to higher cost items and 
CMS-1518-P 97 

services. As a result, the cost-based weights would undervalue high-cost items and 

overvalue low-cost items if a single CCR is applied to items of widely varying costs in 

the same cost center. To address this concern, in August 2006, we awarded a contract to 

RTI to study the effects of charge compression in calculating the relative weights and to 

consider methods to reduce the variation in the CCRs across services within cost centers. 

RTI issued an interim draft report in January 2007 with its findings on charge 

compression (which was posted on the CMS Web site at: 

http://www.cms.hhs.gov/reports/downloads/Dalton.pdf). In that report, RTI found that a 

number of factors contribute to charge compression and affect the accuracy of the relative 

weights. RTI’s findings demonstrated that charge compression exists in several CCRs, 

most notably in the Medical Supplies and Equipment CCR. 

 In its interim draft report, RTI offered a number of recommendations to mitigate 

the effects of charge compression, including estimating regression-based CCRs to 

disaggregate the Medical Supplies Charged to Patients, Drugs Charged to Patients, and 

Radiology cost centers, and adding new cost centers to the Medicare cost report, such as 

adding a “Devices, Implants and Prosthetics” line under “Medical Supplies Charged to 

Patients” and a “CT Scanning and MRI” subscripted line under “Radiology-Diagnostics”. 

Despite receiving public comments in support of the regression-based CCRs as a means 

to immediately resolve the problem of charge compression, particularly within the 

Medical Supplies and Equipment CCR, we did not adopt RTI's recommendation to create 

additional regression-based CCRs. (For more details on RTI’s findings and 

recommendations, we refer readers to the FY 2009 IPPS final rule (73 FR 48452).) RTI 
CMS-1518-P 98 

subsequently expanded its analysis of charge compression beyond inpatient services to 

include a reassessment of the regression-based CCR models using both outpatient and 

inpatient charge data. This interim report was made available in April 2008 during the 

public comment period on the FY 2009 IPPS proposed rule and can be found on RTI’s 

Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-

0029I/PDF/Refining_Cost_to_Charge_Ratios_200804.pdf . The IPPS-specific chapters, 

which were separately displayed in the April 2008 interim report, as well as the more 

recent OPPS chapters, were included in the July 3, 2008 RTI final report entitled, 

“Refining Cost-to-Charge Ratios for Calculating APC [Ambulatory Payment 

Classification] and DRG Relative Payment Weights,” that became available at the time of 

the development of the FY 2009 IPPS final rule. The RTI final report can be found on 

RTI’s Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-

0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf. 

RTI’s final report found that, under the IPPS and the OPPS, accounting 

improvements to the cost reporting data reduce some of the sources of aggregation bias 

without having to use regression-based adjustments. In general, with respect to the 

regression-based adjustments, RTI confirmed the findings of its March 2007 report that 

regression models are a valid approach for diagnosing potential aggregation bias within 

selected services for the IPPS and found that regression models are equally valid for 

setting payments under the OPPS. 

 RTI also noted that cost-based weights are only one component of a final 

prospective payment rate. There are other rate adjustments (wage index, IME, and DSH) 
CMS-1518-P 99 

to payments derived from the revised cost-based weights, and the cumulative effect of 

these components may not improve the ability of final payment to reflect resource cost. 

RTI endorsed short-term regression-based adjustments, but also concluded that more 

refined and accurate accounting data are the preferred long-term solution to mitigate 

charge compression and related bias in hospital cost-based weights. For a more detailed 

summary of RTI’s findings, recommendations, and public comments we received on the 

report, we refer readers to the FY 2009 IPPS final rule (73 FR 48452 through 48453). 

3. Summary of Policy Changes Made in FY 2011 

In the FY 2009 IPPS/LTCH PPS final rule (73 FR 48458 through 48467), in 

response to the RTI's recommendations concerning cost report refinements, and because 

of RAND’s finding that regression-based adjustments to the CCRs do not significantly 

improve payment accuracy, we discussed our decision to pursue changes to the cost 

report to split the cost center for Medical Supplies Charged to Patients into one line for 

“Medical Supplies Charged to Patients” and another line for “Implantable Devices 

Charged to Patients.” (We refer readers to the Web site: 

http://www.rand.org/pubs/working_papers/WR560/, and the FY 2009 IPPS/LTCH PPS 

final rule for details on the RAND report (73 FR 48453 through 48457).) We 

acknowledged, as RTI had found, that charge compression occurs in several cost centers 

that exist on the Medicare cost report. However, as we stated in the FY 2009 

IPPS/LTCH PPS final rule, we focused on the CCR for Medical Supplies and Equipment 

because RTI found that the largest impact on the MS-DRG relative weights could result 

from correcting charge compression for devices and implants. In determining what 
CMS-1518-P 100 

should be reported in these respective cost centers, we adopted the commenters’ 

recommendation that hospitals should use revenue codes established by AHA's National 

Uniform Billing Committee to determine what should be reported in the “Medical 

Supplies Charged to Patients” and the “Implantable Devices Charged to Patients” cost 

centers. Accordingly, a new subscripted line 55.30 for “Implantable Devices Charged to 

Patients” was created in July 2009 as part of CMS’ Transmittal 20 update to the existing 

cost report Form CMS-2552-96. This new subscripted cost center has been available for 

use for cost reporting periods beginning on or after May 1, 2009. 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50075 through 50080), we 

finalized our proposal to create standard cost centers for CT scans, MRI, and cardiac 

catheterization, and to require that hospitals report the costs and charges for these 

services under new cost centers on the revised Medicare cost report Form CMS 2552-10. 

As we discussed in the FY 2009 IPPS/LTCH PPS and CY 2009 OPPS/ASC proposed 

and final rules, RTI found that the costs and charges of CT scans, MRI, and cardiac 

catheterization differ significantly from the costs and charges of other services included 

in the standard associated cost center. RTI also concluded that both the IPPS and OPPS 

relative weights would better estimate the costs of those services if CMS were to add 

standard costs centers for CT scans, MRI, and cardiac catheterization in order for 

hospitals to report separately the costs and charges for those services and in order for 

CMS to calculate unique CCRs to estimate the cost from charges on claims data. (We 

refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50075 through 50080) for 

a more detailed discussion on the reasons for the creation of standard cost centers for CT 
CMS-1518-P 101 

scans, MRI, and cardiac catheterization.) The new standard cost centers for MRI, CT 

scans, and cardiac catheterization are effective for cost report periods beginning on or 

after May 1, 2010, on the revised cost report Form CMS-2552-10. CMS issued the new 

hospital cost report Form CMS-2552-10 on December 30, 2010. The new cost report 

form can be accessed at the CMS Web site at: 

https://www.cms.gov/Manuals/PBM/itemdetail.asp?filterType=none&filterByDID=-

99&sortByDID=1&sortOrder=ascending&itemID=CMS021935&intNumPerPage=10 . Once at 

this Web site, users should double click on “Chapter 40.” 

4. Discussion for FY 2012 

In the FY 2009 IPPS/LTCH PPS final rule (73 FR 48468), we stated that, due to 

what is typically a 3-year lag between the reporting of cost report data and the availability 

for use in ratesetting, we anticipated that we might be able to use data from the new 

“Implantable Devices Charged to Patients” cost center to develop a CCR for Implantable 

Devices Charged to Patients in the FY 2012 or FY 2013 IPPS rulemaking cycle. 

Specifically, we stated, “Because there is approximately a 3-year lag between the 

availability of cost report data for IPPS and OPPS rate-setting purposes in a given fiscal 

year, we may be able to derive two distinct CCRs, one for medical supplies and one for 

devices, for use in calculating the FY 2012 or FY 2013 IPPS relative weights and the 

CY 2012 or CY 2013 OPPS relative weights” (73 FR 48468). However, as noted in the 

FY 2010 IPPS/LTCH PPS final rule (74 FR 43782), due to delays in the issuance of the 

revised cost report CMS 2552-10, a new CCR for Implantable Devices Charged to 

Patients may not be available until FY 2013. Similarly, when we finalized the decision in 
CMS-1518-P 102 

the FY 2011 IPPS/LTCH PPS final rule to add new cost centers for MRI, CT scans, and 

cardiac catheterization, we explained that data from any new cost centers that may be 

created will not be available until at least 3 years after they are first used (75 FR 50077). 

That is, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50077), we stated that the data 

from the standard cost centers for MRI, CT scans, and cardiac catheterization 

respectively, would not even be available for possible use in calculating the relative 

weights earlier than 3 years after Form CMS–2552–10 becomes available. We further 

stated that, at that time, we would analyze the data and determine if it is appropriate to 

use those data to create distinct CCRs from these cost centers for use in the relative 

weights for the respective payment systems. We also reassured public commenters that 

there was no need for immediate concern regarding possible negative payment impacts 

on MRI and CT scans under the IPPS and the OPPS because the cost report data that 

would be used for the calculation of the relative weights were at least 3 years from being 

available. We stated that we will first thoroughly analyze and run impacts on the data 

and provide the public with the opportunity to comment before distinct CCRs for MRI 

and CT scans would be finalized for use in the calculation of the relative weights. We 

also urged all hospitals to properly report their costs and charges for MRI, CT scans, and 

all other services so that, in several years’ time, we will have reliable data from all 

hospitals on which to base a decision as to whether to incorporate additional CCRs into 

the relative weight calculation (75 FR 50077). 

Accordingly, in preparation for this FY 2012 IPPS/LTCH PPS proposed rule, we 

have assessed the availability of data in the “Implantable Devices Charged to Patients” 
CMS-1518-P 103 

cost center. In order to develop a robust analysis regarding the use of cost data from the 

“Implantable Devices Charged to Patients” cost center, it is necessary to have a critical 

mass of cost reports filed with data in this cost center. The cost center for “Implantable 

Devices Charged to Patients” is effective for cost reporting periods beginning on or after 

May 1, 2009. We have checked the availability of FY 2009 cost reports in the 

December 31, 2010 quarter ending update of HCRIS, which is the latest upload of 

FY 2009 cost report data that we could use for this proposed rule. We have determined 

that there are only 437 hospitals (out of approximately 3,500 IPPS hospitals) that have 

completed the “Implantable Devices Charged to Patients” cost center. We do not believe 

that this is a sufficient amount of data from which to generate a meaningful analysis in 

this particular situation. Therefore, we are not proposing to use data from the 

“Implantable Devices Charged to Patients” cost center to create a distinct CCR for 

Implantable Devised Charged to Patients for use in calculating the MS-DRG relative 

weights for FY 2012. We will reassess the availability of data for the “Implantable 

Devices Charged to Patients” cost center, and the “MRI, CT Scans, and Cardiac 

Catheterization” cost centers, for the FY 2013 IPPS rulemaking cycle and, if appropriate, 

we will propose to create a distinct CCR at that time. 

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

1. Background 

a. Statutory Authority 

 Section 1886(d)(4)(D) of the Act addresses certain hospital-acquired conditions 

(HACs), including infections. Section 1886(d)(4)(D) of the Act specifies that by 
CMS-1518-P 104 

October 1, 2007, the Secretary was required to select, in consultation with the Centers for 

Disease Control and Prevention (CDC), at least two conditions that: (a) are high cost, 

high volume, or both; (b) are assigned to a higher paying MS-DRG when present as a 

secondary diagnosis (that is, conditions under the MS-DRG system that are CCs or 

MCCs); and (c) could reasonably have been prevented through the application of 

evidence-based guidelines. Section 1886(d)(4)(D) of the Act also specifies that the list of 

conditions may be revised, again in consultation with CDC, from time to time as long as 

the list contains at least two conditions. 

 Section 1886(d)(4)(D)(iii) of the Act requires that hospitals, effective with 

discharges occurring on or after October 1, 2007, submit information on Medicare claims 

specifying whether diagnoses were present on admission (POA). Section 

1886(d)(4)(D)(i) of the Act specifies that effective for discharges occurring on or after 

October 1, 2008, Medicare no longer assigns an inpatient hospital discharge to a higher 

paying MS-DRG if a selected condition is not POA. Thus, if a selected condition that 

was not POA manifests during the hospital stay, it is considered a HAC and the case is 

paid as though the secondary diagnosis was not present. However, even if a HAC 

manifests during the hospital stay, if any nonselected CC/MCC appears on the claim, the 

claim will be paid at the higher MS-DRG rate. Under the HAC payment policy, all 

CCs/MCCs on the claim must be HACs in order to generate a lower MS-DRG payment. 

In addition, Medicare continues to assign a discharge to a higher paying MS-DRG if a 

selected condition is POA. 
CMS-1518-P 105 

The POA indicator reporting requirement and the HAC payment provision apply 

to IPPS hospitals only. Non-IPPS hospitals, including CAHs, LTCHs, IRFs, IPFs, cancer 

hospitals, children’s hospitals, hospitals in Maryland operating under waivers, rural 

health clinics, federally qualified health centers, RNHCIs, and Department of Veterans 

Affairs/Department of Defense hospitals, are exempt from POA reporting and the HAC 

payment provision. Throughout this section, the term “hospital” refers to an IPPS 

hospital. 

 The HAC provision found in section 1886(d)(4)(D) of the Act is part of an array 

of Medicare value-based purchasing (VBP) tools that we are using to promote increased 

quality and efficiency of care. Those tools include measuring performance, using 

payment incentives, publicly reporting performance results, applying national and local 

coverage policy decisions, enforcing conditions of participation, and providing direct 

support for providers through Quality Improvement Organization (QIO) activities. The 

application of VBP tools, such as this HAC provision, is transforming Medicare from a 

passive payer to an active purchaser of higher value health care services. We are 

applying these strategies for inpatient hospital care and across the continuum of care for 

Medicare beneficiaries. 

 These VBP tools are highly compatible with the underlying purposes as well as 

existing structural features of Medicare’s IPPS. Under the IPPS, hospitals are 

encouraged to treat patients efficiently because they receive the same DRG payment for 

stays that vary in length and in the services provided, which gives hospitals an incentive 

to avoid unnecessary costs in the delivery of care. In some cases, conditions acquired in 
CMS-1518-P 106 

the hospital do not generate higher payments than the hospital would otherwise receive 

for cases without these conditions. To this extent, the IPPS encourages hospitals to avoid 

complications. 

 However, the treatment of certain conditions can generate higher Medicare 

payments in two ways. First, if a hospital incurs exceptionally high costs treating a 

patient, the hospital stay may generate an outlier payment. Because the outlier payment 

methodology requires that hospitals experience large losses on outlier cases before outlier 

payments are made, hospitals have an incentive to prevent outliers. Second, under the 

MS-DRG system that took effect in FY 2008 and that has been refined through 

rulemaking in subsequent years, certain conditions can generate higher payments even if 

the outlier payment requirements are not met. Under the MS-DRG system, there are 

currently 259 sets of MS-DRGs that are split into 2 or 3 subgroups based on the presence 

or absence of a CC or an MCC. The presence of a CC or an MCC generally results in a 

higher payment. However, since we implemented the HAC provisions, if a secondary 

diagnosis acquired during a hospital stay is a HAC and no other CCs or MCCs are 

present, the hospital receives a payment under the MS-DRGs as if the HACs were not 

present. (We refer readers to section II.D. of the FY 2008 IPPS final rule with comment 

period for a discussion of DRG reforms (72 FR 47141).) 

b. HAC Selection 

 Beginning in FY 2007, we have proposed, solicited, and responded to public 

comments and have implemented section 1886(d)(4)(D) of the Act through the IPPS 

annual rulemaking process. For specific policies addressed in each rulemaking cycle, we 
CMS-1518-P 107 

direct readers to the following publications: the FY 2007 IPPS proposed rule 

(71 FR 24100) and final rule (71 FR 48051 through 48053); the FY 2008 IPPS proposed 

rule (72 FR 24716 through 24726) and final rule with comment period (72 FR 47200 

through 47218); the FY 2009 IPPS proposed rule (73 FR 23547) and final rule 

(73 FR 48471); the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24106) and 

final rule (74 FR 43782); and the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 23880) 

and final rule (75 FR 50080). A complete list of the 10 current categories of HACs is 

included in section II.F.2. of this preamble. 

 In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50080 through 50101), we did 

not add any additional HACs or make any changes to policies already established under 

the authority of section 1886(d)(4)(D) of the Act. 

c. Collaborative Process 

 In establishing the HAC payment policy under section 1886(d)(4)(D) of the Act, 

our experts have worked closely with public health and infectious disease professionals 

from across the Department of Health and Human Services, including CDC, the Agency 

for Healthcare Research and Quality (AHRQ), and the Office of Public Health and 

Science (OPHS), to identify the candidate preventable HACs, review comments, and 

select HACs. CMS and CDC also have collaborated on the process for hospitals to 

submit a POA indicator for each diagnosis listed on IPPS hospital Medicare claims and 

on the payment implications of the various POA reporting options. In addition, as 

discussed below, we have used rulemaking and Listening Sessions to obtain public input. 
CMS-1518-P 108 

d. Application of HAC Payment Policy to MS-DRG Classifications 

 As described above, in certain cases, application of the HAC payment policy 

provisions can result in MS-DRG reassignment to a lower paying MS-DRG. The 

following diagram portrays the logic of the HAC payment policy provision as adopted in 

the FY 2008 IPPS final rule with comment period (72 FR 47200) and in the FY 2009 

IPPS final rule (73 FR 48471): 

All Medicare Discharges

Discharges with HAC 

codes as secondary 

diagnoses

Discharges with no

HAC codes as 

secondary diagnoses

Discharges with HAC 

codes present on 

admission (POA)

Discharges with HAC 

codes not present on 

admission (POA)

Discharges where MSDRG is re-assignedDischarges where MSDRG does not change

MS-DRG splits into 2 severity 

levels and HAC does not affect 

severity

MS-DRG does not split by 

severity

CC Exclusion 

List

MS-DRG

logic 

Other CCs/MCCs 

prevent reassignment

e. Public Input Regarding Selected and Potential Candidate HACs 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50080 through 50101), we did 

not add or remove categories of HACs, nor did we make any changes to previously 

established policies. However, we continue to encourage public dialogue about 

refinement of the HAC list. 

Given the timeliness of the HAC discussion, particularly when considered within 

the context of recent legislative health care reform initiatives, we remain eager to engage 

in an ongoing public dialogue about the various aspects of this policy. We plan to 
CMS-1518-P 109 

continue to include updates and findings from the RTI evaluation on CMS’ HospitalAcquired Conditions and Present on Admission Indicator Web site available at: 

http://www.cms.hhs.gov/HospitalAcqCond/. 

f. POA Indicator Reporting 

Collection of POA indicator data is necessary to identify which conditions were 

acquired during hospitalization for the HAC payment provision as well as for broader 

public health uses of Medicare data. In the FY 2011 IPPS/LTCH PPS proposed rule, we 

listed the instructions and change requests that were issued to IPPS hospitals and also to 

non-IPPS hospitals regarding the submission of POA indicator data for all diagnosis 

codes on Medicare claims and the processing of non-PPS claims (75 FR 23381) We also 

indicated that specific instructions on how to select the correct POA indicator for each 

diagnosis code were included in the ICD-9-CM Official Guidelines for Coding and 

Reporting, available on the CDC Web site at: 

http://www.cdc.gov/nchs/data/icd9/icdguide10.pdf. We reiterate that additional 

information regarding POA indicator reporting and application of the POA reporting 

options is available on the CMS Web site at: http://www.cms.gov/HospitalAcqCond/. 

Historically, we have not provided coding advice. Rather, we collaborate with the 

American Hospital Association (AHA) through the Coding Clinic for ICD-9-CM. We 

will continue to collaborate with the AHA to promote the Coding Clinic for ICD-9-CM

as the source for coding advice about the POA indicator. 

As discussed in previous IPPS proposed and final rules, there are five POA 

indicator reporting options, as defined by the ICD-9-CM Official Guidelines for Coding 

and Reporting: 

Indicator Descriptor 

Y Indicates that the condition was present on admission. 
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W Affirms that the hospital has determined that, based on data and clinical 

judgment, it is not possible to document when the onset of the condition 

occurred. 

N Indicates that the condition was not present on admission. 

U Indicates that the documentation is insufficient to determine if the 

condition was present at the time of admission. 

1 Signifies exemption from POA reporting. CMS established this code as a 

workaround to blank reporting on the electronic 4010A1. A list of 

exempt ICD-9-CM diagnosis codes is available in the ICD-9-CM Official 

Guidelines for Coding and Reporting. 

 In the FY 2009 IPPS final rule (73 FR 48486 through 48487), we adopted final 

payment policies to: (1) pay the CC/MCC MS-DRGs for those HACs coded with “Y” 

and “W” indicators; and (2) not pay the CC/MCC MS-DRGs for those HACs coded with 

“N” and “U” indicators. 

 Beginning on or after January 1, 2011, hospitals are required to begin reporting 

POA indicators using the 5010 electronic transmittal standards format. The 5010 format 

removes the need to report a POA indicator of “1” for codes that are exempt from POA 

reporting. However, for claims that continue to be submitted using the 4010 electronic 

transmittal standards format, the POA indicator of “1” is still necessary because of 

reporting restrictions from the use of the 4010 electronic transmittal standards format. 

Hospitals that began reporting with the 5010 format on and after January 1, 2011, 

can no longer report a POA indicator of “1” for POA exempt codes. The POA field 

should instead be left blank for codes exempt from POA reporting. We have issued CMS 

instructions on this reporting change as a One-Time Notification, Pub. No. 100-20, 

Transmittal No. 756, Change Request 7024, effective on August 13, 2010. These 

instructions, entitled 5010 Implementation-Changes to Present on Admission (POA) 

Indicator “1” and the K3 Segment, can be located at the following link on the CMS Web 

site: http://www.cms.gov/manuals/downloads/Pub100_20.pdf. 
CMS-1518-P 111 

We are continuing our efforts to clarify instructions regarding use of the POA 

indicator. As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50088), we 

received public comments in response to the FY 2011 IPPS/LTCH PPS proposed rule 

that expressed concern about the accuracy of reporting of POA indicators for HACs 

related to intracranial injury with loss of consciousness. The codes for loss of 

consciousness are listed in the Falls and Trauma HAC category, within the “Intracranial 

Injury” subcategory. Because loss of consciousness is a component of intracranial 

injuries rather than a separate condition, we agreed that the POA guidelines that 

instructed coders to assign an “N” indicator if any part of the combination code was not 

present on admission did not apply to the loss of consciousness codes. As a member of 

the Editorial Advisory Board for the Coding Clinic for ICD-9-CM, we worked with the 

American Hospital Association (AHA), American Health Information Management 

Association (AHIMA), and the Centers for Disease Control and Prevention (CDC) to 

provide additional clarification on how these conditions should be reported. Additional 

guidance on how these cases should be reported can be found in AHA's Coding Clinic for 

ICD-9-CM, 2nd Quarter 2010, “Frequently Asked POA Questions” section. That 

publication clarified the POA reporting for patients in whom a single code captures the 

fact that the patient was admitted as a result of a head injury and then subsequently lost 

consciousness after the admission. For these cases, we clarified that the POA indicator 

assigned should be “Y,” indicating that the head injury and resulting loss of 

consciousness occurred prior to (and was present on) admission. 

 We expect that this clarification will lead to greater consistency and accuracy in 

POA indicator reporting for these conditions. We look forward to continuing our efforts 

as part of the AHA's Editorial Advisory Board for Coding Clinic for ICD-9-CM to 

provide guidance on accuracy of coding and the reporting of POA indicators. Hospitals 
CMS-1518-P 112 

look to this publication to provide detailed guidance on ICD-9-CM coding and POA 

reporting. We encourage hospitals to send any other questions about ICD-9-CM codes or 

POA indicator selection to the AHA so that the Editorial Advisory Board can continue its 

role of providing instruction on the accurate selection and reporting of both ICD-9-CM 

codes and POA indicators. 

2. Proposed Additions and Revisions to the HAC Policy for FY 2012 

a. Contrast-Induced Acute Kidney Injury 

 We discuss below our analysis for a proposed new condition as a possible 

candidate for selection for FY 2012 under section 1886(d)(4)(D) of the Act. As 

described in more detail in section II.F.1.a. of this preamble, each HAC must be: (1) high 

cost, high volume, or both; (2) assigned to a higher paying MS-DRG when present as a 

secondary diagnosis (that is, conditions under the MS-DRG system that are CCs or 

MCCs); and (3) could reasonably have been prevented through the application of 

evidence-based guidelines. We also discuss other considerations relating to the selection 

of a HAC, including any administrative or operational issues associated with a proposed 

condition. For example, the condition may only be able to be identified by multiple 

codes, thereby requiring the development of special GROUPER logic to also exclude 

similar or related ICD-9-CM codes from being classified as a CC or an MCC. Similarly, 

a condition acquired during a hospital stay may arise from another condition that the 

patient had prior to admission, making it difficult to determine whether the condition was 

reasonably preventable. We invite public comment on clinical, coding, and prevention 

issues on our proposal to add contrast-induced acute kidney injury as a condition subject 

to the HAC payment provision for FY 2012 (for discharges occurring on or after 

October 1, 2011). 

 Contrast-induced acute kidney injury is a significant complication of the use of 

iodinated contrast media and accounts for a large number of cases of hospital-acquired 
CMS-1518-P 113 

acute kidney injury cases. A published study has shown that renal failure associated with 

contrast administration is correlated with up to 11 percent of cases of renal failure that 

occur in hospitals (Nash, et al: American. Journal on. Kidney Disease, 2002, Vol. 39, 

pp. 930-936). Patients who experience acute kidney injury have an increased risk of 

inhospital mortality even after adjustments for disease comorbidities (McCullough, J.: 

American College of Cardiology, 2008, pp. 1419 through 1428). Data suggest that the 

risk for mortality extends beyond the period of hospitalization, resulting in 1-year and 5-

year mortality rates significantly higher than those patients who have not developed acute 

kidney injury. In addition, contrast-induced acute kidney injury is associated with an 

increased incidence of myocardial infarction, bleeding requiring transfusion, and 

prolonged hospital stays (McCullough, J.: American Journal of Medicine, 1997, Vol.103, 

pp 368 through 375). We note that “acute kidney injury” is a new terminology endorsed 

by the National Kidney Foundation to replace “acute renal failure.” 

 There is not a unique code that identifies kidney injury. However, kidney injury 

can be identified as a subset of discharges with ICD-9-CM diagnosis code 584.9 (Acute 

kidney failure, unspecified). Our clinical advisors believe that diagnosis code 584.9, in 

combination with the associated procedure codes below, can accurately identify contrastinduced acute kidney injury: 

● 88.40 (Arteriography using contrast material, unspecified site) 

● 88.41 (Arteriography of cerebral arteries) 

● 88.42 (Aortography) 

● 88.43 (Arteriography of pulmonary arteries) 
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● 88.44 (Arteriography of other intrathoracic vessels) 

● 88.45 (Arteriography of renal arteries) 

● 88.46 (Arteriography of placenta) 

● 88.47 (Arteriography of other intra-abdominal arteries) 

● 88.48 (Arteriography of femoral and other lower extremity arteries) 

● 88.49 (Arteriography of other specified sites) 

● 88.50 (Angiocardiography, not otherwise specified) 

● 88.51 (Angiocardiography of venae cavae) 

● 88.52 (Angiocardiography of right heart structures) 

● 88.53 (Angiocardiography of left heart structures) 

● 88.54 (Combined right and left heart angiocardiography) 

● 88.55 (Coronary arteriography using a single catheter) 

● 88.56 (Coronary arteriography using two catheters) 

● 88.57 (Other and unspecified coronary arteriography) 

● 88.58 (Negative-contrast cardiac roentgenography) 

● 88.59 (Intra-operative coronary fluorescence vascular angiography) 

● 88.60 (Phlebography using contrast material, unspecified site) 

● 88.61 (Phlebography of veins of head and neck using contrast material) 

● 88.62 (Phlebography of pulmonary veins using contrast material) 

● 88.63 (Phlebography of other intrathoracic veins using contrast material) 

● 88.64 (Phlebography of the portal venous system using contrast material) 

● 88.65 (Phlebography of other intra-abdominal veins using contrast material) 
CMS-1518-P 115 

● 88.66 (Phlebography of femoral and other lower extremity veins using contrast 

material) 

● 88.67 (Phlebography of other specified sites using contrast material) 

● 87.71 (C.A.T. of kidney) 

● 87.72 (Other nephrotomogram) 

● 87.73 (Intravenous pyelogram) 

● 87.74 (Retrograde pyelogram) 

● 87.75 (Percutaneous pyelogram) 

We are proposing to identify contrast-induced acute kidney injury with diagnosis 

code 584.9 in combination with one or more of the above associated procedure codes. 

We also considered identifying contrast-induced acute kidney injury through the 

use of external injury codes, or E-codes. Code E947.8 (Other drugs and medicinal 

substances) has an inclusion term “Contrast media used for diagnostic x-ray procedures” 

to identify the use of contrast. However, we note that we do not currently require the 

reporting of E-codes for the HAC payment provisions under the IPPS. Therefore, we 

would be unable to rely on the identification of contrast-induced acute kidney injury 

through E-codes on Medicare IPPS HAC claims. 

 Section 1886(d)(4)(D) of the Act requires that a HAC be a condition that is “high 

cost, high volume, or both.” In FY 2009, there were 38,324 inpatient discharges coded 

with acute renal failure as specified by ICD-9-CM diagnosis code 584.9 reported as not 

present on admission (POA status = N ) when reported with one of the above procedure 

codes submitted through Medicare claims. The cases had an average charge of $29,122 
CMS-1518-P 116 

for the entire hospital stay. Studies suggest the additional average cost per day for a 

patient who has acquired contrast-induced acute kidney injury is $2,654. Other data 

report patients stays increases by 3.75 days once they have acquired the diagnosis 

(Subramanian, et al.: Journal of Medical Economics, 2007, Vol. 10, pp. 119 through 

134). 

 There are widely recognized guidelines for the prevention of acute kidney injury 

that address the prevention of contrast-induced acute kidney injury, and we believe the 

condition is reasonably preventable. One of these guidelines can be found at: 

http://www.renal.org/Clinical/GuidelineSection/AcuteKidneyInjury.aspx. 

 The condition of contrast-induced acute kidney injury as specified in our proposal 

is a CC under the MS DRGs. 

 We have not identified any additional administrative or operational difficulties 

with proposing this condition as a HAC. We invite public comment on whether 

contrast-induced acute kidney injury meets the requirements set forth under section 

1886(d)(4)(D) of the Act, as well as other coding and prevention issues associated with 

our proposal to add this injury as a condition subject to the HAC payment provision for 

FY 2012 (for discharges occurring on or after October 1, 2011). We are particularly 

interested in receiving comments on the degree to which contrast-induced acute kidney 

injury is reasonably preventable through the application of evidence-based guidelines. 

b. New Diagnosis Codes Proposed to be Added to Existing HACs 

As changes to diagnosis codes and new diagnosis codes are proposed and 

finalized for the list of CCs and MCCs, we modify the list of selected HACs to reflect 
CMS-1518-P 117 

these changes. Included in Table 6A, which is listed in section VI. of the Addendum to 

this proposed rule and available via the Internet, are five new ICD-9-CM diagnosis codes 

that we are proposing to add to three of the current HAC categories. We are proposing to 

add two new codes for the Falls and Trauma HAC category, two new codes for the 

Surgical Site Infection (SSI) Following Certain Bariatric Procedures HAC category, and 

one new code for the Deep Vein Thrombosis and Pulmonary Embolism (DVT/PE) 

Following Certain Orthopedic Procedures HAC category. The two new diagnosis codes 

that we are proposing to add to the Falls and Trauma HAC category are code 808.44 

(Multiple closed pelvic fractures without disruption of pelvic circle) and code 808.54 

(Multiple open pelvic fractures without disruption of pelvic circle). These codes fall 

within the range of the fracture code subcategory (800 through 829). The two new 

diagnosis codes that we are proposing to add to the Surgical Site Infection (SSI) 

Following Certain Bariatric Procedures HAC category are code 539.01 (Infection due to 

gastric band procedure) and code 539.81 (Infection due to other bariatric procedure). We 

believe these diagnosis codes are appropriate for inclusion in the existing category when 

reported as a secondary diagnosis with the specified principal diagnosis code of morbid 

obesity (code 278.01) and one of the designated bariatric procedure codes (code 44.38, 

44.39, or 44.95). Lastly, the one new diagnosis code that we are proposing to add to the 

Deep Vein Thrombosis and Pulmonary Embolism (DVT/PE) Following Certain 

Orthopedic Procedures HAC category is code 415.13 (Saddle embolus of pulmonary 

artery). Diagnosis code 415.13 would be applicable when reported along with one of the 

following procedures codes describing certain orthopedic procedures: 00.85 through 
CMS-1518-P 118 

00.87, 81.51, 81.52, or 81.54. Shown in the table below are these five new diagnosis 

codes with their corresponding descriptions and their proposed CC/MCC designations. 

ICD-9-CM 

Code 

Code Descriptor Proposed 

CC/MCC 

Designation 

539.01 Infection due to gastric band procedure CC

539.81 Infection due to other bariatric procedure CC

415.13 Saddle embolus of pulmonary artery MCC

808.44 Multiple closed pelvic fractures without disruption of pelvic circle CC 

808.54 Multiple open pelvic fractures without disruption of pelvic circle MCC 

We are inviting public comments on the proposed adoption of theses five new 

ICD-9-CM diagnosis codes as CC/MCCs that are listed above, which, if finalized, would 

be added to the current Falls and Trauma HAC category, Surgical Site Infection (SSI) 

Following Certain Bariatric Procedures HAC category and Deep Vein Thrombosis and 

Pulmonary Embolism (DVT/PE) Following Certain Orthopedic Procedures HAC 

category and would be subject to the HAC payment provision for FY 2012. 

c. Revision to HAC Subcategory Title 

After publication of the FY 2011 IPPS/LTCH PPS final rule, we received a 

comment stating that the subcategory title “Electric Shock” that is included in the Falls 

and Trauma HAC category was misleading. The commenter stated that this subcategory 

title did not accurately describe the CC/MCC ICD-9-CM diagnoses codes (991 through 

994) contained within this subcategory. The commenter requested that CMS develop a 

new title that would more accurately describe this group of codes. 

 We agree with the commenter that the HAC subcategory title “Electric Shock” is 

potentially misleading because the codes included within these ranges contain a variety of 

injuries, including the following: 
CMS-1518-P 119 

● Category 991 (Effects of Reduced Temperature) 

● Category 992 (Effects of Heat and Light) 

● Category 993 (Effects of Air Pressure) 

● Category 994 (Effects of Other External Causes) 

 We are proposing to change the title of this HAC subcategory from “Electric 

Shock” to “Other Injuries” because it includes a variety of injury codes. The subcategory 

will continue to include the codes within the 991-994 code ranges appearing on the 

CC/MCC list. We are proposing no changes to the list of codes in this subcategory; we 

are simply proposing to rename the subcategory title. We invite public comments on this 

proposed title change to the HAC subcategory from “Electric Shock” to “Other Injuries” 

for FY 2012.

d. Conclusion 

The following table lists the current HAC categories and the ICD-9-CM codes 

that identify the conditions and have been finalized through FY 2011. For FY 2012, we 

are proposing that these conditions continue to be subject to the HAC payment provision, 

along with the creation of a new HAC category for Contrast-Induced Acute Kidney 

Injury as discussed in section II.F.2.a. of this preamble. In addition, we are proposing to 

add five new ICD-9-CM diagnosis codes and to revise the title of the “Electric Shock” 

subcategory in the Falls and Trauma HAC category. 

HAC 

CC/MCC 

(ICD-9-CM Code) 

Foreign Object Retained After Surgery 998.4 (CC)

998.7 (CC)

Air Embolism 999.1 (MCC)
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Blood Incompatibility 999.60 (CC)

999.61 (CC)

999.62 (CC)

999.63 (CC)

999.69 (CC)

Pressure Ulcer Stages III & IV 707.23 (MCC)

707.24 (MCC)

Falls and Trauma: 

 - Fracture 

 - Dislocation 

 - Intracranial Injury 

 - Crushing Injury 

 - Burn 

 - Electric Shock 

Codes within these ranges

on the CC/MCC list:

800-829

830-839

850-854

925-929

940-949

991-994

Catheter-Associated Urinary Tract Infection (UTI) 996.64 (CC)

Also excludes the following 

from acting as a CC/MCC:

112.2 (CC)

590.10 (CC)

590.11 (MCC)

590.2 (MCC)

590.3 (CC)

590.80 (CC)

590.81 (CC)

595.0 (CC)

597.0 (CC)

599.0 (CC)

Vascular Catheter-Associated Infection 999.31 (CC)

Manifestations of Poor Glycemic Control 250.10-250.13 (MCC)

250.20-250.23 (MCC)

251.0 (CC)

249.10-249.11 (MCC)

249.20-249.21 (MCC)

Surgical Site Infections

 Surgical Site Infection, Mediastinitis, Following 

Coronary Artery Bypass Graft (CABG) 

519.2 (MCC)

And one of the following 

procedure codes:

36.10–36.19
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 Surgical Site Infection Following Certain Orthopedic 

Procedures 

996.67 (CC)

998.59 (CC)

And one of the following 

procedure codes: 81.01-

81.08, 81.23-81.24, 81.31-

81.38, 81.83, 81.85

 Surgical Site Infection Following Bariatric Surgery for 

Obesity 

Principal Diagnosis – 278.01

998.59 (CC)

And one of the following 

procedure codes: 44.38, 

44.39, or 44.95

Deep Vein Thrombosis and Pulmonary Embolism 

Following Certain Orthopedic Procedures 

415.11 (MCC)

415.19 (MCC)

453.40-453.42 (CC)

And one of the following 

procedure codes: 00.85-

00.87, 81.51-81.52, or 

81.54 

We refer readers to section II.F.6. of the FY 2008 IPPS final rule with comment 

period (72 FR 47202 through 47218) and to section II.F.7. of the FY 2009 IPPS final rule 

(73 FR 48474 through 48486) for detailed analyses supporting the selection of each of the 

HACs selected through FY 2011. 

3. RTI Program Evaluation Summary 

a. Background 

On September 30, 2009, a contract was awarded to Research Triangle 

Incorporated (RTI) to evaluate the impact of the Hospital-Acquired Condition-Present on 

Admission (HAC-POA) provisions on the changes in the incidence of selected 

conditions, effects on Medicare payments, impacts on coding accuracy, unintended 

consequences, and infection and event rates. This is an intra-agency project with funding 

and technical support coming from CMS, OPHS, AHRQ, and CDC. The evaluation will 

also examine the implementation of the program and evaluate additional conditions for 

future selection. 
CMS-1518-P 122 

RTI’s evaluation of the HAC-POA provisions is divided into several parts. In the 

FY 2011 IPPS/LTCH PPS final rule (50085 through 50101), we summarized the analyses 

by RTI that had been completed at that time. These RTI analyses of POA indicator 

reporting, frequencies and net savings associated with current HACs, and frequencies of 

previously considered candidate HACs reflected MedPAR claims from October 2008 

through September 2009.

b. FY 2009 Data Analysis 

As we describe above, we have provided instructions to IPPS hospitals and 

non-IPPS hospitals regarding the submission of POA indicator data for all diagnosis 

codes on Medicare claims and the processing of non-PPS claims (75 FR 23381) and note 

that specific instructions on how to select the correct POA indicator for each diagnosis 

code were included in the ICD-9-CM Official Guidelines for Coding and Reporting, 

available on the CDC Web site at: http://www.cdc.gov/nchs/data/icd9/icdguide10.pdf. 

After publication of the FY 2011 IPPS/LTCH PPS final rule, we identified a discrepancy 

between the claims data that hospitals submitted and the CMS data file used to calculate 

the HAC measures. Specifically, this error led to incorrect HAC assignments in cases 

where a hospital reported an external cause of injury (E-code). Since then, we have 

corrected this error in the data file. 

As a result, the RTI analysis of the HAC-POA program that was conducted using 

FY 2009 claims data will be updated using the corrected data file. We do not expect the 

corrected data to have a material impact on our previous findings for FY 2009. Revised 

data tables will be made publicly available on the CMS Web site at 

http://www.cms.gov/HospitalAcqCond/01_Overview.asp and the RTI Web site at 

http://www.rti.org/reports/cms/ soon after publication of this proposed rule. 

c. FY 2010 Data Analysis 
CMS-1518-P 123 

RTIs analysis of the FY 2010 MedPAR data file for the HAC-POA program 

evaluation was not fully complete in time for publication in this proposed rule. We will 

provide the results from the study on the CMS Web site at 

http://www.cms.gov/HospitalAcqCond/01_Overview.asp and on the RTI Web site at 

http://www.rti.org/reports/cms/ when available. We anticipate that the examination of 

FY 2010 MedPAR data will be completed soon after publication of this proposed rule. 

We invite public comment on RTI’s analysis of the FY 2010 MedPAR data for the HACPOA program. 

G. Proposed Changes to Specific MS-DRG Classifications

 In this proposed rule, we are inviting public comment on each of the MS-DRG 

classification proposed changes described below, as well as our proposals to maintain 

certain existing MS-DRG classifications, which are also discussed below. In some cases, 

we are proposing changes to the MS-DRG classifications based on our analysis of claims 

data. In other cases, we are proposing to maintain the existing MS-DRG classification 

based on our analysis of claims data. 

1. Pre-Major Diagnostic Categories (Pre-MDCs) 

a. Noninvasive Mechanical Ventilation 

We received a request from the National Association for Medical Direction of 

Respiratory Care (NAMDRC) which suggested that we create a new MS-DRG for 

patients with certain respiratory conditions who receive noninvasive mechanical 

ventilation (NIV). The requestor stated that patients who receive NIV are almost always 

placed within an intensive care unit (ICU) or an emergency department and use the 
CMS-1518-P 124 

resources available in those areas. The requestor recommended that this new MS-DRG 

recognize current practice and allow for appropriate reimbursement for the technical 

complexity and monitoring required for NIV as a form of acute life support. According 

to the requestor, NIV has evolved to become first-line supportive therapy for several 

forms of acute respiratory failure. Lastly, the requestor recommended that the new 

MS-DRG identify NIV usage of approximately 6 to 12 hours to account for the 

“legitimate but very short term use of this therapy.” 

Historically, the concept of mechanical ventilation for critically ill patients 

included establishment of an artificial airway, invasively, through endotracheal intubation 

or a tracheostomy. According to the requestor, a significant portion of these patients can 

now be treated through noninvasive mechanical ventilation with the use of a face or nasal 

mask. In the ICD-9-CM classification system, NIV is described by procedure code 93.90 

(Noninvasive mechanical ventilation), while invasive mechanical ventilation is described 

by procedure codes 96.70 (Continuous invasive mechanical ventilation of unspecified 

duration), 96.71 (Continuous invasive mechanical ventilation for less than 96 consecutive 

hours), and 96.72 (Continuous invasive mechanical ventilation for 96 consecutive hours 

or more). The requestor submitted external data to illustrate trends in NIV use over the 

past decade. These data were derived from a survey conducted during 2002-2003 of 

several hospitals located in Massachusetts and Rhode Island. The requestor believed that 

these data indicate patients with exacerbation of chronic obstructive pulmonary disease 

(COPD), acute pulmonary edema, or worsening congestive heart failure are successfully 

managed with NIV. 
CMS-1518-P 125 

We analyzed FY 2010 MedPAR claims data that are representative of the 

respiratory conditions the requestor identified when reported with NIV. We found 

14 MS-DRGs reporting procedure code 93.90 using the above specifications. The 

MS-DRGs are as follows: 

Pre-MDC MS-DRGs: 

● MS-DRG 003 (ECMO or Tracheostomy with Mechanical Ventilation 96+ Hrs 

or PDX Except Face, Mouth & Neck with Major O.R.) 

● MS-DRG 004 (Tracheostomy with Mechanical Ventilation 96+ Hrs or PDX 

Except Face, Mouth & Neck without Major O.R.) 

MS-DRGs: 

● MS-DRG 189 (Pulmonary Edema & Respiratory Failure) 

● MS-DRG 190 (Chronic Obstructive Pulmonary Disease with MCC) 

● MS-DRG 191 (Chronic Obstructive Pulmonary Disease with CC) 

● MS-DRG 192 (Chronic Obstructive Pulmonary Disease without CC/MCC) 

● MS-DRG 204 (Respiratory Signs & Symptoms) 

● MS-DRG 207 (Respiratory System Diagnosis with Ventilator Support 96+ 

Hours) 

● MS-DRG 208 (Respiratory System Diagnosis with Ventilator Support <96 

Hours) 

● MS-DRG 222 (Cardiac Defibrillator Implant with Cardiac Catheterization with 

AMI/HF/Shock with MCC) 
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● MS-DRG 223 (Cardiac Defibrillator Implant with Cardiac Catheterization with 

AMI/HF/Shock without MCC) 

● MS-DRG 291 (Heart Failure & Shock with MCC) 

● MS-DRG 292 (Heart Failure & Shock with CC) 

● MS-DRG 293 (Heart Failure & Shock without CC/MCC) 

 As shown in the list above and in the chart below, the MS-DRGs identified also 

include those that describe invasive mechanical ventilation. The ICD-9-CM coding 

convention instructs the reporting of both types of mechanical ventilation when patients 

are admitted on noninvasive mechanical ventilation that subsequently requires invasive 

mechanical ventilation therapy. 

The data demonstrate that, in certain MS-DRGs, for example, MS-DRGs 003, 004, and 

222 that the cases with NIV primarily have shorter lengths of stay and lower average 

costs compared to all the cases in those MS-DRGs. Alternatively, the data for MS-DRGs 

189, 190, 191, and 192 demonstrate that the cases with NIV have an increased length of 

stay and higher average costs, but a relatively low volume compared to all the cases in 

those MS-DRGs. Combining the current surgical and medical MS-DRGs into a single, 

new MS-DRG would include noninvasive mechanical ventilation cases with a wide range 

of costs for several indications with varying levels of severity. The average costs for 

these cases range from a low of $5,794 in MS-DRG 293 to a high of $95,940 in 

MS-DRG 003. We believe the cases are more appropriately assigned and reimbursed in 

the MS-DRGs to which they are currently assigned. 
CMS-1518-P 127 

MS-DRG 

Number 

of Cases

Average 

Length 

of Stay 

Average 

Costs 

MS-DRG 003 – All cases 18,223 34.7 $103,492

MS-DRG 003 - Cases with code 93.90 without code 

96.70, 96.71, or 96.72 58 33.3 $95,940

MS-DRG 004 – All cases 19,599 25.79 $63,022

MS-DRG 004 – Cases with code 93.90 without code 

96.70, 96.71, or 96.72 170 25.43 $58,500

MS-DRG 189 – All cases 87,668 5.36 $8,317

MS-DRG 189 – Cases with code 93.90 without code 

96.70, 96.71, or 96.72 22,023 6.07 $10,383

MS-DRG 190 – All cases 130,731 5.30 $7,140

MS-DRG 190 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 8,450 6.78 $11,207

MS-DRG 191 – All cases 135,851 4.49 $6,236

MS-DRG 191 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 4,563 5.41 $8,819

MS-DRG 192 – All cases 115,153 3.52 $4,621

MS-DRG 192 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 2,334 4.25 $6,803

MS-DRG 204 – All cases 21,049 2.61 $4,310

MS-DRG 204 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 265 4.17 $7,591

MS-DRG 207 – All cases 32,752 14.61 $32,897

MS-DRG 207 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 0 0 0

MS-DRG 208 – All cases 67,724 6.98 $14,742

MS-DRG 208 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 0 0 0

MS-DRG 222 – All cases 2,279 11.98 $57,478

MS-DRG 222 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 52 11.79 $55,011

MS-DRG 223 – All cases 3,230 6.17 $41,754

MS-DRG 223 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 19 11.05 $47,064

MS-DRG 291 – All cases 170,399 6.05 $9,585

MS-DRG 291 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 14,274 6.95 $12,320

MS-DRG 292 – All cases 220,031 4.72 $6,584

MS-DRG 292 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 5,171 5.58 $9,180

MS-DRG 293 – All cases 98,134 3.20 $4,410
CMS-1518-P 128 

MS-DRG 

Number 

of Cases

Average 

Length 

of Stay 

Average 

Costs 

MS-DRG 293 – Cases with code 93.90 without code 

96.70, 96.71 or 96.72 1,381 3.43 $5,794

As mentioned in the requestor’s comments, and our clinical advisors agree, NIV 

encompasses a broad range of interventions and utilizes periods of time that range from a 

few hours to a few days of continuous chronic use. Resource requirements are vastly 

different for the various intended indications. For example, as also noted by the 

requestor, respiratory failure can have many forms. Our clinical advisors provided three 

subsets of patients as an example: those that are given oxygen support, those that are 

given pressure (rate) support, and those that are intubated. There is overlap between the 

three subsets in that a patient may require one, two, or all three types of therapy and there 

are multiple options for any given patient. Our clinical advisors stated that these various 

subsets of patients can require significantly different resources. Lastly, respiratory failure 

reflects the severity of the diagnosis (it is a complication) while NIV is a therapeutic 

option. Unlike a major surgical intervention where the intervention creates morbidity, 

NIV merely reflects the severity of the underlying respiratory failure. 

The requestor further noted in its comments that a significant number of patients 

who receive NIV fail this therapy and must be intubated and subsequently placed on a 

ventilator. However, those patients who require both noninvasive and invasive 

mechanical ventilation are already accounted for in the invasive mechanical ventilation 

MS-DRGs. Similar to patients with respiratory failure, patients with heart failure and 

shock have a comparable severity of illness where each condition reflects the severity of 
CMS-1518-P 129 

the diagnosis (it is a complication). Therefore, the cost is already reflected in the high 

resource expenditure estimates for MS-DRGs 222, 223, 291, 292, and 293, as are all 

other severity-correlated resource costs. 

In conclusion, we believe that the data do not support the creation of a single 

MS-DRG to identify NIV cases. As stated previously, the average costs for the NIV 

cases range from a low of $5,794 in MS-DRG 293 to a high of $95,940 in MS-DRG 003. 

If created, this single MS-DRG would include patients with a wide range in average 

costs. We believe the cases are more appropriately captured in their current MS-DRGs. 

In addition to the clinical points raised by our clinical advisors and outlined above, the 

volume and length of stay data for cases where NIV was reported with the specified 

respiratory conditions further support their present MS-DRG assignments. Therefore, we 

are not proposing to create a new MS-DRG for patients receiving NIV. We invite public 

comment on our proposal not to create a new MS-DRG for patients receiving NIV for 

FY 2012. 

b. Debridement with Mechanical Ventilation Greater than 96 Hours with Major 

Operating Room (O.R.) Procedure 

 We received a comment concerning the use of excisional debridement in cases 

with complications that lead to the need for extended mechanical ventilation. The 

commenter stated that patients undergoing procedures such as excisional debridement 

may also develop extensive complications such as respiratory failure and sepsis. The 

commenter indicated that these patients tend to use significant resources. The commenter 

stated that these cases are currently assigned to MS-DRG 207 (Respiratory System 
CMS-1518-P 130 

Diagnosis with Ventilator Support 96+ Hours) or MS-DRG 870 (Septicemia with or 

Severe Sepsis with Mechanical Ventilation 96+ Hours). The commenter expressed a 

concern that the operating room (OR) procedure of the excisional debridement was not 

fully recognized through either of these two medical MS-DRGs. The commenter 

requested that a new MS-DRG be created that would include mechanical ventilation of 

greater than 96 hours with the presence of an additional major OR procedure. 

 We agree that patients with long-term mechanical ventilation greater than 

96 hours and a major OR procedure utilize extensive resources. However, we point out 

that these patient cases are not currently assigned to MS-DRG 207 or MS-DRG 870 as 

the commenter stated. Many of these long-term mechanical ventilation patient cases are 

instead assigned to MS-DRG 003 (ECMO or Tracheostomy with Mechanical Ventilation 

96+ Hours or PDX, Excluding Face, Mouth & Neck with Major Operating Room 

Procedure). Cases that require mechanical ventilation for greater than 96 hours, that have 

a tracheostomy performed, and that have a procedure on the major O.R. list (including 

excisional debridement) are assigned to MS-DRG 003. We specifically created 

MS-DRG 003 to capture these complicated patients on long-term mechanical ventilation 

who also have a major O.R. procedure. Therefore, we are not proposing to create a 

second MS-DRG to capture these patients at this time. We welcome public comments on 

our proposal not to create a new MS-DRG for these patients for FY 2012. 

c. Autologous Bone Marrow Transplant 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50101), effective 

October 1, 2011, we deleted MS-DRG 009 (Bone Marrow Transplant) and created two 
CMS-1518-P 131 

new MS-DRGs: MS-DRG 014 (Allogeneic Bone Marrow Transplant) and MS-DRG 015 

(Autologous Bone Marrow Transplant). We created new MS-DRGs 014 and 015 

because of differences in costs associated with these procedures. During the comment 

period for the FY 2011 IPPS/LTCH PPS proposed rule, two commenters who supported 

the proposed reclassification of the bone marrow transplant MS-DRGs requested further 

refinement to account for severity of illness. At that time, we did not subdivide MS-DRG 

014 and MS-DRG 015 based on severity of illness because they did not meet our criteria 

for subdivision (75 FR 50102). 

As we outlined in our FY 2008 IPPS/LTCH PPS final rule with comment period 

(72 FR 47169), in designating an MS–DRG as one that would be subdivided into 

subgroups based on the presence of a CC or an MCC, we developed a set of criteria to 

facilitate our decision-making process. The original criteria were based on average 

charges; we now use average costs (FY 2007 IPPS final rule, 71 FR 47882). In order to 

warrant creation of a CC or an MCC subgroup within a base MS–DRG, the subgroup 

must meet all of the following five criteria: 

● A reduction in variance of cost of at least 3 percent. 

● At least 5 percent of the patients in the MS–DRG fall within the CC or MCC 

subgroup. 

● At least 500 cases are in the CC or MCC subgroup. 

● There is at least a 20-percent difference in average cost between subgroups. 

● There is a $2,000 difference in average cost between subgroups. 
CMS-1518-P 132 

We examined FY 2010 MedPAR claims data for these newly created MS-DRGs, 

and based on these criteria, we identified MS-DRG 015 as a possible MS-DRG that 

would require further subdivision. MS-DRG 014 was not identified, as this MS-DRG did 

not meet the criteria stated above for possible subdivision. Autologous bone marrow 

transplantation utilizes the patient’s own bone marrow or stem cells in the treatment of 

certain cancers and bone marrow diseases. These procedures restore stem cells that have 

been destroyed either by chemotherapy and/or radiation treatment. 

In our analysis, we found 1,338 total cases assigned to MS-DRG 015 with 

average costs of approximately $38,608 and an average length of stay of approximately 

18.8 days. There were 1,092 cases that had a secondary diagnosis code reported on the 

claim that was designated as a CC or an MCC with average costs of approximately 

$40,974 and an average length of stay of approximately 19.7 days. There were 246 cases 

without a secondary diagnosis code reported on the claim that had a CC or an MCC 

designation with average cost of approximately $28,105 and an average length of stay of 

approximately 14.6 days. The following table illustrates our findings: 

MS-DRG Number 

of Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 015 - All cases 1,338 18.8 $38,608

MS-DRG 015 - Cases with MCC/CC 1,092 19.7 $40,974

MS-DRG 015 - Cases without MCC/CC 246 14.6 $28,105

We found that the cases reported with a secondary diagnosis code of a CC or an 

MCC were more costly and had a longer average length of stay than both the overall 

cases assigned to MS-DRG 015 and the cases without a CC or an MCC. The cases 

without a CC or an MCC were less costly and had a shorter average length of stay than 
CMS-1518-P 133 

both the cases with a CC or an MCC and the overall cases assigned to that MS-DRG. 

Based on our analysis, all five criteria for a subgroup division were met, thereby 

supporting a 2-level severity split for MS-DRG 015. Therefore, we are proposing to 

delete MS-DRG 015 and create two new MS-DRGs: 

● Proposed MS-DRG 016 (Autologous Bone Marrow Transplant with 

MCC/CC); and 

● Proposed MS-DRG 017 (Autologous Bone Marrow Transplant without 

MCC/CC). 

We invite public comment on our proposal to delete MS-DRG 015 and create two 

new MS-DRGs 016 and 017 for autologous bone marrow transplant for FY 2012. 

2. MDC 1 (Diseases and Disorders of the Nervous System): Rechargeable Dual Array 

Deep Brain Stimulation System 

We received a public comment in response to the FY 2011 IPPS/LTCH PPS 

proposed rule regarding the MS-DRG assignment for rechargeable dual array deep brain 

neurostimulators. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50128), we 

indicated that we considered this comment outside of the scope of the proposed rule as 

we did not propose any changes for these procedures for FY 2011. However, we are 

addressing this issue in this FY 2012 proposed rule. 

Deep brain stimulation is a surgical treatment that involves the implantation of a 

neurostimulator, used in the treatment of essential tremor, Parkinson’s disease, dystonia, 

and chronic pain. The commenter recommended that CMS assign the combination of 

procedure codes representing rechargeable systems for deep brain stimulation therapy, 
CMS-1518-P 134 

procedure code 02.93 (Implantation or replacement of intracranial neurostimulator 

lead(s)) and procedure code 86.98 (Insertion or replacement of dual array rechargeable 

neurostimulator pulse generator) to MS–DRG 023 (Craniotomy with Major Device 

Implant/Acute Complex CNS PDX with MCC or Chemo Implant) and MS-DRG 024 

(Craniotomy with Major Device Implant/Acute Complex CNS PDX without MCC). 

The commenter stated that this recommendation would allow all full system dual 

array deep brain stimulation cases to be appropriately grouped to the same MS–DRGs. 

Currently, procedure codes 02.93 and 86.98 are assigned to MS–DRG 025 (Craniotomy 

and Endovascular Intracranial Procedures with MCC), MS-DRG 026 (Craniotomy and 

Endovascular Intracranial Procedures with CC), and MS-DRG 027 (Craniotomy and 

Endovascular Intracranial Procedures without CC/MCC), while the procedure codes for 

the nonrechargeable dual array systems, procedure codes 02.93 and 86.95 (Insertion or 

replacement of dual array neurostimulator pulse generator, not specified as rechargeable), 

are already assigned to MS-DRGs 023 and 024. The commenter stated that the 

procedures to implant the rechargeable and nonrechargeable dual array systems are 

similar clinically as well as comparable in resource utilization. 

We analyzed FY 2010 MedPAR data and found a total of 16 full system 

rechargeable dual array deep brain stimulation systems reported with procedure codes 

02.93 and 86.98 assigned to MS-DRGs 025 through 027. We found one case assigned to 

MS-DRG 025 and one case assigned to MS-DRG 026. The majority of the cases, 14, 

were assigned to MS-DRG 027, with average costs of approximately $23,870 and an 

average length of stay of approximately 2.2 days. We found that the deep brain 
CMS-1518-P 135 

stimulation cases assigned to MS-DRG 027 had higher average costs than the overall 

cases assigned to MS-DRG 027 of approximately $14,200. However, the average length 

of stay was shorter for these cases than the overall length of stay for MS-DRG 027 cases 

of approximately 3.7 days. 

We also examined the data for the nonrechargeable dual array systems to assess 

the commenter’s assumption that both the rechargeable and nonrechargeable dual array 

systems are similar in resource use. We found 155 total nonrechargeable dual array 

systems (procedure codes 02.93 and 86.95) assigned to MS-DRGs 023 and 024. There 

were 5 cases assigned to MS-DRG 023, with average costs of approximately $36,159 and 

an average length of stay of approximately 10 days. We found that the majority of the 

cases, 150, were assigned to MS-DRG 024, with average costs of approximately $25,855 

and an average length of stay of approximately 2.2 days. We believe that these data 

support the commenter’s statement that, for the majority of these cases, the resource use 

is similar for both systems. 

For comparison purposes, if we propose the changes that the commenter 

suggested, those deep brain stimulation cases currently assigned to MS-DRG 027 and the 

one case assigned to MS-DRG 026 (with average costs of approximately $27, 836) would 

be reassigned to MS-DRG 024. The average costs of approximately $23,870 of these 

deep brain stimulation cases assigned to MS-DRG 027 are similar to the overall average 

costs of approximately $23,249 for MS-DRG 024. The one case assigned to 

MS-DRG 025 (with average costs of approximately $29,361) would be reassigned to 
CMS-1518-P 136 

MS-DRG 023 (with average costs of approximately $34,168). The following table 

illustrates our findings: 

MS-DRG Number of 

Cases 

Average 

Length of Stay 

Average 

Costs 

MS-DRG 023 - All cases 4,238 11.8 $34,168

MS-DRG 023 - Cases with 

codes 02.93 and 86.95 5 10.0 $36,159

MS-DRG 024 - All cases 1,592 7.6 $23, 249

MS-DRG 024 - Cases with 

codes 02.93 and 86.95 150 2.2 $25,855

MS-DRG 025 - All cases 11,505 11.0 $29,524

MS-DRG 025 - Cases with 

codes 02.93 and 86.98 1 2.0 $29, 361

MS-DRG 026 - All cases 9,782 7.0 $19,125

MS-DRG 026 - Cases with 

codes 02.93 and 86.98 1 3.0 $27,836

MS-DRG 027 - All cases 10,936 3.7 $14,200

MS-DRG 027 - Cases with 

codes 02.93 and 86.98 14 2.2 $23,870

Based on our findings, we believe that the data support reassigning the 

combination of procedure codes representing rechargeable systems for deep brain 

stimulation therapy, code 02.93 and code 86.98, to MS–DRGs 023 and 024. Our clinical 

advisors support this reassignment. Therefore, we are proposing to assign rechargeable 

dual array systems for deep brain stimulation cases identified by reporting both procedure 

codes 02.93 and 86.98 to MS-DRGs 023 and 024 for FY 2012. We invite public 

comment on our proposal to assign these cases to MS-DRG 023 and 024 for FY 2012. 

3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat): Skull Based 

Surgeries 

 We received a request from a commenter recommending that CMS reclassify 

skull-based surgical procedures that are currently assigned to MS-DRGs 135 and 136 
CMS-1518-P 137 

(Sinus and Mastoid Procedures with CC/MCC and without CC/MCC, respectively) and 

reassign them to MS-DRGs 025, 026, and 027 (Craniotomy and Endovascular 

Intracranial Procedures with MCC, with CC, and without CC/MCC, respectively). The 

commenter stated that the current MS-DRG assignment does not reflect the resource 

utilization and technical complexity of these difficult procedures when performed for 

anterior skull base tumors. 

 Skull (or cranial) based surgery is performed for a variety of serious medical 

conditions including esthesioneuroblastomas, which are rare, malignant tumors that arise 

from the epithelium overlying the olfactory bulb; sinonasal melanomas, which are 

malignant melanomas that may develop in the mucosa of the nose and sinuses; and 

sinonasal undifferentiated carcinomas, which are rapidly growing malignant tumors 

arising in the nasal cavity and/or sinuses. These types of conditions are generally 

identified by the following ICD-9-CM diagnosis codes: 

● 160.0 (Malignant neoplasm of nasal cavities) 

● 160.1 (Malignant neoplasm of auditory tube, middle ear, and mastoid air cells) 

● 160.2 (Malignant neoplasm of maxillary sinus) 

● 160.3 (Malignant neoplasm of ethmoidal sinus) 

● 160.4 (Malignant neoplasm of frontal sinus) 

● 160.5 (Malignant neoplasm of sphenoidal sinus) 

● 160.8 (Malignant neoplasm of other accessory sinuses) 

● 160.9 (Malignant neoplasm of accessory sinus, unspecified) 

● 210.7 (Benign neoplasm of nasopharynx) 
CMS-1518-P 138 

● 212.0 (Benign neoplasm of nasal cavities, middle ear, and accessory sinuses) 

According to the commenter, procedure code 22.63 (Ethmoidectomy) describes 

the type of surgery being performed for these patients and is currently assigned to 

MS-DRGs 135 and 136. 

 Using the FY 2010 MedPAR file, we examined data on cases identified by 

procedure code 22.63 when reported with one of the above listed diagnosis codes in 

MS-DRGs 135 and 136. We found a total of 402 cases in MS-DRG 135 with an average 

length of stay of 6.30 days and average costs of $12,869. We found only 23 cases in 

MS-DRG 135 identified by procedure code 22.63 with one of the diagnosis codes listed 

above with an average length of stay of 3.96 days and average costs of $10,510. In 

MS-DRG 136, there were a total of 320 cases with an average length of stay of 2.36 days 

and average costs of $6,683. We found only 27 cases in MS-DRG 136 identified by 

procedure code 22.63 with one of the diagnosis codes listed above with an average length 

of stay of 2.04 days and average costs of $6,844. As shown in the table below, the cases 

reporting procedure code 22.63 in MS-DRGs 135 and 136 have a lower volume, a shorter 

length of stay, and primarily lower average costs compared to all cases in MS-DRGs 135 

and 136. The data demonstrate that these cases are appropriately assigned to their current 

MS-DRG classifications. 

MS-DRG 

Number 

of Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 135 - All cases 402 6.30 $12,869

MS-DRG 135 -Cases with procedure code 22.63 

and diagnosis code 160.0 through 160.9 or 210.7 

or 212.0 23 3.96 $10,510
CMS-1518-P 139 

MS-DRG 

Number 

of Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 136 -All cases 320 2.36 $6,683

MS-DRG 136 - Cases with procedure code 22.63 

and diagnosis code 160.0 through 160.9 or 210.7 

or 212.0 27 2.04 $6,844

 We also analyzed claims data for MS-DRGs 25 through 27. We determined that 

if the cases identified by procedure code 22.63 were to be reassigned to MS-DRGs 25-27, 

they would be significantly overpaid. As shown in the table below, we found that the 

average costs for these MS-DRGs range from $14,200 to $29,524. 

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 025 - All cases 11,505 10.95 $29,524

MS-DRG 026 - All cases 9,782 7.00 $19,125

MS-DRG 027 - All cases 10,936 3.71 $14,200

In summary, the data do not support moving cases with procedure code 22.63 

when reported with one of the previously listed diagnosis codes from MS-DRGs 135 and 

136 to MS-DRGs 25, 26 and 27. We invite public comment on our proposal not to make 

any MS-DRG modifications for these codes for FY 2012. 
CMS-1518-P 140 

4. MDC 5 (Diseases and Disorders of the Circulatory System) 

a. Percutaneous Mitral Valve Repair with Implant 

 Procedure code 35.97 (Percutaneous mitral valve repair with implant) was created 

for use beginning October 1, 2010 (FY 2011) after the concept of a percutaneous valve 

repair was presented and approved at the February 2010 ICD-9-CM Coordination and 

Maintenance Committee Meeting. Procedure code 35.97 was created at that time to 

describe the MitraClipTM device and any other percutaneous mitral valve repair devices 

currently on the market. This procedure code is assigned to the following MS-DRGs: 

231 and 232 (Coronary Bypass with PTCA with MCC and without MCC, respectively); 

246 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent with MCC or 4+ 

Vessels/Stents); 247 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent 

without MCC); 248 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting 

Stent with MCC or 4+ Vessels/Stents); 249 (Percutaneous Cardiovascular Procedure with 

Non-Drug-Eluting Stent without MCC); 250 (Percutaneous Cardiovascular Procedure 

without Coronary Artery Stent or AMI with MCC); and 251 (Percutaneous 

Cardiovascular Procedure without Coronary Artery Stent or AMI without MCC). 

 According to the Food and Drug Administration’s (FDA’s) terms of the clinical 

trial for MitraClipTM, the device is to be implanted in patients without any additional 

surgeries performed. Therefore, based on these terms, we believe that the most likely 

MS-DRG assignments would be MS-DRGs 250 and 251, as described above. However, 

because procedure code 35.97 has only been in use since October 1, 2010, there are no 

claims data in the most recent MedPAR update file with which to evaluate any alternative 
CMS-1518-P 141 

MS-DRG assignments. Therefore, we are not proposing to make any MS-DRG changes 

for procedure code 35.97 for FY 2012. We are proposing to keep procedure code 35.97 

in its current MS-DRG assignments. We invite public comment on this proposal. 

b. Aneurysm Repair Procedure Codes 

 Thoracic aorta defects, such as aneurysm, dissection, or injury, are uncommon but 

serious conditions that may arise from a disease or an accident. Some patients can be 

medically managed but most patients are treated with surgery. Often these defects result 

in death if they are not diagnosed and treated promptly. Currently, there are two 

techniques used for repair of aortic defects; both are O.R. procedures performed in an 

inpatient hospital setting. These two procedures are described by ICD-9-CM procedure 

codes 38.45 (Resection of vessel with replacement, thoracic vessel) and 39.73 

(Endovascular implantation of graft in thoracic aorta). Both procedure codes 38.45 and 

39.73 are currently assigned to MS-DRGs 237 (Major Cardiovascular Procedures with 

MCC or Thoracic Aortic Aneurysm Repair) and 238 (Major Cardiovascular Procedures 

without MCC). 

We received a request that we consider the reassignment of procedure codes 

38.45 and 39.73 within the MS-DRG structure by removing the procedure codes from 

MS-DRGs 237 and 238 and adding them to a more clinically coherent set of MS-DRGs 

reflecting higher resource consumption. The requestors believed that, based on their 

analysis of MedPAR claims data of MS-DRGs 237 and 238, the resource utilization of 

both the endovascular and open repairs of the abdominal and thoracic aortas are higher 

than the overall average resource utilization for the MS-DRGs to which these procedures 
CMS-1518-P 142 

are currently assigned. The requestors also believed that an unusually high number of 

cases probably fall into cost outlier status. 

We reviewed the MedPAR claims data for these two procedure codes. Our 

findings are shown in the following two tables. 

MS-DRG 

Number 

of Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 237 - All cases 20,680 10.03 $34,268

MS-DRG 237 - Cases with procedure code 

39.73 

1,851 7.73 $41,033

MS-DRG 237 - Cases without procedure code 

39.73 18,829 10.26 $33,603

MS-DRG 238 - All cases 35,705 4.08 $20,597

MS-DRG 238 - Cases with procedure code 

39.73 0 0 0

MS-DRG 238 - Cases without procedure code 

39.73 35,705 4.08 $20,597

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 237 - All cases 20,680 10.03 $34,268

MS-DRG 237 - Cases with procedure code 

38.45 

448 13.29 $51,953

MS-DRG 237 - Cases without procedure code 

38.45 20,234 9.96 $33,878

MS-DRG 238 - All cases 35,705 4.08 $20,597

MS-DRG 238 - Cases with procedure code 

38.45 466 7.29 $30,219

MS-DRG 238 - Cases without procedure code 

38.45 35,239 4.03 $20,465

Our findings of the analysis of the cases with procedure code 39.73 showed that 

the average costs are substantially higher than those costs for the cases overall in both 

MS-DRGs 237 and 238. We found that the average length of stay for the 1,851 cases 
CMS-1518-P 143 

identified in MS-DRG 237 is somewhat lower at 7.73 days than the average length of 

stay of 10.26 days in cases not containing procedure code 39.73. 

Our findings of the analysis of the cases with procedure code 38.45 showed that 

both the average costs and the average length of stay are considerably higher than the 

average costs and the average length of stay for those cases without procedure code 

38.45. 

In addition, we reviewed the cases in which both procedure codes 38.45 and 39.73 

were documented during the same admission. As can be seen in the charts below, we 

found 22 cases in which both procedure codes 38.45 and 39.73 were reported. Therefore, 

the sum of the values in the next two charts below will differ from the charts above 

because of the cases containing both procedure codes that have been removed and the 

data have been reworked. 

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 237 - All cases 20,680 10.03 $34,268

MS-DRG 237 - Cases with procedure code 

39.73 and without procedure code 38.45 1,829 7.68 $40,862

MS-DRG 237 - Cases with procedure code 

38.45 and without procedure code 39.73 424 13.36 $51,783

MS-DRG 238 - All cases 35,705 4.08 $20,597

MS-DRG 238 - Cases with procedure code 

39.73 and without procedure code 38.45 

0 0 0

MS-DRG 238 - Cases with procedure code 

38.45 and without procedure code 39.73 466 7.29 $30,219

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 237 - All cases 20,680 10.03 $34,268

MS-DRG 237 - Cases with procedure code 

38.45 and with procedure code 39.73 22 11.86 $55,243
CMS-1518-P 144 

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 237 - Cases without procedure code 

38.45 or procedure code 39.73 18,405 10.19 $33,184

MS-DRG 238 - All cases 35,705 4.08 $20,597

MS-DRG 238 - Cases with procedure code 

38.45 and with procedure code 39.73 0 0 0

MS-DRG 238 - Cases without procedure code 

38.45 or procedure code 39.73 35,239 4.03 $20,465

We found in our analysis of the claims data for cases with both procedure codes 

38.45 and 39.73 that the average costs are substantially higher than those costs for the 

cases overall in MS-DRG 237. In addition, we found that the average length of stay for 

the 22 cases with both procedure codes 38.45 and 39.73 is higher at 11.86 days than the 

average length of stay of 10.03 days for all cases in MS-DRG 237. 

Our analysis of the claims data for the procedure codes in MDC 5 showed that 

procedure code 34.85 is also assigned to MS-DRGs 228 (Other Cardiothoracic 

Procedures with MCC), 229 (Other Cardiothoracic Procedures with CC), and 230 (Other 

Cardiothoracic Procedures without CC/MCC) when it occurs in combination with 

procedure code 38.44 (Resection of vessel with replacement, aorta, abdominal). We 

found that when procedure code 39.73 is not assigned to MS-DRGs 228 through 230, 

there are no cases reported. 

The table below shows our findings of the average costs and the average length of 

stay for procedure code 38.45 in combination with procedure code 38.44 in MS-DRGs 

228 through 230 and the average costs and the average length of stay in all cases in 

MS-DRGs 228 through 230 when both procedure codes 38.45 and 38.44 are not assigned. 
CMS-1518-P 145 

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 228 - All cases 2,084 13.79 $49,488

MS-DRG 228 - Cases with procedure code 

38.45 and procedure code 38.44 276 15.18 $56,246

MS-DRG 228 - Cases without procedure 

code 38.45 and without procedure code 

38.44 1,808 13.58 $48,456

MS-DRG 229 - All cases 2,354 8.31 $31,148

MS-DRG 229 - Cases with procedure code 

38.45 and procedure code 38.44 157 10.68 $37,723

MS-DRG 229 - Cases without procedure 

code 38.45 and without procedure code 

38.44 2,197 8.14 $30,678

MS-DRG 230 - All cases 628 5.45 $24,236

MS-DRG-230 - Cases with procedure code 

38.45 and procedure code 38.44 34 7.18 $27,054

MS-DRG 230 - Cases without procedure 

code 38.45 and without procedure code 

38.44 594 5.35 $24,075

Our findings show that both the average length of stay and average costs are 

higher in those cases containing procedure code 34.85 than those cases without this 

procedure code in MS-DRGs 228 through 230. 

We then analyzed the 1,851 cases containing procedure code 39.73 in 

MS-DRGs 237 and 238 and the 912 cases containing procedure code 38.45 in MS-DRGs 

237 and 238 to determine if they would meet the established criteria for a 3-way severity 

of illness split. This criterion is described in section III.G.1.c. of this preamble. The 

chart below shows our findings, with MS-DRG 237 acting as a severity of illness proxy 

for all cases, as there were no cases in MS-DRG 238. In the chart, the extensions “-1,” “-

2,” and “-3” correspond to severity levels, with “-1” representing cases with MCC, “-2” 

representing cases with CC, and “-3” representing cases without CC/MCC. 
CMS-1518-P 146 

MS-DRG 

Number 

of Cases 

Average 

Length 

of Stay 

Average 

Costs 

MS-DRG 237-1 - All cases 20,680 10.03 $34,268

MS-DRG 237-1 - Cases with procedure code 

39.73 637 12.14 $57,834

MS-DRG 237-1 - Cases with procedure code 

38.45 446 13.29 $51,954

MS-DRG 237-2 - All cases 17,356 5.73 $22,083

MS-DRG 237-2 - Cases with procedure code 

39.73 659 6.89 $38,673

MS-DRG 237-2 - Cases with procedure code 

38.45 353 8.14 $31,480

MS-DRG 237-3 - All cases 18,349 2.52 $19,183

MS-DRG 237-3 - Cases with procedure code 

39.73 555 3.65 $27,993

MS-DRG 237-3 - Cases with procedure code 

38.45 113 6.30 $26,280

Our next step was to analyze the claims data for the cases in the clinically 

coherent MS-DRGs to which we are proposing to move these cases. These six 

MS-DRGs are: 216 (Cardiac Valve & Other Major Cardiothoracic Procedures with 

Cardiac Catheterization with MCC); 217 (Cardiac Valve & Other Major Cardiothoracic 

Procedures with Cardiac Catheterization with CC); 218 (Cardiac Valve & Other Major 

Cardiothoracic Procedures with Cardiac Catheterization without CC/MCC); 219 (Cardiac 

Valve & Other Major Cardiothoracic Procedures without Cardiac Catheterization with 

MCC), 220 (Cardiac Valve & Other Major Cardiothoracic Procedures without Cardiac 

Catheterization with CC); and 221 (Cardiac Valve & Other Major Cardiothoracic 

Procedures without Cardiac Catheterization without CC/MCC). For the sake of the 

grouping algorithm, procedure codes 39.73 and 38.45 must also be added to MS-DRGs 

216 through 219. However, if these codes are documented in cases in which a cardiac 

catheterization occurs, they will be “trumped” by those catheterizations. Therefore, when 
CMS-1518-P 147 

we reviewed the data in order to make length of stay and cost comparisons, we only used 

the three MS-DRGs to which procedure codes 39.73 and 38.45 would appear without 

cardiac catheterization; that is MS-DRGs 219, 220, and 221. Our findings describing 

these three MS-DRGs are displayed in the following chart: 

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 219 12,805 12.76 $51,399

MS-DRG 220 15,988 7.65 $34,270

MS-DRG 221 4,043 5.90 $28,974

Our evaluation of the severity levels in the cases containing procedure codes 

39.73 and 38.45 using the proxy MS-DRGs 237-1, 237-2, and 237-3 compared to the 

claims data in the table above with MS-DRGs 219 through 221 demonstrates that the 

cases are similar in resource consumption. In addition, the cases are clinically coherent. 

By proposing to move procedure code 38.45 to MS-DRGs 216 through 221, we 

do not believe that there is a need for combination codes 38.45 plus 38.44 to be 

specifically assigned to MS-DRGs 228, 229, and 230. Because MS-DRGs 216 through 

221 are higher in the surgical hierarchy for MDC 5 than MS-DRGs 228 through 230, the 

result of the proposal would be that either procedure code 38.45 by itself or in 

combination with procedure code 38.44 will always be assigned to MS-DRGs 216 

through 221. When reported alone, under our proposal, procedure code 38.44 would 

continue to be assigned to MS-DRGs 237 and 238, as it has been in the past. 

Therefore, for FY 2012, we are proposing to move procedure codes 38.45 and 

39.73 from MS-DRGs 237 and 238 and to add these codes to MS-DRGs 216, 217, 218, 

219, 220, and 221 based on our findings of similar resource consumption and clinical 
CMS-1518-P 148 

coherence. To conform to this proposed change, we also are proposing to change the title 

of MS-DRG 237 (Major Cardiovascular Procedures with MCC or Thoracic Aortic 

Aneurysm Repair) by removing the terms “or Thoracic Aortic Aneurysm Repair.” 

Therefore, the new proposed title of MS-DRG 237 would be “Major Cardiovascular 

Procedures with MCC.” We invite public comment on these proposals. 

5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective 

Tissue) 

a. Artificial Discs 

In response to the FY 2011 IPPS/ LTCH PPS proposed rule, we received a public 

comment that was outside of the scope of any proposal in that proposed rule. The 

commenter urged CMS to reassign procedure code 84.62 (Insertion of total spinal disc 

prosthesis, cervical) from MS-DRG 490 (Back and Neck Procedures Except Spinal 

Fusion with CC/MCC or Disc Device/Neurostimulator) into MS-DRGs 471 through 473 

(Cervical Spinal Fusion with MCC, with CC, and without CC/MCC, respectively). In 

addition, the commenter requested that CMS reassign procedure code 84.65 (Insertion of 

total spinal disc prosthesis, lumbosacral) from MS-DRG 490 (Back and Neck Procedures 

Except Spinal Fusion with CC/MCC or Disc Device/Neurostimulator) to MS-DRGs 459 

and 460 (Spinal Fusion Except Cervical with MCC and without MCC, respectively). 

However, the commenter also provided an alternative option to reassigning the procedure 

codes to different MS-DRGs. The commenter suggested the creation of a new, separate 

MS-DRG for the two artificial disc procedures if reassignment to the fusion MS-DRGs 

was not feasible. 
CMS-1518-P 149 

We refer the reader to the FY 2008 IPPS proposed rule and final rule with 

comment period (72 FR 24731 through 24735 and 47226 through 47232) for discussion 

on the comprehensive evaluation of all the spinal DRGs in the development of the 

MS-DRG classification system. The modifications made to the spinal DRGs for FY 2008 

recognized the similar utilization of resources, differences in levels of severity, and the 

complexity of the services being performed on patients undergoing the various types of 

spinal procedures. 

We analyzed FY 2010 MedPAR claims data for procedure codes 84.62 and 84.65 

in MS-DRG 490 and compared those results to the claims data for MS-DRGs 459, 460, 

471, 472, and 473. We found a total of 19,840 cases in MS-DRG 490 with an average 

length of stay of 4.24 days and average costs of $11,940. As displayed in the chart 

below, we found 97 cases reporting procedure code 84.62, with an average length of stay 

of 1.80 days and average costs of $13,194 in MS-DRG 490. We also found 35 cases 

reporting procedure code 84.65, with an average length of stay of 2.91 days and average 

costs of $20,753. While average costs for the artificial disc cases were slightly higher 

($1,254 for procedure code 84.62 and $8,813 for procedure code 84.65) compared to the 

average cost for all cases in MS-DRG 490, the artificial disc cases were of extremely low 

volume and reflected shorter lengths of stay compared to all the cases in MS-DRG 490. 

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 459 – All cases 3,650 8.92 $40,218

MS-DRG 460 – All cases 60,865 3.75 $25,268

MS-DRG 471– All cases 2,686 8.92 $29,837

MS-DRG 472– All cases 8,586 3.78 $18,494

MS-DRG 473– All cases 24,323 1.80 $13,775
CMS-1518-P 150 

We recognize the disparity in average costs for cases reporting the insertion of a 

cervical or lumbar artificial disc in MS-DRG 490 compared to all the cases in that 

MS-DRG. However, we do not believe this supports reassignment of procedure codes 

84.62 and 84.65 to the MS-DRGs for spinal fusion as the commenter requested. Even 

with the disparity in costs, clinically, the insertion of an artificial disc is not a spinal 

fusion. Therefore, reassignment of the artificial disc cases to the fusion MS-DRGs would 

be clinically inappropriate. In addition, for certain Medicare populations, the insertion of 

an artificial disc is considered a noncovered procedure. 

As stated earlier, the commenter also provided an alternative option to reassigning 

procedure codes 84.62 and 84.65. The commenter suggested the creation of a new, 

separate MS-DRG for the two artificial disc procedures if reassignment to the fusion MSDRGs was not feasible. In our evaluation of the claims data and as shown above in the 

data chart, the artificial disc cases are of extremely low volume; therefore, we do not 

believe the findings warrant the creation of a separate MS-DRG. 

We invite public comment on our proposal not to reassign procedure code 84.62 

from MS-DRG 490 to MS-DRGs 471 through 473 and procedure code 84.65 from 

MS-DRG 490 to MS-DRGs 459 and 460. We also invite public comment on our 

proposal not to create a new, separate MS-DRG for artificial disc procedures (codes 

84.62 and 84.65) for FY 2012. 

b. Major Joint Replacement or Reattachment of Lower Extremities 

MS-DRG 490 – All cases 19,840 4.24 $11,940

MS-DRG 490 – Cases with code 84.62 97 1.80 $13,194

MS-DRG 490 – Cases with code 84.65 35 2.91 $20,753
CMS-1518-P 151 

 We received a request to add an additional severity level for MS-DRG 469 (Major 

Joint Replacement or Reattachment of Lower Extremity with MCC) and MS-DRG 470 

Major Joint Replacement or Reattachment of Lower Extremity without MCC). We 

examined FY 2010 MedPAR claims data to determine if we could subdivide the base 

MS-DRG into three severity levels: with MCC, with CC, and without CC/MCC. We 

applied the criteria used in the development of the MS-DRGs included in the FY 2008 

IPPS final rule with comment period (72 FR 47169). We refer readers to this final rule 

with comment period for a complete description of these criteria. As discussed earlier, 

the original criteria were based on average charges. However, subsequent to the FY 2007 

IPPS final rule (71 FR 47882), we now use average costs. The five criteria using costs 

are listed below. In order to warrant creation of a CC or an MCC subgroup within a base 

MS–DRG, the subgroup must meet all of the following five criteria: 

● A reduction in variance of costs of at least 3 percent. 

● At least 5 percent of the patients in the MS-DRG fall within the CC or MCC 

subgroup. 

● At least 500 cases are in the CC or MCC subgroup. 

● There is at least a 20-percent difference in average costs between subgroups. 

● There is a $2,000 difference in average costs between subgroups 

 The following table shows our determination of the number of cases and average 

costs by MCC, CC, and non-CC levels. 

MS-DRGs 469 and 470 Number of 

Cases 

Average 

Length of Stay 

Average Costs 
CMS-1518-P 152 

MS-DRGs 469 and 470 Number of 

Cases 

Average 

Length of Stay 

Average Costs 

Cases with MCC 25,717 7.72 $21,016

Cases with CC 179,116 3.99 $14,233

Cases without CC/MCC 220,739 3.21 $13,250

Total 425,572 3.8 $14,133

 We determined that these cases do not meet our five criteria for adding a new 

severity level. The cases failed to meet criterion four (requiring at least a 20-percent 

difference in average costs between subgroups) and criterion five (requiring a $2,000 

difference in average costs between subgroups). Therefore, we are not proposing the 

addition of a new severity level for the base MS-DRG. Instead, we are proposing to 

maintain the two existing severity levels for MS-DRGs 469 and 470. We welcome 

public comments on our proposal not to add an additional severity level to MS-DRGs 469 

and 470. 

c. Combined Anterior/Posterior Spinal Fusion 

A manufacturer requested that CMS reassign spinal fusion cases utilizing the 

AxiaLIF technology from MS-DRGs 459 and 460 (Spinal Fusion Except Cervical with 

MCC and without MCC, respectively) to MS-DRGs 453, 454, and 455 (Combined 

Anterior/Posterior Spinal Fusion with MCC, with CC, and without CC/MCC, 

respectively). The commenter stated that an anterior lumbar interbody spinal fusion 

performed with a lateral approach, the extreme lateral interbody fusion (XLIF®), with 

posterior spinal fixation, can report two codes resulting in assignment to the combined 

fusion MS-DRGs. The commenter also stated that the AxiaLIF technology, which is also 

utilized in an anterior lumbar interbody spinal fusion and uses a pre-sacral approach, can 

only report one code, resulting in assignment to the single fusion MS-DRGs. The 
CMS-1518-P 153 

commenter expressed concern that the payment incentives are not properly aligned for 

the recently available minimally invasive spinal fusion technologies. The commenter 

compared the XLIF® to the AxiaLIF and urged CMS to consider the AxiaLIF technology 

similar to the XLIF® for purposes of MS-DRG assignment. 

 Spinal fusion is a surgical procedure that joins two or more vertebrae by the use 

of bone graft (or bone graft substitute), with the goal of maintaining alignment, providing 

stability, decreasing pain, and restoring the function of the spinal nerves. Routinely, a 

spinal fusion also utilizes internal fixation devices (instrumentation) to assist in 

stabilizing the spine. These fixation devices may include pedicle screws, cages, rods, or 

plates. Effective October 1, 2010, ICD-9-CM procedure code 81.06 (Lumbar and 

lumbosacral fusion of the anterior column, anterior technique) describes the XLIF® 

procedure, and code 81.08 (Lumbar and lumbosacral fusion of the anterior column, 

posterior technique) describes the AxiaLIF technology. 

 The spinal fusion codes and their corresponding MS-DRG assignment include the 

use of bone graft and internal fixation. The requestor’s comment regarding the 

assignment of one procedure code for one technology versus assigning two procedure 

codes for another technology indicates that the commenter may not fully understand the 

MS-DRG GROUPER logic for spinal fusions. For example, if an anterior lumbar 

interbody fusion is performed and posterior spinal fixation (or instrumentation) is also 

utilized, this requires one code and results in a single fusion MS-DRG assignment. 

However, if a posterior spinal fusion (procedure code 81.07 (Lumbar and lumbosacral 

fusion of the posterior column, posterior technique) was performed in addition to an 
CMS-1518-P 154 

anterior fusion, for example, the XLIF® procedure (procedure code 81.06), that scenario 

would necessitate the assignment of both codes, resulting in assignment to the combined 

spinal fusion MS-DRGs (453, 454, or 455). MS-DRGs 453, 454, and 455 were created to 

capture patients who have both an anterior and posterior fusion. We believe the requestor 

may have confused the terms “fixation” and “fusion” for MS-DRG assignment in its 

request. 

 We analyzed the FY 2010 MedPAR data to evaluate claims reporting procedure 

codes 81.06, 81.07, and 81.08 in MS-DRGs 456 through 458 (Spinal Fusion Except 

Cervical with Spinal Curvature/Malignancy/Infection or 9+ Fusions with MCC, with CC 

and without CC/MCC, respectively) and MS-DRGs 459 and 460. We found a total of 

1,115 cases in MS-DRG 456, with an average length of stay of 13.14 days and average 

costs of $63,856. We found 278 cases reporting procedure code 81.08, with an average 

length of stay of 12.04 days and average costs of $56,585. Similar results can be seen for 

procedure code 81.08 in the remaining MS-DRGs as shown in the chart below in terms of 

volume, length of stay, and average cost. Clearly, the data demonstrate that the AxiaLIF 

technology (procedure code 81.08) is appropriately assigned to its current MS-DRG 

assignments, as is the XLIF® procedure (procedure code 81.06). 

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 456 – All cases 1,115 13.14 $63,856

MS-DRG 456 – Cases with code 81.06 54 14.37 $52,392

MS-DRG 456 – Cases with code 81.07 22 12.32 $46,828

MS-DRG 456 – Cases with code 81.08 278 12.04 $56,585

MS-DRG 457 – All cases 3,079 6.74 $41,500

MS-DRG 457 – Cases with code 81.06 119 6.42 $36,468
CMS-1518-P 155 

MS-DRG 

Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 457 – Cases with code 81.07 98 6.49 $36,532

MS-DRG 457 – Cases with code 81.08 1,194 5.73 $35,272

MS-DRG 458 – All cases 1,389 3.91 $32,946

MS-DRG 458 – Cases with code 81.06 115 3.49 $29,089

MS-DRG 458 – Cases with code 81.07 76 3.16 $30,551

MS-DRG 458 – Cases with code 81.08 827 3.60 $30,570

MS-DRG 459 – All cases 3,650 8.92 $40,218

MS-DRG 459 – Cases with code 81.06 164 9.12 $40,150

MS-DRG 459 – Cases with code 81.07 165 8.65 $37,970

MS-DRG 459 – Cases with code 81.08 2,468 8.25 $38,010

MS-DRG 460 – All cases 60,865 3.75 $25,268

MS-DRG 460 – Cases with code 81.06 2,681 3.27 $26,464

MS-DRG 460 – Cases with code 81.07 3,709 3.67 $23,334

MS-DRG 460 – Cases with code 81.08 46,565 3.66 $24,571

We also analyzed data for combinations of the spinal fusion codes that result in 

assignment to MS-DRGs 453, 454, and 455. We evaluated the following combinations: 

● 81.06 (Lumbar and lumbosacral fusion of the anterior column, anterior 

technique) and 81.07 (Lumbar and lumbosacral fusion of the posterior column, posterior 

technique). 

● 81.06 (Lumbar and lumbosacral fusion of the anterior column, anterior 

technique) and 81.08 (Lumbar and lumbosacral fusion of the anterior column, posterior 

technique). 

We further analyzed data with the following combination of spinal fusion codes in 

MS-DRGs 456, 457, and 458 and MS-DRGs 459 and 460: 

● 81.07 (Lumbar and lumbosacral fusion of the posterior column, posterior 

technique) and 81.08 (Lumbar and lumbosacral fusion of the anterior column, posterior 

technique). 
CMS-1518-P 156 

 The chart below shows the results of the data analysis for the combination of 

procedure codes listed above where an anterior and posterior spinal fusion was performed 

in the same episode of care. There were a total of 1,190 cases in MS-DRG 453, with an 

average length of stay of 13.08 days and average costs of $71,693. The cases reporting 

the combination of procedure codes 81.06 and 81.08 in this same MS-DRG totaled 431, 

with an average length of stay of 11.59 days and average costs of $69,859. Results for 

the procedure code combination (81.06 and 81.08) in MS-DRGs 454 and 455 with regard 

to volume of cases, length of stay, and average costs data also support that these spinal 

fusion procedure code combinations are appropriately placed in their current MS-DRG 

assignments. Likewise, for MS-DRGs 456, 457, and 458, the data support that the spinal 

fusion procedure code combinations of 81.07 and 81.08 are appropriately placed in their 

current MS-DRG assignments. There were a total of 1,115 cases in MS-DRG 456 with 

an average length of stay of 13.14 days and average costs of $68,856. The cases 

reporting the combination of procedure codes 81.07 and 81.08 in this same MS-DRG 

totaled 54, with an average length of stay of 14.37 days and average costs of $52,392. 

Results for the procedure code combination (81.07 and 81.08) in MS-DRGs 457 and 458 

with regard to volume of cases and average length of stay were lower compared to all the 

cases in those two MS-DRGs. While the data show higher average costs for the 

procedure code combination of 81.07 and 81.08 in MS-DRGs 457 and 458, as stated 

previously, the volume was extremely low. 

MS-DRG 

Number 

of Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 453 – All cases 1,190 13.08 $71,693
CMS-1518-P 157 

MS-DRG 

Number 

of Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRG 453 – Cases with codes 81.06 and 81.07 8 14.00 $109,089

MS-DRG 453 – Cases with codes 81.06 and 81.08 431 11.59 $69,859

MS-DRG 454 – All cases 3,052 6.38 $48,311

MS-DRG 454 – Cases with codes 81.06 and 81.07 47 6.83 $60,743

MS-DRG 454 – Cases with codes 81.06 and 81.08 1,825 5.71 $47,144

MS-DRG 455 – All cases 2,747 3.63 $37,378

MS-DRG 455 – Cases with codes 81.06 and 81.07 40 4.28 $47,794

MS-DRG 455 – Cases with codes 81.06 and 81.08 2,053 3.43 $37,793

MS-DRG 456 – All cases 1,115 13.14 $63,856

MS-DRG 456 – Cases with codes 81.07 and 81.08 54 14.37 $52,392

MS-DRG 457 – All cases 3,079 6.74 $41,500

MS-DRG 457 – Cases with codes 81.07 and 81.08 29 5.97 $60,820

MS-DRG 458 – All cases 1,389 3.91 $32,946

MS-DRG 458 – Cases with code 81.07 and 81.08 23 3.22 $51,942

 As the focus of the analysis was to evaluate procedure code 81.08 in comparison 

to procedure code 81.06, we believe the AxiaLIF technology (procedure code 81.08) is 

grouped appropriately in its current MS-DRG assignments, as is the XLIF® procedure 

(procedure code 81.06). The volume, length of stay, and cost data analyzed demonstrate 

that the complexity of services and resources utilized for each of these technologies are 

properly accounted for in their respective MS-DRG assignments. Therefore, the data 

does not support making changes for procedure code 81.08. As a result, we are not 

proposing to reassign cases reporting this procedure code to the combined fusion 

MS-DRGs. We invite public comment on our proposal to not reassign procedure code 

81.08 from MS-DRGs 456 through 460 to MS-DRGs 453 through 455 for FY 2012. 

6. MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue, and Breast): 

Excisional Debridement of Wound, Infection, or Burn 
CMS-1518-P 158 

 We received a request that we remove procedure code 86.22 (Excisional 

debridement of wound, infection, or burn) from the list of codes considered to be O.R. 

procedures. The commenter stated that many inpatient excisional debridements are 

performed in a patient’s room instead of in an operating room. The commenter believed 

that the original assignment of procedure code 86.22 to the O.R. list served to help reflect 

the resource intensity required by a patient with wounds and ulcers that required an 

excisional debridement. The commenter stated that, by doing so, the code served as a 

proxy for severity of illness in the original CMS DRGs prior to the implementation of 

MS-DRGs in FY 2008. The commenter stated that the creation of the most serious 

pressure ulcer codes for stage 3 and stage 4 pressure ulcers (codes 707.23 and 707.24) 

allows these conditions to be classified as MCCs. Therefore, the commenter stated that 

the need to use procedure code 86.22 to capture severity of illness was no longer needed. 

The commenter also stated that procedure code 86.22 is a non-O.R. code under the 

APR-DRGs and does not affect the DRG assignment. The commenter requested that 

procedure code 86.22 be changed from an O.R. procedure code to a non-O.R. procedure 

code. 

 As the commenter stated, excisional debridements are currently captured in 

procedure code 86.22. Procedure code 88.22 is classified as an O.R. procedure in the 

current MS-DRGs and, therefore, leads to a surgical MS-DRG assignment. We examined 

MedPAR claims data on all excisional debridement cases and found that these 

debridement cases use appreciably fewer resources than other cases in their current 

surgical DRGs. However, we determined that if we were to classify debridement cases as 
CMS-1518-P 159 

non-O.R. cases and assign them to medical DRGs, we would significantly underpay these 

cases. The following chart shows differences in average costs for all excisional 

debridement cases compared to other cases within their current MS-DRG and compared 

to medical DRGs to which the patients would be assigned if the procedure were 

reclassified as a non-O.R. procedure. 

Procedure 

Code 

All Cases 

with No 

Other OR 

Procedure 

Average Cost 

(A) 

Average Costs 

in Surgical 

DRGs to 

Which the 

Patients Are 

Assigned 

(B) 

Average Costs in 

Medical DRGs 

to Which the 

Patients Would 

Be Assigned 

(C) 

86.22 32,152 $12,427 $17,332 $8,070

The chart illustrates that when debridement is the only O.R. procedure, it is 

assigned to MS-DRGs that have an average cost that is approximately $5,000 more than 

the actual cost of the debridement ($12,427 versus $17,332). Conversely, if the 

debridement is made a non-O.R. code, it would, on average, be assigned to MS-DRGs 

that have an average cost that is approximately $4,000 less than the actual cost of the 

debridement ($8,070 versus $12,427). Therefore, we believe it would be inappropriate to 

propose to classify these procedures as a non-O.R. procedure. 

We explored alternative approaches to classifying procedure code 86.22 as a 

non-O.R. procedure. We evaluated the possibility of removing excisional debridements 

from their current MS-DRG assignments within the following skin-related MS-DRGs, 

where they are combined with skin grafts, and creating a new set of debridement 

MS-DRGs. The current MS-DRGs that combine skin grafts and debridements into the 

same MS-DRGs are as follows: 
CMS-1518-P 160 

● MS-DRGs 573 through 575 (Skin Graft &/or Debridement for Skin Ulcer or 

Cellulitis with MCC, with CC, and without CC/MCC, respectively). 

● MS-DRGs 576 through 578 (Skin Graft &/or Debridement Except for Skin 

Ulcer or Cellulitis with MCC, with CC, and without CC/MCC, respectively). 

 We analyzed MedPAR claims data on the severity level of graft cases without any 

debridements in these six MS-DRGs. Our findings are shown in the chart below. 

SKIN GRAFTS WITHOUT DEBRIDEMENTS 

MS-DRG Number of 

Cases 

Average 

Length of 

Stay 

Average 

Costs 

MS-DRGs 573-575 - Cases with severity 

level of MCC 751 14.56 $23,975

MS-DRGs 573-575 - Cases with severity 

level of CC 1,720 10.16 $14.869

MS-DRGs 573-575 - Cases with severity 

level of without CC/MCC 540 5.36 $8,469

MS-DRGs 576-578 - Cases with severity 

level of MCC 335 10.28 $22,996

MS-DRGs 576-578 - Cases with severity 

level of CC 1,482 5.28 $11,299

MS-DRGs 576-578 - Cases with severity 

level of without CC/MCC 1,849 3.01 $6,986

We compared these data to a proposed new set of skin-related MS-DRGs that 

would include only debridements. The results of the findings of the severity levels of 

debridements without skin grafts in these six MS-DRGs are shown in the chart below. 

DEBRIDEMENTS WITHOUT SKIN GRAFTS 

MS-DRG Number of 

Cases 

Average 

Length of 

Stay 

Average costs 

MS-DRG 573-575 - Cases with severity 

level of MCC 3,177 11.73 $18,381
CMS-1518-P 161 

MS-DRG Number of 

Cases 

Average 

Length of 

Stay 

Average costs 

MS-DRG 573-575 - Cases with severity 

level of CC 6,649 7.67 $10,730

MS-DRG 573-575 - Cases with severity 

level of without CC/MCC 2,555 4.94 $6,372

MS-DRG 576-578 - Cases with severity 

level of MCC 271 11.59 $19,429

MS-DRG 576-578 - Cases with severity 

level of CC 638 7.61 $11,913

MS-DRG 576-578 - Cases with severity 

level of without CC/MCC 285 4.45 $6,928

Our findings indicate that the graft procedure cases have higher average costs than 

the excisional debridement cases. The average costs for the excisional debridement cases 

in MS-DRGs 573 through 575 compared to the debridement cases in MS-DRGs 576 

through 578 are very similar. We believe that the data support creating a single set of 

skin-related excisional debridement MS-DRGs composed of cases previously captured in 

MS-DRGs 573 through 575 as well as MS-DRGs 576 through 578. The following chart 

illustrates those combined average costs. 

EXCISIONAL DEBRIDEMENTS FROM MS-DRGs 573 THROUGH 578 

SPLIT ON SEVERITY LEVEL 

MS-DRGs 573 – 578 

Number 

of Cases 

Average 

Length 

of Stay 

Average 

Costs 

Combined Excisional Debridement Cases with 

Severity Level of MCC 3,448 11.71 $18,463

Combined Excisional Debridement Cases with 

Severity Level of CC 7,287 7.76 $10,833

Combined Excisional Debridement Cases with 

Severity Level of without CC/MCC 2,840 4.89 $6,428
CMS-1518-P 162 

 We believe that the data support separating skin graft procedures from excisional 

debridements by creating a new set of MS-DRGs. This would result in more accurate 

payment for both skin grafts and debridement. Therefore, we are proposing to remove 

excisional debridements (procedure code 86.22) from their current MS-DRG assignments 

within MS-DRGs 573 through 578 for skin grafts and assign them to new excisional 

debridement MS-DRGs. We are proposing to maintain MS-DRGs 573 through 578 for 

skin grafts. The following list describes the proposed new and revised MS-DRG titles: 

Proposed new MS-DRGs based on procedure code 86.22:

● Proposed MS-DRG 570 (Skin Debridement with MCC)

● Proposed MS-DRG 571 (Skin debridement with CC)

● Proposed MS-DRG 572 (Skin Debridement without CC/MCC)

Proposed Revised MS-DRGs based on codes currently assigned to MS-DRGs 573 

through 578, excluding procedure code 86.22: 

● Proposed revised MS-DRG 573 (Skin Graft for Skin Ulcer or Cellulitis with 

MCC) 

● Proposed revised MS-DRG 574 (Skin Graft for Skin Ulcer or Cellulitis with 

CC) 

● Proposed revised MS-DRG 575 (Skin Graft for Skin Ulcer or Cellulitis without 

CC/MCC) 

● Proposed revised MS-DRG 576 (Skin Graft Except for Skin Ulcer or Cellulitis 

with MCC) 

● Proposed revised MS-DRG 577 (Skin Graft except for Skin Ulcer or Cellulitis 
CMS-1518-P 163 

with CC) 

● Proposed revised MS-DRG 578 (Skin Graft Except for Skin Ulcer or Cellulitis 

without CC/MCC) 

We welcome public comments on our proposal for FY 2012 to create three new 

debridement MS-DRGs 570, 571, and 572 for skin debridement and to revise MS-DRGs 

573 through 578 to include skin grafts only, as indicated above. 

7. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and Disorders) 

a. Nutritional and Metabolic Diseases: Update of MS-DRG Titles 

We received a request to revise the MS-DRG titles for MS-DRGs 640 through 

642 to more clearly capture the cases that are currently assigned to these MS-DRGs. The 

current titles for these MS-DRGs are: MS-DRGs 640 (Nutritional & Miscellaneous 

Metabolic Disorders with MCC); MS-DRG 641 (Nutritional & Miscellaneous Metabolic 

Disorders without MCC); and MS-DRG 642 (Inborn Errors of Metabolism). The 

requestor suggested that we change the titles to: MS-DRG 640 (Miscellaneous Disorders 

of Nutrition, Metabolism, and Fluids and Electrolytes with MCC); MS-DRG 641 

(Miscellaneous Disorders of Nutrition, Metabolism, and Fluids and Electrolytes without 

MCC); and MS-DRG 642 (Inborn and Other Disorders of Metabolism). 

Our clinical advisors support these suggested changes to the titles, as the 

suggested changes would provide a better description of the diagnoses assigned to 

MS-DRGs 640, 641, and 642. Therefore, we are proposing to revise the MS-DRG titles 

for MS-DRGs 640, 641, and 642 as the requested suggested. We invite public comment 
CMS-1518-P 164 

on our proposal to change the MS-DRG titles for MS-DRGs 640, 641, and 642 for 

FY 2012. 

b. Sleeve Gastrectomy Procedure for Morbid Obesity 

 Sleeve gastrectomy is a 70 percent to 80 percent greater curvature gastrectomy 

(sleeve resection of the stomach) with continuity of the gastric lesser curve being 

maintained while simultaneously reducing stomach volume. It may be the first step in a 

two-stage procedure when performing Roux-en-Y Gastric Bypass (RYGBP). Sleeve 

gastrectomy can be performed either as an open or a laparoscopic procedure. Sleeve 

gastrectomy is currently coded using ICD-9-CM procedure code 43.89 (Other total 

gastrectomy). Procedure code 43.89 is currently assigned to several MS-DRGs. 

However, the code is not assigned to MS-DRG 619, 620, or 621 (O.R. Procedures for 

Obesity with MCC, with CC, and without CC/MCC, respectively). 

 We received a request for CMS to review MDC 10 (Endocrine, Nutritional, and 

Metabolic Diseases and Disorders) for consistency. Specifically, the requestor 

questioned why diagnosis code 278.01 (Morbid obesity), when paired on a claim with 

procedure code 43.89, would be assigned to MS-DRG 981, 982, or 983 (Extensive O.R. 

Procedure Unrelated to Principal Diagnosis with MCC, with CC, or without CC/MCC, 

respectively) instead of MS-DRG 619, 620, or 621. 

 Upon review, we determined that diagnosis code 278.01 is assigned to MDC 10. 

However, procedure code 43.89 is not assigned to any MS-DRG set in this MDC. 

Therefore, the cases are assigned to MS-DRGs 981 through 983, reflecting procedures 

not related to the principal diagnosis. This was an inadvertent oversight on CMS’ part 
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when the MS-DRGs were created. Therefore, we are proposing to add a procedure code 

or codes identifying sleeve gastrectomy to MS-DRGs 619 through 621 for FY 2012. 

 Currently, sleeve gastrectomy is identified in the ICD-9-CM procedure code 

Index as follows: Gastrectomy (partial) (subtotal) NEC 43.89. At procedure code 43.89 

in the ICD-9-CM procedure code Tabular, an inclusion note identifies this code as 

including sleeve resection of the stomach. 

In light of our proposal to add a procedure code or codes to MS-DRGs 619 

through 621, we point out that there is an NCD that has precluded coverage of sleeve 

gastrectomy when performed either open or laparoscopically. This decision may be 

found in the Medicare National Coverage Determination Manual, Section 100.1, 

Nationally Non-Covered Indications for Bariatric Surgery for Treatment of Morbid 

Obesity, effective on February 12, 2009. This manual is available through the CMS Web 

site through a link at: http://www.cms.gov/manuals/downloads/mcd103c1_Part2.pdf. 

This manual entry affirms that treatment for obesity via use of the open or laparoscopic 

sleeve gastrectomy is determined to be noncovered for Medicare beneficiaries. 

Noncoverage of these cases is determined by the fiscal intermediary or MAC 

because of the nature of procedure code 43.89, which is a code that identifies several 

gastrectomy procedures. Therefore, to identify a code describing many procedures in the 

MCE would be inappropriately restricting other procedures which are covered. However, 

we have received a request to create specific codes identifying both laparoscopic sleeve 

gastrectomy and the open procedure, vertical sleeve gastrectomy. We addressed this 

request at the ICD-9-CM Coordination and Maintenance Committee meeting held on 
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March 9, 2011. Should a code or codes be created as a result of this request, we will then 

be able to add these codes to the MCE as a conforming noncoverage edit when combined 

with diagnosis code 278.01. The background information discussing sleeve gastrectomy 

coding can be accessed on the CMS Web site at: 

http://www.cms.gov/ICD9ProviderDiagnosticcodes/03_meetings.asp#TopOfPage. A 

summary of the meeting will be available soon after the meeting is held. This summary 

can be found on CMS’ Web site for the ICD-9-CM Coordination and Maintenance 

Committee at: 

http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopOfPage by 

scrolling down to the .pdf zip files containing the meeting agenda and handouts. 

 Therefore, for FY 2012, we are proposing to add a procedure code or codes 

identifying sleeve gastrectomy to MS-DRGs 619 through 621. However, we also intend 

to add any code or codes created at the ICD-9-CM Coordination and Maintenance 

Committee on March 9, 2011, to the MCE as sleeve gastrectomy, whether open or 

laparoscopic, is not covered for Medicare beneficiaries. The code or codes would appear 

in the “Noncovered Procedures” edit of the MCE. As the timing of the development of 

this proposed rule and the date of the March 2011 meeting of the ICD-9-CM 

Coordination and Maintenance Committee overlap, it is not possible to determine what 

those codes might be, or even if they will be created. However, should a code or codes 

be created, we propose that they will simultaneously be placed in both MS-DRGs 619 

through 621 and the MCE. This decision may seem to be counterintuitive, but CMS 

realizes that our MS-DRGs and the Medicare GROUPER program are used for other 
CMS-1518-P 167 

beneficiaries and insurance plans rather than strictly for Medicare beneficiaries. A 

complete description of this issue will be addressed in the final rule. Any new code or 

codes created as a result of the ICD-9-CM Coordination and Maintenance Committee 

meeting will only be included in Table 6B, which will be listed in section VI. of the 

Addendum to the final rule and available via the Internet; we do not have a mechanism to 

make the codes available prior to the final rule’s publication. We invite public comment 

on this proposal. 

8. MDC 15 (Newborns and Other Neonates with Conditions Originating in the Perinatal 

Period): Discharge Status Code 66 (Discharged/Transferred to Critical Assess Hospital 

(CAH)) 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50236), we finalized our 

transfer policy regarding transfer of patients from an acute care hospital to a CAH. In 

that final rule, we stated that hospitals are required to use patient discharge status code 66 

on the IPPS claims to identify transfers to CAHs. 

With this new requirement, a discharge from an IPPS hospital to a CAH equates 

to a transfer status. However, discharge status code 66 is currently not included in the 

MS-DRG GROUPER logic for MS-DRG 789 (Neonate, Died or Transferred to Another 

Acute Care Facility). Therefore, in this proposed rule, we are proposing to add discharge 

status code 66 to the MS-DRG GROUPER logic for MS-DRG 789. We invite public 

comment on our proposal to add discharge status code 66 to the MS-DRG GROUPER 

logic for MS-DRG 789 for FY 2012. 

9. Proposed Medicare Code Editor (MCE) Changes 
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As explained under section II.B.1. of the preamble of this proposed rule, the 

Medicare Code Editor (MCE) is a software program that detects and reports errors in the 

coding of Medicare claims data. Patient diagnoses, procedure(s), and demographic 

information are entered into the Medicare claims processing systems and are subjected to 

a series of automated screens. The MCE screens are designed to identify cases that 

require further review before classification into a MS-DRG. In this proposed rule, we 

discuss our intention to make the following change to the MCE edits. 

In section II.G.7.a. of this preamble, we discuss that the current ICD-9-CM 

procedure code for sleeve gastrectomy (43.89 (Other partial gastrectomy, other)) is a 

noncovered code when performed for resection of the stomach in patients with morbid 

obesity. We also discussed that noncoverage for Medicare beneficiaries of cases 

containing procedure code 43.89 is determined by the fiscal intermediaries or MACs 

because of the nature of procedure code 43.89. This code is imprecise and identifies 

several other gastrectomy procedures in addition to sleeve resection. Therefore, to limit 

coverage by identifying a code that describes many procedures through the use of the 

MCE would inappropriately restrict other procedures that are covered by Medicare. In 

this same section, we also stated that we received a request to create specific codes 

identifying both laparoscopic sleeve gastrectomy and the open procedure, vertical sleeve 

gastrectomy. As we stated above, we addressed this request at the ICD-9-CM 

Coordination and Maintenance Committee meeting held on March 9, 2011. If a code or 

codes should be created as a result of this request, we will then be able to add these codes 
CMS-1518-P 169 

to the MCE as a conforming noncoverage edit when combined with diagnosis code 

278.01 (Morbid obesity). 

As the timing of development of this proposed rule and the holding of the 

ICD-9-CM Coordination and Maintenance Committee meeting on March 9, 2011 

overlap, it is not possible to determine what those codes might be, or even if they will be 

created. However, should a code or codes be created, we propose that any code or codes 

for laparoscopic or open sleeve resection of the stomach be added to the MCE as a 

noncovered procedure or procedures, in combination with ICD-9-CM diagnosis code 

278.01 (Morbid obesity). The background information discussing sleeve gastrectomy 

coding can be accessed on the CMS Web site at: 

http://www.cms.gov/ICD9ProviderDiagnosticcodes/03_meetings.asp#TopOfPage. A 

complete description of this issue will be addressed in the final rule. Any new code or 

codes describing sleeve gastrectomy will only be included in Table 6B, which will be 

listed in section VI. of the Addendum to the final rule and available via the Internet; we 

do not have a mechanism to make the codes available prior to the final rule’s publication. 

We invite public comments on this proposal. 

10. Surgical Hierarchies 

 Some inpatient stays entail multiple surgical procedures, each one of which, 

occurring by itself, could result in assignment of the case to a different MS-DRG within 

the MDC to which the principal diagnosis is assigned. Therefore, it is necessary to have 

a decision rule within the GROUPER by which these cases are assigned to a single 

MS-DRG. The surgical hierarchy, an ordering of surgical classes from most 
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resource-intensive to least resource-intensive, performs that function. Application of this 

hierarchy ensures that cases involving multiple surgical procedures are assigned to the 

MS-DRG associated with the most resource-intensive surgical class. 

 Because the relative resource intensity of surgical classes can shift as a function 

of MS-DRG reclassification and recalibrations, we reviewed the surgical hierarchy of 

each MDC, as we have for previous reclassifications and recalibrations, to determine if 

the ordering of classes coincides with the intensity of resource utilization. 

 A surgical class can be composed of one or more MS-DRGs. For example, in 

MDC 11, the surgical class "kidney transplant" consists of a single MS-DRG (MS-DRG 

652) and the class "major bladder procedures" consists of three MS-DRGs (MS-DRGs 

653, 654, and 655). Consequently, in many cases, the surgical hierarchy has an impact 

on more than one MS-DRG. The methodology for determining the most 

resource-intensive surgical class involves weighting the average resources for each 

MS-DRG by frequency to determine the weighted average resources for each surgical 

class. For example, assume surgical class A includes MS-DRGs 1 and 2 and surgical 

class B includes MS-DRGs 3, 4, and 5. Assume also that the average costs of MS-DRG 

1 is higher than that of MS-DRG 3, but the average costs of MS-DRGs 4 and 5 are higher 

than the average costs of MS-DRG 2. To determine whether surgical class A should be 

higher or lower than surgical class B in the surgical hierarchy, we would weigh the 

average costs of each MS-DRG in the class by frequency (that is, by the number of cases 

in the MS-DRG) to determine average resource consumption for the surgical class. The 

surgical classes would then be ordered from the class with the highest average resource 
CMS-1518-P 171 

utilization to that with the lowest, with the exception of "other O.R. procedures" as 

discussed below. 

 This methodology may occasionally result in assignment of a case involving 

multiple procedures to the lower-weighted MS-DRG (in the highest, most 

resource-intensive surgical class) of the available alternatives. However, given that the 

logic underlying the surgical hierarchy provides that the GROUPER search for the 

procedure in the most resource-intensive surgical class, in cases involving multiple 

procedures, this result is sometimes unavoidable. 

 We note that, notwithstanding the foregoing discussion, there are a few instances 

when a surgical class with a lower average cost is ordered above a surgical class with a 

higher average cost. For example, the "other O.R. procedures" surgical class is uniformly 

ordered last in the surgical hierarchy of each MDC in which it occurs, regardless of the 

fact that the average costs for the MS-DRG or MS-DRGs in that surgical class may be 

higher than those for other surgical classes in the MDC. The "other O.R. procedures" 

class is a group of procedures that are only infrequently related to the diagnoses in the 

MDC, but are still occasionally performed on patients in the MDC with these diagnoses. 

Therefore, assignment to these surgical classes should only occur if no other surgical 

class more closely related to the diagnoses in the MDC is appropriate. 

 A second example occurs when the difference between the average costs for two 

surgical classes is very small. We have found that small differences generally do not 

warrant reordering of the hierarchy because, as a result of reassigning cases on the basis 
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of the hierarchy change, the average costs are likely to shift such that the higher-ordered 

surgical class has a lower average costs than the class ordered below it. 

Based on the changes that we are proposing to make for FY 2012, as discussed in 

sections II.G.1. and 6. of this preamble, we are proposing to revise the surgical hierarchy 

for Pre-MDCs and MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue, 

and Breast) as follows: 

In Pre-MDCs, we are proposing to reorder proposed new MS-DRG 016 

(Autologous Bone Marrow Transplant with CC/MCC) and proposed new MS-DRG 017 

(Autologous Bone Marrow Transplant without CC/MCC) above MS-DRG 010 (Pancreas 

Transplant). 

In MDC 9, we are proposing to reorder-- 

● MS-DRG 578 (Skin Graft Except for Skin Ulcer or Cellulitis without 

CC/MCC) above proposed new MS-DRG 570 (Skin Debridement with MCC); 

● Proposed new MS-DRG 570 above proposed new MS-DRG 571 (Skin 

Debridement with CC); 

● Proposed new MS-DRG 571 above proposed new MS-DRG 572 (Skin 

Debridement without CC/MCC; and 

● Proposed new MS-DRG 572 above MS-DRG 579 (Other Skin, Subcutaneous 

Tissue, and Breast Procedures with MCC). 

11. Complications or Comorbidity (CC) Exclusions List 

a. Background 
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 As indicated earlier in the preamble of this proposed rule, under the IPPS 

MS-DRG classification system, we have developed a standard list of diagnoses that are 

considered CCs. Historically, we developed this list using physician panels that 

classified each diagnosis code based on whether the diagnosis, when present as a 

secondary condition, would be considered a substantial complication or comorbidity. A 

substantial complication or comorbidity was defined as a condition that, because of its 

presence with a specific principal diagnosis, would cause an increase in the length of stay 

by at least 1 day in at least 75 percent of the patients. We refer readers to section II.D.2. 

and 3. of the preamble of the FY 2008 IPPS final rule with comment period for a 

discussion of the refinement of CCs in relation to the MS-DRGs we adopted for FY 2008 

(72 FR 47121 through 47152). 

b. Proposed CC Exclusions List for FY 2012 

 In the September 1, 1987 final notice (52 FR 33143) concerning changes to the 

DRG classification system, we modified the GROUPER logic so that certain diagnoses 

included on the standard list of CCs would not be considered valid CCs in combination 

with a particular principal diagnosis. We created the CC Exclusions List for the 

following reasons: (1) to preclude coding of CCs for closely related conditions; (2) to 

preclude duplicative or inconsistent coding from being treated as CCs; and (3) to ensure 

that cases are appropriately classified between the complicated and uncomplicated DRGs 

in a pair. As we indicated above, we developed a list of diagnoses, using physician 

panels, to include those diagnoses that, when present as a secondary condition, would be 
CMS-1518-P 174 

considered a substantial complication or comorbidity. In previous years, we have made 

changes to the list of CCs, either by adding new CCs or deleting CCs already on the list. 

 In the May 19, 1987 proposed notice (52 FR 18877) and the September 1, 1987 

final notice (52 FR 33154), we explained that the excluded secondary diagnoses were 

established using the following five principles: 

● Chronic and acute manifestations of the same condition should not be 

considered CCs for one another. 

● Specific and nonspecific (that is, not otherwise specified (NOS)) diagnosis 

codes for the same condition should not be considered CCs for one another. 

● Codes for the same condition that cannot coexist, such as partial/total, 

unilateral/bilateral, obstructed/unobstructed, and benign/malignant, should not be 

considered CCs for one another. 

● Codes for the same condition in anatomically proximal sites should not be 

considered CCs for one another. 

● Closely related conditions should not be considered CCs for one another. 

 The creation of the CC Exclusions List was a major project involving hundreds of 

codes. We have continued to review the remaining CCs to identify additional exclusions 
CMS-1518-P 175 

and to remove diagnoses from the master list that have been shown not to meet the 

definition of a CC.2

(1) Proposed Limited Revisions Based on Changes to the ICD-9-CM Diagnosis Codes 

 For FY 2012, we are proposing to make limited revisions to the CC Exclusions 

List to take into account the changes made in the ICD-9-CM diagnosis coding system 

effective October 1, 2011. (We refer readers to section II.G.13. of the preamble of this 

proposed rule for a discussion of ICD-9-CM changes.) We are proposing to make these 

changes in accordance with the principles established when we created the CC 

Exclusions List in 1987. In addition, we are indicating on the CC Exclusions List some 

changes as a result of updates to the ICD-9-CM codes to reflect the exclusion of codes 

from being MCCs under the MS-DRG system that we adopted in FY 2008. 

 CMS encourages input from our stakeholders concerning the annual IPPS updates 

when that input is made available to us by December of the year prior to the next annual 

proposed rule update. For example, to be considered for any updates or changes in 

FY 2012, comments and suggestions should have been submitted by early 

 

2 See the FY 1989 final rule (53 FR 38485, September 30, 1988), for the revision made for the discharges occurring in FY 1989; the 

FY 1990 final rule (54 FR 36552, September 1, 1989), for the FY 1990 revision; the FY 1991 final rule (55 FR 36126, 

September 4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR 43209, August 30, 1991) for the FY 1992 revision; the 

FY 1993 final rule (57 FR 39753, September 1, 1992), for the FY 1993 revision; the FY 1994 final rule (58 FR 46278, 

September 1, 1993), for the FY 1994 revisions; the FY 1995 final rule (59 FR 45334, September 1, 1994), for the FY 1995 revisions; 

the FY 1996 final rule (60 FR 45782, September 1, 1995), for the FY 1996 revisions; the FY 1997 final rule (61 FR 46171, 

August 30, 1996), for the FY 1997 revisions; the FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998 revisions; the 

FY 1999 final rule (63 FR 40954, July 31, 1998), for the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August 1, 2000), 

for the FY 2001 revisions; the FY 2002 final rule (66 FR 39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final rule 

(67 FR 49998, August 1, 2002), for the FY 2003 revisions; the FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004

revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004), for the FY 2005 revisions; the FY 2006 final rule (70 FR 47640, 

August 12, 2005), for the FY 2006 revisions; the FY 2007 final rule (71 FR 47870) for the FY 2007 revisions; the FY 2008 final rule 

(72 FR 47130) for the FY 2008 revisions, the FY 2009 final rule (73 FR 48510), the FY 2010 final rule (74 FR 43799); and the FY

2011 final rule (75 FR 50114). In the FY 2000 final rule (64 FR 41490, July 30, 1999, we did not modify the CC Exclusions List

because we did not make any changes to the ICD-9-CM codes for FY 2000.
CMS-1518-P 176 

December 2010. The following comments were submitted in a timely manner, and are 

therefore being discussed in this section. 

a. Pressure Ulcer Diagnosis Codes 

We received a comment recommending that CMS remove diagnosis codes 707.23 

(Pressure ulcer, stage III) and 707.24 (Pressure ulcer, stage IV) from the CC Exclusion 

List when reported as a secondary diagnosis code with a principal diagnosis code for the

pressure ulcer site: diagnosis code 707.00 (Pressure ulcer, unspecified); diagnosis code 

707.01 (Pressure ulcer, elbow); diagnosis code 707.02 (Pressure ulcer, upper back); 

diagnosis code 707.03 (Pressure ulcer, lower back); diagnosis code 707.04 (Pressure 

ulcer, hip); diagnosis code 707.05 (Pressure ulcer, buttock); diagnosis code 707.06 

(Pressure ulcer, ankle); diagnosis code 707.07 (Pressure ulcer, heel); or diagnosis code 

707.09 (Pressure ulcer, other site). Currently, when a patient is admitted with a pressure 

ulcer, the CC Exclusion List prevents a pressure ulcer stage diagnosis code from being 

designated as an MCC when reported as a secondary diagnosis. The commenter 

disagreed with this approach and contended that a patient admitted for treatment of a 

stage III or stage IV pressure ulcer likely requires resources that would qualify the case as 

a diagnosis with an MCC or, at a minimum, as a CC. 

Our clinical advisors agree with the commenter. Therefore, we are proposing to 

remove diagnosis codes 707.23 and 707.24 from the CC Exclusion List when a principal 

diagnosis code of one of codes 707.00 through 707.09 is reported. Under this proposal, 

diagnosis code 707.23 or diagnosis code 707.24 would be an MCC when reported as a 
CMS-1518-P 177 

secondary diagnosis code with a principal diagnosis code of one of codes 707.00 through 

707.09. 

b. End-Stage Renal Disease Diagnosis Code 

We received a suggestion from a commenter that diagnosis code 585.6 (End-stage 

renal disease) be added to the CC Exclusion List when reported with a principal diagnosis 

code of 403.90 (Hypertensive chronic kidney disease, unspecified, with chronic kidney 

disease stage I through stage IV, or unspecified) or diagnosis code 403.91 (Hypertensive 

chronic kidney disease, unspecified, with chronic kidney disease stage V or end-stage 

renal disease). Currently, diagnosis code 585.6 is designated as an MCC. 

According to the commenter, diagnosis codes 585.6 and 403.91 are essentially the 

same diagnosis but coding guidelines require the reporting of two codes to identify the 

stage of chronic kidney disease when associated with hypertensive chronic kidney 

disease. The commenter suggested that there is no need for diagnosis code 585.6 to be 

designated as an MCC when reported with a principal diagnosis of hypertensive chronic 

kidney disease, stage V or end-stage renal disease. The commenter also pointed out that, 

while coding guidelines would preclude diagnosis codes 403.90 and 585.6 from being 

reported together, the MS-DRG GROUPER allows diagnosis code 585.6 to act as an 

MCC when reported as a secondary diagnosis with principal diagnosis code 403.90. 

In response to the first issue, our clinical advisors disagree with the commenter. 

Diagnosis code 403.91 includes chronic kidney disease stage V or end-stage renal 

disease. These are two separate conditions (or stages) that are identified by two unique 

codes. Diagnosis code 585.5 identifies stage V chronic kidney disease and is classified as 
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a CC. Diagnosis code 585.6 identifies end-stage renal disease, is classified as an MCC, 

and describes patients who require chronic dialysis. The patients diagnosed with stage V 

chronic kidney disease are a different population who require different resources than 

those patients who are diagnosed with end-stage renal disease. Therefore, we are not 

proposing to add diagnosis code 585.6 to the CC Exclusion List when reported with a 

principal diagnosis of code 403.91. 

On the second issue raised by the commenter, our clinical advisors agree. 

Diagnosis code 403.90 identifies patients with chronic kidney disease, stages I through 

IV or unspecified, and diagnosis code 585.6 identifies end-stage renal disease. Our 

clinical advisors indicate that the reporting of diagnosis code 585.6 should not be 

designated as an MCC in this case. We agree with the commenter that diagnosis codes 

403.90 and 585.6 should not be reported together as instructed by the Coding Guidelines. 

Only a code from the 585.1 through 585.4 range (stages I through IV, or unspecified) 

should be reported with diagnosis code 403.90. Diagnosis code 585.6 is the exclusive 

code that uniquely identifies end-stage renal disease and should only be reported with 

diagnosis code 403.91. Therefore, we are proposing to add diagnosis code 585.6 to the 

CC Exclusion List when reported with a principal diagnosis code of 403.90. 

c. Hypertensive Chronic Kidney Disease with Chronic Kidney Disease Stage V or 

End-Stage Renal Disease Code 

We received a comment recommending the addition of diagnosis code 403.91 

(Hypertensive chronic kidney disease, unspecified, with chronic kidney disease stage V 

or end-stage renal disease) to the CC Exclusion List when reported as a secondary 
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diagnosis code with principal diagnosis code 585.6 (End stage renal disease). The 

commenter stated that it would be unlikely that diagnosis code 403.91 would be reported 

as a secondary diagnosis code with diagnosis code 585.6 as the principal diagnosis code 

due to sequencing rules for end-stage renal disease with hypertension. Currently, 

diagnosis code 403.91 is designated as a CC. 

Our clinical advisors agree with the commenter. Therefore, we are proposing to 

add diagnosis code 403.91 to the CC Exclusion List when reported as a secondary 

diagnosis code with principal diagnosis code 585.6. 

We invite public comment on the above three proposals regarding the CC 

Exclusion List for FY 2012. 

(2) Suggested Changes to Severity Levels for Encephalopathy 

We received a request that we consider changing the following diagnosis codes 

from an MCC to a CC: 

● 348.30 (Encephalopathy NOS) 

● 348.32 (Metabolic encephalopathy) 

● 348.39 (Encephalopathy NEC) 

● 349.82 (Toxic encephalopathy) 

● 572.2 (Hepatic encephalopathy) 

For this FY 2012 IPPS/LTCH PPS proposed rule, we analyzed the claims data for 

the diagnosis codes mentioned above related to encephalopathy. We used the same 

approach we used in initially creating the MS-DRGs and classifying secondary diagnosis 

codes as non-CCs, CCs, or MCCs. A detailed discussion of the process and criteria we 
CMS-1518-P 180 

used in this process is described in the FY 2008 IPPS final rule (72 FR 47158 through 

47161). We refer the readers to this discussion for complete information on our approach 

to developing the non-CC, CC, and MCC lists. Each diagnosis for which Medicare data 

were available was evaluated to determine its impact on resource use and to determine 

the most appropriate CC subclass (non-CC, CC, or MCC) assignment. In order to make 

this determination, the average cost for each subset of cases was compared to the 

expected cost for cases in that subset. The following format was used to evaluate each 

diagnosis: 

Code Diagnosis Cnt1 C1 Cnt2 C2 Cnt3 C3 

Count (Cnt) is the number of patients in each subset. C1, C2, and C3 are a 

measure of the impact on resource use of patients in each of the subsets. The C1, C2, and 

C3 values are a measure of the ratio of average costs for patients with these conditions to 

the expected average cost across all cases. The C1 value reflects a patient with no other 

secondary diagnosis or with all other secondary diagnoses that are non-CCs. The C2 

value reflects a patient with at least one other secondary diagnosis that is a CC but none 

that is a MCC. The C3 value reflects a patient with at least one other secondary diagnosis 

that is a MCC. A value close to 1.0 in the C1 field would suggest that the diagnosis code 

produces the same expected value as a non-CC. A value close to 2.0 suggests the 

condition is more like a CC than a non-CC but not as significant in resource usage as an 

MCC. A value close to 3.0 suggests the condition is expected to consume resources more 

similar to an MCC than a CC or non-CC. For additional details on this analysis, we refer 

readers to the FY 2008 IPPS final rule (72 FR 47158 through 47161). 
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The following chart shows the analysis for each of the encephalopathy diagnosis 

codes that are currently classified as MCCs. 

Code 

Diagnosis 

Description 

CC 

Level Cnt 1 

Cnt 1 

Impact Cnt 2 Cnt 2 Impact Cnt 3 

Cnt 3 

Impact 

34830 

Encephalopathy 

NOS MCC 10,082 2.1206 39,042 2.7774 60,381 3.3702 

34831 

Metabolic 

encephalopathy MCC 6,389 2.0580 29,651 2.6952 49,343 3.4011 

34839 

Encephalopathy 

NEC MCC 4,004 2.1118 15,003 2.7355 19,732 3.3708 

34982 

Toxic 

encephalopathy MCC 4,333 2.3158 18,126 3.0023 26,009 3.5714 

5722 

Hepatic 

encephalopathy MCC 1,375 1.5448 9,885 2.5054 12,421 3.4435 

We ran the following data as described in FY 2008 IPPS final rule (72 FR 47158 

through 47161). The C1 value reflects a patient with no other secondary diagnosis or 

with all other secondary diagnoses that are non-CCs. The C2 value reflects a patient with 

at least one other secondary diagnosis that is a CC but none that is a MCC. The C3 value 

reflects a patient with at least one other secondary diagnosis that is a MCC. 

 The chart above shows that the C1 findings ranged from a low of 1.5448 to a high 

of 2.3158. As stated earlier, a C1 value close to 2.0 suggests the condition is more like a 

CC than a non-CC but not as significant in resource usage as an MCC. The C1 findings 

suggest that these codes are more like a CC than a MCC. However, the C2 findings 

ranged from a low of 2.5054 to a high of 3.0023. Values close to 3.0 suggests the 

condition is more similar to an MCC than a CC or non-CC. The C2 findings support 

maintaining the encephalopathy codes as an MCC level. The data are clearly mixed 

between the C1 and C2 findings, and does not consistently support a change in the 

severity level. Our clinical advisers recommended that these encephalopathy codes 

remain at an MCC level because these patients with encephalopathy typically utilize 
CMS-1518-P 182 

significant resources and are at a higher severity level. Based on the clinical analysis and 

the lack of consistent claims data support for the severity level change, we believe that 

the encephalopathy codes should remain on the MCC list. Therefore, we are proposing to 

retain the following encephalopathy codes on the MCC list: 

● 348.30 (Encephalopathy NOS) 

● 348.32 (Metabolic encephalopathy) 

● 348.39 (Encephalopathy NEC) 

● 349.82 (Toxic encephalopathy) 

● 572.2 (Hepatic encephalopathy) 

We invite public comment on our proposal not to change the severity level 

classification for these codes. 

(3) Suggested Changes to Severity Levels for Mechanical Complication and Infection 

Due to Device Related Codes 

We received a request to change the severity classification from CCs to MCCs for 

the following diagnosis codes: 

● 996.01 (Mechanical of cardiac device, implant and graft due to cardiac 

pacemaker (electrode)). 

● 996.04 (Mechanical complication of cardiac device, implant, and graft due to 

automatic implantable cardiac defibrillator). 

● 996.61 (Infection and inflammatory reaction due to internal prosthetic device, 

implant, and graft due to cardiac device, implant, and graft). 
CMS-1518-P 183 

Currently, all three diagnosis codes are classified as a CC. For this proposed rule, 

we analyzed claims data using the methodology described previously in this section for 

these diagnosis codes. The following chart shows our findings: 

Code 

Diagnosis 

Description 

CC 

Level Cnt 1 

Cnt 1 

Impact Cnt 2 

Cnt 2 

Impact Cnt 3 

Cnt 3 

Impact 

99601 

Malfunc cardiac 

pacemaker CC 1,296 1.6723 1,920 2.4332 1,333 3.1134 

99604 

Mch cmp autm 

mplnt dfbrl CC 419 1.7041 1,032 2.5190 660 3.1508 

99661 

React-cardiac 

dev/graft CC 149 1.9922 633 2.8134 1,253 3.5036 

We reviewed the findings from these data. The C1 findings ranged from a low of 

1.6723 to a high of 1.9922. As stated earlier, a value close to 2.0 in the C1 field suggests 

that the condition is more like a CC than a non-CC but not as significant in resource 

usage as an MCC. The C1 findings clearly support the current classification of these 

three codes on the CC list and the C2 findings supports this classification. Our clinical 

advisors agree that the data findings and their own clinical evaluation of the severity level 

of these conditions support the classification of these three codes on the CC list. 

Therefore, we are proposing that these codes remain on the CC list. We invite public 

comment on this proposal. 

 Tables 6G and 6H, Additions to and Deletions from the CC Exclusion List, 

respectively, which are proposed to be effective for discharges occurring on or after 

October 1, 2011, are not being published in the Addendum to this proposed rule because 

of the length of the two tables. Instead, we are making them available through the 

Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Each of 

these principal diagnoses for which there is a CC exclusion is shown in Tables 6G and 

6H, which are listed in section VI. of the Addendum to this proposed rule (and available 
CMS-1518-P 184 

via the Internet) with an asterisk, and the conditions that will not count as a CC, are 

provided in an indented column immediately following the affected principal diagnosis. 

A complete updated MCC, CC, and Non-CC Exclusions List is also available 

through the Internet on the CMS Web site at: 

http://www.cms.hhs.gov/AcuteInpatientPPS. If finalized in this rulemaking cycle, 

beginning with discharges on or after October 1, 2011, the indented diagnoses will not be 

recognized by the GROUPER as valid CCs for the asterisked principal diagnosis. 

To assist readers in identifying the changes to the MCC and CC lists that occurred 

as a result of updates to the ICD-9-CM codes, as described in Tables 6A, 6C, and 6E, 

which are listed in section VI. of the Addendum to this proposed rule and available via 

the Internet, we are providing the following summaries of those MCC and CC changes 

for FY 2012. 

SUMMARY OF ADDITIONS TO THE MS-DRG MCC LIST--TABLE 6I.1 

Code Description 

415.13 Saddle embolus of pulmonary artery 

444.01 Saddle embolus of abdominal aorta 

516.4 Lymphangioleiomyomatosis 

516.61 Neuroendocrine cell hyperplasia of infancy 

516.62 Pulmonary interstitial glycogenosis 

516.63 Surfactant mutations of the lung 

516.64 Alveolar capillary dysplasia with vein misalignment 

516.69 Other interstitial lung diseases of childhood 

747.31 Pulmonary artery coarctation and atresia 

747.32 Pulmonary arteriovenous malformation 

747.39 Other anomalies of pulmonary artery and pulmonary circulation 

808.54 Multiple open pelvic fractures without disruption of pelvic circle 

SUMMARY OF DELETIONS FROM THE MS-DRG MCC LIST--TABLE 6I.2 

Code Description 

747.3 Anomalies of pulmonary artery 
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SUMMARY OF ADDITIONS TO THE MS-DRG CC LIST--TABLE 6J.1 

Code Description 

286.52 Acquired hemophilia 

286.53 Antiphospholipid antibody with hemorrhagic disorder 

286.59 Other hemorrhagic disorder due to intrinsic circulating anticoagulants, 

antibodies, or inhibitors 

348.82 Brain death 

358.30 Lambert-Eaton syndrome, unspecified 

358.31 Lambert-Eaton syndrome in neoplastic disease 

358.39 Lambert-Eaton syndrome in other diseases classified elsewhere 

444.09 Other arterial embolism and thrombosis of abdominal aorta 

516.30 Idiopathic interstitial pneumonia, not otherwise specified 

516.35 Idiopathic lymphoid interstitial pneumonia 

516.36 Cryptogenic organizing pneumonia 

516.37 Desquamative interstitial pneumonia 

516.5 Adult pulmonary Langerhans cell histiocytosis 

539.01 Infection due to gastric band procedure 

539.09 Other complications of gastric band procedure 

539.81 Infection due to other bariatric procedure 

539.89 Other complications of other bariatric procedure 

596.81 Infection of cystostomy 

596.82 Mechanical complication of cystostomy 

596.83 Other complication of cystostomy 

808.44 Multiple closed pelvic fractures without disruption of pelvic circle 

996.88 Complications of transplanted organ, stem cell 

997.32 Postprocedural aspiration pneumonia 

997.41 Retained cholelithiasis following cholecystectomy 

997.49 Other digestive system complications 

999.41 Anaphylactic reaction due to administration of blood and blood products 

999.42 Anaphylactic reaction due to vaccination 

999.49 Anaphylactic reaction due to other serum 

999.51 Other serum reaction due to administration of blood and blood products 

999.52 Other serum reaction due to vaccination 

999.59 Other serum reaction 

SUMMARY OF DELETIONS FROM THE MS-DRG CC LIST--TABLE 6J.2 

Code Description 

286.5 Hemorrhagic disorder due to intrinsic circulating anticoagulants 

444.0 Embolism and thrombosis of abdominal aorta 

516.3 Idiopathic fibrosing alveolitis 

997.4 Digestive system complications, not elsewhere classified 

999.4 Anaphylactic shock due to serum 

999.5 Other serum reaction, not elsewhere classified 
CMS-1518-P 186 

 Alternatively, the complete documentation of the GROUPER logic, including the 

current CC Exclusions List, is available from 3M/Health Information Systems (HIS), 

which, under contract with CMS, is responsible for updating and maintaining the 

GROUPER program. The current MS-DRG Definitions Manual, Version 28.0, is 

available on a CD for $225.00. Version 29.0 of this manual, which will include the final 

FY 2012 MS-DRG changes, will be available on a CD for $225.00. These manuals may 

be obtained by writing 3M/HIS at the following address: 100 Barnes Road, Wallingford, 

CT 06492; or by calling (203) 949-0303, or by obtaining an order form at the Web site: 

http://www.3MHIS.com. Please specify the revision or revisions requested. 

12. Review of Procedure Codes in MS DRGs 981 through 983; 984 through 986; and 

987 through 989 

 Each year, we review cases assigned to former CMS DRG 468 (Extensive O.R. 

Procedure Unrelated to Principal Diagnosis), CMS DRG 476 (Prostatic O.R. Procedure 

Unrelated to Principal Diagnosis), and CMS DRG 477 (Nonextensive O.R. Procedure 

Unrelated to Principal Diagnosis) to determine whether it would be appropriate to change 

the procedures assigned among these CMS DRGs. Under the MS-DRGs that we adopted 

for FY 2008, CMS DRG 468 was split three ways and became MS-DRGs 981, 982, and 

983 (Extensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, 

and without CC/MCC, respectively). CMS DRG 476 became MS-DRGs 984, 985, and 

986 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and 

without CC/MCC, respectively). CMS DRG 477 became MS-DRGs 987, 988, and 989 
CMS-1518-P 187 

(Nonextensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, with CC, and 

without CC/MCC, respectively). 

 MS-DRGs 981 through 983, 984 through 986, and 987 through 989 (formerly 

CMS DRGs 468, 476, and 477, respectively) are reserved for those cases in which none 

of the O.R. procedures performed are related to the principal diagnosis. These MS-DRGs 

are intended to capture atypical cases, that is, those cases not occurring with sufficient 

frequency to represent a distinct, recognizable clinical group. MS-DRGs 984 through 

986 (previously CMS DRG 476) are assigned to those discharges in which one or more 

of the following prostatic procedures are performed and are unrelated to the principal 

diagnosis: 

● 60.0, Incision of prostate 

● 60.12, Open biopsy of prostate 

● 60.15, Biopsy of periprostatic tissue 

● 60.18, Other diagnostic procedures on prostate and periprostatic tissue 

● 60.21, Transurethral prostatectomy 

● 60.29, Other transurethral prostatectomy 

● 60.61, Local excision of lesion of prostate 

● 60.69, Prostatectomy, not elsewhere classified 

● 60.81, Incision of periprostatic tissue 

● 60.82, Excision of periprostatic tissue 

● 60.93, Repair of prostate 

● 60.94, Control of (postoperative) hemorrhage of prostate 
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● 60.95, Transurethral balloon dilation of the prostatic urethra 

● 60.96, Transurethral destruction of prostate tissue by microwave thermotherapy 

● 60.97, Other transurethral destruction of prostate tissue by other thermotherapy 

● 60.99, Other operations on prostate 

 All remaining O.R. procedures are assigned to MS-DRGs 981 through 983 and 

987 through 989, with MS-DRGs 987 through 989 assigned to those discharges in which 

the only procedures performed are nonextensive procedures that are unrelated to the 

principal diagnosis.3

 Our review of MedPAR claims data showed that there were no cases that merited 

movement or should logically be assigned to any of the other MDCs. Therefore, for 

FY 2012, we are not proposing to change the procedures assigned among these 

MS-DRGs. 

a. Moving Procedure Codes from MS-DRGs 981 through 983 or MS-DRGs 987 through 

989 into MDCs 

 We annually conduct a review of procedures producing assignment to MS-DRGs 

981 through 983 (Extensive O.R. procedure unrelated to principal diagnosis with MCC, 

with CC, and without CC.MCC, respectively) or MS-DRGs 987 through 989 

(Nonextensive O.R. procedure unrelated to principal diagnosis with MCC, with CC, and 

 

3The original list of the ICD-9-CM procedure codes for the procedures we consider nonextensive procedures, if performed with an unrelated principal 

diagnosis, was published in Table 6C in section IV. of the Addendum to the FY 1989 final rule (53 FR 38591). As part of the FY 1991 final rule 

(55 FR 36135), the FY 1992 final rule (56 FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final rule (58 FR 46279), the FY 1995 final 

rule (59 FR 45336), the FY 1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173), and the FY 1998 final rule (62 FR 45981), we moved 

several other procedures from DRG 468 to DRG 477, and some procedures from DRG 477 to DRG 468. No procedures were moved in FY 1999, as 

noted in the final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65 FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule 

(67 FR 49999) we did not move any procedures from DRG 477. However, we did move procedure codes from DRG 468 and placed them in more 

clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365), we moved several procedures from DRG 468 to DRGs 476 and 477 because the 

procedures are nonextensive. In the FY 2005 final rule (69 FR 48950), we moved one procedure from DRG 468 to 477. In addition, we added several 

existing procedures to DRGs 476 and 477. In the FY 2006 (70 FR 47317), we moved one procedure from DRG 468 and assigned it to DRG 477. In 

FY 2007, we moved one procedure from DRG 468 and assigned it to DRGs 479, 553, and 554. In FYs 2008, 2009, FY 2010, and FY 2011, no 

procedures were moved, as noted in the FY 2008 final rule with comment period (72 FR 46241), the FY 2009 final rule (73 FR 48513), the FY 2010 final 

rule (74 FR 43796); and the FY 2011 final rule (75 FR 50122). 
CMS-1518-P 189 

without CC/MCC, respectively) on the basis of volume, by procedure, to see if it would 

be appropriate to move procedure codes out of these MS-DRGs into one of the surgical 

MS-DRGs for the MDC into which the principal diagnosis falls. The data are arrayed in 

two ways for comparison purposes. We look at a frequency count of each major 

operative procedure code. We also compare procedures across MDCs by volume of 

procedure codes within each MDC. 

 We identify those procedures occurring in conjunction with certain principal 

diagnoses with sufficient frequency to justify adding them to one of the surgical 

MS-DRGs for the MDC in which the diagnosis falls. As noted above, there were no 

cases that merited movement or that should logically be assigned to any of the other 

MDCs. Therefore, for FY 2012, we are not proposing to remove any procedures from 

MS-DRGs 981 through 983 or MS-DRGs 987 through 989 into one of the surgical 

MS-DRGs for the MDC into which the principal diagnosis is assigned. 

b. Reassignment of Procedures among MS-DRGs 981 through 983, 984 through 986, 

and 987 through 989 

 We also annually review the list of ICD-9-CM procedures that, when in 

combination with their principal diagnosis code, result in assignment to MS-DRGs 981 

through 983, 984 through 986 (Prostatic O.R. procedure unrelated to principal diagnosis 

with MCC, with CC, or without CC/MCC, respectively), and 987 through 989, to 

ascertain whether any of those procedures should be reassigned from one of these three 

MS-DRGs to another of the three MS-DRGs based on average charges and the length of 

stay. We look at the data for trends such as shifts in treatment practice or reporting 
CMS-1518-P 190 

practice that would make the resulting MS-DRG assignment illogical. If we find these 

shifts, we would propose to move cases to keep the MS-DRGs clinically similar or to 

provide payment for the cases in a similar manner. Generally, we move only those 

procedures for which we have an adequate number of discharges to analyze the data. 

 There were no cases representing shifts in treatment practice or reporting practice 

that would make the resulting MS-DRG assignment illogical, or that merited movement 

so that cases should logically be assigned to any of the other MDCs. Therefore, for 

FY 2012, we are not proposing to move any procedure codes among these MS-DRGs. 

c. Adding Diagnosis or Procedure Codes to MDCs 

 Based on the review of cases in the MDCs as described above in sections 

III.G.12.a. and b., we are not proposing to add any diagnosis or procedure codes to 

MDCs for FY 2012. 

13. Changes to the ICD-9-CM Coding System, Including Discussion of the Replacement 

of the ICD-9-CM Coding System with the ICD-10-CM and ICD-10-PCS Systems in 

FY 2014 

a. ICD-9-CM Coding System 

 As described in section II.B.1. of the preamble of this proposed rule, the 

ICD-9-CM is a coding system currently used for the reporting of diagnoses and 

procedures performed on a patient. In September 1985, the ICD-9-CM Coordination and 

Maintenance Committee was formed. This is a Federal interdepartmental committee, 

co-chaired by the National Center for Health Statistics (NCHS), the Centers for Disease 

Control and Prevention, and CMS, charged with maintaining and updating the ICD-9-CM 
CMS-1518-P 191 

system. The Committee is jointly responsible for approving coding changes, and 

developing errata, addenda, and other modifications to the ICD-9-CM to reflect newly 

developed procedures and technologies and newly identified diseases. The Committee is 

also responsible for promoting the use of Federal and non-Federal educational programs 

and other communication techniques with a view toward standardizing coding 

applications and upgrading the quality of the classification system. 

 The Official Version of the ICD-9-CM contains the list of valid diagnosis and 

procedure codes. (The Official Version of the ICD-9-CM is available from the 

Government Printing Office on CD-ROM for $19.00 by calling (202) 512-1800.) 

Complete information on ordering the CD-ROM is also available at: 

http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/05_CDROM.asp#TopOfPage. 

The Official Version of the ICD-9-CM is no longer available in printed manual form 

from the Federal Government; it is only available on CD-ROM. Users who need a paper 

version are referred to one of the many products available from publishing houses. 

The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in 

the Tabular List and Alphabetic Index for Diseases, while CMS has lead responsibility 

for the ICD-9-CM procedure codes included in the Tabular List and Alphabetic Index for 

Procedures. 

 The Committee encourages participation in the above process by health-related 

organizations. In this regard, the Committee holds public meetings for discussion of 

educational issues and proposed coding changes. These meetings provide an opportunity 

for representatives of recognized organizations in the coding field, such as the American 
CMS-1518-P 192 

Health Information Management Association (AHIMA), the American Hospital 

Association (AHA), and various physician specialty groups, as well as individual 

physicians, health information management professionals, and other members of the 

public, to contribute ideas on coding matters. After considering the opinions expressed at 

the public meetings and in writing, the Committee formulates recommendations, which 

then must be approved by the agencies. 

 The Committee presented proposals for coding changes for implementation in 

FY 2012 at a public meeting held on September 15-16, 2010 and finalized the coding 

changes after consideration of comments received at the meetings and in writing by 

November 19, 2010. Those coding changes are announced in Tables 6A through 6F, 

which are listed in section VI. of the Addendum to this proposed rule and available via 

the Internet. 

The Committee held its 2011 meeting on March 9-10, 2011. New codes for 

which there was a consensus of public support and for which complete tabular and 

indexing changes are made by May 2011 will be included in the October 1, 2011 update 

to ICD-9-CM. Code revisions that were discussed at the March 9-10, 2011 Committee 

meeting but that could not be finalized in time to include them in the tables listed in 

section VI. of the Addendum to this proposed rule will be included in Tables 6A through 

6F, which will be listed in section VI. of the Addendum to the final rule and available via 

the Internet, and will be marked with an asterisk (*). 

Copies of the minutes of the procedure codes discussions at the Committee’s 

September 15-16, 2010 meeting and March 9-10, 2011 meeting can be obtained from the 
CMS-1518-P 193 

CMS Web site at: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. 

The minutes of the diagnosis codes discussions at the September 15-16, 2010 meeting 

and March 9-10, 2011 meeting are found at: http://www.cdc.gov/nchs/icd.htm. These 

Web sites also provide detailed information about the Committee, including information 

on requesting a new code, attending a Committee meeting, and timeline requirements and 

meeting dates. 

 We encourage commenters to address suggestions on coding issues involving 

diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM Coordination and 

Maintenance Committee, NCHS, Room 2402, 3311 Toledo Road, Hyattsville, MD 

20782. Comments may be sent by E-mail to: dfp4@cdc.gov. 

 Questions and comments concerning the procedure codes should be addressed to: 

Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and Maintenance 

Committee, CMS, Center for Medicare Management, Hospital and Ambulatory Policy 

Group, Division of Acute Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 

21244-1850. Comments may be sent by E-mail to: patricia.brooks2@cms.hhs.gov. 

 The ICD-9-CM code changes that have been approved will become effective 

October 1, 2011. The new ICD-9-CM codes are listed, along with their MS-DRG 

classifications, in Tables 6A and 6B (New Diagnosis Codes and New Procedure Codes, 

respectively), which are listed in section VI. of the Addendum to this proposed rule and 

available via the Internet. As we stated above, the code numbers and their titles were 

presented for public comment at the ICD-9-CM Coordination and Maintenance 
CMS-1518-P 194 

Committee meetings. Both oral and written comments were considered before the codes 

were approved. 

 In this proposed rule, we are soliciting comments on the proposed classification of 

these new codes, which are shown in Tables 6A and 6B listed in section VI. of the 

Addendum to this proposed rule and available via the Internet. 

For codes that have been replaced by new or expanded codes, the corresponding 

new or expanded diagnosis codes are included in Table 6A, which is listed in section VI. 

of the Addendum to this proposed rule and available via the Internet. New procedure 

codes are shown in Table 6B, which is listed in section VI. of the Addendum to this 

proposed rule and available via the Internet. Diagnosis codes that have been replaced by 

expanded codes or other codes or have been deleted are in Table 6C (Invalid Diagnosis 

Codes), which is listed in section VI. of the Addendum to this proposed rule and 

available via the Internet. These invalid diagnosis codes will not be recognized by the 

GROUPER beginning with discharges occurring on or after October 1, 2011. Table 6D, 

which is listed in section VI. of the Addendum to this proposed rule and available via the 

Internet contains invalid procedure codes. These invalid procedure codes will not be 

recognized by the GROUPER beginning with discharges occurring on or after 

October 1, 2011. Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis 

Code Titles), which is listed in section VI. of the Addendum to this proposed rule and 

available via the Internet, and also includes the MS-DRG assignments for these revised 

codes. Table 6F, which is listed in section VI. of the Addendum to this proposed rule and 

available via the Internet includes revised procedure code titles for FY 2012. 
CMS-1518-P 195 

 In the September 7, 2001 final rule implementing the IPPS new technology 

add-on payments (66 FR 46906), we indicated we would attempt to include proposals for 

procedure codes that would describe new technology discussed and approved at the 

Spring meeting as part of the code revisions effective the following October. As stated 

previously, ICD-9-CM codes discussed at the March 9-10, 2011 Committee meeting that 

received consensus and that are finalized by May 2011 will be included in Tables 6A 

through 6F, which will be listed in section VI. of the Addendum to the final rule and 

available via the Internet. 

 Section 503(a) of Pub. L. 108-173 included a requirement for updating 

ICD-9-CM codes twice a year instead of a single update on October 1 of each year. This 

requirement was included as part of the amendments to the Act relating to recognition of 

new technology under the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the 

Act by adding a clause (vii) which states that the "Secretary shall provide for the addition 

of new diagnosis and procedure codes on April 1 of each year, but the addition of such 

codes shall not require the Secretary to adjust the payment (or diagnosis-related group 

classification) . . . until the fiscal year that begins after such date." This requirement 

improves the recognition of new technologies under the IPPS system by providing 

information on these new technologies at an earlier date. Data will be available 6 months 

earlier than would be possible with updates occurring only once a year on October 1. 

 While section 1886(d)(5)(K)(vii) of the Act states that the addition of new 

diagnosis and procedure codes on April 1 of each year shall not require the Secretary to 

adjust the payment, or DRG classification, under section 1886(d) of the Act until the 
CMS-1518-P 196 

fiscal year that begins after such date, we have to update the DRG software and other 

systems in order to recognize and accept the new codes. We also publicize the code 

changes and the need for a mid-year systems update by providers to identify the new 

codes. Hospitals also have to obtain the new code books and encoder updates, and make 

other system changes in order to identify and report the new codes. 

 The ICD-9-CM Coordination and Maintenance Committee holds its meetings in 

the spring and fall in order to update the codes and the applicable payment and reporting 

systems by October 1 of each year. Items are placed on the agenda for the ICD-9-CM 

Coordination and Maintenance Committee meeting if the request is received at least 

2 months prior to the meeting. This requirement allows time for staff to review and 

research the coding issues and prepare material for discussion at the meeting. It also 

allows time for the topic to be publicized in meeting announcements in the Federal 

Register as well as on the CMS Web site. The public decides whether or not to attend 

the meeting based on the topics listed on the agenda. Final decisions on code title 

revisions are currently made by March 1 so that these titles can be included in the IPPS 

proposed rule. A complete addendum describing details of all changes to ICD-9-CM, 

both tabular and index, is published on the CMS and NCHS Web sites in May of each 

year. Publishers of coding books and software use this information to modify their 

products that are used by health care providers. This 5-month time period has proved to 

be necessary for hospitals and other providers to update their systems. 

 A discussion of this timeline and the need for changes are included in the 

December 4-5, 2005 ICD-9-CM Coordination and Maintenance Committee minutes. The 
CMS-1518-P 197 

public agreed that there was a need to hold the fall meetings earlier, in September or 

October, in order to meet the new implementation dates. The public provided comment 

that additional time would be needed to update hospital systems and obtain new code 

books and coding software. There was considerable concern expressed about the impact 

this new April update would have on providers. 

 In the FY 2005 IPPS final rule, we implemented section 1886(d)(5)(K)(vii) of the 

Act, as added by section 503(a) of Pub. L. 108-173, by developing a mechanism for 

approving, in time for the April update, diagnosis and procedure code revisions needed to 

describe new technologies and medical services for purposes of the new technology 

add-on payment process. We also established the following process for making these 

determinations. Topics considered during the Fall ICD-9-CM Coordination and 

Maintenance Committee meeting are considered for an April 1 update if a strong and 

convincing case is made by the requester at the Committee's public meeting. The request 

must identify the reason why a new code is needed in April for purposes of the new 

technology process. The participants at the meeting and those reviewing the Committee 

meeting summary report are provided the opportunity to comment on this expedited 

request. All other topics are considered for the October 1 update. Participants at the 

Committee meeting are encouraged to comment on all such requests. There were no 

requests approved for an expedited April l, 2011 implementation of an ICD-9-CM code at 

the September 15-16, 2010 Committee meeting. Therefore, there were no new 

ICD-9-CM codes implemented on April 1, 2011. 
CMS-1518-P 198 

 Current addendum and code title information is published on the CMS Web site 

at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.asp#TopofPage. 

Information on ICD-9-CM diagnosis codes, along with the Official ICD-9-CM Coding 

Guidelines, can be found on the Web site at: http://www.cdc.gov/nchs/icd9.htm. 

Information on new, revised, and deleted ICD-9-CM codes is also provided to the AHA 

for publication in the Coding Clinic for ICD-9-CM. AHA also distributes information to 

publishers and software vendors. 

 CMS also sends copies of all ICD-9-CM coding changes to its Medicare 

contractors for use in updating their systems and providing education to providers. 

These same means of disseminating information on new, revised, and deleted 

ICD-9-CM codes will be used to notify providers, publishers, software vendors, 

contractors, and others of any changes to the ICD-9-CM codes that are implemented in 

April. The code titles are adopted as part of the ICD-9-CM Coordination and 

Maintenance Committee process. Thus, although we publish the code titles in the IPPS 

proposed and final rules, they are not subject to comment in the proposed or final rules. 

We will continue to publish the October code updates in this manner within the IPPS 

proposed and final rules. For codes that are implemented in April, we will assign the new 

procedure code to the same MS-DRG in which its predecessor code was assigned so there 

will be no MS-DRG impact as far as MS-DRG assignment. Any midyear coding updates 

will be available through the Web sites indicated above and through the Coding Clinic for 

ICD-9-CM. Publishers and software vendors currently obtain code changes through 

these sources in order to update their code books and software systems. We will strive to 
CMS-1518-P 199 

have the April 1 updates available through these Web sites 5 months prior to 

implementation (that is, early November of the previous year), as is the case for the 

October 1 updates. 

b. Code Freeze 

The International Classification of Diseases, 10th Revision (ICD-10) coding 

system applicable to hospital inpatient services will be implemented on October 1, 2013, 

as described in the Health Insurance Portability and Accountability Act (HIPAA) 

Administrative Simplification: Modifications to Medical Data code Set Standards to 

Adopt ICD-10-CM and ICD-10-PCS final rule (74 FR 3328 through 3362, 

January 16, 2009). The ICD-10 coding system includes the International Classification 

of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) for diagnosis coding and 

the International Classification of Diseases, 10th Revision, Procedure Coding System 

(ICD-10-PCS) for inpatient hospital procedure coding, as well as the Official 

ICD-10-CM and ICM-10-PCS Guidelines for Coding and Reporting. In the 

January 16, 2009 ICD-10-CM and ICD-10-PCS final rule (74 FR 3328 through 3362), 

there was a discussion of the need for a partial or total freeze in the annual updates to 

both ICD-9-CM and ICD-10-CM and ICD-10-PCS codes. The public comment 

addressed in that final rule stated that the annual code set updates should cease l year 

prior to the implementation of ICD-10. The commenters stated that this freeze of code 

updates would allow for instructional and/or coding software programs to be designed 

and purchased early, without concern that an upgrade would take place immediately 

before the compliance date, necessitating additional updates and purchases. 
CMS-1518-P 200 

We responded to comments in the ICD-10 final rule that the ICD-9-CM 

Coordination and Maintenance Committee has jurisdiction over any action impacting the 

ICD-9-CM and ICD-10 code sets. Therefore, we indicated that the issue of consideration 

of a moratorium on updates to the ICD-9-CM, ICD-10-CM, and ICD-10-PCS code sets in 

anticipation of the adoption of ICD-10-CM and ICD-10-PCS would be addressed through 

the Committee at a future public meeting. 

The code freeze was discussed at multiple meetings of the ICD-9-CM 

Coordination and Maintenance Committee and public comment was actively solicited. 

The Committee evaluated all comments from participants attending the Committee 

meetings as well as written comments that were received. There was an announcement at 

the September 15-16, 2010 ICD-9-CM Coordination and Maintenance Committee 

meeting that a partial freeze of both ICD-9-CM and ICD-10 codes would be implemented 

as follows: 

● The last regular annual update to both ICD-9-CM and ICD-10 code sets will be 

made on October 1, 2011. 

● On October 1, 2012, there will be only limited code updates to both ICD-9-CM 

and ICD-10 code sets to capture new technology and new diseases. 

● There will be no updates to ICD-9-CM on October 1, 2013, as the system will 

no longer be a HIPAA standard. There will be only limited code updates to ICD-10 code 

sets on October 1, 2013, to capture new technology and new diseases. 

● On October 1, 2014, regular updates to ICD-10 will begin. 
CMS-1518-P 201 

The ICD-9-CM Coordination and Maintenance Committee announced that it 

would continue to meet twice a year during the freeze. At these meetings, the public will 

be encouraged to comment on whether or not requests for new diagnosis and procedure 

codes should be created based on the need to capture new technology and new diseases. 

Any code requests that do not meet the criteria will be evaluated for implementation 

within ICD-10 on or after October 1, 2014, once the partial freeze is ended. 

Complete information on the partial code freeze and discussions of the issues at 

the Committee meetings can be found on the ICD-9-CM Coordination and Maintenance 

Committee Web site at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03. A 

summary of the September 15-16, 2010 Committee meeting, along with both written and 

audio transcripts of this meeting, are posted on the “Download” section of this Web page. 

c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on Hospital Inpatient 

Claims 

 In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50127), we discussed that we 

had received repeated requests from the hospital community to process all 25 diagnosis 

codes and 25 procedure codes submitted on electronic hospital inpatient claims. Prior to 

January 1, 2011, hospitals could submit up to 25 diagnoses and 25 procedures; however, 

CMS’ system limitations allowed for the processing of only the first 9 diagnoses and 6 

procedures. We indicated in that final rule that, as part of our efforts to update Medicare 

systems prior to the implementation of ICD-10 on October 1, 2013, we were undergoing 

extensive system updates as part of the move to 5010, which includes the ability to accept 

ICD-10 codes. This complicated transition involved converting many internal systems 
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prior to October 1, 2013, when ICD-10 will be implemented. We stated that, as one 

important step in this planned conversion process, we were planning to complete the 

expansion of our internal system capability so that we are able to process up to 25 

diagnoses and 25 procedures on hospital inpatient claims as part of the HIPAA ASC X12 

Technical Reports Type 3, Version 005010 (Version 5010) standards system update. We 

have not completed this expansion, and, as a result, we were able to process up to 25 

diagnosis codes and 25 procedure codes when received on the 5010 format starting on 

January 1, 2011. We continue to recognize the value of the additional information 

provided by this coded data for multiple uses such as for payment, quality measures, 

outcome analysis, and other important uses. 

d. ICD-10 MS-DRGs 

 In response to the FY 2011 IPPS/LTCH PPS proposed rule, we received 

comments on the creation of the ICD-10 version of the MS-DRGs, which will be 

implemented on October 1, 2013 (FY 2014) when we implement the reporting of ICD-10 

codes (75 FR 50127 and 50128). While we did not propose an ICD-10 version of the 

MS-DRGs in the FY 2011 IPPS/LTCH PPS proposed rule, we noted that we have been 

actively involved in converting our current MS-DRGs from ICD-9-CM codes to ICD-10 

codes and sharing this information through the ICD-9-CM Coordination and Maintenance 

Committee. We undertook this early conversion project to assist other payers and 

providers in understanding how to go about their own conversion projects. We posted 

ICD-10 MS-DRGs based on V26.0 (FY 2009) of the MS-DRGs. We also posted a paper 

that describes how CMS went about completing this project and suggestions for others to 
CMS-1518-P 203 

follow. All of this information can be found on the CMS Web site at: 

http://www.cms.gov/ICD10/17_ICD10_MS_DRG_Conversion_Project.asp. We have 

continued to keep the public updated on our maintenance efforts for ICD-10-CM and 

ICD-10-PCS coding systems as well as the General Equivalence Mappings that assist in 

conversion through the ICD-9-CM Coordination and Maintenance Committee. 

Information on these committee meetings can be found at: 

http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. 

During FY 2011, we developed and posted Version 28.0 of the ICD-10 MS-DRGs 

based on the FY 2011 MS-DRGs (Version 28.0) that we finalized in the FY 2011 

IPPS/LTCH PPS final rule on the CMS Web site. This ICD-10 MS-DRG Version 28.0 

also includes the CC Exclusion List and the ICD-10 version of the hospital acquired 

conditions (HACs), which was not posted with Version 26.0. We also discussed this 

update at the September 15-16, 2010 and the March 9-10, 2011 meetings of the 

ICD-9-CM Coordination and Maintenance Committee. The minutes of these two 

meetings are posted on the CMS Web site at: 

http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. We will continue 

to work with the public to explain how we are approaching the conversion of MS-DRGs 

to ICD-10 and will post drafts of updates as they are developed for public review. The 

final version of the ICD-10 MS-DRGs to be implemented in FY 2014 will be subject to 

notice and comment rulemaking. In the meantime, we will provide extensive and 

detailed information on this activity through the ICD-9-CM Coordination and 

Maintenance Committee. 
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14. Other Issues 

a. O.R./Non-O.R. Status of Procedures 

(1) Brachytherapy Code 

 We received a request that we add ICD-9-CM procedure code 92.27 (Implantation 

or Insertion of Radioactive Elements) [Brachytherapy] into 41 MS-DRGs that are listed 

below: 

● 129 (Major Head and Neck Procedures with CC/MCC or Major Device) 

● 130 (Major Head and Neck Procedures without CC/MCC) 

● 163 (Major Chest Procedures with MCC) 

● 164 (Major Chest Procedures with CC) 

● 165 (Major Chest Procedures without CC/MCC) 

● 180 (Respiratory Neoplasms with MCC) 

● 181 (Respiratory Neoplasms with CC) 

● 182 (Respiratory Neoplasms without CC/MCC) 

● 326 (Stomach, Esophageal and Duodenal Procedures with MCC) 

● 327 (Stomach, Esophageal and Duodenal Procedures with CC) 

● 328 (Stomach, Esophageal and Duodenal Procedures without CC/MCC) 

● 329 (Major Small and Large Bowel Procedures with MCC) 

● 330 (Major Small and Large Bowel Procedures with CC) 

● 331 (Major Small and Large Bowel Procedures without CC/MCC) 

● 332 (Rectal Resection with MCC) 

● 333 (Rectal Resection with CC) 
CMS-1518-P 205 

● 334 (Rectal Resection without CC/MCC) 

● 344 (Minor Small and Large Bowel Procedures with MCC) 

● 345 (Minor Small and Large Bowel Procedures with CC) 

● 346 (Minor Small and Large Bowel Procedures without CC/MCC) 

● 347 (Anal and Stomal Procedures with MCC) 

● 348 (Anal and Stomal Procedures with CC) 

● 349 (Anal and Stomal Procedures without CC/MCC) 

● 405 (Pancreas, Liver and Shunt Procedures with MCC) 

● 406 (Pancreas, Liver and Shunt Procedures with CC) 

● 407 (Pancreas, Liver and Shunt Procedures without CC/MCC) 

● 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc 

Device/Neurostimulator) 

● 491 (Back and Neck Procedures Except Spinal Fusion without CC/MCC) 

● 500 (Soft Tissue procedures with MCC) 

● 501 (Soft Tissue procedures with CC) 

● 502 (Soft Tissue procedures without CC/MCC) 

● 584 (Breast Biopsy, Local Excision and Other Breast Procedures with 

CC/MCC) 

● 585 (Breast Biopsy, Local Excision and Other Breast Procedures without 

CC/MCC) 

● 597 (Malignant Breast Disorders with MCC) 

● 598 (Malignant Breast Disorders with CC) 
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● 599 (Malignant Breast Disorders without CC/MCC) 

● 653 (Major Bladder Procedures with MCC) 

● 654 (Major Bladder Procedures with CC) 

● 655 (Major Bladder Procedures without CC/MCC) 

● 656 (Kidney and Ureter Procedures for Neoplasm with MCC) 

● 657 (Kidney and Ureter Procedures for Neoplasm with CC) 

● 658 (Kidney and Ureter Procedures for Neoplasm without CC/MCC) 

● 662 (Minor Bladder Procedures with MCC) 

● 663 (Minor Bladder Procedures with CC) 

● 664 (Minor Bladder Procedures without CC/MCC) 

● 668 (Transurethral Procedures with MCC) 

● 669 (Transurethral Procedures with CC) 

● 670 (Transurethral Procedures without CC/MCC) 

● 671 (Urethral Procedures with CC/MCC) 

● 672 (Urethral Procedures without CC/MCC) 

● 707 (Major Male Pelvic Procedures with CC/MCC) 

● 708 (Major Male Pelvic Procedures without CC/MCC) 

● 736 (Uterine and Adnexa Procedures for Ovarian or Adnexal Malignancy with 

MCC) 

● 737 (Uterine and Adnexa Procedures for Ovarian or Adnexal Malignancy with 

CC) 
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● 738 (Uterine and Adnexa Procedures for Ovarian or Adnexal Malignancy 

without CC/MCC) 

● 739 (Uterine and Adnexa Procedures for Nonovarian or Adnexal Malignancy 

with MCC) 

● 740 (Uterine and Adnexa Procedures for Nonovarian or Adnexal Malignancy 

with CC) 

● 741 (Uterine and Adnexa Procedures for Nonovarian or Adnexal Malignancy 

without CC/MCC) 

● 746 (Vagina, Cervix and Vulva Procedures with CC/MCC) 

● 747 (Vagina Cervix and Vulva Procedures without CC/MCC) 

● 748 (Female Reproductive System Reconstructive Procedures) 

● 749 (Other Female Reproductive System O.R. Procedures with CC/MCC) 

● 750 (Other Female Reproductive System O.R. Procedures without CC/MCC) 

We examined MedPAR claims data on this request and only found 150 cases 

throughout these MS-DRGs. Our findings are presented in the table below. 

MS-DRG with Code 92.27 MS-DRG without Code 92.27 

DRG Number 

of Cases 

Average 

Length of 

Stay 

Average 

Costs 

Number 

of Cases

Average 

Length of 

Stay 

Average 

Costs 

129 6 6.67 $15,793 1,326 5.35 $14,400

130 2 1.00 $7,587 904 2.78 $7,860

163 17 8.18 $24,166 11,871 13.90 $31,860

164 52 5.94 $17,505 16,487 7.13 $16,865

165 41 2.95 $10,638 9,260 4.27 $11,754

180 0 0 0 19,304 7.37 $11,396

181 0 0 0 22,205 5.30 $8,014

182 0 0 0 2,365 3.59 $5,580

326 0 0 0 10,321 15.48 $35,437

327 1 4.00 $9,302 9.671 8.67 $17,889
CMS-1518-P 208 

MS-DRG with Code 92.27 MS-DRG without Code 92.27 

DRG Number 

of Cases 

Average 

Length of 

Stay 

Average 

Costs 

Number 

of Cases

Average 

Length of 

Stay 

Average 

Costs 

328 0 0 0 8,461 3.49 $9,161

329 1 24.00 $37,654 41,107 15.10 $33,003

330 2 9.00 $20,043 53,584 8.91 $16,736

331 0 0 0 22,105 5.13 $10,654

332 1 48.00 $61,169 1,439 13.40 $29,727

333 1 10.00 $11,446 4,494 7.86 $16,008

334 1 16.00 $27,312 2,855 4.76 $10,518

344 0 0 0 756 11.30 $21,590

345 0 0 0 2,906 6.67 $11,190

346 0 0 0 2,331 4.52 $7,757

347 0 0 0 1,430 8.80 $16,644

348 0 0 0 3,975 5.40 $9,326

349 0 0 0 3,512 2.75 $5,311

405 1 8.00 $8,444 3,940 15.45 $35,970

406 2 10.50 $23,231 4,749 7.83 $17,333

407 0 0 0 1,799 8.04 $12,148

490 0 0 0 19,840 4.24 $11,940

491 0 0 0 38,574 2.05 $6,794

500 0 0 0 1,935 10.86 $20,600

501 5 7.00 $12,896 4,961 5.77 $10,256

502 5 7.40 $13,876 5,009 2.78 $6,844

584 0 0 0 790 5.32 $11,126

585 0 0 0 1,318 2.12 $7,283

597 0 0 0 532 7.41 $10,990

598 0 0 0 1,369 5.32 $7,624

599 0 0 0 165 3.26 $4,368

653 1,589 16.34 $35,856

654 3,502 9.13 $19,367

655 0 0 0 1,121 5.53 $413,162

656 1 20.00 $77,737 3,110 10.00 $24,022

657 0 0 0 7,885 5.63 $13,345

658 0 0 0 6,150 3.25 $9,718

662 0 0 0 763 10.21 $19,455

663 0 0 0 1,818 2.18 $9,729

664 0 0 0 2,705 1.86 $7,457

668 2 3.50 $3,972 2,908 8.99 $16,852

669 4 6.50 $7,832 13,776 4.25 $8,398

670 2 1.50 $5,639 7,321 2.24 $5,158

671 0 0 0 746 5.45 $9,778
CMS-1518-P 209 

MS-DRG with Code 92.27 MS-DRG without Code 92.27 

DRG Number 

of Cases 

Average 

Length of 

Stay 

Average 

Costs 

Number 

of Cases

Average 

Length of 

Stay 

Average 

Costs 

672 0 0 0 613 2.31 $5,575

707 0 0 0 4,719 4.26 $12,080

708 1 3.00 $11,252 14,329 1.80 $8,572

736 0 0 0 775 13.18 $29,827

737 1 6.00 $13,045 2,844 6.49 $13,348

738 0 0 0 642 3.47 $7,966

739 0 0 0 790 10.18 $23,070

740 0 0 0 3,914 4.34 $10,214

741 1 1.00 $3,225 4,917 2.31 $7,438

746 0 0 0 2,282 3.97 $8,504

747 0 0 0 6,243 1.72 $5,995

748 0 0 0 14,682 1.67 $6,285

749 0 0 0 920 8.58 $16,781

750 0 0 0 285 2.88 $7,116

The numbers of cases in any of the MS-DRGs listed were minimal. Many of the 

MS-DRGs listed had no occurrences of procedure code 92.27. The highest number of 

cases found was 52, in MS-DRG 164 (Major Chest Procedures with CC). Based on these 

findings, we do not believe that making a MS-DRG change based on such a minimal 

number of cases can be justified. Therefore, we are proposing not to add procedure code 

92.27 to any of the 41 MS-DRGs listed above. Further, we are not proposing any 

MS-DRG changes for procedure code 92.27. We welcome public comment on our 

proposal not to make changes to procedure code 92.27. 

(2) Intraoperative Electron Radiation Therapy (IOERT) 

We received a public comment that was outside of the scope of the FY 2011 

IPPS/LTCH PPS proposed rule regarding the MS-DRG assignment for intraoperative 

electron radiation therapy (IOERT). This issue was discussed briefly in the FY 2011 

IPPS/LTCH PPS final rule (75 FR 50128). However, we are addressing this issue in this 
CMS-1518-P 210 

FY 2012 proposed rule. IOERT is the direct application of radiation to a tumor and/or 

tumor bed while the patient is undergoing surgery for cancer. This technology may be 

used for cancers of the rectum, head/neck, pancreas, lung, genitourinary, soft tissue, and 

breast. IOERT is a secondary procedure performed during the primary tumor removal 

surgery. 

The commenter requested that CMS update the MS-DRG assignments for 

procedure code 92.41 (Intraoperative electron radiation therapy) to ensure that the cost of 

this technology is captured in each MS-DRG involving tumor removal in the rectum, 

head/neck, pancreas, lung, genitourinary, soft tissue, and breast. Currently, this code is 

not assigned to a specific MS-DRG as the primary procedure performed, the tumor 

removal, would determine the appropriate MS-DRG assignment. 

The commenter provided a recommended list of MS-DRGs to which IOERT 

should be assigned: 

MSDRG Description 

129 Major Head and Neck Procedures with CC/MCC or Major Device 

130 Major Head and Neck Procedures without CC/MCC 

133 Other Ear, Nose, Mouth and Throat O,R, Procedures with CC/MCC 

134 Other Ear, Nose, Mouth and Throat O.R. Procedures without CC/MCC 

163 Major Chest Procedures with MCC 

164 Major Chest Procedures with CC 

165 Major Chest Procedures without CC/MCC 

166 Other Respiratory System O.R. Procedures with MCC 

167 Other Respiratory System O.R. Procedures with CC 

168 Other Respiratory System O,R Procedures without CC/MCC 

326 Stomach, Esophageal and Duodenal Procedures with MCC 

327 Stomach, Esophageal and Duodenal Procedures with CC 

328 Stomach, Esophageal and Duodenal Procedures without CC/MCC 

329 Major Small and Large Bowel Procedures with MCC 

330 Major Small and Large Bowel Procedures with CC 

331 Major Small and Large Bowel Procedures without CC/MCC 
CMS-1518-P 211 

MSDRG Description 

332 Rectal Resection with MCC 

333 Rectal Resection with CC 

334 Rectal Resection without CC/MCC 

344 Minor Small and Large Bowel Procedures with MCC 

345 Minor Small and Large Bowel Procedures with CC 

346 Minor Small and Large Bowel Procedures without CC/MCC 

347 Anal and Stomal Procedures with MCC 

348 Anal and Stomal Procedures with CC 

349 Anal and Stomal Procedures without CC/MCC 

356 Other Digestive System O.R. Procedures with MCC 

357 Other Digestive System O.R. Procedures with CC 

358 Other Digestive System O,R, Procedures without CC/MCC 

405 Pancreas, Liver and Shunt Procedures with MCC 

406 Pancreas, Liver and Shunt Procedures with CC 

407 Pancreas, Liver and Shunt Procedures without CC/MCC 

490 Back and Neck Procedures Except Spinal Fusion with CC/MCC 

491 Back and Neck Procedures Except Spinal Fusion without CC/MCC 

500 Soft Tissue Procedures with MCC 

501 Soft Tissue Procedures with CC 

502 Soft Tissue Procedures without CC/MCC 

579 Other Skin, Subcutaneous Tissue and Breast Procedures with MCC 

580 Other Skin, Subcutaneous Tissue and Breast Procedures with CC 

58 1 Other Skin, Subcutaneous Tissue and Breast Procedures without CC/MCC 

584 Breast Biopsy, Local Excision and Other Breast Procedures with CC/MCC 

585 Breast Biopsy, Local Excision and Other Breast Procedures without 

CC/MCC 

653 Major Bladder Procedures with MCC 

654 Major Bladder Procedures with CC 

655 Major Bladder Procedures without CC/MCC 

656 Kidney and Ureter Procedures For Neoplasm with MCC 

657 Kidney and Ureter Procedures For Neoplasm with CC 

658 Kidney and Ureter Procedures for Neoplasm without MCC/CC 

662 Minor Bladder Procedures with MCC 

663 Minor Bladder Procedures with CC 

664 Minor Bladder Procedures without CC/MCC 

668 Transurethral Procedures with MCC 

669 Transurethral Procedures with CC 

670 Transurethral Procedures without CC/MCC 

671 Urethral Procedures with CC/MCC 

672 Urethral Procedures without CC/MCC 

707 Major Male Pelvic Procedures with CC/MCC 
CMS-1518-P 212 

MSDRG Description 

708 Major Male Pelvic Procedures without CC/MCC 

715 Other Male Reproductive System O.R. Procedures For Malignancy with 

CC/MCC 

716 Other Male Reproductive System O.R. Procedures For Malignancy without 

CC/MCC 

736 Uterine and Adnexa Procedures for Ovarian or Adnexal Malignancy with 

MCC 

737 Uterine and Adnexa Procedures for Ovarian or Adnexal Malignancy with 

CC 

738 Uterine and Adnexa Procedures for Ovarian or Adnexal Malignancy 

without CC/MCC 

739 Uterine and Adnexa Procedures for Nonovarian or Adnexal Malignancy 

with MCC 

740 Uterine and Adnexa Procedures for Nonovarian or Adnexal Malignancy 

with CC 

741 Uterine and Adnexa Procedures for Nonovarian or Adnexal Malignancy 

without CC/MCC 

746 Vagina, Cervix and Vulva Procedures with CC/MCC 

747 Vagina Cervix and Vulva Procedures without CC/MCC 

748 Female Reproductive System Reconstructive Procedures 

749 Other Female Reproductive System O.R. Procedures with CC/MCC 

750 Other Female Reproductive System O.R. Procedures without CC/MCC 

Based on our review of the FY 2010 MedPAR claims data, we found a total of 

12 cases with procedure code 92.41 reported. There were three cases assigned to 

MS-DRG 502; two cases each assigned to two different MS-DRGs: MS-DRG 333 and 

MS-DRG 501; and one case assigned each to five MS-DRGs: MS-DRGs 130, 168, 327, 

329, and 330. 

The IOERT cases were assigned to an MS-DRG that included the tumor removal 

of that particular site, which was listed on the table above. Therefore, the cost of this 

technology is appropriately identified in the MS-DRG assignment for the removal of the 

tumor by specific site, and no change is warranted at this time. Therefore, we are not 
CMS-1518-P 213 

proposing any changes to the assignment for IOERT cases. We invite public comment 

on our proposal to not change the assignment for IOERT cases for FY 2012. 

b. IPPS Recalled Device Policy Clarification 

In the FY 2008 IPPS final rule with comment period (72 FR 47246 through 

47251), we discussed the topic of Medicare payment for devices that are replaced without 

cost or where credit for a replaced device is furnished to the hospital. We implemented a 

policy to reduce a hospital’s IPPS payment for certain MS-DRGs where the implantation 

of a device that has been recalled determined the base MS-DRG assignment. At that 

time, we specified that we would reduce a hospital’s IPPS payment for those MS-DRGs 

where the hospital received a credit equal to 50 percent or more of the cost of the device 

when a manufacturer provided a credit for a recalled device. 

A similar policy was adopted under the Outpatient Prospective Payment System 

(OPPS) in CY 2008 (the “partial credit” policy). This policy can be viewed in its entirety 

at 72 FR 66743 though 66748. In general terms, under the partial credit policy, CMS 

reduces the amount of payment for an implanted device made under the OPPS for which 

CMS determines that a significant portion of the payment is attributable to the cost of an 

implanted device when the provider receives partial credit for the cost of a replaced 

device, but only where the amount of the device credit is greater than or equal to 50 

percent of the cost of the new replacement device being implanted. 

It has come to our attention that there is a discrepancy between the IPPS policy 

and the OPPS partial credit policy for replacement devices. In particular, the OPPS 

partial credit policy specifies that the credit must be 50 percent or greater of the cost of 
CMS-1518-P 214 

the replacement device. However, the IPPS policy does not specify whether the credit 

should be 50 percent or greater of the replacement device or the original device. We 

believe that the OPPS partial credit policy and the IPPS policy should be consistent with 

each other on the issue of whether the 50 percent or more credit is with respect to the 

replacement device or the original device. Therefore, we are proposing to clarify the 

IPPS policy to state that the policy applies where “the hospital received a credit equal to 

50 percent or more of the cost of the replacement device.” We invite public comment on 

this proposal. 

H. Recalibration of MS-DRG Weights

In developing the proposed FY 2012 system of weights, we used two data 

sources: claims data and cost report data. As in previous years, the claims data source is 

the MedPAR file. This file is based on fully coded diagnostic and procedure data for all 

Medicare inpatient hospital bills. The FY 2010 MedPAR data used in this proposed rule 

include discharges occurring on October 1, 2009, through September 30, 2010, based on 

bills received by CMS through December 31, 2010, from all hospitals subject to the IPPS 

and short-term, acute care hospitals in Maryland (which are under a waiver from the IPPS 

under section 1814(b)(3) of the Act). The FY 2010 MedPAR file used in calculating the 

proposed relative weights includes data for approximately 10,814,950 Medicare 

discharges from IPPS providers. Discharges for Medicare beneficiaries enrolled in a 

Medicare Advantage managed care plan are excluded from this analysis. These 

discharges are excluded when the MedPAR “GHO Paid” indicator field on the claim 

record is equal to “1” or when the MedPAR DRG payment field, which represents the 
CMS-1518-P 215 

total payment for the claim, is equal to the MedPAR “Indirect Medical Education (IME)” 

payment field, indicating that the claim was an “IME only” claim submitted by a teaching 

hospital on behalf of a beneficiary enrolled in a Medicare Advantage managed care plan. 

The data exclude CAHs, including hospitals that subsequently became CAHs after the 

period from which the data were taken. The second data source used in the cost-based 

relative weighting methodology is the FY 2009 Medicare cost report data files from 

HCRIS (that is, cost reports beginning on or after October 1, 2008, and before 

October 1, 2009), which represents the most recent full set of cost report data available. 

We used the December 31, 2010 update of the HCRIS cost report files for FY 2009 in 

setting the relative cost-based weights. 

 The methodology we used to calculate the DRG cost-based relative weights from 

the FY 2010 MedPAR claims data and FY 2009 Medicare cost report data is as follows: 

● To the extent possible, all the claims were regrouped using the proposed 

FY 2012 MS-DRG classifications discussed in sections II.B. and G. of the preamble of 

this proposed rule. 

● The transplant cases that were used to establish the relative weights for heart 

and heart-lung, liver and/or intestinal, and lung transplants (MS-DRGs 001, 002, 005, 

006, and 007, respectively) were limited to those Medicare-approved transplant centers 

that have cases in the FY 2010 MedPAR file. (Medicare coverage for heart, heart-lung, 

liver and/or intestinal, and lung transplants is limited to those facilities that have received 

approval from CMS as transplant centers.) 
CMS-1518-P 216 

● Organ acquisition costs for kidney, heart, heart-lung, liver, lung, pancreas, and 

intestinal (or multivisceral organs) transplants continue to be paid on a reasonable cost 

basis. Because these acquisition costs are paid separately from the prospective payment 

rate, it is necessary to subtract the acquisition charges from the total charges on each 

transplant bill that showed acquisition charges before computing the average cost for 

each MS-DRG and before eliminating statistical outliers. 

● Claims with total charges or total lengths of stay less than or equal to zero were 

deleted. Claims that had an amount in the total charge field that differed by more than 

$10.00 from the sum of the routine day charges, intensive care charges, pharmacy 

charges, special equipment charges, therapy services charges, operating room charges, 

cardiology charges, laboratory charges, radiology charges, other service charges, labor 

and delivery charges, inhalation therapy charges, emergency room charges, blood 

charges, and anesthesia charges were also deleted. 

● At least 96.2 percent of the providers in the MedPAR file had charges for 10 of 

the 15 cost centers. Claims for providers that did not have charges greater than zero for 

at least 10 of the 15 cost centers were deleted. 

● Statistical outliers were eliminated by removing all cases that were beyond 

3.0 standard deviations from the mean of the log distribution of both the total charges per 

case and the total charges per day for each MS-DRG. 

● Effective October 1, 2008, because hospital inpatient claims include a POA 

indicator field for each diagnosis present on the claim, only for purposes of relative 

weight-setting, the POA indicator field was reset to "Y" for “Yes” for all claims that 
CMS-1518-P 217 

otherwise have an "N" (No) or a "U" (documentation insufficient to determine if the 

condition was present at the time of inpatient admission) in the POA field. 

Under current payment policy, the presence of specific HAC codes, as indicated 

by the POA field values, can generate a lower payment for the claim. Specifically, if the 

particular condition is present on admission (that is, a "Y" indicator is associated with the 

diagnosis on the claim), then it is not a HAC, and the hospital is paid for the higher 

severity (and, therefore, the higher weighted MS-DRG). If the particular condition is not

present on admission (that is, an "N" indicator is associated with the diagnosis on the 

claim) and there are no other complicating conditions, the DRG GROUPER assigns the 

claim to a lower severity (and, therefore, the lower weighted MS-DRG) as a penalty for 

allowing a Medicare inpatient to contract a HAC. While the POA reporting meets policy 

goals of encouraging quality care and generates program savings, it presents an issue for 

the relative weight-setting process. Because cases identified as HACs are likely to be 

more complex than similar cases that are not identified as HACs, the charges associated 

with HACs are likely to be higher as well. Thus, if the higher charges of these HAC 

claims are grouped into lower severity MS-DRGs prior to the relative weight-setting 

process, the relative weights of these particular MS-DRGs would become artificially 

inflated, potentially skewing the relative weights. In addition, we want to protect the 

integrity of the budget neutrality process by ensuring that, in estimating payments, no 

increase to the standardized amount occurs as a result of lower overall payments in a 

previous year that stem from using weights and case-mix that are based on lower severity 
CMS-1518-P 218 

MS-DRG assignments. If this would occur, the anticipated cost savings from the HAC 

policy would be lost. 

 To avoid these problems, we reset the POA indicator field to “Y” only for relative 

weight-setting purposes for all claims that otherwise have a “N” or an “U” in the POA 

field. This resetting “forced” the more costly HAC claims into the higher severity 

MS-DRGs as appropriate, and the relative weights calculated for each MS-DRG more 

closely reflect the true costs of those cases. 

 Once the MedPAR data were trimmed and the statistical outliers were removed, 

the charges for each of the 15 cost groups for each claim were standardized to remove the 

effects of differences in area wage levels, IME and DSH payments, and for hospitals in 

Alaska and Hawaii, the applicable cost-of-living adjustment. Because hospital charges 

include charges for both operating and capital costs, we standardized total charges to 

remove the effects of differences in geographic adjustment factors, cost-of-living 

adjustments, and DSH payments under the capital IPPS as well. Charges were then 

summed by MS-DRG for each of the 15 cost groups so that each MS-DRG had 15 

standardized charge totals. These charges were then adjusted to cost by applying the 

national average CCRs developed from the FY 2009 cost report data. 

 The 15 cost centers that we used in the relative weight calculation are shown in 

the following table. The table shows the lines on the cost report and the corresponding 

revenue codes that we used to create the 15 national cost center CCRs. 
CMS-1518-P 219 

Cost 

Center 

Group 

Name 

(15 total) 

MedPAR 

Charge Field 

Revenue Codes 

contained in 

MedPAR Charge 

Field 

Cost Report 

Line 

Description 

(Worksheet C 

Part 1 & 

Wksheet D-4) 

Cost from 

HCRIS 

(Worksheet 

C, Part 1, 

Column 5 

and line 

number) 

Charges from 

HCRIS 

(Worksheet C, 

Part 1, Column 

6 & 7 and line 

number) 

Medicare 

Charges from 

HCRIS 

(Worksheet D-4, 

Column & line 

number) 

 

Routine 

Days 

Private Room 

Charges 011X and 014X 

Adults & 

Pediatrics 

(General 

Routine Care) C_1_C5_25 C_1_C6_25 D4_HOS_C2_25 

 

Semi-Private 

Room 

Charges 

010X, 012X, 013X 

and 016X-019X C_1_C7_25 D4_HOS_C2_26 

 Ward Charges 015X 

 

Intensive 

Days 

Intensive Care 

Charges 020X 

Intensive Care 

Unit C_1_C5_26 C_1_C6_26 D4_HOS_C2_26 

 C_1_C7_26 

 

Coronary Care 

Charges 021X 

Coronary 

Care Unit C_1_C5_27 C_1_C6_27 D4_HOS_C2_27 

 C_1_C7_27 

 

Burn Intensive 

Care Unit C_1_C5_28 C_1_C6_28 D4_HOS_C2_28 

 C_1_C7_28 

 

Surgical 

Intensive Care 

Unit C_1_C5_29 C_1_C6_29 D4_HOS_C2_29 

 C_1_C7_29 

 

Other Special 

Care Unit C_1_C5_30 C_1_C6_30 D4_HOS_C2_30 

 C_1_C7_30 

 
CMS-1518-P 220 

Cost 

Center 

Group 

Name 

(15 total) 

MedPAR 

Charge Field 

Revenue Codes 

contained in 

MedPAR Charge 

Field 

Cost Report 

Line 

Description 

(Worksheet C 

Part 1 & 

Wksheet D-4) 

Cost from 

HCRIS 

(Worksheet 

C, Part 1, 

Column 5 

and line 

number) 

Charges from 

HCRIS 

(Worksheet C, 

Part 1, Column 

6 & 7 and line 

number) 

Medicare 

Charges from 

HCRIS 

(Worksheet D-4, 

Column & line 

number) 

Drugs 

Pharmacy 

Charges 

025X, 026X and 

063X 

Intravenous 

Therapy C_1_C5_48 C_1_C6_48 D4_HOS_C2_48 

 C_1_C7_48 

 

Drugs 

Charged To 

Patient C_1_C5_56 C_1_C6_56 D4_HOS_C2_56 

 C_1_C7_56 

 

Supplies 

and 

Equipment 

Medical/Surgic

al Supply 

Charges 027X and 062X 

Medical 

Supplies 

Charged to 

Patients C_1_C5_55 C_1_C6_55 D4_HOS_C2_55 

 C_1_C7_55 

 

Durable 

Medical 

Equipment 

Charges 

0290, 0291, 0292 

and 0294-0299 DME-Rented C_1_C5_66 C_1_C6_66 D4_HOS_C2_66 

 C_1_C7_66 

 

Used Durable 

Medical 

Charges 0293 DME-Sold C_1_C5_67 C_1_C6_67 D4_HOS_C2_67 

 C_1_C7_67 

 

Therapy 

Services 

Physical 

Therapy 

Charges 042X 

Physical 

Therapy C_1_C5_50 C_1_C6_50 D4_HOS_C2_50 

 C_1_C7_50 

 

Occupational 

Therapy 

Charges 043X 

Occupational 

Therapy C_1_C5_51 C_1_C6_51 D4_HOS_C2_51 

 C_1_C7_51 
CMS-1518-P 221 

Cost 

Center 

Group 

Name 

(15 total) 

MedPAR 

Charge Field 

Revenue Codes 

contained in 

MedPAR Charge 

Field 

Cost Report 

Line 

Description 

(Worksheet C 

Part 1 & 

Wksheet D-4) 

Cost from 

HCRIS 

(Worksheet 

C, Part 1, 

Column 5 

and line 

number) 

Charges from 

HCRIS 

(Worksheet C, 

Part 1, Column 

6 & 7 and line 

number) 

Medicare 

Charges from 

HCRIS 

(Worksheet D-4, 

Column & line 

number) 

 

Speech 

Pathology 

Charges 044X and 047X 

Speech 

Pathology C_1_C5_52 C_1_C6_52 D4_HOS_C2_52 

 C_1_C7_52 

 

Inhalation 

Therapy 

 Inhalation 

Therapy 

Charges 041X and 046X 

Respiratory 

Therapy C_1_C5_49 C_1_C6_49 D4_HOS_C2_49 

 C_1_C7_49 

 

Operating 

Room 

Operating 

Room 

Charges 

036X, 071X and 

072X 

Operating 

Room C_1_C5_37 C_1_C6_37 D4_HOS_C2_37 

For all 

DRGs but 

Labor & 

Delivery C_1_C7_37 

 

Recovery 

Room C_1_C5_38 C_1_C6_38 D4_HOS_C2_38 

 C_1_C7_38 

 

Labor & 

Delivery 

Operating 

Room 

Charges 

036X, 071X and 

072X 

Delivery 

Room and 

Labor Room C_1_C5_39 C_1_C6_39 D4_HOS_C2_39 

ONLY FOR 

THE 6 

Labor & 

Delivery 

DRGs C_1_C7_39 

370, 371, 

372, 373, 

374, 375 Clinic Charges 051X 

Obstetrics 

Clinic C_1_C5_63 C_1_C6_63 D4_HOS_C2_63 

 C_1_C7_63 

 
CMS-1518-P 222 

Cost 

Center 

Group 

Name 

(15 total) 

MedPAR 

Charge Field 

Revenue Codes 

contained in 

MedPAR Charge 

Field 

Cost Report 

Line 

Description 

(Worksheet C 

Part 1 & 

Wksheet D-4) 

Cost from 

HCRIS 

(Worksheet 

C, Part 1, 

Column 5 

and line 

number) 

Charges from 

HCRIS 

(Worksheet C, 

Part 1, Column 

6 & 7 and line 

number) 

Medicare 

Charges from 

HCRIS 

(Worksheet D-4, 

Column & line 

number) 

Anesthesia 

Anesthesia 

Charges 037X 

Anesthesiology C_1_C5_40 C_1_C6_40 D4_HOS_C2_40 

 C_1_C7_40 

 

Cardiology 

Cardiology 

Charges 048X and 073X 

Electrocardiology C_1_C5_53 C_1_C6_53 D4_HOS_C2_53 

 C_1_C7_53 

 

Laboratory 

Laboratory 

Charges 

030X, 031X, 074X 

and 075X Laboratory C_1_C5_44 C_1_C6_44 D4_HOS_C2_44 

 C_1_C7_44 

 

PBP Clinic 

Laboratory 

Services C_1_C5_45 C_1_C6_45 D4_HOS_C2_45 

 C_1_C7_45 

 

Electro-encep

halography C_1_C5_54 C_1_C6_54 D4_HOS_C2_54 

 C_1_C7_54 

 

Radiology 

Radiology 

Charges 

028X, 032X, 033X, 

034X, 035X and 

040X 

Radiology - 

Diagnostic C_1_C5_41 C_1_C6_41 D4_HOS_C2_41 

 C_1_C7_41 

 
CMS-1518-P 223 

Cost 

Center 

Group 

Name 

(15 total) 

MedPAR 

Charge Field 

Revenue Codes 

contained in 

MedPAR Charge 

Field 

Cost Report 

Line 

Description 

(Worksheet C 

Part 1 & 

Wksheet D-4) 

Cost from 

HCRIS 

(Worksheet 

C, Part 1, 

Column 5 

and line 

number) 

Charges from 

HCRIS 

(Worksheet C, 

Part 1, Column 

6 & 7 and line 

number) 

Medicare 

Charges from 

HCRIS 

(Worksheet D-4, 

Column & line 

number) 

 MRI Charges 061X 

Radiology - 

Therapeutic C_1_C5_42 C_1_C6_42 D4_HOS_C2_42 

 Radioisotope C_1_C5_43 C_1_C6_43 D4_HOS_C2_43 

 C_1_C7_43 

 

Emergency 

Room 

Emergency 

Room 

Charges 045x Emergency C_1_C5_61 C_1_C6_61 D4_HOS_C2_61 

 C_1_C7_61 

Blood and 

Blood 

Products 

Blood 

Charges 038x 

Whole Blood 

& Packed Red 

Blood Cells C_1_C5_46 C_1_C6_46 D4_HOS_C2_46 

 C_1_C7_46 

Blood Storage 

/ Processing 039x 

Blood Storing, 

Processing, & 

Transfusing C_1_C5_47 C_1_C6_47 D4_HOS_C2_47 

 C_1_C7_47 

Other 

Services 

Lithotripsy 

Charge 079X 

 

 

Other Service 

Charge 

0002-0099, 022X, 

023X, 

024X,052X,053X 

 

055X-060X, 

064X-070X, 

076X-078X, 

090X-095X and 

099X 

 

ASC (Non 

Distinct Part) C_1_C5_58 C_1_C6_58 D4_HOS_C2_58 

 C_1_C7_58 
CMS-1518-P 224 

Cost 

Center 

Group 

Name 

(15 total) 

MedPAR 

Charge Field 

Revenue Codes 

contained in 

MedPAR Charge 

Field 

Cost Report 

Line 

Description 

(Worksheet C 

Part 1 & 

Wksheet D-4) 

Cost from 

HCRIS 

(Worksheet 

C, Part 1, 

Column 5 

and line 

number) 

Charges from 

HCRIS 

(Worksheet C, 

Part 1, Column 

6 & 7 and line 

number) 

Medicare 

Charges from 

HCRIS 

(Worksheet D-4, 

Column & line 

number) 

 

Outpatient 

Service 

Charges 049X and 050X 

Other 

Ancillary C_1_C5_59 C_1_C6_59 D4_HOS_C2_59 

 C_1_C7_59 

 Clinic C_1_C5_60 C_1_C6_60 D4_HOS_C2_60 

 C_1_C7_60 

 

Ambulance 

Charges 054X 

 

 

ESRD 

Revenue 

Setting 

Charges 

080X and 

082X-088X 

Observation 

beds C_1_C5_62 C_1_C6_62 D4_HOS_C2_62 

 C_1_C7_62 

 

Clinic Visit 

Charges 051X 

Observation 

beds C_1_C5_6201 C_1_C6_6201 

D4_HOS_C2_62

01 

 

(excluding 

Labor & 

Delivery 

DRGs) C_1_C7_6201 

 

Rural Health 

Clinic C_1_C5_6350 C_1_C6_6350 

D4_HOS_C2_63

50 

 

Professional 

Fees Charges 

096X, 097X, and 

098X C_1_C7_6350 

 FQHC C_1_C5_6360 C_1_C6_6360 

D4_HOS_C2_63

60 

 C_1_C7_6360 

 

Home 

Program 

Dialysis C_1_C5_64 C_1_C6_64 D4_HOS_C2_64 

 C_1_C7_64 
CMS-1518-P 225 

Cost 

Center 

Group 

Name 

(15 total) 

MedPAR 

Charge Field 

Revenue Codes 

contained in 

MedPAR Charge 

Field 

Cost Report 

Line 

Description 

(Worksheet C 

Part 1 & 

Wksheet D-4) 

Cost from 

HCRIS 

(Worksheet 

C, Part 1, 

Column 5 

and line 

number) 

Charges from 

HCRIS 

(Worksheet C, 

Part 1, Column 

6 & 7 and line 

number) 

Medicare 

Charges from 

HCRIS 

(Worksheet D-4, 

Column & line 

number) 

 Ambulance C_1_C5_65 C_1_C6_65 D4_HOS_C2_65 

 C_1_C7_65 

 

Other 

Reimbursable C_1_C5_68 C_1_C6_68 D4_HOS_C2_68 

 C_1_C7_68 

 

 We developed the national average CCRs as follows: 

 Taking the FY 2009 cost report data, we removed CAHs, Indian Health Service 

hospitals, all-inclusive rate hospitals, and cost reports that represented time periods of 

less than 1 year (365 days). We included hospitals located in Maryland as we are 

including their charges in our claims database. We then created CCRs for each provider 

for each cost center (see prior table for line items used in the calculations) and removed 

any CCRs that were greater than 10 or less than 0.01. We normalized the departmental 

CCRs by dividing the CCR for each department by the total CCR for the hospital for the 

purpose of trimming the data. We then took the logs of the normalized cost center CCRs 

and removed any cost center CCRs where the log of the cost center CCR was greater or 

less than the mean log plus/minus 3 times the standard deviation for the log of that cost 

center CCR. Once the cost report data were trimmed, we calculated a Medicare-specific 

CCR. The Medicare-specific CCR was determined by taking the Medicare charges for 

each line item from Worksheet D-4 and deriving the Medicare-specific costs by applying 

the hospital-specific departmental CCRs to the Medicare-specific charges for each line 
CMS-1518-P 226 

item from Worksheet D-4. Once each hospital’s Medicare-specific costs were 

established, we summed the total Medicare-specific costs and divided by the sum of the 

total Medicare-specific charges to produce national average, charge-weighted CCRs. 

After we multiplied the total charges for each MS-DRG in each of the 15 cost 

centers by the corresponding national average CCR, we summed the 15 “costs” across 

each MS-DRG to produce a total standardized cost for the MS-DRG. The average 

standardized cost for each MS-DRG was then computed as the total standardized cost for 

the MS-DRG divided by the transfer-adjusted case count for the MS-DRG. The average 

cost for each MS-DRG was then divided by the national average standardized cost per 

case to determine the relative weight. 

 The new cost-based relative weights were then normalized by an adjustment 

factor of 1.5798292955 so that the average case weight after recalibration was equal to 

the average case weight before recalibration. The normalization adjustment is intended 

to ensure that recalibration by itself neither increases nor decreases total payments under 

the IPPS, as required by section 1886(d)(4)(C)(iii) of the Act. 

 The 15 proposed national average CCRs for FY 2012 are as follows: 

Group CCR 

Routine Days 0.514

Intensive Days 0.448

Drugs 0.199

Supplies & Equipment 0.331

Therapy Services 0.381

Laboratory 0.145

Operating Room 0.251

Cardiology 0.154

Radiology 0.140

Emergency Room 0.239

Blood and Blood Products 0.408
CMS-1518-P 227 

Group CCR 

Other Services 0.395

Labor & Delivery 0.470

Inhalation Therapy 0.192

Anesthesia 0.117

 Since FY 2009, the relative weights have been based on 100 percent cost weights 

based on our MS-DRG grouping system. 

When we recalibrated the DRG weights for previous years, we set a threshold of 

10 cases as the minimum number of cases required to compute a reasonable weight. In 

this FY 2012 IPPS/LTCH PPS proposed rule, we are proposing to use that same case 

threshold in recalibrating the MS-DRG weights for FY 2012. Using the FY 2010 

MedPAR data set, there are 8 MS-DRGs that contain fewer than 10 cases. Under the 

MS-DRGs, we have fewer low-volume DRGs than under the CMS DRGs because we no 

longer have separate DRGs for patients age 0 to 17 years. With the exception of 

newborns, we previously separated some DRGs based on whether the patient was age 0 

to 17 years or age 17 years and older. Other than the age split, cases grouping to these 

DRGs are identical. The DRGs for patients age 0 to 17 years generally have very low 

volumes because children are typically ineligible for Medicare. In the past, we have 

found that the low volume of cases for the pediatric DRGs could lead to significant 

year-to-year instability in their relative weights. Although we have always encouraged 

non-Medicare payers to develop weights applicable to their own patient populations, we 

have heard frequent complaints from providers about the use of the Medicare relative 

weights in the pediatric population. We believe that eliminating this age split in the 

MS-DRGs will provide more stable payment for pediatric cases by determining their 
CMS-1518-P 228 

payment using adult cases that are much higher in total volume. Newborns are unique 

and require separate MS-DRGs that are not mirrored in the adult population. Therefore, 

it remains necessary to retain separate MS-DRGs for newborns. All of the low-volume 

MS-DRGs listed below are for newborns. In FY 2012, because we do not have sufficient 

MedPAR data to set accurate and stable cost weights for these low-volume MS-DRGs, 

we are proposing to compute weights for the low-volume MS-DRGs by adjusting their 

FY 2011 weights by the percentage change in the average weight of the cases in other 

MS-DRGs. The crosswalk table is shown below: 

Low-Volume 

MS-DRG MS-DRG Title Crosswalk to MS-DRG 

768 Vaginal Delivery with O.R. 

Procedure Except Sterilization 

and/or D&C 

FY 2011 FR weight 

(adjusted by percent change 

in average weight of the 

cases in other MS-DRGs) 

789 Neonates, Died or Transferred to 

Another Acute Care Facility 

FY 2011 FR weight 

(adjusted by percent change 

in average weight of the 

cases in other MS-DRGs) 

790 Extreme Immaturity or Respiratory 

Distress Syndrome, Neonate 

FY 2011 FR weight 

(adjusted by percent change 

in average weight of the 

cases in other MS-DRGs) 

791 Prematurity with Major Problems FY 2011 FR weight 

(adjusted by percent change 

in average weight of the 

cases in other MS-DRGs) 

792 Prematurity without Major 

Problems 

FY 2011 FR weight 

(adjusted by percent change 

in average weight of the 

cases in other MS-DRGs) 

793 Full-Term Neonate with Major 

Problems 

FY 2011 FR weight 

(adjusted by percent change 

in average weight of the 

cases in other MS-DRGs) 
CMS-1518-P 229 

Low-Volume 

MS-DRG MS-DRG Title Crosswalk to MS-DRG 

794 Neonate with Other Significant 

Problems 

FY 2011 FR weight 

(adjusted by percent change 

in average weight of the 

cases in other MS-DRGs) 

795 Normal Newborn FY 2011 FR weight 

(adjusted by percent change 

in average weight of the 

cases in other MS-DRGs) 

I. Proposed Add-On Payments for New Services and Technologies

1. Background 

 Sections 1886(d)(5)(K) and (L) of the Act establish a process of identifying and 

ensuring adequate payment for new medical services and technologies (sometimes 

collectively referred to in this section as "new technologies") under the IPPS. Section 

1886(d)(5)(K)(vi) of the Act specifies that a medical service or technology will be 

considered new if it meets criteria established by the Secretary after notice and 

opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act specifies that a 

new medical service or technology may be considered for new technology add-on 

payment if, “based on the estimated costs incurred with respect to discharges involving 

such service or technology, the DRG prospective payment rate otherwise applicable to 

such discharges under this subsection is inadequate.” We note that beginning with 

discharges occurring in FY 2008, CMS transitioned from CMS-DRGs to MS-DRGs. 

 The regulations implementing these provisions specify three criteria for a new 

medical service or technology to receive the additional payment: (1) the medical service 

or technology must be new; (2) the medical service or technology must be costly such 

that the DRG rate otherwise applicable to discharges involving the medical service or 
CMS-1518-P 230 

technology is determined to be inadequate; and (3) the service or technology must 

demonstrate a substantial clinical improvement over existing services or technologies. 

These three criteria are explained below in the ensuing paragraphs in further detail. 

Under the first criterion, as reflected in 42 CFR 412.87(b)(2), a specific medical 

service or technology will be considered “new” for purposes of new medical service or 

technology add-on payments until such time as Medicare data are available to fully 

reflect the cost of the technology in the MS-DRG weights through recalibration. 

Typically, there is a lag of 2 to 3 years from the point a new medical service or 

technology is first introduced on the market (generally on the date that the technology 

receives FDA approval/clearance) and when data reflecting the use of the medical service 

or technology are used to calculate the MS-DRG weights. For example, data from 

discharges occurring during FY 2010 are used to calculate the FY 2012 MS-DRG 

weights in this proposed rule. Section 412.87(b)(2) of the regulations therefore provides 

that "a medical service or technology may be considered new within 2 or 3 years after the 

point at which data begin to become available reflecting the ICD-9-CM code assigned to 

the new medical service or technology (depending on when a new code is assigned and 

data on the new medical service or technology become available for DRG recalibration). 

After CMS has recalibrated the MS-DRGs, based on available data to reflect the costs of 

an otherwise new medical service or technology, the medical service or technology will 

no longer be considered ‘new’ under the criterion for this section." 

 The 2-year to 3-year period during which a medical service or technology can be 

considered new would ordinarily begin on the date on which the medical service or 
CMS-1518-P 231 

technology received FDA approval or clearance. (We note that, for purposes of this 

section of this proposed rule, we generally refer to both FDA approval and FDA 

clearance as FDA “approval.”) However, in some cases, there may be few to no 

Medicare data available for the new service or technology following FDA approval. For 

example, the newness period could extend beyond the 2-year to 3-year period after FDA 

approval is received in cases where the product initially was generally unavailable to 

Medicare patients following FDA approval, such as in cases of a national noncoverage 

determination or a documented delay in bringing the product onto the market after that 

approval (for instance, component production or drug production has been postponed 

following FDA approval due to shelf life concerns or manufacturing issues). After the 

MS-DRGs have been recalibrated to reflect the costs of an otherwise new medical service 

or technology, the medical service or technology is no longer eligible for special add-on 

payment for new medical services or technologies (as specified under §412.87(b)(2)). 

For example, an approved new technology that received FDA approval in October 2009 

and entered the market at that time may be eligible to receive add-on payments as a new 

technology for discharges occurring before October 1, 2012 (the start of FY 2013). 

Because the FY 2013 MS-DRG weights would be calculated using FY 2011 MedPAR 

data, the costs of such a new technology would be fully reflected in the FY 2013 

MS-DRG weights. Therefore, the new technology would no longer be eligible to receive 

add-on payments as a new technology for discharges occurring in FY 2013 and 

thereafter. 
CMS-1518-P 232 

We do not consider a service or technology to be new if it is substantially similar 

to one or more existing technologies. That is, even if a technology receives a new FDA 

approval, it may not necessarily be considered “new” for purposes of new technology 

add-on payments if it is “substantially similar” to a technology that was approved by 

FDA and has been on the market for more than 2 to 3 years. In the FY 2006 IPPS final 

rule (70 FR 47351), we explained our policy regarding substantial similarity in detail and 

its relevance for assessing if the hospital charge data used in the development of the 

relative weights for the relevant DRGs reflect the costs of the technology. In that final 

rule, we stated that, for determining substantial similarity, we consider (1) whether a 

product uses the same or a similar mechanism of action to achieve a therapeutic outcome, 

and (2) whether a product is assigned to the same or a different DRG. We indicated that 

both of the above criteria should be met in order for a technology to be considered 

“substantially similar” to an existing technology. However, in that same final rule, we 

also noted that, due to the complexity of issues regarding the substantial similarity 

component of the newness criterion, it may be necessary to exercise flexibility when 

considering whether technologies are substantially similar to one another. Specifically, 

we stated that we may consider additional factors, depending on the circumstances 

specific to each application. 

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43813 and 43814), 

we noted that the discussion of substantial similarity in the FY 2006 IPPS final rule 

related to comparing two separate technologies made by different manufacturers. 

Nevertheless, we stated that the criteria discussed in the FY 2006 IPPS final rule also are 
CMS-1518-P 233 

relevant when comparing the similarity between a new use and existing uses of the same 

technology (or a very similar technology manufactured by the same manufacturer). In 

other words, we stated that it is necessary to establish that the new indication for which 

the technology has received FDA approval is not substantially similar to that of the prior 

indication. We explained that such a distinction is necessary to determine the appropriate 

start date of the newness period in evaluating whether the technology would qualify for 

add-on payments (that is, the date of the “new” FDA approval or that of the prior 

approval), or whether the technology could qualify for separate new technology add-on 

payments under each indication. 

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43814), we added a 

third factor of consideration to our analysis of whether a new technology is substantially 

similar to one or more existing technologies. Specifically, in making a determination of 

whether a technology is substantially similar to an existing technology, we adopted a 

policy to consider whether the new use of the technology involves the treatment of the 

same or similar type of disease and the same or similar patient population (74 FR 24130), 

in addition to considering the already established factors described in the FY 2006 IPPS 

final rule (that is, (1) whether a product uses the same or a similar mechanism of action to 

achieve a therapeutic outcome; and (2) whether a product is assigned to the same or a 

different DRG). As we noted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule, if all 

three components are present and the new use is deemed substantially similar to one or 

more of the existing uses of the technology (that is, beyond the newness period), we 
CMS-1518-P 234 

would conclude that the technology is not new and, therefore, is ineligible for the new 

technology add-on payment. 

 Under the second criterion, §412.87(b)(3) further provides that, to be eligible for 

the add-on payment for new medical services or technologies, the MS-DRG prospective 

payment rate otherwise applicable to the discharge involving the new medical services or 

technologies must be assessed for adequacy. Under the cost criterion, to assess the 

adequacy of payment for a new technology paid under the applicable MS-DRG 

prospective payment rate, we evaluate whether the charges for cases involving the new 

technology exceed certain threshold amounts. In the FY 2004 IPPS final rule 

(68 FR 45385), we established the threshold at the geometric mean standardized charge 

for all cases in the MS-DRG plus 75 percent of 1 standard deviation above the geometric 

mean standardized charge (based on the logarithmic values of the charges and converted 

back to charges) for all cases in the MS-DRG to which the new medical service or 

technology is assigned (or the case-weighted average of all relevant MS-DRGs, if the 

new medical service or technology occurs in more than one MS-DRG). 

 However, section 503(b)(1) of Pub. L. 108-173 amended section 

1886(d)(5)(K)(ii)(I) of the Act to provide that, beginning in FY 2005, CMS will apply "a 

threshold...that is the lesser of 75 percent of the standardized amount (increased to reflect 

the difference between cost and charges) or 75 percent of one standard deviation for the 

diagnosis-related group involved." (We refer readers to section IV.D. of the preamble to 

the FY 2005 IPPS final rule (69 FR 49084) for a discussion of the revision of the 

regulations to incorporate the change made by section 503(b)(1) of Pub. L.108-173.) 
CMS-1518-P 235 

Table 10 that was included in the IPPS/LTCH PPS final rule published in the Federal 

Register on August 16, 2010, contained the final thresholds that were used to evaluate 

applications for new technology add-on payments for this proposed rule for FY 2012 

(75 FR 50605 through 50613). 

 In the September 7, 2001 final rule that established the new technology add-on 

payment regulations (66 FR 46917), we discussed the issue of whether the Health 

Insurance Portability and Accountability Act (HIPAA) Privacy Rule at 45 CFR Parts 160 

and 164 applies to claims information that providers submit with applications for new 

technology add-on payments. Specifically, we explained that health plans, including 

Medicare, and providers that conduct certain transactions electronically, including 

hospitals that would receive new technology add-on payments, are required to comply 

with the HIPAA Privacy Rule. We further explained how such entities could meet the 

applicable HIPAA requirements by discussing how the HIPAA Privacy Rule permitted 

providers to share with health plans information needed to ensure correct payment, if they 

had obtained consent from the patient to use that patient’s data for treatment, payment, or 

health care operations. We also explained that, because the information to be provided 

within applications for new technology add-on payment would be needed to ensure 

correct payment, no additional consent would be required. The HHS Office for Civil 

Rights has since amended the HIPAA Privacy Rule, but the results remain. The HIPAA 

Privacy Rule does not require a covered entity to obtain consent from patients to use or 

disclose protected health information for the covered entity's treatment, payment, or 

health care operations purposes, and expressly permits such entities to use or to disclose 
CMS-1518-P 236 

protected health information for these purposes and for the treatment purposes of another 

health care provider and the payment purposes of another covered entity or health care 

provider. (We refer readers to 45 CFR 164.502(a)(1)(ii) and 164.506(c)(1) and (c)(3) and 

the Standards for Privacy of Individually Identifiable Health Information published in the 

Federal Register (67 FR 53208 through 53214) on August 14, 2002, for a full discussion 

of consent in the context of the HIPAA Privacy Rule.) 

 Under the third criterion, §412.87(b)(1) of our existing regulations provides that a 

new technology is an appropriate candidate for an additional payment when it represents 

“an advance that substantially improves, relative to technologies previously available, the 

diagnosis or treatment of Medicare beneficiaries.” For example, a new technology 

represents a substantial clinical improvement when it reduces mortality, decreases the 

number of hospitalizations or physician visits, or reduces recovery time compared to the 

technologies previously available. (We refer readers to the September 7, 2001 final rule 

for a complete discussion of this criterion (66 FR 46902).) 

The new medical service or technology add-on payment policy under the IPPS 

provides additional payments for cases with relatively high costs involving eligible new 

medical services or technologies while preserving some of the incentives inherent under 

an average-based prospective payment system. The payment mechanism is based on the 

cost to hospitals for the new medical service or technology. Under §412.88, if the costs 

of the discharge (determined by applying cost to charge ratios (“CCRs”) as described in 

§412.84(h)) exceed the full DRG payment (including payments for IME and DSH, but 

excluding outlier payments), Medicare will make an add-on payment equal to the lesser 
CMS-1518-P 237 

of: (1) 50 percent of the estimated costs of the new technology (if the estimated costs for 

the case including the new technology exceed Medicare’s payment); or (2) 50 percent of 

the difference between the full DRG payment and the hospital’s estimated cost for the 

case. Unless the discharge qualifies for an outlier payment, Medicare payment is limited 

to the full MS-DRG payment plus 50 percent of the estimated costs of the new 

technology. 

 Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments to annual 

MS-DRG classifications and relative weights be made in a manner that ensures that 

aggregate payments to hospitals are not more or less than they were in the prior fiscal 

year (i.e., they are “budget neutral”). Therefore, in the past, we accounted for projected 

payments under the new medical service and technology provision during the upcoming 

fiscal year, while at the same time estimating the payment effect of changes to the MSDRG classifications and recalibration. The impact of additional payments under this 

provision was then included in the budget neutrality factor, which was applied to the 

standardized amounts and the hospital-specific amounts. However, section 503(d)(2) of 

Pub. L. 108-173 provides that there shall be no reduction or adjustment in aggregate 

payments under the IPPS due to add-on payments for new medical services and 

technologies. Therefore, in accordance with section 503(d)(2) of Pub. L. 108-173, 

add-on payments for new medical services or technologies for FY 2005 and later years 

have not been subjected to budget neutrality. 

 In the FY 2009 IPPS final rule (73 FR 48561 through 48563), we modified our 

regulations at §412.87 to codify our longstanding practice of how CMS evaluates the 
CMS-1518-P 238 

eligibility criteria for new medical service or technology add-on payment applications. 

That is, we first determine whether a medical service or technology meets the newness 

criteria, and only if so, do we then make a determination as to whether the technology 

meets the cost threshold and represents a substantial clinical improvement over existing 

medical services or technologies. We also amended §412.87(c) to specify that all 

applicants for new technology add-on payments must have FDA approval or clearance 

for their new medical service or technology by July 1 of each year prior to the beginning 

of the fiscal year that the application is being considered. 

 The Council on Technology and Innovation (CTI) at CMS oversees the agency's 

cross-cutting priority on coordinating coverage, coding and payment processes for 

Medicare with respect to new technologies and procedures, including new drug therapies, 

as well as promoting the exchange of information on new technologies between CMS and 

other entities. The CTI, composed of senior CMS staff and clinicians, was established 

under section 942(a) of Pub. L. 108-173. The Council is co-chaired by the Director of 

the Office of Clinical Standards and Quality (OCSQ) and the Director of the Center for 

Medicare (CM), who is also designated as the CTI's Executive Coordinator. 

 The specific processes for coverage, coding, and payment are implemented by 

CM, OCSQ, and the local claims-payment contractors (in the case of local coverage and 

payment decisions). The CTI supplements, rather than replaces, these processes by 

working to assure that all of these activities reflect the agency-wide priority to promote 

high-quality, innovative care. At the same time, the CTI also works to streamline, 

accelerate, and improve coordination of these processes to ensure that they remain up to 
CMS-1518-P 239 

date as new issues arise. To achieve its goals, the CTI works to streamline and create a 

more transparent coding and payment process, improve the quality of medical decisions, 

and speed patient access to effective new treatments. It is also dedicated to supporting 

better decisions by patients and doctors in using Medicare-covered services through the 

promotion of better evidence development, which is critical for improving the quality of 

care for Medicare beneficiaries. 

 CMS plans to continue its Open Door forums with stakeholders who are 

interested in CTI's initiatives. In addition, to improve the understanding of CMS’ 

processes for coverage, coding, and payment and how to access them, the CTI has 

developed an “Innovator's Guide” to these processes. The intent is to consolidate this 

information, much of which is already available in a variety of CMS documents and in 

various places on the CMS Web site, in a user-friendly format. This guide was published 

in August 2008 and is available on the CMS Web site at: 

http://www.cms.gov/CouncilonTechInnov/Downloads/InnovatorsGuide5_10_10.pdf. 

 As we indicated in the FY 2009 IPPS final rule (73 FR 48554), we invite any 

product developers or manufacturers of new medical technologies to contact the agency 

early in the process of product development if they have questions or concerns about the 

evidence that would be needed later in the development process for the agency's coverage 

decisions for Medicare. 

 The CTI aims to provide useful information on its activities and initiatives to 

stakeholders, including Medicare beneficiaries, advocates, medical product 

manufacturers, providers, and health policy experts. Stakeholders with further questions 
CMS-1518-P 240 

about Medicare's coverage, coding, and payment processes, or who want further guidance 

about how they can navigate these processes, can contact the CTI at CTI@cms.hhs.gov. 

We note that applicants for add-on payments for new medical services or 

technologies for FY 2013 must submit a formal request, including a full description of 

the clinical applications of the medical service or technology and the results of any 

clinical evaluations demonstrating that the new medical service or technology represents 

a substantial clinical improvement, along with a significant sample of data to demonstrate 

that the medical service or technology meets the high-cost threshold. Complete 

application information, along with final deadlines for submitting a full application, will 

be posted as it becomes available on the CMS Web site at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. To allow interested parties 

to identify the new medical services or technologies under review before the publication 

of the proposed rule for FY 2013, the Web site also will post the tracking forms 

completed by each applicant. 

2. Public Input Before Publication of a Notice of Proposed Rulemaking on Add-On 

Payments 

 Section 1886(d)(5)(K)(viii) of the Act, as amended by section 503(b)(2) of 

Pub. L. 108-173, provides for a mechanism for public input before publication of a notice 

of proposed rulemaking regarding whether a medical service or technology represents a 

substantial clinical improvement or advancement. The process for evaluating new 

medical service and technology applications requires the Secretary to-- 
CMS-1518-P 241 

● Provide, before publication of a proposed rule, for public input regarding 

whether a new service or technology represents an advance in medical technology that 

substantially improves the diagnosis or treatment of Medicare beneficiaries; 

● Make public and periodically update a list of the services and technologies for 

which applications for add-on payments are pending; 

● Accept comments, recommendations, and data from the public regarding 

whether a service or technology represents a substantial clinical improvement; and 

● Provide, before publication of a proposed rule, for a meeting at which 

organizations representing hospitals, physicians, manufacturers, and any other interested 

party may present comments, recommendations, and data regarding whether a new 

medical service or technology represents a substantial clinical improvement to the 

clinical staff of CMS. 

 In order to provide an opportunity for public input regarding add-on payments for 

new medical services and technologies for FY 2012 prior to publication of the FY 2012 

IPPS/LTCH PPS proposed rule, we published a notice in the Federal Register on 

November 29, 2010 (75 FR 73091 through 73094), and held a town hall meeting at the 

CMS Headquarters Office in Baltimore, MD, on February 2, 2011. In the announcement 

notice for the meeting, we stated that the opinions and alternatives provided during the 

meeting would assist us in our evaluations of applications by allowing public discussion 

of the substantial clinical improvement criterion for each of the FY 2012 new medical 

service and technology add-on payment applications before the publication of the 

FY 2012 proposed rule. 
CMS-1518-P 242 

Approximately 50 individuals registered to attend the town hall meeting in 

person, while additional individuals listened over an open telephone line. Each of the 

three FY 2012 applicants presented information on its technology, including a discussion 

of data reflecting the substantial clinical improvement aspect of the technology. We 

considered each applicant’s presentation made at the town hall meeting, as well as written 

comments submitted on the applications, in our evaluation of the new technology add-on 

applications for FY 2012 in this proposed rule. 

In response to the published notice and the new technology town hall meeting, we 

received three written comments regarding applications for FY 2012 new technology 

add-on payments. We summarize these comments or, if applicable, indicate that there 

were no comments received, at the end of each discussion of the individual applications 

in this proposed rule. 

Comment: A number of attendees at the new technology town hall meeting 

provided comments that were unrelated to “substantial clinical improvement.” 

Response: As explained above and in the Federal Register notice announcing 

the meeting (75 FR 73091), the purpose of the new technology town hall meeting was 

specifically to discuss substantial clinical improvement of pending new technology 

applications for FY 2012. Therefore, we are not summarizing those comments in this 

proposed rule. Commenters are welcome to resubmit these comments in response to 

proposals in this proposed rule. 

Comment: One commenter, a major device association, requested that CMS 

provide more flexibility for the substantial clinical improvement criteria by allowing new 
CMS-1518-P 243 

technologies to demonstrate a substantial likelihood that clinical improvement will result. 

The commenter believed that this request was not unreasonable, given the fact that 

conclusive evidence would not necessarily be available in the short period of time for 

which an add-on payment would be available. The commenter also suggested that CMS 

consider a broader range of evidence in assessing whether a new technology meets the 

test of providing substantial clinical improvement over an older technology. 

Response: As stated in the 2001 new technology add-on payment final rule 

(66 FR 46913), we believe that the “substantial clinical improvement” criterion is 

intended “to limit these special payments for those technologies that afford clear 

improvements over the use of previously available technologies.” We believe that 

special payments for new technology should be limited to those new technologies that 

have been demonstrated to represent a substantial clinical improvement in caring for 

Medicare beneficiaries, such that there is a clear advantage to creating a payment 

incentive for physicians and hospitals to utilize the new technology. If such an 

improvement is not demonstrated, we continue to believe the incentives of the MS-DRG 

system provide a useful balance to the introduction of new technologies. In that regard, 

we point out that various new technologies introduced over the years have been 

demonstrated to have been less effective than initially thought, or in some cases even 

potentially harmful. We believe it is in the best interest of Medicare beneficiaries for 

CMS to proceed carefully with respect to the incentives created to quickly adopt new 

technologies. 
CMS-1518-P 244 

With respect to the comment that CMS should consider a broader range of 

evidence in assessing whether a new technology meets the test of providing substantial 

clinical improvement over an older technology, we accept different types of data (for 

example, peer-reviewed articles, study results, or letters from major associations, among 

others) that demonstrate and support the substantial clinical improvement associated with 

the new technology. In addition to clinical data, we will consider any evidence that 

would support the substantial clinical improvement associated with a new technology. 

Therefore, we believe we already consider an appropriate range of evidence as the 

commenter has requested. 

Comment: One commenter stated that, while it appreciated that new technology 

add-on payments are intended to encourage innovation, CMS’ application of the 

substantial clinical improvement criterion fails to account for how many technological 

advances may occur in practice. The commenter expressed confidence that many recent 

design improvements in medical devices represent significant advances in clinical utility 

of older/established technologies, and indicated CMS may fail to recognize these 

improvements in the current context of applying add-on payments. 

Response: As discussed above, a service or technology is not “new” for purposes 

of the new technology add-on payment if it is substantially similar to one or more 

existing technologies. That is, even if a technology receives a new FDA approval, it may 

not necessarily be considered “new” for purposes of new technology add-on payments if 

it is “substantially similar” to a technology that was approved by FDA and has been on 

the market for more than 2 to 3 years. To determine substantial similarity, we consider 
CMS-1518-P 245 

(1) whether a product uses the same or a similar mechanism of action to achieve a 

therapeutic outcome, (2) whether a product is assigned to the same or a different DRG 

and (3) whether the new use of the technology involves the treatment of the same or 

similar type of disease and the same or similar patient population. As we noted in the 

FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43813 through 43814), if all three 

components are present and the new use is deemed substantially similar to one or more of 

the existing uses of the technology (that is, beyond the newness period), we would 

conclude that the technology is not new and, therefore, is ineligible for the new 

technology add-on payment. A complete discussion of the substantial similarity criteria 

and policy can be found in the FY 2010 IPPS/RY 2010 LTCH PPS final rule 

(74 FR 43813 through 43814) 

Comment: One commenter believed that CMS has narrowly interpreted the 

statutory criteria for granting new technology add-on payments, which has created a 

situation in which it has become increasingly difficult for new technologies to qualify for 

this add-on payment. The commenter asserted that the criteria are so steep and the 

process so opaque that many companies, especially small companies, cannot afford to 

undertake the process at all. The commenter recommended that CMS continue to engage 

stakeholders to improve the new technology add-on payment process. The commenter 

also recommended that CMS consider creating additional guidance to further clarify the 

requirements as to what qualifies as a new technology. The commenter believed that 

additional guidance could provide greater certainty and predictability for many 

companies developing novel technologies. 
CMS-1518-P 246 

Response: We believe it is important to maintain an open dialogue on the IPPS 

new technology add-on payment process, as well as the broader issue of how new 

technology is introduced into all of the Medicare payment systems. As announced in a 

notice published in the Federal Register (75 FR 73091 through 73094), on 

February 2, 2011, prior to the new technology town hall meeting, we held an 

informational workshop for the general public that gave an overview on the processes of 

the new technology provisions in both the inpatient hospital and outpatient hospital 

settings, in addition to the procedures involved with ICD-9-CM coding and MS-DRG 

reassignment under the IPPS. We believe that our annual new technology town hall 

meeting and rulemaking process (including the posting of the applicants’ tracking forms 

on the CMS Web site) allow for an ongoing dialogue between CMS and the public on the 

new technology add-on payment process. Furthermore, we are willing to meet with 

potential applicants prior to and after an application has been submitted in order to ensure 

an application meets the submission requirements and to provide technical feedback on 

an applicant’s application. 

In reference to the commenter’s general statement that CMS’ interpretation of the 

statutory criteria has been narrowly cited, we are interested in and welcome comment on 

any specific criteria or data quality standards that commenters believe we should adopt to 

improve the new technology add-on application process, or any concerns or challenges 

that commenters believe we may encounter in undertaking this effort. Again, as we 

stated at the new technology town hall meeting, we are interested in working with 

stakeholders to improve the inpatient new technology add-on payment process. We are 
CMS-1518-P 247 

interested in ensuring that the latest medical technology that improves care for the 

Medicare patient population continues to be available to our beneficiaries. In addition, 

we invite potential applicants to contact CMS with any specific questions or concerns 

they may have prior to the submission of their application for new technology add-on 

payment. 

3. FY 2012 Status of Technologies Approved for FY 2011 Add-On Payments 

a. Spiration® IBV® Valve System 

 Spiration, Inc. submitted an application for new technology add-on payments for 

the Spiration® IBV® Valve System (Spiration® IBV®). The Spiration® IBV® is a device 

that is used to place, via bronchoscopy, small, one-way valves into selected small airways 

in the lung in order to limit airflow into selected portions of lung tissue that have 

prolonged air leaks following surgery while still allowing mucus, fluids, and air to exit, 

thereby reducing the amount of air that enters the pleural space. The device is intended 

to control prolonged air leaks following three specific surgical procedures: lobectomy; 

segmentectomy; or lung volume reduction surgery (LVRS). According to the applicant, 

an air leak that is present on postoperative day 7 is considered “prolonged” unless present 

only during forced exhalation or cough. In order to help prevent valve migration, there 

are five anchors with tips that secure the valve to the airway. The implanted valves are 

intended to be removed no later than 6 weeks after implantation. 

 With regard to the newness criterion, the Spiration® IBV® received a HDE 

approval from the FDA on October 24, 2008. We were unaware of any previously 

FDA-approved predicate devices, or otherwise similar devices, that could be considered 
CMS-1518-P 248 

substantially similar to the Spiration® IBV®. However, the applicant asserted that the 

FDA had precluded the device from being used in the treatment of any patients until the 

Institutional Review Board (IRB) granted approvals regarding its study sites. Therefore, 

the Spiration® IBV® met the newness criterion once it obtained at least one IRB approval 

because the device would then be available on the market to treat Medicare beneficiaries. 

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43819), the applicant stated 

that the first IRB approval for the Spiration® IBV® was March 12, 2009. In that final 

rule, based on the information above from the applicant, we determined that the 

Spiration® IBV® meets the newness criterion and the newness period for the Spiration® 

IBV® begins on March 12, 2009. 

After evaluation of the newness, costs, and substantial clinical improvement 

criteria for new technology payments for the Spiration® IBV® and consideration of the 

public comments we received in response to the FY 2010 IPPS/RY 2010 LTCH PPS 

proposed rule, including the additional analysis of clinical data and supporting 

information submitted by the applicant, we approved the Spiration® IBV® for new 

technology add-on payments for FY 2010 with a maximum add-on payment of 

$3,437.50. 

 In the FY 2011 IPPS/LTCH PPS proposed rule, we did not propose any changes 

to the new technology add-on payments for the Spiration® IBV®. We did not receive any 

public comments on whether to continue or discontinue the new technology add-on 

payment for the Spiration® IBV® for FY 2011. Therefore, for FY 2011, we continued 
CMS-1518-P 249 

new technology add-on payments for cases involving the Spiration® IBV® in FY 2011, 

with a maximum add-on payment of $3,437.50. 

 The new technology add-on payment regulations provide that “a medical service 

or technology may be considered new within 2 or 3 years after the point at which data 

begin to become available reflecting the ICD-9-CM code assigned to the new medical 

service or technology” (42 CFR 412.87(b)(2)). Our practice has been to begin and end 

new technology add-on payments on the basis of a fiscal year, and we have generally 

followed a guideline that uses a 6-month window before and after the start of the fiscal 

year to determine whether to extend the new technology add-on payment for an 

additional fiscal year. In general, we extend add-on payments for an additional year only 

if the 3-year anniversary date of the product’s entry on the market occurs in the latter half 

of the fiscal year (70 FR 47362). With regard to the newness criterion for the Spiration®

IBV®, as stated above, we consider the beginning of the newness period for the device to 

have commenced on the date of the first IRB approval for the Spiration® IBV®, which 

was March 12, 2009. For FY 2012, as of March 12, 2012, the Spiration® IBV® will have 

been on the market for 3 years, and is therefore no longer considered “new” as of 

March 12, 2012. Because the 3-year anniversary date of the Spiration® IBV®’s entry 

onto the market will occur in the first half of the fiscal year, we are proposing to 

discontinue its new technology add-on payment for FY 2012. 

b. CardioWestTM Temporary Total Artificial Heart System (CardioWestTM TAH-t) 

 SynCardia Systems, Inc. submitted an application for approval of the 

CardioWestTM Temporary Total Artificial Heart System (TAH-t) in FY 2009. The TAH-t 
CMS-1518-P 250 

is a technology that is used as a bridge to heart transplant device for heart transplanteligible patients with end-stage biventricular failure. The TAH-t pumps up to 9.5 liters of 

blood per minute. This high level of perfusion helps improve hemodynamic function in 

patients, thus making them better heart transplant candidates. 

 The TAH-t was approved by the FDA on October 15, 2004, for use as a bridge to 

transplant device in cardiac transplant-eligible candidates at risk of imminent death from 

biventricular failure. The TAH-t is intended to be used in hospital inpatients. One of the 

FDA’s post-approval requirements is that the manufacturer agrees to provide a 

post-approval study demonstrating that success of the device at one center can be 

reproduced at other centers. The study was to include at least 50 patients who would be 

followed up to 1 year, including (but not limited to) the following endpoints: survival to 

transplant; adverse events; and device malfunction. 

 In the past, Medicare did not cover artificial heart devices, including the TAH-t. 

However, on May 1, 2008, CMS issued a final national coverage determination (NCD) 

expanding Medicare coverage of artificial hearts when they are implanted as part of a 

study that is approved by the FDA and is determined by CMS to meet CMS' Coverage 

with Evidence Development (CED) clinical research criteria. (The final NCD is 

available on the CMS Web site at: 

http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=211.) 

We indicated in the FY 2009 IPPS final rule (73 FR 48555) that, because 

Medicare’s previous coverage policy with respect to this device had precluded payment 

from Medicare, we did not expect the costs associated with this technology to be 
CMS-1518-P 251 

currently reflected in the data used to determine the relative weights of MS-DRGs. As 

we have indicated in the past, and as we discussed in the FY 2009 IPPS final rule, 

although we generally believe that the newness period would begin on the date that FDA 

approval was granted, in cases where the applicant can demonstrate a documented delay 

in market availability subsequent to FDA approval, we would consider delaying the start 

of the newness period. This technology’s situation represented such a case. We also 

noted that section 1886(d)(5)(K)(ii)(II) of the Act requires that we provide for the 

collection of cost data for a new medical service or technology for a period of at least 

2 years and no more than 3 years “beginning on the date on which an inpatient hospital 

code is issued with respect to the service or technology.” Furthermore, the statute 

specifies that the term “inpatient hospital code” means any code that is used with respect 

to inpatient hospital services for which payment may be made under the IPPS and 

includes ICD-9-CM codes and any subsequent revisions. Although the TAH-t has been 

described by the ICD-9-CM code(s) since the time of its FDA approval, because the 

TAH-t had not been covered under the Medicare program (and, therefore, no Medicare 

payment had been made for this technology), this code could not be “used with respect to 

inpatient hospital services for which payment” is made under the IPPS, and thus we 

assumed that none of the costs associated with this technology would be reflected in the 

Medicare claims data used to recalibrate the MS-DRG relative weights for FY 2009. For 

this reason, as discussed in the FY 2009 IPPS final rule, despite the FDA approval date of 

the technology, we determined that TAH-t would still be eligible to be considered “new” 

for purposes of the new technology add-on payment because the TAH-t met the newness 
CMS-1518-P 252 

criterion on the date that Medicare coverage began, consistent with issuance of the final 

NCD, effective on May 1, 2008. 

After evaluation of the newness, costs, and substantial clinical improvement 

criteria for new technology add-on payments for the TAH-t and consideration of the 

public comments we received in response to the FY 2009 IPPS proposed rule, we 

approved the TAH-t for new technology add-on payments for FY 2009 (73 FR 48557). 

We also continued to make new technology add-on payments for the TAH-t in FY 2010 

and FY 2011. 

We describe the new technology add-on payment requirements with regard to 

newness above. With regard to the newness criterion for the TAH-t, as stated above, we 

consider the beginning of the newness period for the device to have commenced from the 

Medicare NCD date of May 1, 2008; it is no longer considered new as of May 11, 2011. 

Because the 3-year anniversary date of the TAH-t will occur prior to the start of FY 2012, 

we are proposing to discontinue the new technology add-on payment for the TAH-t in 

FY 2012. 

c. Auto Laser Interstitial Thermal Therapy (AutoLITTTM) System 

Monteris Medical submitted an application for new technology add-on payments 

for FY 2011 for the AutoLITTTM. AutoLITTTM is a minimally invasive, MRI-guided 

laser tipped catheter designed to destroy malignant brain tumors with interstitial thermal 

energy causing immediate coagulation and necrosis of diseased tissue. The technology 

can be identified by ICD-9-CM procedure codes 17.61 (Laser interstitial thermal therapy 

[LITT] of lesion or tissue of brain under guidance), and 17.62 (Laser interstitial thermal 
CMS-1518-P 253 

therapy [LITT] of lesion or tissue of head and neck under guidance), which became 

effective on October 1, 2009. 

The AutoLITTTM received a 510K FDA clearance in May 2009. The 

AutoLITTTM is indicated for use to necrotize or coagulate soft tissue through interstitial 

irradiation or thermal therapy in medicine and surgery in the discipline of neurosurgery 

with 1064 nm lasers. The AutoLITTTM may be used in patients with glioblastoma 

multiforme brain (GBM) tumors. The applicant stated in its application and through 

supplemental information that, due to required updates, the technology was actually 

introduced to the market in December 2009. The applicant explained that it was 

necessary to reduce the thermal damage lines from three to one and complete 

International Electrotechnical Commission/Underwriter Laboratory testing, which led to 

the introduction of the technology to the market in December 2009, although the 

technology was approved by FDA in May 2009. The applicant also stated through 

supplementary information to its application that the first sale of the product took place 

on March 19, 2010. However, because the product was already available for use in 

December 2009, it appears that the newness date would begin in December 2009. In the 

FY 2011 IPPS/LTCH PPS proposed rule, we welcomed public comments on this issue. 

After evaluation of the newness, costs, and substantial clinical improvement 

criteria for new technology payments for the AutoLITTTM and consideration of the public 

comments we received in response to the FY 2011 IPPS/RY 2011 LTCH PPS proposed 

rule, including the additional analysis of clinical data and supporting information 

submitted by the applicant, we approved the AutoLITTTM for new technology add-on 
CMS-1518-P 254 

payments for FY 2011. Consistent with the applicant’s clinical trial, the add-on payment 

is intended only for use of the device in cases of Glioblastoma Multiforme. Therefore, 

we limited the new technology add-on payment to cases involving the AutoLITTTM in 

MS-DRGs 025 (Craniotomy and Endovascular Intracranial Procedures with MCC), 026 

(Craniotomy and Endovascular Intracranial Procedures with CC), and 027 (Craniotomy 

and Endovascular Intracranial Procedures without CC or MCC). Cases involving the 

AutoLITTTM that are eligible for the new technology add-on payment are identified by 

assignment to MS-DRGs 025, 026, and 027 with a procedure code of 17.61 (Laser 

interstitial thermotherapy of lesion or tissue of brain under guidance) in combination with 

a primary diagnosis codes that begins with a prefix of 191 (Malignant neoplasm of brain). 

We note that using the procedure and diagnosis codes above and restricting the add-on 

payment to cases that map to MS-DRGs 025, 026, and 027 is consistent with information 

provided by the applicant, which demonstrated that cases of the AutoLITTTM would only 

map to MS-DRGs 025, 026, and 027. Procedure code 17.62 (Laser interstitial 

thermotherapy of lesion or tissue of head and neck under guidance) does not map to 

MS-DRGs 025, 026, or 027 under the GROUPER software and, therefore, is ineligible 

for new technology add-on payment. 

The average cost of the AutoLITTTM is reported as $10,600 per case. Under 

§412.88(a)(2) of the regulations, new technology add-on payments are limited to the 

lesser of 50 percent of the average cost of the device or 50 percent of the costs in excess 

of the MS-DRG payment for the case. As a result, the maximum add-on payment for a 

case involving the AutoLITTTM is $5,300. 
CMS-1518-P 255 

We describe the new technology add-on payment requirements with regard to 

newness above. With regard to the newness criterion for the AutoLITTTM, as stated 

above, we consider the beginning of the newness period for the device to commence from 

the market release date of December 2009. Therefore, the device will be considered 

“new” until December 2012. Because the 3-year anniversary date for the AutoLITTTM 

will occur after FY 2012, we are proposing to continue to make new technology add-on 

payments for the AutoLITTTM in FY 2012. 

4. FY 2012 Applications for New Technology Add-On Payments 

a. AxiaLIF® 2L+TM System 

TranS1 submitted an application for new technology add-on payments for the 

AxiaLIF® 2L+TM System for FY 2012. The AxiaLIF® 2L+TM System is an implantable 

spinal fixation system, delivered through a pre-sacral approach, facilitating spinal fusion 

through axial stabilization of the anterior lumbar spine at Lumbar vertebrae 4 through 

Sacral vertebrae 1 (L4-S1). 

The AxiaLIF® 2L+TM System received 510K FDA clearance (K092124) on 

January 21, 2010, and the applicant asserts that the device was available on the market 

immediately afterward through a limited market release program. The AxiaLIF® 2L+TM

System is indicated for use to provide anterior stabilization of the L4-S1 spinal segments 

as an adjunct to spinal fusion. It is also indicated for minimally invasive access to the 

anterior portion of the lower spine for assisting in the treatment of degeneration of the 

lumbar disc, performing lumbar discectomy, or for assistance in the performance of L4-

S1 interbody fusion. The AxiaLIF® 2L+TM System may be used in patients requiring 
CMS-1518-P 256 

fusion to treat pseudoarthrosis, unsuccessful previous fusion, spinal stenosis, 

spondylolisthesis (Grade 1), or degenerative disc disease as defined as back pain of 

discogenic origin with degeneration of the disc confirmed by history and radiographic 

studies. The AxiaLIF® 2L+TM System is coded using ICD-9-CM procedure code 81.08 

(Lumbar and lumbosacral fusion of the anterior column, posterior technique). 

With regard to the newness criterion, we are concerned that the AxiaLIF® 2L+TM

System may be substantially similar to the other devices manufactured by the applicant, 

AxiaLIF® System and AxiaLIF® IITM System, the latter of which is listed as the predicate 

device on the AxiaLIF® 2L+TM System’s application for FDA approval. Specifically, in 

making a determination of substantial similarity, we consider the following: (1) whether 

a product uses the same or similar mechanism of action to achieve a therapeutic outcome; 

(2) whether a product is assigned to the same or different DRG; and (3) whether the new 

use of a technology involves the treatment of the same or similar type of disease and the 

same or similar patient population. 

 We are particularly concerned that the AxiaLIF® 2L+TM System uses the same or 

similar mechanism of action as the AxiaLIF® IITM System to achieve a therapeutic 

outcome. According to the applicant’s 510K summary submitted to the FDA (K073514), 

the AxiaLIF® System is a multicomponent system including titanium alloy implantable 

devices and instrumentation for creating a pre-sacral axial track to the L5-S1 disk space. 

Similarly, the AxiaLIF® IITM System is described in the applicant’s 510K summary 

submitted to the FDA (K073643) as a system of medical grade titanium alloy for the 

anterior stabilization of the L4-S1 spinal segments as an adjunct to spinal fusion. The 
CMS-1518-P 257 

applicant states that the AxiaLIF® 2L+TM System was created from the AxiaLIF® IITM 

System platform. The applicant submitted the following to distinguish the 

AxiaLIF® 2L+TM System from the AxiaLIF® IITM System: 

● There have been internal thread changes for the 2L+ implant to accompany the 

Spanning Distraction Rod, which is designed to create and hold distraction in the L5-S1 

disc space and allow for a higher degree of control over the Rod advancement and 

distraction; 

● The design enhancements in the 2L+ System remove the dependence of 

distraction on size and placement of the S1 Rod, thus allowing precise implant placement 

in the vertebral bodies; 

● In the 2L+ Implant, the L4 section of the L4-L5 Rod incorporates a conical 

design to increase fixation. The outer diameter (O.D.) of the L5 section is increased to be 

identical to the O.D. of the S1 implant to provide more surface area bone contact; 

● The 2L+ Instrumentation incorporates Dilator Trials as an opportunity to 

enhance and simplify the intraoperative measuring technique by providing a direct visual 

means of measurement; and 

● The 2L+ Fixation Rod fills the cannulation to prevent graft from moving into 

the rod from the disc space. The Fixation Rod also fixates the S1 Anchor and L4-L5 Rod 

together such that these components cannot passively separate. 

 Based on indications for use listed by the FDA for the AxiaLIF® System 

(K073514), the AxiaLIF® IITM System (K073643), and the AxiaLIF® 2L+TM System (as 

described above), we also are concerned that all of these devices involve the treatment of 
CMS-1518-P 258 

the same or similar type of disease and the same or similar patient population. With 

respect to whether a product is assigned to the same or different DRG, we note that 

currently the AxiaLIF® System and the AxiaLIF® 2L+TM System both generally map to 

MS-DRGs 459 (Spinal Fusion Except Cervical with MCC) and 460 (Spinal Fusion 

Except Cervical without MCC). Though the AxiaLIF® IITM System is no longer on the 

market, it would also map to the same DRGs. 

If the AxiaLIF® 2L+TM System is found to be substantially similar to the 

AxiaLIF® System or the AxiaLIF® IITM System, the AxiaLIF® 2L+TM System would no 

longer qualify for the new technology add-on payment. Specifically, the appropriate start 

date for the AxiaLIF® 2L+TM System would be the start date of the device that is found to 

be substantially similar to the AxiaLIF® 2L+TM System. As noted above, the AxiaLIF®

IITM System received FDA approval on April 28, 2008. The 3-year newness period for the 

AxiaLIF® IITM System ends prior to the start of FY 2012 (July 28, 2011). Given the length 

of time since the AxiaLIF® IITM System’s entry into the market, cost-related data for the 

AxiaLIF® IITM System is already reflected in the most recent MS-DRG relative weights. 

Additionally, the AxiaLIF® System received multiple FDA approvals, the most recent of 

which was on January 11, 2008. The 3-year newness period for the AxiaLIF® System 

also ends prior to the start of FY 2012 (January 11, 2011). Given the length of time since 

the AxiaLIF® System’s entry into the market, cost-related data for the AxiaLIF® System 

is already reflected in the most recent MS-DRG relative weights. However, if the 

AxiaLIF® 2L+TM System is not substantially similar to any of the predicate devices 

mentioned above, then the newness period for the AxiaLIF® 2L+TM System would begin 
CMS-1518-P 259 

on January 21, 2010 (the AxiaLIF® 2L+TM System’s FDA approval date) and would be 

within the year newness period for FY 2012. We invite public comment regarding 

whether or not the AxiaLIF® 2L+TM System meets the newness criteria, and, in particular, 

whether it is substantially similar to the AxiaLIF® System or the AxiaLIF® IITM System. 

In an effort to demonstrate that the AxiaLIF® 2L+TM System meets the cost 

criterion, the applicant used data from the FY 2009 MedPAR file. The applicant 

explained through supplemental information to its application that most cases of the 

AxiaLIF® 2L+TM System would map to MS-DRGs 459 (Spinal Fusion Except Cervical 

with MCC) and 460 (Spinal Fusion Except Cervical without MCC). The applicant 

searched the FY 2009 MedPAR file for cases with an ICD-9-CM procedure code of 

81.08 (Lumbar and lumbosacral fusion of the anterior column, posterior technique). The 

applicant found 2,533 cases in MS-DRG 459 (5 percent of all cases) and 48,135 cases in 

MS-DRG 460 (95 percent of all cases). The average standardized charge per case was 

$117,847 for MS-DRG 459 and $84,153 for MS-DRG 460, equating to a case-weighted 

average standardized charge per case of $77,195. 

This case-weighted standardized charge per case contains charges related to other 

implantable devices. Therefore, it is necessary to remove charges of other implantable 

devices from the case-weighted standardized charge per case (before substituting charges 

for the AxiaLIF® 2L+TM System). The applicant used the following methodology to 

determine the average amount of charges related to other implantable devices within the 

case-weighted average standardized charge per case. The applicant estimated a 

standardized medical/surgical supplies charge of $47,860. After searching all claims in 
CMS-1518-P 260 

the CY 2008 100 percent inpatient limited data set standardized file, the applicant 

determined that, on average, implantable devices (revenue center 0278) accounted for 

75 percent of the of medical/surgical supplies charges, equating to $36,104 for the cases 

the applicant found in MS-DRGs 459 and 460. The applicant then subtracted this amount 

from the case-weighted average standardized charge per case, which resulted in a 

case-weighted average standardized charge per case, excluding an implantable device, of 

$41,090 ($77,195 - $36,104). 

The applicant then estimated the charges for the AxiaLIF® 2L+TM System by

inflating the expected purchase price of the AxiaLIF® 2L+TM System by 2.77 times the 

purchase price of defibrillators, resulting in a standardized charge of $51,482 for the 

AxiaLIF® 2L+TM System. The applicant stated that using a markup based on defibrillators 

was appropriate because, like the AxiaLIF® 2L+TM System, defibrillators are also a high 

cost implantable device. The applicant then added the average standardized charge for 

the AxiaLIF® 2L+TM System to the average standardized charge per case excluding an 

implantable device, which resulted in a total case-weighted average standardized charge 

per case of $92,557 ($41,075 + $51,482). The applicant calculated a case-weighted 

threshold of $78,354 for MS-DRGs 459 and 460. Because the total average standardized 

charge per case ($92,557), as calculated by the applicant, exceeds the case-weighted 

threshold ($78,354), the applicant maintains that it meets the cost criteria. 

We have concerns with the applicant’s methodology. Specifically, in determining 

the projected standardized charge for the AxiaLIF® 2L+TM System, the applicant relies on 

a charge markup for defibrillators because it is also a high-cost implantable device for 
CMS-1518-P 261 

which a hospital purchase price is known. We are concerned about whether more direct 

data or different proxies are available, including a charge markup for the 

AxiaLIF® System or AxiaLIF® IITM System. In reviewing the applicant’s charge markup, 

we also are concerned about the source data for determining the 2.77 charge markup ratio 

for defibrillators. We invite public comment on whether the AxiaLIF® 2L+TM System 

meets the cost criterion for a new technology add-on payment for FY 2012. 

 With respect to the substantial clinical improvement criterion, the applicant 

asserts that it meets this criterion in its application. The applicant stated that substantial 

clinical improvement is demonstrated by the AxiaLIF® 2L+TM System’s facilitation of 

spinal fusion surgery without a laparotomy. By avoiding a laparotomy, the 

AxiaLIF® 2L+TM System reduces blood loss, postoperative pain, narcotic use, denervation, 

morbidity, the probability of complications, and the risk of trauma to the tissue area 

surrounding the lumbar. The applicant further stated that the AxiaLIF® 2L+TM System 

reduces morbidity and has reduced risk of injuring vital organs and important intrinsic 

stabilizing structures, with a lower complication profile than traditional open fusion 

techniques. The applicant noted that long-term results can include better support of 

lordosis and prevention of adjacent level disease. We are concerned that this does not 

demonstrate a substantial clinical improvement from the AxiaLIF® IITM System, which 

also facilitated spinal fusion surgery without a laparotomy. 

The applicant has not conducted clinical trials, but the 300 cases of 

AxiaLIF® 2L+TM System’s use (through the Limited Market Release) yielded a 
CMS-1518-P 262 

complication rate of 0.7 percent. The applicant also asserts that the pre-sacral approach 

results in a lower average length of stay than a non-sacral approach. 

The applicant has referred us to several sources of literature presenting data 

related to the pre-sacral approach for the applicant’s AxiaLIF® device. We are concerned 

that the applicant has generally repeated the statements made regarding the clinical 

improvement of its AxiaLIF® device and has not provided information that indicates that 

the AxiaLIF® 2L+TM System offers a substantial clinical benefit over the earlier AxiaLIF®

or AxiaLIF® IITM devices. Moreover, the applicant has not provided any clinical 

outcomes data for the AxiaLIF® 2L+TM System to substantiate its assertions regarding 

substantial clinical improvement for the AxiaLIF® 2L+TM System. While the applicant 

maintains that data from the AxiaLIF® device are relevant and can be used to substantiate 

its assertions for the AxiaLIF® 2L+TM System, we are concerned that data directly 

associated with the use of the AxialLIF® 2L+TM System are not available. For example, it 

is not clear the degree to which the population that requires treatment with the AxiaLIF®

2L+TM System differs from the population that requires treatment with the AxiaLIF®

device or the AxiaLIF® IITM System, and it is also not clear the degree to which the 

differences between the devices discussed above may affect clinical outcomes. 

The applicant also believes that an inline placement of the fixation implant may 

provide an advantage due to closeness of the implant to functional axis of the spine and 

through alignment with the direction of the compressive forces on the vertebral bodies. 

The applicant maintains that evaluation and testing have proven the AxiaLIF® 2L+TM 

System to be a biomechanically sturdy L4-S1 axial construct that significantly reduces 
CMS-1518-P 263 

the range of motion at the desired point and achieves decompression by increasing the 

L4-S1 disc spaces. We note that the only clinical change from the AxiaLIF® device and 

the AxiaLIF® 2L+TM System is that the latter reaches the L4. There is no stated clinical 

change between the AxiaLIF® IITM and the AxiaLIF® 2L+TM System. We invite public 

comment on whether the AxiaLIF® 2L+TM System meets the substantial clinical 

improvement criterion for the new technology add-on payment for FY 2012. 

b. ChampionTM HF Monitoring System 

 CardioMEMS, Inc. submitted an application for new technology add-on payment 

for FY 2012 for the ChampionTM HF Monitoring System, an Implantable Hemodynamic 

Monitor System (IHMS). The IHMS is comprised of an implantable sensor/monitor 

placed in the distal pulmonary artery. Pulmonary artery hemodynamic monitoring is 

used in the management of heart failure. The IHMS measures multiple pulmonary artery 

pressure parameters for an ambulatory patient to measure and transmit data via a wireless 

sensor to a secure Web site. The IHMS utilizes radiofrequency energy to power the 

sensor and to measure pulmonary artery pressure. The data are accessed by clinicians via 

the Internet. Interpretation of trend data allows the clinician to make adjustments to 

therapy while the patient is at home. Changes in pulmonary artery pressure can be used 

along with heart failure signs and symptoms to adjust medications. There are currently 

no FDA approved devices performing this IHMS function. The IHMS consists of three 

components: (1) a wireless implantable hemodynamic sensor/monitor which is implanted 

in the distal pulmonary artery (sensor); (2) an external patient measurement system; and 

(3) a patient data management system. 
CMS-1518-P 264 

CardioMEMS, Inc. believes that a large majority of patients receiving the sensor 

will be admitted to an inpatient hospital with a diagnosis of “acute or chronic heart 

failure” (ICD-9-CM code 428.43 (Acute or chronic combine systolic and diastolic heart 

failure)) and the sensor will be implanted during this hospital stay. For safety 

considerations, a small portion of these patients may be discharged and the sensor 

implanted at a future date in the hospital outpatient setting. In addition, there will likely 

be a group of patients in chronic heart failure who are not currently hospitalized, but who 

have been hospitalized in the past few months for whom the treating physician believes 

that regular pulmonary artery pressure readings are necessary to optimize patient 

management. Depending on the patient’s status, these patients may have the sensor 

implanted in the hospital inpatient or outpatient setting. 

With respect to the newness criterion, we note that this device is not currently 

approved by the FDA, but the manufacturer anticipates that FDA approval will be 

granted in the second quarter of 2011. No ICD-9-CM procedure code exists at this time 

that uniquely identifies the System. As noted in Table 6B, which is listed in section VI. 

of the Addendum to this proposed rule and available via the Internet, we have approved 

the use of new procedure code 38.26 (Insertion of implantable wireless pressure sensor 

for intracardiac or great vessel hemodynamic monitoring), which will identify use of the 

System. The new ICD-9-CM procedure code 38.26 will be assigned to MS-DRG 264 

(Other Circulatory System O.R. Procedures). 

 In an effort to demonstrate that the System meets the cost criteria, the applicant 

used data from a clinical trial. Specifically, the manufacturer used data from the 
CMS-1518-P 265 

CardioMEMS Heart Sensor Allows Monitoring of Pressure to Improve Outcomes in 

NYHA Class III heart failure patients (CHAMPION) trial4 which enrolled 550 patients in 

30 hospitals within the United States. We note that there were 575 patients initially 

enrolled in the trial. Of these 575 patients, 25 underwent a right heart catheterization and 

did not receive an implant primarily because of anatomical/physiological conditions 

identified during the catheterization. The manufacturer collected 310 hospital claims 

from the 550 patients enrolled in the CHAMPION trial. The applicant eliminated claims 

with incomplete data or statistical outliers, and was left with 137 claims for its cost 

analysis. CardioMEMS funded the clinical trial and, therefore, did not submit these 137 

claims. The applicant believes that cases eligible for the System would map to 

MS-DRG 264. Using the 137 claims from the CHAMPION trial, the manufacturer 

determined an average standardized charge per case without the new technology to equal 

$12,817. The applicant indicated that the case-weighted average standardized charge per 

case does not include charges related to the System, so it is then necessary to add the 

charges related to the device to the average standardized charge per case to evaluate the 

cost threshold criterion. To convert the costs of the technology to charges, CardioMEMS 

used an average cost-to-charge ratio (CCR) of 0.311 based on FY 2008 hospital cost 

reports from the 30 hospitals who participated in the CHAMPION trial. Based on this 

CCR, the manufacturer determined an average charge for the System to equal $45,016. 

Using this methodology, the total average standardized charge per case including the new 

 

4 Wireless pulmonary artery haemodynamic monitoring in chronic heart failure: a randomised controlled 

trial. Abraham WT, Adamson PB, Bourge RC, Aaron MF, Costanzo MR, Stevenson LW, Strickland W, 

Neelagaru S, Raval N, Krueger S, Weiner S, Shavelle D, Jeffries B, Yadav JS; for the CHAMPION Trial 

Study Group. Lancet. 2011 Feb 19;377(9766):658-666 
CMS-1518-P 266 

technology equals $57,833 ($45,016 + $12,817). This amount exceeds the cost threshold 

of $46,546 for MS-DRG 264 (Table 10 of the FY 2011 IPPS/LTCH PPS final rule (75 

FR 50607)). Because the total average standardized charge per case ($57,833) exceeds 

the threshold ($46,546), the applicant maintains that it meets the cost criteria. 

In addition to the methodology described above, the manufacturer searched for 

claims for patients in the CHAMPION trial that were aged 65 years or older at the time of 

device implantation as a proxy for Medicare patients. Out of the original 137 hospital 

claims, 56 (41 percent) were for patients aged 65 years or older. From these 56 claims 

(across 23 hospitals from the CHAMPION study), the applicant calculated an average 

standardized charge of $13,031, which did not include charges for the device. The 

applicant added the charges related to the device ($45,016, calculated as described above) 

to the average standardized charge per case to evaluate the cost threshold criterion. 

Using this methodology, the total average standardized charge per case including the new 

technology equals $58,047 ($45,016 + $13,031). This amount also exceeds the FY 2012 

cost threshold of $46,546 for MS-DRG 264. Because the total average standardized 

charge per case ($58,047) exceeds the threshold ($46,546), the applicant maintains that it 

meets the cost criteria. We invite public comment on whether or not the ChampionTM HF 

Monitoring System meets the cost criterion. 

With regard to substantial clinical improvement, the applicant cited clinical data 

from the CHAMPION trial. The trial is a prospective, multicenter, randomized, 

single-blinded clinical trial conducted in the United States, designed to evaluate the 

safety and efficacy of the System in reducing heart failure-related hospitalizations in a 
CMS-1518-P 267 

subset of subjects suffering from heart failure. The applicant shared several major 

findings from the CHAMPION trial5 as described below. First, at 6 months, the 

treatment group exhibited a 30 percent relative risk reduction in the rate of heart failurerelated hospitalization (0.31 vs. 0.44, p<0.0001). There were 83 heart failure-related 

hospitalizations in 270 treatment patients compared to 120 heart failure-related 

hospitalizations in the 280 control subjects. The “number needed to treat” (NNT) to 

reduce one heart failure-related hospitalization was eight patients. Second, during the 6-

month follow-up period, the proportion of subjects hospitalized for one or more heart 

failure-related hospitalizations was significantly lower in the treatment group (54 out of 

270 patients) than in the control group (80 out of 280 patients) (20 percent vs. 28.6 

percent; p = 0.0222). Third, at 6 months, treatment patients had more days alive outside 

of the hospital (174.4 vs. 172.1, p = 0.0222) and fewer average days in the hospital (2.2 

vs. 3.8, p = 0.0194) compared to control patients. Treatment patients spent 472 fewer 

days in the hospital than the control patients. Finally, the treatment group was assessed 

with the Minnesota Living with Heart Failure Questionnaire, which reported a greater 

improvement in quality of life (QOL) than the control group (-10.6 vs. -7.4, p = 0.0373). 

The applicant concluded that the CHAMPION trial demonstrated that, with knowledge of 

class III heart failure patients’ pulmonary artery pressures, physicians could improve 

medical management leading to fewer heart failure-related hospitalizations. The 

 

5 Wireless pulmonary artery haemodynamic monitoring in chronic heart failure: a randomised controlled 

trial. Abraham WT, Adamson PB, Bourge RC, Aaron MF, Costanzo MR, Stevenson LW, Strickland W, 

Neelagaru S, Raval N, Krueger S, Weiner S, Shavelle D, Jeffries B, Yadav JS; for the CHAMPION Trial 

Study Group. Lancet. 2011 Feb 19;377(9766):658-666 
CMS-1518-P 268 

applicant further stated that the device had very few device-related and system-related 

complications over the course of the clinical trial, and that primary and secondary study 

endpoints were successfully achieved. There was one report of an “Unanticipated 

Serious Adverse Device Event” involving a “tingling sensation” in a control patient, 

which was adjudicated by the Clinical Events Committee as not device/system-related. 

There were two reports of Serious Adverse Device Events due to hemoptysis and a blood 

clot, both of which resolved without permanent sequelae. The Clinical Events 

Committee adjudicated both events as device/system-related. The applicant maintained 

that during the first 6 months, there were 336 Serious Adverse Events (hospitalizations or 

deaths due to heart failure or other common comorbidities seen in this population) in 121 

patients in the treatment group (44.8 percent) versus 385 Serious Adverse Events in 155 

patients in the control group (55.4 percent). 

In addition, the manufacturer stated that the CHAMPION trial suggests the safety 

and effectiveness of the device was maintained during longer term follow-up. (The 

primary efficacy endpoint of the CHAMPION trial was 6 months. However, patients 

remained in their assigned groups until the last patient reached 6 months, which is 

referred to as “the entire follow-up.” The mean time of this entire follow up was up to 15 

months.) Therefore, the manufacturer believes that the System meets the substantial 

clinical improvement criterion. We invite public comment on whether or not the 

ChampionTM HF Monitoring System technology represents a substantial clinical 

improvement in the Medicare population. 

c. PerfectCLEAN with Micrillon®
CMS-1518-P 269 

UMF Corporation (the manufacturer) submitted an application for a technology 

called the PerfectCLEAN with Micrillon® (PerfectCLEAN). PerfectCLEAN is a 

cleaning textile product (or cleaning mat/wipe) with chlorine embedded or bound to the 

extruded fiber. The manufacturer asserts that PerfectCLEAN is intended to be used to 

trap and eliminate pathogens such as Methicillin-resistant Staphylococcus aureus 

(MRSA), Clostridium difficile (C diff.) and the H1N1 flu virus from surfaces within the 

hospital (as well as other health care facilities and locations). The applicant asserts that it 

can trap and remove more than 99.99 percent of bacteria on hard surfaces. 

The manufacturer stated that the PerfectCLEAN is an Environmental Protection 

Agency (EPA) approved antimicrobial/disinfectant that will be available on the market in 

the first quarter of 2011. The applicant maintains that PerfectCLEAN is subject to review 

and approval by the EPA per the EPA’s Federal Insecticide, Fungicide, Rodenticide Act 

(FIFRA) Treated Article Exemption and, therefore, is not subject to review by the FDA. 

The applicant states that it was determined in a pre-registry meeting with the EPA that 

the underlying chemistries used to create the chlorine binding effects of Micrillon®

chemistry are EPA and FDA approved even though no FDA claims are being sought. 

 With respect to whether the PerfectCLEAN is eligible for new technology 

add-on payments, we note that our regulations at §412.87(c) state, “CMS will only 

consider, for add-on payments for a particular fiscal year, an application for which the 

new medical service or technology has received FDA approval or clearance by July 1 

prior to the particular fiscal year.” FDA “approval,” refers to the premarket approval 

application (PMA) process for most Class III devices, and FDA “clearance” refers to the 
CMS-1518-P 270 

510(k) premarket notification submission process for most Class II devices and some 

Class I and Class III devices (section 515 of the Food, Drug and Cosmetic Act (FDCA) 

for PMA) and sections 510(k) and 513(i) of the FDCA (for premarket notification 

submission process)). Therefore, we believe our regulations, by requiring applicants to 

receive an FDA approval or clearance in order to be eligible for new technology add-on 

payments, limit the universe of items and services eligible to receive these payments to 

those that require FDA approval or clearance. The applicant has informed CMS that it is 

in the process of registering and listing its product with the FDA under section 510(b) 

through (d) and (j) and anticipates this process to be completed prior to the July 1 

regulatory deadline. The registration process that the applicant is currently pursing will 

result in neither FDA approval nor clearance, and we are therefore concerned that the 

PerfectCLEAN is not eligible for new technology add-on payments under our existing 

regulations., which require “FDA approval or clearance by July 1 prior to the particular 

fiscal year” (42 CFR §412.87(c)). We welcome public comments on whether the 

PerfectCLEAN is eligible for new technology add-on payments under the current 

regulations. 

 With regard to the cost criterion, the applicant used data from the FY 2011 

After Outliers Removed (AOR) file (posted on the CMS Web site) for its cost analysis, 

which is based on the FY 2009 MedPAR file. The applicant considered MS-DRGs that 

relate to surgeries, skin abrasions, open sores, wounds, and similar inflamed tissue 

conditions where infection sites are thought to be more likely to occur for inpatient care 

situations. This resulted in the applicant determining that the technology would be most 
CMS-1518-P 271 

frequently used in 622 different MS-DRGs. The applicant noted that the charges from 

the FY 2011 AOR file were not inflated from FY 2009 to FY 2011; therefore the 

applicant applied a 2-year inflation factor of 12 percent (to update the charges from 

FY 2009 to FY 2011). The applicant based the 2-year inflation factor of 12 percent on a 

3-year average of the 2 year rate-of-change in charges (the 2-year rate-of-change for 

FY 2009 of 11.841 percent (73 FR 48764); the 2-year rate-of-change for FY 2010 of 

14.184 percent (74 FR 44010); and the 2-year rate-of-change for FY 2011 of 9.8843 

percent (75 FR 50429)) that CMS uses in its outlier threshold calculation as published in 

section II. of the Addendum to the annual IPPS final rule. The applicant computed a 

case-weighted standardized charge per case of $40,442 for all 622 MS-DRGs, which did 

not include any charges related to the PerfectCLEAN. Therefore, it added the charges 

related to the technology to the case-weighted average standardized charge per case in 

evaluating the cost threshold criterion. The manufacturer estimates a charge per patient 

of $100 per day for the PerfectCLEAN. The applicant includes in this amount charges 

for payroll, treated textiles, packaging and protective gloves, laundering, storage, and 

distribution. The applicant multiplied the average length of stay for each MS-DRG (as 

found in Table 5 of the Addendum to the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50547 through 50566)) by the charge per patient per day to determine the total 

charges per stay by MS-DRG related to the PerfectCLEAN. The applicant added 

additional charges per stay for the PerfectCLEAN to the case-weighted standardized 

charge per case and determined a total case-weighted average standardized charge per 

case of $41,105. Based on the 622 MS-DRGs to which the technology mapped, the 
CMS-1518-P 272 

applicant computed a case-weighted threshold of $40,834. Because the total 

case-weighted average standardized charge per case of $41,105 exceeds the case 

weighted threshold of $40,834, the applicant maintains that it meets the cost criteria. 

 We have several concerns regarding the applicant’s cost analysis. First, 

although the technology can potentially be used in every single Medicare case, the 

application targets specific MS-DRGs. The applicant did not provide a detailed clinical 

justification regarding their selection of MS-DRGs, or a detailed justification for why the 

technology could not be used in other MS-DRGs. We believe it would be more 

appropriate to target all cases in every MS-DRG when conducting the cost analysis for 

this type of non-procedure or condition specific item. Using the FY 2011 AOR file, we 

conducted our own analysis with the same methodology above (and inflated the charges 

and included the total charges per stay related to the PerfectCLEAN ) across all 

MS-DRGs. Based on our analysis, we determined a total case-weighted average 

standardized charge per case of $29,535. Using the applicant’s methodology, we also 

determined a case-weighted threshold of $37,384 across all MS-DRGs. Because the total 

case-weighted average standardized charge per case of $29,535 is less than the 

case-weighted threshold of $37,384, we believe the PerfectCLEAN may not meet the cost 

criteria. 

 Second, the applicant included in the average charge per day more general 

charges unrelated to the specific new technology, such as payroll, packaging and 

protective gloves, laundering, storage and distribution. We do not believe it is 

appropriate to include charges for expenses already accounted for in MS-DRG based 
CMS-1518-P 273 

payments, such as laundering, storage, and distribution, and supplies already used by 

hospital staff such as packaging and protective gloves. We also note that the applicant 

states in its substantial clinical improvement discussion that the PerfectCLEAN 

represents the first comprehensive process for the removal and elimination of harmful 

micro-organisms responsible for HAIs from patient environments, the elimination of 

cross-contamination, and significant savings across many cost centers. If the 

PerfectCLEAN is a substitute for other cleaning mechanisms such as wiping down a 

hospital room with a spray and can produce significant savings across many cost centers, 

then it would be appropriate to deduct some charges from the average charge per day in 

order to accurately reflect the cost to hospitals of this technology. For these reasons, we 

remain concerned about the accuracy of the computation of a charge per patient of $100 

per day and whether the PerfectCLEAN meets the cost criterion. 

Thirdly, the applicant based the 12-percent, 2-year rate-of-change in charges on a 

3-year average (FY 2009 through FY 2011) of the 2-year rate-of-change in charges as 

published in section II. of the Addendum to the annual IPPS final rule. We do not 

believe it is appropriate to use a 3-year average of the 2-year rate-of-change in charges as 

the 2-year rate-of-change in charges already uses the most recent data available to 

measure this change and, therefore, does not need to be averaged with prior years. 

Specifically, as described in section II. of the Addendum to this proposed rule, to 

calculate the proposed FY 2012 2-year rate-of-change in charges, we compared the 

1-year average annualized rate-of-change in charges per case from the last quarter of 

FY 2009 in combination with the first quarter of FY 2010 (July 1, 2009 through 
CMS-1518-P 274 

December 31, 2009) to the last quarter of FY 2010 in combination with the first quarter 

of FY 2011 (July 1, 2010 through December 31, 2010). This rate-of-change was 4.43 

percent (1.044394) or 9.07 percent (1.090759) over 2 years. If we substitute the FY 2012 

proposed 2-year rate-of-change in charges of 9.07 percent for the 12-percent 3-year 

average of the 2-year rate-of-change in charges that the applicant used in its cost analysis, 

the total case-weighted average standardized charge per case would be $40,047 across the 

622 MS-DRGs to which the applicant believes the technology would map. As mentioned 

above, the applicant computed a case-weighted threshold of $40,834. Because the total 

case-weighted average standardized charge per case of $40,047 is less than the 

case-weighted threshold of $40,834, it appears the applicant would not meet the cost 

criteria. We invite public comment on whether the PerfectCLEAN meets the cost 

criterion. 

The applicant maintains that it meets the substantial clinical improvement criteria 

for the following reasons: The applicant believes the PerfectCLEAN significantly 

improves clinical outcomes for a patient population as compared to currently available 

treatments, decreases rate of subsequent diagnostic or therapeutic interventions, and 

decreases the number of future hospitalizations or physician visits. The applicant cited 

independent laboratory studies that set forth the level of removal and elimination of 

pathogens achieved by the PerfectCLEAN. The applicant stated that the PerfectCLEAN 

includes “more precise and focused patient room procedures that when properly applied 

utilize the textile and micro-denier efficacies” listed in the product’s independent test 

reports. The applicant states that this results “in a safer patient environment where the 
CMS-1518-P 275 

likelihood of cross contamination is reasonable.” The applicant included test report data 

for the product, which demonstrated a 99.99 percent effectiveness of removing pathogens 

such as MRSA and C diff. The applicant cited industry and clinical support to 

demonstrate that improved patient environment can save lives. The applicant also stated 

that PerfectCLEAN represents the first comprehensive process for the removal and 

elimination of harmful micro-organisms responsible for hospital acquired infections from 

patient environments, the elimination of cross-contamination, and significant savings 

across many cost centers. The applicant stated that this new innovative system delivers 

reliable and repeatable results not currently achieved using currently available protocols 

and products. The applicant provided the following example: a traditional method of 

disinfection is to apply liquid disinfectants, which the applicant stated typically requires a 

10-minute dwell time (which in most cases is not completed by the hospital) and then 

wiping or mopping up the nonevaporated liquids. Compared to this method, the 

applicant asserts that the PerfectCLEAN first removes the micro-organisms from those 

surfaces using specially designed microscopic fibers. The applicant asserts that these 

pathogens are trapped in a formulation of a chlorine binding technology which eliminates 

the pathogens. 

The applicant further asserts that the PerfectCLEAN maintains its disinfecting 

capability longer than other methods because the chlorine-binding technology is 

introduced at the pellet stage of fiber extrusion so that it is present throughout the fiber, 

as opposed to a finish or coating process that wears off as textiles are used and laundered. 

Additionally, the applicant asserts that the technology’s non-leaching chlorination system 
CMS-1518-P 276 

recharges in the wash process by attracting and binding free molecules of chlorine. The 

applicant further asserts that in this way the PerfectCLEAN recharges back to its original 

strength and efficacy which allows it to work more rapidly than other techniques. The 

applicant asserts that this reduces cross-contamination by those persons handling soiled 

textiles after the people contact surfaces which have been cleaned of harmful microorganisms. The applicant added that the training in use of color coated textiles (different 

color mats) affords superior monitoring and compliance supervision of the hygiene 

specialists charged with responsibility to reduce cross contamination. We invite public 

comment on whether the PerfectCLEAN meets the substantial clinical improvement 

criterion. 

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

A. Background

 Section 1886(d)(3)(E) of the Act requires that, as part of the methodology for 

determining prospective payments to hospitals, the Secretary must adjust the standardized 

amounts “for area differences in hospital wage levels by a factor (established by the 

Secretary) reflecting the relative hospital wage level in the geographic area of the hospital 

compared to the national average hospital wage level.” In accordance with the broad 

discretion conferred under the Act, we currently define hospital labor market areas based 

on the delineations of statistical areas established by the Office of Management and 

Budget (OMB). A discussion of the proposed FY 2012 hospital wage index based on the 

statistical areas, including OMB’s revised definitions of Metropolitan Areas, appears 

under section III.B. of this preamble. 
CMS-1518-P 277 

 Beginning October 1, 1993, section 1886(d)(3)(E) of the Act requires that we 

update the wage index annually. Furthermore, this section of the Act provides that the 

Secretary base the update on a survey of wages and wage-related costs of short-term, 

acute care hospitals. The survey must exclude the wages and wage-related costs incurred 

in furnishing skilled nursing services. This provision also requires us to make any 

updates or adjustments to the wage index in a manner that ensures that aggregate 

payments to hospitals are not affected by the change in the wage index. The proposed 

adjustment for FY 2012 is discussed in section II.B. of the Addendum to this proposed 

rule. 

 As discussed below in section III.H. of this preamble, we also take into account 

the geographic reclassification of hospitals in accordance with sections 1886(d)(8)(B) and 

1886(d)(10) of the Act when calculating IPPS payment amounts. Under section 

1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amounts so 

as to ensure that aggregate payments under the IPPS after implementation of the 

provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the 

aggregate prospective payments that would have been made absent these provisions. The 

proposed budget neutrality adjustment for FY 2012 is discussed in section II.A.4.b. of the 

Addendum to this proposed rule. 

 Section 1886(d)(3)(E) of the Act also provides for the collection of data every 

3 years on the occupational mix of employees for short-term, acute care hospitals 

participating in the Medicare program, in order to construct an occupational mix 

adjustment to the wage index. A discussion of the occupational mix adjustment that we 
CMS-1518-P 278 

are proposing to apply beginning October 1, 2011 (the FY 2012 wage index) appears 

under section III.C. of this preamble. 

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

 The wage index is calculated and assigned to hospitals on the basis of the labor 

market area in which the hospital is located. In accordance with the broad discretion 

under section 1886(d)(3)(E) of the Act, beginning with FY 2005, we define hospital labor 

market areas based on the Core-Based Statistical Areas (CBSAs) established by OMB 

and announced in December 2003 (69 FR 49027). For a discussion of OMB's revised 

delineations of CBSAs and our implementation of the CBSA definitions, we refer readers 

to the preamble of the FY 2005 IPPS final rule (69 FR 49026 through 49032). 

 As with the FY 2011 final rule, in this FY 2012 proposed rule, we are proposing 

to provide that hospitals receive 100 percent of their wage index based upon the CBSA 

configurations. Specifically, for each hospital, we are proposing to determine a wage 

index for FY 2012 employing wage index data from hospital cost reports for cost 

reporting periods beginning during FY 2008 and using the CBSA labor market 

definitions. We consider CBSAs that are Metropolitan Statistical Areas (MSAs) to be 

urban, and CBSAs that are Micropolitan Statistical Areas as well as areas outside of 

CBSAs to be rural. In addition, it has been our longstanding policy that where an MSA 

has been divided into Metropolitan Divisions, we consider the Metropolitan Division to 

comprise the labor market areas for purposes of calculating the wage index (69 FR 

49029) (regulations at §412.64(b)(1)(ii)(A)). 
CMS-1518-P 279 

 In OMB Bulletin No. 10-2, issued on December 1, 2009, OMB announced that 

the CBSA changes in that bulletin would be the final update prior to the 2010 Census of 

Population and Housing. CMS adopted those changes in the FY 2011 IPPS/LTCH PPS 

final rule (75 FR 50162), beginning October 1, 2010, and they are reflected in this 

FY 2012 proposed rule. In 2013, OMB plans to announce new area delineations based 

on its 2010 standards (75 FR 37246) and the 2010 Census data. 

 The OMB bulletin is available on the OMB Web site at 

http://www.whitehouse.gov/OMB - go to “Agency Information” and click on “Bulletins”. 

C. Proposed Occupational Mix Adjustment to the FY 2012 Wage Index

 As stated earlier, section 1886(d)(3)(E) of the Act provides for the collection of 

data every 3 years on the occupational mix of employees for each short-term, acute care 

hospital participating in the Medicare program, in order to construct an occupational mix 

adjustment to the wage index, for application beginning October 1, 2004 (the FY 2005 

wage index). The purpose of the occupational mix adjustment is to control for the effect 

of hospitals’ employment choices on the wage index. For example, hospitals may choose 

to employ different combinations of registered nurses, licensed practical nurses, nursing 

aides, and medical assistants for the purpose of providing nursing care to their patients. 

The varying labor costs associated with these choices reflect hospital management 

decisions rather than geographic differences in the costs of labor. 
CMS-1518-P 280 

1. Development of Data for the Proposed FY 2012 Occupational Mix Adjustment Based 

on the 2007-2008 Occupational Mix Survey 

 As provided for under section 1886(d)(3)(E) of the Act, we collect data every 

3 years on the occupational mix of employees for each short-term, acute care hospital 

participating in the Medicare program. 

 For the FY 2010 hospital wage index, we used occupational mix data collected on 

a revised 2007-2008 Medicare Wage Index Occupational Mix Survey (the 2007-2008 

survey) to compute the occupational mix adjustment for FY 2010. (We refer readers to 

the FY 2010 IPPS final rule (74 FR 43827) for a detailed discussion of the 2007-2008 

survey.) Again, for the FY 2011 hospital wage index, we used data from the 2007-2008 

survey (including revised data for 45 hospitals) to compute the FY 2011 adjustment. 

 For the FY 2012 hospital wage index, we are proposing to again use occupational 

mix data collected on the 2007-2008 Medicare Wage Index Occupational Mix Survey to 

compute the occupational mix adjustment for FY 2012. We are including data for 3,165 

hospitals that also have wage data included in the proposed FY 2012 wage index. 

2. New 2010 Occupational Mix Survey for the FY 2013 Wage Index 

As stated earlier, section 304(c) of Pub. L. 106-554 amended section 

1886(d)(3)(E) of the Act to require CMS to collect data every 3 years on the occupational 

mix of employees for each short-term, acute care hospital participating in the Medicare 

program. We used occupational mix data collected on the 2007-2008 survey to compute 

the occupational mix adjustment for FY 2010 and the FY 2011 wage index and are 

proposing to use the 2007-2008 occupational mix survey data in this proposed rule for the 
CMS-1518-P 281 

FY 2012 wage index. Therefore, a new measurement of occupational mix will be 

required for FY 2013. 

The new 2010 survey (Form CMS-10079 (2010)) provides for the collection of 

hospital-specific wages and hours data for calendar year 2010 (that is, payroll periods 

ending between January 1, 2010 and December 31, 2010) and will be applied beginning 

with the FY 2013 wage index. The 2010 survey was adopted in the Federal Register on 

January 15, 2010 (75 FR 2548) and approved by OMB on February 26, 2010 (OMB 

control number 0938-0907). The survey is available on the CMS Web site at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage and through the 

fiscal intermediaries/MACs. Hospitals are required to submit their completed 2010 

surveys to their fiscal intermediaries/MACs by July 1, 2011. The preliminary, unaudited 

2010 survey data will be released in early October 2011, along with the FY 2009 

Worksheet S-3 wage data, for the FY 2013 wage index review and correction process. 

3. Calculation of the Proposed Occupational Mix Adjustment for FY 2012 

 For FY 2012 (as we did for FY 2011), we are proposing to calculate the 

occupational mix adjustment factor using the following steps: 

 Step 1--For each hospital, determine the percentage of the total nursing category 

attributable to a nursing subcategory by dividing the nursing subcategory hours by the 

total nursing category's hours. Repeat this computation for each of the four nursing 

subcategories: (1) registered nurses; (2) licensed practical nurses; (3) nursing aides, 

orderlies, and attendants; and (4) medical assistants. 
CMS-1518-P 282 

 Step 2--Determine a national average hourly rate for each nursing subcategory by 

dividing a subcategory's total salaries for all hospitals in the occupational mix survey 

database by the subcategory's total hours for all hospitals in the occupational mix survey 

database. 

 Step 3--For each hospital, determine an adjusted average hourly rate for each 

nursing subcategory by multiplying the percentage of the total nursing category (from 

Step 1) by the national average hourly rate for that nursing subcategory (from Step 2). 

Repeat this calculation for each of the four nursing subcategories. 

 Step 4--For each hospital, determine the adjusted average hourly rate for the total 

nursing category by summing the adjusted average hourly rate (from Step 3) for each of 

the nursing subcategories. 

 Step 5--Determine the national average hourly rate for the total nursing category 

by dividing total nursing category salaries for all hospitals in the occupational mix survey 

database by total nursing category hours for all hospitals in the occupational mix survey 

database. 

 Step 6--For each hospital, compute the occupational mix adjustment factor for the 

total nursing category by dividing the national average hourly rate for the total nursing 

category (from Step 5) by the hospital's adjusted average hourly rate for the total nursing 

category (from Step 4). 

 If the hospital's adjusted average hourly rate is less than the national average 

hourly rate (indicating the hospital employs a less costly mix of nursing employees), the 

occupational mix adjustment factor is greater than 1.0000. If the hospital's adjusted 
CMS-1518-P 283 

average hourly rate is greater than the national average hourly rate, the occupational mix 

adjustment factor is less than 1.0000. 

 Step 7--For each hospital, calculate the occupational mix adjusted salaries and 

wage-related costs for the total nursing category by multiplying the hospital's total 

salaries and wage-related costs (from Step 5 of the unadjusted wage index calculation in 

section III.F. of this preamble) by the percentage of the hospital's total workers 

attributable to the total nursing category (using the occupational mix survey data, this 

percentage is determined by dividing the hospital's total nursing category salaries by the 

hospital's total salaries for "nursing and all other") and by the total nursing category's 

occupational mix adjustment factor (from Step 6 above). 

 The remaining portion of the hospital's total salaries and wage-related costs that is 

attributable to all other employees of the hospital is not adjusted by the occupational mix. 

A hospital's all other portion is determined by subtracting the hospital's nursing category 

percentage from 100 percent. 

 Step 8--For each hospital, calculate the total occupational mix adjusted salaries 

and wage-related costs for a hospital by summing the occupational mix adjusted salaries 

and wage-related costs for the total nursing category (from Step 7) and the portion of the 

hospital's salaries and wage-related costs for all other employees (from Step 7). 

 To compute a hospital's occupational mix adjusted average hourly wage, divide 

the hospital's total occupational mix adjusted salaries and wage-related costs by the 

hospital's total hours (from Step 4 of the unadjusted wage index calculation in 

section III.F. of this preamble). 
CMS-1518-P 284 

 Step 9--To compute the occupational mix adjusted average hourly wage for an 

urban or rural area, sum the total occupational mix adjusted salaries and wage-related 

costs for all hospitals in the area, then sum the total hours for all hospitals in the area. 

Next, divide the area's occupational mix adjusted salaries and wage-related costs by the 

area's hours. 

 Step 10--To compute the national occupational mix adjusted average hourly 

wage, sum the total occupational mix adjusted salaries and wage-related costs for all 

hospitals in the Nation, then sum the total hours for all hospitals in the Nation. Next, 

divide the national occupational mix adjusted salaries and wage-related costs by the 

national hours. The proposed FY 2012 occupational mix adjusted national average 

hourly wage is $36.1406. 

 Step 11--To compute the occupational mix adjusted wage index, divide each 

area's occupational mix adjusted average hourly wage (Step 9) by the national 

occupational mix adjusted average hourly wage (Step 10). 

 Step 12--To compute the Puerto Rico specific occupational mix adjusted wage 

index, follow Steps 1 through 11 above. The proposed FY 2012 occupational mix 

adjusted Puerto Rico-specific average hourly wage is $15.4107. 

 The table below is an illustrative example of the occupational mix adjustment.
CMS-1518-P 285 

Example of Occupational Mix Adjustment 

Hospital A 

 Step 1 Step 2 Step 3 Step 5 

Provider 

Occupational 

Mix Hours 

Provider 

Occupational 

Mix Salaries 

Provider % 

by 

Subcategory 

National AHWs 

by Subcategory 

Provider 

Adjusted 

AHW 

National 

Adjusted 

Nurse AHW 

Registered Nurses 1,642,129 18,125,763 79.84% $40.00 $31.94 Licensed Practical Nurses and Surgical Technologists 67,860 404,822 3.30% $20.00 $0.66 Nursing Aides, Orderlies, & Attendants 259,177 1,762,579 12.60% $13.00 $1.64 Medical Assistants 87,622 577,045 4.26% $12.00 $0.51 

Total Nurse Hours and Salaries 2,056,788 20,870,209 $34.75 $27.0

ALL OTHER 5,000,000 $18,957,010 Step 4 TOTAL 7,056,788 $39,827,219 Wage Data from Cost Report Wages (From S-3, Parts II and III) $83,312,942.55 Hours (From S-3, Parts II and III) 3,836,299.60 Hospital A Unadjusted AHW $21.72 Nurse Occupational Mix Wages $33,925,838 Step 7 All Other Unadjusted Occupational Mix Wages $39,655,400 Step 7 Total Occupational Mix Wages $73,581,237 Step 8 
CMS-1518-P 286 

Hospital A Final Occupational Mix Adjusted AHW $19.18 Step 8 Hospital B 

 Step 1 Step 2 Step 3 Step 5 

Provider Occupational Mix Hours 

Provider Occupational Mix Salaries 

Provider % 

by 

Subcategory 

National AHWs 

by Subcategory 

Provider 

Adjusted 

AHW 

National 

Adjusted 

Nurse AHW 

Registered Nurses 1,142,129 18,125,763 72.43% $30.00 $21.73 Licensed Practical Nurses and Surgical Technologists 67,860 404,822 4.30% $20.00 $0.86 Nursing Aides, Orderlies, & Attendants 279,177 1,762,579 17.71% $13.00 $2.30 Medical Assistants 87,622 577,045 5.56% $12.00 $0.67 

Total Nurse Hours and Salaries 1,576,788 20,870,209 $25.56 $27.0

ALL OTHER 5,000,000 18,957,010 Step 4 TOTAL 6,576,788 $39,827,219 Wage Data from Cost Report Wages (From S-3, Parts II and III) $25,979,714 Hours (From S-3, Parts II and III) 1,097,585 Hospital B Unadjusted AHW $23.67 Nurse Occupational Mix Wages $14,381,144 Step 7 All Other Unadjusted Occupational Mix Wages $12,365,857 Step 7 Total Occupational Mix Wages $26,747,001 Step 8 Hospital B Final Occupational Mix Adjusted AHW $24.37 Step 8 Note: The numbers in this example are hypothetical, including all National AHW amounts. 
CMS-1518-P 287 

 Because the occupational mix adjustment is required by statute, all hospitals that 

are subject to payments under the IPPS, or any hospital that would be subject to the IPPS 

if not granted a waiver, must complete the occupational mix survey, unless the hospital 

has no associated cost report wage data that are included in the proposed FY 2012 wage 

index. For the FY 2007-2008 survey, the response rate was 90.8 percent. 

In computing the proposed FY 2012 wage index, if a hospital did not respond to 

the occupational mix survey, or if we determined that a hospital’s submitted data were 

too erroneous to include in the wage index, we assigned the hospital the average 

occupational mix adjustment for its labor market area. This method has the least impact 

on the wage index for other hospitals in the area. For areas where no hospital submitted 

data for purposes of calculating the occupational mix adjustment, we applied the national 

occupational mix factor of 1.0000 in calculating the area’s proposed FY 2012 

occupational mix adjusted wage index. In addition, if a hospital submitted a survey, but 

that survey data could not be used because we determined the survey data to be aberrant, 

we also assigned the hospital the average occupational mix adjustment for its labor 

market area. For example, if a hospital’s individual nurse category average hourly wages 

were out of range (that is, unusually high or low), and the hospital did not provide 

sufficient documentation to explain the aberrancy, or the hospital did not submit any 

registered nurse salaries or hours data, we assigned the hospital the average occupational 

mix adjustment for the labor market area in which it is located. 

 In calculating the average occupational mix adjustment factor for a labor market 

area, we replicated Steps 1 through 6 of the calculation for the occupational mix 
CMS-1518-P 288 

adjustment. However, instead of performing these steps at the hospital level, we 

aggregated the data at the labor market area level. In following these steps, for example, 

for CBSAs that contain providers that did not submit occupational mix survey data, the 

occupational mix adjustment factor ranged from a low of 0.9246 (CBSA 17780, College 

Station-Bryan, TX), to a high of 1.0761 (CBSA 19, Rural Louisiana). Also, in computing 

a hospital’s occupational mix adjusted salaries and wage-related costs for nursing 

employees (Step 7 of the calculation), in the absence of occupational mix survey data, we 

multiplied the hospital’s total salaries and wage-related costs by the percentage of the 

area’s total workers attributable to the area's total nursing category. For FY 2012, there 

are five CBSAs (that include six hospitals) for which we did not have occupational mix 

data for any of its hospitals. The CBSAs are: 

● CBSA 36140, Ocean City, NJ (1 hospital) 

● CBSA 22140, Farmington, NM (1 hospital) 

● CBSA 41900, San German-Cabo Rojo, PR (2 hospitals) 

● CBSA 49500, Yauco, PR (1 hospital) 

● CBSA 21940, Fajardo, PR (1 hospital) 

 Since the FY 2007 IPPS final rule, we have periodically discussed applying a 

hospital-specific penalty to hospitals that fail to submit occupational mix survey data 

(71 FR 48013 through 48014; 72 FR 47314 through 47315; 73 FR 48580; 74 FR 43832, 

and 75 FR 50167). During the FY 2008 rulemaking cycle, some commenters suggested a 

penalty equal to a 1- to 2-percent reduction in the hospital’s wage index value or a set 

percentage of the standardized amount. During the FY 2009 and FY 2010 rulemaking 
CMS-1518-P 289 

cycles, several commenters reiterated their view that full participation in the occupational 

mix survey is critical, and that CMS should develop a methodology that encourages 

hospitals to report occupational mix survey data but does not unfairly penalize 

neighboring hospitals. We indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 

rule that, while we were not proposing a penalty at that time, we would consider the 

public comments we previously received, as well as any public comments on the 

proposed rule, as we developed the FY 2011 wage index. 

 In the FY 2011 IPPS/LTCH PPS proposed and final rules (75 FR 23943 and 

50167, respectively), we stated that, in order to gain a better understanding of why some 

hospitals are not submitting the occupational mix data, we will require hospitals that do 

not submit occupational mix data to provide an explanation for not complying. This 

requirement will be effective beginning with the new 2010 occupational mix survey (the 

2010 survey is discussed in section III.C.2. of this preamble). We will instruct fiscal 

intermediaries/MACs to begin gathering this information as part of the FY 2013 wage 

index desk review process. We note that we reserve the right to apply a different 

approach in future years, including potentially penalizing nonresponsive hospitals. 

D. Worksheet S-3 Wage Data for the Proposed FY 2012 Wage Index

 The proposed FY 2012 wage index values are based on the data collected from 

the Medicare cost reports submitted by hospitals for cost reporting periods beginning in 

FY 2008 (the FY 2011 wage index was based on data from cost reporting periods 

beginning during FY 2007). 
CMS-1518-P 290 

1. Included Categories of Costs 

 The proposed FY 2012 wage index includes the following categories of data 

associated with costs paid under the IPPS (as well as outpatient costs): 

 • Salaries and hours from short-term, acute care hospitals (including paid lunch 

hours and hours associated with military leave and jury duty) 

 • Home office costs and hours 

 • Certain contract labor costs and hours (which includes direct patient care, 

certain top management, pharmacy, laboratory, and nonteaching physician Part A 

services, and certain contract indirect patient care services (as discussed in the FY 2008 

final rule with comment period (72 FR 47315)) 

 • Wage-related costs, including pensions and other deferred compensation costs. 

2. Proposal for Changes to the Reporting Requirements for Pension Costs for the 

Medicare Wage Index 

a. Background 

The instructions for determining and reporting defined benefit pension costs on 

the cost report for Medicare cost-finding purposes are located in section 2142 of the 

Provider Reimbursement Manual, Part I (PRM-I). For Medicare wage index purposes, 

the instructions in section 3605.2 of the Provider Reimbursement Manual, Part II 

(PRM-II) for Worksheet S–3, Part II, Lines 13 through 20, require hospitals to comply 

with the requirements in section 2142 of the PRM-I.

Specifically, section 2142.5 of the PRM-I defines the current period liability for 

pension cost (that is, the maximum allowable pension cost) based on the actuarial accrued 
CMS-1518-P 291 

liability, normal cost, and unfunded actuarial liability. Under section 2142.4(A) of the 

PRM-I, these liability measurements are to be computed in accordance with the 

Employee Retirement Income Security Act of 1974 (ERISA), regardless of whether or 

not the pension plan is subject to ERISA. Also, section 2142.6(A) of the PRM-I requires 

the current period liability for pension costs to be funded in order to be allowable. In 

addition, section 2142.6(C) of the PRM-I allows for funding in excess of the current 

period liability to be carried forward and recognized in future periods. We note that, on 

March 28, 2008, CMS published Revision 436, a technical clarification to section 2142 of 

the PRM-I. 

Actuarial accrued liability and normal cost are typically determined on an 

ongoing plan basis using long-term, best-estimate assumptions. The interest assumption 

reflects the average rates of return expected over the period during which benefits were 

payable, taking into account the investment mix of plan assets. Pension costs for plans 

not subject to ERISA (such as church plans and plans sponsored by public sector 

employers) are also typically based on the actuarial accrued liability and normal cost 

using long-term, best estimate assumptions. 

The Pension Protection Act (PPA) of 2006 (Pub. L. 109-280) amended ERISA. 

Under the PPA amendments to ERISA, the actuarial accrued liability and normal cost are 

no longer used as a basis for determining ERISA minimum required or maximum tax 

deductible contributions. ERISA contribution limits are now based on a “funding target” 

and “target normal cost” measured on a settlement basis using the current market interest 

rates for investment grade corporate bonds that match the duration of the benefit payouts. 
CMS-1518-P 292 

The Internal Revenue Service (IRS) publishes the applicable interest rate tables on a 

monthly basis. Because pension liabilities are very sensitive to changes in the interest 

rate used to discount future benefit payouts, pension costs based on the PPA “funding 

target” and “target normal cost” values are expected to be less stable than those based on 

the pre-PPA traditional long-term, best-estimate assumptions, which change infrequently. 

Furthermore, plans not subject to the ERISA requirements, as amended by the PPA, are 

not likely to use the new “funding target” and “target normal cost” basis for determining 

pension costs, and ERISA plans are not likely to continue to report costs developed using 

the actuarial accrued liability and normal cost based on long-term, best estimate 

assumptions. Accordingly, there is no longer a standard actuarial basis used by all plans. 

In response to the PPA amendments to ERISA, we began a review of the rules for 

determining pension costs for Medicare cost finding and wage index purposes. As an 

interim measure, we issued a Joint Signature Memorandum (JSM) in November 2009 

that contained instructions and a spreadsheet to assist hospitals and Medicare contractors 

in determining the annual allowable defined benefit pension cost for the FY 2011 wage 

index (JSM/TDL–10061, 11–20–09, December 3, 2009). Although these instructions 

were released for purposes of the wage index, these instructions also serve as interim 

guidance for Medicare cost-finding purposes. 

In this proposed rule, we are proposing to revise our policy for determining 

pension cost for Medicare purposes. As mentioned above, due to the ERISA rules, as 

amended by the PPA, there is no longer a standard actuarial cost basis to be used by all 

types of plans. Therefore, we are proposing to no longer rely on actuarial computation to 
CMS-1518-P 293 

determine the maximum annual cost limitation for Medicare. Instead, the general 

parameters of our proposal would maintain the current requirement that pension costs 

must be funded to be reportable, and would require all hospitals to report the actual 

pension contributions funded during the reporting period, on a cash basis. 

In addition, under this cash basis approach, we are proposing separate 

methodologies for measuring pension costs for Medicare cost-finding purposes 

(discussed in section IV.M. of this preamble) and for purposes of updating the wage 

index (discussed below in section III.D.2.b. of this preamble). We believe it is necessary 

to have two distinct proposals in order to address the different goals of determining a 

hospital’s payments and updating the average hourly wage to establish the geographic 

area wage index. The function of the wage index is to measure relative hospital labor 

costs across areas. This function is distinct from Medicare payment determinations, 

where the goal is to measure the actual costs incurred by individual hospitals. These two 

distinct proposals would require separate updated instructions to section 2142 of the 

PRM-I for Medicare cost-finding purposes and section 3605.2 of the PRM-II for 

purposes of the wage index. Below is a detailed discussion of our proposal for reporting 

pension costs under the wage index. A full discussion of our proposal for Medicare 

cost-finding is discussed in section IV.M. of this preamble. 

The proposal below reflects our commitment to the general principles of the 

President’s Executive Order released January 18, 2011, entitled “Improving Regulation 

and Regulatory Review.” 

b. Proposal for Allowable Pension Cost for the Medicare Wage Index 
CMS-1518-P 294 

As mentioned above, the function of the Medicare wage index is to measure 

relative hospital labor costs across all areas. Therefore, while we believe pension costs 

must be funded in order to be reportable (we refer readers to the August 12, 2010 

Federal Register (74 FR 47369) for an explanation of this longstanding policy), it also is 

important for pension costs to be relatively stable from year to year so that there is less 

volatility in the wage index. Thus, we are proposing to include, in the wage index, 

pension costs equal to the average actual cash contributions deposited to a hospital’s 

defined benefit pension plan by the hospital and/or the hospital system over a 3-year 

period. The use of cash contributions as a measure of the costs incurred is necessary to 

ensure uniformity among all hospitals, regardless of their tax status or ERISA coverage. 

The 3-year average is intended to reduce the volatility that often occurs due to timing of 

contributions. Most pension plan sponsors have flexibility to determine the pension 

funding for a particular period and their decisions may be based on cash-flow 

considerations or other factors unrelated to the normal operation of the plan. 

Furthermore, the funding of current period pension costs may be delayed by almost a full 

year after the close of the period to which it applies. By using a 3-year average, we hope 

to enhance the stability of the wage index. 

To ensure that the average annual pension cost reflected in the wage index is 

consistent with the reporting period applicable to all other costs included in the index, we 

are proposing that the 3-year average be centered on the base cost reporting year for the 

wage index. For example, the FY 2013 wage index will be based on Medicare cost 

reporting periods beginning during FY 2009 and would reflect the average pension 
CMS-1518-P 295 

contributions made in hospitals’ cost reporting periods beginning during FYs 2008, 2009, 

and 2010. Thus, this proposal would require pension plan contribution data for the cost 

reporting periods immediately preceding and immediately following the base cost 

reporting period for the wage index. 

 We do not anticipate that the use of contributions made in the cost reporting 

period immediately following the reporting year will create an administrative burden 

because, even under the existing rule, contributions to fund current period costs are often 

deferred until the following period. In addition, trust account statements and general 

ledger reports to support the contributions should be readily available. We are proposing 

to apply the above methodology for reporting pension costs for the wage index beginning 

with the FY 2013 IPPS update. We invite public comment on this policy proposal and 

are especially interested in receiving comments related to the proposed 3-year averaging 

period. 

3. Excluded Categories of Costs 

 Consistent with the wage index methodology for FY 2011, the proposed wage 

index for FY 2012 also excludes the direct and overhead salaries and hours for services 

not subject to IPPS payment, such as SNF services, home health services, costs related to 

GME (teaching physicians and residents) and certified registered nurse anesthetists 

(CRNAs), and other subprovider components that are not paid under the IPPS. The 

proposed FY 2012 wage index also excludes the salaries, hours, and wage-related costs 

of hospital-based rural health clinics (RHCs), and Federally qualified health centers 

(FQHCs) because Medicare pays for these costs outside of the IPPS (68 FR 45395). In 
CMS-1518-P 296 

addition, salaries, hours, and wage-related costs of CAHs are excluded from the wage 

index, for the reasons explained in the FY 2004 IPPS final rule (68 FR 45397). 

4. Use of Wage Index Data by Providers Other Than Acute Care Hospitals under the 

IPPS 

 Data collected for the IPPS wage index are also currently used to calculate wage 

indices applicable to other providers, such as SNFs, home health agencies (HHAs), and 

hospices. In addition, they are used for prospective payments to IRFs, IPFs, and LTCHs, 

and for hospital outpatient services. We note that, in the IPPS rules, we do not address 

comments pertaining to the wage indices for non-IPPS providers, other than for LTCHs. 

Such comments should be made in response to separate proposed rules for those 

providers. 

E. Verification of Worksheet S-3 Wage Data

 The wage data for the proposed FY 2012 wage index were obtained from 

Worksheet S-3, Parts II and III of the Medicare cost report for cost reporting periods 

beginning on or after October 1, 2007, and before October 1, 2008. For wage index 

purposes, we refer to cost reports during this period as the “FY 2008 cost report,” the 

“FY 2008 wage data,” or the “FY 2008 data.” Instructions for completing Worksheet 

S-3, Parts II and III are in the Provider Reimbursement Manual (PRM), Part II, sections 

3605.2 and 3605.3. The data file used to construct the proposed wage index includes 

FY 2008 data submitted to us as of March 3, 2011. As in past years, we performed an 

intensive review of the wage data, mostly through the use of edits designed to identify 

aberrant data. 
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 We asked our fiscal intermediaries/MACs to revise or verify data elements that 

result in specific edit failures. For the proposed FY 2012 wage index, we identified and 

excluded 23 providers with data that was too aberrant to include in the proposed wage 

index, although if data elements for some of these providers are corrected, we intended to 

include some of these providers in the FY 2012 final wage index. We instructed fiscal 

intermediaries/MACs to complete their data verification of questionable data elements 

and to transmit any changes to the wage data no later than April 13, 2011. We intend that 

all unresolved data elements will be resolved by the date the final rule is issued. The 

revised data will be reflected in the FY 2012 IPPS final rule. 

In constructing the proposed FY 2012 wage index, we included the wage data for 

facilities that were IPPS hospitals in FY 2008, inclusive of those facilities that have since 

terminated their participation in the program as hospitals, as long as those data did not 

fail any of our edits for reasonableness. We believe that including the wage data for 

these hospitals is, in general, appropriate to reflect the economic conditions in the various 

labor market areas during the relevant past period and to ensure that the current wage 

index represents the labor market area's current wages as compared to the national 

average of wages. However, we excluded the wage data for CAHs as discussed in the 

FY 2004 IPPS final rule (68 FR 45397). For this proposed rule, we removed 19 hospitals 

that converted to CAH status between February 16, 2010, the cut-off date for CAH 

exclusion from the FY 2011 wage index, and February 15, 2011, the cut-off date for 

CAH exclusion from the FY 2012 wage index. After removing hospitals with aberrant 
CMS-1518-P 298 

data and hospitals that converted to CAH status, the proposed FY 2012 wage index is 

calculated based on 3,484 hospitals. 

In the FY 2008 final rule with comment period (72 FR 47317) and the FY 2009 

IPPS final rule (73 FR 48582), we discussed our policy for allocating a multicampus 

hospital’s wages and hours data, by full-time equivalent (FTE) staff, among the different 

labor market areas where its campuses are located. During the FY 2011 wage index desk 

review process, we requested fiscal intermediaries/MACs to contact multicampus 

hospitals that had campuses in different labor market areas to collect the data for the 

allocation. The FY 2011 wage index included separate wage data for campuses of three 

multicampus hospitals. 

 For FY 2012, as we discussed in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50168), we are proposing to no longer allow hospitals to use discharge data for 

the allocation of a multicampus hospital's wage data among the different labor market 

areas where its campuses are located. The Medicare cost report was updated in May 

2008 to provide for the reporting of FTE data by campus for multicampus hospitals 

(Form CMS-2552-96, Worksheet S-2, lines 61 and 62). The data from cost reporting 

periods that begin in FY 2008 are now available for calculating the wage index for 

FY 2012. Therefore, a multicampus hospital will not have the option to use either FTE or 

discharge data for allocating wage data among its campuses by providing the information 

from the applicable cost reporting period to CMS through its fiscal intermediary/MAC. 

The table containing the proposed FY 2012 wage index, which is listed in section VI. of 
CMS-1518-P 299 

the Addendum to this proposed rule and available via the Internet, includes separate wage 

data for campuses of three multicampus hospitals. 

F. Method for Computing the Proposed FY 2012 Unadjusted Wage Index

1. Steps for Computation 

The method used to compute the proposed FY 2012 wage index without an 

occupational mix adjustment follows: 

 Step 1--As noted above, we are proposing to base the proposed FY 2012 wage 

index on wage data reported on the FY 2008 Medicare cost reports. We gathered data 

from each of the non-Federal, short-term, acute care hospitals for which data were 

reported on the Worksheet S-3, Parts II and III of the Medicare cost report for the 

hospital's cost reporting period beginning on or after October 1, 2007, and before 

October 1, 2008. In addition, we included data from some hospitals that had cost 

reporting periods beginning before October 2007 and reported a cost reporting period 

covering all of FY 2008. These data are included because no other data from these 

hospitals would be available for the cost reporting period described above, and because 

particular labor market areas might be affected due to the omission of these hospitals. 

However, we generally describe these wage data as FY 2008 data. We note that, if a 

hospital had more than one cost reporting period beginning during FY 2008 (for example, 

a hospital had two short cost reporting periods beginning on or after October 1, 2007, and 

before October 1, 2008), we included wage data from only one of the cost reporting 

periods, the longer, in the wage index calculation. If there was more than one cost 
CMS-1518-P 300 

reporting period and the periods were equal in length, we included the wage data from the 

later period in the wage index calculation. 

 Step 2--Salaries--The method used to compute a hospital’s average hourly wage 

excludes certain costs that are not paid under the IPPS. (We note that, beginning with 

FY 2008 (72 FR 47315), we include Lines 22.01, 26.01, and 27.01 of Worksheet S-3, 

Part II for overhead services in the wage index. However, we note that the wages and 

hours on these lines are not incorporated into Line 101, Column 1 of Worksheet A, 

which, through the electronic cost reporting software, flows directly to Line 1 of 

Worksheet S-3, Part II. Therefore, the first step in the wage index calculation for 

FY 2011 is to compute a “revised” Line 1, by adding to the Line 1 on Worksheet S-3, 

Part II (for wages and hours respectively) the amounts on Lines 22.01, 26.01, and 27.01.) 

In calculating a hospital’s average salaries plus wage-related costs, we subtract from 

Line 1 (total salaries) the GME and CRNA costs reported on Lines 2, 4.01, 6, and 6.01, 

the Part B salaries reported on Lines 3, 5 and 5.01, home office salaries reported on 

Line 7, and exclude salaries reported on Lines 8 and 8.01 (that is, direct salaries 

attributable to SNF services, home health services, and other subprovider components not 

subject to the IPPS). We also subtract from Line 1 the salaries for which no hours were 

reported. To determine total salaries plus wage-related costs, we add to the net hospital 

salaries the costs of contract labor for direct patient care, certain top management, 

pharmacy, laboratory, and nonteaching physician Part A services (Lines 9 and 10), home 

office salaries and wage-related costs reported by the hospital on Lines 11 and 12, and 

nonexcluded area wage-related costs (Lines 13, 14, and 18). 
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 We note that contract labor and home office salaries for which no corresponding 

hours are reported are not included. In addition, wage-related costs for nonteaching 

physician Part A employees (Line 18) are excluded if no corresponding salaries are 

reported for those employees on Line 4. 

 Step 3--Hours--With the exception of wage-related costs, for which there are no 

associated hours, we compute total hours using the same methods as described for 

salaries in Step 2. 

 Step 4--For each hospital reporting both total overhead salaries and total overhead 

hours greater than zero, we then allocate overhead costs to areas of the hospital excluded 

from the wage index calculation. First, we determine the ratio of excluded area hours 

(sum of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours (Line 1 minus 

the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, and Part III, Line 13 of Worksheet 

S-3). We then compute the amounts of overhead salaries and hours to be allocated to 

excluded areas by multiplying the above ratio by the total overhead salaries and hours 

reported on Line 13 of Worksheet S-3, Part III. Next, we compute the amounts of 

overhead wage-related costs to be allocated to excluded areas using three steps: (1) we 

determine the ratio of overhead hours (Part III, Line 13 minus the sum of lines 22.01, 

26.01, and 27.01) to revised hours excluding the sum of lines 22.01, 26.01, and 27.01 

(Line 1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 8.01, 22.01, 26.01, and 

27.01). (We note that for the FY 2008 and subsequent wage index calculations, we are 

excluding the sum of lines 22.01, 26.01, and 27.01 from the determination of the ratio of 

overhead hours to revised hours because hospitals typically do not provide fringe benefits 
CMS-1518-P 302 

(wage-related costs) to contract personnel. Therefore, it is not necessary for the wage 

index calculation to exclude overhead wage-related costs for contract personnel. Further, 

if a hospital does contribute to wage-related costs for contracted personnel, the 

instructions for Lines 22.01, 26.01, and 27.01 require that associated wage-related costs 

be combined with wages on the respective contract labor lines.); (2) we compute 

overhead wage-related costs by multiplying the overhead hours ratio by wage-related 

costs reported on Part II, Lines 13, 14, and 18; and (3) we multiply the computed 

overhead wage-related costs by the above excluded area hours ratio. Finally, we subtract 

the computed overhead salaries, wage-related costs, and hours associated with excluded 

areas from the total salaries (plus wage-related costs) and hours derived in Steps 2 and 3. 

 Step 5--For each hospital, we adjust the total salaries plus wage-related costs to a 

common period to determine total adjusted salaries plus wage-related costs. To make the 

wage adjustment, we estimate the percentage change in the employment cost index (ECI) 

for compensation for each 30-day increment from October 14, 2005, through 

April 15, 2007, for private industry hospital workers from the BLS’ Compensation and 

Working Conditions. We use the ECI because it reflects the price increase associated 

with total compensation (salaries plus fringes) rather than just the increase in salaries. In 

addition, the ECI includes managers as well as other hospital workers. This methodology 

to compute the monthly update factors uses actual quarterly ECI data and assures that the 

update factors match the actual quarterly and annual percent changes. We also note that, 

since April 2006 with the publication of March 2006 data, the BLS’ ECI uses a different 

classification system, the North American Industrial Classification System (NAICS), 
CMS-1518-P 303 

instead of the Standard Industrial Codes (SICs), which no longer exist. We have 

consistently used the ECI as the data source for our wages and salaries and other price 

proxies in the IPPS market basket, and we are not proposing to make any changes to the 

usage for FY 2012. The factors used to adjust the hospital's data were based on the 

midpoint of the cost reporting period, as indicated below. 

MIDPOINT OF COST REPORTING PERIOD 

After Before Adjustment Factor

10/14/2007 11/15/2007 1.03990 

11/14/2007 12/15/2007 1.03699 

12/14/2007 01/15/2008 1.03402 

01/14/2008 02/15/2008 1.03113 

02/14/2008 03/15/2008 1.02831 

03/14/2008 04/15/2008 1.02555 

04/14/2008 05/15/2008 1.02286 

05/14/2008 06/15/2008 1.02024 

06/14/2008 07/15/2008 1.01766 

07/14/2008 08/15/2008 1.01511 

08/14/2008 09/15/2008 1.01258 

09/14/2008 10/15/2008 1.01015 

10/14/2008 11/15/2008 1.00787 

11/14/2008 12/15/2008 1.00575 

12/14/2008 01/15/2009 1.00375 

01/14/2009 02/15/2009 1.00183 

02/14/2009 03/15/2009 1.00000 

03/14/2009 04/15/2009 0.99820 

 For example, the midpoint of a cost reporting period beginning January 1, 2008, 

and ending December 31, 2008, is June 30, 2008. An adjustment factor of 1.01766 

would be applied to the wages of a hospital with such a cost reporting period. In 

addition, for the data for any cost reporting period that began in FY 2008 and covered a 

period of less than 360 days or more than 370 days, we annualize the data to reflect a 
CMS-1518-P 304 

1-year cost report. Dividing the data by the number of days in the cost report and then 

multiplying the results by 365 accomplishes annualization. 

 Step 6--Each hospital is assigned to its appropriate urban or rural labor market 

area before any reclassifications under section 1886(d)(8)(B), section 1886(d)(8)(E), or 

section 1886(d)(10) of the Act. Within each urban or rural labor market area, we add the 

total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in that 

area to determine the total adjusted salaries plus wage-related costs for the labor market 

area. 

 Step 7--We divide the total adjusted salaries plus wage-related costs obtained 

under both methods in Step 6 by the sum of the corresponding total hours (from Step 4) 

for all hospitals in each labor market area to determine an average hourly wage for the 

area. 

 Step 8--We add the total adjusted salaries plus wage-related costs obtained in 

Step 5 for all hospitals in the Nation and then divide the sum by the national sum of total 

hours from Step 4 to arrive at a national average hourly wage. Using the data as 

described above, the proposed national average hourly wage (unadjusted for occupational 

mix) is $36.1697. 

 Step 9--For each urban or rural labor market area, we calculate the hospital wage 

index value, unadjusted for occupational mix, by dividing the area average hourly wage 

obtained in Step 7 by the national average hourly wage computed in Step 8. 

 Step 10--Following the process set forth above, we develop a separate Puerto 

Rico-specific wage index for purposes of adjusting the Puerto Rico standardized 
CMS-1518-P 305 

amounts. (The national Puerto Rico standardized amount is adjusted by a wage index 

calculated for all Puerto Rico labor market areas based on the national average hourly 

wage as described above.) We add the total adjusted salaries plus wage-related costs (as 

calculated in Step 5) for all hospitals in Puerto Rico and divide the sum by the total hours 

for Puerto Rico (as calculated in Step 4) to arrive at an overall proposed average hourly 

wage (unadjusted for occupational mix) of $15.3863 for Puerto Rico. For each labor 

market area in Puerto Rico, we calculate the Puerto Rico-specific wage index value by 

dividing the area average hourly wage (as calculated in Step 7) by the overall Puerto Rico 

average hourly wage. 

 Step 11--Section 4410 of Pub. L. 105-33 provides that, for discharges on or after 

October 1, 1997, the area wage index applicable to any hospital that is located in an urban 

area of a State may not be less than the area wage index applicable to hospitals located in 

rural areas in that State. The areas affected by this provision are identified in Table 4D 

which is listed in section VI. of the Addendum to this proposed rule and available via the 

Internet. 

2. Expiration of the Imputed Floor Policy 

In the FY 2005 IPPS final rule (69 FR 49109 through 49111), we adopted the 

“imputed” floor as a temporary 3-year regulatory measure to address a concern by some 

individuals that hospitals in all-urban States were disadvantaged by the absence of rural 

hospitals to set a wage index floor in those States. There are two States that have no rural 

areas (New Jersey and Rhode Island). Rhode Island has only one urban area. In 

accordance with the imputed floor calculation (§412.64(h)(4) of the regulations), Rhode 
CMS-1518-P 306 

Island receives no benefit from the policy. As a result, the imputed floor policy only 

benefits one State--New Jersey. Although New Jersey may argue that it is disadvantaged 

by the statutory rural floor because it has no rural areas, the imputed floor policy provides 

New Jersey with a guaranteed benefit that no other State has. In any given year, 

approximately one-half of the States have no hospitals that benefit from the rural floor 

provision. However, New Jersey benefits each year that the imputed floor policy is in 

place. 

The imputed floor was originally set to expire in FY 2007, but we extended it an 

additional year in the FY 2008 IPPS final rule with comment period (72 FR 47321). In 

the FY 2009 IPPS final rule (73 FR 48570 through 48574 and 48584), we extended the 

imputed floor for an additional 3 years, through FY 2011, linking the extension to a 

policy to apply budget neutrality for the rural and imputed floors within each state, 

instead of nationally, over a 3-year transition period. Section 3141 of the Affordable 

Care Act replaced the statewide budget neutrality policy with the national budget 

neutrality policy that was in place during FY 2008. That is, section 3141 required that 

budget neutrality for the rural and imputed floor be applied “through a uniform, national 

adjustment to the area wage index” instead of within each State beginning in FY 2011 

(75 FR 50160). However, we note that the Affordable Care Act did not include a 

provision to extend the imputed floor or to make the imputed floor permanent. 

Therefore, the imputed floor is set to expire with the FY 2011 wage index, and we are not 

proposing to extend the imputed floor policy. Thus, the imputed floor is not reflected in 
CMS-1518-P 307 

the table containing the proposed FY 2012 wage index, which is listed in section VI. of 

the Addendum to this proposed rule and available via the Internet. 

As we discussed in the FY 2008 IPPS proposed rule and final rule with comment 

period (72 FR 24786 and 72 FR 47322, respectively), the application of the national 

budget neutrality requirement for the rural and imputed floors requires a transfer of 

payments from hospitals in States with rural hospitals but where the rural floor is not 

applied to hospitals in States where the rural or imputed floor is applied. For this reason, 

we believe that the floor policy should apply only when required by statute. Thus, only 

States containing both rural areas and hospitals located in such areas (including any 

hospital reclassified as rural under §412.103) would benefit from the rural floor, as 

required by section 4410 of Pub. L. 105-33. 

In the proposed FY 2012 wage index, the rural floor will apply to 189 hospitals in 

26 States. If the imputed floor policy was to continue into FY 2012, it would apply to 

39 additional hospitals in New Jersey. We are seeking public comments regarding the 

expiration of the imputed floor. 

3. Proposed FY 2012 Puerto Rico Wage Index 

 We note that, for the proposed FY 2012 wage index, there is one new hospital in 

rural Puerto Rico when previously there were none. However, this hospital has no cost 

reporting period beginning during FY 2008 and, therefore, has no wage data for inclusion 

in the proposed FY 2012 wage index calculation for rural Puerto Rico. We discussed in 

the FY 2005 IPPS final rule that, under these circumstances, we would determine a 

State’s rural floor based on the imputed floor policy in §412.64(h)(4) of the regulations. 
CMS-1518-P 308 

However, as discussed above, the imputed floor is set to expire with the FY 2011 wage 

index. We adopted the policy in the FY 2008 IPPS final rule with comment period 

(72 FR 47323) that if there are no hospitals’ cost report wage data available to calculate a 

State’s rural floor, and the imputed floor policy has expired, “we will use the unweighted 

average of the wage indices from all CBSAs (urban areas) that are contiguous to the rural 

counties of the State to compute the State’s rural floor. (We define contiguous as sharing 

a border.)” Except for Fajardo, Puerto Rico (CBSA 21940), all other Puerto Rico urban 

areas are contiguous to a rural area. Therefore, based on our existing policy, the 

proposed FY 2012 rural Puerto Rico wage index is calculated based on the average of the 

proposed FY 2012 wage indices for the following urban areas: Aguadilla-Isabela-San 

Sebastián, PR (CBSA 10380); Guayama, PR (CBSA 25020); Mayagüez, PR (CBSA 

32420); Ponce, PR (CBSA 38660), San Germán-Cabo Rojo, PR (CBSA 41900), San 

Juan-Caguas-Guaynabo, PR (CBSA 41980), and Yauco, PR (CBSA 49500). 

G. Analysis and Implementation of the Proposed Occupational Mix Adjustment and the 

Proposed FY 2012 Occupational Mix Adjusted Wage Index

As discussed in section III.C. of this preamble, for FY 2012, we are proposing to 

apply the occupational mix adjustment to 100 percent of the proposed FY 2012 wage 

index. We calculated the proposed occupational mix adjustment using data from the 

2007-2008 occupational mix survey data, using the methodology described in section 

III.C.3. of this preamble. 

Using the occupational mix survey data and applying the occupational mix 

adjustment to 100 percent of the proposed FY 2012 wage index results in a proposed 
CMS-1518-P 309 

national average hourly wage of $36.1406 and a proposed Puerto-Rico specific average 

hourly wage of $15.4107. After excluding data of hospitals that either submitted aberrant 

data that failed critical edits, or that do not have FY 2008 Worksheet S-3 cost report data 

for use in calculating the proposed FY 2012 wage index, we calculated the proposed 

FY 2012 wage index using the occupational mix survey data from 3,165 hospitals. Using 

the Worksheet S-3 cost report data of 3,484 hospitals and occupational mix survey data 

from 3,165 hospitals represents a 90.8 percent survey response rate. The proposed 

FY 2012 national average hourly wages for each occupational mix nursing subcategory 

as calculated in Step 2 of the occupational mix calculation are as follows: 

Occupational Mix Nursing Subcategory Average Hourly Wage 

National RN 36.049427439

National LPN and Surgical Technician 20.850540193

National Nurse Aide, Orderly, and Attendant 14.611398009

National Medical Assistant 16.458374237

National Nurse Category 30.442540295

 The proposed national average hourly wage for the entire nurse category as 

computed in Step 5 of the occupational mix calculation is $30.442540295. Hospitals 

with a nurse category average hourly wage (as calculated in Step 4) of greater than the 

national nurse category average hourly wage receive an occupational mix adjustment 

factor (as calculated in Step 6) of less than 1.0. Hospitals with a nurse category average 

hourly wage (as calculated in Step 4) of less than the national nurse category average 

hourly wage receive an occupational mix adjustment factor (as calculated in Step 6) of 

greater than 1.0. 
CMS-1518-P 310 

 Based on the 2007-2008 occupational mix survey data, we determined (in Step 7 

of the occupational mix calculation) that the national percentage of hospital employees in 

the nurse category is 44.31 percent, and the national percentage of hospital employees in 

the all other occupations category is 55.69 percent. At the CBSA level, the percentage of 

hospital employees in the nurse category ranged from a low of 29.08 percent in one 

CBSA, to a high of 70.76 percent in another CBSA. 

 We compared the proposed FY 2012 occupational mix adjusted wage indices for 

each CBSA to the proposed unadjusted wage indices for each CBSA. As a result of 

applying the occupational mix adjustment to the wage data, the proposed wage index 

values for 209 (53.6 percent) urban areas and 32 (66.7 percent) rural areas would 

increase. One hundred seven (27.4 percent) urban areas would increase by 1 percent or 

more, and 5 (1.3 percent) urban areas would increase by 5 percent or more. Seventeen 

(35.4 percent) rural areas would increase by 1 percent or more, and no rural areas would 

increase by 5 percent or more. However, the wage index values for 181 (46.4 percent) 

urban areas and 16 (33.3 percent) rural areas would decrease. Eighty eight (22.6 percent) 

urban areas would decrease by 1 percent or more, and no urban area would decrease by 5 

percent or more. Seven (14.6 percent) rural areas would decrease by 1 percent or more, 

and no rural areas would decrease by 5 percent or more. The largest positive impacts are 

7.81 percent for an urban area and 2.90 percent for a rural area. The largest negative 

impacts are 3.95 percent for an urban area and 2.78 percent for a rural area. No urban or 

rural areas are unaffected. These results indicate that a larger percentage of rural areas 

(66.7 percent) would benefit from the occupational mix adjustment than do urban areas 
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(53.6 percent). While these results are more positive overall for rural areas than under 

the previous occupational mix adjustment that used survey data from 2006, 

approximately one-third (33.3 percent) of rural CBSAs would still experience a decrease 

in their wage indices as a result of the occupational mix adjustment. 

 The proposed wage index values for FY 2012 (except those for hospitals 

receiving wage index adjustments under section 1886(d)(13) of the Act) included in 

Tables 4A, 4B, 4C, and 4F, which are listed in section VI. of the Addendum to this 

proposed rule and available via the Internet, include the proposed occupational mix 

adjustment. 

 Tables 3A and 3B, which are listed in section VI. of the Addendum to this 

proposed rule and available via the Internet, list the 3-year average hourly wage for each 

labor market area before the redesignation or reclassification of hospitals based on FYs 

2010, 2011, and 2012 cost reporting periods. Table 3A lists these data for urban areas, 

and Table 3B lists these data for rural areas. In addition, Table 2, which is listed in 

section VI. of the Addendum to this proposed rule and available via the Internet, includes 

the adjusted average hourly wage for each hospital from the FY 2006 and FY 2007 cost 

reporting periods, as well as the FY 2008 period used to calculate the proposed FY 2012 

wage index. The 3-year averages are calculated by dividing the sum of the dollars 

(adjusted to a common reporting period using the method described previously) across all 

3 years, by the sum of the hours. If a hospital is missing data for any of the previous 

years, its average hourly wage for the 3-year period is calculated based on the data 

available during that period. The proposed average hourly wages in Tables 2, 3A, and 
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3B, which are listed in section VI. of the Addendum to this proposed rule and available 

via the Internet, include the proposed occupational mix adjustment. The proposed wage 

index values in Tables 4A, 4B, 4C, and 4D also include the proposed national rural floor 

budget neutrality adjustment. 

H. Revisions to the Wage Index Based on Hospital Redesignations and Reclassifications

1. General 

 Under section 1886(d)(10) of the Act, the MGCRB considers applications by 

hospitals for geographic reclassification for purposes of payment under the IPPS. 

Hospitals must apply to the MGCRB to reclassify 13 months prior to the start of the fiscal 

year for which reclassification is sought (generally by September 1). Generally, hospitals 

must be proximate to the labor market area to which they are seeking reclassification and 

must demonstrate characteristics similar to hospitals located in that area. The MGCRB 

issues its decisions by the end of February for reclassifications that become effective for 

the following fiscal year (beginning October 1). The regulations applicable to 

reclassifications by the MGCRB are located in 42 CFR 412.230 through 412.280. (We 

refer readers to a discussion of the proximity requirements in the FY 2002 IPPS final rule 

(66 FR 39874 and 39875).) 

 Section 1886(d)(10)(D)(v) of the Act provides that, beginning with FY 2001, a 

MGCRB decision on a hospital reclassification for purposes of the wage index is 

effective for 3 fiscal years, unless the hospital elects to terminate the reclassification. 

Section 1886(d)(10)(D)(vi) of the Act provides that the MGCRB must use average hourly 
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wage data from the 3 most recently published hospital wage surveys in evaluating a 

hospital's reclassification application for FY 2003 and any succeeding fiscal year. 

 Section 304(b) of Pub. L. 106-554 provides that the Secretary must establish a 

mechanism under which a statewide entity may apply to have all of the geographic areas 

in the State treated as a single geographic area for purposes of computing and applying a 

single wage index, for reclassifications beginning in FY 2003. The implementing 

regulations for this provision are located at 42 CFR 412.235. 

 Section 1886(d)(8)(B) of the Act requires the Secretary to treat a hospital located 

in a rural county adjacent to one or more urban areas as being located in the labor market 

area to which the greatest number of workers in the county commute, if the rural county 

would otherwise be considered part of an urban area under the standards for designating 

MSAs and if the commuting rates used in determining outlying counties were determined 

on the basis of the aggregate number of resident workers who commute to (and, if 

applicable under the standards, from) the central county or counties of all contiguous 

MSAs. In light of the CBSA definitions and the Census 2000 data that we implemented 

for FY 2005 (69 FR 49027), we undertook to identify those counties meeting these 

criteria. Eligible counties are discussed and identified under section III.H.5. of this 

preamble. 

2. Effects of Reclassification/Redesignation 

 Section 1886(d)(8)(C) of the Act provides that the application of the wage index 

to redesignated hospitals is dependent on the hypothetical impact that the wage data from 

these hospitals would have on the wage index value for the area to which they have been 
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redesignated. These requirements for determining the wage index values for redesignated 

hospitals are applicable both to the hospitals deemed urban under section 1886(d)(8)(B) 

of the Act and hospitals that were reclassified as a result of the MGCRB decisions under 

section 1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) of the 

Act, the wage index values were determined by considering the following: 

 • If including the wage data for the redesignated hospitals would reduce the wage 

index value for the area to which the hospitals are redesignated by 1 percentage point or 

less, the area wage index value determined exclusive of the wage data for the 

redesignated hospitals applies to the redesignated hospitals. 

 • If including the wage data for the redesignated hospitals reduces the wage index 

value for the area to which the hospitals are redesignated by more than 1 percentage 

point, the area wage index determined inclusive of the wage data for the redesignated 

hospitals (the combined wage index value) applies to the redesignated hospitals. 

 • If including the wage data for the redesignated hospitals increases the wage 

index value for the urban area to which the hospitals are redesignated, both the area and 

the redesignated hospitals receive the combined wage index value. Otherwise, the 

hospitals located in the urban area receive a wage index excluding the wage data of 

hospitals redesignated into the area. 

 • Rural areas whose wage index values would be reduced by excluding the wage 

data for hospitals that have been redesignated to another area continue to have their wage 

index values calculated as if no redesignation had occurred (otherwise, redesignated rural 

hospitals are excluded from the calculation of the rural wage index). The wage index 
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value for a redesignated rural hospital cannot be reduced below the wage index value for 

the rural areas of the State in which the hospital is located.

 CMS also has adopted the following policies:

 • The wage data for a reclassified urban hospital is included in both the wage 

index calculation of the urban area to which the hospital is reclassified (subject to the 

rules described above) and the wage index calculation of the urban area where the 

hospital is physically located. 

 • In cases where hospitals have reclassified to rural areas, such as urban hospitals 

reclassifying to rural areas under 42 CFR 412.103, the hospital's wage data are: 

(a) included in the rural wage index calculation, unless doing so would reduce the rural 

wage index; and (b) included in the urban area where the hospital is physically located. 

The effect of this policy, in combination with the statutory requirement at section 

1886(d)(8)(C)(ii) of the Act, is that rural areas may receive a wage index based upon the 

highest of: (1) wage data from hospitals geographically located in the rural area; 

(2) wage data from hospitals geographically located in the rural area, but excluding all 

data associated with hospitals reclassifying out of the rural area under section 

1886(d)(8)(B) or section 1886(d)(10) of the Act; or (3) wage data associated with 

hospitals geographically located in the area plus all hospitals reclassified into the rural 

area. 

 In addition, in accordance with the statutory language referring to “hospitals” in 

the plural under sections 1886(d)(8)(C)(i) and 1886(d)(8)(C)(ii) of the Act, our 
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longstanding policy is to consider reclassified hospitals as a group when deciding 

whether to include or exclude them from both urban and rural wage index calculations. 

3. FY 2012 MGCRB Reclassifications 

a. FY 2012 Reclassification Requirements and Approvals 

 Under section 1886(d)(10) of the Act, the MGCRB considers applications by 

hospitals for geographic reclassification for purposes of payment under the IPPS. The 

specific procedures and rules that apply to the geographic reclassification process are 

outlined in 42 CFR 412.230 through 412.280. 

 At the time this proposed rule was constructed, the MGCRB had completed its 

review of FY 2012 reclassification requests. Based on such reviews, there were 280 

hospitals approved for wage index reclassifications by the MGCRB for FY 2012. 

Because MGCRB wage index reclassifications are effective for 3 years, for FY 2012, 

hospitals reclassified during FY 2010 or FY 2011 are eligible to continue to be 

reclassified to a particular labor market area based on such prior reclassifications. There 

were 283 hospitals approved for wage index reclassifications in FY 2010 and 294 

hospitals approved for wage index reclassifications in FY 2011. Of all of the hospitals 

approved for reclassification for FY 2010, FY 2011, and FY 2012, based upon the review 

at the time of this proposed rule, 857 hospitals are in a reclassification status for FY 2012. 

 Under 42 CFR 412.273, hospitals that have been reclassified by the MGCRB are 

permitted to withdraw their applications within 45 days of the publication of a proposed 

rule. Generally stated, the request for withdrawal of an application for reclassification or 

termination of an existing 3-year reclassification that would be effective in FY 2012 has 
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to be received by the MGCRB within 45 days of the publication of the proposed rule. 

Hospitals also may cancel prior reclassification withdrawals or terminations in certain 

circumstances. For further information about withdrawing, terminating, or canceling a 

previous withdrawal or termination of a 3-year reclassification for wage index purposes, 

we refer the reader to 42 CFR 412.273, as well as the FY 2002 IPPS final rule 

(66 FR 39887) and the FY 2003 IPPS final rule (67 FR 50065). Additional discussion on 

withdrawals and terminations, and clarifications regarding reinstating reclassifications 

and “fallback” reclassifications, were included in the FY 2008 IPPS final rule 

(72 FR 47333). 

 Changes to the wage index that result from withdrawals of requests for 

reclassification, terminations, wage index corrections, appeals, and the Administrator's 

review process for FY 2012 will be incorporated into the wage index values published in 

the FY 2012 IPPS/LTCH PPS final rule. These changes affect not only the wage index 

value for specific geographic areas, but also the wage index value 

redesignated/reclassified hospitals receive; that is, whether they receive the wage index 

that includes the data for both the hospitals already in the area and the 

redesignated/reclassified hospitals. Further, the wage index value for the area from 

which the hospitals are redesignated/reclassified may be affected. 

b. Applications for Reclassifications for FY 2013 

Applications for FY 2013 reclassifications are due to the MGCRB by 

September 1, 2011. We note that this is also the deadline for canceling a previous wage 

index reclassification withdrawal or termination under 42 CFR 412.273(d). Applications 
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and other information about MGCRB reclassifications may be obtained, beginning in 

mid-July 2011, via the CMS Internet Web site at: 

http://cms.hhs.gov/MGCRB/02_instructions_and_applications.asp, or by calling the 

MGCRB at (410) 786-1174. The mailing address of the MGCRB is: 2520 Lord 

Baltimore Drive, Suite L, Baltimore, MD 21244-2670. 

4. Redesignations of Hospitals under Section 1886(d)(8)(B) of the Act 

 Section 1886(d)(8)(B) of the Act requires us to treat a hospital located in a rural 

county adjacent to one or more urban areas as being located in the MSA if certain criteria 

are met. Effective beginning FY 2005, we use OMB’s 2000 CBSA standards and the 

Census 2000 data to identify counties in which hospitals qualify under 

section 1886(d)(8)(B) of the Act to receive the wage index of the urban area. Hospitals 

located in these counties have been known as “Lugar” hospitals and the counties 

themselves are often referred to as “Lugar” counties. We provide the FY 2011 chart 

below with the listing of the rural counties containing the hospitals designated as urban 

under section 1886(d)(8)(B) of the Act. For discharges occurring on or after 

October 1, 2011, hospitals located in the rural county in the first column of this chart will 

be redesignated for purposes of using the wage index of the urban area listed in the 

second column. 

Rural Counties Containing Hospitals Redesignated as Urban 

under Section 1886(d)(8)(B) of the Act 

(Based on CBSAs and Census 2000 Data) 

Rural County CBSA 

Cherokee, AL Rome, GA 

Macon, AL Auburn-Opelika, AL 

Talladega, AL Anniston-Oxford, AL 
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Rural County CBSA 

Hot Springs, AR Hot Springs, AR 

Windham, CT Hartford-West Hartford-East Hartford, CT 

Bradford, FL Gainesville, FL 

Hendry, FL West Palm Beach-Boca Raton-Boynton, FL 

Levy, FL Gainesville, FL 

Walton, FL Fort Walton Beach-Crestview-Destin, FL 

Banks, GA Gainesville, GA 

Chattooga, GA Chattanooga, TN-GA 

Jackson, GA Atlanta-Sandy Springs-Marietta, GA 

Lumpkin, GA Atlanta-Sandy Springs-Marietta, GA 

Morgan, GA Atlanta-Sandy Springs-Marietta, GA 

Peach, GA Macon, GA 

Polk, GA Atlanta-Sandy Springs-Marietta, GA 

Talbot, GA Columbus, GA-AL 

Bingham, ID Idaho Falls, ID 

Christian, IL Springfield, IL 

DeWitt, IL Bloomington-Normal, IL 

Iroquois, IL Kankakee-Bradley, IL 

Logan, IL Springfield, IL 

Mason, IL Peoria, IL 

Ogle, IL Rockford, IL 

Clinton, IN Lafayette, IN 

Henry, IN Indianapolis-Carmel, IN 

Spencer, IN Evansville, IN-KY 

Starke, IN Gary, IN 

Warren, IN Lafayette, IN 

Boone, IA Ames, IA 

Buchanan, IA Waterloo-Cedar Falls, IA 

Cedar, IA Iowa City, IA 

Allen, KY Bowling Green, KY 

Assumption Parish, LA Baton Rouge, LA 

St. James Parish, LA Baton Rouge, LA 

Allegan, MI Holland-Grand Haven, MI 

Montcalm, MI Grand Rapids-Wyoming, MI 

Oceana, MI Muskegon-Norton Shores, MI 

Shiawassee, MI Lansing-East Lansing, MI 

Tuscola, MI Saginaw-Saginaw Township North, MI 

Fillmore, MN Rochester, MN 

Dade, MO Springfield, MO 

Pearl River, MS Gulfport-Biloxi, MS 

Caswell, NC Burlington, NC 
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Rural County CBSA 

Davidson, NC Greensboro-High Point, NC 

Granville, NC Durham, NC 

Harnett, NC Raleigh-Cary, NC 

Lincoln, NC Charlotte-Gastonia-Concord, NC-SC 

Polk, NC Spartanburg, SC 

Los Alamos, NM Santa Fe, NM 

Lyon, NV Carson City, NV 

Cayuga, NY Syracuse, NY 

Columbia, NY Albany-Schenectady-Troy, NY 

Genesee, NY Rochester, NY 

Greene, NY Albany-Schenectady-Troy, NY 

Schuyler, NY Ithaca, NY 

Sullivan, NY Poughkeepsie-Newburgh-Middletown, NY 

Wyoming, NY Buffalo-Niagara Falls, NY 

Ashtabula, OH Cleveland-Elyria-Mentor, OH 

Champaign, OH Springfield, OH 

Columbiana, OH Youngstown-Warren-Boardman, OH-PA 

Cotton, OK Lawton, OK 

Linn, OR Corvallis, OR 

Adams, PA York-Hanover, PA 

Clinton, PA Williamsport, PA 

Greene, PA Pittsburgh, PA 

Monroe, PA Allentown-Bethlehem-Easton, PA-NJ 

Schuylkill, PA Reading, PA 

Susquehanna, PA Binghamton, NY 

Clarendon, SC Sumter, SC 

Lee, SC Sumter, SC 

Oconee, SC Greenville, SC 

Union, SC Spartanburg, SC 

Meigs, TN Cleveland, TN 

Bosque, TX Waco, TX 

Falls, TX Waco, TX 

Fannin, TX Dallas-Plano-Irving, TX 

Grimes, TX College Station-Bryan, TX 

Harrison, TX Longview, TX 

Henderson, TX Dallas-Plano-Irving, TX 

Milam, TX Austin-Round Rock, TX 

Van Zandt, TX Dallas-Plano-Irving, TX 

Willacy, TX Brownsville-Harlingen, TX 

Buckingham, VA Charlottesville, VA 

Floyd, VA Blacksburg-Christiansburg-Radford, VA 
CMS-1518-P 321 

Rural County CBSA 

Middlesex, VA Virginia Beach-Norfolk-Newport News, VA 

Page, VA Harrisonburg, VA 

Shenandoah, VA Winchester, VA-WV 

Island, WA Seattle-Bellevue-Everett, WA 

Mason, WA Olympia, WA 

Wahkiakum, WA Longview, WA 

Jackson, WV Charleston, WV 

Roane, WV Charleston, WV 

Green, WI Madison, WI 

Green Lake, WI Fond du Lac, WI 

Jefferson, WI Milwaukee-Waukesha-West Allis, WI 

Walworth, WI Milwaukee-Waukesha-West Allis, WI 

 As in the past, hospitals redesignated under section 1886(d)(8)(B) of the Act are 

also eligible to be reclassified to a different area by the MGCRB. Affected hospitals are 

permitted to compare the reclassified wage index for the labor market area in Table 4C 

(which is listed in section VI. of the Addendum to this proposed rule and available via the 

Internet) into which they would be reclassified by the MGCRB to the wage index for the 

area to which they are redesignated under section 1886(d)(8)(B) of the Act. Hospitals 

may withdraw from an MGCRB reclassification within 45 days of the publication of this 

proposed rule. 

5. Reclassifications under Section 1886(d)(8)(B) of the Act 

 As discussed in the FY 2009 IPPS final rule (73 FR 48588), Lugar hospitals are 

treated like reclassified hospitals for purposes of determining their applicable wage index 

and receive the reclassified wage index for the urban area to which they have been 

redesignated. Because Lugar hospitals are treated like reclassified hospitals, when they 

are seeking reclassification by the MGCRB, they are subject to the rural reclassification 

rules set forth at 42 CFR 412.230. The procedural rules set forth at §412.230 list the 
CMS-1518-P 322 

criteria that a hospital must meet in order to reclassify as a rural hospital. Lugar hospitals 

are subject to the proximity criteria and payment thresholds that apply to rural hospitals. 

Specifically, the hospital must be no more than 35 miles from the area to which it seeks 

reclassification (§412.230(b)(1)); and the hospital must show that its average hourly wage 

is at least 106 percent of the average hourly wage of all other hospitals in the area in 

which the hospital is located (§412.230(d)(1)(iii)(C)). In accordance with the 

requirements of section 3137(c) of the Affordable Care Act, beginning with 

reclassifications for the FY 2011 wage index, a Lugar hospital must also demonstrate that 

its average hourly wage is equal to at least 82 percent of the average hourly wage of 

hospitals in the area to which it seeks redesignation (§412.230(d)(1)(iv)(C)). 

 Hospitals not located in a Lugar county seeking reclassification to the urban area 

where the Lugar hospitals have been redesignated are not permitted to measure to the 

Lugar county to demonstrate proximity (no more than 15 miles for an urban hospital, and 

no more than 35 miles for a rural hospital or the closest urban or rural area for RRCs or 

SCHs) in order to be reclassified to such urban area. These hospitals must measure to the 

urban area exclusive of the Lugar County to meet the proximity or nearest urban or rural 

area requirement. We treat New England deemed counties in a manner consistent with 

how we treat Lugar counties. (We refer readers to FY 2008 IPPS final rule with 

comment period (72 FR 47337) for a discussion of this policy.) 

6. Reclassifications under Section 508 of Pub. L. 108-173 

 Section 508 of Pub. L. 108-173 allowed certain qualifying hospitals to receive 

wage index reclassifications and assignments that they otherwise would not have been 
CMS-1518-P 323 

eligible to receive under the law. Although section 508 originally was scheduled to 

expire after a 3-year period, Congress extended the provision several times, as well as 

certain special exceptions that would have otherwise expired. For a discussion of the 

original section 508 provision and its various extensions, we refer readers to the FY 2010 

notice issued in the Federal Register on June 2, 2010 (75 FR 31118). Prior to the 

enactment of the Medicare and Medicaid Extenders Act of 2010 (Pub. L. 111-309) on 

December 15, 2010, the extension of the 508 provision was included in sections 3137(a) 

and 10317 of the Affordable Care Act (Pub. L. 111-148). Section 3137 of the Affordable 

Care Act extended, through FY 2010, section 508 reclassifications as well as certain 

special exceptions. The most recent extension of the provision was included in section 

102 of the Medicare and Medicaid Extender Act, which extends, through FY 2011, 

section 508 reclassifications as well as certain special exceptions. The latest extension of 

these provisions expires on September 30, 2011, and will no longer be applicable 

effective with FY 2012. 

7. Waiving Lugar Redesignation for the Out-Migration Adjustment 

 We have received several inquiries regarding the effect on a hospital’s deemed 

urban status when a hospital waives its reclassification under section 1886(d)(8) of the 

Act in order to accept an out-migration adjustment to the wage index under section 

1886(d)(13) of the Act. (We refer readers to a discussion of the out-migration adjustment 

under section III.I. of the preamble of this proposed rule.) In this proposed rule, we are 

clarifying that Lugar hospitals will be required to waive their Lugar urban status in its 

entirety in order to receive the out-migration adjustment. We believe this represents a 
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permissible reading of the statute, as section 1886(d)(13)(G) of the Act states that a 

hospital with an out-migration adjustment is not “eligible” for a reclassification under 

subsection (8). Therefore, beginning with FY 2012, we are proposing that an eligible 

hospital that waives its Lugar status in order to receive the out-migration adjustment has 

effectively waived its deemed urban status and, thus, is rural for all purposes under the 

IPPS, including being considered rural for the DSH payment adjustment, effective for the 

fiscal year in which the hospital receives the out-migration adjustment. (We refer readers 

to a discussion of DSH payment adjustment under section IV.G. of this preamble.) 

 In addition, we are proposing to make a minor procedural change that would 

allow a Lugar hospital that qualifies for and accepts the out-migration adjustment 

(through written notification to CMS within 45 days from the publication of the proposed 

rule) to automatically waive its urban status for the 3-year period for which its 

out-migration adjustment is effective. That is, such a Lugar hospital would no longer be 

required during the second and third years of eligibility for the out-migration adjustment 

to advise us annually that it prefers to continue being treated as rural and receive the 

adjustment. We are making this proposal in response to public comments we received on 

the FY 2011 IPPS/LTCH proposed rule that discussed the burden of this annual request 

(74 FR 43840). Thus, under the proposed procedural change, a Lugar hospital that 

requests to waive its urban status in order to receive the rural wage index in addition to 

the out-migration adjustment would be deemed to have accepted the out-migration 

adjustment and agrees to be treated as rural for the duration of its 3-year eligibility 

period, unless prior to its second or third year of eligibility the hospital explicitly notifies 
CMS-1518-P 325 

CMS in writing, within 45 days from the publication of the proposed rule, that it instead 

elects to return to its deemed urban status and no longer wishes to accept the 

out-migration adjustment. 

8. Other Geographic Reclassification Issues 

a. Requested Reclassification for Single Hospital MSAs

 Section 412.230 of the regulations sets forth criteria for an individual hospital to 

apply for geographic reclassification to a higher rural or urban wage index area. 

Specifically, under §412.230(a)(3)(ii), an individual hospital may be redesignated from 

an urban area to another urban area, from a rural area to another rural area, or from a rural 

area to an urban area for the purpose of using the other area’s wage index value. Such a 

hospital must also meet other criteria. One required criterion (under 

§412.230(d)(1)(iii)(C) of the regulations) is that the hospital must demonstrate that its 

own average hourly wage is higher than the average hourly wage of hospitals in the area 

in which the hospital is located (108 percent for urban hospitals and 106 percent for rural 

hospitals). In cases where a hospital wishing to reclassify is the only hospital in its MSA, 

that hospital is unable to satisfy this criterion because it cannot demonstrate that its 

average hourly wage is higher than that of the other hospitals in the area in which the 

hospital is located (because there are no other hospitals in the area). For hospitals in the 

category described above, our current policy provides an alternative that allows hospitals 

to seek reclassification using the group reclassification rules under §412.232 or §412.234. 

Specifically, if a hospital is the single hospital in its area for the 3-year period over which 

the average hourly wage is calculated for the purpose of the comparison under 
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§412.230(d)(1)(iii)(C), the hospital may apply for geographic reclassification as a single 

hospital county group in accordance with the procedures set forth at §412.232 or 

§412.234. In addition to specifying the average hourly wage criteria, these regulations 

state that the county in which the hospital is located must be adjacent to the urban area to 

which it seeks redesignation. In addition, a certain level of economic integration needs to 

exist between the two areas. For example, for urban county group reclassifications (for 

FY 2008 and subsequent periods), §412.234(a)(3)(iv) states that “hospitals located in 

counties that are in the same Combined Statistical Area (CSA) or Core-Based Statistical 

Area (CBSA) . . . as the urban area to which they seek redesignation qualify as meeting 

the proximity requirements for reclassification to the urban area to which they seek 

redesignation.” 

Recently, we have been advised of a single hospital MSA scenario of concern to a 

particular hospital. In this scenario, an urban hospital located in an area in which there 

was only one other hospital had previously applied for and was granted a reclassification 

by the MGCRB to an adjacent urban area with a higher wage index. During the 3-year 

reclassification timeframe, the other hospital in its labor market area closed. After the 

expiration of its reclassification, the hospital became ineligible for reclassification to that 

same adjacent urban area with a higher wage index because it was no longer able to 

satisfy the wage data comparison criteria to reclassify individually under 

§412.230(d)(1)(iii)(C). In addition, the hospital could not apply for redesignation under 

the urban county group regulation at §412.234 because the hospital was not located in the 

same CSA or CBSA as the urban area to which it sought reclassification. In this 
CMS-1518-P 327 

example, the concern that was shared with CMS was that the hospital was competitively 

disadvantaged in competing for labor with neighboring hospitals where the hospital had a 

comparable average hourly wage, compared to the other hospitals in its surrounding area, 

because it receives a lower wage index. 

 We believe that the geographic reclassification regulations should not be revised 

to accommodate this situation. We have repeatedly rejected special rules to 

accommodate single hospital MSAs (69 FR 48915, 49109; 71 FR 47869, 48071 and 

48072). In these explanations, we have highlighted the fact that hospitals in single 

hospital MSAs not only may be eligible for out-commuting adjustments, but that they 

also may apply to an adjacent MSA within the same CSA using the group reclassification 

rules without meeting the 108-percent test. Each year, we propose to adopt the OMB’s 

statistical area definitions (75 FR 50162), so if a hospital in a single hospital MSA cannot 

meet group reclassification criteria because of the CSA standard, it means that OMB has 

determined that there is not a sufficient degree of employment interchange to suggest that 

the areas compete for the same labor. In addition, when we originally adopted the 

108-percent test, we noted that “with respect to single hospital MSAs, a hospital in such 

an MSA receives a wage index value that is based entirely on its own wage data and, 

therefore, its actual wage levels. Since such a hospital is clearly not disadvantaged by its 

inclusion in a labor market area where its wage index is determined based on its own 

wage levels, it is appropriate under this guideline that a hospital should not be reclassified 

if it is the only one in its area.” (57 FR 39746) Allowing a hospital representing 100 

percent of its area’s wages to be exempt from the wage data comparison test could 
CMS-1518-P 328 

undermine the 108-percent test for hospitals in other circumstances where the standard 

cannot be met. Finally, we note that section 3137(c) of the Affordable Care Act prohibits 

us from altering average hourly wage comparison criteria for FY 2012. That provision 

states that “notwithstanding any other provision of law,” the MGCRB is required to use 

the “average hourly wage comparison criteria used in making such decisions as of 

September 30, 2008,” until the first fiscal year beginning on the date that is one year after 

the Secretary submits a report to Congress.

We are soliciting public comments on this issue. In particular, we invite 

comments on the types of regulatory solutions that could be made available to a hospital 

in this type of situation. 

b. Requests for Exceptions to Geographic Reclassification Rules 

Over the last several years, CMS has received numerous requests for exceptions 

to current Medicare law and regulation regarding geographic reclassification or requests 

to revise the existing regulations in order to allow a hospital or group of hospitals the 

ability to reclassify to a labor market area with a higher wage index. Section 3137(b) of 

the Affordable Care Act requires the Secretary to submit a report to Congress that 

includes a “plan to reform the hospital wage index.” This report to Congress is due by 

December 31, 2011. As part of our efforts in this regard, we are soliciting public 

comments, to be considered only as part of our report to Congress and not to be 

addressed in the FY 2012 IPPS/LTCH PPS final rule, on ways to redefine the geographic 

reclassification requirements to more accurately define labor markets. 
CMS-1518-P 329 

I. Proposed FY 2012 Wage Index Adjustment Based on Commuting Patterns of Hospital 

Employees

 In accordance with the broad discretion granted to the Secretary under section 

1886(d)(13) of the Act, as added by section 505 of Pub. L. 108-173, beginning with 

FY 2005, we established a process to make adjustments to the hospital wage index based 

on commuting patterns of hospital employees (the "out-migration" adjustment). The 

process, outlined in the FY 2005 IPPS final rule (69 FR 49061), provides for an increase 

in the wage index for hospitals located in certain counties that have a relatively high 

percentage of hospital employees who reside in the county but work in a different county 

(or counties) with a higher wage index. Such adjustments to the wage index are effective 

for 3 years, unless a hospital requests to waive the application of the adjustment. A 

county will not lose its status as a qualifying county due to hospital wage index changes 

during the 3-year period, and counties will receive the same wage index increase for 

those 3 years. However, a county that qualifies in any given year may not necessarily 

qualify after the 3-year period, or it may qualify but receive a different adjustment to the 

wage index level. Hospitals that receive this adjustment to their wage index are not 

eligible for reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. 

Adjustments under this provision are not subject to the budget neutrality requirements 

under section 1886(d)(3)(E) of the Act. 

Hospitals located in counties that qualify for the wage index adjustment are to 

receive an increase in the wage index that is equal to the average of the differences 

between the wage indices of the labor market area(s) with higher wage indices and the 
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wage index of the resident county, weighted by the overall percentage of hospital workers 

residing in the qualifying county who are employed in any labor market area with a 

higher wage index. Beginning with the FY 2008 wage index, we use post-reclassified 

wage indices when determining the out-migration adjustment (72 FR 47339). 

For the proposed FY 2012 wage index, we are proposing to calculate the 

out-migration adjustment using the same formula described in the FY 2005 IPPS final 

rule (69 FR 49064), with the addition of using the post-reclassified wage indices, to 

calculate the out-migration adjustment. This adjustment is calculated as follows: 

 Step 1--Subtract the wage index for the qualifying county from the wage index of 

each of the higher wage area(s) to which hospital workers commute. 

 Step 2--Divide the number of hospital employees residing in the qualifying 

county who are employed in such higher wage index area by the total number of hospital 

employees residing in the qualifying county who are employed in any higher wage index 

area. For each of the higher wage index areas, multiply this result by the result obtained 

in Step 1. 

 Step 3--Sum the products resulting from Step 2 (if the qualifying county has 

workers commuting to more than one higher wage index area). 

 Step 4--Multiply the result from Step 3 by the percentage of hospital employees 

who are residing in the qualifying county and who are employed in any higher wage 

index area. 

 These adjustments will be effective for each county for a period of 3 fiscal years. 

For example, hospitals that received the adjustment for the first time in FY 2011 will be 
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eligible to retain the adjustment for FY 2012. For hospitals in newly qualified counties, 

adjustments to the wage index are effective for 3 years, beginning with discharges 

occurring on or after October 1, 2011. 

Hospitals receiving the wage index adjustment under section 1886(d)(13)(F) of 

the Act are not eligible for reclassification under sections 1886(d)(8) or (d)(10) of the Act 

unless they waive the out-migration adjustment. Consistent with our FYs 2005 through 

2011 IPPS final rules, we are specifying that hospitals redesignated under section 

1886(d)(8) of the Act or reclassified under section 1886(d)(10) of the Act are deemed to 

have chosen to retain their redesignation or reclassification. Hospitals that reclassified 

under section 1886(d)(10) of the Act that wish to receive the out-migration adjustment, 

rather than their reclassification adjustment, are instructed to follow the 

termination/withdrawal procedures specified in 42 CFR 412.273 and section III.H.3. of 

the preamble of this proposed rule. Otherwise, they will be deemed to have waived the 

out-migration adjustment. Hospitals redesignated under section 1886(d)(8)(B) of the Act 

will be deemed to have waived the out-migration adjustment unless they explicitly notify 

CMS within 45 days from the publication of this proposed rule that they elect to receive 

the out-migration adjustment instead. These notifications should be sent to the following 

address: Centers for Medicare and Medicaid Services, Center for Medicare, Attention: 

Wage Index Adjustment Waivers, Division of Acute Care, Room C4-08-06, 7500 

Security Boulevard, Baltimore, MD 21244-1850. 

 Table 4J, which is listed in section VI. of the Addendum to this proposed rule and 

available via the Internet, lists the proposed out-migration wage index adjustments for 
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FY 2012. Hospitals that are not otherwise reclassified or redesignated under section 

1886(d)(8) or section 1886(d)(10) of the Act will automatically receive the listed 

adjustment. In accordance with the procedures discussed above, redesignated/reclassified 

hospitals will be deemed to have waived the out-migration adjustment unless CMS is 

otherwise notified within the timeframe stated above. In addition, hospitals eligible to 

receive the out-migration wage index adjustment and that withdraw their application for 

reclassification will automatically receive the wage index adjustment listed in Table 4J, 

which is listed in section VI. of the Addendum to this proposed rule and available via the 

Internet. 

J. Process for Requests for Wage Index Data Corrections

 The preliminary, unaudited Worksheet S-3 wage data and occupational mix 

survey data files for the proposed FY 2012 wage index were made available on 

October 4 2010, through the Internet on the CMS Web site at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage. 

 In the interest of meeting the data needs of the public, beginning with the 

proposed FY 2009 wage index, we post an additional public use file on our Web site that 

reflects the actual data that are used in computing the proposed wage index. The release 

of this new file does not alter the current wage index process or schedule. We notified 

the hospital community of the availability of these data as we do with the current public 

use wage data files through our Hospital Open Door forum. We encouraged hospitals to 

sign up for automatic notifications of information about hospital issues and the 
CMS-1518-P 333 

scheduling of the Hospital Open Door forums at: 

http://www.cms.hhs.gov/OpenDoorForums/. 

 In a memorandum dated October 13, 2010, we instructed all fiscal 

intermediaries/MACs to inform the IPPS hospitals they service of the availability of the 

wage index data files and the process and timeframe for requesting revisions (including 

the specific deadlines listed below). We also instructed the fiscal intermediaries/MACs 

to advise hospitals that these data were also made available directly through their 

representative hospital organizations. 

 If a hospital wished to request a change to its data as shown in the 

October 4, 2010 wage and occupational mix data files, the hospital was to submit 

corrections along with complete, detailed supporting documentation to its fiscal 

intermediary/MAC by December 6, 2010. Hospitals were notified of this deadline and of 

all other deadlines and requirements, including the requirement to review and verify their 

data as posted on the preliminary wage index data files on the Internet, through the 

October 13, 2010 memorandum referenced above. 

In the October 13, 2010 memorandum, we also specified that a hospital requesting 

revisions to its occupational mix survey data was to copy its record(s) from the 

CY 2007-2008 occupational mix preliminary files posted to our Web site in October, 

highlight the revised cells on its spreadsheet, and submit its spreadsheet(s) and complete 

documentation to its fiscal intermediary/MAC no later than December 6, 2010. 

The fiscal intermediaries/MACs notified the hospitals by mid-February 2011 of 

any changes to the wage index data as a result of the desk reviews and the resolution of 
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the hospitals’ early-December revision requests. The fiscal intermediaries/MACs also 

submitted the revised data to CMS by mid-February 2011. CMS published the proposed 

wage index public use files that included hospitals’ revised wage index data on 

February 22, 2011. Hospitals had until March 7, 2011, to submit requests to the fiscal 

intermediaries/MACs for reconsideration of adjustments made by the fiscal 

intermediaries/MACs as a result of the desk review, and to correct errors due to CMS’s or 

the fiscal intermediary's (or, if applicable, the MAC's) mishandling of the wage index 

data. Hospitals also were required to submit sufficient documentation to support their 

requests. 

 After reviewing requested changes submitted by hospitals, fiscal 

intermediaries/MACs are required to transmit any additional revisions resulting from the 

hospitals’ reconsideration requests by April 13, 2011. The deadline for a hospital to 

request CMS intervention in cases where the hospital disagrees with the fiscal 

intermediary's (or, if applicable, the MAC’s) policy interpretations is April 20, 2011. 

 Hospitals should examine Table 2, which is listed in section VI. of the Addendum 

to this proposed rule and available via the Internet. Table 2 contains each hospital’s 

adjusted average hourly wage used to construct the wage index values for the past 

3 years, including the FY 2008 data used to construct the proposed FY 2012 wage index. 

We note that the hospital average hourly wages shown in Table 2 only reflect changes 

made to a hospital’s data and transmitted to CMS by March 2011. 

We will release the final wage index data public use files in early May 2011 on 

the Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp. The 
CMS-1518-P 335 

May 2011 public use files are made available solely for the limited purpose of identifying 

any potential errors made by CMS or the fiscal intermediary/MAC in the entry of the 

final wage index data that resulted from the correction process described above (revisions 

submitted to CMS by the fiscal intermediaries/MACs by April 13, 2011). If, after 

reviewing the May 2011 final files, a hospital believes that its wage or occupational mix 

data are incorrect due to a fiscal intermediary/MAC or CMS error in the entry or 

tabulation of the final data, the hospital should send a letter to both its fiscal 

intermediary/MAC and CMS that outlines why the hospital believes an error exists and 

provide all supporting information, including relevant dates (for example, when it first 

became aware of the error). CMS and the fiscal intermediaries (or, if applicable, the 

MACs) must receive these requests no later than June 6, 2011. 

Each request also must be sent to the fiscal intermediary/MAC. The fiscal 

intermediary/MAC will review requests upon receipt and contact CMS immediately to 

discuss any findings. 

 At this point in the process, that is, after the release of the May 2011 wage index 

data files, changes to the wage and occupational mix data will only be made in those very 

limited situations involving an error by the fiscal intermediary/MAC or CMS that the 

hospital could not have known about before its review of the final wage index data files. 

Specifically, neither the fiscal intermediary/MAC nor CMS will approve the following 

types of requests: 
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● Requests for wage index data corrections that were submitted too late to be 

included in the data transmitted to CMS by fiscal intermediaries or the MACs on or 

before April 13, 2011. 

● Requests for correction of errors that were not, but could have been, identified 

during the hospital's review of the February 22, 2011 wage index public use files. 

● Requests to revisit factual determinations or policy interpretations made by the 

fiscal intermediary or the MAC or CMS during the wage index data correction process. 

 Verified corrections to the wage index data received timely by CMS and the fiscal 

intermediaries or the MACs (that is, by June 6, 2011) will be incorporated into the final 

wage index in the FY 2012 IPPS/LTCH PPS final rule, which will be effective 

October 1, 2011. 

 We created the processes described above to resolve all substantive wage index 

data correction disputes before we finalize the wage and occupational mix data for the 

FY 2012 payment rates. Accordingly, hospitals that do not meet the procedural deadlines 

set forth above will not be afforded a later opportunity to submit wage index data 

corrections or to dispute the fiscal intermediary's (or, if applicable, the MAC's) decision 

with respect to requested changes. Specifically, our policy is that hospitals that do not 

meet the procedural deadlines set forth above will not be permitted to challenge later, 

before the Provider Reimbursement Review Board, the failure of CMS to make a 

requested data revision. (See W. A. Foote Memorial Hospital v. Shalala, 

No. 99-CV-75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. Thompson, 

No. 99-1230 (D.D.C. 2003).) We refer readers also to the FY 2000 IPPS final rule 
CMS-1518-P 337 

(64 FR 41513) for a discussion of the parameters for appealing to the PRRB for wage 

index data corrections. 

Again, we believe the wage index data correction process described above 

provides hospitals with sufficient opportunity to bring errors in their wage and 

occupational mix data to the fiscal intermediary's (or, if applicable, the MAC's) attention. 

Moreover, because hospitals have access to the final wage index data by early May 2011, 

they have the opportunity to detect any data entry or tabulation errors made by the fiscal 

intermediary or the MAC or CMS before the development and publication of the final 

FY 2012 wage index by August 2011, and the implementation of the FY 2012 wage 

index on October 1, 2011. If hospitals avail themselves of the opportunities afforded to 

provide and make corrections to the wage and occupational mix data, the wage index 

implemented on October 1 should be accurate. Nevertheless, in the event that errors are 

identified by hospitals and brought to our attention after June 6, 2011, we retain the right 

to make midyear changes to the wage index under very limited circumstances. 

Specifically, in accordance with 42 CFR 412.64(k)(1) of our existing regulations, 

we make midyear corrections to the wage index for an area only if a hospital can show 

that: (1) the fiscal intermediary or the MAC or CMS made an error in tabulating its data; 

and (2) the requesting hospital could not have known about the error or did not have an 

opportunity to correct the error, before the beginning of the fiscal year. For purposes of 

this provision, “before the beginning of the fiscal year” means by the June 6 deadline for 

making corrections to the wage data for the following fiscal year’s wage index. This 

provision is not available to a hospital seeking to revise another hospital’s data that may 
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be affecting the requesting hospital’s wage index for the labor market area. As indicated 

earlier, because CMS makes the wage index data available to hospitals on the CMS Web 

site prior to publishing both the proposed and final IPPS rules, and the fiscal 

intermediaries or the MACs notify hospitals directly of any wage index data changes 

after completing their desk reviews, we do not expect that midyear corrections will be 

necessary. However, under our current policy, if the correction of a data error changes 

the wage index value for an area, the revised wage index value will be effective 

prospectively from the date the correction is made. 

In the FY 2006 IPPS final rule (70 FR 47385), we revised 42 CFR 412.64(k)(2) to 

specify that, effective on October 1, 2005, that is, beginning with the FY 2006 wage 

index, a change to the wage index can be made retroactive to the beginning of the Federal 

fiscal year only when: (1) the fiscal intermediary (or, if applicable, the MAC) or CMS 

made an error in tabulating data used for the wage index calculation; (2) the hospital 

knew about the error and requested that the fiscal intermediary (or, if applicable, the 

MAC) and CMS correct the error using the established process and within the established 

schedule for requesting corrections to the wage index data, before the beginning of the 

fiscal year for the applicable IPPS update (that is, by the June 6, 2011 deadline for the 

FY 2012 wage index); and (3) CMS agreed that the fiscal intermediary (or, if applicable, 

the MAC) or CMS made an error in tabulating the hospital’s wage index data and the 

wage index should be corrected. 

In those circumstances where a hospital requested a correction to its wage index 

data before CMS calculated the final wage index (that is, by the June 6, 2011 deadline), 
CMS-1518-P 339 

and CMS acknowledges that the error in the hospital’s wage index data was caused by 

CMS’ or the fiscal intermediary's (or, if applicable, the MAC’s) mishandling of the data, 

we believe that the hospital should not be penalized by our delay in publishing or 

implementing the correction. As with our current policy, we indicated that the provision 

is not available to a hospital seeking to revise another hospital’s data. In addition, the 

provision cannot be used to correct prior years’ wage index data; and it can only be used 

for the current Federal fiscal year. In other situations where our policies would allow 

midyear corrections, we continue to believe that it is appropriate to make 

prospective-only corrections to the wage index. 

 We note that, as with prospective changes to the wage index, the final retroactive 

correction will be made irrespective of whether the change increases or decreases a 

hospital’s payment rate. In addition, we note that the policy of retroactive adjustment 

will still apply in those instances where a judicial decision reverses a CMS denial of a 

hospital’s wage index data revision request. 

K. Labor-Related Share for the Proposed FY 2012 Wage Index

 Section 1886(d)(3)(E) of the Act directs the Secretary to adjust the proportion of 

the national prospective payment system base payment rates that are attributable to wages 

and wage-related costs by a factor that reflects the relative differences in labor costs 

among geographic areas. It also directs the Secretary to estimate from time to time the 

proportion of hospital costs that are labor-related: "The Secretary shall adjust the 

proportion (as estimated by the Secretary from time to time) of hospitals’ costs which are 

attributable to wages and wage-related costs of the DRG prospective payment rates..." 
CMS-1518-P 340 

We refer to the portion of hospital costs attributable to wages and wage-related costs as 

the labor-related share. The labor-related share of the prospective payment rate is 

adjusted by an index of relative labor costs, which is referred to as the wage index. 

 Section 403 of Pub. L. 108-173 amended section 1886(d)(3)(E) of the Act to 

provide that the Secretary must employ 62 percent as the labor-related share unless this 

"would result in lower payments to a hospital than would otherwise be made." However, 

this provision of Pub. L. 108-173 did not change the legal requirement that the Secretary 

estimate "from time to time" the proportion of hospitals' costs that are "attributable to 

wages and wage-related costs." We believe that this reflected Congressional intent that 

hospitals receive payment based on either a 62-percent labor-related share, or the 

labor-related share estimated from time to time by the Secretary, depending on which 

labor-related share resulted in a higher payment. 

 In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43850 through 

43856), we rebased and revised the hospital market basket for operating costs. We 

established a FY-2006-based IPPS hospital market basket to replace the FY 2002-based 

IPPS hospital market basket, effective October 1, 2009. In that final rule, we presented 

our analysis and conclusions regarding the frequency and methodology for updating the 

labor-related share for FY 2010. We also recalculated a labor-related share of 

68.8 percent, using the FY 2006-based IPPS market basket, for discharges occurring on 

or after October 1, 2009. In addition, we implemented this revised and rebased 

labor-related share in a budget neutral manner, but consistent with section 1886(d)(3)(E) 

of the Act, we did not take into account the additional payments that would be made as a 
CMS-1518-P 341 

result of hospitals with a wage index less than or equal to 1.0 being paid using a laborrelated share lower than the labor-related share of hospitals with a wage index greater 

than 1.0. 

The labor-related share is used to determine the proportion of the national IPPS 

base payment rate to which the area wage index is applied. In this proposed rule, we are 

not proposing to make any further changes to the national average proportion of 

operating costs that are attributable to wages and salaries, fringe benefits, contract labor, 

the labor-related portion of professional fees, administrative and business support 

services, and all other labor-related services (previously referred to in the FY 2002-based 

IPPS market basket as labor-intensive). 

Therefore, for FY 2012, we are proposing to continue to use a labor-related share 

of 68.8 percent for discharges occurring on or after October 1, 2011. Tables 1A and 1B, 

which are published in section VI. of the Addendum to this proposed rule and available 

via the Internet, reflect this labor-related share. We note that section 403 of Pub. L. 

108-173 amended sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act to provide that 

the Secretary must employ 62 percent as the labor-related share unless this employment 

"would result in lower payments to a hospital than would otherwise be made." Therefore, 

for all IPPS hospitals whose wage indices are less than 1.0000, we are proposing to apply 

the wage index to a labor-related share of 62 percent of the national standardized amount. 

For all IPPS hospitals whose wage indices are greater than 1.0000, we are proposing to 

apply the wage index to a labor-related share of 68.8 percent of the national standardized 

amount. 
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For Puerto Rico hospitals, the national labor-related share will always be 

62 percent because the national wage index for all Puerto Rico hospitals is less than 1.0. 

In this proposed rule, we are proposing to continue to use a labor-related share for the 

Puerto Rico-specific standardized amounts of 62.1 percent for discharges occurring on or 

after October 1, 2011. This Puerto Rico labor-related share of 62.1 percent was also 

adopted in the FY 2010 IPPS/LTCH PPS final rule (74 FR 43857) at the time the FY 

2006-based hospital market basket was established, effective October 1, 2009. 

Consistent with our methodology for determining the national labor-related share, we 

added the Puerto Rico-specific relative weights for wages and salaries, fringe benefits, 

contract labor, the labor-related portion of professional fees, administrative and business 

support services, and all other labor-related services (previously referred to in the FY 

2002-based IPPS market basket as labor-intensive) to determine the labor-related share. 

Puerto Rico hospitals are paid based on 75 percent of the national standardized amounts 

and 25 percent of the Puerto Rico-specific standardized amounts. The labor-related share 

of a hospital's Puerto Rico-specific rate will be either the Puerto Rico-specific 

labor-related share of 62.1 percent or 62 percent, depending on which results in higher 

payments to the hospital. If the hospital has a Puerto Rico-specific wage index of greater 

than 1.0, we will set the hospital's rates using a labor-related share of 62.1 percent for the 

25 percent portion of the hospital's payment determined by the Puerto Rico standardized 

amounts because this amount will result in higher payments. Conversely, a hospital with 

a Puerto Rico-specific wage index of less than 1.0 will be paid using the Puerto 

Rico-specific labor-related share of 62 percent of the Puerto Rico-specific rates because 
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the lower labor-related share will result in higher payments. The Puerto Rico 

labor-related share of 62.1 percent for FY 2012 is reflected in the Table 1C, which is 

published in section VI. of the Addendum to this proposed rule and available via the 

Internet. 

IV. Other Proposed Decisions and Changes to the IPPS for Operating Costs and 

GME Costs 

A. Hospital Inpatient Quality Reporting (IQR) Program

1. Background 

a. Overview 

 CMS is seeking to promote higher quality and more efficient health care for 

Medicare beneficiaries. This effort is supported by the adoption of an increasing number 

of widely-agreed upon quality measures. CMS has worked with relevant stakeholders to 

define measures of quality in almost every setting and measures various aspects of care 

for almost all Medicare beneficiaries. These measures assess structural aspects of care, 

clinical processes, patient experiences with care, and, increasingly, outcomes. 

CMS has implemented quality measure reporting programs for multiple settings 

of care. To measure the quality of hospital inpatient services, CMS implemented the 

Hospital Inpatient Quality Reporting (IQR) Program (formerly referred to as the 

Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) Program). In 

addition, CMS has implemented quality reporting programs for hospital outpatient 

services, the Hospital Outpatient Quality Data Reporting Program (HOP QDRP), and for 

physicians and other eligible professionals, the Physician Quality Reporting System 
CMS-1518-P 344 

(formerly referred to as the Physician Quality Reporting Program Initiative (PQRI)). 

CMS has also implemented quality reporting programs for home health agencies and 

skilled nursing facilities that are based on conditions of participation, and an end-stage 

renal disease quality incentive program that links payment to performance. 

In implementing the Hospital IQR Program and other quality reporting programs, 

we have focused on measures that have high impact and support CMS and HHS priorities 

for improved quality and efficiency of care for Medicare beneficiaries. Our goal for the 

future is to align the clinical quality measure requirements of the Hospital IQR Program 

with various other programs, including those authorized by the Health Information 

Technology for Economic and Clinical Health (HITECH) Act so that the burden for 

reporting will be reduced. 

We also are proposing to implement a Hospital Value-Based Purchasing (VBP) 

Program under section 1886(o) of the Act. On January 7, 2011, we issued a proposed 

rule to implement the Hospital VBP Program under section 1886(o) of the Act 

(76 FR 2454 through 2491) (the Hospital Inpatient VBP Program proposed rule). We are 

proposing additional policies for the Hospital VBP Program in section IV.B. of this 

proposed rule. In the Hospital Inpatient VBP Program proposed rule (76 FR 2454 

through 2491), we proposed that hospitals would receive value-based incentive payments 

if they meet performance standards with respect to measures for a performance period for 

the fiscal year involved. The measures under the Hospital VBP Program must be 

selected from the measures specified under the Hospital IQR Program. The Hospital 
CMS-1518-P 345 

VBP Program will apply to payments for discharges occurring on or after October 1, 

2012, in accordance with section 1886(o) of the Act. 

The Hospital IQR Program is intertwined with the Hospital VBP Program 

because the measures and reporting infrastructure for both programs will overlap. We 

view the Hospital VBP Program as the next step in promoting higher quality care for 

Medicare beneficiaries by transforming Medicare into an active purchaser of quality 

health care for its beneficiaries. As we stated in the Hospital Inpatient VBP Program 

proposed rule (76 FR 2455), in developing that proposed rule as well as other valuebased payment initiatives, we applied the following principles for the development and 

use of measures and scoring methodologies: 

Purpose:

 ● We view value-based purchasing as an important step to revamping how care 

and services are paid for, moving increasingly toward rewarding better value, outcomes, 

and innovations instead of merely volume. 

Use of Measures:

● Public reporting and value-based payment systems should rely on a mix of 

standards, process, outcomes, and patient experience of care measures, including 

measures of care transitions and changes in patient functional status. Across all 

programs, we seek to move as quickly as possible to the use of primarily outcome and 

patient experience measures. To the extent practicable and appropriate, outcome and 

patient experience measures should be adjusted for risk or other appropriate patient 

population or provider characteristics. 
CMS-1518-P 346 

 ● To the extent possible and recognizing differences in payment system maturity 

and statutory authorities, measures should be aligned across public reporting and payment 

systems under Medicare and Medicaid. The measure sets should evolve so that they 

include a focused core set of measures appropriate to the specific provider category that 

reflects the level of care and the most important areas of service and measures for that 

provider. 

● The collection of information should minimize the burden on providers to the 

extent possible. As part of that effort, we will continuously seek to align our measures 

with the adoption of meaningful use standards for health information technology (HIT), 

so the collection of performance information is part of care delivery. 

● To the extent practicable, measures used by CMS should be nationally 

endorsed by a multi-stakeholder organization. Measures should be aligned with best 

practices among other payers and the needs of the end users of the measures. 

We invite public comment on these principles. 

b. Statutory History and History of Measures Adopted for the Hospital IQR Program 

 We refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule 

(74 FR 43860) and the FY 2011 IPPS/LTCH PPS final rule (75 FR 50180) for detailed 

discussions of the history of the Hospital IQR Program, including the statutory history 

and the measures we have adopted for the Hospital IQR measure set through FY 2014. 

 Section 1886(b)(3)(B)(viii)(V) of the Act requires that, effective for payments 

beginning with FY 2008, the Secretary to add quality measures that reflect consensus 

among affected parties, and to the extent feasible and practicable, have been set forth by 
CMS-1518-P 347 

one or more national consensus building entities. We are seeking comments on an option 

that would allow us from time to time to consider a range of consensus endorsement 

entities or bodies that can assist us with our measure development process. We believe 

that this approach would provide for a diverse endorsement process and the best body of 

evidence to support quality measures used in our quality programs. 

c. Maintenance of Technical Specifications for Quality Measures 

The technical specifications for the Hospital IQR Program measures, or links to 

Web sites hosting technical specifications, are contained in the CMS/The Joint 

Commission Specifications Manual for National Hospital Inpatient Quality Measures 

(Specifications Manual). This Specifications Manual is posted on the CMS QualityNet 

Web site at https://www.QualityNet.org. We maintain the technical specifications by 

updating this Specifications Manual semiannually, or more frequently in unusual cases, 

and include detailed instructions and calculation algorithms for hospitals to use when 

collecting and submitting data on required measures. These semiannual updates are 

accompanied by notifications to users, providing sufficient time between the change and 

the effective date in order to allow users to incorporate changes and updates to the 

specifications into data collection systems. 

The technical specifications for the HCAHPS patient experience of care survey 

are contained in the current HCAHPS Quality Assurance Guidelines manual, which is 

available at the HCAHPS On-Line Web site, http://www.hcahpsonline.org. We maintain 

the HCAHPS technical specifications by updating the HCAHPS Quality Assurance 

Guidelines manual annually, and include detailed instructions on survey implementation, 
CMS-1518-P 348 

data collection, data submission and other relevant topics. As necessary, HCAHPS 

Bulletins are issued to provide notice of changes and updates to technical specifications 

in HCAHPS data collection systems. 

d. Public Display of Quality Measures 

Section 1886(b)(3)(B)(viii)(VII) of the Act, as amended by section 3001(a)(2) of 

the Affordable Care Act, requires that the Secretary establish procedures for making 

information regarding measures submitted available to the public after ensuring that a 

hospital has the opportunity to review its data before they are made public. We are 

proposing to display information regarding the measures (such as names of measures for 

which data will be displayed in the future) on the Hospital Compare Web site under this 

provision, and invite public comment on this proposal. We will continue our current 

practice of reporting data from the Hospital IQR Program as soon as it is feasible on 

CMS Web sites such as the Hospital Compare Web site, 

http://www.hospitalcompare.hhs.gov after a 30-day preview period. 

The Hospital Compare Web site is an interactive Web tool that assists 

beneficiaries by providing information on hospital quality of care to those who need to 

select a hospital. It further serves to encourage beneficiaries to work with their doctors 

and hospitals to discuss the quality of care hospitals provide to patients, thereby 

providing an additional incentive to hospitals to improve the quality of care that they 

furnish. The Hospital IQR Program currently includes process of care measures, riskadjusted outcome measures, the HCAHPS patient experience-of-care survey, and 

structural measures, all of which are featured on the Hospital Compare Web site. 
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However, information that may not be relevant to or easily understood by 

beneficiaries and information for which there are unresolved display issues or design 

considerations for inclusion on Hospital Compare may be made available on other CMS 

Web sites that are not intended to be used as an interactive Web tool, such as 

http://www.cms.hhs.gov/HospitalQualityInits/. Publicly reporting the information in this 

manner, though not on the Hospital Compare Web site, allows CMS to meet the 

requirement under section 1886(b)(3)(B)(viii)(VII) of the Act for establishing procedures 

to make information regarding measures submitted under the Hospital IQR Program 

available to the public following a preview period. In such circumstances, affected 

parties are notified via CMS listservs, CMS e-mail blasts, national provider calls, and 

QualityNet announcements regarding the release of preview reports followed by the 

posting of data on a Web site other than Hospital Compare. 

2. Retirement of Hospital IQR Program Measures 

a. Considerations in Retiring Quality Measures from the Hospital IQR Program 

We generally retain measures from the previous year’s Hospital IQR Program 

measure set for subsequent years’ measure sets. We previously retired one “topped out” 

measure, PN-1: Oxygenation Assessment for Pneumonia, from the Hospital IQR Program 

on the basis of high unvarying performance among hospitals, because measures with very 

high performance among hospitals present little opportunity for improvement, and do not 

provide meaningful distinctions in performance for consumers. 

We also have retired one measure from the Hospital IQR Program because it no 

longer “represent[ed] the best clinical practice,” as required under 
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section 1886(b)(3)(B)(viii)(VI) of the Act. We stated that when there is reason to believe 

that the continued collection of a measure as it is currently specified raises potential 

patient safety concerns, we believe that it is appropriate for CMS to take immediate 

action to remove a measure from the Hospital IQR Program and not wait for the annual 

rulemaking cycle. Therefore, we adopted the policy (74 FR 43864 and 43865) that we 

would promptly retire such a measure, confirm the retirement in the next IPPS 

rulemaking cycle, and notify hospitals and the public of the decision to promptly retire 

measures through the usual hospital and QIO communication channels used for the 

Hospital IQR Program. These channels include memos and email notification and 

QualityNet Web site articles and postings. 

As we stated in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50185), among 

the criteria that we consider when determining whether to retire Hospital IQR Program 

measures are the following: (1) measure performance among hospitals is so high and 

unvarying that meaningful distinctions and improvements in performance can no longer 

be made; (2) performance or improvement on a measure does not result in better patient 

outcomes; (3) a measure does not align with current clinical guidelines or practice; (4) the 

availability of a more broadly applicable (across settings, populations, or conditions) 

measure for the topic; (5) the availability of a measure that is more proximal in time to 

desired patient outcomes for the particular topic; (6) the availability of a measure that is 

more strongly associated with desired patient outcomes for the particular topic; 

(7) collection or public reporting of a measure leads to negative unintended consequences 

other than patient harm. These criteria were suggested by commenters during 
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rulemaking, and we agreed that these criteria should be among those considered in 

evaluating Hospital IQR Program measures for retirement. 

b. Proposed Retirement of Hospital IQR Program Measures for the FY 2014 Payment 

Determination and Subsequent Years 

In order to reduce the reporting burden on hospitals, and in particular, the burden 

associated with reporting chart-abstracted measures, we have considered options to 

accommodate the expansion of the measure set through the retirement of additional 

Hospital IQR measures. Specifically, we have considered retiring one or more of the 

measures suggested by various commenters that were listed in the 

FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43865). We noted in that final rule 

that commenters recommended for retirement 11 Hospital IQR Program chart-abstracted 

measures. Seven of these 11 measures were recommended by commenters for retirement 

based on their performance being uniformly high nationwide, with little variability 

among hospitals (topped-out measures). Based on our own analysis, we concluded that 

these measures are topped out and for this reason, we proposed not to include them in the 

FY 2013 Hospital VBP Program measure set (76 FR 2460). These measures are listed 

below: 

● AMI-1 Aspirin at arrival 

● AMI-3 ACEI/ARB for left ventricular systolic dysfunction 

● AMI-4 Adult smoking cessation advice/counseling 

● AMI-5 Beta-blocker prescribed at discharge 

● HF-4 Adult smoking cessation advice/counseling 
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● PN-4 Adult smoking cessation advice/counseling 

● SCIP INF-6 Appropriate Hair Removal 

The methodology we used to determine that these measures are topped out is 

detailed in the Hospital Inpatient VBP Program proposed rule (76 FR 2460). We are 

proposing to retire these topped out measures from the Hospital IQR measure set. In 

addition, we proposed to not include an eighth measure in the FY 2013 Hospital VBP 

Program measure set because we believe that inclusion of this measure would result in 

the unintended consequence of inappropriate antibiotic use (76 FR 2462). This measure 

is PN-5c Timing of receipt of initial antibiotic following hospital arrival. We are also 

proposing to retire this measure from the Hospital IQR Program because of the potential 

for this negative unintended consequence. 

For these reasons, we are proposing to retire these eight measures from the 

Hospital IQR measure set for FY 2014 and subsequent years, and that hospitals would no 

longer be required to submit data on these measures starting with January 1, 2012 

discharges We invite public comment on this proposal. 

3. Proposed Measures for the FY 2014 and FY 2015 Hospital IQR Payment 

Determinations

a. Considerations in Expanding and Updating Quality Measures under the Hospital IQR 

Program 

In general, we seek to adopt measures for the Hospital IQR Program that promote 

better, safer, more efficient care. Our measure development and selection activities for 

the Hospital IQR Program take into account national priorities, such as those established 
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by the National Priorities Partnership, HHS Strategic Plan, the National Strategy for 

Quality Improvement in Healthcare, as well as other widely accepted criteria established 

in medical literature. (We refer readers to the following Web sites regarding these 

priorities: http://www.nationalprioritiespartnership.org/ (National Priorities Partnership); 

http://www.hhs.gov/secretary/about/priorities/priorities.html (HHS Strategic Plan); and 

http://www.healthcare.gov/center/reports/quality03212011a.html (National Strategy for 

Quality Improvement in Healthcare)). To the extent practicable, we have sought to adopt 

measures which have been endorsed by a national consensus organization, recommended 

by multi-stakeholder organizations, and developed with the input of providers, 

purchasers/payers and other stakeholders. Because measures for the Hospital VBP 

Program must be selected from the measures specified for the Hospital IQR Program, the 

measures to be selected for inclusion in the Hospital VBP Program also reflect these 

priorities. In addition, we believe it is important to expand the pool of measures to 

include measures that are directed toward improving patient safety. This goal is 

supported by at least two Federal reports documenting that tens of thousands of patients 

do not receive safe care in the nation’s hospitals.6 7

Section 3001(a)(2) of the Affordable Care Act amended the Act by adding a new 

section 1886(b)(3)(B)(viii)(VIII) of the Act. This section states that, “[e]ffective for 

payments beginning with fiscal year 2013, with respect to quality measures for outcomes 

of care, the Secretary shall provide for such risk adjustment as the Secretary determines 

 

6

 OEI–06–09–00090, ‘‘Adverse Events in Hospitals: National Incidence Among Medicare Beneficiaries.’’ 

Department of Health and Human Services, Office of Inspector General, November 2010. 

7

 2009 National Healthcare Quality Report, pp. 107–122. ‘‘Patient Safety,’’ Agency for Healthcare 

Research and Quality. 
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to be appropriate to maintain incentives for hospitals to treat patients with severe illnesses 

or conditions.” Section 3001(a)(2) of the Affordable Care Act also added new sections 

1886(b)(3)(B)(viii)(IX)(aa) and (bb) of the Act. These sections state that “. . . effective 

for payments beginning with fiscal year 2013, each measure specified by the Secretary 

under this clause shall be endorsed by the entity with a contract under section 1890(a) [of 

the Act],” and “[i]n the case of a specified area or medical topic determined appropriate 

by the Secretary for which a feasible and practical has not been endorsed by the entity 

with a contract under section 1890(a) [of the Act], the Secretary may specify a measure 

that is not so endorsed as long as due consideration is given to measures that have been 

endorsed or adopted by a consensus organization identified by the Secretary.” In the 

FY 2011 IPPS/LTCH PPS final rule, we established that all of the measures adopted in 

that rule for the FY 2013 and FY 2014 payment determinations meet these standards 

(75 FR 50200). 

We have previously acknowledged the data collection burden for hospitals 

participating in the Hospital IQR Program, and reiterated our desire to expand the 

Hospital IQR Program measure set while minimizing burden and seeking to provide 

alternative mechanisms for data submission (75 FR 50189). We also stated that in future 

expansions and updates to the Hospital IQR Program measure set, we would be taking 

into consideration several important goals. These goals include: (a) expanding the types 

of measures beyond process of care measures to include an increased number of outcome 

measures, efficiency measures, and patients' experience-of-care measures; (b) expanding 

the scope of hospital services to which the measures apply; (c) considering the burden on 
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hospitals in collecting chart-abstracted data; (d) harmonizing the measures used in the 

Hospital IQR Program with other CMS quality programs to align incentives and promote 

coordinated efforts to improve quality; (e) seeking to use measures based on alternative 

sources of data that do not require chart abstraction or that utilize data already being 

reported by many hospitals, such as data that hospitals report to clinical data registries, or 

all-payer claims databases; and, (f) weighing the relevance and utility of the measures 

compared to the burden on hospitals in submitting data under the Hospital IQR Program. 

Specifically, we give priority to measures that assess performance on: 

(a) conditions that result in the greatest mortality and morbidity in the Medicare 

population; (b) conditions that are high volume and high cost for the Medicare program; 

and, (c) conditions for which wide cost and treatment variations have been reported, 

despite established clinical guidelines. We have used and continue to use these criteria to 

guide our decisions regarding what measures to add to the Hospital IQR Program 

measure set. In addition, in selecting measures, we seek to address the six quality aims of 

effective, safe, timely, efficient, patient-centered, and equitable healthcare. Current and 

long term priority topics include: prevention and population health; safety; chronic 

conditions; high cost and high volume conditions; elimination of health disparities; 

healthcare-associated infections (HAIs) and other adverse healthcare outcomes; improved 

care coordination; improved efficiency; improved patient and family experience of care; 

effective management of acute and chronic episodes of care; reduced unwarranted 

geographic variation in quality and efficiency; and adoption and use of interoperable 

HIT. 
CMS-1518-P 356 

 Hospital IQR Program measures were initially based solely on a hospital’s 

submission of chart-abstracted quality measure data. However, in recent years we have 

adopted measures that do not require chart abstraction, including structural measures and 

claims-based measures that we can calculate using other data sources. This approach 

supports our goal of expanding the measures for the Hospital IQR Program while 

minimizing the burden on hospitals and, in particular, without significantly increasing the 

chart abstraction burden. 

In addition to structural measures and claims-based measures, we previously 

noted that registries are potential alternative sources of hospital data for the Hospital IQR 

Program. (A registry is a collection of clinical data for purposes of assessing clinical 

performance, quality of care, and opportunities for quality improvement.) We envisioned 

that instead of requiring hospitals to submit the same data to CMS that many hospitals are 

already submitting to registries, we would collect the data directly from the registries. 

This could enable the expansion of the Hospital IQR Program measure set without 

increasing the burden of data collection for those hospitals participating in the registries. 

We have previously adopted structural measures of registry participation, and we 

continue to evaluate the feasibility of leveraging registry-based data collection 

mechanisms for the Hospital IQR Program. 

 We also stated our intention to explore mechanisms for data submission using 

electronic health records (EHRs) (73 FR 48614; 74 FR 43866, 43892; and 75 FR 50189). 

Establishing such a system will require interoperability between EHRs and CMS data 

collection systems, additional infrastructure development on the part of hospitals and 
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CMS, and the adoption of standards for capturing, formatting, and transmitting the data 

elements that make up the measures. However, once these activities are accomplished, 

the adoption of measures that rely on data obtained directly from EHRs will enable us to 

expand the Hospital IQR Program measure set with less cost and burden to hospitals. We 

believe that automatic collection and reporting of data through EHRs will greatly 

simplify and streamline reporting for various CMS quality reporting programs, and that at 

a future date, such as FY 2015, hospitals will be able to switch solely to EHR-based 

reporting of data that are currently manually chart-abstracted and submitted to CMS for 

the Hospital IQR Program. 

 We reiterate our commitment to pursue our goals to expand and update quality 

measures under the Hospital IQR Program and also to minimize burden. We note that in 

addition to the input we described above, we take into consideration the measures 

adopted by the Hospital Quality Alliance (HQA) as well as an array of input from the 

public. The HQA is a national public-private collaboration that is committed to making 

meaningful, relevant, and easily understood information about hospital performance 

accessible to the public and to informing and encouraging efforts to improve quality. We 

appreciate HQA’s integral efforts to improve hospital quality of care and its support of 

our public quality reporting programs. 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50191 through 502192), we 

finalized our proposal to adopt measures for the Hospital IQR Program for three 

consecutive payment determinations. The intent of this policy was to provide greater 

certainty for hospitals to plan to meet future reporting requirements and implement 
CMS-1518-P 358 

related quality improvement efforts. Aside from giving hospitals more advance notice in 

planning quality reporting, this 3-year approach also provides more time for us to 

prepare, organize and implement the infrastructure needed to collect data on the measures 

and make payment determinations. We indicated, however, that these preliminary 

measure sets could still be updated through the rulemaking process should we need to 

respond to agency and/or legislative changes. 

Finally, in section IV.A.5.a.(2) of the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50219 through 50220), we adopted a proposal to make Hospital IQR Program 

payment determinations beginning with FY 2013 using one calendar year of data for 

chart-abstracted measures. We will use this approach, which synchronizes the quarters 

for which data on these measures must be submitted during each year with the quarters 

used to make payment determinations with respect to a fiscal year beginning with 

January 1, 2011 discharges. However, it will not affect our payment determinations until 

FY 2013. 

Section 1886(o)(2)(A) of the Act requires the Secretary to select measures, other 

than readmission measures, for the Hospital VBP Program from the measures specified 

under the Hospital IQR Program. Section 1886(o)(2)(B)(i)(I) of the Act states that, for 

FY 2013, the selected measures must cover at least the following five specified 

conditions or procedures: Acute myocardial infarction (AMI), Heart failure (HF), 

Pneumonia (PN), Surgeries, as measured by the Surgical Care Improvement Project 

(SCIP), and Healthcare-associated infections (HAIs), as measured by the prevention 

metrics and targets established in the HHS Action Plan to Prevent Healthcare-Associated 
CMS-1518-P 359 

Infections (or any successor plan) of the Department of Health and Human Services. 

Section 1886(o)(2)(B)(i)(II) of the Act provides that, for FY 2013, measures selected for 

the Hospital Inpatient Program must also be related to the Hospital Consumer 

Assessment of Healthcare Providers and Systems survey (HCAHPS). 

In selecting measures for the Hospital IQR Program, we are mindful of the 

conceptual framework of the Hospital VBP Program. We will focus on selecting 

measures that we believe will also meet the Hospital VBP Program measure inclusion 

criteria and advance the goals of the Hospital VBP Program by targeting hospitals’ ability 

to improve patient care and patient outcomes. 

In addition, in order to support HHS priorities such as patient safety and reduction 

of HAIs and readmissions, and meet more of the widespread goals of the Affordable Care 

Act in terms of improving the quality of care provided to Medicare beneficiaries, we are 

proposing in this proposed rule to adopt measures for the FY 2014 and FY 2015 Hospital 

IQR payment determinations. However, we note that the final measure sets to be used 

for these years’ payment determinations could be changed via future rulemaking. This 

allows CMS the flexibility to accommodate changes in program needs and legislative 

changes. We invite public comment on these proposals. 
CMS-1518-P 360 

b. Proposed Hospital IQR Program Measures for the FY 2014 Hospital IQR Payment 

Determination 

(1) Proposed Retention of 52 Hospital IQR Program Measures Finalized in the FY 2011 

IPPS/LTCH PPS Final Rule for the FY 2014 Payment Determination 

 We previously finalized 60 measures for the FY 2014 Hospital IQR Program 

measure set. However, as we discussed above, we are proposing to retire 8 measures 

from the FY 2014 measure set. We are proposing to retain the remaining 52 the 60 

quality measures finalized in the FY 2011 IPPS/LTCH PPS final rule for the FY 2014 

payment determination. We invite public comment on our proposal to retain 52 quality 

measures for the FY 2014 payment determination. 

(2) Proposed Additional Hospital IQR Program Measures for the FY 2014 Payment 

Determination 

(A) Proposed CDC/NHSN-Based Healthcare-Associated Infection (HAI) Measures 

HAIs are among the leading causes of death in the U.S. The Centers for Disease 

Control (CDC) estimates that as many as 2 million infections are acquired each year in 

hospitals and result in approximately 90,000 deaths per year.8

 It is estimated that more 

Americans die each year from HAIs than from auto accidents and homicides combined. 

HAIs not only put the patient at risk, but also increase the days of hospitalization required 

for patients and add considerable health care costs. 

 

8 McKibben L, Horan T, Guidance on public reporting of healthcareassociated infections: Recommendations of the Healthcare 

Infection Control Practices Advisory Committee. AJIC 2005; 

33:217-26
CMS-1518-P 361 

 HAIs are largely preventable with widely publicized interventions such as better 

hygiene and advanced scientifically tested techniques for surgical patients. Therefore, 

the public reporting of HAIs has been of great interest to many health care consumers and 

advocacy organizations because it promotes awareness and permits health care 

consumers to choose the hospitals with lower HAI rates, as well as gives hospitals an 

incentive to improve infection control efforts. To maximize the efficiency and improve 

the coordination of HAI prevention efforts across the Department, HHS established in 

2008 a senior-level Steering Committee for the Prevention of Healthcare-Associated 

Infections. In 2009, the Steering Committee, along with scientists and program officials 

across the government, developed the HHS Action Plan to Prevent Healthcare-Associated 

Infections, providing a roadmap for HAI prevention in acute care hospitals. In the first 

iteration of the Action Plan, the Steering Committee chose to focus on infections in acute 

care hospitals because the associated morbidity and mortality was most severe in that 

setting and the scientific information on prevention and the capacity to measure 

improvement was most complete. Thus, prevention of HAIs in acute care hospitals 

became the first phase of the Action Plan and it focuses on six high priority HAI-related 

areas. 

In addition, the Steering Committee included in the Action Plan five-year goals 

for nine specific measures of improvement tied to the six HAI prevention priority areas. 

Since the release of the first Action Plan in June 2009, the Steering Committee has been 

developing a successor plan in collaboration with public and private partners which is 

expected to incorporate advances in science and technology and expand the scope to the 
CMS-1518-P 362 

outpatient environment. The successor plan is also expected to address the health and 

safety of healthcare personnel, as well as the risks of influenza transmission from 

healthcare personnel to patients. The second Action Plan is due for publication in 2011. 

We also note that the House Committee on Appropriations asked in a 2009 Report 

that CMS include in its "pay for reporting" system two infection control measures 

developed by the Hospital Quality Alliance (HQA) -- Central line-associated bloodstream 

infections and a surgical site infection rate (H. Rep. No. 111-220, at 159 (2009)). In the 

report, the Committee stated that “if the measures are included in Hospital Compare, the 

public reporting of the data is likely to reduce HAI occurrence, an outcome demonstrated 

in previous research.”

 In the FY 2011 IPPS/LTCH PPS final rule, we adopted the two HAI measures 

identified by the House Committee on Appropriations in its 2009 report: Central Line 

[catheter] Associated Blood Stream Infection (CLABSI) measure, and Surgical Site 

Infection (SSI) measure. The CLABSI measure is currently part of the FY 2013 Hospital 

IQR measure set, and data submission on the measure began with January 2011 events.9 

The Surgical Site Infection (SSI) measure is currently part of the FY 2014 Hospital IQR 

measure set, and data submission on the measure will begin with January 2012 events. 

In this proposed rule, we are proposing to adopt two additional HAI measures for the FY 

2014 Hospital IQR measure set. These proposed measures were developed by the CDC and are 

currently collected by the CDC via the NHSN. These measures are: (1) Central Line Bundle 

Compliance (NQF #0298) (referred to by the CDC and in this proposed rule as Central Line 

Insertion Practices, or CLIP); and (2) Catheter Associated Urinary Tract Infection (CAUTI) (NQF 

 

9

 The CDC captures HAI data based on the onset of an event, rather than based on the discharge date. 
CMS-1518-P 363 

#138). Both measures are high priority HAI measures that are included among the 

prevention metrics established in the HHS Action Plan to Prevent HAIs which, as we 

noted above, underscores the importance of reducing HAIs. As detailed below, both 

measures also meet Hospital IQR Program statutory requirements for measure selection. 

Furthermore, both measures are currently collected by the NHSN, which is a secure, 

Internet-based surveillance system maintained and managed by the CDC, and can be 

utilized by all types of healthcare facilities in the U.S., including acute care hospitals, 

long term acute care hospitals, psychiatric hospitals, rehabilitation hospitals, outpatient 

dialysis centers, ambulatory surgery centers, and long term care facilities. The NHSN 

enables healthcare facilities to collect and use data about HAIs, adherence to clinical 

practices known to prevent HAIs, the incidence or prevalence of multidrug-resistant 

organisms within their organizations, and other adverse events. Some States use NHSN 

as a means for healthcare facilities to submit patient-level data on the measures mandated 

through their specific State legislation. Currently, 28 States require hospitals to report 

HAIs using NHSN, and CDC provides support to more than 4,000 hospitals that are using 

NHSN. NHSN data collection occurs via a Web-based tool hosted by CDC provided free 

of charge to providers. In addition, data submission for HAI measures through EHRs 

may be possible in the near future. 

(i) Central Line Insertion Practice Adherence Percentage (CLIP) 

Central line associated blood stream infections (CLABSIs) can be prevented 

through proper management of the central line. The CDC’s Healthcare Infection Control 

Practices Advisory Committee (CDC/HICPAC) Guidelines for the Prevention of 
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Intravascular Catheter-Related Infectionsrecommends evidence-based central line 

insertion practices known to reduce the risk of subsequent central line-associated 

bloodstream infection.10 These include hand-washing by inserters, use of maximal sterile 

barriers during insertion, proper use of a skin antiseptic prior to insertion, and allowing 

that skin antiseptic to dry before catheter insertion. Despite the scientific evidence 

supporting these practices, several reports suggest that adherence to these practices 

remains low in United States hospitals. The proposed CLIP process measure is a 

companion measure to the previously adopted CLABSI measure, and it assesses the 

extent to which a facility employs practices consistent with CDC/HICPAC 

recommendations that are known to reduce CLABSI. There are 2 States that currently 

require facilities to report to NHSN at least one month of CLIP data. 

The CLIP measure is used in State reporting initiatives and is an NQF-endorsed 

measure (NQF #298) that is operationalized for collection via the NHSN. Therefore, the 

measure meets the selection criteria under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act. 

This CLIP prevention metric is also listed in the HHS Action Plan to Prevent HAIs and, 

as we detailed above, has been widely identified as a high priority for public reporting. 

(ii) Catheter Associated Urinary Tract Infection (CAUTI) 

 The urinary tract is the most common site of HAI, accounting for more than 

30 percent of infections reported by acute care hospitals.11 Healthcare-associated urinary 

tract infections (UTIs) are commonly attributed to catheterization of the urinary tract. 

 

10 O’Grady NP, Alexander M, Dellinger EP, Gerberding JL, Heard SO, Maki DG, et al., Guidelines for the 

prevention of intravascular catheter-related infections. MMWR 2002;51(No. RR-10:1-26). 

11 Klevens RM, Edward JR, et al., Estimating health care-associated infections and deaths in U.S. hospitals, 

2002. Public Health Reports 2007;122:160-166. 
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CAUTI can lead to such complications as cystitis, pyelonephritis, gram-negative 

bacteremia, prostatitis, epididymitis, and orchitis in males and, less commonly, 

endocarditis, vertebral osteomyelitis, septic arthritis, endophthalmitis, and meningitis in 

all patients. Complications associated with CAUTI cause discomfort to the patient, 

prolonged hospital stay, and increased cost and mortality. Each year, more than 13,000 

deaths are associated with UTIs.12 Prevention of CAUTIs is discussed in the 

CDC/HICPAC document, Guideline for Prevention of Catheter-associated Urinary Tract 

Infections. The NQF-endorsed CAUTI measure we are proposing is currently collected 

by the NHSN as part of State-mandated reporting and surveillance requirements for 

hospitals. There are 3 States that require facilities to report to NHSN at least one month 

of CAUTI data. 

Section 1886(b)(3)(B)(viii)(IX)(aa) of the Act requires that effective for payments 

beginning with FY 2013, each measure specified by the Secretary for inclusion in the 

Hospital IQR Program be endorsed by the entity with a contract under section 1890(a) of 

the Act, unless the exception set forth in section 1886(b)(3)(B)(viii)(IX)(bb) of the Act 

applies. The NQF currently holds the contract under section 1890(a) of the Act, and the 

NQF has endorsed this CAUTI measure (NQF #138). For this reason, we believe that 

this measure satisfies the endorsement requirement applicable to the Hospital IQR 

Program. This proposed measure is currently risk stratified,and therefore is consistent 

with section 1886(b)(3)(B)(viii)(VIII) of the Act. Risk stratification means that it is 

calculated using different categories of patients with varying risk of developing an 

 

12 Wong ES., Guideline for prevention of catheter-associated urinary tract infections. Infect Control 

1981;2:126-30. 
CMS-1518-P 366 

infection. At the time of this proposed rule, this CAUTI measure (NQF # 138) is 

undergoing measure maintenance review by the NQF and we note that the review may 

result in changes to the specifications. We invite public comment on our proposal to 

adopt these two HAI measures into the Hospital IQR Program for the FY 2014 payment 

determination. We are proposing that hospitals would begin submitting data on these 

measures beginning with events that occur on or after January 1, 2012. We are also 

proposing that hospitals use the NHSN infrastructure and protocols, as well as the 

specifications (available at 

http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf) to report the measures for 

Hospital IQR Program purposes. The proposed reporting mechanism for these HAI 

measures is discussed in greater detail in section IV.A.5.i. of this proposed rule. 

(B) Proposed New Claims-Based Measure 

 We are proposing to add the following new claim-based measure to the Hospital 

IQR Program measure set for the FY 2014 payment determination: Medicare Spending 

per Beneficiary. The details of this measure are discussed below. 

(i) Medicare Spending per Beneficiary Measure 

Healthcare costs consume an ever-increasing amount of our Nation’s resources, 

straining family, business, and government budgets. Healthcare costs take up a growing 

share of Federal and State budgets and imperil the governments’ long-term fiscal 

outlooks. In the U.S., the sources of inefficiency that are leading to rising healthcare 

costs include payment systems that reward medical inputs rather than outcomes. 
CMS-1518-P 367 

Medicare is transforming from a system that rewards volume of service to one that 

rewards efficient, effective care and reduces delivery system fragmentation. 

In order to further this transformation and help address the critical issue of health 

care costs, we are proposing to add a measure of Medicare spending per beneficiary to 

the Hospital IQR Program measure set for the FY 2014 payment determination. This 

proposed Medicare spending per beneficiary measure addressing the cost of care is a type 

of measure that is not currently included in the Hospital IQR Program. We are not aware 

that the NQF or any other consensus organizations under section 1886(b)(3)(B)(viii)(IX) 

of the Act have currently endorsed any Medicare spending per beneficiary measures. We 

will give due consideration under section 1886(b)(3)(B)(viii)(IX)(bb) of the Act to any 

Medicare spending per beneficiary measures that become endorsed in the future. It is 

important that the cost of care be explicitly measured so that, in conjunction with other 

measures that we have adopted and are proposing to adopt for the Hospital IQR Program, 

we can recognize hospitals that are involved in the provision of high quality care at lower 

cost. 

We are proposing that this Medicare spending per beneficiary measure would be 

calculated using claims data for hospital discharges occurring between May 15, 2012 and 

February 14, 2013. Therefore, the addition of this proposed measure would not increase 

the data submission burden on hospitals. We outline below the methodology that we are 

proposing to use to calculate the measure, if finalized. 
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● The Medicare Spending per Beneficiary Episode 

In order to calculate the Medicare spending per beneficiary for each hospital, we 

believed that it would be necessary to determine: (1) the timeframe, or length of the 

“spending per beneficiary episode” during which Medicare payments would be 

aggregated; (2) the types of Medicare payments to be aggregated over this timeframe; 

and (3) how to adjust or standardize these payments across hospitals (for example, risk 

adjustment). 

● Length of the Medicare Spending per Beneficiary Episode 

We are proposing an episode that runs from three days prior to an inpatient PPS 

hospital admission (the index admission) through 90 days post hospital discharge. We 

are proposing to include the time period 90 days post hospital discharge in order to 

emphasize the importance of care transitions and care coordination in improving patient 

care. We believe inclusion of this time period surrounding the hospital admission would 

reinforce the need to reduce adverse outcomes, including readmissions. Encouraging 

delivery of coordinated care in an efficient manner is an important goal which can best be 

achieved through inclusion of Medicare payments made outside the timeframe of the 

hospital inpatient stay. 

We recognize that some outcome measures are based on an episode that runs 30 

days post discharge. We considered proposing 30 days as the post discharge time period 

for the episode. However, we believe this shorter time period does not place sufficient 

emphasis on longer term care transitions and care coordination. Nevertheless, while we 

are proposing a 90 day post discharge period, we seek public comment on an alternative 
CMS-1518-P 369 

30 day time period for the initial implementation of this measure that would be more 

consistent with the 30 day time period currently in use for some outcome measures. 

● Medicare Payments Included in the Spending per Beneficiary Episode 

In order to calculate the Medicare spending per beneficiary, it is necessary to 

define the Medicare payments included in the spending per beneficiary episode. Subject 

to the adjustments described below, we are proposing to include all Medicare Part A and 

Part B payments made for services provided to the beneficiary during the episode, 

including payments made by beneficiaries that we can determine using our claims data, 

such as Part B deductibles and coinsurance amounts. As with the 90 day post discharge 

period, we believe that this comprehensive inclusion of Medicare Part A and Part B 

spending emphasizes the importance of care coordination in improving patient care. 

Encouraging delivery of coordinated care in an efficient manner over an extended time 

period is an important goal which can best be achieved through the inclusion of 

comprehensive Medicare Part A and Part B spending. 

We also are proposing that transfers, readmissions, and additional admissions that 

began during the 90-day post discharge window of an index admission would be included 

in the episode used for calculating the measure. 

We are proposing to exclude from the Medicare spending per beneficiary 

calculation episodes where at any time during the episode the beneficiary is not enrolled 

in both Medicare Part A and Medicare Part B, including if the beneficiary is enrolled in a 

Medicare Advantage plan at any time during the episode or becomes deceased. We also 

are proposing to exclude any episodes where the beneficiary is covered by the Railroad 
CMS-1518-P 370 

Retirement Board. We also propose to exclude any episodes where Medicare is a 

secondary payer. The rationale for exclusion of these episodes from the calculation of 

the Medicare spending per beneficiary is that we do not have full payment data to 

identify and standardize spending which would otherwise be attributable to these 

episodes. 

● Adjusting the Medicare Payments Included in the Spending per Beneficiary Episode 

Section 1886(o)(2)(B)(ii) of the Act requires that a Medicare spending per 

beneficiary measure adopted for the Hospital VBP Program be “adjusted for factors such 

as age, sex, race, severity of illness, and other factors that the Secretary determines 

appropriate.” Consistent with these statutory requirements, we are proposing to adjust 

the proposed Medicare spending per beneficiary measure for age and severity of illness. 

We are proposing to adjust for severity of illness based on the hierarchical condition 

categories (HCCs) for the period 90 days prior to the episode and based on the MS-DRG 

during the index admission. Adding the MS-DRG to the use of the HCC improves the 

severity of illness adjustment and better standardizes the data, allowing for more valid 

comparisons of Medicare spending per beneficiary amounts across hospitals. Note that 

we would exclude episodes where the beneficiary is not enrolled in both Medicare Part A 

and Medicare Part B, for the 90 days prior to the episode because we would not be able to 

capture all the data necessary for the severity of illness adjustment. 

We are not proposing to adjust the Medicare spending per beneficiary for sex and 

race, consistent with our understanding of NQF’s position strongly discouraging 

adjusting measures based on these factors. 
CMS-1518-P 371 

In addition, we are proposing to exclude geographic payment rate differences (for 

example, based on the wage index and geographic practice cost index) in order to 

standardize the spending per beneficiary. Note, we are not proposing to adjust for 

geographic differences in spending that are unrelated to geographic payment rate 

differences. However, we seek comment on whether there are geographic factors other 

than payment rate differences that should be considered in the spending per beneficiary 

measure. We also propose to standardize spending by excluding the portion of IPPS 

payments resulting from the payment differentials caused by Hospital-Specific Rates, 

IME, and DSH. Note that we are not proposing to exclude spending for hospitals that are 

paid Hospital-Specific Rates, rather we are proposing to exclude the differential 

additional spending that results from the use of the Hospital-Specific Rates. Again, 

making these adjustments allows for more valid comparisons of Medicare spending per 

beneficiary amounts across hospitals. For example, without adjusting for geographic 

payment rate differences, a hospital might have higher or lower spending per beneficiary 

amounts compared to other hospitals based on its wage index and not its performance. 

● Calculating a Hospital’s Medicare Spending per Beneficiary Amount 

For each subsection (d) hospital participating in the Hospital IQR Program, we 

are proposing to add together all the adjusted Medicare Part A and Part B payments, as 

defined above, included in all the Medicare spending per beneficiary episodes, as defined 

above, for that hospital. We would then divide this sum by the total number of Medicare 

Spending per Beneficiary episodes for that hospital. The resulting amount would 

constitute the hospital’s Medicare spending per beneficiary amount for the period. The 
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discharge period that we are proposing to apply the proposed measure for the FY 2014 

Hospital IQR Program is May 15, 2012 through February 14, 2013. 

● Calculating a Hospital’s Medicare Spending per Beneficiary Ratio 

We are proposing to calculate a hospital’s Medicare spending per beneficiary 

ratio as the hospital’s Medicare spending per beneficiary amount divided by the median 

Medicare spending per beneficiary amount across all hospitals. 

As noted above, we are also proposing to adopt this proposed measure for the 

Hospital VBP Program FY 2014 measure set. The proposed method for scoring and 

incorporating this Medicare spending per beneficiary ratio into the hospital’s total 

performance score for the Hospital VBP Program is fully described in section 

IV.B.3.b.(3)(C) of this proposed rule. 

(C) Proposed New Web-Based Structural Measure 

 Structural measures assess the characteristics and capacity of the provider to 

deliver quality health care. In the FY 2009 IPPS final rule, we finalized the 

“Participation in a Systematic Database for Cardiac Surgery” measure (73 FR 48609) for 

the FY 2010 payment determination. This measure does not require the hospital to 

actually participate in a cardiac surgery registry, instead, it only requires the hospital to 

report whether or not it participates in a cardiac surgery registry. In the FY 2010 

IPPS/RY 2010 LTCH PPS final rule (74 FR 43871 and43872), we adopted two more 

structural measures: Participation in a Systematic Clinical Database Registry for Stroke 

Care; and Participation in a Systematic Clinical Database Registry for Nursing Sensitive 
CMS-1518-P 373 

Care under the Hospital IQR Program for the FY 2011 payment determination. Based on 

public comments, we collect these structural measures once annually. 

 We are now proposing to include a new structural measure, Participation in a 

Systematic Clinical Database Registry for General Surgery, in the Hospital IQR Program 

beginning with the FY 2014 payment determination. The Participation in a Systematic 

Clinical Database Registry for General Surgery measure would require each hospital that 

participates in Hospital IQR Program to indicate whether it is participating in a 

Systematic Clinical Database Registry for General Surgery and, if so, to identify the 

registry. This measure, like two of the previously adopted structural measures on registry 

participation (Participation in a Systematic Clinical Database Registry for Stroke Care; 

and Participation in a Systematic Clinical Database Registry for Nursing Sensitive Care), 

is an application of an NQF-endorsed measure (NQF #0493) “Participation by a 

physician or other clinician in a systematic clinical database registry that includes 

consensus endorsed quality measures” to the inpatient facility. 

We recognize that the NQF has endorsed this measure for the physician/clinician 

setting, but believe that this measure is highly relevant to the hospital setting, in that 

participation in a systematic clinical database registry for various topics is quite common 

in hospitals. Therefore, we previously adopted the Stroke and Nursing Sensitive Care 

registry participation measures as applications of the measure appropriate to the hospital 

inpatient setting. We reviewed the NQF’s consensus endorsed measures, as well as 

measures endorsed or adopted by another consensus organization, and were unable to 

identify any other measures specifically for participation in a systematic clinical database 
CMS-1518-P 374 

registry for general surgery that have been endorsed for the hospital inpatient setting. 

Having given due consideration to other measures that have been endorsed or adopted by 

a consensus entity, we are proposing to adopt an application of this non-NQF endorsed 

measure under the Secretary’s authority to select non-NQF endorsed measures where 

such measures do not exist for a specified topic or medical topic. We are proposing to 

adopt the measure under the exception authority provided in section 1886 

(b)(3)(B)(IX)(bb) of the Act. Additionally, we believe that, for the same reasons, the 

previously adopted structural measures for Stroke and Nursing Sensitive Care registries 

also meet the requirements under this authority and propose to continue collecting them 

on that basis. 

We are proposing that annual data submission for this proposed structural 

measure via a Web-based collection tool would begin in July 2012 with respect to the 

time period January 1, 2012, through June 30, 2012. We believe that participation in a 

registry provides hospitals with valuable ongoing quality improvement information and 

demonstrates a commitment to improve. Many registries also collect outcome data and 

provide feedback to hospitals about their performance. We invite public comment on this 

proposal to include this structural measure for the FY 2014 payment determination. 

In summary, we are proposing to retire 8 measures from the measure set for the 

FY 2014 payment determination that was finalized in the FY 2011 IPPS/LTCH PPS final 

rule, and we are proposing to add 4 measures to the measure set for the FY 2014 payment 

determination: 2 HAI measures collected through the NHSN, 1 claims-based measure 

(Medicare Spending Per Beneficiary), and 1 structural measure, for a total of 56 measures 
CMS-1518-P 375 

for the FY 2014 Hospital IQR payment determination. These 56 measures are listed 

below. 

Topic Proposed Hospital IQR Program Measures for FY 2014 Payment 

Determination Reflecting Proposed Retirement of 8 Measures and 

Proposed New Measures 

Acute Myocardial Infarction (AMI) 

● AMI-2 Aspirin prescribed at discharge 

● AMI-7a Fibrinolytic (thrombolytic) agent received within 30 

minutes of hospital arrival 

● AMI-8a Timing of Receipt of Primary Percutaneous Coronary 

Intervention (PCI) 

● AMI-10 Statin Prescribed at Discharge 

Heart Failure (HF) 

● HF-1 Discharge instructions 

● HF-2 Evaluation of left ventricular systolic function 

● HF-3 Angiotensin Converting Enzyme Inhibitor (ACE-I) or 

Angiotensin II Receptor Blocker (ARB) for left ventricular systolic 

dysfunction 

Pneumonia (PN) 

● PN-3b Blood culture performed in the emergency department 

prior to first antibiotic received in hospital 

● PN-6 Appropriate initial antibiotic selection 

Surgical Care Improvement Project (SCIP) 

● SCIP INF-1 Prophylactic antibiotic received within 1 hour prior 

to surgical incision 

● SCIP INF-2: Prophylactic antibiotic selection for surgical 

patients 

● SCIP INF-3 Prophylactic antibiotics discontinued within 24 

hours after surgery end time (48 hours for cardiac surgery) 

● SCIP INF-4: Cardiac surgery patients with controlled 6AM 

postoperative serum glucose 

● SCIP INF-9: Postoperative urinary catheter removal on post 

operative day 1 or 2 with day of surgery being day zero 

● SCIP INF-10: Surgery patients with perioperative temperature 

management 

● SCIP Cardiovascular-2: Surgery Patients on a Beta Blocker 

prior to arrival who received a Beta Blocker during the 

perioperative period 

● SCIP INF -VTE-1: Surgery patients with recommended Venous 

Thromboembolism (VTE) prophylaxis ordered 

● SCIP-VTE-2: Surgery patients who received appropriate VTE 
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Topic Proposed Hospital IQR Program Measures for FY 2014 Payment 

Determination Reflecting Proposed Retirement of 8 Measures and 

Proposed New Measures 

prophylaxis within 24 hours pre/post surgery 

Mortality Measures (Medicare Patients) 

● Acute Myocardial Infarction (AMI) 30-day mortality rate 

● Heart Failure (HF) 30-day mortality rate 

● Pneumonia (PN) 30-day mortality rate 

Patients' Experience of Care 

● HCAHPS survey 

Readmission Measure (Medicare Patients) 

● Acute Myocardial Infarction 30-day Risk Standardized 

Readmission Measure 

● Heart Failure 30-day Risk Standardized Readmission Measure 

● Pneumonia 30-day Risk Standardized Readmission Measure 

AHRQ Patient Safety Indicators (PSIs), Inpatient Quality Indicators (IQIs) and 

Composite Measures 

● PSI 06: Iatrogenic pneumothorax, adult 

● PSI 11: Post Operative Respiratory Failure 

● PSI 12: Post Operative PE or DVT 

● PSI 14: Postoperative wound dehiscence 

● PSI 15: Accidental puncture or laceration 

● IQI 11: Abdominal aortic aneurysm (AAA) mortality rate (with 

or without volume) 

● IQI 19: Hip fracture mortality rate 

● Complication/patient safety for selected indicators (composite) 

● Mortality for selected medical conditions (composite) 

AHRQ PSI and Nursing Sensitive Care 

● PSI 04 Death among surgical inpatients with serious treatable 

complications 

Structural measures 

● Participation in a Systematic Database for Cardiac Surgery 

● Participation in a Systematic Clinical Database Registry for 

Stroke Care 

● Participation in a Systematic Clinical Database Registry for 

Nursing Sensitive Care 

● Participation in a Systematic Clinical Database Registry for 

General Surgery** 

Healthcare-Associated Infections 

● Central Line Associated Bloodstream Infection 

● Surgical Site Infection* 

● Central Line Insertion Practices Percentage** 
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Topic Proposed Hospital IQR Program Measures for FY 2014 Payment 

Determination Reflecting Proposed Retirement of 8 Measures and 

Proposed New Measures 

● Catheter-Associated Urinary Tract Infection** 

Hospital Acquired Condition Measures 

● Foreign Object Retained After Surgery 

● Air Embolism 

● Blood Incompatibility 

● Pressure Ulcer Stages III & IV 

● Falls and Trauma: (Includes: Fracture Dislocation Intracranial 

Injury Crushing Injury Burn Electric Shock) 

• Vascular Catheter-Associated Infection 

● Catheter-Associated Urinary Tract Infection (UTI) 

● Manifestations of Poor Glycemic Control 

Emergency Department Throughput 

● ED-1 Median time from emergency department arrival to time of 

departure from the emergency room for patients admitted to the 

hospital* 

● ED-2 Median time from admit decision to time of departure 

from the emergency department for emergency department patients 

admitted to the inpatient status* 

Prevention: Global Immunization Measures 

● Immunization for Influenza *

● Immunization for Pneumonia* 

Cost Efficiency 

● Medicare Spending per Beneficiary**

* Measures finalized in the FY 2011 IPPS/LTCH PPS final rule for the FY 2014 payment determination 

** Additional measures proposed in this proposed rule for FY 2014 payment determination 

c. Proposed Hospital IQR Program Quality Measures for the FY 2015 Payment 

Determination 

(1) Proposed Retention of FY 2014 Payment Determination Measures for the FY 2015 

Payment Determination 

 We generally retain the Hospital IQR Program measures from one year to the 

next. Consistent with this approach, we are proposing to retain all of the proposed 
CMS-1518-P 378 

measures for the FY 2014 payment determination, if finalized, for the FY 2015 payment 

determination. We invite public comment on this proposal. 

(2) Proposed New Hospital IQR Program Measures for the FY 2015 Payment 

Determination 

(A) Proposed New CDC/NHSN-Based Healthcare-Associated Infection (HAI) Measures 

for the 2015 Payment Determination 

For the FY 2015 payment determination, we are proposing to adopt three 

additional HAI measures that are currently collected by CDC via the NHSN. These 

measures are: (1) Methicillin-resistant Staphylococcus Aureus (MRSA) Bacteremia 

measure; (2) C. Difficile SIR; and (3) Healthcare Personnel (HCP) Influenza Vaccination 

and the specifications for these 3 measures are available at 

http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf. Like the CLIP and the 

CAUTI measures that we are proposing for the FY 2014 payment determination, all three 

proposed HAI measures are high priority HAI measures listed in the HHS Action Plan to 

Prevent HAIs and were listed in previous rulemaking as possible quality measures for 

future payment determinations. 

Our review indicated that there are no measures for MRSA or C. Difficile SIR 

that have been endorsed by the NQF or another consensus entity for the hospital inpatient 

setting. Therefore, we are proposing to adopt this non-NQF-endorsed measure under the 

Secretary’s authority to select non-NQF endorsed measures where such measures do not 

exist for a specified topic or medical topic. We are proposing to adopt these two CDC-
CMS-1518-P 379 

developed measures (MRSA and C. Difficile SIR) under the exception authority provided 

in section 1886 (b)(3)(B)(IX)(bb) of the Act. 

The HCP Influenza Vaccination measure is NQF-endorsed (NQF #0431) for the 

hospital setting. Therefore, this measure meets the requirement for measure selection 

under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act. 

(1) Methicillin-Resistant Staphylococcus Aureus (MRSA) Bacteremia Measure 

 There are different types of staphylococcus aureus bacteria, commonly called 

“staph.” Staph bacteria are normally found on the skin or in the nose. The bacteria are 

generally harmless unless they enter the body through a cut or other wound, and even 

then they usually cause only minor skin problems in healthy people. MRSA infection is 

caused by a strain of staph bacteria that has become resistant to the antibiotics commonly 

used to treat ordinary staph infections. Older adults with weakened immune systems and 

patients in hospital or nursing home settings are most vulnerable to MRSA infections. 

Health care-associated MRSA infections typically are associated with invasive 

procedures or devices, such as surgeries, intravenous tubing, urinary catheters, or 

artificial joints. MRSA infections account for about 60 percent of skin infections seen in 

United States emergency departments and invasive MRSA infections may cause about 

18,000 deaths during a hospital stay a year.13 Currently, there are 6 States that require 

facilities to report MRSA information to NHSN. As stated above, we were unable to 

identify any other measures specifically for MRSA that have been endorsed by the NQF 

for the hospital inpatient setting. We found no other measures that have been endorsed or 

 

13 Catherine Liu, Arnold Bayer, et al., Clinical practice Guidelines by the for the treatment of 

Methicillin-Resistant Staphylococcus Aureus Infections in Adult and Children. Infectious Disease Society 

of America 2011; 52:e18 
CMS-1518-P 380 

adopted by a consensus entity. Therefore, we are proposing to adopt this non-NQFendorsed and CDC-developed measure under the Secretary’s authority to select non-NQF 

endorsed measures where such measures do not exist for a specified topic or medical 

topic, under the exception authority provided in section 1886 (b)(3)(B)(IX)(bb) of the 

Act. The proposed reporting mechanism for the MRSA measure is discussed in greater 

detail in section IV.A.5.i. of this proposed rule. We invite public comment on this 

proposed HAI measure. 

(2) C. Difficile SIR Measure 

Clostridium Difficile (C. difficile) is a bacterium that can cause symptoms ranging from 

diarrhea, pseudo-membranous colitis, and toxic megacolon to life-threatening sepsis and 

even death. Illness from C. Difficile most commonly affects older adults in hospitals or 

in long term care facilities where germs spread easily, antibiotic use is common and 

people are especially vulnerable to infection. Illness from C. Difficile typically occurs 

after use of antibiotic medications. C. Difficile spreads mainly on hands from person to 

person, but also on commonly touched services such as cart handles, bedrails, bedside 

tables, toilets, sinks, stethoscopes, thermometers, and telephones. In recent years, C. 

Difficile infections have become more frequent, more severe and more difficult to treat. 

Each year, tens of thousands of people in the United States get sick from C. Difficile, 

including some otherwise healthy people who are not hospitalized or taking antibiotics. 

Healthcare providers have become more aware of the C. Difficile infection and therefore, 

more testing is being done for symptomatic patients. The C. Difficile pathogens may 

require specialized monitoring to evaluate if intensified infection control efforts are 
CMS-1518-P 381 

required to reduce the occurrence of these organisms and related infections. Currently, 

there are 3 States that require facilities to report C. Difficile data to NHSN. Our goal for 

this proposed C. Difficile SIR measure is to provide a common mechanism 

(CDC/NHSN) for all hospitals including hospitals participating in the Hospital IQR 

Program to report and analyze these data that will inform infection control staff of the 

impact of targeted prevention efforts. The NHSN is listed in the HHS Action Plan to 

Prevent HAIs as the data source for HAI measures. As stated above, we were unable to 

identify any other measures specifically for C. Difficile SIR that have been endorsed by 

the NQF for the hospital inpatient setting. We found no other measures that have been 

endorsed or adopted by a consensus entity. Therefore, we are proposing to adopt this 

non-NQF-endorsed and CDC-developed measure under the Secretary’s authority to select 

non-NQF endorsed measures where such measures do not exist for a specified topic or 

medical topic, under the exception authority provided in section 1886 (b)(3)(B)(IX)(bb) 

of the Act. We have chosen to leverage existing NHSN reporting system to collect HAI 

measures since we have already established a mechanism for reporting to the NHSN. 

The proposed reporting mechanism for these proposed HAI measures is discussed 

in greater detail in section IV.A.5.i. of this proposed rule. We invite public comment on 

these proposed HAI measures. 

(3) Healthcare Personnel (HCP) Influenza Vaccination (NQF # 0431) 

For the FY 2015 payment determination, we are proposing to adopt one additional 

HAI measure that is currently collected by CDC via the NHSN: Healthcare Personnel 

(HCP) Influenza Vaccination (NQF # 0431). This measure assesses the percentage of 
CMS-1518-P 382 

HCP employed at the facility that received a prophylactic vaccination for influenza. This 

measure is NQF endorsed, and therefore, the measure meets the selection criteria under 

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

 Rates of serious illness and death resulting from influenza and its complications 

are increased in high-risk populations such as persons over 50 years or under four years 

of age, and persons of any age who have underlying conditions that put them at an 

increased risk. HCP can acquire influenza from patients and can transmit influenza to 

patients and other HCP. Many HCP provide care for, or are in frequent contact with, 

patients with influenza or patients at high risk for complications of influenza. The 

involvement of HCP in influenza transmission has been a long-standing concern.14,15,16

Vaccination is an effective preventive measure against influenza, and can prevent 

many illnesses, deaths, and losses in productivity.17 HCP are considered a high priority 

for expanding influenza vaccine use. Achieving and sustaining high influenza 

vaccination coverage among HCP is intended to help protect HCP and their patients and 

reduce disease burden and healthcare costs. Results of several studies indicate that higher 

vaccination coverage among HCP is associated with lower incidence of nosocomial 

 

14 Maltezou HC, Drancourt M., Nosocomial influenza in children. Journal of Hospital Infection 2003; 

55:83-91 

15 Hurley JC, Flockhart S., An influenza outbreak in a regional residential facility. Journal of Infection 

Prevention 2010; 11:58-61 

16 Salgado CD, Farr BM, Hall KK, Hayden FG., Influenza in the acute hospital setting. The Lancet 

Infectious Diseases 2002; 2:145-155. 

17 Wilde JA, McMillan JA, Serwint J, Butta J, O’Riordan MA, Steinhoff MC., Effectiveness of influenza 

vaccine in health care professionals: a randomized trial. The Journal of the American Medical Association 

1999; 281:908-913. 
CMS-1518-P 383 

influenza.18,19,20 Such findings have led some to call for mandatory influenza vaccination 

of HCP.21,22,23,24, 25 

Until recently, vaccination coverage among HCP has been well below the national 

Healthy People 2010 target of 60 percent,26 but preliminary data suggest 62 percent of 

HCP reported receiving seasonal influenza vaccine in 2009-201027. Only 37 percent 

reported receiving the 2009 pandemic A/H1N1 vaccine.28 

 HCP refers to all personnel working in healthcare settings who have the potential 

for exposure to patients and/or to infectious materials, including body substances, 

contaminated medical supplies and equipment, contaminated environmental surfaces, 

 

18 Salgado CD, Giannetta ET, Hayden FG, Farr BM., Preventing influenza by improving the vaccine 

acceptance rate of clinicians. Infection Control and Hospital Epidemiology 2004; 25: 923-928. 

19 Potter J, Stott DJ, Roberts MA, et al., Influenza vaccination of health-care workers in long-term-care 

hospitals reduces the mortality of elderly patients. Journal of Infectious Diseases 1997; 175:1-6. 

20 Hayward AC, Harling R, Wetten S, et al., Effectiveness of an influenza vaccine programme for care 

home staff to prevent death, morbidity, and health service use among residents: cluster randomised 

controlled trial. British Medical Journal 2006; 333:1241-1246. 

21 Talbot TR, Bradley SF, Cosgrove SE, et al., SHEA position paper: Influenza vaccination of healthcare 

workers and vaccine allocation for healthcare workers during vaccine shortages. Infection Control and 

Hospital Epidemiology 2005; 26:882-890 

22 American College of Physicians (ACP), ACP policy on influenza vaccination of health care workers. 

http://www.acponline.org/running_practice/quality_improvement/projects/adult_immuniz 

ation/flu_hcw.pdf 23 Greene LR, Cain TA, Dolan SA et al., APIC position paper: influenza immunization of healthcare personnel. Association of Professionals in 

Infection Control (APIC).

 November 2008. 

http://www.apic.org/Content/NavigationMenu/PracticeGuidance/Topics/Influenza/APIC_Position_Paper_I

nfluenza_11_7_08final_revised.pdf 24 National Patient Safety Foundation (NPSF),

 Mandatory flu vaccinations for healthcare workers. Press Release, November 18, 2009. 

http://www.npsf.org/pr/pressrel/2009-11- 18.php

25 Infectious Diseases Society of America (IDSA), IDSA policy on mandatory immunization of health care workers against seasonal and 2009 H1N1 influenza. 

I

nfectious Diseases Society of America (IDSA). September 30, 2009. http://www.idsociety.org/HCWimmunization/ 26 Walker FJ, Singleton JA, Lu P, Wooten KG, Strikas RA., Influenza vaccination of healthcare workers in 

the United States, 1989-2002. Infection Control and Hospital Epidemiology 2006; 27:257-265. 

27http://www.cdc.gov/mmwr/preview/mmwrhtml/rr55e209a1.htm Influenza Vaccination of Health-Care 

Personnel 

Recommendations of the Healthcare Infection Control Practices Advisory Committee (HICPAC) and the 

Advisory Committee on Immunization Practices 

28 Centers for Disease Control and Prevention., Interim results: Influenza A (H1N1) 2009 and Monovalent 

Seasonal Influenza Vaccination Coverage Among Health-Care Personnel—United States August 2009- 

January 2010. Morbidity and Mortality Weekly Report (MMWR); 59:357-362. Available at: 

http://www.cdc.gov/mmwr/preview/mmwrhtml/mm5912a1.htm
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or contaminated air.29 HCP may include (but are not limited to) physicians, nurses, 

nursing assistants, therapists, technicians, emergency medical service personnel, dental 

personnel, pharmacists, laboratory personnel, autopsy personnel, students and trainees, 

contractual staff not employed by the healthcare facility, and persons (for example, 

clerical, dietary, house-keeping, laundry, security, maintenance, billing, and volunteers) 

not directly involved in patient care but potentially exposed to infectious agents that can 

be transmitted to and from HCP and patients. Settings in which HCP may work 

include, but are not limited to, acute care hospitals, long-term care facilities, skilled 

nursing facilities, rehabilitation centers, physicians’ offices, urgent care centers, 

outpatient clinics, home health agencies, and emergency medical services. 

Currently, four States have “offer” laws for influenza vaccination of HCP, 

meaning that vaccine must be offered to HCP by healthcare facilities; and three States 

(Alabama, California, and New Hampshire) have “ensure” laws for influenza vaccination 

of HCP, meaning that vaccination of non-immune HCP is mandatory in the absence of a 

specified exemption or refusal; and, additionally, numerous hospitals and other healthcare 

facilities have established policies requiring mandatory influenza vaccination of their 

HCP.30

Currently, no State requires that hospitals report this measure to NHSN. 

However, approximately 13 hospitals (including long term acute care and 

 

29Adapted from: Pearson ML., Bridges CB., Harper SA.,: Influenza vaccination of health-care personnel: 

Recommendations of the Healthcare Infection Control Practices Advisory Committee (HICPAC) and the 

Advisory Committee on Immunization Practices (ACIP). Morbidity and Mortality Weekly Report 

(MMWR) 2006; 55:1-16. Available at: http://www.cdc.gov/mmwr/preview/mmwrhtml/rr5502a1.htm 30 For additional information regarding healthcare facilities’ influenza vaccine policies, please see: 

http://www.immunize.org/honor%2Droll/
CMS-1518-P 385 

rehabilitation), outpatient hemodialysis centers, long term care facilities, and 

ambulatory surgical centers are currently reporting HCP immunization data to NHSN. 

In September 2009, CDC released the Healthcare Personnel Safety (HPS) Component of 

NHSN, which complements Patient Safety and Biovigilance components available in 

NHSN. The HPS Component replaced CDC’s National Surveillance System for Health 

Care Workers (NaSH) and is comprised of two modules: the Blood/ Body Fluid Exposure 

Module and the Influenza Vaccination and Management and Exposure Module.31 

Currently, participation in either module is voluntary. The current Influenza Vaccination 

and Management and Exposure Module may soon offer options for healthcare facilities to 

submit vaccination summary data. NHSN plans to partner with vendor-based 

surveillance systems to permit periodic data extractions into NHSN. 

The modules feature basic, custom, and advanced analysis capabilities available 

in real-time, which allow individual healthcare facilities to compile and analyze their own 

data, as well as benchmark these results to aggregate NHSN estimates. The HPS 

Component can assist participating facilities in developing surveillance and analysis 

capabilities to permit the timely recognition of HCP safety problems and prompt 

interventions with appropriate measures. Influenza vaccination data submitted to CDC 

will ultimately capture regional trends on the yearly uptake of the vaccine, prophylaxis 

and treatment for healthcare personnel, as well as the elements within yearly influenza 

campaigns that succeed or require improvement. At the State and national levels, the 

HPS Component will aid in monitoring rates and trends. 

 

31 Available at: http://www.cdc.gov/nhsn/hps.html
CMS-1518-P 386 

 We are proposing to adopt the Healthcare Provider Influenza Vaccination 

measure that is currently collected by the CDC via the NHSN because of its importance 

in preventing influenza not only among healthcare workers but also patients that they 

attend.. As stated earlier, this measure assesses the percent of Healthcare Personnel 

employed at the facility that received a prophylactic vaccination for influenza. Detailed 

specifications for the proposed measure are available at: 

http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf. As we also stated above, 

this measure is NQF-endorsed for the hospital setting. The proposed reporting 

mechanism for this proposed HAI measure is discussed in greater detail in section 

IV.A.5.i. of this proposed rule. We invite public comment on this proposed HAI 

measure. 

(B) Proposed New Chart-Abstracted Measures for the FY 2015 Payment Determination 

 We are proposing to adopt two sets of chart-abstracted measures for the FY 2015 

payment determination: the Stroke and Venous Thromboembolism (VTE) measure sets. 

All of these proposed measures have either previously been proposed for the Hospital 

IQR Program, or have been listed as being under consideration for future adoption into 

the program. In addition, with one exception (STK-1: VTE Prophylaxis), all of the 

measures in these two measure sets have been electronically specified and are among the 

measures adopted for the EHR Incentive Program for eligible hospitals. While we are 

proposing to adopt these for chart-abstracted submission in 2013 for the FY 2015 

payment determination, we believe that by a future date, such as 2015, hospitals will be 

able to switch to EHR-based submission of these and all other chart-abstracted measures 
CMS-1518-P 387 

submitted for the Hospital IQR Program, and, as we discuss in greater detail below, we 

intend to work toward this goal over the next few years. 

 The Stroke measure set we are proposing to adopt consists of 8 measures; and the 

VTE measure set consists of 6 measures. Both measure sets are NQF-endorsed and their 

specifications are currently available in the Specifications Manual, which can be found 

on QualityNet. We believe that both of the proposed measure sets compliment the data 

elements in our current SCIP VTE and AMI measure sets. 

(i) Stroke Measure Set 

Stroke is a topic of great relevance to the Medicare population due to its impact 

on morbidity and mortality, and it is an area with great potential for quality improvement 

for hospitals caring for stroke patients. Stroke is the third most common cause of death in 

the United States and is one of the top 20 conditions contributing to Medicare costs. 

Approximately 8 to 12 percent of ischemic strokes are fatal,32 and mortality following 

stroke is influenced by the quality of care provided to patients during their initial 

hospitalization.33 In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43873), 

we listed 8 Stroke measures as being under consideration for adoption for the FY 2012 

Hospital IQR payment determination. Numerous commenters encouraged us to adopt the 

listed stroke measures which they see as evidence-based measures that accurately 

measure the care of the stroke patient (74 FR 43875 through 43876). Commenters 

 

32 American Heart Association, Heart Disease and Stroke Statistics - 2009 Update. American Heart 

Association, 2009: p. 1-36. 

33 Weir, N.U., et al., Variations between countries in outcome after stroke in the International Stroke Trial 

(IST). Stroke, 2001. 32(6): p. 1370-7. 
CMS-1518-P 388 

believed that the measures are widely recognized for their roles in minimizing secondary 

strokes and other complications. 

We are proposing to adopt a stroke measure set with 8 NQF-endorsed 

process-of-care measures for the FY 2015 payment determination. The table below lists 

and describes each of these eight proposed measures. 

8 Proposed Stroke Measures 

STK-1: Venous 

Thromboembolism (VTE) 

Prophylaxis for patients with 

ischemic or hemorrhagic 

stroke (NQF #0434) 

Percent of patients with an ischemic stroke or a 

hemorrhagic stroke and who are non-ambulatory should 

start receiving DVT prophylaxis by end of hospital day 

two. 

STK-2: Ischemic stroke 

patients discharged on 

antithrombotic therapy. (NQF 

#0435) 

Percent of patients with an ischemic stroke prescribed 

antithrombotic therapy at discharge. 

STK-3: Anticoagulation 

therapy for atrial 

fibrillation/flutter. (NQF 

#0436) 

Percent of patients with an ischemic stroke with atrial 

fibrillation discharged on anticoagulation therapy. 

STK-4: Thrombolytic 

Therapy for Acute ischemic 

stroke patients. (NQF #0437) 

Percent of acute ischemic stroke patients who arrive at 

the hospital within 120 minutes (2 hours) of time last 

known well and for whom IV t-PA was initiated at this 

hospital within 180 minutes (3 hours) of time last known 

well. 

STK-5: Antithrombotic 

therapy by the end of hospital 

day two. (NQF #0438) 

Percent of patients with ischemic stroke who receive 

antithrombotic therapy by the end of hospital day two. 

STK-6: Discharged on statin 

medication. (NQF #0439) 

Percent of ischemic stroke patients with LDL >/= 100 

mg/dL, or LDL not measured, or, who were on 

cholesterol reducing therapy prior to hospitalization are 

discharged on a statin medication. 

STK-8: Stroke education. 

(NQF #0440) 

Percent of patients with ischemic or hemorrhagic stroke 

or their caregivers who were given education or 

educational materials during the hospital stay addressing 

all of the following: personal risk factors for stroke, 

warning signs for stroke, activation of emergency. 

STK-10: Assessed for 

rehabilitation services. (NQF 

#0441) 

Percent of patients with an ischemic stroke or 

hemorrhagic stroke who were assessed for rehabilitation 

services. 
CMS-1518-P 389 

Because the NQF is the entity that holds a contract with the Secretary under 

section 1890(a) of the Act, measures that are endorsed by the NQF meet the requirement 

for measure selection under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act. Aside from 

the consideration of NQF-endorsement, we believe that the inclusion of the proposed 

stroke measure set in the Hospital IQR Program would provide a comprehensive view of 

how well stroke care is being managed in a hospital setting. As stated earlier, detailed 

measure specifications for these 8 proposed measures are available in the Specifications 

Manual located in QualityNet. We invite public comment on the proposed stroke 

measure set. 

(ii) VTE Measure Set 

It is widely agreed that VTE is the number one preventable cause of hospital death 

in the United States and the cost of VTE when it occurs is very high. A recent study from 

AHRQ in Health Affairs highlighted that when an acute VTE event occurs, it increases 

the costs of care by 25 percent. In 2008, the Surgeon General issued a Call to Action to 

Prevent Deep Vein Thrombosis and Pulmonary Embolism. (This document can be found 

at: http://www.surgeongeneral.gov/topics/deepvein/calltoaction/call-to-action-on-dvt2008.pdf.) VTE prevention with pharmacologic agents can impact the cost effectiveness 

of care. Specifically, patients who received anti-coagulant medication during 

hospitalization have less likelihood of recurrence of VTEs upon discharge to home. 

Parenteral anticoagulation is the first line of therapy because of its rapid onset of action. 

Because the oral anticoagulant medication has a very slow onset of action, it cannot be 
CMS-1518-P 390 

used as mono-therapy for acute VTE. A minimum of five days of parenteral 

anticoagulation is recommended as “overlap therapy” while oral anticoagulant 

medication is being initiated. More thrombotic complications and higher costs are 

associated with treatment in patients demonstrating a subtherapeutic aPTT. 

Unfractionated Heparin (UFH) Dosages/Platelet Count Monitoring by Protocol (or 

Nomogram) has significantly advanced the use of UFH with the demonstrated ability to 

achieve therapeutic aPTTs more rapidly than with standard UFH dosing. When this 

occurs, patients can be discharged sooner. However, anticoagulation therapy poses risks 

to patients and often leads to adverse drug events due to complex dosing, requisite 

follow-up monitoring and inconsistent patient compliance. The use of standardized 

practices for anticoagulation therapy that includes patient/caregiver involvement may 

reduce the risk of adverse drug events. 

The Hospital IQR Program currently has 2 measures of VTE prophylaxis for 

surgical patients (SCIP-VTE-1: Venous thromboembolism (VTE) prophylaxis ordered 

for surgery patients; and SCIP-VTE-2: VTE prophylaxis within 24 hours pre/post 

surgery) in the SCIP measure set. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule 

(74 FR 43873), we listed 5 VTE measures (VTE-1; Venous thromboembolism 

prophylaxis; VTE-3: Venous thromboembolism patients with anticoagulation overlap 

therapy; VTE-4: Venous thromboembolism patients receiving unfractionated heparin 

with dosages/platelet count monitoring by protocol; VTE-5: Venous thromboembolism 

discharge instructions; and VTE-6: Incidence of potentially-preventable venous 

Thromboembolism) as possible new quality measures for the FY 2012 payment 
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determination. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50213 through 50218), 

we listed 6 VTE measures (VTE-1; Venous thromboembolism prophylaxis; VTE-2: 

Intensive care unit venous thromboembolism prophylaxis; VTE-3: Venous 

thromboembolism patients with anticoagulation overlap therapy; VTE-4: Venous 

thromboembolism patients receiving unfractionated heparin with dosages/platelet count 

monitoring by protocol; VTE-5: Venous thromboembolism discharge instructions; and 

VTE-6: Incidence of potentially-preventable venous thromboembolism) as measures we 

were considering for possible future adoption into the program. 

We are now proposing to adopt for the FY 2015 Hospital IQR measure set 6 VTE 

measures which are aimed at preventing the incidence of potentially preventable VTE. 

These 6 measures are listed and described below. 

6 Proposed Venous Thromboembolism (VTE) Measures 

VTE-1: Venous 

thromboembolism prophylaxis 

(NQF #0371) 

Percent of patients who received VTE prophylaxis or 

have documentation why no VTE prophylaxis was given 

the day of or the day after hospital 

admission or surgery end date for surgeries that start the 

day of or the day after hospital 

admission. 

VTE-2: Intensive care unit 

venous thromboembolism 

prophylaxis 

(NQF #0372) 

Percent of patients who received VTE prophylaxis or 

have documentation why no VTE prophylaxis was given 

the day of or the day after the initial admission (or 

transfer) to the Intensive Care Unit (ICU) or surgery end 

date for surgeries that start the day of or the day after 

ICU admission (or transfer). 

VTE-3: Venous 

thromboembolism patients 

with anticoagulation overlap 

therapy 

(NQF #0371) 

Percent of patients diagnosed with confirmed VTE who 

received an overlap of parenteral (intravenous [IV] or 

subcutaneous [subcu]) anticoagulation and warfarin 

therapy. For patients who received less than five days of 

overlap therapy, they must be discharged on both 

medications. Overlap therapy must be administered for 

at least five days with an international normalized ratio 

(INR) = 2 prior to discontinuation of the parenteral 

anticoagulation therapy or the patient must be 
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discharged on both medications. 

VTE-4: Venous 

thromboembolism patients 

receiving unfractionated 

heparin with dosages/platelet 

count monitoring by protocol 

(NQF #0371) 

Percent of patients diagnosed with confirmed VTE who 

received intravenous (IV) UFH therapy dosages AND 

had their platelet counts monitored using defined 

parameters such as a nomogram or protocol. 

VTE-5: Venous 

thromboembolism discharge 

instructions 

(NQF #0371) 

Percent of patients diagnosed with confirmed VTE that 

are discharged to home, to home with home health or 

home hospice on warfarin with written 

discharge instructions that address all four criteria: 

compliance issues, dietary advice, follow-up monitoring, 

and information about the potential for adverse drug 

reactions/interactions. 

VTE-6: Incidence of 

potentially-preventable 

venous Thromboembolism 

(NQF #0371) 

Percent of patients diagnosed with confirmed VTE 

during hospitalization (not present on arrival) who did 

not receive VTE prophylaxis between 

hospital admission and the day before the VTE 

diagnostic testing order date. 

These 6 measures were endorsed in a 2008 NQF project titled: National Voluntary 

Consensus Standards for Prevention and Care of Venous Thromboembolism: Additional 

Performance Measures. Because the NQF is the entity that holds a contract with the 

Secretary under section 1890(a) of the Act, measures that are endorsed by the NQF meet 

the requirement for measure selection under section 1886(b)(3)(B)(viii)(IX)(aa) of the 

Act. Aside from the consideration of NQF-endorsement, we believe that the inclusion of 

the VTE measure set in the Hospital IQR Program would provide a comprehensive view 

of how well VTE care is being managed in a hospital setting. Detailed measure 

specifications for these 6 proposed measures are available in the Specifications Manual 

located on QualityNet. We invite public comment on the proposed VTE measure set. 
CMS-1518-P 393 

In summary, for the FY 2015 payment determination, we are proposing to retain 

all of the FY 2014 measures (56 measures if all of the measures are finalized), to adopt 3 

HAI measures, and 14 chart-abstracted measures for a total of 73 measures for the FY 

2015 payment determination. The measures proposed for the Hospital IQR Program for 

the FY 2015 payment determinations are set forth below. 

Topic Proposed Hospital IQR Program Measures for FY 2015 Payment 

Determination 

Acute Myocardial Infarction (AMI) Measures 

● AMI-2 Aspirin prescribed at discharge 

● AMI-7a Fibrinolytic (thrombolytic) agent received within 30 

minutes of hospital arrival 

● AMI-8a Timing of Receipt of Primary Percutaneous Coronary 

Intervention (PCI) 

● AMI-10 Statin Prescribed at Discharge 

Heart Failure (HF) Measures 

● HF-1 Discharge instructions 

● HF-2 Evaluation of left ventricular systolic function 

● HF-3 Angiotensin Converting Enzyme Inhibitor (ACE-I) or 

Angiotensin II Receptor Blocker (ARB) for left ventricular systolic 

dysfunction 

Stroke Measure Set 

● STK-1 VTE prophylaxis** 

● STK-2 Antithrombotic therapy for ischemic stroke** 

● STK-3 Anticoagulation therapy for Afib/flutter** 

● STK-4 Thrombolytic therapy for acute ischemic stroke** 

● STK-5 Antithrombotic therapy by the end of hospital day 2** 

● STK-6 Discharged on Statin** 

● STK-8 Stroke education** 

● STK-10 Assessed for rehab** 

VTE Measure Set 

● VTE-1 VTE prophylaxis** 

● VTE-2 ICU VTE prophylaxis** 

● VTE-3 VTE patients with anticoagulation overlap therapy** 

● VTE-4 Patients receiving un-fractionated Heparin with 

doses/labs monitored by protocol** 

● VTE-5 VTE discharge instructions** 

● VTE-6 Incidence of potentially preventable VTE** 
CMS-1518-P 394 

Topic Proposed Hospital IQR Program Measures for FY 2015 Payment 

Determination 

Pneumonia (PN) Measures 

● PN-3b Blood culture performed in the emergency department 

prior to first antibiotic received in hospital 

● PN-6 Appropriate initial antibiotic selection 

Surgical Care Improvement Project (SCIP) Measures 

● SCIP INF-1 Prophylactic antibiotic received within 1 hour prior 

to surgical incision 

● SCIP INF-2: Prophylactic antibiotic selection for surgical 

patients 

● SCIP INF-3 Prophylactic antibiotics discontinued within 24 

hours after surgery end time (48 hours for cardiac surgery) 

● SCIP INF-4: Cardiac surgery patients with controlled 6AM 

postoperative serum glucose 

● SCIP INF-9: Postoperative urinary catheter removal on post 

operative day 1 or 2 with day of surgery being day zero 

● SCIP INF-10: Surgery patients with perioperative temperature 

management 

● SCIP Cardiovascular-2: Surgery Patients on a Beta Blocker 

prior to arrival who received a Beta Blocker during the 

perioperative period 

● SCIP INF -VTE-1: Surgery patients with recommended Venous 

Thromboembolism (VTE) prophylaxis ordered 

● SCIP-VTE-2: Surgery patients who received appropriate VTE 

prophylaxis within 24 hours pre/post surgery 

Mortality Measures (Medicare Patients) 

● Acute Myocardial Infarction (AMI) 30-day mortality rate 

● Heart Failure (HF) 30-day mortality rate 

● Pneumonia (PN) 30-day mortality rate 

Patients' Experience of Care Measure 

● HCAHPS survey 

Readmission Measures (Medicare Patients) 

● Acute Myocardial Infarction 30-day Risk Standardized 

Readmission Measure 

● Heart Failure 30-day Risk Standardized Readmission Measure 

● Pneumonia 30-day Risk Standardized Readmission Measure 

AHRQ Patient Safety Indicators (PSIs), Inpatient Quality Indicators (IQIs) and 

Composite Measures 

● PSI 06: Iatrogenic pneumothorax, adult 

● PSI 11: Post Operative Respiratory Failure 

● PSI 12: Post Operative PE or DVT 
CMS-1518-P 395 

Topic Proposed Hospital IQR Program Measures for FY 2015 Payment 

Determination 

● PSI 14: Postoperative wound dehiscence 

● PSI 15: Accidental puncture or laceration 

● IQI 11: Abdominal aortic aneurysm (AAA) mortality rate (with 

or without volume) 

● IQI 19: Hip fracture mortality rate 

● Complication/patient safety for selected indicators (composite) 

● Mortality for selected medical conditions (composite) 

AHRQ PSI and Nursing Sensitive Care 

● PSI-4 Death among surgical inpatients with serious treatable 

complications 

Structural Measures 

● Participation in a Systematic Database for Cardiac Surgery 

● Participation in a Systematic Clinical Database Registry for 

Stroke Care 

● Participation in a Systematic Clinical Database Registry for 

Nursing Sensitive Care 

● Participation in a Systematic Clinical Database Registry for 

General Surgery* 

Healthcare-Associated Infections Measures 

● Central Line Associated Bloodstream Infection 

● Surgical Site Infection 

● Central Line Insertion Practice Percentage* 

● Catheter-Associated Urinary Tract Infection* 

● MRSA Bacteremia** 

● Clostridium Difficile (C.Diff)** 

● Healthcare Personnel Influenza Vaccination** 

Hospital Acquired Condition Measures 

● Foreign Object Retained After Surgery 

● Air Embolism 

● Blood Incompatibility 

● Pressure Ulcer Stages III & IV 

● Falls and Trauma: (Includes: Fracture Dislocation Intracranial 

Injury Crushing Injury Burn Electric Shock) 

• Vascular Catheter-Associated Infection 

● Catheter-Associated Urinary Tract Infection (UTI) 

● Manifestations of Poor Glycemic Control 

Emergency Department Throughput Measures 

● ED-1 Median time from emergency department arrival to time of 

departure from the emergency room for patients admitted to the 

hospital 
CMS-1518-P 396 

Topic Proposed Hospital IQR Program Measures for FY 2015 Payment 

Determination 

● ED-2 Median time from admit decision to time of departure 

from the emergency department for emergency department patients 

admitted to the inpatient status

Prevention: Global Immunization Measures 

● Immunization for Influenza 

● Immunization for Pneumonia 

Cost Efficiency 

● Medicare Spending per Beneficiary*

* New proposed quality measures for the FY 2014 payment determination 

** New Proposed quality measures for FY 2015 payment determination 

4. Possible New Quality Measures and Measure Topics for Future Years 

 Looking forward, we anticipate that as EHR technology evolves, and more 

infrastructure is put in place, we will have the capacity to accept electronic reporting of 

all of the clinical chart-abstracted quality measures that are currently in the Hospital IQR 

Program or have been proposed for adoption into the program. We intend for this future 

progress to significantly reduce the administrative burden on hospitals under the Hospital 

IQR Program. We recognize that considerable work needs to be done by measure owners 

and developers to make this possible with respect to the clinical quality measures that we 

proposed. This includes completing electronic specifications for measures, pilot testing, 

reliability and validity testing, and implementing such specifications into EHR 

technology to capture and calculate the results, and implementing the systems. We 

believe that at a future date, such as 2015, CMS and hospitals will be able to switch to 

complete EHR-based reporting of all chart-abstracted measures to CMS for the Hospital 

IQR Program, and we intend to work diligently toward this goal. We believe this will 
CMS-1518-P 397 

simplify measure collection and submission for the Hospital IQR Program, and will 

reduce the burden on hospitals. We invite public comment and suggestions on this topic. 

In future rules, it is our intention to propose to adopt outcome measures for stroke 

and joint replacement surgery which we have developed and anticipate submitting for 

NQF review. In addition, we intend to propose additional HAI measures as they gain 

NQF endorsement. We also invite public comment on the following quality measures 

and topics set out below that we are considering for the future. We seek to limit the 

number of chart-abstracted measures and topics in the near future, in order to facilitate 

the transition to EHR-based reporting. 

Possible Hospital IQR Program Future Measures and Topics 

Measurement 

Topic Measure Title/ Description/Concept

Mortality/Complications 

● Acute stroke 30-day mortality rate 

● Total Hip and Total Knee arthroplasty 30-day complications 

Readmissions 

● Stroke 30-Day Risk Standardized Readmission Measure 

● Total Hip and Total Knee Arthroplasty 30-Day Risk Standardized 

Readmission Measure 

Patient Safety 

● Surgical checklist use for surgical procedures 

● NQF approved Serious Reportable Events 

Medication Safety 

● Universal Documentation and Verification of Current Medications 

in the Medical Record 

● Drug-Drug interaction 

● Medication Reconciliation 

Surgical Outcome Measures 

● Lower Extremity Bypass Complications 

● ICD Complications 
CMS-1518-P 398 

Possible Hospital IQR Program Future Measures and Topics 

Measurement 

Topic Measure Title/ Description/Concept

● Risk Adjusted Case Mix Adjusted Elderly surgery outcomes 

● Risk Adjusted Case Mix Adjusted Colorectal surgery outcomes 

Healthcare-Associated Infections 

● Ventilator Associated Pneumonia 

● Post Procedure Pneumonias 

● Multi Drug Resistant Organisms—VRE, Klebsiella, Acinetobacter 

Readmissions 

● COPD 30-day Risk Standardized Readmission Rate 

● CABG 30-day Risk Standardized Readmission Rate 

● Other Vascular Condition 30-day Risk Standardized Readmission 

● Percutaneous Coronary Intervention (PCI) 30-day Risk 

Standardized Readmission Rate 

● All-Patient Condition-Specific Readmission Rates for AMI, Heart 

Failure, Pneumonia, CABG, COPD, PCI, other vascular conditions 

● All-condition 30-day readmission rate 

Average Length of Stay 

● Overall inpatient hospital average length of stay (ALOS) and ALOS 

by medical service category 

Mortality 

● 30-day Risk Standardized Mortality Rate following PCI for 

STEMI/shock patients. 

● 30-day risk-standardized mortality rate following PCI for nonSTEMI/non-shock patients. 

SCIP 

● Short Half-Life prophylactic administered preoperatively redosed 

within 4 hours after preoperative dose 

Care Coordination 

● Cardiac Rehabilitation Referral for AMI, HF, Cardiac Surgery 

Heart Failure 

● Symptom and Activity Assessment 

● Symptom Management 

● Patient Education 

● Combination Medical Therapy for LVSD 

● Beta Blocker Therapy for LVSD 

● Counseling Regarding ICD for Patients with LVSD 

Tobacco & Alcohol Cessation 

● TAM-1: Tobacco Use Screening 

● TAM-2: Tobacco Use Treatment 

● TAM-3: Tobacco Use Treatment Management at Discharge 

● TAM-4: Assessing Status after Discharge 
CMS-1518-P 399 

Possible Hospital IQR Program Future Measures and Topics 

Measurement 

Topic Measure Title/ Description/Concept

● TAM-5: Alcohol Use Screening 

● TAM-6: Alcohol Use Brief Intervention 

● TAM-7: Alcohol and other Drug dependence-Treatment 

Management at Discharge 

● TAM-8: Substance Use - Assessing Status after Discharge 

Nursing Sensitive (remainder of measures) 

● NSC-2: Patients surveyed on an eligible reporting unit that have at 

least one stage II or greater [National Ulcer Advisory Panel (NPUAP)] 

nosocomial pressure ulcer on the day of the prevalence study 

● NSC-3: Number of patient falls, with or without injury to the 

patient, by type of Unit during the calendar month x 1000. 

● NSC-4: Number of patient falls with an injury level of minor or 

greater by Type of Unit during the calendar month x 1,000. 

● NSC-5: Patients surveyed on the eligible reporting unit that have a 

vest restraint and/or limb restraint (upper or lower or both) on the day 

of the prevalence study 

● NSC-12: Number of productive hours worked as specified in the 

Set Measure Identifier 

● NSC-13: Total number of productive hours worked by nursing staff 

(stratified by type of certification RN, LPN/LVN, UAP) with direct 

patient care responsibilities by Type of Unit during the calendar 

month. 

● NSC-14: Nursing satisfaction survey 

● NSC 15: The total number of voluntary separations (as specified 

under the Performance Measure Identifier and Description above) 

during the calendar month 

Cardiac Surgery measures 

● Post-operative Renal Failure 

● Surgical Re-exploration 

● Anti-Platelet Medication at Discharge 

● Beta Blockade at Discharge 

● Anti-Lipid Treatment Discharge (Statin at Discharge) 

● Risk-Adjusted Operative Mortality for CABG 

● Risk-Adjusted Operative Mortality for Aortic Valve Replacement 

(AVR) 

● Risk-Adjusted Operative Mortality for Mitral Valve 

Replacement/Repair (MVR) 

● Risk-Adjusted Operative Mortality MVR+CABG Surgery 

● Risk-Adjusted Operative Mortality for AVR+CABG 
CMS-1518-P 400 

Possible Hospital IQR Program Future Measures and Topics 

Measurement 

Topic Measure Title/ Description/Concept

● Surgical Volume - a. Isolated Coronary Artery Bypass Graft 

(CABG) Surgery, b. Valve Surgery, c. CABG+Valve Surgery 

● Timing of Antibiotic Prophylaxis for Cardiac Surgery Patients 

● Selection of Antibiotic Prophylaxis for Cardiac Surgery Patients 

● Pre-Operative Beta Blockade 

● Duration of Prophylaxis for Cardiac Surgery Patients 

● Prolonged Intubation (ventilation) 

● Deep Sternal Wound Infection Rate 

● Stroke/Cerebrovascular Accident 

● CABG Composite Score 

5. Form, Manner, and Timing of Quality Data Submission 

a. Background 

 Sections 1886(b)(3)(B)(viii)(I) and (II) of the Act state that the applicable 

percentage increase, for FY 2007 and each subsequent fiscal year, shall be reduced by 

2.0 percentage points (or, beginning with FY 2015, by one-quarter of such applicable 

percentage increase (determined without regard to sections 1886(b)(3)(B)(ix), (xi), or 

(xii) of the Act) for any subsection (d) hospital that does not submit quality data in a form 

and manner, and at a time, specified by the Secretary. The data submission requirements, 

Specifications Manual, and submission deadlines are posted on the QualityNet Web site 

at: http://www.QualityNet.org/. CMS requires that hospitals submit data in accordance 

with the specifications for the appropriate discharge periods. Hospitals submit quality 

data through the secure portion of the QualityNet Web site (formerly known as 

QualityNet Exchange) (https://www.QualityNet.org). This Web site meets or exceeds all 

current Health Insurance Portability and Accountability Act requirements for security of 

protected health information. 
CMS-1518-P 401 

 In order to participate in the Hospital IQR Program, hospitals must meet specific 

procedural requirements. Hospitals choosing to participate in the Hospital IQR Program 

must also meet specific data collection, submission, and validation requirements. 

b. Procedural Requirements for FY 2012 Payment Determinations and Subsequent Years 

 The proposed Hospital IQR Program procedural requirements are, for the most 

part, the same as the procedures adopted in the FY 2011 IPPS/LTCH PPS final rule for 

the Hospital IQR Program. Hospitals must comply with the following procedural 

requirements to participate-- 

● Register with QualityNet, before participating hospitals initially begin 

reporting data, regardless of the method used for submitting data. 

● Identify a QualityNet Administrator who follows the registration process 

located on the QualityNet Web site (http://www.QualityNet.org). 

● Complete a Notice of Participation. New subsection (d) hospitals and existing 

hospitals that wish to participate in the Hospital IQR Program for the first time must 

complete an online Notice of Participation (formerly known as “Reporting Hospital 

Quality Data for Annual Payment Update Notice of Participation,” also referred to as 

IPledge) that includes the name and address of each hospital campus that shares the same 

CMS Certification Number (CCN). We revise the Notice of Participation periodically as 

needed and provide appropriate notification of any revisions to hospitals and QIOs 

through the routine Hospital IQR Program communication channels, which include 

memo and email notification and QualityNet Web site articles and postings. 
CMS-1518-P 402 

● Any hospital that receives a new CCN on or after October 15, 2009 (including 

new subsection (d) hospitals and hospitals that have merged) that wishes to participate in 

the Hospital IQR Program and has not otherwise submitted a Notice of Participation 

using the new CCN must submit a completed Notice of Participation no later than 180 

days from the date identified as the open date (that is, the Medicare acceptance date) on 

the approved CMS Online System Certification and Reporting (OSCAR) system to 

participate in the Hospital IQR Program. We are proposing regulation text to codify this 

requirement. 

● We will accept Hospital IQR Program withdrawal forms for the FY 2013 

payment determination from hospitals any time from October 1, 2011 until 

August 15, 2012. The August 15, 2012 deadline will give us sufficient time to update the 

FY 2013 payment to hospitals starting on October 1, 2012. If a hospital withdraws from 

the program for the FY 2013 payment determination, it will receive a reduction of 

2.0 percentage points to the FY 2013 applicable percentage increase. Once a hospital has 

submitted a Notice of Participation, it is considered to be an active Hospital IQR Program 

participant until such time as the hospital submits a withdrawal form to CMS. 

● We will determine if a hospital has complied with our data submission 

requirements by looking at whether the hospital has properly submitted data to the 

appropriate data warehouses for HCAHPS, CDC/NHSN, chart-abstracted measures, and 

structural measure quality measure data during the four calendar year quarters of 

FY 2012. 
CMS-1518-P 403 

The Hospital IQR Program procedural requirements have remained relatively 

unchanged for the past several years and we are proposing to codify them at 42 CFR 

412.140. We invite public comment on this proposal. 

c. Proposed Procedural Requirements for FY 2013 and Subsequent Years 

 We are proposing that hospitals that have an open date (as noted on the approved 

CMS OSCAR system) before March 31, 2009 that did not participate in the Hospital IQR 

Program in FY 2011 or FY 2012 but that wish to participate in the Hospital IQR Program 

for the FY 2013 payment determination must submit a completed Notice of Participation 

to CMS on or before December 31, 2011. These hospitals, unlike hospitals that receive a 

new CCN, do not need to get their operations up and running. Therefore, we believe this 

is a reasonable deadline that will enable these hospitals to decide whether they want to 

participate in the Hospital IQR Program while also enabling us to collect enough data 

from them to make an accurate FY 2013 payment determination. We are proposing 

regulation text that provides that hospitals that would like to participate in the Hospital 

IQR program for the first time, or that previously withdrew from the program and would 

like to participate again, must submit to CMS a completed Notice of Participation Form 

by December 31 of the fiscal year preceding the fiscal year in which they would like to 

participate. 

d. Proposed Data Submission Requirements for Chart-Abstracted Measures 

We are proposing to reduce the quarterly submission deadline for chart-abstracted 

quality measures from 4 1⁄2 months to 104 days. In other words, for FY 2014 payment 

determinations, the quarterly deadline for the quality measures under the topic that 
CMS-1518-P 404 

require chart abstraction (AMI, HF, PN, SCIP, Emergency Department Throughput 

(EDT), and Global Immunization (GIM) will be 104 days following the last discharge 

date in the calendar quarter. We are proposing to reduce the data submission deadline in 

order to allow for a correction period, which we will propose in future rulemaking. We 

also believe that this proposed change will encourage hospitals to utilize quality measure 

information in a more rapid manner to facilitate quality improvement. We also want to 

provide hospitals sufficient notice of any proposed changes to our submission deadline, 

since we recognize the advance time needed by hospitals to modify their recordkeeping 

and abstraction practices to comply with this proposed requirement. We also are 

proposing to change the aggregate population and sampling deadline from 4 months to 3 

months to align with the corresponding proposal to change the data submission deadline 

from 135 to 104 days 

 We will continue to require hospitals to submit aggregate population and sample 

size counts to CMS on a quarterly basis for Medicare and non-Medicare discharges for 

the topic areas for which chart-abstracted data must be submitted (currently AMI, HF, 

PN, and SCIP) (75 FR 50221). Starting with the FY 2014 payment determination, we are 

proposing to change the submission deadline for hospitals to submit aggregate population 

and sample size count data for the measures requiring chart abstraction from four months 

to three months following the last discharge date in the calendar quarter. We are 

proposing this three-month deadline for submission of the aggregate population and 

sample size counts data to provide CMS with information necessary to notify hospitals 

about their data completeness status. Specifically, we currently provide a Provider 
CMS-1518-P 405 

Participation Report the day after the submitted file is processed, which includes a 

calculation of the number of hospital submitted cases by topic, hospital self-reported 

aggregate population and sample size count, and Medicare FFS claims by clinical topic 

and SCIP surgical category. We expect that hospitals will use this report after 

submission to assess their patient-level data completeness and will submit additional 

patient-level cases before the proposed quarterly patient-level deadline. We are 

proposing to provide hospitals with the same 14-day period after the proposed aggregate 

population and sample size count deadline to submit the required patient-level records. 

e. Proposed Sampling and Case Thresholds Beginning with the FY 2015 Payment 

Determination 

 We are proposing to continue the requirement for hospital submission of population 

and sampling data for the FY 2015 payment determination and future years. Hospitals 

must submit to CMS quarterly aggregate population and sample size counts for Medicare 

and non-Medicare discharges for the topic areas for which chart-abstracted data must be 

submitted (AMI, HF, PN, SCIP, EDT and GIM). Hospitals are required to submit their 

aggregate population and sample size count for each topic area. 

 In accordance with the policy we adopted in the FY 2011 IPPS/LTCH PPS final 

rule, hospitals that have not treated patients in a specific topic area must still submit 

quarterly population and sample size counts for all Hospital IQR chart-abstracted data 

topics. For example, if a hospital has not treated AMI patients, the hospital is still 

required to submit a zero for its quarterly aggregate population and sample count for that 

topic in order to meet the requirement. We view it as vital for hospitals to determine 
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accurately their aggregate population and appropriate sampling size data in order for 

CMS to assess hospitals’ data reporting completeness for their total population of cases, 

Medicare and non-Medicare. 

In order to reduce the burden on hospitals that treat a low number of patients in a 

Hospital IQR Program topic area, a hospital that has five or fewer discharges (Medicare 

and non-Medicare combined) in a topic area during a quarter in which data must be 

submitted would not be required to submit patient-level data for that topic area for the 

quarter. The hospital must still submit its aggregate population and sample size counts 

for Medicare and non-Medicare discharges for the topic areas each quarter. Hospitals 

meeting the five or fewer patient discharge exception may voluntarily submit these data. 

We strongly recommend that hospitals review the QIO Clinical Warehouse 

Feedback Reports and the Hospital IQR Program Provider Participation Reports that are 

available after patient-level data are submitted to the QIO Clinical Warehouse. We 

generally update these reports on a daily basis to provide accurate information to 

hospitals about their submissions. These reports enable hospitals to ensure that their data 

were submitted on time and accepted into the QIO Clinical Warehouse. 

f. Proposed HCAHPS Requirements for the FY 2013, FY 2014, and FY 2015 Payment 

Determinations 

 Beginning with discharges occurring in third quarter CY 2011, we are proposing 

to move the HCAHPS data submission deadline forward by one week in order to allow 

for a review and correction period, which we will propose in future rulemaking. 

Currently, hospitals have about 14 weeks after the end of a calendar quarter to submit 
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HCAHPS data for that quarter to the QIO Clinical Warehouse. If this proposal is 

adopted, hospitals will have about 13 weeks after the end of a calendar quarter to submit 

HCAHPS data for that quarter to the QIO Clinical Warehouse. 

Other than this proposed change, we are not proposing any other changes to the 

HCAHPS requirements for the FY 2013 and FY 2014 Hospital IQR Program payment 

determinations, which were adopted in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50220). For FY 2015 Hospital IQR payment determinations, we are proposing to 

continue the HCAHPS requirements as follows. Under these requirements, a hospital 

must continuously collect and submit HCAHPS data in accordance with the current 

HCAHPS Quality Assurance Guidelines and the quarterly data submission deadlines, 

both of which are posted at http://www.hcahpsonline.org. In order for a hospital to 

participate in the collection of HCAHPS data, a hospital must either: (1) contract with an 

approved HCAHPS survey vendor that will conduct the survey and submit data on the 

hospital’s behalf to the QIO Clinical Warehouse; or (2) self-administer the survey 

without using a survey vendor provided that the hospital attends HCAHPS training and 

meets Minimum Survey Requirements as specified on the HCAHPS Web site at: 

http://www.hcahpsonline.org. A current list of approved HCAHPS survey vendors can 

be found on the HCAHPS Web site. For the FY 2015 Hospital IQR Program, we are 

proposing that the HCAHPS data will be based on discharges from January 1, 2013 

through December 31, 2013. 

 
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Every hospital choosing to contract with a survey vendor must provide the sample 

frame of HCAHPS-eligible discharges to its survey vendor with sufficient time to allow 

the survey vendor to begin contacting each sampled patient within 6 weeks of discharge 

from the hospital. (We refer readers to the Quality Assurance Guidelines located at 

http://www.hcahpsonline.org for details about HCAHPS survey administration.) 

Hospitals are strongly encouraged to submit their entire patient discharge list, excluding 

patients who had requested “no publicity” status or who are excluded because of State 

regulations, in a timely manner to their survey vendor to allow adequate time for sample 

creation, sampling, and survey administration. We wish to emphasize that hospitals must 

also provide the administrative data that is required for HCAHPS in a timely manner to 

their survey vendor. This includes the patient MS-DRG at discharge, or alternative 

information that can be used to determine the patient’s service line, in accordance with 

the survey protocols in the most recent HCAHPS Quality Assurance Guidelines. 

We note that the HCAHPS Quality Assurance Guidelines require that hospitals 

maintain complete discharge lists that indicate which patients were eligible for the 

HCAHPS survey, which patients were not eligible, which patients were excluded, and the 

reason(s) for ineligibility and exclusion. (We refer readers to the Quality Assurance 

Guidelines located at http://www.hcahpsonline.org for details about HCAHPS eligibility 

and sample frame creation.) In addition, the hospital must authorize the survey vendor to 

submit data via My QualityNet, the secure part of the QualityNet Web site, on the 

hospital’s behalf. 
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Hospitals must submit at least 300 completed HCAHPS surveys in a rolling 

four-quarter period unless the hospital is too small to obtain 300 completed surveys. We 

wish to emphasize that the absence of a sufficient number of HCAHPS eligible 

discharges is the only acceptable reason for submitting fewer than 300 completed 

HCAHPS surveys in a rolling four quarter period. If a hospital obtains fewer than 100 

completed surveys, the hospital’s HCAHPS scores will be accompanied by a footnote on 

the Hospital Compare Web site alerting the Web site users that the scores should be 

reviewed with caution, as the number of surveys may be too low to reliably assess 

hospital performance. 

After the survey vendor submits the data to the QIO Clinical Warehouse, we 

strongly recommend that hospitals employing a survey vendor promptly review the two 

HCAHPS Feedback Reports (the Provider Survey Status Summary Report and the Data 

Submission Detail Report) that are available. These reports enable a hospital to ensure 

that its survey vendor has submitted the data on time and the data has been accepted into 

the QIO Clinical Warehouse. 

In order to ensure compliance with HCAHPS survey and administration 

protocols, hospitals and survey vendors must participate in all oversight activities. As 

part of the oversight process, during the onsite visits or conference calls, the HCAHPS 

Project Team will review the hospital’s or survey vendor’s survey systems and assess 

protocols based upon the most recent HCAHPS Quality Assurance Guidelines. All 

materials relevant to survey administration will be subject to review. The systems and 

program review includes, but is not limited to: (a) survey management and data systems; 
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(b) printing and mailing materials and facilities; (c) telephone and Interactive Voice 

Response (IVR) materials and facilities; (d) data receipt, entry and storage facilities; and, 

(e) written documentation of survey processes. As needed, hospitals and survey vendors 

will be subject to follow-up site visits or conference calls. We wish to point out that the 

HCAHPS Quality Assurance Guidelines state that hospitals should refrain from activities 

that explicitly influence how patients respond on the HCAHPS survey. If we determine 

that a hospital is not compliant with HCAHPS program requirements, we may determine 

that the hospital is not submitting HCAHPS data that meet the requirements of the 

Hospital IQR Program. 

We continue to strongly recommend that each new hospital participate in an 

HCAHPS dry run, if feasible, prior to beginning to collect HCAHPS data on an ongoing 

basis to meet Hospital IQR Program requirements. New hospitals can conduct a dry run 

in the last month of a calendar quarter. The dry run will give newly participating 

hospitals the opportunity to gain first-hand experience collecting and transmitting 

HCAHPS data without the public reporting of results. Using the official survey 

instrument and the approved modes of administration and data collection protocols, 

hospitals/survey vendors will collect HCAHPS dry-run data and submit the data to My 

QualityNet, the secure portion of QualityNet. 

 We again are encouraging hospitals to regularly check the HCAHPS Web site at 

http://www.hcahpsonline.org for program updates and information. 

 We proposed that HCAHPS scores become part of the Hospital VBP Program in 

FY 2013. As HCAHPS scores become incorporated in hospital payment, we believe that 
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a neutral third-party should administer the survey for hospitals whose annual payment 

updates will be affected by their HCAHPS scores. It is our belief that an experienced 

survey vendor will be best able to ensure reliable results. Therefore, we are considering 

whether to allow only non-subsection (d) hospitals to self-administer the HCAHPS 

survey. We invite public comment that will inform our future policy on this issue. 

g. Proposed Procedures for Claims-Based Measures 

 CMS is proposing to adopt a new claims-based measure for FY 2014, the 

Medicare Spending per Beneficiary Measure, which is included in the chart below. 

Topic FY 2014 Payment Determination: Adopted and Proposed ClaimsBased Quality Measures (No Additional Hospital Data Submission 

Required)

Mortality Measures (Medicare Patients) 

● Acute Myocardial Infarction (AMI) 30-day mortality rate 

● Heart Failure (HF) 30-day mortality rate 

● Pneumonia (PN) 30-day mortality rate 

 

Complications 

 

Readmission Measure (Medicare Patients) 

● Acute Myocardial Infarction 30-day Risk Standardized 

Readmission Measure 

● Heart Failure 30-day Risk Standardized Readmission Measure 

● Pneumonia 30-day Risk Standardized Readmission Measure 

 

 

AHRQ Patient Safety Indicators (PSIs), Inpatient Quality Indicators (IQIs) and 

Composite Measures 

● PSI 06: Iatrogenic pneumothorax, adult 

● PSI 11: Post Operative Respiratory Failure 

● PSI 12: Post Operative PE or DVT 

● PSI 14: Postoperative wound dehiscence 

● PSI 15: Accidental puncture or laceration 

● IQI 11: Abdominal aortic aneurysm (AAA) mortality rate (with 

or without volume) 

● IQI 19: Hip fracture mortality rate 

● Complication/patient safety for selected indicators (composite) 
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Topic FY 2014 Payment Determination: Adopted and Proposed ClaimsBased Quality Measures (No Additional Hospital Data Submission 

Required)

● Mortality for selected medical conditions (composite) 

AHRQ PSI and Nursing Sensitive Care 

● PSI 04 Death among surgical inpatients with serious treatable 

complications 

Hospital Acquired Condition Measures 

● Foreign Object Retained After Surgery 

● Air Embolism 

● Blood Incompatibility 

● Pressure Ulcer Stages III & IV 

● Falls and Trauma: (Includes: Fracture Dislocation Intracranial 

Injury Crushing Injury Burn Electric Shock) 

● Vascular Catheter-Associated Infection 

● Catheter-Associated Urinary Tract Infection (UTI) 

● Manifestations of Poor Glycemic Control 

Cost Efficiency 

● Medicare Spending per Beneficiary* 

*New proposed measure for FY 2014

We are not proposing to change the procedures and time periods we adopted in 

the FY 2011 IPPS/LTCH PPS final rule for the FY 2012, FY 2013 and FY 2014 payment 

determinations. For the FY 2014 payment determination, we are proposing to use up to 

3 years of Medicare FFS claims data to calculate the measures, as appropriate for the 

measure. 

Hospitals are encouraged to regularly check the QualityNet Web site, 

http://www.QualityNet.org, for program updates and information. 

h. Proposed Data Submission Requirements for Structural Measures 

 Structural measures assess the characteristics and capacity of the provider to 

deliver quality healthcare. We are proposing to add one additional structural measure for 

the FY 2014 payment determination, Participation in a Systematic Clinical Database 
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Registry for General Surgery, and to align the submission deadline for all structural 

measures with the submission deadline for the fourth quarter of the chart-abstracted 

measures. We are proposing to update the period of data collection that hospitals will 

submit the required registry participation information once annually for the structural 

measures via a Web-based collection tool between April 1, 2012 and May 15, 2012 with 

respect to the time period of January 1, 2011 through December 31, 2011. This proposal 

will give CMS a more complete picture of registry participation as well as synchronize 

data submissions for structural and chart-abstracted measures. These measures do not 

require the hospital to participate in a registry. 

 Below is the list of structural measures we have adopted or are proposing to 

adopt for the FY 2014 payment determination: 

Topic FY 2014 Payment Determination: Adopted and Proposed 

Structural Measures 

Cardiac Surgery 

● Participation in a Systematic Database for Cardiac Surgery

Stroke Care 

● Participation in a Systematic Clinical Database Registry for Stroke 

Care

Nursing Sensitive Care 

● Participation in a Systematic Clinical Database Registry for Nursing 

Sensitive Care

General Surgery 

● Participation in a Systematic Clinical Database Registry for General 

Surgery* 

*New proposed measures for FY 2014
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i. Proposed Data Submission and Reporting Requirements for Healthcare-Associated 

Infection (HAI) Measures Reported via NHSN 

 As discussed above, we are proposing to adopt 2 new HAI measures for the 

FY 2014 payment determination and 3 HAI measures for FY 2015 payment 

determination. For FY 2014, the two proposed measures are Central Line Insertion 

Practices Adherence Percentage and Catheter Associated Urinary Tract Infection. For 

FY 2015, the three proposed measures are: Healthcare Provider Influenza Vaccination, 

MRSA Bacterimia and C. Difficile. Below is the list of HAI measures we are proposing 

to adopt for the FY 2014 and FY 2015 payment determinations: 

Topic FY 2014 and 2015 Payment Determination: 

Proposed and Adopted Healthcare-Associated Infection Measures 

(CDC/NHSN) 

Surgical Site Infection* 

Central Line Insertion Practices Adherence Percentage** 

Catheter Associated Urinary Tract Infection** 

Clostridium Difficile*** 

Healthcare Provider Influenza Vaccination*** 

MRSA Bacteremia*** 

* Measures adopted for FY 2014 payment determination in the FY 2011 IPPS/LTCH PPS final 

rule 

** Measures proposed for FY 2014 payment determination in this proposed rule 

*** Measures proposed for FY 2015 payment determination in this proposed rule 

We are proposing to update the current data submission and reporting 

requirements for these proposed measures. Specifically, we are proposing to utilize the 

data submission and reporting standard procedures that have been set forth by CDC for 

NHSN participation in general and for submission of these measures to NHSN. We refer 

readers to the CDC’s NHSN Web site (http://www.cdc.gov/nhsn) for detailed data 
CMS-1518-P 415 

submission and reporting procedures. We believe that these procedures are feasible 

because they are already widely used by over 4,000 hospitals reporting HAI data using 

the NHSN. Our proposal seeks to reduce hospital burden by aligning CMS data 

submission and reporting procedures with NHSN procedures currently utilized by 

hospitals, including hospitals complying with 28 State HAI reporting requirements. The 

existing data collection and submission timeframes for the HAI measures for the 

FY 2014 payment determination, which we are proposing to use for the HAI measures 

we have proposed above, are shown below. Hospitals must submit their quarterly data to 

NHSN for Hospital IQR Program purposes on or around the dates shown in the table 

below (updates to this will be posted on the QualityNet Web site). 

Submission Timeframes for HAI Measures 

for the FY 2014 Payment Determination

CY 2012 Infection 

Events, and Central Line 

Insertion Practices

CDC-NHSN Collection 

and Quarterly Report 

Generation Timeframe

Final Submission Deadline for 

Hospital IQR Program 

FY 2014 Payment 

Determination

Q1 (Jan-Mar 2012) January 31st – August 

15th

August 15, 2012

Q2 (Apr-Jun 2012) April 30th – November 

15th

November 15, 2012

Q3 (Jul-Sep 2012) July 31st – Feb-15th February 15, 2013

Q4 (Oct-Dec 2012) October 31st – May 15th May 15, 2013

 Hospitals would have until the Hospital IQR Program final submission deadline 

to submit their quarterly data to NHSN. After the final Hospital IQR Program 
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submission deadline has occurred for each CY 2012 quarter, CMS will obtain the 

hospital-specific calculations that have been generated by the NHSN for the Hospital IQR 

Program. 

 We invite public comment on this proposal. 

6. Proposed Chart Validation Requirements for Chart-Abstracted Measures 

a. Proposed Changes to the Chart Validation Requirements and Methods for the FY 2012 

Payment Determination and Subsequent Years 

We are proposing several changes to the chart validation requirements and 

methods we adopted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50225 through 

50229) for the FY 2012 payment determination and subsequent years. In previous years, 

charts were requested by the CMS CDAC contractor and hospitals were given 45 days 

from the date of the request to submit the requested records. If any record(s) were not 

received by the 45-day requirement, the CMS CDAC contractor assigned a “zero” 

validation score to each measure in a missing record. We are proposing to change the 

time period given to hospitals to submit medical records to the CDAC contractor to 30 

calendar days, and we are proposing to codify this proposal at 42 CFR 412.140(d)(1). 

This proposed change in submission timeframe will align the current process with the 

requirements in 42 CFR 476.78(b)(2), which currently allow only 30 days for chart 

submission in the context of reviews by QIOs. We are proposing this deadline 

modification to reduce the time we need to complete validation, and provide hospitals 

with feedback on their abstraction accuracy. We believe that this linkage between 

Hospital IQR Program validation discharge quarters and the same fiscal year’s Hospital 
CMS-1518-P 417 

VBP Program proposed performance period would improve the reliability and accuracy 

of the Hospital VBP Program’s chart-abstracted measures. Hospitals that are subject to 

Hospital IQR payment reduction due to not passing our validation requirement would be 

excluded from receiving a Hospital VBP performance score and corresponding incentive 

payment under section 1886(o)(1)(C)(ii)(I) of the Act. Thus, CMS would ensure that the 

data submitted on chart-abstracted measures we adopt for the Hospital VBP Program is 

accurate by virtue of validating it under the validation procedures we have adopted for 

the Hospital IQR Program. 

b. Proposed Supplements to the Chart Validation Process for the FY 2014 Payment 

Determination and Subsequent Years 

We are proposing to continue to use the supplements to the chart validation 

requirements and methods we adopted in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50227 through 50229) for FY 2014 payment determinations and future years with 

several proposed modifications. 

We are proposing to add hospitals to our validation sample if they were open 

under their current CCNs in FY 2012 but not selected for validation in the three previous 

annual Hospital IQR Program validation samples. We are proposing this addition to 

supplement our validation approach to ensure that all eligible Hospital IQR Program 

hospitals are selected for validation at least once every 4 years. We are proposing this 

addition starting in FY 2015 because FY 2015 would be the fourth year that CMS would 

have used the random validation approach (which begins in FY 2012 as adopted in the 

FY 2011 IPPS/LTCH PPS final rule). We invite public comment on this proposal. 
CMS-1518-P 418 

 We believe that this proposed Hospital IQR Program validation process meets the 

requirements set forth in section 1886(b)(3)(B)(viii)(XI) of the Act. This section states 

that “the Secretary shall establish a process to validate measures specified under this 

clause as appropriate. Such process shall include the auditing of a number of randomly 

selected hospitals sufficient to ensure validity of the reporting program under this clause 

as a whole and shall provide a hospital with an opportunity to appeal the validation of 

measures reported by such hospital.” 

 Starting with the FY 2012 payment determination and continuing in subsequent 

fiscal years, the chart validation process audits 800 randomly selected hospitals for the 

discharge quarters. This sample size is sufficient to validate more than 22 percent of 

subsection (d) hospitals in an applicable fiscal year and ensure accuracy of the Hospital 

IQR Program quality data. 

 For FY 2014 payment determination, we are proposing to validate 24 chartabstracted measures including 19 currently validated measures, and 5 proposed additional 

measures. The FY 2014 proposed validation reflects the 5 measures we are proposing to 

add (2 EDT measures, Central Line Associated Blood Stream Infection, Global Influenza 

Immunization, and Global Pneumonia Immunization measures) and the 8 measures we 

are proposing to retire (AMI-1, AMI-3, AMI-4, AMI-5, HF-4, PN-4, PN-5c, and SCIP 

Infection 6). 

 Validation of the HCAHPS measure is conducted through our oversight activities. 

We provide oversight of all HCAHPS survey vendors and hospitals self-administering 

the survey in order to ensure that the data collection protocols are followed. We also 
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provide oversight and validation through our review of Quality Assurance Plans, site 

visits, conference calls and detailed data analyses each quarter to ensure there are no 

anomalies found in the data. In particular, we use site visits to review all data collection 

activities, including data reviews to track a discharged patient from sampling to survey 

administration to data submission. 

We are proposing, starting with FY 2014 payment determinations, a modest 

increase to the current Hospital IQR Program validation sample of SCIP, AMI, HF, and 

PN cases. Specifically, we are proposing to add three charts per selected hospital per 

quarter to the validation sample. This additional quarterly sample would enable us to 

validate the CLABSI measure that we added to the Hospital IQR Program measure set 

beginning with the FY 2014 payment determination. CLABSI is a relatively rare event 

compared to SCIP, AMI, HF, and PN cases. In 2009, about 18,000 CLABSIs occurred in 

ICU patients in the United States, and these infections were a major contributor to 

prolonged hospital stays and inpatient mortality. We are proposing a process to validate 

the CLABSI measure that takes into account the relative infrequency of this event and the 

case-finding methodology for it, specifically the requirements for a positive blood culture 

result and the presence of a central venous catheter in the patient at the time of, or within 

48 hours before, onset of the infection. We recognize that the current validation process 

and sample size for AMI, HF, PN, and SCIP measures is not likely to be sufficiently 

reliable to detect systematic underreporting of CLABSI. Unlike the current AMI, HF, 

PN, and SCIP chart abstracted process of care measures, CLABSI is a rarely occurring 

infection among acute care inpatient discharges. We estimate that between 0.1 percent to 
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0.2 percent of all acute care inpatient patient discharges nationwide involve patients who 

are infected with a CLABSI. We believe that our current Hospital IQR AMI, HF, PN, 

and SCIP sample sizes and sample methods would not reliably validate CLABSI measure 

rates at the hospital level because of the relatively rare occurrence of these events. We 

also seek to target validation of the CLABSI measure to minimize hospital burden in 

complying with our sample size proposals, for which hospitals must find, photocopy, and 

return requested medical records to CMS. If CMS did not utilize this targeted validation 

approach for the CLABSI measure, hospitals would have to submit 200 to 300 additional 

randomly selected cases in order to effectively validate this measure, given its rare 

occurrence. We believe that our proposed CLABSI validation process addresses these 

limitations through the use of a targeted incremental validation sample comprised of three 

charts of possible CLABSI events, and will reliably validate the Hospital IQR Program 

CLABSI measure while not overly burdening hospitals with medical record requests. 

Specifically, we are proposing to identify sampled hospitals’ three quarterly 

potential CLABSI charts using a two-step selection process that would target intensive 

care unit patients with bloodstream infection (positive blood culture results) and a Central 

Venous Catheter (CVC) provided by sampled hospitals to CMS. In the first step of this 

process, a CMS contractor would require the 800 randomly sampled hospitals to provide 

a quarterly list of all blood cultures positive for infection status taken from intensive care 

units conducting CLABSI surveillance during the discharge quarter. We are aware that 

this list will include both reported CLABSI events and many non-CLABSI events, 

including patients with and without CVCs. In clinical terms, our intent in reviewing 
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these positive blood culture lists is to identify the information needed to determine 

whether the blood culture isolate is a likely pathogen found at least once, or a common 

skin commensal (CSC) found in two or more positive blood cultures drawn on separate 

occasions. CSC’s are microorganisms that are commonly found on the skin and often 

indicate contamination of the blood culture media rather than infection by the 

microorganism when it is identified in a single blood culture test. Two sets of blood 

cultures are needed to differentiate true infection from contamination. The list of CSCs is 

comprised of the following organisms: diphtheroids (Corynebacterium spp.); Bacillus

spp. (not B. anthracis); Priopionibacterium spp.; coagulase negative staphylococci 

including S. epidermidis; viridans group streptococci; Aerococcus spp.; and Micrococcus

spp. This list of CSCs is also found at the NHSN Web site, 

http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf. We would also 

require hospitals to self-identify intensive care unit patients with a CVC that are on this 

blood culture list. Using all of this information, we would be able to identify intensive 

care unit patients with a bloodstream infection and with a CVC (that is, candidate 

CLABSI events) for subsequent sampling. 

In the second step of this process, we would randomly sample these candidate 

CLABSI events (ICU patients with a CVC and where a pathogen was recovered at least 

once or the same CSC was cultured from 2 or more blood cultures drawn on separate 

occasions). Specifically, the CMS CDAC would require hospitals to submit up to 

3 medical records each quarter meeting these criteria, randomly selected by CMS from 

among eligible charts. This number of medical records is sufficient to detect unreported 
CMS-1518-P 422 

CLABSI events based on our sample size analysis and experience from State health 

department validation efforts. This proposed process utilizes the validation experience 

from at least ten current State health department validation initiatives. In addition, we are 

proposing to randomly validate CLABSI data by abstracting all necessary quality data 

from the 12 quarterly medical records in our AMI, HF, PN, and SCIP targets already 

collected for IQR validation as well as the 3 additional records we later propose to collect 

for ED throughput/Immunization. Our intent in validating all currently requested 

quarterly medical records for CLABSI is to assess reliability of CLABSI measure rates 

from a random sample of patients independent from the proposed 3 record sample 

selected using blood culture lists and CVC presence to target underreporting of CLABSI 

events to the CDC’s NHSN. In our proposed 12 record random sample of CLABSI 

events, we will not use blood culture list and CVC presence in our sampling, since this 

sample is already drawn from the AMI, HF, PN, and SCIP hospital reported data reported 

to CMS. By combining a random and targeted sampling approach using two independent 

sources to validate CLABSI data, we believe that we are adequately assessing the 

accuracy and reliability of the CLABSI measure in accordance with section 

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

We are proposing to determine the CLABSI validation score using a process that 

begins with the CMS contractor validation coordinator comparing the CDAC’s CLABSI 

infection status to the hospital’s event data reported to NHSN for the applicable quarter. 

For each medical record reviewed, a hospital would receive a match only if the CMS 

contractor validation coordinator determines equivalency between the CMS contractor’s 
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determination of infection status and the infection status reported to NHSN. For 

example, if one of the CMS-requested validation medical records revealed CLABSI and 

the event was not reported to the NHSN, then the hospital would receive a zero score for 

the CLABSI measure for that validated record. If the CMS contractor discovered that a 

second record in the CMS validation sample indicated no CLABSI event, but a CLABSI 

was reported to the NHSN for the record, the hospital would also receive a zero score for 

the CLABSI measure for that validation record. Thus, Hospitals would only receive a 

100% CLABSI validation score for individual records if their CMS validation records’ 

CLABSI status was consistent with the information reported, or not reported, to NHSN. 

In the above example, if the CMS quarterly validation process identified that 13 out of 15 

total sampled records accurately reported the presence of a CLABSI or did not report a 

CLABSI where none was present, then the hospital’s CLABSI validation score would be 

13/15, or about 87 percent. 

Starting with FY 2014 payment determination, we are also proposing to add a 

sixth quarterly sample, which would enable us to validate the EDT measures and the 

Immunization for Influenza and Immunization for Pneumonia global measures that we 

added to the Hospital IQR Program measure set. We are proposing to modify the current 

process (75 FR 50225- 75 FR 50229) for these measures in two ways. First, we are 

proposing to select 3 additional records each quarter from the records submitted by the 

800 annually sampled hospitals. These records would only include principal diagnoses 

and surgical procedures not already included in the AMI, HF, PN, and SCIP populations 

eligible for validation sampling in these four topic areas. Second, we would abstract 
CMS-1518-P 424 

EDT and the Immunization for Influenza and Immunization for Pneumonia global 

measure data from the 15 quarterly AMI, HF, PN, SCIP and CLABSI records already 

submitted by hospitals for IQR validation. We would validate 18 records per quarter for 

these measures. With the addition of this sample of three records, we would ensure that 

all hospitals that reported chart-abstracted Hospital IQR data in all principal procedure 

and diagnosis codes would be eligible for sample selection for these global measures, 

thus, starting in FY 2014, we would be validating a total of 18 records per quarter per 

validated hospital in 6 strata (1) SCIP, (2) AMI, (3) HF, (4) PN, (5) CLABSI, and (6) 

EDT/immunization measures. 

7. Proposed QIO Regulation Changes for Provider Medical Record Deadlines Possibly 

Including Serious Reportable Events 

 Our Hospital IQR validation requirement has utilized 42 CFR 476.78 authority 

and deadlines to require participating hospitals to return requested medical record 

information in a timely manner. Our State QIOs use this information to educate hospitals 

on medical record abstraction accuracy, and identify potential opportunities for quality 

improvement through medical record review. It is our goal to improve the alignment of 

QIO work in the Hospital IQR Program, quality improvement assistance, beneficiary (or 

beneficiary representative) requested QIO quality of care reviews, and QIO medical 

necessity reviews to improve the following three aims: (1) improve individual care; 

(2) improve health for populations; and (3) lower cost through improvement. QIOs serve 

a critical role in advancing these three aims through their work with Medicare providers 

and beneficiaries to advance quality care and health. 
CMS-1518-P 425 

 Moreover, because we developed our validation process based on the 

requirements of the QIO program regulations, we are also proposing corresponding 

changes to 42 CFR 476.78(b), along with minor editorial revisions. This section includes 

requirements related to the submission of medical information as well as other 

information associated with the prospective payment system. Specifically, we are 

proposing to add a new §478.78(b)(2)(ii) that would require the submission of medical 

information within 21 days in those situations in which a “serious reportable event” or 

other circumstance has been identified during the course of a QIO review. For purposes 

of this subsection, we are proposing to define the term “serious reportable event” to be 

consistent with the NQF’s definition of a serious reportable event in its report “Serious 

Reportable Events in Healthcare 2006 Update.” These events include the following: 

Surgical Events

 • Surgery performed on the wrong body part 

 • Surgery performed on the wrong patient 

 • Wrong surgical procedure performed on a patient 

 • Unintended retention of a foreign object in a patient after surgery or other 

procedure 

 • Intraoperative or immediately postoperative death in an ASA Class I patient 

Product or Device Events

 • Patient death or serious disability associated with the use of contaminated 

drugs, devices or biologics provided by the healthcare facility 
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 • Patient death or serious disability associated with the use or function of a device 

in patient care in which the device is used or functions other than as intended 

 • Patient death or serious disability associated with intravascular air embolism 

that occurs while being cared for in a healthcare facility 

Patient Protection Events

 • Infant discharged to the wrong person 

 • Patient death or serious disability associated with patient leaving the facility 

without permission 

 • Patient suicide, or attempted suicide, resulting in serious disability while being 

cared for in a healthcare facility 

Care Management Events

 • Patient death or serious disability associated with a medication error (for 

example, errors involving the wrong drug, wrong dose, wrong patient, wrong time, wrong 

rate, wrong preparation or wrong route of administration) 

 • Patient death or serious disability associated with a hemolytic reaction 

(abnormal breakdown of red blood cells) due to the administration of ABO/HLA – 

incompatible blood or blood products 

 • Maternal death or serious disability associated with labor or delivery in a lowrisk pregnancy while being cared for in a healthcare facility 

 • Patient death or serious disability associated with hypoglycemia, the onset of 

which occurs while the patient is being cared for in a healthcare facility 
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 • Death or serious disability associated with failure to identify and treat 

hyperbilirubinemia (condition where there is a high amount of bilirubin in the blood) in 

newborns 

 • Stage 3 or 4 pressure ulcers acquired after admission to a healthcare facility 

 • Patient death or serious disability due to spinal manipulative therapy 

 • Artificial insemination with the wrong donor sperm or wrong egg 

Environmental Events

 • Patient death or serious disability associated with an electric shock while being 

cared for in a healthcare facility 

 • Any incident in which a line designated for oxygen or other gas to be delivered 

to a patient contains the wrong gas or is contaminated by toxic substances 

 • Patient death or serious disability associated with a burn incurred from any 

source while being cared for in a healthcare facility 

 • Patient death or serious disability associated with a fall while being cared for in 

a healthcare facility 

 • Patient death or serious disability associated with the use of restraints or 

bedrails while being cared for in a healthcare facility 

Criminal Events

 • Any instance of care ordered by or provided by someone impersonating a 

physician, nurse, pharmacist, or other licensed healthcare provider 

 • Abduction of a patient of any age 

 • Sexual assault on a patient within or on the grounds of a healthcare facility 
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 • Death or significant injury of a patient or staff member resulting from a 

physical assault (that is, battery) that occurs within or on the grounds of a healthcare 

facility 

 This proposed 21 day medical record deadline would be used when, for example, 

in the QIO’s judgment, delays in receiving medical information could negatively 

undermine its efforts to evaluate the quality of care provided or the facility’s adherence to 

payment policies. It also would enable QIOs to better utilize, and respond to, information 

about adverse events gained from the quality reporting program, in a timely fashion so 

that QIOs can have an improved and more immediate impact on the quality of health 

care. 

 We also are proposing a technical correction to 42 CFR 476.78(a) to correct a 

cross reference. 

 We invite public comment on our proposal to improve patient care through QIO 

access to more rapid provider information about “serious reportable events” and our 

proposed technical correction to 42 CFR 476.78(a). 

8. Proposed Data Accuracy and Completeness Acknowledgement Requirements for the 

FY 2012 Payment Determination and Subsequent Years 

 We are proposing to require hospitals to continue to electronically acknowledge 

their data accuracy and completeness once annually. However, we are proposing to 

change the submission deadline to be used for the FY 2012 Hospital IQR Program 

payment determination and subsequent years. This proposal will allow us to align the 

submission deadline with the final quarter of the chart-abstracted measures. Hospitals 
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will continue to submit the required electronic acknowledgment attesting that the data 

provided to meet the FY 2012 Hospital IQR Program data submission requirements is 

accurate and complete to the best of the hospital's knowledge at the time of data 

submission. We are proposing to make the submission deadline for the Data Accuracy 

and Completeness Acknowledgement May 15, 2012 with respect to the time period of 

January 1, 2011 through December 31, 2011. We invite public comment on this 

proposal. 

9. Proposed Public Display Requirements for the FY 2014 Payment Determination and 

Subsequent Years 

 We are proposing to continue, for the FY 2014 payment determination and 

subsequent years, the approach we adopted in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50230) for public display requirements for the FY 2012 payment determination 

and subsequent years. 

 The Hospital IQR Program quality measures are typically reported on the 

Hospital Compare Web site http://www.hospitalcompare.hhs.gov, but on occasion are 

reported on other CMS Web sites. We require that hospitals sign a Notice of 

Participation form when they first register to participate in the Hospital IQR Program. 

Once a hospital has submitted a form, the hospital is considered to be an active Hospital 

IQR Program participant until such time as the hospital submits a withdrawal form to 

CMS (72 FR 47360). Hospitals signing this form agree that they will allow us to publicly 

report the quality measures included in the Hospital IQR Program. 
CMS-1518-P 430 

 We will continue to display quality information for public viewing as required by 

section 1886(b)(3)(B)(viii)(VII) of the Act. Before we display this information, hospitals 

will be permitted to review their information as recorded in the QIO Clinical Warehouse. 

 We invite public comment on this proposal. 

10. Proposed Reconsideration and Appeal Procedures for the FY 2012 Payment 

Determination 

 We are proposing to continue, for the FY 2012 payment determination and 

subsequent years, the general approach we adopted in the FY 2011 IPPS/LTCH PPS final 

rule (75 FR 50230) for reconsideration and appeal procedures for the FY 2011 payment 

determination. We also are proposing to codify the requirements under this process at 

42 CFR 412.140(e). We discuss each of the regulatory provisions being proposed, as 

well as specific changes, below. 

 We are proposing that the general deadline for submitting a request for 

reconsideration in connection with the FY 2012 payment determination will be 30 days 

from the date of receipt of the payment determination notification. Historically, most 

reconsideration requests are based on the failure to meet established data submission 

deadlines. While we want to ensure that hospitals have an opportunity to request 

reconsiderations when warranted, we also need to balance this goal with our need to 

complete the reconsideration process in a timely manner and with the hospitals’ desire to 

obtain final decisions on their requests in a timely manner. Therefore, we are proposing 

to reduce the reconsideration and appeal period from a deadline of November 1st 2012 to 

30 days after hospital receipt of the payment determination notification. Notifications 
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will be sent via a trackable mail option such as Certified U.S. Mail or Registered Mail. 

We include this change in the proposed §412.140(e)(1). 

As discussed more fully below, we are proposing that all hospitals submit a 

request for reconsideration and receive a decision on that request before they can file an 

appeal with the Provider Reimbursement Review Board (PRRB). For the FY 2012 

payment determination, we are proposing to continue utilizing many of the same 

procedures that we utilized for the FY 2011 requests for reconsideration. We are, 

however, clarifying that a hospital must submit all documentation and evidence that 

supports its request for reconsideration at the time that it submits its request. This 

includes copies of any communications, such as e-mails that the hospital believes 

demonstrate its compliance with the program requirements, as well as all paper medical 

records that support the hospital’s rationale for seeking reconsideration. The information 

that must be included when a hospital submits a reconsideration request has been listed in 

proposed §412.140(e)(2). Under these proposed procedures, the hospital must: 

 --Submit to CMS, via QualityNet, a Reconsideration Request form (available on 

the QualityNet Web site) containing the following information: 

 -- Hospital CMS Certification number (CCN). 

 -- Hospital Name. 

 -- CMS-identified reason for failure (as provided in the CMS notification of 

failure letter to the hospital). 
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 -- Hospital basis for requesting reconsideration. This must identify the hospital's 

specific reason(s) for believing it met the Hospital IQR Program requirements and should 

receive the full update to the standardized amount. 

-- CEO contact information, including name, e-mail address, telephone number, 

and mailing address (must include the physical address, not just the post office box). We 

note that to the extent a hospital can submit a request for reconsideration on-line, the 

burden on our staff would be reduced and, as a result, we can more quickly review the 

request. 

 -- QualityNet System Administrator contact information, including name, e-mail 

address, telephone number, and mailing address (must include the physical address, not 

just the post office box). 

 -- Paper medical record requirement for reconsideration requests involving 

validation. We are proposing that if a hospital asks us to reconsider an adverse Hospital 

IQR Program payment decision made because the hospital failed the validation 

requirement, the hospital must submit paper copies of all the medical records that it 

submitted to the CDAC contractor each quarter for purposes of the validation. Hospitals 

must submit this documentation to a CMS contractor. The contractor will be a QIO 

support contractor, which has authority to review patient level information under 

42 CFR Part 480. We will post the address where hospitals can ship the paper charts on 

the QualityNet Web site after we issue the FY 2012 IPPS/LTCH PPS final rule. 

 Hospitals submitting a Hospital IQR Program validation reconsideration request 

will have all data elements to be reconsidered reviewed by CMS, and not their State QIO. 
CMS-1518-P 433 

(The State QIO is available to conduct a quarterly validation appeal if requested to do so 

by a hospital.) 

Hospitals must provide a written justification for each appealed data element 

classified during the validation process as a mismatch. We will review the data elements 

that were labeled as mismatched, as well as the written justifications provided by the 

hospitals, and make a decision on the reconsideration request. 

As we mentioned above, hospitals that submit a reconsideration request to CMS 

must receive a decision on that request prior to submitting a PRRB appeal. We believe 

that the reconsideration process is less costly for both CMS and hospitals, and that it 

decreases the number of PRRB appeals by resolving issues earlier in the reconsideration 

and appeals process. We have proposed language at §412.140(e)(3) stating that a 

hospital that receives an adverse decision on its reconsideration request may appeal that 

decision to the PRRB. 

Following receipt of a request for reconsideration, we will-- 

● Provide an e-mail acknowledgement, using the contact information provided in 

the reconsideration request, to the CEO and the QualityNet Administrator that the request 

has been received. 

● Provide written notification to the hospital CEO, using the contact information 

provided in the reconsideration request, regarding our decision. We expect the process to 

take approximately 90 days from the receipt of the reconsideration request. 

We are proposing to continue for the FY 2012 Hospital IQR reconsideration and 

future years the scope of review when a hospital requests reconsideration because it 
CMS-1518-P 434 

failed our validation requirements, which we adopted in the FY 2010 IPPS/RY 2010 

LTCH PPS final rule (74 FR 43892). The scope of this review will be as follows:

 1. Hospital requests reconsideration for CDAC contractor-abstracted data 

elements classified as mismatches affecting validation scores. Hospitals must timely 

submit a copy of the entire requested medical record to the CDAC contractor during the 

quarterly validation process for the requested case to be eligible to be reconsidered on the 

basis of mismatched data elements. Only hospitals that fail to meet the passing threshold 

for the quarterly validation would receive an opportunity to appeal the validation results 

to their State QIO. 

 2. Hospital requests reconsideration for medical record copies submitted during 

the quarterly validation process and classified as invalid record selections. Invalid record 

selections are defined as medical records submitted by hospitals during the quarterly 

validation process that do not match the patient’s episode of care information as 

determined by the CDAC contractor (in other words, the contractor determines that the 

hospital returned a medical record that is different from that which was requested). If the 

CDAC contractor determines that the hospital has submitted an invalid record selection 

case, it awards a zero validation score for the case because the hospital did not submit the 

entire copy of the medical record for that requested case. During the reconsideration 

process, our review of invalid record selections will initially be limited to determining 

whether the record submitted to the CDAC contractor was actually an entire copy of the 

requested medical record. If we determine during reconsideration that the hospital did 
CMS-1518-P 435 

submit the entire copy of the requested medical record, then we would abstract data 

elements from the medical record submitted by the hospital. 

 3. Hospital requests reconsideration for medical records not submitted to the 

CDAC contractor within the proposed 30 calendar day deadline. Our review will initially 

be limited to determining whether the CDAC contractor received the requested record 

within the proposed 30 calendar days, and whether the hospital received the initial 

medical record request. If we determine during reconsideration that the CDAC 

contractor did receive a paper copy of the requested medical record within the proposed 

30 calendar days, then we would abstract data elements from the medical record 

submitted by the hospital. If we determine that the hospital received a request for 

medical records and did not submit the requested records within the proposed 30 day 

period, CMS will not accept these records as part of the reconsideration. CMS will not 

abstract data from charts not received timely by the CMS contractor. Please note that this 

proposed language is also designed to address those instances where the hospital’s 

request is based on “invalid record selections,” which we have defined as medical records 

submitted during the quarterly validation process that do not match the patient’s episode 

of care information as determined by the CMS contractor as described above in situation 

2, above “Hospital requests reconsideration for medical record copies submitted during 

the quarterly validation process and classified as invalid record selections.” 

 In sum, we are proposing to continue to initially limit the scope of our 

reconsideration reviews involving validation to information already submitted by the 

hospital during the quarterly validation process, and we will not abstract medical records 
CMS-1518-P 436 

that were not submitted to the CMS contractor during the quarterly validation process. 

We would expand the scope of our review only if we find during the initial review that 

the hospital correctly and timely submitted the requested medical records. In that case, 

we would abstract data elements from the medical record submitted by the hospital as 

part of our review of its reconsideration request.

If a hospital is dissatisfied with the result of a Hospital IQR Program 

reconsideration decision, the hospital may file an appeal under 42 CFR Part 405, Subpart 

R (a PRRB appeal). We invite public comment on the extent to which these proposed 

procedures will be less costly for hospitals, and whether they will lead to fewer PRRB 

appeals. 

11. Proposed Hospital IQR Program Disaster Waivers 

 In our experience, there have been times when hospitals have been unable to 

submit required quality data due to extraordinary circumstances that are not within their 

control. It is our goal to not penalize hospitals for such circumstances or unduly increase 

their burden during these times. Therefore, we are proposing to continue, for the 

FY 2014 and subsequent years payment determinations, the process we adopted in the 

FY 2011 IPPS/LTCH PPS final rule (75 FR 50225), for hospitals to request and for CMS 

to grant waivers with respect to the reporting of required quality data when there are 

extraordinary circumstances beyond the control of the hospital. Under the process, in the 

event of extraordinary circumstances, such as a natural disaster, not within the control of 

the hospital, for the hospital to receive consideration for an extension or waiver of the 

requirement to submit quality data for one or more quarters, a hospital would submit to 
CMS-1518-P 437 

CMS a request form that would be made available on the QualityNet Web site. The 

following information should be noted on the form: 

● Hospital CCN; 

● Hospital Name; 

● CEO and any other designated personnel contact information, including name, 

e-mail address, telephone number, and mailing address (must include a physical address, 

a post office box address is not acceptable); 

● Hospital’s reason for requesting an extension or waiver; 

● Evidence of the impact of the extraordinary circumstances, including but not 

limited to photographs, newspaper and other media articles; and 

● A date when the hospital will again be able to submit Hospital IQR Program 

data, and a justification for the proposed date. 

 The request form must be signed by the hospital’s CEO. We are proposing that a 

request form must be submitted within 30, rather than 45, days of the date that the 

extraordinary circumstance occurred. The QIO in the hospital’s state will forward the 

request form to CMS. Following receipt of the request form, CMS will: (1) provide a 

written acknowledgement using the contact information provided in the request, to the 

CEO and any additional designated hospital personnel, notifying them that the hospital’s 

request has been received; and (2) provide a formal response to the CEO and any 

additional designated hospital personnel using the contact information provided in the 

request notifying them of our decision. 
CMS-1518-P 438 

This proposal does not preclude CMS from granting waivers or extensions to 

hospitals that have not requested them when we determine that an extraordinary 

circumstance, such as an act of nature (for example, hurricane), affects an entire region or 

locale. If CMS makes the determination to grant a waiver or extension to hospitals in a 

region or locale, CMS proposes to communicate this decision through routine 

communication channels to hospitals, vendors and QIOs, including but not limited to 

issuing memos, emails and notices on the QualityNet Web site. We are proposing to 

include an overview of this process in proposed 42 CFR 412.140(c)(2). We invite public 

comment on this proposal. 

12. Electronic Health Records (EHRs) 

a. Background 

 Starting with the FY 2006 IPPS final rule, we have encouraged hospitals to take 

steps toward the adoption of EHRs (also referred to in previous rulemaking documents as 

electronic medical records) that will allow for reporting of clinical quality data from the 

EHRs directly to a CMS data repository (70 FR 47420 through 47421). We sought to 

prepare for future EHR submission of quality measures by sponsoring the creation of 

electronic specifications for quality measures under consideration for the Hospital IQR 

Program. 

b. HITECH Act EHR Provisions

 The HITECH Act (Title IV of Division B of the ARRA, together with Title XIII 

of Division A of the ARRA) authorizes payment incentives under Medicare for the 

adoption and use of certified EHR technology beginning in FY 2011. Hospitals are 
CMS-1518-P 439 

eligible for these payment incentives if they meet requirements for meaningful use of 

certified EHR technology, which include reporting on quality measures using certified 

EHR technology. With respect to the selection of quality measures for this purpose, 

under section 1886(n)(3)(A)(iii) of the Act, as added by section 4102 of the HITECH 

Act, the Secretary shall select measures, including clinical quality measures, that 

hospitals must provide to CMS in order to be eligible for the EHR incentive payments. 

With respect to the clinical quality measures, section 1886(n)(3)(B)(i) of the Act requires 

the Secretary to give preference to those clinical quality measures that have been selected 

for the Hospital IQR Program under section 1886(b)(3)(B)(viii) of the Act or that have 

been endorsed by the entity with a contract with the Secretary under section 1890(a) of 

the Act. All measures must be proposed for public comment prior to their selection, 

except in the case of measures previously selected for the Hospital IQR Program under 

section 1886(b)(3)(B)(viii) of the Act. The final rule for the Medicare and Medicaid 

EHR Incentive Programs includes 15 clinical quality measures for eligible hospitals and 

critical access hospitals (75 FR 44418), 2 of which were previously selected for the 

Hospital IQR Program under section 1886(b)(3)(B)(viii) of the Act. The remainder of the 

measures for these incentive programs are being proposed for the Hospital IQR Program 

for the FY 2015 payment determination. 

 We continue to believe there are important synergies with respect to the two 

programs. We believe the financial incentives under the HITECH Act for the adoption 

and meaningful use of certified EHR technology by hospitals will encourage the adoption 

and use of certified EHRs for the reporting of clinical quality measures under the 
CMS-1518-P 440 

Hospital IQR Program. Through the EHR Incentive Programs we expect that the 

submission of quality data through EHRs will provide a foundation for establishing the 

capacity of hospitals to send, and for CMS to receive, quality measures via hospital EHRs 

for Hospital IQR Program measures in the future. 

 The HITECH Act requires that the Secretary seek to avoid redundant and 

duplicative reporting, with specific reference to the Hospital IQR Program for eligible 

hospitals. To the extent that quality measures are included in both the Hospital IQR 

Program and the EHR Incentive Programs, this would mean that Hospital IQR Program 

would need to transition to use of certified EHR technology rather than manual chart 

abstraction. We are considering what the most practical approach to effect such a 

transition might be. One option is to select a date after which chart-abstracted data would 

no longer be used in the Hospital IQR Program. This would require sufficient advance 

notice to hospitals for hospitals to report the data via certified EHR technology. At that 

point, we believe that it is likely that nearly all IPPS hospitals will have implemented 

certified EHR technology as incentivized by the HITECH Act. Another option would be 

to allow hospitals to submit the same measure for the Hospital IQR Program based on 

either chart-abstraction or EHR-based reporting. This would require extensive testing to 

ensure equivalence given that the data for the Hospital IQR Program supports both the 

public reporting of such information and the Hospital VBP Program. We are concerned 

that this option would not be feasible. We invite public comment on the approach of 

selecting a date such as calendar year 2015 after which chart-abstracted data would no 

longer be accepted for the Hospital IQR Program. 
CMS-1518-P 441 

Ultimately, we do not anticipate having two different sets of clinical quality 

measures for the EHR Incentive Program and the Hospital IQR Program. Rather, we 

anticipate a single set of hospital clinical quality measures, most of which we anticipate 

would be electronically specified. We envision a single reporting infrastructure for 

electronic submission in the future, and will strive to align the hospital quality initiative 

programs to seek to avoid redundant and duplicative reporting of quality measures for 

hospitals. We note that some important Hospital IQR Program quality measures such as 

HCAHPS experience of care measures are based on survey data and do not lend 

themselves to EHR reporting. Similarly, certain outcome quality measures, such as the 

current Hospital IQR Program readmission measures, are based on claims rather than 

clinical data. Thus, not all Hospital IRP quality measures will necessarily be capable of 

being submitted through EHRs. As a consequence, not all Hospital IQR Program 

measures would necessarily be appropriate for inclusion in the EHR Incentive Programs. 

 We again note that the provisions in this FY 2012 IPPS/LTCH PPS proposed rule 

do not implicate or implement any HITECH statutory provisions. Those provisions are 

the subject of separate rulemaking and public comment. 

B. Hospital Value-Based Purchasing (VBP) Program

1. Background 

Section 1886(o) of the Act requires the Secretary to establish a Hospital Inpatient 

VBP Program under which value-based incentive payments are made in a fiscal year to 

hospitals meeting performance standards established for a performance period for such 
CMS-1518-P 442 

fiscal year. Both the performance standards and the performance period for a fiscal year 

are to be established by the Secretary. 

Section 1886(o)(1)(B) of the Act directs the Secretary to begin making 

value-based incentive payments under the Hospital Inpatient VBP Program to hospitals 

for discharges occurring on or after October 1, 2012. These incentive payments will be 

funded for FY 2013 through a reduction to the FY 2013 base operating MS-DRG 

payment for each discharge of 1 percent, as required by section 1886(o)(7)(B)(i) of the 

Act. 

Section 1886(o)(1)(C) of the Act provides that the Hospital Inpatient VBP 

Program applies to subsection (d) hospitals (as defined in section 1886(d)(1)(B) of the 

Act), but excludes from the definition of the term “hospital,” with respect to a fiscal year: 

(1) a hospital that is subject to the payment reduction under section 1886(b)(3)(B)(viii)(I) 

of the Act (the Hospital IQR Program) for such fiscal year; (2) a hospital for which, 

during the performance period for the fiscal year, the Secretary cited deficiencies that 

pose immediate jeopardy to the health or safety of patients; and (3) a hospital for which 

there are not a minimum number (as determined by the Secretary) of measures for the 

performance period for the fiscal year involved, or for which there are not a minimum 

number (as determined by the Secretary) of cases for the measures that apply to the 

hospital for the performance period for such fiscal year. 

2. Overview of the Hospital Inpatient VBP Program Proposed Rule 

On January 7, 2011, we issued the Hospital Inpatient VBP Program proposed rule 

to implement section 1886(o) of the Act (76 FR 2454 through 2491). This proposed rule 
CMS-1518-P 443 

was developed based on extensive research we conducted on hospital value-based 

purchasing, including research that formed the basis of a 2007 report we submitted to 

Congress, entitled “Report to Congress: Plan to Implement a Medicare Hospital ValueBased Purchasing Program” (November 21, 2007). This report is available on the CMS 

Web site at: 

http://www.cms.gov/AcuteInpatientPPS/downloads/HospitalVBPPlanRTCFINALSUBM

ITTED2007.pdf. The report takes into account input from both stakeholders and other 

interested parties. 

As described more fully in the Hospital Inpatient VBP Program proposed rule 

(76 FR 2458 through 2463), we proposed to initially adopt for the FY 2013 Hospital 

Inpatient VBP Program 18 measures that we have already adopted for the Hospital IQR 

Program, categorized into two domains. We proposed to group 17 of the proposed 

measures, which are clinical process of care measures, into a Clinical Process of Care 

domain, and proposed to place 1 measure, the Hospital Consumer Assessment of 

Healthcare Providers and Systems (HCAHPS) survey, into a Patient Experience of Care 

domain. We also proposed to use a 3-quarter performance period from July 1, 2011 

through March 31, 2012 for these proposed measures for purposes of the FY 2013 

Hospital Inpatient VBP Program and to determine whether hospitals meet the proposed 

performance standards for these measures by comparing their performance during the 

proposed performance period to their performance during a proposed 9-month (3-quarter) 

baseline period from July 1, 2009 through March 31, 2010. 
CMS-1518-P 444 

We proposed to implement a methodology for assessing the total performance of 

each hospital based on performance standards, under which we will score each hospital 

based on achievement and improvement ranges for each applicable measure. In addition, 

we proposed for FY 2013 to calculate a total performance score for each hospital by 

combining the greater of the hospital’s achievement or improvement points for each 

measure to determine a score for each domain, multiplying each domain score by a 

proposed weight (clinical process of care: 70 percent, patient experience of care: 

30 percent), and adding together the weighted domain scores. We proposed to convert 

each hospital’s total performance score into a value-based incentive payment utilizing a 

linear exchange function. We refer readers to the Hospital Inpatient VBP Program 

proposed rule for greater detail on all of these proposals. 

3. Proposed FY 2014 Hospital Inpatient VBP Program Measures 

a. Background 

 Section 1886(o)(2)(A) of the Act requires the Secretary to select for the Hospital 

Inpatient VBP Program measures, other than readmission measures, from the measures 

specified under section 1886(b)(3)(B)(viii) of the Act for the Hospital IQR Program. 

Section 1886(o)(2)(B)(i) of the Act requires the Secretary, with respect to value-based 

incentive payments made for discharges occurring during FY 2013, to ensure that the 

selected measures cover at least the following specified conditions or topics: Acute 

Myocardial Infarction (AMI); Heart Failure (HF); Pneumonia (PN); Surgeries, as 

measured by the Surgical Care Improvement Project (SCIP); Healthcare-Associated 

Infections (HAIs), as measured by the prevention metrics and targets established in the 
CMS-1518-P 445 

HHS Action Plan to Prevent HAIs (available at: 

http://www.hhs.gov/ash/initiatives/hai/actionplan/index.html) (or any successor plan); 

and HCAHPS. Section 1886(o)(2)(B)(ii) of the Act requires the Secretary, with respect 

to value-based incentive payments made for discharges occurring during FY 2014 or a 

subsequent year, to ensure that Hospital Inpatient VBP Program measures include 

efficiency measures, including measures of Medicare spending per beneficiary. 

Section 1886(o)(2)(C)(i) of the Act provides that the Secretary may not select a 

measure with respect to a performance period for a fiscal year unless the measure has 

been specified under the Hospital IQR Program and included on the Hospital Compare

Web site for at least one year prior to the beginning of the performance period. 

Section 1886(o)(2)(C)(ii) of the Act provides that a measure selected under 

section 1886(o)(2)(A) of the Act shall not apply to a hospital if the hospital does not 

furnish services appropriate to the measure. 

b. Proposed Efficiency Measure - Medicare Spending Per Beneficiary Measure - for the 

FY 2014 Hospital Inpatient VBP Program 

(1) Introduction 

 Section 1886(o)(2)(B)(ii) of the Act requires the Secretary to ensure that, for 

Hospital Inpatient VBP discharges occurring during FY 2014 or a subsequent year, the 

measures selected “include efficiency measures, including measures of ‘Medicare 

spending per beneficiary’. . . .” Therefore, for the FY 2014 Hospital Inpatient VBP 

Program, we are proposing to adopt a Medicare spending per beneficiary measure. This 

measure also is proposed for inclusion in the Hospital IQR Program in this proposed rule 
CMS-1518-P 446 

and is described in detail above in section IV.A.3.b.(2)(B)(v). The proposed approach to 

scoring this measure and including it in the Hospital Inpatient VBP Program is described 

below. 

(2) Scoring the Medicare Spending Per Beneficiary Measure 

 Section 1886(o)(5)(B)(ii) of the Act requires that the hospital performance score 

be determined using the higher of its achievement or improvement score for each 

measure. Therefore, we are proposing to calculate each hospital’s achievement score and 

improvement score on the proposed Medicare spending per beneficiary measure, in order 

to determine which score will be used to calculate the total performance score for the 

hospital. 

We are proposing this scoring methodology because it is generally similar to the 

methodology proposed for scoring the Clinical Process of Care and Outcome Measures in 

the Hospital Inpatient VBP Program proposed rule (76 FR 2465 through 2471). 

(A) Scoring Based on Achievement 

 We are proposing to calculate a Medicare per beneficiary spending ratio of the 

Medicare spending per beneficiary amount for each hospital to the median Medicare 

spending per beneficiary amount across all hospitals during the performance period. We 

are proposing that a hospital would earn between 1 and 10 achievement points on the 

Medicare spending per beneficiary measure if its individual Medicare spending per 

beneficiary ratio during the performance period falls at or between the achievement 

threshold and the achievement benchmark for the measure. We are proposing to set the 

achievement threshold at the median Medicare spending per beneficiary ratio across all 
CMS-1518-P 447 

hospitals during the performance period. We are proposing to set the benchmark at the 

mean of the lowest decile of Medicare spending per beneficiary ratios during the 

performance period. A hospital whose individual Medicare spending per beneficiary 

ratio falls below the achievement threshold would score 0 achievement points on the 

measure, and a hospital whose individual Medicare spending per beneficiary ratio falls at 

or above the achievement benchmark would score the maximum of 10 achievement 

points on the measure. A hospital whose individual Medicare spending per beneficiary 

ratio falls at or above the achievement threshold, but below the benchmark, would score 

between 1-9 points according to the following formula: 

[9 * ((Hospital’s performance period score – achievement threshold) / 

(benchmark – achievement threshold))] + .5

(B) Scoring Based on Improvement 

 We are proposing that a hospital would earn between 1 and 9 improvement points 

on the proposed Medicare spending per beneficiary measure if its individual Medicare 

spending per beneficiary ratio during the performance period falls within the 

improvement range. We are proposing to set the threshold for improvement at the 

hospital’s own Medicare spending per beneficiary ratio, as calculated during the baseline 

period. We are proposing a baseline period of May 15, 2010 through February 14, 2011 

for the Medicare spending per beneficiary measure and discuss this proposal in section 

IV.B.3.b.(4) of the preamble of this proposed rule. We are proposing that the 

improvement benchmark would be equal to the achievement benchmark for the 

performance period, which is the mean of the lowest decile of Medicare spending per 
CMS-1518-P 448 

beneficiary ratios across all hospitals. A hospital whose Medicare spending per 

beneficiary ratio is equal to or lower than its baseline period Medicare spending per 

beneficiary ratio would score 0 improvement points on the measure. If a hospital’s score 

on the measure during the performance period was greater than its baseline period score 

but below the benchmark (within the improvement range), the hospital would receive a 

score of 0-9 according to the following formula: 

[10 * ((Hospital performance period score – Hospital baseline period score) / 

(Benchmark – Hospital baseline period score))] – .5

(C) Example of Scoring the Medicare Spending per Beneficiary Measure 

If Hospital A had the following spending per beneficiary amounts during the 

baseline and performance period: 

Baseline = $10,105 

Performance = $9,125; 

and the median spending per beneficiary amounts across all hospitals for the baseline and 

performance periods were: 

Median Baseline = $11,672 

Median Performance = $12,467; 

then the Medicare spending per beneficiary ratios for Hospital A in the baseline and 

performance periods would be: 

Baseline Ratio = 0.866 

Performance Ratio = 0.732. 
CMS-1518-P 449 

With an achievement threshold of 1.0 and an achievement benchmark of 0.712, 

we would then calculate attainment and improvement points for Hospital A as follows: 

Attainment Points = 9 * (1.0 – 0.732) / (1.0 – 0.712) + 0.5 = 8.868 

Improvement Points = 10 * (0.866 – 0.732) / (0.866 – 0.712) – 0.5 = 8.185 

These points are rounded to yield 9 attainment points and 8 improvement points. 

Because section 1886(o)(5)(B)(ii) of the Act, as added by section 3001 of the 

Affordable Care Act, requires that the hospital performance score will be determined 

using the higher of attainment or improvement score for each measure, the hospital in this 

example would receive 9 points on the Medicare spending per beneficiary measure. 

(D) Incorporation of Medicare Spending Per Beneficiary Measure Score Into the Overall 

Hospital Total Performance Score 

We are proposing to incorporate the Medicare spending per beneficiary measure 

score into the FY 2014 Hospital Inpatient VBP Program as part of a new domain: The 

“Efficiency” domain. The Medicare spending per beneficiary measure score would be 

the Efficiency domain score for purposes of the FY 2014 Hospital Inpatient VBP 

Program. Consistent with the domain scoring method proposed in the Hospital Inpatient 

VBP Program proposed rule (76 FR 2454 through 2491), we are proposing to determine 

the total earned points for the Efficiency domain in general by adding the points earned 

for each domain measure and dividing by the total possible points, then multiplying that 

number by 100 percent. However, because we are proposing to adopt only one measure 

for the Efficiency domain for the FY 2014 Hospital Inpatient VBP Program, the total 

points earned for the domain would be the points earned on the Medicare spending per 
CMS-1518-P 450 

beneficiary measure. We are proposing that the total possible points that a hospital could 

earn for the Efficiency domain for FY 2014 would be 10, which is equal to the total 

possible points that the hospital could earn for the Medicare spending per beneficiary 

measure. We are proposing that the Efficiency domain percentage score would be 

calculated for FY 2014 as follows: Efficiency domain score = Total points earned on the 

Medicare spending per beneficiary measure divided by 10, then multiplied by 100 

percent. 

 Once the Efficiency domain score has been determined, we are proposing to 

assign it a weight for use in the calculation of the total performance score. We intend to 

propose FY 2014 domain weighting, any additional FY 2014 measures, and other FY 

2014 proposals for the Hospital Inpatient VBP Program in the CY 2012 Hospital 

Outpatient Prospective Payment System proposed rule. 

4. Proposed Efficiency Domain (Medicare Spending per Beneficiary Measure) 

Performance Period and Baseline Period 

Section 1886(o)(2)(C)(i) of the Act prohibits the Secretary from selecting a 

measure for the Hospital Inpatient VBP Program with respect to a performance period 

unless it has been specified under the Hospital IQR Program and included on the Hospital 

Compare Web site for at least 1 year prior to the beginning of such performance period. 

Section 1886(o)(8) of the Act requires that hospitals be notified of the calculation of their 

value-based incentive payment no later than 60 days prior to the fiscal year involved. In 

order to comply with these statutory requirements for the FY 2014 Hospital Inpatient 

VBP Program, we are proposing to adopt a 9-month period of performance from 
CMS-1518-P 451 

May 15, 2012 through February 14, 2013 for the proposed Medicare spending per 

beneficiary measure. If the measure is adopted, this would allow for a 1-year display 

period on Hospital Compare, a 60-day notification period, and would allow the time 

needed for administrative processes. We note that this would mean that only IPPS 

discharges occurring from May 15, 2012 through 90 days prior to February 14, 2013 

would count as index stays for purposes of creating the Medicare spending per 

beneficiary episodes. The Medicare spending per beneficiary episode is described in 

section IV.A.3.b.(2).(B).(v) of this proposed rule. 

 For the purposes of calculating improvement points on the proposed Medicare 

spending per beneficiary measure, it is necessary to establish the baseline period to which 

the performance period score will be compared. For purposes of the FY 2014 Hospital 

Inpatient VBP Program, we are proposing to adopt a baseline period of May 15, 2010 

through 90 days prior to February 14, 2011 for this proposed measure. The proposed 

baseline period is consistent with the baseline period that has been proposed for the 

FY 2013 clinical process of care and patient experience of care measures in the Hospital 

Inpatient VBP Program proposed rule (76 FR 2454 through 2491) because it precedes the 

performance period by 2 years. 

We invite public comment on all of our proposals related to the Efficiency 

Domain and Medicare spending per beneficiary measure. 

5. Proposal to Simultaneously Specify Additional Measures for the Hospital Inpatient 

VBP Program and Adoption into the Hospital IQR Program 
CMS-1518-P 452 

We are proposing to simultaneously specify additional measures for the Hospital 

Inpatient VBP Program and adoption into the Hospital IQR Program, as appropriate for 

usage in both programs. Our rationale is to improve patient safety and quality of care in 

an expedited manner that is compliant with applicable statutory guidance. We are 

currently utilizing this approach in this rule by proposing to add the Medicare Spending 

per Beneficiary measure to both Hospital Inpatient VBP and Hospital IQR Programs. We 

will provide all associated regulatory impact and policy rationale in future proposals for 

both programs. We believe that this proposal notifies stakeholders through rulemaking 

and welcome comments on this proposal. 

C. Hospital Readmissions Reduction Program

1. Background 

a. Overview 

CMS is committed to promoting high quality health care and improving patient 

health outcomes. Readmission to a hospital may be an adverse event for patients and 

many times imposes a financial burden on the health care system. Successful efforts to 

reduce preventable readmission rates will improve quality of care while simultaneously 

decreasing costs. Hospitals can work with their communities to lower readmission rates 

and improve patient care in a number of ways, such as ensuring patients are clinically 

ready to be discharged, reducing infection risk, reconciling medications, improving 

communication with community providers responsible for post-discharge patient care, 

improving care transitions, and ensuring that patients understand their care plans upon 

discharge. 
CMS-1518-P 453 

 Many studies have demonstrated the effectiveness of these types of in-hospital 

and post-discharge interventions in reducing the risk of readmission, confirming that 

hospitals and their partners have the ability to lower readmission rates.34 35 36 These types 

of efforts taken during and after a hospitalization have been shown to be effective in 

reducing readmission rates in geriatric populations generally,37 38 as well as for multiple 

specific conditions. Moreover, such interventions can be cost saving. For example, in 

the case of heart failure, improved hospital 39 and post-discharge care,40 41 including predischarge planning,42 43 home-based follow-up, and patient education,44 45 have been 

shown to lower heart failure readmission rates, suggesting that heart failure readmission 

rates might be reduced if proven interventions were more widely adopted. Financial 

incentives to reduce readmissions will in turn promote improvement in care transitions 

 

34 Gwadry-Sridhar FH, Flintoft V, Lee DS, Lee H, Guyatt GH: A systematic review and meta-analysis of studies comparing 

readmission rates and mortality rates in patients with heart failure. Arch Intern Med. 2004;164(21):2315-2320. 

35 McAlister FA, Lawson FM, Teo KK, Armstrong PW.: A systematic review of randomized trials of disease management programs 

in heart failure. AmJMed. 2001;110(5):378-384. 

36 Krumholz HM, Amatruda J, Smith GL, et al.: Randomized trial of an education and support intervention to prevent readmission of

patients with heart failure. J Am Coll Cardiol. 2002;39(1):83-89. 

37 Coleman EA, Parry C, Chalmers S, Min SJ.: The care transitions intervention: results of a randomized controlled trial. Arch Intern 

Med. 2006;166:1822-8. 

38 Naylor MD, Brooten D, Campbell R, Jacobsen BS, Mezey MD, Pauly MV, Schwartz JS.: Comprehensive discharge planning and 

home follow-up of hospitalized elders: a randomized clinical trial. JAMA. 1999;281:613-20. 

39 Gwadry-Sridhar FH, Flintoft V, Lee DS, Lee H, Guyatt GH.: A systematic review and meta-analysis of studies comparing 

readmission rates and mortality rates in patients with heart failure. Arch Intern Med. 2004;164(21):2315-2320. 

40 Lappe JM, Muhlestein JB, Lappe ́ DL, et al.: Improvements in 1-year cardiovascular clinical outcomes associated with a hospitalbased discharge medication program. Ann Intern Med. 2004;141(6):446-453. 

41 Phillips CO, Wright SM, Kern DE, Singa RM, Shepperd S, Rubin HR.: Comprehensive discharge planning with postdischarge 

support for older patients with congestive heart failure: a metaanalysis [published correction appears in JAMA. 2004;292(9):1022]. 

JAMA. 2004;291(11): 1358-1367. 

42 Rich MW, Beckham V, Wittenberg C, Leven CL, Freedland KE, Carney RM.: A multi disciplinary intervention to prevent the 

readmission of elderly patients with congestive heart failure. N Engl J Med. 1995;333(18):1190-1195. 

43 Schneider JK, Hornberger S, Booker J, Davis A, Kralicek R.: A medication discharge planning program: measuring the effect on 

readmissions. Clin Nurs Res. 1993;2(1):41-53. 

44 Koelling TM, Johnson ML, Cody RJ, Aaronson KD.: Discharge education improves clinical outcomes in patients with chronic heart 

failure. Circulation. 2005;111(2):179-185. 

45 Krumholz HM, Amatruda J, Smith GL, et al.: Randomized trial of an education and support intervention to prevent readmission of

patients with heart failure. J Am Coll Cardiol. 2002;39(1):83-89. 
CMS-1518-P 454 

and care coordination, as these are important means of reducing preventable 

readmissions.46

 In its 2007 “Report to Congress: Promoting Better Efficiency in Medicare,”47

MedPAC noted the potential benefit to patients of lowering readmissions and suggested 

payment strategies that would incentivize hospitals to reduce these rates. MedPAC 

identified 7 conditions and procedures that accounted for almost 30 percent of potentially 

preventable readmissions: heart failure; chronic obstructive pulmonary disease; 

pneumonia; acute myocardial infarction; coronary artery bypass graft surgery; 

percutaneous transluminal coronary angioplasty; and other vascular procedures. 

To promote quality of care, CMS developed hospital quality of care measures that 

compare patient outcomes across different hospitals. These measures, including hospital 

risk-standardized readmission measures for Acute Myocardial Infarction (AMI), Heart 

Failure (HF) and Pneumonia (PN), were originally developed for public reporting as a 

part of the Hospital IQR Program. We adopted the HF readmission measure for the 

Hospital IQR Program in the FY 2009 IPPS final rule for the FY 2010 payment 

determination (73 FR 48606) and the AMI and PN readmission measures in the CY 2009 

OPPS/ASC final rule with comment period for the FY 2010 payment determination 

(73 FR 68781). Details about the methodology used for these measures may be found 

online at: 

http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage

%2FQnetTier4&cid=1219069855841. 

 

46 Coleman EA.: 2005. Background Paper on Transitional Care Performance Measurement. Appendix I. In: Institute of Medicine, 

Performance Measurement: Accelerating Improvement. Washington, DC: National Academy Press. 

47 Medicare Payment Advisory Commission (MedPAC). Report to Congress: Promoting Greater Efficiency in Medicare; 2007. 

Available at http://www.medpac.gov/documents/Jun07_EntireReport.pdf. Accessed January 10, 2011. 
CMS-1518-P 455 

As described above, readmission rates are important markers of quality of care, 

particularly of the care of a patient in transition from an acute care setting to a non-acute 

care setting, and improving readmissions can positively influence patient outcomes and 

the cost of care. The above hospital risk-standardized readmission measures are endorsed 

by the National Quality Forum (NQF) and have been publicly reported on Hospital 

Compare Web site since 2009 (http://www.hospitalcompare.hhs.gov) to encourage 

quality improvement and lower readmission rates. As discussed in detail below, we are 

now proposing that the readmission measures for these three conditions be used for the 

Hospital Readmission Reduction Program under section 1886(q) of the Act, as added by 

Section 3025 of the Affordable Care Act. 

b. Statutory Basis for the Hospital Readmission Reduction Program 

 Section 3025 of the Affordable Care Act, as amended by section 10309 of the 

Affordable Care Act, added a new subsection (q) to section 1886 of the Act. Section 

1886(q) of the Act establishes the “Readmission Reduction Program" effective for 

discharges from an “applicable hospital” beginning on or after October 1, 2012, under 

which payments to those hospitals under section 1886(d) of the Act will be reduced to 

account for certain excess readmissions. 

In this year’s IPPS rulemaking, we address: (i) those aspects of the program that 

relate to the conditions and readmissions to which the program will apply for the first 

program year beginning October 1, 2012; (ii) the readmission measures and related 

methodology used for those measures, as well as the calculation of the readmission rates; 

and (iii) public reporting of the readmission data. Specific information regarding the 
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payment adjustment required under section 1886(q) of the Act will be proposed in next 

year’s IPPS/LTCH PPS proposed rule. Although we are not proposing specific policies 

regarding the payment adjustment under the Hospital Readmissions Reduction Program 

in this proposed rule, we believe that it is still important to set forth the general 

framework of the Hospital Readmissions Reduction Program, including the payment 

adjustment provisions, in order for the public to understand how the proposed measures 

outlined in this rulemaking will affect certain hospital payments beginning in FY 2013. 

Section 1886(q)(1) of the Act sets forth the methodology by which payments to 

“applicable hospitals” will be adjusted to account for excess readmissions. Pursuant to 

section 1886(q)(1) of the Act, payments for discharges from an “applicable hospital” will 

be an amount equal to the product of the “base operating DRG payment amount” and the 

adjustment factor for the hospital for the fiscal year. That is, the “base operating DRG 

payments” are reduced by an adjustment factor that accounts for excess readmissions. 

Section 1886(q)(1) of the Act requires the Secretary to make payments for a discharge in 

an amount equal to the product of “the base operating DRG payment amount” and “the 

adjustment factor” for the hospital in a given fiscal year. Section 1886(q)(2) of the Act 

defines the base operating DRG payment amount as “the payment amount that would 

otherwise be made under subsection (d) (determined without regard to subsection (o) [the 

Hospital VBP Program]) for a discharge if this subsection did not apply; reduced by . . . 

any portion of such payment amount that is attributable to payments under paragraphs 

(5)(A), (5)(B), (5)(F) , and (12) of subsection (d).” Paragraphs (5)(A), (5)(B), (5)(F), and 
CMS-1518-P 457 

(12) of subsection(d) refer to outlier payments, IME payments, DSH payments, and 

payments for low volume hospitals, respectively. 

Furthermore, section 1886(q)(2)(B) of the Act specifies special rules for defining 

“the payment amount that would otherwise be made under subsection (d)” for certain 

hospitals. Specifically, section 1886(q)(2)(B) of Act states that “[i]n the case of a 

Medicare-dependent, small rural hospital (with respect to discharges occurring during 

fiscal years 2012 and 2013) or a sole community hospital . . . the payment amount that 

would otherwise be made under subsection (d) shall be determined without regard to 

subparagraphs (I) and (L) of subsection (b)(3) and subparagraphs (D) and (G) of 

subsection (d)(5).” We intend to propose regulations to implement the statutory 

provisions related to the definition of “base operating DRG payment amount” in the FY 

2013 IPPS/LTCH PPS proposed rule. 

Section 1886(q)(3)(A) of the Act defines the “adjustment factor” for an applicable 

hospital for a fiscal year as equal to the greater of “(i) the ratio described in subparagraph 

(B) for the hospital for the applicable period (as defined in paragraph (5)(D)) for such 

fiscal year; or (ii) the floor adjustment factor specified in subparagraph (C).” 

Section 1886(q)(3)(B) of the Act in turn describes the ratio used to calculate the 

adjustment factor. It states that the ratio is “equal to 1 minus the ratio of – (i) the 

aggregate payments for excess readmissions...; and (ii) the aggregate payments for all 

discharges....” Section 1886(q)(3)(C) of the Act describes the floor adjustment factor, 

which is set at 0.99 for FY 2013, 0.98 for FY 2014, and 0.97 for FY 2015 and subsequent 

fiscal years. 
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 Section 1886(q)(4) of the Act sets forth the definitions of “aggregate payments for 

excess readmissions” and “aggregate payments for all discharges” for an applicable 

hospital for the applicable period. The term “aggregate payments for excess 

readmissions” is defined in section 1886(q)(4)(A) of the Act as “the sum, for applicable 

conditions . . . of the product, for each applicable condition, of (i) the base operating 

DRG payment amount for such hospital for such applicable period for such condition; (ii) 

the number of admissions for such condition for such hospital for such applicable period; 

and (iii) the “Excess Readmission Ratio... for such hospital for such applicable period 

minus 1.” The “Excess Readmission Ratio” is a hospital-specific ratio hospital-specific 

ratio based on each applicable condition. Specifically, section 1886(q)(4)(C) of the Act 

defines the Excess Readmission Ratio as the ratio of “risk-adjusted readmissions based 

on actual readmissions” for an applicable hospital for each applicable condition, to the 

“risk-adjusted expected readmissions” for the applicable hospital for the applicable 

condition. 

 Section 1886(q)(5) of the Act provides definitions of “applicable condition,” 

“expansion of applicable conditions,” “applicable hospital,” “applicable period,” and 

“readmission.” The term “applicable condition,” which we address in detail in this 

proposed rule, is defined as a “condition or procedure selected by the Secretary among 

conditions and procedures for which: (i) readmissions... represent conditions or 

procedures that are high volume or high expenditures...and (ii) measures of such 

readmissions . . . have been endorsed by the entity with a contract under section 

1890(a)...and such endorsed measures have exclusions for readmissions that are 
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unrelated to the prior discharge (such as a planned readmission or transfer to another 

applicable hospital).” The term “expansion of the applicable condition” refers to the 

Secretary’s authority, beginning with fiscal year 2015, “to the extent practicable, [to] 

expand the applicable conditions beyond the 3 conditions for which measures have been 

endorsed...to the additional 4 conditions that have been identified by the Medicare 

Payment Advisory Commission in its report to Congress in June 2007 and to other 

conditions and procedures as determined appropriate by the Secretary.” 

Section 1886(q)(5)(C) of the Act defines “applicable hospital,” that is, a hospital 

subject to the readmission reduction program, as a “subsection (d) hospital or a hospital 

that is paid under section 1814(b)(3) [of the Act], as the case may be.” The term 

“applicable period,” as defined by section 1886(q)(5)(D) of the Act, “means, with respect 

to a fiscal year, such period as the Secretary shall specify.” As explained in this proposed 

rule, the “applicable period” is the period from which data are collected in order to 

calculate various ratios and adjustments under the Hospital Readmissions Reduction 

Program. 

 Section 1886(q)(6) of the Act sets forth the reporting requirements for 

hospital-specific readmission rates. Section 1886(q)(7) of the Act limits administrative 

and judicial review of certain determinations made pursuant to section 1886(q) of the 

Act. Finally, section 1886(q)(8) of the Act requires the Secretary to collect data on 

readmission rates for all hospital inpatients for “specified hospitals” in order to calculate 

the hospital-specific readmission rates for all hospital inpatients and to publicly report 

these readmission rates. 
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2. Implementation of the Hospital Readmissions Reduction Program 

a. Overview 

We intend to implement the requirements of the Hospital Readmissions Reduction 

Program in the FY 2012, FY 2013, and future IPPS/LTCH PPS rulemaking cycles. 

b. Proposed Provisions in the FY 2012 IPPS/LTCH PPS Rulemaking 

 As explained above, the adjustment factor set forth in section 1886(q) of the Act 

does not apply to discharges until FY 2013. Therefore, we are able to implement the 

Hospital Readmission Reduction Program over two years. We are first addressing issues 

such as the selection of readmission measures and the calculation of the excess 

readmission ratio, which will then be used, in part, to calculate the readmission payment 

adjustment factor. Specifically, in the FY 2012 IPPS rulemaking, we are addressing 

portions of section 1886(q) of the Act related to the following provisions: 

● Selection of applicable conditions; 

● Definition of “readmission;” 

● Measures for the applicable conditions chosen for readmission; 

● Methodology for calculating the Excess Readmission Ratio; 

● Public reporting of the readmission data; and 

● Definition of “applicable period.” 

With respect to the topics of “measures for readmission” for the applicable 

conditions, and “methodology for calculating the Excess Readmission Ratio,” we will 

specifically address the following: 

● Index hospitalizations; 
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● Risk Adjustment; 

● Risk Standardized Readmission Rate; 

● Data sources; and 

● Exclusion of Certain Readmissions. 

c. Proposed Provisions to be Included in the FY 2013 IPPS/LTCH PPS Proposed Rule 

In the FY 2013 IPPS rulemaking, we will address the provisions in section 

1886(q) of the Act that are related to the payment adjustment, as well as the rest of the 

provisions in section 1886(q) of the Act that are not addressed in the FY 2012 

IPPS/LTCH PPS rulemaking. Specifically, in the FY 2013 IPPS/LTCH proposed rule, 

we plan to address section 1886(q) of the Act related to the following provisions: 

● Base operating DRG payment amount, including policies for SCHs and MDHs; 

● Adjustment factor (both the ratio and floor adjustment factor); 

● Aggregate payments for excess readmissions; 

● Applicable hospital; and 

 We believe it is appropriate to first address the readmission measures and the 

calculation of the excess readmission ratio that will then be used, in part, to calculate the 

readmission payment adjustment factor and the application of the readmission payment 

adjustment factor to inpatient hospital payments. We believe the 2-year rulemaking 

schedule provides adequate time and opportunities for careful consideration of the 

various aspects of this program by both CMS and stakeholders prior to implementation of 

the Hospital Readmission Reduction Program in FY 2013. 
CMS-1518-P 462 

d. Proposed Expansion of the Applicable Conditions to be Included in the Future 

Rulemaking 

Pursuant to section 1886(q)(5)(B) of the Act, the Secretary “shall, to the extent 

practicable,” expand the list of applicable conditions beyond the 3 conditions for which 

measures have been endorsed and add 4 conditions that have been identified by MedPAC 

for the Hospital Readmission Reduction Program. We plan to implement this section of 

the Act in later rulemaking. 

3. Proposed Provisions for the Hospital Readmission Reduction Program 

a. Proposed Applicable Conditions for the FY 2013 Hospital Readmission Reduction 

Program 

Section 1886(q) of the Act sets forth payment adjustments for applicable hospitals 

to account for excess readmissions, for applicable conditions, that are high volume or 

high expenditure, in the hospital. These payment adjustments are determined based on 

the occurrence of readmissions for “applicable conditions.” When selecting “applicable 

conditions,” the Secretary must select among conditions and procedures for which 

(1) readmissions are “high volume or high expenditure; and (2) “measures of such 

readmissions” have been endorsed by the entity with a contract under section 1890(a) of 

the Act (currently NQF) and such endorsed measures have exclusions for readmissions 

that are unrelated to the prior discharge. Consistent with these requirements, we are 

proposing to include AMI, HF and PN as “applicable conditions” for the Hospital 

Readmissions Reduction Program in FY 2013 and subsequent fiscal years. As set forth 

below, we believe these conditions meet the criteria for “applicable conditions” under 
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section 1886(q)(5)(A) of the Act. We also note that in the 2007 Report to Congress that 

we referred to earlier in the overview section, MedPAC listed three conditions: AMI, HF, 

and PN, as priorities for hospital-specific public reporting of readmission rates.48

With regards to the first criterion, that readmissions of “applicable conditions” be 

“high volume or high expenditure,” MedPAC identified AMI, HF, PN as being among 

the seven conditions and procedures associated with approximately 30 percent of 

potentially preventable readmissions,49 based on an 3M analysis conducted for MedPAC 

of 2005 MedPAR (Medicare FFS hospital claims). Of these seven conditions and 

procedures, HF and PN were the highest in terms of volume and expenditures. 

Additionally, in our analysis of the 235 diagnostic categories for hospitalization 

based on 2008 Medicare hospital claims data, HF and PN were first and second, 

respectively, as the most frequent diagnostic category for both total admissions and total 

readmissions. AMI was ninth among the 235 conditions in terms of frequency of 

admission and 8th in frequency of readmission. We therefore believe that AMI, HF and 

PN consitute high volume and high expenditure conditions particularly as relates to 

hospital admission and readmission. 

With regards to the second criterion, we believe that measures of readmissions for 

these applicable conditions also meet the statutory requirements. 

Section 1886(q)(5)(A)(i) of the Act requires that each “applicable condition” have 

“measures of readmissions” that “(I) have been endorsed by the entity with a contract 

under section 1890(a); and (II) such endorsed measures have exclusions for readmissions 

 

48 Medicare Payment Advisory Commission (MedPAC). Report to Congress: Promoting Greater Efficiency in Medicare; 2007. 

Available at http://www.medpac.gov/documents/Jun07_EntireReport.pdf. Accessed January 10, 2011. 49 Medicare Payment Advisory Commission (MedPAC). Report to Congress: Promoting Greater Efficiency in Medicare; 2007. 

Available at http://www.medpac.gov/documents/Jun07_EntireReport.pdf. Accessed January 10, 2011. 
CMS-1518-P 464 

that are unrelated to the prior discharge.” As discussed in section IV.C.3.c. below, we 

believe that our proposal to select AMI, HF, and PN as “applicable conditions” is 

consistent with this statutory requirement. The NQF (the entity with a contract under 

section 1890(a) of the Act) has endorsed “measures of readmissions” for each of these 

three conditions, and those NQF-endorsed measures “have exclusions for readmissions 

that are unrelated to the prior discharge (such as a planned readmission or transfer to 

another applicable hospital).”

We believe AMI, HF, and PN meet both prongs of the definition of “applicable 

condition.” Therefore, we are proposing to include AMI, HF, and PN as “applicable 

conditions” for the Hospital Readmissions Reduction Program for FY 2013 and 

subsequent fiscal years. We invite public comment on this proposal. 

b. Proposed Definition of “Readmission” 

 Section 1886(q)(5)(E) of the Act defines “readmission” as, “in the case of an 

individual who is discharged from an applicable hospital, the admission of the individual 

to the same or another applicable hospital within a time period specified by the Secretary 

from the date of such discharge.” The definition further states that “[i]nsofar as the 

discharge relates to an applicable condition for which there is an endorsed measure . . . 

such time period (such as 30 days) shall be consistent with the time period specified for 

such measure.” 

The three NQF-endorsed readmission measures define a readmission as occurring 

when a patient is discharged from the applicable hospital to a non-acute setting (for 

example, home health, skilled nursing, rehabilitation or home) and then is admitted to the 
CMS-1518-P 465 

same or another acute care hospital within a specified time period from the time of 

discharge from the index hospitalization. The time period specified for these measures is 

30 days. Because the measures as endorsed by NQF are calculated based on readmissions 

occurring within 30 days, we are proposing 30 days as the time period specified from the 

date of discharge for the purpose of defining readmission for the purpose of the Hospital 

Readmissions Reduction Program. This is in compliance with the statutory requirement 

that the time period specified by the Secretary from the date of discharge for the purpose 

of defining readmission be consistent with the time period specified for the endorsed 

measures. We invite public comment on our proposal to adopt, without revision, a 

proposed definition of readmission with a time period of 30 days from the date of 

discharge from the index hospital as set forth in the existing NQF-endorsed measures. 

c. Proposed Readmission Measures and Related Methodology 

(1) Proposed Readmission Measures for Applicable Conditions 

As explained above, section 1886(q)(5)(A)(ii) of the Act requires that each 

“applicable condition” selected by the Secretary have “measures of readmissions” that 

“have been endorsed by the entity with a contract under section 1890(a)” and that “such 

endorsed measures have exclusions for readmissions that are unrelated to the prior 

discharge.” We are proposing to adopt three NQF-endorsed, hospital risk-standardized 

readmission measures for AMI, HF, and PN which are currently included in the Hospital 

IQR Program. These existing measures are: 

● Acute Myocardial Infarction 30-day Risk Standardized Readmission Measure 

(NQF# 0505); 
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● Heart Failure 30-day Risk Standardized Readmission Measure (NQF#0330 ); 

and 

● Pneumonia 30-day Risk Standardized Readmission Measure (NQF#0506). 

CMS adopted these measures for the Hospital IQR Program in the FY 2009 

IPPS/LTCH final rule for FY 2010 payment determination (73 FR 48606) and the 

CY 2009 OPPS/ASC final rule with comment period (73 FR 68781). The NQF (the 

entity with a contract under section 1890(a) of the Act) has endorsed each of these 

“measures of readmissions” and, as explained in more detail below, those NQF-endorsed 

measures “have exclusions for readmissions that are unrelated to the prior discharge.” 

Therefore, we believe these measures meet the statutory requirements for selection for 

the Hospital Readmissions Reduction Program, and we are proposing them, without 

modification, as measures for the program. 

(2) NQF Endorsement of Measures of Readmissions 

 We note that these measures and their underlying methodologies were endorsed 

by NQF. We are proposing to adopt, for purposes of the Hospital Readmissions 

Reduction Program, the measures and related methodologies as they are currently 

endorsed by NQF. This includes the currently endorsed 30-day time window, 

risk-adjustment methodology, and exclusions for certain readmissions that comprise the 

measures. We believe that this proposal to adopt, without modification, these measures 

of readmission is consistent with the statutory language, which requires the measures of 

readmissions to be “endorsed by the entity with a contract under section 1890(a).” If we 

were to modify the endorsed measures, we are concerned that they would no longer be 
CMS-1518-P 467 

considered “endorsed.” If the NQF were to later endorse a revised measure for one of 

these conditions, we would then propose through notice and comment rulemaking that 

the revised measure be used prospectively for purposes of the Hospital Readmissions 

Reduction Program. 

We welcome public comment on this proposal to use, for each of the proposed 

applicable conditions, existing measures as endorsed by the NQF. 

(3) Endorsed Measures with Exclusions for Unrelated Readmissions 

 Section 1886(q)(5)(A)(i)(ii)(II) of the Act requires that each of the readmission 

measures also has “exclusions for readmissions that are unrelated to the prior discharge 

(such as a planned readmission or transfer to another applicable hospital).” The three 

NQF-endorsed readmission measures that we are proposing for inclusion in the Hospital 

Readmissions Reduction Program have exclusions that meet this statutory requirement. 

Under each measure, certain unrelated readmissions are not taken into account when 

determining the number of readmissions under the measures. 

 The AMI 30-day risk standardized readmission measure, as endorsed by the NQF 

and as proposed in this rule, has exclusions for certain unrelated readmissions. Because 

admissions for Percutaneous Transluminal Coronary Angioplasty (PTCA) or Coronary 

Artery Bypass Graft (CABG) may be staged or are typically scheduled readmissions for 

patients initially admitted for AMI, the AMI 30-day risk standardized readmission 

measure does not count as readmissions those admissions after discharge that include 

PTCA or CABG procedures, unless the principal discharge diagnosis for the readmission 

is one of the following diagnoses that are not consistent with a scheduled readmission: 
CMS-1518-P 468 

heart failure, acute myocardial infarction, unstable angina, arrhythmia, and cardiac arrest 

(that is, readmissions with these diagnoses and a PTCA or CABG procedure are counted 

as readmissions). We adopted this approach when first developing this measure after 

consultation with clinical experts, including cardiologists, and review of relevant 

readmissions data. 

During the development of the readmission measures for both HF and PN, we 

similarly asked clinical experts to identify planned readmissions for these conditions, that 

is, those which would not count as a readmission, after an admission for HF or PN. 

Specifically, the clinical experts were asked whether there were common follow-up 

causes of readmissions for a scheduled procedure that represented a continuation of care 

after either a HF or PN admission, respectively. No such related, planned procedures 

were identified as occurring commonly after the index admissions for HF or PN at the 

time of the development of the IQR measures. Therefore, no similar exclusions exist for 

the HF and PN measures of readmissions as they are currently endorsed. 

Under the three NQF-endorsed risk-standardized readmission measures that we 

are proposing in this proposed rule, transfers to other acute care facilities are excluded 

from each of the readmission measures. The NQF-endorsed proposed measures consider 

these multiple contiguous hospitalizations to be a single acute episode of care. The 

measures attribute the readmission for transferred patients to the hospital that ultimately 

discharges the patient to a non-acute care setting (for example, to home or a skilled 

nursing facility). Thus, in the case of a patient who is transferred between two or more 

hospitals, if the patient is readmitted in the 30 days following the final hospitalization, the 
CMS-1518-P 469 

measures attribute such a readmission to the hospital that discharged the patient to a 

non-acute care setting. We believe that the exclusion of transfers to other applicable 

hospitals under the measures is sufficient to meet the requirement set forth in section 

1886(q)(5)(A)(ii)(II) of the Act that certain “unrelated” readmissions be excluded from 

the measures selected for use in the program. We invite public comment on our proposal 

to adopt, without revision or modification, the exclusions for unrelated admissions set 

forth in the existing NQF-endorsed measures. 

(4) Methodology of Proposed Readmission Measures 

In the following section, we describe the major components of the measure 

methodology of the three NQF-endorsed risk-standardized readmission measures for 

AMI, HF and PN proposed for the implementation of the Hospital Readmissions 

Reduction Program. Additional details about each of these measures may be found online 

at http://www.QualityNet.org > Hospital-Inpatient > Readmission Measures 

>methodologies. This Web page is located at 

http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage

%2FQnetTier4&cid=1219069855841. 

Briefly, as is described in more detail in the sections below, the measures are riskstandardized rates of readmission. For each hospital qualifying index hospitalizations are 

identified based on the principal discharge diagnosis of the patient and the 

inclusion/exclusion criteria (section IV.C.3.c.(4)(A), Index hospitalization). Each 

hospitalization is evaluated for whether the patient had a readmission to an acute care 

setting in the 30-days following discharge (section IV.C.3.c.(4)(B), Readmission). 
CMS-1518-P 470 

Patient-risk factors, including age, and chronic medical conditions are also identified 

from inpatient and outpatient claims for the 12-months prior to the hospitalization for 

risk-adjustment (section IV.C.3.c.(4)(D), Risk-Adjustment). The readmissions, sample 

size for each hospital, and patient risk-factors are then used to calculate a riskstandardized readmission ratio for each hospital. For the purposes of publicly-reporting 

the measures, this risk-standardized readmission ratio is then multiplied by the national 

crude rate of readmission for the given condition to produce a risk-standardized 

readmission rate (RSRR) (section IV.C.3.c.(5)(B)). 

As stated above, we invite public comment on our selection of the three 

readmission measures, as endorsed by the NQF, and as described in more detail below. 

(A) Index Hospitalization 

 An index hospitalization for each of the readmission measures is the 

hospitalization from which we evaluate the 30 days after discharge for possible 

readmissions. The measures, as endorsed by the NQF, evaluate eligible hospitalizations 

and readmissions of Medicare patients discharged from an applicable hospital (as defined 

by section 1886(q)(5)(C) of the Act) having a principal discharge diagnosis for the 

measured condition in an applicable period. The NQF endorsed measures, as specified, 

exclude patients under 65 year of age. 

The discharge diagnoses for each applicable condition are based on a list of 

specific ICD-9-CM codes for that condition. These codes are listed in the 2010 Measures 

Maintenance Technical Report: Acute Myocardial Infarction, Heart Failure, and 

Pneumonia 30-Day Risk-Standardized Readmission Measures. They also are posted on 
CMS-1518-P 471 

the QualityNet Web site: http://www.QualityNet.org > Hospital-Inpatient > Readmission 

Measures >methodologies. See 

http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage

%2FQnetTier4&cid=1219069855841 

The current NQF-endorsed CMS 30-day risk standardized readmission measures 

exclude the following admissions from the group of index hospitalizations: 

● Hospitalizations for patients with an in-hospital death (because they are not 

eligible for readmission); 

● Hospitalizations for patients without at least 30 days post-discharge enrollment 

in Medicare FFS (because the 30-day readmission outcome cannot be assessed in this 

group); 

● Hospitalizations for patients discharged against medical advice (because 

providers did not have the opportunity to deliver full care and prepare the patient for 

discharge. 

(B) Readmission 

 As explained above, the initial hospitalization assessed for a readmission is called 

the index hospitalization. The proposed measures, as endorsed by the NQF, define 

readmission as a second admission to another acute care hospital within 30-days of the 

index hospitalization. Under the proposed measure, as endorsed by the NQF, a patient 

who is readmitted twice within 30 days simply is counted as having been readmitted; this 

patient’s readmissions are not counted differently than a patient with a single readmission 

within 30 days of discharge. 
CMS-1518-P 472 

 With the exception of the exclusions discussed previously (transfers and planned 

readmissions, as discussed in the Exclusions for Unrelated Readmissions section above), 

the proposed measures, as currently endorsed by the NQF, include readmissions for all 

causes, without regard to the principal diagnosis of the readmission. There are several 

reasons for this approach. First, from the patient’s perspective, readmission from any 

cause is an adverse event. We want the measures to be patient-centered measures. 

Second, although we would expect few hospitals to use gaming strategies, we strive to 

make sure that measures do not create incentives for them to do so. Limiting the 

readmissions to particular diagnoses creates an opportunity for hospitals to potentially 

avoid having readmissions counted by changing coding practices. Further, do so could 

create a perverse incentive whereby hospitals begin to avoid patients with conditions that 

are part of the readmissions measures. Third, there are not clinically and technically 

sound and accepted strategies for accurately identifying readmission that are unrelated to 

hospital quality based on the documented cause of readmission. For example, a patient 

with HF who develops an HAI may ultimately be readmitted for sepsis. It would be 

inappropriate to consider the readmission as unrelated to the care the patient received for 

HF. Finally, we believe it is important that hospitals strive to reduce readmissions from 

all causes, not just those that are readmissions measures; while the measures do not 

presume that each readmission is preventable, interventions have generally shown 

reductions in all types of readmissions. The NQF measures are intended to provide 

incentives for hospitals to reduce readmissions and not to achieve zero readmissions. 
CMS-1518-P 473 

(C) Time Window 

The three proposed measures, as endorsed by the NQF, count readmissions within 

a 30-day period from the date of the initial discharge from the index hospitalization. This 

is the standard time period to be considered a readmission. The timeframe of 30 days is a 

clinically meaningful period for hospitals, in collaboration with their medical 

communities, to reduce readmission risk. This time period for assessing readmission is 

an accepted standard in research and measurement. We believe that during this 30-day 

time period, hospital and community partners can take steps to reduce risk by ensuring 

patients are clinically ready to be discharged, improving communication across providers, 

reducing risks of infections, and educating patients on symptoms to monitor whom to 

contact with questions and where and when to seek follow-up care can influence 

readmission rates. 

(D) Risk Adjustment 

Section 1886(q)(4)(C)(i)(I) of the Act requires that the number of readmissions 

used in the Excess Readmission Ratio be risk adjusted. This language requires us, when 

comparing hospitals’ readmission rates, to account for differences in the severity of 

illness of the patients that hospitals treat. Risk adjustment essentially “levels the playing 

field” for comparing hospital performance by taking into account that some hospitals’ 

patients are sicker than others on admission and therefore have a higher risk of 

readmission. 

The methodology for calculating the RSRRs under the NQF-endorsed measures 

that we are proposing adjust for key factors that are clinically relevant and have strong 
CMS-1518-P 474 

relationships with the outcome (for example, patient demographic factors, patient coexisting medical conditions, and indicators of patient frailty). Under the current 

NQF-endorsed methodology, these covariates are obtained from Medicare claims 

extending 12 months prior to, and including, the index admission. This risk-adjustment 

approach adjusts for differences in the clinical status of the patient at the time of the 

index admission as well as for demographic variables. 

 A complete list of the variables used for risk adjustment and the clinical and 

statistical process for selecting the variables for each NQF-endorsed measure, as 

proposed, is available in the publicly-available technical documentation of the existing 

measures for AMI, HF, and pneumonia. The risk adjustment variables for each condition 

are presented in the 2010 Measures Maintenance Technical Report: Acute Myocardial 

Infarction, Heart Failure, and Pneumonia 30-Day Risk-Standardized Readmissions 

Measures that are posted on http://www.QualityNet.org > Hospital-Inpatient > 

Readmission Measures >Resources. The variables used are Condition Categories that 

group ICD-9-CM codes into clinically coherent variables. The 2010 Condition 

Category-ICD-9-CM Crosswalk provides a map to the specific ICD-9-CM codes in each 

variable and is also posted on http://www.QualityNet.org > Hospital-Inpatient > 

Readmission Measures > Measure Calculation Methodology or readers may use the 

following Web site address: 

http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage

%2FQnetTier4&cid=1219069855841

(E) Applicable Period 
CMS-1518-P 475 

Section 1886 (q)(5)(D) of the Act authorizes the Secretary to specify the 

“applicable period” with respect to a fiscal year. Currently, for Hospital IQR Program 

public reporting purposes, we use three years of data (three 12-month increments) to 

calculate the three proposed readmission measures. This provides substantially more data 

than a one or two year time frame and increases the precision of the measure in 

distinguishing performance among hospitals. This is advantageous in the display of the 

three proposed readmission measures on Hospital Compare where we categorize hospital 

performance into one of three discrete categories: “Better than the US national rate,” 

“No different than the US national rate,” and “Worse than the US national rate.” 

For the FY 2013 Hospital Readmissions Reduction Program, we are proposing to 

use 3 years of data for discharges from July 1, 2008 through June 30, 2011 as the 

applicable period upon which to calculate excess readmission ratios for each of the three 

proposed measures. Based on our experience with the IQR program, we believe that this 

timeframe increases the precision of the measures in distinguishing performance among 

hospitals. However, for purposes of the Hospital Readmissions Reduction Program, we 

will not be categorizing hospital performance in three categories; rather, we will be using 

the measures to calculate excess readmission ratios for the three conditions. We are 

currently conducting analyses to determine an appropriate data period (for example, 1 

year, 2 years, 3 years) that will yield reliable excess readmission ratios for the three 

proposed measures. We intend to consider both the positive and negative consequences 

of using longer or shorter data periods for this program. Should our analysis or public 
CMS-1518-P 476 

comment indicate that a shorter data period yields excess readmission ratios with 

acceptable reliability, we may consider finalizing a shorter time period. 

We invite public comment and suggestions on the topic of an appropriate length 

for the applicable period to consider using for the three proposed readmission measures 

for the FY 2013 payment determination. 

(F) Data Sources 

As discussed above, the adjustment under section 1886(q) of the Act is made to 

the “base operating DRG payment amount,” and components of the ratio used to 

determine a hospital’s adjustment factor also use that payment amount. Payments under 

section 1886 of the Act, including the “base operating DRG payment amount, are made 

for services furnished to Medicare’s fee-for-service population under part A. Therefore, 

for purposes of implementing the Hospital Readmissions Program under section 1886(q) 

of the Act, we are proposing to use Medicare claims data for the Medicare FFS 

population only. This is the same universe of claims used for calculating the endorsed 

measures for the purposes of the IQR program. 

The administrative data sources for the risk adjustment analyses are Medicare 

administrative claims datasets that contain FFS inpatient and outpatient (Medicare Parts 

A and B) claims information in the prior 12 months and subsequent one month for 

patients admitted in each of these years. We are proposing to use claims from the index 

hospitalization included the measure and from the prior 12 months from all of these data 

sources to gather risk factors. If the patient does not have any claims in the 12 months 
CMS-1518-P 477 

prior to the index hospitalization admission, only comorbidities from the included 

admission are used. 

We welcome public comment on this proposal. 

(G) Minimum Number of Discharges for Applicable Conditions 

Section 1886 (q)(4)(C)(II)(ii) of the Act authorizes the Secretary to exclude 

readmissions for an applicable condition for which there are “fewer than a minimum 

number (as determined by the Secretary).” Currently, for public reporting purposes under 

the IQR program, only hospitals with at least 25 discharges for each of the three proposed 

applicable conditions are included in the display of the three proposed readmission 

measures on Hospital Compare. We chose this number of discharges for the IQR based 

on our findings that using fewer cases did not provide sufficiently reliable information on 

hospital performance. In general the larger the number of cases, the more reliable is the 

information. We are currently conducting additional analyses to determine further 

evaluate the appropriate minimum number of discharges needed to yield reliable excess 

readmission ratios for the three proposed measures. However, based on our experience 

with the IQR program, we are proposing to use the current threshold of 25 discharges for 

each of the three measures for the Hospital Readmissions Reduction Program. However, 

should our analysis or public comment indicate that a different minimum number of 

discharges would be more appropriate for this program, we would consider finalizing a 

different number. 

We invite public comment and suggestions on the topic of appropriate minimum 

number of discharges to consider for the three proposed readmission measures. 
CMS-1518-P 478 

(H) Reporting Hospital-Specific Readmission Rates 

 Section 1886(q)(6)(A) of the Act requires the Secretary to “make information 

available to the public regarding readmission rates of each subsection (d) hospital under 

the readmission reduction program.” Section 1886(q)(6)(B) of the Act requires the 

Secretary to “ensure that a subsection (d) hospital has the opportunity to review and 

submit corrections for, the information to be made public with respect to the hospital . . . 

prior to such information being made public.” Section 1886(q)(6)(C) of the Act requires 

the Secretary to post the hospital-specific readmission information on the Hospital 

Compare Web site in an easily understandable format. 

We currently report information on the three readmission rates we are proposing 

in this proposed rule on the Hospital Compare Web site for each subsection (d) hospital. 

We provide hospitals with an opportunity to preview their readmission rates for 30-days 

prior to posting on the Web site. We propose to use a similar process and timeframe for 

the rates calculated for the Hospital Readmissions Reduction Program. Through this 

process hospitals will be able to review the information and submit to CMS corrections in 

advance of the information to be made public. We will carefully review all such 

correction submissions and determine the appropriateness of any revisions. We will 

inform the hospital requesting corrections of our findings and we will make any 

appropriate revisions to the information to be made available to the public regarding the 

hospital’s readmission rates. 

We invite public comment on this proposal. 
CMS-1518-P 479 

(I) Readmission Rates for All Patients 

 Section 1886(q)(8)(A) of the Act requires the Secretary to calculate readmission 

rates for all patients for a “specified hospital” for an applicable condition and “other 

conditions deemed appropriate by the Secretary for an applicable period.” Section 

1886(q)(8)(D)(ii) of the Act defines “specified hospital” as: subsection (d) hospitals; 

hospitals described in clauses (i) through (v) of subsection (d)(1)(B) (psychiatric 

hospitals, rehabilitation hospitals, children’s hospitals, LTCHs, and cancer hospitals); 

and, “as determined feasible and appropriate by the Secretary, other hospitals.” Such 

information is to be calculated in the same manner as used to calculate readmission rates 

for hospitals with respect to the postings on the CMS Hospital Compare Web site. 

 Section 1886(q)(8)(C) of the Act requires specified hospitals, or a State or an 

appropriate entity on behalf of the hospitals, to submit to the Secretary, in a form, manner 

and time specified by the Secretary, data and information determined necessary to 

calculate the all patient readmission rates. Section 1886(q)(8)(D) of the Act defines “all 

patients” to mean patients who are treated on an inpatient basis and discharged from a 

specified hospital. We are not proposing any specific policies to implement section 

1886(q)(8) of the Act at this time, but we invite public comment and suggestions for 

issues related to implementation of these provisions, such as the mechanisms to collect 

the all-patient data, the collection of patient identifiers to track patient care history across 

multiple settings to conduct risk adjustment for outcome measures, what entities could 

submit all patient data on behalf of hospitals, and more generally, the requirement for all 

patient data submission. 
CMS-1518-P 480 

(5) Proposed Excess Readmission Ratio 

(A) Statutory Background 

 Section 1886(q)(4)(C) of the Act requires the Secretary to develop a risk-adjusted 

“Excess Readmission Ratio.” The Excess Readmission Ratio will be used in the 

calculation of “aggregate payments for excess readmissions” as required under section 

1886(q)(4)(A)(iii) of the Act, which, in turn, is used to determine the adjustment factor 

under section 1886(q)(3). Specifically, section 1886(q)(4)(C)(i) states that the term 

“‘Excess Readmission Ratio’ means . . . with respect to an applicable condition for a 

hospital for an applicable period . . . the ratio of . . . risk adjusted readmissions based on 

actual readmissions . . . to . . . the risk adjusted expected readmissions.” The statute also 

requires that the numerator and denominator of the ratio, that is, “risk adjusted 

readmissions based on actual readmissions” and the “risk adjusted expected 

readmissions,” be determined “consistent with a readmission measure methodology that 

has been endorsed under paragraph (5)(A)(ii)(I).” 

(B) Proposed Excess Readmission Ratio Methodology 

We are proposing to use the risk-standardized ratio calculated for the 

NQF-endorsed measures for AMI, HF, and PN as the “excess readmission ratio.” This 

risk-standardized ratio (excess readmission ratio), as required by statute, is a ratio of “risk 

adjusted readmission based on actual” to “risk adjusted expected readmissions.” 

Moreover, use of this ratio meets the statutory requirement that the numerator and 

denominator of the ratio be determined in a manner that is “consistent with” an NQFendorsed readmission measure methodology. 
CMS-1518-P 481 

The proposed ratio is a measure of relative performance. If a hospital performs 

better than an average hospital that admitted similar patients (that is, patients with the 

same risk factors for readmission such as age and comorbidities), the ratio will be less 

than one. If a hospital performs worse than average, the ratio will be greater than one. 

Hospitals with a ratio greater than one have excess readmissions relative to average 

quality hospitals with similar types of patients 

As part of the Hospital IQR Program, the risk-standardized ratio to the measure 

result is reported on Hospital Compare Web site. The risk-standardized ratio is the 

unique result produced by the measures for each hospital for each condition to assess 

relative hospital performance. Hospitals may not be familiar with this ratio, because the 

measure result reported on Hospital Compare for each hospital and each condition is this 

ratio multiplied by a constant (the national raw rate of readmission for the condition), and 

it is currently presented as the risk-standardized readmission rate (RSRR). Multiplying 

by a constant transforms the ratio into a rate (the risk-standardized readmission rate) that 

is better understood by consumers. Thus Hospital Compare results for CMS readmission 

measures are computed as follows: 

[Hospital risk-standardized ratio] X [national raw readmission rate] 

(i) Numerator and Denominator of the Risk-Standardized Ratio (Excess Readmission 

Ratio) 

 The NQF-endorsed measures, which we are proposing for the Hospital 

Readmissions Reduction Program, calculate this risk-standardized ratio (excess 

readmission ratio) using hierarchical logistic modeling, which is a widely accepted 
CMS-1518-P 482 

statistical method that evaluates relative hospital performance based on outcomes such as 

readmission. The method adjusts for variation across hospitals in how sick their patients 

are when admitted to the hospital (and therefore variation in hospitals’ patients’ 

readmission risk) as well as the variation in the number of patients that a hospital treats to 

reveal difference in quality. The detailed methodology for these measures is publiclyavailable and the calculation SAS packs are made available upon request. This is the 

calculation software that permits the measures to be calculated. We describe the key 

details of the methodology here. 

In order to model the extent to which hospitals affect patients’ risk of 

readmission, this statistical model first analyzes data on all the patients discharged from 

all hospitals for a given condition that indicate for each patient what comorbidities were 

present when the patient was admitted and whether or not the patient was readmitted and 

calculates: 

● How much variation in hospital readmission rates overall is accounted for by 

variation across hospitals in patients’ individual risk factors (such as age and other 

medical conditions); a risk weight (beta-coefficient) is calculated for each patient risk 

factor at all hospitals. The specific approach and variables used in the risk adjustment are 

discussed below. 

● How much variation in readmission rates is accounted for by hospitals’ 

contribution to readmission risk, after adjusting for differences in readmission due to 

differences in patients’ risk factors. The model estimates the amount by which a specific 

hospital increases or decreases patients’ risk of readmission relative to an average 
CMS-1518-P 483 

hospital based on the hospitals actual readmission relative to hospitals with similar 

patients. The estimated amount each hospital contributes (or subtracts) from its patients 

readmission risk compared to hospitals with similar patients is called the 

“hospital-specific readmission effect.” It is used only in the numerator to estimate the 

adjusted actual readmissions. The hospital-specific effect will be negative for a better 

than average hospital, positive for a worse than average hospital, and close to zero for an 

average hospital. If there are no quality differences resulting in excess readmissions 

among hospitals (if all hospitals had the same readmission rates relative to hospitals with 

similar patients), the hospital-specific effects for all hospitals will be zero and the ratio 

for all hospitals will be one. 

(ii) Numerator Calculation – Adjusted Actual Readmissions 

 For each hospital, the numerator of the ratio used in the NQF-endorsed 

methodology (actual adjusted readmissions) is calculated by estimating the probability of 

readmission for each patient at that hospital and summing up over all the hospital’s 

patients to get the actual adjusted number of readmissions for that hospital. This 

estimated probability of readmission for each patient is calculated using: 

● The hospital-specific effect (increase, decrease, or no change in probability of 

readmission relative to the probability of readmission at an average hospital); 

● The intercept term for the model (the same for all hospitals and for both 

numerator and denominator equations); 
CMS-1518-P 484 

● The increase or decrease in the probability of readmission contributed by each 

of the patients’ risk factors (risk adjustment coefficients multiplied by the patient’s risk 

factors, X) 

Mathematically, the numerator equation can be expressed as: 

(iii) Denominator Calculation – Expected Readmissions (at an Average Quality Hospital 

Treating the Same Patients) 

The denominator of the risk-standardized ratio (excess readmission ratio) under 

this NQF-endorsed methodology sums the probability of readmission for each patient at 

an average hospital. This probability is calculated using: 

● The intercept term for the model (the same for all hospitals and for both 

numerator and denominator equations); and 

● The increase or decrease in the probability of readmission contributed by each 

of the patients’ risk factors (risk adjustment coefficients multiplied by the patient’s risk 

factors, X). 
CMS-1518-P 485 

This can be expressed mathematically as: 

 Thus, the ratio compares the total adjusted actual readmissions at the hospital to 

the number that would be expected if the hospital’s patients were treated at an average 

hospital with similar patients. Hospitals with more adjusted actual readmissions than 

expected readmissions will have a risk-standardized ratio (excess readmission ratio) 

greater than one. 

Because the ratio is risk-adjusted, a hospital may have high crude readmission 

rates (number of 30-day readmissions among patients with the applicable condition 

divided by number of admissions for patients with the applicable condition) yet have a 

risk-standardized ratio (excess readmission ratio) less than one. For example, if a 

hospital with a higher than average raw readmission rate cares for very sick patients, the 

ratio may show that the adjusted actual number of readmissions (the numerator), which 

accounts for the case-mix, is actually lower than what would be expected for an average 

hospital caring for these patients (denominator) and therefore the Excess Readmission 
CMS-1518-P 486 

Ratio, as proposed, will be less than one, demonstrating that this hospital performs better 

than average, despite having a high crude readmission rate, and does not have excess 

readmissions. Similarly, if a hospital has a seemingly low unadjusted readmission rate 

but cares for a very low risk population of patients, it may be found to have an adjusted 

actual number of readmissions that is higher than the expected number of readmissions, 

and therefore a ratio greater than one. 

In summary, we are proposing to use the risk-standardized readmission ratio of 

the NQF-endorsed readmission measures as the Excess Readmission Ratio. The ratio is a 

measure of relative performance. If a hospital performs better than an average hospital 

that admitted similar patients (that is, patients with the same risk factors for readmission 

such as age and comorbidities), the ratio will be less than 1.0. If a hospital performs 

worse than average, the ratio will be greater than 1.0. 

We welcome public comment on our proposal to use this methodology for 

calculating the “risk adjusted readmissions based on actual readmissions” as well as the 

“risk adjusted expected readmissions” used to determine the Excess Readmission Ratio, 

as set forth in section 1886(q)(5)(C) of the Act. 

D. Rural Referral Centers (RRCs) (§412.96)

 Under the authority of section 1886(d)(5)(C)(i) of the Act, the regulations at 

§412.96 set forth the criteria that a hospital must meet in order to qualify under the IPPS 

as an RRC. For discharges that occurred before October 1, 1994, RRCs received the 

benefit of payment based on the other urban standardized amount rather than the rural 

standardized amount (as discussed in the FY 1993 IPPS final rule (59 FR 45404 through 
CMS-1518-P 487 

45409)). Although the other urban and rural standardized amounts are the same for 

discharges occurring on or after October 1, 1994, RRCs continue to receive special 

treatment under both the DSH payment adjustment and the criteria for geographic 

reclassification. 

 Section 402 of Pub. L. 108-173 raised the DSH adjustment for RRCs such that 

they are not subject to the 12-percent cap on DSH payments that is applicable to other 

rural hospitals. RRCs are also not subject to the proximity criteria when applying for 

geographic reclassification. In addition, they do not have to meet the requirement that a 

hospital's average hourly wage must exceed, by a certain percentage, the average hourly 

wage of the labor market area where the hospital is located. 

 Section 4202(b) of Pub. L. 105-33 states, in part, "[a]ny hospital classified as an 

RRC by the Secretary . . . for fiscal year 1991 shall be classified as such an RRC for 

fiscal year 1998 and each subsequent year." In the August 29, 1997 IPPS final rule with 

comment period (62 FR 45999), CMS reinstated RRC status for all hospitals that lost the 

status due to triennial review or MGCRB reclassification. However, CMS did not 

reinstate the status of hospitals that lost RRC status because they were now urban for all 

purposes because of the OMB designation of their geographic area as urban. 

Subsequently, in the August 1, 2000 IPPS final rule (65 FR 47089), we indicated that we 

were revisiting that decision. Specifically, we stated that we would permit hospitals that 

previously qualified as an RRC and lost their status due to OMB redesignation of the 

county in which they are located from rural to urban, to be reinstated as an RRC. 

Otherwise, a hospital seeking RRC status must satisfy all of the other applicable criteria. 
CMS-1518-P 488 

We use the definitions of “urban” and “rural” specified in Subpart D of 42 CFR Part 412. 

One of the criteria under which a hospital may qualify as an RRC is to have 275 or more 

beds available for use (§412.96(b)(1)(ii)). A rural hospital that does not meet the bed size 

requirement can qualify as an RRC if the hospital meets two mandatory prerequisites (a 

minimum CMI and a minimum number of discharges), and at least one of three optional 

criteria (relating to specialty composition of medical staff, source of inpatients, or referral 

volume). (We refer readers to §412.96(c)(1) through (c)(5) and the September 30, 1988 

Federal Register (53 FR 38513).) With respect to the two mandatory prerequisites, a 

hospital may be classified as an RRC if-- 

● The hospital's CMI is at least equal to the lower of the median CMI for urban 

hospitals in its census region, excluding hospitals with approved teaching programs, or 

the median CMI for all urban hospitals nationally; and 

● The hospital's number of discharges is at least 5,000 per year, or, if fewer, the 

median number of discharges for urban hospitals in the census region in which the 

hospital is located. (The number of discharges criterion for an osteopathic hospital is at 

least 3,000 discharges per year, as specified in section 1886(d)(5)(C)(i) of the Act.) 

1. Case-Mix Index (CMI) 

 Section 412.96(c)(1) provides that CMS establish updated national and regional 

CMI values in each year’s annual notice of prospective payment rates for purposes of 

determining RRC status. The methodology we used to determine the national and 

regional CMI values is set forth in the regulations at §412.96(c)(1)(ii). The proposed 

national median CMI value for FY 2012 includes data from all urban hospitals 
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nationwide, and the proposed regional values for FY 2012 are the median CMI values of 

urban hospitals within each census region, excluding those hospitals with approved 

teaching programs (that is, those hospitals that train residents in an approved GME 

program as provided in §413.75). These proposed values are based on discharges 

occurring during FY 2010 (October 1, 2009 through September 30, 2010), and include 

bills posted to CMS’ records through December 2010. 

 We are proposing that, in addition to meeting other criteria, if rural hospitals with 

fewer than 275 beds are to qualify for initial RRC status for cost reporting periods 

beginning on or after October 1, 2011, they must have a CMI value for FY 2010 that is at 

least-- 

● 1.5292; or 

● The median CMI value (not transfer-adjusted) for urban hospitals (excluding 

hospitals with approved teaching programs as identified in §413.75) calculated by CMS 

for the census region in which the hospital is located. 

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

Region 

Case-Mix 

Index Value 

1. New England (CT, ME, MA, NH, RI, VT) 1.3247

2. Middle Atlantic (PA, NJ, NY) 1.3723

3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV) 1.4579

4. East North Central (IL, IN, MI, OH, WI) 1.4624

5. East South Central (AL, KY, MS, TN) 1.4001

6. West North Central (IA, KS, MN, MO, NE, ND, SD) 1.4419

7. West South Central (AR, LA, OK, TX) 1.5689

8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY) 1.6292
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Region 

Case-Mix 

Index Value 

9. Pacific (AK, CA, HI, OR, WA) 1.5151

 The preceding numbers will be revised in the FY 2012 IPPS final rule to the 

extent required to reflect the updated FY 2010 MedPAR file, which will contain data 

from additional bills received through March 2011. 

 A hospital seeking to qualify as an RRC should obtain its hospital-specific CMI 

value (not transfer-adjusted) from its fiscal intermediary or MAC. Data are available on 

the Provider Statistical and Reimbursement (PS&R) System. In keeping with our policy 

on discharges, the CMI values are computed based on all Medicare patient discharges 

subject to the IPPS MS-DRG-based payment. 

2. Discharges 

 Section 412.96(c)(2)(i) provides that CMS set forth the national and regional 

numbers of discharges in each year’s annual notice of prospective payment rates for 

purposes of determining RRC status. As specified in section 1886(d)(5)(C)(ii) of the Act, 

the national standard is set at 5,000 discharges. We are proposing to update the regional 

standards based on discharges for urban hospitals’ cost reporting periods that began 

during FY 2009 (that is, October 1, 2008 through September 30, 2009), which are the 

latest cost report data available at the time this proposed rule was developed. 

 Therefore, we are proposing that, in addition to meeting other criteria, a hospital, 

if it is to qualify for initial RRC status for cost reporting periods beginning on or after 

October 1, 2011, must have, as the number of discharges for its cost reporting period that 

began during FY 2009, at least- 
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● 5,000 (3,000 for an osteopathic hospital); or 

● The median number of discharges for urban hospitals in the census region in 

which the hospital is located, as indicated in the following table. 

Region 

Number of 

Discharges 

1. New England (CT, ME, MA, NH, RI, VT) 8,141

2. Middle Atlantic (PA, NJ, NY) 11,919

3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV) 11,504

4. East North Central (IL, IN, MI, OH, WI) 8,395

5. East South Central (AL, KY, MS, TN) 7,337

6. West North Central (IA, KS, MN, MO, NE, ND, SD) 8,102

7. West South Central (AR, LA, OK, TX) 5,847

8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY) 9,608

9. Pacific (AK, CA, HI, OR, WA) 8,900

 These numbers will be revised in the FY 2012 final rule based on the latest 

available cost report data. 

 We note that the median number of discharges for hospitals in each census region 

is greater than the national standard of 5,000 discharges. Therefore, 5,000 discharges is 

the minimum criterion for all hospitals under this proposed rule. 

 We reiterate that, if an osteopathic hospital is to qualify for RRC status for cost 

reporting periods beginning on or after October 1, 2011, the hospital would be required to 

have at least 3,000 discharges for its cost reporting period that began during FY 2009. 
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E. Payment Adjustment for Low-Volume Hospitals (§412.101)

1. Background 

Section 1886(d)(12) of the Act, as added by section 406(a) of Pub. L. 108-173, 

provides for a payment adjustment to account for the higher costs per discharge for 

low-volume hospitals under the IPPS, effective beginning FY 2005. The additional 

payment adjustment to a low-volume hospital provided for under section 1886(d)(12) of 

the Act is “in addition to any payment calculated under this section.” Therefore, the 

additional payment adjustment is based on the per discharge amount paid to the 

qualifying hospital under section 1886 of the Act. In other words, the low-volume add-on 

payment amount is based on all other per discharge payments made under section 1886 of the 

Act, including capital, DSH, IME, and outliers. For SCHs and MDHs, the low-volume addon payment amount is based on either the Federal rate or the hospital-specific rate, whichever 

results in a greater operating IPPS payment. Sections 3125 and 10314 of the Affordable 

Care Act amended the definition of a low-volume hospital under section 1886(d)(12)(C) 

of the Act. Sections 3125 and 10314 of the Affordable Care Act also revised the 

methodology for calculating the payment adjustment for low-volume hospitals. 

Prior to the amendments made by the Affordable Care Act, section 

1886(d)(12)(C)(i) of the Act defined a low-volume hospital as “a subsection (d) hospital 

(as defined in paragraph (1)(B)) that the Secretary determines is located more than 25 

road miles from another subsection (d) hospital and that has less than 800 discharges 

during the fiscal year.” Section 1886(d)(12)(C)(ii) of the Act further stipulates that the 

term “discharge” means “an inpatient acute care discharge of an individual regardless of 

whether the individual is entitled to benefits under Part A.” Therefore, the term 
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“discharge” refers to total discharges, not merely Medicare discharges. Furthermore, 

under section 406(a) of Pub. L. 108-173, which initially added subparagraph (12) to 

section 1886(d) of the Act, the provision requires the Secretary to determine an 

applicable percentage increase for these low-volume hospitals based on the “empirical 

relationship” between “the standardized cost-per-case for such hospitals and the total 

number of discharges of such hospitals and the amount of the additional incremental 

costs (if any) that are associated with such number of discharges.” The statute thus 

mandates that the Secretary develop an empirically justifiable adjustment based on the 

relationship between costs and discharges for these low-volume hospitals. The statute 

also limits the adjustment to no more than 25 percent. 

Based on an analysis we conducted for the FY 2005 IPPS final rule (69 FR 49099 

through 49102), a 25 percent low-volume adjustment to all qualifying hospitals with less 

than 200 discharges was found to be most consistent with the statutory requirement to 

provide relief to low-volume hospitals where there is empirical evidence that higher 

incremental costs are associated with low numbers of total discharges. In the FY 2006 

IPPS final rule (70 FR 47432 through 47434), we stated that a multivariate analyses 

supported the existing low-volume adjustment implemented in FY 2005. Therefore, the 

low-volume adjustment of an additional 25 percent would continue to be provided for 

qualifying hospitals with less than 200 discharges. 

2. Temporary Changes for FYs 2011 and 2012 

Section 1886(d)(12) of the Act was amended by sections 3125 and 10314 of the 

Affordable Care Act. The changes made by these sections of the Affordable Care Act are 
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effective only for discharges occurring during FYs 2011 and 2012. Beginning with 

FY 2013, the preexisting low-volume hospital payment adjustment and qualifying 

criteria, as implemented in FY 2005, will resume. Specifically, as discussed above, the 

provisions of the Affordable Care Act revised the definition of a low-volume hospital and 

also revised the methodology for calculating the payment adjustment for low-volume 

hospitals for FYs 2011 and 2012. 

Sections 3125(3) and 10314(1) of the Affordable Care Act amended the 

qualifying criteria for low-volume hospitals under section 1886(d)(12)(C)(i) of the Act to 

make it easier for hospitals to qualify for the low-volume adjustment. Specifically, the 

revised provision specifies that, for FYs 2011 and 2012, a hospital qualifies as a 

low-volume hospital if it is “more than 15 road miles from another subsection (d) hospital 

and has less than 1,600 discharges of individuals entitled to, or enrolled for, benefits 

under Part A during the fiscal year.” In addition, section 1886(d)(12)(D) of the Act, as 

added by section 3125(4) and amended by section 10314 of the Affordable Care Act, 

provides that the payment adjustment (the applicable percentage increase) is to be 

determined “using a continuous linear sliding scale ranging from 25 percent for 

low-volume hospitals with 200 or fewer discharges of individuals entitled to, or enrolled 

for, benefits under Part A in the fiscal year to 0 percent for low-volume hospitals with 

greater than 1,600 discharges of such individuals in the fiscal year.” 

Section 3125(3)(A) of the Affordable Care Act revised the distance requirement 

of “25 road miles” to “15 road miles” for FYs 2011 and 2012 such that a low-volume 

hospital is required to be only more than 15 road miles, rather than more than 25 road 
CMS-1518-P 495 

miles, from another subsection (d) hospital for purposes of qualifying for the low-volume 

payment adjustment in FYs 2011 and 2012. The mileage requirement will revert back to 

“more than 25 road miles” for fiscal years after FY 2012. 

Sections 3125(3)(B) and 10314(1) of the Affordable Care Act revised the 

discharge requirement for FYs 2011 and 2012 to less than 1,600 discharges of individuals 

entitled to, or enrolled for, benefits under Medicare Part A during the fiscal year. Prior to 

enactment of the Affordable Care Act, under section 1886(d)(12) of the Act, as added by 

section 406(a) of Pub. L. 108-173, the discharge requirement to qualify as a low-volume 

hospital is less than 800 total discharges annually, which includes discharges of both 

Medicare and non-Medicare patients. This discharge requirement will apply also for 

fiscal years after FY 2012. 

Section 3125(4) of the Affordable Care Act added section 1886(d)(12)(D) to the 

Act, and section 10314(2) of the Affordable Care Act further modified that section of the 

Act. Section 1886(d)(12)(D) of the Act, as modified, revises the methodology for 

calculating the payment adjustment under section 1886(d)(12)(A) of the Act for 

low-volume hospitals for discharges occurring in FYs 2011 and 2012. For FY 2010 and 

prior fiscal years, and beginning again in FY 2013, sections 1886(d)(12)(A) and (B) of 

the Act require the Secretary to determine an applicable percentage increase for lowvolume hospitals based on the “empirical relationship” between “the standardized costper-case for such hospitals and the total number of discharges of such hospitals and the 

amount of the additional incremental costs (if any) that are associated with such number 

of discharges.” The statute thus requires the Secretary to develop an empirically 
CMS-1518-P 496 

justifiable adjustment based on the relationship between costs and discharges for these 

low-volume hospitals. The statute also limits the adjustment to no more than 25 percent. 

Based on analyses we conducted for the FY 2005 IPPS final rule (69 FR 49099 through 

49102) and the FY 2006 IPPS final rule (70 FR 47432 through 47434), a 25 percent 

low-volume adjustment to all qualifying hospitals with less than 200 discharges was 

found to be most consistent with the statutory requirement to provide relief to 

low-volume hospitals where there is empirical evidence that higher incremental costs are 

associated with low numbers of total discharges. However, section 1886(d)(12)(D) of the 

Act, as added by the Affordable Care Act, provides that, for discharges occurring in FYs 

2011 and 2012, the Secretary shall determine the applicable percentage increase using a 

continuous linear sliding scale ranging from an additional 25 percent payment adjustment 

for hospitals with 200 or fewer Medicare discharges to a 0 percent additional payment 

adjustment for hospitals with more than 1,600 Medicare discharges. 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50275), we 

revised our regulations at 42 CFR 412.101 to reflect the changes to the payment 

adjustment for low-volume hospitals provided for by the provisions of the Affordable 

Care Act. We also clarified the existing regulations to indicate that a hospital must 

continue to qualify as a low-volume hospital in order to receive the payment adjustment 

in that year; that is, it is not based on a one-time qualification. Furthermore, we 

established a procedure for a hospital to request low-volume hospital status. 

Specifically, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 and 

50414), we revised our regulations at §412.101(b)(2)(ii) to provide that, to qualify for the 
CMS-1518-P 497 

low-volume payment adjustment in FYs 2011 and 2012, a hospital must be located more 

than 15 road miles from the nearest subsection (d) hospital. We also defined, at 

§412.101(a), the term “road miles” to mean “miles” as defined at §412.92(c)(i). This 

change in the qualifying criteria from 25 to 15 road miles is applicable only for FYs 2011 

and 2012, but the definition of “road miles” continues to apply even after the distance 

requirement reverts to 25 road miles beginning in FY 2013. 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50239 and 

50414), we revised our regulations at §412.101(b)(2)(ii) to provide that, to qualify for the 

low-volume adjustment in FYs 2011 and 2012, a hospital must have fewer than 1,600 

“Medicare discharges” during the fiscal year based on the hospital's Medicare discharges 

from the most recently available MedPAR data as determined by CMS. We also revised 

the regulations to specify at §412.101(a) that the term “Medicare discharges” means a 

“discharge of inpatients entitled to Medicare Part A , including discharges associated 

with individuals whose inpatient benefits are exhausted or whose stay was not covered by 

Medicare and also discharges of individuals enrolled in a MA organization under 

Medicare Part C.” 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50240 through 50241), we 

adopted a continuous linear sliding scale equation to determine the low-volume payment 

adjustment for FYs 2011 and 2012 for eligible low-volume hospitals with Medicare 

discharges of more than 200 and less than 1,600 (that is, from 201 to 1,599 Medicare 

discharges). Consistent with the statute, for FYs 2011 and 2012 for eligible low-volume 
CMS-1518-P 498 

hospitals with 200 or fewer Medicare discharges, we established a low-volume payment 

adjustment of 25 percent. 

Under the regulations at §412.101(c)(2), for FYs 2011 and 2012, the low-volume 

adjustment is determined as follows: 

● Low-volume hospitals with 200 or fewer Medicare discharges will receive a 

low-volume adjustment of an additional 25 percent for each discharge. 

● Low-volume hospitals with Medicare discharges of more than 200 and fewer

than 1,600 will receive for each discharge a low-volume adjustment of an additional 

percent calculated using the formula: [(4/14) – (Medicare discharges/5600)]. For 

additional information on the mathematical interpretation of this formula, we refer 

readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50241). 

While we revised the qualifying criteria and the payment adjustment for 

low-volume hospitals for FYs 2011 and 2012, consistent with the amendments made by 

the Affordable Care Act, we also noted in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50240), that we did not modify the process for requesting and obtaining the 

low-volume hospital payment adjustment. In general, in order to qualify for the 

low-volume hospital payment adjustment, a hospital must provide to its fiscal 

intermediary or MAC sufficient evidence to document that it meets the discharge and 

distance requirements. The fiscal intermediary or MAC will determine, based on the 

most recent data available, if the hospital qualifies as a low-volume hospital, so that the 

hospital will know in advance whether or not it will receive a payment adjustment and, if 

so, the applicable add-on percentage. The fiscal intermediary or MAC and CMS may 
CMS-1518-P 499 

review available data, in addition to the data the hospital submits with its request for lowvolume hospital status, in order to determine whether or not the hospital meets the 

qualifying criteria. 

3. Proposed Discharge Data Source to Identify Qualifying Low-Volume Hospitals and 

Calculate the Payment Adjustment (Percentage Increase) for FY 2012 

 As described above, for FYs 2005 through 2010 and FY 2013 and subsequent 

years, since the discharge determination is made based on the hospital’s number of total 

discharges, the hospital’s most recently submitted cost report is used to determine if the 

hospital meets the criteria to receive the low-volume payment adjustment in the current 

year (§412.101(b)(2)(i)). For FYs 2011 and 2012, the hospital’s Medicare discharges 

from the most recently available MedPAR data, as determined by CMS, are used to 

determine if the hospital meets the discharge criteria to receive the low-volume payment 

adjustment in the current year (§412.101(b)(2)(ii)). As also described above, the 

applicable low-volume percentage increase is determined using a continuous linear 

sliding scale equation that results in a low-volume adjustment ranging from an additional 

25 percent for hospitals with 200 or fewer Medicare discharges to a 0 percent additional 

payment adjustment for hospitals with 1,600 or more Medicare discharges. 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50241), we established that, for 

FY 2011, the low-volume payment adjustment would be determined using Medicare 

discharge data for FY 2009 from the March 2010 update of the MedPAR files, as these 

were the most recent available data. We also stated that we expected to use Medicare 
CMS-1518-P 500 

claims data from FY 2010 to determine the low-volume payment adjustment for 

FY 2012, as these would be the most recent available data at that time. 

In this proposed rule, we are proposing that, for FY 2012, qualifying low-volume 

hospitals and their payment adjustment would be determined using Medicare discharge 

data from the most recent update of the FY 2010 MedPAR file, that is, the 

December 2010 update, as these data are the most recent data available. Furthermore, we 

are proposing that if more recent FY 2010 Medicare discharge data are available (such as 

data from the March 2011 update of the MedPAR files), we would use such data in the 

final rule. Table 14, which is listed in section VI. of the Addendum to this proposed rule 

and available via the Internet, lists the “subsection (d)” hospitals with fewer than 1,600 

Medicare discharges based on the December 2010 update of the FY 2010 MedPAR files 

and their proposed FY 2012 low-volume payment adjustment. Eligibility for the 

proposed low-volume payment adjustment for FY 2012 is also dependent upon meeting 

(if the hospital is qualifying for the low-volume payment adjustment for the first time in 

FY 2012), or continuing to meet (if the hospital qualified in FY 2011) the mileage criteria 

specified at §412.101(b)(2)(ii). 

We note that the list of hospitals with fewer than 1,600 Medicare discharges in 

Table 14 does not reflect whether or not the hospital meets the mileage criterion; that is, 

the hospital also must be located more than 15 road miles from any other IPPS hospital in 

order to qualify for a low-volume hospital payment adjustment in FY 2012. 

In order to receive a low-volume hospital adjustment payment under §412.101, a 

hospital must notify and provide documentation to its fiscal intermediary or MAC that it 
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meets the mileage criterion. The use of a Web-based mapping tool, such as MapQuest, as 

part of documenting that the hospital meets the mileage criterion for low-volume 

hospitals, is acceptable. The fiscal intermediary or MAC will determine if the 

information submitted by the hospital, such as the name and street address of the nearest 

hospitals, location on a map, and distance (in road miles, as defined in the regulations at 

§412.101(a)) from the hospital requesting low-volume hospital status, is sufficient to 

document that it meets the mileage criterion. If not, the fiscal intermediary or MAC will 

follow up with the hospital to obtain additional necessary information to determine 

whether or not the hospital meets the low-volume mileage criterion. The fiscal 

intermediary or MAC will refer to the hospital’s Medicare discharge data determined by 

CMS (as proposed for FY 2012 as shown in Table 14, which is listed in section VI. of the 

Addendum to this proposed rule and available via the Internet), to determine whether or 

not the hospital meets the discharge criterion, and the amount of the payment adjustment, 

once it is determined that both the mileage and discharge criteria are met. The Medicare 

discharge data shown in Table 14, as well as the Medicare discharge data for all 

“subsection (d)” hospitals with claims in the December 2010 update of the FY 2010 

MedPAR files, also will be available on the CMS Web site for hospitals to check their 

Medicare discharges to help them to decide whether or not to apply for low-volume 

hospital status. 

 Similar to the policy we established in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 20574 through 20575), we are proposing that, for FY 2012, a hospital make its 

request for low-volume hospital status in writing to its fiscal intermediary or MAC by 
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September 1, 2011, so that the applicable low-volume percentage add-on would be 

applied to payments for its discharges beginning on or after October 1, 2011. For 

FY 2012, we are proposing that a hospital which qualified for the low-volume payment 

adjustment in FY 2011 may continue to receive a low-volume payment adjustment in 

FY 2012, without reapplying, if it continues to meet the Medicare discharge criterion, 

based on the latest available FY 2010 MedPAR data (as proposed above) and the distance 

criterion. However, the hospital would be required to verify in writing to its fiscal 

intermediary or MAC that it continues to be more than 15 miles from any other 

“subsection (d)” hospital no later than September 30, 2011. Further, similar to the policy 

we established for FY 2011 (Transmittal 2060, Change Request 7134; October 1, 2010), 

we are proposing that, for requests for low-volume hospital status for FY 2012 received after 

September 1, 2011, if the hospital meets the criteria to qualify as a low-volume hospital, the 

fiscal intermediary or MAC would apply the applicable low-volume adjustment in 

determining payments to the hospital’s FY 2012 discharges prospectively within 30 days of 

the date of the fiscal intermediary’s or MAC’s low-volume status determination.

F. Indirect Medical Education (IME) Adjustment (§412.105)

1. Background 

 Section 1886(d)(5)(B) of the Act provides for an additional payment amount 

under the IPPS for hospitals that have residents in an approved graduate medical 

education (GME) program in order to reflect the higher indirect patient care costs of 

teaching hospitals relative to nonteaching hospitals. The regulations regarding the 

calculation of this additional payment, known as the indirect medical education (IME) 

adjustment, are located at §412.105. 
CMS-1518-P 503 

 Pub. L. 105-33 (BBA 1987) established a limit on the number of allopathic and 

osteopathic residents that a hospital may include in its full-time equivalent (FTE) resident 

count for direct GME and IME payment purposes. Under section 1886(h)(4)(F) of the 

Act, for cost reporting periods beginning on or after October 1, 1997, a hospital’s 

unweighted FTE count of residents for purposes of direct GME may not exceed the 

hospital’s unweighted FTE count for its most recent cost reporting period ending on or 

before December 31, 1996. Under section 1886(d)(5)(B)(v) of the Act, a similar limit on 

the FTE resident count for IME purposes is effective for discharges occurring on or after 

October 1, 1997. Changes to the policies regarding counting residents for both IME and 

direct GME payment purposes as a result of the implementation of sections 5503 through 

5506 of the Affordable Care Act were issued in a final rule published in the Federal 

Register on November 24, 2010 (75 FR 72133). 

2. IME Adjustment Factor for FY 2012 

 The IME adjustment to the MS-DRG payment is based in part on the applicable 

IME adjustment factor. The IME adjustment factor is calculated by using a hospital’s 

ratio of residents to beds, which is represented as r, and a formula multiplier, which is 

represented as c, in the following equation: c x [{1 + r} .405 - 1]. The formula is 

traditionally described in terms of a certain percentage increase in payment for every 

10-percent increase in the resident-to-bed ratio. 

 Section 502(a) of Pub. L. 108-173 modified the formula multiplier (c) to be used 

in the calculation of the IME adjustment. Prior to the enactment of Pub. L. 108-173, the 

formula multiplier was fixed at 1.35 for discharges occurring during FY 2003 and 
CMS-1518-P 504 

thereafter. In the FY 2005 IPPS final rule, we announced the schedule of formula 

multipliers to be used in the calculation of the IME adjustment and incorporated the 

schedule in our regulations at §412.105(d)(3)(viii) through (d)(3)(xii). Section 502(a) 

modified the formula multiplier beginning midway through FY 2004 and provided for a 

new schedule of formula multipliers for FYs 2005 and thereafter as follows: 

● For discharges occurring on or after April 1, 2004, and before October 1, 2004, 

the formula multiplier is 1.47. 

● For discharges occurring during FY 2005, the formula multiplier is 1.42. 

● For discharges occurring during FY 2006, the formula multiplier is 1.37. 

● For discharges occurring during FY 2007, the formula multiplier is 1.32. 

● For discharges occurring during FY 2008 and fiscal years thereafter, the 

formula multiplier is 1.35. 

 Accordingly, for discharges occurring during FY 2012, the formula multiplier is 

1.35. We estimate that application of this formula multiplier for the FY 2012 IME 

adjustment will result in an increase in IPPS payment of 5.5 percent for every 

approximately 10-percent increase in the hospital’s resident-to-bed ratio. 

G. Payment Adjustment for Medicare Disproportionate Share Hospitals (DSHs) and 

Indirect Medical Education (IME) (§§412.105 and 412.106)

1. Background 

Section 1886(d)(5)(F) of the Act provides for additional Medicare payments to 

subsection (d) hospitals that serve a significantly disproportionate number of low-income 

patients. The Act specifies two methods by which a hospital may qualify for the 
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Medicare disproportionate share hospital (DSH) adjustment. Under the first method, 

hospitals that are located in an urban area and have 100 or more beds may receive a 

Medicare DSH payment adjustment if the hospital can demonstrate that, during its cost 

reporting period, more than 30 percent of its net inpatient care revenues are derived from 

State and local government payments for care furnished to needy patients with low 

incomes. This method is commonly referred to as the “Pickle method.” 

The second method for qualifying for the DSH payment adjustment, which is the 

most common, is based on a complex statutory formula under which the DSH payment 

adjustment is based on the hospital’s geographic designation, the number of beds in the 

hospital, and the level of the hospital's disproportionate patient percentage (DPP). A 

hospital's DPP is the sum of two fractions: the “Medicare fraction” and the “Medicaid 

fraction.” The Medicare fraction (also known as the “SSI fraction” or “SSI ratio”) is 

computed by dividing the number of the hospital’s inpatient days that are furnished to 

patients who were entitled to both Medicare Part A (including patients who are enrolled 

in a Medicare Advantage (Part C) plan) and Supplemental Security Income (SSI) benefits 

by the hospital’s total number of patient days furnished to patients entitled to benefits 

under Medicare Part A (including patients who are enrolled in a Medicare Advantage 

(Part C) plan). The Medicaid fraction is computed by dividing the hospital’s number of 

inpatient days furnished to patients who, for such days, were eligible for Medicaid, but 

were not entitled to benefits under Medicare Part A, by the hospital’s total number of 

inpatient days in the same period. 
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Because the DSH payment adjustment is part of the IPPS, the DSH statutory 

references (under section 1886(d)(5)(F) of the Act) to “days” apply only to hospital acute 

care inpatient days. Regulations located at §412.106 govern the Medicare DSH payment 

adjustment and specify how the DPP is calculated as well as how beds and patient days 

are counted in determining the Medicare DSH payment adjustment. Under 

§412.106(a)(1)(i), the number of beds for the Medicare DSH payment adjustment is 

determined in accordance with bed counting rules for the IME adjustment under 

§412.105(b). 

In section IV.G.2. of this preamble, we are combining our discussion of proposed 

changes to the policies for counting beds in relation to the calculations for the IME 

adjustment at §412.105(b) and the DSH payment adjustment at §412.106(a)(1)(i) and for 

counting patient days for purposes of the DSH payment adjustment at §412.106(a)(1)(ii). 

2. Proposed Policy Change Relating to the Exclusion of Hospice Beds and Patient Days 

from the Medicare DSH Calculation 

a. Background 

As discussed in the FY 2004 IPPS final rule (68 FR 45415 through 45420), when 

determining a hospital’s Medicare DSH payment, our policy is to include patient days in 

hospital units or wards that would be directly included in determining the allowable costs 

of inpatient hospital care payable under the IPPS on the Medicare cost report. Under this 

policy, CMS uses the level of care generally provided in such a unit or ward as a proxy 

for determining the level of care provided to a particular patient on a particular day 

within that unit. As stated in the FY 2004 IPPS final rule, our policy is “not intended to 
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focus on the level or type of care provided to individual patients in a unit, but rather on 

the level and type of care provided in the unit as a whole.” (68 FR 45417) In the 

FY 2005 IPPS final rule, we amended this policy to specifically exclude observation and 

swing days from the patient day count. In this proposed rule, we are proposing to 

establish an additional exclusion with respect to counting bed days and patient days for 

patients receiving hospice services in an inpatient setting of a hospital. 

b. Hospice Inpatient Services 

Section 1861(dd)(1) of the Act defines hospice care to include a limited set of 

“items and services provided to a terminally ill individual by, or by others under 

arrangements made by, a hospice program under a written plan (for providing such care 

to such individual) established and periodically reviewed by the individual’s attending 

physician and by the medical director.” Among those items and services specified under 

section 1861(dd)(1)(G) of the Act is “short-term inpatient care (including both respite 

care and procedures necessary for pain control and acute and chronic symptom 

management) in an inpatient facility meeting such conditions as the Secretary determines 

to be appropriate to provide such care, but such respite care may be provided only on an 

intermittent, nonroutine, and occasional basis and may not be provided consecutively 

over longer than five days.” Based on these statutory definitions of hospice care, the 

Secretary, through regulation at §418.302, has grouped hospice care services into four 

categories for payment purposes. Two of these payment categories describe hospice 

services in an inpatient setting: inpatient respite care day and general inpatient care day. 
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Section 418.302(b)(3) of the regulations defines an inpatient respite care day as “a 

day on which the individual who has elected hospice care receives care in an approved 

facility on a short-term basis for respite.” Section 40.2.2 of Chapter 9 of the Medicare 

Benefit Policy Manual (https://www.cms.gov/manuals/Downloads/bp102c09.pdf) further 

describes an inpatient respite care day as a short-term inpatient day provided only when 

necessary to relieve family members or other caregivers caring for the individual at 

home. Under the Act, inpatient respite care is limited to 5 consecutive days for a given 

stay. Similarly, the regulations at §418.302(b)(4) describe a general inpatient care day as 

“a day on which an individual who has elected hospice care receives general inpatient 

care in an inpatient facility for pain control or acute or chronic symptom management 

which cannot be managed in other settings.” 

Section 40.1.5 of Chapter 9 of the Medicare Benefit Policy Manual provides that 

general inpatient care is appropriate when care for pain control or acute or chronic 

symptom management cannot feasibly be provided in another setting. This section of the 

Medicare Benefit Policy Manual further states that such care is “not equivalent to a 

hospital level of care.” That hospice care is not hospital level care is further supported by 

the provision at §418.202(e), which provides that general inpatient care and inpatient 

respite care hospice services can be “provided in a participating hospice inpatient unit, or 

a participating hospital or [skilled nursing facility], that additionally meets the standards 

in §418.202(a) and (e) regarding staffing and patient areas . . . [and] must conform to the 

[hospice provider’s] written plan of care.” 
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Furthermore, hospice services provided in an inpatient hospital setting are not 

payable under the IPPS. Rather, at this time, these services are payable under two of the 

four prospectively determined all-inclusive categories of care under the hospice payment 

system. In the FY 2004 IPPS final rule (68 FR 45418), we stated that we believed it 

“reasonable to interpret the phrase ‘hospital’s patient days,’ to mean only the hospital’s 

inpatient days at a level of care that would be covered under the IPPS as a means to 

determine an IPPS payment adjustment.” In that rule, we acknowledged that it would be 

“administratively inefficient and impracticable” to calculate a hospital’ inpatient days 

based on a determination of whether a particular patient in a particular inpatient bed for a 

particular stay is receiving a level of care that would be covered under the IPPS 

(68 FR 45418). Accordingly, we adopted a policy under which we use the level of care 

that is generally provided in particular units or wards as a proxy for determining whether 

the care provided to a particular patient is of a type that would be covered under the IPPS. 

However, we have recognized exceptions to this policy for certain categories of nonacute 

care, even if that care is provided in an acute care unit. 

Therefore, we are proposing to revise §412.106(a)(1)(ii) to exclude patient days 

associated with hospice patients receiving inpatient hospice services in an inpatient 

hospital setting from the Medicare and Medicaid fractions of the DPP. We also are 

proposing to amend our cost reporting instructions accordingly. Our proposal to exclude 

hospice inpatient days is analogous to our decision in the FY 2005 IPPS final rule to 

exclude observation and swing-bed days from the Medicare and Medicaid fractions of the 

DPP. In that rule, we stated that our policies to exclude observation days and swing-bed 
CMS-1518-P 510 

days from the count of patient days “stem from the fact that although the services are 

provided in beds that would otherwise be available to provide an IPPS level of services, 

these days are not payable under the IPPS . . . .” (69 FR 49097). Similarly, our proposal 

to exclude inpatient hospice days stems from the fact that these days are not acute care 

services generally payable under the IPPS. 

We note that, on rare occasions, patients receiving care under a third payment 

category, routine home care, may also receive services in an inpatient hospital setting. 

Unlike inpatient respite care or general inpatient services, routine home care services are 

not intended to be provided in a hospital setting. For the same reasons stated above, such 

days should also be excluded from the Medicare and Medicaid fractions of the DPP. 

We also are proposing to exclude from the hospital’s bed count days associated 

with hospice patients who receive inpatient hospice services in the hospital for purposes 

of both the IME payment adjustment and the DSH payment adjustment. The rules for 

counting hospital beds for the purposes of the IME adjustment are codified in the IME 

regulations at §412.105(b), which is cross-referenced in §412.106(a)(1)(i) for purposes of 

the DSH payment adjustment. Our bed counting policy is to include bed days available 

for IPPS-level acute care hospital services. Inpatient hospice services provided in an 

acute unit or ward are occasional, alternative uses of acute inpatient beds that would 

otherwise be considered available for IPPS-level acute care hospital services (as long as 

other criteria for a bed to be considered as an available bed are met under §412.105(b)). 

A bed used for inpatient hospice services on a given day is not available to be used for 

IPPS-level services. Therefore, we are proposing to revise §412.105(b)(4) to state that 
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such hospice days are excluded from the counts of available beds for purposes of the IME 

payment adjustment. Because the same rules govern the counting of available beds for 

purposes of the DSH payment adjustment under §412.106(a)(1)(i), hospice days will also 

be excluded from the count of available beds for purposes of the DSH payment 

adjustment. 

We note that there is a circumstance in which a hospital will provide IPPS-level 

acute care hospital services to a hospice patient for which it would receive payment under 

the IPPS. This occurs when a Medicare beneficiary receiving hospice care under his or 

her hospice benefit requires acute care hospital services to treat a condition unrelated to 

his or her hospice plan of care. For example, an individual who has elected the hospice 

benefit could be treated in the inpatient hospital setting for a broken bone that is unrelated 

to his or her terminal illness. Under these circumstances, the patient is receiving acute 

care hospital services of the sort payable under the IPPS. As such, consistent with 

§412.106(a)(ii), we are not proposing to exclude these patient days from the Medicare 

and Medicaid fractions of the DPP or from the count of available beds under 

§412.105(b)(4) and §412.106(a)(1)(i). 

We further note that hospitals may have hospice units that are separate and 

distinct from their acute care inpatient units. Under existing regulations at 

§412.105(b)(3) and §412.106(a)(ii)(A), services provided in distinct nonacute inpatient 

units are excluded from the patient day and bed day count. Our proposal with respect to 

inpatient hospice services does not change or affect this policy. 
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In summary, we are proposing to exclude inpatient hospice days from the patient 

day count in §412.106(a)(1)(ii) (for DSH) and the bed day count at §412.105(b) (for 

IME) and at §412.106(a)(1)(i) (for DSH). 

H. Medicare-Dependent, Small Rural Hospitals (MDHs) (§412.108)

1. Background 

 Under the IPPS, separate special payment protections are provided to a 

Medicare-dependent, small rural hospital (MDH). MDHs are paid based on the higher of 

the Federal rate for their hospital inpatient services or a blended rate based in part on the 

Federal rate and in part on the MDH’s hospital-specific rate. Section 1886(d)(5)(G)(iv) 

of the Act defines an MDH as a hospital that is located in a rural area, has not more than 

100 beds, is not an SCH, and has a high percentage of Medicare discharges (that is, not 

less than 60 percent of its inpatient days or discharges either in its 1987 cost reporting 

year or in two of its most recent three settled Medicare cost reporting years). The 

regulations at 42 CFR 412.108 set forth the criteria that a hospital must meet to be 

classified as an MDH. 

Although MDHs are paid under an adjusted payment methodology, they are still 

IPPS hospitals paid under section 1886(d) of the Act. Like all IPPS hospitals paid under 

section 1886(d) of the Act, MDHs are paid for their discharges based on the DRG 

weights calculated under section 1886(d)(4) of the Act. 

Through and including FY 2006, under section 1886(d)(5)(G) of the Act, MDHs 

are paid based on the Federal rate or, if higher, the Federal rate plus 50 percent of the 

amount by which the Federal rate is exceeded by the updated hospital-specific rate based 
CMS-1518-P 513 

on the hospital’s FY 1982 or FY 1987 costs per discharge, whichever of these 

hospital-specific rates is higher. Section 5003(b) of Pub. L. 109-171 (DRA 2005) 

amended section 1886(d)(5)(G) of the Act to provide that, for discharges occurring on or 

after October 1, 2006, MDHs are paid based on the Federal rate or, if higher, the Federal 

rate plus 75 percent of the amount by which the Federal rate is exceeded by the updated 

hospital-specific rate based on FY 1982, FY 1987, or FY 2002 costs per discharge, 

whichever of these hospital-specific rates is highest. 

For each cost reporting period, the fiscal intermediary or MAC determines which 

of the payment options will yield the highest aggregate payment. Interim payments are 

automatically made at the highest rate using the best data available at the time the fiscal 

intermediary or MAC makes the determination. However, it may not be possible for the 

fiscal intermediary or MAC to determine in advance precisely which of the rates will 

yield the highest aggregate payment by year’s end. In many instances, it is not possible 

to accurately forecast the outlier payments, the amount of the DSH adjustment or the 

IME adjustment, all of which are applicable only to payments based on the Federal rate 

and not to payments based on the hospital-specific rate. The fiscal intermediary or MAC 

makes a final adjustment at the settlement of the cost report after it determines precisely 

which of the payment rates would yield the highest aggregate payment to the hospital. 

If a hospital disagrees with the fiscal intermediary’s or the MAC’s determination 

regarding the final amount of program payment to which it is entitled, it has the right to 

appeal the determination in accordance with the procedures set forth in 42 CFR Part 405, 

Subpart R, which govern provider payment determinations and appeals. 
CMS-1518-P 514 

2. Extension of the MDH Program 

 As we discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50286 and 

50287), section 3124 of the Affordable Care Act extended the MDH program from the 

end of FY 2011 (that is, for discharges occurring before October 1, 2011) to the end of 

FY 2012 (that is, for discharges occurring before October 1, 2012). Under prior law, as 

specified in section 5003(a) of Pub. L. 109-171 (DRA 2005), the MDH program was to 

be in effect through the end of FY 2011 only. Section 3124(a) of the Affordable Care 

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

MDH program and payment methodology from the end of FY 2011 to the end of 

FY 2012, by striking "October 1, 2011" and inserting "October 1, 2012". Section 

3124(b) of the Affordable Care Act also made conforming amendments to sections 

1886(b)(3)(D)(i) and 1886(b)(3)(D)(iv) of the Act. Section 3124(b)(2) of the Affordable 

Care Act also amended section 13501(e)(2) of OBRA 1993 to extend the provision 

permitting hospitals to decline reclassification as an MDH through FY 2012. In the 

FY 2011 IPPS/LTCH PPS final rule (75 FR 50287 and 50414), we amended the 

regulations at §412.108(a)(1) and (c)(2)(iii) to reflect the statutory extension of the MDH 

program through FY 2012. We are not proposing any additional changes to this 

regulatory text for FY 2012. 

I. Certified Registered Nurse Anesthetist (CRNA) Services Furnished in Rural Hospitals 

and CAHs (§412.113)

 Section 2312 of the Deficit Reduction Act of 1984 (Pub. L. 98-369) provided for 

reimbursement to hospitals on a reasonable cost basis for the costs that hospitals incur in 
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connection with the services of certified registered nurse anesthetists (CRNAs). Section 

2312(c) provided that pass-through payment of CRNA costs was effective for cost 

reporting periods beginning on or after October 1, 1984, and before October 1, 1987. 

Section 9320 of the Omnibus Budget Reconciliation Act of 1986 (Pub. L. 99–509) 

(which established a fee schedule for the services of nurse anesthetists) amended section 

2312(c) of Pub. L. 98-369 by extending the CRNA pass-through provision through cost 

reporting periods beginning before January 1, 1989. In addition, Pub. L. 99-509 amended 

section 1861 of the Act to add a new subsection (bb), which provides that CRNA services 

include anesthesia services and related care furnished by a CRNA. Section 608 of the 

Family Support Act of 1988 (Pub. L. 100-485) extended pass-through payments for 

CRNA services through 1991 and amended section 9320 of Pub. L. 99-509 by including 

language referring to eligibility for pass-through payments for CRNA services if the 

facility is “...a hospital located in a rural area (as defined for purposes of section 1886(d) 

of the Social Security Act).” Reasonable cost-based payment for CRNA services was 

extended indefinitely by section 6132 of the Omnibus Budget Reconciliation Act of 1989 

(Pub. L. 101–239). 

Section 1886(d) of the Act defines “rural” as any area outside an urban area. This 

definition of “rural” was in effect when Pub. L. 100-485 was implemented. In 1999, the 

Balanced Budget Refinement Act (Pub. L. 106-113) amended section 1886(d)(8) of the 

Act by adding a new subparagraph (E), which permits a hospital physically located in an 

urban area to apply for reclassification to be treated as rural. In addition, Pub. L. 106-113 

made a corresponding change to section 1820(c)(2)(B)(i) of the Act, which specifies the 
CMS-1518-P 516 

rural location requirement for CAH designation, by adding the phrase “or is treated as 

being located in a rural area pursuant to section 1886(d)(8)(E).” 

 The regulations implementing pass-through payments for anesthesia services and 

related care furnished by qualified nonphysician anesthetists employed by a hospital or 

CAH, including CRNAs, are located at §412.113(c). In the FY 2011 IPPS/LTCH PPS 

proposed rule (75 FR 24010), we proposed to revise §412.113(c)(2)(i)(A) to state that, 

effective for cost reporting periods beginning on or after October 1, 2010, CAHs and 

hospitals that have reclassified pursuant to section 1886(d)(8)(E) of the Act and §412.103 

of the regulations also are rural for purposes of section 1886(d) of the Act and, therefore, 

are eligible to be paid based on reasonable cost for anesthesia services and related care 

furnished by a qualified nonphysician anesthetist. 

After consideration of the public comments, in the FY 2011 IPPS/LTCH PPS 

final rule (75 FR 50303), we adopted a policy that would allow otherwise eligible critical 

access hospitals (CAHs) or hospitals, that have reclassified from urban to rural status 

under section 1886(d)(8)(E) of the Act and 42 CFR 412.103, to receive reasonable cost 

payments for anesthesia services and related care furnished by qualified nonphysician 

anesthetists (also referred to in this section as CRNA pass-through payments), effective 

for cost reporting periods beginning on or after October 1, 2010. After the issuance of 

the final rule, we received an inquiry from a public commenter who indicated that CMS 

had misunderstood its submitted comment on the FY 2011 IPPS/LTCH PPS proposed 

rule in which the commenter stated that the policy should be effective on the basis of a 

calendar year, not a cost reporting period, since as a rule a hospital can only begin 
CMS-1518-P 517 

receiving CRNA pass-through payments at the beginning of a calendar year. Our 

response to this public comment in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50303) indicated that it was unnecessary to modify the effective date in the final 

rule because “if the provision is effective for cost reporting periods beginning on or after 

October 1, 2010, it will also be in effect for the calendar year beginning January 1, 2011.” 

While this statement was accurate, it did not take into account that if a hospital’s cost 

reporting period begins on or after January 1, 2011, the hospital would be ineligible to 

receive CRNA pass-through payments until the beginning of the next calendar year, on 

January 1, 2012. Under the finalized policy in the FY 2011 IPPS/LTCH PPS final rule, 

hospitals reclassifying from urban to rural areas with cost reporting periods beginning 

between October 1, 2010, and December 31, 2010, would be able to first receive CRNA 

pass-through payments effective January 1, 2011, while hospitals with cost reporting 

periods beginning on or after January 1, 2011, would not be able to receive CRNA passthrough payments until one year later on January 1, 2012. 

 In an interim final rule with comment period included in the Federal Register on 

November 24, 2010 (75 FR 72256), we stated that our intention in the FY 2011 

IPPS/LTCH PPS final rule was not to make the provision for CRNA pass-through 

payment for anesthesia services and related care furnished by nonphysician anesthetists 

effective January 1, 2011, for some hospitals and CAHs and January 1, 2012, for other 

hospitals and CAHs. We stated our belief that the provision would be more equitable if it 

had a uniform effective date for all eligible hospitals and CAHs. While we considered 

changing the effective date to January 1, 2011, for all hospitals and CAHs to begin 
CMS-1518-P 518 

receiving CRNA pass-through payments under this provision, we noted that our 

regulations at 42 CFR 412.113(c)(2)(iii) state that the hospital or CAH must demonstrate 

to its fiscal intermediary prior to the start of the calendar year that it meets the 

requirements for receiving CRNA pass-through payments. For this reason, we stated our 

belief that the best option was to adopt an effective date of December 2, 2010, for all 

hospitals and CAHs, which we provided for in the interim final rule with comment 

period. With an effective date of December 2, 2010, all hospitals and CAHs regardless of 

their specific fiscal year beginning date were provided the opportunity to demonstrate 

prior to January 1, 2011, that they met the requirements for receiving CRNA passthrough payments beginning January 1, 2011. In the interim final rule with comment 

period, we amended the regulations at §412.113(c)(2)(i)(A) to provide for an effective 

date of December 2, 2010, for all eligible hospitals and CAHs to receive CRNA passthrough payments for anesthesia services and related care furnished by qualified 

nonphysician anesthetists. 

We intend to respond to public comments received on the interim final rule with 

comment period and will adopt our final policy in the FY 2012 IPPS/LTCH PPS final 

rule. 

J. Additional Payments for Qualifying Hospitals with Lowest Per Enrollee Medicare 

Spending

1. Background 

Section 1109 of the Affordable Care Act requires additional payments for FYs 

2011 and 2012 for “qualifying hospitals.” Section 1109(d) defines a “qualifying 
CMS-1518-P 519 

hospital” as a “subsection (d) hospital . . . that is located in a county that ranks, based 

upon its ranking in age, sex and race adjusted spending for benefits under parts A 

and B . . . per enrollee within the lowest quartile of such counties in the United States.” 

Therefore, a “qualifying hospital” is one that meets the following conditions: (1) It is a 

“subsection (d) hospital” as defined in section 1886(d)(1)(B) of the Act; and (2) it is 

located in a county that ranks within the lowest quartile of counties based upon its 

spending for benefits under Medicare Part A and Part B per enrollee adjusted for age, 

sex, and race. Section 1109(b) of the Affordable Care Act makes available $400 million 

to qualifying hospitals for FY 2011 and FY 2012. Section 1109(c) of the Affordable 

Care Act requires the $400 million to be divided among each qualifying hospital in 

proportion to the ratio of the individual qualifying hospital's FY 2009 IPPS operating 

hospital payments to the sum of total FY 2009 IPPS operating hospital payments made to 

all qualifying hospitals. 

Section 1109 is one of several provisions in the Affordable Care Act that 

addresses concerns about how Medicare makes adjustments for geographic differences in 

the cost of providing services and geographic variation in the volume and intensity of 

health care spending. Some other provisions in the Affordable Care Act that relate to 

concerns about geographic variation in Medicare payments include: 

● Section 3102(a), which provides a floor of 1.0 on the physician fee schedule 

work geographic practice cost index (GPCI) through the end of CY 2010 (later extended 

by the Medicare and Medicaid Extension Act of 2010 through the end of CY 2011); 
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● Section 3102(b), as amended by section 1108 of the Affordable Care Act, 

which requires that only one-half of the relative cost differences in employee wages and 

office rents be reflected in the practice expense GPCIs in 2010 and 2011; 

● Section 10324, which provides for a floor on the wage index and the practice 

expense GPCI in frontier States (defined as 50 percent or more of the counties in the 

State having a population density of less than six people per square mile). 

These provisions provide temporary adjustments in payments while other 

initiatives are underway to evaluate geographic adjustment factors that are used in 

Medicare’s payment systems. For instance, section 3101 of the Affordable Care Act 

requires the Secretary, not later than January 1, 2012, to make appropriate adjustments to 

the practice expense GPCI considering alternative data sources such as the American 

Community Survey for the nonphysician employee portion of the GPCI. Section 3137 of 

the Affordable Care Act requires the Secretary to submit to Congress a report that 

includes a plan to reform the hospital wage index system under section 1886 of the Act 

by December 31, 2011. In addition to these provisions, the Secretary has contracted with 

the Institute of Medicine (IOM) to study the hospital wage index and the physician fee 

schedule GPCI. The IOM’s first report to CMS is due in May 2011 and will provide an 

evaluation and assessment of: 

(1) The empirical validity of the adjustment factors (the hospital wage index and 

physician fee schedule GPCI); 

(2) The methodology used to determine the adjustment factors; 

(3) Measures used for the adjustment factors, taking into account— 
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● Timeliness of data and frequency of revisions to such data; 

● Sources of data and the degree to which such data are representative of costs; 

and 

● Operational costs of providers who participate in Medicare. 

The report will include recommendations for the Secretary to consider. We are 

looking forward to receiving IOM’s report and acting expeditiously on its 

recommendations to improve Medicare’s payment systems and better adjust for 

geographic differences in the cost of hospital labor as well as the cost of operating a 

physician practice. 

2. Methodology for Identifying Qualifying Hospitals and Eligible Counties 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50303 through 50342), we 

finalized our methodology for distributing the $400 million to qualifying hospitals 

located in the lowest quartile of counties in per enrollee Medicare spending. First, we 

provided our methodology for determining the bottom quartile of counties with the 

lowest Medicare Part A and Part B spending adjusted by age, sex, and race for the 

purpose of disbursing the available $400 million. We developed an adjustment model by 

age, sex, and race, as required under the provisions of section 1109. We then applied this 

adjustment to the county Medicare Part A and Part B spending data to account for the 

demographics of the Medicare beneficiaries in those counties. After those adjustments 

were applied, we determined the Medicare Part A and Part B spending by county per 

enrollee. As we explained in the final rule, our methodology for determining the 

Medicare Part A and Part B spending per enrollee by county adjusted for age, sex, and 
CMS-1518-P 522 

race is similar to the methodology we use to calculate risk adjustment models for 

Medicare Advantage (MA) ratesetting. For more information on the methodology we 

used to calculate the county Medicare per enrollee spending rates, we refer readers to the 

FY 2011 IPPS/LTCH PPS final rule (75 FR 50303 through 75 FR 50307). 

In addition, in the FY 2011 IPPS/LTCH PPS final rule, we developed a 

methodology to identify the qualifying hospitals located in each of the eligible counties. 

As we stated earlier, section 1109 defines a qualifying hospital is a “subsection (d) 

hospital” (as defined for purposes of section 1886(d) of the Act) that is “located in” an 

eligible county. A subsection (d) hospital is defined in section 1886(d)(1)(B) of the Act, 

in part, as a “hospital located in one of the 50 States or the District of Columbia.” 

Therefore, we excluded Puerto Rico hospitals and CAHs from the provisions of section 

1109 because they do not meet the definition of a “subsection (d) hospital.” 

In the FY 2011 IPPS/LTCH PPS final rule, we identified “qualifying hospitals” 

based on their Medicare provider number (now referred to as the “CMS certification 

number” (CCN)) because this number is used by hospitals to identify themselves on their 

Medicare cost reports. We also provided that, in order to meet the definition of a 

“qualifying hospital,” the hospital, as identified by its CCN, must: (1) have existed as a 

subsection (d) hospital as of April 1, 2010; (2) be geographically located in an eligible 

county; and (3) have received IPPS operating payments (in accordance with section 

1886(d)) of the Act) under its CCN in FY 2009. We used the Online Survey, 

Certification and Reporting (OSCAR) database to determine a hospital’s county location 

associated with that CCN. We also specified that the address listed for a hospital’s CCN 
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must be currently located in a qualifying county in order for a hospital to meet the 

definition of a “qualifying hospital.” For more information on how we identified the 

qualifying hospitals, we refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 

50307 and 50308). We note that we are proposing to clarify the application of our 

definition in section IV.J.4. of this preamble. 

3. Determination of Annual Payment Amounts 

The third step in the implementation of section 1109 of the Affordable Care Act 

required that we determine the payment amount that each qualifying hospital would 

receive. Specifically, section 1109(c) of the Affordable Care Act required that the 

payment amount for a qualifying hospital be determined “in proportion to the portion of 

the amount of the aggregate payments under section 1886(d) of the Social Security Act to 

the hospital for fiscal year 2009 bears to the sum of all such payments to all qualifying 

hospitals for such fiscal year.” As specified in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50310 through 50312), we determined that a qualifying hospital’s payment 

amount will be based on the proportion of its IPPS operating payments made in FY 2009 

under section 1886(d) of the Act relative to the total IPPS operating payments made to all 

qualifying hospitals in FY 2009 under section 1886(d) of the Act. The FY 2009 IPPS 

operating payments made under section 1886(d) of the Act includes DRG and wageadjusted payments made under the IPPS standardized amount with add-on payments for 

operating DSH, operating IME, operating outliers, and new technology (collectively 

referred to in this preamble as the IPPS operating payment amount). We used the March 

2010 update of the FY 2009 MedPAR hospital inpatient claims data to determine the 
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IPPS operating payment amounts for each qualifying hospital in order to calculate the 

proportion of money that each qualifying hospital would receive under this provision. 

For more information on the methodology we used to calculate the payment 

determinations, we refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 30310 

through 75 FR 50312). 

4. Eligible Counties and Qualifying Hospitals 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50312 through 50342), we 

published the list of eligible counties, that is, the lowest quartile of counties with 

Medicare Part A and Part B spending per enrollee adjusted for age, sex, and race, the 

qualifying hospitals located in those counties, and the qualifying hospitals’ payment 

weighting factors, for purposes of making payments under section 1109 for FY 2011 and 

FY 2012. We identified 3,142 counties in the United States. Therefore, there are 786 

eligible counties (rounded from 785.5 eligible counties). Of those 786 eligible counties, 

there are only 273 counties in which qualifying hospitals are located, using the 

methodology that we finalized in the FY 2011 IPPS/LTCH PPS final rule. Using CCNs, 

we identified 416 IPPS hospitals that are currently located in those eligible counties and 

that received IPPS operating payments in FY 2009. 

In response to public comments on the FY 2011 IPPS/LTCH PPS proposed rule, 

in the FY 2011 IPPS/LTCH PPS final rule, we corrected the list of eligible counties by 

replacing two counties on our list of eligible counties (adding Crooks County, OR and 

Bottineu County, ND). However, we did not identify any qualifying hospitals located in 

those two eligible counties. Therefore, we provided the public an opportunity to notify 
CMS-1518-P 525 

CMS by August 30, 2010, if there were any qualifying IPPS hospitals located in either of 

the two newly added counties. We stated that if we added qualifying hospitals in these 

counties as a result of accurate notification from the public, we would publish a revised 

list of qualifying hospitals and their payment weighting factors on the CMS Web site 

after August 30, 2010. We did not receive any public comments that there were 

qualifying hospitals located in Crooks County, OR or Bottineu County, ND. Therefore, 

the list of eligible counties and qualifying hospitals that was finalized in Tables 1 and 2 in 

the FY 2011 IPPS/LTCH PPS final rule remained valid for distribution of payments 

under section 1109 for FY 2011 and FY 2012. 

In auditing our determination of qualifying hospitals prior to the distribution of 

payments for FY 2011, we found that the following providers on the list of qualifying 

hospitals which we finalized in the FY 2011 IPPS/LTCH PPS final rule were not 

subsection (d) hospitals in FY 2011: 

CMS 

Certification 

Number 

Provider Name 

110231 Landmark Hospital of Athens LLC 

130024 Bonner General Hospital 

130069 SW Idaho Advanced Care 

130070 Complex Care Hospital of Idaho 

160156 Continuing Care Hospital at St. Luke’s 

250112 Calhoun Health Services 

260221 Select Specialty Hospital - Springfield Inc. 

270002 Holy Rosary Healthcare 

320088 Advanced Care of South New Mexico 

330010 Amsterdam Memorial Hospital 

500143 Providence St. Peter Chemical Dependency Center 
CMS-1518-P 526 

Because these providers were not subsection (d) hospitals in FY 2011, the statute 

precludes them from being qualifying hospitals eligible to receive section 1109 payments 

for FY 2011. We are proposing to clarify in this proposed rule that, in applying our 

definition of qualifying hospitals for making payments under section 1109 of the 

Affordable Care Act, these 11 providers (and other providers that do not meet the 

statutory definition) are not qualifying hospitals and, therefore, should be removed from 

the list of qualifying hospitals. Furthermore, we are proposing to clarify that, in order to 

meet the definition of “qualifying hospital” under section 1109 for FY 2012, a hospital 

that is on the list of qualifying hospitals in this proposed rule must meet the statutory 

criteria of a “qualifying hospital” for some portion of FY 2012 (a hospital must be a 

subsection (d) hospital for some part of FY 2012). 

In addition, we note that, prior to the issuance of the FY 2012 final rule and prior 

to making section 1109 payments for FY 2012, we intend to review providers’ status 

vis-à-vis the statutory definition of qualifying hospital. Accordingly, we note that, in the 

FY 2012 final rule and again prior to distribution of section 1109 payments for FY 2012, 

we will update the list of qualifying hospitals and payment weighting factors based on 

these findings. In addition to the opportunity to submit comments on this proposed rule, 

we are proposing to provide hospitals an opportunity after the FY 2012 IPPS rulemaking 

cycle to notify CMS whether any qualifying hospitals removed from the list have been 

removed in error and to notify CMS if a hospital is on the list of qualifying hospitals and 

will not be a qualifying hospital (for example, a subsection (d) hospital) for any or all part 

of FY 2012. The public may submit input on these two topics via email to Nisha Bhat, 
CMS-1518-P 527 

nisha.bhat@cms.hhs.gov. All information, including relevant documentation, must be 

received by November 1, 2011. 

5. Payment Determinations and Distributions for FY 2011 and FY 2012 

Under section 1109(b) of the Affordable Care Act, the total pool of payments 

available to qualifying hospitals for FY 2011 and FY 2012 is $400 million. In the FY 

2011 IPPS/LTCH PPS final rule (75 FR 50308 through 50310), we stated that we would 

distribute $150 million for FY 2011 and $250 million for FY 2012. We stated that we 

would distribute payments to the qualifying hospitals through an annual one-time 

payment during each of FY 2011 and FY 2012 through their Medicare contractor (fiscal 

intermediary or MAC). We instructed qualifying hospitals to report these additional 

payments on their Medicare hospital cost report corresponding to the appropriate cost 

reporting period that the hospitals receive the payments and that hospitals should report 

these payments on the “Other adjustment” line on Worksheet E, Part A of the Medicare 

hospital cost report Form 2552. We noted that we require these payments to be reported 

on the cost report for tracking purposes only and that these additional payments will not 

be adjusted or settled by the fiscal intermediary or MAC on the cost report. 

At the time of the issuance of this FY 2012 proposed rule, we have not yet made 

the payments to the qualifying hospitals for FY 2011. As we stated in the FY 2011 

IPPS/LTCH PPS final rule, we will make the FY 2011 payments during FY 2011 (that is, 

by September 30, 2011). However, in this proposed rule, we are notifying the public that 

we intend to change the method we will use to distribute the payment for FY 2011 and 

FY 2012, in order to ease the reporting burden on hospitals. Rather than making a 
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one-time annual payment to the qualifying hospitals through their Medicare contractor 

using the Medicare cost report, we plan to make payments to the qualifying hospitals 

through a one-time annual payment made by one Medicare contractor who would directly 

pay all of the qualifying hospitals. We will send each qualifying hospital a letter stating 

the specifics of how the hospital will receive its payments. Because these one-time 

annual payments would be made through a special process outside of the scope of normal 

payments by their Medicare contractor, the hospitals’ Medicare contractor would no 

longer need to track the payment amounts made to the hospitals under this provision. We 

believe this will simplify and expedite the payment process so that one Medicare 

contractor is responsible for overseeing the distribution of payments. In addition, this 

simplified process will ease the administrative burden within CMS to track that payments 

have been properly made to the qualifying hospitals. In addition, the burden to hospitals 

is reduced because hospitals would no longer have to report these additional payments on 

their Medicare hospital cost report corresponding to the appropriate cost reporting period 

for which the hospitals receive payments in FY 2011 or FY 2012 (as we instructed in the 

FY 2011 IPPS/LTCH PPS final rule and note above). 

In the FY 2011 IPPS/LTCH PPS final rule, we also stated that we would make 

only one determination of eligible counties and qualifying hospitals for FY 2011 and 

FY 2012, with the caveat that we would accept additional public input on the limited 

issue of whether there are any qualifying hospitals in the two newly identified eligible 

counties. As we stated earlier, we did not receive any public input on qualifying 

hospitals for the two newly identified eligible counties. However, as we describe above, 
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11 hospitals that were included on the list of qualifying hospitals do not meet the 

statutory criteria in section 1109 of the Affordable Care Act. Therefore, we are 

proposing to revise our list of qualifying hospitals and their payment weighting factors 

finalized in the FY 2011 IPPS/LTCH PPS final rule to exclude these 11 providers. As 

explained in the FY 2011 IPPS/LTCH PPS final rule, we finalized in that rule (to the best 

of our ability) the list of eligible counties and qualifying hospitals once for ease of 

implementation of the section 1109 provision and to allow hospitals to plan their budgets 

accordingly. The proposed revision of our determination to exclude these 11 providers 

will result in changes to the payment weighting factors. We are proposing to update the 

payment weighting factors accordingly. Therefore, we are proposing to distribute the 

remaining $250 million in FY 2012 to those qualifying hospitals proposed in this 

proposed rule based on payment weighting factors proposed in this proposed rule. In 

addition, in order to distribute the section 1109 payments for FY 2011 in as timely a 

manner as possible, we intend to make preliminary section 1109 payments for FY 2011 

using this proposed list of qualifying providers and payment weighting factors using the 

payment method described above. If additional hospitals are deleted from the proposed 

list of qualifying hospitals for FY 2011 because they do not meet the statutory criteria, 

the payment weighting factors would need additional revision. If this situation occurs, 

we are proposing to further amend the payment weighting factors for payments to be 

made in FY 2012 so that each qualifying hospital receives its appropriate share of the 

total $400 million. 
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 We refer readers to the CMS Web site at: 

http://www.cms.gov/AcuteInpatientPPS/ TopOfPage for the tables listed below. The 

tables are included collectively as the “Section 1109 Files” for the FY 2012 IPPS/LTCH 

proposed rule. 

● The final list of eligible counties that was published in the FY 2011 

IPPS/LTCH PPS final rule. We note that we are not updating this table. 

● The proposed list of qualifying hospitals, location, and payment weighting 

factors (based on the March 2010 update of the FY 2009 MedPAR); based on the 

clarifications proposed above. 

● The distribution of the $400 million for FY 2011 and FY 2012 by State based 

on the proposed list of qualifying hospitals, location, and payment weighting factors. 

We note that the Web address for this Web site is effective as of the date of 

publication of this proposed rule and that, in the future, these tables may be archived to 

the Web site at: http://www.cms.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage. 

K. Proposed Changes in the Inpatient Hospital Update

1. FY 2012 Inpatient Hospital Update 

In accordance with section 1886(b)(3)(B)(i) of the Act, each year we update the 

national standardized amount for inpatient operating costs by a factor called the 

“applicable percentage increase.” Prior to enactment of the Affordable Care Act, section 

1886(b)(3)(B)(i)(XX) of the Act set the applicable percentage increase equal to the rateof-increase in the hospital market basket for subsection (d) hospitals (hereafter referred to 

as “IPPS hospitals”) in all areas, subject to the hospital submitting quality information 
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under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of 

the Act. For hospitals that did not provide these data, the update was equal to the market 

basket percentage increase less an additional 2.0 percentage points. The update for the 

hospital-specific rates for SCHs and MDHs is set by section 1886(b)(3)(B)(iv) of the Act 

as discussed further below. 

As discussed below in section IV.K.3. of this preamble, section 1886(b)(3)(B) of 

the Act, as amended by sections 3401(a) and 10319(a) of the Affordable Care Act, sets 

the applicable percentage increase under the IPPS for FY 2012 as equal to the rate-of 

increase in the hospital market basket for IPPS hospitals in all areas (which is currently 

based on the first quarter 2011 forecast of the FY 2006-based IPPS market basket), 

subject to a reduction of 2.0 percentage points if the hospital fails to submit quality 

information under rules established by the Secretary in accordance with section 

1886(b)(3)(B)(viii) of the Act, and then subject to an adjustment based on changes in 

economy-wide productivity (the multifactor productivity (MFP) adjustment), and an 

additional reduction of 0.1 percentage point. Sections 1886(b)(3)(B)(xi) and 

(b)(3)(B)(xii) of the Act, as added by section 3401(a) of the Affordable Care Act, state 

that application of the MFP adjustment and the additional FY 2012 adjustment of 0.1 

percentage point may result in the applicable percentage increase being less than zero. 

In accordance with section 1886(b)(3)(B) of the Act, as amended by section 

3401(a) of the Affordable Care Act, we are proposing an MFP adjustment (the 10-year 

moving average of MFP for the period ending FY 2012) of 1.2 percent, which is 
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calculated as described below in section IV.K.3. of this preamble, based on IHS Global 

Insight, Inc.’s (IGI’s) first quarter 2011 forecast. 

Consistent with current law, and based on IGI’s first quarter 2011 forecast of the 

FY 2012 market basket increase, we are proposing an applicable percentage increase to 

the FY 2012 operating standardized amount of 1.5 percent (that is, the FY 2012 estimate 

of the market basket rate-of-increase of 2.8 percent less an adjustment of 1.2 percentage 

points for economy-wide productivity and less 0.1 percentage point) for hospitals in all 

areas, provided the hospital submits quality data in accordance with our rules. For 

hospitals that do not submit quality data, we are proposing an applicable percentage 

increase to the operating standardized amount of -0.5 percent (that is, the FY 2012 

estimate of the market basket rate-of-increase of 2.8 percent, less 2.0 percentage points 

for failure to submit quality data, less an adjustment of 1.2 percentage points for 

economy-wide productivity, and less an additional adjustment of 0.1 percentage point). 

We are proposing to revise the existing regulations at 42 CFR 412.64(d) to reflect 

the current law. Specifically, in accordance with section 1886(b)(3)(B) of the Act, as 

amended by sections 3401(a) and 10319(a) of the Affordable Care Act, we are proposing 

to add a new paragraph (iv) to §412.64(d)(1) to set the applicable percentage increase to 

the FY 2012 operating standardized amount as the percentage increase in the market 

basket index, subject to a reduction of 2.0 percentage points if the hospital fails to submit 

quality information under rules established by the Secretary in accordance with section 

1886(b)(3)(B)(viii) of the Act, and then subject to a multifactor productivity adjustment 

and, lastly, subject to the additional reduction of 0.1 percentage point. 
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Section 1886(b)(3)(B)(iv) of the Act provides that the applicable percentage 

increase to the hospital-specific rates for SCHs and MDHs equals the applicable 

percentage increase set forth in section 1886(b)(3)(B)(i) of the Act (that is, the same 

update factor as for all other hospitals subject to the IPPS). Therefore, the update to the 

hospital specific rates for SCHs and MDHs is also subject to section 1886(b)(3)(B)(i) of 

the Act, as amended by sections 3401(a) and 10319(a) of the Affordable Care Act. 

Accordingly, we are proposing an update to the hospital-specific rates applicable to SCHs 

and MDHs of 1.5 percent for hospitals that submit quality data or -0.5 percent for 

hospitals that fail to submit quality data. For FY 2012, the regulations in 

§§412.73(c)(16), 412.75(d), 412.77(e), 412.78(e), and 412.79(d) already contain 

provisions that set the update factor for SCHs and MDHs equal to the update factor 

applied to the national standardized amount for all IPPS hospitals. Therefore, we are not 

proposing to make further changes to these five regulatory provisions to reflect the 

FY 2012 update factor for SCHs and MDHs.

2. FY 2012 Puerto Rico Hospital Update 

Puerto Rico hospitals are paid a blended rate for their inpatient operating costs 

based on 75 percent of the national standardized amount and 25 percent of the Puerto 

Rico-specific standardized amount. Section 1886(d)(9)(C)(i) of the Act is the basis for 

determining the applicable percentage increase applied to the Puerto Rico-specific 

standardized amount. Section 401(c) of Pub. L. 108-173 amended section 

1886(d)(9)(C)(i) of the Act, which states that, for discharges occurring in a fiscal year 

(beginning with FY 2004), the Secretary shall compute an average standardized amount 
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for hospitals located in any area of Puerto Rico that is equal to the average standardized 

amount computed under subclause (I) for fiscal year 2003 for hospitals in a large urban 

area (or, beginning with FY 2005, for all hospitals in the previous fiscal year) increased 

by the applicable percentage increase under subsection (b)(3)(B) for the fiscal year 

involved. Therefore, the update to the Puerto Rico-specific operating standardized 

amount equals the applicable percentage increase set forth in section 1886(b)(3)(B)(i) of 

the Act, as amended by sections 3401(a) and 10319(a) of the Affordable Care Act (that 

is, the same update factor as for all other hospitals subject to the IPPS). Accordingly, we 

are proposing an applicable percentage increase to the Puerto Rico-specific operating 

standardized amount of 1.5 percent. For FY 2012, under the authority of section 

1886(d)(9)(C)(i) of the Act, as amended by section 401(c) of Pub. L. 108-173, we are 

proposing to revise the existing regulations at §412.211(c) to set the update factor for the 

Puerto Rico-specific operating standardized amount equal to the update factor applied to 

the national standardized amount for all IPPS hospitals. 

3. Productivity Adjustment 

Section 3401(a) of the Affordable Care Act amends section 1886(b)(3)(B) of the 

Act to require certain adjustments to the “applicable percentage increase” to the operating 

IPPS. One such change is to require that, in FY 2012 (and in subsequent fiscal years), the 

applicable percentage increase be annually adjusted by changes in economy-wide 

productivity. Section 1886(b)(3)(B)(xi)(II) of the Act, as added by section 3401(a) of the 

Affordable Care Act, defines this productivity adjustment as equal to the 10-year moving 

average of changes in annual economy-wide, private nonfarm business multifactor 
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productivity (MFP) (as projected by the Secretary for the 10-year period ending with the 

applicable fiscal year, calendar year, cost reporting period, or other annual period) (the 

“MFP adjustment”). The Bureau of Labor Statistics (BLS) is the agency that publishes 

the official measure of private nonfarm business MFP. We refer readers to the BLS Web 

site at: http://www.bls.gov/mfp to obtain the BLS historical published MFP data. 

The projection of MFP is currently produced by IHS Global Insight, Inc. (IGI), an 

economic forecasting firm. In order to generate a forecast of MFP, IGI replicated the 

MFP measure calculated by the BLS using a series of proxy variables derived from its 

U.S. macroeconomic models. These models take into account a broad range of factors 

that influence the total U.S. economy. IGI forecasts the underlying proxy components 

such as Gross Domestic Product (GDP), capital, and labor inputs required to estimate 

MFP and then combines those projections according to the BLS methodology. In Table 

IV.K.1 below, we identify each of the major MFP component series employed by the 

BLS to measure MFP. We also provide the corresponding concepts forecasted by IGI 

and determined by IGI and CMS to be the best available proxies for the BLS series. 

TABLE IV.K.1.—MULTIFACTOR PRODUCTIVITY COMPONENT SERIES 

EMPLOYED BY THE BUREAU OF LABOR STATISTICS AND IHS GLOBAL 

INSIGHT 

BLS Series IGI Series 

Real value-added output, constant 

2005 dollars 

Nonhousing, nongovernment, nonfarm real 

GDP, Billions of chained 2005 dollars – annual 

rate 

Private nonfarm business sector 

labor input; 2005=100.00 

Hours of all persons in private non-farm 

establishments, 2005=100.00, adjusted for labor 

composition effects 

Aggregate capital inputs; 

2005=100.00 

Real effective capital stock used for full 

employment GDP, Billions of chained 2005 
CMS-1518-P 536 

dollars 

IGI found that the historical growth rates of the BLS components used to 

calculate MFP and the IGI components identified are consistent across all series and, 

therefore, suitable proxies for calculating MFP. We have included below a more detailed 

description of the methodology used by IGI to construct a forecast of MFP, which is 

aligned closely with the methodology employed by the BLS. For more information 

regarding the BLS method for estimating productivity, we refer readers to the BLS Web 

site at: http://www.bls.gov/mfp/mprtech.pdf. 

At the time of the development of this proposed rule, the BLS had published a 

historical time series of private nonfarm business MFP for 1987 through 2009, with 2009 

being a preliminary value. Using this historical MFP series and the IGI forecasted series, 

the IGI had developed a forecast of MFP for 2010 through 2021, as described below. 

To create a forecast of BLS’ MFP index, the forecasted annual growth rates of the 

“non-housing, non-government, nonfarm, real GDP,” “hours of all persons in private 

non-farm establishments adjusted for labor composition,” and “real effective capital 

stock” series (ranging from 2010 to 2021) are used to “grow” the levels of the “real 

value-added output,” “private nonfarm business sector labor input,” and “aggregate 

capital input” series published by the BLS. Projections of the “hours of all persons” 

measure are calculated using the difference between projections of the BLS index of 

output per hour and real GDP. This difference is then adjusted to account for changes in 

labor composition in the forecast interval. 
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Using these three key concepts, MFP is derived by subtracting the contribution of 

labor and capital inputs from output growth. However, in order to estimate MFP, we 

need to understand the relative contributions of labor and capital to total output growth. 

Therefore, two additional measures are needed to operationalize the estimation of the IGI 

MFP projection: Labor compensation and capital income. The sum of labor 

compensation and capital income represents total income. The BLS calculates labor 

compensation and capital income (in current dollar terms) to derive the nominal values of 

labor and capital inputs. IGI uses the “nongovernment total compensation” and “flow of 

capital services from the total private nonresidential capital stock” series as proxies for 

the BLS’ income measures. These two proxy measures for income are divided by total 

income to obtain the shares of labor compensation and capital income to total income. In 

order to estimate labor’s contribution and capital’s contribution to the growth in total 

output, the growth rates of the proxy variables for labor and capital inputs are multiplied 

by their respective shares of total income. These contributions of labor and capital to 

output growth are subtracted from total output growth to calculate the “change in the 

growth rates of multifactor productivity”: 

MFP = Total output growth — (labor input growth*labor compensation share) + 

(capital input growth * capital income share)) 

The change in the growth rates (also referred to as the compound growth rates) of 

the IGI MFP are multiplied by 100 in order to calculate the percent change in growth 

rates (the percent change in growth rates are published by the BLS for its historical MFP 

measure). Finally, the growth rates of the IGI MFP are converted to index levels based to 
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2005 to be consistent with the BLS’ methodology. For benchmarking purposes, the 

historical growth rates of IGI’s proxy variables were used to estimate a historical measure 

of MFP, which was compared to the historical MFP estimate published by the BLS. The 

comparison revealed that the growth rates of the components were consistent across all 

series and, therefore, validated the use of the proxy variables in generating the IGI MFP 

projections. The resulting MFP index was then interpolated to a quarterly frequency 

using the Bassie method for temporal disaggregation. The Bassie technique utilizes an 

indicator (pattern) series for its calculations. IGI uses the index of output per hour 

(published by the BLS) as an indicator when interpolating the MFP index. 

As described in section I. of the Addendum to this proposed rule, we are 

proposing to determine the IPPS market basket percentage increase for FY 2012, which is 

used to determine the FY 2012 applicable percentage increase, based on the 

FY 2006-based IPPS market basket. The FY 2006-based IPPS market basket was 

finalized and adopted in the FY 2010 IPPS/LTCH PPS final rule (74 FR 43843). Section 

3401(a) of the Affordable Care Act amended section 1886(b)(3)(B) of the Act in part by 

adding a new clause (xi) which requires that, after determining the applicable percentage 

increase for a fiscal year, “such percentage increase shall be reduced by the productivity 

adjustment described in subclause (II)” (which we refer to as the “MFP adjustment”). 

Section 1886(b)(3)(B)(i)(XX) of the Act establishes the applicable percentage increase 

for FY 2007 and each subsequent fiscal year as equal to the rate-of-increase (that is, the 

percentage increase) in the hospital market basket for IPPS hospitals, subject to the 

hospital submitting quality data under rules established by the Secretary in accordance 
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with section 1886(b)(3)(B)(viii) of the Act and to other statutory adjustments, including 

the productivity adjustment. 

We are proposing that the MFP adjustment be subtracted from the FY 2012 

operating applicable percentage increase. We are proposing that the end of the 10-year 

moving average of changes in the MFP should coincide with the end of the appropriate 

FY update period. Because the applicable percentage increase is reduced by the MFP 

adjustment, we believe it is appropriate for the numbers associated with both components 

of the calculation (the underlying market basket percentage increase used to determine 

the applicable percentage increase and the productivity adjustment) to line up so that 

changes in market conditions are aligned. Therefore, for the FY 2012 update, the MFP 

adjustment is calculated as the 10-year moving average of changes in MFP for the period 

ending September 30, 2012. We are proposing to round the final annual adjustment to 

the one-tenth of one percentage point level up or down as applicable according to 

conventional rounding rules (that is, if the number we are rounding is followed by 5, 6, 7, 

8, or 9, we would round the number up; if the number we are rounding is followed by 0, 

1, 2, 3, or 4, we would round the number down). 

In accordance with section 1886(b)(3)(B) of the Act, as amended by section 

3401(a) of the Affordable Care Act, we are proposing to base the FY 2012 market basket 

update used to determine the applicable percentage increase for the IPPS on the first 

quarter 2011 forecast of the FY 2006-based IPPS market basket, which is estimated to be 

2.8 percent. This percentage increase, subject to the hospital submitting quality data 

under rules established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of 
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the Act, is then reduced by the proposed MFP adjustment (the 10-year moving average of 

MFP for the period ending FY 2012) of 1.2 percent, which is calculated as described 

above and based on IGI’s first quarter 2011 forecast. We are proposing that if more 

recent data are subsequently available (for example, a more recent estimate of the market 

basket and MFP adjustment), we would use such data, if appropriate, to determine the 

FY 2012 market basket update and MFP adjustment in the final rule. Following 

application of the productivity adjustment, the applicable percentage increase is then 

reduced by 0.1 percentage point, as required by section 1886(b)(3)(B)(xii) of the Act, as 

added and amended by sections 3401 and 10319(a) of the Affordable Care Act (as 

discussed in section I. of the Addendum to this proposed rule). 

L. Additional Payments to Hospitals with High Percentage of End-Stage Renal Disease 

(ESRD) Discharges (§412.104)

 Under existing regulations at §412.104(a), we provide additional Medicare 

payments to a hospital for inpatient services provided to Medicare beneficiaries with 

end-stage renal disease (ESRD) who receive dialysis during a hospital stay if the 

hospital’s ESRD Medicare beneficiary discharges, excluding certain MS-DRGs noted 

below, where the beneficiary receives dialysis during the inpatient stay, are 10 percent or 

more of its total Medicare discharges. These additional payments are intended to lessen 

the impact of the added costs for hospitals that deliver inpatient dialysis services to a high 

concentration of ESRD Medicare beneficiaries. The regulation provides that discharges 

classified into MS-DRG 652 (Renal Failure), MS-DRG 682 (Renal Failure with MCC), 

MS-DRG 683 (Renal Failure with CC), MS-DRG 684 (Renal Failure without CC/MCC), 
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and MS-DRG 685 (Admit for Renal Dialysis) are excluded from the calculation of ESRD 

Medicare beneficiary discharges for purposes of determining a hospital’s eligibility for 

these additional payments. We excluded these MS-DRGs because they include payment 

for the cost of inpatient dialysis treatments. 

 The current Medicare cost reporting instructions in the Provider Reimbursement 

Manual, Part II (PRM-II), at section 3630.1, require hospitals to enter as the denominator 

of the calculation on Line 5 “total Medicare discharges as reported on Worksheet S-3, 

Part I,” excluding discharges for the dialysis MS-DRGs. As drafted, this instruction 

includes only discharges for beneficiaries enrolled in original fee-for-service Medicare in 

the denominator of the calculation. We are proposing to clarify that our policy is that the 

term “Medicare discharges” used in §412.104(a) refers to discharges of all beneficiaries 

entitled to Medicare Part A. Discharges associated with individuals entitled to Medicare 

Part A include discharges of individuals receiving benefits under original Medicare, 

discharges of individuals whose inpatient benefits are exhausted or whose stay was not 

covered by Medicare, and discharges for individuals enrolled in Medicare Advantage 

Plans, cost contracts under section 1876 of the Act (health maintenance organizations 

(HMOs)) and competitive medical plans (CMPs). Consistent with this proposed 

clarification, these discharges would be included in the denominator of the calculation for 

the purpose of determining eligibility for the ESRD additional payment to hospitals. 

Similarly, for the numerator of this calculation, all discharges of ESRD beneficiaries who 

are entitled to Medicare Part A and who receive inpatient dialysis, subject to the 

exclusions of certain discharges classified into MS-DRGs 652, 682, 683, 684, and 685, 
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would be included in the determination of eligibility for the additional payment to 

hospitals. We intend to revise the instructions under section 3630.1 of the Provider 

Reimbursement Manual to reflect this clarification. 

M. Proposal for Changes to the Reporting Requirements for Pension Costs for Medicare 

Cost-Finding Purposes

1. Background 

Currently, certain pension costs may be allowable costs under Medicare to the 

extent such costs are related to the reasonable and necessary cost of providing patient 

care and represent costs actually incurred. Reasonable cost reimbursement is addressed 

in section 1861(v)(1)(A) of the Act. Section 1861(v)(1)(A) of the Act defines 

“reasonable cost,” in part, as the cost actually incurred, excluding costs found to be 

unnecessary in the efficient delivery of needed health services. Section 1861(v)(1)(A) of 

the Act does not specifically address the determination of reasonable costs, but authorizes 

the Secretary to promulgate regulations and principles to be applied in determining 

reasonable costs. 

We have issued regulations implementing this provision of the Act, including 

42 CFR 413.9(a), which provide that the determination of reasonable cost “must be based 

on the reasonable cost of services covered under Medicare and related to the care of 

beneficiaries.” In addition, §413.9(c) requires that the provision for payment of 

reasonable cost of services is intended to meet the actual costs incurred in providing 

services. Therefore, in accordance with the statute, the regulations include two principles 

that help guide the determination of which expenses may be considered allowable 
CMS-1518-P 543 

reasonable costs that can be paid under Medicare; that is, such costs must be “related” to 

the care of Medicare beneficiaries, and such costs must actually be “incurred.” 

Consistent with these provisions, we have issued instructions in section 2142 of 

the Provider Reimbursement Manual, Part I (PRM-I) for determining and reporting 

defined benefit pension costs on the cost report for Medicare cost-finding purposes. For 

Medicare wage index purposes, the cost reporting instructions in section 3605.2 of the 

Provider Reimbursement Manual, Part II (PRM-II) for Worksheet S–3, Part II, Lines 13 

through 20, require hospitals to comply with the requirements in section 2142 of the 

PRM-I. 

Specifically, section 2142.5 of the PRM-I defines the current period liability for 

pension cost (that is, the maximum allowable pension cost) based on the actuarial accrued 

liability, normal cost, and unfunded actuarial liability. Under section 2142.4(A) of PRMI, these liability measurements are to be computed in accordance with the Employee 

Retirement Income Security Act of 1974 (ERISA), regardless of whether or not the 

pension plan is subject to ERISA. Also, section 2142.6(A) of the PRM-I requires the 

current period liability for pension cost to be funded in order to be allowable. In addition, 

section 2142.6(C) of the PRM-I allows for funding in excess of the current period 

liability to be carried forward and recognized in future periods. We note that, on 

March 28, 2008, CMS published Revision 436, a technical clarification to section 2142 of 

the PRM-I. 

Actuarial accrued liability and normal cost are typically determined on an 

ongoing plan basis using long-term, best-estimate assumptions. The interest assumption 
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reflects the average rates of return expected over the period during which benefits were 

payable, taking into account the investment mix of plan assets. Pension costs for plans 

not subject to ERISA (such as church plans and plans sponsored by public sector 

employers) also are typically based on the actuarial accrued liability and normal cost 

using long-term, best estimate assumptions. 

The Pension Protection Act (PPA) of 2006 (Pub. L. 109-280) amended ERISA. 

Under the PPA amendments to ERISA, the actuarial accrued liability and normal cost are 

no longer used as a basis for determining ERISA minimum required or maximum tax 

deductible contributions. ERISA contribution limits are now based on a “funding target” 

and “target normal cost” measured on a settlement basis using the current market interest 

rates for investment grade corporate bonds that match the duration of the benefit payouts. 

The Internal Revenue Service (IRS) publishes the applicable interest rate tables on a 

monthly basis. Because pension liabilities are very sensitive to changes in the interest 

rate used to discount future benefit payouts, pension costs based on the PPA “funding 

target” and “target normal cost” values are expected to be less stable than those based on 

the pre-PPA traditional long-term, best-estimate assumptions, which change infrequently. 

Furthermore, plans not subject to the ERISA requirements, as amended by the PPA, are 

not likely to use the new “funding target” and “target normal cost” basis for determining 

pension costs, and ERISA plans are not likely to continue to report costs developed using 

the actuarial accrued liability and normal cost based on long-term basis, best estimate 

assumptions. Accordingly, there is no longer a standard actuarial basis used by all plans. 
CMS-1518-P 545 

In response to the PPA amendments to ERISA, we began a review of the rules for 

determining pension costs for Medicare cost-finding and wage index purposes. As an 

interim measure, we issued a Joint Signature Memorandum (JSM) in November 2009 

that contained instructions and a spreadsheet to assist hospitals and Medicare contractors 

in determining the annual allowable defined benefit pension cost for the FY 2011 wage 

index (JSM/TDL–10061, 11–20–09, December 3, 2009). Although these instructions 

were released for purposes of the wage index, these instructions also serve as interim 

guidance for Medicare cost-finding purposes. 

In this proposed rule, we are proposing to revise our policy for determining 

pension cost for Medicare purposes. As mentioned above, due to the ERISA rules, as 

amended by the PPA, there is no longer a standard actuarial cost basis to be used by all 

types of plans. Therefore, we are proposing to no longer rely on actuarial computation to 

determine the maximum annual cost limitation for Medicare. Instead, the general 

parameters of our proposal would maintain the current requirement that pension costs 

must be funded to be reportable, and would require all hospitals to report the actual 

pension contributions funded during the reporting period, on a cash basis. 

In addition, under this cash basis approach, we are proposing separate 

methodologies for measuring pension costs for Medicare cost-finding purposes 

(discussed below under section IV.M.2. of this preamble) and for purposes of updating 

the wage index (discussed in section III.D.2. of this preamble). We believe it is 

necessary to have two distinct proposals in order to address the different goals of 

determining a hospital’s payments and updating the average hourly wage to establish the 
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geographic area wage index. The function of the wage index is to measure relative 

hospital labor costs across areas. This function is distinct from Medicare payment 

determinations, where the goal is to measure the actual costs incurred by individual 

hospitals. These two distinct proposals would require separate updated instructions to 

section 2142 of the PRM-I for Medicare cost-finding purposes and section 3605.2 of the 

PRM-II for purposes of the wage index. Below is a detailed discussion of our proposal of 

a new methodology for reporting pension costs for Medicare cost-finding purposes. A 

full discussion of our proposal for reporting pension costs under the wage index is 

discussed in section III.D.2. of this preamble. 

The proposal below reflects our commitment to the general principles of the 

President’s Executive Order released January 18, 2011, entitled “Improving Regulation 

and Regulatory Review.” 

2. Proposal for Allowable Defined Benefit Pension Plan Cost for Medicare Cost-Finding 

Purposes 

As mentioned above, the defined benefit pension plan costs (hereafter referred to 

as “pension costs”) reported for Medicare payment purposes should reflect the actual 

costs incurred by an individual provider. We are proposing to retain the policy in the 

current manual requiring pension costs to be funded in order to be reportable. We believe 

funding is an appropriate basis because it measures the actual expenditure towards the 

current period liability for pensions. We also are proposing to continue to limit the 

current period liability for pension costs (that is, maximum annual allowable pension 

costs). However, we are proposing to change the methodology for calculating the limit 
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on the current period liability. We are proposing that this methodology would be 

effective for cost reporting periods beginning on or after October 1, 2011. 

Specifically, we are proposing a limit on the current period liability equal to 150 

percent of the three consecutive reporting periods out of the recent reporting which 

produce the highest average. We believe a threshold of 150 percent is appropriate for the 

following reasons: First, the proposed threshold should be adequate to allow for typical 

fluctuations in contributions and for inflation. Second, we believe a threshold is 

necessary to limit the current period liability in order to ensure that reported pension costs 

are reasonable and do not reflect excessive or advance funding in any particular year. In 

addition, the proposed limit would help ensure that pension costs in the current year are 

reasonable because we expect the limit to capture pension costs which relate exclusively 

to patient care services furnished in the current cost reporting period. While we are 

proposing a limit, we recognize there may be situations in which pension costs in excess 

of the 150-percent limit might be reasonable, such as a funding requirement imposed by a 

third party, that is, ERISA’s minimum funding requirement, statute or collective 

bargaining agreement. Therefore, we are proposing a process to allow hospitals with 

contributions in excess of the proposed limit to submit documentation demonstrating that 

all or a portion of the “excess” costs are reasonable and necessary for a particular cost 

reporting period. 

The proposed 150-percent limit was established based on an analysis of historical 

contribution data submitted by pension plans subject to ERISA and published by the 

U.S. Department of Labor (DOL). Based on our analysis of the DOL contribution data, 
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we expect the limit to apply only in a small minority of cases. We believe the use of 

readily available historical contribution data to establish the limitation will avoid the 

complexity of a limitation based on technical actuarial measurements. A limit based on 

the three consecutive reporting periods out of the five most recent reporting periods 

which produce the highest average will help to ensure that periods when no contributions 

(or only minimal contributions) are made will not dramatically reduce the limit in 

subsequent periods. 

We believe use of a 5-year period would minimize the administrative burden on 

providers that would be associated with a longer period. We also believe using the three 

consecutive reporting periods which produce the highest average will better reflect a 

typical average pension cost while use of contributions for any three periods, even 

nonconsecutive, could introduce atypical results. Specifically, using the three highest 

contributions in the 5-year period may overstate the average contribution. However, 

because excessive contributions tend to reduce future funding requirements, we believe it 

would be unusual for excessive contributions to occur in three consecutive periods. 

While we are proposing a limit, we believe that providers’ pension costs in excess 

of the 150-percent limit that are not considered reasonable for the current cost reporting 

period under the proposed review process are likely to be prefunded pension costs 

attributable to the patient care services for a future cost reporting period. Therefore, 

similar to the current instruction in section 2142.6(C) of the PRM-I, we are proposing to 

continue to use a carry forward policy. Specifically, we are proposing that current period 

contributions in excess of the 150-percent limit that are not considered reasonable for the 
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current cost reporting period under the proposed review process be carried forward and 

reported in future period(s) as the applicable limit for the future period(s) will allow. 

Medicare contractors would be required to maintain historical data in order to determine 

the 150-percent limit and track any carry forward amounts. We anticipate making a 

worksheet available for this purpose. 

We are interested in public comments as to documentation or criteria that would 

be appropriate for the review process proposed above. We also invite public comments 

on this proposal and are especially interested in receiving public comments related to our 

proposal to limit the reportable pension amount. 

N. Rural Community Hospital Demonstration Program

1. Background 

Section 410A(a) of the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA), Pub. L. 108-173, required the Secretary to establish 

a demonstration program to test the feasibility and advisability of establishing “rural 

community hospitals” to furnish covered inpatient hospital services to Medicare 

beneficiaries. The demonstration program pays rural community hospitals for such 

services under a cost-based methodology for Medicare payment purposes for covered 

inpatient hospital services furnished to Medicare beneficiaries. A rural community 

hospital, as defined in section 410A(f)(1) of MMA, is a hospital that-- 

● Is located in a rural area (as defined in section 1886(d)(2)(D) of the Act) or is 

treated as being located in a rural area under section 1886(d)(8)(E) of the Act; 
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● Has fewer than 51 beds (excluding beds in a distinct part psychiatric or 

rehabilitation unit) as reported in its most recent cost report; 

● Provides 24-hour emergency care services; and 

● Is not designated or eligible for designation as a CAH under section 1820 of 

the Act. 

Section 410A(a)(4) of Pub. L. 108-173, in conjunction with paragraphs (2) and 

(3) of section 410A(a), provided that the Secretary was to select for participation no more 

than 15 rural community hospitals in rural areas of States that the Secretary identified as 

having low population densities. Using 2002 data from the U.S. Census Bureau, we 

identified the 10 States with the lowest population density in which rural community 

hospitals were to be located in order to participate in the demonstration program: Alaska, 

Idaho, Montana, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Utah, 

and Wyoming. (Source: U.S. Census Bureau, Statistical Abstract of the United States: 

2003.) 

 We originally solicited applicants for the demonstration program in May 2004; 

13 hospitals began participation with cost reporting years beginning on or after 

October 1, 2004. In 2005, 4 of these 13 hospitals withdrew from the program and 

became CAHs. In a notice published in the Federal Register on February 6, 2008 

(73 FR 6971), we announced a solicitation for up to 6 additional hospitals to participate 

in the demonstration program. Four additional hospitals were selected to participate 

under this solicitation. These four additional hospitals began under the demonstration 

program payment methodology with the hospital's first cost reporting period starting on 
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or after July 1, 2008. At that time, there were 13 hospitals participating in the 

demonstration program. 

 Five hospitals (3 of the hospitals were among the 13 hospitals that were original 

participants in the demonstration program and 2 of the hospitals were among the 

4 hospitals that began the demonstration program in 2008) withdrew from the 

demonstration program during CYs 2009 and 2010. (Three of these hospitals indicated 

that they would be paid more for Medicare inpatient services under the rebasing option 

allowed under the SCH methodology provided for under section 122 of the Medicare 

Improvements for Patients and Providers Act of 2008 (Pub. L. 110-275). One hospital 

restructured to become a CAH, and one hospital closed.) These actions left 8 hospitals 

participating in the demonstration program as of November 1, 2010. 

In addition, section 410A(c)(2) of Pub. L. 108-173 required that, “[i]n conducting 

the demonstration program under this section, the Secretary shall ensure that the 

aggregate payments made by the Secretary do not exceed the amount which the Secretary 

would have paid if the demonstration program under this section was not implemented.” 

This requirement is commonly referred to as “budget neutrality.” Generally, when we 

implement a demonstration program on a budget neutral basis, the demonstration 

program is budget neutral in its own terms; in other words, the aggregate payments to the 

participating hospitals do not exceed the amount that would be paid to those same 

hospitals in the absence of the demonstration program. Typically, this form of budget 

neutrality is viable when, by changing payments or aligning incentives to improve overall 

efficiency, or both, a demonstration program may reduce the use of some services or 
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eliminate the need for others, resulting in reduced expenditures for the demonstration 

program's participants. These reduced expenditures offset increased payments elsewhere 

under the demonstration program, thus ensuring that the demonstration program as a 

whole is budget neutral or yields savings. However, the small scale of this demonstration 

program, in conjunction with the payment methodology, makes it extremely unlikely that 

this demonstration program could be viable under the usual form of budget neutrality. 

Specifically, cost-based payments to participating small rural hospitals are likely to 

increase Medicare outlays without producing any offsetting reduction in Medicare 

expenditures elsewhere. Therefore, a rural community hospital's participation in this 

demonstration program is unlikely to yield benefits to the participant if budget neutrality 

were to be implemented by reducing other payments for these same hospitals. 

 In the past seven IPPS final regulations, spanning the period for which the 

demonstration program has been implemented, we have adjusted the national inpatient 

PPS rates by an amount sufficient to account for the added costs of this demonstration 

program, thus applying budget neutrality across the payment system as a whole rather 

than merely across the participants in the demonstration program. As we discussed in the 

FY 2005, FY 2006, FY 2007, FY 2008, FY 2009, FY 2010, FY 2011 IPPS final rules 

(69 FR 49183; 70 FR 47462; 71 FR 48100; 72 FR 47392; 73 FR 48670; 74 FR 43922, 

and 75 FR 50343 respectively), we believe that the language of the statutory budget 

neutrality requirements permits the agency to implement the budget neutrality provision 

in this manner. In light of the statute's budget neutrality requirement, we are proposing a 
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methodology to calculate a budget neutrality adjustment factor to the FY 2012 national 

IPPS rates. 

2. Changes to the Demonstration Program Made by the Affordable Care Act 

 Sections 3123 and 10313 of the Affordable Care Act (Pub. L. 111-148) amended 

section 410A of Pub. L. 108-173, which established the rural community hospital 

demonstration program. Sections 3123 and 10313 of the Affordable Care Act changed 

the rural community hospital demonstration program in several ways. First, the Secretary 

is required to conduct the demonstration program for an additional 5-year period that 

begins on the date immediately following the last day of the initial 5-year period under 

section 410A(a)(5) of Pub. L. 108-173, as amended (section 410A(g)(1) of Pub. L. 108-

173, as added by section 3123(a) of the Affordable Care Act and further amended by 

section 10313 of that Act). Further, the Affordable Care Act requires that, in the case of 

a rural community hospital that is participating in the demonstration program as of the 

last day of the initial 5-year period, the Secretary shall provide for the continued 

participation of such rural hospital in the demonstration program during the 5-year 

extension, unless the hospital makes an election, in such form and manner as the 

Secretary may specify, to discontinue participation (section 410A(g)(4)(A) of Pub. L. 

108-173, as added by section 3123(a) of the Affordable Care Act and further amended by 

section 10313 of such Act). In addition, the Affordable Care Act provides that during the 

5-year extension period, the Secretary shall expand the number of States with low 

population densities determined by the Secretary to 20 (section 410A(g)(2) of Pub. L. 

108-173, as added by section 3123(a) and amended by section 10313 of the Affordable 
CMS-1518-P 554 

Care Act). Further, the Secretary is required to use the same criteria and data that the 

Secretary used to determine the States under section 410A(a)(2) of Pub. L. 108-173 for 

purposes of the initial 5-year period. The Affordable Care Act also allows not more than 

30 rural community hospitals in such States to participate in the demonstration program 

during the 5-year extension period (section 410A(g)(3) of Pub. L. 108-173, as added by 

section 3123(a) of the Affordable Care Act and as further amended by section 10313 of 

such Act). Additionally, we note that we indicated in the FY 2011 IPPS final rule 

(75 FR 50343) that section 410A(g)(4)(b) of Pub. L. 108-173 as added by section 3123(a) 

of the Affordable Care Act and as further amended by section 10313 of that Act provides 

that the amount of payment under the demonstration program for covered inpatient 

hospital services furnished in a rural community hospital [other than services furnished in 

a psychiatric or rehabilitation unit of the hospital that is a distinct part] is the reasonable 

costs of providing such services for discharges occurring in the first cost reporting period 

beginning on or after the first day of the 5-year extension period. We want to clarify that 

we believe that section 410A(g)(4)(B) of Pub. L. 108-173, as added by section 3123(a) 

the Affordable Care Act and as further amended by section 10313 of such Act, provides 

this with respect to a rural community hospital that is participating in the demonstration 

program under section 410A as of the last day of the initial 5-year period. Specifically, 

the Affordable Care Act requires that in the case of a rural community hospital that is 

participating in the demonstration as of the last day of the initial 5-year period, the 

Secretary in calculating payments under subsection (b) shall substitute under paragraph 

(1)(A) the phrase “the reasonable costs of providing such services for discharges 
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occurring in the first cost reporting period beginning on or after the first day of the 5-year 

extension period” for the phrase “the reasonable costs of providing such services for 

discharges occurring in the first cost reporting period beginning on or after the 

implementation of the demonstration.” The phrase “the reasonable costs of providing 

such services for discharges occurring in the first cost reporting period beginning on or 

after the implementation of the demonstration” does not precisely track the language in 

section 410A(b)(1)(A) of Pub. L. 108-173, therefore we cannot delete and replace as 

described in the Affordable Care Act. However, we believe the language of section 

410A(g)(4)(B)(i) of Pub. L. 108-173 as amended is clear. Namely, a rural community 

hospital that is participating in the demonstration as of the last day of the initial 5-year 

period shall be paid for its covered inpatient hospital services “the reasonable costs of 

providing such services for discharges occurring in the first cost reporting period 

beginning on or after the first day of the 5-year extension period.” (This methodology 

does not apply to services furnished in a psychiatric or rehabilitation unit of the hospital 

which is a distinct part.) For discharges occurring in a subsequent cost reporting period 

during the demonstration, the formula in section 410A(b)(1)(B) of Pub. L. 108-173, as 

amended, would apply to such hospitals. That is, the payment will be the lesser of 

reasonable cost or the target amount. We calculate the target amount in the second cost 

reporting period by taking the reasonable costs of providing covered inpatient hospital 

services in the first cost reporting period beginning on or after the first day of the 5-year 

extension and increasing it by the IPPS market basket percentage increase for that 

particular cost reporting period. We calculate the target amount in subsequent cost 
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reporting periods by taking the preceding cost reporting period’s target amount and 

increasing it by the IPPS market basket percentage increase for that particular cost 

reporting period. (We note that in calculating target amounts we utilize the IPPS market 

basket percentage increase as defined in section 1886(b)(3)(B)(iii), opposed to the 

applicable percentage increase as defined in section 1886(b)(3)(B)(i) of the Act. We note 

that section 410A(b)(2)(B) of Pub. L. 108-173, in pertinent part, provides that target 

amounts are “increased by the applicable percentage increase (under clause (i) of section 

1886(b)(3)(B) of the Social Security Act . . . .) in the market basket percentage increase 

(as defined in clause (iii) of such section) for that particular cost reporting period.” The 

phrase “applicable percentage increase (under clause (i) of section 1886(b)(3)(B) of the 

Social Security Act . . . .) in the market basket percentage increase . . . .” is ambiguous as 

there is no applicable percentage increase in the market basket percentage increase. 

Because the focus of the provision is the amount of the IPPS market basket percentage 

increase, we believe the provision is addressing the IPPS market basket percentage 

increase, and not the applicable percentage increase, which includes other adjustments to 

the market basket percentage increase. Further, because section 410A(b)(2)(B) of Pub. L. 

108-173 is addressing target amounts under the demonstration we believed it was logical 

to read the statute as providing for an update structure mimicking the update structure for 

target amounts of reasonable cost-based providers like children’s and cancer hospitals, as 

well as RNCHIs. This rationale applies any time we use the IPPS market basket 

percentage increase to update target amounts in the demonstration. With respect to 

hospitals that are newly joining the demonstration, they are paid the reasonable costs of 
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providing covered inpatient hospital services, other than services furnished in a 

psychiatric or rehabilitation unit of the hospital which is a distinct part, for discharges 

occurring in the hospital’s first cost reporting period beginning on or after the 

implementation of the demonstration program (section 410A(b)(1)(A) of Pub. L. 108-

173). We have determined that each of these new hospitals will begin participating in the 

demonstration with its first cost reporting period beginning on or after April 1, 2011. We 

chose this date because it follows immediately upon the notification of the hospitals of 

their acceptance to the demonstration and it will allow the hospitals to begin participation 

in the demonstration as soon as possible. With respect to rural community hospitals 

newly joining the demonstration, for discharges occurring in a subsequent cost reporting 

period under the demonstration program, the formula in section 410A(b)(1)(B) of Pub. L. 

108-173, as amended, would apply. That is, payments will be the lesser amount of 

reasonable costs or the target amount. We calculate the target amount in the second cost 

reporting period by taking the reasonable costs of providing covered inpatient hospital 

services in the first cost reporting period and increasing it by the IPPS market basket 

percentage increase for that particular cost reporting period. We calculate the target 

amount in subsequent cost reporting periods by taking the preceding cost reporting 

period’s target amount and increasing it by the IPPS market basket percentage increase 

for that particular cost reporting period. In addition, various other technical and 

conforming changes were made to section 410A of Pub. L. 108-173 by section 3123(a) of 

the Affordable Care Act and as further amended by section 10313 of that Act. 
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 We published a solicitation for applications for additional participants in the Rural 

Community Hospital Demonstration Program in the Federal Register on 

August 30, 2010 (75 FR 52960). Applications were due on October 14, 2010. The 

20 States with the lowest population density, which are eligible for the demonstration 

program are: Alaska, Arizona, Arkansas, Colorado, Idaho, Iowa, Kansas, Maine, 

Minnesota, Mississippi, Montana, Nebraska, Nevada, New Mexico, North Dakota, 

Oklahoma, Oregon, South Dakota, Utah, and Wyoming (Source: U.S. Census Bureau, 

Statistical Abstract of the United States: 2003). We approved 19 new hospitals for 

participation in the demonstration program. As of this date, we are waiting for these 

hospitals to respond as to whether they accept the terms and conditions stipulated for 

their participation in the demonstration; therefore, it is possible that fewer than the total 

of 19 will participate. We have based cost estimates for the demonstration for this new 

set of hospitals based on the assumption that all 19 hospitals will elect to participate. If 

fewer actually make this election, we are proposing to accordingly adjust the 

demonstration cost estimates in the FY 2012 IPPS/LTCH PPS final rule. 

3. Proposed FY 2012 Budget Neutrality Adjustment 

In order to ensure that the demonstration is budget neutral as is required by the 

statute, we are proposing to adjust the national IPPS rates in this proposed rule to account 

for any added costs attributable to the demonstration program. Specifically, the proposed 

budget neutrality adjustment would account for: (1) the estimated costs of the 

demonstration program in FY 2012 for the 8 currently participating hospitals (“preexpansion participating hospitals”); (2) the estimated costs of the demonstration in 
CMS-1518-P 559 

FY 2012 for the 19 hospitals newly selected to begin participation in the demonstration 

program; and (3) the amount by which the costs of the demonstration program, as 

indicated by settled cost reports for cost reporting periods beginning in FYs 2007 and 

2008 for hospitals participating in the demonstration program during FYs 2007 and 2008, 

exceeded the amount that was identified in the FY 2007 and FY 2008 IPPS final rules as 

the budget neutrality offsets for FYs 2007 and 2008. 

a. Component of the Proposed FY 2012 Budget Neutrality Adjustment that Accounts for 

Estimated FY 2012 Demonstration Program Costs of the “Pre-Expansion Participating 

Hospitals” 

We note that eight hospitals that were selected for participation in either 2005 or 

2008 are currently continuing to participate in the extension period mandated by the 

Affordable Care Act. We are proposing that the component of the proposed FY 2012 

budget neutrality adjustment to the national IPPS rates that accounts for the estimated 

demonstration program costs in FY 2012 for the eight “pre-expansion participating 

hospitals” would be calculated by utilizing three separate methodologies: one 

methodology for the six hospitals that have participated in the demonstration program 

since its inception and that are continuing to participate in the demonstration program 

(“originally participating hospitals”); a second methodology for one hospital that is 

currently participating in the demonstration program and that was among the four 

hospitals that joined the demonstration program in 2008; and a third methodology for the 

other hospital that is currently participating in the demonstration program and that was 

among the four hospitals that joined the demonstration program in 2008. Different 
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methods are used for these three sets of hospitals because the data available to us to 

estimate the demonstration program costs for each is different. Specifically, we are 

proposing to use the following hospital cost reports as the data sources used to estimate 

the costs attributable to the demonstration program under section 410A of Pub. L. 108-

173 as amended: 

(1) For the six “originally participating hospitals”, the estimate of the portion of 

the proposed budget neutrality adjustment that accounts for the estimated FY 2012 

demonstration program costs is based on data from their settled cost reports applicable to 

the second year of the demonstration – that is, for cost reporting periods ending in FY 

2007. We are proposing to use these cost reports because they are the most recent 

finalized cost reports and, thus, we believe their accounting of costs is the most accurate 

indicator available to us at this time to estimate FY 2012 demonstration costs. 

(2) For one of the two hospitals that joined the demonstration program in 2008, 

and that are still participating, we are proposing to estimate the FY 2012 demonstration 

program costs under section 410A of Pub. L. 108-173 as amended based on data from its 

as submitted cost report beginning January 1, 2008. Because we do not have final settled 

cost reports for this hospital for either 2008 or 2009, we are proposing to rely on its “as 

submitted” cost report for this period to estimate FY 2008 demonstration program costs 

for that hospital. We are proposing to use the “as submitted cost report” because we 

believe that as it is among the most recent cost reports, its accounting of costs is the most 

accurate indicator available to us at this time to estimate costs under the demonstration. 
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(3) The remaining hospital of the eight “pre-expansion participating hospitals”, 

which began participation in FY 2008, is an Indian Health Service provider. Historically, 

the hospital has not filed standard Medicare cost reports. To estimate its costs for 

FY 2012, we are proposing to use its full “as submitted” cost report filed for the period 

ending September 30, 2009. We are proposing to use this “as submitted” cost report 

because as among the most recent cost reports we believe it allows us to estimate 

FY 2012 costs accurately. 

We are proposing to use the same general methodology as for the FY 2011 

IPPS/LTCH PPS final rule, but providing more detail. The proposed methodology for 

calculating the estimated FY 2012 demonstration cost for the eight “pre-expansion 

hospitals” is as follows: 

 Step 1: In order to calculate demonstration costs for each of the six “originally 

participating hospitals” for the cost reporting period ending in FY 2007, we subtracted 

the amount it would have otherwise been paid under the applicable payment system(s) for 

covered inpatient hospital services without the demonstration during such period (as 

indicated on the settled cost report for this period) from the amount paid to it for such 

services under the reasonable cost methodology in section 410A(b) of Pub. L. 108-173 

(as indicated on the settled cost report for this period). Steps 1(a) through (c) below are 

performed to calculate FY 2007 demonstration costs for these six hospitals. (We are 

proposing to use final settled cost reports ending in FY 2007 to represent FY 2007 

demonstration costs for each of these hospitals because a substantial portion of the 

months included within these cost report years (respective to each hospital) fall within 
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FY 2007, and, therefore we believe that for purposes of this analysis it is appropriate to 

consider data from these cost reports to represent FY 2007 inpatient costs for the 

demonstration during that period. In addition, we note that throughout the remainder of 

the preamble discussion on the budget neutrality adjustment for the rural community 

hospital demonstration we refer to “covered inpatient hospital services” as that term is 

defined in section 410A(f)(2) of Pub. L. 108-173 as amended as “inpatient hospital 

services.” We also note that the phrase “the reasonable cost methodology” means the 

reasonable cost methodology in section 410A(b) of Pub. L. 108-173 or the reasonable 

cost methodology in section 410A(b) of Pub. L. 108-173, as amended as applicable in the 

particular situation. 

● Step 1(a): First, for each hospital, we subtracted the amount that would 

otherwise be paid under the IPPS for the hospital’s inpatient hospital services (excluding 

those associated with swing beds) for the cost reporting period ending in FY 2007 (as 

indicated on the settled cost report for this period) from the amount paid for such services 

under the reasonable cost methodology (as indicated on the settled cost report for this 

period). The result of this difference is each hospital’s demonstration costs for its 

inpatient hospital services (excluding those associated with swing beds) for the cost 

reporting period ending in FY 2007. (We used the amount the hospital would otherwise 

be paid under the IPPS as indicated above because this is the payment methodology 

under which the hospital’s beds (excluding swing beds) would be paid in the absence of 

the demonstration. This rationale applies throughout the preamble discussion on the rural 
CMS-1518-P 563 

community hospital demonstration budget neutrality adjustment whenever this is a 

component of the proposed methodology.) 

● Step 1(b): Next, with respect to the hospitals that have swing beds, we 

subtracted the amount the hospital would otherwise be paid under section 1888(e)(7) of 

the Act for the inpatient hospital services associated with the swing beds for the cost 

reporting period ending in FY 2007 (as indicated in the settled cost report for this period) 

from the amount paid for such services under the reasonable cost methodology (as 

indicated in the settled cost report for such period). The result of this difference is each 

hospital’s demonstration costs associated with its swing beds for the cost reporting period 

ending in FY 2007. (We used the amount the hospital would otherwise be paid under 

section 1888(e)(7) of the Act as indicated above because this is the payment methodology 

under which the hospital’s swing beds would be paid in the absence of the demonstration. 

This rationale applies throughout the preamble discussion on the rural community 

hospital demonstration budget neutrality adjustment whenever this is a component of the 

proposed methodology.) 

● Step 1(c): Next, in order to calculate total estimated FY 2010 demonstration 

costs for all six hospitals, we added together the differences calculated above in Step 1(a) 

and Step 1(b) as applicable for each of the six hospitals and then multiplied this sum by 

the IPPS market basket percentage increases for FYs 2008 through 2010, which were 

adopted in the respective IPPS final rules and a 2-percent annual volume adjustment for 

the years 2008 through 2010. 
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We note that we are proposing to apply the applicable IPPS market basket 

percentage increases described above to model estimated FY 2010 demonstration costs 

because we believe that this update factor appropriately indicates the trend of increase in 

hospital operating costs. Further, this approach is consistent with the agency’s use of the 

IPPS market basket percentage increase to update the rate-of-increase limits (which is a 

reasonable cost-based methodology) for children’s and cancer hospitals as well as 

RNCHIs. Therefore, we believe it enables us to estimate appropriately demonstration 

costs that are tied to a reasonable cost-based methodology. Also, this approach is 

consistent with how we update target amounts under the demonstration under section 

410A(b)(2)(B) of Pub. L. 108-173. The proposed 2-percent annual volume adjustment 

was stipulated by the CMS Office of the Actuary in 2004, at the outset of the 

demonstration and is supposed to accurately reflect the tendency of hospitals’ volumes to 

increase. We acknowledge the possibility that volumes for small hospitals may fluctuate, 

and are incorporating into the estimate of demonstration costs a factor to allow for a 

potential increase. We note that the rationale provided herein for utilizing an IPPS 

market basket percentage increase and a 2-percent annual volume adjustment to estimate 

demonstration costs is applicable throughout the preamble discussion on the rural 

community hospital budget neutrality adjustment whenever these factors are used in the 

proposed methodology. 

 As a side note, as a special feature of the demonstration, we added a supplemental 

work sheet to the standard hospital cost report which is completed by the fiscal 

intermediary in the final settlement for these six “originally participating hospitals.” This 
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supplemental work sheet includes the calculation of the hospital’s first year reasonable 

costs of inpatient hospital services (excluding those associated with swing beds) as set 

forth in section 410A of Pub. L. 108-173, and, in addition, for the hospital’s second year 

cost reports (those cost reports ending in FY 2007), the target amount (that is, the 

previous year’s Medicare reasonable cost amount for inpatient hospital services updated 

by the IPPS market basket percentage increase as provided in section 410A(b)(2)(B) of 

Pub. L. 108-173). (This supplemental work sheet also includes a calculation of the 

amount that would otherwise be paid for the hospital’s inpatient hospital services under 

the IPPS, as is ordinarily presented on the standard hospital cost report. For hospitals that 

have swing beds, this supplemental work sheet also includes the following: the estimated 

amount the hospital would otherwise be paid under section 1888(e)(7) of the Act for the 

inpatient hospital services associated with the hospital’s swing beds; the estimated 

amount the hospital would be paid under the reasonable cost methodology for the 

inpatient hospital services provided in its swing beds, and the hospital’s target amount for 

its swing beds. 

Step 2: In order to calculate estimated FY 2008 demonstration costs for the nonIndian Health Service hospital that began the demonstration program in 2008, we 

subtracted the estimated amount it would have otherwise been paid for inpatient hospital 

services without the demonstration under the applicable payment system(s) (as indicated 

on the “as submitted” cost report beginning January 1, 2008) from the estimated costs of 

such services under the reasonable cost methodology (as indicated on the “as submitted” 

cost report for this period). Steps 2(a) through (c) below are performed to calculate this 
CMS-1518-P 566 

amount. We note that we are proposing to use the cost report beginning January 1, 2008 

to represent FY 2008 demonstration costs for this hospital because it corresponds most 

precisely to FY 2008 and, therefore, we believe correctly represents FY 2008 inpatient 

costs for the demonstration for that period. 

● Step 2(a): Specifically, we subtracted the estimated amount that would 

otherwise be paid under the IPPS for the hospital’s inpatient hospital services (excluding 

swing beds) for the cost reporting period beginning January 1, 2008 (as indicated on the 

“as submitted” cost report) from the estimated amount to be paid for such services under 

the reasonable cost methodology (as indicated on the “as submitted” cost report for such 

period). 

● Step 2(b): Next, we subtracted the estimated amount that would otherwise be 

paid under section 1888(e)(7) of the Act for the inpatient hospital services associated 

with the swing beds during the cost reporting period beginning January 1, 2008 (as 

indicated on the “as submitted” cost report) from the estimated amount to be paid for 

such services under the reasonable cost methodology as indicated on the “as submitted” 

cost report for such period. 

● Step 2(c): We added together the differences calculated in Steps 2(a) and (b) 

above to obtain the hospital’s total estimated FY 2008 demonstration cost. 

● Step 2(d): Then, in order to calculate the hospital’s estimated FY 2010 

demonstration costs, we took the amount calculated in Step 2(c) above and multiplied it 

by the IPPS market basket percentage increases for FYs 2009 and 2010 as adopted in the 
CMS-1518-P 567 

respective IPPS final rules and a 2-percent annual volume adjustment for each of FYs 

2009 and 2010. 

Step 3: In order to calculate the estimated FY 2009 demonstration costs for the 

Indian Health Service provider, we subtracted the estimated amount the hospital would 

have otherwise been paid for inpatient hospital services without the demonstration under 

the applicable payment system (as indicated on the “as submitted” cost report ending 

September 30, 2009) from the estimated costs for such services under the reasonable cost 

methodology (as indicated in the “as submitted” cost report for such period). Step 3(a) 

below is performed to calculate this amount. (We note that we are proposing to use the 

cost report ending September 30, 2009 to represent FY 2009 demonstration costs for this 

hospital because it corresponds most precisely to FY 2009 and, therefore, we believe 

correctly represents FY 2009 inpatient costs for the demonstration for that period.) 

● Step 3(a): Specifically, we subtracted the estimated amount the hospital would 

have otherwise been paid for inpatient hospital services under the IPPS in the cost 

reporting period ending September 30, 2009 without the demonstration (as indicated on 

the “as submitted” cost report for this period) from the estimated amount to be paid under 

the reasonable cost methodology for such services (as indicated in the “as submitted” cost 

report for such period). We note that this provider had no swing beds, therefore, we did 

not estimate any portion of the costs under section 1888(e)(7) of the Act. 

● Step 3(b): Next, in order to calculate the Indian Health Service provider’s 

estimated FY 2010 demonstration costs, we multiplied the difference calculated in Step 
CMS-1518-P 568 

3(a) above by the IPPS market basket percentage increase for FY 2010 adopted in the 

FY 2010 IPPS/LTCH PPS final rule and the 2-percent annual volume adjustment. 

Step 4: Then, in order to calculate total estimated FY 2010 demonstration costs 

for all eight “pre-expansion participating hospitals”, we added the estimated FY 2010 

demonstration costs calculated in Steps 1(c), 2(d), and 3(b) above. 

Step 5: Next, in order to calculate total estimated FY 2012 demonstration costs 

for all eight “pre-expansion hospitals”, we multiplied the amount calculated in Step 4 

above by the FY 2011 IPPS market basket percentage increase adopted in the FY 2011 

IPPS/LTCH PPS final rule and the proposed FY 2012 IPPS market basket percentage 

increase contained elsewhere in this proposed rule and a 2-percent annual volume 

adjustment for FYs 2011 and 2012. Thus, we arrived at the total estimated FY 2012 

demonstration costs for all eight currently participating hospitals which needs to be 

offset, which is $21,290,305. If updated data become available for the final rule, we are 

proposing to use them to estimate the costs of the demonstration program in FY 2012 

(including the use of any change in the FY 2012 market basket percentage increase). 

b. Portion of the Proposed FY 2012 Budget Neutrality Adjustment That Accounts for 

Estimated FY 2012 Demonstration Program Costs for Hospitals Newly Selected to 

Participate in the Demonstration Program 

Section 410A(g)(3) of Pub. L. 108-173, as added by section 3123 of the 

Affordable Care Act and as further amended by section 10313 of such Act, provides that 

“[n]otwithstanding subsection (a)(4), during the 5-year extension period, not more than 

30 rural community hospitals may participate in the demonstration program under this 
CMS-1518-P 569 

section.” Consequently, up to 22 additional hospitals may be added to the demonstration 

program (30 hospitals minus the 8 “pre-expansion participating hospitals”). In order to 

ensure budget neutrality for the 19 newly selected hospitals, we are proposing to include 

a component in the proposed budget neutrality adjustment factor to the proposed 

FY 2012 national IPPS rates to account for the estimated FY 2012 costs of those new 

hospitals. For this proposed rule, we are proposing to generally use “as submitted” cost 

reports to estimate demonstration costs because they are the most recent cost reports and, 

therefore, we believe most accurately reflect the hospital’s cost and payment for 

Medicare inpatient services in the respective year. We note that hospitals were required 

to submit pages from their most recent cost reports with their applications. For 13 of 

these hospitals, these cost reports had end dates in FY 2009; for the 6 remaining 

hospitals, they had end dates in FY 2010. Therefore, in various steps in the proposed 

methodology below, we begin various estimates with FY 2009 if the hospital submitted a 

cost report ending in FY 2009, and FY 2010 if the hospital submitted a cost report ending 

in FY 2010. 

We are proposing to use the following methodology in order to estimate FY 2012 

demonstration program costs for the 19 newly selected hospitals. This methodology 

differs from that in the FY 2011 IPPS/LTCH PPS final rule, because, at that time, 

hospitals had not been selected for participation, and thus we had no data specific to those 

hospitals that would enter the demonstration as a result of its expansion mandated by the 

Affordable Care Act. 
CMS-1518-P 570 

Step 1(a): For each hospital that submitted a cost report ending in FY 2009, we 

subtracted the estimated amount that would be paid for its inpatient hospital services 

(excluding those associated with swing beds) under the IPPS for such period (as indicated 

on the “as submitted” cost report for such period) from the estimated amount for 

reasonable costs for such services (as indicated on the “as submitted” cost report for such 

period) in order to calculate the difference between the hospital’s estimated cost and 

payment for its inpatient hospital services (excluding those associated with swing beds) 

during the cost reporting period ending in FY 2009. 

Step 1 (b): For each hospital that submitted a cost report ending in FY 2010, we 

subtracted the estimated amount that would be paid for its inpatient hospital services 

(excluding those associated with swing beds) under the IPPS (as indicated on the “as 

submitted” cost report for such period) from the estimated amount for the reasonable cost 

for such services (as indicated on the “as submitted” cost report for such period) in order 

to calculate the difference between the hospital’s estimated costs and payment for its 

inpatient hospital services (excluding those associated with swing beds) during such 

period. 

Step 1(c): While a portion of the 19 newly selected hospitals that have swing 

beds reported estimated costs for those beds, some hospitals did not, namely a portion of 

the hospitals that submitted cost reports ending in FY 2009 with their applications. 

Therefore, we needed to gap-fill in order to account for this issue. For each of the 

hospitals with swing beds that submitted cost reports ending in FY 2009, but that did not 

submit with its application estimated costs associated with those swing beds, we assigned 
CMS-1518-P 571 

an estimated cost for its swing beds based on an average of the estimated cost-payment 

difference associated with the swing beds of the newly participating hospitals that 

reported such data on their applications. We are proposing to assign estimated costs 

based on the average of the cost-payment difference for those hospitals that submitted 

these data, because these hospitals represent a sample of hospitals chosen for the 

demonstration, which we believe can accurately reflect costs and payment. We believe 

that these amounts, derived from the applications of the hospitals that submitted these 

data, accurately reflect this sample because they are hospitals of similar size and 

circumstances. Furthermore, these hospitals, which submitted the data, were chosen from 

the same set of States as the overall set of the newly selected hospitals. We utilized the 

methodology in Steps 1(c)(i) through (c)(iii) below to calculate this amount: 

● Step 1(c)(i): For each of the hospitals with swing beds that submitted with its 

application both a cost report ending in FY 2009 and estimated costs of those swing beds 

during such period, we calculated its estimated cost-payment difference between the 

amount that the hospital estimates that will be paid under section 1888(e)(7) of the Act 

during such period for those swing beds (that is, the amount that the hospital estimates 

that will be paid under section 1886(e)(7) for the inpatient hospital services associated 

with its swing beds for such period from the amount that the hospital estimates that it 

would be paid for the reasonable costs for such services during such period as those 

amounts are reported on the hospital’s application) by simply taking this amount from the 

hospital’s application. 
CMS-1518-P 572 

● Step 1(c)(ii): Then, for each of the hospitals with swing beds that submitted 

with its application both a cost report ending in FY 2010 and the estimated costs of those 

swing beds during such period, we calculated the difference between the estimate costs 

and payment for those swing beds for such period by simply taking this amount from the 

hospital’s application. (We note that all hospitals that had swing beds and that submitted 

cost reports ending in FY 2010 with their application supplied data on the estimated cost 

and payment for swing bed services on these cost reports.) 

● Step 1(c)(iii): Next, we totaled all of the individual amounts calculated under 

Steps 1(c)(i) and (c)(ii) above and then divided this amount by the total number of 

hospitals that provided data on estimated costs on swing beds in their applications. We 

used the result of this computation as the estimated cost for the swing beds for each of the 

hospitals that failed to submit estimated costs for those beds with their applications. 

● Step 1(d): Then, in order to calculate the total costs during the cost reporting 

period ending in FY 2009 for each hospital that submitted a cost report ending in 

FY 2009, we did the following: (a) If the hospital had no swing beds, its total estimated 

costs for such period is the difference calculated under Step 1(a); (b) If the hospital had 

swing beds, we added the difference calculated under Step 1(a) with the difference 

calculated under Step 1(c)(i) or Step 1(c)(iii) as applicable. 

● Step 1(e): Next, in order to calculate total estimated FY 2009 costs for all of 

the hospitals that submitted cost reports ending in FY 2009 with their applications, we 

added together all of the total estimated costs that were calculated for each such hospital 

under Step 1(d) above. We note that we believe that using cost reports ending in FYs 
CMS-1518-P 573 

2009 and 2010 best reflect costs and payment in FYs 2009 and 2010 because these cost 

reports most closely respond to those fiscal years. 

● Step 1(f): Then, in order to calculate the total estimated FY 2011 costs for the 

newly selected hospitals that submitted cost reports ending in FY 2009 with their 

applications, we multiplied the amount calculated in Step 1(e) above by the FYs 2010 

and 2011 IPPS market basket percentage increases adopted in the respective IPPS/LTCH 

PPS final rules as well as a 2-percent annual volume adjustment for each of FYs 2010 

and 2011. 

● Step 1(g): Then, in order to calculate the total estimated FY 2010 costs for 

each hospital that submitted a cost report ending in FY 2010, we did the following: (a) If 

the hospital had no swing beds, its total estimated costs is the difference calculated under 

Step 1(b); (b) If the hospital had swing beds, we added the difference calculated under 

Step 1(b) with the difference calculated under Step 1(c)(ii). 

● Step 1(h): Next, in order to calculate the total FY 2010 costs for all of the 

hospitals that submitted FY 2010 cost reports with their applications, we added together 

all of the total estimated FY 2010 costs calculated for each such hospital under Step 1(g) 

above. 

● Step (1)(i): Then, we calculated the total estimated FY 2011 costs for all of the 

newly selected hospitals that submitted cost reports ending in FY 2010 by multiplying the 

amount calculated in Step 1(h) above by the FY 2011 IPPS market basket percentage 

increase adopted in the respective IPPS/LTCH PPS final rule as well as a 2-percent 

annual volume adjustment for FY 2011. 
CMS-1518-P 574 

● Step (1)(j): Next, in order to calculate total estimated FY 2012 demonstration 

costs for all of the 19 newly selected hospitals, we added together the amounts calculated 

in Steps 1(f) and 1(i) above and then multiplied this sum by the proposed IPPS FY 2012 

market basket percentage increase proposed elsewhere in this proposed rule and a 

2-percent annual volume adjustment for FY 2012. The amount of the estimated FY 2012 

demonstration costs for the 19 newly selected hospitals needing to be offset is 

$31,351,908. If updated data become available for the final rule, we are proposing to use 

them to estimate the costs of the demonstration program in FY 2012. 

c. Portion of the Proposed FY 2012 Budget Neutrality Adjustment to Offset the Amount 

by Which the Costs of the Demonstration Program in FYs 2007 and 2008 Exceeded the 

Amount That was Identified in the FYs 2007 and 2008 IPPS Final Rules as the Budget 

Neutrality Offset for FYs 2007 and 2008 

In addition, in order to ensure that the demonstration program in FYs 2007 and 

2008 was budget neutral, we are proposing to incorporate a component into the budget 

neutrality adjustment factor to the proposed FY 2012 national IPPS rates, which would 

offset the amount by which the demonstration program costs as indicated by settled cost 

reports beginning in FYs 2007 and 2008 for hospitals participating in the demonstration 

program during FYs 2007 and 2008 exceeded the amount that was identified in the FYs 

2007 and 2008 IPPS final rules as the budget neutrality offset for FYs 2007 and 2008. 

Specifically, we are proposing the following methodology. This is the same 

methodology as used in the FY 2011 IPPS/LTCH PPS final rule, but we are adding 

detail. In this proposed rule, we are recognizing the possibility that in the year’s time 
CMS-1518-P 575 

between the FY 2011 and FY 2012 final rule that the cost reports for the cost reporting 

years beginning in FY 2008 for the hospitals then participating in the demonstration may 

be finalized, that is, settled. 

• Step One: Calculate the costs of the demonstration program for each of FYs 

2007 and 2008 according to the settled cost reports that began in FYs 2007 or 2008 for 

the then participating hospitals (which represent the third and fourth years of the 

demonstration program for each of the then participating hospitals) and then add these 

two sums together. The costs of the demonstration program for each of FYs 2007 and 

2008 is the difference resulting from subtracting the total amount that would otherwise be 

paid to the then participating hospitals under the applicable payment system(s) (that is, 

under the IPPS and under section 1888(e)(7) of the Act to the extent the participating 

hospital had swing beds) without the demonstration from the amount paid to those 

hospitals under the demonstration payment methodology in section 410A(b) of 

Pub. L. 108-173. (We are proposing to use these settled cost reports, which represent the 

third and fourth years of the demonstration program for each of the then participating 

hospitals, and, therefore, we believe correctly represent inpatient costs for the 

demonstration program during each of those 2 years.) These settled cost reports represent 

the third and fourth years of the demonstration, because the demonstration started with 

cost report start dates on or after October 1, 2004. Therefore, the first year of the 

demonstration program is represented by cost reports with a start date between 

October 1, 2004 and September 30, 2005 (that is, FY 2005; the second year of the 

demonstration program is represented by cost reports with a start date between 
CMS-1518-P 576 

October 1, 2005 and September 30, 2006 (FY 2006); the third year of the demonstration 

program is represented by cost reports with a start date between October 1, 2006 and 

September 30, 2007 (FY 2007); and the fourth year of the demonstration program is 

represented by cost reports with a start date between October 1, 2007 and 

September 30, 2008 (FY 2008). 

• Step Two: Subtract the amount that was offset by the budget neutrality 

adjustment for FYs 2007 and 2008 ($9,197,870 for FY 2007 and $9,681,893 for 

FY 2008) from the combined costs of the demonstration program in FYs 2007 and 2008 

as calculated in Step one. 

• Step Three: The result of Step two is a dollar amount, for which we would 

calculate a factor that would offset such amounts and would be incorporated into the 

overall proposed budget neutrality adjustment to the proposed national IPPS rates for 

FY 2012. This specific component to the overall proposed budget neutrality adjustment 

for FY 2012 would account for the difference between the combined costs of the 

demonstration program in FYs 2007 and 2008 and the amount of the budget neutrality 

adjustment published in the FYs 2007 and 2008 IPPS/LTCH PPS final rules and, 

therefore, would ensure that the demonstration program is budget neutral for FYs 2007 

and 2008. 

 Because of delays in the settlement process for the demonstration hospitals' third 

and fourth year cost reports, that is, for cost reporting periods starting in each FYs 2007 

and 2008 respectively, we are unable to state the costs of the demonstration program 

corresponding to FYs 2007 and 2008 for purposes of determining the amount by which 
CMS-1518-P 577 

the costs corresponding to FYs 2007 and 2008 exceeded the amount offset by the budget 

neutrality adjustment for FYs 2007 and 2008. Therefore, we are not proposing the 

specific numeric amount representing this offsetting process that would be incorporated 

into the budget neutrality adjustment applied to the national IPPS rates. We note that we 

anticipate that they may be available for the FY 2012 IPPS/LTCH PPS final rule. 

Therefore, the estimated adjustment to the national IPPS rates in this proposed rule 

cannot include a component to account for these costs. However, to the extent such data 

is available for the final rule, we are proposing to have the budget neutrality offset to the 

IPPS rates account for the amount by which the costs corresponding to FYs 2007 and 

2008 exceeded the amount offset by the budget neutrality adjustments for FYs 2007 and 

2008 as calculated by the process described above. 

 For this FY 2012 IPPS/LTCH PPS proposed rule, the estimated amount for which 

an adjustment to the proposed national IPPS rates is being calculated is the sum of the 

amounts specified in sections IV.N.3.a. and IV. N.3.b. of this proposed rule, which is 

$52,642,213 (this estimate does not account for the numeric result of the method in 

IV.N.3.c.). As explained previously, to the extent the numeric result of the method in 

IV.N.3.c. is available in the final rule, under our proposal, this amount would be included 

in the amount which needs to be offset by the budget neutrality adjustment. Sections 

IV.N.3.a. and IV.N.3.b. of this proposed rule state dollar amounts, which represent 

estimated costs attributable to the demonstration program for the respective component of 

the overall estimated calculation of the proposed budget neutrality factor for FY 2012. 

This estimated amount is based on the specific assumptions identified, as well as from 
CMS-1518-P 578 

data sources that are used because they represent either the most recently finalized, (that 

is, settled) or, if “as submitted,” recently available cost reports. 

O. Bundling of Payments for Services Provided to Outpatients Who Later Are Admitted 

as Inpatients: 3-Day Payment Window

1. Background 

Section 1886(a)(4) of the Act includes in the definition of “operating costs of 

inpatient hospital services” diagnostic services (including clinical diagnostic laboratory 

tests) or other services related to the admission (as defined by the Secretary) furnished by 

the hospital (or by an entity that is wholly owned or operated by the hospital) to the 

patient during the 3 days preceding the date of the patient’s admission to a subsection (d) 

hospital subject to the IPPS. For a non-subsection (d) hospital (psychiatric hospitals and 

units, inpatient rehabilitation hospitals and units, long-term care hospitals, children’s 

hospitals, and cancer hospitals), the statutory payment window is 1 day preceding the 

date of the patient’s admission. 

Section 102(a)(1) of Preservation of Access to Care for Medicare Beneficiaries 

and Pension Relief Act of 2010 (Pub. L. 111-192, enacted on June 25, 2010) specifies 

that the term in section 1886(a)(4) of the Act, “other services related to the admission”, 

includes “all services that are not diagnostic services (other than ambulance and 

maintenance renal dialysis services) for which payment may be made under this title 

[Title XVIII] that are provided by a hospital (or an entity wholly owned or wholly 

operated by the hospital) to a patient--(A) on the date of the patient’s inpatient admission; 

or (B) during the 3 days (or, in the case of a hospital that is not a subsection (d) hospital, 
CMS-1518-P 579 

during the 1 day) immediately preceding the date of admission unless the hospital 

demonstrates (in a form and manner, and at a time, specified by the Secretary) that such 

services are not related (as determined by the Secretary) to such admission.” Pub. L. 

111-192 makes no changes to the existing policy regarding billing for diagnostic services. 

Under the 3-day (or 1-day) payment window policy, all outpatient diagnostic 

services furnished to a Medicare beneficiary by a hospital (or an entity wholly owned or 

operated by the hospital), on the date of a beneficiary’s admission or during the 3 days (1 

day for a non-subsection (d) hospital) immediately preceding the date of a beneficiary’s 

inpatient hospital admission, must be included on the Part A bill for the beneficiary’s 

inpatient stay at the hospital. All outpatient nondiagnostic services provided by the 

hospital (or an entity wholly owned or wholly operated) on the date of the inpatient 

admission or during the 3 days (1 day for a non-subsection (d) hospital) immediately 

preceding the date of a beneficiary’s inpatient hospital admission are deemed related to 

the admission and must be billed with the inpatient stay unless the hospital attests to 

specific nondiagnostic services as being unrelated to the hospital claim. 

In an interim final rule with comment period issued in the Federal Register on 

August 16, 2010 (75 FR 50346 through 50349), we discussed and made changes to the 

Medicare regulations pertaining to the 3-day payment window policy in order to comport 

with the requirements of section 102 of Pub. L. 111-192. We refer readers to that interim 

final rule with comment period for further information about the 3-day payment window 

policy. We have received public comments on the August 16, 2010 interim final rule 

with comment period, and we plan to address these public comments as well as any 
CMS-1518-P 580 

public comments we may receive on the proposals in this proposed rule in the FY 2012 

IPPS/LTCH PPS final rule. 

2. Condition Code 51 (Attestation of Unrelated Outpatient Nondiagnostic Services) 

As we stated in the August 16, 2010 interim final rule with comment period 

(75 FR 50348), we intend to establish a process for hospitals to attest to nondiagnostic 

services as being unrelated to the hospital claim when a hospital submits an outpatient 

claim. As part of the process, hospitals would be required to maintain documentation in 

the beneficiary’s medical record to support their claim that the outpatient nondiagnostic 

services are unrelated to the beneficiary’s inpatient admission. 

The National Uniform Billing Committee (NUBC) is a committee established by 

the American Hospital Association and includes the participation of all the major national 

provider and payer organizations. The NUBC was formed to develop a single billing 

form and standard data set that could be used nationwide by institutional providers and 

payers for handling health care claims. The NUBC has provided a mechanism through 

the establishment of a condition code for a hospital to attest directly on the outpatient 

claim to specific nondiagnostic services as being clinically unrelated to an inpatient 

hospital claim (that is, the preadmission diagnostic services are clinically distinct or 

independent from the reason for the beneficiary’s inpatient admission). As of 

April 1, 2011, a hospital must add condition code 51 on claims for separately billed 

outpatient nondiagnostic services furnished on or after June 25, 2010 (the date of 

enactment of Pub. L. 111-192) if the hospital wishes to attest to nondiagnostic services as 

being unrelated to the hospital claim. We issued a manual system revision through 
CMS-1518-P 581 

Change Request #7142, Transmittal 796, on October 29, 2010, instructing CMS 

contractors to accept condition code 51 on outpatient claims. 

3. Applicability of the Payment Window Policy to Services Furnished at Physicians’ 

Practices 

We have received several inquiries regarding the applicability of the payment 

window to preadmission services furnished at hospital-owned or hospital-operated 

physicians’ clinics or practices. The statutory language under section 1886(a)(4) of the 

Act is clear that the 3-day (or, where applicable, 1-day) payment window policy applies 

not only to diagnostic and related nondiagnostic services furnished to patients at hospitals 

but also at entities that are wholly owned or operated by the admitting hospital. In a 1998 

final rule on payment for preadmission services (63 FR 6866), we stated, “A hospitalowned or hospital-operated physician clinic or practice is subject to the payment window 

provision. The technical portion of preadmission diagnostic services performed by the 

physician clinic or practice must be included on the inpatient bill and may not be billed 

separately. A physician’s professional service is not subject to the window.” Thus, we 

made clear that the term “entities” under this section of the statute includes physicians’ 

clinics or practices. Although the 1998 rule provides specific guidance regarding billing 

for preadmission diagnostic services furnished at hospital-owned or hospital-operated 

physician’s practices, we had issued no guidelines regarding billing for preadmission 

nondiagnostic services provided by a hospital-owned or hospital-operated physician’s 

practice, leaving many to assume that the payment window does not apply to such 

services. 
CMS-1518-P 582 

Prior to the June 25, 2010 enactment of section 102(a)(1) of Pub. L. 111-192, the 

payment window policy for preadmission nondiagnostic services was rarely applied 

because the policy required an exact match between the principal ICD-9 CM diagnosis 

codes for the outpatient services and the inpatient admission. Because of the exact match 

policy, very few services furnished in a physician’s office or clinic that is wholly owned 

or operated by the hospital would be subject to the policy. However, the statutory change 

to the payment window policy made by Pub. L. 111-192 significantly broadened the 

definition of nondiagnostic services that are subject to the payment window to include 

any nondiagnostic service that is clinically related to the reason for a patient’s inpatient 

admission, regardless of whether the inpatient and outpatient diagnoses are the same. 

This statutory change therefore significantly broadens the application of the payment 

window policy in hospital-owned or hospital-operated physician offices or clinics (that is, 

clinics that are not provider-based). We note that, under this change, hospitals and 

hospital-owned or hospital-operated entities must now attest that preadmission 

nondiagnostic services are not related to an admission using condition code 51 

(Attestation of Unrelated Outpatient Nondiagnostic Services) when they submit a claim 

during the 3-day (or, where applicable, 1-day) preadmission period. 

In response to ongoing requests to clarify the applicability of the payment window 

policy to preadmission nondiagnostic services provided in hospital-owned or 

hospital-operated physicians’ offices or clinics, we are clarifying in this proposed rule 

that the 3-day (or, where applicable, 1-day) payment window policy applies to both 

preadmission diagnostic and nondiagnostic services furnished to a patient at physician’s 
CMS-1518-P 583 

practices that are wholly owned or wholly operated by the admitting hospital. For 

purposes of the payment window, “wholly owned or operated” literally means that the 

admitting hospital must be the sole owner or the sole operator of the entity providing the 

preadmission services in order for the payment window policy to apply. A hospital is 

considered the sole operator of an entity if the hospital has exclusive responsibility for 

conducting or overseeing the entity’s routine operations, regardless of whether the 

hospital also has policymaking authority over the entity (we refer readers to the 

regulations at 42 CFR 412.2(c)(5)(i) and to discussions and examples of wholly owned or 

operated scenarios in rules issued in the Federal Register on January 12, 1994 

(59 FR 1656) and February 11, 1998 (63 FR 6865 through 6867)). 

In the circumstance where a clinic that is not provider-based meets the definition 

of being wholly owned or wholly operated by the hospital and the 3-day (or, if 

applicable, 1-day) payment window applies to related nondiagnostic preadmission 

services, the hospital’s charge on the inpatient claim would include any overhead costs 

associated with Medicare’s physician fee schedule payment. Therefore, it should follow 

that Medicare’s payment to the physician for the physician fee schedule service should be 

at the lower facility rate, which does not include overhead, staff, equipment, and supplies 

required to perform the service in the physician’s office (rather than the higher 

nonfacility rate that does include those overhead costs) to avoid paying for the services 

twice because they are no longer being paid separately under Part B. 

Under 42 CFR 414.22(b)(5)(i), Medicare pays physicians using the nonfacility 

relative value units when services are provided in a physician’s office and bases 
CMS-1518-P 584 

physician payment on the facility relative value units when the physician provides 

services in a facility, including hospitals, skilled nursing facilities, community mental 

health centers, and ambulatory surgical centers. Because a hospital-owned or 

hospital-operated physician practice or clinic that is not provider-based is a nonfacility 

setting, we will need to change the regulation to specifically provide for Medicare to pay 

for a service provided in a nonfacility setting at the facility rate in order to comply with 

section 102(a) of Pub 111-192. We intend to discuss such a proposal in more detail in a 

future physician fee schedule proposed rule and address how this statutory provision will 

be implemented in physicians’ offices that are wholly owned or wholly operated by the 

hospital. In all circumstances, we would expect the hospital to inform the physician 

offices and clinics where the hospital is the sole owner or sole operator and when an 

inpatient admission occurs. 
CMS-1518-P 585 

P. Proposed Changes to MS-DRGs Subject to the Postacute Care Transfer Policy

1. Background 

 Existing regulations at §412.4(a) define discharges under the IPPS as situations in 

which a patient is formally released from an acute care hospital or dies in the hospital. 

Section 412.4(b) defines acute care transfers, and §412.4(c) defines postacute care 

transfers. Our policy, set forth in §412(f), provides that when a patient is transferred and 

his or her length of stay is less than the geometric mean length of stay for the MS-DRG to 

which the case is assigned, the transferring hospital is generally paid based on a 

graduated per diem rate for each day of stay, not to exceed the full MS-DRG payment 

that would have been made if the patient had been discharged without being transferred. 

 The per diem rate paid to a transferring hospital is calculated by dividing the full 

DRG payment by the geometric mean length of stay for the MS-DRG. Based on an 

analysis that showed that the first day of hospitalization is the most expensive (60 FR 

45804), our policy generally provides for payment that is double the per diem amount for 

the first day, with each subsequent day paid at the per diem amount up to the full MSDRG payment (§412.4(f)(1)). Transfer cases are also eligible for outlier payments. In 

general, the outlier threshold for transfer cases, as described in §412.80(b), is equal to the 

fixed-loss outlier threshold for nontransfer cases (adjusted for geographic variations in 

costs), divided by the geometric mean length of stay for the MS-DRG, and multiplied by 

the length of stay for the case, plus one day. 

 We established the criteria set forth in § 412.4 for determining which DRGs 

qualify for postacute care transfer payments in the FY 2006 IPPS final rule (70 FR 47419 
CMS-1518-P 586 

through 47420). The determination of whether a DRG is subject to the postacute care 

transfer policy was initially based on the Medicare Version 23.0 GROUPER (FY 2006) 

and data from the FY 2004 MedPAR file. However, if a DRG did not exist in Version 

23.0 or a DRG included in Version 23.0 is revised, we use the current version of the 

Medicare GROUPER and the most recent complete year of MedPAR data to determine if 

the DRG is subject to the postacute care transfer policy. Specifically, if the DRG’s total 

number of discharges and proportion of short-stay discharges to postacute care exceed the 

55th percentile for all DRGs, CMS will apply the postacute care transfer policy to that 

DRG and to any other MS-DRG that shares the same base DRG. In the preamble to the 

FY 2006 final rule (70 FR 47419), we stated that “we will not revise the list of DRGs 

subject to the postacute care transfer policy annually unless we are making a change to a 

specific DRG.” 

To account for MS-DRGs subject to the postacute care policy that exhibit 

exceptionally higher shares of costs very early in the hospital stay, §412.4(f) also 

includes special payment methodology. For these MS-DRGs, hospitals receive 

50 percent of the full MS-DRG payment, plus the single per diem payment, for the first 

day of the stay, as well as a reduced per diem payment for subsequent days (up to the full 

MS-DRG payment (§412.4(f)(6)). For an MS-DRG to qualify for the special payment 

methodology, the geometric mean length of stay must be greater than 4 days, and the 

average charges of 1-day discharge cases in the MS-DRG must be at least 50 percent of 

the average charges for all cases within the MS-DRG. DRGs that are part of an 
CMS-1518-P 587 

MS-DRG group must meet DRG special payment policy if any one of the MS-DRGs that 

share that same base MS-DRG qualifies (§412.4(f)(6)). 

2. Proposed Changes to the Postacute Care Transfer MS-DRGs 

Based on our annual review of MS-DRGs, we have identified a number of 

MS-DRGs that should be included on the list of MS-DRGs subject to the postacute care 

transfer policy. As we discuss in section III.G. of this proposed rule, in response to 

public comments and based on our analysis of FY 2010 MedPAR claims data, we are 

proposing to make several changes to MS-DRGs to better capture certain severity of 

illness levels, to be effective for FY 2012. Specifically, we are proposing to modify the 

assignment of the autologous bone marrow transplants now assigned to MS-DRG 015 

(Autologous Bone Marrow Transplant) to capture the severity levels of “with CC/MCC” 

and “without CC/MCC.” We are proposing to establish two new MS-DRGs (proposed 

MS-DRGs 016 and 017 (Autologous Bone Marrow Transplant with MCC/CC and 

without MCC/CC, respectively) to replace MS-DRG 015. We also are proposing to 

establish three new MS-DRGs to capture three severity of illness levels for skin 

debridement--proposed MS-DRG 570 (Skin Debridement with MCC); proposed 

MS-DRG 571 (Skin Debridement with CC); and proposed MS-DRG 572 (Skin 

Debridement without CC/MCC). In addition, we are proposing to move the codes for 

rechargeable dual array deep brain stimulation (codes 02.93 and 86.98) to MS-DRGs 023 

and 024 (Craniotomy with Major Device Implant/Acute Complex CNS PDX, with MCC 

and without MCC, respectively) where similar devices are currently assigned. We are 

proposing to move two procedure codes that either repair a thoracic aneurysm or place a 
CMS-1518-P 588 

stent graft (codes 38.45 and 39.73) out of MS-DRG 237 and 238 (Major Cardiovascular 

Procedures w MCC or Thoracic Aortic Aneurysm Repair, and Major Cardiovascular 

Procedures with MCC and without MCC, respectively). We are proposing to assign 

these two codes to MS-DRGs 219, 220, and 221 (Cardiac Valve & Other Major 

Cardiothoracic Procedure without Cardiac Catheterization with MCC, with CC, and 

without CC, respectively). We are proposing to add a procedure code for partial 

gastrectomy (43.89) to MS-DRGs 619, 620, and 621 (O.R. Procedure for Obesity with 

MCC, with CC, and without CC/MCC, respectively). A discussion of these proposed 

changes can be found in section II.G. of the preamble of this proposed rule. 

In light of these proposed changes to the MS-DRGs ̧ according to the regulations 

under §412.4(c), we evaluated these proposed FY 2012 MS-DRGs against the general 

postacute care transfer policy criteria using the FY 2010 MedPAR data. If an MS-DRG 

qualified for the postacute care transfer policy, we also evaluated that MS-DRG under the 

special payment methodology criteria according to regulations at §412.4(f)(6). We note 

that these proposed changes to the MS-DRGs can result in interactive effects between 

MS-DRGs and in cases moving from existing MS-DRGs to the new proposed MS-DRGs, 

and that our review reflects this as well. As a result of our review, we are proposing to 

update the list of MS-DRGs that are subject to the postacute care transfer policy to 

include the proposed new MS-DRGs 570, 571, and 572 for FY 2012. (These MS-DRGs 

are reflected in Table 5, which is listed in section VI. of the Addendum to this proposed 

rule and available via the Internet, and are also listed in the tables at the end of this 

section.) 
CMS-1518-P 589 

In addition, based on our evaluation of the proposed FY 2012 MS-DRGs using 

the FY 2010 Med PAR data, we have identified the following two existing MS-DRGs 

that meet the criteria to be subject to the postacute care transfer policy for FY 2012: 

MS-DRGs 023 (Craniotomy with Major Device Implant or Acute Complex CNS PDX 

with MCC) and MS-DRG 024 (Craniotomy with Major Device Implant or Acute 

Complex CNS PDX without MCC). We are proposing to add these two MS-DRGs to the 

list of MS-DRGs that are subject to the postacute care transfer policy for FY 2012. The 

following table lists the respective criteria for each MS-DRG that we are proposing to 

add to the postacute transfer policy list. 

Further, based on our evaluation of the proposed FY 2012 MS-DRGs using the 

FY 2010 Med PAR data, we have determined that MS-DRGs 228 (Other Cardiothoracic 

Procedures with MCC), 229 (Other Cardiothoracic Procedures with CC), 230 (Other 

Cardiothoracic Procedures without CC/MCC), 640 (Miscellaneous Disorders of 

Nutrition, Metabolism, Fluids/Electrolytes with MCC), and 641 (Miscellaneous 

Disorders of Nutrition, Metabolism, Fluids/Electrolytes without MCC) no longer meet 

the postacute care transfer criteria. Therefore, we are proposing that they be removed 

from the list of DRGs subjected to the postacute care transfer policy, effective FY 2012. 

We refer readers to the bolded text in the following table to see which criteria were not 

met in our analysis for each MS-DRG removed from the postacute care transfer policy 

list. 

LIST OF MS-DRGs CHANGING POSTACUTE CARE TRANSFER POLICY STATUS 

IN FY 2012
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MS-DRG MS-DRG Title 

Total 

cases 

Postacute 

care 

transfers 

(55th

percentile: 

1,586) 

Shortstay 

postacute 

care 

transfers 

Percent of 

short-stay 

postacute 

care 

transfers 

to all 

cases (55th

percentile: 

7.9591%) 

Postacute 

transfer 

policy 

status 

023 CRANIO W MAJOR DEV 

IMPL/ACUTE COMPLEX 

CNS PDX W MCC OR 

CHEMO IMPLANT 

4,601 2,215 370 8.04% YES 

024 CRANIO W MAJOR DEV 

IMPL/ACUTE COMPLEX 

CNS PDX W/O MCC 

1,726 992* 161 9.33% YES** 

228 OTHER 

CARDIOTHORACIC 

PROCEDURES W MCC 

1,929 1,215* 450 23.33% NO 

229 OTHER 

CARDIOTHORACIC 

PROCEDURES W CC 

2,381 1,315* 418 17.56% NO 

230 OTHER 

CARDIOTHORACIC 

PROCEDURES W/O 

CC/MCC 

641 226* 11 1.72%* NO 

570 SKIN DEBRIDEMENT W 

MCC 

5,211 4,007 1577 30.26% YES 

571 SKIN DEBRIDEMENT W 

CC 

5,574 3,851 1099 19.72% YES 

572 SKIN DEBRIDEMENT 

W/O CC/MCC 

2,542 1,384* 226 8.89% YES** 

640 MISC DISORDERS OF 

NUTRITION,METABOLIS

M,FLUIDS/ELECTROLYT

ES W MCC 

57,197 22,571 3618 6.33%* NO 

641 MISC DISORDERS OF 

NUTRITION,METABOLIS

M,FLUIDS/ELECTROLYT

ES W/O MCC 

169,353 69,590 5167 3.05%* NO 

* Indicates a current postacute care transfer policy criterion that the MS-DRG did not meet. 

** As described in the policy at 42 CFR 412.4(d)(3)(ii)(D), MS-DRGs that share the same base MS-DRG 

shall all meet postacute care transfer policy if any one of the MS-DRGs that share that same base MS-DRG 

qualifies.

Finally, we have determined that MS-DRGs 216 (Cardiac Valve & Other Major 

Cardiothoracic Procedure with Cardiac Catheterization with MCC), 217 (Cardiac Valve 
CMS-1518-P 591 

& Other Major Cardiothoracic Procedure with Cardiac Catheterization with CC), and 218 

(Cardiac Valve & Other Major Cardiothoracic Procedure without CC/MCC) meet the 

criteria for the special payment methodology. Therefore, we are proposing that they 

would be subject to the DRG special payment methodology, effective FY 2012. 

LIST OF MS-DRGs CHANGING DRG SPECIAL PAYMENT POLICY STATUS 

 IN FY 2012

MS-DRG MS-DRG Title 

Geometric 

mean 

length of 

stay 

Average 

charges of 

1-day 

discharges 

50% of 

average 

charges 

for all 

cases 

within 

MS-DRG 

Special pay 

policy status 

216 CARDIAC VALVE & OTH 

MAJ CARDIOTHORACIC 

PROC W CARD CATH W 

MCC 

14.2497327 $164,838 125,398 YES 

217 CARDIAC VALVE & OTH 

MAJ CARDIOTHORACIC 

PROC W CARD CATH W 

CC 

9.518336312 $126,655 84,669 YES 

218 CARDIAC VALVE & OTH 

MAJ CARDIOTHORACIC 

PROC W CARD CATH W/O 

CC/MCC 

7.102572558 $0 0 YES* 

* As described in the policy at 42 CFR 412.4(d)(6)(iv), MS-DRGs that share the same base MS-DRG shall 

meet DRG special payment policy if any one of the MS-DRGs that share that same base MS-DRG 

qualifies. 

Q. Hospital Services Furnished under Arrangements

 For purposes of Medicare payment, section 1861(b) of the Act defines “inpatient 

hospital services” in part as “...the following items and services furnished to an inpatient 

of a hospital and (except as provided in paragraph (3)) by the hospital— 

 (1) bed and board; 
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 (2) such nursing services and other related services, such use of hospital 

facilities, and such medical social services as are ordinarily furnished by the hospital for 

the care and treatment of inpatients...; and 

 (3) such other diagnostic or therapeutic items or services, furnished by the 

hospital or by others under arrangements with them made by the hospital, as are 

ordinarily furnished to inpatients either by such hospital or by others under such 

arrangements;” 

 We note that the statute specifies that “routine services,” for example, bed, board, 

nursing and other related services, except those specified at paragraph (3) of section 

1861(b) of the Act are to be provided by “the hospital,” and not just “a hospital.” 

Similarly, our implementing regulations at 42 CFR 409.12 indicate that Medicare pays 

for “nursing and related services, use of hospital . . . facilities, and medical social services 

as . . . inpatient hospital services or inpatient CAH services . . . only if those services are 

ordinarily furnished by the hospital or CAH”. Consistent with the statute, only with 

regard to other diagnostic or therapeutic services do the regulations at 42 CFR 409.16 

state that Medicare will also pay for these services if furnished “by others under 

arrangements made by the hospital or CAH”. 

 However, it has come to our attention that some providers in the hospital 

community may have interpreted our instructions under section 2118 (Cost of Services 

Furnished under Arrangement) of the Provider Reimbursement Manual, Part I (PRM-I), 

relating to payment for routine services to allow additional services to be provided under 

arrangements. Some providers have interpreted the provision of the paragraph on 
CMS-1518-P 593 

“Routine Services” relating to services provided “under arrangement” under section 2118 

of the PRM-I to mean that even routine services described in sections 1861(b)(1) and 

(b)(2) of the Act, which are normally provided to hospital inpatients by the hospital, can 

be provided by an outside entity under arrangement. 

 To the extent that our manual provisions could be read to allow hospitals to 

furnish such “routine services” “under arrangements,” we are now proposing a change to 

limit the services a hospital may provide under arrangement to reflect the statutory 

definition of “inpatient hospital services” and the implementing regulations. Under our 

proposed policy, if routine services, that is, services described in sections 1861(b)(1) and 

(b)(2) of the Act, are provided in the hospital, they are considered as being provided “by 

the hospital.” We believe that this proposal is consistent with the statute because the 

statutory language specifying that the routine services described in sections 1861(b)(1) 

and (b)(2) of the Act be provided “by the hospital” suggests that the hospital is required 

to exercise professional responsibility over the services, including quality controls. In 

situations in which certain routine services are provided under arrangements “in the 

hospital,” for example, contracted nursing services, we believe the arrangement generally 

results in the hospital exercising the same level of control over those services as the 

hospital does in situations in which the services are provided by the hospital’s salaried 

employees. Therefore, if these services are provided in the hospital to its inpatients, we 

consider the services as being provided by the hospital. However, if these services are 

provided outside the hospital, the services are considered as being provided under 

arrangement, and not by the hospital. That is, consistent with the statute, only therapeutic 
CMS-1518-P 594 

and diagnostic services can be provided under arrangement. If we finalize this proposed 

policy, we will change the provisions of section 2118 of the PRM-I accordingly. 

V. Proposed Changes to the IPPS for Capital-Related Costs 

A. Overview

 Section 1886(g) of the Act requires the Secretary to pay for the capital-related 

costs of inpatient acute hospital services “in accordance with a prospective payment 

system established by the Secretary.” Under the statute, the Secretary has broad authority 

in establishing and implementing the IPPS for acute care hospital inpatient capital-related 

costs. We initially implemented the IPPS for capital-related costs in the Federal fiscal 

year (FY) 1992 IPPS final rule (56 FR 43358), in which we established a 10-year 

transition period to change the payment methodology for Medicare hospital inpatient 

capital-related costs from a reasonable cost-based methodology to a prospective 

methodology (based fully on the Federal rate). 

 FY 2001 was the last year of the 10-year transition period established to phase in 

the IPPS for hospital inpatient capital-related costs. For cost reporting periods beginning 

in FY 2002, capital IPPS payments are based solely on the Federal rate for almost all 

acute care hospitals (other than hospitals receiving certain exception payments and 

certain new hospitals). (We refer readers to the FY 2002 IPPS final rule (66 FR 39910 

through 39914) for additional information on the methodology used to determine capital 

IPPS payments to hospitals both during and after the transition period.) The basic 

methodology for determining capital prospective payments using the Federal rate is set 
CMS-1518-P 595 

forth in §412.312 of the regulations. For the purpose of calculating capital payments for 

each discharge, currently the standard Federal rate is adjusted as follows: 

 (Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment Factor 

(GAF)) x (COLA for hospitals located in Alaska and Hawaii) x (1 + Capital DSH 

Adjustment Factor + Capital IME Adjustment Factor, if applicable). 

B. Exception Payments

 The regulations at §412.348(f) provide that a hospital may request an additional 

payment if the hospital incurs unanticipated capital expenditures in excess of $5 million 

due to extraordinary circumstances beyond the hospital’s control. This policy was 

originally established for hospitals during the 10-year transition period, but as we 

discussed in the FY 2003 IPPS final rule (67 FR 50102), we revised the regulations at 

§412.312 to specify that payments for extraordinary circumstances are also made for cost 

reporting periods after the transition period (that is, cost reporting periods beginning on 

or after October 1, 2001). Additional information on the exception payment for 

extraordinary circumstances in §412.348(f) can be found in the FY 2005 IPPS final rule 

(69 FR 49185 and 49186). 

 During the transition period, under §§412.348(b) through (e), eligible hospitals 

could receive regular exception payments. These exception payments guaranteed a 

hospital a minimum payment percentage of its Medicare allowable capital-related costs 

depending on the class of the hospital (§412.348(c)), but were available only during the 

10-year transition period. After the end of the transition period, eligible hospitals can no 

longer receive this exception payment. However, even after the transition period, eligible 
CMS-1518-P 596 

hospitals receive additional payments under the special exceptions provisions at 

§412.348(g), which guarantees all eligible hospitals a minimum payment of 70 percent of 

its Medicare allowable capital-related costs provided that special exceptions payments do 

not exceed 10 percent of total capital IPPS payments. Hospitals eligible for special 

exceptions payments are required to submit documentation to the fiscal intermediary or 

MAC indicating the completion date of their project. Special exceptions payments may 

be made only for the 10 years from the cost reporting year in which the hospital 

completes its qualifying project, and the hospital must have completed the project no later 

than the hospital’s cost reporting period beginning before October 1, 2001. Thus, an 

eligible hospital may receive special exceptions payments for up to 10 years beyond the 

end of the capital IPPS transition period. Under this limitation on the period for special 

exceptions payments at §412.348(g)(7) of the regulations, FY 2012 is the final year 

hospitals can receive special exceptions payments. (For more detailed information 

regarding the special exceptions policy under §412.348(g), we refer readers to the 

FY 2002 IPPS final rule (66 FR 39911 through 39914) and the FY 2003 IPPS final rule 

(67 FR 50102).) 

C. New Hospitals

 Under the IPPS for capital-related costs, §412.300(b) of the regulations defines a 

new hospital as a hospital that has operated (under current or previous ownership) for less 

than 2 years. For example, the following hospitals are not considered new hospitals: 

(1) a hospital that builds new or replacement facilities at the same or another location, 

even if coincidental with a change of ownership, a change in management, or a lease 
CMS-1518-P 597 

arrangement; (2) a hospital that closes and subsequently reopens; (3) a hospital that has 

been in operation for more than 2 years but has participated in the Medicare program for 

less than 2 years; and (4) a hospital that changes its status from a hospital that is excluded 

from the IPPS to a hospital that is subject to the capital IPPS. For more detailed 

information, we refer readers to the FY 1992 IPPS final rule (56 FR 43418). During the 

10-year transition period, a new hospital was exempt from the capital IPPS for its first 

2 years of operation and was paid 85 percent of its reasonable costs during that period. 

Originally, this provision was effective only through the transition period and, therefore, 

ended with cost reporting periods beginning in FY 2002. Because, as discussed in the 

FY 2003 IPPS final rule (67 FR 50101), we believe that special protection to new 

hospitals is also appropriate even after the transition period, we revised the regulations at 

§412.304(c)(2) to provide that, for cost reporting periods beginning on or after 

October 1, 2002, a new hospital (defined under §412.300(b)) is paid 85 percent of its 

Medicare allowable capital-related costs through its first 2 years of operation, unless the 

new hospital elects to receive full prospective payment based on 100 percent of the 

Federal rate. (We refer readers to the FY 2003 IPPS final rule (67 FR 50101 through 

50102) for a detailed discussion of the special payment provisions for new hospitals 

under the capital IPPS after the 10-year transition period.) 

D. Hospitals Located in Puerto Rico

Section 412.374 of the regulations provides for the use of a blended payment 

amount for prospective payments for capital-related costs to hospitals located in Puerto 

Rico. Accordingly, under the capital IPPS, we compute a separate payment rate specific 
CMS-1518-P 598 

to Puerto Rico hospitals using the same methodology used to compute the national 

Federal rate for capital-related costs. In general, hospitals located in Puerto Rico are paid 

a blend of the applicable capital IPPS Puerto Rico rate and the applicable capital IPPS 

Federal rate. 

Prior to FY 1998, hospitals in Puerto Rico were paid a blended capital IPPS rate 

that consisted of 75 percent of the capital IPPS Puerto Rico specific rate and 25 percent 

of the capital IPPS Federal rate. However, effective October 1, 1997 (FY 1998), in 

conjunction with the change to the operating IPPS blend percentage for hospitals located 

in Puerto Rico required by section 4406 of Pub. L. 105-33, we revised the methodology 

for computing capital IPPS payments to hospitals in Puerto Rico to be based on a blend 

of 50 percent of the capital IPPS Puerto Rico rate and 50 percent of the capital IPPS 

Federal rate. Similarly, in conjunction with the change in operating IPPS payments to 

hospitals located in Puerto Rico for FY 2005 required by section 504 of Pub. L. 108-173, 

we again revised the methodology for computing capital IPPS payments to hospitals 

located in Puerto Rico to be based on a blend of 25 percent of the capital IPPS Puerto 

Rico rate and 75 percent of the capital IPPS Federal rate effective for discharges 

occurring on or after October 1, 2004. 

E. Proposed Changes for FY 2012: MS-DRG Documentation and Coding 

Adjustment

1. Background 

 In the FY 2008 IPPS final rule with comment period (72 FR 47175 through 

47186), we adopted the MS-DRG patient classification system for the IPPS, effective 
CMS-1518-P 599 

October 1, 2007, to better recognize patient severity of illness in Medicare payment rates. 

Adoption of the MS-DRGs resulted in the expansion of the number of DRGs from 538 in 

FY 2007 to 745 in FY 2008. (Currently, there are 747 MS-DRGs and we are proposing 4 

additional MS-DRGs for FY 2012.) By increasing the number of DRGs and more fully 

taking into account patient severity of illness in Medicare payment rates, the MS-DRGs 

encourage hospitals to change their documentation and coding of patient diagnoses. In 

that same final rule with comment period (72 FR 47183), we indicated that we believe the 

adoption of the MS-DRGs had the potential to lead to increases in aggregate payments 

without a corresponding increase in actual patient severity of illness due to the incentives 

for changes in documentation and coding. Accordingly, we established adjustments to 

both the national operating standardized amount and the national capital Federal rate to 

eliminate the estimated effect of changes in documentation and coding resulting from the 

adoption of the MS-DRGs that do not reflect real changes in case-mix. Specifically, we 

established prospective documentation and coding adjustments of -1.2 percent for 

FY 2008, -1.8 percent for FY 2009, and -1.8 percent for FY 2010. However, to comply 

with section 7(a) of Pub. L. 110-90, enacted on September 29, 2007, in a final rule 

published in the Federal Register on November 27, 2007 (72 FR 66886 through 66888), 

we modified the documentation and coding adjustment for FY 2008 to -0.6 percent, and 

consequently revised the FY 2008 IPPS operating and capital payment rates, factors, and 

thresholds accordingly, with these revisions effective October 1, 2007. 

 For FY 2009, section 7(a) of Pub. L. 110-90 required a documentation and coding 

adjustment of -0.9 percent instead of the -1.8 percent adjustment established in the 
CMS-1518-P 600 

FY 2008 IPPS final rule with comment period. As discussed in the FY 2008 IPPS final 

rule with comment period (72 FR 48447 and 48733 through 48774), we applied an 

additional documentation and coding adjustment of -0.9 percent to the FY 2009 IPPS 

national standardized amounts and the national capital Federal rate. The documentation 

and coding adjustments established in the FY 2009 IPPS final rule, as amended by Pub. 

L. 110-90, are cumulative. As a result, the -0.9 percent documentation and coding 

adjustment in FY 2009 was in addition to the -0.6 percent adjustment in FY 2008, 

yielding a combined effect of -1.5 percent. (For additional details on the development 

and implementation of the documentation and coding adjustments for FY 2008 and 

FY 2009, we refer readers to section II.D. of this preamble and the following rules 

published in the Federal Register: August 22, 2007 (72 FR 47175 through 47186 and 

47431 through 47432); November 27, 2007 (72 FR 66886 through 66888); and 

August 19, 2008 (73 FR 48447 through 48450 and 48773 through 48775).) 

 In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24092 through 

24101), we presented the results of a retrospective evaluation of the FY 2008 data for 

claims paid through December 2008. We sought public comment on our methodology 

and analysis and our proposal to apply a prospective adjustment to address the effect of 

documentation and coding changes unrelated to changes in real case-mix in FY 2008. In 

addition, we sought public comment on addressing in the FY 2011 rulemaking cycle any 

effect of documentation and coding changes that do not reflect real changes in case-mix 

for discharges occurring during FY 2009. However, after consideration of the public 

comments received on the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, consistent 
CMS-1518-P 601 

with the application of the documentation and coding adjustment to the operating IPPS 

standardized amounts, we determined that it would be appropriate to postpone the 

adoption of any additional documentation and coding adjustments to the capital IPPS 

rates until a full analysis of FY 2009 case-mix changes could be completed (74 FR 43926 

through 43928). 

 For the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24014), we performed a 

thorough retrospective evaluation of the most recent available claims data, and the results 

of this evaluation were used by our actuaries to determine any necessary payment 

adjustments beyond the cumulative -1.5 percent adjustment that has already been applied 

to the national capital Federal rate to ensure budget neutrality for the implementation of 

MS-DRGs. Specifically, we performed a retrospective evaluation of the FY 2009 claims 

data updated through December 2009 using the same analysis methodology as we did for 

FY 2008 claims in the FY 2010 IPPS/RY 2010 LTCH PPS proposed and final rules. 

Based on this evaluation, our actuaries determined that the implementation of the 

MS-DRG system resulted in a 5.4 percent change in case-mix due to documentation and 

coding that did not reflect real changes in case-mix for discharges occurring during 

FY 2009. We also noted our intent to update our analysis with FY 2009 data on claims 

paid through March 2009 (sic) for the FY 2011 IPPS/LTCH PPS final rule. (We note 

that the March 2009 update date for claims paid data in the proposed rule should have 

stated March 2010.) 

As intended, as discussed in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50355), we updated our analysis with FY 2009 data on claims paid through 
CMS-1518-P 602 

March 2010 in that final rule. For the FY 2011 IPPS/LTCH PPS final rule, applying the 

same analysis methodology as we did for the proposed rule to an FY 2009 claims data 

updated through March 2010 verified the 5.4 percent change in case-mix due to 

documentation and coding that did not reflect real changes in case-mix for discharges 

occurring during FY 2009. The 5.4 percent estimate of the cumulative effect of changes 

in documentation and coding under the MS-DRG system that did not reflect real changes 

in case-mix for FYs 2008 and 2009 exceeded the cumulative -1.5 percent prospective 

documentation and coding adjustment that had already been applied to the national 

capital Federal rate by 3.9 percentage points (5.4 percent minus 1.5 percent). Therefore, 

an additional cumulative adjustment of -3.9 percent to the national capital Federal rate 

would be necessary to eliminate the full effect of the documentation and coding changes 

due to the adoption of the MS-DRGs on future payments. 

Therefore, in that same final rule, under the Secretary’s broad authority under 

section 1886(g) of the Act, consistent with section 1886(d)(3)(A)(vi) of the Act and 

section 7(b) of Pub. L. 110-90, we implemented an adjustment to the FY 2011 national 

capital Federal rate of -2.9 percent to account for part of the effect of the estimated 

changes in documentation and coding changes under the MS-DRG system that occurred 

in FYs 2008 and 2009 that did not reflect real changes in case-mix. We also established 

that we will leave the -2.9 percent adjustment in place for subsequent fiscal years to 

account for the effect of that documentation and coding change in subsequent years. 

Furthermore, we stated our intention to address the remaining estimated adjustment to the 

national capital Federal rate of -1.0 percent (that is, the estimated effect of documentation 
CMS-1518-P 603 

and coding changes under the MS-DRG system of -5.4 percent minus the existing -0.6 

percent and -0.9 percent adjustments and the -2.9 percent adjustment for FY 2011) in 

future rulemaking cycles. 

2. Proposed Prospective MS-DRG Documentation and Coding Adjustment to the 

National Capital Federal Rate for FY 2012 and Subsequent Years 

We continue to believe that it is appropriate to make adjustments to the capital 

IPPS rates to eliminate the effect of any documentation and coding changes as a result of 

the implementation of the MS-DRGs. These adjustments are intended to ensure that 

future annual aggregate IPPS payments are the same as payments that otherwise would 

have been made had the prospective adjustments for documentation and coding applied in 

FY 2008 and FY 2009 accurately reflected the changes due to documentation and coding 

that occurred in those years. As noted in section V.A. of this preamble, under section 

1886(g) of the Act, the Secretary has broad authority in establishing and implementing 

the IPPS for acute-care hospital inpatient capital-related costs (that is, the capital IPPS). 

We have consistently stated since the initial implementation of the MS-DRG system that 

we do not believe it is appropriate for Medicare expenditures under the capital IPPS to 

increase due to MS-DRG related changes in documentation and coding. Accordingly, we 

believe that it is appropriate under the Secretary’s broad authority under section 1886(g) 

of the Act, in conjunction with section 1886(d)(3)(A)(vi) of the Act and section 7(b) of 

Pub. L. 110-90, to make adjustments to the national capital Federal rate to eliminate the 

full effect of the documentation and coding changes resulting from the adoption of the 

MS-DRGs. We believe that this is appropriate because, in absence of such adjustments, 
CMS-1518-P 604 

the effect of the documentation and coding changes resulting from the adoption of the 

MS-DRGs results in inappropriately high capital IPPS payments because that portion of 

the increase in aggregate payments is not due to an increase in patient severity of illness 

(and costs). 

As discussed above, based on our retrospective evaluation of the FY 2009 claims, 

our actuaries determined that implementation of the MS-DRG system resulted in a 

5.4 percent change in case-mix due to documentation and coding that did not reflect real 

changes in case-mix for discharges occurring during FY 2009. To date, we have made 

adjustments to the national capital Federal rate to account for 4.4 percent (that is, 

-0.6 percent in FY 2008, -0.9 percent in FY 2009, and -2.9 percent in FY 2011) of the 

estimated 5.4 percent documentation and coding effect. Thus, our current estimate of the 

remaining adjustment to the national capital Federal rate is -1.0 percent to account for the 

effect of documentation and coding changes under the MS-DRG system for FYs 2008 

and 2009. 

In this proposed rule, under the Secretary's broad authority under section 1886(g) 

of the Act, in conjunction with section 1886(d)(3)(A)(vi) of the Act and section 7(b) of 

Pub. L. 110-90, consistent with the intention we stated in the FY 2011 IPPS/LTCH PPS 

final rule (75 FR 50357), we are proposing to reduce the national capital Federal rate in 

FY 2012 by -1.0 percent to account for the remainder of the cumulative effect of the 

estimated changes in documentation and coding under the MS-DRG system in FYs 2008 

and 2009 that did not reflect real changes in case-mix. Furthermore, consistent with the 

documentation and coding adjustments we have made in the past, we are proposing to 
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leave this proposed -1.0 percent adjustment in place for subsequent fiscal years to 

account for the effect in FY 2012 and subsequent years. As explained above, this 

proposed -1.0 percent adjustment accounts for the remainder of our current estimate of 

the cumulative effect of documentation and coding changes under the MS-DRG system 

for FYs 2008 and 2009 of -5.4 percent minus the existing -0.6 percent, -0.9 percent, and 

-2.9 percent adjustments. 

3. Documentation and Coding Adjustment to the Puerto Rico-Specific Capital Rate 

Under §412.74, Puerto Rico hospitals are currently paid based on 75 percent of 

the national capital Federal rate and 25 percent of the Puerto Rico-specific capital rate. In 

the FY 2011 IPPS/LTCH PPS final rule (75 FR 50358 through 50359), we discussed the 

retrospective evaluation of the FY 2009 claims data from the March 2010 update of the 

MedPAR file of hospitals located in Puerto Rico using the same methodology used to 

estimate documentation and coding changes under IPPS for non-Puerto Rico hospitals. 

This analysis shows that the change in case-mix due to documentation and coding that 

did not reflect real changes in case-mix for discharges occurring during FYs 2008 and 

2009 from hospitals located in Puerto Rico was approximately 2.6 percent. (As discussed 

in that same final rule, the Puerto Rico-specific capital rate was not adjusted for the 

cumulative effects of documentation and coding changes in FY 2008 or FY 2009.) We 

also explained that we continue to believe that such an adjustment is appropriate because 

all hospitals have the same financial incentives for documentation and coding 

improvements, and the same ability to benefit from the resulting increase in aggregate 

payments that do not reflect real changes in case-mix. 
CMS-1518-P 606 

Given this case-mix increase due to changes in documentation and coding under 

the MS-DRGs, consistent with the adjustment we made to the FY 2011 national capital 

Federal rate (discussed above) and consistent with our adjustment to the FY 2011 Puerto 

Rico-specific standardized amount, under the Secretary’s broad authority under section 

1886(g) of the Act, we established an adjustment to the Puerto Rico-specific capital rate 

of –2.6 percent in FY 2011 for the cumulative increase in case-mix due to changes in 

documentation and coding under the MS-DRGs for FYs 2008 and 2009. In addition, 

consistent with our implementation of other prospective MS-DRG documentation and 

coding adjustments to the capital Federal rate and operating IPPS standardized amounts, 

we established that we will leave that -2.6 percent adjustment in place for subsequent 

fiscal years in order to ensure that changes in documentation and coding resulting from 

the adoption of the MS-DRGs do not lead to an increase in aggregate payments not 

reflective of an increase in real case-mix in subsequent years. The -2.6 percent 

adjustment to the capital Puerto Rico-specific rate that we made in FY 2011 reflects the 

entire amount of our current estimate of the effects of documentation and coding that did 

not reflect real changes in case-mix for discharges occurring during FYs 2008 and 2009 

from hospitals located in Puerto Rico. Consequently, in this proposed rule, we are not 

proposing to make any additional adjustments to the capital Puerto Rico-specific rate for 

FY 2012 for the effect of documentation and coding that did not reflect real changes in 

case-mix. 
CMS-1518-P 607 

F. Other Proposed Changes for FY 2012

 The proposed annual update to the capital IPPS national Federal and Puerto 

Rico-specific rates, as provided for at §412.308(c), for FY 2012 is discussed in section 

III. of the Addendum to this proposed rule. 

VI. Proposed Changes for Hospitals Excluded from the IPPS 

A. Excluded Hospitals

 Historically, hospitals and hospital units excluded from the prospective payment 

system received payment for inpatient hospital services they furnished on the basis of 

reasonable costs, subject to a rate-of-increase ceiling. A per discharge limit (the target 

amount as defined in §413.40(a)) was set for each hospital or hospital unit based on the 

hospital’s own cost experience in its base year, and updated annually by a rate-ofincrease percentage. The updated target amount was multiplied by total Medicare 

discharges during that period and applied as an aggregate upper limit (the ceiling as 

defined in §413.40(a)) on total inpatient operating costs for a hospital’s cost reporting 

period. Prior to October 1, 1997, these payment provisions applied consistently to all 

categories of excluded providers, which included rehabilitation hospitals and units (now 

referred to as IRFs), psychiatric hospitals and units (now referred to as IPFs), LTCHs, 

children’s hospitals, and IPPS-excluded cancer hospitals. 

Payment to children’s hospitals and cancer hospitals that are excluded from the 

IPPS continues to be subject to the rate-of-increase ceiling based on the hospital’s own 

historical cost experience. (We note that, in accordance with §403.752(a) of the 
CMS-1518-P 608 

regulations, RNHCIs are also subject to the rate-of-increase limits established under 

§413.40 of the regulations.) 

We are proposing that the FY 2012 rate-of-increase percentage to be applied to 

the target amount for cancer and children's hospitals and RNHCIs be the estimated 

FY 2012 percentage increase in the IPPS operating market basket, estimated to be 

2.8 percent. Beginning with FY 2006, we have used the percentage increase in the IPPS 

operating market basket to update the target amounts for children’s and cancer hospitals. 

As explained in the FY 2006 IPPS final rule (70 FR 47396 through 47398), with IRFs, 

IPFs, and LTCHs being paid under their own PPS, the remaining number of providers 

being paid based on reasonable cost subject to a ceiling (that is, children’s hospitals, 

11 cancer hospitals, and RNHCIs) is too small and the cost report data are too limited to 

be able to create a market basket solely for these hospitals. For FY 2012, we are 

proposing to continue to use the IPPS operating market basket to update the target 

amounts for children’s and cancer hospitals and RNHCIs for the reasons discussed in the 

FY 2006 IPPS final rule. 

Therefore, we are proposing to use the revised and rebased FY 2006-based IPPS 

operating market basket to update the target amounts for children’s and cancer hospitals 

and RNHCIs for FY 2012. Based on IHS Global Insight, Inc.'s 2011 first quarter 

forecast, with historical data through the 2010 fourth quarter, we are estimating that the 

FY 2012 update to the IPPS operating market basket would be 2.8 percent (that is, the 

estimate of the market basket rate-of-increase). (We are proposing that if more recent 
CMS-1518-P 609 

data become available for the final rule, we would use them to calculate the IPPS 

operating market basket update for FY 2012.) 

We note that IRFs, IPFs, and LTCHs, which were paid previously under the 

reasonable cost methodology, now receive payment under their own prospective payment 

systems, in accordance with changes made to the statute. In general, the prospective 

payment systems for IRFs, IPFs, and LTCHs provided transition periods of varying 

lengths during which time a portion of the prospective payment was based on cost-based 

reimbursement rules under Part 413. (However, certain providers do not receive a 

transition period or may elect to bypass the transition period as applicable under 

42 CFR Part 412, Subparts N, O, and P.) We note that the various transition periods 

provided for under the IRF PPS, the IPF PPS, and the LTCH PPS have ended. 

The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. We refer 

readers to section IV. of the Addendum to this proposed rule for the specific proposed 

update changes to the Federal payment rates for LTCHs under the LTCH PPS for 

FY 2012. The annual updates for the IRF PPS and the IPF PPS are issued by the agency 

in separate Federal Register documents. 

B. Critical Access Hospital (CAH) Payment for Ambulance Services

1. Background 

 Section 1820 of the Act provides for the establishment of Medicare Rural 

Hospital Flexibility Programs (MRHFPs) under which individual States may designate 

certain facilities as critical access hospitals (CAHs). Facilities that are so designated and 

that meet the CAH conditions of participation under 42 CFR Part 485, Subpart F, will be 
CMS-1518-P 610 

certified as CAHs by CMS. Regulations governing payments to CAHs for services to 

Medicare beneficiaries are located in 42 CFR Part 413. Section 1834(l) of the Act sets 

forth the payment rules for ambulance services. Generally, payment to ambulance 

providers and suppliers for ambulance services are made under the ambulance fee 

schedule. Section 205 of Pub. L. 106-554 (BIPA) amended section 1834(l) of the Act by 

adding a paragraph (8) to that section, which provides that the Secretary shall pay the 

reasonable costs incurred in furnishing ambulance services if such services are furnished 

by a CAH (as defined in section 1861(mm)(1) of the Act), or by an entity that is owned 

and operated by a CAH, but only if the CAH or entity is the only provider or supplier of 

ambulance services that is located within a 35-mile drive of the CAH. The term 

“provider of ambulance services” includes all Medicare-participating providers that 

submit claims under Medicare for ambulance services (for example, hospitals, CAHs, 

skilled nursing facilities (SNFs), and home health agencies (HHAs)). The term “supplier 

of ambulance services” is defined as an entity that provides ambulance services and that 

is independent of any Medicare-participating or non-Medicare-participating provider. 

Section 205 was effective for services furnished on or after December 21, 2000. 

Regulations implementing section 1834(l)(8) of the Act are set forth at 

42 CFR413.70(b)(5). 

 In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50361), we implemented 

section 3128(a) of the Affordable Care Act, which amended section 1834(l)(8) of the Act 

by inserting “101 percent of” before “the reasonable costs.” As such, section 3128(a) 

increased payment for ambulance services furnished by a qualifying CAH or entity 
CMS-1518-P 611 

owned and operated by a CAH to 101 percent of reasonable costs, effective for cost 

reporting periods beginning on or after January 1, 2004. We amended the regulations at 

§413.70(b)(5)(i) to conform to this statutory change by stating that, effective for cost 

reporting periods beginning on or after January 1, 2004, payment for ambulance services 

furnished by a CAH or an entity that is owned and operated by a CAH is 101 percent of 

the reasonable costs of the CAH or the entity in furnishing those services, but only if the 

CAH or the entity furnishing those services is the only provider or supplier of ambulance 

services located within a 35-mile drive of the CAH or the entity. 

2. Requirement for CAH Ambulance within a 35-Mile Location of a CAH or Entity 

Section 413.70(b)(5) of the existing regulations states that payment for ambulance 

services furnished by a CAH or an entity that is owned and operated by a CAH is 101 

percent of reasonable costs of the CAH or the entity in furnishing those services, but only 

if the CAH or the entity is “the only provider or supplier of ambulance services located 

within a 35-mile drive of the CAH or the entity”. However, the statutory language at 

section 1834(l)(8) of the Act states that a CAH is eligible to be paid based on 101 percent 

of reasonable cost for ambulance services furnished by the CAH or by an entity that is 

owned and operated by a CAH, but only if the CAH or entity is the only provider or 

supplier of ambulance services that is located within a 35-mile drive of such CAH. 

Because the statute only requires that there be no other provider or supplier of ambulance 

services within a 35-mile drive of the CAH and does not address whether there is another 

provider or supplier of ambulance services within a 35-mile drive of the CAH-owned and 

operated entity, we believe that the existing regulation is not consistent with the plain 
CMS-1518-P 612 

reading of the statutory language at section 1834(l)(8) of the Act. In addition, we believe 

the plain reading of the statutory language at section 1834(l)(8) of the Act does not 

address the situation where there is no provider or supplier of ambulance services within 

a 35-mile drive of the CAH, but there is a CAH-owned and operated entity furnishing 

ambulance services that is more than a 35-mile drive from the CAH, thus creating a 

“gap” in the statutory language. That is, the statutory language does not address the 

situation where the entity that is owned and operated by the CAH is located more than a 

35-mile drive from the CAH. 

 In order to ensure that the regulations are consistent with the plain language of 

section 1834(l)(8) of the Act, we are proposing to revise §413.70(b)(5)(i) by adding a 

new paragraph (C) to state that, effective for cost reporting periods beginning on or after 

October 1, 2011, payment for ambulance services furnished by a CAH or by a CAHowned and operated entity is 101 percent of reasonable costs of the CAH or the entity in 

furnishing those services, but only if the CAH or the entity is the only provider or 

supplier of ambulance services located within a 35-mile drive of the CAH (Figure 1). 

Under this proposed change, the CAH-owned and operated entity would be paid 

101 percent of reasonable cost for its ambulance services only if there is no other 

provider or supplier of ambulance services within a 35-mile drive of the CAH. However, 

if there is a provider or supplier of ambulance services located within a 35-mile drive of 

the CAH (Figure 2), the CAH-owned and operated entity would not be paid at 101 

percent of reasonable cost, but instead would be paid under the ambulance fee-schedule. 
CMS-1518-P 613 

 In addition, we are proposing to establish a policy that would address the “gap” in 

the statutory language, that is, where the CAH-owned and operated entity furnishing 

ambulance services is more than a 35-mile drive from the CAH, but there is no other 

provider or supplier of ambulance services located within a 35-mile drive of the CAH. 

We are proposing to include in the proposed new paragraph (C) of §413.70(b)(5)(i) a 

provision which states that, effective for cost reporting periods beginning on or after 

October 1, 2011, if there is no provider or supplier of ambulance services within a 

35-mile drive of the CAH but there is a CAH-owned and operated entity that is more than 

a 35-mile drive from the CAH, the CAH-owned and operated entity would be paid at 

101 percent of reasonable cost for its ambulance services as long as that entity is the 

closest provider or supplier of ambulance services to the CAH (Figure 3). Allowing the 

CAH-owned and operated entity to be paid at 101 percent of reasonable cost if there is no 

other provider or supplier of ambulance services that is closer to the CAH is consistent 

with the original purpose of section 1834(l)(8) of the Act, which was intended to help 

ensure an adequate level of ambulance services in areas served by CAHs. The statute 

allows for reasonable cost-based payment only if there is no other provider or supplier of 

ambulance services within a 35-mile drive of the CAH. If there is another provider or 

supplier of ambulance services located within a 35-mile drive of the CAH, the statute 

does not allow for payment to the CAH or a CAH-owned and operated entity at 101 

percent of reasonable cost because there is an adequate level of ambulance services 

available. Accordingly, where a CAH-owned and operated entity is located more than a 

35-mile drive from the CAH, we are proposing to allow payment at 101 percent of 
CMS-1518-P 614 

reasonable cost only if there is no other provider or supplier of ambulance services 

located closer to the CAH. If there is a closer provider or supplier of ambulance services, 

that closer provider or supplier would also be assuring an adequate level of ambulance 

services in the area served by the CAH, and there would be no need to pay the 

CAH-owned and operated entity at 101 percent of reasonable cost in order to ensure 

access to ambulance services. Therefore, if the CAH-owned and operated entity (located 

more than a 35-mile drive from the CAH) is not the closest provider or supplier of 

ambulance services to the CAH (Figure 4), the CAH-owned and operated entity would be 

reimbursed under the ambulance fee schedule. 

Figure 1: 

 The CAH-owned and operated entity would be paid at 101 percent of reasonable 

cost for its ambulance service because there is no other provider or supplier of ambulance 

services within a 35-mile drive of the CAH. 

Figure 2: 
CMS-1518-P 615 

 The CAH-owned and operated entity would be paid under the ambulance fee 

schedule for its ambulance services because the CAH-owned and operated entity is not 

the only provider or supplier of ambulance services located within a 35-mile drive of the 

CAH. 

Figure 3: 

 The CAH-owned and operated entity would be paid at 101 percent of reasonable 

cost for its ambulance services because even though the CAH-owned and operated entity 

is more than a 35-mile drive from the CAH, it is the closest provider or supplier of 

ambulance services to the CAH. 
CMS-1518-P 616 

Figure 4: 

 The CAH-owned and operated entity would receive payment under the ambulance 

fee schedule for its ambulance service because there is another provider or supplier of 

ambulance services that is closer to the CAH than the CAH-owned and operated entity. 

 In summary, we are proposing to amend §413.70(b)(5)(i) by adding a new 

paragraph (C) to state that, effective for cost reporting periods beginning on or after 

October 1, 2011, payment for ambulance services furnished by a CAH or by a CAHowned and operated entity is 101 percent of reasonable costs of the CAH or the entity in 
CMS-1518-P 617 

furnishing those services, but only if the CAH or the entity is the only provider or 

supplier of ambulance services located within a 35-mile drive of the CAH. In addition, 

we are proposing to include in the proposed new §413.70(b)(5)(i)(C) a provision to state 

that, effective for cost reporting periods beginning on or after October 1, 2011, if there is 

no provider or supplier of ambulance services located within a 35-mile drive of the CAH, 

but there is a CAH-owned and operated entity more than a 35-mile drive from the CAH, 

the CAH-owned and operated entity would be paid at 101 percent of reasonable cost for 

its ambulance services as long as that entity is the closest provider or supplier of 

ambulance services to the CAH. We also are making a conforming change to 

§413.70(b)(5)(i)(B) to make the effective date of that paragraph consistent with the 

effective date of the new proposed paragraph (C). 

VII. Proposed Changes to the Long-Term Care Hospital Prospective Payment 

System (LTCH PPS) for FY 2012 

A. Background of the LTCH PPS

1. Legislative and Regulatory Authority 

Section 123 of the Medicare, Medicaid, and SCHIP (State Children's Health 

Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA) 

(Pub. L. 106-113) as amended by section 307(b) of the Medicare, Medicaid, and SCHIP 

Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554) provides for 

payment for both the operating and capital-related costs of hospital inpatient stays in 

long-term care hospitals (LTCHs) under Medicare Part A based on prospectively set 

rates. The Medicare prospective payment system (PPS) for LTCHs applies to hospitals 
CMS-1518-P 618 

that are described in section 1886(d)(1)(B)(iv) of the Social Security Act (the Act), 

effective for cost reporting periods beginning on or after October 1, 2002. 

Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as "a hospital which has 

an average inpatient length of stay (as determined by the Secretary) of greater than 

25 days." Section 1886(d)(1)(B)(iv)(II) of the Act also provides an alternative definition 

of LTCHs: specifically, a hospital that first received payment under section 1886(d) of 

the Act in 1986 and has an average inpatient length of stay (LOS) (as determined by the 

Secretary of Health and Human Services (the Secretary)) of greater than 20 days and has 

80 percent or more of its annual Medicare inpatient discharges with a principal diagnosis 

that reflects a finding of neoplastic disease in the 12-month cost reporting period ending 

in FY 1997. 

Section 123 of the BBRA requires the PPS for LTCHs to be a "per discharge" 

system with a diagnosis-related group (DRG) based patient classification system that 

reflects the differences in patient resources and costs in LTCHs. 

Section 307(b)(1) of the BIPA, among other things, mandates that the Secretary 

shall examine, and may provide for, adjustments to payments under the LTCH PPS, 

including adjustments to DRG weights, area wage adjustments, geographic 

reclassification, outliers, updates, and a disproportionate share adjustment. 

In the August 30, 2002 Federal Register, we issued a final rule that implemented 

the LTCH PPS authorized under the BBRA and BIPA (67 FR 55954). For the initial 

implementation of the LTCH PPS (FYs 2003 through FY 2007), the system used 

information from LTCH patient records to classify patients into distinct long-term care 
CMS-1518-P 619 

diagnosis-related groups (LTC-DRGs) based on clinical characteristics and expected 

resource needs. Beginning in FY 2008, we adopted the Medicare severity long-term care 

diagnosis-related groups (MS-LTC-DRGs) as the patient classification system used under 

the LTCH PPS. Payments are calculated for each MS-LTC-DRG and provisions are 

made for appropriate payment adjustments. Payment rates under the LTCH PPS are 

updated annually and published in the Federal Register. 

The LTCH PPS replaced the reasonable cost-based payment system under the Tax 

Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Pub. L. 97-248) for payments for 

inpatient services provided by a LTCH with a cost reporting period beginning on or after 

October 1, 2002. (The regulations implementing the TEFRA reasonable cost-based 

payment provisions are located at 42 CFR Part 413.) With the implementation of the PPS 

for acute care hospitals authorized by the Social Security Amendments of 1983 

(Pub. L. 98-21), which added section 1886(d) to the Act, certain hospitals, including 

LTCHs, were excluded from the PPS for acute care hospitals and were paid their 

reasonable costs for inpatient services subject to a per discharge limitation or target 

amount under the TEFRA system. For each cost reporting period, a hospital-specific 

ceiling on payments was determined by multiplying the hospital's updated target amount 

by the number of total current year Medicare discharges. (Generally, in section VIII. of 

this preamble, when we refer to discharges, the intent is to describe Medicare discharges.) 

The August 30, 2002 final rule further details the payment policy under the TEFRA 

system (67 FR 55954). 
CMS-1518-P 620 

In the August 30, 2002 final rule, we provided for a 5-year transition period. 

During this 5-year transition period, a LTCH's total payment under the PPS was based on 

an increasing percentage of the Federal rate with a corresponding decrease in the 

percentage of the LTCH PPS payment that is based on reasonable cost concepts. 

However, effective for cost reporting periods beginning on or after October 1, 2006, total 

LTCH PPS payments are based on 100 percent of the Federal rate. 

 In addition, in the August 30, 2002 final rule, we presented an in-depth discussion 

of the LTCH PPS, including the patient classification system, relative weights, payment 

rates, additional payments, and the budget neutrality requirements mandated by section 

123 of the BBRA. The same final rule that established regulations for the LTCH PPS 

under 42 CFR Part 412, Subpart O also contained LTCH provisions related to covered 

inpatient services, limitation on charges to beneficiaries, medical review requirements, 

furnishing of inpatient hospital services directly or under arrangement, and reporting and 

recordkeeping requirements. We refer readers to the August 30, 2002 final rule for a 

comprehensive discussion of the research and data that supported the establishment of the 

LTCH PPS (67 FR 55954). 

In the June 6, 2003 Federal Register, we published a final rule that set forth the 

FY 2004 annual update of the payment rates for the Medicare PPS for inpatient hospital 

services furnished by LTCHs (68 FR 34122). It also changed the annual period for which 

the payment rates were to be effective, such that the annual updated rates were effective 

from July 1 through June 30 instead of from October 1 through September 30. We 

referred to the July through June time period as a "long-term care hospital rate year" 
CMS-1518-P 621 

(LTCH PPS rate year). In addition, we changed the publication schedule for the annual 

update to allow for an effective date of July 1. The payment amounts and factors used to 

determine the annual update of the LTCH PPS Federal rate are based on a LTCH PPS 

rate year. In the past, while the LTCH payment rate updates were effective July 1, the 

annual update of the DRG classifications and relative weights for LTCHs continued to be 

linked to the annual adjustments of the acute care hospital inpatient DRGs and were 

effective each October 1. 

As discussed in detail in the RY 2009 LTCH PPS final rule (73 FR 26797 through 

26798), we again changed the schedule for the annual updates of the LTCH PPS Federal 

payment rates beginning with RY 2010. We consolidated the rulemaking cycle for the 

annual update of the LTCH PPS Federal payment rates and description of the 

methodology and data used to calculate these payment rates with the annual update of the 

MS-LTC-DRG classifications and associated weighting factors for LTCHs so that the 

updates to the rates and the relative weights now occur on the same schedule and appear 

in the same publication. As a result, the updates to the rates and the relative weights are 

now effective on October 1 (on a Federal fiscal year schedule), and the annual updates to 

the LTCH PPS Federal rates are no longer published with a July 1 effective date. 

 Pub. L. 110-173 (MMSEA), enacted on December 29, 2007, included provisions 

that have various effects on the LTCH PPS. In addition to amending section 1861 of the 

Act to add a subsection (ccc) which provided an additional definition of LTCHs, 

Pub. L. 110-173 also required the Secretary to submit, no later than 18 months after the 

date of enactment of the law, a report to Congress on a study of national long-term care 
CMS-1518-P 622 

hospital facility and patient criteria that included “recommendations for such legislation 

and administrative actions, including timelines for the implementation of LTCH patient 

criteria or other actions, as the Secretary determines appropriate.” The payment policy 

provisions under sections 114(c)(1) and (c)(2) of Pub. L. 110-173 focused on providing 

3 years of relief for certain LTCHs from the percentage threshold payment adjustment 

policy at 42 CFR 412.534 and 412.536. However, because of the original 

implementation schedule of those sections of the regulations, the payment provisions had 

varying timeframes of applicability (73 FR 29701 through 29704). In addition, section 

114(c)(3) of Pub. L. 110-173 provided that the Secretary shall not apply, for the 3-year 

period beginning on the date of enactment of the Act the revision to the short-stay outlier 

(SSO) policy that was finalized in the RY 2008 LTCH PPS final rule (72 FR 26904 and 

26992). In addition, section 114(c)(4) of Pub. L. 110-173 provided that the Secretary 

shall not, for the 3-year period beginning on the date of enactment of the Act, make the 

one-time adjustment to the payment rates provided for in §412.523(d)(3) or any similar 

provision (73 FR 26800 through 26804). The statute also provided that the base rate for 

RY 2008 be the same as the base rate for RY 2007 (the revised base rate, however, does 

not apply to discharges occurring on or after July 1, 2007, and before April 1, 2008) 

(73 FR 24875 through 24877). Section 114(d) of Pub. L. 110-173 established a 3-year 

moratorium (with specified exceptions) on the establishment and classification of new 

LTCHs, LTCH satellites, and on the increase in the number of LTCH beds in existing 

LTCHs or satellite facilities. Finally, section 114(f) of Pub. L. 110-173 provided for an 

expanded review of medical necessity for admission and continued stay at LTCHs. 
CMS-1518-P 623 

 In the RY 2009 LTCH PPS final rule (73 FR 26804 through 26812), we 

established the applicable Federal rates for RY 2009, consistent with section 1886(m)(2) 

of the Act as amended by Pub. L. 110-173. We also revised the regulations at 

§412.523(d)(3) to change the methodology for the one-time budget neutrality adjustment 

and to comply with section 114(c)(4) of Pub. L. 110-173. Other policy revisions that 

were necessary as a result of the statutory changes of Pub. L. 110-173 were addressed in 

separate interim final rules with comment period (73 FR 24871 and 73 FR 29699). In the 

FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43976 through 43990), we 

addressed all of the public comments received and finalized these two interim final rules 

with comment period. 

Section 4302 of the ARRA, Pub. L. 111-5, enacted on February 17, 2009, 

included several amendments to the provisions set forth in section 114 of Pub. L. 

110-173. Specifically, section 4302(a) modified the effective dates of the provisions of 

section 114(c) of Pub. L. 110-173, described above, and added an additional category of 

LTCHs or satellite facilities that would not be subject to the percentage threshold 

payment adjustment at §412.536 for a 3-year period. In addition, section 4302(a)(2)(A) 

of Pub. L. 111-5 added “grandfathered” satellites (specified in §412.22(h)(3)(i) of the 

regulations) to those “applicable” LTCHs (specified in §412.534(g) of the regulations) 

originally granted relief under section 114(c) of Pub. L. 110-173. We issued instructions 

to the fiscal intermediaries and MACs interpreting the provisions of section 4302 of 

Pub. L. 111-5 (Change Request 6444). In addition, in the FY 2010 IPPS/RY 2010 LTCH 

PPS final rule (74 FR 43990 through 43992), we implemented the provisions of section 
CMS-1518-P 624 

4302 of Pub. L. 111-5 through an interim final rule with comment period. We received 

one piece of timely correspondence regarding the provisions of section 4302 of 

Pub. L. 111-5 that were implemented through the interim final rule with comment period 

that was included in the FY 2010 IPPS/RY 2010 LTCH PPS final rule. We addressed 

this public comment and finalized the interim final rule with comment period in section 

VII.E. of the preamble of the FY 2011 IPPS/LTCH PPS final rule (75 FR 50399). 

 As discussed in the FY 2011 IPPS/LTCH PPS final rule, a number of the 

provisions of the Affordable Care Act affected the policies, payment rates and factors 

under the LTCH PPS. Specifically, section 1886(m)(3)(A)(ii) of the Act, as added by 

section 3401(c) of the Affordable Care Act, specifies that, for each of rate years 2010 

through 2019, any annual update to the standard Federal rate shall be reduced by the 

other adjustment specified in new section 1886(m)(4) of the Act. Furthermore, section 

1886(m)(3)(A)(i) of the Act specifies that, for rate year 2012 and subsequent rate years, 

any annual update to the standard Federal rate shall be reduced by the productivity 

adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. Section 

1886(m)(3)(A)(ii) and sections 1886(m)(4)(A) and (B) of the Act require a 0.25 

percentage point reduction for rate year 2010 and a 0.50 percentage point reduction for 

rate year 2011. Section 1886(m)(3)(B) of the Act provides that the application of 

paragraph (3) of section 1886(m) of the Act may result in the annual update being less 

than zero for a rate year, and may result in payment rates for a rate year being less than 

such payment rates for the preceding rate year. Furthermore, section 3401(p) of the 

Affordable Care Act specifies that the amendments made by section 3401(c) of such Act 
CMS-1518-P 625 

shall not apply to discharges occurring before April 1, 2010 (75 FR 50387 through 

50390). Sections 3106 and 10312 of the Affordable Care Act together provide for a 

2-year extension to the payment policies applicable to LTCHs and LTCH satellite 

facilities set forth in sections 114(c) and (d)(1) of the MMSEA, as amended by the 

ARRA. Specifically, sections 3106 and 10312 of the Affordable Care Act together result 

in the phrase “3-year period” being replaced with the phrase “5-year period” each place it 

appears in sections 114(c) and (d)(1) of MMSEA, as amended by the ARRA. As 

discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50399 through 50400), 

sections 3106 and 10312 of the Affordable Care Act, which amended sections 114(c) and 

(d)(1) of the MMSEA, as amended by the ARRA, result in the following: 

● An additional 2-year delay in the application of the SSO payment adjustment, 

which would have applied the additional payment option of an ‘‘IPPS comparable’’ 

payment to LTCHs for certain SSO cases where the covered length of stay is less than or 

equal to the “IPPS comparable threshold.” Therefore, the Secretary will not apply this 

SSO payment adjustment for the 5-year period beginning on the date of enactment of 

MMSEA (December 29, 2007). 

● An additional 2-year delay in the one-time prospective budget neutrality 

adjustment to the standard Federal rate (§412.523(d)(3)). Thus, the Secretary is precluded 

from making the one-time adjustment to standard Federal rate until December 29, 2012. 

● An increase from 3 years to 5 years to the timeframes set forth in section 

114(c) of the MMSEA as amended by the ARRA, thereby extending for an additional 

2 years the delay in the application of the 25-percent payment threshold policy for certain 
CMS-1518-P 626 

LTCHs and LTCH satellite facilities (§§ 412.534 and 412.536), and extending for an 

additional 2 years, the increased percentage thresholds outlined at section 114(c)(2) of the 

MMSEA as amended by the ARRA. 

● Additional 2-year extensions of the moratorium on the establishment of new 

LTCHs and LTCH satellite facilities and the moratorium on the increase of LTCH beds 

in existing LTCHs or satellite facilities as provided by section 114(d) of the MMSEA as 

amended by the ARRA. In general, section 114(d) of the MMSEA as amended by the 

ARRA precluded the establishment and classification of new LTCHs or LTCH satellite 

facilities or additional beds from being added to existing LTCHs or LTCH satellite 

facilities unless one of the specified exceptions to the particular moratorium was met. 

2. Criteria for Classification as a LTCH 

a. Classification as a LTCH 

 Under the existing regulations at §412.23(e)(1) and (e)(2)(i), which implement 

section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to be paid under the LTCH PPS, a 

hospital must have a provider agreement with Medicare and must have an average 

Medicare inpatient length of stay (LOS) of greater than 25 days. Alternatively, 

§412.23(e)(2)(ii) states that for cost reporting periods beginning on or after 

August 5, 1997, a hospital that was first excluded from the PPS in 1986 and can 

demonstrate that at least 80 percent of its annual Medicare inpatient discharges in the 

12-month cost reporting period ending in FY 1997 have a principal diagnosis that reflects 

a finding of neoplastic disease must have an average inpatient length of stay for all 

patients, including both Medicare and non-Medicare inpatients, of greater than 20 days. 
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b. Hospitals Excluded from the LTCH PPS 

 The following hospitals are paid under special payment provisions, as described 

in §412.22(c), and therefore, are not subject to the LTCH PPS rules: 

● Veterans Administration hospitals. 

● Hospitals that are reimbursed under State cost control systems approved under 

42 CFR Part 403. 

● Hospitals that are reimbursed in accordance with demonstration projects 

authorized under section 402(a) of the Social Security Amendments of 1967 

(Pub. L. 90-248) (42 U.S.C. 1395b-1) or section 222(a) of the Social Security 

Amendments of 1972 (Pub. L. 92-603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer 

systems, subject to the rate-of-increase test at section 1814(b) of the Act). 

● Nonparticipating hospitals furnishing emergency services to Medicare 

beneficiaries. 

3. Limitation on Charges to Beneficiaries 

 In the August 30, 2002 final rule, we presented an in-depth discussion of 

beneficiary liability under the LTCH PPS (67 FR 55974 through 55975). In the RY 2005 

LTCH PPS final rule (69 FR 25676), we clarified that the discussion of beneficiary 

liability in the August 30, 2002 final rule was not meant to establish rates or payments 

for, or define Medicare-eligible expenses. Under §412.507, if the Medicare payment to 

the LTCH is the full LTC-DRG payment amount, as consistent with other established 

hospital prospective payment systems, a LTCH may not bill a Medicare beneficiary for 

more than the deductible and coinsurance amounts as specified under §§409.82, 409.83, 
CMS-1518-P 628 

and 409.87 and for items and services as specified under §489.30(a). However, under the 

LTCH PPS, Medicare will only pay for days for which the beneficiary has coverage until 

the SSO threshold is exceeded. Therefore, if the Medicare payment was for a SSO case 

(§412.529) that was less than the full LTC-DRG payment amount because the beneficiary 

had insufficient remaining Medicare days, the LTCH could also charge the beneficiary 

for services delivered on those uncovered days (§412.507). 

4. Administrative Simplification Compliance Act (ASCA) and Health Insurance 

Portability and Accountability Act (HIPAA) Compliance 

Claims submitted to Medicare must comply with both the Administrative 

Simplification Compliance Act (ASCA) (Pub. L. 107-105), and the Health Insurance 

Portability and Accountability Act of 1996 (HIPAA) (Pub. L. 104-191). Section 3 of the 

ASCA requires that the Medicare Program deny payment under Part A or Part B for any 

expenses incurred for items or services "for which a claim is submitted other than in an 

electronic form specified by the Secretary." Section 1862(h) of the Act (as added by 

section 3(a) of the ASCA) provides that the Secretary shall waive such denial in two 

specific types of cases and may also waive such denial “in such unusual cases as the 

Secretary finds appropriate” (68 FR 48805). Section 3 of the ASCA operates in the 

context of the HIPAA regulations, which include, among other provisions, the 

transactions and code sets standards requirements codified as 45 CFR Parts 160 and 162, 

Subparts A and I through R (generally known as the Transactions Rule). The 

Transactions Rule requires covered entities, including covered health care providers, to 
CMS-1518-P 629 

conduct certain electronic healthcare transactions according to the applicable transactions 

and code sets standards. 

B. Proposed Medicare Severity Long-Term Care Diagnosis-Related Group 

(MS-LTC-DRG) Classifications and Relative Weights for FY 2012

1. Background 

 Section 123 of the BBRA requires that the Secretary implement a PPS for LTCHs 

(that is, a per discharge system with a diagnosis-related group (DRG)-based patient 

classification system reflecting the differences in patient resources and costs). Section 

307(b)(1) of the BIPA modified the requirements of section 123 of the BBRA by 

requiring that the Secretary examine “the feasibility and the impact of basing payment 

under such a system [the long-term care hospital (LTCH) PPS] on the use of existing (or 

refined) hospital DRGs that have been modified to account for different resource use of 

LTCH patients, as well as the use of the most recently available hospital discharge data.” 

 When the LTCH PPS was implemented for cost reporting periods beginning on or 

after October 1, 2002, we adopted the same DRG patient classification system (that is, 

the CMS DRGs) that was utilized at that time under the IPPS. As a component of the 

LTCH PPS, we refer to this patient classification system as the “long-term care 

diagnosis-related groups (LTC-DRGs).” Although the patient classification system used 

under both the LTCH PPS and the IPPS are the same, the relative weights are different. 

The established relative weight methodology and data used under the LTCH PPS result in 

relative weights under the LTCH PPS that reflect “the differences in patient resource use 

. . .” of LTCH patients (section 123(a)(1) of the BBRA (Pub. L. 106-113)). 
CMS-1518-P 630 

 As part of our efforts to better recognize severity of illness among patients, in the 

FY 2008 IPPS final rule with comment period (72 FR 47130), the MS-DRGs and the 

Medicare severity long-term care diagnosis-related groups (MS-LTC-DRGs) were 

adopted under the IPPS and the LTCH PPS, respectively, effective beginning 

October 1, 2007 (FY 2008). For a full description of the development and 

implementation and rationale for the use of the MS-DRGs and MS-LTC-DRGs, we refer 

readers to the FY 2008 IPPS final rule with comment period (72 FR 47141 through 

47175 and 47277 through 47299). (We note that, in that same final rule, we revised the 

regulations at §412.503 to specify that for LTCH discharges occurring on or after 

October 1, 2007, when applying the provisions of 42 CFR Part 412, Subpart O applicable 

to LTCHs for policy descriptions and payment calculations, all references to LTC-DRGs 

would be considered a reference to MS-LTC-DRGs. For the remainder of this section, 

we present the discussion in terms of the current MS-LTC-DRG patient classification 

system unless specifically referring to the previous LTC-DRG patient classification 

system that was in effect before October 1, 2007.) We believe the MS-DRGs (and by 

extension, the MS-LTC-DRGs) represent a substantial improvement over the previous 

CMS DRGs in their ability to differentiate cases based on severity of illness and resource 

consumption. 

 The MS-DRGs adopted in FY 2008 represent an increase in the number of DRGs 

by 207 (that is, from 538 to 745) (72 FR 47171). The MS-DRG classifications are 

updated annually. As described in section II.G. of this preamble, for FY 2012 we are 

proposing to delete one MS-DRG and create two new MS-DRGs for a net gain of one 
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MS-DRG. If this proposal is adopted, we would have a total of 751 MS-DRG groupings. 

Consistent with section 123 of the BBRA, as amended by section 307(b)(1) of the BIPA, 

and §412.515 of the regulations, we use information derived from LTCH PPS patient 

records to classify LTCH discharges into distinct MS-LTC-DRGs based on clinical 

characteristics and estimated resource needs. We then assign an appropriate weight to the 

MS-LTC-DRGs to account for the difference in resource use by patients exhibiting the 

case complexity and multiple medical problems characteristic of LTCHs. 

In a departure from the IPPS, and as discussed in greater detail below in section 

VII.B.3.f. of this preamble, we are proposing to continue to use low-volume 

MS-LTC-DRGs (that is, MS-LTC-DRGs with less than 25 LTCH cases) in determining 

the MS-LTC-DRG relative weights because LTCHs do not typically treat the full range 

of diagnoses as do acute care hospitals. For purposes of determining the relative weights 

for the large number of low-volume MS-LTC-DRGs, we are proposing to group all of the 

low-volume MS-LTC-DRGs into five quintiles based on average charge per discharge. 

(A detailed discussion of the initial development and application of the quintile 

methodology appears in the August 30, 2002 LTCH PPS final rule (67 FR 55978).) We 

also are proposing to account for adjustments to payments for short-stay outlier (SSO) 

cases (that is, cases where the covered length of stay at the LTCH is less than or equal to 

five-sixths of the geometric average length of stay for the MS-LTC-DRG). Furthermore, 

we are proposing to make adjustments to account for nonmonotonically increasing 

weights, when necessary. That is, theoretically, cases under the MS-LTC-DRG system 

that are more severe require greater expenditure of medical care resources and will result 
CMS-1518-P 632 

in higher average charges such that, in the severity levels within a base MS-LTC-DRG, 

the weights should increase monotonically with severity from the lowest to highest 

severity level. (We discuss nonmonotonicity in greater detail and our proposed 

methodology to adjust the FY 2011 MS-LTC-DRG relative weights to account for 

nonmonotonically increasing relative weights in section VII.B.3.g. (Step 6) of this 

preamble.) 

2. Patient Classifications into MS-LTC-DRGs 

a. Background 

 The MS-DRGs (used under the IPPS) and the MS-LTC-DRGs (used under the 

LTCH PPS) are based on the CMS DRG structure. As noted above in this section, we 

refer to the DRGs under the LTCH PPS as MS-LTC-DRGs although they are structurally 

identical to the MS-DRGs used under the IPPS. 

 The MS-DRGs are organized into 25 major diagnostic categories (MDCs), most 

of which are based on a particular organ system of the body; the remainder involve 

multiple organ systems (such as MDC 22, Burns). Within most MDCs, cases are then 

divided into surgical DRGs and medical DRGs. Surgical DRGs are assigned based on a 

surgical hierarchy that orders operating room (O.R.) procedures or groups of O.R. 

procedures by resource intensity. The GROUPER software program does not recognize 

all ICD-9-CM procedure codes as procedures affecting DRG assignment. That is, 

procedures that are not surgical (for example, EKG), or minor surgical procedures (for 

example, biopsy of skin and subcutaneous tissue (procedure code 86.11)) do not affect 

the MS-LTC-DRG assignment based on their presence on the claim. 
CMS-1518-P 633 

 Generally, under the LTCH PPS, a Medicare payment is made at a predetermined 

specific rate for each discharge and that payment varies by the MS-LTC-DRG to which a 

beneficiary’s stay is assigned. Cases are classified into MS-LTC-DRGs for payment 

based on the following six data elements: 

● Principal diagnosis; 

● Additional or secondary diagnoses; 

● Surgical procedures; 

● Age; 

● Sex; and 

● Discharge status of the patient. 

 Through FY 2010, the number of secondary or additional diagnoses and the 

number of surgical procedures considered for MS-DRG assignment was limited to eight 

and six, respectively. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50127), we 

established that, for claims submitted on the 5010 format beginning January 1, 2011, we 

would increase the capacity to process diagnosis and procedure codes up to 25 diagnoses 

and 25 procedures. This includes one principal diagnosis and up to 24 secondary 

diagnoses for severity of illness determinations. We refer readers to section II.G.11.c. of 

the preamble of the FY 2011 IPPS/LTCH PPS final rule for a complete discussion of this 

change (75 FR 50127). 

 Upon the discharge of the patient from a LTCH, the LTCH must assign 

appropriate diagnosis and procedure codes from the most current version of the 

International Classification of Diseases, Ninth Revision, Clinical Modification 
CMS-1518-P 634 

(ICD-9-CM). HIPAA Transactions and Code Sets Standards regulations at 

45 CFR Parts 160 and 162 require that no later than October 16, 2003, all covered entities 

must comply with the applicable requirements of Subparts A and I through R of Part 162. 

Among other requirements, those provisions direct covered entities to use the ASC X12N 

837 Health Care Claim: Institutional, Volumes 1 and 2, Version 4010, and the applicable 

standard medical data code sets for the institutional health care claim or equivalent 

encounter information transaction (45 CFR 162.1002 and 45 CFR 162.1102). For 

additional information on the ICD-9-CM Coding System, we refer readers to the FY 2008 

IPPS final rule with comment period (72 FR 47241 through 47243 and 47277 through 

47281). We also refer readers to the detailed discussion on correct coding practices in the 

August 30, 2002 LTCH PPS final rule (67 FR 55981 through 55983). Additional coding 

instructions and examples are published in the Coding Clinic for ICD-9-CM, a product of 

the American Hospital Association. (We refer readers to section II.G.13. of this 

preamble for additional information on the annual revisions to the ICD-9-CM codes.) 

 With respect to the ICD-9-CM coding system, we have been discussing the 

conversion to the ICD-10-CM and the ICD-10-PCS coding systems for many years. As 

is discussed in detail in section II.G.11. of the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50122 through 50127) and in section III.G.13 of this proposed rule, the ICD-10 

coding systems applicable to hospital inpatient services will be implemented on 

October 1, 2013. In order for the industry to make the necessary conversions from 

ICD-9-CM to ICD-10-CM and ICD-10-PCS, we proposed, through the ICD-9-CM 

Coordination and Maintenance Committee, to consider a moratorium on updates to the 
CMS-1518-P 635 

ICD-9-CM and ICD-10 coding sets. We refer readers to section II.G.13. of this preamble 

for additional information on the adoption of the ICD-10-CM and ICD-10-PCS systems. 

 To create the MS-DRGs (and by extension, the MS-LTC-DRGs), individual 

DRGs were subdivided according to the presence of specific secondary diagnoses 

designated as complications or comorbidities (CCs) into three, two, or one level, 

depending on the impact of the CCs on resources used for those cases. Specifically, there 

are sets of MS–DRGs that are split into 2 or 3 subgroups based on the presence or 

absence of a CC or a major complication and comorbidity (MCC). We refer readers to 

section II.D. of the FY 2008 IPPS final rule with comment period for a detailed 

discussion about the creation of MS-DRGs based on severity of illness levels 

(72 FR 47141 through 47175). 

 Medicare contractors (that is, fiscal intermediaries and MACs) enter the clinical 

and demographic information submitted by LTCHs into their claims processing systems 

and subject this information to a series of automated screening processes called the 

Medicare Code Editor (MCE). These screens are designed to identify cases that require 

further review before assignment into a MS-LTC-DRG can be made. During this 

process, certain cases are selected for further development (74 FR 43949). 

 After screening through the MCE, each claim is classified into the appropriate 

MS-LTC-DRG by the Medicare LTCH GROUPER software on the basis of diagnosis 

and procedure codes and other demographic information (age, sex, and discharge status). 

The GROUPER software used under the LTCH PPS is the same GROUPER software 

program used under the IPPS. Following the MS-LTC-DRG assignment, the Medicare 
CMS-1518-P 636 

contractor determines the prospective payment amount by using the Medicare PRICER 

program, which accounts for hospital-specific adjustments. Under the LTCH PPS, we 

provide an opportunity for LTCHs to review the MS-LTC-DRG assignments made by the 

Medicare contractor and to submit additional information within a specified timeframe as 

provided in §412.513(c). 

 The GROUPER software is used both to classify past cases to measure relative 

hospital resource consumption to establish the MS-LTC-DRG weights and to classify 

current cases for purposes of determining payment. The records for all Medicare hospital 

inpatient discharges are maintained in the MedPAR file. The data in this file are used to 

evaluate possible MS-DRG and MS-LTC-DRG classification changes and to recalibrate 

the MS-DRG and MS-LTC-DRG relative weights during our annual update under both 

the IPPS (§412.60(e)) and the LTCH PPS (§412.517), respectively. 

b. Proposed Changes to the MS-LTC-DRGs for FY 2012 

 As specified by our regulations at §412.517(a), which requires that the 

MS-LTC-DRG classifications and relative weights be updated annually and consistent 

with our historical practice of using the same patient classification system under the 

LTCH PPS as is used under the IPPS, we are proposing to update the MS-LTC-DRG 

classifications effective October 1, 2011, through September 30, 2012 (FY 2012) 

consistent with the proposed changes to specific MS-DRG classifications presented in 

section II.G. of this proposed rule (that is, proposed GROUPER Version 29.0). 

Therefore, the proposed MS-LTC-DRGs for FY 2012 presented in this proposed rule are 

the same as the proposed MS-DRGs that would be used under the IPPS for FY 2012. In 
CMS-1518-P 637 

addition, because the proposed MS-LTC-DRGs for FY 2012 are the same as the proposed 

MS-DRGs for FY 2012, the other changes that affect MS-DRG (and by extension 

MS-LTC-DRG) assignments under proposed Version 29.0 of the GROUPER discussed 

in section II.G. of the preamble of this proposed rule, including the proposed changes to 

the MCE software and proposed changes to the ICD-9-CM coding system, also would be 

applicable under the LTCH PPS for FY 2012. 

3. Development of the Proposed FY 2012 MS-LTC-DRG Relative Weights 

a. General Overview of the Development of the MS-LTC-DRG Relative Weights 

 As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 55984), one of 

the primary goals for the implementation of the LTCH PPS is to pay each LTCH an 

appropriate amount for the efficient delivery of medical care to Medicare patients. The 

system must be able to account adequately for each LTCH's case-mix in order to ensure 

both fair distribution of Medicare payments and access to adequate care for those 

Medicare patients whose care is more costly. To accomplish these goals, we have 

annually adjusted the LTCH PPS standard Federal prospective payment system rate by 

the applicable relative weight in determining payment to LTCHs for each case. 

 Although the adoption of the MS-LTC-DRGs resulted in some modifications of 

existing procedures for assigning weights in cases of zero volume and/or 

nonmonotonicity (as discussed in the FY 2008 IPPS final rule with comment period 

(72 FR 47289 through 47295) and the FY 2009 IPPS final rule (73 FR 48542 through 

48550)), the basic methodology for developing the proposed FY 2012 MS-LTC-DRG 

relative weights in this proposed rule continues to be determined in accordance with the 
CMS-1518-P 638 

general methodology established in the August 30, 2002 LTCH PPS final rule 

(67 FR 55989 through 55991). Under the LTCH PPS, relative weights for each 

MS-LTC-DRG are a primary element used to account for the variations in cost per 

discharge and resource utilization among the payment groups (§412.515). To ensure that 

Medicare patients classified to each MS-LTC-DRG have access to an appropriate level of 

services and to encourage efficiency, we calculate a relative weight for each 

MS-LTC-DRG that represents the resources needed by an average inpatient LTCH case 

in that MS-LTC-DRG. For example, cases in a MS-LTC-DRG with a relative weight 

of 2 will, on average, cost twice as much to treat as cases in a MS-LTC-DRG with a 

relative weight of 1. 

b. Development of the Proposed MS-LTC-DRG Relative Weights for FY 2012 

Beginning with the FY 2008 update, we established a budget neutrality 

requirement for the annual update to the MS-LTC-DRG classifications and relative 

weights at §412.517(b) (in conjunction with §412.503), such that estimated aggregate 

LTCH PPS payments would be unaffected, that is, would be neither greater than nor less 

than the estimated aggregate LTCH PPS payments that would have been made without 

the classification and relative weight changes (RY 2008 LTCH PPS final rule 

(72 FR 26882 through 26884)). Consistent with §412.517(b), we are proposing to apply 

a two-step budget neutrality methodology, which is based on the current year 

MS-LTC-DRG classifications and relative weights. (For additional information on the 

established two-step budget neutrality methodology, we refer readers to the FY 2008 

IPPS final rule (72 FR 47295 through 47296).) Thus, for this proposed rule, the annual 
CMS-1518-P 639 

update to the MS-LTC-DRG classifications and relative weights for FY 2012 are based 

on the FY 2011 MS-LTC-DRG classifications and relative weights established in the 

FY 2011 IPPS/LTCH PPS final rule (75 FR 50613 through 50627). 

c. Data 

 In this proposed rule, to calculate the proposed MS-LTC-DRG relative weights 

for FY 2012, we are proposing to obtain total charges from FY 2010 Medicare LTCH bill 

data from the December 2010 update of the FY 2010 MedPAR file, which are the best 

available data at this time, and to use the proposed Version 29.0 of the GROUPER to 

classify LTCH cases. We also are proposing that if more recent data become available, 

we would to use those data and the finalized Version 29.0 of the GROUPER in 

establishing the FY 2012 MS-LTC-DRG relative weights in the final rule. 

 Consistent with our historical methodology, we are proposing to exclude the data 

from LTCHs that are all-inclusive rate providers and LTCHs that are reimbursed in 

accordance with demonstration projects authorized under section 402(a) of 

Pub. L. 90-248 or section 222(a) of Pub. L. 92-603. In addition, as is the case with the 

IPPS, Medicare Advantage (Part C) claims are now included in the MedPAR files 

(74 FR 43808). Consistent with IPPS policy, we are proposing to continue to exclude 

such claims in the calculations for the relative weights under the LTCH PPS that are used 

to determine payments for fee-for-service Medicare claims. Specifically, we are 

proposing to remove any claims from the MedPAR files that have a GHO Paid indicator 

value of “1,” which effectively removes Medicare Advantage claims from the relative 

weight calculations (73 FR 48532). Therefore, in the development of the proposed 
CMS-1518-P 640 

FY 2012 MS-LTC-DRG relative weights in this proposed rule, we are proposing to 

exclude the data of 13 all-inclusive rate providers and the 2 LTCHs that are paid in 

accordance with demonstration projects that had claims in the FY 2010 MedPAR file, as 

well as any Medicare Advantage claims. 

d. Hospital-Specific Relative Value (HSRV) Methodology 

 By nature, LTCHs often specialize in certain areas, such as ventilator-dependent 

patients and rehabilitation and wound care. Some case types (DRGs) may be treated, to a 

large extent, in hospitals that have, from a perspective of charges, relatively high (or low) 

charges. This nonrandom distribution of cases with relatively high (or low) charges in 

specific MS-LTC-DRGs has the potential to inappropriately distort the measure of 

average charges. To account for the fact that cases may not be randomly distributed 

across LTCHs, consistent with the methodology we have used since the implementation 

of the LTCH PPS, we are proposing to continue to use a hospital-specific relative value 

(HSRV) methodology to calculate the proposed MS-LTC-DRG relative weights for 

FY 2012. We believe this method removes this hospital-specific source of bias in 

measuring LTCH average charges (67 FR 55985). Specifically, we are proposing to 

reduce the impact of the variation in charges across providers on any particular proposed 

MS-LTC-DRG relative weight by converting each LTCH's charge for a case to a relative 

value based on that LTCH's average charge. 

 Under the HSRV methodology, we standardize charges for each LTCH by 

converting its charges for each case to hospital-specific relative charge values and then 

adjust those values for the LTCH's case-mix. The adjustment for case-mix is needed to 
CMS-1518-P 641 

rescale the hospital-specific relative charge values (which, by definition, average 1.0 for 

each LTCH). The average relative weight for a LTCH is its case-mix, so it is reasonable 

to scale each LTCH's average relative charge value by its case-mix. In this way, each 

LTCH's relative charge value is adjusted by its case-mix to an average that reflects the 

complexity of the cases it treats relative to the complexity of the cases treated by all other 

LTCHs (the average case-mix of all LTCHs). 

 In accordance with our established methodology, we are proposing to continue to 

standardize charges for each case by first dividing the adjusted charge for the case 

(adjusted for SSOs under §412.529 as described below in section VII.B.3.g. (step 3) of 

the preamble of this proposed rule) by the average adjusted charge for all cases at the 

LTCH in which the case was treated. SSO cases are cases with a length of stay that is 

less than or equal to five-sixths the average length of stay of the MS-LTC-DRG 

(§412.529 and §412.503). The average adjusted charge reflects the average intensity of 

the health care services delivered by a particular LTCH and the average cost level of that 

LTCH. The resulting ratio is multiplied by that LTCH's case-mix index to determine the 

standardized charge for the case (67 FR 55989). 

 Multiplying the resulting ratio by the LTCH's case-mix index accounts for the fact 

that the same relative charges are given greater weight at a LTCH with higher average 

costs than they would at a LTCH with low average costs, which is needed to adjust each 

LTCH's relative charge value to reflect its case-mix relative to the average case-mix for 

all LTCHs. Because we standardize charges in this manner, we count charges for a

Medicare patient at a LTCH with high average charges as less resource intensive than 
CMS-1518-P 642 

they would be at a LTCH with low average charges. For example, a $10,000 charge for a 

case at a LTCH with an average adjusted charge of $17,500 reflects a higher level of 

relative resource use than a $10,000 charge for a case at a LTCH with the same case-mix, 

but an average adjusted charge of $35,000. We believe that the adjusted charge of an 

individual case more accurately reflects actual resource use for an individual LTCH 

because the variation in charges due to systematic differences in the markup of charges 

among LTCHs is taken into account. 

e. Treatment of Severity Levels in Developing the Proposed MS-LTC-DRG Relative 

Weights 

For purposes of determining the MS-LTC-DRG relative weights, under our 

historical methodology, there are three different categories of DRGs based on volume of 

cases within specific MS-LTC-DRGs. MS-LTC-DRGs with at least 25 cases are each 

assigned a unique relative weight; low-volume MS-LTC-DRGs (that is, MS-LTC-DRGs 

that contain between 1 and 24 cases based on a given year’s claims data) are grouped into 

quintiles (as described below) and assigned the relative weight of the quintile. 

No-volume MS-LTC-DRGs (that is, no cases in the given year's claims data were 

assigned to those MS-LTC-DRGs) are cross-walked to other MS-LTC-DRGs based on 

the clinical similarities and assigned the relative weight of the cross-walked 

MS-LTC-DRG (as described in greater detail below). In this proposed rule, we are 

proposing to continue to utilize these same three categories of MS-LTC-DRGs for 

purposes of determining the proposed MS-LTC-DRG relative weights for FY 2012. (We 

provide in-depth discussions of our proposed policy regarding weight-setting for 
CMS-1518-P 643 

proposed low-volume MS-LTC-DRGs in section VII.B.3.f. of the preamble of this 

proposed rule and for proposed no-volume MS-LTC-DRGs, under Step 5 in section 

VII.B.3.g. of the preamble of this proposed rule.) 

As also noted above, while the LTCH PPS and the IPPS use the same patient 

classification system, the methodology that is used to set the DRG relative weights for 

use in each payment system differs because the overall volume of cases in the LTCH PPS 

is much less than in the IPPS. In general, consistent with our existing methodology, we 

are proposing to use the following steps to determine the proposed FY 2012 

MS-LTC-DRG relative weights: (1) if a proposed MS-LTC-DRG has at least 25 cases, it 

is assigned its own proposed relative weight; (2) if a proposed MS-LTC-DRG has 

between 1 and 24 cases, it is assigned to a quintile for which we compute a proposed 

relative weight for all of the proposed MS-LTC-DRGs assigned to that quintile; and (3) if 

a proposed MS-LTC-DRG has no cases, it is cross-walked to another proposed 

MS-LTC-DRG based upon clinical similarities to assign an appropriate proposed relative 

weight (as described below in detail in Step 5 of section VII.B.3.g. of this preamble). 

Furthermore, in determining the proposed FY 2012 MS-LTC-DRG relative weights, 

when necessary, we are proposing to make adjustments to account for nonmonotonicity, 

as discussed in greater detail below in Step 6 of section VII.B.3.g. of this preamble. We 

refer readers to the discussion in the FY 2010 IPPS/RY LTCH PPS final rule for our 

rationale for including an adjustment for nonmonotonicity (74 FR 43953 through 43954). 

f. Proposed Low-Volume MS-LTC-DRGs 
CMS-1518-P 644 

 In order to account for proposed MS-LTC-DRGs with low volume (that is, with 

fewer than 25 LTCH cases), consistent with our existing methodology we are proposing, 

for purposes of determining the proposed FY 2012 MS-LTC-DRG relative weights, to 

continue to employ the quintile methodology for proposed low-volume MS-LTC-DRGs, 

such that we group those proposed “low-volume MS-LTC-DRGs” (that is, proposed 

MS-LTC-DRGs that contained between 1 and 24 cases annually) into one of five 

categories (quintiles) based on average charges (67 FR 55984 through 55995 and 

72 FR 47283 through 47288). In determining the proposed FY 2012 MS-LTC-DRG 

relative weights in this proposed rule, in cases where the initial assignment of a proposed 

low-volume MS-LTC-DRG to quintiles resulted in nonmonotonicity within a base-DRG, 

in order to ensure appropriate Medicare payments, consistent with our historical 

methodology, we are proposing to make adjustments to the treatment of proposed 

low-volume MS-LTC-DRGs to preserve monotonicity, as discussed in detail below in 

section VII.B.3.g. (Step 6) in this preamble. 

In this proposed rule, using LTCH cases from the December 2010 update of the 

FY 2010 MedPAR file, we identified 277 MS-LTC-DRGs that contained between 1 and 

24 cases. This list of proposed MS-LTC-DRGs was then divided into one of the 

5 low-volume quintiles, each containing a minimum of 55 proposed MS-LTC-DRGs 

(277/5 = 55 with 2 proposed MS-LTC-DRG as the remainder). We assigned a proposed 

low-volume MS-LTC-DRG to a specific low-volume quintile by sorting the proposed 

low-volume MS-LTC-DRGs in ascending order by average charge in accordance with 

our established methodology. Furthermore, because the number of MS-LTC-DRGs with 
CMS-1518-P 645 

less than 25 cases is not evenly divisible by 5, the average charge of the low-volume 

quintile was used to determine which of the proposed low-volume quintiles would 

contain the 2 additional proposed low-volume MS-LTC-DRGs. Specifically, after 

organizing the MS-LTC-DRGs by ascending order by average charge, we assigned the 

first fifth (1st through 55th) of proposed low-volume MS-LTC-DRGs (with the lowest 

average charge) into Quintile 1. The proposed MS-LTC-DRGs with the highest average 

charge cases would be assigned into Quintile 5. Because the average charge of the 56th

proposed low-volume MS-LTC-DRG in the sorted list is closer to the average charge of 

the 55th proposed low-volume MS-LTC-DRG (assigned to Quintile 1) than to the average 

charge of the 57th proposed low-volume MS-LTC-DRG (assigned to Quintile 2), we are 

proposing to assign it to Quintile 1 (such that Quintile 1 would contain 56 proposed lowvolume MS-LTC-DRGs before any adjustments for nonmonotonicity, as discussed 

below). This process was repeated through the remaining proposed low-volume 

MS-LTC-DRGs so that 3 of the 5 low-volume quintiles contain 55 proposed MS-LTCDRGs (Quintiles 2, 3, and 5) and the other 2 low-volume quintiles contain 56 proposed 

MS-LTC-DRGs (Quintiles 1 and 4). Table 13A, which is listed in section VI. of the 

Addendum to this proposed rule and is available via the Internet, lists the composition of 

the proposed low-volume quantitles for MS-LTC-DRGs for FY 2012. 

 Accordingly, in order to determine the proposed FY 2012 relative weights for the 

proposed MS-LTC-DRGs with low volume, we are proposing to use the 5 low-volume 

quintiles described above. The proposed composition of each of the 5 low-volume 

quintiles shown in the chart below was used in determining the proposed FY 2012 
CMS-1518-P 646 

MS-LTC-DRG relative weights (as shown in Table 11 listed in section VI. of the 

Addendum to this proposed rule and available via the Internet). We determined a 

proposed relative weight and (geometric) average length of stay for each of the 5 lowvolume quintiles using the methodology that we are proposing to apply to the proposed 

MS-LTC-DRGs (25 or more cases), as described in section VII.B.3.g. of the preamble of 

this proposed rule. We are proposing to assign the same relative weight and average 

length of stay to each of the proposed low-volume MS-LTC-DRGs that make up an 

individual low-volume quintile. We note that, as this system is dynamic, it is possible 

that the number and specific type of MS-LTC-DRGs with a proposed low volume of 

LTCH cases will vary in the future. We are proposing to use the best available claims 

data in the MedPAR file to identify proposed low-volume MS-LTC-DRGs and to 

calculate the proposed relative weights based on our methodology. 

 We note that we will continue to monitor the volume (that is, the number of 

LTCH cases) in the low-volume quintiles to ensure that our quintile assignments used in 

determining the proposed MS-LTC-DRG relative weights result in appropriate payment 

for such cases and do not result in an unintended financial incentive for LTCHs to 

inappropriately admit these types of cases. 

g. Steps for Determining the Proposed FY 2012 MS-LTC-DRG Relative Weights 

 In this proposed rule, we are proposing, in general, to determine the FY 2012 

MS-LTC-DRG relative weights based on our existing methodology. For additional 

information on the original development of this methodology, and modifications to it 

since the adoption of the MS-LTC-DRGs, we refer readers to the August 30, 2002 LTCH 
CMS-1518-P 647 

PPS final rule (67 FR 55989 through 55995) and the FY 2010 IPPS/RY 2010 LTCH PPS 

final rule (74 FR 43951 through 43966). 

 In summary, for FY 2012, to determine the proposed FY 2012 MS-LTC-DRG 

relative weights, we are proposing to group LTCH cases to the appropriate proposed 

MS-LTC-DRG, while taking into account the proposed low-volume quintile (as 

described above). After grouping the cases to the appropriate MS-LTC-DRG (or 

low-volume quintile), we are proposing to calculate the proposed FY 2012 relative 

weights by first removing statistical outliers and cases with a length of stay of 7 days or 

less (as discussed in greater detail below). Next, we are proposing to adjust the number 

of cases in each MS-LTC-DRG (or low-volume quintile) for the effect of SSO cases (step 

3 below). After removing statistical outliers (step 1 below) and cases with a length of 

stay of less than 8 days (step 2 below), the SSO adjusted discharges and corresponding 

charges were then used to calculate proposed "relative adjusted weights" for each 

proposed MS-LTC-DRG (or proposed low-volume quintile) using the HSRV method. 

 Below we discuss in detail the steps for calculating the proposed FY 2012 

MS-LTC-DRG relative weights. We note that, as we stated in section VII.B.3.c. of this 

preamble, we excluded the data of all-inclusive rate LTCHs, LTCHs that are paid in 

accordance with demonstration projects, and any Medicare Advantage claims in the 

FY 2010 MedPAR file. 

 Step 1--Remove statistical outliers. 

 The first step in the calculation of the proposed FY 2012 MS-LTC-DRG relative 

weights is to remove statistical outlier cases. Consistent with our historical relative 
CMS-1518-P 648 

weight methodology, we are proposing to continue to define statistical outliers as cases 

that are outside of 3.0 standard deviations from the mean of the log distribution of both 

charges per case and the charges per day for each proposed MS-LTC-DRG. These 

statistical outliers are removed prior to calculating the proposed relative weights because 

we believe that they may represent aberrations in the data that distort the measure of 

average resource use. Including those LTCH cases in the calculation of the proposed 

relative weights could result in an inaccurate relative weight that does not truly reflect 

relative resource use among the proposed MS-LTC-DRGs. (For additional information 

on this step of the relative weight methodology, we refer readers to 67 FR 55989 and 

74 FR 43959.) 

 Step 2--Remove cases with a length of stay of 7 days or less. 

 The proposed MS-LTC-DRG relative weights reflect the average of resources 

used on representative cases of a specific type. Generally, cases with a length of stay of 7 

days or less do not belong in a LTCH because these stays do not fully receive or benefit 

from treatment that is typical in a LTCH stay, and full resources are often not used in the 

earlier stages of admission to a LTCH. If we were to include stays of 7 days or less in the 

computation of the proposed FY 2012 MS-LTC-DRG relative weights, the value of many 

relative weights would decrease and, therefore, payments would decrease to a level that 

may no longer be appropriate. We do not believe that it would be appropriate to 

compromise the integrity of the payment determination for those LTCH cases that 

actually benefit from and receive a full course of treatment at a LTCH by including data 

from these very short-stays. Therefore, consistent with our historical relative weight 
CMS-1518-P 649 

methodology, in determining the proposed FY 2012 MS-LTC-DRG relative weights, we 

removed LTCH cases with a length of stay of 7 days or less. (For additional information 

on this step of the relative weight methodology, we refer readers to 67 FR 55989 and 

74 FR 43959.) 

 Step 3--Adjust charges for the effects of SSOs. 

 After removing cases with a length of stay of 7 days or less, we are left with cases 

that have a length of stay of greater than or equal to 8 days. As the next step in the 

calculation of the proposed FY 2012 MS-LTC-DRG relative weights, consistent with our 

historical relative weight methodology, we are proposing to adjust each LTCH's charges 

per discharge for those remaining cases for the effects of SSOs (as defined in §412.529(a) 

in conjunction with §412.503). 

 We are proposing to make this adjustment by counting an SSO case as a fraction 

of a discharge based on the ratio of the length of stay of the case to the average length of 

stay for the proposed MS-LTC-DRG for non-SSO cases. This has the effect of 

proportionately reducing the impact of the lower charges for the SSO cases in calculating 

the average charge for the proposed MS-LTC-DRG. This process produces the same 

result as if the actual charges per discharge of an SSO case were adjusted to what they 

would have been had the patient's length of stay been equal to the average length of stay 

of the proposed MS-LTC-DRG. 

 Counting SSO cases as full discharges with no adjustment in determining the 

proposed FY 2012 MS-LTC-DRG relative weights would lower the proposed FY 2012 

MS-LTC-DRG relative weight for affected proposed MS-LTC-DRGs because the 
CMS-1518-P 650 

relatively lower charges of the SSO cases would bring down the average charge for all 

cases within a proposed MS-LTC-DRG. This would result in an “underpayment” for 

non-SSO cases and an “overpayment” for SSO cases. Therefore, we are proposing to 

adjust for SSO cases under §412.529 in this manner because it results in more appropriate 

payments for all LTCH cases. (For additional information on this step of the relative 

weight methodology, we refer readers to 67 FR 55989 and 74 FR 43959.) 

 Step 4--Calculate the proposed FY 2012 MS-LTC-DRG relative weights on an 

iterative basis. 

 Consistent with our historical relative weight methodology, we are proposing to 

calculate the proposed FY 2012 MS-LTC-DRG relative weights using the HSRV 

methodology, which is an iterative process. First, for each LTCH case, we are proposing 

to calculate a hospital-specific relative charge value by dividing the SSO adjusted charge 

per discharge (see Step 3) of the LTCH case (after removing the statistical outliers (see 

Step 1)) and LTCH cases with a length of stay of 7 days or less (see Step 2) by the 

average charge per discharge for the LTCH in which the case occurred. The resulting 

ratio is then multiplied by the LTCH's case-mix index to produce a proposed adjusted 

hospital-specific relative charge value for the case. An initial case-mix index value of 1.0 

is used for each LTCH. 

 For each proposed MS-LTC-DRG, we are proposing to calculate the proposed 

FY 2012 relative weight by dividing the average of the adjusted hospital-specific relative 

charge values (from above) for the proposed MS-LTC-DRG by the overall average 

hospital-specific relative charge value across all cases for all LTCHs. Using these 
CMS-1518-P 651 

recalculated proposed MS-LTC-DRG relative weights, each LTCH's average relative 

weight for all of its cases (that is, its case-mix) is calculated by dividing the sum of all the 

LTCH’s proposed MS-LTC-DRG relative weights by its total number of cases. The 

LTCHs' hospital-specific relative charge values above were multiplied by these hospitalspecific case-mix indexes. These hospital-specific case-mix adjusted relative charge 

values were then used to calculate a new set of proposed MS-LTC-DRG relative weights 

across all LTCHs. This iterative process was continued until there was convergence 

between the weights produced at adjacent steps, for example, when the maximum 

difference was less than 0.0001. 

 Step 5--Determine a proposed FY 2012 relative weight for MS-LTC-DRGs with 

no LTCH cases. 

 As we stated above, we are proposing to determine the proposed FY 2012 relative 

weight for each proposed MS-LTC-DRG using total Medicare allowable total charges 

reported in the best available LTCH claims data (that is, the December 2010 update of the 

FY 2010 MedPAR file for this proposed rule). Using these data, we identified a number 

of proposed MS-LTC-DRGs for which there were no LTCH cases in the database, such 

that no patients who would have been classified to those proposed MS-LTC-DRGs were 

treated in LTCHs during FY 2010 and, therefore, no charge data were available for these 

proposed MS-LTC-DRGs. Thus, in the process of determining the proposed 

MS-LTC-DRG relative weights, we were unable to calculate proposed relative weights 

for the proposed MS-LTC-DRGs with no LTCH cases using the methodology described 

in Steps 1 through 4 above. However, because patients with a number of the diagnoses 
CMS-1518-P 652 

under these proposed MS-LTC-DRGs may be treated at LTCHs, consistent with our 

historical methodology, we are proposing to assign a proposed relative weight to each of 

the proposed no-volume MS-LTC-DRGs based on clinical similarity and relative 

costliness (with the exception of “transplant” MS-LTC-DRGs and “error” 

MS-LTC-DRGs, as discussed below). (For additional information on this step of the 

relative weight methodology, we refer readers to 67 FR 55991 and 74 FR 43959 through 

43960.) 

 In general, we are proposing to determine proposed FY 2012 relative weights for 

the proposed MS-LTC-DRGs with no LTCH cases in the FY 2010 MedPAR file used in 

this proposed rule (that is, proposed “no-volume” MS-LTC-DRGs) by cross-walking 

each no-volume proposed MS-LTC-DRG to another proposed MS-LTC-DRG with a 

calculated proposed relative weight (determined in accordance with the proposed 

methodology described above). Then, the proposed “no-volume” MS-LTC-DRG was 

assigned the same relative weight (and average length of stay) of the proposed 

MS-LTC-DRG to which it was cross-walked (as described in greater detail below). 

 Of the 751 proposed MS-LTC-DRGs for FY 2012, we identified 237 proposed 

MS-LTC-DRGs for which there were no LTCH cases in the database (including the 

8 “transplant” proposed MS-LTC-DRGs and 2 “error” proposed MS-LTC-DRGs). As 

stated above, we are proposing to assign relative weights for each of the 237 proposed 

no-volume MS-LTC-DRGs (with the exception of the 8 “transplant” proposed 

MS-LTC-DRGs and the 2 “error” proposed MS-LTC-DRGs, which are discussed below) 

based on clinical similarity and relative costliness to one of the remaining 
CMS-1518-P 653 

514 (751 - 237= 514) proposed MS-LTC-DRGs for which we were able to determine 

proposed relative weights based on FY 2010 LTCH claims data using the steps described 

above. (For the remainder of this discussion, we refer to the proposed “cross-walked” 

MS-LTC-DRGs as the proposed MS-LTC-DRGs to which we crosswalk one of the 237 

proposed “no volume” MS-LTC-DRGs for purposes of determining a proposed relative 

weight.) Then, we assigned the proposed no-volume MS-LTC-DRG the proposed 

relative weight of the proposed cross-walked MS-LTC-DRG. (As explained below in 

Step 6, when necessary, we made adjustments to account for nonmonotonicity.) 

 For this proposed rule, we are proposing to crosswalk the proposed no-volume 

MS-LTC-DRG to a proposed MS-LTC-DRG for which there were LTCH cases in the 

FY 2010 MedPAR file, and to which it is similar clinically in intensity of use of 

resources and relative costliness as determined by criteria such as care provided during 

the period of time surrounding surgery, surgical approach (if applicable), length of time 

of surgical procedure, postoperative care, and length of stay. We evaluated the relative 

costliness in determining the applicable proposed MS-LTC-DRG to which a proposed 

no-volume MS-LTC-DRG was cross-walked in order to assign an appropriate proposed 

relative weight for the proposed no-volume MS-LTC-DRGs in FY 2012. (For more 

detail on our process for evaluating relative costliness, we refer readers to the FY 2010 

IPPS/RY 2010 LTCH PPS final rule (73 FR 48543).) We believe in the rare event that 

there would be a few LTCH cases grouped to one of the proposed no-volume 

MS-LTC-DRGs in FY 2012, the proposed relative weights assigned based on the 

proposed cross-walked MS-LTC-DRGs would result in an appropriate LTCH PPS 
CMS-1518-P 654 

payment because the crosswalks, which are based on similar clinical similarity and 

relative costliness, generally require equivalent relative resource use. 

 We are proposing to then assign the proposed relative weight of the proposed 

cross-walked MS-LTC-DRG as the proposed relative weight for the proposed no-volume 

MS-LTC-DRG such that both of these proposed MS-LTC-DRGs (that is, the proposed 

no-volume MS-LTC-DRG and the proposed cross-walked MS-LTC-DRG) have the same 

proposed relative weight for FY 2012. We note that if the proposed cross-walked 

MS-LTC-DRG had 25 cases or more, its proposed relative weight, which was calculated 

using the proposed methodology described in Steps 1 through 4 above, was assigned to 

the proposed no-volume MS-LTC-DRG as well. Similarly, if the proposed 

MS-LTC-DRG to which the no-volume MS-LTC-DRG is cross-walked had 24 or less 

cases and, therefore, was designated to one of the low-volume quintiles for purposes of 

determining the proposed relative weights, we assigned the proposed relative weight of 

the applicable low-volume quintile to the proposed no-volume MS-LTC-DRG such that 

both of these proposed MS-LTC-DRGs (that is, the proposed no-volume MS-LTC-DRG 

and the proposed cross-walked MS-LTC-DRG) have the same proposed relative weight 

for FY 2012. (As we noted above, in the infrequent case where nonmonotonicity 

involving a proposed no-volume MS-LTC-DRG results, additional adjustments as 

described in Step 6 are required in order to maintain monotonically increasing relative 

weights.) 

 For this proposed rule, a list of the proposed no-volume MS-LTC-DRGs and the 

proposed MS-LTC-DRG to which it is cross-walked (that is, the proposed cross-walked 
CMS-1518-P 655 

MS-LTC-DRG) for FY 2012 is shown in Table 13B, which is listed in section VI. of the 

Addendum to this proposed rule and is available via the Internet. 

 To illustrate this methodology for determining the proposed relative weights for 

the FY 2012 MS-LTC-DRGs with no LTCH cases, we are providing the following 

example, which refers to the proposed no-volume MS-LTC-DRGs crosswalk information 

for FY 2012 provided in Table 13B. 

 Example: There were no cases in the FY 2010 MedPAR file used for this 

proposed rule for MS-LTC-DRG 61 (Acute Ischemic Stroke with Use of Thrombolytic 

Agent with MCC). We determined that MS-LTC-DRG 70 (Nonspecific Cebrovascular 

Disorders with MCC) was similar clinically and based on resource use to 

MS-LTC-DRG 61. Therefore, we assigned the same proposed relative weight of 

MS-LTC-DRG 70 of 0.8062 for FY 2012 to MS-LTC-DRG 61 (Table 11, which is listed 

in section VI. of the Addendum to this proposed rule and is available vie the Internet). 

 Again, we note that, as this system is dynamic, it is entirely possible that the 

number of MS-LTC-DRGs with no volume of LTCH cases based on the system will vary 

in the future. We are proposing to use the most recent available claims data in the 

MedPAR file to identify proposed no-volume MS-LTC-DRGs and to determine the 

proposed relative weights in this proposed rule. 

 Furthermore, for FY 2012, consistent with our historical relative weight 

methodology, we are proposing to establish proposed MS-LTC-DRG relative weights of 

0.0000 for the following transplant proposed MS-LTC-DRGs: Heart Transplant or 

Implant of Heart Assist System with MCC (proposed MS-LTC-DRG 1); Heart 
CMS-1518-P 656 

Transplant or Implant of Heart Assist System without MCC (proposed MS-LTC-DRG 2); 

Liver Transplant with MCC or Intestinal Transplant (proposed MS-LTC-DRG 5); Liver 

Transplant without MCC (proposed MS-LTC-DRG 6); Lung Transplant (proposed 

MS-LTC-DRG 7); Simultaneous Pancreas/Kidney Transplant (proposed MS-LTC-DRG 

8); Pancreas Transplant (proposed MS-LTC-DRG 10); and Kidney Transplant (proposed 

MS-LTC-DRG 652). This is because Medicare will only cover these procedures if they 

are performed at a hospital that has been certified for the specific procedures by Medicare 

and presently no LTCH has been so certified. At the present time, we include these 

proposed eight transplant MS-LTC-DRGs in the GROUPER program for administrative 

purposes only. Because we use the same GROUPER program for LTCHs as is used 

under the IPPS, removing these proposed MS-LTC-DRGs would be administratively 

burdensome. (For additional information regarding our treatment of transplant 

MS-LTC-DRGs, we refer readers to the RY 2010 LTCH PPS final rule (74 FR 43964).) 

 Step 6--Adjust the proposed FY 2012 MS-LTC-DRG relative weights to account 

for nonmonotonically increasing relative weights. 

As discussed earlier in this section, the MS-DRGs contain base DRGs that have 

been subdivided into one, two, or three severity of illness levels. Where there are three 

severity levels, the most severe level has at least one code that is referred to as an MCC 

(that is, major complication or comorbidity). The next lower severity level contains cases 

with at least one code that is a CC (that is, complication or comorbidity). Those cases 

without an MCC or a CC are referred to as “without CC/MCC.” When data do not 

support the creation of three severity levels, the base DRG is subdivided into either two 
CMS-1518-P 657 

levels or the base DRG is not subdivided. The two-level subdivisions could consist of the 

DRG with CC/MCC and the DRG without CC/MCC. Alternatively, the other type of 

two-level subdivision may consist of the DRG with MCC and the DRG without MCC. 

 In those base MS-LTC-DRGs that are split into either two or three severity levels, 

cases classified into the “without CC/MCC” MS-LTC-DRG are expected to have a lower 

resource use (and lower costs) than the “with CC/MCC” MS-LTC-DRG (in the case of a 

two-level split) or both the “with CC” and the “with MCC” MS-LTC-DRGs (in the case 

of a three-level split). That is, theoretically, cases that are more severe typically require 

greater expenditure of medical care resources and will result in higher average charges. 

Therefore, in the three severity levels, proposed relative weights should increase by 

severity, from lowest to highest. If the proposed relative weights decrease as severity 

decreased (that is, if within a base proposed MS-LTC-DRG, a proposed MS-LTC-DRG 

with CC has a higher proposed relative weight than one with MCC, or the proposed 

MS-LTC-DRG without CC/MCC has a higher proposed relative weight than either of the 

others), they are nonmonotonic. We continue to believe that utilizing nonmonotonic 

relative weights to adjust Medicare payments would result in inappropriate payments 

because the payment for the cases in the higher severity level in a base MS-LTC-DRG 

(which are generally expected to have higher resource use and costs) would be lower than 

the payment for cases in a lower severity level within the same base MS-LTC-DRG 

(which are generally expected to have lower resource use and costs). Consequently, in 

determining the proposed FY 2012 MS-LTC-DRG relative weights in this proposed rule, 

consistent with our historical methodology we are proposing to combine proposed 
CMS-1518-P 658 

MS-LTC-DRG severity levels within a base proposed MS-LTC-DRG for the purpose of 

computing a proposed relative weight when necessary to ensure that monotonicity is 

maintained. For a comprehensive description of our existing methodology to adjust for 

nonmonotonicity, we refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule 

(74 FR 43964 through 43966). Any adjustments for nonmonotonicity that were made in 

determining the proposed FY 2012 MS-LTC-DRG relative weights in this proposed rule 

by applying this methodology are denoted in Table 11, which is listed in sectin VI. of the 

Addendum to this proposed rule and is available via the Internet. 

Step 7-- Calculate the proposed FY 2012 budget neutrality factor. 

 As we established in the RY 2008 LTCH PPS final rule (72 FR 26882), under the 

broad authority conferred upon the Secretary to develop the LTCH PPS under section 

123 of Pub. L. 106-113, as amended by section 307(b) of Pub. L. 106-554, beginning 

with the MS-LTC-DRG update for FY 2008, the annual update to the MS-LTC-DRG 

classifications and relative weights is done in a budget neutral manner such that estimated 

aggregate LTCH PPS payments would be unaffected, that is, would be neither greater 

than nor less than the estimated aggregate LTCH PPS payments that would have been 

made without the MS-LTC-DRG classification and relative weight changes (§412.517(b) 

in conjunction with §412.503). (For a detailed discussion on the establishment of the 

budget neutrality requirement for the annual update of the MS-LTC-DRG classifications 

and relative weights, we refer readers to the RY 2008 LTCH PPS final rule 

(72 FR 26881).) 
CMS-1518-P 659 

 The MS-LTC-DRG classifications and relative weights are updated annually 

based on the most recent available LTCH claims data to reflect changes in relative LTCH 

resource use (§412.517(a) in accordance with §412.503). Under the budget neutrality 

requirement at §412.517(b), for each annual update, the MS-LTC-DRG relative weights 

are uniformly adjusted to ensure that estimated aggregate payments under the LTCH PPS 

would not be affected (that is, decreased or increased). Consistent with that provision, 

we are proposing to update the MS-LTC-DRG classifications and relative weights for 

FY 2012 based on the most recent available LTCH data, and to apply a budget neutrality 

adjustment in determining the proposed FY 2012 MS-LTC-DRG relative weights. 

 To ensure budget neutrality in the proposed update to the MS-LTC-DRG 

classifications and relative weights under §412.517(b), we are proposing to continue to 

use our established two-step budget neutrality methodology. In this proposed rule, in the 

first step of our proposed MS-LTC-DRG budget neutrality methodology, we are 

proposing for FY 2012 to calculate and apply a proposed normalization factor to the 

recalibrated proposed relative weights (the result of Steps 1 through 6 above) to ensure 

that estimated payments are not influenced by changes in the composition of case types 

or the changes to the classification system. That is, the proposed normalization 

adjustment is intended to ensure that the recalibration of the proposed MS-LTC-DRG 

relative weights (that is, the process itself) neither increases nor decreases the average 

CMI. 

 To calculate the proposed normalization factor for FY 2012 (the first step of our 

budget neutrality methodology), we are proposing to use the following three steps: 
CMS-1518-P 660 

(1.a.) we used the most recent available LTCH claims data (FY 2010) and grouped them 

using the proposed FY 2012 GROUPER (Version 29.0) and the proposed recalibrated 

FY 2012 MS-LTC-DRG relative weights (determined in steps 1 through 6 of the Steps 

for Determining the Proposed FY 2012 MS-LTC-DRG Relative Weights above) to 

calculate the average CMI; (1.b.) we grouped the same LTCH claims data (FY 2010) 

using the FY 2011 GROUPER (Version 28.0) and FY 2011 MS-LTC-DRG relative 

weights and calculated the average CMI; and (1.c.) we computed the ratio of these 

average CMIs by dividing the average CMI for FY 2011 (determined in Step 1.b.) by the 

proposed average CMI for FY 2012 (determined in step 1.a.). In determining the 

proposed MS-LTC-DRG relative weights for FY 2012, each proposed recalibrated 

MS-LTC-DRG relative weight was multiplied by 1.11482 in the first step of the budget 

neutrality methodology, which produced “normalized relative weights.” 

 In this proposed rule, in the second step of our proposed MS-LTC-DRG budget 

neutrality methodology, we are proposing to determine a budget neutrality factor to 

ensure that estimated aggregate LTCH PPS payments (based on the most recent available 

LTCH claims data) after reclassification and recalibration (that is, the proposed FY 2012 

MS-LTC-DRG classifications and relative weights) are equal to estimated aggregate 

LTCH PPS payments before reclassification and recalibration (that is, the FY 2011 

MS-LTC-DRG classifications and relative weights). Accordingly, consistent with our 

existing methodology, we are proposing to use FY 2010 discharge data to simulate 

payments and compare estimated aggregate LTCH PPS payments using the FY 2011 

MS-LTC-DRGs and relative weights to estimate aggregate LTCH PPS payments using 
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the proposed FY 2012 MS-LTC-DRGs and relative weights. Furthermore, consistent 

with our historical policy of using the best available data, we also are proposing that if 

more recent data become available, we would use such data to determine the budget 

neutrality adjustment factor for FY 2012 in the final rule. 

 For this proposed rule, we are proposing to determine the proposed FY 2012 

budget neutrality adjustment factor using the following three steps: (2.a.) we simulated 

estimated total LTCH PPS payments using the proposed normalized relative weights for 

FY 2012 and proposed GROUPER Version 29.0 (as described above); (2.b.) we 

simulated estimated total LTCH PPS payments using the FY 2011 GROUPER (Version 

28.0) and the FY 2011 MS-LTC-DRG relative weights shown in Table 11 of the FY 2011 

IPPS/LTCH PPS final rule (75 FR 50613 through 50626); and (2.c.) we calculated the 

ratio of these estimated total LTCH PPS payments by dividing the estimated total LTCH 

PPS payments using the FY 2011 GROUPER (Version 28.0) and the FY 2011 

MS-LTC-DRG relative weights (determined in step 2.b.) by the estimated total LTCH 

PPS payments using the proposed FY 2012 GROUPER (Version 29.0) and the proposed 

normalized MS-LTC-DRG relative weights for FY 2012 (determined in Step 2.a.). In 

determining the proposed FY 2012 MS-LTC-DRG relative weights, each proposed 

normalized relative weight was multiplied by a budget neutrality factor of 0.994312 in 

the second step of the proposed budget neutrality methodology to determine the proposed 

budget neutral FY 2012 relative weight for each proposed MS-LTC-DRG. 

 Accordingly, in determining the proposed FY 2012 MS-LTC-DRG relative 

weights in this proposed rule, consistent with our existing methodology, we are proposing 
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to apply a normalization factor of 1.11482 and a budget neutrality factor of 0.994312 

(computed as described above). Table 11, which is listed in sectin VI. of the Addendum 

to this proposed rule and is available via the Internet, lists the proposed MS-LTC-DRGs 

and their respective proposed relative weights, geometric mean length of stay, and 

five-sixths of the geometric mean length of stay (used in determining SSO payments 

under §412.529) for FY 2012. The proposed FY 2012 MS-LTC-DRG relative weights in 

Table 11, which is listed in section VI. of the Addendum to this proposed rule and 

available via the Internet, reflect both the proposed normalization factor of 1.11482 and 

the proposed budget neutrality factor of 0.994312. 

C. Proposed Quality Reporting Program for LTCHs

1. Background and Statutory Authority 

 CMS seeks to promote higher quality and more efficient health care for Medicare 

beneficiaries, and our efforts are furthered by quality reporting programs coupled with 

public reporting of that information. Such quality reporting programs already exist for 

various settings such as hospital inpatient services via the Hospital Inpatient Quality 

Reporting (IQR) Program (formerly called the Reporting Hospital Quality Data for 

Annual Payment Update (RHQDAPU) Program), hospital outpatient services via the 

Hospital Outpatient Quality Data Reporting Program (HOP QDRP), and physicians’ and 

other eligible professionals’ services via the Physician Quality Reporting System 

(formerly called the Physician Quality Reporting Initiative, or PQRI). We have also 

implemented quality reporting programs for home health agencies and skilled nursing 
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facilities that are based on conditions of participation, and an end-stage renal disease 

quality incentive program (ESRD QIP) that links payment to performance. 

Section 3004(a) of the Affordable Care Act authorizes an additional quality 

reporting program for LTCHs, by adding a new paragraph (5) to section 1886(m) of the 

Act. Section 1886(m)(5)(A)(i) of the Act requires that, for rate year 2014 and each 

subsequent rate year, the Secretary shall reduce any annual update to the standard Federal 

rate for discharges occurring during such rate year, by 2 percentage points, for any LTCH 

that does not comply with quality data submission requirements with respect to an 

applicable rate year. We note that section 1886(m)(5) of the Act uses the term “rate 

year.” Beginning with the annual update to the LTCH PPS that took effect on 

October 1, 2009, we consolidated the rulemaking cycle for the annual update of the 

LTCH PPS Federal payment rates with the annual update of the MS–LTC–DRG 

classifications and weights so that the annual updates to the rates and factors have an 

October 1 effective date and occur on the same schedule. To reflect this change to the 

annual payment rate update cycle, we revised the regulations at §412.503 to specify that, 

beginning on or after October 1, 2009, the “LTCH PPS rate year” is defined as 

October 1 through September 30 (73 FR 26797 through 26798 and 26838). Beginning 

October 1, 2010, we changed from using the term “rate year” to “fiscal year” under the 

LTCH PPS in order to conform to the standard definition of the Federal fiscal year 

(October 1 through September 30). For LTCH PPS purposes, the term “rate year” and 

the term “fiscal year” both refer to the time period beginning October 1 and ending 

September 30. For more information regarding this terminology change, we refer readers 
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to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50396 and 50397). For purposes of 

the discussion below, in order to eliminate any possible confusion that may be caused by 

using the term “rate year” with respect to the proposed Quality Measurement Reporting 

Program for LTCHs, we will use the term “fiscal year” rather than “rate year.” 

As provided at section 1886(m)(5)(A)(ii) of the Act, depending on the amount of 

annual update for a particular year, a reduction of 2.0 percentage points may result in the 

annual update being less than 0.0 percent for a fiscal year and may result in payment rates 

under the LTCH PPS being less than payment rates for the preceding fiscal year. In 

addition, as set forth at section 1886(m)(5)(B) of the Act, any reduction based on failure 

to comply with the reporting requirements, as required by section 1886(m)(5)(A) of the 

Act, shall apply only with respect to the particular fiscal year involved, and any such 

reduction shall not be taken into account in computing the payment rate for subsequent 

fiscal years. 

Section 1886(m)(5)(C) of the Act requires that, for fiscal year 2014 and each 

subsequent fiscal year, each LTCH shall submit to the Secretary data on quality measures 

as specified by the Secretary. Such data must be submitted in a form and manner, and at 

a time, specified by the Secretary. Any measures selected by the Secretary must have 

been endorsed by the entity with a contract under section 1890(a) of the Act. This 

contract is currently held by the NQF. The NQF is a voluntary consensus standardsetting organization with a diverse representation of consumer, purchaser, provider, 

academic, clinical, and other health care stakeholder organizations. The NQF was 

established to standardize health care quality measurement and reporting through its 
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consensus development process. We have generally adopted NQF-endorsed measures in 

our reporting programs. 

However, section 1886 (m)(5)(D)(ii) of the Act provides that, in the case of a 

specified area or medical topic determined appropriate by the Secretary for which a 

feasible and practical measure has not been endorsed by the entity with a contract under 

section 1890(a) of the Act (currently, NQF), the Secretary may specify a measure(s) that 

is (are) not so endorsed, as long as due consideration is given to measures that have been 

endorsed or adopted by a consensus organization identified by the Secretary. Under 

section 1886(m)(5)(D)(iii) of the Act, the Secretary shall publish, by no later than 

October 1, 2012, measures which shall be applicable with respect to the FY 2014 

payment determination. 

Section 1886(m)(5)(E) of the Act requires the Secretary to establish procedures 

for making data submitted under the LTCH quality reporting program available to the 

public. The Secretary must ensure that each LTCH has the opportunity to review the data 

that are to be made public with respect to that facility prior to such data being made 

public. The Secretary must also report quality measures that relate to services furnished 

in LTCHs on the CMS Web site. 

2. Proposed Quality Measures for the LTCH Quality Reporting Program for FY 2014 

a. Considerations in the Selection of the Proposed Quality Measures 

 In implementing the LTCH quality reporting program, we believe that the 

development of a quality reporting program that is successful in promoting the delivery 

of high quality health care services in LTCHs is of paramount importance. As the statute 
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provides in section 1886(m)(5)(D) of the Act, in establishing the LTCH quality reporting 

program, we must publish quality measures to be reported with respect to the FY 2014 

payment determination no later than October 1, 2012. In an effort to meet that mandate, 

we sought to develop a quality reporting program that incorporates overarching health 

care aims and goals intended to facilitate quality care in a manner that is effective and 

meaningful, while remaining mindful of reporting burden and feasibility of data 

collection by LTCHs, in order to reduce and avoid duplicative reporting efforts when 

possible. We seek to efficiently collect information on valid, reliable, and relevant 

measures of quality and to share this information with the public, as provided at section 

1886(m)(5)(E) of the Act. 

 Several provisions of the Affordable Care Act, taken together, call on the 

Secretary to establish a national strategy to provide a comprehensive plan and priorities 

to improve the delivery of health care services, patient health outcomes, and population 

health through a transparent, collaborative process. This strategy, the National Quality 

Strategy, was released by the Secretary (available on the Web site at: 

http://www.healthcare.gov/center/reports/quality03212011a.html#es). We have used the 

priorities of the National Quality Strategy to guide identification of the proposed quality 

measures for LTCHs under section 1886(m)(5) of the Act. 

 We also applied the following additional considerations and criteria in selecting 

the proposed quality measures for LTCHs: whether a measure is included in, or facilitates 

alignment with, other Medicare and Medicaid programs; whether a measure addresses 

HHS priorities, such as prevention, care of chronic illness, high prevalence conditions, 
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patient safety, patient and caregiver engagement, and care coordination; and whether a 

measure is evidence-based and may drive quality improvement as well as has a low 

probability of causing unintended adverse consequences, such as reduced LTCH 

admissions of higher risk patients. 

Furthermore, at the Listening Session held on November 15, 2010, for the 

Affordable Care Act section 3004 quality reporting programs, we sought input, and 

invited comments and suggestions, regarding quality reporting, quality measurement 

recommendation, prioritization, and feasibility, and did the same through the use of a 

Special Open Door Forum held on December 16, 2010, for the Affordable Care Act 

section 3004 quality reporting programs. Transcripts for both the Listening Session and 

the Open Door Forum can be found on the CMS Web site at: 

http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting. 

In addition, we invited suggestions and input regarding the section 3004 quality 

reporting programs to be sent to us using the CMS Web site mail box LTCH-IRFHospice-Quality-ReportingComments@cms.hhs.gov found at 

http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting. We also received 

suggestions and input from a LTCH technical expert panel (TEP), convened by the CMS 

measure development contractor on January 31, 2011, that reviewed and prioritized the 

quality measures identified by a LTCH environmental scan led by a CMS measures 

development contractor, RTI International, specifically for the LTCH quality reporting 

program. Specifically, this TEP reviewed measures found in the environmental scan and 

rated them for importance, scientific soundness, usability, and feasibility. 
CMS-1518-P 668 

In sum, in selecting the proposed quality measures discussed below, with 

applicability for FY 2014 and subsequent years, our goal is to achieve several objectives. 

First, the proposed measures should relate to the general aims of better care for the 

individual, better population health, and lower cost through better quality. Second, the 

proposed measures should promote improved quality specifically to the priorities that are 

of most relevance to LTCHs. These include patient safety, such as avoiding healthcareassociated infections (HAIs) and adverse events, better coordination of care, and personcentered and family-centered care. Third, the proposed measures should address 

improved quality for the primary role of LTCHs, which is to furnish extended medical 

care to individuals with clinically complex problems, such as multiple acute or chronic 

conditions, that need hospital-level care for relatively extended periods of greater than 

25 days. 

b. Proposed LTCH Quality Measures for FY 2014 Payment Determination 

 We are proposing that, for the FY 2014 payment determination, LTCHs submit 

data on three quality measures: (1) Urinary Catheter-Associated Urinary Tract Infections 

(CAUTI); (2) Central Line Catheter-Associated Blood Stream Infection (CLABSI); and 

(3) Pressure Ulcers that are New or Have Worsened 

 HAIs are a topic area widely acknowledged by the HHS Action Plan to Prevent 

HAIs, the Institute of Medicine (IOM), the National Priorities Partnership, and others as a 

high impact priority requiring measurement and improvement. Better care is one of the 

aims found in the National Quality Strategy, and patient safety is one of the priorities. 

Mitigating HAIs is essential in the improvement of patient safety, and, therefore, patient 
CMS-1518-P 669 

care. HAIs are among the leading causes of death in the United States and, therefore, are 

serious reportable events. CDC estimates that as many as 2 million infections are 

acquired each year in hospitals and result in approximately 90,000 deaths per year.50 

HAIs not only put the patient at risk, but also increase the days of hospitalization required 

for patients and add considerable health care costs. Therefore, two of the three quality 

measures proposed are HAI measures. 

Other HAIs included in the HHS Action Plan to Prevent HAIs were under 

consideration for the LTCH quality reporting program beginning October 1, 2012. 

However, the TEP convened by the measure development contractor recommended the 

two proposed infection events, urinary catheter-associated urinary tract infection and 

central line catheter-associated bloodstream infection (each an episode of an infection, 

such as CAUTI or CLABSI) as highly pertinent, and important for data collection as well 

as most ready and currently feasible for implementation in the LTCH setting. HAI 

quality measures are important for quality reporting, and we intend to propose additional 

HAI measures included in the HHS HAI Action Plan to Prevent HAIs through future 

rulemaking. These potential HAI quality measures are listed in our discussion of possible 

measures under consideration for future years. At this time, we are proposing the 

selection of the CLABSI and CAUTI events as the two initial HAI quality measures for 

the LTCH quality measure reporting program. 

 

50 McKibben L; Horan T: Guidance on public reporting of healthcare-associated infections: 

Recommendations of the Healthcare Infection Control Practices Advisory Committee. AJIC 2005;33:217 

through 226. 
CMS-1518-P 670 

(1) Proposed FY 2014 LTCH Measure #1: Urinary Catheter-Associated Urinary Tract 

Infections (CAUTI) 

 The first measure we are proposing for LTCHs for purposes of the FY 2014 

payment determination is an application of the NQF-endorsed measure developed by 

CDC for hospital intensive care units (ICU) entitled (NQF# CAUTI 0138) “Urinary 

Catheter-Associated Urinary Tract Infection [CAUTI] rate per 1,000 urinary catheter 

days, for Intensive Care Unit Patients” to all LTCH care units. This measure was 

developed by the CDC to measure the percentage of patients with CAUTIs in the ICU 

context. At the time we are developing this proposed rule, the measure we are applying, 

NQF CAUTI #0138, is undergoing measure maintenance review by NQF. This review 

may result in a change in how the CDC calculates the aggregated data from using a rate 

for CAUTI, to the use of a Standardized Infection Ratio (SIR) of healthcare associated 

catheter-associated urinary tract infections. We are proposing to adopt the current 

measure in this rulemaking cycle. However, we intend to propose the adoption of any 

modifications to this measure that may result from the NQF review process in future 

rulemaking. 

 While it is fast becoming a medical best practice to avoid urinary catheter use 

whenever possible, this may not always be possible with the LTCH patient population, 

due to the severity of their primary illnesses as well as comorbidities. Patients who are 

exposed to indwelling urinary catheters have a significantly higher risk of developing 

urinary tract infections (UTIs). 
CMS-1518-P 671 

 UTIs are a common cause of morbidity and mortality. The HHS National Action 

Plan to Prevent HAIs identified catheter associated urinary tract infections as the leading 

type of HAI that is largely preventable, and the occurrence of which can be drastically 

reduced in order to reduce adverse health care related events and avoid excess costs. 

The urinary tract is the most common site of HAI, accounting for more than 30 

percent of infections reported by acute care hospitals.51 Healthcare-associated UTIs are 

commonly attributed to catheterization of the urinary tract. 

CAUTI can lead to such complications as cystitis, pyelonephritis, gram-negative 

bacteremia, prostatitis, epididymitis, and orchitis in males and, less commonly, 

endocarditis, vertebral osteomyelitis, septic arthritis, endophthalmitis, and meningitis in 

all patients. Complications associated with CAUTI also include discomfort to the patient, 

prolonged hospital stay, and increased cost and mortality. Each year, more than 13,000 

deaths are associated with UTIs.2

 Prevention of CAUTIs is discussed in the 

CDC/HICPAC document, Guideline for Prevention of Catheter-associated Urinary Tract 

Infections.

52 The NQF-endorsed CAUTI measure we are proposing is currently collected 

by the National Healthcare Safety Network (NHSN) as part of State-mandated reporting 

and surveillance requirements for hospitals. We note that CDC's NHSN is a secure 

Internet-based surveillance system that currently has data collection forms and data 

submission and reporting mechanism in place for LTCHs. NHSN is currently used, in 

 

51 Klevens RM, Edward JR, et al. Estimating health care-associated infections and deaths in U.S. hospitals, 

2002. Public Health Reports 2007;122:160-166. 

52 Wong ES. Guideline for prevention of catheter-associated urinary tract infections. Infect Control 

1981;2:126-30. 
CMS-1518-P 672 

part, as one means by which certain State-mandated reporting and surveillance data are 

collected. 

 We recognize that the NQF has endorsed this measure for the short term, acute 

care ICU setting, but believe that this measure is highly relevant to LTCHs, in that 

urinary catheters are commonly used in the LTCH care setting. As previously noted, 

NQF CAUTI #0138 is undergoing measure maintenance review by NQF. This review 

may result in a change in how CDC calculates the aggregated data from using a rate for 

CAUTI to the use of a SIR). We are proposing to adopt the current measure in this rule 

making cycle. However, we intend to propose the adoption of any modifications to this 

measure that may result from the NQF review process in future rulemaking. The TEP 

convened by the CMS measure development contractor on January 31, 2011, identified 

CAUTI as a high priority quality issue for LTCHs, and there was agreement by this TEP 

that this particular infection rate is worthy of surveillance within LTCHs. This measure 

is applicable for surveillance in long-term care units (CDC/NHSN Manual, 

Device-Associated Module, CAUTI Event, which is available on the CDC Web site at: 

http://www.cdc.gov/nhsn/pdfs/pscManual/7pscCAUTIcurrent.pdf. 

 Section 1886(m)(5)(D)(ii) of the Act provides that “[i]n the case of a specified 

area or medical topic determined appropriate by the Secretary for which a feasible and 

practical measure has not been endorsed by the entity with a contract under 

section 1890(a) [of the Act], the Secretary may specify a measure that is not so endorsed 

as long as due consideration is given to measures that have been endorsed or adopted by a 

consensus organization identified by the Secretary.” We reviewed the NQF’s 
CMS-1518-P 673 

consensus-endorsed measures and were unable to identify any NQF-endorsed measures 

for urinary catheter-associated urinary tract infections for the LTCH setting. We are 

unaware of any other measures for catheter-associated urinary tract infections that have 

been approved by a voluntary consensus standards bodies and endorsed by NQF. We are 

proposing to adopt an application of this NQF-endorsed (in the short-term acute care ICU 

setting) measure under the Secretary’s authority to select non-NQF-endorsed measures. 

We are proposing to adopt the measure under the exception authority provided in 

section 1886(m)(5)(D)(ii) of the Act. As previously noted, NQF CAUTI #0138 is 

undergoing measure maintenance review by NQF. This review may result in changes to 

this measure’s specifications in how CDC calculates the aggregated data from using a 

rate for CAUTI to the use of a SIR. We are proposing to adopt the current measure in 

this rulemaking cycle. We intend to propose the adoption of any modifications to this 

measure that may result from the NQF review process in future rulemaking. We note that 

we intend to ask NQF to formally extend its endorsement of the CAUTI measure to the 

LTCH setting. 

(2) FY 2014 Measure #2: Central Line Catheter-Associated Bloodstream Infection 

(CLABSI) 

The second measure we are proposing for LTCHs for the FY 2014 payment 

determination is an application of a CDC-developed NQF-endorsed measure for hospital 

ICU and high-risk nursery patients; (NQF# CLABSI 0139) “Central Line CatheterAssociated Bloodstream Infection (CLABSI) Rate for ICU and High-Risk Nursery 

(HRN) Patients.” This is a measure of the percentage of ICU and high-risk nursery 
CMS-1518-P 674 

patients who, over a certain amount of days, acquired central line catheter-associated 

bloodstream infections over a specified number of line days. At the time we are 

developing this proposed rule, the measure we are proposing to apply, NQF CLABSI 

#0139, is undergoing measure maintenance review by NQF. This review may result in a 

change in how CDC calculates the aggregated data from using a rate for CLABSI to the 

use of a SIR of health care associated CLASBIs. We propose to adopt the measure in its 

current state in this rulemaking cycle. We intend to propose the adoption of any 

modifications to this measure that may result from the NQF review process in a future 

rule cycle. 

A central line is a catheter that health care providers often place in a large vein in 

the neck, chest, or groin to give medication or fluids or to collect blood for medical tests. 

Many LTCH patients have been discharged from short-term acute care hospital ICUs or 

ICU step-down units with these central lines already in place. In other situations, a 

central line IV may be inserted during the patient’s stay at the LTCH. Bloodstream 

infections are usually serious infections typically causing a prolongation of hospital stay 

and increased cost and risk of mortality.53 An estimated 248,000 bloodstream infections 

occur in U.S. hospitals each year.54 Furthermore, CLABSIs result in thousands of deaths 

each year and billions of dollars in added costs to the U.S. healthcare system, yet these 

infections are preventable. The CDC is providing guidelines and tools to the health care 

community to help reduce central line catheter-associated bloodstream infections. 

 

53 CDC/NHSN Manual. Device-Associated Module, CLABSI Event. Available at 

http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf, assessed on Jauary 20, 2011. 54] Klevens RM, Edward JR, et al. Estimating health care-associated infections and deaths in U.S. hospitals, 

2002. Public Health Reports 2007;122:160-166. 
CMS-1518-P 675 

Techniques to prevent CLABSI through proper central line management are addressed in 

CDC’s Healthcare Infection Control Practices Advisory Committee Guidelines for the 

Prevention of Intravascular Catheter Related Infections.55

We recognize that NQF endorsement of this measure is limited to ICU and HRN 

patients in hospital settings, but believe that this measure is also highly relevant in the 

LTCH setting because intravascular, central venous catheters (also known as a “central 

line”) are used frequently due to the fact that these types of hospitals care for patients 

with complex medical problems which require LTCH stays and intensive treatment. As 

previously noted, NQF CLABSI #0139 is undergoing measure maintenance review by 

NQF. This review may result in changes to this measure’s specifications in how CDC 

calculates the aggregated data from using a rate for CLABSI to the use of a SIR. We are 

proposing to adopt the current measure in this rulemaking cycle. We intend to propose 

the adoption of any modifications to this measure that may result from the NQF review 

process in future rulemaking. The CMS measure development contractor convened a 

TEP on January 31, 2011, which identified CLASBIs as a high priority quality issue for 

LTCHs; there was agreement by the TEP that this particular infection rate is worthy of 

surveillance within LTCHs. This measure is applicable for surveillance in long-term 

hospital care units (CDC/NHSN Manual, Device-Associated Module, CLABSI Event, 

which is available at the CDC Web site at: 

http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf . 

 

55O’Grady NP, Alexander M, Dellinger EP, Gerberding JL, Heard SO, Maki DG, et al. Guidelines for the 

prevention of intravascular catheter-related infections. MMWR 2002;51(No. RR-10:1-26. 
CMS-1518-P 676 

Section 1886(m)(5)(D)(ii) of the Act provides that “[i]n the case of a specified 

area or medical topic determined appropriate by the Secretary for which a feasible and 

practical measure has not been endorsed by the entity with a contract under 

section 1890(a) [of the Act], the Secretary may specify a measure that is not so endorsed 

as long as due consideration is given to measures that have been endorsed or adopted by a 

consensus organization identified by the Secretary.” We reviewed the NQF’s 

consensus-endorsed measures, and were unable to identify any NQF endorsed measures 

for central line catheter-associated bloodstream infections for the LTCH setting. We are 

unaware of any other measures for CLABSI that have been approved by voluntary 

consensus standards bodies and endorsed by NQF. Therefore, we are proposing to adopt 

an application of this NQF-endorsed (for ICU and HRN) measure under the Secretary’s 

authority provided in section 1886(m)(5)(D)(ii) of the Act. As previously noted, NQF 

CLABSI #0139 is undergoing measure maintenance review by NQF. This review may 

result in changes to this measure’s specifications in how CDC calculates the aggregated 

data from using a rate for CLABSI to the use of a SIR. We are proposing to adopt the 

measure in its current state in this rulemaking cycle. We intend to propose the adoption of 

any modifications to this measure that may result from the NQF review process in future 

rulemaking. We note that we intend to ask NQF to formally extend its endorsement of 

the CLABSI measure to all care settings within the LTCH (that is, beyond the LTCH 

ICU). 
CMS-1518-P 677 

(3) FY 2014 Measure #3: Pressure Ulcers 

The third measure we are proposing for LTCHs for purposes of the FY 2014 

payment determination is an application of a CMS-developed NQF-endorsed measure for 

short-stay nursing home patients: (NQF NH-012-10) “Percent of Residents with Pressure 

Ulcers that Are New or Have Worsened.” This measure includes the percentage of 

patients who have one or more stage 2-4 pressure ulcers that are new or worsened from a 

previous assessment. Consistent in our support of the National Quality Strategy 

principles, mitigating the occurrence or worsening of pressure ulcers is essential in the 

improvement of patient safety and, therefore, patient care. 

We recognize NQF endorsement of this measure is limited to short-stay nursing 

home patients, but believe that this measure is highly relevant and a high priority quality 

issue for the care of LTCH patients. Pressure ulcers are high-volume and high-cost 

adverse events across the spectrum of health care settings from acute hospitals to home 

health. Patients in the LTCH setting are medically complex, have functional limitations 

that often are severe, and, therefore, are at high risk for the development, or worsening, of 

pressure ulcers. Pressure ulcers are serious medical conditions and an important measure 

of quality. Pressure ulcers can lead to serious, life-threatening infections, which 

substantially increase the total cost of care. Furthermore, as we noted in the FY 2008 

IPPS final rule with comment period (72 FR 42705), in 2006 there were 322,946 reported 

cases of Medicare patients with a pressure ulcer as a secondary diagnosis—each case had 

an average charge of $40,381 for a hospital stay, for an annual total cost of 13 billion 

dollars. The prevalence of pressure ulcers in health care facilities is increasing, with some 
CMS-1518-P 678 

2.5 million patients being treated annually for pressure ulcers in acute care facilities.56,57 

In 2006, there were 503,300 acute hospital stays during which pressure ulcers were noted. 

This is a 78.9 percent increase from 1993 when there were about 281,300 hospital stays 

related to pressure ulcers.58

 The CMS measure development contractor convened a TEP on January 31, 2011, 

which identified this topic as highly relevant and a high priority quality issue for the care 

of LTCH patients, and the application of this measure (NQF NH-012-10) as appropriate 

for LTCHs. 

 Section 1886(m)(5)(D)(ii) of the Act provides that “[i]n the case of a specified 

area or medical topic determined appropriate by the Secretary for which a feasible and 

practical measure has not been endorsed by the entity with a contract under 

section 1890(a) [of the Act], the Secretary may specify a measure that is not so endorsed 

as long as due consideration is given to measures that have been endorsed or adopted by a 

consensus organization identified by the Secretary.” We reviewed the 

NQFconsensus-endorsed measures, and we were unable to identify any NQF-endorsed 

measures for the monitoring of pressure ulcers that are new or worsened, for the LTCH 

setting. We are unaware of any other measure for the LTCH setting of new or worsened 

pressure ulcers that are approved by voluntary consensus standards bodies and endorsed 

 

56 Russo CA, Steiner C, Spector W.: Hospitalizations related to pressure ulcers among adults 18 years and 

older, 2006 (Healthcare Cost and Utilization Project Statistical Brief No. 64). December 2008. Available 

at: http://www.hcup-us.ahrq.gov/reports/statbriefs/sb64.pdf. 57 Institute for Healthcare Improvement: Relieve the pressure and reduce harm. May 21, 2007. Available 

at: 

http://www.ihi.org/IHI/Topics/PatientSafety/SafetyGeneral/ImprovementStories/FSRelievethePressureand

ReduceHarm.htm. 58 MacLean DS.: Preventing & managing pressure sores. Caring for the Ages. March 2003;4(3):34-7. 

Available at: http://www.amda.com/publications/caring/march2003/policies.cfm. 
CMS-1518-P 679 

by NQF. Therefore, we are proposing to adopt an application of this NQF-endorsed (for 

short-stay nursing home patients) measure for the LTCH quality reporting program under 

the Secretary’s authority set forth at section 1886(m)(5)(D)(ii) of the Act. We also intend 

to ask NQF to extend its endorsement of the short-stay nursing home pressure ulcer 

measure specifically to the LTCH setting. 

 We invite public comment on the proposed quality measures: (1) Urinary Catheter 

Associated Urinary Tract Infections (CAUTI); (2) Central Line Catheter-Associated 

Bloodstream Infection (CLABSI); and (3) Pressure Ulcers that are New or Have 

Worsened. 

3. Possible LTCH Quality Measures under Consideration for Future Years 

 As discussed below, we seek to achieve a comprehensive set of quality measures 

to be available for widespread use for informed decision-making and quality 

improvement. Therefore, as stated previously, we intend to propose, through future 

rulemaking, measures included in the HHS Action Plan to Prevent HAIs. We also intend 

to propose through future rulemaking measures related to ventilator care such as the 

NQF-endorsed Institute for Healthcare Improvement process measure, NQF #0302, 

Ventilator Bundle, which is a comprehensive ventilator care-bundle process measure that 

is designed to facilitate protocols such as weaning, and mitigate ventilator-related 

infections, such as ventilator-associated pneumonia, and other complications. We also 

intend to propose additional outcome measures such as those related to acute care 

rehospitalization. We are aware of the limits related to feasibility in data submission at 

the present time. For example, there is no feasible means to submit the ventilator bundle 
CMS-1518-P 680 

process measure at this at this time, and are therefore currently identifying the data 

elements necessary for this measure using a data subset from the Continuity Assessment 

Record and Evaluation (CARE) data set as well as a submission mechanism. We also 

intend to propose, through future rulemaking, additional measures, such as those related 

to symptom management, physical restraints, medication use, falls, infections, and 

function, using the data subsets of the CARE data set necessary for measure calculations. 

We invite public comment and suggestions on the implementation of a standardized 

assessment instrument for LTCHs that would similarly support the calculation of quality 

measures. We also invite public comment on the measures and measures topics under 

consideration for future years set out below. In addition, we invite other suggestions and 

rationale to support the adoption of measures and topics not listed below. 

Possible Measures and Measure Topics for the LTCH Quality Reporting Program 

Under Consideration for Future Years 

Overarching Goal: Safety and Healthcare Acquired Conditions -- HAIs 

 HAI reporting for: 

● Ventilator-associated Pneumonia*** 

● Surgical site infection rate*** 

● Multi-drug resistant organism infection 

Overarching Goal: Safety and Healthcare Acquired Conditions: Avoidable Adverse 

Events and Serious Reportable Events 

● Unplanned acute care hospitalizations 

● Mortality*** 

● Blood Incompatibility** 

● Foreign object retained after surgery** 

● Manifestation of poor glycemic control** 

● Air Embolism** 

● Falls and trauma** 

● Venous Thromboembolism* 

● Injuries secondary to Poly-pharmacy 

● Injuries related restraint use 
CMS-1518-P 681 

Possible Measures and Measure Topics for the LTCH Quality Reporting Program 

Under Consideration for Future Years 

Overarching Goal: Safety and Healthcare Acquired Conditions -- HAIs 

● Medication errors* 

● Stage III and IV Pressure Ulcer** 

Overarching Goal: Safety and Improvement Practices for Adverse Event Reduction 

● Central line bundle*** 

● Ventilator bundle*** 

● Patient Immunization for Influenza*** 

● Patient Immunization for Pneumonia*** 

● Staff immunization*** 

Overarching Goal: Safety -- NQF Endorsed Nursing Sensitive Care Measures 

● Patient Fall Rate*** 

• Falls with Injury*** 

● Pressure Ulcer Prevalence*** 

● Restraint Prevalence (vest and limb only)*** 

● Skill mix (Registered Nurse [RN], Licensed Vocational/Practical Nurse 

[LVN/LPN], unlicensed assistive personnel [UAP], and 

contract)***Nursing care hours per patient day (RN, LPN, UAP)*** 

● Voluntary turnover for RN, APN, LPN, UAP*** 

● Practice Environment Scale-Nursing Work Index*** 

*Harmonizes with NQF Serious Reportable Events. 

**Harmonizes with Hospital-Acquired Conditions –Present on Admission Program for IPPS hospitals. 

***Harmonizes with NQF-endorsed measures. 

4. Proposed Data Submission Methods and Timelines 

a. Proposed Method of Data Submission for HAIs 

 We are proposing to adopt two proposed HAI quality measures, Central Line 

Catheter-Associated Blood Stream Infection (CLABSI) Event: CLABSI rate per 1000 

central line days, and Urinary Catheter-Associated Urinary Tract Infection (CAUTI) 

Event: CAUTI rate per 1000 urinary catheter days. We are proposing to use CDC/NHSN 

for data collection and reporting for these two HAI measures (http://www.cdc.gov/nhsn/). 
CMS-1518-P 682 

 As we noted above, the NHSN is a secure, Internet-based surveillance system. It 

is maintained by CDC, and can be utilized by all types of healthcare facilities in the 

United States, including LTCHs, acute care hospitals that collect and report HAIs through 

the NHSN as part of our Hospital IQR Program, as well as psychiatric hospitals, 

rehabilitation hospitals, outpatient dialysis centers, and ambulatory surgery centers. The 

NHSN enables health care facilities to submit their HAI event data, and access their data 

for the purposes of internal infection-surveillance. 

Facilities can also use the NHSN to obtain information on clinical practices 

known to prevent HAIs, information on the incidence or prevalence of multidrugresistant organisms within their organizations, and information on other adverse events. 

Some States use the NHSN as a means of collecting State law-mandated HAI reporting. 

NHSN collects data via a Web-based tool hosted by the CDC and available at: 

http://www.cdc.nhsn. This reporting service is provided free of charge to healthcare 

facilities. In addition, CDC may have the ability to receive NHSN measures data from 

electronic health records (EHRs) in the near future. Currently, the data reporting of these 

two HAI events is completed through the NHSN. More than 20 States require hospitals 

to report HAIs using NHSN, and CDC supports more than 4,000 hospitals that are using 

the NHSN. Over 80 LTCHs currently submit HAI data via the NHSN. 

HAI event reporting, and meaningful HAI event surveillance by the LTCH, using 

the CDC/NHSN requires the submission of HAI events, regardless of payor. We believe 

delivery of high quality care in the LTCH setting is imperative. Collecting such quality 

data on all patients in the LTCH setting supports CMS’ mission to ensure high quality 
CMS-1518-P 683 

care for Medicare beneficiaries. This will provide us with the most robust and accurate 

reflection of quality in the LTCH setting. Therefore, in order to facilitate and ensure that 

high quality care is delivered to Medicare beneficiaries in the LTCH setting, we are 

proposing that quality data related to HAIs be collected on all LTCH patients, regardless 

of payor. 

Currently the NHSN has data collection forms and data submission and reporting 

mechanisms in place that are in use by LTCHs for these CLABSI and CAUTI measures. 

Details related to the procedures using the NHSN for data submission can be found at: 

http://www.cdc.gov/nhsn. Specifically, details related to the procedures of using the 

NHSN for data submission and information on definitions, numerator data, denominator 

data and data analyses for CLABSI Event: CLABSI rate per 1000 central line days 

calculated by dividing the number of CLABSI by the number of central line days and 

multiplying the result by 1000 can be found at 

http://www.cdc.gov/nhsn/PatientSafety.html. Details related to the CLABSI SIR can be 

found at http://www.cdc.gov/hai/pdfs/stateplans/SIR_05_25_2010.pdf. Details related to 

the procedures of using the NHSN for data submission and information on definitions, 

numerator data, denominator data and data analyses for CAUTI Event: CAUTI rate per 

1000 urinary catheter days calculated by dividing the number of CAUTIs by the number 

of catheter days and multiplying the result by 1000 can also be found at 

http://www.cdc.gov/nhsn/PatientSafety.html. 

The reporting procedures for these HAI events would not be affected by the use of 

the SIR instead of the current rate calculation. CDC performs those calculations. Further 
CMS-1518-P 684 

information related to the use of the SIRs can be found on the Web sites at: 

http://www.hhs.gov/ash/initiatives/hai/appendices.html and 

http://www.cdc.gov/HAI/surveillance/QA_stateSummary.html. 

b. Proposed Timeline for Data Reporting Related to HAIs 

CDC recommends that HAI reporting occur closest in time to the event, and 

further recommends that reporting occur no later than 30 days following the event. To 

facilitate HAI surveillance and reporting for these proposed measures for payment 

determination, we are proposing an additional timeframe for reporting following the 

initial reporting period. We are proposing a data submission timeframe for NHSN event 

reporting for these proposed LTCH quality reporting program HAI measures of 

October 1, 2012 through December 31, 2012 for the determination of FY 2014 annual 

payment update, and that LTCHs submit their data no later than May 15, 2013. 

In order to better align with the current Hospital IQR Program HAI reporting 

processes (75 FR 20223), we also are proposing that all subsequent LTCH quality 

reporting cycles will be based on a calendar year cycle (for example, beginning 

January 1, 2013 through December 31, 2013) for determination of the update to the 

standard Federal rate for each LTCH in FY 2015 and subsequent years. We are 

proposing that, beginning in CY 2013, and for all subsequent years, LTCHs would 

submit HAI event data via the NHSN, for four consecutive quarters of the calendar year. 

For example, for the FY 2015 annual payment update to the standard Federal rate, 

LTCHs would submit HAI data collected in the first quarter of CY 2013, the second 

quarter of CY 2013, the third quarter of CY 2013, and the fourth quarter of CY 2013. 
CMS-1518-P 685 

 The proposed timelines for submission of quality data on the CLABSIs and 

CAUTIs for the FY 2015 annual payment update are set out below. 

Proposed Timelines for Submission of Data on the Proposed Central Line CatheterAssociated Bloodstream Infections and Urinary Catheter-Associated Urinary Tract 

Infections (CAUTI & CLABSI) Measures for the FY 2015 Annual Payment Update 

CY 2013 Infection Event (s) 

CDC-NHSN collection and 

quarterly report generation 

time 

Proposed final 

submission deadlines 

for the LTCH quality 

reporting program FY 

2015 payment

determination

Q1 (January-March 2013) 

Q2 (April-June 2013) 

Q3 (July-September 2013) 

Q4 (October-December 2013) 

January 31-August 15 

April 30-November 15 

July 31-February 15 

October 31-May 15 

August 15, 2013 

November 15, 2013 

February 15, 2014 

May 15, 2014 

LTCHs would have until the final submission deadline for the LTCH quality 

reporting program to submit their quarterly data to the NHSN. After the final submission 

deadline has occurred for each CY 2013 quarter, CMS will receive a file from the CDC 

with the aggregated measurement rates of the specific calculations that have been 

generated by the NHSN for the LTCH quality reporting program and we will use those 

results for purposes of determining whether the LTCH met the requirements for the 

LTCH quality reporting program. We invite public comments on the proposed reporting 

cycle for LTCHs. 

In alignment with the Hospital IQR Program, (75 FR 50223), we also are 

proposing that once quarterly each LTCH will utilize an automated report function that 

will be made available to submitters in the NHSN, to generate a quarterly report 

containing individual LTCH-level numerator, denominator, and exclusion counts for 
CMS-1518-P 686 

these two HAI measures specifically. CDC will create an automated LTCH quality 

program report function and add it to NHSN’s reporting functionalities. While LTCHs 

may be reporting other data elements to CDC for other reporting programs (that is: 

State-mandated surveillance programs), the quarterly LTCH quality program report that 

would be generated within NHSN would only contain those data elements needed to 

calculate the two measures currently being proposed for the LTCH quality reporting 

program. We would only receive this aggregated data from CDC. 

 We also are proposing that any further details regarding, data submission and 

reporting requirements for HAI measures to be reported via NHSN would be posted on 

the CMS Web site at: http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ by no 

later than January 31, 2012. 

 Requirements for NHSN participation, measure specifications, and data collection 

can be found at the Web site at: http://www.cdc.gov/nhsn/. LTCHs are encouraged to 

visit this Web site in order to view the NHSN enrollment and reporting requirements. 

Training resources are available there. In order to allow adequate time for enrollment in 

the NHSN, and for training to take place, should these measures be finalized, additional 

details related to this reporting program’s requirements, such as when enrollment is due 

to occur, will be announced by no later than January 31, 2012, on the CMS Web site at: 

http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/. In the announcement, we 

would propose to provide guidance on the specifications, definitions and reporting 

requirements. 
CMS-1518-P 687 

 We invite public comments on the proposed HAI NHSN submission 

requirements, reporting cycle, and reporting timeline for LTCHs. 

c. Proposed Method of Data Collection and Submission for the Pressure Ulcer Measure 

Data 

We are proposing that the pressure ulcer data elements necessary to calculate the 

pressure ulcer measure would be identical to those data elements collected through the 

Minimum Data Set 3.0 (MDS 3.0), which is a reporting instrument used in nursing homes 

The current MDS 3.0 pressure ulcer items evolved as an outgrowth of CMS’ work to 

develop a standardized patient assessment instrument, referred to as the Continuity 

Assessment Record and Evaluation tool, or CARE. The current MDS 3.0 pressure ulcer 

items are also currently used in the calculation of the NQF-endorsed nursing home 

pressure ulcer measure, Percent of Residents With Pressure Ulcers That Are New or 

Worsened [Short Stay] (NQF NH-012-10). We note that the MDS data elements were 

supported by the National Pressure Ulcer Advisory Panel (NPUAP). 

We believe that to support the standardized collection and calculation of the 

LTCH pressure ulcer quality measure will require the use of a subset of the standardized 

CARE instrument, and thus we are proposing the use of a subset of the CARE 

instrument’s assessment items for data collection. We will be using specifically the 

pressure ulcer data elements necessary to calculate the pressure ulcer measure, and those 

data items are identical to those data elements collected through the Minimum Data Set 

3.0 (MDS 3.0). The current MDS 3.0 pressure ulcer data items can be found at the CMS 

Web site at: 
CMS-1518-P 688 

https://www.cms.gov/NursingHomeQualityInits/45_NHQIMDS30TrainingMaterials.asp.

59 

This data assessment subset will allow identical data elements to be collected in LTCHs 

and in nursing homes. 

The CARE assessment instrument, was developed and tested in the post-acute 

care payment reform demonstration (which included LTCHs) as required by section 5008 

of the Deficit Reduction Act (DRA) (Pub. L. 109-171). It is a standardized assessment 

instrument that can be used across all postacute care sites to measure functional status 

and other factors during treatment and at discharge from each provider. (For more 

information, we refer readers to the following Web site: www.pacdemo.rti.org.) CARE 

was tested over the last 2 years in 199 providers, of which 28 were LTCHs. Participant 

feedback suggested most of these items are already collected by LTCHs during their 

intake process and in monitoring the patients’ health status during the stay. Importantly, 

the CARE items meet Federal interoperable data standards and should be transferable by 

most data systems. A data collection mechanism for transferring the data to CMS is 

currently under development, and it is anticipated to be similar to the current systems 

used to report assessment data for payment and quality monitoring in the other post acute 

care sites. 

We believe that, for the collection of data necessary to calculate this pressure 

ulcer measure, using a CARE subset of standardized data elements to collect, report, and 

calculate the proposed pressure ulcer quality measure will drive uniformity across 

settings which will lead to better quality of care in LTCHs and, ultimately, across the 

 

59https://www.cms.gov/NursingHomeQualityInits/45_NHQIMDS30TrainingMaterials.asp (Look for 

Downloads. Select MDS 3.0 Item Subsets v1.002. Click on MDS 3.0 ALL Items. Scroll down to Section 

M, Skin Conditions, items M0100-M0900.) 
CMS-1518-P 689 

continuum of care settings. We also believe that the use of a standardized method of 

communication will lead to better informed decision making. 

If this proposal is finalized, additional details regarding the data elements needed 

to calculate this measure, submission requirements and specifications used for these data 

elements to calculate the proposed pressure ulcer quality measure using a subset of 

CARE instrument will be published on the CMS Web site at http://www.cms.gov/LTCHIRF-Hospice-Quality-Reporting/ by no later than January 31, 2012. 

We are proposing to use standardized assessment data elements for data collection 

that would support the calculation of quality measures in the LTCHs. Specifically, we 

are proposing to use a subset of the CARE instrument for the collection of the data 

elements necessary to calculate the proposed quality measure, the Percent of New or 

Worsened Pressure Ulcers. 

We invite public comment on the use of a subset of CARE items for the purposes 

data collection for this proposed measure: Percent of Patients with New or Worsened 

Pressure Ulcers. We invite public comment on this proposal for the calculation of the 

proposed quality measure for pressure ulcers. 

d. Proposed Timeline for Data Reporting Related to Pressure Ulcers 

 The delivery of high quality care in the LTCH setting is imperative. We believe 

that collecting quality data on all patients in the LTCH setting supports CMS’ mission to 

ensure quality care for Medicare beneficiaries. Collecting data on all patients provides 

the most robust and accurate reflection of quality in the LTCH setting. Accurate 

representation of quality provided in LTCHs is best conveyed using data related to 
CMS-1518-P 690 

pressure ulcers on all LTCH patients, regardless of payor. Thus, so as to facilitate and 

ensure this effort, we are proposing that quality data related to pressure ulcers shall be 

collected on all LTCH patients, regardless of payor, using a subset of the CARE data 

collection instrument in accordance with the timetable and schedule set forth in section 

VII.C.4.b. of this preamble. We will provide further details about the data collection 

instrument on the CMS Web site http://www.cms.gov/LTCH-IRF-Hospice-QualityReporting/ as these details become available. We invite public comments on the 

proposed reporting cycle for LTCHs. 

5. Public Reporting and Availability of Data Submitted 

 Under section 1886(m)(5)(E) of the Act, the Secretary is required to establish 

procedures for making any quality data submitted by LTCHs available to the public. 

Such procedures will ensure that a LTCH has the opportunity to review the data that is to 

be made public with respect to the LTCH prior to such data being made public. The 

Secretary will report quality measures that relate to services furnished in LTCHs on the 

CMS Web site. Currently, the agency is developing plans regarding the implementation 

of this provision. Procedures for public reporting will be proposed through future rule 

making. At this time no procedures or timeline has been established for public reporting 

of data. 

D. Proposed Rebasing and Revising of the Market Basket Used under the LTCH PPS

1. Background 

 The input price index (that is, the market basket) that was used to develop the 

LTCH PPS for FY 2003 was the “excluded hospital with capital” market basket. That 
CMS-1518-P 691 

market basket was based on 1997 Medicare cost report data and included data for 

Medicare-participating IRFs, IPFs, LTCHs, cancer hospitals, and children’s hospitals. 

Although the term “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 section, refers to 

an input price index. 

 Beginning with RY 2007, LTCH 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 long-term 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 paid under a PPS. Also, 

the FY 2002 cost structures for cancer and children’s hospitals are noticeably different 

than the cost structures of the freestanding IRFs, freestanding IPFs, and LTCHs. A 

complete discussion of the FY 2002-based RPL market basket appears in the RY 2007 

LTCH PPS final rule (71 FR 27810 through 27817). 

 In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 21062), we 

expressed our interest in exploring the possibility of creating a stand-alone LTCH market 

basket that reflects the cost structures of only LTCH providers. However, as we 

discussed in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43967 through 
CMS-1518-P 692 

43968), we are conducting further research to assist us in understanding the reasons for 

the variations in costs and cost structure between freestanding IRFs and hospital-based 

IRFs. We also are researching the reasons for similar variations in costs and cost 

structure between freestanding IPFs and hospital-based IPFs. We remain unable to 

sufficiently understand the observed differences in costs and cost structures between 

hospital-based IRFs and freestanding IRFs and between hospital-based IPFs and 

freestanding IPFs. Therefore, we do not believe it is appropriate at this time to propose 

stand-alone market baskets for IRFs, IPFs, and LTCHs. 

 We are currently exploring the viability of creating two separate market baskets 

from the current RPL market basket: One market basket would include freestanding 

IRFs and freestanding IPFs and would be used to update payments under both the IPF 

and IRF payment systems. The other market basket would be a stand-alone LTCH 

market basket. Depending on the outcome of our research, we may propose a stand-alone 

LTCH market basket in the next LTCH PPS update cycle. We invite public comment on 

the possibility of using this type of market basket to update LTCH payments in the future. 

 Under the LTCH PPS for FY 2012, 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 are proposing to use for purposes of 

determining the operating and capital portions of the proposed FY 2008-based RPL 

market basket. 
CMS-1518-P 693 

2. 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, we are proposing to use FY 2008 as the base period) and total base 

period expenditures are estimated for a set of mutually exclusive and exhaustive spending 

categories, with the proportion of total costs that each category represents being 

calculated. These proportions are called cost or expenditure weights. Second, each 

expenditure category is matched to an appropriate price or wage variable, referred to as a 

price proxy. In nearly every instance, these price proxies are derived from publicly 

available statistical series that are published on a consistent schedule (preferably at least 

on a quarterly basis). Finally, the expenditure weight for each cost category is multiplied 

by the level of its respective price proxy. The sum of these products (that is, the 

expenditure weights multiplied by their price levels) for all cost categories yields the 

composite index level of the market basket in a given period. Repeating this step for 

other periods produces a series of market basket levels over time. Dividing an index 

level for a given period by an index level for an earlier period produces a rate of growth 

in the input price index over that timeframe. 
CMS-1518-P 694 

 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. 

3. 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. For FY 2012, we are proposing to rebase 

and revise the market basket used to update the LTCH PPS. 
CMS-1518-P 695 

a. Development of Cost Categories 

(1) 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 Medicare cost 

reports include providers whose cost report begin date is on or between October 1, 2007, 

and September 30, 2008. We are proposing 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 because 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. However, because 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 are proposing 

to develop these cost weights using FY 2008 Medicare cost report data for IPPS hospitals 
CMS-1518-P 696 

(similar to the method that was used for the FY 2002-based RPL market basket). We 

provide additional detail on this approach later in this section. 

 Because 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 that is within a comparable range of their total facility 

average length of stay. We believe this provides a more accurate reflection of the 

structure of costs for Medicare covered days. We are proposing to use the cost reports of 

LTCHs and IRFs with Medicare average lengths of stay within 15 percent (that is, 15 

percent higher or lower) of the total facility average length of stay for the hospital. This 

is the same edit we applied to derive the FY 2002-based RPL market basket and 

generally includes those LTCHs and IRFs with Medicare average length of stay within 

approximately 5 days of the facility average length of stay of the hospital. 

 We are proposing to use a less stringent measure of Medicare average length of 

stay for IPFs. For this provider type, and in order to produce a robust sample size, we are 

proposing to use those facilities’ Medicare cost reports whose average length of stay is 

within 30 or 50 percent (depending on the total facility average length of stay) of the total 

facility average length of stay. This is the same edit we applied to derive the 

FY 2002-based RPL market basket. 

 We applied these length of stay edits to first obtain a set of cost reports for 

facilities that have a Medicare length of stay within a comparable range of their total 

facility length of stay. Using this set of Medicare cost reports, we then calculated cost 
CMS-1518-P 697 

weights for four cost categories and a residual as represented by all other costs directly 

from the FY 2008 Medicare cost reports for freestanding IRFs, freestanding IPFs, and 

LTCHs (found in Table VII.D-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 VII.D-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 

(2) Other Data Sources 

 In addition to the IRF, IPF and LTCH Medicare cost reports for freestanding 

IRFs, 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 2002 Benchmark Input-Output (I-O) Tables created by the 

Bureau of Economic Analysis (BEA), U.S. Department of Commerce. The FY 2008 

Medicare cost reports include providers whose cost report begin date is on or between 

October 1, 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 
CMS-1518-P 698 

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 VII.D-1 that are attributable to the benefits 

and contract labor cost categories. The BEA Benchmark I-O data are generally 

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. 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. 
CMS-1518-P 699 

 The “all other” cost category expenditure shares are determined as being equal to 

each category’s proportion to total “all other” expenditures based on 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 “all other” cost category of the RPL 

market basket. 

b. Final Cost Category Computation 

As stated previously, for this FY 2012 rebasing proposal, we are proposing to use 

the 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 below in section 

VII.D.3.f. of this proposed rule. Also, the proposed FY 2008-based RPL market basket 

excludes one cost category: “Photographic 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. 
CMS-1518-P 700 

Therefore, we are proposing to include the photographic supplies costs in the 

“Chemicals” 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 “nonlabor-intensive” 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 labor-intensive 

and its cost varies with the local labor market. In previous regulations, we grouped cost 

categories that met both of these criteria into labor-intensive services. We believe the 

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 labor-intensive and 

vary with the local labor market. 

c. 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: 
CMS-1518-P 701 

 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 encountered by hospitals. For example, we use a 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 encountered 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 
CMS-1518-P 702 

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 proposed PPIs, CPIs, and ECIs selected 

meet these criteria. 

 Table VII.D-2 below 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 also are 

listed. 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 VII.D-2 is a summary outlining the choice of the proxies we are 

proposing 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 below in section VII.D.3.d. 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 
CMS-1518-P 703 

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, we refer readers to the 

discussion in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43843). 

TABLE VII.D-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 Salaries1 52.895 49.447 ECI for Wages and Salaries, 

Civilian Hospital Workers 

B. Employee Benefits1 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 and 

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 and 

Feeds 
CMS-1518-P 704 

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 

(3.) Food: Contract 

Services 

0.620 0.392 CPI-U for Food Away From 

Home 

(4.) Chemicals2 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 Supplies2 0.096 -- -- 

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

Products 

(8.) Paper and Printing 

Products 

1.000 1.021 PPI for Converted Paper and 

Paperboard Products 

(9.) Apparel 0.207 0.210 PPI for Apparel 

(10.) Machinery and 

Equipment 

0.297 0.106 PPI for Machinery and 

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-related3

2.892 2.114 ECI for Compensation for 

Professional and Related 

Occupations 

(b.) Administrative and 

Business Support Services4

n/a 0.422 ECI for Compensation for 

Office and Administrative 

Services 

(c.) All Other: LaborRelated Services5

2.219 2.145 ECI for Compensation for 

Private Service Occupations 

(2.) Nonlabor-Related 

Services 

3.722 6.733 -- 

(a.) Professional Fees: 

Nonlabor-Related3

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 
CMS-1518-P 705 

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 

(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: NonlaborRelated Services6

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)—vintageweighted (26 years) 

(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. 

2

To proxy the Chemicals cost category, we used a blended PPI composed of the PPI for Industrial Gases, 

the PPI for Other Basic Inorganic Chemical Manufacturing, the PPI for Other Basic Organic Chemical 

Manufacturing, and the PPI for Soap and Cleaning Compound Manufacturing. For more detail about this 

proxy, we refer readers to section VII.D.3.c.(10) of the preamble of this proposed rule. In addition, we are 

proposing to now include expenses related to Photographic Supplies in the Chemicals cost category due to 
CMS-1518-P 706 

the small cost weight associated with these expenses. We note that, although we would be eliminating the 

specific cost category, these costs are still accounted for within the RPL market basket. 

3

The “Professional Fees: Labor-related” and “Professional Fees: Nonlabor-related” cost categories were 

included in one cost category called “Professional Fees” in the FY 2002-based RPL market basket. For 

more detail about how these new categories were derived, we refer readers to section VII.D.3.f. of the 

preamble of this proposed rule on the labor-related share. 

4

The Administrative and Business Support Services cost category was contained within the “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 proposed FY 2008-based RPL market basket. 

5

The “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 

proposed FY 2008-based RPL market basket. 

(1) 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. 

(2) 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. 

(3) 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. 

(4) 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 used the PPI for Commercial Natural Gas (BLS series code WPU0552) as a proxy for 

this cost category. For the proposed FY 2008-based market basket, we are proposing to 
CMS-1518-P 707 

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. 

(5) 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. 

(6) 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. 
CMS-1518-P 708 

(7) 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. 

Although there was a recent change to the BLS naming convention for this series, this is 

the same proxy that was used in the FY 2002-based RPL market basket. 

(8) 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. 

(9) 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. 

(10) 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 series code PCU32519-32519-), and the PPI for Soap and Cleaning 

Compound Manufacturing (NAICS 325610) (BLS series code PCU32561-32561-). 
CMS-1518-P 709 

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 VII.D-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 VII.D-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

(11) 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 
CMS-1518-P 710 

(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. 

(12) 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. 

(13) 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. 

(14) 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. 

(15) 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. 
CMS-1518-P 711 

(16) 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. 

(17) 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. 

(18) 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. 

(19) 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 
CMS-1518-P 712 

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. 

(20) 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. 

(21) 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. 

(22) 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: Nonlaborintensive category (now renamed the All Other: Nonlabor-related Services category), and 

were proxied by the CPI for All Items. We believe that this compensation index better 

reflects the changing price of labor associated with the provision of financial services and 

its incorporation represents a technical improvement to the market basket. 
CMS-1518-P 713 

(23) 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. 

(24) 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. 

(25) 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. 

d. Proposed Methodology for Capital Portion of the RPL Market Basket 

 In the FY 2002-based RPL market basket, we did not have freestanding IRF, 

freestanding 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. 
CMS-1518-P 714 

 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 

length of stay edits as applied when calculating the operating cost weights as described 

above in section VII.D.3.a. of this preamble 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 and Fixed Equipment; and 

(2) Movable Equipment. The apportionment between building and fixed equipment and 

movable equipment was determined using the FY 2008 Medicare cost reports for 

freestanding IRFs, freestanding IPFs, and LTCHs. This methodology was also used to 

compute the apportionment used in the FY 2002-based RPL market basket (71 FR 

27815). 
CMS-1518-P 715 

 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 for-profit 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 freestanding IRFs, freestanding IPFs, and LTCHs. For the 

proposed FY 2008-based RPL market basket, we are proposing to derive the split using 

the FY 2008 Medicare cost report data on interest expenses for government/nonprofit and 

for-profit freestanding IRFs, freestanding 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 average length of stay 

edits (as described in section VII.D.3.a. of this preamble) 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 freestanding IRFs, freestanding IPFs, and LTCHs as 

well as the application of these length of stay 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. 
CMS-1518-P 716 

The vintage-weighted capital portion of the proposed 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 and fixed equipment, movable equipment, and interest. We are proposing to use 

the vintage weights to compute vintage-weighted 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. 
CMS-1518-P 717 

 To calculate the vintage weights for depreciation and interest expenses, we 

needed a time series of capital purchases for building and fixed equipment and movable 

equipment. We found no single source that provides an appropriate time series of capital 

purchases by hospitals for all of the above components of capital purchases. The early 

Medicare cost reports did not have sufficient capital data to meet this need. Data we 

obtained from the American Hospital Association (AHA) do not include annual capital 

purchases. However, AHA does provide a consistent database back to 1963. We used 

data from the AHA Panel Survey and the AHA Annual Survey to obtain a time series of 

total expenses for hospitals. We then used data from the AHA Panel Survey 

supplemented with the ratio of depreciation to total hospital expenses obtained from the 

Medicare cost reports to derive a trend of annual depreciation expenses for 1963 through 

2008. 

 In order to estimate capital purchases using data on depreciation expenses, the 

expected life for each cost category (building and 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 freestanding IRFs, freestanding 

IPFs, and LTCHs, we used 2001 Medicare cost reports for IPPS hospitals to determine 

the expected life of building and fixed equipment and movable equipment (71 FR 27816). 

The FY 2002-based RPL market basket was based on an expected average life of 

building and fixed equipment of 23 years. It used 11 years as the average expected life 

for moveable equipment. We believed that this data source reflected the latest relative 
CMS-1518-P 718 

cost structure of depreciation expenses for hospitals at the time and was analogous to 

freestanding IRFs, freestanding IPFs, and LTCHs. 

 The expected life of any asset 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 

average expected life of building and fixed equipment to be equal to 26 years, and the 

average 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 and fixed equipment 

and movable equipment using the Medicare cost reports from freestanding IRFs, 

freestanding IPFs, and LTCHs. 

 We also are proposing to use the building and fixed equipment and movable 

equipment weights derived from FY 2008 Medicare cost reports for freestanding IRFs, 

freestanding IPFs, and LTCHs to separate the depreciation expenses into annual amounts 

of building and fixed equipment depreciation and movable equipment depreciation. 

Year-end asset costs for building and fixed equipment and movable equipment were 

determined by multiplying the annual depreciation amounts by the expected life 

calculations. 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 
CMS-1518-P 719 

and fixed equipment and for movable equipment. Each of these sets of vintage weights is 

explained in more detail below. 

 For the proposed building and fixed equipment vintage weights, we used the real 

annual capital purchase amounts for building and fixed equipment to capture the actual 

amount of the physical acquisition, net of the effect of price inflation. This real annual 

purchase amount for building and fixed equipment was produced by deflating the 

nominal annual purchase amount by the building and fixed equipment price proxy, BEA's 

chained price index for nonresidential construction for hospitals and special care 

facilities. Because building and fixed equipment have an expected life of 26 years, the 

vintage weights for building and fixed equipment are deemed to represent the average 

purchase pattern of building and fixed equipment over 26-year periods. With real 

building and fixed equipment purchase estimates available from 2008 back to 1963, we 

averaged twenty 26-year periods to determine the average vintage weights for building 

and fixed equipment that are representative of average building and fixed equipment 

purchase patterns over time. Vintage weights for each 26-year period are calculated by 

dividing the real building and fixed capital purchase amount in any given year by the 

total amount of purchases in the 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 and 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 
CMS-1518-P 720 

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 and fixed, and movable) were used to capture the 

value of the debt instrument. Because we have determined that hospital debt instruments 

have an expected life of 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 
CMS-1518-P 721 

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 VII.D-4 below. 

TABLE VII.D-4.--FY 2002 AND FY 2008 VINTAGE WEIGHTS FOR 

CAPITAL-RELATED PRICE PROXIES 

Building and Fixed 

Equipment 

Movable Equipment Interest 

Year 

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 
CMS-1518-P 722 

Building and Fixed 

Equipment 

Movable Equipment Interest 

Year 

FY 2002 

23 years 

FY 2008 

26 years 

FY 2002 

11 years 

FY 2008 

11 years 

FY 2002 

23 years 

FY 2008 

26 years 

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 Capital Input Price Index 

(CIPI) as described in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43857). 
CMS-1518-P 723 

e. Proposed FY 2012 Market Basket Update for LTCHs 

 For FY 2012 (that is, October 1, 2011 through September 30, 2012), we are 

proposing to use an estimate of the proposed FY 2008-based RPL market basket update 

based on the best available data. Consistent with historical practice, we estimate the RPL 

market basket update for the LTCH PPS based on IHS Global Insight, Inc.’s (IGI’s) 

forecast using the most recent available data. IGI is a nationally recognized economic 

and financial forecasting firm that contracts with CMS to forecast the components of the 

market baskets. 

 Based on IGI’s first quarter 2011 forecast with history through the 4th quarter of 

2010, the projected market basket update for FY 2012 is 2.8 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 2.8 percent for FY 2012. 

Furthermore, because the proposed FY 2012 annual update is based on the most recent 

market basket estimate for the 12-month period (currently 2.8 percent), we also are 

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 

FY 2012 annual update in the final rule. (As discussed in greater detail in section V.A.2. 

of the Addendum to this proposed rule, we are proposing an annual update of 1.5 percent 

to the LTCH PPS standard Federal rate for FY 2012 under proposed §412.523(c)(3)(viii) 

of the regulations.) 

 Using the current FY 2002-based RPL market basket and IGI’s first quarter 2011 

forecast for the market basket components, the FY 2012 market basket update would be 
CMS-1518-P 724 

2.8 percent (before taking into account any statutory adjustment). Table VII.D-5 below 

compares the proposed FY 2008-based RPL market basket and the FY 2002-based RPL 

market basket percent changes. 

TABLE VII.D-5.--FY 2002-BASED AND PROPOSED FY 2008-BASED RPL 

MARKET BASKET PERCENT CHANGES; FY 2006 THROUGH FY 2014 

Fiscal Year (FY) 

FY 2002-Based RPL 

Market Basket Index 

Percent Change 

Proposed FY 2008-Based 

RPL Market Basket 

Index Percent Change 

Historical data: 

 FY 2006 3.9 3.7 

 FY 2007 3.4 3.4 

 FY 2008 3.8 3.7 

 FY 2009 2.5 2.7 

 FY 2010 2.3 2.2 

 Average 2006-2010 3.2 3.1 

Forecast: 

 FY 2011 2.6 2.7 

 FY 2012 2.8 2.8 

 FY 2013 2.9 2.9 

 FY 2014 3.0 3.0 

 Average 2011-2014 2.8 2.9 

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

required. 

Source: IHS Global Insight, Inc. first quarter 2011 forecast. 

 For FY 2012, the proposed FY 2008-based RPL market basket update (2.8 

percent) is the same as the market basket update based on the FY 2002-based RPL 

market basket. 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. However, this impact is 

partially offset by the larger weight associated with the Professional Fees category. In 

both market baskets, these expenditures are proxied by the ECI for Compensation for 
CMS-1518-P 725 

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. The net effect is that the market basket 

update is the same for FY 2012 based on the current FY 2002-based RPL market basket 

and the proposed FY 2008-based RPL market basket. 

f. Proposed Labor-Related Share 

 As discussed in section V.B. of the Addendum to this proposed rule, under the 

authority of section 123 of the BBRA as amended by section 307(b) of the BIPA, we 

established an adjustment to the LTCH PPS payments to account for differences in 

LTCH area wage levels (§412.525(c)). The labor-related portion of the LTCH PPS 

standard Federal rate, hereafter referred to as the labor-related share, is adjusted to 

account for geographic differences in area wage levels by applying the applicable LTCH 

PPS wage index. 

 The labor-related share is determined by identifying the national average 

proportion of 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 laborintensive 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. 
CMS-1518-P 726 

 Consistent with previous rebasings, the All Other: Labor-related Services cost 

category is mostly comprised of building maintenance and security services (including, 

but not limited to, commercial and industrial machinery and equipment repair, 

nonresidential maintenance and repair, and investigation and security services). Because 

these services tend to be labor-intensive and are mostly performed at the hospital facility 

(and, therefore, unlikely to be purchased in the national market), we believe that they 

meet our definition of labor-related services. 

 As stated in the RY 2007 LTCH PPS final rule (71 FR 27829), the labor-related 

share was defined as the sum of the relative importance of the labor-related share of 

operating costs (Wages and Salaries, Employee Benefits, Professional Fees, and All 

Other: Labor-intensive Services), and capital costs of the RPL market basket based on 

FY 2002 data. Therefore, to determine the labor-related share for the LTCH PPS for 

FY 2011, we used the FY 2002-based RPL market basket cost weights relative 

importance to determine the labor-related share for the LTCH 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 Labor-intensive 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. 
CMS-1518-P 727 

 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. 

 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 LTCHs as they are also institutional providers of health care 

services. Using data on full-time equivalents (FTEs) to allocate responding hospitals 

across strata (region of the country and urban/rural status), we calculated post-
CMS-1518-P 728 

stratification 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 to determine the Professional 

Fees: Nonlabor-related costs. The Professional Fees: Labor-related costs were 

determined to be the difference between the total costs for each Benchmark I-O category 

and the Professional Fees: Nonlabor-related costs. This is the methodology that we used 

to separate the proposed 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 
CMS-1518-P 729 

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 laborrelated share. 

 Using data primarily from the Medicare cost reports and a CMS database of 

Home Office Medicare Records (HOMER) (a database that provides city and state 

information (addresses) for home offices), we were able to determine that 19 percent of 

the total number of freestanding IRFs, freestanding IPFs, and LTCHs that had home 

offices had those home offices located in their respective local labor markets--defined as 

being in the same Metropolitan Statistical Area (MSA). 

 The Medicare cost report requires hospitals to report their home office provider 

numbers. Using the HOMER database to determine the home office location for each 

home office provider number, we compared the location of the provider with the location 

of the hospital's home office. We then placed providers into one of the following three 

groups: 

● Group 1--Provider and home office are located in different States. 

● Group 2--Provider and home office are located in the same State and same city. 

● Group 3--Provider and home office are located in the same State and different 

city. 

 We found that 63 percent of the providers with home offices were classified into 

Group 1 (that is, different State) and, thus, these providers were determined to not be 

located in the same local labor market as their home office. Although there were a very 
CMS-1518-P 730 

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: Nonlabor-related 

Services cost category. 

 Using this proposed method and the IGI forecast for the first quarter 2011 of the 

proposed FY 2008-based RPL market basket, the proposed LTCH labor-related share for 
CMS-1518-P 731 

FY 2012 is the sum of the FY 2012 relative importance of each labor-related cost 

category. Consistent with our proposal to update the labor-related share with the most 

recent available data, the labor-related share for this proposed rule reflects IGI’s first 

quarter 2011 forecast of the proposed FY 2008-based RPL market basket. Table VII.D-6 

below shows the proposed FY 2012 relative importance labor-related share using the 

proposed FY 2008-based RPL market basket and the FY 2011 relative importance laborrelated share using the FY 2002-based RPL market basket. 

TABLE VII.D-6.--COMPARISON OF THE FY 2011 RELATIVE IMPORTANCE 

LABOR-RELATED SHARE BASED ON THE FY 2002-BASED RPL MARKET 

BASKET AND THE PROPOSED FY 2012 RELATIVE IMPORTANCE 

LABOR-RELATED SHARE BASED ON THE PROPOSED FY 2008-BASED RPL 

MARKET BASKET 

FY 2011 Relative 

Importance 

Labor-Related 

Share1

Proposed FY 2012 

Relative 

Importance 

Labor-Related 

Share2

Wages and Salaries 52.449 49.066

Employee Benefits 13.971 13.040

Professional Fees: Labor-Related 2.855 2.073

Administrative and Business 

Support Services -- 0.416

All Other: Labor-Related Services 2.109 2.094

Subtotal 71.384 66.689

Labor-Related Portion of Capital 

Costs (46%) 3.887 3.645

Total Labor-Related Share 75.271 70.334

1

Published in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50391) and based on the second quarter 2010 

IGI forecast. 

2

Based on the first quarter 2011 IGI forecast. 

 The proposed labor-related share for FY 2012 is the sum of the proposed 

FY 2012 relative importance of each labor-related cost category, and would reflect the 
CMS-1518-P 732 

different rates of price change for these cost categories between the base year (FY 2008) 

and FY 2012. The sum of the proposed relative importance for FY 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 66.689 percent, as shown in Table VII.D-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. 

Because the relative importance for Capital-Related Costs would be 7.923 percent of the 

proposed FY 2008-based RPL market basket in FY 2012, we are proposing to take 46 

percent of 7.923 percent to determine the proposed labor-related share of Capital for 

FY 2012. The result would be 3.645 percent, which we are proposing to add to 66.689 

percent for the operating cost amount to determine the total proposed labor-related share 

for FY 2012. Thus, the labor-related share that we are proposing to use for LTCH PPS in 

FY 2012 would be 70.344 percent. This proposed labor-related share is determined using 

the same methodology as employed in calculating all previous LTCH labor-related 

shares. 

E. Proposed Changes to the LTCH Payment Rates and Other Proposed Changes to the 

FY 2012 LTCH PPS

1. Overview of Development of the LTCH Payment Rates 

 The LTCH PPS was effective beginning with a LTCH's first cost reporting period 

beginning on or after October 1, 2002. Therefore, beginning with their FY 2003 cost 

reporting period, LTCHs were paid, during a 5-year transition period, a total LTCH 
CMS-1518-P 733 

prospective payment that was comprised of an increasing proportion of the LTCH PPS 

Federal rate and a decreasing proportion based on reasonable cost-based principles, 

unless the hospital made a one-time election to receive payment based on 100 percent of 

the Federal rate, as specified in §412.533. New LTCHs (as defined at §412.23(e)(4)) 

were paid based on 100 percent of the Federal rate, with no phase-in transition payments. 

 The basic methodology for determining LTCH PPS Federal prospective payment 

rates is set forth at §412.515 through §412.536. In this section, we discuss the factors 

that we are proposing to use to update the LTCH PPS standard Federal rate for FY 2012, 

that is, effective for LTCH discharges occurring on or after October 1, 2011 through 

September 30, 2012. 

 For further details on the development of the FY 2003 standard Federal rate, we 

refer readers to the August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56037). 

For subsequent updates to the LTCH PPS Federal rate, we refer readers to the following 

final rules: RY 2004 LTCH PPS final rule (68 FR 34134 through 34140); RY 2005 

LTCH PPS final rule (68 FR 25682 through 25684); RY 2006 LTCH PPS final rule 

(70 FR 24179 through 24180); RY 2007 LTCH PPS final rule (71 FR 27819 through 

27827); RY 2008 LTCH PPS final rule (72 FR 26870 through 27029); RY 2009 LTCH 

PPS final rule (73 FR 26800 through 26804); RY 2010 LTCH PPS final rule 

(74 FR 44021 through 44030); and FY 2011 IPPS/LTCH PPS final rule (75 FR 50443 

through 50444). 

 The proposed update to the LTCH PPS standard Federal rate for FY 2012 is 

presented in section V.A. of the Addendum to this proposed rule. The components of the 
CMS-1518-P 734 

proposed annual market basket update to the LTCH PPS standard Federal rate for 

FY 2012 are discussed below. In addition, as discussed below in section VII.E.3. of this 

preamble, beginning in FY 2012, in addition to the proposed update factor, we are 

proposing to make an adjustment to the standard Federal rate to account for the estimated 

effect of any proposed changes to the area wage level adjustment on estimated aggregate 

LTCH PPS payments. 

2. Proposed FY 2012 LTCH PPS Annual Market Basket Update 

a. Overview 

Historically, the Medicare program has used a market basket to account for price 

increases in the services furnished by providers. The market basket used for the LTCH 

PPS includes both operating and capital-related costs of LTCHs because the LTCH PPS 

uses a single payment rate for both operating and capital-related costs. With the initial 

implementation of the LTCH PPS for FY 2003, we established the use of the excluded 

hospital with capital market basket as the LTCH PPS market basket (67 FR 56016 

through 56017). (For further details on the development of the excluded hospital with 

capital market basket, we refer readers to the RY 2004 LTCH PPS final rule 

(68 FR 34134 through 34137).) The development of the initial LTCH PPS standard 

Federal rate for FY 2003, using the excluded hospital with capital market basket, is 

discussed in further detail in the August 30, 2002 LTCH PPS final rule (67 FR 56027 

through 56033). 

 Beginning in RY 2007, we adopted the rehabilitation, psychiatric, long-term care 

(RPL) hospital market basket based on FY 2002 data as the appropriate market basket of 
CMS-1518-P 735 

goods and services under the LTCH PPS for discharges occurring on or after 

July 1, 2006. As discussed in the RY 2007 LTCH PPS final rule (71 FR 27810), based 

on our research, we did not develop a market basket specific to LTCH services. We were 

unable to create a separate market basket specifically for LTCHs at that time due to the 

small number of facilities and the limited amount of data that was reported. (For further 

details on the development of the FY 2002-based RPL market basket, we refer readers to 

the RY 2007 LTCH PPS final rule (71 FR 27810 through 27817).) 

 As discussed in greater detail in section VII.D. of this preamble, we are proposing 

to revise and rebase the market basket used under the LTCH PPS for FY 2012. 

Specifically, we are proposing to adopt a newly created FY 2008-based RPL market 

basket (described in section VII.D. of this preamble). Also, in section VII.D. of this 

preamble, we discuss our continued interest in exploring the possibility of creating a 

stand-alone LTCH market basket that reflects the cost structures of only LTCH providers. 

b. Revision of Certain Market Basket Updates as Required by the Affordable Care Act 

Several provisions of the Affordable Care Act affect the policies and payment 

rates under the LTCH PPS. Section 1886(m)(3)(A) of the Act, as added by section 

3401(c) of the Affordable Care Act, specifies that, for rate year 2010 and each subsequent 

rate year through 2019, any annual update to the standard Federal rate shall be reduced: 

● For rate year 2010 through 2019, by the other adjustment specified in sections 

1886(m)(3)(A)(ii) and (m)(4) of the Act; and 
CMS-1518-P 736 

● For rate year 2012 and each subsequent year, by the productivity adjustment 

(which we refer to as “the multifactor productivity (MFP) adjustment” as discussed in 

section VII.E.2.d. of this preamble) described in section 1886(b)(3)(B)(xi)(II) of the Act. 

Section 1886(m)(3)(B) of the Act provides that the application of paragraph (3) of 

section 1886(m) of the Act may result in the annual update being less than zero for a rate 

year, and may result in payment rates for a rate year being less than such payment rates 

for the preceding rate year. We note that because the annual update to the LTCH PPS 

policies, rates, and factors now occurs on October 1, we have adopted the term “fiscal 

year” (FY) rather than “rate year” (RY) under the LTCH PPS beginning October 1, 2010, 

to conform with the standard definition of the Federal fiscal year (October 1 through 

September 30) used by other PPSs, such as the IPPS (75 FR 50396 through 50397). 

Although the language of sections 3401(c), 10319, and 1105(b) of the Affordable Care 

Act refers to years 2010 and thereafter under the LTCH PPS as “rate year,” consistent 

with our change in the terminology used under the LTCH PPS from “rate year” to “fiscal 

year,” for purposes of clarity, when discussing the annual update for the LTCH PPS, 

including the provisions of the Affordable Care Act, we employ “fiscal year” rather than 

“rate year” for 2011 and subsequent years. 

c. Proposed Market Basket under the LTCH PPS for FY 2012 

 As noted above and as discussed in the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50389), when we initially created the FY 2002-based RPL market basket, we 

were unable to create a separate market basket specifically for LTCHs due, in part, to the 

small number of facilities and the limited data that were provided in the Medicare cost 
CMS-1518-P 737 

reports. Over the last several years, however, the number of LTCHs submitting valid 

Medicare cost report data has increased. Based on this development, as well as our desire 

to move from one RPL market basket to three stand-alone and provider-specific market 

baskets (for IRFs, IPFs, and LTCHs, respectively), we have begun to explore the viability 

of creating these market baskets for future use. However, as we discussed in the 

RY 2010 LTCH PPS final rule (74 FR 43967 through 43968), we are conducting further 

research to assist us in understanding the reasons for the variations in costs and cost 

structure between freestanding IRFs and hospital-based IRFs. We also are researching 

the reasons for similar variations in costs and cost structure between freestanding IPFs 

and hospital-based IPFs. Therefore, we do not believe it is appropriate at this time to 

propose stand-alone market baskets for IRFs, IPFs, and LTCHs, and we believe that it is 

appropriate to continue to use the RPL market basket for LTCHs, IRFs, and IPFs under 

their respective PPSs. 

 We continue to believe that the RPL market basket appropriately reflects the cost 

structure of LTCHs, for the reasons discussed when we adopted the RPL market basket 

for use under the LTCH PPS in the RY 2007 LTCH PPS final rule (71 FR 27810 through 

27817). For the reasons explained above, we are proposing to continue to use the RPL 

market basket under the LTCH PPS for FY 2012. However, as discussed in greater detail 

in section VII.D. of this preamble, we are proposing to rebase and revise the 

FY 2002-based RPL market basket by creating a proposed FY 2008-based RPL market 

basket. Currently, we are exploring the viability of creating two separate market baskets 

from the current RPL market basket: One market basket would include freestanding 
CMS-1518-P 738 

IRFs and freestanding IPFs and would be used to update payments under both the IPF 

and IRF payment systems. The other market basket would be a stand-alone LTCH 

market basket. Depending on the outcome of our research, we may propose a stand-alone 

LTCH market basket in the next LTCH PPS update cycle. We invite public comment on 

the possibility of using this type of market basket to update LTCH payments in the future. 

 Under the authority of section 123 of the BBRA as amended by section 307(b) of 

the BIPA, we are proposing to use the proposed FY 2008-based RPL market basket 

(described in section VII.D. of this preamble) under the LTCH PPS for FY 2012, which 

we continue to believe appropriately reflects the cost structure of LTCHs. 

d. Productivity Adjustment 

Section 1886(m)(3)(A)(i) of the Act specifies that, for FY 2012 and subsequent 

years, any annual update to the standard Federal rate shall be reduced by the productivity 

adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. Section 

1886(b)(3)(B)(xi)(II) of the Act, as added by section 3401(a) of the Affordable Care Act, 

defines the productivity adjustment as equal to the 10-year moving average of changes in 

annual economy-wide, private nonfarm business multifactor productivity (MFP) (as 

projected by the Secretary for the 10-year period ending with the applicable fiscal year, 

calendar year, cost reporting period, or other annual period) (the “MFP adjustment”). 

The Bureau of Labor Statistics (BLS) is the agency that publishes the official measure of 

private non-farm business MFP. We refer readers to the BLS Web site at 

http://www.bls.gov/mfp to obtain the BLS historical published MFP data. 
CMS-1518-P 739 

The proposed MFP adjustment that would be applied in determining any annual 

update to the LTCH PPS standard Federal rate is the same adjustment that is required to 

be applied in determining the applicable percentage increase under the IPPS under 

section 1886(b)(3)(B)(i) of the Act. As described in section IV.K.3. of this preamble, we 

are proposing to derive the FY 2012 MFP adjustment applied to the operating IPPS 

applicable percentage increase using a projection of MFP that is currently produced by 

IHS Global Insight, Inc. (IGI). For a detailed description of the model currently used by 

IGI to project MFP, as well as a description of how the proposed MFP adjustment is 

calculated for FY 2012, we refer readers to section IV.K.3 of this preamble. The current 

estimate of the proposed MFP adjustment for FY 2012 based on IGI’s first quarter 2011 

forecast is 1.2 percent. Consistent with the statute, we are proposing to reduce the 

proposed FY 2012 market basket update of the LTCH PPS standard Federal rate using 

this same proposed FY 2012 MFP adjustment. 

To determine the proposed market basket update for LTCHs for FY 2012, as 

reduced by the MFP adjustment, consistent with the approach proposed under the IPPS 

for FY 2012 (discussed in section IV.K.3. of this preamble), we are proposing that the 

proposed FY 2012 MFP percentage adjustment be subtracted from the proposed FY 2012 

market basket update. We are proposing that if more recent data are subsequently 

available (for example, a more recent estimate of the market basket and MFP 

adjustment), we would use such data, if appropriate, to determine the FY 2012 market 

basket update and MFP adjustment in the final rule. Following application of the 

productivity adjustment, the proposed adjusted market basket update (that is, the full 
CMS-1518-P 740 

market basket increase less the MFP adjustment) is then reduced by the “other 

adjustment” as required by sections 1886(m)(3)(A)(ii) and 1886(m)(4) of the Act. The 

proposed market basket update for FY 2012, which reflects both the proposed MFP 

adjustment and the “other adjustment” as required by sections 1886(m)(3)(A)(ii) and 

1886(m)(4) of the Act, is described in section VII.E.2.e. of this preamble. 
CMS-1518-P 741 

e. Proposed Annual Market Basket Update for LTCHs for FY 2012 

 Consistent with our historical practice, we are proposing to estimate the proposed 

market basket update based on IGI’s forecast using the most recent available data. Based 

on IGI’s first quarter 2011 forecast, the proposed FY 2012 market basket estimate for the 

LTCH PPS using the proposed FY 2008-based RPL market basket is 2.8 percent. 

Consistent with our historical practice of using market basket estimates based on the most 

recent available data, we are proposing that if more recent data are available when we 

develop the final rule, we would use such data, if appropriate. 

 Section 1886(m)(3)(A)(i) of the Act specifies that, for FY 2012 (and subsequent 

years), any annual update to the standard Federal rate shall be reduced by the productivity 

adjustment (referred to as “the MFP adjustment”) described in section 

1886(b)(3)(B)(xi)(II) of the Act. Furthermore, section 1886(m)(3)(A)(ii) of the Act 

specifies that, for each of RYs 2010 through 2019, any annual update to the standard 

Federal rate shall be reduced by the other adjustment specified in section 1886(m)(4) of 

the Act. Specifically, section 1886(m)(4)(C) of the Act requires a 0.1 percentage point 

reduction to the annual update to the LTCH PPS standard Federal rate for FY 2012. 

In accordance with section 1886(m)(3)(A)(i) of the Act, we are proposing to 

reduce the proposed FY 2012 full market basket estimate of 2.8 percent (based on the 

first quarter 2011 forecast of the proposed FY 2008-based RPL market basket) by the 

proposed FY 2012 MFP adjustment (that is, the 10-year moving average of MFP for the 

period ending FY 2012, as described in section VII.E.2.d of this preamble) of 1.2 percent 

(based on IGI’s first quarter 2011 forecast). Following application of the productivity 
CMS-1518-P 742 

adjustment, the proposed adjusted market basket update of 1.6 percent (2.8 percent minus 

1.2 percentage points) is then reduced by 0.1 percentage point, as required by sections 

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

 Therefore, in this proposed rule, we are proposing to establish an annual market 

basket update under the LTCH PPS for FY 2012 of 1.5 percent (that is, the most recent 

estimate of the proposed LTCH PPS market basket update at this time of 2.8 percent less 

the proposed MFP adjustment of 1.2 percentage points less the 0.1 percentage point 

required under section 1886(m)(4)(C) of the Act). Accordingly, we are proposing to 

revise §412.523(c)(3) by adding a new paragraph (viii), which would specify that the 

standard Federal rate for FY 2012 is the standard Federal rate for the previous long-term 

care hospital prospective payment system fiscal year updated by 1.5 percent. Again, 

consistent with our historical practice of using the most recent available data, we are 

proposing that if more recent data are available when we develop the final rule, we would 

use such data, if appropriate, in determining the final market basket update under the 

LTCH PPS for FY 2012. (We note that in section VII.E.3. of this preamble, for FY 2012, 

we are proposing to adjust the standard Federal rate by an area wage level budget 

neutrality factor of 0.99723 in accordance with proposed §412.523(d)(4).) 

3. Proposed Budget Neutrality Adjustment for the Changes to the Area Wage Level 

Adjustment 

 As described in section V.B. of the Addendum to this proposed rule, when the 

LTCH PPS was implemented, under the authority of section 123 of the BBRA as 

amended by section 307(b) of the BIPA, we established an adjustment to the LTCH PPS 
CMS-1518-P 743 

standard Federal rate to account for differences in LTCH area wage levels at §412.525(c). 

The labor-related share of the LTCH PPS standard Federal rate is adjusted to account for 

geographic differences in area wage levels by applying the applicable LTCH PPS wage 

index. The applicable LTCH PPS wage index is computed using wage data from 

inpatient acute care hospitals without regard to reclassification under section 1886(d)(8) 

or section 1886(d)(10) of the Act. Historically, in general, the LTCH PPS wage index 

and labor-related share are updated annually based on the latest available data. However, 

there are currently no statutory or regulatory requirements that state that any updates or 

adjustments to the LTCH PPS area wage level adjustment (that is, the wage index or the 

labor-related share) be budget neutral, such that estimated aggregate LTCH PPS 

payments would be neither greater than nor less than estimated aggregate LTCH PPS 

payments without such changes to the area wage level adjustment. 

As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56015), 

when we implemented the LTCH PPS, we established a 5-year transition to the full area 

wage level adjustment. The area wage level adjustment was completely phased-in for 

cost reporting periods beginning in FY 2007. Therefore, for cost reporting periods 

beginning on or after October 1, 2006, the applicable full LTCH PPS wage index values 

are used to make payments under the LTCH PPS. As discussed in section VII.D. of this 

preamble, we are proposing to revise and rebase the market basket used under the LTCH 

PPS for FY 2012, and we are also proposing to update the labor-related share for 

FY 2012 based on this proposed market basket. We are taking this opportunity to revisit 

our approach for annually updating the area wage level adjustment. In order to mitigate 
CMS-1518-P 744 

estimated yearly fluctuations in estimated aggregate LTCH PPS payments, as have been 

suggested in the past, we have given further consideration to the issue of establishing a 

budget neutrality requirement for any changes to the area wage level adjustment. 

Therefore, in this proposed rule, under the broad authority conferred upon the Secretary 

under section 123 of the BBRA, as amended by section 307(b) of the BIPA, to develop 

the LTCH PPS, we are proposing that, beginning with the proposed adjustment for area 

wage levels for FY 2012 (discussed in section V.B. of the Addendum to this proposed 

rule), any changes to the wage index values or labor-related share would be made in a 

budget neutral manner such that estimated aggregate LTCH PPS payments would be 

unaffected, that is, would be neither greater than nor less than the estimated aggregate 

LTCH PPS payments that would have been made without such changes to the area wage 

level adjustment. Accordingly, under §412.525(c), we are proposing to specify that, 

beginning in FY 2012, any adjustments or updates made to the area wage level 

adjustment under this section will be made in a budget neutral manner such that estimated 

aggregate LTCH PPS payments are not affected. 

Under this proposal, we would determine an area wage level adjustment budget 

neutrality factor that would be applied to the standard Federal rate to ensure that any 

changes to the area wage level adjustment would be budget neutral such that any changes 

to the wage index values or labor-related share would not result in any change (increase 

or decrease) in estimated aggregate LTCH PPS payments. Specifically, we are proposing 

to use the following steps to determine a proposed area wage level adjustment budget 

neutrality factor that would be applied to the standard Federal rate that would ensure that 
CMS-1518-P 745 

the proposed FY 2012 update to the wage index values and to the labor-related share are 

adopted in a budget neutral manner. 

● Step 1--We would simulate estimated aggregate LTCH PPS payments using 

the FY 2011 wage index values as established in Tables 12A and 12B of the Addendum 

to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50627 through 50646) and the 

FY 2011 labor-related share of 75.271 percent as established in the FY 2011 IPPS/LTCH 

PPS final rule (75 FR 50391 and 50445). 

● Step 2--We would simulate estimated aggregate LTCH PPS payments using 

the proposed FY 2012 wage index values as shown in Tables 12A and 12B of the 

Addendum to this proposed rule and the proposed FY 2012 labor-related share of 

70.334 percent as discussed in section VII.D.3.f. of this proposed rule. 

● Step 3--We would calculate the ratio of these estimated total LTCH PPS 

payments by dividing the estimated total LTCH PPS payments using the FY 2011 area 

wage level adjustments (calculated in Step 1) by the estimated total LTCH PPS payments 

using the proposed FY 2012 area wage level adjustments (calculated in Step 2) to 

determine the area wage level adjustment budget neutrality factor. 

● Step 4--We would then apply the proposed FY 2012 area wage level 

adjustment budget neutrality factor from Step 3 to determine the proposed FY 2012 

LTCH PPS standard Federal rate after the application of the proposed FY 2012 annual 

update (discussed in section V.A.2. of the Addendum to this proposed rule). We are 

proposing to revise the existing regulations at §412.523(d) to add a new paragraph (4), 

which would specify that, beginning in FY 2012, we would adjust the standard Federal 
CMS-1518-P 746 

rate by a factor that accounts for the estimated effect of any adjustments or updates to the 

area wage level adjustment under §412.525(c)(1) on estimated aggregate LTCH PPS 

payments. In this proposed rule, we also are proposing to revise existing §412.525(c) to 

reflect our current policy of updating the labor-related share annually. 

 For this proposed rule, using the steps in the proposed methodology described 

above, we have determined a proposed FY 2012 area wage level adjustment budget 

neutrality factor of 0.99723. Accordingly, in section V.A.2. of the Addendum to this 

proposed rule, to determine the proposed FY 2012 LTCH PPS standard Federal rate, we 

are proposing to apply an area wage level adjustment budget neutrality factor of 0.99723, 

in accordance with proposed §412.523(d)(4), and therefore, the proposed FY 2012 LTCH 

PPS standard Federal rate shown in Table 1E reflects this proposed adjustment. 

4. Greater than 25-Day Average Length of Stay Requirement for LTCHs 

Section 1886(d)(1)(B) of the Act lists hospitals that are excluded from the IPPS. 

Section 1886(d)(1)(B)(iv) of the Act specifies the exclusion from the IPPS for “a hospital 

which has an average inpatient length of stay (as determined by the Secretary) of greater 

than 25 days.” The average length of stay requirement was established as the sole 

prerequisite for a hospital seeking to be excluded from the IPPS under this provider 

category. Section 114(a) of the MMSEA of 2007 amended section 1861 of the Act by 

adding a new subsection (ccc), which further defined LTCHs. Thus, a hospital’s 

classification as an LTCH has depended, in large part, upon whether an acute care 

hospital met the greater than 25 days average length of stay requirement. Once the 

hospital was classified as such under this criterion, the ability for the hospital to continue 
CMS-1518-P 747 

its exclusion from the IPPS and be paid as an LTCH depended, in part, upon its 

continuing to meet that criterion. 

The regulations at 42 CFR 412.23(e)(1) and (e)(2) set forth the requirements a 

hospital must meet in order to be excluded from the IPPS and be paid as an LTCH. 

Specifically, §412.23(e)(1) requires that a hospital must have a provider agreement under 

42 CFR Part 489 to participate as a Medicare hospital, and §412.23(e)(2) provides that a 

hospital must meet the LTCH average length of stay of greater than 25 days policy. The 

methodology for calculating the average length of stay is specified at §412.23(e)(3). A 

detailed explanation of the procedural features of the average length of stay policy was 

included in the FY 2003 LTCH PPS final rule, which implemented the LTCH PPS 

(67 FR 55970 through 55974)). 

In this proposed rule, we are proposing to clarify two existing CMS policies 

related to the greater than 25 days average length of stay requirement policy: (1) the 

determination of the average length of stay for a hospital seeking exclusion under the 

IPPS to be paid as an LTCH or an existing LTCH undergoes a change of ownership; and 

(2) the inclusion of Medicare Advantage days in calculating the average length of stay. 

a. Determination of the Average Length of Stay When There is a Change of Ownership 

Under §412.23(e)(3)(iv) of the regulations, we implemented a policy regarding 

the application of the average length of stay methodology, where a hospital (that is either 

seeking LTCH status, or is an existing LTCH) has undergone a change of ownership. 

Specifically, in the event of a change of ownership, the regulation provides: 
CMS-1518-P 748 

“If a hospital has undergone a change of ownership (as described in §489.18 of 

this chapter) at the start of a cost reporting period or at any time within the period of at 

least 5 months of the preceding 6-month period, the hospital may be excluded from the 

prospective payment system as a long-term care hospital for a cost reporting period if, for 

the period of at least 5 months of the 6 months immediately preceding the start of the 

period (including time before the change of ownership), the hospital has the required 

average length of stay, continuously operated as a hospital, and continuously participated 

as a hospital in Medicare.” 

Section 412.23(e)(3)(iv) institutes a procedure by which the average length of stay 

of a hospital seeking LTCH status or an existing LTCH is evaluated by its fiscal 

intermediary or MAC to determine whether or not the facility that is being sold meets the 

requirements for LTCH status. Because the sale of the facility, in effect, ends the seller’s 

cost reporting period (§413.24(f)(1)), and triggers the beginning of the purchaser’s first 

cost reporting period, the period of time that is evaluated is the “at least 5 months of the 6 

months immediately preceding the period (including time before the change of 

ownership” to determine the average length of stay that will result in the hospital that 

meets the requirements for LTCH status. If the average length of stay data indicates that, 

for this period of time, the hospital met the required average length of stay of greater than 

25 days, then the new owner’s hospital will achieve IPPS exclusion and LTCH status. 

On the other hand, if the data indicate that the hospital does not meet the required average 

length of stay, the hospital will instead be paid under the IPPS under its new ownership. 

We understand that there has been some confusion in the provider community regarding 
CMS-1518-P 749 

the specific applicability of this regulation to a change of ownership of an existing 

LTCH. Accordingly, in this proposed rule, we are proposing to clarify this policy in 

regulation text by revising §412.23(e)(3)(iv) to specifically address the circumstance of a 

hospital that has not as yet been classified as an LTCH and wishes to be classified as an 

LTCH based on data from the hospital’s discharges occurring both before and after the 

change of ownership. Moreover, in an effort to provide greater clarity, we are also 

proposing to establish a separate provision in the regulations (proposed paragraph 

(e)(3)(v) under §412.23) to directly address LTCH status where there is a change of 

ownership of an existing LTCH. The sale of an existing LTCH, which triggers the 

beginning of a new cost reporting period under the new owner (413.24(f)(1)), is a 

situation where we believe it is appropriate to review whether the hospital that is being 

sold has been functioning as an LTCH, that is, has been treating patients for on average 

length of stay of greater than 25 days, before allowing the new owner to continue to be 

paid for services provided at the hospital under the LTCH PPS. Therefore, we are 

proposing that where there has been a change of ownership of an existing LTCH, the 

hospital will continue to be excluded from the inpatient prospective payment system as a 

long-term care hospital for the cost reporting period beginning with the change of 

ownership only if for the period of at least 5 months of the 6 months immediately 

preceding the change of ownership, the hospital meets the required average length of 

stay. We note that, conversely, under this proposed policy, if the hospital fails to meet 

the required average length of stay criterion, after this evaluation, and if it is an acute-
CMS-1518-P 750 

care hospital, it will be paid instead under the IPPS effective with the day of the change 

of ownership, that is, the start of the new owner’s cost reporting period. 

Accordingly, we are proposing to clarify our existing policy as described above 

by (1) revising existing §412.23(e)(3)(iv), to specifically address LTCH status in 

instances where a hospital is seeking IPPS exclusion and payment under the LTCH PPS 

but a change of ownership has occurred, and (2) proposing to establish a new 

§412.23(e)(3)(v) to specifically address the issue of LTCH status for existing LTCHs 

undergoing a change of ownership. 

b. Inclusion of Medicare Advantage (MA) Days in the Average Length of Stay 

Calculation 

With the passage of the Balanced Budget Act of 1997, Medicare beneficiaries 

were given the option to receive their Medicare benefits through private health insurance 

plans instead of through the original Medicare plan (Parts A and B). These programs 

were known as Medicare+Choice or Part C plans (Section 1851 through 1859 of the Act, 

implemented in 42 CFR Part 422). Pursuant to the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003, the compensation and business practices 

changed for insurers that offer these plans, and "Medicare+Choice" plans became known 

as Medicare Advantage (MA) plans.) 

When CMS implemented the LTCH PPS beginning in FY 2003, we revised the 

then-existing policy for calculating the average length of stay for LTCHs described at 

then §412.23(e)(2)(i). Under the TEFRA payment system, the average length of stay was 

determined by “...dividing the number of total inpatient days...by the total discharges for 
CMS-1518-P 751 

the hospital’s most recent complete cost reporting period ...” However, beginning with 

FY 2003, under the newly implemented LTCH PPS, the calculation was based on 

“dividing the total number of covered and noncovered days of stay of Medicare 

inpatients...by the total Medicare discharges for the hospital’s most recent complete cost 

reporting period” (§412.23(e)(3)(i)). The rationale for this change, as noted in the 

preamble to the FY 2003 LTCH PPS final rule, is that “LTCHs exist as a provider type in 

order to treat Medicare patients requiring complex long-term hospital-level care. We 

believe that a hospital’s right to qualify for payments under the prospective payment 

system for LTCHs should result from the actual provision of clinically appropriate care to 

Medicare LTCH patients...” (67 FR 55971). 

Although the policy since the start of the LTCH PPS has been for all LTCH 

patients being paid for by Medicare to be included in the average length of stay 

calculation, until recently, we were unable to include data for Medicare Advantage (MA) 

patients in our calculations because our database did not capture discharge data on claims 

paid by an MA plan. (In contrast, patients who still had private insurance as their 

primary health coverage and for whom Medicare was a secondary payer, were included 

in the calculations because the portion of their claims covered by Medicare was paid by 

Part A and was therefore included in our database.) 

On July 20, 2007, we issued Change Request 5647 that required the submission 

by hospitals (IPPS, IRFs, and LTCHs) of “information only” (not for payment) bills for 

their MA patients to their fiscal intermediaries or MACs beginning with FY 2007. The 

stated goal of capturing these MA data was that the data were needed for disproportionate 
CMS-1518-P 752 

share payments (DSH) under the IPPS, low-income patient (LIP) payments under the IRF 

PPS, and for short-stay outlier (SSO) payments under the LTCH PPS. An additional onetime notification, Change Request 6821, issued on June 7, 2010, reiterated the 

requirements of Change Request 5647 for the reporting of MA days for DHS and LIP 

data and also noted “[i]n addition, this data is used for other purposes such as determining 

LTCH short stay outlier payments and evaluating the greater than 25 days length of stay 

requirement of Medicare patients for LTCHs.” 

 Although the inclusion of MA days in the average length of stay calculation has 

been CMS’ policy under the LTCH PPS because, at the outset of the LTCH PPS, we 

specified that the average length of stay calculation was based on “all covered” and on 

“all covered days of stay of Medicare patients” (§412.23(e)(2)). We acknowledge that, in 

practice, MA days were not included due to limitations in our ability to capture the data. 

We have been informed by some members of the provider community that it was not 

their understanding that MA data should be included in determining a LTCH’s average 

length of stay, and that, in some cases, the inclusion of these data could substantially 

lower their average length of stay, thus threatening their status as LTCHs. Therefore, we 

are proposing to clarify our existing policy at 42 CFR 412.23(e)(3) on the calculation of 

the average length of stay to specify that all data on all Medicare inpatient days, 

including MA days, shall be included in the average length of stay calculation. 

F. Proposed Application of LTCH Moratorium on the Increase in Beds at 

Section 114(d)(1)(B) of Pub. L. 110-173 (MMSEA) to LTCHs and LTCH Satellite 

Facilities Established or Classified as such under Section 114(d)(2) of Pub. L. 110-173
CMS-1518-P 753 

Under section 114(d) of the Medicare, Medicaid, and SCHIP Extension Act of 

2007 (MMSEA) (Pub. L. 110-173), Congress established one moratorium on the 

establishment or classification of new LTCHs and LTCH satellite facilities and a second 

moratorium on the increase in the number of LTCH beds in “existing hospitals and 

satellite facilities.” This section 114(d) provision was amended by section 4302(b) of the 

American Recovery and Reinvestment Act of 2009 (ARRA) (Pub. L. 111-5) and 

implemented in interim final rules issued in the Federal Register on May 22, 2008, and 

August 27, 2009 (73 FR 29704 through 29707 and 74 FR 43990 through 43992, 

respectively), and finalized in the FY 2010 and FY 2011 IPPS/LTCH PPS final rules 

(74 FR 43985 through 43990 and 75 FR 50397 through 50399, respectively). With the 

passage of the Affordable Care Act on March 23, 2010, these moratoria were extended 

under sections 3016 and 10312 for an additional 2 years, through December 29, 2012, 

and implemented in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50400). 

Specific exceptions to each moratorium are included in the statute and permit both 

the continued establishment or classification of an LTCH or LTCH satellite facility and 

an increase in LTCH beds at a statutorily defined “existing” hospital or satellite facility, 

respectively. Under section 114(d)(2) of the MMSEA, as of December 29, 2007, the 

preclusion on the establishment or classification of a new LTCH or LTCH satellite 

facility would not apply if the circumstance met one of the following three exceptions: 

● The LTCH began its qualifying period for payment as a LTCH under 

42 CFR 412.23(e) on or before the date of enactment of the MMSEA (section 

114(d)(2)(A)). 
CMS-1518-P 754 

● The LTCH has a binding written agreement with an outside, unrelated party for 

the actual construction, renovation, lease, or demolition for a LTCH and had expended 

before December 29, 2007, at least 10 percent of the estimated cost of the project or, if 

less, $2.5 million (section 114(d)(2)(B)). 

● The LTCH has obtained an approved certificate of need (CON) in a State 

where one is required on or before December 29, 2007 (section 114(d)(2)(C)). 

 Section 114(d)(3) of the MMSEA, as originally enacted, provided an exception 

to the moratorium on increase in beds at an existing LTCH or LTCH satellite facility, if 

an existing LTCH or satellite facility is located in a State where there is only one other 

LTCH; and the LTCH or satellite facility requests an increase in beds following the 

closure or decrease in the number of beds of another LTCH in the State. Section 4302(b) 

of the ARRA amended this MMSEA provision to specify an additional exception to the 

moratorium on the increase in bed number if the hospital or facility obtained a certificate 

of need for an increase in beds that is in a State for which such certificate of need is 

required and that was issued on or after April 1, 2005, and before December 29, 2007. 

 In implementing these two moratorium provisions, we required that each 

hospital or entity submit details of its individual circumstance for evaluation by CMS 

regional offices and contractors in order to determine whether a specific statutory 

exception was applicable to the particular situation (74 FR 43985 through 43990). We 

note that, based upon these exceptions (73 FR 29707), CMS records indicate that, as of 

January 1, 2011, 50 new LTCHs and 8 new LTCH satellites have been established or 

classified after December 29, 2007, the date MMSEA was enacted. (Data on additional 
CMS-1518-P 755 

beds developed in existing LTCHs and LTCH satellite facilities under the CON exception 

provided by section 4302(b) of the ARRA are maintained by States.) 

 Sections 3106 and 10312 of the Affordable Care Act provided a 2-year 

extension of both moratoria initially established by section 114(d)(1) of the MMSEA 

(which provided for an original 3-year application), indicating that Congress continues to 

believe that it is appropriate to continue to stem the increase in the number of LTCHs and 

LTCH satellite facilities and LTCH beds. 

 As noted above, section 114(d)(1)(B) of the MMSEA established a moratorium 

on the increase of LTCH beds in existing LTCHs or satellite facilities. Section 114(d)(4) 

of the MMSEA defines “an existing hospital or satellite facility” as a hospital or satellite 

facility that received payment under the LTCH PPS as of December 29, 2007, the date of 

enactment of the MMSEA. By definition, LTCHs or satellite facilities that were 

established or classified as such under an exception at section 114(d)(2) to the 

moratorium under section 114(d)(1)(A) first received payments under the LTCH PPS 

after December 29, 2007, and therefore, would not fall under the definition of “an 

existing hospital or satellite facility” to whom the moratorium on the increase in bed 

numbers at section 114(d)(1)(B) applies. However, we do not believe that it was 

Congress’ intent to allow this subset of hospitals and satellite facilities established or 

classified after the enactment of MMSEA unlimited bed growth and expansion. 

Continued Congressional concern regarding the increase in the number of LTCHs and 

satellite facilities and LTCH beds is indicated in the 2-year extension of the moratorium 

provided by sections 3106 and 10312 of the Affordable Care Act. 
CMS-1518-P 756 

 Section 123 of the Medicare, Medicaid, and SCHIP [State Children’s Health 

Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA of 1999) 

(Pub. L. 106-113), as amended by section 307 (b) of the Medicare, Medicaid, and SCHIP 

[State Children’s Health Insurance Program] Benefits Improvement and Protection Act of 

2000 (BIPA) (Pub. L. 106-554), confers upon the Secretary discretion in creating the 

LTCH PPS as the payment system for LTCHs beginning in FY 2003. Furthermore, the 

Secretary has authority, under the general rulemaking authority of sections 1102(a) and 

1871(a) of the Act, to establish rules and regulations as necessary to administer the 

Medicare program and for the efficient administration of the Medicare program. 

Consistent with these authorities, therefore, we are proposing that, effective 

October 1, 2011, the moratorium established under section 114(d)(1)(B) of the MMSEA, 

and implemented at 42 CFR 412.23(e)(7) be applied to those LTCHs and LTCH satellite 

facilities established or classified as such pursuant to the exceptions at section 114(d)(2) 

to the moratorium specified under section 114(d)(1)(B) of the MMSEA, as implemented 

at 42 CFR 412.23(e)(6). Specifically, we are proposing to limit the number of beds in 

these facilities to the number of beds that were certified by Medicare at the LTCH or 

satellite facility when it was first paid under the LTCH PPS. We are proposing to amend 

§412.23 by adding a new paragraph (e)(8) to specify this proposed policy. We believe 

that this proposed policy captures the essence of the original statutory moratoria—which 

was to limit growth in the number of LTCHs and LTCH satellite facilities and LTCH 

beds payable under Medicare—while recognizing the inherent fairness in allowing those 
CMS-1518-P 757 

projects already underway that represented substantial investment, planning, and State 

commitment to be completed. 

VIII. MedPAC Recommendations 

 Under section 1886(e)(4)(B) of the Act, the Secretary must consider MedPAC’s 

recommendations regarding hospital inpatient payments. Under section 1886(e)(5) of the 

Act, the Secretary must publish in the annual proposed and final IPPS rules the 

Secretary's recommendations regarding MedPAC's recommendations. We have reviewed 

MedPAC’s March 2011 “Report to the Congress: Medicare Payment Policy” and have 

given the recommendations in the report consideration in conjunction with the policies 

set forth in this proposed rule. MedPAC recommendations for the IPPS for FY 2012 are 

addressed in Appendix B to this proposed rule. 

 For further information relating specifically to the MedPAC reports or to obtain a 

copy of the reports, contact MedPAC at (202) 653-7226, or visit MedPAC's Web site at: 

http://www.medpac.gov. 

IX. Other Required Information 

A. Requests for Data from the Public

 In order to respond promptly to public requests for data related to the prospective 

payment system, we have established a process under which commenters can gain access 

to raw data on an expedited basis. Generally, the data are now available on compact disc 

(CD) format. However, many of the files are available on the Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS. Data files and the cost for each file, if 

applicable, are listed below. Anyone wishing to purchase data tapes, cartridges, or 
CMS-1518-P 758 

diskettes should submit a written request along with a company check or money order 

(payable to CMS-PUF) to cover the cost of the following address: Centers for Medicare 

& Medicaid Services, Public Use Files, Accounting Division, P.O. Box 7520, Baltimore, 

MD 21207-0520, (410) 786-3691. Files on the Internet may be downloaded without 

charge. 

1. CMS Wage Data Public Use File 

 This file contains the hospital hours and salaries from Worksheet S-3, Parts II and 

III from FY 2008 Medicare cost reports used to create the proposed FY 2012 prospective 

payment system wage index. Multiple versions of this file are created each year. For a 

complete schedule on the release of different versions of this file, we refer readers to the 

wage index schedule in section III.K. of the preamble of this proposed rule. 

Processing Year Wage Data Year PPS Fiscal Year 

2011 2008 2012 

2010 2007 2011 

2009 2006 2010 

2008 2005 2009 

2007 2004 2008 

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage. 

Periods Available: FY 2007 through FY 2012 IPPS Update. 

2. CMS Occupational Mix Data Public Use File 

 This file contains the 2007-2008 occupational mix survey data to be used to 

compute the occupational mix adjustment wage indexes. Multiple versions of this file are 

created each year. For a complete schedule on the release of different versions of this 
CMS-1518-P 759 

file, we refer readers to the wage index schedule in section III.K. of the preamble of this 

proposed rule. 

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage. 

 Period Available: FY 2012 IPPS Update. 

3. Provider Occupational Mix Adjustment Factors for Each Occupational Category 

Public Use File 

 This file contains each hospital’s occupational mix adjustment factors by 

occupational category. Two versions of these files are created each year. They support 

the following: 

● Notice of proposed rulemaking published in the Federal Register.

● Final rule published in the Federal Register.

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage. 

 Period Available: FY 2012 IPPS Update. 

4. Other Wage Index Files 

 CMS releases other wage index analysis files after each proposed and final rule. 

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage. 

 Periods Available: FY 2005 through FY 2012 IPPS Update. 

5. FY 2012 IPPS SSA/FIPS CBSA State and County Crosswalk 
CMS-1518-P 760 

 This file contains a crosswalk of State and county codes used by the Social 

Security Administration (SSA) and the Federal Information Processing Standards (FIPS), 

county name, and a historical list of Metropolitan Statistical Areas (MSAs). 

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage. 

 Period Available: FY 2012 IPPS Update. 

6. HCRIS Cost Report Data 

 The data included in this file contain cost reports with fiscal years ending on or 

after September 30, 1996. These data files contain the highest level of cost report status. 

 Media: Internet at: 

http://www.cms.hhs.gov/CostReports/02_HospitalCostReport.asp and Compact Disc 

(CD). 

 File Cost: $100.00 per year. 

7. Provider-Specific File 

 This file is a component of the PRICER program used in the fiscal intermediary’s 

or the MAC’s system to compute DRG/MS-DRG payments for individual bills. The file 

contains records for all prospective payment system eligible hospitals, including hospitals 

in waiver States, and data elements used in the prospective payment system recalibration 

processes and related activities. Beginning with December 1988, the individual records 

were enlarged to include pass-through per diems and other elements. 

 Media: Internet at: 

http://www.cms.hhs.gov/ProspMedicareFeeSvcPmtGen/03_psf_text.asp 
CMS-1518-P 761 

 Period Available: Quarterly Update. 

8. CMS Medicare Case-Mix Index File 

 This file contains the Medicare case-mix index by provider number as published 

in each year’s update of the Medicare hospital inpatient prospective payment system. 

The case-mix index is a measure of the costliness of cases treated by a hospital relative to 

the cost of the national average of all Medicare hospital cases, using DRG/MS-DRG 

weights as a measure of relative costliness of cases. Two versions of this file are created 

each year. They support the following: 

● Notice of proposed rulemaking published in the Federal Register.

● Final rule published in the Federal Register. 

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage 

 Periods Available: FY 1985 through FY 2012. 

9. MS-DRG Relative Weights (Also Table 5 - MS-DRGs) 

 This file contains a listing of MS-DRGs, MS-DRG narrative descriptions, relative 

weights, and geometric and arithmetic mean lengths of stay as published in the Federal 

Register. There are two versions of this file as published in the Federal Register. 

● Notice of proposed rulemaking. 

● Final rule. 

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage 

 Periods Available: FY 2005 through 2012 IPPS Update 
CMS-1518-P 762 

10. IPPS Payment Impact File 

 This file contains data used to estimate payments under Medicare’s hospital 

impatient prospective payment systems for operating and capital-related costs. The data 

are taken from various sources, including the Provider-Specific File, Minimum Data Sets, 

and prior impact files. The data set is abstracted from an internal file used for the impact 

analysis of the changes to the prospective payment systems published in the Federal 

Register. Two versions of this file are created each year. They support the following: 

● Notice of proposed rulemaking. 

● Final rule. 

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage and 

http://www.cms.hhs.gov/AcuteInpatientPPS/HIF/list.asp#TopOfPage 

 Periods Available: FY 1994 through FY 2012 IPPS Update. 

11. AOR/BOR Tables 

 This file contains data used to develop the MS-DRG relative weights. It contains 

mean, maximum, minimum, standard deviation, and coefficient of variation statistics by 

MS-DRG for length of stay and standardized charges. The BOR tables are “Before 

Outliers Removed” and the AOR is “After Outliers Removed.” (Outliers refer to 

statistical outliers, not payment outliers.) 

 Two versions of this file are created each year. They support the following: 

● Notice of proposed rulemaking published in the Federal Register. 

● Final rule published in the Federal Register. 
CMS-1518-P 763 

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage. 

 Periods Available: FY 2006 through FY 2012 IPPS Update. 

12. Prospective Payment System (PPS) Standardizing File 

 This file contains information that standardizes the charges used to calculate 

relative weights to determine payments under the hospital inpatient operating and capital 

prospective payment systems. Variables include wage index, cost-of-living adjustment 

(COLA), case-mix index, indirect medical education (IME) adjustment, disproportionate 

share, and the Core-based Statistical Area (CBSA). The file supports the following: 

● Notice of proposed rulemaking published in the Federal Register. 

● Final rule published in the Federal Register. 

 Media: Internet at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage. 

 Period Available: FY 2012 IPPS Update. 

 For further information concerning these data tapes, contact the CMS Public Use 

Files Hotline at (410) 786-3691. 

Commenters interested in discussing any data used in constructing this proposed 

rule should contact Nisha Bhat at (410) 786-5320. 

B. Collection of Information Requirements

1. Legislative Requirement for Solicitation of Comments 

 Under the Paperwork Reduction Act of 1995, we are required to provide 60-day 

notice in the Federal Register and solicit public comment before a collection of 
CMS-1518-P 764 

information requirement is submitted to the Office of Management and Budget (OMB) 

for review and approval. In order to fairly evaluate whether an information collection 

should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 

1995 requires that we solicit comment on the following issues: 

● The need for the information collection and its usefulness in carrying out the 

proper functions of our agency. 

● The accuracy of our estimate of the information collection burden. 

● The quality, utility, and clarity of the information to be collected. 

● Recommendations to minimize the information collection burden on the 

affected public, including automated collection techniques. 

We are soliciting public comment on each of these issues for the following 

sections of this document that contain information collection requirements (ICRs). 

2. ICRs for Add-On Payments for New Services and Technologies 

Section II.I.1. of the preamble of this proposed rule discusses add-on payments 

for new services and technologies. Specifically, this section states that applicants for 

add-on payments for new medical services or technologies for FY 2012 must submit a 

formal request. A formal request includes a full description of the clinical applications of 

the medical service or technology and the results of any clinical evaluations 

demonstrating that the new medical service or technology represents a substantial clinical 

improvement. In addition, the request must contain a significant sample of the data to 

demonstrate that the medical service or technology meets the high-cost threshold. We 

detailed the burden associated with this requirement in the September 7, 2001, IPPS final 
CMS-1518-P 765 

rule (66 FR 46902). As stated in that final rule, collection of the information for this 

requirement is conducted on an individual case-by-case basis. We believe the associated 

burden is thereby exempt from the PRA as stipulated under 5 CFR 1320.3(h)(6). 

Similarly, we also believe the burden associated with this requirement is exempt from the 

PRA under 5 CFR 1320.3(c), which defines the agency collection of information subject 

to the requirements of the PRA as information collection imposed on 10 or more persons 

within any 12-month period. This information collection does not impact 10 or more 

entities in a 12-month period. In FYs 2008, 2009, 2010, 2011, and 2012, we received 1, 

4, 5, 3, and 3 applications, respectively. 

3. ICRs for the Hospital Inpatient Quality Reporting (IQR) Program 

The Hospital Inpatient Quality Reporting (IQR) Program (formerly referred to as 

the Reporting Hospital Quality Data for Annual Payment (RHQDAPU) Program) was 

originally established to implement section 501(b) of the MMA, Pub. L. 108-173. This 

Program expanded our voluntary Hospital Quality Initiative. The Hospital IQR Program 

originally consisted of a “starter set” of 10 quality measures. OMB approved the 

collection of information associated with the original starter set of quality measures under 

OMB control number 0938-0918. 

 We added additional quality measures to the Hospital IQR Program and submitted 

the information collection request to OMB for approval. This expansion of the Hospital 

IQR measures was part of our implementation of section 5001(a) of the DRA. New 

section 1886(b)(3)(B)(viii)(III) of the Act, added by section 5001(a) of the DRA, requires 

that the Secretary expand the “starter set” of 10 quality measures that were established by 
CMS-1518-P 766 

the Secretary as of November 1, 2003, to include measures “that the Secretary determines 

to be appropriate for the measurement of the quality of care furnished by hospitals in 

inpatient settings.” The burden associated with these reporting requirements is currently 

approved under OMB control number 0938-1022. For the FY 2014 and FY 2015 

payment updates, we intend to seek OMB approval for a revised information collection 

request using the same OMB control number (0938-1022). In the revised request, we 

will add five measures that we adopted in the FY 2011 IPPS/LTCH PPS final rule (four 

chart-abstracted measures and an HAI measure (Surgical Site Infection (SSI)) to be 

collected via NSHN for the FY 2014 payment determination. In addition, we are 

proposing to add two HAI measures (CLIP and CAUTI) also to be collected via NHSN, 

one structural measure and one claims-based measure that we are proposing in this 

proposed rule to adopt for the FY 2014 payment determination. We estimate that the 

proposed changes to our FY 2014 payment determination measure set would increase the 

collection burden on hospitals by approximately 4,250,175 hours per year. Because the 

currently approved CDC information collection request for the NHSN (OCN: 0920-0666) 

does not include all of the respondents associated with the IQR program, we intend to 

request a separate OMB control number for the NHSN proposal. 

 With respect to the four new chart-abstracted measures for the FY 2014 payment 

determination, hospitals would be required to submit data on patients who receive 

inpatient acute care hospital services. Specifically, with respect to the two EDT measures 

and two Global Immunization measures, hospitals would need to collect information on 

patients who receive inpatient acute care hospital services regarding EDT, as well as flu 
CMS-1518-P 767 

and pneumonia vaccinations information for all inpatients for which hospitals currently 

collect only for patients admitted for pneumonia. We estimate that hospitals would incur 

an additional 3,500,000 burden hours resulting from the addition of these four measures 

for the FY 2014 payment determination. We estimate that hospitals would submit 

approximately 3,500,000 cases annually for these 4 measures, and the information needed 

to calculate these measures requires an average of 1 hour to abstract from medical records 

for each case. 

 The HAI measure (Surgical Site Infection (SSI)) that we adopted in the FY 2011 

IPPS/LTCH PPS final rule for the FY 2014 payment determination and the two HAI 

measures that we are proposing to add for the FY 2014 payment determination (CLIP and 

CAUTI) are structured to keep additional burden to a minimum because they are to be 

collected via NHSN. More than 4,000 hospitals in 29 States are already using NHSN to 

comply with State-mandated reporting. Although this will add burden for hospitals, we 

believe that the additional burden will be lessened because hospitals will already be 

using NHSN to report the CLABSI measure for the FY 2013 payment determination. In 

addition, as mentioned above, not all hospitals will experience any additional burden 

because many hospitals already submit data to this system either voluntarily or as part of 

mandatory State reporting requirements for HAIs. The burden associated with these 

proposals is the time and effort associated with collecting and submitting the additional 

data. We estimate that hospitals will need about 750,000 additional hours to report 

Surgical Site Infection (SSI), CLIP, and CAUTI event data and denominator information 

into the system. 
CMS-1518-P 768 

 The structural measure we are proposing to add for the FY 2014 payment 

determination would require hospitals to indicate whether they are participating in a 

systematic qualified clinical database for registry for General Surgery and, if so, to 

identify the registry. If this measure is finalized, we estimate that 3,500 hospitals will 

spend about 5 minutes each to answer this question each year, resulting in an estimated 

total increase of 175 hours in terms of the total burden to hospitals each year. 

 We are also proposing to add one new claims-based measure for the FY 2014 

payment determination. We do not believe that this proposed claims-based measure, if 

finalized, will create any additional burden for hospitals because it would be collected 

and calculated by CMS based on the Medicare FFS claims the hospitals have already 

submitted to CMS. 

 We believe that the overall burden on hospitals will be reduced to some extent by 

the policy we finalized in the FY 2011 IPPS/LTCH PPS final rule to retire two measures 

(PN-2 and PN-7) beginning with the FY 2014 payment determination. Burden will be 

further reduced by our proposal in this proposed rule to retire eight additional measures 

(AMI-1 Aspirin at Arrival, AMI-3 ACE/ARB, AMI-4 Smoking Cessation, AMI-5 BetaBlocker at Discharge, HF-4 Smoking Cessation, PN-4 Smoking Cessation, PN-5c 

Antibiotic within 6 Hours of Arrival and SCIP Inf-6 Appropriate Hair Removal) 

beginning with the FY 2014 payment determination. We estimate that if we finalize 

these proposals, the burden to hospitals will be reduced by a total of 740,000 hours as a 

result of retiring these eight measures, including reductions of 170,000 hours for 
CMS-1518-P 769 

abstracting AMI measures, 220,000 hours for abstracting PN measures, 50,000 hours for 

abstracting HF measures, and 300,000 hours for abstracting SCIP measures. 

 We also are proposing to add two new chart-abstracted measure sets to the 

Hospital IQR Program for FY 2015: Stroke (eight measures) and Venous 

Thromboembolism (VTE) (six measures). Both measure sets are of great importance to 

the Medicare population, with stroke affecting about 795,000 people each year 

(American Stroke Association). Both stroke and VTE measures are currently collected 

by the Joint Commission for accreditation and certification purposes. Both measure sets 

use complimentary data elements to our current SCIP, VTE, and AMI measure sets, thus 

reducing the chart-abstraction burden. The burden associated with this proposal is the 

time and effort associated with collecting and submitting the additional data. We 

estimate that each proposed chart abstracted measure set will require about 1 hour to 

abstract. We anticipate the number of subsection (d) hospitals participating in the 

Hospital IQR Program to be approximately 3,500. The number of charts to be abstracted 

by all participating hospitals is estimated to be 180,000 per year for the proposed Stroke 

measure set, and 6,000,000 per year for the proposed VTE measure set. In total, our 

proposal to add Stroke and VTE measures is estimated to increase the burden to hospitals 

by 6,180,000 hours per year. 

 We also are proposing to add three new HAI measures to be collected via NHSN 

to the Hospital IQR Program for FY 2015: (1) Methicillin-resistant Staphylococcus 

aureus (MRSA) Bacteremia measure; (2) C. Difficile SIR measure; and (3) Healthcare 

Personnel Influenza vaccination measure. The information needed for these measures 
CMS-1518-P 770 

would be collected via NHSN, and, therefore, is structured to keep additional burden to a 

minimum because more than 4,000 hospitals in 29 States are already using NHSN to 

comply with State-mandated reporting. Although this will add burden to hospitals, the 

initial setup and acclimation to the NHSN system will have already occurred with the 

adoption of the CLABSI measure for all hospital IQR for the FY 2013 payment 

determination. In addition, as mentioned above, not all hospitals will experience any 

additional burden since many hospitals already submit data to this system either 

voluntarily or as part of mandatory State reporting requirements for HAIs. The burden 

associated with this section is the time and effort associated with collecting and 

submitting the additional data. With respect to the new HAI proposed measures for the 

FY 2015 payment determination, we estimate that an additional 1,500,000 burden hours 

per year (500,000 hours per measure) would be incurred by hospitals to report data on 

these measures. 

We estimate that our proposed changes to our FY 2015 Hospital IQR Program 

measure set will increase the collection burden to hospitals by approximately 6,780,000 

hours per year. 

We have stated our intention to explore mechanisms for data submission using 

electronic health records (EHRs) (73 FR 48614; 74 FR 43866, 43892; 75 FR 50189). 

Establishing such a system will require interoperability between EHRs and CMS data 

collection systems, additional infrastructure development on the part of hospitals and 

CMS, and the adoption of standards for capturing, formatting, and transmitting the data 

elements that make up the measures. However, once these activities are accomplished, 
CMS-1518-P 771 

the adoption of measures that rely on data obtained directly from EHRs will enable us to 

expand the Hospital IQR Program measure set with less cost and burden to hospitals. We 

believe that automatic collection and reporting of data through EHRs will greatly 

simplify and streamline reporting for various CMS quality reporting programs, and that at 

a future date, such as FY 2015, hospitals will be able to switch solely to EHR-based 

reporting of data that are currently manually chart-abstracted and submitted to CMS for 

the Hospital IQR Program. 

4. ICRs for the Occupational Mix Adjustment to the Proposed FY 2012 Index (Hospital 

Wage Index Occupational Mix Survey) 

Section II.D. of the preamble of this proposed rule discusses the occupational mix 

adjustment to the proposed FY 2012 wage index. While the preamble does not contain 

any new ICRs, it is important to note that there is an OMB approved information 

collection request associated with the hospital wage index. 

Section 304(c) of Pub. L. 106–554 amended section 1886(d)(3)(E) of the Act to 

require CMS to collect data at least once every 3 years on the occupational mix of 

employees for each short-term, acute care hospital participating in the Medicare program 

in order to construct an occupational mix adjustment to the wage index. We collect the 

data via the occupational mix survey. 

The burden associated with this information collection requirement is the time 

and effort required to collect and submit the data in the Hospital Wage Index 

Occupational Mix Survey to CMS. The aforementioned burden is subject to the PRA; 
CMS-1518-P 772 

however, it is currently approved under OMB control number 0938-0907, with an 

expiration date of February 28, 2013. 

5. Hospital Applications for Geographic Reclassifications by the MGCRB 

Section III.I.3. of the preamble of this final rule discusses revisions to the wage 

index based on hospital redesignations. As stated in that section, under section 

1886(d)(10) of the Act, the MGCRB has the authority to accept short-term IPPS hospital 

applications requesting geographic reclassification for wage index or standardized 

payment amounts and to issue decisions on these requests by hospitals for geographic 

reclassification for purposes of payment under the IPPS. 

The burden associated with this application process is the time and effort 

necessary for an IPPS hospital to complete and submit an application for reclassification 

to the MGCRB. While this requirement is subject to the PRA, the associated burden is 

currently approved under OMB control number 0938–0573, with an expiration date of 

December 31, 2011. 

6. ICRs for the Proposed Quality Reporting Program for LTCHs 

 In section VII.C. of this preamble, we are proposing three quality reporting 

measures for LTCHs for FY 2014: (1) Catheter Associated Urinary Tract Infections 

(CAUTI); (2) Central Line Associated Blood Stream Infection Event (CLABSI); and 

(3) Pressure Ulcers that are New or Have Worsened. 

We are proposing to collect the proposed HAI CLABSI and CAUTI quality 

measures through the use of the CDC/NHSN (http://www.cdc.gov/nhsn/). We will 

require that LTCH facilities report data on each patient in their facility who has been 
CMS-1518-P 773 

diagnosed with either a catheter associated urinary tract infection or a central line 

associated bloodstream infection. 

The NHSN is a secure, Internet-based surveillance system which is maintained 

and managed by CDC. Many LTCHs already submit data to the NHSN either voluntarily 

or as part of mandatory State reporting requirements for HAIs. There are currently 435 

LTCHs in operation in the United States and, according to CDC, 80 of these LTCHs 

already submit HAI data to NHSN. For these LTCHs, the burden of complying with the 

requirements of the proposed quality reporting program will be reduced because of 

familiarity with the NHSN submission process. 

We require IPPS hospitals to report data regarding certain HAIs via NHSN as part 

of the Hospital IQR Program. We adopted the CLABSI quality measure under the 

Hospital IQR Program for the FY 2013 payment determination and are proposing to 

adopt the CAUTI measure for the FY 2014 payment determination. In addition, hospitals 

in 29 States are already using NHSN, and CDC supports more than 4,000 hospitals that 

are already using NHSN. Many LTCHs are integrated into or are part of large inpatient 

hospital systems. We believe that these hospital systems have gained the requisite 

knowledge and experience with the submission of data about HAIs via NHSN, under the 

Hospital IQR Program, State law, or voluntarily. Therefore, the transition to reporting 

HAIs via the NHSN for these LTCHs may be less burdensome. 

The burden associated with these proposed quality measures is the time and effort 

associated with collecting and submitting the data concerning CAUTI and CLABSI to 

NHSN for LTCHs that are not currently reporting such data. For LTCHs that already 
CMS-1518-P 774 

submit data regarding these HAIs to NHSN, there should be little, if any, additional 

burden. For LTCHs who submit data to NHSN for other HAIs, but not CAUTI and 

CLABSI data, then there may be some burden. However, we believe that this burden will 

be significantly decreased because these LTCHs are already enrolled in the NHSN 

system and are already familiar with the NHSN data submission process. 

 There are currently 435 LTCHs in the United States paid under the LTCH PPS. 

We estimate that each LTCH would submit approximately 12 NHSN submissions 

(6 CAUTI and 6 CLABSI) per month (144 per LTCH annually). This equates to a total 

of approximately 62,640 submissions of HAI data to NHSN from all LTCHs per year. 

We estimate that each NHSN assessment will take approximately 25 minutes to 

complete. This time estimate consists of 10 minutes of clinical (for example, nursing 

time) needed to collect the clinical data and 15 minutes of clerical time necessary to enter 

the data into the NHSN data base. Based on this estimate, we expect each LTCH would 

expend 300 minutes (5 hours) per month and 60 hours per year reporting to NHSN. 

Therefore, the total estimated annual hourly burden to all LTCHs in the U.S. for reporting 

to NHSN is 26,100 hours. The estimated cost per submission is estimated at $12.07. 

These costs are estimated using an hourly wage for a Registered Nurse of $41.59 and a 

Medical Billing Clerk/Data Entry person of $20.57 (U.S. Bureau of Labor Statistics data). 

Therefore, we estimate that the annual cost per each LTCH provider would be $1,739 and 

the total yearly cost to all LTCHs for the submission of CAUTI and CLABSI data to 

NHSN would be $760,676.60. While the aforementioned requirements are subject to the 

 

60Nursing Time – 24 hours @ $41.59 per hour = $998.16 / $998.16 x 435 LTCHs = $434,200. 

 Admin Time – 36 hours @ $20.57 per hour = $740.52 / $740.52 x 435 LTCHs = $326,476 
CMS-1518-P 775 

PRA, we believe the associated burden hours are accounted for in the information 

collection request currently approved OCN 0920-0666. 

 With respect to the proposed pressure ulcer measure, we are proposing that we 

would post the specification for the pressure ulcer measure on our Web site along with 

the specific data elements necessary to be collected. We expect that the specific data 

items needed are part of the Continuity Assessment Record & Evaluation (CARE) 

instrument. We developed the CARE as required by section 5008 of the Deficit 

Reduction Act of 2005. CARE is a standardized assessment instrument that could be 

used across all postacute care sites to measure functional status and other factors during 

treatment and at discharge from each provider. 

Because the CMS CARE pressure ulcer data set has not previously been 

introduced in the LTCH setting, there will be some initial burdens associated with the 

introduction of this data assessment tool. These initial costs would mainly be incurred in 

the training of the facility staff. However, there should be little, if any, additional 

education required, in regards to the collection of the data, because pressure ulcer 

assessment should be a vital part of good patient care and daily in-house patient chart 

documentation. 

We are proposing to require that the CARE pressure ulcer assessment be 

performed on each patient in a LTCH upon admission and again upon discharge. We 

believe that it is necessary to obtain admission and discharge pressure ulcer assessments 

on all patients admitted to LTCH facilities in order to obtain full and complete statistical 

 

TOTAL = $434,200 + $326,476 = $760,676 
CMS-1518-P 776 

data regarding the quality of care provided by the facility to the patients receiving care in 

that facility. The delivery of high quality care in the LTCH setting is imperative. We 

believe that collecting quality data on all patients in the LTCH setting supports CMS’ 

mission to insure quality care for Medicare beneficiaries. Collecting data on all patients 

provides the most robust and accurate reflection of quality in the LTCH setting. Accurate 

representation of quality provided in LTCHs is best conveyed using data related to 

pressure ulcers on all LTCH patient, regardless of payor, using a subset of the CARE data 

set. An admission assessment is necessary in order to assess for either the presence or 

absence of pressure ulcers upon admission. If pressure ulcers are detected upon 

admission, then they must be properly assessed, staged and documented. Upon 

discharge, an assessment is needed to determine if any worsening of the pressure ulcers 

occurred during the LTCH stay. If no pressure ulcers had been noted on the admission 

assessment, then a discharge pressure ulcer assessment would be necessary in order to 

assess whether the patient had developed any new pressure ulcers during the LTCH stay. 

At this time, CMS has not completed development of the information collection 

instrument that LTCHs would have to submit to comply with the aforementioned 

reporting requirements regarding the CARE pressure ulcer assessment. Because the 

forms are still under development, we cannot assign a complete burden estimate at this 

time. Once the forms are available, we will publish the required 60-day and 30-day 

Federal Register notices to solicit public comments on the instrument and to announce 

the submission of the information collection request to OMB for its review and approval. 
CMS-1518-P 777 

If you comment on these information collection and recordkeeping requirements, 

please do either of the following: 

 1. Submit your comments electronically as specified in the ADDRESSES section 

of this proposed rule; or 

 2. Submit your comments to the Office of Information and Regulatory Affairs, 

Office of Management and Budget, 

 Attention: CMS Desk Officer, CMS-1518-P 

 Fax: (202) 395-6974; or 

 Email: OIRA_submission@omb.eop.gov 

C. Response to Comments

 Because of the large number of public comments we normally receive on Federal 

Register documents, we are not able to acknowledge or respond to them individually. 

We will consider all comments we receive by the date and time specified in the 

“DATES” section of this preamble, and, when we proceed with a subsequent document, 

we will respond to the comments in the preamble to that document. 

List of Subjects 

42 CFR Part 412 

 Administrative practice and procedure, Health facilities, Medicare, Puerto Rico, 

Reporting and recordkeeping requirements. 

42 CFR Part 413 
CMS-1518-P 778 

 Health facilities, Kidney diseases, Medicare, Puerto Rico, Reporting and 

recordkeeping requirements. 

42 CFR Part 476 

 Health care, Health professional, Health record, Peer Review Organization 

(PRO), Penalties, Privacy, Reporting and recordkeeping requirements. 

For the reasons stated in the preamble of this proposed rule, the Centers for 

Medicare & Medicaid Services is proposing to amend 42 CFR Chapter IV as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT 

HOSPITAL SERVICES 

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

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

1395hh), and sec. 124 of Pub. L. 106-113 (113 Stat. 1501A-332). 

 2. Section 412.23 is amended by— 

 a. In paragraph (e)(3)(i), removing the cross-reference “paragraph (e)(3)(ii) 

through (e)(3)(iv) of this section” and adding in its place the cross-reference “paragraphs 

(e)(3)(ii) through (e)(3)(v) of this section”. 

 b. Revising paragraph (e)(3)(iv). 

 c. Adding a new paragraph (e)(3)(v). 

 d. Adding a new paragraph (e)(8). 

 The revision and additions read as follows: 

§412.23 Excluded hospitals: Classifications. 

* * * * * 
CMS-1518-P 779 

 (e) * * * 

 (3) * * * 

 (iv) If a hospital seeks exclusion from the inpatient prospective payment system 

as a long-term care hospital and a change of ownership (as described in §489.18 of this 

chapter) occurs within the period of at least 5 months of the 6-month period preceding its 

petition for long-term care hospital status, the hospital may be excluded from the 

inpatient prospective payment system as a long-term care hospital for the next cost 

reporting period if, for the period of at least 5 months of the 6 months immediately 

preceding the start of the cost reporting period for which the hospital is seeking exclusion 

from the inpatient prospective payment system as a long-term care hospital (including 

time before the change of ownership), the hospital has met the required average length of 

stay, has continuously operated as a hospital, and has continuously participated as a 

hospital in Medicare. 

(v) For periods beginning on or after October 1, 2011, a hospital that is excluded 

from the prospective payment system as a long-term care hospital that plans to undergo a 

change of ownership (as described in §489.18 of this chapter) must notify its fiscal 

intermediary or MAC within 30 days of the effective date of such change of ownership, 

as specified in §424.516(d)(1)(i) of this subchapter. The hospital will continue to be 

excluded from the inpatient prospective payment system as a long-term care hospital for 

the cost reporting period following the change of ownership only if, for the period of at 

least 5 months of the 6 months immediately preceding the start of the hospital’s next cost 
CMS-1518-P 780 

reporting period before the change of ownership, the hospital meets the required average 

length of stay (calculated in accordance with paragraph (e)(3)(i) of this section). 

* * * * * 

 (8) Application of LTCH moratorium on the increase in beds at 

section 114(d)(1)(B) of Pub. L. 110-173 to LTCHs and LTCH satellite facilities 

established or classified as such under section 114(d)(2) of Pub. L. 110-173. Effective 

for the period beginning October 1, 2011, and ending December 28, 2012, for long-term 

care hospitals and long-term care hospital satellite facilities established under paragraph 

(e)(6)((ii) of this section for the period beginning December 29, 2007, and ending 

September 30, 2011, the moratorium at paragraph (e)(7) applies and the number of 

Medicare-certified beds must not be increased beyond the initial number of Medicarecertified beds established under paragraph (e)(6)(ii) of this section. 

* * * * * 

 3. Section 412.64 is amended by adding a new paragraph (d)(1)(iv) to read as 

follows: 

§412.64 Federal rates for inpatient operating costs for Federal fiscal year 2005 and 

subsequent fiscal years.

* * * * * 

 (d) * * * 

 (1) * * * 

 (iv) For fiscal year 2012, the percentage increase in the market basket index less 

a multifactor productivity adjustment (as determined by CMS) and less 0.1 percentage 
CMS-1518-P 781 

points for prospective payment hospitals (as defined in §413.40(a) of this subchapter) for 

hospitals in all areas. 

* * * * * 

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

§412.105 Special treatment: Hospitals that incur indirect costs for graduate medical 

education programs. 

* * * * * 

 (b) * * * 

 (4) Beds otherwise countable under this section used for outpatient observation 

services, skilled nursing swing-bed services, ancillary labor/delivery services, or inpatient 

hospice services; 

* * * * * 

 5. Section 412.106 is amended by revising paragraph (a)(1)(ii)(B) to read as 

follows: 

§412.106 Special treatment: Hospitals that service a disproportionate share of low 

income patients. 

 (a) * * * 

 (1) * * * 

 (ii) * * * 

 (B) Beds otherwise countable under this section used for outpatient observation 

services, skilled nursing swing-bed services, or inpatient hospice services; 

* * * * * 

 6. A new §412.140 is added to Subpart H to read as follows: 
CMS-1518-P 782 

§412.140 Participation, data submission, and validation requirements under the 

Hospital Inpatient Quality Review (IQR) Program.

 (a) Participation in the Hospital IQR Program. In order to participate in the 

Hospital IQR Program, a subsection (d) hospital must– 

 (1) Register on QualityNet.org, before it begins to report data; 

 (2) Identify and register a QualityNet Administrator as part of the registration 

process under paragraph (a)(1) of this section; and 

 (3) Submit a completed Notice of Participation Form to CMS if the hospital is 

participating in the program for the first time, has previously withdrawn from the 

program and would like to participate again, or has received a new CMS Certification 

Number (CNN). 

(i) A hospital that would like to participate in the program for the first time (and 

to which paragraph (a)(3)(ii) of this section does not apply), or that previously withdrew 

from the program and would now like to participate again, must submit to CMS a 

completed Notice of Participation Form by December 31 of the fiscal year preceding the 

fiscal year in which it wishes to participate. 

(ii) A hospital that has received a new CCN and would like to participate in the 

program must submit a completed Notice of Participation Form to CMS no later than 180 

days from the date identified as the open date on the approved CMS OSCAR system. 

(b) Withdrawal from the Hospital IQR Program. CMS will accept Hospital IQR 

Program withdrawal forms from hospitals on or before August 15 of the fiscal year 

preceding the fiscal year for which a Hospital IQR payment determination will be made. 
CMS-1518-P 783 

(c) Submission and validation of Hospital IQR Program data. 

(1) General rule. Except as provided in paragraph (c)(2) of this section, 

subsection (d) hospitals that participate in the Hospital IQR Program must submit to 

CMS data on measures selected under section 1886(b)(3)(B)(viii) of the Act in a form 

and manner, and at a time, specified by CMS. A hospital must begin submitting data on 

the first day of the quarter following the date that the hospital submits a completed Notice 

of Participation form under paragraph (a)(3) of this section. 

(2) Exception. Upon request by a hospital, CMS may grant an extension or 

waiver of one or more data submission deadlines in the event of extraordinary 

circumstances beyond the control of the hospital. Specific requirements for submission 

of a request for an extension or waiver are available onQualityNet.org. 

(d) Validation of Hospital IQR Program data. CMS may validate one or more 

measures selected under section 1886(b)(3)(B)(viii) of the Act by reviewing patient 

charts submitted by selected participating hospitals.

(1) Upon written request by CMS or its contractor, a hospital must submit to 

CMS a sample of patient charts that the hospital used for purposes of data submission 

under the program. The specific sample that a hospital must submit will be identified in 

the written request. A hospital must submit the patient charts to CMS or its contractor 

within 30 days of the date identified on the written request. 

(2) A hospital meets the validation requirement with respect to a fiscal year if it 

achieves a 75-percent score, as determined by CMS. 

(e) Reconsiderations and appeals of Hospital IQR Program decisions. 
CMS-1518-P 784 

(1) A hospital may request reconsideration of a decision by CMS that the hospital 

has not met the requirements of the Hospital IQR Program for a particular fiscal year. 

Except as provided in paragraph (c)(2) of this section, a hospital must submit a 

reconsideration request to CMS no later than 30 days from the date identified on the 

Hospital Inpatient Quality Reporting Program Annual Payment Update Notification 

Letter provided to the hospital. 

(2) A reconsideration request must contain the following information: 

(i) The hospital’s CMS Certification Number (CCN); 

(ii) The name of the hospital; 

(iii) Contact information for the hospital’s chief executive officer and QualityNet 

system administrator, including each individual’s name, e-mail address, telephone 

number, and physical mailing address; 

(iv) A summary of the reason(s), as set forth in the Hospital Inpatient Quality 

Reporting Program Annual Payment Update Notification Letter, that CMS concluded the 

hospital did not meet the requirements of the Hospital IQR Program; 

(v) A detailed explanation of why the hospital believes that it complied with the 

requirements of the Hospital IQR Program for the applicable fiscal year; 

(vi) Any evidence that supports the hospital’s reconsideration request, including 

copies of patient charts, emails and other documents; and 

(vii) If the hospital has requested reconsideration on the basis that CMS 

concluded it did not meet the validation requirement set forth in paragraph (d) of this 

section, the reconsideration request must contain the following additional information: 
CMS-1518-P 785 

(A) A copy of each patient chart that the hospital timely submitted to CMS or its 

contractor in response to a request made under paragraph (d)(1) of this section; and 

(B) A detailed explanation identifying which data the hospital believes was 

improperly validated by CMS and why the hospital believes that such data are correct. 

(3) A hospital that is dissatisfied with a decision made by CMS on its 

reconsideration request may file an appeal with the Provider Reimbursement Review 

Board under Part 405, Subpart R of this chapter. 

 7. Section 412.211 is amended by adding a new paragraph (c)(4) to read as 

follows: 

§412.211 Puerto Rico rates for Federal fiscal year 2004 and subsequent fiscal years.

* * * * * 

 (c) * * * 

 (4) For fiscal year 2012 and subsequent fiscal years, the applicable percentage 

increase specified in §412.64(d). 

* * * * * 

 8. Section 412.523 is amended by-- 

 a. Adding a new paragraph (c)(3)(viii). 

 b. Adding a new paragraph (d)(4). 

The additions to read as follows: 

§412.523 Methodology for calculating the Federal prospective payment rates. 

* * * * * 

 (c) * * * 
CMS-1518-P 786 

 (3) * * * 

 (viii) For long-term care hospital prospective payment system fiscal year 

beginning October 1, 2011, and ending September 30, 2012. The standard Federal rate 

for the long-term care hospital prospective payment system beginning October 1, 2011, 

and ending September 30, 2012, is the standard Federal rate for the previous long-term 

care hospital prospective payment system fiscal year updated by 1.5 percent. The 

standard Federal rate is adjusted, as appropriate, as described in paragraph (d) of this 

section. 

* * * * * 

 (d) * * * 

 (4) Changes to the adjustment for area wage levels. Beginning in FY 2012, CMS 

adjusts the standard Federal rate by a factor that accounts for the estimated effect of any 

adjustments or updates to the area wage level adjustment under §412.525(c)(1) on 

estimated aggregate LTCH PPS payments. 

* * * * * 

9. Section 412.525 is amended by revising paragraph (c) to read as follows: 

§412.525 Adjustments to the Federal prospective payment. 

* * * * * 

 (c) Adjustments for area wage levels. (1) The labor portion of a long-term care 

hospital’s Federal prospective payment is adjusted to account for geographical 

differences in the area wage levels using an appropriate wage index (established by 

CMS), which reflects the relative level of hospital wages and wage-related costs in the 
CMS-1518-P 787 

geographic area (that is, urban or rural area as determined in accordance with the 

definitions set forth in §412.503) of the hospital compared to the national average level of 

hospital wages and wage-related costs. The appropriate wage index that is established by 

CMS is updated annually. The labor portion of a long-term care hospital’s Federal 

prospective payment is established by CMS and is updated annually. 

 (2) Beginning in FY 2012, any adjustments or updates to the area wage level 

adjustment under this paragraph (c) will be made in a budget neutral manner such that 

estimated aggregate LTCH PPS payments are not affected. 

* * * * * 

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; 

PAYMENT FOR END-STAGE RENAL DISEASE SERVICES; OPTIONAL 

PROSPECTIVELY DETERMINED PAYMENT RATES FOR SKILLED 

NURSING FACILITIES

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

 Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and (n), 1861(v), 

1871, 1881, 1883, and 1886 of the Social Security Act (42 U.S.C. 1302, 1395d(d), 

1395f(b), 1395g, 1395l(a), (i), and (n), 1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); 

and sec. 124 of Pub. L. 106-133 (113 Stat. 1501A-332). 

 11. Section 413.70 is amended by— 

 a. Revising paragraph (b)(5)(i)(B). 

 b. Adding a new paragraph (b)(5)(i)(C). 

 The revision and addition read as follows: 
CMS-1518-P 788 

§413.70 Payment for services of a CAH. 

* * * * * 

 (b) * * * 

 (5) * * * 

 (i) * * * 

 (B) Effective for cost reporting periods beginning on or after January 1, 2004 and 

on or before September 30, 2011, payment for ambulance services furnished by a CAH or 

an entity that is owned and operated by a CAH is 101 percent of the reasonable costs of 

the CAH or the entity in furnishing those services, but only if the CAH or the entity is the 

only provider or supplier of ambulance services located within a 35-mile drive of the 

CAH or the entity. 

 (C) Effective for cost reporting periods beginning on or after October 1, 2011, 

payment for ambulance services furnished by a CAH or an entity that is owned and 

operated by a CAH is 101 percent of the reasonable costs of the CAH or the entity in 

furnishing those services, but only if the CAH or the entity is the only provider or 

supplier of ambulance services located within a 35-mile drive of the CAH. If there is no 

provider or supplier of ambulance services located within a 35-mile drive of the CAH and 

there is an entity that is owned and operated by a CAH that is more than a 35-mile drive 

from the CAH, payment for ambulance services furnished by that entity is 101 percent of 

the reasonable costs of the entity in furnishing those services, but only if the entity is the 

closest provider or supplier of ambulance services to the CAH. 

* * * * * 
CMS-1518-P 789 

PART 476—UTILIZATION AND QUALITY CONTROL REVIEW 

 12. The authority citation for Part 476 continues to read as follows: 

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

1395(hh)). 

 13. Section 476.78 is amended by-- 

a. In paragraph (a), removing the reference “§466.71” and adding in its place the 

reference “§476.71”. 

b. Revising paragraph (b). 

The revision reads as follows: 

§476.78 Responsibilities of health care facilities. 

* * * * * 

(b) Cooperation with QIOs. Health care providers that submit Medicare claims 

must cooperate in the assumption and conduct of QIO review. 

(1) Providers must allocate adequate space to the QIO for its conduct of review at 

the times the QIO is conducting review. 

(2) Providers must provide patient care data and other pertinent data to the QIO 

at the time the QIO is collecting review information that is required for the QIO to make 

its determinations. QIOs pay providers paid under the prospective payment system for 

the costs of photocopying records requested by the QIO in accordance with the payment 

rate determined under the methodology described in paragraph (c) of this section and for 

first class postage for mailing the records to the QIO. When the QIO does postadmission, 

preprocedure review, the facility must provide the necessary information before the 
CMS-1518-P 790 

procedure is performed, unless it must be performed on an emergency basis. Providers 

must-- 

 (i) Photocopy and deliver to the QIO all required information within 30 calendar 

days of a request; 

 (ii) Deliver all required medical information to the QIO within 21 calendar days 

from the date of the request in those situations where a potential “serious reportable 

event” has been identified or where other circumstances as deemed by the QIO warrant 

earlier receipt of all required medical information. For purposes of this paragraph, a 

serious reportable event is defined as a preventable, serious, and unambiguous adverse 

event that should never occur.

(3) Providers must inform Medicare beneficiaries at the time of admission, in 

writing, that the care for which Medicare payment is sought will be subject to QIO 

review and indicate the potential outcomes of that review. Furnishing this information to 

the patient does not constitute notice, under §405.332(a) of this chapter, that can support 

a finding that the beneficiary knew the services were not covered. 

(4) When the provider has issued a written determination in accordance with 

§412.42(c)(3) of this chapter that a beneficiary no longer requires inpatient hospital care, 

it must submit a copy of its determination to the QIO within 3 working days. 

(5) Providers must assure, in accordance with the provisions of their agreements 

with the QIO, that each case subject to preadmission review has been reviewed and 

approved by the QIO before admission to the hospital or a timely request has been made 

for QIO review. 
CMS-1518-P 791 

 (6)(i) Providers must agree to accept financial liability for any admission subject 

to preadmission review that was not reviewed by the QIO and is subsequently determined 

to be inappropriate or not medically necessary. 

(ii) The provisions of paragraph (b)(6)(i) of this section do not apply if a 

provider, in accordance with its agreement with a QIO, makes a timely request for 

preadmission review and the QIO does not review the case timely. Cases of this type are 

subject to retrospective prepayment review under paragraph (b)(7) of this section. 

(7) Hospitals must agree that, if the hospital admits a case subject to 

preadmission review without certification, the case must receive retrospective 

prepayment review, according to the review priority established by the QIO. 

* * * * * 
CMS-1518-P 

(Catalog of Federal Domestic Assistance Program No. 93.773, Medicare--Hospital 

Insurance; Program No. 93.774, Medicare--Supplementary Medical Insurance Program; 

and Program No. 93.778, Medical Assistance) 

Dated: April 7, 2011

 

 ______________________________ 

 Donald M. Berwick,

 Administrator, Centers for 

 Medicare & Medicaid Services

Dated: April 15, 2011

 ___________________________ 

 Kathleen Sebelius,

 Secretary. 

BILLING CODE 4120-01-P
CMS-1518-P 793 

Note: The following Addendum and Appendixes will not appear in the Code of 

Federal Regulations. 

Addendum—Proposed Schedule of Standardized Amounts, Update Factors, and 

Rate-of-Increase Percentages Effective with Cost Reporting Periods Beginning on or 

after October 1, 2011 

I. Summary and Background 

In this Addendum, we are setting forth a description of the methods and data we 

used to determine the proposed prospective payment rates for Medicare hospital inpatient 

operating costs and Medicare hospital inpatient capital-related costs for FY 2012 for 

acute care hospitals. We also are setting forth the proposed rate-of-increase percentages 

for updating the target amounts for certain hospitals excluded from the IPPS for FY 2012. 

We note that, because certain hospitals excluded from the IPPS are paid on a reasonable 

cost basis subject to a rate-of-increase ceiling (and not by the IPPS), these hospitals are 

not affected by the figures for the standardized amounts, offsets, and budget neutrality 

factors. Therefore, in this proposed rule, we are proposing the rate-of-increase 

percentages for updating the target amounts for certain hospitals excluded from the IPPS 

that are effective for cost reporting periods beginning on or after October 1, 2011. 

 In addition, we are setting forth a description of the methods and data we used to 

determine the proposed standard Federal rate that will be applicable to Medicare LTCHs 

for FY 2012. 

 In general, except for SCHs, MDHs, and hospitals located in Puerto Rico, each 

hospital’s payment per discharge under the IPPS is based on 100 percent of the Federal 
CMS-1518-P 794 

national rate, also known as the national adjusted standardized amount. This amount 

reflects the national average hospital cost per case from a base year, updated for inflation. 

 Currently, SCHs are paid based on whichever of the following rates yields the 

greatest aggregate payment: the Federal national rate; the updated hospital-specific rate 

based on FY 1982 costs per discharge; the updated hospital-specific rate based on 

FY 1987 costs per discharge; the updated hospital-specific rate based on FY 1996 costs 

per discharge; or the updated hospital-specific rate based on the FY 2006 costs per 

discharge. 

Under section 1886(d)(5)(G) of the Act, MDHs historically have been paid based 

on the Federal national rate or, if higher, the Federal national rate plus 50 percent of the 

difference between the Federal national rate and the updated hospital-specific rate based 

on FY 1982 or FY 1987 costs per discharge, whichever was higher. However, section 

5003(a)(1) of Pub. L. 109-171 extended and modified the MDH special payment 

provision that was previously set to expire on October 1, 2006, to include discharges 

occurring on or after October 1, 2006, but before October 1, 2011. Section 3124(a) of the 

Affordable Care Act amended sections 1886(d)(5)(G)(i) and 1886(d)(5)(G)(ii)(II) of the 

Act to extend the MDH program and payment methodology from the end of FY 2011 to 

the end of FY 2012, by striking “October 1, 2011” and inserting “October 1, 2012”. 

Section 3124(b) of the Affordable Care Act also made conforming amendments to 

sections 1886(b)(3)(D) and 1886(b)(3)(D)(iv) of the Act. Section 3124(b)(2) of the 

Affordable Care Act also amended section 13501(e)(2) of OBRA 1993 to extend the 

provision permitting hospitals to decline reclassification as an MDH through FY 2012. 
CMS-1518-P 795 

Under section 5003(b) of Pub. L. 109-171, if the change results in an increase to an 

MDH’s target amount, we must rebase an MDH's hospital-specific rates based on its 

FY 2002 cost report. Section 5003(c) of Pub. L. 109-171 further required that MDHs be 

paid based on the Federal national rate or, if higher, the Federal national rate plus 

75 percent of the difference between the Federal national rate and the updated 

hospital-specific rate. Further, based on the provisions of section 5003(d) of 

Pub. L. 109-171, MDHs are no longer subject to the 12-percent cap on their DSH 

payment adjustment factor. 

 For hospitals located in Puerto Rico, the payment per discharge is based on the 

sum of 25 percent of an updated Puerto Rico-specific rate based on average costs per case 

of Puerto Rico hospitals for the base year and 75 percent of the Federal national rate. 

(We refer readers to section II.D.3. of this Addendum for a complete description.) 

 As discussed below in section II. of this Addendum, we are proposing to make 

changes in the determination of the prospective payment rates for Medicare inpatient 

operating costs for acute care hospitals for FY 2012. In section III. of this Addendum, 

we discuss our proposed policy changes for determining the prospective payment rates 

for Medicare inpatient capital-related costs for FY 2012. In section IV. of this 

Addendum, we are setting forth our proposed changes for determining the 

rate-of-increase limits for certain hospitals excluded from the IPPS for FY 2012. In 

section V. of this Addendum, we are proposing to make changes in the determination of 

the standard Federal rate for LTCHs under the LTCH PPS for FY 2012. The tables to 
CMS-1518-P 796 

which we refer in the preamble of this proposed rule are listed in section VI. of this 

Addendum and are available via the Internet.

II. Proposed Changes to Prospective Payment Rates for Hospital Inpatient 

Operating Costs for Acute Care Hospitals for FY 2012 

 The basic methodology for determining prospective payment rates for hospital 

inpatient operating costs for acute care hospitals for FY 2005 and subsequent fiscal years 

is set forth at §412.64. The basic methodology for determining the prospective payment 

rates for hospital inpatient operating costs for hospitals located in Puerto Rico for 

FY 2005 and subsequent fiscal years is set forth at §§412.211 and 412.212. Below we 

discuss the factors used for determining the proposed prospective payment rates for 

FY 2012. 

 In summary, the proposed standardized amounts set forth in Tables 1A, 1B, and 

1C that are listed and published in section VI. of this Addendum (and available via the 

Internet) reflect— 

● Equalization of the standardized amounts for urban and other areas at the level 

computed for large urban hospitals during FY 2004 and onward, as provided for under 

section 1886(d)(3)(A)(iv)(II) of the Act. 

● The labor-related share that is applied to the standardized amounts and Puerto 

Rico-specific standardized amounts to give the hospital the highest payment, as provided 

for under sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act. 

● Proposed updates of 1.5 percent for all areas (that is, the FY 2012 estimate of 

the market basket rate-of-increase of 2.8 percent less an adjustment of 1.2 percentage 
CMS-1518-P 797 

points for multifactor productivity and less 0.1 percentage point), as required by section 

1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) and10319(a) of the 

Affordable Care Act. For hospitals that fail to submit data, in a form and manner, and at 

the time, specified by the Secretary relating to the quality of inpatient care furnished by 

the hospital, pursuant to section 1886(b)(3)(B)(viii) of the Act, the proposed update is 

-0.5 percent (that is, the FY 2012 estimate of the market basket rate-of-increase of 2.8 

percent, less 2.0 percentage points for failure to submit data under the Hospital IQR 

Program, less an adjustment of 1.2 percentage points for multifactor productivity, and 

less 0.1 percentage point). 

● A proposed update of 1.5 percent to the Puerto Rico-specific standardized 

amount (that is, the FY 2012 estimate of the market basket rate-of-increase of 2.8 percent 

less an adjustment of 1.2 percentage points for multifactor productivity and less 0.1 

percentage point), in accordance with section 1886(d)(9)(C)(i) of the Act, as amended by 

section 401(c) of Pub. L. 108-173, which sets the update to the Puerto Rico-specific 

standardized amount equal to the applicable percentage increase set forth in section 

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

● An adjustment to the standardized amount to ensure budget neutrality for DRG 

recalibration and reclassification, as provided for under section 1886(d)(4)(C)(iii) of the 

Act. 

● An adjustment to ensure the wage index changes are budget neutral, as 

provided for under section 1886(d)(3)(E)(i) of the Act. We note that section 

1886(d)(3)(E)(i) of the Act requires that when we compute such budget neutrality, we 
CMS-1518-P 798 

assume that the provisions of section 1886(d)(3)(E)(ii) of the Act (requiring a 62 percent 

labor-related share in certain circumstances) had not been enacted. 

● An adjustment to ensure the effects of geographic reclassification are budget 

neutral, as provided for in section 1886(d)(8)(D) of the Act, by removing the FY 2011 

budget neutrality factor and applying a revised factor. 

● An adjustment to ensure the effects of the rural community hospital 

demonstration required under section 410A of Pub. L. 108-173, as amended by sections 

3123 and 10313 of Pub. L. 111-148, which extended the demonstration for an additional 

5 years are budget neutral, as required under section 410A(c)(2) of Pub. L. 108-173. 

● An adjustment in light of the court’s decision in Cape Cod v. Sebelius, 

(630 F.3d 203 (D.C. Cir. 2011)). 

● An adjustment to remove the FY 2011 outlier offset and apply an offset for 

FY 2012, as provided for in section 1886(d)(3)(B) of the Act. 

● As discussed below and in section II.D. of the preamble to this proposed rule, 

an adjustment to meet the requirements of sections 7(b)(1)(A) and 7(b)(1)(B) of Pub. L. 

110-90 to adjust the standardized amounts to offset the estimated amount of the increase 

in aggregate payments (including interest) due to the effect of documentation and coding 

that did not reflect real changes in case-mix for discharges occurring during FY 2008 and 

FY 2009. 

Beginning in FY 2008, we applied the budget neutrality adjustment for the rural 

floor to the hospital wage indices rather than the standardized amount. As we did for 

FY 2011, for FY 2012, we are proposing to continue to apply the rural floor budget 
CMS-1518-P 799 

neutrality adjustment to hospital wage indices rather than the standardized amount. 

Consistent with section 3141 of the Affordable Care Act, instead of applying a State level 

rural floor budget neutrality adjustment on the wage index, we are proposing to apply a 

uniform, national budget neutrality adjustment to the FY 2012 wage index for the rural 

floor. We note that, as proposed in section III.F.2 of the preamble of this proposed rule, 

we are not proposing to extend the imputed floor as this policy is set to expire with the 

FY 2011 wage index. Thus, the imputed floor it is not reflected in the proposed FY 2012 

wage index. 

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts 

 In general, the national standardized amount is based on per discharge averages of 

adjusted hospital costs from a base period (section 1886(d)(2)(A) of the Act), updated 

and otherwise adjusted in accordance with the provisions of section 1886(d) of the Act. 

For Puerto Rico hospitals, the Puerto Rico-specific standardized amount is based on per 

discharge averages of adjusted target amounts from a base period (section 

1886(d)(9)(B)(i) of the Act), updated and otherwise adjusted in accordance with the 

provisions of section 1886(d)(9) of the Act. The September 1, 1983 interim final rule 

(48 FR 39763) contained a detailed explanation of how base-year cost data (from cost 

reporting periods ending during FY 1981) were established for urban and rural hospitals 

in the initial development of standardized amounts for the IPPS. The September 1, 1987 

final rule (52 FR 33043 and 33066) contains a detailed explanation of how the target 

amounts were determined and how they are used in computing the Puerto Rico rates. 
CMS-1518-P 800 

 Sections 1886(d)(2)(B) and 1886(d)(2)(C) of the Act require us to update 

base-year per discharge costs for FY 1984 and then standardize the cost data in order to 

remove the effects of certain sources of cost variations among hospitals. These effects 

include case-mix, differences in area wage levels, cost-of-living adjustments for Alaska 

and Hawaii, IME costs, and costs to hospitals serving a disproportionate share of 

low-income patients. 

 In accordance with section 1886(d)(3)(E) of the Act, the Secretary estimates, from 

time-to-time, the proportion of hospitals’ costs that are attributable to wages and 

wage-related costs. In general, the standardized amount is divided into labor-related and 

nonlabor-related amounts; only the proportion considered to be the labor-related amount 

is adjusted by the wage index. Section 1886(d)(3)(E) of the Act requires that 62 percent 

of the standardized amount be adjusted by the wage index, unless doing so would result 

in lower payments to a hospital than would otherwise be made. (Section 

1886(d)(9)(C)(iv)(II) of the Act extends this provision to the labor-related share for 

hospitals located in Puerto Rico.) 

For FY 2012, we are proposing to continue to use a labor-related share of 

68.8 percent for discharges occurring on or after October 1, 2011, for the national 

standardized amounts and 62.1 percent for the Puerto Rico-specific standardized amount. 

Consistent with section 1886(d)(3)(E) of the Act, we are applying the wage index to a 

labor-related share of 62 percent for all IPPS hospitals whose wage index values are less 

than or equal to 1.0000. For all IPPS hospitals whose wage indices are greater than 

1.0000, we are applying the wage index to a labor-related share of 68.8 percent of the 
CMS-1518-P 801 

national standardized amount. For FY 2012, all Puerto Rico hospitals have a wage index 

less than 1.0. Therefore, the national labor-related share will always be 62 percent 

because the wage index for all Puerto Rico hospitals is less than 1.0. 

For hospitals located in Puerto Rico, we are applying a labor-related share of 62.1 

percent if its Puerto Rico-specific wage index is greater than 1.0000. For hospitals 

located in Puerto Rico whose Puerto-Rico specific wage index values are less than or 

equal to 1.0000, we are applying a labor share of 62 percent.

 The proposed standardized amounts for operating costs appear in Table 1A, 1B, 

and 1C that are listed and published in section VI. of the Addendum to this proposed rule 

and are available via Internet. 

2. Computing the Average Standardized Amount 

Section 1886(d)(3)(A)(iv)(II) of the Act requires that, beginning with FY 2004 

and thereafter, an equal standardized amount be computed for all hospitals at the level 

computed for large urban hospitals during FY 2003, updated by the applicable percentage 

update. Section 1886(d)(9)(A)(ii)(II) of the Act equalizes the Puerto Rico-specific urban 

and rural area rates. Accordingly, we are proposing to calculate the FY 2012 national 

and Puerto Rico standardized amounts irrespective of whether a hospital is located in an 

urban or rural location. 

3. Updating the Average Standardized Amount 

Section 1886(b)(3)(B) of the Act specifies the applicable percentage increase used 

to update the standardized amount for payment for inpatient hospital operating costs. As 

discussed in section IV.K.3. of the preamble of this proposed rule, in accordance with 
CMS-1518-P 802 

section 1886(b)(3)(B) of the Act, as amended by section 3401(a) of the Affordable Care 

Act, we are proposing to reduce the FY 2012 applicable percentage increase (which is 

based on the first quarter 2011 forecast of the FY 2006-based IPPS market basket) by the 

multifactor productivity (MFP) adjustment (the 10-year moving average of MFP for the 

period ending FY 2012) of 1.2 percent, which is calculated based on IHS Global Insight, 

Inc.’s (IGI’s) first quarter 2011 forecast. In addition, in accordance with section 

1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) and 10319(a) of the 

Affordable Care Act, we are proposing to further update the standardized amount for FY 

2012 by the estimated market basket percentage increase less 0.1 percentage point for 

hospitals in all areas. Sections 1886(b)(3)(B)(xi) and (xii) of Act, as added and amended 

by sections 3401(a) and 10319(a) the Affordable Care Act, further state that these 

adjustments may result in the applicable percentage increase being less than zero. The 

percentage increase in the market basket reflects the average change in the price of goods 

and services comprising routine, ancillary, and special care unit hospital inpatient 

services. Based on IGI’s 2011 first quarter forecast of the hospital market basket increase 

(as discussed in Appendix B of this proposed rule), the most recent forecast of the 

hospital market basket increase for FY 2012 is 2.8 percent. Thus, for FY 2012, the 

proposed update to the average standardized amount is 1.5 percent for hospitals in all 

areas (that is, the FY 2012 estimate of the market basket rate-of-increase of 2.8 percent 

less an adjustment of 1.2 percentage points for multifactor productivity and less 0.1 

percentage point). For hospitals that do not submit quality data pursuant to section 

1886(b)(3)(B)(viii), the estimated update to the operating standardized amount is -0.5 
CMS-1518-P 803 

percent (that is, the FY 2012 estimate of the market basket rate-of-increase of 2.8 percent, 

less 2.0 percentage points for failure to submit data under the IQR program, less an 

adjustment of 1.2 percentage points for multifactor productivity, and less 0.1 percentage 

point) The proposed standardized amounts in Tables 1A through 1C that are published in 

section VI. of this Addendum and available via the Internet reflect these differential 

amounts. 

Section 401(c) of Pub. L. 108-173 amended section 1886(d)(9)(C)(i) of the Act 

and states that, for discharges occurring in a fiscal year (beginning with FY 2004), the 

Secretary shall compute an average standardized amount for hospitals located in any area 

of Puerto Rico that is equal to the average standardized amount computed under 

subclause (I) for FY 2003 for hospitals in a large urban area (or, beginning with FY 2005, 

for all hospitals in the previous fiscal year) increased by the applicable percentage 

increase under subsection (b)(3)(B) for the fiscal year involved. Therefore, the update to 

the Puerto Rico-specific operating standardized amount is subject to the applicable 

percentage increase set forth in section 1886(b)(3)(B)(i) of the Act, as amended by 

sections 3401(a) and 10319(a) of the Affordable Care Act, (that is, the same update factor 

as for all other hospitals subject to the IPPS). Accordingly, we are proposing an 

applicable percentage increase to the Puerto Rico-specific standardized amount of 

1.5 percent. 

 Although the update factors for FY 2012 are set by law, we are required by 

section 1886(e)(4) of the Act to recommend, taking into account MedPAC’s 

recommendations, appropriate update factors for FY 2012 for both IPPS hospitals and 
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hospitals and hospital units excluded from the IPPS. Section 1886(e)(5)(A) of the Act 

requires that we publish our proposed recommendations in the Federal Register for 

public comment. Our recommendation on the update factors is set forth in Appendix B 

of this proposed rule. 

4. Other Adjustments to the Average Standardized Amount 

 As in the past, we are proposing to adjust the FY 2012 standardized amount to 

remove the effects of the FY 2011 geographic reclassifications and outlier payments 

before applying the FY 2012 updates. We then apply budget neutrality offsets for 

outliers and geographic reclassifications to the standardized amount based on FY 2012 

payment policies. 

 We do not remove the prior year’s budget neutrality adjustments for 

reclassification and recalibration of the DRG weights and for updated wage data because, 

in accordance with sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act, estimated 

aggregate payments after updates in the DRG relative weights and wage index should 

equal estimated aggregate payments prior to the changes. If we removed the prior year’s 

adjustment, we would not satisfy these conditions. 

Budget neutrality is determined by comparing aggregate IPPS payments before 

and after making changes that are required to be budget neutral (for example, changes to 

DRG classifications, recalibration of the DRG relative weights, updates to the wage 

index, and different geographic reclassifications). We include outlier payments in the 

simulations because they may be affected by changes in these parameters. 
CMS-1518-P 805 

 Consistent with our methodology established in the FY 2011 IPPS/LTCH final 

rule (75 FR 50422 through 50433), because IME Medicare Advantage payments are 

made to IPPS hospitals under section 1886(d) of the Act, we believe these payments must 

be part of these budget neutrality calculations. However, we note that it is not necessary 

to include Medicare Advantage IME payments in the outlier threshold calculation or the 

outlier offset to the standardized amount because the statute requires that outlier 

payments be not less than 5 percent nor more than 6 percent of total “operating DRG 

payments,” which does not include IME and DSH payments. In order to account for 

these Medicare Advantage IME payments in determining the budget neutrality 

adjustments for this final rule, we identified Medicare Advantage claims from IPPS 

teaching hospitals in the MedPAR data. Consistent with our methodology established in 

the FY 2011 IPPS/LTCH final rule (75 FR 50422-50423), we first searched the MedPAR 

file for all claims with an IME payment greater than zero. We then filtered these claims 

for a subset of claims with a GHO Paid indicator with a value of “1” or if the IME 

payment field was equal to the DRG payment field. The GHO Paid indicator with a 

value of “1” in the MedPAR file indicates that the claim was paid by a Medicare 

Advantage plan (other than the IPPS IME payment specified at §412.105(g)). For these 

Medicare Advantage claims from IPPS teaching hospitals, we computed a 

transfer-adjusted CMI by provider based on the FY 2011 MS-DRG GROUPER 

Version 28.0 assignment and relative weights. We also computed a transfer-adjusted 

CMI for these Medicare Advantage claims from IPPS teaching hospitals based on the 

proposed FY 2012 MS-DRG GROUPER Version 29.0 assignments and relative weights. 
CMS-1518-P 806 

These transfer-adjusted CMIs (and corresponding case counts) were used to calculate an 

IME teaching add-on payment in accordance with §412.105(g). The total Medicare 

Advantage IME payment amount was then added to the total Federal payment amount for 

each provider (where applicable) in order to account for the Medicare Advantage IME 

payment in determining the budget neutrality adjustments. We note that we did not 

include Medicare Advantage IME claims when estimating outlier payments for providers 

because Medicare Advantage claims are not eligible for outlier payments under the IPPS. 

Additionally, consistent with our methodology established in the FY 2011 

IPPS/LTCH final rule (75 FR 50422-50423), we examined the MedPAR and removed 

pharmacy charges for antihemophilic blood factor (which are paid separately under the 

IPPS) with an indicator of “3” for blood clotting with a revenue code of “0636”from the 

covered charge field for the budget neutrality adjustments. We also removed organ 

acquisition charges from the covered charge field for the budget neutrality adjustments 

because organ acquisition is a pass-through payment not paid under the IPPS. 

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

Adjustment 

 Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning in FY 1991, the 

annual DRG reclassification and recalibration of the relative weights must be made in a 

manner that ensures that aggregate payments to hospitals are not affected. As discussed 

in section II. of the preamble of this proposed rule, we normalized the recalibrated DRG 

weights by an adjustment factor so that the average case weight after recalibration is 

equal to the average case weight prior to recalibration. However, equating the average 
CMS-1518-P 807 

case weight after recalibration to the average case weight before recalibration does not 

necessarily achieve budget neutrality with respect to aggregate payments to hospitals 

because payments to hospitals are affected by factors other than average case weight. 

Therefore, as we have done in past years, we are proposing to make a budget neutrality 

adjustment to ensure that the requirement of section 1886(d)(4)(C)(iii) of the Act is met. 

Section 1886(d)(3)(E)(i) of the Act requires us to update the hospital wage index 

on an annual basis beginning October 1, 1993. This provision also requires us to make 

any updates or adjustments to the wage index in a manner that ensures that aggregate 

payments to hospitals are not affected by the change in the wage index. Section 

1886(d)(3)(E)(i) of the Act requires that we implement the wage index adjustment in a 

budget neutral manner. However, section 1886(d)(3)(E)(ii) of the Act sets the 

labor-related share at 62 percent for hospitals with a wage index less than or equal to 1.0, 

and section 1886(d)(3)(E)(i) of the Act provides that the Secretary shall calculate the 

budget neutrality adjustment for the adjustments or updates made under that provision as 

if section 1886(d)(3)(E)(ii) of the Act had not been enacted. In other words, this section 

of the statute requires that we implement the updates to the wage index in a budget 

neutral manner, but that our budget neutrality adjustment should not take into account the 

requirement that we set the labor-related share for hospitals with indices less than or 

equal to 1.0 at the more advantageous level of 62 percent. Therefore, for purposes of this 

budget neutrality adjustment, section 1886(d)(3)(E)(i) of the Act prohibits us from taking 

into account the fact that hospitals with a wage index less than or equal to 1.0 are paid 

using a labor-related share of 62 percent. Consistent with current policy, for FY 2012, 
CMS-1518-P 808 

we are proposing to adjust 100 percent of the wage index factor for occupational mix. 

We describe the occupational mix adjustment in section III.C. of the preamble of this 

proposed rule. 

 For FY 2012, to comply with the requirement that DRG reclassification and 

recalibration of the relative weights be budget neutral for the Puerto Rico standardized 

amount and the hospital-specific rates, we used FY 2010 discharge data to simulate 

payments and compared aggregate payments using the FY 2011 labor-related share 

percentages, the FY 2011 relative weights, and the FY 2011 pre-reclassified wage data to 

aggregate payments using the FY 2011 labor-related share percentages, the proposed 

FY 2012 relative weights, and the FY 2011 pre-reclassified wage data. Based on this 

comparison, we computed a budget neutrality adjustment factor equal to 0.998419. As 

discussed in section IV. of this Addendum, we also would apply the proposed DRG 

reclassification and recalibration budget neutrality factor of 0.998419 to the 

hospital-specific rates that are to be effective for cost reporting periods beginning on or 

after October 1, 2011. 

 In order to meet the statutory requirements that we do not take into account the 

labor-related share of 62 percent when computing wage index budget neutrality, it was 

necessary to use a three-step process to comply with the requirements that DRG 

reclassification and recalibration of the relative weights and the updated wage index and 

labor-related share have no effect on aggregate payments for IPPS hospitals. We first 

determined a proposed DRG reclassification and recalibration budget neutrality factor of 

0.998419 by using the same methodology described above to determine the proposed 
CMS-1518-P 809 

DRG reclassification and recalibration budget neutrality factor for the Puerto Rico 

standardized amount and hospital-specific rates. Secondly, to compute a budget 

neutrality factor for wage index and labor-related share changes, we used FY 2010 

discharge data to simulate payments and compared aggregate payments using proposed 

FY 2012 relative weights and FY 2011 pre-reclassified wage indices, and applied the 

FY 2011 labor-related share of 68.8 percent to all hospitals (regardless of whether the 

hospital’s wage index was above or below 1.0) to aggregate payments using the proposed 

FY 2012 relative weights and the proposed FY 2012 pre-reclassified wage indices, and 

applied the proposed labor-related share for FY 2012 of 68.8 percent to all hospitals 

(regardless of whether the hospital’s wage index was above or below 1.0). In addition, 

we applied the proposed DRG reclassification and recalibration budget neutrality factor 

(derived in the first step) to the rates that were used to simulate payments for this 

comparison of aggregate payments from FY 2011 to FY 2012. By applying this 

methodology, we determined a proposed budget neutrality factor of 1.000113 for changes 

to the wage index. Finally, we multiplied the proposed DRG reclassification and 

recalibration budget neutrality factor of 0.998419 (derived in the first step) by the 

proposed budget neutrality factor of 1.000113 for changes to the wage index (derived in 

the second step) to determine the proposed DRG reclassification and recalibration and 

updated wage index budget neutrality factor of 0.998532. 

b. Reclassified Hospitals—Proposed Budget Neutrality Adjustment 

 Section 1886(d)(8)(B) of the Act provides that, effective with discharges 

occurring on or after October 1, 1988, certain rural hospitals are deemed urban. In 
CMS-1518-P 810 

addition, section 1886(d)(10) of the Act provides for the reclassification of hospitals 

based on determinations by the MGCRB. Under section 1886(d)(10) of the Act, a 

hospital may be reclassified for purposes of the wage index. 

 Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the 

standardized amount to ensure that aggregate payments under the IPPS after 

implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of 

the Act are equal to the aggregate prospective payments that would have been made 

absent these provisions. We note that the wage index adjustments provided under 

section 1886(d)(13) of the Act are not budget neutral. Section 1886(d)(13)(H) of the Act 

provides that any increase in a wage index under section 1886(d)(13) shall not be taken 

into account “in applying any budget neutrality adjustment with respect to such index” 

under section 1886(d)(8)(D) of the Act. To calculate the proposed budget neutrality 

factor for FY 2012, we used FY 2010 discharge data to simulate payments and compared 

total IPPS payments with proposed FY 2012 relative weights, FY 2012 labor-related 

share percentages, and proposed FY 2012 wage data prior to any reclassifications under 

sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act to total IPPS payments with 

proposed FY 2012 relative weights, FY 2012 labor-related share percentages, and 

proposed FY 2012 wage data after such reclassifications. Based on these simulations, we 

calculated a proposed adjustment factor of 0.991528 to ensure that the effects of these 

provisions are budget neutral, consistent with the statute. 

 The proposed FY 2012 budget neutrality adjustment factor is applied to the 

standardized amount after removing the effects of the FY 2011 budget neutrality 
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adjustment factor. We note that the proposed FY 2012 budget neutrality adjustment 

reflects proposed FY 2012 wage index reclassifications approved by the MGCRB or the 

Administrator. We note that, for this proposed rule, as discussed in section III.B. of the 

preamble to this proposed rule, section 3137(c) of the Affordable Care Act resulted in 

some additional hospitals receiving reclassifications, or some hospitals receiving 

reclassifications to a different area. These reclassifications are included in the calculation 

of reclassification budget neutrality. 

c. Proposed Rural Floor Budget Neutrality Adjustment 

 We make an adjustment to the wage index to ensure that aggregate payments to 

hospitals after implementation of the rural floor under section 4410 of the BBA (Pub. L. 105-

33) are not affected. As discussed in section III.F. of the preamble of this proposed rule, 

consistent with section 3141 of the Affordable Care Act, the budget neutrality adjustment for 

the rural and imputed floors is a national adjustment to the wage index. 

 As discussed in section III.F.2. of the preamble of this proposed rule, for the FY 2012 

wage index, there are wage data for one new hospital in rural Puerto Rico when previously 

there were none. Therefore, for FY 2012, we are proposing to calculate a national rural 

Puerto Rico wage index (used to adjust the labor-related share of the national standardized 

amount for hospitals in Puerto Rico which receive 75 percent of the national standardized 

amount) and a rural Puerto Rico-specific wage index (which will be used to adjust the laborrelated share of the Puerto Rico-specific standardized amount for hospitals in Puerto Rico 

which receive 25 percent of the Puerto Rico-specific standardized amount). Our calculation 

is based on the policy adopted in the FY 2008 IPPS final rule with comment period 
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(72 FR 47323). A complete discussion on the computation of the rural Puerto Rico wage 

index can be found in section III.G. of the preamble of this proposed rule. In past fiscal 

years, when there was no rural Puerto Rico wage index, we applied the national rural floor 

budget neutrality wage index factor to the national wage indices used to adjust the laborrelated share for the national standardized amount (including the national Puerto Rico wage 

indexes) but did not apply this factor to the Puerto Rico-specific wage indices. We did not 

apply the national rural floor budget neutrality wage index factor to the Puerto Rico-specific 

wage indices (nor did we compute a Puerto Rico-specific rural floor budget neutrality wage 

index factor) because there were no rural hospitals in Puerto Rico. As mentioned above, for 

FY 2012, there is now one rural Puerto Rico hospital and, therefore, it is necessary to 

compute and propose a Puerto Rico-specific rural floor budget neutrality wage index factor 

(in addition to the national factor). 

 To calculate both the national and Puerto Rico-specific rural floor budget 

neutrality adjustment factors, we used FY 2010 discharge data and proposed FY 2012 

post-reclassified national and Puerto Rico-specific wage indices to simulate IPPS 

payments. First, we compared the national and Puerto Rico-specific simulated payments 

without the national and Puerto Rico-specific rural floor applied to national and Puerto 

Rico-specific simulated payments with the national and Puerto Rico-specific rural floor 

applied to determine the proposed national rural budget neutrality adjustment factor of 

0.993834 and the proposed Puerto Rico-specific budget neutrality adjustment factor of 

0.989226. The proposed national adjustment was applied to the national wage indices to 

produce a national rural floor budget neutral wage index and the proposed Puerto 
CMS-1518-P 813 

Rico-specific adjustment was then applied to the Puerto Rico-specific wage indices to 

produce a Puerto Rico-specific rural floor budget neutral wage index. 

d. Proposed Adjustment in Light of Court Decision in Cape Cod v. Sebelius

 We are proposing a 1.1 percent adjustment to the standardized amount in 

recognition of the decision of Cape Cod v. Sebelius (630 F.3d 203 (D.C. Cir. 2011)), 

(here after referred to as “Cape Cod”). However, we emphasize that remand proceedings 

in that case are not complete and this proposal reflects the timing of the development of 

this proposed rule and not a final decision as to how the remand will proceed. In Cape 

Cod, the plaintiff hospitals challenged the rural floor budget neutrality adjustments for 

FY 2007 and FY 2008. In its opinion, the D.C. Circuit Court found that section 4410 of 

the Balanced Budget Act of 1997 (BBA) Pub. L. 105-33, which authorized both the rural 

floor and rural floor budget neutrality, would not permit CMS to ignore prior year errors 

in calculating rural floor budget neutrality adjustments. The case has now been remanded 

to CMS for further proceedings consistent with the D.C. Circuit Court’s opinion. 

While Cape Cod involved only FYs 2007 and 2008, the decision may have 

implications for FY 2012 payment rates, depending on the ultimate result of the remand 

proceedings. In light of that opinion and the timing of the rulemaking development 

process, we are proposing to restore to the FY 2012 standardized amount the offset for 

the rural floor and imputed floor on the standardized amount over FY 1998 through 2006. 

By making this proposal for FY 2012, all affected parties will have an opportunity to 

consider and comment on this proposed adjustment. Given that the court has remanded 

the case to the Secretary for FYs 2007 and 2008 and those remand proceedings are not 
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yet complete, we may decide to take a different approach in the final rule, depending on 

public comments or developments in the remand proceedings. 

To assess the overall impact of applying the rural floor budget neutrality 

adjustment to the standardized amount for the years between FY 1998 and FY 2006, we 

remodeled the recalibration/wage index budget neutrality factor for the years at issue (for 

which data were available), excluding the effect of the rural floor adjustment. For 

example, to compute the revised recalibration/wage index budget neutrality factor for 

FY 2000, we compared the FY 1999 pre-reclassified wage data with no rural floor to 

FY 2000 pre-reclassified wage data with no rural floor. We then compared the revised 

factor to the wage/recalibration budget neutrality factor derived under the original 

modeling logic; that is, where the current year’s pre-reclassified wage data had a rural 

floor applied. The percent change in these two factors was then calculated for each 

remodeled year. 

Remodeled years from FY 1998 to FY 2004 showed an approximate 0.1 

percentage point increase between the factors for each year. This increase results in a 

total 0.7 percentage points, which, based on the court’s comments, we believe should be 

returned to the standardized amount. Beginning with FY 2005 through FY 2006, the 

number of States for which a floor wage index was available was extended via the 

imputed floor policy. With additional States receiving increases in payment due to the 

application of the imputed floor, we estimated the combined effects of the rural and 

imputed floor to be approximately 0.2 percentage points per year. This resulted in a total 

of 0.4 percentage points, which we believe should be returned to the standardized 
CMS-1518-P 815 

amount. Therefore, to remove the effects of the rural floor from the standardized amount 

for FY 1998 through FY 2006, we are proposing to apply a onetime adjustment of 1.1 

percentage points, which would increase the standardized amount (0.7 percentage points 

plus 0.4 percentage points for a factor of 1.011). We note that, in the FY 2008 IPPS final 

rule with comment period, we applied a onetime adjustment of 1.002214 to the FY 2008 

standardized amount to address a single year transition (from FY 2007 to FY 2008) to a 

noncumulative system of the rural floor budget neutrality adjustment. This adjustment of 

1.002214 to the FY 2008 standardized amount reflected the increase to the rates to 

remove the effects of the rural floor budget neutrality adjustment from FY 2007. 

Because this 1.002214 factor remains on the rate, we are not including an adjustment for 

FY 2007 in our calculation above. 

e. Proposed Case-Mix Budget Neutrality Adjustment 

(1) Proposed Adjustment to the FY 2012 IPPS Standardized Amount for the Prospective 

Adjustment for FY 2010 and Subsequent Years Authorized by Section 7(b)(1)(A) of 

Pub. L. 110-90 and Section 1886(d)(3)(A)(vi) of the Act 

 As stated earlier, beginning in FY 2008, we adopted the MS–DRG patient 

classification system for the IPPS to better recognize patients’ severity of illness in 

Medicare payment rates. In the FY 2008 IPPS final rule with comment period 

(73 FR 47175 through 47186), we indicated that we believe the adoption of the 

MS-DRGs had the potential to lead to increases in aggregate payments without a 

corresponding increase in actual patient severity of illness due to the incentives for 

changes in documentation and coding. In that final rule, using the Secretary’s authority 
CMS-1518-P 816 

under section 1886(d)(3)(A)(vi) of the Act to maintain budget neutrality by adjusting the 

national standardized amounts to eliminate the effect of changes in documentation and 

coding that do not reflect real change in case-mix, we established prospective 

documentation and coding adjustments of -1.2 percent for FY 2008, -1.8 percent for 

FY 2009, and -1.8 percent for FY 2010 (for a total adjustment of -4.8 percent). On 

September 29, 2007, Pub. L. 110–90 was enacted. Section 7 of Pub. L. 110-90 included 

a provision that reduces the documentation and coding adjustment for the MS–DRG 

system that we adopted in the FY 2008 IPPS final rule with comment period to 

-0.6 percent for FY 2008 and -0.9 percent for FY 2009. To comply with the provision of 

section 7(a) of Pub. L. 110-90, in a final rule that appeared in the Federal Register on 

November 27, 2007 (72 FR 66886), we changed the IPPS documentation and coding 

adjustment for FY 2008 to -0.6 percent, and revised the FY 2008 national standardized 

amounts (as well as other payment factors and thresholds) accordingly, with these 

revisions being effective as of October 1, 2007. For FY 2009, section 7(a) of 

Pub. L. 110-90 required a documentation and coding adjustment of -0.9 percent instead 

of the -1.8 percent adjustment specified in the FY 2008 IPPS final rule with comment 

period. As required by statute, we applied a documentation and coding adjustment of 

-0.9 percent to the FY 2009 IPPS national standardized amounts. The documentation and 

coding adjustments established in the FY 2008 IPPS final rule with comment period are 

cumulative. As a result, the -0.9 percent documentation and coding adjustment in 

FY 2009 was in addition to the -0.6 percent adjustment in FY 2008, yielding a combined 

effect of -1.5 percent. 
CMS-1518-P 817 

 In the FY 2010 IPPS proposed and final rules (74 FR 24092 through 24101 and 

43768 through 43772), we discussed our analysis of FY 2008 claims data and did not 

apply any additional documentation and coding adjustments to the average standardized 

amounts under section 1886(d) of the Act. We refer readers to these rules for a detailed 

description of our analysis, responses to comments, and final policy respectively. After 

analysis of the FY 2009 claims data for the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50057 through 50073), we found a total prospective documentation and coding 

effect of 1.054. After accounting for the -0.6 percent and the -0.9 percent documentation 

and coding adjustments in FYs 2008 and 2009, we found a remaining documentation and 

coding effect of 3.9 percent. Therefore, an additional cumulative adjustment of -3.9 

percent would be necessary to meet the requirements of section 7(b)(1)(A) of Pub. L. 

110-90 to make an adjustment to the average standardized amounts in order to eliminate 

the full effect of the documentation and coding changes on future payments. As we 

discussed in the FY 2011 IPPS/LTCH PPS final rule, we did not propose a prospective 

adjustment under section 7(b)(1)(A) of Pub. L. 110-90 for FY 2011 (75 FR 23868 

through 23870). We note that, as a result, payments in FY 2011 (and in each future year 

until we implement the requisite adjustment) were 3.9 percent higher than they would 

have been if we had implemented an adjustment under section 7(b)(1)(A) of Pub. L. 

110-90. Our actuaries estimate that this 3.9 percentage point increase will result in an 

aggregate payment of approximately $4 billion. We refer readers to the FY 2011 

IPPS/LTCH PPS final rule for a detailed description of our analysis, responses to 

comments, and final policy (75 FR 50057 through 50073). 
CMS-1518-P 818 

Because further delay of this prospective adjustment will result in a continued 

accrual of unrecoverable overpayments, we consider it imperative that CMS propose a 

prospective adjustment for FY 2012, while recognizing CMS’ continued desire to 

mitigate the effects of any significant downward adjustments to hospitals. Therefore, we 

are proposing a -3.15 percent prospective adjustment to the standardized amount to 

partially eliminate the full effect of the documentation and coding changes on future 

payments. Due to the offsetting nature of the remaining recoupment adjustment under 

section 7(b)(1)(B) of Pub. L. 110-90 (described below), and after considering other 

positive payment adjustments to FY 2012 rates proposed elsewhere in this proposed rule, 

we believe that the proposed -3.15 percent adjustment would allow for a significant 

reduction in potential unrecoverable overpayments, yet will maintain a comparable 

adjustment level between FY 2011 and FY 2012, reflecting the applicable percentage 

increase with a documentation and coding adjustment. This proposal recognized that an 

additional adjustment of -0.75 percent (3.9 minus 3.15) will be required in future 

rulemaking to complete the statutory requirement under section 7(b)(1)(A) of Pub. L. 

110-90. At this time, we are not proposing a timeline to implement the remainder of this 

adjustment. We refer the reader to section II.D. of the preamble of this proposed rule for 

more discussion. In addition, for a complete discussion on our proposed documentation 

and coding adjustment to the hospital-specific rates, we refer readers to section 

II.D.2.c.of this Addendum. 
CMS-1518-P 819 

(2) Proposed Adjustment to the FY 2012 IPPS Standardized Amount for the 

Recoupment or Repayment Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) of 

Pub. L. 110-90 

 As indicated in section II.D.4. in the preamble to this proposed rule, the change 

due to documentation and coding that did not reflect real changes in case-mix for 

discharges occurring during FY 2008 and FY 2009 exceeded the -0.6 and -0.9 percent 

prospective documentation and coding adjustment applied under section 7(a) of Pub. L. 

110-90 for those 2 years respectively by 1.9 percentage points in FY 2008 and 3.9 

percentage points in FY 2009. In total, this change exceeded the cumulative prospective 

adjustments by 5.8 percentage points. Our actuaries estimated that this 5.8 percentage 

point increase resulted in an increase in aggregate payments of approximately 

$6.9 billion. In the FY 2011 IPPS/LTCH PPS final rule, we determined that an aggregate 

adjustment of -5.8 percent in FYs 2011 and 2012, subject to actuarial adjustment to 

reflect accumulated interest, would be necessary in order to meet the requirements of 

section 7(b)(1)(B) of Pub. L. 110-90 to adjust the standardized amounts for discharges 

occurring in FYs 2010, 2011, and/or 2012 to offset the estimated amount of the increase 

in aggregate payments (including interest) in FYs 2008 and 2009. 

 It is often our practice to phase in rate adjustments over more than one year in 

order to moderate the effect on rates in any one year. Therefore, as we specified in the 

FY 2011 IPPS/LTCH PPS final rule (75 FR 50425), we made an adjustment in FY 2011 

to the standardized amount of -2.9 percent, representing half of the aggregate adjustment 

required under section 7(b)(1)(B) of Pub. L. 110-90, for FY 2011. As we have 
CMS-1518-P 820 

previously noted, unlike the prospective adjustment to the standardized amounts under 

section 7(b)(1)(A) of Pub. L. 110-90 described earlier, the recoupment or repayment 

adjustment to the standardized amounts under section 7(b)(1)(B) of Pub. L. 110-90 is not 

cumulative, but would be removed for subsequent fiscal years once we have offset the 

increase in aggregate payments for discharges for FY 2008 expenditures and FY 2009 

expenditures. We refer readers to the FY 2011 IPPS/LTCH PPS final rule for a detailed 

description of our analysis, responses to comments, and final policy (75 FR 50057 

through 50073). 

 While we stated in the FY 2011 IPPS/LTCH PPS final rule the need to potentially 

adjust the remaining -2.9 percent estimate to account for accumulated interest, our 

actuaries have determined that there has been no significant interest accumulation and 

that no additional adjustment will be required. Therefore, we are proposing to complete 

the recoupment adjustment according to the timeframes set forth by section 7(b)(1)(B) of 

Pub. L. 110-90 by implementing the remaining -2.9 percent adjustment, in addition to 

removing the effect of the -2.9 percent adjustment to the standardized amount finalized in 

FY 2011. Because these adjustments will, in effect, balance out, there will be no year-toyear change in the standardized amount due to this recoupment adjustment. As this 

adjustment will complete the required recoupment for overpayments due to 

documentation and coding effects on discharges occurring in FYs 2008 and 2009, we 

anticipate removing the effect of this adjustment by adding 2.9 percent to the 

standardized amount in FY 2013. We continue to believe that this is a reasonable and 

fair approach that satisfies the requirements of the statute while substantially moderating 
CMS-1518-P 821 

the financial impact on hospitals. We refer the reader to section II.D. of the preamble to 

this proposed rule for more discussion. 

(3) Proposed Adjustment to the FY 2012 Puerto Rico Standardized Amount 

As discussed in section II.D.9. of the preamble of this proposed rule, in the 

FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 through 50073), using the same 

methodology we applied to estimate documentation and coding changes under IPPS for 

non-Puerto Rico hospitals, our best estimate, based on the then most recently available 

data (FY 2009 claims paid through March 2010), was that for documentation and coding 

changes that occurred over FY 2008 and FY 2009, a cumulative adjustment of -2.6 

percent was required to eliminate the full effect of the documentation and coding changes 

on future payments from the Puerto Rico-specific rate. In FY 2011, as finalized in the 

FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 through 50073), we applied an 

adjustment of -2.6 percent to the Puerto Rico-specific rate. Therefore, because the Puerto 

Rico-specific rate received a full prospective adjustment of -2.6 percent in FY 2011, we 

are proposing no further adjustment in this proposed rule for FY 2012. For a complete 

discussion on this proposal, we refer readers to section II.D.9. of the preamble of this 

proposed rule. 

f. Rural Community Hospital Demonstration Program Adjustment 

As discussed in section IV.N. of the preamble to this proposed rule, section 410A 

of Pub. L. 108-173 originally required the Secretary to establish a demonstration that 

modifies reimbursement for inpatient services for up to 15 small rural hospitals. Section 

410A(c)(2) of Pub. L. 108-173 requires that “[i]n conducting the demonstration program 
CMS-1518-P 822 

under this section, the Secretary shall ensure that the aggregate payments made by the 

Secretary do not exceed the amount which the Secretary would have paid if the 

demonstration program under this section was not implemented.” 

Sections 3123 and 10313 of the Affordable Care Act extended the demonstration 

for an additional 5-year period, and allow up to 30 hospitals to participate in 20 States 

with low population densities determined by the Secretary. (In determining which States 

to include in the expansion, the Secretary is required to use the same criteria and data that 

the Secretary used to determine the States for purposes of the initial 5-year period.) In 

the FY 2011 IPPS/LTCH PPS final rule (75 FR 50426), in order to achieve budget 

neutrality, we adjusted the national IPPS rates by an amount sufficient to account for the 

added costs of this demonstration as described in section IV.K. of that final rule. In other 

words, we applied budget neutrality across the payment system as a whole rather than 

merely across the participants of this demonstration, consistent with past practice. We 

stated that we believe that the language of the statutory budget neutrality requirement 

permits the agency to implement the budget neutrality provision in this manner. The 

statutory language requires that “aggregate payments made by the Secretary do not 

exceed the amount which the Secretary would have paid if the demonstration...was not 

implemented,” but does not identify the range across which aggregate payments must be 

held equal. 

For FY 2012, we are proposing the estimated amount for the adjustment to the 

national IPPS rates for FY 2012 to be $52,642,213. Accordingly, to account for the 

estimated costs of the demonstration for the specific time periods as explained in detail in 
CMS-1518-P 823 

section IV.N. of the preamble of this proposed rule, for FY 2012, we computed a 

proposed factor of 0.999479 for the rural community hospital demonstration program 

budget neutrality adjustment that would be applied to the IPPS standardized rate. 

We note that because the settlement process for the demonstration hospitals' third 

and fourth year cost reports, that is, for cost reporting periods starting in FYs 2007 and 

2008, has experienced a delay, for this proposed rule, we are unable to state the costs of 

the demonstration corresponding to FYs 2007 and 2008 for purposes of determining the 

amount by which the costs of the demonstration corresponding to FYs 2007 and 2008 

exceeded the amount offset by the budget neutrality adjustments for FYs and 2008. As a 

result, we are unable to propose the specific numeric adjustment representing this 

offsetting process that would be a component of the budget neutrality adjustment and that 

would be applied to the national IPPS rates. Therefore, the estimated budget neutrality 

adjustment to the national IPPS rate in this proposed rule does not include a component 

to account for these costs. We anticipate that this information may be available for the 

FY 2012 IPPS/LTCH PPS final rule, at which time, if data from settled cost reports are 

available, under our proposal, we would incorporate a component into the budget 

neutrality adjustment to the national IPPS rates to account for the amount by which the 

demonstration costs corresponding to FY 2007 and FY 2008 exceeded the amount offset 

by the budget neutrality adjustments for FYs 2007 and 2008. 

g. Proposed Outlier Payments 

 Section 1886(d)(5)(A) of the Act provides for payments in addition to the basic 

prospective payments for “outlier” cases involving extraordinarily high costs. To qualify 
CMS-1518-P 824 

for outlier payments, a case must have costs greater than the sum of the prospective 

payment rate for the DRG, any IME and DSH payments, any new technology add-on 

payments, and the “outlier threshold” or “fixed-loss” amount (a dollar amount by which 

the costs of a case must exceed payments in order to qualify for an outlier payment). We 

refer to the sum of the prospective payment rate for the DRG, any IME and DSH 

payments, any new technology add-on payments, and the outlier threshold as the outlier 

“fixed-loss cost threshold.” To determine whether the costs of a case exceed the 

fixed-loss cost threshold, a hospital’s CCR is applied to the total covered charges for the 

case to convert the charges to estimated costs. Payments for eligible cases are then made 

based on a marginal cost factor, which is a percentage of the estimated costs above the 

fixed-loss cost threshold. The marginal cost factor for FY 2012 is 80 percent, the same 

marginal cost factor we have used since FY 1995 (59 FR 45367). 

 In accordance with section 1886(d)(5)(A)(iv) of the Act, outlier payments for any 

year are projected to be not less than 5 percent nor more than 6 percent of total operating 

DRG payments plus outlier payments. We note that the statute requires outlier payments 

to be not less than 5 percent nor more than 6 percent of total “operating DRG payments” 

(which does not include IME and DSH payments) plus outlier payments. When setting 

the outlier threshold, we compute the 5.1 percent target by dividing the total operating 

outlier payments by the total operating DRG payments plus outlier payments. We do not 

include any other payments such as IME and DSH within the outlier target amount. 

Therefore, it is not necessary to include Medicare Advantage IME payments in the outlier 

threshold calculation. Section 1886(d)(3)(B) of the Act requires the Secretary to reduce 
CMS-1518-P 825 

the average standardized amount by a factor to account for the estimated proportion of 

total DRG payments made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the 

Act requires the Secretary to reduce the average standardized amount applicable to 

hospitals located in Puerto Rico to account for the estimated proportion of total DRG 

payments made to outlier cases. More information on outlier payments may be found on 

the CMS Web site at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage. 

(1) Proposed FY 2012 Outlier Fixed-Loss Cost Threshold 

 For FY 2012, we are proposing to continue to use the same methodology used for 

FY 2009 (73 FR 48763 through 48766) to calculate the outlier threshold. Similar to the 

methodology used in the FY 2009 IPPS final rule, for FY 2012, we are proposing to 

apply an adjustment factor to the CCRs to account for cost and charge inflation (as 

explained below). As we have done in the past, to calculate the proposed FY 2012 outlier 

threshold, we simulated payments by applying proposed FY 2012 rates and policies using 

cases from the FY 2010 MedPAR files. Therefore, in order to determine the proposed 

FY 2012 outlier threshold, we inflated the charges on the MedPAR claims by 2 years, 

from FY 2010 to FY 2012. 

We are proposing to continue to use a refined methodology that takes into account 

the lower inflation in hospital charges that are occurring as a result of the outlier final rule 

(68 FR 34494), which changed our methodology for determining outlier payments by 

implementing the use of more current CCRs. Our refined methodology uses more recent 

data that reflect the rate-of-change in hospital charges under the new outlier policy. 
CMS-1518-P 826 

Using the most recent data available, we calculated the 1-year average annualized 

rate-of-change in charges per case from the last quarter of FY 2009 in combination with 

the first quarter of FY 2010 (July 1, 2009 through December 31, 2009) to the last quarter 

of FY 2010 in combination with the first quarter of FY 2011 (July 1, 2010 through 

December 31, 2010). This rate-of-change was 4.43 percent (1.044394) or 9.07 percent 

(1.090759) over 2 years. As we have done in the past, we established the proposed 

FY 2012 outlier threshold using hospital CCRs from the December 2010 update to the 

Provider-Specific File (PSF)--the most recent available data at the time of this proposed 

rule. 

As discussed in the FY 2007 IPPS final rule (71 FR 48150), we worked with the 

Office of Actuary to derive the methodology described below to develop the CCR 

adjustment factor. For FY 2012, we are proposing to continue to use the same 

methodology to calculate the CCR adjustment by using the FY 2010 operating cost per 

discharge increase in combination with the actual FY 2010 operating market basket 

percentage increase determined by IHS Global Insight, Inc. (IGI), as well as the charge 

inflation factor described above to estimate the adjustment to the CCRs. (We note that 

the FY 2010 actual (otherwise referred to as “final”) operating market basket percentage 

increase reflects historical data, whereas the published FY 2010 operating market basket 

update factor was based on IGI’s 2009 second quarter forecast with historical data 

through the first quarter of 2009. We also note that while the FY 2010 published 

operating market basket update was based on the FY 2002-based IPPS market basket, the 

actual or “final” market basket percentage increase is based on the FY 2006-based IPPS 
CMS-1518-P 827 

market basket. Similarly, the FY 2010 published capital market basket update factor was 

based on the FY 2002-based capital market basket and the actual or “final” capital market 

basket percentage increase is based on the FY 2006-based capital market basket.) By 

using the operating market basket percentage increase and the increase in the average 

cost per discharge from hospital cost reports, we are using two different measures of cost 

inflation. For FY 2012, we determined the adjustment by taking the percentage increase 

in the operating costs per discharge from FY 2008 to FY 2009 (1.0285) from the cost 

report and dividing it by the final operating market basket percentage increase from 

FY 2009 (1.0260). This operation removes the measure of pure price increase (the 

market basket) from the percentage increase in operating cost per discharge, leaving the 

nonprice factors in the cost increase (for example, quantity and changes in the mix of 

goods and services). We repeated this calculation for 2 prior years to determine the 

3-year average of the rate of adjusted change in costs between the operating market 

basket percentage increase and the increase in cost per case from the cost report (the 

FY 2006 to FY 2007 percentage increase of operating costs per discharge of 1.0465 

divided by the FY 2007 final operating market basket percentage increase of 1.036, the 

FY 2007 to FY 2008 percentage increase of operating costs per discharge of 1.0506 

divided by FY 2008 final operating market basket percentage increase of 1.040). For 

FY 2012, we averaged the differentials calculated for FY 2007, FY 2008, and FY 2009, 

which resulted in a mean ratio of 1.0076. We multiplied the 3-year average of 1.0076 by 

the FY 2010 final operating market basket percentage increase of 1.021, which resulted 

in an operating cost inflation factor of 2.87 percent or 1.028747. We then divided the 
CMS-1518-P 828 

operating cost inflation factor by the 1-year average change in charges (1.044394) and 

applied an adjustment factor of 0.985018 to the operating CCRs from the PSF 

(calculation performed on unrounded numbers). 

As stated in the FY 2009 IPPS final rule (73 FR 48763), we continue to believe it 

is appropriate to apply only a 1-year adjustment factor to the CCRs. On average, it takes 

approximately 9 months for a fiscal intermediary or MAC to tentatively settle a cost 

report from the fiscal year end of a hospital’s cost reporting period. The average “age” of 

hospitals’ CCRs from the time the fiscal intermediary or the MAC inserts the CCR in the 

PSF until the beginning of FY 2009 is approximately 1 year. Therefore, as stated above, 

we believe a 1-year adjustment factor to the CCRs is appropriate. 

We used the same methodology for the capital CCRs and determined the 

adjustment by taking the percentage increase in the capital costs per discharge from 

FY 2008 to FY 2009 (1.0508) from the cost report and dividing it by the final capital 

market basket percentage increase from FY 2009 (1.015). We repeated this calculation 

for 2 prior years to determine the 3-year average of the rate of adjusted change in costs 

between the capital market basket percentage increase and the increase in cost per case 

from the cost report (the FY 2006 to FY 2007 percentage increase of capital costs per 

discharge of 1.0507 divided by the FY 2007 final capital market basket percentage 

increase of 1.013, the FY 2007 to FY 2008 percentage increase of capital costs per 

discharge of 1.0811 divided by the FY 2008 final capital market basket percentage 

increase of 1.015). For FY 2012, we averaged the differentials calculated for FY 2007, 

FY 2008, and FY 2009, which resulted in a mean ratio of 1.0459. We multiplied the 
CMS-1518-P 829 

3-year average of 1.0459 by the FY 2010 final capital market basket percentage increase 

of 1.010, which resulted in a capital cost inflation factor of 5.63 percent or 1.056329. We 

then divided the capital cost inflation factor by the 1-year average change in charges 

(1.044394) and applied an adjustment factor of 1.011428 to the capital CCRs from the 

PSF (calculation performed on unrounded numbers). We are proposing to use the same 

charge inflation factor for the capital CCRs that was used for the operating CCRs. The 

charge inflation factor is based on the overall billed charges. Therefore, we believe it is 

appropriate to apply the charge factor to both the operating and capital CCRs. 

As stated above, for FY 2012, we applied the proposed FY 2012 rates and policies 

using cases from the FY 2010 MedPAR files in calculating the proposed outlier 

threshold. As discussed in section III.B.3. of the preamble to the FY 2011 IPPS/LTCH 

PPS final rule (75 FR 50160 and 50161) and in section III.F. of this proposed rule, in 

accordance with section 10324(a) of the Affordable Care Act, beginning in FY 2011, we 

created a wage index floor of 1.00 for all hospitals located in States determined to be 

frontier States. We noted that the frontier State floor adjustments will be calculated and 

applied after rural and imputed floor budget neutrality adjustments are calculated for all 

labor market areas, in order to ensure that no hospital in a frontier State will receive a 

wage index lesser than 1.00 due to the rural and imputed floor adjustment. In accordance 

with section 10324(a) of the Affordable Care Act, the frontier State adjustment will not 

be subject to budget neutrality, and will only be extended to hospitals geographically 

located within a frontier State. However, for purposes of estimating the proposed outlier 

threshold for FY 2012, it was necessary to apply this provision by adjusting the wage 
CMS-1518-P 830 

index of those eligible hospitals in a frontier State when calculating the outlier threshold 

that results in outlier payments being 5.1 percent of total payments for FY 2012. If we 

did not take into account this provision, our estimate of total FY 2012 payments would be 

too low, and, as a result, our proposed outlier threshold would be too high, such that 

estimated outlier payments would be less than our projected 5.1 percent of total 

payments. 

For this proposed rule, we are using the FY 2010 claims data to calculate the 

FY 2012 proposed outlier threshold. Our estimate of the cumulative effect of changes in 

documentation and coding due to the adoption of the MS-DRGs through FY 2010 is 

5.4 percent, which is already included within the claims data (FY 2010 MedPAR files) 

used to calculate the proposed FY 2012 outlier threshold. Furthermore, we currently 

estimate that there would be no continued changes in documentation and coding in FYs 

2011 and 2012. Therefore, the cumulative effect of documentation and coding that has 

occurred is already reflected within the FY 2010 MedPAR claims data, and we do not 

believe there is any need to inflate FY 2010 claims data for any additional case-mix 

growth projected to have occurred since FY 2010. 

 Using this methodology, we are proposing an outlier fixed-loss cost threshold for 

FY 2012 equal to the prospective payment rate for the DRG, plus any IME and DSH 

payments, and any add-on payments for new technology, plus $23,375. 

 As we did in establishing the FY 2009 outlier threshold (73 FR 57891), in our 

projection of FY 2012 outlier payments, we are not proposing to make any adjustments 

for the possibility that hospitals’ CCRs and outlier payments may be reconciled upon cost 
CMS-1518-P 831 

report settlement. We continue to believe that, due to the policy implemented in the 

June 9, 2003 outlier final rule (68 FR 34494), CCRs will no longer fluctuate significantly 

and, therefore, few hospitals will actually have these ratios reconciled upon cost report 

settlement. In addition, it is difficult to predict the specific hospitals that will have CCRs 

and outlier payments reconciled in any given year. We also note that reconciliation 

occurs because hospitals’ actual CCRs for the cost reporting period are different than the 

interim CCRs used to calculate outlier payments when a bill is processed. Our 

simulations assume that CCRs accurately measure hospital costs based on information 

available to us at the time we set the outlier threshold. For these reasons, we are 

proposing not to make any assumptions about the effects of reconciliation on the outlier 

threshold calculation. 

(2) Other Proposed Changes Concerning Outliers 

 As stated in the FY 1994 IPPS final rule (58 FR 46348), we establish an outlier 

threshold that is applicable to both hospital inpatient operating costs and hospital 

inpatient capital-related costs. When we modeled the combined operating and capital 

outlier payments, we found that using a common threshold resulted in a lower percentage 

of outlier payments for capital-related costs than for operating costs. We project that the 

thresholds for FY 2012 will result in outlier payments that will equal 5.1 percent of 

operating DRG payments and 5.93 percent of capital payments based on the Federal rate. 

 In accordance with section 1886(d)(3)(B) of the Act, we are proposing to reduce 

the FY 2012 standardized amount by the same percentage to account for the projected 

proportion of payments paid as outliers. 
CMS-1518-P 832 

 The outlier adjustment factors that would be applied to the standardized amount 

based on the proposed FY 2012 outlier threshold are as follows: 

Operating 

Standardized Amounts Capital Federal Rate 

National 0.949000 0.940626

Puerto Rico 0.955896 0.929936

 We are proposing to apply the outlier adjustment factors to the proposed FY 2012 

rates after removing the effects of the FY 2011 outlier adjustment factors on the 

standardized amount. 

 To determine whether a case qualifies for outlier payments, we apply 

hospital-specific CCRs to the total covered charges for the case. Estimated operating and 

capital costs for the case are calculated separately by applying separate operating and 

capital CCRs. These costs are then combined and compared with the outlier fixed-loss 

cost threshold. 

 Under our current policy at §412.84, for hospitals for which the fiscal 

intermediary or MAC computes operating CCRs greater than 1.147 or capital CCRs 

greater than 0.158, or hospitals for which the fiscal intermediary or MAC is unable to 

calculate a CCR (as described at §412.84(i)(3) of our regulations), we use statewide 

average CCRs to determine whether a hospital qualifies for outlier payments.61 Table 8A 

listed in section VI. of this Addendum (and available only via the Internet) contains the 

proposed statewide average operating CCRs for urban hospitals and for rural hospitals for 

which the fiscal intermediary or MAC is unable to compute a hospital-specific CCR 

 

61 These figures represent 3.0 standard deviations from the mean of the log distribution of CCRs for all hospitals.
CMS-1518-P 833 

within the above range. Effective for discharges occurring on or after October 1, 2011, 

these statewide average ratios would replace the ratios published in the IPPS final rule for 

FY 2011 (75 FR 50390-50392). Table 8B listed in section VI. of this Addendum (and 

available via the Internet) contains the proposed comparable statewide average capital 

CCRs. Again, the proposed CCRs in Tables 8A and 8B would be used during FY 2012 

when hospital-specific CCRs based on the latest settled cost report are either not 

available or are outside the range noted above. Table 8C listed in section VI. of this 

Addendum (and available via the Internet) contains the proposed statewide average total 

CCRs used under the LTCH PPS as discussed in section V. of this Addendum. 

We finally note that we published a manual update (Change Request 3966) to our 

outlier policy on October 12, 2005, which updated Chapter 3, Section 20.1.2 of the 

Medicare Claims Processing Manual. The manual update covered an array of topics, 

including CCRs, reconciliation, and the time value of money. We encourage hospitals 

that are assigned the statewide average operating and/or capital CCRs to work with their 

fiscal intermediary or MAC on a possible alternative operating and/or capital CCR as 

explained in Change Request 3966. Use of an alternative CCR developed by the hospital 

in conjunction with the fiscal intermediary or MAC can avoid possible overpayments or 

underpayments at cost report settlement, thus ensuring better accuracy when making 

outlier payments and negating the need for outlier reconciliation. We also note that a 

hospital may request an alternative operating or capital CCR ratio at any time as long as 

the guidelines of Change Request 3966 are followed. Additionally, we published an 

additional manual update (Change Request 7192) to our outlier policy on 
CMS-1518-P 834 

December 3, 2010 which also updated Chapter 3, Section 20.1.2 of the Medicare Claims 

Processing Manual. The manual update outlines the outlier reconciliation process for 

hospitals and Medicare contractors. To download and view the manual instructions on 

outlier reconciliation, we refer readers to the CMS Web site: 

http://www.cms.hhs.gov/manuals/downloads/clm104c03.pdf.

(3) FY 2010 and FY 2011 Outlier Payments 

 In the FY 2011 IPPS final rule (75 FR 50431), we stated that, based on available 

data, we estimated that actual FY 2010 outlier payments would be approximately 

4.7 percent of actual total DRG payments. This estimate was computed based on 

simulations using the FY 2009 MedPAR file (discharge data for FY 2009 claims). That 

is, the estimate of actual outlier payments did not reflect actual FY 2010 claims, but 

instead reflected the application of FY 2010 rates and policies to available FY 2009 

claims. 

 Our current estimate, using available FY 2010 claims data, is that actual outlier 

payments for FY 2010 were approximately 4.7 percent of actual total DRG payments. 

Thus, the data indicate that, for FY 2010, the percentage of actual outlier payments 

relative to actual total payments is lower than we projected for FY 2010. Consistent with 

the policy and statutory interpretation we have maintained since the inception of the 

IPPS, we do not plan to make retroactive adjustments to outlier payments to ensure that 

total outlier payments for FY 2010 are equal to 5.1 percent of total DRG payments. 

We currently estimate that actual outlier payments for FY 2011 will be 

approximately 4.9 percent of actual total DRG payments, approximately 0.2 percentage 
CMS-1518-P 835 

points lower than the 5.1 percent we projected when setting the outlier policies for 

FY 2011. This estimate of 4.9 percent is based on simulations using the FY 2010 

MedPAR file (discharge data for FY 2010 claims). 

5. Proposed FY 2012 Standardized Amount 

 The adjusted standardized amount is divided into labor-related and 

nonlabor-related portions. Tables 1A and 1B listed and published in section VI. of this 

Addendum (and available via the Internet) contain the national standardized amounts that 

we are proposing to apply to all hospitals, except hospitals located in Puerto Rico, for FY 

2012. The proposed Puerto Rico-specific amounts are shown in Table 1C listed and 

published in section VI. of this Addendum (and available via the Internet). The proposed 

amounts shown in Tables 1A and 1B differ only in that the labor-related share applied to 

the standardized amounts in Table 1A is the labor-related share of 68.8 percent, and 

Table 1B is 62 percent. In accordance with sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) 

of the Act, we are applying a labor-related share of 62 percent, unless application of that 

percentage would result in lower payments to a hospital than would otherwise be made. 

In effect, the statutory provision means that we will apply a labor-related share of 62 

percent for all hospitals (other than those in Puerto Rico) whose wage indices are less 

than or equal to 1.0000. 

 In addition, Tables 1A and 1B include the proposed standardized amounts 

reflecting the proposed applicable percentage increase of 1.5 percent for FY 2012, and a 

proposed update of -0.5 percent for hospitals that fail to submit quality data consistent 

with section 1886(b)(3)(B)(viii) of the Act. 
CMS-1518-P 836 

 Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion of the Puerto Rico 

payment rate is based on the discharge-weighted average of the national large urban 

standardized amount (this amount is set forth in Table 1A). The labor-related and 

nonlabor-related portions of the proposed national average standardized amounts for 

Puerto Rico hospitals for FY 2011 are set forth in Table 1C listed and published in 

section VI. of this Addendum (and available via the Internet). This table also includes 

the proposed Puerto Rico standardized amounts. The labor-related share applied to the 

Puerto Rico specific standardized amount is the labor-related share of 62.1 percent, or 62 

percent, depending on which provides higher payments to the hospital. 

(Section 1886(d)(9)(C)(iv) of the Act, as amended by section 403(b) of Pub. L. 108-173, 

provides that the labor-related share for hospitals located in Puerto Rico be 62 percent, 

unless the application of that percentage would result in lower payments to the hospital.) 

 The following table illustrates the proposed changes from the FY 2011 national 

standardized amount. The second column shows the proposed changes from the FY 2011 

standardized amounts for hospitals that satisfy the quality data submission requirement 

and therefore receive the full update of 1.5 percent. The third column shows the 

proposed changes for hospitals receiving the reduced update of -0.5 percent. The first 

row of the table shows the proposed updated (through FY 2011) average standardized 

amount after restoring the FY 2011 offsets for outlier payments, demonstration budget 

neutrality and the geographic reclassification budget neutrality. The DRG 

reclassification and recalibration wage index budget neutrality factors are cumulative. 

Therefore, the FY 2011 factor is not removed from this table. 
CMS-1518-P 837 

COMPARISON OF FY 2011 STANDARDIZED AMOUNTS TO THE PROPOSED 

FY 2012 STANDARDIZED AMOUNT WITH FULL AND REDUCED UPDATE 

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

Full Update 

(1.5 percent); 

Wage index is 

greater than 1.0000 

Full Update 

(1.5 percent); 

Wage index is less 

than or equal to 

1.0000 

Reduced Update (-

0.5 percent); 

Wage index is 

greater than 1.0000 

Reduced Update 

(-0.5 percent); 

Wage index is less 

than or equal to 

1.0000 

FY 2011 Base Rate, after 

removing geographic 

reclassification budget 

neutrality, demonstration 

budget neutrality, 

cumulative FY 2008 and 

FY 2009 documentation 

and coding adjustment, FY 

2011 documentation and 

coding recoupment, and 

outlier offset (based on the 

labor-related share 

percentage for FY 2011) 

Labor: $3,947.65 

Nonlabor: $1,790.21 

Labor: $3,557.48 

Nonlabor: $2,180.39 

Labor: $3,947.65 

Nonlabor: $1,790.21 

Labor: $3,557.48 

Nonlabor: $2,180.39 

Proposed FY 2012 Update 

Factor 1.015 1.015 0.9950 0.9950 

Proposed Adjustment for 

Restoring Rural Floor 

Budget Neutrality 1.011 1.011 1.011 1.011 

Proposed FY 2012 DRG 

Recalibration and Wage 

Index Budget Neutrality 

Factor 0.998532 0.998532 0.998532 0.998532 

Proposed FY 2012 

Reclassification Budget 

Neutrality Factor 0.991528 0.991528 0.991528 0.991528 

Proposed FY 2012 Rural 

Demonstration Budget 

Neutrality Factor 0.999479 0.999479 0.999479 0.999479 

Proposed FY 2012 Outlier 

Factor 0.949000 0.949000 0.949000 0.949000 

Proposed documentation 

and coding adjustments 

required under sections 

7(b)(1)(A) and 7(b)(1)(B) 

of Pub. L. 110-90 0.9282 0.9282 0.9282 0.9282 

Proposed Rate for FY 2012 Labor: $3,531.06 

Nonlabor: $1,601.30 

Labor: $3,182.06 

Nonlabor:$1,950.30 

Labor: $3,461.48 

Nonlabor: $1,569.75 

Labor: $3,119.36 

Nonlabor: $1,911.87 
CMS-1518-P 838 

 Tables 1A through 1C, as published in section VI. of this Addendum (and 

available via the Internet), contain the labor-related and nonlabor-related shares that we 

are proposing to use to calculate the prospective payment rates for hospitals located in the 

50 States, the District of Columbia, and Puerto Rico for FY 2012. This section addresses 

two types of adjustments to the standardized amounts that are made in determining the 

proposed prospective payment rates as described in this Addendum. 

1. Proposed Adjustment for Area Wage Levels 

 Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require that we make an 

adjustment to the labor-related portion of the national and Puerto Rico prospective 

payment rates, respectively, to account for area differences in hospital wage levels. This 

adjustment is made by multiplying the labor-related portion of the adjusted standardized 

amounts by the appropriate wage index for the area in which the hospital is located. In 

section III. of the preamble of this proposed rule, we discuss the data and methodology 

for the proposed FY 2012 wage index. 

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

 Section 1886(d)(5)(H) of the Act authorizes the Secretary to make an adjustment 

to take into account the unique circumstances of hospitals located in Alaska and Hawaii. 

Higher labor-related costs for these two States are taken into account in the adjustment 

for area wages described above. For FY 2011 and in prior fiscal years, we used the most 

recent updated cost of living adjustment (COLA) factors obtained from the U.S. Office of 

Personnel Management (OPM) Web site at http://www.opm.gov/oca/cola/rates.asp. We 
CMS-1518-P 839 

multiply the nonlabor-related portion of the standardized amount by the applicable 

adjustment factor. 

Sections 1911 through 1919 of the Nonforeign Area Retirement Equity Assurance 

Act, as contained in subtitle B of title XIX of the National Defense Authorization Act 

(NDAA) for Fiscal Year 2010 (Pub. L. 111-84, October 28, 2009) transitions the Alaska 

and Hawaii COLAs to locality pay. Under section 1914 of Pub. L. 111-84, locality pay is 

being phased in over a 3-year period beginning in January 2010 with COLA rates frozen 

as of the date of enactment, October 28, 2009, and then proportionately reduced to reflect 

the phase-in of locality pay. 

We do not believe it is appropriate to propose to use either the 2010 or 2011 

reduced factors for adjusting the nonlabor-related portion of the standardized amount for 

hospitals in Alaska and Hawaii for Medicare payment purposes. Therefore, for FY 2012, 

we are proposing to continue to use the same COLA factors (published by OPM) that we 

used to adjust payments in FY 2011 (which are based on OPMs 2009 COLA factors) to 

adjust the nonlabor-related portion of the standardized amount for hospitals located in 

Alaska and Hawaii. We believe using these COLAs will appropriately adjust the 

nonlabor-related portion of the standardized amount for hospitals in Alaska and Hawaii 

consistent with section 1886(d)(5)(H) of the Act. We invite public comments on this 

proposal. 

Below is a table of factors obtained from OPM that we are proposing for 

FY 2012, which are the same as the factors currently in use under the IPPS for FY 2011. 

Table of Cost-of-Living Adjustment Factors: 

Alaska and Hawaii Hospitals 
CMS-1518-P 840 

Area Cost of 

Living 

Adjustment 

Factor 

Alaska: 

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

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

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

Rest of Alaska 1.25

Hawaii: 

City and County of Honolulu 1.25

County of Hawaii 1.18

County of Kauai 1.25

County of Maui and County of Kalawao 1.25

(The above factors are based on data obtained from the U.S. Office of Personnel 

 Management Web site at: http://www.opm.gov/oca/cola/rates.asp.) 

C. Proposed MS-DRG Relative Weights

 As discussed in section II.H. of the preamble of this proposed rule, we have 

developed relative weights for each MS-DRG that reflect the resource utilization of cases 

in each MS-DRG relative to Medicare cases in other MS-DRGs. Table 5 listed in section 

VI. of this Addendum (and available via the Internet) contains the relative weights that 

we are proposing to apply to discharges occurring in FY 2012. These factors have been 

recalibrated as explained in section II. of the preamble of this proposed rule. 

D. Calculation of the Proposed Prospective Payment Rates

General Formula for Calculation of the Proposed Prospective Payment Rates for FY 2012 

 In general, the operating prospective payment rate for all hospitals paid under the 

IPPS located outside of Puerto Rico, except SCHs and MDHs, for FY 2012 equals the 

Federal rate. 
CMS-1518-P 841 

 Currently, SCHs are paid based on whichever of the following rates yields the 

greatest aggregate payment: the Federal national rate; the updated hospital-specific rate 

based on FY 1982 costs per discharge; the updated hospital-specific rate based on 

FY 1987 costs per discharge; the updated hospital-specific rate based on FY 1996 costs 

per discharge; or the updated hospital-specific rate based on the FY 2006 costs per 

discharge to determine the rate that yields the greatest aggregate payment. 

 The prospective payment rate for SCHs for FY 2012 equals the higher of the 

applicable Federal rate, or the hospital-specific rate as described below. The prospective 

payment rate for MDHs for FY 2012 equals the higher of the Federal rate, or the Federal 

rate plus 75 percent of the difference between the Federal rate and the hospital-specific 

rate as described below. For MDHs, the updated hospital-specific rate is based on 

FY 1982, FY 1987 or FY 2002 costs per discharge, whichever yields the greatest 

aggregate payment. 

The prospective payment rate for hospitals located in Puerto Rico for FY 2012 

equals 25 percent of the Puerto Rico rate plus 75 percent of the applicable national rate. 

1. Federal Rate 

 The Federal rate is determined as follows: 

 Step 1--Select the applicable average standardized amount depending on whether 

the hospital submitted qualifying quality data (full update for hospitals submitting quality 

data; update including a -2.0 percent adjustment for hospitals that did not submit these 

data). 
CMS-1518-P 842 

 Step 2--Multiply the labor-related portion of the standardized amount by the 

applicable wage index for the geographic area in which the hospital is located or the area 

to which the hospital is reclassified. 

 Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-related portion 

of the standardized amount by the applicable cost-of-living adjustment factor. 

 Step 4--Add the amount from Step 2 and the nonlabor-related portion of the 

standardized amount (adjusted, if applicable, under Step 3). 

 Step 5--Multiply the final amount from Step 4 by the relative weight 

corresponding to the applicable MS-DRG (Table 5 listed in section VI. of this Addendum 

and available via the Internet). 

 The Federal rate as determined in Step 5 may then be further adjusted if the 

hospital qualifies for either the IME or DSH adjustment. In addition, for hospitals that 

qualify for a low-volume payment adjustment under section 1886(d)(12) of the Act and 

42 CFR 412.101(b), the payment in Step 5 would be increased by the formula described 

in section IV.E. of the preamble of this proposed rule. 

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

a. Calculation of Hospital-Specific Rate 

 Section 1886(b)(3)(C) of the Act provides that currently SCHs are paid based on 

whichever of the following rates yields the greatest aggregate payment: the Federal rate; 

the updated hospital-specific rate based on FY 1982 costs per discharge; the updated 

hospital-specific rate based on FY 1987 costs per discharge; the updated hospital-specific 

rate based on FY 1996 costs per discharge; or the updated hospital-specific rate based on 
CMS-1518-P 843 

the FY 2006 costs per discharge to determine the rate that yields the greatest aggregate 

payment. 

 As discussed previously, currently MDHs are paid based on the Federal national 

rate or, if higher, the Federal national rate plus 75 percent of the difference between the 

Federal national rate and the greater of the updated hospital-specific rates based on either 

FY 1982, FY 1987 or FY 2002 costs per discharge. 

 Hospital-specific rates have been determined for each of these hospitals based on 

the FY 1982 costs per discharge, the FY 1987 costs per discharge, or, for SCHs, the 

FY 1996 costs per discharge or the FY 2006 costs per discharge, and for MDHs, the 

FY 2002 cost per discharge. For a more detailed discussion of the calculation of the 

hospital-specific rates, we refer the reader to the FY 1984 IPPS interim final rule 

(48 FR 39772); the April 20, 1990 final rule with comment period (55 FR 15150); the 

FY 1991 IPPS final rule (55 FR 35994); and the FY 2001 IPPS final rule (65 FR 47082). 

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

Rates for FY 2012 

 Section 1886(b)(3)(B)(iv) of the Act provides that the applicable percentage 

increase applicable to the hospital-specific rates for SCHs and MDHs equals the 

applicable percentage increase set forth in section 1886(b)(3)(B)(i) of the Act (that is, the 

same update factor as for all other hospitals subject to the IPPS). Because the Act sets 

the update factor for SCHs and MDHs equal to the update factor for all other IPPS 

hospitals, the update to the hospital specific rates for SCHs and MDHs is subject to the 

amendments to section 1886(b)(3)(B) of the Act made by sections 3401(a) and 10319(a) 
CMS-1518-P 844 

of the Affordable Care Act. Accordingly, the proposed applicable percentage increase to 

the hospital-specific rates applicable to SCHs and MDHs is 1.5 percent (that is, the 

FY 2012 estimate of the market basket rate-of-increase of 2.8 percent less an adjustment 

of 1.2 percentage points for multifactor productivity and less 0.1 percentage point) for 

hospitals that submit quality data or -0.5 percent (that is, the FY 2012 estimate of the 

market basket rate-of-increase of 2.8 percent, less 2.0 percentage points for failure to 

submit data under the Hospital IQR Program, less an adjustment of 1.2 percentage points 

for multifactor productivity, and less 0.1 percentage points) for hospitals that fail to 

submit quality data. For a complete discussion of the applicable percentage increase 

applicable to the hospital-specific rates for SCHs and MDHs, we refer readers to section 

IV.H. of the preamble of this proposed rule. 

 In addition, because SCHs and MDHs use the same MS-DRGs as other hospitals 

when they are paid based in whole or in part on the hospital-specific rate, the 

hospital-specific rate is adjusted by a budget neutrality factor to ensure that changes to 

the DRG classifications and the recalibration of the DRG relative weights are made in a 

manner so that aggregate IPPS payments are unaffected. Therefore, for both SCHs and 

MDHs, the hospital-specific rate is adjusted by the proposed DRG reclassification and 

recalibration budget neutrality factor of 0.998419, as discussed in section III. of this 

Addendum. The resulting rate would be used in determining the payment rate an SCH or 

MDH will receive for its discharges beginning on or after October 1, 2011. 

c. Documentation and Coding Adjustment to the FY 2012 Hospital-Specific Rates for 

SCHs and MDHs 
CMS-1518-P 845 

 As discussed in section II.D. of the preamble of this proposed rule, because 

hospitals (SCHs and MDHs) paid based in whole or in part on the hospital-specific rate 

use the same MS-DRG system as other hospitals, we believe they have the potential to 

realize increased payments from documentation and coding changes that do not reflect 

real increases in patients' severity of illness. Under section 1886(d)(3)(A)(vi) of the Act, 

Congress stipulated that hospitals paid based on the standardized amount should not 

receive additional payments based on the effect of documentation and coding changes 

that do not reflect real changes in case-mix. Similarly, we believe that hospitals paid 

based on the hospital-specific rate should not have the potential to realize increased 

payments due to documentation and coding changes that do not reflect real increases in 

patients' severity of illness. Therefore, as discussed in the FY 2011 IPPS/LTCH PPS 

final rule (75 FR 50426) and in section II.D. of the preamble of this proposed rule, we 

believe they should be equally subject to a prospective budget neutrality adjustment that 

we are applying for adoption of the MS-DRGs to all other hospitals. While we continue 

to believe that section 1886(d)(3)(A)(vi) of the Act does not provide explicit authority for 

application of the documentation and coding adjustment to the hospital-specific rates, we 

believe that we have the authority to apply the documentation and coding adjustment to 

the hospital-specific rates using our special exceptions and adjustment authority under 

section 1886(d)(5)(I)(i) of the Act. 

 As we discuss in section II.D. of the preamble of this proposed rule, our best 

estimate, based on the most recently available data, is that a cumulative adjustment of 

-5.4 percent is required to eliminate the full effect of the documentation and coding 
CMS-1518-P 846 

changes on future payments to SCHs and MDHs. Unlike the case of standardized 

amounts paid to IPPS hospitals, prior to FY 2011 we had not made any previous 

adjustments to the hospital specific rates paid to SCHs and MDHs to account for 

documentation and coding changes. Consequently, in order to maintain consistency as 

far as possible with the adjustments applied to IPPS hospitals, we made an adjustment of 

-2.9 percent in FY 2011 to the hospital-specific rates paid to SCHs and MDHs. 

As discussed above, we are proposing a -3.15 percent documentation and coding 

adjustment for IPPS hospitals in FY 2012 (-3.15 percent prospective adjustment plus a 

-2.9 percent recoupment adjustment in FY 2012, offset by the removal of the -2.9 percent 

recoupment adjustment for FY 2011). The proposed IPPS documentation and coding 

adjustment exceeds the remaining -2.5 percent documentation and coding adjustment for 

hospitals receiving a hospital-specific rate (that is, the entire -5.4 percent adjustment, 

minus the -2.9 percent adjustment finalized for FY 2011). We believe that any 

adjustment to the hospital-specific rate due to documentation and coding effect should be 

as similar as possible to adjustments to the IPPS rate. Accordingly, we are proposing a -

2.5 percent payment adjustment to the hospital-specific rate. We believe that proposing 

the entire remaining prospective adjustment of -2.5 percent allows CMS to maintain, to 

the extent possible, similarity and consistency in payment rates for different IPPS 

hospitals paid using the MS-DRG. 

d. Proposed Adjustment to Restore Prior Rural Floor Budget Neutrality Offsets 

 As discussed in section II.A.4.d. of this Addendum, in light of the Cape Cod

decision, we are proposing to adjust hospital-specific amounts by 0.9 percent to restore to 
CMS-1518-P 847 

these amounts the offset for the rural floor and imputed floor in prior years. Our rationale 

and methodology for such adjustment are explained in section II.A.4.d of this Addendum. 

As with the standardized amount, we are proposing to return 0.7 percentage points for 

FYs 1998 through 2004, and 0.2 percentage points for FY 2005 to the hospital-specific 

rates. We note that, in the FY 2006 IPPS final rule (70 FR 47429 and 47430), beginning 

in FY 2006, we changed our methodology and began applying only the DRG 

reclassification and recalibration budget neutrality factor to the hospital-specific rates. 

Because the rural floor budget neutrality adjustment was not applied to the 

hospital-specific rates in FYs 2006 and 2007, we are not including FY 2006 and FY 2007 

in our assessment. Therefore, to remove the effects of the rural floor from the 

hospital-specific rates for FYs 1998 through 2005, we are proposing to apply a onetime 

permanent adjustment of 0.9 percent to the hospital-specific rates (that is, a factor of 

1.009). 

3. General Formula for Calculation of Prospective Payment Rates for Hospitals Located 

in Puerto Rico Beginning on or after October 1, 2011, and before October 1, 2012 

 Section 1886(d)(9)(E)(iv) of the Act provides that, effective for discharges 

occurring on or after October 1, 2004, hospitals located in Puerto Rico are paid based on 

a blend of 75 percent of the national prospective payment rate and 25 percent of the 

Puerto Rico-specific rate. 

a. Puerto Rico Rate 

 The Puerto Rico prospective payment rate is determined as follows: 
CMS-1518-P 848 

 Step 1- Select the applicable average standardized amount considering the 

applicable wage index (Table 1C published in section VI. of this Addendum and 

available via the Internet). 

 Step 2 - Multiply the labor-related portion of the standardized amount by the 

applicable Puerto Rico-specific wage index. 

 Step 3 - Add the amount from Step 2 and the nonlabor-related portion of the 

standardized amount. 

 Step 4 - Multiply the amount from Step 3 by the applicable MS-DRG relative 

weight (Table 5 listed in section VI. of this Addendum and available via the Internet). 

 Step 5 - Multiply the result in Step 4 by 25 percent. 

b. National Rate 

 The national prospective payment rate is determined as follows: 

 Step 1 - Select the applicable average standardized amount. 

 Step 2--Multiply the labor-related portion of the standardized amount by the 

applicable wage index for the geographic area in which the hospital is located or the area 

to which the hospital is reclassified. 

 Step 3 - Add the amount from Step 2 and the nonlabor-related portion of the 

national average standardized amount. 

 Step 4 - Multiply the amount from Step 3 by the applicable MS-DRG relative 

weight (Table 5 listed in section VI. of this Addendum and available via the Internet). 

 Step 5 - Multiply the result in Step 4 by 75 percent. 
CMS-1518-P 849 

 The sum of the Puerto Rico rate and the national rate computed above equals the 

prospective payment for a given discharge for a hospital located in Puerto Rico. This rate 

would then be further adjusted if the hospital qualifies for either the IME or DSH 

adjustment. 

III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient 

Capital-Related Costs for FY 2012 

The PPS for acute care hospital inpatient capital-related costs was implemented 

for cost reporting periods beginning on or after October 1, 1991. Effective with that cost 

reporting period, hospitals were paid during a 10-year transition period (which extended 

through FY 2001) to change the payment methodology for Medicare acute care hospital 

inpatient capital-related costs from a reasonable cost-based methodology to a prospective 

methodology (based fully on the Federal rate). 

 The basic methodology for determining Federal capital prospective rates is set 

forth in the regulations at 42 CFR 412.308 through 412.352. Below we discuss the 

factors that we used to determine the proposed capital Federal rate for FY 2012, which 

would be effective for discharges occurring on or after October 1, 2011. 

The 10-year transition period ended with hospital cost reporting periods beginning 

on or after October 1, 2001 (FY 2002). Therefore, for cost reporting periods beginning in 

FY 2002, all hospitals (except “new” hospitals under §412.304(c)(2)) are paid based on 

the capital Federal rate. For FY 1992, we computed the standard Federal payment rate 

for capital-related costs under the IPPS by updating the FY 1989 Medicare inpatient 

capital cost per case by an actuarial estimate of the increase in Medicare inpatient capital 
CMS-1518-P 850 

costs per case. Each year after FY 1992, we update the capital standard Federal rate, as 

provided at §412.308(c)(1), to account for capital input price increases and other factors. 

The regulations at §412.308(c)(2) also provide that the capital Federal rate be adjusted 

annually by a factor equal to the estimated proportion of outlier payments under the 

capital Federal rate to total capital payments under the capital Federal rate. In addition, 

§412.308(c)(3) requires that the capital Federal rate be reduced by an adjustment factor 

equal to the estimated proportion of payments for (regular and special) exceptions under 

§412.348. Section 412.308(c)(4)(ii) requires that the capital standard Federal rate be 

adjusted so that the effects of the annual DRG reclassification and the recalibration of 

DRG weights and changes in the geographic adjustment factor (GAF) are budget neutral. 

For FYs 1992 through 1995, §412.352 required that the capital Federal rate also 

be adjusted by a budget neutrality factor so that aggregate payments for inpatient hospital 

capital costs were projected to equal 90 percent of the payments that would have been 

made for capital-related costs on a reasonable cost basis during the respective fiscal year. 

That provision expired in FY 1996. Section 412.308(b)(2) describes the 7.4 percent 

reduction to the capital Federal rate that was made in FY 1994, and §412.308(b)(3) 

describes the 0.28 percent reduction to the capital Federal rate made in FY 1996 as a 

result of the revised policy for paying for transfers. In FY 1998, we implemented section 

4402 of Pub. L. 105-33, which required that, for discharges occurring on or after 

October 1, 1997, the budget neutrality adjustment factor in effect as of 

September 30, 1995, be applied to the unadjusted capital standard Federal rate and the 

unadjusted hospital-specific rate. That factor was 0.8432, which was equivalent to a 
CMS-1518-P 851 

15.68 percent reduction to the unadjusted capital payment rates. An additional 

2.1 percent reduction to the rates was effective from October 1, 1997 through 

September 30, 2002, making the total reduction 17.78 percent. As we discussed in the 

FY 2003 IPPS final rule (67 FR 50102) and implemented in §412.308(b)(6), the 

2.1 percent reduction was restored to the unadjusted capital payment rates effective 

October 1, 2002. 

To determine the appropriate budget neutrality adjustment factor and the regular 

exceptions payment adjustment during the 10-year transition period, we developed a 

dynamic model of Medicare inpatient capital-related costs; that is, a model that projected 

changes in Medicare inpatient capital-related costs over time. With the expiration of the 

budget neutrality provision, the capital cost model was only used to estimate the regular 

exceptions payment adjustment and other factors during the transition period. As we 

explained in the FY 2002 IPPS final rule (66 FR 39911), beginning in FY 2002, an 

adjustment for regular exception payments is no longer necessary because regular 

exception payments were only made for cost reporting periods beginning on or after 

October 1, 1991, and before October 1, 2001 (see §412.348(b)). Because payments are 

no longer made under the regular exception policy effective with cost reporting periods 

beginning in FY 2002, we discontinued use of the capital cost model. The capital cost 

model and its application during the transition period are described in Appendix B of the 

FY 2002 IPPS final rule (66 FR 40099). 

Section 412.374 provides for blended payments to hospitals located in Puerto 

Rico under the IPPS for acute care hospital inpatient capital-related costs. Accordingly, 
CMS-1518-P 852 

under the capital PPS, we compute a separate payment rate specific to hospitals located in 

Puerto Rico using the same methodology used to compute the national Federal rate for 

capital-related costs. In accordance with section 1886(d)(9)(A) of the Act, under the 

IPPS for acute care hospital operating costs, hospitals located in Puerto Rico are paid for 

operating costs under a special payment formula. Prior to FY 1998, hospitals located in 

Puerto Rico were paid a blended operating rate that consisted of 75 percent of the 

applicable standardized amount specific to Puerto Rico hospitals and 25 percent of the 

applicable national average standardized amount. Similarly, prior to FY 1998, hospitals 

located in Puerto Rico were paid a blended capital rate that consisted of 75 percent of the 

applicable capital Puerto Rico-specific rate and 25 percent of the applicable capital 

Federal rate. However, effective October 1, 1997, in accordance with section 4406 of 

Pub. L. 105-33, the methodology for operating payments made to hospitals located in 

Puerto Rico under the IPPS was revised to make payments based on a blend of 50 percent 

of the applicable standardized amount specific to Puerto Rico hospitals and 50 percent of 

the applicable national average standardized amount. In conjunction with this change to 

the operating blend percentage, effective with discharges occurring on or after 

October 1, 1997, we also revised the methodology for computing capital payments to 

hospitals located in Puerto Rico to be based on a blend of 50 percent of the Puerto Rico 

capital rate and 50 percent of the national capital Federal rate. 

 As we discussed in the FY 2005 IPPS final rule (69 FR 49185), section 504 of 

Pub. L. 108-173 increased the national portion of the operating IPPS payments for 

hospitals located in Puerto Rico from 50 percent to 62.5 percent and decreased the Puerto 
CMS-1518-P 853 

Rico portion of the operating IPPS payments from 50 percent to 37.5 percent for 

discharges occurring on or after April 1, 2004 through September 30, 2004 (refer to the 

March 26, 2004 One-Time Notification (Change Request 3158)). In addition, section 

504 of Pub. L. 108-173 provided that the national portion of operating IPPS payments for 

hospitals located in Puerto Rico is equal to 75 percent and the Puerto Rico-specific 

portion of operating IPPS payments is equal to 25 percent for discharges occurring on or 

after October 1, 2004. Consistent with that change in operating IPPS payments to 

hospitals located in Puerto Rico, for FY 2005 we revised the methodology for computing 

capital payments to hospitals located in Puerto Rico to be based on a blend of 25 percent 

of the Puerto Rico-specific capital rate and 75 percent of the national capital Federal rate 

for discharges occurring on or after October 1, 2004 (69 FR 49185). 

A. Determination of Proposed Federal Hospital Inpatient Capital-Related Prospective 

Payment Rate Update

 In the discussion that follows, we explain the factors that we used to determine 

the proposed capital Federal rate for FY 2012. In particular, we explain why the 

proposed FY 2012 capital Federal rate would increase approximately 0.60 percent, 

compared to the FY 2011 capital Federal rate. As discussed in the impact analysis in 

Appendix A of this proposed rule, we estimate that capital payments per discharge would 

increase 1.7 percent during that same period. Because capital payments constitute about 

10 percent of hospital payments, a percent change in the capital Federal rate yields only 

about a 0.1 percent change in actual payments to hospitals. 
CMS-1518-P 854 

1. Projected Capital Standard Federal Rate Update 

a. Description of the Update Framework 

Under §412.308(c)(1), the capital standard Federal rate is updated on the basis of 

an analytical framework that takes into account changes in a capital input price index 

(CIPI) and several other policy adjustment factors. Specifically, we adjust the projected 

CIPI rate-of-increase as appropriate each year for case-mix index-related changes, for 

intensity, and for errors in previous CIPI forecasts. The proposed update factor for 

FY 2012 under that framework is 1.5 percent based on the best data available at this time. 

The proposed update factor under that framework is based on a projected 1.5 percent 

increase in the CIPI, a 0.0 percent adjustment for intensity, a 0.0 percent adjustment for 

case-mix, a 0.0 percent adjustment for the FY 2010 DRG reclassification and 

recalibration, and a forecast error correction of 0.0 percent. As discussed below in 

section III.C. of this Addendum, we continue to believe that the CIPI is the most 

appropriate input price index for capital costs to measure capital price changes in a given 

year. We also explain the basis for the FY 2012 CIPI projection in that same section of 

this Addendum. We note, as discussed in section VI.E.1. of the preamble of this 

proposed rule, we are proposing to apply a -1.0 percent adjustment to the capital rate in 

FY 2012 to account for the effect of changes in documentation and coding under the 

MS-DRGs that do not correspond to changes in real increases in patients’ severity of 

illness. Below we describe the policy adjustments that we are proposing to apply in the 

update framework for FY 2012. 
CMS-1518-P 855 

The case-mix index is the measure of the average DRG weight for cases paid 

under the IPPS. Because the DRG weight determines the prospective payment for each 

case, any percentage increase in the case-mix index corresponds to an equal percentage 

increase in hospital payments. 

The case-mix index can change for any of several reasons: 

● The average resource use of Medicare patients changes ("real" case-mix 

change); 

● Changes in hospital documentation and coding of patient records result in 

higher weight DRG assignments (“coding effects”); and 

● The annual DRG reclassification and recalibration changes may not be budget 

neutral ("reclassification effect"). 

We define real case-mix change as actual changes in the mix (and resource 

requirements) of Medicare patients as opposed to changes in documentation and coding 

behavior that result in assignment of cases to higher weighted DRGs but do not reflect 

higher resource requirements. The capital update framework includes the same case-mix 

index adjustment used in the former operating IPPS update framework (as discussed in 

the May 18, 2004 IPPS proposed rule for FY 2005 (69 FR 28816)). (We no longer use an 

update framework to make a recommendation for updating the operating IPPS 

standardized amounts as discussed in section II. of Appendix B in the FY 2006 IPPS final 

rule (70 FR 47707).) 

For FY 2012, we are projecting a 1.0 percent total increase in the case-mix index. 

We estimated that the real case-mix increase would also equal 1.0 percent for FY 2012. 
CMS-1518-P 856 

The proposed net adjustment for change in case-mix is the difference between the 

projected real increase in case-mix and the projected total increase in case-mix. 

Therefore, the proposed net adjustment for case-mix change in FY 2012 is 0.0 percentage 

points. 

The capital update framework also contains an adjustment for the effects of DRG 

reclassification and recalibration. This adjustment is intended to remove the effect on 

total payments of prior year’s changes to the DRG classifications and relative weights, in 

order to retain budget neutrality for all case-mix index-related changes other than those 

due to patient severity. Due to the lag time in the availability of data, there is a 2-year lag 

in data used to determine the adjustment for the effects of DRG reclassification and 

recalibration. For example, we have data available to evaluate the effects of the FY 2010 

DRG reclassification and recalibration as part of our update for FY 2012. To adjust for 

reclassification and recalibration effects, under our historical methodology, we would run 

the FY 2010 cases through the FY 2009 GROUPER and through the FY 2010 

GROUPER. If the resulting ratio of the case-mix indices did not equate to 1.0, in the 

update framework for FY 2012, we would propose to make an adjustment to account for 

the reclassification and recalibration effects in FY 2010. In the update framework for 

FY 2011 (the FY 2011 IPPS final rule (75 FR 50435)), we did not adjust for 

reclassification and recalibration effects from FY 2009 because it was accounted for in 

the documentation and coding adjustment to the capital Federal rates for FY 2011. For 

FY 2012, we are proposing not to perform an analysis of changes in case-mix in FY 2010 

due to the effect of documentation and coding, as this would be most consistent with our 
CMS-1518-P 857 

approach under the operating IPPS. Therefore, at this time, under our broad authority in 

section 1886(g) of the Act, we are proposing a 0.0 percent adjustment for reclassification 

and recalibration in the update framework. We may evaluate the effect of FY 2010 

reclassification and recalibration if we perform an analysis of the documentation and 

coding effect in FY 2010 in future rulemaking. 

The capital update framework also contains an adjustment for forecast error. The 

input price index forecast is based on historical trends and relationships ascertainable at 

the time the update factor is established for the upcoming year. In any given year, there 

may be unanticipated price fluctuations that may result in differences between the actual 

increase in prices and the forecast used in calculating the update factors. In setting a 

prospective payment rate under the framework, we make an adjustment for forecast error 

only if our estimate of the change in the capital input price index for any year is off by 

0.25 percentage point or more. There is a 2-year lag between the forecast and the 

availability of data to develop a measurement of the forecast error. A forecast error of -

0.2 percentage point was calculated for the proposed FY 2012 update. That is, current 

historical data indicate that the forecasted FY 2010 CIPI (1.2 percent) used in calculating 

the FY 2010 update factor was 0.2 percentage point higher than the actual realized price 

increases (1.0 percent). The two primary contributing factors for the FY 2011 CIPI 

forecast being slightly higher than the actual FY 2011 increase in the CIPI were that the 

prices for the nonprofit and government interest cost category grew slower than what had 

been forecasted, and the prices for the other capital expenses cost category also grew 

slower than what had been forecasted. Because the estimation of the change in the CIPI 
CMS-1518-P 858 

is not greater than 0.25 percentage point, we are proposing to make a 0.0 percent 

adjustment for forecast error in the update for FY 2012. 

Under the capital IPPS update framework, we also make an adjustment for 

changes in intensity. Historically, we calculated this adjustment using the same 

methodology and data that were used in the past under the framework for operating IPPS. 

The intensity factor for the operating update framework reflected how hospital services 

are utilized to produce the final product, that is, the discharge. This component accounts 

for changes in the use of quality-enhancing services, for changes within DRG severity, 

and for expected modification of practice patterns to remove non-cost-effective services. 

Our intensity measure is based on a 5-year average. 

Historically, we calculated case-mix constant intensity as the change in total 

charges per admission, adjusted for price level changes (the CIPI for hospital and related 

services) and changes in real case-mix. Without reliable estimates of the proportions of 

the overall annual intensity increases that are due, respectively, to ineffective practice 

patterns and the combination of quality-enhancing new technologies and complexity 

within the DRG system, we assume that one-half of the annual increase is due to each of 

these factors. The capital update framework thus provides an add-on to the input price 

index rate of increase of one-half of the estimated annual increase in intensity, to allow 

for increases within DRG severity and the adoption of quality-enhancing technology. 

We developed a Medicare-specific intensity measure based on a 5-year average. 

Past studies of case-mix change by the RAND Corporation (Has DRG Creep Crept Up? 

Decomposing the Case Mix Index Change Between 1987 and 1988 by G. M. Carter, J. P. 
CMS-1518-P 859 

Newhouse, and D. A. Relles, R-4098-HCFA/ProPAC (1991)) suggest that real case-mix 

change was not dependent on total change, but was usually a fairly steady increase of 1.0 

to 1.5 percent per year. However, we used 1.4 percent as the upper bound because the 

RAND study did not take into account that hospitals may have induced doctors to 

document medical records more completely in order to improve payment. 

 In accordance with §412.308(c)(1)(ii), we began updating the capital standard 

Federal rate in FY 1996 using an update framework that takes into account, among other 

things, allowable changes in the intensity of hospital services, as noted above. For much 

of the last decade, we found that the charge data appeared to be skewed as a result of 

hospitals attempting to maximize outlier payments, while lessening costs, and we 

established a 0.0 percent adjustment for intensity in each of those years. Therefore, for 

FY 2011, in an effort to further refine the intensity adjustment and more accurately 

reflect allowable changes in hospital intensity, we revised our intensity measure to use 

changes in hospital costs per discharge over a 5-year average rather than changes in 

hospital charges, which had been the basis of the intensity adjustment in prior years. The 

unique nature of capital--how and when it is purchased, its longevity, and how it is 

financed--creates a greater degree of variance in capital cost among hospitals than does 

operating cost. As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50436), 

we believe that using changes in capital costs per discharge as the basis for the intensity 

adjustment in lieu of changes in charges will decrease some of the variability of this 

adjustment. In this proposed rule, for FY 2012, we are proposing to use an intensity 

measure that is based on a 5-year adjusted average of cost per discharge, as we did for 
CMS-1518-P 860 

FY 2011. Therefore, the proposed intensity measure for FY 2012 is based on an average 

of cost per discharge data from the 5-year period beginning with FY 2005 and extending 

through FY 2009. Based on these data, we estimated that case-mix constant intensity 

declined during FYs 2005 through 2009. In the past, when we found intensity to be 

declining, we believed a zero (rather than negative) intensity adjustment was appropriate. 

Consistent with this approach, because we estimate that intensity declined during that 5-

year period, we believe it is appropriate to continue to apply a zero intensity adjustment 

for FY 2012. Therefore, we are proposing to make a 0.0 percent adjustment for intensity 

in the update for FY 2012. 

Above, we described the basis of the components used to develop the proposed 

1.5 percent capital update factor under the capital update framework for FY 2012 as 

shown in the table below. 

Proposed CMS FY 2012 Update Factor to the Capital Federal Rate 

Capital Input Price Index 1.5 

Intensity: 0.0 

Case-Mix Adjustment Factors: 

 Real Across DRG Change -1.0 

 Projected Case-Mix Change 1.0 

Subtotal 1.5 

Effect of FY 2010 Reclassification and Recalibration 0.0 

Forecast Error Correction 0.0 

Total Update 1.5 
CMS-1518-P 861 

b. Comparison of CMS and MedPAC Update Recommendation 

 In its March 2011 Report to Congress, MedPAC did not make a specific update 

recommendation for capital IPPS payments for FY 2012. (MedPAC’s Report to the 

Congress: Medicare Payment Policy, March 2011, Chapter 3.) 

2. Outlier Payment Adjustment Factor 

 Section 412.312(c) establishes a unified outlier payment methodology for 

inpatient operating and inpatient capital-related costs. A single set of thresholds is used 

to identify outlier cases for both inpatient operating and inpatient capital-related 

payments. Section 412.308(c)(2) provides that the standard Federal rate for inpatient 

capital-related costs be reduced by an adjustment factor equal to the estimated proportion 

of capital-related outlier payments to total inpatient capital-related PPS payments. The 

outlier thresholds are set so that operating outlier payments are projected to be 

5.1 percent of total operating IPPS DRG payments. 

 For FY 2011, we estimated that outlier payments for capital would equal 

5.96 percent of inpatient capital-related payments based on the capital Federal rate in 

FY 2011. Based on the thresholds as set forth in section II.A. of this Addendum, we 

estimate that outlier payments for capital-related costs will equal 5.94 percent for 

inpatient capital-related payments based on the proposed capital Federal rate in FY 2012. 

Therefore, we are proposing to apply an outlier adjustment factor of 0.9406 in 

determining the capital Federal rate. Thus, we estimate that the percentage of capital 

outlier payments to total capital standard payments for FY 2012 would be slightly lower 

than the percentage for FY 2011. This slight decrease in estimated capital outlier 
CMS-1518-P 862 

payments is primarily due to the estimated increase in capital IPPS payments per 

discharge. That is, because capital payments per discharge are projected to be higher in 

FY 2012 compared to FY 2011, as shown in Table III. in section VIII. of Appendix A to 

this proposed rule, fewer cases would qualify for outlier payments. 

 The outlier reduction factors are not built permanently into the capital rates; that 

is, they are not applied cumulatively in determining the capital Federal rate. The 

proposed FY 2012 outlier adjustment of 0.9406 is a 0.02 percent change from the 

FY 2011 outlier adjustment of 0.9404. Therefore, the proposed net change in the outlier 

adjustment to the capital Federal rate for FY 2012 is 1.0002 (0.9406/0.9404). Thus, the 

proposed outlier adjustment would increase the FY 2012 capital Federal rate by 

0.02 percent compared with the FY 2011 outlier adjustment. 

3. Proposed Budget Neutrality Adjustment Factor for Changes in DRG Classifications 

and Weights and the GAF 

 Section 412.308(c)(4)(ii) requires that the capital Federal rate be adjusted so that 

aggregate payments for the fiscal year based on the capital Federal rate after any changes 

resulting from the annual DRG reclassification and recalibration and changes in the GAF 

are projected to equal aggregate payments that would have been made on the basis of the 

capital Federal rate without such changes. Because we implemented a separate GAF for 

Puerto Rico, we apply separate budget neutrality adjustments for the national GAF and 

the Puerto Rico GAF. We apply the same budget neutrality factor for DRG 

reclassifications and recalibration nationally and for Puerto Rico. Separate adjustments 
CMS-1518-P 863 

were unnecessary for FY 1998 and earlier because the GAF for Puerto Rico was 

implemented in FY 1998. 

 In the past, we used the actuarial capital cost model (described in Appendix B of 

the FY 2002 IPPS final rule (66 FR 40099)) to estimate the aggregate payments that 

would have been made on the basis of the capital Federal rate with and without changes 

in the DRG classifications and weights and in the GAF to compute the adjustment 

required to maintain budget neutrality for changes in DRG weights and in the GAF. 

During the transition period, the capital cost model was also used to estimate the regular 

exception payment adjustment factor. As we explained in section III.A. of this 

Addendum, beginning in FY 2002, an adjustment for regular exception payments was no 

longer necessary. Therefore, we no longer use the capital cost model. Furthermore, as 

discussed below, special exceptions payments will no longer be made in FY 2012, and an 

exceptions payment adjustment factor will no longer be necessary, as there are no 

remaining hospitals eligible to receive special exceptions payments. 

To determine the proposed factors for FY 2012, we compared (separately for the 

national capital rate and the Puerto Rico capital rate) estimated aggregate capital Federal 

rate payments based on the FY 2011 MS-DRG classifications and relative weights and 

the FY 2011 GAF to estimated aggregate capital Federal rate payments based on the 

FY 2011 MS-DRG classifications and relative weights and the proposed FY 2012 GAFs. 

To achieve budget neutrality for the changes in the national GAFs, based on calculations 

using updated data, we are proposing to apply an incremental budget neutrality 

adjustment of 1.0005 for FY 2012 to the previous cumulative FY 2011 adjustment of 
CMS-1518-P 864 

0.9902, yielding an adjustment of 0.9906, through FY 2012. For the Puerto Rico GAFs, 

we are proposing to apply an incremental budget neutrality adjustment of 1.0087 for 

FY 2012 to the previous cumulative FY 2011 adjustment of 0.9965, yielding a 

cumulative adjustment of 1.0052 through FY 2012. 

We then compared estimated aggregate capital Federal rate payments based on 

the FY 2011 DRG relative weights and the proposed FY 2012 GAFs to estimate 

aggregate capital Federal rate payments based on the cumulative effects of the proposed 

FY 2012 MS-DRG classifications and relative weights and the proposed FY 2012 GAFs. 

The proposed incremental adjustment for DRG classifications and proposed changes in 

relative weights is 1.0000 both nationally and for Puerto Rico. The proposed cumulative 

adjustments for MS-DRG classifications and proposed changes in relative weights and 

for proposed changes in the GAFs through FY 2012 are 0.9906 nationally and 1.0052 for 

Puerto Rico. We note that all the values are calculated with unrounded numbers. The 

following table summarizes the adjustment factors for each fiscal year: 
CMS-1518-P 865 

PROPOSED BUDGET NEUTRALITY ADJUSTMENT FOR DRG 

RECLASSIFICATIONS AND RECALIBRATION AND THE GEOGRAPHIC 

ADJUSTMENT FACTORS 

National Puerto Rico 

Incremental Adjustment Incremental Adjustment 

Fiscal 

Year 

Geographic 

Adjustment 

Factor 

DRG Reclassifications 

and 

Recalibration Combined Cumulative

Geographic 

Adjustment 

Factor 

DRG 

Reclassifications and 

Recalibration Combined

Cumulative 

1992 — — — 1.00000 — — — — 

1993 — — 0.99800 0.99800 — — — — 

1994 — — 1.00531 1.00330 — — — — 

1995 — — 0.99980 1.00310 — — — — 

1996 — — 0.99940 1.00250 — — — — 

1997 — — 0.99873 1.00123 — — — — 

1998 — — 0.99892 1.00015 — — — 1.00000

1999 0.99944 1.00335 1.00279 1.00294 0.99898 1.00335 1.00233 1.00233

2000 0.99857 0.99991 0.99848 1.00142 0.99910 0.99991 0.99901 1.00134

20011 0.99782 1.00009 0.99791 0.99933 1.00365 1.00009 1.00374 1.00508

20012 0.997713 1.000093 0.997803 0.99922 1.003653 1.000093 1.003743 1.00508

2002 0.996664 0.996684 0.993354 0.99268 0.989914 0.996684 0.996624 0.99164

20035 0.99915 0.99662 0.99577 0.98848 1.00809 0.99662 1.00468 0.99628

20036 0.998967 0.996627 0.995587 0.98830 1.00809 0.99662 1.00468 0.99628

20048 1.001759 1.000819 1.002569 0.99083 1.00028 1.00081 1.00109 0.99736

200410 1.001649 1.000819 1.002459 0.99072 1.00028 1.00081 1.00109 0.99736

200511 0.9996712 1.00094 1.0006112 0.99137 0.99115 1.00094 0.99208 0.98946

200513 0.9994612 1.00094 1.0004012 0.99117 0.99115 1.00094 0.99208 0.98946

2006 1.0018514 0.99892 1.0007614 0.99198 1.00762 0.99892 1.00653 0.99592

2007 1.00000 0.99858 0.99858 0.99057 1.00234 0.99858 1.00092 0.99683

2008 1.00172 0.99792 0.99963 0.99021 1.00079 0.99792 0.99870 0.99554

200915 1.00206 0.99945 1.00150 0.99170 1.00097 0.99945 1.00041 0.99595

201016 0.99989 0.99945 0.99941 0.99112 1.00141 0.99953 1.00094 0.99688

201117 0.99989 0.99914 0.99903 0.99016 1.00050 0.99914 0.999564 0.99652

201218 1.00050 0.99996 1.00046 0.99061 1.00879 0.99996 1.00874 1.00523

1

Factors effective for the first half of FY 2001 (October 2000 through March 2001). 

2 Factors effective for the second half of FY 2001 (April 2001 through September 2001). 

3

Incremental factors are applied to FY 2000 cumulative factors. 

4

Incremental factors are applied to the cumulative factors for the first half of FY 2001. 

5

Factors effective for the first half of FY 2003 (October 2002 through March 2003). 

6

Factors effective for the second half of FY 2003 (April 2003 through September 2003). 

7

Incremental factors are applied to FY 2002 cumulative factors. 

8

Factors effective for the first half of FY 2004 (October 2003 through March 2004). 

9

Incremental factors are applied to the cumulative factors for the second half of FY 2003. 

10Factors effective for the second half of FY 2004 (April 2004 through September 2004). 

11Factors effective for the first quarter of FY 2005 (September 2004 through December 2004). 12Incremental factors are applied to average of the cumulative factors for the first half 

(October 1, 2003 through March 31, 2004) and second half (April 1, 2004 through September 30, 2004) of 

FY 2004. 

13Factors effective for the last three quarters of FY 2005 (January 2005 through September 2005). 
CMS-1518-P 866 

14Incremental factors are applied to average of the cumulative factors for 2005. 

15Final factors for FY 2009, including the implementation of section 124 of Pub. L. 110-275, which affects 

wage indices and GAFs for FY 2009. 

16 Final revised factors for FY 2010 which reflect the effect of the provisions of the Affordable Care Act. 17 Final factors for FY 2011. 

18 Proposed factors for FY 2012.

 

The methodology used to determine the recalibration and geographic adjustment 

factor (GAF/DRG) budget neutrality adjustment is similar to the methodology used in 

establishing budget neutrality adjustments under the IPPS for operating costs. One 

difference is that, under the operating IPPS, the budget neutrality adjustments for the 

effect of geographic reclassifications are determined separately from the effects of other 

changes in the hospital wage index and the DRG relative weights. Under the capital 

IPPS, there is a single GAF/DRG budget neutrality adjustment factor (the national capital 

rate and the Puerto Rico capital rate are determined separately) for changes in the GAF 

(including geographic reclassification) and the DRG relative weights. In addition, there 

is no adjustment for the effects that geographic reclassification has on the other payment 

parameters, such as the payments for DSH or IME. 

 For FY 2011, we established a GAF/DRG budget neutrality factor of 0.9990 

(75 FR 50437). For FY 2012, we are proposing to establish a GAF/DRG budget 

neutrality factor of 1.0005. The GAF/DRG budget neutrality factors are built 

permanently into the capital rates; that is, they are applied cumulatively in determining 

the capital Federal rate. This follows the requirement that estimated aggregate payments 

each year be no more or less than they would have been in the absence of the annual 

DRG reclassification and recalibration and changes in the GAFs. The incremental 
CMS-1518-P 867 

change in the proposed adjustment from FY 2011 to FY 2012 is 1.0005. The proposed 

cumulative change in the capital Federal rate due to this proposed adjustment is 0.9906 

(the product of the incremental factors for FYs 1995 through 2011 and the proposed 

incremental factor of 1.0005 for FY 2012). (We note that averages of the incremental 

factors that were in effect during FYs 2005 and 2006, respectively, were used in the 

calculation of the cumulative adjustment of 0.9906 for FY 2012.) 

The proposed factor accounts for the proposed MS-DRG reclassifications and 

recalibration and for proposed changes in the GAFs. It also incorporates the effects on 

the proposed GAFs of FY 2012 geographic reclassification decisions made by the 

MGCRB compared to FY 2011 decisions. However, it does not account for changes in 

payments due to changes in the DSH and IME adjustment factors. 

4. Exceptions Payment Adjustment Factor 

 Section 412.308(c)(3) of our regulations requires that the capital standard Federal 

rate be reduced by an adjustment factor equal to the estimated proportion of additional 

payments for both regular exceptions and special exceptions under §412.348 relative to 

total capital PPS payments. In estimating the proportion of regular exception payments 

to total capital PPS payments during the transition period, we used the actuarial capital 

cost model originally developed for determining budget neutrality (described in 

Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to determine the exceptions 

payment adjustment factor, which was applied to both the Federal and hospital-specific 

capital rates. 
CMS-1518-P 868 

 Since FY 2002, an adjustment for regular exception payments was no longer 

necessary in determining the capital Federal rate because, in accordance with 

§412.348(b), regular exception payments were only made for cost reporting periods 

beginning on or after October 1, 1991 and before October 1, 2001. Accordingly, in 

FY 2002 and subsequent fiscal years, no payments are made under the regular exceptions 

provision (66 FR 39949). Furthermore, there are no longer any remaining hospitals 

eligible to receive a special exceptions payment under §412.348(g) because they have 

reached the limitation on the period for exception payments under §412.348(g)(7). A 

hospital qualifying for a special exceptions payment could receive exceptions payments 

for up to 10 years from the year in which it completed a project that met the applicable 

criteria under §412.348(g). However, the project had to be completed no later than the 

end of the hospital’s last cost reporting period beginning before October 1, 2001. 

Therefore, FY 2012 would be the final year any hospital could have received a special 

exceptions payment. However, as we indicated above, based on the date the projects 

were completed, there are no remaining hospitals eligible to receive a special exceptions 

payment in FY 2012, which negates the need for a special exceptions adjustment for 

FY 2012. Furthermore, we note that special exceptions adjustments will no longer be 

made in subsequent years because FY 2012 is the final year payments could have been 

made to eligible hospitals in accordance with §412.348(g)(7). 

 In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50439), we estimated that total 

(special) exceptions payments for FY 2011 would equal 0.04 percent of aggregate 

payments based on the capital Federal rate. Therefore, we applied an exceptions 
CMS-1518-P 869 

adjustment factor of 0.9996 (1 − 0.0004) to determine the FY 2011 capital Federal rate. 

As we stated above, because there are no special exceptions payments in FY 2012, we are 

proposing to no longer apply an exceptions payment adjustment factor to the proposed 

capital Federal rate for FY 2012. However, the exceptions reduction factors were not 

built permanently into the capital rates; that is, the factors were not applied cumulatively 

in determining the capital Federal rate. Therefore, we are proposing to apply a factor of 

1.0004 (1/0.9996) in determining the proposed FY 2012 capital Federal rate to restore the 

reduction that resulted from the 0.9996 exceptions adjustment factor that was applied in 

determining the FY 2011 capital Federal rate. 

5. Proposed Capital Standard Federal Rate for FY 2012 

 For FY 2011, we established a capital Federal rate of $420.01 (75 FR 50439). 

We are proposing to establish an update of 1.5 percent in determining the proposed 

FY 2012 capital Federal rate for all hospitals. However, as discussed in greater detail in 

section V.E. of the preamble of this proposed rule, under the statutory authority at section 

1886(g) of the Act, consistent with section 1886(d)(3)(A)(vi) of the Act and section 7(b) 

of Pub. L. 110-90, we are proposing to make an additional 1.0 percent reduction to the 

national capital Federal payment rate in FY 2012 to account for the effect of changes in 

case-mix resulting from documentation and coding changes that do not reflect real 

changes in the case-mix in light of the adoption of MS-DRGs. Accordingly, we are 

proposing to apply a cumulative documentation and coding adjustment factor of 0.9479 

in determining the proposed FY 2012 capital Federal rate (that is, the existing 

-0.6 percent adjustment in FY 2008 plus the -0.9 percent adjustment in FY 2009, plus the 
CMS-1518-P 870 

-2.9 percent adjustment for FY 2011, plus the proposed -1.0 percent adjustment for 

FY 2012, computed as 1 divided by (1.006 x 1.009 x 1.029 x 1.010). (We note that we 

did not apply a documentation and coding adjustment to the capital Federal rate in 

FY 2010 (74 FR 43927).) As a result of the proposed 1.5 percent update and other 

budget neutrality factors discussed above, we are proposing to establish a national capital 

Federal rate of $422.54 for FY 2012. The proposed national capital Federal rate for 

FY 2012 was calculated as follows: 

● The proposed FY 2012 update factor is 1.0150, that is, the proposed update is 

1.5 percent. 

● The proposed FY 2012 budget neutrality adjustment factor that is applied to the 

capital standard Federal payment rate for proposed changes in the MS-DRG 

classifications and relative weights and proposed changes in the GAFs is 1.0005. 

● The proposed FY 2012 outlier adjustment factor is 0.9406. 

● The proposed FY 2012 (special) exceptions payment adjustment factor is 

1.0000 because we project that there will be no exceptions payments made in FY 2012 as 

discussed above in section III.A. of this Addendum. However, we are proposing to apply 

a factor of 1.0004 (1/0.9996) in determining the proposed FY 2012 capital Federal rate to 

restore the reduction that resulted from the 0.9996 exceptions adjustment factor applied 

in determining the FY 2011 capital Federal rate. 

● The proposed cumulative adjustment factor for FY 2012 applied to the national 

capital Federal rate for proposed changes in documentation and coding under the 

MS-DRGs is 0.9479. 
CMS-1518-P 871 

 Because the proposed capital Federal rate has already been adjusted for 

differences in case-mix, wages, cost-of-living, indirect medical education costs, and 

payments to hospitals serving a disproportionate share of low-income patients, we are not 

proposing to make additional adjustments in the capital standard Federal rate for these 

factors, other than the proposed budget neutrality factor for proposed changes in the 

MS-DRG classifications and relative weights and for proposed changes in the GAFs. 

 We are providing the following chart that shows how each of the proposed factors 

and adjustments for FY 2012 affects the computation of the proposed FY 2012 national 

capital Federal rate in comparison to the FY 2011 national capital Federal rate. The 

proposed FY 2012 update factor has the effect of increasing the capital Federal rate by 

1.5 percent compared to the FY 2011 capital Federal rate. The proposed GAF/DRG 

budget neutrality factor of 1.0005 has the effect of increasing the capital Federal rate by 

0.05 percent. The proposed FY 2012 outlier adjustment factor has the effect of 

increasing the capital Federal rate by 0.02 percent compared to the FY 2011 capital 

Federal rate. The proposed FY 2012 special exceptions payment adjustment factor to 

restore the FY 2011 exceptions adjustment factor of 0.9996 has the net effect of 

increasing the proposed FY 2012 national capital Federal rate by 0.04 percent as 

compared to the FY 2011 national capital Federal rate. The combined effect of all the 

proposed changes would increase the proposed national capital Federal rate by 

approximately 0.60 percent compared to the FY 2011 national capital Federal rate. 
CMS-1518-P 872 

Comparison of Factors and Adjustments: 

FY 2011 Capital Federal Rate and 

Proposed FY 2012 Capital Federal Rate 

FY 2011 

Proposed 

FY 2012 Change 

Percent 

Change 

Update Factor1 1.0150 1.0150 1.0150 1.50

GAF/DRG Adjustment Factor1 0.9990 1.0005 1.0005 0.05

Outlier Adjustment Factor2 0.9404 0.9406 1.0002 0.02

Exceptions Adjustment Factor3 0.9996 1.0000 1.0004 0.04

MS-DRG Documentation and 

Coding Adjustment Factor 0.95744 0.94795 0.99016 -0.99

Capital Federal Rate7 $420.01 $422.54 1.0060 0.60

1

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

incremental change from FY 2011 to FY 2012 resulting from the application of the 1.0005 GAF/DRG budget neutrality factor for 

FY 2012 is a net change of 1.0005. 

2

 The outlier reduction factor is not built permanently into the capital rate; that is, the factor is not applied cumulatively in determining 

the capital rate. Thus, for example, the net change resulting from the application of the FY 2012 outlier adjustment factor is

0.9406/0.9404, or 1.0002. 

3 There are no longer any hospitals eligible to receive special exception adjustments in FY 2012, but since the exceptions payment 

adjustment is not cumulative, we are restoring the 0.9996 special exceptions adjustment applied to the FY 2011 capital rate. 

4

The documentation and coding adjustment factor includes the -0.6 percent in FY 2008, -0.9 percent in FY 2009, no additional 

reduction in FY 2010, and the -2.9 percent in FY 2011. 

5

The documentation and coding adjustment factor includes the -0.6 percent in FY 2008, -0.9 percent in FY 2009, no additional 

reduction in FY 2010, the -2.9 percent in FY 2011, and the proposed -1.0 percent in FY 2012. 

6

The change is measured from the FY 2011 cumulative factor of 0.9574. 

7

Sum of percent change may not sum due to rounding. 

6. Proposed Special Capital Rate for Puerto Rico Hospitals 

Section 412.374 provides for the use of a blended payment system for payments 

to hospitals located in Puerto Rico under the PPS for acute care hospital inpatient 

capital-related costs. Accordingly, under the capital PPS, we compute a separate 

payment rate specific to hospitals located in Puerto Rico using the same methodology 

used to compute the national Federal rate for capital-related costs. Under the broad 

authority of section 1886(g) of the Act, as discussed in section V. of the preamble of this 

proposed rule, beginning with discharges occurring on or after October 1, 2004, capital 

payments to hospitals located in Puerto Rico are based on a blend of 25 percent of the 
CMS-1518-P 873 

Puerto Rico capital rate and 75 percent of the capital Federal rate. The Puerto Rico 

capital rate is derived from the costs of Puerto Rico hospitals only, while the capital 

Federal rate is derived from the costs of all acute care hospitals participating in the IPPS 

(including Puerto Rico). 

 To adjust hospitals' capital payments for geographic variations in capital costs, we 

apply a GAF to both portions of the blended capital rate. The GAF is calculated using 

the operating IPPS wage index, and varies depending on the labor market area or rural 

area in which the hospital is located. We use the Puerto Rico wage index to determine 

the GAF for the Puerto Rico part of the capital-blended rate and the national wage index 

to determine the GAF for the national part of the blended capital rate. 

 Because we implemented a separate GAF for Puerto Rico in FY 1998, we also 

apply separate budget neutrality adjustments for the national GAF and for the Puerto 

Rico GAF. However, we apply the same budget neutrality factor for DRG 

reclassifications and recalibration nationally and for Puerto Rico. The proposed national 

GAF budget neutrality factor is 1.0088 and the proposed DRG adjustment is 1.0000, for a 

combined proposed cumulative adjustment of 1.0052 for FY 2012. 

 In computing the payment for a particular Puerto Rico hospital, the Puerto Rico 

portion of the capital rate (25 percent) is multiplied by the Puerto Rico-specific GAF for 

the labor market area in which the hospital is located, and the national portion of the 

capital rate (75 percent) is multiplied by the national GAF for the labor market area in 

which the hospital is located (which is computed from national data for all hospitals in 

the United States and Puerto Rico). In FY 1998, we implemented a 17.78 percent 
CMS-1518-P 874 

reduction to the Puerto Rico capital rate as a result of Pub. L. 105-33. In FY 2003, a 

small part of that reduction was restored. 

 For FY 2011, the special capital rate for hospitals located in Puerto Rico was 

$197.66 (75 FR 50441). Consistent with our adjustment to the FY 2011 Puerto 

Rico-specific standardized amount, under the Secretary’s broad authority under section 

1886(g) of the Act, we established an adjustment to the Puerto Rico-specific capital rate 

of –2.6 percent in FY 2011 for the cumulative increase in case-mix due to changes in 

documentation and coding under the MS-DRGs for FYs 2008 and 2009. The -2.6 percent 

adjustment to the capital Puerto Rico-specific rate that we made in FY 2011 reflects the 

entire amount of our current estimate of the effects of documentation and coding that did 

not reflect real changes in case-mix for discharges occurring during FYs 2008 and 2009 

from hospitals located in Puerto Rico. Consequently, in this proposed rule, we are not 

proposing to make any additional adjustments for the effect of documentation and coding 

that did not reflect real changes in case-mix to the capital Puerto Rico-specific rate for 

FY 2012. Therefore, with the changes we are proposing to make to the other factors used 

to determine the capital rate, the proposed FY 2012 special capital rate for hospitals in 

Puerto Rico is $205.01. 

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

FY 2012

 Because the 10-year capital PPS transition period ended in FY 2001, all hospitals 

(except "new" hospitals under §412.324(b) and under §412.304(c)(2)) are paid based on 

100 percent of the capital Federal rate in FY 2012. 
CMS-1518-P 875 

For purposes of calculating payments for each discharge during FY 2012, the 

capital standard Federal rate is adjusted as follows: (Standard Federal Rate) x (DRG 

weight) x (GAF) x (COLA for hospitals located in Alaska and Hawaii) x (1 + DSH 

Adjustment Factor + IME Adjustment Factor, if applicable). The result is the adjusted 

capital Federal rate. 

 Hospitals also may receive outlier payments for those cases that qualify under the 

thresholds established for each fiscal year. Section 412.312(c) provides for a single set of 

thresholds to identify outlier cases for both inpatient operating and inpatient 

capital-related payments. The proposed outlier thresholds for FY 2012 are in 

section II.A. of this Addendum. For FY 2012, a case would qualify as a cost outlier if the 

cost for the case plus the (operating) IME and DSH payments is greater than the 

prospective payment rate for the MS-DRG plus the proposed fixed-loss amount of 

$23,375. 

 Currently, as provided in §412.304(c)(2), we pay a new hospital 85 percent of its 

reasonable costs during the first 2 years of operation unless it elects to receive payment 

based on 100 percent of the capital Federal rate. Effective with the third year of 

operation, we pay the hospital based on 100 percent of the capital Federal rate (that is, the 

same methodology used to pay all other hospitals subject to the capital PPS). 

C. Capital Input Price Index

1. Background 

 Like the operating input price index, the capital input price index (CIPI) is a 

fixed-weight price index that measures the price changes associated with capital costs 
CMS-1518-P 876 

during a given year. The CIPI differs from the operating input price index in one 

important aspect--the CIPI reflects the vintage nature of capital, which is the acquisition 

and use of capital over time. Capital expenses in any given year are determined by the 

stock of capital in that year (that is, capital that remains on hand from all current and 

prior capital acquisitions). An index measuring capital price changes needs to reflect this 

vintage nature of capital. Therefore, the CIPI was developed to capture the vintage 

nature of capital by using a weighted-average of past capital purchase prices up to and 

including the current year. 

 We periodically update the base year for the operating and capital input price 

indexes to reflect the changing composition of inputs for operating and capital expenses. 

In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 44021), we rebased and 

revised the CIPI to a FY 2006 base year to reflect the more current structure of capital 

costs in hospitals. A complete discussion of this rebasing is provided in section IV. of the 

preamble of that final rule. 

2. Forecast of the CIPI for FY 2012 

Based on the latest forecast by IHS Global Insight, Inc. (first quarter of 2011), we 

are forecasting the FY 2006-based CIPI to increase 1.5 percent in FY 2012. This reflects 

a projected 1.9 percent increase in vintage-weighted depreciation prices (building and 

fixed equipment, and movable equipment), and a projected 2.1 percent increase in other 

capital expense prices in FY 2012, partially offset by a projected 0.9 percent decline in 

vintage-weighted interest expenses in FY 2012. The weighted average of these three 
CMS-1518-P 877 

factors produces the 1.5 percent increase for the FY 2006-based CIPI as a whole in 

FY 2012. 

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

Percentages 

 Historically, hospitals and hospital units excluded from the prospective payment 

system received payment for inpatient hospital services they furnished on the basis of 

reasonable costs, subject to a rate-of-increase ceiling. An annual per discharge limit (the 

target amount as defined in §413.40(a)) was set for each hospital or hospital unit based on 

the hospital’s own cost experience in its base year, and updated annually by a 

rate-of-increase percentage. The updated target amount for that period was multiplied by 

the Medicare discharges during that period and applied as an aggregate upper limit (the 

ceiling as defined in §413.40(a)) on total inpatient operating costs for a hospital’s cost 

reporting period. Prior to October 1, 1997, these payment provisions applied consistently 

to all categories of excluded providers (rehabilitation hospitals and units (now referred to 

as IRFs), psychiatric hospitals and units (now referred to as IPFs), LTCHs, children’s 

hospitals, and cancer hospitals). 

Payments for services furnished in children’s hospitals and cancer hospitals that 

are excluded from the IPPS continue to be subject to the rate-of-increase ceiling based on 

the hospital’s own historical cost experience. (We note that, in accordance with 

§403.752(a), RNHCIs are also subject to the rate-of-increase limits established under 

§413.40 of the regulations.) 
CMS-1518-P 878 

We are proposing that the FY 2012 rate-of-increase percentage for updating the 

target amounts for cancer and children’s hospitals and RNHCIs be the estimated 

percentage increase in the FY 2012 IPPS operating market basket, estimated to be 

2.8 percent, in accordance with applicable regulations at §413.40. We also are proposing 

to use the most recent data available to determine the estimated percentage increase for 

the FY 2012 IPPS operating market basket. Based on IHS Global Insight, Inc.'s first 

quarter 2011 forecast, with historical data through the 2010 fourth quarter, the IPPS 

operating market basket is 2.8 percent for FY 2012. Therefore, for cancer and children’s 

hospitals and RNHCIs, the proposed FY 2012 rate-of-increase percentage that would be 

applied to the FY 2011 target amounts in order to determine the FY 2012 target amount is 

2.8 percent. (We are proposing to use more recent data when determining the estimated 

percentage increase for the FY 2012 IPPS operating market basket for the final rule, to 

the extent that these data are available.) 

IRFs, IPFs, and LTCHs were previously paid under the reasonable cost 

methodology. However, the statute was amended to provide for the implementation of 

prospective payment systems for IRFs, IPFs, and LTCHs. In general, the prospective 

payment systems for IRFs, IPFs, and LTCHs provide transitioning periods of varying 

lengths of time during which a portion of the prospective payment is based on cost-based 

reimbursement rules under 42 CFR Part 413 (certain providers do not receive a 

transitioning period or may elect to bypass the transition as applicable under 

42 CFR Part 412, Subparts N, O, and P.) We note that all of the various transitioning 

periods provided for under the IRF PPS, the IPF PPS, and the LTCH PPS have ended. 
CMS-1518-P 879 

The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. We refer readers to 

section VII. of the preamble and section V. of the Addendum to this proposed rule for the 

proposed update changes to the Federal payment rates for LTCHs under the LTCH PPS 

for FY 2012. The annual updates for the IRF PPS and the IPF PPS are issued by the 

agency in separate Federal Register documents. 

V. Proposed Changes to the Payment Rate for the LTCH PPS for FY 2012 

A. Proposed LTCH PPS Standard Federal Rate for FY 2012

1. Background 

 In section VII. of the preamble of this proposed rule, we discuss our proposed 

changes to the payment rates, factors, and specific policies under the LTCH PPS for 

FY 2012 

Under §412.523(c)(3)(ii) of the regulations, for LTCH PPS rate years beginning 

RY 2004 through RY 2006, we updated the standard Federal rate annually by a factor to 

adjust for the most recent estimate of the increases in prices of an appropriate market 

basket of goods and services for LTCHs. We established this policy of annually updating 

the standard Federal rate because, at that time, we believed that was the most appropriate 

method for updating the LTCH PPS standard Federal rate for years after the initial 

implementation of the LTCH PPS in FY 2003. Thus, under §412.523(c)(3)(ii), for 

RYs 2004 through 2006, the annual update to the LTCH PPS standard Federal rate was 

equal to the previous rate year’s Federal rate updated by the most recent estimate of 

increases in the appropriate market basket of goods and services included in covered 

inpatient LTCH services. 
CMS-1518-P 880 

In determining the annual update to the standard Federal rate for RY 2007, based 

on our ongoing monitoring activity, we believed that, rather than solely using the most 

recent estimate of the LTCH PPS market basket as the basis of the annual update factor, 

it was appropriate to adjust the standard Federal rate to account for the effect of 

documentation and coding in a prior period that was unrelated to patients’ severity of 

illness (71 FR 27818). Accordingly, we established under §412.523(c)(3)(iii) that the 

annual update to the standard Federal rate for RY 2007 was zero percent based on the 

most recent estimate of the LTCH PPS market basket at that time, offset by an adjustment 

to account for changes in case-mix in prior periods due to the effect of documentation 

and coding that were unrelated to patients’ severity of illness. For RY 2008 through 

FY 2011, we also considered the effect of documentation and coding that was unrelated 

to patients’ severity of illness in establishing the annual update to the standard Federal 

rate as set forth in the regulations at §412.523(c)(3)(iv) through (c)(3)(vii). 

Several provisions of the Affordable Care Act revised the annual update to the 

standard Federal rate, beginning in RY 2010. Specifically, section 1886(m)(3)(A) of the 

Act, as added by section 3401(c) of the Affordable Care Act, specifies that, for rate year 

2010 and each subsequent rate year, any annual update to the standard Federal rate shall 

be reduced: 

● For rate year 2010 through 2019, by the other adjustment specified in section 

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

● For rate year 2012 and each subsequent year, by the productivity adjustment 

(which we refer to as “the multifactor productivity (MFP) adjustment” as discussed in 
CMS-1518-P 881 

section VII.E.2.d. of the preamble of this proposed rule) described in section 

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

Section 1886(m)(3)(B) of the Act provides that the application of paragraph (3) of 

section 1886(m) of the Act may result in the annual update being less than zero for a rate 

year, and may result in payment rates for a rate year being less than such payment rates 

for the preceding rate year. (As noted in section VII.E.2.d. of the preamble of this 

proposed rule, the annual update to the LTCH PPS occurs on October 1 and we have 

adopted the term “fiscal year” (FY) rather than “rate year” (RY) under the LTCH PPS 

beginning October 1, 2010. Therefore, for purposes of clarity, when discussing the 

annual update for the LTCH PPS, including the provisions of the Affordable Care Act, 

we employ “fiscal year” rather than “rate year” for 2011 and subsequent years.) 

 For FY 2011, consistent with our historical practice, we established an update to 

the LTCH PPS standard Federal rate based on the full estimated LTCH PPS market 

basket increase, including the 0.50 percentage point reduction required by sections 

1886(m)(3)(A)(i) and (m)(4)(B) of the Act, of 2.0 percent and an adjustment to account 

for the increase in case-mix in prior periods (FYs 2008 and 2009) that resulted from the 

effect of documentation and coding practices of -2.5 percent. Accordingly, at 

§412.523(c)(vii) of the regulations, we established an annual update of -0.49 percent to 

the standard Federal rate for FY 2011 (75 FR 50443 through 50444). 

In this proposed rule, for FY 2012, as discussed in greater detail in section 

VII.E.2. of the preamble of this proposed rule, we are proposing to establish an annual 

update to the LTCH PPS standard Federal rate of 1.5 percent based on the full estimated 
CMS-1518-P 882 

increase in the proposed LTCH PPS market basket of 2.8 percent less the proposed MFP 

adjustment of 1.2 percentage points required under 1886(m)(3)(A)(ii) of the Act and less 

the 0.1 percentage point required by sections 1886(m)(3)(A)(i) and (m)(4)(C) of the Act. 

As discussed in greater detail below, for FY 2012, we are not proposing to make an 

adjustment to account for the increase in case-mix in a prior period (FY 2010) resulting 

from the effect of documentation and coding. 

2. Development of the Proposed FY 2012 LTCH PPS Standard Federal Rate 

We continue to believe that the annual update to the LTCH PPS standard Federal 

rate should be based on the most recent estimate of the increase in the LTCH PPS market 

basket, including any statutory adjustments. We also continue to believe it is appropriate 

that the standard Federal rate be offset by an adjustment to account for any effect of 

documentation and coding practices that does not reflect increased severity of illness. 

Such an adjustment protects the integrity of the Medicare Trust Funds by ensuring that 

the LTCH PPS payment rates better reflect the true costs of treating LTCH patients. 

Consistent with past LTCH payment policy, we have continued to monitor the most 

recent available LTCH data. Based on an analysis of FY 2010 LTCH claims from the 

December 2010 update of the MedPAR files, it does not appear that an adjustment for the 

effect of documentation and coding in FY 2010 is warranted. Therefore, in this proposed 

rule, we are not proposing to make an adjustment for the effect of documentation and 

coding during FY 2010 in our proposed annual update to the LTCH PPS standard Federal 

rate for FY 2012. Furthermore, we are proposing that, consistent with our historical 

practice of using the best available data, if more recent data subsequently become 
CMS-1518-P 883 

available, we would examine such data for the final rule to determine if an adjustment for 

the effect of documentation and coding during FY 2010 is warranted. 

In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50443 through 50444), we 

established an annual update to the LTCH PPS standard Federal rate for FY 2011 based 

on the full estimated LTCH PPS market basket increase, including the 0.50 percentage 

point reduction required by sections 1886(m)(3)(A)(i), (m)(3)(A)(ii), and (m)(4)(B) of the 

Act, of 2.0 percent and an adjustment to account for the increase in case-mix in prior 

periods (FYs 2008 and 2009) that resulted from the effect of documentation and coding 

practices of -2.5 percent. Accordingly, at §412.523(c)(vii), we established an annual 

update to the standard Federal rate for FY 2011 of -0.49 percent. That is, we applied an 

update factor of 0.9951 (calculated as 1.020 x 1 divided by 1.025 = 0.9951 or 

-0.49 percent) to the RY 2010 Federal rate of $39,794.95 (as established in the June 2, 

2010 FY 2010 IPPS/RY 2010 LTCH PPS notice (75 FR 31128 through 31129)) to 

determine the FY 2011 standard Federal rate. Consequently, we established a standard 

Federal rate for FY 2011 of $39,599.95, which is applicable to LTCH PPS discharges 

occurring on or after October 1, 2010, through September 30, 2011. 

In this proposed rule, for FY 2012, as noted above and as discussed in greater 

detail in section VII.E.2. of the preamble of this proposed rule, consistent with our 

historical practice, we are proposing to establish an annual update to the LTCH PPS 

standard Federal rate of 1.5 percent, based on the full estimated increase in the proposed 

LTCH PPS market basket of 2.8 percent less the proposed MFP adjustment of 

1.2 percentage points required under 1886(m)(3)(A)(ii) and less the 0.1 percentage point 
CMS-1518-P 884 

required by sections 1886(m)(3)(A)(i) and( m)(4)(C) of the Act. Accordingly, the 

proposed update factor to the standard Federal rate for FY 2012 is 1.5 percent. That is, 

under proposed §412.523(c)(viii), we are proposing to apply a factor of 1.015 to the 

FY 2011 standard Federal rate of $39,599.95 (as established in the FY 2011 IPPS/LTCH 

PPS final rule (75 FR 50444)) to determine the FY 2012 standard Federal rate. 

Furthermore, as discussed in greater detail in section VII.E.3. of the preamble of this 

proposed rule, for FY 2012, we are proposing to apply an area wage level budget 

neutrality factor of 0.99723 to the standard Federal rate to ensure that any changes to the 

area wage level adjustment (that is, the proposed annual update of the wage index values 

and labor-related share) would not result in any change (increase or decrease) in 

estimated aggregate LTCH PPS payments. Consequently, we are proposing to establish a 

standard Federal rate for FY 2012 of $40,082.61 (calculated as $39,599.95 x 1.015 x 

0.99723), which would be applicable to LTCH PPS discharges occurring on or after 

October 1, 2011, through September 30, 2012. 

B. Proposed Adjustment for Area Wage Levels under the LTCH PPS for FY 2012

1. Background 

 Under the authority of section 123 of the BBRA as amended by section 307(b) of 

the BIPA, we established an adjustment to the LTCH PPS standard Federal rate to 

account for differences in LTCH area wage levels at §412.525(c). The labor-related 

share of the LTCH PPS standard Federal rate is adjusted to account for geographic 

differences in area wage levels by applying the applicable LTCH PPS wage index. The 

applicable LTCH PPS wage index is computed using wage data from inpatient acute care 
CMS-1518-P 885 

hospitals without regard to reclassification under section 1886(d)(8) or section 

1886(d)(10) of the Act. 

 As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56015), 

when we implemented the LTCH PPS, we established a 5-year transition to the full area 

wage index level adjustment. The area wage level adjustment was completely phased-in 

for cost reporting periods beginning in FY 2007. Therefore, for cost reporting periods 

beginning on or after October 1, 2006, the applicable LTCH wage index values are the 

full LTCH PPS wage index values calculated based on acute care hospital inpatient wage 

index data without taking into account geographic reclassification under section 

1886(d)(8) and section 1886(d)(10) of the Act. For additional information on the phasein of the area wage level adjustment under the LTCH PPS, we refer readers to the 

August 30, 2002 LTCH PPS final rule (67 FR 56017 through 56019) and the RY 2008 

LTCH PPS final rule (72 FR 26891). 

2. Geographic Classifications/Labor Market Area Definitions 

 As discussed in the August 30, 2002 LTCH PPS final rule, which implemented 

the LTCH PPS (67 FR 56015 through 56019), in establishing an adjustment for area 

wage levels, the labor-related portion of a LTCH's Federal prospective payment is 

adjusted by using an appropriate wage index based on the labor market area in which the 

LTCH is located. Specifically, the application of the LTCH PPS area wage level 

adjustment at existing §412.525(c) is made on the basis of the location of the LTCH in 

either an urban area or a rural area as defined in §412.503. Currently under the LTCH 

PPS at §412.503, an “urban area” is defined as a Metropolitan Statistical Area (which 
CMS-1518-P 886 

would include a metropolitan division, where applicable) as defined by the Executive 

OMB and a “rural area” is defined as any area outside of an urban area. 

In the RY 2006 LTCH PPS final rule (70 FR 24184 through 24185), in 

regulations at §412.525(c), we revised the labor market area definitions used under the 

LTCH PPS effective for discharges occurring on or after July 1, 2005, based on the 

Executive OMB's CBSA designations, which are based on 2000 Census data. We made 

this revision because we believe that the CBSA-based labor market area definitions will 

ensure that the LTCH PPS wage index adjustment most appropriately accounts for and 

reflects the relative hospital wage levels in the geographic area of the hospital as 

compared to the national average hospital wage level. We note that these are the same 

CBSA-based designations implemented for acute care hospitals under the IPPS at 

§412.64(b), effective October 1, 2004 (69 FR 49026 through 49034). (For further 

discussion of the CBSA-based labor market area (geographic classification) definitions 

currently used under the LTCH PPS, we refer readers to the RY 2006 LTCH PPS final 

rule (70 FR 24182 through 24191).) We have updated the LTCH PPS CBSA-based labor 

market area definitions annually since they were adopted for RY 2006 (73 FR 26812 

through 26814, 74 FR 44023 through 44204, and 75 FR 50444 through 50445). 

 In OMB Bulletin No. 10-2, issued on December 1, 2009, OMB announced that 

the CBSA changes in that bulletin would be the final update prior to the 2010 Census of 

Population and Housing. We adopted those changes under the LTCH PPS in the 

FY 2011 IPPS/LTCH PPS final rule (75 FR 50444 through 50445), effective beginning 

October 1, 2010, and they are also reflected in this FY 2012 proposed rule. In 2013, 
CMS-1518-P 887 

OMB plans to announce new area delineations based on its 2010 standards 

(75 FR 37246) and the 2010 Census data. 

 The OMB bulletin is available on the OMB Web site at 

http://www.whitehouse.gov/OMB - go to “Agency Information” and click on “Bulletins”. 

3. Proposed LTCH PPS Labor-Related Share 

Under the adjustment for differences in area wage levels at §412.525(c), the 

labor-related share of a LTCH’s PPS Federal prospective payment is adjusted by the 

applicable wage index for the labor market area in which the LTCH is located. The 

LTCH PPS labor-related share currently represents the sum of the labor-related portion of 

operating costs (wages and salaries, employee benefits, professional fees, and all other 

labor-intensive services) and a labor-related portion of capital costs using the applicable 

LTCH PPS market basket. Currently, as established in the RY 2007 LTCH PPS final 

rule (71 FR 27829 through 27830), the LTCH PPS labor-related share is based on the 

relative importance of the labor-related share of operating costs and capital costs of the 

rehabilitation, psychiatric, and long-term care hospital (RPL) market basket based on 

FY 2002 data, as those were the best available data at that time that reflected the cost 

structure of LTCHs. For the past 4 years (RY 2008, RY 2009, RY 2010, and FY 2011), 

we updated the LTCH PPS labor-related share annually based on the latest available data 

for the FY 2002-based RPL market basket. For FY 2011, in the FY 2011 IPPS/LTCH 

PPS final rule (75 FR 20445), we established a labor-related share of 75.271 percent 

based on the best available data at that time for the FY 2002-based RPL market basket for 

FY 2011. (Additional background information on the historical development of the 
CMS-1518-P 888 

labor-related share under the LTCH PPS and the development of the RPL market basket 

can be found in the RY 2007 LTCH PPS final rule (71 FR 27810 through 27817 and 

27829 through 27830).) 

 In section VII.D. of the preamble of this proposed rule, we are proposing to revise 

and rebase the market basket used under the LTCH PPS beginning in FY 2012. 

Specifically, we are proposing to adopt the newly created FY 2008-based RPL market 

basket. 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 “nonlabor-intensive” services to “labor-related” and 

“nonlabor-related” services (as discussed. in section VII.D.3.b. of the preamble of this 

proposed rule). As discussed in section VII.D.3.f. of the preamble of this proposed rule, 

we are proposing a labor-related share under the LTCH PPS for FY 2012 based on IHS 

Global Insight, Inc.’s first quarter 2011 forecast of the proposed FY 2008-based RPL 

market basket for FY 2012, as these are the most recent available data at this time that 

reflect the cost structure of LTCHs. We are also proposing that the labor-related share 

for FY 2012 is the sum of the proposed FY 2012 relative importance of each laborrelated cost category of the proposed FY 2008-based RPL market basket, and reflects the 

different rates of price change for these cost categories between the proposed base year 

(FY 2008) and FY 2012. 

As discussed in greater detail in section VII.D.3.f. of the preamble of this 

proposed rule, the sum of the proposed relative importance for FY 2012 for operating 

costs (Wages and Salaries, Employee Benefits, Professional Fees: Labor-Related, 
CMS-1518-P 889 

Administrative and Business Support Services, and All-Other: Labor-related Services) is 

66.689 percent and the proposed labor-related share of capital costs is 3.645 percent. 

Thus, under the authority set forth in section 123 of the BBRA as amended by section 

307(b) of the BIPA, we are proposing to establish a labor-related share of 70.334 percent 

(66.689 percent + 3.645 percent) under the LTCH PPS for the FY 2012, which would be 

effective for discharges occurring on or after October 1, 2011, and through 

September 30, 2012. Consistent with our historical practice of using the best data 

available, we also are proposing that if more recent data are available to determine the 

labor-related share used under the LTCH PPS for FY 2012, we would use these data for 

determining the FY 2012 LTCH PPS labor-related share in the final rule. 

4. Proposed LTCH PPS Wage Index for FY 2012 

 Historically, under the LTCH PPS, we have established LTCH PPS wage index 

values calculated from acute care IPPS hospital wage data without taking into account 

geographic reclassification under sections 1886(d)(8) and 1886(d)(10) of the Act 

(67 FR 56019). The area wage level adjustment established under the LTCH PPS is 

based on a LTCH's actual location without regard to the urban or rural designation of any 

related or affiliated provider. 

In the FY 2011 LTCH PPS final rule (75 FR 50445 through 50446), we calculated 

the FY 2011 LTCH PPS wage index values using the same data used for the FY 2011 

acute care hospital IPPS (that is, data from cost reporting periods beginning during 

FY 2007), without taking into account geographic reclassification under sections 

1886(d)(8) and 1886(d)(10) of the Act, as these were the most recent complete data 
CMS-1518-P 890 

available at that time. In that same final rule, we indicated that we computed the 

FY 2011 LTCH PPS wage index values consistent with the urban and rural geographic 

classifications (labor market areas) and consistent with the pre-reclassified IPPS wage 

index policy (that is, our historical policy of not taking into account IPPS geographic 

reclassifications in determining payments under the LTCH PPS). We also continued to 

use our existing policy for determining wage index values in areas where there are no 

IPPS wage data. 

 Consistent with our historical methodology, to determine the applicable wage 

index values under the LTCH PPS for FY 2012, under the broad authority conferred upon 

the Secretary by section 123 of the BBRA, as amended by section 307(b) of BIPA, to 

determine appropriate adjustments under the LTCH PPS, we are proposing to use wage 

data collected from cost reports submitted by IPPS hospitals for cost reporting periods 

beginning during FY 2008, without taking into account geographic reclassification under 

sections 1886(d)(8) and 1886(d)(10) of the Act. We are proposing to use FY 2008 data 

because these data are the most recent complete data available. These are the same data 

used to compute the proposed FY 2012 acute care hospital inpatient wage index, as 

discussed in section III. of the preamble of this proposed rule. (For our rationale for 

using IPPS hospital wage data as a proxy for determining the wage index values used 

under the LTCH PPS, we refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final 

rule (74 FR 44024 through 44025).) 

The proposed FY 2012 LTCH PPS wage index values we are presenting in this 

proposed rule are computed consistent with the urban and rural geographic classifications 
CMS-1518-P 891 

(labor market areas) discussed above in section V.B.2. of the Addendum to this proposed 

rule and consistent with the pre-reclassified IPPS wage index policy (that is, our 

historical policy of not taking into account IPPS geographic reclassifications under 

sections 1886(d)(8) and 1886(d)(10) of the Act in determining payments under the LTCH 

PPS). As with the IPPS wage index, wage data for multicampus hospitals with campuses 

located in different labor market areas (CBSAs) are apportioned to each CBSA where the 

campus or campuses are located (as discussed in section III.F. of the preamble of this 

proposed rule). Furthermore, we are proposing that, in determining the FY 2012 LTCH 

PPS wage index values in this proposed rule, we continue to use our existing policy for 

determining wage index values in areas where there are no IPPS wage data. 

 As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50446), we 

established a methodology for determining LTCH PPS wage index values for areas that 

have no IPPS wage data in the RY 2009 LTCH PPS final rule, and we are proposing to 

continue to use this methodology for FY 2012. (We refer readers to 73 FR 26817 

through 26818 for an explanation of and rationale for our policy.) Under this 

methodology, the LTCH PPS wage index value for urban CBSAs with no IPPS wage 

data is determined by using an average of all of the urban areas within the State. As was 

the case in FY 2011, there are currently no LTCHs located in labor areas without IPPS 

hospital wage data (or IPPS hospitals) for FY 2012. However, we calculate proposed 

LTCH PPS wage index values for these areas using our established methodology in the 

event that, in the future, a LTCH should open in one of those areas. 
CMS-1518-P 892 

 Based on the FY 2008 IPPS wage data that we are proposing to use to determine 

the proposed FY 2012 LTCH PPS wage index values in this proposed rule, there are no 

IPPS wage data for the urban area Hinesville-Fort Stewart, GA (CBSA 25980). 

Consistent with the methodology discussed above, we are proposing to calculate the 

FY 2012 wage index value for CBSA 25980 as the average of the proposed wage index 

values for all of the other urban areas within the State of Georgia (that is, CBSAs 10500, 

12020, 12060, 12260, 15260, 16860, 17980, 19140, 23580, 31420, 40660, 42340, 46660 

and 47580), as shown in Table 12A, which is listed in section VI. of the Addendum to 

this proposed rule and available via the Internet). We note that, as IPPS wage data are 

dynamic, it is possible that urban areas without IPPS wage data will vary in the future. 

 For FY 2012, using our established methodology, we are proposing to calculate a 

LTCH PPS wage index value for rural areas with no IPPS wage data using the 

unweighted average of the wage indices from all of the CBSAs that are contiguous to the 

rural counties of the State (for an explanation of this policy, we refer readers to 

73 FR 26818). For this purpose, we define “contiguous” as sharing a border. Based on 

the FY 2008 IPPS wage data that we are proposing to use to determine the proposed 

FY 2012 LTCH PPS wage index values in this proposed rule, there are no IPPS wage 

data for the rural area of Massachusetts (CBSA code 22). Consistent with the 

methodology described above, the proposed FY 2012 wage index value for rural 

Massachusetts is computed using the unweighted average of the wage indices from all of 

the CBSAs contiguous to the rural counties in that State. Specifically, the entire 

Massachusetts rural area consists of Dukes and Nantucket counties. The borders of 
CMS-1518-P 893 

Dukes and Nantucket counties are “contiguous” with Barnstable County, MA, and Bristol 

County, MA. Therefore, the proposed FY 2012 LTCH PPS wage index value for rural 

Massachusetts is computed as the unweighted average of the proposed FY 2012 wage 

indexes for Barnstable County and Bristol County, which are shown in Table 12A in the 

Addendum to this proposed rule). As noted above, as IPPS wage data are dynamic, it is 

possible that rural areas without IPPS wage data will vary in the future. 

 The proposed FY 2012 LTCH wage index values that would be applicable for 

LTCH discharges occurring on or after October 1, 2011, through September 30, 2012, are 

presented in Table 12A (for urban areas) and Table 12B (for rural areas) in the 

Addendum of this proposed rule. 

5. Proposed Budget Neutrality Adjustment for Changes to the Area Wage Level 

Adjustment 

 Historically, the LTCH PPS wage index and labor-related share are updated 

annually based on the latest available data. However, there are currently no statutory or 

regulatory requirements that the annual update to the LTCH PPS area wage level 

adjustment at existing §412.525(c) (that is, the wage index and the labor-related share) be 

budget neutral such that estimated aggregate LTCH PPS payments would be unaffected 

(that is, would be neither greater than nor less than estimated aggregate LTCH PPS 

payments without such changes). In section VII.E.3. of the preamble of this proposed 

rule, under §412.525(c), we are proposing that, beginning in FY 2012, any changes to the 

wage index values or labor-related share be made in a budget neutral manner such that 

estimated aggregate LTCH PPS payments are unaffected, that is, would be neither greater 
CMS-1518-P 894 

than nor less than estimated aggregate LTCH PPS payments without such changes to the 

area wage level adjustment. Under this proposal, we are also proposing to determine an 

area wage level adjustment budget neutrality factor that would be applied to the standard 

Federal rate to ensure that any changes to the area wage level adjustment would be 

budget neutral such that any changes to the wage index values or labor-related share 

would not result in any change (increase or decrease) in estimated aggregate LTCH PPS 

payments. Therefore, under proposed §412.523(d)(4), we are proposing to apply an area 

wage level adjustment budget neutrality factor of 0.99723 (determined under the 

proposed methodology described in section VII.E.3. of the preamble of this proposed 

rule) to determine the proposed FY 2012 LTCH PPS standard Federal rate. (The 

development of the proposed LTCH PPS standard Federal rate for FY 2012 is discussed 

in section V.A.2. of this Addendum.) 

C. Proposed LTCH PPS Cost-of-Living Adjustment for LTCHs Located in Alaska and 

Hawaii

In the August 30, 2002 final rule (67 FR 56022), we established, under 

§412.525(b), a cost-of-living adjustment (COLA) for LTCHs located in Alaska and 

Hawaii to account for the higher costs incurred in those States. Specifically, we apply a 

COLA to payments to LTCHs located in Alaska and Hawaii by multiplying the 

nonlabor-related portion of the standard Federal payment rate by the applicable COLA 

factors established annually by CMS. Higher labor-related costs for LTCHs located in 

Alaska and Hawaii are taken into account in the adjustment for area wage levels 

described above. 
CMS-1518-P 895 

For FY 2011 and in prior years, we used the most recent updated COLA factors 

obtained from the U.S. Office of Personnel Management (OPM) Web site at 

http://www.opm.gov/oca/cola/rates.asp to adjust the payments for LTCHs in Alaska and 

Hawaii. Sections 1911 through 1919 of the Nonforeign Area Retirement Equity 

Assurance Act, as contained in subtitle B of title XIX of the National Defense 

Authorization Act (NDAA) for Fiscal Year 2010 (Pub. L. 111-84, October 28, 2009) 

transitions the Alaska and Hawaii COLAs to locality pay. Under section 1914 of 

Pub. L. 111-84, locality pay is being phased in over a 3-year period beginning in 

January 2010 with COLA rates frozen as of the date of enactment, October 28, 2009, and 

then proportionately reduced to reflect the phase-in of locality. 

We do not believe it is appropriate to propose to use either the 2010 or 2011 

reduced factors for adjusting the nonlabor-related portion of the standard Federal rate for 

LTCHs in Alaska or Hawaii. 

Therefore, for FY 2012, we are proposing to continue to use the same COLA 

factors (published by OPM) that we used to adjust payments in FY 2011 (which are 

based on OPM’s 2009 COLA factors) to adjust the nonlabor-related portion of the 

standard Federal rate for LTCHs located in Alaska and Hawaii. We believe using these 

COLA factors would appropriately adjust the nonlabor-related portion of the standard 

Federal rate for LTCHs in Alaska and Hawaii consistent with §412.525(b). (We note that 

this proposal is consistent with the proposed adjustment for cost-of-living in Alaska and 

Hawaii for IPPS hospitals discussed in section II.B.2. of this Addendum.) We invite 

public comment on this proposal. 
CMS-1518-P 896 

 In this proposed rule, for FY 2012, under the broad authority conferred upon the 

Secretary by section 123 of the BBRA, as amended by section 307(b) of BIPA, to 

determine appropriate adjustments under the LTCH PPS, consistent with our current 

policy, we are proposing to apply a COLA to payments to LTCHs located in Alaska and 

Hawaii by multiplying the nonlabor-related portion of the standard Federal payment rate 

by the proposed factors listed in the chart below because they are the most recent 

available data at this time. As discussed above, these factors were obtained from the 

OPM and are also proposed to be used under the IPPS for FY 2012. 

Proposed Cost-of-Living Adjustment Factors for Alaska and Hawaii Hospitals 

for the LTCH PPS for FY 2012 

Alaska:

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

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

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

 All other areas of Alaska 1.25

Hawaii:

 City and County of Honolulu 1.25

County of Hawaii 1.18

 County of Kauai 1.25

 County of Maui and County of Kalawao 1.25

(The above factors are based on data obtained from the U.S. Office of Personnel 

 Management Web site at: http://www.opm.gov/oca/cola/rates.asp.) 

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

1. Background 

 Under the broad authority conferred upon the Secretary by section 123 of the 

BBRA as amended by section 307(b) of BIPA, in the regulations at §412.525(a), we 

established an adjustment for additional payments for outlier cases that have 

extraordinarily high costs relative to the costs of most discharges. We refer to these cases 
CMS-1518-P 897 

as high cost outliers (HCOs). Providing additional payments for outliers strongly 

improves the accuracy of the LTCH PPS in determining resource costs at the patient and 

hospital level. These additional payments reduce the financial losses that would 

otherwise be incurred when treating patients who require more costly care and, therefore, 

reduce the incentives to underserve these patients. We set the outlier threshold before the 

beginning of the applicable rate year so that total estimated outlier payments are 

projected to equal 8 percent of total estimated payments under the LTCH PPS. 

 Under §412.525(a) in the regulations (in conjunction with §412.503), we make 

outlier payments for any discharges if the estimated cost of a case exceeds the adjusted 

LTCH PPS payment for the MS-LTC-DRG plus a fixed-loss amount. Specifically, in 

accordance with §412.525(a)(3) (in conjunction with §412.503), we make an additional 

payment to an HCO case that is equal to 80 percent of the difference between the 

estimated cost of the patient case and the outlier threshold, which is the sum of the 

adjusted Federal prospective payment for the MS-LTC-DRG and the fixed-loss amount. 

The fixed-loss amount is the amount used to limit the loss that a hospital will incur under 

the outlier policy for a case with unusually high costs. This results in Medicare and the 

LTCH sharing financial risk in the treatment of extraordinarily costly cases. Under the 

LTCH PPS HCO policy, the LTCH's loss is limited to the fixed-loss amount and a fixed 

percentage of costs above the outlier threshold (adjusted MS-LTC-DRG payment plus the 

fixed-loss amount). The fixed percentage of costs is called the marginal cost factor. We 

calculate the estimated cost of a case by multiplying the Medicare allowable covered 

charge by the hospital’s overall hospital cost-to-charge ratio (CCR). 
CMS-1518-P 898 

 Under the LTCH PPS HCO policy at §412.525(a), we determine a fixed-loss 

amount, that is, the maximum loss that a LTCH can incur under the LTCH PPS for a case 

with unusually high costs before the LTCH will receive any additional payments. We 

calculate the fixed-loss amount by estimating aggregate payments with and without an 

outlier policy. The fixed-loss amount results in estimated total outlier payments being 

projected to be equal to 8 percent of projected total LTCH PPS payments. Currently, 

MedPAR claims data and CCRs based on data from the most recent Provider-Specific 

File (PSF) (or from the applicable statewide average CCR if a LTCH's CCR data are 

faulty or unavailable) are used to establish a fixed-loss threshold amount under the 

LTCH PPS. 

2. Determining LTCH CCRs under the LTCH PPS 

a. Background 

 The following is a discussion of CCRs that are used in determining payments for 

HCO and SSO cases under the LTCH PPS, at §412.525(a) and §412.529, respectively. 

Although this section is specific to HCO cases, because CCRs and the policies and 

methodologies pertaining to them are used in determining payments for both HCO and 

SSO cases (to determine the estimated cost of the case at §412.529(d)(2)), we are 

discussing the determination of CCRs under the LTCH PPS for both of these types of 

cases simultaneously. 

 In determining both HCO payments (at §412.525(a)) and SSO payments (at 

§412.529), we calculate the estimated cost of the case by multiplying the LTCH's overall 

CCR by the Medicare allowable charges for the case. In general, we use the LTCH's 
CMS-1518-P 899 

overall CCR, which is computed based on either the most recently settled cost report or 

the most recent tentatively settled cost report, whichever is from the latest cost reporting 

period, in accordance with §412.525(a)(4)(iv)(B) and §412.529(f)(4)(ii) for HCOs and 

SSOs, respectively. (We note that, in some instances, we use an alternative CCR, such as 

the statewide average CCR in accordance with the regulations at §412.525(a)(4)(iv)(C) 

and §412.529(f)(4)(iii), or a CCR that is specified by CMS or that is requested by the 

hospital under the provisions of the regulations at §412.525(a)(4)(iv)(A) and 

§412.529(f)(4)(i).) Under the LTCH PPS, a single prospective payment per discharge is 

made for both inpatient operating and capital-related costs. Therefore, we compute a 

single “overall” or “total” LTCH-specific CCR based on the sum of LTCH operating and 

capital costs (as described in Section 150.24, Chapter 3, of the Medicare Claims 

Processing Manual (Pub. 100-4)) as compared to total charges. Specifically, a LTCH's 

CCR is calculated by dividing a LTCH's total Medicare costs (that is, the sum of its 

operating and capital inpatient routine and ancillary costs) by its total Medicare charges 

(that is, the sum of its operating and capital inpatient routine and ancillary charges). 

b. LTCH Total CCR Ceiling 

 Generally, a LTCH is assigned the applicable statewide average CCR if, among 

other things, a LTCH's CCR is found to be in excess of the applicable maximum CCR 

threshold (that is, the LTCH CCR ceiling). This is because CCRs above this threshold 

are most likely due to faulty data reporting or entry, and, therefore, CCRs based on 

erroneous data should not be used to identify and make payments for outlier cases. Thus, 

under our established policy, generally, if a LTCH's calculated CCR is above the 
CMS-1518-P 900 

applicable ceiling, the applicable LTCH PPS statewide average CCR is assigned to the 

LTCH instead of the CCR computed from its most recent (settled or tentatively settled) 

cost report data. 

In accordance with §412.525(a)(4)(iv)(C)(2) for HCOs and §412.529(f)(4)(iii)(B) 

for SSOs, using our established methodology for determining the LTCH total CCR 

ceiling (described above), based on IPPS total CCR data from the December 2010 update 

of the PSF, we are proposing to establish a total CCR ceiling of 1.210 under the LTCH 

PPS that would be effective for discharges occurring on or after October 1, 2011, through 

September 30, 2012. Consistent with our historical policy of using the best available 

data, we also are proposing that if more recent data become available, we would use such 

data to establish a total CCR ceiling for FY 2012 in the final rule. 

c. Proposed LTCH Statewide Average CCRs 

Our general methodology established for determining the statewide average CCRs 

used under the LTCH PPS is similar to our established methodology for determining the 

LTCH total CCR ceiling (described above) because it is based on “total” IPPS CCR data. 

Under the LTCH PPS HCO policy at §412.525(a)(4)(iv)(C) and the SSO policy at 

§412.529(f)(4)(iii), the fiscal intermediary or MAC may use a statewide average CCR, 

which is established annually by CMS, if it is unable to determine an accurate CCR for a 

LTCH in one of the following circumstances: (1) new LTCHs that have not yet 

submitted their first Medicare cost report (for this purpose, consistent with current policy, 

a new LTCH is defined as an entity that has not accepted assignment of an existing 

hospital's provider agreement in accordance with §489.18); (2) LTCHs whose CCR is in 
CMS-1518-P 901 

excess of the LTCH CCR ceiling; and (3) other LTCHs for whom data with which to 

calculate a CCR are not available (for example, missing or faulty data). (Other sources of 

data that the fiscal intermediary or MAC may consider in determining a LTCH's CCR 

include data from a different cost reporting period for the LTCH, data from the cost 

reporting period preceding the period in which the hospital began to be paid as a LTCH 

(that is, the period of at least 6 months that it was paid as a short-term, acute care 

hospital), or data from other comparable LTCHs, such as LTCHs in the same chain or in 

the same region.) 

Consistent with our historical practice of using the best available data and using 

our established methodology for determining the LTCH statewide average CCRs, based 

on the most recent complete IPPS total CCR data from the December 2010 update of the 

PSF, we are proposing to establish LTCH PPS statewide average total CCRs for urban 

and rural hospitals that would be effective for discharges occurring on or after 

October 1, 2011, through September 30, 2012, in Table 8C of the Addendum to this 

proposed rule. Consistent with our historical policy of using the best available data, we 

also are proposing that if more recent data become available, we would use such data to 

establish LTCH PPS statewide average total CCRs for FY 2012 in the final rule. 

All areas in the District of Columbia, New Jersey, and Rhode Island are classified 

as urban. Therefore, there are no rural statewide average total CCRs listed for those 

jurisdictions in Table 8C listed in section VI. of the Addendum to this proposed rule and 

available via the Internet. This policy is consistent with the policy that we established 

when we revised our methodology for determining the applicable LTCH statewide 
CMS-1518-P 902 

average CCRs in the FY 2007 IPPS final rule (71 FR 48119 through 48121) and is the 

same as the policy applied under the IPPS. In addition, although North Dakota and 

Puerto has areas that are designated as rural, there are no short-term, acute care IPPS 

hospitals or LTCHs located in those areas as of March 2011. Therefore, there is no rural 

statewide average total CCR listed for rural North Dakota in Table 8C listed in section 

VI. of the Addendum to this proposed rule and available via the Internet. 

In addition, consistent with our existing methodology, in determining the urban 

and rural statewide average total CCRs for Maryland LTCHs paid under the LTCH PPS, 

in this proposed rule, we are using, as a proxy, the national average total CCR for urban 

IPPS hospitals and the national average total CCR for rural IPPS hospitals, respectively. 

We use this proxy because we believe that the CCR data on the PSF for Maryland 

hospitals may not be entirely accurate (as discussed in greater detail in the FY 2007 IPPS 

final rule (71 FR 48120)). 

d. Reconciliation of LTCH HCO and SSO Payments 

We note that under the LTCH PPS HCO policy at §412.525(a)(4)(iv)(D) and the 

LTCH PPS SSO policy at §412.529(f)(4)(iv), the payments for HCO and SSO cases, 

respectively, are subject to reconciliation. Specifically, any reconciliation of outlier 

payments is based on the CCR that is calculated based on a ratio of cost-to-charge data 

computed from the relevant cost report determined at the time the cost report coinciding 

with the discharge is settled. For additional information, we refer readers to sections 

150.26 through 150.28 of the Medicare Claims Processing Manual (Pub. 100-4) as added 
CMS-1518-P 903 

by Change Request 7192 (Transmittal 2111; December 3, 2010) and the RY 2009 LTCH 

PPS final rule (73 FR 26820 through 26821). 

3. Establishment of the Proposed LTCH PPS Fixed-Loss Amount for FY 2012 

 When we implemented the LTCH PPS, as discussed in the August 30, 2002 

LTCH PPS final rule (67 FR 56022 through 56026), under the broad authority of section 

123 of the BBRA as amended by section 307(b) of BIPA, we established a fixed-loss 

amount so that total estimated outlier payments are projected to equal 8 percent of total 

estimated payments under the LTCH PPS. To determine the fixed-loss amount, we 

estimate outlier payments and total LTCH PPS payments for each case using claims data 

from the MedPAR files. Specifically, to determine the outlier payment for each case, we 

estimate the cost of the case by multiplying the Medicare covered charges from the claim 

by the LTCH’s CCR. Under §412.525(a)(3) (in conjunction with §412.503), if the 

estimated cost of the case exceeds the outlier threshold, we make an outlier payment 

equal to 80 percent of the difference between the estimated cost of the case and the 

outlier threshold (that is, the sum of the adjusted Federal prospective payment for the 

MS-LTC-DRG and the fixed-loss amount). 

 In this proposed rule, we are proposing to continue to use our existing 

methodology to calculate the proposed fixed-loss amount for FY 2012 (based on updated 

data and the proposed rates and policies presented in this proposed rule) in order to 

maintain estimated HCO payments at the projected 8 percent of total estimated LTCH 

PPS payments. (For an explanation of our rationale for establishing an HCO payment 

“target” of 8 percent of total estimated LTCH payments, we refer readers to the August 
CMS-1518-P 904 

30, 2002 LTCH PPS final rule (67 FR 56022 through 56024).) Consistent with our 

historical practice of using the best data available, in determining the proposed fixed-loss 

amount for FY 2012, we are using the most recent available LTCH claims data and CCR 

data at this time. Specifically, we are using LTCH claims data from the December 2010 

update of the FY 2010 MedPAR files and CCRs from the December 2010 update of the 

PSF to determine a fixed-loss amount that would result in estimated outlier payments 

projected to be equal to 8 percent of total estimated payments in FY 2012 because these 

data are the most recent complete LTCH data currently available. Consistent with the 

historical practice of using the best available data, we also are proposing that if more 

recent LTCH claims data become available, we would use them for determining the 

fixed-loss amount for FY 2012 in the final rule. Furthermore, we are proposing to 

determine the proposed FY 2012 fixed-loss amount based on the proposed 

MS-LTC-DRG classifications and relative weights from the version of the GROUPER 

that would be in effect as of the beginning of FY 2012, that is, proposed Version 29.0 of 

the GROUPER. 

Under the broad authority of section 123(a)(1) of the BBRA and section 307(b)(1) 

of BIPA, we are proposing to establish a fixed-loss amount of $19,270 for FY 2012. 

Thus, we would make an additional payment to an HCO case that is equal to 80 percent 

of the difference between the estimated cost of the case and the outlier threshold (the sum 

of the adjusted Federal LTCH payment for the MS-LTC-DRG and the proposed 

fixed-loss amount of $19.270). We also note that the proposed fixed-loss amount of 

$19,270 for FY 2012 is slightly higher than the FY 2011 fixed-loss amount of $18,785. 
CMS-1518-P 905 

Based on our payment simulations using the most recent available data at this time, the 

proposed increase in the fixed-loss amount for FY 2012 would be necessary to maintain 

the existing requirement that estimated outlier payments would equal 8 percent of 

estimated total LTCH PPS payments. (For further information on the existing 8 percent 

HCO “target” requirement, as noted above, we refer readers to the August 30, 2002 

LTCH PPS final rule (67 FR 56022 through 56024.) Maintaining the fixed-loss amount 

at the current level would result in HCO payments that are greater than the current 

regulatory 8-percent requirement because a higher fixed-loss amount would result in 

fewer cases qualifying as outlier cases as well as a decrease in the amount of the 

additional payment for an HCO case because the maximum loss that a LTCH must incur 

before receiving an HCO payment (that is, the fixed-loss amount) would be larger. For 

these reasons, we believed that proposing a slight increase in the fixed-loss amount is 

appropriate and necessary to maintain that estimated outlier payments would equal 

8 percent of estimated total LTCH PPS payments as required under §412.525(a). 

4. Application of Outlier Policy to SSO Cases 

As we discussed in the August 30, 2002 final rule (67 FR 56026), under some rare 

circumstances, a LTCH discharge could qualify as a SSO case (as defined in the 

regulations at §412.529 in conjunction with §412.503) and also as a HCO case. In this 

scenario, a patient could be hospitalized for less than five-sixths of the geometric average 

length of stay for the specific MS-LTC-DRG, and yet incur extraordinarily high 

treatment costs. If the estimated costs exceeded the HCO threshold (that is, the SSO 

payment plus the fixed-loss amount), the discharge is eligible for payment as a HCO. 
CMS-1518-P 906 

Thus, for a SSO case in FY 2012, the HCO payment would be 80 percent of the 

difference between the estimated cost of the case and the outlier threshold (the sum of the 

proposed fixed-loss amount of $19,270 and the amount paid under the SSO policy as 

specified in §412.529). 

E. Computing the Proposed Adjusted LTCH PPS Federal Prospective Payments for 

FY 2012

 Section 412.525 sets forth the adjustments to the LTCH PPS standard Federal 

rate. Under §412.525(c), the standard Federal rate is adjusted to account for differences 

in area wages by multiplying the labor-related share of the standard Federal rate by the 

appropriate LTCH PPS wage index (as shown in Tables 12A and 12B listed in section 

VI. of the Addendum of this proposed rule and available via the Internet). The standard 

Federal rate is also adjusted to account for the higher costs of hospitals in Alaska and 

Hawaii by multiplying the nonlabor-related portion of the standard Federal rate by the 

appropriate cost-of-living factor (shown in the chart in section V.C.5. of the Addendum 

of this proposed rule) in accordance with §412.525(b). In this proposed rule, we are 

proposing to establish a proposed standard Federal rate for FY 2012 of $40,082.61, as 

discussed above in section V.A.2. of the Addendum of this proposed rule. We illustrate 

the methodology to adjust the proposed LTCH PPS Federal rate for FY 2012 in the 

following example: 

Example:

 During FY 2012, a Medicare patient is in a LTCH located in Chicago, Illinois 

(CBSA 16974). The FY 2012 LTCH PPS wage index value for CBSA 16974 is 1.0632 
CMS-1518-P 907 

(Table 12A listed in section VI. of the Addendum of this proposed rule and available via 

the Internet). The Medicare patient is classified into proposed MS-LTC-DRG 28 (Spinal 

Procedures with MCC), which has a proposed relative weight for FY 2012 of 1.7360 

(Table 11 listed in section VI. of the Addendum of this proposed rule and available via 

the Internet). 

 To calculate the LTCH's total adjusted Federal prospective payment for this 

Medicare patient, we compute the wage-adjusted Federal prospective payment amount by 

multiplying the unadjusted proposed standard Federal rate ($40,082.61) by the proposed 

labor-related share (70.334 percent) and the proposed wage index value (1.0632). This 

wage-adjusted amount is then added to the nonlabor-related portion of the unadjusted 

proposed standard Federal rate (29.666 percent; adjusted for cost of living, if applicable) 

to determine the adjusted Federal rate, which is then multiplied by the proposed 

MS-LTC-DRG relative weight (1.7360) to calculate the total adjusted proposed Federal 

LTCH PPS prospective payment for FY 2012 ($72,676.47). The table below illustrates 

the components of the calculations in this example. 
CMS-1518-P 908 

Proposed Unadjusted Standard Federal Prospective 

Payment Rate $40,082.61

Proposed Labor-Related Share x 0.70334 

Proposed Labor-Related Portion of the Federal Rate = $28,191.70

Proposed Wage Index (CBSA 16974) x 1.0632

Proposed Wage-Adjusted Labor Share of Federal Rate = $29,973.42

Proposed Nonlabor-Related Portion of the Federal Rate 

($40,082.61 x 0.29666) + $11,890.91 

Proposed Adjusted Federal Rate Amount = $41,864.33

Proposed MS-LTC-DRG 28 Relative Weight x 1.7360 

Total Proposed Adjusted Federal Prospective Payment = $72,676.47

VI. Tables Referenced in this Proposed Rule and Available Only through the 

Internet on the CMS Web Site 

 This section lists the tables referred to throughout the preamble of this proposed 

rule and in this Addendum. In the past, a majority of these tables were published in the 

Federal Register as part of the annual proposed and final rules. However, beginning in 

FY 2012, IPPS tables 2, 3A, 3B, 4A, 4B, 4C, 4D, 4E, 4F, 4J, 5, 6A, 6B, 6C, 6D, 6E, 6F, 

7A, 7B, 8A, 8B, 9A, 9C, and 10, and LTCH PPS tables 8C, 11, 12A, and 12B will no 

longer be published as part of the annual IPPS/LTCH PPS proposed and final 

rulemakings. Instead, these tables, along with new LTCH PPS tables 13A and 13B, and 

new IPPS table 14 will be available only through the Internet. IPPS tables 1A, 1B, 1C, 

and 1D, and LTCH PPS table 1E, displayed at the end of this section, will continue to be 

published in the Federal Register as part of the annual and final rules. We note that 

previously tables 6G, 6H, 6I, 6I.1, 6I.2, 6J, 6J.1, 6J.2, and 6K were already made 
CMS-1518-P 909 

available only through the Internet. We will continue to post these tables through the 

Internet. 

 Readers who experience any problems accessing any of the tables that are posted 

on the CMS Web sites identified below should contact Ing Jye Cheng at (410) 786-4548. 

The following IPPS tables for this FY 2012 proposed rule are available only 

through the Internet on the CMS Web site at: 

http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. Click on the link on the 

left side of the screen titled, “FY 2012 IPPS Proposed Rule Home Page” or “Acute 

Inpatient – Files for Download”. 

Table 2.—Acute Care Hospitals Case-Mix Indexes for Discharges Occurring in 

Federal Fiscal Year 2010; Proposed Hospital Wage Indexes for Federal Fiscal Year 2012; 

Hospital Average Hourly Wages for Federal Fiscal Years 2010 (2006 Wage Data), 2011 

(2007 Wage Data), and 2012 (2008 Wage Data); and 3-Year Average of Hospital 

Average Hourly Wages 

Table 3A.—Proposed FY 2012 and 3-Year Average Hourly Wage for Acute Care 

Hospitals in Urban Areas by CBSA 

Table 3B.—Proposed FY 2012 and 3-Year Average Hourly Wage for Acute Care 

Hospitals in Rural Areas by CBSA 

Table 4A.—Proposed Wage Index and Capital Geographic Adjustment Factor 

(GAF) for Acute Care Hospitals in Urban Areas by CBSA and by State--FY 2012 

Table 4B.—Proposed Wage Index and Capital Geographic Adjustment Factor 

(GAF) for Acute Care Hospitals in Rural Areas by CBSA and by State--FY 2012 
CMS-1518-P 910 

Table 4C.—Proposed Wage Index and Capital Geographic Adjustment Factor 

(GAF) for Acute Care Hospitals That Are Reclassified by CBSA and by State--FY 2012 

Table 4D.—States Designated as Frontier, with Acute Care Hospitals Receiving 

at a Minimum the Frontier State Floor Wage Index1; Urban Areas with Acute Care 

Hospitals Receiving the Proposed Statewide Rural Floor Wage Index—FY 2012 

Table 4E.—Urban CBSAs and Constituent Counties for Acute Care 

Hospitals--FY 2012 

Table 4F.—Proposed Puerto Rico Wage Index and Capital Geographic 

Adjustment Factor (GAF) for Acute Care Hospitals by CBSA--FY 2012 

Table 4J.—Proposed Out-Migration Adjustment for Acute Care Hospitals—

FY 2012 

Table 5.—List of Proposed Medicare Severity Diagnosis-Related Groups 

(MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of 

Stay--FY 2012 

 Table 6A.—Proposed New Diagnosis Codes—FY 2012 

 Table 6B.—Proposed New Procedure Codes—FY 2012 

 Table 6C.—Proposed Invalid Diagnosis Codes—FY 2012 

 Table 6D.— Proposed Invalid Procedure Codes—FY 2012 

 Table 6E.—Proposed Revised Diagnosis Code Titles—FY 2012 

 Table 6F.—Proposed Revised Procedure Code Titles—FY 2012 

Table 6G.--Proposed Additions to the CC Exclusions List—FY 2012 

 Table 6H.—Proposed Deletions from the CC Exclusions List—FY 2012 
CMS-1518-P 911 

 Table 6I.—Proposed Complete MCC List—FY 2012 

 Table 6I.1.—Proposed Additions to the MCC List—FY 2012 

 Table 6I.2.—Proposed Deletions to the MCC List—FY 2012 

 Table 6J.—Proposed Complete CC List—FY 2012 

 Table 6J.1.—Proposed Additions to the CC List—FY 2012 

 Table 6J.2.—Proposed Deletions to the CC List—FY 2012 

 Table 6K.—Proposed Complete List of CC Exclusions—FY 2012 

Table 7A.—Medicare Prospective Payment System Selected Percentile Lengths 

of Stay: FY 2010 MedPAR Update—December 2010 GROUPER V28.0 MS-DRGs 

Table 7B.—Medicare Prospective Payment System Selected Percentile Lengths 

of Stay: FY 2010 MedPAR Update—December 2010 GROUPER V29.0 MS-DRGs 

Table 8A.—Proposed FY 2012 Statewide Average Operating Cost-to-Charge 

Ratios (CCRs) for Acute Care Hospitals (Urban and Rural) 

Table 8B.—Proposed FY 2012 Statewide Average Capital Cost-to-Charge Ratios 

(CCRs) for Acute Care Hospitals 

Table 9A.—Hospital Reclassifications and Redesignations--FY 2012 

Table 9C.—Hospitals Redesignated as Rural under Section 1886(d)(8)(E) of the 

Act--FY 2012 

Table 10.—Proposed Geometric Mean Plus the Lesser of .75 of the National 

Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference 

Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by 

Medicare Severity Diagnosis-Related Groups (MS-DRGs) 
CMS-1518-P 912 

Table 14.—List of Hospitals with Fewer than 1,600 Medicare Discharges Based 

on the December 2010 Update of the FY 2010 MedPAR File and Their Proposed 

FY 2012 Low-Volume Payment Adjustment 

 The following LTCH PPS tables for this FY 2012 proposed rule are available 

only through the Internet on the CMS Web site at 

http://www.cms.gov/LongTermCareHospitalPPS/LTCHPPSRN/list.asp under the list 

item for Regulation Number CMS-1518-P. 

Table 8C.—Proposed FY 2012 Statewide Average Total Cost-to-Charge Ratios 

(CCRs) for LTCHs (Urban and Rural) 

Table 11.—Proposed MS-LTC-DRGs, Relative Weights, Geometric Average 

Length of Stay, and Short-Stay Outlier (SSO) Threshold for Discharges Occurring from 

October 1, 2011 through September 30, 2012 under the LTCH PPS 

Table 12A.—Proposed LTCH PPS Wage Index for Urban Areas for Discharges 

Occurring from October 1, 2011 through September 30, 2012 

Table 12B.--Proposed LTCH PPS Wage Index for Rural Areas for Discharges 

Occurring From October 1, 2011 through September 20, 2012 

Table 13A.—Composition of Proposed Low-Volume Quintiles for 

MS-LTC-DRGs—FY 2012 

Table 13B.—Proposed No-Volume MS-LTC-DRG Crosswalk for FY 2012 
CMS-1518-P 913 

TABLE 1A.—PROPOSED NATIONAL ADJUSTED OPERATING 

STANDARDIZED AMOUNTS, LABOR/NONLABOR (68.8 PERCENT LABOR 

SHARE/31.2 PERCENT NONLABOR SHARE IF WAGE INDEX IS GREATER 

THAN 1)--FY 2012 

Full Update (1.50 Percent) Reduced Update (-0.50 Percent) 

Labor-related Nonlabor-related Labor-related Nonlabor-related 

$3,531.06 $1,601.30 $3,461.48 $1,569.75

 

TABLE 1B.—PROPOSED NATIONAL ADJUSTED OPERATING 

STANDARDIZED AMOUNTS, LABOR/NONLABOR (62 PERCENT LABOR 

SHARE/38 PERCENT NONLABOR SHARE IF WAGE INDEX IS LESS THAN 

OR EQUAL TO 1)--FY 2012

 

Full Update (1.50 Percent) Reduced Update (-0.50 Percent) 

Labor-related Nonlabor-related Labor-related Nonlabor-related 

$3,182.06 $1,950.30 $3,119.36 $1,911.87

 

TABLE 1C.—PROPOSED ADJUSTED OPERATING STANDARDIZED 

AMOUNTS FOR PUERTO RICO, LABOR/NONLABOR--FY 2012 

 

Rates if Wage Index is 

Greater Than 1 

Rates if Wage Index is Less 

Than or Equal to 1 

Labor Nonlabor Labor Nonlabor 

National $3,531.06 $1,601.30 $3,182.06 $1,950.30

Puerto Rico $1,551.84 $947.10 $1,549.34 $949.60

 

TABLE 1D.—PROPOSED CAPITAL STANDARD FEDERAL PAYMENT 

RATE—FY 2012 

 

Rate 

National $422.54

Puerto Rico $205.01

 
CMS-1518-P 914 

TABLE 1E.— PROPOSED LTCH STANDARD FEDERAL PROSPECTIVE 

PAYMENT RATE--FY 2012 

Rate 

Standard Federal Rate $40,082.61

Appendix A: Regulatory Impact Analysis 

I. Introduction 

A. Overall Impact

 We have examined the impacts of this proposed rule as required by Executive 

Order 12866 on Regulatory Planning and Review (September 30, 1993), Executive 

Order 13563 on Improving Regulation and Regulatory Review (February 2, 2011) the 

Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) 

of the Social Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 

(March 22, 1995, Pub. L. 104-4), Executive Order 13132 on Federalism 

(August 4, 1999), and the Congressional Review Act (5 U.S.C. 804(2)). 

 Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits 

of available regulatory alternatives and, if regulation is necessary, to select regulatory 

approaches that maximize net benefits (including potential economic, environmental, 

public health and safety effects, distributive impacts, and equity). Executive Order 13563 

emphasizes the importance of quantifying both costs and benefits, of reducing costs, of 

harmonizing rules, and of promoting flexibility. A regulatory impact analysis (RIA) must 

be prepared for major rules with economically significant effects ($100 million or more 

in any 1 year). 
CMS-1518-P 915 

 We have determined that this proposed rule is a major rule as defined in 

5 U.S.C. 804(2). We estimate that the proposed changes for FY 2012 acute care hospital 

operating and capital payments will redistribute amounts in excess of $100 million 

among different types of inpatient cases. The proposed applicable percentage increase to 

the IPPS rates required by the statute, in conjunction with other proposed payment 

changes in this proposed rule, would result in an estimated $498 million decrease in 

FY 2012 operating payments (or -0.5 percent change) and an estimated $146 million 

increase in FY 2012 capital payments (or 1.8 percent change). The impact analysis of the 

capital payments can be found in section VIII. of this Appendix. In addition, as described 

in section IX. of this Appendix, LTCHs are expected to experience a change in payments 

by $95 million (or 1.9 percent). 

 Our operating impact estimate includes the proposed -2.5 percent documentation 

and coding adjustment applied to the hospital-specific rates and the proposed –3.15 

percent adjustment for documentation and coding changes to the IPPS standardized 

amounts. In addition, our operating impact estimate includes the proposed 1.5 percent 

hospital update to the standardized amount (which includes the proposed 2.8 percent 

market basket update with the reduction of 1.2 percentage point for the multifactor 

productivity adjustment and the 0.1 percentage point reduction required under the 

Affordable Care Act). Finally, our operating impact estimate includes the proposed 1.1 

percent update to the standardized amount and the 0.9 percent update to the hospitalspecific rates in light of D.C. Circuit’s decision in Cape Cod v. Sebelius (630 F.3d 203 

(D.C. Cir. 2011)). The estimates of IPPS operating payments to acute care hospitals do 
CMS-1518-P 916 

not reflect any changes in hospital admissions or real case-mix intensity, which would 

also affect overall payment changes. 

 The RFA requires agencies to analyze options for regulatory relief of small 

entities. For purposes of the RFA, small entities include small businesses, nonprofit 

organizations, and small government jurisdictions. We estimate that most hospitals and 

most other providers and suppliers are small entities as that term is used in the RFA. The 

great majority of hospitals and most other health care providers and suppliers are small 

entities, either by being nonprofit organizations or by meeting the SBA definition of a 

small business (having revenues of less than $7.5 million to $34.5 million in any 1 year). 

(For details on the latest standards for health care providers, we refer readers to page 33 

of the Table of Small Business Size Standards for NAIC 622 found on the SBA Web site 

at: 

http://www.sba.gov/contractingopportunities/sizestandardtopics/tableofsize/index.html.) 

 For purposes of the RFA, all hospitals and other providers and suppliers are 

considered to be small entities. Individuals and States are not included in the definition 

of a small entity. We believe that the provisions of this proposed rule relating to acute 

care hospitals would have a significant impact on small entities as explained in this 

Appendix. Because we lack data on individual hospital receipts, we cannot determine the 

number of small proprietary LTCHs. Therefore, we are assuming that all LTCHs are 

considered small entities for the purpose of the analysis in section IX. of this Appendix. 

Medicare fiscal intermediaries and MACs are not considered to be small entities. 

Because we acknowledge that many of the affected entities are small entities, the analysis 
CMS-1518-P 917 

discussed throughout the preamble of this proposed rule constitutes our proposed 

regulatory flexibility analysis. Therefore, we are soliciting public comments on our 

estimates and analysis of the impact of our proposals on those small entities. 

 In addition, section 1102(b) of the Social Security Act requires us to prepare a 

regulatory impact analysis for any proposed or final rule that may have a significant 

impact on the operations of a substantial number of small rural hospitals. This analysis 

must conform to the provisions of section 603 of the RFA. With the exception of 

hospitals located in certain New England counties, for purposes of section 1102(b) of the 

Act, we now define a small rural hospital as a hospital that is located outside of an urban 

area and has fewer than 100 beds. Section 601(g) of the Social Security Amendments of 

1983 (Pub. L. 98-21) designated hospitals in certain New England counties as belonging 

to the adjacent urban area. Thus, for purposes of the IPPS and the LTCH PPS, we 

continue to classify these hospitals as urban hospitals. (We refer readers to Table I and 

section VI. of this Appendix for the quantitative effects of the proposed policy changes 

under the IPPS for operating costs.) 

 Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) also 

requires that agencies assess anticipated costs and benefits before issuing any rule whose 

mandates require spending in any 1 year of $100 million in 1995 dollars, updated 

annually for inflation. In 2011, that threshold level is approximately $136 million. This 

proposed rule would not mandate any requirements for State, local, or tribal 

governments, nor would it affect private sector costs. 
CMS-1518-P 918 

 The analysis that begins in section II of this Appendix, in conjunction with the 

remainder of this document, demonstrates that this proposed rule is consistent with the 

regulatory philosophy and principles identified in Executive Orders 12866 and 13563, the 

RFA, and section 1102(b) of the Act. The proposed rule would affect payments to a 

substantial number of small rural hospitals, as well as other classes of hospitals, and the 

effects on some hospitals may be significant. 

B. Need

 This proposed rule is necessary in order to make payment and policy changes 

under the Medicare IPPS for Medicare acute care hospital inpatient services for operating 

and capital-related costs as well as for certain hospitals and hospital units excluded from 

the IPPS. This proposed rule also is necessary to make payment and policy changes for 

Medicare hospitals under the LTCH PPS payment system. 

II. Objectives of the IPPS 

 The primary objective of the IPPS is to create incentives for hospitals to operate 

efficiently and minimize unnecessary costs while at the same time ensuring that payments 

are sufficient to adequately compensate hospitals for their legitimate costs. In addition, 

we share national goals of preserving the Medicare Hospital Insurance Trust Fund. 

 We believe the changes in this proposed rule would further each of these goals 

while maintaining the financial viability of the hospital industry and ensuring access to 

high quality health care for Medicare beneficiaries. We expect that these proposed 

changes would ensure that the outcomes of the prospective payment systems are 
CMS-1518-P 919 

reasonable and equitable while avoiding or minimizing unintended adverse 

consequences. 

III. Limitations of Our Analysis 

The following quantitative analysis presents the projected effects of our proposed 

policy changes, as well as statutory changes effective for FY 2012, on various hospital 

groups. We estimate the effects of individual policy changes by estimating payments per 

case while holding all other payment policies constant. We use the best data available, 

but, generally, we do not attempt to make adjustments for future changes in such 

variables as admissions, lengths of stay, or case-mix. 

IV. Hospitals Included in and Excluded from the IPPS 

The prospective payment systems for hospital inpatient operating and 

capital-related costs of acute care hospitals encompass most general short-term, acute 

care hospitals that participate in the Medicare program. There were 32 Indian Health 

Service hospitals in our database, which we excluded from the analysis due to the special 

characteristics of the prospective payment methodology for these hospitals. Among other 

short-term, acute care hospitals, only the 46 such hospitals in Maryland remain excluded 

from the IPPS pursuant to the waiver under section 1814(b)(3) of the Act. 

 As of March 2011, there are 3,419 IPPS acute care hospitals to be included in our 

analysis. This represents about 64 percent of all Medicare-participating hospitals. The 

majority of this impact analysis focuses on this set of hospitals. There also are 

approximately 1,342 CAHs. These small, limited service hospitals are paid on the basis 

of reasonable costs rather than under the IPPS. (We refer readers to section VII.M. of 
CMS-1518-P 920 

this Appendix for a further description of the impact of CAH-related proposed policy 

changes.) There are also 1,290 IPPS-excluded hospitals and 2,119 IPPS-excluded 

hospital units. These IPPS-excluded hospitals and units include IPFs, IRFs, LTCHs, 

RNHCIs, children's hospitals, and cancer hospitals, which are paid under separate 

payment systems. Changes in the prospective payment systems for IPFs and IRFs are 

made through separate rulemaking. Payment impacts for these IPPS-excluded hospitals 

and units are not included in this proposed rule. The impact of the proposed update and 

policy changes to the LTCH PPS for FY 2012 are discussed in section IX. of this 

Appendix. 

V. Effects on Hospitals and Hospital Units Excluded From the IPPS 

 As of March 2011, there were 3,409 hospitals and hospital units excluded from 

the IPPS. Of these, 78 children's hospitals, 11 cancer hospitals, and 17 RNHCIs are 

being paid on a reasonable cost basis subject to the rate-of-increase ceiling under 

§413.40. The remaining providers, 235 rehabilitation hospitals and 940 rehabilitation 

units, and 437 LTCHs, are paid the Federal prospective per discharge rate under the IRF 

PPS and the LTCH PPS, respectively, and 512 psychiatric hospitals and 1,179 psychiatric 

units are paid the Federal per diem amount under the IPF PPS. As stated above, IRFs and 

IPFs are not affected by proposed rate updates discussed in this proposed rule. The 

impacts of the changes to LTCHs are discussed in section IX. of this Appendix. 

 In the past, certain hospitals and units excluded from the IPPS have been paid 

based on their reasonable costs subject to limits as established by the Tax Equity and 

Fiscal Responsibility Act of 1982 (TEFRA). Cancer and children's hospitals continue to 
CMS-1518-P 921 

be paid on a reasonable cost basis subject to TEFRA limits for FY 2012. For these 

hospitals (cancer and children's hospitals), consistent with the authority provided in 

section 1886(b)(3)(B)(ii) of the Act, the update is the FY 2012 percentage increase in the 

IPPS operating market basket. In compliance with section 404 of the MMA, in the 

FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43930), we replaced the 

FY 2002-based IPPS operating and capital market baskets with the revised and rebased 

FY 2006-based IPPS operating and capital market baskets. Therefore, consistent with 

current law, based on IHS Global Insight, Inc.’s 2011 first quarter forecast, with 

historical data through the 2010 fourth quarter, we are estimating that the FY 2012 update 

based on the IPPS operating market basket will be 2.8 percent (that is, the current 

estimate of the market basket rate-of-increase). However, the Affordable Care Act 

requires an adjustment for multifactor productivity (currently estimated to be -1.2 

percentage points) and a 0.1 percentage point reduction to the market basket update 

resulting in a proposed 1.5 percent applicable percentage increase for IPPS hospitals. 

RNCHIs, children's hospitals and cancer hospitals are not subject to the reduction in the 

applicable percentage increase required under the Affordable Care Act. In accordance 

with §403.752(a) of the regulations, RNHCIs are paid under §413.40. Therefore, for 

RNHCIs, the proposed update is the same as for children's and cancer hospitals, which is 

the percentage increase in the FY 2012 IPPS operating market basket, estimated to be 2.8 

percent, without the reductions required under the Affordable Care Act. 

 The impact of the proposed update in the rate-of-increase limit on those excluded 

hospitals depends on the cumulative cost increases experienced by each excluded hospital 
CMS-1518-P 922 

since its applicable base period. For excluded hospitals that have maintained their cost 

increases at a level below the rate-of-increase limits since their base period, the major 

effect is on the level of incentive payments these excluded hospitals receive. Conversely, 

for excluded hospitals with per-case cost increases above the cumulative update in their 

rate-of-increase limits, the major effect is the amount of excess costs that will not be 

reimbursed. 

 We note that, under §413.40(d)(3), an excluded hospital that continues to be paid 

under the TEFRA system and whose costs exceed 110 percent of its rate-of-increase limit 

receives its rate-of-increase limit plus 50 percent of the difference between its reasonable 

costs and 110 percent of the limit, not to exceed 110 percent of its limit. In addition, 

under the various provisions set forth in §413.40, cancer and children's hospitals can 

obtain payment adjustments for justifiable increases in operating costs that exceed the 

limit. 

VI. Quantitative Effects of the Proposed Policy Changes Under the IPPS for 

Operating Costs 

A. Basis and Methodology of Estimates

 In this proposed rule, we are announcing proposed policy changes and payment 

rate updates for the IPPS for operating costs of acute care hospitals. Updates to the 

capital payments to acute care hospitals are discussed in section VIII. of this Appendix. 

Based on the overall percentage change in payments per case estimated using our 

payment simulation model, we estimate that total FY 2012 operating payments would 

change by -0.5 percent compared to FY 2011, largely due to the documentation and 
CMS-1518-P 923 

coding adjustments and the applicable percentage increase applied to the IPPS rates. This 

amount reflects the proposed FY 2012 adjustments for documentation and coding and 

recoupment described in section II.D. of the preamble of this proposed rule: -3.15 percent 

for the IPPS national standardized amounts and -2.5 percent for the IPPS hospitalspecific rates. The impacts do not illustrate changes in hospital admissions or real 

case-mix intensity, which will also affect overall payment changes. 

 We have prepared separate impact analyses of the proposed changes to each 

system. This section deals with proposed changes to the operating inpatient prospective 

payment system for acute care hospitals. Our payment simulation model relies on the 

most recent available data to enable us to estimate the impacts on payments per case of 

certain proposed changes in this proposed rule. However, there are other proposed 

changes for which we do not have data available that would allow us to estimate the 

payment impacts using this model. For those proposed changes, we have attempted to 

predict the payment impacts based upon our experience and other more limited data. 

 The data used in developing the quantitative analyses of changes in payments per 

case presented below are taken from the FY 2010 MedPAR file and the most current 

Provider-Specific File (PSF) that is used for payment purposes. Although the analyses of 

the proposed changes to the operating PPS do not incorporate cost data, data from the 

most recently available hospital cost reports were used to categorize hospitals. Our 

analysis has several qualifications. First, in this analysis, we do not make adjustments for 

future changes in such variables as admissions, lengths of stay, or underlying growth in 

real case-mix. Second, due to the interdependent nature of the IPPS payment 
CMS-1518-P 924 

components, it is very difficult to precisely quantify the impact associated with each 

change. Third, we use various data sources to categorize hospitals in the tables. In some 

cases, particularly the number of beds, there is a fair degree of variation in the data from 

the different sources. We have attempted to construct these variables with the best 

available source overall. However, for individual hospitals, some miscategorizations are 

possible. 

 Using cases from the FY 2010 MedPAR file, we simulated payments under the 

operating IPPS given various combinations of payment parameters. As described above, 

Indian Health Service hospitals and hospitals in Maryland were excluded from the 

simulations. The impact of payments under the capital IPPS, or the impact of payments 

for costs other than inpatient operating costs, are not analyzed in this section. Estimated 

payment impacts of the capital IPPS for FY 2012 are discussed in section VIII. of this 

Appendix. 

 We discuss the following proposed changes below: 

● Effects of the application of the proposed documentation and coding 

adjustment and applicable percentage increase (including the proposed market basket 

update, the multifactor productivity adjustment and the applicable percentage reduction 

in accordance with the Affordable Care Act) to the standardized amount and 

hospital-specific rates. 

● Effects of the proposed increase to the standardized amount and hospitalspecific rates in light of D.C. Circuit’s decision in Cape Cod v. Sebelius, 630 F.3d 203 

(D.C. Cir. 2011). 
CMS-1518-P 925 

● The effects of the proposed annual reclassification of diagnoses and 

procedures, full implementation of the MS-DRG system and 100 percent cost-based 

MS-DRG relative weights. 

● The effects of the proposed changes in hospitals' wage index values reflecting 

updated wage data from hospitals' cost reporting periods beginning during FY 2008, 

compared to the FY 2007 wage data. 

● The effects of the recalibration of the MS-DRG relative weights as required by 

section 1886(d)(4)(C) of the Act, including the wage and recalibration budget neutrality 

factors. 

● The effects of the proposed geographic reclassifications by the MGCRB that 

will be effective in FY 2012. 

● The effects of the rural floor with the application of the national budget 

neutrality factor applied to the wage index, as required by the Affordable Care Act. 

● The effects of the expiration of applying an imputed floor to States that have no 

rural areas and to States that have rural areas but no IPPS hospitals are located in those 

areas. 

● The effects of the frontier wage index provision that requires that hospitals 

located in States that qualify as frontier States cannot have a wage index less than 1.0. 

This provision is not budget neutral. 

● The effects of section 505 of Pub. L. 108-173, which provides for an increase 

in a hospital's wage index if the hospital qualifies by meeting a threshold percentage of 
CMS-1518-P 926 

residents of the county where the hospital is located who commute to work at hospitals in 

counties with higher wage indexes. 

● The total estimated change in payments based on the proposed FY 2012 

policies relative to payments based on FY 2011 policies that include the applicable 

percentage increase of 1.5 percent (or 2.8 percent market basket update with a reduction 

of 1.2 percentage points for the multifactor productivity adjustment, and a 0.1 percentage 

point reduction, as required under the Affordable Care Act). 

 To illustrate the impact of the proposed FY 2012 changes, our analysis begins 

with a FY 2011 baseline simulation model using: the proposed FY 2012 applicable 

percentage increase of 1.5 percent and the proposed documentation and coding 

adjustment of -3.15 percent; the FY 2011 MS-DRG GROUPER (Version 28.0); the most 

current CBSA designations for hospitals based on OMB's MSA definitions; the FY 2011 

wage index; and no MGCRB reclassifications. Outlier payments are set at 5.1 percent of 

total operating MS-DRG and outlier payments for modeling purposes. 

 Section 1886(b)(3)(B)(viii) of the Act, as added by section 5001(a) of 

Pub. L. 109-171, as amended by section 4102(b)(1)(A) of the ARRA (Pub. L. 111-5) and 

by section 3401(a)(2) of the Affordable Care Act (Pub. L. 111-148), provides that, for 

FY 2007 through FY 2014, the update factor will include a reduction of 2.0 percentage 

points for any hospital that does not submit quality data in a form and manner and at a 

time specified by the Secretary. (Beginning in FY 2015, the reduction is one-quarter of 

such applicable percentage increase determined without regard to section 

1886(b)(3)(B)(ix), (xi), or (xii) of the Act.) At the time that this impact was prepared, 56 
CMS-1518-P 927 

hospitals did not receive the full market basket rate-of-increase for FY 2011 because they 

failed the quality data submission process or did not choose to participate. For purposes 

of the simulations shown below, we modeled the proposed payment changes for FY 2012 

using a reduced update for these 56 hospitals. However, we do not have enough 

information at this time to determine which hospitals will not receive the full update 

factor for FY 2012. 

 Each proposed policy change, statutory or otherwise, is then added incrementally 

to this baseline, finally arriving at an FY 2012 model incorporating all of the proposed 

changes. This simulation allows us to isolate the effects of each change. 

 Our final comparison illustrates the percent change in payments per case from 

FY 2011 to FY 2012. Three factors not discussed separately have significant impacts 

here. The first factor is the update to the standardized amount. In accordance with 

section 1886(b)(3)(B)(i) of the Act, we are proposing to update the standardized amounts 

for FY 2012 using an applicable percentage increase of 1.5 percent. This includes our 

forecasted IPPS operating hospital market basket increase of 2.8 percent with a proposed 

reduction of 1.2 percentage points for the multifactor productivity adjustment and a 

0.1 percentage point reduction as required under the Affordable Care Act. (Hospitals that 

fail to comply with the quality data submission requirements will receive a proposed 

update of -0.5 percent (this update includes the 2.0 percentage point reduction for failure 

to submit these data).) Under section 1886(b)(3)(B)(iv) of the Act, the proposed updates 

to the hospital-specific amounts for SCHs and for MDHs are also equal to the applicable 
CMS-1518-P 928 

percentage increase, or 1.5 percent. In addition, we are proposing to update the Puerto 

Rico-specific amount by an applicable percentage increase of 1.5 percent. 

 A second significant factor that affects the changes in hospitals' payments per 

case from FY 2011 to FY 2012 is the change in hospitals’ geographic reclassification 

status from one year to the next. That is, payments may be reduced for hospitals 

reclassified in FY 2011 that are no longer reclassified in FY 2012. Conversely, payments 

may increase for hospitals not reclassified in FY 2011 that are reclassified in FY 2012. 

A third significant factor is that we currently estimate that actual outlier payments 

during FY 2011 will be 4.9 percent of total MS-DRG payments. Our updated FY 2011 

outlier estimate accounts for changes to the FY 2011 IPPS payments required under the 

Affordable Care Act. When the FY 2011 final rule was published, we projected FY 2011 

outlier payments would be 5.1 percent of total MS-DRG plus outlier payments; the 

average standardized amounts were offset correspondingly. The effects of the lower than 

expected outlier payments during FY 2011 (as discussed in the Addendum to this 

proposed rule) are reflected in the analyses below comparing our current estimates of 

FY 2011 payments per case to estimated FY 2012 payments per case (with outlier 

payments projected to equal 5.1 percent of total MS-DRG payments). 

B. Analysis of Table I

 Table I displays the results of our analysis of the proposed changes for FY 2012. 

The table categorizes hospitals by various geographic and special payment consideration 

groups to illustrate the varying impacts on different types of hospitals. The top row of 
CMS-1518-P 929 

the table shows the overall impact on the 3,419 acute care hospitals included in the 

analysis. 

 The next four rows of Table I contain hospitals categorized according to their 

geographic location: all urban, which is further divided into large urban and other urban; 

and rural. There are 2,492 hospitals located in urban areas included in our analysis. 

Among these, there are 1,369 hospitals located in large urban areas (populations over 

1 million), and 1,123 hospitals in other urban areas (populations of 1 million or fewer). 

In addition, there are 927 hospitals in rural areas. The next two groupings are by bed-size 

categories, shown separately for urban and rural hospitals. The final groupings by 

geographic location are by census divisions, also shown separately for urban and rural 

hospitals. 

 The second part of Table I shows hospital groups based on hospitals' FY 2012 

payment classifications, including any reclassifications under section 1886(d)(10) of the 

Act. For example, the rows labeled urban, large urban, other urban, and rural show that 

the numbers of hospitals paid based on these categorizations after consideration of 

geographic reclassifications (including reclassifications under sections 1886(d)(8)(B) and 

1886(d)(8)(E) of the Act that have implications for capital payments) are 2,514; 1,382; 

1,132; and 905, respectively. 

 The next three groupings examine the impacts of the changes on hospitals 

grouped by whether or not they have GME residency programs (teaching hospitals that 

receive an IME adjustment) or receive DSH payments, or some combination of these two 

adjustments. There are 2,389 nonteaching hospitals in our analysis, 790 teaching 
CMS-1518-P 930 

hospitals with fewer than 100 residents, and 240 teaching hospitals with 100 or more 

residents. 

 In the DSH categories, hospitals are grouped according to their DSH payment 

status, and whether they are considered urban or rural for DSH purposes. The next 

category groups together hospitals considered urban or rural, in terms of whether they 

receive the IME adjustment, the DSH adjustment, both, or neither. 

 The next five rows examine the impacts of the changes on rural hospitals by 

special payment groups (SCHs, RRCs, and MDHs). There were 175 RRCs, 320 SCHs, 

195 MDHs, and 120 hospitals that are both SCHs and RRCs, and 18 hospitals that are 

both MDHs and RRCs. 

 The next series of groupings are based on the type of ownership and the hospital's 

Medicare utilization expressed as a percent of total patient days. These data were taken 

from the FY 2008 or FY 2007 Medicare cost reports. 

 The next two groupings concern the geographic reclassification status of 

hospitals. The first grouping displays all urban hospitals that were reclassified by the 

MGCRB for FY 2012. The second grouping shows the MGCRB rural reclassifications. 

The final category shows the impact of the proposed policy changes on the 19 cardiac 

hospitals. 
CMS-1518-P 931 

TABLE I.--IMPACT ANALYSIS OF PROPOSED CHANGES TO THE IPPS FOR OPERATING COS

Number of 

Hospitals1

Propose

d 

Hospital 

Rate 

Update 

and 

Docume

ntation 

and 

Coding 

Adjust

ment 2

Propose

d Cape 

Cod 

Adjust

ment3

Proposed 

FY 2012 

Weights 

and DRG 

Changes 

with 

Application 

of 

Recalibratio

n Budget 

Neutrality4

Proposed 

FY 2012 

Wage 

Data 

with 

Applicati

on of 

Wage 

Budget 

Neutralit

y5

Proposed 

FY 2012 

DRG, Rel. 

Wts., 

Wage 

Index 

Changes 

with Wage 

and 

Recalibrati

on Budget 

Neutrality6

FY 2012 

MGCRB 

Reclassific

ations7

Proposed 

Rural Floor 

with 

Application 

of National 

Rural Floor 

Budget 

Neutrality8

Expiration of 

the 

Imputed 

Floor9

Proposed 

Applicati

on of the 

Frontier 

Wage 

Index10

 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 

P

F

M

Adj

All Hospitals 3,419 -1.6 1.1 0 0 0 0 0 0 0 By Geographic Location:Urban hospitals 2,492 -1.6 1.1 0 0 0 -0.2 0 0 0 Large urban areas 1,369 -1.6 1.1 0 0 0 -0.3 0 0 0 Other urban areas 1,123 -1.6 1.1 0 0 0 -0.1 0.2 0 0.1 Rural hospitals 927 -1.3 1 0 -0.1 0 1.7 -0.2 0 0 Bed Size (Urban): 0-99 beds 634 -1.6 1.1 0.1 -0.1 -0.1 -0.5 0.2 0.1 0.1 100-199 beds 777 -1.6 1.1 0.1 0 0.1 0 0.3 0 0 200-299 beds 457 -1.6 1.1 0.1 0.2 0.2 -0.2 0 -0.1 0.1 300-499 beds 428 -1.6 1.1 0 -0.1 -0.1 -0.2 -0.1 0 0.1 500 or more beds 196 -1.6 1.1 -0.1 0.1 0 -0.3 0.1 0 0 Bed Size (Rural): 0-49 beds 317 -1.3 1 0.1 0.1 0.1 0.6 -0.2 0 0.1 
CMS-1518-P 932 

Number of 

Hospitals1

Propose

d 

Hospital 

Rate 

Update 

and 

Docume

ntation 

and 

Coding 

Adjust

ment 2

Propose

d Cape 

Cod 

Adjust

ment3

Proposed 

FY 2012 

Weights 

and DRG 

Changes 

with 

Application 

of 

Recalibratio

n Budget 

Neutrality4

Proposed 

FY 2012 

Wage 

Data 

with 

Applicati

on of 

Wage 

Budget 

Neutralit

y5

Proposed 

FY 2012 

DRG, Rel. 

Wts., 

Wage 

Index 

Changes 

with Wage 

and 

Recalibrati

on Budget 

Neutrality6

FY 2012 

MGCRB 

Reclassific

ations7

Proposed 

Rural Floor 

with 

Application 

of National 

Rural Floor 

Budget 

Neutrality8

Expiration of 

the 

Imputed 

Floor9

Proposed 

Applicati

on of the 

Frontier 

Wage 

Index10

 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 

P

F

M

Adj

50-99 beds 351 -1.3 1 0 -0.1 0 0.7 -0.2 0 0 100-149 beds 153 -1.4 1 0 -0.1 -0.1 2.3 -0.2 0.1 0 150-199 beds 60 -1.4 1 0 -0.1 -0.1 2.5 -0.2 0.1 0.1 200 or more beds 46 -1.4 1 0 -0.1 -0.1 2.6 -0.2 0 0 Urban by Region: New England 120 -1.6 1.1 0.1 0.1 0.2 0.9 5 0.1 0 Middle Atlantic 320 -1.6 1.1 0 0.3 0.3 0.3 -0.4 -0.4 0 South Atlantic 379 -1.6 1.1 0 -0.3 -0.3 -0.4 -0.3 0.1 0 East North Central 401 -1.6 1.1 0 -0.4 -0.3 -0.3 -0.3 0.1 0 East South Central 153 -1.6 1.1 0 -0.3 -0.3 -0.4 -0.2 0.1 0 West North Central 168 -1.6 1.1 0 0.3 0.2 -0.6 -0.3 0.1 0.5 West South Central 365 -1.6 1.1 0 0.4 0.4 -0.6 -0.3 0.1 0 Mountain 159 -1.5 1.1 -0.1 0 -0.1 -0.4 -0.1 0.1 0.2 Pacific 377 -1.6 1.1 0 0.2 0.2 -0.2 -0.2 0.1 0 Puerto Rico 50 -1.1 0.9 0.1 0.3 0.2 -0.8 0.1 0.1 0 
CMS-1518-P 933 

Number of 

Hospitals1

Propose

d 

Hospital 

Rate 

Update 

and 

Docume

ntation 

and 

Coding 

Adjust

ment 2

Propose

d Cape 

Cod 

Adjust

ment3

Proposed 

FY 2012 

Weights 

and DRG 

Changes 

with 

Application 

of 

Recalibratio

n Budget 

Neutrality4

Proposed 

FY 2012 

Wage 

Data 

with 

Applicati

on of 

Wage 

Budget 

Neutralit

y5

Proposed 

FY 2012 

DRG, Rel. 

Wts., 

Wage 

Index 

Changes 

with Wage 

and 

Recalibrati

on Budget 

Neutrality6

FY 2012 

MGCRB 

Reclassific

ations7

Proposed 

Rural Floor 

with 

Application 

of National 

Rural Floor 

Budget 

Neutrality8

Expiration of 

the 

Imputed 

Floor9

Proposed 

Applicati

on of the 

Frontier 

Wage 

Index10

 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 

P

F

M

Adj

Rural by Region: New England 23 -1.3 1 -0.1 0.8 0.7 1.2 -0.2 0 0 Middle Atlantic 69 -1.3 1 0 -0.1 -0.1 1.4 -0.2 0 0 South Atlantic 165 -1.4 1 0 -0.2 -0.2 2.2 -0.2 0.1 0 East North Central 120 -1.3 1 0 -0.1 -0.1 1.1 -0.2 0 0 East South Central 171 -1.5 1.1 0.1 -0.5 -0.3 2.6 -0.3 0.1 0 West North Central 99 -1.1 0.9 -0.1 0.1 0 0.7 -0.1 0 0.1 West South Central 184 -1.5 1.1 0.1 0.4 0.4 2.4 -0.3 0.1 0 Mountain 66 -1.2 1 0.1 0.1 0.2 0.5 -0.1 0 0.6 Pacific 29 -1.2 1 0 -0.4 -0.4 1.7 -0.1 0 0 Puerto Rico 1 -1 0.9 -0.2 0.7 0.3 -0.8 -0.3 0 0 By Payment Classification: Urban hospitals 2,514 -1.6 1.1 0 0 0 -0.2 0 0 0 Large urban areas 1,382 -1.6 1.1 0 0 0 -0.3 0 0 0 Other urban areas 1,132 -1.6 1.1 0 0 0 0 0.1 0 0.1 Rural areas 905 -1.3 1 0 -0.1 -0.1 1.5 -0.2 0 0 
CMS-1518-P 934 

Number of 

Hospitals1

Propose

d 

Hospital 

Rate 

Update 

and 

Docume

ntation 

and 

Coding 

Adjust

ment 2

Propose

d Cape 

Cod 

Adjust

ment3

Proposed 

FY 2012 

Weights 

and DRG 

Changes 

with 

Application 

of 

Recalibratio

n Budget 

Neutrality4

Proposed 

FY 2012 

Wage 

Data 

with 

Applicati

on of 

Wage 

Budget 

Neutralit

y5

Proposed 

FY 2012 

DRG, Rel. 

Wts., 

Wage 

Index 

Changes 

with Wage 

and 

Recalibrati

on Budget 

Neutrality6

FY 2012 

MGCRB 

Reclassific

ations7

Proposed 

Rural Floor 

with 

Application 

of National 

Rural Floor 

Budget 

Neutrality8

Expiration of 

the 

Imputed 

Floor9

Proposed 

Applicati

on of the 

Frontier 

Wage 

Index10

 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 

P

F

M

Adj

Teaching Status: Nonteaching 2,389 -1.5 1.1 0.1 0 0 0.2 0 0 0 Fewer than 100 residents 790 -1.6 1.1 0 0 0 -0.2 -0.1 -0.1 0.1 100 or more residents 240 -1.6 1.1 -0.1 0.1 0 -0.2 0.1 0 0 Urban DSH: Non-DSH 738 -1.6 1.1 0 -0.1 -0.1 0 0 -0.2 0 100 or more beds 1,543 -1.6 1.1 0 0 0 -0.2 0 0 0 Less than 100 beds 339 -1.6 1.1 0.2 -0.3 -0.1 -0.2 0.2 0.1 0.1 Rural DSH: SCH 416 -1.2 1 0 0 0 0.2 -0.1 0 0 RRC 222 -1.4 1 0 -0.1 -0.1 2.5 -0.2 0.1 0 100 or more beds 28 -1.6 1.1 0.1 -0.3 -0.1 0.5 -0.3 0.1 0 Less than 100 beds 133 -1.6 1.1 0.2 -0.1 0.2 1.4 -0.4 0.1 0 Urban teaching and DSH: Both teaching and DSH 825 -1.6 1.1 0 0 0 -0.3 0 0 0.1 Teaching and no DSH 144 -1.6 1.1 -0.1 -0.1 -0.2 0.2 0.1 -0.3 0 
CMS-1518-P 935 

Number of 

Hospitals1

Propose

d 

Hospital 

Rate 

Update 

and 

Docume

ntation 

and 

Coding 

Adjust

ment 2

Propose

d Cape 

Cod 

Adjust

ment3

Proposed 

FY 2012 

Weights 

and DRG 

Changes 

with 

Application 

of 

Recalibratio

n Budget 

Neutrality4

Proposed 

FY 2012 

Wage 

Data 

with 

Applicati

on of 

Wage 

Budget 

Neutralit

y5

Proposed 

FY 2012 

DRG, Rel. 

Wts., 

Wage 

Index 

Changes 

with Wage 

and 

Recalibrati

on Budget 

Neutrality6

FY 2012 

MGCRB 

Reclassific

ations7

Proposed 

Rural Floor 

with 

Application 

of National 

Rural Floor 

Budget 

Neutrality8

Expiration of 

the 

Imputed 

Floor9

Proposed 

Applicati

on of the 

Frontier 

Wage 

Index10

 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 

P

F

M

Adj

No teaching and DSH 1,057 -1.6 1.1 0.1 0 0.1 0 0.1 0.1 0 No teaching and no DSH 488 -1.6 1.1 0 -0.1 -0.1 -0.3 -0.2 -0.1 0 Special Hospital Types: RRC 175 -1.6 1.1 0 -0.2 -0.1 3.1 -0.3 0.1 0.1 SCH 320 -1.1 0.9 -0.1 0 -0.1 0.2 -0.1 0 0 MDH 195 -1.4 1 0 0 0.1 0.2 -0.1 0 0 SCH and RRC 120 -1.1 0.9 -0.1 0 -0.1 0.8 -0.1 0 0 MDH and RRC 18 -1.1 1 -0.1 0.1 0 0.5 -0.1 0 0 Type of Ownership: Voluntary 1,991 -1.6 1.1 0 0 0 0 0.1 0 0.1 Proprietary 850 -1.6 1.1 0.1 0.1 0.1 -0.1 -0.2 0.1 0 Government 574 -1.5 1.1 0 -0.1 -0.1 -0.1 -0.2 0.1 0 Medicare Utilization as a Percent of Inpatient Days: 0-25 359 -1.5 1.1 -0.1 0 -0.1 -0.3 -0.3 0.1 0 25-50 1,703 -1.6 1.1 0 0 0 -0.2 0 0 0.1 
CMS-1518-P 936 

Number of 

Hospitals1

Propose

d 

Hospital 

Rate 

Update 

and 

Docume

ntation 

and 

Coding 

Adjust

ment 2

Propose

d Cape 

Cod 

Adjust

ment3

Proposed 

FY 2012 

Weights 

and DRG 

Changes 

with 

Application 

of 

Recalibratio

n Budget 

Neutrality4

Proposed 

FY 2012 

Wage 

Data 

with 

Applicati

on of 

Wage 

Budget 

Neutralit

y5

Proposed 

FY 2012 

DRG, Rel. 

Wts., 

Wage 

Index 

Changes 

with Wage 

and 

Recalibrati

on Budget 

Neutrality6

FY 2012 

MGCRB 

Reclassific

ations7

Proposed 

Rural Floor 

with 

Application 

of National 

Rural Floor 

Budget 

Neutrality8

Expiration of 

the 

Imputed 

Floor9

Proposed 

Applicati

on of the 

Frontier 

Wage 

Index10

 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 

P

F

M

Adj

50-65 1,089 -1.5 1.1 0 -0.1 0 0.7 0.1 0 0 Over 65 195 -1.5 1.1 0.1 -0.1 0.1 0.5 0 -0.3 0 FY 2012 Reclassifications by the Medicare Geographic Classification Review Board: All Reclassified Hospitals 805 -1.5 1.1 0 -0.1 0 1.9 0.3 0 0 NonReclassified Hospitals 2,614 -1.6 1.1 0 0 0 -0.7 -0.1 0 0.1 Urban Hospitals Reclassified 469 -1.6 1.1 0 -0.1 0 1.6 0.5 0 0 Urban Nonreclassified Hospitals, FY 2012: 1,990 -1.6 1.1 0 0 0 -0.7 -0.1 0 0.1 All Rural Hospitals Reclassified FY 2012: 336 -1.4 1 0 -0.1 -0.1 2.7 -0.2 0.1 0 Rural Nonreclassified Hospitals FY 2012: 529 -1.3 1 0 0 0 -0.3 -0.2 0 0.1 
CMS-1518-P 937 

Number of 

Hospitals1

Propose

d 

Hospital 

Rate 

Update 

and 

Docume

ntation 

and 

Coding 

Adjust

ment 2

Propose

d Cape 

Cod 

Adjust

ment3

Proposed 

FY 2012 

Weights 

and DRG 

Changes 

with 

Application 

of 

Recalibratio

n Budget 

Neutrality4

Proposed 

FY 2012 

Wage 

Data 

with 

Applicati

on of 

Wage 

Budget 

Neutralit

y5

Proposed 

FY 2012 

DRG, Rel. 

Wts., 

Wage 

Index 

Changes 

with Wage 

and 

Recalibrati

on Budget 

Neutrality6

FY 2012 

MGCRB 

Reclassific

ations7

Proposed 

Rural Floor 

with 

Application 

of National 

Rural Floor 

Budget 

Neutrality8

Expiration of 

the 

Imputed 

Floor9

Proposed 

Applicati

on of the 

Frontier 

Wage 

Index10

 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 

P

F

M

Adj

All Section 401 Reclassified Hospitals: 40 -1.1 0.9 -0.1 0 -0.1 -0.8 0.2 0 0 Other Reclassified Hospitals (Section 1886(d)(8)(B)) 63 -1.4 1 0 0 0 2.8 -0.2 0.1 0 Specialty Hospitals Cardiac specialty Hospitals 19 -1.6 1.1 -0.1 0 -0.1 -0.8 -0.4 0.1 0.2 1 Because data necessary to classify some hospitals by category were missing, the total number of hospitals in each category may not equal the national total. Discharge 

hospital cost report data are from reporting periods beginning in FY 2009 and FY 2008. 

2 This column displays the payment impact of the proposed hospital rate update and documentation and coding adjustment including the 1.5 percent adjustment to the na

2.8 percent market basket update reduced by the proposed 1.2 percentage points for the multifactor productivity adjustment and the 0.1 percentage point reduction under the -3.15 percent documentation and coding adjustment to the national standardized amount and the proposed -2.5 documentation and coding adjustment to the hospital-s

3 This column displays the payment impact of the proposed 1.1 percent adjustment to the national standardized amount and the 0.9 percent adjustment to the hospital-spe

in Cape Cod v. Sebelius.

 4 This column displays the payment impact of the proposed changes to the Version 29.0 GROUPER and the recalibration of the MS-DRG weights based on FY 2010 Msection 1886(d)(4)(C)(iii) of the Act. This column displays the application of the recalibration budget neutrality factor of 0.998418, in accordance with section 1886(d)(5. This column displays the payment impact of the proposed update to wage index data using FY 2008 cost report data. This column displays the payment impact of the 

neutrality factor, which is calculated separately from the recalibration budget neutrality factor, and will be calculated in accordance with section 1886(d)(3)(E)(i) of the A

factor is 1.000113. 6 This column displays the combined payment impact of the proposed changes in Columns 4 through 5 and the cumulative budget neutrality factor for MS-DRG and wasection 1886(d)(4)(C)(iii) of the Act and section 1886(d)(3)(E) of the Act. The cumulative wage and recalibration budget neutrality factor of 0.998532 is the product of and the recalibration budget neutrality factor. 
CMS-1518-P 938 

7. Shown here are the effects of geographic reclassifications by the Medicare Geographic Classification Review Board (MGCRB). The effects demonstrate the FY 2012 

no reclassifications to the reclassifications scheduled to be in effect for FY 2012. Reclassification for prior years has no bearing on the payment impacts shown here. Th

geographic budget neutrality factor of 0.991528. 8 This column displays the effects of the rural floor, including the Affordable Care Act requirement that the floor budget neutrality is at a 100 percent national level adju

neutrality factor is 0.993834. 

9. This column displays the effects of the expiration of the imputed floor, finalized in the FY 2009 IPPS rule (73 FR 48570 through 48574 and 48584).

10/ This column shows the impact of the policy required under section 10324 of the Affordable Care Act that hospitals located in frontier States have a wage index no les

11. This column displays the impact of section 505 of Pub. L. 108-173, which provides for an increase in a hospital's wage index if the hospital qualifies by meeting a thr

the county where the hospital is located who commute to work at hospitals in counties with higher wage indexes. 

12. This column displays the impact of the expiration of section 508 of the MMA as extended by the MMEA, a non-budget neutral reclassification provision. 13 This column shows the proposed changes in payments from FY 2011 to FY 2012. It reflects the impact of the proposed FY 2012 hospital update, the proposed reduct

and coding effect and the proposed adjustment in light of the decision in Cape Cod v. Sebelius. The proposed FY 2012 documentation and coding adjustment is -3.15 peamounts and -2.5 percent to the hospital-specific rates. It also reflects changes in hospitals' reclassification status in FY 2012 compared to FY 2011. It incorporates all odisplayed in Columns 2, 3, 6, 7, 8, 10, 11 and 12 (the changes displayed in Columns 4 and 5 are included in Column 6). The sum of these impacts may be different from here due to rounding and interactive effects.
CMS-1518-P 939 

1. Effects of the Proposed Hospital Update and Documentation and Coding Adjustment 

(Column 2)

 As discussed in section II.D. of the preamble of this proposed rule, this column 

includes the proposed hospital update including the 2.8 percent market basket update, the 

reduction of 1.2 percentage points for the multifactor productivity adjustment and the 0.1 

percentage point reduction in accordance with the Affordable Care Act. In addition, this 

column includes the proposed FY 2012 documentation and coding adjustment of -3.15 

percent on the national standardized amount and the proposed -2.5 percent documentation 

and coding adjustment on the hospital-specific rates. As a result, we are proposing to 

apply a -1.65 percent adjustment to the national standardized amount and -1.0 percent 

adjustment to the hospital specific rate. Overall, hospitals will experience a -1.6 percent 

decrease in payments due to the effects of the hospital update and documentation and 

coding adjustment on the national standardized amount. Hospital categories that 

experience less than a 1.6 percent decrease in payments have hospitals that are paid under 

the hospital-specific rate, which is reduced by 1.0 percent. In addition, Puerto Rico 

hospitals will experience a -1.0 percent decrease in payments, a smaller decrease than 

average, because we are not proposing any documentation and coding adjustment to the 

Puerto Rico-specific rate, which is 25 percent of Puerto Rico’s payment rate. 

2. Effects of the Proposed Adjustment to the Standardized Amount for Cape Cod 

Hospital v. Sebelius (Column 3)

Column 3 shows the impact of the proposed 1.1 percent adjustment to the national 

standardized amount and the proposed 0.9 percent adjustment to the hospital-specific rate 
CMS-1518-P 940 

in light of the decision in Cape Cod Hospital v. Sebelius, as discussed in section II. of the 

Addendum to this proposed rule. 

Overall, hospitals will experience a 1.1 percent increase in payments due to the 

effects of the adjustment on the national standardized amount. Hospital categories that 

experience less than a 1.1 percent increase in payments include hospitals that are paid 

under the hospital-specific rate, which we are proposing to increase by 0.9 percent. Rural 

hospitals will experience a 1.0 percent increase in payments because many rural hospitals 

are paid under the hospital-specific rate, which we are proposing to increase by 0.9 

percent. 

3. Effects of the Proposed Changes to the MS-DRG Reclassifications and Relative 

Cost-Based Weights with Recalibration Budget Neutrality (Column 4)

 Column 4 shows the effects of the proposed changes to the MS-DRGs and 

relative weights with the application of the recalibration budget neutrality factor to the 

standardized amounts. Section 1886(d)(4)(C)(i) of the Act requires us annually to make 

appropriate classification changes in order to reflect changes in treatment patterns, 

technology, and any other factors that may change the relative use of hospital resources. 

Consistent with section 1886(d)(4)(C)(iii) of the Act, we are calculating a recalibration 

budget neutrality factor to account for the changes in MS-DRGs and relative weights to 

ensure that the overall payment impact is budget neutral. 

 As discussed in section II.E. of the preamble of this proposed rule, the FY 2012 

MS-DRG relative weights will be 100 percent cost-based and 100 percent MS-DRGs. 

For FY 2012, the proposed MS-DRGs are calculated using the FY 2010 MedPAR data 

grouped to the Version 29.0 (FY 2012) MS-DRGs. The methods of calculating the 
CMS-1518-P 941 

relative weights and the reclassification changes to the GROUPER are described in more 

detail in section II.H. of the preamble of this proposed rule. 

The "All Hospitals" line in Column 4 indicates that proposed changes due to 

MS-DRGs and relative weights will result in a 0.0 percent change in payments with the 

application of the recalibration budget neutrality factor of 0.998413 on to the 

standardized amount. The changes in payments due to the proposed MS-DRGs, relative 

weights and GROUPER are modest with no hospital category seeing an increase or 

decrease of more than 0.2 percent. 

4. Effects of Proposed Wage Index Changes (Column 5)

 Column 5 shows the impact of updated wage data with the application of the 

wage budget neutrality factor. Section 1886(d)(3)(E) of the Act requires that, beginning 

October 1, 1993, we annually update the wage data used to calculate the wage index. In 

accordance with this requirement, the proposed wage index for acute care hospitals for 

FY 2012 is based on data submitted for hospital cost reporting periods beginning on or 

after October 1, 2007 and before October 1, 2008. The estimated impact of the updated 

wage data and labor share on hospital payments is isolated in Column 5 by holding the 

other payment parameters constant in this simulation. That is, Column 5 shows the 

percentage change in payments when going from a model using the FY 2011 wage index, 

based on FY 2007 wage data, the current labor-related share and having a 100-percent 

occupational mix adjustment applied, to a model using the FY 2012 pre-reclassification 

wage index with the labor-related share, also having a 100-percent occupational mix 

adjustment applied, based on FY 2008 wage data (while holding other payment 
CMS-1518-P 942 

parameters such as use of the Version 29.0 MS-DRG GROUPER constant). The 

occupational mix adjustment is based on the 2007-2008 occupational mix survey. 

 In addition, the column shows the impact of the application of wage budget 

neutrality to the national standardized amount. In FY 2010, we began calculating 

separate wage budget neutrality and recalibration budget neutrality factors, in accordance 

with section 1886(d)(3)(E) of the Act, which specifies that budget neutrality to account 

for wage changes or updates made under that subparagraph must be made without regard 

to the 62 percent labor-related share guaranteed under section 1886(d)(3)(E)(ii) of the 

Act. Therefore, for FY 2012, we are calculating the wage budget neutrality factor to 

ensure that payments under updated wage data and the labor-related share are budget 

neutral without regard to the lower labor-related share of 62 percent applied to hospitals 

with a wage index less than or equal to 1. In other words, the wage budget neutrality is 

calculated under the assumption that all hospitals receive the higher labor-related share of 

the standardized amount. The proposed wage budget neutrality factor is 1.000113, and 

the overall payment change is 0 percent. 

 Column 5 shows the impacts of updating the wage data using FY 2008 cost 

reports. Overall, the new wage data will lead to a 0.0 percent change for all hospitals 

before being combined with the wage budget neutrality adjustment shown in Column 5. 

Among the regions, the largest increase is in the rural New England region, which 

experiences a 0.8 percent increase due to increases in the wage index among rural 

Connecticut and rural Massachusetts hospitals. The largest decline from updating the 

wage data is seen in the rural East South Central region (-0.5 percent decrease). 
CMS-1518-P 943 

 In looking at the wage data itself, the national average hourly wage increased 3.4 

percent compared to FY 2011. Therefore, the only manner in which to maintain or 

exceed the previous year's wage index was to match or exceed the national 3.4 percent 

increase in average hourly wage. Of the 3,424 hospitals with wage data for both 

FYs 2011 and 2012, 1,681, or 49.1 percent, experienced an average hourly wage increase 

of 3.4 percent or more. 

 The following chart compares the shifts in proposed wage index values for 

hospitals for FY 2012 relative to FY 2011. Among urban hospitals, 37 will experience an 

increase of more than 5 percent and less than 10 percent and 5 will experience an increase 

of more than 10 percent. Among rural hospitals, 1 will experience an increase of more 

than 5 percent and less than 10 percent, and none will experience an increase of more 

than 10 percent. However, 915 rural hospitals will experience increases or decreases of 

less than 5 percent, while 2,397 urban hospitals will experience increases or decreases of 

less than 5 percent. Fifty-six urban hospitals will experience decreases in their wage 

index values of more than 5 percent and less than 10 percent. Sixteen urban hospitals 

will experience decreases in their wage index values of greater than 10 percent. One 

rural hospital will experience a decrease of more than 10 percent. Ten rural hospitals will 

experience decreases in their wage index values of greater than 5 percent but less than 10 

percent. These figures reflect changes in the wage index which is an adjustment to either 

68.8 percent or 62 percent of the labor share of a hospital’s standardized amount, 

depending upon whether its wage index is greater than 1.0 or less than or equal to 1.0. 

Therefore, these figures illustrate a somewhat larger change in the wage index than will 

occur to the hospital’s total payment. 
CMS-1518-P 944 

 The following chart shows the projected impact for urban and rural hospitals. 

Percentage Change in Area Wage Index Values Number of Hospitals 

 Urban Rural 

Increase more than 10 percent 5 0

Increase more than 5 percent and less than 10 percent 37 1

Increase or decrease less than 5 percent 2,397 915

Decrease more than 5 percent and less than 10 percent 56 10

Decrease more than 10 percent 16 1

5. Combined Effects of the Proposed MS-DRG and Wage Index Changes (Column 6)

 Section 1886(d)(4)(C)(iii) of the Act requires that changes to MS-DRG 

reclassifications and the relative weights cannot increase or decrease aggregate payments. 

In addition, section 1886(d)(3)(E) of the Act specifies that any updates or adjustments to 

the wage index are to be budget neutral. We computed a proposed wage budget 

neutrality factor of 1.000113, and a proposed recalibration budget neutrality factor of 

0.998419 (which is applied to the Puerto Rico-specific standardized amount and the 

hospital-specific rates). The product of the two proposed budget neutrality factors is the 

proposed cumulative wage and recalibration budget neutrality factor. The proposed 

cumulative wage and recalibration budget neutrality adjustment is 0.998532, or 

approximately -0.15 percent, which is applied to the national standardized amounts. 

Because the wage budget neutrality and the recalibration budget neutrality are calculated 

under different methodologies according to the statute, when the two budget neutralities 

are combined and applied to the standardized amount, the overall payment impact is not 

necessarily budget neutral. However, in this proposed rule, we are estimating that the 

changes in the MS-DRG relative weights and updated wage data with wage and budget 

neutrality applied will result in a 0.0 change in payments. 
CMS-1518-P 945 

 We estimate that the combined impact of the proposed changes to the relative 

weights and MS-DRGs and the proposed updated wage data with budget neutrality 

applied will result in no change in payments for urban or rural hospitals. Urban West 

South Central hospitals would experience a 0.4 percent increase in payments due to 

increases in their wages compared to the national average, while the urban East South 

Central and East North Central area would experience a -0.3 decrease in payments 

because of below average increases in wages. Among the rural hospital categories, rural 

New England hospitals would experience the greatest increase in payment (0.7 percent) 

primarily due to above average increases in the wage data, while the rural Pacific area 

would experience a 0.4 percent decrease in payments due to decreases in the wage data. 

6. Effects of MGCRB Reclassifications (Column 7)

 Our impact analysis to this point has assumed acute care hospitals are paid on the 

basis of their actual geographic location (with the exception of ongoing policies that 

provide that certain hospitals receive payments on other bases than where they are 

geographically located). The changes in Column 7 reflect the per case payment impact 

of moving from this baseline to a simulation incorporating the MGCRB decisions for 

FY 2012 which affect hospitals' wage index area assignments. 

 By spring of each year, the MGCRB makes reclassification determinations that 

will be effective for the next fiscal year, which begins on October 1. The MGCRB may 

approve a hospital's reclassification request for the purpose of using another area's wage 

index value. Hospitals may appeal denials of MGCRB decisions to the CMS 

Administrator. Further, hospitals have 45 days from publication of the IPPS rule in the 
CMS-1518-P 946 

Federal Register to decide whether to withdraw or terminate an approved geographic 

reclassification for the following year. 

 The overall effect of geographic reclassification is required by section 

1886(d)(8)(D) of the Act to be budget neutral. Therefore, for the purposes of this impact 

analysis, we are applying an adjustment of 0.991528 to ensure that the effects of the 

section 1886(d)(10) reclassifications are budget neutral (section II.A. of the Addendum to 

this proposed rule). Geographic reclassification generally benefits hospitals in rural 

areas. We estimate that geographic reclassification will increase payments to rural 

hospitals by an average of 1.7 percent. By region, all the rural hospital categories, with 

the exception of the one rural Puerto Rico hospital, will experience increases in payments 

due to MGCRB reclassification. Rural hospitals in the East South Central region will 

experience a 2.6 percent increase in payments and rural hospitals in the Mountain region 

will experience a 0.5 percent increase in payments. Urban hospitals in New England and 

the Middle Atlantic will experience an increase in payments of 0.9 percent and 0.3 

percent, respectively, largely due to reclassifications of hospitals in Connecticut and New 

Jersey. 

 Table 9A listed in section VI. of the Addendum to this proposed rule and 

available via the Internet reflects the approved reclassifications for FY 2012. 

7. Effects of the Rural Floor, Including Application of National Budget Neutrality 

(Column 8)

 As discussed in section III.B. of the preamble of the FY 2009 IPPS final rule, the 

FY 2010 IPPS/RY 2010 LTCH PPS final rule, the FY 2011 IPPS/LTCH PPS final rule 

and this proposed rule, section 4410 of Pub. L. 105-33 established the rural floor by 
CMS-1518-P 947 

requiring that the wage index for a hospital in any urban area cannot be less than the 

wage index received by rural hospitals in the same State. Beginning with FY 2008, we 

apply a uniform budget neutrality adjustment is applied to the wage index. For FY 2012 

(and in FY 2011), the Affordable Care Act requires that we apply one rural floor budget 

neutrality factor to the wage index, nationally. The proposed FY 2012 rural floor budget 

neutrality factor applied to the wage index is 0.993834, which would reduce wage 

indexes by -0.62 percent. 

 Column 8 shows the projected impact of the rural floor with the national rural 

floor budget neutrality factor applied to the wage index. The column compares the 

post-reclassification FY 2012 wage index of providers before the rural floor adjustment 

and the post-reclassification FY 2012 wage index of providers with the rural floor 

adjustment. Only urban hospitals can benefit from the rural floor provision. Because the 

provision is budget neutral, all other hospitals (that is, all rural hospitals and those urban 

hospitals to which the adjustment is not made) experience a decrease in payments due to 

the budget neutrality adjustment applied nationally to their wage index. 

 We project that, in aggregate, rural hospitals will experience a -0.2 percent 

decrease in payments as a result of the application of rural floor budget neutrality because 

the rural hospitals do not benefit from the rural floor, but have their wage indexes 

downwardly adjusted to ensure that the application of the rural floor is budget neutral 

overall. We project hospitals located in other urban areas (populations of 1 million or 

fewer) will experience a 0.2 percent increase in payments because those providers benefit 

from the rural floor. Urban hospitals in the New England region can expect a 5.0 percent 

increase in payments primarily due to the application of the rural floor in Massachusetts 
CMS-1518-P 948 

and the applicable national rural floor budget neutrality as required by the Affordable 

Care Act. All 60 urban providers in Massachusetts are expected to receive the rural floor 

wage index of 1.3614. During most past years, there have been no IPPS hospitals located 

in rural areas in Massachusetts. There was one urban IPPS hospital that was reclassified 

to rural Massachusetts (under section 1886(d)(8)(E) of the Act) which established the 

Massachusetts rural floor, but the wage index resulting from that hospital’s data was not 

high enough for any urban hospital to benefit from the rural floor policy. However, 

beginning with the FY 2012 wage index, the rural floor for the State is established by the 

conversion of a CAH to an IPPS hospital that is geographically located in rural 

Massachusetts. Massachusetts hospitals can expect approximately an 8-percent increase 

in IPPS payments due to the application of rural floor. 

 Urban Puerto Rico hospitals are expected to experience a 0.1 percent increase in 

payments as a result of the application of a Puerto Rico rural floor. Similar to 

Massachusetts, this is the first year in which urban Puerto Rico hospitals will receive a 

rural floor as a result of a new IPPS hospital located in rural Puerto Rico setting a rural 

floor. We are proposing to apply a rural floor budget neutrality factor to the Puerto 

Rico-specific wage index of 0.989226 or 1.1 percent. The Puerto Rico-specific wage 

index adjusts the Puerto Rico-specific standardized amount, which represents 25 percent 

of payments to Puerto Rico hospitals. 

8. Effects of the Expiration of the Imputed Floor (Column 9)

As discussed in section III.F.2. of the preamble of this proposed rule, the imputed 

floor, which is budget neutral, is set to expire with the FY 2011 wage index, and we are 

not proposing to extend it. 
CMS-1518-P 949 

 Column 9 shows the effects of the expiration of the imputed floor. This column 

compares payments that would have been made if the imputed floor were still in place to 

payments that are estimated to be made with only the rural floor. There are 39 hospitals 

in New Jersey that are affected by the expiration of the imputed floor. Therefore, only 

urban providers in the Middle Atlantic Region (New Jersey) will experience a decrease 

by 0.4 percent, from the imputed floor no longer being applied in that State. Hospitals in 

other regional categories will experience an increase in payments as they will no longer 

have payments reduced because of the imputed floor to ensure budget neutrality. 

9. Effects of the Proposed Application of the Frontier Wage Index (Column 10)

 Section 10324(a) of Affordable Care Act requires that we establish a minimum 

post-reclassified wage-index of 1.00 for all hospitals located in “frontier States.” The 

term “frontier States” is defined in the statute as States in which at least 50 percent of 

counties have a population density less than 6 persons per square mile. Based on these 

criteria, five States (Montana, North Dakota, Nevada, South Dakota, and Wyoming) are 

considered frontier States and 47 hospitals located in those States will receive a frontier 

wage index of 1.0. This provision is not budget neutral and is estimated to increase IPPS 

operating payments by approximately $48 million. 

Urban hospitals located in the West North Central region and urban hospitals 

located in the Mountain region will experience an increase in payments by 0.5 percent 

and 0.2 percent, respectively because many of the hospitals located in this region are 

frontier hospitals. Similarly, rural hospitals located in the Mountain region and rural 

hospitals in the West North Central region will experience an increase in payments by 

0.6 percent and 0.1 percent, respectively. 
CMS-1518-P 950 

10. Effects of the Proposed Wage Index Adjustment for Out-Migration (Column 11)

 Section 1886(d)(13) of the Act, as added by section 505 of Pub. L. 108-173, 

provides for an increase in the wage index for hospitals located in certain counties that 

have a relatively high percentage of hospital employees who reside in the county, but 

work in a different area with a higher wage index. Hospitals located in counties that 

qualify for the payment adjustment are to receive an increase in the wage index that is 

equal to a weighted average of the difference between the wage index of the resident 

county, post-reclassification and the higher wage index work area(s), weighted by the 

overall percentage of workers who are employed in an area with a higher wage index. 

Overall, rural hospitals will experience a 0.1 percent increase in payments as a result of 

the outmigration adjustment. Rural providers with less than 50 beds will experience a 

0.2 percent increase in payments in FY 2012. We included these additional payments to 

providers in the impact table shown above, and we estimate the impact of these providers 

receiving the out-migration increase to be approximately $14 million. 

11. Effects of the Expiration of Section 508 (Column 12)

 Column 12 shows our estimate of the changes in payments due to the expiration 

of section 508, a non-budget neutral reclassification provision, applied under the MMEA. 

Because this provision is not budget neutral, the expiration of this reclassification 

provision results in a -0.2 percent decrease in payments, overall. Section 508 hospitals 

are generally urban hospitals, resulting in a -0.2 percent decrease in payments among the 

urban hospital category and a 0.0 percent change in payments among rural hospitals. 

Urban New England and Urban Middle Atlantic regions will experience a decrease in 

payments of -0.2 percent and -0.4 percent respectively because many section 508 
CMS-1518-P 951 

hospitals are located in those regions. Urban teaching hospitals that do not receive DSH 

will experience a -0.3 percent decrease in payments due to the expiration of section 508. 

12. Effects of All Proposed FY 2012 Changes (Column 13)

 Column 13 shows our estimate of the changes in payments per discharge from 

FY 2011 and FY 2012, resulting from all proposed changes reflected in this proposed 

rule for FY 2012. It includes combined effects of the previous columns in the table. 

 The average decrease in payments under the IPPS for all hospitals is 

approximately -0.5 percent. As discussed in section II.D. of the preamble of this 

proposed rule, this column includes the proposed FY 2012 documentation and coding 

adjustment of -3.15 percent on the national standardized amount and -2.5 percent on the 

hospital-specific rates. In addition, this column includes the proposed annual hospital 

update of 1.5 percent to the national standardized amount. This annual hospital update 

includes the 2.8 percent market basket update, the reduction of -1.2 percentage points for 

the multifactor productivity adjustment, and the -0.1 percentage point reduction under 

section 3401 of the Affordable Care Act. As described in Column 2, the proposed annual 

hospital update, combined with the proposed documentation and coding adjustment, 

results in a -1.6 percent decrease in payments in FY 2012 relative to FY 2011. As 

described in Column 3, the proposed 1.1 percent adjustment to the national standardized 

amount and the proposed 0.9 percent adjustment to the hospital specific rate in light of a 

recent court decision related to rural floor budget neutrality results in a 1.1 percent 

increase in payments in FY 2012 relative to FY 2011. In addition, column 12 describes a 

-0.2 percent decrease in payments due to the expiration of section 508 reclassifications 

that had been extended for FY 2011 under the MMEA. Section 508 was not a budget-
CMS-1518-P 952 

neutral provision. There might also be interactive effects among the various factors 

comprising the payment system that we are not able to isolate. For these reasons, the 

values in Column 13 may not equal the sum of the percentage changes described above. 

 The overall change in payments per discharge for hospitals paid under the IPPS in 

FY 2012 is estimated to decrease by -0.5 percent. The payment decreases among the 

hospital categories are largely attributed to the proposed documentation and coding 

adjustments. Hospitals in urban areas would experience an estimated -0.4 percent 

decrease in payments per discharge in FY 2012 compared to FY 2011. Hospital 

payments per discharge in rural areas are estimated to decrease by -0.8 percent in 

FY 2012 as compared to FY 2011. 

 Among urban census divisions, the largest estimated payment decreases will be 

1.2 percent in the East North Central region because many of the urban providers in this 

region had benefited from section 508 reclassifications in FY 2011 that have expired for 

FY 2012. Urban Middle Atlantic providers will experience a -0.9 percent decrease in 

payments due to the expiration of the imputed floor that had previously benefited urban 

hospitals in this region. Urban hospitals in the New England will see the largest payment 

increases (3.6 percent) because the Massachusetts hospitals are benefitting from the rural 

floor in their State. Furthermore, urban Puerto Rico hospitals will experience a 0.2 

percent increase in payments due to the application of the rural floor. 

Among the rural regions, the providers in the East South Central region will 

experience the largest decrease in payments of -1.6 percent due to decreases in wage data. 

Rural hospitals in the West North Central region will experience a decrease in payments 

by -0.2 percent, which is better than average, because the rural providers in this region 
CMS-1518-P 953 

benefit from MGCRB reclassification and the frontier State wage index provision, 

implemented under the Affordable Care Act. 

 Among special categories of hospitals, MDHs will receive an estimated payment 

decrease of -0.4 percent. MDHs are paid the higher of the IPPS rate based on the 

national standardized amount, that is, the Federal rate, or, if the hospital-specific rate 

exceeds the Federal rate, the Federal rate plus 75 percent of the difference between the 

Federal rate and the hospital-specific rate. MDHs will experience a decrease in payments 

because of the proposed documentation and coding adjustments applied to both the 

Federal rate and the hospital-specific rate. SCHs are paid the higher of their Federal rate 

and the hospital-specific rate. Overall, SCHs will experience an estimated decrease in 

payments by -1.4 percent due to the proposed documentation and coding adjustments to 

the national standardized amount and the hospital-specific rates. 

 Rural hospitals reclassified for FY 2012 are anticipated to receive a -0.6 percent 

payment decrease, and rural hospitals that are not reclassifying are estimated to receive a 

payment decrease of -1.2 percent. Urban reclassified hospitals will experience payment 

decreases better than average at -0.2 percent due to the benefits under MGCRB 

reclassification and the rural floor. Urban non-reclassified hospitals will experience a 

payment decrease of -0.5 percent. 

 Cardiac hospitals are expected to experience a payment decrease of 0.6 percent in 

FY 2012 relative to FY 2011. 

C. Impact Analysis of Table II

 Table II presents the projected impact of the proposed changes for FY 2012 for 

urban and rural hospitals and for the different categories of hospitals shown in Table I. It 
CMS-1518-P 954 

compares the estimated average payments per discharge for FY 2011 with the proposed 

payments per discharge for FY 2012, as calculated under our models. Thus, this table 

presents, in terms of the average dollar amounts paid per discharge, the combined effects 

of the proposed changes presented in Table I. The estimated percentage changes shown 

in the last column of Table II equal the estimated percentage changes in average 

payments per discharge from Column 13 of Table I. 

TABLE II.--IMPACT ANALYSIS OF PROPOSED CHANGES FOR FY 2012 

ACUTE CARE HOSPITAL OPERATING PROSPECTIVE PAYMENT SYSTEM 

(PAYMENTS PER DISCHARGE) 

Number of 

Hospitals 

Average 

FY 2011 

Payment 

Per 

Discharge 

(2) 

Average 

Proposed 

FY 2012 

Payment Per 

Discharge 

(3) 

All 

Proposed 

FY 2012 

Changes 

(4) 

All hospitals 3,419 $10,257 $10,209 -0.5 

By Geographic Location: 

 Urban hospitals 2,492 $10,667 $10,620 -0.4 

 Large urban areas (populations over 1 

million) 1,369 $11,249 $11,203 -0.4 

 Other urban areas 

(populations of 1 million or fewer) 1,123 $9,950 $9,904 -0.5 

 Rural hospitals 927 $7,656 $7,595 -0.8 

 Bed Size (Urban): 

 0-99 beds 634 $8,173 $8,149 -0.3 

 100-199 beds 777 $9,004 $8,970 -0.4 

 200-299 beds 457 $9,814 $9,777 -0.4 

 300-499 beds 428 $10,971 $10,894 -0.7 

 500 or more beds 196 $13,208 $13,176 -0.2 

 Bed Size (Rural): 

 0-49 beds 317 $6,173 $6,101 -1.2 

 50-99 beds 351 $7,134 $7,061 -1 

 100-149 beds 153 $7,545 $7,491 -0.7 

 150-199 beds 60 $8,235 $8,188 -0.6 

 200 or more beds 46 $9,485 $9,434 -0.5 

 Urban by Region: 

 New England 120 $11,138 $11,544 3.6 

 Middle Atlantic 320 $11,788 $11,679 -0.9 

 South Atlantic 379 $9,814 $9,736 -0.8 

 East North Central 401 $10,051 $9,930 -1.2 

 East South Central 153 $9,502 $9,403 -1 

 West North Central 168 $10,260 $10,245 -0.1 

 West South Central 365 $10,006 $9,999 -0.1 

 Mountain 159 $10,815 $10,763 -0.5 
CMS-1518-P 955 

Number of 

Hospitals 

Average 

FY 2011 

Payment 

Per 

Discharge 

(2) 

Average 

Proposed 

FY 2012 

Payment Per 

Discharge 

(3) 

All 

Proposed 

FY 2012 

Changes 

(4) 

 Pacific 377 $13,104 $13,059 -0.3 

 Puerto Rico 50 $5,284 $5,297 0.2 

 Rural by Region: 

 New England 23 $10,176 $10,080 -0.9 

 Middle Atlantic 69 $8,040 $8,015 -0.3 

 South Atlantic 165 $7,363 $7,316 -0.6 

 East North Central 120 $7,963 $7,920 -0.5 

 East South Central 171 $7,023 $6,907 -1.6 

 West North Central 99 $8,136 $8,123 -0.2 

 West South Central 184 $6,729 $6,645 -1.2 

 Mountain 66 $8,500 $8,460 -0.5 

 Pacific 29 $10,326 $10,281 -0.4 

 Puerto Rico 1 $2,280 $2,287 0.3 

By Payment Classification: 

 Urban hospitals 2,514 $10,652 $10,605 -0.4 

 Large urban areas (populations over 1 

million) 1,382 $11,234 $11,187 -0.4 

 Other urban areas 

(populations of 1 million or fewer) 1,132 $9,930 $9,885 -0.5 

 Rural areas 905 $7,732 $7,672 -0.8 

 Teaching Status: 

 Non-teaching 2,389 $8,591 $8,551 -0.5 

 Fewer than 100 Residents 790 $10,161 $10,103 -0.6 

 100 or more Residents 240 $15,094 $15,041 -0.4 

 Urban DSH: 

 Non-DSH 738 $8,955 $8,879 -0.9 

 100 or more beds 1,543 $11,154 $11,114 -0.4 

 Less than 100 beds

 339 $7,615 $7,586 -0.4 

 Rural DSH: 

 SCH 416 $7,120 $7,015 -1.5 

 RRC 222 $8,466 $8,427 -0.5 

 100 or more beds 28 $6,290 $6,213 -1.2 

 Less than 100 beds

 133 $5,962 $5,923 -0.6 

 Urban teaching and DSH: 

 Both teaching and DSH 825 $12,198 $12,148 -0.4 

 Teaching and no DSH 144 $9,863 $9,766 -1 

 No teaching and DSH 1,057 $9,116 $9,095 -0.2 

 No teaching and no DSH 488 $8,533 $8,463 -0.8 

 Rural Hospital Types: 

 RRC 175 $8,557 $8,486 -0.8 

 SCH 320 $8,157 $8,039 -1.4 

 MDH 195 $6,472 $6,447 -0.4 

 SCH and RRC 120 $9,414 $9,390 -0.3 

 MDH and RRC 18 $8,466 $8,442 -0.3 

Type of Ownership: 
CMS-1518-P 956 

Number of 

Hospitals 

Average 

FY 2011 

Payment 

Per 

Discharge 

(2) 

Average 

Proposed 

FY 2012 

Payment Per 

Discharge 

(3) 

All 

Proposed 

FY 2012 

Changes 

(4) 

 Voluntary 1,991 $10,381 $10,336 -0.4 

 Proprietary 850 $9,131 $9,085 -0.5 

 Government 574 $10,958 $10,885 -0.7 

 Medicare Utilization as a Percent of 

Inpatient Days: 

 0-25 359 $14,311 $14,257 -0.4 

 25-50 1,703 $10,902 $10,857 -0.4 

 50-65 1,089 $8,503 $8,446 -0.7 

 Over 65 195 $7,426 $7,381 -0.6 

Hospitals Reclassified by the 

Medicare Geographic Classification Review 

Board: 

 FY 2012 Reclassifications: 

All Reclassified Hospitals FY 2012 805 $10,011 $9,979 -0.3

All Non-Reclassified Hospitals FY 2012 2,614 $10,346 $10,292 -0.5

Urban Reclassified Hospitals FY 2012: 469 $10,735 $10,709 -0.2

Urban Non-reclassified Hospitals FY 2012 1,990 $10,665 $10,613 -0.5

Rural Reclassified Hospitals FY 2012 336 $8,246 $8,199 -0.6

Rural Nonreclassified Hospitals FY 2012: 529 $6,819 $6,738 -1.2

All Section 401 Reclassified Hospitals: 40 $8,594 $8,537 -0.7

Other Reclassified Hospitals (Section 

1886(d)(8)(B)) 63 $7,260 $7,193 -0.9

Specialty Hospitals 

 Cardiac Hospitals 19 $11,159 $11,093 -0.6

VII. Effects of Other Proposed Policy Changes 

In addition to those proposed policy changes discussed above that we are able to 

model using our IPPS payment simulation model, we are proposing to make various other 

changes in this proposed rule. Generally, we have limited or no specific data available 

with which to estimate the impacts of these proposed changes. Our estimates of the 

likely impacts associated with these other proposed changes are discussed below. 

A. Effects of Proposed Policy on HACs, Including Infections

 In section II.F. of the preamble of this proposed rule, we discuss our 

implementation of section 1886(d)(4)(D) of the Act, which requires the Secretary to 
CMS-1518-P 957 

identify conditions that are: (1) high cost, high volume, or both; (2) result in the 

assignment of a case to an MS-DRG that has a higher payment when present as a 

secondary diagnosis; and (3) could reasonably have been prevented through application 

of evidence-based guidelines. For discharges occurring on or after October 1, 2008, 

hospitals will not receive additional payment for cases in which one of the selected 

conditions was not present on admission, unless, based on data and clinical judgment, it 

cannot be determined at the time of admission whether a condition is present. That is, the 

case will be paid as though the secondary diagnosis were not present. However, the 

statute also requires the Secretary to continue counting the condition as a secondary 

diagnosis that results in a higher IPPS payment when doing the budget neutrality 

calculations for MS-DRG reclassifications and recalibration. Therefore, we will perform 

our budget neutrality calculations as though the payment provision did not apply, but 

Medicare will make a lower payment to the hospital for the specific case that includes the 

secondary diagnosis. Thus, the provision results in cost savings to the Medicare program. 

 We note that the provision will only apply when one or more of the selected 

conditions are the only secondary diagnosis or diagnoses present on the claim that will 

lead to higher payment. Medicare beneficiaries will generally have multiple secondary 

diagnoses during a hospital stay, such that beneficiaries having one MCC or CC will 

frequently have additional conditions that also will generate higher payment. Only a 

small percentage of the cases will have only one secondary diagnosis that would lead to a 

higher payment. Therefore, if at least one nonselected secondary diagnosis that leads to 

higher payment is on the claim, the case will continue to be assigned to the higher paying 

MS-DRG and there will be no Medicare savings from that case. In addition, as discussed 
CMS-1518-P 958 

in section II.F.3.e. of the preamble of this proposed rule, it is possible to have two 

severity levels where the HAC does not affect the MS-DRG assignment or for an 

MS-DRG not to have severity levels. In either of these circumstances, the case will 

continue to be assigned to the higher paying MS-DRG and there will be no Medicare 

savings from that case. 

In section II.F. of the preamble of this proposed rule, we discuss our proposal to 

add an additional HAC for FY 2012: Contrast-Induced Acute Kidney Injury. In that 

discussion, we stated that, in FY 2009, there were 38,324 inpatient discharges coded as 

acute renal failure using ICD-9-CM diagnosis code 584.9 and reported as not present on 

admission (POA status = N ) when reported with one of the above procedure codes 

submitted through Medicare claims. These cases had an average charge of $29,122 for 

the entire hospital stay. Further analysis of the FY 2009 claims showed that the average 

charge was approximately $9,122 more than the average charge for inpatient discharges 

coded as acute renal failure using ICD-9-CM diagnosis code 584.9 and reported as 

present on admission (POA status = Y ). 

 The HAC payment provision went into effect on October 1, 2008. Our savings 

estimates for the next 5 fiscal years are shown below: 

Year Savings 

(in millions) 

FY 2012 $23

FY 2013 $24

FY 2014 $26

FY 2015 $28

FY 2016 $30
CMS-1518-P 959 

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

Payments

 In section II.I. of the preamble to this proposed rule, we discuss the three 

applications for add-on payments for new medical services and technologies for 

FY 2012, as well as the status of the new technology that was approved to receive new 

technology add-on payments in FY 2011. As explained in that section, add-on payments 

for new technology under section 1886(d)(5)(K) of the Act are not required to be budget 

neutral. As discussed in section II.I.4. of the preamble of this proposed rule, we have yet 

to determine whether any of the three applications we received for consideration for new 

technology add-on payments for FY 2012 will meet the specified criteria. Consequently, 

it is premature to estimate the potential payment impact of any potential new technology 

add-on payments for FY 2012. We note that if any of the three applications are found to 

be eligible for new technology add-on payments for FY 2012 in the FY 2012 IPPS/LTCH 

PPS final rule, we would discuss the estimated payment impact for FY 2012 in that final 

rule. 

 However, because we are proposing to continue to make new technology add-on 

payments in FY 2012 for the AutoLITTTM (because the technology is still within the 3-

year anniversary of the product’s entry onto the market), we are providing an estimate of 

total payments for this technology for FY 2012. We note that new technology add-on 

payments per case are limited to the lesser of (1) 50 percent of the costs of the new 

technology or (2) 50 percent of the amount by which the costs of the case exceed the 

standard MS-DRG payment for the case. Because it is difficult to predict the actual new 

technology add-on payment for each case, our estimate below is based on the increase in 
CMS-1518-P 960 

add-on payments for FY 2012 as if every claim that would qualify for a new technology 

add-on payments would receive the maximum add-on payment. Therefore, we currently 

estimate that payments for the AutoLITTTM will increase overall FY 2012 payments by 

$900,000. For FY 2011, the applicant estimates that approximately 170 Medicare 

beneficiaries would be eligible for the AutoLITTTM. Therefore, based on the applicant’s 

estimate from FY 2011, we currently estimate that payments for the AutoLITTTM will 

increase overall FY 2012 payments by $900,000. 

C. Effects of Proposed Requirements for Hospital Inpatient Quality Reporting (IQR) 

Program

 In section VII.C. of Appendix A of the FY 2011 IPPS/LTCH PPS final rule 

(75 FR 50662 through 50663), we discussed the impact of the FY 2011 through FY 2014 

Hospital Inpatient Quality Reporting (IQR) Program requirements we adopted in that 

final rule. We estimated that 95 hospitals would not receive the full payment update in 

any fiscal year from FY 2012 through FY 2014. At the time that analysis was prepared, 

104 hospitals did not receive the full payment update in FY 2010. 

 In section IV.A. of the preamble of this proposed rule, we discuss our proposed 

requirements for hospitals to report quality data under the Hospital IQR Program in order 

to receive the full update to the standardized amount for FY 2012 through FY 2015. We 

now estimate that approximately 104 hospitals may not receive the full update in any 

fiscal year. (In this proposed rule, we are proposing to retire eight of the FY 2011 

measures for the FY 2014 payment determination. We believe that this proposal would 

not have a significant effect on our estimate.) We believe that most of these hospitals 

would be either small rural or small urban hospitals. However, at this time, information 
CMS-1518-P 961 

is not available to determine the precise number of hospitals that will not meet the 

requirements to receive the full annual percentage increase for FY 2012 through 

FY 2015. 

 In section IV.A.7. of the FY 2011 IPPS/LTCH PPS final rule (75 FR 50225 

through 50229), we established Hospital IQR validation requirements for the FY 2012 

and FY 2013 payment determinations. Beginning with the FY 2012 payment update, 

hospitals must pass our validation requirement of a minimum of 75 percent reliability, 

based upon our chart-audit validation process, for four quarters of data from the last 

quarter of CY 12011 through the third quarter of CY 2012. 

 In previous years, charts were requested by the CMS CDAC contractor and 

hospitals were given 45 days from the date of the request to submit the requested records. 

In section IV.A.6.a. of the preamble of this proposed rule and in proposed 

§412.140(d)(1), beginning with the FY 2012 we are proposing to reduce the deadline 

from 45 days to 30 days for hospitals to return requested medical record documentation 

to support our validation requirement. This may be an additional administrative burden 

to hospitals selected for validation. However, this deadline is in line with our QIO 

regulations at §476.78 and the total burden would be 18 charts for each for the four 

quarters that must be copied and mailed in a 30 day period for FY 2012 and subsequent 

years. 

 In addition, we are proposing to add a new §478.78(b)(2)(2) that will require the 

submission of medical information within 21 days in those situations in which a “serious 

reportable event” or other circumstance has been identified during the course of a QIO 

review. We do not believe this will cause a significantly higher administrative burden on 
CMS-1518-P 962 

the hospitals, since CMS reimburses providers returning medical records to QIOs at the 

rate of 12 cents per page for copying and approximately $4.00 per chart for postage. 

Given that we reimburse for the data collection effort, we believe that this proposed 

requirement represents a minimal burden to providers. We have continued our efforts to 

ensure that QIOs provide assistance to all hospitals that wish to participate in the Hospital 

IQR Program. 

 In section IV.A.6.b. of the preamble of this proposed rule, for FY 2014 payment 

determinations and subsequent years, we are proposing to add two strata to the current 

Hospital IQR validation sample of SCIP, AMI, HF, and PN cases. For the first stratum, 

we are proposing to select three cases per selected hospital per quarter to validate the 

CLABSI measure using a two step selection process that would target potential patients 

with positive infection from blood culture results and a Central Venous Catheter. The 

requirement of an additional 3 charts per hospital submitted for validation for the 

CLABSI measure would result in approximately 2,400 total additional charts per quarter 

being submitted to CMS by all selected hospitals. We reimburse hospitals for the cost of 

sending charts to the CDAC contractor at the rate of 12 cents per page for copying and 

approximately $4.00 per chart for postage. Our experience shows that the average chart 

received by the CDAC contractor is approximately 275 pages. Thus, we would expend 

approximately $88,800 per quarter to collect the additional charts we need to validate the 

CLASBI measure. Additionally, we will collect the CLABSI-specific data elements from 

all charts currently requested for Hospital IQR validation. We would validate a total of 

15 records per quarter per validated hospital in 5 strata (SCIP, AMI, HF, PN, CLABSI 

and the proposed ED/Global Immunization measure). 
CMS-1518-P 963 

 In section IV.A.6.b. of the preamble of this proposed rule, for FY 2014 and 

subsequent years, we are proposing to add a second stratum to our validation sample, 

which would enable us to validate the EDT and the Immunization for Influenza and 

Immunization for Pneumonia global measures. Thus, we would be validating a total of 

18 records per quarter per selected hospital in 6 strata ((1) SCIP, (2) AMI, (3) HF, 

(4) PN, (5) CLABSI, and (6) EDT/immunization measures). Under the assumptions 

outlined above, we would expend approximately $88,800 per quarter to collect the 

additional charts for the EDT/immunization measures. The proposed total requirement of 

18 charts per hospital (should we adopt both the proposed CLABSI validation 

requirement and the proposed EDT/immunization validation requirement) would result in 

approximately 14,400 charts per quarter being submitted to CMS. Using the assumptions 

discussed above, for the FY 2014 Hospital IQR Program, we estimate that CMS would 

have expenditures of approximately $532,800 per quarter related to the validation 

requirement. Additionally, we will collect the CLABSI-specific data and the 

EDT/Immunization data elements from all charts currently requested for Hospital IQR 

validation. We would validate a total of 18 records per quarter per validated hospital in 6 

strata (SCIP, AMI, HF, PN, CLABSI and the proposed ED/Global Immunization 

measure). We do not believe this will be an additional burden on the hospitals since this 

data will be abstracted from records already submitted. 

 Given that we reimburse for the data collection effort, we believe that a 

requirement for 18 charts per hospital per quarter represents a minimal burden to 

participating hospitals selected for validation. 
CMS-1518-P 964 

 Finally, with respect to our proposed validation requirements, we also are 

proposing for FY 2015 to select additional hospitals for validation if they were open 

under their current CCNs in FY 2012 but not selected for validation in the three previous 

annual Hospital IQR Program validation selections. This proposal could affect data 

collection costs and burdens, but we are unable to estimate any impact at this time. 

We are proposing to adjust the Hospital IQR Program data submission deadline 

from 4 1⁄2 months to 104 days. While the proposed shortened time frame may create a 

new administrative burden for hospitals, we believe that this burden is reduced because, 

many hospitals currently report AMI, HF, SCIP, and PN data to the Joint Commission 

within 4 months following a discharge quarter. We believe that our proposed 104 day 

deadline is relatively consistent with other industry submission deadlines. 

D. Effects of Additional Proposed Hospital Value-Based Purchasing (VBP) Program 

Requirements

Section 1886(o)(1)(B) of the Act directs the Secretary to begin making 

value-based incentive payments under the Hospital VBP Program to hospitals for 

discharges occurring on or after October 1, 2012. These incentive payments will be 

funded for FY 2013 through a reduction to the FY 2013 base operating MS-DRG 

payment for each discharge of 1 percent, as required by section 1886(o)(7)(B)(i) of the 

Act. The applicable percentage for FY 2014 is 1.25 percent, for FY 2015 is 1.5 percent, 

for FY 2016 is 1.75 percent, and for FY 2017 and subsequent years is 2 percent. 

 In section IV.B. of the preamble of this proposed rule, we are proposing 

additional requirements for the FY 2014 Hospital VBP Program. Specifically, we are 

proposing the addition of a Medicare Spending per Beneficiary Measure, how the 
CMS-1518-P 965 

proposed measure would be scored, and the measure’s proposed performance period and 

proposed baseline period. Because this additional measure is claims-based and is 

required for the Hospital IQR Program, its inclusion in the Hospital VBP Program does 

not result in any additional burden because the Hospital VBP Program uses data that are 

required for the Hospital IQR Program. 

E. Effects of Proposed Requirements for Hospital Readmissions Reduction Program

 In section IV.C. of the preamble of this proposed rule, we are proposing the 

selection of three high cost, high volume conditions for the Hospital Readmission 

Reduction Program FY 2013 payment reduction, and the definition of readmission for 

these conditions. We also are proposing the use of the following three measures for these 

conditions for the FY 2013 payment determination: 

● Heart failure [HF] 30-day Risk Standardized Readmission Measure 

● Acute Myocardial Infarction [AMI] 30-day Risk Standardized Readmission 

Measure 

● Pneumonia [PN] 30-day Risk Standardized Readmission Measure 

 These three risk-adjusted NQF endorsed measures will be calculated by CMS for 

hospitals subject to this provision using Medicare FFS Part A and B claims data, and 

require no submission of additional data by the hospital. Therefore, there is no data 

collection burden associated with this provision for FY 2013. These measures also are 

used under the Hospital IQR Program, and have been publicly reported on the Hospital 

Compare Web site since 2009. Therefore, there is a high degree of familiarity and 

acceptance among the stakeholder community with regard to these measures. 
CMS-1518-P 966 

 We also are proposing a methodology for calculating the Excess Readmission 

Ratio using these three measures for the FY 2013 payment determination. This would be 

defined as a ratio of the number of risk-adjusted readmissions (based on actual 

readmissions) for the given condition at a specified hospital compared with the number of 

readmissions that would be expected for an average hospital caring for the same patients. 

Below is a description of this calculation: 

Numerator – Adjusted number of readmission at specific hospital (calculated 

for each patient and add up results for all patients): 

 Hospital-specific readmission effect + average hospital contribution to 

readmission risk + [risk factor weights x patient risk factors] 

Denominator – Number of readmissions if an average hospital treated the 

same patients (calculated for each patient and summed for all patients): 

 Average hospital contribution to readmission risk + [risk factor weights x patient 

risk factors] 

 We are proposing a minimum case threshold of 25 cases for a given condition in 

order to have an Excess Readmission Ratio calculated. Using the proposed 25 case 

threshold, we have analyzed the distribution of Excess Readmission Ratio calculations on 

various types of IPPS hospitals. The results of these analyses are shown in the three 

tables below. 
CMS-1518-P 967 

Distribution of Excess Readmission Ratio for Acute Myocardial Infarction (AMI): 

AMI Readmission Distribution of Excess Readmission Ratio 

(for hospitals with greater than 25 AMI cases between July 2006-June 2009)

Percentile 

Hospital 

Characteristic 

Hospitals with 

(≥ 25 cases over 

3-year period) 

Hospitals 

with Excess 

Readmission 

Ratio 

≤ 1* 

Percentage 

of Hospitals 

with Excess 

Readmission 

Ratio 

≤ 1* 

Mean 5th 10th 25th 50th 75th 90th 

OVERALL 2,477 1,248 50.4 1.0019 0.8953 0.9238 0.9627 0.9997 1.0412 1.0795 Region**  New England 148 72 48.6 1.0060 0.9172 0.9331 0.9623 1.0049 1.0400 1.0949  Mid Atlantic 338 106 31.4 1.0325 0.9266 0.9544 0.9894 1.0292 1.0690 1.1137  South Atlantic 448 235 52.5 0.9977 0.8918 0.9207 0.9608 0.9951 1.0370 1.0717  East North Central 408 210 51.5 1.0046 0.9022 0.9260 0.9649 0.9991 1.0435 1.0884  East South Central 171 69 40.4 1.0143 0.9338 0.9467 0.9747 1.0084 1.0518 1.0803  West North Central 166 92 55.4 0.9930 0.8839 0.9190 0.9502 0.9928 1.0311 1.0710  West South Central 288 149 51.7 0.9964 0.8928 0.9225 0.9612 0.9952 1.0352 1.0632  Mountain 131 94 71.8 0.9726 0.8758 0.8913 0.9328 0.9744 1.0067 1.0511  Pacific 275 172 62.5 0.9797 0.8707 0.8979 0.9355 0.9839 1.0229 1.0591  Associated Areas 

25 9 36.0 1.0306 0.9610 0.9649 0.9846 1.0276 1.0632 1.1039 

Bed Size**  1 to 99 beds 395 220 55.7 0.9987 0.9279 0.9451 0.9710 0.9953 1.0275 1.0516  100 to 199 beds 731 358 49.0 1.0015 0.9096 0.9345 0.9646 1.0019 1.0375 1.0713  200 to 299 beds 517 272 52.6 0.9979 0.8868 0.9137 0.9541 0.9961 1.0423 1.0771  300 to 399 beds 320 164 51.3 0.9994 0.8686 0.9036 0.9507 0.9989 1.0511 1.0923  400 to 499 beds 170 78 45.9 1.0116 0.8816 0.9021 0.9610 1.0067 1.0636 1.1090  500+ beds 265 116 43.8 1.0125 0.8839 0.9007 0.9643 1.0115 1.0632 1.1139 Teaching Status**  Teaching 896 439 49.0 1.0061 0.8840 0.9121 0.9580 1.0028 1.0530 1.0992  Non-Teaching 1,502 769 51.2 0.9994 0.9058 0.9284 0.9649 0.9987 1.0353 1.0672 Urban/Rural Status**  Urban 2,279 1,146 50.3 1.0017 0.8928 0.9211 0.9615 0.9998 1.0418 1.0797  Rural 119 62 52.1 1.0061 0.9409 0.9517 0.9713 0.9966 1.0328 1.0761 * With ≥ 25 cases over 3-year period. 

** Total number of hospitals with available hospital characteristics and with > 25 cases over 3-year period equals 2,398. 

Distribution of Excess Readmission Ratio for Heart Failure (HF): 

Heart Failure Readmission Distribution of Excess Readmission Ratio 

(for hospitals with greater than 25 HF cases between July 2006-June 2009)
CMS-1518-P 968 

Percentile 

Hospital 

Characteristic 

Hospitals with 

(≥ 25 cases over 

3-year period) 

Hospitals 

with Excess 

Readmission 

Ratio 

≤ 1* 

Percentage 

of Hospitals 

with Excess 

Readmission 

Ratio 

≤ 1* 

Mean 5th 10th 25th 50th 75th 90th 

OVERALL 4,209 2,171 51.6 1.0021 0.8799 0.9108 0.9527 0.9971 1.0484 1.0991 Region**  New England 174 99 56.9 0.9933 0.8830 0.9058 0.9418 0.9879 1.0382 1.0940  Mid Atlantic 397 135 34.0 1.0376 0.9020 0.9314 0.9788 1.0354 1.0936 1.1485  South Atlantic 639 323 50.5 1.0021 0.8860 0.9097 0.9517 0.9993 1.0507 1.0962  East North Central 672 378 56.3 0.9933 0.8740 0.8983 0.9413 0.9890 1.0423 1.0937  East South Central 381 156 40.9 1.0225 0.9059 0.9291 0.9646 1.0142 1.0708 1.1313  West North Central 519 304 58.6 0.9918 0.8876 0.9174 0.9482 0.9867 1.0267 1.0730  West South Central 560 256 45.7 1.0112 0.8920 0.9212 0.9650 1.0082 1.0549 1.1052  Mountain 271 188 69.4 0.9664 0.8511 0.8789 0.9315 0.9706 1.0118 1.0435  Pacific 418 247 59.1 0.9892 0.8671 0.9035 0.9458 0.9841 1.0392 1.0823  Associated Areas 

34 12 35.3 1.0304 0.9365 0.9515 0.9877 1.0253 1.0665 1.1122 

Bed Size**  1 to 99 beds 1,755 947 54.0 0.9999 0.8980 0.9206 0.9556 0.9939 1.0394 1.0865  100 to 199 beds 983 467 47.5 1.0080 0.8833 0.9145 0.9584 1.0042 1.0517 1.1119  200 to 299 beds 547 284 51.9 1.0019 0.8647 0.8959 0.9476 0.9966 1.0565 1.1125  300 to 399 beds 337 176 52.2 1.0003 0.8626 0.8939 0.9449 0.9964 1.0586 1.1052  400 to 499 beds 176 93 52.8 0.9979 0.8501 0.8857 0.9290 0.9920 1.0596 1.1275  500+ beds 267 131 49.1 1.0004 0.8506 0.8908 0.9397 1.0017 1.0549 1.1051 Teaching Status**  Teaching 1,036 547 52.8 1.0005 0.8681 0.9001 0.9454 0.9937 1.0534 1.1085  Non-Teaching 3,029 1,551 51.2 1.0027 0.8838 0.9149 0.9554 0.9980 1.0469 1.0978 Urban/Rural Status**  Urban 3,160 1,666 52.7 0.9996 0.8742 0.9048 0.9487 0.9941 1.0476 1.1005  Rural 905 432 47.7 1.0110 0.9126 0.9312 0.9631 1.0043 1.0517 1.0984 * With ≥ 25 cases over 3-year period. 

** Total number of hospitals with available hospital characteristics and with > 25 cases over 3-year period equals 4,065. 

Distribution of Excess Readmission Ratio for Pneumonia (PN): 

Pneumonia Readmission Distribution of Excess Readmission Ratio 

(for hospitals with greater than 25 Pneumonia cases between July 2006-June 2009)

Hospital Hospitals Hospitals Percentage Percentile 
CMS-1518-P 969 

Mean 5th 10th 25th 50th 75th 90th 

OVERALL 4,450 2,351 52.8 1.0021 0.8763 0.9019 0.9435 0.9944 1.0531 1.1134 Region**  New England 178 88 49.4 1.0086 0.8750 0.9045 0.9488 1.0011 1.0603 1.1262  Mid Atlantic 399 143 35.8 1.0458 0.9021 0.9360 0.9735 1.0326 1.1033 1.1773  South Atlantic 653 301 46.1 1.0135 0.8858 0.9187 0.9586 1.0073 1.0639 1.1207  East North Central 

679 368 54.2 1.0003 0.8614 0.8907 0.9340 0.9889 1.0557 1.1231 

 East South Central 

381 132 34.6 1.0381 0.9032 0.9248 0.9719 1.0329 1.0938 1.1544 

 West North Central 

618 379 61.3 0.9831 0.8766 0.9027 0.9365 0.9785 1.0207 1.0741 

 West South Central 

590 343 58.1 0.9917 0.8682 0.8928 0.9344 0.9871 1.0399 1.0922 

 Mountain 323 236 73.1 0.9605 0.8487 0.8812 0.9187 0.9615 1.0027 1.0525  Pacific 443 273 61.6 0.9822 0.8590 0.8865 0.9369 0.9827 1.0258 1.0774  Associated Areas 36 11 30.6 1.0395 0.9343 0.9575 0.9820 1.0382 1.0819 1.1441 Bed Size**  1 to 99 beds 1,982 1,187 59.9 0.9910 0.8784 0.9019 0.9386 0.9812 1.0348 1.0914  100 to 199 beds 989 501 50.7 1.0067 0.8771 0.9044 0.9466 0.9989 1.0616 1.1199  200 to 299 beds 547 261 47.7 1.0081 0.8684 0.8920 0.9450 1.0028 1.0609 1.1270  300 to 399 beds 37 142 42.1 1.0139 0.8567 0.8933 0.9551 1.0154 1.0710 1.1370  400 to 499 beds 177 80 45.2 1.0167 0.8763 0.9194 0.9488 1.0105 1.0646 1.1383  500+ beds 268 103 38.4 1.0296 0.8579 0.9105 0.9583 1.0215 1.0819 1.1573 Teaching Status**  Teaching 1,049 470 44.8 1.0144 0.8614 0.8997 0.9492 1.0108 1.0682 1.1383  Non-Teaching 3,251 1,804 55.5 0.9981 0.8786 0.9015 0.9418 0.9892 1.0476 1.1072 Urban/Rural Status**  Urban 3,215 1,651 51.4 1.0032 0.8671 0.8953 0.9421 0.9976 1.0565 1.1182  Rural 1,085 623 57.4 0/9985 0.8924 0.9120 0.9460 0.9871 1.0405 1.1027 * With ≥ 25 cases over 3-year period. 

** Total number of hospitals with available hospital characteristics and with ≥ 25 cases over 3-year period equals 4,300. 
CMS-1518-P 970 

The three tables above show the distribution of Excess Readmission Ratios for 

AMI hospitalizations, HF hospitalizations, and PN hospitalizations respectively. The 

data for these tables come from the publicly-reported risk-standardized rates of 

readmission reported in 2010 on Hospital Compare (representing hospitalizations 

between July 2006 and June 2009). The distributions of the ratios are shown only for 

hospitals with at least 25 cases included in the measures over the 3-year period. 

 The first column of the tables lists hospital characteristics (census region, bed 

size, teaching status, and urban/rural location) and the second column shows the number 

of hospitals included in the distribution for the particular category. For example, for the 

first table, AMI readmission, a total of 2,477 hospitals had at least 25 included 

hospitalizations between July 2006 and June 2009. Of these hospitals, 148 were in the 

New England region. 

 The third and fourth columns show the number and percentage of hospitals (of 

those with 25 or more cases) in the particular category with an Excess Readmission Ratio 

less than or equal to 1; such hospitals would not have their payments adjusted due to the 

Readmission Reduction Program because they would not be found to have “excess” 

readmissions. For example in the first table, for AMI readmissions, 72 of the 148 

hospitals in the New England region (that had 25 or more AMI hospitalizations) had an 

Excess Readmission Ratio of less than or equal to 1, which means that 48.6 percent of the 

hospitals in the New England region (with at least 25 cases of AMI in 3 years) would not 

have their payments affected by the Hospital Readmission Reduction Program, whereas 
CMS-1518-P 971 

the remaining hospitals would be at risk of a payment reduction based on excess 

readmissions. 

 The following eight columns show the distribution of the excess readmissions. 

For example, for AMI, in the New England region the mean Excess Readmission Ratio is 

1.0060, the lowest 5th percentile hospitals had ratios of 0.9172 or less and the hightest 

95th percentile of hospitals had Excess Readmission Ratios of 1.1104 or greater. 

 The final column of each table shows the number of hospitals, within the given 

category, that are not included in the distribution based on sample size. For example, for 

AMI, in the New England region 30 hospitals are not included in the distribution because 

they had fewer than 25 AMI hospitalizations over the 3-year period. Currently, 25 

hospitalizations is the minimum number of hospitalizations for public reporting. 

Hospitals with fewer than 25 cases for a given condition do not have risk-standardized 

rates of readmission reported on Hospital Compare. We are proposing to use this 

threshold for inclusion in the Readmission Reduction Program. 

 Overall these analyses show, for all three conditions, that in all hospital categories 

approximately half of the hospitals are at risk of payment reductions based on excess 

readmissions. This percentage does not vary greatly by region; however for all three 

measures the Mid-Atlantic region has the lowest percentage of hospitals with Excess 

Readmission Ratios of less than or equal to 1 and, therefore, the Mid-Atlantic region is 

the region with the highest percentage of hospitals at risk of payment reduction. By 

contrast, the Mountain region has the largest percentage of hospitals with ratios of less 

than or equal to 1. The distributions do not differ greatly by bed size, though the largest 
CMS-1518-P 972 

hospitals have slightly lower percentages of hospitals with ratios less than or equal to 1 

for AMI and PN. The distributions do not vary greatly by teaching status or rural/urban 

location for any of the measures. 

 We also are proposing to publicly report the readmission rates for these three 

measures on the Hospital Compare Web site using the current processes employed for 

public reporting of these measures, which includes a preview period. We believe that this 

also poses no additional burden to hospitals, as they currently employ this system for 

Hospital IQR public reporting. 

F. Effects of Proposed Policy Changes Relating to Payment Adjustments for Medicare 

Disproportionate Share Hospitals (DSHs) and Indirect Medical Education (IME)

 In section IV.G. of the preamble of this proposed rule, we proposed to exclude 

from the hospital’s disproportionate patient percentage (DPP) of the Medicare DSH 

calculation and from the available bed day count used to calculate the DSH payment 

adjustment and the IME payment adjustments, patient days for hospice patients receiving 

in[atient hospice services in a hospital setting. For the purpose of the DSH payment 

calculation, the patient days for hospice patients receiving inpatient hospice services in 

the hospital would be excluded from both the numerator and the denominator of the 

Medicare and Medicaid fractions. As such, the impact on hospitals’ DSH payment 

adjustment would vary based on the demographic composition of an individual hospital’s 

patient population. In other words, under this proposal, some hospitals may receive 

increased DSH payment adjustments and other hospitals may expect to receive lower 
CMS-1518-P 973 

DSH payment adjustments, depending on the extent to which a hospital provides 

inpatient hospice services to hospice patients. 

The proposed change in policy to exclude from the available bed count, patient 

days for hospice patients receiving hospice services in an inpatient hospital setting only 

impacts DSH payments for limited situations. Specifically, urban hospitals with fewer 

than 100 beds or rural hospitals with fewer than 500 beds, with the exception of rural 

referral centers or MDHs, are subject to a cap of their DSH payment adjustment of 12 

percent. Thus, a decrease in the number of available beds due to the exclusion of beds 

used to provide inpatient hospice services only impacts a provider’s DSH payments if it 

results in the hospital’s bed count falling below the bed count threshold. Should a 

hospital fall below the bed count threshold, it would become subject to the Medicare 

DSH payment adjustment cap and its DSH payment could decrease. 

For IME payment purposes, a decrease in a hospital’s number of available beds 

results in an increase in the resident-to-bed ratio. The exclusion of bed days associated 

with hospice patients from the available bed count for IME would reduce the available 

beds, increase the resident-to-bed ratio, and, consequently, may increase IME payments 

to teaching hospitals depending on the extent to which these hospitals were providing 

inpatient hospice services to hospice patients. 

G. Effects of the FY 2012 Low-Volume Hospital Payment Adjustment

 As discussed in section IV.E. of the preamble to this proposed rule, we discuss the 

provisions of sections 3125 and 10314 of the Affordable Care Act that expand eligibility 

for the low-volume hospital payment adjustment at section 1886(d)(12) of the Act for 
CMS-1518-P 974 

FYs 2011 and 2012 to hospitals with less than 1,600 Medicare discharges (instead of the 

prior requirement of less than 800 total, Medicare and non-Medicare, discharges) and 

hospitals that are located more than 15 miles from other IPPS hospitals (rather than the 

prior requirement of more than 25 miles). The payment adjustment is also changed from 

an empirically determined additional 25 percent payment adjustment to qualifying 

hospitals with less than 200 total discharges (69 FR 49099 through 49102 and 

70 FR 47432 through 47434) to a continuous, linear sliding scale adjustment ranging 

from an additional 25 percent payment adjustment to qualifying hospitals with 200 or 

fewer Medicare discharges to no additional payment to hospitals with 1,600 or more 

Medicare discharges (75 FR 50241). 

Based on FY 2010 claims data (December 2010 update of the MedPAR file), we 

estimate that 492 out of the 502 hospitals in our database that qualified as a low-volume 

hospital for FY 2011 would continue to meet the Medicare discharges criterion to qualify 

as a low-volume hospital for FY 2012. For purposes of this impact analysis, we are 

assuming that all of these 492 hospitals would continue to meet the distance criterion in 

FY 2012. If all 492 hospitals qualified for the low-volume payment adjustment in 

FY 2012, we estimate that these hospitals would receive an additional estimated 

$280 million based on the proposed FY 2012 low-volume payment adjustment (described 

in section IV.E. of the preamble of this proposed rule) as compared to FY 2012 payments 

without the proposed low-volume adjustment. (As discussed in section IV.E. of the 

preamble of this proposed rule, for FY 2012, we are proposing to determine a hospital’s 
CMS-1518-P 975 

number of Medicare discharges based on the most recent update of the FY 2010 

MedPAR files (that is, the December 2010 update for this proposed rule.) 

In addition, we identified an additional 89 hospitals in our database that would 

meet the Medicare discharges criterion to qualify as a low-volume hospital for FY 2012 

based on our proposal set forth in section IV.E. of the preamble of this proposed rule. 

(We note that these 89 hospitals did not meet the discharge criterion to qualify as a 

low-volume hospital for FY 2011.) However, we are not able to estimate the number of 

these 89 hospitals that would also meet the distance criterion. The actual number of 

hospitals that would also meet the distance criterion to qualify as a low-volume hospital 

would very likely be significantly less than the estimated 89 maximum number of 

potential additional low-volume hospitals for FY 2012 (as compared to FY 2011). (We 

note that approximately 40 percent of the hospitals that met the discharge criterion for 

FY 2011 also met the mileage criterion and, therefore, are eligible to receive the 

low-volume payment adjustment in FY 2011.) If all these 89 hospitals were to qualify as 

low-volume hospitals in FY 2012, we estimate that an additional $26 million in payments 

would be made for the FY 2012 low-volume payment adjustment at section 1886(d)(12) 

of the Act. 

H. Effects of Proposed Changes Relating to MDHs

 As discussed in section IV.H. of the preamble to this proposed rule, section 3124 

of Pub. L. 111-148 extended the MDH program for 1 additional year, from the end of 

FY 2011 (that is, for discharges before October 1, 2011) to the end of FY 2012 (that is, 

for discharges before October 1, 2012). The extension had no impact on FY 2011. For 
CMS-1518-P 976 

FY 2012, the extension allows the continuation of MDH status and the payment 

methodology, for an MDH to be paid its hospital-specific rate, based on its FY 1982, 

1987, or 2002 updated costs per discharge, rather than the Federal rate, if this results in a 

greater aggregate payment. Therefore, the impact of the extension is one additional year 

of hospital-specific rate payments, when greater than Federal rate payments, for these 

hospitals as MDHs, rather than Federal rate payments for these hospitals without special 

treatment as MDHs. 

I. Effects of Proposed Policy Relating to CRNA Services Furnished in Rural Hospitals 

and CAHs

 In section IV.I. of this preamble of this proposed rule, we discuss the interim final 

rule with comment that appeared in the November 24, 2010 Federal Register

(75 FR 72256) regarding pass-through payment for CRNA services. In that interim final 

rule with comment period, we stated that we were changing the effective date of our 

policy to allow hospitals and CAHs that have reclassified as rural under 42 CFR 412.103 

to be eligible for CRNA pass-through from “cost reporting periods beginning on or after 

October 1, 2010” to “December 2, 2010.” In section IV.I. of the preamble of this 

proposed rule, we state that we intend to respond to comments received on the interim 

final rule with comment period in the FY 2012 IPPS/LTCH PPS final rule. Also in the 

interim final rule with comment (75 FR 72258), we stated that a change to the effective 

date would only affect at most a small subset of hospitals and CAHs affected by the 

change to the regulations adopted in the FY 2010 IPPS/LTCH PPS final rule and, for this 
CMS-1518-P 977 

reason, we expected the change to the effective date in the interim final rule with 

comment period to have a minor impact on Federal expenditures. 

J. Effects of Proposed Changes Relating to ESRD Add-On Payment

 In section IV.L. of the preamble of this proposed rule, we discuss our proposal to 

clarify that the term “Medicare discharges” as used in §412.104(a) refers to discharges of 

all beneficiaries entitled to Medicare Part A; that is, discharges associated with 

individuals entitled to Part A, including discharges of individuals receiving benefits under 

original Medicare, discharges of individuals whose inpatient benefits are exhausted or 

whose stay was not covered by Medicare, and discharges for individuals enrolled in 

Medicare Advantage Plans, cost contracts under section 1876 of the Act (health 

maintenance organizations (HMOs)) and competitive medical plans (CMPs). 

 We are not able to provide a detailed analysis of the impact of the clarification of 

this definition. We are not proposing any changes to the existing regulations at §412.104 

under which we will continue to provide an additional Medicare payment to a hospital for 

inpatient services provided to Medicare beneficiaries with ESRD who receive a dialysis 

treatment during a hospital stay, if the hospital has established that ESRD Medicare 

beneficiary discharges, excluding certain MS-DRGs for renal failure, admission for renal 

dialysis, and kidney transplant, where the beneficiary received dialysis services during 

the inpatient stay, are 10 percent or more of its total Medicare discharges. We note that 

this clarification could change both the denominator (total Medicare discharges) and the 

numerator (ESRD Medicare beneficiary discharges, excluding certain MS-DRGs for 

renal failure, admission for renal dialysis, and kidney transplant) associated with this 
CMS-1518-P 978 

calculation. As a result of our proposed clarification, these discharges would be included 

in the denominator of the calculation for the determination of eligibility for the ESRD 

additional payment to hospitals. Similarly, for the numerator of this calculation, we also 

would include all discharges of ESRD beneficiaries who are entitled to Medicare Part A 

and who receive inpatient dialysis, subject to the exclusions of certain MS-DRG codes 

described above. Depending on whether or not the additional discharges are for ESRD 

beneficiaries, the calculation may increase or decrease. 

K. Effects of Proposed Changes Relating to the Reporting Requirements for Pension 

Costs for Medicare Cost-Finding and Wage Reporting Purposes

In sections III.D.3. and IV.M. of the preamble of this proposed rule, we are 

proposing to revise our policy for determining pension cost for Medicare purposes. We 

are setting forth two distinct proposals: one proposal for determining and reporting 

defined benefit pension costs on the cost report for Medicare cost finding purposes and 

the other for determining and reporting defined benefit pension costs for Medicare wage 

index purposes. The allowable pension cost under the current rules and the proposed 

policies are based on the amount funded. The current rules impose an actuarially based 

limit on the allowable amount and the proposed rules limit the costs based on historical 

funding data. Because the current rules and the proposed policies are both tied to the 

amount funded, we expect that there would be minimal impact. We note that it is not 

possible to determine a precise impact for Medicare cost-finding purposes because we do 

not currently have data in the form and manner required to calculate the pension costs for 

all providers under our proposal. Moreover, because we lack these data, we are unable to 
CMS-1518-P 979 

determine a hospital-level impact for the Medicare wage index. We note that our 

proposal may result in redistribution within the Medicare wage index, but section 

1886(d)(3)(E) of the Act requires any adjustments or updates made to the Medicare wage 

index to be budget neutral. 

L. Effects of Implementation of Rural Community Hospital Demonstration Program

 In section IV.N. of the preamble of this proposed rule, we discuss our 

implementation of section 410A of Pub. L. 108-173, as amended, which, prior to the 

amendments made by the Affordable Care Act, required the Secretary to establish a 

demonstration that would modify reimbursement for inpatient services for up to 15 small 

rural hospitals. Section 410A(c)(2) requires that “[i]n conducting the demonstration 

program under this section, the Secretary shall ensure that the aggregate payments made 

by the Secretary do not exceed the amount which the Secretary would have paid if the 

demonstration program under this section was not implemented.” As discussed in section 

IV.N. of the preamble of this proposed rule, in the IPPS final rules for each of the 

previous 7 fiscal years, we have estimated the additional payments made by the program 

for each of the participating hospitals as a result of the demonstration. In order to achieve 

budget neutrality, we are proposing to adjust the national IPPS rates by an amount 

sufficient to account for the added costs of this demonstration. In other words, we are 

proposing to apply budget neutrality across the payment system as a whole rather than 

merely across the participants of this demonstration. We believe that the language of the 

statutory budget neutrality requirement permits the agency to implement the budget 

neutrality provision in this manner. The statutory language requires that “aggregate 
CMS-1518-P 980 

payments made by the Secretary do not exceed the amount which the Secretary would 

have paid if the demonstration . . . was not implemented” but does not identify the range 

across which aggregate payments must be held equal. 

 An extension of this demonstration was mandated by the Affordable Care Act. 

The demonstration is extended for an additional 5 years and expanded to include up to a 

total of 30 hospitals. We are proposing to make an adjustment in the FY 2012 IPPS final 

rule of $52,642,213 to the national IPPS rates. This amount accounts for an estimate of 

the demonstration cost for FY 2012 for the 8 hospitals that are currently participating in 

the demonstration and, in addition, an estimate of the cost of participation in the 

demonstration for the 19 additional hospitals selected to participate as a result of the 

expansion of the demonstration under the Affordable Care Act. In addition, for this 

FY 2012 proposed rule, we are proposing that the budget neutrality adjustment also 

account for any differences between the cost of the demonstration program for hospitals 

participating in the demonstration during FYs 2007 and 2008, represented by their cost 

reports beginning in FYs 2007 and 2008, and the amount that was offset by the budget 

neutrality adjustment for FYs 2007 and 2008. The estimated $52,642,213 that we are 

proposing to offset does not account for any differences between the cost of the 

demonstration program for hospitals participating in the demonstration during FYs 2007 

and 2008 and the amount that was offset by the budget neutrality adjustment for 

FYs 2007 and 2008 because the specific numeric value associated with this component of 

the proposed adjustment to the national IPPS rates cannot be known at this time. This is 

because settled cost reports beginning in FYs 2007 and 2008 of the hospitals participating 
CMS-1518-P 981 

during FYs 2007 and 2008 in the demonstration are not available yet. We anticipate that 

those settled cost reports may be available prior to the publication of the FY 2012 

IPPS/LTCH PPS final rule. To this extent that they become available prior to publication 

of the FY 2012 IPPS/LTCH PPS final rule, under our proposal these costs would be 

included in the amount to be offset by the FY 2012 budget neutrality adjustment. 

M. Effects of Proposed Changes to the List of MS-DRGs Subject to Postacute Care 

Transfer and DRG Special Pay Policy

In section IV.P. of the preamble to this proposed rule, we discuss proposed 

changes to the list of MS-DRGs subject to the postacute care transfer and DRG special 

payment policies. As reflected in Table 5 listed in section VI of the Addendum to this 

proposed rule and available via the Internet, using criteria set forth in regulation at 

§412.4, we evaluated MS-DRG charges, discharge, and transfer data to determine which 

MS-DRGs qualify for the postacute care transfer and DRG special pay policies. We note 

that we are making no proposal to change these payment policies in this FY 2012 

proposed rule. We are proposing to change the status of certain MS-DRGs as a result of 

proposals to revise the MS-DRGs for FY 2012. We are proposing to change the status of 

eight MS-DRGs to qualify for the postacute care transfer policy in FY 2012, after not 

qualifying in FY 2011. An additional five MS-DRGs that qualified under the policy in 

FY 2011 do not qualify in FY 2012, and we are proposing to change their statuses 

accordingly. Finally, three MS-DRGs now qualify for the MS-DRG special pay policy in 

FY 2012 after not qualifying in FY 2011, and we are proposing to add them to the list of 

qualifying MS-DRGs. Column 4 of Table I in this Appendix A shows the effects of the 
CMS-1518-P 982 

proposed changes to the MS-DRGs and relative weights with the application of the 

recalibration budget neutrality factor to the standardized amounts. Section 

1886(d)(4)(C)(i) of the Act requires us annually to make appropriate classification 

changes in order to reflect changes in treatment patterns, technology, and any other 

factors that may change the relative use of hospital resources. The analysis and methods 

determining the proposed changes due to the MS-DRGs and relative weights accounts for 

and includes changes in MS-DRG postacute care transfer and special pay policy statuses. 

We refer readers to section VI.D. of this Appendix for a more detailed discussion of 

payment impacts due to MS-DRG reclassification policies. 

N. Effects of Proposed Changes Relating to Hospital Services Furnished under 

Arrangements

 In section VI.B. of the preamble of this proposed rule, we are proposing to clarify 

that only diagnostic and therapeutic services (that is, ancillary services) may be provided 

outside the hospital under arrangement. Routine services must be provided in the 

hospital in which the patient is a registered inpatient. We are aware of only a few cases 

where routine services are being provided outside the hospital other than where the 

patient is a registered inpatient. Therefore, we have determined that the impact of this 

clarification is negligible. 

O. Effects of Proposed Change Relating to CAH Payment for Ambulance Services

 In section VI.C. of the preamble of this proposed rule, we discuss our proposal to 

revise the regulations at §413.70(b)(5) to state that, effective for cost reporting periods 

beginning on or after October 1, 2011, payment for ambulance services furnished by a 
CMS-1518-P 983 

CAH or by a CAH-owned entity is 101 percent of the reasonable costs of the CAH or the 

entity in furnishing those services, but only if the CAH or the entity is the only provider 

or supplier of ambulance services located within a 35-mile drive of the CAH. In 

addition, we are proposing to revise the regulations at §413.70(b)(5) to state that, 

effective for cost reporting periods beginning on or after October 1, 2011, if there is no 

provider or supplier of ambulance services located within a 35-mile drive of the CAH, 

but there is a CAH-owned and operated entity located more than a 35-mile drive from the 

CAH, the CAH owned and operated entity would be paid at 101 percent of reasonable 

cost for its ambulance services as long as that entity is the closest provider or supplier of 

ambulance services to the CAH. We believe this proposal would continue to allow for 

sufficient ambulance services to CAHs. We do not have sufficient information or data to 

determine how many CAH-owned and operated entities would qualify under the 

proposal. As a result, we are unable to quantify the financial impact of this proposed for 

payment based on 101 percent of reasonable cost. However, even those entities that do 

not qualify for payment based on 101 percent of reasonable cost would be paid for 

ambulance services under the Medicare ambulance fee schedule. 

VIII. Effects of Proposed Changes in the Capital IPPS 

A. General Considerations

 For the impact analysis presented below, we used data from the December 2010 

update of the FY 2010 MedPAR file and the December 2010 update of the 

Provider-Specific File (PSF) that is used for payment purposes. Although the analyses of 

the proposed changes to the capital prospective payment system do not incorporate cost 
CMS-1518-P 984 

data, we used the December 2010 update of the most recently available hospital cost 

report data (FYs 2008 and 2009) to categorize hospitals. Our analysis has several 

qualifications. We use the best data available and make assumptions about case-mix and 

beneficiary enrollment as described below. In addition, as discussed in section V.E. of 

the preamble to this proposed rule, we are proposing to make a -1.0 percent 

documentation and coding adjustment to the national capital rate for FY 2012 in addition 

to the -0.6 percent adjustment established for FY 2008, the -0.9 percent adjustment for 

FY 2009, and the -2.9 percent adjustment for FY 2011. This results in a proposed 

cumulative adjustment factor of 0.9479 that we applied in determining the proposed 

FY 2012 national capital rate to account for improvements in documentation and coding 

that do not reflect real changes in case mix under the MS-DRGs. We note that we 

applied a -2.6 percent documentation and coding adjustment to the Puerto Rico-specific 

capital rate in FY 2011, which reflects the entire amount of our current estimate of the 

effects of documentation for FYs 2008 and 2009 that do not reflect real changes in 

case-mix under the MS-DRGs. Therefore, we are not proposing to adjust the proposed 

Puerto Rico-specific capital rate in FY 2012 to account for changes in documentation and 

coding. 

Due to the interdependent nature of the IPPS, it is very difficult to precisely 

quantify the impact associated with each proposed change. In addition, we draw upon 

various sources for the data used to categorize hospitals in the tables. In some cases (for 

instance, the number of beds), there is a fair degree of variation in the data from different 

sources. We have attempted to construct these variables with the best available sources 
CMS-1518-P 985 

overall. However, it is possible that some individual hospitals are placed in the wrong 

category. 

 Using cases from the December 2010 update of the FY 2010 MedPAR file, we 

simulated payments under the capital IPPS for FY 2011 and FY 2012 for a comparison of 

total payments per case. Any short-term, acute care hospitals not paid under the general 

IPPS (Indian Health Service hospitals and hospitals in Maryland) are excluded from the 

simulations. 

 The methodology for determining a capital IPPS payment is set forth at §412.312. 

The basic methodology for calculating proposed capital IPPS payments in FY 2012 is as 

follows: 

 (Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for hospitals located 

in Alaska and Hawaii) x (1 + DSH Adjustment Factor + IME adjustment factor, if 

applicable). 

 In addition to the other proposed adjustments, hospitals may also receive outlier 

payments for those cases that qualify under the threshold established for each fiscal year. 

We modeled payments for each hospital by multiplying the capital Federal rate by the 

GAF and the hospital's case-mix. We then added estimated payments for indirect 

medical education, disproportionate share, and outliers, if applicable. For purposes of 

this impact analysis, the model includes the following assumptions: 

● We estimate that the Medicare case-mix index would increase by 1.0 percent in 

both FYs 2011 and 2012. 
CMS-1518-P 986 

● We estimate that the Medicare discharges would be approximately 11.8 million 

in FY 2011 and 12.2 million in FY 2012. 

● The capital Federal rate was updated beginning in FY 1996 by an analytical 

framework that considers changes in the prices associated with capital-related costs and 

adjustments to account for forecast error, changes in the case-mix index, allowable 

changes in intensity, and other factors. As discussed in section III.A.1.a. of the preamble 

of this proposed rule, the proposed update is 1.5 percent for FY 2012. 

● In addition to the proposed FY 2012 update factor, the proposed FY 2012 

capital Federal rate was calculated based on a proposed GAF/DRG budget neutrality 

factor of 1.0005, and a proposed outlier adjustment factor of 0.9406. As discussed in 

section III.A.4. of the Addendum to this proposed rule, an exceptions adjustment factor is 

not necessary in FY 2012 because there are no longer any hospitals eligible to receive 

special exceptions payments in FY 2012. However, the special exceptions adjustment 

factor was not built permanently into the capital rate; that is, was not applied 

cumulatively. Therefore, because there will be no special exceptions payments in 

FY 2012, we are only applying an adjustment to restore the special exceptions adjustment 

that was applied to the FY 2011 capital rate, that is, 1.0004 (calculated as 1/0.9996).

● For FY 2012, as discussed above and in section V.E. of the preamble to this 

proposed rule, we are proposing to apply a cumulative 0.9479 adjustment in determining 

the proposed FY 2012 national capital rate for changes in documentation and coding that 

are expected to increase case-mix under the MS-DRGs but do not reflect real case-mix 

change. This cumulative adjustment of 0.9479 reflects the proposed additional 
CMS-1518-P 987 

-1.0 percent adjustment in FY 2012 for the effects of documentation and coding in 

FYs 2008 and 2009. 

B. Results

 We used the actuarial model described above to estimate the potential impact of 

our proposed changes for FY 2012 on total capital payments per case, using a universe of 

3,419 hospitals. As described above, the individual hospital payment parameters are 

taken from the best available data, including the December 2010 update of the FY 2010 

MedPAR file, the December 2010 update to the PSF, and the most recent cost report data 

from the December 2010 update of HCRIS. In Table III, we present a comparison of 

estimated total payments per case for FY 2011 and estimated total payments per case 

proposed for FY 2012 based on the proposed FY 2012 payment policies. Column 2 

shows estimates of payments per case under our model for FY 2011. Column 3 shows 

estimates of payments per case under our model for FY 2012. Column 4 shows the total 

percentage change in payments from FY 2011 to FY 2012. The proposed change 

represented in Column 4 includes the proposed 1.5 percent update to the capital Federal 

rate and other proposed changes in the adjustments to the capital Federal rate. The 

comparisons are provided by: (1) geographic location; (2) region; and (3) payment 

classification. 

 The simulation results show that, on average, proposed capital payments per case 

in FY 2012 are expected to increase as compared to capital payments per case in 

FY 2011. The proposed capital rate for FY 2012 would increase approximately 

0.60 percent as compared to the FY 2011 capital rate. The proposed changes to the GAFs 
CMS-1518-P 988 

are expected to result, on average, in a slight decrease in capital payments for most 

regions with the following exceptions. We estimate that the GAFs will result in a slight 

increase in capital payments for the West North Central and West South Central urban 

and rural regions, as well as a slight increase for Puerto Rico and the Pacific rural region. 

The West North Central urban and rural regions include the frontier States that have a 

wage index of no less than 1.0 under the provisions of section 10324 of the Affordable 

Care Act, which creates the slight increase in capital IPPS payments for FY 2012. For 

the West South Central urban and rural regions, increases in their wage data are creating 

the estimated increase in their FY 2012 capital IPPS payments. The GAFs for hospitals 

located in Puerto Rico results in a positive effect in estimated capital IPPS payments in 

FY 2012 because of the application of a Puerto Rico rural floor--FY 2012 is the first year 

an IPPS hospital is located in rural Puerto Rico and, therefore, setting a rural floor. The 

most significant increase resulting from the proposed changes to the GAFs is for the New 

England urban region. We estimate the proposed changes to the GAFs would result in a 

3.9 percent increase in capital payments per case in FY 2012 compared to FY 2011 due 

to the application of the rural floor in Massachusetts. Previously, there had been no IPPS 

hospitals in Massachusett’s rural areas, but the conversion of a CAH in rural 

Massachusetts to an IPPS hospital has set a rural floor for that State for FY 2012. 

We also are estimating a slight decrease in outlier payments from FY 2011 to 

FY 2012 due primarily to an estimated increase in capital IPPS payments per discharge. 

Because capital payments per discharge are projected to be higher in FY 2012 compared 

to FY 2011, fewer cases would qualify for outlier payments. 
CMS-1518-P 989 

 The net impact of these proposed changes, as discussed above, is an estimated 

1.7 percent change in capital payments per discharge from FY 2011 to FY 2012 for all 

hospitals (as shown below in Table III). 

The geographic comparison shows that, on average, all hospitals, urban and rural, 

are expected to experience an increase in capital IPPS payments per case in FY 2012 as 

compared to FY 2011. Capital IPPS payments per case for urban hospitals are estimated 

to increase 1.7 percent, while rural hospitals are expected to experience a 1.4 percent 

increase. 

 The change comparisons by region shows that most urban regions would 

experience, on average, increases in capital IPPS payments of between 1.0 percent for the 

East North Central urban region, and 5.4 percent for the New England urban region. As 

discussed above, the New England urban region is estimated to have a larger than 

average increase in capital payments per case in FY 2012 as compared to FY 2011 due to 

the application of a rural floor. The rural regions show estimates of a 0.8 percent change 

in capital payments from FY 2011 to FY 2012 in the East North Central rural region to a 

3.0 percent increase for the Puerto Rico rural region. This estimated increase in capital 

IPPS payments for the Puerto Rico rural region is due to the application of a rural floor, 

as discussed above. 

By type of ownership, government hospitals are estimated to experience a 

1.6 percent increase in capital payments per case; voluntary hospitals, an estimated 1.7 

percent increase in capital payments; and proprietary hospitals, an estimated 1.8 percent 

increase in capital payments from FY 2011 to FY 2012. 
CMS-1518-P 990 

 Section 1886(d)(10) of the Act established the MGCRB. Hospitals may apply for 

reclassification for purposes of the wage index for FY 2012. Reclassification for wage 

index purposes also affects the GAFs because that factor is constructed from the hospital 

wage index. 

 To present the effects of the hospitals being reclassified for FY 2012, we show 

the average capital payments per case for reclassified hospitals for FY 2011. All 

reclassified and non-reclassified hospitals are expected to experience an increase in 

capital payments in FY 2012 as compared to FY 2011. Urban reclassified hospitals are 

estimated to experience the largest increase of 1.9 percent, while urban nonreclassified 

and rural reclassified are both estimated to have a 1.6 percent increase. For rural 

nonreclassified hospitals, the estimated increase in capital payments per case is 

1.2 percent. Other reclassified hospitals (that is, hospitals reclassified under section 

1886(d)(8)(B) of the Act) are expected to experience an increase of 0.7 percent in capital 

payments from FY 2011 to FY 2012. 

TABLE III.—COMPARISON OF TOTAL PAYMENTS PER CASE

[FY 2011 PAYMENTS COMPARED TO PROPOSED FY 2012 PAYMENTS] 

Number of 

hospitals 

Average FY 

2011 

payments/ 

case 

Proposed 

Average FY 

2012 

payments/ 

case 

Change 

By Geographic Location: 

All hospitals....................................................................................................... 3,419 787 800 1.7 

Large urban areas (populations over 1 million).................................................. 1,369 866 881 1.7 

Other urban areas (populations of 1 million of fewer) ........................................ 1,123 775 787 1.6 

Rural areas ....................................................................................................... 927 542 550 1.4 

Urban hospitals ................................................................................................. 2,492 825 839 1.7 

0-99 beds ...................................................................................................... 634 666 678 1.7 

100-199 beds ................................................................................................ 777 711 723 1.7 

200-299 beds ................................................................................................ 457 769 781 1.7 

300-499 beds ................................................................................................ 428 842 854 1.4 

500 or more beds .......................................................................................... 196 1,001 1,021 2.0 

Rural hospitals .................................................................................................. 927 542 550 1.4 

0-49 beds ...................................................................................................... 317 431 439 1.8 
CMS-1518-P 991 

TABLE III.—COMPARISON OF TOTAL PAYMENTS PER CASE

[FY 2011 PAYMENTS COMPARED TO PROPOSED FY 2012 PAYMENTS] 

Number of 

hospitals 

Average FY 

2011 

payments/ 

case 

Proposed 

Average FY 

2012 

payments/ 

case 

Change 

50-99 beds .................................................................................................... 351 499 506 1.4 

100-149 beds ................................................................................................ 153 546 554 1.5 

150-199 beds ................................................................................................ 60 598 606 1.4 

200 or more beds .......................................................................................... 46 658 667 1.3 

By Region: 

Urban by Region ............................................................................................... 2,492 825 839 1.7 

New England................................................................................................. 120 863 910 5.4 

Middle Atlantic............................................................................................... 320 879 889 1.1 

South Atlantic ................................................................................................ 379 770 781 1.3 

East North Central......................................................................................... 401 801 809 1.0 

East South Central ........................................................................................ 153 730 738 1.1 

West North Central........................................................................................ 168 816 832 1.9 

West South Central ....................................................................................... 365 780 797 2.2 

Mountain ....................................................................................................... 159 848 863 1.7 

Pacific ........................................................................................................... 377 983 1,000 1.8 

Puerto Rico ................................................................................................... 50 378 389 2.9 

Rural by Region ................................................................................................ 927 542 550 1.4 

New England................................................................................................. 23 721 728 0.9 

Middle Atlantic............................................................................................... 69 554 563 1.5 

South Atlantic ................................................................................................ 165 529 537 1.6 

East North Central......................................................................................... 120 574 579 0.8 

East South Central ........................................................................................ 171 498 503 1.1 

West North Central........................................................................................ 99 570 582 2.0 

West South Central ....................................................................................... 184 483 493 2.0 

Mountain ....................................................................................................... 66 575 582 1.3 

Pacific ........................................................................................................... 29 685 700 2.2 

Puerto Rico ................................................................................................... 1 163 168 3.0 

By Payment Classification: 

All hospitals....................................................................................................... 3,419 787 800 1.7 

Large urban areas (populations over 1 million).................................................. 1,382 865 880 1.7 

Other urban areas (populations of 1 million of fewer) ........................................ 1,132 775 788 1.6 

Rural areas ....................................................................................................... 905 544 551 1.4 

Teaching Status: 

Non-teaching................................................................................................. 2,389 671 682 1.7 

Fewer than 100 Residents............................................................................. 790 786 797 1.5 

100 or more Residents .................................................................................. 240 1,113 1,135 1.9 

Urban DSH: 

100 or more beds ...................................................................................... 1,543 849 864 1.8 

Less than 100 beds ................................................................................... 339 591 601 1.6 

Rural DSH: 

Sole Community (SCH/EACH)................................................................... 416 475 483 1.7 

Referral Center (RRC/EACH) .................................................................... 222 596 605 1.5 

Other Rural: 

100 or more beds................................................................................... 28 480 483 0.7 

Less than 100 beds ............................................................................... 133 452 458 1.3 

Urban teaching and DSH: 

Both teaching and DSH................................................................................. 825 919 935 1.7 

Teaching and no DSH................................................................................... 144 807 816 1.1 

No teaching and DSH.................................................................................... 1,057 711 724 1.9 

No teaching and no DSH............................................................................... 488 734 744 1.3 

Rural Hospital Types: 

Non special status hospitals .......................................................................... 2,396 829 843 1.7 

RRC/EACH ................................................................................................... 56 741 749 1.0 
CMS-1518-P 992 

TABLE III.—COMPARISON OF TOTAL PAYMENTS PER CASE

[FY 2011 PAYMENTS COMPARED TO PROPOSED FY 2012 PAYMENTS] 

Number of 

hospitals 

Average FY 

2011 

payments/ 

case 

Proposed 

Average FY 

2012 

payments/ 

case 

Change 

SCH/EACH ................................................................................................... 33 725 740 2.0 

Medicare-dependent hospitals (MDH) ........................................................... 12 557 569 2.0 

SCH, RRC and EACH ................................................................................... 17 769 784 1.9 

Hospitals Reclassified by the Medicare Geographic Classification Review Board:

FY2012 Reclassifications: 

All Urban Reclassified ................................................................................... 469 836 851 1.9 

All Urban Non-Reclassified............................................................................ 1,990 825 838 1.6 

All Rural Reclassified .................................................................................... 336 587 596 1.6 

All Rural Non-Reclassified............................................................................. 529 474 479 1.2 

Other Reclassified Hospitals (Section 1886(d)(8)(B)) .................................... 55 547 551 0.7 

Type of Ownership: 

Voluntary....................................................................................................... 1,991 801 814 1.7 

Proprietary .................................................................................................... 850 709 721 1.8 

Government .................................................................................................. 574 807 819 1.6 

Medicare Utilization as a Percent of Inpatient Days: 

0-25............................................................................................................... 359 1,006 1,025 1.9 

25-50............................................................................................................. 1,703 837 851 1.7 

50-65............................................................................................................. 1,089 667 676 1.4 

Over 65 ......................................................................................................... 195 580 588 1.4

IX. Effects of Proposed Payment Rate Changes and Policy Changes under the 

LTCH PPS

A. Introduction and General Considerations

 In section VII. of the preamble and section V. of the Addendum to this proposed 

rule, we set forth the annual update to the payment rates for the LTCH PPS for FY 2012. 

In the preamble, we specify the statutory authority for the proposed provisions that are 

presented, identify those proposed policies, and present rationales for our proposed 

decisions as well as alternatives that were considered. In this section of Appendix A to 

this proposed rule, we discuss the impact of the proposed changes to the payment rates, 

factors, and other payment rate policies related to the LTCH PPS that are presented in the 

preamble of this proposed rule in terms of their estimated fiscal impact on the Medicare 

budget and on LTCHs. 
CMS-1518-P 993 

Currently, our database of 422 LTCHs includes the data for 82 nonprofit 

(voluntary ownership control) LTCHs and 322 proprietary LTCHs. Of the remaining 

18 LTCHs, 12 LTCHs are government-owned and operated and the ownership type of the 

other 6 LTCHs is unknown. In the impact analysis, we used the proposed rates, factors, 

and policies presented in this proposed rule, including the proposed 1.5 percent annual 

update, which is based on the full increase of the proposed LTCH PPS market basket and 

the reductions required by sections 1886(m)(3) and (m)(4) of the Act, the proposed 

update to the MS-LTC-DRG classifications and relative weights, the proposed update to 

the wage index values and labor-related share, including the proposed application of a 

budget neutrality adjustment for changes to the area wage adjustment, and the best 

available claims and CCR data to estimate the change in payments for FY 2012. The 

proposed standard Federal rate for FY 2012 is $40,082.61. This proposed rate reflects 

the proposed 1.5 percent annual update to the standard Federal rate and the proposed area 

wage level budget neutrality factor of 0.99723, which ensures that the proposed changes 

in the wage indexes and labor-related share do not influence estimated aggregate 

payments.

Based on the best available data for the 422 LTCHs in our database, we estimate 

that the proposed update to the standard Federal rate for FY 2012 (discussed in section 

V.A.2. of the Addendum to this proposed rule) and the proposed changes to the area 

wage adjustment for FY 2012 (discussed in section V.B. of the Addendum to this 

proposed rule), in addition to an estimated increase in HCO payments and an estimated 

increase in SSO payments, would result in an increase in estimated payments from 
CMS-1518-P 994 

FY 2011 of approximately $95.0 million (or about 1.9 percent). Based on the 

422 LTCHs in our database, we estimate FY 2012 LTCH PPS payments to be 

approximately $5.233 billion, an increase from FY 2011 LTCH PPS payments which 

were approximately $5.138 billion. Because the combined distributional effects and 

estimated changes to the Medicare program payments are approximately $100 million, 

this proposed rule is considered a major economic rule, as defined in this section. We 

note the approximately $95 million for the projected increase in estimated aggregate 

proposed LTCH PPS payments from FY 2011 to FY 2012 does not reflect changes in 

LTCH admissions or case-mix intensity in estimated LTCH PPS payments, which also 

would affect overall payment changes. 

The projected 1.9 percent increase in estimated proposed payments per discharge 

from FY 2011 to FY 2012 is attributable to several factors, including the proposed 

1.5 percent annual update to the standard Federal rate, and projected increases in 

proposed estimated HCO and SSO payments. As Table IV shows, the change 

attributable solely to the proposed update to the standard Federal rate is projected to 

result in an increase of 1.3 percent in estimated payments per discharge from FY 2011 to 

FY 2012, on average, for all LTCHs. Because we are proposing to apply an area wage 

level budget neutrality factor to the standard Federal rate, the proposed update to the 

wage data and labor-related share does not impact the proposed increase in payments. 

As discussed in section V.B. of the Addendum to this proposed rule, we are 

proposing to update the wage index values for FY 2012 based on the most recent 

available data. In addition, we are proposing a decrease in the labor-related share from 
CMS-1518-P 995 

75.271 percent to 70.334 percent under the LTCH PPS for FY 2012, based on the most 

recent available data on the relative importance of the proposed labor-related share of 

operating and capital costs of the proposed FY 2008-based RPL market basket. We also 

are proposing to apply an area wage level budget neutrality factor to the standard Federal 

rate to ensure that annual changes to the area wage level adjustment (that is, the wage 

index and labor-related changes) are budget neutral. We are proposing an area wage 

level budget neutrality factor of 0.99723, which reduces the proposed standard Federal 

rate by 0.28 percent. Therefore, the proposed changes to the wage data and labor-related 

share do not result in a change in aggregate LTCH PPS payments. 

Table IV below shows the impact of the proposed payment rate and proposed 

policy changes on LTCH PPS payments for FY 2012 presented in this proposed rule by 

comparing estimated FY 2011 payments to estimated FY 2012 payments. The projected 

increase in payments per discharge from FY 2011 to FY 2012 is 1.9 percent (shown in 

Column 8). This projected increase in payments is attributable to the impacts of the 

proposed change to the standard Federal rate (1.3 percent in Column 6), as well as the 

effect of the estimated increase in payments for HCO cases and SSO cases in FY 2012 as 

compared to FY 2011 (0.2 percent and 0.3 percent, respectively). That is, estimated total 

HCO payments are projected to increase from FY 2011 to FY 2012 in order to ensure that 

estimated HCO payments would be 8 percent of the total estimated LTCH PPS payments 

in FY 2012. An analysis of the most recent available LTCH PPS claims data (that is, 

FY 2010 claims data from the December 2010 update of the MedPAR file) indicates that 

the FY 2011 HCO threshold of $18,785 (as established in the FY 2011 IPPS/LTCH PPS 
CMS-1518-P 996 

final rule) may result in HCO payments in FY 2011 that fall slightly below the estimated 

8 percent. Specifically, we currently estimate that HCO payments would be 

approximately 7.8 percent of the estimated total LTCH PPS payments in FY 2011. We 

estimate that the impact of the increase in HCO payments would result in approximately 

a 0.2 percent increase in estimated payments from FY 2011 to FY 2012, on average, for 

all LTCHs. Furthermore, in calculating the estimated increase in payments from 

FY 2011 to FY 2012 for HCO and SSO cases, we increased estimated costs by the 

applicable market basket percentage increase as projected by our actuaries, which 

increases estimated payments by 0.3 percent relative to last year. We note that estimated 

payments for all SSO cases comprise approximately 13 percent of the estimated total 

LTCH PPS payments, and estimated payments for HCO cases comprise approximately 

8 percent of the estimated total LTCH PPS payments. Payments for HCO cases are based 

on 80 percent of the estimated cost of the case above the HCO threshold, while the 

majority of the payments for SSO cases (over 65 percent) are based on the estimated cost 

of the SSO case. 

 As we discuss in detail throughout this proposed rule, based on the most recent 

available data, we believe that the provisions of this proposed rule relating to the 

LTCH PPS would result in an increase in estimated aggregate LTCH PPS payments and 

that the resulting LTCH PPS payment amounts would result in appropriate Medicare 

payments. 
CMS-1518-P 997 

B. Impact on Rural Hospitals

 For purposes of section 1102(b) of the Act, we define a small rural hospital as a 

hospital that is located outside of an urban area and has fewer than 100 beds. As shown 

in Table IV, we are projecting a 2.8 percent increase in estimated payments per discharge 

for FY 2012 as compared to FY 2011 for rural LTCHs that would result from the 

proposed changes presented in this proposed rule, as well as the effect of estimated 

changes to HCO and SSO payments. This estimated impact is based on the data for the 

26 rural LTCHs in our database (out of 422 LTCHs) for which complete data were 

available. 

The estimated increase in LTCH PPS payments from FY 2011 to FY 2012 for 

rural LTCHs is primarily due to the higher than average impacts from the proposed 

changes to the area wage level adjustment, specifically, the proposed reduction to the 

labor-related share from 75.271 to 70.334. Although we are proposing to apply an area 

wage level budget neutrality factor for proposed changes to the wage indexes and 

labor-related share to ensure that there is no change in aggregate LTCH PPS payments 

due to those changes, we estimate rural hospitals would experience a 0.8 percent increase 

in payments due to the proposed changes to the area wage level adjustment, as shown in 

Column 7 below. Rural hospitals generally have a wage index of less than 1; therefore, a 

proposed decrease to the labor-related share results in their proposed wage index 

reducing a smaller portion of the standard Federal rate, resulting in an estimated increase 

in payments in FY 2012 as compared to FY 2011. 
CMS-1518-P 998 

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

Changes

1. Budgetary Impact 

Section 123(a)(1) of the BBRA requires that the PPS developed for LTCHs 

“maintain budget neutrality.” We believe that the statute’s mandate for budget neutrality 

applies only to the first year of the implementation of the LTCH PPS (that is, FY 2003). 

Therefore, in calculating the FY 2003 standard Federal rate under §412.523(d)(2), we set 

total estimated payments for FY 2003 under the LTCH PPS so that estimated aggregate 

payments under the LTCH PPS were estimated to equal the amount that would have been 

paid if the LTCH PPS had not been implemented. 

As discussed above in section IX.A. of this Appendix, we project an increase in 

aggregate LTCH PPS payments in FY 2012 of approximately $95 million (or 1.9 percent) 

based on the 422 LTCHs in our database. 

2. Anticipated Effects of Proposed Requirements for LTCH Quality Reporting Program 

 In section VII.C. of the preamble of this proposed rule, we discuss our proposed 

requirements for LTCHs to report quality data under the LTCH quality reporting 

program. As set forth at section 1886(m)(5)(A) of the Act, beginning with FY 2014, the 

Secretary must reduce by 2.0 percentage points any annual update to the standard Federal 

rate for discharges for any LTCH which does not comply with the LTCH quality data 

submission requirements. When the policy is implemented for FY 2014, we estimate that 

few LTCHs would not receive the full payment update in any fiscal year. We believe 

that most of these LTCHs would be either small rural or small urban LTCHs. However, 
CMS-1518-P 999 

at this time, information is not available to determine the precise number of LTCHs that 

will not meet the requirements for the full hospital market basket increase for FY 2014. 

 In section VII.C. of the preamble of this proposed rule, we are proposing three 

quality reporting measure for LTCHs for FY 2014: (1) Catheter-Associated Urinary 

Tract Infections (CAUTI); (2) Central Line Catheter-Associated Blood Stream Infection 

Event (CLABSI); and (3) Pressure Ulcers that are New or Have Worsened. We estimate 

that the total LTCH costs to report these data, including: NHSN registration and training 

for the CAUTI and CLABSI quality measures; data submission for all three measures, 

and monitoring data submission to be $1,128,440.

3. Impact of Proposed Application of LTCH Moratorium on the Increase in Beds at 

Section 114(d)(1)(B) of Pub. L. 110-173 (MMSEA) to LTCHs and LTCH Satellite 

Facilities Established or Classified as such under Section 114(d)(1)(B) of 

Pub. L. 110-173 

As discussed in section VII.F. of the preamble of this proposed rule, at proposed 

§412.23(e)(8), for the period beginning October 1, 2011, and ending December 28, 2012, 

we are proposing to apply the moratorium on the increase in the number of beds under 

section 114(d)(1)(B) of the MMSEA, and specified in paragraph (e)(7) to LTCHs and 

LTCH satellite facilities that were established or classified as such after the 

December 29, 2007 under one of the exceptions to the moratorium at section 114(d)(2) of 

the MMSEA, as set forth in paragraph (e)(6)(ii). The proposed regulation precludes an 

LTCH or LTCH satellite that was developed under an exception to the establishment of 

new LTCHs and LTCH satellites from increasing the number of Medicare-certified beds 
CMS-1518-P 1000 

beyond the initial number for which the facility was first paid under the LTCH PPS. 

Approximately 50 LTCHs and 8 satellite facilities were developed under the exceptions 

at §412.23(e)(6)(ii). Because additional increases in the number of LTCH beds in these 

facilities could result in added costs to the Medicare program, the impact of precluding 

additional growth in the number of Medicare certified beds in these facilities is expected 

to result in no additional spending under the Medicare program from these LTCHs and 

LTCH satellites. 

4. Impact of the Proposed Clarification to the Greater than 25 Day Average Length of 

Stay Requirement for LTCHs 

 In section VII.E.5. of the preamble of this proposed rule, we have proposed two 

clarifications to our existing policy for determining whether a hospital is meeting the 

greater than 25 day average length of stay requirement for payment under the LTCH PPS. 

First, we are proposing to clarify and revise the regulations at §412.23(e)(3)(iv) dealing 

with the average length of stay determination when there is a change of ownership of 

either a hospital seeking to qualify as an LTCH or of an existing LTCH. Second, we 

describe, and are proposing to clarify, our existing policy regarding the inclusion of 

Medicare Advantage days in the average length of stay calculation. Because typically 

LTCHs track the lengths of stay of their Medicare patients on an on-going basis for 

purposes of maintaining their LTCH status and Medicare contractors are already tasked 

with evaluating each LTCH’s average length of stay, we do not believe that there is any 

actual impact resulting from the clarification of these existing policies nor do they impose 

any additional burdens on either LTCHs or Medicare contractors. 
CMS-1518-P 1001 

5. Impact on Providers 

The basic methodology for determining a per discharge LTCH PPS payment is set 

forth in §412.515 through §412.536. In addition to the basic MS-LTC-DRG payment 

(the standard Federal rate multiplied by the MS-LTC-DRG relative weight), we make 

adjustments for differences in area wage levels, the COLA for Alaska and Hawaii, and 

SSOs. Furthermore, LTCHs may also receive HCO payments for those cases that qualify 

based on the threshold established each year. 

To understand the impact of the proposed changes to the LTCH PPS payments 

presented in this proposed rule on different categories of LTCHs for FY 2012, it is 

necessary to estimate payments per discharge for FY 2011 using the rates, factors 

(including the FY 2011 GROUPER (Version 28.0), and relative weights and the policies 

established in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50364 through 50400 and 

50442 through 50449). It is also necessary to estimate the payments per discharge that 

would be made under the proposed LTCH PPS rates, factors, policies, and GROUPER 

(proposed Version 29.0) for FY 2012 (as discussed in VII. of the preamble and section V. 

of the Addendum to this proposed rule). These estimates of FY 2011 and FY 2012 

LTCH PPS payments are based on the best available LTCH claims data and other factors, 

such as the application of inflation factors to estimate costs for SSO and HCO cases in 

each year. We also evaluated the proposed change in estimated FY 2011 payments to 

estimated FY 2012 payments (on a per discharge basis) for each category of LTCHs. 

Hospital groups were based on characteristics provided in the OSCAR data, 

FY 2008 through FY 2009 cost report data in HCRIS, and PSF data. Hospitals with 
CMS-1518-P 1002 

incomplete characteristics were grouped into the “unknown” category. Hospital groups 

include the following: 

● Location: large urban/other urban/rural. 

● Participation date. 

● Ownership control. 

● Census region. 

● Bed size. 

 To estimate the impacts of the proposed payment rates and policy changes among 

the various categories of existing providers, we used LTCH cases from the FY 2010 

MedPAR file to estimate payments for FY 2011 and to estimate payments for FY 2012 

for 422 LTCHs. We believe that the discharges based on the FY 2010 MedPAR data for 

the 422 LTCHs in our database, which includes 322 proprietary LTCHs, provide 

sufficient representation in the MS-LTC-DRGs containing discharges for patients who 

received LTCH care for the most commonly treated LTCH patients' diagnoses. 

6. Calculation of Prospective Payments 

For purposes of this impact analysis, to estimate per discharge payments under the 

LTCH PPS, we simulated payments on a case-by-case basis using LTCH claims from the 

FY 2010 MedPAR files. For modeling estimated LTCH PPS payments for FY 2011, we 

applied the FY 2011 standard Federal rate (that is, $39,599.95, under which LTCH 

discharges occurring on or after October 1, 2010, to September 30, 2011 are paid). For 

modeling estimated LTCH PPS payments for FY 2012, we applied the proposed FY 2012 

standard Federal rate of $40,082.61, which would be effective for LTCH discharges 
CMS-1518-P 1003 

occurring on or after October 1, 2011, and through September 30, 2012. The proposed 

FY 2012 standard Federal rate of $40,082.61 includes the proposed application of an area 

wage level budget neutrality factor of 0.99723 (as discussed in section VII.E.4. of the 

preamble of this proposed rule). 

Furthermore, in modeling estimated LTCH PPS payments for both FY 2011 and 

FY 2012 in this impact analysis, we applied the FY 2011 and the proposed FY 2012 

adjustments for area wage levels and the proposed COLA for Alaska and Hawaii. 

Specifically, we adjusted for differences in area wage levels in determining estimated 

FY 2011 payments using the current LTCH PPS labor-related share of 75.271 percent 

(75 FR 50445) and the wage index values established in the Tables 12A and 12B of the 

Addendum to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50627 through 50646). 

We also applied the FY 2011 COLA factors shown in the table in section V.B.5. of the 

Addendum to that final rule (75 FR 50446) to the FY 2011 nonlabor-related share 

(24.729 percent) for LTCHs located in Alaska and Hawaii. Similarly, we adjusted for 

differences in area wage levels in determining estimated FY 2012 payments using the 

proposed LTCH PPS FY 2012 labor-related share of 70.334 percent and the proposed 

FY 2012 wage index values presented in Tables 12A and 12B listed in section VI. of the 

Addendum to this proposed rule (and available via the Internet). We also applied the 

proposed FY 2012 COLA factors shown in the table in section V.B.5. of the Addendum 

to the FY 2011 IPPS/LTCH PPS final rule to the proposed FY 2012 nonlabor-related 

share (29.666 percent) for LTCHs located in Alaska and Hawaii. 
CMS-1518-P 1004 

As discussed above, our impact analysis reflects an estimated change in payments 

for SSO cases, as well as an estimated increase in payments for HCO cases (as described 

in section V.C. of the Addendum to this proposed rule). In modeling proposed payments 

for SSO and HCO cases in FY 2012, we applied an inflation factor of 1.055 (determined 

by OACT) to the estimated costs of each case determined from the charges reported on 

the claims in the FY 2010 MedPAR files and the best available CCRs from the 

December 2010 update of the PSF. Furthermore, in modeling estimated LTCH PPS 

payments for FY 2012 in this impact analysis, we used the proposed FY 2012 fixed-loss 

amount of $19,270 (as discussed in section V.C. of the Addendum to this proposed rule). 

These impacts reflect the estimated “losses” or “gains” among the various 

classifications of LTCHs from the FY 2011 to FY 2012 based on the proposed payment 

rates and policy changes presented in this proposed rule. Table IV illustrates the 

estimated aggregate impact of the LTCH PPS among various classifications of LTCHs. 

● The first column, LTCH Classification, identifies the type of LTCH. 

● The second column lists the number of LTCHs of each classification type. 

● The third column identifies the number of LTCH cases. 

● The fourth column shows the estimated payment per discharge for FY 2011 (as 

described above). 

● The fifth column shows the estimated payment per discharge for FY 2012 (as 

described above). 
CMS-1518-P 1005 

● The sixth column shows the percentage change in estimated payments per 

discharge from FY 2011 to FY 2012 due to the proposed update to the standard Federal 

rate (as discussed in section V.A.2. of the Addendum to this proposed rule). 

● The seventh column shows the percentage change in estimated payments per 

discharge from FY 2011 to FY 2012 for proposed changes to the area wage level 

adjustment (that is, the proposed wage indexes and proposed labor-related share) 

including the proposed application of an area wage level budget neutrality factor (as 

discussed in section V.B.5. of the Addendum to the proposed rule). 

● The eighth column shows the percentage change in estimated payments per 

discharge from FY 2011 (Column 4) to FY 2012 (Column 5) for all proposed changes 

(and includes the effect of estimated proposed changes to HCO and SSO payments). 

TABLE IV: IMPACT OF PROPOSED PAYMENT RATE AND POLICY 

CHANGES TO LTCH PPS PAYMENTS FOR FY 2012 (ESTIMATED FY 2011 

PAYMENTS COMPARED TO ESTIMATED PROPOSED FY 2012 PAYMENTS*) 

LTCH Classification 

(1) 

Number 

of 

LTCHs 

(2) 

Number 

of LTCH 

PPS Cases 

(3) 

Average FY 

2011 LTCH 

PPS 

Payment Per 

Case1 

(4) 

Average FY 

2012 LTCH 

PPS Proposed 

Payment Per 

Case2 

(5)

Percent 

Change in 

Estimated 

Payments 

Per 

Discharge 

from FY 

2011 to FY 

2012 for the 

Proposed 

Annual 

Update to 

the Federal 

Rate 2 

(6) 

Percent 

Change in 

Estimated 

Payments 

Per 

Discharge 

from FY 

2011 to FY 

2012 for 

Proposed 

Changes to 

the Area 

Wage Level 

Adjustment 

with 

Proposed 

Budget 

Neutrality3 

(7) 

Percent 

Change in 

Payments 

Per 

Discharge 

from FY 

2011 to FY 

2012 for 

All 

Proposed 

Changes4 

(8) 

ALL PROVIDERS 422 134,805 $38,115 $38,820 1.3 0.0 1.9

 

BY LOCATION: 

 RURAL 26 5,854 $33,611 $34,550 1.4 0.8 2.8

 URBAN 396 128,951 $38,320 $39,014 1.3 0.0 1.8

 LARGE 204 77,381 $40,098 $40,745 1.3 -0.2 1.6
CMS-1518-P 1006 

LTCH Classification 

(1) 

Number 

of 

LTCHs 

(2) 

Number 

of LTCH 

PPS Cases 

(3) 

Average FY 

2011 LTCH 

PPS 

Payment Per 

Case1 

(4) 

Average FY 

2012 LTCH 

PPS Proposed 

Payment Per 

Case2 

(5)

Percent 

Change in 

Estimated 

Payments 

Per 

Discharge 

from FY 

2011 to FY 

2012 for the 

Proposed 

Annual 

Update to 

the Federal 

Rate 2 

(6) 

Percent 

Change in 

Estimated 

Payments 

Per 

Discharge 

from FY 

2011 to FY 

2012 for 

Proposed 

Changes to 

the Area 

Wage Level 

Adjustment 

with 

Proposed 

Budget 

Neutrality3 

(7) 

Percent 

Change in 

Payments 

Per 

Discharge 

from FY 

2011 to FY 

2012 for 

All 

Proposed 

Changes4 

(8) 

 OTHER 192 51,570 $35,651 $36,416 1.4 0.3 2.2

 

BY PARTICIPATION DATE: 

 BEFORE OCT. 1983 16 5,884 $33,874 $34,280 1.3 -0.6 1.2

 OCT. 1983 - SEPT. 1993 44 16,648 $40,063 $40,762 1.3 -0.3 1.7

 OCT. 1993 - SEPT. 2002 186 63,258 $37,248 $37,938 1.3 0.1 1.9

 AFTER OCTOBER 2002 173 48,210 $39,117 $39,870 1.4 0.1 1.9

 UNKNOWN 

PARTICIPATION DATE 3 805 $36,962 $38,300 1.4 1.7 3.6

 

BY OWNERSHIP TYPE: 

 VOLUNTARY 82 19,507 $39,280 $40,097 1.3 -0.1 2.1

 PROPRIETARY 322 113,029 $37,836 $38,521 1.3 0.0 1.8

 GOVERNMENT 12 1,693 $43,296 $44,059 1.3 -0.5 1.8

 UNKNOWN OWNERSHIP 

TYPE 6 576 $38,191 $38,970 1.3 0.0 2.0

 

BY REGION: 

 NEW ENGLAND 15 7,283 $33,832 $34,156 1.3 -0.7 1.0

 MIDDLE ATLANTIC 30 7,957 $39,016 $39,739 1.3 0.0 1.9

 SOUTH ATLANTIC 57 15,487 $41,372 $42,106 1.3 -0.2 1.8

 EAST NORTH CENTRAL 68 19,780 $39,942 $40,516 1.3 -0.4 1.4

 EAST SOUTH CENTRAL 29 8,158 $37,727 $38,521 1.3 0.2 2.1

 WEST NORTH CENTRAL 26 5,899 $39,847 $40,743 1.3 0.3 2.3

 WEST SOUTH CENTRAL 141 50,707 $33,617 $34,412 1.4 0.5 2.4

 MOUNTAIN 32 6,724 $41,617 $42,293 1.3 -0.3 1.6

 PACIFIC 24 12,810 $48,649 $49,242 1.3 -0.6 1.2

 

BY BED SIZE: 

 BEDS: 0-24 29 3,728 $32,665 $33,483 1.4 0.5 2.5

 BEDS: 25-49 196 43,731 $37,536 $38,247 1.4 0.1 1.9

 BEDS: 50-74 112 35,963 $38,762 $39,518 1.4 0.1 2.0

 BEDS: 75-124 49 22,005 $40,891 $41,555 1.3 -0.3 1.6

 BEDS: 125-199 21 14,824 $36,329 $36,961 1.3 0.0 1.7
CMS-1518-P 1007 

LTCH Classification 

(1) 

Number 

of 

LTCHs 

(2) 

Number 

of LTCH 

PPS Cases 

(3) 

Average FY 

2011 LTCH 

PPS 

Payment Per 

Case1 

(4) 

Average FY 

2012 LTCH 

PPS Proposed 

Payment Per 

Case2 

(5)

Percent 

Change in 

Estimated 

Payments 

Per 

Discharge 

from FY 

2011 to FY 

2012 for the 

Proposed 

Annual 

Update to 

the Federal 

Rate 2 

(6) 

Percent 

Change in 

Estimated 

Payments 

Per 

Discharge 

from FY 

2011 to FY 

2012 for 

Proposed 

Changes to 

the Area 

Wage Level 

Adjustment 

with 

Proposed 

Budget 

Neutrality3 

(7) 

Percent 

Change in 

Payments 

Per 

Discharge 

from FY 

2011 to FY 

2012 for 

All 

Proposed 

Changes4 

(8) 

 BEDS: 200 + 15 14,554 $37,275 $37,942 1.3 0.1 1.8

1

 Estimated FY 2012 LTCH PPS payments based on the proposed payment rates and policy changes presented in the preamble and the 

Addendum to this proposed rule. 

2

 Percent change in estimated payments per discharge from FY 2011 to FY 2012 for the proposed annual update to the standard 

Federal rate, as discussed in section V.A.2. of the Addendum to this proposed rule. 

3

 Percent change in estimated payments per discharge from FY 2011 to FY 2012 for proposed changes to the area wage level 

adjustment at §412.525(c) (as discussed in section V.B. of the Addendum to this proposed rule). 

4

 Percent change in estimated payments per discharge from FY 2011 LTCH PPS (shown in Column 4) to FY 2012 LTCH PPS (shown 

in Column 5), including all of the proposed changes presented in the preamble and the Addendum to this proposed rule. Note, this 

column, which shows the percent change in estimated payments per discharge for all proposed changes, does not equal the sum of the 

percent changes in estimated payments per discharge for the proposed annual update to the standard Federal rate (column 5) and the 

proposed changes to the area wage level adjustment with budget neutrality (Column 6) due to the effect of estimated changes in both 

estimated payments to SSO cases that are paid based on estimated costs and aggregate HCO payments (as discussed in this impact 

analysis), as well as other interactive effects that cannot be isolated. 

7. Results 

Based on the most recent available data for 422 LTCHs, we have prepared the 

following summary of the impact (as shown above in Table IV) of the proposed LTCH 

PPS payment rate and policy changes presented in this proposed rule. The impact 

analysis in Table IV shows that estimated payments per discharge are expected to 

increase approximately 1.9 percent, on average, for all LTCHs from FY 2011 to FY 2012 

as a result of the proposed payment rate and policy changes presented in this proposed 

rule, as well as estimated increases in HCO and SSO payments. We note that we applied 

a proposed 1.5 percent annual update in determining the proposed standard Federal rate 

for FY 2012, based on the latest estimate of the proposed LTCH PPS market basket 
CMS-1518-P 1008 

increase (2.8 percent), the proposed reduction of 1.2 percentage points for the multifactor 

productivity adjustment and the 0.1 percentage point reduction required under sections 

1886(m)(3) and (m)(4) of the Act. We noted earlier in this section that for most 

categories of LTCHs, as shown in Table IV (Column 6), the impact of the increase of 

approximately 1.5 percent for the proposed annual update to the standard Federal rate is 

projected to result in approximately a 1.3 percent change in estimated payments per 

discharge for all LTCHs from FY 2011 to FY 2012. Because payments to cost-based 

SSO cases and a portion of payments to SSO cases that are paid based on the “blend” 

option of the SSO payment formula at §412.529(c)(2)(iv) are not affected by the 

proposed annual update to the standard Federal rate, we estimate that the effect of the 

proposed 1.5 percent annual update to the standard Federal rate would result in a 1.3 

percent increase on estimated aggregate LTCH PPS payments to all LTCH PPS cases, 

including SSO cases. Furthermore, as discussed previously in this regulatory impact 

analysis, the average increase in estimated payments per discharge from the FY 2011 to 

FY 2012 for all LTCHs of approximately 1.9 percent (as shown in Table IV) was 

determined by comparing estimated FY 2012 LTCH PPS payments (using the proposed 

rates and policies discussed in this proposed rule) to estimated FY 2011 LTCH PPS 

payments (as described above in section IX.C.5. of this Appendix). 

a. Location 

Based on the most recent available data, the vast majority of LTCHs are located 

in urban areas. Only approximately 6 percent of the LTCHs are identified as being 

located in a rural area, and approximately 4 percent of all LTCH cases are treated in these 
CMS-1518-P 1009 

rural hospitals. The impact analysis presented in Table IV shows that the average percent 

increase in estimated payments per discharge from FY 2011 to FY 2012 for all hospitals 

is 1.9 percent for all proposed changes. For rural LTCHs, the percent change for all 

proposed changes is estimated to be 2.8 percent, while for urban LTCHs, we estimate the 

increase to be 1.8 percent. Large urban LTCHs are projected to experience an increase of 

1.6 percent in estimated payments per discharge from FY 2011 to FY 2012, while other 

urban LTCHs are projected to experience an increase of 2.2 percent in estimated 

payments per discharge from FY 2011 to FY 2012, as shown in Table IV. 

b. Participation Date 

LTCHs are grouped by participation date into four categories: (1) before 

October 1983; (2) between October 1983 and September 1993; (3) between October 1993 

and September 2002; and (4) after October 2002. Based on the most recent available 

data, the majority (approximately 47 percent) of the LTCH cases are in hospitals that 

began participating in the Medicare program between October 1993 and September 2002, 

and are projected to experience nearly the average increase (1.9 percent) in estimated 

payments per discharge from FY 2011 to FY 2012, as shown in Table IV. 

In the participation category where LTCHs began participating in the Medicare 

program before October 1983, LTCHs are projected to experience a lower than 

average percent increase (1.2 percent) in estimated payments per discharge from FY 2011 

to FY 2012, as shown in Table IV. Approximately 4 percent of LTCHs began 

participating in Medicare before October 1983. The LTCHs in this category are 

projected to experience a lower than average increase in estimated payments because of 
CMS-1518-P 1010 

decreases in payments due to the proposed changes to the area wage adjustment. 

Approximately 10 percent of LTCHs began participating in Medicare between 

October 1983 and September 1993. These LTCHs are also projected to experience a 

slightly lower than average increase (1.7 percent) in estimated payments from FY 2011 to 

FY 2012. LTCHs that began participating in Medicare after October 2002 currently 

represent approximately 41 percent of all LTCHs, and are projected to experience an 

average increase (1.9 percent) in estimated payments from FY 2011 to FY 2012. 

c. Ownership Control 

Other than LTCHs whose ownership control type is unknown, LTCHs are 

grouped into three categories based on ownership control type: voluntary, proprietary, 

and government. Based on the most recent available data, approximately 19 percent of 

LTCHs are identified as voluntary (Table IV). We expect that, for these LTCHs in the 

voluntary category, estimated FY 2012 LTCH payments per discharge would increase 

higher than the average (2.1 percent) in comparison to estimated payments in FY 2011 

primarily because we project an increase in estimated HCO payments and SSO payments 

to be higher than the average for these LTCHs. The majority (76 percent) of LTCHs are 

identified as proprietary and these LTCHs are projected to experience a nearly average 

increase (1.8 percent) in estimated payments per discharge from FY 2011 to FY 2012. 

Finally, government-owned and operated LTCHs (3 percent) are also expected to 

experience a nearly average increase in payments of 1.8 percent in estimated payments 

per discharge from FY 2011 to FY 2012. 
CMS-1518-P 1011 

d. Census Region 

Estimated payments per discharge for FY 2012 are projected to increase for 

LTCHs located in all regions in comparison to FY 2011. Of the 9 census regions, we 

project that the increase in estimated payments per discharge would have the largest 

positive impact on LTCHs in the West South Central region (2.4 percent, as shown in 

Table IV). The estimated percent increase in payments per discharge from FY 2011 to 

FY 2012 for the West South Central is largely attributable to the proposed changes in the 

area wage level adjustment. 

 In contrast, LTCHs located in the New England region are projected to experience 

the smallest increase in estimated payments per discharge from FY 2011 to FY 2012. 

The average estimated increase in payments of 1.0 percent for LTCHs in the New 

England region is primarily due to estimated decreases in payments associated with the 

area wage level adjustment. 

e. Bed Size 

 LTCHs were grouped into six categories based on bed size: 0-24 beds; 25-49 

beds; 50-74 beds; 75-124 beds; 125-199 beds; and greater than 200 beds. 

We project that payments for small LTCHs (0-24 beds) would experience a 2.5 percent 

increase in payments due to increases in the proposed area wage adjustment while large 

LTCHs (200+ beds) would experience a 1.8 percent increase in payments. LTCHs with 

between 75 and 124 beds and between 125 and 199 beds are expected to experience a 

slightly below average increase in payments per discharge from FY 2011 to FY 2012 
CMS-1518-P 1012 

(1.6 percent and 1.7 percent, respectively) primarily due to an estimated decreases in their 

payments from FY 2011 to FY 2012 due to the proposed area wage level adjustment. 

D. Effect on the Medicare Program

 As noted previously, we project that the provisions of this proposed rule would 

result in an increase in estimated aggregate LTCH PPS payments in FY 2012 of 

approximately $95.0 million (or about 1.9 percent) for the 422 LTCHs in our database. 

E. Effect on Medicare Beneficiaries

Under the LTCH PPS, hospitals receive payment based on the average resources 

consumed by patients for each diagnosis. We do not expect any changes in the quality of 

care or access to services for Medicare beneficiaries under the LTCH PPS, but we 

continue to expect that paying prospectively for LTCH services would enhance the 

efficiency of the Medicare program. 

X. Alternatives Considered 

A. General

 This proposed rule contains a range of policies. It also provides descriptions of 

the statutory provisions that are addressed, identifies proposed policies, and presents 

rationales for our decisions and, where relevant, alternatives that were considered. 

B. Alternative Considered for Hospital Inpatient Quality Review (IQR) and Value-Based 

Purchasing (VBP) Programs: Medicare Spending per Beneficiary Measure

 In section IV.A.3.b.(ii)(B) of the preamble to this proposed rule, we are proposing 

to adopt a claims-based Medicare spending per beneficiary measure for the FY 2014 

Hospital IQR Program. In section IV.B.3.b.(iii) of the preamble of this proposed rule, we 
CMS-1518-P 1013 

are proposing to adopt this claims-based Medicare spending per beneficiary measure for 

the FY 2014 Hospital VBP Program. For the Medicare spending per beneficiary 

measure, we considered an alternative approach based on the principle that Medicare 

spending per beneficiary benchmarks for lower quality hospitals should not exceed the 

benchmarks for higher quality hospitals. This alternative approach is more complex than 

our proposal. Due to its increased complexity, we are including the discussion of this 

alternative approach here rather than earlier in the preamble for ease of presentation: both 

the efficiency measure and its scoring as part of the Hospital VBP Program can be 

presented in a continuous narrative. 

As noted earlier, the NQF has not endorsed a Medicare spending per beneficiary 

measure. However, its 2009 report “Measurement Framework: Evaluating Efficiency 

Across Patient-Focused Episodes of Care” (NQF 2009), discusses four general terms that 

are helpful in framing the discussion of an alternative Medicare Spending per Beneficiary 

measure. 

● Quality of care is a measure of performance on the Institute of Medicine’s 

(IOM) six aims for healthcare: safety, timeliness, effectiveness, efficiency, equity, and 

patient centeredness. 

● Cost of care is a measure of the total healthcare spending, including total 

resource use and unit price(s), by payor or consumer, for a healthcare service or group of 

healthcare services associated with a specified patient population, time period, and unit(s) 

of clinical accountability. 
CMS-1518-P 1014 

● Efficiency of care is a measure of cost of care associated with a specified level 

of quality of care. “Efficiency of care” is a measure of the relationship of the cost of care 

associated with a specific level of performance measured with respect to the other five 

IOM aims of quality. 

● Value of care is a measure of a specified stakeholder’s (such as an individual 

patient’s, consumer organization’s, payor’s, provider’s, government’s, or society’s) 

preference-weighted assessment of a particular combination of quality and cost of care 

performance.” (p. 6, Measurement Framework: Evaluating Efficiency Across PatientFocused Episodes of Care, NQF 2009) 

We will examine each of these four terms (Quality of Care, Cost of Care, 

Efficiency of Care, and Value of Care) in the context of an alternative to our proposed 

Medicare Spending per Beneficiary measure. 

1. Quality of Care 

As discussed in the Hospital VBP Program proposed rule, a hospital’s 

performance on the quality measures (based on the higher of achievement or 

improvement) is consolidated into a single Total Performance Score for that hospital. For 

purposes of this discussion, we will refer to the Total Performance Score discussed in the 

Hospital VBP Program proposed rule as the “total quality score (TQS).” 

2. Cost of Care 

For purposes of this discussion, we are considering the cost of care to be the 

Medicare spending per beneficiary amount described in section IV.B.3.b.(3) of the 

preamble of this proposed rule. 
CMS-1518-P 1015 

3. Efficiency of Care 

The term “efficiency of care” is discussed in the NQF report as a measure of cost 

of care associated with a specified level of quality of care. “Efficiency of care” is a 

measure of the relationship of the cost of care associated with a specific level of 

performance measured with respect to the other five IOM aims of quality. We 

considered the following approach to measuring the relationship between the cost of care 

(that is, Medicare spending per beneficiary amount) and quality of care (that is, the TQS). 

The result of this measurement is an efficiency score for each hospital. 

Steps in Measuring the Efficiency of Care under the Alternative Approach

Step 1:--Hospitals are grouped by total quality score (TQS). 

Step 1a.--Define the first (highest) Quality Group. 

The first Quality Group consists of hospitals with a TQS in the top decile of the 

TQSs. 

{Quality1} = {Q1} = Quality Group 1 = Hospitals in the top decile of 

quality = Hospitals with a TQS of 100, 99, ...α1

Step 1b. -- Define the remaining Quality Groups 

Beginning with the first TQS not included in the first Quality Group (TQS= α1-1), 

add hospitals with this TQS to the hospitals in the first Quality Group. This group of 

hospitals forms the second Quality Group: 

{Quality2} = {Q2} = Quality Group 2 = Hospitals with a TQS ≥ (α1-1) 

Note that {Q1} {Q2}, meaning {Q1} is a subset of {Q2}. 

The process repeats for the next Quality Group: 
CMS-1518-P 1016 

{Quality3} = {Q3} = Quality Group 3 = Hospitals with a TQS ≥ (α1-2) 

Note that {Q1} {Q2} {Q3}, meaning {Q2} is a subset of {Q3}. 

It continues with successively lower quality scores until the hospitals with a TQS 

of 1 are added. 

{QualityN } = {QN} = Last Quality Group N = Hospitals with a TQS ≥ 1 

Note that {Q1} {Q2} {Q3}........, {QN}, so all Quality Groups are subsets 

of {QN} since {QN} contains all hospitals with a TQS greater than or equal to 1. 

Step 2: Determine the cost benchmarks for each hospital. 

Step 2a -- Determine the cost benchmark for the top Quality Group. 

The cost benchmark for the hospitals in the top Quality Group is the mean 

Medicare spending per beneficiary for the hospitals in the top Quality Group. 

Step 2b. -- Determine the cost benchmarks for all hospitals that are not in the top Quality 

Group. 

The cost benchmark for each hospital with TQS of j is the lower of: (1) the 10th

percentile of Medicare spending per beneficiary for all hospitals in the smallest (in terms 

of the number of hospitals in the group) Quality Group that contains hospitals with a TQS 

score of j; and (2) the benchmark for the group of hospitals of next higher quality. 

= Smallest Quality Group {Qi} that contains hospitals with TQS = j 

 = 10th percentile of Medicare spending per beneficiary for all hospitals in 

Cost benchmark j = Cost benchmark for all hospitals with TQS j = min ( , 

Cost Benchmark j-1 ) 
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Step 3: Calculate the efficiency ratio for each hospital. 

Calculate the efficiency ratio for hospital k with TQS j. 

 The efficiency ratio for hospital k with TQS j is the ratio of the Medicare 

spending per beneficiary for hospital k to the cost benchmark for TQS j. 

Costk = Medicare spending per beneficiary for hospital k 

Efficiency ratiok = Efficiency ratio for hospital k = Cost k / Cost Benchmark j 

Step 4: Calculate the efficiency ratio threshold and benchmark. 

Step 4a. Calculate the efficiency ratio threshold. 

The efficiency ratio threshold is the point at which hospitals can begin to earn 

efficiency points based on achievement. It is the median efficiency ratio across all 

hospitals. 

Efficiency ratio threshold = Median efficiency ratio across all hospitals 

Step 4b. Calculate the efficiency ratio benchmark. 

The efficiency ratio benchmark is the point at which hospitals earn the maximum 

efficiency points (10) based on achievement. It is the 10th percentile of the efficiency 

ratios across all hospitals. 

Efficiency ratio benchmark = 10th percentile efficiency ratio across all hospitals 

Step 5: Calculate the efficiency points based on achievement. 

Calculate the efficiency points based on achievement for hospital k. 

Achievement Efficiency Points k = 

 + .05 
CMS-1518-P 1018 

Step 6: Calculate the efficiency points based on improvement. 

Calculate the efficiency points based on improvement for hospital k. 

The performance period has a corresponding base period, analogous to the base 

period for other Hospital VBP measures. In order to calculate efficiency points based on 

improvement, an efficiency ratio would be determined for each hospital k using only the 

data from the base period and following Step 1 to Step 3 above. Using this base period 

efficiency ratio for hospital k, the improvement points for hospital k are calculated as: 

Improvement Efficiency Points k = 

 - .05 

The efficiency score for hospital k is the higher of the achievement or 

improvement efficiency points. 

4. Value of Care 

The term “value of care” is discussed in the NQF report as a measure of a 

specified stakeholder’s (such as an individual patient’s, consumer organization’s, payor’s, 

provider’s, government’s, or society’s) preference-weighted assessment of a particular 

combination of quality and cost of care performance. Under our alternative Medicare 

spending per beneficiary approach, we considered creating an efficiency adjustment to 

the TQS for a hospital using a function of the general form: 

Efficiency adjustment to the total quality score = A*TQS + B*(efficiency 

score*10) + C , where A is the weight given to the quality score, B is the weight 

given to the efficiency score, and C is a constant. 
CMS-1518-P 1019 

 We multiply the efficiency score by 10 to put it on the same scale as the TQS (0 

to 100). 

Depending on the parameters chosen, adopting such a function for valuing 

efficiency could allow the TQS for a hospital to be adjusted upwards or downwards 

depending on the hospital’s TQS and its efficiency score. For example, suppose two 

hospitals both have an efficiency score of 5, but one hospital has a much higher TQS than 

the other. We could choose parameters that would result in a negative efficiency 

adjustment to the TQS for the lower quality hospital and a positive efficiency adjustment 

to the TQS for the higher quality hospital. Under this approach, we value the efficiency 

score of 5 for the higher quality hospital more than the efficiency score of 5 for the lower 

quality hospital, hence the positive adjustment to the TQS for the higher quality hospital 

and the negative adjustment to the TQS for the lower quality hospital. 

Using the TQS adjusted for efficiency, meaning after we apply the efficiency 

adjustment the TQS, the linear exchange function approach previously proposed in the 

Hospital VBP Program proposed rule for the hospital VBP system would be used to 

determine each hospital’s VBP incentive payment such that the overall hospital VBP 

program remains budget neutral. 

XI. Overall Conclusion 

A. Acute Care Hospitals

Table I of section VI. of this Appendix demonstrates the estimated distributional 

impact of the IPPS budget neutrality requirements for the proposed MS-DRG and wage 

index changes, and for the wage index reclassifications under the MGCRB. Table I also 
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shows an overall proposed decrease of 0.5 percent in operating payments. We estimate 

that operating payments would decrease by approximately $498 million in FY 2012. For 

FY 2012, we are proposing to distribute $250 million to hospitals that qualify to receive 

additional payment under section 1109 of Pub. L. 111-152, which is an additional $100 

million than what we had distributed under this provision in FY 2011. In addition, we 

estimate a savings of $23 million associated with the HACs policies. These estimates, 

added to our proposed FY 2012 operating estimate of -$498 million, would result in a 

decrease of $421.2 million for FY 2012. We estimate that capital payments will 

experience a 1.8 percent increase in payments per case, as shown in Table III of section 

VIII. of this Appendix. We project that there would be a $146 million increase in capital 

payments in FY 2012 compared to FY 2011. The proposed cumulative operating and 

capital payments should result in a net decrease of $275 million to IPPS providers. The 

discussions presented in the previous pages, in combination with the rest of this proposed 

rule, constitute a regulatory impact analysis. 

B. LTCHs

Overall, LTCHs are projected to experience an increase in estimated payments per 

discharge in FY 2012. In the impact analysis, we are using the proposed rates, factors, 

and policies presented in this proposed rule, including proposed updated wage index 

values and relative weights, and the best available claims and CCR data to estimate the 

proposed change in payments under the LTCH PPS for FY 2012. Accordingly, based on 

the best available data for the 422 LTCHs in our database, we estimate that proposed 
CMS-1518-P 1021 

FY 2012 LTCH PPS payments would increase approximately $95 million (or about 

1.9 percent). 

XII. Accounting Statements and Tables 

A. Acute Care Hospitals

 As required by OMB Circular A-4 (available at 

http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table V below, we have 

prepared an accounting statement showing the classification of the expenditures 

associated with the provisions of this proposed rule as they relate to acute care hospitals. 

This table provides our best estimate of the proposed change in Medicare payments to 

providers as a result of the proposed changes to the IPPS presented in this proposed rule. 

All expenditures are classified as transfers to Medicare providers. 

Table V.—Accounting Statement: Classification of Estimated Expenditures under 

the IPPS from FY 2011 to FY 2012 

Category Transfers 

Annualized Monetized Transfers -$275 million 

From Whom to Whom Federal Government to IPPS Medicare Providers 

Total -$275 million 

B. LTCHs

As discussed in section IX. of this Appendix, the impact analysis for the proposed 

changes under the LTCH PPS for this proposed rule projects an increase in estimated 

aggregate payments of approximately $95 million (or about 1.9 percent) for the 

422 LTCHs in our database that are subject to payment under the LTCH PPS. Therefore, 

as required by OMB Circular A-4 (available at 
CMS-1518-P 1022 

http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table VI below, we have prepared 

an accounting statement showing the classification of the expenditures associated with 

the provisions of this proposed rule as they relate to proposed changes to the LTCH PPS. 

Table VI provides our best estimate of the estimated increase in Medicare payments 

under the LTCH PPS as a result of the proposed provisions presented in this proposed 

rule based on the data for the 422 LTCHs in our database. All expenditures are classified 

as transfers to Medicare providers (that is, LTCHs). 

TABLE VI.—Accounting Statement: Classification of Estimated Expenditures 

from the FY 2011 LTCH PPS to the FY 2012 LTCH PPS 

Category Transfers 

Annualized Monetized Transfers Positive transfer--Estimated increase in 

expenditures: $95 million 

XII. Executive Order 12866 

In accordance with the provisions of Executive Order 12866, the Executive Office 

of Management and Budget reviewed this proposed rule. 

Appendix B: Recommendation of Update Factors for Operating Cost Rates of 

Payment for Inpatient Hospital Services 

I. Background 

 Section 1886(e)(4)(A) of the Act requires that the Secretary, taking into 

consideration the recommendations of MedPAC, recommend update factors for inpatient 

hospital services for each fiscal year that take into account the amounts necessary for the 

efficient and effective delivery of medically appropriate and necessary care of high 

quality. Under section 1886(e)(5) of the Act, we are required to publish update factors 
CMS-1518-P 1023 

recommended by the Secretary in the proposed and final IPPS rules, respectively. 

Accordingly, this Appendix provides the recommendations for the update factors for the 

IPPS national standardized amount, the Puerto Rico-specific standardized amount, the 

hospital-specific rates for SCHs and MDHs, and the rate-of-increase limits for certain 

hospitals excluded from the IPPS, as well as LTCHs, IPFs, and IRFs. We also discuss 

our response to MedPAC’s recommended update factors for inpatient hospital services. 

II. Inpatient Hospital Update for FY 2012 

A. Proposed FY 2012 Inpatient Hospital Update

Section 1886(b)(3)(B) of the Act, as amended by sections 3401(a) and 10319(a) 

of the Affordable Care Act, sets the applicable percentage increase under the IPPS for 

FY 2012 as equal to the rate-of-increase in the hospital market basket for IPPS hospitals 

in all areas (which is based on IHS Global Insight Inc.’s (IGI’s) first quarter 2011 

forecast of the FY 2006-based IPPS market basket), subject to a reduction of 2.0 

percentage points if the hospital fails to submit quality information under rules 

established by the Secretary in accordance with section 1886(b)(3)(B)(viii) of the Act, 

and then subject to an adjustment based on changes in economy-wide productivity and an 

additional reduction of 0.1 percentage point. Sections 1886(b)(3)(B)(xi) and 

(b)(3)(B)(xii) of the Affordable Care Act, as added by section 3401(a) of the Affordable 

Care Act, state that the application of the multifactor productivity adjustment and the 

additional FY 2012 adjustment of 0.1 percentage point may result in the applicable 

percentage increase being less than zero. 
CMS-1518-P 1024 

In accordance with section 1886(b)(3)(B) of the Act, as amended by section 

3401(a) of the Affordable Care Act, in section IV.K.3. of the preamble of this proposed 

rule, we are proposing a multifactor productivity (MFP) adjustment (the 10-year moving 

average of MFP for the period ending FY 2012) of 1.2 percent. 

Therefore, based on IGI’s first quarter 2011 forecast of the FY 2012 market 

basket increase, we are proposing an applicable percentage increase to the FY 2012 

operating standardized amount of 1.5 percent (that is, the FY 2012 estimate of the market 

basket rate-of-increase of 2.8 percent less an adjustment of 1.2 percentage points for 

economy-wide productivity and less 0.1 percentage point) for hospitals in all areas, 

provided the hospital submits quality data in accordance with section 1886(b)(3)(B)(vii) 

of the Act and our rules. For hospitals that fail to submit quality data, we are proposing 

an applicable percentage increase to the operating standardized amount of -0.5 percent 

(that is, the FY 2012 estimate of the market basket rate-of increase of 2.8 percent less 2.0 

percentage points for failure to submit quality data, less an adjustment of 1.2 percentage 

points for economy-wide productivity, and less an additional adjustment of 0.1 

percentage point). 

B. Proposed Update for SCHs and MDHs for FY 2012

Section 1886(b)(3)(B)(iv) of the Act provides that the FY 2012 applicable 

percentage increase in the hospital-specific rates for SCHs and MDHs equals the 

applicable percentage increase set forth in section 1886(b)(3)(B)(i) of the Act (that is, the 

same update factor as for all other hospitals subject to the IPPS). Therefore, the update to 

the hospital specific rates for SCHs and MDHs is subject to section 1886(b)(3)(B)(i) of 
CMS-1518-P 1025 

the Act, as amended by sections 3401(a) and 10319(a) of the Affordable Care Act. 

Accordingly, we are proposing an applicable percentage increase to the hospital-specific 

rates applicable to SCHs and MDHs of 1.5 percent for hospitals that submit quality data 

or -0.5 percent for hospitals that fail to submit quality data. 

C. Proposed FY 2012 Puerto Rico Hospital Update

Section 401(c) of Pub. L. 108-173 amended section 1886(d)(9)(C)(i) of the Act 

and states that, for discharges occurring in a fiscal year (beginning with FY 2004), the 

Secretary shall compute an average standardized amount for hospitals located in any area 

of Puerto Rico that is equal to the average standardized amount computed under 

subclause (I) for FY 2003 for hospitals in a large urban area (or, beginning with FY 2005, 

for all hospitals in the previous fiscal year) increased by the applicable percentage 

increase under subsection (b)(3)(B) for the fiscal year involved. Therefore, the update to 

the Puerto Rico-specific operating standardized amount is subject to the applicable 

percentage increase set forth in section 1886(b)(3)(B)(i) of the Act as amended by 

sections 3401(a) and 10319(a) of the Affordable Care Act (that is, the same update factor 

as for all other hospitals subject to the IPPS). Accordingly, we are proposing an 

applicable percentage increase to the Puerto Rico-specific standardized amount of 

1.5 percent. 

D. Proposed Update for Hospitals Excluded from the IPPS

 Section 1886(b)(3)(B)(ii) of the Act is used for purposes of determining the 

percentage increase in the rate-of-increase limits for children’s and cancer hospitals. 

Section 1886(b)(3)(B)(ii) of the Act sets the percentage increase in the rate-of-increase 
CMS-1518-P 1026 

limits equal to the market basket percentage increase. In accordance with §403.752(a) of 

the regulations, RNHCIs are paid under §413.40, which also uses section 

1886(b)(3)(B)(ii) of the Act to update the percentage increase in the rate-of-increase 

limits. 

Section 1886(j)(3)(C) of the Act addresses the increase factor for the Federal 

prospective payment rate of IRFs. Section 123 of Pub. L. 106-113, as amended by 

section 307(b) of Pub. L. 106-554 (and codified at section 1886(m)(1) of the Act), 

provides the statutory authority for updating payment rates under the LTCH PPS. In 

addition, section 124 of Pub. L. 106-113 provides the statutory authority for updating all 

aspects of the payment rates for IPFs. 

 Currently, children's hospitals, cancer hospitals, and RNHCIs are the remaining 

three types of hospitals still reimbursed under the reasonable cost methodology. We are 

proposing to provide our current estimate of the FY 2012 IPPS operating market basket 

percentage increase (2.8 percent) to update the target limits for children’s hospitals, 

cancer hospitals, and RNHCIs. 

For FY 2012, as discussed in section VII. of the preamble to this proposed rule, 

we are proposing to establish an update to the LTCH PPS standard Federal rate for 

FY 2012 based on the full proposed LTCH PPS market basket increase estimate 

(2.8 percent). The proposed annual update also includes the requirement at section 

1886(m)(3)(A)(i) of the Act to reduce the annual update by the productivity adjustment 

described in section 1886(b)(3)(B)(xi)(ii) of the Act, which is currently estimated to be 

1.2 percent. In addition, the statute at section 1886(m)(3)(A)(ii) of the Act requires that 
CMS-1518-P 1027 

any annual update for FY 2012 be reduced by the “other adjustment” at section 

1886(m)(4)(C) of the Act, which is 0.1 percentage point. Accordingly, the proposed 

update factor to the standard Federal rate for FY 2012 is 1.5 percent (that is, we are 

proposing to apply a factor of 1.015 in determining the proposed LTCH PPS standard 

Federal rate for FY 2012). 

 Effective for cost reporting periods beginning on or after January 1, 2005, IPFs 

are paid under the IPF PPS. IPF PPS payments are based on a Federal per diem rate that 

is derived from the sum of the average routine operating, ancillary, and capital costs for 

each patient day of psychiatric care in an IPF, adjusted for budget neutrality. In the 

RY 2012 IPF PPS proposed rule (76 FR 5000 through 5001), we proposed to extend the 

IPF PPS RY 2012 by 3 months (a total of 15 months instead of 12 months) through 

September 30, 2012. Based on IGI’s fourth quarter 2010 forecast, with history through 

the third quarter of 2010, the projected 15-month market basket update based on the 

proposed FY 2008-based RPL market basket for the proposed 15-month RY 2012 

(July 1, 2011 through September 30, 2012) is 3.0 percent. However, if we were not 

proposing to extend the 2012 IPF PPS rate year by 3 months, we would have proposed a 

market basket update of 2.6 percent for a 12-month RY 2012. 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 CY 2011, we proposed to adjust the IPF PPS update by 0.25 percentage 

point for RY 2012. Therefore, we proposed to apply the 15-month FY 2008-based RPL 
CMS-1518-P 1028 

market basket increase of 3.0 percent, which is then adjusted by the “other adjustment” of 

0.25 percentage point. 

IRFs are paid under the IRF PPS for cost reporting periods beginning on or after 

January 1, 2002. For cost reporting periods beginning on or after October 1, 2002 

(FY 2003), and thereafter, the Federal prospective payments to IRFs are based on 

100 percent of the adjusted Federal IRF prospective payment amount, updated annually 

(69 FR 45721). Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act require the 

application of a 0.1 percentage point reduction to the market basket increase factor for 

FYs 2012 and 2013. In addition, section 1886(j)(3)(C)(ii)(I) of the Act requires the 

application of a productivity adjustment. Increase factors for the IRF PPS will be 

discussed in future notice and comment rulemaking.

III. Secretary’s Recommendations 

 MedPAC is recommending an inpatient hospital update equal to one percent for 

FY 2012. MedPAC’s rationale for this update recommendation is described in more 

detail below. As mentioned above, section 1886(e)(4)(A) of the Act requires that the 

Secretary, taking into consideration the recommendations of MedPAC, recommend 

update factors for inpatient hospital services for each fiscal year that take into account the 

amounts necessary for the efficient and effective delivery of medically appropriate and 

necessary care of high quality. Consistent with current law, we are recommending an 

applicable percentage increase to the standardized amount of 1.5 percent (that is, the 

FY 2012 estimate of the market basket rate-of-increase of 2.8 percent less an MFP 

adjustment of 1.2 percentage points for MFP and less 0.1 percentage point). We are 
CMS-1518-P 1029 

recommending that the same applicable percentage increase apply to SCHs and MDHs 

and the Puerto Rico-specific standardized amount. 

 In addition to making a recommendation for IPPS hospitals, in accordance with 

section 1886(e)(4)(A) of the Act, we are recommending update factors for all other types 

of hospitals. Consistent with our proposal for these facilities, we are recommending an 

update for children's hospitals, cancer hospitals, and RNHCIs of 2.8 percent. 

 For FY 2012, consistent with policy proposal set forth in section VII. of the 

preamble of this proposed rule, we are recommending an update of 1.5 percent to the 

LTCH PPS standard Federal rate. In addition, consistent with the proposed update 

specified in the FY 2012 IRF PPS proposed rule (as described above), we are 

recommending an update of 1.5 percent (that is, the market basket increase factor of 

2.8 percent less 1.2 percentage points for economy-wide productivity and less 0.1 

percentage point in accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of 

the Act) to the IRF PPS Federal rate for FY 2012. Finally, consistent with the proposed 

update specified in the FY 2012 IPF PPS proposed rule (as described above), we are 

recommending an update of 3.0 percent reduced by 0.25 percentage point to the IPF PPS 

Federal rate for RY 2012 for the Federal per diem payment amount. 

IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating 

Payments in Traditional Medicare 

 In its March 2011 Report to Congress, MedPAC assessed the adequacy of current 

payments and costs, and the relationship between payments and an appropriate cost base. 

MedPAC recommended an update to the hospital inpatient rates equal to one percent. 
CMS-1518-P 1030 

MedPAC expects Medicare margins to remain low in 2012. At the same time though, 

MedPAC’s analysis finds that efficient hospitals have been able to maintain positive 

Medicare margins while maintaining a relatively high quality of care. MedPAC also 

recommended that Congress should require the Secretary to make adjustments to 

inpatient payment rates in future years to recover all overpayments due to documentation 

and coding improvements. MedPAC noted that priority should be given to preventing 

future overpayments. 

Response: With regard to MedPAC’s recommendation of an update to the 

hospital inpatient rates equal to one percent, for FY 2012, as discussed above, sections 

3401(a) and 10319(a) of the Affordable Care Act amended section 1886(b)(3)(B) of the 

Act. Section 1886(b)(3)(B), as amended by these sections, sets the requirements for the 

FY 2012 applicable percentage increase. Therefore, we have proposed an applicable 

percentage increase for FY 2012 of 1.5 percent, provided the hospital submits quality 

data, consistent with these statutory requirements. 

Similar to our response last year, we agree with MedPAC that hospitals should 

control costs rather than have Medicare accommodate the current rate of growth. As 

MedPAC noted, the lack of financial pressure at certain hospitals can lead to higher costs 

and in turn bring down the overall Medicare margin for the industry.

 With regard to MedPAC’s recommendation that Congress should require the 

Secretary to make adjustments to inpatient payment rates in future years to recover all 

overpayments due to diagnosis and coding improvements, we refer the reader to section 

III. D. of the preamble to this proposed rule for a complete discussion on the proposed 
CMS-1518-P 1031 

FY 2012 MS-DRG documentation and coding adjustment. In section III. D. of the 

preamble to this proposed rule, we are proposing a prospective adjustment of 3.15 

percent and a recoupment of 2.9 percent to the FY 2012 inpatient payment rates to 

recover overpayments due to documentation and coding improvements. We note that any 

recoupments for overpayments due to documentation and coding improvements beyond 

the authority of section 7(b)(1)(B) of Pub. L. 110-90 would require additional changes to 

current law by Congress. Therefore, without a change to current law, our ability to 

recoup all overpayments due to documentation and coding improvements is limited. 

 We note that, because the operating and capital prospective payment systems 

remain separate, we are continuing to use separate updates for operating and capital 

payments. The update to the capital rate is discussed in section III. of the Addendum to 

this proposed rule.
CMS-1518-P 1032 

[FR Doc. 2011-9644 Filed 04/19/2011 at 4:15 pm; Publication 

Date: 05/05/2011]