[Federal Register Volume 71, Number 160 (Friday, August 18, 2006)]
[Rules and Regulations]
[Pages 47870-48351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-6692]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 409, 410, 412, et al.



Revision to Hospital Inpatient Prospective Payment Systems--2007 FY 
Occupational Mix Adjustment to Wage Index; Implementation; Final Rule

Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules 
and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 409, 410, 412, 413, 414, 424, 485, 489, and 505

[CMS-1488-F; CMS-1287-F; CMS-1320-F; and CMS-1325-IFC4]
RINs 0938-AO12; 0938-AO03; 0938-AN93; and 0938-AN58


Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2007 Rates; Fiscal Year 2007 
Occupational Mix Adjustment to Wage Index; Health Care Infrastructure 
Improvement Program; Selection Criteria of Loan Program for Qualifying 
Hospitals Engaged in Cancer-Related Health Care and Forgiveness of 
Indebtedness; and Exclusion of Vendor Purchases Made Under the 
Competitive Acquisition Program (CAP) for Outpatient Drugs and 
Biologicals Under Part B for the Purpose of Calculating the Average 
Sales Price (ASP)

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

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

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SUMMARY: We are revising the Medicare hospital inpatient prospective 
payment systems (IPPS) for operating and capital-related costs to 
implement changes arising from our continuing experience with these 
systems, and to implement a number of changes made by the Deficit 
Reduction Act of 2005 (Pub. L. 109-171). In addition, in the Addendum 
to this final rule, we describe the changes to the amounts and factors 
used to determine the rates for Medicare hospital inpatient services 
for operating costs and capital-related costs. We also are setting 
forth rate-of-increase limits as well as policy changes for hospitals 
and hospital units excluded from the IPPS that are paid in full or in 
part on a reasonable cost basis subject to these limits. These changes 
are applicable to discharges occurring on or after October 1, 2006.
    In this final rule, we discuss public comments we received on our 
proposals to refine the diagnosis-related group (DRG) system under the 
IPPS to better recognize severity of illness among patients--to use a 
hospital-specific relative value (HSRV) cost center weighting 
methodology to adjust DRG relative weights; and to implement 
consolidated severity-adjusted DRGs or alternative severity adjustment 
methods.
    Among the other policy changes that we are making are those changes 
related to: limited revisions of the reclassification of cases to DRGs; 
the long-term care (LTC)-DRGs and relative weights; the wage data, 
including the occupational mix data, used to compute the wage index; 
applications for new technologies and medical services add-on payments; 
payments to hospitals for the direct and indirect costs of graduate 
medical education; submission of hospital quality data; payments to 
sole community hospitals and Medicare-dependent, small rural hospitals; 
and provisions governing emergency services under the Emergency Medical 
Treatment and Labor Act of 1986 (EMTALA).
    We are responding to requested public comments on a number of other 
issues that include performance-based hospital payments for services 
and health information technology, as well as how to improve health 
data transparency for consumers.
    In addition, we are responding to public comments received on a 
proposed rule issued in the Federal Register on May 17, 2006 that 
proposed to revise the methodology for calculating the occupational mix 
adjustment to the wage index for the FY 2007 hospital inpatient 
prospective payment system by applying an adjustment to 100 percent of 
the wage index using new 2006 occupational mix survey data collected 
from hospitals.
    We are finalizing two policy documents published in the Federal 
Register relating to the implementation of the Health Care 
Infrastructure Improvement Program, a hospital loan program for cancer 
research, established under the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003.
    This final rule also revises the definition of the term ``unit'' to 
specify the exclusion of units of drugs sold to approved Medicare 
Competitive Acquisition Program (CAP) vendors for use under the CAP 
from average sales price (ASP) calculations for a period of up to 3 
years, at which time we will reevaluate our policy.

DATES: Effective Dates: The provisions of these final rules are 
effective on October 1, 2006, with the exception of the provisions in 
Sec.  412.8, Sec.  414.802, and the procedures for withdrawing or 
terminating reclassifications established in section III.H.4. of the 
preamble. The provisions of Sec.  412.8, Sec.  414.802, and the 
procedures for withdrawing or terminating reclassifications established 
in section II.H.4. of the preamble are effective August 18, 2006. This 
rule is a major rule as defined in 5 U.S.C. 804(2). Pursuant to 5 
U.S.C. 801(a)(1)(A), we are submitting a report to the Congress on this 
rule on August 1, 2006.
    Comment Date: We will consider comments on the exclusion of CAP 
drugs from the ASP calculation (Sec.  414.802) as discussed in section 
XII. of the preamble of this final rule, if we receive them at one of 
the addresses provided below, no later than 5 p.m. on October 2, 2006.

ADDRESSES: In commenting, on section XII. of this rule, please refer to 
file code CMS-1325-IFC4.
    Because of staff and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to http://www.cms.hhs.gov/eRulemaking. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period.'' (Attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word.)
    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-1325-IFC4, P.O. Box 8011, Baltimore, MD 21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1325-IFC4, 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 one of the following addresses. 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. Room 445-G, Hubert H. Humphrey Building, 
200 Independence Avenue, SW., Washington, DC 20201; or 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to

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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.)
    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: 
Marc Hartstein, (410) 786-4548, Operating Prospective Payment, 
Diagnosis-Related Groups (DRGs), Wage Index, Occupational Mix 
Adjustment, New Medical Services and Technology Add-On Payments, 
Hospital Geographic Reclassifications, Sole Community Hospital, 
Disproportionate Share Hospital, and Medicare-Dependent, Small Rural 
Hospital Issues.
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded 
Hospitals, Graduate Medical Education, Critical Access Hospitals, Long-
Term Care (LTC)-DRGs, and Terms of Hospital Loans under Health Care 
Infrastructure Improvement Program Issues.
Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Issues.
Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment 
Update Issues.
Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing Issues.
Frederick Grabau, (410) 786-0206, Services in Foreign Hospitals Issues.
Brian Reitz, (410) 786-5001, Obsolete Paper Claims Forms Issues.
Melinda Jones, (410) 786-7069, Loan Forgiveness Criteria for Health 
Care Infrastructure Improvement Program.
Corinne Axelrod, (410) 786-5620, Competitive Acquisition Program (CAP) 
for Part B Drugs Issues.
Angela Mason, (410) 786-7452, Payment for Covered Outpatient Drugs and 
Biologicals Issues.
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-1325-IFC4 and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    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 a public Web site as 
soon as possible after they are received: http://www.cms.hhs.gov/eRulemaking. Clink on the link ``Electronic Comments on CMS 
Regulations'' on that Web site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

Electronic Access

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

Acronyms

AHA American Hospital Association
AHIMA American Health Information Management Association
AHRO Agency for Health Care Research and Quality
AMI Acute myocardial infarction
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis-Related Group System
ASC Ambulatory surgical center
ASP Average sales price
AWP Average wholesale price
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
AH Critical access hospital
AP Competitive Acquisition Program
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CDAC Clinical Data Abstraction Center
CIPI Capital input price index
CPI Consumer 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
CPI Consumer price index
CRNA Certified registered nurse anesthetist
CY Calendar year
DRA Deficit Reduction Act of 2005, Pub. L. 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EMR Electronic medical record
EMTALA Emergency Medical Treatment and Labor Act of 1986, Pub. L. 99-
272
FDA Food and Drug Administration
FFY Federal fiscal year
FIPS Federal information processing standards
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems
HCFA Health Care Financing Administration
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HIC Health insurance card
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
HSA Health savings account
HSCRC Maryland Health Services Cost Review Commission

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HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
HwH Hospital-within-a-hospital
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Edition, 
Procedure Coding System
ICU Intensive care unit
IHS Indian Health Service
IME Indirect medical education
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS Acute care hospital inpatient prospective payment system
IRF Inpatient rehabilitation facility
IRP Initial residency period
JCAHO Joint Commission on Accreditation of Healthcare Organizations
LAMCs Large area metropolitan counties
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
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
MMA Medicare Prescription Drug, Improvement, and Modernization Act of 
2003, Pub. L. 108-173
MRHFP Medicare Rural Hospital Flexibility Program
MSA Metropolitan Statistical Area
NAICS North American Industrial Classification System
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
NICU Neonatal intensive care unit
NQF National Quality Forum
NTIS National Technical Information Service
NVHRI National Voluntary Hospital Reporting Initiative
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
PRM Provider Reimbursement Manual
PPI Producer price index
PMSAs Primary metropolitan statistical areas
PPS Prospective payment system
PRA Per resident amount
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious Nonmedical Health Care Institution
RRC Rural referral center
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSA Social Security Administration
SSI Supplemental Security Income
TAG Technical Advisory Group
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248
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
    a. Inpatient Rehabilitation Facilities (IRFs)
    b. Long-Term Care Hospitals (LTCHs)
    c. Inpatient Psychiatric Facilities (IPFs)
    3. Critical Access Hospitals (CAHs)
    4. Payments for Graduate Medical Education (GME)
    B. Provisions of the Deficit Reduction Act of 2005 (DRA)
    C. Summary of the Provisions of the FY 2007 IPPS and FY 2007 
Occupational Mix Adjustment to the Wage Index Proposed Rules
    1. DRG Reclassifications and Recalibrations of Relative Weights
    2. Changes to the Hospital Wage Index
    3. Other Decisions and Changes to the IPPS for Operating Costs, 
GME Costs, and Promoting Hospitals' Effective Use of Health 
Information Technology
    4. Changes to the PPS for Capital-Related Costs
    5. Changes for Hospitals and Hospital Units Excluded from the 
IPPS
    6. Payments for Services Furnished Outside the United States
    7. Payment for Blood Clotting Factor Administered to Inpatients 
with Hemophilia
    8. Limitation on Payments to Skilled Nursing Facilities for Bad 
Debt
    9. Determining Prospective Payment Operating and Capital Rates 
and Rate-of-Increase Limits
    10. Impact Analysis
    11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Inpatient Hospital Services
    12. Discussion of Medicare Payment Advisory Commission 
Recommendations
    13. Appendix C and Appendix D
    D. Public Comments Received in Response to the FY 2007 IPPS and 
FY 2007 Occupational Mix Adjustment to the Wage Index Proposed Rules
    E. Interim Final Rule on Selection Criteria of Loan Program for 
Qualifying Hospitals Engaged in Cancer-Related Health Care
    F. Proposed Rule on Forgiveness of Indebtedness under the Health 
Care Infrastructure Improvement Program
    G. Interim Final Rule on the Exclusion of Vendor Purchases Made 
Under the Competitive Acquisition Program for Part B Outpatient 
Drugs and Biologicals for the Purpose of Calculating the Average 
Sales Price
II. Changes to DRG Classifications and Relative Weights
    A. Background
    B. DRG Reclassifications
    1. General
    2. Yearly Review for Making DRG Changes
    C. Revisions to the DRG System Used Under the IPPS
    1. MedPAC Recommendations
    2. Refinement of the Relative Weight Calculation
    3. Refinement of DRGs Based on Severity of Illness
    a. Comparison of the CMS DRG System and the APR DRG System
    b. CS DRGs for Use in the IPPS
    c. Changes to CMI from a New DRG System
    4. Effect of CS DRGs on the Outlier Threshold
    5. Impact of Refinement of DRG System on Payments
    6. Conclusions
    7. Severity Refinement to CMS DRGs
    a. MDC 1 (Diseases and Disorders of the Nervous System)
    b. MDC 4 (Diseases and Disorders of the Respiratory System): 
Respiratory System Diagnosis with Ventilator Support
    c. MDC 6 (Diseases and Disorders of the Digestive System)
    d. MDC 11 (Diseases and Disorders of the Kidney and Urinary 
Tract): Major Bladder Procedures
    e. MDC 16 (Diseases and Disorders of the Blood and Blood Forming 
Organs and Immunological Disorders): Major Hematological and 
Immunological Diagnoses
    f. MDC 18 (Infectious and Parasitic Diseases (Systemic or 
Unspecified Sites)): O.R. Procedure for Patients with Infectious and 
Parasitic Diseases

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    g. Severe Sepsis
    D. Changes to Specific DRG Classifications
    1. Pre-MDCs
    a. Heart Transplant or Implant of Heart Assist System: Addition 
of Procedure to DRG 103
    b. Pancreas Transplants
    2. MDC 1 (Diseases and Disorders of the Nervous System)
    a. Implantation of Intracranial Neurostimulator System for Deep 
Brain Stimulation (DBS)
    b. Carotid Artery Stents
    3. MDC 5 (Diseases and Disorders of the Circulatory System)
    a. Insertion of Epicardial Leads for Defibrillator Devices
    b. Application of Major Cardiovascular Diagnoses (MCVs) List to 
Defibrillator DRGs
    4. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue)
    a. Hip and Knee Replacements
    b. Spinal Fusion
    c. CHARITE<SUP>TM</SUP> Spinal Disc Replacement Device
    5. MDC 18 (Infectious and Parasitic Diseases (Systemic or 
Unspecified Sites)): Severe Sepsis
    6. Medicare Code Editor (MCE) Changes
    a. Edit: Newborn Diagnoses
    b. Edit: Diagnoses for Pediatric--Age 0-17 Years Old
    c. Edit: Maternity Diagnoses--Age 12 through 55
    d. Edit: Diagnoses Allowed for Females Only
    e. Edit: Diagnoses Allowed for Males Only
    f. Edit: Procedures Allowed for Females Only
    g. Edit: Manifestations Not Allowed as Principal Diagnosis
    h. Edit: Nonspecific Principal Diagnosis
    i. Edit: Unacceptable Principal Diagnosis
    j. Edit: Nonspecific O.R. Procedures
    k. Edit: Noncovered Procedures
    l. Edit: Bilateral Procedure
    7. Surgical Hierarchies
    8. Refinement of Complications and Comorbidities (CC) List
    a. Background
    b. Comprehensive Review of the CC List
    c. CC Exclusions List for FY 2007
    9. Review of Procedure Codes in DRGs 468, 476, and 477
    a. Moving Procedure Codes from DRG 468 or DRG 477 to MDCs
    b. Reassignment of Procedures among DRGs 468, 476, and 477
    c. Adding Diagnosis or Procedure Codes to MDCs
    10. Changes to the ICD-9-CM Coding System
    11. Other Issues
    a. Chronic Kidney Disease
    b. Bronchial Valve
    c. Female Reproductive System Reconstruction Procedures
    d. Devices That are Replaced Without Cost or Where Credit for a 
Replaced Device is Furnished to the Hospital
    E. Recalibration of DRG Weights
    F. LTC-DRG Reclassifications and Relative Weights for LTCHs for 
FY 2007
    1. Background
    2. Changes in the LTC-DRG Classifications
    a. Background
    b. Patient Classifications into DRGs
    3. Development of the FY 2007 LTC-DRG Relative Weights
    a. General Overview of Development of the LTC-DRG Relative 
Weights
    b. Data
    c. Hospital-Specific Relative Value Methodology
    d. Low-Volume LTC-DRGs
    4. Steps for Determining the FY 2007 LTC-DRG Relative Weights
    5. Summary of Public Comments and Departmental Responses
    G. 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 2007 Status of Technologies Approved for FY 2006 Add-On 
Payments
    a. Kinetra[supreg] Implantable Neurostimulator (Kinetra[supreg]) 
for Deep Brain Stimulation
    b. Endovascular Graft Repair of the Thoracic Aorta
    c. Restore[supreg] Rechargeable Implantable Neurostimulator
    4. FY 2007 Applications for New Technology Add-On Payments
    a. C-Port[supreg] Distal Anastomosis System
    b. NovoSeven[supreg] for Intracerebral Hemorrhage
    c. X STOP Interspinous Process Decompression System
    5. Interim and Final Cost Threshold Tables Due to Changes to 
Wage Index and Budget Neutrality Factors
III. Changes to the Hospital Wage Index
    A. Background
    B. Core-Based Statistical Areas for the Hospital Wage Index
    C. Occupational Mix Adjustment to the FY 2007 Wage Index
    1. Development of Data for the FY 2007 Occupational Mix 
Adjustment
    2. Timeline for the Collection, Review, and Correction of the 
Occupational Mix Data
    3. Calculation of the Occupational Mix Adjustment
    D. Worksheet S-3 Wage Data for the FY 2007 Wage Index Update
    E. Verification of Worksheet S-3 Wage Data
    F. Computation of the FY 2007 Unadjusted Wage Index
    G. Implementation of the FY 2007 Occupational Mix Adjustment to 
the Wage Index
    H. Revisions to the Wage Index Based on Hospital Redesignations
    1. General
    2. Effects of Reclassification/Redesignation
    3. FY 2007 MGCRB Reclassifications
    4. Procedures for Hospitals Applying for Reclassification 
Effective in FY 2008 and Reinstating Reclassifications in FY 2008
    5. FY 2007 Redesignations Under Section 1886(d)(8)(B) of the Act
    6. Reclassifications Under Section 508 of Pub. L. 108-173
    7. Wage Indices for Reclassified Hospitals and Reclassification 
Budget Neutrality Factor
    I. FY 2007 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 Wage Index for FY 2007
    L. Proxy for the Hospital Market Basket
IV. Other Decisions and Changes to the IPPS for Operating Costs and 
GME Costs
    A. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update
    1. Background
    2. New Procedures for Hospital Reporting of Quality Data
    a. Two Percentage Point Reduction
    b. New Procedures
    c. Expanded Quality Measures
    d. HCAHPS[supreg] Survey
    e. Data Submission
    f. RHQDAPU Program Withdrawal and Chart Validation Requirements
    g. Data Validation and Attestation
    h. Public Display and Reconsideration Procedures
    i. Conclusion
    3. Electronic Medical Records
    B. Value-Based Purchasing
    1. Introduction
    2. Premier Hospital Quality Incentive Demonstration
    3. RHQDAPU Program
    a. Section 501(b) of Pub. L. 108-173 (MMA)
    b. Section 5001(a) of Pub. L. 109-171 (DRA)
    4. Plan for Implementing Hospital Value-Based Purchasing 
Beginning with FY 2009
    a. Measure Development and Refinement
    b. Data Infrastructure
    c. Incentive Methodology
    d. Public Reporting
    5. Considerations Related to Certain Conditions, Including 
Hospital-Acquired Infections
    6. Promoting Effective Use of Health Information Technology
    C. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small 
Rural Hospitals (MDHs)
    1. Background
    2. Volume Decrease Adjustment for SCHs and MDHs
    a. HAS/Monitrend Data
    b. HAS/Monitrend Data Book Replacement Alternative
    3. Mandatory Reporting Requirements for Any Changes in the 
Circumstances Under Which a Hospital Was Designated as an SCH or MDH
    4. Payment Changes for MDHs under the DRA of 2005
    a. Background
    b. Regulation Changes
    5. Technical Change
    D. Rural Referral Centers
    1. Case-Mix Index
    2. Discharges
    E. Indirect Medical Education (IME) Adjustment
    1. Background
    2. IME Adjustment Factor for FY 2007
    3. Technical Change to Revise Cross-Reference
    F. Payment Adjustment for Disproportionate Share Hospitals 
(DSHs)

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    1. Background
    2. Technical Corrections
    3. Reinstatement of Inadvertently Deleted Provisions on DSH 
Payment Adjustment Factors
    4. Enhanced DSH Adjustment for MDHs
    G. Geographic Reclassifications
    1. Background
    2. Reclassifications under Section 508 of Pub. L. 108-173
    3. Multicampus Hospitals
    4. Urban Group Hospital Reclassifications
    5. Effect of Change of Ownership on Urban County Group 
Reclassifications
    6. Requested Reclassification for Hospitals Located in a Single 
Hospital MSA Surrounded by Rural Counties
    7. Special Adjustment for the Hospital Group Reclassification 
Denied on the Basis of Incomplete CSA Listing
    H. Payment for Direct Graduate Medical Education
    1. Background
    2. Determination of Weighted Average Per Resident Amounts (PRAs) 
for Merged Teaching Hospitals
    3. Determination of Per Resident Amounts (PRAs) for New Teaching 
Hospitals
    4. Requirements for Counting and Appropriate Documentation of 
FTE Residents: Clarification
    5. Resident Time Spent in Nonpatient Care Activities as Part of 
Approved Residency Programs
    6. Medicare GME Affiliated Groups: Technical Changes to 
Regulations
    I. Payment for the Costs of Nursing and Allied Health Education 
Activities: Clarification
    J. Hospital Emergency Services under EMTALA
    1. Background
    2. Role of the EMTALA Technical Advisory Group (TAG)
    3. Definition of ``Labor''
    4. Application of EMTALA Requirements to Hospitals Without 
Dedicated Emergency Departments
    5. Clarification of Reference to ``Referral Centers''
    K. Other Technical Changes
    1. Cross-Reference Correction in Regulations on Limitations on 
Beneficiary Charges
    2. Cross-Reference Corrections in Regulations on Payment Denials 
Based on Admissions and Quality Reviews
    3. Cross-Reference Correction in Regulations on Outlier Payments
    4. Removing References to Two Paper Claims Forms
    L. Rural Community Hospital Demonstration Program
    M. Health Care Information Transparency Initiative
V. Changes to the PPS for Capital-Related Costs
    A. Background
    B. Treatment of Certain Urban Hospitals Reclassified as Rural 
Hospitals Under Sec.  412.103
    C. Other Technical Corrections Relating to the Capital PPS 
Geographic Adjustment Factors
VI. Changes for Hospitals and Hospital Units Excluded from the IPPS
    A. Payments to Excluded Hospitals and Hospital Units
    1. Payments to Existing Excluded and New Hospitals and Hospital 
Units
    2. Separate PPS for IRFs
    3. Separate PPS for LTCHs
    4. Separate PPS for IPFs
    5. Grandfathering of Hospitals-Within-Hospitals (HwHs) and 
Satellite Facilities
    6. Changes to the Methodology for Determining LTCH Cost-to-
Charge Ratios (CCRs) and the Reconciliation of High-Cost and Short-
Stay Outlier Payments under the LTCH PPS
    a. Background
    b. High-Cost Outliers
    c. Short-Stay Outliers
    d. CCR Ceiling
    e. Statewide Average CCRs
    f. Data Used to Determine a CCR
    g. Reconciliation of Outlier Payments Upon Cost report 
Settlement
    7. Technical Corrections Relating to LTCHs
    8. Cross-Reference Correction in Authority Citations for 42 CFR 
412 and 413
    9. Report of Adjustment (Exceptions) Payments
    B. Critical Access Hospitals (CAHs)
    1. Background
    2. Sunset of Designation of CAHs as Necessary Providers: 
Technical Correction
VII. Payment for Services Furnished Outside the United States
    A. Background
    B. Proposed Clarification of Regulations
VIII. Payment for Blood Clotting Factor Administered to Inpatients 
with Hemophilia
IX. Limitation on Payments to Skilled Nursing Facilities for Bad 
Debt
    A. Background
    B. Changes Made by Section 5004 of Pub. L. 109-171
    C. Proposed Regulation Changes
X. MedPAC Recommendations
XI. Health Care Infrastructure Improvement Program: Selection 
Criteria for Loan Program for Qualifying Hospitals Engaged in 
Cancer-Related Health Care and Forgiveness of Indebtedness
    A. Background
    B. Issuance of an Interim Final Rule with Comment Period and a 
Proposed Regulation
    C. Provisions of the Interim Final Rule With Comment Period
    1. Loan Qualifying Criteria
    2. Selection Criteria
    3. Terms of the Loan
    4. Public Comments Received on the Interim Final Rule With 
Comment Period
    5. Provisions of this Final Rule
    D. Proposed Rule on Forgiveness of Indebtedness
    1. Conditions for Loan Forgiveness
    2. Plan Criteria for Meeting the Conditions for Loan Forgiveness
    3. Public Comments Received on the Proposed Rule and Our 
Responses
    4. Provisions of the Final Rule
    E. Statutory Requirements for Issuance of Regulations
XII. Exclusion of Vendor Purchases Made Under the Competitive 
Acquisition Program (CAP) for Outpatient Drugs and Biologicals Under 
Part B for the Purpose of Calculating the Average Sales Price (ASP)
    A. Background
    1. Average Sales Price (ASP)
    2. Competitive Acquisition Program (CAP)
    3. Regulatory History
    B. Regulation Change
XIII. Other Required Information
    A. Requests for Data from the Public
    B. Collection of Information Requirements
    C. Waiver of Proposed Rulemaking and Delay in the Effective Date
    D. Response to Comments

Regulation Text

Addendum--Schedule of Tentative Standardized Amounts, Tentative 
Update Factors and Rate-of-Increase Percentages Effective With Cost 
Reporting Periods Beginning On or After October 1, 2006
I. Summary and Background
II. Changes to Prospective Payment Rates for Hospital Inpatient 
Operating Costs
    A. Calculation of the Tentative Adjusted Standardized Amount
    1. Standardization of Base-Year Costs or Target Amounts
    2. Computing the Tentative Average Standardized Amount
    3. Updating the Tentative Average Standardized Amount
    4. Other Adjustments to the Average Standardized Amount
    a. Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment
    b. Reclassified Hospitals--Tentative Budget Neutrality 
Adjustment
    c. Outliers
    d. Tentative Rural Community Hospital Demonstration Program 
Adjustment (Section 410A of Pub. L. 108-173)
    5. Tentative FY 2007 Standardized Amount
    B. Tentative Adjustments for Area Wage Levels and Cost-of-Living
    1. Tentative Adjustment for Area Wage Levels
    2. Final Adjustment for Cost-of-Living in Alaska and Hawaii
    C. DRG Relative Weights
    D. Calculation of the Prospective Payment Rates
    1. Federal Rate
    2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
    a. Calculation of Hospital-Specific Rate
    b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-
Specific Rates for FY 2007
    3. General Formula for Calculation of Prospective Payment Rates 
for Hospitals Located in Puerto Rico Beginning On or After October 
1, 2006, and Before October 1, 2007
    a. Puerto Rico Rate
    b. National Rate
III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2007
    A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update
    1. Projected Capital Standard Federal Rate Update

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    a. Description of the Update Framework
    b. Comparison of CMS and MedPAC Update Recommendation
    2. Outlier Payment Adjustment Factor
    3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the GAF
    4. Exceptions Payment Adjustment Factor
    5. Capital Standard Federal Rate for FY 2007
    6. Special Capital Rate for Puerto Rico Hospitals
    B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2007
    C. Capital Input Price Index
    1. Background
    2. Forecast of the CIPI for FY 2007
IV. Payment Rates for Excluded Hospitals and Hospital Units: Rate-
of-Increase Percentages
    A. Payments to Existing Excluded Hospitals and Units
    B. New Excluded Hospitals and Units
V. Payment for Blood Clotting Factor Administered to Inpatients with 
Hemophilia

Tables

The following tables are included as part of this final rule:
Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share If 
Wage Index Is Greater Than 1) (Tentative)
Table 1B--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage 
Index Is Less Than or Equal to 1) (Tentative)
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, 
Labor/Nonlabor (Tentative)
Table 1D--Capital Standard Federal Payment Rate (Tentative)
Table 4J--Out-Migration Wage Adjustment--FY 2007 (Tentative)
Table 5--List of Diagnosis-Related Groups (DRGs), Relative Weighting 
Factors, and Geometric and Arithmetic Mean Length of Stay (LOS) 
(Tentative)
Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes
Table 6E--Revised Diagnosis Code Titles
Table 6F--Revised Procedure Code Titles
Table 6G--Additions to the CC Exclusions List
Table 6H--Deletions from the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2005 MedPAR Update March 2006 GROUPER V23.0
Table 7B--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2005 MedPAR Update March 2006 GROUPER V24.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios--July 
2006
Table 8B--Statewide Average Capital Cost-to-Charge Ratios--July 2006
Table 8C-- Statewide Average Total Cost-to-Charge Ratios for LTCHs--
July 2006
Table 9A--Hospital Reclassifications and Redesignations by 
Individual Hospital and CBSA for FY 2007 (Tentative)
Table 9B--Hospital Reclassifications and Redesignation by Individual 
Hospital Under Section 508 of Pub. L. 108-173 for FY 2007 
(Tentative)
Table 9C--Hospitals Redesignated as Rural under Section 
1886(d)(8)(E) of the Act for FY 2007 (Tentative)
Table 10--Geometric Mean Plus the Lesser of .75 of the National 
Adjusted Operating Standardized Payment Amount (Increased to Reflect 
the Difference Between Costs and Charges) or .75 of One Standard 
Deviation of Mean Charges by Diagnosis-Related Group (DRG)--July 
2006 (Tentative)
Table 11--FY 2007 LTC-DRGs, Relative Weights, Geometric Average 
Length of Stay, and \5/6\ths of the Geometric Average Length of Stay
Appendix A--Regulatory Impact Analysis
I. Overall Impact
II. Objectives
III. Limitations on Our Analysis
IV. Hospitals Included In and Excluded From the IPPS
V. Effects on Excluded Hospitals and Hospital Units
VI. Quantitative Effects of the Policy Changes Under the IPPS for 
Operating Costs
    A. Basis and Methodology of Estimates
    B. Analysis of Table I
    C. Effects on the Hospitals that Failed the Quality Data 
Submission Process (Column 2)
    D. Effects of the DRA Provision Related to MDHs (Column 3)
    E. Effects of the Changes to the DRG Reclassifications and 
Relative Cost-Based Weights (Column 4)
    F. Effects of Wage Index Changes (Column 5)
    G. Combined Effects of DRG and Wage Index Changes, Including 
Budget Neutrality Adjustment (Column 6)
    H. Effects of the 3-Year Provision Allowing Urban Hospitals that 
Were Converted to Rural as a Result of the FY 2005 Labor Market Area 
Changes to Maintain the Wage Index of the Urban Labor Market Area in 
Which They Were Formerly Located (Column 7)
    I. Effects of MGCRB Reclassifications (Column 8)
    J. Effects of the Wage Index Adjustment for Out-Migration 
(Column 9)
    K. Effects of All Changes (Column 10)
    L. Effects of Policy on Payment Adjustments for Low-Volume 
Hospitals
    M. Impact Analysis of Table II
VII. Effects of Other Policy Changes
    A. Effects of LTC-DRG Reclassifications and Relative Weights for 
LTCHs
    B. Effects of New Technology Add-On Payments
    C. Effects of Requirements for Hospital Reporting of Quality 
Data for Annual Hospital Payment Update
    D. Effects of Other Policy Changes Affecting Sole Community 
Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals 
(MDHs)
    E. Effects of Policy on Payment for Direct Costs of Graduate 
Medical Education
    1. Determination of Weighted Average GME PRAs for Merged 
Teaching Hospitals
    2. Determination of PRAs for New Teaching Hospitals
    3. Requirements for Counting and Appropriate Documentation of 
FTE Residents
    4. Resident Time Spent in Nonpatient Care Activities as Part of 
an Approved Residency Program
    F. Effects of Policy Changes Relating to Emergency Services 
under EMTALA
    G. Effects of Policy on Rural Community Hospital Demonstration 
Program
    H. Effects of Policy on Hospitals-within-Hospitals and Satellite 
Facilities
    I. Effects of Policy Changes to the Methodology for Determining 
LTCH CCRs and the Reconciliation of LTCH PPS Outlier Payments
    J. Effects of Policy on Payment for Services Furnished Outside 
the United States
    K. Effects of Final Policy on Limitation on Payments to SNFs
    L. Effects of Policy on CAP for Outpatient Drugs and Biologicals 
under Part B for the Purpose of Calculating the ASP
VIII. Impact of Changes in the Capital PPS
    A. General Considerations
    B. Results
IX. Impact of Changes Relating to the Loan Program for Capital Cost 
under the Health Care Infrastructure Improvement Program
    A. Effects on Hospitals
    B. Effects on the Medicare and Medicaid Programs
X. Alternatives Considered
XI. Overall Conclusion
XII. Accounting Statement
XIII. Executive Order 12866
Appendix B--Recommendation of Update Factors for Operating Cost 
Rates of Payment for Inpatient Hospital Services
I. Background
II. Secretary's Final Recommendation for Updating the Prospective 
Payment System Standardized Amounts
III. Secretary's Final Recommendation for Updating the Rate-of-
Increase Limits for Excluded Hospitals and Hospital Units
IV. Secretary's Recommendation for Updating the Capital Prospective 
Payment Amounts

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

[[Page 47876]]

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; and if the hospital is located in 
Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-
living adjustment factor. This base payment rate is multiplied by the 
DRG relative weight.
    If the hospital treats a high percentage of low-income patients, it 
receives a percentage add-on payment applied to the DRG-adjusted base 
payment rate. This add-on payment, known as the disproportionate share 
hospital (DSH) adjustment, provides for a percentage increase in 
Medicare payments to hospitals that qualify under either of two 
statutory formulas designed to identify hospitals that serve a 
disproportionate share of low-income patients. For qualifying 
hospitals, the amount of this adjustment may vary based on the outcome 
of the statutory calculations.
    If the hospital is an approved teaching hospital, it receives a 
percentage add-on payment for each case paid under the IPPS, known as 
the indirect medical education (IME) adjustment. This percentage 
varies, depending on the ratio of residents to beds.
    Additional payments may be made for cases that involve new 
technologies or medical services that have been approved for special 
add-on payments. To qualify, a new technology or medical service must 
demonstrate that it is a substantial clinical improvement over 
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG 
payment.
    The costs incurred by the hospital for a case are evaluated to 
determine whether the hospital is eligible for an additional payment as 
an outlier case. This additional payment is designed to protect the 
hospital from large financial losses due to unusually expensive cases. 
Any outlier payment due is added to the DRG-adjusted base payment rate, 
plus any DSH, IME, and new technology or medical service add-on 
adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid the higher of a hospital-specific rate based on their costs in a 
base year (the higher of FY 1982, FY 1987, FY 1996, or FY 2002) or the 
IPPS rate based on the standardized amount. For example, sole community 
hospitals (SCHs) are the sole source of care in their areas, and 
Medicare-dependent, small rural hospitals (MDHs) are a major source of 
care for Medicare beneficiaries in their areas. Both of these 
categories of hospitals are afforded special payment protection in 
order to maintain access to services for beneficiaries. (Through FY 
2007, an MDH receives the IPPS rate plus 50 percent of the difference 
between the IPPS rate and its hospital-specific rate if the hospital-
specific rate is higher than the IPPS rate. In addition, an MDH may not 
use FY 1996 as its base year for the hospital-specific rate. As 
discussed below, for discharges occurring on or after October 1, 2007, 
but before October 1, 2011, an MDH will receive the IPPS rate plus 75 
percent of the difference between the IPPS rate and its hospital-
specific rate, if the hospital-specific rate is higher than the IPPS 
rate.)
    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 PPS, payments are adjusted by the same DRG for the case as they 
are under the operating IPPS. Capital PPS 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 
specialty hospitals and hospital units are excluded from the IPPS. 
These hospitals and units are: inpatient rehabilitation hospitals and 
units (commonly referred to as inpatient rehabilitation facilities 
(IRFs); long-term care hospitals (LTCHs); inpatient psychiatric 
hospitals and units (commonly referred to as inpatient psychiatric 
facilities (IPFs); 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 (Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State 
Children's Health Insurance Program] Balanced Budget Refinement Act of 
1999 (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (Pub. L. 106-554) provide for 
the implementation of PPSs for IRFs, LTCHs, and IPFs, as discussed 
below. Children's hospitals, cancer hospitals, and RNHCIs continue to 
be paid solely under a reasonable cost-based system.
    The existing regulations governing payments to excluded hospitals 
and hospital units are located in 42 CFR Parts 412 and 413.
a. Inpatient Rehabilitation Facilities (IRFs)
    Under section 1886(j) of the Act, IRFs have been transitioned from 
payment based on a blend of reasonable cost reimbursement and the 
adjusted IRF Federal prospective payment rate for cost reporting 
periods beginning on or after January 1, 2002, through September 30, 
2002, to payment at 100 percent of the Federal rate effective for cost 
reporting periods beginning on or after October 1, 2002. IRFs subject 
to the blend were also permitted to elect payment based on 100 percent 
of the Federal rate. The existing regulations governing payments under 
the IRF PPS are located in 42 CFR Part 412, Subpart P.
b. Long-Term Care Hospitals (LTCHs)
    Under the authority of sections 123(a) and (c) of Pub. L. 106-113 
and section 307(b)(1) of Pub. L. 106-554, LTCHs that do not meet the 
definition of ``new'' under Sec.  412.23(e)(4) are being transitioned 
from being paid for inpatient hospital services based on a blend of 
reasonable cost-based reimbursement under section 1886(b) of the Act to 
100 percent of the Federal rate during a 5-year period with cost 
reporting periods beginning on or after October 1, 2002. Those LTCHs 
that do not meet the definition of ``new'' may elect to be paid based 
on 100 percent of the Federal prospective payment rate instead of a 
blended payment in any year during the 5-year transition. For cost 
reporting periods beginning on or after October 1, 2006, LTCHs will be 
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.
c. Inpatient Psychiatric Facilities (IPFs)
    Under the authority of sections 124(a) and (c) of Pub. L. 106-113, 
IPFs are paid under the IPF PPS. Under the IPF PPS, some IPFs are 
transitioning from being paid for inpatient hospital services based on 
a blend of reasonable cost-based payment to a Federal per diem

[[Page 47877]]

payment rate, effective for cost reporting periods beginning on or 
after January 1, 2005 (November 15, 2004 IPF PPS final rule (69 FR 
66922) and May 9, 2006 IPF PPS final rule (71 FR 27040)). For cost 
reporting periods beginning on or after January 1, 2008, all IPFs will 
be paid 100 percent of the Federal per diem payment amount. The 
existing regulations governing payment under the IPF PPS are located in 
42 CFR 412, Subpart N.
3. Critical Access Hospitals (CAHs)
    Under sections 1814, 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 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.
4. 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 Deficit Reduction Act of 2005 (DRA)

    On February 8, 2006, the Deficit Reduction Act of 2005 (DRA), Pub. 
L. 109-171, was enacted. Pub. L. 109-171 made a number of changes to 
the Act relating to prospective payments to hospitals and other 
providers for inpatient services. This final rule implements amendments 
made by the following sections of Pub. L. 109-171:
    <bullet> Section 5001(a), which, effective for FY 2007 and 
subsequent years, allows for expansion of the requirements for hospital 
quality data reporting.
    <bullet> Section 5003, which makes several changes to the MDH 
program. It extends special payment provisions, requires MDHs to use FY 
2002 as their base year for determining whether use of their hospital-
specific rate enhances payment (but permits them to continue to use 
either their 1982 or 1987 hospital-specific rate if using either of 
those rates results in higher payments), and removes the application of 
the 12-percent cap on the DSH payment adjustment factor for MDHs.
    <bullet> Section 5004, which reduces certain allowable SNF bad debt 
payments by 30 percent. Payments for the bad debts of full-benefit, 
dual eligible individuals are not reduced.
    In this final rule, we also discuss the provisions of section 
5001(b) of Pub. L. 109-171, which require us to develop a plan to 
implement, beginning with FY 2009, a value-based purchasing plan for 
section 1886(d) hospitals and summarize the public comments received in 
response to our invitation for public comments. This discussion also 
includes the provisions of section 5001(c) of Pub. L. 109-171, which 
requires a quality adjustment in DRG payments for certain hospital-
acquired conditions, effective for FY 2008.

C. Summary of the Provisions of the FY 2007 IPPS and FY 2007 
Occupational Mix Adjustment to the Wage Index Proposed Rules

    In the FY 2007 IPPS proposed rule, we set forth proposed changes to 
the Medicare IPPS for operating costs and for capital-related costs in 
FY 2007. We also set forth proposed changes relating to payments for 
GME costs, payments to certain hospitals and units that continue to be 
excluded from the IPPS and paid on a reasonable cost basis, and 
payments for SCHs and MDHs. The changes were proposed to be effective 
for discharges occurring on or after October 1, 2006, unless otherwise 
noted.
    After publication of the FY 2007 IPPS proposed rule, the United 
States Court of Appeals for the Second Circuit issued a decision in the 
Bellevue case that caused us to modify our proposals on the 
implementation of the occupational mix adjustment. As a result, we 
published a second proposed rule in the May 17, 2006 Federal Register 
that superseded the occupational mix proposals that had been made in 
the FY 2007 IPPS proposed rule (published April 25, 2006). The 
following is a summary of the major changes that we proposed to make 
and the issues that we addressed in the FY 2007 IPPS and FY 2007 
Occupational Mix Adjustment to the Wage Index proposed rules:
1. DRG Reclassifications and Recalibrations of Relative Weights
    As required by section 1886(d)(4)(C) of the Act, we proposed 
limited annual revisions to the DRG classifications structure. In this 
section, we responded to several recommendations made by MedPAC 
intended to improve the DRG system. We also proposed to use, for FY 
2007, hospital-specific relative values (HSRVs) for 10 cost centers to 
compute DRG relative weights. In addition, we proposed to use 
consolidated severity-adjusted DRGs or alternative severity adjustment 
methods in FY 2008 (if not earlier).
    We presented our reevaluation of certain FY 2006 applicants for 
add-on payments for high-cost new medical services and technologies, 
and our analysis of FY 2007 applicants (including public input, as 
directed by Pub. L. 108-173, obtained in a town hall meeting).
    We proposed the annual update of the long-term care diagnosis-
related group (LTC-DRG) classifications and relative weights for use 
under the LTCH PPS for FY 2007.
2. Changes to the Hospital Wage Index
    We proposed revisions to the wage index and the annual update of 
the wage data. Specific issues addressed include the following:
    <bullet> The FY 2007 wage index update, using wage data from cost 
reporting periods that began during FY 2003.
    <bullet> The FY 2007 occupational mix adjustment to the wage index 
(discussed inthe May 17, 2006 proposed rule).
    <bullet> The revisions to the wage index based on hospital 
redesignations and reclassifications.
    <bullet> The adjustment to the wage index for FY 2007 based on 
commuting patterns of hospital employees who reside in a county and 
work in a different area with a higher wage index.
    <bullet> The timetable for reviewing and verifying the wage data 
that will be in effect for the proposed FY 2007 wage index.
    <bullet> The special timetable that will apply in FY 2007 in order 
to allow us to make presumptive reclassification withdrawal or 
termination decisions on behalf of affected hospitals which will then 
become final unless reversed or modified by the affected hospitals in 
accordance with CMS procedural rules.
    <bullet> The labor-related share for the FY 2007 wage index, 
including the labor-related share for Puerto Rico.
3. Other Decisions and Changes to the IPPS for Operating Costs, GME 
Costs, and Promoting Hospitals' Effective Use of Health Information 
Technology
    In the proposed rule, we discussed a number of provisions of the 
regulations in 42 CFR Parts 412 and 413 and related proposed changes, 
including the following:
    <bullet> The reporting of hospital quality data as a condition for 
receiving the full annual payment update increase.
    <bullet> Changes in payments to SCHs and MDHs.

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    <bullet> Updated national and regional case-mix values and 
discharges for purposes of determining rural referral center status.
    <bullet> The statutorily-required IME adjustment factor for FY 
2007.
    <bullet> Changes relating to hospitals' geographic classifications, 
including reclassifications under section 508 of Pub. L. 108-173, 
multicampus hospitals, urban group hospital reclassification and the 
effect of change in ownership on urban county group reclassifications.
    <bullet> Changes and clarifications relating to GME that address 
determining the per resident amounts (PRAs) for merged hospitals and 
new teaching hospitals, counting and appropriate documentation of FTE 
residents, and counting of resident time spent in nonpatient care 
activities as part of approved residency programs.
    <bullet> Changes relating to payment for costs of nursing and 
allied health education programs.
    <bullet> Changes relating to requirements for emergency services 
for hospitals under EMTALA.
    <bullet> Discussion of the third year of implementation of the 
Rural Community Hospital Demonstration Program.
    We also invited comments on promoting hospitals' effective use of 
health information technology.
4. Changes to the PPS for Capital-Related Costs
    In the proposed rule, we discussed the payment policy requirements 
for capital-related costs and capital payments to hospitals and 
proposed several technical corrections to the regulations.
5. Changes for Hospitals and Hospital Units Excluded From the IPPS
    In the proposed rule, we discussed payments made to excluded 
hospitals and hospital units, proposed policy changes regarding 
decreases in square footage or decreases in the number of beds of the 
``grandfathering'' HwHs and satellite facilities, and proposed changes 
to the methodology for determining LTCH CCRs and the reconciliation of 
high-cost and short-stay outlier payments under the LTCH PPS. In 
addition, we proposed a technical change relating to the designation of 
CAHs as necessary providers.
6. Payments for Services Furnished Outside the United States
    In the proposed rule, we set forth proposed changes to clarify what 
is considered ``outside the United States'' for Medicare payment 
purposes.
7. Payment for Blood Clotting Factor Administered to Inpatients With 
Hemophilia
    In the proposed rule, we discussed the proposed changes in payment 
for blood clotting factor administered to Medicare beneficiaries with 
hemophilia for FY 2007.
    8. Limitation on Payments to Skilled Nursing Facilities for Bad 
Debt
    In the proposed rule, we proposed to implement section 5004 of Pub. 
L. 109-171 relating to reduction in payments to SNFs for bad debt.
9. Determining Prospective Payment Operating and Capital Rates and 
Rate-of-Increase Limits
    In the Addendum to the proposed rule, we set forth proposed changes 
to the amounts and factors for determining the FY 2007 prospective 
payment rates for operating costs and capital-related costs. We also 
proposed to establish the threshold amounts for outlier cases. In 
addition, we addressed the proposed update factors for determining the 
rate-of-increase limits for cost reporting periods beginning in FY 2007 
for hospitals and hospital units excluded from the PPS.
10. Impact Analysis
    In Appendix A of the proposed rule, we set forth an analysis of the 
impact that the proposed changes would have on affected hospitals.
11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Inpatient Hospital Services
    In Appendix B of the proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provided our recommendations of 
the appropriate percentage changes for FY 2007 for the following:
    <bullet> A single average standardized amount for all areas for 
hospital inpatient services paid under the IPPS for operating costs 
(and hospital-specific rates applicable to SCHs and MDHs).
    <bullet> Target rate-of-increase limits to the allowable operating 
costs of hospital inpatient services furnished by hospitals and 
hospital units excluded from the IPPS.
12. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, MedPAC is required to submit a 
report to the Congress, no later than March 1 of each year, in which 
MedPAC reviews and makes recommendations on Medicare payment policies. 
MedPAC's March 2006 recommendation concerning hospital inpatient 
payment policies addressed the update factor for inpatient hospital 
operating costs and capital-related costs under the IPPS and for 
hospitals and distinct part hospital units excluded from the IPPS. This 
recommendation was addressed in Appendix B of the proposed rule. For 
further information relating specifically to the MedPAC reports or to 
obtain a copy of the reports, contact MedPAC at (202) 220-3700 or visit 
MedPAC's Web site at: www.medpac.gov.
13. Appendix C and Appendix D
    In Appendix C of the proposed rule, we listed the combinations of 
the consolidated severity-adjusted DRGs that we proposed to implement 
on FY 2008 (if not earlier), as discussed in section II.C. of the 
preamble of the proposed rule. In Appendix D of the proposed rule, we 
provided a crosswalk of the proposed consolidated severity-adjusted DRG 
system to the respective All Patient Related Diagnosis-Related Group 
(APR DRG) system.

D. Public Comments Received in Response to the FY 2007 IPPS and FY 2007 
Occupational Mix Adjustment to the Wage Index Proposed Rules

    We received over 2,300 timely items of correspondence containing 
multiple comments on the FY 2007 IPPS proposed rule. We also received 
over 100 timely items of correspondence on the FY 2007 Occupational Mix 
Adjustment to the Wage Index proposed rule. Summaries of the public 
comments and our responses to those comments are set forth under the 
appropriate heading.

E. Interim Final Rule on Selection Criteria of Loan Program for 
Qualifying Hospitals Engaged in Cancer-Related Health Care

    On September 30, 2005, we published in the Federal Register (70 FR 
57368) an interim final rule with comment period (CMS-1287-IFC) that 
set forth the criteria for implementing a loan program for qualifying 
hospitals engaged in research in the causes, prevention, and treatment 
of cancer, as specified in section 1016 of the Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 (Pub. L. 108-173). 
Specifically, this interim final rule established a loan application 
process by which qualifying hospitals, including specified entities, 
may apply for a loan for the capital costs of health care 
infrastructure improvement projects. The interim final rule was 
effective on November 29, 2005.
    We received seven timely items of correspondence on the interim 
final

[[Page 47879]]

rule. In section XI. of the preamble to this final rule, we are 
finalizing this interim final rule with comment period. In that 
section, we discuss the provisions of the program, the public comments 
received, our responses to those comments, and the final policy.

F. Proposed Rule on Forgiveness of Indebtedness under the Health Care 
Infrastructure Improvement Program

    On September 30, 2005, we published in the Federal Register (70 FR 
57376) a proposed rule (CMS-1320-P) to establish the loan forgiveness 
criteria for qualifying hospitals who receive loans under the Health 
Care Infrastructure Improvement Program that was established under 
section 1016 of Pub. L. 108-173.
    We received one timely item of correspondence on this proposed 
rule. We address the provisions of the proposed rule, a summary of the 
public comments received and our responses, and the provisions of the 
final rule in section XI. of the preamble of this final rule.

G. Interim Final Rule on the Exclusion of Vendor Purchases Made Under 
the Competitive Acquisition Program for Part B Outpatient Drugs and 
Biologicals for the Purpose of Calculating the Average Sales Price

    In November 21, 2005 Federal Register (70 FR 70748), we published 
an interim final rule with comment period (CMS-1325-IFC3) to clarify 
and solicit comments on the relationship between drugs supplied under 
the CAP for Part B Drugs and Biologicals and the calculation of the 
ASP.
    We did not receive any timely items of correspondence on this 
interim final rule with comment period. We summarize the provisions of 
the July 6, 2005 and the November 21, 2005 interim final rules and the 
current interim final provisions in section XII. of the preamble of 
this final rule.

II. Changes to DRG Classifications and Relative Weights

A. Background

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

B. DRG Reclassifications

1. General
    As discussed in section II.D. of the preamble to the FY 2007 IPPS 
proposed rule (71 FR 24030), for FY 2007, we are making only limited 
changes to the current DRG classifications that will be applicable to 
discharges occurring on or after October 1, 2006. We are limiting our 
changes because, as discussed in detail in section II.C. of the 
preamble to the proposed rule and to this final rule, we are focusing 
our efforts on addressing the recommendations made last year by MedPAC 
to refine the entire CMS DRG system by taking into account severity of 
illness and applying hospital-specific relative value (HSRV) weights to 
DRGs.
    Currently, cases are classified into CMS DRGs for payment under the 
IPPS based on the principal diagnosis, up to eight additional 
diagnoses, and up to six procedures performed during the stay. In a 
small number of DRGs, classification is also based on the age, sex, and 
discharge status of the patient. The diagnosis and procedure 
information is reported by the hospital using codes from the 
International Classification of Diseases, Ninth Revision, Clinical 
Modification (ICD-9-CM).
    The process of forming the 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 formed 
by physician panels as the first step toward ensuring that the DRGs 
would be clinically coherent. The diagnoses in each MDC correspond to a 
single organ system or etiology and, in general, are associated with a 
particular medical specialty. Thus, in order to maintain the 
requirement of clinical coherence, no final DRG could contain patients 
in different MDCs. Most MDCs are based on a particular organ system of 
the body. 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 2006, cases are 
assigned to one of 526 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.

[[Page 47880]]

 
17......................  Myeloproliferative Diseases and Disorders and
                           Poorly Differentiated Neoplasms.
18......................  Infectious and Parasitic Diseases (Systemic or
                           Unspecified Sites).
19......................  Mental Diseases and Disorders.
20......................  Alcohol/Drug Use and Alcohol/Drug Induced
                           Organic Mental Disorders.
21......................  Injuries, Poisonings, and Toxic Effects of
                           Drugs.
22......................  Burns.
23......................  Factors Influencing Health Status and Other
                           Contacts with Health Services.
24......................  Multiple Significant Trauma.
25......................  Human Immunodeficiency Virus Infections.
------------------------------------------------------------------------

    In general, cases are assigned to an MDC based on the patient's 
principal diagnosis before assignment to a DRG. However, for FY 2006, 
there are nine DRGs to which cases are directly assigned on the basis 
of ICD-9-CM procedure codes. These 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 for tracheostomies. Cases are 
assigned to these DRGs before they are classified to an MDC. The table 
below lists the nine current pre-MDCs.

               Pre-Major Diagnostic Categories (Pre-MDCs)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
DRG 103.....................  Heart Transplant or Implant of Heart
                               Assist System.
DRG 480.....................  Liver Transplant and/or Intestinal
                               Transplant.
DRG 481.....................  Bone Marrow Transplant.
DRG 482.....................  Tracheostomy for Face, Mouth, and Neck
                               Diagnoses.
DRG 495.....................  Lung Transplant.
DRG 512.....................  Simultaneous Pancreas/Kidney Transplant.
DRG 513.....................  Pancreas Transplant.
DRG 541.....................  ECMO or Tracheostomy with Mechanical
                               Ventilation 96+ Hours or Principal
                               Diagnosis Except for Face, Mouth, and
                               Neck Diagnosis with Major O.R.
DRG 542.....................  Tracheostomy with Mechanical Ventilation
                               96+ Hours or Principal Diagnosis Except
                               for Face, Mouth, and Neck Diagnosis
                               without Major O.R.
------------------------------------------------------------------------

    Once the MDCs were defined, each MDC was evaluated to identify 
those additional patient characteristics that would have a consistent 
effect on the consumption of hospital resources. Because the presence 
of a surgical procedure that required the use of the operating room 
would have a significant effect on the type of hospital resources used 
by a patient, most MDCs were initially divided into surgical DRGs and 
medical DRGs. Surgical DRGs are based on a hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. Medical DRGs generally are differentiated on the 
basis of diagnosis and age (0 to 17 years of age or greater than 17 
years of age). Some surgical and medical DRGs are further 
differentiated based on the presence or absence of a complication or a 
comorbidity (CC).
    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 DRG assignment for certain principal diagnoses. An example is 
extracorporeal shock wave lithotripsy for patients with a principal 
diagnosis of urinary stones.
    Once the medical and surgical classes for an MDC were formed, each 
class of diagnoses was evaluated to determine if complications, 
comorbidities, or the patient's age would consistently affect the 
consumption of hospital resources. Physician panels classified each 
diagnosis code based on whether the diagnosis, when present as a 
secondary condition, would be considered a substantial CC. A 
substantial CC was defined as a condition which, because of its 
presence with a specific principal diagnosis, would cause an increase 
in the length of stay by at least one day in at least 75 percent of the 
patients. Each medical and surgical class within an MDC was tested to 
determine if the presence of any substantial CC would consistently 
affect the consumption of hospital resources.
    A patient's diagnosis, procedure, discharge status, and demographic 
information is fed 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 a DRG.
    After patient information is screened through the MCE and any 
further development of the claim is conducted, the cases are classified 
into the appropriate DRG by the Medicare GROUPER software program. The 
GROUPER program was developed as a means of classifying each case into 
a DRG on the basis of the diagnosis and procedure codes and, for a 
limited number of DRGs, demographic information (that is, sex, age, and 
discharge status).
    After cases are screened through the MCE and assigned to a DRG by 
the GROUPER, the PRICER software calculates a base DRG payment. The 
PRICER calculates the payment for each case covered by the IPPS based 
on the DRG relative weight and additional factors associated with each 
hospital, such as IME and DSH adjustments. These additional factors 
increase the payment amount to hospitals above the base DRG payment.
    The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible DRG classification 
changes and to recalibrate the DRG weights. However, in the July 30, 
1999 IPPS final rule (64 FR 41500), we discussed a process for 
considering non-MedPAR data in the recalibration process. In order for 
us to consider using particular non-MedPAR data, we must have 
sufficient time to evaluate and test the data. The time necessary to do 
so depends upon the nature and quality of the non-MedPAR data 
submitted. Generally, however, a significant sample of the non-MedPAR

[[Page 47881]]

data should be submitted by mid-October for consideration in 
conjunction with the next year's proposed rule. This allows us time to 
test the data and make a preliminary assessment as to the feasibility 
of using the data. Subsequently, a complete database should be 
submitted by early December for consideration in conjunction with the 
next year's proposed rule.
    In the FY 2007 IPPS proposed rule, we proposed limited changes to 
the DRG classification system for FY 2007 for the FY 2007 GROUPER, 
Version 24.0 and to the methodology used to recalibrate the DRG 
weights. The changes we proposed, the public comments we received 
concerning the proposed changes, the final DRG changes, and the 
methodology used to calculate the DRG weights are set forth below. The 
changes we are implementing in this final rule will be reflected in the 
FY 2007 GROUPER, Version 24.0, and are effective for discharges 
occurring on or after October 1, 2006. Unless otherwise noted in this 
final rule, our DRG analysis is based on data from the March 2006 
update of the FY 2005 MedPAR file, which contains hospital bills 
received through March 31, 2006, for discharges occurring in FY 2005.
2. Yearly Review for Making DRG Changes
    Many of the changes to the DRG classifications are the result of 
specific issues brought to our attention by interested parties. We 
encourage individuals with concerns about DRG classifications to bring 
those concerns to our attention in a timely manner so they can be 
carefully considered for possible inclusion in the annual proposed rule 
Therefore, similar to the timetable for interested parties to submit 
non-MedPAR data for consideration in the DRG recalibration process, 
concerns about DRG classification issues should be brought to our 
attention 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 DRGs was, and continues to be, 
highly iterative, involving a combination of statistical results from 
test data combined with clinical judgment. For purposes of this final 
rule, in deciding whether to create a separate DRG, we consider 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 existing DRG. We evaluate patient care costs 
using average charges and lengths of stay as proxies for costs and rely 
on the judgment of our medical officers to decide whether patients are 
clinically distinct or similar to other patients in the DRG. In 
evaluating resource costs, we consider both the absolute and percentage 
differences in average charges between the cases we are selecting for 
review and the remainder of cases in the DRG. We also consider 
variation in charges within these groups; that is, whether observed 
average differences are consistent across patients or attributable to 
cases that are extreme in terms of charges or length of stay, or both. 
Further, we also consider the number of patients who will have a given 
set of characteristics and generally prefer not to create a new DRG 
unless it will include a substantial number of cases.

C. Revisions to the DRG System Used Under the IPPS

1. MedPAC Recommendations
    In the FY 2006 IPPS final rule, we discussed a number of 
recommendations made by MedPAC regarding revisions to the DRG system 
used under the IPPS (70 FR 47473 through 47482).
    In Recommendation 1-3 in the 2005 Report to Congress on Physician-
Owned Specialty Hospitals, MedPAC recommended that CMS refine the 
current DRGs to more fully capture differences in severity of illness 
among patients, including:
    <bullet> Base the DRG relative weights on the estimated cost of 
providing care.
    <bullet> Base the weights on the national average of the hospital-
specific relative values (HSRVs) for each DRG (using hospital-specific 
costs to derive the HSRVs).
    <bullet> Adjust the DRG relative weights to account for differences 
in the prevalence of high-cost outlier cases.
    <bullet> Implement the case-mix measurement and outlier policies 
over a transitional period.
    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. Following 
the publication of the FY 2006 IPPS final rule, we contracted with 3M 
Health Information Systems to assist us in performing this analysis.
    Beginning with MedPAC's relative weight recommendations, we 
analyzed MedPAC's recommendations to move to a cost-based HSRV 
weighting methodology. In performing this portion of the analysis, we 
studied hospital cost report data, departmental cost-to-charge ratios 
(CCRs), MedPAR claims data, and HSRV weighting methodology. Our 
intention in undertaking this portion of the analysis was to find an 
administratively feasible approach to improving the accuracy of the DRG 
weights. As we described in the proposed rule, we believe some changes 
can be made to MedPAC's methodology for determining the relative 
weights that will make it more feasible to replicate on an annual basis 
but will result in similar impacts.
    In conjunction with analyzing MedPAC's relative weight 
recommendations, we looked at refining the current DRG system to better 
recognize severity of illness. Starting with the APR DRG GROUPER used 
by MedPAC in its analysis, we studied Medicare claims data. Based on 
this analysis, we developed a CS DRG GROUPER that we believe could be a 
better alternative for recognizing severity of illness among the 
Medicare population. We note that MedPAC's recommendations with regard 
to revising the DRGs to better recognize severity of illness may have 
implications for the outlier threshold, the measurement of real case-
mix versus apparent case-mix, and the IME and the DSH adjustments. We 
discuss these implications in more detail in the following sections.
    As we present below, we believe that the recommendations made by 
MedPAC, or some variants of them, have significant promise to improve 
the accuracy of the payment rates in the IPPS. We agree with MedPAC 
about exploring possible refinements to our payment methodology even in 
the absence of concerns about the proliferation of specialty hospitals. 
In the FY 2006 final rule, we indicated that until we had completed 
further analysis of the options and their effects, we could not predict 
the extent to which changing to APR DRGs would provide payment equity 
between specialty and general hospitals. In fact, we cautioned that any 
system that groups cases will always present some opportunities for 
providers to specialize in cases they believe to have higher margins. 
We believe that improving payment accuracy should reduce these 
opportunities and potentially reduce the

[[Page 47882]]

incentives that Medicare payments may provide for the further 
development of specialty hospitals.
    We considered MedPAC's recommendation to adjust the relative 
weights to account for differences in the prevalence of outlier cases. 
However, we placed most of our attention and resources on the 
recommendations related to refinement of the current DRGs to more fully 
capture differences in severity of illness among patients, as we do not 
have the statutory authority to make the specific changes to our 
outlier policy that MedPAC recommended. While we have not made MedPAC's 
recommendation regarding outliers a central focus of our analysis, we 
do intend to examine this issue in more detail in the future. In 
sections II.C.2. through C.6. of the FY 2007 proposed rule, we 
discussed a number of issues related to the MedPAC recommendations. We 
also presented our analysis and specific proposals for FY 2007 and FY 
2008 including their estimated impacts. In this final rule, we present 
the public comments received on the proposed rule, our responses to 
those comments, our final decisions for FY 2007 and our intended 
actions for FY 2008.
2. Refinement of the Relative Weight Calculation
    MedPAC made two recommendations with respect to the DRG relative 
weight calculation. First, MedPAC recommended that CMS base the DRG 
relative weights on the estimated cost of providing care. Second, 
MedPAC recommended that CMS base the weights on the national average of 
hospitals' relative values in each DRG. Because both of these 
recommendations address the relative weight calculation, we are 
addressing them together. The work we have done to address these 
recommendations was discussed in detail in the proposed rule (71 FR 
24006-24011).
    MedPAC recommended that CMS replace its charge-based relative 
weight methodology with cost-based weights, as it believed that the 
charge-based relative weight methodology that CMS has utilized since 
1985 has introduced bias into the weights due to differential markups 
for ancillary services among the DRGs. In analyzing claims data, it is 
evident to us that some hospital types (for example, teaching 
hospitals) are systematically more expensive overall than the average 
hospital and certain case types are more commonly treated at these more 
expensive facilities. Higher average charges for cases that are treated 
at more expensive hospitals may result in higher weights for these 
types of cases. MedPAC suggested a hospital-specific relative value 
(HSRV) methodology which MedPAC believed would reduce the effect of 
cost differences among hospitals that may be present in the national 
relative weights due to differences in case-mix adjusted costs.
    Under the HSRV methodology recommended by MedPAC, charges are 
standardized for each provider by converting its charges for each case 
to hospital-specific relative charge values and then adjusting those 
values for the hospital's case-mix. The first step in this process 
involves dividing the charge for each case at the hospital by the 
average charge for all cases at the hospital in which the case was 
treated. The hospital-specific relative charge value, by definition, 
averages 1.0 for each hospital. The resulting ratio is then multiplied 
by the hospital's case-mix index (CMI). In this way, each hospital'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 hospitals. We discuss this 
issue in further detail below.
    Our analysis of departmental-level CCRs from the Medicare cost 
report data has shown that charges for routine days, intensive care 
days, and various ancillary services are not marked up by a consistent 
amount. For example, the markup amounts for cardiology services are 
higher than average. Because charges are the current basis for the DRG 
relative weights, the practice of differential markups can lead to bias 
in the DRG weights because various DRGs use, on average, more or less 
of particular ancillary services. MedPAC believes that the bias in the 
national DRG relative weights that may arise as a result of 
differential markups across various cost centers can be removed by 
moving from charge-based to cost-based weights. Based on the analysis 
we have conducted, we agree that it is appropriate to adjust the DRG 
relative weights to account for the differences in charge markups 
across cost centers.
    In the proposed rule, we indicated several concerns about the 
methodology used by MedPAC. MedPAC's methodology to reduce hospital 
charges to cost is administratively burdensome, not only to develop, 
but also to maintain. First, MedPAC developed CCRs for individual 
hospitals at the most detailed department level. Specifically, in 
calculating costs as the basis for the relative weights, MedPAC applied 
hospital-specific CCRs from each provider's cost report to the line 
item charges on the claims that the hospital submitted during the same 
time period. This methodology required matching cost report data to 
claims data, and because cost report data take longer to compile and 
file, the method necessitates using older claims data to set relative 
weights. The most recent complete set of Medicare cost reports 
available to us is from FY 2003. Thus, if we were to model the exact 
approach used by MedPAC and use claims data for a matching year, we 
would be using claims data from FY 2003 instead of using FY 2005 claims 
data, as we would if we were to continue with our current methodology. 
In addition, MedPAC's hospital-specific approach required detailed cost 
center distinctions for each hospital that are difficult to define, 
map, and apply. This approach also required the use of the Standard 
Analytic File (SAF) because MedPAR data that we currently use to set 
DRG weights did not have the necessary level of detail. Using the SAF 
increases processing time and adds further complexity to the process of 
setting the relative weights.
    Second, because MedPAC applied these CCRs at the individual claim 
level, missing or invalid data resulted in MedPAC deleting a large 
number of claims (approximately 10 percent) from the relative weight 
calculation. Lastly, MedPAC acknowledged that its method was too 
difficult to replicate on an annual basis and suggested that the 
weights be recalculated once every 5 years with other adjustments based 
on charges during the intervening years.
    As we explained in the FY 2007 IPPS proposed rule, we developed an 
alternative to MedPAC's approach that we believe achieves similar 
results in a more administratively feasible manner. This method 
involves developing hospital-specific charge relative weights at the 
cost center level and then scaling the weights to costs using the 
national cost center charge ratios developed from the cost report data. 
After studying Medicare cost report data, we established 10 cost center 
categories based upon broad hospital accounting definitions. In our 
cost center categories, there are 8 ancillary cost groups in addition 
to routine day costs and intensive care day costs, and each category 
represents at least 5 percent of the charges in the claims data. The 
specific cost report lines that contribute to each category and the 
corresponding charge lines from the MedPAR claims data are itemized in 
Table A below.
    In the proposed rule, we stated that this alternative approach, 
which we labeled as the HSRV cost center (HSRVcc) methodology, has 
several advantages. First, the use of national average rather than 
hospital-specific CCRs avoids the complexity

[[Page 47883]]

encountered with cost center CCRs at the hospital level and allows us 
to retain more data for use in the relative weight calculation. In 
addition, the methodology eliminates the need to match claims to the 
time period of the CCRs, resulting in the ability to use more timely 
claims data. Furthermore, the alternative approach makes it more 
feasible to update the relative weights annually using a single 
methodology. We do not have to replicate the methodology once every 5 
years and make adjustments based on changes in charges in the 
intervening years. The HSRVcc methodology is described in detail in the 
proposed rule (71 FR 24008 through 24011).
    Comment: Several commenters supported CMS' effort to restructure 
the DRG relative weights based on cost. They stated that using charges 
as a proxy for hospital costs in determining resource utilization under 
the current system is inappropriate and encouraged CMS to implement a 
cost-based system consistent with the agency's original intent without 
delay.
    Response: We appreciate the commenters' support of our proposal to 
implement a cost-based weighting methodology. We believe that adopting 
cost-based weights will result in significant improvements to 
Medicare's IPPS payments. MedPAC concluded after an extensive analysis 
of Medicare hospital inpatient claims and cost data that the IPPS 
payment rates are badly distorted, resulting in Medicare paying too 
much for some types of patients and too little for others. As indicated 
below, we are making some modifications to our proposals in response to 
the public comments. However, we are adopting a system of cost-based 
weights for FY 2007 to address the concerns raised by MedPAC. As a 
result, all hospitals, including specialty hospitals, will be paid more 
appropriately. In addition, based on our analysis, we concur with 
MedPAC that the current DRG system needs to be changed to better 
account for severity of illness among patients. This issue is discussed 
in more detail in the next section of this final rule.
    Comment: A majority of commenters supported CMS' efforts to improve 
the accuracy of the DRG weights, and better reflect variations in 
patients' severity of illness. However, many commenters viewed the 
HSRVcc proposal as flawed from both a methodological and policy 
perspective, and believed the proposal to implement cost-based weights 
should be delayed for at least a year. They believed that CMS needs to 
further consider a number of issues raised in the public comments 
before such sweeping changes are implemented. In addition, the 
commenters indicated that CMS needs to provide hospitals with more 
lead-time before implementing changes so they can budget accurately. 
They urged CMS to use the current standardized charge-based approach in 
FY 2007 until these issues can be addressed. At a minimum, they 
believed CMS should address what were characterized as methodological 
flaws and publish revised relative weights along with hospital impacts 
for public comment prior to implementation.
    Response: We appreciate the commenters' concerns with regard to a 
rapid and full implementation of the changes we proposed to the 
relative weight methodology. However, based on our analysis and study 
of the MedPAC recommendations that we presented in our proposed rule, 
it has come to our attention that differential markups between routine 
and ancillary cost centers have introduced significant bias into the 
relative weights. In order to reduce the bias in weights and make more 
appropriate payments under the IPPS, we believe it is necessary to 
initiate the transition to a cost-based relative weight methodology in 
FY 2007. However, we have considered the commenters' requests to 
further review the HSRV methodology. Therefore, in this final rule, we 
are not adopting our proposal to standardize charges using the HSRV 
methodology. However, we are adopting our proposal to reduce charges to 
estimated costs prior to setting DRG weights. We will undertake further 
analysis of the HSRV methodology during the next year. Based on this 
analysis, we will consider proposing further changes to adopt the HSRV 
methodology for FY 2008.
    Comment: Many commenters disagreed with CMS' assertion that the 
more administratively feasible HSRVcc approach achieves similar results 
to the MedPAC methodology. While they supported CMS' efforts to ensure 
the DRG weights are updated annually to reflect the most recent trends 
in inpatient care, they expressed concern with the specifics of the 
HSRVcc methodology.
    First, they noted that CMS stated in the proposed rule that organ 
acquisition costs were eliminated from hospital charges before the 
HSRVcc weights were calculated. However, it had come to their attention 
that organ acquisition charges were actually included in the 
calculation of DRG weights under the proposed methodology. They stated 
that organ acquisition is reimbursed by Medicare on a cost basis and 
should not be included in the weight calculation. Furthermore, the 
commenters asserted that the inclusion of organ acquisition charges 
improperly overstated the transplant DRG HSRVcc weights. Commenters 
recommended that CMS remove the organ acquisition charges from the 
computation of the DRG weights if the HSRVcc methodology is to be 
adopted.
    Second, commenters believe CMS made questionable methodological 
decisions when calculating the national CCRs. Under the proposed 
methodology, CMS calculated hospital-weighted rather than charge-
weighted CCRs for each of the 10 cost centers used to scale the charge-
based weights. Because the averages are unweighted, the commenters 
stated that the CCRs do not account for the differential contribution 
of each hospital to total charges. The commenters asserted that, 
mathematically, the only correct way to get from total hospital charges 
to total hospital costs is to use a charge-weighted average of hospital 
CCRs. Failure to use charge-weighted averages overestimates routine and 
ICU costs and underestimates ancillary costs, which ultimately 
exaggerates the shift in payments, according to the commenters. 
Therefore, commenters believed CMS should recalculate the mean national 
CCRs using a charge-weighted method.
    Third, commenters believed CMS applied questionable trimming 
criteria in computing the cost center CCRs. They stated that trimming 
the cost center CCRs at 1.96 standard deviations (rather than 3 
standard deviations) from the geometric mean inappropriately excluded 
over 200 large hospitals that account for 25 percent of routine 
accommodation charges. They noted that the CCRs for these hospitals 
appear to be predominantly correct. In addition, the commenters noted 
that CMS applied the CCRs to the charge data for hospitals that were 
excluded from the national average CCR calculation. Thus, the 
commenters argued there is a significant mismatch between the hospital 
data that was included in the CCR and HSRVcc calculations. These 
commenters recommended that CMS exclude hospital data from the CCRs if 
it is more than 3 standard deviations (rather than 1.96) from the mean 
CCR. Many commenters characterized these methodological decisions as 
errors and indicated that their combined impact is significant. If CMS 
is to use the HSRVcc methodology, the commenters indicated that these 
issues should be addressed.
    A few commenters stated that we made incorrect assumptions that may 
have resulted in new distortions to the relative weights. Specifically, 
the commenters stated that we were incorrect in applying the same CCR

[[Page 47884]]

across all hospitals for a given cost center and applying the same 
percent mix of services by cost center to all DRGs. The commenters 
recommended that we first convert charges to costs for each hospital 
and DRG, and then compute hospital-specific relative values. They 
stated that the reversal of the calculations in the HSRVcc methodology 
accommodates cost center mix and charge markup differences across 
hospitals and across DRGs.
    Many commenters argued that the hospital-specific relative value 
methodology is unnecessary and compresses the DRG weights. Commenters 
cited past research indicating that HSRV has a disproportionate impact 
on certain types of hospitals and types of care, and reduces the range 
of DRG weights between the lowest and highest weight DRGs.\1\ 
Commenters noted that the HSRV methodology ``produces more compressed 
DRG weights'' than the existing standardization methodology and that 
``the greater compression of the HSRV weights is counter balanced by 
the fact that more high-weighted cases qualify as [high cost] outlier 
cases.'' A few commenters expressed concern that adopting MedPAC's 
recommendation to exclude high-cost outliers in addition to statistical 
outliers from the computation of the DRG weights so that the weights 
reflect the average cost only of inlier cases would compound the DRG 
weight compression caused by the HSRV methodology because high-cost 
outlier cases occur most frequently in high-weighted DRGs. The 
commenters indicated that the finding raises the concern of patient 
access to care for services in higher cost DRGs.
---------------------------------------------------------------------------

    \1\ Carter, Grace ``How recalibration method, pricing, and 
coding affect DRG weights,'' Health Care Financing Review, Winter 
1992.
---------------------------------------------------------------------------

    Commenters also believed that the HSRV methodology fails to take 
into account legitimate variation in costs that occur between 
hospitals. Therefore, any hospital-level variation in cost that is not 
explained by the IPPS case mix index is simply ignored, according to 
the commenters. To the extent that certain services are provided most 
frequently in hospitals with higher than average cost, the commenters 
believed that the HSRV methodology will result in inappropriately lower 
DRG weights for these services.
    Therefore, commenters strongly recommended that the HSRV 
methodology be eliminated in favor of the cost-based weighting 
methodology adopted under the OPPS. They stated that the main 
difference between these two approaches is the treatment of cost 
variation that is not otherwise explained with IPPS payment factors. In 
the standardization approach employed by OPPS, any variation in 
hospital costs that is not explained by CMS payment factors affects the 
calibration of DRG weights. They stated that the HSRV approach proposed 
by CMS, by contrast, ignores any hospital level variation in charges 
that is not explained by the case mix index. Many commenters added that 
CMS could propose to remove other sources of cost variation beyond its 
current practice of standardizing for wage index, DSH, and IME. They 
believed a factor-specific approach to standardization would lead to 
more precise and valid adjustments than those recognized under the HSRV 
methodology, which eliminates all sources of charge variation 
irrespective of whether there are legitimate differences among 
hospitals in costs that are not taken into account in the payment 
system.
    Response: In preparing the FY 2007 relative weights, the costs of 
organ acquisition were inadvertently included in the relative weight 
for the calculation of ``other services.'' The costs of organ 
acquisition are paid by Medicare on a cost basis and should not be 
included in setting the IPPS relative weights. These costs have been 
excluded from the IPPS relative weights calculated for this final rule.
    In response to the concerns expressed regarding the CCR 
calculation, we proposed to establish the geometric mean CCRs using a 
hospital-weighted methodology because we believed that it served as an 
acceptable measure of central tendency. In addition, we proposed to 
trim the CCRs on the basis of 1.96 standard deviations since we were 
using national averages and thought a more stringent statistical trim 
would be appropriate. In response to comments, however, we have 
reconsidered our approach and have implemented the 3 standard deviation 
statistical trim supported by commenters. Further, we are also adopting 
the charge-weighted method of calculating CCRs, as we now believe it 
may be more appropriate to apply CCRs based on aggregate costs and 
charges among hospitals to the charges that are aggregated by DRG and 
used to set the relative weights.
    Although commenters asserted that the HSRV methodology exacerbates 
the effect of charge compression on the relative weights, we have not 
had sufficient time between the close of the comment period and the 
publication of this final rule to analyze this assertion. Therefore, in 
response to comments (and as stated above), we are postponing the 
implementation of the HSRV methodology until we can study this comment 
further. Instead, as suggested by many commenters, we are using an 
approach to calculating the IPPS relative weights that is more similar 
to the approach used in the OPPS. That is, rather than using a 
hospital-specific relative weighting methodology, we are standardizing 
charges to remove relevant payment factor adjustments and then 
adjusting those charges to costs using national cost center CCRs. As we 
stated in the proposed rule, it is not administratively feasible to 
adjust charges to cost using hospital-specific cost to charge ratios. 
Therefore, while we are standardizing charges for the IPPS cost-based 
weights using a similar process to the OPPS, we are still utilizing 
national average CCRs to determine cost. Specifically, we are 
standardizing the charges for each DRG by cost center to remove 
differences in wage index, indirect medical education and 
disproportionate share adjustments and are then reducing the 
standardized charges to cost using the national average CCRs. The 
relative weights we are adopting in this final rule are calculated 
based on the average total cost for a DRG in relation to the national 
average total cost.
    Comment: Many commenters expressed concern that CMS collapsed the 
full set of at least 37 cost centers into only 10. They believed this 
approach eliminates detail that is available on the cost report. The 
commenters requested that CMS elaborate on the process it went through 
to derive the 10 cost centers used to calculate the HSRVcc weights. 
Some commenters stated CMS should use all 37 cost centers that are used 
in calculating the OPPS relative weights for the IPPS. Other commenters 
suggested that CMS expand the number of cost centers used in the 
calculation. MedPAC found that the CCRs within the proposed 10 cost 
centers varied significantly in some areas and recommended that CMS 
expand the number to 13 by distinguishing anesthesia and labor and 
delivery from the operating room cost center and distinguishing 
inhalation therapy from the therapy services cost center. Several 
commenters supported MedPAC's recommendation. Further, MedPAC 
recommended that the CCRs be based on Medicare-specific costs and 
charges rather than on the costs and charges for the entire facility. 
Some commenters advocated that a separate cost center be added for 
implantable devices. They believed this additional cost center would 
better identify the mark-up for high cost technological devices than

[[Page 47885]]

using the average for all supplies and equipment.
    Several commenters encouraged CMS to specifically incorporate 
nursing costs into the weighting methodology. They stated that nursing 
care represents approximately 30 percent of all hospital expenditures 
and nearly half of all direct care costs and have been essentially 
ignored in the payment formula. Specifically, these commenters urged 
CMS to create a unique Nursing Cost Center that identifies the 
inpatient direct and indirect costs for registered nurses, licensed 
practical nurses, and unlicensed assistive personnel. They defined 
direct nursing costs as those associated with licensed and assistive 
nursing personnel assigned to care for an individual patient. Indirect 
nursing costs are all other salary and benefits related to licensed and 
assistive nursing personnel not directly assigned to care for 
individual patients. They suggested that the routine and intensive care 
cost centers in the proposed HSRVcc methodology be replaced with a 
nursing cost center and a separate facility cost center to identify the 
non-nursing cost component of care. They urged CMS to set aside funds 
to study and implement the above recommendation using methodologically 
sound research and demonstration projects.
    Response: As we stated in the proposed rule, we established 10 cost 
center categories based upon broad hospital accounting definitions. 
These 10 cost center categories consist of 8 ancillary cost groups, a 
routine days cost group, and an intensive care days cost group. These 
cost centers were selected because each category represents at least 5 
percent of the charges in the claims data.
    We thoroughly reviewed the comments advocating that we expand the 
number of cost centers used in the calculation. We currently use the 
MedPAR data set for charge detail. The MedPAR file does not provide 
enough granularity in the charge detail to support 37 different cost 
centers. In addition, in the proposed methodology, we eliminated claims 
for providers that did not have costs greater than zero for at least 8 
of the 10 cost centers. At least 96 percent of the providers in the 
MedPAR file had charges for at least 8 of the 10 cost centers. We 
believe that if we were to expand to the full set of 37 cost centers 
outlined in the cost report, we would eliminate a greater number of 
claims in the calculation of the DRG relative weights.
    While we do not believe expanding to 37 cost centers is feasible, 
we agree with MedPAC that we may have consolidated a few revenue 
centers that have significantly different CCRs. Upon further 
examination of the data, in this final rule, we are expanding the 
number of cost centers from 10 to 13 by creating separate cost centers 
for anesthesia, labor and delivery, and inhalation therapy. We also 
agree with MedPAC that it would be more appropriate to set the CCRs 
based on Medicare-specific charges and costs rather than on the costs 
and charges for the entire facility. Therefore, in this final rule, we 
are modifying our CCR calculations to incorporate Medicare-specific 
charge data from Worksheet D Part 4 in addition to the cost and charge 
data from Worksheet C Part I that we used in the proposed rule.
    Other commenters suggested that we also create separate cost 
centers for implantable devices and nursing. As noted in the comments, 
the MedPAR file does not contain the necessary detail to identify a 
separate cost center for implantable devices or nursing. In addition, 
we did not have enough time to evaluate whether it would be reasonable 
to utilize a nursing cost center in the methodology in the future. 
However, we anticipate undertaking further analysis of the relative 
weight methodology over the next year in conjunction with the research 
we are doing on charge compression to determine if additional cost 
centers are necessary.
    Comment: Commenters, referring to Table A, ``Charge Line Items from 
MedPAR Included in Cost Center Charge Group,'' noted that MedPAR charge 
descriptions do not match the Form CMS-2552-96 Cost Center 
description(s) for several cost centers. For example:
    (a) MedPAR lists (18) Lithotripsy Charges where the cost reporting 
form lists Radioisotopes;
    (b) MedPAR lists (6) Other Services where the cost reporting form 
lists Whole Blood and Packed Red Blood Cells;
    (c) MedPAR lists (19) Cardiology Charges as including line 54 of 
the cost report, which is Electroencephalography;
    (d) MedPAR lists (16) Blood Administration Charges where the cost 
reporting form lists ASC (Non-Distinct Part);
    (e) MedPAR lists (24) Outpatient Services Charges where the cost 
reporting form lists Emergency;
    (f) MedPAR lists (25) Emergency Room Charges where the cost 
reporting form lists Ambulance Services;
    (g) MedPAR lists (26) Ambulance Charges where the cost reporting 
form lists Renal Dialysis;
    (h) MedPAR lists (29) ESRD Revenue Setting Charges where the cost 
reporting form lists Clinic;
    (i) MedPAR lists (30) Clinic Visit Charges where the cost reporting 
form lists Other Outpatient Services, Other Ancillary, Home Program 
Dialysis and Ambulance Services;
    (j) Ambulance Services appear to be included twice, once in (30) 
Clinic Visit Charges and once in (25) Emergency Room Charges;
    (k) Lithotripsy is included in Radiology Services;
    (l) Line 62 ``Observation Beds'' is not reflected separately in 
Table A; and
    (m) Line 68 ``Other reimbursement'' of the cost report is not 
listed in Table A.
    In addition, commenters were unclear as to whether CMS accounted 
for subscripted lines in the cost report when calculating CCRs. The 
commenters noted that subscripted lines did not appear in Table A. 
Commenters believed this inconsistency in reporting may lead to 
distorted DRG weights. Therefore, commenters recommended that CMS 
examine this issue thoroughly before implementing cost-based weights. 
Several commenters requested that CMS publish a crosswalk of the 
revenue codes that are used for each MedPAR charge data group and 
require intermediaries to review cost report data to ensure that 
providers have reported data consistent with the mapping to the MedPAR 
data.
    Response: We wish to clarify to the commenters that the charge 
description titles shown in the MedPAR charge description column in 
Table A were not meant to also be interpreted as the title for each of 
the cost report line items. That is, we were simply using Table A to 
illustrate the MedPAR charge groups and the cost report line numbers 
that were used to create the 10 proposed cost centers. To alleviate 
this confusion, we are revising Table A to show both the MedPAR charge 
titles and the titles of the cost report line items. In response to 
comments (j) and (l), we note that the cost report line item number 65 
for ambulance was inadvertently listed twice in the proposed rule; line 
item 62, observation beds, was used in establishing the CCR for the 
other services category. Line 65 for ambulance was only used once in 
the actual other services CCR calculation. Line item 62 should have 
appeared in the ``other services'' cost center grouping printed in 
Table A in the proposed rule. We have corrected this error in the final 
version of Table A. In addition, in regards to comment (k) above, we 
have moved the lithotripsy charges from MedPAR to the ``other 
services'' cost center grouping and we have also

[[Page 47886]]

revised the CCR for ``other services'' to include the cost report line 
item 43 for radioisotopes, which was formerly included in the radiology 
CCR.
    In response to the commenters' question regarding the inclusion of 
subscripted lines, when we calculated the CCRs for the proposed rule 
and subsequently for this final rule, we relied on a HCRIS data set 
that contains rolled-up cost report fields such that line items which 
are subscripted contain the total value for the line item and any 
subscripted lines below. Therefore, most subscripted lines were 
included in the proposed rule CCRs and continue to be included in the 
final rule CCR calculations. However, some subscripted line items are 
not rolled up and continue to have their own field on the HCRIS data 
set that we used to calculate the CCRs. Therefore, we are now including 
the cost report line item 6201 for observation beds, the cost report 
line item 6350 for Rural Health clinics and the cost report line item 
6360 for Federally Qualified Health clinics in the other services CCR. 
Cost report line items 6350 and 6360 are only reported by provider-
based Rural Health clinics and Federally Qualified Health clinics and 
are necessary in order to identify all incurred costs applicable to 
furnishing an observation bed prior to a decision to admit a patient to 
the hospital. Further, we are now including the cost report line item 
68 for other reimbursement in the other services CCR, and we are 
including professional services charges from MedPAR in the other 
services charge grouping. In response to the commenters' requests that 
we show the revenue codes that comprise the MedPAR charges, we have 
also inserted an additional column in Table A that lists the revenue 
codes MedPAR groups into each charge field that we are using in the 
final 13 cost centers. The final version of Table A appears below:
BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TR18AU06.000


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[GRAPHIC] [TIFF OMITTED] TR18AU06.001


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[GRAPHIC] [TIFF OMITTED] TR18AU06.002


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[GRAPHIC] [TIFF OMITTED] TR18AU06.003


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[GRAPHIC] [TIFF OMITTED] TR18AU06.004


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[GRAPHIC] [TIFF OMITTED] TR18AU06.005

    Comment: Many commenters warned that the redistribution of payments 
from the surgical to the medical DRGs under the proposed methodology 
may create unintended consequences. Several of these commenters stated 
that this redistribution poses a threat to patients' access to the 
latest medical advances and highest quality care. They feared that 
hospitals will invest less in new medical technologies because Medicare 
would not pay sufficiently for the DRGs that use them. Another 
commenter stated that the increased reimbursement for psychiatric DRGs 
may create an incentive for IPFs to decertify and become inpatient 
units.
    Response: We appreciate the commenters' concern that payment 
redistribution may create the potential for unintended consequences. 
However, we wish to emphasize that the redistribution of payments among 
DRGs is necessary to improve payment accuracy and eliminate the 
distortions in the current IPPS payment rates. Under the methodology in 
this final rule, we will increase payment for relatively underpaid 
cases and reduce payment for relatively overpaid cases.
    We are adopting a methodology that will realign payments with costs 
to pay more appropriately for services rendered by hospitals. 
Therefore, we do not believe altering the DRG relative weighting 
methodology will affect patients' access to quality medical care. 
Patients should have continued and uninterrupted access to new, 
innovative technologies.
    We have analyzed the impact of the increased reimbursement for 
psychiatric DRGs in response to the commenter's concern that increased 
reimbursement may provide incentives for IPFs to decertify their units 
and be paid under the IPPS. Because of the differences in payment 
between the IPPS and the IPF PPS, we do not believe that the DRG 
relative weights we are adopting in this final rule will provide 
increased incentive for IPFs to decertify units. Whereas under the IPF 
PPS, hospitals receive a daily base rate and adjustments to account for 
certain patient and facility characteristics, hospitals paid under the 
IPPS are paid a specified amount based on the DRG for the same cases, 
regardless of the length of the hospital stay. Our analysis suggests 
that even though the average payment per day (total payment divided by 
average length of stay) for the psychiatric DRGs in the IPPS proposed 
rule may be higher than under the IPF PPS, the total average payment 
per episode of care remains lower (product of the average IPF payment 
per day and the average length of stay). Thus, because payments per 
episode of care remain lower under the IPPS than under the IPF PPS, we 
are not concerned that IPFs will decertify to get paid using the IPPS. 
In addition, as indicated above, we are making some modifications to 
our methodology in response to the public comments. Based on these 
changes, the increase in the relative weights for the psychiatric DRGs 
presented in this final rule will not be as significant as those 
contained in the proposed rule.
    Comment: Commenters expressed concern that because hospitals often 
allocate charges on the cost reports differently than charges on the 
claims, the cost-center level CCRs are calculated based on a different 
set of charges than the charges on the claims to which the CCRs are 
later applied. Commenters expressed concern that Medicare cost report 
data are not detailed enough or consistently reported accurately to 
determine costs accurately at a DRG level since such data lack specific 
cost data on individual items and services. They reiterated that the 
Medicare cost reports, which serve as the primary source of data under 
the proposed system, were not designed to be used in a prospective 
payment system and have not been used to establish hospital rates for 
inpatient services for some time. They noted several limitations in 
using the cost reports to derive estimated costs utilized in the DRG 
relative weight calculations that should be carefully examined and 
addressed before moving forward with the proposed system of hospital-
specific cost weights.
    First, the commenters believed that CMS should address cost report 
accuracy. The commenters stated that because the cost reports have only 
been used for payment in limited circumstances (DSH, IME, outlier 
policy), hospitals have had little incentive to report accurately and 
completely for the services provided to Medicare beneficiaries. In 
addition, they claimed the cost reports do not contain the level of 
detail necessary to accurately determine costs at the DRG level. 
Instead, the cost report provides payments, costs, and some 
reimbursement totals by department or cost center. The commenters also 
advised that CMS perform additional auditing of the cost reports to 
ensure accuracy. The commenters were concerned that if CMS implements a 
cost-based weighting methodology, the DRG weights will be based on 
largely un-audited cost reports since approximately 15 percent of 
hospital cost reports are audited each year. They noted that MedPAC 
estimated that a full-scale audit could require 1,000 to 2,000 hours 
from a fiscal intermediary,

[[Page 47893]]

as well as additional time and resources from the hospital. In 
addition, a few commenters stated that CMS should only use final 
settled cost report data, not as-submitted data, in calculating DRG 
weights.
    Second, some commenters contended that CMS should evaluate the 
overall timeliness of cost report data. They stated that cost report 
data used to recalibrate the DRG weights are outdated and significantly 
older than the charge-based data currently used to determine DRG 
weights under the IPPS. Under the proposed methodology, CMS used 
hospital claims data from FY 2005 and hospital cost reports from FY 
2003. The commenters were concerned that because a lag between the cost 
report year and the payment year exists, the proposed methodology would 
rely on older data that does not reflect the costs of many newer 
technologies. The commenters supported an approach that uses more 
recent claims and cost report data and also urge CMS to explore options 
for using alternative data sources that include current information on 
the costs of inpatient care.
    Third, the commenters stated that CMS should examine the 
comparability of cost reports due to variability in how hospitals 
allocate costs. Commenters explained that a cost allocation methodology 
must be used to estimate the cost of individual items and services from 
the aggregate costs reported for each cost-center on the cost-report. 
They stated that the proposed methodology assumes that all hospitals 
consistently allocate costs to the same cost centers. However, 
hospitals may have inconsistent cost accounting practices or use 
different cost allocation methods (for example, utilization or square-
footage) according to the commenters. The commenters suggested these 
factors and the compression of charges both within and across cost-
centers, limits the usefulness of cost report data to accurately 
estimate costs. According to the commenters, each hospital uses its own 
method to allocate costs among cost centers, often resulting in cost 
assignments that do not reflect the departments to which charges are 
assigned in the MedPAR data. For example, some commenters indicated 
that they included cardiac catheterization in lines other than 53 and 
54 that group to the cardiac cost center. In addition, several 
commenters noted that hospitals report medical supply costs 
inconsistently. While some report them in the supply cost center, 
others report the medical supply cost in the cost center for the 
procedure in which the device was used (that is, medical supplies 
specific to the Emergency Room are included in line 61 of the cost 
report). The commenters suggested that more specific cost report 
instructions may be necessary to ensure that hospitals report the 
information correctly and consistently. Some commenters believed that 
cost report data were not intended or designed to be used to develop 
accurate payment rates and suggested developing a proxy to more 
accurately allocate costs at the DRG level, such as collecting data 
from hospitals that utilize ``sophisticated cost accounting tools that 
provide more accurate allocation of costs.''
    Some commenters also recommended that CMS convene an expert panel 
to explore ways to address the current limitations of the cost report. 
They stated that this effort should identify methods to better use or 
improve hospital cost reports for use in setting the inpatient and 
outpatient relative weights. The expert panel should aim to identify 
changes to the cost report that reduce the net information burden on 
hospitals, while improving overall payment accuracy. The panel should 
report its recommendations by April 2007 to enable CMS enough time to 
consider the recommendations in setting the relative weights for FY 
2008. Other commenters advocated that CMS initiate a national project 
to correct any misalignments between cost and charges in cost reports 
and on the MedPAR claims. Other commenters suggested that CMS postpone 
the adoption of the proposed HSRVcc methodology until such time that 
providers improve the accuracy of the source data used in the 
determination of the DRG weights.
    Response: With respect to the commenters' recommendation regarding 
the reporting of costs and charges for services, CMS requires hospitals 
to report their costs and charges through the cost report with 
sufficient specificity to support CMS' use of cost report data for 
monitoring and payment. Within generally accepted principles of cost 
accounting, CMS allows providers flexibility to accommodate the unique 
attributes of each institution's accounting systems. For example, 
providers must match the generally intended meaning of the line-item 
cost centers, both standard and non-standard, to the unique 
configuration of department and service categories used by each 
hospital's accounting system. Also, while the cost report provides a 
recommended basis of allocation for the general service cost centers, a 
provider is permitted, within specified guidelines, to use an 
alternative basis for a general service cost if it can support to its 
intermediary that the alternative is more accurate than the recommended 
basis. This approach creates internal consistency between a hospital's 
accounting system and the cost report but cannot guarantee the precise 
comparability of costs and charges for individual cost centers across 
institutions.
    However, we believe that achieving greater uniformity by, for 
example, specifying the exact components of individual cost centers, 
would be very burdensome for hospitals and auditors. Hospitals would 
need to tailor their internal accounting systems to reflect a national 
definition of a cost center. It is not clear that the marginal 
improvement in precision created here is worth the additional 
administrative burden. The current hospital practice of matching costs 
to the generally intended meaning of a cost center ensures that most 
services in the cost center will be comparable across providers, even 
if the precise composition of a cost center among hospitals differs. 
Further, every hospital provides a different mix of services. Even if 
CMS specified the components of each cost center, costs and charges on 
the cost report would continue to reflect each hospital's mix of 
services. At the same time, internal consistency is very important to 
the IPPS. Costs are estimated on claims by matching CCRs for a given 
hospital to their own claims data through a cost center-to-revenue code 
crosswalk.
    Despite the concerns raised in the comments, we believe that costs 
and charges are reported through the cost report with sufficient 
specificity to support CMS' use of cost report data to develop cost-
based weights. The information we obtained from the cost report on the 
differing level of charge markups occurring between routine and 
ancillary hospital departments supports MedPAC's conclusions that the 
most profitable DRGs that are leading to the development of specialty 
hospitals are those that require a lot of ancillary services with high 
markups and low CCRs. To the extent that charge markups vary 
significantly between the various routine and ancillary hospital 
departments, we believe that there is a need to adjust charges to cost 
prior to setting the relative weights. We will continue to rely on the 
cost report to establish the CCRs that we are finalizing to use to 
adjust the DRG charges to costs.
    However, we continue to be interested in receiving suggestions on 
ways that hospitals can uniformly and consistently report charges and 
costs related to all cost centers that also acknowledge the ubiquitous 
tradeoff between greater precision in developing CCRs and 
administrative burden

[[Page 47894]]

coupled with reduced flexibility in hospital accounting practices. 
Another issue to consider is the potential changes to the relative 
weights from undertaking efforts of this magnitude that will be costly 
for both CMS, its fiscal intermediaries and costly and burdensome to 
hospitals. Although we are not modifying the cost report or our cost 
report instructions at this time, we would be open to making 
improvements in the future.
    Comment: Several commenters applauded CMS' efforts to find ``an 
administratively feasible approach to improving the accuracy of the DRG 
weights.'' However, they expressed serious concerns about whether the 
proposed approach achieves that goal. Many commenters asserted that CMS 
proposes to move to a new cost-based methodology without offering any 
evidence that the proposed method actually improves payment accuracy.
    A few commenters submitted analyses that suggest that the impact of 
the proposed HSRVcc methodology is substantially different than the 
MedPAC recommendations, and may even decrease payment accuracy relative 
to the charge-based weights. A few commenters specifically noted that 
cardiac procedures are more adversely impacted by the HSRVcc 
methodology. The proposed methodology reduces relative weights for the 
three major implantable cardioverter defibrillator (ICD) DRGs (515, 
535, and 536) by 25 percent or more. While these proposed reductions 
imply that the weights based on the existing charge-based methodology 
overstate the costs of ICD procedures and therefore overpay them, the 
commenters presented analyses suggesting that these cases are actually 
underpaid. One such analysis by MedPAC, in its report on physician-
owned specialty hospitals, found ICD procedures to have ``lower 
marginal'' profitability or ``possibly a loss'' for hospitals, based on 
calculation of payment-to-cost ratios and surveys of specialty 
hospitals. They also indicated that CMS, in approving cardiac 
resynchronization therapy defibrillators (CRT-D) for new technology 
add-on payments, found the device to be inadequately paid and granted 
the add-on payments to defray the costs of the therapy. Given that 
payment rates under the charge-based weights appear to be inadequate in 
many of the cardiovascular DRGs, the commenters believed the severe 
reductions resulting from the proposed HSRVcc methodology appear to be 
unjustified and provide ample reason to believe that the proposed 
methodology does not accomplish the goal of improving payment accuracy.
    These commenters emphasized that while measuring improved payment 
accuracy is difficult, the large degree to which the weights fluctuate 
given the methodological changes alone indicates the need for further 
analysis and study. The commenters believed CMS should publish reliable 
indicators that demonstrate how the goal of payment accuracy is 
achieved. One commenter requested that CMS produce and publish 
estimates of payment-to-cost ratios and the relative profitability by 
DRG to determine the effectiveness of different weight-setting and 
patient classification methodologies in improving overall payment 
accuracy. The commenter emphasized that such estimates must be adjusted 
to account for the cost of providing services that include high-
technology devices that are understated in the cost reports. Another 
commenter recommended that CMS construct a process to test the 
sensitivity of weights to various methodological assumptions and 
publicly share the results, including: a comparison of the CMS weights 
to MedPAC's HSRV cost approach; a comparison of CMS weights to an 
approach using standardized costs (as opposed to HSRV); comparison of 
CMS weights to weights calculated by estimating costs at the claim 
level using the 10 cost center approach; evaluation of other 
alternative methodologies for estimating costs; and an evaluation of 
the stability of weights over time.
    Response: We appreciate the commenters concerns regarding the 
HSRVcc relative weight setting methodology we proposed and the large 
change in the relative weights that result from the application of this 
methodology. As we stated in the FY 2006 IPPS final rule, given the 
potential for significant redistribution in payments, the MedPAC 
recommendations should be studied extensively before any broad 
fundamental changes are made to the current system. In the proposed 
rule, we provided the results of such an extensive analysis and 
concluded that changes can be made to the relative weight methodology 
and the DRG system to improve payment accuracy. Although we agree that 
adopting a methodology that results in large changes in payment should 
not be adopted without careful study, we do not believe that the mere 
presence of such significant impacts invalidates the methodology. On 
the contrary, we believe large payment impacts may suggest there is a 
significant degree of distortion present in the current payment system. 
In our view, we believe that the changes to the IPPS should be 
evaluated based on whether they represent an improvement to the current 
system. MedPAC has studied the IPPS extensively and found that 
improvement can be found in payment accuracy from adopting its 
recommendations that are similar to those we proposed.\2\
---------------------------------------------------------------------------

    \2\ Medicare Payment Advisory Commission: Report to Congress on 
Physician-Owned Specialty Hospitals, March 2005, p. 37-38.
---------------------------------------------------------------------------

    While we acknowledge the need for further study and evaluation of 
the HSRVcc methodology, we continue to believe that the differential 
markups among departmental CCRs have introduced distortion into the 
charge-based relative weights. We note that MedPAC found that ``the 
current payment system encourages community hospitals to allocate 
capital to profitable services such as cardiology and stimulates the 
formation of specialty hospitals that often focus on providing 
profitable services and tend to care for low-severity patients.'' \3\ 
The information we obtained from the cost reports on the differing 
level of charge markups occurring between routine and ancillary 
hospital departments supports MedPAC's conclusions that the most 
profitable DRGs that are leading to the development of cardiac 
specialty hospitals are those that require a lot of ancillary services 
with high markups and low CCRs. We note that the proposed rule showed 
that these hospitals are almost exclusively affected by changes to the 
relative weight methodology providing further evidence of bias and 
distortion in the relative weights by setting them using hospital 
charges. To the extent that charge markups vary significantly between 
the various routine and ancillary hospital departments, we believe that 
there is a need to adjust charges to cost prior to setting the relative 
weights. Although it suggested refinements to CMS' proposal (all of 
which we have adopted in this final rule), we note that MedPAC found 
that the CMS proposals made great strides toward achieving the goal of 
improvements in payment accuracy.\4\ Therefore, as discussed in section 
II. C., we are using the national average CCRs to adjust the cost 
center charges for each DRG to cost prior to setting the relative 
weights. While we acknowledge that no payment methodology can be 
perfect because DRG-specific costs cannot be determined, we believe the 
cost-based methodology we are finalizing in this rule represents a 
significant

[[Page 47895]]

improvement over the current charge-based methodology for all of the 
reasons we specified above. Under the cost-based methodology in this 
final rule, we will increase payment for relatively underpaid cases and 
reduce payment for relatively overpaid cases. We believe this reform is 
badly needed to reduce the bias in the weights and make more 
appropriate payments for both medical and surgical DRGs.
---------------------------------------------------------------------------

    \3\ Hackbarth, Glenn, MedPAC Comments on the IPS Rule, June 12, 
2006, page 2.
    \4\ Hackbarth, Glenn, MedPAC Comments on the IPPS Rule, June 12, 
2006, page 2.
---------------------------------------------------------------------------

    In order to mitigate the impact of the changes in the relative 
weights, we are implementing the new cost-based weight methodology in a 
3-year transition, where the weights in the first year will be set 
based on 33 percent of the cost-based weight and 67 percent of the 
charge based weight. We will continue to study the HSRVcc methodology, 
the potential effects of charge compression and ways in which we can 
better account for severity of illness within the DRG system in the 
coming year.
    With respect to the changes in the new patient classification 
system, the proposed rule noted that we modeled the CS DRGs and 
observed a 12-percent increase in the explanatory power (or R-quare 
statistic) of the DRG system to explain hospital charges. That is, we 
found more uniformity among hospital total charges within the CS DRGs 
than we did with Medicare's current DRG system (71 FR 24027). Thus, we 
believe that there is clear evidence that improvements can be made to 
the current DRG system that will reduce heterogeneity among patients 
within a given DRG. While this statistic indicates that the current CMS 
DRG system can be refined to improve payment accuracy, we agree that it 
does not necessarily mean we should adopt the system we proposed. For a 
variety of reasons explained further below, we believe that a number of 
factors must be considered in deciding how to revise the DRG system to 
better recognize severity of illness.
    Comment: One commenter asserted that CMS published incorrect and 
deficient information about the HSRVcc methodology, its impact on 
hospitals, and the underlying data utilized in developing the proposed 
rule. Specifically, the commenter believed the HSRVcc methodology was 
flawed and therefore stated that the published impacts were inaccurate. 
The commenter believed that we failed to comply with the Federal Data 
Quality Act, and OMB, HHS, and CMS Guidelines which address the quality 
of the data used for policy development, in particular, meeting 
standards of utility, objectivity, integrity, and transparency and 
reproducibility. Because the commenter believed that we have violated 
these data quality standards, the public was deprived of the 
opportunity to submit meaningful comments, as required by the 
Administrative Procedure Act (APA). The commenter urged CMS to take the 
appropriate steps that would result in the withdrawal of the FY 2007 
IPPS proposed rule and the publication of a new proposed rule.
    Response: We disagree with the commenter's claims that the data 
utilized in the development of the FY 2007 IPPS proposed rule were 
materially flawed, did not comply with the Federal Data Quality Act, 
and did not meet established OMB, Department and CMS guidelines for 
data quality. The data sources used in estimating the payment impacts 
from policy changes proposed in the FY 2007 IPPS proposed rule were the 
HCRIS files that contain Medicare cost report data, the MedPAR files 
that contain Medicare claims data, the OSCAR database, and the PSF 
(which is maintained by the fiscal intermediaries and used in paying 
Medicare claims). These are the best and most reliable data sources 
available to CMS for modeling the impacts of policy changes. We note 
that these same databases are used in modeling payment impacts under 
the LTCH PPS, the OPPS, the IRF PPS, and the IPF PPS, as well as other 
payment systems. We also note that the comment period to the FY 2007 
IPPS proposed rule provided commenters with an opportunity to bring to 
our attention specific examples of incorrect or inaccurate data. In 
addition to our posting the impact files from the FY 2007 IPPS proposed 
rule on the CMS Web site, as always, commenters had access to the same 
CMS data files that we utilized through communication with our Office 
of Information Services (OIS).
    The fact that the data we used in the development of the FY 2007 
IPPS proposed rule were available and transparent to the public was 
attested by the detailed data analyses included with a significant 
number of the public comments we received on the FY 2007 IPPS proposed 
rule. Therefore, for the reasons stated above, we disagree with the 
commenter's assertion that the data used by CMS in the FY 2007 IPPS 
proposed rule does not meet the transparency and reproducibility 
standards. As is the case with any change in policy, we do not base 
policy decisions on mere assumptions, but rather we analyze the 
relevant data and any comments submitted in response to a proposed 
rule.
    Comment: One commenter stated that it was unclear whether the 
weights published for CS DRGs included using the transfer-adjusted 
charges prior to calculating weights.
    Response: We used the hospital's charge on the claim in the HSRVcc 
methodology. We presume the commenter is asking whether we adjusted the 
number of cases in setting the relative weights to reflect early 
transfer to either a post-acute or other acute care setting. We did use 
transfer-adjusted case counts when we applied the HSRVcc methodology 
for the relative weights that were shown in Table 5 of the IPPS 
proposed rule (71 FR 24272) and the ``Consolidated severity adjusted 
DRG HSRVcc relative weights'' provided on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp #TopOfPage. The case 
mix index that we use to iterate the proposed FY 2007 HSRVcc weights 
did not reflect a transfer-adjusted case count. That is, we used the 
sum of all the case weights divided by the total number of cases 
unadjusted for transfers to post-acute or other acute care settings.
    Comment: Many commenters stated that once a cost-based system is 
implemented, CMS should provide at least a three-year transition. They 
stated that a three-year transition is consistent with MedPAC's 
recommendation to implement the changes to the weights and DRG system 
over a transitional period. Commenters recommended that payments be 
made based on a blend of charge and cost-based weights culminating with 
full cost-based weights at the completion of the transition period.
    Response: We have in the past provided for transition periods when 
adopting changes that have significant payment implications. Given the 
significant payment impacts upon some hospitals because of these 
changes to the DRG weighting methodology, we considered options to 
transition to cost-based weights. We believe the potential payment 
effects from the changes to the DRG relative weights can be mitigated 
by adopting a 3-year transition of the relative weights. During the 
first year of the transition, the relative weights will be based on a 
blend of 33 percent of the cost-based weights and 67 percent of the 
charge weights. In the second year of the transition, the relative 
weights will be based on a blend of 33 percent of the charge weights 
and 67 percent of the cost-based weights. In the third year of the 
transition, the relative weights will be based on 100 percent of the 
cost-based weights.
    Comment: One commenter asserted that the proposed changes to 
improve

[[Page 47896]]

payment accuracy and to provide payment equity between specialty and 
general hospitals do not address many of the differences between 
specialty and full-service hospitals. The commenter stated that 
hospitals should be reimbursed for the additional services that are 
required to operate a full-service hospital which are often unnecessary 
in a specialty hospital setting. The commenter acknowledged that CMS 
already provides some support to hospitals that serve a high percentage 
of Medicaid patients through disproportionate share payments. However, 
the commenter suggested that CMS also make add-on payments to the base 
DRG payment for expenses such as: operation of a full-service, 24-hour 
emergency department; operation of a trauma service, a burn unit, or 
other high cost medically necessary services; sponsoring ground and 
helicopter ambulance services; operation of 24-hour diagnostic 
services; provision of round the clock nursing services; and provision 
of other support services such as clinical pharmacists, nutritionists, 
case managers, and medical social workers. The commenter believed these 
add-on payments will encourage hospitals to maintain these services 
rather than promote specialty hospitals that may be able to operate at 
a lesser cost without some or all of these services.
    Response: Medicare does pay for all of these services through 
either the IPPS or OPPS payment. We disagree that add-on payments are 
necessary for services that are commonly provided at many hospitals. 
The costs of these services will be incorporated in the IPPS or OPPS 
relative weights. Rather, we continue to believe that Medicare's IPPS 
payment system needs to be changed to make more equitable payment 
across all hospitals and decrease the incentive to profit from patient 
and DRG selection.
    Comment: A few commenters stated that although the DRG payment 
changes proposed by CMS seek to address the proliferation of physician-
owned, limited service hospitals in response to recommendations by 
MedPAC, they do not believe that these payment changes alone will 
remove the inappropriate incentives created by physician self-referral 
to limited-service hospitals. They stated that physicians will still 
have the ability and incentive to refer financially attractive patients 
to facilities they own, avoid serving low-income patients, and 
encourage utilization of profitable services. The commenters urged CMS 
to examine the investment structures of physician-owned, limited 
service hospitals and to continue the moratorium on issuing new 
provider numbers to physician-owned, limited service hospitals until 
the agency's strategic plan has been developed and the Congress has had 
the opportunity to consider the agency's final report on the topic.
    Response: We are in the process of completing the Final Report to 
Congress and the Strategic and Implementing Plan on Specialty 
Hospitals, as required by section 5006 of the DRA. Section 5006 of the 
DRA requires us to consider, among other things, issues of bona fide 
investment and proportionality of investment with respect to physician 
investment in specialty (that is, cardiac, orthopedic or surgical) 
hospitals. Section 5006 of the DRA also provides that the suspension on 
enrollment of new specialty hospitals that we administratively 
instituted on June 9, 2005, shall expire upon the date we issue the 
final report, or, if the report is issued after August 8, 2006, it 
shall expire on October 8, 2006. We note that Congress has provided for 
a date certain for the end of the suspension on enrollment of new 
specialty hospitals. Furthermore, we have not identified a need at this 
time to continue the suspension beyond that date.
    Comment: Many commenters stated that CMS's proposed HSRVcc 
methodology presented in the FY 2007 IPPS proposed rule failed to 
address issues of ``charge compression.'' The commenters explained that 
``charge compression'' describes the common billing practice of 
hospitals applying higher percentage markups on lower cost items and 
lower percentage markups on higher cost items. The commenters noted 
that MedPAC explained that hospitals may reduce the mark-ups for 
higher-cost items to avoid ``sticker shock.'' \5\ As discussed below, 
many commenters believed that, to the extent ``charge compression'' 
exists, the proposed HSRVcc methodology would lead to systematic 
differences between estimates of costs and Medicare's payments. 
Therefore, the commenters believed that the proposal failed to 
accomplish CMS's stated goal of setting the DRG weights based on 
accurate cost determinations. If the proposed methodology is 
implemented, several commenters believed hospitals that perform a large 
volume of procedures requiring relatively costly supplies/procedures 
would be severely and unfairly penalized through inappropriately 
reduced Medicare DRG payments. The treatments they provide would be 
less likely to be provided, and consequently, Medicare beneficiaries' 
access to care may be diminished. Therefore, the commenters stated that 
if CMS adopts a cost-based DRG weighting methodology, a more accurate 
measure of determining hospitals' actual costs must be developed.
---------------------------------------------------------------------------

    \5\ Medicare Payment Advisory Commission, ``Meeting Brief: Study 
of Hospital Charge-Setting Practices, '' September 9-10, 2004.
---------------------------------------------------------------------------

    Many commenters believed that ``charge compression'' is a concern 
because the proposed HSRVcc methodology uses a single CCR for a variety 
of items and services in a department. Specifically, under the proposed 
HSRVcc methodology, we proposed to aggregate hospital-level 
departmental charges into 10 cost centers for each DRG, and then apply 
national average cost-center level CCRs to determine estimated costs. 
The commenters asserted that because most hospitals do not apply the 
same uniform percentage mark-up when setting the charges of each item 
in the department, the proposed HSRVcc methodology underestimates the 
cost of relatively more expensive items (particularly devices and 
implants) and overestimates the cost of relatively less expensive 
items. The commenters believed that the use of a single CCR for a 
variety of different items results in a systematic distortion of the 
estimated costs, and consequently the DRG relative weights that are 
used in determining the IPPS payment rates. Specifically, many 
commenters stated that the HSRVcc methodology has a disproportionate 
adverse impact on DRGs that include implantable technologies and 
devices, and in some cases would result in Medicare reimbursement that 
is less than the actual cost of the device.
    Some commenters discussed cost data research that has been 
performed since the implementation of the OPPS to determine the causes 
and effects of ``charge compression.'' The commenters asserted that 
OPPS payment rates are also affected by charge compression. 
Specifically, one commenter recently commissioned research to 
investigate whether Medicare claims data provided statistical evidence 
of ``charge compression.'' (This research was summarized in an 
executive summary by Christopher Hogan of Direct Research, LLC. 
entitled ``A Proposed Solution for Charge Compression.'') Many other 
commenters cited this recent research in their own comments, and 
recommended that the results of this research be used to develop an 
adjustment under the proposed HSRVcc methodology to account for 
``charge compression.'' This analysis utilized the detailed coding of 
charges for supplies by revenue center on the Medicare claims data in 
the Standard Analytical Files (SAF) to divide the single cost-

[[Page 47897]]

center CCR for ``supplies and equipment'' used under the proposed 
HSRVcc methodology into separate cost-center CCRs for 5 supplies 
subcategories (general supplies; implantables; sterile supplies; 
pacemakers and defibrillators; and all other supplies) based on a 
``strong statistical association between mix of charges for supplies 
(by revenue center) in a hospital and the [overall] supplies CCR in a 
hospital.'' Using these data from all hospitals, a regression analysis 
yielded a single ``set of CCR adjustments reflecting national average 
CCRs for [each of] the [five supplies] sub-categories.'' This national-
average set of adjustments is applied to each hospital (and combined 
with each hospital's actual supplies CCR) to determine an adjusted 
estimate of cost on each hospital's claim in the MedPAR file. The 
results of this research showed that this variation in CCRs across the 
supplies subcategories would result in weights for some DRGs being 
significantly different than under the HSRVcc methodology. In 
particular, the methodology advocated by Hogan would increase the 
relative weights ``for DRGs with substantial charges in the implantable 
devices and pacemaker/defibrillator revenue centers.''
    The commenters pointed out that the results of this research are 
consistent with previous analyses demonstrating ``charge compression'' 
in hospitals' billing patterns. The commenters also noted that this 
research was conducted exclusively on Medicare claims data, without 
supplementation with any external data. The commenters believed that 
this research demonstrates that an adjustment for ``charge 
compression'' is possible. They further asserted that the research 
provides a solid analytical basis for a specific adjustment. The 
commenters advocated that we use the coefficients from this regression 
analysis to develop a ``data-driven'' adjustment to the CCRs for the 
supplies and equipment to address the distortion caused by ``charge 
compression.''
    Another commenter supported the idea of a ``charge compression'' 
adjustment but suggested that CMS should ensure appropriate stakeholder 
involvement before applying such a policy. Other commenters also 
advocated for the use of data from the SAF to analyze the relationship 
between costs and charges for non-implantable supplies and equipment to 
determine whether an adjustment to the medical-surgical supplies cost 
center on the MedPAR files to account for ``charge compression'' is 
also warranted.
    As a result of the concerns discussed above, many commenters stated 
that any change toward a cost-based DRG weighting methodology under the 
IPPS must address the distortion caused by ``charge compression'' and 
must ensure that the methodology utilizes accurate cost determinations. 
Consequently, some commenters requested a delay in the implementation 
of the cost-based DRG weighting methodology until an adjustment for 
``charge compression'' can be incorporated. In addition, some 
commenters stated that such an adjustment should also be used to 
address ``charge compression'' under the OPPS. Several commenters 
recommended that, in addition to including an adjustment for ``charge 
compression,'' the methodology for determining the cost-based DRG 
relative weights be developed without employing the HSRV methodology. 
However, a few other commenters endorsed the proposed HSRVcc 
methodology, stating that the ``HSRVcc methodology more closely 
represents the cost of providing services than the current charge-based 
system.''
    Several commenters referenced various research studies on this 
issue undertaken over the past 5 to 6 years. These commenters asserted 
that the research supports the existence of ``charge compression'' and 
its systemic distortion in payment rates. The commenters also stated 
that ``although evidence of the effect of charge compression is not 
new,'' research that could support an adjustment to offset charge 
compression was not available. However, according to the commenters, 
``research just completed now presents a solution.''
    Response: We appreciate the commenters' concerns regarding charge 
compression and its impact on the relative weight calculations under 
the proposed HSRVcc methodology. We are interested in further studying 
the analytic technique suggested in the comments of using a regression 
analysis to identify adjustments that could be made to the CCRs to 
account for charge compression. We note that the Hogan study's 
regression model was only applied to expensive medical supplies and 
devices and was not applied uniformly to develop potential adjustments 
that could be made to costs and charges across all revenue and cost 
centers that could potentially be subject to charge compression. If 
such a model were to be applied, we believe further analysis would have 
to be undertaken to determine whether it should apply to all costs and 
revenue centers. At this time, we intend to research whether a rigorous 
model should allow an adjustment for ``charge compression'' to the 
extent it exists. Accordingly, we have engaged a contractor to 
undertake a study on charge compression and review the statistical 
models provided to us by the commenters. To the extent that we find 
``charge compression'' exists, we will further study potential models 
that could adjust for it so we can develop more accurate systems of 
cost-based weights to better reflect the relative costs of the 
different types of services provided under the IPPS. As suggested in 
the comments, we plan to fully involve appropriate stakeholders in 
future analysis of this issue to the extent feasible. Before 
implementing such an adjustment, we would fully describe our analysis 
and a potential proposed adjustment as part of the IPPS proposed rule 
for FY 2008.
    Further, we intend to use the charge compression study that we will 
conduct over the next year as an opportunity to better understand the 
costs of medical devices. The United States faces a dilemna in health 
care. Although the rate-of-increase in health care spending slowed last 
year, costs are still growing at an unsustainable rate. One reason 
health care costs are rising so quickly is that most consumers of 
health care are frequently not aware of the actual cost of their care 
due to lack of transparency. We believe that cost, quality, and patient 
satisfaction information should be available across the spectrum of 
care.
    Transparency of device pricing is a key aspect of consumer 
understanding of the cost of health care. We believe that the enhanced 
understanding of device pricing that will be brought about as part of 
our charge compression study will help accelerate the public release, 
in a consumer friendly fashion, of pricing information of medical 
devices. The public release of device pricing will help augment our 
overall efforts to empower consumers with better information on the 
health care they require.
    In addition, we note that in order to mitigate the impact of 
adopting a revised methodology for calculating DRG weights, we are 
standardizing charges for MedPAR claims using the same methodology we 
have used in past years, rather than using the HSRV methodology. 
However, as discussed in detail in section II.E. of this preamble to 
the final rule, we are adopting our proposal to adjust charges to 
account for costs prior to establishing DRG weights. However, we 
anticipate undertaking further analysis of the hospital-specific 
methodology over the next year in conjunction with the research we are 
doing on charge compression. If our analysis suggests that an 
adjustment for charge compression should be applied and/or that the 
hospital-specific methodology will result in relative

[[Page 47898]]

weights that more closely approximate the relative costs of care, we 
will propose further changes for FY 2008. In the interim, we are 
further mitigating the potential payment effects from the changes to 
the DRG relative weights by adopting a 3-year transition of the 
relative weights. During the first year of the transition, the relative 
weights will be based on a blend of 33 percent of the cost-based 
weights and 67 percent of the charge weights. In the second year of the 
transition, the relative weights will be based on a blend of 33 percent 
of the charge weights and 67 percent of the cost-based weights. In the 
third year of the transition, the relative weights will be based on 100 
percent of the cost-based weights.
3. Refinement of DRGs Based on Severity of Illness
    For purposes of the following discussions, the term ``CMS DRGs'' 
means the DRG system we currently use under the IPPS; the term ``APR 
DRGs'' means the severity DRG system designed by 3M Health Information 
Systems that currently is used by the State of Maryland; and the term 
``consolidated severity-adjusted DRGs (CS DRGs)'' means the DRG system 
based on a consolidated version of the APR DRGs (as described in detail 
below). We discussed the CS DRGs in the FY 2007 IPPS proposed rule and 
solicited public comments on whether there are alternative DRG systems 
that could result in better recognition of severity than the CS DRGs we 
were proposing. As we made clear in the proposed rule, there are still 
further changes that are important to make to the CS DRG system before 
it is ready for adoption. In the remainder of this final rule, ``CS 
DRGs'' refers to the DRG system we analyzed and proposed for adoption 
in FY 2008. However, as we indicate below, we received a number of 
public comments about the proposed CS DRGs, potential alternatives, and 
a number of other issues related to our proposal. Below we summarize 
those comments, respond to the comments, and present our plans for 
adopting a severity-adjusted DRG system for FY 2008.
    In the FY 2006 IPPS final rule (70 FR 47474), we stated that we 
would consider making changes to the CMS DRGs to better reflect 
severity of illness among patients. We indicated that we would conduct 
a comprehensive review of the CC list as well as consider the 
possibility of using the APR DRGs for FY 2007. We did not adopt APR 
DRGs for FY 2006 because such an adoption would represent a significant 
undertaking that could have a substantial effect on all hospitals. 
There was insufficient time between the release of the MedPAC report in 
March 2005 and the publication of the FY 2006 IPPS final rule for us to 
analyze fully a change of this magnitude. Instead, we adopted a more 
limited policy by implementing severity-adjusted cardiac DRGs.
    After publication of the FY 2006 IPPS final rule, CMS contracted 
with 3M Health Information Systems to further analyze the MedPAC 
recommendations in support of our consideration of possible changes to 
the IPPS for FY 2007. Under one task of this contract, 3M Health 
Information Systems analyzed the feasibility of using a revised DRG 
system under the IPPS that is modeled on the APR DRGs Version 23 to 
better recognize severity of illness. The APR DRGs have been used 
successfully as the basis of Belgium's hospital prospective global 
budgeting system since 2002. The State of Maryland began using APR DRGs 
as the basis of its all-payer hospital payment system in July 2005. 
More than a third of the hospitals in the United States are already 
using APR DRG software to analyze comparative hospital performance. 
Many major health information system vendors have integrated this 
system into their products. Several State agencies utilize the APR DRGs 
for the public dissemination of comparative hospital performance 
reports. APR DRGs have been widely applied in policy and health 
services research. In addition to being used in research by MedPAC, the 
APR DRGs also contain a separate measure of risk of mortality that is 
used in the Quality Indicators of the Agency for Healthcare Research 
and Quality, the Premier Hospital Quality Incentive Demonstration 
discussed in section IV.B. of this preamble, and the Joint Commission 
on Accreditation of Healthcare Organizations (JCAHO) hospital 
accreditation survey process (Shared Visions-New Pathways).
    Below we present a comparison of the CMS DRG system and the APR DRG 
system.
a. Comparison of the CMS DRG System and the APR DRG System
    The CMS DRG and APR DRG systems have a similar basic structure. 
There are 25 MDCs in both systems. The DRG assignments for both systems 
are based on the reporting of ICD-9-CM diagnosis and procedure codes. 
Both DRG systems are composed of a base DRG that describes the reason 
for hospital admission and a subdivision of the base DRG based on other 
patient attributes that affect the care of the patient. For surgical 
patients, the base DRG is defined based on the type of procedure 
performed. For medical patients, the base DRG is defined based on the 
principal diagnosis. In Version 23.0 of the CMS DRG system, there are 
367 base DRGs and 526 total DRGs. In Version 23 of the APR DRG system, 
there are 314 base DRGs and 1,258 total APR DRGs. Some of the base DRGs 
in the two systems are virtually identical. For example, there is no 
significant difference between the base DRG under both systems for 
medical treatment of congestive heart failure. For other base DRGs, 
there are substantial differences. For example, in the CMS DRG system, 
there are two base DRGs for appendectomy (simple and complex); in the 
APR DRG system, there is only one base DRG for appendectomy (the 
relative complexity of the patient is addressed in the subsequent 
subdivision of the base DRG into severity of illness subclasses).
    The focus of the CMS DRGs is on complexity. Complexity is defined 
as the relative volume and types of diagnostic, therapeutic, and bed 
services required for the treatment of a particular illness. Thus, the 
focus of payment in the CMS DRG system reflects the relative resource 
use needed by the patient in one DRG group compared to another. 
Resource use is generally correlated with severity of illness but 
intensive resource use does not necessarily indicate a high level of 
severity in every case. It is possible that some patients will be 
resource-intensive and require high-cost services even though they are 
less severely ill than other patients. The CMS DRG system subdivides 
the base DRGs using age and the presence of a secondary diagnosis that 
represents a CC. The age subdivisions primarily relate to pediatric 
patients (those who are less than 18 years of age). Patients are 
assigned to the CC subgroup if they have at least one secondary 
diagnosis that is considered a CC. The diagnoses that are designated as 
CCs are the same across all base DRGs. The subdivisions of the base CMS 
DRGs are not uniform: Some base DRGs have no subdivision; some base 
DRGs have a two-way subdivision based on the presence of a CC; and 
other base DRGs have a three-way subdivision based on a pediatric 
subdivision followed by a CC subdivision of the adult patients. In 
addition, some base DRGs in MDC 5 (Diseases and Disorders of the 
Circulatory System) have a subdivision based on the presence of a major 
cardiovascular condition or complex diagnosis.
    The APR DRG system subdivides the base DRGs by adding four severity 
of

[[Page 47899]]

illness subclasses to each DRG. Under the APR DRG system, severity of 
illness is defined as the extent of physiologic decompensation or organ 
system loss of function. The underlying clinical principle of APR DRGs 
is that the severity of illness of a patient is highly dependent on the 
patient's underlying problem and that patients with high severity of 
illness are usually characterized by multiple serious diseases or 
illnesses. The assessment of the severity of illness of a patient is 
specific to the base APR DRG to which a patient is assigned. In other 
words, the determination of the severity of illness is disease-
specific. High severity of illness is primarily determined by the 
interaction of multiple diseases. Patients with multiple comorbid 
conditions involving multiple organ systems are assigned to the higher 
severity of illness subclasses. The four severity of illness subclasses 
under the APR DRG system are numbered sequentially from 1 to 4, 
indicating minor (1), moderate (2), major (3), and extreme (4) severity 
of illness.
    The APR DRG system does not subdivide base DRGs based on the age of 
the patient. Instead, patient age is used in the determination of the 
severity of illness subclass. In the CMS DRG system, the CC list is 
generally the same across all base DRGs. However, there are CC list 
exclusions for secondary diagnoses that are related to the principal 
diagnosis. In the APR DRG system, the significance of a secondary 
diagnosis is dependent on the base DRG. For example, an infection is 
considered more significant for an immune-suppressed patient than for a 
patient with a broken arm. The logic of the CC subdivision in the CMS 
DRG system is a simple binary split for the presence or absence of a 
CC. In the APR DRG system, the determination of the severity subclass 
is based on an 18-step process that takes into account secondary 
diagnoses, principal diagnosis, age, and procedures. The 18 steps are 
divided into three phases. There are six steps in Phase I, three steps 
in Phase II, and nine steps in Phase III.
    The diagram below illustrates the three-phase process for 
determining patient severity of illness subclass.
BILLING CODE 4120-01-P

[[Page 47900]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.006

    Under the CMS DRG system, a patient is assigned to the DRG with CC 
if there is at least one secondary diagnosis present that is a CC. 
There is no recognition of the impact of multiple CCs. Under the APR 
DRG system, high severity of illness is primarily determined by the 
interaction of multiple diseases. Under the CMS DRG

[[Page 47901]]

system, patients are assigned to an MDC based on their principal 
diagnosis. While the principal diagnosis is generally used to assign 
the patient to an MDC in the APR DRG system, there is a rerouting step 
that assigns some patients to another MDC. For example, lower leg 
amputations can be performed for circulatory, endocrine, or 
musculoskeletal principal diagnoses. Instead of having three separate 
amputation base DRGs in different MDCs as is done in the CMS DRG 
system, the APR DRG system reroutes all of these amputation patients 
into a single base APR DRG in the musculoskeletal MDC. The CMS DRG 
system uses death as a variable in the DRG definitions but the APR DRG 
system does not. Both DRG systems are based on the information 
contained in the Medicare Uniform Bill. The APR DRG system requires the 
same information used by the current CMS DRG system. No changes to the 
claims form or the data reported would be necessary if CMS were to 
adopt APR DRGs or a variant of them.
    The CMS DRG structure makes some DRG modifications difficult to 
accommodate. For example, high severity diseases that occur in low 
volume are difficult to accommodate because the only choice is to form 
a separate base DRG with relatively few patients. Such an approach 
could lead to a proliferation of low-volume DRGs. Alternatively, these 
cases may be included in DRGs with other patients that are dissimilar 
clinically or in costs. Requests for new base DRGs formed on the use of 
a specific technology may also be difficult to accommodate. Base DRGs 
formed based on the use of a specific technology would result in the 
payment weight for the DRG being dominated by the price set by the 
manufacturer for the technology.
    The structure of the APR DRGs provides a means of addressing high 
severity cases that occur in low volume through assignment of the case 
to a severity of illness subclass. However, the APR DRG structure does 
not currently accommodate distinctions based on complexity. 
Technologies that represent increased complexity, but not necessarily 
greater severity of illness, are not explicitly recognized in the APR 
DRG system. For example, in the CMS DRGs, there are separate DRGs for 
coronary angioplasty with or without insertion of stents. The APR DRGs 
do not make such a differentiation. The insertion of the stent makes 
the patient's case more complex but does not mean the patient is more 
severely ill. However, the inability to insert a stent may be 
indicative of a patient's more advanced coronary artery disease. 
Although such conflicts are relatively few in number, they do represent 
an underlying difference between the two systems. If Medicare were to 
adopt a severity DRG system based on the APR DRG logic but assign cases 
based on complexity as well as severity as we do under the current 
Medicare DRG system, such a distinction would represent a departure 
from the exclusive focus on severity of illness that currently forms 
the basis of assigning cases in the APR DRG system.
    Section 1886(d)(4) of the Act specifies that the Secretary must 
adjust the classifications and weighting factors at least annually to 
reflect changes in treatment patterns, technology, and other factors 
that may change the relative use of hospital resources. Therefore, we 
believe a method of recognizing technologies that represent increased 
complexity, but not necessarily greater severity of illness, should be 
included in the system. We plan to develop criteria for determining 
when it is appropriate to recognize increased complexity in the 
structure of the DRG system and how these criteria interact with the 
existing statutory provisions for new technology add-on payments. In 
the FY 2007 IPPS proposed rule, we invited public comments on this 
particular issue.
    Another difference between the CMS DRG system and the APR DRG 
system is the assignment of diagnosis codes in category 996 
(Complications peculiar to certain specified procedures). The CMS DRG 
system treats virtually all of these codes as CCs. With the exceptions 
of complications of organ transplant and limb reattachments, these 
complication codes do not contribute to the severity of illness 
subclass in the APR DRG system. While these codes could be added to the 
severity logic, the appropriateness of recognizing codes such as code 
998.4 (Foreign body accidentally left during a procedure) as a factor 
in payment calculation could create the appearance of incentives for 
less than optimal quality. Although there is no direct recognition of 
the codes under the 996 category, the precise complication, in general, 
can be coded separately and could contribute to the severity of illness 
subclass assignment.
    Comment: Some commenters strongly supported including the 
complication codes (996.00-999.9) when assigning a patient to a 
severity-adjusted DRG because the codes represent pre-existing or 
predictably higher risks upon admission for difficult patients who are 
typically referred to regional centers. The commenters stated that 
failure to do so will create new incentives for adverse admission 
selection and underpay hospitals that treat difficult patients. The 
commenters stated that the 996 codes include some complications that 
should never be paid (for example, wrong site surgery and instruments 
left in the patient). However, the commenters indicated that these 
kinds of complications likely constitute less than one-half of one 
percent of all complications and revising the DRG system so that all 
996 codes are not paid will provide incentives to hospitals to avoid 
admitting patients that are at high risk because of a pre-existing 
condition or other circumstance. Another commenter stated that all 
infections should be removed as complicating conditions under the DRG 
system.
    Response: The discussion in this section of the proposed rule noted 
that 996 codes are used in assigning a patient to a CMS DRG but not to 
an APR DRG. Although the discussion in this section of the proposed 
rule did indicate that using these codes to assign a patient to a DRG 
may raise questions about incentives for less than optimal quality, the 
discussion was only intended to note the differences that currently 
exist between the CMS and the APR DRGs. The commenters raised issues 
that require further study. We will consider quality of care issues and 
payment incentives as we consider how to implement section 5001(c) of 
Pub. L. 109-171 with respect to hospital acquired conditions, including 
infections. There is a more detailed discussion of this provision of 
the law in a later section of this final rule.
    Table B below summarizes the differences between the two DRG 
systems:

                        Table B.--Comparison of the CMS DRG System and the APR DRG System
----------------------------------------------------------------------------------------------------------------
                 Element                          CMS DRG System                      APR DRG System
----------------------------------------------------------------------------------------------------------------
Number of base DRGs......................  367.........................  314
Total number of DRGs.....................  526.........................  1,258
Number of CC (severity) subclasses.......  2...........................  4

[[Page 47902]]

 
Multiple CCs recognized..................  No..........................  Yes.
CC assignment specific to base DRG.......  No..........................  Yes.
Logic of CC subdivision..................  Presence or absence.........  18-step process.
Logic of MDC assignment..................  Principal diagnosis.........  Principal diagnosis with rerouting.
Death used in DRG definitions............  Yes.........................  No.
Data requirements........................  Hospital claims.............  Hospital claims.
----------------------------------------------------------------------------------------------------------------

    To illustrate the differences between the two DRG systems, we 
compare in Table C below four cases that have been assigned to CMS DRGs 
and APR DRGs. In all four cases, the patient is a 67-year-old who is 
admitted for diverticulitis of the colon and who has a multiple 
segmental resection of the large intestine performed. ICD-9-CM 
diagnosis code 562.11 (Diverticulitis of colon (without mention of 
hemorrhage)) and ICD-9-CM procedure code 45.71 (Multiple segmental 
resection of large intestine) would be reported to capture this case. 
In both DRG systems, the patient would be assigned to the base DRG for 
major small and large bowel procedures. These four cases would fall 
into two different CMS DRGs and four different APR DRGs. We include 
Medicare average charges in the table to illustrate the differences in 
hospital resource use.
    Case 1: The patient receives only a secondary diagnosis of an ulcer 
of anus and rectum (ICD-9-CM diagnosis code 569.41). Under the CMS DRG 
system, the patient is assigned to base DRG 149 (Major Small and Large 
Bowel Procedures Without CC). Under the APR DRG system, the patient is 
assigned to base DRG 221 (Major Small and Large Bowel Procedures) with 
a severity of illness subclass of 1 (minor).
    Case 2: The patient receives a secondary diagnosis of an ulcer of 
anus and rectum and an additional secondary diagnosis of unspecified 
intestinal obstruction (ICD-9-CM diagnosis code 560.9). Under the CMS 
DRG system, the patient is assigned to DRG 148 (Major Small and Large 
Bowel Procedures With CC). Under the APR DRG system, the patient is 
assigned to base DRG 221 and the severity of illness subclass increases 
to 2 (moderate).
    Case 3: The patient receives multiple secondary diagnoses of an 
ulcer of anus and rectum, unspecified intestinal obstruction, acute 
myocarditis (ICD-9-CM diagnosis code 422.99), and atrioventricular 
block, complete (ICD-9-CM diagnosis code 426.0). Under the CMS DRG 
system, the patient is assigned to DRG 148. Under the APR DRG system, 
the patient is assigned to base DRG 221 and the severity of illness 
subclass increases to 3 (major).
    Case 4: The patient receives multiple secondary diagnoses of an 
ulcer of anus and rectum, unspecified intestinal obstruction, acute 
myocarditis, atrioventricular block, complete, and the additional 
diagnosis of acute renal failure, unspecified (ICD-9-CM diagnosis code 
584.9). Under the CMS DRG system, the patient is assigned to DRG 148. 
Under the APR DRG system, the patient is assigned to base DRG 221 and 
the severity of illness subclass increases to 4 (extreme).

        Table C.--Example of Sample Cases Assigned Under the CMS DRG System and Under the APR DRG System
----------------------------------------------------------------------------------------------------------------
                                                  CMS DRG System                        APR DRG System
   Principal diagnosis code: 562.11   --------------------------------------------------------------------------
        Procedure code: 45.71                                     Average                              Average
                                             DRG assigned          charge         DRG assigned          charge
----------------------------------------------------------------------------------------------------------------
Case 1--Secondary Diagnosis: 569.41..  149 without CC.........      $25,147  221 with severity of        $25,988
                                                                              illness subclass 1.
Case 2--Secondary Diagnoses: 569.41,   148 with CC............       59,519  221 with severity of         38,209
 560.9.                                                                       illness subclass 2.
Case 3--Secondary Diagnoses: 569.41,   148 with CC............       59,519  221 with severity of         66,597
 560.9, 422.99, 426.0.                                                        illness subclass 3.
Case 4--Secondary Diagnoses: 569.41,   148 with CC............       59,519  221 with severity of        130,750
 560.9, 422.99, 426.0, 584.9.                                                 illness subclass 4.
----------------------------------------------------------------------------------------------------------------

    The largest significant difference in average charges is seen in 
case 4 where the average charge under the APR DRG assigned to the 
patient ($130,750) is more than double the average charge under the CMS 
DRG assigned to the patient ($59,519).
b. CS DRGs for Use in the IPPS
    APR DRGs were developed to encompass all-payer patient populations. 
As a result, we found that, for the Medicare population, some of the 
APR DRGs have very low volume. MedPAC noted that the larger number of 
DRGs under a severity-weighted system might mean that CMS would be 
faced with establishing weights in many categories that have few cases 
and, thus, potentially creating unstable estimates. While volume is an 
important consideration in evaluating any potential consolidation of 
APR DRGs for use under the IPPS, we believe that hospital resource use 
and clinical interpretability also need to be taken into consideration. 
For example, any consolidation of severity of illness subclasses within 
a base DRG should be restricted to contiguous severity of illness 
subclasses. Thus, it would not be reasonable clinically to combine 
severity of illness subclasses 1 and 4 solely because both consist of 
low-volume cases. We analyzed consolidating APR DRGs by either 
combining the base DRGs or the severity of illness subclasses within a 
base DRG. For consolidation across base APR DRGs, we considered patient 
volume, similarity of hospital charges across all four severity of 
illness subclasses and

[[Page 47903]]

clinical similarity of the base APR DRGs. For consolidations of 
severity of illness subclasses within a base DRG, we considered patient 
volume and the similarity of hospital charges between severity of 
illness subclasses. In considering how to consolidate severity of 
illness subclasses, we believed it was important to use uniform 
criteria across all DRGs to avoid creating confusing and difficult to 
interpret results. That is, we were concerned about inconsistencies in 
the number of severity levels across different DRGs.
    The objective to simultaneously take into consideration patient 
volume and average charges often produced conflict. Table D below 
contains the overall patient volume and average charge by APR DRG 
severity of illness subclass. While severity of illness subclass 4 
(extreme) has the lowest patient volume of 5.80 percent, we found that 
the dramatically different average charges between severity of illness 
subclass 3 (major) and subclass 4 (extreme) patients of approximately 
$32,426 and $81,952, respectively, would make it difficult to 
consolidate severity of illness subclass 3 and 4 patients. Conversely, 
we found that, while the average charge difference between severity of 
illness subclass 1 (minor) and 2 (moderate) patients was much smaller, 
of approximately $17,649 and $20,021, respectively, the majority of 
patient volume (68.08 percent) is in these two subclasses. Thus, low 
patient volume and small average charge differences rarely coincided.

                              Table D.--Overall Average Charges and Patient Volume by APR DRG Severity of Illness Subclass
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                          APR DRG          APR DRG          APR DRG          APR DRG
                                                                                        Severity of      Severity of      Severity of      Severity of
                                                                        All cases         illness          illness          illness          illness
                                                                                         Subclass 1       Subclass 2       Subclass 3       Subclass 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Cases....................................................       11,142,651           21.47%           46.61%           26.12%            5.80%
Average Charges....................................................          $26,342          $17,649          $20,021          $32,426          $81,952
--------------------------------------------------------------------------------------------------------------------------------------------------------

    There were also few opportunities to consolidate base DRGs. For 
base DRGs in which there was a clinical basis for considering a 
consolidation, there were usually significant differences in average 
charges for one or more of the severity of illness subclasses. APR DRGs 
already represented a considerable consolidation of base DRGs (314) 
compared to CMS DRGs (367). Thus, we expected that further base DRG 
consolidation would be difficult.
    We reviewed the patient volume and average charges across APR DRGs 
and found that medical cases assigned severity of illness subclass 4 
within an MDC have similar average charges. We observed the same 
pattern in average charges across severity of illness subclass 4 
surgical patients within an MDC. The data suggest that, in cases with a 
severity of illness of subclass 4, the severity of the cases had more 
impact on hospital resource use than the reason for admission (that is, 
the base APR DRG within an MDC). Thus, we believe that, within each 
MDC, the severity of illness subclass 4 medical and surgical patients, 
respectively, could be consolidated into a single group.
    In some MDCs, it was not possible to consolidate into a single 
medical and a single surgical severity of illness subclass 4 group. In 
these MDCs, more than one group was necessary. For instance, Table E 
below contains the patient volume and average charges for severity of 
illness subclass 4 cases in MDC 11 (Diseases and Disorders of the 
Kidney and Urinary Tract). Taking into consideration volume and average 
charges, except for APR DRG 440 (Kidney Transplant), surgical cases 
assigned severity of illness subclass 4 in MDC 11 could be consolidated 
into a single group having 5,492 patients and an average charge of 
$107,258. However, we decided not to include kidney transplant patients 
in this severity of illness subclass 4 due to their very high average 
charges (approximately $203,732 or more than $100,000 greater than 
other patients in MDC 11 having a severity of illness subclass 4). 
Average charges within the consolidated severity of illness subclass 4 
surgical DRG in MDC 11 show some variation but are much higher than the 
corresponding average charges for the severity of illness subgroup 3 
patients of $48,863. Thus, our analysis suggests that the data support 
maintaining three severity of illness levels for each base DRG in MDC 
11; a separate severity of illness subclass 4 for all patients other 
than those having kidney transplant; and a separate DRG for kidney 
transplants.

Table E.--Summary Statistics for Surgical Cases With Severity of Illness
                          Subclass 4 in MDC 11
------------------------------------------------------------------------
                                                  Average      Average
             APR DRG                Number of    length of      total
                                      cases         stay       charges
------------------------------------------------------------------------
440 (Kidney Transplant)..........          378         18.0     $203,732
441 (Major Bladder Procedures)...          528         21.5      128,729
442 (Kidney & Urinary Tract                833         16.6      101,501
 Procedure for Malignancy).......
443 (Kidney & Urinary Tract                966         18.4      103,905
 Procedure for Non-Malignancy)...
444 (Renal Dialysis Access Device          935         18.3      104,249
 Procedure Only--Severity of
 Illness Subclass 4).............
445 (Other Bladder Procedures)...          186         15.2       80,197
446 (Urethral & Transurethral              492         13.4       73,110
 Procedure--Severity of Illness
 Subclass 4).....................
447 (Other Kidney, Urinary Tract         1,552         19.3      121,011
 & Related Procedures)...........
------------------------------------------------------------------------

    The consolidation of severity of illness subclass 4 APR DRG into 
fewer groups was done for all MDCs except MDC 15 (Newborn and Other 
Neonates With Conditions Originating in the Perinatal Period), MDC 19 
(Mental Diseases and Disorders), and MDC 20 (Alcohol/Drug Use and 
Alcohol/Drug Induced Organic Mental Disorders). In the 22 MDCs in which 
the severity of illness subclass 4 consolidation was applied, the 
number of separate severity

[[Page 47904]]

of illness subclass 4 groups was reduced from 262 to 69.
    For MDC 14 (Pregnancy, Childbirth, and Puerperium), the base APR 
DRGs were consolidated from 12 to 6. Severity of illness subclass 1 
through 3 were retained, and severity of illness subclass 4 was 
consolidated into a single APR DRG, except for cesarean section and 
vaginal deliveries, which were maintained as separate APR DRGs. This 
consolidation reduced the total number of obstetric APR DRGs from 48 to 
22.
    The Medicare patient volume in MDC 15 was very low, allowing for a 
more aggressive consolidation. For MDC 15, we consolidated 28 base APR 
DRGs into 7 base CS DRGs. For each of the 7 consolidated base MDC 15 
DRGs, we combined severity of illness subclasses 1 and 2 into one DRG 
and severity of illness subclass 3 and 4 into another DRG. This 
consolidation reduced the total number of MDC 15 DRGs from 112 in the 
APR DRG system to 14 CS DRGs.
    In MDC 19, we consolidated 12 base DRGs into 4 base DRGs. We 
retained the 4 severity of illness subclasses in MDC 19 for each of the 
4 base DRGs. In MDC 20, the base APR DRG for patients who left against 
medical advice has severity of illness subclass 1 and 2 consolidated 
and severity of illness subclass 3 and 4 consolidated. The remaining 4 
base DRGs were consolidated into 1 base DRG with 4 severity of illness 
subclasses.
    We did not consolidate any of the pre-MDC subclass 4 APR DRGs such 
as Heart Transplant. As explained earlier, pre-MDC DRGs are DRGs to 
which cases are directly assigned on the basis of ICD-9-CM procedure 
codes. These DRGs are for liver and/or intestinal transplants, heart 
and/or lung transplants, bone marrow transplants, pancreas transplants, 
and tracheotomies. For the pre-MDC DRGs, except for Bone Marrow 
Transplant, we consolidated severity of illness subclasses 1 and 2 into 
one DRG. In addition, the three base APR DRGs for Human 
Immunodeficiency Virus (HIV) with multiple or major HIV-related 
conditions had severity of illness subclasses 1 and 2 consolidated.
    In total, we reduced 1,258 APR DRGs to 861 CS DRGs. In Appendix C 
of this proposed rule, we present the 861 unique combinations of CS 
DRGs.
    Table F below includes a description of the consolidations that we 
did within each individual MDC and includes information about the total 
number of DRGs that were eliminated from the APR DRGs to develop the CS 
DRGs.
BILLING CODE 4120-01-P

[[Page 47905]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.007

    Appendix D of the FY 2007 IPPS proposed rule (71 FR 24433) showed 
the crosswalk of each CS DRG to its respective APR DRG. We numbered the 
DRGs sequentially and incorporated the severity of illness subclass 
into the DRG

[[Page 47906]]

description. However, within the range of sequential numbers used for 
an MDC, we retained some unused numbers to allow for future DRG 
expansion. By using a three-digit number for the CS DRGs, we also avoid 
the need for reprogramming of computer systems that would be necessary 
to accommodate a change from the current three-digit DRG number to 
separate fields for the base CS DRG number and the severity of illness 
subclass.
    Severity DRGs represent a significant change from our current DRG 
system. In addition to changing the way claims are grouped, severity 
DRGs introduce other issues requiring additional analysis, including 
possible increases in reported case-mix and changes to the outlier 
threshold. Our analysis of these issues is outlined further in the next 
section.
    Comment: A number of commenters suggested further refinements that 
need to be made to the CS DRGs to account for complexity as well as 
severity. Commenters recommended that CMS create a ``task force'' to 
analyze situations in which the complexity of the patients is not 
always appropriately recognized by the proposed CS DRGs. One commenter 
stated that the severity system is flawed because it does not capture 
resource utilization or the utility of technologies that would be more 
appropriate for beneficiaries.
    The commenters also provided examples of base DRG assignments under 
the current CMS DRGs that are different than those under the CS DRG. 
For instance, one commenter indicated that high dose interleukin-2 (HD 
IL2) is used to treat otherwise terminal cancer patients with 
metastatic renal cell cancer and melanoma. HD IL2 can evoke an immune 
response that eradicates the tumor and provides a potential opportunity 
for recovery. In the FY 2004 IPPS final rule, CMS created a new 
procedure code for HD IL2 therapy and assigned these patients to DRG 
492. The commenter reported improved access to HD IL2 therapy as a 
result of these changes. However, the commenter was concerned that 
these patients could potentially be assigned to a number of different 
DRGs under the CS DRGs with a weighted average reduction in the 
relative weight of 58 percent. The commenter suggested revising the CS 
DRG to take into account the complexity associated with providing HD 
IL2 therapy. Other commenters noted:
    <bullet> Some patients in need of ventricular assist devices (VAD) 
are currently paid in the same group as heart transplant patients using 
the CMS DRGs. Other heart assist devices are assigned to DRG 525 (Other 
Heart Assist Implant). These patients will be paid in the same group as 
implantable cardiac defibrillator patients under the CS DRGs. The 
commenters noted that it is possible that payment for these kinds of 
cases could decline by more than 70 percent under the proposed rule. 
The commenter believed that the assignment under the CS DRGs will not 
recognize higher resources associated with treating VAD patients 
relative to those in need of implantable cardiac defibrillators.
    <bullet> Bare metal and drug-eluting coronary stents would be 
assigned to the same CS DRG eliminating the distinction currently made 
for these two different kinds of stents in the CMS DRGs. The commenters 
noted that CMS created separate DRGs for drug eluting and bare metal 
stents to recognize the higher costs of drug eluting stents.
    <bullet> Defibrillator device replacement cases are currently 
assigned to DRG 551 (Permanent Cardiac Pacemaker Implant With Major 
Cardiovascular Diagnoses or AICD Lead or Generator). The commenters 
were concerned that these cases would be assigned to the DRGs for 
Permanent Cardiac Pacemaker Implant With & W/O AMI, Heart Failure or 
Shock and the cases would revert back to classification based on 
presence or absence of heart failure, AMI, or shock, rather than an 
MCV.
    <bullet> Patients receiving tPA thrombolytic therapy for stroke are 
currently assigned to DRG 559 (Acute Ischemic Stroke With Use of a 
Thrombolytic Agent). CMS revised the DRGs in FY 2006 to provide a 
separate DRG for stroke patients being treated with a reperfusion 
agent. According to the commenter, these patients will be paid in the 
same group with all stroke cases under CS DRGs undoing the change that 
CMS made in FY 2006 according to the commenter.
    <bullet> In FY 2006, CMS created separate DRGs for the revision of 
hip or knee replacement (DRG 545, Revision of Hip or Knee Replacement) 
to distinguish the higher resources associated with revisions from 
original replacements. Under CS DRGs, these cases would be assigned to 
the same group as the original replacement (bilateral or single) of the 
specific joint. The commenters were concerned that CMS' proposal to 
adopt cCS DRGs will undo a proposal that it adopted just 1 year ago.
    <bullet> Combined anterior/posterior spinal fusion cases are 
currently assigned to DRG 496 (Combined Anterior/Posterior Spinal 
Fusion). This procedure requires two separate incisions and turning the 
patient over during surgery. The commenter expressed concern that under 
the CS DRG system, these cases would be paid in the same group as all 
spinal fusions and the new DRGs would not recognize higher costs 
associated with treating these patients.
    <bullet> The APR DRG and CS DRG systems do not have DRGs for lung 
transplants alone or combined kidney/pancreas transplants. The 
commenter suggested that there should be separate DRGs for these 
transplants in addition to liver/intestinal transplants. The commenter 
indicated that lung transplants alone have lower costs and should not 
be in the same DRG as combined transplants.
    Response: In the vast majority of clinical situations, severity of 
illness and treatment complexity are directly related and are therefore 
addressed in the CS DRGs. As discussed in the proposed rule, there are 
a number of clinical situations, primarily related to the use of 
specific technologies, in which low severity patients receive care with 
high treatment complexity and cost. We acknowledge that further 
refinements are needed to the proposed CS DRG system before it will be 
ready for adoption. In the FY 2007 IPPS proposed rule, we noted a 
number of concerns we had with adopting the CS DRGs in FY 2007 (71 FR 
24027). Among them was our concern that we might need additional time 
to refine the CS DRGs to better account for complexity as well as 
severity. The commenters have brought some important issues to our 
attention that we believe should be carefully considered before we 
adopt the CS DRGs. We will consider these issues if we were to make 
further modifications to the CS DRGs and propose adopting them for FY 
2008. However, as we indicate elsewhere in this final rule, we have 
engaged a contractor to assist us with completing an evaluation of 
alternative DRG systems that may better recognize severity than the 
current CMS DRGs and meet other criteria that would make them suitable 
to adopt for purposes of payment under the IPPS. We expect to complete 
this evaluation of alternative DRG systems quickly this fall as part of 
moving forward on adopting a revised DRG system that better recognizes 
severity in the IPPS rulemaking for FY 2008. It is possible that some 
of the alternatives that we evaluate for better recognizing severity in 
the DRGs will be based on the current CMS DRGs. If we were to develop a 
clinical severity concept that uses the current CMS DRGs as the 
starting point, it is possible that the issues raised by the commenters 
will no longer be a concern. If, however, we were to propose adopting 
the CS DRGs for FY 2008, we would consider the issues raised by the 
commenters as we make further refinements to this DRG

[[Page 47907]]

system so it accounts for complexity as well as severity as a proxy for 
relative resource use.
    Comment: One commenter suggested a way of accounting for 
therapeutic complexity when assigning a patient under the CS DRGs. The 
commenter indicated that the patient should be assigned to a severity 
of illness subclass based on whether they received a separately 
identifiable technology that provides a clinical benefit and results in 
significantly higher case costs independent of severity level relative 
to the base DRG. The commenter also recommended that complexity levels 
be superimposed on the proposed severity of illness levels, such that 
either severity or complexity, or a combination of the two, would 
increase the classification of a case. The classifications would be 
defined as severity of illness or complexity (1-4).
    Response: We will further consider how to incorporate complexity 
into the assignment of a patient to a severity of illness subclass 
under either the CS DRGs if we propose to adopt them in FY 2008 or the 
alternative DRG system that we will consider once we complete our 
evaluation of potential DRG systems. It may be possible to assign a 
case to a severity of illness subclass under either the CS DRGs, the 
alternative system we plan to evaluate or even underrefined CMS DRGs by 
using the procedures or services that are provided to the patient as a 
measure of resource use (that is, complexity). We agree that the use of 
a separately identifiable procedure or technology may be useful in 
determining the assignment of a patient to a specific subclass of a 
base DRG much like what occurs today under the CMS DRGs when assigning 
patients with placement of a bare metal or drug-eluting stent to 
separate DRGs.
    Comment: Some commenters were concerned that CMS did not propose to 
adopt the already widely used APR DRGs endorsed by MedPAC, but rather 
proposed to adopt CMS'-developed CS DRGs. Some commenters stated that 
the CMS analysis that resulted in the CS DRGs is skewed because 
Medicare uses a truncated list of diagnosis and procedure codes. The 
commenter noted that CMS does not use comparable data to what 3M uses 
for the complete APR DRGs. Another commenter stated that the APR DRGs 
are the most advanced DRG classification system available yielding the 
most clinically homogenous groupings and the greatest predictive power. 
This commenter believed that it provides a sound basis for developing 
CS DRGs.
    Response: MedPAC did not endorse using the APR DRGs.\6\ However, 
MedPAC's analysis that led to their recommendation to refine the 
current DRGs to more fully account for difference in severity of 
illness among patients was based on the APR DRGs. Even though MedPAC's 
analysis was based on the APR DRGs, it recognized that CMS would have 
to consider a number of different factors when making decisions in the 
design of a DRG system. For instance, MedPAC noted that the large 
number of DRGs might mean that CMS would be faced with establishing 
weights in many categories that have few cases and thus potentially 
creating unstable estimates. To avoid creating refined DRGs with 
unstable relative weights, MedPAC recommended that the Secretary should 
be selective in adopting fine clinical distinctions similar to those 
reflected in the APR DRGs. Refining the DRGs will require carefully 
weighing the benefits of more accurate and economic distinctions 
against the potential for instability in relative weights based on a 
small number of cases.\7\ We do not believe that MedPAC expected that 
we would adopt the APR DRGs without any changes.
---------------------------------------------------------------------------

    \6\ Medicare Payment Advisory Commission. March, 2005. Report to 
the Congress, Physician-Owned Specialty Hospitals, page 76.
    \7\ Ibid, page 41.
---------------------------------------------------------------------------

    Comment: Some commenters stated concerns with merging of dissimilar 
patient groups in the CS DRG system. Combining clinically dissimilar 
groups across the severity dimension has the potential to render the 
groups far less clinically meaningful. It is anticipated that such 
groups would have to be restructured frequently as treatment patterns 
change for primarily very ill patients. Some commenters stated that it 
seems that more categories may have been consolidated than necessary, 
giving up clinical and statistical homogeneity unnecessarily. It was 
noted that this is especially important if the CS DRGs are envisioned 
as part of the basis for evolving efforts towards value-based 
purchasing where such measures as post-admission complications and 
readmissions need to be evaluated on a risk-adjusted basis. An 
alternative approach was suggested to keep the patient groups separate 
from a classification perspective, but merge from a payment analysis 
perspective.
    Response: As discussed above, the CS DRGs are based on the APR DRG 
system. The APR DRG system is comprised of 314 base DRGs, which are 
divided into four severity of illness subclasses. We believe that the 
APR DRG greatly improve recognition of resource use and clinical 
similarity of patients. However, in our analysis of the APR DRG system, 
we observed that cases assigned severity of illness subclass 4 within 
an MDC have similar average charges. Furthermore, our clinical 
consultants frequently considered the severity of illness subclass 4 
patients across DRGs within an MDC to have a closer clinical 
resemblance than to lower severity patients in their respective DRGs 
because, in severely ill patients, comorbidities have a greater impact 
on severity than the reason for admisssion. Treatment patterns will 
evolve for these multiple comorbidities leading to severity level 4 
(sepsis, shock, acute renal failure, among others). However, to the 
extent that these multiple comorbidities will change (for example, 
better treatment of septic shock so that this occurs less frequently) 
they should do so equally across all patients within an MDC. With 
respect to the comment about maintaining more DRG groups for purposes 
other than payment under the IPPS, we proposed to adopt the CS DRGs 
only for Medicare inpatient hospital payment. We chose to consolidate 
the APR DRGs to increase administrative simplicity, minimize the impact 
on existing claim processing systems, and avoid having multiple DRGs 
with low case volumes and similar weights. The commenter's suggestion 
would essentially result in many more DRGs having exactly the same 
weight. Therefore, we do not see a need to adopt the commenter's 
suggestion. However, a hospital or any other entity can use an 
alternative patient classification system for the other purposes 
suggested in the comment.
    Comment: Some commenters stated that the CS DRGs are problematic 
because they were not designed to accommodate non-Medicare populations. 
The commenters indicated that many hospitals use DRGs for quality and 
other outcome measurements and that the proposed CS DRGs may not be 
clinically appropriate for these purposes.
    In addition, another commenter stated that private health insurance 
company contracts use the CMS DRG relative weights as the payment basis 
for inpatient services delivered to members under private health 
insurance plans. The commenter stated that because these contracts are 
typically negotiated based on a fairly static assumption of CMS DRGs 
(including classification and weights), the proposed redistribution 
will disrupt virtually every contract because of the varying services

[[Page 47908]]

consumed by members covered under private health insurance. The 
commenter urged CMS to provide a greater lead time in implementing 
changes to the DRG system and relative weight methodology to allow 
health insurers more time to model the impact of the methodological 
changes to their hospital contracts.
    Response: We acknowledge that Medicare DRGs are sometimes used by 
non-Medicare payers for their own purposes. However, CMS' primary focus 
of updates to the Medicare DRG classification system is on changes 
relating to payment for services furnished to Medicare beneficiaries, 
not the obstetric, pediatric, or neonatal population. Cases involving 
these patients are found far less frequently among Medicare 
beneficiaries than in the general population. In fact, we applied 
consolidations to the APR DRGs to develop the CS DRGs to recognize that 
the APR DRGs were developed to accommodate all patient populations and 
there would be many DRGs with few Medicare cases or insufficient 
differences in the relative weights to warrant us maintaining a 
separate DRG. We encourage other payers that use Medicare's DRG system 
for payment to make appropriate modifications for patient populations 
that are found infrequently among Medicare beneficiaries such as 
neonates and children. Again, as we stated above, a hospital or any 
other entity can use an alternative patient classification system for 
purposes other than Medicare payment.
    In response to the commenter's concern with regard to the impact on 
private health insurance plans, we are improving our relative weight 
methodology to make Medicare payments more accurate. We utilize 
Medicare specific data to calculate the relative weights designed to 
pay Medicare costs. We have a fiduciary responsibility to administer 
the trust fund in order to provide quality care for our beneficiaries 
and that, not private payer contracts, is our foremost concern. 
However, as we noted earlier in this section, we are postponing the 
implementation of the HSRV methodology while we study its impact on 
charge compression. Instead, we are using a more similar approach to 
calculating the IPPS relative weights that is used in the OPPS. That 
is, rather than using a hospital-specific relative weighting 
methodology, we are standardizing charges to remove relevant payment 
factor adjustments and then adjusting those charges to costs using 
national cost center CCRs.
    In addition, we are adopting a 3-year transition of the relative 
weights. We believe this transition may also mitigate any potential 
impacts to private payer contracts from the changes to the DRG relative 
weights. During the first year of the transition, the relative weights 
will be based on a blend of 33 percent of the cost-based weights and 67 
percent of the charge weights. In the second year of the transition, 
the relative weights will be based on a blend of 33 percent of the 
charge weights and 67 percent of the cost-based weights. In the third 
year of the transition, the relative weights will be based on 100 
percent of the cost-based weights.
    Comment: One commenter suggested that CMS seek further refinements 
to the DRGs for mental services. The commenter suggested that these 
DRGs have been underpaid for many years.
    Response: We will consider whether the psychiatric DRGs need 
further refinements as we proceed to refine the DRG system to better 
recognize severity for FY 2008. We note that the application of cost-
based weights will increase Medicare's payments for the psychiatric 
DRGs in FY 2007.
    Comment: Some commenters inquired how other prospective payment 
systems such as the IPF PPS and LTCH PPS that rely upon the IPPS DRG 
classifications would be affected by the changes to adopt CS DRGs.
    Response: We did not propose any changes to the DRG classifications 
systems used under the IPF PPS or the LTCH PPS in the IPPS proposed 
rule. However, we acknowledge that these PPSs use the IPPS DRG 
classifications to make payment determinations. Furthermore, we note 
that the refinements we are adopting to the current CMS DRG system to 
better recognize severity (which are discussed in detail in section 
II.C.7. of this final rule) will be applicable under the IPF PPS and 
LTCH PPS, just as past annual updates to the IPPS DRG classifications). 
We will need to consider whether corresponding changes need to be made 
to these other payment systems once final decisions are made about how 
DRG classification will occur under the IPPS in the future. Payment 
rate and policy changes to the IPF PPS and LTCH PPS went into effect 
for RY 2007 on July 1, 2006. These PPSs are using the Version 23 IPPS 
GROUPER for the first 3 months of RY 2007 (July 2006 through September 
2006). Consistent with the IPPS, the IPF PPS will use Version 24 of the 
IPPS GROUPER, effective October 1, 2006. No further changes will be 
made to the IPF PPS until next July. Under the LTCH PPS, changes to the 
LTC-DRGs were proposed for FY 2007, based on the proposed Version 24 
IPPS GROUPER (71 FR 24049 through 24068), and changes to the LTC-DRGs 
that will be effective October 1, 2006, based on the finalized Version 
24 IPPS GROUPER (presented in this final rule) are discussed in section 
II.F. of the preamble of this final rule. Any changes to the DRG 
classification systems for these prospective payment systems would be 
undertaken through notice and comment rulemaking in their respective 
proposed rules.
    Comment: One commenter stated that it was not clear how the 
judgment was made for the MDC 11 severity subclass 4 example shown that 
these average charge values were sufficiently similar to consolidate. 
The commenter suggested that CMS provide further information about the 
criteria and considerations it used to judge categories as low volume 
and potentially unstable and to judge the mean charges (or costs) as 
sufficiently similar to warrant consolidation. One commenter expressed 
concern about the consolidations related to obstetrics and psychiatric 
care services.
    Response: As discussed above, the CS DRGs are based on APR DRGs 
that are divided into severity subclasses 2 through 4 subclasses which 
greatly increase the resource and clinical similarity of the patients. 
Furthermore, as discussed above, our clinical consultants frequently 
considered the level 4 severity patients across DRGs within an MDC to 
have a closer clinical resemblance than to lower severity patients in 
their respective DRGs. In consolidating the severity level 4 patients 
in an MDC, volume was a primary consideration along with the extent of 
clinical difference. For example, in MDC 11 severity level 4, kidney 
transplants were kept in a separate group and not consolidated with the 
other MDC 11 surgical DRGs because of the clinical distinctiveness of 
patients having a major organ transplant.
    Comment: One commenter expressed concern that patients may need to 
suffer adverse consequences in order for the case to be assigned to a 
higher severity level. The commenter believed that the severity 
grouping should reflect complexity and patient benefit as well and 
should allow for an increased severity/complexity level even without 
adverse patient consequences.
    Response: The current DRG system assigns a CC status to most 
patients with a complication or adverse event that occurs after 
admission. Although in the CS DRGs post admission complications can 
result in an increase in a patient's

[[Page 47909]]

severity level, patients are primarily assigned to the higher severity 
levels (levels 3 and 4) based on the presence of multiple serious 
comorbidities in multiple organ systems rather than a single adverse 
event. Thus, unlike the current DRGs in which a single post admission 
complication can place the patient in a higher paying DRG, the CS DRGs 
in general require multiple significant problems to be present in order 
for a higher severity level to be assigned. In general, these patients 
will be more costly to treat. The system does not reward ``adverse'' 
consequences as suggested by the commenter but instead recognizes 
severity of illness will also be associated, at least in part, with 
resource use.
    Patients are increasingly admitted to the hospital at high severity 
of illness. Adverse consequences can and do occur within the hospital. 
However, some of those consequences are unavoidable (particularly for 
patients who are admitted at a high severity of illness). Section 
5001(c) of Pub. L. 109-171 requires that, beginning in FY 2009, we 
select diagnosis codes associated with at least two conditions that 
result in assignment of a higher weighted DRG and that reasonably could 
be prevented through the application of evidence-based guidelines. 
Beginning with discharges in FY 2009, section 5001(c) requires that we 
not assign cases to higher weighted DRGs based on the presence of these 
preventable conditions. Section 5001(c) also mandates that, for 
discharges on or after October 1, 2007, we require a hospital to 
include the secondary diagnosis of a patient at admission as part of 
the information required to be reported by a hospital for payment 
purposes. We believe that the concerns of the commenter will be 
addressed when we implement section 5001(c) of Pub. L. 109-171.
    Comment: A number of comments supported CMS' goal of improving 
payment accuracy. However, the commenters stated that the need for and 
best approach to changing the patient classification system has not 
been objectively demonstrated. One commenter provided a sophisticated 
statistical analysis that it asserted confirms MedPAC's conclusion that 
changes are needed to improve payment accuracy. However, this commenter 
suggested the greatest improvement in cost-margin consistency resulted 
from switching the basis for the DRG weights from charges to cost and 
neither the HSRVcc methodology nor the CS DRGs improved payment 
accuracy. Other commenters indicated that more careful analysis is 
needed, along with greater access to the details of the CS DRG 
methodology. The commenters identified the following concerns:
    <bullet> Validation. The commenters indicated that it is unclear 
whether there is a need for a new patient classification system. The 
commenters stated that the implication of moving from a resource-based 
system to a severity-based payment system must be more fully explored 
and understood. They indicated that CMS provided no analysis that shows 
that the proposed changes result in an improved hospital payment system 
compared to the existing DRG system or APR DRGs.
    <bullet> Budget neutrality adjustment. The commenter indicated that 
the proposed rule did not address an adjustment for improved 
documentation and coding or even a methodology for determining one. The 
commenter suggested that CMS not apply an adjustment for more 
comprehensive documentation and coding that increases perceived but not 
real case mix until there is evidence that one is needed. The commenter 
requested that CMS monitor actual changes in coding and documentation 
practices associated with implementation of inpatient payment reforms 
to determine if any base payment adjustments are needed rather than 
adjust payments in anticipation of such changes.
    <bullet> Availability of the GROUPER. Many commenters stated that 
the proprietary nature and lack of transparency of the proposed CS DRG 
GROUPER are concerns. The current DRG GROUPER logic has been in the 
public domain since the inception of IPPS. Without the new GROUPER 
logic, the commenters believed that it is virtually impossible for 
anyone to thoroughly analyze the system and comment. The commenters 
urged that CMS make any new classification system widely available to 
the public on the same terms as the current DRG system. Some commenters 
stated that CMS should provide the GROUPER for the CS DRGs and open a 
new public comment period. Several commenters were concerned about the 
cost of the GROUPER if the CS DRGs were implemented.
    <bullet> Too few diagnoses and procedures considered. The 
commenters are concerned that the current CMS GROUPER does not use all 
diagnosis and procedures that affect a patient's severity of illness 
and/or the resources utilized. The commenters believed that the number 
of secondary diagnoses may be an important factor in determining 
differences in patient characteristics.
    Response: With respect to the comment about the need for a new 
patient classification system, the proposed rule noted that we modeled 
the CS DRGs and observed a 12-percent increase in the explanatory power 
(or R-square statistic) of the DRG system to explain hospital charges. 
That is, we found more uniformity among hospital total charges within 
the CS DRGs than we did with Medicare's current DRG system (71 FR 
24027). Thus, we believe that there is clear evidence that improvements 
can be made to the current DRG system that will reduce heterogeneity 
among patients within a given DRG. While this statistic indicates that 
the current CMS DRG system can be refined to improve payment accuracy, 
we agree that it does not necessarily mean we should adopt the system 
we proposed. As suggested by the commenters, there are a number of 
other evaluation criteria that we need to consider before deciding 
whether to adopt the CS DRGs or a potential alternative. We describe 
these criteria in more detail below. With respect to the comments about 
a budget neutrality adjustment to account for potential improvements in 
documentation and coding, we discuss the comments and our responses on 
this issue more fully in the next section of this final rule. The 
comment about the availability of the GROUPER is related to a number of 
detailed comments we received about the potential for Medicare to adopt 
a proprietary DRG system. We have provided a more detailed description 
of these comments and our responses below. With respect to the comment 
about fully utilizing all of the diagnosis and procedure codes 
submitted on the claim, we note that CMS does not process codes 
submitted electronically on the 837i electronic format beyond the first 
9 diagnosis codes and the first 6 procedure codes. While HIPAA requires 
CMS to accept up to 25 ICD-9-CM diagnosis and procedure codes on the 
HIPAA 837i electronic format, it does not require that CMS process that 
many diagnosis and procedure codes. As suggested by the commenters, 
there may be value in retaining additional data on patient conditions 
that would result from expanding Medicare's data system so it can 
accommodate additional diagnosis and procedure codes. We will consider 
this issue while we contemplate refinements to our DRG system to better 
recognize patient severity. However, extensive lead time is required to 
allow for modifications to our internal and contractors' electronic 
systems in order to process and store this additional information. We 
are unable to move forward with this recommendation without carefully 
evaluating implementation issues. One

[[Page 47910]]

issue that we expect to consider in deciding whether to adopt such a 
major systems change is how frequently information beyond the ninth 
diagnosis code and sixth procedure code affects DRG assignment. Given 
the cost of an infrastructure change to accommodate this request, we 
want to be certain that there are sufficient benefits to justify the 
costs. Again, we will continue to carefully evaluate this request to 
expand the process capacity of our systems.
    Comment: Some commenters stated that the CS DRG grouping 
methodology based on average charges is inconsistent with the proposed 
changes to adopt cost relative weights. The commenters recommended 
using the HSRVcc methodology to determine cost-based weights for 
consolidating the APR DRGs into CS DRGs.
    Response: As explained above, we are not adopting the HSRVcc 
methodology for FY 2007 because of our concerns about the interaction 
of charge compression with the hospital-specific portion of the cost 
weight methodology. Instead, we are setting relative weights based on 
the estimated cost of the DRGs where cost is determined by applying the 
national average CCRs to the standardized charges for each DRG in each 
of the 13 cost centers. In general, when we consider whether to further 
distinguish types of cases within a DRG in order to create a new DRG or 
to reassign these cases to a different DRG, we are comparing cases that 
are clinically similar. Therefore, it is possible or even likely that 
these cases will be using the same mix of routine and ancillary 
services and the results of the analysis will be similar whether the 
cases are compared based on average costs or charges. That is, the 
cases will be using services that have comparable charge markups over 
costs and the analysis will produce the same conclusion whether the 
comparison between cases is based on costs or charges. The major 
differences between cost and charge weights will occur when comparing 
across clinically dissimilar services that use a different mix of 
routine and ancillary services with variable markups. For this reason, 
we believe that we can continue to do our initial evaluation of 
potential DRG changes using average charges. Given the complexity 
associated with developing cost-based weights, we believe our 
preliminary analysis for evaluating whether to make a DRG change should 
use charges as a proxy for costs. However, we will consider the 
commenters' suggestion and, to the extent feasible, consider whether it 
is possible to evaluate potential DRG changes using costs as well as 
charges.
    Comment: Numerous comments expressed concerns about the use of a 
proprietary DRG classification system. The commenters indicated that 
the current DRG GROUPER logic has been in the public domain since the 
inception of the IPPS. Many commenters noted that the source code, 
logic and documentation for the current DRG system can be purchased 
through the National Technical Information Service. The commenters 
stressed the importance of maintaining transparency within the DRG 
system (that is, any new DRG system should be available to the public 
on the same terms as the current one). The commenters stated that any 
methodology used for the Medicare GROUPER must not be based on a 
proprietary system. One commenter questioned how future DRG refinements 
would be made if the underlying system is owned by 3M.
    A number of commenters were concerned that it was not possible to 
thoroughly analyze the proposed CS DRGs and provide comments without 
the GROUPER logic. Other commenters stated that limited information on 
the proposed CS DRGs hampered their ability to conduct modeling of the 
new system. Some commenters raised serious concerns allowing CMS to 
assign the CS DRG without hospitals having the ability to group the 
case themselves. According to the commenters, without the CS DRG 
information, revenue and patient receivables cannot be recorded 
accurately. The commenters stated that hospitals must have the ability 
to accurately estimate payments in evaluating strategic initiatives, 
business plans, budgets, marketing, staffing, and other critical 
decisions. Commenters noted that CMS provided a link to a web tool on 
the 3M Web site that allowed hospitals to conduct their own analyses of 
the impact of moving to CS DRGs. However, these commenters stated that 
the reality was that if a hospital does not have its own APR DRG 
GROUPER software, it can only obtain CS DRG information one case at a 
time by entering specific diagnostic and procedure codes.
    Several commenters stated that if CS DRGs are adopted and the 
GROUPER remains proprietary, they would be limited in their ability to 
educate and assist hospitals in use of the new system. One commenter 
indicated that the current 3M product is proprietary and not available 
in the public domain for hospitals or their software vendors who 
develop and support their patient account billing and case management 
software. The commenter also stated that it does not have any access to 
the underlying codes, conditions and edits utilized by 3M with its 
product and as a result could not accurately comment on the interaction 
between severity and complexity associated with individual claims in 
contrast to resource consumption. The commenter stated that, although 
hospitals are not required to have a GROUPER, hospitals that hold 
compliance as a top priority rely on a grouper/encoder to ensure that 
claims meet all edits prior to submission.
    Several commenters stated that a single company's monopoly over the 
DRG system would be costly to hospitals. The commenters indicated that 
it would be more difficult to obtain the system to integrate it into 
hospitals' existing systems. The commenters reported that Maryland 
hospitals report a GROUPER price of $20,000 per hospital with the 
ultimate price varying based on criteria such as whether it is used on 
a mainframe or personal computer. Another commenter expressed concerns 
that only 3M would be providing access to the GROUPER. The commenter 
stated that with over 4,000 hospitals requiring a new severity-adjusted 
DRG GROUPER, it is not feasible or reasonable to expect that one vendor 
could service all the hospitals nationally in the few months between 
the posting of the final IPPS rule and an October 1, 2006 
implementation. The commenter stated that having 3M maintain control of 
the GROUPER software limits access by other software vendors to begin 
reprogramming of the many computer systems that would need to be loaded 
with the CS DRGs that is currently incompatible with the CMS DRGs. The 
commenter stated that there will need to be sufficient time between 
making the GROUPER available and implementation so that hospitals can 
test their systems, and study the impact on their facilities.
    Another commenter stated that it offered software that hospitals 
and health plans utilize in managing the billing, coding, and payment 
for inpatient hospital services under the DRGs. The development of 
software related to Medicare's DRG system by private companies is 
possible only because the current DRG methodology is available in the 
public domain. The commenter also noted that the public can obtain full 
access to the details underlying the CMS DRG system by purchasing 
information and software from the National Technical Information 
Service for a nominal charge in a timely manner well in advance of the 
implementation of changes. The commenter noted the information was 
available to all of the public simultaneously and no company

[[Page 47911]]

currently has a competitive advantage in producing DRG products. The 
commenter added that CMS currently engages in an open and comprehensive 
discussion about the structure of the DRG methodology through a variety 
of mechanisms including notices published in the Federal Register. CMS 
releases sufficient detail about its methodology in electronic formats 
to enable providers, health plans, and vendors to develop and validate 
their own computer programs. The commenter expressed concern that 
unfettered access to the underpinnings of the DRG system would not 
continue to be available under the CMS proposal to adopt CS DRGs. The 
commenter suggested the following criteria that a new DRG system should 
meet in order to be adopted by Medicare:
    <bullet> Software distribution comparable to what is currently made 
available, which includes:
    <bullet> GROUPER source code which produces all pertinent return 
information;
    <bullet> All underlying tables that drive the GROUPER with 
documentation;
    <bullet> A complete set of test cases to validate the functioning 
of the software;
    <bullet> Complete system and user documentation;
    <bullet> Contact people who can and will respond to questions in a 
timely fashion;
    <bullet> The right to redistribute the methodology to business 
partners and consultants;
    <bullet> The right to translate source code to other technology 
environments and to integrate it into other systems;
    <bullet> Pre-releases of software and documentation well in advance 
of planned implementations; and
    <bullet> An open inclusive process for considering future 
enhancements.
    The commenter indicated that the agency must also ensure that 
whatever refinement methodology is adopted is open to public discussion 
and scrutiny, now and on an ongoing basis. The commenter stated that 
transparency is critical to advancing affordability in our health care 
system.
    Response: With respect to making information available for the 
public to analyze the proposed DRGs, we were cognizant of this issue 
and attempted to provide as much information as possible that would 
allow the public an opportunity to comment meaningfully on the proposed 
CS DRGs. We provided the following data files on the CMS Web site at no 
cost to the public to assist with understanding our proposed rule:
    <bullet> Provider Specific File.
    <bullet> Impact file for IPPS FY 2007 Proposed Rule.
    <bullet> CCRs and Weighting Factors.
    <bullet> DRG Relative Weights.
    <bullet> CS DRG HSRVcc relative weights.
    <bullet> CAH List for FY 2007 Proposed Rule.
    In addition to this information, we made available for purchase 
both the FY 2004 and FY 2005 MedPAR data that were used in simulating 
the policies in the IPPS proposed rule. We also discussed the proposed 
rule in at least two national teleconferences that were open to the 
public. One of these calls was a Special Hospital Open Door call that 
was scheduled for 1 and 1\/2\ hours and was completely devoted to 
explaining the IPPS proposed rule and answering questions from the 
public. There were over 1,100 calls into this national teleconference. 
Finally, we were able to provide access to a Web tool on 3M's Web site 
that would allow an end user to build case examples using the proposed 
CS DRGs. While the commenters are correct that these case examples 
could only be analyzed one at a time, the tool did provide a detailed 
explanation of how the severity of illness was assigned and the 
demographic and diagnostic information that went into that 
determination. Further, other information about the CS DRGs and APR 
DRGs were available at that Web site, including access to the APR DRG 
definitions manual.
    We acknowledge the many comments suggesting that the logic of 
Medicare's DRG system should continue to remain in the public domain as 
it has since the inception of PPS. We also acknowledge the commenters' 
concern about the impact of moving to a proprietary system and the 
potential for limiting public access to the underlying GROUPER logic 
relative to the current CMS DRGs. We note that the issues associated 
with using a proprietary DRG system were well illustrated in a public 
comment that we received from the Maryland Health Services Cost Review 
Commission (HSCRC). Maryland adopted the APR DRGs in June 2004. The 
commenter noted that ``despite the advance notice, a number of 
hospitals had not acquired the APR DRG GROUPER until near the time for 
full implementation to begin. In addition to acquiring the GROUPER, 
hospitals had to deal with issues of integrating the GROUPER with other 
hospital systems, which was at times difficult with proprietary 
systems.'' The commenter further noted that Maryland has 47 acute care 
hospitals and ``moving the nation's entire hospital industry to a new 
system in a short period is likely to be much more difficult.'' The 
commenter indicated that ``CMS has the opportunity to avoid some of the 
transition issues the HSCRC faced by placing the CS DRG logic in the 
public domain or by requiring open licensing of the GROUPER at 
reasonable rates.'' The commenter noted that consultants and vendors to 
hospitals have struggled to obtain access to the GROUPER as they 
advised their clients.
    The public comments and Maryland's experience with APR DRGs have 
led to many commenters recommending that Medicare should adopt a new 
DRG system that is in the public domain. As we evaluate alternative 
severity classification systems, we will use public access to the 
system as an important element in evaluating whether each system can be 
adopted by Medicare. We will continue to strive to promote transparency 
in our decision making as well as in future payment and classification 
systems, as we have done in the past.
    Comment: A number of commenters suggested that a more 
straightforward approach to achieving the same or similar objective 
would be for CMS to refine the current DRG classification system by 
retaining the current base DRGs (eliminating the current paired DRGs 
with and without CC) and adding 3-4 levels of severity, rather than 
using APR DRGs. This option would preserve the many policy decisions 
that CMS has made over the last 20 years that are already incorporated 
into the DRG system and yet adjust hospital payments to reflect the 
cost of care based on patient needs and conditions. Other commenters 
suggested designating certain DRGs as device-dependent to ensure that 
device costs are appropriately reflected in the claims file data. Some 
commenters suggested that CMS retain the current DRG system but revise 
the CC list as an alternative approach to better recognizing severity 
of illness in the DRG system.
    Several commenters stated that CMS did not conduct an objective 
study of the CS DRGs although alternatives for the APR DRG system are 
readily available. These commenters asked whether CMS considered 
adopting an alternative DRG system that could also better recognize 
severity.
    Two commenters proposed alternative severity of illness systems to 
the APR DRG system. One commenter suggested that we use the Refined DRG 
(RDRG) severity of illness system which is supported by Health Systems 
Consultants, Inc, that contains 1,274 groups with 350 base DRGs. The 
commenter explained that each of the medical base DRGs is divided into 
three severity classes and each of the surgical base DRGs is divided 
into four severity

[[Page 47912]]

classes. In addition, there are neonate groups based on birth weight, 
seven DRGs that do not have severity classes and an early death group 
in each MDC created to remove low outliers according to the commenter. 
The commenter noted that the research for the RDRG system was 
undertaken between 1986 and 1989 under a Health Care Financing 
Administration (now CMS) cooperative agreement. The commenter indicated 
that the RDRG system has been updated annually using the current CMS 
complications and comorbidities list since 1989. Solucient, LLC has 
also used the previous HCFA DRG severity work to develop a risk 
adjusted DRG system which they refer to as Refined Diagnosis Related 
Group (R-DRG). Solucient also reports that they have updated their 
system annually with ICD-9-CM code changes. Another commenter noted 
that HSS/Ingenix has developed an all-payer severity-adjusted DRG 
system (APS-DRGs) which contains 1,130 case-mix cells with 376 
consolidated DRGs plus 2 error categories. The commenter indicated 
that, outside of MDC 15, all consolidated DRGs are divided uniformly 
into three severity levels. The commenter also indicated that the 
number of severity levels within MDC 15 depends upon the consolidated 
DRG in the APS-DRG system.
    One commenter stated that based on their analysis none of the off-
the-shelf Version 23 DRG systems is the best alternative. Rather, it 
was recommended that a hybrid system be created which would combine the 
best features of each system. The commenter stated that the proposed CS 
DRG system or the current CMS DRG system would be the preferred systems 
to modify. One commenter stated that the use of objective, physiologic 
data on admission to enhance claims data significantly improves the 
accuracy of any severity stratification. The commenter suggested that 
CMS conduct one or more demonstration projects studying claims data 
enhanced with objective, time-stamped electronically captured 
laboratory results as an alternative approach for severity adjustment 
for payment and quality assessment purposes.
    Response: The approach suggested in the comments to incorporating 
severity measures into the current CMS DRG system may be a viable 
option that we will evaluate in the coming year. With respect to the 
comment that we undertake demonstration projects to study alternative 
ways of better recognizing severity in the DRG system, we are concerned 
that such an endeavor could not be completed in time for FY 2008 
implementation. We believe it is very important to make improvements to 
the DRG system to better recognize severity rapidly and there are a 
number of different ways that improvements in payment accuracy can be 
achieved without undertaking a lengthy demonstration project. As 
suggested by the commenters, much research has already been completed 
on alternative DRG systems. We believe it is likely that at least one 
of these systems (or potentially a system that we develop ourselves 
based on our own prior research) will be suitable to achieve our goal 
of improvements in payment accuracy by FY2008. We are currently in the 
process of engaging a research contractor to evaluate the 3M Severity 
of Illness DRG products along with the other DRG severity systems that 
have come to our attention during the comment process.
    As indicated above, we will use public access to the system as an 
important element in evaluating whether each system can be adopted by 
Medicare. With respect to the CS DRGs and potentially the other systems 
described in the public comments, there may be licensing issues. We 
proposed to use the CS DRGs beginning in FY 2008. While they were 
developed under a contract with the Federal government, the CS DRGs are 
essentially a variant of the APR DRGs that are copyrighted by 3M. The 
APS-DRGs are a proprietary product owned by HSS/Ingenix, a division of 
United Health Care. However, HSS/Ingenix has indicated that, should we 
decide to adopt their product, it would make its DRG system available 
to the public under the same terms as the current CMS DRGs (that is, 
the source code, logic and documentation can be purchased through the 
National Technical Information Service). The RDRG system is supported 
by Health Systems Consultants.
    There are other issues of note with respect to the DRG systems 
mentioned in the comments and Medicare's efforts to adopt a DRG system 
that better recognizes severity. In the late 1980's, CMS (then HCFA) 
funded a Yale University contract for the development of refined 
severity DRGs. The severity DRGs developed under this contract formed 
the basis for most of the severity DRG systems available today, 
including the Ingenix APS-DRGs, the 3M APR DRGs, the Health Systems 
Consultants RDRGs and the Australian government's AR-DRGs. In the mid-
1990's, CMS (then HCFA) also adapted the Yale system and developed a 
potential severity DRG system, which was described in the Health Care 
Financing Review.\8\ Although the APR DRGs have departed from the Yale 
approach to a greater extent than have the other systems, both the 3M 
product and the APS-DRGs were derived from the 1989 Yale severity 
system that is in the public domain. Given that the Yale system is in 
the public domain and CMS considered adopting a severity DRG system 
based on it in the mid 1990's, we will also consider updating our prior 
work part of our initiative to identify and implement a severity DRG 
system for use by Medicare in FY 2008. Consistent with the sentiment 
expressed in the public comments, this option would have the advantage 
of using the current DRGs as a starting point and retaining the benefit 
of the many DRG decisions we have made in recent years. The DRG system 
we considered in the mid-1990's used a base DRG with 3 levels of 
severity depending upon whether the patient had no CC, a CC, or a major 
CC. During this past winter, CMS began a comprehensive review of over 
13,000 diagnosis codes to determine whether they should be classified 
as CCs when present as a secondary diagnosis. Under this option, we 
could continue this review of the CC list, classifying them into one of 
the three categories described above in conjunction with updating the 
severity DRG system that we considered in mid-1990's.
---------------------------------------------------------------------------

    \8\ Edwards, Nancy et al., ``Refinement of Medicare Diagnosis 
Related Groups to Incorporate a Measure of Severity,''Health Care 
Financing Review, Winter 1994, pages 45-64.
---------------------------------------------------------------------------

c. Changes to CMI From a New DRG System
    After the 1983 implementation of the IPPS DRG classification 
system, CMS observed unanticipated growth in inpatient hospital case-
mix (the average relative weight of all inpatient hospital cases) that 
is used as proxy measurement for severity of illness.
    There are three factors that determine changes in a hospital's CMI:
    (1) Admitting and treating a more resource intensive patient-mix 
(due, for example, to technical changes that allow treatment of 
previously untreatable conditions and/or an aging population);
    (2) Providing services (such as higher cost surgical treatments, 
medical devices, and imaging services) on an inpatient basis that 
previously were more commonly furnished in an outpatient setting; and
    (3) Changes in documentation (more complete medical records) and 
coding practice (more accurate and complete coding of the information 
contained in the medical record).

[[Page 47913]]

    Changes in CMI as a result of improved documentation and coding do 
not represent real increases in underlying resource demands. For the 
implementation of the IPPS in 1983, improved documentation and coding 
were found to be the primary cause in the underprojection of CMI 
increases, accounting for as much as 2 percent in the annual rate of 
CMI growth observed post-PPS.\9\
---------------------------------------------------------------------------

    \9\ Carter, Grace M. and Ginsburg, Paul: The Medicare Case Mix 
Index Increase, Medical Practice Changes, Aging and DRG Creep, Rand, 
1985.
---------------------------------------------------------------------------

    We believe that adoption of CS DRGs would create a risk of 
increased aggregate levels of payment as a result of increased 
documentation and coding. MedPAC notes that ``refinements in DRG 
definitions have sometimes led to substantial unwarranted increases in 
payments to hospitals, reflecting more complete reporting of patients' 
diagnoses and procedures.'' MedPAC further notes that ``refinements to 
the DRG definitions and weights would substantially strengthen 
providers' incentives to accurately report patients' comorbidities and 
complications.'' To address this issue, MedPAC recommended that the 
Secretary ``project the likely effect of reporting improvements on 
total payments and make an offsetting adjustment to the national 
average base payment amounts.'' \10\
---------------------------------------------------------------------------

    \10\ Medicare Payment Advisory Commission: Report to Congress on 
Physician-Owned Specialty Hospitals, March 2005, p. 42.
---------------------------------------------------------------------------

    The Secretary has broad discretion under section 1886(d)(3)(A)(vi) 
of the Act to adjust the standardized amount so as to eliminate the 
effect of changes in coding or classification of discharges that do not 
reflect real changes in case-mix. While we modeled the changes to the 
DRG system and relative weights for the proposed rule to ensure budget 
neutrality, we are concerned that the large increase in the number of 
DRGs will provide opportunities for hospitals to do more accurate 
documentation and coding of information contained in the medical 
record. Coding that has no effect on payment under the current DRG 
system may result in a case being assigned to a higher paid DRG under a 
system that better recognizes severity. Thus, more accurate and 
complete documentation and coding may occur under a DRG system that 
better recognizes severity because it will result in higher payments 
than the current CMS DRGs. In the FY2007 IPPS proposed rule, we 
solicited comments on this issue.
    Comment: One commenter suggested that CMS should delay 
implementation of the proposed changes to the DRG system until it 
conducts nationwide coding and documentation education, particularly to 
physicians. The commenter also suggested that CMS should find a method 
to provide physicians who practice in hospitals with web-based 
documentation training and incentives document correctly.
    Response: The proposed CS DRG system is based on the reporting of 
current ICD-9-CM diagnosis and procedure codes. The proposed changes do 
not require any changes for hospitals or physicians in how they code or 
document information in the medical record. For this reason, we do not 
believe there is a need for any changes to education and training that 
occurs with respect to documentation and coding.
    Comment: Several commenters expressed concern that the proposed 
rule did not provide any type of analysis to justify or support the 
need for an adjustment to the IPPS rates for anticipated changes in 
case mix from a new DRG system. These commenters noted that CMS did not 
provide a specific adjustment amount in the proposed rule. The 
commenters stated their view that it is the responsibility of CMS to 
provide adequate notice and the opportunity for meaningful public 
comments in response to such a specific proposal before any adjustment 
can be applied. One commenter recognized that CMS is authorized to make 
adjustments for changes in coding that are likely to occur. However, 
absent strong evidence, they urged CMS to avoid making negative 
adjustments to the standardized amount for anticipated increases in 
case mix. Another commenter provided two suggestions to CMS. The first 
suggestion was for CMS to share its thought process on how the 
standardized amount would be adjusted and allow the public an 
opportunity to provide comments on this basic set of criteria. The 
second suggestion was that CMS should make a commitment to adjust 
future base payment levels if it is determined that the initial 
adjustment projections are inaccurate. Another commenter stated that 
any adjustment to the standardized amount in an attempt to account for 
increased documentation and coding is unnecessary and unwarranted. The 
commenter asserted that it is virtually impossible to objectively 
distinguish real changes in case mix from those that occur due to 
improved coding and documentation. This commenter stated claims are 
coded using the official coding guidelines that are the same regardless 
of the DRG system being used. Another commenter requested that CMS not 
overestimate the growth in CMI as a result of improved coding. This 
commenter asserted there are many needs for accurate data collection in 
a hospital setting and coders do not stop reviewing a medical record 
after locating the first CC that assigns the patient to a higher 
weighted DRG. The commenter maintained that several hospitals ask 
coders to assign codes to many of the non-invasive procedures that do 
not affect DRG assignment. This same commenter also stated they believe 
the increase in CMI will not be as significant as CMS anticipates.
    One commenter representing the State of Maryland shared the state's 
experience with case mix index changes after adoption of the APR DRG 
system. The commenter stated correct coding resulting in maximum 
reimbursement under the CMS DRGs could understate a hospital's case mix 
under the APR DRGs. Facilities that have tried to improve their coding 
productivity by seeking to maximize reimbursement under Medicare may 
not obtain an accurate representation of its patient's severity of 
illness under APR DRGs. According to the commenter, hospitals have a 
financial incentive to improve their clinical documentation and to code 
more completely when APR DRGs (or CS DRGs which are based on APR DRGs) 
are used for reimbursement.
    The commenter also indicated that case mix growth exceeded four 
percent for the State's hospitals on average, as they began to prepare 
for the full transition to APR DRGs. Case mix growth in this current 
fiscal year is about the same. As such, the State has established a 
policy for FY 2006, limiting the amount of case mix growth experienced 
for each hospital until the coding patterns become stable. In addition, 
an appeals process for hospitals with services that generate rising 
case mix growth due to complexity has also been established.
    Response: We appreciate the commenters' concerns and feedback 
regarding potential adjustments to the national standardized amount to 
account for improvements in documentation and coding that may cause the 
case-mix index to increase absent real case-mix growth. The commenters 
are correct that we did not propose a specific adjustment for improved 
documentation and coding. As stated in the proposed rule, we were 
soliciting comments on the possibility of changes in the case mix index 
as a result of the increase in the number of DRGs within the proposed 
CS DRGs. We will continue to analyze this issue as we evaluate 
alternative DRG systems that may better recognize severity of illness 
for implementation in FY 2008. We

[[Page 47914]]

acknowledge the commenters' request to provide an opportunity for 
public comment before CMS adopts a specific adjustment to the 
standardized amounts for improved documentation and coding. As stated 
earlier, we intend to propose further changes to better recognize 
severity in the DRG system for FY 2008. If we decide to make an 
adjustment to the standardized amount to account for improvements in 
documentation and coding, we will provide the specific level adjustment 
and the data and analysis underlying it in a proposed rule that will 
allow for an opportunity for public comment.
    We disagree with the commenters that suggested there is no need for 
an adjustment to the IPPS standardized amounts to account for 
improvements in documentation that increase case mix and, therefore, 
payments. As presented above and in the proposed rule, Medicare's 
experience since the original inception of the IPPS and long-standing 
research provide substantiation that improvements in documentation and 
coding that increase case-mix and payment will occur when the 
opportunity arises through the expansion of the DRG system. Further, 
the comment representing the State of Maryland made clear that when CS 
DRGs ``are used for reimbursement, hospitals have the financial 
incentive to improve their clinical documentation and to code 
administrative records more completely.'' \11\ MedPAC also noted that 
``adopting our recommended refinements to the DRG definitions and 
weights would substantially strengthen providers' incentives to 
accurately report patients' comorbidities and complications.'' \12\
---------------------------------------------------------------------------

    \11\ Redmon, Patrick, D., Comment Letter to CMS on the FY 2007 
IPPS Proposed Rule, June 12, 2006.
    \12\ MedPAC, p. 42.
---------------------------------------------------------------------------

    Comment: One commenter stated that, in its experience, a change to 
the severity of illness grouping logic will result in an increase to 
the rate of change in case-mix. Because any effect will not be revenue 
neutral, the commenter questioned if and how CMS intends to address the 
change in case-mix, for example, regulating the change or setting a cap 
for hospitals. The commenter indicated that case-mix could rapidly 
decline as well as rapidly increase at the hospital-specific level and 
asked if CMS had a mechanism to address that issue, as well. The 
commenter also recommended that hospitals with improved case mix due to 
improved coding accuracy and internal documentation should be entitled 
to the full CMI benefit.
    Response: We appreciate the commenter's concern and agree that the 
severity of illness grouping logic will affect case-mix. Also, we have 
known since the development of a PPS for capital payments that changes 
in case-mix affect capital payments to certain hospitals as much, or 
more than, operating payments. However, we do not know, at this point, 
the extent and direction of the impact to case-mix that the severity of 
illness grouping logic would have, or how rapidly the changes to case-
mix would occur. When a decision is made regarding implementing the 
severity logic, we will be carefully scrutinizing the data and a myriad 
of variables to ascertain its effect and whether or not adjustments or 
interventions are necessary.
4. Effect of CS DRGs on the Outlier Threshold
    In its March 2005 Report to Congress on Physician-Owned Specialty 
Hospitals, MedPAC recommended that Congress amend the law to give the 
Secretary authority to adjust the DRG relative weights to account for 
the differences in the prevalence of high-cost outlier cases. MedPAC 
recommended DRG-specific outlier thresholds that would be financed by 
each DRG rather than through an across-the-board adjustment to the 
standardized amounts. Furthermore, in comments that MedPAC submitted 
during the comment period for the FY 2006 IPPS proposed rule, MedPAC 
stated its belief that the current policy makes DRGs with a high 
prevalence of outliers profitable for two reasons: 1) These DRGs 
receive more in outlier payments than the 5.1 percent that is removed 
from the national standardized amount; and 2) the relative weight 
calculation results in these DRGs being overvalued because of the high 
standardized charges of outlier cases. MedPAC also noted that, under 
its recommendations, outlier thresholds in each DRG would reduce the 
distortion in the relative weights that comes from including the 
outlier cases in the calculation of the weight and would correct the 
differences in profitability that stem from using a uniform outlier 
offset for all cases. MedPAC added that its recommendation would help 
make relative profitability more uniform across all DRGs.
    In the FY 2006 IPPS final rule (70 FR 47481), we responded to 
MedPAC's recommendation on outliers by noting that a change in policy 
to replace the 5.1 percent offset to the standardized amount would 
require a change in law. However, because the Secretary has broad 
discretion to consider all factors that change the relative use of 
hospital resources in the calculation of the DRG relative weights, we 
stated we would consider changes that would reduce or eliminate the 
effect of high-cost outliers on the DRG relative weights. At this time, 
we have not completed a detailed analysis of MedPAC's outlier 
recommendation because we do not have the authority to adopt such a 
change under current law. Instead, we have focused our resources on 
analyzing MedPAC's recommendations with respect to adopting severity 
DRGs and calculating cost-based HSRV weights that can be adopted 
without a change in law. While we intend to study MedPAC's 
recommendation in more detail at a future date, we note that changes to 
the DRG system that better recognize severity would have important 
implications for the outlier threshold. In the proposed rule, we 
analyzed how the outlier threshold would be affected by adopting the CS 
DRGs.
    Using FY 2004 Medicare charge data, 3M Health Information Systems 
simulated the effect of adopting CS DRGs in conjunction with HSRVcc 
weights (described) on the FY 2006 outlier threshold using the same 
estimation parameters used by CMS in the FY 2006 final rule (that is, 
the charge inflation factor of 14.94 percent) (70 FR 47494). Under 
these assumptions, 3M Health Information Systems estimated that the 
outlier threshold would be reduced from $23,600 under the current 
system to $18,758 under the CS DRGs with HSRVcc weights. By increasing 
the number of DRGs to better recognize severity, the DRG system itself 
would provide better recognition for cases that are currently paid as 
outliers. That is, many cases that are high-cost outlier cases under 
the current DRG system would be paid using a severity of illness 
subclass 3 or 4 under the CS DRGs and could potentially be paid as 
nonoutlier cases.
    Comment: Some commenters noted that there was only a limited 
discussion of the CS DRGs' effect on the outlier threshold and no 
information about application of the postacute care transfer payment 
policy. Some commenters inquired how policy areas such as outliers and 
new technology will be affected by the proposed DRG changes.
    Response: We will consider further the application of the postacute 
care transfer payment policy as we make changes to the DRG system. With 
respect to outliers, we discussed this issue in the proposed rule. We 
noted that better recognition of severity in the

[[Page 47915]]

DRG system will result in some cases that are currently paid as 
outliers becoming nonoutliers. Under current law, we are required to 
establish an estimated outlier threshold so that between 5 and 6 
percent of estimated IPPS payments are made as outlier payments. Our 
longstanding policy has been to set the outlier threshold so that 
estimated outlier payments equal 5.1 percent of estimated IPPS 
payments. If we were to continue this longstanding policy, we would 
expect DRG refinements that better recognize severity to lead to a 
reduction in the outlier threshold. In the proposed rule, using the 
same data and assumptions used for the FY 2006 final rule, we estimated 
that adoption of the CS DRGs would reduce the outlier threshold from 
$23,600 to $18,758.
    Comment: One commenter recommended that CMS continue to provide the 
additional payment for blood clotting factor administered to 
hemophiliac inpatients in the future even if severity-adjusted DRGs are 
implemented.
    Response: Section 1886(a)(4) of the Act excludes the costs of 
administering blood clotting factors to inpatients with hemophilia from 
the definition of ``operating costs of inpatient hospital services.'' 
Therefore, under the statute, payment for blood clotting factor 
provided to hemophiliac inpatients is not included in Medicare's IPPS 
payment and is paid separately. For this reason, we will continue to 
apply Medicare's policy of paying separately for blood clotting factor 
provided to hemophiliac inpatients.
5. Impact of Refinement of DRG System on Payments
    In the FY 2007 IPPS proposed rule (71 FR 24020), using the FY 2004 
MedPAR claims data, we simulated the payment impacts of moving to the 
CS DRG GROUPER and the alternative HSRVcc method for developing HSRV 
weights. These payment simulations did not make any adjustments for 
changes in coding or case-mix. For purposes of this analysis, estimated 
payments were held budget neutral to estimated FY 2006 payments because 
we have a statutory requirement to make any changes to the weights or 
GROUPER budget neutral. Based on the results of this impact analysis, 
in the FY 2007 IPPS proposed rule, we proposed to adopt both the HSRVcc 
weighting methodology for FY 2007 and the CS DRGs for FY 2008. Later in 
the proposed rule (71 FR 24028) and in the Appendix A--Regulatory 
Impact Analysis (71 FR 24404), we modeled the effect of only adopting 
HSRVcc relative weights using the FY 2005 MedPAR claims data applying 
the traditional statutory budget neutrality requirements.
    For reasons described in more detail above, we are adopting cost-
based weights in this final rule. However, we are not adopting our 
proposal to standardize charges on MedPAR claims using HSRVs until we 
further research issues related to charge compression. Further, as 
described in more detail above, we are modifying our proposed plan to 
adopt the CS DRG system for FY 2008. Rather, we will evaluate the CS 
DRGs along with the other DRG severity systems that have come to our 
attention during the comment process and consider updating the work we 
did to develop a severity DRG system in the mid-1990's before adopting 
a system that better recognizes severity for FY 2008.
    In the proposed rule, we presented the impact of the proposed 
changes on specific high volume DRGs. For comparison purposes, in the 
following table we are showing the percent changes in weight for these 
DRGs presented in the proposed rule and the percent changes in weights 
for these DRGs under the policies we are finalizing in this rule:

------------------------------------------------------------------------
                                                            Final rule
                             Proposed   Final rule (w/o       (with
DRG          Title             rule       transition)      transition)
                            (percent)      (percent)        (percent)
------------------------------------------------------------------------
14.  INTRACRANIAL                  3.8              1.8              0.6
      HEMORRHAGE OR
      CEREBRAL INFARCTION.
75.  MAJOR CHEST                   1.4              0.0              0.0
      PROCEDURES.
76.  OTHER RESP SYSTEM            -3.4             -1.7             -0.6
      O.R. PROCEDURES W
      CC.
79.  RESPIRATORY                   7.6              2.0              0.7
      INFECTIONS &
      INFLAMMATIONS AGE
      >17 W CC.
87.  PULMONARY EDEMA &            10.9              0.0              0.0
      RESPIRATORY FAILURE.
88.  CHRONIC OBSTRUCTIVE           8.3              1.8              0.6
      PULMONARY DISEASE.
89.  SIMPLE PNEUMONIA &            9.7              2.1              0.7
      PLEURISY AGE >17 W
      CC.
104  CARDIAC VALVE & OTH         -11.0             -3.1             -1.0
      MAJOR
      CARDIOTHORACIC PROC
      W CARD CATH.
105  CARDIAC VALVE & OTH          -7.2             -2.3             -0.8
      MAJOR
      CARDIOTHORACIC PROC
      W/O CARD CATH.
110  MAJOR CARDIOVASCULAR         -5.4             -3.3             -1.1
      PROCEDURES W CC.
113  AMPUTATION FOR CIRC           5.0              3.4              1.1
      SYSTEM DISORDERS
      EXCEPT UPPER LIMB &
      TOE.
121  CIRCULATORY                   4.7              0.7              0.2
      DISORDERS W AMI &
      MAJOR COMP,
      DISCHARGED ALIVE.
124  CIRCULATORY                 -19.7             -9.3             -3.1
      DISORDERS EXCEPT
      AMI, W CARD CATH &
      COMPLEX DIAG.
125  CIRCULATORY                 -28.9            -14.6             -4.9
      DISORDERS EXCEPT
      AMI, W CARD CATH W/
      O COMPLEX DIAG.
127  HEART FAILURE &               2.8              3.7              1.2
      SHOCK.
138  CARDIAC ARRHYTHMIA &          2.7              2.5              0.8
      CONDUCTION
      DISORDERS W CC.
143  CHEST PAIN..........        -10.5             -6.2             -2.1
144  OTHER CIRCULATORY             4.2              2.2              0.7
      SYSTEM DIAGNOSES W
      CC.
174  G.I. HEMORRHAGE W CC         11.2              2.9              1.0
182  ESOPHAGITIS,                  5.6             -1.1             -0.4
      GASTROENT & MISC
      DIGEST DISORDERS
      AGE >17 W CC.
188  OTHER DIGESTIVE               5.7              1.0              0.3
      SYSTEM DIAGNOSES
      AGE >17 W CC.
210  HIP & FEMUR                   3.8              2.2              0.7
      PROCEDURES EXCEPT
      MAJOR JOINT AGE >17
      W CC.
277  CELLULITIS AGE >17 W         15.2              9.1              3.0
      CC.
296  NUTRITIONAL & MISC           10.6              5.3              1.8
      METABOLIC DISORDERS
      AGE >17 W CC.
316  RENAL FAILURE.......          8.3              3.7              1.2
320  KIDNEY & URINARY             10.9              5.3              1.8
      TRACT INFECTIONS
      AGE >17 W CC.
493  LAPAROSCOPIC                 -4.0             -4.6             -1.5
      CHOLECYSTECTOMY W/O
      C.D.E. W CC.
497  SPINAL FUSION EXCEPT        -13.4              0.5              0.2
      CERVICAL W CC.
515  CARDIAC                     -20.6              0.3              0.1
      DEFIBRILLATOR
      IMPLANT W/O CARDIAC
      CATH.
541  ECMO OR TRACH W MV            3.6             -2.9             -1.0
      96+HRS OR PDX EXC
      FACE, MOUTH & NECK
      W MAJ O.R..
542  TRACH W MV 96+HRS OR          8.4             -0.8             -0.3
      PDX EXC FACE, MOUTH
      & NECK W/O MAJ O.R..
544  MAJOR JOINT                  -3.7              2.6              0.9
      REPLACEMENT OR
      REATTACHMENT OF
      LOWER EXTREMITY.
545  REVISION OF HIP OR           -5.8              1.8              0.6
      KNEE REPLACEMENT.

[[Page 47916]]

 
547  CORONARY BYPASS W            -8.9             -5.5             -1.8
      CARDIAC CATH W
      MAJOR CV DX.
548  CORONARY BYPASS W           -11.9             -6.2             -2.1
      CARDIAC CATH W/O
      MAJOR CV DX.
550  CORONARY BYPASS W/O          -5.8             -3.8             -1.3
      CARDIAC CATH W/O
      MAJOR CV DX.
551  PERMANENT CARDIAC           -13.0              1.3              0.4
      PACEMAKER IMPL W
      MAJ CV DX OR AICD
      LEAD OR GNRTR.
552  OTHER PERMANENT             -15.0              1.0              0.3
      CARDIAC PACEMAKER
      IMPLANT W/O MAJOR
      CV DX.
553  OTHER VASCULAR               -5.8             -0.5             -0.2
      PROCEDURES W CC W
      MAJOR CV DX.
554  OTHER VASCULAR               -6.5             -1.4             -0.5
      PROCEDURES W CC W/O
      MAJOR CV DX.
556  PERCUTANEOUS                -34.9            -16.2             -5.4
      CARDIOVASC PROC W
      NON-DRUG-ELUTING
      STENT W/O MAJ CV DX.
557  PERCUTANEOUS                -25.5            -10.4             -3.5
      CARDIOVASCULAR PROC
      W DRUG-ELUTING
      STENT W MAJOR CV DX.
558  PERCUTANEOUS                -34.5            -13.8             -4.6
      CARDIOVASCULAR PROC
      W DRUG-ELUTING
      STENT W/O MAJ CV DX.
------------------------------------------------------------------------

    We received a number of comments, which we discuss below, 
expressing concern over the magnitude of the changes we proposed to the 
relative weight methodology and the effects on the DRG weights. As 
shown in this table above, the impact of the transitional cost based 
weights computed without using the HSRVcc method of standardization is 
significantly less than the impacts projected in the proposed rule. As 
a further demonstration of the manner in which our final policy 
mitigates the impacts of the proposed rule, we are presenting the 
following two tables showing the number of DRGs experiencing percent 
gains and losses in their relative weights in the proposed and final 
rules. We also are showing the number of providers experiencing percent 
gains and losses in case mix due to the proposed and final changes. As 
shown in the tables, the more extreme percent changes are greatly 
reduced with our final policies.

  Comparison of the Number of DRGs Experiencing Percent Gains/Losses in
    Relative Weights in the Proposed Rule Relative to the Final Rule
                               Transition
------------------------------------------------------------------------
                                                      Final rule  (with
  Percent change in DRG weight      Proposed rule        transition)
------------------------------------------------------------------------
More than -10%..................                32                     0
Between -5 and -10%.............                42                     1
Between -1 and -5%..............                49                    78
Between -1 and +1%..............                42                   308
Between 1% and 5%...............               111                   130
Between 5% and 10%..............                97                    12
More than +10%..................               153                     7
------------------------------------------------------------------------


 Comparison of the Number of Hospitals Experiencing Percent Gains/Losses
    in Case-Mix Index in the Proposed Rule Relative to the Final Rule
                               Transition
------------------------------------------------------------------------
                                                      Final rule  (with
Percent change in case-mix index    Proposed rule        transition)
------------------------------------------------------------------------
More than -10%..................                40                     0
Between -5 and -10%.............               103                     0
Between -1 and -5%..............               597                    30
Between -1 and +1%..............               416                 2,067
Between 1% and 5%...............              1493                 1,450
Between 5% and 10%..............               794                    28
More than +10%..................                79                    20
------------------------------------------------------------------------

    For additional comparison purposes between the proposed and final 
rule relative weights and DRG changes, the following table shows the 
estimated payment impacts on case mix change by hospital group that we 
projected for the proposed rule and also shows the estimated payment 
impacts that we are finalizing in this rule.

----------------------------------------------------------------------------------------------------------------
                                                                                                   Severity DRG
                                                                   Proposed rule     Severity     changes & cost
                                                                     Column 1       changes in     weights (with
                                                                                       DRGs         transition)
----------------------------------------------------------------------------------------------------------------
All hospitals...................................................             0.0             0.0             0.0
By Geographic Location:
  Urban hospitals...............................................            -0.3             0.0             0.0

[[Page 47917]]

 
  Large urban areas (populations over 1 million)................             0.1             0.0             0.1
  Other urban areas (populations of 1 million or fewer).........            -0.9             0.0            -0.2
  Rural hospitals...............................................             2.7            -0.1             0.2
Bed Size (Urban):
  0-99 beds.....................................................             0.5             0.3             0.1
  100-199 beds..................................................             1.8             0.0             0.3
  200-299 beds..................................................             0.0            -0.1            -0.1
  300-499 beds..................................................            -1.1             0.0             0.1
  500 or more beds..............................................            -1.5             0.0            -0.2
Bed Size (Rural):
  0-49 beds.....................................................             5.5            -0.1             0.3
  50-99 beds....................................................             4.3            -0.2             0.3
  100-149 beds..................................................             2.8            -0.2             0.2
  150-199 beds..................................................             1.0             0.1             0.1
  200 or more beds..............................................            -0.2            -0.2            -0.2
Urban by Region:
  New England...................................................             0.3             0.3             0.1
  Middle Atlantic...............................................             0.1             0.0             0.2
  South Atlantic................................................            -0.7            -0.1            -0.2
  East North Central............................................            -0.4             0.0             0.0
  East South Central............................................            -0.8            -0.2            -0.3
  West North Central............................................            -1.4             0.1            -0.2
  West South Central............................................            -0.7             0.0            -0.1
  Mountain......................................................            -1.4             0.2            -0.1
  Pacific.......................................................             0.6            -0.1             0.2
  Puerto Rico...................................................             3.3            -0.4             0.1
Rural by Region:
  New England...................................................             1.8             0.1             0.5
  Middle Atlantic...............................................             2.8             0.0             0.4
  South Atlantic................................................             3.4            -0.3             0.2
  East North Central............................................             1.9            -0.1             0.1
  East South Central............................................             2.9             0.0             0.0
  West North Central............................................             1.7            -0.1             0.1
  West South Central............................................             3.5            -0.2             0.1
  Mountain......................................................             2.4            -0.1             0.2
  Pacific.......................................................             3.5            -0.4             0.3
By Payment Classification:
  Urban hospitals...............................................            -0.3             0.0             0.0
  Large urban areas (populations over 1 million)................             0.1             0.0             0.1
  Other urban areas (populations of 1 million or fewer).........            -0.9             0.0            -0.2
  Rural areas...................................................             2.6            -0.1             0.2
Teaching Status:
  Non-teaching..................................................             1.1             0.0             0.2
  Fewer than 100 Residents......................................            -0.8            -0.1            -0.1
  100 or more Residents.........................................            -0.8             0.0            -0.2
Urban DSH:
  Non-DSH.......................................................            -1.1             0.1             0.0
  100 or more beds..............................................            -0.2            -0.1             0.0
  Less than 100 beds............................................             3.5             0.1             0.4
Rural DSH:
  SCH...........................................................             4.2           --0.2             0.2
  RRC...........................................................             1.3            -0.1             0.0
  Other Rural:..................................................
  100 or more beds..............................................             4.2             0.1             0.3
  Less than 100 beds............................................             5.5            -0.1             0.2
Urban teaching and DSH:
  Both teaching and DSH.........................................            -0.6             0.0            -0.1
  Teaching and no DSH...........................................            -1.7             0.1            -0.1
  No teaching and DSH...........................................             1.1             0.0             0.2
  No teaching and no DSH........................................            -1.0             0.1             0.0
Rural Hospital Types:
  RRC...........................................................             4.8             0.1             0.3
  SCH...........................................................             0.9             0.0             0.0
  MDH...........................................................             3.9            -0.3             0.2
  SCH and RRC...................................................             5.1            -0.1             0.4
  MDH and RRC...................................................             1.0            -0.3             0.0
Type of Ownership:
  Voluntary.....................................................            -0.3             0.0             0.0
  Proprietary...................................................             0.2             0.0             0.1
  Government....................................................             1.3             0.0             0.0

[[Page 47918]]

 
Medicare Utilization as a Percent of Inpatient Days:
  0-25..........................................................             2.7             0.2             0.3
  25-50.........................................................            -0.5             0.0             0.0
  50-65.........................................................             0.3            -0.1             0.0
  Over 65.......................................................             0.3             0.0            -0.1
Hospitals Reclassified by the Medicare Geographic Classification
 Review Board:
  FY 2005 Reclassifications:....................................
  Urban Hospitals Reclassified by the Medicare Geographic                   -0.5             0.1             0.0
   Classification Review Board: First Half FY 2007
   Reclassifications............................................
  Urban Nonreclassified, First Half FY 2007.....................            -0.3             0.0             0.0
  All Urban Hospitals Reclassified Second Half FY 2007..........            -0.3             0.0             0.0
  Urban Nonreclassified Hospitals Second Half FY 2007...........            -0.3             0.0             0.0
  All Rural Hospitals Reclassified Second Half FY 2007..........             1.6            -0.1             0.1
  Rural Nonreclassified Hospitals Second Half FY 2007...........             4.5            -0.1             0.3
  All Section 401 Reclassified Hospitals........................             2.9            -0.1             0.2
  Other Reclassified Hospitals (Section 1886(d)(8)(B))..........             4.6            -0.2             0.4
  Section 508 Hospitals.........................................            -0.5            -0.1             0.0
Cardic Specialty Hospitals......................................           -11.2             0.0            -2.3
----------------------------------------------------------------------------------------------------------------

    We are discussing specific comments and responses relevant to our 
impact analysis below. The changes that we are adopting in this final 
rule are illustrated in our regulatory impact analysis.
    Comment: Some commenters expressed concern that the proposed rule 
discusses the impact of moving to CS DRGs using FY 2004 inpatient 
claims rather than FY 2005 claims to estimate impact. Some commenters 
stated that using 2 separate years of claims data to show the impact of 
major changes made it impossible to assess the overall impact of the 
changes with any reasonable level of confidence.
    Response: Because of the long lead time to develop the methodology 
and our proposed rule, we used the FY 2004 MedPAR data to calculate 
HSRVcc weights and model the CS DRGs for purposes of the analysis shown 
on pages 24007-24011, 24020-24026 of the FY 2007 IPPS proposed rule (71 
FR24007-24011, 24020-24026). At the time we were developing provisions 
of the proposed rule, FY 2005 MedPAR data were unavailable to us. Given 
the public interest in prompt publication of the rule, we decided not 
to replicate all of the analysis that we provided in section II.C. of 
the proposed rule based on the FY 2004 data once the new FY 2005 data 
became available to us. We believed delaying publication of the 
proposed rule to revise our analysis so all of the payment impacts were 
shown based on FY 2005 data was not in the public interest. Once we 
developed the methodology and the analysis for the proposed rule, we 
calculated the relative weights using the HSRVcc methodology that we 
were proposing to adopt for FY 2007 using the FY 2005 MedPAR. We 
modeled the HSRVcc relative weights using the FY 2005 MedPAR because we 
would be using these data to calculate actual relative weights that 
would be used to determine FY 2007 hospital payments. We believed it 
was important to model our FY 2007 proposal as closely to how payments 
would be determined to provide the most meaningful opportunity for 
public comment. For purposes of providing the payment impacts shown on 
pages 24028-24030 and the Appendix A--Regulatory Impact Analysis (71 
FR24404) and the methodological description shown on pages 24044-24049 
of the proposed rule, we used FY 2005 MedPAR data. We disagree with the 
commenters that providing separate analyses using 2 years of data makes 
it more difficult to understand and assess the payment impacts. Rather, 
we believe that providing these analyses makes it easier to understand 
how relative weights will change solely as a result of updating the 
data.
    Comment: MedPAC was pleased that CMS proposed three of MedPAC's 
four recommended changes to the IPPS system. However, the MedPAC 
expressed concern the proposal not to implement the severity changes 
until FY 2008. They stated that it is important to correct for 
differences in patients' severity concurrently with the corrections for 
charging distortions. MedPAC believed that all of the proposed policy 
changes to the IPPS should happen concurrently. MedPAC stated that 
failure to adopt all of the changes would leave some payment 
distortions in place, thereby continuing to favor some kinds of 
patients over others. According to MedPAC, adopting all of the policies 
would create the most accurate payments and prevent hospitals from 
facing unjustified shifts in their payments that may occur under 
partial adoption of the payment reforms. MedPAC stated that concerns 
about giving hospitals time to adapt to the changes may be better 
managed by implementing all changes in FY 2007 and then giving 
hospitals a transition period. Another commenter asked that CMS 
implement both of these proposed changes in FY 2007 for the following 
reasons:
    <bullet> MedPAC's analysis revealed significant inaccuracy in the 
current payment system and recommended implementation of both the new 
severity-refined DRGs and a revised method for the weights at the same 
time.
    <bullet> It is inequitable to remove the subsidy provided by the 
overpayments for cardiac and orthopedic surgery prior to correcting the 
underpayments for the most severely ill patients.
    <bullet> It is not reasonable to ask that some hospitals experience 
financial losses from implementing the new weights this year if 
implementing severity would offset some or all of these losses. To 
stagger implementation will cause providers to experience unnecessary 
payment fluctuation between FY 2007 and FY 2008.
    The commenter further added that a delay is not beneficial to 
taxpayers as hospitals will have more time to up-code and increase 
their Medicare payments. Many commenters agreed with MedPAC that the 
cost weights and severity-adjusted DRGs should be implemented 
simultaneously. However, these commenters suggested implementation no 
sooner than FY 2008 to limit sharp fluctuations in payments

[[Page 47919]]

to hospitals from year to year. Many commenters opposed a two-step 
implementation, whereby CMS would implement cost-based weights in one 
year and a new DRG system to better account for patient severity in a 
subsequent year. They noted that each of these two major reforms 
significantly redistributes payments, often in off-setting directions. 
They stated that large swings in payments between the two reforms would 
create unnecessary volatility and have a profound impact on hospitals' 
ability to plan effectively, especially for necessary major medical 
equipment purchases and other capital expenditures. Therefore, they 
recommended that CMS implement both cost-based weights and severity-
adjusted DRGs concurrently. While some commenters urged CMS to 
implement both payment reforms concurrently in FY 2007, other 
commenters advised delaying until at least FY 2008 to allow enough time 
to improve the proposed methodologies and underlying cost data to 
ensure accuracy of payments. Some commenters stated that the cost-based 
weights methodology should be implemented after the severity adjusted 
DRG methodology.
    Response: Although we are not adopting the CS DRGs this year, we 
agree that it is important to smooth the transition for our current DRG 
system to a more accurate payment system. As indicated above, we have 
decided to adopt traditional cost-based weights for FY 2007 without the 
HSRV part of the methodology and we are making refinements that will 
create 20 new CMS DRGs, modify 32 others across 13 different clinical 
areas involving 1,666,476 cases that would improve the CMS DRG system's 
recognition of severity of illness for FY 2007. We believe it is 
appropriate to take steps toward transitioning the IPPS to a severity 
based DRG system for FY 2007 by applying some of the severity logic 
from our proposal to the CMS DRGs where appropriate. By revising the 
CMS DRGs, we are offering hospitals an interim step toward severity 
DRGs. Hospitals would be able to take advantage of the improved 
recognition of severity within the context of the more familiar CMS 
DRGs. This interim step affords us the opportunity to adopt some of the 
more basic components of a severity DRG system, such as specific splits 
in DRGs that lead to groups with greater resource utilization.
    Comment: Some commenters were concerned that CMS has not taken into 
account all of MedPAC's recommendations for reforming the IPPS.
    Response: We believe the commenters were expressing concern that we 
did not analyze MedPAC's recommendation to adjust the relative weights 
to account for differences in the prevalence of outlier cases. As 
explained above, we placed most of our attention and resources on the 
recommendations related to refinement of the current DRGs to more fully 
account for differences in severity of illness among patients as we do 
not have the statutory authority to make the specific changes to our 
outlier policy that MedPAC recommended. While we have not made MedPAC's 
recommendation regarding outliers a central focus of our analysis, we 
do intend to examine this issue in more detail over the next year.
    Comment: One commenter stated that the annual impact of the changes 
to the proposed CS DRG system will reduce payments for its institution 
by an additional $2.7 million per year. The commenter suggested that 
community, not for profit hospitals be exempt from these proposed 
changes as this is not the group of hospitals that were the intended 
target of these changes. One commenter stated that the efforts to 
address issues identified in the MedPAC report should begin and end 
with the specialty hospital subset and should not occur in conjunction 
with payment systems at large for all other hospital facilities.
    A few commenters urged CMS to further analyze and evaluate the 
impact of the proposed HSRVcc methodology on access to Centers of 
Excellence. They noted that the proposed changes are particularly 
significant for large volume hospitals and may have a negative impact 
on the Centers of Excellence. Any negative impact to these Centers 
could impede beneficiary access to high quality services. Several 
commenters stated that although CMS' intent may have been to eliminate 
reimbursement incentives for specialty hospitals to select the most 
profitable cases, the proposed methodology appears to negatively affect 
all hospitals serving the most prevalent diagnoses (cardiology, 
orthopedic joint replacement, and neurosurgery) within the Medicare 
population. The commenters stated that efforts to address issues 
identified in the MedPAC report should be limited to specialty 
hospitals. The payment systems at large that affect all other hospital 
facilities should not be changed. These commenters suggested that CMS 
address the reimbursement incentives of specialty hospitals by 
implementing a separate payment system for specialty hospitals, rather 
than implement a proposed policy that could negatively impact all 
hospitals. Several commenters suggested implementing the proposal only 
for specialty hospitals while deferring the proposed payment reforms 
for full-service hospitals to afford more time to study the 
implications of the HSRVcc as a method of general applicability. 
Another commenter stated that care for Medicare beneficiaries in rural 
areas will be adversely affected by the proposed adoption of HSRVcc 
weights because of the dramatic impact on specialized services provided 
by rural referral centers that are not available at other smaller 
hospitals in rural communities. The commenter suggested that the future 
viability of these specialized services may be at risk. Therefore, the 
commenter recommended that CMS recognize the unique impact of the 
proposed changes on rural referral centers by excluding these hospitals 
from the change.
    Response: Payments under a prospective payment system are 
predicated on averages. Therefore, we do not believe it would be 
appropriate to exclude certain hospital groups from implementation of 
the changes we are adopting to use cost-based weights or better 
recognize severity in the DRG system. While these changes are expected 
to reduce incentives for hospitals to ``cherry pick'' or treat only the 
most profitable patients, the objective of these proposed revisions is 
to improve the accuracy of payments, leading to better incentives for 
hospital quality and efficiency and ensure that payment rates relate 
more closely to patient resource needs. Even though few hospitals will 
have a large increase or decrease in overall Medicare payments, there 
may be a significant increase or decrease in payment for individual 
cases within a hospital. Under certain circumstances, the current DRG 
system benefits hospitals that focus on treating less severely ill 
patients. Adjusting payment for the severity of the patient will remove 
the incentives to systematically choose one patient over another. 
Currently, the DRGs overpay for some types of cases and underpay for 
others because the relative weight system is based on charges and the 
DRG system does not sufficiently distinguish more or less resource 
intensive patients based on severity of illness. The changes we are 
making to account for costs in the DRG relative weights and improve 
recognition of severity within the DRG system will significantly 
increase payment accuracy at both the patient and hospital level.
    For these reasons, we believe these changes should apply to all 
hospitals paid using the IPPS, regardless of

[[Page 47920]]

whether a hospital is a specialty hospital or a rural referral center. 
We have made significant changes to our proposal and the impacts shown 
in this final rule may be very different for an individual hospital 
than those we showed in the proposed rule. The impact on any specific 
hospital will depend on the types of cases it treats.
    Comment: Several commenters stated that in order to analyze and 
comment, a crosswalk between the current DRGs and the severity DRGs 
should be made available.
    Response: As indicated earlier, we provided a number of resources 
during the comment period to assist commenters in analyzing our 
proposal. We provided a number of data files listed earlier on the CMS 
Web site at no cost to the public. In addition to this information, we 
made available for purchase both the FY 2004 and FY 2005 MedPAR data 
that were used in simulating the policies in the FY 2007 IPPS proposed 
rule. We also provided access to a Web tool on 3M's Web site that would 
allow an end user to build case examples using the proposed CS DRGs.
    Comment: One commenter stated that the best estimates on a hospital 
specific basis, of the incremental effects on payment of CMS' changes 
to the DRG system should be published in the FY 2007 IPPS final rule. 
The commenter also suggested that CMS release impact files by hospitals 
far in advance of any implementation.
    Response: Information to determine hospital-specific impacts is 
available on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage Page. Click on: ``Acute 
Inpatient--Files for Download http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp.'' For the proposed rule impact file, click 
on ``Impact file for IPPS FY 2007 Proposed Rule http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/itemdetail.asp?filterType=none&filterByDID=-99&sortByDID=2 sortByDID=2<ls-thn-eq>&sortOrder=ascending& 
itemID=CMS061736.'' Similar information for the final rule will also be 
available on the CMS Web site shortly after the publication of this 
final rule. We note that some level of familiarity with data concepts 
and Medicare payment variables will be necessary for hospitals to use 
these files and simulate a payment analysis for their own facility. 
Using the latest data available at the time this final rule was 
prepared, we estimated impacts by category of hospital, and the tables 
displaying these impacts are published in the impact section of this 
final rule. Space limitations preclude us from being able to provide 
hospital-level impacts. In addition, to the extent that adjustments for 
providers such as the IME adjustment, DSH adjustment, and/or operating 
and capital CCRs may be updated for FY 2007 subsequent to the 
publication of this final rule, the actual impacts on individual 
providers may differ slightly from those we estimated. We believe that 
by providing the payment variables and other information electronically 
on the CMS Web site, hospitals have the flexibility to simulate and 
develop their own impact analyses that may be better suited to their 
needs than any analysis CMS would do at the hospital level.
    Comment: Some commenters stated that CMS needs to extend the 
comment period to allow hospitals additional time to evaluate the 
effects of these proposed changes.
    Response: One of the reasons that we proposed adopting the CS DRGs 
for FY 2008 was to give hospitals more than the 60-day public comment 
period and the additional 60-day delay between the publication of the 
final rule and implementation on October 1, 2006, to fully understand 
and plan for the change to the CS DRG system. As indicated earlier, we 
are not adopting CS DRGs for FY 2007. Therefore, we do not see a need 
to extend the 60-day public comment period. Although we are not 
extending the 60-day public comment period, we will involve hospitals 
and other stakeholders in our plans for moving to a severity DRG system 
for FY 2008. We are interested in public input on the types of criteria 
that we should consider and how to evaluate improved payment accuracy 
as we consider changes to the DRG system to better recognize severity 
of illness.
    Comment: Some commenters encouraged CMS to review the cost/benefit 
of implementing the cost-based weight methodology and a severity-
adjusted DRG system in conjunction with changes to the CMS UB04 claim 
form and the adoption of ICD-10-CM. The commenters suggested that 
implementing these changes simultaneously could help alleviate the 
additional cost of multiple system upgrades both for the hospital and 
the fiscal intermediaries. Some commenters stated that CMS should 
conduct a single independent study to determine the impact that 
implementation of this methodology will have on coding and billing 
productivity or hospital cash flow. Some commenters stated that 
implementing the significant DRG changes proposed by CMS is only a 
temporary solution until a more refined DRG system can be adopted with 
more specific clinical classification systems such as ICD-10-CM and 
ICD-10-PCS that will be capable of fully recognizing a patient's 
severity of illness and the services provided to treat that condition.
    Response: We believe that it is important to improve the payment 
accuracy in the hospital IPPS by implementing these changes when 
appropriate. The IPPS payment reforms that we have proposed do not 
require information system changes for hospitals similar to those that 
will be required for adoption of ICD-10 or a new HIPAA compliant 
transaction system. The relative weights are merely one component in a 
payment formula for calculating Medicare's IPPS payment rate. Although 
there will be increases and decreases in the relative weights that are 
used in the payment formula for different DRGs, this payment change 
does not require hospitals to make any computer system changes. 
Similarly, the changes to adopt a severity DRG system will also not 
necessarily require hospitals to make any upgrades to their computer 
systems. The proposed DRG system or any alternative that we consider 
would use the same ICD-9-CM diagnosis and procedures codes as the 
current CMS DRGs. Although it seems likely that hospitals will want to 
acquire the DRG system that Medicare will use, we do not expect that 
substituting one DRG GROUPER for another should be burdensome and 
require upgrades to hospital information systems. With regard to the 
comment that a more refined DRG system can only be adopted with more 
specific classification systems such as ICD-10-CM and ICD-10-PCS, the 
Secretary is evaluating whether we should adopt ICD-10.
    Comment: One commenter supported the decision to use the CS DRGs, 
noting that use of a 3-digit DRG number would avoid the undue health 
programming costs that move limited financial resources away from 
initiatives focused on improving quality care and access to health 
care. However, the commenter also indicated that the number of digits 
in the DRG number should not be a factor in choosing the best severity 
classification system.
    Response: We appreciate the commenter's support for our proposal as 
well as the comment that the DRG classification system used by Medicare 
should not be dependent upon the number of digits in the DRG number. We 
will consider any information system infrastructure issues as we 
evaluate alternative DRG systems.
    Comment: Several commenters stated that the reasons CMS gave in the 
proposed rule for not implementing CS DRGs for FY 2007 are valid. The 
commenters stated that they are all the

[[Page 47921]]

more valid because hospitals now would have less time to prepare if CMS 
were to implement its proposed severity adjusted DRGs this October 1.
    Response: We agree. The proposed change to adopt CS DRGs represents 
a major change to how hospitals are paid for Medicare inpatient 
services. We will not be implementing the CS DRGs for FY 2007. However, 
we do plan to evaluate potential alternative DRG systems that better 
recognize severity than the current CMS DRGs for FY 2008.
    Comment: One commenter suggested that the CS DRG system's reliance 
on 3M's proprietary APR DRG grouping logic and software may not be in 
compliance with Pub. L. 104-113, the National Technology Transfer and 
Advancement Act of 1995. The commenter recommended that we participate 
in the formation of expert committees with a proven consensus standards 
body to develop a standardized DRG classification and severity-
adjustment system for the IPPS.
    Response: We appreciate the commenter's support for the use of a 
consensus standards body to develop a severity-adjusted DRG system. The 
National Technology Transfer and Advancement Act of 1995 directs 
Federal agencies to use voluntary consensus standards in lieu of 
government-unique standards, except where inconsistent with law or 
otherwise impractical. As we move toward implementing a severity-
adjusted DRG system, we will carefully consider whether it would be 
appropriate to involve a voluntary consensus standards body in the 
process.
    Comment: Some commenters stated a transition (blended) period with 
stop loss protections should be provided over a period of one to three 
years. Other commenters suggested a longer transition period given the 
magnitude of payment distribution across DRGs and hospitals. The 
commenters believe that the transition approach would be consistent 
with many other major changes that have been implemented gradually over 
the years, including the capital prospective payment system. The 
commenters suggested that a minimum of 1 year should be allowed for the 
development of software systems to handle these changes.
    Response: We agree that these changes should be implemented over a 
transitional period. As we indicated earlier, we are revising the 
current DRG system to better recognize severity (which is discussed in 
detail in section II.C.7. of the preamble of this final rule) and are 
also adopting cost-based weights for FY 2007. We are providing for a 
transition period of 3 years with the relative weights becoming an 
increasing blend of costs weights as the transition proceeds. We also 
believe that the 20 new DRGs we are adopting for 2007 will improve the 
transition from our current system to a more sophisticated severity DRG 
system in FY 2008.
    Comment: One commenter noted that MedPAC recommended excluding 
statistical and high cost outliers from the computation of the DRG 
weights in order that the weights reflect the average cost of the 
inlier case only. MedPAC further recommended shifting the financing of 
the outlier pool from all cases to cases in the DRGs with the highest 
prevalence of outliers. The commenter noted that outlier cases occur 
most frequently in high-weighted DRGs. Therefore, MedPAC's proposal of 
accounting for the high prevalence of outliers in the DRGs would 
compound the weight compression caused by the HSRV methodology. The 
commenter believed that each proposal by MedPAC (to exclude statistical 
and high cost outliers from the computation of the DRGs) would 
exacerbate payment inaccuracies, and the two proposals combined would 
be deleterious. The commenter stated that it would further analyze 
MedPAC's proposal to test their theory empirically.
    Another commenter was also concerned about MedPAC's recommendation 
to adjust the DRGs to account for the prevalence of high-cost cases. 
The commenter explained that reducing the relative weights to finance 
the outlier pool will adversely affect payment for hospitals 
specializing in the most complex patients. Hospitals may be discouraged 
from developing the capacity to treat high cost outliers and responding 
to the needs of their community according to the commenter. Meanwhile, 
the commenter suggested that hospitals that have the capacity to treat 
the highest cost and most complex cases may abandon such an 
infrastructure because it will be too costly to maintain.
    One commenter supported MedPAC's proposal and believed that 
implementing MedPAC's proposal would support the goal of achieving 
payment accuracy. The commenter explained that the current system 
provides double reward for DRGs with a high prevalence of outliers. The 
commenter recommended that CMS seek legislative authority to implement 
MedPAC's proposal of DRG specific outlier thresholds.
    Another commenter was supportive of MedPAC's recommendation and 
noted that MedPAC stated in a letter to CMS that ``failure to adopt any 
of (MedPAC's) recommendations would leave some payment distortions in 
place, thereby continuing to favor some patients over others.'' 
Therefore, the commenter recommended that CMS implement all of MedPAC's 
recommendations simultaneously when Congress has granted CMS authority 
to adopt MedPAC's outlier recommendation.
    One commenter was concerned that CMS provided only ``minimal'' 
analysis of the effect of the DRG refinements on the outlier threshold. 
Noting that the 5.1 percent set aside for outlier payments could be 
significantly reduced with the adoption of severity DRG refinements, 
the commenter believed that implementation of severity DRGs is 
premature until the Secretary determines whether statutory changes are 
needed to determine the percentage of total IPPS payments that should 
be made as outliers.
    One commenter recommended that, even though CMS does not have the 
authority to change the outlier policy, it should review creating DRG-
specific or day outliers under a severity DRG system. Another commenter 
recommended that CMS reduce payments for outliers and eventually 
eliminate them upon implementing severity DRGs.
    Response: We thank the commenters for taking the time to comment on 
MedPAC's recommendation. As noted above, we do not have the statutory 
authority to implement MedPAC's recommendation, and, therefore, we 
placed most of our attention and resources on the recommendations 
related to refinement of the current DRGs to more fully capture 
differences in severity of illness among patients. However, we intend 
to examine MedPAC's recommendation regarding outliers in more detail in 
the future and will consider the comments we received on the FY 2007 
IPPS proposed rule.
6. Conclusions
    As we describe in more detail below, we believe that adopting cost-
based weights and making improvements to the DRG system to better 
recognize severity has the potential to result in significant 
improvements to Medicare's IPPS payments. This final rule implements a 
cost weight methodology effective for FY 2007. Further, we are creating 
20 new CMS DRGs and modifying 32 others across 13 different clinical 
areas involving 1,666,476 cases that would improve the CMS DRG system's 
recognition of severity of illness for FY 2007. Further, as suggested 
by MedPAC and others, we are adopting these changes over a

[[Page 47922]]

transition period while we plan further improvements to the IPPS for FY 
2008.
    In developing our proposed and final policies, we considered a 
range of alternatives outlined below, and we solicited comments on both 
the proposal and the alternatives. We asked commenters to consider both 
the CS DRGs and alternative severity adjustment methods for accounting 
for severity more comprehensively in the DRG payment system. For 
example, under one alternative in the proposed rule, we would implement 
the CS DRGs in FY 2007 along with the HSRVcc weighting methodology. In 
this event, as discussed above, to maintain budget neutrality, we would 
also implement in FY 2007 an adjustment to the standardized amounts to 
eliminate the effect of changes in coding or classification of 
discharges that do not reflect real changes in case-mix. Although we 
did receive comments in support of this idea, many commenters requested 
that we not adopt the CS DRGs and the HSRVcc weights for FY 2007. Many 
of these commenters suggested delaying implementation of both proposals 
until at least FY 2008. Under another alternative, we would have 
adopted and implemented CS DRGs in FY 2008. Although we did receive 
comments in support of this idea, we also received many comments 
raising important concerns about licensing and proprietary issues 
potentially associated with use of the CS DRGs. The commenters asked us 
not to adopt the CS DRGs unless we could make them available on the 
same terms as the current CMS DRGs. Yet other commenters objected to 
our proposed implementation of the CS DRGs unless we evaluated 
alternatives and better justified why there is a need to adopt a 
revised DRG system. Under yet another alternative, we would consider 
partially implementing the CS DRGs in FY 2007 and complete 
implementation in FY 2008. However, we noted that there were practical 
difficulties associated with partial implementation of CS DRGs because 
cases in a single DRG under the current CMS DRG system may group to 
multiple DRGs and MDCs under the CS DRG system. Conversely, cases that 
group to multiple MDCs and DRGs under the current system may group to a 
single MDC and DRG under the current CS DRG system. We did not receive 
any comments supporting the idea of partial adoption of the CS DRGs.
    In the FY 2007 IPPS proposed rule, we discussed in some detail an 
alternative to partially adopting CS DRGs that would apply a clinical 
severity concept to an expanded set of DRGs in FY 2007. For example, we 
have received correspondence that raised the concern that hospitals may 
have incentives under the current DRG system to avoid severely ill, 
resource-intensive back and spine surgical cases (as discussed in 
section II.D.3.b. of the proposed rule; the correspondence specifically 
requested that we apply a clinical severity concept to DRG 546). In the 
proposed rule, we noted that other surgical DRGs may not accurately 
recognize case severity. Because of the frequency of DRG use and the 
potential for risk selection, we pointed out that certain DRGs may be 
particularly important in creating a financial incentive for hospitals 
to select a less severely ill patient whose case would be assigned to 
the same DRG as a more severely ill patient.
    Therefore, while we proposed to adopt the CS DRGs in FY 2008, we 
were considering whether to make more limited changes to the current 
DRG system to better recognize severity of illness in FY 2007. In the 
FY 2006 IPPS final rule (70 FR 47474 through 47478), we took steps to 
better recognize severity of illness among cardiovascular patients. For 
all DRGs except cardiac DRGs, we currently distinguish between more and 
less complex cases based on the presence or absence of a CC. However, 
the diagnoses that we designate as CCs are the same across all base 
DRGs. Because the CC list is not dependent on the patient's underlying 
condition, CCs may not accurately recognize severity in a given case. 
The changes we made in FY 2006 to the cardiac DRGs significantly 
improved recognition of severity between patients by distinguishing 
between more and less severe cases based on the presence or absence of 
a MCV. In the proposed rule, we indicated that we were considering 
whether a similar approach applied to other DRGs would improve payment.
    Much like the approach we took last year to identify MCV conditions 
that represented higher severity in cardiovascular patients, in the 
proposed rule, we indicated that we planned to examine which conditions 
identified more severely ill cases in selected MDCs and DRGs. We 
solicited comments as to whether it would be appropriate to adopt these 
types of limited changes in FY 2007 as an intermediate step to adopting 
CS DRGs in FY 2008. There were a number of comments that suggested we 
should make improvements to our current DRG system rather than adopting 
the CS DRGs. A number of comments expressed support for using the 
current DRG system as the starting point for revising the DRG system to 
better recognize severity to avoid losing the many positive changes 
that have been made over the years to the CMS DRGs. We also encouraged 
commenters to send us suggestions regarding potential changes that 
could be made to the current DRG system to better recognize severity of 
illness. As indicated below, some commenters did provide us with 
specific suggestions for how we could revise the current DRGs.
    In the FY 2007 IPPS proposed rule, we also discussed an additional 
alternative under which we would implement the CS DRGs in FY 2007 and 
the HSRVcc methodology in FY 2008. We did receive one comment 
supporting this idea. However, as we have discussed elsewhere, we 
believe that we should not adopt CS DRGs in FY 2007, but rather 
evaluate severity DRG systems for adoption in FY 2008.
    With respect to the relative weight calculations, we believe that 
adopting HSRVcc weights has the potential to significantly improve 
payment equity between DRGs. As MedPAC notes, a ``survey of hospitals' 
charging practices suggests that hospitals use diverse strategies for 
setting service charges and raising them over time.'' MedPAC found that 
data from the Medicare cost reports indicate that hospital markups for 
ancillary services (for example, operating room, radiology, and 
laboratory) are generally higher than for routine services (for 
example, intensive care unit and room and board).\13\ Thus, MedPAC has 
concluded that the relative weights for DRGs that use more ancillary 
services may be too high compared to other DRGs where the routine costs 
account for a higher proportion of hospital costs. Although we agree 
with MedPAC's conclusion, the public comments raised important issues 
about the effect of charge compression on the relative weights using 
the HSRVcc methodology. These commenters argued that the HSRV 
calculation exacerbates the effect of charge compression or the 
practice of hospitals applying higher percentage markups on lower cost 
items and lower percentage markups on higher cost items. As we 
indicated above, we have engaged a contractor to assist us with 
studying whether charge compression is an actual phenomenon and how it 
affects the HSRV methodology. As part of this analysis, we will study 
an adjustment for charge compression suggested in the public comments 
and will consider adopting HSRV weights in the future. Nevertheless, in 
the interim, we believe it is important to adopt a methodology for 
calculation of DRG

[[Page 47923]]

relative weights that takes costs into account. We have revised the 
CCRs that we used to develop cost-based weights based on the public 
comments. Although they do not show the same differentials indicated in 
the proposed rule, they continue to support MedPAC's conclusion that a 
system based on charges pays too much for some types of cases and pays 
too little for others. As indicated above, we summarized hospital-level 
cost and charge information to 2 routine and 11 ancillary departmental 
cost centers and found that national average routine cost center CCRs 
ranged from 50 percent (intensive care unit days) to 56 percent 
(routine days), while ancillary cost center CCRs ranged from 16 percent 
(anesthesiology) to 46 percent (labor and delivery room).
---------------------------------------------------------------------------

    \13\ Ibid, p. 26.
---------------------------------------------------------------------------

    MedPAC also found that relative profitability ratios were higher 
among cardiovascular surgical DRGs than the medical DRGs.\14\ We 
believe the relative profitability of the surgical cardiovascular DRGs 
has been an important factor in the development of specialty heart 
hospitals. Our payment impact analysis indicates that this issue will 
be addressed by adopting cost-based weights. Moving from the current 
system of charge-based weights to cost-based weights increases payment 
in the medical DRGs relative to the surgical DRGs. We expected this 
result, given that routine costs will generally account for a higher 
proportion of total costs in the medical DRGs than in the surgical 
DRGs. In the proposed rule, we estimated that all of our combined 
changes would, on average, increase the medical DRG weights by 
approximately 7.3 percent while reducing the surgical DRG weights by 
approximately 6.9 percent. Implementing the cost-based weights without 
utilizing the HSRV standardization method under the 3-year transition 
period where the weights for FY 2007 will be based on 33 percent of the 
cost-based weight and 67 percent of the charge weight will lessen the 
effects of redistribution between medical and surgical DRGs. In this 
final rule, we estimate that the increase in the average medical DRG 
weight will be 0.9 percent and that the decrease in the average 
surgical DRG weight will be 1.2 percent. The pattern of increasing 
medical weights and decreasing surgical weights still holds true. 
However, by adopting the cost based weights in a transition period, we 
are mitigating the larger swings in payments that our proposed policies 
adopted in full would have caused.
---------------------------------------------------------------------------

    \14\ Ibid, p. 29.
---------------------------------------------------------------------------

    Although adopting HSRVcc weights would result in the most 
significant improvement in hospital payment-to-cost ratios among the 
changes to the IPPS recommended by MedPAC,\15\ we have concerns about 
implementing this methodology until we can further study whether the 
relative weights might be affected by charge compression. For this 
reason, we are adopting cost-based weights without HSRV for FY 2007. 
However, we will consider applying the HSRV methodology in subsequent 
years if our analysis of charge compression suggests the issue is not a 
concern or, if appropriate, we can apply an adjustment that would 
account for its effects.
---------------------------------------------------------------------------

    \15\ Ibid, p. 37.
---------------------------------------------------------------------------

    Based on our analysis, we concur with MedPAC that the CS DRGs would 
account more completely for differences in severity of illness and 
associated costs among hospitals. MedPAC observed some modest 
improvements in hospitals' payment-to-cost ratios from adopting APR 
DRGs.\16\ We modeled the CS DRGs discussed above and observed a 12-
percent increase in the explanatory power (or R-square statistic) of 
the DRG system to explain total hospital charges. That is, we found 
more uniformity among hospital total charges within the CS DRG system 
than we did with Medicare's current DRG system. While we believe the CS 
DRG system that we described above has the potential to improve the 
IPPS, we have the following concerns about adopting it for FY 2007:
---------------------------------------------------------------------------

    \16\ Ibid, p.37.
---------------------------------------------------------------------------

    <bullet> Further adjustments are needed to the proposed DRG system. 
In the proposed rule, we indicated that further adjustments need to be 
made to the proposed CS DRGs to account for situations where less 
severely ill patients may be more resource-intensive because they need 
expensive medical technology. The CS DRGs assign a patient to a DRG 
based on severity of illness but do not recognize increased complexity 
due to the types of services/technology provided. In addition, the CS 
DRGs do not incorporate many of the changes to the base DRG assignments 
that have been made over the years to the CMS DRGs. There was 
significant interest in the public comments in either revising the CS 
DRGs to reflect these changes or use the CMS DRGs at the starting point 
to better recognize severity. The public comments provided a number of 
examples where we need to consider whether further changes are needed 
to the CS DRGs before they are ready for implementation.
    <bullet> Use of a proprietary DRG system. The commenters raised 
valid points about adopting a proprietary DRG system, including 
concerns about the availability, price and transparency of logic of the 
APR DRGs that are currently in use in Maryland. The CS DRGs are a 
variant of the APR DRG system. As we evaluate alternative severity 
classification systems, we will use public access to the system as an 
important element in evaluating whether each system can be adopted for 
Medicare. We will continue to strive to promote transparency in our 
decisionmaking as well as in future payment and classification systems 
as we have done in the past.
    <bullet> No alternatives have been evaluated. We have not evaluated 
alternative DRG systems that could also better recognize severity. We 
have received comments suggesting that alternative DRG systems can 
better recognize severity than the CS DRGs. It appears that all of the 
DRG systems that were raised in the public comments as potential 
alternatives to the CS DRGs are proprietary systems. However, it is 
possible that we could use one of these systems if it were made 
available in the public domain on the same terms as the current CMS 
DRGs. Further, as discussed above, CMS (then HCFA) did work on 
developing a severity DRG system in the mid-1990's. It is possible that 
we could update this work and adopt a system that better recognizes 
severity based on the current CMS DRGs for FY 2008 that does not raise 
the licensing issues that are involved with using prioprietary systems.
    Therefore, for the reasons indicated above, we are not adopting the 
CS DRGs for FY 2007. However, we are creating 20 new CMS DRGs and 
modifying 32 others across 13 different clinical areas involving 
1,666,476 cases that would improve the CMS DRG system's recognition of 
severity of illness for FY 2007. Furthermore, as discussed earlier, we 
have engaged a contractor to assist us with evaluating alternative DRG 
systems that were raised as potential alternatives to the 3M Severity 
of Illness DRG products in the public comments. Finally, we will 
consider the review that we have undertaken of the 13,000 codes on the 
CC list 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 to adopt severity DRGs. Again, we 
expect to complete this work in time for proposing changes to the DRG 
system to better recognize severity of illness by FY 2008.

[[Page 47924]]

7. Severity Refinements to CMS DRGs
    In response to the FY 2007 IPPS proposed rule, we received a number 
of public comments that supported the refinement of the current CMS 
DRGs so that they better capture severity. Several commenters supported 
the expanded use of a clinical severity concept similar to the approach 
used in FY 2006 to refine the cardiac DRGs. One commenter urged CMS to 
expand the set of DRGs to which this clinical severity concept would 
apply, including the DRGs that capture the implanting of 
defibrillators. Another commenter expressed support for additional 
modifications to the current DRGs to better capture severity and 
complexity of patients. Another commenter recommended that CMS start 
with the current DRG system and provide overlays for severity, 
complexity and patient benefit. One commenter suggested that CMS 
develop severity levels within all of the existing DRGs (or pairs of 
DRGs, in the cases where CC or MCV splits now exist), or identify 
specific DRGs that may be most appropriate for severity adjustments. 
Several commenters recommended specific adjustments to better capture 
severity for septicemia, headache, and mechanical ventilation patients. 
(The DRG recommendations are discussed below under the specific DRG 
topic.)
    We recognize the importance of having a classification system that 
recognizes cases that utilize greater resources and have higher levels 
of severity of illness. While we discussed moving to a new DRG system 
such as the CS DRGs for FY 2007, we stated that we were also interested 
in improving the current DRGs so that they better capture patients with 
greater severity of illness as early as FY 2007. We solicited comments 
in the proposed rule on whether it would be appropriate in FY 2007 to 
apply a clinical severity concept to an expanded set of DRGs, similar 
to the approach we used in FY 2006 to refine cardiac DRGs based on the 
presence or absence of an MCV.
    We believe it is appropriate to move in a direction toward a DRG 
system that better recognizes severity. Our strategy involves following 
recommendations received as part of public comments and implementing 
some of the severity logic in the proposed CS DRGs in the CMS DRGs 
where appropriate. By doing so, we would be taking an interim step 
toward better recognizing severity in the DRG system. Hospitals would 
be able to take advantage of a portion of improved severity logic in 
the proposed CS DRGs within the context of the more familiar CMS DRGs. 
This interim step would also afford hospitals a more detailed 
understanding of some of the basic types of DRG logic used in the 
proposed CS DRG system. Obviously, we were not able to adopt some of 
the more sophisticated logic involved in the 18 steps included in the 
proposed CS DRG system. However, we were able to adopt some of the more 
basic components such as specific splits in DRGs that lead to groups 
with greater resource utilization.
    We began our process of adopting some of the severity logic within 
the proposed CS DRGs by first comparing the current CMS DRGs to the 
base DRGs in the proposed CS DRGs to identify areas where improvements 
could be made to better account for severity of illness and resource 
utilization. We used two general approaches to evaluate potential DRG 
changes. First, we analyzed where the assignment of a case to a DRG 
differed under the CMS DRGs and the proposed base CS DRGs. Second, we 
analyzed whether there was a list of ``major conditions'' that could be 
used to revise any DRGs to better recognize severity, similar to the 
changes to the cardiovascular DRGs involving MCVs we established in 
last year's final rule. We used the diagnoses listed as ``major'' or 
``extreme'' under the proposed CS DRGs for this review. The changes 
described below will result in better recognition of severity in the 
current DRG system and, like the changes we made last year to reform 
the cardiovascular DRGs based on MCVs, represent an excellent next step 
in refining the Medicare inpatient hospital payment system so our 
payments are better targeted to specific patients based on their costs 
of care.
    We began our review by focusing on the cardiac and orthopedic DRGs 
because of our concerns that cardiac, orthopedic, and surgical 
hospitals have taken advantage of opportunities in the DRG system to 
specialize in the least complex and most profitable inpatient cases. 
However, with respect to orthopedic and surgical specialty hospitals, 
we considered that they have very small inpatient volume and the issues 
that are leading to their creation are generally unrelated to profit 
opportunities in the IPPS. Although we did review the orthopedic DRGs, 
we generally did not find opportunities within the current DRG system 
to make further refinements for severity of illness. We were also 
unable to find a strong basis to subdivide further most of the 
cardiovascular DRGs. In last year's IPPS rule, we already made 
significant changes to the DRG system to better account for severity of 
illness in the DRGs frequently performed by cardiac hospitals. As 
mentioned earlier, this DRG change involved splitting some cardiac DRGs 
based on the presence or absence of an MCV. We then conducted a 
comparison of the base DRGs in the CMS DRG system and proposed CS DRGs. 
We analyzed data to identify specific CMS DRGs with wide ranges in 
charges that had been subdivided or in other ways modified under the 
proposed CS DRGs. As stated earlier, this process did not allow CMS to 
use the more sophisticated logic involved in the proposed CS DRGs to 
differentiate groups with greater severity. However, we were able to 
identify a group of DRGs that could be created to better align our 
payments based on severity of illness. We used our own analysis along 
with specific recommendations received during the comment period to 
develop further severity refinements to the current DRGs.
    We identified 20 new CMS DRGs involving 13 different clinical areas 
that would improve the CMS DRG system's recognition of severity of 
illness. Twelve of the new DRGs are medical and 8 are surgical. The 20 
new DRGs are constructed through a combination of approaches used in 
the proposed CS DRGs to refine the base DRGs such as:
    <bullet> Subdividing existing DRGs through the use of diagnosis 
codes.
    <bullet> Subdividing DRGs based on specific surgical procedures.
    <bullet> Selecting cases with specific diagnosis and/or procedure 
codes and assigning them to a new DRG which better accounts for their 
resource use and severity.
    We also modified 32 DRGs to better capture differences in severity. 
The new and revised DRGs were selected from 40 current DRGs which 
contain 1,666,476 cases and represent a number of body systems. In 
creating these 20 new DRGs, we are deleting 8 existing DRGs and 
modifying 32 existing DRGs. The specific DRG changes are described 
below:
a. MDC 1 (Diseases and Disorders of the Nervous System)
(1) Nervous System Infection Except Viral Meningitis
    Under our current DRG system, all nervous system infections except 
viral meningitis are assigned to CMS DRG 20 (Nervous System Infection 
Except Viral Meningitis). By combining all nervous system infections 
except viral meningitis into one DRG, we are grouping together patients 
with wide ranges of severity. Under our proposed CS DRGs, there are 
separate DRGs that distinguish bacterial infection and tuberculosis 
from other infections of the

[[Page 47925]]

nervous system. The CS DRGs divided these cases in order to better 
recognize severity. The codes which describe bacterial infection and 
tuberculosis are listed below.
    We then divided the cases within CMS DRG 20 based on the presence 
or absence of bacterial infections and tuberculosis of the nervous 
system. Our medical advisors support dividing these cases in this 
manner to better recognize severity of illness. The data indicated that 
these are two distinctly different groups with significant differences 
in severity. The bacterial and tuberculosis infection group had average 
charges of $47,034 compared to the $36,507 average charges for cases 
with other types of infection of the nervous system. Clearly these 
charge data support the fact that the bacterial and tuberculous 
infection group has a significantly greater degree of severity. The 
chart below illustrates these data:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                               DRG                                     cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
CMS DRG 20......................................................           6,130            9.88      $42,191.76
DRG 20 with Bacterial & TB Infections of Nervous System.........           3,310            10.1       47,034.42
DRG 20 w/o Bacterial & TB Infections of Nervous System..........           2,820            9.54       36,507.64
----------------------------------------------------------------------------------------------------------------

    The data support the creation of two separate DRGs for these two 
groups of patients. Therefore, we are deleting DRG 20 and creating the 
following two new DRGs:
    <bullet> DRG 560 (Bacterial & Tuberculosis Infections of Nervous 
System).
    <bullet> DRG 561 (Non-Bacterial Infections of Nervous System Except 
Viral Meningitis).
    The ICD-9-CM diagnosis codes assigned to each new DRG are as 
follows.
    The new DRG 560 will have principal diagnosis codes listed in the 
following table.

------------------------------------------------------------------------
    Diagnosis code                DRG 560 diagnosis code titles
------------------------------------------------------------------------
003.21................  Salmonella meningitis.
013.00................  Tuberculous meningitis, unspecified examination.
013.01................  Tuberculous meningitis, bacteriological or
                         histological examination not done.
013.02................  Tuberculous meningitis, bacteriological or
                         histological examination results unknown (at
                         present).
013.03................  Tuberculous meningitis, tubercle bacilli found
                         (in sputum) by microscopy.
013.04................  Tuberculous meningitis, tubercle bacilli not
                         found (in sputum) by microscopy, but found by
                         bacterial culture.
013.05................  Tuberculous meningitis, tubercle bacilli not
                         found by bacteriological examination, but
                         tuberculosis confirmed histologically.
013.06................  Tuberculous meningitis, tubercle bacilli not
                         found by bacteriological or histological
                         examination, but tuberculosis confirmed by
                         other methods (inoculation of animals).
013.10................  Tuberculoma of meninges, unspecified
                         examination.
013.11................  Tuberculoma of meninges, bacteriological or
                         histological examination not done.
013.12................  Tuberculoma of meninges, bacteriological or
                         histological examination results unknown (at
                         present).
013.13................  Tuberculoma of meninges, tubercle bacilli found
                         (in sputum) by microscopy.
013.14................  Tuberculoma of meninges, tubercle bacilli not
                         found (in sputum) by microscopy, but found by
                         bacterial culture.
013.15................  Tuberculoma of meninges, tubercle bacilli not
                         found by bacteriological examination, but
                         tuberculosis confirmed histologically.
013.16................  Tuberculoma of meninges, tubercle bacilli not
                         found by bacteriological or histological
                         examination, but tuberculosis confirmed by
                         other methods (inoculation of animals).
013.20................  Tuberculoma of brain, unspecified examination.
013.21................  Tuberculoma of brain, bacteriological or
                         histological examination not done.
013.22................  Tuberculoma of brain, bacteriological or
                         histological examination results unknown (at
                         present).
013.23................  Tuberculoma of brain, tubercle bacilli found (in
                         sputum) by microscopy.
013.24................  Tuberculoma of brain, tubercle bacilli not found
                         (in sputum) by microscopy, but found by
                         bacterial culture.
013.25................  Tuberculoma of brain, tubercle bacilli not found
                         by bacteriological examination, but
                         tuberculosis confirmed histologically.
013.26................  Tuberculoma of brain, tubercle bacilli not found
                         by bacteriological or histological examination,
                         but tuberculosis confirmed by other methods
                         (inoculation of animals).
013.30................  Tuberculous abscess of brain, unspecified
                         examination.
013.31................  Tuberculous abscess of brain, bacteriological or
                         histological examination not done.
013.32................  Tuberculous abscess of brain, bacteriological or
                         histological examination results unknown (at
                         present).
013.33................  Tuberculous abscess of brain, tubercle bacilli
                         found (in sputum) by microscopy.
013.34................  Tuberculous abscess of brain, tubercle bacilli
                         not found (in sputum) by microscopy, but found
                         by bacterial culture.
013.35................  Tuberculous abscess of brain, tubercle bacilli
                         not found by bacteriological examination, but
                         tuberculosis confirmed histologically.
013.36................  Tuberculous abscess of brain, tubercle bacilli
                         not found by bacteriological or histological
                         examination, but tuberculosis confirmed by
                         other methods (inoculation of animals).
013.40................  Tuberculoma of spinal cord, unspecified
                         examination.
013.41................  Tuberculoma of spinal cord, bacteriological or
                         histological examination not done.
013.42................  Tuberculoma of spinal cord, bacteriological or
                         histological examination results unknown (at
                         present).
013.43................  Tuberculoma of spinal cord, tubercle bacilli
                         found (in sputum) by microscopy.
013.44................  Tuberculoma of spinal cord, tubercle bacilli not
                         found (in sputum) by microscopy, but found by
                         bacterial culture.
013.45................  Tuberculoma of spinal cord, tubercle bacilli not
                         found by bacteriological examination, but
                         tuberculosis confirmed histologically.
013.46................  Tuberculoma of spinal cord, tubercle bacilli not
                         found by bacteriological or histological
                         examination, but tuberculosis confirmed by
                         other methods (inoculation of animals).
013.50................  Tuberculous abscess of spinal cord, unspecified
                         examination.
013.51................  Tuberculous abscess of spinal cord,
                         bacteriological or histological examination not
                         done.
013.52................  Tuberculous abscess of spinal cord,
                         bacteriological or histological examination
                         results unknown (at present).
013.53................  Tuberculous abscess of spinal cord, tubercle
                         bacilli found (in sputum) by microscopy.
013.54................  Tuberculous abscess of spinal cord, tubercle
                         bacilli not found (in sputum) by microscopy,
                         but found by bacterial culture.

[[Page 47926]]

 
013.55................  Tuberculous abscess of spinal cord, tubercle
                         bacilli not found by bacteriological
                         examination, but tuberculosis confirmed
                         histologically.
013.56................  Tuberculous abscess of spinal cord, tubercle
                         bacilli not found by bacteriological or
                         histological examination, but tuberculosis
                         confirmed by other methods (inoculation of
                         animals).
013.60................  Tuberculous encephalitis or myelitis,
                         unspecified examination.
013.61................  Tuberculous encephalitis or myelitis,
                         bacteriological or histological examination not
                         done.
013.62................  Tuberculous encephalitis or myelitis,
                         bacteriological or histological examination
                         results unknown (at present).
013.63................  Tuberculous encephalitis or myelitis, tubercle
                         bacilli found (in sputum) by microscopy.
013.64................  Tuberculous encephalitis or myelitis, tubercle
                         bacilli not found (in sputum) by microscopy,
                         but found by bacterial culture.
013.65................  Tuberculous encephalitis or myelitis, tubercle
                         bacilli not found by bacteriological
                         examination, but tuberculosis confirmed
                         histologically.
013.66................  Tuberculous encephalitis or myelitis, tubercle
                         bacilli not found by bacteriological or
                         histological examination, but tuberculosis
                         confirmed by other methods (inoculation of
                         animals).
013.80................  Other specified tuberculosis of central nervous
                         system, unspecified examination.
013.81................  Other specified tuberculosis of central nervous
                         system, bacteriological or histological
                         examination not done.
013.82................  Other specified tuberculosis of central nervous
                         system, bacteriological or histological
                         examination results unknown (at present).
013.83................  Other specified tuberculosis of central nervous
                         system, tubercle bacilli found (in sputum) by
                         microscopy.
013.84................  Other specified tuberculosis of central nervous
                         system, tubercle bacilli not found (in sputum)
                         by microscopy, but found by bacterial culture.
013.85................  Other specified tuberculosis of central nervous
                         system, tubercle bacilli not found by
                         bacteriological examination, but tuberculosis
                         confirmed histologically.
013.86................  Other specified tuberculosis of central nervous
                         system, tubercle bacilli not found by
                         bacteriological or histological examination,
                         but tuberculosis confirmed by other methods
                         (inoculation of animals).
013.90................  Unspecified tuberculosis of central nervous
                         system, unspecified examination.
013.91................  Unspecified tuberculosis of central nervous
                         system, bacteriological or histological
                         examination not done.
013.92................  Unspecified tuberculosis of central nervous
                         system, bacteriological or histological
                         examination results unknown (at present).
013.93................  Unspecified tuberculosis of central nervous
                         system, tubercle bacilli found (in sputum) by
                         microscopy.
013.94................  Unspecified tuberculosis of central nervous
                         system, tubercle bacilli not found (in sputum)
                         by microscopy, but found by bacterial culture.
013.95................  Unspecified tuberculosis of central nervous
                         system, tubercle bacilli not found by
                         bacteriological examination, but tuberculosis
                         confirmed histologically.
013.96................  Unspecified tuberculosis of central nervous
                         system, tubercle bacilli not found by
                         bacteriological or histological examination,
                         but tuberculosis confirmed by other methods
                         (inoculation of animals).
036.0.................  Meningococcal meningitis.
036.1.................  Meningococcal encephalitis.
098.82................  Gonococcal meningitis.
320.0.................  Hemophilus meningitis.
320.1.................  Pneumococcal meningitis.
320.2.................  Streptococcal meningitis.
320.3.................  Staphylococcal meningitis.
320.7.................  Meningitis in other bacterial diseases
                         classified elsewhere.
320.81................  Anaerobic meningitis.
320.82................  Meningitis due to gram-negative bacteria, not
                         elsewhere classified.
320.89................  Meningitis due to other specified bacteria.
320.9.................  Meningitis due to unspecified bacterium.
324.0.................  Intracranial abscess.
324.1.................  Intraspinal abscess.
324.9.................  Intracranial and intraspinal abscess of
                         unspecified site.
357.0.................  Acute infective polyneuritis.
------------------------------------------------------------------------

    The new DRG 561 will have principal diagnosis codes listed in the 
following table.

------------------------------------------------------------------------
    Diagnosis code                DRG 561 diagnosis code titles
------------------------------------------------------------------------
006.5.................  Amebic brain abscess.
045.00................  Acute paralytic poliomyelitis specified as
                         bulbar, unspecified type of poliovirus.
045.01................  Acute paralytic poliomyelitis specified as
                         bulbar, poliovirus type i.
045.02................  Acute paralytic poliomyelitis specified as
                         bulbar, poliovirus type ii.
045.03................  Acute paralytic poliomyelitis specified as
                         bulbar, poliovirus type iii.
045.10................  Acute poliomyelitis with other paralysis,
                         unspecified type of poliovirus.
045.11................  Acute poliomyelitis with other paralysis,
                         poliovirus type i.
045.12................  Acute poliomyelitis with other paralysis,
                         poliovirus type ii.
045.13................  Acute poliomyelitis with other paralysis,
                         poliovirus type iii.
045.90................  Unspecified acute poliomyelitis, unspecified
                         type poliovirus.
045.91................  Unspecified acute poliomyelitis, poliovirus type
                         i.
045.92................  Unspecified acute poliomyelitis, poliovirus type
                         ii.
045.93................  Unspecified acute poliomyelitis, poliovirus type
                         iii.
049.8.................  Other specified non-arthropod-borne viral
                         diseases of central nervous system.

[[Page 47927]]

 
049.9.................  Unspecified non-arthropod-borne viral diseases
                         of central nervous system.
052.0.................  Postvaricella encephalitis.
052.2.................  Postvaricella myelitis.
053.14................  Herpes zoster myelitis.
054.3.................  Herpetic meningoencephalitis.
054.74................  Herpes simplex myelitis.
055.0.................  Postmeasles encephalitis.
056.01................  Encephalomyelitis due to rubella.
056.09................  Rubella with other neurological complications.
062.0.................  Japanese encephalitis.
062.1.................  Western equine encephalitis.
062.2.................  Eastern equine encephalitis.
062.3.................  St. Louis encephalitis.
062.4.................  Australian encephalitis.
062.5.................  California virus encephalitis.
062.8.................  Other specified mosquito-borne viral
                         encephalitis.
062.9.................  Mosquito-borne viral encephalitis, unspecified.
063.0.................  Russian spring-summer (taiga) encephalitis.
063.1.................  Louping ill.
063.2.................  Central European encephalitis.
063.8.................  Other specified tick-borne viral encephalitis.
063.9.................  Tick-borne viral encephalitis, unspecified.
064...................  Viral encephalitis transmitted by other and
                         unspecified arthropods.
066.2.................  Venezuelan equine fever.
071...................  Rabies.
072.2.................  Mumps encephalitis.
090.40................  Juvenile neurosyphilis, unspecified.
090.41................  Congenital syphilitic encephalitis.
090.42................  Congenital syphilitic meningitis.
090.49................  Other juvenile neurosyphilis.
091.81................  Acute syphilitic meningitis (secondary).
094.2.................  Syphilitic meningitis.
094.3.................  Asymptomatic neurosyphilis.
094.81................  Syphilitic encephalitis.
100.81................  Leptospiral meningitis (aseptic).
100.89................  Other specified leptospiral infections.
112.83................  Candidal meningitis.
114.2.................  Coccidioidal meningitis.
115.01................  Histoplasma capsulatum meningitis.
115.11................  Histoplasma duboisii meningitis.
115.91................  Histoplasmosis meningitis, unspecified.
130.0.................  Meningoencephalitis due to toxoplasmosis.
321.0.................  Cryptococcal meningitis.
321.1.................  Meningitis in other fungal diseases.
321.2.................  Meningitis due to viruses not elsewhere
                         classified.
321.3.................  Meningitis due to trypanosomiasis.
321.4.................  Meningitis in sarcoidosis.
321.8.................  Meningitis due to other nonbacterial organisms
                         classified elsewhere.
322.0.................  Nonpyogenic meningitis.
322.1.................  Eosinophilic meningitis.
322.2.................  Chronic meningitis.
322.9.................  Meningitis, unspecified.
323.01................  Encephalitis and encephalomyelitis in viral
                         diseases classified elsewhere.
323.02................  Myelitis in viral diseases classified elsewhere.
323.1.................  Encephalitis, myelitis, and encephalomyelitis in
                         rickettsial diseases classified elsewhere.
323.2.................  Encephalitis, myelitis, and encephalomyelitis in
                         protozoal diseases classified elsewhere.
323.41................  Other encephalitis and encephalomyelitis due to
                         infection classified elsewhere.
323.42................  Other myelitis due to infection classified
                         elsewhere.
323.51................  Encephalitis and encephalomyelitis following
                         immunization procedures.
323.52................  Myelitis following immunization procedures.
323.61................  Infectious acute disseminated encephalomyelitis
                         (ADEM).
323.62................  Other postinfectious encephalitis and
                         encephalomyelitis.
323.63................  Postinfectious myelitis.
323.81................  Other causes of encephalitis and
                         encephalomyelitis.
323.82................  Other causes of myelitis.
323.9.................  Unspecified causes of encephalitis, myelitis,
                         and encephalomyelitis.
341.20................  Acute (transverse) myelitis NOS.
341.21................  Acute (transverse) myelitis in conditions
                         classified elsewhere.
341.22................  Idiopathic transverse myelitis.
------------------------------------------------------------------------


[[Page 47928]]

(2) Seizure and Headache
    Comment: One commenter stated that the current DRGs do not 
adequately capture the severity of patients with more severe types of 
headaches. The commenter further noted that seizures and headaches 
represent distinctly different levels of severity, yet they are grouped 
together in the CMS DRGs:
    <bullet> CMS DRG 24 (Seizure & Headache Age >17 with CC).
    <bullet> CMS DRG 25 (Seizure & Headache Age >17 without CC).
    <bullet> CMS DRG 26 (Seizure & Headache Age 0-17).
    The commenter stated that more severely ill patients, such as those 
with intense migraine headaches, should be differentiated from other 
patients in the DRG. The commenter suggested splitting these DRGs into 
two or more new DRGs to better capture severity. Alternatively, the 
commenter suggested that CMS examine how the APR DRG system handles 
these types of cases.
    Response: Under both the APR DRGs and our proposed CS DRGs, seizure 
and headache cases are assigned to separate DRGs while these cases are 
grouped together in the CMS DRGs. Both severity DRG systems recognize 
different levels of severity for these two groups of patients. Our 
medical advisors found that seizure and headache patients are 
clinically different, with seizure patients having a higher level of 
severity. We also analyzed data for patients with seizures versus those 
who are admitted with headaches and found that seizure cases have 
higher average charges than headaches. We did not have enough cases to 
analyze potential DRG changes for DRG 26. As the chart below shows, 
seizure patients age greater than 17 have average charges of $17,125 
with CC and $10,540 without CC. Headache patients greater than 17 years 
of age have average charges of $11,618. The data did not support 
creating a split for headache patients greater than 17 years with and 
without CC. The difference in average charges for these groups was only 
$2,596 ($12,591 with CC as compared to $9,995 for those without a CC).

                                               DRGs 24, 25, and 26
----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                               DRG                                     cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
24..............................................................          60,186            4.67      $16,403.55
25..............................................................          25,816            3.13       10,419.00
26..............................................................              21            4.05       17,396.43
----------------------------------------------------------------------------------------------------------------


                                      Seizures Age >17 With and Without CC
----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                               DRG                                     cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
With CC.........................................................          50,605             4.8      $17,125.19
Without CC......................................................          20,065             3.1       10,540.27
----------------------------------------------------------------------------------------------------------------


                             Headaches > 17
------------------------------------------------------------------------
                                          Average length      Average
                   DRG                        of stay         charges
------------------------------------------------------------------------
15,332..................................             3.4      $11,618.15
------------------------------------------------------------------------


                                        Headaches >17 With and Without CC
----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                               DRG                                     cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
With CC.........................................................           9,581             3.7      $12,591,92
Without CC......................................................           5,751             2.9        9,995.85
----------------------------------------------------------------------------------------------------------------

    The data also support creating separate DRGs for seizure and 
headache patients greater than 17 years of age. The data further 
support an additional split for seizure patients based on the presence 
of a complication or comorbidity (CC). Seizure cases with a CC have 
$6,585 greater average charges compared to cases without a CC. The data 
are less compelling for creating a split based on the presence of a CC 
for headache cases, since the difference in average charges is only 
$2,596.
    The clinical data and our medical advisors support the creation of 
separate DRGs for these two groups of patients. Therefore, we are 
deleting the following DRGs:
    <bullet> DRG 24 (Seizure & Headache Age >17 with CC).
    <bullet> DRG 25 (Seizure & Headache Age >17 without CC).
    We are creating the following three new DRGs:
    <bullet> DRG 562 (Seizure Age >17 with CC).
    <bullet> DRG 563 (Seizure Age >17 without CC).
    <bullet> DRG 564 (Headaches Age >17).
    The ICD-9-CM codes and DRG logic for cases assigned to these new 
DRGs will be as follows.
    New DRG 562 will have the following principal diagnosis codes and 
age greater than 17 years with a CC.

[[Page 47929]]



 
------------------------------------------------------------------------
    Diagnosis code                    Diagnosis code title
------------------------------------------------------------------------
345.00................  Generalized nonconvulsive epilepsy, without
                         mention of intractable epilepsy.
345.01................  Generalized nonconvulsive epilepsy, with
                         intractable epilepsy.
345.10................  Generalized convulsive epilepsy, without mention
                         of intractable epilepsy.
345.11................  Generalized convulsive epilepsy, with
                         intractable epilepsy.
345.2.................  Petit mal status, epileptic.
345.3.................  Grand mal status, epileptic.
345.40................  Localization-related (focal) (partial) epilepsy
                         and epileptic syndromes with complex partial
                         seizures, without mention of intractable
                         epilepsy.
345.41................  Localization-related (focal) (partial) epilepsy
                         and epileptic syndromes with complex partial
                         seizures, with intractable epilepsy.
345.50................  Localization-related (focal) (partial) epilepsy
                         and epileptic syndromes with simple partial
                         seizures, without mention of intractable
                         epilepsy.
345.51................  Localization-related (focal) (partial) epilepsy
                         and epileptic syndromes with simple partial
                         seizures, with intractable epilepsy.
345.60................  Infantile spasms, without mention of intractable
                         epilepsy.
345.61................  Infantile spasms, with intractable epilepsy.
345.70................  Epilepsia partialis continua, without mention of
                         intractable epilepsy.
345.71................  Epilepsia partialis continua, with intractable
                         epilepsy.
345.80................  Other forms of epilepsy and recurrent seizures,
                         without mention of intractable epilepsy.
345.81................  Other forms of epilepsy and recurrent seizures,
                         with intractable epilepsy.
345.90................  Epilepsy, unspecified, without mention of
                         intractable epilepsy.
345.91................  Epilepsy, unspecified, with intractable
                         epilepsy.
780.31................  Febrile convulsions (simple), unspecified.
780.32................  Complex febrile convulsions.
780.39................  Other convulsions.
------------------------------------------------------------------------

    New DRG 563 will have the principal diagnosis codes listed above 
for DRG 562, age greater than 17 years, but no complication/
comorbidity.
    New DRG 564 will have the principal diagnosis codes listed as 
follows and an age greater than 17 years.

------------------------------------------------------------------------
    Diagnosis code                    Diagnosis code title
------------------------------------------------------------------------
307.81................  Tension headache.
310.2.................  Postconcussion syndrome.
346.00................  Classical migraine without mention of
                         intractable migraine.
346.01................  Classical migraine with intractable migraine, so
                         stated.
346.10................  Common migraine without mention of intractable
                         migraine.
346.11................  Common migraine with intractable migraine, so
                         stated.
346.20................  Variants of migraine without mention of
                         intractable migraine.
346.21................  Variants of migraine with intractable migraine,
                         so stated.
346.80................  Other forms of migraine without mention of
                         intractable migraine.
346.81................  Other forms of migraine with intractable
                         migraine, so stated.
346.90................  Migraine, unspecified without mention of
                         intractable migraine.
346.91................  Migraine, unspecified with intractable migraine,
                         so stated.
348.2.................  Benign intracranial hypertension.
349.0.................  Reaction to spinal or lumbar puncture.
437.4.................  Cerebral arteritis.
784.0.................  Headache.
------------------------------------------------------------------------

b. MDC 4 (Diseases and Disorders of the Respiratory System): 
Respiratory System Diagnosis With Ventilator Support
    Medical patients who are treated with mechanical ventilation for 
respiratory failure are currently assigned to DRG 475 (Respiratory 
System Diagnosis with Ventilator Support). This DRG includes patients 
who are on a mechanical ventilator for only a few hours as well as 
patients who are on mechanical ventilation for several days. The 
proposed CS DRGs divide these patients into two groups, those on 
ventilator support for 96 or more hours and those on ventilator support 
for less than 96 hours. The CS DRGs recognize the difference in 
severity between these two groups of patients. Our medical advisors 
agree that medical patients who are treated with mechanical ventilation 
for respiratory failure for 96 or more hours in most cases are more 
severely ill than patients who are treated with mechanical ventilation 
for fewer than 96 hours. A review of these cases illustrates a 
significant difference in average charges for patients on ventilator 
support for 96 or more hours which supports the greater severity of 
these patients. The chart below shows that patients on ventilator 
support for 96 or more hours have average charges of $83,058 compared 
to $38,300 for patients on ventilator support for less than 96 hours, a 
difference of $44,758 in charges. The following chart summarizes these 
data.

[[Page 47930]]



      DRG 475 Respiratory System Diagnosis With Ventilator Support
------------------------------------------------------------------------
                                                Average
               DRG                 Number of   length of      Average
                                     cases        stay        charges
------------------------------------------------------------------------
DRG 475.........................      114,199      10.64      $55,873.15
DRG 475 with Ventilator Support        44,836      15.30       83,058.24
 96+ Hours......................
DRG 475 with Ventilator Support        69,363       7.64       38,300.81
 <96 Hours......................
------------------------------------------------------------------------

    The proposed CS DRGs do a much better job of identifying patients 
on ventilator support who have higher levels of severity and utilize 
significantly more resources. Therefore, we will adopt the approach 
used under the CS DRG system and split these patients based on whether 
or not the patients are on mechanical ventilation for 96 hours. We are 
deleting DRG 475 and creating the following two new DRGs:
    <bullet> DRG 565 (Respiratory System Diagnosis with Ventilator 
Support 96+ Hours).
    <bullet> DRG 566 (Respiratory System Diagnosis with Ventilator 
Support < 96 Hours).
    The DRG logic for these two new DRGs is as follows.
    New DRG 565 will have a respiratory system diagnosis and procedure 
code 96.72 (Continuous mechanical ventilation for 96 consecutive hours 
or more).
    New DRG 566 will have a respiratory system diagnosis and the 
following procedure codes:
    96.70 (Continuous mechanical ventilation of unspecified duration).
    96.71 (Continuous mechanical ventilation for less than 96 
consecutive hours).
c. MDC 6 (Diseases and Disorders of the Digestive System)
(1) Major Esophageal Disorders and Major Gastrointestinal and 
Peritoneal Infections
    The proposed CS DRGs assign major esophageal disorders to a single 
DRG because these disorders have been shown to have a higher level of 
severity than do other types of esophageal disorders. Under the current 
CMS DRGs these disorders are dispersed throughout 8 separate DRGs. The 
conditions included in the list of major esophageal disorders are 
described in the table below. The proposed CS DRGs also assign specific 
gastrointestinal and peritoneal infections that represent a high level 
of severity into a single DRG. These conditions are assigned to the 
same group of eight CMS DRGs mentioned above within CMS' current DRGS. 
The conditions considered gastrointestinal and peritoneal infections 
are described in the table below.
    Our data show that the two groups of cases assigned to major 
esophageal disorders and to the gastrointestinal and peritoneal 
infections represent significantly greater severity levels and have 
higher average charges than do other cases in the eight CMS DRGs. The 
eight current CMS DRGs to which these two groups of higher severity 
cases as assigned are as follows:
    <bullet> CMS DRG 174 (G.I. Hemorrhage with CC).
    <bullet> CMS DRG 175 (G.I. Hemorrhage without CC).
    <bullet> CMS DRG 182 (Esophagitis, Gastroenteritis & Miscellaneous 
Digestive Disorders Age >17 with CC).
    <bullet> CMS DRG 183 (Esophagitis, Gastroenteritis & Miscellaneous 
Digestive Disorders Age >17 without CC).
    <bullet> CMS DRG 184 (Esophagitis, Gastroenteritis & Miscellaneous 
Digestive Disorders Age 0-17).
    <bullet> CMS DRG 188 (Digestive System Diagnoses Age >17 with CC).
    <bullet> CMS DRG 189 (Digestive System Diagnoses Age >17 without 
CC).
    <bullet> CMS DRG 190 (Digestive System Diagnoses Age 0-17).

             DRGs 174, 175, 182, 183, 184, 188, 189, and 190
------------------------------------------------------------------------
                                               Average
              DRG                Number of    length of       Average
                                   cases         stay         charges
------------------------------------------------------------------------
DRG 174.......................      249,359         4.69      $16,987.26
DRG 174 w/o Major Esophageal        241,508         4.69       16,934.86
 Disorders or Gastrointestinal
 and Peritoneal Infections....
DRG 175.......................       28,485         2.86        9,573.73
DRG 175 w/o Major Esophageal         27,816         2.87        9,934.86
 Disorders or Gastrointestinal
 and Peritoneal Infections....
DRG 182.......................      282,619         4.48       14,269.01
DRG 182 w/o Major Esophageal        243,563         4.07       13,124.03
 Disorders or Gastrointestinal
 and Peritoneal Infections....
DRG 183.......................       77,582         2.89        9,933.62
DRG 183 w/o Major Esophageal         74,899         2.84        9,845.81
 Disorders or Gastrointestinal
 and Peritoneal Infections....
DRG 184.......................           66         4.38       12,116.67
DRG 184 w/o Major Esophageal             60         3.88       10,053.38
 Disorders or Gastrointestinal
 and Peritoneal Infections....
DRG 188.......................       88,970         5.45       18,278.19
DRG 189 w/o Major Esophageal         87,210         5.43       18,194.27
 Disorders or Gastrointestinal
 and Peritoneal Infections....
DRG 189.......................       12,454         3.06        9,963.90
DRG 190 w/o Major Esophageal         12,123         3.02        9,855.31
 Disorders or Gastrointestinal
 and Peritoneal Infections....
DRG 190.......................           58         5.02       14,156.52
DRG 190 w/o Major Esophageal             45         5.13       14,829.47
 Disorders or Gastrointestinal
 and Peritoneal Infections....
------------------------------------------------------------------------


[[Page 47931]]


                       Major Esophageal Disorders
------------------------------------------------------------------------
                                               Average
              Number of cases                 length of       Average
                                                 stay         charges
------------------------------------------------------------------------
10,633.....................................          4.7      $18,410.30
------------------------------------------------------------------------


            Major Gastrointestinal and Peritoneal Infections
------------------------------------------------------------------------
                                               Average
              Number of cases                 length of       Average
                                                 stay         charges
------------------------------------------------------------------------
41,736.....................................          6.9      $20,861.06
------------------------------------------------------------------------

    As can be seen from the tables above, cases assigned to these eight 
DRGs without a major esophageal disorder or a major gastrointestinal 
disorder and peritoneal infection have average charges ranging from 
$9,845 to $18,194. The average charges for major esophageal disorders 
are $18,410, while average charges for major gastrointestinal disorders 
and peritoneal infections are $20,861. Removing these higher severity 
cases from the eight DRGs does not have a significant impact on the DRG 
weights for the remaining cases. Most of the higher severity cases are 
being removed from DRG 182. There were 282,619 cases in this DRG. By 
removing the two new groups of cases, the DRG has 243,563 cases 
remaining. The average charge for DRG 182 with the remaining cases 
decreases from $14,269 to $13,124. Therefore, the impact on the 
remaining cases is not that significant. However, reassigning cases 
with major esophageal and gastrointestinal disorders and peritoneal 
infections to two new DRGs has the effect of creating two groups which 
have higher levels of severity and use significantly greater resources. 
Our medical advisors agree that these two groups represent higher 
levels of severity and that it is appropriate to move these two groups 
of cases out of their existing assignments and into the following two 
new DRGs:
    <bullet> DRG 571 (Major Esophageal Disorders)
    <bullet> DRG 572 (Major Gastrointestinal Disorders and Peritoneal 
Infections)
    We are creating new DRG 571 with the following ICD-9-CM diagnosis 
codes (removing them from DRGs 174, 175, 182, 183, 184, 188, 189, and 
190):

------------------------------------------------------------------------
    Diagnosis code      Major esophageal disorders diagnosis code titles
------------------------------------------------------------------------
017.80................  Tuberculosis of esophagus, unspecified
                         examination.
017.81................  Tuberculosis of esophagus, bacteriological or
                         histological examination not done.
017.82................  Tuberculosis of esophagus, bacteriological or
                         histological examination results unknown (at
                         present).
017.83................  Tuberculosis of esophagus, tubercle bacilli
                         found (in sputum) by microscopy.
017.84................  Tuberculosis of esophagus, tubercle bacilli not
                         found (in sputum) by microscopy, but found by
                         bacterial culture.
017.85................  Tuberculosis of esophagus, tubercle bacilli not
                         found by bacteriological examination, but
                         tuberculosis confirmed histologically.
017.86................  Tuberculosis of esophagus, tubercle bacilli not
                         found by bacteriological or histological
                         examination, but tuberculosis confirmed by
                         other methods (inoculation of animals).
112.84................  Candidal esophagitis.
456.0.................  Esophageal varices with bleeding.
456.1.................  Esophageal varices without mention of bleeding.
456.20................  Esophageal varices in diseases classified
                         elsewhere, with bleeding.
530.4.................  Perforation of esophagus.
530.7.................  Gastroesophageal laceration-hemorrhage syndrome.
530.82................  Esophageal hemorrhage.
530.84................  Tracheoesophageal fistula.
750.3.................  Congenital tracheoesophageal fistula, esophageal
                         atresia and stenosis.
750.4.................  Other specified congenital anomalies of
                         esophagus.
862.22................  Injury to esophagus without mention of open
                         wound into cavity.
947.2.................  Burn of esophagus.
------------------------------------------------------------------------

    We are creating new DRG 572 with the following ICD-9-CM diagnosis 
codes (removing them from DRGs 182, 183, 184, 188, 189, and 190):

------------------------------------------------------------------------
    Diagnosis code      Major esophageal disorders diagnosis code titles
------------------------------------------------------------------------
 001.0................  Cholera due to vibrio cholerae.
001.1.................  Cholera due to vibrio cholerae el tor.
001.9.................  Cholera, unspecified.
003.0.................  Salmonella gastroenteritis.
004.0.................  Shigella dysenteriae.
004.1.................  Shigella flexneri.
004.2.................  Shigella boydii.
004.3.................  Shigella sonnei.
004.8.................  Other specified shigella infections.
004.9.................  Shigellosis, unspecified.
005.0.................  Staphylococcal food poisoning.
005.2.................  Food poisoning due to clostridium perfringens
                         (c. welchii).
005.3.................  Food poisoning due to other clostridia.
005.4.................  Food poisoning due to vibrio parahaemolyticus.
005.81................  Food poisoning due to vibrio vulnificus.
005.89................  Other bacterial food poisoning.
006.0.................  Acute amebic dysentery without mention of
                         abscess.
006.1.................  Chronic intestinal amebiasis without mention of
                         abscess.
006.2.................  Amebic nondysenteric colitis.
007.0.................  Balantidiasis.
007.1.................  Giardiasis.

[[Page 47932]]

 
007.2.................  Coccidiosis.
007.3.................  Intestinal trichomoniasis.
007.4.................  Cryptosporidiosis.
007.5.................  Cyclosporiasis.
007.8.................  Other specified protozoal intestinal diseases.
007.9.................  Unspecified protozoal intestinal disease.
008.00................  Intestinal infection due to e. coli,
                         unspecified.
008.01................  Intestinal infection due to enteropathogenic e.
                         coli.
008.02................  Intestinal infection due to enterotoxigenic e.
                         coli.
008.03................  Intestinal infection due to enteroinvasive e.
                         coli.
008.04................  Intestinal infection due to enterohemorrhagic e.
                         coli.
008.09................  Intestinal infection due to other intestinal e.
                         coli infections.
008.1.................  Intestinal infection due to arizona group of
                         paracolon bacilli.
008.2.................  Intestinal infection due to aerobacter
                         aerogenes.
008.3.................  Intestinal infection due to proteus (mirabilis)
                         (morganii).
008.41................  Intestinal infection due to staphylococcus.
008.42................  Intestinal infection due to pseudomonas.
008.43................  Intestinal infection due to campylobacter.
008.44................  Intestinal infection due to yersinia
                         enterocolitica.
008.45................  Intestinal infection due to clostridium
                         difficile.
008.46................  Intestinal infection due to other anaerobes.
008.47................  Intestinal infection due to other gram-negative
                         bacteria.
008.49................  Intestinal infection due to other organisms.
008.5.................  Bacterial enteritis, unspecified.
4.00..................  Tuberculous peritonitis, unspecified
                         examination.
014.01................  Tuberculous peritonitis, bacteriological or
                         histological examination not done.
014.02................  Tuberculous peritonitis, bacteriological or
                         histological examination results unknown (at
                         present).
014.03................  Tuberculous peritonitis, tubercle bacilli found
                         (in sputum) by microscopy.
014.04................  Tuberculous peritonitis, tubercle bacilli not
                         found (in sputum) by microscopy, but found by
                         bacterial culture.
014.05................  Tuberculous peritonitis, tubercle bacilli not
                         found by bacteriological examination, but
                         tuberculosis confirmed histologically.
014.06................  Tuberculous peritonitis, tubercle bacilli not
                         found by bacteriological or histological
                         examination, but tuberculosis confirmed by
                         other methods (inoculation of animals).
014.80................  Other tuberculosis of intestines and mesenteric
                         glands, unspecified examination.
014.81................  Other tuberculosis of intestines and mesenteric
                         glands, bacteriological or histological
                         examination not done.
014.82................  Other tuberculosis of intestines and mesenteric
                         glands, bacteriological or histological
                         examination results unknown (at present).
014.83................  Other tuberculosis of intestines and mesenteric
                         glands, tubercle bacilli found (in sputum) by
                         microscopy.
014.84................  Other tuberculosis of intestines and mesenteric
                         glands, tubercle bacilli not found (in sputum)
                         by microscopy, but found by bacterial culture.
014.85................  Other tuberculosis of intestines and mesenteric
                         glands, tubercle bacilli not found by
                         bacteriological examination, but tuberculosis
                         confirmed histologically.
014.86................  Other tuberculosis of intestines and mesenteric
                         glands, tubercle bacilli not found by
                         bacteriological or histological examination,
                         but tuberculosis confirmed by other methods
                         (inoculation of animals).
021.1.................  Enteric tularemia.
022.2.................  Gastrointestinal anthrax.
032.83................  Diphtheritic peritonitis.
039.2.................  Abdominal actinomycotic infection.
095.2.................  Syphilitic peritonitis.
098.86................  Gonococcal peritonitis.
123.1.................  Cysticercosis.
123.5.................  Sparganosis (larval diphyllobothriasis).
123.6.................  Hymenolepiasis.
123.8.................  Other specified cestode infection.
123.9.................  Cestode infection, unspecified.
126.0.................  Ancylostomiasis due to ancylostoma duodenale.
126.1.................  Necatoriasis due to necator americanus.
126.2.................  Ancylostomiasis due to ancylostoma braziliense.
126.3.................  Ancylostomiasis due to ancylostoma ceylanicum.
126.8.................  Other specified ancylostoma.
126.9.................  Ancylostomiasis and necatoriasis, unspecified.
540.0.................  Acute appendicitis with generalized peritonitis.
540.1.................  Acute appendicitis with peritoneal abscess.
567.0.................  Peritonitis in infectious diseases classified
                         elsewhere.
567.1.................  Pneumococcal peritonitis.
567.21................  Peritonitis (acute) generalized.
567.22................  Peritoneal abscess.
567.23................  Spontaneous bacterial peritonitis.
567.29................  Other suppurative peritonitis.
567.31................  Psoas muscle abscess.
567.38................  Other retroperitoneal abscess.
7.39..................  Other retroperitoneal infections.
567.89................  Other specified peritonitis.
567.9.................  Unspecified peritonitis.
569.5.................  Abscess of intestine.
------------------------------------------------------------------------


[[Page 47933]]

(2) Principal or Secondary Diagnosis of Major Gastrointestinal 
Diagnosis
    We examined the diagnosis codes assigned to MDC 6 for severity 
using the proposed CS DRGs and created a list of diagnosis codes that 
are identified as major or extreme in the APR DRGs or the consolidated 
severity DRGs. We refer to this set of higher severity diagnosis codes 
as Major Gastrointestinal Diagnoses. The list of higher severity 
diagnosis codes considered to be a Major Gastrointestinal Diagnosis is 
provided in the table below showing new DRG 569.
    We then examined DRGs 148 and 149 (Major Small & Large Bowel 
Procedures with and without CC, respectively) and DRGs 154 through 156 
(Stomach, Esophageal & Duodenal Procedures Age >17 with and without CC 
and Age 0-17, respectively) when these Major Gastrointestinal Diagnoses 
were present as either a principal or secondary diagnosis. In general, 
these Major Gastrointestinal Diagnoses represent or are associated with 
the reason for performing the surgical procedure in DRGs 148 and 149 
and DRGs 154 through 156 and are the most serious diagnoses that 
necessitate surgery. As the following tables illustrate, the presence 
of these Major Gastrointestinal Diagnoses identifies patients with a 
higher level of severity. The presence of these Major Gastrointestinal 
Diagnoses leads to significantly higher average charges for these two 
groups of surgical patients, particularly for cases currently assigned 
to DRGs 148 and 154 which are the surgical procedures that include the 
presence of a CC. The surgical patients with Major Gastrointestinal 
Diagnoses would not only be considered to have a greater level of 
severity and be more expensive, they would also be assigned to the 
surgical DRG that includes a CC. The tables below show that patients in 
DRG 148 with a Major Gastrointestinal Diagnosis have average charges of 
$70,001.16 compared to average charges of $43,809.03 when a Major 
Gastrointestinal Diagnosis is not present. The difference in charges 
for cases in DRG 149 was not as great. The difference in average 
charges was $29,103.84 for DRG 149 when a Major Gastrointestinal 
Diagnosis was present and $23,077.84 when it was not. The number of 
cases with a Major Gastrointestinal Diagnosis was significantly larger 
for DRG 148 (58,153 cases compared to only 1,822 in DRG 149). Similar 
findings occur for DRGs 154, 155, and 156. Cases with a Major 
Gastrointestinal Diagnosis occur with significantly greater numbers in 
DRG 154 (9,924 compared to only 357 in DRG 155 and none in DRG 156). 
The average charges for cases with a Major Gastrointestinal Diagnosis 
were $84,270.92 for DRG 154, and only $29,193.81 for DRG 155.

                    DRGs 148, 149, 154, 155, and 156
------------------------------------------------------------------------
                                               Average
              DRG                Number of    length of       Average
                                   cases         stay         charges
------------------------------------------------------------------------
DRG 148.......................      126,156        11.92      $55,882.59
DRG 148 with PDX/SDX of Major        58,153        14.24       70,001.16
 GI Diagnoses.................
DRG 148 w/o PDX/SDX Major GI         68,003         9.94       43,809.03
 Diagnoses....................
DRG 149.......................       18,471         5.66       23,672.25
DRG 149 with PDX/SDX of Major         1,822         7.66       29,103.84
 GI Diagnoses.................
DRG 149 w/o PDX/SDX Major GI         16,649         5.44       23,077.84
 Diagnoses....................
DRG 154.......................       25,617        12.95       66,257.17
DRG 154 with PDX/SDX of Major         9,924        15.59       84,270.92
 GI Diagnoses.................
DRG 154 w/o PDX/SDX Major GI         15,693        11.28       54,865.56
 Diagnoses....................
DRG 155.......................        5,679         3.96       21,543.88
DRG 155 with PDX/SDX of Major           357         7.10       29,193.81
 GI Diagnoses.................
DRG 155 w/o PDX/SDX Major GI          5,322         3.75       21,030.50
 Diagnoses....................
DRG 156.......................            4         9.25       48,015.50
DRG 156 with PDX/SDX of Major             0            0               0
 GI Diagnoses.................
DRG 156 w/o PDX/SDX Major GI              4         9.25       48,015.50
 Diagnoses....................
------------------------------------------------------------------------

    Our medical advisors agree that these gastrointestinal surgical 
patients with a Major Gastrointestinal Diagnosis are more severely ill 
and represent patients with a higher level of severity. They support 
subdividing cases in DRG 148 and 154 based on the presence of a Major 
Gastrointestinal Diagnosis to better capture patients with higher level 
of severity. A summary of these changes is provided below.
    We are deleting DRG 148 and creating the following two new DRGs:
    <bullet> DRG 569 (Major Small & Large Bowel Procedures with CC with 
Major Gastrointestinal Diagnosis)
    <bullet> DRG 570 (Major Small & Large Bowel Procedures with CC 
without Major Gastrointestinal Diagnosis)
    The DRG logic for new DRGs 569 and 570 is as follows.
    New DRG 569 will have a principal diagnosis from MDC 6 and one of 
the following codes as either the principal or secondary diagnosis. 
This DRG will also have an operating room procedure from current DRG 
148 and a Complication/Comorbidity (as defined in CMS DRG GROUPER 
Version 24.0).

------------------------------------------------------------------------
                             Principal or secondary diagnosis--major
    Diagnosis code       gastrointestinal diagnosis diagnosis code title
------------------------------------------------------------------------
008.41................  Intestinal infection due to staphylococcus.
008.42................  Intestinal infection due to pseudomonas.
008.43................  Intestinal infection due to campylobacter.
008.45................  Intestinal infection due to clostridium
                         difficile.
008.46................  Intestinal infection due to other anaerobes.
008.49................  Intestinal infection due to other organisms.
014.04................  Tuberculous peritonitis, tubercle bacilli not
                         found (in sputum) by microscopy, but found by
                         bacterial culture.
098.86................  Gonococcal peritonitis.

[[Page 47934]]

 
456.0.................  Esophageal varices with bleeding.
456.20................  Esophageal varices in diseases classified
                         elsewhere, with bleeding.
530.21................  Ulcer of esophagus with bleeding.
530.4.................  Perforation of esophagus.
530.7.................  Gastroesophageal laceration-hemorrhage syndrome.
530.84................  Tracheoesophageal fistula.
531.00................  Acute gastric ulcer with hemorrhage, without
                         mention of obstruction.
531.21................  Acute gastric ulcer with hemorrhage and
                         perforation, with obstruction.
531.40................  Chronic or unspecified gastric ulcer with
                         hemorrhage, without mention of obstruction.
531.41................  Chronic or unspecified gastric ulcer with
                         hemorrhage, with obstruction.
531.50................  Chronic or unspecified gastric ulcer with
                         perforation, without mention of obstruction.
531.60................  Chronic or unspecified gastric ulcer with
                         hemorrhage and perforation, without mention of
                         obstruction.
531.91................  Gastric ulcer, unspecified as acute or chronic,
                         without mention of hemorrhage or perforation,
                         with obstruction.
532.00................  Acute duodenal ulcer with hemorrhage, without
                         mention of obstruction.
532.10................  Acute duodenal ulcer with perforation, without
                         mention of obstruction.
532.11................  Acute duodenal ulcer with perforation, with
                         obstruction.
532.20................  Acute duodenal ulcer with hemorrhage and
                         perforation, without mention of obstruction.
532.31................  Acute duodenal ulcer without mention of
                         hemorrhage or perforation, with obstruction.
532.40................  Chronic or unspecified duodenal ulcer with
                         hemorrhage, without mention of obstruction.
532.41................  Chronic or unspecified duodenal ulcer with
                         hemorrhage, with obstruction.
532.50................  Chronic or unspecified duodenal ulcer with
                         perforation, without mention of obstruction.
532.60................  Chronic or unspecified duodenal ulcer with
                         hemorrhage and perforation, without mention of
                         obstruction.
533.00................  Acute peptic ulcer of unspecified site with
                         hemorrhage, without mention of obstruction.
533.10................  Acute peptic ulcer of unspecified site with
                         perforation, without mention of obstruction.
533.21................  Acute peptic ulcer of unspecified site with
                         hemorrhage and perforation, with obstruction.
533.40................  Chronic or unspecified peptic ulcer of
                         unspecified site with hemorrhage, without
                         mention of obstruction.
533.41................  Chronic or unspecified peptic ulcer of
                         unspecified site with hemorrhage, with
                         obstruction.
533.50................  Chronic or unspecified peptic ulcer of
                         unspecified site with perforation, without
                         mention of obstruction.
533.51................  Chronic or unspecified peptic ulcer of
                         unspecified site with perforation, with
                         obstruction.
533.60................  Chronic or unspecified peptic ulcer of
                         unspecified site with hemorrhage and
                         perforation, without mention of obstruction.
533.91................  Peptic ulcer of unspecified site, unspecified as
                         acute or chronic, without mention of hemorrhage
                         or perforation, with obstruction.
534.00................  Acute gastrojejunal ulcer with hemorrhage,
                         without mention of obstruction.
534.40................  Chronic or unspecified gastrojejunal ulcer with
                         hemorrhage, without mention of obstruction.
534.41................  Chronic or unspecified gastrojejunal ulcer, with
                         hemorrhage, with obstruction.
534.50................  Chronic or unspecified gastrojejunal ulcer with
                         perforation, without mention of obstruction.
534.51................  Chronic or unspecified gastrojejunal ulcer with
                         perforation, with obstruction.
534.91................  Gastrojejunal ulcer, unspecified as acute or
                         chronic, without mention of hemorrhage or
                         perforation, with obstruction.
535.01................  Acute gastritis with hemorrhage.
535.11................  Atrophic gastritis with hemorrhage.
535.21................  Gastric mucosal hypertrophy with hemorrhage.
535.31................  Alcoholic gastritis with hemorrhage.
535.41................  Other specified gastritis with hemorrhage.
535.51................  Unspecified gastritis and gastroduodenitis with
                         hemorrhage.
535.61................  Duodenitis with hemorrhage.
537.3.................  Other obstruction of duodenum.
537.83................  Angiodysplasia of stomach and duodenum with
                         hemorrhage.
540.0.................  Acute appendicitis with generalized peritonitis.
540.1.................  Acute appendicitis with peritoneal abscess.
550.00................  Unilateral or unspecified inguinal hernia, with
                         gangrene.
550.01................  Recurrent unilateral or unspecified inguinal
                         hernia, with gangrene.
550.02................  Bilateral inguinal hernia, with gangrene.
551.00................  Unilateral or unspecified femoral hernia with
                         gangrene.
551.1.................  Umbilical hernia with gangrene.
551.20................  Unspecified ventral hernia with gangrene.
551.21................  Incisional ventral hernia, with gangrene.
551.29................  Other ventral hernia with gangrene.
551.3.................  Diaphragmatic hernia with gangrene.
551.8.................  Hernia of other specified sites, with gangrene.
551.9.................  Hernia of unspecified site, with gangrene.
557.0.................  Acute vascular insufficiency of intestine.
557.1.................  Chronic vascular insufficiency of intestine.
557.9.................  Unspecified vascular insufficiency of intestine.
560.0.................  Intussusception.
560.2.................  Volvulus.
560.31................  Gallstone ileus.
560.81................  Intestinal or peritoneal adhesions with
                         obstruction (postoperative) (postinfection).
560.89................  Other specified intestinal obstruction.
560.9.................  Unspecified intestinal obstruction.
562.02................  Diverticulosis of small intestine with
                         hemorrhage.
562.03................  Diverticulitis of small intestine with
                         hemorrhage.
562.12................  Diverticulosis of colon with hemorrhage.
562.13................  Diverticulitis of colon with hemorrhage.
564.7.................  Megacolon, other than hirschsprung's.

[[Page 47935]]

 
567.0.................  Peritonitis in infectious diseases classified
                         elsewhere.
567.1.................  Pneumococcal peritonitis.
567.21................  Peritonitis (acute) generalized.
567.22................  Peritoneal abscess.
567.23................  Spontaneous bacterial peritonitis.
567.29................  Other suppurative peritonitis.
567.31................  Psoas muscle abscess.
567.38................  Other retroperitoneal abscess.
567.39................  Other retroperitoneal infections.
567.81................  Choleperitonitis.
567.9.................  Unspecified peritonitis.
568.81................  Hemoperitoneum (nontraumatic).
569.5.................  Abscess of intestine.
569.83................  Perforation of intestine.
569.85................  Angiodysplasia of intestine with hemorrhage.
578.0.................  Hematemesis.
750.3.................  Congenital tracheoesophageal fistula, esophageal
                         atresia and stenosis.
863.30................  Injury to small intestine, unspecified site,
                         with open wound into cavity.
863.31................  Injury to duodenum with open wound into cavity.
863.39................  Other injury to small intestine with open wound
                         into cavity.
863.50................  Injury to colon, unspecified site, with open
                         wound into cavity.
863.51................  Injury to ascending (right) colon with open
                         wound into cavity.
863.52................  Injury to transverse colon with open wound into
                         cavity.
863.53................  Injury to descending (left) colon with open
                         wound into cavity.
863.54................  Injury to sigmoid colon with open wound into
                         cavity.
863.55................  Injury to rectum with open wound into cavity.
863.59................  Other injury to colon and rectum with open wound
                         into cavity.
863.90................  Injury to gastrointestinal tract, unspecified
                         site, with open wound into cavity.
863.95................  Injury to appendix with open wound into cavity.
863.99................  Injury to other and unspecified gastrointestinal
                         sites with open wound into cavity.
868.13................  Injury to peritoneum with open wound into
                         cavity.
947.3.................  Burn of gastrointestinal tract.
------------------------------------------------------------------------

    New DRG 570 will have an operating room procedure code from current 
CMS DRG 148 and a principal diagnosis from MDC 6, except for a 
principal or secondary diagnosis listed above in the Major 
Gastrointestinal Diagnosis list and will have a Complication/
Comorbidity.
    We also are deleting DRG 154 and creating two new DRGs as follows:
    <bullet> DRG 567 (Stomach, Esophageal & Duodenal Procedures Age >17 
with Complication/Comorbidity with Major Gastrointestinal Diagnosis)
    <bullet> DRG 568 (Stomach, Esophageal & Duodenal Procedures Age >17 
with Complication/Comorbidity without Major Gastrointestinal Diagnosis)
    New DRG 567 will have a principal diagnosis from MDC 6 with either 
a principal or secondary diagnosis of a Major Gastrointestinal 
Diagnosis (see list of Major Gastrointestinal Diagnoses listed above). 
New DRG 567 will also have an operating room procedure from current CMS 
DRG 154 and a CC. New DRG 568 will have a principal diagnosis from MDC 
6, except it will not have a principal or secondary diagnosis from the 
list of Major Gastrointestinal Diagnoses. It will also have an 
operating room procedure from current CMS DRG 154 and a CC.
d. MDC 11 (Diseases and Disorders of the Kidney and Urinary Tract): 
Major Bladder Procedures
    Under our proposed CS DRGs, cases with a major bladder procedure 
were found to have a higher level of severity than were cases with 
other types of bladder procedures. Therfore, cases with a major bladder 
procedure are assigned to a single DRG in the CS DRGs. The procedures 
classified as a major bladder procedure are as follows:

                        Major Bladder Procedures
------------------------------------------------------------------------
    Procedure code                         Description
------------------------------------------------------------------------
57.6..................  Partial cystectomy.
57.71.................  Radical cystectomy.
57.79.................  Other total cystectomy.
57.83.................  Repair of fistula involving bladder and
                         intestine.
57.84.................  Repair of other fistula of bladder.
57.85.................  Cystourethroplasty and plastic repair of bladder
                         neck.
57.86.................  Repair of bladder exstrophy.
57.87.................  Reconstruction of urinary bladder.
57.88.................  Other anastomosis of bladder.
57.89.................  Other repair of bladder.
------------------------------------------------------------------------


[[Page 47936]]

    The CMS DRGs assign these cases to one of the five following DRGs:
    <bullet> DRG 303 (Kidney, Ureter & Major Bladder Procedures for 
Neoplasm).
    <bullet> DRG 304 (Kidney, Ureter & Major Bladder Procedures for 
Non-Neoplasm with CC)
    <bullet> DRG 305 (Kidney, Ureter & Major Bladder Procedures for 
Non-Neoplasm without CC)
    <bullet> DRG 308 (Minor Bladder Procedures with CC)
    <bullet> DRG 309 (Minor Bladder Procedures without CC)
    Our medical advisors support creating a new DRG for major bladder 
procedures because they represent cases with higher levels of severity, 
are clinically different, and use greater resources. We examined data 
on cases containing a major bladder procedure and determined they 
represent cases with a higher level of severity and utilize 
significantly more resources than other cases within the DRGs where 
they are currently assigned. Cases with a major bladder procedure had 
average charges of $53,434 compared to $14,976 to $38,119 for other 
cases within the five DRGs where the patient did not have a major 
bladder procedure. The tables below illustrate these data.

------------------------------------------------------------------------
                                               Average
             DRGs                Number of    length of       Average
                                   cases         stay         charges
------------------------------------------------------------------------
DRG 303.......................       23,328         7.28      $37,510.79
DRG 303 Without Major Bladder        18,909         6.33       32,867.55
 Procedures...................
DRG 304.......................       13,257         8.35       38,800.38
DRG 304 Without Major Bladder        12,835         8.19       38,119.74
 Procedures...................
DRG 305.......................        2,827         3.10       19,528.35
DRG 305 Without Major Bladder         2,776         3.02       19,295.59
 Procedures...................
DRG 308.......................        6,358         6.15       27,982.54
DRG 308 Without Major Bladder         5,180         5.30       24,017.30
 Procedures...................
DRG 309.......................        3,104         1.98       15,446.61
DRG 309 Without Major Bladder         2,820         1.72       14,976.79
 Procedures...................
------------------------------------------------------------------------


                        Major Bladder Procedures
------------------------------------------------------------------------
                                          Average length      Average
             Number of cases                  of stay         charges
------------------------------------------------------------------------
6,354...................................            10.8      $53,434.93
------------------------------------------------------------------------

    Therefore, we are moving these procedures out of their current DRGs 
(DRG 303, 304, 305, 308, and 309) and into new DRG 573 (Major Bladder 
Procedures). A summary of these changes is as follows:
    We are renaming the following three DRGs:
    <bullet> DRG 303--`` Kidney and Ureter Procedures for Neoplasm''
    <bullet> DRG 304--`` Kidney and Ureter Procedures for Non-Neoplasm 
With CC''
    <bullet> DRG 305--`` Kidney and Ureter Procedures for Non-Neoplasm 
Without CC''
    We are removing the following procedure codes from DRG 303-305, 
308, and 309 and assigning them to new DRG 573. New DRG 573 will 
contain the following procedure codes.

                        Major Bladder Procedures
------------------------------------------------------------------------
    Procedure code                         Description
------------------------------------------------------------------------
57.6..................  Partial cystectomy.
57.71.................  Radical cystectomy.
57.79.................  Other total cystectomy.
57.83.................  Repair of fistula involving bladder and
                         intestine.
57.84.................  Repair of other fistula of bladder.
57.85.................  Cystourethroplasty and plastic repair of bladder
                         neck.
57.86.................  Repair of bladder exstrophy.
57.87.................  Reconstruction of urinary bladder.
57.88.................  Other anastomosis of bladder.
57.89.................  Other repair of bladder.
------------------------------------------------------------------------

e. MDC 16 (Diseases and Disorders of the Blood and Blood Forming Organs 
and Immunological Disorders): Major Hematological and Immunological 
Diagnoses
    Under our proposed CS DRGs, major hematological and immunological 
diagnoses were found to identify cases with a higher level of severity. 
They are assigned to a single DRG under the CS DRGs. The diagnoses 
considered to be major hematological and immunological diagnoses 
include the following conditions:

------------------------------------------------------------------------
                           Major hematological and immunological code
    Diagnosis code                           titles
------------------------------------------------------------------------
279.11................  Digeorge's syndrome.
279.12................  Wiskott-aldrich syndrome.
279.13................  Nezelof's syndrome.
279.19................  Other deficiency of cell-mediated immunity.
279.2.................  Combined immunity deficiency.
283.0.................  Autoimmune hemolytic anemias.

[[Page 47937]]

 
283.10................  Non-autoimmune hemolytic anemia, unspecified.
283.19................  Other non-autoimmune hemolytic anemias.
283.2.................  Hemoglobinuria due to hemolysis from external
                         causes.
283.9.................  Acquired hemolytic anemia, unspecified.
284.8.................  Other specified aplastic anemias.
284.9.................  Aplastic anemia, unspecified.
288.1.................  Functional disorders of polymorphonuclear
                         neutrophils.
288.2.................  Genetic anomalies of leukocytes.
996.85................  Complications of transplanted bone marrow.
------------------------------------------------------------------------

    These conditions are currently assigned to the following four CMS 
DRGs:
    <bullet> DRG 395 (Red Blood Cell Disorders Age >17)
    <bullet> DRG 396 (Red Blood Cell Disorders Age 0-17)
    <bullet> DRG 398 (Reticuloendothelial & Immunity Disorders with CC)
    <bullet> DRG 399 (Reticuloendothelial & Immunity Disorders without 
CC)
    Our medical advisors agree that major hematological and 
immunological disorders are found in patients with significantly 
greater levels of severity and are different from other conditions in 
the four DRGs where they are assigned. Our data analysis shows that 
major hematological and immunological diseases identify patients with 
significantly greater levels of severity. They are more resource 
intensive than other conditions assigned to these four DRGs. Cases with 
major hematological and immunological conditions had average charges of 
$21,276 compared to $11,066 to $18,791 for the other conditions where 
these cases are currently assigned. Most of the nonhematological and 
immunological cases (96,557) are assigned to DRG 395 and have an 
average charge of $12,977.

                       DRGs 395, 396, 398, and 399
------------------------------------------------------------------------
                                                  Average
               DRG                  Number of    length of     Average
                                      cases         stay       charges
------------------------------------------------------------------------
DRG 395..........................      109,874         4.28   $14,078.78
DRG 395 Without Major                   96,557         4.10    12,977.20
 Hematological Diagnosis
 excluding Sickle Cell Crisis &
 Coagulation Disorders...........
DRG 396..........................           19         2.95    10,406.05
DRG 396 Without Major                       17         3.06    11,066.94
 Hematological Diagnosis
 excluding Sickle Cell Crisis &
 Coagulation Disorders...........
DRG 398..........................       17,608         5.71    19,902.21
DRG 398 Without Major                    6,381         3.28    18,791.32
 Hematological Diagnosis
 excluding Sickle Cell Crisis &
 Coagulation Disorders...........
DRG 399..........................        1,552         3.38    11,277.35
DRG 399 Without Major                    1,011         3.28    11,207.22
 Hematological Diagnosis
 excluding Sickle Cell Crisis &
 Coagulation Disorders...........
------------------------------------------------------------------------


Major Hematological Diagnosis excluding Sickle Cell Crisis & Coagulation
                                Disorders
------------------------------------------------------------------------
                                          Average length      Average
             Number of cases                  of stay         charges
------------------------------------------------------------------------
25,087..................................             5.6      $21,276.25
------------------------------------------------------------------------

    We are creating a new CMS DRG 574 (Major Hematologic/Immunologic 
Diagnoses Except Sickle Cell Crisis and Coagulation Disorders). We are 
removing the codes mentioned in the table above from DRGs 395, 396, 
398, and 399 and assigning them to new DRG 574. We also are assigning 
the new diagnosis codes indicated by an asterisk (*) to new DRG 574. 
These new codes also capture major hematological and immunological 
conditions and were created to provide more detail than the current 
codes in this section of ICD-9-CM. The DRG assignments for these new 
codes are also shown in Table 6A of the Addendum to this final rule.

------------------------------------------------------------------------
                           Major hematological and immunological code
    Diagnosis code                           titles
------------------------------------------------------------------------
279.11................  Digeorge's syndrome.
279.12................  Wiskott-aldrich syndrome.
279.13................  Nezelof's syndrome.
279.19................  Other deficiency of cell-mediated immunity.
279.2.................  Combined immunity deficiency.
283.0.................  Autoimmune hemolytic anemias.
283.10................  Non-autoimmune hemolytic anemia, unspecified.
283.19................  Other non-autoimmune hemolytic anemias.
283.2.................  Hemoglobinuria due to hemolysis from external
                         causes.
283.9.................  Acquired hemolytic anemia, unspecified.
284.01 *..............  Constitutional red blood cell aplasia.
284.09 *..............  Other constitutional aplastic anemia.
284.8.................  Other specified aplastic anemias.
284.9.................  Aplastic anemia, unspecified.
288.00 *..............  Neutropenia, unspecified.

[[Page 47938]]

 
288.01 *..............  Congenital neutropenia.
288.02 *..............  Cyclic neutropenia.
288.03 *..............  Drug induced neutropenia.
288.04 *..............  Neutropenia due to infection.
288.09 *..............  Other neutropenia.
288.1.................  Functional disorders of polymorphonuclear
                         neutrophils.
288.2.................  Genetic anomalies of leukocytes.
996.85................  Complications of transplanted bone marrow.
------------------------------------------------------------------------

f. MDC 18 (Infections and Parasitic Diseases (Systemic or Unspecified 
Sites)): O.R. Procedure for Patients With Infectious and Parasitic 
Diseases
    Under the APR DRG system, cases in DRG 415 (O.R. Procedure for 
Infectious and Parasitic Diseases) are subdivided based on the presence 
or absence of one of the following principal diagnosis codes, which we 
are referring to as Postoperative or Post-Traumatic Infection:
    <bullet> 958.3, Posttraumatic wound infection, not elsewhere 
classified
    <bullet> 998.51, Infected postoperative seroma
    <bullet> 998.59, Other postoperative infection
    <bullet> 999.3, Infection complicating medical care, not elsewhere 
classified
    The APR DRG system found cases with one of the above infection 
codes to represent a higher level of severity. Our medical advisors 
examined cases in the current CMS DRG system in DRG 415 and found that 
the presence of one of these infection codes as a principal diagnosis 
led to significantly higher levels of severity. Charge data also 
support this conclusion. The following table illustrates our findings.

----------------------------------------------------------------------------------------------------------------
                                                                                       Average
          DRG                       Redefinition of DRG 415              Number of    length of       Average
                                                                           cases         stay         charges
----------------------------------------------------------------------------------------------------------------
415....................  O.R. Procedure for Infectious & Parasitic           52,458        14.03      $63,211.99
                          Diseases.
A......................  O.R. Procedure with Principal Diagnosis             33,077        15.90       74,964.28
                          Except Postoperative or Post-Traumatic
                          Infection.
B......................  O.R. Procedure with Principal Diagnosis of          19,381         10.8       43,154.68
                          Postoperative or Post-Traumatic Infection.
----------------------------------------------------------------------------------------------------------------

    As can be seen from the above table, cases in DRG 415 with a 
principal diagnosis except for postoperative or post-traumatic 
infection have average charges of $74,964.28. Cases with a principal 
diagnosis of postoperative or post[pi]traumatic infection have average 
charges of $43,154.68, or $31,809.60 less. Therefore, cases without one 
of the four infection codes, 958.3, 998.51, 998.59, and 999.3, have 
significantly higher severity levels than do cases that contain one of 
the four infection codes.
    Accordingly, we are deleting DRG 415 and divide the cases into two 
new DRGs as follows:
    <bullet> DRG 578, Infectious and Parasitic Diseases with O.R. 
Procedure
    <bullet> DRG 579, Postoperative or Post-traumatic Infection with 
O.R. Procedure
    Cases will be assigned to new DRG 578 if they were previously in 
DRG 415, but do not contain one of the following principal diagnosis 
codes:
    <bullet> 958.3, Posttraumatic wound infection, not elsewhere 
classified
    <bullet> 998.51, Infected postoperative seroma
    <bullet> 998.59, Other postoperative infection
    <bullet> 999.3, Infection complicating medical care, not elsewhere 
classified
    Cases will be assigned to DRG 579 if they were previously assigned 
to DRG 415 and contain one of the four principal diagnosis codes listed 
above.
g. Severe Sepsis
    Comment: As an alternative to the proposed CS DRGs, commenters 
recommended a new DRG to identify patients with severe sepsis 
associated with respiratory failure requiring mechanical ventilation. 
One commenter suggested using an approach to better recognize severity 
of illness that is similar to the change CMS implemented in the FYa2006 
final rule for major cardiovascular conditions (MCVs). This approach 
involved examining the MCVs which could be present as either a 
principal or secondary diagnosis leading to greater severity of illness 
and resource consumption. Another option suggested by two commenters 
involved modifying DRGa416 (Septicemia Age >17) so that it would be 
split based on mechanical ventilation greater than 96 hours (code 
96.72). The commenter stated that patients on mechanical ventilation 
for greater than 96 hours have a greater severity of illness than do 
those who are not on mechanical ventilation for 96 or more hours. 
Another commenter recommended considering mechanical ventilation as a 
pre-MDC DRG on the basis of the mechanical ventilation greater than 96 
hours procedure code (96.72) to better recognize patients with a 
greater severity level. This commenter also provided an option to add 
systemic infections (038.x) as an acceptable principal diagnosis for 
DRG 475 when reported in conjunction with mechanical ventilation or 
tracheostomy. One commenter maintained that the clinical reason to 
address a new DRG for severe sepsis is related to proper recognition 
and treatment for this group of patients with a greater degree of 
severity. This commenter stated clinicians are getting better at 
understanding the importance of early recognition and treatment. As 
sepsis presents with organ dysfunction, treatments must be prompt or 
mortality rapidly increases according to the commenter.
    Response: We analyzed data for patients in DRG 416 and 417 who are 
on mechanical ventilation for 96 or more hours. The following table 
shows our findings.

[[Page 47939]]



------------------------------------------------------------------------
                                               Average
             DRGs                Number of    length of       Average
                                   cases         stay         charges
------------------------------------------------------------------------
DRG 416.......................      272,603         7.45      $28,344.81
DRG 416 With Mechanical              10.369        15.55       94,994.49
 Ventilation 96 Hours (96.72).
DRG 416 Without Mechanical          262,234         7.13       25,709.42
 Ventilation 96 + Hours.......
DRG 417.......................           31         6.35       27,131.58
DRG 417 With Mechanical                   0            0               0
 Ventilation 96 + Hours.......
DRG 417 Without Mechanical               31         6.35       27,131.58
 Ventilation 96 + Hours.......
------------------------------------------------------------------------

    The data clearly show that DRG 416 septicemia patients who are on 
mechanical ventilation for 96 or more hours have a significantly 
greater severity of illness level and use greater resources than do 
other patients in DRG 416. Those patients on mechanical ventilation for 
96 or more hours had average charges of $94,994 compared to $25,709 for 
other patients in DRG 416. We found no cases in DRG 417 with patients 
who reported mechanical ventilation for 96 or more hours. Therefore, we 
agree with the commenters that patients in DRG 416 who are on long term 
mechanical ventilation of 96 or more hours have greater severity of 
illness and use significantly greater resources. These patients should 
be assigned to a separate DRG to better reflect their higher severity 
level. Because we have no data on patients in DRG 417, we are not 
modifying that DRG at this time. Because the data on DRG 416 are 
compelling, we are deleting DRG 416 and splitting these cases into two 
new DRGs based on whether or not the patient is on mechanical 
ventilation for 96 or more hours. These two new DRGs are as follows:
    <bullet> DRG 575 (Septicemia with Mechanical Ventilation 96 + Hours 
Age >17)
    <bullet> DRG 576 (Septicemia without Mechanical Ventilation 96 + 
Hours Age >17)
    Cases will be assigned to DRG 575 when they have a principal 
diagnosis from current DRG 416 and code 96.72 (Continuous mechanical 
ventilation for 96 consecutive hours or more). Cases will be assigned 
to DRG 576 when they have a principal diagnosis from current DRG 416 
and do not have code 96.72.
    We note that this DRG split is similar to the change we are making 
in MDC 4, for DRG 475 which was discussed earlier. The creation of 
these two new DRGs is distinct from the request to create a separate 
DRG for severe sepsis, which is discussed in section II.D.7. of this 
final rule.

D. Changes to Specific DRG Classifications

1. Pre-MDCs
a. Heart Transplant or Implant of Heart Assist System: Addition of 
Procedure to DRG 103
    Based on public comments, we are assigning an additional procedure 
code to DRG 103 (Heart Transplant or Implant of Heart Assist System) 
under the pre-MDCs. In the FY 2006 IPPS final rule (70 FR 47297), we 
addressed suggestions concerning the placement of codes for external 
heart assist systems in DRG 103. Although we found that charges 
associated with code 37.65 (Implant of external heart assist system) 
were more than $100,000 lower than the average charges for all cases in 
DRG 103, we found that there was a subgroup of patients who were 
comparable in resource use and length of stay to other cases included 
in DRG 103. Those patients received both the external heart assist 
device (code 37.65) and later had the device removed (code 37.64, 
Removal of heart assist system) after a lengthy period of rest and 
recovery of their native hearts. We note that commenters provided 
external data indicating that survival rates are improving for patients 
receiving more advanced versions of these devices. In addition, 
commenters provided information indicating that longer periods of 
support with the external heart assist device are improving patients' 
survival chances and opportunity to be discharged with their native 
heart. These data show a 50-percent survival rate with an average total 
length of stay of 43 days for all AMI heart recovery patients. On 
average, a surviving patient will receive 31 days of average support 
time followed by an additional 38 days in the hospital after the device 
is removed. Based on information considered from a later year than our 
MedPAR data, it is clear that patients weaned from the external heart 
assist system have longer lengths of stay and are very different from 
the average patients having this procedure that were in our FY 2004 
data.
    Given the newness of this procedure and the latest generation of 
this device, the Medicare charge data included a limited number of 
patients having the device implanted and removed. However, the Medicare 
charge data did support that patients receiving both an implant and 
removal of an external heart assist system in a single hospital stay 
had an average length of stay exceeding 50 days and average charges of 
$378,000 that are more comparable to patients in DRG 103 than DRG 525 
(Other Heart Assist System Implant). Accordingly, in FY 2006, we 
revised DRG 103 so that both implantation and removal of an external 
heart assist device in the same hospitalization would group to DRG 103.
    However, we did not consider those cases where an external heart 
assist system is switched during a hospitalization, and replaced with 
another external heart assist system, that is subsequently removed. The 
ICD-9-CM coding structure specifies that the replacement of the system 
be coded to 37.63 (Repair of heart assist system), and not to 37.65. 
These cases are assigned to DRG 525 not DRG 103 even though the cases 
are comparable in resources expended, length of stay, etc., to other 
patients where the device is implanted and explanted during the same 
hospital stay.
    Based on public comments, we believe that DRG 103 should be revised 
to take this situation into account. Therefore, we are reconfiguring 
DRG 103 in the following manner: Those patients who have both the 
replacement of an external heart assist system (code 37.63) and the 
explantation of that system (code 37.64) prior to the hospital 
discharge will be assigned to DRG 103.
    By making this change, Medicare will be making higher payments for 
patients who receive both a replacement and an explant of an external 
heart assist system during a single hospital stay. Our intent in making 
this change is to recognize the higher costs of patients who have a 
longer length of stay and are discharged alive with their native heart. 
Cases in which a heart transplant also occurs during the same 
hospitalization

[[Page 47940]]

episode will continue to be assigned to DRG 103.
b. Pancreas Transplants
    On July 1, 1999, we issued coverage policy that specified that 
pancreas transplants were only covered when performed simultaneously 
with or after a Medicare covered kidney transplant. A noncoverage 
policy for pancreas transplant remained in effect for patients who had 
not experienced end stage renal failure secondary to diabetes. On July 
29, 2005, we opened a national coverage determination (NCD) to 
determine whether pancreas transplant alone, that is, without a kidney 
transplant, is a reasonable and necessary service for Medicare 
beneficiaries. On April 26, 2006, we published the NCD for pancreas 
transplants on our Web site at: http://www.cms.hhs.gov/mcd/viewncd.asp?ncd_ id=260.3&-- version=3& basket=ncd%3A260%2E3% 3A3%3 
APancreas+Transplants. The NCD specifies the limited circumstances 
where the evidence is adequate to conclude that pancreas transplant 
alone is reasonable and necessary for Medicare beneficiaries.
    Medicare coverage of pancreas transplants alone is limited to 
transplants in those facilities that are Medicare-approved for kidney 
transplantation. A listing of approved transplant centers can be found 
at: http://www.cms.hhs.gov/ESRDGeneralInformation/02_Data.asp#TopOfPage. The CMS NCD includes several criteria for the coverage 
of pancreas transplants alone, including having a diagnosis of Type I 
diabetes. (We refer readers to section 260.3 of the Medicare National 
Coverage Manual for the entire language of the NCD.)
    Because we had issued a proposed NCD and a final NCD was not 
expected to be completed until late April 2006 (after completion of the 
proposed rule), we used the FY 2007 IPPS proposed rule to indicate the 
coding changes that we would make to DRG 513 (Pancreas Transplant) in 
FY 2007 if Medicare's final decision memorandum would have continued 
the program's national noncoverage of pancreas transplants (71 FR 
24030). In addition, we also indicated the conforming changes that we 
would make to the MCE ``NonCovered Procedure'' edit if Medicare 
coverage was established for pancreas transplants alone. That 
discussion was included in section II.D.6. of the preamble of the 
proposed rule (71 FR 24039), which described proposed changes to the 
MCE.
    Because the April 2006 Medicare final decision memorandum stated 
that the performance of pancreas transplants alone is reasonable and 
necessary for Medicare beneficiaries in limited circumstances, the 
logic for the determination of patient case assignment to DRG 513 in 
the FY 2006 GROUPER program needs to be modified to remove the 
requirement that patients also have kidney disease. Therefore, because 
the NCD was finalized, we are modifying DRG 513 to consist of the 
following logic: List A (the diabetes codes) of the required principal 
or secondary diagnosis codes remains the same, as does the required 
operating room procedures (codes 52.80 (Pancreatic transplant NOS), and 
52.82, (Homotransplant of pancreas)). List B is removed from the logic; 
the following codes will no longer be required as a principal or 
secondary diagnosis:
    <bullet> 403.01, Hypertensive kidney disease, malignant, with 
chronic kidney disease
    <bullet> 403.11, Hypertensive kidney disease, benign, with chronic 
kidney disease
    <bullet> 403.91, Hypertensive kidney disease, unspecified, with 
chronic kidney disease
    <bullet> 404.02, Hypertensive heart and kidney disease, malignant, 
with chronic kidney disease
    <bullet> 404.03, Hypertensive heart and kidney disease, malignant, 
with heart failure and chronic kidney disease
    <bullet> 404.12, Hypertensive heart and kidney disease, benign, 
with chronic kidney disease
    <bullet> 404.13, Hypertensive heart and kidney disease, benign, 
with heart failure and chronic kidney disease
    <bullet> 404.92, Hypertensive heart and kidney disease, 
unspecified, with chronic kidney disease
    <bullet> 404.93, Hypertensive heart and kidney disease, 
unspecified, with heart failure and chronic kidney disease
    <bullet> 585.1, Chronic kidney disease, Stage I
    <bullet> 585.2, Chronic kidney disease, Stage II (mild)
    <bullet> 585.3, Chronic kidney disease, Stage III (moderate)
    <bullet> 585.4, Chronic kidney disease, Stage IV (severe)
    <bullet> 585.5, Chronic kidney disease, Stage V
    <bullet> 585.6, End stage renal disease
    <bullet> 585.9, Chronic kidney disease, unspecified
    <bullet> V42.0, Organ or tissue replaced by transplant, kidney
    <bullet> V43.89, Organ or tissue replaced by other means, other 
organ or tissue, other
    We note that DRG 513 remains in the pre-MDC hierarchy.
    Comment: Five commenters supported the proposed coding changes to 
DRG 513 and the MCE.
    Response: We appreciate the support of the commenters. Accordingly, 
as the NCD for pancreas transplants alone was approved, in this final 
rule, we are adopting the changes as described above to DRG 513 and the 
MCE logic.
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Implantation of Intracranial Neurostimulator System for Deep Brain 
Stimulation (DBS)
    Deep-brain stimulation (DBS) is designed to deliver electrical 
stimulation to the subthalamic nucleus or internal globus pallidus to 
ameliorate symptoms caused by abnormal neurotransmitter levels that 
lead to abnormal cell-to-cell electrical impulses in Parkinson's 
disease and essential tremor. DBS implants for essential tremor are 
unilateral, with neurostimulation leads on one side of the brain. DBS 
implants for Parkinson's disease are bilateral, requiring implantation 
of neurostimulation leads in both the left and right sides of the 
brain.
    The implantation of a full DBS system requires two types of 
procedures. First, surgeons implant leads containing electrodes into 
the targeted sections of the brain where neurostimulation therapy is to 
be delivered. Second, a neurostimulator pulse generator is implanted in 
the pectoral region and extensions from the neurostimulator pulse 
generator are then tunneled under the skin along the neck and connected 
with the proximal ends of the leads implanted in the brain. Hospitals 
stage the two procedures required for a full-system DBS implant.
    In FY 2005, to better account for these two types of procedures, we 
revised procedure code 02.93 (Implantation or replacement of 
intracranial neurostimulator lead(s)) for the lead placement and 
created three new procedures codes for the pulse generator: 86.94 
(Insertion or replacement of single array neurostimulator pulse 
generator); 86.95 (Insertion or replacement of dual array 
neurostimulator pulse generator); and 86.96 (Insertion or replacement 
of other neurostimulator pulse generator). We published the new 
procedure codes and revised procedure code titles in Tables 6B and 6F 
of the FY 2005 IPPS final rule (69 FR 49627 and 49641).
    In FY 2006, we made further refinements to the pulse generator 
codes to identify rechargeable pulse generators. We published the new 
procedure codes and revised procedure code titles in Tables 6B and 6F 
of the FY 2006 IPPS final rule (70 FR 47637

[[Page 47941]]

and 47639). The current list of pulse generators codes are:
    <bullet> 86.94 (Insertion or replacement of single array 
neurostimulator pulse generator, not specified as rechargeable);
    <bullet> 86.95 (Insertion or replacement of dual array 
neurostimulator pulse generator, not specified as rechargeable);
    <bullet> 86.96 (Insertion or replacement of other neurostimulator 
pulse generator);
    <bullet> 86.97 (Insertion or replacement of single array 
neurostimulator rechargeable generator); and
    <bullet> 86.98 (Insertion or replacement of dual array 
neurostimulator rechargeable generator).
    Kinetra[supreg] is an implantable dual array neurostimulator pulse 
generator that is approved for a new technology add-on payment through 
FYA2006. For more information about the new technology add-on payment, 
please refer to section II.G.3.a. of this preamble.
    Medtronic, the manufacturer of Kinetra[supreg], argues that the new 
technology add-on payment provision is designed to recognize the higher 
costs of new medical innovations for the initial period the technology 
is available on the market, and until the associated costs and charges 
related to the technology are available in the MedPAR database and can 
be used to recalibrate the DRG weights. Medtronic also argues that, 
once a technology is no longer eligible for new technology add-on 
payments, the new technology add-on payment provision is designed to 
support the reclassification of the technology to other clinically 
coherent DRGs with comparable resource costs.
    With the conclusion of the new technology add-on payment, Medtronic 
is concerned that Kinetra[supreg] will be inadequately paid in DRG 1 
(Craniotomy Age >17 With CC) or DRG 2 (Craniotomy Age >17 Without CC) 
under MDC 1. Medtronic recommended that CMS reassign the full-system 
Kinetra[supreg] implants to DRG 543 (Craniotomy with Implant of Chemo 
Agent or Acute Complex CNS Principal Diagnosis) under MDC 1. To 
accommodate this recommendation, procedure codes 02.93 and 86.95 would 
have to be reassigned to DRG 543 and the title for DRG 543 would have 
to be revised to ``Craniotomy with Implantation of Major Device or 
Acute Complex CNS Principal Diagnosis.'' Medtronic argued that DRG 543 
would be a ``clinically-consistent DRG that more appropriately reflects 
the resource utilization associated with full-system [deep brain 
stimulation] procedures.'' Medtronic also emphasized that its proposal 
would only apply to full-system Kinetra[supreg] implants when both the 
leads and generators are implanted during a single inpatient stay and 
procedure codes 02.93 and 86.95 both appear on the claim. Medtronic 
believes the current DRG assignment is appropriate for partial system 
implants.
    Medtronic provided an analysis of FY 2004 MedPAR data. Procedure 
code 86.95 was not created until FY 2005 so Medtronic used procedure 
codes 02.93 and 86.09 (Other incision of skin and subcutaneous tissue) 
to identify the full system. It identified 193 cases assigned to DRG 1 
with average charges of approximately $69,155, and 532 cases assigned 
to DRG 2 with average charges of approximately $56,113.
    In the FY 2007 IPPS proposed rule we indicated that we have 
reviewed the latest data for the full-system DBS implants assigned to 
DRG 1 or DRG 2 in the FY 2005 MedPAR file. We identified cases with 
procedure codes 02.93 and 86.95 for full-system dual array cases. We 
also identified cases with reported codes 02.93 and 86.96 for those 
full-system cases where the type of pulse generator was not specified. 
The following table displays our results:

------------------------------------------------------------------------
                                               Average
              DRG                Number of    length of       Average
                                   cases         stay         charges
------------------------------------------------------------------------
DRG 1--All Cases..............       23,037         9.61         $55,494
DRG 1--Cases with 02.93 and              51         5.18          73,020
 86.95 (Kinetra[supreg])......
DRG 1--Cases with 02.93 and             101         4.86          53,356
 86.96 (Unspecified)..........
DRG 2--All Cases..............        9,707         4.41          32,791
DRG 2--Cases with 02.93 and             146         2.40          59,414
 86.95 (Kinetra[supreg])......
DRG 2--Cases with 02.93 and             249         2.12          47,047
 86.96 (Unspecified)..........
DRG 543--All cases............        5,192        11.71          71,138
------------------------------------------------------------------------

    These data showed that approximately one-quarter of the full-system 
dual array neurostimulator pulse generator cases are assigned to DRG 1 
and approximately three-quarters of these cases are assigned to DRG 2. 
In both DRGs, the average length of stay was shorter for the full-
system array neurostimulator pulse generator cases than for all other 
cases. However, the average charges for the full-system dual array 
neurostimulator pulse generator cases are approximately $18,000 and 
$27,000 higher than the average charges for DRGs 1 and 2, respectively. 
The average charges for these cases in DRG 1 are comparable to those 
for DRG 543. However, the more commonly occurring cases in DRG 2 have 
average charges that are less than those in DRG 543 by nearly $12,000. 
We reviewed all of the procedures that will result in a case being 
assigned to DRGs 1 and 2. Unlike the full-system DBS implants, we 
believe for most of the cases assigned to these DRGs, there will be no 
device cost to the hospital. For this reason, we believe the higher 
average charges and lower length of stay for cases involving full-
system dual array neurostimulator pulse generators are likely accounted 
for by the cost of the device. While it is possible that the cost of 
the device itself will make the full-system DBS implants more expensive 
than other cases in the DRG, the hospital's charge markup may also 
explain the higher charges but lower average length of stay. As 
indicated in section II.G.3.a. of this final rule, the national average 
CCR for medical equipment and supplies is approximately 34 percent. 
Thus, the actual cost to the hospital of the case including the full-
system dual array neurostimulator pulse generator may be much lower 
than the charges would suggest.
    With respect to whether the cost of the technology itself, absent a 
charge markup, makes the case more expensive, in the FY 2007 IPPS 
proposed rule, we stated that we intended to address this issue as we 
make further refinements to the DRG system to address severity of 
illness as discussed in section II.C. of this preamble.
    Comment: Several commenters opposed CMS' proposed decision to 
retain the current assignment of implantable dual array neurostimulator 
pulse generator cases in DRGs 1 and 2. Several commenters stated that 
CMS should recognize the higher resources associated with this 
technology and reassign implantable dual array neurostimulator pulse 
generator cases to DRG 543. Two commenters disagreed

[[Page 47942]]

with CMS' statements that markups associated with Kinetra[supreg] may 
overstate the total charges of the implant procedure. Medtronic 
submitted information on charge compression in which the company 
contends that it conclusively finds the hospital charge markups for 
implantable devices are in fact significantly lower than for other, 
lower cost supplies and equipment. Medtronic and one other commenter 
argued that the total charges found in the FY 2005 MedPAR data 
associated with implantable dual array neurostimulator pulse generator 
procedures may be understated relative to other procedures in DRG 1, 
DRG 2 and DRG 543 and that reassignment of this technology to DRG 543 
is fully warranted. The commenters stated that the implementation of 
the CS DRGs should be deferred to at least FY 2008 and not be a factor 
in CMS' decision to make DRG reassignments this year.
    Response: With regard to the issue of charge compression, we are 
studying this issue in our effort to improve payment accuracy in the 
IPPS. The average charges for the 51 cases in DRG 1 where the patient 
received a dual array neurostimulator are $17,426 or 31 percent higher 
than the rest of the cases in DRG 1. The average charges are comparable 
to those for DRG 543 ($73,020 for dual array neurostimulator cases and 
$71,138 for DRG 543).
    The average charges for the 146 cases in DRG 2 are $26,623 or 81 
percent higher than the rest of the cases in DRG 2 and only $12,000 
less than the average charges for DRG 543. Based on these data, we 
believe that the dual array neurostimulator cases will be more 
accurately paid in DRG 543 than DRGs 1 and 2. We will be implementing 
this change to the DRG assignment for the full-system dual array 
neurostimulator cases for FY 2007. Implantable dual array 
neurostimulator pulse generator procedure cases reported with ICD-9-CM 
procedure codes 02.93 and 86.95 will be reassigned to DRG 543. We are 
changing the DRG title for DRG 543 to ``Craniotomy With Major Device 
Implant or Acute Complex CNS Principal Diagnosis.''
b. Carotid Artery Stents
    Background: Stroke is the third leading cause of death in the 
United States and the leading cause of serious, long-term disability. 
Approximately 70 percent of all strokes occur in people age 65 and 
older. The carotid artery, located in the neck, is the principal artery 
supplying the head and neck with blood. Accumulation of plaque in the 
carotid artery can lead to stroke either by decreasing the blood flow 
to the brain or by the plaque breaking free and lodging in the brain or 
other arteries leading to the head. The percutaneous transluminal 
angioplasty (PTA) procedure involves inflating a balloon-like device in 
the narrowed section of the carotid artery to reopen the vessel. A 
carotid stent is then deployed in the artery to prevent the vessel from 
closing or restenosing. A distal filter device (embolic protection 
device) may also be present, which is intended to prevent pieces of 
plaque from entering the bloodstream.
    Effective July 1, 2001, Medicare covered PTA of the carotid artery 
concurrent with carotid stent placement when furnished in accordance 
with the FDA-approved protocols governing Category B Investigational 
Device Exemption (IDE) clinical trials. PTA of the carotid artery, when 
provided solely for the purpose of carotid artery dilation concurrent 
with carotid stent placement, was considered to be a reasonable and 
necessary service only when provided in the context of such clinical 
trials and, therefore, was considered a covered service for the 
purposes of those trials. Performance of PTA in the carotid artery when 
used to treat obstructive lesions outside of approved protocols 
governing Category B IDE clinical trials remained noncovered until the 
release of the October 12, 2004 NCD for PTA of the carotid artery in 
post-approval studies. This decision extended coverage of PTA in the 
carotid artery concurrent with placement of an FDA-approved carotid 
stent for an FDA-approved indication when furnished in accordance with 
the FDA-approved protocols governing post-approval studies. On March 
17, 2005, CMS released an NCD that extended coverage to patients at 
high risk for carotid endarterectomy (CEA) who also have symptomatic 
carotid artery stenosis >=70 percent. Procedures must be performed in 
CMS-approved facilities and with FDA-approved carotid artery stent(s) 
with distal embolic protection. (Section 20.7 of the NCD manual which 
discusses this decision may be viewed at the Web site: http://www.cms.hhs.gov/manuals/downloads/ncd103c1_Part1.pdf.
    Placement of a carotid artery stent in patients who have had a 
disabling stroke (modified Rankin scale >=3) is excluded from coverage.
    We established codes for carotid artery stent procedures for use 
with discharges occurring on or after October 1, 2004, for inpatients 
who were enrolled in an FDA-approved clinical trial and who were using 
on-label FDA-approved stents and embolic protection devices. These 
codes are as follows:
    <bullet> 00.61 (Percutaneous angioplasty or atherectomy of 
precerebral (extracranial vessel(s)); and
    <bullet> 00.63 (Percutaneous insertion of carotid artery stent(s)).
    We assigned procedure code 00.61 to four MDCs and seven DRGs. The 
most likely clinical scenario is that in which cases are assigned to 
MDC 1 (Diseases and Disorders of the Nervous System) in DRGs 533 
(Extracranial Procedures with CC) and 534 (Extracranial Procedures 
without CC). Other DRG assignments can be found in Table 6B of the 
Addendum to the FY 2005 IPPS final rule (69 FR 49624). Code 00.63 is 
not considered a procedure code itself and should be used in 
combination with code 00.61.
    Based on the results of evaluation of PTA and carotid stents for 
our FY 2006 final rule (70 FR 47300, August 12, 2005), we did not find 
sufficient evidence to warrant a DRG change at that time.
    We again reviewed the PTA and insertion of a carotid stent(s) for 
the FY 2007 proposed rule, as manufacturer representatives suggested 
that we assign all carotid stenting cases to DRG 533 only, bypassing 
DRG 534. As we indicated in the FY 2007 IPPS proposed rule (71 FR 
24032), we reviewed the FY 2005 MedPAR data on all cases in DRGs 533 
and 534 and on those cases containing code 00.61 in combination with 
00.63. The following table displays those results:

------------------------------------------------------------------------
                                               Average
              DRG                Number of    length of       Average
                                   cases     stay (Days)      charges
------------------------------------------------------------------------
DRG 533--All cases............       44,031         3.65         $26,376
DRG 533 with codes 00.61 and          2,400         2.94          33,344
 00.63 reported...............
DRG 533 with code 00.61 and              99         5.95          46,591
 without 00.63................
DRG 534--All cases............       40,381         1.72          17,196
DRG 534 with codes 00.61 and          2,056         1.52          25,000
 00.63 reported...............

[[Page 47943]]

 
DRG 534 with code 00.61 and              55         2.31          27,895
 without 00.63................
------------------------------------------------------------------------

    We found that 5.5 and 5.1 percent of the cases in DRGs 533 and 534, 
respectively, involved placement of a carotid artery stent. In DRG 533, 
the average length of stay was 19.4 percent shorter for the carotid 
stenting cases than for all other cases. In DRG 534, the average length 
of stay was 11.6 percent shorter for the carotid stenting cases than 
for all other cases. However, the average charges for the carotid stent 
cases were higher by $6,968 in DRG 533 and $7,804 in DRG 534. We 
reviewed all of the procedures that would result in a case being 
assigned to DRGs 533 and 534. Unlike the carotid artery stent 
placements, we believe that, for most of the other cases assigned to 
these DRGs, there will be no device cost to the hospital. For this 
reason, we believe the higher average charges and lower length of stay 
for the cases involving carotid artery stents could be accounted for by 
the cost of the device. We discussed the possibility that the cost of 
the device itself makes the stent cases more expensive than other cases 
in the DRG, and that the hospital's charge markup may also explain the 
higher charges but lower average length of stay. We also suggested that 
we intended to address this issue as we make further refinements to the 
CS DRG system previously described. The use of a carotid stent or 
stents may increase complexity and resource use even though the patient 
is not necessarily more severely ill. We indicated that we believed 
that the CS DRG system we proposed would need to be further refined to 
assign cases based on complexity as well as severity to account for 
technologies such as carotid stents that increase costs. For this 
reason, we did not propose a change to the current DRG assignment for 
these cases.
    Comment: More than a dozen commenters addressed this topic. State 
hospital associations, in particular, were unanimous in their 
recommendation that all carotid stenting cases should immediately be 
assigned only to DRG 533, bypassing DRG 534 entirely. The commenters 
suggested this solution to increase payments to hospitals in order that 
the higher costs associated with carotid stents are recognized within 
the existing DRG system.
    Response: We are opposed to this suggestion. The DRGs comprise a 
native structure of the types of patients within each DRG category. 
Further, this structure is based on an organizing principle. For 
example, cases in DRGs 533 and 534 are organized on the principle of 
surgical approach (extracranial procedures) as well as the presence or 
absence of CCs. To ignore the structure of the DRG solely for the 
purpose of increasing payment would set an unwelcome precedent for 
defining all of the other DRGs in the system.
    Comment: Several commenters mentioned that, while CMS suggested 
that the higher average charges and lower lengths of stay for cases 
involving carotid artery stents are likely accounted for by the cost of 
the device, CMS provided no evidence to support this assertion.
    Response: The average length of stay for patients in DRGs 533 and 
534 with the placement of carotid stent(s) are 19.4 and 11.6 percent 
shorter than the other patients assigned to DRGs 533 and 534, 
respectively. Therefore, a long length of stay is not the reason for 
the higher average charges. We based our assertion on the contribution 
of the cost of the device to the total cost of the patients in these 
DRGs compared to other cases in the DRG with longer lengths of stay. We 
note that the next comment suggests that our analysis is correct that 
the higher charges for the carotid artery stent cases relative to other 
cases in the DRG are, in part, associated with higher supply costs.
    Comment: One commenter suggested that CMS create a new pair of DRGs 
with and without MCVs until the adequacy of payment under the severity 
adjustment methodology is fully assessed. This commenter noted that, 
while length of stay and operating room costs are lower for carotid 
stenting, supply and radiology charges associated with the stent and 
the angiography are higher, resulting in higher overall costs for 
carotid stenting.
    Response: While we recognize the creativity of this approach, we 
note that the MCVs are applicable to cases in MDC 5 (Diseases and 
Disorders of the Circulatory System), while DRGs 533 and 534 are in MDC 
1 (Diseases and Disorders of the Nervous System). Such an approach for 
MDC 1 might have merit, but we would want to evaluate the entire MDC 
thoroughly before creating such a list of complicating diagnoses. We 
will further consider this concept as we evaluate severity DRG systems 
for adoption in FY 2008.
    Comment: One commenter, while urging CMS to reconsider our decision 
not to assign all carotid cases to DRG 533, noted that the current 
National Coverage Determination on CAS [Carotid Artery Stenting] very 
clearly states that only those patients who are at high risk for [open] 
surgery due to the presence of a detailed list of complications or 
comorbidities are eligible for carotid artery stenting. Therefore, by 
CMS' own characterization, all patients undergoing carotid artery 
stenting have complications and comorbidities and should be assigned to 
DRG 533.
    Response: This assumption is theoretically correct. However, the 
detailed list of comorbidities or anatomical risk factors that are 
required to support the surgeon's decision to perform carotid stenting 
instead of a carotid endarterectomy is not the same as the CMS list of 
CCs. For example, amaurosis fugax, code 362.34 (Transient arterial 
occlusion) is recognized as a risk factor which would justify carotid 
stenting, but is not recognized by the CMS GROUPER as a diagnosis 
defined as a CC.
    Comment: Several commenters suggested that CMS create two new DRGs 
for the carotid stent cases.
    Response: We note that the number of procedures has increased from 
the data reported in the FY 2006 IPPS final rule (70 FR 47300), thus 
indicating acceptance of this procedure by the medical community as a 
main-stream surgical alternative. In FY 2006, as the specific codes for 
carotid stenting had only been in use since October 1, 2004, we used 
the existing codes 39.50 (Angioplasty or atherectomy of other 
noncoronary vessel(s)) and 39.90 (Insertion of non-drug-eluting 
peripheral vessel stent(s)), in combination with principal diagnosis 
code 433.10 (Occlusion and stenosis of carotid artery, without mention 
of cerebral infarction) as a proxy for the number of cases involved in 
clinical trials. In DRG 533, we had 1,586 cases with the proxy codes 
reported, and in DRG 534, there were 1,397 cases. In FY 2005, the 
patients represented 3.5 percent and 3.3 percent of all cases in DRGs 
533 and 534, respectively. That figure has now climbed to 2,400 cases

[[Page 47944]]

and 2,056 cases, and 5.5 percent and 5.1 percent, respectively.
    In addition, the difference in the average charges are 26 percent 
higher for carotid artery stent cases in DRG 533 than for the average 
charges in all cases in that DRG, and 45 percent higher using the same 
parameters for DRG 534. We believe these data are compelling enough to 
warrant creation of a new DRG.
    Accordingly, we are creating DRG 583 (Carotid Artery Stent 
Procedure). This DRG will be located in MDC 1, and will be 
hierarchically ordered above DRGs 533 and 534. DRG 583 will contain two 
procedure codes. Code 00.61 will determine the DRG, and will be 
combined with code 00.63. Both codes must be reported in order for 
cases to be assigned to this DRG.
    We are not splitting this DRG based on the presence or absence of a 
CC as suggested by the commenters. One criterion for splitting a DRG 
based on the presence or the absence of a CC is that it must have an 
impact of at least $40 million. In this situation, the overall average 
of the charges for all cases in DRGs 533 and 534 is $30,193. We then 
subtracted the actual average charges for only the carotid stent cases 
in both DRGs 533 and 534, and multiplied that figure by the actual 
number of cases. For DRG 533 and DRG 534, we estimate an impact of 
approximately $10 million each. Added together, the total impact would 
be $20 million, falling short of our threshold of a $40 million impact 
to create a CC/non-CC split. Therefore, we are not creating a CC/non-CC 
split in the DRG for carotid artery stenting at this time.
    We reiterate that coverage of the carotid artery stent procedure is 
limited to patients at risk of developing a stroke due to narrowing or 
stenosis of the carotid artery. Diagnosis code 433.10 (Occlusion and 
stenosis of carotid artery without mention of cerebral infarction) 
should be used to identify the site of the procedure in the carotid 
artery. If it is necessary to identify bilateral occlusion or stenosis, 
diagnosis code 433.30 (Occlusion and stenosis of multiple and bilateral 
arteries without mention of cerebral infarction) may also be used. 
These codes should be used together, as code 433.30 contains arterial 
sites that are not currently covered for Medicare patients. Reporting 
of code 433.30 alone will cause the case to fail the editing system at 
the fiscal intermediary, and the case could be denied.
    Inclusion of the fifth digit of ``1'' (with cerebral infarction) 
with either 433.1x or 433.3x will cause the claim to be rejected.
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Insertion of Epicardial Leads for Defibrillator Devices
    As we indicated in the FY 2007 IPPS proposed rule (71 FR 24033), we 
received a comment indicating that a change in coding advice for the 
insertion of epicardial leads for CRT-D defibrillator devices affects 
DRG assignment. The commenter noted that the Third Quarter 2005 issue 
of the American Hospital Association's publication Coding Clinic for 
ICD-9-CM instructs coders to assign code 37.74 (Insertion or 
replacement of epicardial lead [electrode] into atrium) for pacemaker 
or defibrillator leads inserted through use of a thoracotomy into the 
epicardium. While the use of code 37.74 is standard coding practice for 
pacemakers, the advice is new for defibrillators. This coding advice 
was discussed at the ICD-9-CM Coordination and Maintenance Committee 
meeting held on September 29 and 30, 2005. Participants at the 
Committee meeting proposed modifications for the code category 37.7 
(insertion, revision, replacement, and removal of pacemaker leads; 
insertion of temporary pacemaker system; and revision of cardiac device 
pocket). These modifications involved expanding the category so that 
the codes for leads would no longer be restricted to pacemakers. This 
change would guide coders to use code 37.74 for the insertion of 
epicardial leads for both defibrillators and pacemakers for the ICD-9-
CM and will become effective on October 1, 2006.
    The commenter indicated that this coding advice would restrict some 
defibrillator cases from being assigned to the defibrillator DRGs. 
Specifically, the commenter expressed concerns about the DRG logic for 
the following DRGs:
    <bullet> DRG 515 (Cardiac Defibrillator Implant without Cardiac 
Catheter)
    <bullet> DRG 535 (Cardiac Defibrillator Implant with Cardiac 
Catheter with AMI/Heart Failure/Shock)
    <bullet> DRG 536 (Cardiac Defibrillator Implant with Cardiac 
Catheter without AMI/Heart Failure/Shock)
    Cases are assigned to one of these three DRGs when a total 
defibrillator system, including both the device and one or more leads, 
is implanted. The implant could be represented by the ICD-9-CM codes 
for the total system, that is, code 00.51 (Implantation of cardiac 
resynchronization defibrillator, total system [CRT-D]) or code 37.94 
(Implantation or replacement of automatic cardioverter/defibrillator, 
total system [AICD]). Cases can also be assigned to DRGs 515, 535, and 
536 when a combination of a device and a lead code is reported. The 
following combinations of defibrillator device and lead codes are 
present in the current DRG logic:
    <bullet> 00.52 (Implantation or replacement of transvenous lead 
[electrode] into left ventricular coronary venous system) and 00.54 
(Implantation or replacement of cardiac resynchronization 
defibrillator, pulse generator device only [CRT-D])
    <bullet> 37.95 (Implantation of automatic cardioverter/
defibrillator lead(s) only) and 00.54 (Implantation or replacement of 
cardiac resynchronization defibrillator, pulse generator device only 
[CRT-D])
    <bullet> 37.95 (Implantation of automatic cardioverter/
defibrillator lead(s) only) and 37.96 (Implantation of automatic 
cardioverter/defibrillator pulse generator only)
    <bullet> 37.97 (Replacement of automatic cardioverter/defibrillator 
lead(s) only) and 00.54 (Implantation or replacement of cardiac 
resynchronization defibrillator, pulse generator device only [CRT-D])
    <bullet> 37.97 (Replacement of automatic cardioverter/defibrillator 
lead(s) only) and 37.98 (Replacement of automatic cardioverter/
defibrillator pulse generator only)
    A DRG logic issue has arisen concerning the instruction to use code 
37.74 for epicardial leads inserted with CRT-D defibrillators. The new 
combination of a defibrillator device with an epicardial lead (code 
37.74) is not included in DRGs 515, 535, and 536. The commenter 
recommended that the following combinations be added to DRGs 515, 535, 
and 536 so that all types of defibrillator device and lead combinations 
would be included: code 37.74 and code 00.54; code 37.74 and code 
37.96; and code 37.74 and code 37.98.
    We agree that these three combinations should be added to the list 
of combination codes included in DRGs 515, 535, and 536. This change 
would result in all combinations of defibrillator devices and leads 
being assigned to one of the defibrillator DRGs. Therefore, in the FY 
2007 IPPS proposed rule, we proposed to add these three combinations to 
the list of procedure combinations under DRGs 515, 535, and 536.
    Comment: A number of commenters supported adding the new 
combinations of defibrillator devices with the epicardial leads to DRGs 
515, 535, and 536. One commenter stated that this change would bring 
the DRGs into

[[Page 47945]]

alignment with the change in coding advice to assign code 37.74 in 
conjunction with implantation of CRT-D defibrillators.
    Response: We appreciate the support of commenters and agree that 
this change would bring the DRGs into alignment with the change in 
coding advice.
    In this final rule, we are adding the following combinations of 
device and lead codes to DRGs 515, 535, and 536: code 37.74 and code 
00.54; code 37.74 and code 37.96; and code 37.74 and code 37.98.
b. Application of Major Cardiovascular Diagnoses (MCVs) List to 
Defibrillator DRGs
    In the FY 2006 IPPS final rule (70 FR 47289 and 47474 through 
47479), we addressed a comment we had received in response to the FY 
2006 proposed rule which noted that section 507(c) of Pub. L. 108-173 
required MedPAC to conduct a study to determine how the DRG system 
should be updated to better reflect the cost of delivering care in a 
hospital setting. The commenter noted that MedPAC reported that the 
``cardiac surgery DRGs have high relative profitability ratios.'' While 
the commenter acknowledged that it may take time to conduct and 
complete a thorough evaluation of the MedPAC payment recommendations 
for all DRGs, the commenter strongly encouraged CMS to revise the 
cardiac DRGs through patient severity refinement as part of the IPPS 
final rule effective for FY 2006.
    In response to this comment, we performed an extensive review of 
the cardiovascular DRGs in MDC 5, particularly those DRGs that were 
commonly billed by specialty hospitals. We observed that there was some 
overlap between the lists of cardiovascular complications and complex 
diagnoses and that these lists were already used to segregate patients 
into DRGs that used greater resources. Because the hospital industry 
already was familiar with the major complication and complex diagnosis 
lists used within the cardiovascular DRGs, we began our analysis with 
these two overlapping lists.
    The two lists were originally developed for the current DRG system 
because they contained conditions that could have an impact on the 
resources needed to treat a patient with cardiovascular complications. 
Many of the conditions were cardiovascular diagnoses and, therefore, 
would be classified to MDC 5. However, we determined that some of the 
diagnoses were not cardiovascular, but would still have an impact on a 
patient with cardiovascular complications. The conditions that were not 
cardiovascular diagnoses were not assigned to MDC 5 if they were the 
principal diagnosis.
    We reviewed the conditions on the two overlapping lists and 
identified conditions that we believed would lead to a more complicated 
patient stay requiring greater resource use. We referred to these 
conditions as ``major cardiovascular conditions (MCVs).'' The MCVs 
could be present as either a principal diagnosis or a secondary 
diagnosis and lead to greater resource consumption. The complete list 
of MCVs was published in the FY 2006 IPPS final rule (70 FR 47477 and 
47478).
    In the FY 2006 IPPS final rule, we also adopted new DRGs 547 
through 558, effective October 1, 2005 (70 FR 47475 and 47476). 
However, we emphasized that the refinements to the DRGs were being 
taken as an interim step to better recognize severity in the DRG system 
for FY 2006 until we could complete a more comprehensive analysis of 
the APR DRG system and the CC list as part of a complete analysis of 
the MedPAC recommendations that we planned to perform for FY 2007 (and 
which was addressed in section II.C. of the preamble of the FY 2007 
proposed rule).
    Since publication of the FY 2006 IPPS final rule, we have received 
a question from a commenter as to why we did not apply the MCV list to 
the following defibrillator DRGs: 515, 535, and 536. The commenter 
noted that the pacemaker DRGs were revised using the MCV list, but the 
defibrillator DRGs were not.
    As noted above, for FY 2006, we created new DRGs 546 through 558 to 
identify cases with more costly and severely ill patients as an interim 
step to evaluating severity DRGs. We analyzed for the first time last 
year data on cases within MDC 5 and presented data that showed 
significant difference for patients in certain DRGs based on the 
presence or absence of an MCV. This split did not work for the 
defibrillator DRGs, as we could not identify groups with significantly 
different resource use. For instance, splitting DRG 515 based on the 
presence of an MCV would lead to two groups with differences in charges 
of only $3,430 ($89,341 for those with an MCV and $85,911 for those 
without an MCV). In the data we displayed in the FY 2006 IPPS final 
rule, the differences for DRGs selected for an MCV split ranged from 
$10,319 to $21,035. Splitting DRG 515 based on an MCV would produce a 
difference in charges of only 10.1 percent as compared to differences 
of 28.7 to 47.7 percent for DRGs 547 through 558. Therefore, the data 
did not support including DRG 515 among those split based on the 
presence or absence of an MCV. Similar results were found when DRG 536 
was split by an MCV. There was only an 8.1 percent difference in 
charges between the two groups. We also identified other problems with 
splitting DRG 535 based on the presence or absence of an MCV. Some of 
the codes a claim must include for the case to be grouped to DRG 535 
under our current system are also codes on the MCV list. Therefore, 
applying the MCV list to DRG 535 would result in all cases being 
assigned to the DRG with an MCV and none to the DRG without an MCV. For 
these reasons, we did not subdivide DRGs 515, 535, and 536 based on the 
presence or absence of an MCV.
    In the FY 2007 IPPS proposed rule, we indicated that we had decided 
not to propose additional refinements of the DRGs based on MCVs for FY 
2007 because of our efforts to propose a broader refinement of the DRG 
system, as discussed in detail in section II.C. of the proposed rule. 
However, as discussed further in section II.C. of the preamble of the 
proposed rule, we solicited comments on whether it would be appropriate 
in FY 2007 to apply a clinical severity concept to an expanded set of 
DRGs, similar to the approach we used in FY 2006 to refine cardiac DRGs 
based on the presence or absence of an MCV.
    Comment: Commenters agreed with the recommendation that we not 
subdivide DRGs 515, 535, and 536 based on MCV. However, one commenter 
expressed concerns about how the current DRGs were achieving their goal 
of identifying patients with greater severity of illness. Other 
commenters opposed the proposal to delay refining defibrillator DRGs 
based on MCVs. These commenters believed it was appropriate for CMS to 
apply a clinical severity concept similar to the approach used in FY 
2006 to refine cardiac DRGs to an expanded set of DRGS (for example, 
defibrillator DRGs) based on the presence or absence of an MCV.
    Response: We agree with the commenters who suggested that our goal 
should be to reform the Medicare DRG system to develop a better means 
of capturing severity of illness and complexity. As discussed in 
section II.C. of the preamble of the proposed rule, we solicited 
comments on whether it would be appropriate in FY 2007 to apply a 
clinical severity concept to an expanded set of DRGs, similar to the 
approach we used in FY 2006 to refine cardiac DRGs based on the 
presence or absence of an MCV. As discussed in section II.C.7., we are 
implementing revisions to the

[[Page 47946]]

current DRGs to better recognize severity of illness. However, the 
analysis we have performed to this point does not support splitting 
defibrillator DRGs based on the presence or absence of an MCV. As 
stated earlier, simply applying the MCVs to the defibrillator DRGs in 
DRGs 515, 535, and 536 would not lead to significant improvements for 
DRG 515. Applying the MCV list to DRG 535 would result in all cases 
being assigned to the DRG with an MCV and none to the DRG without an 
MCV. For these reasons, we did not subdivide DRGs 515, 535, and 536 
based on the presence or absence of an MCV.
    While we did not find additional severity improvements for 
defibrillator cases, we will continue to study this area and look for 
further improvements.
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue)
a. Hip and Knee Replacements
    In the FY 2006 final rule (70 FR 47303), we deleted DRG 209 (Major 
Joint and Limb Reattachment Procedures of Lower Extremity) and created 
new DRGs 544 (Major Joint Replacement or Reattachment of Lower 
Extremity) and 545 (Revision of Hip or Knee Replacement) to help 
resolve payment issues for hospitals that perform revisions of joint 
replacements because we found revisions of joint replacements to be 
significantly more resource intensive than original hip and knee 
replacements. DRG 544 includes the following code assignments:
    <bullet> 81.51, Total hip replacement
    <bullet> 81.52, Partial hip replacement
    <bullet> 81.54, Total knee replacement
    <bullet> 81.56, Total ankle replacement
    <bullet> 84.26, Foot reattachment
    <bullet> 84.27, Lower leg or ankle reattachment
    <bullet> 84.28, Thigh reattachment
    DRG 545 includes the following procedure code assignments:
    <bullet> 00.70, Revision of hip replacement, both acetabular and 
femoral components
    <bullet> 00.71, Revision of hip replacement, acetabular component
    <bullet> 00.72, Revision of hip replacement, femoral component
    <bullet> 00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
    <bullet> 00.80, Revision of knee replacement, total (all 
components)
    <bullet> 00.81, Revision of knee replacement, tibial component
    <bullet> 00.82, Revision of knee replacement, femoral component
    <bullet> 00.83, Revision of knee replacement, patellar component
    <bullet> 00.84, Revision of knee replacement, tibial insert (liner)
    <bullet> 81.53, Revision of hip replacement, not otherwise 
specified
    <bullet> 81.55, Revision of knee replacement, not otherwise 
specified
    In the FY 2006 IPPS final rule (70 FR 47305), we indicated that the 
American Association of Orthopaedic Surgeons had requested that, once 
we receive claims data using the two DRG procedure code assignments, we 
closely examine data from the use of the codes under the two DRGs to 
determine if future additional DRG modifications are needed.
    After publication of the FY 2006 IPPS final rule, a number of 
hospitals and coding personnel advised us that the DRG logic for DRG 
471 (Bilateral or Multiple Major Joint Procedures of Lower Extremity), 
which utilizes the new and revised hip and knee procedure codes under 
DRGs 544 and 545, also includes codes that describe procedures that are 
not bilateral or that do not involve multiple major joints. DRG 471 was 
developed to include cases where major joint procedures such as 
revisions or replacements were performed either bilaterally or on two 
joints of one lower extremity. We changed the logic for DRG 471 last 
year for the first time when we added the new and revised codes. The 
commenters indicated that, by adding the more detailed codes that do 
not include total revisions or replacements to the list of major joint 
procedures to DRG 471, we are assigning cases to DRG 471 that do not 
have bilateral or multiple joint procedures. For example, when a 
hospital reports a code for revision of the tibial component (code 
00.81) and patellar component of the right knee (code 00.83), the 
current DRG logic assigns the case to DRG 471. The commenters indicated 
that this code assignment is incorrect because only one joint has 
undergone surgery, but two components were used. One commenter 
indicated that ICD-9-CM does not identify left/right laterality. 
Therefore, it is difficult to use the current coding structure to 
determine if procedures are performed on the same leg or on both legs. 
The commenters raised a concern about whether CMS intended to pay 
hospitals using DRG 471 for procedures performed on one joint. The 
commenters indicated that the DRG assignments for these codes would 
also make future data analysis misleading. The commenters recommended 
removing codes from DRG 471 that do not specifically identify bilateral 
or multiple joint procedures.
    We agree that the new and revised joint procedure codes should not 
be assigned to DRG 471 unless they include bilateral and multiple 
joints. Therefore, in the FY 2007 IPPS proposed rule (71 FR 24035), we 
proposed to remove the following codes from DRG 471:
    <bullet> 00.71, Revision of hip replacement, acetabular component
    <bullet> 00.72, Revision of hip replacement, femoral component
    <bullet> 00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
    <bullet> 00.81, Revision of knee replacement, tibial component
    <bullet> 00.82, Revision of knee replacement, femoral component
    <bullet> 00.83, Revision of knee replacement, patellar component
    <bullet> 00.84, Revision of total knee replacement, tibial insert 
(liner)
    <bullet> 81.53, Revision of hip replacement, not otherwise 
specified
    <bullet> 81.55, Revision of knee replacement, not otherwise 
specified
    The proposed revised DRG 471 would then contain only the following 
codes:
    <bullet> 00.70, Revision of hip replacement, both acetabular and 
femoral components
    <bullet> 00.80, Revision of knee replacement, total (all 
components)
    <bullet> 81.51, Total hip replacement
    <bullet> 81.52, Partial hip replacement
    <bullet> 81.54, Total knee replacement
    <bullet> 81.56, Total ankle replacement
    We proposed to assign the codes removed from DRG 471 (codes 00.71, 
00.72, 00.73, 00.81, 00.82, 00.83, 00.84, 81.53, and 81.55) to DRG 545 
when used either alone or in combination. This list of codes removed 
from DRG 471 and added to DRG 545 includes partial revisions of the 
knee and hip as well as unspecified joint procedures such as code 81.55 
where it is not clear if the revision is total or partial.
    Comment: Several comments supported our proposals to remove codes 
00.71, 00.72, 00.73, 00.81, 00.82, 00.83, 00.84, 81.53, and 81.55 from 
the combinations assigned to DRG 471 and assign cases with these codes 
to DRG 545. The commenters agreed that these codes should be removed 
from DRG 471 because they do not represent bilateral and multiple joint 
revisions or replacements.
    Response: We appreciate the commenters support to remove codes 
00.71, 00.72, 00.73, 00.81, 00.82, 00.83, 00.84, 81.53, and 81.55 from 
the combinations assigned to DRG 471. These cases will be assigned to 
DRG 545.
    We are finalizing the changes to DRG 471 and DRG 545 that we 
proposed.

[[Page 47947]]

Further, as we indicated in the proposed rule, we plan to perform 
extensive data analysis on the new and revised joint procedure codes as 
we receive billing data to determine if future refinements of these 
DRGs are needed. In addition, as indicated in section II.C. of the 
preamble of the proposed rule, we are planning in the future to adopt a 
revised DRG system for the IPPS that addresses severity of illness. We 
encouraged commenters to evaluate how the new and revised joint 
procedures should be addressed in such a revised system. We received 
comments indicating that the CS DRGs that we proposed do not 
distinguish between patients receiving an original joint replacement 
from a revision. As we indicate elsewhere in this final rule, we will 
evaluate these issues as we develop our plans for adopting a revised 
DRG system that addresses severity of illness.
b. Spinal Fusion
    In the FY 2006 IPPS final rule (70 FR 47307), we created new DRG 
546 (Spinal Fusions Except Cervical with Curvature of the Spine or 
Malignancy). DRG 546 is composed of all noncervical spinal fusions 
previously assigned to DRGs 497 (Spinal Fusion Except Cervical with CC) 
and 498 (Spinal Fusion Except Cervical without CC) that have a 
principal or secondary diagnosis of curvature of the spine or a 
principal diagnosis of a malignancy. The principal diagnosis codes that 
lead to DRG 546 assignment are the following:
    <bullet> 170.2, Malignant neoplasm of vertebral column, excluding 
sacrum and coccyx
    <bullet> 198.5, Secondary malignant neoplasm of bone and bone 
marrow
    <bullet> 213.2, Benign neoplasm of bone and articular cartilage; 
vertebral column, excluding sacrum and coccyx
    <bullet> 238.0, Neoplasm of uncertain behavior of other and 
unspecified sites and tissues; Bone and articular cartilage
    <bullet> 239.2, Neoplasms of unspecified nature; bone, soft tissue, 
and skin
    <bullet> 732.0, Juvenile osteochondrosis of spine
    <bullet> 733.13, Pathologic fracture of vertebrae
    <bullet> 737.0, Adolescent postural kyphosis
    <bullet> 737.10, Kyphosis (acquired) (postural)
    <bullet> 737.11, Kyphosis due to radiation
    <bullet> 737.12, Kyphosis, postlaminectomy
    <bullet> 737.19, Kyphosis (acquired), other
    <bullet> 737.20, Lordosis (acquired) (postural)
    <bullet> 737.21, Lordosis, postlaminectomy
    <bullet> 737.22, Other postsurgical lordosis
    <bullet> 737.29, Lordosis (acquired), other
    <bullet> 737.30, Scoliosis [and kyphoscoliosis], idiopathic
    <bullet> 737.31, Resolving infantile idiopathic scoliosis
    <bullet> 737.32, Progressive infantile idiopathic scoliosis
    <bullet> 737.33, Scoliosis due to radiation
    <bullet> 737.34, Thoracogenic scoliosis
    <bullet> 737.39, Other kyphoscoliosis and scoliosis
    <bullet> 737.8, Other curvatures of spine
    <bullet> 737.9, Unspecified curvature of spine
    <bullet> 754.2, Congenital scoliosis
    <bullet> 756.51, Osteogenesis imperfecta
    The secondary diagnoses that will lead to DRG 546 assignment are:
    <bullet> 737.40, Curvature of spine, unspecified
    <bullet> 737.41, Curvature of spine associated with other 
conditions, kyphosis
    <bullet> 737.42, Curvature of spine associated with other 
conditions, lordosis
    <bullet> 737.43, Curvature of spine associated with other 
conditions, scoliosis
    After publication of the FY 2006 IPPS final rule, we received a 
comment stating that creating new DRG 546 was insufficient to address 
clinical severity and resource differences among spinal fusion cases 
that involve fusing multiple levels of the spine. Specifically, the 
commenter suggested that the spinal fusion DRGs be further modified to 
incorporate Bone Morphogenic Protein (BMP), code 84.52 (Insertion of 
recombinant bone morphogenetic protein). The commenter also suggested 
that CMS apply a clinical severity concept to all back and spine 
surgical cases similar to the approach that we used for the MCVs to 
refine the cardiac DRGs in the final rule for FY 2006. The commenter 
recommended recognizing additional conditions that reflect higher 
resource needs, regardless of whether they are principal or secondary 
diagnoses. The commenter also suggested that the spine DRGs be further 
subdivided based on the use of specific spinal devices such as 
artificial discs. These changes would entail the creation of 10 new 
spine DRGs in addition to other changes requested.
    Response: We agree that it is important to recognize severity when 
classifying patients into specific DRGs. In response to recommendations 
made by MedPAC last year that are discussed in section II.C. of this 
final rule, we are conducting a comprehensive analysis of the entire 
DRG system to determine whether to undertake significant reform to 
better recognize severity of illness. At this time, we believe it is 
premature to develop a severity adjustment for spine surgeries while we 
are considering a more systematic approach to capturing severity of 
illness across all DRGs. We also believe it would be premature to make 
revisions to DRG 546 because this DRG was created on October 1, 2005, 
and we do not yet have data to analyze its impact. Given the number of 
innovations occurring in spinal surgery over the last several years 
(for example, artificial spinal disc prostheses, kyphoplasty, and 
vertebroplasty), we agree that additional analysis of the spine DRGs 
would be warranted if we were to continue with the current DRG system 
and not adopt CS DRGs. However, as discussed above, in the FY 2007 IPPS 
proposed rule, we proposed to develop a severity-adjusted DRG system. 
For this reason, we are not further researching this issue for FY 2007. 
However, in the proposed rule, we encouraged commenters to examine the 
proposed CS DRG system described in section II.C. of the preamble of 
the proposed rule to determine whether there is a better recognition of 
severity of illness and resource use in that system.
    Comment: One commenter stated that it was premature to consider 
splitting the spinal fusion DRGs into potentially up to 10 new DRGs at 
this time. The commenter stated there is a need for additional data 
analysis prior to recommending new DRGs.
    Response: We agree with the commenter that it is premature to 
consider splitting the spinal fusion DRGs into as many as 10 new DRGs. 
We will continue to study this area. In the meantime, we will not 
modify the spinal fusion DRGs for October 1, 2006.
c. CHARITE<SUP>TM</SUP> Spinal Disc Replacement Device
    CHARITE<SUP>TM</SUP> is a prosthetic intervertebral disc. On 
October 26, 2004, the FDA approved the CHARITE<SUP>TM</SUP> Artificial 
Disc for single level spinal arthroplasty in skeletally mature patients 
with degenerative disc disease between L4 and S1. On October 1, 2004, 
we created new procedure codes for the insertion of spinal disc 
prostheses (codes 84.60 through 84.69). We provided the DRG assignments 
for these new codes in Table 6B of the FY 2005 IPPS proposed rule (69 
FR 28673). We received comments on the FY 2005 proposed rule 
recommending that we change the assignments for these codes from DRG 
499 (Back and Neck Procedures Except Spinal Fusion With CC) and DRG 500 
(Back and Neck Procedures Except Spinal Fusion Without CC) to the DRGs 
for spinal fusion, DRG 497 (Spinal Fusion Except Cervical With CC) and 
DRG 498 (Spinal Fusion Except Cervical Without CC) for procedures on 
the lumbar spine and to

[[Page 47948]]

DRGs 519 and 520 for procedures on the cervical spine. In the FY 2005 
IPPS final rule (69 FR 48938, August 11, 2004), we indicated that DRGs 
497 and 498 are limited to spinal fusion procedures. Because the 
surgery involving the CHARITE<SUP>TM</SUP> Artificial Disc is not a 
spinal fusion, we decided not to include this procedure in these DRGs. 
However, we stated that we would continue to analyze this issue and 
solicited further public comments on the DRG assignment for spinal disc 
prostheses.
    In the FY 2006 final rule (70 FR 47353, August 12, 2005), we noted 
that, if a product meets all of the criteria for Medicare to pay for 
the product as a new technology under section 1886(d)(5)(K) of the Act, 
there is a clear preference expressed in the statute for us to assign 
the technology to a DRG based on similar clinical or anatomical 
characteristics or costs. However, for FY 2006, we did not find that 
the CHARITE<SUP>TM</SUP> Artificial Disc met the substantial clinical 
improvement criterion and, thus, did not qualify as a new technology. 
Consequently, we did not address the DRG classification request made 
under the authority of this provision of the Act.
    However, we did evaluate whether to reassign the 
CHARITE<SUP>TM</SUP> Artificial Disc to different DRGs using the 
Secretary's authority under section 1886(d)(4) of the Act (70 FR 47308, 
August 12, 2005). We indicated that we did not have Medicare charge 
information to evaluate DRG changes for cases involving an implant of a 
prosthetic intervertebral disc like the CHARITE<SUP>TM</SUP> and did 
not make a change in its DRG assignments. We stated that we would 
consider whether changes to the DRG assignments for the 
CHARITE<SUP>TM</SUP> Artificial Disc were warranted for FY 2007, once 
we had information from Medicare's data system that would assist us in 
evaluating the costs of these patients.
    As we discussed in the FY 2007 IPPS proposed rule (71 FR 24036), we 
received correspondence regarding the DRG assignments for the 
CHARITE<SUP>TM</SUP> Artificial Disc, code 84.65 (Insertion of total 
spinal disc prosthesis, lumbosacral). The commenter had previously 
submitted an application for the CHARITE<SUP>TM</SUP> Artificial Disc 
for new technology add-on payments for FY 2006 and had requested a 
reassignment of cases involving CHARITE<SUP>TM</SUP> implantation to 
DRGs 497 and 498. The commenter asked that we examine claims data for 
FY 2005 and reassign procedure code 84.65 from DRGs 499 and 500 into 
DRGs 497 and 498. The commenter again stated the view that cases with 
the CHARITE<SUP>TM</SUP> Artificial Disc reflect comparable resource 
use and similar clinical indications as do those in DRGs 497 and 498. 
If CMS were to reject reassignment of the CHARITE<SUP>TM</SUP> 
Artificial Disc to DRGs 497 and 498, the commenter suggested creating 
two separate DRGs for lumbar disc replacements.
    On February 15, 2006, we posted a proposed national coverage 
determination (NCD) on the CMS Web site seeking public comment on our 
proposed finding that the evidence is not adequate to conclude that 
lumbar artificial disc replacement with the CHARITE<SUP>TM</SUP> 
Artificial Disc is reasonable and necessary. The proposed NCD stated 
that lumbar artificial disc replacement with the CHARITE<SUP>TM</SUP> 
Artificial Disc is generally not indicated in patients over 60 years 
old. Further, it stated that there is insufficient evidence among 
either the aged or disabled Medicare population to make a reasonable 
and necessary determination for coverage. With an NCD pending to make 
spinal arthroplasty with the CHARITE<SUP>TM</SUP> Artificial Disc 
noncovered, we indicated in the FY 2007 IPPS proposed rule that we did 
not believe it was appropriate at that time to reassign procedure code 
84.65 from DRGs 499 and 500 to DRGs 497 and 498.
    After considering the public comments and additional evidence 
received, we made a final NCD on May 16, 2006, that Medicare would not 
cover the CHARITE<SUP>TM</SUP> Artificial Disc for the Medicare 
population over 60 years of age. For Medicare beneficiaries 60 years of 
age and under, local Medicare contractors have the discretion to 
determine coverage for lumbar artificial disc replacement procedures 
involving the CHARITE<SUP>TM</SUP> Artificial Disc. The final NCD can 
be found at: http://www.cms.hhs.gov/mcd/viewncd.asp:ncd_;id-
150.10&ncd --version1& basket=ncd%3A150%2E10% 3A1%3ALumbar+ 
Artificial+Disc+ Replacement%280ADR%29.
    Comment: Some commenters agreed with our proposed decision not to 
reassign CHARITE<SUP>TM</SUP> Artificial Disc at this time to the 
spinal fusion DRGs. Other commenters disagreed with our proposal not to 
move code 84.65 (CHARITE<SUP>TM</SUP>) from DRGs 499 and 500 to DRGs 
497 and 498. One commenter noted that the national noncoverage 
determination for the CHARITE<SUP>TM</SUP> Artificial Disc only applies 
to patients over 60 years of age. The commenter further noted that 
local Medicare carriers have the discretion to make coverage decisions 
for Medicare beneficiaries who are under 60 years of age. The commenter 
stated that patients who receive the CHARITE<SUP>TM</SUP> Artificial 
Disc are candidates for a fusion procedure involving an anterior 
surgical approach. The commenter goes on to state that the 
CHARITE<SUP>TM</SUP> Artificial Disc is an alternative therapy to 
spinal fusion for patients with similar diagnoses. The commenter 
supplied data from FY 2005 MedPAR file in support of its request for a 
DRG change. These data included 54 cases that were assigned to DRGs 499 
and 500. The 23 cases in DRG 499 had mean charges of $61,750, while the 
31 cases assigned to DRG 500 had mean charges of $53,802. These data 
compare to mean charges of $26,974 for all cases in DRG 499 and $17,731 
for all cases in DRG 500. The commenter reported mean charges of 
$71,581 for DRG 497 and $55,489 for DRG 498. The commenter stated that 
the 54 CHARITE<SUP>TM</SUP> cases are more similar in average charges 
to all cases in DRGs 497 and 498 than to DRGs 499 and 500.
    Response: We agree with the commenter that it is not appropriate to 
consider a DRG revision at this time for the CHARITE<SUP>TM</SUP> 
Artificial Disc, given the recent decision to limit coverage for 
surgical procedures involving this device. Although we have reviewed 
the Medicare charge data, we are concerned that there are a very small 
number of cases for patients under 60 years of age who have received 
the CHARITE<SUP>TM</SUP> Artificial Disc. We believe it appropriate to 
base the decision on a DRG change on charge data only on the population 
for which the procedure is covered. We have an extremely small number 
of cases for patients under 60 on which to base such a decision. For 
this reason, we do not believe it is appropriate to modify the DRGs at 
this time for CHARITE<SUP>TM</SUP> cases.
5. MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified 
Sites)): Severe Sepsis
    In FYs 2005 and 2006, we considered requests for the creation of a 
separate DRG for the diagnosis of severe sepsis. Severe sepsis is 
described by ICD-9-CM code 995.92 (Systemic inflammatory response 
syndrome due to infection with organ dysfunction). Patients admitted 
with sepsis as a principal diagnosis currently are assigned to DRG 416 
(Septicemia Age > 17) and DRG 417 (Septicemia Age 0-17) in MDC 18 
(Infectious and Parasitic Diseases (Systemic or Unspecified Sites)). 
The commenter requested that all cases in which severe sepsis is 
present on admission, as well as those cases in which it develops after 
admission (which are currently classified elsewhere), be included in 
this new DRG. In both FY 2005 and FY 2006 (69 FR 48975 and 70 FR 
47309), we did not believe the current clinical definition of

[[Page 47949]]

severe sepsis was specific enough to identify a meaningful cohort of 
patients in terms of clinical coherence and resource utilization to 
warrant a separate DRG. Sepsis is found across hundreds of medical and 
surgical DRGs, and the term ``organ dysfunction'' implicates numerous 
currently existing diagnosis codes. While we recognize that Medicare 
beneficiaries with severe sepsis are quite ill and require extensive 
hospital resources, in the past we have not found that they can be 
identified adequately to justify removing them from all of the other 
DRGs in which they appear. For this reason, we did not create a new DRG 
for severe sepsis for FY 2005 or FY 2006. We indicated that we would 
continue to work with National Center for Health Statistics (NCHS) to 
improve the codes so that our data on these patients improve. We also 
indicated that we would continue to examine data on these patients as 
we consider future modifications.
    For the FY 2007 IPPS proposed rule, we again received a request to 
consider creating a separate DRG for patients diagnosed with severe 
sepsis (71 FR 24037). The information and data available to us from 
hospital bills with respect to identifying patients with severe sepsis 
have not changed since last year. However, the NCHS discussed 
modifications to the current ICD-9-CM diagnosis codes for systemic 
inflammatory response syndrome (SIRS), codes 995.91 through 995.94 
(which include severe sepsis) at the September 29-30, 2005 ICD-9-CM 
Coordination and Maintenance Committee meeting. During the meeting, it 
became clear that there is still confusion surrounding the use of these 
codes. As a result of the meeting and the comments received, the 
Committee made modifications to the set of SIRS codes. These 
modifications are reflected in Table 6E, Revised Diagnosis Code Titles, 
of the Addendum to this final rule.
    We believe that implementation of the modified SIRS diagnosis codes 
and the updated coding guidelines over the next year could begin the 
process of improving data for this group of patients. The desired 
outcome is to be able to better evaluate Medicare beneficiaries with 
severe sepsis with regard to their clinical coherence, resource 
utilization, and charges. Therefore, in the FY 2007 IPPS proposed rule, 
we did not propose to create a new DRG for severe sepsis for FY 2007.
    Comment: Numerous commenters asked for changes to the current 
sepsis classification. The commenters agreed that coding of systemic 
inflammatory response syndrome (SIRS), sepsis, septicemia, severe 
sepsis, and septic shock has been confusing to the provider community 
in the last few years. Specifically, one commenter stated coding 
guidelines have been revised based on clinical definitions, which in 
turn has affected the DRG classification for sepsis. Another commenter 
referenced the ICD-9-CM Code Book tabular section and the American 
Hospital Association's (AHA) fourth quarter (4Q) 2003 Coding Clinic, 
``for patients with severe sepsis, the code for the systemic infection 
(038.x) or trauma should be sequenced first, followed by either code 
995.92 (Systemic Inflammatory Response Syndrome due to infectious 
process with organ dysfunction) or code 995.94 (Systemic inflammatory 
response syndrome due to noninfectious process with organ dysfunction). 
Codes for the specific organ dysfunction should also be assigned.'' The 
commenter stated that as a result of this coding guideline, respiratory 
failure cannot be sequenced as the principal diagnosis because it is 
considered an organ dysfunction of the patient's sepsis. However, 
reverting sequencing instructions would be confusing and again disrupt 
the data according to some of the commenters. As a result, many 
commenters stated that a new DRG for severe sepsis is not appropriate 
due to the inconsistent data.
    Response: We agree that there has been a great deal of confusion in 
the coding and sequencing of cases with severe sepsis and SIRS. The 
commenters are correct that the coding directives lead cases with 
severe sepsis that are on mechanical ventilation for respiratory 
failure to be assigned to DRG 416 (Septicemia Age >17) and DRG 417 
(Septicemia Age 0 >17) instead of DRG 475 (Respiratory System Diagnosis 
with Ventilator Support). As stated in the proposed rule, we have 
continued to work with NCHS to improve the codes so that our data on 
these patients improve. We believe that implementation of the modified 
SIRS diagnosis codes and the updated coding guidelines over the next 
year will further improve the coding of this subset of patients.
    Comment: One commenter presented its analysis of the MedPAR data 
and again requested the creation of two new DRGS for severe sepsis, one 
medical and one surgical. The other option suggested by the commenter 
was to split DRGs 415 and 416 into DRGs with and without severe sepsis 
cases. The commenter expressed concern that, while there has been some 
confusion over the use of the SIRS family of codes (995.90-995.94) over 
the past three years, the confusion has been mainly associated with the 
other codes and not the severe sepsis code (995.92). The commenter 
provided information concerning the definition of severe sepsis and its 
adoption following a 1992 consensus panel of the American College of 
Chest Physicians and the Society of Critical Care Medicine. According 
to the commenter, the panel defined severe sepsis as a systemic 
inflammatory response to infection that leads to acute organ 
dysfunction. The commenter noted this definition has been used 
successfully to identify thousands of patients with severe sepsis and 
in more than 30 large-scale clinical trials. The commenter also stated 
severe sepsis cases are clinically coherent with a common underlying 
problem (SIRS) leading to complications (acute organ dysfunction) and 
are managed similarly, receiving advanced life support in intensive 
care units. The commenter also provided examples to demonstrate how 
clinical coherence leads to resource use coherence.
    Response: We appreciate the commenter's analysis of the data. As 
stated above, there has been significant confusion over the use of the 
sepsis codes. While the definition may be well understood among the 
individuals involved with the clinical trials, there has been 
uncertainty in the application of the codes as evidenced by repeated 
discussions at the ICD-9-CM Coordination and Maintenance Committee 
meetings and comments received in response to the proposed rule. We 
note that the National Center for Health Statistics has revised the 
sepsis and systemic inflammatory response syndrome codes in response to 
suggestions made at the Committee meetings. These revisions are shown 
in Table 6E of the Addendum to this final rule and will go into effect 
on October 1, 2006 (codes 995.91 through 995.94). We did not propose a 
new DRG for severe sepsis for FY 2007 in the proposed rule due to the 
data inconsistencies and difficulty expressed with properly assigning 
the sepsis codes, among other reasons cited previously.
    In the FY 2007 IPPS proposed rule, we also solicited comments on 
the proposal we were considering to adopt a CS DRG system. We noted it 
is possible that the proposed system would better recognize the 
extensive resources that hospitals use to treat patients with severe 
sepsis. We encouraged commenters to examine the proposed system and 
provide comments. The comments and responses on this proposal are 
discussed in section II.C of this final rule.

[[Page 47950]]

    Therefore, in this FY 2007 final rule we are not creating new DRGs 
for medical or surgical severe sepsis cases as requested by the 
commenter.
6. Medicare Code Editor (MCE) Changes
    As explained under section II.B.1. of this preamble, 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), 
discharge status, and demographic information go into the Medicare 
claims processing systems and are subjected to a series of automated 
screens. The MCE screens are designed to identify cases that require 
further review before classification into a DRG.
    For FY 2007, we proposed to make several changes to the MCE edits 
(71 FR 24038 and 24039). We received one comment on this topic. As a 
result of new and modified codes approved after the annual spring ICD-
9-CM Coordination and Maintenance meeting, we make changes to the MCE. 
In the past, in both the IPPS proposed and final rules, we only 
provided the list of changes to the MCE in the IPPS that were brought 
to our attention after the prior year's final rule. We historically 
have not listed the changes we have made to the MCE as a result of the 
new and modified codes approved after the annual spring ICD-9-CM 
Coordination and Maintenance meeting. These changes are approved too 
late in the rulemaking schedule for inclusion in the proposed rule. 
Furthermore, although our MCE policies have been described in our 
proposed and final rules, we have not provided the detail of each new 
or modified diagnosis and procedure code edit in the final rule. 
However, in response to a public comment and in the interest of making 
the IPPS more transparent, we are including in this final rule a 
comprehensive list of all the changes to the MCE edits for the next 
fiscal year as a result of coding changes.
a. Edit: Newborn Diagnoses
    We proposed to add code 780.92 (Excessive crying of infant (baby)) 
to the ``Newborn Diagnoses'' edit in the MCE. This edit is structured 
for patients with an age of ``0''. In the Tabular portion of the ICD-9-
CM diagnosis codes, the ``excludes'' note at code 780.92 states that 
this code ``excludes excessive crying of child, adolescent or adult'' 
and sends the coder to code 780.95 (Other excessive crying. (The new 
title of this code, shown on Table 6E of the Addendum to this final 
rule is ``Excessive crying of child, adolescent, or adult''.) To make a 
conforming change, we also proposed that code 780.92 be removed from 
the ``Pediatric Diagnoses--Age 0 Through 17'' edit.
    We did not receive any public comments on the proposed edit and, 
therefore, are adopting it as final.
    In addition, there were diagnosis codes discussed at the March 2006 
ICD-9-CM Coordination and Maintenance meeting that were approved too 
late in the rulemaking schedule for inclusion in the proposed rule. 
Therefore, the following ICD-9-CM diagnosis codes are added to the 
``Newborn Diagnosis'' MCE edit for FY 2007:
    <bullet> 768.7, Hypoxic-ischemic encephalopathy (HIE)
    <bullet> 770.87, Respiratory arrest of newborn
    <bullet> 770.88, Hypoxemia of newborn
    <bullet> 775.81, Other acidosis of newborn
    <bullet> 775.89, Other neonatal endocrine and metabolic 
disturbances
    <bullet> 779.85, Cardiac arrest of newborn
    Because diagnosis code 775.8 (Other transitory neonatal endocrine 
and metabolic disturbances) was expanded to the fifth-digit level, this 
code is being deleted from the Newborn Diagnosis edit.
b. Edit: Diagnoses for Pediatric--Age 0-17 Years Old
    We are adding the following new diagnosis codes to the edit for 
diagnosis for pediatrics--age 0-17 years old:
    <bullet> V85.51, Body Mass Index, pediatric, less than 5th 
percentile for age
    <bullet> V85.52, Body Mass Index, pediatric, 5th percentile to less 
than 85th percentile for age
    <bullet> V85.53, Body Mass Index, pediatric, 85th percentile to 
less than 95th percentile for age
    <bullet> V85.54, Body Mass Index, pediatric, greater than or equal 
to 95th percentile for age
c. Edit: Maternity Diagnoses--Age 12 through 55
    We are adding the following new codes to the edit for maternity 
diagnoses--age 12 through 55:
    <bullet> 649.00, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, unspecified as to episode of care or not 
applicable
    <bullet> 649.01, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, delivered, with or without mention of 
antepartum condition
    <bullet> 649.02, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, delivered, with mention of postpartum 
complication
    <bullet> 649.03, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, antepartum condition or complication
    <bullet> 649.04, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, postpartum condition or complication
    <bullet> 649.10, Obesity complicating pregnancy, childbirth, or the 
puerperium, unspecified as to episode of care or not applicable
    <bullet> 649.11, Obesity complicating pregnancy, childbirth, or the 
puerperium, delivered, with or without mention of antepartum condition
    <bullet> 649.12, Obesity complicating pregnancy, childbirth, or the 
puerperium, delivered, with mention of postpartum complication
    <bullet> 649.13, Obesity complicating pregnancy, childbirth, or the 
puerperium, antepartum condition or complication
    <bullet> 649.14, Obesity complicating pregnancy, childbirth, or the 
puerperium, postpartum condition or complication
    <bullet> 649.20, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, unspecified as to episode of care or not 
applicable
    <bullet> 649.21, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, delivered, with or without mention of 
antepartum condition
    <bullet> 649.22, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, delivered, with mention of postpartum 
complication
    <bullet> 649.23, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, antepartum condition or complication
    <bullet> 649.24, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, postpartum condition or complication
    <bullet> 649.30, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, unspecified as to episode of care or not 
applicable
    <bullet> 649.31, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, delivered, with or without mention of 
antepartum condition
    <bullet> 649.32, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, delivered, with mention of postpartum 
complication
    <bullet> 649.33, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, antepartum condition or complication
    <bullet> 649.34, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, postpartum condition or complication
    <bullet> 649.40, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, unspecified as to episode of care or not applicable

[[Page 47951]]

    <bullet> 649.41, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, delivered, with or without mention of antepartum 
condition
    <bullet> 649.42, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, delivered, with mention of postpartum complication
    <bullet> 649.43, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, antepartum condition or complication
    <bullet> 649.44, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, postpartum condition or complication
    <bullet> 649.50, Spotting complicating pregnancy unspecified as to 
episode of care or not applicable
    <bullet> 649.51, Spotting complicating pregnancy delivered, with or 
without mention of antepartum condition
    <bullet> 649.53, Spotting complicating pregnancy antepartum 
condition or complication
    <bullet> 649.60, Uterine size date discrepancy, unspecified as to 
episode of care or not applicable
    <bullet> 649.61, Uterine size date discrepancy, delivered, with or 
without mention of antepartum condition
    <bullet> 649.62, Uterine size date discrepancy, delivered, with 
mention of postpartum complication
    <bullet> 649.63, Uterine size date discrepancy, antepartum 
condition or complication
    <bullet> 649.64, Uterine size date discrepancy, postpartum 
condition or complication
d. Edit: Diagnoses Allowed for Females Only
    The following codes are now invalid codes, as shown in Table 6C of 
the Addendum to the FY 2007 IPPS proposed rule and this final rule. In 
the FY 2007 IPPS proposed rule, we proposed to remove them from the 
``Diagnosis Allowed for Females Only'' edit in the MCE.
    <bullet> 616.8, Other specified inflammatory diseases of cervix, 
vagina, and vulva
    <bullet> 629.8, Other specified disorders of female genital organs
    Codes 616.8 and 629.8 have been expanded to the fifth-digit level. 
Therefore, we proposed to place the following expanded codes in the 
``Diagnoses Allowed for Females Only'' edit.
    <bullet> 616.81, Mucositis (ulcerative) of cervix, vagina, and 
vulva
    <bullet> 616.89, Other inflammatory disease of cervix, vagina, and 
vulva
    <bullet> 629.81, Habitual aborter without current pregnancy
    <bullet> 629.89, Other specified disorders of female genital organs
    The following two codes have revised descriptions (as shown in 
Table 6E of the Addendum to this final rule) which specify gender. 
Therefore, we proposed to add them to ``Diagnoses Allowed for Females 
Only'' edit.
    <bullet> V26.31, Testing of female for genetic disease carrier 
status
    <bullet> V26.32, Other genetic testing of female
    We did not receive any public comments on the proposed changes to 
this edit. Therefore, we are adopting the changes as final.
    In addition, we are adding the following new ICD-9-CM codes to this 
edit:
    <bullet> 618.84, Cervical stump prolapse
    <bullet> 629.29, Other female genital mutilation status
    <bullet> 649.00, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, unspecified as to episode of care or not 
applicable
    <bullet> 649.01, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, delivered, with or without mention of 
antepartum condition
    <bullet> 649.02, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, delivered, with mention of postpartum 
complication
    <bullet> 649.03, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, antepartum condition or complication
    <bullet> 649.04, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, postpartum condition or complication
    <bullet> 649.10, Obesity complicating pregnancy, childbirth, or the 
puerperium, unspecified as to episode of care or not applicable
    <bullet> 649.11, Obesity complicating pregnancy, childbirth, or the 
puerperium, delivered, with or without mention of antepartum condition
    <bullet> 649.12, Obesity complicating pregnancy, childbirth, or the 
puerperium, delivered, with mention of postpartum complication
    <bullet> 649.13, Obesity complicating pregnancy, childbirth, or the 
puerperium, antepartum condition or complication
    <bullet> 649.14, Obesity complicating pregnancy, childbirth, or the 
puerperium, postpartum condition or complication
    <bullet> 649.20, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, unspecified as to episode of care or not 
applicable
    <bullet> 649.21, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, delivered, with or without mention of 
antepartum condition
    <bullet> 649.22, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, delivered, with mention of postpartum 
complication
    <bullet> 649.23, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, antepartum condition or complication
    <bullet> 649.24, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, postpartum condition or complication
    <bullet> 649.30, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, unspecified as to episode of care or not 
applicable
    <bullet> 649.31, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, delivered, with or without mention of 
antepartum condition
    <bullet> 649.32, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, delivered, with mention of postpartum 
complication
    <bullet> 649.33, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, antepartum condition or complication
    <bullet> 649.34, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, postpartum condition or complication
    <bullet> 649.40, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, unspecified as to episode of care or not applicable
    <bullet> 649.41, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, delivered, with or without mention of antepartum 
condition
    <bullet> 649.42, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, delivered, with mention of postpartum complication
    <bullet> 649.43, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, antepartum condition or complication
    <bullet> 649.44, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, postpartum condition or complication
    <bullet> 649.50, Spotting complicating pregnancy unspecified as to 
episode of care or not applicable
    <bullet> 649.51, Spotting complicating pregnancy delivered, with or 
without mention of antepartum condition
    <bullet> 649.53, Spotting complicating pregnancy antepartum 
condition or complication
    <bullet> 649.60, Uterine size date discrepancy, unspecified as to 
episode of care or not applicable
    <bullet> 649.61, Uterine size date discrepancy, delivered, with or 
without mention of antepartum condition

[[Page 47952]]

    <bullet> 649.62, Uterine size date discrepancy, delivered, with 
mention of postpartum complication
    <bullet> 649.63, Uterine size date discrepancy, antepartum 
condition or complication
    <bullet> 649.64, Uterine size date discrepancy, postpartum 
condition or complication
    <bullet> 795.06, Papanicolaou smear of cervix with cytologic 
evidence of malignancy
    <bullet> 795.82, Elevated cancer antigen 125 [CA 125]
e. Edit: Diagnoses Allowed for Males Only
    Code 608.2 (Torsion of testis) is now an invalid code (as shown in 
Table 6C of the Addendum to the proposed rule and this final rule). 
Therefore, we proposed to remove it from the ``Diagnoses Allowed for 
Males Only'' edit. This code has been expanded to the fifth-digit 
level. We proposed to place the following expanded codes in the 
``Diagnoses Allowed for Males Only'' edit:
    <bullet> 608.20, Torsion of testis, unspecified
    <bullet> 608.21, Extravaginal torsion of spermatic cord
    <bullet> 608.22 Intravaginal torsion of spermatic cord
    <bullet> 608.23, Torsion of appendix testis
    <bullet> 608.24, Torsion of appendix epididymis
    The following codes have been created effective for FY 2007 and are 
gender specific. Therefore, we proposed to add them to the ``Diagnosis 
Allowed for Males Only'' edit.
    <bullet> V26.34, Testing of male for genetic disease carrier status
    <bullet> V26.35, Encounter for testing of male partner of habitual 
aborter
    <bullet> V26.39, Other genetic testing of male
    We did not receive any public comments on our proposed changes to 
this edit. Therefore, we are adopting the changes as final.
f. Edit: Procedures Allowed for Females Only
    The following new codes are added to the list of female procedures:
    <bullet> 68.41, Laparoscopic total abdominal hysterectomy
    <bullet> 68.49, Other and unspecified total abdominal hysterectomy
    <bullet> 68.61, Laparoscopic radical abdominal hysterectomy
    <bullet> 68.69, Other and unspecified radical abdominal 
hysterectomy
    <bullet> 68.71, Laparoscopic radical vaginal hysterectomy [LRVH]
    <bullet> 68.79, Other and unspecified radical vaginal hysterectomy
    In addition, the following codes were expanded to the fourth digit 
and, therefore, are removed from this edit:
    <bullet> 68.4, Total abdominal hysterectomy
    <bullet> 68.6, Radical abdominal hysterectomy
    <bullet> 68.7, Radical vaginal hysterectomy
g. Edit: Manifestations Not Allowed as Principal Diagnosis
    We proposed to add the following codes to the ``Manifestations Not 
Allowed as Principal Diagnosis'' edit in the MCE:
    <bullet> 362.03, Nonproliferative diabetic retinopathy, NOS
    <bullet> 362.04, Mild nonproliferative diabetic retinopathy
    <bullet> 362.05, Moderate nonproliferative diabetic retinopathy
    <bullet> 362.06, Severe nonproliferative diabetic retinopathy
    <bullet> 362.07, Diabetic macular edema.
    We did not receive any public comments concerning this proposed 
change. Therefore, we are adopting the above proposed changes as final.
    In addition, we are adding the following new codes to this edit:
    <bullet> 284.2, Myelophthisis
    <bullet> 289.83, Myelofibrosis
    <bullet> 323.01, Encephalitis and encephalomyelitis in viral 
diseases classified elsewhere
    <bullet> 323.02, Myelitis in viral diseases classified elsewhere
    <bullet> 323.41, Other encephalitis and encephalomyelitis due to 
infection classified elsewhere
    <bullet> 323.42, Other myelitis due to infection classified 
elsewhere
    <bullet> 323.61, Infectious acute disseminated encephalomyelitis 
(ADEM)
    <bullet> 323.62, Other postinfectious encephalitis and 
encephalomyelitis
    <bullet> 323.63, Postinfectious myelitis
    <bullet> 323.71, Toxic encephalitis and encephalomyelitis
    <bullet> 323.72, Toxic myelitis
    <bullet> 341.21, Acute (transverse) myelitis in conditions 
classified elsewhere
    The following codes have been expanded to the fifth-digit level of 
specificity, which results in making the four-digit code invalid. 
Therefore, these codes are removed from the manifestation edit:
    <bullet> 323.0, Encephalitis in viral diseases classified elsewhere
    <bullet> 323.4, Other encephalitis due to infection classified 
elsewhere
    <bullet> 323.6, Postinfectious encephalitis
    <bullet> 323.7, Toxic encephalitis
    In the proposed rule, we had suggested we would remove code 525.10 
(Acquired absence of teeth, unspecified) from this edit in the MCE. 
However, all codes in subcategory 525.1 (Loss of teeth due to trauma, 
extraction, or periodontal disease) are considered manifestation codes. 
Therefore, we are retracting this proposal, and are leaving code 525.10 
in this edit.
h. Edit: Nonspecific Principal Diagnosis
    We proposed to add the following codes to the ``Nonspecific 
Principal Diagnosis'' edit in the MCE:
    <bullet> 255.10, Hyperaldosteronism, unspecified
    <bullet> 323.9, Unspecified causes of encephalitis, myelitis, and 
encephalomyelitis
    <bullet> 770.10, Fetal and newborn aspiration, unspecified.
    <bullet> 780.31, Febrile convulsions (simple), unspecified
    Codes 255.10, 323.9, and 780.31 appear on Table 6E, Revised 
Diagnosis Codes, and are being included in this edit because of their 
revised descriptions. Code 770.10 was inadvertently left off this list 
for FY 2006 when the code was created.
    We did not receive any public comments on the proposed changes to 
this edit. Therefore, we are adopting the proposed changes as final. In 
addition, we are adding the following codes to this edit:
    <bullet> 238.75, Myelodysplastic syndrome, unspecified
    <bullet> 276.50, Volume depletion NOS
    <bullet> 277.30, Amyloidosis, unspecified
    <bullet> 288.00, Neutropenia, unspecified
    <bullet> 288.50, Leukocytopenia, unspecified
    <bullet> 288.60, Leukocytosis, unspecified
    <bullet> 341.20, Acute (transverse) myelitis NOS
    <bullet> 379.60, Inflammation (infection) of postprocedural bleb, 
unspecified
    <bullet> 523.30, Aggressive periodontitis, unspecified
    <bullet> 523.40, Chronic periodontitis, unspecified
    <bullet> 525.60, Unspecified unsatisfactory restoration of tooth
    <bullet> 528.00, Stomatitis and mucositis, unspecified
    <bullet> 608.20, Torsion of testis, unspecified
    <bullet> 649.00, Tobacco use disorder complicating pregnancy, 
childbirth, or the puerperium, unspecified as to episode of care or not 
applicable
    <bullet> 649.10, Obesity complicating pregnancy, childbirth, or the 
puerperium, unspecified as to episode of care or not applicable
    <bullet> 649.20, Bariatric surgery status complicating pregnancy, 
childbirth, or the puerperium, unspecified as to episode of care or not 
applicable
    <bullet> 649.30, Coagulation defects complicating pregnancy, 
childbirth, or the puerperium, unspecified as to episode of care or not 
applicable

[[Page 47953]]

    <bullet> 649.40, Epilepsy complicating pregnancy, childbirth, or 
the puerperium, unspecified as to episode of care or not applicable
    <bullet> 649.50, Spotting complicating pregnancy, childbirth, or 
the puerperium, unspecified as to episode of care or not applicable
    <bullet> 649.60, Uterine size date discrepancy, unspecified as to 
episode of care or not applicable
    <bullet> 958.90, Compartment syndrome, unspecified
    <bullet> 995.20, Unspecified adverse effect of unspecified drug, 
medicinal and biological substance
    <bullet> 995.22, Unspecified adverse effect of anesthesia
    <bullet> 995.23, Unspecified adverse effect of insulin
    <bullet> 995.29, Unspecified adverse effect of other drug, 
medicinal and biological substance
    We are removing the following codes from this edit:
    <bullet> 362.03, Nonproliferative diabetic retinopathy NOS
    <bullet> 525.10, Acquired absence of teeth, unspecified
    <bullet> 793.9, Other nonspecific abnormal findings on radiological 
and other examinations of body structure
    Comment: Two commenters suggested that the expanded code (793.99, 
Other nonspecific abnormal findings on radiological and other 
examinations of body structure) be added back into this edit.
    Response: We will not act on those suggestions at this time, as we 
believe that code 739.9 should not originally have been in the edit as 
it is more like an ``other'' code than a ``nonspecific'' code.
i. Edit: Unacceptable Principal Diagnosis
    Most V-codes describe an individual's health status, but these 
codes are not usually a current illness or injury. Therefore, most V-
codes are included in the ``Unacceptable Principal Diagnosis'' edit. 
The following codes became invalid (as shown in Table 6C of the 
Addendum to the proposed rule and this final rule) for FY 2007, and we 
proposed to remove them from this edit:
    <bullet> V18.5, Family history, digestive disorders
    <bullet> V58.3, Attention to surgical dressings and sutures
    <bullet> V72.1, Examination of ears and hearing
    The following V-codes represent either fifth-digit extensions of 
the above codes, or new codes that were created effective October 1, 
2006 (Table 6A of the Addendum to the proposed rule and this final 
rule). Therefore, we proposed to add the following codes to the 
``Unacceptable Principal Diagnosis'' edit:
    <bullet> V18.51, Family history, colonic polyps
    <bullet> V18.59, Family history, other digestive disorders
    <bullet> V26.34, Testing of male for genetic disease carrier status
    <bullet> V26.35, Encounter for testing of male partner of habitual 
aborter
    <bullet> V26.39, Other genetic testing of male
    <bullet> V45.86, Bariatric surgery status
    <bullet> V58.30, Encounter for change or removal of nonsurgical 
wound dressing
    <bullet> V58.31, Encounter for change or removal of surgical wound 
dressing
    <bullet> V58.32, Encounter for removal of sutures
    <bullet> V72.11, Encounter for hearing examination following failed 
hearing screening
    <bullet> V72.19, Other examination of ears and hearing
    <bullet> V82.71, Screening for genetic disease carrier status
    <bullet> V82.79, Other genetic screening
    <bullet> V85.51, Body mass index, pediatric, less than 5th 
percentile for age
    <bullet> V85.52, Body mass index, pediatric, 5th percentile to less 
than 85th percentile for age
    <bullet> V85.53, Body mass index, pediatric, 85th percentile to 
less than 95th percentile for age
    <bullet> V85.54, Body mass index, pediatric, greater than or equal 
to 95th percentile for age
    <bullet> V86.0, Estrogen receptor positive status [ER+]
    <bullet> V86.1, Estrogen receptor negative status [ER-]
    We did not receive any public comments on these proposed edits. 
Therefore, we are adopting the proposed changes as final.
j. Edit: Nonspecific O.R. Procedures
    We proposed to remove code 00.29 (Intravascular imaging unspecified 
vessel(s)) from the ``Nonspecific O.R. Procedure'' edit in the MCE. 
This code was erroneously placed in this edit; it is not considered an 
O.R. procedure.
    We did not receive any public comments on these proposed edits. 
Therefore, we are adopting the proposed changes as final.
    In addition, we are removing code 68.39 (Other subtotal abdominal 
hysterectomy) from this edit. Code 68.39 is not a nonspecific code, it 
is considered other, and was originally included in this edit in error.
k. Edit: Noncovered Procedures
    Under the proposed changes to DRG 513 (Pancreas Transplant) under 
the Pre-MDCs described in section II.D.1. of the preamble of the FY 
2007 IPPS proposed rule, a patient must have a history of medically 
uncontrollable, insulin-dependent diabetes mellitus, that is, Type I 
diabetes mellitus. Therefore, to conform the ``Noncovered Procedures'' 
Edit in the MCE to these proposed changes, we proposed to revise 
Diagnosis List 1 in this edit to include only the following codes:
    <bullet> 250.01, Diabetes mellitus without mention of complication, 
type I [juvenile type], not stated as uncontrolled
    <bullet> 250.03, Diabetes mellitus without mention of complication, 
type I [juvenile type], uncontrolled
    <bullet> 250.11, Diabetes with ketoacidosis, type I [juvenile 
type], not stated as uncontrolled
    <bullet> 250.13, Diabetes with ketoacidosis, type I [juvenile 
type], uncontrolled
    <bullet> 250.21, Diabetes with hyperosmolarity, type I [juvenile 
type], not stated as uncontrolled
    <bullet> 250.23, Diabetes with hyperosmolarity, type I [juvenile 
type], uncontrolled
    <bullet> 250.31, Diabetes with other coma, type I [juvenile type], 
not stated as uncontrolled
    <bullet> 250.33, Diabetes with other coma, type I [juvenile type], 
uncontrolled
    <bullet> 250.41, Diabetes with renal manifestations, type I 
[juvenile type], not stated as uncontrolled
    <bullet> 250.43, Diabetes with renal manifestations, type I 
[juvenile type], uncontrolled
    <bullet> 250.51, Diabetes with ophthalmic manifestations, type I 
[juvenile type], not stated as uncontrolled
    <bullet> 250.53, Diabetes with ophthalmic manifestations, type I 
[juvenile type], uncontrolled
    <bullet> 250.61, Diabetes with neurological manifestations, type I 
[juvenile type], not stated as uncontrolled
    <bullet> 250.63, Diabetes with neurological manifestations, type I 
[juvenile type], uncontrolled
    <bullet> 250.71, Diabetes with peripheral circulatory disorders, 
type I [juvenile type], not stated as uncontrolled
    <bullet> 250.73, Diabetes with peripheral circulatory disorders, 
type I [juvenile type], uncontrolled
    <bullet> 250.81, Diabetes with other specified manifestations, type 
I [juvenile type], not stated as uncontrolled
    <bullet> 250.83, Diabetes with other specified manifestations, type 
I [juvenile type], uncontrolled
    <bullet> 250.91, Diabetes with unspecified complication, type I 
[juvenile type], not stated as uncontrolled
    <bullet> 250.93, Diabetes with unspecified complication, type I 
[juvenile type], uncontrolled

[[Page 47954]]

    In addition, we proposed to remove Diagnosis List 2 from the 
``Noncovered Procedures'' edit, which is comprised of the following 
codes:
    <bullet> 403.01, Hypertensive kidney disease, malignant, with 
chronic kidney disease
    <bullet> 403.11, Hypertensive kidney disease, benign, with chronic 
kidney disease
    <bullet> 403.91, Hypertensive kidney disease, unspecified, with 
chronic kidney disease
    <bullet> 404.02, Hypertensive heart and kidney disease, malignant, 
with chronic kidney disease
    <bullet> 404.03, Hypertensive heart and kidney disease, malignant, 
with heart failure and chronic kidney disease
    <bullet> 404.12, Hypertensive heart and kidney disease, benign, 
with chronic kidney disease
    <bullet> 404.13, Hypertensive heart and kidney disease, benign, 
with heart failure and chronic kidney disease
    <bullet> 404.92, Hypertensive heart and kidney disease, 
unspecified, with chronic kidney disease
    <bullet> 404.93, Hypertensive heart and kidney disease, 
unspecified, with heart failure and chronic kidney disease
    <bullet> 585.1, Chronic kidney disease, Stage I
    <bullet> 585.2, Chronic kidney disease, Stage II (mild)
    <bullet> 585.3, Chronic kidney disease, Stage III (moderate)
    <bullet> 585.4, Chronic kidney disease, Stage IV (severe)
    <bullet> 585.5, Chronic kidney disease, Stage V
    <bullet> 585.6, End stage renal disease
    <bullet> 585.9, Chronic kidney disease, unspecified
    <bullet> V42.0, Organ or tissue replaced by transplant, kidney
    <bullet> V43.89, Organ or tissue replaced by other means, other 
organ or tissue, other
    All of the comments we received regarding this proposal were 
favorable. Therefore, we are adopting the above changes as final.
    Lumbar Artificial Disc: CMS has found that lumbar artificial disc 
replacement (LADR) with the Charite<SUP>TM</SUP> lumbar artificial disc 
is not reasonable and necessary for the Medicare population over 60 
years of age. Therefore, we issued a national noncoverage determination 
for LADR with the Charite<SUP>TM</SUP> lumbar artificial disc for 
Medicare patients over 60 years of age. For Medicare beneficiaries 60 
years of age and under, there is no national coverage determination, 
leaving such determinations to be made on a local basis. The coverage 
decision memo can be viewed on the CMS Web site at http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=170.
    To conform to this decision, procedure code 84.65 (Insertion of 
total spinal disc prosthesis, lumbosacral) is put on the Non-Covered 
Procedure edit except when the patient is 60 years of age or less. The 
logic will be as follows:
    84.65, Insertion of total spinal disc prosthesis, lumbosacral
    AND
    Age <=61
l. Edit: Bilateral Procedure
    We proposed to remove the following codes from the Bilateral 
Procedure edit, as these are adjunct codes. They are not O.R. codes 
recognized by the GROUPER as procedures, and the edit was created in 
error last year.
    <bullet> 00.74, Hip replacement bearing surface, metal-on-
polyethylene
    <bullet> 00.75, Hip replacement bearing surface, metal-on-metal
    <bullet> 00.76, Hip replacement bearing surface, ceramic-on-ceramic
    We did not receive any public comments on these proposed edits. 
Therefore, we are adopting the proposed changes as final.
    In addition, we are deleting the following joint revision codes 
from this edit, as they should not have been added last year.
    <bullet> 00.71, Revision of hip replacement, acetabular component
    <bullet> 00.72, Revision of hip replacement, femoral component
    <bullet> 00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
    <bullet> 00.81, Revision of knee replacement, tibial component
    <bullet> 00.82, Revision of knee replacement, femoral component
    <bullet> 00.83, Revision of knee replacement, patellar component
    <bullet> 00.84, Revision of total knee replacement, tibial insert 
(liner)
    <bullet> 81.53, Revision of hip replacement not otherwise specified
    <bullet> 81.55, Revision of knee replacement not otherwise 
specified
7. 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 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 DRG. The surgical 
hierarchy, an ordering of surgical classes from most resource-intensive 
to least resource-intensive, performs that function. Application of 
this hierarchy ensures that cases involving multiple surgical 
procedures are assigned to the DRG associated with the most resource-
intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of 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 DRGs. For example, 
in MDC 11, the surgical class ``kidney transplant'' consists of a 
single DRG (DRG 302) and the class ``kidney, ureter and major bladder 
procedures'' consists of three DRGs (DRGs 303, 304, and 305). 
Consequently, in many cases, the surgical hierarchy has an impact on 
more than one DRG. The methodology for determining the most resource-
intensive surgical class involves weighting the average resources for 
each DRG by frequency to determine the weighted average resources for 
each surgical class. For example, assume surgical class A includes DRGs 
1 and 2 and surgical class B includes DRGs 3, 4, and 5. Assume also 
that the average charge of DRG 1 is higher than that of DRG 3, but the 
average charges of DRGs 4 and 5 are higher than the average charge of 
DRG 2. To determine whether surgical class A should be higher or lower 
than surgical class B in the surgical hierarchy, we would weight the 
average charge of each DRG in the class by frequency (that is, by the 
number of cases in the DRG) to determine average resource consumption 
for the surgical class. The surgical classes would then be ordered from 
the class with the highest average resource utilization to that with 
the lowest, with the exception of ``other O.R. procedures'' as 
discussed below.
    This methodology may occasionally result in assignment of a case 
involving multiple procedures to the lower-weighted 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 charge is 
ordered above a surgical class with a higher average charge. 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 charge for the

[[Page 47955]]

DRG or DRGs in that surgical class may be higher than that 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 
charges for two surgical classes is very small. We have found that 
small differences generally do not warrant reordering of the hierarchy 
because, as a result of reassigning cases on the basis of the hierarchy 
change, the average charges are likely to shift such that the higher-
ordered surgical class has a lower average charge than the class 
ordered below it.
    Based on the preliminary recalibration of the DRGs, in the FY 2007 
IPPS proposed rule (71 FR 24039), we proposed to revise the surgical 
hierarchy for Pre-MDCs, MDC 1 (Diseases and Disorders of the Nervous 
System), MDC 2 (Diseases and Disorders of the Eye), MDC 3 (Diseases and 
Disorders of the Ear, Nose, Mouth, and Throat), MDC 8 (Diseases and 
Disorders of the Musculoskeletal System and Connective Tissue), MDC 10 
(Endocrine, Nutritional and Metabolic Diseases and Disorders), and MDC 
13 (Diseases and Disorders of the Female Reproductive System) as 
follows:
    In Pre-MDCs, we proposed to reorder DRG 481 (Bone Marrow 
Transplant) above DRG 513 (Pancreas Transplant).
    In MDC 1, we proposed to reorder DRGs 531-532 (Spinal Procedures, 
With CC and Without CC, respectively) above DRGs 529-530 (Ventricular 
Shunt Procedures, With CC and Without CC, respectively).
    In MDC 2, we proposed to reorder DRG 42 (Intraocular Procedures 
Except Retina, Iris and Lens) above DRG 36 (Retinal Procedures).
    In MDC 3, we proposed to reorder DRGs 168-169 (Mouth Procedures, 
With CC and Without CC, respectively) above DRG 57 (T&A Procedures, 
Except Tonsillectomy and/or Adenoidectomy Only, Age > 17) and DRG 58 
(T&A Procedures, Except Tonsillectomy and/or Adenoidectomy Only, Age 0-
17).
    In MDC 8, we proposed to reorder DRG 213 (Amputation for 
Musculoskeletal System and Connective Tissue Disorders) above DRG 216 
(Biopsies of Musculoskeletal System and Connective Tissue).
    In MDC 10, we proposed to reorder DRG 285 (Amputation of Lower Limb 
for Endocrine, Nutritional and Metabolic Diseases and Disorders) above 
DRG 288 (O.R. Procedures for Obesity).
    In MDC 13, we proposed to reorder DRG 363 (D&C, Conization and 
Radio-Implant, for Malignancy) and DRG 364 (D&C, Conization and Radio-
Implant, Except for Malignancy) above DRG 360 (Vagina, Cervix, and 
Vulva Procedures).
    We did not receive any public comments on the proposed changes to 
the surgical hierarchy described above. Based on a test of the proposed 
revisions using the March 2006 update of the FY 2005 MedPAR file and 
the revised GROUPER software, we found that the revisions are still 
supported by the data. Therefore, we are incorporating these proposed 
revisions to the surgical hierarchy as final for FY 2007. In addition, 
because, in this final rule, we are deleting 8 DRGs and creating 20 new 
DRGs as discussed under section II.D.7. of this preamble, we are 
reordering the following DRGs in MDC 1 (Diseases and disorders of the 
Nervous System), MDC 6 (Diseases and Disorders of the Digestive 
System), MDC 11 (Diseases and Disorders of the Kidney and urinary 
Tract), and MDC 18 (Infectious and Parasitic Diseases (Systemic or 
Unspecified Sites)):
    <bullet> In MDC 1, we are reordering DRG 577 (Carotid Artery Stent 
Procedure) above DRG 533 (Extracranial Procedures With CC).
    <bullet> In MDC 6, we are reordering DRGs 567 and 568 (Stomach, 
Esophageal and Duodenal Procedures Age >17 With CC With and Without 
Major GI Diagnoses, respectively) above DRG 155 (Stomach, Esophageal 
and Duodenal Procedures Age >17 Without CC);
    <bullet> In MDC 6, we are reordering DRGs 569-570 (Major Small and 
Large Bowel Procedures With CC With and Without Major GI Diagnoses, 
respectively) above DRG 149 (Major Small and Large Bowel Procedures 
Without CC).
    <bullet> In MDC 11, we are reordering DRG 573 (Major Bladder 
Procedures) above DRG 303 (Kidney, Ureter and Major Bladder Procedures 
for Neoplasm).
    <bullet> In MDC 18, we are reordering DRG 578 (Infections and 
Parasite Diseases With O.R. Procedure) above DRG 579 (Postoperative or 
Post-Traumatic Infections With O.R. Procedure).
8. Refinement of Complications and Comorbidities (CC) List
a. Background
    As indicated earlier in this preamble, under the IPPS DRG 
classification system, we have developed a standard list of diagnoses 
that are considered complications or comorbidities (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.
b. Comprehensive Review of the CC List
    In previous years, we have made changes to the standard list of 
CCs, either by adding new CCs or deleting CCs already on the list, but 
we have never conducted a comprehensive review of the list. Given the 
long period of time that had elapsed since the original CC list was 
developed, the incremental nature of changes to it, and changes in the 
way inpatient care is delivered, and in partial response to 
recommendations in MedPAC's March 2005 Report to Congress on Physician-
Owned Specialty Hospitals, for the FY 2006 IPPS final rule, we reviewed 
the 121-paired DRGs that were split on the presence or absence of a CC 
among the 3,285 diagnosis codes on the CC list. We presented the 
results of that review and summarized public comments that we received 
in the FY 2006 proposed rule on the review results in the FY 2006 IPPS 
final rule (70 FR 47313 through 47315). Further analysis of the CC list 
and refinement to recognize the effects of differences in severity of 
illness among patients is discussed in section II.C. of the preamble of 
the proposed rule as part of our efforts to develop a CSDRG system for 
use in the IPPS.
    During this past winter, CMS began a comprehensive review of over 
13,000 diagnosis codes to determine whether they should be classified 
as CCs when present as a secondary diagnosis. Although we did not 
complete this review because of the work we did to develop the CS DRGs, 
we are considering whether to continue our analysis of the CC list as 
part of an effort to develop and adopt a severity DRG system that is in 
the public domain for FY 2008. As we explained in more detail above, we 
may update the work we did to develop a severity DRG system in the mid-
1990s that classified patients into a base DRG that was further 
subdivided based on three levels of severity depending upon whether the 
patient had no CC, a CC, or a major CC in conjunction with continuing 
our review of the CC list.

[[Page 47956]]

c. CC Exclusions List for FY 2007
    In the September 1, 1987 final notice (52 FR 33143) concerning 
changes to the DRG classification system, we modified the GROUPER logic 
so that certain diagnoses included on the standard list of CCs would 
not be considered valid CCs in combination with a particular principal 
diagnosis. We created the CC Exclusions List for the following reasons: 
(1) To preclude coding of CCs for closely related conditions; (2) to 
preclude duplicative or inconsistent coding from being treated as CCs; 
and (3) to ensure that cases are appropriately classified between the 
complicated and uncomplicated DRGs in a pair. As we indicated above, we 
developed a list of diagnoses, using physician panels, to include those 
diagnoses that, when present as a secondary condition, would be 
considered a substantial complication or comorbidity. In previous 
years, we have made changes to the list of CCs, either by adding new 
CCs or deleting CCs already on the list. We did not propose to delete 
any of the diagnosis codes on the CC list for FY 2007.
    In the May 19, 1987 proposed notice (52 FR 18877) and the September 
1, 1987 final notice (52 FR 33154), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
    <bullet> Chronic and acute manifestations of the same condition 
should not be considered CCs for one another.
    <bullet> Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for the same condition should not be considered 
CCs for one another.
    <bullet> Codes for the same condition that cannot coexist, such as 
partial/total, unilateral/bilateral, obstructed/unobstructed, and 
benign/malignant, should not be considered CCs for one another.
    <bullet> Codes for the same condition in anatomically proximal 
sites should not be considered CCs for one another.
    <bullet> Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. We have continued to review the remaining 
CCs to identify additional exclusions and to remove diagnoses from the 
master list that have been shown not to meet the definition of a 
CC.\17\
---------------------------------------------------------------------------

    \17\ 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; and the FY 2006 final rule (70 FR 47640, 
August 12, 2005), for the FY 2006 revisions. 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.
---------------------------------------------------------------------------

    As we proposed, we are making limited revisions to the CC 
Exclusions List to take into account the changes that will be made in 
the ICD-9-CM diagnosis coding system effective October 1, 2006. (See 
section II.D.10. of this preamble for a discussion of ICD-9-CM 
changes.) We are making these changes in accordance with the principles 
established when we created the CC Exclusions List in 1987.
    Tables 6G and 6H in the Addendum to this final rule contain the 
revisions to the CC Exclusions List that will be effective for 
discharges occurring on or after October 1, 2006. Each table shows the 
principal diagnoses with changes to the excluded CCs. Each of these 
principal diagnoses is shown with an asterisk, and the additions or 
deletions to the CC Exclusions List are provided in an indented column 
immediately following the affected principal diagnosis.
    CCs that are added to the list are in Table 6G--Additions to the CC 
Exclusions List. Beginning with discharges on or after October 1, 2006, 
the indented diagnoses will not be recognized by the GROUPER as valid 
CCs for the asterisked principal diagnosis.
    CCs that are deleted from the list are in Table 6H--Deletions from 
the CC Exclusions List. Beginning with discharges on or after October 
1, 2006, the indented diagnoses will be recognized by the GROUPER as 
valid CCs for the asterisked principal diagnosis.
    Copies of the original CC Exclusions List applicable to FY 1988 can 
be obtained from the National Technical Information Service (NTIS) of 
the Department of Commerce. It is available in hard copy for $152.50 
plus shipping and handling. A request for the FY 1988 CC Exclusions 
List (which should include the identification accession number (PB) 88-
133970) should be made to the following address: National Technical 
Information Service, United States Department of Commerce, 5285 Port 
Royal Road, Springfield, VA 22161; or by calling (800) 553-6847.
    Users should be aware of the fact that all revisions to the CC 
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 
1997, 1998, 1999, 2001, 2002, 2003, 2004, 2005, and 2006) and those in 
Tables 6G and 6H of this final rule for FY 2007 must be incorporated 
into the list purchased from NTIS in order to obtain the CC Exclusions 
List applicable for discharges occurring on or after October 1, 2006. 
(Note: There was no CC Exclusions List in FY 2000 because we did not 
make changes to the ICD-9-CM codes for FY 2000.)
    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 DRG Definitions Manual, Version 23.0, is available for $225.00, 
which includes $15.00 for shipping and handling. Version 24.0 of this 
manual, which will include the final FY 2007 DRG changes, will be 
available in hard copy for $250.00. Version 24.0 of the manual is also 
available on a CD for $200.00; a combination hard copy and CD is 
available for $400.00. 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. Please specify the revision or revisions 
requested.
9. Review of Procedure Codes in DRGs 468, 476, and 477
    Each year, we review cases assigned to DRG 468 (Extensive O.R. 
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic O.R. 
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive 
O.R. Procedure Unrelated to Principal Diagnosis) to determine whether 
it would be appropriate to change the procedures assigned among these 
DRGs.
    DRGs 468, 476, and 477 are reserved for those cases in which none 
of the O.R. procedures performed are related to the principal 
diagnosis. These DRGs are intended to capture atypical cases, that is, 
those cases not occurring with sufficient frequency to represent a 
distinct, recognizable clinical group. DRG 476 is assigned to those 
discharges

[[Page 47957]]

in which one or more of the following prostatic procedures are 
performed and are unrelated to the principal diagnosis:
    <bullet> 60.0, Incision of prostate
    <bullet> 60.12, Open biopsy of prostate
    <bullet> 60.15, Biopsy of periprostatic tissue
    <bullet> 60.18, Other diagnostic procedures on prostate and 
periprostatic tissue
    <bullet> 60.21,Transurethral prostatectomy
    <bullet> 60.29, Other transurethral prostatectomy
    <bullet> 60.61, Local excision of lesion of prostate
    <bullet> 60.69, Prostatectomy, not elsewhere classified
    <bullet> 60.81, Incision of periprostatic tissue
    <bullet> 60.82, Excision of periprostatic tissue
    <bullet> 60.93, Repair of prostate
    <bullet> 60.94, Control of (postoperative) hemorrhage of prostate
    <bullet> 60.95, Transurethral balloon dilation of the prostatic 
urethra
    <bullet> 60.96, Transurethral destruction of prostate tissue by 
microwave thermotherapy
    <bullet> 60.97, Other transurethral destruction of prostate tissue 
by other thermotherapy
    <bullet> 60.99, Other operations on prostate
    All remaining O.R. procedures are assigned to DRGs 468 and 477, 
with DRG 477 assigned to those discharges in which the only procedures 
performed are nonextensive procedures that are unrelated to the 
principal diagnosis.\18\
---------------------------------------------------------------------------

    \18\ The original list of the ICD-9-CM procedure codes for the 
procedures we consider nonextensive procedures, if performed with an 
unrelated principal diagnosis, was published in Table 6C in section 
IV of the Addendum to the FY 1989 final rule (53 FR 38591). As part 
of the FY 1991 final rule (55 FR 361.35), 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 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.
---------------------------------------------------------------------------

    For FY 2007, we did not propose to change the procedures assigned 
among these DRGs. We did not receive any comments on our proposal and, 
therefore, are adopting it as final.
a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs
    We annually conduct a review of procedures producing assignment to 
DRG 468 or DRG 477 on the basis of volume, by procedure, to see if it 
would be appropriate to move procedure codes out of these DRGs into one 
of the surgical DRGs for the MDC into which the principal diagnosis 
falls. The data are arrayed in two ways for comparison purposes. We 
look at a frequency count of each major operative procedure code. We 
also compare procedures across MDCs by volume of procedure codes within 
each MDC.
    We identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical DRGs for the MDC in which the diagnosis falls. 
Based on this year's review, as proposed, we are not removing any 
procedures from DRG 477 with assignment to one of the surgical DRGs. We 
did not receive any comments on our proposal, and, therefore, there 
will be no change to DRG 477.
    However, we did receive a comment regarding DRG 468 after the 
publication of the proposed rule. The comment addressed advances in 
treatment technology for hypertension and noted that two procedure 
codes cause cases to be assigned to DRG 468 instead of more 
appropriately to DRGs in MDC 5. Therefore, we are moving the following 
two codes into MDC 5, DRG 479 (Other Vascular Procedures without CC), 
and paired DRGs 553 and 554 (Other Vascular Procedures with CC with and 
without Major CV Diagnosis, respectively):
    <bullet> 04.92, Implantation or replacement of peripheral 
neurostimulator lead(s)
    <bullet> 86.96, Insertion or replacement of other neurostimulator 
pulse generator
b. Reassignment of Procedures Among DRGs 468, 476, and 477
    We also annually review the list of ICD-9-CM procedures that, when 
in combination with their principal diagnosis code, result in 
assignment to DRGs 468, 476, and 477, to ascertain if any of those 
procedures should be reassigned from one of these three DRGs to another 
of the three DRGs based on average charges and the length of stay. We 
look at the data for trends such as shifts in treatment practice or 
reporting practice that would make the resulting DRG assignment 
illogical. If we find these shifts, we would propose to move cases to 
keep the 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.
    We did not propose to move any procedure codes from DRG 476 to DRGs 
468 or 477, or from DRG 477 to DRGs 468 or 476 for FY 2007. We did not 
receive any public comments on our proposal and; therefore, are 
adopting it as final.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on our review this year, as we proposed, we are not adding 
any diagnosis codes to MDCs for FY 2007. We did not receive any public 
comments on our proposal and, therefore, are adopting it as final.
10. Changes to the ICD-9-CM Coding System
    As described in section II.B.1. of this preamble, the ICD-9-CM is a 
coding system used for the reporting of diagnoses and procedures 
performed on a patient. In September 1985, the ICD-9-CM Coordination 
and Maintenance Committee was formed. This is a Federal 
interdepartmental committee, co-chaired by the National Center for 
Health Statistics (NCHS), the Centers for Disease Control and 
Prevention, and CMS, charged with maintaining and updating the ICD-9-CM 
system. The Committee is jointly responsible for approving coding 
changes, and developing errata, addenda, and other modifications to the 
ICD-9-CM to reflect newly developed procedures and technologies and 
newly identified diseases. The Committee is also responsible for 
promoting the use of Federal and non-Federal educational programs and 
other communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The Official Version of the ICD-9-CM contains the list of valid 
diagnosis and procedure codes. (The Official Version of the ICD-9-CM is 
available from the Government Printing Office on CD-ROM for $25.00 by 
calling (202) 512-1800.) 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

[[Page 47958]]

Tabular List and Alphabetic Index for Procedures.
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding field, such 
as the American Health Information Management Association (AHIMA), the 
American Hospital Association (AHA), and various physician specialty 
groups, as well as individual physicians, health information management 
professionals, and other members of the public, to contribute ideas on 
coding matters. After considering the opinions expressed at the public 
meetings and in writing, the Committee formulates recommendations, 
which then must be approved by the agencies.
    The Committee presented proposals for coding changes for 
implementation in FY 2007 at a public meeting held on September 29-30, 
2005, and finalized the coding changes after consideration of comments 
received at the meetings and in writing by December 2, 2005. Those 
coding changes were announced in the FY 2007 IPPS proposed rule and are 
listed in Tables 6A through 6F in the Addendum to this final rule. The 
Committee held its 2006 meeting on March 23-24, 2006. Proposed new 
codes for which there was a consensus of public support and for which 
complete tabular and indexing changes can be made by May 2006 will be 
included in the October 1, 2006 update to ICD-9-CM. Code revisions that 
were discussed at the March 23-24, 2006 Committee meeting could not be 
finalized in time to include them in the FY 2007 IPPS proposed rule. 
These additional codes are included in Tables 6A through 6F of this 
final rule and are marked with an asterisk (*).
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 29-30, 2005 meeting can be obtained from the CMS 
Web site: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the diagnosis codes discussions at the 
September 29-30, 2005 meeting are found at: http://www.cdc.gov/nchs/icd9.htm. Paper copies of these minutes are no longer available and the 
mailing list has been discontinued. These Web sites also provide 
detailed information about the Committee, including information on 
requesting a new code, attending a Committee meeting, and timeline 
requirements and meeting dates.
    We encourage commenters to address suggestions on coding issues 
involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM 
Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo 
Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: 
<a href="/cdn-cgi/l/email-protection#6c080a1c582c0f080f420b031a"><span class="__cf_email__" data-cfemail="7d191b0d493d1e191e531a120b">[email protected]</span></a>.
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination 
and Maintenance Committee, CMS, Center for Medicare Management, 
Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06, 
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent 
by E-mail to: <a href="/cdn-cgi/l/email-protection#91e1f0e5e3f8f2f8f0bff3e3fefefae2a3d1f2fce2bff9f9e2bff6fee7"><span class="__cf_email__" data-cfemail="16667762647f757f7738746479797d652456757b65387e7e6538717960">[email protected]</span></a>.
    The ICD-9-CM code changes that have been approved will become 
effective October 1, 2006. The new ICD-9-CM codes are listed, along 
with their DRG classifications, in Tables 6A and 6B (New Diagnosis 
Codes and New Procedure Codes, respectively) in the Addendum to this 
proposed rule. As we stated above, the code numbers and their titles 
were presented for public comment at the ICD-9-CM Coordination and 
Maintenance Committee meetings. Both oral and written comments were 
considered before the codes were approved. In the FY 2007 IPPS proposed 
rule, we only solicited comments on the proposed classification of 
these new codes.
    Comment: One commenter expressed concern about the DRG assignment 
for codes 629.81 (Habitual aborter without current pregnancy) and 
629.89 (Other specified disorders of female genital organs). The 
commenter indicated that CMS proposed to assign both codes to DRG 368 
(Infections, Female Reproductive System) within MDC-18. The commenter 
posited that CMS may have erred in listing the DRG assignment as DRG 
368 and instead intended to assign the code to DRG 369 (Menstrual and 
Other Female Reproductive System Disorders) since these conditions are 
not infections.
    Response: We agree with the commenter that codes 629.81 and 629.89 
do not represent infections and should not be assigned to DRG 368 
within MDC 18. They should instead be assigned to DRG 369 as the 
commenter suggested. Therefore, we are changing the DRG assignment for 
codes 629.81 and 629.89 from DRG 368 to DRG 369. This change is shown 
in Table 6A of the Addendum to this final rule.
    Comment: One commenter asked whether the footnotes for codes 995.20 
through 995.29 in Table 6A of the Addendum to the proposed rule was in 
error. The commenter stated that the predecessor code, 995.2 
(Unspecified adverse effect of drug, medicinal and biological 
substance) is considered a secondary diagnosis of a ``major problem'' 
diagnosis that will assign a patient to DRGs 387 (Prematurity with 
Major Problems) and DRG 389 (Full-Term Neonate with Major Problems) 
when present only as a secondary diagnosis. However, the commenter 
added, the footnote on the expanded codes 995.20 through 995.29 lists 
them as principal or secondary diagnoses that will assign a patient to 
DRGs 387 and 389 for neonates with major problems. The specific codes 
are as follows:
    <bullet> 995.20 (Unspecified adverse effect of unspecified drug, 
medicinal and biological substance)
    <bullet> 995.21 (Arthus phenomenon)
    <bullet> 995.22 (Unspecified adverse effect of anesthesia)
    <bullet> 995.23 (Unspecified adverse effect of insulin)
    <bullet> 995.27 (Other drug allergy)
    <bullet> 995.29 (Unspecified adverse effect of other drug, 
medicinal and biological substance)
    Response: The commenter is correct that we made an error in the 
footnote. The predecessor code 995.2 when present as a secondary 
diagnosis, will be a major problem that assigns the patient to DRGs 387 
and 389. The footnote should have indicated codes 995.20 through 995.29 
will only assign patients DRGs 387 and 389 when present as a secondary 
diagnosis. We have corrected the footnote in Table 6A of the Addendum 
to this final rule.
    For codes that have been replaced by new or expanded codes, the 
corresponding new or expanded diagnosis codes are included in Table 6A. 
New procedure codes are shown in Table 6B. Diagnosis codes that have 
been replaced by expanded codes or other codes or have been deleted are 
in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes 
will not be recognized by the GROUPER beginning with discharges 
occurring on or after October 1, 2006. Table 6D contains invalid 
procedure codes. These invalid procedure codes will not be recognized 
by the GROUPER beginning with discharges occurring on or after October 
1, 2006. Revisions to diagnosis code titles are in Table 6E (Revised 
Diagnosis Code Titles), which also includes the DRG assignments for 
these revised codes. Table 6F includes revised procedure code titles 
for FY-2007.
    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

[[Page 47959]]

would describe new technology discussed and approved at the April 
meeting as part of the code revisions effective the following October. 
As stated previously, ICD-9-CM codes discussed at the March 23-24, 2006 
Committee meeting that received consensus and that were finalized by 
May 2006, are included in Tables 6A through 6F of the Addendum to this 
final rule.
    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 in April 1 of 
each year, but the addition of such codes shall not require the 
Secretary to adjust the payment (or diagnosis-related group 
classification) * * * until the fiscal year that begins after such 
date.'' This requirement improves the recognition of new technologies 
under the IPPS system by providing information on these new 
technologies at an earlier date. Data will be available 6 months 
earlier than would be possible with updates occurring only once a year 
on October 1.
    While section 1886(d)(5)(K)(vii) of the Act states that the 
addition of new diagnosis and procedure codes on April 1 of each year 
shall not require the Secretary to adjust the payment, or DRG 
classification, under section 1886(d) of the Act until the fiscal year 
that begins after such date, we have to update the DRG software and 
other systems in order to recognize and accept the new codes. We also 
publicize the code changes and the need for a mid-year systems update 
by providers to capture the new codes. Hospitals also have to obtain 
the new code books and encoder updates, and make other system changes 
in order to capture 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 publicized on CMS and NCHS Web pages in May of each year. Publishers 
of coding books and software use this information to modify their 
products that are used by health care providers. This 5-month time 
period has proved to be necessary for hospitals and other providers to 
update their systems.
    A discussion of this timeline and the need for changes are included 
in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance 
Committee minutes. The public agreed that there was a need to hold the 
fall meetings earlier, in September or October, in order to meet the 
new implementation dates. The public provided comment that additional 
time would be needed to update hospital systems and obtain new code 
books and coding software. There was considerable concern expressed 
about the impact this new April update would have on providers.
    In the FY 2005 IPPS final rule, we implemented section 
1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of 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 for 
an expedited April 1, 2006 implementation of an ICD-9-CM code at the 
September 29-30, 2005 Committee meeting. Therefore, there were no new 
ICD-9-CM codes implemented on April 1, 2006.
    We believe that this process captures the intent of section 
1886(d)(5)(K)(vii) of the Act. This requirement was included in the 
provision revising the standards and process for recognizing new 
technology under the IPPS. In addition, the need for approval of new 
codes outside the existing cycle (October 1) arises most frequently and 
most acutely where the new codes will capture new technologies that are 
(or will be) under consideration for new technology add-on payments. 
Thus, we believe this provision was intended to expedite data 
collection through the assignment of new ICD-9-CM codes for new 
technologies seeking higher payments.
    Current addendum and code title information is published on the CMS 
Web page at: 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 
page at: 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 
contractors for use in updating their systems and providing education 
to providers.
    These same means of disseminating information on new, revised, and 
deleted ICD-9-CM codes will be used to notify providers, publishers, 
software vendors, contractors, and others of any changes to the ICD-9-
CM codes that are implemented in April. The code titles are adopted as 
part of the ICD-9-CM Coordination and Maintenance Committee process. 
Thus, although we publish the code titles in the IPPS proposed and 
final rules, they are not subject to comment in the proposed or final 
rules. We will continue to publish the October code updates in this 
manner within the IPPS proposed and final rules. For codes that are 
implemented in April, we will assign the new procedure code to the same 
DRG in which its predecessor code was assigned so there will be no DRG 
impact as far as DRG assignment. This mapping was specified by section 
1886(d)(5)(K)(vii) of the Act as added by section 503(a) of Pub. L. 
108-173. 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

[[Page 47960]]

to update their code books and software systems. We will strive to have 
the April 1 updates available through these Web sites 5 months prior to 
implementation (that is, early November of the previous year), as is 
the case for the October 1 updates.
    Comment: Many commenters recommended that the Secretary use the 
regulatory process to replace ICD-9-CM with ICD-10-CM and ICD-10-PCS 
expeditiously. Several commenters indicated that the April 2005 ICD-9-
CM Coordination and Maintenance Committee meeting included discussions 
of limiting the creation of new procedure codes in order to allow the 
classification system to last at least 2 more years. ICD-9-CM procedure 
code categories 00 and 17 were created to identify a diverse group of 
procedures and interventions affecting all body systems. The commenters 
stressed that the establishment of these code categories represented a 
deviation from the normal structure of ICD-9-CM and was a stopgap 
measure to accommodate new technology when there are no other codes 
available in the corresponding body system chapters (for example, 
musculoskeletal system and circulatory system). The commenters 
indicated that category 00 is now full, and the ICD-9-CM Coordination 
and Maintenance Committee is considering proposals for codes in 
category 17. The commenters stated that at the April Coordination and 
Maintenance meeting a proposal was presented that would in effect leave 
only 80 codes available in the new category 17. The commenters stated 
that in recent years, as many as 50 new procedure codes have been 
created in a single year. The commenters strongly recommended that the 
Secretary use the regulatory process to implement ICD-10-CM and ICD-10-
PCS in place of ICD-9-CM expeditiously.
    Several commenters indicated that limitations with ICD-9-CM make 
data collected with these codes less precise. The commenters stated 
that systems such as the CS DRGs could make use of the more detailed 
information in ICD-10-CM and ICD-10-PCS to group claims more accurately 
and better identify differences in severity and complexity. Similar 
comments were received from a number of other individuals.
    Response: We agree that it is important to have an accurate and 
precise coding system. The Department will continue to study whether to 
adopt ICD-10-CM. In the interim, we continue to update both ICD-9-CM 
and ICD-10-PCS.
    Comment: A number of commenters expressed concern that only nine 
diagnosis codes and six procedure codes are processed by Medicare. The 
commenters recommended that CMS modify its systems so that the number 
of diagnoses codes processed would increase from 9 to 25 and the number 
of procedures processed would increase from 6 to 25. The commenters 
stated that hospitals submit claims to CMS in electronic format, and 
that the HIPAA compliant electronic transaction standard, HIPAA 837i, 
allows up to 25 diagnoses and 25 procedures. The commenters stated that 
CMS does not require its fiscal intermediaries to process codes beyond 
the first nine diagnosis codes and six procedure codes. The commenters 
indicated that complex classification systems such as the proposed CS 
DRGs could make use of the information in these additional codes to 
better classify the patients.
    One commenter stated that an incremental step in working towards a 
refined DRG system is to have CMS systems process 25 diagnosis and 
procedure codes.
    Response: The commenters are correct that CMS does not process 
codes submitted electronically on the 837i electronic format beyond the 
first 9 diagnosis codes and first 6 procedure codes. While HIPAA 
requires CMS to accept up to 25 ICD-9-CM diagnosis and procedure codes 
on the HIPAA 837i electronic format, it does not require that CMS 
process that many diagnosis and procedure codes.
    As suggested by the commenters, there is value in retaining 
additional data on patient conditions that would result from expanding 
Medicare's data system so it can accommodate additional diagnosis and 
procedure codes. We have been considering this issue while we 
contemplated refinements to our DRG system to better recognize patient 
severity of illness. However, extensive lead time is required to allow 
for modifications to our internal and contractors' electronic systems 
in order to process and store this additional information. We are 
unable to move forward with this recommendation without carefully 
evaluating implementation issues. We will continue to carefully 
evaluate this request to expand the process capacity of our systems.
    Comment: One commenter expressed concern about the process involved 
with updating the ICD-9-CM Coding Guidelines. The guidelines are 
updated by the cooperating parties of ICD-9-CM, including 
representatives from the Centers for Disease and Prevention Control 
(CDC), CMS, the AHA, and the AHIMA. The commenter complimented CMS 
staff for becoming more ``provider friendly'' and using such tools as 
the open door forum to involve providers in policy discussions. The 
commenter requested that some of the coding guideline discussions be 
held in an open meeting so that providers could give input.
    Response: We agree with the commenter that it is important to 
involve the provider community in activities involving the updating of 
ICD-9-CM codes and guidelines. The Department utilizes the ICD-9-CM 
Coordination and Maintenance Committee to discuss proposed changes to 
the coding system. At times, this Committee also addresses coding 
guidelines that affect code selection. The current process of approving 
new and revised coding guidelines involves approval by all four 
cooperating parties. It is our understanding that AHA and AHIMA 
actively seek input from their members on coding issues. AHA and AHIMA 
use this input when they are voting on coding issue to be published in 
the AHA's Coding Clinic for ICD-9-CM and on coding guidelines. We will 
refer these concerns to the cooperating parties so that they may 
discuss improvements which could be made in obtaining providers' input 
into coding guidelines. We will also welcome recommendations on 
specific coding guideline issues that providers wish to be included in 
future agendas of the ICD-9-CM Coordination and Maintenance Committee. 
The Committee recently discussed coding guidelines for septicemia. We 
will continue to work with the provider community to offer a public 
forum for discussion of ICD-9-CM code revisions and guidelines.
11. Other Issues
a. Chronic Kidney Disease
    Comment: Two commenters expressed concern regarding the revised 
diagnosis codes for chronic kidney disease and their DRG assignments 
which appeared in Table 6E of the Addendum to the proposed rule. The 
following codes were identified as being classified to DRGs 331, 332, 
and 333 (Other kidney and urinary tract diagnoses with and without CC, 
and age 0-17, respectively) in MDC 11 (Diseases and Disorders of the 
Kidney and Urinary Tract):
    <bullet> 403.00 (Hypertensive chronic kidney disease, malignant, 
with chronic kidney disease stage I through stage IV, or unspecified)
    <bullet> 403.10 (Hypertensive chronic kidney disease, benign, with 
chronic kidney disease stage I through stage IV, or unspecified)

[[Page 47961]]

    <bullet> 403.90 (Hypertensive chronic kidney disease, unspecified, 
with chronic kidney disease stage I through stage IV, or unspecified)
    The commenters stated that revisions made to these three codes will 
go into effect October 1. These changes would add the concept of 
chronic kidney disease to the three codes. Therefore, these three codes 
should be assigned to the same DRGs as other codes for chronic kidney 
disease. The codes with chronic kidney disease are assigned to DRGs 315 
(Other kidney and urinary tract procedures) and 316 (Renal failure) and 
not to DRGs 331 through 333 where they were proposed.
    Response: The commenters are correct. The three codes listed above 
were modified to include the concept of chronic kidney disease. As 
such, they should be assigned to DRG 315 (Other Kidney and Urinary 
Tract Procedures) and DRG 316 (Renal Failure) (and not to DRGs 331 
through 333. We have made these changes in Table 6E of the Addendum to 
this final rule. Therefore, we will assign codes 403.00, 403.10, and 
403.90 to DRG 315-316.
b. Bronchial Valve
    Comment: Two commenters that manufacture minimally invasive 
surgical therapies for patients with chronic obstructive pulmonary 
disease addressed the establishment of a new code for the insertion of 
a bronchial valve. This topic was discussed at the March 23-24, 2006 
meeting of the ICD-9-CM Coordination and Maintenance Committee. (A 
complete summary report of the meeting including handouts can be found 
at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopofPage.) CMS created a new code for endoscopic 
insertion of a bronchial valve: code 33.71 (Endoscopic insertion or 
replacement of bronchial valve(s)). The new code is listed in Table 6B 
of the Addendum to this final rule. The predecessor codes that are 
currently used for this procedure are:
    <bullet> 33.22, Fiber-optic bronchoscopy
    <bullet> 96.05, Other intubation of respiratory tract
    The commenters expressed support for the creation of the new code, 
but requested that the code not be assigned to the same DRG as its 
predecessor codes. The predecessor codes are assigned to a medical DRG 
if the patient is admitted with a respiratory diagnosis. If the patient 
is admitted with a history of malignancy, the patient would be assigned 
to DRG 412 (History of Malignancy with Endoscopy). The commenters 
requested that code 33.71 be assigned to DRG 75 (Major Chest 
Procedure). Although the commenters acknowledged that CMS has no data 
on which to evaluate this request, they recommended that CMS use a 
combination of the diagnosis of air leaks and treatment with 
scarification as a proxy for cases that receive a bronchial valve. The 
commenters stated that these patients are clinically similar and can be 
expected to have similar resource intensity to patients that would 
receive an endobronchial insertion or replacement of bronchial valves.
    The commenters undertook their own data analysis using the FY 2005 
MedPAR file. They used the following diagnosis procedure codes to 
identify the proxy patients:
    <bullet> 512.0, Spontaneous tension pneumothorax
    <bullet> 512.8, Other spontaneous pneumothorax
    <bullet> 34.6, Scarification of the pleura
    Using these codes, the companies identified 490 patients which were 
assigned to DRG 75. These patients had average charges of $56,711 as 
compared to $49,698 for all patients in DRG 75. The commenters stated 
that, although the resource utilization for scarification (and by 
inference, valve implantation) appears to be higher than the average 
for DRG 75, they believed it would still be reasonable to initially 
assign code 33.71 to DRG 75 until actual cost data can be gathered 
using the new procedure code.
    Response: We do not agree that the endoscopic insertion of a 
bronchial valve is clinically similar to scarification of the pleura. 
The commenters themselves indicate that insertion of the bronchial 
valve is a minimally invasive procedure. Scarification of the pleura is 
a significantly invasive procedure. Furthermore, the bronchial valves 
are inserted into patients admitted with chronic obstructive pulmonary 
disease, not spontaneous pneumothorax. Therefore, we do not agree with 
using the pneumothorax diagnoses as a proxy for patients who will 
receive the bronchial valve.
    The bronchial valve code 33.71 will go into effect on October 1, 
2006. At this time, we have no information that suggests we should 
assign this new code to a DRG that is different than the predecessor 
codes. For this reason, we are classifying code 33.71, Endoscopic 
insertion or replacement of bronchial valve(s) as a nonoperating room 
procedure that will be assigned to DRG 412. This classification is 
listed in Table 6B of the Addendum to this final rule. Once we receive 
data using the new code, we will evaluate this issue further.
c. Female Reproductive System Reconstruction Procedures
    Comment: One commenter recommended that CMS consider revising the 
current procedure code assignments for DRG 356 (Female Reproductive 
System Reconstructive Procedures) under MDC 13 (Diseases and Disorders 
of the Female Reproduction System) to better reflect the clinical 
coherence of those procedures that are specific to maintaining 
reproductive health. The proposal suggested by the commenter would 
distinguish procedures that are intended to ensure the reproductive 
function of a woman from urinary conditions that cause discomfort and 
emptying the bladder. The commenter suggested revising DRG 356 to limit 
it to procedures that are specific to maintaining reproductive health 
while creating four new DRGs that would be clinically similar for 
procedures performed to repair pelvic floor defects which cause urinary 
incontinence. The commenter stated these new DRGs would be timely with 
the procedure code proposal they are planning to present at the 
September 28-29, 2006 ICD-9-CM Coordination and Maintenance Committee 
meeting.
    Response: We appreciate the commenter's recommendation to create 
four new DRGs in order to recognize the clinical coherence of 
procedures specific to maintaining reproductive health. There are two 
aspects to the commenter's proposal. The first part of the proposal 
would limit DRG 356 to procedures that are intended to maintain 
reproductive health. The second part of the commenter's proposal would 
create four new DRGs for repairing pelvic floor defects that create 
urinary incontinence. These four new DRGs would consist of two new DRG 
pairs (each split based on whether or not the patient has a CC) that 
would separate patients based on whether or not they had a graft 
procedure.
    The commenter provided no data to support its proposal. Further, 
two of the four new DRGs being requested by the commenter would be 
based on new and revised procedure codes that have not yet been 
proposed or created. Therefore, we are unable to evaluate the request 
at this time. We may consider this proposal further in the future if 
the ICD-9-CM Coordination and Maintenance Committee creates the new 
codes being requested by the commenter and further data are made 
available for review.

[[Page 47962]]

d. Devices That Are Replaced Without Cost or Where Credit for a 
Replaced Device Is Furnished to the Hospital
    In recent years, there have been several field actions and recalls 
with regard to failure of implantable cardiac defibrillators (ICDs) and 
pacemakers. In many of these cases, the manufacturers have offered 
replacement devices without cost to the hospital or credit for the 
device being replaced if the patient required a more expensive device. 
In some circumstances, manufacturers have also offered, through a 
warranty package, to pay specified amounts for unreimbursed expenses to 
persons who had replacement devices implanted. In addition, we believe 
that incidental device failures that are covered by manufacturer 
warranties occur routinely. While we understand that some device 
malfunctions may be inevitable as medical technology grows increasingly 
sophisticated, we believe that early recognition of problems would 
reduce the number of people with the potential to be adversely affected 
by these device problems. The medical community needs heightened and 
early awareness of patterns of device failures, voluntary field 
actions, and recalls so that it can take appropriate action to care for 
Medicare beneficiaries. Systematic efforts must be undertaken by all 
interested and involved parties, including manufacturers, insurers, and 
the medical community, to ensure that device problems are recognized 
and addressed as early as possible so that people's health is protected 
and high quality medical care is provided. We are taking several steps 
to assist in the early recognition and analysis of patterns of device 
problems to minimize the potential for harmful device-related effects 
on the health of Medicare patients and the public in general.
    In recent years, CMS has recognized the importance of data 
collection as a condition of Medicare coverage for selected services. 
In 2005, CMS issued a National Coverage Determination (NCD) that 
expanded coverage of ICDs and also required registry participation when 
the devices were implanted for certain clinical indications. The NCD 
included this requirement in order to ensure that the care received by 
Medicare beneficiaries was reasonable and necessary and, therefore, 
appropriately reimbursed. Presently, the American College of 
Cardiology--National Cardiovascular Data Registry (ACC-NCDR) collects 
these data and maintains the registry.
    In addition to ensuring appropriate payment of claims, collection, 
and ongoing analysis of ICD implantation, data can facilitate public 
health response in the event of future device recalls. The systematic 
recording of device manufacturer and model number can enhance patient 
and provider notification. Analysis of registry data may uncover 
patterns in complication rates (for example, device malfunction, device 
related infection, or early battery depletion) associated with 
particular devices that signify the need for a more specific 
investigation. Patterns found in registry data may identify problems 
earlier than the currently available mechanisms, which do not 
systematically collect such detailed information surrounding 
procedures.
    We encourage the medical community to work to develop additional 
registries for implantable devices, so that timely and comprehensive 
information is available regarding devices, recipients of those 
devices, and their health status and outcomes. While participation in 
an ICD registry is required as a condition of coverage for ICD 
implantation for certain clinical conditions, we believe that the 
potential benefits of registries extend well beyond their application 
in Medicare's specific NCDs. As medical technology continues to advance 
swiftly, data collection regarding the short and long term outcomes of 
new technologies, and especially concerning implanted devices that may 
remain in the bodies of patients for their lifetimes, will be essential 
to the timely recognition of any specific problems and patterns of 
complications. This information will facilitate early interventions to 
mitigate harm and improve the quality and efficiency of health care 
services.
    Moreover, data from registries may help further the development of 
high quality, evidence-based clinical practice guidelines for the care 
of patients who may receive device-intensive procedures. In turn, 
widespread use of evidence-based guidelines may reduce variation in 
medical practice, leading to improved personal and public health. 
Registry information may also contribute to the development of more 
comprehensive and refined quality metrics that may be used to 
systematically assess and then improve the safety and quality of health 
care. Such improvements in the quality of care that result in better 
personal health will require the sustained commitment of industry, 
payers, health care providers, and others towards that goal, along with 
excellent and open communication and rapid systemwide responses in a 
comprehensive effort to protect and enhance the health of the public. 
We look forward to further discussions with the public about new 
strategies to recognize device problems early and how to definitively 
address them, in order to minimize both the harmful health effects and 
increased health care costs that may result.
    In addition, we believe that the routine identification of Medicare 
claims for certain device implantation procedures in situations where a 
payment adjustment is appropriate may enhance the medical community's 
recognition of device problems, potentially leading to more timely 
improvements in device technologies. This systematic approach, where 
hospitals identify and then appropriately report selected services when 
devices are replaced without cost to the hospital or with full credit 
to the hospital for the cost of the replaced device, should provide 
comprehensive information regarding the hospital experiences of 
Medicare patients with certain devices that are being replaced. Because 
Medicare patients are common recipients of implanted devices, this 
claims information may be particularly helpful in identifying patterns 
of device problems early in their natural history so that appropriate 
strategies to reduce future problems may be developed.
    In addition to our concern for the public health, we also have a 
fiduciary responsibility to the Medicare Trust Fund to ensure that 
Medicare pays only for covered services. Therefore, we believe that we 
need to consider whether it is appropriate to reduce the Medicare 
payment in cases in which an implanted device is replaced without cost 
to the hospital or with full credit for the removed device. Such a 
proposal could cover certain devices for which credit for the replaced 
device is given or which are replaced as a result of or pursuant to a 
warranty, field action, voluntary recall, involuntary recall, and 
certain devices which are provided free of charge. It could provide for 
a reduction in the IPPS payment when we determine that the device is 
replaced without cost to the provider or beneficiary or when the 
provider receives full credit for the cost of a replaced device. We 
will need to develop a methodology to determine the amount of the 
reduction to the otherwise payable IPPS payment. We believe that this 
is appropriate because in these cases the full cost of the replaced 
device is not incurred and, therefore, we believe that an adjustment to 
the payment is necessary to remove the cost of the device.

E. Recalibration of DRG Weights

    In the FY 2007 IPPS proposed rule, we proposed to change the DRG

[[Page 47963]]

recalibration process methodology for FY 2007 to move to an HSRV 
weighting method as discussed in section II.C.2. of the preamble to the 
proposed rule (71 FR 24044). For FY 2006 and years prior, we have 
recalibrated the DRG weights based on charge data for Medicare 
discharges using the most current charge information available (for 
example, the FY 2005 MedPAR file would have been used for FY 2007). Our 
thorough analysis of the March 2005 MedPAC recommendations regarding 
refinement of the DRG system used for the IPPS (see discussion of the 
MedPAC recommendations in section II.C.2. of this preamble) has shown 
that using gross charges as a basis for setting the DRG weights has 
introduced bias into the weighting process. Specifically, hospitals 
that are systematically more expensive than others (that is, teaching 
hospitals and specialty hospitals) tend to treat certain cases more 
commonly than others, causing the weights for these cases to be 
artificially high. In addition, hospitals may mark up their charges for 
routine days, intensive care days, and various ancillary services by 
different percentages. This practice of differential markups among 
hospital cost centers may also introduce bias into the weights. For 
instance, we have observed that ancillary service cost centers 
generally have higher charge markups than routine services. Thus, the 
charge-based relative weight methodology may result in higher weights 
for DRGs that use more ancillary services relative to DRGs that use 
more routine services than would occur under a system where the weights 
are based on costs.
    As discussed in section II.C.2. of the preamble of the proposed 
rule, based on our study of the MedPAC recommendations, we developed an 
alternative methodology for recalibrating the DRG weights. This 
proposed method is discussed in detail beginning on 71 FR 24044. The 
proposed method involved applying the HSRV methodology at the cost 
center level (HSRVcc) to remove the bias introduced by hospital 
characteristics (that is, teaching, disproportionate share, location, 
and size, among others) and then scaling the weights to costs using 
national cost center CCRs derived from cost report data. However, in 
response to comments discussed in section II.C.2 of this final rule, we 
have postponed the implementation of the HSRV methodology in order to 
further study its effects and have subsequently revised the methodology 
for setting relative weights based on cost. Further, we are adopting 
the cost relative weights under a 3-year transition period such that in 
FY 2007, year one of the transition, the relative weights will be a 
blend of 33 percent of the relative cost weight and 67 percent of the 
relative charge weight. In year two, the relative weights will be based 
on 67 percent of the relative cost weight and 33 percent of the 
relative charge weight and in year three, the relative weights will be 
100 percent cost based.
    In developing the final 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 2005 MedPAR data used in this proposed rule include 
discharges occurring on October 1, 2004, through September 30, 2005, 
based on bills received by CMS through March 31, 2006, 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 2005 MedPAR file used in calculating the 
relative weights includes data for approximately 12,238,146 Medicare 
discharges. Discharges for Medicare beneficiaries enrolled in a 
Medicare+Choice managed care plan are excluded from this analysis. The 
data exclude CAHs, including hospitals that subsequently became CAHs 
after the period from which the data were taken. The second data source 
used in the cost relative weight methodology are the FY 2004 Medicare 
cost report data files from HCRIS, which represents the most recent 
full set of cost report data available. We used the March 31, 2006 
update of the HCRIS cost report files for FY 2004 in setting the final 
relative cost based weights.
    Because we are implementing the relative weights on a transitional 
basis it is necessary to calculate both charge based and cost based 
relative weights. The charge-based methodology used to calculate the 
DRG relative weights from the MedPAR data is the same methodology that 
was in place for FY 2006 and was applied as follows:
    <bullet> To the extent possible, all the claims were regrouped 
using the FY 2007 DRG classification revisions discussed in section 
II.D. of this preamble.
    <bullet> The transplant cases that were used to establish the 
relative weight for heart and heart-lung, liver and/or intestinal, and 
lung transplants (DRGs 103, 480, and 495) were limited to those 
Medicare-approved transplant centers that have cases in the FY 2005 
MedPAR file. (Medicare coverage for heart, heart-lung, liver and/or 
intestinal, and lung transplants is limited to those facilities that 
have received approval from CMS as transplant centers.)
    <bullet> Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it was necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition 
charges before computing the average charge for the DRG and before 
eliminating statistical outliers.
    <bullet> Total charges were standardized to remove the effects of 
differences in area wage levels, indirect medical education and 
disproportionate share payments, and, for hospitals in Alaska and 
Hawaii, the applicable cost-of-living adjustment.
    <bullet> The average standardized charge per DRG was calculated by 
summing the standardized total charges for all cases in the DRG and 
dividing that amount by the number of cases classified in the DRG. A 
transfer case was counted as a fraction of a case based on the ratio of 
its transfer payment under the per diem payment methodology to the full 
DRG payment for non-transfer cases. That is, a transfer case receiving 
payment under the transfer methodology equal to half of what the case 
would receive as a non-transfer would be counted as 0.5 of a total 
case.
    <bullet> Statistical outliers were eliminated by removing all cases 
that were beyond 3.0 standard deviations from the mean of the log 
distribution of both the charges per case and the charges per day for 
each DRG.
    <bullet> The average charge for each DRG was then recomputed 
(excluding the statistical outliers) and divided by the national 
average standardized charge per case to determine the relative weight.
    The new charge-based weights were then normalized by an adjustment 
factor of 1.49338 so that the average case weight after recalibration 
was equal to the average case weight before recalibration. This 
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. We note that due to 
the decision in Bellevue Hosp. Center v. Leavitt, in which the Court of 
Appeals for the Second Circuit (the Court) ordered CMS to apply the 
occupational mix adjustment to 100 percent of the wage index effective 
for FY 2007 (see section III.C. of this final

[[Page 47964]]

rule for more details of this Court decision), we are unable to 
finalize the FY 2007 wage index data at this time. Since we are relying 
on the wage index data as one of the standardizing factors that we use 
in calculating both the charge-based and the cost-based relative 
weights that are blended to set the FY 2007 transitional relative 
weights, we will recalculate the FY 2007 relative weights when the wage 
data becomes available and will publish these recalculated relative 
weights in a subsequent Federal Register notice prior to October 1, 
2006.
    The methodology we used to calculate the DRG cost-based weights 
from the FY 2005 MedPAR claims data and FY 2004 Medicare cost report 
data is as follows:
    <bullet> To the extent possible, all the claims were regrouped 
using the FY 2007 DRG classification revisions discussed in section 
II.D. of this preamble.
    <bullet> The transplant cases that were used to establish the 
relative weight for heart and heart-lung, liver and/or intestinal, and 
lung transplants (DRGs 103, 480, and 495) were limited to those 
Medicare-approved transplant centers that have cases in the FY 2005 
MedPAR file. (Medicare coverage for heart, heart-lung, liver and/or 
intestinal, and lung transplants is limited to those facilities that 
have received approval from CMS as transplant centers.)
    <bullet> Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it is necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition 
charges before computing the average cost for each DRG and before 
eliminating statistical outliers.
    <bullet> Claims with total charges or total length of stay less 
than or equal to zero were dropped. 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 and anesthesia charges were also dropped. At least 94 percent 
of the providers in the MedPAR file had charges for 10 of the 13 cost 
centers. Claims for providers that did not have charges greater than 
zero for at least 10 of the 13 cost centers were dropped.
    <bullet> Statistical outliers were eliminated by removing all cases 
that were beyond 3.0 standard deviations from the mean of the log 
distribution of both the total charges per case and the total charges 
per day for each DRG.
    Once the MedPAR data were trimmed and the statistical outliers were 
removed, the charges for each of the 13 cost groups for each claim were 
standardized to remove the effects of differences in area wage levels, 
indirect medical education and disproportionate share payments, and for 
hospitals in Alaska and Hawaii, the applicable cost-of-living 
adjustment. Charges were then summed by DRG for each of the 13 cost 
groups such that each DRG had 13 standardized charge totals. These 
charges were then adjusted to cost by applying the national average 
CCRs developed from the FY 2004 cost report data.
    The 13 cost centers that we used in the DRG cost calculation are 
shown in the following table. In addition, the table shows the lines on 
the cost report that we used to create the national cost center CCRs 
that we used to adjust the DRG charges to cost:

BILLING CODE 4120-01-P

[[Page 47965]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.008


[[Page 47966]]


[GRAPHIC] [TIFF OMITTED] TR18AU06.009


[[Page 47967]]


[GRAPHIC] [TIFF OMITTED] TR18AU06.010


[[Page 47968]]


[GRAPHIC] [TIFF OMITTED] TR18AU06.011


[[Page 47969]]


[GRAPHIC] [TIFF OMITTED] TR18AU06.012


[[Page 47970]]


[GRAPHIC] [TIFF OMITTED] TR18AU06.013

    We developed the national average CCRs as follows:
    Taking the FY 2004 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 .01. In 
response to a comment from MedPAC discussed in section II.C.1. of this 
preamble, 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 all 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. In the proposed 
rule we had used a trim of 1.96 times the standard deviation. However, 
in response to comments as discussed in section II C. of this preamble, 
we have subsequently revised our trim to 3 standard deviations as 
commenters stated that this less stringent trim appropriately retains 
more providers in the database. Once the cost report data were trimmed, 
we calculated a Medicare specific CCR, again in response to a comment 
from MedPAC as discussed in section II.C. of this preamble. The 
Medicare specific CCR was determined by taking the Medicare charges for 
each line item from worksheet D Part 4 and deriving the Medicare 
specific costs by applying the hospital-specific departmental CCRs to 
the Medicare specific charges for each line item from worksheet D Part 
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. In the proposed rule, we used hospital-specific CCRs, 
but in response to comments as discussed in section II C. of this 
preamble, we have revised our methodology to use charge-weighted CCRs 
in establishing the national average CCRs.
    After we multiplied the total charges for each DRG in each of the 
13 cost centers by the corresponding national average CCR, we summed 
the 13 ``costs'' across each DRG to produce a total standardized cost 
for the DRG. The average standardized cost for each DRG was then 
computed as the total standardized cost for the DRG divided by the 
transfer adjusted case count for the DRG. The average cost for each DRG 
was then divided by the national average standardized cost per case to 
determine the relative weight.
    The new cost-based weights were then normalized by an adjustment 
factor of 1.49338 so that the average case weight after recalibration 
was equal to the average case weight before recalibration. This 
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.
    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. We used that same case threshold in 
recalibrating the DRG weights for FY 2007. Using the FY 2005 MedPAR 
data set, there are 40 DRGs that contain fewer than 10 cases. In FY 
2006, we computed weights for low volume DRGs by adjusting the FY 2005 
weights of these low volume DRGs by the percentage change in the 
average weight of the cases in other DRGs. Because we believe that we 
do not have sufficient MedPAR data to set accurate and stable HSRVcc 
weights for these low-volume DRGs, we proposed to assign them the 
weights of similar DRGs for which we have more complete data and 
solicited comment on this proposal. The crosswalk table we proposed is 
shown in the FY 2007 IPPS proposed rule (71 FR 24048).
    Comment: One commenter stated that we should not assign weights 
based on other DRGs but should instead supplement our current data the 
data from other sources so that we can set weights for these DRGs based 
on actual cases.
    Response: Because we are implementing cost based weights in a 
transition phase and because we intend to study the DRGs and relative 
weight methodologies during the coming year we have reconsidered our 
proposal to assign low volume DRGs the weights of other DRGS for FY 
2007 and are reverting to our previous method of updating the prior 
year's weight for these DRGs by the percentage change in the average 
weight of the cases in the other DRGs. We may consider supplementing 
our MedPAR data with additional claims data in the future.
    Section 1886(d)(4)(C)(iii) of the Act requires that, beginning with 
FY 1991, reclassification and recalibration changes be made in a manner 
that assures that the aggregate payments are neither greater than nor 
less than the aggregate payments that would have been made without the 
changes. Although normalization is intended to achieve this effect, 
equating the average case weight after recalibration to the average 
case weight before recalibration does not necessarily achieve budget 
neutrality with respect to aggregate

[[Page 47971]]

payments to hospitals because payments to hospitals are affected by 
factors other than average case weight. Therefore, as we have done in 
past years, and as discussed in section II.A.4.a. of the Addendum to 
this final rule, we are making a budget neutrality adjustment to ensure 
that the requirement of section 1886(d)(4)(C)(iii) of the Act is met.

F. LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2007

1. Background
    In the June 6, 2003 LTCH PPS final rule (68 FR 34122), we changed 
the LTCH PPS annual payment rate update cycle to be effective July 1 
through June 30 instead of October 1 through September 30. In addition, 
because the patient classification system utilized under the LTCH PPS 
uses the same DRGs as those currently used under the IPPS for acute 
care hospitals, in that same final rule, we explained that the annual 
update of the long-term care diagnosis-related group (LTC-DRG) 
classifications and relative weights will continue to remain linked to 
the annual reclassification and recalibration of the DRGs used under 
the IPPS. In that same final rule, we specified that we will continue 
to update the LTC-DRG classifications and relative weights to be 
effective for discharges occurring on or after October 1 through 
September 30 each year. Furthermore, we stated that we will publish the 
annual update of the LTC-DRGs in the proposed and final rules for the 
IPPS.
    In the past, the annual update to the IPPS DRGs has been based on 
the annual revisions to the ICD-9-CM codes and was effective each 
October 1. As discussed in the FY 2006 IPPS final rule (70 FR 47323 
through 47341) and in the Rate Year (RY) 2007 LTCH PPS final rule (71 
FR 27803 through 27809), with the implementation of section 503(a) of 
Pub. L. 108-173, there is the possibility that one feature of the 
GROUPER software program may be updated twice during a Federal fiscal 
year (October 1 and April 1) as required by the statute for the IPPS. 
Section 503(a) of Pub. L. 108-173 amended section 1886(d)(5)(K) of the 
Act by adding a new clause (vii) which states that ``the Secretary 
shall provide for the addition of new diagnosis and procedure codes in 
[sic] April 1 of each year, but the addition of such codes shall not 
require the Secretary to adjust the payment (or diagnosis-related group 
classification) * * * until the fiscal year that begins after such 
date.'' This requirement improves the recognition of new technologies 
under the IPPS by accounting for those ICD-9-CM codes in the MedPAR 
claims data at an earlier date. In implementing the statutory change, 
the agency has provided that ICD-9-CM diagnosis and procedure codes for 
new medical technology may be created and added to existing DRGs in the 
middle of the Federal fiscal year on April 1. However, this policy 
change will have no effect on the LTC-DRG relative weights, which will 
continue to be updated only once a year (October 1), nor will there be 
any impact on Medicare payments under the LTCH PPS. The use of the ICD-
9-CM code set is also compliant with the current requirements of the 
Transactions and Code Sets Standards regulations at 45 CFR Parts 160 
and 162, promulgated in accordance with the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA), Pub. L. 104-191.
    As we explained in the RY 2007 LTCH PPS final rule (71 FR 27805 
through 27809), in the health care industry, historically annual 
changes to the ICD-9-CM codes were effective for discharges occurring 
on or after October 1 each year. Thus, the manual and electronic 
versions of the GROUPER software, which are based on the ICD-9-CM 
codes, were also revised annually and effective for discharges 
occurring on or after October 1 each year. As noted above, the patient 
classification system used under the LTCH PPS (LTC-DRGs) is based on 
the patient classification system used under the IPPS (CMS DRGs), which 
historically had been updated annually and is effective for discharges 
occurring on or after October 1 through September 30 each year. As also 
mentioned above, the ICD-9-CM coding update process was revised as a 
result of implementing section 503(a) of Pub. L. 108-173, which 
includes a requirement for updating diagnosis and procedure codes as 
often as twice a year instead of the current process of annual updates 
on October 1 of each year (as discussed in greater detail in section 
II.D.10. of the preamble of this final rule). The agency uses the ICD-
9-CM codes as its code set for diagnoses and procedures. Therefore, the 
ICD-9-CM codes currently used under both the IPPS and LTCH PPS may be 
updated as often as twice a year. This requirement is included as part 
of the amendments to the Act relating to recognition of new medical 
technology under the IPPS.
    Despite the fact that aspects of the GROUPER software may be 
updated to recognize any new technology ICD-9-CM codes, as discussed 
most recently in the RY 2007 LTCH PPS final rule (71 FR 27805 through 
27808), there will be no impact on either LTC-DRG assignments or 
payments under the LTCH PPS at that time. That is, changes to the LTC-
DRGs (such as the creation or deletion of LTC-DRGs) and the relative 
weights will continue to be updated in the manner and timing (October 
1) as they are now. As noted above and as described in the RY 2007 LTCH 
PPS final rule (71 FR 27805 through 27809), updates to the GROUPER for 
both the IPPS and the LTCH PPS (with respect to relative weights and 
the creation or deletion of DRGs) are made in the annual IPPS proposed 
and final rules and are effective each October 1. We also explained 
that because we do not publish a midyear IPPS rule, any April 1 code 
updates will not be published in a midyear IPPS rule. Rather, we will 
assign any new diagnosis or procedure codes to the same DRG in which 
its predecessor code was assigned, so that there will be no impact on 
the DRG assignments (as also discussed in section II.D.10. of this 
preamble). Any coding updates will be available through the Web sites 
provided in section II.D.10. of this preamble and through the Coding 
Clinic for ICD-9-CM. Publishers and software vendors currently obtain 
code changes through these sources in order to update their code books 
and software system. If new codes are implemented on April 1, revised 
code books and software systems, including the GROUPER software 
program, will be necessary because we must use current ICD-9-CM codes. 
Therefore, for purposes of the LTCH PPS, because each ICD-9-CM code 
must be included in the GROUPER algorithm to classify each case into a 
LTC-DRG, the GROUPER software program used under the LTCH PPS would 
need to be revised to accommodate any new codes.
    In implementing section 503(a) of Pub. L. 108-173, there will only 
be an April 1 update if new technology codes are requested and 
approved. We note that any new codes created for April 1 implementation 
will be limited to those diagnosis and procedure code revisions 
primarily needed to describe new technologies and medical services. 
However, we reiterate that the process of discussing updates to the 
ICD-9-CM has been an open process through the ICD-9-CM Coordination and 
Maintenance Committee since 1995. Requestors will be given the 
opportunity to present the merits for a new code and make a clear and 
convincing case for the need to update ICD-9-CM codes for purposes of 
the IPPS new technology add-on payment process through an April 1 
update (as also discussed in section II.D.10. of this preamble).
    However, as we discussed in the RY 2007 LTCH PPS final rule (71 FR 
27805

[[Page 47972]]

through 27809), at the September 29-30, 2005 ICD-9-CM Coordination and 
Maintenance Committee meeting, there were no requests for an April 1, 
2006 implementation of ICD-9-CM codes, and, therefore, the next update 
to the ICD-9-CM coding system would not occur until October 1, 2006 (FY 
2007). Presently, as there were no coding changes suggested for an 
April 1, 2006 update, the ICD-9-CM coding set implemented on October 1, 
2005, will continue through September 30, 2006 (FY 2006). The update to 
the ICD-9-CM coding system for FY 2007 is discussed above in section 
II.D.10. of this preamble. Accordingly, in this final rule, as 
discussed in greater detail below, we are revising the LTC-DRG 
classifications and relative weights, to be effective October 1,2006 
through September 30, 2007 (FY 2007). Furthermore, we will notify LTCHs 
of any revisions to the GROUPER software used under the IPPS and the 
LTCH PPS that will be implemented April 1, 2007. The LTC-DRGs and 
relative weights for FY 2007 in this final rule are based on the IPPS 
DRGs (GROUPER Version 24.0) discussed in section II.B. of the preamble 
to this final rule.
    Comment: Two commenters urged us to consolidate rulemaking for the 
LTCH PPS into one annual cycle rather than setting the payment rates 
and policy changes on a July 1 through June 30 rate year but making 
changes to the LTC-DRGs and relative weights based on the Federal 
fiscal year, October 1 through September 30. Both commenters noted that 
this situation has caused management and planning difficulty for some 
LTCHs. One of the commenters, whose LTCH has a June 1 through May 31 
fiscal year, emphasizes the difficulties in ``estimating the impact of 
changes in case weights as part of the final rule'' associated with the 
hospital IPPS.
    One commenter noted that other Medicare provider types only 
experience one routine annual adjustment to their respective PPSs and 
that it is not reasonable to expect the LTCH provider community to 
comment on the reasonableness of a proposed payment level in February 
when ``that payment level is subject to change in a second rulemaking 
proposed in April or May of the same year.'' This commenter suggested 
that, commencing with FY 2008, all LTCH PPS rulemaking should occur on 
the same schedule as it does under the IPPS, which would maintain the 
established cycle for the update of the LTC-DRGs and relative weights. 
The same commenter further suggested that, should CMS make this change 
in the rulemaking schedule, for the first year only, CMS should 
establish a 3-month (July through September) and 12-month (October 
through September) update factor to the Federal rate.
    Response: In the LTCH RY 2004 final rule (68 FR 34122), we revised 
our regulations at Sec.  412.535, which established a LTCH PPS rate 
year with a July 1 effective date for the annual update of the Federal 
payment rate and associated payment policies while also maintaining an 
October 1 implementation date for the update of the LTC-DRG patient 
classification system and associated weighting factors. In changing the 
effective date of the annual LTCH PPS rate year update and the 
resulting publication dates of the proposed and final regulations for 
the LTCH PPS, we stated that this shift in the schedule would promote 
``administrative feasibility and efficiency'' by avoiding concurrent 
rulemaking and publication with the IPPS final rule. We also noted that 
although section 1886(e)(5)(A) of the Act required that, for the IPPS, 
the proposed rule be published in the Federal Register ``not later than 
the April 1 before each fiscal year; and the final rule, not later than 
the August 1 before such fiscal year,'' no similar requirement is 
imposed on the LTCH PPS and that we believed that this schedule change 
was well within the considerable discretion that Congress afforded the 
Secretary in the implementation of the LTCH PPS (68 FR 34125 through 
34128). We maintained at that time, and we continue to believe, that 
this change to the LTCH rate year annual rulemaking schedule was not 
unduly burdensome for the LTCH industry because we had not added any 
requirements that LTCHs maintain payment systems or coding software in 
order to be paid under the LTCH PPS, although we understood that it was 
common for many hospitals, consultants, and industry associations to do 
so.
    With regard to the commenter who described a LTCH with a fiscal 
year beginning on June 1, we would also reiterate what we stated in the 
FY 2004 final rule that ``since the start of cost reporting periods for 
many LTCHs, as well as acute care hospitals, have not generally 
coincided with the October starting date of the Federal fiscal year, 
those hospitals that choose to have their own payment software are very 
familiar with the virtually seamless routine of inputting new numbers 
to their existing systems when a final rule is published'' (68 FR 
34127).
    Therefore, we continue to believe that there is no significant 
administrative burden imposed on the LTCH industry by the establishment 
of the July 1 through June 30 rate year for the annual payment rate 
update under the LTCH PPS while still maintaining the October 1 through 
September 30 update of the LTC-DRGs and relative weights which are 
linked to the annual update of the diagnosis and procedure code set 
(ICD-9-CM) currently adopted by the DHHS and the IPPS DRGs and relative 
weights.
    However, two commenters also stated that the separate rule-making 
cycles cause difficulty in ``estimating the impact of changes in case 
weights,'' which will be published in April or May, when commenting on 
the payment rates published in the LTCH PPS proposed rule in the 
preceding January or February. From the volume of correspondence that 
we receive from LTCH associations and their consultants, some of which 
include detailed analyses of CMS data, we do not believe that our 
annual publication in the IPPS proposed rule of the proposed updates of 
the LTC-DRGs and corresponding relative weights (which are derived 
solely from the best available LTCH MedPAR claims data) prohibits the 
public from assessing the impact such proposed changes would have if 
finalized. In fact, in their specific comments on the proposed FY 2007 
LTC-DRG relative weights (discussed in greater detail below), several 
commenters presented analyses of the combined effect of the policy 
changes established in the RY 2007 LTCH PPS final rule, effective July 
1, 2007 (for example, revisions to the short-stay outlier policy), and 
the proposed changes to the LTC-DRGs and relative weights for FY 2007. 
Furthermore, the comments received on the policies presented in the 
LTCH PPS RY 2007 proposed rule, a number of which contained detailed 
data evaluations, demonstrated the availability as well as the ability 
of the public to analyze the proposed policy changes using the most 
recent LTCH MedPAR claims data. Therefore, we do not believe that our 
present publication schedule deprives industry stakeholders of the 
opportunity to submit meaningful comments on proposed changes to 
payment levels when we are establishing the payment rates and 
associated policy under the LTCH PPS, even though changes to the LTC-
DRG weights are proposed in a separate notice of proposed rulemaking.
    Given the considerable discretion granted to the Secretary under 
the BBRA of 1999 and the BIPA of 2000 to develop the LTCH PPS, we may 
revisit the rulemaking schedule for the LTCH PPS in the future. If a 
revision to the schedule is proposed, the public will have the 
opportunity to submit

[[Page 47973]]

comments on any proposed change to the schedule during the rulemaking 
process.
2. Changes in the LTC-DRG Classifications
a. Background
    Section 123 of Pub. L. 106-113 specifically requires that the 
agency implement a PPS for LTCHs that is a per discharge system with a 
DRG-based patient classification system reflecting the differences in 
patient resources and costs in LTCHs. Section 307(b)(1) of Pub. L. 106-
554 modified the requirements of section 123 of Pub. L. 106-113 by 
specifically requiring that the Secretary examine ``the feasibility and 
the impact of basing payment under such a system [the LTCH PPS] on the 
use of existing (or refined) hospital diagnosis-related groups (DRGs) 
that have been modified to account for different resource use of long-
term care hospital patients as well as the use of the most recently 
available hospital discharge data.''
    In accordance with section 307(b)(1) of Pub. L. 106-554 and Sec.  
412.515 of our existing regulations, the LTCH PPS uses information from 
LTCH patient records to classify patient cases into distinct LTC-DRGs 
based on clinical characteristics and expected resource needs. The LTC-
DRGs used as the patient classification component of the LTCH PPS 
correspond to the DRGs under the IPPS for acute care hospitals. Thus, 
in this final rule, we are using the IPPS GROUPER Version 24.0 for FY 
2007 to process LTCH PPS claims for LTCH discharges occurring from 
October 1, 2006, through September 30, 2007. The changes to the CMS-DRG 
classification system used under the IPPS for FY 2007 (GROUPER Version 
24.0) are discussed in section II.D. of the preamble to this final 
rule.
    We note that, as we discuss in section II.C.6. of the preamble to 
this final rule, MedPAC, in its 2005 Report to Congress on Physician-
Owned Specialty Hospitals, recommended that CMS, among other things, 
refine the current DRGs under the IPPS to more fully capture 
differences in severity of illness among patients. As we also discuss 
in that same section, in evaluating the MedPAC recommendation for the 
IPPS, we are evaluating the APR DRG GROUPER used by MedPAC in its 
analysis. Based on this analysis, we concur with MedPAC that the 
modified version of the APR DRGs would account more completely for 
differences in severity of illness and associated costs among 
hospitals. However, as we made clear in the proposed rule and reiterate 
in section II.C.6. of the preamble of this final rule, there are still 
further changes that are important to make to the CS DRG system before 
it is ready for adoption. At this time, we are not adopting a new 
severity-adjusted DRG system, such as the APR DRGs or a modified 
version of the APR DRGs, under the IPPS, as discussed in greater detail 
in section II.C.6. of the preamble of this final rule. However, we are 
refining the current CMS-DRG system by creating 20 new CMS DRGs and 
modifying 32 others across 13 different clinical areas involving 
1,666,476 cases that would improve the CMS DRG system's recognition of 
severity of illness for FY 2007. We note that the LTCH PPS uses the 
same patient classification system (DRGs) as the IPPS. That is, the 
patient classification system used under the LTCH PPS (LTC DRGs) is 
based on the patient classification system used under the IPPS (CMS 
DRGs), which historically had been updated annually and is effective 
for discharges occurring on or after October 1 through September 30 
each year. As such, the updates to the CMS DRG classification system 
used under the IPPS for FY 2007 (GROUPER Version 24.0), discussed in 
section II.D. of the preamble to this final rule, will also be updates 
that apply under the LTCH PPS.
    Under the LTCH PPS, we determine relative weights for each of the 
DRGs to account for the difference in resource use by patients 
exhibiting the case complexity and multiple medical problems 
characteristic of LTCH patients. In a departure from the IPPS, as we 
discussed in the August 30, 2002 LTCH PPS final rule (67 FR 55985), 
which implemented the LTCH PPS, and the FY 2006 IPPS final rule (70 FR 
47324), we use low-volume quintiles in determining the LTC-DRG relative 
weights for LTC-DRGs with less than 25 LTCH cases, because LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
Specifically, we group those low-volume LTC-DRGs (that is, LTC-DRGs 
with fewer than 25 cases) into 5 quintiles based on average charge per 
discharge. (A listing of the composition of low-volume quintiles for 
the FY 2006 LTC-DRGs (based on FY 2004 MedPAR data) appears in section 
II.G.3. of the FY 2006 IPPS final rule (70 FR 47325 through 47332).) We 
also adjust for cases in which the stay at the LTCH is less than or 
equal to five-sixths of the geometric average length of stay; that is, 
short-stay outlier cases (Sec.  412.529), as discussed below in section 
II.F.4. of this preamble.
b. Patient Classifications Into DRGs
    Generally, under the LTCH PPS, Medicare payment is made at a 
predetermined specific rate for each discharge; that is, payment varies 
by the LTC-DRG to which a beneficiary's stay is assigned. Just as cases 
are classified into DRGs for acute care hospitals under the IPPS (see 
section II.B. of this preamble), cases are classified into LTC-DRGs for 
payment under the LTCH PPS based on the principal diagnosis, up to 
eight additional diagnoses, and up to six procedures performed during 
the stay, as well as age, sex, and discharge status of the patient. The 
diagnosis and procedure information is reported by the hospital using 
the ICD-9-CM codes.
    As discussed in section II.B. of this preamble, the CMS-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). Accordingly, the 
principal diagnosis determines MDC assignment. Within most MDCs, cases 
are then divided into surgical DRGs and medical DRGs. Some surgical and 
medical DRGs are further differentiated based on the presence or 
absence of CCs. (See section II.B. of this preamble for further 
discussion of surgical DRGs and medical DRGs.)
    Because the assignment of a case to a particular LTC-DRG will 
determine the amount that is paid for the case, it is important that 
the coding is accurate. As used under the IPPS, classifications and 
terminology used under the LTCH PPS are consistent with the ICD-9-CM 
and the Uniform Hospital Discharge Data Set (UHDDS), as recommended to 
the Secretary by the National Committee on Vital and Health Statistics 
(``Uniform Hospital Discharge Data: Minimum Data Set, National Center 
for Health Statistics, April 1980'') and as revised in 1984 by the 
Health Information Policy Council (HIPC) of the U.S. Department of 
Health and Human Services. We point out again that the ICD-9-CM coding 
terminology and the definitions of principal and other diagnoses of the 
UHDDS are consistent with the requirements of the Transactions and Code 
Sets Standards under HIPAA (45 CFR Parts 160 and 162).
    The emphasis on the need for proper coding cannot be overstated. 
Inappropriate coding of cases can adversely affect the uniformity of 
cases in each LTC-DRG and produce inappropriate weighting factors at 
recalibration and result in inappropriate payments under the LTCH PPS. 
LTCHs are to follow the same coding guidelines used by acute care 
hospitals to ensure

[[Page 47974]]

accuracy and consistency in coding practices. There will be only one 
LTC-DRG assigned per long-term care hospitalization; it will be 
assigned at the time of discharge of the patient. Therefore, it is 
mandatory that the coders continue to report the same principal 
diagnosis on all claims and include all diagnosis codes for conditions 
that coexist at the time of admission, for conditions that are 
subsequently developed, or for conditions that affect the treatment 
received. Similarly, all procedures performed in a LTCH, or paid for 
under arrangements by a LTCH, during that stay are to be reported on 
each claim.
    Upon the discharge of the patient from a LTCH, the LTCH must assign 
appropriate diagnosis and procedure codes from the ICD-9-CM. Completed 
claim forms are to be submitted electronically to the LTCH's Medicare 
fiscal intermediary. Medicare fiscal intermediaries enter the clinical 
and demographic information 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 
LTC-DRG can be made.
    After screening through the MCE, each LTCH claim will be classified 
into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH 
GROUPER is specialized computer software and is the same GROUPER used 
under the IPPS. After the LTC-DRG is assigned, the Medicare fiscal 
intermediary determines the prospective payment by using the Medicare 
LTCH PPS PRICER program, which accounts for LTCH hospital-specific 
adjustments and payment rates. As provided for under the IPPS, we 
provide an opportunity for the LTCH to review the LTC-DRG assignments 
made by the fiscal intermediary and to submit additional information, 
if necessary, within a specified timeframe (Sec.  412.513(c)).
    The LTCH GROUPER is used both to classify past cases in order to 
measure relative hospital resource consumption to establish the 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 DRG classification changes and to recalibrate the DRG 
weights during our annual update (as discussed in section II.E. of this 
preamble). The LTC-DRG relative weights are based on data for the 
population of LTCH discharges, reflecting the fact that LTCH patients 
represent a different patient-mix than patients in short-term acute 
care hospitals.
3. Development of the FY 2007 LTC-DRG Relative Weights
a. General Overview of Development of the LTC-DRG Relative Weights
    As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 
55981), 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 
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 adjust the LTCH PPS standard Federal prospective payment system rate 
by the applicable LTC-DRG relative weight in determining payment to 
LTCHs for each case. Under the LTCH PPS, relative weights for each LTC-
DRG are a primary element used to account for the variations in cost 
per discharge and resource utilization among the payment groups (Sec.  
412.515). To ensure that Medicare patients classified to each LTC-DRG 
have access to an appropriate level of services and to encourage 
efficiency, we calculate a relative weight for each LTC-DRG that 
represents the resources needed by an average inpatient LTCH case in 
that LTC-DRG. For example, cases in a LTC-DRG with a relative weight of 
2 will, on average, cost twice as much as cases in a LTC-DRG with a 
weight of 1.

b. Data

    In the FY 2007 IPPS proposed rule (71 FR 24052), to calculate the 
proposed LTC-DRG relative weights for FY 2007, we obtained total 
Medicare allowable charges from FY 2005 Medicare LTCH bill data from 
the December 2005 update of the MedPAR file, which were the best 
available data at that time, and we used the proposed Version 24.0 of 
the CMS GROUPER used under the IPPS (as discussed in that same proposed 
rule) to classify cases. In that same proposed rule, we also proposed 
that if more recent data were available, we would use that data and the 
finalized Version 24.0 of the CMS GROUPER (used under the IPPS) to 
determine the final LTC-DRG relative weights for FY 2007. Accordingly, 
to calculate the final LTC-DRG relative weights for FY 2007 in this 
final rule, we obtained total Medicare allowable charges from FY 2005 
Medicare hospital bill data from the March 2006 update of the MedPAR 
file (which are the most recent available data), and used the final 
Version 24.0 of the CMS GROUPER used under the IPPS (as discussed in 
section II.B. of this preamble) to classify cases.
    We also stated in the FY 2007 IPPS proposed rule (71 FR 24052), as 
we discussed in the FY 2006 IPPS final rule (70 FR 47325), we have 
excluded the data from LTCHs that are all-inclusive rate providers and 
LTCHs that are reimbursed in accordance with demonstration projects 
authorized under section 402(a) of Pub. L. 90-248 as amended. 
Therefore, consistent with the proposed rule, in the development of the 
FY 2007 LTC-DRG relative weights in this final rule, we have excluded 
the data of the 19 all-inclusive rate providers and the 3 LTCHs that 
are paid in accordance with demonstration projects that had claims in 
the FY 2005 MedPAR file.
c. Hospital-Specific Relative Value 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 nonarbitrary distribution of cases with relatively high (or low) 
charges in specific 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, we use a hospital-
specific relative value (HSRV) method to calculate the LTC-DRG relative 
weights instead of the methodology used to determine the DRG relative 
weights under the IPPS described in section II.E. of this preamble. We 
believe this method will remove this hospital-specific source of bias 
in measuring LTCH average charges. Specifically, we reduce the impact 
of the variation in charges across providers on any particular 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 method, we standardize charges for each LTCH by 
converting its charges for each case to hospital-specific relative 
charge values and then adjusting those values for the LTCH's case-mix. 
The adjustment for case-mix is needed to rescale the hospital-specific 
relative charge values (which, by definition, average 1.0 for each 
LTCH). The average relative weight for a LTCH is its case-mix, so it is 
reasonable to scale each LTCH's average

[[Page 47975]]

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 the methodology established under Sec.  412.523, 
as implemented in the August 30, 2002 LTCH PPS final rule (67 FR 55989 
through 55991), we standardize charges for each case by first dividing 
the adjusted charge for the case (adjusted for short-stay outliers 
under Sec.  412.529 as described in section II.F.4. (step 3) of this 
preamble) by the average adjusted charge for all cases at the LTCH in 
which the case was treated. Short-stay outliers under Sec.  412.529 are 
cases with a length of stay that is less than or equal to five-sixths 
the average length of stay of the LTC-DRG. The average adjusted charge 
reflects the average intensity of the health care services delivered by 
a particular LTCH and the average cost level of that LTCH. The 
resulting ratio is multiplied by that LTCH's case-mix index to 
determine the standardized charge for the case.
    Multiplying by the LTCH's case-mix index accounts for the fact that 
the same relative charges are given greater weight at a LTCH with 
higher average costs than they would at a LTCH with low average costs, 
which is needed to adjust each LTCH's relative charge value to reflect 
its case-mix relative to the average case-mix for all LTCHs. Because we 
standardize charges in this manner, we count charges for a Medicare 
patient at a LTCH with high average charges as less resource intensive 
than they would be at a LTCH with low average charges. For example, a 
$10,000 charge for a case at a LTCH with an average adjusted charge of 
$17,500 reflects a higher level of relative resource use than a $10,000 
charge for a case at a LTCH with the same case-mix, but an average 
adjusted charge of $35,000. We believe that the adjusted charge of an 
individual case more accurately reflects actual resource use for an 
individual LTCH because the variation in charges due to systematic 
differences in the markup of charges among LTCHs is taken into account.
d. Low-Volume LTC-DRGs
    In order to account for LTC-DRGs with low-volume (that is, with 
fewer than 25 LTCH cases), in accordance with the methodology 
established in the August 30, 2002 LTCH PPS final rule (67 FR 55984), 
we group those ``low-volume LTC-DRGs'' (that is, DRGs that contained 
between 1 and 24 cases annually) into one of five categories 
(quintiles) based on average charges, for the purposes of determining 
relative weights. Consistent with the FY 2007 IPPS proposed rule (71 FR 
24052 and 24053), we will continue to employ this treatment of low-
volume LTC-DRGs in determining the FY 2007 LTC-DRG relative weights 
using the best available LTCH data in this final rule. In that same 
proposed rule, using LTCH cases from the December 2005 update of the FY 
2005 MedPAR file, we identified 173 LTC-DRGs that contained between 1 
and 24 cases. As noted above, we also proposed that if more recent data 
were available, we would use that data and the finalized Version 24.0 
of the CMS GROUPER (used under the IPPS) to determine the final LTC-DRG 
relative weights for FY 2007. Accordingly, for this final rule, using 
LTCH cases from the March 2006 update of the FY 2005 MedPAR file, we 
identified 180 LTC-DRGs that contained between 1 and 24 cases. This 
list of LTC-DRGs was then divided into one of the 5 low-volume 
quintiles, each containing 36 LTC-DRGs (180/5 = 36). In accordance with 
our established methodology, as we proposed, we then make an assignment 
to a specific low-volume quintile by sorting the low-volume LTC-DRGs in 
ascending order by average charge. For this final rule, this results in 
an assignment to a specific low-volume quintile of the sorted 180 low-
volume LTC-DRGs by ascending order by average charge. For this final 
rule, based on LTCH claims data from the March 2006 update of the FY 
2005 MedPAR file and the finalized Version 24.0 of the CMS GROUPER, the 
number of low-volume LTC-DRGs is evenly divisible by five (that is, the 
number of low-volume quintile used to determine the LTC-DRG relative 
weights). Consequently, for this final rule, it was not necessary to 
employ our established methodology to determine which low-volume 
quintile would receive the additional LTC-DRG(s) if the number of low-
volume LTC-DRGs had not been evenly divisible by five. However, if the 
number of LTC-DRGs with less than 25 LTCH cases for this final rule had 
not evenly divisible by five, we would have employed our established 
methodology that compares the average charge of the low-volume LTC-
DRGs, to determine which low-volume quintile would receive the 
additional LTC-DRG, as presented in greater detail in the FY 2007 IPPS 
proposed rule (71 FR 24053). Because, for this final rule, the number 
of LTC-DRGs with less than 25 LTCH cases was evenly divisible by five, 
to determine the composition of the low-volume quintiles, in accordance 
with our established methodology, as was proposed, we sorted the 180 
low-volume LTC-DRGs in ascending order, and grouped the first fifth 
(1st through 36th) of low-volume LTC-DRGs (with the lowest average 
charge) into Quintile 1; the next fifth (37th through 72nd) of low-
volume LTC-DRGs were into Quintile 2; and so on until the last fifth 
(145th through 180th) of low-volume LTC-DRGs (with the highest average 
charge) were grouped into Quintile 5.
    In order to determine the relative weights for the LTC-DRGs with 
low volume for FY 2007, as was proposed, in accordance with the 
methodology established in the August 30, 2002 LTCH PPS final rule (67 
FR 55984), in this final rule, we used the five low-volume quintiles 
described above. The composition of each of the five low-volume 
quintiles shown in the chart below was used in determining the LTC-DRG 
relative weights for FY 2007. As was proposed, for this final rule, we 
determined a relative weight and (geometric) average length of stay for 
each of the five low-volume quintiles using the formula that we apply 
to the regular LTC-DRGs (25 or more cases), as described below in 
section II.F.4. of this preamble. We assigned the same relative weight 
and average length of stay to each of the LTC-DRGs that make up that 
low-volume quintile. We note that, as this system is dynamic, it is 
possible that the number and specific type of LTC-DRGs with a low 
volume of LTCH cases will vary in the future. We use the best available 
claims data in the MedPAR file to identify low-volume LTC-DRGs and to 
calculate the relative weights based on our methodology.

             Composition of Low-Volume Quintiles for FY 2007
------------------------------------------------------------------------
      LTC-DRG                            Description
------------------------------------------------------------------------
                               Quintile 1
------------------------------------------------------------------------
29................  TRAUMATIC STUPOR & COMA, COMA <1 HR AGE >17 W/O CC.

[[Page 47976]]

 
31................  CONCUSSION AGE >17 W CC.
45................  NEUROLOGICAL EYE DISORDERS.
65................  DYSEQUILIBRIUM.
69................  OTITIS MEDIA & URI AGE >17 W/O CC.
83................  MAJOR CHEST TRAUMA W CC.
93................  INTERSTITIAL LUNG DISEASE W/O CC.
102...............  OTHER RESPIRATORY SYSTEM DIAGNOSES W/O CC.
125...............  CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH W/O
                     COMPLEX DIAG.
129...............  CARDIAC ARREST, UNEXPLAINED.
136...............  CARDIAC CONGENITAL & VALVULAR DISORDERS AGE >17 W/O
                     CC.
140...............  ANGINA PECTORIS.
143...............  CHEST PAIN.
160...............  HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17
                     W/O CC.
181...............  G.I. OBSTRUCTION W/O CC.
183...............  ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE
                     >17 W/O CC.
208...............  DISORDERS OF THE BILIARY TRACT W/O CC.
224...............  SHOULDER, ELBOW OR FOREARM PROC, EXC MAJOR JOINT
                     PROC, W/O CC.
237...............  SPRAINS, STRAINS, & DISLOCATIONS OF HIP, PELVIS &
                     THIGH.
241...............  CONNECTIVE TISSUE DISORDERS W/O CC.
250...............  FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17
                     W CC.
254...............  FX, SPRN, STRN & DISL OF UPARM, LOWLEG EX FOOT AGE
                     >17 W/O CC.
273...............  MAJOR SKIN DISORDERS W/O CC.
323...............  URINARY STONES W CC, &/OR ESW LITHOTRIPSY.
324...............  URINARY STONES W/O CC.
332...............  OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE >17 W/O
                     CC.
335...............  MAJOR MALE PELVIC PROCEDURES W/O CC.
347...............  MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W/O CC.
367...............  MALIGNANCY, FEMALE REPRODUCTIVE SYSTEM W/O CC.
383...............  OTHER ANTEPARTUM DIAGNOSES W MEDICAL COMPLICATIONS.
399...............  RETICULOENDOTHELIAL & IMMUNITY DISORDERS W/O CC.
425...............  ACUTE ADJUSTMENT REACTION & PSYCHOSOCIAL
                     DYSFUNCTION.
432...............  OTHER MENTAL DISORDER DIAGNOSES.
509...............  FULL THICKNESS BURN W/O SKIN GRFT OR INH INJ W/O CC
                     OR SIG TRAUMA.
511...............  NON-EXTENSIVE BURNS W/O CC OR SIGNIFICANT TRAUMA.
523...............  ALCOHOL/DRUG ABUSE OR DEPENDENCE W/O REHABILITATION
                     THERAPY W/O CC.
------------------------------------------------------------------------
                               Quintile 2
------------------------------------------------------------------------
8.................  PERIPH & CRANIAL NERVE & OTHER NERV SYST PROC W/O
                     CC.
11................  NERVOUS SYSTEM NEOPLASMS W/O CC.
17................  NONSPECIFIC CEREBROVASCULAR DISORDERS W/O CC.
46................  OTHER DISORDERS OF THE EYE AGE >17 W CC.
77................  OTHER RESP SYSTEM O.R. PROCEDURES W/O CC.
117...............  CARDIAC PACEMAKER REVISION EXCEPT DEVICE
                     REPLACEMENT.
122...............  CIRCULATORY DISORDERS W AMI W/O MAJOR COMP,
                     DISCHARGED ALIVE.
128...............  DEEP VEIN THROMBOPHLEBITIS.
133...............  ATHEROSCLEROSIS W/O CC.
139...............  CARDIAC ARRHYTHMIA & CONDUCTION DISORDERS W/O CC.
173...............  DIGESTIVE MALIGNANCY W/O CC.
175...............  G.I. HEMORRHAGE W/O CC.
177...............  UNCOMPLICATED PEPTIC ULCER W CC.
189...............  OTHER DIGESTIVE SYSTEM DIAGNOSES AGE >17 W/O CC.
246...............  NON-SPECIFIC ARTHROPATHIES.
261...............  BREAST PROC FOR NON-MALIGNANCY EXCEPT BIOPSY & LOCAL
                     EXCISION.
276...............  NON-MALIGNANT BREAST DISORDERS.
281...............  TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE >17 W/O
                     CC.
284...............  MINOR SKIN DISORDERS W/O CC.
295...............  DIABETES AGE 0-35.
301...............  ENDOCRINE DISORDERS W/O CC.
325...............  KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W
                     CC.
348...............  BENIGN PROSTATIC HYPERTROPHY W CC.
419...............  FEVER OF UNKNOWN ORIGIN AGE >17 W CC.
420...............  FEVER OF UNKNOWN ORIGIN AGE >17 W/O CC.
427...............  NEUROSES EXCEPT DEPRESSIVE.
431...............  CHILDHOOD MENTAL DISORDERS.
441...............  HAND PROCEDURES FOR INJURIES.
445...............  TRAUMATIC INJURY AGE >17 W/O CC.
447...............  ALLERGIC REACTIONS AGE >17.
450...............  POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W/O CC.
479...............  OTHER VASCULAR PROCEDURES W/O CC.
492...............  CHEMO W ACUTE LEUKEMIA AS SDX OR W USE OF HIGH DOSE
                     CHEMO AGENT.
521...............  ALCOHOL/DRUG ABUSE OR DEPENDENCE W CC.

[[Page 47977]]

 
524...............  TRANSIENT ISCHEMIA.
563...............  SEIZURE AGE >17 W/O CC.
------------------------------------------------------------------------
                               Quintile 3
------------------------------------------------------------------------
21................  VIRAL MENINGITIS.
22................  HYPERTENSIVE ENCEPHALOPATHY.
44................  ACUTE MAJOR EYE INFECTIONS.
67................  EPIGLOTTITIS.
72................  NASAL TRAUMA & DEFORMITY.
97*...............  BRONCHITIS & ASTHMA AGE >17 W/O CC.
100...............  RESPIRATORY SIGNS & SYMPTOMS W/O CC.
118...............  CARDIAC PACEMAKER DEVICE REPLACEMENT.
119...............  VEIN LIGATION & STRIPPING.
142*..............  SYNCOPE & COLLAPSE W/O CC.
157...............  ANAL & STOMAL PROCEDURES W CC.
171...............  OTHER DIGESTIVE SYSTEM O.R. PROCEDURES W/O CC.
199...............  HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR MALIGNANCY.
206*..............  DISORDERS OF LIVER EXCEPT MALIG, CIRR, ALC HEPA W/O
                     CC.
227...............  SOFT TISSUE PROCEDURES W/O CC.
228...............  MAJOR THUMB OR JOINT PROC, OR OTH HAND OR WRIST PROC
                     W CC.
235...............  FRACTURES OF FEMUR.
259...............  SUBTOTAL MASTECTOMY FOR MALIGNANCY W CC.
266...............  SKIN GRAFT &/OR DEBRID EXCEPT FOR SKIN ULCER OR
                     CELLULITIS W/O CC.
270...............  OTHER SKIN, SUBCUT TISS & BREAST PROC W/O CC.
299...............  INBORN ERRORS OF METABOLISM.
312...............  URETHRAL PROCEDURES, AGE >17 W CC.
338...............  TESTES PROCEDURES, FOR MALIGNANCY.
339...............  TESTES PROCEDURES, NON-MALIGNANCY AGE >17.
344...............  OTHER MALE REPRODUCTIVE SYSTEM O.R. PROCEDURES FOR
                     MALIGNANCY.
346...............  MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W CC.
369...............  MENSTRUAL & OTHER FEMALE REPRODUCTIVE SYSTEM
                     DISORDERS.
404...............  LYMPHOMA & NON-ACUTE LEUKEMIA W/O CC.
414...............  OTHER MYELOPROLIF DIS OR POORLY DIFF NEOPL DIAG W/O
                     CC.
449...............  POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W CC.
454...............  OTHER INJURY, POISONING & TOXIC EFFECT DIAG W CC.
467...............  OTHER FACTORS INFLUENCING HEALTH STATUS.
486...............  OTHER O.R. PROCEDURES FOR MULTIPLE SIGNIFICANT
                     TRAUMA.
502...............  KNEE PROCEDURES W PDX OF INFECTION W/O CC.
532...............  SPINAL PROCEDURES W/O CC.
555...............  PERCUTANEOUS CARDIOVASCULAR PROC W MAJOR CV DX.
------------------------------------------------------------------------
                               Quintile 4
------------------------------------------------------------------------
55................  MISCELLANEOUS EAR, NOSE, MOUTH & THROAT PROCEDURES.
63................  OTHER EAR, NOSE, MOUTH & THROAT O.R. PROCEDURES.
95*...............  PNEUMOTHORAX W/O CC.
110...............  MAJOR CARDIOVASCULAR PROCEDURES W CC.
124...............  CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH &
                     COMPLEX DIAG.
193...............  BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O
                     C.D.E. W CC.
197...............  CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O C.D.E. W
                     CC.
223...............  MAJOR SHOULDER/ELBOW PROC, OR OTHER UPPER EXTREMITY
                     PROC W CC.
262...............  BREAST BIOPSY & LOCAL EXCISION FOR NON-MALIGNANCY.
268...............  SKIN, SUBCUTANEOUS TISSUE & BREAST PLASTIC
                     PROCEDURES.
288...............  O.R. PROCEDURES FOR OBESITY.
304...............  KIDNEY AND URETER PROCEDURES FOR NON-NEOPLASM W CC.
306...............  PROSTATECTOMY W CC.
308...............  MINOR BLADDER PROCEDURES W CC.
310...............  TRANSURETHRAL PROCEDURES W CC.
336...............  TRANSURETHRAL PROSTATECTOMY W CC.
345...............  OTHER MALE REPRODUCTIVE SYSTEM O.R. PROC EXCEPT FOR
                     MALIGNANCY.
365...............  OTHER FEMALE REPRODUCTIVE SYSTEM O.R. PROCEDURES.
376...............  POSTPARTUM & POST ABORTION DIAGNOSES W/O O.R.
                     PROCEDURE.
394...............  OTHER O.R. PROCEDURES OF THE BLOOD AND BLOOD FORMING
                     ORGANS.
401...............  LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC W
                     CC.
408...............  MYELOPROLIF DISORD OR POORLY DIFF NEOPL W OTHER
                     O.R.PROC.
487...............  OTHER MULTIPLE SIGNIFICANT TRAUMA.
488...............  HIV W EXTENSIVE O.R. PROCEDURE.
493...............  LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W CC.
496...............  COMBINED ANTERIOR/POSTERIOR SPINAL FUSION.
500...............  BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W/O CC.
503...............  KNEE PROCEDURES W/O PDX OF INFECTION.

[[Page 47978]]

 
506...............  FULL THICKNESS BURN W SKIN GRAFT OR INHAL INJ W CC
                     OR SIG TRAUMA.
515...............  CARDIAC DEFIBRILLATOR IMPLANT W/O CARDIAC CATH.
519...............  CERVICAL SPINAL FUSION W CC.
533...............  EXTRACRANIAL PROCEDURES W CC.
538...............  LOCAL EXCISION & REMOVAL INT FIX DEVICES EXCEPT HIP
                     & FEMUR W/O CC.
539...............  LYMPHOMA & LEUKEMIA W MAJOR O.R. PROCEDURE W CC.
552...............  OTHER PERMANENT CARDIAC PACEMAKER IMPLANT W/O MAJOR
                     CV DX PERCUTANEOUS CARDIOVASCULAR PROC W DRUG-
                     ELUTING STENT W MAJOR CV.
557...............  DX.
                               Quintile 5
------------------------------------------------------------------------
1.................  CRANIOTOMY AGE >17 W CC.
146...............  RECTAL RESECTION W CC.
150...............  PERITONEAL ADHESIOLYSIS W CC.
152...............  MINOR SMALL & LARGE BOWEL PROCEDURES W CC.
159...............  HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17
                     W CC.
168...............  MOUTH PROCEDURES W CC.
191...............  PANCREAS, LIVER & SHUNT PROCEDURES W CC.
195...............  CHOLECYSTECTOMY W C.D.E. W CC.
200...............  HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR NON-
                     MALIGNANCY.
218...............  LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR
                     AGE >17 W CC.
230...............  LOCAL EXCISION & REMOVAL OF INT FIX DEVICES OF HIP &
                     FEMUR.
232...............  ARTHROSCOPY.
257...............  TOTAL MASTECTOMY FOR MALIGNANCY W CC.
293*..............  OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W/O CC.
341...............  PENIS PROCEDURES.
406...............  MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ O.R.
                     PROC W CC.
424...............  O.R. PROCEDURE W PRINCIPAL DIAGNOSES OF MENTAL
                     ILLNESS.
471...............  BILATERAL OR MULTIPLE MAJOR JOINT PROCS OF LOWER
                     EXTREMITY.
476...............  PROSTATIC O.R. PROCEDURE UNRELATED TO PRINCIPAL
                     DIAGNOSIS.
482...............  TRACHEOSTOMY FOR FACE, MOUTH & NECK DIAGNOSES.
491...............  MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF UPPER
                     EXTREMITY.
497...............  SPINAL FUSION EXCEPT CERVICAL W CC.
499...............  BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W CC.
504...............  EXTENSIVE BURNS OR FULL THICKNESS BURNS W MV 96+ HRS
                     W SKIN GRAFT.
505...............  EXTENSIVE BURNS OR FULL THICKNESS BURNS W MV 96+ HRS
                     W/O SKIN GRAFT.
529...............  VENTRICULAR SHUNT PROCEDURES W CC.
531...............  SPINAL PROCEDURES W CC.
535...............  CARDIAC DEFIB IMPLANT W CARDIAC CATH W AMI/HF/SHOCK.
543...............  CRANIOTOMY W MAJOR DEVICE IMPLANT OR ACUTE COMPLEX
                     CNS PDX.
544...............  MAJOR JOINT REPLACEMENT OR REATTACHMENT OF LOWER
                     EXTREMITY.
545...............  REVISION OF HIP OR KNEE REPLACEMENT.
567...............  STOMACH, ESOPHAGEAL & DUODENAL PROC AGE >17 W CC W
                     MAJOR GI DX.
568...............  STOMACH, ESOPHAGEAL & DUODENAL PROC AGE >17 W CC W/O
                     MAJOR GI DX.
569...............  MAJOR SMALL & LARGE BOWEL PROCEDURES W CC W MAJOR GI
                     DX.
570...............  MAJOR SMALL & LARGE BOWEL PROCEDURES W CC W/O MAJOR
                     GI DX.
573...............  MAJOR BLADDER PROCEDURES.
------------------------------------------------------------------------
* One of the original 180 low-volume LTC-DRGs initially assigned to this
  low-volume quintile; removed from this low-volume quintile in
  addressing nonmonotonicity (see step 5 below)..

    We note that we will continue to monitor the volume (that is, the 
number of LTCH cases) in these low-volume quintiles to ensure that our 
quintile assignment results in appropriate payment for such cases and 
does not result in an unintended financial incentive for LTCHs to 
inappropriately admit these types of cases.
4. Steps for Determining the FY 2007 LTC-DRG Relative Weights
    As we noted previously, as was proposed, the FY 2007 LTC-DRG 
relative weights in this final rule are determined in accordance with 
the methodology established in the August 30, 2002 LTCH PPS final rule 
(67 FR 55989 through 55991). In summary, LTCH cases must be grouped in 
the appropriate LTC-DRG, while taking into account the low-volume LTC-
DRGs as described above, before the FY 2007 LTC-DRG relative weights 
can be determined. After grouping the cases in the appropriate LTC-DRG, 
we calculated the relative weights for FY 2007 in this final rule by 
first removing statistical outliers and cases with a length of stay of 
7 days or less, as discussed in greater detail below. Next, we adjusted 
the number of cases in each LTC-DRG for the effect of short-stay 
outlier cases under Sec.  412.529, as also discussed in greater detail 
below. The short-stay adjusted discharges and corresponding charges are 
used to calculate ``relative adjusted weights'' in each LTC-DRG using 
the HSRV method described above.
    Below we discuss in detail the steps for calculating the FY 2007 
LTC-DRG relative weights in this final rule. These steps are the same 
as the ones we presented in the FY 2007 IPPS proposed rule for 
calculating the proposed FY 2007 LTC-DRG relative weights. We note 
that, as we stated above in section II.F.3.b. of this preamble, we have 
excluded the data of all-inclusive rate LTCHs and LTCHs that are paid 
in accordance with demonstration projects that had claims in the FY 
2005 MedPAR file.

[[Page 47979]]

    Step 1--Remove statistical outliers.
    The first step in the calculation of the FY 2007 LTC-DRG relative 
weights, as was proposed, is to remove statistical outlier cases. We 
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 LTC-DRG. These statistical 
outliers are removed prior to calculating the relative weights. As 
noted above, we believe that they may represent aberrations in the data 
that distort the measure of average resource use. Including those LTCH 
cases in the calculation of the relative weights could result in an 
inaccurate relative weight that does not truly reflect relative 
resource use among the LTC-DRGs.
    Step 2--Remove cases with a length of stay of 7 days or less.
    The FY 2007 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. As explained above, if we were 
to include stays of 7 days or less in the computation of the FY 2007 
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, 
in order to include data from these very short-stays. Thus, as 
explained above, in determining the FY 2007 LTC-DRG relative weights in 
this final rule, as was proposed, we remove LTCH cases with a length of 
stay of 7 days or less.
    Step 3--Adjust charges for the effects of short-stay outliers.
    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. The next step in the calculation of the FY 2007 LTC-DRG 
relative weights is to adjust each LTCH's charges per discharge for 
those remaining cases for the effects of short-stay outliers as defined 
in Sec.  412.529(a). (However, we note that even if a case was removed 
in Step 2 (that is, cases with a length of stay of 7 days or less), it 
was paid as a short-stay outlier if its length of stay was less than or 
equal to five-sixths of the average length of stay of the LTC-DRG, in 
accordance with Sec.  412.529.)
    We make this adjustment by counting a short-stay outlier 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 LTC-DRG for nonshort-stay 
outlier cases. This has the effect of proportionately reducing the 
impact of the lower charges for the short-stay outlier cases in 
calculating the average charge for the LTC-DRG. This process produces 
the same result as if the actual charges per discharge of a short-stay 
outlier 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 LTC-DRG.
    As we explained in the FY 2007 IPPS proposed rule (71 FR 24059), 
counting short-stay outlier cases as full discharges with no adjustment 
in determining the LTC-DRG relative weights would lower the LTC-DRG 
relative weight for affected LTC-DRGs because the relatively lower 
charges of the short-stay outlier cases would bring down the average 
charge for all cases within a proposed LTC-DRG. This would result in an 
``underpayment'' for nonshort-stay outlier cases and an ``overpayment'' 
for short-stay outlier cases. Therefore, in this final rule, as was 
proposed, we adjust for short-stay outlier cases under Sec.  412.529 in 
this manner because it results in more appropriate payments for all 
LTCH cases.
    Step 4--Calculate the FY 2007 LTC-DRG relative weights on an 
iterative basis.
    The process of calculating the LTC-DRG relative weights using the 
HSRV methodology is iterative. First, for each LTCH case, we calculate 
a hospital-specific relative charge value by dividing the short-stay 
outlier adjusted charge per discharge (see step 3) of the LTCH case 
(after removing the statistical outliers (see step 1)) and LTCH cases 
with a length of stay of 7 days or less (see step 2) by the average 
charge per discharge for the LTCH in which the case occurred. The 
resulting ratio is then multiplied by the LTCH's case-mix index to 
produce an adjusted hospital-specific relative charge value for the 
case. An initial case-mix index value of 1.0 is used for each LTCH.
    For each LTC-DRG, the FY 2007 LTC-DRG relative weight is calculated 
by dividing the average of the adjusted hospital-specific relative 
charge values (from above) for the LTC-DRG by the overall average 
hospital-specific relative charge value across all cases for all LTCHs. 
Using these recalculated LTC-DRG relative weights, each LTCH's average 
relative weight for all of its cases (case-mix) is calculated by 
dividing the sum of all the LTCH's LTC-DRG relative weights by its 
total number of cases. The LTCHs' hospital-specific relative charge 
values above are multiplied by these hospital-specific case-mix 
indexes. These hospital-specific case-mix adjusted relative charge 
values are then used to calculate a new set of LTC-DRG relative weights 
across all LTCHs. In this final rule, as was proposed, this iterative 
process is continued until there is convergence between the weights 
produced at adjacent steps, for example, when the maximum difference is 
less than 0.0001.
    Step 5--Adjust the FY 2007 LTC-DRG relative weights to account for 
nonmonotonically increasing relative weights.
    As explained in section II.B. of this preamble, the FY 2007 CMS 
DRGs, on which the FY 2007 LTC-DRGs are based, contain ``pairs'' that 
are differentiated based on the presence or absence of CCs. The LTC-
DRGs with CCs are defined by certain secondary diagnoses not related to 
or inherently a part of the disease process identified by the principal 
diagnosis, but the presence of additional diagnoses does not 
automatically generate a CC. As we discussed in the FY 2006 IPPS final 
rule (70 FR 47336), the value of monotonically increasing relative 
weights rises as the resource use increases (for example, from 
uncomplicated to more complicated). The presence of CCs in a LTC-DRG 
means that cases classified into a ``without CC'' LTC-DRG are expected 
to have lower resource use (and lower costs). In other words, resource 
use (and costs) are expected to decrease across ``with CC/without CC'' 
pairs of LTC-DRGs.
    For a case to be assigned to a LTC-DRG with CCs, more coded 
information is called for (that is, at least one relevant secondary 
diagnosis), than for a case to be assigned to a LTC-DRG ``without CCs'' 
(which is based on only one principal diagnosis and no relevant 
secondary diagnoses). Currently, the LTCH claims data include both 
accurately coded cases without complications and cases that have 
complications (and cost more), but were not coded completely. Both 
types of cases are grouped to a LTC-DRG ``without CCs'' when only the 
principal diagnosis was coded. Since the LTCH PPS was only implemented 
for cost reporting periods beginning on or after October 1, 2002 (FY 
2003), and LTCHs were previously paid under cost-based reimbursement, 
which is not based on patient diagnoses, coding by LTCHs for

[[Page 47980]]

these cases may not have been as detailed as possible.
    Thus, in developing the FY 2003 LTC-DRG relative weights for the 
LTCH PPS based on FY 2001 claims data, as we discussed in the August 
30, 2002 LTCH PPS final rule (67 FR 55990), we found on occasion that 
the data suggested that cases classified to the LTC-DRG ``with CCs'' of 
a ``with CC/without CC'' pair had a lower average charge than the 
corresponding LTC-DRG ``without CCs.'' Similarly, as discussed in the 
FY 2006 IPPS final rule (70 FR 47336 through 47337), based on FY 2004 
claims data, we also found on occasion that the data suggested that 
cases classified to the LTC-DRG ``with CCs'' of a ``with CC/without 
CC'' pair have a lower average charge than the corresponding LTC-DRG 
``without CCs'' for the FY 2006 LTC-DRG relative weights.
    We believe this anomaly may be due to coding that may not have 
fully reflected all comorbidities that were present. Specifically, 
LTCHs may have failed to code relevant secondary diagnoses, which 
resulted in cases that actually had CCs being classified into a 
``without CC'' LTC-DRG. It would not be appropriate to pay a lower 
amount for the ``with CC'' LTC-DRG because, in general, cases 
classified into a ``with CC'' LTC-DRG are expected to have higher 
resource use (and higher cost) as discussed above. Therefore, 
previously when we determined the LTC-DRG relative weights in 
accordance with the methodology established in the August 30, 2002 LTCH 
PPS final rule (67 FR 55990) when we implanted the LTCH PPS, we grouped 
both the cases ``with CCs'' and ``without CCs'' together for the 
purpose of calculating the LTC-DRG relative weights. As we stated in 
that same final rule, we will continue to employ this methodology to 
account for nonmonotonically increasing relative weights until we have 
adequate data to calculate appropriate separate weights for these 
anomalous LTC-DRG pairs. We expect that, as was the case when we first 
implemented the IPPS, in most instances, this problem will be self-
correcting, as LTCHs submit more completely coded data in the future.
    There are three types of ``with CC'' and ``without CC'' pairs that 
could be nonmonotonic; that is, where the ``without CC'' LTC-DRG would 
have a higher average charge than the ``with CC'' LTC-DRG. For this 
final rule, using the LTCH cases in the March 2006 update of the FY 
2005 MedPAR file (the most recent and complete data available at this 
time), we identified one of the three types of nonmonotonic LTC-DRG 
pairs. As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 
55990), we believe this anomaly may be due to coding inaccuracies and 
expect that, as was the case when we first implemented the acute care 
hospital IPPS, this problem will be self-correcting, as LTCHs submit 
more completely coded data in the future.
    The first category of nonmonotonically increasing relative weights 
for LTC-DRG pairs ``with and without CCs'' contains one pair of LTC-
DRGs in which both the LTC-DRG ``with CCs'' and the LTC-DRG ``without 
CCs'' had 25 or more LTCH cases and, therefore, did not fall into one 
of the 5 low-volume quintiles. For those nonmonotonic LTC-DRG pairs, 
based on our established methodology (67 FR 55983 through 55990), we 
combined the LTCH cases and computed a new relative weight based on the 
case-weighted average of the combined LTCH cases of the LTC-DRGs. The 
case-weighted average charge is determined by dividing the total 
charges for all LTCH cases by the total number of LTCH cases for the 
combined LTC-DRG. This new relative weight is then assigned to both of 
the LTC-DRGs in the pair. In this final rule, for FY 2007, there were 
no LTC-DRGs that fell into this category.
    The second category of nonmonotonically increasing relative weights 
for LTC-DRG pairs ``with and without CCs'' consists of one pair of LTC-
DRGs that has fewer than 25 cases, and each LTC-DRG is grouped to 
different low-volume quintiles in which the ``without CC'' LTC-DRG is 
in a higher-weighted low-volume quintile than the ``with CC'' LTC-DRG. 
For those pairs, based on our established methodology, we combine the 
LTCH cases and determine the case-weighted average charge for all LTCH 
cases. The case-weighted average charge is determined by dividing the 
total charges for all LTCH cases by the total number of LTCH cases for 
the combined LTC-DRG. Based on the case-weighted average LTCH charge, 
we determine within which low-volume quintile the ``combined LTC-DRG'' 
is grouped. Both LTC-DRGs in the pair are then grouped into the same 
low-volume quintile, thus having the same relative weight. In this 
final rule, for FY 2007, there were no LTC-DRGs that fell into this 
category.
    The third category of nonmonotonically increasing relative weights 
for LTC-DRG pairs ``with and without CCs'' consists of one pair of LTC-
DRGs where one of the LTC-DRGs has fewer than 25 LTCH cases and is 
grouped to a low-volume quintile and the other LTC-DRG has 25 or more 
LTCH cases and has its own LTC-DRG relative weight, and the LTC-DRG 
``without CCs'' has the higher relative weight. Based on our 
established methodology, as proposed, we removed the low-volume LTC-DRG 
from the low-volume quintile and combined it with the other LTC-DRG for 
the computation of a new relative weight for each of these LTC-DRGs. 
This new relative weight is assigned to both LTC-DRGs, so they each 
have the same relative weight. In this final rule, for FY 2007, 5 
``pairs'' of LTC-DRGs fall into this category: LTC-DRGs 94 and 95; LTC-
DRGs 96 and 97; LTC-DRGs 141 and 142; LTC-DRGs 205 and 206; and LTC-
DRGs 292 and 293.
    Step 6--Determine a FY 2007 LTC-DRG relative weight for LTC-DRGs 
with no LTCH cases.
    As we stated above, in this final rule, as we proposed we determine 
the relative weight for each LTC-DRG using total Medicare allowable 
charges reported in the March 2006 update of the FY 2005 MedPAR file. 
Of the 538 LTC-DRGs for FY 2007, we identified 183 LTC-DRGs for which 
there were no LTCH cases in the database. That is, based on data from 
the FY 2005 MedPAR file used in this final rule, no patients who would 
have been classified to those LTC-DRGs were treated in LTCHs during FY 
2005 and, therefore, no charge data were reported for those LTC-DRGs. 
Thus, in the process of determining the LTC-DRG relative weights, we 
are unable to determine weights for these 183 LTC-DRGs using the 
methodology described in Steps 1 through 5 above. However, because 
patients with a number of the diagnoses under these LTC-DRGs may be 
treated at LTCHs beginning in FY 2007, as was proposed, for this final 
rule, we assigned relative weights to each of the 183 ``no volume'' 
LTC-DRGs based on clinical similarity and relative costliness to one of 
the remaining 355 (538 - 183 = 355) LTC-DRGs for which we are able to 
determine relative weights, based on FY 2005 LTCH claims data. As there 
are currently no LTCH cases in these ``no volume'' LTC-DRGs, as 
proposed, we determined relative weights for the 183 LTC-DRGs with no 
LTCH cases in the FY 2005 MedPAR file used in this final rule by 
grouping them to the appropriate low-volume quintile. This methodology 
is consistent with our methodology used in determining relative weights 
to account for the low-volume LTC-DRGs described above.
    As was proposed, for this final rule, our methodology for 
determining the relative weights for the ``no volume'' LTC-DRGs is as 
follows: We crosswalk the no volume LTC-DRGs by matching them to other 
similar LTC-DRGs for

[[Page 47981]]

which there were LTCH cases in the FY 2005 MedPAR file based on 
clinical similarity and intensity of use of resources as determined by 
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 assigned the relative weight 
for the applicable low-volume quintile to the no volume LTC-DRG if the 
LTC-DRG to which it is crosswalked is grouped to one of the low-volume 
quintiles. If the LTC-DRG to which the no volume LTC-DRG is crosswalked 
is not one of the LTC-DRGs to be grouped to one of the low-volume 
quintiles, we compared the relative weight of the LTC-DRG to which the 
no volume LTC-DRG is crosswalked to the relative weights of each of the 
five quintiles and we assigned the no volume LTC-DRG the relative 
weight of the low-volume quintile with the closest weight. For this 
final rule, a list of the no volume FY 2007 LTC-DRGs and the FY 2007 
LTC-DRG to which it is crosswalked in order to determine the 
appropriate low-volume quintile for the assignment of a relative weight 
for FY 2007 is shown in the chart below.

                         No Volume LTC-DRG Crosswalk and Quintile Assignment for FY 2007
----------------------------------------------------------------------------------------------------------------
                                                                             Cross-
              LTC-DRG                            Description              walked LTC-     Low-volume quintile
                                                                              DRG              assignment
----------------------------------------------------------------------------------------------------------------
2.................................  CRANIOTOMY AGE >17 W/O CC...........            1  Quintile 5.
3.................................  CRANIOTOMY AGE 0-17.................            1  Quintile 5.
6.................................  CARPAL TUNNEL RELEASE...............          237  Quintile 1.
26................................  SEIZURE & HEADACHE AGE 0-17.........          563  Quintile 2.
30................................  TRAUMATIC STUPOR & COMA, COMA <1 HR            29  Quintile 1.
                                     AGE 0-17.
32................................  CONCUSSION AGE >17 W/O CC...........           31  Quintile 1.
33................................  CONCUSSION AGE 0-17.................           31  Quintile 1.
36................................  RETINAL PROCEDURES..................           46  Quintile 2.
37................................  ORBITAL PROCEDURES..................           46  Quintile 2.
38................................  PRIMARY IRIS PROCEDURES.............           46  Quintile 2.
39................................  LENS PROCEDURES WITH OR WITHOUT                46  Quintile 2.
                                     VITRECTOMY.
40................................  EXTRAOCULAR PROCEDURES EXCEPT ORBIT            46  Quintile 2.
                                     AGE >17.
41................................  EXTRAOCULAR PROCEDURES EXCEPT ORBIT            46  Quintile 2.
                                     AGE 0-17.
42................................  INTRAOCULAR PROCEDURES EXCEPT                  46  Quintile 2.
                                     RETINA, IRIS & LENS.
43................................  HYPHEMA.............................           45  Quintile 1.
47................................  OTHER DISORDERS OF THE EYE AGE >17 W/          45  Quintile 1.
                                     O CC.
48................................  OTHER DISORDERS OF THE EYE AGE 0-17.           45  Quintile 1.
49................................  MAJOR HEAD & NECK PROCEDURES........           64  Quintile 4.
50................................  SIALOADENECTOMY.....................           63  Quintile 4.
51................................  SALIVARY GLAND PROCEDURES EXCEPT               63  Quintile 4.
                                     SIALOADENECTOMY.
52................................  CLEFT LIP & PALATE REPAIR...........           63  Quintile 4.
53................................  SINUS & MASTOID PROCEDURES AGE >17..           63  Quintile 4.
54................................  SINUS & MASTOID PROCEDURES AGE 0-17.           63  Quintile 4.
56................................  RHINOPLASTY.........................           63  Quintile 4.
57................................  T&A PROC, EXCEPT TONSILLECTOMY &/OR            69  Quintile 1.
                                     ADENOIDECTOMY ONLY, AGE >17.
58................................  T&A PROC, EXCEPT TONSILLECTOMY &/OR            69  Quintile 1.
                                     ADENOIDECTOMY ONLY, AGE 0-17.
59................................  TONSILLECTOMY &/OR ADENOIDECTOMY               69  Quintile 1.
                                     ONLY, AGE >17.
60................................  TONSILLECTOMY &/OR ADENOIDECTOMY               69  Quintile 1.
                                     ONLY, AGE 0-17.
61................................  MYRINGOTOMY W TUBE INSERTION AGE >17           69  Quintile 1.
62................................  MYRINGOTOMY W TUBE INSERTION AGE 0-            69  Quintile 1.
                                     17.
66................................  EPISTAXIS...........................           69  Quintile 1.
70................................  OTITIS MEDIA & URI AGE 0-17.........           69  Quintile 1.
71................................  LARYNGOTRACHEITIS...................           97  Quintile 2.
74................................  OTHER EAR, NOSE, MOUTH & THROAT                69  Quintile 1.
                                     DIAGNOSES AGE 0-17.
81................................  RESPIRATORY INFECTIONS &                       69  Quintile 1.
                                     INFLAMMATIONS AGE 0-17.
84................................  MAJOR CHEST TRAUMA W/O CC...........           93  Quintile 1.
86................................  PLEURAL EFFUSION W/O CC.............          102  Quintile 1.
91................................  SIMPLE PNEUMONIA & PLEURISY AGE 0-17           90  Quintile 2.
98................................  BRONCHITIS & ASTHMA AGE 0-17........           97  Quintile 2.
104...............................  CARDIAC VALVE & OTHER MAJOR                   110  Quintile 4.
                                     CARDIOTHORACIC PROC W CARDIAC CATH.
105...............................  CARDIAC VALVE & OTHER MAJOR                   110  Quintile 4.
                                     CARDIOTHORACIC PROC W/O CARDIAC
                                     CATH.
106...............................  CORONARY BYPASS W PTCA..............          110  Quintile 4.
108...............................  OTHER CARDIOTHORACIC PROCEDURES.....          110  Quintile 4.
111...............................  MAJOR CARDIOVASCULAR PROCEDURES W/O           110  Quintile 4.
                                     CC.
137...............................  CARDIAC CONGENITAL & VALVULAR                 136  Quintile 1.
                                     DISORDERS AGE 0-17.
147...............................  RECTAL RESECTION W/O CC.............          171  Quintile 3.
149...............................  MAJOR SMALL & LARGE BOWEL PROCEDURES          176  Quintile 3.
                                     W/O CC.
151...............................  PERITONEAL ADHESIOLYSIS W/O CC......          160  Quintile 1.
153...............................  MINOR SMALL & LARGE BOWEL PROCEDURES          152  Quintile 5.
                                     W/O CC.
155...............................  STOMACH, ESOPHAGEAL & DUODENAL                567  Quintile 5.
                                     PROCEDURES AGE >17 W/O CC.
156...............................  STOMACH, ESOPHAGEAL & DUODENAL                567  Quintile 5.
                                     PROCEDURES AGE 0-17.
158...............................  ANAL & STOMAL PROCEDURES W/O CC.....          157  Quintile 3.
161...............................  INGUINAL & FEMORAL HERNIA PROCEDURES          160  Quintile 1.
                                     AGE >17 W CC.
162...............................  INGUINAL & FEMORAL HERNIA PROCEDURES          160  Quintile 1.
                                     AGE >17 W/O CC.
163...............................  HERNIA PROCEDURES AGE 0-17..........          160  Quintile 1.
164...............................  APPENDECTOMY W COMPLICATED PRINCIPAL          171  Quintile 3.
                                     DIAG W CC.
165...............................  APPENDECTOMY W COMPLICATED PRINCIPAL          171  Quintile 3.
                                     DIAG W/O CC.

[[Page 47982]]

 
166...............................  APPENDECTOMY W/O COMPLICATED                  171  Quintile 3.
                                     PRINCIPAL DIAG W CC.
167...............................  APPENDECTOMY W/O COMPLICATED                  171  Quintile 3.
                                     PRINCIPAL DIAG W/O CC.
169...............................  MOUTH PROCEDURES W/O CC.............          185  Quintile 2.
178...............................  UNCOMPLICATED PEPTIC ULCER W/O CC...          160  Quintile 1.
184...............................  ESOPHAGITIS, GASTROENT & MISC DIGEST          183  Quintile 1.
                                     DISORDERS AGE 0-17.
186...............................  DENTAL & ORAL DIS EXCEPT EXTRACTIONS          185  Quintile 2.
                                     & RESTORATIONS, AGE 0-17.
187...............................  DENTAL EXTRACTIONS & RESTORATIONS...          185  Quintile 2.
190...............................  OTHER DIGESTIVE SYSTEM DIAGNOSES AGE          189  Quintile 2.
                                     0-17.
192...............................  PANCREAS, LIVER & SHUNT PROCEDURES W/         191  Quintile 5.
                                     O CC.
194...............................  BILIARY TRACT PROC EXCEPT ONLY                193  Quintile 4.
                                     CHOLECYST W OR W/O C.D.E. W/O CC.
196...............................  CHOLECYSTECTOMY W C.D.E. W/O CC.....          197  Quintile 4.
198...............................  CHOLECYSTECTOMY EXCEPT BY                     197  Quintile 4.
                                     LAPAROSCOPE W/O C.D.E. W/O CC.
211...............................  HIP & FEMUR PROCEDURES EXCEPT MAJOR           210  Quintile 5.
                                     JOINT AGE >17 W/O CC.
212...............................  HIP & FEMUR PROCEDURES EXCEPT MAJOR           210  Quintile 5.
                                     JOINT AGE 0-17.
219...............................  LOWER EXTREM & HUMER PROC EXCEPT              210  Quintile 5.
                                     HIP, FOOT, FEMUR AGE >17 W/O CC.
220...............................  LOWER EXTREM & HUMER PROC EXCEPT              218  Quintile 5.
                                     HIP, FOOT, FEMUR AGE 0-17.
229...............................  HAND OR WRIST PROC, EXCEPT MAJOR              237  Quintile 1.
                                     JOINT PROC, W/O CC.
234...............................  OTHER MUSCULOSKELET SYS & CONN TISS           237  Quintile 1.
                                     O.R. PROC W/O CC.
251...............................  FX, SPRN, STRN & DISL OF FOREARM,             237  Quintile 1.
                                     HAND, FOOT AGE >17.W/O CC.
252...............................  FX, SPRN, STRN & DISL OF FOREARM,             253  Quintile 2.
                                     HAND, FOOT AGE 0-17.
255...............................  FX, SPRN, STRN & DISL OF                      253  Quintile 2.
                                     UPARM,LOWLEG EX FOOT AGE 0-17.
258...............................  TOTAL MASTECTOMY FOR MALIGNANCY W/O           274  Quintile 3.
                                     CC.
260...............................  SUBTOTAL MASTECTOMY FOR MALIGNANCY W/         274  Quintile 3.
                                     O CC.
267...............................  PERIANAL & PILONIDAL PROCEDURES.....          270  Quintile 3.
275...............................  MALIGNANT BREAST DISORDERS W/O CC...          274  Quintile 3.
279...............................  CELLULITIS AGE 0-17.................          273  Quintile 1.
282...............................  TRAUMA TO THE SKIN, SUBCUT TISS &             281  Quintile 2.
                                     BREAST AGE 0-17.
286...............................  ADRENAL & PITUITARY PROCEDURES......          292  Quintile 4.
289...............................  PARATHYROID PROCEDURES..............           63  Quintile 4.
290...............................  THYROID PROCEDURES..................           63  Quintile 4.
291...............................  THYROGLOSSAL PROCEDURES.............           63  Quintile 4.
298...............................  NUTRITIONAL & MISC METABOLIC                  297  Quintile 1.
                                     DISORDERS AGE 0-17.
303...............................  KIDNEY AND URETER PROCEDURES FOR              318  Quintile 3.
                                     NEOPLASM.
305...............................  KIDNEY AND URETER PROCEDURES FOR NON-         318  Quintile 3.
                                     NEOPLASM W/O CC.
307...............................  PROSTATECTOMY W/O CC................          306  Quintile 4.
309...............................  MINOR BLADDER PROCEDURES W/O CC.....          308  Quintile 4.
311...............................  TRANSURETHRAL PROCEDURES W/O CC.....          310  Quintile 4.
313...............................  URETHRAL PROCEDURES, AGE >17 W/O CC.          312  Quintile 3.
314...............................  URETHRAL PROCEDURES, AGE 0-17.......          312  Quintile 3.
319...............................  KIDNEY & URINARY TRACT NEOPLASMS W/O          318  Quintile 3.
                                     CC.
322...............................  KIDNEY & URINARY TRACT INFECTIONS             321  Quintile 1.
                                     AGE 0-17.
326...............................  KIDNEY & URINARY TRACT SIGNS &                321  Quintile 1.
                                     SYMPTOMS AGE >17 W/O CC.
327...............................  KIDNEY & URINARY TRACT SIGNS &                321  Quintile 1.
                                     SYMPTOMS AGE 0-17.
328...............................  URETHRAL STRICTURE AGE >17 W CC.....          325  Quintile 2.
329...............................  URETHRAL STRICTURE AGE >17 W/O CC...          325  Quintile 2.
330...............................  URETHRAL STRICTURE AGE 0-17.........          325  Quintile 2.
333...............................  OTHER KIDNEY & URINARY TRACT                  332  Quintile 1.
                                     DIAGNOSES AGE 0-17.
334...............................  MAJOR MALE PELVIC PROCEDURES W CC...          335  Quintile 1.
337...............................  TRANSURETHRAL PROSTATECTOMY W/O CC..          306  Quintile 4.
340...............................  TESTES PROCEDURES, NON-MALIGNANCY             339  Quintile 3.
                                     AGE 0-17.
342...............................  CIRCUMCISION AGE >17................          339  Quintile 3.
343...............................  CIRCUMCISION AGE 0-17...............          339  Quintile 3.
349...............................  BENIGN PROSTATIC HYPERTROPHY W/O CC.          339  Quintile 3.
351...............................  STERILIZATION, MALE.................          339  Quintile 3.
353...............................  PELVIC EVISCERATION, RADICAL                  365  Quintile 4.
                                     HYSTERECTOMY & RADICAL VULVECTOMY.
354...............................  UTERINE,ADNEXA PROC FOR NON-OVARIAN/          365  Quintile 4.
                                     ADNEXAL MALIG W CC.
355...............................  UTERINE,ADNEXA PROC FOR NON-OVARIAN/          365  Quintile 4.
                                     ADNEXAL MALIG W/O CC.
356...............................  FEMALE REPRODUCTIVE SYSTEM                    365  Quintile 4.
                                     RECONSTRUCTIVE PROCEDURES.
357...............................  UTERINE & ADNEXA PROC FOR OVARIAN OR          365  Quintile 4.
                                     ADNEXAL MALIGNANCY.
358...............................  UTERINE & ADNEXA PROC FOR NON-                365  Quintile 4.
                                     MALIGNANCY W CC.
359...............................  UTERINE & ADNEXA PROC FOR NON-                365  Quintile 4.
                                     MALIGNANCY W/O CC.
360...............................  VAGINA, CERVIX & VULVA PROCEDURES...          365  Quintile 4.
361...............................  LAPAROSCOPY & INCISIONAL TUBAL                383  Quintile 1.
                                     INTERRUPTION.
362...............................  ENDOSCOPIC TUBAL INTERRUPTION.......          383  Quintile 1.
363...............................  D&C, CONIZATION & RADIO-IMPLANT, FOR          383  Quintile 1.
                                     MALIGNANCY.
364...............................  D&C, CONIZATION EXCEPT FOR                    383  Quintile 1.
                                     MALIGNANCY.
370...............................  CESAREAN SECTION W CC...............          383  Quintile 1.
371...............................  CESAREAN SECTION W/O CC.............          383  Quintile 1.
372...............................  VAGINAL DELIVERY W COMPLICATING               383  Quintile 1.
                                     DIAGNOSES.
373...............................  VAGINAL DELIVERY W/O COMPLICATING             383  Quintile 1.
                                     DIAGNOSES.

[[Page 47983]]

 
374...............................  VAGINAL DELIVERY W STERILIZATION &/           383  Quintile 1.
                                     OR D&C.
375...............................  VAGINAL DELIVERY W O.R. PROC EXCEPT           383  Quintile 1.
                                     STERIL &/OR D&C.
377...............................  POSTPARTUM & POST ABORTION DIAGNOSES          383  Quintile 1.
                                     W O.R. PROCEDURE.
378...............................  ECTOPIC PREGNANCY...................          383  Quintile 1.
379...............................  THREATENED ABORTION.................          383  Quintile 1.
380...............................  ABORTION W/O D&C....................          383  Quintile 1.
381...............................  ABORTION W D&C, ASPIRATION CURETTAGE          383  Quintile 1.
                                     OR HYSTEROTOMY.
382...............................  FALSE LABOR.........................          383  Quintile 1.
384...............................  OTHER ANTEPARTUM DIAGNOSES W/O                383  Quintile 1.
                                     MEDICAL COMPLICATIONS.
385...............................  NEONATES, DIED OR TRANSFERRED TO              383  Quintile 1.
                                     ANOTHER ACUTE CARE FACILITY.
386...............................  EXTREME IMMATURITY OR RESPIRATORY             383  Quintile 1.
                                     DISTRESS SYNDROME, NEONATE.
387...............................  PREMATURITY W MAJOR PROBLEMS........          383  Quintile 1.
388...............................  PREMATURITY W/O MAJOR PROBLEMS......          383  Quintile 1.
389...............................  FULL TERM NEONATE W MAJOR PROBLEMS..          383  Quintile 1.
390...............................  NEONATE W OTHER SIGNIFICANT PROBLEMS          383  Quintile 1.
391...............................  NORMAL NEWBORN......................          383  Quintile 1.
392...............................  SPLENECTOMY AGE >17.................          197  Quintile 4.
393...............................  SPLENECTOMY AGE 0-17................          197  Quintile 4.
396...............................  RED BLOOD CELL DISORDERS AGE 0-17...          399  Quintile 1.
402...............................  LYMPHOMA & NON-ACUTE LEUKEMIA W               395  Quintile 2.
                                     OTHER O.R. PROC W/O CC.
405...............................  ACUTE LEUKEMIA W/O MAJOR O.R.                 404  Quintile 3.
                                     PROCEDURE AGE 0-17.
407...............................  MYELOPROLIF DISORD OR POORLY DIFF             408  Quintile 4.
                                     NEOPL W MAJ O.R.PROC W/O CC.
411...............................  HISTORY OF MALIGNANCY W/O ENDOSCOPY.          173  Quintile 2.
412...............................  HISTORY OF MALIGNANCY W ENDOSCOPY...          173  Quintile 2.
417...............................  SEPTICEMIA AGE 0-17.................          576  Quintile 3.
422...............................  VIRAL ILLNESS & FEVER OF UNKNOWN              426  Quintile 1.
                                     ORIGIN AGE 0-17.
433...............................  ALCOHOL/DRUG ABUSE OR DEPENDENCE,             523  Quintile 1.
                                     LEFT AMA.
443...............................  OTHER O.R. PROCEDURES FOR INJURIES W/         445  Quintile 2.
                                     O CC.
446...............................  TRAUMATIC INJURY AGE 0-17...........          445  Quintile 2.
448...............................  ALLERGIC REACTIONS AGE 0-17.........          447  Quintile 2.
451...............................  POISONING & TOXIC EFFECTS OF DRUGS            449  Quintile 3.
                                     AGE 0-17.
455...............................  OTHER INJURY, POISONING & TOXIC               449  Quintile 3.
                                     EFFECT DIAG W/O CC.
481...............................  BONE MARROW TRANSPLANT..............          394  Quintile 4.
484...............................  CRANIOTOMY FOR MULTIPLE SIGNIFICANT             1  Quintile 5.
                                     TRAUMA.
485...............................  LIMB REATTACHMENT, HIP & FEMUR PROC           487  Quintile 4.
                                     FOR MULTIPLE SIGNIFICANT TRAUMA.
494...............................  LAPAROSCOPIC CHOLECYSTECTOMY W/O              493  Quintile 4.
                                     C.D.E. W/O CC.
498...............................  SPINAL FUSION EXCEPT CERVICAL W/O CC          497  Quintile 5.
507...............................  FULL THICKNESS BURN W SKIN GRFT OR            511  Quintile 1.
                                     INHAL INJ W/O CC OR SIG TRAUMA.
518...............................  PERCUTANEOUS CARDIOVASC PROC W/O              125  Quintile 1.
                                     CORONARY ARTERY STENT OR AMI.
520...............................  CERVICAL SPINAL FUSION W/O CC.......          497  Quintile 5.
522...............................  ALCOHOL/DRUG ABUSE OR DEPENDENCE W            521  Quintile 2.
                                     REHABILITATION THERAPY W/O CC.
525...............................  OTHER HEART ASSIST SYSTEM IMPLANT...          468  Quintile 5.
528...............................  INTRACRANIAL VASCULAR PROCEDURES W              1  Quintile 5.
                                     PDX HEMORRHAGE.
530...............................  VENTRICULAR SHUNT PROCEDURES W/O CC.          529  Quintile 5.
534...............................  EXTRACRANIAL PROCEDURES W/O CC......          500  Quintile 4.
536...............................  CARDIAC DEFIB IMPLANT W CARDIAC CATH          517  Quintile 4.
                                     W/O AMI/HF/SHOCK.
540...............................  LYMPHOMA & LEUKEMIA W MAJOR O.R.              399  Quintile 1.
                                     PROCEDURE W/O CC.
546...............................  SPINAL FUSION EXC CERV WITH                   499  Quintile 5.
                                     CURVATURE OF THE SPINE OR MALIG.
547...............................  CORONARY BYPASS W CARDIAC CATH W              517  Quintile 4.
                                     MAJOR CV DX.
548...............................  CORONARY BYPASS W CARDIAC CATH W/O            517  Quintile 4.
                                     MAJOR CV DX.
549...............................  CORONARY BYPASS W/O CARDIAC CATH W            517  Quintile 4.
                                     MAJOR CV DX.
550...............................  CORONARY BYPASS W/O CARDIAC CATH W/O          517  Quintile 4.
                                     MAJOR CV DX.
556...............................  PERCUTANEOUS CARDIOVASC PROC W NON-           125  Quintile 1.
                                     DRUG-ELUTING STENT W/O MAJ CV DX.
558...............................  PERCUTANEOUS CARDIOVASCULAR PROC W            125  Quintile 1.
                                     DRUG-ELUTING STENT W/O MAJ CV DX.
559...............................  ACUTE ISCHEMIC STROKE WITH USE OF              16  Quintile 3.
                                     THROMBOLYTIC AGENT.
577...............................  CAROTID ARTERY STENT PROCEDURE......          533  Quintile 4
----------------------------------------------------------------------------------------------------------------

    To illustrate this methodology for determining the relative weights 
for the 183 LTC-DRGs with no LTCH cases, we are providing the following 
examples, which refer to the no volume LTC-DRGs crosswalk information 
for FY 2007 provided in the chart above.
    Example 1: There were no cases in the FY 2005 MedPAR file used for 
this final rule for LTC-DRG 3 (Craniotomy Age 0-17). Since the 
procedure is similar in resource use and the length and complexity of 
the procedures and the length of stay are similar, we determined that 
LTC-DRG 1 (Craniotomy Age >17 with CC), which is assigned to low-volume 
Quintile 5 for the purpose of determining the FY 2007 relative weights, 
would display similar clinical and resource use. Therefore, we assigned 
the same relative weight of LTC-DRG 1 of 1.6835 (Quintile 5) for

[[Page 47984]]

FY 2007 (Table 11 in the Addendum to this final rule) to LTC-DRG 3.
    Example 2: There were no LTCH cases in the FY 2005 MedPAR file used 
in this final rule for LTC-DRG 91 (Simple Pneumonia and Pleurisy Age 0-
17). Since the severity of illness in patients with pneumonia and 
pleurisy is similar in patients regardless of age, we determined that 
LTC-DRG 90 (Simple Pneumonia and Pleurisy Age >17 Without CC) would 
display similar clinical and resource use characteristics and have a 
similar length of stay to LTC-DRG 91. There were over 25 cases in LTC-
DRG 90 in the FY 2005 MedPAR file data used determining the FY 2007 
LTC-DRG relative weights in this final rule. Therefore, it would not be 
assigned to a low-volume quintile for the purpose of determining the 
LTC-DRG relative weights. However, under our established methodology, 
LTC-DRG 91, with no LTCH cases, would need to be grouped to a low-
volume quintile. We determined that the low-volume quintile with the 
closest weight to LTC-DRG 90 (0.4958) (refer to Table 11 in the 
Addendum to this final rule) would be low-volume Quintile 2 (0.5594) 
(refer to Table 11 in the Addendum to this final rule). Therefore, we 
assigned LTC-DRG 91 a relative weight of 0.5694 for FY 2007. We note 
that we will continue to monitor the volume (that is, the number of 
LTCH cases) that have few or no LTCH cases to ensure that our no volume 
LTC-DRG crosswalking and relative weight assignment results in 
appropriate payments for such cases and does not result in an 
unintended financial incentive for LTCHs to inappropriately admit these 
types of cases.
    Furthermore, as was proposed, we are establishing LTC-DRG relative 
weights of 0.0000 for heart, kidney, liver, lung, pancreas, and 
simultaneous pancreas/kidney transplants (LTC-DRGs 103, 302, 480, 495, 
512, and 513, respectively) for FY 2007 in this final rule because 
Medicare will only cover these procedures if they are performed at a 
hospital that has been certified for the specific procedures by 
Medicare and presently no LTCH has been so certified. Based on our 
research, we found that most LTCHs only perform minor surgeries, such 
as minor small and large bowel procedures, to the extent any surgeries 
are performed at all. Given the extensive criteria that must be met to 
become certified as a transplant center for Medicare, we believe it is 
unlikely that any LTCHs would become certified as a transplant center. 
In fact, in the nearly 20 years since the implementation of the IPPS, 
there has never been a LTCH that even expressed an interest in becoming 
a transplant center.
    However, if in the future a LTCH applies for certification as a 
Medicare-approved transplant center, we believe that the application 
and approval procedure would allow sufficient time for us to determine 
appropriate weights for the LTC-DRGs affected. At the present time, we 
would only include these six transplant LTC-DRGs in the GROUPER program 
for administrative purposes. Because we use the same GROUPER program 
for LTCHs as is used under the IPPS, removing these LTC-DRGs would be 
administratively burdensome.
    Again, we note that, as this system is dynamic, it is entirely 
possible that the number of LTC-DRGs with a zero volume of LTCH cases 
based on the system will vary in the future. We used the best most 
recent available claims data in the MedPAR file to identify zero volume 
LTC-DRGs and to determine the relative weights in this final rule.
    Table 11 in the Addendum to this final rule lists the LTC-DRGs and 
their respective relative weights, geometric mean length of stay, and 
five-sixths of the geometric mean length of stay (to assist in the 
determination of short-stay outlier payments under Sec.  412.529) for 
FY 2007.
    We also wish to point out that in section VI.A.5. of the preamble 
of this rule, we discuss our revision to the regulations for 
grandfathered HwHs, grandfathered hospital satellite facilities, and 
grandfathered satellite units at Sec. Sec.  412.22(f), 412.22(h), and 
412.25(e), respectively. In addition, in section VI.A.6. of the 
preamble of this final rule, we discuss our revision and clarification 
to the existing policies governing the determination of LTCHs' CCRs and 
the reconciliation of high-cost and short-stay outlier payments under 
the LTCH PPS based on the proposal presented in the FY 2007 IPPS 
proposed rule (71 FR 24126 through 24135).
5. Summary of Public Comments and Departmental Responses
    Comment: Numerous commenters opposed the proposed changes in the 
LTC-DRG weights, which they noted would result in an approximately 1.4 
percent decrease in estimate aggregate payments to LTCHs. Several of 
the commenters noted that LTCHs had been subject to a number of 
``significant Medicare payment reductions in recent years,'' including 
an estimated 4.2 percent reduction as a result of the reweighting of 
the LTC-DRGs for FY 2006; a zero update (as opposed to a 3.4 percent 
market-basket increase) in the Federal rate for RY 2007; an estimated 
3.7 percent decrease caused by the revised short-stay outlier payment 
policy for RY 2007; and, most recently, the estimated 1.4 percent 
reduction as a result of the proposed reclassification and reweighting 
of the LTC-DRGs for FY 2007. The commenters maintained that the 
cumulative effect of these established and proposed Medicare payment 
reductions is not sustainable for the LTCH industry and will cause much 
``volatility'' for LTCH providers, and also restrict access to LTCHs 
for patients.
    One commenter provided a chart that indicated that if CMS finalizes 
the proposed LTC-DRG relative weights, LTCH industry-wide margins would 
approximate 0 percent. Another commenter, an association that 
represents large LTCH chains, urged CMS to postpone implementation of 
the proposed FY 2007 reweighting of the LTC-DRGs until an analysis of 
the impact of this change on payment adequacy, as well as other payment 
changes established for RY 2007, is conducted.
    Response: While we understand the commenters' concerns with the 
estimated decrease of 1.4 percent in LTCH PPS payments as a result of 
the proposed changes in the LTC-DRGs, and relative weights for FY 2007, 
we did not propose any changes in the methodology used to determine the 
proposed recalibration of the LTC-DRG relative weights for FY 2007. (We 
note that based on the final LTCH-DRG relative weights for FY 2007 the 
estimate is a 1.3 percent decrease.) The proposed update to the LTC-DRG 
relative weights for FY 2007 is based on the proposed Version 24.0 of 
the CMS GROUPER (including the proposed changes in the DRG 
classifications relative weights and geometric mean length of stay) and 
FY 2005 LTCH claims data. For this final rule, we used updated data as 
described previously. In the FY 2003 final rule for the LTCH PPS, which 
first implemented the payment system, we described in great detail, the 
methodology for the development of the LTC-DRG relative weights, and we 
have reiterated these steps in every subsequent rulemaking cycle. (When 
we revised our regulations at Sec.  412.535, establishing the LTCH PPS 
rate year, while still publishing the LTC-DRG updates on the Federal 
fiscal year (October through September) cycle, we continued to include 
a brief write-up of our LTC-DRG update methodology in the annual LTCH 
PPS proposed and final rules and a comprehensive description of the 
policy in the annual IPPS proposed and final rules (67 FR 55984-55995; 
68 FR

[[Page 47985]]

34131-34132; 69 FR 25681; 69 FR 48989-48999; 70 FR 24177-24178; 70 FR 
37323-37341; and 71 FR 27808).) There has been no methodological change 
in the way in which the LTC-DRG relative weights are computed since the 
implementation of the LTCH PPS. The annual determination of the LTC-DRG 
relative weights is data-driven; that is, based on claims data in the 
most current MedPAR files which are derived from patient bills 
submitted by LTCHs.
    We agree with the commenters who noted that the LTCH industry has 
indeed been impacted by significant changes since the start of the LTCH 
PPS for FY 2003. Since we first established the LTCH PPS, the 
unadjusted Federal payment rate, which began at $34,956.15, increased 
to $38,086.64 for RY 2006. (The zero percent update finalized in the RY 
2007 LTCH PPS final rule (71 FR 27798) resulted in the stabilization of 
this amount for RY 2007.) From RY 2005 to RY 2006, there was a 5.7 
percent increase in estimated aggregate LTCH PPS payments (70 FR 
24217). The average Medicare payment per case for FY 2003 was reported 
at $26,751, while, for RY 2006, it was estimated to be $33,208, which 
is an increase of over 24 percent. Significantly, there was a 13.8 
percent increase in estimated Medicare payments to LTCHs in RY 2005 
alone. The results of the first 2 years of this ``volatility'' were 
aggregate industry margins estimated at 7.8 percent for FY 2003, and 
for FY 2004, preliminary cost report data revealed an estimated average 
Medicare margin of 12.7 percent, as stated in the RY 2007 LTCH PPS 
final rule (71 FR 27819).
    The commenters noted the Medicare payment reductions in recent 
years, including the estimated 4.2 percent reduction for FY 2006 due to 
the recalibration of the LTC-DRG weights and the estimated 1.4 percent 
decrease in aggregate LTCH PPS payments due to the proposed update to 
the LTC-DRG relative weights for FY 2007. As noted above, the decrease 
in average case-mix based on the proposed LTC-DRG relative weights for 
FY 2007 as compared to FY 2006, as well as the decrease in average 
case-mix from FY 2006 as compared to FY 2005, which were estimated to 
result in an aggregate estimated decrease in LTCH PPS payments, were 
data driven. For this final rule they remain data driven as well. In 
the FY 2006 IPPS proposed rule (70 FR 23667), we noted that we 
continued to observe a significant increase of relatively lower charge 
cases being assigned to LTC-DRGs with higher relative weights in the 
prior year. The addition of these lower charge cases resulted in a 
decrease in many of the LTC-DRG relative weights from FY 2005 to FY 
2006. This decrease in many of the LTC-DRG relative weights, in turn, 
resulted in an estimated decrease in LTCH PPS payments from FY 2005 to 
FY 2006. As we explained in that same rule, contributing to this 
increased number of relatively lower charge cases being assigned to 
LTC-DRGs with higher relative weights in the prior year were 
improvements in coding practices, which are typically found when moving 
from a reasonable cost-based payment system to a PPS.
    Our analyses of data from the March 2005 update of the FY 2004 
MedPAR files, which were used to calculate the FY 2006 LTC-DRG relative 
weights, and the most recent update of the FY 2005 MedPAR files which 
were used to determine the proposed and final FY 2007 LTC-DRG relative 
weights continue to show an increase of relatively lower charge cases 
being assigned to LTC-DRGs with higher relative weights in the prior 
year. As we explained in the FY 2006 IPPS final rule (70 FR 47335) and 
the FY 2007 IPPS proposed rule (71 FR 24413), the impact of including 
cases with relatively lower charges into LTC-DRGs that had a relatively 
higher relative weight in the previous fiscal year's GROUPER is a 
decrease in the average relative weight for those LTC-DRGs, which, in 
turn, may result in an estimated aggregate decrease in LTCH PPS 
payments.
    The commenters also mentioned the zero update to the RY 2007 
standard Federal rate as one of the ``significant Medicare payment 
reductions in recent years.'' In the RY 2007 LTCH PPS final rule (71 FR 
27819 through 27827), we explained our rationale for establishing a 
zero percent update to the standard Federal rate for the 2007 LTCH PPS 
rate year, which was based on the most recent estimate in the 
Rehabilitation, Psychiatric and Long-Term Care (RPL) market basket 
offset by an adjustment for changes in coding practices that are 
unrelated to case mix, rather than solely using the most recent 
estimate of the RPL market basket to update the RY 2006 Federal rate. 
This market basket offset resulted from a number of factors that 
included our ongoing monitoring activities, which prompted us to 
examine the changes in LTCHs' patient case-mix index and margins since 
the inception of the LTCH PPS for FY 2003 (67 FR 56014).
    First, we noted that there has been tremendous growth in the number 
of LTCHs reimbursed by Medicare. Specifically, the number of LTCHs 
almost doubled from approximately 200 LTCHs in FY 2003 to 378 LTCHs at 
the start of FY 2005. In addition, Medicare spending for LTCHs has also 
grown rapidly, as noted in MedPAC's June 2004 Report to Congress (page 
122). Rapid increases in LTCH growth and Medicare spending under the 
LTCH PPS, in conjunction with the fact that over 98 percent of LTCHs 
are currently paid based fully on the Federal rate (rather than 
choosing to be paid under a blend of the reasonable cost-based (TEFRA) 
payment amount and the LTCH PPS Federal rate payment amount), prompted 
us to examine changes in LTCHs' patient case-mix index and margins 
under the LTCH PPS. We believed the zero percent update factor for RY 
2007, which was based on the most recent estimate of the RPL market 
basket at that time, adjusted to account for coding changes, was 
supported by our findings regarding the case-mix index, Medicare 
margins, and patient census based on the most recent complete LTCH 
data.
    As we explained in considerable detail in the RY 2007 final rule 
for the LTCH PPS (71 FR 27818 through 27824), a LTCH's case-mix index 
is defined as the case-weighted average LTC-DRG relative weight for all 
its discharges in a given period. Changes in the case-mix index consist 
of two components: ``real'' case-mix index changes and ``apparent'' 
case-mix index changes. Real case-mix index increase is defined as the 
increase in the average LTC-DRG relative weights resulting from the 
hospital's treatment of more resource intensive patients. Apparent 
case-mix index increase is defined as the increase in computed case-mix 
index that is due to changes in coding practices (including better 
documentation of the medical record by physicians and more complete 
coding of the medical record by coders). Observed case-mix index 
increase is defined as real case-mix index increase plus the apparent 
case-mix index increase.
    If LTCH patients have more costly impairments, lower functional 
status, or increased comorbidities, and thus require more resources in 
the LTCH, we consider this a real change in case-mix. Conversely, if 
LTCH patients have the same impairments, functional status, and 
comorbidities but are coded differently resulting in higher payment, we 
consider this an apparent change in case-mix. We believe that changes 
in payment rates should accurately reflect changes in LTCHs' true cost 
of treating patients (real case-mix index increase), and should not be 
influenced by changes in coding practices (apparent case-mix index 
increase). Apparent case-mix index increase results in a case

[[Page 47986]]

being grouped to a LTC-DRG with a higher weight than it would be 
without such changes in coding practices, which results in a higher 
payment to the LTCH that does not necessarily reflect the true cost of 
treating the patient. Therefore, in the RY 2007 LTCH PPS final rule (71 
FR 27798) under the broad discretionary authority conferred upon the 
Secretary by section 123 of the BBRA as amended by section 307(b) of 
the BIPA to include appropriate adjustments, including updates, in the 
establishment of the LTCH PPS, we revised the annual update to the LTCH 
PPS standard Federal rate set forth at Sec.  412.523(a)(2) for the 2007 
LTCH PPS rate year to adjust the payment amount for LTCH inpatient 
hospital services to eliminate the effect of coding or classification 
changes that do not reflect real changes in LTCHs' case-mix.
    Our determination to specifically provide a zero update resulted 
from data analysis by 3M Health Information Systems (3M) regarding 
changes in case-mix and coding since the implementation of the LTCH 
PPS, based on the most recently available data, which compared FY 2003 
LTCH claims data from the first year of implementation of the PPS with 
FY 2004 LTCH claims data, and also looked at FY 2001 claims data 
(generated prior to the implementation of the LTCH PPS). (The FY 2001 
data was the same LTCH claims data used to develop the LTCH PPS.) The 
analysis indicated, among other things, that the average annual case-
mix index increase from FY 2001 to FY 2003 was 2.75 percent. Since 
coding of diagnoses was not a factor in determining payments under the 
former reasonable cost-based (TEFRA) payment system, and since payments 
were not directly tied to diagnosis codes, there was no incentive for 
LTCHs to attempt to influence payments through changes in coding 
practices. Therefore, it was reasonable to assume that the observed 
2.75 percent change in case-mix in the years prior to the 
implementation of the LTCH PPS represent the value for the real case-
mix index increase (that is, we assumed that the 2.75 percent increase 
in case-mix is due to treatment of more resource intensive patients, 
rather than to improvements in documentation or more complete coding of 
the medical record during this period). Using the average annual 2.75 
percent observed case-mix index increase as a baseline, we separated 
the computed case-mix index increase between FY 2003 and FY 2004 into 
the real case-mix index increase, which is based on the treatment of 
more resource intensive patients, and the apparent case-mix index 
increase, due to improvements in documentation and coding practices.
    As we stated in the RY 2007 LTCH PPS final rule (71 FR 27820), the 
calculated observed case-mix index increase between FY 2003 and FY 2004 
was 6.75 percent. Assuming that the real case-mix index increase 
observed (on average) from FY 2001 to FY 2003 remained relatively 
constant into FY 2004, then the difference of 4.0 percent (6.75 percent 
minus 2.75 percent) represented the apparent case-mix index increase 
that was due to improvements in documentation and coding. This was 
considerably higher than the 0.34 percent behavioral offset originally 
estimated by the CMS Office of the Actuary, which was used in the 
development of the FY 2003 LTCH PPS standard Federal rate (67 FR 
56033). Therefore, we believed that it was appropriate that the market 
basket be offset by an adjustment to account for changes in coding 
practices that do not reflect changes in real case mix. This adjustment 
was implemented to ensure that the LTCH PPS payment rates continue to 
reflect, as closely as possible, the true costs of treating LTCH 
patients. It was our intent that such an adjustment to the most recent 
estimate of the LTCH PPS market basket would eliminate the effect of 
coding or classification changes that did not reflect real changes in 
LTCHs' case-mix in prior years.
    Regarding the impact of the revised short-stay outlier policy on 
Medicare payments to LTCHs, we continue to believe that the revisions 
we established to the short-stay outlier payment adjustments in the RY 
2007 LTCH PPS final rule were highly appropriate and that they provide 
fair and reasonable payment for short-stay patients in LTCHs, which are 
required to meet the same certification criteria as short-term acute 
care hospitals set forth in section 1861(e) of the Act and generally 
have an average length of stay of greater than 25 days. Therefore, our 
present policy under the short-stay outlier policy at Sec.  412.529, 
effective for discharges beginning on or after July 1, 2006, is to base 
Medicare payment on the least of 100 percent of the estimated costs of 
the discharge, 120 percent of the LTC-DRG per diem payment amount 
multiplied by the length of stay, the full LTC-DRG payment, or a LTCH 
PPS payment based on a blend of the IPPS-comparable per diem payment 
amount (capped at the full IPPS comparable payment amount) and a 
payment based on 120 percent of the LTC-DRG per diem amount.
    We believe that this finalized policy clearly demonstrates our 
rationale, which is that as the length of a short-stay outlier case 
increases, the case begins to resemble a more ``typical'' LTCH stay as 
defined under section 1886(d)(1)(B)(IV)(I) of the Act and envisioned by 
the statutes authorizing the establishment of the LTCH PPS. 
Furthermore, the estimated 3.7 percent decrease in payments cited by 
the commenters will only have an impact on payments to those LTCHs that 
continue to admit a large number of very short-stay patients. We 
believe that the previous short-stay outlier policy, under which 
Medicare paid the least of 120 percent of the estimated cost of the 
case, 120 percent of the per diem LTC-DRG multiplied by the length of 
stay, or the full LTC-DRG, inadvertently provided an incentive for a 
LTCH to inappropriately admit patients who could otherwise have been 
treated in acute care hospitals and paid for under the IPPS. Therefore, 
we believe the provisions of the short-stay outlier policy that were 
finalized in the RY 2007 LTCH PPS final rule (71 FR 27845 through 
27872) will result in fair and equitable payment for short-stay 
patients at LTCHs.
    In response to the commenter who provided a chart that indicated 
industry-wide margins of approximately zero percent because of the 
proposed changes in the LTC-DRG relative weights that are anticipated 
to result from the 1.4 percent payment reduction, we continue to 
believe that our case-mix analysis (case-mix index) and Medicare 
margins analysis are sound. In the RY 2007 final rule for the LTCH PPS, 
we calculated ``revenue-weighted'' Medicare margins, which are the sum 
of hospital inpatient Medicare revenue (payments) minus the sum of 
hospital inpatient Medicare expenses (costs) divided by the sum of 
hospital inpatient Medicare revenue (payments). This margin analysis, 
which is also utilized by MedPAC in its analyses, is used to evaluate 
the overall financial status of LTCHs in general. In our analysis of 
the latest available LTCH data, we found that LTCH Medicare margins for 
FY 2003 (the first year of the LTCH PPS) were 7.8 percent, and 
preliminary data for FY 2004 based on the most recent HCRIS data 
revealed an even higher Medicare margin of 12.7 percent. Moreover, our 
analysis of LTCHs' payments and costs per discharge based on the latest 
available cost report data supports our adjustment to account for 
changes in coding practices that do not reflect changes in real case 
mix because it shows that, while payments (revenue) increased 
approximately 15 percent from FY 2002 to FY 2003, costs

[[Page 47987]]

(expenses) per discharge increased by only 8 percent for the same 
period.
    Thus, payments to LTCHs from FY 2002 to FY 2003 increased almost 
twice as much as the increase of costs for the same period. We also 
noted that even though we established a zero update to the Federal 
payment rate for RY 2007, we continue to believe that, based on the 
sizeable Medicare margins among LTCHs, the standard rate for the RY 
2007 LTCH PPS will not affect beneficiary access to LTCH services 
because LTCHs will continue to be paid adequately to reflect the cost 
of resources needed to treat Medicare beneficiaries. We also note that 
MedPAC's March 2006 Report to Congress on Medicare Payment Policy 
included similar data on margins and, based on its indepth evaluation 
of payment adequacy for LTCHs for 2006, MedPAC recommended that there 
be no update to the LTCH PPS Federal rate for RY 2007.
    In addition, we do not believe that it would be appropriate to 
``postpone implementation'' of the proposed reweighting of the LTC-DRGs 
pending an analysis of the impact on LTCH payment adequacy of this 
change, as well as other payment changes established for LTCHs for RY 
2007. The annual recalibration of the LTC-DRG relative weights, which 
is based on patient data, is one of the cornerstones of all prospective 
payment systems. To reiterate, we believe that the policies finalized 
for RY 2007, including the zero percent update to the standard Federal 
rate and the payment adjustment for short-stay outlier cases, do not 
provide any impediment to the ability of LTCHs to continue to maintain 
the quality or the availability of appropriately delivered LTCH 
services to Medicare beneficiaries.
    Comment: Several comments questioned the methodology that we used 
that distinguishes between payment ``reductions'' resulting from the 
zero update to the standard Federal rate finalized in the RY 2007 LTCH 
PPS final rule and payment reductions resulting from the proposed 
reweighting of the LTC-DRGs for FY 2007. One commenter asserted that 
CMS has utilized the same rationale as a basis to propose to reduce the 
FY 2007 LTC-DRG relative weights that were used to apply a zero percent 
update in the RY 2007 LTCH PPS final rule. The commenters believed CMS 
has double-counted the same phenomenon.
    Another commenter stated that, because the LTC-DRG relative weights 
are not updated in a budget-neutral manner, through the annual 
recalibration of the weights, the LTC-DRG system will ``self-correct 
over time'' without the need for any lowering of the Federal payment 
rate. The commenter believed that this non-budget neutral weight 
recalibration will continue to correct for the case-mix creep until 
coding improvement reaches a plateau, at which point annual case-mix 
variation will reflect actual variations in case-mix intensity. Citing 
our justification of ``apparent'' as opposed to real case-mix increase 
based on FY 2004 LTCH data for the zero percent update to the Federal 
rate for RY 2007, the commenter believed that CMS has overpenalized 
LTCHs by a net 4.2 percent. The commenter recommended that CMS work 
with the industry to establish an update system that eliminates the 
possibility of ``over reduction'' due to case-mix creep by one of the 
following options: implementing a budget neutral recalibration system 
and address case-mix creep through the update; or alternatively, 
maintaining the current non-budget neutral weight recalibration system 
but foregoing any future Federal rate update reduction for case-mix 
creep.
    Response: The commenters have expressed concern that, if we 
finalize the proposed change in the FY 2007 LTC-DRG relative weights, 
the change would result in an estimated 1.4 percent decrease in 
payments. Because we have already finalized the zero update to the RY 
2007 standard Federal rate, the commenters believe we will have reduced 
payments to LTCHs twice for the same phenomenon. We would like to 
remind the commenters that the ``zero percent'' update to the Federal 
rate for RY 2007 did not reduce LTCH PPS payments from their previous 
level. Instead, the Federal rate remained at $38,086.04 from RY 2006 to 
RY 2007. Furthermore, we disagree and do not believe that LTCHs are 
being penalized twice, once through adjustment of the standard Federal 
rate and again due to the proposed and finalized recalibration of the 
LTC-DRG relative weights for FY 2007.
    In the LTCH PPS RY 2007 final rule, we addressed a similar 
allegation by commenters that we were ``unfairly penalizing'' LTCHs 
twice in proposing the zero percent update to the standard Federal rate 
as a remedy for inappropriate Medicare payments to LTCHs resulting from 
``case-mix creep'' (that is, the ``apparent'' case-mix index increase) 
between FYs 2003 and 2004. At that time, several commenters stated that 
CMS had already corrected any coding issues from FY 2004 by the annual 
recalibration of the LTC-DRGs for FY 2006 based on case-mix changes 
from FYs 2003 and 2004, which resulted in an estimated decrease of 4.2 
percent in payments to LTCHs.
    In the RY 2007 LTCH PPS final rule (71 FR 27882), we presented the 
explanation of the distinction between the annual reweighting of the 
LTC-DRGs, which we expect to result in appropriate payments for the 
forthcoming fiscal year's LTCH discharges, and determinations regarding 
the appropriate application of adjustments to the market basket 
increase applied to the standard Federal rate which was established to 
account for payments made in a prior year that were based on improved 
coding rather than increased patient severity (71 FR 27821). At that 
time, we reviewed the discussion in the FY 2006 IPPS final rule (70 FR 
47701-47702) in which we estimated that a payment reduction of -4.2 
percent would result from the FY 2006 recalibration of the LTC-DRG 
relative weights, which were based on LTCH claims data from the FY 2004 
MedPAR file. We stated ``* * * [t]hus FY 2004 LTCH claims data, which 
reflected improved coding, were used to determine the LTC-DRG relative 
weights used to pay LTCH PPS discharges occurring during FY 2006. While 
it is true that the reweighting of the LTC-DRGs using FY 2004 LTCH 
claims served to update the relative weights based on actual claims 
data in each LTC-DRG, which also reflects coding improvements that 
occurred in FY 2004, the recalibration of LTC-DRG weights only corrects 
for any coding improvement for the purpose of making accurate LTCH PPS 
payments in FY 2006.'' (71 FR 27822)
    However, annual recalibration does not serve to account for 
payments that were made based on improved coding (rather than patient 
severity) in prior years. The case-mix adjustment to the market basket 
in determining the RY 2007 Federal rate is meant to reduce current 
payments to account for the increase payments that occurred in FY 2004 
that resulted from the CMI increase that is attributable to ``case-
mix'' creep in that year 71 FR 27822).
    We also explained the rationale and computations underlying our 
update for RY 2007 in that same final rule: ``In the RY 2007 LTCH PPS 
proposed rule, we proposed to offset the market basket by an amount 
equal to the increase in case mix that was due solely to improved 
documentation and coding rather than changes in real case mix. At the 
time of the proposed rule, that increase was within rounding error of 
the market basket, and therefore resulted in a proposed Federal rate 
for RY 2007 that was equal to the RY 2006 Federal rate, and not a 
reduction to the RY 2006

[[Page 47988]]

Federal rate.'' (71 FR 27821). Therefore, this policy determination 
regarding the market basket increase of zero percent for RY 2007 was 
based on changes in the LTCHs' case-mix indices in conjunction with a 
broader analysis of trends in the LTCH industry (noted most recently by 
MedPAC in the Commission's March 2006 Report to the Congress (page 
211)) and in particular, driven by a detailed analysis of LTCH margins 
since the implementation of the LTCH PPS. As we stated in that same 
final rule, we believe that, in determining the Federal rate update for 
RY 2007, it is appropriate to apply an adjustment to the most recent 
estimate of the LTCH PPS market basket to eliminate the effects of 
coding and classification changes that do not reflect changes in real 
case-mix. This adjustment is necessary to account for prior year 
payments that were made based on improved coding practices (rather than 
increased patient severity) (71 FR 27821). Furthermore, we note that FY 
2004 LTCH claims data were used to determine the adjustment to the 
market basket to account for changes in coding practices in 
establishing the zero percent update to the Federal rate for RY 2007, 
while FY 2005 LTCH claims data were used to determine the proposed and 
final FY 2007 LTC-DRG relative weights. Because LTCH claims data from 
different years were used to determine the two adjustments noted by the 
commenters, we further disagree that we ``double counted the same 
phenomenon.''
    Regarding our margins analysis, based on data from the LTCHs' cost 
reports received as of December 31, 2005, updated LTCH margins analysis 
for the LTCH PPS RY 2007 final rule continued to show high Medicare 
margins among LTCHs since the implementation of the LTCH PPS in FY 
2003. As noted in the RY 2007 LTCH PPS final rule, ``[w]e calculated 
`revenue-weighted' Medicare margins, which are the sum of hospital 
inpatient Medicare revenue (payments) minus the sum of hospital 
inpatient Medicare expenses (costs) divided by the sum of hospital 
inpatient Medicare revenue (payments). This margin calculation, also 
utilized by MedPAC in its analyses, is used to evaluate the overall 
financial status of LTCHs in general. In an analysis of the latest 
available LTCH cost reports, we found that LTCH Medicare margins for FY 
2003 (the first year of the LTCH PPS) were 7.8 percent and preliminary 
cost report data for FY 2004 based on the most recent update to the 
cost report data in HCRIS reveal an even higher Medicare margin of 12.7 
percent. For periods prior to the implementation of the LTCH PPS (that 
is, FY 1999 through FY 2002), we found that aggregate Medicare margins 
ranged between a minimum of -2.3 percent in FY 2000, and a maximum of 
1.5 percent in FY 2002.'' (71 FR 27823).
    We wish to emphasize that, as we specified in the RY 2007 LTCH PPS 
proposed rule, the large observed increase in LTCH case-mix was not 
accompanied by a corresponding increase in Medicare costs. This was 
consistent with our belief expressed earlier that a significant part of 
this observed increase in case-mix was ``apparent'' and not ``real.'' 
In conjunction with an increase in real case-mix (that is, patient 
severity), we would have expected to see a significant increase in 
costs per discharge, even taking into account LTCH operating 
efficiencies, to pay for the resources needed to treat sicker patients. 
Consistent with MedPAC's most recent research discussed in its March 
2006 Report to Congress (section 4C), our margins analysis indicated 
that, in spite of the estimated real increase in case-mix (severity of 
patients), payments to LTCHs under the LTCH PPS are generally more than 
adequate to cover the Medicare costs of the inpatient hospital services 
provided to LTCH patients.
    Therefore, for the reasons discussed above, we disagree with the 
commenters who believe that we ``double counted the same phenomenon.'' 
To summarize, the purpose of the adjustment to the market basket which 
was to account for changes in coding practices that resulted in a zero 
percent update to the Federal rate for RY 2007 and the changes in 
payments that will result from the proposed and final reweighting of 
the LTC-DRGs are different. Specifically, the objective of our 
adjustment to the standard Federal rate update for RY 2007 was to 
adjust payments to account for prior year payments made by the Medicare 
program that were due to changes in coding practices, that did not 
reflect actual costs of beneficiary care. However, the annual 
recalibration of the relative weights for LTC-DRGs reflects the 
variation in coding practices and charges from the previous year and it 
helps ensure that the LTC-DRG relative weights in the upcoming fiscal 
year will result in appropriate payments to LTCHs for the resources 
they expend to treat patients. This was the case for FY 2006, when LTC-
DRG relative weight recalibrations were estimated to result in a 
payment decrease of 4.2 percent and it was also the case for the 
estimated 1.4 percent decrease based on the proposed LTC-DRG relative 
weights for FY 2007. It is also the case for the estimated 1.3 percent 
decrease in this final rule due to the recalibration of the LTC-DRG 
relative weights.
    Therefore, in response to the commenter who presented an ``either/
or'' scenario suggesting that we should adjust payments based on case-
mix variation through the present (that is, not budget neutral) 
recalibration of the LTC-DRG relative weights but forego any future 
Federal rate update for case-mix creep, or we should address ``case-mix 
creep'' through the annual update in the Federal rate but implement a 
budget neutral recalibration system, we do not believe that this 
approach is appropriate, given that, as discussed in greater detail 
above, the purposes of the case-mix adjustments in each context are 
distinct. It is possible that if coding practices stabilize and reach 
``a plateau,'' as one of the commenters suggested, and case-mix 
variation only reflects real variations in case-mix intensity, the 
``self-correcting'' mechanism of the annual recalibrations of LTC-DRG 
relative weights may be a reliable indication of actual costs at LTCHs 
by DRG. However, we emphasize that there is a distinct difference 
between the payment adjustments that could result from data-driven 
determinations that we consider, as described earlier, when we 
promulgate our policy regarding the annual application of the market 
basket update to the standard Federal rate and the data-driven effects 
of the recalibration of the LTC-DRG relative weights. Moreover, we do 
not believe that the zero update to the standard Federal rate 
implemented for RY 2007, which was intended to adjust for payments that 
were reflective of payments that were made based on improved coding 
rather than patient severity in 2004, and the reweighting of the 
relative weights for the LTC-DRGs, which would only address making 
appropriate payments for FY 2007, have resulted in an ``over 
reduction'' of payments to LTCHs, or overpenalized the LTCH industry.
    As we have stated most recently in the RY 2007 LTCH PPS final rule, 
we discussed a potential framework to update payments to LTCHs that 
would account for appropriate factors that affect efficient delivery of 
services and care to Medicare beneficiaries (71 FR 27818), and we have 
solicited comments on the presentation of a model for such a framework 
presented in Appendix A of that final rule. Presently, however, in the 
absence of a more comprehensive update framework, we believe that it is 
necessary and appropriate for us to evaluate the need of applying an

[[Page 47989]]

adjustment to the full market-basket increase, based upon the best 
available data and policy considerations. Similarly, we believe it is 
appropriate to update the LTC-DRG relative weights based on the latest 
available data because the more recent data ensure that the LTC DRG 
relative weights for FY 2007 best reflect the resources actually used 
in the treatment of LTCH patients.
    Comment: Several commenters discussed the impact of policies that 
we proposed under the IPPS for short-term, acute care hospitals (that 
is, the adoption of severity-adjusted DRGs; and the implementation of 
HSRVcc (cost-based weights) methodology for calibration of DRG weights) 
in their evaluation of the proposed 1.4 decrease in the LTC-DRG 
payments based on the proposed LTC-DRG changes for FY 2007. Both 
commenters urged us not to implement the proposed LTC-DRG relative 
weights because they believe that the discussion of the severity-
adjusted DRGs in the proposed rule emphasized the fact that the LTC-DRG 
classifications, as they currently exist, do not accurately capture the 
full measure of severity for LTCH patients.
    One commenter commissioned a study by the Lewin Group that utilized 
claims data from the FY 2005 MedPAR file and cost report data from FY 
2003 to simulate the HSRVcc methodology set forth in the proposed rule. 
The commenter stated that the result was that, rather than a estimated 
1.4 percent payment reduction, the HSRVcc method of determining LTC-DRG 
relative weights resulted in an estimated 1.5 percent increase in LTCH 
PPS payments. The commenter added that this indicates that there can be 
reasonable differences as to what is the most accurate method of 
establishing relative weights under PPSs and that the Secretary should 
adjust the LTC-DRG weights this year on a budget-neutral basis, thus 
eliminating the estimated 1.4 percent decrease based on the proposed 
LTC-DRG relative weights. The commenter recommended that, although the 
authorizing legislation contemplates that CMS use the most recently 
available LTC-DRG weights for an annual update, the Secretary could use 
his broad authority to modify the LTC-DRG payments, as appropriate, and 
in order to accurately reflect current LTCH patient care. The commenter 
believed that the FY 2006 LTC-DRG relative weights should be maintained 
for FY 2007 because they more accurately account for the expected 
resources to be used by LTCH patients in FY 2007.
    Another commenter noted that, based on the discussion in the FY 
2007 proposed rule, CMS believes that severity-adjusted DRGs would 
improve the accuracy of the DRG system under the IPPS, and 
consequently, the commenter believed that, for FY 2008, severity-
adjusted LTC-DRGs could be considered because they may better account 
for differences in severity of illnesses and associated costs across 
hospitals. This commenter further stated that higher weighted LTC-DRGs 
(and the LTCHs that treat them) are more vulnerable to the payment 
reductions proposed for FY 2007 based on proposed LTC-DRG relative 
weights because payment rates for higher acuity LTCH patients will be 
diluted by the FY 2005 upcoding of many lower severity cases to the 
higher weighted DRGs. In addition, the commenter pointed to the revised 
short-stay outlier policy established in the RY 2007 LTCH PPS final 
rule which, they believe, is intended to reduce the number of lower-
acuity patients being treated in LTCHs, and stated that those LTCH 
patients that are not short-stay outlier cases will be more typical of 
LTCH patients and, therefore, have higher acuity. The same commenter 
also mentioned that the FY 2005 data that are being proposed to be used 
to reweight the LTC-DRGs for FY 2007 represent a system ``still in 
flux'' because the system is still transitioning to full payment under 
the LTCH PPS and only a portion of each case is being paid based on 
LTC-DRGs. For these reasons, the commenter urged CMS to postpone 
further LTC-DRG rate reductions and instead recommended that CMS 
address coding improvements comprehensively in FY 2008 under the LTCH 
PPS in the context of the improved severity measures proposed under the 
IPPS for FY 2008 (or earlier).
    Response: We understand that the commenters are concerned with the 
1.4 percent decrease in estimated aggregated LTCH PPS payments for FY 
2007 due to the proposed reweighting of the LTC-DRGs. We also 
understand that the commenters believe that the adoption of a severity-
adjusted patient classification system under the LTCH PPS applied to 
the LTC-DRGs and the use of cost-based weights (HSRVcc) methodology 
could result in a different estimated aggregate payment change for FY 
2007. However, as we discussed in greater detail below, we do not agree 
that the FY 2006 relative weights would more accurately represent 
resource use by LTCH patients for FY 2007 and that it would be 
necessary or appropriate to postpone the finalization of the annual 
reweighting of the LTC-DRGs. The current (FY 2006) LTC-DRG relative 
weights were determined based on FY 2004 LTCH claims data from the 
MedPAR files. For FY 2007, we proposed to use our existing relative 
weight methodology (established when the LTCH PPS was implemented for 
FY 2003) and FY 2005 LTCH claims data from the MEDPAR files to 
recalibrate the LTC-DRG relative weights, as these were currently the 
most recent complete LTCH claims data. As was proposed, for this final 
rule, we are using the March 2006 update of the FY 2005 MedPAR files 
because this is currently the most recent and complete LTCH claims 
data. We believe that the FY 2005 data are the best LTCH data available 
that reflect LTCHs' current treatment practice and coding patterns. 
Therefore, because the FY 2005 LTCH claims data better reflects current 
LTCH behavior than the FY 2004 LTCH claims data that was used to 
determine the FY 2006 LTC-DRG relative weights, we believe that using 
this updated (FY 2005) LTCH claims data with our existing relative 
weight methodology will result in LTC-DRG relative weights for FY 2007 
that will best reflect the resources actually utilized by LTCHs in 
treating their Medicare patients.
    With respect to the accuracy of the current LTCH-DRG system, we 
note the following. For FY 2003, we decided to adopt the current LTC-
DRG system stating, ``the LTC-CMS-DRG system is a system that is 
familiar to hospitals because it is based on the current DRG system 
under the acute care hospital inpatient prospective payment system. We 
believe that the familiarity of the LTC-CMS-DRG model may best 
facilitate the transition from the reasonable cost-based system to the 
prospective payment system as well as providing continuity in payment 
methodology across related sites of care (for example, an acute care 
hospitalization for a patient with a chronic condition)'' (67 FR 
55966). However, we have noted that we believed that there may be 
significant advantages in the use of severity-adjusted LTC-DRGs. In 
fact, when we were developing the LTCH PPS for FY 2003, we seriously 
considered using a specially modified version of the APR-DRGs (67 FR 
55966-55967). At that time, we stated:
    ``The LTC-APR-DRGs, a condensed version of 3M's all-patient refined 
DRGs (APR-DRGs) for acute care hospitals, was developed by 3M Health 
Information Systems, for exclusive use in LTCHs. The LTC-APR-DRG system 
was designed to reflect the clinical characteristics of LTCH patients. 
This case-mix classification model contains 26 base LTC-APR-DRGs, 
subdivided by 4 severity of illness levels to yield 104 classification 
levels. In this system, the

[[Page 47990]]

patient's secondary diagnoses, their interaction, and their clinical 
impact on the primary diagnosis determine the severity level assigned 
to each of the 26 LTC-APR-DRGs'' (67 FR 55966).
    When we decided to use the same patient classification system as 
the IPPS, following a comprehensive analysis of both the LTC-APR-DRGs 
and the existing DRG system (modified by the use of quintiles for low 
volume DRGs) for the particular purposes of patient classification at 
LTCHs, we indicated that we believed that either classification system 
would result in appropriate payments for LTCHs under the PPS. However, 
we noted several issues to consider concerning the LTC-APR-DRG system, 
including--
    ``* * * its complexity, its clinical subjectivity, and its utility 
as it relates to other Medicare prospective payment systems. The LTC-
APR-DRG model provides a clinical description of the population of 
LTCHs, patients exhibiting a range of severity of illness with multiple 
comorbidities as indicated by secondary diagnoses. The clinical 
interaction of the primary diagnosis with these comorbidities 
determines the severity level of the primary diagnoses, resulting in 
the final assignment to a LTC-APR-DRG by the GROUPER software designed 
for this system'' (67 FR 55966).
    We further noted that ``* * * determining whether particular 
comorbidities increase the cost of a case for a LTCH patient is 
complicated by the nature of the clinical characteristics of these 
patients. More specifically, many LTCH patients have numerous 
conditions that may not all be relevant to the cost of care for a 
particular discharge. Although the patient actually has a specific 
condition, including this condition among secondary diagnoses coded 
under the LTC-APR-DRG system may assign an inaccurate severity level to 
the primary diagnosis and result in inappropriate LTC-APR-DRG payment. 
We also believe that reliance on existing comorbidity information 
submitted on LTCH bills could result in significant variation in the 
assignment of the specific LTC-APR-DRGs'' (67 FR 55967).
    We concluded our explanation in the FY 2003 final rule for the LTCH 
PPS by stating that ``[e]ven though we are using LTC-DRGs in the LTCH 
prospective payment system in this final rule, we may have the 
opportunity to propose a severity-adjusted patient classification for 
LTCHs in the future, particularly if the acute care hospital inpatient 
prospective payment system moves in this direction'' (67 FR 55967). As 
we noted in the FY 2007 IPPS proposed rule, if and when a severity-
adjusted patient classification system is adopted under the IPPS, we 
would need to consider whether to propose revisions to the patient 
classification system used under the LTCH PPS. Any proposed changes to 
the patient classification system would be done through notice and 
comment rulemaking (71 FR 24051). Subsequently, in 2005, MedPAC 
recommended we refine the entire inpatient acute care CMS DRG system to 
take into account severity of illness and apply HSRV weights to DRGs. 
However, we believe that it is advantageous to the LTCH community to 
wait for CMS to first finalize its policies regarding any refinements 
to the DRG system for the IPPS so that we can fully analyze what the 
effects of such changes would be on LTCH PPS payments. To the extent 
any changes for severity-adjusted DRGs for the IPPS system have been 
finalized, an analysis could then be performed to determine whether it 
is appropriate to propose the same severity-adjusted patient 
classification for LTCHs. As we stated in the FY 2007 IPPS proposed 
rule:
    ``At that time, we would need to consider whether to propose 
revisions to the patient classification system under the LTCH PPS. Any 
proposed changes to the patient classification system would be done 
through notice and comment rulemaking'' (71 FR 24051).
    The commenters cited the virtues of the severity-adjusted DRGs and 
one commenter commissioned the above described study to assess the 
validity of our proposed update to the LTC-DRG relative weights for FY 
2007. In response to these comments, we reiterate that, while we 
understand that applying the severity-adjusted DRGs under the LTCH PPS 
could have an impact on setting relative weights used in determining 
LTCH PPS payments, we would consider their use in the LTCH PPS after we 
evaluate any DRG refinements for the IPPS, as noted above.
    We note that while severity-adjusted DRGs had been proposed under 
the IPPS system for FY 2008 (or earlier), we did not propose to revise 
the current patient classification system used under the LTC PPS. 
Because, as we explained above, we believe any refinement due to 
severity-adjusted DRGs for the IPPS system would need to be evaluated 
to determine whether it is appropriate to use the same severity-
adjusted DRGs for LTCHs, we will, at that time, take into consideration 
such issues as the impact of treating higher acuity patients.
    We have noted that some commenters believe it is not appropriate 
that LTCHs be impacted by decreasing payments because of the upcoding 
of lower acuity patients to higher weighted LTC-DRGs, as discussed in 
the previous responses. However, as we discussed in the FY 2007 IPPS 
proposed rule (71 FR 24413), many of the LTC-DRG relative weights 
proposed for FY 2007 are lower than the current (FY 2006) LTC-DRG 
relative weight because based on the latest available LTCH claims data, 
we continue to observe an increase in the number of relatively lower 
charge cases being assigned to LTC-DRGs with higher relative weights in 
prior years. As explained previously, we believe that using updated (FY 
2005) LTCH claims data will result in LTC-DRG relative weights for FY 
2007 that best reflect the resources actually utilized by LTCHs in 
treating their Medicare patients and thereby act to ensure appropriate 
LTCH PPS payments in FY 2007. The commenter is correct in noting that 
it was our intention, when we revised the short-stay outlier policy 
described above, to reduce the number or type of short-stay patients 
being treated in LTCHs that do not utilize the resources of ``typical'' 
LTCHs. Many of these very short stay cases require more appropriate 
treatment at another hospital setting, such as an acute care hospital. 
Therefore, we are not convinced that reducing the number of short stay 
patients treated at LTCHs will necessarily result in higher LTC-DRG 
weights in all LTC-DRGs or even in higher weighted LTC-DRGs.
    Moreover, since the implementation of the LTCH PPS in FY 2003, we 
have accounted for very short-stay and short-stay outliers cases in our 
LTC-DRG relative weight methodology. Specifically, we have removed 
cases with a length of stay of 7 days or less because we believed that 
they could ``significantly bias payments against inlier cases'' (67 FR 
55989). In addition, the methodology includes a step to adjust charges 
for the effects of short-stay outliers by ``counting a short-stay 
outlier 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 LTC-DRG.'' 
Without this adjustment, we maintained at that time that we believed 
that ``the relatively lower charges of the short-stay outlier cases 
bring down the average charge for all cases within a LTC-DRG * * * 
[and] result in an `underpayment' to nonshort-stay outlier cases * * 
*'' (67 FR 55990). Therefore, we do not believe that the changes that 
we have made in the short-stay outlier policy in the RY 2007 LTCH PPS 
final rule will affect the DRG weights because our methodology has

[[Page 47991]]

always accounted for this potential effect so that a reduction in 
short-stay outlier cases will not necessarily result in a significant 
change to the DRG weights.
    During the previous 4 years, while we phased in to full payments 
under the LTCH PPS, we have reweighted the LTC-DRGs, with the result 
that for the first year, there was an estimated negligible increase in 
average payments based upon the reweighting of the LTC-DRGs (FY 2004 + 
0.4 percent) and a negligible decrease in estimated payments based on 
the LTC-DRG update in FY 2005 (FY 2005, -0.5 percent). For the 
subsequent 2 years, there were decreases (FY 2006, -4.2 percent; 
proposed FY 2007, -1.4 percent). Although the LTCH PPS has been 
evolving, we believe that using the updated (FY 2005) LTCH claims data 
with our existing relative weight methodology will result in LTC-DRG 
relative weights for FY 2007 that will best reflect the resources 
actually utilized by LTCHs in treating its Medicare patients since the 
FY 2005 data is the best LTCH data available that reflects LTCHs' 
current treatment practice and coding patterns. Therefore, we do not 
find it either necessary or appropriate to postpone the FY 2007 update 
of the LTC-DRG relative weights until we consider the adoption of a 
classification system with ``improved severity measures.''
    Comment: Numerous commenters suggested that CMS forgo the proposed 
approximately 1.4 percent decrease in estimated aggregate LTCH PPS 
payments and, instead, establish a policy of budget neutrality for the 
annual updates of the LTC-DRG relative weights. The commenters believed 
a policy of budget neutrality would mitigate the estimated LTCH PPS 
payment reductions that CMS estimates would result from the proposed 
changes to the LTC-DRGs and relative weights for FY 2007. MedPAC also 
endorsed adopting a policy of budget neutrality for the annual 
recalibration of the LTC-DRG weights and noted that the adoption of the 
budget neutrality process that CMS uses in recalibrating the annual 
weights for the IPPS for the LTCH would avoid the estimated decrease in 
payments of 1.4 percent for FY 2007.
    One commenter asserted that the absence of a budget neutrality 
adjustment for the annual recalibration of the LTC-DRGs provides a 
negative incentive for efficiency, because assigning cases that 
appropriately use fewer hospital resources to a particular LTC-DRG will 
result in a lower weight for that LTC-DRG. Therefore, the commenter 
urged CMS not to implement the proposed reweighting for FY 2007 prior 
to a full analysis of the impact of the proposed reweighting along with 
other payment policy changes provided in the RY 2007 LTCH PPS on the 
overall adequacy of payments to LTCHs. In addition, the commenters 
expressed eagerness to review the recommendations currently under 
development by RTI International for patient and facility criteria for 
LTCHs. Several commenters further suggested that no additional 
reimbursement reductions under the LTCH PPS should be imposed until the 
RTI report is complete and the industry works with CMS to implement its 
findings.
    Response: We understand that the commenters are concerned with the 
estimated decrease in payments under LTCH PPS based upon the changes in 
the LTC DRGs and relative weights proposed for FY 2007. However, as 
discussed above, we are not postponing the proposed FY 2007 
reclassification and recalibration of the LTC-DRGs. In addition, the 
payment policies that were finalized in the RY 2007 LTCH PPS final 
rule, such as the zero update to the standard Federal rate and the 
revised short-stay outlier policy, will be effective for LTCH 
discharges beginning on July 1, 2007, as established in that rule.
    We further acknowledge that the commenters and also MedPAC are 
urging us to establish a budget neutrality requirement for the annual 
reclassification and recalibration of the LTC-DRGs so that, in future 
years, the LTCH PPS would avoid an estimated decrease in aggregate 
payments such as the estimated 1.3 percent based on the LTC-DRG weights 
that we are finalizing for FY 2007.
    In the responses to comments addressed above, we have noted several 
reasons for the annual fluctuations in LTC-DRG relative weights that 
resulted in an estimated increase in aggregate payments for FY 2004, a 
negligible estimated decrease in aggregate payments for FY 2005, and 
decreases in aggregate payments for FYs 2006 and 2007. We reiterate 
that the LTCH PPS has existed since FY 2003, and we believe that 
several factors are occurring that affect the changes to the relative 
weights, including actual improvements in coding so that cases are 
appropriately assigned to LTC-DRGs. Each year, we recalibrate the LTC-
DRG relative weights based on the most recent available LTCH claims 
data, which reflect current LTCH patient mix and coding practices. The 
annual recalibration of the LTC-DRG relative weights to which LTCH 
cases are assigned will appropriately reflect more or less resource use 
than the previous year's LTC-DRG relative weights.
    We understand the concerns expressed by the commenters regarding 
this fiscal year's estimated decrease in payments based upon the 
proposed (and finalized) FY 2007 reweighting of the LTC-DRGs. However, 
we remind the commenters that establishing a budget-neutrality policy 
for the LTC-DRG weights would have precluded the increase in payments 
that occurred during FY 2004 as well as any increase that an analysis 
of future data may warrant.
    Under the IPPS, there is a statutory requirement in section 
1886(d)(4)(C)(iii) of the Act that requires that, beginning with FY 
1991, reclassification and recalibration changes be made in a manner 
that assures that the aggregate payments are neither greater than nor 
less than the aggregate payments that would have been made without the 
changes. However, there is no statutory or regulatory requirement that 
the annual update to the LTC-DRG classifications and relative weights 
be done in a budget neutral manner. In addition, after FY 2003, the 
year that the LTCH PPS was implemented, there was no statutory 
requirement for budget neutrality for any component of the LTCH PPS.
    However, as we have already noted, the LTCH PPS, having been first 
implemented for cost reporting periods beginning on or after the start 
of FY 2003, will soon end its transition period and payment will be 
based solely on the Federal rate with cost reporting periods beginning 
in FY 2007. In the RY 2007 LTCH PPS final rule, we provided that we 
would reevaluate all payment adjustments that were originally 
considered for the LTCH PPS prior to its implementation and also 
determine the appropriateness of a one-time prospective adjustment to 
the standard Federal rate (Sec.  412.523(d)(3)) so that the effect of 
any significant differences between actual payments and estimated 
payments for the first year of the LTCH PPS would not be perpetuated in 
the PPS for future years. Given the considerable discretion granted to 
the Secretary under the BBRA of 1999 and the BIPA of 2000 to develop 
the LTCH PPS, it is possible, however, that at the same time, the 
Secretary would consider using his broad authority to establish a 
policy of budget neutrality for the annual update of the LTC-DRG 
classifications and relative weights. As noted above, currently the 
best available LTCH data (FY 2005) are from the second full year of the 
PPS, and LTCHs

[[Page 47992]]

may still be modifying their behavior to the change in payment 
methodology. If, upon reevaluation of our payment policies based on 
future LTCH data as the data become available, we find that it would be 
appropriate to propose making the updates to the LTC-DRGs and relative 
weights in a budget neutral manner, the public will have the 
opportunity to submit comments on any proposed change during the 
rulemaking process.
    The commenters mentioned their eagerness to review the 
recommendations currently being developed by RTI regarding the 
feasibility of patient and facility level admissions criteria for 
LTCHs. We anticipate that RTI will submit its final report and 
recommendations during RY 2007. We place considerable importance on 
RTI's work, and we will encourage a dialogue with the public based on 
the report. We note that, while we believe the report will have a 
substantial impact on future Medicare policy for LTCHs, we still 
believe that the retention of many of the specific payment adjustment 
features of the LTCH PPS presently in place and the development of 
additional or revised adjustments may still be both necessary and 
appropriate for purposes of protecting the integrity of the Medicare 
trust fund.
    Comment: Several commenters believed that the changes to the LTC-
DRG relative weights will have a more significant impact on high case-
mix providers than on low-case mix providers. One commenter referred to 
a LTCH which, as a high acuity provider, will experience an approximate 
5 percent drop in total case mix index. This commenter requested that 
CMS make a weighted average calculation available when it publishes the 
impacts of changes in the relative weights. The commenter further 
suggested that CMS produce an impact statement focusing on changes 
across all DRGs that will enable providers to understand the impacts on 
their individual LTCHs.
    Response: We believe we published a comprehensive description of 
the impact of the reweighting of the LTC-DRGs for FY 2007 in the 
proposed rule (71 FR 24413). Specifically, in section VII, Effects of 
Other Proposed Policy Changes, in subsection A, under the heading, 
Effects of LTC-DRG Reclassifications and Relative Weights for LTCHs, we 
included a detailed analysis of the impact that would result from our 
proposals.
    In that section, we stated: ``When we compared the GROUPER Version 
23.0 (FY 2006) LTC-DRG relative weights to the proposed GROUPER Version 
24.0 (FY 2007) proposed LTC-DRG relative weights, we found that 
approximately 62 percent of the LTC-DRGs would have a higher relative 
weight under Version 23.0, while the remaining approximately 38 percent 
of the LTC-DRGs would have a higher relative weight under Version 24.0. 
We also found that, based on FY 2005 LTCH cases, the GROUPER Version 
23.0 LTC-DRG relative weights were, on average, approximately 3.1 
percent higher than the proposed GROUPER Version 24.0 LTC-DRG relative 
weights. In addition, based on an analysis of the most recent available 
LTCH claims data from the FY 2005 MedPAR file, we continue to observe 
that the average proposed LTC-DRG relative weight decreases due to an 
increase of relatively lower charge cases being assigned to LTC-DRGs 
with higher relative weights in the prior year.
    Contributing to this increase in these relatively lower charge 
cases being assigned to proposed LTC-DRGs with higher relative weights 
in the prior year are improvements in coding practices, which are 
typical when moving from a reasonable cost-based payment system to a 
PPS. The impact of including additional cases with relatively lower 
charges in LTC-DRGs that had a relatively higher relative weight in the 
GROUPER Version 23.0 (FY 2006) is a decrease in the average relative 
weight for those LTC-DRGs in the proposed GROUPER Version 24.0. As 
noted above in section II.F. of the preamble to this proposed rule, 
LTCHs are a specialized provider type that typically do not treat a 
broad spectrum of patients in their facilities with many different 
diagnoses. While there are 526 valid proposed GROUPER Version 24.0 LTC-
DRGs, 191 LTC-DRGs have no LTCH cases. In addition, another 173 LTC-
DRGs are categorized as `low volume' (that is, have less than 25 cases 
annually). Consequently, only about 162 LTC-DRGs are used by most LTCHs 
on a `regular basis' (that is, nationally LTCHs discharge, in total, an 
average of 25 or more of these cases annually).
    Of these 162 LTC-DRGs that are used on a regular basis, we found 
that approximately 60 percent of the LTC-DRGs would have higher 
relative weights under GROUPER Version 23.0 in comparison to proposed 
GROUPER Version 24.0, and the remaining 40 percent of the 162 LTC-DRGs 
that are used on a `regular basis' would have higher relative weights 
under proposed GROUPER Version 24 in comparison to GROUPER Version 
23.0. In addition, about 25 percent of the 162 LTC-DRGs that are used 
on a `regular basis' would experience a decrease in the average charge 
per case as compared to the average charge per case in that DRG based 
on FY 2004 data, which generally results in a lower relative weight. 
Moreover, of the 162 LTC-DRGs that are used on a `regular basis,' 
approximately 63 percent of those LTC-DRGs would experience a change in 
the average charge per case from FY 2004 LTCH data as compared to FY 
2005 LTCH data that is less than the increase in overall average LTCH 
charges across all LTC-DRGs from FY 2004 to FY 2005 of about 8.3 
percent. Accordingly, those LTC-DRGs would also have a proposed 
reduction in their relative weight as compared to the relative weight 
in FY 2006. For those LTC-DRGs in which the average charge within the 
LTC-DRG increase is less than 8.3 percent, the proposed relative 
weights for those LTC-DRGs would decrease because the average charge 
for each of those LTC-DRGs is being divided by a larger number (that 
is, the average charge across all LTC-DRGs). For the reasons discussed 
above, we believe that the proposed changes in the LTC-DRG relative 
weights, which include a significant number of LTC-DRGs with lower 
proposed relative weights, would result in approximately a 1.4 percent 
decrease in estimated aggregate LTCH PPS payments'' (71 FR 24413).
    The above paragraphs, published in the FY 2007 IPPS proposed rule, 
clearly indicated the impact of the reweighting of the LTC-DRGs. All of 
the impact percentages listed are ``weighted averages,'' as was the 
proposed estimated 1.4 percent decrease in aggregate LTCH PPS payments. 
That is, all LTCH cases in the December 2005 update of the FY 2005 
MedPAR file were used to determine the LTC-DRG impact figures presented 
in the FY 2007 IPPS proposed rule. Therefore, the latest data on the 
types of patients treated across all LTCHs were used to determine the 
impact and not just the proposed changes to the LTC-DRG weights. The 
proposed and final FY 2007 reweighting of the LTC-DRGs may indeed have 
a more significant impact on a high acuity provider because many of the 
proposed and final LTC-DRG weights in relatively high weighted LTC-DRGs 
would decrease compared to their current values. However, we also note 
that Medicare payments for several of the highest acuity LTC-DRGs have 
yielded substantial margins. For example, an analysis of MedPAR data 
from FY 2004 indicated that, for LTC-DRG 475 (Ventilator Support) with 
a relative weight of 2.1358 for FY 2004, average aggregate (dollar 
weighted) margins for all providers was 21.09 percent, and for LTC-DRG 
87 (Pulmonary Edema/Respiratory

[[Page 47993]]

Support) with a relative weight of 1.6513 for FY 2004, average 
aggregate margins were 26.93 percent. Even for cases requiring somewhat 
less resource intensity, such as LTC-DRG 416 (Septicemia) with a 
relative weight of 0.9191 for FY 2004, which is also one of the 
diagnoses most frequently found in LTCHs, the aggregate margin is 11.54 
percent and for LTC-DRG 249 (After Care Musculoskeletal) with a 
relative weight of 0.7829 for FY 2004, the margin is 9.69 percent. 
Therefore, we believe that the reweighting of the LTC-DRGs for FY 2007, 
even for those high-acuity providers who experience a more significant 
impact, should not impede the efficient and effective delivery of care 
to Medicare beneficiaries, because, as described above, several of the 
highest-acuity LTC-DRGs have yielded substantial margins. Furthermore, 
even though the recalibration of the LTC-DRG relative weights will 
result in a decrease in the relative weight for some high-acuity LTC-
DRGs, because the recalibration is based on the most recent available 
LTCH claims data (FY 2005), it ensures the most accurate payments for 
FY 2007 based on current LTCH treatment and coding practices.
    In response to the commenter who requested impacts that reflected a 
weighted average calculation, as noted above, the impact of the 
proposed changes to the LTC-DRGs for FY 2007 presented in the FY 2007 
IPPS proposed rule (71 FR 24413) are based on a weighted average 
calculation. That is, all FY 2005 LTCH cases in the December 2005 
update of the MedPAR data were used to determine the impact figures 
presented in the proposed rule. This means that only the proposed 
changes to the relative weights for LTC-DRGs that had LTCH cases in 
those DRGs based on the FY 2005 LTCH data contributed to the impact. 
This continues to be true for the impact of the final LTC--DRG weights 
which are based on the most recent update of the FY 2005 MedPAR data. 
It also means that, for example, LTCH cases in LTC-DRG 475 represent 
approximately 12 percent of all LTCH cases in FY 2005 and therefore, 12 
percent of the impact presented in the proposed rule was due to the 
proposed change in the LTC-DRG weight for LTC-DRG 475. We believe that 
the commenter may have mistakenly believed that we measured the impact 
of the proposed LTC-DRG changes based on the changes proposed for each 
LTC-DRG without accounting for the volume of LTCH cases treated in each 
LTC-DRG. In addition, we note that if a provider is eager to determine 
the specific impact of the annual proposed LTC-DRG reweighting on an 
individual LTCH or a particular weight, the provider needs only to 
compare an application of the LTC-DRG weights published in the previous 
year's final rule (Table 11) of its cases to the proposed LTC-DRG 
relative weights that are published in the current year's proposed rule 
(Table 11; 71 FR 24395-24403) as applied to the same set of cases.
    Comment: Several commenters maintained that the proposed 1.4 
percent decrease in aggregate payments to LTCHs due to the proposed 
LTC-DRG reclassification and recalibration for FY 2007, in addition to 
payment cuts established for RY 2007 represent a ``misinterpretation'' 
of MedPAC's recommendation in its March 2006 Report to the Congress for 
a zero update for LTCHs. MedPAC cited Medicare margins for 2004 of 9.0 
for the LTCH industry and projected 7.8 percent margins for 2006, but 
the commenters believed that these projections did not factor in the 
impact of the ``25 percent policy'' for co-located LTCHs or the 
estimated payment reductions associated with the revised short-stay 
outlier policy.
    Response: As we have noted elsewhere in earlier responses to 
comments, the estimated 1.4 percent decrease aggregate in LTCH PPS 
payments due to the proposed LTC-DRG reclassification and recalibration 
for FY 2007 is a data-driven result of the annual recalibration of the 
relative weights for LTC-DRGs based on the latest available LTCH claims 
data from the MedPAR files (FY 2005). Therefore, for FY 2007, based on 
the updated LTC-DRGs classifications and relative weights, estimated 
payments to LTCHs will be 1.3 percent less than they would have been 
based on the prior fiscal year's (that is, FY 2006) classifications and 
relative weights for the same LTCH cases. Similarly, LTCH claims data 
from the FY 2006 MedPAR files will be used to determine the proposed 
LTC-DRG relative weights for FY 2008, and the resulting aggregate LTCH 
PPS payments, absent a regulatory or statutory change implementing 
recalibration of relative weights in a budget neutral manner, may 
either decrease or increase, based upon the FY 2006 data and DRG 
classification changes. In setting the annual relative weights for the 
LTC-DRG system for FY 2007, we have followed the requirements 
established with the implementation of the LTCH PPS in FY 2003 (67 FR 
55984-55995). Although the proposed recalibrated LTC-DRG relative 
weights were estimated to result in 1.4 percent decrease in LTCH PPS 
payments for FY 2007 (and based on final policies established in this 
final rule, the updated LTC-DRGs for FY 2007 are estimated to result in 
a 1.3 percent decrease in aggregate LTCH PPS payments for FY 2007, as 
noted above), we do not believe that this adjustment is relevant to 
MedPAC's recommendation for the zero percent update to the LTCH PPS 
Federal rate for RY 2007.
    The annual LTC-DRG update is separate from the Federal rate update; 
specifically, their purposes are different and independent. The 
standard Federal base rate is an estimate of the national average cost 
per case which is adjusted by the LTC-DRG relative weights to reflect 
the resource consumption of the particular case; that is, a case with a 
relative weight of 2.0 is twice as costly/uses twice the resources as a 
case with a relative weight of 1.0. The LTC-DRG relative weights are 
recalibrated annually based on the most recent available LTCH data to 
reflect resources used by LTCHs in treating each type of case. The 
update to the Federal rate is to adjust the Federal rate to account for 
various adjustments to that rate, including inflation.
    MedPAC's data analysis, in its March 2006 Report to the Congress, 
indicated that the average Medicare margin for LTCHs was 9.0 percent 
for FY 2005 and was projected at 7.8 percent for 2006. (As we stated in 
our RY 2007 LTCH PPS final rule, MedPAC also noted that ``LTCH HwHs 
were found to have higher margins than freestanding LTCHs in RY 2005'' 
(71 FR 27823).) Based on its analysis, MedPAC stated that ``* * * 
evidence from the indicators we have examined suggests that LTCHs can 
accommodate the cost of caring for Medicare beneficiaries in 2007 
without an increase in the base rate'' (p. 218). Consistent with 
MedPAC's recommendation, after incorporating an adjustment to account 
for changes in coding practices that did not reflect ``real'' case-mix, 
we finalized a zero percent update for FY 2007 (71 FR 27819). As stated 
earlier, this adjustment is not a function of, or related to, the 
update to the relative weights for LTC-DRGs.
    The commenters' also reference the 25-percent threshold payment 
adjustment for co-located LTCHs (Sec.  412.534) established beginning 
in FY 2005 and the newly revised short stay outlier payment policy 
(Sec.  412.529) beginning in RY 2007. We believe that the commenters 
are seeking to connect these adjustments, which are also estimated to 
result in a decrease in aggregate LTCH PPS payments in the absence of a 
change in admission

[[Page 47994]]

practices by LTCHs to the estimated impact of the updated LTC-DRG 
relative weights. However, the policies cited by the commenters are not 
related to the impact of the updating of the LTCH-DRG relative weights, 
but each independently, furthers the goal of establishing fair and 
reasonable Medicare payments under the LTCH PPS.
    The HwH ``25 percent rule,'' that is, the special payment 
provisions for LTCH HwHs and satellites, was established at Sec.  
412.534 in the FY 2005 IPPS final rule. Under that policy, we provide a 
payment adjustment for those patients discharged from co-located LTCHs 
(that is, HwHs and satellites) admitted from host hospitals that 
exceeded a specified threshold percentage (in most cases, 25 percent). 
Medicare patients who reach high-cost outlier status in the host 
hospital are excluded from the count of the percentage of patients 
admitted directly from the host. As we discussed in the FY 2005 IPPS 
final rule, when we implemented the ``25 percent rule,'' we were unable 
to estimate the impact of this policy because we anticipated behavioral 
changes by both the host and the co-located LTCHs resulting from the 
provision that exempted high-cost outliers from the percentage 
threshold calculation (69 FR 49771).
    MedPAC further addressed this issue in the March 2006 Report, where 
it noted that it ``* * * cannot foresee how HwHs/ behavior will change 
in response to this rule. CMS has discussed scenarios (CMS 2005). For 
example, patients admitted to an HwHs from the host hospital after 
becoming an outlier are not counted in the limit, thus HwHs may admit 
more outlier cases under this rule. Alternatively, host hospitals may 
discharge fewer patients to their HwHs because of constraints from the 
25 percent rule, in which case HwHs' volume might fall. In cities where 
there is another LTCH, an acute care hospital might discharge patients 
to a different long-term care hospital than the one on its grounds. The 
Office of Inspector General or the QIOs may want to monitor acute care 
hospitals' and HwHs' behavior in response to the 25 percent rule. 
Because we have no evidence of how HwHs will react, we have not modeled 
margins incorporating this policy change.'' (p. 218)
    Because the policy at Sec.  412.534 exempts patients admitted from 
the host hospital if they had already achieved high-cost outlier status 
under the IPPS, from the LTCHs' percentage threshold calculation (as 
noted above), we believe that even with some adjustments resulting in a 
decrease in payments to some co-located LTCHs, Medicare payments to co-
located LTCHs on average will continue to exceed the Medicare costs of 
the inpatient hospital services provided to its patients, even with a 
zero percent update to the Federal rate for RY 2007 (71 FR 27823). 
Furthermore, we believe that the 25-percent threshold policy and the 
short stay outlier payment revision that that we have established, 
first for co-located LTCHs at Sec.  412.534 for FY 2004 and the 
revisions to the short-stay outlier policies at Sec.  412.529 that we 
finalized for RY 2007, each have a firm and consistent basis in our 
general policy considerations under the LTCH PPS.
    As we noted in the RY 2007 final rule for the LTCH PPS, we do not 
believe that the change to the short-stay outlier policy will result in 
an adverse impact on LTCHs. As a result of the change to the short-stay 
outlier payment formula, we believe that LTCHs will have an incentive 
to significantly reduce the number of very short-stay cases that they 
admit. We believe that, by paying appropriately for short-stay outlier 
cases and by removing the financial incentive for LTCHs to admit those 
very short stay cases that could otherwise receive appropriate 
treatment at an acute care hospital (and paid under the IPPS), LTCHs 
will change their admission patterns for these patients. We further 
believe that payment decreases to LTCHs resulting from this policy 
would only occur if LTCHs were to continue to admit the same number of 
short-stay outlier patients with very short lengths of stay. We believe 
this policy is needed to assure that payments for short-stay outlier 
cases are appropriate.
    Therefore, we disagree with the commenter that we have 
``misinterpreted'' MedPAC's recommendation of a zero percent update for 
2007 in our proposed update to the LTC-DRGs for FY 2007. We maintain 
that the rationale for each of the policy features mentioned by the 
commenter, when evaluated independently, is clear and reasonable. In 
addition, they are independent of the DRG recalibration that occurs 
every year based on an established formula. We strongly disagree with 
the allegations that their implementation represents a 
``misinterpretation'' of MedPAC's margin analysis and recommendation 
(discussed above) in the March 2006 Report to the Congress. As 
discussed above, this update is not based on MedPAC's analysis and we 
believe that updating the LTC-DRG relative weights for FY 2007 based on 
FY 2005 LTCH claims data will result in more appropriate LTCH PPS 
payments since the relative resource intensity of each LTC-DRG (that 
is, the relative weight) will be determined from the most recent 
available LTCH data (FY 2005) reflecting LTCHs' current practice and 
treatment patterns.
    Comment: Several commenters, including MedPAC, recommended that we 
adopt severity-adjusted DRGs as the patient classification system for 
the LTCH PPS. In particular, MedPAC analyzed FY 2004 CMS LTCH data 
using both standardized charges and standardized hospital-specific 
costs (removing the effect of local wages) using Version 23 (FY 2006) 
of the GROUPER and stated that, on a preliminary basis, CS DRGs are 
relatively homogeneous in resource use for the kinds of cases treated 
in LTCHs. They believed that this indicates that the CS DRGs proposed 
for IPPS hospitals may also ``be promising for LTCHs.''
    Response: We are aware of the heightened interest in severity-
adjusted DRGs by the provider community, and in section II.C.6.of this 
final rule, we discuss the revisions that we are making to the DRG 
classifications structure for the IPPS and our expectations for 
adopting severity adjustments for DRGs under the IPPS in FY 2008. We 
appreciate the data analysis that MedPAC produced to demonstrate the 
potential utility of CS DRGs for classifying patients being treated in 
LTCHs. It is possible that the modified version of the APR DRGs or 
another severity-adjusted patient classification system may account for 
differences in severity of illness and associated costs among 
hospitals. In section II.C. of this preamble, we discuss the issues 
that we are dealing with respect to the adoption of a severity adjusted 
DRG system. Once we have addressed those issues under the IPPS, we 
would need to consider whether it is appropriate to propose similar 
revisions to the patient classification system under the LTCH PPS. As 
stated in the FY 2007 IPPS proposed rule, we would emphasize that any 
proposed changes to the patient classification system for LTCHs would 
be done through notice and comment rulemaking.

G. 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

[[Page 47995]]

that a medical service or technology will be considered new if it meets 
criteria established by the Secretary after notice and opportunity for 
public comment. Section 1886(d)(5)(K)(ii)(I) of the Act specifies that 
the process must apply to a new medical service or technology if, 
``based on the estimated costs incurred with respect to discharges 
involving such service or technology, the DRG prospective payment rate 
otherwise applicable to such discharges under this subsection is 
inadequate.''
    The regulations implementing this provision establish three 
criteria for new medical services and technologies to receive an 
additional payment. First, Sec.  412.87(b)(2) defines when a specific 
medical service or technology will be considered new for purposes of 
new medical service or technology add-on payments. The statutory 
provision contemplated the special payment treatment for new medical 
services or technologies until such time as data are available to 
reflect the cost of the technology in the DRG weights through 
recalibration. There is a lag of 2 to 3 years from the point a new 
medical service or technology is first introduced on the market and 
when data reflecting the use of the medical service or technology are 
used to calculate the DRG weights. For example, data from discharges 
occurring during FY 2005 are used to calculate the FY 2007 DRG weights 
in this final rule. Section 412.87(b)(2) provides that a ``medical 
service or technology may be considered new within 2 or 3 years after 
the point at which data begin to become available reflecting the ICD-9-
CM code assigned to the new medical service or technology (depending on 
when a new code is assigned and data on the new medical service or 
technology become available for DRG recalibration). After CMS has 
recalibrated the DRGs, based on available data, to reflect the costs of 
an otherwise new medical service or technology, the medical service or 
technology will no longer be considered `new' under the criterion for 
this section.''
    The 2-year to 3-year period during which a medical service or 
technology can be considered new would ordinarily begin with FDA 
approval, unless there was some documented delay in bringing the 
product onto the market after that approval (for instance, component 
production or drug production had been postponed until FDA approval due 
to shelf life concerns or manufacturing issues). After the DRGs have 
been recalibrated to reflect the costs of an otherwise new medical 
service or technology, the special add-on payment for new medical 
services or technology ceases (Sec.  412.87(b)(2)). For example, an 
approved new technology that received FDA approval in October 2005 and 
entered the market at that time may be eligible to receive add-on 
payments as a new technology until FY 2008 (discharges occurring before 
October 1, 2007), when data reflecting the costs of the technology 
would be used to recalibrate the DRG weights. Because the FY 2008 DRG 
weights will be calculated using FY 2006 MedPAR data, the costs of such 
a new technology would likely be reflected in the FY 2008 DRG weights.
    Section 412.87(b)(3) further provides that, to receive special 
payment treatment, new medical services or technologies must be 
inadequately paid otherwise under the DRG system. To assess whether 
technologies would be inadequately paid under the DRGs, we establish 
thresholds to evaluate applicants for new technology add-on payments. 
In the FY 2004 IPPS final rule (68 FR 45385, August 1, 2003), we 
established the threshold at the geometric mean standardized charge for 
all cases in the DRG plus 75 percent of 1 standard deviation above the 
geometric mean standardized charge (based on the logarithmic values of 
the charges and transformed back to charges) for all cases in the DRG 
to which the new medical service or technology is assigned (or the 
case-weighted average of all relevant DRGs, if the new medical service 
or technology occurs in many different DRGs). Table 10 in the Addendum 
to the FY 2004 IPPS final rule (68 FR 45648) listed the qualifying 
threshold by DRG, based on the discharge data that we used to calculate 
the FY 2004 DRG weights.
    However, section 503(b)(1) of Pub. L. 108-173 amended section 
1886(d)(5)(K)(ii)(I) of the Act to provide for ``applying 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 1 standard deviation for the diagnosis-related group 
involved.'' The provisions of section 503(b)(1) apply to classification 
for fiscal years beginning with FY 2005. We updated Table 10 from the 
Federal Register document that corrected the FY 2004 final rule (68 FR 
57753, October 6, 2003), which contained the thresholds that we used to 
evaluate applications for new service or technology add-on payments for 
FY 2005, using the section 503(b)(1) measures stated above, and posted 
these new thresholds on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. In the FY 2005 IPPS final rule (in 
Table 10 of the Addendum), we included the final thresholds that were 
being used to evaluate applicants for new technology add-on payments 
for FY 2006. (Refer to section IV.D. of the preamble to the FY 2005 
IPPS final rule (69 FR 49084, August 11, 2004) for a discussion of a 
revision of the regulations to incorporate the change made by section 
503(b)(1) of Pub. L. 108-173.) Table 10 of the Addendum to the FY 2006 
final rule (70 FR 47680) contained the final thresholds that are being 
used to evaluate applications for new technology add-on payments for FY 
2007.
    Section 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. (Refer to the 
September 7, 2001 final rule (66 FR 46902) for a complete discussion of 
this criterion.)
    The new medical service or technology add-on payment policy 
provides additional payments for cases with high costs involving 
eligible new medical services or technologies while preserving some of 
the incentives under the average-based payment system. The payment 
mechanism is based on the cost to hospitals for the new medical service 
or technology. Under Sec.  412.88, Medicare pays a marginal cost factor 
of 50 percent for the costs of a new medical service or technology in 
excess of the full DRG payment. If the actual costs of a new medical 
service or technology case exceed the DRG payment by more than the 50-
percent marginal cost factor of the new medical service or technology, 
Medicare payment is limited to the DRG payment plus 50 percent of the 
estimated costs of the new technology.
    The report language accompanying section 533 of Pub. L. 106-554 
indicated Congressional intent that the Secretary implement the new 
mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033, 
106th Cong., 2nd Sess. at 897 (2000)). Section 1886(d)(4)(C)(iii) of 
the Act requires that the adjustments to annual DRG classifications and 
relative weights must be made in a manner that ensures that aggregate 
payments to hospitals are not affected. Therefore, in the past, we 
accounted for projected payments under the new medical

[[Page 47996]]

service and technology provision during the upcoming fiscal year at the 
same time we estimated the payment effect of changes to the DRG 
classifications and recalibration. The impact of additional payments 
under this provision was then included in the budget neutrality factor, 
which was applied to the standardized amounts and the hospital-specific 
amounts.
    Section 1886(d)(5)(K)(ii)(III) of the Act, as amended by 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, add-on 
payments for new medical services or technologies for FY 2005 and later 
years have not been budget neutral.
    Applicants for add-on payments for new medical services or 
technologies for FY 2008 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 the medical service or technology meets the high-cost 
threshold, no later than October 15, 2006. Applicants must submit a 
complete database no later than December 30, 2006. Complete application 
information, along with final deadlines for submitting a full 
application, will be available at our Web site: 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 2008, the Web site will 
also list 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--
    <bullet> Provide, before publication of a proposed rule, for public 
input regarding whether a new service or technology represents an 
advance in medical technology that substantially improves the diagnosis 
or treatment of Medicare beneficiaries.
    <bullet> Make public and periodically update a list of the services 
and technologies for which applications for add-on payments are 
pending.
    <bullet> Accept comments, recommendations, and data from the public 
regarding whether a service or technology represents a substantial 
clinical improvement.
    <bullet> Provide, before publication of a proposed rule, for a 
meeting at which organizations representing hospitals, physicians, 
manufacturers, and any other interested party may present comments, 
recommendations, and data regarding whether a new 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 2007 
before publication of the FY 2007 IPPS proposed rule, we published a 
notice in the Federal Register on December 23, 2005 (70 FR 76315) and 
held a town hall meeting at the CMS Headquarters Office in Baltimore, 
MD, on February 16, 2006. 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 discussions of the substantial clinical improvement criterion 
for each of the FY 2007 new medical service and technology add-on 
payment applications before the publication of the FY 2007 IPPS 
proposed rule.
    Approximately 35 participants registered and attended the town hall 
meeting in person, while additional participants listened over an open 
telephone line. The participants focused on presenting data on the 
substantial clinical improvement aspect of their products, as well as 
the need for additional payments to ensure access to Medicare 
beneficiaries. In addition, we received written comments regarding the 
substantial clinical improvement criterion for the applicants. We 
considered these comments in our evaluation of each new application for 
FY 2007 in the proposed rule and in this final rule. We have summarized 
these comments or, if applicable, indicated that no comments were 
received, at the end of the discussion of the individual applications.
    We received two general comments about application of the newness 
and substantial clinical improvement criteria.
    Comment: One commenter encouraged CMS to amend the definition of 
substantial clinical improvement for the IPPS new technology provision 
to conform to the OPPS definition of substantial clinical improvement 
used in 2001. Specifically, AdvaMed requested that after ``decreased 
pain, bleeding, or other quantifiable symptom,'' CMS should insert the 
following language: ``such as convenience, durability, ease of 
operation or make other improvements in quality of life.''
    Response: We believe we addressed this concern in the FY 2006 IPPS 
final rule (70 FR 47360). We use similar standards to evaluate 
substantial clinical improvement in the IPPS and OPPS and, in both 
systems, we employ identical language to explain and elaborate on the 
kinds of considerations that are taken into account in determining 
whether a new technology represents a substantial clinical improvement. 
We do not believe a change to the regulations text is necessary.
    Comment: One commenter suggested that CMS should not use 
``substantial similarity'' to evaluate newness without also determining 
whether the product is a substantial clinical improvement. The 
commenter argued that CMS is applying a concept that is not defined in 
regulations. If CMS applies the concept as part of determining whether 
a product is new without evaluating substantial clinical improvement, 
the commenter recommended that CMS should define substantial similarity 
through notice and comment rulemaking.
    Response: We addressed this comment in the FY 2006 IPPS final rule 
(70 FR 47350 through 47351). We refer readers to that final rule for a 
detailed response to this comment.
    Section 1886(d)(5)(K)(ix) of the Act, as added by section 503(c) of 
Pub. L. 108-173, requires that, before establishing any add-on payment 
for a new medical service or technology, the Secretary shall seek to 
identify one or more DRGs associated with the new technology, based on 
similar clinical or anatomical characteristics and the costs of the 
technology and assign the new technology into a DRG where the average 
costs of care most closely approximate the costs of care using the new 
technology. No add-on payment will be made if the new technology is 
assigned to a DRG that most closely approximates its costs.
    At the time an application for new technology add-on payments is 
submitted, the DRGs associated with the new technology are identified. 
We only determine that a new DRG assignment is necessary or a new 
technology add-on

[[Page 47997]]

payment is appropriate when the payment under these currently assigned 
DRGs is not adequate and the technology otherwise meets the newness, 
cost, and substantial clinical improvement criteria.
    In this final rule, we evaluate whether new technology add-on 
payments will continue in FY 2007 for the three technologies that 
currently receive such payments. In addition, we present our 
evaluations of three applications for add-on payments in FY 2007.
    Comment: One commenter stated that section 503 of Pub. L. 108-173 
provided new funding for new technology add-on payments by no longer 
requiring that these payments be budget neutral. The commenter stated 
that this provision was enacted to ensure that the IPPS would better 
account for new drugs, devices, and services. However, the commenter 
believed that CMS continues to resist approval of new technologies and 
considers only a few technologies a year for add-on payments.
    Another commenter called upon CMS to be more willing to indicate 
its preliminary views regarding whether a new technology application 
meets the criteria for add-on payments in the proposed rule. The 
commenter expressed particular concern that CMS had not given a strong 
indication of whether any of the initial new technology applications 
would meet the substantial clinical improvement criterion and noted 
that doing so would enhance stakeholder dialogue with CMS on the 
evaluation of the new technology criteria during the comment period.
    Another commenter believed that CMS' definition of new technology 
is contrary to the statute. The commenter explained that CMS uses the 
FDA approval date to determine newness while the statute clearly 
requires that new technology add-on payments begin on the date an ICD-
9-CM code is issued. The commenter urged CMS to use the date an ICD-9-
CM code is issued to determine whether a technology is new instead of 
the FDA approval date.
    Response: With respect to the comment that CMS resists approval of 
new technologies and considers only a few technologies a year for add-
on payments, we note that we encourage companies with new-technologies 
that believe that they may meet the new technology criteria to apply 
for add-on payments. In our view, we have not resisted approving new 
technologies or been overly stringent in our application of the 
criteria. Our review of new technology focuses on the merits of the 
application and the requirements under the statute. The experience of 
our review process indicates that a significant number of new 
technologies have met the criteria. In fact, we have approved over 50 
percent (6 of 11) of applications where we had to apply judgment about 
whether the technology met the criteria for an add-on payment. From FY 
2003 to FY 2006, we received a total of 25 applications, but only 21 
were unique (four applicants applied twice in subsequent years for the 
same technology). Of the applications that we received, 8 were already 
beyond the timeline to be considered new, 1 had not received FDA 
approval, and 1 did not meet the cost criterion. In our view, we denied 
these applications using objective criteria and without having to apply 
any subjective judgment. Of the remaining 11 applications, 6 were 
approved for new technology add-on payment, while the other 5 were not 
approved because we determined that these applications were not 
substantially different from older technologies or did not meet the 
substantial clinical improvement criterion. Therefore, to date, we have 
approved over 50 percent of applications where we needed to apply 
judgment about whether a new technology met the criteria for an add-on 
payment. These statistics obviously reflect the recent experience of 
new technology applications, and, depending on the ability of 
applications to meet the criteria in the future, will likely change. We 
note that the merits of each application determine whether it should be 
approved. The aggregate statistics reflect the ability of applicants to 
satisfy the criteria, and should not be construed as a measure of the 
appropriateness of the review process. We also note that over the 
years, the cost criterion has been lowered, giving applicants a lower 
threshold to meet the cost criterion. We encourage and welcome 
additional applications in future years so that we can continue to make 
payments for those technologies that meet the criteria and warrant new 
technology add-on payments.
    With respect to the comment that CMS should be more willing to 
indicate our preliminary views regarding whether a new technology meets 
the criteria for an add-on payment, we provided our initial concerns 
regarding the two pending applications in the proposed rule. For the C-
Port[supreg] System, we described our concerns about both the newness 
(``various forms of surgical staples and clips have been used for more 
than a decade in a wide range of surgical procedures'') and substantial 
clinical improvement (``the applicant submitted evidence suggesting 
that device does not always produce reliable anastomoses'') criteria 
and also indicated that the device appears to meet the cost threshold 
(71 FR 24071). Similarly, for the X STOP Interspinous Process 
Decompression System, we indicated our belief that ``the device 
satisfies the newness and cost threshold criteria'' and described our 
concerns about substantial clinical improvement (71 FR 24072). As a 
result of information provided in the proposed rule, the applicants 
were afforded the opportunity to address the specific concerns we 
raised. For example, the applicant for the C-Port[supreg] system was 
able to address our concerns about similarity to predicate devices to 
allow us to determine that the device meets the newness criterion. 
Similarly, the applicant for X STOP was able to address the concerns we 
raised in the proposed rule about whether the device meets the 
substantial clinical improvement criterion during the comment period.
    Finally, with respect to the comment that CMS should use the 
issuance of an ICD-9-CM code as the date on which ``newness'' would 
begin, we have addressed this issue several times before, including in 
the FY 2005 IPPS final rule (69 FR 49002) and the FY 2006 IPPS final 
rule (70 FR 47343).
    Comment: One commenter proposed that CMS allow manufacturers to 
apply for a new technology add-on payment on an ongoing basis and 
recommended that the agency issue quarterly updates announcing the 
approval of new technology add-on payments, similar to the outpatient 
setting.
    Response: Section 1886(d)(5)(K)(i) of the Act requires that new 
technology add-on payments be established after notice and opportunity 
for public comments (in the publication required by subsection (e)(5) 
for a fiscal year or otherwise). In addition, pursuant to section 
1886(d)(5)(K)(viii) of the Act, we are also required to hold an annual 
town hall meeting prior to the IPPS proposed rule to obtain public 
input about whether a new technology meets the substantial clinical 
improvement criterion. Given the requirements in the statute, it is not 
feasible to process applications on a quarterly basis.
    Comment: Some commenters expressed disappointment that CMS has not 
increased the payment rate for new technology add-on payments from a 
maximum of 50 percent to a maximum of 80 percent of the marginal cost 
factor of the new medical service or technology, consistent with the 
outlier payment methodology. The commenters stated that increasing the 
marginal cost factor from 50 percent to 80 percent

[[Page 47998]]

would offer some stability and consistency for hospitals thus enabling 
hospitals to more easily provide their patients access to new 
technologies.
    Other commenters noted that CMS has approved so few technologies 
for new technology add-on payments that it would make more sense to 
compensate hospitals with a full add-on payment by paying on a cost 
basis using the average sales price plus six percent for FDA approved 
drugs and biologicals and list price plus a percentage for devices. The 
commenters believed that such a payment methodology would ensure that, 
``providers recoup their costs, Medicare pays a fair rate, and that 
payment is harmonized across treatment settings.'' Finally, one 
commenter requested that CMS provide clear guidance and greater 
transparency as to how determinations of newness will be made for a 
technology that already has an ICD-9-CM code but is later approved by 
the FDA for a new indication.
    Response: We did not propose any changes to the marginal cost 
factor in the proposed rule. Furthermore, we continue to believe that a 
50-percent marginal cost factor is appropriate for the reasons 
described in detail in the new technology final rule (66 FR 46919, 
September 7, 2001).
    Also, we have already discussed the situation in which a technology 
is described under an existing ICD-9-CM code, but subsequently receives 
approval for a new indication from the FDA. That discussion can be 
found in the September 7, 2001 new technology final rule (66 FR 46915) 
and in the FY 2005 IPPS final rule (69 FR 49011) concerning 
InFUSE[supreg] Bone Graft for tibia fractures.
    Comment: Several commenters stated that CMS did not address how the 
proposed changes to the DRGs would affect new technology add-on 
payments. Another commenter stated that it is essential that CMS 
maintain new technology add-on payments for FY 2007 and beyond. Another 
commenter recommended that CMS broaden the new technology criteria to 
ensure that new technologies are accounted for within a cost-based DRG 
system.
    Response: Although we are adopting a system of cost relative 
weights in this final rule (section III.C. of this preamble), we will 
continue to apply the cost criterion using standardized charges 
consistent with the statute. The statute requires that we apply ``a 
threshold specified by the Secretary that is the lesser of 75 percent 
of the standardized payment amount (increased to reflect the difference 
between costs and charges) or 75 percent of one standard deviation for 
the diagnosis-related group involved.'' Changes to the DRG system to 
better recognize severity in the DRG will also have no effect on our 
application of the new technology criteria. Any changes to the DRG 
system will merely result in us calculating different thresholds for 
the revised DRGs. In addition, once a technology is approved for new 
technology add-on payments, we will continue to use the ICD-9-CM code 
to identify the technology for determining when new technology add-on 
payments are appropriate.
    Finally, section 1886(d)(5)(K) and (L) of the Act establishes a 
process of identifying and ensuring adequate payment for new medical 
services and technologies. Because no changes have been made to this 
section of the statute, we will continue to make new technology add-on 
payments for FY 2007 and beyond for those technologies that meet the 
criteria.
    Comment: One commenter recommended that, because CMS proposed to 
implement a cost-based weight DRG system, CMS should reconsider whether 
applicants for FY 2007 new technology add-on payments meet the cost 
criterion based on a revised data set.
    Response: As stated above, Table 10 of the Addendum to the FY 2006 
IPPS final rule (70 FR 47680) contained the final thresholds that are 
being used to evaluate applications for new technology add-on payments 
for FY 2007. We use the thresholds contained in Table 10 that were 
published in the previous year's final rule (that is, FY 2006) to 
determine whether a technology is inadequately paid for the next fiscal 
year (that is, FY 2007). We publish Table 10 in the proposed rule in 
order to give the public notice and the opportunity to submit comments 
before we finalize the thresholds in the final rule. Also, it is 
necessary for applicants to have the thresholds from Table 10 during 
the application process so that both the applicants and CMS can 
establish if the applicant's technology meets the cost criterion. 
Further, as we note above, we believe that the statute requires us to 
establish the cost thresholds using charges.
    Comment: One commenter noted that section 503 of Pub. L. 108-173 
included a provision to expand the inpatient new technology add-on 
payment to include a broader range of technologies. The commenter added 
that this legislation was made to ensure that adequate payments were 
made to hospitals until hospital charges include the costs for these 
technologies. The commenter explained that CMS' narrow interpretation 
has created a situation where few, if any, products can qualify for new 
technology add-on payments and a process that is opaque and thus, 
costly, especially for small companies, to apply for add-on payments. 
The commenter requested that CMS provide greater opportunity for 
technologies to qualify for add-on payments to ensure patient access to 
new technologies as Congress intended.
    Response: Section 503 of Pub. L. 108-173 amended the law to: (1) 
require that we establish diagnosis and procedure codes annually on 
April 1 as well as October 1; (2) change the application of the cost 
threshold; (3) require a process for obtaining public input on new 
technology applications prior to the proposed rule; and (4) eliminate 
the budget neutrality requirement for new technology add-on payments. 
We believe that we have implemented section 503 as Congress intended.
    As we discussed in the FY 2006 IPPS final rule (70 FR 47344), we do 
not believe that our criteria present an inordinately cumbersome burden 
for small companies that want to apply for new technology add-on 
payments. We have received applications for FY 2007 from relatively 
small companies compared to some of the companies that have applied in 
the past. Further, we have already been approached by other small 
companies seeking new technology add-on payments for FY 2008. We 
encourage potential applicants to contact us before their technology is 
available on the market if they have questions about the new technology 
application process.
    Comment: One commenter requested that it be given the opportunity 
to work closely with CMS to help refine the regulatory framework under 
which CMS evaluates new innovative treatments for Medicare 
beneficiaries. The commenter suggested ideas such as creating a pathway 
for small companies under FDA review to elect to meet with CMS to 
discuss coverage, payment, and coding issues. In addition, the 
commenter recommended that CMS establish a committee and annual public 
workshop to assist emerging technologies and small companies with the 
new technology add-on payment process.
    Response: We have been committed to providing ample opportunity for 
applicants and other interested parties to make their views known to us 
throughout the application process, at the annual public meeting, and 
during the comment period on the proposed rule. We encourage interested 
parties to contact CMS staff for more information about the new 
technology add-on application process. Interested parties

[[Page 47999]]

may contact Tiffany Swygert at (410) 786-4642 or Michael Treitel at 
(410) 786-4552.
    Comment: One commenter requested that CMS broaden the definition of 
substantial clinical improvement. The commenter explained that, in the 
outpatient setting, CMS views as a separate factor ``improvements in 
the medical technology itself that are so significant that we may wish 
to recognize them for separate payment even though they do not directly 
result in substantial clinical improvements.'' For example, 
technological advancements may result in improvement of a product's 
``convenience, durability [or] ease of operation such as the strength 
of materials, increased battery life, [and] miniaturization.'' The 
commenter suggested that CMS could recognize these additional 
improvements along with others when evaluating substantial clinical 
improvement in the inpatient setting.
    Response: The commenter's specific reference to language that was 
included in the November 2, 2001 OPPS final rule was taken out of 
context. The language quoted above by the commenter from that OPPS 
final rule stated that CMS ``may,'' under the OPPS, recognize 
technologies for separate payment even though they do not directly 
result in substantial clinical improvements. To date, under the OPPS, 
we have only applied the explicit substantial clinical improvement 
criteria to pass-through device category applications. In the OPPS 
context, CMS has not found any applications for technologies ``that are 
so significant that we may wish to recognize them for separate payment 
(as opposed to packaged payments) even though they do not result in 
substantial clinical improvements'' (67 FR 66783). In fact, the 
historical OPPS experience has indicated that, in general, highly 
significant advances in medical technology from characteristics such as 
longer battery life commonly result in substantial clinical 
improvements that may be appropriately evaluated according to the 
substantial clinical improvement criteria alone. We have not made a 
determination to apply these standards within the IPPS. However, as 
noted in the FY 2005 IPPS final rule (69 FR 49021), we will continue to 
consider whether to employ specific factors such as those identified 
for the OPPS in the IPPS.
    Comment: One commenter urged CMS not to use the FDA section 510(k) 
approval process as a bar to a determination of meeting the newness 
criterion because the ``predicate'' devices identified through the 
section 510(k) approval process are not necessarily substantially 
similar to the new technology; rather the approval indicates that the 
new device is at least as safe and effective as its predicate(s).
    Response: We appreciate the commenter's concern and agree that the 
mere existence of a predicate device(s) identified in the FDA section 
510(k) approval process should not automatically preclude a product 
from meeting the newness criterion. Although we may consider the 
predicate devices that are listed in the FDA section 510(k) approval, 
we will evaluate whether a new technology is substantially similar to 
existing products on a case-by-case basis. We refer readers to the 
discussion in the FY 2006 final rule (70 FR 47350-47352) for more 
detailed information on substantial similarity.
3. FY 2007 Status of Technologies Approved for FY 2006 Add-On Payments
a. Kinetra[supreg] Implantable Neurostimulator (Kinetra[supreg]) for 
Deep Brain Stimulation
    Medtronic, Inc. submitted an application for approval of the 
Kinetra[supreg] implantable neurostimulator device for new technology 
add-on payments for FY 2005. In the IPPS final rule for FY 2005 (69 FR 
49019, August 11, 2004), we approved Kinetra[supreg] for new technology 
add-on payments.
    As noted above, the period for which technologies are eligible to 
receive new technology add-on payments is 2 to 3 years after the 
product becomes available on the market and data reflecting the cost of 
the technology are reflected in the DRG weights. This technology 
received FDA approval on December 16, 2003. Therefore, the technology 
will be beyond the 2- to 3-year period during which it can be 
considered new during FY 2007. Therefore, we proposed in the FY 2007 
IPPS proposed rule (71 FR 24070), to discontinue add-on payments for 
the Kinetra[supreg] rechargeable, implantable neurostimulator device 
for FY 2007.
    The manufacturer submitted a request that we consider a higher-
paying DRG assignment for dual array neurostimulator pulse generator 
cases. We have taken this request into consideration and have reviewed 
the FY 2005 Medicare charge data for cases that use implantable 
neurostimulator for deep brain stimulation. Our findings and a full 
discussion of this issue can be found in section II.D.2.a. of the 
preamble of this final rule.
    Comment: A number of commenters were concerned that the expiration 
of the new technology add-on payment for Kinetra[supreg] will lead to 
inadequate payments for full system Kinetra[supreg] implants. One 
commenter requested that CMS reconsider its decision to end payments 
for the Kinetra[supreg] implantable neurostimulator. Other commenters 
thanked CMS for its efforts in granting add-on payments for the 
Kinetra[supreg] during the last 2 years.
    Response: As noted above, the Kinetra[supreg] technology will be 
beyond the 2-year to 3-year period during which it can be considered 
new during FY 2007. Therefore, we are finalizing our proposal from the 
FY 2007 IPPS proposed rule (71 FR 24070) to discontinue add-on payments 
for the Kinetra[supreg] rechargeable implantable neurostimulator for FY 
2007.
b. Endovascular Graft Repair of the Thoracic Aorta
    W. L. Gore & Associates, Inc. submitted an application for 
consideration of its Endovascular Graft Repair of the Thoracic Aorta 
(GORE TAG) for new technology add-on payments for FY 2006. The 
manufacturer argued that endovascular stent-grafting of the descending 
thoracic aorta provides a less invasive alternative to the traditional 
open surgical approach required for the management of descending 
thoracic aortic aneurysms. The GORE TAG device is a tubular stent-graft 
mounted on a catheter-based delivery system, and it replaces the 
synthetic graft normally sutured in place during open surgery. The 
device was initially identified using ICD-9-CM procedure code 39.79 
(Other endovascular repair (of aneurysm) of other vessels). The 
applicant also requested a unique ICD-9-CM procedure code. As noted in 
Table 6B of the FY 2006 IPPS final rule (70 FR 47637), new procedure 
code 39.73 (Endovascular implantation of graft in thoracic aorta) was 
assigned to this technology.
    In the FY 2006 IPPS final rule (70 FR 47356), we approved the GORE 
TAG device for new technology add-on payment for FY 2006. We noted that 
any substantially similar device that is FDA-approved before or during 
FY 2006 that uses the same ICD-9-CM procedure code as GORE TAG and is 
assigned to the same DRGs as those approved for new technology add-on 
payments may also receive the new technology add-on payment associated 
with this technology in FY 2006.
    FDA approved GORE TAG on March 23, 2005. The technology remains 
within the 2- to 3-year period during which it can be considered new. 
Therefore, as we proposed (71 FR 24070), we are continuing add-on

[[Page 48000]]

payments for the endovascular graft repair of the thoracic aorta for FY 
2007.
    Comment: Some commenters supported our proposal to continue new 
technology add-on payments for GORE TAG for FY 2007.
    Response: We thank the commenters for their support and, as noted 
above, we are continuing new technology add-on payments for GORE TAG 
for FY 2007.
c. Restore[supreg] Rechargeable Implantable Neurostimulator
    Medtronic Neurological submitted an application for new technology 
add-on payments for its Restore[supreg] Rechargeable Implantable 
Neurostimulator for FY 2006. The Restore[supreg] Rechargeable 
Implantable Neurostimulator is designed to deliver electrical 
stimulation to the spinal cord to block the sensation of pain. The 
technology standard for neurostimulators uses internal sealed batteries 
as the power source to generate the electrical current. These internal 
batteries have finite lives, and require replacement when their power 
has been completely discharged. According to the manufacturer, the 
Restore[supreg] Rechargeable Implantable Neurostimulator ``represents 
the next generation of neurostimulator technology, allowing the 
physician to set the voltage parameters in such a way that fully meets 
the patient's requirements to achieve adequate pain relief without fear 
of premature depletion of the battery.'' The applicant stated that the 
expected life of the Restore[supreg] rechargeable battery is 9 years, 
compared to an average life of 3 years for conventional neurostimulator 
batteries. We approved new technology add-on payments for all 
rechargeable, implantable neurostimulators for FY 2006. Cases involving 
these devices, made by any manufacturer, are identified by the presence 
of newly created ICD-9-CM code 86.98 (Insertion or replacement of dual 
array rechargeable neurostimulator pulse generator).
    As noted above, the period for which technologies are eligible to 
receive new technology add-on payments is 2 to 3 years after the 
product becomes available on the market and data reflecting the cost of 
the technology are reflected in the DRG weights. The FDA approved the 
Restore[supreg] Rechargeable Implantable Neurostimulator in 2005. 
However, as noted above and in the FY 2006 IPPS final rule (70 FR 
47358), at least one similar product was approved by the FDA as early 
as April 2004. Nevertheless, consistent with current policy (70 FR 
47362) and decisions for prior products (that is, bone morphogenetic 
products and CRT-D devices), as we proposed (71 FR 24070 through 
24071), we are continuing new technology add-on payments for 
rechargeable, implantable neurostimulators in FY 2007 because the 
product will be beyond the 3-year period only in the latter 6 months of 
the fiscal year.
    Comment: Some commenters supported our decision to continue add-on 
payments for the Restore[supreg] Rechargeable Implantable 
Neurostimulator.
    Response: We appreciate the commenters' support and as noted above, 
we are continuing new technology add-on payments for Restore[supreg] 
Rechargeable Implantable Neurostimulator for FY 2007.
4. FY 2007 Applications for New Technology Add-On Payments
a. C-Port[supreg] Distal Anastomosis System
    Cardica, Inc. submitted an application for new technology add-on 
payments for FY 2007 for its Cardica C-Port[supreg] Distal Anastomosis 
System. The manufacturer stated that the C-Port[supreg] System is 
indicated for all patients requiring a vein as a conduit during a 
coronary bypass operation for bypassing a coronary artery stenosis or 
occlusion. The manufacturer contended that the C-Port[supreg] System is 
specifically designed to create a reliable and consistent end-to-side 
anastomosis between a conduit, such as a venous graft, and a small 
arterial vessel during the bypass surgery. The device consists of eight 
stainless steel clips and a delivery system. Once the vein graft has 
been loaded into the device and the device positioned against the 
target vessel, the anastomosis is created by pushing a single button. 
Cardica, Inc. stated the main purpose of the device is to replace a 
conventional hand-sewn, distal anastomosis with an automated, 
compliant, mechanical anastomosis.
    We received the following public comments at the new technology 
town hall meeting regarding whether this technology meets the 
substantial clinical improvement criteria:
    Comment: The manufacturer argued that this technology meets the 
substantial clinical improvement criterion because:
    <bullet> It achieves higher patency rates at 6 months compared to 
conventional hand-sewn anastomoses.
    <bullet> Use of the device will result in less surgeon-to-surgeon 
variability in the quality of the anastomosis compared to hand sewing.
    <bullet> The device leads to reduced operative time.
    <bullet> The product allows for the creation of an anastomosis 
during minimally invasive surgery.
    In addition, we received written comments expressing support for 
approval of new technology add-on payments for the C-Port[supreg] 
System. These commenters noted that--
    <bullet> The device allows the anastomosis to be completed quickly, 
reducing patient complications during surgery from ischemia.
    <bullet> The device will allow for smaller incisions during heart 
surgery and physicians will not have to position their hands in the 
chest cavity in order to hand-sew the anastomosis.
    <bullet> The rapidly deployed anastomosis clamp provides patients 
with a surgical alternative where one would otherwise not be available 
due to the comorbidities associated with the more invasive CABG 
procedures.
    Response: We appreciate the time and effort the applicant took to 
present at the town hall meeting. We indicated in the proposed rule 
that we would consider the information presented in the written 
comments and at the town hall meeting, and invoted interested parties 
to submit objective data that would support the assertions presented 
above by the commenters.
    The C-Port[supreg] System was granted section 510(k) approval from 
the FDA on November 10, 2005. While the device appeared to meet the 
criteria for being considered new based on its FDA approval date, we 
were concerned that various forms of surgical staples and clips have 
been used for more than a decade in a wide range of surgical 
procedures. In fact, the FDA found that the C-Port[supreg] System ``is 
substantially equivalent to the predicate devices with regard to 
indications, device characteristics, method of use, labeling and 
materials.'' Thus, given its similarity to other devices currently on 
the market, we were concerned that the C-Port[supreg] System may not 
qualify as new. In the FY 2007 IPPS proposed rule, we solicited 
specific comments on whether this device is new and how it could be 
distinguished from predicate devices that perform the same or a similar 
function.
    We received the following public comments in response to the 
proposed rule.
    Comment: The manufacturer commented that the C-Port[supreg] System 
meets the newness criterion for the following reasons:
    <bullet> The FDA section 510(k) approval process identifies 
predicate devices as having ``a similar, not necessarily identical use 
and function.''

[[Page 48001]]

    <bullet> There is no other ``fully-integrated anastomotic system 
cleared by the FDA for the creation of an anastomosis between a blood 
vessel graft and a target coronary artery.'' There are no ``clip or 
staple-based automated distal coronary anastomotic devices such as [C-
Port[supreg]] approved by the FDA.'' The manufacturer argued that while 
the devices they identified in the FDA section 510(k) approval process 
are similar to C-Port[supreg] system, none of them are identical.
    <bullet> C-Port[supreg] was FDA approved in November 2005, thus 
enabling the device to still qualify as new based on its FDA approval 
date.
    <bullet> There is no clinical precedence for the use of a stapling 
device in creating distal coronary anastomoses, and there are no ICD-9 
CM codes for stapling devices--the lack of the procedure code means 
that CMS does not have charge data for C-Port[supreg] and that the 
device's costs are not reflected in the current DRG weights.
    <bullet> CMS approved Kinetra[supreg] in 2004 and stated that the 
Kinetra[supreg] device was not ``significantly different in terms of 
how it achieves its desired clinical results from its predecessor 
Soletra[supreg].'' The manufacturer believed that the approval of 
Kinetra[supreg] sets precedence for C-Port[supreg] approval.
    Response: We appreciate the manufacturer's clarification of the 
questions we posed in the proposed rule about whether the C-
Port[supreg] would meet the newness criterion. The additional 
information submitted has allowed us to determine that the C-
Port[supreg] meets the newness criterion.
    In response to the commenter's statement about Kinetra[supreg], we 
indicated that Soletra[supreg] and Kinetra[supreg] achieve the desired 
clinical result through the same stimulation mechanism. However, we did 
not find Soletra[supreg] and Kinetra[supreg] to be substantially 
similar products. We noted that Soletra[supreg] controls symptoms only 
on one side of a patient's body, while Kinetra[supreg] provides 
bilateral control of neurological symptoms through a single device. We 
determined in the FY 2005 IPPS final rule (69 FR 49019) that 
Kinetra[supreg] represented a substantial clinical improvement over the 
previous Soletra[supreg] device.
    In the proposed rule, we also noted that there is currently no ICD-
9-CM code used to identify how the anastomosis is performed. The 
surgical technique used to graft the bypass to the arterial vessel is 
part of the surgical procedure itself and is not separately identified 
in our current coding structure. Although there is not an explicit code 
to identify C-Port[supreg], the hospital's charge for the device will 
be included on its bill. The hospital is permitted to charge for all 
items and services it furnishes irrespective of whether a particular 
item is identified by an explicit ICD-9-CM code. The charges included 
on hospital bills for the device will be part of the relative weight 
calculation 2 years later (that is, FY 2005 hospital charge data are 
used to set the FY 2007 relative weights).
    Comment: The manufacturer of C-Port[supreg] urged CMS to 
differentiate between ``distinct procedures involving the creation of 
anastomosis'' by creating the following codes: (a) Anastomosis, manual; 
and (b) anastomosis, automated, using single or multiple clip array 
deployment technology. The manufacturer commented that a new code 
should be created for C-Port[supreg] because the C-Port[supreg] Distal 
Anastomosis procedure is not a typical part of the bypass procedure 
code and the use of the C-Port[supreg] system requires training and 
proctoring for physicians and OR staff to use the equipment because the 
C-Port[supreg] system comprises new steps and preparation in the bypass 
procedure. Finally, the manufacturer stated that CMS set a precedent 
for the creation of a new code by creating a code for a drug-eluting 
stent even though ICD-9-CM procedure codes already existed for stent 
procedures and by creating a new code to distinguish single versus dual 
channel-pulse generator devices (Kinetra[supreg] by Medtronic).
    Response: While the use of the C-Port[supreg] device may represent 
a difference in technique of creating a distal anastomosis, we do not 
agree that it is a distinct procedure. Historically, we have subdivided 
procedures involving the insertion of specific devices that are 
designed to achieve a specific therapeutic purpose, but we have not 
assigned a code for specific tools used to perform surgery. 
Kinetra[supreg], a stent and a pacemaker, is an example of a device 
that is implanted in a patient to treat an illness that is 
appropriately assigned a code. To date, we have not used a code to 
identify a specific type of surgical tool such as a scalpel, saw, or 
clamp. Similarly, we view C-Port[supreg] as a surgical tool (albeit far 
more sophisticated or innovative than those just mentioned) that should 
also not be recognized by its own ICD-9-CM code.
    The applicant made several arguments in support of the device 
meeting the cost criterion. Cardica, Inc. estimated that the cost of 
each device will be approximately $1,200. The applicant assumed a 
hospital markup of 100 percent, with an average use of 2.5 C-
Port[supreg] devices per case. Therefore, it estimated that the total 
average charge per patient will be $6,000. The C-Port[supreg] System 
would be used when a coronary artery bypass graft is performed. Thus, 
we assessed whether it meets the cost criterion in relation to the 
threshold for DRGs 106 (Coronary Bypass with Percutaneous Transluminal 
Coronary Angioplasty), 547 (Coronary Bypass with Cardiac Catheter with 
Major CV Diagnosis), 548 (Coronary Bypass with Cardiac Catheter without 
Major CV Diagnosis), 549 (Coronary Bypass without Cardiac Catheter with 
Major CV Diagnosis), and 550 (Coronary Bypass without Cardiac Catheter 
without Major CV Diagnosis). We note that the data analysis for this 
technology is slightly unusual, as the DRGs to which the technology 
would have been assigned in FY 2005 (the MedPAR data we are currently 
using) are DRGs 107 and 109. These DRGs were terminated in FY 2006, and 
4 new coronary bypass DRGs were created for these cases (DRGs 547, 548, 
549, and 550). The manufacturer provided estimates showing a case-
weighted threshold for DRGs 106, 547, 548, 549 and 550 of $75,373. The 
applicant projected a 20-percent market penetration for the device in 
FY 2007 or its use in approximately 23,000 cases across the 5 DRGs. The 
applicant submitted data showing average standardized charges for cases 
using the C-Port[supreg] System of $80,887. Therefore, the applicant 
argued that the device meets the cost threshold for a new technology 
add-on payment. Our internal data analysis of the technology, using the 
FY 2005 MedPAR data and Table 10 thresholds for FY 2005, shows a case-
weighted threshold of $68,416. We identified cases using coronary 
bypass procedure codes 36.10, 36.11, 36.12, 36.13 and 36.14, and 
concluded that the case-weighted average standardized charge for these 
bypass cases was $79,394. Thus, our internal data also suggested that 
the device meets the cost threshold.
    As we discussed in the proposed rule, the applicant made several 
arguments in support of the device meeting the substantial clinical 
improvement criterion. The manufacturer argued that the C-Port[supreg] 
creates a reliable and fully compliant end-to-side anastomosis between 
a vein graft and a coronary artery, in less time than is required to 
create a hand-sewn distal anastomosis. The applicant also stated that 
the C-Port[supreg] System integrates deployment of the anastomotic 
clips and creation of the arteriotomy, thus enabling deployment to 
occur without occlusion of blood flow through the target vessel. 
However, we note that the applicant submitted evidence suggesting that 
the device does not always produce reliable

[[Page 48002]]

anastomoses; specifically, a study of 130 patients receiving 132 
devices reported 13 incomplete anastomoses in 12 patients, and the 
study also noted that additional manual stitches were required in the 
majority of the patients studied. Therefore, we were concerned that 
these studies suggested that the C-Port[supreg] System may not 
represent a substantial clinical improvement over the traditional hand-
sewn technique. At the town hall meeting, the applicant noted that 
these results were associated with inexperience preparing the target 
vessel, vein thickness assessment, proper device alignment and 
anastomosis site selection rather than problems with the device itself. 
The applicant believed that these problems will become infrequent as 
surgeons have more experience with the device. In the FY 2007 IPPS 
proposed rule, we solicited further information from commenters that 
would suggest how the product meets the substantial clinical 
improvement criterion.
    We received the following comment in response to the proposed rule.
    Comment: The manufacturer submitted the following comments to be 
considered in our evaluation of whether C-Port[supreg] met the 
substantial clinical improvement criterion:
    <bullet> Intraoperative anastomotic failures with the hand-sewn 
technique occur in approximately 10 percent of patients. Falk, et al., 
evaluated vein graft patency using a meta-analysis of 28 published 
studies with over 28,000 grafts and found that occlusion within 30 days 
occurs in about 12 percent of vein grafts while occlusion within 6 
months occurs in 20 percent.
    <bullet> The C-Port[supreg] device may mitigate some of the 
negative factors found in hand-sewn anastomoses that impact vein graft 
patency. Post-operative vein graft patency rates using the hand-sewn 
technique were 88 percent at 30 days and 80 percent at 6 months (data 
obtained from historical controls); whereas patency rates using the C-
Port[supreg] device were 99 percent at discharge and 96 percent at 6 
months.
    <bullet> In the greater than 1-year followup group, none of the 
patients in the pivotal C-Port[supreg] study required a reintervention.
    <bullet> The ``10 percent failure rate'' cited in a C-Port[supreg] 
publication referred to a failure in surgeons using the device (due to 
lack of experience using it), not a failure of the device itself.
    Response: We are concerned that information presented by the 
applicant does not demonstrate that this technology is a sufficient 
improvement over hand-sewing the distal anastomosis. Although patency 
rates using the C-Port[supreg] device were reportedly higher than those 
found using the hand-sewn technique (99 percent at discharge and 96 
percent at 6 months compared to 88 percent at 30 days and 80 percent at 
6 months), we also found that the data on the hand-sewn patency rates 
was derived from a meta-analysis of over 28,000 bypass grafts to 
different coronary vessels, many of which may have been comparatively 
poor candidates for bypass grafting, suggesting a possible selection 
bias in the arteries in the C-Port[supreg] study. We believe that a 
clinical study demonstrating substantial clinical improvement in 
outcomes is necessary for this technology because the comparison is of 
the CABG procedure using the C-Port[supreg] device to the hand-sewn 
technique. In some cases, our approval of a technology was based on a 
clinical assessment that at least one of the criteria for evaluating 
substantial clinical improvement listed in the new technology final 
rule (66 FR 46914) was met. For example, our approval of the Restore 
rechargeable neurostimulator was based on evidence that showed it 
decreased the ``rate of subsequent * * * therapeutic interventions'' by 
avoiding a surgery to replace a battery. Similarly, we approved GORE 
TAG because it ``offers a treatment option for patient population 
unresponsive to, or ineligible for, currently available treatments.'' 
In these cases, we were less reliant on a clinical study to demonstrate 
improvement over an existing technology than our clinical judgment that 
the product achieved its intended purposes which itself is a 
substantial clinical improvement. With C-Port[supreg] or with a hand-
sewn anastomosis, the treatment is the same (a CABG for coronary artery 
vessel disease). Thus, clinical studies demonstrating an improvement in 
CABG outcomes using the C-Port[supreg] device relative to the hand-sewn 
technique are critical to approving the device for new technology add-
on payments.
    Given the relatively high rates of success of both the hand sewn 
and the automated technique, we were not able to determine that the C-
Port[supreg] device is a substantial clinical improvement over the 
traditional hand-sewn technique. Accordingly, after consideration of 
the comments received, we are not approving the C-Port[supreg] Distal 
Anastomosis System for FY 2007 new technology add-on payment.
    There are several potential criteria listed in the new technology 
final rule that C-Port[supreg] could potentially meet. For instance, it 
is possible that C-Port[supreg] will reduce recovery time or lead to 
more rapid beneficial resolution of the disease process treatment. 
Given the potential benefits of C-Port[supreg], it is likely that we 
would approve the technology for add-on payments with a study that more 
definitively demonstrates substantial clinical improvement. For 
instance, our main concern with the study presented was that the 
control group and the study population used to demonstrate substantial 
clinical improvement may not have been directly comparable. If there 
was a study that showed similar improvements in patency rates between 
the control group and a study population where the patients were 
directly comparable in their coronary artery vessel disease, we believe 
it would be more likely to demonstrate that the substantial clinical 
improvement criterion was met.
b. NovoSeven[supreg] for Intracerebral Hemorrhage
    The Pinnacle Health Group in conjunction with Novo Nordisk Inc. 
(the manufacturer) submitted an application for new technology add-on 
payments for FY 2007 for NovoSeven[supreg] for Intracerebral 
Hemorrhage. However, the applicant withdrew its application for new 
technology add-on payment on June 07, 2006.
    We received the following public comments regarding this 
application for new technology add-on payments in response to the FY 
2007 IPPS proposed rule.
    Comment: One commenter supported approving new technology add-on 
payments for NovoSeven[supreg]. The commenter believed that the 
availability of an add-on payment would help facilitate patient access 
to this important and costly therapy.
    Response: We appreciate the commenter's response to the proposed 
rule. We note that, during the comment period, the applicant withdrew 
its application from consideration for new technology add-on payments 
for FY 2007.
    We appreciate the applicant for its submittal of an application for 
new technology add-on payments and encourage a resubmission of an 
application upon FDA approval of its technology.
c. X STOP Interspinous Process Decompression System
    St. Francis Medical Technologies submitted an application for new 
technology add-on payments for the X STOP Interspinous Process 
Decompression System for FY 2007. Lumbar spinal stenosis describes a 
condition that occurs when the spaces between bones in the spine become

[[Page 48003]]

narrowed due to arthritis and other age-related conditions. This 
narrowing, or stenosis, causes nerves coming from the spinal cord to be 
compressed, thereby causing symptoms including pain, numbness, and 
weakness. It particularly causes symptoms when the spine is in 
extension, as occurs when a patient stands fully upright or leans back. 
The X STOP device is inserted between the spinous processes of adjacent 
vertebrae in order to provide a minimally invasive alternative to 
conservative treatment (exercise and physical therapy) and invasive 
surgery (spinal fusion). It works by limiting the spine extension that 
compresses the nerve roots while still preserving as much motion as 
possible. The device is inserted in a relatively simple, primarily 
outpatient procedure using local anesthesia. However, in some 
circumstances, the physician may prefer to admit the patient for an 
inpatient stay. The manufacturer described the device as providing ``a 
new minimally invasive, stand-alone alternative treatment for lumbar 
spinal stenosis.''
    The X STOP Interspinous Process Decompression system received pre-
market approval from the FDA on November 21, 2005. The device is 
currently described by ICD-9-CM code 84.58 (Implantation of 
Interspinous process decompression device) (excluding: fusion of spine 
(codes 81.00 through 81.08, and 81.30 through 81.39)). This ICD-9-CM 
code went into effect on October 1, 2005.
    The manufacturer provided data in support of the device meeting the 
cost threshold criterion. The applicant stated that there would be an 
average of 1.6 units used per case. Each unit costs $5,500; therefore, 
the technology is expected to cost $8,800 per case. The device is 
currently assigned to DRGs 499 (Back and Neck Procedures Except Spinal 
Fusion with CC) and 500 (Back and Neck Procedures Except Spinal Fusion 
without CC). The manufacturer projected that there would be 
approximately 424 patients eligible to receive the device in DRG 499 in 
FY 2007, while there may be approximately 1,700 patients who receive 
the device in DRG 500. The manufacturer also provided data for cases 
involved in the clinical trials. The average standardized charge for 
the cases in FY 2004 was $24,065. The weighted threshold for DRGs 499 
and 500 is $20,096. However, the manufacturer argued that because 
significantly less than 20 percent of patients receiving the X STOP 
experienced complications or had comorbidities, the threshold should be 
calculated by estimating that 20 percent of patients would be assigned 
to DRG 499 and 80 percent would to DRG 500. The manufacturer stated in 
its application that, using this methodology, the applicable threshold 
should be $19,796. Using either calculation, it appears that the 
technology meets the cost threshold for new technology add-on payments.
    The applicant also submitted information in support of its claim of 
meeting the substantial clinical improvement criterion. The 
manufacturer stated that the X STOP device is placed between the 
spinous processes to limit extension of the symptomatic level(s), yet 
allowing flexion, axial rotation, and lateral bending (that is, the 
device limits pressure on the spinal nerves and the resulting pain 
symptoms when the patient is in an upright position or leans backward 
while also preserving the patient's ability to turn side-to-side, bend 
forward, and to turn to either side). The applicant contended that this 
technology provides an alternative with improved clinical outcomes to 
conservative and surgical treatments. The manufacturer further stated 
that the device may offer a new alternative to lumbar spinal 
decompression procedures such as laminectomy and laminotomy. Additional 
information included in the application suggested that the device 
preserves spinal motion and is superior to a spinal decompression 
procedure that requires concomitant fusion (with or without 
instrumentation). The applicant argued that the advantages over spinal 
decompression include reduced risk, shorter hospital stay, and earlier 
improvement in pain and function. The manufacturer further contended 
that disease progression at adjacent levels is minimal following X STOP 
implantation compared to the known risk associated with surgical 
decompression and concomitant fusion. The applicant stated that the X 
STOP is comparable to traditional surgical decompression of lumbar 
spinal stenosis with respect to improved quality of life 
postoperatively. According to the applicant, the device provides 
advantages over nonoperative care, including better symptom relief, 
improved function, and increased patient satisfaction.
    We received the following public comments through the new 
technology town hall meeting process regarding this application for 
add-on payments.
    Comment: The applicant asserted that the X STOP Interspinous 
Process Decompression system has the following advantages:
    <bullet> It retains spinal anatomy and all spinal structures.
    <bullet> The device allows for increased function and less pain 
after implantation as evidenced by radiographic measures that showed 
increases in the spinal canal area by 18 percent, diameter by 9 
percent, and subarticular diameter (the route that the nerves exit the 
spine) by 50 percent. In lateral view: area increased by 25 percent and 
width by 41 percent.
    <bullet> The X STOP is a reversible procedure that causes no damage 
to facets or disks.
    <bullet> The device allows for a treatment option for patients that 
cannot undergo surgeries with general anesthesia.
    <bullet> The rate of complications associated with implantation of 
the device is below 1 percent.
    Response: In the proposed rule, we indicated that we would evaluate 
these assertions as we further considered this application for new 
technology add-on payments for the final rule. We also noted that the 
study that the applicant summarized at the town hall meeting for the X 
STOP used a randomized study that targeted lumbar spinal stenosis 
patients with mild to moderate symptoms. The control group did not 
require operative care. In the proposed rule, we solicited information 
from the comments that demonstrates how the study populations showed 
substantial clinical improvement compared to the control group.
    We believe that the device satisfies the newness and cost threshold 
criteria for new technology add-on payments. However, in the FY 2007 
IPPS proposed rule, we expressed our concern that the information 
included with the application may raise issues about substantial 
clinical improvement. During the FDA approval process, the Center for 
Devices and Radiological Health (CDRH) Advisory Panel voted against 
premarket approval (PMA) in August 2004 because of concerns about 
proper patient selection as well as the lack of objective endpoints, 
especially radiographic endpoints. The Panel also mentioned the overall 
low clinical efficacy rate in the study population. The device 
subsequently received PMA approval, but only on the condition that it 
be used in the context of a long term (5 year) follow-up study. In the 
proposed rule, we solicited information from commenters that addressed 
the concerns raised by the CDRH Advisory Panel or other information 
bearing on the issue of whether this product meets the substantial 
clinical improvement criterion.
    We note that the town hall meeting produced contradictory 
information regarding whether this procedure is generally performed in 
inpatient or

[[Page 48004]]

outpatient settings. The presenter indicated that over 90 percent of 
his patients were treated as outpatients. The manufacturer noted that 
90 percent of non-U.S. patients and approximately two-thirds of U.S. 
patients since FDA approval have been treated in inpatient settings. 
While the setting where the procedure is typically performed has no 
bearing on whether the product represents a substantial clinical 
improvement, we noted that we believe the physician should select the 
most appropriate site to perform the procedure based on the clinical 
needs of the patient.
    We received the following comments in response to the FY 2007 IPPS 
proposed rule.
    Comment: The manufacturer commented that the contradictory 
information we noted in the proposed rule about whether the procedure 
in general performed in the outpatient or inpatient setting was likely 
the result of the presenter at the town hall meeting misspeaking when 
he said that the device was used in the outpatient setting about 90 
percent of the time. Although the device may be used with local 
anesthesia, the manufacturer predicted that many clinicians attending 
to Medicare patients will choose general anesthesia and will use the 
procedure in an inpatient setting. The manufacturer stated that the X 
STOP device is currently used in the inpatient setting about 90 percent 
of the time.
    Response: We appreciate the commenter's clarification of this 
point. As we indicated in the proposed rule, the site of service has no 
bearing on whether we will determine the technology to be a substantial 
clinical improvement. However, given the similarity in the criteria we 
apply in the two settings for determining substantial clinical 
improvement, we note that a decision to approve a device for inpatient 
new technology add-on payment may have implications for outpatient new 
technology pass-through payment.
    Comment: In response to our request for additional information 
supporting that the X STOP device meets the substantial clinical 
improvement criterion, the manufacturer reiterated many of the comments 
that it submitted through the new technology town hall meeting process. 
Mainly, the commenter stated that X STOP offers an alternative to 
surgery that is associated with fewer and less severe complications, is 
a reversible procedure, and offers a faster recovery time than more 
invasive surgery. The commenter also stated that X STOP meets the 
criterion when compared to other disease management modalities for 
lumbar spinal stenosis patients, as evidenced by symptom relief, 
physical functioning, treatment satisfaction, and health-related 
quality of life, and that use of X STOP results in--
    <bullet> Comparable treatment efficacy when compared to laminectomy
    <bullet> Lower rates of intraoperative complications compared to 
surgical decompression with or without concomitant fusion
    <bullet> Lower reoperation rates for unresolved stenosis systems 
compared to other surgical treatments.
    In addition, the manufacturer stated that it addressed the issues 
that the Advisory Panel to the FDA cited as reasons for voting against 
approving X STOP. Those issues were in regards to proper patient 
selection, a lack of objective endpoints, especially radiographic 
endpoints and an overall low clinical efficacy rate in the study 
population. The manufacturer claimed that it addressed the concerns of 
the Advisory Panel by submitting additional data and analyses to the 
FDA that--
    <bullet> Identified patients with LSS and moderately impaired 
physical function at baseline as the appropriate indication.
    <bullet> Supplemented ``the showing of the mechanism of effect on 
the spine in cadavers with in vivo clinical radiographic data.''
    <bullet> Addressed the issue of low clinical efficacy rates, by 
showing that the success rates using X STOP were comparable to those of 
more invasive procedures that are covered by Medicare.
    The manufacturer further noted that the Advisory Panel wrote in its 
Summary of Safety and Effectiveness document that ``the X STOP device 
met the primary clinical study endpoint for success, exceeding the 
success rate of the control in every statistical analysis.'' Finally, 
the manufacturer noted that the FDA requirement that X STOP's approval 
was conditioned on a 5-year followup study was not uncommon for spinal 
implant devices and that, over the past 10 years, all nine spinal 
implant FDA approvals have had similar conditional requirements. The 
manufacturer also commented that CMS approved the INFUSE Bone Graft 
device and noted that the FDA required a 6-year followup study as a 
condition of its approval of that device.
    Several commenters who were individual physicians who have had 
experience using the X STOP device indicated that X STOP provides an 
alternative to more invasive surgery such as a laminectomy after 
conservative treatment has failed. All of the commenters supported 
approving the device for new technology add-on payment. In addition to 
commenters' support that the device is minimally invasive and has short 
operative and recovery time, some of the commenters mentioned other 
positive outcomes that the X STOP procedure--
    <bullet> Increases foraminal height and produces minimal reversal 
of the lordosis, as measured by post operative x-rays;
    <bullet> Reduced the pain reported by patients by half in some 
cases;
    <bullet> Provided alleviation of neurogenic claudication symptoms; 
and
    <bullet> Benefited patients with significant comorbidities, 
including cardiothoracic problems, specifically chronic obstructive 
pulmonary disease or coronary artery disease
    In addition, some commenters noted that the X STOP device can very 
easily be implanted in the outpatient setting (assuming appropriate 
patient-selection), thus allowing high inpatient costs to be avoided.
    Response: We appreciate the commenters' submittal of comments in 
support of X STOP. With respect to substantial clinical improvement, we 
continue to be concerned that the FDA Advisory Panel noted the overall 
low clinical efficacy rate in the study population and only approved 
the technology conditional on a 5 year followup study. Nevertheless, we 
note that the FDA did approve the technology, meaning that it is safe 
and effective (that is, it achieves its intended purpose). Further, we 
note that the applicant was able to address the FDA concern about lack 
of objective endpoints by the showing of the mechanism of effect on the 
spine in cadavers with in vivo clinical radiographic data. That is, the 
applicant was able to show that the X STOP device limits spine 
extension that compresses the nerve. Thus, we believe that the 
technology has promise for providing a less invasive alternative to 
procedures such as laminectomy or fusion for patients that have failed 
conservative treatment (exercise, physical therapy and medication). The 
X STOP system represents a new level of treatment on the continuum of 
care for patients with lumbar spinal stenosis that previously did not 
exist.
    Accordingly, after consideration of the comments received, we are 
approving the X STOP Interspinous Process Decompression System for new 
technology add-on payment for FY 2007. However, we remain interested in 
seeing whether the clinical evidence from the 5-year followup study 
required by the FDA demonstrates that X STOP

[[Page 48005]]

continues to be effective. Cases involving X STOP will be identified by 
ICD-9-CM code 84.58 (Implantation of interspinous process decompression 
device). These cases are generally included in DRG 499 (Back and Neck 
Procedures Except Spinal Fusion with CC) and DRG 500 (Back and Neck 
Procedures Except Spinal Fusion without CC). As noted in the proposed 
rule, the manufacturer submitted data to support its estimated cost per 
case involving the X STOP procedure of $8,800. Accordingly, we are 
finalizing a maximum add-on payment of $4,400 for cases that involve 
this technology.
5. Interim and Final Cost Threshold Tables Due to Changes to Wage Index 
and Budget Neutrality Factors
    Table 10 of the IPPS proposed and final rules contains the cost 
thresholds that are used to determine whether a technology meets the 
criteria for new technology add-on payments. We are publishing an 
interim Table 10 in this final rule. We use the national adjusted 
operating standardized amounts in calculating the cost threshold. As 
noted in section III. and in the Addendum to this final rule, the final 
national adjusted operating standardized amounts will be published 
subsequent to this final rule when the wage index and budget neutrality 
factors are finalized for FY 2007. Therefore, we will also publish a 
revised version of Table 10, containing the final thresholds for FY 
2008 between August 1 and October 1.

III. Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the 
methodology for determining prospective payments to hospitals, the 
Secretary must adjust the standardized amounts ``for area differences 
in hospital wage levels by a factor (established by the Secretary) 
reflecting the relative hospital wage level in the geographic area of 
the hospital compared to the national average hospital wage level.'' In 
accordance with the broad discretion conferred under the Act, we 
currently define hospital labor market areas based on the definitions 
of statistical areas established by the Office of Management and Budget 
(OMB). A discussion of the FY 2007 hospital wage index based on the 
statistical areas, including OMB's revised definitions of Metropolitan 
Areas, appears under section III.B. of this preamble.
    Beginning October 1, 1993, section 1886(d)(3)(E) of the Act 
requires that we update the wage index annually. Furthermore, this 
section provides that the Secretary base the update on a survey of 
wages and wage-related costs of short-term, acute care hospitals. The 
survey must exclude the wages and wage-related costs incurred in 
furnishing skilled nursing services. This provision also requires us to 
make any updates or adjustments to the wage index in a manner that 
ensures that aggregate payments to hospitals are not affected by the 
change in the wage index. The adjustment for FY 2007 is discussed in 
section II.B. of the Addendum to this final rule.
    As discussed below in section III.G. 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 
the wage index. Under section 1886(d)(8)(D) of the Act, the Secretary 
is required to adjust the standardized amounts so as to ensure that 
aggregate payments under the IPPS after implementation of the 
provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act 
are equal to the aggregate prospective payments that would have been 
made absent these provisions. The budget neutrality adjustment for FY 
2007 is discussed in section II.A.4.b. of the Addendum to this final 
rule.
    Section 1886(d)(3)(E) of the Act also provides for the collection 
of data every 3 years on the occupational mix of employees for short-
term, acute care hospitals participating in the Medicare program, in 
order to construct an occupational mix adjustment to the wage index. A 
discussion of the occupational mix adjustment that we are applying 
beginning October 1, 2006 (the FY 2007 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). OMB defines a CBSA, 
beginning in 2003, as ``a geographic entity associated with at least 
one core of 10,000 or more population, plus adjacent territory that has 
a high degree of social and economic integration with the core as 
measured by commuting ties.'' The standards designate and define two 
categories of CBSAs: Metropolitan Statistical Areas (MSAs) and 
Micropolitan Statistical Areas (65 FR 82235).
    According to OMB, MSAs are based on urbanized areas of 50,000 or 
more population, and Micropolitan Statistical Areas (referred to in 
this discussion as Micropolitan Areas) are based on urban clusters with 
a population of at least 10,000 but less than 50,000. Counties that do 
not fall within CBSAs are deemed ``Outside CBSAs.'' In the past, OMB 
defined MSAs around areas with a minimum core population of 50,000, and 
smaller areas were ``Outside MSAs.''
    The general concept of the CBSAs is that of an area containing a 
recognized population nucleus and adjacent communities that have a high 
degree of integration with that nucleus. The purpose of the standards 
is to provide nationally consistent definitions for collecting, 
tabulating, and publishing Federal statistics for a set of geographic 
areas. CBSAs include adjacent counties that have a minimum of 25 
percent commuting to the central counties of the area. (This is an 
increase over the minimum commuting threshold of 15 percent for 
outlying counties applied in the previous MSA definition.) We consider 
CBSAs that are MSAs to be urban, and CBSAs that are Micropolitan 
Statistical Areas as well as areas outside of CBSAs to be rural. In 
addition, where an MSA has been divided into Metropolitan Division to 
comprise the labor market areas for purposes of calculating the wage 
index (69 FR 49029).
    The revised CBSAs established by OMB comprised MSAs and 
Micropolitan Areas based on Census 2000 data. (A copy of the 
announcement may be obtained at the following Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.) The revised 
definitions recognize 49 MSAs and 565 Micropolitan Areas, and 
extensively changed the composition of many of the MSAs that existed 
prior to the revisions.
    The revised area designations resulted in a higher wage index for 
some areas and a lower wage index for others. Further, some hospitals 
that were previously classified as urban are now in rural areas. Given 
the significant payment impacts upon some hospitals because of these 
changes, we provided a transition period to the new labor market areas 
in the FY 2005 IPPS final rule (69 FR 49027 through 49034). As part of 
that transition, we allowed urban hospitals that became rural under the 
new definitions to maintain their assignment to the MSA where they were 
previously located for the 3-year period of FY 2005, FY 2006, and FY 
2007.

[[Page 48006]]

Specifically, these hospitals were assigned the wage index of the urban 
area to which they previously belonged. (For purposes of the wage index 
computation, the wage data of these hospitals remained assigned to the 
statewide rural area in which they are located.) The hospitals 
receiving this transition will not be considered urban hospitals; 
rather, they will maintain their status as rural hospitals. Thus, the 
hospital would not be eligible, for example, for a large urban add-on 
payment under the capital PPS. In other words, it is the wage index, 
but not the urban or rural status, of these hospitals that is being 
affected by this transition. The higher wage indices that these 
hospitals are receiving are also being taken into consideration in 
determining whether they qualify for the out-migration adjustment 
discussed in section III.I. of this preamble and the amount of any 
adjustment.
    FY 2007 will be the third year of this transition period. We will 
continue to assign the wage index for the urban area in which the 
hospital was previously located through FY 2007. In order to ensure 
this provision remains budget neutral, we will continue to adjust the 
standardized amount by a transition budget neutrality factor to account 
for these hospitals. Doing so is consistent with the requirement of 
section 1886(d)(3)(E) of the Act that any ``adjustments or updates [to 
the adjustment for different area wage levels] * * * shall be made in a 
manner that assures that aggregate payments * * * are not greater or 
less than those that would have been made in the year without such 
adjustment.''
    Beginning in FY 2008, these hospitals will receive their statewide 
rural wage index, although they will be eligible to apply for 
reclassification by the MGCRB both during this transition period and in 
subsequent years. These hospitals will be considered rural for 
reclassification purposes.
    Consistent with the FY 2005 and FY 2006 IPPS final rules, as we did 
beginning in FY 2006, for FY 2007 we are providing that hospitals 
receive 100 percent of their wage index based upon the CBSA 
configurations. Specifically, we will determine for each hospital a 
wage index for FY 2007 employing wage index data from FY 2003 hospital 
cost reports and using the CBSA labor market definitions.

C. Occupational Mix Adjustment to the FY 2007 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.
    Comment: Some commenters expressed concern about the occupational 
mix adjustment relative to the proposed implementation of changes to 
the DRG system. A few stated that the purpose of the occupational mix 
adjustment is to ensure that hospitals are not paid through both the 
wage index and the resource-based DRG system for the additional 
resources needed for certain procedures. The commenters suggested that 
the occupational mix adjustment is not necessary if a robust severity-
adjusted DRG system is implemented. Other commenters indicated that CMS 
should consider deferring the implementation of the proposed hospital-
specific cost weighting methodology and severity DRGs until at least FY 
2008 to alleviate the burden on hospitals that will be negatively 
affected by a redistribution of Medicare payments under the new 
occupational mix adjustment.
    Response: We remind the commenters that an occupational mix 
adjustment to the wage index is required under section 1886(d)(3)(E) of 
the Act. Although we understand the commenters' concerns that some 
hospitals may be negatively affected by the new occupational mix 
adjustment, we also believe that it is important for us to move forward 
with implementing changes in the DRG system that would recognize that 
some more complex cases may require a higher DRG payment because the 
services are provided by more highly skilled workers.
    Comment: A few commenters opposed the occupational mix adjustment. 
One commenter believed that the initial application of the occupational 
mix adjustment had unintended results, benefiting fewer rural hospitals 
and more large urban hospitals than anticipated. The commenter stated 
that this problem has been compounded by the additional pressure from 
the decision in Bellevue Hosp. Center v. Leavitt, 443 F.3d 163 (2nd 
Cir. 2006), and, therefore, recommended that CMS approach Congress 
about repealing the mandate for the occupational mix adjustment. 
Another commenter indicated that the occupational mix survey is 
confusing and burdensome to hospitals.
    Response: As held in Bellevue Hosp. Center v. Leavitt, 443 F.3d 163 
(2nd Cir. 2006), adjusting the wage index for occupational mix is 
required by Congress. Therefore, commenters who believe that the 
occupational mix should be eliminated would need to approach the 
Congress with such concerns. As for the initial application of the 
occupational mix, we believe the unexpected outcomes may have been due 
to a combination of factors, including the newness of the survey and 
changing trends in hospital employment. We have modified the survey for 
2006, and these modifications should reduce the risk of reporting and 
measurement errors. These modifications are based largely on 
suggestions we received from MedPAC and the hospital community. We 
understand the commenter's concern that completing the survey causes a 
burden to hospitals; however, the statute requires us to collect data 
on occupational mix every 3 years. In response to similar concerns 
expressed for the 2003 survey, we streamlined the 2006 survey and 
clarified the instructions in an effort to reduce the burden. We will 
continue to work with hospitals and associations to explore ways to 
improve the survey to ensure the accuracy of the occupational mix 
adjustment while reducing the reporting burden for hospitals.
1. Development of Data for the FY 2007 Occupational Mix Adjustment
    In our initial FY 2007 IPPS proposed rule (71 FR 23996), we 
discussed our proposals for calculating the proposed FY 2007 
occupational mix adjustment. We proposed to use the same CMS Wage Index 
Occupational Mix Survey and Bureau of Labor Statistics (BLS) data that 
we used for the FY 2005 and FY 2006 wage indices, with a few 
exceptions. We also proposed to adjust 10 percent of the FY 2007 wage 
index by a factor reflecting occupational mix. However on April 3, 
2006, in Bellevue Hosp. Center v. Leavitt, 443 F.3d 163 (2nd Cir. 2006) 
the Court of Appeals for the Second Circuit (the Court) ordered CMS to 
apply the occupational mix adjustment to 100 percent of the wage index 
effective for FY 2007. The Court ordered CMS to ``immediately * * * 
collect data that are sufficiently robust to permit full application of 
the

[[Page 48007]]

occupational mix adjustment.'' The Court also ordered that all ``data 
collection and measurement and any other preparations necessary for 
full application be completed by September 30, 2006, at which time the 
agency is to immediately apply the adjustment in full.'' For more 
information, we refer the readers to Bellevue Hosp. Center v. Leavitt, 
443 F.3d 163, 179 (2nd Cir. 2006).
    To comply with the Court's order, on April 21, 2006, we issued a 
Joint-Signature Memorandum (JSM-06412) to all Medicare fiscal 
intermediaries announcing our plans to collect new occupational mix 
data from hospitals. The Joint-Signature Memorandum is available on the 
CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Click on 
``Wage Index Files'' and the link is titled: 2006 Occupational Mix 
Survey--Interim Data Collection--CMS Memo to Fiscal Intermediaries.
    On May 17, 2006, we also published in the Federal Register (71 FR 
28644) a second proposed rule that proposed to revise the methodology 
for calculating the occupational mix adjustment by applying the 
occupational mix adjustment to 100 percent of the wage index using the 
new occupational mix data collected from hospitals. The second proposed 
rule also proposed to modify hospitals' procedures for withdrawing 
requests to reclassify for the FY 2007 wage index and for supplementing 
the FY 2008 reclassification application with official data used to 
develop the FY 2007 wage index. In addition, we proposed to replace in 
full the descriptions of the data and methodology that would be used in 
calculating the occupational mix adjustment discussed in the initial FY 
2007 IPPS proposed rule.
    As stated earlier, section 1886(d)(3)(E) of the Act requires us to 
conduct a new survey at least once every 3 years. On October 14, 2005, 
we published a notice in the Federal Register (70 FR 60092) proposing 
to use a new survey, the 2006 Medicare Wage Index Occupational Mix 
Survey (the 2006 survey) to apply an occupational mix adjustment to the 
FY 2008 wage index. In the proposed 2006 survey, we included several 
modifications based on the comments and recommendations we received on 
the 2003 survey, including (1) allowing hospitals to report their own 
average hourly wage rather than using BLS data; (2) extending the 
prospective survey period; and (3) reducing the number of occupational 
categories but refining the subcategories for registered nurses.
    We made the changes to the occupational categories in response to 
MedPAC comments to the FY 2005 IPPS final rule (69 FR 49036). 
Specifically, MedPAC recommended that CMS assess whether including 
subcategories of registered nurses would result in a more accurate 
occupational mix adjustment. MedPAC believed that including all 
registered nurses in a single category may obscure significant wage 
differences among the subcategories of registered nurses, for example, 
the wages of surgical registered nurses and floor registered nurses may 
differ. Also, to offset additional reporting burden for hospitals, 
MedPAC recommended that CMS should combine the general service 
categories that account for only a small percentage of a hospital's 
total hours with the ``all other occupations'' category because most of 
the occupational mix adjustment is correlated with the nursing general 
service category.
    In addition, in response to the public comments on the October 14, 
2005 notice, we modified the 2006 survey. On February 10, 2006, we 
published a Federal Register notice (71 FR 7047) that solicited 
comments and announced our intent to seek OMB approval on the revised 
occupational mix survey (Form CMS-10079 (2006)).
    The revised 2006 survey provides for the collection of hospital-
specific wages and hours data, a 6-month prospective reporting period 
(that is, January 1, 2006, through June 30, 2006), the transfer of each 
general service category that comprised less than 4 percent of total 
hospital employees in the 2003 survey to the ``all other occupations'' 
category (the revised survey focuses only on the mix of nursing 
occupations), additional clarification of the definitions for the 
occupational categories, an expansion of the registered nurse category 
to include functional subcategories, and the exclusion of average 
hourly rate data associated with advance practice nurses.
    The 2006 survey includes only two general occupational categories: 
Nursing and ``all other occupations.'' The nursing category has four 
subcategories: registered nurses, licensed practical nurses, aides, 
orderlies, attendants, and medical assistants. The registered nurse 
subcategory includes two functional subcategories: management personnel 
and staff nurses or clinicians. As indicated above, the 2006 survey 
provides for a 6-month data collection period, from January 1, 2006 
through June 30, 2006. However, we allowed flexibility for the 
reporting period begin and end dates to accommodate some hospitals' bi-
weekly payroll and reporting systems. That is, the 6-month reporting 
period must begin on or after December 25, 2005, and must end before 
July 9, 2006.
    To comply with the order of the court in Bellevue Hosp. Center v. 
Leavitt, as discussed above, we proposed to collect new survey data, 
instead of using the 2003 survey data proposed in the FY 2007 IPPS 
proposed rule, to calculate the occupational mix adjustment for the FY 
2007 wage index. Because hospitals were already collecting data for the 
revised 2006 survey, we proposed to use the first 3 months of that data 
(that is, from January 1, 2006, through March 31, 2006) to calculate 
the FY 2007 occupational mix adjustment. In order to allow sufficient 
time for hospitals, fiscal intermediaries, and CMS to collect, review, 
and correct the new data, and for CMS to perform required analyses and 
apply the new data in calculating the FY 2007 occupational mix 
adjustment, we determined that it would be impossible for us to apply 
the full 6 months of data by October 1, 2006.
    Comment: Several commenters stated that hospitals were sometimes 
unsure of the placement of certain employees on the survey. For 
example, hospitals were uncertain as to the category that would include 
surgical technicians and paramedics who are employed by the hospital 
and who usually work in the emergency department. The commenters urged 
CMS to evaluate where these employees should be placed on the survey 
for future collections.
    The commenters also stated that they agreed with CMS' efforts to 
ensure consistent reporting by specifying the cost centers for 
collecting nursing personnel data. They agreed that the cost centers 
included on the survey are where the majority of nurses are employed 
within hospitals. The commenters added that the use of the cost centers 
significantly reduces the burden for hospitals by allowing them to 
focus on only the listed cost centers. However, the commenters urged 
CMS to consider refining the list of cost centers for future 
collections. The commenters advised that every hospital has a different 
method for attributing costs to cost centers; therefore, some hospitals 
may have a few cost centers that contain a significant number of 
nursing personnel that were not included in the current survey.
    The commenters recommended that CMS work with the hospital 
community to explore potential changes to the survey occupational 
categories and cost centers. Even if they are warranted, the commenters 
suggested that CMS should not make any changes to the ongoing survey 
collection, as it would

[[Page 48008]]

necessitate the resubmission of the 1st quarter 2006 data to ensure 
that both 1st and 2nd quarters could be used for the FY 2008 and the FY 
2009 occupational mix adjustment.
    Response: We appreciate the assistance we have already received 
from the hospital community in developing the 2006 occupational mix 
survey. On May 25, 2006, in response to questions from hospitals and 
associations, we distributed supplemental instructions to the 
intermediaries, hospitals (via the intermediaries), and national 
hospital associations (and posted the instructions on our Web site) to 
clarify the placement of nursing and nonnursing personnel on the 
occupational mix survey. We will continue to work with MedPAC and the 
hospital community to determine if changes to the occupational 
categories and cost centers included on the survey are reasonable and 
necessary for future collections. We agree with not changing the 
instructions for the 2006 survey. As the commenters indicated, to 
change the survey with the 1st quarter data collection already 
completed would require substantial rework on the part of hospitals, 
fiscal intermediaries, and CMS.
    Comment: A few commenters expressed concern that hospitals in 
States with mandatory nurse-staffing ratios for inpatient facilities 
and hospitals that use higher levels of registered nurses to improve 
the quality of care will be adversely affected by the occupational mix 
adjustment. One commenter stated that the current survey is designed to 
benefit parts of the country that make greater use of lesser skilled 
nurses and allied health professionals, and to reduce payment in areas 
that make greater use of registered nurses in nursing positions. The 
commenter speculated that the occupational mix adjustment will likely 
reduce the payments for its hospitals, thus reducing the quality of 
care they can provide to Medicare beneficiaries.
    Another commenter indicated that the wage index and occupational 
mix adjustments penalize hospitals that invest in quality and 
efficiency at the same time that Congress is trying to improve quality 
and efficiency under the Medicare program. The commenter stated that 
the effect of these adjustments on hospitals that use higher levels of 
registered nurses reduces or eliminates the annual Medicare inflation 
increase provided to address the increasing costs these hospitals 
incur. The commenter further indicated that this reduction would not be 
a savings to the program, but rather it would be a redistribution of 
Medicare payments to hospitals that have not been as efficient or as 
focused on improving the quality of care.
    Response: As stated earlier, the statute requires implementation of 
an occupational mix adjustment to the wage index. In addition, the 
purpose of the occupational mix adjustment is to control the effect of 
a hospital's employment mix on its average hourly wage for the wage 
index. The adjustment standardizes the employment mix for hospitals so 
that the wage index more accurately compares wage rates among labor 
market areas for a constant mix of labor. As the commenters noted, the 
occupational mix adjustment would lower the wage index for an area 
employing a mix of more highly paid and skilled labor than the national 
average. Although we understand the commenters' concerns regarding the 
effect of the occupational mix on their areas' Medicare payments, we 
disagree that the wage index and occupational mix adjustments penalize 
hospitals that invest in quality and efficiency. We note that CMS is 
moving toward adoption of a severity-based DRG system that will better 
recognize severity of illness and provide improved payments to those 
hospitals that need more highly skilled labor to care for more severely 
ill patients. Even under the current system, the labor costs incurred 
by hospitals that provide more highly skilled services are currently 
reflected in the hospital's DRG payments and illustrated through a 
higher case mix index. Reflecting the costs associated with more highly 
skilled labor in both the case mix and the wage index is essentially 
counting them twice.
    To comply with the order of the court in Bellevue Hosp. Center v. 
Leavitt, as a final policy, we are adopting our proposal to use the new 
1st quarter 2006 survey data to calculate the occupational mix 
adjustment for the FY 2007 wage index.
2. Timeline for the Collection, Review, and Correction of the 
Occupational Mix Data
    The Joint-Signature Memorandum (JSM-06412) that we issued on April 
21, 2006, instructed all fiscal intermediaries to immediately alert the 
hospitals they service to the changes in the schedule for submitting 
the occupational mix data files.
    The Joint-Signature Memorandum provided hospitals and fiscal 
intermediaries with the revised schedule for the occupational mix 
survey data that would be used in the FY 2007 wage index. The schedule 
included deadlines for--
    <bullet> Hospitals to submit occupational mix data. The deadline 
was June 1, 2006.
    <bullet> Fiscal intermediary review of the submitted data. The 
deadline was June 22, 2006.
    <bullet> Availability of the submitted data on the CMS Web site. 
The deadline was June 29, 2006.
    <bullet> Hospitals to submit requests to their fiscal 
intermediaries for corrections to their interim occupational mix data. 
The deadline was July 13, 2006.
    <bullet> Fiscal intermediaries to submit corrected interim 
occupational mix survey data for the January 1, 2006, through March 31, 
2006 period. The deadline was July 27, 2006.
    We noted that it was critical that hospitals provide information 
according to the dates provided in the schedule in order to be able to 
appeal any disputed calculations at a later point to the Provider 
Review Reimbursement Board (PRRB). The final deadline for the fiscal 
intermediaries to make occupational mix data available to CMS was July 
27, 2006. These data would reflect fiscal intermediary review and the 
resolution of any errors or adjustments between the hospitals and 
fiscal intermediary. Once these data are available on the CMS Web site, 
changes to a hospital's occupational mix data would be allowed only in 
those very limited situations involving an error by the fiscal 
intermediary or CMS that the hospital could not have known about before 
its review of the final occupational mix data file. Specifically, 
neither the fiscal intermediary nor CMS would approve the following 
types of requests:
    <bullet> Requests for occupational mix data corrections that were 
submitted too late to be included in the data transmitted to CMS by 
fiscal intermediaries on or before July 27, 2006.
    <bullet> Requests for correction of errors that were not, but could 
have been, identified during the hospital's review of the June 29, 2006 
occupational mix file.
    Verified corrections to the occupational mix received by the fiscal 
intermediaries and CMS (that is, by July 13, 2006) would be 
incorporated into the final wage index for FY 2007, to be effective 
October 1, 2006.
    We created the process described above to resolve all substantive 
occupational mix correction disputes before we finalize the wage and 
occupational mix data for the FY 2007 payment rates. Accordingly, 
hospitals that did not meet the procedural deadlines set forth above 
will not be

[[Page 48009]]

afforded a later opportunity to submit occupational mix data 
corrections or to dispute the fiscal intermediary'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 PRRB, 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 also refer 
the reader to the FY 2000 IPPS final rule (64 FR 41513) for a 
discussion of the parameters for appealing to the PRRB for wage index 
data corrections.
    We believe the occupational mix data correction process described 
above provided hospitals with the opportunity to bring errors in their 
occupational mix data to the fiscal intermediary's attention.
    Because hospitals had access to the final occupational mix data by 
June 29, 2006, we believe they had the opportunity to detect any data 
entry or tabulation errors made by the fiscal intermediary or CMS 
before the development and publication of the final FY 2007 wage index 
and the implementation of the FY 2007 wage index on October 1, 2006. We 
believe that if hospitals availed themselves of the opportunities 
afforded to provide and make corrections to the occupational mix data, 
the wage index implemented on October 1, 2006, will be accurate. In the 
event that errors are identified by hospitals and brought to our 
attention after July 13, 2006, we will only make mid-year changes to 
the wage index in accordance with Sec.  412.64(k). For a detailed 
discussion, see section III.J. of this preamble.
    Comment: One commenter stated that the 6-month reporting period for 
the 2006 survey, originally planned for the FY 2008 wage index, is an 
improvement over the 2003 survey process. However, the commenter urged 
CMS to initiate a survey with a full-year reporting period for the FY 
2009 wage index.
    Response: We appreciate the commenter's recognition of our efforts 
to improve the occupational mix survey process. We also appreciate the 
commenter's suggestion for expanding the survey reporting period to a 
full year for the FY 2009 wage index. While we appreciate the 
willingness expressed in the comment to collect a complete year of data 
in order to achieve more accurate survey results, we note that 
hospitals are currently obligated to collect data for the period April 
1, 2006, to June 30, 2006, by August 31 in order for us to use 6 months 
of data to apply the occupational mix adjustment for FY 2008. If we 
were to use a full year of 2006 survey data to apply an occupational 
mix adjustment for FY 2009, hospitals would have to submit data for the 
last 6 months of calendar year 2006. Hospitals have already been 
required to submit occupational mix survey data for two different 3-
month periods in 2006. At this time, we believe it would be burdensome 
to require a third occupational mix data collection from hospitals for 
2006 in order to apply the adjustment based on a full year of data for 
FY 2009. We also note that collecting a full year of calendar year 2007 
data, from January 1, 2007, through December 31, 2007, would not 
provide enough time for a thorough review and correction period before 
the FY 2009 proposed rule would be published in April 2008. Our normal 
wage index review and correction process before the proposed rule 
publication begins in early October and ends in late February. This 
would mean that hospitals and intermediaries would have only 
approximately 2 months, from January to late February, to review and 
correct a year's worth of occupational mix data. We believe that such 
an abbreviated review and correction period would not be in the 
hospitals' best interest. However, we will consider expanding the 
survey reporting period to a full year for a future collection.
    Comment: Some commenters expressed concern that the 3-month survey 
period for FY 2007 will lead to inaccurate results for several reasons: 
Having no advance notice of the expedited data collection; some 
hospitals had not yet begun, or had just begun, to plan for the 2006 
survey data collection and had little or no resources available to 
complete the survey for all or part of the 3-month time period; the new 
survey, though improved over the previous survey, is more complicated 
and requires more effort to complete; due to the short timeframe for 
developing and submitting the data (4 months), some normal review 
processes had to be eliminated by hospitals; not enough time was 
allowed for the types of corrections that can be made during the annual 
wage index survey process; due to the infrequent collection of the 
occupational mix data, many hospitals may underestimate its importance; 
there was not enough time for hospital groups to review the data for 
individual hospitals in the area, a process that often raises questions 
that leads to more accurate data.
    Response: We understand the commenters' concerns about the 
potential for inaccurate occupational mix survey data to be used due to 
the abbreviated data collection and reporting periods. However, CMS has 
established a process that we believe will maximize the opportunity for 
accurate occupational mix data to be used to adjust area wage indices. 
Hospitals were required to submit occupational mix survey data to their 
fiscal intermediaries by June 1, 2006. CMS provided fiscal 
intermediaries with a desk review program to assist in identifying 
erroneous or aberrant data. Fiscal intermediaries then had 3 weeks (or 
until June 22) to review the data and submit it to CMS. CMS made the 
occupational mix survey data available on the CMS Web site on June 29 
to facilitate review by hospitals, fiscal intermediaries, and others. 
The June 29 posting of occupational survey data resulted in hospitals, 
State hospital associations, wage index consultants, and others 
identifying errors and other aberrant data. These parties then 
initiated action to correct the occupational mix survey data by the 
July 13 deadline. While there is no additional time available to 
correct the survey data for the FY 2007 wage index, we will, however, 
allow hospitals to submit any additional revisions and corrections to 
both 3-month periods of data for the FY 2008 wage index. We strongly 
encourage hospitals to take full advantage of the FY 2008 wage index 
correction process. Hospitals will be notified early in the Fall of 
2006 regarding the revision/correction process for the FY 2008 wage 
index for both the cost report wage data and the 2006 occupational mix 
survey data.
3. Calculation of the Occupational Mix Adjustment
    In the May 17, 2006 proposed rule, we proposed a series of steps to 
be used in calculating the FY 2007 occupational mix adjustment factor. 
In this final rule, we are adopting the proposed steps with one minor 
exception. In response to comments (discussed below), we have made an 
adjustment to step 7 so that the percentage of worker salaries 
attributable to the nursing category is based on salaries and not on 
hours. For 2007, we will 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 
(registered nurse management personnel and registered nurse staff 
nurses or clinicians are treated as separate nursing

[[Page 48010]]

subcategories). Repeat this computation for each of the five nursing 
subcategories: Registered nurse management personnel, registered nurse 
staff nurses or clinicians, licensed practical nurses; nursing aides, 
orderlies, and attendants; and medical assistants.
    Step 2--Determine a national average hourly rate for each nursing 
subcategory by dividing a subcategory's total salaries for all 
hospitals in the occupational mix survey database by the subcategory's 
total hours for all hospitals in the occupational mix survey database.
    Step 3--For each hospital, determine an adjusted average hourly 
rate for each nursing subcategory by multiplying the percentage of the 
total nursing category (from Step 1) by the national average hourly 
rate for that nursing subcategory (from Step 2). Repeat this 
calculation for each of the five 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 would be greater than 1.0000. If the hospital's adjusted average 
hourly rate is greater than the national average hourly rate, the 
occupational mix adjustment factor would be 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).
    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.
    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.
    Comment: MedPAC and a few other commenters noted that Step 7 of 
CMS' proposed calculation for the occupational mix adjustment uses the 
occupational mix survey's paid hours to determine the portion of the 
salaries and wage-related costs to adjust for occupational mix (that 
is, the total nursing portion) and the portion to remain unadjusted 
(that is, the all other occupations portion). One of the commenters 
stated that this approach was reasonable using the 2003 survey data 
because hospital-specific paid salaries data were not collected. 
However, the commenter also noted that the actual share of wages for 
either the nursing category or the all other occupations category could 
differ using an allocation that is based on paid hours compared to paid 
salaries. The commenters suggested that, since the 2006 survey provides 
for the collection of paid salaries data, CMS should use paid salaries 
instead of paid hours to more accurately determine the wage costs that 
should be adjusted for occupational mix and those that should not.
    Response: As discussed above, we evaluated the commenters' 
recommendation and agree that it is reasonable to use the occupational 
mix survey salaries instead of hours in computing the portion of a 
hospital's salaries and wage-related costs to adjust for occupational 
mix and the portion to remain unadjusted. Accordingly, we revised Step 
7 of the final calculation for the occupational mix adjustment to 
reflect this change.
    We received no other comments on the steps used in calculating the 
occupational mix adjustment. As a final policy, we are adopting the 
proposed calculation, with the change to Step 7, for the occupational 
mix adjustment to the FY 2007 wage index. Also, to comply with the 
order of the court in Bellevue Hosp. Center v. Leavitt, we will apply 
this adjustment to 100 percent of the wage index.
    The table below is an illustrative example of the final 
occupational mix adjustment. (Note: We have revised this example from 
that included in the proposed rule to reflect the change in step 7 
discussed above. We have added an additional column for provider 
occupational mix salaries and the Provider Percent by Total is 
determined by dividing the hospital's total nurse salaries (and 
separately, Total All Other Salaries) by Total Employee Salaries.
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    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 FY 2007 wage 
index.
    For the FY 2005 and FY 2006 final wage indices, we used the 
unadjusted wage data for hospitals that did not submit occupational mix 
survey data. For calculation purposes, this equates to applying the 
national nursing mix to the wage data for these hospitals, because 
hospitals having the same mix as the Nation would have an occupational 
mix adjustment factor equaling 1.0000. However, an adjustment may not 
be equitable in situations where the hospital has a higher or lower 
than average occupational mix than the Nation as a whole. If the 
hospital's occupational mix is higher than the average for the nation 
as a whole, hospitals in other areas are disadvantaged by the hospital 
not providing occupational mix information. If the hospital's 
occupational mix is lower than the average for the Nation as a whole, 
other hospitals in the same geographic area would be disadvantaged by 
the hospital not providing the information.
    In the FY 2005 and FY 2006 IPPS final rules (69 FR 49035 and 70 FR 
47368), we noted that we would revisit this matter with subsequent 
collections of the occupational mix data. In the May 17, 2006 proposed 
rule, for the FY 2007 wage index, we proposed to use one of four 
options for treating the occupational mix data for nonresponsive 
hospitals: (1) Assign the hospital an occupational mix adjustment 
factor of 1.0000 as we did for FY 2005 and FY 2006; (2) assign the 
hospital the average occupational mix adjustment factor for its labor 
market area; (3) assign the hospital the lowest occupational mix 
adjustment factor for its labor market area; or (4) assign the hospital 
the average occupational mix factor for similar hospitals, based on 
factors such as, geographic location, bed size, teaching versus non-
teaching status and case mix. We requested comments on these or other 
alternatives for equitably addressing the situation of hospitals that 
are not responsive to the occupational mix survey.
    Comment: A majority of the commenters believed that, in order for 
the wage index to be computed accurately, it is critical for all IPPS 
hospitals to complete the occupational mix survey. Many of the 
commenters suggested that CMS should penalize hospitals that did not 
submit a survey. However, the commenters indicated that no hospitals 
should be penalized for not completing the survey for the 1st quarter 
of FY 2006 (to be used in calculating the FY 2007 wage index) because 
of the short notification and timeframe for the collection of that 
data. Some suggested future penalties such as a 1 to 2 percent 
reduction in the hospital's wage index value or a set percentage of the 
standardized amount, whichever is administratively feasible. However, 
the commenters also suggested that any penalty should be hospital-
specific and should not affect the wage index amounts for other 
hospitals in the area. Commenters suggested that CMS should first 
calculate the area wage index using proxy data for a nonresponsive 
hospital's occupational mix adjustment, and then CMS should assess a 
penalty on its wage index value or national standardized amount.
    The commenters supported all of the ideas we raised in the proposed 
rule except option 3. Commenters unanimously opposed assigning the 
hospital the lowest occupational mix adjustment factor for its labor 
market area, because they believed this option would have the most 
negative impact on other hospitals in the labor market area. MedPAC 
recommended option 4, to assign the hospital the average occupational 
mix factor for similar hospitals, based on factors such as, geographic 
location, bed size, teaching versus nonteaching status and case-mix. 
MedPAC suggested other factors that CMS should consider, such as share 
of ICU days and types of services offered. Some commenters recommended 
an option that we did not describe. These commenters recommended that 
CMS substitute data from the previous 2003 survey for hospitals that 
did not submit 2006 survey data for the FY 2007 wage index. 
Alternatively, several commenters recommended that CMS could substitute 
the national average hourly wage (that is, option 1, an occupational 
mix adjustment of 1.0000) for nonresponsive hospitals in calculating an 
area's wage index, while others favored option 2 because it would have 
the least affect on the labor market area. One commenter recommended 
assigning the lower of the hospital's occupational mix adjustment in FY 
2006 or the average for the hospital's labor market in FY 2007. The 
commenter believed that the best proxy for a hospital's missing FY 2007 
data is its FY 2006 occupational mix adjustment, even though there was 
a change in the formula to calculate the FY 2007 adjustment. The 
commenter stated that CMS should provide an exception for an exogenous 
event affecting all hospitals in the labor market area. In this 
scenario, the commenter recommended using the average FY 2007 
adjustment.
    Response: We agree with the commenters that hospitals that did not 
respond to the occupational mix survey should not benefit from the 
participation of others. We also agree that, due to the unusual 
circumstances of the Court's order and the short timeframe that 
hospitals were provided for completing and submitting their data, it 
would not be fair to apply a penalty to nonresponsive hospitals for the 
2007 wage index. However, we believe that section 1886(d)(5)(I)(i) of 
the Act provides us with the authority to penalize hospitals that do 
not submit occupational mix survey data. That section authorizes us to 
provide for exceptions and adjustments to the payment amounts under 
IPPS as the Secretary deems appropriate. We will give serious 
consideration to applying a hospital-specific penalty such as those 
suggested by the commenters if a hospital does not comply with 
regulations requiring submission of occupational mix survey data in 
future years. We will address this issue in the FY 2008 IPPS proposed 
rule.
    Regarding the treatment of data for nonresponsive hospitals, we 
have chosen not to adopt option 3, because it would be punitive to 
other hospitals in the area that submitted occupational mix data. We 
also have not chosen option 1 because it does not provide an incentive 
for hospitals to respond if they have a higher mix of employees than 
the national average. We will not use data from the 2003 survey, as 
some commenters suggested, because the 2007 wage index, we believe, 
should be exclusively based on the newly collected data. In addition, 
there was concern about the sufficient robustness of such data to 
support 100 percent adjustments. We also do not believe it would be 
entirely feasible, for 2007, to implement MedPAC's recommendation, 
option 4, due to the wide range of parameters that could be used for 
developing proxies for the missing hospitals and the fact that the 
exact set of such parameters was not subject to comment. So many 
variables might be of relevance that our selection of any particular 
variables might be subject to controversy, and hospitals may wish to 
have an opportunity to comment on the exact variables that would be 
used. MedPAC's recommendation to add more variables to further refine 
the analysis

[[Page 48014]]

could be so limiting as to result in few or no hospitals to use for 
comparison.
    For the FY 2007 wage index, we have adopted option 2--using the 
average occupational mix adjustment for the labor market area. We 
believe this option would have the least impact on the wage index for 
other hospitals in the area and does not have the disadvantages of the 
options discussed above. Although we believe this option is the best of 
the ones we considered for nonresponsive hospitals for FY 2007, we 
reserve the right to apply a different approach in future years, 
including potentially penalizing nonresponsive hospitals. If there is 
only one hospital in the labor market area, and that hospital failed to 
submit occupational mix data, or, if there are no hospitals in the 
labor market area, we would apply the national occupational mix factor 
of 1.0000 in calculating the area's FY 2007 occupational mix adjusted 
wage index.
    Comment: Some commenters recommended that CMS allow hospitals that 
failed to submit their 1st quarter data by June 1, 2006, to submit that 
data when the 2nd quarter data is due (that is, by August 31, 2006). 
The commenters also suggested that CMS allow hospitals that submitted 
their 1st quarter data by June 1, an opportunity to correct that data 
when the 2nd quarter data are due. The commenters indicated that 
allowing hospitals to submit the data at this time would improve the 
survey response rate and eliminate the need for penalties for hospitals 
that would otherwise be nonresponsive and improve the accuracy of the 
data for the FY 2008 and the FY 2009 occupational mix adjustment.
    Response: We agree with the commenters. Hospitals that did not 
submit occupational mix data for the 1st quarter of 2006 will be 
permitted to submit 1st and 2nd quarter data by August 31. We included 
the 1st quarter data for some hospitals that submitted survey data 
after June 1. However, submissions that were received too late to 
include in the FY 2007 occupational mix adjustment will be included in 
the desk review process for the occupational mix adjustment for the FY 
2008 wage index. As we previously mentioned, we will also allow 
hospitals an opportunity to revise both their 1st quarter and 2nd 
quarter 2006 occupational mix data for the FY 2008 wage index. Further, 
we stated that we will notify hospitals early in the Fall of 2006 
regarding the revision/correction process for the FY 2008 wage index 
for both the cost report wage data and the 2006 occupational mix survey 
data.

D. Worksheet S-3 Wage Data for the FY 2007 Wage Index

    The FY 2007 wage index values (effective for hospital discharges 
occurring on or after October 1, 2006, and before October 1, 2007) that 
will be published separately from this final rule will be based on the 
data collected from the Medicare cost reports submitted by hospitals 
for cost reporting periods beginning in FY 2003 (the FY 2006 wage index 
was based on FY 2002 wage data).
    The FY 2007 wage index will include the following categories of 
data associated with costs paid under the IPPS (as well as outpatient 
costs):
    <bullet> Salaries and hours from short-term, acute care hospitals 
(including paid lunch hours and hours associated with military leave 
and jury duty).
    <bullet> Home office costs and hours.
    <bullet> Certain contract labor costs and hours (which includes 
direct patient care, certain top management, pharmacy, laboratory, and 
nonteaching physician Part A services).
    <bullet> Wage-related costs, including pensions and other deferred 
compensation costs.
    Consistent with the wage index methodology for FY 2006, the final 
wage index for FY 2007 also will exclude 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 final FY 2007 wage index also will exclude the salaries, 
hours, and wage-related costs of hospital-based rural health clinics 
(RHCs), and Federally qualified health centers (FQHCs) because Medicare 
pays for these costs outside of the IPPS (68 FR 45395). In addition, 
salaries, hours, and wage-related costs of CAHs will be excluded from 
the wage index, for the reasons explained in the FY 2004 IPPS final 
rule (68 FR 45397).
    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, 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. Such 
comments should be made in response to separate proposed rules for 
those providers.
    Comment: Several commenters addressed CMS' policy of excluding data 
from CAHs when computing the wage index. They stated that, as of FY 
2007, 1,191 CAHs (representing approximately 24 percent of all IPPS 
hospitals in FY 2000, and approximately 55 percent of all rural 
hospitals in FY 2000) have been removed from the wage index. The 
commenters indicated that CAHs have lower average hourly wages than the 
typical IPPS hospital and eliminating their data from the wage index 
overstates the national average hourly wage by an estimated 0.707 
percent. They added that increases in the national average hourly wage, 
in turn, are offset with the application of a negative budget 
neutrality adjustment, which understates IPPS operating payments 
according to the commenters. The commenters believed that the 
artificial increase in the national average hourly wage has lowered the 
budget neutrality adjustment by an estimated $1.52 billion over 5 years 
(2003-2007). The commenters stated that CMS should apply a one-time 
positive budget neutrality adjustment in FY 2007 to compensate for the 
prior underpayments. They did not believe similar future adjustments 
would be necessary because very few hospitals are expected ``to convert 
to CAH status now that the necessary provider designation is no longer 
an option.''
    Other commenters asked that CMS use estimated CAH wage data to 
compute the FY 2007 wage index, and that an occupational mix factor of 
1.0000 be assigned to these hospitals. The commenters noted that MedPAC 
has recommended that CAH data be included in the wage index, at least 
in computing the national average hourly wage. The commenters asserted 
that because CAHs in rural areas still compete with rural IPPS 
hospitals for scarce resources, their data should be included in the 
wage index.
    Commenters also requested that CMS obtain wage data from CAHs and 
subject that data to the same rigorous review by the fiscal 
intermediaries as is done for IPPS hospitals. Another commenter 
suggested that an alternative to including the CAHs in wage index would 
be to not factor in any increases in the national average hourly wage 
that are attributable to the removal of CAHs' wage data.
    Response: In the August 1, 2003 final rule (68 FR 45397-8), we 
explained the reasons for our decision to remove CAH data from the wage 
index immediately upon conversion to CAH status, even if the hospital 
was paid under the IPPS during the cost reporting period used in 
calculating the current fiscal year's wage index. The primary reason 
for excluding CAHs from the wage index was that

[[Page 48015]]

they are a separate provider type and are unique compared to other 
short term, acute care hospitals with respect to factors such as their 
location and bed size. We discussed the payment impact, mentioning the 
substantial negative impact CAHs typically have on the wage indexes in 
the areas where they are located, and the minimal impact they have on 
other areas. We also stated that we would not be holding other 
hospitals' payments harmless for this change, consistent with our 
general wage index policy.
    As the commenters indicated, in the FY 2006 IPPS final rule, we 
addressed a comment from MedPAC recommending that data from CAHs be 
included in the wage index (70 FR 47370). MedPAC had recommended that 
CMS begin collecting wage data from CAHs in 2005. Although we agree 
with MedPAC that CAHs have recently become more similar to other rural 
hospitals, in structure, location, and services provided, largely due 
to changes in the CAH statute resulting from section 405 of Pub. L. 
108-173 (MMA), the wage index must be based on data from ``subsection 
(d),'' short-term, acute care hospitals, consistent with section 
1886(d)(3)(E) of the Act. Therefore, we cannot use any wage data 
collected from CAHs in the IPPS wage index. Because Pub. L. 108-173 was 
enacted at the end of calendar year 2003, it would not affect the wage 
index at least until FY 2008, which would be computed from cost 
reporting periods beginning in FY 2004. Accordingly, we continue to 
believe that it has been prudent policy to remove the wage data for 
hospitals that later became CAHs from the wage index.
    We do not believe that the elimination of these data has resulted 
in an overstated national average hourly wage, nor has the budget 
neutrality adjustment been inappropriately reduced. The national 
average hourly wage appropriately reflects only those wages paid by 
IPPS hospitals. To determine the budget neutrality adjustment for FY 
2007, we equate IPPS payments using the FY 2006 and FY 2007 wage 
indices using FY 2005 MedPAR data that excludes any hospitals that 
became CAHs as of February 17, 2006. The calculation excludes CAHs from 
the determination of IPPS payments using both the FY 2006 and FY 2007 
wage indices so the budget neutrality adjustment reflects only 
information from IPPS hospitals and is not overstated. Consequently, we 
will not apply a one-time positive budget neutrality adjustment in FY 
2007.

E. Verification of Worksheet S-3 Wage Data

    The wage data for the final FY 2007 wage index will be obtained 
from Worksheet S-3, Parts II and III of the FY 2003 Medicare cost 
reports. Instructions for completing the Worksheet S-3, Parts II and 
III are in the Provider Reimbursement Manual, Part I, sections 3605.2 
and 3605.3. The data file used to construct the wage index will include 
FY 2003 data submitted to us as of June 28, 2006. As in past years, we 
will perform an intensive review of the wage data, mostly through the 
use of edits designed to identify aberrant data.
    We asked our fiscal intermediaries to revise or verify data 
elements that resulted in specific edit failures. While some of the 
edits failures were resolved, we did remove the wage data of some 
hospitals from the final FY 2007 wage index. For the final FY 2007 wage 
index in this final rule, we removed the data for 229 hospitals from 
our database: 189 hospitals designated as CAHs by 7 or more days prior 
to the posting of the preliminary February public use file, and 30 
hospitals were low Medicare utilization hospitals or failed edits that 
could not be corrected because the hospitals terminated the program or 
changed ownership. In addition, we removed the wage data for 10 
hospitals with incomplete or inaccurate data resulting in zero or 
negative, or otherwise aberrant, average hourly wages. As a result, the 
final FY 2007 wage index is calculated based on FY 2003 wage data from 
3,570 hospitals.
    In constructing the final FY 2007 wage index, we will include the 
wage data for facilities that were IPPS hospitals in FY 2003, even for 
those facilities that have since terminated their participation in the 
program as hospitals, as long as those data do 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. However, we exclude the wage data for CAHs as discussed in 68 
FR 45397.
    Section 4410 of Pub. L. 105-33 provides that, for the purposes of 
section 1886(d)(3)(E) of the Act, for discharges occurring 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 the State. This 
provision is commonly referred to as the ``rural floor.'' In the August 
11, 2004 IPPS final rule (69 FR 49109), we discussed situations where a 
State has only urban areas and no geographically rural areas, or a 
State has geographically rural areas but no IPPS hospitals are located 
in those rural areas. As a result, these States did not have rural IPPS 
hospitals from which to compute and apply a ``rural floor.'' In that 
final rule, we developed a policy for imputing a ``rural floor'' for 
these States, effective for the FYs 2005, 2006, and 2007 wage indices, 
so that a ``rural floor'' could be applicable to IPPS urban hospitals 
in those States in the same manner that a ``rural floor'' is applicable 
to IPPS urban hospitals in States that have IPPS rural hospitals. We 
revised the regulations at Sec.  412.64(h) to describe the methodology 
for computing the imputed ``rural floors'' for these States and to 
define an all-urban State. Specifically, Sec.  412.64(h)(5) defines an 
all-urban State as ``a State with no rural areas * * * or a State in 
which there are no hospitals classified as rural. A State with rural 
areas and with hospitals reclassified as rural under Sec.  412.103 is 
not an all-urban State.''
    We have received questions as to what area wage index CMS would 
apply in the instance where a new rural IPPS hospital opens in a State 
that has an imputed ``rural floor'' because it has rural areas but had 
no hospitals classified as rural. In addition, we have been asked 
whether a new IPPS hospital could submit its wages and hours data to be 
used in computing the wage index, even though the hospital did not file 
a cost report as an IPPS provider for the cost report base year that is 
used in calculating that wage index.
    A new hospital can be an entirely new facility that did not exist 
before, or it can be a hospital that participated in Medicare under a 
previous provider number, but has acquired a new Medicare provider 
number (such as when a CAH converts to IPPS status, or vice versa). As 
a new IPPS hospital (in this case, rural), the hospital would not yet 
have filed any wages and hours data on a Medicare cost report. Even in 
the situation where a new IPPS hospital previously participated in 
Medicare as a non-IPPS provider, wages and hours data collected as a 
non-IPPS provider would not be suitable for calculating an IPPS wage 
index because section 1886(d)(3)(E) of the Act specifies that the wage 
index must be based on data from ``subsection (d)'' hospitals. Thus, 
CMS could not include wages and hours from a period during which a 
hospital was not an IPPS provider. Furthermore, even once the hospital 
files its first Medicare cost report under the new IPPS provider 
number, that first cost report is not used in computing the wage index 
for the hospital's geographic

[[Page 48016]]

area until 4 years later (for example, we use the 2003 data to compute 
the wage index for FY 2007). Therefore, if a new rural IPPS hospital 
opens in a State that has an imputed ``rural floor'' and has rural 
areas, for FY 2007, the hospital would receive the imputed ``rural 
floor'' as its wage index. The imputed rural floor is set to expire on 
September 30, 2007. However, we expect that we would address the 2008 
implications for a new rural hospital that is the only rural hospital 
in the State in the FY 2008 proposed rule.
    Comment: Two commenters stated that CMS' above policy conflicts 
with the policy of excluding the wage data of IPPS hospitals that 
convert to CAH status. The commenters also asserted that in the years 
before the hospital's own wage data is used, the rural hospital will be 
paid at the imputed rural floor, which they contend is unrelated to the 
hospital's own labor market costs. The commenters also asserted that if 
the new rural hospital's average hourly wage is greater than the 
imputed rural floor, the hospital would suffer underpayments until its 
index could be based upon its own wage data. One commenter suggested 
that, at least for CAHs converting to IPPS status, CMS should use wage 
data filed by the hospital when it was a CAH.
    The commenters urged CMS to include the wage data of a new rural 
IPPS hospital in the wage index ``as soon as a full year's cost report 
with the hospital operating as a PPS hospital is available.''
    Response: We disagree with the commenters. Our consistent policy is 
that new hospitals must first develop their wage data and have it 
reviewed by our fiscal intermediaries prior to the wage data being 
included in the wage index. The submission and review process requires 
a 4-year period, in order to allow time for all hospitals to complete 
and submit their wage data for the fiscal year, for the fiscal 
intermediaries to review the data, for the fiscal intermediaries to 
present the results of their review to hospitals, for hospitals to 
review any potential errors in the wage index files, for us to resolve 
any disputes between the fiscal intermediary and the hospital, and 
finally, for the final wage indices to be calculated and published in 
advance of the fiscal year. For a discussion of the wage data review 
and correction process, refer to section III.J. of this preamble. This 
policy applies to all new hospitals, not just rural hospitals. Although 
a new rural IPPS hospital that previously was a CAH may be willing to 
provide CMS with wage data from the period during which it was a CAH, 
the wage index must be based on data from IPPS hospitals, consistent 
with section 1886(d)(3)(E) of the Act. A CAH is not an IPPS hospital; 
thus, we cannot include the hospital's wages and hours from the period 
during which it was a CAH. Indeed, even if a CAH previously existed as 
an IPPS hospital (that is, it previously was an IPPS hospital, 
converted to CAH status, and then converted back to IPPS status), its 
historical wage data would have been submitted from years prior to the 
cost reports used to calculate the FY 2007 wage index (that is, the FY 
2003 cost reports). If a CAH converts back to IPPS status in FY 2007, 
there would be no wage data for the FY 2007 wage index because such a 
provider did not file Medicare cost reports as an IPPS provider in FY 
2003.
    We recognize, as one commenter pointed out that in the past we have 
noted the importance of including ``all'' available wage data in the 
wage index calculation. However, our past statements to this effect 
were discussing the inclusion of all IPPS hospital wage data, not data 
from non-IPPS hospitals. In the FY 2003 IPPS final rule (67 FR 50023), 
we discussed our policy of including data from IPPS hospitals that have 
since closed. We stated that such data should be included because, 
``any hospital that is in operation during the data collection period 
used to calculated the wage index should be included in the database, 
since the hospital's data reflect conditions occurring in that labor 
market area during the period surveyed.'' Our statement, however, was 
directed at the inclusion of IPPS hospital data--not the inclusion of 
data from hospitals that were not IPPS hospitals during the data 
collection period. As stated earlier, section 1886(d)(3)(E) of the Act 
requires the wage index to be based upon a survey of ``subsection (d) 
hospitals.''
    Lastly, we think it is false logic to state that our policy 
excluding data from hospitals that become CAHs necessarily requires 
inclusion of data from hospitals that switch from CAH status to IPPS 
status. As stated in the FY 2003 IPPS final rule, we exclude hospitals 
that convert to CAH status because our analysis showed that the wage 
data for these hospitals, in general, are significantly different from 
other short-term hospitals (68 FR 45397). CAHs that convert to IPPS 
status, in contrast, could not, under the statute, be included in the 
wage index survey because they are not IPPS hospitals at the time of 
the survey.
    Comment: A few commenters recommended that CMS propose now to 
extend the imputed rural floor to coincide with the rural floor 
established under section 4410 of Pub. L. 105-33, in order to place all 
50 states on a level playing field.
    Response: As stated above, our policy for imputing a ``rural 
floor'' is effective for the FYs 2005, 2006, and 2007 wage indices. We 
will determine the appropriateness of extending that policy beyond FY 
2007 and state our proposal in the FY 2008 proposed rule. Commenters 
will be have sufficient time during the FY 2008 IPPS comment period to 
assess and comment on such a proposal.
    Comment: One commenter suggested that CMS should select one 
national contractor as part of the Medicare Administrative Contractor 
(MAC) bidding process (provided for under section 1847A of the Act as 
added by section 911 of Pub. L. 108-173) to do wage index reviews. The 
commenter believed that the use of the MAC process to solicit a single 
``national'' contractor would ensure that the wage data and 
occupational mix data reviews are handled consistently and accurately, 
so that all hospitals are subject to the same policy interpretations. 
The commenter noted the importance of the wage index in determining 
Medicare payments to hospitals and indicated that any variation among 
contractors in the handling of hospitals' wage index data could be 
detrimental to hospitals in certain geographic regions. The commenter 
also stated that the inclusion of a 100 percent occupational mix 
adjustment intensifies the need for a contractor approach going 
forward.
    Response: We appreciate the suggestion and will consider it as we 
develop our program acquisition strategies.

F. Computation of the FY 2007 Unadjusted Wage Index

    The method used to compute the FY 2007 wage index without an 
occupational mix adjustment follows:
    Step 1--As noted above, we based the FY 2007 wage index on wage 
data reported on the FY 2003 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, 2002, and before October 1, 2003. In addition, 
we include data from some hospitals that had cost reporting periods 
beginning before October 2002 and reported a cost reporting period 
covering all of FY 2003. These data are included because no other data 
from these hospitals would be available for

[[Page 48017]]

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 2003 data. We note 
that, if a hospital had more than one cost reporting period beginning 
during FY 2003 (for example, a hospital had two short cost reporting 
periods beginning on or after October 1, 2002, and before October 1, 
2003), we include wage data from only one of the cost reporting 
periods, the longer, in the wage index calculation. If there was more 
than one cost reporting period and the periods were equal in length, we 
include 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. 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 nonexuded area wage-
related costs (Lines 13, 14, and 18).
    We note that contract labor and home office salaries for which no 
corresponding hours are reported are not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are 
excluded if no corresponding salaries are reported for those employees 
on Line 4.
    Step 3--Hours--With the exception of wage-related costs, for which 
there are no associated hours, we compute total hours using the same 
methods as described for salaries in Step 2.
    Step 4--For each hospital reporting both total overhead salaries 
and total overhead hours greater than zero, we then allocate overhead 
costs to areas of the hospital excluded from the wage index 
calculation. First, we determine the ratio of excluded area hours (sum 
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours 
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 
7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts 
of overhead salaries and hours to be allocated to excluded areas by 
multiplying the above ratio by the total overhead salaries and hours 
reported on 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) to revised hours (Line 1 minus the sum of Lines 2, 
3, 4.01, 5, 5.01, 6, 6.01, 7, 8, and 8.01); (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, 2002, through April 15, 
2004, 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. The factors used to adjust the hospital's data 
were based on the midpoint of the cost reporting period, as indicated 
below.

                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
                                                              Adjustment
                     After                         Before       factor
------------------------------------------------------------------------
10/14/2002....................................   11/15/2002      1.06058
11/14/2002....................................   12/15/2002      1.05679
12/14/2002....................................   01/15/2003      1.05304
01/14/2003....................................   02/15/2003      1.04915
02/14/2003....................................   03/15/2003      1.04513
03/14/2003....................................   04/15/2003      1.04108
04/14/2003....................................   05/15/2003      1.03713
05/14/2003....................................   06/15/2003      1.03325
06/14/2003....................................   07/15/2003      1.02948
07/14/2003....................................   08/15/2003      1.02584
08/14/2003....................................   09/15/2003      1.02231
09/14/2003....................................   10/15/2003      1.01878
10/14/2003....................................   11/15/2003      1.01510
11/14/2003....................................   12/15/2003      1.01127
12/14/2003....................................   01/15/2004      1.00743
01/14/2004....................................   02/15/2004      1.00367
02/14/2004....................................   03/15/2004      1.00000
03/14/2004....................................   04/15/2004      0.99644
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 2003, and ending December 31, 2003, is June 30, 2003. An 
adjustment factor of 1.02948 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 2003 and covered a 
period of less than 360 days or more than 370 days, we annualize the 
data to reflect a 1-year cost report. Dividing the data by the number 
of days in the cost report and then multiplying the results by 365 
accomplishes annualization.
    Step 6--Each hospital is assigned to its appropriate urban or rural 
labor market area before any reclassifications under section 
1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the 
Act. Within each urban or rural labor market area, we add the total 
adjusted salaries plus wage-related costs obtained in Step 5 for all 
hospitals in that area to determine the total adjusted salaries plus 
wage-related costs for the labor market area.
    Step 7--We divide the total adjusted salaries plus wage-related 
costs obtained under both methods in Step 6 by the sum of the 
corresponding total hours (from Step 4) for all hospitals in each labor 
market area to determine an average hourly wage for the area.
    Step 8--We add the total adjusted salaries plus wage-related costs 
obtained in Step 5 for all hospitals in the Nation and then divide the 
sum by the national sum of total hours from Step 4 to arrive at a 
national average hourly wage. Using the data as described above, the 
national average hourly wage is $29.6521.
    Step 9--For each urban or rural labor market area, we calculate the 
hospital wage index value, unadjusted for occupational mix, by dividing 
the area average hourly wage obtained in Step 7 by the national average 
hourly wage computed in Step 8.
    Step 10--Following the process set forth above, we develop a 
separate Puerto Rico-specific wage index for purposes of adjusting the 
Puerto Rico standardized amounts. (The national Puerto Rico 
standardized amount is

[[Page 48018]]

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 divided the sum by the 
total hours for Puerto Rico (as calculated in Step 4) to arrive at an 
overall average hourly wage of $13.0915 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. (For all-urban States, we establish an imputed 
floor (69 FR 49109). Furthermore, this wage index floor is to be 
implemented in such a manner as to ensure that aggregate IPPS payments 
are not greater or less than those that would have been made in the 
year if this section did not apply. For FY 2007, the areas affected by 
this provision, after the occupational mix adjustment is applied, will 
be by a footnote in Tables 4A-1 and 4A-2 that are to be published 
separate from this final rule.

G. Implementation of the FY 2007 Occupational Mix Adjustment to the 
Wage Index

    For the final FY 2005 and FY 2006 wage indices, we used a blend of 
the occupational mix adjusted wage index and the unadjusted wage index. 
Specifically, we adjusted 10 percent of the FY 2005 and FY 2006 wage 
index adjustment factor by a factor reflecting occupational mix. We 
refer readers to the FY 2005 IPPS final rule at 69 FR 49052 and the FY 
2006 IPPS final rule at 70 FR 47376 for a detailed discussion of the 
blended wage index.
    As discussed in section III.C. of this preamble, for FY 2007, we 
are applying the occupational mix adjustment to 100 percent of the FY 
2007 wage index. We will calculate the occupational mix adjustment 
using the first 3 months of the 2006 survey data, using the methodology 
described in section III.C. of this preamble.
    Comment: One commenter suggested that, for the FY 2007 wage index, 
CMS should apply the Bellevue Hosp. Center v. Leavitt decision only to 
hospitals in the Second Circuit, and not on a nationwide basis. For 
States outside the Second Circuit, the commenter recommended that CMS 
apply the occupational mix adjustment at 10 percent, as it did in FYs 
2005 and 2006. The commenter noted that there is a CMS (then HCFA) 
precedent for applying a court's order to only hospitals in the States 
in the Circuit where the decision was rendered, citing HCFA Ruling 97-
2, pertaining to the inclusion of ``eligible but unpaid'' Medicaid days 
in the DSH calculation.
    Response: The commenter did not address whether the 10-percent 
adjustment would use the new 2006 occupational mix survey data or the 
prior 2003 data. Therefore, it is not clear how the commenter is 
suggesting we apply the policy. Nevertheless, we believe the most 
appropriate policy is to apply the occupational mix adjustment 
uniformly nationwide, using the same survey data and a 100 percent 
adjustment for all hospitals. It is important to keep in mind that the 
occupational mix adjustment is an adjustment to the wage index factor 
that represents the ratio of a labor market area's average hourly wage 
to the national average hourly wage. DSH adjustments, in contrast, are 
not based upon individual hospital information compared to a national 
average. If we were to use separate sets of data depending upon 
geographic location, hospitals located in the Second Circuit would be 
compared to one national benchmark, whereas hospitals located elsewhere 
would be compared to a different one. We believe such a policy would 
undermine the calculation of the wage index that is a relative measure 
of differences in area wage levels that uses a uniform national 
baseline for purposes of comparison. In addition, we note that the New 
York labor market area includes counties located both inside and 
outside of the Second Circuit. The New York-White Plains-Wayne, NY-NJ 
CBSA includes three New Jersey Counties: Bergen, Hudson, and Passaic 
Counties. These counties are located in the Third Circuit, not the 
Second Circuit. Therefore, applying the Bellevue Hosp. Center v. 
Leavitt decision only in the Second Circuit would result in two area 
wage index values for the New York labor market area, adding further 
complexity to the wage index calculation.
    Comment: One commenter believed that section 1886(d)(6) of the Act 
requires CMS to publish its actual wage tables and other factors by 
August 1. The commenter also cited the Balanced Budget Act of 1997 
(BBA), Pub. L. 105-33, under which Congress moved the deadline in 
section 1886(d)(6) of the Act from September 1 to August 1. The 
commenter contended that Congress would not have needed to move the 
deadline if the final data were not to be published as of August 1.
    Response: The relevant language of section 1886(d)(6)of the Act 
states: ``The Secretary shall provide for publication in the Federal 
Register, on or before August 1 before each fiscal year * * * of a 
description of the methodology and data used in computing the adjusted 
DRG prospective payment rates under this subsection.'' We believe the 
plain language of section 1886(d)(6) of the Act requires merely a 
description of the data and methodology that are used to compute the 
IPPS rates and does not require actual publication of the rates.
    With respect to the comments about the statutory change that moved 
the deadline for the IPPS rule from September 1 to August 1, section 
4644 of the BBA was an amendment to conform section 1886(h)(6) of the 
Act to the requirements of the Congressional Review Act. The 
Congressional Review Act does not allow a major rule to go into effect 
for 60-days unless there is an act of Congress allowing the rule to go 
into effect earlier. The publication date in section 1886(d)(6) of the 
Act was changed accordingly so that the IPPS final rule could take 
effect no sooner than 60 days after publication, or by the beginning of 
the Federal fiscal year on October 1 without Congress having to act. 
However, Congress did not alter section 1886(d)(6) of the Act with 
respect to the information that is to be included in the final rule. We 
agree with the commenter that it is our usual practice to publish the 
wage tables and other factors along with the final rule consistent with 
42 CFR 412.8. However, due to our implementation of the Bellevue Hosp. 
Center v. Leavitt decision, it is not possible to follow this procedure 
for FY 2007. In the proposed rule, we explained our intent to post the 
FY 2007 occupational mix adjusted wage index tables and related impacts 
on the CMS Web site after we publish the FY 2007 IPPS final rule, and 
in advance of October 1, 2006 (71 FR 28652). We have modified 42 CFR 
412.8 accordingly. The change we are making to Sec.  412.8 is a 
procedural rule that we are making effective upon publication.
    Comment: A few commenters expressed concern that the new 
occupational mix adjustment may have a negative impact on some 
hospitals, and they would not know how they are affected until the 
final FY 2007 wage index tables are published. Some commenters 
recommended that CMS allow hospitals more time to review their data, 
comment on the survey results, and make adjustments and/or

[[Page 48019]]

revisions to their occupational mix survey data. One commenter 
requested that CMS publish the occupational mix regulations and data as 
an interim final rule with a full 60-day comment period so that 
providers will have an opportunity to comment further. Another 
commenter urged CMS to consider either delaying the implementation of 
the occupational mix adjustment, or consider allowing retroactive 
correction to any errors discovered after October 1. A few commenters 
recommended that CMS use its discretionary authority to ``smooth out'' 
the impact of this change on adversely affected hospitals and apply a 
multiyear transition of the occupational mix survey data.
    Response: As we indicated above, while we understand the 
commenters' concerns about the potential for inaccurate occupational 
mix survey data to be used due to the abbreviated data collection and 
reporting periods, we believe we have established a review and 
correction process that is intended to minimize errors. We cannot delay 
the implementation of, or transition in, the occupational mix 
adjustment for the FY 2007 wage index because the Second Circuit Court 
required that all ``data collection and measurement and any other 
preparations necessary for full application should be complete by 
September 30, 2006, at which time we instruct the agency to immediately 
apply the adjustment in full.'' Also, we believe that the 30-day 
comment period after the May 17, 2006 publication of the amended FY 
2007 IPPS proposed rule provided ample opportunity for the public to 
comment on the new occupational mix survey data and adjustment for the 
FY 2007 wage index. Hospitals are usually afforded 60 days to comment 
on the entire IPPS rule. In addition, we cannot allow retroactive 
changes to the FY 2007 wage index for errors discovered after October 
1, 2006, unless a hospital's correction request meets the strict 
criteria of Sec.  412.64(k)(1) of our existing regulations (also see 
section III.J. of this preamble). However, as previously mentioned, we 
will allow hospitals an additional opportunity to revise both their 1st 
quarter and 2nd quarter 2006 occupational mix data for the FY 2008 wage 
index.
    Comment: One commenter recommended that CMS publish the corrected 
1st quarter 2006 survey data as a public use file prior to the 
publication of the final FY 2007 wage index tables.
    Response: Intermediaries are required to transmit the corrected 1st 
quarter 2006 survey data to CMS by July 27, 2007. Unfortunately, due to 
our short timeframe after July 27 for reviewing the survey data and 
computing, analyzing, and publishing the final FY 2007 occupational mix 
adjusted wage index, we cannot publish the corrected 1st quarter survey 
data before we publish final FY 2007 wage index tables.
    The final wage index values for FY 2007 (except those for hospitals 
receiving wage index adjustments under section 505 of Pub. L. 108-173) 
will be included in Tables 4A-1, 4A-2, 4B, 4C-1, 4C-2, and 4F that are 
to be posted on our Web site and published in a Federal Register notice 
subsequent to this final rule.
    Tables 3A and 3B in the separate issuance will list the 3-year 
average hourly wage for each labor market area before the redesignation 
of hospitals, using the wages included in the calculation for the FYs 
2005, 2006, 2007 wage indices. Table 3A in the separate issuance will 
list these data for urban areas and Table 3B in the separate issuance 
will list these data for rural areas. In addition, Table 2 in the 
separate issuance will include the adjusted average hourly wage for 
each hospital from the FY 2001 and FY 2002 cost reporting periods, as 
well as the FY 2003 period used to calculate the FY 2007 wage index. 
The 3-year averages will be 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 will be calculated based on the data 
available during that period.
    The final wage index values in Tables 4A-1, 4A-2, 4B, 4C-1, 4C-2, 
and 4F and the average hourly wages in Tables 2, 3A, and 3B to be 
posted on our Web site and published in a subsequent Federal Register 
notice will include the occupational mix adjustment.

H. Revisions to the Wage Index Based on Hospital Redesignations

1. General
    Under section 1886(d)(10) of the Act, the Medicare Geographic 
Classification Review Board (MGCRB) considers applications by hospitals 
for geographic reclassification for purposes of payment under the IPPS. 
Hospitals must apply to the MGCRB to reclassify by September 1 of the 
year preceding the year during which reclassification is sought. 
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 Sec. Sec.  412.230 through 412.280.
    Section 1886(d)(10)(D)(v) of the Act provides that, beginning with 
FY 2001, a MGCRB decision on a hospital reclassification for purposes 
of the wage index is effective for 3 fiscal years, unless the hospital 
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of 
the Act provides that the MGCRB must use the 3 most recent years' 
average hourly wage data 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 Sec.  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 MSA 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 new 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. The eligible counties are identified under section III.H.4. 
of this preamble.
2. Effects of Reclassification/Redesignation
    Section 1886(d)(8)(C) of the Act provides that the application of 
the wage index to redesignated hospitals is dependent on the 
hypothetical impact that the wage data from these hospitals would have 
on the wage index value for the area to which they have been 
redesignated. These requirements for determining the wage index values 
for redesignated hospitals is applicable both to the hospitals located 
in rural counties deemed urban under section 1886(d)(8)(B) of the Act 
and hospitals

[[Page 48020]]

that were reclassified as a result of the MGCRB decisions under section 
1886(d)(10) of the Act. In compliance with section 1886(d)(8)(C) of the 
Act, as well as with the rules CMS has established by regulation, the 
wage index values were determined by considering the following:
    <bullet> If including the wage data for the redesignated hospitals 
would reduce the wage index value for the area to which the hospitals 
are redesignated by 1 percentage point or less, the area wage index 
value determined exclusive of the wage data for the redesignated 
hospitals applies to the redesignated hospitals.
    <bullet> If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the area wage index 
determined inclusive of the wage data for the redesignated hospitals 
(the combined wage index value) applies to the redesignated hospitals.
    <bullet> If including the wage data for the redesignated hospitals 
increases the wage index value for the urban area to which the 
hospitals are redesignated, both the area and the redesignated 
hospitals receive the combined wage index value. Otherwise, the 
hospitals located in the urban area receive a wage index excluding the 
wage data of hospitals redesignated into the area.
    <bullet> The wage data for a reclassified urban hospital is 
included in both the wage index calculation of the area to which the 
hospital is reclassified (subject to the rules described above) and the 
wage index calculation of the urban area where the hospital is 
physically located.
    <bullet> 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).
    <bullet> The wage index value for a redesignated rural hospital 
cannot be reduced below the wage index value for the rural areas of the 
State in which the hospital is located.
    <bullet> In cases where urban hospitals have reclassified to rural 
areas under 42 CFR 412.103, the urban hospital 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.
3. FY 2007 MGCRB Reclassifications
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. The specific procedures and rules that apply 
to the geographic reclassification process are outlined in Sec.  
412.230 through Sec.  412.280.
    In the FY 2007 IPPS proposed rule (71 FR 24377), we identified 
hospitals that have reclassifications effective in FY 2007. As 
specified in Sec.  412.273, hospitals that have been reclassified by 
the MGCRB are permitted to withdraw an application for reclassification 
or terminate an existing 3-year reclassification for FY 2007. The 
request must be received by the MGCRB within 45 days of publication of 
the IPPS proposed rule.
    However, as a result of our compliance with the Bellevue Hosp. 
Center v. Leavitt court decision, as discussed earlier, we will be 
recalculating wage indices using new occupational mix data and applying 
the occupational mix to 100 percent of the wage index. Wage tables in 
the IPPS proposed rule did not include the new survey data, nor did 
they adjust 100 percent for occupational mix. Thus, the data that 
hospitals might have used to make withdrawal or termination decisions 
are obsolete. The necessary data (including wage indices and out-
migration adjustments) hospitals generally utilize in evaluating 
whether to withdraw or terminate a reclassification will not be 
available until after this IPPS final rule has been published. 
Therefore, in the May 17, 2006 proposed rule (71 FR 28650), in this 
limited circumstance, we suspended the 45-day deadline and have 
established the new procedure described below to withdraw from or 
terminate reclassifications for FY 2007. Some hospitals may have 
adhered to the established process and notified the MGCRB of their 
decision to withdraw or terminate a reclassification, in accordance 
with Sec.  412.273, before publication of that proposed rule.
    Because hospitals made these decisions based on information in the 
FY 2007 IPPS proposed rule that is now obsolete, in the May 17, 2006 
proposed rule, we proposed that the MGCRB not act on these withdrawal 
or termination requests. Instead, we have applied the following 
procedures for withdrawal and termination determinations for all 
hospital reclassifications for FY 2007. We will make reclassification 
withdrawal and termination determinations based on what we perceive 
would be most advantageous to the hospital. We will use our best 
efforts to determine what would provide the hospital with the highest 
possible wage index. Specifically, we will choose among: section 508 
reclassifications, section 1886(d)(10) reclassifications, section 505 
out-migration adjustments, and certain other changes to the wage index 
(for example, the special exceptions policy explained in the FY 2005 
IPPS rule (69 FR 49105) or Lugar status if we determine that it is in 
the hospital's best interest to waive the Lugar/section 1886(d)(8)(B) 
redesignation in order to receive the section 505 out-migration 
adjustment).
    We also will make the final occupational mix adjusted wage indices 
and out-migration adjustments and our interim decisions on hospital 
reclassifications available to the public in the Federal Register and 
on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp after August 1, 2006, and before October 1, 2006. We will 
allow hospitals a 30-day period from the date the final data and our 
interim decisions are made available on the Web site to notify CMS in 
writing, with a copy to the MGCRB, of whether they wish to reverse the 
reclassification decision made by CMS or to choose another 
reclassification for which they are eligible. We will make every effort 
to provide the final data before September 1, 2006, so that the 30-day 
period to make these determinations will end before October 1, 2006, 
and no retroactive adjustments will be necessary. Requests to reverse a 
decision made by CMS must be received, in writing, no later 30 days 
after the data are made available on the CMS Web site at the following:
    Division of Acute Care, C4-08-06, 7500 Security Boulevard, 
Baltimore, MD 21244, Attn: Marianne Myers;
    AND a copy to
    Medicare Geographic Classification Review Board, 2520 Lord 
Baltimore Drive, Suite L, Baltimore, MD 21244-2670.
    Prior to FY 2004, hospitals had been able to apply to be 
reclassified for purposes of either the wage index or the standardized 
amount. Section 401 of Pub. L. 108-173 established that all hospitals 
will be paid on the basis of the large urban standardized amount, 
beginning with FY 2004. Consequently, all hospitals are paid on the 
basis of the same standardized amount, which made such 
reclassifications moot. Although there could still be some benefit in 
terms of payments for some hospitals under the DSH payment adjustment 
for operating IPPS, section 402 of Pub. L. 108-173 equalized DSH 
payment adjustments for rural and urban hospitals, with the exception 
that the rural DSH adjustment is capped at 12 percent (except that 
rural referral centers and, effective for discharges

[[Page 48021]]

occurring on or after October 1, 2006, MDHs have no cap). (A detailed 
discussion of this application appears in section IV.I. of the preamble 
of the FY 2005 IPPS final rule (69 FR 49085). The exclusion of MDHs 
from the 12 percent DSH cap under Pub. L. 109-171 is discussed under 
section IV.F.4. of this preamble.)
    Comment: Several commenters asked CMS to clarify its position on 
withdrawing reclassifications as well as the timeframe of submitting 
applications for geographic reclassification.
    Response: The normal timetable of 45 days after the publication of 
the proposed rule for hospitals to withdraw or terminate a 
reclassification under section 508 of Pub. L. 108-173, section 
1886(d)(10) of the Act, or section 1886(d)(8)(B) of the Act (in order 
to receive a section 505 out-migration adjustment) does not apply for 
FY 2007. For this reason, any withdrawal or termination requests 
submitted to the MGCRB and/or CMS following publication of the FY 2007 
IPPS proposed rule are not reflected in the reclassification tables 
shown in this final rule.
    We will make best efforts to give each hospital the highest FY 2007 
wage index after reviewing applicable data using the 100 percent 
occupational adjusted wage index. Hospitals will have 15 days from the 
display date of this final rule to notify us of whether, in the absence 
of viewing the final 100 percent occupational mix-adjusted wage index 
data, they wish to choose a particular wage index for which they are 
eligible (such as to definitively maintain a reclassification that they 
received or to definitively terminate or withdraw from a 
reclassification). Written requests to maintain, terminate, or withdraw 
a reclassification, in the absence of viewing the final wage tables, 
must be received at the following address no later than 5 p.m. EDT 15 
days from the date this final rule appears on public display at the 
Office of the Federal Register:
    Division of Acute Care, C4-08-06, 7500 Security Boulevard, 
Baltimore, MD 21244, Attn: Marianne Myers.
    If we do not receive notice from the hospital within such 15-day 
timeframe, we will make determinations for the hospital using our best 
efforts to determine what we believe results in the highest wage index 
for the hospital. If applicable, we will give the hospital its home 
wage index with the out-migration adjustment, if that option results in 
the highest wage index. In some cases, we may determine that it is most 
advantageous for a hospital to terminate its Lugar/section 
1886(d)(8)(B) reclassification in order to receive the out-migration 
adjustment. Because this termination would result in the hospital 
losing urban status, we will separately publish a table identifying 
these hospitals that move from Lugar/urban status to rural status with 
the out-migration adjustment. For section 508 hospital individual 
reclassifications, we may make half-year terminations/withdrawals on 
behalf of hospitals, using the procedures identified in our proposed 
rule. That is, for a section 508 hospital that applied for an 
individual reclassification under section 1886(d)(10), we would give 
the section 508 hospital the higher of its home wage index, section 508 
or 1886(d)(10) wage index for the first half of the year. For the 
second half of the year, we would give the section 508 hospital the 
higher of its home wage index or its section 1886(d)(10) 
reclassification. (However, in no case could such a hospital receive 
its home wage indes for the first half of the year and its MGCRB 
reclassification for the second half, or vice versa. For group 
reclassifications, we will apply the higher of the home wage index or 
the section 1886(d)(10) reclassification for the entire year. For group 
reclassifications that include a section 508 hospital, we will apply 
the decision that was on the MGCRB application for groups that followed 
the procedural rules (that is, the group either: (1) Withdrew from its 
section 1886(d)(10) reclassification for the first half of FY 2007 and 
will only receive a second half FY 2007 section 1886(d)(10) 
reclassification; or (2) the group is reclassified under section 
1886(d)(10) of the Act for the entire year and the section 508 hospital 
withdraws from its section 508 reclassification for the first half of 
the FY 2007) unless the group informs us differently after publication 
of the final occupational mix adjusted wage indices. Groups that 
include a section 508 hospital will be able to make decisions as a 
group, separately for the first and second half of the year. Thus, the 
group may decide to withdraw a section 1886(d)(10) reclassification 
that would be applicable only for the second half of FY 2007. Again, 
however, in no case could a group whose 508 hospital chose to waive its 
508 reclassification (and therefore accept the MGCRB reclassification 
for the first half of FY 2007) withdraw its MGCRB reclassification for 
the first half of the year, but not the second (or vice versa).
    We acknowledge that hospitals may base withdrawal/termination 
decisions on factors other than simply what results in the highest wage 
index for the upcoming fiscal year. For this reason, we will allow a 
hospital to change a decision that is made by CMS on its behalf. 
Hospitals should note that we will not recalculate the wage indices or 
budget neutrality factors after the final notice announcing the FY 2007 
occupational mix adjusted wage indices. That is, we will not further 
recalculate the wage indices or standardized amounts based on hospital 
decisions that further revise decisions made by CMS on the hospitals' 
behalf.
    We will post the final occupational mix adjusted wage indices, out-
migration adjustments, and our interim decisions on hospital 
reclassification on the CMS Web site, as discussed above, sometime 
after August 1, 2006, and before October 1, 2006. We will post the same 
tables on the CMS Web site that appear in the Federal Register final 
notice of the occupational mix adjusted wage indices to be published 
after August 1, 2006 and before October 1, 2006. Hospitals will be able 
to determine the reclassification decision applied on their behalf by 
reviewing Tables 9A through 9C for hospitals that are reclassified 
under section 1886(d)(8)(B) of the Act, section 508 of Pub. L. 108-173, 
or section 1886(d)(10) of the Act. The applicable wage index for these 
hospitals will be found on Table 2. If a hospital is not listed in 
Tables 9A through 9C, CMS will have made a decision not to reclassify 
the hospital and its home wage index will apply, including the effect 
of the out-migration adjustment, will be found in Table 2. The 
applicable out-migration adjustment for the hospital will be found in 
Table 4J. As indicated above, we will separately publish a table 
identifying hospitals that we move from Lugar/urban status to rural 
status with the out-migration adjustment in Table 9D. Hospitals will 
have 30 days after the data are placed on the CMS Web site to submit, 
in writing, whether they wish to revise the decision made on their 
behalf by CMS. Written requests to revise a decision made on behalf of 
a hospital by CMS must be received by CMS no later than 5 p.m. EDT, 
with a copy sent to the MGCRB, within 30 days from the date the 
information appears on the CMS Web site at http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp at the following addresses:
    Division of Acute Care, C4-08-06, 7500 Security Boulevard, 
Baltimore, MD 21244, Attn: Marianne Myers;
    AND a copy to
    Medicare Geographic Classification Review Board, 2520 Lord 
Baltimore Drive, Suite L, Baltimore, MD 21244-2670.

[[Page 48022]]

    If a hospital fails to notify CMS that it is revising a 
determination made on its behalf within 30 days from the date the 
information appears on the CMS Web site, the interim decision made by 
CMS on the hospital's behalf will be final for FY 2007. Therefore, if 
CMS makes a decision on a hospital's behalf to terminate or withdraw a 
reclassification and the hospital does not reverse or modify CMS's 
decision, we will deem the hospital's reclassification is withdrawn or 
terminated. Once CMS's decision on the hospital's behalf is in effect, 
it will be treated in the same manner as if the hospital(s) had made 
the reclassification decision on its own. Thus, for example, because a 
hospital cannot have overlapping reclassifications, if we decide a 
hospital should accept a FY 2007 through 2009 reclassification, any 
reclassification the hospital previously had for FY 2006 through 2008 
would be permanently terminated.
    Section 1886(d)(10)(C)(ii) of the Act indicates that a hospital 
requesting a change in geographic classification for a FY must submit 
its application to the MGCRB no later than the first day of the 13-
month period ending on September 30 of the preceding fiscal year. Thus, 
the statute requires that FY 2008 reclassification applications be 
submitted to the MGCRB no later than September 1, 2006. Hospitals must 
submit applications for geographic reclassification for FY 2008 by 
September 1, 2006. However, because the 3-year average hourly wage of 
hospitals for the FY 2007 final rule will not be available by the 
September 1, 2006 deadline for submitting FY 2008 geographic 
reclassification applications, we will allow hospitals to supplement 
incomplete reclassification applications with the official data used to 
develop the FY 2007 wage index after filing their initial application. 
As indicated above, the 3-year average hourly wage information that 
will be necessary for FY 2008 reclassification applications will be 
available subsequent to this final rule after August 1, and before 
October 1, 2006. The information will be available on the CMS Web site 
at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp and then 
accessing the page titled ``MGCRB Reclassification Data for FY 2008 
Applications.'' Applications and other information about MGCRB 
reclassifications may be obtained via the CMS Internet Web site at: 
http://www.cms.hhs.gov/mgcrb/, or by calling the MGCRB at (410) 786-
1174. The mailing address of the MGCRB is: 2520 Lord Baltimore Drive, 
Suite L, Baltimore, MD 21244-2670.
    Comment: Several commenters requested a revision in the geographic 
reclassification rules so that in the future the occupational mix 
adjusted average hourly wage data is used as a point of comparison for 
eligibility. The commenters believed this change would make 
reclassification decisions consistent with the new basis for the wage 
index. The commenters also suggested that hospitals should not be 
allowed to apply for reclassification if they do not provide complete 
occupational mix data.
    Response: Section 1886(d)(10)(D)(vi) of the Act requires the MGCRB 
to use the 3-year average of the average hourly wage data from the most 
recently published hospital wage survey data, as well as the preceding 
2 fiscal years' published surveys. Because our published surveys of 
wage data include adjustments for occupational mix (10 percent in FYs 
2005 and 2006 and 100 percent in FY 2007), the MGCRB uses mix-adjusted 
wage indices in making reclassification decisions. Therefore, for FY 
2008 reclassification applications, the MGCRB will use the average of 
the average hourly wages for FYs 2005 through 2007. These data will be 
based on an occupational mix adjustment of 10 percent for FY 2005 and 
FY 2006 and 100 percent for FY 2007.
    With respect to the comment about precluding hospitals that did not 
submit occupational mix survey data from reclassifying, we believe that 
due to the unusual circumstances of the Court's order and the short 
timeframe that hospitals were provided for completing and submitting 
their data, it would not be fair to apply a penalty to non-responsive 
hospitals for the 2008 reclassification applications. However, as 
indicated earlier, we will give serious consideration to applying some 
sort of penalty in the future if a hospital does not comply with 
regulations requiring submission of occupational mix survey data.
4. Procedures for Hospitals Applying for Reclassification Effective in 
FY 2008 and Reinstating Reclassifications in FY 2008
    Applications for FY 2008 reclassifications are due to the MGCRB by 
September 1, 2006. We note that this deadline also applies for 
canceling a previous wage index reclassification withdrawal or 
termination under Sec.  412.273(d). As we noted in the FY 2007 IPPS 
proposed rule (71 FR 24083), applications and other information about 
MGCRB reclassifications may be obtained, beginning in mid-July 2006, on 
the CMS Web site at: http://www.cms.hhs.gov/mgcrb/, or by calling the 
MGCRB at (410) 786-1174.
    The MGCRB, in evaluating a hospital's request for reclassification 
for FY 2008 for the wage index, must utilize the official data used to 
develop the FY 2007 wage index. The wage data used to support the 
hospital's wage comparisons must be from the CMS hospital wage survey. 
Generally, the source for these data is the IPPS final rule to be 
published on or before August 1, 2006. However, as we stated earlier, 
the wage tables identifying the 3-year average hourly wage of hospitals 
will not be available in time to include them in this FY 2007 IPPS 
final rule. Therefore, we will make the data available subsequent to 
August 1, 2006, but before October 1, 2006.
    Section 1886(d)(10)(C)(ii) of the Act indicates that a hospital 
requesting a change in geographic classification for a FY must submit 
its application to the MGCRB not later than the first day of the 13-
month period ending on September 30 of the preceding FY. Thus, the 
statute requires that FY 2008 reclassification applications be 
submitted to the MGCRB by no later than September 1, 2006. For this 
reason, hospitals must file an FY 2008 reclassification application by 
the September 1, 2006 deadline even though the average hourly wage data 
used to develop the final FY 2007 wage indices will not yet be 
available. We note that, under Sec.  412.256(c), the MGCRB must review 
applications and notify the hospital if it determines that the 
application is incomplete. We are also allowing hospitals 30 days from 
the date the final wage data is posted on the CMS Web site to request 
to cancel a withdrawal or termination in order to reinstate its 
reclassification for FY 2008 or FY 2009, or both fiscal years. Requests 
to cancel a withdrawal or termination in order to reinstate a 
hospital's reclassification for FY 2008 or FY 2009, or both fiscal 
years, should be forwarded to the following addresses:
    Medicare Geographic Classification Review Board, 2520 Lord 
Baltimore Drive, Suite L, Baltimore, MD 21244-2670;
    AND a copy to
    Division of Acute Care, C4-08-06, 7500 Security Boulevard, 
Baltimore, MD 21244, Attn: Marianne Myers.
    As outlined in Sec.  412.256(c)(2), hospitals with incomplete 
applications have the opportunity to request that the MGCRB grant a 
hospital that has submitted an application by September 1, 2006, an 
extension beyond September 1, 2006, to complete its application. Thus, 
while hospitals must file an application for reclassification to the

[[Page 48023]]

MGCRB by September 1, 2006, they will be able to supplement the 
reclassification application with official data used to develop the FY 
2007 wage index after filing their initial application. We are 
providing that hospitals file a supplement to the reclassification 
application with official data used to develop the FY 2007 wage index 
no later than 30 days after the data are made available on the CMS Web 
site. These same rules will apply to canceling a withdrawal or 
termination of a geographic reclassification.
5. FY 2007 Redesignations Under Section 1886(d)(8)(B) of the Act
    Beginning October 1, 1988, section 1886(d)(8)(B) of the Act 
required us to treat a hospital located in a rural county adjacent to 
one or more urban areas as being located in the MSA if certain criteria 
were met. Prior to FY 2005, the rule was that a rural county adjacent 
to one or more urban areas would be treated as being located in the MSA 
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 published in the Federal Register on January 3, 1980 (45 
FR 956) for designating MSAs (and New England County Metropolitan Areas 
(NECMAs)), and if the commuting rates used in determining outlying 
counties (or, for New England, similar recognized areas) 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 (or NECMAs). Hospitals that 
met the criteria using the January 3, 1980 version of these OMB 
standards were deemed urban for purposes of the standardized amounts 
and for purposes of assigning the wage data index.
    Effective beginning FY 2005, we use OMB's 2000 CBSA standards and 
the Census 2000 data to identify counties qualifying for redesignation 
under section 1886(d)(8)(B) for the purpose of assigning the wage index 
to the urban area. We provided the chart below with the listing of the 
rural counties designated as urban under section 1886(d)(8)(B) of the 
Act in the FY 2007 IPPS proposed rule. For discharges occurring on or 
after October 1, 2006, hospitals located 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.
    The following table is subject to revision if CMS decides it is 
most advantageous for a county to waive its county Lugar status in 
order for a hospital within that county to receive a section 505 out-
migration adjustment.

 Rural Counties 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.
Hot Springs, AR........................  Hot Springs, AR.
Windham, CT............................  Hartford-West Hartford-East
                                          Hartford, CT.
Bradford, FL...........................  Gainesville, FL.
Flagler, FL............................  Deltona-Daytona Beach-Ormond
                                          Beach, 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.

[[Page 48024]]

 
Pearl River, MS........................  Gulfport-Biloxi, MS.
Caswell, NC............................  Burlington, NC.
Granville, NC..........................  Durham, NC.
Harnett, NC............................  Raleigh-Cary, NC.
Lincoln, NC............................  Charlotte-Gastonia-Concord, NC-
                                          SC.
Polk, NC...............................  Spartanburg, NC.
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.
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 Tables 4C-1 and 4C-2 into which 
they have been 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 
once the final wage index data are posted on the CMS Web site.
6. Reclassifications Under Section 508 of Pub. L. 108-173
    Under section 508 of Pub. L. 108-173, a qualifying hospital could 
appeal the wage index classification otherwise applicable to the 
hospital and apply for reclassification to another area of the State in 
which the hospital is located (or, at the discretion of the Secretary, 
to an area within a contiguous State). We implemented this process 
through notices published in the Federal Register on January 6, 2004 
(69 FR 661), and February 13, 2004 (69 FR 7340). Such reclassifications 
are applicable to discharges occurring during the 3-year period 
beginning April 1, 2004, and ending March 31, 2007. Under section 
508(b), reclassifications under this process do not affect the wage 
index computation for any area or for any

[[Page 48025]]

other hospital and cannot be effected in a budget neutral manner.
    Some hospitals currently receiving a section 508 reclassification 
are eligible to reclassify to that same area under the standard 
reclassification process as a result of the new labor market 
definitions that we adopted for FY 2005. The governing regulations 
indicate that ``if a hospital is already reclassified to a given 
geographic area for wage index purposes for a 3-year period, and 
submits an application to the same area for either the second or third 
year of the 3-year period, that application will not be approved.'' 
However in the FY 2006 IPPS final rule (70 FR 47382), we stated that 
hospitals that indicated in their FY 2007 MGCRB applications that they 
agreed to waive their section 508 reclassification for the first 6 
months of FY 2007 if they were granted a 3-year reclassification under 
the traditional MGCRB process will not be subject to the rule cited 
above. Thus, in applying for a 3-year MGCRB reclassification beginning 
in FY 2007, hospitals that are already reclassified to the same area 
under section 508 should have indicated in their MGCRB reclassification 
requests that if they receive the MGCRB reclassification, they would 
forfeit the section 508 reclassification for the first 6 months of FY 
2007.
    Under 1886(d)(10)(D)(v) of the Act, CMS has the authority to 
``establish procedures'' under which a hospital may elect to terminate 
a reclassification before the end of a 3-year period. In the FY 2006 
IPPS final rule (70 FR 47382), we discussed our decision to exercise 
this authority to establish a procedural rule for section 508 hospitals 
to retain their section 508 reclassification through its expiration on 
March 31, 2007, and reclassify under the regulations at 42 CFR Part 
412, Subpart L, for the second half of FY 2007. We provided further 
detail above on how we will apply decisions regarding section 508 
reclassifications in the context of the Bellevue Hosp. Center v. 
Leavitt court decision. Again, we will select the reclassification 
option that provides the highest wage index for the hospital and will 
give the hospital 30 days to revise the decision made on its behalf by 
CMS. We refer readers to the discussion above for further details about 
how section 508 hospitals that have applied for an individual 
reclassification and hospitals groups that include a section 508 
hospital can revise a CMS decision.
    We will apply a similar rule for purposes of the out-migration 
adjustment for FY 2007 discussed in section III.I. of this preamble. 
The statute states that a hospital cannot receive an out-migration 
adjustment if it is reclassified under section 1886(d)(10) of the Act. 
Therefore, eligible hospitals that are not reclassified during any part 
of FY 2007 will, by default, receive an out-migration adjustment during 
that time period. If the hospital is reclassified for all of FY 2007, 
the hospital will be ineligible for the out-migration adjustment. If a 
hospital has a half fiscal year reclassification, the hospital will be 
eligible for the out-migration adjustment for the portion of the fiscal 
year that it is not reclassified.
    The procedural rules described in the FY 2006 IPPS final rule were 
intended to address specific circumstances where individual and group 
reclassifications involve a section 508 hospital. The rules were 
designed to recognize the special circumstances of section 508 hospital 
reclassifications ending mid-year during FY 2007 and were intended to 
provide flexibility in our regulations that would allow previously 
approved reclassifications to continue through March 31, 2007, and new 
reclassifications to begin April 1, 2007, upon the conclusion of the 
section 508 reclassifications. As we indicated in the proposed rule, we 
have received questions about the application of these special 
procedural rules to non-section 508 hospitals that are part of group 
applications that previously were awarded an individual 
reclassification that continues into FY 2007. These hospitals are 
concerned that the procedural rules imply that such prior 
reclassification would be terminated beginning October 1, 2006, because 
the rules specify that ``the remainder of the group receives the home 
wage index'' for the period October 1, 2006, through March 31, 2007, if 
the group reclassification application specified that the section 
1886(d)(10) group reclassification would not begin until April 1, 2007. 
We did not specifically contemplate preexisting individual 
reclassifications when we drafted the special procedural rules for 
group reclassifications that involve section 508 hospitals. However, we 
did not intend to adopt a less favorable policy for non-section 508 
hospitals in a group with a pending individual geographic 
reclassification than we did for section 508 hospitals. Thus, we 
clarified our procedural rule with respect to non-section 508 hospitals 
with preexisting individual reclassifications that are part of group 
reclassifications that include a section 508 hospital. For the first 
half of FY 2007, we intend to either apply (a) the area wage index 
where the hospital is physically located if there is no 
reclassification pending, or (b) the hospital's individual 
reclassification wage index if the hospital was part of a group awarded 
a group reclassification and the group followed the procedural rules 
for postponing reclassification until April 1, 2007. However, once the 
hospital begins its new section 1886(d)(10) reclassification for the 
period April 1, 2007, through September 30, 2009, any prior 
reclassifications are permanently terminated, consistent with 42 CFR 
412.274(b)(2)(ii). We are also reiterating that the special procedural 
rules that we have adopted for half fiscal year reclassifications and 
terminations are intended only to address the special circumstances 
created by section 508 of Pub. L. 108-173 with respect to 
reclassifications beginning and ending mid-way through a fiscal year. 
These special procedural rules do not change any of the permanent 
provisions currently in effect with respect to reclassifications under 
subpart L of 42 CFR Part 412.
    We show the reclassifications effective under the one-time appeal 
process in tentative Table 9B in the Addendum to this final rule. All 
section 1886(d)(10) reclassifications are listed in tentative Table 9A 
in the Addendum to this final rule.
    Comment: Many commenters stated their appreciation and support of 
CMS' flexibility relating to the expiration of section 508 and in 
facilitating the transition between the end of section 508 and 
reclassifications occurring under section 1886(d)(10) of the Act.
    Response: We thank the commenters for their support.
7. Wage Indices for Reclassified Hospitals and Reclassification Budget 
Neutrality Factor
    Under the procedural rules described under section III.H.6. of this 
preamble, different wage indices may be in effect for the first 6 
months and the second 6 months of FY 2007. Specifically, there may be 
different wage indices in effect for the first and second half of FY 
2007 due to the special circumstances of section 508 reclassifications 
ending in the middle of a fiscal year and half of FY 2007 geographic 
reclassifications under section 1886(d)(10) beginning on April 1, 2007. 
This unique circumstance will not change as a result of the Bellevue 
Hosp. Center v. Leavitt court decision.
    The half fiscal year section 1886(d)(10) reclassifications present 
issues related to the calculation of the reclassified wage indices and 
reclassification budget neutrality factor. Section 1886(d)(8)(C) of the 
Act provides requirements for determining

[[Page 48026]]

the wage index values for both hospitals located in rural counties 
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. As provided in the statute, we are required to 
calculate a separate wage index for hospitals reclassified to an area 
if including the wage data for the reclassified hospitals would reduce 
the area wage index by more than 1 percent. We proposed to issue two 
separate reclassified wage indices for affected areas (one effective 
from October 1, 2006, through March 31, 2007, and a second reclassified 
wage index effective April 1, 2007, through September 30, 2007). The 
reclassified wage indices will be calculated based on the wage data for 
hospitals reclassified to the area in the respective half of the fiscal 
year. We only received public comments supporting this proposal.
    The half fiscal year reclassifications also have implications for 
budget neutrality. The overall effect of geographic reclassification is 
required by section 1886(d)(8)(D) of the Act to be budget neutral. We 
apply an adjustment to the IPPS standardized amounts to ensure that the 
effects of geographic reclassification are budget neutral. We proposed 
calculating one budget neutrality adjustment that reflects the average 
of the adjustments required for first and second half fiscal year 
reclassifications, respectively, as discussed in section II.A.4.b. of 
the Addendum to this final rule. We only received public comments 
supporting this proposal.

I. FY 2007 Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees

    In accordance with the broad discretion under section 1886(d)(13) 
of the Act, as added by section 505 of 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 
process, outlined in the FY 2005 IPPS final rule (69 FR 49061), 
provides for an increase in the wage index for hospitals located in 
certain counties that have a relatively high percentage of hospital 
employees who reside in the county but work in a different county (or 
counties) with a higher wage index. Such adjustments to the wage index 
are effective for 3 years, unless a hospital requests to waive the 
application of the adjustment. A county will not lose its status as a 
qualifying county due to wage index changes during the 3-year period, 
and counties will receive the same wage index increase for those 3 
years. However, a county that qualifies in any given year may no longer 
qualify after the 3-year period, or it may qualify but receive a 
different adjustment to the wage index level. Hospitals that receive 
this adjustment to their wage index are not eligible for 
reclassification under section 1886(d)(8) or section 1886(d)(10) of the 
Act. Adjustments under this provision are not subject to the budget 
neutrality requirements under section 1886(d)(3)(E) of the Act.
    Hospitals located in counties that qualify for the wage index 
adjustment are to receive an increase in the wage index that is equal 
to the average of the differences between the wage indices of the labor 
market area(s) with higher wage indices and the wage index of the 
resident county, weighted by the overall percentage of hospital workers 
residing in the qualifying county who are employed in any labor market 
area with a higher wage index. We employ the pre-reclassified wage 
indices in making these calculations.
    In the FY 2007 IPPS proposed rule (71 FR 24264 through 24272), in 
the Out-Migration Adjustment table, Table 4J, we identified hospitals 
located in qualifying counties. Table 4J also listed the proposed 
adjustments calculated for qualifying hospitals. Hospitals that newly 
qualified for the adjustment in FY 2005 or FY 2006 are eligible to 
receive the same adjustment in FY 2007. In the FY 2007 IPPS proposed 
rule, we determined county eligibility based on a 10 percent 
occupational mix adjustment to the wage index. However, under the May 
17, 2006 proposed rule discussed in section III.C. of this preamble, 
for FY 2007 we are applying the occupational mix adjustment to 100 
percent of the FY 2007 wage index. Therefore, we must reevaluate which 
counties are newly eligible for the out-migration adjustment in FY 2007 
using the 100 percent occupational mix adjusted wage index data. We 
will publish an updated version of Table 4J showing eligible hospitals 
and their corresponding wage index adjustments on the CMS Web site 
after we publish this IPPS final rule, and in advance of October 1, 
2006, using the procedures discussed in section III.H.of this preamble. 
We will use the same formula described in the FY 2005 final rule (69 FR 
49064) to calculate the out-migration adjustment.
    The adjustments calculated for qualifying hospitals will be listed 
in the revised Table 4J that will be issued separately from this final 
rule. These adjustments will be effective for each county for a period 
of 3 fiscal years. Hospitals that received the adjustment in FY 2006 
will be eligible to retain that same adjustment for FY 2007. 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, 2006.
    As previously noted, 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, or 
under section 508 of Pub. L. 108-173, unless they waive such out-
migration adjustment. As announced in the FYs 2005 and 2006 final 
rules, hospitals redesignated under section 1886(d)(8) of the Act or 
reclassified under section 1886(d)(10) of the Act or under section 508 
of Pub. L. 108-173 will be deemed to have chosen to retain their 
redesignation or reclassification, unless they explicitly notified CMS 
that they elected to receive the out-migration adjustment instead 
within 45 days from the publication of the FY 2007 proposed rule.
    As previously noted, 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, or 
under section 508 of Pub. L. 108-173, unless they waive such out-
migration adjustment. Ordinarily, our rule is to presume that a 
hospital wishes to retain its reclassification, unless it notifies us 
within 45 days of the proposed rule that it wishes to receive the out-
migration adjustment in lieu of the reclassification. However, for FY 
2007, as stated earlier, we will be making reclassification withdrawal 
and termination decisions on behalf of hospitals. Thus, the ordinary 
45-day rule would not apply in FY 2007. Rather, hospitals will have 15 
days from the display date of this final rule to notify us of whether, 
in the absence of viewing the final 100 percent occupational mix-
adjusted wage index data, they wish to choose a particular wage index 
for which they are eligible (such as to definitively maintain a 
reclassification which they received or to definitively terminate or 
withdraw from a reclassification). Otherwise, we will make withdrawal 
and termination decisions on behalf of the hospital (including a 
decision as to whether to accept an out-migration adjustment instead of 
a reclassification), and the hospital will then have 30 days to reverse 
or modify our decision, as applicable.

J. Process for Requests for Wage Index Data Corrections

    In the FY 2005 IPPS final rule (68 FR 27194), we revised the 
process and

[[Page 48027]]

timetable for application for development of the wage index, beginning 
with the FY 2005 wage index. The preliminary and unaudited wage index 
data for FY 2007 were made available on October 7, 2005, through the 
Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. In a memorandum dated October 7, 2005, we instructed 
all Medicare fiscal intermediaries 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 instructed the fiscal intermediaries to 
advise hospitals that these data are 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 7, 2005 wage index data files, the hospital was to submit 
corrections along with complete, detailed supporting documentation to 
its fiscal intermediary by December 5, 2005. Hospitals were notified of 
this deadline and of all other possible deadlines and requirements, 
including the requirement to review and verify their data as posted on 
the preliminary wage index data file on the Internet, through the 
October 7, 2005 memorandum referenced above.
    The fiscal intermediaries notified the hospitals by mid-February 
2006 of any changes to the wage index data as a result of the desk 
reviews and the resolution of the hospitals' early December 2005 change 
requests. The fiscal intermediaries also submitted the revised data to 
CMS by mid-February 2006. CMS published the proposed wage index PUFs 
that included hospitals' revised wage data on February 24, 2006. Also, 
in a memorandum dated February 14, 2006, we instructed fiscal 
intermediaries to notify all hospitals regarding the availability of 
the proposed wage index PUFs and the criteria and process for 
requesting corrections and revisions to the wage index data. Hospitals 
had until March 13, 2006, to submit requests to the fiscal 
intermediaries for reconsideration of adjustments made by the fiscal 
intermediaries as a result of the desk review, and to correct errors 
due to CMS's or the fiscal intermediary's mishandling of the wage index 
data. Hospitals were also required to submit sufficient documentation 
to support their requests.
    After reviewing requested changes submitted by hospitals, fiscal 
intermediaries transmitted any additional revisions resulting from the 
hospitals' reconsideration requests by April 14, 2006. The deadline for 
a hospital to request CMS intervention in cases where the hospital 
disagreed with the fiscal intermediary's policy interpretations was 
April 21, 2006.
    Hospitals were also instructed to examine Table 2 in the Addendum 
to the proposed rule. Table 2 contained each hospital's adjusted 
average hourly wage used to construct the wage index values for the 
past 3 years, including the FY 2003 data used to construct the proposed 
FY 2007 wage index. We noted that the hospital average hourly wages 
shown in Table 2 only reflected changes made to a hospital's data and 
transmitted to CMS by March 1, 2006.
    As discussed in section III.C. of this preamble, on May 17, 2006, 
we published in the Federal Register (71 FR 28644) a proposed rule that 
proposed to revise the methodology for calculating the occupational mix 
adjustment by applying the occupational mix adjustment to 100 percent 
of the wage index using the new 2006 occupational mix data. In section 
III.C.2 of this preamble, we discussed in detail the timeline and 
process for collecting, reviewing, and correcting the FY 2006 
occupational mix survey data. The 1st quarter 2006 occupational mix 
data PUF was released on June 29, 2006, to hospital associations and 
the public on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS. 
The release of this file superseded any and all of the 2003 
occupational mix survey data that we had previously published and 
proposed to use for the FY 2007 wage index. Hospitals had until July 13 
to submit to the intermediaries their requests for corrections to the 
new 2006 survey data. Intermediaries were to submit all corrected 
occupational mix data to CMS by July 27, 2007. Also, as discussed in 
section III.C., the occupational mix data could not be finalized in 
time to include in this final rule, so we are releasing the final 
occupational mix adjusted wage index data and tables after the 
publication of this final rule, but before October 1, 2006.
    Because hospitals had access to the final occupational mix data by 
June 29, 2006, we believe they had the opportunity to detect any data 
entry or tabulation errors made by the fiscal intermediary or CMS 
before the development and publication of the final FY 2007 wage index 
and the implementation of the FY 2007 wage index on October 1, 2006. We 
believe that if hospitals availed themselves of the opportunities 
afforded to provide and make corrections to the occupational mix data, 
the wage index implemented on October 1, 2006, will be accurate. In the 
extent that errors are identified by hospitals and brought to our 
attention after July 13, 2006, we will only make mid-year changes to 
the wage index in accordance with Sec.  412.64(k) (see below for a 
detailed discussion).
    The final Worksheet S-3 wage data PUF was released in May 2006 to 
hospital associations and the public on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS (hereon, referred to as the May 2006 
PUF). The May 2006 PUF was made available solely for the limited 
purpose of identifying any potential errors made by CMS or the fiscal 
intermediary in the entry of the final Worksheet S-3 wage data that 
result from the correction process described above (revisions submitted 
to CMS by the fiscal intermediaries by April 14, 2006). If, after 
reviewing the May 2006 PUF, a hospital believed that its Worksheet S-3 
wage data were incorrect due to a fiscal intermediary or CMS error in 
the entry or tabulation of the final data, the hospital was to send a 
letter to both its fiscal intermediary and CMS outlining why the 
hospital believed an error existed and to provide all supporting 
information, including relevant dates (for example, when it first 
became aware of the error). CMS and the fiscal intermediaries were to 
receive these requests no later than June 12, 2006. (We note that the 
June 12, 2006 date was revised from the June 9, 2006 date originally 
specified in the October 7, 2005 letter to hospitals.) Requests mailed 
to CMS were to be sent to: Centers for Medicare & Medicaid Services, 
Center for Medicare Management, Attention: Wage Index Team, Division of 
Acute Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-
1850.
    Each request also was to be sent to the fiscal intermediary. The 
fiscal intermediary was to review requests upon receipt and contact CMS 
immediately to discuss its findings.
    After the release of the May 2006 PUF, changes to the hospital 
Worksheet S-3 wage data were only to be made in those very limited 
situations involving an error by the fiscal intermediary or CMS that 
the hospital could not have known about before its review of the final 
wage data file. Specifically, neither the intermediary nor CMS would 
approve the following types of requests:
    <bullet> Requests for Worksheet S-3 wage data corrections that were 
submitted too late to be included in the data transmitted to CMS by 
fiscal intermediaries on or before April 14, 2006.
    <bullet> Requests for correction of errors that were not, but could 
have been, identified during the hospital's review

[[Page 48028]]

of the February 24, 2006 wage index data file.
    <bullet> Requests to revisit factual determinations or policy 
interpretations made by the fiscal intermediary or CMS during the wage 
index data correction process.
    Verified corrections to the Worksheet S-3 wage data received timely 
by CMS and the fiscal intermediaries (that is, by June 12, 2006) are 
incorporated into the final wage index and will be reflected in the FY 
2007 final wage index tables that will be published in a separate 
issuance after the publication of this final rule.
    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 2007 payment rates. Accordingly, 
hospitals that did not meet the procedural deadlines set forth above 
will not be afforded a later opportunity to submit wage index data 
corrections or to dispute the fiscal intermediary's decision with 
respect to requested changes. Specifically, our policy is that 
hospitals that did 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 the reader also to the FY 2000 
final rule (64 FR 41513) for a discussion of the parameters for 
appealing to the Provider Reimbursement Review Board for wage index 
data corrections.
    We believe the wage index data correction process described above 
provides hospitals with sufficient opportunity to bring errors in their 
wage index data to the fiscal intermediaries' attention. Nevertheless, 
in the event that errors are identified by hospitals and brought to our 
attention after June 12, 2006, for Worksheet S-3 wage data, or after 
July 13, 2006, for the 1st quarter 2006 occupational mix data, we 
retain the right to make midyear changes to the wage index under very 
limited circumstances.
    Specifically, in accordance with Sec.  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 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 deadline for making corrections to the wage data for 
the following fiscal year's wage index. With regard to the FY 2007 wage 
index, this means by June 12 for Worksheet S-3 wage data and by July 13 
for 1st quarter 2006 occupational mix data. This provision is not 
available to a hospital seeking to revise another hospital's data that 
may be affecting the requesting hospital's wage index for the labor 
market area. As indicated earlier, since CMS makes the wage data 
available to a hospital on the CMS Web site prior to publishing both 
the proposed and final IPPS rules, and the fiscal intermediaries notify 
hospitals directly of any wage data changes after completing their desk 
reviews, we do not expect that midyear corrections would 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 Sec.  
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 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 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, 
for the FY 2007 wage index, by the June 12, 2006 deadline for Worksheet 
S-3 data and the July 13, 2006 deadline for 1st quarter 2006 
occupational mix data); and (3) CMS agreed that the fiscal intermediary 
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 requests a correction to 
its wage index data before CMS calculates the final wage index (that 
is, for the FY 2007 wage index, by the June 12, 2006 deadline for 
Worksheet S-3 wage data and the July 13, 2006 deadline for 1st quarter 
2006 occupational mix data), and CMS acknowledges that the error in the 
hospital's wage data was caused by CMS's or the fiscal intermediary'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; it can only be used for the current Federal fiscal year. In 
other situations, we continue to believe that it is appropriate to make 
corrections prospectively only. 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 Wage Index for FY 2007

    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 * * *'' 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.
    We have continued our research into the assumptions employed in 
calculating the labor-related share. Our research involves analyzing 
the compensation share separately for urban

[[Page 48029]]

and rural hospitals, using regression analysis to determine the 
proportion of costs influenced by the area wage index, and exploring 
alternative methodologies to determine whether all or only a portion of 
professional fees and nonlabor intensive services should be considered 
labor-related.
    In the FY 2006 IPPS final rule (70 FR 47392), we presented our 
analysis and conclusions regarding the frequency and methodology for 
updating the labor-related share for FY 2006. We also recalculated a 
labor-related share of 69.731 percent, using the FY 2002-based PPS 
market basket for discharges occurring on or after October 1, 2005. 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 result of hospitals with a wage index less than or 
equal to 1.0 being paid using a labor-related 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 PPS base payment rate to which the area wage index is applied. 
In this final rule, we are not making any changes to the national 
average proportion of operating costs that are attributable to wages 
and salaries, fringe benefits, professional fees, contract labor, and 
labor intensive services. Therefore, we are continuing to use a labor-
related share of 69.731 percent for discharges occurring on or after 
October 1, 2006. Tables 1A and 1B which will be issued as part of a 
document separate from this final rule, as discussed in section III.C. 
of this final rule, will 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.''
    We also are continuing to use a labor-related share for the Puerto 
Rico-specific standardized amounts of 58.7 percent for discharges 
occurring on or after October 1, 2006. 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, nonmedical professional fees, and other labor-intensive 
services 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. For Puerto 
Rico hospitals, the national labor-related share will always be 62 
percent because the wage index for all Puerto Rico hospitals is less 
than 1.0. A Puerto Rico-specific wage index is applied to the Puerto 
Rico-specific portion of payments to the hospitals. The labor-related 
share of a hospital's Puerto Rico-specific rate will be either 62 
percent or the Puerto Rico-specific labor-related share 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 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 58.7 percent of the Puerto Rico-specific rates because 
the lower labor-related share will result in higher payments. The 
Puerto Rico labor-related share of 58.7 percent for FY 2007 will be 
reflected in the Table 1C of the separately issued document referenced 
under sections III.C. and III.H. of this preamble.
    Comment: One commenter suggested that, for hospitals with a wage 
index greater than one, CMS should use the FY 1992-based labor share of 
71.1 percent rather than continue to use the FY 2002-based IPPS labor 
share of 69.7 percent.
    Response: The labor-related share is used to determine the 
proportion of the national PPS based payment rate to which the area 
wage index is applied. For IPPS, the labor share remains constant until 
the market basket is rebased. As discussed in the August 12, 2005 IPPS 
final rule (70 FR 47393), the labor-related share for the FY 2002-based 
market basket was calculated by adding the relative weights of the 
labor-related operating cost categories of that market basket. These 
cost categories are: wages and salaries, fringe benefits, professional 
fees, contract labor, and labor-intensive services. Their relative 
weights were derived from the FY 2002 Medicare cost reports, which 
represented the most recent and complete data available when the FY 
2002-based market basket was developed.
    A return to the considerably older FY 1992-based labor share, where 
the relative weights were determined using FY 1992 Medicare cost 
reports, would mean relying on outdated information and thus is not 
optimal.
    Finally, although the wage index and the labor-related share are 
interrelated regarding final payments, it is important to note that the 
labor-related share is calculated completely independently of the wage 
index. For these reasons, we will continue to use a labor-related share 
of 69.731 percent for discharges occurring on or after October 1, 2006.

L. Proxy for the Hospital Market Basket

    In the FY 2006 IPPS final rule (70 FR 47387), we changed the base 
year cost structure for the IPPS hospital index for the hospital market 
basket for operating costs from FY 1997 to FY 2002. As discussed in 
that final rule, the IPPS hospital index primarily uses the BLS data as 
price proxies, which are grouped in one of the three BLS categories. 
The categories are Producer Price Indexes (PPIs), Consumer Price 
Indexes (CPIs), and Employment Cost Indexes (ECIs), discussed in detail 
in the FY 2006 IPPS final rule (70 FR 47388 through 47391). We evaluate 
the price proxies using the criteria of reliability, timeliness, 
availability, and relevance. The PPIs, CPIs, and ECIs selected by us 
and used for this final rule meet these criteria as described in the FY 
2006 IPPS final rule. We believe they continue to be the best measures 
of price changes for the cost categories.
    Beginning April 2006 with the publication of March 2006 data, the 
BLS' ECI will use a different classification system, the North American 
Industrial Classification System (NAICS), instead of the Standard 
Industrial Codes (SIC), which will 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 are not making 
any changes to the usage at this time. However, we did solicit comments 
in the IPPS proposed rule on our continued use of the BLS ECI data in 
light of the BLS change in system usage to the NAICS-based ECI. CMS 
received no comments on use of the BLS ECI data. As the SIC-based ECIs 
no longer exist, we will therefore adopt the proposed policy of using 
the BLS NAICS-based ECIs to replace the SIC-based ECIs as price proxies 
in the market basket.

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

A. Reporting of Hospital Quality Data for Annual Hospital Payment 
Update (Sec.  412.64(d)(2))

1. Background
    Section 5001(a) of the Deficit Reduction Act of 2005, Pub. L. 109-
171 (DRA) sets out new requirements for the Reporting Hospital Quality 
Data for

[[Page 48030]]

Annual Payment Update (RHQDAPU) program. The RHQDAPU program was 
established to implement section 501(b) of Pub. L. 108-173 (MMA). It 
builds on our ongoing voluntary Hospital Quality Initiative which is 
intended to empower consumers with quality of care information to make 
more informed decisions about their health care while also encouraging 
hospitals and clinicians to improve the quality of care.
    Section 5001(a) of Pub. L. 109-171 revises the mechanism used to 
update the standardized amount for payment for hospital inpatient 
operating costs. New sections 1886(b)(3)(B)(viii)(I) and (II) of the 
Act provide that the payment update for FY 2007 and each subsequent 
fiscal year will be reduced by 2.0 percentage points for any 
``subsection (d) hospital'' that does not submit certain quality data 
in a form and manner, and at a time, specified by the Secretary.
    New sections 1886(b)(3)(B)(viii)(III) and (IV) of the Act require 
that we expand the ``starter set'' of 10 quality measures that we have 
used since 2003. Specifically, the Secretary is required to expand, 
consistent with the provisions of section 5001(a) of Pub. L. 109-171, 
the set of measures that the Secretary determines to be appropriate for 
the measurement of the quality of care furnished by hospitals in 
inpatient settings. In expanding these measures, section 
1886(b)(3)(B)(viii)(IV) of the Act provides that we must begin to adopt 
the baseline set of performance measures as set forth in a 2005 report 
issued by the Institute of Medicine (IOM) of the National Academy of 
Sciences under section 238(b) of Pub. L. 108-173,\19\ effective for 
payments beginning with FY 2007. The IOM measures include the Hospital 
Quality Alliance (HQA) measures (the HQA is a public-private 
collaboration to improve the quality of care provided by the nation's 
hospitals by measuring and publicly reporting on that care), the 
HCAHPS[supreg] patient perspective survey, and three structural 
measures. The structural measures included in the IOM report are: ``(1) 
Implementation of computerized provider order entry for prescriptions, 
(2) staffing of intensive care units with intensivists, and (3) 
evidence-based hospital referrals. These measures originate from the 
Leapfrog Group's original ``three leaps,'' and are part of the 
[National Quality Forum's] 30 safe practices.''
---------------------------------------------------------------------------

    \19\ Institute of Medicine, ``Performance Measurement: 
Accelerating Improvement,'' December 1, 2005, available at http://www.iom.edu/CMS/3809/19805/31310.aspx.
---------------------------------------------------------------------------

    New sections 1886(b)(3)(B)(viii)(V) and (VI) of the Act require 
that, effective for payments beginning with FY 2008, we add other 
quality measures that reflect consensus among affected parties, and 
provide the Secretary with the discretion to replace any quality 
measures or indicators in appropriate cases, such as where all 
hospitals are effectively in compliance with a measure, or the measures 
or indicators have been subsequently shown to not represent the best 
clinical practice. Thus, the Secretary has broad discretion to replace 
measures on the basis that they are not appropriate.
    New section 1886(b)(3)(B)(viii)(VII) of the Act requires that we 
establish procedures for making quality data available to the public 
after ensuring that a hospital has the opportunity to review, in 
advance, its data that are to be made public. In addition, this section 
requires that we report quality measures of process, structure, 
outcome, patients' perspective on care, efficiency, and costs of care 
that relate to services furnished in inpatient settings on the CMS Web 
site.
    Like the provisions of section 501(b) of Pub. L. 108-173, the 
provisions of section 5001(a) of Pub. L. 109-171 do not apply to 
hospitals and hospital units excluded from the IPPS, or to payments to 
hospitals under other prospective payment systems such as the hospital 
outpatient PPS. New section 1886(b)(3)(B)(viii)(I) of the Act also 
provides that any reduction will apply only with respect to the fiscal 
year involved, and will not be taken into account for computing the 
applicable percentage increase for a subsequent fiscal year.
    Initially, section 1886(b)(3)(B)(vii) of the Act provided for a 
reduction of 0.4 percentage points to the update percentage increase 
for each of FYs 2005 through 2007 for any ``subsection (d) hospital'' 
that did not submit data on the starter set of 10 quality measures 
established by the Secretary of Health and Human Services as of 
November 1, 2003. Section 5001(a) of Pub. L. 109-171 limits the 0.4 
percentage point reduction to FY 2005 and FY 2006, and establishes a 
2.0 percentage point reduction for FY 2007 and subsequent fiscal years.
    The starter set of 10 quality measures we established as of 
November 1, 2003 are:

Heart Attack (Acute Myocardial Infarction)

    <bullet> Was aspirin given to the patient upon arrival to the 
hospital?
    <bullet> Was aspirin prescribed when the patient was discharged?
    <bullet> Was a beta-blocker given to the patient upon arrival to 
the hospital?
    <bullet> Was a beta-blocker prescribed when the patient was 
discharged?
    <bullet> Was an ACE inhibitor given for the patient with heart 
failure?

Heart Failure (HF)

    <bullet> Did the patient get an assessment of his or her heart 
function?
    <bullet> Was an ACE inhibitor given to the patient?

Pneumonia (PNE)

    <bullet> Was an antibiotic given to the patient in a timely way?
    <bullet> Had the patient received a pneumococcal vaccination?
    <bullet> Was the patient's oxygen level assessed?
    We adopted these measures after the Secretary of HHS initiated a 
partnership with several collaborators intended to promote hospital 
quality improvement and public reporting of hospital quality 
information. These collaborators included the American Hospital 
Association, the Federation of American Hospitals, the Association of 
American Medical Colleges, the Joint Commission on Accreditation of 
Healthcare Organizations (JCAHO), the National Quality Forum (NQF), the 
American Medical Association, the Consumer-Purchaser Disclosure 
Project, the American Association of Retired Persons, the American 
Federation of Labor-Congress of Industrial Organizations, the Agency 
for Healthcare Research and Quality (AHRQ), as well as CMS, Quality 
Improvement Organizations (QIOs), and others.
    This collaboration, originally known as the National Voluntary 
Hospital Reporting Initiative, is now known as the HQA. Hospital data 
are submitted through the QualityNet Exchange secure Web site 
(www.qnetexchange.org). This Web site meets or exceeds all current 
Health Insurance Portability and Accountability Act requirements. Data 
from this initiative were initially used to populate the Hospital 
Compare Web site, www.hospitalcompare.hhs.gov. This Web site assists 
beneficiaries and the general public by providing information on 
hospital quality of care for consumers who need to select a hospital. 
It further serves to encourage consumers to work with their doctors and 
hospitals to discuss the quality of care they provide to patients, 
thereby providing an additional incentive to improve the quality of 
that care.
    This starter set of 10 quality measures, all of which have been 
endorsed by the NQF, is a subset of measures currently collected for 
the JCAHO as part of its

[[Page 48031]]

certification program. NQF is a voluntary consensus standard-setting 
organization established to standardize health care quality measurement 
and reporting through its consensus development process We chose these 
10 quality measures in order to collect data that will: (1) provide 
useful and valid information about hospital quality to the public; (2) 
provide hospitals with a sense of predictability about public reporting 
expectations; (3) begin to standardize data and data collection 
mechanisms; and (4) foster hospital quality improvement. Most hospitals 
have participated in the HQA, and are continuing to submit data to the 
QIO Clinical Warehouse. Since the HQA released the starter set of 10 
quality measures, it has continued to release additional quality 
measures, and has released 11 additional NQF-endorsed quality measures 
to date. Many HQA-participating hospitals have been voluntarily 
reporting on these additional quality measures, although only the 
starter set of 10 quality measures were subject to potential reductions 
in hospitals' annual payment update percentages under section 501(b) of 
Pub. L. 108-173.
    To implement section 501(b) of Pub. L. 108-173, we created the 
RHQDAPU program. Originally, the program set out the form, manner, and 
timeframes for hospitals to submit data regarding the starter set of 10 
quality measures. For the FY 2005 payment update, we permitted 
hospitals to withdraw from the RHQDAPU program at any time up to August 
1, 2004. Hospitals that withdrew from the program did not receive the 
full payment update and, instead, received a reduction of 0.4 
percentage points in their payment update. We did not establish a 
deadline for withdrawal for the FY 2006 payment update.
    For FY 2006, in order to receive a full payment update, hospitals 
were required to continuously submit to the QIO Clinical Warehouse 
abstracted data regarding the starter set of 10 quality measures each 
calendar quarter according to the schedule found on the QualityNet 
Exchange Web site. New participants were required to submit these data 
using the same schedule, starting with the quarter they began 
discharging patients. The data for each quarter had to be submitted on 
time and pass all of the edits and consistency checks required in the 
QIO Clinical Warehouse. Hospitals that did not treat a condition or 
that had very few discharges were not penalized, and they received the 
full payment update if they submitted appropriate data on each of the 
10 quality measures that they treated for patients who were discharged 
during the reporting periods.
2. New Procedures for Hospital Reporting of Quality Data
a. Two Percentage Point Reduction
    In the FY 2007 IPPS proposed rule (71 FR 24091), we proposed to 
amend our regulations at Sec.  412.64(d)(2) to reflect the 2.0 
percentage point reduction in the payment update for FY 2007 and 
subsequent fiscal years for hospitals that do not comply with 
requirements for reporting quality data as provided for under section 
5001(a) of Pub. L. 109-171.
    Comment: One commenter stated that the increase from a 0.4 
percentage point reduction in the annual payment update to a 2.0 
percentage point reduction was too great and that this increase could 
cause some small hospitals to close.
    Response: The increase from a 0.4 percentage point reduction to a 
2.0 percentage point reduction is mandated by section 
1886(b)(3)(B)(viii)(I) of the Act.
    Comment: One commenter asked if the 2.0 percentage point reduction 
in the market basket update would ever apply retroactively.
    Response: The amount of the reduction and the payment update to 
which a reduction applies are governed by statute. Section 
1886(b)(3)(B)(viii)(I) of the Act requires a 2.0 percentage point 
reduction for FY 2007 ``and each subsequent fiscal year.'' Section 
1886(b)(3)(B)(viii)(I) also provides that the 2.0 percentage point 
reduction ``shall apply only to the fiscal year involved.'' Therefore, 
the 2.0 percentage point reduction will not affect the annual payment 
update for a hospital for any fiscal year prior to FY 2007.
b. New Procedures
    We also revised the RHQDAPU program's procedures to reflect our 
experience with this program and to implement section 5001(a) of Pub. 
L. 109-171, including the new requirement for the reporting of an 
expanded set of quality measures. In addition to publication in this 
final rule, all revised procedures will be added to the ``Reporting 
Hospital Quality Data for Annual Payment Update Reference Checklist'' 
section of the QualityNet Exchange Web site. This checklist also 
contains all of the forms to be completed by hospitals participating in 
the program. In order to participate in the hospital reporting 
initiative, hospitals must follow these steps:
    <bullet> Identify a QualityNet Exchange Administrator who follows 
the registration process and submits the information through the QIO. 
This must be done regardless of whether the hospital uses a vendor for 
transmission of data.
    <bullet> Complete the revised ``Reporting Hospital Quality Data for 
Annual Payment Update Notice of Participation'' form. All hospitals 
must send this form to their QIO, no later than August 15, 2006. In 
addition, before participating hospitals initially begin reporting 
data, they must register with the QualityNet Exchange, regardless of 
the method used for submitting data. Although, we proposed that this 
form be submitted by August 1, 2006, we have chosen to extend the due 
date to August 15, 2006 to provide hospitals with additional time to 
notify their QIOs regarding their intent to participate. We received no 
comments on this proposal.
    <bullet> Continue to collect data for all 10 ``starter set'' 
quality measures (or begin collecting such data, if newly participating 
in the program), and submit the data to the QIO Clinical Warehouse 
either using the CMS Abstraction & Reporting Tool (CART), the JCAHO 
ORYX[supreg] Core Measures Performance Measurement System, or another 
third-party vendor tool that has met the measurement specification 
requirements for data transmission to QualityNet Exchange. The QIO 
Clinical Warehouse will submit the data to CMS on behalf of the 
hospitals. The submission will be done through QualityNet Exchange. 
Because the information in the QIO Clinical Warehouse is considered QIO 
information, it is subject to the stringent QIO confidentiality 
regulations in 42 CFR Part 480. We proposed that hospitals continue to 
submit data regarding the starter set of 10 quality measures because 
the existing data submission schedule that we will use for the FY 2007 
update relies on discharges that occurred in calendar year (CY) 2005. 
Because the first three quarters of CY 2005 data already have been 
submitted, we did not propose to require hospitals to submit any 
additional CY 2005 data to address the new quality measures. However, 
we again note that many hospitals have been providing data on these 
additional measures since they were first included in the HQA set, 
although these measures did not affect hospitals' annual payment 
adjustment under the RHQDAPU program implementing section 501(b) of 
Pub. L. 108-173.
    <bullet> For the FY 2007 update, we proposed that hospitals also 
would be required to complete and return a written form on which they 
pledge to submit data on the set of expanded

[[Page 48032]]

quality measures starting with discharges that occur in CY 2006. The 
proposed 21 quality measures which we included in the proposed rule are 
part of the HQA-released measures that the 2005 IOM report recommended 
we use as expanded ``starter'' measures, and they include the 10 
measures that we originally adopted for the RHQDAPU program. As 
discussed above, new section 1886(b)(3)(B)(viii)(IV) of the Act 
requires us to begin to adopt the baseline set of performance measures 
set forth in the 2005 IOM report effective for payments beginning with 
FY 2007. We proposed that hospitals would be required to submit data on 
the expanded measures to the QIO Clinical Warehouse beginning with 
discharges that occur in the first calendar quarter of 2006 (January 
through March discharges). We also stated that the deadline for 
hospitals to submit their data for first calendar quarter of 2006 would 
be August 15, 2007.
    Comment: Over 100 commenters opposed our proposal that hospitals 
submit data using the expanded quality measures for discharges 
occurring in calendar year 2006. Even though data for the first 
calendar quarter of 2006 are not required to be submitted until August 
15, 2006, commenters stated that using the first calendar quarter as a 
starting date for submissions would create a hardship for hospitals, 
and require that their staff re-review records. Commenters recommended 
that the expanded measure set be used for future reviews only, and that 
all changes made to reporting should be done with a future effective 
date. Most of the commenters recommended that we require hospitals to 
begin reporting using the expanded quality measures starting with 
discharges occurring in the third calendar quarter of 2006.
    Response: After careful review and consideration of the operational 
issues raised by commenters, CMS has decided to modify the starting 
quarter for hospital reporting of the expanded 21 quality measures. In 
reviewing this matter, we recognized that hospitals who concurrently 
abstract data may have been required to reabstract data from records 
that had already been completed. Others would have the burden of 
reconsidering the additional data elements after the timeframe for 
which they are preparing to submit data. Given the goal of improving 
quality through public reporting in an efficient manner that does not 
create undue burden, CMS believes it is appropriate in this instance to 
modify the starting quarter for the expanded measures. Therefore, 
hospitals will now be required to submit data on the specified expanded 
set of 21 quality measures to the QIO Clinical Data Warehouse beginning 
with discharges that occur in the third calendar quarter of 2006 (July 
through September discharges). The deadline for hospitals to submit 
this data for third calendar quarter of 2006 is February 15, 2007. The 
measures that are part of this expanded measure set are described 
below.
    Comment: Several commenters stated that not all hospitals are 
currently submitting data on the expanded measure set. These commenters 
noted that hospitals that do not currently submit data using the 
expanded measure set may need to hire and train new staff to handle the 
new increased data abstraction requirements that we proposed to 
implement in the proposed rule. Some of these commenters suggested that 
reporting data on the expanded measure set should start with January 
2007 discharges in order to allow hospitals additional time to make the 
necessary changes for the extra work.
    Response: Although hospitals are not currently required to submit 
data on the full set of 21 quality measures identified in the proposed 
rule, many of them are already submitting these data on a voluntary 
basis under the HQA initiative. As noted in our response to the 
previous set of comments, we have modified our proposal in response to 
concerns expressed by commenters. Hospitals will now be required to 
submit data on a specified expanded set of measures to the QIO Clinical 
Data Warehouse beginning with discharges that occur in the third 
calendar quarter of 2006 (July through September discharges). The 
deadline for hospitals to submit this data for third quarter 2006 is 
February 15, 2007. We believe that this will provide adequate 
additional time for hospitals to hire or train staff regarding the 
expanded quality measures.
    Comment: One commenter expressed concern that the proposed rule 
requires hospitals to start collecting data on the expanded quality 
measures immediately.
    Response: As indicated above, we have modified our original 
proposal to ease the hospitals' transition to reporting using the 
expanded quality measures. For the expanded measures reporting 
requirement, hospitals will now be required to pledge to submit data on 
the expanded measures beginning with discharges that occur in the third 
calendar quarter of 2006 (July through September discharges). Hospitals 
are given 4\1/2\ months following the last day of a discharge quarter 
to submit accurate data into the QIO Clinical Data Warehouse. 
Therefore, under our revised policy, we believe that hospitals will 
have sufficient time to plan when they will begin to collect data on 
the expanded quality measures.
    We would also like to note that we have taken steps to ensure that 
the burden on hospitals to submit data on the expanded measures is as 
minimal as possible. For example, in addition to being described in 
this rule, all of the measures that must be reported, including the 11 
newly required measures, are also described in the ``Specifications 
Manual for National Hospital Quality Measures,'' which is a manual that 
is jointly issued and maintained by CMS and JCAHO. The manual contains 
all of the specifications, data definitions, data collection rules and 
algorithms related to all 21 measures (the 10 RHQDAPU PROGRAM measures 
and the 11 measures that are being voluntarily reported under the HQA 
initiative). All specifications for each of these measures as used by 
CMS for the RHQDAPU program are identical to, or ``aligned'' with, 
those used by JCAHO. The CMS and JCAHO alignment results in a single 
standardized process for the reporting of measures that is accepted by 
both CMS and JCAHO. In an effort to reduce the reporting burden on 
hospitals, CMS and the JCAHO work together to refine the data 
collection process for hospitals for the purposes of validation, public 
reporting, and the RHQDAPU program. Additionally, CMS and JCAHO have 
agreed to release all documents associated with data collection at a 
minimum of 120 days prior to implementation.
    Comment: One commenter stated that the time frames for data 
collection in the proposed rule do not provide hospitals the 
opportunity to change or correct mistakes.
    Response: The current data submission timeframe is designed to 
provide sufficient time for hospitals to meet all reporting 
requirements. Hospitals are given 4\1/2\ months following the last day 
of a discharge quarter to submit accurate data into the QIO Clinical 
Data Warehouse. We believe that this is a sufficient timeframe for the 
vendor, hospital, QIO or other interested party to identify data errors 
and submit corrections in advance of the data submission deadline. 
Additionally, abstractions can begin as early during the quarter as the 
day the patient is actually admitted. As such, hospitals actually have 
up to 3 months in addition to the 4\1/2\ months following the last day 
of the discharge quarter to collect and submit data. In

[[Page 48033]]

addition, under Sec.  482.24 of our regulations, all elements of the 
medical record (for example, documentation) are required to be complete 
within 30 days following discharge, so we believe that hospitals have 
adequate time for the record abstraction and submission.
    To ensure that data submission problems are recognized and 
corrected early, we encourage hospitals to submit their data 
continuously or to conduct test transmissions prior to the quarterly 
posted data transmission deadlines. Testing transmissions ensures that 
hospitals' computer systems are equipped with the proper software and 
configuration required to successfully transmit data through QualityNet 
Exchange Web site. We note that it is a hospital's responsibility to 
ensure that its data are submitted successfully to the QIO Clinical 
Data Warehouse. To make it easier for hospitals to verify whether their 
data were successfully submitted, the QualityNet Exchange Web site has 
a function that enables hospitals to run reports during test 
transmissions and after final transmission of data that indicate which 
records were successfully submitted, with and without errors, and/or 
which data were rejected by the warehouse. We recommend that hospitals 
run these reports following each submission of data. Submitting test 
files early also allows hospitals to check the reports to identify and 
change or correct mistakes.
    Comment: Two commenters stated that the retrospective way that data 
are reviewed does not offer sufficient opportunity to quickly correct a 
problem in the hospital setting. One commenter recommended that 
abstracting occur concurrently with discharge, thereby preventing 
discharge if additional clinical requirements need to be met. The 
commenter suggested that a real-time data system be developed to 
capture this information. The system would alert health care providers 
when clinical requirements have not been met so that hospitals can 
remedy these requirements prior to discharging the patient. The 
commenter also suggested that CMS sponsor a demonstration project for 
this activity. It would give CMS the opportunity to lead the way for 
improved technology dissemination in hospitals.
    Response: As we discussed in our discussion of value-based 
purchasing in the FY 2007 IPPS proposed rule (71 FR 24098), one of the 
challenges we face is minimizing the length of time between our receipt 
of, and our ability to provide feedback to hospitals on, the data they 
submit. We agree that hospitals also face this same issue with data 
they collect. CMS encourages hospitals to take steps toward the 
adoption of electronic medical records (EMRs) that will allow for the 
reporting of clinical quality data. In general, whether to abstract on 
a concurrent or on a retrospective basis is a hospital's decision, 
although we recognize there may be a necessary period of retrospective 
abstraction due to the implementation of new measures. We do not 
believe that a demonstration project is needed.
    Comment: Several commenters noted that expanding the measure set 
retroactively will require hospitals to re-negotiate contracts with 
their vendors.
    Response: We disagree that our proposal to require hospitals to 
submit data beginning with first quarter 2006 discharges would have 
expanded the measure set retroactively. However, as noted above, in 
response to the comments we received, we will require that hospitals 
begin using the expanded measure set for submissions due February 15, 
2007 relating to discharges occurring in the third calendar quarter of 
2006. We believe that this change will afford hospitals adequate notice 
to prepare for reporting using the expanded quality measures. CMS 
provides information in a manner that is timely for purposes of meeting 
the requirements outlined. CMS does not comment on the contractual 
arrangements between private parties such as hospitals and their 
vendors. CMS will continue to work with all to assist with their timely 
performance, but this issue remains a private contractual arrangement 
between those parties. As an alternative, CMS also provides the CART 
tool to ensure that hospitals may timely meet its requirements for the 
annual payment update.
    Comment: Sixteen commenters requested that CMS consider publishing 
the proposal to expand the set of measures at least one full year prior 
to the start of the fiscal year to which the proposal would apply. 
Seven other commenters requested a 6-month to 1-year lead-time to 
prepare for reporting additional quality measures adopted by the 
Secretary as part of the RHQDAPU program.
    Response: We have used the rulemaking process to adopt new quality 
measures under the RHQDAPU program, and we believe that this process 
provides sufficient notice for hospitals to comply for the annual 
payment update. We also note that all of the measures we have adopted 
to date for reporting under the RHQDAPU program were previously 
reported by many hospitals under other voluntary reporting initiatives.
    Comment: One commenter suggested that CMS publicly release a list 
of the hospitals that do not meet quality reporting requirements each 
year. This would allow the affected hospitals to know immediately that 
they are not in compliance with quality reporting.
    Response: Hospitals that met the current CMS requirements for 
quality data reporting and received their full annual payment update 
(APU) for FY 2006 are listed on www.qualitynet.org. In the future, 
QualityNet will display a list of those hospitals receiving their full 
APU for FY 2007. CMS currently does not have a system in place for 
individually notifying hospitals that fail to meet the RHQDAPU program 
requirements. CMS is currently considering how to inform those 
hospitals that do not receive their full annual payment update for FY 
2007.
c. Expanded Quality Measures
    In the FY 2007 IPPS proposed rule (71 FR 24093), we listed 21 
proposed quality measures, including the 10 ``starter set'' measures 
and 11 new measures. The expanded set of measures includes:

Heart Attack (Acute Myocardial Infarction)

    <bullet> Aspirin at arrival
    <bullet> Aspirin prescribed at discharge
    <bullet> ACE inhibitor (ACE-I) or Angiotensin Receptor Blocker 
(ARBs) for left ventricular systolic dysfunction
    <bullet> Beta blocker at arrival
    <bullet> Beta blocker prescribed at discharge
    <bullet> Thrombolytic agent received within 30 minutes of hospital 
arrival
    <bullet> Percutaneous Coronary Intervention (PCI) received within 
120 minutes of hospital arrival
    <bullet> Adult smoking cessation advice/counseling

Heart Failure (HF)

    <bullet> Left ventricular function assessment
    <bullet> ACE inhibitor (ACE-I) or Angiotensin Receptor Blocker 
(ARBs) for left ventricular systolic dysfunction
    <bullet> Discharge instructions
    <bullet> Adult smoking cessation advice/counseling

Pneumonia (PNE)

    <bullet> Initial antibiotic received within 4 hours of hospital 
arrival
    <bullet> Oxygenation assessment
    <bullet> Pneumococcal vaccination status
    <bullet> Blood culture performed before first antibiotic received 
in hospital
    <bullet> Adult smoking cessation advice/counseling
    <bullet> Appropriate initial antibiotic selection
    <bullet> Influenza vaccination status

[[Page 48034]]

Surgical Care Improvement Project (SCIP)--Named SIP for Discharges 
Prior to July 2006 (3Q06)

    <bullet> Prophylactic antibiotic received within 1 hour prior to 
surgical incision
    <bullet> Prophylactic antibiotics discontinued within 24 hours 
after surgery end time
    Comment: Six commenters fully supported the progress CMS has made 
on the identification and reporting of quality measures.
    Response: CMS appreciates the comments and looks forward to 
continued support for this effort.
    Comment: One commenter suggested that, with regard to hospital 
acquired infections, CMS make it clear that process measures are an 
interim step prior to the reporting in the near future of the actual 
rates of common hospital acquired infections.
    Response: CMS believes that the information obtained from both 
process and outcome measures (an example of which would be the rates of 
common hospital acquired infections) are important and complementary in 
stimulating the system changes necessary for quality improvement. With 
regard to nosocomial or hospital-acquired infections, we appreciate the 
comment and would note that the NQF is currently evaluating measures of 
hospital acquired infections with the goal of endorsing a set of 
measures by 2007. The NQF is a voluntary consensus standard-setting 
organization established to standardize healthcare quality measurement 
and reporting, for its review and endorsement through its consensus 
development process. In addition, we are working with the Centers for 
Disease Control (CDC) and the AHRQ, two government agencies that 
collaborate with CMS on the SCIP on ways to further reduce surgical 
complications and infections and improve the kinds of information 
collected related to this goal.
    Comment: One commenter urged CMS to recognize new technology 
promptly and appropriately to ensure that measures do not provide 
incentives for hospitals to keep older technologies in place after they 
are outdated.
    Response: CMS is constantly reviewing the medical literature and 
maintains technical expert panels and consultants for its performance 
measure sets so that its measures remain up to date with current 
technologies. Additionally, we have regular conference calls with the 
relevant specialty societies, such as the American College of Surgeons, 
the American Society of Anesthesiologists, and the Association of 
periOperative Registered Nurses), to obtain their input on new evidence 
and changing best practices that might warrant a change to our 
performance measures.
    Comment: One commenter stated that in small hospitals, one person 
may be responsible for many jobs. In this situation, the commenter felt 
that submitting data regarding more measures was very redundant.
    Response: For each of the conditions (such as pneumonia) for which 
we adopt measures, the measures focus on individual aspects of care 
that are considered standard for every patient. The addition of 
measures represents a more comprehensive view of the quality of 
services provided to each patient. We believe that additional 
information from the added measures will contribute to quality 
improvement in patient care.
    Comment: Twenty-four commenters stated that their hospitals do not 
currently collect data for the surgical infection prevention (SIP) 
measures. They contend that the FY 2007 IPPS proposed rule's 
requirement that they establish a procedure for abstracting and 
collecting these measures for first quarter 2006 would be very 
burdensome for hospitals. Many of the commenters requested a delay in 
the implementation of the collection of SIP measures until third 
calendar quarter of 2006. Another commenter noted that the hospital's 
data collecting vendor would require additional funds to collect and 
process data to support the SIP measure data collection for January and 
February of 2006.
    Response: As noted above, in this final rule we have revised the 
implementation date for hospital reporting using the expanded quality 
measures (including the SIP/SCIP measures) so that reporting will begin 
starting with discharges occurring in the third calendar quarter of 
2006. We also note that submitting data via vendors is not the only 
route available to hospitals. Currently hospitals have available to 
them three mechanisms by which to submit data into the QIO Clinical 
Warehouse. It is the hospital's choice which mechanism it will utilize 
to report its data. The following data reporting mechanisms are 
available to hospitals:
    <bullet> Quality Improvement Organization Program (QIO)--CMS makes 
available to hospitals data reporting assistance via QIOs. QIOs provide 
technical assistance to hospitals as they report data, and if need be 
will report the data on behalf of the hospital.
    <bullet> Self reporting--Hospitals can report their own data. All 
data collection, including SIP/SCIP can be accomplished by using the 
CMS Abstraction & Reporting Tool (CART). This application tool is 
available at no charge to hospitals or other organizations.
    <bullet> JCAHO vendor--A hospital may authorize a JCAHO Performance 
Measurement System (PMS) vendor that has met the CMS measurement 
specifications to transmit data into the QIO Clinical Warehouse on its 
behalf.
    These reporting mechanisms are also described on the QualityNet 
Exchange Web site (www.qualitynet.org).
    Comment: Nine commenters noted that the data requirement for SCIP 
would result in unplanned costs to hospitals including the hiring of 
additional abstractors, additional training, and additional medical 
assistance to pull the pertinent charts.
    Response: Under section 5001(a) of Pub. L. 109-171, we are required 
to begin to adopt the baseline set of performance measures as set forth 
in the 2005 IOM report, which include the SIP/SCIP measures. In 
considering which of these measures we would adopt for the RHQDAPU 
program, we weighed the burden for the hospital to report additional 
quality data for the measure against the benefits of addressing 
recognized gaps in quality and providing beneficiaries with useful 
information on the quality of hospital care. We believe that the SIP/
SCIP measures strike the appropriate relative balance of interests.
    That balance is appropriate and valuable on three levels given the 
potential improvements in surgical site infections that can occur 
through proper antibiotic use. It is estimated that over half of the 
127,000 surgical site infections that are contracted by Medicare 
beneficiaries were preventable (Best, WR, Khuri SF, et al.; Identifying 
Patient Preoperative Risk Factors and Postoperative Adverse Events in 
Administrative Databases: Results from the Department of Veterans 
Affairs National Surgical Quality Improvement Program. J Am Coll Surg 
2002;194:257-266. 2002 by the American College of Surgeons).
    SCIP measures are designed as a framework to help hospitals 
organize and coordinate care. Evidence has shown that when hospitals 
change their internal systems to reliably deliver the care mandated in 
the SCIP measures, they are more efficient and safer for patients. For 
example, a nationwide collaborative dedicated to improve the processes 
of care outlined in the proposed SCIP Infection measures demonstrated a 
significant reduction in surgical site infection (Dellinger EP, 
Hausmann SM, et al., Hospitals collaborate to decrease surgical site

[[Page 48035]]

infections. Am J Surg. 2005 Jul;190(1):9-15.). And reliable processes 
of care aimed at assuring the correct deep venous thrombosis prevention 
as outlined in the proposed SCIP VTE measures ``markedly reduced'' the 
rates of these complications in patients at risk (Kucher, N, Koo S, et 
al.; Electronic Alerts to Prevent Venous Thromboembolism among 
Hospitalized Patients N Engl J Med 2005;352:969-77).
    Comment: One commenter stated that the sample size for SCIP for 
large hospitals will be onerous for these facilities. The commenter 
requested that the sample size be calculated using the entire 
organization's activity rather than each specialty. Under this 
approach, hospitals could decide on an individual basis if they want to 
drill down for more information.
    Response: Specialty-specific sample sizes are required to provide 
more precise measures by specialty. Much of the existing research about 
antibiotic administration is specialty-specific, and the exclusion 
criteria and process measure rates differ by specialty. The increased 
sample size is necessary to incorporate these specialty-specific 
differences into hospital-level estimates of antibiotic administration.
    The SCIP sample is designed to provide precise hospital level 
measures for all SCIP measures, including the SCIP Infection 1 and 3 
measures included in this rule. CMS believes that the SCIP specialty-
specific sample is designed to produce precise measures for the entire 
SCIP expanded measure set.
    Comment: One commenter agreed with the inclusion of the SIP 
measures. This commenter believed that there was not sufficient 
information provided by the two measures alone. The commenter urged CMS 
to include SIP-2 in the measures.
    Response: We agree with the commenter. CMS will evaluate how we can 
include SIP 2 (SCIP 2), appropriate selection of prophylactic 
antibiotics, in the future.
    Comment: One commenter recommended that CMS review the way some of 
the indicators are measured. Two commenters recommended that quality 
measures should conform to clinically appropriate care established by 
peer-reviewed literature or professional consensus. One commenter 
suggested that there needs to be a more scientific method when setting 
up indicators.
    Response: We believe that the quality measures in this rule and on 
Hospital Compare have a strong evidence base and represent technical 
guidelines from relevant stakeholder societies such as the American 
College of Cardiology and the American Heart Association. They are 
maintained by CMS working with the JCAHO through ongoing assessments of 
changes in the clinical literature, evaluation of trends in 
performance, and review by technical experts. In addition, all measures 
currently being reported, as well as those that we are adopting in this 
rule, have been endorsed by the NQF, a national consensus body whose 
mission is to identify a common set of standardized evidence-based 
measures for quality reporting. Detailed specifications for each of the 
measures, including information concerning the underlying literature 
and clinical evidence that led to their endorsement and adoption, are 
included in the Specifications Manual for National Hospital Quality 
Measures, at www.qualitynet.org.
    Comment: Two commenters stated that financial incentives must allow 
sufficient flexibility to meet the unique needs of individual patients, 
and not encourage hospitals to avoid the most difficult cases.
    Response: As noted in our response to the previous commenter, we 
have adopted evidence-based quality measures which have been endorsed 
by the NQF. There is no question that any payment system potentially 
contains incentives for unintended consequences that may be counter to 
the intent of those who design the system. We share the commenters' 
concern regarding this issue and will consider it as we monitor the 
impact of hospitals reporting data to receive the full market basket 
update under section 5001(a) of Pub. L. 109-171, and as we develop our 
plan for implementing a value-based purchasing, under section 5001(b) 
of Pub. L. 109-171.
    Comment: Eight commenters stated payment for 2007 will be reduced 
by 2.0 percentage points for performance indicators that have a track 
record of poor reliability, such as the working diagnosis of pneumonia. 
The commenters noted that some hospitals resort to answering working 
diagnosis for pneumonia as a ``yes'' for all pneumonia charts 
regardless of actual documentation, since the penalty is 
disproportionately more severe if the no answer is found to be 
incorrect. The commenters noted that a couple of mismatches on the 
``no'' response to working diagnosis can drive the hospitals to the 
brink of losing 2.0 percentage points of their annual payment update.
    Response: The working diagnosis element is only one of over 15 
elements in a single episode of care that is used to calculate the 
pneumonia measures. Many of the hospitals that failed quarterly 
validation due to submitting inaccurate pneumonia elements did not 
submit additional elements used in the calculation of pneumonia 
measures and validation score. All hospitals are able to submit all 
elements potentially used to calculate validation scores, and we 
encourage hospitals to submit all of these elements to improve their 
likelihood to pass quarterly validation.
    Comment: Two commenters recommended that for future measure 
development, CMS select measures only from those used by the HQA for 
public reporting.
    Response: CMS strongly values its participation in the HQA, which 
was established as a public-private collaboration to promote voluntary 
hospital public reporting on quality of care. Led by representatives of 
the hospital industry, with membership that includes consumer groups, 
unions, purchasers, providers, health plans and government, accrediting 
and standard-setting organizations, the HQA has been instrumental in 
helping to identify and find common ground among the diverse interests 
of these stakeholders. Congress recognized the HQA's role when it 
included the ``starter set'' of 10 measures, first identified by the 
HQA for reporting on Hospital Compare, in the Pub. L. 108-173 RHQDAPU 
program provisions (section 501(b)). As we now implement section 
5001(a) of Pub. L. 109-171 and expand the measure set for FY 2007 and 
beyond, we are asking hospitals to report on the 21 HQA-approved 
measures. In addition, HQA has strongly supported the development and 
use of the HCAHPS tool for assessment of patient experience with care. 
We expect to continue to work closely with the HQA in our future 
efforts, as well.
    In addition, we expect to add HCAHPS[supreg] measures to the 
RHQDAPU program's reporting set as soon as feasible. The HCAHPS[supreg] 
survey is designed to make ``apples to apples'' comparisons of 
patients'' perspectives on hospital care including communications with 
doctors, communications with nurses, responsiveness of hospital staff, 
cleanliness and quietness of the hospital, pain control, communication 
about medicines, and discharge information.
    Comment: One commenter requested a clear definition for antibiotic 
administration time. In the commenter's opinion, the current standard 
requiring that no longer than one-hour pass between the administration 
of the antibiotic and the making of a surgical

[[Page 48036]]

incision does not have adequate clinical support.
    Response: The performance measures that we have adopted for the 
RHQDAPU program, including the timing of prophylactic antibiotic 
administration prior to surgery, are evidence-based, consensus-derived 
measures. The measurement specifications each of these measures 
includes the supporting evidence basis for the measure, and can be 
found in the Specifications Manual for National Hospital Quality 
Measures, at www.qualitynet.org. In addition, as part of our routine 
maintenance review of the measures, we monitor any changes in the 
medical literature that would require modification of the measures.
    Comment: One commenter suggested ``retiring'' the oxygenation 
assessment measure. New section 1886(b)(3)(B)(viii)(VI) of the Act 
specifies that CMS has the ability to replace measures ``where all 
hospitals are effectively in compliance.'' The commenter noted that the 
average performance on this measure is 99 percent and that retiring 
this measure would be a signal to hospitals that CMS is willing to 
reduce the burden of data collection as the set evolves.
    Response: The commenter's points are well taken. The oxygenation 
measure was previously endorsed by the NQF. The NQF has recently 
initiated a ``maintenance'' review of all of its previously-endorsed 
pulmonary care measures, including the oxygenation measure, under which 
process these measures will be reevaluated by panels of experts and 
health care stakeholders (including CMS) to determine their continuing 
technical merit. CMS will defer its decision on the oxygenation measure 
until after this group has completed its deliberations.
    Comment: Several commenters stated that the measures recommended by 
the Leapfrog Group (computerized provider order entry, intensive care 
intensivists, and evidence-based hospital referrals) and included in 
the 2005 IOM report do not meet the quality measure standards necessary 
for inclusion in CMS' national quality measurement initiatives. In 
addition, commenters noted that rural hospitals have not previously 
been asked to comply with these measures. These commenters believe that 
it would be unwise for CMS to adopt these measures. Another commenter 
wrote in support of the use of such structural measures. This commenter 
noted, however, that in terms of burden on hospitals, such programs 
span multiple years, must be approved on an annual basis, and require 
board approval. They also require significant financial resources, 
human resources, and time to develop and implement. The commenter 
stated that requiring such programs, which present a challenge to 
either fund or risk reduction in payment, would not appear to be 
reasonable. For example, the commenter stated that the phased-approach 
implementation of computerized provider order entry for prescriptions 
(CPOE) for its facility is projected to be completed by 2009 with an 
estimated cost of up to $2 million.
    Response: We thank the commenters for their input. For FY 2007, we 
are not proposing that hospitals submit data on the three structural 
measures recommended by the three Leapfrog Group and included in the 
2005 IOM report. However, as we continue to expand the set of measures 
on which hospitals report, we will consider whether to include these 
measures, as well as other structural measures and will bear the 
commenters' observations in mind.
    Comment: Several commenters agreed that measures selected should be 
those that are endorsed by NQF and aligned with JCAHO's reporting 
requirements. The commenters also proposed that methods for maintaining 
measures be developed and implemented. Since medical knowledge 
continues to evolve, the science behind clinical practice guidelines 
must be monitored for changing evidence that previously accepted 
clinical practices no longer define the best care. Without this 
important step, measures cannot continue to evaluate best quality of 
care delivered to patients. The commenters proposed that CMS create a 
plan, including method and frequency for monitoring new evidence that 
impacts established measures, in addition to monitoring for adjustments 
needed to improve their implementation.
    Response: We agree with the commenters. CMS continuously monitors 
new evidence and works with panels of experts, as well as with the 
relevant specialty societies and other groups that develop practice 
guidelines, to assure that the measures are up to date, and to verify 
that measures reflect best clinical practice. In addition, we work with 
JCAHO experts to assure that the detailed specifications and 
instructions for collection of data used to calculate the rates 
reflects the most up to date information about medications, coding, and 
other issues.
    Comment: A commenter suggested that as new measures are added and 
mandated for public reporting, payment should not be based on simply 
the indicator percentage, but should also include the percentage change 
of improvement or the quarters of sustained improvement. The commenter 
stated that data collected based on such process improvement would be 
test data until the processes being measured were stable. Just as 
indicators are tested and validated, process improvement provides data 
that is test data. Transparency of data reporting connected to payment 
needs to allow a test period for data to not ``count'' toward payment.
    Response: The commenter has made several important suggestions that 
are relevant to our ongoing deliberations about measures for both 
reporting quality data and for value-based payment systems (discussed 
more fully in section IV.B. of this preamble). In proposing that CMS 
consider measures that highlight improvement over time, rather than 
just performance during a single time period, the commenter has offered 
an important suggestion that addresses our goal of identifying a set of 
measures that will support sustained quality improvement. We also 
raised this issue in the 2007 IPPS proposed rule in our discussion of 
value-based purchasing (71 FR 24098). As we consider further expansion 
of the measure set, we will consider this suggestion, as well as the 
commenter's suggestion that hospitals be given the opportunity to 
``test'' the reporting of new measures before they are included in any 
payment incentive arrangement.
    Comment: Three commenters strongly urged CMS to adopt measures 
identified in the 2005 IOM report as well as consider and adopt as many 
additional NQF-endorsed measures as can be feasibly collected, for 
example:

Outcomes

    <bullet> 30-day heart failure mortality
    <bullet> 30-day heart attack mortality
    <bullet> Failure to rescue

Complications

    <bullet> Urinary catheter-associated infection rate
    <bullet> Central line-associated blood stream infection rate
    <bullet> Ventilator associated pneumonia rate

Clinical

    <bullet> Surgery patients with recommended venous thromboembolism 
prophylaxis ordered
    <bullet> Surgery patients who received appropriate venous 
thromboembolism prophylaxis within 24 hours prior to surgery to 24 
hours after surgery
    Response: We appreciate the specific recommendations of the 
commenters and will consider them as we look to expand the set of 
measures.

[[Page 48037]]

    Comment: One commenter recommended that CMS continue to work to 
ensure the accuracy of the information posted on the Hospital Compare 
Web site. The methodology adopted should be fully transparent to all 
stakeholders to clearly assess hospital-level reliability. The 
commenter recommended that we also engage representatives from the 
research, provider, and consumer communities to obtain input on the 
different potential methodologies and their impact on data validity, 
accuracy, and completeness.
    Response: We agree with the commenter. The integrity of the 
information posted on the Web site depends on the accuracy of the 
underlying data. In the 2007 IPPS proposed rule, we solicited input on 
proposed revisions to our methodology, and CMS remains open to advice 
and suggestions concerning how to continue to improve its processes to 
assess and assure hospital-level reliability.
    Comment: Two commenters urged CMS to include outcome measures based 
on the best available science and consensus, rather than permanently 
focus on the process measures that it has adopted. Ultimately, 
consumers want to see the results of hospital practices, that is, 
whether the processes measured actually yield higher quality care as 
indicated by results, such as better mortality rates and fewer 
infections.
    Response: We appreciate the specific recommendations of the 
commenter and will consider them as we look to further expand the set 
of measures. We are particularly interested in considering measures 
that have been endorsed by consensus building entities such as the NQF 
that take into account the issues of validity, reliability, impact and 
feasibility of the measures and involve a wide array of stakeholders. 
We also anticipate issuing a rulemaking in the near future that would 
propose to adopt a number of outcome measures, which may include 30-day 
post-admission mortality rates for patients with acute myocardial 
infarction and heart failure
    Comment: Two commenters requested that, as we consider new 
measures, we involve all stakeholders in the process.
    Response: CMS agrees with the commenter that stakeholder input is 
an essential part of the measure selection process. CMS receives input 
from stakeholders through multiple vehicles such as the NQF, the HQA 
and the notice and comment rulemaking process. CMS remains committed to 
the goal of including stakeholders in the process.
    Comment: One commenter suggested that because CMS makes its 
hospital quality data public, the data should be risk adjusted, and 
technical standards should be applied to the data to assure fair 
treatment of hospitals.
    Response: The set of measures currently reported on Hospital 
Compare are process measures for which no risk adjustment is needed, 
since they are constructed to reflect the proportion of cases in which 
a patient received the care that is appropriate for his or her clinical 
needs. The measures are constructed to exclude cases for which an 
intervention would not be appropriate. We expect that, as we consider 
whether to expand the set of measures to include outcome measures, we 
will need to address concerns about risk-adjustment and patient-mix.
    Comment: Two commenters suggested that CMS develop measures that 
examine quality and costs of care within and across settings over time. 
A commenter also recommended allowing variation in the implementation 
of new measures due to variability across the country.
    Response: We appreciate the recommendations of the commenters. As 
we work to expand the set of measures that hospitals report under the 
RHQDAPU program, we will consider such issues as how to assess care 
coordination both within and across hospitals and health care 
providers, as well as how to account for expected and unexpected 
variations in performance across providers.
    Comment: One commenter expressed concern about the negative effects 
of requiring hospitals to report measures when it is actually the 
physician who orders the care. This particularly happens in the case of 
small rural hospitals. This commenter indicated that the hospital 
should not be responsible for physician mistakes.
    Response: Hospitals cannot abrogate their responsibility for the 
care that is practiced at their own facilities. Given that virtually 
all significant treatment decisions are initiated with a physician's 
order, this argument would absolve hospitals of virtually all 
responsibility for quality and safety.
    Comment: One commenter recommended addressing the alignment of 
physician and hospital indicators. If alignment is not possible, the 
commenter recommended that we have physician-driven indicators that 
apply to physicians only.
    Response: CMS is working collectively with the hospital and 
physician communities to improve the overall quality of health care for 
Americans. As part of this effort, CMS to use a common focus on quality 
by clinicians and providers to achieve improvement in the quality of 
healthcare. One example of this is the Surgical Care Improvement 
Project (SCIP). The use of metrics that focus on surgical quality from 
both the physician and provider perspective offer the best opportunity 
to improve the surgical quality of care. In addition, CMS launched a 
Physician Voluntary Reporting Program (PVRP) that incorporated 
indicators that will align physician interests with hospitals. More 
information on PVRP can be found at www.cms.hhs.gov/pvrp.
d. HCAHPS[supreg] Survey
    As recommended in the IOM report, we will be implementing the 
HCAHPS[supreg] survey in October 2006 as a part of the HQA. 
HCAHPS[supreg] is designed to make ``apples to apples'' comparisons of 
patients'' perspectives on hospital care including communications with 
doctors, communications with nurses, responsiveness of hospital staff, 
cleanliness and quietness of the hospital, pain control, communication 
about medicines, and discharge information. More information on this 
survey can be found on our Web site: www.cms.hhs.gov/HospitalQualityInits/downloads/HospitalHCAHPSFactSheet200512.pdf. We 
intend to report the first three quarters of these survey data in late 
2007 on the Web site: www.hospitalcompare.hhs.gov. HCAHPS[supreg] was 
endorsed by the NQF in May 2005. However, we did not propose to include 
HCAHPS[supreg] as a part of the revised FY 2007 ``Reporting Hospital 
Quality Data for Annual Payment Update Notice of Participation'' form.
    We believe that the procedures and expanded measure set that we 
proposed to adopt in the FY 2007 IPPS proposed rule meets the 
requirement of section 1886(b)(3)(B)(viii)(IV) of the Act that, ``for 
payments beginning with fiscal year 2007, in expanding the number of 
measures, under subclause (III), the Secretary shall begin to adopt'' 
the 2005 IOM report's set of baseline measures. Section 
1886(b)(3)(B)(viii)(III) of the Act states that we must expand, for FY 
2007 and each subsequent fiscal year, the set of measures that the 
Secretary determines to be ``appropriate'' for the measurement of the 
quality of care furnished by hospitals in inpatient settings beyond the 
original quality measures that applied in FY 2005 and FY 2006.
    We believe that the statute gives the Secretary the discretion to 
choose what ``begin to adopt'' should involve in FY 2007 and the number 
of additional

[[Page 48038]]

measures, if any that would be ``appropriate'' during this time. In 
proposing our revised procedures, designing the methods that hospitals 
will use to report during FY 2007, establishing a set of expanded 
measures based on the 2005 IOM report, and revising RHQDAPU program 
materials, we believe that we have met the statutory requirements. We 
will continue to explore the feasibility of adopting additional 
measures for purposes of the FY 2008 update, including the 
HCAHPS[supreg] survey described in the IOM report and other measures 
that reflect consensus among affected parties, as required by new 
sections 1886(b)(3)(B)(viii)(III) through (V) of the Act.
    Comment: One commenter expressed support for the HCAHPS[supreg] 
initiative, but requested that CMS make the survey available in 
languages other than English and Spanish. The commenter noted that in 
areas with diverse patient populations such as New York City, hospitals 
will not be able to conduct the survey adequately in only two 
languages.
    Response: The HCAHPS[supreg] survey is currently available only in 
English and Spanish. We intend to solicit comments from participating 
hospitals and survey vendors regarding additional languages for 
HCAHPS[supreg]. This information can be submitted to our HCAHPS 
mailbox, <a href="/cdn-cgi/l/email-protection#e0a3adb3a8afb3b0a9b4a1aca3a1a8b0b3a0838d93ce888893ce878f96"><span class="__cf_email__" data-cfemail="f5b6b8a6bdbaa6a5bca1b4b9b6b4bda5a6b5969886db9d9d86db929a83">[email protected]</span></a>. Based on the information we 
receive, we will establish priorities for HCAHPS[supreg] translation 
into additional languages.
    Comment: One commenter recommended that we offer hospitals 
sufficient time to incorporate the HCAHPS[supreg] measures into their 
care protocols. The commenter suggested that we establish an 
implementation schedule that provides for sufficient time for hospitals 
to become familiar with data submission, and instructions explaining 
how to use the tool for feedback. The commenter noted that such an 
approach would allow for development of more accurate data.
    Response: We agree that hospitals and survey vendors must become 
familiar with the HCAHPS[supreg] instrument, data collection, and data 
submission procedures prior to participation in the national 
implementation of the survey. To this end, CMS offered free training to 
hospitals and survey vendors in February and April of this year. 
Additionally, to gain experience in all aspects of the survey, 
hospitals that will participate in the national implementation of 
HCAHPS[supreg] in October 2006 were required to take part in a ``dry 
run'' of the survey in April, May, or June of this year. Data submitted 
to CMS from this dry run will not be publicly reported. CMS is planning 
to offer additional training and dry run opportunities for hospitals 
that will join the HCAHPS[supreg] initiative after October 2006.
    Comment: One commenter recommended that the following question be 
added to the HCAHPS[supreg] patient survey proposed for October 2006, 
``Did you get an infection while you were in the hospital or after any 
surgery or other procedure?'' The commenter stated that most patients 
would know about the existence of an infection, and this would be a 
more precise way to identify significant problems than more general and 
subjective HCAHPS[supreg] questions, such as questions that address the 
``cleanliness and quietness of the hospital.''
    Response: We appreciate this suggestion, but at this time we are 
not planning to add new items to the current version of the 
HCAHPS[supreg] survey (which can be found on www.hcahpsonline.org)) 
based on our evaluation of the survey and on comments we received on 
the survey in response to multiple Federal Register notices that we 
published (for example, 68 FR 5889, 68 FR 38346, 68 FR 68087, and 70 FR 
67476). However, we will keep this suggestion in mind for future 
versions of the survey.
    Comment: Two commenters stated that for FY 2008, CMS needs to more 
than merely explore the feasibility of adopting additional measures for 
FY 2008 update. There should be a substantial expansion of measures for 
hospitals to obtain the FY 2008 annual update. The commenters agreed 
with the Consumer-Purchaser Disclosure Project recommendations that CMS 
adopt the additional measures identified in the 2005 IOM report 
(HCAHPS[supreg] and three structural measures), as well as consider and 
adopt a number of other NQF-endorsed measures.
    Response: We note that in addition to the expanded measure set that 
we are adopting in this rule, we will begin national implementation of 
the HCAHPS[supreg] survey in October 2006. We also anticipate further 
expanding the measure set for FY 2008 and will consider adopting other 
NQF-endorsed measures at that time.
    Comment: A commenter suggested that CMS identify and develop, in 
collaboration with the long-term care hospital (LTCH) industry, 
appropriate quality measurement indicators and begin collecting and 
public reporting results across providers.
    Response: At this time, we are not working on developing measures 
for the long term care hospital setting. However we will consider, in 
the future, the commenter's suggestions regarding the collection of 
quality measures from long term care hospitals. HCAHPS[supreg] has been 
developed for use by short-term, acute-care hospitals, which 
encompasses all hospitals that are eligible to submit clinical measures 
for public reporting. At this time, other types of hospitals, including 
LTCHs, are not eligible to participate in HCAHPS[supreg]. CMS will, in 
the future, consider whether and how an HCAHPS[supreg] survey could be 
re-designed for appropriate use by other types of hospitals, including 
LTCHs.
    Comment: Several commenters stated that there is no ``no-cost'' 
alternative to using a vendor to participate in HCAHPS[supreg], unlike 
the situation of the collection of clinical chart abstraction data. 
They noted that this presented a significant burden to hospitals that 
will have no alternative to using commercial vendors to satisfy a 
Federal mandate. In addition, the commenters stated that a substantial 
number of hospitals do not currently conduct a patient experience 
survey and that the Federal government has committed only to providing 
the interface to upload data to QualityNet Exchange. Some commenters 
suggested that it would be helpful if we provided clear and concise 
guidance on HCAHPS[supreg] sampling.
    Response: From the inception of the survey, CMS has been attentive 
to the costs to hospitals that participate in HCAHPS[supreg]. 
HCAHPS[supreg] has been designed to allow a hospital to either conduct 
the survey on its own, or to conduct the survey through the use of a 
survey vendor. A hospital that elects to self-administer HCAHPS[supreg] 
must meet a series of minimum survey requirements related to prior 
survey experience, capacity to conduct HCAHPS[supreg], and its ability 
to satisfy quality control procedures. In addition, HCAHPS[supreg] was 
designed to be compatible with a range of popular survey practices. It 
is made available in four modes of administration (mail, telephone, 
mail with telephone follow-up, or active IVR), and can be implemented 
as a stand-alone survey, or integrated within an ongoing patient 
survey. Because of the nature of the HCAHPS[supreg], the tool developed 
for HCAHPS[supreg] is different from the CART tool. However, CMS has 
designed an HCAHPS[supreg] on-line tool that allows hospitals that 
self-administer the survey to enter and upload the survey data into the 
QualityNet Exchange data base. There is no charge for use of the 
HCAHPS[supreg] on-line tool.
    Further, in February and April 2006 CMS offered free training on 
participation in the HCAHPS[supreg] survey.

[[Page 48039]]

Among its topics, this training included detailed instruction on 
sampling. Additional iterations of this training program are currently 
being planned. CMS also provides readily available guidance on sampling 
and other HCAHPS[supreg] issues through its HCAHPSonline.org help desk. 
In addition, QualityNet Exchange maintains a help desk that provides 
assistance on matters related to submission to the HCAHPS[supreg] data 
warehouse. All of these services are available free of charge.
    An independent study of the benefits and costs of HCAHPS[supreg] 
estimated that the average cost of HCAHPS[supreg] collected as a 
separate survey to be between $3,300 and $4,575 per hospital. The cost 
of combining HCAHPS[supreg] with an existing hospital survey would be 
about $978 per hospital (Abt Associates Inc.: Costs and Benefits of 
HCAHPS, October 5, 2005). Additionally, hospitals have the option to 
use a survey vendor or conduct HCAHPS[supreg] on their own if they have 
prior survey experience.
e. Data Submission
    For the FY 2007 update, we specify that hospitals must submit 
complete data regarding the quality measures in accordance with the 
joint CMS/JCAHO sampling requirements located on the QualityNet 
Exchange Web site. These requirements specify that hospitals must 
submit a random sample or complete population of cases for each of 
three topics (acute myocardial infarction, heart failure, and 
pneumonia) covered by the starter set of 10 quality measures. Hospitals 
are expected to continuously meet these sampling requirements for the 
starter set of 10 quality measures for discharges in each quarter.
    We do not anticipate significant additional burden on hospitals 
regarding the starter set of 10 quality measures or the anticipated 21 
clinical quality measures because all JCAHO-accredited hospitals are 
currently required to adhere to these sampling requirements in acute 
myocardial infarction, heart failure, pneumonia, and surgical infection 
prevention for accreditation and core measure reporting purposes.
    Comment: One commenter suggested that CMS consider a methodology 
that would allow resubmission of data in cases where incorrect data has 
been identified by the submitting provider, while still maintaining the 
integrity of the data validation process for payment purposes. The 
commenter suggested that this could be accomplished through the use of 
two databases. One database would be frozen once the final submission 
deadline for a quarter has passed to be used for Clinical Data 
Abstraction Center (CDAC) validation. However, if the providers 
discovered errors in its data submission after the quarterly deadline, 
it would be able to use a second database to submit updated data. The 
commenter believed that this would improve the data available on 
Hospital Compare.
    Response: We believe that the commenter's suggestion that we create 
two separate databases has the potential to maintain the integrity of 
the validation process as well as to improve the quality of the 
publicly reported data. We will review the methodology and take this 
suggestion into consideration.
    Comment: One commenter requested that CMS create meaningful and 
useful reports that would be available to vendors after data submission 
is complete each quarter. The reports should identify actionable steps 
that hospitals are required to take to make sure they successfully 
submit data for the RHQDAPU program. CMS should also modify the current 
Failure and Success Reports so that any data elements needed to 
populate or calculate measures reported for the annual payment update 
can be identified as a critical error and result in the rejection of 
the record. The hospital should be able to download the entire report, 
without having to download it into several reports.
    Response: CMS thanks the commenter for the suggestions on how to 
improve the reports. The following reports are currently available to 
hospitals and vendors:

------------------------------------------------------------------------
                                                              Provider
           Title of report                Vendor access        access
------------------------------------------------------------------------
QIO Clinical Warehouse Import Detail  X...................            X
 by Provider--Provides case import
 status into warehouse; options for
 queries include topic, upload
 status, discharge dates, types of
 messages (critical, informational
 and measures) and various sort
 options.
QIO Clinical Warehouse Import Detail  X...................            X
 by Error Code--Provides case import
 status into warehouse; options for
 queries include topic, upload
 status, discharge dates and various
 sort options.
QIO Clinical Warehouse Submission     X...................            X
 Summary--Case submission summary.
Case Status Summary Report--Includes  Based on hospital               X
 measure inclusion status and reason   authorization.
 for exclusion.
Measure Status Summary Report--       Based on hospital               X
 Summary of number of cases            authorization.
 indicated per quality measure for
 cases accepted into the QIO
 Clinical Warehouse.
------------------------------------------------------------------------

    CMS is currently reviewing the data submission reports and 
considering modifications to improve and enhance the existing feedback 
reports. In the interim, we released two additional reports in June 
2006 to provide more detailed information to hospitals.
    <bullet> QIO Clinical Warehouse Measure Status by Category; this 
report will provide information by measure to include total cases as 
well as the number of cases by measure category (A-E).
    <bullet> QIO Clinical Warehouse Measure Status by Case; this report 
will provide by measure for each case whether the case was eligible for 
the denominator, passed the measure (numerator), was excluded from 
measure calculation and the reason for exclusion.
    CMS and its contractors routinely conduct training to provide 
additional assistance concerning how to access and utilize QualityNet 
Exchange Reports. Information on these trainings can be found on 
QualityNet Exchange Web site.
    Comment: Two commenters requested that corporate owners and vendors 
have access to QualityNet reports about their specific hospitals, and 
believe that these reports should not be provided only to hospitals. 
The commenters stated that having access to these reports will allow 
hospitals to discern whether errors in data transmission have occurred 
and whether data should be resubmitted before the deadline.
    Response: Hospitals have had the ability to grant third parties 
such as health care systems and vendors permission to access select 
QualityNet Exchange Reports since December 2004 through QualityNet 
Exchange Self-Serve. Health care system users and vendors obtain 
permission to access hospital reports by completing a QualityNet 
registration form and submitting the form to the QualityNet help desk. 
The QualityNet help desk will process the registration form. When

[[Page 48040]]

a QualityNet user account is assigned, the health care system or vendor 
user can then request access to reports through the QualityNet Self 
Serve. The healthcare system's or vendor's report request is then sent 
to the hospital for report access approval. Detailed instructions for 
using QualityNet Exchange Self-Serve are available in Chapter 2, 
Section 2 of the User Guide located on www.QualityNet.org.
    Comment: One commenter opposed CMS' intent to develop measures 
specifications and a system or mechanism to accept data without 
converting it into XML.
    Response: CMS does not intend to develop measures specifications 
and a system or mechanism to accept data without converting it into 
XML. Our intent is to continue to utilize the XML format for file 
submissions.
    Comment: Four commenters disagreed with CMS' opinion that no 
additional burden would be placed on hospitals. The commenters noted 
that JCAHO participating hospitals are not required to submit the data 
regarding all 21 measures found in the proposed rule. Therefore, it 
would be an additional burden on the hospitals to have to submit more 
measures than are required by the current JCAHO requirements.
    Response: We acknowledge this concern, but we are required by new 
section 1886(b)(3)(B)(viii)(IV) of the Act to begin to adopt the 
measures as specified in the 2005 IOM report. We believe that the 
measures we have selected are appropriate because we believe these 
quality measures will: (1) Provide useful and valid information about 
hospital quality to the public; (2) provide hospitals with a sense of 
predictability about public reporting expectations; (3) begin to 
standardize data and data collection mechanisms; and (4) foster 
hospital quality improvement.
    We have also taken steps to ensure that the burden on hospitals is 
as minimal as possible. First, while some hospitals report through 
JCAHO vendors, we make available the CART tool for reporting on all of 
the measures in the expanded measures set, at no additional cost to the 
hospital. Second, our data analysis indicates that although hospitals 
are not currently required to submit data regarding the 21 measures 
identified in the proposed rule, many of them are already submitting 
these data as part of our HQA voluntary reporting initiative. Many 
hospitals have participated in the HQA, and are continuing to submit 
data to the QIO Clinical Warehouse. Many HQA-participating hospitals 
have been voluntarily reporting on the additional quality measures
    Comment: One commenter stated that the additional requirements for 
reporting are too burdensome for rural hospitals. The commenter noted 
that additional resources required for this work takes away from time 
the staff can provide for actual care and that the costs associated 
with submitting the additional measures are too prohibitive for rural 
hospitals.
    Response: Although we acknowledge that the additional reporting 
requirements will potentially require hospitals to begin collecting 
data that they have not, to date, been collecting, this potential 
burden must be weighed against the goals of improving quality of care 
and meeting the needs of patients. As we stated in response to a 
previous comment above, we have taken a series of steps to minimize the 
burden for all hospitals.
    Comment: One commenter stated that the QUEST system does not 
provide consistent answers to questions about abstraction. This 
commenter stated that there are flaws in the current system. Therefore, 
the commenter stated that payment should not be based on this system.
    Response: The QUEST system is the question and answer system that 
is available on the internet at QualityNet.org. Questions can be 
submitted by anyone and they are answered by CMS or its contractors. 
CMS is working to improve the QUEST system. New processes have been 
implemented in order to avoid inconsistent answers to questions about 
abstraction. However, payment is not based on the QUEST system, but is 
based on compliance with the full set of RHAQDAPU requirements. The 
primary source for abstraction clarification is the Specifications 
Manual for National Hospital Quality Measures, available on the 
QualityNet Exchange Web site.
f. RHQDAPU Program Withdrawal and Chart Validation Requirements
    For the FY 2007 update, hospitals may withdraw from the revised 
RHQDAPU program at any time up to August 1, 2006. If a hospital 
withdraws from the program, it will receive a 2.0 percentage point 
reduction in its payment update.
    For the FY 2007 update, and until further notice, we will continue 
to require that hospitals meet the chart validation requirements that 
we implemented in the FY 2006 IPPS final rule. There were no chart-
audit validation criteria in place for FY 2005. Based upon our 
experience with the FY 2005 submissions and our requirement for 
reliable and validated data, in the FY 2006 IPPS final rule, we 
discussed additional requirements that we had established for the data 
that hospitals were required to submit in order to receive the full FY 
2006 payment update (70 FR 47421 and 47422). These requirements, as 
well as additional information on validation requirements, will 
continue and are being placed on the QualityNet Exchange Web site.
    For the FY 2007 payment update, and until further notice, hospitals 
must pass our validation requirement of a minimum of 80 percent 
reliability, based upon our chart-audit validation process, for the 
first three quarters of data from CY 2005. These data were due to the 
QIO Clinical Warehouse by July 15, 2005 (first quarter CY 2005 
discharges), November 15, 2005 (second quarter CY 2005 discharges), and 
February 15, 2006 (third quarter CY 2005 discharges).
    We use confidence intervals to determine if a hospital has achieved 
an 80-percent reliability aggregated over the three quarters. The use 
of confidence intervals allows us to establish an appropriate range 
below the 80-percent reliability threshold that demonstrates a 
sufficient level of reliability to allow the data to still be 
considered validated. We estimate the percent reliability based upon a 
review of five charts, and then calculate the upper 95-percent 
confidence limit for that estimate. If this upper limit is above the 
required 80-percent reliability, the hospital data are considered 
validated.
    We are using the design-specific estimate of the variance for the 
confidence interval calculation, which, in this case, is a stratified 
single stage cluster sample, with unequal cluster sizes. (For 
reference, see Cochran, William G.: Sampling Techniques, John Wiley & 
Sons, New York, chapter 3, section 3.12 (1977); and Kish, Leslie.: 
Survey Sampling, John Wiley & Sons, New York, chapter 3, section 3.3 
(1964).) Each quarter is treated as a stratum for variance estimation 
purposes.
    We use a two-step process to determine if a hospital is submitting 
valid data. In the first step, we calculate the percent agreement for 
all of the variables submitted in all of the charts. If a hospital 
falls below the 80-percent cutoff, we restrict the comparison to those 
variables associated with the starter set of 10 quality measures. We 
recalculate the percent agreement and the estimated 95-percent 
confidence interval and again compare to the 80-percent cutoff point. 
If a hospital passes under this restricted set of variables, the 
hospital is considered to be submitting

[[Page 48041]]

valid data for purposes of the RHQDAPU program.
    Comment: Four commenters recommended that CMS consider a validation 
process that would focus more resources on those hospitals that are 
having difficulty in passing the validation thresholds on a consistent 
basis.
    Response: QIOs, on behalf of CMS, work to assist hospitals with all 
aspects of hospital reporting activity. QIOs are available to provide 
training and assistance to those hospitals experiencing difficulty 
passing the validation thresholds. This training and assistance is 
designed to improve the validation scores of hospitals with failing 
validation scores through better performance measurement techniques and 
medical record documentation.
    Comment: One commenter recommended using an alternative method of 
data validation and suggested that we use the monthly data points of 
each clinical measure instead of relying on chart abstraction. Under 
this methodology, a monthly data point that exceeds three (3) standard 
deviations would be considered an outlier.
    Response: The current validation methodology measures abstraction 
accuracy of hospital submitted data elements, and thereby measures the 
accuracy of reported data. The suggested alternative methodology is 
designed to identify outlier measures at the aggregate hospital level, 
and does not identify the specific source of errors. CMS believes that 
its current validation methodology more accurately measures abstraction 
accuracy at the element level for the RHQDAPU program.
    Comment: One commenter stated that it is incongruent to require 
results from the first three quarters of 2005 for validation with an 
effective date of the final rule that is after the data submissions.
    Response: Section 1886(b)(3)(B)(viii)(I) of the Act requires an 
annual determination of payment eligibility, and we believe that we can 
make accurate payment determinations based on three quarters of 
validated data. In order to make timely payments to hospitals under the 
IPPS during FY 2007, we need to complete our payment determinations 
prior to the start of FY 2007 that is, prior to October 1, 2006. Data 
submitted in connection with discharges that occurred during the first 
three quarters of 2005 constitute the most current data that we can use 
to make our payment determination for FY 2007.
    Comment: Two commenters suggested that if we are going to increase 
the penalties for failure, there needs to be more timely feedback 
allowing organizations to correct their submission errors. These 
commenters recommended that the validation process take into account at 
least 6 quarters of data to allow for learning and to accommodate the 
constant changes in the specifications.
    Response: We use quarterly validation results in order to make a 
single annual determination. The first three quarters of 2005 
constitute the complete set of most currently available data to 
determine FY 2007 payment eligibility by September 1, 2006. We believe 
that using three quarters of data is sufficient to allow us to make 
accurate payment assessments. We will continue to review whether using 
additional quarters of data can improve the reliability of hospital 
results under the RHQDAPU program. In addition, as we noted in response 
to an earlier comment, hospitals and their vendors can use test 
transmissions in order to identify problems before the submission 
deadlines. Also, in an effort to reduce hospital burdens, CMS and JCAHO 
have agreed to release aligned measure changes 120-days prior to their 
implementation. This allows both hospitals and vendors adequate time to 
prepare for those changes prior to implementation. However, hospitals 
are responsible for ensuring that their vendors submit accurate and 
timely data. It is the responsibility of each vendor, and ultimately of 
the hospital, to adhere to the requirements listed in the 
specifications manual for the set discharge time period.
    Comment: One commenter recommended a provision to allow CMS and the 
hospital to have the flexibility to meet 2 of 3, or 3 of 4 quarters. 
This would provide some assurance that if and when the processes break 
down, hospitals are not unilaterally punished while providing quality 
care.
    Response: The 3 quarter validation determination is designed to 
provide a single overall estimate of hospital abstraction accuracy over 
the entire period. This single overall estimate pools the quarterly 
samples to increase the overall reliability of the abstraction accuracy 
estimate for that period. The expectation is that hospitals will 
abstract and submit cases every quarter with consistency. The entire 
period would not be reflected if hospitals are allowed the flexibility 
to meet 2 of 3, or 3 of 4 quarters. To utilize fewer quarters decreases 
the overall reliability of the abstraction accuracy estimate.
    Comment: One commenter suggested that the annual payment update not 
be tied to validation until the JCAHO and CMS have aligned the 
measures, resulting in making the guidelines clear and consistent.
    Response: As of July 1, 2004 discharges, all data elements within 
the 10-starter set were CMS and JCAHO aligned. As of January 1, 2005 
discharges, all data elements for the expanded 21 measure set were 
aligned. The changes are designed to keep the measures current with the 
accepted evidence base of medical research, and to improve the clarity 
and reliability of the abstraction instructions. CMS and its 
contractors have and will continue to work diligently to ensure that 
alignment issues do not affect a hospital's eligibility for receiving 
the full annual payment update.
    Comment: One commenter requested that hospitals not be held 
responsible when data processing and communication errors, under the 
control of CMS or that occur as a result of actions of its contractors, 
cause a failure in validation.
    Response: When a hospital reports data processing and communication 
errors, the errors are thoroughly researched. CMS has not held a 
hospital responsible for data processing and communication errors that 
were clearly under the control of CMS or its contractors. However, CMS 
does hold the hospital responsible for its own errors in data 
processing and communication. If the error is by the hospital's 
contracted vendor, the hospital is held responsible.
    Under the standard appeal process, all hospitals are given the 
detailed results of CDAC reabstraction along with their estimated 
percent reliability and the upper bound of the 95-percent confidence 
interval. If a hospital does not meet the required 80-percent 
threshold, the hospital has 10 working days to appeal these results to 
its QIO. The QIO will review the appeal with the hospital and make a 
final determination on the appeal. The QIO receives from the hospital 
the element or elements that are to be evaluated during the appeal 
process, along with the hospital's rationale for the difference between 
the hospital's abstraction and the CDAC reabstraction. In this 
validation appeal process, the QIO reviews the appeal using the medical 
record to evaluate the data elements that are being appealed. This 
process allows for an independent review and is designed to find coding 
errors on the part of abstractors. QIO appeal decisions are based on 
the data that the hospital submitted to the QIO Clinical Warehouse. The 
QIO has 20 calendar days to make a final decision. The QIO can either 
uphold or reverse the CDAC validation decision. If the QIO does not 
agree with the hospital's

[[Page 48042]]

appeal, the original results stand. However, if the QIO agrees with the 
hospital, new validation results are calculated and provided to the 
hospital through the usual processes. This validation appeal process is 
described in detail at the QualityNet Exchange Web site.
    Comment: Twelve commenters recommended expanding the appeal process 
to include any indicator, regardless of whether the overall validation 
score for the hospitals is at or above 80 percent. The commenters 
believed that this would allow hospitals the opportunity for 
improvement. The commenters also felt that this was significant due to 
the aggregations of validation results for multiple quarters, and for 
the resolution of discrepancies between the hospital and the CDAC.
    Response: Currently the appeals process is only available to those 
hospitals that had an overall reliability rate of less than 80 percent 
for the quarter. However, CMS encourages all hospitals to use their 
validation results as a tool for improving abstraction accuracy.
    Comment: Seventeen commenters urged CMS to review, on a case-by-
case basis, any instance in which a hospital's payment would be put in 
jeopardy as a result of the validation process. These commenters did 
not feel that the validation process is reliable enough to warrant a 
hospital losing its update due to faulty validation. If a hospital has 
made a good faith effort to submit valid data, one commenter felt that 
the hospital should receive its update regardless of whether the data 
are deemed accurate enough for display.
    Response: CMS believes that the current validation process provides 
a reliable estimate of abstraction accuracy on an annual basis. CMS and 
its contractors work closely with the CDAC regarding issues that are 
raised by hospitals about the validation processes. If a hospital 
identifies an issue where it believes that its validation score is 
incorrect, CMS conducts a comprehensive review. We work diligently to 
ensure that validation issues do not impact eligibility for receiving 
the full market basket update.
    Comment: Two commenters requested that hospitals receive more time 
to file validation appeals. One commenter suggested increasing the time 
for filing validation appeals from 10 days to 30 days.
    Response: The current time frame for a hospital to file an appeal 
is 10 business days after the results are posted to QualityNet 
Exchange. The hospital is notified by electronic mail when its 
validation results are posted so it receives the information quickly, 
and it has the full 10 business days to review and appeal the results. 
The QIO then has an additional 20 calendar days to review and respond 
to this appeal by forwarding the information to the CDAC or upholding 
the CDAC decision while providing education to the hospital. CMS 
believes this is adequate time to file an appeal. The current 
validation and appeal process can extend as much as 6-9 months beyond 
the last day of a discharge quarter. To extend the time allowed to file 
appeals would further lengthen this time for hospitals to receive final 
results.
    Comment: One commenter recommended that we use an impartial party 
to decide appeals. The commenter felt that the CDAC should not be 
responsible for both the abstraction as well as reabstraction if there 
is an appeal.
    Response: All data successfully submitted into the QIO Clinical 
Data Warehouse are subject to the hospital data validation process. The 
CDAC reabstraction process that occurs during the appeal is a very 
objective process. Both the hospitals and the CDAC abstract the records 
using the same guidelines, the Specifications Manual for National 
Hospital Quality Measures. The hospital's abstraction is compared to 
the CDAC's reabstraction in order to determine mismatches and the 
validation score. A hospital that scores at least 80 percent overall 
for the quarter is considered to be supplying valid data for that 
quarter. A hospital that scores less than 80 percent overall for the 
quarter has the opportunity to file an appeal with its QIO. The 
hospital must supply to the QIO the rationale for the appeal and the 
QIO will review a copy of the same record the CDAC completed during its 
reabstraction. The QIO will then determine the final outcome of the 
appeal. The QIO has the final say in appeal decisions.
    Comment: One commenter expressed several concerns with the 
validation process.
    <bullet> The method that is used to construct the numerator and 
denominator on the summary report is unclear.
    Response: We are unsure specifically which numerator & denominator 
the commenter is referring to. If we interpret the comment correctly, 
the commenter is referring to the Submission Feedback report. The 
denominator in the summary report refers to the number of elements in 
the sampled records used to calculate the measures, and the numerator 
refers to the number of correctly abstracted elements in the sampled 
records used to calculate the measures. Two measure lists are used to 
determine the denominator list of elements, one list for the ten 
starter set measures versus the second list for the expanded measure 
set. We believe that the documentation regarding these reports, 
available on the QualtyNet.org Web site, provides clear explanation of 
how the numerator and denominator are determined.
    <bullet> CMS does not accept documentation from hospitals after the 
validation results have been published.
    Response: Although we do not accept documentation from hospitals 
after the validation results have been published, we do have several 
safeguards in place to prevent this from happening. The CDAC works 
diligently with the QIOs and CMS to ensure that the requirements for 
hospital reporting of quality data are efficiently and effectively 
being addressed. We have devoted a great deal of resources to ensuring 
that the CDAC process, including the receipt of documentation, is 
consistent, reliable and accurate. Due in part to our adherence to the 
fixed time schedule in the hospital data validation process, and for 
security purposes, the CDAC utilizes an in-house system to track and 
monitor the end-to-end processing of each medical record request from 
hospitals. The CDAC also relies on external contractors like Federal 
Express or the U.S. Postal Service (within HIPAA guidelines) with their 
tracking systems to ship and track medical records. The CDAC goes so 
far as to contact each provider when all requested medical records are 
not received.
    <bullet> Hospitals have failed validation due to the CDAC not 
receiving all materials, although the hospital verified that all of the 
materials were sent in a timely manner.
    Response: CMS has several safeguards in place to prevent this from 
happening. The CDAC works diligently with QIOs and CMS to ensure that 
the requirements of the QIO program are efficiently and effectively 
being met. We have devoted a great deal of resources to ensuring that 
the CDAC process is consistent, reliable and accurate. Due in part to 
our adherence to the fixed time schedule in the hospital data 
validation process, and for security purposes, the CDAC utilizes an in-
house system to track and monitor the end-to-end processing of each 
medical record request from hospitals. The CDAC also relies on external 
contractors like Federal Express or the U.S. Postal Service (within 
HIPAA guidelines) with their tracking systems to ship and track medical 
records. The CDAC goes so far as to contact each provider when all

[[Page 48043]]

requested medical records are not received.
    <bullet> There is no information to verify the reliability of 
abstraction.
    Response: Hospitals that score below 80 percent are able to appeal 
abstraction results, and these results are documented. If the hospital 
believes that it scored below 80 percent due to an abstraction error on 
the part of the CDAC, there is an appropriate process by which the 
hospital can appeal the validation results.
    <bullet> For most hospitals, the sample size is too small to 
determine condition-specific indicator accuracy.
    Response: The validation sample is designed to provide overall 
quarterly feedback on abstraction accuracy and to provide an annual 
estimate for payment eligibility determination. However, hospitals can 
use several quarters' validation results to estimate condition-specific 
accuracy.
    In reviewing the hospital data, we will combine the samples for 
first quarter, second quarter, and third quarter (15 cases) into a 
single stratified sample to determine whether the 80-percent 
reliability level is met. This gives us the greatest accuracy when 
estimating the reliability level. The confidence interval approach 
accounts for the variation in coding among the five charts pulled each 
quarter and for the entire year around the overall hospital mean score 
(on all individual data elements compared). The closer each case's 
reliability score is to the hospital mean score, the tighter the 
confidence interval established for that hospital. A hospital may code 
each chart equally inaccurately, achieve a tight confidence interval, 
and not pass, even though its overall score is just below the passing 
threshold (75 percent, for example). A hospital with more variation 
among charts will achieve a broader confidence interval, which may 
allow it to pass, even though some charts score very low and others 
score very high.
    We believe we have adopted the most suitable statistical tests for 
the hospital data we are trying to validate. In the FY 2007 IPPS 
proposed rule, we solicited comments from hospitals on this passing 
threshold, the confidence interval, and the sampling approach (71 FR 
24094). Based on analytical results from FY 2006, we found confidence 
intervals using only five charts widely varied in size. As a result of 
these findings, we decided to combine multiple quarters of validation 
samples into a single stratified sample to shrink and/or decrease the 
variation and produce a more reliable estimate of abstraction 
reliability to determine if any changes in our methodology are 
required. We will make any necessary revisions to the sampling 
methodology and the statistical approach through manual issuances and 
other guidance to hospitals.
    Comment: Several commenters objected to our validation process. 
They indicated that this process places a large burden on hospitals 
working with vendors that require the submission of 100 percent of the 
hospitals' cases. Additionally, this process will not provide timely 
feedback, and will only add to the burden of receiving untimely 
feedback while attempting to continue abstraction. Two commenters 
expressed concern about the accuracy of the validation process due to 
large fluctuations in the data dictionary guidelines. One of the 
commenters suggested that any modifications to the technical process 
should be published 120 days before the effective/implementation date 
and that the parameters of the validation process should be stated 
explicitly and documented. Several commenters suggested that hospitals 
should be notified about any validation rule changes at least 120 days 
before abstraction and that any validation process should not penalize 
hospitals for technical data issues.
    Response: The current validation process of 5 charts per quarter is 
designed to provide hospitals, regardless of size, with an estimate of 
their abstraction accuracy. The quarterly interval is designed to 
minimize abstraction burden by coinciding with required submission 
requirements for JCAHO-accredited hospitals. Non-JCAHO accredited 
hospitals also need periodic feedback about their abstraction accuracy 
for quality improvement, and the current process is designed to provide 
this feedback. As noted above, CMS and JCAHO have agreed to release 
documents at a minimum of 120 days before implementation. All manuals 
contain data file submission requirements and programming formats for 
each quarter. Hospitals are encouraged to be aware of the release 
schedule and to ensure the proper Specifications Manual (data 
dictionary) is being used for the discharge time period specified. We 
will explore modifying the release date of updated Specifications 
Manuals to provide additional time to hospitals and vendors to 
incorporate these modifications.
    Comment: Three commenters did not believe the validation process of 
using 5 charts over 4 patient populations is statistically reliable. 
The commenters recommended that we use 4 quarters of data to increase 
the number of charts. A commenter also recommended that we use as many 
as 25 charts.
    Response: As we noted above, although we will consider using 
additional quarters of data, we believe that the current 3 quarters 
stratified sample provides sufficiently reliable results. The 
abstraction accuracy estimate is an element level estimate, and the 
chart is considered a cluster of elements. Each quarterly validation 
sample generally contains 50 to 100 elements clustered in 5 charts. 
Analysis of previous quarters of submitted data indicates that the 
clustering effect increases sampling variability by a relatively small 
proportion. However, the increase in sampling variability is so small 
that the sample still produces reliable validation rate estimates. The 
median hospital standard error using the three quarter stratified 
sample was about 3 percent.
    Time limitations prevent us from using 2005 fourth quarter calendar 
year discharges for purposes of making the FY 2007 annual payment 
determination, since the scheduled completion date of appeals would not 
occur until after the September 1, 2006 scheduled release date of the 
list of hospitals receiving full payment update. However, we will 
consider using 4 quarters of validation results (that is, fourth 
quarter 2005 through third quarter 2006) for the FY 2008 determination. 
Additionally, CMS factored cost, burden, and precision of the 
validation results in determining the current validation sampling 
methodology. The goal of the chart audit validation process is to 
ensure that the hospital is abstracting and submitting accurate data. 
In order to calculate quality measures, which are used to determine the 
standard of care, complete and accurate data are necessary.
    Comment: Eight commenters stated that hospitals may be negatively 
affected by the way CMS will determine the 80 percent reliability. The 
stratified sampling method could result in a passing score for the 
first two quarters, but may result in an overall failure rating based 
on the results of the third quarter.
    Response: The stratified sampling method is designed to produce a 
single estimate of abstraction accuracy using three combined quarters 
of validation results. CMS uses three quarters' results to provide a 
reliable estimate of sustained abstraction accuracy. Combining results 
from multiple quarters improves the reliability of the estimate, since 
it is possible that abstraction accuracy varies widely from quarter to 
quarter. Thus, it is possible

[[Page 48044]]

that one or two quarterly validation samples achieve a passing score 
above 80percent, but a single quarterly validation score below 80 
percent would drop the three combined quarter score below 80 percent. 
It is the weight of cases for a particular quarter that determines how 
much impact a single quarter will have on the overall reliability 
calculation. However, the aggregate approach improves the ability to 
accurately calculate the reliability of data submissions.
g. Data Validation and Attestation
    For the FY 2007 update, we will revise and post up-to-date 
confidence interval information on the QualityNet Exchange Web site 
explaining the application of the confidence interval to the overall 
validation results. The data are being validated at several levels. 
There are consistency and internal edit checks to ensure the integrity 
of the submitted data; there are external edit checks to verify 
expectations about the volume of the data received.
    In the FY 2007 proposed IPPS rule, we proposed that hospitals 
attest to the completeness and accuracy of the data submitted to the 
QIO Clinical Warehouse in order to improve aspects of the validation 
checks (71 FR 24094). In order to meet this requirement, for each 
quarter, hospitals will have to verify the completeness and accuracy, 
including the volume, of the data submitted. We plan to provide 
additional information to explain the data completeness requirement as 
well as provide the relevant form to be completed on the QualityNet 
Exchange Web site.
    Comment: One commenter supported the requirement for hospitals to 
attest to the validity of their data. One commenter also suggested 
requiring hospitals to not only attest to the data, but to also subject 
a small number of hospitals to a random audit. Another commenter felt 
there are still significant issues with the completeness and adherence 
to sampling requirements.
    Response: CMS appreciates the commenter's support for the 
attestation requirement and strives to continually improve the accuracy 
and reliability of the hospital quality data. In addition to the 
attestation requirement, CMS is currently studying the need, cost, and 
feasibility of alternative methods for assessing submission 
completeness and adherence to sampling requirements, including on-site 
random audits.
    Comment: One commenter did not want the hospital attestations to 
become too burdensome. The commenter recommended that if the 
attestation can be a part of the review period, the QualityNet Exchange 
Administrator should be allowed to review the data in the preview 
period, and electronically sign for its accuracy. At a minimum, the 
attestations should be able to be delivered electronically.
    Response: We welcome this suggestion, and agree that the electronic 
attestation would increase efficiency and lessen the burden for 
hospitals. We will investigate aspects, such as operational and legal 
requirements for attestation pertaining to electronic submission.
    Comment: One commenter requested that CMS establish and communicate 
to the field which quarters will be used in the calculation of the 
validation threshold. The commenter believes that CMS should provide 
notice to RHQDAPU program eligible hospitals which quarters will be 
included in the annual payment update prior to the beginning of the 
rulemaking process each year.
    Response: CMS is aware of and understands the commenters concerns 
in regards to the calculation of the validation threshold. However, we 
believe that the appropriate way to announce the quarters for which 
data must be submitted under the program is to announce them as part of 
the rulemaking process.
h. Public Display and Reconsideration Procedures
    We will continue to display quality information for public viewing 
as required by new section 1886(b)(3)(B)(viii)(VII) of the Act. Before 
we display this information, hospitals will be permitted to review 
their information as we have it recorded.
    For hospitals that CMS has determined do not meet the RHQDAPU 
program requirements for the applicable fiscal year who wish to appeal 
this determination, the appeals process set forth in 42 CFR Part 405, 
Subpart R (a Provider Reimbursement Review Board (PRRB) appeal) 
applies. However, in the FY 2007 IPPS proposed rule (71 FR 24095) we 
noted that we believe it may be appropriate to establish a structured 
reconsideration process to precede the PRRB appeal for FY 2008 and 
subsequent fiscal years.
    Currently, a hospital may submit a letter setting out its reasons 
for requesting that we reconsider our decision that the hospital did 
not meet the RHQDAPU program requirements. We proposed to continue this 
process for FY 2007 RHQDAPU program decisions (71 FR 24095). However, 
we proposed to establish a deadline of November 1, 2006, for hospitals 
to make such requests related to the FY 2007 RHQDAPU program decisions, 
which will give hospitals a minimum of 30 days to submit 
reconsideration requests from the dates that the decisions are made 
public. Further, we proposed that the November 1, 2006 deadline also 
would apply to FY 2005 and FY 2006 RHQDAPU program decisions and that a 
November 1 deadline would apply in all future fiscal years. CMS will 
officially respond to the letters submitted by hospitals.
    Further, we sought public comment specifically on the need for a 
more structured reconsideration process to precede any PRRB appeal for 
FY 2008 and subsequent fiscal years (71 FR 24095). We also sought 
comment on what such a process would entail. For example, we noted that 
such a process, if established, could include--
    <bullet> A limited time, such as 30 days from the public release of 
the decision, for requesting a reconsideration;
    <bullet> Who in a hospital organization can request such a 
reconsideration and be notified of its outcome;
    <bullet> The specific factors that CMS will consider in such a 
reconsideration, such as an inability to submit data timely due to CMS 
systems failures;
    <bullet> Specific requirements for submitting a reconsideration 
request, such as a written request for reconsideration specifically 
stating all reasons and factors, including specific data elements, why 
the hospital believes it did meet the RHQDAPU program requirements;
    <bullet> Specific CMS components that would participate in the 
reconsideration process; and
    <bullet> The timeframe, such as 60 days, for CMS to provide its 
reconsideration decision to the hospital.
    We also solicited comments on the reasons for not establishing such 
a reconsideration process.
    Comment: One commenter recommended a structured reconsideration 
process for FY 2007 RHQDAPU program decisions. This commenter supported 
reconsideration predicated on a written request specifically stating 
all reasons and factors why a hospital believes it did not meet the 
RHQDAPU program requirements. The commenter agreed with the deadline of 
November 1 for RHQDAPU program decisions, and a maximum of 60 days for 
a CMS response to the reconsideration.
    Response: We are pleased that the commenter supports 
reconsideration predicated on a written request stating all reasons and 
factors for a hospital not meeting the RHQDAPU program requirements and 
concurs with the timeframes we proposed. We expect to

[[Page 48045]]

move forward with establishing a structured reconsideration process for 
future RHQDAPU program decisions.
    Comment: Three commenters stated that the PRRB may not be the best 
review mechanism for appeals. A commenter suggested that CEOs should be 
able to submit their appeals in writing, stating all reasons and facts 
and that CMS should then establish a pre-PRRB review panel that does 
not involve any of the individuals who make the original determination. 
If the pre-PRRB review panel renders a decision against the hospital, 
the hospital can then go before the PRRB for a review.
    Response: We are pleased that the commenter supports 
reconsideration predicated on a written request stating all reasons and 
factors for a hospital not meeting the RHQDAPU program requirements. We 
expect to move forward with establishing a structured reconsideration 
process for future RHQDAPU program decisions. We will examine the 
feasibility of using a panel structure that does not include 
individuals involved in the original determination. However, because of 
the highly technical nature of this process, it may be necessary to 
consult with those individuals due to their specialized expertise.
    Comment: Three commenters supported establishing a process that 
could consider the reasons why a hospital did not meet the RHQDAPU 
program requirements. A commenter suggested that QIOs could be very 
helpful in developing and administering a reconsideration process.
    Response: We appreciate these comments and will consider the 
suggestion that QIOs have a role in a reconsideration process as we 
begin to implement the reconsideration process for FY 2007 and 
subsequent fiscal years.
i. Conclusion
    After consideration of the public comments received, because the 
change in the percentage point reduction from 0.4 percentage points to 
2.0 percentage points is required by section 1886(b)(3)(B)(viii)(I) of 
the Act, we are adopting as final, without modification, the proposed 
changes to Sec.  412.64(d) of our regulations.
    After careful consideration of the public comments received, we are 
adopting as final the expanded quality measures we proposed.
    In response to public comments, we will require that reporting of 
the expanded quality measures begin with discharges occurring on or 
after the third calendar quarter of 2006 (July through September 
discharges). The deadline for hospitals to submit data for this quarter 
will be February 15, 2007. We are also setting the deadline for 
hospitals to complete and send the revised ``Reporting Hospital Quality 
Data for Annual Payment Update Notice of Participation'' form to their 
respective QIO, no later than August 15, 2006. With these 
modifications, after careful consideration of the public comments 
received, we are adopting these procedures as final.
3. Electronic Medical Records
    In the FY 2006 IPPS final rule, we encouraged hospitals to take 
steps toward the adoption of electronic medical records (EMRs) that 
will allow for reporting of clinical quality data from the EMRs 
directly to a CMS data repository (70 FR 47420). We intend to begin 
working toward creating measures specifications and a system or 
mechanism, or both, that will accept the data directly without 
requiring the transfer of the raw data into an XML file as is currently 
done. The Department continues to work cooperatively with other Federal 
agencies in the development of Federal health architecture data 
standards. We encouraged hospitals that are developing systems to 
conform them to both industry standards and, when developed, the 
Federal Health Architecture Data standards, and to ensure that the data 
necessary for quality measures are captured. Ideally, such systems will 
also provide point-of-care decision support that enables high levels of 
performance on the measures. Hospitals using EMRs to produce data on 
quality measures will be held to the same performance expectations as 
hospitals not using EMRs.
    Due to the low volume of comments we received on this issue in 
response to the FY 2006 proposed IPPS rule, in the proposed IPPS rule 
for FY 2007 (71 FR 24095), we again invited comments on these 
requirements and options. In section IV.B.6. of the preamble to the FY 
2007 IPPS proposed rule, we also invited comments on the potential role 
of effective, interoperable health information on technology in value-
based purchasing.
    Comment: Most of the comments that were submitted on the adoption 
of electronic health records in the hospital settings focused on:
    <bullet> HIT associated cost implication for hospitals.
    <bullet> The time frame for implementation should be at least a 10-
year window, to allow hospitals to obtain the financial and technical 
support needed for this initiative.
    <bullet> CMS statutory authority to encourage the use and adoption 
of HIT without new legislation.
    <bullet> Support for the initiative but recommended that CMS 
develop partnerships with affected parties to ensure its successful 
development.
    Response: After consideration of the public comments received, we 
will continue to pursue the adoption of electronic health records for 
the reporting of hospital quality data. In addition, for the future we 
will take all comments submitted under consideration as we move 
forward.

B. Value-Based Purchasing

1. Introduction
    CMS has undertaken a number of activities to improve the quality 
and efficiency of care delivered to Medicare beneficiaries. Currently, 
there are several different fee-for-service payment systems under 
Medicare that are used to pay health professionals and other providers 
based on the number and complexity of services provided to patients. In 
general, all providers to which a specific Medicare payment system 
applies receive the same amount for a service, regardless of its 
quality or efficiency. As a result, Medicare's payment systems can 
direct more resources to hospitals that deliver care that is not of the 
highest quality or include unnecessary services (for example, 
duplicative tests and services or services to treat avoidable 
complications). Therefore, we are examining the concept of ``value-
based purchasing,'' which may use a range of incentives to achieve 
identified quality and efficiency goals, as a means of promoting better 
quality of care and more effective resource use in the Medicare payment 
systems. In considering the concept of value-based purchasing, we are 
working closely with stakeholder partners, including health 
professionals and providers. In the FY 2007 IPPS proposed rule (71 FR 
24095), we sought public comment on value-based purchasing as related 
specifically to hospitals.
    We discussed CMS' and Congress' initial steps toward hospital 
value-based purchasing, which include the Premier Hospital Quality 
Incentive Demonstration, the RHQDAPU program authorized by section 
501(b) of Pub. L. 108-173 (MMA), and the extended and expanded RHQDAPU 
program authorized by section 5001(a) of Pub. L. 109-171 (DRA). (The 
RHQDAPU program was also discussed in section IV.A. of the preamble to 
the proposed rule.) In addition, we discussed the issues that must be 
considered in

[[Page 48046]]

developing a plan to implement a value-based purchasing plan beginning 
with FY 2009 for Medicare payments for subsection (d) hospitals. This 
plan is required by section 5001(b) of Pub. L. 109-171. For each of the 
required planning issues (measures, data infrastructure, incentives), 
we discussed CMS' activities to date and solicited comments on 
outstanding policy questions. Next, we discussed options for 
implementation of section 5001(c) of Pub. L. 109-171, which authorizes 
quality adjustment to DRG payments for certain conditions that were not 
present on hospital admission. We solicited input about detailed design 
considerations related to each of these issues and the advantages and 
disadvantages of possible approaches to planning and implementing 
hospital value-based purchasing.
    Finally, we discussed and invited comments on how to encourage 
hospitals to effectively use health information technology to improve 
efficiency, processes, and health care outcomes, through, for example, 
adopting interoperable health information technology.
2. Premier Hospital Quality Incentive Demonstration
    One of the ways in which CMS is testing innovative potential 
approaches to improving quality is through demonstrations and pilot 
projects. The demonstration most relevant to hospitals is the Premier 
Hospital Quality Incentive Demonstration. Premier, Inc., a nationwide 
alliance of not-for-profit hospitals, submitted an unsolicited proposal 
for consideration by CMS.\20\ We have partnered with Premier to conduct 
a demonstration that is designed to test whether the quality of 
inpatient care for Medicare beneficiaries improves when financial 
incentives are provided. Under the demonstration, about 270 hospitals 
are voluntarily providing data on 34 quality measures related to 5 
clinical conditions: heart attack, heart failure, pneumonia, coronary 
artery bypass graft, and hip and knee replacements.
---------------------------------------------------------------------------

    \20\ The Premier Hospital Quality Incentive Demonstration was 
authorized under section 402 of Pub. L. 90-248, Social Security 
Amendments of 1967 (42 U.S.C. 1395b-1). This section authorizes 
certain types of demonstration projects that waive compliance with 
the regular payment methods used in the Medicare program.
---------------------------------------------------------------------------

    Using the quality measures, CMS identifies hospitals with the 
highest quality performance in each of the five clinical areas. 
Hospitals scoring in the top 10 percent in each clinical area receive a 
2-percent bonus payment in addition to the regular Medicare DRG payment 
for the measured condition. Hospitals in the second highest 10 percent 
receive a 1-percent bonus payment. In the third year of the 
demonstration, some hospitals that do not achieve absolute improvements 
above the demonstration's first year composite score baseline (the 
lowest 20 percent) for that condition will have their DRG payments 
reduced by 1 or 2 percent, depending on how far their performance is 
below the baseline.
    Following the first year of the demonstration (FY 2004), CMS 
awarded a total of $8.85 million to participating hospitals in the top 
two deciles for each clinical area. In the aggregate, quality of care 
improved in all five clinical areas that were measured. Preliminary 
information from the second year of the demonstration indicates that 
quality is continuing to improve, particularly for the poorest 
performing hospitals. Additional information on the Premier Hospital 
Quality Incentive Demonstration is available on the CMS Web site at: 
http://www.cms.hhs.gov/HospitalQualityInits/35_HospitalPremier.asp.
3. RHQDAPU Program
    We believe that the acts of collecting and submitting performance 
data and of publicly reporting comparative information about hospital 
performance seem to be a strong incentive to encourage hospital 
accountability. Measurement and reporting can help focus the attention 
of hospitals and consumers on specific goals and on hospitals' 
performance relative to those goals.
a. Section 501(b) of Pub. L. 108-173 (MMA)
    Since 2003, we have operated the Hospital Quality Initiative,\21\ 
which is designed to stimulate improvements in hospital care by 
standardizing hospital performance measures and data transmission to 
ensure that all payers, hospitals, and oversight and accrediting 
entities use the same measures when publicly reporting on hospital 
performance. Section 501(b) of Pub. L. 108-173 authorized us to link 
the collection of data for an initial starter set of 10 quality 
measures to the Medicare annual update of the standardized payment 
amount for hospital inpatient operating costs (also known as the 
RHQDAPU program). For FYs 2005 and 2006, hospitals that met the RHQDAPU 
program's requirements received the full annual payment update to their 
inpatient operating costs, while hospitals that did not comply received 
an update that was reduced by 0.4 percentage points. For FY 2005, 
virtually every hospital in the country that was eligible to 
participate submitted data (98.3 percent), and approximately 96 percent 
of all participating hospitals met the requirements to receive the full 
update. The data regarding the starter set of 10 quality measures as 
well as additional, voluntarily-reported data on other quality 
measures, are available to the public through the Hospital Compare Web 
site at: http://www.hospitalcompare.hhs.gov.
---------------------------------------------------------------------------

    \21\ For more information about CMS' Hospital Quality 
Initiative, see http://www.cms.hhs.gov/HospitalQualityInits/.
---------------------------------------------------------------------------

b. Section 5001(a) of Pub. L. 109-171 (DRA)
    As discussed in section IV.A. of the FY 2007 IPPS proposed rule (71 
FR 24091), for FY 2007 and each subsequent year, section 5001(a) of 
Pub. L. 109-171 amended section 1886(b)(3)(B) of the Act and made 
changes to the program established under section 501(b) of Pub. L. 108-
173. These changes require us to expand the number of measures for 
which data must be submitted, and to change the percentage point 
reduction in the annual payment update from 0.4 percentage points to 
2.0 percentage points for subsection (d) hospitals that do not report 
the required quality measures in a form and manner, and at a time, 
specified by the Secretary. Effective for payments beginning with FY 
2007, new section 1886(b)(3)(B)(viii)(IV) of the Act requires the 
Secretary to begin to adopt the expanded set of performance measures 
set forth in the IOM's 2005 report entitled, ``Performance Measurement: 
Accelerating Improvement.'' \22\ Those measures include the HQA 
measures, the HCAHPS[supreg] patient perspective survey, and three 
structural measures.\23\ Effective for payments beginning with FY 2008, 
the Secretary must add other measures that reflect consensus among 
affected parties and may replace existing measures as appropriate. New 
section 1886(b)(3)(B)(viii)(VII) of the Act requires the Secretary to 
establish procedures for making hospital quality data on these measures 
available to the public. We discuss our responses to

[[Page 48047]]

public comments on these requirements in section IV.A. of this 
preamble.
---------------------------------------------------------------------------

    \22\ Institute of Medicine, ``Performance Measurement: 
Accelerating Improvement,'' December 1, 2005, available at http://www.iom.edu/CMS/3809/19805/31310.aspx.
    \23\ The three structural measures are: (1) Computerized 
provider order entry; (2) intensive care intensivists; and (3) 
evidence-based hospital referrals.
---------------------------------------------------------------------------

4. Plan for Implementing Hospital Value-Based Purchasing Beginning With 
FY 2009
    Section 5001(b) of Pub. L. 109-171 requires us to develop a plan to 
implement hospital value-based purchasing beginning with FY 2009. The 
plan must consider the following issues: (a) The ongoing development, 
selection, and modification process for measures of quality and 
efficiency in hospital inpatient settings; (b) the reporting, 
collection, and validation of quality data; (c) the structure of 
payment adjustments, including the determination of thresholds of 
improvements in quality that would substantiate a payment adjustment, 
the size of such payments, and the sources of funding for the payments; 
and (d) the disclosure of information on hospital performance. Section 
5001(b) of Pub. L. 109-171 also calls for us to consult with affected 
parties and to consider relevant demonstrations in developing the plan. 
Each of these issues (measure development and refinement, data 
infrastructure, incentives, and public reporting) is discussed below, 
along with our activities to date and outstanding policy questions.
    In the FY 2007 IPPS proposed rule (71 FR 24097), we sought comments 
on these issue areas and outstanding policy questions. We received 50 
items of correspondence, which included 37 comments from hospitals and 
health care systems, including the American Hospital Association and 
many State hospital associations, the Federation of American Hospitals, 
the National Association of Public Hospitals, the Association of 
American Medical Colleges, and the Catholic Health Association. From 
the purchaser and consumer perspectives, we received comments from The 
Leapfrog Group, the National Business Coalition on Health, the 
Consumer-Purchaser Disclosure Project, the National Breast Cancer 
Coalition Fund, and Consumers Union. The medical device and information 
technology industries also provided comments.
    As a preliminary matter, almost half of all commenters also made 
recommendations on the process for developing the Medicare value-based 
purchasing plan. The AHA, the State hospital associations, the 
Voluntary Hospital Association, and the Federation of American 
Hospitals all stressed that the HQA be the foundation for planning. 
Several other commenters noted the value of an iterative process, with 
multiple opportunities for public comment to build consensus.
    We present a summary of the comments by major issue area below and 
our response.
a. Measure Development and Refinement
    As we explore the potential connections between performance 
measurement and incentives, we would like to better understand how to 
develop valid, meaningful, current performance measures that are 
aligned with other hospital measurement activities, and an enterprise 
for development, validation, consensus building, and maintenance of 
these measures. In addition, before measures could be used to compare 
the relative quality or cost of care provided by hospitals, we believe 
that the information would need to be appropriately adjusted to account 
for relevant differences among hospitals and among their patients. The 
availability of appropriate measures on which consensus might be 
achieved depends on the state of the art of research on measure 
development.
    We believe that it is desirable for performance measures to be 
based on appropriate evidence, effectively related to desired outcomes, 
derived in a transparent fashion involving consultation with experts 
and affected hospitals, and routinely updated. MedPAC's 2005 Report to 
Congress \24\ stated that measures should be evidence-based; that 
collecting and analyzing data should not be unduly burdensome for the 
provider or for CMS; that risk adjustment should be sufficient to deter 
providers from avoiding patients who might lower performance scores; 
that most providers should be able to improve on the measures; that 
measures should apply to a broad range of care and providers; that 
measures should capture aspects of care that are under the control of 
the providers being measured; and that areas of care being measured 
should be those needing improvement.
---------------------------------------------------------------------------

    \24\ Medicare Payment Advisory Commission: Report to Congress: 
Medicare Payment Policy, March 2005, pp. 186-187, available at: 
http://www.medpac.gov/publications/generic_report_display.cfm?report_type_id=1&sid=2&subid=0.
---------------------------------------------------------------------------

    The IOM's December 2005 report, ``Performance Measurement: 
Accelerating Improvement'' \25\ recommended that measure sets should 
build on the work of key public- and private-sector organizations; that 
national performance measures that have been approved through ongoing 
consensus processes led by major stakeholder groups are an appropriate 
starting point; that the limited scope of current measures should be 
broadened to address efficiency, equity, and patient-centeredness; that 
quality, costs, and outcomes of care should be measured over longer 
time intervals; and that measures be applicable to more than one 
setting so that providers can share accountability for a patient's care 
(pp. 8-11).
---------------------------------------------------------------------------

    \25\ Institute of Medicine, ``Performance Measurement: 
Accelerating Improvement,'' December 1, 2005, available at http://www.iom.edu/CMS/3809/19805/31310.aspx.
---------------------------------------------------------------------------

    The plan for hospital value-based purchasing mandated by Pub. L. 
109-171 must address the ongoing development, selection, and 
modification process for measures of quality and efficiency in hospital 
inpatient settings. We have worked collaboratively in defining 
consistent, meaningful performance measures for hospitals and other 
providers for a number of years. The efforts of CMS and its stakeholder 
partners to develop standardized performance measures increase the 
likelihood that the measures will be valid, reliable, and widely 
accepted as viable indicators of performance. Standardized measures 
also reduce the burden for hospitals that would otherwise have to 
report different measures to multiple entities, such as accrediting 
bodies and State agencies.
    CMS and the HQA (which includes representatives from consumers, 
hospitals, health professionals, purchasers, and accreditation 
organizations) collectively selected a starter set of 10 consensus-
derived quality measures for public reporting, which was incorporated 
into the RHQDAPU program authorized by section 501(b) of Pub. L. 108-
173. (See section IV.A. of the preamble to the FY 2007 IPPS proposed 
rule (71 FR 24091) for a detailed discussion of the RHQDAPU program.) 
The measures were endorsed by the NQF, a nonprofit voluntary 
organization that represents a broad range of health care stakeholders 
and endorses consensus-based national performance standards. CMS has 
also worked with the JCAHO to align hospital performance measures that 
we share in common, thereby reducing hospitals' reporting burden.
    In April and September 2005, CMS and the HQA identified additional 
NQF-endorsed measures of hospital performance. In section IV.A. of the 
preamble to the FY 2007 IPPS proposed rule (71 FR 24093), we listed 
these measures and proposed to require hospital reporting on these 
measures under an expanded version of the RHQDAPU program authorized by 
section 5001(a) of Pub. L. 109-171. These measures are discussed in 
more

[[Page 48048]]

detail on the CMS Web site at: http://www.cms.hhs.gov/HospitalQualityInits/ HospitalQualityInits/ downloads/HospitalHQA2004 --2007200512.pdf. In 
this final rule, we have included the 20 NQF-endorsed measures 
currently reported on our Hospital Compare Web site, as well as two 
additional NQF-endorsed measures, as requirements for hospital 
reporting under the FY 2007 RHQDAPU program.
    Two additional outcome measures (30-day mortality for heart attack 
and heart failure) have been endorsed by the NQF for public reporting. 
Further, in October 2006, we will be implementing the HCAHPS[supreg] 
survey of inpatient perceptions of their hospital care experiences, 
with the intention that an aggregate HCAHPS[supreg] measure will become 
a publicly reported performance measure. HCAHPS[supreg] was endorsed by 
the NQF in May 2005. Beyond these, we could also consider including 
additional measures from the Surgical Care Improvement Project, 
measures relating to a hospital's use of information technology that 
result in improved patient outcomes, implementation of data standards, 
and preventable readmissions as quality reporting measures under the 
RHQDAPU program or the hospital value-based purchasing program.
    Comment: Virtually all of the commenters discussed the measures 
issues. The commenters focused on three major topics: (1) The use of 
quality versus efficiency measures, (2) the use of process versus 
outcome measures, and (3) the importance of including measures that 
capture aspects of care from the patient experience, including access, 
respect, and disparities/differences experienced by patients of 
different races and ethnic backgrounds.
    From the perspective of virtually all provider associations, the 
hospital value-based purchasing program should focus on evidence-based 
process measures. The majority of commenters also believed that, for 
now, measures should focus solely on quality and that measures of 
efficiency are premature. Several commenters also stressed that the 
goal of the program should be to improve overall quality of care, 
rather than to decrease costs.
    Commenters from the medical device industry raised the concern that 
a reliance on process measures when assessing efficiency could inhibit 
access to new technologies and urged that risk-adjusted outcome 
measures be used instead. Two provider associations urged that payment 
systems must ensure that evolving and improved technologies continue to 
be available to all patients and that efficiency measures not inhibit 
the adoption of new quality-enhancing technologies.
    Commenters representing the purchaser and consumer perspectives 
stressed the importance of including measures that reflect quality, 
efficiency, equity, patient experience, and structure and urged that 
all measures be nationally endorsed, scientifically valid, risk-
adjusted, and regularly updated. Several consumer groups and safety net 
providers also noted the importance of including measures that could 
capture disparities in care experienced by patients of different races 
and ethnic backgrounds. On a related note, the Association of American 
Medical Colleges and safety net providers emphasized the importance of 
assuring a level playing field to account for differences among types 
of hospitals and patient demographics.
    Several commenters noted that developing measures is a public good 
and that substantial funding should be provided to support the 
development of consumer-relevant measures to fill existing gaps, 
especially for measures of efficiency and equity.
    Several commenters supported including measures from the Surgical 
Care Improvement Program (SCIP) because surgical wounds and infections 
are among the most common and harmful hospital-acquired infections.
    Regarding information technology, the response was mixed. Some 
commenters supported the inclusion of measures that would encourage IT 
adoption, while others noted the obstacle of ongoing issues with 
current health IT standards.
b. Data Infrastructure
    Implementing measures on which to base a value-based purchasing 
system would require an infrastructure that could collect appropriate 
information from hospitals, store and aggregate it as necessary, and 
prepare it for use in determining appropriate incentives. Hospitals 
would likely need to be able to generate appropriate data as input for 
calculation of the measures. For some measures, data that hospitals 
already submit with claims for payment or for some other administrative 
purpose may be sufficient. For other measures, hospitals might need to 
provide information regarding their structure and resources or about 
the specifics of medical care provided to patients or the outcomes of 
that care. For that information, hospitals may need special software to 
assist with data collection and secure channels by which they can 
transmit data. In the FY 2007 IPPS proposed rule, we solicited comments 
on how to develop an infrastructure that would facilitate the efficient 
transmission and storage of data, and especially, as discussed in 
sections IV.A.3. and IV.B.6. of the preamble to that proposed rule (71 
FR 24095, 24100). We especially solicited comments on how electronic 
medical and health record systems could help improve care and be 
integrated into or facilitate the data collection process.
    We did not receive any comments specific to this issue.
    Implementation would require communication channels and data 
warehouses with sufficient capacity and flexibility to acquire and 
store data from hospitals. We are considering how we might validate the 
submitted data, determine incentives based on that data, and transmit 
these values to Medicare's fiscal intermediaries. The potential 
infrastructure would need to be extremely secure and afford the most 
privacy protection permitted by law. It would also need to minimize the 
burden of data collection and transmission on providers. It would need 
to be accurate, efficient, and cost-effective for CMS to administer.
    The plan for hospital value-based purchasing mandated by Pub. L. 
109-171 must address the reporting, collection, and validation of 
quality data. Over the past few years, we have developed a data 
collection and reporting infrastructure for the RHQDAPU program that 
can transmit performance measurement data via secure channels for its 
submission, storage, analysis, validation, and reporting. Specifically, 
to facilitate data collection, we have developed the CART software to 
assist hospitals in the collection of clinical and administrative data 
used to measure performance improvement. CART, which is provided to 
hospitals free of charge, is a powerful application that hospitals and 
their designees can use to abstract clinical data needed for 
performance measurement from medical records. This tool was designed 
and developed by CMS with input from the JCAHO and the Medicare QIOs. 
We have also developed the QualityNet Exchange system for secure 
transmission of data to the QIO Clinical Warehouse. QNetExchange.org is 
the CMS-approved Web site for secure communications and data exchange 
between two or more of the following: Hospitals, performance 
measurement system vendors, end stage renal disease networks and 
facilities, QIOs, and CMS.
    For data warehousing, we have a claims warehouse for Medicare Part 
A data, which maintains the claims for the most recent 42 months. We 
also have a QIO Clinical Warehouse that currently

[[Page 48049]]

contains information on the starter set of 10 quality measures 
collected under the RHQDAPU program, as well as additional voluntarily 
reported measures. We must assess the validity of the RHQDAPU 
information because of its use for quality improvement, public 
reporting, and determining hospitals' annual payment updates under the 
RHQDAPU program. Validation activities assess the reliability of the 
data that a hospital has submitted, as evidenced by the consistency 
between a hospital's abstraction and reabstraction by an independent 
party.
    We are currently using a contractor, the CDAC, to carry out the 
validation process under the RHQDAPU program. Hospitals are required to 
submit certain quality data to the QIO Clinical Warehouse within 4.5 
months of the end of each quarterly reporting period. The steps in the 
validation process are: (1) Check for duplicates; (2) draw a sample; 
(3) obtain copies of medical records; (4) request and complete CDAC 
abstraction; (5) post results on QualityNet Exchange for hospitals' 
review; and (6) resolve validation appeals. In the FY 2007 IPPS 
proposed rule (71 FR 24098), we sought comments on how the data 
submission and validation processes that we currently use for the 
RHQDAPU program might be adaptable to a hospital value-based purchasing 
program.
    We did not receive any comments specific to this issue.
    One of the key challenges we face in considering implementation of 
hospital value-based purchasing is minimizing the length of time 
between our receipt of data and our ability to provide feedback to 
hospitals on the data. Some of the hospitals that are participating in 
the RHQDAPU program and the Premier Hospital Quality Incentive 
Demonstration have asked for more timely feedback on their performance. 
We recognize that a long delay between the provision of services and 
feedback about the quality of those services may impede both 
improvement efforts and a hospital's motivation to improve. The current 
lag time between the end of the quarterly reporting period and the 
availability of performance feedback under the RHQDAPU program is 
approximately 9 months. Hospitals have 4.5 months to complete their 
paper medical records and to submit information to the QIO Clinical 
Warehouse, which roughly coincides with JCAHO's timeline for submission 
of data to their ORYX[supreg] Core Measure Performance Measurement 
System. Another 4.5 months are required to accomplish the steps in the 
validation process.
    We are considering options to decrease the overall length of time 
between our receipt of data and our ability to provide feedback to 
hospitals, and we are interested in comments on these options. First, 
we are considering whether more frequent data submissions, such as 
monthly submissions, would decrease the time between the provision of 
services and feedback about the quality of those services. We are aware 
that some hospitals and their vendors already submit quality data on a 
monthly basis to JCAHO. However, unless we reduced the sample size per 
reporting period, the process of validating each month the same number 
of records that are currently validated each quarter would increase 
costs significantly. On the other hand, if we reduced the sample size 
per reporting period, the monthly numbers might be too small to provide 
for adequate validation. Second, we could shorten the data submission 
period, which is a significant source of lag time. This option would 
require hospitals to submit information to the data warehouse more 
quickly, which could increase the possibility that hospitals would 
submit less complete data. In addition, this option would require 
coordination with JCAHO to keep submission timelines congruent, which 
reduces hospitals' reporting burden. Third, we could eliminate the 
validation appeals process, which would reduce the lag time by up to 2 
months. Fourth, we could create an expanded role for the third party 
vendors that assist hospitals with submitting quality data to CMS and 
JCAHO. For example, CMS could certify third party vendors to also 
provide standardized validation services and quick performance feedback 
to their hospital customers.
    Comment: Approximately half of the commenters' responses included 
comments specific to data issues. The commenters addressed two issues 
in particular: (1) The data challenges confronted by small hospitals 
and (2) the timeliness of feedback versus the burden of submission.
    A quarter of commenters raised the special challenges confronted by 
small, in particular rural, hospitals because of the small sample sizes 
they often encounter for many measures and the volatility and 
instability in measure results under these circumstances.
    Regarding timeliness and the lag time between reporting and 
feedback, commenters from different stakeholder groups had opposing 
perspectives. Provider commenters were concerned that monthly reporting 
would be extremely burdensome, while purchaser and consumer advocate 
commenters suggested that monthly submission could improve the 
timeliness of data. All commenters stressed the importance of data 
validation. Consumers Union stressed that validation is critical and 
need not increase the time lag. It recommended the use of rolling 
publication of data with quarterly updates. Two commenters endorsed the 
concept that the data submission and validation processes could be 
streamlined through use of electronic health records (EHRs), which 
could also provide an incentive for adoption of EHRs. The Federation of 
American Hospitals found none of the options presented in the proposed 
IPPS rule for reducing the lag time between submission and feedback to 
be acceptable.
    Several commenters mentioned the benefits of augmenting billing 
forms with clinical data elements and cited the approach of the 
Pennsylvania Healthcare Cost Containment Council.
c. Incentive Methodology
    While measurement of the quality of care and of resources use may 
be advantageous in itself, we are considering whether and what kind of 
incentives can further improve outcomes. The potential design of 
incentives in a value-based purchasing system presents many choices. 
The implementation plan for hospital value-based purchasing mandated by 
Pub. L. 109-171 must address the structure of payment adjustments, 
including the determination of thresholds of improvements in quality 
that would substantiate a payment adjustment, the size of such 
payments, and the sources of funding for the value-based payments. In 
the FY 2007 IPPS proposed rule (71 FR 24098), we sought comments on the 
merits of and alternatives to all of the approaches to the design of a 
value-based purchasing methodology that are discussed below.
(1) How should incentives be structured?
    A number of options exist for the structure of potential 
incentives. The incentive methodology could include differential 
incentives depending on whether hospitals exceed a particular standard 
of performance. To reflect expectations of continued improvement among 
hospitals, the standard could be raised in predictable steps over time. 
Alternatively, incentives could be structured to reward hospitals that 
improve from a baseline level of performance. These approaches could be 
combined to develop an incentive

[[Page 48050]]

methodology that includes both attaining benchmarks and improving care.
    Comment: Approximately half of the commenters responded to at least 
one of the questions on incentives, and comments varied widely on these 
issues. Most commenters saw the combination of incentives to reward 
continuous improvement over time and incentives for attainment of 
specific benchmarks as most desirable. However, there was disagreement 
about the value of absolute benchmarks. Several commenters favored 
developing a fixed standard, rewarding hospitals that meet or exceed 
the standard, and when the majority achieves this standard, either 
raising the standard or selecting another measure with a fixed 
standard. They commented that the bar should be high enough to serve as 
an effective target, but not so high as to become attainable by only a 
small number of providers. By contrast, one commenter believed that a 
fixed benchmark discourages hospitals, particularly small and rural 
hospitals, because it might not reflect their unique circumstances.
    Almost half of all commenters emphasized the importance of aligning 
hospital and physician incentives so that everyone will be working 
toward the same goals of improving quality and providing appropriate 
care.
(2) What level of incentive is needed?
    Value-based purchasing incentives should be targeted to that level 
needed to achieve a desired level of performance. Our experience with 
implementing section 501(b) of Pub. L. 108-173 indicates that a 
targeted incentive, coupled with active management by CMS, can 
encourage reporting on quality measures. Nearly every eligible hospital 
has been willing and able to submit the required data in order to 
receive the full payment update under the RHQDAPU program. Similarly, 
our experience with the Premier Hospital Quality Incentive 
Demonstration indicates that a 1 or 2 percent bonus, coupled with 
potential reductions for poor performance, may stimulate improvement. 
Further experience in ascertaining how hospitals respond to incentives 
will be important for examining incentives over time.
    Comment: A number of commenters across the stakeholder spectrum 
responded that the annual IPPS update is proving to be a sufficient 
incentive to encourage virtually all hospitals to participate in the 
RHQDAPU program and that the current level of a 1-2 percent incentive 
is appropriate. Commenters noted that an additional portion of the 
update could be made conditional upon achieving specified performance 
goals.
    Many provider commenters stated that a system of rewards should 
increase payments or reduce regulatory burden for successful providers 
and urged that incentives involving penalties should not be used 
because the basic level of DRG payment does not now cover costs for 
more than one-third of hospitals. Several provider commenters suggested 
that rewards should be large enough to cover the costs of implementing 
process changes and to allow for reinvestment in quality improvement 
efforts. One provider commenter also urged that incentive structures 
should be gradual to avoid ``cliff'' effects in either rewards or 
penalties.
(3) What should be the source of incentives?
    The President's FY 2007 Budget indicates support for identifying 
and testing ``budget-neutral incentives that will stimulate Medicare 
providers to improve performance on quality and efficiency measures.'' 
\26\ We do not believe that providing additional aggregate funding to 
finance performance-based incentives is either supportable or 
necessary. One approach might be to examine how we could identify and 
apply measurable savings achieved by reducing care that is unnecessary 
or otherwise inappropriate. For example, we may examine possibilities 
of improving care coordination, whether this could produce measurable 
savings, and whether some of the savings generated in one payment 
system could be used for incentives in another, as long as these 
reforms do not provide inappropriate incentives to stop providing 
necessary care. For instance, appropriate quality of care and effective 
resource use in hospitals and other institutional providers might 
generate savings that could be used for incentives for both physicians 
and facilities.
---------------------------------------------------------------------------

    \26\ Budget of the United States Government, Fiscal Year 2007, 
available at: http://www.whitehouse.gov/omb/budget/fy2007/.
---------------------------------------------------------------------------

    Comment: Several hospital association and individual provider 
commenters suggested that savings from improved care coordination could 
be a source of funding for incentives and recommended studying whether 
savings generated in one payment system could be used for payments in 
another setting.
    One commenter noted the importance of assuring that funds 
designated for rewards be fully allocated to hospitals and urged that a 
program designed to reward improving quality should not become an 
arbitrary cost-cutting mechanism.
    The budget-neutral shared savings approach currently used in the 
Leapfrog Hospital Rewards Program was cited by several commenters as a 
model worth considering, though the commenters noted that savings are 
harder to identify in the Medicare DRG-based system than in the 
commercial per diem systems where the Leapfrog Program is currently 
operating.
(4) What should the form of incentives be?
    Potential approaches for incentives include making an add-on 
payment to the base payment for individual inpatient hospital services 
or providing periodic, lump-sum payments on a monthly, quarterly, or 
annual basis. Under the RHQDAPU program, hospitals that do not submit 
the required data receive a decrease in the standardized payment amount 
made for all inpatient operating costs for the applicable fiscal year. 
In a hospital value-based purchasing system, per-service payments might 
be made only in connection with the services directly associated with 
the particular measure for which the hospital achieved a good result. 
Alternatively, lump-sum payments might be made on a periodic basis to 
hospitals that achieve particular performance targets. The preferable 
approach may depend on operational concerns, the strength of incentive 
effects, and other aspects of the design. In the FY 2007 IPPS proposed 
rule (71 FR 24099), we sought comments on this issue.
    Comment: We received three comments on this issue, and all 
commenters favored periodic lump-sum payments over other options.
(5) What should the timing of incentives be in relation to performance?
    Any value-based purchasing system should seek a balance between 
rewarding desired performance close to when it occurs and ensuring the 
accuracy of both performance measurement and incentives. Given the lag 
times for collecting and reviewing different types of data, some 
measures may be calculated quickly after the period of performance, 
while data lag times for other measures may be longer. For instance, 
structural measures could affect incentives soon after they are 
collected. Other measures that are based on experience over a time 
interval may require some time for measured events to manifest. An 
example of this type of measure would be the rate of mortality within 
30 days of hospitalization.

[[Page 48051]]

    We did not receive any comments specific to this issue.
(6) How should we develop composite scores?
    Encouraging improved performance could be facilitated by valid and 
reliable methods to aggregate performance data into single composite 
scores. Composite scoring may also improve consumer understanding of 
complex performance indicators by combining measures of many dimensions 
of care into a single score. One example of a composite scoring 
methodology that we used for the Premier Hospital Quality Incentive 
Demonstration (discussed in detail above) is a modification of the 
``opportunity model,'' which can be used to address individual 
weighting, missing data, and sensitivity to case volumes. For example, 
a hospital that has few or no cases for a particular dimension of care 
could receive a low score, yet that measure is equally weighted with 
others in the composite. Under the opportunity model, a composite may 
be developed for a disease category by dividing the total number of 
successful interventions by the total number of opportunities for the 
same targeted interventions. Some of the advantages of the opportunity 
model are that individual measures are weighted by the volume of 
opportunities for the associated intervention for a particular 
hospital; missing values for a particular aspect of care provided by an 
individual hospital would not prevent that hospital from being 
represented in a public report; and composite measures may easily 
accommodate the addition of individual measures.
    The ``appropriate care measure'' (ACM) is another composite scoring 
methodology, which we used in connection with the QIOs. The ACM scoring 
methodology is patient-centric. For a hospital to receive credit for 
treating a patient well, the hospital must have met the standard for 
every measure applicable to that patient's condition. There are also a 
number of proprietary composite measures, such as those used by 
Solucient, Healthgrades, CareScience, and U.S. News & World Report. In 
the FY 2007 IPPS proposed rule (71 FR 24099), we solicited comments on 
the use of composite scoring for hospital value-based purchasing and on 
the various composite scoring methodologies.
    Comment: Five commenters supported the use of the ``opportunity 
model.'' No comments were received regarding the ``appropriate care 
model.''
    Several commenters urged that further research and consumer testing 
be done around the development and display of measure composites. 
Several other commenters urged that while composites are useful, they 
should not be the only information available; instead, information 
should be presented in various ways, including composite scores, 
individual scores making up the composite, statistics supporting the 
score, and graphics.
    Value-based purchasing methods are still under development, and 
anticipating their potential effects on the health care system is 
difficult. We understand that unintended consequences may result from 
the implementation of these methods. We believe that we will need to 
assess incentives and evaluate their effects so that we can revise them 
quickly as we learn more about their impact on hospitals and on 
inpatient hospital services provided to Medicare beneficiaries.
    We did not receive any comments specific to this issue.
d. Public Reporting
    The plan for hospital value-based purchasing mandated by Pub. L. 
109-171 must address the public disclosure of information on hospital 
performance. CMS currently provides public reporting of quality 
information through the ``Compare'' Web sites for hospitals, nursing 
homes, home health agencies, and dialysis facilities.\27\ The Compare 
Web sites provide comparative quality information to consumers and 
others to help guide choices and drive improvements in the quality of 
care delivered in these settings. Besides providing Medicare 
beneficiaries and their health professionals with information to assist 
them in making informed health care decisions, public reporting of 
comparative performance data also provides information that is useful 
to health care consumers who are not Medicare beneficiaries. For 
example, a consumer who has a Health Savings Account can access CMS' 
Hospital Compare Web site to gather comparative quality information to 
assist in choosing a high quality hospital. CMS is contributing to the 
Administration's Consumer-Directed Health Care Initiative by working 
with our private- and public-sector partners to make health care 
information more transparent and available to consumers than ever 
before. (Refer to section IV.M. of the preamble to the FY 2007 IPPS 
proposed rule (71 FR 24120) for more information.) In the FY 2007 IPPS 
proposed rule (71 FR 24100), we sought comments on how we can further 
stimulate public reporting to increase the transparency and 
meaningfulness of healthcare performance information.
---------------------------------------------------------------------------

    \27\ See CMS' Hospital Compare Web site, available at: http://www.hospitalcompare.hhs.gov/; Nursing Home Compare Web site, 
avaialble at: http://www.medicare.gov/NHCompare; Home Health Compare 
Web site, avaialble at: http://www.medicare.gov/HHCompare/Home.asp; 
Dialysis Facility Compare Web site, available at: http://www.medicare.gov/Dialysis.
---------------------------------------------------------------------------

    Comment: Five commenters made recommendations regarding public 
reporting. One commenter stressed that informed decision-making about 
performance cannot occur if reported costs are divorced from 
information about quality. A second commenter noted the importance of 
providing a formal appeals process for providers that disagree with 
their performance ratings. Consumers Union urged CMS to use multiple 
approaches to get consumers more engaged in using quality information, 
suggesting that Hospital Compare be promoted continuously, that tools 
be developed to support comparisons in different ways, and that 
information on Hospital Compare to be updated more frequently than once 
a year to be relevant to the patient and fair to the hospital.
    Response: We thank all commenters for their thoughtful and valuable 
input. We will use these comments to inform our design of the plan for 
Medicare hospital value-based purchasing, as mandated by Pub. L. 109-
171. This rulemaking process is the first opportunity for the public to 
be involved in our planning process. We will also be hosting public 
listening sessions in 2007 to receive public input on drafts of the 
plan. We encourage your participation in those listening sessions.
5. Considerations Related to Certain Conditions, Including Hospital-
Acquired Infections
    Medicare's IPPS encourages hospitals to treat patients efficiently. 
Hospitals receive the same DRG payment for stays that vary in length. 
In many cases, complications acquired in the hospital do not generate 
higher payments than the hospital would otherwise receive for other 
cases in the same DRG. To this extent, the IPPS does encourage 
hospitals to manage their patients well and to avoid complications, 
when possible. However, complications, such as infections, acquired in 
the hospital can trigger higher payments in two ways. First, the 
treatment of complications can increase the cost of hospital stays 
enough to generate outlier payments. However, the outlier payment 
methodology requires that hospitals experience large losses on outlier 
cases (in FY 2006, hospitals must lose $23,600 before a case qualifies 
for outlier payments, and the hospital

[[Page 48052]]

would then only receive 80 percent of its costs above the outlier 
threshold). Second, there are about 121 sets of DRGs that split based 
on the presence or absence of a complication or comorbidity (CC). The 
CC DRG in each pair would generate a higher Medicare payment. If an 
infection acquired during the beneficiary's hospital stay is one of the 
conditions on the CC list, the result may be a higher payment to the 
hospital under a CC DRG. (See section II.C. of the FY 2007 IPPS 
proposed rule (71 FR 24006) for a detailed discussion of proposed DRG 
reforms.)
    Section 5001(c) of Pub. L. 109-171 requires the Secretary to 
identify, by October 1, 2007, at least two conditions that are (a) high 
cost or high volume or both, (b) result in the assignment of a case to 
a DRG that has a higher payment when present as a secondary diagnosis, 
and (c) could reasonably have been prevented through the application of 
evidence-based guidelines. For discharges occurring on or after October 
1, 2008, hospitals would not receive additional payment for cases in 
which one of the selected conditions was not present on admission. That 
is, the case would be paid as though the secondary diagnosis was not 
present. Section 5001(c) provides that we can revise the list of 
conditions from time to time, as long as it contains at least two 
conditions. Section 5001(c) also requires hospitals to submit the 
secondary diagnoses that are present at admission when reporting 
payment information for discharges on or after October 1, 2007. In the 
FY 2007 IPPS proposed rule (71 FR 24100), we sought input about which 
conditions and which evidence-based guidelines should be selected.
    We received 44 comments on this section from hospitals and health 
care systems, provider associations, consumer groups, purchasers, 
medical device manufacturers, information technology companies, and 
health care research organizations.
    Comment: The majority of commenters addressed conceptual issues 
concerning the selection, measurement, and prevention of hospital-
acquired infections. While most of the commenters focused on broad 
factors CMS should consider, some of the commenters included specific 
recommendations of conditions for possible inclusion in the payment 
changes. We found these comments very helpful and constructive, and we 
look forward to further input as we work towards implementation of this 
section. In the following discussion, we present a summary of the major 
themes of the commenters and list the specific hospital-acquired 
complications presented in the comments.
    Many commenters encouraged CMS to engage in a collaborative 
discussion with relevant experts in designing, evaluating, and 
implementing this section. The commenters urged CMS to include 
individuals with expertise in infection control and prevention, as well 
as representatives from the provider community, in this discussion.
    Nearly half of the commenters expressed concern about the 
difficulty in distinguishing between hospital-acquired and community-
acquired infections. Multiple commenters indicated that community-
acquired infections often cannot be diagnosed on admission and thus 
would not be included as secondary diagnoses at the time of admission. 
These commenters indicated that it would be costly and inefficient to 
attempt to diagnose all community-acquired infections at the time of 
admission. The commenters requested that CMS provide technical guidance 
to assist providers in distinguishing between hospital and community-
acquired infections.
    Many commenters discussed the statutory requirement for hospitals 
to submit information regarding secondary diagnoses present on 
admission beginning FY 2008. Some commenters supported this requirement 
and suggested that it would better enable CMS and health care providers 
to more accurately differentiate between comorbidities and hospital-
acquired complications. MedPAC, in particular, noted that this 
requirement was recommended in its March 2005 Report to Congress and 
indicated that this information is important to Medicare's value-based 
purchasing efforts. Other commenters suggested that CMS delay 
implementation of this provision, given the significant payment changes 
contained in the FY 2007 IPPS proposed rule.
    Many commenters, including States, health care associations, and 
health care providers with experience in hospital-acquired infection 
prevention, cautioned us about potential problems with relying on 
secondary diagnosis codes to identify hospital-acquired complications. 
These commenters indicated that secondary diagnosis codes may be an 
inaccurate method for identifying true hospital-acquired complications. 
Some of the commenters referred to research showing a wide discrepancy 
between hospital-acquired infections identified through claims data and 
hospital-acquired infections identified through active surveillance 
and/or chart review. According to the commenters, this research found 
that active surveillance conducted by trained infection control 
practitioners was the most accurate method for identifying hospital-
acquired infections. The commenters also noted that there is currently 
no standardized and validated method for using claims data to identify 
hospital-acquired infections.
    A number of commenters expressed concerns about the data coding 
requirements for this payment change. They asked for detailed guidance 
from CMS to help them identify and document hospital-acquired 
complications. The commenters also noted that there are currently no 
standard definitions or guidance to code the present on admission 
indicator. In addition, there was concern that the current system of 
bill coding does not support a present on admission indicator and that 
future versions of the bill coding systems may not be implemented in 
time to meet the data reporting requirements for this payment change. 
The commenters also urged CMS to allow adequate time for hospitals to 
implement the necessary changes to their billing and coding systems and 
to conduct appropriate staff training.
    Almost half of the commenters expressed concern that not all 
hospital-acquired infections are preventable. In particular, the 
commenters noted that sicker and more complex patients are at greater 
risk for hospital-acquired infections and complications. The commenters 
urged CMS to use discretion in implementing this section to ensure that 
the program does not punish hospitals taking care of sicker and more 
complex patients.
    To address this issue, many of the commenters suggested that CMS 
include standardized infection-prevention process measures, in addition 
to outcome measures of hospital-acquired infections. The commenters 
proposed that hospitals should not be penalized if they follow 
evidence-based infection prevention measures. Specifically, a number of 
commenters referenced the Surgical Care Improvement Program (SCIP) and 
suggested that CMS build on this initiative. These commenters 
recommended that CMS include exceptions to the payment changes for 
cases in which the hospital performed evidence-based infection-
prevention measures.
    Some commenters proposed that CMS expand the scope of the payment 
changes beyond the statutory minimum of two conditions. They noted that 
the death, injury, and cost of hospital-acquired infections are too 
high to limit this provision to only two conditions. Commenters also 
recommended that

[[Page 48053]]

CMS annually select additional hospital-acquired complications for the 
payment change.
    Conversely, a number of commenters proposed that CMS initially 
begin with limited demonstrations to test CMS'' methodology before 
nationwide implementation. The commenters specifically mentioned the 
Michigan Hospital Association Keystone Center, the Pittsburgh Regional 
Health Initiative, and the Maryland Patient Safety Center as possible 
models. In addition, several commenters suggested that CMS work with 
states that currently collect information on diagnoses present on 
admission.
    A commenter recommended that CMS include appropriate consumer 
protections to prevent providers from billing patients for the non-
reimbursed costs of the hospital-acquired complications and to prevent 
hospitals from selectively avoiding patients perceived at risk for 
complications.
    In addition to the broad conceptual suggestions, some commenters 
recommended specific conditions for possible inclusion in the payment 
changes. The specific conditions mentioned in the comments are listed 
below:
    <bullet> Surgical site infections. Some commenters recommended 
including surgical site infections because of their high frequency and 
cost. Commenters also noted that evidence-based measures to prevent the 
occurrence of these infections are currently measured and reported as 
part of SCIP. Many commenters suggested that CMS work with SCIP 
partners to identify appropriate post-surgical hospital-acquired 
infections for possible inclusion in the payment changes. Other 
commenters expressed concern that administrative data may not be a 
reliable source for identifying surgical site infections. Commenters 
also cautioned that surgical site infections often do not manifest and 
thus cannot be diagnosed until after the patient has been discharged 
from the hospital.
    <bullet> Ventilator-associated pneumonia. Commenters also mentioned 
ventilator-associated pneumonia as a possible condition for inclusion 
in the payment changes because this condition is currently measured and 
reported through SCIP. Other commenters recommended against this 
condition due to the subjective and labor-intensive nature of defining 
the diagnosis.
    <bullet> Catheter-associated bloodstream infections. Commenters 
recommended catheter-associated bloodstream infections, including 
central line infections, as possible conditions. Commenters noted that 
these infections are currently reported through SCIP.
    <bullet> Urinary tract infections. One commenter recommended 
nosocomial urinary tract infection for possible inclusion in the 
payment change. Another commenter argued against this condition because 
it has limited impact on patient mortality and morbidity.
    <bullet> Pressure ulcers. Multiple commenters suggested that CMS 
consider pressure ulcers as an alternative to hospital-acquired 
infections.
    <bullet> Hospital falls. Several commenters suggested that CMS 
consider hospital falls as an alternative to hospital-acquired 
infections.
    <bullet> Deep vein thromboses. Commenters also suggested that CMS 
consider deep vein thromboses as an alternative to hospital-acquired 
infections.
    Response: We would like to express our gratitude to all of the 
commenters for their thoughtful and helpful recommendations. We will 
carefully consider their views as we move toward implementing this 
section. CMS will be working closely with our colleagues at the Centers 
for Disease Control and Prevention over the coming months to select 
appropriate conditions to propose for implementation. We anticipate 
that the next opportunity for formal public comment will be the FY 2008 
IPPS proposed rule-making, which will be published in spring of 2007. 
We encourage the public to comment on our proposal at that time.
6. Promoting Effective Use of Health Information Technology
    We recognize the potential for health information technology (HIT) 
to facilitate improvements in the quality and efficiency of health care 
services. One recent RAND study found that broad adoption of electronic 
health records could save more than $81 billion annually and, at the 
same time, improve quality of care.\28\ The largest potential savings 
that the study identified was in the hospital setting because of 
shorter hospital stays promoted by better coordinated care; less 
nursing time spent on administrative tasks; better use of medications 
in hospitals; and better utilization of drugs, laboratory services, and 
radiology services in hospital outpatient settings. The study also 
identified potential quality gains through enhanced patient safety, 
decision support tools for evidence-based medicine, and reminder 
mechanisms for screening and preventive care. Despite such large 
potential benefits, the study found that only about 20 to 25 percent of 
hospitals have adopted HIT systems.
---------------------------------------------------------------------------

    \28\ RAND News Release: Rand Study Says Computerizing Medical 
Records Could Save $81 Billion Annually and Improve the Quality of 
Medical Care, September 14, 2005, available at: http://rand.org/news.press.05/09.14.html.
---------------------------------------------------------------------------

    It is important to note the caveats to the RAND study. The 
projected savings are across the health care sector, and any Federal 
savings would be a reduced percentage. In addition, there are 
significant assumptions made in the RAND study. National savings are 
projected in some cases based on one or two small studies. Also, the 
study assumes patient compliance, in the form of participation in 
disease management programs and following medical advice. For these 
reasons, extreme caution should be used in interpreting these results.
    There are some mixed signals about the potential of HIT to reduce 
costs. Some studies have indicated that HIT adoption does not 
necessarily lead to lower costs and improved quality. In addition, some 
industry experts have stated that factors such as an aging population, 
medical advances, and increasing provider expenses would offset any 
projected savings.
    In his 2004 State of the Union Address, President Bush announced a 
plan to ensure that most Americans have electronic health records 
within 10 years.\29\ One part of this plan involves developing 
voluntary standards and promoting the adoption of interoperable HIT 
systems that use these standards. The 2007 Budget states that ``The 
Administration supports the adoption of health information technology 
(IT) as a normal cost of doing business to ensure patients receive high 
quality care.''
---------------------------------------------------------------------------

    \29\ Transforming Health Care: The President's Health 
Information Technology Plan, available at: http://www.whitehouse.gov/infocus/technology/economic_policy200404/chap3.html.
---------------------------------------------------------------------------

    Over the past several years, CMS has undertaken several activities 
to promote the adoption and effective use of HIT in coordination with 
other Federal agencies and with the Office of the National Coordinator 
for Health Information Technology. One of those activities is promotion 
of data standards for clinical information, as well as for claims and 
administrative data. In addition, through our 8th Scope of Work 
contract with the QIOs, we are offering assistance to hospitals on how 
to adopt and redesign care processes to effectively use HIT to improve 
the quality of care for Medicare beneficiaries, including computerized 
physician order entry (CPOE) and bar coding systems. In section IV.A.3. 
of the FY 2007 IPPS proposed rule (71 FR

[[Page 48054]]

24095), we again invited comments on streamlining the submission of 
clinical quality data by using standards-based electronic medical 
records. (We used the term ``electronic medical records'' in section 
IV.A.3. instead of the term ``electronic health records'' that is used 
in this section in order to maintain consistency with our request for 
comments in the FY 2006 IPPS final rule.) Finally, our Premier Hospital 
Quality Incentive Demonstration provides additional financial payments 
for hospitals that achieve improvements in quality, which effective HIT 
systems can facilitate.
    We are considering the role of interoperable HIT systems in 
increasing the quality of hospital services while avoiding unnecessary 
costs. As noted above, the Administration supports the adoption of HIT 
as a normal cost of doing business. Whereas payments under the IPPS do 
not vary depending on the adoption and use of HIT, hospitals that 
leverage HIT to provide better quality services may more efficiently 
reap the reward of any resulting cost savings. In addition, the 
adoption and use of HIT may contribute to improved processes and 
outcomes of care, including shortened hospital stays and the avoidance 
of adverse drug reactions.
    In the preamble to the FY 2007 IPPS proposed rule (71 FR 24101), we 
sought comments on our statutory authority to encourage the adoption 
and use of HIT. We also sought comments on the appropriate role of HIT 
in any value-based purchasing program, beyond the intrinsic incentives 
of the IPPS, to provide efficient care, encourage the avoidance of 
unnecessary costs, and increase quality of care. In addition, we sought 
comments on promotion of the use of effective HIT through hospital 
conditions of participation (CoPs), perhaps by adding a requirement 
that hospitals use HIT that is compliant with and certified in its use 
of the HIT standards adopted by the Secretary. We anticipate that the 
American Health Information Community will provide advice to the 
Secretary on these issues.
    We received 30 comments on this section. Below is a summary of the 
comments addressing: (1) CMS'' statutory authority to encourage 
adoption of effective health information technology (HIT); (2) the role 
that HIT should play in value-based purchasing; and (3) whether CMS 
should promote the adoption of effective HIT through our CoPs. In 
addition to these areas in which we sought comments, we also received 
several comments on the challenges of implementing HIT, which were 
particularly focused on overcoming the high cost of implementation. We 
conclude the summary with additional commenter input on the adoption 
and use of HIT.
    Comment: Seven comments addressed our statutory authority to 
encourage adoption and use of HIT. Two of the seven commenters stated 
that the HHS has the authority to encourage adoption of HIT. Those 
commenters referred to the Hill Burton Act, the Medicare Modernization 
Act, the Deficit Reduction Act, and the FY 2006 Health and Human 
Services Appropriations Act as bases for our statutory authority. Other 
commenters stated that we do not have the authority to encourage 
adoption and use of HIT. Those commenters pointed out the need for 
legislation to specifically authorize support for HIT implementation.
    Nineteen commenters addressed the role of HIT in a value-based 
purchasing program. Only 2 of the 19 commenters stated that HIT should 
be directly tied to value-based purchasing. An overwhelming majority of 
the commenters believed that HIT funding should not be tied to value-
based purchasing; rather those commenters stated that HIT 
implementation should be tied to increases in hospital payment. 
However, nearly all of the commenters agreed that use of effective HIT 
could increase health care quality, efficiency, patient safety, and 
care coordination. A few commenters recognized that HIT will likely 
reduce the burden of reporting to a value-based purchasing system.
    We received 14 comments on the promotion of HIT through our CoPs. 
Of those comments, only three were in favor of including HIT in the 
CoPs. Of these comments, only three were in favor of including adoption 
of certified, interoperable HIT in the CoPs. The majority of commenters 
opposed this proposal and termed such a requirement a potential 
``unfunded mandate.''
    There were a total of 19 comments addressing the high costs 
associated with HIT implementation. Commenters identified cost as the 
greatest barrier to HIT implementation and stated that the short term 
benefits do not justify the costs. Several commenters noted that HIT is 
a public good and felt strongly that funding for HIT implementation 
should be provided through government loan guarantees and grants. Two 
commenters felt that safety-net hospitals should be the primary 
beneficiaries of any federal funding for HIT. One commenter observed 
that the governments of other countries funds HIT. Nine commenters 
observed that the proposed rule failed to recognize that a major 
finding of the RAND study was that HIT investments accrue more to the 
payers and purchasers than to hospitals and health systems, which the 
commenters believed indicates that purchasers and plans should make a 
greater share of investment in HIT.
    We received 11 comments addressing the challenges of HIT 
implementation beyond costs. Many of the commenters noted that HIT 
adoption takes careful planning and requires many internal workflow 
process changes. Several comments addressed the variation in health 
care delivery systems and the vastly different needs for HIT across 
systems, as well as vastly differing abilities to accomplish HIT 
implementation. Many felt strongly that inoperability standards must 
precede implementation.
    Several thoughtful ideas were addressed by a small proportion of 
commenters. Two commenters felt that until HIT is fully implemented, 
hospitals should be required to report a unique identifier for each 
coded procedure, capture referring and ordering providers for each 
procedure, record vital signs at presentation, include any do not 
resuscitate (DNR) orders, and record time of admission. Along the same 
lines, another commenter felt that until HIT is in place, hospitals 
should be required to notify dialysis facilities via phone, fax, or e-
mail, when a kidney failure patient is admitted.
    Response: We thank all commenters for their thoughtful and valuable 
discussion of the issues. In the HIT section of the preamble to the 
proposed rule, we recognized the potential for effective HIT to 
facilitate improvements in the quality and efficiency of health care 
services. We also pointed out CMS' promotion of the adoption and 
effective use of HIT in coordination with other Federal agencies and 
the Office of the National Coordinator of Health Information 
Technology. Here, we will discuss three areas that we are emphasizing 
to promote the effective use of HIT, in light of the comments we 
received: (1) Value-based purchasing, (2) the e-prescribing rule, and 
(3) infrastructure and interoperability standards. We believe that 
these activities will address the barriers to HIT implementation that 
were presented by the commenters and will increase the benefits of HIT 
adoption relative to the costs.
    We continue our work toward the implementation of value-based 
purchasing payment system reforms because we believe that, among other 
advantages, value-based purchasing can encourage hospitals to invest in 
activities , such as effective HIT, that

[[Page 48055]]

have the potential to improve quality and decrease unnecessary costs. 
However, linking a portion of Medicare payments to valid measures of 
quality and effective use of resources could give hospitals more direct 
incentives to implement innovative ideas and approaches that may result 
in improved value of care. We agree with the commenters that noted that 
the use of effective HIT could increase quality, efficiency, patient 
safety, and care coordination. We also agree with the commenters that 
noted that effective use of HIT can be used to decrease the burden of 
reporting to value-based purchasing programs. However, we disagree with 
the commenters that recommended direct government funding of HIT. As 
stated in the President's 2007 Budget, ``the Administration supports 
the adoption of [HIT] as a normal cost of doing business to ensure 
patients receive high quality care.''
    Commenters noted that multiple stakeholders in the health care 
system, including purchasers and payers, benefit from provider adoption 
and use of effective HIT and should share in the cost. CMS and OIG are 
in the process of issuing final rules to allow hospitals and other 
health care providers under some circumstances to donate electronic 
prescribing and electronic health records technology to physicians and 
others without running afoul of the Stark (physician self-referral) and 
anti-kickback statutes. We believe that these rules will facilitate the 
adoption of HIT by physicians and other health care providers who might 
otherwise have been unable or unwilling to invest in the technology. We 
also believe that these regulatory changes will help to stimulate the 
adoption of effective HIT, and that, as HIT use spreads, the benefits 
relative to the costs of implementation may increase for all 
stakeholders.
    The majority of commenters pointed out that the current lack of HIT 
infrastructure, including lack of interoperability standards, is a 
major obstacle to adoption and effective use of HIT. To address the 
lack of infrastructure, the Secretary has undertaken a national 
strategy that calls for Federal agencies to collaborate with private 
stakeholders in the development of architecture, standards, 
certification processes, and methods of governance to facilitate the 
adoption of effective HIT. In September 2005, the Secretary selected 16 
commissioners to serve on the American Health Information Community 
(AHIC), which is a federally chartered collaborative forum of private 
and public interests charged with advising the Secretary on how to make 
health information digital and interoperable. The goals of the 
Community include immediate access to vital medical information at the 
point of care, privacy protection, better data for research, and 
overall cost savings. The work of the Community has been divided among 
four workgroups: (1) the Electronic Health Records Workgroup, (2) the 
Chronic Care Workgroup, (3) the Consumer Empowerment Workgroup, and (4) 
the Biosurveillance Workgroup. The AHIC Workgroups have made 
recommendations, as their initial ``breakthroughs,'' pertaining to: an 
electronic medication summary and registration history; secure 
messaging capabilities for individuals with chronic disease; 
biosurveillance monitoring; and, through secure means, broadening the 
availability and access to current and historical laboratory results 
and interpretations. More information about the Community is available 
at: http://www.hhs.gov/healthit/ahic.html.
    In conclusion, we are not adopting at this time our proposal to 
require adoption of certified, interoperable HIT as a Medicare CoP. 
Rather, we are reserving judgment on the imposition of such a 
requirement and will continue to research the feasibility of doing so. 
We may revisit this issue in the FY 2008 IPPS proposed rule or in 
another rulemaking proceeding.

C. Sole Community Hospitals (SCHs) (Sec.  412.92) and Medicare-
Dependent, Small Rural Hospitals (MDHs) (Sec.  412.108)

1. Background
    Under the IPPS, special payment protections are provided to a sole 
community hospital (SCH). Section 1886(d)(5)(D)(iii) of the Act defines 
an SCH as a hospital that, by reason of factors such as isolated 
location, weather conditions, travel conditions, absence of other like 
hospitals (as determined by the Secretary), or historical designation 
by the Secretary as an essential access community hospital, is the sole 
source of inpatient hospital services reasonably available to Medicare 
beneficiaries. The regulations that set forth the criteria that a 
hospital must meet to be classified as an SCH are located in Sec.  
412.92.
    Under the IPPS, separate special payment protections also are 
provided to a Medicare-dependent, small rural hospital (MDH). Section 
1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is 
located in a rural area, has not more than 100 beds, is not an SCH, and 
that has a high percentage of Medicare discharges (not less than 60 
percent in its 1987 cost reporting year or in 2 of its most recent 3 
audited and settled Medicare cost reporting years). The regulations 
that set forth the criteria that a hospital must meet to be classified 
as an MDH are located in Sec.  412.108.
    Although SCHs and MDHs are paid under special payment 
methodologies, they are section 1886(d) hospitals. Like all section 
1886(d) IPPS hospitals, SCHs and MDHs are paid for their discharges 
based on the DRG weights calculated under section 1886(d)(4) of the 
Act.
    Effective with hospital cost reporting periods beginning on or 
after October 1, 2000, section 1886(d)(5)(D)(i) of the Act (as amended 
by section 6003(e) of Pub. L. 101-239) and section 1886(b)(3)(I) of the 
Act (as added by section 405 of Pub. L. 106-113 and further amended by 
section 213 of Pub. L. 106-554), provide that SCHs are paid based on 
whichever of the following rates yields the greatest aggregate payment 
to the hospital for the cost reporting period:
    <bullet> The Federal rate applicable to the hospital;
    <bullet> The updated hospital-specific rate based on FY 1982 costs 
per discharge;
    <bullet> The updated hospital-specific rate based on FY 1987 costs 
per discharge; or
    <bullet> The updated hospital-specific rate based on FY 1996 costs 
per discharge.
    For purposes of payment to SCHs for which the FY 1996 hospital-
specific rate yields the greatest aggregate payment, payments for 
discharges during FYs 2001, 2002, and 2003 were based on a blend of the 
FY 1996 hospital-specific rate and the greater of the Federal rate or 
the updated FY 1982 or FY 1987 hospital-specific rate. For discharges 
during FY 2004 and subsequent fiscal years, payments based on the FY 
1996 hospital-specific rate are 100 percent of the updated FY 1996 
hospital-specific rate.
    For each cost reporting period, the fiscal intermediary determines 
which of the payment options will yield the highest rate of payment to 
the SCH. Payments are automatically made at the highest rate using the 
best data available at the time the fiscal intermediary makes the 
determination. However, it may not be possible for the fiscal 
intermediary to determine in advance precisely which of the rates will 
yield the highest payment by year's end. In many instances, it is not 
possible to forecast the outlier payments, the amount of the DSH 
adjustment, or the IME adjustment, all of which are applicable only to 
payments based on the Federal rate. The fiscal intermediary makes a 
final adjustment at the close of the cost reporting period after it

[[Page 48056]]

determines precisely which of the payment rates would yield the highest 
payment to the hospital.
    If an SCH disagrees with the fiscal intermediary's determination 
regarding the final amount of program payment to which it is entitled, 
it has the right to appeal the fiscal intermediary's decision in 
accordance with the procedures set forth in Subpart R of Part 405, 
which concern provider payment determinations and appeals.
    Through and including FY 2006, 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 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 is higher. However, 
section 5003 of Pub. L. 109-171 (DRA) modified these rules for 
discharges occurring on or after October 1, 2006. Section 5003(c) 
changed the 50-percent adjustment to 75 percent. Section 5003(b) 
requires that an MDH use the 2002 cost reporting year as its base year 
(that is, the FY 2002 hospital-specific rate), if that use results in a 
higher payment. An MDH does not have the option to use its FY 1996 
hospital-specific rate. We discussed our proposed changes to implement 
section 5003 of the DRA in section IV.C.4 of the preamble to the FY 
2007 IPPS proposed rule (71 FR 24104).
2. Volume Decrease Adjustment for SCHs and MDHs
    Section 1886(d)(5)(D)(ii) of the Act requires that the Secretary 
make a payment adjustment to an SCH that experiences a decrease of more 
than 5 percent in its total number of inpatient discharges from one 
cost reporting period to the next, if the circumstances leading to the 
decline in discharges were beyond the SCH's control. Section 
1886(d)(5)(G)(iii) of the Act requires that the Secretary make a 
payment adjustment to an MDH that experiences a decrease of more than 5 
percent in its total number of inpatient discharges from one cost 
reporting period to the next, if the circumstances leading to the 
decline in discharges were beyond the MDH's control. These adjustments 
were designed to compensate an SCH or MDH for the fixed costs it incurs 
in the year following the reduction in discharges (this is, the second 
year), which it may be unable to reduce. Such costs include the 
maintenance of necessary core staff and services. Our records indicate 
that three to four SCHs/MDHs request this adjustment each year.
    However, we believe that not all staff costs can be considered 
fixed costs. Using a standardized formula specified by us, the SCH or 
MDH must demonstrate that it appropriately adjusted the number of staff 
in inpatient areas of the hospital based on the decrease in the number 
of inpatient days. This formula examines nursing staff in particular. 
If an SCH or MDH has an excess number of nursing staff, the cost of 
maintaining those staff members is deducted from the total adjustment. 
One exception to this policy is that no SCH or MDH may reduce its 
number of staff to a level below what is required by State or local 
law. In other words, an SCH or MDH will not be penalized for 
maintaining a level of staff that is consistent with State or local 
requirements.
    The process for determining the amount of the volume decrease 
adjustment can be found in section 2810.1 of the Provider Reimbursement 
Manual. Fiscal intermediaries are responsible for establishing whether 
an SCH or MDH is eligible for a volume decrease adjustment and, if so, 
the amount of the adjustment. To qualify for this adjustment, the SCH 
or MDH must demonstrate that: (a) A 5 percent or more decrease of total 
discharges has occurred; and (b) the circumstance that caused the 
decrease in discharges was beyond the control of the hospital. Once the 
fiscal intermediary has established that the SCH or MDH satisfies these 
two requirements, it will calculate the adjustment. The adjustment 
amount is determined by subtracting the second year's DRG payment from 
the lesser of: (a) The second year's costs minus any adjustment for 
excess staff; or (b) the previous year's costs multiplied by the 
appropriate IPPS update factor minus any adjustment for excess staff. 
The SCH or MDH receives the difference in a lump-sum payment.
    The adjustment for excess staff is currently broken into two parts: 
the routine acute care area (excluding intensive care unit areas) 
excess staff adjustment and the intensive care unit excess staff 
adjustment. (For purposes of this section of the preamble, any 
subsequent references to the routine acute care area of an SCH or MDH 
refer to the routine acute care area excluding any intensive care unit 
areas.) In order to determine whether or not the hospital is 
appropriately staffing its routine acute care and its intensive care 
unit area, the fiscal intermediary compares the hospital's actual 
number of nursing staff in each area with the staffing of like-size 
hospitals in the same census region. Currently, fiscal intermediaries 
obtain average nurse staffing data from the American Hospital 
Association's HAS/Monitrend Data Book. (More information on the HAS/
Monitrend Data Book follows.) If a hospital employs more than the 
reported average number of nurses in the routine acute care or 
intensive care unit area for hospitals of its size and census region, 
the fiscal intermediary reduces the amount of the adjustment by the 
cost of maintaining the additional staff. The amount of the reduction 
is calculated by multiplying the actual number of nursing staff above 
the reported average by the average nurse salary for that hospital as 
reported on the Medicare cost report. The complete process for 
determining the amount of the adjustment can be found at section 2810.1 
of the Provider Reimbursement Manual.
    Representatives from several SCH and MDH hospitals have contacted 
CMS with concerns regarding the current use of the HAS/Monitrend data 
for determining the volume decrease adjustment for SCHs and MDHs. 
Because the most recent HAS/Monitrend Data Book was published in 1989 
and is no longer updated, the hospitals expressed concern that the 
information in the publication is too outdated for current use. 
Therefore, in the FY 2007 IPPS proposed rule (71 FR 24102), we 
presented for public comment a new methodology for calculating the 
adjustment for excess staff.
a. HAS/Monitrend Data
    From the mid-1960's to 1989, the Healthcare Administrative Services 
Division of the American Hospital Association (AHA) published 
biannually the HAS/Monitrend Data Book, a collection of aggregate 
hospital statistics. Hospitals completed surveys based on 6 months of 
data; these data were categorized into one of five bed-size groups and 
into one of nine census regions. The bed size groups were 0-49, 50-99, 
100-199, 200-399, and 400 or more beds. The census regions include: (1) 
New England (Connecticut, Maine, Massachusetts, New Hampshire, Rhode 
Island, and Vermont); (2) Middle Atlantic (New Jersey, New York, and 
Pennsylvania); (3) South Atlantic (Delaware, District of Columbia, 
Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, 
and West Virginia); (4) East North Central (Illinois, Indiana, 
Michigan, Ohio, and Wisconsin); (5) East South Central (Alabama, 
Kentucky, Mississippi, and Tennessee); (6) West North Central (Iowa, 
Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota); 
(7) West South Central (Arkansas, Louisiana, Oklahoma, and Texas); (8) 
Mountain (Arizona, Colorado, Idaho, Montana, Nevada, New

[[Page 48057]]

Mexico, Utah, and Wyoming); and (9) Pacific (Alaska, California, 
Hawaii, Oregon, and Washington).
    The survey collected data on nearly 400 items pertaining to 
utilization, resource allocation, departmental productivity, 
departmental direct expenses, and staffing. In order for aggregate data 
to be published for a category, at least three hospitals in the same 
census region and bed-size group had to have responded to the survey. 
For the final 1989 publication, 996 acute care hospitals completed the 
survey. CMS has used the HAS/Monitrend Data Book since 1984 to 
determine the volume decrease adjustment for SCHs; the data also have 
been used for the volume decrease adjustment for MDHs since 1990. In 
particular, CMS has used the HAS/Monitrend data on the number of paid 
nursing hours per patient day (``paid hours/patient day'') in both the 
general acute care area (``Medical and Surgical Units'') and the 
intensive care unit (``Med & Surg Intensive Care Unit''). More 
information on the HAS/Monitrend Data Book is available from the 
American Hospital Association, 840 North Lake Shore Drive, Chicago, 
Illinois 60611.
b. HAS/Monitrend Data Book Replacement Alternative
    In the FY 2007 IPPS proposed rule (71 FR 24102), we proposed an 
alternative method for determining an SCH's or MDH's target number of 
core staff using data from the Medicare cost report and the 
occupational mix survey. However, this methodology would only establish 
one combined average number of nursing hours per patient day for both 
the inpatient routine care and the intensive care unit areas. We 
proposed to use the Medicare cost report and occupational mix survey 
data beginning with requests for adjustments for FY 2008 cost reports. 
We invited comments from the public on this proposal.
(1) Occupational Mix Survey
    As discussed in the FY 2007 IPPS proposed rule (71 FR 24075), the 
CMS occupational mix survey collects from each hospital data on the mix 
of employees in the areas of the hospital payable under the IPPS for a 
limited number of hospital occupational categories. For the 2006 
survey, these categories include registered nurses, licensed practical 
nurses, aides, orderlies, attendants, and medical assistants. The 
registered nurse subcategory includes two functional subcategories: 
management personnel and staff nurses or clinicians. For example, 
hospitals may choose to employ different combinations of registered 
nurses, licensed practical nurses, and nurses' aides 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. The data 
collected on the survey are used to adjust hospitals' wage data to 
account for each hospital's mix within the general occupational 
categories. Hospitals completed the first occupational mix survey using 
FY 2003 data. A second survey will be completed this year (FY 2006).
    Under the proposed method, we would calculate the nursing hours per 
inpatient day for each SCH or MDH by dividing the number of paid 
nursing hours (for registered nurses, licensed practical nurses, and 
nursing aides) reported on the occupational mix survey by the number of 
inpatient days reported on the Medicare cost report. The results would 
be grouped into the same bed-size groups and census regions as the HAS/
Monitrend Data Book. CMS would publish the mean number of nursing hours 
per patient day for each census region and bed-size group in the 
Federal Register. (We proposed to include licensed practical nurse and 
nursing aide hours as well as registered nurse hours to reflect the 
various levels of nursing staff employed by hospitals to provide direct 
patient care.)
    The results that would be published in the Federal Register would 
be the target number of core nursing hours per patient day. For 
purposes of the volume decrease adjustment, the published data would be 
utilized in the same way as the HAS/Monitrend data: The fiscal 
intermediary would multiply the SCH's or MDH's number of inpatient days 
by the applicable published hours per patient day. This figure would be 
divided by the average number of worked hours per year per nurse (for 
example, 2,080 for a standard 40-hour week). The result would be the 
target number of core nursing staff for the particular SCH or MDH. If 
necessary, the cost of any excess staff (number of FTEs that exceed the 
published number) would be removed from the second year's costs or, if 
applicable, the previous year's costs multiplied by the IPPS update 
factor when determining the volume decrease adjustment. Because we 
would consider registered nurses, licensed practical nurses, and 
nursing aides, the fiscal intermediary would calculate the excess staff 
adjustment by multiplying the number of excess staff by the average 
salary among the three groups, taking into account how many registered 
nurses, licensed practical nurses, and nursing aides work at the 
facility. (For instance, if the hospital's average salary for a 
registered nurse is $50,000 and the hospital's average salary for a 
licensed practical nurse is $30,000 and the hospital employs 5 
registered nurses, 3 licensed practical nurses, and no nursing aides, 
the calculated average salary would be $42,500 for one FTE (((5 x 
$50,000) + (3 x $30,000))/8 = $42,500).
    We proposed to use the results of the FY 2006 occupational mix 
survey and begin applying the proposed methodology for adjustments 
resulting from a decrease in discharges between FYs 2007 to 2008. 
Because the occupational mix survey is conducted once every 3 years, we 
would update the data set every 3 years. We proposed to use the FY 2006 
survey results and not to utilize the FY 2003 survey results to take 
into account comments we received in response to the first set of 
results from the occupational mix survey, and to ensure that hospitals 
have had some experience with the occupational mix survey before it is 
used in determining these adjustments. Because we have used the HAS/
Monitrend data for so many years, we stated our belief that it was 
appropriate to continue to use these data for one more year and wait 
for the results of the FY 2006 survey. We stated that this would give 
hospitals an opportunity to have some experience with the occupational 
mix survey before it is used in these adjustments, and would allow us 
to compare the data from the FY 2006 occupational mix survey with the 
data reported in the 2003 survey, if necessary. However, for purposes 
of describing how we would implement this methodology, we applied the 
proposed calculation to the FY 2003 occupational mix survey data. While 
we did not propose to use the FY 2003 data, we stated our belief that 
it was the best data available at the time to help explain our proposed 
methodology.
    To calculate the results below, we merged the FY 2003 occupational 
mix survey results into the FY 2003 cost report file. We eliminated all 
observations for non-IPPS providers, providers who failed to complete 
the occupational mix survey, and providers for which provider numbers, 
bed counts and/or day counts were missing. We also only included 
providers with 12 months' worth of data. This resulted in a pool of 
approximately 3,541 providers.
    For each provider in this pool, we calculated the number of nursing 
hours by adding the number of registered nurse, license practical 
nurse, and nursing aide hours reported on the occupational mix survey. 
We divided

[[Page 48058]]

the result of this calculation by the total number of inpatient days 
reported on the cost report to determine the number of nursing hours 
per patient day.
    For purposes of calculating the census regional averages for the 
various bed-size groups, we proposed to only include observations that 
fall within 3 standard deviations of the mean of all observations, thus 
removing potential outliers in the data. Below are the results of this 
calculation.
    We realize that, in the chart, some results may appear to be 
anomalous (for example, 0-49 beds for census regions 4, 6, and 8). We 
believe a small number of outlier data may have skewed the mean, which 
was the basis for identifying data within 3 standard deviations to 
include in the calculations. Therefore, we solicited comments on 
whether we should consider another method for determining the 
appropriateness of using available data in calculating the average 
number of nursing hours per patient day. For instance, in this case, 
the results are based on the inclusion of data within 3 standard 
deviations of the mean. Alternatively, we stated that we could use 
another measure of central tendency.

                                       Paid Nursing Hours Per Patient Day
----------------------------------------------------------------------------------------------------------------
                                                                  Census region
         Number of beds         --------------------------------------------------------------------------------
                                    1        2        3        4        5        6        7        8        9
----------------------------------------------------------------------------------------------------------------
0-49...........................    16.38     8.33    19.26    30.76    11.72    26.70    20.50    31.00    17.39
50-99..........................    13.71    11.07    15.66    17.37    13.69    15.53    12.51    16.63    16.11
100-199........................    11.98    10.99    14.38    13.44    11.93    17.03    13.91    14.33    13.32
200-399........................    12.40    12.19    14.19    13.00    10.57    16.20    11.35    14.06    15.33
400 or more....................    13.32     9.42    12.77    15.39     9.51    19.70    12.36    17.64    13.32
----------------------------------------------------------------------------------------------------------------

(2) American Hospital Association Annual Hospital Survey
    In the process of evaluating different sources of data to replace 
the HAS/Monitrend Data Book, we considered using the results of the 
AHA's Annual Hospital Survey. This survey includes over 700 data fields 
that cover facilities and services, utilization, finances, and 
staffing. On average, 6,000 hospitals complete the survey each year. 
Section E of the Annual Survey Database includes total facility 
staffing data. FTE counts are available for registered nurses, 
practical and vocational nurses, nursing assistive personnel, and other 
personnel. However, FTEs in outpatient areas, excluded units, and 
nursing home units within the hospital are also included in the 
aggregated FTE counts. It is not possible to separately identify how 
many of the total reported nursing FTEs are attributable to the general 
acute care facility and how many to a distinct part unit or outpatient 
facility. Due to varying staffing needs in distinct part units and 
outpatient areas, in the proposed rule we stated our belief that it 
would be best for any calculation of average staffing for the inpatient 
acute care area to consist of data solely from the inpatient acute care 
area of the hospital. In the FY 2007 IPPS proposed rule (71 FR 24104), 
we requested comments on this issue.
    We received 16 public comments on our proposal.
    Comment: Many commenters believed that it is not appropriate to use 
the FY 2006 occupational mix survey for making determinations under the 
volume decrease adjustment. The commenters believed the FY 2006 
occupational mix survey consists of unreliable data due to the rushed 
nature of the collection. The commenters suggested that CMS use the AHA 
Annual Survey data to determine nursing levels per patient day. One 
commenter expressed concern that the data from the occupational mix 
survey and the hospital cost report data were not for the same time 
period and that annualizing the data from the occupational mix survey 
may distort the data. Another commenter noted that the occupational mix 
survey collects data from ancillary areas similar to the AHA Annual 
Survey data and, therefore, use of either data source would result in a 
similar calculation. One commenter recommended that CMS work with the 
AHA to develop a new survey tool to collect this information. In the 
interim, the commenter recommended continuing to use the latest HAS 
Monitrend data.
    One commenter suggested that CMS no longer require fiscal 
intermediaries to compare a hospital's nursing staff per patient day 
with other hospitals of like size in the same area. Rather, the 
commenter suggested that fiscal intermediaries should be able to 
evaluate a hospital's individual needs and circumstances. The commenter 
also suggested that CMS only consider registered nurse and licensed 
practical nurse hours and eliminate nursing aide hours from the 
calculation. The commenter further suggested that CMS compare SCHs and 
MDHs to a smaller sample than the current census regions; for instance, 
CMS could compare hospitals in the same State.
    Response: We do not agree with the commenters who stated that the 
occupational mix survey results are unreliable. The data is supplied 
solely by hospitals, and because this is the second time hospitals have 
completed the survey, we believe they are familiar with the 
requirements and are providing accurate information. In addition, 
although the collection may have been more hurried in 2006 due to the 
Bellevue decision, as explained in section III.C. of this preamble, 
hospitals had opportunities to review, validate and correct their 
occupational mix data. For 2006, the occupational mix collection will 
include three months of data. Therefore, it will be necessary to 
annualize the data to reflect staffing levels for a one year period. We 
do not believe this distorts an individual hospital's average staffing 
levels throughout the year unless the hospital experiences a unique 
event that either greatly increases or reduces hospital utilization 
and/or the hospital's ability to recruit and maintain staff. However, 
it is for this reason that we require a minimum number of hospitals in 
each bed-size/census group to have reported staffing data before 
calculating an average for that category. We believe that by combining 
the results of at least three hospitals of like size in an area, we 
reduce the chance of unique events affecting individual hospitals 
distorting the averages.
    As previously mentioned, we stated in the proposed rule that it 
would be best to collect nursing data from only the inpatient, acute 
care portion of the hospital and that this would be a justification for 
using occupational mix survey data. However, in this final rule, we are 
correcting this statement, since the occupational mix survey--like the 
wage survey--collects data on both the

[[Page 48059]]

inpatient and outpatient areas of the hospital. Also, it is our 
understanding that hospital nursing staff may, and often do, rotate 
between the inpatient and outpatient areas of the hospital as 
necessary. In addition, inpatients often utilize services in the 
outpatient (or ancillary) areas of the hospital. Given that the 
occupational mix survey collects data on both outpatient and inpatient 
areas of the hospital, and given that most commenters stated that they 
preferred to use the AHA Annual Survey data and not the occupational 
mix data, our final policy will be to allow an SCH or MDH that has 
experienced a 5 percent or greater reduction in the number of 
discharges from one cost reporting period to the next the option of 
using either the AHA Annual Survey results or the occupational mix data 
to compare the number of hospital's core staff with other like-sized 
hospitals in its geographic area.
    We recognize that the AHA data includes staffing data from distinct 
part units and skilled nursing facilities. While it is possible to 
identify which hospitals have skilled nursing facilities, it is not 
possible to distinguish between those hospitals with distinct part 
units and those without. Our data indicate that there are currently 
1230 hospital-based skilled nursing facilities. If we eliminated all 
hospitals with skilled nursing facilities from the pool of comparison 
hospitals that responded to the FY 2004 AHA Annual Survey, roughly 
3,000 hospitals would remain. We believe this is a sufficient number of 
hospitals with which to calculate staffing averages and our final 
policy will be that when using the AHA Annual Survey, we will eliminate 
hospitals with hospital-based skilled nursing facilities. Also, 
consistent with the HAS/Monitrend Databook, we will only calculate the 
average number of nursing staff for a bed-size/census group if there 
are data available for three or more hospitals.
    In order to account for staff in the distinct part units, we would 
include in the patient day count the number of inpatient days from 
these units. While this may still lower the average number of staff per 
patient day, as discussed in more detail later in this section, a 
hospital may decide whether this data most closely resembles its 
staffing or whether the HAS/Monitrend data or occupational mix data 
better represents hospitals in its bed-size/census group. In light of 
this, we do not believe it is necessary for the AHA to develop a new 
survey tool to collect staffing information for purposes of this 
adjustment.
    In response to the commenter who suggested that the fiscal 
intermediaries take into account the individual circumstances of each 
SCH/MDH that experiences a decrease in discharges, we note that the 
commenter failed to suggest how this may be achieved. In light of our 
goal of maintaining a uniform standard for calculating the amount of 
the volume decrease adjustments, we believe that it is more appropriate 
for the fiscal intermediaries to utilize either the same or comparable 
data sources for all hospitals. The AHA Annual Survey, occupational mix 
survey, and HAS/Monitrend Databook offer this standard. We note, 
however, that the AHA Annual Survey, the occupational mix survey and 
the HAS/Monitrend Databook are not identical data sources, as described 
above. Therefore, fiscal intermediaries and hospitals should work 
together to determine which data source best represents the staffing 
needs of the hospital. In addition, the fiscal intermediaries must 
consider any minimum staffing requirement set by the State. If the 
average number of nursing hours per patient day for a bed-size/census 
group is below the State's minimum staffing requirement, the fiscal 
intermediaries may not reduce the amount of a hospital's volume 
decrease adjustment to reflect a core number of nursing staff below 
what is required by law. In addition, we are continuing to employ the 
census areas defined by the AHA in the HAS/Monitrend Databook. The 
larger size of the census areas ensures that a sufficient number of 
hospitals respond in every bed-size category for each census region.
    We have considered the commenter's statement that we should only 
consider registered nurse and licensed practical nurse staff when 
computing the number of nursing staff per patient day. However, we 
believe that nursing aides play an integral part in the delivery of 
nursing care and, therefore, should be considered part of the 
hospital's nursing staff for purposes of this determination. Therefore, 
we will continue to calculate the average number of reported registered 
nurse, licensed practical nurse, and nursing aide hours per patient 
day. As previously noted, the registered nurse, licensed practical 
nurse, and nursing aide FTEs in the AHA Annual Survey data include 
employees from outpatient areas and distinct part units of the 
hospital. Therefore, the fiscal intermediaries will include SCH or MDH 
registered nurse, licensed practical nurse, and nursing aide FTEs for 
all areas of the hospital, including any distinct part units, when 
conducting the comparison.
    We had proposed to use the results of the 2006 occupational mix 
survey but not until FY 2008. At that time, we were not aware that we 
would have the results of the FY 2006 survey available to use for 
adjustments for decreases in discharges occurring in 2006. However, due 
to the shortened collection period necessitated by the decision in 
Bellevue Hospital Center v. Leavitt, these data will now be available 
for use for volume decrease adjustments for decreases in discharges 
between the 2005 and 2006 cost reporting periods. These data will be 
updated every 3 years. The results of the FY 2006 survey may be used 
for volume decrease adjustment calculations for decreases in discharges 
occurring during the 2006, 2007 and 2008 cost reporting periods.
    After consideration of the public comments received, we are 
finalizing a policy to allow SCHs and MDHs the option of using the 
results of (1) the occupational mix survey, (2) the AHA Annual Survey, 
or (3) the HAS/Monitrend Databook for purposes of determining the 
amount of the volume decrease adjustment for any open adjustment 
requests. Beginning with adjustment requests for decreases in 
discharges occurring beginning with 2007, the amount of the volume 
decrease adjustment will be based on either the AHA Annual Survey or 
the occupational mix survey results. Therefore a SCH or MDH that has 
experienced a decrease in discharges in 2007 as compared to 2006 will 
no longer be permitted to use the HAS/Monitrend Databook results to 
calculate the amount of the volume decrease adjustment.
    If the SCH/MDH opts to use the results of the occupational mix 
survey, the fiscal intermediaries will determine the SCH's or MDH's 
total hospital nursing staff per inpatient day for the year of the 
volume decrease and compare that figure to the number published for the 
hospital's census area and bed-size division. As described in the FY 
2007 proposed rule, we will calculate the average number of nursing 
hours per patient day for all IPPS hospitals that responded to the 
occupational mix survey. We will begin by annualizing the results. We 
will then divide this figure by the number of inpatient days reported 
on the hospital cost report. At this point, we will eliminate results 
that fall outside three standard deviations of the mean in order to 
eliminate any potential outlier data. Hospitals will then be grouped by 
bed-size and census area and the average number of nursing hours per 
patient day will be calculated. We will post the

[[Page 48060]]

results of the occupational mix survey grouped by census division and 
bed-size group on the CMS Web site. Core staffing results and salaries 
will be compared to the salaries reported for both the inpatient and 
outpatient areas of the hospital.
    In place of the occupational mix survey results (or the HAS/
Monitrend Databook, which may be used only for open adjustment 
requests) hospitals may also opt to use the AHA Annual Survey results. 
Where available, these AHA Annual Survey Results may be used for all 
open adjustment requests, as well as for requests involving decreases 
experienced in 2007 or thereafter. Currently, the AHA has published the 
annual results including the FY 2004 survey. Fiscal intermediaries will 
use the survey results from the year in which the decrease occurred. 
For instance, if a hospital experiences a decrease between its 2002 and 
2003 cost reporting periods, the fiscal intermediaries will compare the 
hospital's 2003 staffing with the results of the FY 2003 AHA Annual 
Survey. We will calculate the results of the Annual Survey in a similar 
method to the occupational mix survey (eliminating from our data-set 
any hospitals with hospital-based SNFs). We will begin by multiplying 
the number of reported nurse FTEs by 2080 to derive the number of 
nursing hours per year (based on a 40 hour work week). We will then 
divide this number by the total number of inpatient days, including 
inpatient days from distinct part units, as reported on the hospital 
cost report. We will then eliminate all providers with results outside 
of three standard deviations from the mean. The hospitals will then be 
grouped by bed-size and census area and the average number of nursing 
hours per patient day will be calculated for each category. If the 
hospital chooses to use the results of the AHA Annual Survey, the 
fiscal intermediary will include the hospital's number of nursing staff 
in the distinct part units, as well as distinct part unit inpatient 
days, in the determination. Bed-size groups will also be determined 
based on the total number of beds in the inpatient areas and distinct 
part units as reported on the hospital cost report. We will post the 
results of the Annual Survey grouped by census division and bed-size 
group on the CMS Web site. If a particular year is unavailable on the 
Web site or there are no results for a particular bed-size/census 
group, the fiscal intermediaries may contact CMS for the data.
    If the fiscal intermediary determines that the SCH or MDH has a 
disproportionately high number of staff on a per inpatient day basis as 
compared to area hospitals, the fiscal intermediary will modify the 
amount of the adjustment to reflect the cost of the excess staff. As 
stated above, because we are including registered nurses, licensed 
practical nurses, and nursing aides in this determination, the fiscal 
intermediary will calculate the excess staff adjustment by multiplying 
the number of excess staff by the average weighted salary among the 
three groups, taking into account the number of registered nurses, 
licensed practical nurses, and nursing aides at the facility.
3. Mandatory Reporting Requirements for Any Changes in the 
Circumstances Under Which a Hospital Was Designated as an SCH or MDH
    Under Sec.  412.92(b)(3) and Sec.  412.108(b)(4) respectively, once 
a facility has been designated as an SCH or MDH, the classification 
remains in effect without need for reapproval unless there is a change 
in the hospital's circumstances. Currently, the regulations do not 
contain an explicit requirement that an SCH report to CMS or the fiscal 
intermediary a change in circumstances that would affect its status as 
an SCH. Likewise, the current regulations for MDHs do not contain an 
explicit requirement that an MDH report to CMS or the fiscal 
intermediary a change in the circumstances affecting its MDH status. 
However, the fiscal intermediary is required to evaluate on an ongoing 
basis whether a hospital continues to qualify for MDH status.
    We have become aware of several hospitals that have been paid based 
on SCH or MDH status even after the original circumstances that led to 
the respective classification changed. In the FY 2007 IPPS proposed 
rule (71 FR 24104), we proposed to amend Sec.  412.92(b)(3) for SCHs 
and Sec.  412.108(b)(4) for MDHs to require an SCH or MDH to report to 
its appropriate CMS Regional Office when the circumstances under which 
the hospital was approved for SCH or MDH status have changed. The CMS 
Regional Office would then determine whether the SCH or MDH continues 
to meet the criteria for classification under Sec.  412.92 or Sec.  
412.108. If an SCH or MDH no longer meets these criteria, the CMS 
Regional Office would issue a letter canceling the classification 
within 30 days of its determination. If the circumstances affecting a 
hospital's SCH or MDH classification change and the hospital does not 
disclose the information to the CMS Regional Office, CMS would cancel 
the hospital's SCH or MDH designation effective on the earliest 
discernable date on which the fiscal intermediary can determine that 
the hospital no longer met the criteria for classification.
    For MDHs, this reporting requirement is in addition to the fiscal 
intermediary's ongoing evaluations of whether a hospital continues to 
qualify for MDH status as set out in our existing regulations at Sec.  
412.108(b)(5).
    We received 41 comments on this proposal.
    Comment: Most commenters agreed that hospitals that no longer meet 
the qualification criteria for either SCH or MDH status should not 
continue to be paid as SCHs or MDHs. However, several commenters 
disagreed with the proposed requirement that an SCH or MDH notify the 
CMS Regional Office when any change in the circumstances that led to 
their classification occurs. They contended that the fiscal 
intermediary should be responsible for monitoring such conditions. One 
commenter argued that hospitals should not be required to report 
changes they cannot control, such as the building of new roads or 
hospitals.
    Another commenter noted that some of the criteria are very 
difficult for hospitals to monitor, such as patient stays at other 
hospitals in the area. The commenter stated that to monitor these 
criteria would impose a tremendous administrative burden on SCHs and 
MDHs.
    One commenter suggested that if CMS is to require that an SCH or 
MDH report on changes in the circumstances that led to its 
classification, the circumstances required to be reported be limited to 
those for which the hospital has readily available data, such as the 
opening of a new hospital within an SCH's mileage criterion. One 
commenter suggested that CMS not finalize any reporting requirement for 
SCHs or MDHs.
    Response: We understand that some criteria may be difficult for 
hospitals to monitor. However, because a hospital cannot control the 
changes in circumstances should not imply that the hospital not be 
required to report changes of which it becomes aware. We agree with the 
commenters who suggested that certain criteria may be excessively 
burdensome for a hospital to monitor because they do not have ready 
access to the necessary data. For instance, we recognize that a 
hospital may not have the resources available to determine what 
percentage of patients in their service area has been admitted to other 
facilities in that area. For this reason, CMS often provides this data 
to hospitals seeking initial SCH classification. Therefore, we are 
modifying the change to the regulations to specify that SCHs will only 
be

[[Page 48061]]

expected to report changes that would effect the distance between it 
and another like-hospital, its geographic classification status (urban/
rural), the number of beds (if the SCH was eligible under Sec.  
412.92(a)(1)(ii)), and travel time between itself and a like-provider. 
For instance, an SCH would be expected to report the opening of a new 
hospital or road, whether its geographic classification changed from 
rural to urban, and/or an increase in the number of beds at the 
hospital if the SCH was eligible under Sec.  412.92(a)(1)(ii). An MDH 
would only be required to report if there is a change to the number of 
beds in the facility that increase the bed count to more than 100 and/
or if its geographic classification changed from rural to urban. We 
will not expect an SCH or MDH to have knowledge of other factors that 
could affect SCH or MDH status. However, if it is subsequently shown 
that the hospital had knowledge of those factors, we would terminate 
SCH or MDH status as of the date the hospital became aware of the 
event. For example, we would not expect an SCH to be aware of the 
conversion of a nearby CAH to a short term acute care hospital. 
However, if there is documentation clearly indicating that the SCH had 
prior knowledge of the CAH's conversion and the converted hospital is 
located within the mileage criterion precluding SCH status, we will 
rescind the SCH designation to the time when the documentation 
indicates the SCH became aware of the conversion. The SCH/MDH must 
report any changes of which it becomes aware that affect SCH or MDH 
status within 30 days of the event occurring. We are updating the 
regulations text at Sec.  412.92 and Sec.  412.108 to reflect these 
requirements.
    We are also modifying the proposed change to the regulations to 
require that an SCH or MDH report any changes to the fiscal 
intermediary and not the regional office. Fiscal intermediaries are 
responsible for accepting and reviewing applications for SCH and MDH 
designations. Therefore, we believe it is appropriate for all 
documentation to continue to be sent to the fiscal intermediary. The 
fiscal intermediary will forward the information submitted by the SCH 
or the MDH and its recommendation to the appropriate regional office.
    Comment: Several commenters disagreed with the proposal to 
``retroactively'' withdraw SCH or MDH classification if it could be 
expected that the hospital was aware of a change in the circumstances 
that led to its classification but did not report those changes to the 
fiscal intermediary. The commenters noted that such a change in 
reimbursement could be financially devastating to a hospital and 
recommended that CMS develop a prospective process for withdrawing the 
hospital's special payment status. One commenter suggested that an SCH 
or MDH in such a position lose their status immediately, but not 
retroactively. Several commenters requested clarification of how far 
back CMS would retroactively terminate SCH or MDH status.
    Response: As explained earlier, we have modified the proposal to 
withdraw SCH or MDH status when the provider was expected to be aware 
of limited changes in circumstances that caused the provider to be no 
longer eligible for such designation or when documentation shows that 
an SCH or MDH was aware of a change outside of those listed in the 
revised regulations at Sec.  412.92(b)(3)(ii) and Sec.  
412.108(b)(4)(ii) that would affect its classification and did not 
report these changes to the fiscal intermediary. In those 
circumstances, we believe it is appropriate to withdraw the special 
payment rate effective with the date the change occurred or, with 
respect to changes that an SCH or MDH is not required to report, when 
the provider becomes aware of the event. However, we understand the 
need to establish a limit to how far back CMS may rescind SCH or MDH 
status. We believe that withdrawal of the classification status falls 
within the framework of the reopening rules at 42 CFR 405.1885. 
Accordingly, we will withdraw such status for cost reporting periods 
that are within the 3-year reopening period. Therefore, if the 
triggering event (as noted in the revised regulations) changes the 
circumstances under which the SCH or the MDH received such designation 
occurs within the three-year reopening period, under the reopening 
rules, we will withdraw the SCH or MDH designation for those periods. 
If the event occurred prior to the 3-year reopening period, we will 
only withdraw SCH or MDH designation for those cost reporting periods 
subject to the reopening period.
    Comment: Several commenters expressed concern that an SCH or MDH 
would be penalized for a change in circumstances even if it were 
unaware of such a change.
    Response: If an SCH or an MDH is not expected to be aware of a 
change in circumstances, they will not be penalized if one has occurred 
and it is not reported. We acknowledge the commenter's concern and as 
noted above revised the regulations to take his concern into account. 
If due to the change in circumstances the SCH or the MDH is out of 
compliance with the criteria for classification and the change was not 
one of those specifically listed above and the SCH or MDH was not 
previously aware of the change, the provider's status will be 
terminated 30 days after the Regional Office has determined that the 
provider no longer meets the criteria for classification.
    Comment: Several commenters disagreed with the termination of SCH 
or MDH status within 30 days of the determination that the hospital no 
longer met the qualifications for such status. One commenter suggested 
that CMS continue to pay the provider as an SCH or MDH for either 6 
months or to the end of the cost reporting period, whichever comes 
later. Several commenters suggested that CMS extend the period to 12 
months. One commenter requested that CMS only finalize these policies 
for future SCHs and MDHs, in effect grandfathering all current SCHs and 
MDHs.
    Response: We do not agree that an SCH or an MDH that no longer 
meets the eligibility requirements for such designation should continue 
to receive enhanced payments. Currently, when the Regional Office 
determines that an SCH or MDH no longer meets the classification 
criteria, it issues a letter informing the provider that in 30 days the 
SCH or MDH status will terminate. As noted above, we will only 
terminate the provider's status 30 days after the Regional Office has 
determined that the provider no longer meets the criteria for 
classification if due to a change in circumstances the SCH or the MDH 
is out of compliance with the criteria for classification and the 
change was not one of those specifically listed above and the SCH or 
MDH was not previously aware of the change.
    Comment: One commenter requested that CMS retain the current 
grandfathering provision for SCHs that permits any hospital that was an 
SCH as of December 19, 1989 to maintain that status despite any change 
of circumstances.
    Response: Section 6003(e)(1) of Pub. L. 101-239 modified the 
criteria for being eligible for SCH status by reducing the number of 
miles between providers from 50 to 35 and by requiring the Secretary to 
establish a criterion that takes into consideration the travel time 
between two providers. Section 6003(e)(3) of Pub. L. 101-239 exempted 
hospitals that already had SCH status from meeting either of these 
requirements. In other words, any hospital that was an SCH in 1989 is 
protected under this grandfathering provision from the mileage 
criterion and whether or not it meets the criterion for

[[Page 48062]]

classification concerning travel time at Sec.  412.92(a)(3). However, 
we note that this grandfathering provision is limited to these two 
circumstances. Hospitals with SCH designation in effect prior to 1989 
can lose SCH status if they fail to meet any of the other eligibility 
criteria.
    Comment: One commenter suggested that CMS use this rule to change 
the regulation at Sec.  412.92(a)(1)(i), which requires that no more 
than 25 percent of residents who become hospital inpatients or 25 
percent of Medicare beneficiaries who become hospital inpatients in the 
hospital's service area are admitted to other like hospitals within a 
35-mile radius, or, if larger, the hospital's service area. The 
commenter suggested that CMS require that either an SCH initially meet 
this requirement but later meet a lower threshold or that the SCH be 
required to demonstrate compliance in two out of the three most recent 
cost reporting periods.
    Response: We believe that this comment falls outside the scope of 
the proposed change in policy. However, we will keep this comment in 
mind when evaluating SCH policy in the future.
    Comment: Several commenters requested that CMS revise the 
definition of ``like hospital,'' especially in response to the growing 
number of specialty hospitals. Several commenters recommended that CMS 
not consider a specialty hospital to be a ``like hospital'' for 
purposes of determining eligibility and compliance with SCH criteria. 
One commenter expressed concern that the policy of considering any 
hospital whose number of inpatient days from units or wards generally 
payable under the IPPS is 8 percent or more of the total number of 
inpatient days from units or wards generally payable under the IPPS at 
the SCH a ``like hospital'' is arbitrary and should be reviewed. The 
commenter suggested that CMS increase the 8-percent threshold to at 
least 10 percent. Another commenter requested that CMS allow SCHs to 
retain its status even if a like hospital opens in its service area as 
long as the SCH's case mix index exceeds those of the like hospitals.
    Response: While we understand the commenters' concerns, we believe 
that this comment is outside of the scope of the proposed policy 
change. However, we will keep this comment in mind when evaluating SCH 
policy in the future. In the meantime, we refer commenters to the 
discussion of ``like hospital'' in the preamble of the FY 2003 IPPS 
final rule (67 FR 50053-56). As we noted in that preamble, our goal for 
defining ``like hospital'' was to strike a balance between the need to 
ensure that SCHs do not lose their special status due to specialty 
hospitals opening nearby and the need to ensure that only hospitals 
that are the sole source of short-term acute hospitals services for 
their community qualify as SCHs. We originally proposed to consider any 
hospital that overlapped on 3 percent of more of services rendered to 
be considered a like hospital. However, in response to the public 
comments received, we finalized a definition of ``like hospital'' as a 
hospital paid under the IPPS with 8 percent or more of the total number 
of inpatient days as the SCH.
    After consideration of the public comments received, we are 
finalizing a change to the regulations to specify that SCHs and MDHs 
will be required to report to the fiscal intermediary specific changes 
it becomes aware of that would affect the criteria under which it was 
eligible for such designation. For an SCH, the changes are as follows: 
distance between it and another like hospital, its geographic 
classification status (urban/rural), the number of beds if the SCH was 
eligible under Sec.  412.92(a)(1)(ii), and the travel time between 
itself and a like-provider. An MDH will be required to report if there 
is a change to the number of beds in the facility that increase the bed 
count to more than 100 and/or if its geographic classification changed 
from rural to urban.
4. Payment Changes for MDHs Under the DRA of 2005 (Sec.  412.79, Sec.  
412.90(j) and Sec.  412.108)
a. Background
    Under Sec.  412.108(a) of our regulations, in order to be 
classified as an MDH, a hospital must: (1) Be located in a rural area 
(as defined in 42 CFR Part 412, Subpart D); (2) have 100 or fewer beds 
(as defined at Sec.  412.105(b)) during the cost reporting period; (3) 
must not be classified as an SCH (as defined in Sec.  412.92); and (4) 
have no less than 60 percent of its inpatient days or discharges 
attributable to inpatients receiving Medicare Part A benefits during 
either its cost reporting period beginning in FY 1987, or in two of the 
last three of its audited cost reports that have been settled.
    MDHs have been eligible for a series of special payment rates under 
the IPPS. Section 6003(f) of Pub. L. 101-239 created the first IPPS 
special payment methodology for MDHs. Effective for cost reporting 
periods beginning on or after April 1, 1990, and ending on or before 
March 31, 1993, an MDH was paid based on whichever of the following 
rates yielded the greatest aggregate payment for the cost reporting 
period:
    <bullet> The Federal payment rate applicable to the MDH;
    <bullet> The MDH's updated hospital-specific rate based on its FY 
1982 base period costs per discharge; or
    <bullet> The MDH's updated hospital-specific rate based on its FY 
1987 base period costs per discharge.
    Section 13501(e)(1) Pub. L. 103-66 extended the MDH payment 
provisions through 1994 and provided that, for discharges occurring 
after March 31, 1993, if an MDH's applicable hospital-specific rate 
exceeded the Federal payment rate, the additional payment was limited 
to 50 percent of the amount by which the applicable updated hospital-
specific rate exceeded the Federal rate. These provisions expired 
effective for cost reporting periods beginning on or after October 1, 
1994.
    Section 4204(a)(3) of Pub. L. 105-33 amended sections 
1886(d)(5)(G)(i) and (d)(5)(G)(ii)(II) of the Act to reinstate these 
special MDH payment provisions, including the 50-percent limitation, 
for cost reporting periods ``beginning on or after October 1, 1997, and 
before October 1, 2001.'' Section 321(b)(1) of Pub. L. 106-113 made a 
technical amendment to these provisions of the Act (which describes the 
time periods for which some of the special payment provisions apply and 
the time periods during which a hospital may be considered an MDH under 
section 1886(d)(1)(G)(iv) of the Act) by striking the language 
``beginning on or after October 1, 1997, and before October 1, 2001'' 
and replacing it with ``discharges occurring on or after October 1, 
1997, and before October 1, 2001''. This change was made effective as 
if included in Pub. L. 105-33. Pub. L. 106-113 also provided for a 5-
year extension of the MDH special payment provisions. Section 404(a) of 
that law further amended sections 1886(d)(1)(G)(i) and 
(d)(1)(G)(ii)(II) of the Act by striking the phrase ``and before 
October 1, 2001'' and inserting the phrase ``and before October 1, 
2006''.
    Section 5003(a) of Pub. L. 109-171 (DRA of 2005) amended the MDH 
special payment provisions in the Act. It amended section 1886(d)(5)(G) 
of the Act and made a conforming amendment under section 1886(b)(3)(D) 
of the Act to provide for another 5-year extension of the special MDH 
payment methodology. Under this extension, a revised special MDH 
payment methodology will apply for discharges occurring on or after 
October 1, 2006, and before October 1, 2011.
    As stated earlier, MDHs currently are paid using whichever rate 
yields the

[[Page 48063]]

greatest aggregate payment: the Federal payment rate or, if higher, the 
Federal payment rate plus 50 percent of the difference between the 
Federal payment rate and the updated hospital-specific rate based on FY 
1982 or FY 1987 base period costs per discharge.
    Section 5003(b) of Pub. L. 109-171 provides that, for discharges 
occurring on or after October 1, 2006, and before October 1, 2011, an 
MDH's updated hospital-specific rate will be the FY 2002 base period 
costs per discharges if the FY 2002 based hospital-specific rate 
results in a payment increase. In cases where no payment increase 
results from using FY 2002 hospital-specific rate, an MDH will continue 
to be paid based on the higher of its updated FY 1982 or FY 1987 
hospital-specific rates, if using one of those rates results in a 
payment higher than that under the Federal payment rate. (Unlike an 
SCH, an MDH does not have the option of using its updated FY 1996 
hospital-specific rate.)
    Under section 5003(c) of Pub. L. 109-171, for discharges occurring 
on or after October 1, 2006, and before October 1, 2011, if an MDH's 
applicable hospital-specific rate exceeded the Federal payment rate, 
the additional payment is limited to 75 percent (as opposed to the 
previous 50 percent) of the amount by which the applicable updated 
hospital-specific rate exceeded the Federal rate.
    Section 5003(d) of Pub. L. 109-171 enhances the DSH adjustment for 
MDHs for discharges occurring on or after October 1, 2006. Further 
discussion concerning the implementation of this provision can be found 
in section IV.F.4. of the preamble to the FY 2007 IPPS final rule.
b. Regulation Changes
    In this FY 2007 IPPS final rule, we are amending our regulations to 
implement section 5003(a) through (c) of Pub. L. 109-171. We are adding 
a new Sec.  412.79 that describes how we will compute and update the 
MDH hospital-specific rate based on its FY 2002 base period. In 
addition, we are revising Sec.  412.90(j) to reflect the extension of 
the MDH special payment provisions to discharges occurring before 
October 1, 2011. We also are amending Sec.  412.108 by revising 
paragraph (a) and adding a new paragraph (c)(2)(iii) to reflect the 
changes to the special payment methodology effective for discharges 
occurring on or after October 1, 2006, and before October 1, 2011.
    Comment: One commenter pointed out that the proposed language in 
the new Sec.  412.79(a) in the proposed rule differs from the language 
provided in section 5003 of the statute. That is, the proposed 
regulatory language reads ``ending on or before October 1, 2001''; 
however, the commenter believed it should read ``beginning on or after 
October 1, 2001'' as specified in the statute.
    Response: We agree with the commenter that the regulatory language 
should mirror the statutory language and are making the appropriate 
changes to the regulatory language in this final rule.
    Comment: One commenter supported the proposed changes made as well 
as CMS' timely implementation of the provisions from the DRA of 2005.
    Response: We appreciate the commenter's support.
    We received no other comments on these proposed changes. Therefore, 
we are adopting the proposed changes to the regulations as final, with 
the indicated change to the regulatory text to reflect the FY 2002 base 
period statutory language.
    In addition, as we proposed, in this FY 2007 IPPS final rule, as a 
part of the amendments to Sec.  412.90(j) and Sec.  412.108(a), we are 
making two technical corrections. Section 412.90(j) describes when an 
MDH may receive a special payment adjustments, while Sec.  412.108(a) 
discusses the definition of an MDH. Each of these sections now refers 
to ``cost reporting periods beginning on or after April 1, 1990 and 
before October 1, 1994, or beginning on or after October 1, 1997 and 
before October 1, 2006''. However, as noted above, sections 
1886(d)(5)(G)(i) and (d)(5)(G)(ii)(II) of the Act, the provisions of 
the Act from which these time periods were drawn, were amended by Pub. 
L. 106-113. Sections 321(b)(1) and 404(a) of Pub. L. 106-113 amended 
sections 1886(d)(5)(G)(i) and (d)(5)(ii)(II) of the Act so that the 
phrase in each section ``beginning on or after October 1, 1997, and 
before October 1, 2001'' was replaced with the phrase ``discharges 
occurring on or after October 1, 1997, and before October 1, 2006''. 
(Section 5003(a)(1) of Pub. L. 109-171 changed the ending date in these 
provisions from ``before October 1, 2006'' to ``before October 1, 
2011''.)
    Therefore, we are removing the incorrect phrase ``beginning on or 
after October 1, 1997'' from each of these regulations and inserting 
the phrase, ``discharges occurring on or after October 1, 1997'', to 
conform the regulations to the statute.
    We did not receive any public comments on these technical changes.
5. Technical Change
    As we proposed, in this final rule, we are correcting the spelling 
of the word ``adjustment'' in paragraph (b)(2)(iv) of Sec.  412.92, by 
changing it to ``adjustment''.
    We did not receive any public comments on this technical change.

D. Rural Referral Centers (Sec.  412.96)

    Under the authority of section 1886(d)(5)(C)(i) of the Act, the 
regulations at Sec.  412.96 set forth the criteria that a hospital must 
meet in order to qualify under the IPPS as a rural referral center. For 
discharges occurring before October 1, 1994, rural referral centers 
received the benefit of payment based on the other urban standardized 
amount rather than the rural standardized amount. Although the other 
urban and rural standardized amounts are the same for discharges 
occurring on or after October 1, 1994, rural referral centers 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 other 
rural hospitals with less than 500 beds and rural referral centers. 
Other rural hospitals with less than 500 beds are subject to a 12-
percent cap on DSH payments. Rural referral centers are not subject to 
the 12 percent cap on DSH payments that is applicable to other rural 
hospitals (with the exception of rural hospitals with 500 or more 
beds). Rural referral centers are not subject to the proximity criteria 
when applying for geographic reclassification, and they do not have to 
meet the requirement that a hospital's average hourly wage must exceed 
106 percent of 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 a rural referral center by the Secretary * * * for fiscal 
year 1991 shall be classified as such a rural referral center for 
fiscal year 1998 and each subsequent year.'' In the August 29, 1997 
final rule with comment period (62 FR 45999), we also reinstated rural 
referral center status for all hospitals that lost the status due to 
triennial review or MGCRB reclassification, but not to hospitals that 
lost rural referral center status because they were now urban for all 
purposes because of the OMB designation of their geographic area as 
urban. However, subsequently, in the August 1, 2000 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 a rural referral center and lost their status due to OMB 
redesignation of the county in which they are located from rural to 
urban to be reinstated as a rural referral center.

[[Page 48064]]

Otherwise, a hospital seeking rural referral center status must satisfy 
the applicable criteria. We used 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 a rural 
referral center is to have 275 or more beds available for use (Sec.  
412.96(b)(1)(ii)). A rural hospital that does not meet the bed size 
requirement can qualify as a rural referral center 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) (Sec.  412.96(c)(1) through (c)(5)). (See also the 
September 30, 1988 Federal Register (53 FR 38513).) With respect to the 
two mandatory prerequisites, a hospital may be classified as a rural 
referral center if--
    <bullet> The hospital's CMI is at least equal to the lower of the 
median CMI for urban hospitals in its census region, excluding 
hospitals with approved teaching programs, or the median CMI for all 
urban hospitals nationally; and
    <bullet> The hospital's number of discharges is at least 5,000 per 
year, or, if fewer, the median number of discharges for urban hospitals 
in the census region in which the hospital is located. (The number of 
discharges criterion for an osteopathic hospital is at least 3,000 
discharges per year, as specified in section 1886(d)(5)(C)(i) of the 
Act.)
1. Case-Mix Index
    Section 412.96(c)(1) provides that CMS will establish updated 
national and regional CMI values in each year's annual notice of 
prospective payment rates for purposes of determining rural referral 
center status. The methodology we use to determine the national and 
regional CMI values is set forth in regulations at Sec.  
412.96(c)(1)(ii). The national median CMI value for FY 2007 includes 
all urban hospitals nationwide, and the regional values for FY 2007 are 
the median values of urban hospitals within each census region, 
excluding those hospitals with approved teaching programs (that is, 
those hospitals receiving indirect medical education payments as 
provided in Sec.  412.105(f)). These values are based on discharges 
occurring during FY 2005 (October 1, 2004 through September 30, 2005) 
and include bills posted to CMS' records through March 2006.
    In the FY 2007 IPPS proposed rule (71 FR 24106), we proposed that, 
in addition to meeting other criteria, if they are to qualify for 
initial rural referral center status for cost reporting periods 
beginning on or after October 1, 2006, rural hospitals with fewer than 
275 beds must have a CMI value for FY 2005 that is at least--
    <bullet> 1.3365; or
    <bullet> The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  412.105(f)) calculated by CMS for the census region 
in which the hospital is located. (See the table set forth in the 
proposed FY 2007 IPPS proposed rule at 71 FR 24106.)
    Based on the latest data available (FY 2005 bills received through 
March 2006), in addition to meeting other criteria, if they are to 
qualify for initial rural referral center status for cost reporting 
periods beginning on or after October 1, 2006, rural hospitals with 
fewer than 275 beds must have a CMI value for FY 2005 that is at 
least--
    <bullet> 1.3132; or
    <bullet> The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  412.105(f)) calculated by CMS for the census region 
in which the hospital is located.
    The final median CMI values by region are set forth in the 
following table:

------------------------------------------------------------------------
                                                                Case-mix
                            Region                               index
                                                                 value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)......................     1.2313
2. Middle Atlantic (PA, NJ, NY)..............................     1.2619
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).......     1.3252
4. East North Central (IL, IN, MI, OH, WI)...................     1.3118
5. East South Central (AL, KY, MS, TN).......................     1.2926
6. West North Central (IA, KS, MN, MO, NE, ND, SD)...........     1.2344
7. West South Central (AR, LA, OK, TX).......................     1.3872
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY).................     1.3877
9. Pacific (AK, CA, HI, OR, WA)..............................     1.3366
------------------------------------------------------------------------

    Hospitals seeking to qualify as rural referral centers or those 
wishing to know how their CMI value compares to the criteria should 
obtain hospital-specific CMI values (not transfer-adjusted) from their 
fiscal intermediaries. Data are available on the Provider Statistical 
and Reimbursement (PS&R) System. In keeping with our policy on 
discharges, these CMI values are computed based on all Medicare patient 
discharges subject to the IPPS DRG-based payment.
2. Discharges
    Section 412.96(c)(2)(i) provides that CMS will set forth the 
national and regional numbers of discharges in each year's annual 
notice of prospective payment rates for purposes of determining rural 
referral center status. As specified in section 1886(d)(5)(C)(ii) of 
the Act, the national standard is set at 5,000 discharges. In the FY 
2007 IPPS proposed rule (71 FR 24106), we proposed to update the 
regional standards based on discharges for urban hospitals' cost 
reporting periods that began during FY 2003 (that is, October 1, 2002 
through September 30, 2003), which is the latest available cost report 
data we had at that time.
    Therefore, in the FY 2007 IPPS proposed rule (71 FR 24106), we 
proposed that, in addition to meeting other criteria, a hospital, if it 
is to qualify for initial rural referral center status for cost 
reporting periods beginning on or after October 1, 2006, must have as 
the number of discharges for its cost reporting period that began 
during FY 2003 a figure that is at least--
    <bullet> 5,000 (3,000 for an osteopathic hospital); or
    <bullet> The median number of discharges for urban hospitals in the 
census region in which the hospital is located. (See the table set 
forth in the FY 2007 IPPS proposed rule at 71 FR 24106.)
    Based on the latest discharge data available at this time, that is, 
for cost reporting periods that began during FY 2003, the final median 
number of discharges for urban hospitals by census region area are as 
follows:

------------------------------------------------------------------------
                                                               Number of
                           Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).....................       7,366
2. Middle Atlantic (PA, NJ, NY).............................      10,307
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)......      10,546
4. East North Central (IL, IN, MI, OH, WI)..................       9,200
5. East South Central (AL, KY, MS, TN)......................       7,519
6. West North Central (IA, KS, MN, MO, NE, ND, SD)..........       7,441
7. West South Central (AR, LA, OK, TX)......................       7,239
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................      10,419
9. Pacific (AK, CA, HI, OR, WA).............................       7,965
------------------------------------------------------------------------

     We note that the median number of discharges for hospitals in each 
census region is greater than the national standard of 5,000 
discharges. Therefore, 5,000 discharges is the minimum criterion for 
all hospitals.
    We reiterate that if an osteopathic hospital is to qualify for 
rural referral

[[Page 48065]]

center status for cost reporting periods beginning on or after October 
1, 2006, the hospital would be required to have at least 3,000 
discharges for its cost reporting period that began during FY 2003.
    Comment: Commenters indicated the case-mix index values that are 
used as criteria for rural referral center status have been fluctuating 
significantly in the past few years (2005 through 2007), where they had 
been relatively stable in prior years. They questioned the methodology 
used to calculate the values.
    Response: While we agree that there have been changes in the case-
mix index values over the past few years, in our view, they have not 
been significant. The methodology for determining the case-mix index 
values for rural referral center status has not changed. The FY 2007 
final case-mix index values are based on a more complete file than the 
proposed values and are more in line with the prior year's values. 
Although the methodology for calculating the indices has not changed, 
in response to the commenters' concerns, we will continue to evaluate 
whether there are other factors that would cause the observed shift in 
the values.
    Comment: One commenter recommended that CMS clarify the last 
sentence of the ``Case-Mix Index'' section which states that ``In 
keeping with our policy on discharges, these case-mix index values are 
computed based on all Medicare patient discharges subject to DRG-based 
payment.'' The commenter believed it would be inappropriate to include 
discharges paid under the LTC DRG payment system. The commenter 
recommended that, assuming that discharges paid under the LTC DRG-based 
payment system are excluded, this sentence should be changed to specify 
``under the inpatient PPS DRG-based payment system.''
    Response: We agree with the commenter and have revised the preamble 
language in this final rule. The sentence now states, ``In keeping with 
our policy on discharges, these case-mix index values are computed 
based on all Medicare patient discharges subject to the IPPS DRG-based 
payment.''
    Comment: Two commenters addressed the issue of which cost reporting 
period is to be used to determine the number of discharges of a 
hospital applying for initial rural referral center status. One 
commenter referenced 42 CFR 412.96(c)(2)(ii), which states that an 
osteopathic hospital applying for rural referral center status ``must 
have at least 3,000 discharges during its most recently completed cost 
reporting period to meet the number of discharges criterion.'' This 
commenter believed that the preamble language in the proposed rule 
should be corrected to reflect the use of the hospital's most recently 
completed cost reporting period, rather than a cost reporting period 
specified by a fiscal year. The second commenter expressed an opposite 
view and stated that the cost reporting period specified by a fiscal 
year in the rule should apply and not the ``most recently completed 
cost reporting period'' specified in the regulations.
    Response: We have considered this issue and have decided to clarify 
the regulations to be consistent with our longstanding practice as well 
as the policy we proposed in the FY 2007 IPPS proposed rule of using 
the same cost reporting period used to develop the regional medians. In 
this way, we derive the regional medians (to which the hospital's 
discharges may be compared) as well as the hospital's own discharge 
data using the same time period. Because we use the FY 2003 data for 
developing the regional medians, we will also use this data for 
determining the hospital's own discharges. This is in keeping with our 
longstanding and consistent policy of publishing in our preamble a 
specific cost reporting period that we consider to have the latest 
available cost report data at the time of publication of the rule. We 
have made technical revisions to Sec.  412.96 to reflect our proposed 
policy. The language at Sec.  412.96(c)(2)(i) will now state, ``the 
hospital's cost reporting period that began during the same fiscal year 
as the cost reporting periods used to compute the regional median 
discharges under paragraph (i) of this section.'' We are also making 
similar revisions to the references to ``the hospital's most recently 
completed cost reporting period'' in Sec.  412.96(c)(2)(ii) and 
412.96(i)(3). In addition, in Sec.  412.96(c)(2)(ii), we are deleting 
the last sentence that references ``the triennial review.''

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

1. Background
    Section 1886(d)(5)(B) of the Act provides that prospective payment 
hospitals that have residents in an approved graduate medical education 
(GME) program receive an additional payment to reflect the higher 
indirect patient care costs of teaching hospitals relative to 
nonteaching hospitals. The regulations regarding the calculation of 
this additional payment, known as the indirect medical education (IME) 
adjustment, are located at Sec.  412.105.
    The Balanced Budget Act of 1997 (Pub. L. 105-33) 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, a hospital's unweighted FTE count of residents 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, the limit on the FTE resident count for 
IME purposes is effective for discharges occurring on or after October 
1, 1997. A similar limit is effective for direct GME purposes for cost 
reporting periods beginning on or after October 1, 1997.
2. IME Adjustment Factor for FY 2007
    The IME adjustment to the DRG payment is based in part on the 
applicable IME adjustment factor. The IME adjustment factor is 
calculated using a hospital's ratio of residents to beds, which is 
represented as r, and a formula multiplier, which is represented as c, 
in the following equation: c x [{1 + r{time}  <SUP>.405</SUP> - 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 thereafter. Section 502(a) 
modified the formula multiplier beginning midway through FY 2004 and 
provided for a new schedule of formula multipliers for FY 2005 and 
thereafter. In the FY 2005 IPPS rule, we announced the schedule of 
formula multipliers to be used in the calculation of the IME adjustment 
and incorporated the schedule in our regulations at Sec.  
412.105(d)(3)(viii) through (d)(3)(xii). In the FY 2007 IPPS proposed 
rule (71 FR 24107), we specified that for any discharges occurring 
during FY 2007, the statutorily mandated formula multiplier is 1.32. 
Previously, for FY 2007, the mandated formula multiplier was 1.42. We 
estimate that application of the mandated formula multiplier for FY 
2007 will result in an increase of 5.35 percent in IME payment for 
every approximately 10-percent increase in the resident-to-bed ratio.
    Comment: While acknowledging that the formula multiplier for FY 
2007 is mandated in law, several commenters expressed opposition to the 
reduced

[[Page 48066]]

IME payment resulting from the application of the formula multiplier.
    Response: As noted by the commenters, the schedule of formula 
multipliers to be used in the calculation of the IME adjustment is 
mandated in law. In this rule, we are simply reiterating that, for any 
discharges occurring during FY 2007, the formula multiplier is 1.32.
3. Technical Change to Revise Cross-Reference
    In the FY 2007 IPPS proposed rule (71 FR 24107), we proposed to 
revise the cross-references included in paragraph (f)(1)(ii)(C) of 
Sec.  412.105 that specify the criteria for counting FTE residents who 
spend time in nonprovider settings for IME payment adjustment purposes. 
Currently, this paragraph only cites the criteria set forth in 
Sec. Sec.  413.78(c) or 413.78(d). We should have also cited the 
provisions of Sec.  413.78(e), which state that the time residents 
spend in nonprovider settings such as freestanding clinics, nursing 
homes, and physicians' offices in connection with approved programs may 
be included in determining the number of FTE residents in the 
calculation of a hospital's resident count if other applicable 
conditions specified in paragraph (e) are met.
    We did not receive any specific public comments on the proposed 
addition of a cross-reference to Sec.  413.78(e) to Sec.  
412.105(f)(1)(ii)(C) and are therefore adopting it as final without 
modification.
    We note that in sections IV.H.2.,3.,4., and 5. of the FY 2007 IPPS 
proposed rule (71 FR 24111), we discussed other policy changes and 
clarifications to the methodology for counting FTE residents for the 
purposes of direct GME payments, which also would be applicable to IME 
payments. We respond to public comments received on those proposals 
below in the specified sections.

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

1. Background
    Section 1886(d)(5)(F) of the Act provides for additional payments 
to subsection (d) hospitals that serve a disproportionate share of low-
income patients. The Act specifies two methods for a hospital to 
qualify for the Medicare disproportionate share hospital (DSH) 
adjustment. Under the first method, hospitals that are located in an 
urban area and have 100 or more beds may receive a 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 indigent patients. These hospitals are commonly known as 
``Pickle hospitals.'' The second method, which is also the most 
commonly used method for a hospital to qualify, is based on a complex 
statutory formula under which payment adjustments are based on the 
level of the hospital's DSH patient percentage, which is the sum of two 
fractions: the ``Medicare fraction'' and the ``Medicaid fraction.'' The 
Medicare fraction is computed by dividing the number of patient days 
that are furnished to patients who were entitled to both Medicare Part 
A and Supplemental Security Income (SSI) benefits by the total number 
of patient days furnished to patients entitled to benefits under 
Medicare Part A. The Medicaid fraction is computed by dividing the 
number of patient days furnished to patients who, for those days, were 
eligible for Medicaid but were not entitled to benefits under Medicare 
Part A by the number of total hospital patient days in the same period.
[GRAPHIC] [TIFF OMITTED] TR18AU06.094

2. Technical Corrections
    In the FY 2007 IPPS proposed rule (71 FR 24108), we proposed to 
make a technical correction to Sec.  412.106(a)(1)(iii) to reflect the 
statutory requirement at section 1886(d)(8)(E) of the Act that, as of 
January 1, 2000, hospitals reclassified under Sec.  412.103 are 
considered rural for purposes of this DSH regulation. We also proposed 
to correct the regulation to eliminate the reference to Sec.  
412.62(f). These corrections reflect current policy and already-
existing statutory requirements.
    We did not receive any public comments regarding the proposed 
corrections to Sec.  412.106(a)(1)(iii) to reflect the statutory 
requirement that section 1886(d)(8)(E) of the Act that hospitals 
reclassified under Sec.  412.103 are considered rural for purposes of 
this DSH regulation and to eliminate the reference to Sec.  412.62(f). 
Therefore, we are adopting the corrections as final without 
modification.
3. Reinstatement of Inadvertently Deleted Provisions on DSH Payment 
Adjustment Factors
    In an interim final rule published in the Federal Register on June 
13, 2001 (66 FR 32174 and 32194) (which was finalized in the Federal 
Register on August 1, 2001 (66 FR 39827)), we incorporated into our 
regulations at Sec.  412.106(d)(2) the provisions of section 211(b) of 
Pub. L. 106-554. Section 211(b) amended section 1886(d)(5)(F) of the 
Act to revise the calculation of the disproportionate share percentage 
adjustment for hospitals affected by the revised DSH qualifying 
threshold percentages specified in section 211(a) of Pub. L. 106-554. 
When the section 211 changes were incorporated into the Code of Federal 
Regulations at Sec.  412.106(d)(2), the regulation text at Sec.  
412.106(d)(2)(v) was inadvertently deleted during the transcribing of 
the new text into the existing regulations. Section 412.106(d)(2)(v) 
specifies the payment adjustment factors for hospitals that meet the 
following criteria under Sec.  412.106(c)(2) for discharges occurring 
on or after April 1, 1990, and before October 1, 1991, and on or after 
October 1, 1991: Hospitals located in an urban area, that have 100 or 
more beds, and that can demonstrate that, during their cost reporting 
period, more than 30 percent of their net inpatient care revenues are 
derived from State and local government payments for care furnished to 
indigent patients.
    In the FY 2007 IPPS proposed rule (71 FR 24108), we proposed to 
reinstate the inadvertently deleted text of Sec.  412.106(d)(2)(v). We 
noted that this is a correction to the regulations; we did not propose 
to change the payment adjustment factors for hospitals that meet the 
criteria under Sec.  412.106(c)(2).
    We did not receive any public comments on this proposal and are, 
therefore, adopting it as final without modifications.

[[Page 48067]]

4. Enhanced DSH Adjustment for MDHs
    The DSH adjustment factor for most categories of hospitals is 
capped at 12 percent. Urban hospitals with more than 100 beds, rural 
hospitals with more than 500 beds, and rural referral centers, are 
exempt from this cap.
    Section 5003(d) of Pub. L. 109-171 (DRA of 2005) amended section 
1886(d)(5)(F) of the Act to revise the DSH payment adjustment factor 
for MDHs, effective for discharges occurring on or after October 1, 
2006. Specifically, section 5003(d) amended section 
1886(d)(5)(F)(xiv)(II) of the Act to exclude MDHs from the 12-percent 
DSH adjustment factor cap.
    For all discharges occurring on or after October 1, 2006, the 
fiscal intermediary will not apply the cap when calculating the DSH 
payments. These payments will be subject to revision upon final 
settlement of the cost reporting period. We note that this change will 
not affect the calculation of the disproportionate patient percentage.
    In the FY 2007 IPPS proposed rule (71 FR 24108), we proposed to 
amend the regulations at Sec.  412.106 to include this provision under 
proposed new paragraph (d)(2)(iv)(D).
    We did not receive any public comments of the proposed addition of 
Sec.  412.106(d)(2)(iv)(D) to our regulations to reflect the revision 
to section 1886(d)(5)(F)(xiv)(II) of the Act made by section 5003 of 
Pub. L. 109-171. Therefore, we are adopting the proposed revision as 
final.

G. Geographic Reclassifications (Sec. Sec.  412.103, 412.230, and 
412.234)

1. Background
    With the creation of the MGCRB, beginning in FY 1991, under section 
1886(d)(10) of the Act, hospitals could request reclassification from 
one geographic location to another for the purpose of using the other 
area's standardized amount for inpatient operating costs or the wage 
index value, or both (September 6, 1990 interim final rule with comment 
period (55 FR 36754), June 4, 1991 final rule with comment period (56 
FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). As a result 
of legislative changes under section 402(b) of Pub. L. 108-7, section 
402 of Pub. L. 108-89, and section 401 of Pub. L. 108-173, the 
standardized amount reclassification criterion for large urban and 
other areas is no longer necessary or appropriate and has been removed 
from our reclassification policy. We implemented this policy in the FY 
2005 IPPS final rule (69 FR 49103). As a result, hospitals can request 
reclassification for the purposes of the wage index only and not the 
standardized amount. Implementing regulations in Subpart L of 42 CFR 
Part 412 (Sec. Sec.  412.230 et seq.) set forth criteria and conditions 
for reclassifications for purposes of the wage index from rural to 
urban, rural to rural, or from an urban area to another urban area, 
with special rules for SCHs and rural referral centers.
    Under section 1886(d)(8)(E) of the Act, an urban hospital may file 
an application to be treated as being located in a rural area if 
certain conditions are met. The regulations implementing this provision 
are located under Sec.  412.103.
    Effective with reclassifications for FY 2003, section 
1886(d)(10)(D)(vi)(II) of the Act provides that the MGCRB must use the 
average of the 3 years of hourly wage data from the most recently 
published data for the hospital when evaluating a hospital's request 
for reclassification. The regulations at Sec.  412.230(d)(2)(ii) 
stipulate that the wage data are taken from the CMS hospital wage 
survey used to construct the wage index in effect for prospective 
payment purposes. To evaluate applications for wage index 
reclassifications for FY 2007, the MGCRB used the 3-year average hourly 
wages published in Table 2 of the August 12, 2005 IPPS final rule (70 
FR 47508). These average hourly wages are taken from data used to 
calculate the wage indexes for FY 2004, FY 2005, and FY 2006, based on 
cost reporting periods beginning during FY 2000, FY 2001, and FY 2002, 
respectively.
2. Reclassifications under Section 508 of Pub. L. 108-173
    Under section 508 of Pub. L. 108-173, a qualifying hospital could 
appeal the wage index classification otherwise applicable to the 
hospital and apply for reclassification to another area of the State in 
which the hospital is located (or, at the discretion of the Secretary, 
to an area within a contiguous State). Such reclassifications are 
applicable to discharges occurring during the 3-year period beginning 
April 1, 2004, and ending March 31, 2007. Under section 508(b), 
reclassifications under this process do not affect the wage index 
computation for any area or for any other hospital and cannot be 
achieved in a budget neutral manner.
    Some hospitals currently receiving a section 508 reclassification 
are eligible to reclassify to that same area under the standard 
reclassification process as a result of the new labor market 
definitions that we adopted for FY 2005. In applying for a 3-year MGCRB 
reclassification beginning in FY 2007, hospitals that are already 
reclassified to the same area under section 508 should have indicated 
in their MGCRB reclassification requests that if they receive the MGCRB 
reclassification, they would forfeit the section 508 reclassification 
for the first 6 months of FY 2007.
    We refer readers to section III.H. of this preamble for a 
discussion of our updated procedural rules established under section 
1886(d)(10)(D)(v) of the Act in which a section 508 hospital may retain 
its section 508 reclassification through its expiration on March 31, 
2007, and accept a reclassification approved by the MGCRB for the 
second half of FY 2007 (April 1, 2007, through September 30, 2007). We 
also clarified the procedural rules for an already individually 
reclassified hospital that is part of a group that includes a section 
508 hospital. For nonsection 508 hospitals in a group with a pending 
individual geographic reclassification, we will apply one of the 
following for the first half of FY 2007: (a) The area wage index where 
the hospital is physically located if there is no reclassification 
pending, or (b) the hospital's individual reclassification wage index 
if the hospital was part of a group awarded a group reclassification 
and the group followed the procedural rules for postponing 
reclassification until April 1, 2007. Final Table 9B will include a 
final list of section 508 reclassifications for the 1st half of FY 2007 
and will be included in a subsequent Federal Register notice as well as 
posted to the CMS Web site after August 1, 2006, and before October 1, 
2006.
3. Multicampus Hospitals (Sec.  412.230(d)(2)(iii))
    Subsequent to the publication of the FY 2005 IPPS final rule, we 
became aware of a situation in which, as a result of the new labor 
market areas implemented in FY 2005 for the IPPS, a multicampus 
hospital previously located in a single MSA is now located in more than 
one CBSA. Under our existing policy, a multi-campus hospital with 
campuses located in the same labor market area receives a single wage 
index. However, if the campuses are located in more than one labor 
market area, payment for each discharge is determined using the wage 
index value for the MSA (or Metropolitan Divisions, where applicable) 
in which the campus of the hospital is located. Prior to FY 2006, the 
criteria for a hospital being reclassified to another wage area by the 
MGCRB did not address the circumstances under which a single campus of 
a multicampus hospital may seek reclassification. The regulations

[[Page 48068]]

require that a hospital provide data from the CMS hospital wage survey 
for the average hourly wage comparison that is used to support a 
request for reclassification. Because a multicampus hospital is 
required to report data for the entire hospital on a single cost 
report, there is no wage survey data for the individual hospital campus 
that can be used in a reclassification application.
    In the FY 2006 IPPS final rule (70 FR 47444 through 47446 and 
47487), we modified the reclassification rules at Sec.  
412.230(d)(2)(iii) to allow campuses of multicampus hospitals located 
in separate wage index areas to support a reclassification application 
to an area where another campus is located using the average hourly 
(composite) wage data submitted on the cost report for the entire 
multi-campus hospital as its hospital-specific data. This special rule 
applies for reclassification applications for FY 2006, FY 2007, and FY 
2008 and will not be in effect for FY 2009 reclassification requests 
and beyond. Because reclassification applications to the MGCRB for FY 
2009 must be filed in September 2007, or 1 month before the effective 
date of the FY 2008 IPPS rule, we addressed whether to extend the 
special rule for multicampus hospitals beyond FY 2008 in this FY 2007 
final rule. In the FY 2006 IPPS final rule, we indicated that we would 
continue to explore options that would allow individual campuses of 
multi-campus hospitals to submit wage data necessary for geographic 
reclassification and also monitor the number of multi-campus hospitals 
affected by this provision (70 FR 47445 and 47446).
    After reviewing this situation further, we are finalizing our 
proposed policy. Beginning with FY 2009 reclassifications, we will no 
longer allow a campus of a multicampus hospital to use the average 
hourly wage the entire hospital system to support its reclassification 
application. Because a cost report is filed for an entire hospital, the 
campus would have to obtain a separate provider number and be treated 
for Medicare payment purposes as an independent entity in order to be 
able to provide wage data for the specific campus. If a hospital were 
to make a change in FY 2007 to its organizational structure to provide 
campus specific data to support a reclassification application, the 
earliest fiscal year that the campus would be eligible to reclassify 
would be FY 2012 because the cost report data that are used for 
geographic reclassification precede the payment year by 5 years (that 
is, FY 2003 cost report data will be used to determine the FY 2008 
geographic reclassifications).
    To our knowledge, only one hospital has used the special rule for 
multicampus hospitals. This hospital has since joined a successful FY 
2007 urban county group reclassification application to the same area 
to which it was approved under the multicampus hospital rule. Thus, 
this hospital is no longer required to meet the multicampus hospital 
rule. Given that there is only one hospital that has used this rule and 
this hospital was able to reclassify under the normal reclassification 
rules, we believe the special reclassification rule that applies to 
multi-campus hospitals is no longer needed. We proposed in the FY 2007 
IPPS proposed rule, to not extend the special rule beyond FY 2008. 
After considering comments (discussed below) we have decided to adopt 
the proposal not to extend the multicampus rule beyond 2008. For 
reclassification requests for FY 2009 and thereafter, a campus of a 
multicampus hospital would be required to obtain a separate provider 
number in order to provide the required wage data from the CMS hospital 
wage survey for the average hourly wage comparison in its MGCRB 
reclassification application.
    Comment: Several commenters requested that CMS continue to allow 
multi-campus hospitals to use the average hourly wage for the entire 
hospital system as its wage data to support a reclassification 
application to an area where another one of the campuses is located. 
One commenter argued that, once the new census data are available, 
there may be more hospitals in need of the provision. Two commenters 
asked CMS to retain the provision because they believed eliminating the 
multi-campus hospital rule will preclude both reclassifications of 
groups from areas where one of the hospital campuses is located as well 
as a campus of a multicampus provider from reclassifying as an 
individual hospital. These commenters argued that the multicampus 
hospital rule is necessary in order for an individual campus of a 
multi-campus hospital to provide wage data to join a group 
reclassification. Given how few hospitals are expected to use this 
option, the commenters asked that CMS extend the current rule for at 
least 5 more years.
    Response: The next decennial census is in 2010. Using past 
experience as a guide, we would not be developing new labor market 
areas based on the decennial census until FY 2014 or FY 2015 and it is 
unknown whether such a special rule will be needed at that time. We do 
not believe a special time limited rule that was intended to give us 
time to address the particular circumstances of a situation should be 
retained for nearly 10 more years merely on the possibility that it 
will be needed. We can reconsider whether to reestablish this special 
rule if necessary when OMB publishes new MSA definitions following the 
2010 Census. Further, as stated in the proposed rule, we believe that 
hospitals should have to support an individual reclassification 
application with their own data.
    With respect to the comments about group reclassifications, we 
believe the commenters misunderstand our current rules on 
reclassification. We are not changing these already existing rules, 
under which a satellite campus of a multicampus hospital located in a 
CBSA different from the main hospital would not be required to provide 
campus-specific wage data in order to join the group and for the MGCRB 
to approve a group reclassification application. (When a campus of a 
multicampus hospital joins a group reclassification, the group uses 
average hourly wage information for the county that was used to develop 
the wage index for the labor market area. These data do not include 
wage information for an individual campus of a multicampus hospital.) 
As we stated in the proposed rule, a campus of a multicampus hospital 
can join a group reclassification under our normal rules (71 FR 24109). 
That is, the special rule for multicampus hospitals would not be needed 
when a campus of a multicampus hospital joins a group reclassification 
application. As we allow for new hospitals that are part of group 
reclassifications, an individual campus of a multicampus hospital may 
join a group reclassification under 42 CFR 412.234 without having to 
provide campus-specific wage data. The rationale for this policy was 
explained in the proposed rule and is the same for both new hospitals 
and individual campuses of multicampus hospitals that join group 
reclassifications (71 FR 24110).
    After consideration of the public comments received, we are not 
making any further changes in this final rule to our policy relating to 
multicampus hospitals.
4. Urban Group Hospital Reclassifications (Sec.  412.234(a)(3)(iii))
    Section 412.234(a)(3)(iii) of the regulations sets forth criteria 
for urban hospitals to be reclassified as a group for FY 2007 and 
thereafter. Under these criteria, ``hospitals located in counties that 
are in the same Combined Statistical Area (CSA) (under the MSA 
definitions announced by the OMB on June 6, 2003) as the urban area to 
which

[[Page 48069]]

they seek redesignation qualify as meeting the proximity requirement 
for reclassification to the urban area to which they seek 
redesignation.''
    Last year, several commenters brought to our attention that, while 
the CSA standard allows for urban county group reclassifications in 
large urban areas throughout the United States (including 10 of the 11 
CBSAs containing Metropolitan Divisions), the CSA standard precludes 
urban county group reclassifications between three Metropolitan 
Divisions within one CBSA in Florida. They urged us to modify our 
policy to also allow hospitals located in counties that are in the same 
CBSA (in the case of Metropolitan Divisions) as the area to which they 
seek redesignation to be considered to have met the proximity 
requirement. We agree with the commenter's proposed modification. The 
proximity standard for group reclassifications is intended to allow all 
of a county's hospitals to reclassify to an adjacent area where there 
is sufficient economic integration that there can be an expectation 
that both areas are competing in a similar labor market area. We 
believe there is sufficient economic integration between Metropolitan 
Divisions within a CBSA that urban county reclassifications within a 
CBSA or a CSA should be permitted. A CBSA, as defined by the OMB, is a 
``geographic entity associated with at least one core of 10,000 or more 
population, plus adjacent territory that has a high degree of social 
and economic integration with the core as measured by commuting ties.''
    Therefore, in the FY 2007 IPPS proposed rule (71 FR 24110), we 
proposed to revise Sec.  412.234(a)(3) by adding a new paragraph (iv) 
to expand the proximity criteria to allow urban county groups to apply 
for reclassification to another area within the same CBSA. We proposed 
to require that, beginning with FY 2008, hospitals must be located in 
counties that are in the same CSA or CBSA (under the MSA definitions 
announced by OMB on June 6, 2003) as the urban area to which they seek 
redesignation to qualify as meeting the proximity requirement for 
reclassification to the urban area to which they seek redesignation.
    Comment: Several commenters supported CMS' proposal to allow 
hospitals located in counties that are in the same CBSA as the county 
in which they seek redesignation to be considered to have met the 
proximity requirement for an urban county group reclassification. These 
commenters indicated that use of the CBSA criteria appropriately 
recognizes economic integration among different metropolitan divisions 
for purposes of applying the proximity standard within the urban county 
group reclassification regulations. Commenters further indicated that 
the new proximity criteria should be applied retroactively and be 
effective for urban group reclassifications beginning on October 1, 
2006 (as opposed to October 1, 2007) under specified circumstances.
    Response: We appreciate the commenters' support for our proposed 
change to the regulations, but we do not believe the changes should be 
made retroactively. The IPPS system, including any wage indices 
associated with a hospital's geographic classification or 
reclassification is a prospective system. In addition, under section 
1886(d)(10) of the Act, the MGCRB makes decisions about 
reclassifications, not CMS. Applications for reclassifications for a 
fiscal year are required to be submitted in September, 13 months before 
the reclassification would go into effect (for example, a 
reclassification application for FY 2007 would have had to be submitted 
by September 2005). Reclassification decisions issued through the 
statutory process are final and binding and are not subject to judicial 
review. Making a reclassification criterion retroactive would interfere 
with the prospective nature of the MGCRB reclassification decisions, 
and we believe would conflict with the prospective nature of the entire 
IPPS system. In addition, it could require a recalculation of the 
budget neutrality adjustment required by section 1886(d)(8)(C) of the 
Act. Modifying the FY 2006 reclassification budget neutrality 
adjustment for all hospitals nationwide, we believe would not be 
feasible at this late date.
    After consideration of the public comments received, we are 
adopting as final, without modification, the proposed revision to Sec.  
412.234(a)(3) to add a new paragraph (iv) to expand the proximity 
criteria to allow urban county groups to apply for reclassification to 
another area within the same CBSA.
5. Effect of Change of Ownership on Urban County Group 
Reclassifications (Sec. Sec.  412.230, 412.234, and 489.18)
    We have received questions asking for clarification of our policy 
regarding whether newly constructed hospitals and hospitals that do not 
accept assignment of the previous owner's provider agreement can join 
an urban county group reclassification.
    The Medicare regulations at Sec.  412.230 require that, for 
individual hospital reclassifications, a hospital must provide a 
weighted 3-year average of its average hourly wages using data from the 
CMS hospital wage survey used to construct the wage index in effect for 
prospective payment purposes. Section 489.18(c) of the regulations 
provides that, when there is a change of ownership, the existing 
provider agreement will automatically be assigned to the new owner when 
there is a change of ownership as defined in the rules. Section 
412.230(d)(2)(iv) of the regulations specifies that, in situations 
where a hospital becomes a new provider and the existing hospital's 
provider agreement is not assigned under Sec.  489.18, the wage data 
associated with the previous hospital's provider number will not be 
used in calculating the new hospital's 3-year average hourly wage. This 
policy is consistent with how we treat hospitals whose ownership has 
changed for other Medicare payment purposes. The regulations also state 
that once a new hospital has accumulated at least 1 year of wage data 
using survey data from the CMS hospital wage survey used to determine 
the wage index, it is eligible to apply for reclassification on the 
basis of those data.
    While the regulations preclude a new provider from individually 
reclassifying until the hospital accumulates at least 1 year of wage 
data from the CMS hospital wage survey used to determine the wage 
index, a new provider may join a group reclassification under Sec.  
412.234. Under Sec.  412.234, all hospitals in an urban county must 
apply for redesignation as a group. If we did not permit a new hospital 
to join group reclassifications, all hospitals in the county would not 
be part of the reclassification application and the urban county group 
would be precluded from reclassifying for 3 years until the new 
hospital accumulated at least 1 year of wage data. We believe it would 
be inequitable to preclude a group reclassification merely because 
there was one newly constructed hospital or one hospital in the county 
changed ownership and did not accept the prior owner's provider 
agreement. Alternatively, we believe that allowing group applications 
without a new hospital would be inconsistent with our regulations and 
unfair to new hospitals because it would put them at a competitive 
disadvantage with other hospitals in the county. Because such 
reclassifications are effective for 3 years, a new hospital that was 
not allowed to join a group reclassification would have to accept a 
lower wage index than all other hospitals in the county with which it 
competes for labor for up to 3 years.
    Comment: One commenter suggested that where there is already an 
approved

[[Page 48070]]

group reclassification, the new provider should be automatically 
granted the wage index of all the other hospitals in the county. 
Alternatively, the commenter suggested that the Secretary could use the 
broad authority provided in the statute to grant an urban county group 
reclassification already in progress to a new hospital in the same 
county.
    Response: There is currently no provision that allows a hospital to 
join a county-wide group reclassification already in effect. The 
existing regulations at Sec.  412.234 provide that all hospitals in an 
urban county must apply for redesignation as a group. The MGCRB 
decision applies to only those hospitals listed on the application. 
However, it is possible that the urban county group can apply for 
another reclassification to a different area with the new provider.
6. Requested Reclassification for Hospitals Located in a Single 
Hospital MSA Surrounded by Rural Counties
    In the FY 2006 IPPS final rule (70 FR 47448), we presented a 
commenter's concern about the special circumstances of a hospital 
located in a single hospital MSA surrounded by rural counties in 
relation to the wage index and the rules governing geographic 
reclassification. The commenter stated that an isolated hospital in a 
single hospital MSA is at a competitive disadvantage because the rural 
hospitals that surround the hospital have been reclassified to higher 
wage index areas or have been designated as rural referral centers, 
SCHs, MDHs, or CAHs. The urban hospital is ineligible for 
reclassification to a higher wage index area either as an individual 
hospital or as part of a group under the existing regulations. The 
commenter emphasized that this concern is especially significant given 
the fact that an isolated hospital in a single hospital MSA is the only 
hospital in its urban area, and, therefore, has an even greater 
obligation to the communities it serves.
    The commenter advocated a change to the urban county group 
reclassification regulations whereby a hospital in a single hospital 
MSA surrounded by rural counties would be able to reclassify to the 
closest urban area that is part of a CSA located in the same State as 
the hospital. We did not adopt this suggested policy for FY 2006 
because we did not believe it would be prudent to adopt the suggested 
policy in a final rule without first soliciting public comment. In the 
FY 2007 IPPS proposed rule, we solicited comments on this issue.
    Comment: Commenters supported allowing a hospital that is the only 
hospital in its MSA to reclassify to the closest urban area that is 
part of a CSA located in the same State, when the hospitals in 
surrounding areas have all been reclassified to and/or are located in 
areas that receive wage index reimbursement significantly higher than 
the surrounding hospitals' actual wages. Without this reclassification, 
the commenters indicated that the hospital must continually work to 
keep wages competitive, purchase new technology, and provide services 
needed by Medicare beneficiaries in its community. The commenters also 
stated that a single hospital in an urban county must offer a broad 
range of services to meet the needs of the Medicare beneficiaries in 
its large service area, while potentially competing with hospitals that 
offer fewer services yet receive increased reimbursement due to their 
ability to reclassify. Some commenters also recommended that proximity 
criteria should focus more on competition as demonstrated through 
economic connection, rather than location. The commenters argued that 
there is an anomaly in the reclassification rules that allows a 
reclassified hospital to receive a wage index that is higher than its 
own average hourly wage. Such a hospital has an advantage relative to 
its competitors in the single hospital MSA by being able to take the 
excess revenue and invest in technology and services. One commenter 
stated that making an exception for the hospital addressed here would 
be an unnecessary expansion of the geographic reclassification 
provisions. The commenter indicated that it was not unsympathetic to 
the situation described of a hospital that is surrounded by rural 
hospitals that have all received special payment status. The commenter 
opposed allowing the hospital to reclassify to a distant area but 
indicated that it might support some accommodation that was 
particularized to this situation.
    Response: We disagree with the notion that receiving a higher wage 
index than a hospital's own average hourly wage is an anomaly of 
reclassification. The wage index represents an average of all hospitals 
in a labor market area. Using the commenter's logic, such an 
``anomaly'' would not be limited to reclassification. It would also be 
a feature of the wage index in a labor market area with multiple 
hospitals. Some hospitals would have higher wages than the labor market 
area average, and others, lower. The only policy option for addressing 
such a concern would be to have a hospital-specific wage index. We 
believe such an option would not be permitted under the section 
1886(d)(3)(E) of the Act, which requires us to adjust IPPS rates for 
``area differences in hospital wage levels'' to reflect the ``relative 
hospital wage level in the geographic area of the hospital compared to 
the national average hospital wage level.'' The statute clearly directs 
the Secretary to use area, and not hospital-specific, differences in 
wage levels in creating the wage index.
    We believe that allowing hospitals in single hospital MSAs 
surrounded by rural counties to reclassify to the closest urban area 
that is part of a CSA located in the same State as the hospital would 
be an unnecessary expansion of the geographic reclassification 
provisions. If we adopted the commenters' change to the 
reclassification provisions, we would be allowing a hospital group to 
reclassify to a labor market area that is farther away from, rather 
than closer to, urban market areas. Such a change would be inconsistent 
with the geographic reclassification regulations that require a 
hospital to demonstrate proximity to the area where it requests 
reclassification. For individual hospital reclassifications, the 
proximity requirement is demonstrated by either meeting a mileage 
requirement or showing that at least 50 percent of the hospital's 
employees reside in the area to which it wishes to reclassify. For 
group reclassifications, the proximity requirement is met if the county 
demonstrates that it is adjacent to the area where it is seeking 
reclassification and has a sufficient degree of economic integration to 
suggest that both areas compete for the same labor. The commenter's 
approach would allow a hospital to reclassify to a labor market that is 
more than 75 miles away from the requested area. In general, we believe 
it is highly unlikely that two areas more than 75 miles apart compete 
for the same labor.
    In accord with the comment from a national hospital association, we 
agree that the geographic reclassification rules should not be revised 
to accommodate this situation. However, as suggested in the comment, we 
considered an accommodation to address the particular circumstances of 
this situation. In this situation, a number of the surrounding 
hospitals benefit from being an MDH, SCH, or RRC. There are also two 
hospitals within approximately 35 miles of the hospital in the single 
hospital urban area that do not receive special payment under these 
provisions but receive a special wage index under

[[Page 48071]]

section 508 of Pub. L. 108-173. Therefore, the hospital in the single 
hospital urban area has neighboring hospitals that either receive 
special payment provisions such as RRC and SCH status or benefit from 
the special circumstances of section 508 that provided them with 
temporary higher wage indices. The section 508 reclassifications were 
special one-time reclassification provisions that permitted certain 
hospitals to reclassify that ordinarily would not be able to. Thus, the 
reclassification of the two neighboring hospitals, in conjunction with 
the special payment of the other surrounding hospitals, represents a 
situation that would not ordinarily occur under our reclassification of 
labor market area rules. Due to the combination of these factors and 
the unique circumstances surrounding the section 508 reclassifications, 
we are invoking our special exceptions and adjustment authority under 
section 1886(d)(5)(I)(i) of the Act for this situation. The special 
exceptions and adjustment authority authorizes us to provide ``for such 
other exceptions and adjustments to [IPPS] payment amounts * * * as the 
Secretary deems appropriate.'' We believe it is appropriate in these 
circumstances to give the hospital in the single hospital urban area 
the same wage index as the nearby 508 hospitals until the expiration of 
the provision on March 31, 2007. We note that in somewhat analogous 
circumstances, we used the special exceptions authority to address 
hospitals co-located with other hospitals that received a special 
temporary wage index increase. In that case, a special exception was 
granted where individual hospitals were part of a failed group 
application, where a significant proportion of the group (one-third) 
was able to otherwise reclassify, and where the hospitals that did 
reclassify received wage indices at least 10 percent higher than the 
wage index of the MSA where the hospital was located (69 FR 49105).
    Comment: One commenter indicated that when competing hospitals are 
geographically located in two separate MSAs they may experience large 
differences in their wage indices, thus leading to reimbursement 
differentials. The commenter stated that a hospital in a single 
hospital MSA could not rectify its situation simply by increasing labor 
compensation, thereby resulting in a higher hospital-specific wage 
index, because the wage index is based on wage data from 3 years 
earlier and, in addition, the wage index is only paid on the labor-
related share of the standardized amount. Thus, the commenter 
concluded, a hospital could not receive dollar-for-dollar returns on 
its own labor costs for any particular year, even though it receives a 
wage index based on its own wage data.
    Response: We disagree with the commenter's suggestion that the use 
of MSAs do not provide a sound basis for identifying hospital labor 
market areas. As noted in the FY 2005 IPPS final rule (69 FR 29027), 
exhaustive research has been completed since the mid-1990's on use of 
alternatives to using MSA definitions for inpatient hospital labor 
market. While individual hospitals may sometimes be disadvantaged by 
the use of OMB statistical area definitions for the Medicare IPPS labor 
market areas, there has been no consensus among interested parties that 
there are any better alternatives. Dividing the country into geographic 
areas used to determine wage indices, as is required by section 
1886(d)(3)(E) of the Act, will necessarily result in different wage 
indices across different labor market areas. The commenter is correct 
that hospitals can neither change the proportion of their payment that 
is adjusted by the wage index nor shorten the period between when 
hospitals pay wages to their employees and when those wages are used in 
determining the wage index. However, these circumstances are not unique 
to hospitals in single-hospital MSAs. All hospitals experience a delay 
between the date hospital wage costs are incurred and the date those 
costs are used to determine the wage index. Similarly, all hospitals 
are paid based upon a set labor-related share.
    Commenters: provided the following suggestions for revising the 
reclassification rules for single hospital MSAs:
    <bullet> Exempt the hospital from the requirement that its wages be 
at least 108 percent of the average hourly wage of all other hospitals 
in its area, since a single hospital alone in its MSA could not, by 
definition, meet this test.
    <bullet> Combine single hospital areas with neighboring MSAs, for 
the same reasons CMS treated micropolitan areas as rural when it 
adopted new labor market areas in FY 2005.
    <bullet> Allow urban hospitals that qualify to be SCHs or rural 
referral centers other than being located in a rural area to reclassify 
using the special rules that apply to hospitals with such a status.
    Response: We are not adopting any of the above recommendations in 
this final rule. We do not believe the reclassification rules should be 
modified to abolish the 108 percent test in the case of a hospital in a 
single-hospital MSA. The 108-percent test exists precisely to create a 
specific threshold for reclassifying and to ensure that a reclassifying 
hospital's own wages are significantly higher than the wages used in 
calculating the index of its home area. Allowing a hospital receiving 
100 percent of its area wages to be exempt from this test, we believe, 
could potentially undermine the 108-percent test for all hospitals, and 
we are not certain how we would distinguish between a hospital with 
wages at, for example, 105 or 107 percent of its area wages and the 
single hospital with a wage index at 100 percent of its area wages. We 
note that section 1886(d)(10)(D)(i)(I) of the Act specifically directs 
us to include in our reclassification guidelines ``guidelines for 
comparing wages * * * in the area in which the hospital is 
classified.''
    We also disagree with the suggestion that we should combine 
adjacent urban areas into one labor market area where one of the MSAs 
has a single hospital. As we indicated above, the MSAs have 
consistently been used by CMS to designate geographic areas and there 
has been no consensus among interested parties in favor of any 
alternatives. Combining MSAs could also potentially disadvantage 
hospitals in the urban area with multiple hospitals. For the same 
reason, we also disagree with the suggestion of the commenter that 
indicated a hospital that meets all of the requirements to be an SCH or 
a rural referral centers except rural status should be able to take 
advantage of the special reclassification provisions that apply to 
hospitals with these designations. As rural hospitals, these hospitals 
are afforded advantages that do not apply to urban hospitals. Congress 
has repeatedly recognized the special circumstances of rural hospitals. 
For example, Congress, in section 1886(d)(10)(D)(iii) of the Act, 
exempted rural referral centers from certain wage comparison rules used 
in reclassification.
    Finally, hospitals in single hospital MSAs already have another 
reclassification option available where the 108-percent test does not 
need to be met. A hospital in a single hospital MSA can apply to an 
adjacent area using the group reclassification rules. Under these 
rules, the hospital must be located in a county that is in the same CSA 
or CBSA as the urban area where they are seeking reclassification. The 
CSA and CBSA requirement is intended to identify economic integration 
among different areas. To be part of an optional CSA, the OMB standard 
requires that there be at least a 15-percent employment interchange 
between the areas (25 percent for CBSAs). We do not see a need to 
exempt a hospital in a single

[[Page 48072]]

hospital MSA from wage data comparison because it can apply to an 
adjacent MSA within the same CSA using the group reclassification rules 
without having to meet the 108-percent test. If a hospital in a single 
hospital MSA cannot meet group reclassification criteria because of the 
CSA standard, it means there is not a sufficient degree of employment 
interchange to suggest that the areas compete for the same labor.
7. Special Adjustment for Hospital Group Reclassification Denied on the 
Basis of Incomplete CSA Listing
    In this final rule, we are also invoking our special exceptions and 
adjustment authority under section 1886(d)(5)(I)(i) of the Act to 
adjust the wage index of a hospital group that failed to reclassify on 
the basis of incomplete OMB guidance for FY 2007 only. The hospital 
group in question timely applied to the MGCRB for geographic 
reclassification. On December 5, 2005, the OMB issued a bulletin, 
Bulletin 06-01, listing the MSAs that comprise various CSAs throughout 
the country. The bulletin did not include the hospital group's county 
as being part of the CSA to which the group sought reclassification. 
CMS regulations at 42 CFR 412.234 require a group to be in the same CSA 
as the urban area to which it seeks reclassification. Thus, the MGCRB 
properly denied the hospital group's request.
    However, subsequent to the MGCRB denial, the OMB corrected its 
December 5, 2005 bulletin. On April 25, 2006 and then again on May 26, 
2006, OMB issued correction bulletins stating that it had omitted from 
Bulletin 06-01 certain MSAs that should have been part of the CSA 
listing. The correction bulletin resulted in the hospital group 
becoming part of the same CSA as the urban area to which it had sought 
reclassification. However, by the time OMB issued its correction, the 
deadline for appealing the MGCRB denial to the Administrator (15 days 
from the date of the MGCRB decision) under 42 CFR 412.276(a) had 
passed. In addition, the time for the Administrator to issue a decision 
on his or her own motion (105 days following the issuance of an MGCRB 
decision) had also expired. As provided under Sec.  412.276(b), MGCRB 
decisions are final and binding unless reviewed and changed by the 
Administrator.
    Four other hospital groups were affected by OMB's correction 
bulletin(s). However, all of these groups were able to receive a 
positive determination by the Administrator. In one case, the 
Administrator was able to toll the timeframe for deciding the group's 
appeal under Sec.  412.278(f)(2)(i). In the other three cases, the 
Administrator affirmed the MGCRB's decision but then amended the 
decision on May 30 within the 15 days allotted under Sec.  
412.278(g)(2).
    The special exceptions and adjustment authority authorizes us to 
provide ``for such other exceptions and adjustments to [IPPS] payment 
amounts * * * as the Secretary deems appropriate.'' We believe it is 
appropriate in these circumstances to adjust the hospital group's wage 
index to reflect the reclassification it would have received had OMB's 
initial CSA listing been complete. First, of the five hospital groups 
affected by the OMB bulletin(s), four were granted reclassifications 
under the procedures for Administrator review. Only the remaining 
hospital group was unable to reclassify because the deadline for the 
Administrator discretionary review expired on May 17, 2006, and the OMB 
did not issue its correction bulletin until May 26, 2006. The 
circumstances of the five cases are identical in that each was denied 
reclassification by the MGCRB by virtue of not meeting the CSA standard 
that was later corrected by OMB. We believe it would be inequitable for 
the one remaining hospital group to be the only group of the five 
similarly situated not to benefit from the correction of the errors to 
OMB Bulletin 06-01. Second, the MGCRB's decision was based upon an 
incomplete OMB listing. We do not believe the hospital group should 
experience an adverse determination solely on the basis of OMB 
omissions. Third, OMB issued its correction only 9 days after 
expiration of the discretionary review period for the Administrator to 
take review. Taken in conjunction, we believe that these three factors, 
the reclassification of all other similarly situated hospital groups; 
the governmental omission; and the closeness in time between OMB's 
correction and the expiration of the Administrator discretionary review 
period, support a special adjustment. We note that we are not 
retroactively granting a reclassification to the hospital group in 
question. Rather, we will adjust payment to reflect the wage index it 
would have received (for example, we will give the hospital group that 
wage index for hospitals reclassified to the requested area). The 
hospitals in the group will not receive the section 505 out-migration 
adjustment in FY 2007.
    Finally, we note that the hospital group in question may reapply 
for geographic reclassification to the same area for the period FY 2008 
through FY 2010. As specified in section III.H. of the preamble of this 
final rule, the deadline for FY 2008 reclassification applications is 
September 1, 2006. We encourage hospitals to closely review the special 
instructions provided in section III.H. of this preamble elsewhere in 
this final rule affecting the procedures for applying for 
reclassification for FY 2008, considering the unique circumstances of 
occupational mix wage adjusted average hourly wages not being available 
until after August 1 and prior to October 1.

H. Payment for Direct Graduate Medical Education

1. Background
    Section 1886(h) of the Act, as added by section 9202 of the 
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L. 
99-272) and implemented in regulations at existing Sec. Sec.  413.75 
through 413.83, establishes a methodology for determining payments to 
hospitals for the costs of approved graduate medical education (GME) 
programs. Section 1886(h)(2) of the Act, as added by COBRA, sets forth 
a methodology for the determination of a hospital-specific, base-period 
per resident amount (PRA) that is calculated by dividing a hospital's 
allowable costs of GME for a base period by its number of residents in 
the base period. The base period is, for most hospitals, the hospital's 
cost reporting period beginning in FY 1984 (that is, the period 
beginning between October 1, 1983, through September 30, 1984). 
Medicare direct GME payments are calculated by multiplying the PRA 
times the weighted number of full-time equivalent (FTE) residents 
working in all areas of the hospital (and nonhospital sites, when 
applicable), and the hospital's Medicare share of total inpatient days. 
The base year PRA is updated each year for inflation. However, as 
specified in section 1886(h)(2)(D)(ii) of the Act, for cost reporting 
periods beginning on or after October 1, 1993, through September 30, 
1995, each hospital-specific PRA for the previous cost reporting period 
is not updated for inflation for any FTE residents who are not either a 
primary care or an obstetrics and gynecology resident. As a result, 
hospitals that train primary care and obstetrics and gynecology 
residents, as well as nonprimary care residents in FY 1994 or FY 1995, 
have two separate PRAs: one for primary care and obstetrics and 
gynecology residents and one for nonprimary care residents.
    Pub. L. 106-113 amended section 1886(h)(2) of the Act, effective 
October 1, 2000, to establish a methodology for the use of a national 
average PRA in computing direct GME payments for

[[Page 48073]]

cost reporting periods beginning on or after October 1, 2000. 
Specifically, Pub. L. 106-113 established a ``floor'' for FY 2001 such 
that a hospital-specific PRA should not be less than 70 percent of the 
locality-adjusted national average PRA. In addition, it established a 
``ceiling'' that froze or limited the annual inflation adjustment to a 
hospital-specific PRA if the PRA exceeded 140 percent of the locality-
adjusted national average PRA. Section 511 of Pub. L. 106-554 increased 
the ``floor'' established by Pub. L. 106-113 to equal 85 percent of the 
locality-adjusted national average PRA for PRAs in existence in FY 
2002. Existing regulations at Sec.  413.77(d)(2)(iii) specify that, for 
purposes of calculating direct GME payments, each hospital-specific PRA 
is compared to the floor (for FY 2001 and FY 2002) and the ceiling (for 
FY 2001 through 2013) to determine whether a hospital-specific PRA 
should be revised. We note that, under existing regulations at Sec.  
413.77(c), if a hospital-specific PRA for FY 2001 or FY 2002 is revised 
due to application of the floor PRA, the revised PRA is the starting 
point for the PRA in future years, subject to the annual inflation 
adjustment and any other applicable adjustments.
    Section 1886(h)(4)(F) of the Act established caps on the number of 
allopathic and osteopathic residents that hospitals may count for 
purposes of calculating direct GME payments. For most hospitals, the 
caps were the number of allopathic and osteopathic FTE residents 
training in the hospital's most recent cost reporting period ending on 
or before December 31, 1996. Section 422 of Pub. L. 108-173 added 
section 1886(h)(7) of the Act which provided for one-time reductions to 
the resident caps of teaching hospitals that were training a number of 
FTE residents below their cap in a reference period, and authorized a 
one-time ``redistribution'' of FTE resident slots to hospitals that 
could demonstrate a likelihood of using the additional resident slots 
within the first three cost reporting periods beginning on or after 
July 1, 2005.
2. Determination of Weighted Average Per Resident Amounts (PRAs) for 
Merged Teaching Hospitals (Sec.  413.77)
    As stated in the background section above, in accordance with 
section 1886(h) of the Act, Medicare pays teaching hospitals for the 
direct costs of GME based on the per resident direct GME costs in a 
base year. For most hospitals, the base year is FY 1984 (cost reporting 
periods beginning between October 1, 1983, and September 30, 1984). 
Although section 1886(h) of the Act provides for the establishment of a 
PRA for a hospital that trained residents in the 1984 base year, the 
statute does not address how to treat the PRA(s) of teaching hospitals 
that subsequently merge.
    Our policy has always been that when two or more teaching hospitals 
merge, we determine a weighted average PRA for the surviving merged 
hospital using direct GME costs and resident data from the base year 
cost report for each teaching hospital involved in the merger. This 
policy was detailed in Questions and Answers on Medicare GME Payments 
issued on November 8, 1990: ``[When] two hospitals merge * * * the 
merged hospital's per resident amount * * * [is] based on the weighted 
average of the per resident amounts of both hospitals.'' We believe 
this is an equitable way to determine a PRA for the surviving merged 
hospital because it is based on the relative costs and sizes of the GME 
training programs in the respective facilities. Moreover, we believe 
this policy minimizes the role Medicare GME payments play in the choice 
of the surviving hospital entity. For example, there is no incentive to 
choose the surviving hospital based in part on the hospitals' relative 
PRAs.
    To calculate the weighted average PRA for the merged entity, the 
fiscal intermediary begins by determining the base year PRAs and the 
base year FTE resident counts of the hospitals that merge. The weighted 
average PRA is calculated by adding the product of each hospital's base 
year PRA and its base year FTE resident count, and dividing that number 
by the total number of the base year FTE residents for those hospitals.
    When our current methodology was first established for calculating 
the new PRA for a merged hospital, we adopted a policy to use base year 
PRAs and FTE resident counts. It was appropriate and workable to use 
data from the PRA base year because the base year data (usually for the 
1984 fiscal year) associated with the hospital-specific PRAs were 
easily accessible. However, these data are now often over 20 years old 
and it has become administratively burdensome for both CMS and the 
fiscal intermediaries to access base year information in calculating 
the weighted average of the PRAs for merged hospitals.
    In addition to it being administratively burdensome to use base 
year cost report data, where a hospital has two PRAs (one for primary 
care and obstetrics and gynecology residents and another for nonprimary 
care residents), these two PRAs are not being taken into account in 
developing the weighted average PRA for the merged hospital. As 
discussed earlier, hospitals that were training nonprimary care 
residents in FYs 1994 and 1995 have a separate nonprimary care PRA 
because there was no update for inflation applied to the PRA for 
nonprimary care residents in those years (Sec.  413.77(c)(2)). 
Accordingly, many teaching hospitals currently have two PRAs: one for 
primary care and obstetrics and gynecology residents and one for all 
other residents. (Hospitals that first train residents after FY 1995 
would only have a single PRA, even if they train both primary care 
residents and nonprimary care residents.) Because the current 
methodology for calculating the weighted average PRA for a merged 
teaching hospital is based solely on data from the PRA base year (which 
is usually prior to the years during which the PRAs were not adjusted 
for inflation to reflect nonprimary care residents), this methodology 
does not take into account that the merged hospitals may currently have 
more than one PRA.
    In the FY 2007 IPPS proposed rule (71 FR 24111 through 24113), we 
proposed, effective for cost reporting periods beginning on or after 
October 1, 2006, rather than using the direct GME FTE resident count 
and PRA from hospitals' base year cost reports, to simplify and revise 
the weighted average PRA methodology for determining a merged teaching 
hospital's PRA by using FTE resident data and PRA data from the most 
recently settled cost reports of the merging hospitals. We believe it 
is less administratively burdensome to use these data because these 
data are more recent and, therefore, more accessible. In addition, 
these data would reflect both a primary care and obstetrics and 
gynecology PRA and, if applicable, a nonprimary care PRA.
    We noted that, prior to FY 2003, our policy for calculating the PRA 
for a new teaching hospital was to calculate the PRA based on the lower 
of the new teaching hospital's actual cost per resident in its base 
period or a weighted average of all the PRAs of existing teaching 
hospitals in the same geographic wage area, as that term is used under 
the prospective payment system (existing Sec.  413.77(e)(1)). (For ease 
of discussion, we refer to a hospital that did not participate in 
Medicare or that did not have any approved medical residency training 
programs during the period beginning between October 1, 1983, through 
September 30, 1984, and has since commenced participating in Medicare 
and begun training residents in an approved program, as a ``new 
teaching hospital.'') The weighted average PRA of teaching hospitals 
within a particular geographic wage area

[[Page 48074]]

was determined using the base year PRA and the base year FTE resident 
count of each respective teaching hospital within the geographic wage 
area. However, as discussed in the August 1, 2002 IPPS final rule (67 
FR 50067) effective October 1, 2002, we revised our policy to use PRAs 
and FTE resident data from the most recently settled cost reports of 
teaching hospitals in the same CBSA as the new teaching hospitals, 
rather than data from the 1984 base year (existing Sec.  
413.77(e)(1)(ii)(B)). We revised this policy for establishing PRAs for 
new teaching hospitals because it is less administratively burdensome 
to use data from the hospitals' most recently settled cost reports and 
because the more recent data takes into account that hospitals have a 
primary care PRA and a nonprimary care PRA. In the FY 2007 IPPS 
proposed rule, we proposed a similar policy revision for establishing a 
merged teaching hospital's PRA.
    We proposed that the fiscal intermediaries would use the following 
steps to calculate the weighted average PRA for the merged teaching 
hospital:
    Step 1: Identify the primary care and obstetrics and gynecology FTE 
resident count, the nonprimary care FTE resident count for hospitals 
with two PRAs, or the single FTE resident count for hospitals with a 
single PRA, for each teaching hospital involved in the merger. (Use the 
sum of the FTE resident counts from Line 3.07, Line 3.08, and Line 3.11 
of the hospital's most recently settled Medicare cost report, CMS 2552-
96, Worksheet E-3, Part IV.)
    Step 2: Identify the PRAs (either a hospital's primary care and 
obstetrics and gynecology PRA and nonprimary care PRA or, if 
applicable, a hospital's single PRA) from the most recently settled 
cost report for each hospital involved in the merger, and update the 
PRAs using the CPI-U inflation factor to coincide with the fiscal year 
end of the surviving teaching hospital. For example, if the surviving 
teaching hospital's fiscal year end is December 31, 2006, and the most 
recently settled cost report of the teaching hospital(s) involved in 
the merger is June 30, 2003, the PRAs from this cost report would be 
updated for inflation to December 31, 2006.
    Step 3: Calculate the weighted average PRA for the single merged 
hospital using the PRAs and FTE resident counts from Step 1 and Step 2. 
For each teaching hospital in the merger:
    (a) For hospitals with two PRAs, multiply the primary care PRA by 
the number of primary care and obstetrics and gynecology FTE residents.
    (b) For hospitals with two PRAs, multiply the nonprimary care PRA 
by the number of nonprimary care FTE residents.
    (c) For hospitals with a single PRA, multiple the single PRA by the 
hospital's total number of FTE residents.
    (d) Add the products from applicable Steps 3(a), (b), and (c) for 
all teaching hospitals that merged.
    (e) Add the number of FTE residents from Step 1 for all hospitals.
    (f) Divide the sum from Step 3(d) by the sum from Step 3(e). The 
result is the weighted average PRA for the merged hospital.
    As mentioned above, many hospitals currently have two PRAs, one for 
primary care residents and another for nonprimary care residents. An 
advantage to using data from the most recently settled cost reports of 
the hospitals involved in a merger is that the two PRAs are taken into 
account in determining the weighted average PRA for the merged 
hospital. Because two PRAs would be taken into account under this 
proposal, we considered whether a primary care PRA and a nonprimary 
care PRA should, therefore, be determined for the merged hospital. 
Although it would be possible to determine and retain two PRAs for a 
merged hospital when one or more hospitals involved in the merger had 
two PRAs, we did not propose to do so. We proposed that a single PRA 
also be determined for the merged hospital in this situation because it 
is more administratively straightforward for the fiscal intermediaries 
and the merged hospitals and since the merged hospital itself was not 
in existence in the years that the two PRAs were established (FY 1994 
and FY 1995), we do not believe it is necessary to retain the two PRAs. 
Furthermore, because the two existing pre-merger PRAs are taken into 
account when establishing the single PRA for the merged hospital, and 
the statutory provision that resulted in the creation of two PRAs has 
no continuing effect (because the updates were prohibited only for FY 
1994 and FY 1995), we see no compelling reason to continue to carry two 
PRAs for a merged hospital.
    The following was presented as an example of how to calculate a 
weighted average PRA under the proposed revised methodology:
    Example: Assume that Hospital A, Hospital B, and Hospital C merge 
and Hospital B with a fiscal year end of December 31, 2006, is the 
surviving hospital. In their respective most recently settled cost 
reports, Hospital A has 200 primary care and obstetrics and gynecology 
FTE residents and 150 nonprimary care FTE residents, and Hospital B has 
50 primary care and obstetrics and gynecology FTE residents and 60 
nonprimary care FTE residents. Hospital C became a teaching hospital in 
2000 and has 25 FTE residents. After updating the primary care and 
nonprimary care PRAs for inflation by the CPI-U to December 31, 2006, 
Hospital A has a primary care PRA of $120,000 and a nonprimary care PRA 
of $115,000, Hospital B has a primary care PRA of $100,000 and a 
nonprimary care PRA of $97,000, and Hospital C has a single PRA of 
$90,000.
    (a) Primary care:

Hospital A: $120,000 x 200 FTEs = $24,000,000
Hospital B: $100,000 x 50 FTEs = $5,000,000
    (b) Nonprimary care:

Hospital A: $115,000 x 150 FTEs = $17,250,000
    Hospital B: $97,000 x 60 FTEs = $5,820,000
    (c) Single PRA: Hospital C: $90,000 x 25 FTEs = $2,250,000
    (d) $24,000,000 + $5,000,000 + $17,250,000 + $5,820,000 + 
$2,250,000 = $54,320,000
    (e) 200 + 50 + 150 + 60 + 25 = 485 total FTEs
    (f) $54,320,000/485 FTEs = $112,000, the weighted average of the 
hospitals involved in the merger for fiscal year end December 31, 2006.
    Comment: One commenter commended our proposal to revise the 
weighted average PRA methodology for determining a merged teaching 
hospital's PRA by using direct GME FTE resident data and PRA data from 
the most recently settled cost reports of the merging hospitals. 
However, the commenter suggested that because a teaching hospital's 
reimbursement is calculated using the hospital's rolling average FTE 
count, and not the hospital's current year FTE count, the rolling 
average FTE count of merging hospitals (Lines 3.16 and 3.22 of 
Worksheet E-3, Part IV) should be used to determine a merged teaching 
hospital's PRA. The commenter also pointed out that a new teaching 
hospital's FTE count only appears on Lines 3.16 and 3.22 and in the 
case where one of the hospitals involved in a merger is a new teaching 
hospital, if CMS were to use the current year FTE counts, the new 
teaching hospital's PRA would not be taken into account in the weighted 
average PRA determination for the merged hospital.
    Response: We appreciate the commenter's support for the proposed 
policy revision; however, we disagree with the commenter's suggestion. 
The intent of the policy revision is to ease

[[Page 48075]]

the administrative burden for hospitals and fiscal intermediaries by 
using more accessible cost reporting data for determining a merged 
hospital's weighted average PRA. We do not believe it is appropriate to 
change which FTE counts are used to make a PRA determination for a 
merged hospital. While it is true that the statute requires that direct 
GME payment be determined based on a 3-year rolling average of the 
hospital's FTE counts, that provision is intended by Congress to 
moderate the impact of year-to-year changes in hospitals' FTE counts. 
However, to calculate a weighted PRA for merging teaching hospitals, we 
believe it is appropriate to weight each hospital's PRA based on the 
FTE resident count for each hospital's current year. We do agree with 
the commenter that in the case of a merger that involves a new teaching 
hospital or an existing teaching hospital which, in accordance with 42 
CFR 413.79(d)(5), included residents in ``new teaching programs'' on 
Lines 3.16 and/or 3.22 of Worksheet E-3, Part IV, the merged hospital's 
weighted average PRA will be computed by including the ``new teaching 
program'' FTE residents from those lines.
    Comment: One commenter suggested that a separate primary care PRA 
and nonprimary care PRA be determined for a merged hospital. The 
commenter believed that because most existing teaching hospitals 
currently have two PRAs, it would be appropriate to determine two PRAs 
for a merged teaching hospital as well. In addition, the commenter 
believed that determining one PRA for a merged hospital might result in 
inaccurate reimbursement should the surviving hospital's mix of primary 
and nonprimary care residents or programs change significantly.
    Response: Although we initially proposed to determine a single PRA 
for the merged hospital, after considering this comment, we are 
convinced that it is appropriate to determine two PRAs for a merged 
teaching hospital. Although we do not believe the determination of a 
single PRA for a merged hospital would necessarily result in 
``inaccurate reimbursement,'' we do recognize the commenter's point 
that the application of a single PRA for a merged hospital would be 
inconsistent with the application of two PRAs for most other teaching 
hospitals (typically, a lower one for residents in nonprimary care 
specialties), and could produce some unintended incentives. 
Specifically, we recognize that the two PRAs have the continuing effect 
of discouraging shifts from primary care and obstetrics and gynecology 
programs to nonprimary care programs. Therefore, we are revising the 
steps for calculating the weighted average PRAs for a merged teaching 
hospital. The following steps should be used by fiscal intermediaries 
to calculate the primary care weighted average PRA for a merged 
teaching hospital for mergers that occur on or after October 1, 2006:
    Step 1: From the most recently settled cost report of each hospital 
involved in the merger, identify the primary care and obstetrics and 
gynecology FTE resident count (Line 3.07 and ``new program'' residents 
from Line 3.22 of Worksheet E-3, Part IV).
    Step 2: From the most recently settled cost report of each hospital 
involved in the merger, identify the hospital's primary care and 
obstetrics and gynecology PRA (or a hospital's single PRA when 
applicable). Update the hospitals' PRAs to the midpoint of the 
surviving provider's cost reports that precede the cost report in which 
the merger occurs using a special CPI-U inflation factor obtained from 
the CMS Central Office. All of the merging hospitals' PRAs should be 
updated to coincide with the surviving hospital's fiscal year end for 
the cost reporting period prior to the merger. (For example, if the 
surviving teaching hospital's cost reporting period fiscal year end 
prior to the merger is December 31, 2006, and the most recently settled 
cost report of the teaching hospital(s) involved in the merger is June 
30, 2003, the PRAs from this cost report would be updated for inflation 
to December 31, 2006).
    Step 3: Calculate the weighted average primary care PRA for the 
merged hospital using the PRAs and FTE resident counts from Steps 1 and 
2.
    (a) For hospitals with two PRAs, multiply the primary care PRA by 
the number of primary care and obstetrics and gynecology FTE residents.
    (b) For hospitals with a single PRA, multiply the single PRA by the 
number of primary care FTE residents.
    (c) Add the products from each hospital from Steps 3(a) and (b).
    (d) Add the number of FTE residents from each hospital from Step 1.
    (e) Divide the sum from Step 3(c) by the sum from Step 3(d). The 
result is the weighted average primary care PRA for the merged 
hospital.
    Fiscal intermediaries will follow these same steps to calculate the 
weighted average nonprimary care PRA for a merged teaching hospital. 
For the weighted average nonprimary care PRA, the merging hospitals' 
nonprimary care FTE counts (Lines 3.08 and 3.11 and ``new program'' 
residents on Line 3.22 from Worksheet E-3, Part IV) and nonprimary care 
PRAs (or a single PRA for a hospital with one PRA) should be used.
    Comment: One commenter requested that CMS provide a detailed 
example that includes the merger date and the fiscal year ends for each 
merging hospital's cost report.
    Response: The following is a detailed example of how a weighted 
average primary care PRA would be determined for a merged hospital. The 
changes to the proposed policy revision discussed previously have been 
incorporated into this example.
    Example: Assume that Hospital A, Hospital B, and Hospital C will 
merge on February 1, 2007. On their most recently settled cost reports, 
Hospital A has 200 primary care and obstetrics and gynecology FTE 
residents, Hospital B has 50 primary care and obstetrics and gynecology 
FTE residents, and Hospital C has 10 primary care and obstetrics and 
gynecology FTE residents. The surviving hospital is Hospital C whose 
fiscal year end prior to the merger is December 31, 2006. Hospital A's 
and Hospital B's most recently settled cost report is September 30, 
2002 and Hospital C's most recently settled cost report is December 31, 
2003. Since Hospital C is the surviving provider and Hospitals A and B 
have fiscal year ends (that is, September 30, 2006) that differ from 
the fiscal year end of Hospital C (that is, December 31, 2006), 
Hospitals A and B's PRAs must be made concurrent with the PRA of 
Hospital C for fiscal year end December 31, 2006. The fiscal 
intermediary should contact the CMS Central Office for special update 
factors and for instructions on making the PRAs concurrent. Additional 
special update factors will be necessary to determine the direct GME 
payment, pre-merger and post-merger, as indicated in response to the 
next comment. After updating the PRAs for inflation by the appropriate 
CPI-U update factor to December 31, 2006, Hospital A has a primary care 
PRA of $120,000, Hospital B has a primary care PRA of $100,000, and 
Hospital C has a single PRA of $90,000.
    (a) Hospital A: $120,000 x 200 FTEs = $24,000,000
    Hospital B: $100,000 x 50 FTEs = $5,000,000
    (b) Hospital C: $90,000 x 10 FTEs = $900,000
    (c) $24,000,000 + $5,000,000 + 900,000 = $29,900,000
    (d) 200 + 50 + 10 = 260 total FTEs
    (e) $29,900,000/260 FTEs = $115,000, the weighted average primary 
care PRA for Hospital C, the surviving hospital, effective February 1, 
2007, the date of

[[Page 48076]]

the merger. The weighted average nonprimary care PRA would be 
calculated using the merging hospitals' nonprimary care FTE counts and 
nonprimary care PRAs (or single PRA for Hospital C).
    Comment: One commenter requested clarification on how CMS would 
treat a merger that occurs in the middle of the surviving hospital's 
cost reporting period. More specifically, the commenter questioned 
whether, in such a situation, the surviving hospital would have two 
PRAs, a pre-merger PRA and post-merger PRA.
    Response: In the case described by the commenter, the surviving 
hospital would indeed be reimbursed with two sets of PRAs, a set of 
pre-merger PRAs and a set of post-merger PRAs. To calculate the direct 
GME payment for the surviving hospital for the cost reporting period in 
which the merger occurred, the fiscal intermediary performs a series of 
off-the-cost-report calculations, treating the pre-merger and post-
merger periods of the surviving hospital's cost reporting period as if 
they are two short cost reporting periods. The fiscal intermediary 
would first calculate the direct GME reimbursement for the surviving 
hospital for the portion of the cost reporting period prior to the 
merger using only the surviving hospital's FTEs and PRA(s) and Medicare 
utilization rate. Second, the fiscal intermediary would calculate the 
surviving hospital's post-merger direct GME reimbursement using the 
weighted average PRA(s) updated with special CPI-U factors, a combined 
rolling average FTE count reflecting the merged hospitals' FTEs, and a 
combined Medicare utilization rate reflecting the portion of the cost 
reporting period after the merger. Then the fiscal intermediary would 
add the pre-merger and post-merger payments to determine the surviving 
hospital's total reimbursement for that cost reporting period. (Note 
that, although not the topic of this discussion, similar pre-merger and 
post-merger calculations are done for the resident-to-bed ratio for IME 
purposes as well).
    Comment: One commenter believed that varying methodologies have 
been used in the past to determine the PRA for a merged teaching 
hospital and that our statement in the proposed rule that CMS' policy 
``has always been that when two or more teaching hospitals merge, we 
determine a weighted average PRA for the surviving merged hospital'' is 
inaccurate. The commenter further believed that the reference to the 
1990 GME Questions and Answers is poor evidence that CMS' current 
policy is to determine a weighted average PRA for the surviving merged 
hospital. Finally, the commenter believed that CMS should promulgate a 
policy that gives latitude to a merged hospital to have a PRA 
determined that takes into consideration the surviving hospital's post-
merger operations. The commenter suggested that CMS adopt a policy that 
provides a merged hospital the option of having its PRA determined as 
the weighted average PRA or the surviving provider's PRA.
    Response: We disagree with the commenter's assertion that varying 
policies have been used in the past to determine the PRA for a merged 
hospital. In addition to the 1990 Questions and Answers on Medicare GME 
Payments, we have consistently expressed our policy to determine a 
weighted average PRA for a merged hospital. For example, our policy was 
clearly cited in the May 12, 1998 Federal Register (63 FR 26239) in 
which we state that ``in implementing the COBRA 1985 provision 
establishing a hospital-specific per resident amount in the situation 
of a merger, we have calculated the revised per resident amount for the 
merged hospital using an FTE weighted average of each of the respective 
hospital's per resident amount which is part of the merger.'' We have 
worked with numerous fiscal intermediaries in determining weighted 
average PRAs for merged hospitals and are unaware of any instance that 
a weighted average PRA was not determined for a merged hospital.
    Our current policy, as revised by this final rule, applies 
prospectively for cost reporting periods beginning on or after October 
1, 2006. Our main concern in making these clarifications and changes to 
our policy is to adopt a policy that can be applied consistently and 
that recognizes the nature of a merger of hospital entities. We believe 
it is appropriate to adopt a policy that takes into account each of the 
various merging hospitals' preexisting, statutorily established PRAs. 
We have adopted a policy under which the PRA(s) determined for a merged 
hospital is based on the weighted average of the different merging 
hospitals' PRAs precisely because it takes all of the merging 
hospitals' PRAs into account. We do not believe it is appropriate to 
provide a merged hospital the option of adopting the surviving 
hospital's PRA instead of the average weighted PRA because, aside from 
the fact that such a policy would ignore the fact that the merger is a 
result of multiple hospitals with individual PRAs joining together, 
such a policy could inappropriately provide an incentive to choose the 
surviving hospital based on which surviving hospital's PRA would yield 
the highest reimbursement.
    Comment: Several commenters requested that this policy revision be 
included as a provision in the regulatory text of Sec.  413.77, the 
regulation that deals with the determination of PRAs.
    Response: We agree with the commenters. In this final rule, we are 
revising Sec.  413.77 by adding a new paragraph (h) to reflect the 
policy on determining the PRA for the surviving hospital when multiple 
hospitals merge, effective October 1, 2006.
3. Determination of Per Resident Amounts (PRAs) for New Teaching 
Hospitals (Sec.  413.77(e))
    As we discussed earlier in the background portion of this section, 
the hospital-specific, base-period PRA used in the payment methodology 
for determining Medicare direct GME payments is calculated by dividing 
a hospital's allowable direct costs of GME in a base period by its 
number of residents in that base period. In the case of a hospital that 
did not train residents in its FY 1984 cost reporting period, a PRA is 
determined by comparing and taking the lower of a PRA based on direct 
GME costs and FTE residents in a base year or the updated weighted mean 
value of PRAs of all hospitals located in the same geographic wage 
area. For ease of discussion, we refer to a hospital that did not 
participate in Medicare or have any approved medical residency training 
programs during the base period beginning between October 1, 1983, 
through September 30, 1984, and has since commenced participating in 
Medicare and begun training residents in an approved program, as a 
``new teaching hospital.'' A new teaching hospital's PRA is established 
by using the lower of its hospital-specific PRA based on the actual 
allowable direct GME costs and FTE residents during a base period as 
defined in Sec.  413.77(e) or the updated weighted mean value of PRAs 
of other teaching hospitals in the same geographic area.
    Existing regulations at Sec.  413.77(e) specify that the base year 
for establishing a PRA for a new teaching hospital is the first cost 
reporting period in which the new teaching hospital participates in 
Medicare and the residents are on duty during the first month of that 
period. If the new teaching hospital begins training residents but does 
not have residents on duty during the first month of the first cost 
reporting period in which training occurs, the new teaching hospital is 
paid on a reasonable cost basis under Sec.  413.77(e) for any GME costs 
incurred

[[Page 48077]]

by that hospital during that period. The intent of this policy for new 
teaching hospitals is to make a more accurate determination of a PRA 
based on the hospital's per resident direct GME costs in a cost 
reporting period in which GME costs have been incurred for that entire 
period. As we noted in a response to comments in a final rule published 
in the Federal Register on September 29, 1989 (54 FR 40310), we believe 
that where the new teaching hospital's cost reporting period begins on 
a date other than July 1 (the beginning of the academic year), for 
example, October 1 or January 1, the cost reporting period that 
includes costs and resident counts from the first year of the training 
program may not be reflective of the actual average costs per resident 
of the program because the full complement of residents might not be on 
duty, and those that are on duty might be receiving a salary for as few 
as 1 or 2 months of the cost reporting period. In the usual case, 
training in the program would continue into the following cost 
reporting period and residents would thus be on duty in the first month 
of this next cost reporting period. Consequently, our existing 
regulations at Sec.  413.77(e)(1) specify that the PRA is to be 
determined by using the cost and resident data from the first cost 
reporting period during which residents are training in the first month 
of the cost reporting period.
    It has come to our attention that, in rare instances, it is 
possible for a new teaching hospital, either through happenstance or by 
purposeful gaming of the policy, to continue to be reimbursed for 
direct GME costs on a reasonable cost basis even beyond the first cost 
reporting period during which residents begin training at the hospital 
as long as no residents are on duty at the new teaching hospital in the 
first month of the subsequent cost reporting period(s). We believe this 
scenario is contrary to the statutory intent of section 1886(h) of the 
Act, which instructs that instead of payment on a reasonable cost 
basis, the Secretary is to determine and base direct GME payments on a 
PRA for each hospital with a residency program. For that reason, in the 
FY 2007 IPPS proposed rule (71 FR 24113), we proposed to revise Sec.  
413.77(e)(1) and (e)(1)(i) to provide that we will make a PRA 
determination even where residents are not on duty in the first month 
of a cost reporting period but where residents began training at the 
hospital in the prior cost reporting period. We proposed that, 
effective for cost reporting periods beginning on or after October 1, 
2006, if a new teaching hospital begins training residents in a cost 
reporting period beginning on or after October 1, 2006, and no 
residents are on duty during the first month of that period, the fiscal 
intermediary establishes a PRA for the hospital using the lesser of: 
(1) The cost and resident data from the cost reporting period 
immediately following the one for which GME training at the hospital 
was first reported (that is, the base period); or (2) the updated 
weighted mean value of PRAs of all hospitals located in the same 
geographic wage area. We note that, as with existing policy, the base 
year need not be a full cost reporting year.
    Comment: One commenter noted that CMS should clarify that the PRA 
will be based on ``the lesser of'' the cost and resident data from the 
cost report, or the updated weighted mean value of PRAs of all 
hospitals located in the same geographic wage area.
    Response: We agree with the commenter and have revised the language 
in the preamble of this final rule accordingly.
    After consideration of the public comments received, we are 
adopting as final, without modifications, the proposed changes to Sec.  
413.77(e)(1) and (e)(1)(i) to provide that ``effective for cost 
reporting periods beginning on or after October 1, 2006, if a new 
teaching hospital does not have residents on duty during the first 
month of that period, the PRA will be determined using information from 
the cost reporting period immediately following the cost reporting 
period during which the hospital participates in Medicare and residents 
began training at the hospital even if the residents are not on duty 
during the first month of that period.''
4. Requirements for Counting and Appropriate Documentation of FTE 
Residents: Clarification (Sec. Sec.  412.105(f), 413.75(d), 413.78(b) 
and (e), 413.80, and 413.81)
    Despite the fact that current policies concerning the counting of 
FTE residents for IME and direct GME payment purposes have been in 
effect since October 1985, we continue to receive questions on the 
proper counting and appropriate documentation for FTE residents for IME 
and direct GME payment purposes. As a result of these continuing 
questions, in the FY 2007 IPPS proposed rule (71 FR 24113), we included 
a clarification of policies that apply in determining hospitals' FTE 
resident counts for Medicare GME payment purposes.
    In the existing regulations at Sec.  413.78(b) for direct GME 
payments, we specify that no individual may be counted as more than one 
FTE, and that a hospital cannot claim the time spent by residents 
training at another hospital. Therefore, if a resident spends time 
training in more than one hospital, the residents counts as a partial 
FTE based on the portion of time the resident trains at the hospital 
(and a nonhospital setting if the hospital meets the requirements of 
Sec.  413.78(e)) to the total time worked. (The same provisions apply 
to part-time residents as specified in Sec.  413.78(b)). A similar 
policy exists at Sec.  412.105(f)(1)(ii) and (iii) for purposes of 
counting FTE residents for IME payment purposes. As we have explained 
in previous Federal Register documents (55 FR 36064 and 67 FR 50077), 
these policies apply even when a hospital actually incurs the cost of 
training the resident(s) at another hospital(s). For example, during a 
cost reporting year, a full-time resident trains at Hospital A for 6 
months and trains at Hospital B for 6 months. Hospital A is paying the 
salary and fringe benefits of the resident for the entire year. In this 
case, each hospital would only count 0.5 of an FTE at the most for that 
resident. Hospital A would not be able to count the entire FTE for that 
resident, regardless of the fact that it incurred all of the training 
costs for the resident during that training year.
    We also have become aware of issues that have arisen due to a 
hospital's failure to document the number of FTE residents claimed on 
its cost report. Proper documentation is required so that Medicare 
fiscal intermediaries can determine where and when a resident(s) is 
training and to allow the fiscal intermediary to make payment to the 
hospital based on the time the resident(s) spends at the hospital, 
which may be a percentage of the total time trained. A rotation 
schedule is the primary documentation that can be used to support the 
direct GME and IME resident counts but other similar documentation may 
be acceptable. The following is a situation about which we learned that 
illustrates how inadequate documentation resulted in inappropriate 
counting of FTEs. Two hospitals, Hospital C and D, were ``associated'' 
with each other, with residents training at both hospitals. However, 
instead of differentiating between the number of FTEs and the actual 
amount of time spent at each hospital, Hospitals C and D split the FTEs 
50/50. Since, in reality, the number of residents actually training at 
each hospital differed, splitting the FTE

[[Page 48078]]

count 50/50 resulted in inappropriate payment to both hospitals. 
Hospitals are not permitted to decide among themselves how their FTEs 
will be counted. A hospital may not count a greater number of FTE 
residents than is actually training at the hospital (or its nonhospital 
sites) during the year. Each hospital must have documentation which 
demonstrates, for the entire cost reporting period, the amount of time 
that the resident trained at the hospital and, if applicable, a 
nonhospital site. Furthermore, to the extent that residents train in 
nonhospital sites, the hospital claiming the FTEs in the nonhospital 
site must meet the requirements at Sec.  413.78(e).
    Situations such as the one described above involving Hospital C and 
Hospital D are particularly harmful when one or more of the hospitals 
involved incorrectly reported FTEs in the cost reporting period used to 
establish one or more of the hospitals' FTE resident caps, and as a 
result, the caps were established incorrectly. Unless the incorrect 
caps can be revised pursuant to our regulations regarding review and 
revision of agency determinations, those caps must be applied to the 
hospital(s) in future years. For instance, we have learned of 
situations where a hospital's FTE resident caps were established 
incorrectly a number of years earlier and, due to administrative 
finality of settled cost reports, can no longer be adjusted. However, 
going forward, that cap will be applied to the hospital's count of 
FTEs, which must reflect the number of FTE residents actually training 
in the hospital (or in nonhospital sites where applicable).
    In order to ensure that FTEs are being properly counted, hospitals 
are required to furnish specific documentation to support the number of 
FTE residents included in the hospital's FTE count. Section 413.75(d) 
specifies the requirements concerning documentation of FTE residents. 
Proper documentation must include the following information: The name 
and social security number of the resident; the type of residency 
program in which the individual participates and the number of years 
the resident has completed in all types of residency programs; the 
dates the resident is assigned to the hospital and any hospital-based 
providers (similar to the rotation schedule); the dates the resident is 
assigned to other hospitals, or other freestanding providers, and any 
nonprovider setting during the cost reporting period, if any; and the 
name of the employer paying the resident's salary. In addition, the 
documentation should include the name of the medical, osteopathic, 
dental, or podiatric school from which the resident graduated and the 
date of graduation, and whether the resident is a foreign medical 
graduate, including documentation concerning whether the resident has 
satisfied the regulatory requirements for foreign medical graduates at 
Sec.  413.80. The information must be certified by an official of the 
hospital and, if different, an official responsible for administering 
the residency program. Again, proper documentation on where and when a 
FTE resident is training during a cost reporting period is essential in 
order for the hospital to receive direct GME and IME payments based on 
the correct number of FTE resident(s). Inaccurate, incomplete, or 
inappropriate documentation will lead to Medicare disallowing certain 
FTE residents from being counted for purposes of direct GME and IME 
payments. We note that we are not expanding or making any changes to 
current policy for proper documentation of FTEs. Rather, we are 
clarifying the existing regulations concerning proper counting and 
documentation of FTEs.
    Comment: Several commenters noted that the issue of proper 
documentation has been a frequent topic of discussion between teaching 
hospitals and fiscal intermediaries and that concerns involving the 
``lack of uniform standards'' for documentation, burdens related to 
``duplicative documentation requests,'' and matters pertaining to the 
``Medicare audit process'' have been communicated to the CMS central 
office. Several commenters asserted that the Medicare Intern and 
Resident Information System (IRIS) is used by many teaching hospitals 
as a means of documentation and verification of FTE resident rotations 
and counts. One commenter noted further that since teaching hospitals 
and fiscal intermediaries use the IRIS ``* * *as the key reporting tool 
for resident information * * *'' CMS should contribute further 
resources and consideration to maintaining the IRIS and ensuring that 
the program itself and its technical support systems are ``state-of-
the-art.'' Specifically, the commenter stated that because CMS is the 
agency responsible for the management of the Medicare program, it has 
the responsibility to update the IRIS so that it is a ``user-friendly'' 
tool for teaching hospitals. In addition, the commenter noted that 
because the IRIS has not recently been updated, teaching hospitals have 
had to rely on private software in order to use the IRIS. The commenter 
stated that it is inappropriate that teaching hospitals have had to 
rely on private software to make the IRIS work. The commenter suggested 
that CMS form an IRIS task force comprised of ``* * * CMS policy staff, 
CMS audit staff, and industry and intermediary representation * * *'' 
to attend to concerns involving the IRIS.
    Response: We believe that Sec.  413.75(d) clearly specifies the 
documentation that is required to allow a hospital to count FTE 
residents for Medicare payment purposes. However, we encourage 
hospitals and fiscal intermediaries to contact CMS with questions they 
have about proper documentation. With regards to the use of the IRIS in 
determining a hospital's FTE resident count and as a source for 
documentation purposes, we note that currently the IRIS does not 
contain all of the specific documentation requirements cited under 
Sec.  413.75(d) and Sec.  412.105(f)(1). Furthermore, the IRIS does not 
serve as the evidence/documentation that supports the accuracy of the 
FTE resident counts reported in the cost report, which is the subject 
of section IV.H.4. of this preamble. The hospitals prepare the IRIS 
using actual records (for example, rotation schedules or similar 
documentation) that could be proper evidence/documentation to support 
the accuracy of the FTE resident counts reported in the cost report. In 
addition, we are aware that, for whatever reasons, the FTE resident 
counts computed using the IRIS information do not always match the FTE 
resident counts reported in the related cost reports. Thus, the IRIS is 
not, in itself, a sufficient mechanism for hospitals to meet their 
obligation to furnish information required under Sec.  413.75(d) to 
support the FTE resident counts reported in the cost report. We 
emphasize that rotation schedules or other similar documentation should 
stand as the primary evidence to support hospitals' FTE resident 
counts. Regarding the commenter's assertion that it is inappropriate 
that teaching hospitals have had to rely on a private software program 
for IRIS use, we note that CMS does not mandate that fiscal 
intermediaries purchase separate software packages to supplement the 
IRIS. Where the hospitals or the fiscal intermediaries utilize a 
private software program for the IRIS, those fiscal intermediaries can 
use the IRIS in conjunction with the rotation schedule or similar 
documentation as an audit tool to identify duplicates, that is, the 
counting of the same resident by more than one hospital.
    Comment: One commenter noted that in order for hospitals and 
intermediaries to determine proper GME reimbursement improved guidance 
and reporting systems are necessary, and

[[Page 48079]]

that, without better guidance, mistakes will continue to be made by 
hospitals and intermediaries. Furthermore, the commenter stated that in 
order to maintain a cost effective policy, GME payment policy should be 
evaluated from time to time ``* * * to determine operational efficiency 
and effectiveness.'' The commenter stated that maintaining a cost 
effective approach includes limiting disagreements between teaching 
hospitals and fiscal intermediaries which requires that Medicare direct 
hospitals and fiscal intermediaries, ``* * * on the spirit and intent 
of the law.'' The commenter stated that, although the law imparts that 
payment be rooted in rules of nongovernmental organizations, ``* * * 
such as the American Council of Graduate Medical Education (ACGME) and 
American Board of Medical Specialties (ABMS),'' the rules of these 
organizations ``* * * are not enforced rigidly and do not have the 
force of the law.'' The commenter understands that policy cannot cover 
every issue but stated that ``* * * financial auditors will not allow a 
situation unless it is specifically addressed in regulation and other 
directives.''
    The commenter asserted that, ``improper payment is usually due to 
the intermediaries' lack of knowledge about a policy or 
misunderstanding about the GME rules and, [t]o remedy the fact that 
intermediaries are not well versed in many of the basic principles 
required for GME audit work, there is a need for Medicare GME payment 
specialists.'' In addition, the commenter stated that hospitals must 
deal with inconsistencies from year to year due to different auditors 
and the auditors' requirements for documentation. The commenter further 
stated that Medicare policies established to adhere with the law are 
instituted without an adequate understanding of how teaching programs 
and hospitals function. The commenter asserted that it is time to 
provide further guidance to fiscal intermediaries and hospitals on 
Medicare GME payment policy and one way CMS could provide further 
guidance is to revise the Provider Reimbursement Review Manual (PRM) 
instead of issuing instructions through multiple Federal Registers.
    In addition, the commenter stated that a cost effective measure to 
take to correctly count FTE residents would be to modify the IRIS 
because the system currently does not incorporate sufficient 
information to meet the regulatory requirement to report all training 
locations for an individual resident, and only identifies a range of 
dates where some FTE time is counted for the same resident by more than 
one hospital. Furthermore, the commenter stated that fiscal 
intermediaries interpret software limitations as the need for hospitals 
to provide supplementary documentation. The commenter noted that ``[i]n 
practice, neither the intermediary nor the hospitals have followed the 
regulatory requirement to report all training locations of a resident'' 
and therefore recommended that ``* * * CMS clarify that hospitals must 
obtain a report from the entity sponsoring the training program that 
lists each resident's training location.'' Furthermore, the commenter 
asserted that ``[t]he intermediary's level of acceptable documents has 
been increasingly stringent * * *'' and that there have been occasions 
where disallowances have occurred because the submitted documentation 
did not meet individual intermediary requirements. The commenter also 
provided other examples of situations where auditors have disallowed 
FTE residents.
    Response: We acknowledge that the PRM should be revised and updated 
to incorporate current GME policies. However, we disagree with the 
commenters' assertion that not enough guidance is provided to teaching 
hospitals concerning Medicare's GME payment policies. In addition to 
clarifying policy through public Q&As and Federal Registers, we meet 
with teaching hospitals and intermediaries on hospital-specific issues 
and with associations representing teaching hospitals in order to 
clarify GME policy. We urge hospitals and fiscal intermediaries to 
contact us regarding questions they have about appropriate 
documentation. With regards to the use of the IRIS in determining a 
hospital's FTE resident count, we note that the IRIS is only intended 
to serve as an audit tool to help identify duplicates and does not 
contain all of the specific documentation requirements listed under 
Sec.  413.75(d) and Sec.  412.105(f)(1) and, therefore, additional 
documentation is required. As previously mentioned, the fact that the 
IRIS does not meet the regulatory provision to report all training 
locations for an individual resident is not the only reason that the 
IRIS cannot serve as the evidence/documentation to support the accuracy 
of the FTE resident counts reported in the cost report. Modification of 
the IRIS would not eliminate the need for auditable evidence to support 
the cost report and the information included in the IRIS. We specified 
in the preamble background and the previous response in this section 
that CMS considers the rotation schedules or similar documentation as 
the primary evidence to support the FTE resident counts. In response to 
the commenter's recommendation that sponsoring institutions submit 
documentation listing residents' training locations, the rotation 
schedules are prepared by the Director of the GME program of the 
sponsoring institution. These types of rotation schedules should be 
used by the hospital to determine the cost report FTE resident counts 
and be furnished by the hospital to the fiscal intermediary when 
requested for audit purposes.
    Comment: One commenter noted that the documentation submitted in 
accordance with Sec.  413.75(d) needs to be certified by an official of 
the hospital or by an official responsible for administering the 
residency program. The commenter was unclear as to what exactly needs 
to be certified, and in what format, and asked if submission and 
certification of the IRIS report meets the certification requirement.
    Response: The IRIS report does not contain all the information 
listed in Sec.  413.75(d) or Sec.  412.105(f)(1). Therefore, in itself, 
it does not meet all the requirements of these sections regardless of 
whether it is certified or not. Therefore, in addition to submitting 
the IRIS report, the hospital must submit the other documentation 
elements specified in Sec.  413.75(d), and those must be certified by a 
hospital or GME program official.
    Comment: One commenter expressed concern over the policies 
regarding the proper counting of FTE residents. Specifically, the 
commenter expressed dismay that a hospital can count resident training 
time for GME payment purposes when the resident rotates to a 
nonhospital site but not when a resident is training at another 
hospital even if the teaching hospital is incurring all the training 
costs of that resident at that other hospital. The commenter noted that 
this policy is particularly detrimental to emergency medicine. The 
commenter stated that the Accreditation Council for Graduate Medical 
Education (ACGME) sets forth a required case volume for residency 
training in emergency medicine and that this volume requirement limits 
the number of rural emergency medical residency training programs. The 
commenter noted that in an effort to provide residents in emergency 
medicine with experience in rural practice, attempts have been made to 
expand training to rural hospitals. The commenter noted that since few 
small rural hospitals ``* * * want to undertake the burden of becoming 
teaching hospitals in their

[[Page 48080]]

own right * * *,'' the major teaching hospitals have continued to pay 
the costs of those residents training at the rural hospitals. The 
commenter stated that the current policy opposes efforts of 
governmental agencies to increase training in rural areas and further 
stated that more residency program directors would make rural training 
available if they were permitted to continue to count residents that 
were rotating to rural hospitals. The commenter urged CMS to change its 
policy to allow payment to the primary teaching institution for 
resident time spent in rural hospitals in situations where it is not 
economically feasible for the rural hospital to become a teaching 
hospital.
    Response: We agree that efforts should be made to ensure that 
residency training is occurring at rural facilities so that residents 
are prepared to work in these environments upon completion of their 
residency training programs. However, we do not believe that it is 
consistent with the requirements at sections 1886(d)(5)(B)(IV) and 
1886(h)(4)(E) of the Social Security Act to expand the policy to allow 
hospitals to count residents training at rural hospitals even if the 
hospital seeking to count the resident is paying the cost of training 
for those residents rotating to the rural hospital. In addition, 
section 1886(h)(4)(B) of the Social Security Act requires that the 
regulations take into account individuals who serve as residents 
simultaneously in more than one hospital. Therefore, we believe that 
the statute contemplates allowing a hospital to count only those 
residents actually training in that hospital. We do not believe it is 
appropriate for the ``primary'' teaching hospital to include time spent 
by residents at other hospitals in its FTE count, even when the 
``primary'' teaching hospital is incurring the costs of training the 
residents.
    Comment: One commenter stated that fiscal intermediaries may be 
using the IRPs set forth in the August 30, 1996 Federal Register. The 
commenter noted that in the August 30, 1996 Federal Register, CMS set 
an IRP of 2 years for podiatry residency programs. The commenter noted, 
however, that since at least 2003, the Council on Podiatric Medical 
Education (CPME) has stated that there exists both a 2-year podiatric 
medicine and surgery-24 program and a 3-year podiatric medicine and 
surgery-36 program. The commenter requested that all intermediaries use 
the most recent information regarding the length of the relevant 
training programs as set forth by the relevant accrediting 
organizations, in this case the CPME.
    Response: We did not propose any changes in policy regarding IRPs 
in the FY 2007 IPPS proposed rule. We consider this comment out of the 
scope of the proposed rule. Therefore, we are not responding to this 
comment at this time.
5. Resident Time Spent in Nonpatient Care Activities as Part of 
Approved Residency Programs (Sec. Sec.  413.9 and 413.78(a))
    In section IV.H.4. of this preamble, we discussed the importance of 
properly documenting where and when residents are training in a 
particular hospital or nonhospital site, in order for that hospital to 
count those FTE residents for purposes of direct GME and IME payment. 
In addition, it is important for hospitals to be able to document the 
activities in which residents are engaged because there are certain 
activities that are not allowable for direct GME or IME payment 
purposes, even though those activities may be performed as part of an 
approved residency program. Specifically, it has come to our attention 
that there may be some confusion in the provider community as to 
whether the time that residents spend in nonpatient care activities 
that are part of the approved residency program may be counted for the 
purpose of direct GME and IME payments. We have most recently received 
questions as to whether the time residents spend in nonhospital sites 
in didactic activities such as journal clubs or classroom lectures may 
be included in determining the allowable FTE resident counts. To 
respond to these inquiries and to resolve any confusion, in the FY 2007 
IPPS proposed rule (71 FR 24114 and 24115), we included a clarification 
of our policy concerning the counting of time spent in nonpatient care 
activities for the purpose of direct GME and IME payments in both 
hospital and nonhospital settings.
    With respect to training in nonhospital settings, the time that 
residents spend in nonpatient care activities as part of an approved 
program, including didactic activities, cannot be included in a 
hospital's direct GME or IME FTE resident count. This longstanding 
policy is based on the statutory requirements for counting FTE 
residents training in nonhospital sites. For the purpose of direct GME 
payments, providers have been allowed since July 1, 1987, to count the 
time residents spend training in nonhospital sites under certain 
conditions. Section 1886(h)(4)(E) of the Act specifies that the 
implementing regulations concerning computation of direct GME for 
training in nonhospital sites ``shall provide that only time spent in 
activities relating to patient care shall be counted and that all the 
time so spent by a resident under an approved medical residency 
training program shall be counted towards the determination of full-
time equivalency, without regard to the setting in which the activities 
are performed, if the hospital incurs all, or substantially all, of the 
costs for the training program in that setting'' (emphasis added).
    For IME payment purposes, hospitals were first allowed to count the 
time residents spend training in nonhospital sites for discharges 
occurring on or after October 1, 1997. Section 1886(d)(5)(B)(iv) of the 
Act was amended by Pub. L. 105-33 in 1997 to provide that ``all the 
time spent by an intern or resident in patient care activities under an 
approved medical residency program at an entity in a nonhospital 
setting shall be counted towards the determination of full-time 
equivalency if the hospital incurs all, or substantially all, of the 
costs for the training program in that setting'' (emphasis added).
    We understand that, as part of an approved medical residency 
program, residents are often required to participate in didactic and 
``scholarly'' activities such as educational conferences, journal 
clubs, and seminars. Some of these activities may take place in 
nonhospital sites, such as freestanding clinics or physicians' offices, 
or in conference rooms at nonhospital settings. In implementing section 
1886(h)(4)(E) of the Act for direct GME payment purposes, we 
specifically stated that ``only time spent in activities relating to 
patient care may be counted [in nonhospital sites]'' (54 FR 40292, 
September 29, 1989). In 1998, when we implemented the statute allowing 
FTE residents to be counted in nonhospital sites for IME, we reiterated 
that a hospital may only count resident training time ``in nonhospital 
sites for indirect and direct GME, respectively, if the resident is 
involved in patient care'' (63 FR 40986, July 31, 1998). While we have 
not explicitly defined in regulations ``patient care activities,'' we 
have applied the plain meaning of that term. In addition, we note that 
the scope of the term ``patient care'' had been well-established in the 
Medicare program even prior to issuance of the first rules on counting 
FTE residents for purposes of direct GME and IME payments. For example, 
prior to the IPPS, acute care hospitals were paid by Medicare for 
inpatient services based on their reasonable operating costs, or costs 
relating to the provision of reasonable and necessary ``patient care.'' 
The

[[Page 48081]]

longstanding regulation at 42 CFR 413.9, entitled ``Costs related to 
patient care,'' states that ``all payments to providers of services 
must be based on the reasonable cost of services covered under Medicare 
and related to the care of beneficiaries.'' Thus, the scope of costs 
recognized as reasonable under Medicare had been limited to those 
relating to ``patient care,'' or to those relating to covered services 
for the care of beneficiaries. Although the agency appears to have made 
a conflicting statement in a letter directed to a particular individual 
implying that didactic time spent in nonhospital settings could be 
counted for direct GME and IME, that statement was inaccurate. We have 
applied and continue to apply the plain meaning of the statutory terms 
``patient care activities'' and ``activities relating to patient care'' 
in the context of approved GME programs. That is, the plain meaning of 
patient care activities would certainly not encompass didactic 
activities. Rather, the plain meaning refers to the care and treatment 
of particular patients, or to services for which a physician or other 
practitioner may bill. Time spent by residents in such patient care 
activities may be counted for direct GME and IME payment purposes in 
the nonhospital site. Time spent by residents in other activities in 
the nonhospital site that do not involve the care and treatment of 
particular patients, such as didactic or ``scholarly'' activities, is 
not allowable for direct GME and IME payment purposes.
    We note that there is a difference in the rules for counting FTE 
resident time for IME and direct GME payments when residents are 
training in a hospital. For direct GME payment purposes, under Sec.  
413.78(a), ``residents in an approved program working in all areas of 
the hospital complex may be counted.'' As explained in the September 
29, 1989 Federal Register document (54 FR 40286), the hospital complex 
consists of the hospital and the hospital-based providers and 
subproviders. Therefore, the distinction between patient care 
activities and nonpatient care activities is not relevant to direct GME 
FTE count determinations when the residents are training in the 
hospital complex. However, for IME payment purposes, consistent with 
the regulations at Sec.  413.9, only time spent in patient care 
activities in the hospital may be counted. It has been our longstanding 
policy that, regardless of the site of training, ``* * * we do not 
include residents in the IME count to the extent that the residents are 
not involved in furnishing patient care * * *'' (66 FR 39897, August 1, 
2001).
    Comment: Many commenters took issue with CMS's ``clarification'' 
that FTE resident time spent in didactic activities while training in 
the hospital could not be counted for purposes of IME payment, and 
while training in a nonhospital site could not be counted for either 
direct GME or IME payments. The commenters urged CMS to ``revert'' to 
the position expressed in a letter in 1999, and questioned whether, in 
light of that 1999 letter, CMS is actually ``clarifying'' its policy 
rather than changing existing policy. One commenter suggested that to 
``avoid challenges'' to CMS's policy, a definition of ``patient care 
activities'' should be promulgated under the Administrative Procedures 
Act (APA). Another commenter argued that it is ``improper'' for CMS to 
exclude nonpatient care time from the IME count for fiscal years prior 
to 2001 (as the April 25, 2006 proposed rule would) because CMS did not 
enact regulations requiring the exclusion of nonpatient care activities 
from the IME count until 2001. The commenter observed that in the April 
25, 2006 proposed rule, as in the 2001 rule (66 FR 39898), CMS stated 
that the rule excluding nonpatient care time from the IME count was 
``longstanding'' policy and applies to periods prior to 2001. The 
commenter asserted that it is inappropriate for the agency to apply the 
policy expressed in the April 25, 2006 proposed rule retroactively (as 
was done in 2001) because it ``amends the agency's policy prior to 2001 
without notice and comment rulemaking as required by the APA.'' Another 
commenter noted that, as justification for CMS's ``longstanding 
policy'' concerning patient care activities, CMS quoted from the August 
1, 2001 final rule (66 FR 39897) which states that ``we do not include 
residents in the IME count to the extent that the residents are not 
involved in furnishing patient care * * *.'' The commenter stated that 
CMS ``failed'' to include the remainder of the text, which states ``but 
are instead engaged exclusively in research.'' The commenter argued 
that the excluded phrase indicates that CMS only meant to exclude 
research activities that are not patient-related from the IME count, 
and that ``nowhere is the word `didactic' ever mentioned.''
    Response: We disagree with the commenters' assertion that the 
provision in the proposed rule concerning the time residents spend in 
nonpatient care activities is a change in policy, rather than a 
clarification of existing policy. With respect to residency training 
occurring in nonhospital settings, in the April 25, 2006 proposed rule 
(71 FR 24115), we enumerated several examples to illustrate that the 
requirement for residents to spend time in patient care activities is 
fundamental to including the FTE resident time in the count for direct 
GME and IME purposes. Specifically, in implementing section 
1886(h)(4)(E) of the Act, which allows hospitals to count time spent by 
residents training in nonhospital sites for direct GME payment purposes 
under certain circumstances including that the resident time be spent 
in activities related to patient care, we reiterated that ``only time 
spent in activities relating to patient care may be counted'' (54 FR 
40292, September 29, 1989). In 1998, when we implemented section 
1886(d)(5)(B)(iv), which first allowed hospitals to count time spent by 
residents in nonhospital sites for purposes of IME under certain 
conditions including that the resident time be spent in patient care 
activities, we reiterated that a hospital may only count resident 
training time ``in nonhospital sites for indirect and direct GME, 
respectively, if the resident is involved in patient care'' (63 FR 
40986, July 31, 1998). In addition, we noted in the April 25, 2006 
proposed rule that the scope of the term ``patient care'' had been 
well-established in the Medicare program even prior to issuance of the 
first rules on counting FTE residents for purposes of direct GME and 
IME payments.
    While we have not explicitly defined ``patient care activities'' in 
regulations, we have consistently used the plain meaning of that term. 
This is the case despite the agency's erroneous response to a question 
on this issue in a September 24, 1999 letter. The commenters refer to 
this 1999 letter to support their argument that the ``clarification'' 
in the proposed rule demonstrates that CMS has changed its position 
since 1999. In the September 24, 1999 letter, CMS (then HCFA) wrote:
    ``HCFA interprets the phrase `patient care activities' broadly to 
include any patient care oriented activities that are part of the 
residency program. * * * [T]his can include resident participation in 
``(1) the direct delivery of patient care, such as clinical rounds, 
discussions, and conferences, and (2) scholarly activities, such as 
educational seminars, classroom lectures, research conferences, patient 
care related research as part of the residency program, and 
presentations of papers and research results to fellow residents, 
medical students, and faculty.''
    As we stated in the April 25, 2006 proposed rule (71 FR 24115), in 
this

[[Page 48082]]

September 24, 1999 letter, we inaccurately stated our interpretation of 
the phrase ``patient care activities,'' implying that didactic time 
spent in nonhospital settings could be counted for direct GME and IME 
purposes. While there is no explanation of the phrase ``patient care 
activities'' in the conference report language accompanying the change 
in the laws allowing the counting of FTE residents in nonhospital sites 
in 1987 for direct GME and in 1997 for IME, we believe that Congress 
intended to limit in some meaningful way the types of activities for 
which FTE resident time could be counted in the nonhospital setting. If 
the term ``patient care'' in the statutory phrase ``only time spent in 
activities relating to patient care'' (section 1886(h)(4)(E) of the 
Act) was to be interpreted as broadly as suggested in the agency's 
September 24, 1999 letter, there would be virtually no limit to the 
types of activities that could be counted, rendering the entire phrase, 
and particularly, the word ``only,'' meaningless. If Congress had 
desired that all FTE time as part of an approved program be counted in 
nonhospital sites, then it need not have added the limiting language 
concerning patient care. It could have stated simply that time spent in 
an approved program at a nonhospital site should be counted. We do not 
believe that Congress would have included a superfluous phrase in the 
statute. As the commenters point out, CMS had not defined the term 
``patient care'' prior to the enactment of either of the statutory 
provisions in 1987 and 1997. Therefore, we believe that when Congress 
used the term ``patient care'', it meant to give the term its plain 
meaning. Such a plain meaning of the statutory language is in direct 
conflict with the exceedingly broad definition of ``patient care 
activities'' articulated in the September 24, 1999 letter. We do not 
believe it would be appropriate to adopt a broad definition of patient 
care activities as was expressed in the 1999 letter when that 
definition would conflict with the plain meaning of a limiting phrase 
in the statute--to the extent that it would give little or no meaning 
to the statutory phrase. Moreover, we believe it would be particularly 
inappropriate to adopt such a broad construction when the definition 
has not been promulgated through notice and comment rulemaking, but 
rather, expressed in a single letter directed to a single individual.
    We also question whether the provider community would actually have 
relied as heavily as commenters suggest on the September 24, 1999 
letter when it was clearly directed to a single attorney in response to 
his specific inquiry, and not to a broader audience, nor was it (nor 
any similar guidance) disseminated by the Agency to its fiscal 
intermediaries. Furthermore, although we believe that the letter 
responding to this attorney contained an inartful and incorrect 
expression of the policy concerning nonpatient care activities, we do 
not believe that expression should be used to permit the indiscriminate 
inclusion of FTE resident time spent in nonpatient care activities in 
nonhospital sites.
    With respect to residency training in the hospital, our policy 
limiting the IME count to only time spent in patient care activities is 
rooted in the creation and the purpose of the IME adjustment. The IME 
adjustment is a payment to a teaching hospital for its higher costs of 
patient care. Before Congress passed the 1983 law that included the IME 
adjustment in the IPPS, the Secretary submitted a report to Congress in 
1982 that (in part) explained that, ``the indirect costs of graduate 
medical education are higher patient care costs incurred by hospitals 
with medical education programs'' (Report to Congress required by the 
Tax Equity and Fiscal Responsibility Act of 1982, December 1982, pp. 
48-49, italics emphasis added). Similarly, in passing the IPPS 
legislation in 1983, the House Committee on Ways and Means acknowledged 
the link between higher patient care costs and teaching hospitals, and 
noted that the IME adjustment was important due to concerns about 
whether the PPS could adequately account for factors such as the 
severity of illness of patients utilizing the more specialized 
treatment programs at teaching hospitals. Thus, the reasons for the IME 
adjustment enumerated by Congress and by the Secretary are directly 
linked to the involvement of residents in patient care. The August 1, 
2001 final rule (66 FR 39897) also lists discussions in other Federal 
Register notices in the 1980s that clearly state that the indirect 
costs of medical education are the additional operating costs that 
teaching hospitals incur in furnishing patient care. We reiterated this 
longstanding policy in the August 1, 2001 final rule and stated that, 
``* * * consistent with the purpose of IME payments and general 
Medicare reimbursement principles, in determining the FTE count with 
respect to the IME adjustment, it has been our longstanding policy that 
we do not include residents to the extent that the residents are not 
involved in patient care [but are instead engaged exclusively in 
research]'' (66 FR 39897). One of the commenters stated that, in the 
discussion in the April 25, 2006 proposed rule (71 FR 24115), ``CMS 
failed to include the remainder of the text which states `but are 
instead engaged exclusively in research.' These excluded words put in 
context what CMS was trying to convey in that rule--that in terms of 
research activities, only those that are patient-related may be 
counted. Nowhere is the word `didactic' ever mentioned.'' We did not 
include the remainder of that text in the proposed rule because the 
focus of the discussion in the proposed rule was on didactic 
activities, not research. However, we reiterate that, just as residents 
engaged in activities that are exclusively research are not engaged in 
patient care activities, and are not included in the IME count in the 
hospital, residents in the hospital engaged in didactic, nonpatient 
care activities are also not counted for the purpose of IME.
    Comment: Several commenters pointed to what they believe is an 
``inconsistency of logic'' concerning CMS' position regarding the time 
that may be included in the resident count at nonhospital settings, and 
the policy concerning the time for which a hospital must incur the 
costs relating to a teaching physician in those settings. On the one 
hand, CMS argues that in order for hospitals to receive direct GME and 
IME payments relating to residents training in nonhospital settings, 
the hospital must pay for the costs of the time spent by teaching 
physicians in educating residents, even when the activities are not 
associated with patient care. On the other hand, CMS precludes 
hospitals from counting FTE resident time not spent in patient care 
activities. According to the commenters, these ``conflicting 
positions'' where the hospitals must pay for costs of training time 
that they cannot count for purposes of direct GME and IME payments will 
result in confusion in the provider community.
    Response: We are aware of what the commenter views as a paradox in 
the requirements concerning the time that residents train in 
nonhospital settings. Nevertheless, the statute clearly requires that 
hospitals must incur ``all, or substantially all, of the costs for the 
training program'' in the nonhospital setting in order to count any FTE 
residents training at a nonhospital site for IME and direct GME 
purposes (Sec.  1886(d)(5)(B)(iv) and Sec.  1886(h)(4)(E) of the Act). 
The definition of ``all or substantially all of the costs for the 
training program in the nonhospital

[[Page 48083]]

site'' at Sec.  413.75(b) is consistent with what CMS (and previously 
HCFA) has always considered to be ``direct costs'' of a GME program, 
inlcuding ``the residents' salaries and fringe benefits * * * and the 
portion of the cost of teaching physicians'' salaries and fringe 
benefits attributable to direct GME.'' The direct costs of GME 
associated with teaching physicians were historically paid for under 
Part A of the Medicare Trust Fund, while payment for billable, patient 
care services provided by residents supervised by teaching physicians 
are generally paid under Medicare Part B. Therefore, the costs 
associated with patient care activities in which the teaching 
physicians are involved are not included in the direct costs of the GME 
program. Yet, in allowing hospitals to count FTE residents training in 
nonhospital sites, the statutory provision regarding direct GME also 
states that ``only time spent in activities relating to patient care 
shall be counted * * *'' (Sec.  1886(h)(4)(E) of the Act). Similarly, 
the statutory provision regarding IME states, ``all the time spent by 
an intern or resident in patient care activities * * * shall be counted 
* * *'' (Sec.  1886(d)(5)(B)(iv)). Consequently, hospitals are not 
permitted to count a portion of the FTE resident time (that is, the 
nonpatient care time) even though they must incur the training program 
costs associated with that time.
    Comment: Several commenters stated that the IME and direct GME 
statute pertaining to nonhospital sites supports the counting of 
didactic activities, and that Congress wanted to encourage, not limit, 
residency training in nonhospital sites. The commenters believe that 
the reference to ``patient care activities'' in the IME and direct GME 
nonhospital statutes refers generally to patient care settings, such as 
physicians' offices and other ambulatory care sites. One commenter 
cited the statutory language as the reason why hospitals exclude 
extended periods of time spent exclusively in ``bench'' research 
outside of the hospital, or time spent by preventive medicine residents 
in state and local public health departments from the IME and direct 
GME FTE counts, since these activities do not involve ``patient care.'' 
Another commenter implied that didactic time in nonhospital sites is 
allowed for IME purposes since the conference agreement accompanying 
the legislative language in the BBA states, ``The conference agreement 
includes new permission for hospitals to rotate residents through 
nonhospital settings, which include primarily ambulatory care settings, 
without reduction indirect medical education funds'' (emphasis added). 
Commenters also stated that Congress was ``well aware'' that residency 
training involves didactic components, and Congressional actions in 
both COBRA 1986 (enacting the direct GME nonhospital site provision) 
and BBA 1997 (enacting the IME nonhospital site provision) make it 
clear that Medicare would allow hospitals to count time spent in 
nonhospital sites for purposes of direct GME and IME.
    Response: We believe the commenters have erroneously concluded that 
because Congress desired to encourage increased residency training in 
nonhospital sites, the nonhospital IME and direct GME statutes must, 
therefore, also support the counting of FTE residents engaged in 
didactic activities in nonhospital sites. In fact, despite the lack of 
an explicit explanation of what was intended by the term ``patient care 
activities,'' when the Conference committee report language is viewed 
in conjunction with the statute, we believe the obvious and correct 
conclusion is that Congress wanted to encourage more training in 
nonhospital settings, but only for the purpose of increasing patient 
care training in outpatient, ambulatory settings. This Congressional 
intent is evident in the legislative history of both the direct GME and 
the IME provisions on nonhospital settings. First, legislative history 
associated with passage of the direct GME provision (as part of Pub. L. 
99-509) indicates that ``[s]ince it is difficult to find sufficient 
other sources of funding [other than hospitals and Medicare] for the 
costs of such training, [that is, training in freestanding primary care 
settings such as family practice clinics or ambulatory surgery centers] 
assignments to these settings are discouraged [under the pre-enactment 
payment scheme]. It is the Committee's view that training in these 
settings is desirable, because of the growing trend to treat more 
patients out of the inpatient hospital setting and because of the 
encouragement it gives to primary care.'' (Emphasis added.) (H.R. Rep. 
No. 99-727, 99th Cong., 1st Sess., 70 (1986).) Thus, from the start of 
the provision allowing hospitals to count FTE resident training in 
nonprovider sites, we believe Congress intended to create a monetary 
incentive (or remove the disincentive) for hospitals to rotate 
residents from the hospital to the nonhospital settings for the purpose 
of treating patients in those ambulatory settings, not for the purpose 
of spending time in didactic activities in those settings. We believe 
this is the reason why Congress specifically added the ``patient care 
activities'' requirement to the direct GME (and later, the IME) 
statute. Similarly, in the Conference committee report accompanying the 
provision of Pub. L. 105-33 on counting resident training time in 
nonhospital settings for IME, Congress stated that ``[t]he conference 
agreement includes new permission for hospitals to rotate residents 
through nonhospital settings, without reduction in indirect medical 
education funds'' (emphasis added, H.R. Conf. Rep. No. 105-217, 105th 
Cong., 1st Sess., 817 (1997).) We believe that by the phrase ``without 
reduction in indirect medical education funds,'' Congress intended that 
when hospitals send residents to nonhospital sites for training, the 
IME payments relating to those FTE residents would not cease; that is, 
the hospitals would continue to receive IME, in addition to the direct 
GME payments they were already receiving when residents rotate from the 
hospitals to nonhospital settings. Furthermore, as we stated in the 
August 1, 2003 final rule in the context of redistribution of cost and 
community support principles (68 FR 45436), legislative intent becomes 
even more evident when the nature of the IME adjustment is considered. 
Because the IME adjustment is a payment for patient care costs that is 
made for each Medicare discharge from the areas subject to the IPPS in 
a teaching hospital, ``the authorization by Congress for IME payments 
relating to nonhospital services while residents are training at 
nonhospital sites would be absurd if not viewed as an incentive to 
transfer existing residency training from the hospital to the 
nonhospital setting'' (68 FR 45436). Given the nature of IME as a 
patient care payment, surely Congress would not have made IME payments 
available for training in nonhospital settings to encourage movement of 
didactic training from the hospital to nonhospital sites. To the 
contrary, we believe Congress clearly intended to encourage hospitals 
to shift only residency training that involves patient care activities 
from the hospital to outpatient ambulatory settings.
    Comment: One commenter alleged that, ``in a very misleading fashion 
in the proposed rule, CMS does not quote the entire section of the 
relevant portion of the Medicare statute, which reads in full:
    ``Counting Time Spent in Outpatient Settings. Such rules shall 
provide that only time spent in activities relating to patient care 
shall be counted and that all the time so spent by a resident under an 
approved medical residency training program shall be counted toward the 
determination of full-time equivalency, without regard to the setting 
in which

[[Page 48084]]

the activities are performed, if the hospital incurs all, or 
substantially all, of the costs for the training in that setting.'' 
(Emphasis added). Section 1886(h)(4)(E) of the Social Security Act.''
    The commenter argued that Congress and CMS are well aware of the 
language that can be used to describe care directly provided to 
individual patients; that is ``direct patient care.'' The commenter 
included a list of mostly regulatory (and 2 statutory) cites where the 
term ``direct patient care'' is used and noted that the statutory 
language regarding GME does not use the term ``direct patient care,'' 
but rather, uses the much broader language of ``activities relating to 
patient care.'' Further, the law states that ``all the time so spent by 
a resident under an approved medical residency training program shall 
be counted * * * without regard to the setting in which the activities 
are performed'' (emphasis added.) The commenter added that Medicare 
regulations also define ``direct medical and surgical services'' of 
physicians in a teaching setting as ``services to individual 
beneficiaries that are either personally furnished by a physician or 
furnished by a resident under the supervision of a physician in a 
teaching hospital * * *'' (42 CFR 415.152), and that in all these 
situations, the idea of ``direct patient care'' can be more narrowly 
defined than ``activities relating to patient care.''
    Response: It appears that the commenter has overlooked the 
paragraph on page 24115 of the April 25, 2006 proposed rule where we 
did, in fact, quote the entire section of the statutory language 
pertaining to direct GME payments for nonhospital training. We also 
believe the statutory language is intended to be read differently from 
the way the commenter has suggested, resulting in a significantly 
different policy. Specifically, the commenter quotes and emphasizes the 
statute as follows: ``all the time so spent by a resident under an 
approved medical residency training program shall be counted * * * 
without regard to the setting in which the activities are performed * * 
* '' The commenter uses this language to suggest that CMS must allow 
the time spent in didactic activities in nonhospital sites. However, we 
believe the correct reading of the statute in its entirety is:
    ``Such rules shall provide that only time spent in activities 
relating to patient care shall be counted and that all the time so 
spent by a resident * * * shall be counted toward the determination of 
full-time equivalency, without regard to the setting in which the 
activities are performed * * * '' (Sec.  1886(h)(4)(E) of the Act).
    In other words, only a subset of the time that residents spend in 
nonhospital settings can be counted. Specifically, only all of the time 
so spent in activities relating to patient care can be counted, not 
necessarily all of the time spent training in the nonhospital site. 
Similarly, the IME statute states, ``all the time spent by an intern or 
resident in patient care activities * * * shall be counted * * * '' 
(Sec.  1886(d)(5)(B)(iv) of the Act). Furthermore, as we stated in 
response to previous comments, if ``patient care'' in the phrase ``only 
time spent in activities relating to patient care'' (section 
1886(h)(4)(E) of the Act) is interpreted as broadly as suggested by the 
commenter, there would be virtually no limit to the types of activities 
that could be counted, rendering the entire phrase, and particularly 
the word ``only,'' meaningless. In addition, we note that the 
definition of ``direct medical and surgical services'' at Sec.  415.152 
of regulations relating to physicians in a teaching setting is 
consistent with our definition of the plain meaning of ``patient care 
activities.'' Just as the definition of ``direct medical and surgical 
services'' refers to services to individual beneficiaries that are 
either personally furnished by a physician or furnished by a resident 
under the supervision of a physician, our definition of ``patient care 
activities'' refers to the care and treatment of particular patients, 
or to services for which a physician or other practitioner may bill. 
Therefore, the terms ``direct medical and surgical services'' and 
``direct patient care'' are, for all intents and purposes, synonymous 
with the phrase ``patient care activities.''
    Comment: We received many comments expressing strong opposition to 
the clarification in the proposed rule, some of which were quite 
passionate and included ominous predictions of the dire consequences of 
such a policy on GME programs. Generally, commenters urged that we 
rescind the provision in the proposed rule, on the grounds that there 
is a very close connection between the didactic activities that 
residents engage in and the delivery of patient care. They argued that 
with the exception of extended periods of time spent doing ``bench 
research'' which is excluded from the IME count, every activity that 
the residents are engaged in is integral to patient care activities. 
The commenters argued that there is no distinction between patient care 
and other activities in which residents participate during their 
residency training. Rather, the distinction is more appropriate when 
comparing undergraduate medical training and post-graduate residency 
training. The commenters noted that the emphasis in medical school is 
didactic education, while the focus in residency training is patient 
care delivery, with continued didactic education in the context of 
furnishing patient care. The commenters argued that the didactic 
activities are an important part of the ACGME's required curriculum 
since it is now widely recognized that physicians should be competent 
in ``medical knowledge about established and evolving biomedical, 
clinical, and cognate * * * sciences and the application of this 
knowledge to patient care'' (ACGME Institutional Requirements, 
III(E)(1)(b)). Several other commenters pointed out that the ACGME 
competencies are intended to address ``exactly what the IOM has 
criticized our training professions for,'' and therefore, didactic 
sessions are necessary to improve the quality of residency education. 
These commenters stated that their program (family medicine) currently 
evaluates their residents ``in all these competencies as a continuing 
quality improvement process during patient care'' (emphasis in the 
original). Commenters representing osteopathic residency programs 
stated that all osteopathic training programs are required to teach 
certain core competencies by 2006. Another commenter stated that, in an 
effort to improve the residents' skills in delivering patient care, the 
teaching physician ``looks for every opportunity, in whatever physical 
setting for the `teachable moment' to review a critical point or two to 
hone the learner's skills.'' Commenters also asserted that most 
didactic activities are relatively short, and residents often continue 
to have direct patient care responsibilities during the didactic time, 
and are often paged to respond to emergencies or to tend to their 
assigned patients during scheduled didactic periods. They noted 
generally that current patients are often used as a springboard for 
discussions at lectures, and it would be extremely difficult to track 
when the ``patient care'' ends and the didactic time begins. In 
addition, residents are required to attend simulation programs, which 
prepare them for ``real-time'' patient care experiences using advanced 
technologies. A commenter urged CMS to promote and encourage investment 
in such technologies and activities that are intended to improve the 
quality of patient care, rather than ``create reimbursement 
disincentives for institutions that may be struggling to

[[Page 48085]]

afford it.'' Many commenters indicated that if CMS finalized this rule, 
teaching faculty ``will be caught up in the productivity race with no 
time for'' valuable discussions with their residents, at a time when 
family physicians need to be ``exceptionally well trained'' in order to 
meet the needs of underserved, vulnerable patient population who need 
chronic disease management. The commenters warned that CMS's proposal 
``lowers the standards of care for Medicare patients'' and is 
``dangerous for our current and our future patients.'' One commenter 
asked that we reconsider rule changes that will ``rob Peter to pay 
Paul,'' while another commenter urged that we ``please [do] not allow 
anything to occur that might reduce the attractiveness'' of medical 
school graduates pursuing primary care specialties. One commenter added 
that with the recent loss of funding for primary care education in 
Title VII of the Public Health Act, this ruling could ``literally spell 
the end of primary care practice in the United States.'' Another 
commenter asked if ``perhaps [CMS] could refocus [its] efforts toward 
educating doctors instead of spending so much of [its] time identifying 
new ways of withholding funding.'' We also received a comment that 
stated that reimbursement for direct GME and IME is ``sufficiently 
restricted'' by limits on increases to per resident amounts (PRAs) and 
FTE resident caps, and there is no need to impose additional 
``burdensome recordkeeping requirements with the sole apparent intent 
of further reducing such payments.''
    Response: We are sympathetic to the commenters' arguments that the 
didactic activities in which the residents are required to participate 
contribute to the development of more highly skilled, proficient, well-
rounded clinicians, and we are not in any way minimizing the importance 
of such activities, nor are we advocating a position that would deny 
all GME payments for these activities. However, we note that Medicare 
GME payments were never intended to cover the total costs of medical 
education, as is evidenced most obviously by the fact that direct GME 
payments are based on Medicare's share of the costs of training an FTE 
resident. Rather, we are merely distinguishing between activities that 
concern the treatment and diagnosis of particular patients (that is, 
patient care), and activities that are didactic in nature (that is, not 
patient care), as this distinction is necessary to ensure that Medicare 
funds for medical education are paid appropriately. Direct GME has 
historically been considered to be the payment for the direct costs of 
education. Accordingly, the direct educational costs incurred by a 
hospital in providing didactic activities are more appropriately paid 
for via the direct GME payment. We note that the methodology used to 
determine hospitals' base year direct GME PRAs included the allowable 
costs and FTE time of didactic activities occurring within the hospital 
complex. The IME adjustment serves an entirely different purpose. 
Specifically, the IME adjustment is a payment under the IPPS to 
recognize the higher operating costs that teaching hospitals incur in 
furnishing patient care; it is intended to pay a teaching hospital for 
those additional indirect patient care costs, not the direct costs 
associated with didactic learning.
    Furthermore, while we do not dispute that didactic activities are 
essential to and integrated with the residents' patient care 
experience, this does not mean that the didactic activities are patient 
care activities. In addition, the didactic activities are not an 
insignificant portion of a resident's training. These activities are 
required by the accrediting organizations, and are necessary for board 
certification, and therefore, even though it may not be an unusual 
occurrence for a resident to be called out of a conference to tend to a 
patient care emergency, the resident surely must satisfy his/her 
minimum requirements of didactic training over the course of the entire 
academic year. A random search on the internet of individual hospitals' 
program requirements revealed that many programs schedule didactic 
activities for their residents of an hour or more in length every 
single day. In fact, many comments we received were from commenters who 
included detailed descriptions of the nonpatient care activities in 
which their residents are required to participate. We are also aware of 
rotations that are administrative or didactic in nature that are more 
lengthy (for example, 2 weeks or 6 weeks), but are scheduled less 
frequently. Such rotations are surely not patient care. Therefore, we 
are not convinced by the commenters' arguments that since didactic time 
is frequently integrated with patient care activities, it is patient 
care and, therefore, the time should be allowed for IME purposes in the 
hospital, and for direct GME and IME purposes in the nonhospital site.
    Comment: One commenter noted that direct GME and IME payments are 
based on allowable ``full-time equivalent'' (FTE) counts, and that the 
regulations do not specify the number of hours that comprise one FTE. 
Rather, the regulations for IME state that ``full-time equivalent 
status is based on the total time necessary to fill a residency slot'' 
(Sec.  412.105(f)(1)(iii)(A)), and the direct GME regulations have a 
similar requirement (42 CFR Sec.  413.78(a)).
    Response: The commenter is correct that a hospital's allowable FTE 
count is ``based on the total time necessary to fill a residency slot'' 
(Sec.  412.105(f)(1)(iii)(A). As the regulations state, the concept of 
the total time necessary to fill a residency slot is used to determine 
the part-time or full-time status of the resident. If it is determined 
that the resident is not working the number of hours necessary to fill 
a residency slot (between all the resident's hospital and nonhospital 
training sites), the resident would be considered part-time, and the 
proportion of total time the resident is working in all training sites 
would be adjusted accordingly. For purposes of determining a hospital's 
count of FTE residents, the important word in the regulatory phrase is 
``based.'' That is, the starting point (denominator) for determining 
the allowable FTE count is the total time necessary to fill a residency 
slot. However, the hospital must then subtract (from the numerator) all 
nonallowable training time, such as time spent at other providers, time 
spent in IPPS-excluded distinct part units (for IME), didactic 
activities (for IME), and so on. Thus, while a hospital's allowable FTE 
count is certainly ``based'' on the total time necessary to fill a 
resident slot, the total time is often greater than the FTE time a 
particular hospital is permitted to count for IME and direct GME 
payment purposes.
    Comment: One commenter noted that the average resident's workweek 
is 80 hours, and if CMS were to count an FTE resident for GME purposes 
based on a 40 hour workweek as is done for the Medicare IPPS wage 
index, the exclusion of didactic activities would not affect the 
overall FTE count.
    Response: The total number of hours recorded as worked by residents 
for the purpose of the wage index adjustment to the IPPS represents a 
compromise, and is irrelevant in the context of determining the FTE 
resident count for GME payment. Historically, the actual number of 
hours worked by residents (often more than 80 hours per week) was 
included in the average hourly wages of hospitals used to compute the 
wage index. However, teaching hospitals argued that the excessive 
number of resident hours relative to the hours worked by other 
employees skewed their average hourly wage

[[Page 48086]]

downward, and placed them at a disadvantage relative to non-teaching 
hospitals. Therefore, CMS (then HCFA) determined that it would be 
appropriate to count interns and residents for wage index purposes 
based on a 40-hour workweek. Thus, the 40-hour workweek actually 
benefited teaching hospitals for wage index purposes. In any case, 
beginning with the FY 2000 wage index (which was based on cost 
reporting periods starting on or after October 1, 1995 and ending on or 
before September 30, 1996), the wages and hours of interns and 
residents were phased out of the wage index, since Medicare payments 
for the salaries and fringe benefits of interns and residents are made 
by Medicare through the direct GME payment (based on the PRA), and not 
the IPPS. (Beginning with the FY 2003 wage index (cost reporting 
periods beginning on or after October 1, 1999), we removed 100 percent 
of the interns' and residents' wage data from the wage index). For 
purposes of determining what portion of an FTE resident a hospital may 
count for a resident that is training at the hospital (after first 
determining whether the resident is a part-time or full-time resident 
based on the total necessary to fill the residency slot), it is 
important and necessary to first determine the actual total time worked 
by the resident. Accordingly, if 80 hours per week is established as 
the total time necessary to fill the residency slot, and if a resident 
works an 80-hour week and works 40 hours per week at each of two 
hospitals, each hospital would count no more than one half of an FTE 
for the resident. The FTE determination for that resident cannot be 
based on 40 hours, since that would result in both hospitals counting 
the same resident as a full FTE. Thus, in calculating the FTE count, it 
would be inappropriate to compare the time spent in patient care 
activities to a 40 hour week and not to the total time worked by the 
resident.
    Comment: Some commenters asserted that just as the direct GME 
statute for residency training in the hospital does not include a 
reference to patient care, and therefore, all training in the hospital 
is countable for direct GME, the IME statute for hospital training also 
does not refer to patient care, and therefore, all the training in the 
hospital should be counted for IME too. One commenter asserted that the 
proposed rule is ``ultra vires'' and is therefore, ``unconstitutional'' 
because the IME statute for training in the hospital does not exclude 
time spent in nonpatient care activities, and that the IME adjustment 
is only the ``best proxy'' for teaching hospitals' increased training 
costs--it was not intended to measure the ``actual costs'' of training 
residents. The commenter argued that the Congress did not ``intend that 
CMS parse apart or exclude certain time'' from the FTE count, and doing 
so is beyond the scope of the agency's authority. Another comment 
stated that ``we are unaware of any Medicare directive that 
distinguishes patient care activity in a hospital and nonhospital 
site.'' One commenter stated that he is ``not aware that the fiscal 
intermediaries made disallowances for educational activities when 
calculating hospitals' PRAs in the 1984 base year.'' The commenter also 
refers to the 1990 Q&As issued by CMS (then HCFA) to the CMS Regional 
Offices and the fiscal intermediaries for use in computing the base 
year PRAs, and argues that ``CMS makes numerous references to 
educational activities as allowable costs and does not once specify 
that these costs and the associated resident time were to be carved out 
if the activity took place in the nonhospital setting.'' The commenter 
quoted part of a response (to one of the 1990 Q&As) which stated, ``If 
the hospital, rather than the related school, directly incurs the costs 
associated with these educational activities, they should be recognized 
as allowable graduate medical education costs and included in the per 
resident amount.''
    Another commenter noted that the provisions at section 2120 of the 
Provider Reimbursement Manual, Part I, titled Reimbursement for Costs 
of Interns and Residents, which described the cost method of 
reimbursement for GME programs, do not distinguish between training 
types or training location, and therefore, Medicare allowed costs of 
residents when they trained in didactic activities in nonhospital 
locations.
    Commenters also argued that CMS's ``overly rigid'' interpretation 
of ``patient care activities'' ignores CMS's longstanding definition of 
``costs related to patient care,'' which is the basis for much of CMS's 
analysis, because educational activities like conferences and seminars 
for hospital employees have always been allowable costs under Medicare, 
and therefore, should be allowed for purposes of the IME as well. [see 
PRM-I, chapter 21, sections 2108.1, 2128, 2136.1, 2138.1, 2138.2, 
2144.4, and 2144.6]. Another commenter contended that to exclude 
didactic time from the IME calculation would be inconsistent with 
Congress's purpose in instituting the IME adjustment. Congress's reason 
for enacting this provision was to address factors that contribute to 
the higher costs incurred by teaching hospitals, such as more acutely 
ill patients, more specialized treatments, and the additional costs 
associated with training residents such as the ordering of additional 
tests and extra staffing demands. The commenter argued that during the 
time the residents are involved in didactic activities, ``these costs 
are in no way reduced,'' since the ``patients remain just as ill as 
they were before, the hospital continues with its resident-related 
inefficiencies, the hospital continues to provide specialized services, 
and the services are just as intense. Thus, all of the costs that the 
IME adjustment is intended to compensate continue unabated no matter 
what the resident is doing.''
    Other commenters quoted the Committee report language accompanying 
the PPS legislation, which stated that purpose of the IME adjustment 
was to address ``serious doubts about the ability of the DRG case 
classification system to account fully for factors such as severity of 
illness of patients requiring the specialized services and treatment 
programs provided by teaching institutions and the additional costs 
associated with the teaching of residents * * * the adjustment for 
indirect medical education costs is only a proxy to account for a 
number of factors which may legitimately increase costs in teaching 
hospitals (emphasis added, U.S. House of Representatives, 1983).''
    In light of this Committee report language, the commenter believed 
that the language in the proposed rule defining the ``plain meaning'' 
of patient care as related to the care and treatment of a specific 
patient or to services for which physicians can bill is ``patently 
incorrect.''
    Response: After reading the numerous comments challenging CMS' 
position that only the time spent by residents in patient care 
activities in the hospital may be counted for IME purposes, it has 
become apparent to us that there actually has been a good deal of 
confusion in the teaching hospital community regarding our longstanding 
policy with respect to IME and patient care activities. Nevertheless, 
we do believe that the commenters are misconstruing and confusing CMS' 
position on, and the purpose for, the direct GME payments and IME 
payments, respectively. By including a provision in the April 25, 2006 
proposed rule clarifying our position on the time residents spend in 
nonpatient care activities, we were (and still are) distinguishing 
between activities that concern the treatment and diagnosis of

[[Page 48087]]

particular patients (that is, patient care), and activities that are 
didactic in nature (that is not patient care), as this distinction is 
necessary to ensure that Medicare funds for medical education are paid 
appropriately. As stated in response to a previous comment, 
historically, direct GME has been considered to be a payment for the 
direct costs of education. The conference report accompanying the 
original Medicare legislation (Pub. L. 89-97) stated:
    ``Many hospitals engage in substantial educational activities, 
including the training of medical students, internship and residency 
programs, the training of nurses, and the training of various 
paramedical personnel. Educational activities enhance the quality of 
care in an institution and it is intended, until the community 
undertakes to bear such education costs in some other way, that a part 
of the net cost of such activities (including stipends of trainees as 
well as compensation of teachers and other costs) should be considered 
as an element in the cost of patient care, to be borne to an 
appropriate extent by the hospital insurance program'' (S. Rep. No. 
404, 89th Cong., 1st Sess. 36 (1965); H.R. No. 213, 89th Cong., 1st 
Sess. 32 (1965)).
    Accordingly, educational activities of hospital employees, 
particularly those in ``formally organized or planned programs of 
study'' as they were described in the original regulations first 
published on November 22, 1966 (31 FR 14814, and 20 CFR 405.421) (later 
redesignated as 42 CFR 405.421 on September 30, 1977 and as 42 CFR 
413.85 on September 30, 1986)), were recognized as Medicare-allowable 
costs and implicitly included in the definition of ``costs related to 
patient care'' at 42 CFR 413.9. These specific payments for medical 
education activities were the basis for what later evolved into the 
direct GME payments, as established by Section 9202 of the Consolidated 
Omnibus Budget Reconciliation Act of 1985 (Pub. L. 99-272). That is, 
direct GME (and also, payments for approved nursing and allied health 
education programs under 42 CFR 413.85) is a payment for education 
because it explicitly pays hospitals for the direct costs of these 
formally organized programs, such as the stipends of trainees and 
teachers. Additionally, as early as 1971, Chapter 4 of the Provider 
Reimbursement Manual, Part I, stated that ``any costs of usual patient 
care'' are excluded from the definition of approved educational 
activities (Section 404.2 of the PRM-I). Clearly, the early medical 
education payments, in which current direct GME payments are rooted, 
were not intended to be a payment for caring for patients, but rather 
were (and are still today) payments to hospitals for education costs. 
Medicare made then, and still makes, payments for usual patient care as 
part of the hospital's operating costs and as direct payment to 
hospital-based physicians under Medicare Part B. Therefore, to the 
extent that residents engage in nonpatient care didactic activities as 
part of their approved programs, the costs of those didactic activities 
are allowed and paid by Medicare through the direct GME payment, based 
on the PRA. The commenter is indeed correct that the costs of didactic 
activities were included as allowable costs by the fiscal 
intermediaries when determining the base year PRAs. However, the 
commenter should not conclude that didactic activities that occurred 
outside of the hospital were included in the determination of the PRAs. 
Under Medicare's previous reasonable cost method of payment for 
approved medical education activities, any costs incurred by a hospital 
for resident training that took place outside of the hospital setting 
were not allowable costs to that hospital (66 FR 3371). In establishing 
PRAs, fiscal intermediaries used a count of FTE residents for the 1984 
base period that reflected ``the average number of FTE residents 
working in the health care complex during the GME base period'' (54 FR 
40299). Section 9314 of Pub. L. 99-509 changed the law to allow 
resident time spent training in nonhospital settings to be counted for 
the first time for purposes of direct GME payments on and after July 1, 
1987. Furthermore, regarding the specific language from the 1990 Q&As 
quoted by the commenter, neither that question, nor the answer provided 
by CMS (then HCFA) gives any indication of where the educational 
activities took place. Therefore, the fact that CMS stated that the 
costs of educational activities incurred directly by a hospital are 
included in the PRA does not mean that the costs incurred by a hospital 
for all educational activities are allowable, regardless of the 
location in which they occurred. Similarly, just because the FTE time 
associated with certain costs is allowable (according to the statute) 
does not mean that the costs of a particular activity are necessarily 
allowable. Certainly, if the Congress had not changed the law in 1987 
to allow residents training in nonhospital settings to be counted (for 
direct GME purposes), then even the time spent in direct patient care 
activities in nonhospital sites would not be allowed to be counted by a 
hospital. The relevant point, however, is that educational costs 
incurred by a hospital in providing didactic activities to residents in 
approved programs are paid by Medicare via the direct GME payment, 
which is a payment for costs of education.
    The purpose of the IME adjustment is different from that of direct 
GME in that it is designed to adjust the IPPS payment to teaching 
hospitals for the higher operating costs they incur in furnishing 
patient care. It is intended to pay a teaching hospital for those 
additional patient care costs that are an indirect result of the 
presence of the teaching program at the hospital, and not the direct 
costs associated with didactic learning. Although the commenters argue 
that didactic activities have long been recognized by CMS as ``related 
to patient care,'' despite the fact that none of these activities 
involves the ``care and treatment of individual patients'' or 
``services for which a physician or other practitioner may bill,'' we 
believe that because IME is a payment specifically for patient care 
costs, the regulations and subregulatory guidance concerning ``costs 
related to patient care'' are not sufficient for determining what 
actually constitutes patient care and is therefore, an activity for 
which FTE resident time in the hospital may be counted for IME. As 
stated in response to a previous comment, with respect to residency 
training in the hospital, our policy limiting the IME count to only 
time spent in patient care activities is rooted in the creation and the 
purpose of the IME adjustment. Before Congress passed the 1983 law that 
included the IPPS and an IME adjustment, the Secretary submitted a 
report to Congress in 1982 that (in part) explained that, ``the 
indirect costs of graduate medical education are higher patient care 
costs incurred by hospitals with medical education programs'' (Report 
to Congress required by the Tax Equity and Fiscal Responsibility Act of 
1982, December 1982, pp. 48-49, italics emphasis added). Similarly, in 
passing the IPPS legislation in 1983, the House Committee on Ways and 
Means acknowledged the link between higher patient care costs of 
teaching hospitals, and noted that the IME adjustment was important due 
to--
    ``* * * serious doubts about the ability of the DRG case 
classification system to account fully for factors such as severity of 
illness of patients requiring the specialized services and treatment 
programs provided by teaching institutions and the additional costs 
associated with the teaching of

[[Page 48088]]

residents * * * the adjustment for indirect medical education costs is 
only a proxy to account for a number of factors which may legitimately 
increase costs in teaching hospitals (U.S. House of Representatives, 
1983).''
    Essentially, Congress listed two reasons for the IME adjustment, 
similar to those stated in the Secretary's 1982 report: (1) Teaching 
hospitals typically offer more technologically advanced treatments to 
their patients, and therefore, patients who are sicker and need more 
sophisticated treatment are more likely to go to teaching hospitals, 
and (2) the presence of inefficiencies associated with teaching 
residents resulting from the additional tests or procedures ordered by 
residents and the demands put on physicians who supervise, and staff 
that support, the residents. That is, because teaching hospitals 
attract sicker patients, they incur higher costs in caring for those 
sicker patients--whether due to additional tests ordered by residents 
or more intensive treatments provided in an educational setting. The 
Secretary and Congress recognized that the learning process in which 
the residents are engaged results in more intensive, and therefore more 
costly, treatment. Thus, the purpose of the IME adjustment is clearly 
limited to the unique characteristics and conditions of teaching 
hospitals that directly relate to the delivery of patient care.\30\ 
Since the purpose of the IME adjustment is rooted in patient care, 
there is a clear and compelling reason to limit the FTE resident time 
that can be counted for IME to time spent by residents in patient care; 
that is, in the care and the treatment of particular patients, or in 
furnishing services for which a physician or practitioner may bill.
---------------------------------------------------------------------------

    \30\ Similarly, to the extent that the higher costs are caused 
by other factors such as a greater relative share of medically 
complex or indigent patients, the IPPS includes payments in the form 
of the outlier and disproportionate share hospital (DSH) adjustments 
to specifically compensate for those costs. (Health Care Financing 
Review, Winter 1992, Vol. 14, No. 2, p. 69, and Health Care 
Financing Review, Spring 1990, Vol. 11, No. 3, pp. 31-41).Therefore, 
the additional indirect medical education costs that remain after 
controlling for outlier and DSH payments are the essentially the 
higher patient care costs resulting from the presence and 
involvement of residents in patient care.
---------------------------------------------------------------------------

    Commenters argued that during the time the residents are involved 
in didactic activities, higher costs incurred by teaching hospitals 
``are in no way reduced,'' and emphasized the language in the Committee 
report describing the purpose of the IME adjustment as addressing (in 
part), ``* * * the additional costs associated with the teaching of 
residents.'' To address these comments, we refer to the August 1, 2001 
final rule (66 FR 39898), in which we reiterated our policy that IME is 
a payment for patient care, and we also included an example from that 
rule to illustrate how the FTE resident count for IME should be 
determined in a manner that would properly reimburse a hospital with 
residents that are engaged in non-patient care research activities. 
Although the discussion in the August 1, 2001 Federal Register focused 
on research, this example is useful for this discussion on nonpatient 
care didactic activities. In the example (66 FR 39898), a hospital has 
20 FTE residents who were furnishing patient care in the areas of the 
hospital subject to the PPS, and 4 FTE residents engaged exclusively in 
research. We stated that the IME payment to the hospital should reflect 
the additional operating costs resulting from those 20 FTE residents 
delivering patient care, and would not include the 4 FTEs engaged 
exclusively in research, as those 4 FTE residents did not contribute to 
the hospital's higher operating costs. While it may be that the 
existence of the research activities did contribute in some marginal 
way to the higher operating costs of the hospital, for instance, by 
attracting more severely ill or uninsured patients to the hospital for 
non-research treatment, those residents engaged exclusively in research 
are not involved in and do not contribute to more intensive or 
inefficient patient care, and therefore, their presence does not result 
in higher allowable operating costs. We believe the same holds true for 
the time residents spend in didactic activities--during this time, the 
residents are not participating in or contributing to more intensive or 
inefficient patient care. Moreover, we believe that it is the 
combination of the factors enumerated by the Secretary and Congress as 
the reasons for the IME adjustment that contribute to the higher 
operating costs of teaching hospitals. We believe the Congress' 
reference to ``additional costs associated with the teaching of 
residents'' refers to the presence of inefficiencies associated with 
teaching residents resulting from the additional tests or procedures 
ordered by residents and the demands put on physicians who supervise, 
and staff that support, the residents; and not to costs associated with 
research or didactic activities. Since direct GME payments are made to 
teaching hospitals to cover the explicit educational costs of training 
residents, we do not believe Congress intended for the IME adjustment 
to duplicate those educational payments. In fact, it first became 
evident that an adjustment to payments for teaching hospitals was 
necessary, in addition to the cost-based GME payments, after 1972 when 
Congress instituted what became known as the ``section 223'' limits to 
hospitals' routine operating costs. Since the agency's analyses showed 
that the section 223 cost limits adversely impacted teaching hospitals, 
a calculation based on a regression formula was computed to adjust the 
routine operating cost limits of teaching hospitals. Consequently, the 
IME adjustment was instituted to address the higher patient care costs 
not sufficiently compensated under the cost limits, and later the DRG 
system. In the example above, the inclusion of the four FTE residents 
engaged in nonpatient care research in the resident count for IME would 
vastly overcompensate the hospital for any marginal contribution to 
operating costs resulting from the presence of those FTE residents. 
Similarly, a resident that is participating in a seminar or a 
conference is not contributing to the higher patient care costs of the 
hospital. Thus, although it would be appropriate to count such 
nonpatient care time in calculating direct GME payments, it would not 
be appropriate to count that time for purposes of the IME adjustment. 
Accordingly, we believe it is appropriate and fully consistent with 
Congressional intent to apply the plain meaning of the term ``patient 
care activities'' and to limit the FTE resident count to time spent in 
patient care activities for IME for training in the hospital, and for 
both IME and direct GME for training in nonhospital sites. That is, 
only time spent in the care and treatment of particular patients, or in 
providing services for which a physician or other practitioner may 
bill, may be counted.
    Comment: One commenter said that independent research activity 
rotations were included in the allowable FTE count used to determine 
hospitals' direct GME base year PRAs. The commenter said that these 
research electives, which are part of the ACGME approved program, ``may 
happen at the hospital's medical library'' or ``may happen at home at 
the resident's study desk,'' but ``all of it has been included in the 
FTEs used to calculate the PRA amount.'' The commenter suggested that, 
by the clarification in the April 25, 2006 proposed rule, CMS is 
adopting a ``change in accounting method,'' and that, therefore, CMS 
should consider adopting a change in the PRAs for hospitals that 
``exclude these newly excluded'' FTEs.
    Response: We believe the commenter is confusing our policy of 
including the

[[Page 48089]]

FTE time spent in research activities in the denominator of the PRA 
calculation, and, in the FTE count in years subsequent to the PRA base 
year, our policy of excluding the costs of research activities from the 
numerator of the PRA. As we explained in the September 29, 1989 Federal 
Register and again in the August 1, 2001 Federal Register (66 FR 39898 
through 39899), each hospital's PRA is determined by taking the 
hospital's total allowable graduate medical education costs (which do 
not include costs allocated to the nursery cost center, research, and 
other nonreimbursable cost centers) in a base year and dividing the 
costs by the number of FTE residents working in all areas of the 
hospital complex in the base year (Sec.  413.77(a)(1)(i)). In the case 
of research and other nonreimbursable cost centers, costs were excluded 
from the PRA calculation because they were nonreimbursable in the base 
year, consistent with longstanding Medicare policy on Medicare cost 
reimbursement to teaching hospitals. Ideally, residents participating 
in research electives would also have been excluded from the base year 
FTE count used in the PRA calculation. However, for a number of 
hospitals, the FTE count for the base year did include residents 
engaged in such research because the 1984 base year information 
available from hospitals when the PRAs were determined in 1990 did not 
consistently distinguish between residents involved in furnishing 
patient care services and residents engaged in nonpatient care 
research. The inclusion of such additional FTEs in the denominator of 
the PRA calculation lowered the PRAs for these hospitals.
    In order to avoid disadvantaging these hospitals, in making direct 
GME payments for a given year, we included and continue to include 
residents engaged in nonpatient care research in the direct GME FTE 
count both in the base year PRA calculation and in the FTE count in 
subsequent payment year calculations. This policy was adopted to 
``offset'' the effects of the inclusion of such FTE residents in the 
denominator of the direct GME PRA calculation (no such ``offset'' is 
warranted in the context of IME). Thus, there has been no ``change in 
accounting method,'' and it is not necessary to consider changing the 
PRAs of hospitals that exclude independent research rotations, as the 
commenter suggests. Furthermore, because the nonreimburseable costs 
were excluded in calculating the PRA, the end result is that the direct 
GME payment does not encompass the costs of residents engaged 
exclusively in research. Therefore, as with the IME payment, Medicare 
is not and has not been reimbursing teaching hospitals under direct GME 
for costs the hospital incurs associated with resident time spent in 
nonpatient care research.
    Comment: One commenter disputed CMS' policy to exclude nonpatient 
care time from the IME count on the grounds that the IME statute states 
that ``the Secretary shall provide for an additional payment amount for 
subsection (d) hospitals with indirect costs of medical education, in 
an amount computed in the same manner as the adjustment for such costs 
under regulations (in effect as of January 1, 1983) * * *'' (section 
1886(d)(5)(B) of the Act). The commenter maintained that because the 
regulations in effect as of January 1, 1983, did not exclude nonpatient 
care activities from the IME count, the plain meaning of the statute 
requires that this time continue to be included in the IME resident 
count.
    Response: The exclusion of time spent in nonpatient care activities 
from the IME count is longstanding CMS policy, and consistent with the 
rules in effect as of January 1, 1983. The statute implementing the IME 
adjustment at section 1886(d)(5)(B) of the Act requires that, ``[t]he 
Secretary shall provide for an additional payment amount for subsection 
(d) hospitals with indirect costs of medical education in an amount 
computed in the same manner as the adjustment for such costs under 
regulations (in effect as of January 1, 1983) * * *'').
    For the initial analysis of the operating costs of teaching 
hospitals versus non-teaching hospitals that was used to develop the 
IME adjustment, while analysts could distinguish between allowable and 
non-allowable costs, they did not have a method to consistently and 
accurately isolate all the time spent by residents in nonpatient care 
activities. Therefore, no consideration was given to where the 
residents were training in the hospital or what the residents were 
doing (that is, patient care or other activities). Prior to the 
implementation of the IPPS, under the reasonable cost system of 
reimbursement, the concept of an ``FTE resident'' had little, if any, 
relevance. Thus, for this analysis, an ``FTE'' simply distinguished 
between a resident that was employed at the hospital on a full-time 
basis and a resident that was employed at the hospital only part-time. 
Accordingly, while only allowable costs were considered in the 
analysis, the time spent by residents in non-reimbursable activities or 
areas of the hospital was not excluded from the analysis.
    The April 1, 1980 Federal Register implementing the initial IME 
adjustment specified simplistic requirements for hospitals to report 
FTE residents to the fiscal intermediaries for purposes of receiving 
the IME adjustment to their cost limits, consistent with the relatively 
crude resident counts CMS used in computing the IME adjustment (45 FR 
21484). The rules in effect as of January 1, 1983 concerning 
determining the resident count for IME required, in part, that only 
residents in approved programs could be counted (47 FR 43310 (September 
30, 1982)). Once the IPPS was effective, CMS took certain steps to 
modify the rules concerning FTE resident counts for the resident-to-bed 
ratio to more appropriately adapt the IME adjustment to the new 
prospective payment methodology under which only inpatient operating 
costs were reimbursed. (Other types of costs, such as direct GME and 
outpatient hospital costs were specifically excluded from payment under 
the IPPS, and continued to be paid under existing mechanisms.) A 
distinction was drawn, for payment purposes, between the acute 
inpatient hospital (subject to the IPPS), and distinct part units and 
hospitals not paid under the IPPS. Since reasonable cost payments to 
these ``IPPS excluded'' providers and units already included the 
indirect costs of medical education, in order to avoid a ``double'' 
payment that would result from counting residents in those IPPS-
excluded settings, CMS clarified in regulations that the IPPS IME 
adjustment does not apply to any hospitals or distinct part units not 
paid under the PPS, and consequently, both the number of beds and the 
time spent by residents in those areas could not be included in the 
resident-to-bed ratio (48 FR 39844). The agency modified the rules for 
counting FTE residents and hospital beds for purposes of the IME 
adjustment so that the adjustment would be more closely tailored to 
reflect the higher allowable patient care costs of teaching hospitals 
under the prospective payment system for inpatient acute care 
hospitals.
    In the September 3, 1985 final rule, CMS responded to comments 
regarding its proposal to exclude FTE resident time spent in outpatient 
departments from the numerator of the resident-to-bed ratio. CMS had 
proposed this exclusion ``because outpatient departments also are not 
subject to the prospective payment system and because the additional 
operating costs of outpatient departments associated with interns and 
residents are already recognized through reasonable cost

[[Page 48090]]

reimbursement for hospital services furnished to outpatients'' (50 FR 
35681 through 35682). The commenters stated that CMS was required to 
count residents training in outpatient departments since section 
1886(d)(5)(B) of the Act requires that the IME adjustment be ``computed 
in the same manner'' as set forth in the regulations on January 1, 
1983. The commenters further argued that in the September 1, 1983 
interim final rule, CMS said that residents in outpatient departments 
would be counted so as to avoid ``altering only one element of the 
variable and failing to maintain comparability between the methodology 
used for developing the adjustment factors and subsequently 
standardizing hospital costs based on that factor'' (48 FR 39778).
    In response to those comments, CMS stated that the agency believed 
that in excluding residents training in the outpatient departments from 
the FTE count, it was computing the adjustment ``in the same manner'' 
as previously, since the adjustment continued to be based on a 
resident-to-bed ratio. CMS noted that, although the statute purports to 
refer to regulations in effect on January 1, 1983, there were no 
specific regulations in effect on that date, and, although the 
September 30, 1982 Federal Register (47 FR 43310) contained a 
description of the method to be used, the agency believed that 
``Congress, in enacting the prospective payment system, intended that 
the methodology in effect be adopted rather than the entire description 
published in that notice'' (emphasis added). CMS further noted that the 
agency had already made changes to the methodology for counting interns 
and residents in the January 3, 1984 and August 31, 1984 final rules 
(the latter in response to a provision in Pub. L. 98-369) to ``adapt 
the previous system to the prospective payment system more 
effectively.'' (In fact, the Agency had also made changes in the 
September 1, 1983 Federal Register (48 FR 39844) to exclude FTE 
training time in distinct part units that are excluded from the PPS). 
We noted that, in response to the refinements the agency made in 1983 
and 1984 to the rules for counting residents for purposes of the IME 
adjustment, Congress could have made adjustments to the IME multiplier, 
but chose not to do so even though it passed legislation (Pub. L. 98-
369) dealing specifically with indirect medical education payments. In 
response to comments, the agency observed that ``the current [IME] 
adjustment itself is no longer entirely consistent with the original 
factor'' (50 FR 35682). We concluded that, ``if the deletion of time 
furnishing services to outpatients, which decreases the count of 
interns and residents, invalidates the indirect medical education 
adjustment, it should follow that the expansion of programs that took 
place since the current factor was developed also should have 
invalidated the adjustment. However, especially since Congress did not 
mandate that the factor be recalculated, we believe that if there are, 
as here, overriding concerns, the revision to the method of counting 
interns and residents is justified'' (50 FR 35682).
    We acknowledge that soon after publication of this rule, Congress 
passed the Consolidated Omnibus Budget Reconciliation Act (COBRA) (Pub. 
L. 99-272) on April 7, 1986, which included a provision (section 
9104(a)) that addressed the agency's regulation, and required that time 
spent by residents training in outpatient departments ``will continue 
to be counted for purposes of determining the indirect teaching 
adjustment'' (See 51 FR 16773, May 6, 1986). We note further, however, 
that although Congress addressed CMS's rule on excluding time spent in 
outpatient departments, Congress could have, but did not, also address 
the agency's regulations concerning the exclusion of training time in 
distinct part psychiatric and rehabilitation units. Congress has 
considered and taken legislative action with respect to the IME 
adjustment many times since 1986, but has not found it necessary to 
modify the agency's policies with respect to the counting of FTE 
residents for IME purposes. We do not believe that we are obligated to 
adhere rigidly to the rudimentary methodology of counting FTE residents 
for IME purposes that was in effect prior to and in the early days of 
the IPPS. Rather, since the IME adjustment is a payment for additional 
patient care costs, we believe there is a clear and compelling reason 
to limit the FTE resident time counted for IME purposes to the time 
spent by residents in the care and the treatment of particular 
patients, or to services for which a physician or other practitioner 
may bill.
    Comment: One commenter argued that CMS' position in the April 25, 
2006 proposed rule that nonpatient care activities must be excluded 
from the IME FTE count ``flies in the face of'' the United States 
District Court's decision in Riverside Methodist Hospital v. Thompson, 
Case No. C2-02-94 (S.D. Ohio 2003). In Riverside, the hospital appealed 
the fiscal intermediary's disallowance of time spent in the hospital in 
journal clubs and seminars from the IME FTE count. In that decision, 
the Court ruled ``1) that the 2001 rule excluding nonpatient care time 
from the FTE count must not apply retroactively and 2) that resident 
time spent on nonpatient care activities should be included in the IME 
FTE count.'' The commenter contended that CMS' position in the proposed 
rule is ``an unconstitutional attempt to use the regulatory process to 
overturn the decision of an Article III court.'' Another commenter 
claimed that the Court in Riverside affirmed Congress' intent that the 
IME adjustment should compensate teaching hospitals for more than just 
the direct costs of residents' involvement in patient care because 
those higher operating costs are difficult to separately identify and 
measure precisely. The commenter quoted part of the ruling in the 
Riverside case: ``It is precisely because the indirect costs cannot be 
adequately itemized and quantified that Congress devised a formula 
based on the degree of teaching intensity in a particular hospital, as 
a substitution for any other method of reimbursing such costs. If 
Congress had believed that the indirect medical education costs of a 
teaching hospital could be separately identified and quantified, and 
that higher direct patient care costs could be so determined from the 
hospital's records, then Congress could easily have qualified its 
formula for reimbursement to restrict the number of FTE residents to a 
number based only on hours that residents spent providing `patient 
care.' It obviously did not do so''.
    Response: The first commenter is correct that the Court in the 
Riverside case ruled to reverse the fiscal intermediary's disallowance 
of time spent by the hospital's residents in nonpatient care activities 
from the IME FTE count. We respect and will give full effect to that 
Court's decision. However, we do not read that decision to restrict the 
Secretary's discretion to promulgate regulations on the issues 
litigated in that case. Although we acknowledge the Court's recognition 
that the statute did not specify that the IME formula be based only on 
hours spent in providing patient care, we believe, as explained above, 
that such a limitation is appropriate and in accordance with the 
purpose of the IME payment, as well as Congressional intent, under the 
IPPS. It is also noteworthy that Congress has not acted to modify the 
agency's policies with respect to counting FTE residents even though 
Congress has recently enacted several provisions relating to IME and 
direct GME in the MMA. We

[[Page 48091]]

would also note that the cost report at issue in the Riverside case was 
from Fiscal Year 1996, which is clear evidence that the agency's policy 
to disallow the time spent in nonpatient care activities from the IME 
FTE count in the hospital is, indeed, longstanding.
    Comment: Many commenters voiced their concern that if CMS were to 
``inappropriately'' require that all didactic activities must be 
excluded for IME purposes in the hospital, and for direct GME and IME 
purposes in the nonhospital sites, it would result in a ``quagmire of 
administrative difficulties,'' and enormously increase teaching 
hospitals' documentation burdens. It would mean a ``sea change'' for 
many hospitals, as rotation schedules are often weekly or monthly, and 
vary widely not only from hospital to hospital, but also from program 
to program. Especially for very large teaching hospitals, reporting 
residents' activities in hour-long increments is ``literally not 
achievable.'' One commenter alleged that CMS's ``nefarious'' separation 
of patient care time from didactic activities which ``devolve[s] to 
discussions of particular patients seems a capricious exercise in 
futility.'' With respect to training in nonhospital settings, one 
commenter warned that CMS' proposal would have a ``chilling effect'' on 
training outside the hospital. The commenter believed that hospitals 
will be ``forced to demand'' that nonhospital sites closely monitor the 
portion of time that is spent in nonpatient care activities, which may 
be difficult to distinguish from the patient care activities. The 
commenter believed that physicians will refuse to supervise residents 
in nonhospital sites if the documentation requirements become too 
burdensome, which would ``frustrate'' Congress' intent in enacting the 
IME nonhospital site payment provision. Another commenter expressed 
concern that CMS' ``short-sighted'' approach ``penalizes'' hospital-
based residency programs that provide their residents with nonhospital 
training experiences, ``exacerbating other recent CMS policy changes 
that disadvantage training programs conducted outside the hospital.''
    Response: We have carefully considered the comments, and we 
recognize that providing hour-by-hour schedules for, in some cases, 
more than 1,000 residents, could be a daunting task. We would point 
out, however, that nowhere in the preamble discussion of the April 25, 
2006 proposed rule did we explicitly require hourly rotation schedules. 
We did say that ``it is important for hospitals to be able to document 
the activities in which residents are engaged because there are certain 
activities that are not allowable for direct GME or IME payment 
purposes, even though those activities may be performed as part of an 
approved residency program'' (71 FR 24114). Although we need to ensure 
that Medicare payments are paid accurately, it is not our desire to 
impose unreasonably complicated and time-consuming recordkeeping 
requirements. It has always been the general practice of fiscal 
intermediaries to use rotation schedules as the primary source of 
documentation to determine whether residents' time is allowable for IME 
and direct GME payment purposes. However, we are sympathetic to the 
fact that up to this point, hospitals have been inconsistent in their 
reporting of nonpatient care activities, either because of confusion 
surrounding our FTE-counting policy, or because of differing approaches 
to developing and maintaining rotation schedules. Therefore, we believe 
it is appropriate from an administrative perspective to distinguish 
between the treatment of cost reports for cost reporting periods 
beginning prior to October 1, 2006, and cost reporting periods starting 
on or after October 1, 2006, with respect to documentation 
requirements. Prospectively, (for cost reporting periods beginning on 
or after October 1, 2006), to ensure consistent reporting by hospitals 
and auditing by fiscal intermediaries, we believe it is appropriate to 
require all teaching hospitals to document residents' time at some 
minimum level of detail. Specifically, for cost reporting periods 
beginning on or after October 1, 2006, for training occurring either in 
the hospital or in nonhospital settings, we are instituting a ``one 
workday'' threshold for documentation purposes. That is, we are not 
requiring that hospitals overhaul their current rotation schedules, nor 
are we mandating that rotation schedules be in one-day increments. 
Rather, if a resident's workday consists entirely of scheduled didactic 
activities and no scheduled patient care activities (for example, no 
care and treatment of individual patients, or no services which are 
billable) then, for documentation purposes, that workday must not be 
recorded as ``patient care'' (or, as occurring in a patient care unit 
such as ICU or Pediatrics, etc.). Instead that workday must be 
identified as nonpatient care and the time must be subtracted from the 
allowable FTE count (for IME if the training occurred within the 
hospital complex, and for both IME and direct GME if the training 
occurred in a nonhospital site). In other words, as long as an entire 
workday is not scheduled for didactic activities, then for 
documentation purposes, that day may be recorded as spent in patient 
care activities. For example, if a hospital maintains rotation 
schedules in monthly blocks for each resident in a particular program, 
and if a resident that is otherwise assigned to the Coronary Care Unit 
(CCU) for the month of January was scheduled to attend an all day 
conference on January 10 and not to participate in any planned patient 
care activities on that day, then the hospital must note on the 
rotation schedule that it submits to the fiscal intermediary that this 
resident was not in ``patient care'' on January 10. The hospital would 
subtract that time from the resident's allowable IME and/or direct GME 
FTE count accordingly. We believe this ``one workday'' approach to 
documentation of residents' time is an appropriate administrative 
measure that will assist our fiscal intermediaries in enforcing the 
policy concerning time spent in nonpatient care activities for cost 
reporting periods starting on or after October 1, 2006, while not 
overburdening hospitals with excessively detailed recordkeeping 
requirements. However, our policy continues to be that only time spent 
in patient care activities may be counted for IME purposes in the 
hospital complex, and for direct GME and IME purposes in nonhospital 
sites. Accordingly, we are amending Sec.  413.75(b) to add a definition 
of the term ``patient care activities'' which means, ``the care and 
treatment of particular patients, including services for which a 
physician or other practitioner may bill.'' (We note that in the 
proposed rule, we defined patient care activities as ``the care and 
treatment of particular patients or services for which a physician or 
other practitioner may bill'' (emphasis added). In this final rule, we 
are changing the word ``or'' to ``including,'' because we did not mean 
to imply that the phrase ``the care and treatment of particular 
patients'' and ``services for which a physician or other practitioner 
may bill'' are mutually exclusive. Rather, services that are billable 
are a subset of the more general category of activities involving the 
``care and treatment of particular patients,'' and are indicative of 
patient care delivery). In addition, we are amending the IME 
regulations at Sec.  412.105(f)(1)(iii) to add a paragraph (C) to state 
that ``In order to be counted, a resident must be spending time in 
patient care activities, as defined in Sec.  413.75(b).''

[[Page 48092]]

    Comment: One commenter requested that if CMS decides to implement 
the policy expressed in the proposed rule, CMS should clarify that 
``only planned activities expressly undertaken to meet programmatic 
requirements should be included as part of the approved residency 
program.'' The commenter was concerned that without such a 
clarification, CMS may interpret ``spontaneous'' encounters at 
nonhospital settings (such as unplanned lunch meetings with a teaching 
physician and a resident where they ``happen'' to discuss a medical 
topic) as nonpatient care time. Another commenter listed several 
residency training scenarios that he believed would need further 
clarification with respect to whether the time could be counted for IME 
and/or direct GME purposes, if CMS's policy is finalized. The scenarios 
included the time that a resident is called out of a conference to care 
for a patient, lunch time lectures, and requires courses of study or 
activities that the resident may complete at home or at a faculty 
member's home.
    Response: As we stated in response to the previous comment, as long 
as an entire workday is not scheduled for didactic activities, then for 
documentation purposes, that day may be recorded as spent in patient 
care activities. Of course, activities must be part of the approved 
residency training program in order to be counted for IME and direct 
GME payment purposes and a resident must be training within the 
hospital complex or in a nonhospital site. If a hospital documents that 
time was spent studying at a resident's or a teaching physician's home, 
this time is not permitted to be included in the IME count because it 
is not time spent in patient care, nor is it permitted to be included 
in the direct GME count because it did not take place in the hospital 
complex.
    Comment: One commenter stated that if CMS decides to implement the 
policy in the proposed rule in some form (although the commenter 
believed CMS shouldn't), then the final policy would represent a change 
that must be modified formally through the process of notice and 
comment rulemaking, and therefore, should only apply prospectively for 
rotations beginning on or after July 1, 2007.
    Response: Although we recognize that there has been some 
misapprehension of our policies among the teaching hospital community, 
in particular with respect to the counting of FTE residents training in 
the hospital for purposes of IME, the only change we are making to 
current policy is the ``one workday'' approach to identifying 
nonpatient care time spent by residents. We do not believe it is 
necessary to wait until July 1, 2007, to implement our recordkeeping 
policy. We believe that an effective date stated above, for cost 
reporting periods beginning on or after October 1, 2006, provides 
hospitals with sufficient time to either modify their rotation 
schedules to reflect the ``one workday'' approach or to find other 
comparable documentation that can be used by the fiscal intermediaries 
in auditing cost reports.
    Comment: A commenter said that it is unclear how CMS intends to 
exclude nonpatient care time for cost reporting purposes; that is, just 
from the time allowable as part of a hospital's resident count (that 
is, the numerator), or from the total time worked (in all locations) by 
the resident (that is, the denominator). The commenter observed that 
the statute quoted by CMS in the proposed rule states that ``only time 
spent in activities relating to patient care shall be counted'' 
(emphasis added, section 1886(h)(4)(E) of the Act). The commenter 
believed that to be ``counted'', the time appears both in the allowable 
time claimed by the hospital and the total time worked by the resident 
in a given year, and conversely, if the activities do not relate to 
patient care, then the time should not be counted either as allowable 
time or as part of the total time worked. The commenter requested that 
CMS specify that these activities are not to be included at all in 
IRIS, either as allowable or unallowable, so as not to dilute the total 
resident count that may be claimed by all of the hospitals training the 
resident.
    Response: The effect of the commenter's request would be to ignore 
portions of training time spent by residents in approved residency 
training programs with the result that, in total, less than a full-time 
equivalent resident would be counted. We do not believe such a policy 
would be appropriate or comport with Congressional intent. Section 
1886(h)(4)(A) of the Act states that, ``The Secretary shall establish 
rules consistent with this paragraph for the computation of the number 
full-time equivalent residents in an approved medical residency 
training program'' and the remainder of the subsection is replete with 
references to ``full-time equivalent'' residents. Accordingly, the 
regulations at Sec.  412.105(f)(1)(iii)(A) for IME and Sec.  413.78(b) 
for direct GME indicate that, in computing the FTE count of a hospital, 
for each resident, the denominator consists of the total time necessary 
to fill a residency slot, which constitutes full-time equivalent 
status. Full-time equivalent status, in turn, is based upon the total 
amount of training time necessary to fulfill the requirements of the 
approved medical residency training program in a given academic year. 
Therefore, the denominator must consist of the total time worked by a 
resident throughout the academic year in activities that are part of 
the approved program, whether or not the time is permitted to be 
counted for IME or direct GME payment purposes. As stated in response 
to a previous comment, the starting point (denominator) for determining 
the allowable FTE count is the total time necessary to fill a residency 
slot consistent with the requirements of the approved residency 
program. However, the hospital must then subtract all non-allowable 
training time, such as time spent at other providers, time spent in 
IPPS-excluded distinct part units, nonpatient care activities (for 
example, research, didactic time), and so on, and only include the 
allowable time in the numerator. Thus, while a hospital's allowable FTE 
count is certainly ``based'' on the total time necessary to fill a 
resident slot that total time is often greater than the FTE time a 
particular hospital is permitted to count for payment purposes. 
Furthermore, certainly no FTE resident time that is outside the scope 
of the approved program would be included in either the numerator or 
the denominator of the FTE computation.
    Comment: A commenter noted that CMS uses the definition of 
``hospital complex'' as explained in the September 29, 1989 Federal 
Register to determine which residents may be included in a hospital's 
direct GME count. Specifically, the September 29, 1989 Federal Register 
(54 FR 40286) states that the hospital complex consists of the hospital 
and hospital-based providers and subproviders. The commenter observed 
that CMS's regulations concerning the requirements for provider-based 
status are at Sec.  413.65, and stated that it is their understanding 
that if a facility qualifies as provider-based under these regulations, 
the facility will be considered part of the hospital complex. The 
commenter requested that the connection between ``hospital complex'' 
and ``provider-based'' be clarified in the final rule, since the 
September 29, 1989 Federal Register seems to imply that only facilities 
such as SNFs and HHAs (facilities that bill Medicare and have direct 
patient care activities) can qualify as provider-based. The commenter 
noted that, for example, a separate building where only research is 
conducted may qualify for provider-

[[Page 48093]]

based status and should be included as part of the hospital complex.
    Response: The commenter is correct that the regulations that would 
be used to determine if a facility is part of the hospital complex 
(that is, provider-based) for direct GME purposes, are at Sec.  413.65. 
As the commenter pointed out, it may be necessary to determine for 
direct GME purposes if a facility in which no patient care is provided 
is ``provider-based,'' even though a provider-based determination would 
not otherwise be made for such a facility. The example mentioned by the 
commenter of a separate building in which only research is conducted 
would be an instance where it would be appropriate for the fiscal 
intermediary to use the criteria at Sec.  413.65 to determine if a 
facility is part of the hospital complex for direct GME purposes. Thus, 
training that occurs in facilities that meet the provider-based 
criteria at Sec.  413.65 is training ``in the hospital'', and training 
that occurs in facilities that do not meet the provider-based criteria 
is training ``in nonhospital settings,'' (and, of course, in the case 
of the training in nonhospital settings, the hospital must meet certain 
requirements in order to count any FTE resident training time spent in 
that setting).
    Comment: Some commenters urged CMS not to distinguish between 
direct GME and IME payments based on hospital versus nonhospital 
locations. One commenter argued that ``geography'' is irrelevant, 
particularly in the era of telephone and Internet communications. 
Another commenter believed that distinctions between provider-based 
versus freestanding practices or medical school facilities are 
``founded on legal, structural, or financial issuances.'' The commenter 
stated that hospital and nonhospital locations might be ``across the 
hall or on the next floor from each other'' with no difference between 
the patient care and learning experiences in each place. The commenter 
believed that CMS has recently distinguished between these sites for 
reimbursement purposes based solely on who is bearing ``all or 
substantially all'' of the costs of the residency program, which has 
created ``confusion, complexity, and controversy'' in the provider 
community. Further ``clarifications'' of payment based on location or 
on type of activity are ``unnecessary and onerous.''
    Response: We understand that it is quite common for hospitals, 
especially large academic medical centers, to be located on the same 
campus as a medical school, where the buildings are very closely 
situated or even connected, and the facilities are often shared. 
However, as the commenter indicated, hospitals, nonhospital sites, and 
medical schools are structured separately for legal and financial 
purposes, and are recognized independently for state licensing and 
Medicare cost reporting purposes. To put it simply, a hospital is not a 
medical school, and a medical school is not a hospital. As we stated in 
response to the previous comment, the criteria to be used in 
determining if a facility is provider-based are in the regulations at 
Sec.  413.65. Facilities that meet the provider-based criteria are part 
of the hospital, and facilities that do not meet the provider-based 
criteria are nonhospital sites, even if they are located on the same 
campus as the hospital. Additionally, while there is no requirement 
that hospitals incur the costs of residents training in a hospital in 
order for those residents to be counted for IME and direct GME 
purposes, hospitals are required by statute (not merely by CMS 
regulations, as the commenter implies) to incur ``all, or substantially 
all of the costs'' of a residency training program in a nonhospital 
site (such as a medical school) in order to count any of the resident 
FTE training time spent in those nonhospital sites for IME and direct 
GME purposes. Similarly, the statutes for IME and direct GME clearly 
indicate that only training in patient care activities may be counted 
in the nonhospital sites. Since the statute makes these distinctions, 
we do not believe we have created ``unnecessary'' and ``confusing'' 
distinctions between where the residents are training, or the type of 
activities in which the residents are engaged.
    Comment: Many comments from members of an academy of family 
medicine in a particular State indicated that they were informed that 
``CMS is considering the disallowance of faculty development activity 
in the calculation of IME and DME reimbursement.'' Some of the 
activities they listed as being at risk included development, review, 
and delivery of curriculum, scholarly activities such as written 
publications and faculty development conferences, resident evaluation, 
faculty training, and alumni evaluation and research. The commenters 
were concerned that future physicians cannot be properly trained 
``without support for the educational aspects of their experience.'' 
Another group of commenters, also teaching faculty for family medicine 
programs, stated that they were attracted to a profession in family 
medicine because ``the community recognized the value of experience and 
academic inquiry to the well-being of our communities and the training 
of future physicians.'' These teaching physicians stated that less than 
one-third of their academic time is compensated, and if funding for 
their work on program development, clinical research, writing critical 
reviews, and evaluating resident performance is reduced, then they may 
find it necessary to return to full time clinical practice, since the 
``thought of being told by a program that [we] will need to see more 
patients to pay for the time [we are] developing and delivering 
curriculum will be unacceptable.'' The commenters concluded by wishing 
CMS ``the best of luck'' if CMS implements this rule, and stated that 
they would not continue as faculty members. Another commenter cautioned 
that ``with every additional burden placed'' on residency training by 
CMS or the ACGME, more valuable teaching physicians will be lost.
    Response: It appears the commenters have confused the time that 
residents in approved programs spend in nonpatient care activities, 
with the time that teaching faculty spend in nonpatient care 
activities. While the direct GME payments, through the PRAs, do 
compensate teaching hospitals for the portion of the teaching 
physicians'' salaries and fringe benefits attributable to GME 
activities, only the FTE time of residents participating in approved 
programs is included in the hospital's FTE resident count for both IME 
and direct GME. Accordingly, the activities listed by the commenters in 
which teaching faculty engage either on behalf of, or independent of, 
the residents they supervise are not affected by the rule that only 
time spent by residents in patient care activities may be counted for 
IME purposes in the hospital, and for IME and direct GME purposes in 
the nonhospital sites.
    Comment: One commenter, a hospital system, said that their 
understanding, which has been ``reaffirmed time and again by our annual 
fiscal intermediary audits,'' is that, with respect to direct GME, time 
spent in a nonpatient care activity, ``no matter where it took place 
(on site or off), was allowed to be counted if that activity was needed 
for Board certification.'' The commenter stated that it seems CMS 
``largely agrees'' with this position ``If the nonpatient care 
activities occur on site, but doesn't if the activity is offsite'' 
(emphasis included in the original). The commenter believes this is 
``illogical'' considering that the hospital continues to bear the 
direct costs of the resident in either case. The commenter concluded 
that, although they were commenting on the implications for

[[Page 48094]]

direct GME, ``at least for IME, [CMS's] position is consistent--
nonpatient care activities are not allowed whether one is on site OR 
offsite'' (emphasis included in the original).
    Response: As we indicated in response to a previous comment, 
although our position with respect to IME and FTE time spent in 
nonpatient care activities is a longstanding policy as we explained in 
greater detail above, it has become apparent to us that there actually 
has been significant confusion regarding this policy in the teaching 
hospital community. Our policy has been to apply the plain meaning of 
the term ``patient care activities,'' which means that, even if the 
nonpatient care activities that occur in nonhospital sites count toward 
Board certification (that is, they are part of the approved program), 
such time must not be included in the direct GME or IME count. With 
respect to training in the hospital, resident time spent training in 
didactic activities that are part of an approved program can be counted 
for direct GME purposes, but not for IME. It makes no difference 
whether the hospital is paying the residents'' salaries when the 
training occurs in the hospital complex; whether a hospital incurs the 
costs for the residents it trains in the hospital is irrelevant for 
purposes of both IME and direct GME. The requirement to incur the costs 
of the residency training program only applies in the instances where 
hospitals wish to count FTE residents that are training in nonhospital 
settings. In that case, the hospital must incur all or substantially 
all of the costs of the training program in the nonhospital site (and 
meet certain other requirements) in order to count any FTE residents 
training in that site.
    In summary, we are finalizing the clarification of our policy that 
only time spent in patient care activities may be counted for IME 
purposes in the hospital complex and for direct GME and IME purposes in 
nonhospital sites. We are amending Sec.  413.75(b) to add a definition 
of the term ``patient care activities'' which means, ``the care and 
treatment of particular patients, including services for which a 
physician or other practitioner may bill.'' In addition, we are 
amending the IME regulations at Sec.  412.105(f)(1)(iii) to add a 
paragraph (C) to state that ``In order to be counted, a resident must 
be spending time in patient care activities, as defined in Sec.  
413.75(b).'' We are also making conforming changes to the regulations 
text at Sec.  412.105(f)(1)(iii)(C), and Sec.  413.78(c)(1), (d)(1), 
and (e)(1) for residency training in nonhospital settings. Lastly for 
cost reporting periods beginning on or after October 1, 2006, we are 
implementing a ``one workday'' approach to documentation of residents' 
time, where, if a resident's workday consists entirely of scheduled 
nonpatient care activities, that workday must be identified as 
nonpatient care time and must be subtracted from the allowable FTE 
count (for IME, if the training occurred in the hospital complex, and 
for both IME and direct GME, if the training occurred in a nonhospital 
site).
6. Medicare GME Affiliated Groups: Technical Changes to Regulations
    In the FY 2005 IPPS final rule (69 FR 49112 and 49254 through 
49265), we redesignated the contents of Sec.  413.86 (which contained 
the regulations governing Medicare payment for direct GME) as 
Sec. Sec.  413.75 through 413.83 and made corresponding cross-reference 
changes in the text of these regulations. We have discovered that under 
the definition of ``Medicare GME affiliated group'' under Sec.  
413.75(b), we incorrectly cited the cross-reference to the rotation 
requirements for GME affiliated groups in paragraphs (1), (2), and (3), 
as ``Sec.  413.79(g)(2)''. In the FY 2007 IPPS proposed rule (71 FR 
24115), we proposed to correct the cross-reference for the rotation 
requirements in paragraphs (2) and (3) of the definition to read 
``Sec.  413.79(f)(2)''.
    We did not receive any public comments on this proposed technical 
change and, therefore, are adopting it as final.
    In the FY 2006 IPPS final rule (70 FR 47457 and 47489), we made 
additional changes to certain sections of the GME redesignated 
regulations to correct cross-references to other parts of 42 CFR 
Chapter IV relating to the definitions of the ``urban'' and ``rural'' 
location of a hospital. In one of the corrections, in paragraph (1) 
under the definition of ``Medicare GME affiliated group'' under Sec.  
413.75(b), we inadvertently dropped the language in that paragraph 
relating to the rotational requirements for these groups, including the 
incorrect cross-reference to Sec.  413.79(g)(2). In the FY 2007 IPPS 
proposed rule (71 FR 24115), we proposed to correct the language of 
paragraph (1) under the definition of ``Medicare GME affiliated group'' 
under Sec.  413.75(b) by adding the dropped language and correcting the 
cross-reference to read ``Sec.  413.79(f)(2).''
    We did not receive any public comments on this proposed technical 
change and, therefore, are adopting it as final.
    In the FY 2006 IPPS final rule (70 FR 47454 and 47489), we revised 
Sec.  413.79(e)(1)(iv) to provide that a new urban teaching hospital 
that qualifies for an adjustment to its FTE cap for a newly approved 
program may enter into a Medicare GME affiliation agreement, but only 
if the resulting adjustments to its direct GME and IME caps are 
``positive adjustments.'' We specified in the preamble of that final 
rule that this provision is effective for affiliation agreements 
entered into on or after October 1, 2005. However, we inadvertently did 
not include this effective date in the regulation text. In the FY 2007 
IPPS proposed rule (71 FR 24115 and 24116), we proposed to revise Sec.  
413.79(e)(1)(iv) to include the effective date as part of the text of 
that section.
    In addition, we proposed to correct a cross-reference in the 
introductory text of paragraph (f) of Sec.  413.79 relating to Medicare 
GME affiliated groups. The cross-reference to ``paragraph (e)(3)'' of 
Sec.  413.79 should read ``paragraph (d)'' of that section. This 
proposed change is necessary to accurately cite the reference to our 
rules regarding the 3-year rolling average.
    We did not receive any public comments on the proposed technical 
change and cross-reference change and, therefore, are adopting them as 
final.

I. Payment for the Costs of Nursing and Allied Health Education 
Activities: Clarification (Sec.  413.85)

    In addition to direct GME and IME payments to hospitals for the 
direct and indirect costs incurred for their graduate medical education 
programs in medicine, osteopathy, dentistry, and podiatry, Medicare 
makes payments to hospitals for two other categories of education-
related costs for which different payment policies apply:
    <bullet> Approved nursing and allied health education programs 
operated by the hospital. The costs of these programs are excluded from 
the definition of inpatient hospital operating costs and are not 
included in the calculation of the per discharge payment rates for 
hospitals paid under the IPPS, or in the calculation of payments to 
hospitals and hospital units excluded from the IPPS that are subject to 
the rate-of-increase ceiling. These costs are separately identified and 
``passed through'' (that is, paid separately, on a reasonable cost 
basis).
    <bullet> All other costs that can be categorized as educational 
programs and activities (for example, continuing education, on the job 
training, or seminars). These costs are considered to be part of the 
hospitals' normal operating costs and payment for these costs is 
included in the per discharge payment amount for hospitals subject to 
the IPPS, the IRF PPS, or the LTCH PPS

[[Page 48095]]

and the prospective per diem payment amount for facilities under the 
IPF PPS. Similarly, these costs are considered to be part of the 
hospitals' normal operating costs and are included as reasonable costs 
that are subject to the TEFRA rate-of-increase limits applicable to 
hospitals that continue to receive payments subject to those limits, 
including cancer and children's hospitals.
    Regulations governing payment for the costs of approved and allied 
health education activities are located at 42 CFR 413.85.
    In the FY 2004 IPPS final rule (68 FR 45429), we revised the 
regulations at Sec.  413.85(h)(3) to further clarify the difference 
between provider-operated and continuing education programs. We revised 
the regulations to state that, effective October 1, 2003, programs in 
which employees participate that do not lead to the ability to practice 
and begin employment in a nursing or allied health specialty are also 
treated as normal operating costs. We now realize that when we revised 
Sec.  413.85(h)(3) to include this clarification, we inadvertently did 
not specify that the provision was applicable to trainees as well as 
employees. In the preamble of the FY 2004 IPPS final rule, we stated 
that because Sec.  413.85(h)(3) refers to education that will not lead 
to the ability to practice and begin employment, we intended the 
provisions to apply not only to employees but to trainees as well. 
Therefore, in the FY 2007 IPPS proposed rule (71 FF 24116), we proposed 
to make a technical change to Sec.  413.85(h)(3) to make it applicable 
to both employees and trainees. We proposed this technical change to 
clarify that the educational activities in which employees or trainees 
participate, but that do not lead to the ability to practice and begin 
employment in a nursing or allied health specialty, are treated as 
normal operating costs. We noted that we did not propose to expand or 
make any changes to the current payment policy for nursing and allied 
health education activities; rather, we merely proposed to clarify the 
language of the existing regulations.
    Comment: One commenter requested that, in response to CMS'' 
clarification of the regulations pertaining to normal operating costs, 
CMS make ``* * * a regulation revision to reflect that trainees are 
included in the normal operation costs to avoid confusion.''
    Response: We agree with the commenter and note that as we proposed, 
we are revising the regulations at Sec.  413.85(h)(3) to read: 
Educational seminars, workshops, and continuing education programs in 
which the employees or trainees participate that enhance the quality of 
medical care or operating efficiency of the provider and, effective 
October 1, 2003, do not lead to the ability to practice and begin 
employment in a nursing or allied health specialty.
    In this final rule, we are adopting as final, without 
modifications, the proposed technical change to Sec.  413.85(h)(3) to 
make it applicable to both employees and trainees.

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

1. Background
    Sections 1866(a)(1)(I), 1866(a)(1)(N), and 1867 of the Act impose 
specific obligations on certain Medicare-participating hospitals and 
CAHs. (Throughout this section of this proposed rule, when we reference 
the obligation of a ``hospital'' under these sections of the Act and in 
our regulations, we mean to include CAHs as well.) These obligations 
concern individuals who come to a hospital emergency department and 
request examination or treatment for medical conditions, and apply to 
all of these individuals, regardless of whether they are beneficiaries 
of any program under the Act.
    The statutory provisions cited above are frequently referred to as 
the Emergency Medical Treatment and Labor Act (EMTALA), also known as 
the patient antidumping statute. EMTALA was passed in 1986 as part of 
the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), 
Pub. L. 99-272. Congress enacted these antidumping provisions in the 
Social Security Act to ensure that individuals with emergency medical 
conditions are not denied essential lifesaving services because of a 
perceived inability to pay.
    Under section 1866(a)(1)(I)(i) of the Act, a hospital that fails to 
fulfill its EMTALA obligations under these provisions may be liable for 
termination of its Medicare provider agreement, which would result in 
loss of all Medicare and Medicaid payments.
    Section 1867 of the Act sets forth requirements for medical 
screening examinations for individuals who come to the hospital and 
request examination or treatment for a medical condition. The section 
further provides that if a hospital finds that such an individual has 
an emergency condition, it is obligated to provide that individual with 
either necessary stabilizing treatment or an appropriate transfer to 
another medical facility where stabilization can occur.
    The EMTALA statute also outlines the obligation of hospitals to 
receive appropriate transfers from other hospitals. Section 1867(g) of 
the Act states that a participating hospital that has specialized 
capabilities or facilities (such as burn units, shock-trauma units, 
neonatal intensive care units or (with respect to rural areas) regional 
referral centers as identified by the Secretary in regulation) shall 
not refuse to accept an appropriate transfer of an individual who 
requires these specialized capabilities or facilities if the hospital 
has the capacity to treat the individual.
    The regulations implementing section 1867 of the Act are found at 
42 CFR 489.24.
2. Role of the EMTALA Technical Advisory Group (TAG)
    Section 945 of Pub. L. 108-173 (MMA) required the Secretary to 
establish a Technical Advisory Group (TAG) to provide the Secretary 
with advice concerning issues related to EMTALA regulations and 
implementation. Section 945 of Pub. L. 108-173 further required that 
the EMTALA TAG be composed of 19 members, including the Administrator 
of CMS, the Inspector General of HHS, hospital representatives and 
physicians representing various specialties, patient representatives, 
and representatives of organizations involved in EMTALA enforcement.
    The EMTALA TAG was first established in 2005 and held three 
meetings during that year. At each of its meetings, the EMTALA TAG 
heard testimony from representatives of physician groups, hospital 
associations, and others regarding EMTALA issues and concerns. As 
explained more fully below in sections IV.K.3. and 4. of this preamble, 
in the FY 2007 IPPS proposed rule (71 FR 24116 through 24118) we 
proposed to revise the EMTALA regulations at Sec.  489.24 based on the 
recommendations adopted and forwarded to the Secretary by the EMTALA 
TAG.
3. Definition of ``Labor''
    As noted in the background portion of this section, the EMTALA 
statute and regulations require that if an individual comes to a 
hospital emergency department and a request is made on the individual's 
behalf for examination or treatment for a medical condition, the 
hospital is obligated to provide that individual with an appropriate 
medical screening examination within the capability of the hospital. If 
the individual is found to have an emergency medical condition, the 
hospital is obligated by EMTALA to

[[Page 48096]]

provide either necessary stabilizing treatment or an appropriate 
transfer to another medical facility where stabilization can occur.
    Section 489.24(b) of the regulations defines the key terms used in 
the section. The term ``emergency medical condition'' is defined as--
    ``A medical condition manifesting itself by acute symptoms of 
sufficient severity (including severe pain, psychiatric disturbances 
and/or symptoms of substance abuse) such that the absence of immediate 
medical attention could reasonably be expected to result in placing the 
health of the individual (or, with respect to a pregnant woman, the 
health of the woman or her unborn child) in serious jeopardy; serious 
impairment to bodily functions; or serious dysfunction of any bodily 
organ or part; or with respect to a pregnant woman who is having 
contractions, that there is inadequate time to effect a safe transfer 
to another hospital before delivery; or that transfer may pose a threat 
to the health and safety of the woman or the unborn child.''
    This definition closely follows the definition of ``emergency 
medical condition'' in section 1867(e)(1) of the Act with the exception 
that the regulation text further expands on ``acute symptoms of 
sufficient severity'' by including ``psychiatric disturbances and/or 
symptoms of substance abuse'' in addition to severe pain. In 
recognition of the fact that this definition gives special 
consideration to women in labor, the term ``labor'' is itself defined, 
in paragraph (b) of Sec.  489.24, to mean ``the process of childbirth 
beginning with the latent or early phases of labor and continuing 
through the delivery of the placenta.'' The definition further states: 
``A woman experiencing contractions is in true labor unless a physician 
certifies that, after a reasonable period of observation, the woman is 
in false labor.'' A woman found to be in false labor is considered not 
to have an emergency medical condition and that finding thus means that 
the hospital has no further EMTALA obligation to her.
    The CMS interpretative guidelines used by State surveyors in EMTALA 
investigations provide that once an individual has presented to a 
hospital seeking emergency care, the determination as to whether an 
emergency medical condition exists is made by the examining 
physician(s) or other qualified medical person(s) actually caring for 
the individual at the treating facility. The guidelines further provide 
that the medical screening examination must be conducted by one or more 
individuals who are determined to be qualified by the hospital bylaws 
or rules and regulations and who meet the hospital condition of 
participation in 42 CFR 482.55 regarding emergency services personnel 
and direction. (Of course, these individuals would not be expected or 
permitted to perform any screening functions other than those which 
they are allowed to perform under State scope of practice laws.) 
However, consistent with the definition of ``labor'' at Sec.  
489.24(b), the guidelines also state that if a qualified medical person 
other than a physician determines that a woman is in false labor, a 
physician must certify the diagnosis. The guidelines permit this 
certification to be made based either on actual examination of the 
patient or on a telephone consultation with the qualified medical 
person who actually examined the patient. (Medicare State Operations 
Manual, Appendix V--Interpretive Guidelines--Responsibility of 
Participating Hospitals in Emergency Cases, TAG A-406.)
    At its meeting held on June 15-17, 2005, the EMTALA TAG heard 
testimony from representatives of both physician and nonphysician 
professional societies regarding the competence of practitioners other 
than physicians to certify false labor. In particular, a representative 
of the American College of Nurse-Midwives stated that the current 
requirement that allows only a physician to certify false labor is 
overly restrictive and does not adequately recognize the training and 
competence of certified nurse-midwives. Testimony was also presented by 
the American College of Obstetricians and Gynecologists, which 
recommended amending the EMTALA regulations to allow certified nurse-
midwives and other qualified medical persons to determine whether a 
woman is in false labor.
    After extensive consideration of the issue, the members of the 
EMTALA TAG voted to recommend to the Secretary that the definition of 
``labor'' at Sec.  489.24(b) be amended to permit certified nurse-
midwives and other qualified medical personnel to certify false labor. 
The TAG recommended deleting the second sentence, which states that a 
woman experiencing contractions is in true labor unless a physician 
certifies that, after a reasonable time of observation, the woman is in 
false labor.
    We agree with the TAG's recommendation that other health care 
practitioners besides physicians should be allowed to certify false 
labor, and believe that the recommendation is consistent with CMS' 
current policy regarding who may conduct medical screening 
examinations. However, we do not believe such a change can be best 
accomplished by simply deleting the second sentence of the current 
definition of ``labor'' in the existing regulations because doing so 
would also remove the explicit statement that a woman experiencing 
contractions is in labor unless she has been found to be in false 
labor. To achieve the principal objective of the EMTALA TAG 
recommendation without compromising the protections of EMTALA for women 
having contractions, in the FY 2007 IPPS proposed rule, we proposed to 
modify the definition of ``labor'' in Sec.  489.24(b) by revising the 
second sentence of that definition to state that a woman experiencing 
contractions is in true labor unless a physician, certified nurse-
midwife, or other qualified medical person acting within his or her 
scope of practice as defined in hospital medical staff bylaws and State 
law, certifies that, after a reasonable time of observation, the woman 
is in false labor. The effect of this change would be to have a single, 
uniform policy on the personnel who are authorized to make a 
determination as to whether an individual has an emergency medical 
condition.
    Comment: Several commenters expressed approval of the proposed 
change to the regulations to allow nonphysician practitioners to 
certify when a woman is in false labor, pursuant to State law and 
hospital bylaws. The commenters stated that this change to the 
regulations would provide hospitals greater flexibility in staffing and 
help ensure access to necessary services.
    Response: We appreciate the commenters' support for this change to 
the regulations and have kept their remarks in mind while finalizing 
this proposal.
    Comment: One commenter disagreed with the proposed change to the 
regulations. The commenter stated that one cause of higher rates of 
premature labor and malformed and malpresented neonates in the United 
States than among other industrialized nations is the use of nurses for 
labor and delivery services. The commenter recommended that CMS not 
only continue to require that a physician determine when a woman is in 
false labor but also that such physician be specialized in obstetrics.
    Response: While we understand this commenter's concerns, the 
commenter has not provided evidence to support the allegation that 
there is a higher rate of premature labor and malformed and 
malpresented neonates in the United

[[Page 48097]]

States than other industrialized nations. Nor has the commenter 
demonstrated that the problems as cited are directly linked to 
nonphysician practitioners' involvement in labor and delivery services. 
Therefore, we are not modifying the proposed change based on this 
comment.
    Comment: One commenter expressed approval of the concept of 
allowing practitioners other than physicians to certify false labor, 
but objected to the use of the phrase ``qualified medical person'' in 
Sec.  489.24(b) to describe the kind of individual who may perform this 
function. The commenter stated that use of the term ``medical'' could 
suggest, incorrectly, that only a physician could certify false labor. 
The commenter recommended that the term used be ``other qualified 
health care professional''.
    Response: The term ``qualified medical person'' is used in section 
1867(c)(1)(A)(ii) of the Act and in current regulations at Sec.  489.24 
(e)(1)(C). Both statutory and regulatory usages of this term make 
reference to a ``qualified medical person'' as an individual other than 
a physician who is authorized to sign a certificate outlining the risks 
and benefits of transfer in the absence of a physician. Thus, we do not 
believe the language in our proposed revision will be misleading. 
However, we will keep the commenter's concern in mind as we draft 
conforming revisions to the EMTALA program instructions and other 
issuances, to make it clear that a qualified medical person need not be 
(and in fact will not be) a physician.
    After consideration of the public comments received, we are 
adopting as final, without modifications, the proposed change in the 
definition of ``labor'' in Sec.  489.24(b).
4. Application of EMTALA Requirements to Hospitals Without Dedicated 
Emergency Departments
    Section 489.24(b) of the regulations outlines when a hospital will 
be considered to be a hospital with a ``dedicated emergency 
department'' and makes it clear that only a hospital with a dedicated 
emergency department has an EMTALA responsibility with respect to an 
individual for whom no appropriate transfer is sought but who comes to 
the hospital seeking examination or treatment for a medical condition. 
However, it has come to CMS' attention that our policy regarding the 
application of EMTALA to hospitals that have specialized capabilities 
but are without dedicated emergency departments may be less well 
understood as it relates to individuals for whom an appropriate 
transfer is sought.
    It has been CMS' longstanding policy that any Medicare-
participating hospital with a specialized capability must, in 
accordance with section 1867(g) of the Act, accept, within the capacity 
of the hospital, an appropriate transfer from a requesting hospital. 
This policy has been applied to hospitals without regard to whether 
they have dedicated emergency departments. In fact, in the past, CMS 
has taken enforcement actions against hospitals with specialized 
capabilities that failed to accept appropriate transfers under EMTALA 
when the hospitals had the capacity to treat the transferred 
individuals.
    At its meeting held on October 26-28, 2005, the EMTALA TAG heard 
testimony from representatives of physician groups, hospital 
associations, and others regarding EMTALA compliance by specialty 
hospitals that typically do not have dedicated emergency departments. 
After extensive consideration and discussion of the issues raised and 
views presented, the members of the EMTALA TAG voted to recommend to 
the Secretary that hospitals with specialized capabilities (as defined 
in Sec.  489.24(f) of the regulation) that do not have a dedicated 
emergency department be bound by the same responsibility to accept an 
appropriate transfer under EMTALA as hospitals with a dedicated 
emergency department.
    We agree with the EMTALA TAG's assessment. We believe that the 
recommendation is consistent with CMS' current policy and highlights 
the need to clarify CMS' policy regarding hospitals with specialized 
capabilities. Therefore, in the FY 2007 IPPS proposed rule (71 FR 
24118), we proposed to modify the regulations at Sec.  489.24(f) to 
specifically indicate that any participating hospital with specialized 
capabilities or facilities, even if it does not have a dedicated 
emergency department, may not refuse to accept an appropriate transfer 
if the hospital has the capacity to treat the individual. We noted that 
the proposed revision does not reflect any change in current CMS 
policy. We further noted that the revision would not require hospitals 
without dedicated emergency departments to open dedicated emergency 
departments nor would it impose any EMTALA obligations on those 
hospitals with respect to individuals who come to the hospital as their 
initial point of entry into the medical system seeking a medical 
screening examination or treatment for a medical condition. Although 
the proposed revision sought only to clarify, rather than change, 
current policy, we nevertheless, solicited comments on what effect, if 
any, commenters believe the proposed clarification might have on EMTALA 
compliance and patient health and safety.
    Comment: Several commenters expressed approval of the proposed 
change to the regulations to clarify that hospitals with specialized 
capabilities have an obligation under EMTALA to accept appropriate 
transfers within their capabilities whether or not the hospital has a 
dedicated emergency department, including all physician-owned limited 
service facilities.
    Response: We appreciate the commenters' support for this change to 
the regulations and have kept their remarks in mind while finalizing 
this proposal.
    Comment: Several commenters requested that CMS provide additional 
guidance on the definition of ``specialized capabilities or 
facilities.''
    Response: We refer these commenters to the regulations at Sec.  
489.24(f) for a partial list of specialized capabilities or facilities. 
These include, but are not limited to, burn units, shock-trauma units, 
neonatal intensive care units, and certain referral centers. We 
recognize that this list is not exhaustive and would include physician-
owned limited service facilities with special capabilities. We also 
would note that the EMTALA TAG is currently considering whether the 
definition of ``specialized capabilities'' should be further revised. 
However, no expansion of the list of specialized facilities or 
capabilities was specifically proposed in the proposed rule published 
on April 25, 2006. In view of this fact and in consideration of the 
fact that the EMTALA TAG may make recommendations relating to this 
issue, we have decided not to make any further revision to the list of 
examples noted above. However, we will consider carefully any 
recommendations made by the EMTALA TAG on the issue and may propose 
changes in the future.
    Comment: Several commenters asked CMS to emphasize that all 
physician-owned limited service facilities are required to maintain 
adequate on-call panels to comply with the Medicare hospital conditions 
of participation. In addition, the commenters requested that CMS 
require these hospitals to have preexisting transfer agreements with 
any community hospital to which it may send patients for emergency 
services. Two commenters suggested that the Secretary establish the 
terms of such agreements. The commenters recommended three issues to be

[[Page 48098]]

addressed in the agreements: Procedures for an appropriate transfer for 
patients not covered under EMTALA; continuity of care; and support for 
maintaining full-time emergency capacity at the community hospital, 
including on-call coverage. The commenters also requested that CMS 
require physicians who practice at such hospitals to participate in on-
call panels at the community hospitals with which their hospital has a 
transfer agreement.
    Response: While physician-owned limited service hospitals certainly 
are required to maintain compliance with the hospital conditions of 
participation, those regulations set forth in 42 CFR Part 482 do not 
include an explicit on-call requirement. Thus, we are not including a 
revision in this final rule to include the specific change requested by 
the commenter. However, we note that the conditions of participation 
relating to a hospital's governing body at Sec.  482.12(c)(3) requires 
that all Medicare-participating hospitals have a doctor of medicine or 
osteopathy either on duty or on call at all times. In addition, the 
governing body condition of participation and the condition of 
participation for medical staff found at Sec.  482.22 include various 
other requirements that make the hospital governing body and medical 
staff accountable for providing adequate physician services for 
hospital patients. These requirements also apply to physician-owned 
limited service facilities, including those that do not operate 
emergency departments, on the same basis as to community and other 
hospitals.
    In general, we believe the comments concerning transfer agreements 
are outside the scope of the proposed change to the regulations. In 
addition, the terms of transfer agreements between hospitals are 
decided upon by the individual hospitals party to the agreement. 
However, we will refer these comments to the EMTALA TAG for further 
consideration, and may propose some further change in Medicare 
regulations on these topics in the future if they are warranted.
5. Clarification of Reference to ``Referral Centers''
    The language of the existing regulations at Sec.  489.24(f) 
duplicates the language of section 1867(g) of the Act in that it 
identifies, as an example of a hospital with specialized capabilities, 
``(with respect to rural areas) regional referral centers identified by 
the Secretary in regulation)''. Because the term ``regional referral 
centers'' is not used elsewhere in the Medicare regulations, it is 
unclear whether the reference is to referral centers as defined in 42 
CFR 412.96, which must be located in rural areas and meet other 
criteria spelled out in that section, or to any facilities that are 
located in rural areas and accept patients on referral. To maintain 
consistency in the Medicare regulations and avoid confusion as to which 
facilities are considered to have specialized capabilities for purposes 
of EMTALA, in the FY 2007 IPPS proposed rule (71 FR 24118), we proposed 
to amend Sec.  489.24 by clarifying that ``regional referral centers'' 
are those centers meeting the requirements of Sec.  412.96.
    We did not receive any public comments on this clarification and, 
therefore, are adopting, as final without modification, the amendment 
to Sec.  489.24 to clarify that ``regional referral centers'' are those 
centers meeting the requirements of Sec.  412.96.

K. Other Technical Changes

1. Cross-Reference Correction in Regulations on Limitations on 
Beneficiary Charges (Sec.  412.42)
    In the FY 2007 IPPS proposed rule (71 Fr 24118), we proposed to 
amend Sec.  412.42 to correct an obsolete cross-reference. Paragraph 
(d) of Sec.  412.42 contains a cross-reference to ``Sec.  405.310(k).'' 
This section was redesignated as Sec.  411.15(k) in 1989 (54 FR 41737, 
October 11, 1989). We proposed to amend paragraph (d) of Sec.  412.42 
to delete the obsolete cross-reference and insert the correct cross-
reference.
    We did not receive any public comments on this proposed cross-
reference change and are, therefore, adopting it as final.
2. Cross-Reference Corrections in Regulations on Payment Denials Based 
on Admissions and Quality Reviews (Sec.  412.48)
    In the FY 2007 IPPS proposed rule (71 FR 24118), we proposed to 
amend Sec.  412.48 to correct an obsolete cross-reference. Paragraph 
(b) of Sec.  412.48 contains a cross-reference to ``Sec. Sec.  405.330 
through 405.332''. Section 405.330 was redesignated as Sec.  411.400, 
and Sec.  405.332 was redesignated as Sec.  411.402 in 1989 (54 FR 
41746, October 11, 1989). (There was no Sec.  405.331.) We proposed to 
amend paragraph (b) of Sec.  412.48 to delete the obsolete cross-
references and to insert the correct cross-references.
    We did not receive any public comments on this proposed cross-
reference change and are, therefore, adopting it as final.
3. Cross-Reference Correction in Regulations on Outlier Payments (Sec.  
412.84)
    On June 9, 2003, we published a final rule in the Federal Register 
(68 FR 34494) that amended the portion of the hospital IPPS regulations 
that sets out the methodology for determining payments for 
extraordinarily high-cost cases (outliers). We changed the methodology 
because we concluded that, in certain cases, hospitals were 
dramatically and inappropriately increasing charges, thereby inflating 
CCRs, resulting in overestimation of these hospitals' costs per case, a 
critical factor in determining outlier payments.
    As a part of these methodology changes, we required that outlier 
payments be reconciled using a hospital's settled cost report for the 
cost reporting year in which the outlier discharge occurred. This 
approach meant that there would be some delay in computing the final 
outlier payment. To address this issue, we added Sec.  412.84(m), which 
provided that reconciled outlier payments would be adjusted to account 
for the time value of any underpayments or overpayments.
    We inadvertently included in paragraph (m) of Sec.  412.84 a cross-
reference to paragraph (h)(3) of Sec.  412.84. The cross-reference 
should be to paragraph (i)(4), which sets out the requirement for 
reconciling outlier payments when the cost report for the year in which 
the discharge occurred is settled. In the FY 2007 IPPS proposed rule 
(71 FR 24118 and 24119), we proposed to amend paragraph (m) of Sec.  
412.84 to correct the cross-reference to read ``paragraph (i)(4)'' of 
Sec.  412.84.
    We did not receive any public comments on this proposed cross-
reference change and are, therefore, adopting it as final.
4. Removing References to Two Paper Claims Forms
    Section 1862(a)(22) of the Act generally requires electronic 
submission of initial Medicare claims requesting payment for items and 
services. Section 1862(h) of the Act provides for limited exceptions 
when paper claims still may be used. Our existing regulations at 42 CFR 
424.32 set out the requirements for submitting electronic and paper 
claims for payment, as well as when the exceptions apply and paper 
forms still may be used. Our existing regulations at paragraph (b) of 
Sec.  424.32 list six forms that are to be used for submitting paper 
claims.
    We have evaluated the use of two of these forms, Form CMS-1490U 
(Request for Medicare Payment by Organization)

[[Page 48099]]

and Form CMS-1491 (Request for Medicare Payment--Ambulance). We found 
that these forms have limited use, we would incur expensive costs in 
redesigning these forms to comply with other reporting requirements, 
and that an alternate form is available to claim payments. For these 
reasons, we intend to no longer use these forms. Therefore, in the FY 
2007 IPPS proposed rule (71 FR 24119), we proposed to remove the 
references to these forms from paragraph (b) of Sec.  424.32.
    Form CMS-1490U is a paper claim form used by employers, unions, 
employer-employee organizations that pay physicians and suppliers for 
their services to employees, group practice prepayment plans, and 
health maintenance organizations. Form CMS-1490U is used to claim 
payment from carriers for bills already paid by these entities. We 
concluded that this form should no longer be used for several reasons. 
It is duplicative of Form CMS-1500 (Health Insurance Claim Form), which 
also may be used to claim payment for these services. We have 
encouraged suppliers to submit their paper claims using the Form CMS-
1500. Unlike Form CMS-1500, Form CMS-1490U cannot accommodate an 
additional reporting requirement, the National Provider Identifier 
(NPI), without an expensive redesign. Finally, according to our 
records, relatively few suppliers currently use the form. The CMS 
component that supplies blank copies of this form for users reported 
that, between 2002 and 2005, only 2,550 copies of Form CMS-1490U were 
ordered by carriers. A 2005 survey of Part B carriers indicated that 
requests for the form are very low and that receipts of the form vary 
from very few to none.
    Form CMS-1491 is a paper claim form used by ambulance suppliers to 
apply for payment for ambulance services. We concluded that this form 
should no longer be used for several reasons. It also is duplicative of 
Form CMS-1500, which also may be used to claim payment for ambulance 
services. In addition, we have encouraged suppliers to submit their 
paper ambulance claims using the Form CMS-1500. Unlike Form CMS-1500, 
Form CMS-1491 cannot accommodate the NPI without an expensive redesign 
and usage of this form is low. A recent survey of carriers, initiated 
by Joint Signature Memorandum RO-2324, Request for Information 
Concerning the CMS-1491, issued October 30, 2003, from the Centers for 
Medicare Management, was conducted to ascertain the usage of Form CMS-
1491. The results of the survey showed that fewer than 2 percent (1.71 
percent) of all suppliers of ambulance services currently use the Form 
CMS-1491. CMS received approximately 240,000 ambulance claims using 
Form CMS-1491 during the period from October 1, 2002, to September 30, 
2003. These data were used for the most recent OMB renewal under the 
Paperwork Reduction Act. Since the last OMB renewal approval in 2001, 
CMS has printed a total of 1,620,000 forms at a cost of $42,890.
    We did not receive any public comments on our proposal. Therefore, 
we are adopting, as final without modification, the proposed removal of 
the references to the identified forms from paragraph (b) of Sec.  
424.32.

L. Rural Community Hospital Demonstration Program

    In accordance with the requirements of section 410A(a) of Pub. L. 
108-173, the Secretary has established a 5-year demonstration program 
(beginning with selected hospitals' first cost reporting period 
beginning on or after October 1, 2004) to test the feasibility and 
advisability of establishing ``rural community hospitals'' for Medicare 
payment purposes for covered inpatient hospital services furnished to 
Medicare beneficiaries. A rural community hospital, as defined in 
section 410A(f)(1), is a hospital that:
    <bullet> Is located in a rural area (as defined in section 
1886(d)(2)(D) of the Act) or is treated as being located in a rural 
area under section 1886(d)(8)(E) of the Act;
    <bullet> Has fewer than 51 beds (excluding beds in a distinct part 
psychiatric or rehabilitation unit) as reported in its most recent cost 
report;
    <bullet> Provides 24-hour emergency care services; and
    <bullet> Is not designated or eligible for designation as a CAH.
    As we indicated in the FY 2005 IPPS final rule (69 FR 49078), in 
accordance with sections 410A(a)(2) and (a)(4) of Pub. L.108-173 and 
using 2002 data from the U.S. Census Bureau, we identified 10 States 
with the lowest population density from which to select hospitals: 
Alaska, Idaho, Montana, Nebraska, Nevada, New Mexico, North Dakota, 
South Dakota, Utah, and Wyoming (Source: U.S. Census Bureau Statistical 
Abstract of the United States: 2003). Nine rural community hospitals 
located within these States are currently participating in the 
demonstration program for FY 2007. (Of the 13 hospitals that 
participated in the first 2 years of the demonstration program, 4 
hospitals located in Nebraska have withdrawn from the program; they 
have become CAHs.)
    Under the demonstration program, participating hospitals are paid 
the reasonable costs of providing covered inpatient hospital services 
(other than services furnished by a psychiatric or rehabilitation unit 
of a hospital that is a distinct part), applicable for discharges 
occurring in the first cost reporting period beginning on or after the 
October 1, 2004, implementation date of the demonstration program. 
Payments to the participating hospitals will be the lesser amount of 
the reasonable cost or a target amount in subsequent cost reporting 
periods. The target amount in the second cost reporting period is 
defined as the reasonable costs of providing covered inpatient hospital 
services in the first cost reporting period, increased by the inpatient 
prospective payment update factor (as defined in section 1886(b)(3)(B) 
of the Act) for that particular cost reporting period. The target 
amount in subsequent cost reporting periods is defined as the preceding 
cost reporting period's target amount, increased by the inpatient 
prospective payment update factor (as defined in section 1886(b)(3)(B) 
of the Act) for that particular cost reporting period.
    Covered inpatient hospital services are inpatient hospital services 
(defined in section 1861(b) of the Act), and include extended care 
services furnished under an agreement under section 1883 of the Act.
    Section 410A of Pub. L. 108-173 requires that ``in conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration program 
under this section was not implemented.'' Generally, when CMS 
implements a demonstration program on a budget neutral basis, the 
demonstration program is budget neutral in its own terms; in other 
words, the aggregate payments to the participating providers do not 
exceed the amount that would be paid to those same providers in the 
absence of the demonstration program. This form of budget neutrality is 
viable when, by changing payments or aligning incentives to improve 
overall efficiency, or both, a demonstration program may reduce the use 
of some services or eliminate the need for others, resulting in reduced 
expenditures for the demonstration program's participants. These 
reduced expenditures offset increased payments elsewhere under the 
demonstration program, thus ensuring that the demonstration program as 
a whole is budget neutral or

[[Page 48100]]

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 
the nine 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 providers.
    In order to achieve budget neutrality for this demonstration 
program for FY 2007, we are adjusting the national inpatient PPS rates 
by an amount sufficient to account for the added costs of this 
demonstration program. We are applying budget neutrality across the 
payment system as a whole rather than merely across the participants in 
this demonstration program. As we discussed in the FY 2005 and FY 2006 
IPPS final rules (69 FR 49183 and 70 FR 47462), we believe that the 
language of the statutory budget neutrality requirements permits the 
agency to implement the budget neutrality provision in this manner. For 
FY 2007, using cost report data for FY 2003, adjusted to account for 
the increased estimated costs for the remaining nine participating 
hospitals, we estimate that the adjusted amount would be $9,197,870. 
This estimated adjusted amount reflects the estimated difference 
between the participating hospitals' costs and the IPPS payment based 
on data from the hospitals' cost reports. We discuss the payment rate 
adjustment that will be required to ensure the budget neutrality of the 
demonstration program for FY 2007 in section II.A.4. of the Addendum to 
this final rule.
    We did not receive any public comments on the provisions of the 
demonstration program discussed in the proposed rule.

M. Health Care Information Transparency Initiative

    The United States faces a dilemma in health care. Although the rate 
of increase in health care spending slowed last year, costs are still 
growing at an unsustainable rate. The United States spends $1.9 
trillion on health care, or 16 percent of the gross domestic product 
(GDP). By 2015, projections are that health care will consume 20 
percent of the GDP. The Medicare program alone consumes 3.4 percent of 
the GDP; by 2040, it will consume 8.1 percent of the GDP, and by 2070, 
14 percent of the GDP.
    Part of the reason health care costs are rising so quickly is that 
most consumers of health care--the patients--are frequently not aware 
of the actual cost of their care. Health insurance shields them from 
the full cost of services, and they have only limited information about 
the quality and costs of their care. Consequently, consumers do not 
have the incentive or means to carefully shop for providers offering 
the best value. Thus, providers of care are not subject to the 
competitive pressures that exist in other markets for offering quality 
services at the best possible price. Reducing the rate of increase in 
health care prices and avoiding health services of little value could 
help to stem the growth in health care spending, and potentially 
translate into fewer individuals who are unable to afford health 
insurance. Part of the President's health care agenda is to expand 
Health Savings Accounts (HSAs), which would provide consumers with 
greater financial incentives to compare providers in terms of price and 
quality, and choose those that offer the best value.
    In order to exercise such choices, consumers must have accessible 
and useful information on price and quality of health care items and 
services. Typically, health care providers do not publicly quote or 
publish their prices. Moreover, list prices, or charges, generally 
differ from the actual prices negotiated and paid by different health 
plans. Thus, even if consumers were financially motivated to shop for 
the best price, it would be very difficult at the current time for them 
to access usable information.
    Similarly, individuals have very little information available to 
them about the quality of care that they receive. Although there are 
preliminary steps underway to rectify that fact, including the hospital 
quality reporting initiative in which a significant number of acute 
care hospitals are participating (see sections IV.A and IV.B of this 
preamble), those data are nascent and consumers lack sufficient 
information on which to base a judgment about where to receive care 
based on quality of care.
    For these reasons, in the FY 2007 IPPS proposed rule (71 FR 24120), 
we announced that the Department intends to launch a major health care 
information transparency initiative in 2006. This effort will build on 
steps already taken by CMS to make quality and price information 
available. For example, we currently collect quality information and 
publish it through the CMS Hospital Compare Web site, which we 
reference in other parts of this final rule. We also make available 
unprecedented information on the prices of drugs to beneficiaries in 
the Medicare prescription drug plan for each pharmacy in the United 
States.
    In the FY 2007 IPPS proposed rule, we also stated that we intend to 
take further steps to collect and publish useful information on quality 
and cost. The Department intends to identify several regions in the 
United States where health care costs are high, and where there is 
significant interest in reducing health care costs and improving health 
care quality. The Department will use its leadership role in health 
care policy to help lead change in those areas.
    The Secretary also has significant regulatory authority as well. In 
the FY 2007 IPPS proposed rule, we solicited comments on several 
proposals that the Secretary might adopt to increase the transparency 
of quality and pricing information, and how this can be used to 
attenuate the growth in health care costs. In addition, we solicited 
comments from the public on additional ways that we could use our 
regulatory authority to enhance transparency of quality and pricing 
information.
    In the FY 2007 IPPS proposed rule, we addressed several 
possibilities that we believe exist. First, we could publish a list of 
hospital charges either for every region of the country or for selected 
regions of the country. In addition, we could publish the rates that 
Medicare actually pays to a particular hospital for every DRG or for 
selected DRGs that could be adjusted to take into account the 
hospital's labor market area, teaching hospital status, and DSH status. 
Some might argue that publishing these payment rates does not provide 
meaningful information to consumers because Medicare payment rates are 
not set by the market, but rather by a statutory payment formula. In 
addition, providing information on hospital payments only does not 
disclose the true cost of an episode of care because it would not take 
into account the cost of physician services, laboratory tests, and 
other procedures that go along with hospital charges. On the other 
hand, Medicare payment rates may provide a helpful benchmark, 
especially for uninsured individuals, to determine whether the charges 
they see on a hospital bill bear any relationship to what third-party 
fee-for-service payors pay to the hospital.
    A second option would be for the Secretary to use his authority to 
establish conditions of participation for

[[Page 48101]]

hospitals to propose a rule that relates to charges for uninsured 
patients. For example, the conditions of participation could include a 
requirement that hospitals post their prices and/or post their policies 
regarding discounts or other assistance for uninsured patients.
    Yet another alternative to posting Medicare DRG payment rates would 
be to make publicly available the total Medicare payments for an 
episode of care. For example, one of the most common inpatient hospital 
procedures under the Medicare program (based on total dollars spent) is 
hip replacement surgery. Under this proposal, we could make publicly 
available the expected total payment for an episode of care for hip 
replacement surgery, including the inpatient hospital stay, physician 
payments (including the surgeon and the anesthesiologist), and payments 
for post-acute care services such as services provided in an IRF, SNF, 
or LTCH. In the proposed rule, we indicated that we are currently 
assessing methods for making such information available and were 
seeking comments on how to do so as quickly and effectively as 
possible.
    We solicited comment on any ways in which the Department can 
encourage transparency in health care quality and pricing whether 
through its leadership on voluntary initiatives or through regulatory 
requirements. We also sought comment on the Department's statutory 
authority to impose such requirements. We indicated that discussion of 
particular options in the proposed rule should not be taken as an 
indication that the Department will adopt any of these proposals. 
Rather, the proposals were included to foster comment on possible 
options to promote the aims of transparency of quality and pricing 
information and the Department's authority and ability potentially to 
implement these options. We indicated that the Department is anxious to 
receive comments on any of these proposals, or on other options that 
may be available that the Department could adopt either through 
voluntary initiatives or through its regulatory authority.
    Thirty-eight commenters made more than a hundred specific comments 
on the transparency discussion in the FY 2007 IPPS proposed rule. We 
received comments from providers, practitioners, and their 
representatives or associations, including hospital associations, 
physician associations, and organizations representing other health 
care professionals, as well as the medical device industry. We also 
received comments from organizations that promote quality measures in 
health care, from employers, and from health care-related companies. We 
found these comments to be extremely helpful and constructive as we 
seek to promote transparency in the health care system.
    Listed below are the eight issue areas related to transparency that 
we identified in the comments and which generated the greatest number 
of comments:
    <bullet> Features of transparency;
    <bullet> Types of pricing information;
    <bullet> Leadership/stakeholder participation;
    <bullet> Medicare Conditions of Participation;
    <bullet> Limited effectiveness of transparency efforts to address 
uninsured and safety net providers;
    <bullet> Physician-identifiable Medicare claims data;
    <bullet> Concerns regarding the June 1, 2006 posting of payment 
information on the 30 common elective procedures by DRG; and
    <bullet> The link between value-based purchasing and making the 
health care system more transparent.
    Comment: The majority of commenters provided comments on what types 
of transparency features would be important to consumers with the end 
goal of providing consumers with meaningful, easily accessible 
information for health care decision-making. Many commenters suggested 
conducting research on what information consumers would want. For 
example, ease of use and ease of access to posted price information 
(which may include a web-based tool), common definitions and language 
to describe pricing information, and offering explanations of the 
potential sources of variation in price are features that numerous 
commenters identified. They also noted that the integration of price 
and quality information is critical and that price should only be one 
consideration in consumers' decision-making process. Several commenters 
highlighted the importance of a feasible approach to implementation, 
specifically highlighting the complexity of hospital pricing. One 
commenter noted that physician ownership in specialty hospitals should 
be transparent to the public. One commenter suggested that transparency 
should promote the continuum of care. Finally, several commenters noted 
that promoting the use of health information technology as well as 
further developing quality measurements are important factors in 
advancing transparency.
    Response: We agree that it is important to understand what 
information beneficiaries want, how they use the information, whom 
beneficiaries consult in making decisions, and the needs of different 
types of users of information. Particularly with regard to Medicare 
beneficiaries--many of whom face challenges in accessing and 
understanding information--CMS has strived to provide information on 
quality in a way that is accessible and meaningful to beneficiaries and 
to those who assist beneficiaries in making health care decisions. CMS 
and AHRQ have sponsored research in this area and will continue to 
examine these issues. We will continue to improve the web-based tools 
currently in use (such as Hospital Compare and Nursing Home Compare), 
and will continue to explore other means of improving our ability to 
disseminate information and means of encouraging the use of available 
information.
    We recognize the complexities involved in attempting to present 
pricing information in an accurate and useful manner that is accessible 
for the intended users. We agree that in making health care decisions, 
consumers must have access to both cost and quality information and 
that information must be available across the continuum of care. 
Consumers also must have access to other types of information that may 
be considered relevant when they are making decisions about their 
health care. While CMS has recently begun releasing information on 
Medicare payments to hospitals by procedure, and we plan to make 
pricing information available for other types of providers and 
practitioners, we recognize that an education effort is required to 
enable the best use of pricing information. Similarly, from the 
provider and practitioner point of view, there are many complexities 
involved in the reporting of information on price and quality. We agree 
that standardizing terminology and greater use of health information 
technology would support transparency by reducing reporting burdens. 
The ideal is to design a system that is feasible and accomplishes its 
intended goals in the most efficient manner possible.
    Comment: We received a significant number of comments on what types 
of pricing information should be made publicly available based on 
reliable claims data. Many commenters recommended making both hospital 
charges and out-of-pocket costs available, and several commenters 
recommended this as a Federal requirement. However, some commenters 
cautioned against using hospital charges since they do not reflect 
consumers' expected costs. Commenters noted that it is important to 
help consumers understand that there

[[Page 48102]]

are price variations that reflect factors such as additional payments 
to fund teaching and research missions, caring for the under- and 
uninsured, and other costs. Several commenters noted the importance of 
measuring costs and quality across settings and over appropriate 
timeframes using evidence-based protocols. One commenter recommended 
displaying CCRs. Another commenter recommended reporting national 
average charges for certain common procedures. One commenter noted that 
the cost of nursing care is not shown as a separate cost to patients. 
One commenter noted that costs of supplies and services should be 
transparent as well. With regard to possible studies of costs in areas 
of the country where there are relatively high health care costs, one 
commenter recommended that a studied region be homogenous, but 
heterogeneous outside of the study area.
    Response: As mentioned previously, we recognize the complexities 
involved in attempting to present pricing information in an accurate 
and useful manner that is accessible for the intended users. As also 
noted above, we agree that in making health care decisions, consumers 
must have access to both cost and quality information, as well as other 
information that may be considered relevant when consumers are making 
decisions about their health care. As noted above, while CMS has 
recently begun to release information on Medicare payments to hospitals 
by procedure as well as the number of procedures performed by the 
hospital, and we plan to make pricing information available for other 
types of providers and practitioners, we recognize that an education 
effort is required to enable the best use of pricing information. 
Consumers must take into account the many factors noted by commenters 
which are components of the prices that consumers (or insurers) will 
pay for care. For example, consumers may want to know the costs of all 
the services they received in an episode-of-care when determining the 
total costs for a course of treatment. Similarly, with an episode-of-
care approach, consumers also may want information about the quality of 
care at each point in the continuum of care when multiple providers and 
practitioners are involved.
    With regard to beneficiary out-of-pocket costs, the current pricing 
tools available to Medicare beneficiaries--the Medicare Personal Plan 
Finder and the tools beneficiaries use in evaluating Part D drug 
plans--are intended to give beneficiaries important, accurate 
information about their expected out-of-pocket costs when faced with 
various choices. At the same time, we believe it is desirable for 
consumers to know how much their insurer--or the Medicare program (and 
therefore taxpayers)--is paying for a person's care. The cost of care 
to the primary payer should be a factor when a person is attempting to 
make judicious decisions about his or her health care.
    Comment: A considerable number of commenters addressed the 
importance of leadership and stakeholder participation in efforts to 
bring greater transparency to the health care system. Many commenters 
noted the success of existing public-private partnerships and 
recommended that CMS continue to build on these partnerships. Many 
commenters recommended that the further expansion of hospital quality 
information should be accomplished through the Hospital Quality 
Alliance. Also, commenters noted that the AHRQ is best suited to 
conduct research on what consumers want in helping them with health 
care purchasing decisions. Several commenters suggested collaborative 
efforts though workshops. Several commenters recommended a hospital-led 
effort to create consumer-friendly pricing language. One commenter 
suggested that insurance companies are best positioned to be advisors 
to patients and to provide information on the expected costs for an 
entire episode of care. One commenter supported a hospital-led effort 
in making transparent information available to consumers, rather than a 
government-led initiative.
    Response: The views of many of the commenters are consistent with 
CMS' current practices in the development and dissemination of quality 
measures for Medicare beneficiaries, and are consistent with our future 
direction with respect to transparency in providing price and quality 
information. Many of the tools and measures that CMS currently uses in 
providing information on quality have been developed through public-
private collaborations. CMS has used a collaborative approach for many 
years, and CMS actively participates in efforts such as the Hospital 
Quality Alliance, the Ambulatory Care Quality Alliance, the National 
Committee on Quality Assurance, the National Quality Forum, and 
numerous other organizations whose mission is to improve the quality of 
health care by making valid, reliable information available to 
providers and consumers. In particular, CMS is supporting pilot 
programs in Boston, Indianapolis, Minneapolis-St. Paul, Wisconsin, 
Phoenix, and California, in conjunction with the Hospital Quality 
Alliance and Ambulatory Care Quality Alliance, to identify and 
implement effective ways of providing better information on quality and 
improving quality. As the commenters noted, the AHRQ is a leader in 
this arena, and CMS will continue to work with AHRQ to ensure that 
there is continuing progress in providing information on quality. A 
broad, collaborative approach to the development and dissemination of 
information also promotes improvement in the usefulness of the 
information and improvement in the mechanisms of dissemination.
    As noted above, we agree that it is important to understand the 
information needs of Medicare beneficiaries, and we will continue to 
examine that issue as it pertains to beneficiaries. As more information 
on quality continues to be made available, and as pricing information 
becomes more commonly available, we need to understand whether the new 
information and the manner in which it is disseminated is effectively 
serving the needs of beneficiaries and the needs of other individuals 
and entities that assist beneficiaries in their decisionmaking 
processes.
    Comment: Several commenters opposed the option which suggested that 
we modify the Medicare conditions of participation to require hospitals 
to post price information on assistance programs for the uninsured. 
Commenters noted that hospitals provide community financial assistance 
to the uninsured in their service areas based on local patient 
demographics and the local poverty level. They believe that as patient 
demographics and poverty levels vary from community to community, so 
must charity care policies. One commenter noted that without 
Congressional action, CMS does not have the authority to require 
hospitals to produce price information unrelated to Federal program 
beneficiaries. This commenter also advocated that CMS allow the current 
hospital pricing marketplace, that includes the provision of charity 
care to the uninsured, to continue to operate without Federal 
interference.
    Response: Although we are not adopting our proposal to amend the 
Medicare conditions of participation to require hospitals to post price 
information, including information on assistance programs for the 
uninsured at this time, we have not abandoned the idea and may consider 
it in the future. As noted in the FY 2007 IPPS proposed rule, we are 
considering several options to achieve greater transparency in the 
health care system. We agree that any transparency policy must take 
into

[[Page 48103]]

consideration the current programs operated by hospitals across the 
country to provide financial assistance to the uninsured and the 
variances in the patient demographics that are addressed by these 
programs. However, we believe that providing true cost transparency in 
the health care system will require making available price information 
across populations through public-private collaboratives, such as the 
AQA pilots. We appreciate the current efforts of the hospital and 
insurance industries to work with CMS towards greater transparency in 
the health care system.
    Comment: Two commenters suggested that pricing transparency will 
not address the problem of the uninsured and will have a marginal 
impact on costs. Specifically, the commenters argued that the 
complexity of, and variances in, hospital charge structures make price 
comparisons among hospitals nearly impossible; and therefore posting 
hospital-specific charges will not accomplish CMS' transparency goals. 
Rather the commenters stated that CMS should work with Congress to 
expand Medicaid and other safety net programs. Alternatively, the 
commenters supported the expansion of CMS' current efforts to report 
national average charges for certain common procedures, as this 
information would allow patients to encourage their local hospitals to 
align their charges with national averages. The commenters also noted 
that for the privately insured, the relevant financial information is 
the amount that is the patient's responsibility.
    Response: We believe by increasing the transparency of health care 
costs and providing cost and quality information to consumers to make 
better-informed health care choices, overall costs to the health care 
system should decrease and the quality of care will improve. Greater 
health care efficiency is critical for the long-term sustainability of 
the health care system, including the ability to deliver care to the 
uninsured population. As we continue to develop policies to support 
transparency in the health care system, CMS is committed to ensuring 
that the needs of the uninsured population and the safety net providers 
that serve them are addressed.
    Comment: Three commenters recommended the release of physician-
identifiable Medicare claims data (fully protecting patient privacy), 
to allow for better quality and efficiency performance reporting.
    Response: Those making this comment suggest that releasing 
physician-identifiable Medicare claims data to the public would 
increase the scope and breadth of performance measures. CMS is firmly 
committed to increasing the scope and breadth of performance measures 
in all settings of care in which Medicare patients receive care. 
Specifically, in this regulation, CMS is requiring hospitals to report 
on a broader set of quality measures to receive the full payment 
update. We agree that physician-identifiable claims are an important 
source of information and are evaluating the potential to use 
physician-identifiable Medicare claims in this initiative.
    Comment: One commenter noted that the June 1, 2006 CMS posting of 
payment information on the 30 common elective procedures by diagnosis-
related group (DRG) does not include information on the quality of care 
delivered within each specific DRG.
    Response: We agree that both quality and cost information must be 
used to assess the value of health care. We disagree with the 
commenter's view that CMS is not releasing information for 
beneficiaries on both quality and cost on the same conditions. Many of 
the patients who would receive care for the high-utilization condition 
for which payment information has been posted would be the same 
patients whose care would be assessed for Hospital Compare quality 
measures. Further, the HQA surgical measures would apply to some of the 
surgical procedures for which payment information was posted. Many 
quality measures, such as the Hospital Consumer Assessment of 
Healthcare Providers and Systems Survey[supreg] (HCAHPS[supreg]), are 
not specific to certain procedures and may be just as important to 
beneficiaries and other consumers as condition-specific clinical 
measures. Other information included in the posting, such as how many 
patients a hospital treats for a certain condition, also adds to the 
information that people can use to make better decisions on their care.
    Comment: Several commenters supported the link between value-based 
purchasing and making the health care system more transparent.
    Response: We agree that financial incentives can be a powerful tool 
to encourage quality improvement. Almost all hospitals chose to report 
and improve on certain quality measures when Congress determined that 
reporting them should be a condition of receiving the full payment 
update for inpatient care. Further, the initial results from the 
Premier Hospital Quality Incentive Demonstration show that 
participating hospitals, on average, improved on the quality measures 
upon which they were assessed for purposes of receiving a payment 
bonus. In addition to these efforts, CMS has embarked on a variety of 
initiatives that use public reporting to provide useful information to 
beneficiaries and to improve the quality and value of care. Payers, 
beneficiaries, and providers share a common interest in having 
consumers make informed health care decisions. Providers who deliver 
high quality services at a lower cost than others should be given the 
opportunity to be publicly acknowledged for their efforts.

V. Changes to the PPS for Capital-Related Costs

A. Background

    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 PPS established by the Secretary.'' Under the 
statute, the Secretary has broad authority in establishing and 
implementing the PPS for hospital inpatient capital-related costs. We 
initially implemented the PPS for capital-related costs in the August 
30, 1991 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).
    Federal fiscal year (FFY) 2001 was the last year of the 10-year 
transition period established to phase in the PPS for hospital 
inpatient capital-related costs. For cost reporting periods beginning 
in FY 2002, capital PPS payments are based solely on the Federal rate 
for most acute care hospitals (other than certain new hospitals and 
hospitals receiving certain exception payments). The basic methodology 
for determining capital prospective payments using the Federal rate is 
set forth in Sec.  412.312. For the purpose of calculating payments for 
each discharge, the standard Federal rate is adjusted as follows:
    (Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment 
Factor (GAF)) x (Large Urban Add-on, if applicable) x (COLA for 
hospitals located in Alaska and Hawaii) x (1 + Capital DSH Adjustment 
Factor + Capital IME Adjustment Factor, if applicable).
    Hospitals also may receive outlier payments for those cases that 
qualify under the threshold established for each fiscal year as 
specified in Sec.  412.312(c) of the regulations.
    The regulations at Sec.  412.348(f) provide that a hospital may 
request an additional payment if the hospital

[[Page 48104]]

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 August 1, 2002 IPPS final 
rule (67 FR 50102), we revised the regulations at Sec.  412.312 to 
specify that payments for extraordinary circumstances are also made for 
cost reporting periods after the transition period (that is, cost 
reporting periods beginning on or after October 1, 2001). Additional 
information on the exception payment for extraordinary circumstances in 
Sec.  412.348(f) can be found in the FY 2005 IPPS final rule (69 FR 
49185 and 49186).
    During the transition period, under Sec. Sec.  412.348(b) through 
(e), eligible hospitals could receive regular exception payments. These 
exception payments guaranteed a hospital a minimum payment percentage 
of its Medicare allowable capital-related costs depending on the class 
of hospital (Sec.  412.348(c)), but were available only during the 10-
year transition period. After the end of the transition period, 
eligible hospitals can no longer receive this exception payment. 
However, even after the transition period, eligible hospitals receive 
additional payments under the special exceptions provisions at Sec.  
412.348(g), which guarantees all eligible hospitals a minimum payment 
of 70 percent of its Medicare allowable capital-related costs provided 
that special exceptions payments do not exceed 10 percent of total 
capital IPPS payments. Special exceptions payments may be made only for 
the 10 years from the cost reporting year in which the hospital 
completes its qualifying project, and the hospital must have completed 
the project no later than the hospital's cost reporting period 
beginning before October 1, 2001. Thus, an eligible hospital may 
receive special exceptions payments for up to 10 years beyond the end 
of the capital PPS transition period. Hospitals eligible for special 
exceptions payments were required to submit documentation to the 
intermediary indicating the completion date of their project. (For more 
detailed information regarding the special exceptions policy under 
Sec.  412.348(g), refer to the August 1, 2001 IPPS final rule (66 FR 
39911 through 39914) and the August 1, 2002 IPPS final rule (67 FR 
50102).)
    Under the PPS for capital-related costs, Sec.  412.300(b) of the 
regulations defines a new hospital as a hospital that has operated 
(under current or previous ownership) for less than 2 years. (For more 
detailed information, see the August 30, 1991 final rule (56 FR 
43418).) During the 10-year transition period, a new hospital was 
exempt from the capital PPS 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 we believe that special protection to new hospitals is also 
appropriate even after the transition period, as discussed in the 
August 1, 2002 IPPS final rule (67 FR 50101), we revised the 
regulations at Sec.  412.304(c)(2) to provide that, for cost reporting 
periods beginning on or after October 1, 2002, a new hospital (defined 
under Sec.  412.300(b)) is paid 85 percent of its Medicare allowable 
capital-related costs through its first 2 years of operation, unless 
the new hospital elects to receive fully prospective payment based on 
100 percent of the Federal rate. (Refer to the August 1, 2001 IPPS 
final rule (66 FR 39910) for a detailed discussion of the statutory 
basis for the system, the development and evolution of the system, the 
methodology used to determine capital-related payments to hospitals 
both during and after the transition period, and the policy for 
providing exception payments.)
    Section 412.374 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 PPS, we compute a 
separate payment rate specific to Puerto Rico hospitals using the same 
methodology used to compute the national Federal rate for capital-
related costs. In general, hospitals located in Puerto Rico are paid a 
blend of the applicable capital PPS Puerto Rico rate and the applicable 
capital PPS Federal rate.
    Prior to FY 1998, hospitals in Puerto Rico were paid a blended 
capital PPS rate that consisted of 75 percent of the capital PPS Puerto 
Rico specific rate and 25 percent of the capital PPS Federal rate. 
However, effective October 1, 1997 (FY 1998), in conjunction with the 
change to the operating PPS blend percentage for Puerto Rico hospitals 
required by section 4406 of Pub. L. 105-33, we revised the methodology 
for computing capital PPS payments to hospitals in Puerto Rico to be 
based on a blend of 50 percent of the capital PPS Puerto Rico rate and 
50 percent of the capital PPS Federal rate. Similarly, in conjunction 
with the change in operating PPS payments to hospitals in Puerto Rico 
for FY 2005 required by section 504 of Pub. L. 108-173, we again 
revised the methodology for computing capital PPS payments to hospitals 
in Puerto Rico to be based on a blend of 25 percent of the capital PPS 
Puerto Rico rate and 75 percent of the capital PPS Federal rate 
effective for discharges occurring on or after October 1, 2004.

B. Treatment of Certain Urban Hospitals Reclassified as Rural Hospitals 
Under Sec.  412.103

    In the FY 2007 IPPS proposed rule (71 FR 24122), we proposed 
technical changes to Sec. Sec.  412.316(b) and 412.320(a)(1) to clarify 
that hospitals reclassified as rural under Sec.  412.103 are not 
eligible for the large urban add-on payment or for the capital DSH 
adjustment. These changes were proposed to reflect our historic policy 
that hospitals reclassified as rural under Sec.  412.103 also are 
considered rural under the capital PPS. Since the genesis of the 
capital PPS in FY 1992, the same geographic classifications used under 
the operating PPS also have been used under the capital PPS.
    These changes and clarifications are necessary because we 
inadvertently made an error when we updated our capital PPS regulations 
to incorporate OMB's new CBSA definitions for IPPS hospital labor 
market areas beginning in FY 2005. In the FY 2005 IPPS final rule (69 
FR 49187 through 49188), in order to incorporate the new CBSA 
designations and the provisions of the newly established Sec.  412.64, 
which incorporated the CBSA-based geographic classifications, we 
revised Sec.  412.316(b) and Sec.  412.320 to specify that, effective 
for discharges occurring on or after October 1, 2004, the capital PPS 
payment adjustments are based on the geographic classifications under 
Sec.  412.64. However, Sec.  412.64 does not reference the provisions 
of Sec.  412.103 regarding the urban-to-rural reclassifications, as was 
previously found in Sec.  412.63(b)(1).
    We believe that this error must be corrected in order to maintain 
our historic policy for treating urban-to-rural hospital 
reclassifications under the operating PPS the same for purposes of the 
capital PPS. Therefore, we proposed to specify under Sec. Sec.  
412.316(b)(2) and (b)(3) and 412.320(a)(1)(ii) and (a)(1)(iii) that, 
for discharges on or after October 1, 2006, hospitals that are 
reclassified from urban to rural under Sec.  412.103 would be 
considered rural.
    We did not receive any public comments on our proposal. Therefore, 
we are adopting as final, without modification, the proposed changes to 
Sec. Sec.  412.316(b)(2) and (b)(3) and 412.320(a)(1)(ii) and 
(a)(1)(iii) which specify that, for discharges on or after October 1, 
2006, hospitals that are

[[Page 48105]]

reclassified from urban to rural under Sec.  412.103 would be 
considered rural.

C. Other Technical Corrections Relating to the Capital PPS Geographic 
Adjustment Factors

    In the FY 2007 IPPS proposed rule (71 FR 24122) we proposed to make 
technical corrections to the regulations under paragraphs (a) and (c) 
of Sec.  412.316. Specifically, we proposed to make a technical change 
under Sec.  412.316(a) to correct the cross-reference to ``Sec.  
412.63(k)'' to clarify that the same wage index that applies to 
hospitals under the operating PPS is used to determine the geographic 
adjustment factor (GAF) under the capital PPS. We proposed to cross-
refer instead to subpart D of Part 412 to capture the applicable 
requirements in their entirety.
    We did not receive any public comments on our proposal. Therefore, 
we are adopting as final without modification the proposed technical 
change under Sec.  412.316(a) to correct the cross-reference to ``Sec.  
412.63(k)'' to clarify that the same wage index that applies to 
hospitals under the operating PPS is used to determine the geographic 
adjustment factor (GAF) under the capital PPS. We cross-refer instead 
to subpart D of Part 412 to capture the applicable requirements in 
their entirety. This technical correction does not change any current 
payment policies because the regulation, as written, makes clear that 
the GAF adjustment for local cost variation under the capital PPS is 
based on a hospital's operating PPS wage index value. Thus, the same 
payment policies that are in effect prior to FY 2007 (that is, the GAF 
is based on a hospital's operating PPS wage index value) will continue 
in effect for FY 2007 and beyond; the only change in the regulation is 
a correction of the erroneous cross-reference.
    In addition, we proposed to make a technical correction under Sec.  
412.316(c) to correct the cross-reference to ``Sec.  412.115'' to 
clarify that, for hospitals located in Alaska and Hawaii, the same COLA 
factor that applies to these hospitals under the operating PPS is used 
to determine the COLA factor under the capital PPS. The existing 
regulation erroneously references the COLA factor used to determine 
payment under Sec.  412.115, which is not related to the operating PPS 
COLA factor or any other payment factors. Again, we proposed to cross-
refer instead to subpart D of Part 412 to capture the applicable 
requirements in their entirety.
    We did not receive any public comments on this proposal. Therefore, 
we are adopting as final, without modification, the proposed technical 
correction. This technical correction does not change any current 
payment policy; rather it makes clear that the capital PPS COLA factor 
is based on the hospital's COLA factor under the operating PPS. This 
technical correction reflects our historic policy that the COLA factor 
under the capital PPS is based on the hospital's operating PPS COLA 
factor, which is how the capital PPS COLA factor has been determined 
since the implementation of the capital PPS in FY 1992. Thus, the same 
payment policy that has been in effect prior to FY 2007 (that is, the 
use of the operating PPS COLA factor as shown in the table in section 
II.B.2 of the Addendum of this final rule in determining a hospital's 
capital PPS COLA factor) will continue to be in effect for FY 2007 and 
beyond; the only change in the regulation is a correction of the 
erroneous cross-reference.

VI. Changes for Hospitals and Hospital Units Excluded From the IPPS

A. Payments to Excluded Hospitals and Hospital Units (Sec.  413.40)

1. Payments to Existing and New Excluded Hospitals and Hospital Units
    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to a 
rate-of-increase ceiling. An annual per discharge limit (the target 
amount as defined in Sec.  413.40(a)) was set for each hospital or 
hospital unit based on the hospital's own cost experience in its base 
year. The target amount was multiplied by the Medicare discharges and 
applied as an aggregate upper limit (the ceiling as defined in Sec.  
413.40(a)) on total inpatient operating costs for a hospital's cost 
reporting period. Prior to October 1, 1997, these payment provisions 
applied consistently to all categories of excluded providers 
(rehabilitation hospitals and units (now referred to as IRFs), 
psychiatric hospitals and units (now referred to as IPFs), LTCHs, 
children's hospitals, and cancer hospitals).
    Payment for children's hospitals and cancer hospitals that are 
excluded from the IPPS continues to be subject to the rate-of-increase 
ceiling based on the hospital's own historical cost experience. (We 
note that, in accordance with Sec.  403.752(a) of the regulations, 
RNHCIs are also subject to the rate-of-increase limits established 
under Sec.  413.40 of the regulations.) For IRFs, IPFs, and LTCHs, 
reasonable cost payment provisions changed significantly for cost 
reporting periods beginning on or after October 1, 1997.
    Section 1886(b)(3)(H) of the Act established caps on the target 
amounts for cost reporting periods beginning on or after October 1, 
1997, through September 30, 2002, for certain existing hospitals and 
hospital units excluded from the IPPS. Section 413.40(c)(4)(iii) of the 
implementing regulations states that ``In the case of a psychiatric 
hospital or unit, rehabilitation hospital or unit, or long-term care 
hospital, the target amount is the lower of amounts specified in 
paragraph (c)(4)(iii)(A) or (c)(4)(iii)(B) of this section.'' 
Accordingly, in general, for ``existing'' IPFs, IRFs, or LTCHs for the 
applicable 5-year period, the target amount is the lower of: The 
hospital-specific target amount (Sec.  413.40(c)(4)(iii)(A)) or the 
75th percentile cap (Sec.  413.40(c)(4)(iii)(B)).
    For cost reporting periods beginning on or after October 1, 2002, 
all IRFs are paid 100 percent of the adjusted Federal rate under the 
IRF PPS. Therefore, an IRF, considered ``existing'' under section 
1886(b)(3)(H) of the Act would have no portion of its payment subject 
to Sec.  413.40(c)(4)(ii) of the regulations for cost reporting periods 
beginning on or after October 1, 2002.
    For cost reporting periods beginning on or after October 1, 2002, 
to the extent an IPF or LTCH has all or a portion of its payment 
determined under reasonable cost principles, the target amounts for the 
reasonable cost-based portion of the payment are determined in 
accordance with section 1886(b)(3)(A)(ii) of the Act and the 
regulations at Sec.  413.40(c)(4)(ii). Section 413.40(c)(4)(ii) states, 
``Subject to the provisions of [Sec.  413.40] paragraph (c)(4)(iii) of 
this section, for subsequent cost reporting periods, the target amount 
equals the hospital's target amount for the previous cost reporting 
period increased by the update factor for the subject cost reporting 
period unless the provisions of [Sec.  413.40] paragraph (c)(5)(ii) of 
this section apply.'' Thus, because Sec.  413.40(c)(4)(ii) indicates 
that the provisions of that paragraph are subject to the provisions of 
Sec.  413.40(c)(4)(iii), which are applicable only for cost reporting 
periods beginning on or after October 1, 1997, through September 30, 
2002, the target amount for FY 2003 was determined by updating the 
target amount for FY 2002 by the applicable update factor. For example, 
if a provider was paid the cap amount in FY 2002, the target amount for 
FY 2003 would be the amount paid in FY 2002, updated to FY 2003 (that 
is, the target amount from the previous year increased by the 
applicable update

[[Page 48106]]

factor). As discussed below, IRFs, IPFs, and LTCHs are now paid under 
separate PPSs, although some are subject to transition payment 
provisions.
    In addition, a new method of determining the payment amount for 
``new'' excluded providers for cost reporting periods beginning on or 
after October 1, 1997. Section 413.40(f)(2)(ii) of the implementing 
regulations states that, ``* * * the amount of payment for a new 
psychiatric hospital or unit, a new rehabilitation hospital or unit, or 
a new long term care hospital that was not paid and excluded prior to 
October 1, 1997, is the lower of the hospital's net inpatient operating 
cost per case or 110 percent of the nation median of the target amounts 
for the class of excluded hospitals and units (psychiatric, 
rehabilitation, long-term care) as adjusted for the difference in wage 
levels and updated to the first cost reporting period in which the 
hospital receives payment. The second cost reporting period is subject 
to the same target amount as the first cost reporting period.'' For the 
third cost reporting period, the target amount determined for the 
preceding cost reporting period is updated to the third cost reporting 
period. (See Sec.  413.40(c)(4)(v).)
    The 110 percent of the national median payment limits for new 
providers under TEFRA (Sec.  413.40(f)(2)(ii)) do not apply to those 
IPFs or LTCHs, whose first cost reporting period begins on or after the 
date the particular class of hospitals implemented their respective PPS 
because they are paid 100 percent of their Federal PPS rate. IRFs are 
paid 100 percent of the Federal rate under the IRF PPS for cost 
reporting periods beginning on or after October 1, 2002. Therefore, the 
110 percent of the median payment limitations are not applicable to 
IRFs for cost reporting periods beginning on or after that date.
2. Separate PPS for IRFs
    Section 1886(j) of the Act, as added by section 4421(a) of Pub. L. 
105-33, provided for a phase-in of a case-mix adjusted PPS for 
inpatient hospital services furnished by IRFs for cost reporting 
periods beginning on or after October 1, 2000, and before October 1, 
2002, with payments based entirely on the adjusted Federal prospective 
payment for cost reporting periods beginning on or after October 1, 
2002. Section 1886(j) of the Act was amended by section 125 of Pub. L. 
106-113 to require the Secretary to use a discharge as the payment unit 
under the PPS for inpatient hospital services furnished by IRFs and to 
establish classes of patient discharges by functional-related groups. 
Section 305 of Pub. L. 106-554 further amended section 1886(j) of the 
Act to allow IRFs, subject to the blend methodology, to elect to be 
paid the full Federal prospective payment rather than the transitional 
period payments specified in the Act.
    On August 7, 2001, we issued a final rule in the Federal Register 
(66 FR 41316) establishing the PPS for IRFs, effective for cost 
reporting periods beginning on or after January 1, 2002. There was a 
transition period for cost reporting periods beginning on or after 
January 1, 2002, and ending before October 1, 2002. For cost reporting 
periods beginning on or after October 1, 2002, payments are based 
entirely on the adjusted Federal prospective payment rate determined 
under the IRF PPS.
3. Separate PPS for LTCHs
    In accordance with the requirements of section 123 of Pub. L. 106-
113, as modified by section 307(b) of Pub. L. 106-554, we established a 
per discharge, DRG-based PPS for LTCHs as described in section 
1886(d)(1)(B)(iv) of the Act for cost reporting periods beginning on or 
after October 1, 2002, in a final rule issued on August 30, 2002 (67 FR 
55954). The LTCH PPS uses information from LTCH hospital patient 
records to classify patients into distinct LTC-DRGs based on clinical 
characteristics and expected resource needs. Separate payments are 
calculated for each LTC-DRG with additional adjustments applied.
    On May 7, 2004, we issued in the Federal Register a final rule (69 
FR 25673) that updated the payment rates for the LTCH PPS and made 
policy changes effective for a new LTCH PPS rate year of July l, 2004 
through June 30, 2005. For the LTCH PPS rate year of July 1, 2005 
through June 30, 2006, we issued in the Federal Register a final rule 
(70 FR 24168) that further updated the payment rates and made policy 
changes. For the LTCH PPS rate year of July 1, 2006 through June 30, 
2007, we issued in the Federal Register a final rule (71 FR 27798) that 
further updated the payment rates, discussed the LTC-DRG 
classifications and relative weights which remain linked to the 
inpatient DRG system, and made several policy changes. The 5-year 
period for LTCHs to transition from a PPS payment consisting of a blend 
of reasonable cost-based reimbursement and the adjusted Federal 
prospective payment rate to a payment based on 100 percent of the 
Federal prospective rate ends with cost reporting periods beginning on 
or after October 1, 2005, and before October 1, 2006. LTCHs with cost 
reporting periods beginning on or after October 1, 2006, are paid 
entirely on the adjusted Federal prospective payment rate.
4. Separate PPS for IPFs
    In accordance with section 124 of the BBRA and section 405(g)(2) of 
Pub. L. 108-173, we established a PPS for inpatient hospital services 
furnished in IPFs. On November 15, 2004, we issued in the Federal 
Register a final rule (69 FR 66922) that established the IPF PPS, 
effective for IPF cost reporting periods beginning on or after January 
1, 2005. Under the final rule, we compute a Federal per diem base rate 
to be paid to all IPFs for inpatient psychiatric services based on 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. The Federal per diem base rate is adjusted to reflect 
certain patient characteristics, including age, specified DRGs, 
selected high-cost comorbidities, days of the stay, and certain 
facility characteristics, including a wage index adjustment, rural 
location, indirect teaching costs, the presence of a full-service 
emergency department, and COLAs for IPFs located in Alaska and Hawaii. 
We have established a 3-year transition period during which IPFs whose 
first cost reporting periods began before January 1, 2005, will be paid 
based on a blend of reasonable cost-based payment and IPF PPS payments. 
For cost reporting periods beginning on or after January 1, 2008, all 
IPFs will be paid 100 percent of the Federal per diem payment amount.
5. Grandfathering of Hospitals-Within-Hospitals (HwHs) and Satellite 
Facilities
    Existing regulations at 42 CFR 412.22(e) define a hospital-within-
a-hospital (HwH) as a hospital that occupies space in a building also 
used by another hospital, or in one or more separate buildings located 
on the same campus as buildings used by another hospital. In order to 
be paid as an excluded hospital, an HwH is required to demonstrate 
compliance with requirements at Sec.  412.22(e)(1) through (e)(3), as 
applicable, which were established to create operational and 
organizational separateness between the HwH and the host hospital with 
which it is co-located.
    The existing regulations at Sec.  412.22(h), relating to satellite 
facilities of hospitals excluded from the IPPS, define a satellite 
facility as a part of a hospital that provides inpatient services in a 
building also used by another hospital, or in one or more entire 
buildings located on the same campus as buildings used by another 
hospital.

[[Page 48107]]

Section 412.25(e), relating to satellite facilities of excluded 
hospital units, defines a satellite facility as a part of a hospital 
unit that provides inpatient services in a building also used by 
another hospital, or in one or more entire buildings located on the 
same campus as buildings used by another hospital.
    There are significant similarities between the definition of a 
satellite facility and the definition of an HwH as it relates to their 
co-location with other Medicare hospital-level providers (hosts). There 
are also similarities in our policy concerns with the potential for 
patient-shifting (and its consequences for the Medicare program) 
between the co-located entities and their hosts. Regarding HwHs and 
satellite facilities, particularly LTCH HwHs and satellite facilities 
of LTCHs, which were the original entities that we regulated beginning 
with FY 1995, we have repeatedly expressed our concerns (for example, 
in the FY 2005 IPPS final rule (69 FR 49191)) that an HwH's or a 
satellite facility's ``configuration could result in patient admission, 
treatment, and discharge patterns that are guided more by attempts to 
maximize Medicare payments than by patient welfare.'' (69 FR 48916 and 
49191). We further believe that ``the unregulated linking of an IPPS 
hospital and a hospital excluded from the IPPS could lead to two 
Medicare payments for what was essentially one episode of patient 
care.'' (69 FR 48916 and 49191). Therefore, we established 
``separateness and control'' criteria to govern these relationships 
with host hospitals, at Sec.  412.22(e) for HwHs, and at Sec. Sec.  
412.22(h) and 412.25(e) for satellite facilities of excluded hospitals 
and satellite facilities of hospital units, respectively. Moreover, for 
HwHs and satellite facilities, we provided for the ``grandfathering'' 
of existing facilities, thereby exempting those that were in existence 
prior to the establishment of the ``separateness and control'' 
requirements from compliance with the criteria. At Sec.  412.22(f), we 
provided for the grandfathering of HwHs that were in existence on or 
before September 30, 1995, as long as the hospital continues to operate 
under the same terms and conditions. We also provided for 
grandfathering HwHs that changed the terms and conditions under which 
they operated between September 30, 1995 and before October 1, 2003, 
but subsequently continued to operate under the terms and conditions in 
effect on September 30, 2003. At Sec.  412.22(h)(3) and (h)(4) we 
grandfathered satellite facilities that were part of a hospital, that 
were in existence on September 30, 1999, and that met certain other 
conditions. Further, at Sec.  412.25(e)(3) and (e)(4), we grandfathered 
satellite facilities that were part of a hospital unit, were in 
existence on September 30, 1999, and that met certain other conditions. 
The purpose of our grandfathering certain existing HwHs and satellites 
was to reflect reliance interests and settled expectations that existed 
on the part of these facilities at the time the separateness and 
control requirements were created.
    The regulations addressing ``separateness and control'' policies 
for each of the above types of entities are presently not entirely 
uniform. This situation has arisen, in part, because the policies were 
implemented at different times and also because there are differences 
among the types of entities. (For example, in the FY 2003 IPPS final 
rule (67 FR 49982 and 50105), we included a detailed discussion of the 
``performance of basic functions'' test utilized for HwHs and how this 
test was not applicable to satellite facilities.) There are also 
differences between specific features of the grandfathering provisions 
for HwHs and satellite facilities, despite the fact that, as noted 
above, the intent of each of the grandfathering provisions was the same 
(for HwHs at Sec.  412.22(f), for satellite facilities of hospitals at 
Sec.  412.22(h)(3)(i) and (h)(4), and for satellite facilities of 
hospital units at Sec.  412.25(e)(3) and (e)(4)). The regulations 
exempt certain HwHs and satellite facilities from compliance with the 
``separateness and control'' criteria governing the relationships with 
their host hospitals as long as they continue to operate under the same 
``terms and conditions,'' including the number of beds and square 
footage considered to be part of the hospital or satellite facility as 
of the date that they were grandfathered.
    This particular policy was adopted because we believed that those 
entities that were designated as grandfathered, versus those that were 
required to meet the ``separateness and control'' requirements, should 
not be permitted to alter their operations from the ``snapshot in 
time'' taken when they were grandfathered and thus benefit even more 
from this status. In other words, we believed that grandfathered 
facilities received a benefit not enjoyed by nongrandfathered 
facilities--namely, they were free from compliance with the 
``separateness and control'' regulations and we did not want to allow 
these entities to realize additional economic advantages by expansion 
that would increase their Medicare payments by virtue of their 
grandfathered status. Furthermore, it has been our policy that if a 
grandfathered HwH or satellite facility of the HwH chooses not to 
operate under the same terms and conditions in effect as of its 
grandfathering, it could still be paid under the applicable excluded 
hospital payment system if it changed its relationship with its host to 
the extent that it has come into compliance with the applicable 
``separateness and control'' requirements. In addition, our rationale 
for the separateness and control requirements (and limiting the 
grandfathering provision) was to prevent abusive gaming of the Medicare 
payment system by co-located hospitals.
    Because the underlying rationale for the grandfathering policies 
for both HwHs and satellite facilities of HwHs is the same, upon review 
of these various provisions, we believe that, where appropriate, the 
grandfathering provisions should be consistent. Under the authority of 
section 1871(a)(1) of the Act, which authorizes the Secretary to 
prescribe such regulations as may be necessary to carry out the 
administration of the Medicare program, in the FY 2007 IPPS proposed 
rule (71 FR 24124) we proposed the following revisions to make the 
policies consistent. We proposed to revise the HwH provision at Sec.  
412.22(f) to include an exception to the requirement that a 
grandfathered HwH be operated under the terms and conditions in effect 
on October 1, 2003, that corresponds to the existing exceptions for 
satellite facilities of hospitals and for satellite facilities of 
hospital units at Sec.  412.22(h)(4) and 412.25(e)(4), respectively. 
(As provided in Sec.  412.22(f), the original September 30, 1995, 
``snapshot in time'' date for grandfathered HwHs was extended to 
hospitals that changed the terms and conditions under which they 
operated between September 30, 1995, and before October 1, 2003, in the 
FY 2004 IPPS final rule (68 FR 45462).) Specifically, we proposed a 
corresponding change to the HwH grandfathering provision at Sec.  
412.22(f)(3) that would allow for increases or decreases in square 
footage, or decreases in the number of beds of the HwH that are needed 
for specific circumstances beyond the control of the facility. We 
proposed to specify that increases or decreases in square footage or 
decreases in the number of beds that are required because of the 
relocation of a facility to permit construction or renovation necessary 
for compliance with Federal, State, or local law affecting the physical 
facility or because of catastrophic events such as fires, floods, 
earthquakes, or tornadoes. (64 FR 14535) We also proposed to add a

[[Page 48108]]

provision for grandfathered hospital satellites and satellites of units 
at Sec.  412.22(h)(5) and Sec.  412.25(e)(5) respectively, allowing a 
decrease in square footage or numbers of beds for consistency with the 
proposed regulations for grandfathered HwHs at Sec.  412.22(f)(3)(i) 
and we proposed to amend Sec.  412.22(h)(4)(i) to mirror to the 
language in Sec.  412.25(e)(4)(i).
    The comments we received on our proposals, and our responses, are 
set forth below.
    Comment: All of the commenters, including commenters representing 
grandfathered HwHs, including grandfathered LTCHs, children's 
hospitals, a cancer hospital, and an IRF, hospital associations, 
legislators, and industry consultants, endorsed our reexamination of 
the existing restrictions on grandfathered HwHs changing the ``terms 
and conditions'' under which they operate. A number of commenters 
questioned whether or not HwHs would lose their grandfathered status if 
they were required by Federal, State, or local law, or catastrophic 
events to increase or decrease their square footage or to decrease 
their number of beds in ways that did not involve relocations of the 
facilities. Two commenters described hypothetical situations that could 
result in a need for an increase in square footage for the 
grandfathered HwH such as the following: Making necessary repairs to 
the existing physical plant that are now governed by building standards 
established by the American Institute of Architects (AIA) or the 
Americans with Disabilities Act (ADA) since the facility was 
established (and now required by law); compliance with privacy and 
security requirements of the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA); or meeting fire or safety codes 
that were not in existence when the facility was built. The commenters 
requested that CMS clarify its grandfathering policies in light of such 
scenarios.
    Response: We thank the commenters for their support for our 
proposals. After reviewing the comments, we agree that there are indeed 
situations not related to the relocation of a facility that could make 
it necessary to add or reduce square footage, or decrease the number of 
beds in a grandfathered facility. Moreover, after consideration of this 
concern and of the comments we received on our proposals, and for the 
reasons summarized below, and in accordance with our authority in 
section 1871(a)(1) of the Act we have decided to revise our regulations 
on grandfathering of HwHs, satellites of IPPS-excluded hospitals, and 
satellites of IPPS-excluded hospital units to allow these facilities 
more flexibility to adjust their square footage upward or downward or 
to decrease their number of beds. Specifically, in this final rule, for 
cost reporting periods beginning on or after October 1, 2006, we are 
revising the regulations in Sec. Sec.  412.22(f)(3)(applicable to 
HwHs), 412.22(h)(4)(applicable to satellites of IPPS-excluded 
hospitals), and 412.25(e)(4)(applicable to satellites of IPPS-excluded 
units) to allow these facilities to increase or decrease the square 
footage of the facility or to decrease the number of beds in the 
facility without affecting the facility's grandfathered status. Under 
the final rule, such changes could be undertaken for any reason and 
would not be limited to situations involving changes in Federal, State, 
or local laws or catastrophic events. Such changes also would not be 
limited to cases in which a facility must be relocated. Therefore, we 
have not finalized our proposed provisions that specified such 
exceptions for HwHs, and in the case of satellites hospitals, we have 
restored the existing terminology of Sec.  412.22(h)(4) for cost 
reporting periods beginning before October 1, 2006. This is the case 
because under our finalized policy, which is effective for cost periods 
beginning on or after October 1, 2006, as discussed in detail below, we 
are not restricting grandfathered HwHs at Sec.  412.22(h)(3) and 
grandfathered satellites at 412.22(h)(5) from increasing or decreasing 
their square footage or decreasing their number of beds. As discussed 
elsewhere in these responses, even though grandfathered satellite units 
will also be permitted to increase or decrease their square footage or 
decrease their number of beds at Sec.  412.25(e), such facilities are 
subject to the existing regulations regarding changes in size of 
excluded units unless the change in size is necessitated by relocation 
of the unit to permit construction or renovation necessary for 
compliance with a law affecting the physical facility or because of 
catastrophic event.
    As noted above, in establishing grandfathering provisions 
generally, we intended to protect certain existing hospitals and 
satellite facilities from ``the potentially adverse impact of recent, 
more specific regulations that we now believe to be essential to the 
goals of the Medicare program'' (68 FR 45463). However, they were not 
intended to establish a separate class of providers. Moreover, it was 
our intention that our ``snapshot in time'' policy prevented 
grandfathered entities that were advantaged more than their 
nongrandfathered peer facilities as a result of their protected status 
from realizing additional benefits by changing their ``terms and 
conditions'' in ways that could increase their Medicare reimbursement. 
It also helps prevent the program abuse associated with co-located 
facilities that may result from patient shifting whereby Medicare makes 
two separate payments for what is essentially a single episode of care.
    Recently, several grandfathered LTCH HwHs and satellite facilities 
questioned whether a decrease in their square footage or their number 
of beds would result in negating their grandfathered status, because 
compliance with each of the above cited grandfathering provisions 
requires that they continue to operate under the same terms and 
conditions, including the number of beds and square footage considered 
to be part of the hospital, the satellite facility, or the hospital 
unit in effect on the day that the grandfathering policy was 
implemented. We also have been urged to modify our policies to allow 
these grandfathered entities to increase in square footage and number 
of beds without requiring compliance with the ``separateness and 
control''policies discussed above. Clearly, under existing regulations, 
an increase or a decrease in square footage or number of beds would 
result in a loss of status as a grandfathered HwH or hospital satellite 
facility (unless Sec.  412.22(h)(4) or Sec.  412.25(b)(3) applies) 
because the existing regulations prohibit any change in the terms and 
conditions of operation, as described above.
    As stated above, under our broad authority in section 1871(a)(1) of 
the Act, we have now decided to revise the regulations in Sec. Sec.  
412.22(f) (applicable to HwHs), 412.22(h)(4) and (h)(5) (applicable to 
satellites of IPPS-excluded hospitals) and 412.25(e)(4) and (e)(5) 
(applicable to satellites of IPPS-excluded units) to allow these 
facilities for cost reporting periods beginning on or after October 1, 
2006, to increase or decrease the square footage of the facility or to 
decrease the number of beds in the facility at any time without 
affecting the facility's grandfathered status.
    We made this decision following a review of public comments on our 
proposed rule, as summarized below. In reaching this decision, we 
recognize that allowing increases in the square footage of those 
grandfathered facilities could, in some cases, increase their 
reimbursement under Federal health insurance programs administered by 
CMS. For example, any increase in the square footage of a grandfathered 
facility

[[Page 48109]]

could result in increased operating costs. Therefore, an increase in 
square footage in a grandfathered HwH that is paid for services to 
Medicare beneficiaries under the TEFRA system could lead to an increase 
in Medicare payments. We recognize that this result is not fully 
consistent with our objective of not allowing a grandfathered facility 
to make changes that would lead to increased costs to the Medicare 
program. However, we believe it is necessary to weigh the importance of 
this objective against the need, described by many of those whose 
comments are summarized below, for hospitals and other grandfathered 
facilities to have the flexibility to upgrade their facilities and 
services to incorporate new technology or additional services to meet 
patient needs or to comply with applicable new laws. After considering 
these two competing objectives in relation to one another, we concluded 
that allowing increases in square footage is justified even though in a 
very limited number of cases (as explained below), it may result in 
some additional cost to the Medicare program.
    We note that with the exception of children's and cancer hospitals, 
the only IPPS-excluded facilities are IRFs, IPFs, and LTCHs. The 
payment methodologies applicable to IRFs, IPFs, and LTCHs use 
prospectively determined rates, so that payments to an individual 
facility are not affected by increases in the square footage of that 
facility. Children's and cancer hospitals are paid through the use of a 
TEFRA system under which increases in the square footage of a facility 
would increase the facility's Medicare payments. However, there is only 
one grandfathered cancer HwH and only three grandfathered children's 
HwHs. For this reason, we believe that the total Medicare cost 
increases, if any, will be very small.
    Comment: Several commenters requested that we establish a policy 
that would enable them to maintain their grandfathered status while 
also being permitted to increase square footage to accommodate 
advancements in patient care, and improvements in medical technology 
that have evolved since they were grandfathered, and that would also 
permit expansion for administrative or nonpatient related care 
activities. The comments focused on each facility's need for additional 
space (square footage) which would allow them the ability to expand to 
accommodate dialysis, rehabilitation, telemetry, and hyperbaric 
services, isolation areas, and additional diagnostic equipment which 
are essential in order to maintain high quality patient services. A 
number of commenters also noted that their needs for additional space 
for administrative activities, professional instruction, and computer 
hardware had grown since they were grandfathered. These commenters 
argued that such expansions of square footage are essential in order to 
efficiently deliver the highest quality care to Medicare beneficiaries 
and, furthermore, would not result in any increased costs to the 
Medicare program.
    Several of the commenters asserted that the legislative intent of 
section 4417(a) of the BBA of 1997, which established grandfathering 
for those LTCH HwHs that were certified to participate in the Medicare 
program on or before September 30, 1995, and that were co-located with 
another hospital, was to protect these hospitals and not limit their 
functioning. These commenters maintained that Congress did not intend 
for a grandfathered HwH to lose the ability to participate in the 
Medicare program as a hospital excluded from the IPPS if they added 
beds or increased square footage in order to better serve Medicare 
beneficiaries. Another commenter stated that the issue of how Medicaid 
payments might be impacted by grandfathering of certain LTCHs was not 
contemplated by the grandfathering provision in the BBA of 1997, and 
asks CMS to clarify the application of the HwH rules to an excluded 
hospital's participation in the Medicaid program.
    Response: When we established the basic grandfathering requirements 
for HwHs, we had two objectives. As we have noted above, we believed 
the grandfathering provision enacted by Congress reflected a legitimate 
interest in protecting certain existing hospitals that were co-located 
with other hospitals from ``the potentially adverse impact of recent, 
more specific regulations that we now believe to be essential to the 
goals of the Medicare program'' (68 FR 45463). The grandfathering 
provisions are an exception to the separateness and control 
requirements that reflect reliance interests and settled expectations 
that existed at the time the rule was set into place. Grandfathering 
provisions for these facilities allowed existing HwHs to continue to be 
paid outside of the IPPS, despite the fact that, among other factors, 
they did not demonstrate operational or organizational separateness 
between these grandfathered entities and their host hospitals. However, 
the second objective was to ensure that these entities would not make 
changes that would lead to increased costs to the Medicare program or 
that could encourage inappropriate patient shifting by co-located 
hospitals. This particular policy was adopted because we believed that 
those entities that were designated as grandfathered should not be 
permitted to alter their operations from the ``snapshot in time'' taken 
when they were grandfathered and thus benefit even more from this 
status than those facilities that were required to meet the 
``separateness and control'' requirements. As noted above, an HwH could 
change its terms and conditions under which it operates after September 
39, 1995 but before October 1, 2003, after which time its terms and 
conditions may not further change. (See FY 2004 IPPS final rule (68 FR 
45462).) In other words, we believed that grandfathered facilities 
received a benefit not enjoyed by nongrandfathered facilities--namely, 
they were free from compliance with the ``separateness and control'' 
regulations and we did not want to allow these entities to realize 
additional economic advantages by expansion that could increase 
Medicare payments by virtue of their grandfathered status.
    With respect to section 4417(a) of the BBA, we believe its purpose 
was to protect LTCH HwHs that existed prior to September 30, 1995, from 
losing their IPPS excluded status because they failed to meet the 
separateness and control requirements recently promulgated by the 
Secretary. We do not believe that it is reasonable to assume that by 
creating a limited exception for these hospitals, Congress was 
immunizing these facilities from any further regulation by the 
Secretary as to their growth and financial impact on the Medicare 
program. We do not believe Congress was establishing a separate class 
of providers. Furthermore, contrary to commenter's assertions, 
grandfathered facilities continue to remain free to add beds or square 
footage at any time, as long as they meet the separation and control 
requirements outlined in these regulations. Consequently, it is 
inaccurate to suggest that a grandfathered HwH would lose its ability 
to participate in the Medicare program as an excluded hospital if it 
increases the number of beds or square footage since complying with the 
separateness and control requirements remains an option for these 
facilities.
    In response to the comments stating that the issue of Medicaid 
payments is not contemplated by the grandfathering provision in the BBA 
of 1997 and asking us to clarify the application of the HwH rules to an 
excluded hospital's participation in the Medicaid program, we note that 
the grandfathering rules'

[[Page 48110]]

impact on the Medicaid payments to a hospital, to the extent there is 
an impact, will depend on the particular payment methodology adopted by 
the State in its State Medicaid plan. In general, if a State pays 
grandfathered HwHs under a predetermined prospective rate which is 
unaffected by changes in square footage, then individual hospitals 
would not be directly affected by increases or decreases in their 
square footage. By contrast, if the State were to pay grandfathered 
HwHs under the TEFRA system used by Medicare or under another cost-
based system, payment could be directly affected by changes in square 
footage. With respect to changes in the numbers of beds, to the extent 
a hospital seeks to increase its number of beds because it is already 
operating at or near its State licensed and Medicare-certified bed 
capacity, increasing the number of beds would lead to a proportionate 
increase in utilization and payment. We believe that it is appropriate 
to consider the impact of revisions in Medicare policy on the Medicaid 
payment system.
    We continue to believe that it is entirely reasonable and 
appropriate for to us regulate the growth of HwHs that have been 
otherwise favored by exemptions from the more rigorous ``separateness 
and control'' provisions that we have implemented for non-grandfathered 
co-located providers. We also note that the issue here, namely our 
reexamination of our grandfathering policies, is an exception to a 
general rule to permit reliance on expectations that existed at the 
time the rule was put in place. However, we do understand that, in 
order to provide the highest level of patient care, any hospital will 
have to respond to advancements in patient care, some of which may 
involve the introduction of new technology requiring an increased need 
for space, such as new imaging equipment or the installation of a 
hyperbaric chamber. We also understand that a hospital may also have 
reasonable need to create additional administrative space for a number 
of reasons, among which are instructional space, updated computer 
hardware, and record storage.
    We believe that these commenters have presented cogent arguments 
for our reconsideration of the preclusion against a grandfathered HwH 
expanding square footage. We have evaluated the impact on the Medicare 
program of allowing an increase in square footage for grandfathered 
HwHs and have determined that we believe that such a policy change will 
not result in additional Medicare payments to those grandfathered HwHs 
that are paid under the excluded hospital PPSs (LTCH, IRF, and IPF). 
For those grandfathered HwHs that are still reimbursed under the TEFRA 
payment system (that is, certain cancer and children's hospitals) 
square footage is used to allocate certain costs, so there may be a 
corresponding increase in Medicare payment for those costs. However, we 
believe (as we discuss in greater detail below) that because there is 
only one grandfathered cancer HwH and three grandfathered children's 
HwHs, the increased costs will be ``de minimus'' and we see no reason, 
therefore, to distinguish them from other grandfathered HwHs in a way 
that might discourage them from making necessary and appropriate 
changes to their facilities that would result in increases in their 
square footage. Therefore, we believe the de minimus costs to the 
Medicare program associated with increases in square footage are 
outweighed by the benefits associated with advancements in technology 
and other patient care enhancements that may be achieved through 
changes to hospital facilities that concurrently increase the square 
footage of the facilities. Even though it is likely that any increase 
in the square footage of a hospital or satellite paid under the TEFRA 
system will increase the costs upon which Medicare payment is based, 
certain improvements, such as the adoption of new technology or 
modernization of a physical facility, may also result in reduced 
operating costs that partially or entirely offset any cost increases.
    Therefore, in this final rule, we are revising the policy that we 
proposed at Sec.  412.22(f)(3) to specify that a grandfathered HwH may 
increase or decrease its square footage or decrease its number of beds, 
or both, without affecting its exception from the ``separateness and 
control'' requirements for HwHs at Sec.  412.22(e). However, as 
explained below, we continue to believe that an increase in the number 
of beds, which could have a much more significant impact on the level 
of payments to the facility under the Medicare programs, is a change to 
the facility that should be a basis for terminating its grandfathered 
status. This policy will be effective for cost reporting periods 
beginning on or after October 1, 2006. Although we considered allowing 
increases in square footage to situations involving new technology or 
new laws affecting hospitals' physical facilities, we concluded that 
such a policy would be overly prescriptive and that its enforcement 
would not be cost effective in light of the limited increases in 
Medicare spending we expect to result from this change. Thus, we have 
not included any provision restricting the reasons for which such 
changes may be made.
    In the interest of consistent treatment of HwHs, hospital satellite 
facilities (as defined in Sec.  412.22(h)), and satellite facilities of 
units (as defined in section 412.25(e)(1)), and because similar 
considerations underlie our policies with respect to each type of 
grandfathered facility, we are also applying this policy to satellites, 
effective for cost reporting periods beginning on or after October 1, 
2006. To accomplish these changes, we are revising Sec. Sec.  
412.22(f), 412.22(h), and 412.25(e) as set forth below.
    In the case of facilities that are satellites of IPPS-excluded 
units, we note that there are existing rules in Sec.  412.25(b)(1) and 
(2) which govern changes in the square footage and number of beds in an 
IPPS-excluded unit and where applicable, the regulations that we are 
finalizing for the increase or decrease in square footage of the 
decrease in number or beds of a grandfathered satellite unit will be 
subject to these rules. Section 412.25(b)(1) permits increases in the 
square footage or number of beds of a unit to be made only at the start 
of a cost reporting period. However, as we have discussed previously, 
in these finalized revisions of our grandfathering policy, while we are 
allowing for an increase in square footage of grandfathered satellite 
units, we are not allowing these facilities to increase their number of 
beds. Therefore, we specify in Sec.  412.25(e)(5)(i), a grandfathered 
unit structured as a satellite facility may only increase in square 
footage at the beginning of a cost reporting period. Further, existing 
regulations for excluded hospitals at Sec.  412.25(b)(2) permit 
reductions in the square footage or number of beds of a unit to be made 
only with 30 days' advance written notice to the fiscal intermediary 
and CMS, requires maintenance of sufficient information to accurately 
determine costs, and specifies that reductions in the number of beds or 
square footage considered to be part of an excluded unit made during a 
cost reporting period must remain in effect for the remainder of that 
period. Since our finalized policy at Sec.  412.25(e)(5)(i) allows for 
both reductions in square footage or bed number for grandfathered 
satellite units, under circumstance other than those specified at Sec.  
412.25(e)(4) we are requiring that any such decreases by these 
facilities be subject to existing regulations for units of excluded 
hospitals at 412.25(b)(2). We believe

[[Page 48111]]

that these requirements are reasonable and necessary because changes in 
the square footage or a decrease in the number of beds in a satellite 
of a unit may affect the bed size or square footage of the facility of 
which it is a part. We believe this requirement is needed to avoid 
confusion and provide for equitable and consistent treatment of all 
excluded units.
    However, under existing regulations at 412.25(e)(4), a 
grandfathered satellite of a unit would be able to increase or decrease 
its square footage or decrease its number of beds at any time, for 
purposes of relocation of the facility to permit construction or 
renovation necessary for compliance with changes in the law affecting 
the physical facility, or because of catastrophic events.
    Comment: Several commenters stated that if the proposed revisions 
allowing for a decrease in square footage, but not an increase, were 
finalized, their grandfathered HwHs would face the very onerous choice 
of either not making necessary operational or clinical improvements to 
their facilities or of having to disrupt longstanding favorable 
relationships with the administration of their host hospital.
    Response: As we have stated above, under the policy in this final 
rule, we are not attempting to prescribe the reasons for which changes 
in the square footage of grandfathered HwHs and satellites may be made. 
We believe this approach will give the hospitals and satellites the 
flexibility they need to increase or decrease square footage in 
response to technological innovation, changes in hospital practice 
patterns, shifts in the types of services required by the hospital's or 
satellite's patients, and other factors relevant to the operation of 
the facilities, without having to alter their historic relationship 
with their host hospital.
    Comment: One commenter stated that our proposed regulations 
indicated a new flexibility to our implementation of grandfathering 
rules for HwHs but found no logic in why we would allow certain changes 
in ``terms and conditions'' but not others.
    Response: Although we are making significant changes to the 
proposed revisions of our grandfathering policy for HwHs and satellite 
facilities in this final rule, as noted throughout these responses, we 
believe that the rationale underlying our determinations is quite 
apparent. We are permitting grandfathered HwHs and satellite facilities 
an increase in square footage because we believe that there have been 
significant clinical advances, some of which are detailed elsewhere in 
these responses, reasonably requiring a hospital to increase its 
physical space in order to accommodate new equipment or treatment 
modalities so that it could continue it to offer the highest level of 
medical care to its patients. We could also envision circumstances 
under which changing administrative or otherwise nonclinical needs 
could require additional space, and we have noted that we understand 
that an increase in square footage by those HwHs and satellite 
facilities paid under the TEFRA system may result in a de minimus 
increase in Medicare costs. However, we do not believe that any of 
these changes require the establishment of additional beds. Because the 
number of beds is directly related to hospital capacity, adding bed 
capacity will significantly increase costs to the Medicare program 
across all excluded providers. This case is unlike that of an increase 
in square footage because square footage increases would increase 
Medicare spending only for services of those hospitals paid under the 
TEFRA system. By contrast, increasing the bed capacity of a 
grandfathered HwH or unit would allow increased utilization not only in 
TEFRA facilities but in HwHs and satellites paid under the prospective 
payment systems applicable to IRFs, IPFs, and LTCHs. To the extent that 
any of these systems provides a higher level of payment for certain 
services than the IPPS, allowing bed size increases by grandfathered 
facilities might lead to the shifting of utilization from less 
expensive to more expensive settings, thereby inappropriately 
increasing Medicare spending.
    Furthermore, a significant increase in the number of beds could 
dramatically alter the size and character of the facility, thereby 
defeating one of the primary purposes of grandfathering which was, as 
noted above, to capture the ``snapshot in time'' for the grandfathered 
facility. By allowing existing co-located facilities (HwHs or satellite 
facilities) to continue to function as they had been, we were enabling 
these facilities to continue to function as they were, without having 
to make the organizational and operating changes necessary for 
compliance with our separateness and control policies. Therefore, in 
answer to the commenter, we believe that our rationale for the changes 
that we are finalizing to the grandfathering regulations is apparent. 
We are permitting changes that relate directly to the quality of 
patient care and services and we are not allowing changes that we 
believe could substantially and inappropriately increase costs to the 
Medicare program. In addition, we note that we have never adopted a 
policy that would preclude one of these facilities from changing other 
terms and conditions under which it operates, including its bed size. 
We would only require that such a facility begin to comply with the 
separateness and control requirements.
    Comment: Several hospitals requested that we allow them to increase 
their bed numbers. One commenter, a children's hospital, noted that it 
wanted to establish mental health beds for children and adolescents. 
Another commenter suggested alternatives to our preclusion of increase 
in bed size for grandfathered HwHs: that CMS allow a ``modest'' 
increase in beds equivalent to those permitted during the 18-month 
moratorium established by Congress in section 507 of Pub. L. 108-173 
for physician-owned specialty hospitals or if the grandfathered HwH 
admitted a ``de minimus'' percentage (for example, 10 percent or less) 
of patients from its host. This commenter and one other commenter, a 
grandfathered LTCH co-located with an IRF from which the commenter 
stated that the LTCH receives a minimum of admissions, suggested that 
CMS establish another exemption from the bed size increase preclusion 
of the grandfathering regulations if the inpatient facility with which 
the grandfathered HwH is co-located is not an acute care hospital, but 
rather is an IRF or an IPF or if the HwH is located on a campus of the 
host acute care hospital but is not physically co-located with an acute 
care hospital. The commenters believed that this particular exemption 
is reasonable because, in the view of the commenter, our most 
significant concern regarding HwHs is inappropriate shifting of 
patients from a host acute care hospital to a LTCH HwH.
    Response: In considering these comments, we believe it is important 
to recall that grandfathered HwHs, as well as satellite facilities, are 
organized and operated in ways that make them unable to meet the 
minimal tests of separateness and control applicable to 
nongrandfathered facilities, so that they effectively function as units 
of their host facilities. Because of this, we continue to believe that, 
in grandfathering HwHs and satellites facilities, we have conferred a 
significant advantage on them as compared to like facilities that are 
required to meet our ``separateness and control'' requirements and are 
closely monitored. Therefore, although we are finalizing regulations 
that will allow grandfathered HwHs and satellite facilities the ability 
to increase their square footage, we are not allowing grandfathered 
facilities an increase in the number of beds because such an

[[Page 48112]]

increase would result in unjustifiable additional payments to the 
grandfathered HwH and inappropriate additional costs to the Medicare 
program.
    With respect to the childrens' hospital that indicated that it 
wanted to be able to add additional beds to its hospital in order to 
establish mental health beds for children and adolescents, we note the 
following. First, grandfathered HwHs are not precluded from increasing 
the number of beds, and in fact, they may do so at any time, so long as 
they comply with the separateness and control requirements. In 
addition, the fiscal intermediary for the grandfathered childrens' HwHs 
that commented on this issue has indicated that based upon the 
hospital's average inpatient census figures, there appear to be 
sufficient beds available at the hospital to establish inpatient mental 
health services for children and adolescents without adding additional 
beds.
    In response to the commenter's suggestions of either allowing a 
``modest'' increase in bed numbers equivalent to that permitted for 
physician-owned specialty hospitals under Pub. L. 108-173 or of 10 
percent, or allowing an increase in bed numbers if the grandfathered 
HwH was only admitting a ``de minimus'' percentage of patients from its 
host, we do not believe that allowing any increase in the number of 
beds for a grandfathered HwH is either necessary or appropriate. We 
also do not believe that it is appropriate to establish a distinction 
between grandfathered HwHs depending upon the hospital category of the 
host, as did the commenters referring to a LTCH HwH that is co-located 
with an IRF. Nor do we believe that it would be appropriate to broaden 
this commenter's suggested exemption to grandfathered HwHs that are on 
the campus of an acute care hospital but are physically co-located with 
IRFs or IPFs. Our intent in establishing the grandfathering provisions 
for HwHs and satellite facilities was never to establish separate 
classes of grandfathered providers. Rather, it was to protect settled 
expectations that existed at the time that the grandfathering rules 
were put in place. In addition, in each of these configurations, an 
increase in bed size could result in a significant increase in Medicare 
utilization and payment and given the close integration between a 
grandfathered HwH or satellite and its host hospital, we believe the 
potential for inappropriate Medicare spending increases exists.
    As discussed above, although the original ``separateness and 
control'' regulations focused on the particular configuration of an 
acute care host being paid under the IPPS and a LTCH being paid under 
the TEFRA system (59 FR 45389 through 45393), the regulations were 
extended for FY 1998 (62 FR 46014) to include all hospitals excluded 
from the IPPS and not just those that were co-located with an acute 
care hospital. (In the FY 1999 IPPS final rule, among other rules, we 
established ``separateness and control'' requirements for satellites 
(65 FR 41532 through 41535)). Thus, contrary to the commenter's 
assertion, our concern with HwHs is not limited to an acute care 
hospital co-located with a LTCH HwH.). Despite the fact that the LTCH 
HwH commenter received very few patients from its host IRF, we do not 
believe that the behavior of one grandfathered HwH can be generalized 
to indicate the behavior of an entire LTCH industry or the behavior of 
all grandfathered facilities. Although we endorse the behavior that the 
commenter describes, we do not believe that it is necessary or 
appropriate to establish an additional exemption that would allow a 
grandfathered HwH that is already advantaged by not having to comply 
with ``separateness and control'' regulations to expand its number of 
beds solely because it is not ``gaming'' the system but rather it is 
functioning within accepted Medicare policies and procedures.
    Comment: One commenter asked us to clarify whether CMS would permit 
a grandfathered HwH that reduced its size and bed number from the 
number that it had at the time at which it had been grandfathered to 
return to that original size and bed number at a future time without 
threatening its grandfathered status. A number of commenters asked CMS 
to specify that grandfathered HwHs would be able to add or discontinue 
direct patient care services in the same manner as any other hospital 
and whether the scope and amount of those services would be limited to 
those that were in place when the HwH was grandfathered. Specifically, 
commenters asked whether a grandfathered HwH could provide outpatient 
services or establish provider based services.
    Response: After considering the question raised by the first 
commenter, we have decided to adopt a policy under which a 
grandfathered HwH that reduced its bed number from the point at which 
it had been grandfathered would be permitted to return at a future time 
to the number of Medicare-certified beds that existed at the time it 
was grandfathered, as governed either by Sec.  412.22(f)(1) or (f)(2), 
without threatening its grandfathered status. Specifically, we are 
revising Sec.  412.22(f)(3) to provide that if a hospital decreases its 
number of beds below the number of beds considered to be part of the 
hospital on September 30, 1995, it may subsequently increase the number 
of beds at any time as long as the resulting total number of beds 
considered to be part of the hospital does not exceed the number in 
effect on September 30, 1995 (for hospitals that continue to operate 
under the same terms and conditions in effect on that date, as 
described in Sec.  412.22(f)(1)) or the number in effect on September 
30, 2003, as described in Sec.  412.22(f)(1) (for hospitals that 
changed the terms and conditions under which they operated after 
September 30, 1995 but before October 1, 2003), as described in Sec.  
412.22(f)(2). We are including similar changes in Sec.  412.22(h)(4) 
(applicable to satellites of IPPS-excluded hospitals) and Sec.  
412.25(h)(4) (applicable to satellites of IPPS-excluded units). We 
believe this policy is consistent with our stated intent to allow 
hospitals that were in existence prior to the implementation of the HwH 
or the satellite rules to continue to operate under the same terms and 
conditions they had operated under at the time those provisions were 
implemented. Allowing a hospital that had decreased its number of beds 
below the number it had as of the date of the implementation of the HwH 
and satellite provisions to increase its number of beds up to the level 
it had on the implementation date, allows the hospital to maintain its 
original ``terms and conditions''. These changes, like the rest of our 
revisions to sections 412.22 and 412.25, will be effective for cost 
reporting periods beginning on or after October 1, 2006.
    In response to the question as to whether a grandfathered HwH could 
provide outpatient services or establish provider-based services, we 
wish to note that the statutory provisions of section 1886(d)(1)(B) of 
the Act govern Medicare payment for inpatient hospital services of 
hospitals and units that are excluded from the IPPS. Our HwH 
regulations at Sec.  412.22 address the relationship between an 
inpatient acute care hospital payable under the IPPS and an inpatient 
hospital that is excluded from the IPPS that are co-located. For this 
reason, our HwH regulations, including the exemption for grandfathered 
facilities, only address space used for inpatient services and this 
would also be true for satellite facilities. As has always been the 
case, an HwH or satellite facility would be able to discontinue or to 
initiate noninpatient services, including onsite

[[Page 48113]]

or offsite outpatient hospital services without compromising its 
grandfathered status. Such changes in scope of outpatient services or 
the establishment of provider-based departments would of course have to 
be done in compliance with other applicable regulations, such as 42 CFR 
413.65 governing provider-based status for facilities or organizations.
    Comment: Several commenters urged CMS to make an exception for 
grandfathered children's hospitals and allow them to expand square 
footage and also bed numbers without any deleterious impact on their 
status as hospitals certified by Medicare as exempt from the IPPS. The 
commenters noted that there are only three grandfathered children's 
hospitals. One commenter emphasized that, as opposed to other excluded 
HwHs, children's hospitals do not serve a Medicare population, because 
very few beneficiaries are children. Therefore, any expansion that CMS 
allows for the three grandfathered facilities would not lead to 
increased Medicare costs. Although these HwHs do not treat a 
significant number of Medicare beneficiaries, however, the commenters 
emphasize that loss of the Medicare exclusion from the IPPS would have 
a significant and negative impact on their Medicaid reimbursements as 
well as on their ability to receive funds to train residents under the 
Federal CHGME. The commenters believed that, despite the fact that each 
of the children's hospitals are major Medicaid providers, the number of 
beds in a facility has no bearing on whether or not a patient is deemed 
Medicaid eligible. Furthermore, they added, since Federal funding for 
State Medicaid disproportionate share hospital payments is capped, if 
these hospitals are allowed to grow, such growth would not cause the 
Federal portion of Medicaid to exceed the caps. The commenters claimed 
that there is no benefit to Medicare from applying the prohibition 
against growth or increase in bed numbers to children's hospitals; 
rather, they believe that there would be significant harm to these 
hospitals and to their community if they had to choose one of the three 
alternatives open to them: not expanding to serve their communities; 
losing their Medicare IPPS-exempt status; or altering their 
administrative and medical governance with regard to their co-located 
hospital, which would pose significant legal, operational, and 
financial barriers.
    This commenter further asserted that the three reasons why CMS has 
established special regulations for grandfathered HwHs are not germane 
for children's hospitals, that is, ``to prevent proliferation of LTCHs 
that function as units of host acute care hospitals; to prevent the 
avoidance of TEFRA target rates; and to avoid two Medicare payments for 
one episode of care.'' The commenter also asserted the following 
points: there is no proliferation of children's hospitals; children are 
admitted directly to their facilities and do not spend time in the 
acute care hospital, so there are no issues about two hospital payments 
for one spell of illness; and the three grandfathered children's HwHs 
have not reorganized since they were established at least 30 years ago, 
long before this category was recognized for payment purposes by CMS.
    Some commenters stated that CMS has established a precedent of 
treating children's hospitals differently from other excluded hospital 
types in establishing our regulations at Sec.  412.22(i), which 
exempted children's hospitals from the general policy that disallowed 
excluded hospitals with satellite facilities that were in existence 
prior to October 1, 1997, from expanding their total bed numbers (the 
sum of the beds in the hospital and the satellite) beyond the number 
that they had on October 1, 1997. These commenters further maintained 
that CMS has stated that it believes that the grandfathering 
regulations for satellite regulations and grandfathering regulations 
for HwHs should be consistent and that, specifically, the satellite 
regulations at Sec.  412.22(h)(2)(i) exempt children's hospitals from 
the limitation on bed number expansion to which other excluded hospital 
satellites are subject. Therefore, the commenter requested that CMS 
provide the same exception for grandfathered children's HwH and allow 
expansion in the number of beds without compromising their 
grandfathered status.
    Response: The commenters have urged us to establish a policy that 
would distinguish grandfathered children's HwHs from the other 
categories of grandfathered HwHs and allow them to expand both in 
square footage and in number of beds. We understand the commenters' 
statements that, although the facilities do not serve a significant 
Medicare population and hence there would be little or no additional 
costs to the Medicare program should they be permitted to expand, their 
continued status as hospitals excluded from the IPPS under Medicare is 
important to them because it might enhance their ability to obtain 
higher Medicaid payment or more for CHGME.
    As we have noted above, we are finalizing a policy for all 
grandfathered excluded HwHs that would allow them to increase or 
decrease their square footage without compromising their status of 
IPPS-excluded hospitals or their grandfathered status and this policy 
would also be applicable to the three grandfathered children's HwHs. We 
are making this change because we believe that the commenters have 
presented cogent arguments regarding their facility's need to 
physically expand in order to accommodate new medical equipment and 
services as well as to meet new administrative needs in order to 
continue to deliver high quality medical care. However, we have stated 
that we are not allowing grandfathered HwHs to increase their number of 
beds without compromising their grandfathered status. The commenters 
claimed that children's HwHs treat few Medicare beneficiaries, and 
therefore there would be no significant additional costs to the 
Medicare system should they be allowed to increase their bed numbers. 
Because a change allowing children's HwHs to keep grandfathered status 
while increasing their number of beds would not significantly increase 
Medicare spending but would increase Medicaid payments to the 
hospitals, these hospitals recommend that such a change be made.
    We considered this comment carefully but do not find it persuasive. 
As stated above, a key objective of revising our HwH and satellite 
grandfathering regulations is to provide a high degree of uniformity 
and consistency for all grandfathered IPPS-excluded facilities. We do 
not believe it would be consistent with this objective if we were to 
single out a particular type of excluded facility for special, more 
favorable treatment simply because the patient population treated by 
the hospital typically includes very few Medicare patients. (In 
addition, even though Medicare payment amounts might not increase in 
this circumstance, we find it important to maintain a high level of 
credibility in the Medicare system because it is typically used as a 
reference for Medicaid payments.) We also do not believe the absence of 
adverse Medicare cost impact is a sufficient reason for making a change 
to national Medicare policy solely in order to increase Medicaid 
payments to a select class of hospitals. In this context, we note under 
Medicaid, the States are not bound to follow Medicare payment rules for 
children's hospitals, but instead have considerable flexibility to 
modify their individual State plans to provide the level of payments 
for services that will best meet the needs of Medicaid recipients in 
the particular

[[Page 48114]]

State. To the extent additional payment under Medicaid is appropriate 
in a State, we believe provision for it should be made through the 
State Medicaid plan rather than by a national Medicare change affecting 
all States. Moreover, as we have noted, our data reveal that the there 
presently is no shortage of bed capacity for the three grandfathered 
children's HwHs, but that, on the contrary, all three are operating 
below the licensed bed capacity under State law. Thus, it appears that 
the current number of beds in these hospitals is adequate. Further, we 
wish to emphasize that grandfathered facilities remain free at any time 
to increase their number of beds so long as the applicable separateness 
and control regulations are met.
    In regard to the comment that CMS should allow grandfathered 
children's HwHs to increase their bed size without losing their 
grandfathered status because CMS has established a precedent for 
special treatment of children's hospitals through the regulations at 
Sec.  412.22(h)(2)(i), which exempt children's hospitals from the 
satellite restrictions applicable to certain other types of IPPS-
excluded hospitals, we believe this comment reflects a misunderstanding 
of the scope and purpose of Sec.  412.22(h)(2)(i).
    To respond fully to this comment, it will be necessary to review 
the background of Sec.  412.22(h)(2)(i). Under the BBA of 1997, certain 
types of hospitals and hospital units which were first excluded from 
the IPPS for a cost reporting period beginning on or after October 1, 
1997 were paid under lower TEFRA ceilings than hospitals and units that 
were excluded from the IPPS for a cost reporting period beginning 
before that date (64 FR 41533). Following enactment of this provision, 
CMS became aware of some interest by existing hospitals in establishing 
satellite units in new locations that would function in much the same 
way as new hospitals, but would qualify for payment under the higher 
TEFRA ceilings applicable to previously-excluded hospitals. To prevent 
satellite facilities of this type from being used to circumvent the BBA 
provision, we added new regulatory requirements, in Sec.  
412.22(h)(2)(i). Under those requirements, an IPPS-excluded hospital's 
number of beds, including both beds at the main campus and beds at any 
satellite locations, could not exceed the hospital's number of beds on 
the last day of its last cost reporting period beginning before October 
1, 1997. As noted earlier, the lower TEFRA ceilings imposed by the BBA 
applied only to certain types of hospitals, specifically long-term 
care, psychiatric, and rehabilitation hospitals. They did not apply to 
children's hospitals. In determining the scope of section 
412.22(h)(2)(i), therefore, we decided not to impose the satellite 
restrictions on children's hospitals because those new children's 
hospitals were not subject to the new, lower TEFRA ceilings and 
therefore would have no incentive to attempt to evade them.
    In other words, the inapplicability of Sec.  412.22(h)(2)(i) to 
children's hospitals does not reflect any decision by CMS to provide 
special, favorable treatment for children's hospitals by excluding them 
from a restriction that would otherwise apply to them. On the contrary, 
it simply reflects a policy decision by CMS that a regulation designed 
to prevent a particular abusive practice should not be applied to those 
hospitals that would not have an incentive to engage in that practice.
    (Although not raised by any commenter, a question might arise as to 
why CMS did not exempt cancer hospitals from the bed size restriction 
since they, like children's hospitals, were not subject to the lower 
TEFRA ceilings imposed by the BBA. The legislative provision under 
which cancer hospitals are excluded from the IPPS at section 
1886(d)(1)(B)(v)(I), (II) and (III)] limits cancer hospital status to 
those specified hospitals. These provisions effectively prevent the 
recognition of new cancer hospitals. We were concerned that this 
provision might create an incentive for the opening of new satellites 
in an attempt to circumvent the restriction inherent in the legislative 
provision, which would be an abusive practice of the same type as using 
satellites to evade the BBA provisions. To counter the incentive that 
might exist for such a practice, cancer hospitals have not been 
excluded from the scope of Sec.  412.22(h)(2)(i).)
    We also would address the commenter's specific assertions that 
children's hospitals should not be subject to general restrictions on 
growth that we have established for grandfathered HwHs and satellite 
facilities because of the following reasons: there is no proliferation 
of children's hospitals; children are admitted directly to their 
facilities and do not spend time in acute care hospitals; the three 
grandfathered children's HwHs have not reorganized since they were 
established at least 30 years ago, long before this category was 
established for payment purposes by CMS. Although these assertions may 
be accurate, we do not believe that they are germane to the issue of 
the revisions of the regulations for grandfathered HwHs and satellite.
    In this final rule, we are finalizing policies that revise the 
preclusion on changing ``terms and conditions'' and will allow 
grandfathered HwHs and satellite facilities to decrease their square 
footage or bed numbers and also to increase their square footage. As 
discussed above, expansion in square footage of the three grandfathered 
children's HwHs, could result in increased costs to the Medicare 
program, since children's hospitals are paid for under the TEFRA 
system. We have determined, however, that the increased costs will be 
``de minimus'' and we believe that such costs to the Medicare program 
associated with increases in square footage are outweighed by the 
benefits associated with advancements in technology and other patient 
care enhancements that may be achieved through changes to hospital 
facilities that concurrently increase the square footage of the 
facilities.
    Comment: One commenter representing a cancer hospital, which the 
commenter identifies as the only grandfathered hospital in this 
provider category, stated that limiting the growth of this cancer 
hospital is inequitable and punitive since it is the only cancer 
hospital being affected. The commenter stated that the regulatory 
criteria have ensured that there will be no future hospitals in this 
category developed and, therefore, our concerns about the negative 
impact of HwH growth on the Medicare system has no policy rationale in 
this case. The commenter urged CMS to exempt this cancer hospital from 
the growth restrictions for grandfathered HwHs.
    Response: We do not agree that the grandfathering provision for 
HwHs in existence before September 30, 1995, is ``inequitable or 
punitive.'' Although we understand that the specific statutory 
provision at section 1886(d)(1)(B)(v) of the Act and the regulatory 
criteria at Sec.  412.23(f) make it unlikely that there will be 
additional cancer HwHs established, we reiterate that our 
grandfathering policy for HwHs was not established in order to limit 
HwH growth. Our goal, as noted above, was to enable hospitals excluded 
from the IPPS that were co-located prior to the recognition of HwHs as 
an entity to continue in their present arrangement with their ``host'' 
hospital without having to comply with the regulatory framework that we 
were establishing for HwHs. Because we were giving these hospitals a 
significant advantage, we believe that it was reasonable and equitable 
to put restrictions on their

[[Page 48115]]

growth unless they elected to comply with the HwH regulations at Sec.  
412.22(e). As we have indicated previously, grandfathered facilities 
remain free at any time to increase their beds so long as they comply 
with separateness and control requirements.
    Based on our reconsideration of our proposed policy, at this time 
we are finalizing regulations at Sec.  412.22(f)(3) that allow 
grandfathered HwHs to increase in square footage because we believe 
that there have been significant clinical advances, some of which are 
detailed elsewhere in these responses, reasonably requiring a hospital 
to physically expand in order to accommodate new equipment or treatment 
modalities that would enable it to continue to offer the highest level 
medical care to its patients. We could also envision that circumstances 
under which changing administrative or otherwise non-clinical needs 
could require additional space. However, we emphasize that we do not 
believe that any of these changes require the establishment of 
additional beds. Therefore, although the commenter's hospital will be 
permitted to increase its square footage, we are not establishing an 
exemption for a grandfathered cancer HwH from the limitation on 
increasing the number of beds.
    After consideration of the public comments received, we are 
revising Sec.  412.22(f)(3) and (h)(5) and Sec.  412.25(c)(4) of the 
regulations to state that grandfathered HwHs and satellites will be 
permitted to decrease their square footage or number of beds, or both 
or increase their square footage without compromising their 
grandfathered status. This policy is effective for cost reporting 
periods beginning on or after October 1, 2006.
    Because grandfathered HwHs or grandfathered satellite facilities 
may be co-located with an acute care hospital or may be co-located with 
another excluded hospital (69 FR 49198), we want to emphasize that 
under our policy revisions described above, where the HwH or satellite 
facility decreases its number of beds or square footage, there could be 
an impact on the host hospital if the hospital is also a PPS-exempt 
hospital and is also exempted because of grandfathering from compliance 
with the ``separateness and control'' requirements. (Because excluded 
hospitals are prohibited from having excluded hospital units under 
Sec.  412.25(a)(1)(ii), this discussion is limited to HwHs and 
satellite facilities of hospitals.) For example, if grandfathered HwH 
``A'' is co-located with another hospital excluded from the IPPS, 
hospital ``B'' (which is a rehabilitation hospital), a decrease in the 
number of beds in hospital ``A'' could impact the grandfathered status 
of hospital ``B'' if hospital ``B'' absorbed the extra beds. In such a 
case, if the determination were made that hospital ``B'' would expand, 
in order to maintain status as an excluded hospital, hospital ``B'' 
would then have to meet the applicable ``separateness and control'' 
requirements at Sec.  412.22(e).
6. Changes to the Methodology for Determining LTCH Cost-to-Charge 
Ratios (CCRs) and the Reconciliation of High-Cost and Short-Stay 
Outlier Payments under the LTCH PPS
a. Background
    In the June 9, 2003 IPPS high-cost outlier final rule (68 FR 
34498), we made revisions to our policies concerning the determination 
of LTCHs' CCRs and the reconciliation of high-cost and short-stay 
outlier payments under the LTCH PPS. As we stated in that final rule, 
(68 FR 34507), because the LTCH PPS high-cost outlier and short-stay 
outlier policies are modeled after the IPPS outlier policy, we believe 
they are susceptible to the same payment vulnerabilities and, 
therefore, merited revision.
    We revised our regulations to specify that fiscal intermediaries 
will use either the most recent settled cost report or the most recent 
tentative settled cost report, whichever is from the later cost 
reporting period, because we believe that a hospital has the ability to 
inappropriately increase its outlier payments during the time lag 
between the current charges and the CCR from the settled cost report, 
through dramatic charge increases. Using either the most recent settled 
cost report or the most recent tentative settled cost report, whichever 
is from the later cost reporting period, in many cases, reduces the 
time lag for updating CCRs by a year or more.
    We also revised the regulations to specify that, in the event more 
recent charge data indicate that an alternative CCR would be more 
appropriate, CMS has the authority to direct the fiscal intermediary to 
change the LTCH's CCR to reflect the change evidenced by the more 
recent data. We made this change because even the later (that is, most 
recent) CCRs calculated from the tentatively settled cost reports would 
overestimate costs for hospitals that have continued to increase 
charges much faster than costs during the time between the tentatively 
settled cost report and the time when the claim is processed. In 
addition, we further revised the regulations to allow a hospital to 
contact its fiscal intermediary to request that its otherwise 
applicable CCR be changed if the LTCH presents substantial evidence 
that its CCR is inaccurate (68 FR 34497 and 34506 through 34508).
    Also in the June 9, 2003 final rule (68 FR 34499 through 34500 and 
34506 through 34507), we revised the regulations to specify that a 
fiscal intermediary may use a statewide average CCR if it is unable to 
determine an accurate CCR in one of three circumstances discussed in 
greater detail below. We made this revision because we noted that as 
hospitals raise their charges faster than their costs increase, over 
time their CCRs will decline. If hospitals continue to increase charges 
at a faster rate than their costs increase over a long period of time, 
or if they increase charges at extreme rates, their CCRs may fall below 
the range considered reasonable and, under our former policy, fiscal 
intermediaries would, in most cases, assign a statewide average CCR. 
These statewide averages are generally considerably higher than the 
threshold. Therefore, prior to the change in the regulations, these 
hospitals benefited from an artificially high ratio being applied to 
their already high charges. Furthermore, hospitals could continue to 
increase charges faster than costs, without any further downward 
adjustment to their CCR.
    In addition, in the June 9, 2003 final rule (68 FR 34500 through 
34502 and 34506 through 34508), we added a provision to our regulations 
to provide that outlier payments would become subject to reconciliation 
when hospitals' cost reports are settled. We noted that we had become 
increasingly aware that some hospitals had taken advantage of the 
former outlier policy by increasing their charges at extremely high 
rates, knowing that there would be a time lag before their CCRs would 
be adjusted to reflect the higher charges. We believed that even the 
revisions to the regulations described above would not completely 
eliminate all such opportunity. We explained that we believed that a 
hospital would still be able to dramatically increase its charges by 
far above the rate-of-increase in costs during any given year.
    In the RY 2007 LTCH PPS proposed rule (71 FR 4648, 4674 through 
4676, and 4690 through 4692), we discussed our current methodology for 
determining hospitals' CCRs under the LTCH PPS high-cost and short-stay 
outlier policies, and we presented proposals to refine our methodology 
for determining the annual CCR ceiling and statewide average CCRs. In 
that same proposed rule, we also discussed our

[[Page 48116]]

existing policy for the reconciliation of LTCH PPS high-cost and short-
stay outlier payments, along with our proposal to codify in Subpart O 
of 42 CFR Part 412 those policies, including proposed modifications and 
editorial clarifications to those existing policies.
    In that RY 2007 LTCH PPS proposed rule, we proposed that the 
proposed revisions to the policies governing the determination of 
LTCHs' CCRs and the reconciliation of high-cost and short-stay outlier 
payments would be effective October 1, 2006, noting that historically, 
annual updates to LTCH CCR ceiling and statewide average CCRs have been 
effective on October 1. In addition, our proposal stated that the LTCH 
CCR ceiling and statewide average CCRs that would be effective October 
1, 2006, would be presented in the annual IPPS proposed and final 
rules.
    As we stated in both the RY 2007 LTCH PPS final rule (71 FR 27832 
through 27833 and 27871) and the FY 2007 IPPS proposed rule (71 FR 
24127), we received a few specific comments on this portion of the RY 
2007 LTCH PPS proposed rule concerning the proposed changes to the 
policies governing the determination of LTCHs' CCRs. As mentioned 
below, one commenter in this final rule supported our proposal. Several 
other commenters referenced one of the specific comments raised by 
another commenter on the proposed changes to the methodology for 
determining LTCH CCRs in their own comments on the RY 2007 LTCH PPS 
proposed rule. In addition, a commenter on the RY 2007 LTCH PPS 
proposed rule included a synopsis of our proposed changes concerning 
the determination of LTCHs' CCRs. Based on the commenter's synopsis of 
the proposed changes, we believe that the commenters clearly understood 
the nature and purpose of the proposed changes. However, the commenter 
pointed out that, in the RY 2007 LTCH PPS proposed rule, we did not 
provide an analysis of the effect of this proposed change, nor did we 
provide an example of the new CCR values under this proposed 
methodology. Another commenter did not ``object in concept to the 
proposed combination of [IPPS] operating and capital cost-to-charge 
ratios'' (to compute a ``total'' CCR for each IPPS hospital by adding 
together each hospital's operating CCR and its capital CCR) from which 
to compute the LTCH CCR ceiling and applicable statewide average CCRs. 
However, the commenter also pointed out that we did not provide any 
impact data and requested that we defer adoption of that proposed 
change until such data are provided for comment.
    Therefore, in light of the comments referenced above, we proposed 
in the FY 2007 IPPS proposed rule (71 FR 24126 through 24135) the same 
changes to the policies governing the determination of LTCHs' CCRs and 
the reconciliation of high-cost and short-stay outlier payments that we 
proposed in the RY 2007 LTCH PPS proposed rule. We included in the FY 
2007 IPPS proposed rule the values of the proposed LTCH CCR ceiling and 
the proposed statewide average LTCH CCRs that would be effective 
October 1, 2006, based on our proposed policy changes, along with the 
values of the proposed LTCH CCRs that would be determined under our 
current methodology. We also indicated that we would respond further to 
any comments received on the proposed changes to the policies governing 
the determination of LTCHs' CCRs and the reconciliation of LTCH PPS 
high-cost outlier and short-stay payments presented in the FY 2007 IPPS 
proposed rule in the FY 2007 IPPS final rule that will be published 
this summer. We received two public comments concerning the proposed 
changes to the policies governing the determination of LTCHs' CCRs and 
the reconciliation of LTCH high-cost outlier and short-stay payments 
presented in the FY 2007 IPPS proposed rule (71 FR 24125 through 
24136). As discussed in greater detail below in this section, in this 
final rule, we are finalizing the proposed changes to the policies 
governing the determination of LTCHs' CCRs and the reconciliation of 
LTCH high-cost outlier and short-stay payments as proposed. In the RY 
2007 LTCH PPS final rule (71 FR 27871), we revised the short-stay 
outlier payment formula based on the existing regulatory language at 
Sec.  412.529(c) concerning the determination of LTCH CCRs and the 
reconciliation of short-stay outlier payments since we did not finalize 
any changes to our policy regarding the determination of LTCHs' CCRs 
and the reconciliation of LTCH PPS short-stay outlier payments in that 
LTCH PPS final rule.
    In that same final rule, we noted that, to the extent the policy 
changes we proposed in the FY 2007 IPPS proposed rule regarding the 
determination of LTCHs' CCRs and the reconciliation of short-stay 
outlier payments are implemented, we may need to make conforming 
changes to the regulatory language in Sec.  412.529 in the FY 2007 IPPS 
final rule to ensure that any such changes are consistent with (and do 
not contradict) the changes we made to Sec.  412.529 in the RY 2007 
LTCH PPS final rule. Accordingly, in adopting the proposed changes to 
the regulations regarding the determination of LTCHs' CCRs and the 
reconciliation of outlier payments in this final rule, we are making 
conforming changes to the regulatory language in Sec.  412.529 as 
necessary based on the changes to the short-stay outlier policy at 
Sec.  412.529 established in the RY 2007 LTCH PPS proposed rule (71 FR 
27899 through 27900).
    Comment: One commenter supported our proposed changes to the 
methodology for determining LTCH CCRs and LTCH PPS outlier 
reconciliation. The commenter was particularly appreciative of the 
impact analysis presented in the FY 2007 IPPS proposed rule.
    Response: We appreciate the commenter's support and are pleased 
that our impact analysis was able to assist in the understanding of our 
proposal.
b. High-Cost Outliers
    Under the broad authority conferred upon the Secretary by section 
123 of the BBRA as amended by section 307(b) of BIPA, when we 
implemented the LTCH PPS, we established an adjustment for additional 
payments for outlier cases that have extraordinarily high-costs 
relative to the costs of most discharges at Sec.  412.525(a). Providing 
additional payments for outliers strongly improves the accuracy of the 
LTCH PPS in determining resource costs at the patient level and 
hospital level. Specifically, under Sec.  412.525(a), we make outlier 
payments for any discharge if the estimated cost of the case exceeds 
the adjusted LTCH PPS payment for the LTC-DRG plus a fixed-loss amount. 
Under the LTCH PPS high-cost outlier policy, the LTCH's loss is limited 
to the fixed-loss amount and a fixed percentage of costs above the 
marginal cost factor. We calculate the estimated cost of a case by 
multiplying the overall hospital CCR by the Medicare allowable covered 
charge. In accordance with Sec.  412.525(a)(3), we pay outlier cases 80 
percent of the difference between the estimated cost of the patient 
case and the outlier threshold (the sum of the adjusted Federal 
prospective payment for the LTC-DRG and the fixed-loss amount).
c. Short-Stay Outliers
    When we implemented the LTCH PPS, under Sec.  412.529, we 
established a special payment policy for short-stay outlier cases, that 
is, LTCH PPS cases with a length of stay that is less than or equal to 
five-sixths of the geometric average length of stay for each LTC-DRG. 
Generally, LTCHs are defined by

[[Page 48117]]

statute as having an average length of stay of greater than 25 days. We 
believe that a short-stay outlier payment adjustment results in more 
appropriate payments, because these cases most likely would not receive 
a full course of a LTCH-level of treatment in such a short period of 
time and a full LTC-DRG payment may not always be appropriate. A short-
stay outlier is defined at Sec.  412.529(a) as a LTCH discharge with a 
length of stay of up to and including five-sixths the geometric average 
length of stay for the LTC-DRG. Under the short-stay outlier policy at 
Sec.  412.529(c)(1), for LTCH PPS discharges occurring before July 1, 
2006, in general, we adjust the per discharge payment under the LTCH 
PPS by the least of 120 percent of the estimated cost of the case, 120 
percent of the LTC-DRG specific per diem amount, or the full LTC-DRG 
payment. Under the short-stay outlier policy at Sec.  412.529(c)(2), 
for LTCH PPS discharges occurring on or after July 1, 2006, in general, 
we adjust the per discharge payment under the LTCH PPS by the least of 
100 percent of the estimated cost of the case, 120 percent of the LTC-
DRG specific per diem amount, the full LTC-DRG payment, or a blend of 
an amount comparable to the IPPS per diem amount (capped at the full 
IPPS comparable amount) and the 120 percent of the LTC-DRG specific 
amount (71 FR 27899). Consistent with the LTCH PPS high-cost outlier 
policy, we calculate the estimated cost of a case by multiplying the 
overall hospital CCR by the Medicare allowable covered charges.
d. CCR Ceiling
    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'' LTCH-specific CCR based on the sum of 
LTCH operating and capital-related costs (as described in Chapter 3, 
section 150.24, of the Medicare Claims Processing Manual (CMS Pub. 100-
4)) as compared to total charges. A LTCH's CCR is calculated by 
dividing its 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). (Instructions regarding the 
changes established in the June 9, 2003 IPPS high-cost outlier final 
rule for both LTCHs and IPPS hospitals can be found in Program 
Transmittal A-03-058 (Change Request 2785; July 3, 2003).)
    Under our current policy, a LTCH is assigned the applicable 
statewide average CCR instead of using its CCR computed from data in 
its most recent (settled or tentatively settled) cost report if, among 
other things, the LTCH's CCR is found to be in excess of the applicable 
maximum CCR threshold. The applicable maximum CCR threshold is the 
combined IPPS operating and capital CCR ceiling. For instance, for FY 
2006, under the current policy, the IPPS operating CCR ceiling is 1.254 
and the IPPS capital CCR ceiling is 0.169 (70 FR 47496). Therefore, 
under our current policy, the combined operating and capital CCR 
ceiling is 1.423 (1.254 + 0.169 = 1.423) as specified in Program 
Transmittal 692 (Change Request 4046, September 30, 2005).
    These ceilings represent 3.0 standard deviations from the mean of 
the log distribution of operating and capital cost-to-charge ratios for 
all IPPS hospitals. As we explained in the June 9, 2003 final rule (68 
FR 34507), LTCH CCRs above this threshold are most likely due to faulty 
data reporting or entry, and, therefore, these CCRs should not be used 
to identify and make payments for outlier cases. Such data are clearly 
errors and should not be relied upon. (There are also other 
circumstances, discussed below, when we use a statewide CCR instead of 
a LTCH-specific CCR.)
    Under the current methodology, we determine a ``combined'' 
statewide average CCR for LTCHs located in rural areas of a State that 
accounts for operating and capital costs and charges and a ``combined'' 
statewide average CCR for LTCHs located in urban areas of a State that 
accounts for operating and capital-related costs and charges. In order 
to calculate a combined statewide average CCR under our current 
methodology, we first calculate separate statewide average operating 
CCRs and capital CCRs. Under the IPPS, two statewide average operating 
CCRs are computed for each State: a statewide average CCR for rural 
areas and a statewide average CCR for urban areas. One statewide 
average capital CCR is computed for each State (applicable to both 
urban and rural areas). We use the same capital CCR for urban and rural 
areas because capital costs are the same regardless of geographic 
location. (Below we discuss our proposed revisions to this methodology, 
which we are adopting as final in this final rule.)
    As we explained in the RY 2006 LTCH PPS final rule (70 FR 24192), 
we believe it is appropriate to use the combined IPPS operating and 
capital CCR ceiling and the applicable combined IPPS statewide average 
urban and rural CCRs in determining LTCHs' CCRs because LTCHs' cost and 
charge structures are similar to that of IPPS acute care hospitals. For 
instance, LTCHs are certified as acute care hospitals, as set forth in 
section 1861(e) of the Act, to participate as a hospital in the 
Medicare program, and these hospitals, in general, are paid as LTCHs 
only because their Medicare average length of stay is greater than 25 
days (Sec.  412.23(e)). Furthermore, as also explained in that same 
final rule, prior to qualifying as a LTCH under Sec.  412.23(e)(2)(i), 
a hospital generally is paid as an acute care hospital under the IPPS 
during the period in which it demonstrates that it has an average 
length of stay of greater than 25 days. In addition, because there are 
less than 400 LTCHs, and they are unevenly geographically distributed 
throughout the United States, there may not be sufficient LTCH CCR data 
to determine an appropriate LTCH PPS CCR ceiling using LTCH data.
    Because LTCHs have a single ``total'' CCR (rather than separate 
operating and capital CCRs), under the broad authority of section 123 
of the BBRA and section 307(b)(1) of BIPA, in the FY 2007 IPPS proposed 
rule (71 FR 24128 through 24129 and 24132 through 24133), we proposed 
to revise our regulations for high-cost outliers and short-stay 
outliers (Sec. Sec.  412.525(a)(4) and 412.529(c)(5), respectively) to 
specify that, for discharges occurring on or after October 1, 2006, if 
a LTCH's CCR is in excess of the LTCH CCR ceiling (which would be 
calculated as 3 standard deviations above the corresponding national 
geometric mean total CCR (established and published annually by CMS)), 
the fiscal intermediary may use a statewide average CCR (also 
established annually by CMS and discussed in more detail below). (We 
also proposed a change in our methodology for calculating the 
applicable statewide average CCRs under the LTCH PPS, which we are 
finalizing in this final rule, as discussed in greater detail below.)
    Specifically, for purposes of determining a LTCH's CCR under the 
LTCH PPS high-cost and short-stay outlier policies at Sec. Sec.  
412.525(a)(4) and 412.529 respectively, for discharges occurring on or 
after October 1, 2006, we proposed that we would determine the single 
``total'' CCR ceiling, based on IPPS CCR data, by first calculating the 
total (that is, operating and capital) IPPS CCR for each hospital and 
then determining the average total CCR for all IPPS hospitals. For 
example, if an IPPS hospital's operating CCR is 0.432 and its capital 
CCR is 0.027, its total CCR would be 0.459 (0.432 + 0.027 = 0.459).

[[Page 48118]]

This calculation would be repeated for all IPPS hospitals in order to 
determine a total CCR for all IPPS hospitals. Next, the total IPPS CCR 
would be used to determine the average total IPPS CCR and standard 
deviation across all IPPS hospitals. The LTCH CCR ceiling would then be 
established at 3 standard deviations from the national geometric mean 
total IPPS CCR, rather than determining the LTCH total CCR ceiling as 
we do under our current policy by adding the separate IPPS operating 
CCR and capital CCR ceilings, which are each separately determined at 3 
standard deviations from the average operating IPPS CCR and average 
capital IPPS CCR, respectively.
    Under this proposed policy, we would use the same IPPS CCR data 
that we currently use to annually determine the separate IPPS operating 
CCR and capital CCR ceilings (that we add together under our current 
policy to determine the annual CCR ceiling for LTCHs) to compute IPPS 
hospital-specific total CCRs that would be used to determine the single 
LTCH total CCR ceiling. We believe that determining a LTCH CCR ceiling 
based on IPPS total (operating and capital-related) Medicare costs and 
charges rather than adding the separate IPPS CCR ceilings determined 
from operating CCRs and capital CCRs, respectively, would be more 
consistent with the LTCH PPS single payment, which does not 
differentiate payments between operating and capital-related costs. We 
noted that we still believe that it is appropriate to continue to use 
IPPS data to determine the annual LTCH CCR ceiling.
    We also explained in both the RY 2007 LTCH PPS proposed rule (71 FR 
4675) and the FY 2007 IPPS proposed rule (71 FR 24129), that these 
proposed revisions to our policy concerning the determination of the 
annual LTCH CCR ceiling would be effective for discharges occurring on 
or after October 1, 2006, rather than July 1, 2006. We proposed this 
approach because we proposed to continue to use the same IPPS data used 
to determine the individual IPPS operating and capital CCR ceilings 
established and published annually in the IPPS proposed and final 
rules. Because both the separate IPPS operating and capital CCRs 
ceilings and the new LTCH ``total'' CCR ceiling would be determined 
using the same data, we believe it would be administratively expedient 
to continue to establish the LTCH CCR ceiling to be effective for 
discharges occurring on or after October 1 of each year. (As stated 
previously, this is consistent with our current policy, where the LTCH 
CCR ceiling is updated annually on October 1.) Therefore, under this 
proposal, the public would continue to consult the annual IPPS proposed 
and final rules for changes to the LTCH CCR ceiling that would be 
effective for discharges occurring on or after October 1. Under this 
proposal, the current LTCH CCR ceiling established for discharges 
occurring on or after October 1, 2005, in the FY 2006 IPPS final rule 
would remain in effect for discharges occurring on or before September 
30, 2006.
    Comment: One commenter questioned why CMS' proposal concerning LTCH 
CCRs did not utilize a floor for applying the statewide average similar 
to using a ceiling. The commenter explained that even though a hospital 
could increase payment by increasing its charges, if a hospital has a 
historically low CCR, then it should be assigned the statewide average.
    Response: As discussed in the June 9, 2003 outlier final rule (68 
FR 34494 and 34507), we no longer assign the statewide average when a 
hospital's CCR falls below a minimum CCR threshold or ``floor,'' as we 
believe a LTCH could arbitrarily increase its charges in order to 
maximize outlier payments. Even though this increase in charges should 
result in a lower CCR in the future (due to the time lag in cost report 
settlement), a floor would result in a LTCH being assigned the 
statewide average CCR. This would result in inappropriately higher 
outlier payments because in order to avoid making excessive outlier 
payments, under both our current policy and the proposed LTCH CCR 
policy, we apply the LTCH's actual CCR no matter how low the hospital's 
CCR falls. This policy for LTCHs is consistent with the policy we have 
adopted under the IPPS.
    Under both our current policy and the proposed LTCH CCR policy, we 
apply a CCR maximum threshold or ``ceiling'' for those hospitals beyond 
three standard deviations of the national mean CCR to address what we 
believe is questionable data. As we explained in the FY 2007 IPPS 
proposed rule (71 FR 24127), CCRs above this threshold are most likely 
due to faulty data reporting or entry, and, therefore, these CCRs 
should not be used to identify and make payments for outlier cases. 
Such data are likely errors and should not be relied upon, and 
therefore, we assign the hospital the statewide average CCR. We note 
that, if a hospital has a historically low CCR, then a consistent 
pattern of a low CCR suggests that this CCR is reflective of their 
actual ratio of costs to charges as opposed to an instance of the data 
being aberrant. Therefore, we believe application of the statewide 
average CCR is not necessary. While it is possible that this low CCR 
may be based on questionable data, under both our current policy and 
the proposed LTCH CCR policy, a hospital may request its fiscal 
intermediary to use a different (higher or lower) CCR based on 
substantial evidence presented by the hospital.
    We did not remove the ceiling similar to removing the floor, as the 
vulnerability of a hospital gaming the outlier payment system applies 
to hospitals raising their charges, thus lowering their CCR and then 
receiving the statewide average (if a floor was in place). Hospitals 
with high CCRs reflect costs that are high or exceed their charges, 
which is uncommon. Therefore, as stated above, we believe if a hospital 
does cross the ceiling, it is likely due to an error and we assign the 
statewide average. However, as noted above, a hospital may request its 
fiscal intermediary to use a different (higher or lower) CCR based on 
substantial evidence presented by the hospital even if a hospital's CCR 
is above the ceiling. Therefore, consistent with our current CCR 
policy, the applicable statewide average CCR will only be assigned when 
a LTCH's CCR exceeds the maximum CCR threshold (ceiling) determined as 
three standard deviations of the national mean total CCR (as described 
above), and not when it falls below the minimum threshold (floor).
    We received no other comments and after consideration of the public 
comments received, we are adopting as final, without modification, the 
policy proposed in the proposed rule. Accordingly, in this final rule, 
under the broad authority of section 123 of the BBRA and section 
307(b)(1) of BIPA, we are establishing under the LTCH PPS high-cost 
outlier policy at Sec.  412.525(a)(4)(iv)(C)(2) and the LTCH PPS short-
stay outlier policy at Sec.  412.529(c)(3)(iv)(C)(2), that the fiscal 
intermediary may use a statewide CCR if it is unable to determine an 
accurate CCR for a LTCH if, amoung other things, a LTCHs' CCR is in 
excess of 3 standard deviations above the corresponding national 
geometric mean cost-to-charge ratio. Furthermore, Sec. Sec.  
412.525(a)(4)(iv)(C)(2) and 412.529(c)(3)(iv)(C)(2) specify that CMS 
will establish and publish this mean annually. As discussed above, as 
proposed, for discharges occurring on or after October 1, 2006, the 
LTCH total CCR ceiling will be calculated as three standard deviations 
above the corresponding national geometric mean total CCR, which will 
be determined based on IPPS CCR data, by first calculating the total 
(that is, operating and capital) IPPS CCR for each hospital

[[Page 48119]]

and then determining the average total IPPS CCR for all hospitals. As 
noted in the FY 2007 IPPS proposed rule (71 FR 24129) and reiterated 
above, consistent with our current policy, the LTCH total CCR ceiling 
will be updated annually and will be effective for discharges occurring 
on or after October 1 of each year. Therefore, the public should 
continue to consult the annual IPPS proposed and final rules for 
changes to the LTCH CCR ceiling that would be effective for discharges 
occurring on or after October 1.
    In the FY 2007 IPPS proposed rule, based on IPPS total CCR data 
from the December 2005 update to the Provider-Specific File, we 
proposed a total CCR ceiling of 1.313 under the LTCH PPS that would be 
effective October 1, 2006. Furthermore, in the FY 2007 IPPS proposed 
rule, we proposed that, if more recent data are available, we would use 
those data to determine the final total CCR ceiling under the LTCH PPS 
for FY 2007 using the proposed methodology described above. Based on 
the latest available data (data from the March 2006 update to the 
Provider-Specific File), for this final rule, the CCR ceiling under our 
proposed methodology would be 1.321.
    The LTCH CCR ceiling determined under our current ``combined'' 
methodology using the most recent data would result in a slightly 
higher LTCH CCR ceiling (that is, 1.26 + 0.154 = 1.414) for FY 2007 
compared to the ``total'' CCR ceiling of 1.321 for FY 2007 calculated 
using our new methodology. However, based on CCRs from the March 2006 
update of the Provider-Specific File, there are no LTCHs that have a 
CCR that is greater than the ceiling of 1.321 (the highest LTCH CCR in 
the current database of 392 LTCHs is 1.27).
e. Statewide Average CCRs
    In addition to being authorized to assign the applicable statewide 
average CCR to a LTCH whose CCR is above the ceiling, the fiscal 
intermediary may use the applicable statewide average CCR in other 
circumstances. In the June 9, 2003 IPPS high-cost outlier final rule, 
we also established our current policy that the fiscal intermediary may 
use the applicable statewide average CCR for LTCHs for whom data with 
which to calculate a CCR are not available (for example, missing or 
faulty data) or for new LTCHs that have not yet submitted their first 
Medicare cost report. For this purpose, a ``new'' LTCH is defined as an 
entity that has not accepted assignment of an existing hospital's 
provider agreement in accordance with Sec.  489.18.
    We note that, consistent with our current policy, either CMS or the 
LTCH may request the use of a different (higher or lower) CCR based on 
substantial evidence that such a CCR more accurately reflects the 
LTCH's actual costs and charges. This applies to new LTCHs (as defined 
above) as well. For instance, CMS may determine that the applicable 
statewide average CCR should not be applied to hospitals that convert 
from acute care IPPS hospitals to LTCHs and receive new LTCH provider 
numbers. Rather, the cost and charge data from the IPPS hospitals' cost 
reports (even if they are for more or less than a 12-month cost 
reporting period) would be used to determine the LTCH's CCR.
    In addition to proposing to revise our methodology for determining 
the annual CCR ceiling under the LTCH PPS for discharges occurring on 
or after October 1, 2006, under the broad authority of section 123 of 
the BBRA and section 307(b)(1) of BIPA, in the FY 2007 proposed rule 
(71 FR 24131 through 24134), we proposed to revise our regulations for 
high-cost outliers and short-stay outliers (Sec. Sec.  412.525(a)(4) 
and 412.529(c)(5), respectively) for discharges occurring on or after 
October 1, 2006, to codify in Subpart O of 42 CFR Part 412 the 
remaining LTCH PPS outlier policy changes that were established in the 
June 9, 2003 IPPS high-cost outlier final rule (68 FR 34506 through 
34513), including proposed modifications and editorial clarifications 
to those existing policies established in that final rule, which are 
discussed in greater detail below in this section. We proposed these 
additional revisions to Sec. Sec.  412.525(a)(4) and 412.529(c)(5) 
because we believe that making these revisions would more precisely 
describe the application of those policies as they relate to the 
determination of LTCH CCRs and because these proposed changes would be 
consistent with the proposed changes to the calculation of the LTCH CCR 
ceiling discussed above in this section.
    Specifically, we proposed to specify under the LTCH PPS high-cost 
outlier policy at Sec.  412.525(a)(4) and the LTCH PPS short-stay 
outlier policy at Sec.  412.529 that the fiscal intermediary may use a 
statewide average CCR, which would be established annually by CMS, if 
it is unable to determine an accurate CCR for a LTCH in one of the 
following three circumstances: (1) new LTCHs that have not yet 
submitted their first Medicare cost report (for this purpose, 
consistent with current policy, a new LTCH would be defined as an 
entity that has not accepted assignment of an existing hospital's 
provider agreement in accordance with Sec.  489.18); (2) LTCHs whose 
CCR is in excess of the LTCH CCR ceiling; and (3) other LTCHs for whom 
data with which to calculate a CCR are not available (for example, 
missing or faulty data). (Other sources of data that the fiscal 
intermediary may consider in determining a LTCH's CCR included 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.)
    We did not receive any public comments on our proposal. Therefore, 
in this final rule, we are adopting as final, without modification, our 
proposed policy. Accordingly, under the broad authority of section 123 
of the BBRA and section 307(b)(1) of BIPA, in this final rule, we are 
establishing Sec. Sec.  412.525(a)(4)(iv)(C)(1) through (3) and 
412.529(c)(3)(iv)(C)(1) through (3), which specify that the fiscal 
intermediary may use a statewide average CCR if it is unable to 
determine an accurate CCR for a LTCH in one of the following three 
circumstances: (1) new LTCHs that have not yet submitted their first 
Medicare cost report (for this purpose, consistent with current policy, 
a new LTCH would be defined as an entity that has not accepted 
assignment of an existing hospital's provider agreement in accordance 
with Sec.  489.18; (2) LTCHs whose CCR is in excess of the LTCH CCR 
ceiling; and (3) other LTCHs for whom data with which to calculate a 
CCR are not available (for example, missing or faulty data). (Other 
sources of data that the fiscal intermediary may consider in 
determining a LTCH's CCR included 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.) These regulations further specify 
that the statewide average CCRs used under the LTCH PPS, as described 
in greater detail below, will be established annually by CMS.
    Also, in the FY 2007 IPPS proposed rule (71 FR 24130 through 24131 
and 24133 through 24134) we described our existing methodology for 
calculating the combined statewide average CCR for rural and urban 
LTCHs. Under the proposed LTCH PPS high-cost outlier policy at Sec.  
412.525(a)(4) and the

[[Page 48120]]

proposed LTCH PPS short-stay outlier policy at Sec.  412.529 for 
discharges occurring on or after October 1, 2006, we proposed to 
compute statewide average CCRs for use under the LTCH PPS in a manner 
similar to the way we proposed to compute LTCH PPS CCR ceilings. 
Specifically, under this proposed policy, we would use the same IPPS 
CCR data that we currently use to annually establish the separate IPPS 
operating and capital statewide CCRs to compute statewide average total 
CCRs. Below we outline our proposed methodology for calculating the 
total statewide average CCR for a rural LTCH:
    Step 1: Calculate the total CCR for each rural IPPS hospital by 
adding together its operating CCR and its capital CCR.
    Step 2: Calculate the weighted average total CCR for all rural IPPS 
hospitals in the State (as shown in the third column of Table 8C of the 
Addendum to the FY 2007 IPPS proposed rule). This same proposed 
methodology would be applied when determining the ``total'' statewide 
average CCR for LTCHs located in urban areas, except that we would 
replace ``rural IPPS hospitals'' with ``urban IPPS hospitals'' in Steps 
1 and 2. Under this proposal, the underlying data, that is, the IPPS 
CCRs, would remain the same. (We note that the weighted average total 
CCR for all urban IPPS hospitals in the State is shown in the second 
column of Table 8C of the Addendum to this final rule and the weighted 
average total CCR for all rural IPPS hospitals in the State is shown in 
the third column of Table 8C of the Addendum to this final rule, based 
on the policies finalized in this final rule as discussed below.)
    We also proposed that these statewide average ``total'' (operating 
and capital) CCRs that would be used under the LTCH PPS would continue 
to be published annually in the IPPS proposed and final rules, and, 
therefore, the public would continue to consult the annual IPPS 
proposed and final rules for changes to the applicable statewide 
average total CCRs that would be effective for discharges occurring on 
or after October 1. Under this proposal, the current applicable 
statewide average operating and capital CCRs, established for 
discharges occurring on or after October 1, 2005, would remain in 
effect for discharges occurring on or before September 30, 2006. Our 
rationale for proposing to establish statewide average ``total'' CCRs 
(as described above in this section) based on IPPS data under the 
proposed revisions to the high-cost outlier policy at Sec.  
412.525(a)(4) and short-stay outlier policy at Sec.  412.529 is the 
same as the one stated above for proposing to use IPPS data to 
determine a ``total'' LTCH CCR ceiling.
    We did not receive any public comments on our proposed changes. 
Therefore, we are adopting them as final without modification. 
Accordingly, under the broad authority of section 123 of the BBRA and 
section 307(b)(1) of BIPA, in this final rule, under Sec. Sec.  
412.525(a)(4)(iv)(C) and 412.529(c)(3)(iv)(C), as proposed and as 
described above, for discharges occurring on or after October 1, 2006, 
the applicable LTCH statewide average total CCRs will be determined 
based on IPPS CCR data in a manner similar to the way we will be 
computing the LTCH PPS CCR ceiling, as discussed above. As also noted 
in the FY 2007 IPPS proposed rule (71 FR 24129 and 24134) and 
reiterated above, consistent with our policy, the LTCH PPS statewide 
average total CCRs will be updated annually and will be effective for 
discharges occurring on or after October 1 of each year. Therefore, the 
public should continue to consult the annual IPPS proposed and final 
rules for changes to the LTCH PPS statewide average total CCRs that 
would be effective for discharges occurring on or after October 1.
    We also proposed to determine the urban and rural statewide average 
total CCRs for Maryland LTCHs paid under the LTCH PPS using, as a 
proxy, the national average total CCR for urban IPPS hospitals and the 
national average total CCR for rural IPPS hospitals, respectively (71 
FR 24130 through 24131 and 24134). As we explained in the FY 2007 IPPS 
proposed rule, we proposed this proxy because we believe that the CCR 
data on the Provider-Specific File for Maryland hospitals may not be 
accurate. This is because acute care hospitals in Maryland are 
operating under a waiver of Medicare's ratesetting methodologies for 
inpatient and outpatient services under the authorities of sections 
1814(b)(3) and 1833(a)(2) of the Act. The State's Health Services Cost 
Review Commission (HSCRC) is the regulatory body that establishes 
hospital-specific rates for all hospital services in Maryland.
    Because all Maryland short-term acute care hospitals are paid based 
on the hospital-specific rates set by the HSCRC rather than under the 
IPPS, CCRs are not required to determine their Medicare payments (as 
they are for other acute care hospitals that are not governed under the 
waiver at sections 1814(b)(3) and 1833(a)(2) of the Act, and who are 
reimbursed for their treatment of Medicare patients under the IPPS). 
Therefore, CCRs in the Provider-Specific File for Maryland acute care 
hospitals, for the most part, are missing (because they are not used 
for payment). Those CCRs that are inputted into the Provider-Specific 
File for Maryland acute care hospitals by the fiscal intermediary are 
most likely unaudited because they are not used for making payments. 
For all these reasons, we are concerned that CCRs for Medicare acute 
care hospitals located in Maryland that are in the Provider-Specific 
File may not be reliable. Therefore, we believe that they should not be 
used as proxies for setting the statewide average total CCRs for 
Maryland LTCHs.
    As we discussed in the FY 2007 IPPS proposed rule (71 FR 24130 and 
24134), we believe it would be more appropriate to establish statewide 
average total CCRs for Maryland LTCHs based on national average total 
CCRs of IPPS hospitals that were audited by fiscal intermediaries. 
Therefore, we proposed to establish statewide average total CCRs for 
Maryland LTCHs based on the national average total CCRs of all IPPS 
hospitals because we believe that the average of the CCRs of all the 
IPPS hospitals across the country that were audited by fiscal 
intermediaries would be based on sufficient rigorous complete data that 
would be a representative proxy for the ratio of costs-to-charges of 
LTCHs in Maryland that are subject to LTCH PPS. (We note that, under 
our proposal, the fiscal intermediary may assign the statewide average 
CCR in one of three circumstances (that is, ``new'' LTCHs, as defined 
above; LTCHs with a CCR that is in excess of the LTCH ceiling; and 
LTCHs with unavailable data, as discussed above).) We solicited 
comments or suggestions for an alternative proxy statewide average CCR 
to use for LTCHs that are located in Maryland and are paid under the 
LTCH PPS in the FY 2007 IPPS proposed rule. We did not receive any 
public comments on our proposal or any alternative proxy statewide 
average CCR to use for LTCHs that are located in Maryland and are paid 
under the LTCH PPS. Therefore, under the broad authority of section 123 
of the BBRA and section 307(b)(1) of BIPA, we are adopting our proposed 
methodology for determining the statewide average CCR for Maryland 
under the LTCH PPS as final without modification.
    In the FY 2007 IPPS proposed rule (71 FR 24130 and 24134) we stated 
that, if more recent data are available for the final rule, we would 
use those data to determine the final LTCH PPS statewide average CCRs 
for FY 2007 using the proposed methodology describe above that we are 
adopting as final in this final rule. Therefore, in this final rule, 
based on the most recent complete IPPS total

[[Page 48121]]

CCR data from the March 2006 update of the Provider-Specific File, the 
final LTCH PPS statewide average total CCRs for urban and rural 
hospitals that will be effective October 1, 2006, are presented in 
Table 8C of the Addendum to this final rule. (As was proposed, we note 
that for this final rule, as is the case under the IPPS, all areas in 
the District of Columbia, New Jersey, Puerto Rico, and Rhode Island are 
classified as urban, and therefore there are no rural statewide average 
total CCRs listed for those jurisdictions in Table 8C of the Addendum 
to this final rule. As was proposed, we also note that for this final 
rule, as is the case under the IPPS, although Massachusetts has areas 
that are designated as rural, there are no short-term acute care IPPS 
hospitals or LTCHs located in those areas as of March 2006, and 
therefore there are no rural statewide average total CCR listed for 
rural Massachusetts in Table 8C of the Addendum of this final rule.)
    Comparing the statewide average ``total'' CCRs in Table 8C of the 
Addendum to this final rule to the ``combined'' statewide average CCRs 
that would have been calculated using our existing methodology shows 
that the changes to our methodology for determining LTCH statewide 
average CCRs results in only minor changes in the average CCR for each 
State. In particular, the largest decrease in a statewide average CCR 
(with the exception of Maryland, as discussed above) will be in urban 
Wyoming (-0.7 percent). However, there is currently only 1 LTCH located 
in Wyoming. The largest increase in a statewide average CCR will be in 
urban District of Columbia (0.7 percent), and there are currently only 
2 LTCHs located in the District of Columbia.
f. Data Used to Determine a CCR
    Similar to our current policy, in the FY 2007 IPPS proposed rule 
(71 FR 24131 and 24134), we also proposed to specify under our proposed 
revision to the LTCH PPS high-cost outlier policy at Sec.  
412.525(a)(4) and the LTCH PPS short-stay outlier policy at Sec.  
412.529 that, for discharges occurring on or after October 1, 2006, the 
CCR applied at the time a claim is processed would be 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. Furthermore, in the same proposed rule, we proposed under the 
LTCH PPS high-cost outlier policy at Sec.  412.525(a)(4) and the LTCH 
PPS short-stay outlier policy at Sec.  412.529 to state that CMS may 
specify an alternative to the CCR computed from the most recently 
settled cost report or the most recent tentatively settled cost report, 
whichever is later (under proposed Sec. Sec.  412.525(a)(4)(iv)(B) and 
412.529(c)(3)(iv)(B)), or a hospital may also request that the fiscal 
intermediary use a different (higher or lower) CCR based on substantial 
evidence presented by the hospital. These proposed revisions to our 
policy for determining a LTCH's CCR for discharges occurring on or 
after October 1, 2006, under the proposed revisions to the LTCH PPS 
high-cost and short-stay outlier policies, described above, are similar 
to our existing policy established in the June 9, 2003 IPPS high-cost 
outlier final rule (68 FR 34506 through 34513). In addition, we 
proposed a technical correction to existing Sec.  412.525(a)(3) to 
change the plural reference from cost-to-charge ``ratios'' to the 
singular reference to a cost-to-charge ``ratio'' because, under the 
LTCH PPS, a single (total) CCR is computed for LTCHs.
    We did not receive any comment on our proposal. Therefore, we are 
adopting as final without modification the proposed policy changes. 
Accordingly, under the broad authority of section 123 of the BBRA and 
section 307(b)(1) of BIPA, in this final rule, we are establishing 
under Sec. Sec.  412.525(a)(4)(iv)(B) and 412.529(c)(3)(iv) that, for 
discharges occurring on or after October 1, 2006, the CCR applied at 
the time a claim is processed will be 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. Under the broad 
authority of section 123 of the BBRA and section 307(b)(1) of BIPA, we 
are also establishing at Sec. Sec.  412.525(a)(4)(iv)(A) and 
412.529(c)(3)(iv)(A) that, for discharges occurring on or after October 
1, 2006, CMS may specify an alternative to the CCR computed under new 
Sec. Sec.  412.525(a)(4)(iv)(B) and 412.529(c)(3)(iv)(B) (that is, 
computed from the most recently settled cost report or the most recent 
tentatively settled cost report, whichever is later), or a hospital may 
also request that the fiscal intermediary use a different (higher or 
lower) CCR based on substantial evidence presented by the hospital. In 
addition, as proposed, under the broad authority of section 123 of the 
BBRA and section 307(b)(1) of BIPA, we are revising Sec.  412.525(a)(3) 
to change the plural reference from cost-to-charge ``ratios'' to the 
singular reference to a cost-to-charge ``ratio'' in this final rule.
g. Reconciliation of Outlier Payments Upon Cost Report Settlement
    In the June 9, 2003 IPPS high-cost outlier final rule (68 FR 34508 
through 34512), we established our policy for LTCHs that effective with 
LTCH PPS discharges occurring on or after August 8, 2003, any 
reconciliation of outlier payments will be based upon the actual CCR 
computed from the costs and charges incurred in the period during which 
the discharge occurs. In that same final rule, we also established our 
current policy that for discharges occurring on or after August 8, 
2003, at the time of any reconciliation, outlier payments may be 
adjusted to account for the time value of any underpayments or 
overpayments based upon a widely available index to be established in 
advance by the Secretary and will be applied from the midpoint of the 
cost reporting period to the date of reconciliation. Additional 
information on the administration of the reconciliation process under 
the IPPS is provided in Program Transmittal 707 (Change Request 3966, 
October 12, 2005). We note that, in addition to the changes to the 
high-cost outlier and short-stay outlier policies presented in this 
final rule, we are currently developing additional instructions on the 
administration of the existing reconciliation process under the LTCH 
PPS that would be similar to the IPPS reconciliation process.
    In the FY 2007 IPPS proposed rule (71 FR 24131 and 24134), for 
discharges occurring on or after October 1, 2006, we proposed to codify 
into the LTCH PPS section of the regulations (Subpart O of 42 CFR Part 
412) the provisions governing the determination of LTCHs'' CCRs, 
including proposed modifications and editorial clarifications to our 
existing methodology for determining the annual LTCH CCR ceiling and 
applicable statewide average CCRs under the LTCH PPS. In addition, in 
that same proposed rule, under the broad authority of section 123 of 
the BBRA and section 307(b)(1) of BIPA, we proposed to revise 
Sec. Sec.  412.525(a)(4), and 412.529(c)(3) for discharges occurring on 
or after October 1, 2006, to codify in Subpart O of 42 CFR Part 412 the 
provisions discussed above concerning the reconciliation of LTCH PPS 
outlier payments, including proposed editorial clarifications discussed 
in greater detail below in this section, that would more precisely 
describe the application of those policies. We proposed the additional 
revisions to Sec. Sec.  412.525(a)(4) and 412.529(c)(3) concerning the 
reconciliation of outlier payments, which are discussed in greater 
detail

[[Page 48122]]

below in this section, because these proposed changes would be 
consistent with the proposed changes to the calculation of the LTCH CCR 
ceiling discussed above.
    Specifically, we proposed under the LTCH PPS high-cost outlier 
policy at Sec.  412.525(a)(4) and the LTCH PPS short-stay outlier 
policy at Sec.  412.529, similar to our current policy, to specify 
that, for discharges occurring on or after October 1, 2006, any 
reconciliation of outlier payments would be based on the CCR calculated 
based on a ratio of costs to charges computed from the relevant cost 
report and charge data determined at the time the cost report 
coinciding with the discharge is settled. In addition, we proposed 
under the LTCH PPS high-cost outlier policy at Sec.  412.525(a)(4)and 
the LTCH PPS short-stay outlier policy at Sec.  412.529, similar to our 
current policy, to specify that, for discharges occurring on or after 
October 1, 2006, at the time of any reconciliation, outlier payments 
may be adjusted to account for the time value of any underpayments or 
overpayments. Consistent with our current policy, we also proposed that 
such an adjustment would be based upon a widely available index to be 
established in advance by the Secretary and would be applied from the 
midpoint of the cost reporting period to the date of reconciliation. As 
we discussed in the FY 2007 IPPS proposed rule (71 FR 24131 and 24134), 
we proposed to make these additions to Sec. Sec.  412.525(a)(4) and 
412.529 because we believe that such proposed changes reinforce the 
concept that the LTCH PPS has a single payment rate for inpatient 
operating and capital-related costs (as discussed in greater detail 
previously), and because we believe it would be more appropriate and 
administratively simpler to include all of the regulatory provisions 
concerning the determination of LTCH PPS (high-cost and short-stay) 
outlier payments applicable under the LTCH PPS regulations in Subpart O 
of 42 CFR Part 412.
    We did not receive any public comments on the proposed changes 
regarding the reconciliation of LTCH PPS outlier payments upon cost 
report settlement. Therefore, under the broad authority of section 123 
of the BBRA and section 307(b)(1) of BIPA, we are adopting as final, 
without modification, the proposed changes to the regulations at Sec.  
412.525(a)(4)(iv)(D) through (E) for LTCH PPS high-cost outliers and 
Sec.  412.529(c)(3)(iv)(D) through (E) for LTCH PPS short-stay outliers 
regarding the methodology for determining LTCH CCRs and LTCH PPS 
outlier reconciliation.
7. Technical Corrections Relating to LTCHs
    In the FY 2007 IPPS proposed rule (71 FR 24135), we proposed to 
make the following technical changes to various sections of the 
regulations relating to LTCHs to update or correct cross-references or 
to include inadvertently omitted provisions: a. In the following 
sections, we proposed to correct several incorrect cross-references in 
the existing regulations:
    <bullet> In Sec.  412.505(b)(1), we proposed to change the cross-
reference ``Sec.  412.22(e) and (h)(5)'' to the phrase ``Sec.  
412.22(e)(3) and (h)(6), if applicable''.
    <bullet> In Sec.  412.508(c)(3), we proposed to change the cross-
reference ``Sec.  1001.301'' to ``Sec.  1001.201.''
    <bullet> In Sec.  412.541(b)(2)(i), we proposed to change the 
cross-reference ``Sec.  412.533(b)'' to ``Sec.  412.533(a)(5) and Sec.  
412.533(c)'' to correctly refer to the provisions on the determination 
of the LTCH PPS rates.
    b. We proposed to revise Sec.  412.511 to change the cross-
reference ``Sec.  412.22(e) and (h)(5)'' to the phrase ``Sec.  
412.22(e)(3) and (h)(6)'' and to clarify the requirement that LTCHs 
must meet under Sec. Sec.  412.22(e)(3) and (h)(6) to report co-
location status as part of its overall reporting requirements.
    c. We proposed to revise Sec.  412.525(d) by adding new paragraphs 
(d)(3) and (d)(4) to specify two additional payment adjustments to the 
per discharge payments under the LTCH PPS that were inadvertently 
omitted; that is, the special payment under the onsite transfer and 
readmission policy at Sec.  412.532 and the special payment provisions 
for LTCH HwHs and satellites of LTCHs at Sec.  412.534.
    d. We proposed to revise Sec.  412.532(a)(2) to correct the cross-
reference to the definition of a satellite facility by changing ``Sec.  
412.22(f)'' to ``Sec.  412.22(h)''. In addition, we proposed to revise 
paragraph (b) of Sec.  412.532 to include satellite facilities and SNFs 
as part of the definition of entities that may be ``co-located'' or 
``onsite'' with a hospital. In existing Sec.  412.532(a)(2) and (a)(3), 
we include satellite facilities and SNFs, respectively, within the 
onsite provider payment policy as entities that may be co-located with 
a LTCH, but omitted to mention them in Sec.  412.532(b) as being 
included when we defined ``co-located or onsite'' facilities. We 
proposed to conform Sec.  412.532(b) to include their mention.
    We did not receive any public comments on these technical changes 
and, therefore, are adopting them as final without modification.
8. Cross-Reference Correction in Authority Citations for 42 CFR Parts 
412 and 413
    As stated earlier, on November 15, 2004, we published in the 
Federal Register the final rule establishing a PPS for IPFs (69 FR 
66922). As a part of that rule, we amended the authority citations for 
42 CFR Parts 412 and 413 to include references to section 124 of Pub. 
L. 106-113. Section 124 directed us to take various actions regarding a 
per diem PPS for IPFs. We included incorrect cross-references to the 
United States Statutes at Large citation for this provision. We 
proposed to amend the authority citations for Parts 412 and 413 by 
removing the incorrect cross-reference to ``113 Stat. 1515'' and 
inserting the correct cross-reference ``113 Stat. 1501A-332''.
    We did not receive any public comments on the proposed cross-
reference correction and, therefore, are adopting it as final without 
modification.
9. Report of Adjustment (Exceptions) Payments
    Section 4419(b) of Pub. L. 105-33 requires the Secretary to publish 
annually in the Federal Register a report describing the total amount 
of adjustment payments made to excluded hospitals and units, by reason 
of section 1886(b)(4) of the Act, during the previous fiscal year.
    The process of requesting, adjudicating, and awarding an adjustment 
payment is likely to occur over a 2-year period or longer. First, an 
excluded hospital or excluded unit of a hospital must file its cost 
report for a fiscal year with its fiscal intermediary within 5 months 
after the close of its cost reporting period in accordance with Sec.  
413.24(f)(2). The fiscal intermediary then reviews the cost report and 
issues a Notice of Program Reimbursement (NPR) within approximately 2 
months after the filing of the cost report. If the hospital's operating 
costs are in excess of the ceiling, the hospital may file a request for 
an adjustment payment within 180 days from the date of the NPR. The 
fiscal intermediary, or CMS, depending on the type of adjustment 
requested, then reviews the request and determines if an adjustment 
payment is warranted. This determination is often not made until more 
than 6 months after the date the request is filed. However, in an 
attempt to provide interested parties with data on the most recent 
adjustments for which we do have data, we are publishing data on 
adjustment payments that were processed by the

[[Page 48123]]

fiscal intermediary or CMS during FY 2005.
    The table below includes the most recent data available from the 
fiscal intermediaries and CMS on adjustment payments that were 
adjudicated during FY 2005. As indicated above, the adjustments made 
during FY 2005 only pertain to cost reporting periods ending in years 
prior to FY 2004. Total adjustment payments awarded to excluded 
hospitals and units during FY 2005 are $21,362,945. The table depicts 
for each class of hospitals, in the aggregate, the number of adjustment 
requests adjudicated, the excess operating cost over ceiling, and the 
amount of the adjustment payments.

----------------------------------------------------------------------------------------------------------------
                                                                                    Excess cost     Adjustment
                        Class of hospital                             Number       over ceiling      payments
----------------------------------------------------------------------------------------------------------------
Rehabilitation..................................................              12     $ 4,753,618      $1,352,043
Psychiatric.....................................................              34      27,408,956      18,362,262
Long-Term Care..................................................               2       2,147,623       1,485,380
Children's......................................................              --              --              --
Cancer..........................................................              --              --              --
Religious Nonmedical............................................
Health Care Institution.........................................               3         383,951         163,260
----------------------------------------------------------------------------------------------------------------

B. Critical Access Hospitals (CAHs)

1. Background
    Section 1820 of the Act provides for the establishment of Medicare 
Rural Hospital Flexibility Programs (MRHFPs), under which individual 
States may designate certain facilities as critical access hospitals 
(CAHs). Facilities that are so designated and meet the CAH conditions 
of participation under 42 CFR Part 485, Subpart F, will be certified as 
CAHs by CMS. Regulations governing payments to CAHs for services to 
Medicare beneficiaries are located in 42 CFR Part 413.
2. Sunset of Designation of CAHs as Necessary Providers: Technical 
Correction
    Under section 1820(c)(2)(B)(i) of the Act, a CAH is required to be 
located more than a 35-mile drive (or in the case of mountainous 
terrain or only secondary roads, a 15-mile drive) from a hospital or 
another CAH, unless the CAH is certified by the State as a necessary 
provider of health care services to residents in the area. Section 
405(h) of Pub. L. 108-173 amended section 1820(c)(2)(B)(i)(II) of the 
Act by adding language that terminated a State's authority to waive the 
location requirement for a CAH by designating the CAH as a necessary 
provider, effective January 1, 2006. As a result of this amendment, as 
of January 1, 2006, States are no longer able to designate CAH status 
based upon a determination that an entity is a necessary provider of 
health care. However, section 405(h) of Pub. L. 108-173 also included a 
grandfathering provision for CAHs that are certified as necessary 
providers prior to January 1, 2006. Under this provision, a CAH that is 
designated as a necessary provider in its State's rural health plan 
prior to January 1, 2006, is permitted to maintain its necessary 
provider designation.
    The regulations that specify the location requirements for CAHs 
described above are set forth at 42 CFR 485.610(c). To implement the 
amendment made by section 405(h) of Pub. L. 108-173, we published a 
final rule in the Federal Register on August 11, 2004 (69 FR 49271) to 
revise the regulations under paragraph (c) of Sec.  485.610. In that 
revision, we inadvertently included an erroneous date: In the second 
sentence of paragraph (c), we stated that a CAH that is designated as a 
necessary provider as of October 1, 2006, will maintain its necessary 
provider designation after October 1, 2006. Although a correction 
notice was published in the Federal Register on October 7, 2004 (69 FR 
60252), the notice corrected only the second citation of the date in 
that paragraph. As a result, the second sentence of Sec.  485.610(c) 
continues to state, incorrectly, that a CAH that is designated as a 
necessary provider as of October 1, 2006, will maintain its necessary 
provider designation as of January 1, 2006.
    To avoid further confusion, and to ensure that the regulations 
implementing the CAH location requirement under section 
1820(c)(2)(B)(i)(II) of the Act specify that requirement accurately, we 
proposed to revise the second sentence of Sec.  485.610(c) to state 
that a CAH that was designated as a necessary provider on or before 
December 31, 2005, will maintain its necessary provider designation as 
of January 1, 2006. We note that this change would merely correct the 
previous error and does not reflect any change in our policy as to how 
the statutory provision is implemented.
    Comment: A number of commenters raised issues concerning the 
interpretative guidelines that we issued relating to implementation of 
the CAH necessary provider provision.
    Response: These interpretative guidelines were developed after the 
FY 2005 IPPS final rule was published. We consider the comments that we 
received to be outside the scope of the May 12, 2006 proposed rule and, 
therefore, are not responding to them in this final rule. However, we 
are considering these comments as part of our ongoing policy review 
efforts and will take appropriate action if warranted.
    In this final rule, we are adopting as final, without modification, 
the revision to the second sentence of Sec.  412.610(c) described 
above.

VII. Payment for Services Furnished Outside the United States

A. Background

    Section 1862(a)(4) of the Act generally prohibits payment under 
Medicare for items and services furnished outside the United States. 
Under sections 1861(x) and 210(i) of the Act, ``United States'' is 
defined to include the 50 States, the District of Columbia, Puerto 
Rico, the Virgin Islands, Guam, and America Samoa. Furthermore, under 
Pub. L. 94-241, ``those laws which provide Federal services and 
financial assistance programs'' apply to the Northern Mariana Islands 
to the same extent as they do to Guam. In addition, we have interpreted 
the term ``United States'' as including U.S. territorial waters. We 
consider shipboard services furnished in a port of the United States or 
within 6 hours before arrival at, or departure from, a port of the 
United States to be furnished in the United States territorial waters 
(54 FR 41723). Therefore, in our regulations at Sec.  411.9(a), we 
define the United States to include the 50 States, the District of 
Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, the 
Northern Mariana Islands, and for purposes of services furnished on 
board ship, the territorial waters

[[Page 48124]]

adjoining the land areas of the United States. This general prohibition 
has exceptions, under which payment may be made for inpatient hospital 
services, emergency inpatient hospital services, and for physician and 
ambulance services associated with these hospital services that are 
furnished outside the United States.
    Payment may be made for inpatient hospital services if a Medicare 
beneficiary who is a United States resident received these services at 
a hospital located outside of the United States that either was closer 
to, or was substantially more accessible from, the beneficiary's 
residence than the nearest United States hospital that was adequately 
equipped and available to treat the beneficiary. Payment may be made 
for emergency inpatient hospital services if a beneficiary was in the 
United States (or in Canada while traveling between Alaska and another 
State without unreasonable delay and by the most direct route) when the 
emergency arose, and the hospital located outside the United States was 
closer to, or substantially more accessible from, the place where the 
emergency arose than the nearest available adequately equipped hospital 
within the United States. Payment may be made for physician and 
ambulance services furnished in connection with these inpatient and 
emergency inpatient hospital services. Our existing regulations that 
implement these statutory provisions are located at 42 CFR 409.3, 
409.5, 410.14, 410.66, 411.9, 413.74 and Subparts G and H of Part 424.

B. Proposed Clarification of Regulations

    Services that fall under these exceptions typically are furnished 
in Canada or Mexico. However, in accordance with section 1814(f) of the 
Act and the definition of the term ``United States'' (42 CFR 411.9(a)), 
it is permissible for Medicare to pay for services furnished in foreign 
countries other than Canada and Mexico. For example, if a Medicare 
beneficiary who is in Guam needed emergency inpatient hospital services 
and the nearest available hospital adequately equipped to treat that 
beneficiary was located in the Philippines, Medicare payment would be 
permitted for the services.
    Several of our existing regulations (Sec. Sec.  409.3, 409.5, 
410.66, and 413.74) specifically refer to services furnished in Canada 
and Mexico and do not indicate that it is permissible for Medicare 
payment to be made for services furnished in other foreign countries. 
The references in these sections also are more limited than the 
provisions of 42 CFR Part 424, Subpart H, the portion of our 
regulations that addresses treatment furnished in a foreign country. 
Therefore, in the FY 2007 IPPS proposed rule (71 FR 24136), we proposed 
to amend those regulations that refer to Canada and Mexico in order to 
conform them to the Act and to our other regulations addressing these 
situations.
    Comment: Commenters indicated that they believed additional 
clarification of the proposed revisions on payment for services outside 
the United States may be necessary to avoid confusion. Specifically, 
they noted that the example cited in the preamble states: if a Medicare 
beneficiary who is in Guam needed emergency inpatient hospital services 
and the nearest available hospital adequately equipped was located in 
the Philippines, Medicare payment would be permitted for the services. 
The commenters indicated that this statement and the proposed 
accompanying changes to the regulations raise several questions. First, 
does it matter that the beneficiary happens to be in Guam, or is there 
an expectation that the beneficiary resides in Guam? Second, does it 
matter if the beneficiary is in a United States Territory (that is, 
Guam), or would payment be permitted for services furnished to a 
beneficiary who was in another foreign country? Finally, what is the 
applicability of these provisions to a beneficiary who maintains 
residence outside the 50 States, the District of Columbia, Puerto Rico, 
the Virgin Islands, Guam, or American Samoa?
    Further, the commenters believed that CMS should evaluate the 
safety concerns of beneficiaries living outside the United States, but 
in close proximity to hospitals accredited by Joint Commission on 
Accreditation of Healthcare Organizations (JCAHO) in foreign countries. 
They stated that these beneficiaries are forced to travel great 
distances to reach hospitals in the U.S., sometimes at great risk to 
their health, while adequately equipped, accredited hospitals are 
immediately available to meet their health care needs.
    Response: If a Medicare beneficiary is in Guam (or any other U.S. 
Territory) and an emergency arises that results in the beneficiary 
receiving emergency inpatient services from a foreign hospital, 
Medicare may pay for such services irrespective of whether the 
beneficiary is a resident of Guam (or any other U.S. Territory). That 
is, section 1814(f)(2) of the Act and 42 CFR 424.122 do not require 
that a beneficiary be a resident of Guam (or any other U.S. Territory 
where an emergency occurs) in order for Medicare to pay for those 
services. Because section 1814(f)(2) of the Act and our regulations at 
Sec.  424.122 already directly address when Medicare payment may be 
made for emergency inpatient services furnished in foreign hospitals, 
it is unnecessary to outline those provisions again in 42 CFR 409.3, 
409.5, 410.66, and 413.74 of the regulations.
    With respect to the question concerning Medicare beneficiaries who 
maintain their residence outside the 50 States, the District of 
Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, or the 
Northern Mariana Islands as we noted above, section 1814(f)(2) of the 
Act and Sec.  424.122 of the regulations do not require that a 
beneficiary be a resident of Guam (or any other U.S. Territory where an 
emergency occurs) in order for Medicare to pay for emergency inpatient 
services that a Medicare beneficiary receives from a foreign hospital. 
However, section 1814(f)(1) of the Act and Sec.  424.123 of the 
regulations require that, in order for payment to be made for 
nonemergency inpatient hospital services that a Medicare beneficiary 
receives at a hospital located outside the United States, the 
beneficiary must be a U.S. resident who received these nonemergency 
services at a hospital located outside of the United States that either 
was closer to, or was substantially more accessible from, the 
beneficiary's residence than the nearest U.S. hospital that was 
adequately equipped and available to treat the beneficiary.
    With respect to beneficiaries who are forced to travel great 
distances to reach hospitals in the United States, although we are 
concerned about the health and safety of Medicare beneficiaries, CMS 
does not have the legal authority to expand upon the foreign services 
for which Medicare may make payment, because Medicare law prohibits 
payment for items and services furnished outside the United States, 
except for certain limited services (see sections 1814(f) and 
1862(a)(4) of the Act).
    After consideration of the public comments received, we are 
adopting as final, without modification, the amendments to our existing 
regulations regarding services furnished outside the United States 
described above.
    In the FY 2007 IPPS proposed rule, we also proposed to make some 
related technical changes. In Sec. Sec.  409.3(e) and 424.123(c)(2), we 
proposed to change the references from the Joint Commission on 
Accreditation of Hospitals (JCAH) to the Joint Commission on 
Accreditation of Healthcare Organizations (JCAHO), the

[[Page 48125]]

current name of that organization. In Sec.  424.121(c), we proposed to 
change the obsolete cross-reference from Sec.  405.313 to the correct 
cross-reference, Sec.  411.9.
    We did not receive any public comments on these technical changes. 
Therefore, we are adopting as final, without modification, the 
technical changes to Sec. Sec.  409.3(e), 424.123(c)(2), and 424.121(c) 
described above.

VIII. Payment for Blood Clotting Factor Administered to Inpatients With 
Hemophilia

    Section 1886(a)(4) of the Act excludes the costs of administering 
blood clotting factors to inpatients with hemophilia from the 
definition of ``operating costs of inpatient hospital services.'' 
Section 6011(b) of Pub. L. 101-239 states that the Secretary of Health 
and Human Services shall determine the payment amount made to hospitals 
under Medicare Part A for the costs of administering blood clotting 
factors to individuals with hemophilia by multiplying a predetermined 
price per unit of blood clotting factor by the number of units provided 
to the individual. The regulations governing payment for blood clotting 
factors furnished to hospital inpatients and for payment for the 
furnishing fee are located in Sec. Sec.  412.2(f)(8) and 412.115(b).
    In FY 2005, we made payments for blood clotting factors furnished 
to inpatients at 95 percent of average wholesale price (AWP), 
consistent with the rates then paid under section 1842(o) of the Act 
for Medicare Part B drugs (including blood clotting factor furnished to 
beneficiaries who are not inpatients).
    Section 303 of Pub. L. 108-173 added section 1847A to the Act. 
Effective January 1, 2005, this section requires that almost all 
Medicare Part B drugs not paid on a cost or prospective basis be paid 
at 106 percent of average sales price (ASP), while section 1842(o)(5) 
of the Act provides for a Medicare Part B payment of a furnishing fee 
for blood clotting factor. On November 15, 2004, we published 
regulations in the Federal Register (69 FR 66310 through 66319) that 
implemented the provisions of section 1847A of the Act. These 
regulations are codified at Subpart K of Part 414 and Sec.  410.63, 
respectively.
    The furnishing fee is updated each calendar year as specified by 
section 1842(o)(5) of the Act. The furnishing fee for clotting factor 
for years after CY 2005 is equal to the fee for the previous year 
increased by the percentage increase in the consumer price index (CPI) 
for medical care for the 12-month period ending with June of the 
previous year. This requirement is set forth in our regulations at 
Sec.  410.63.
    In the FY 2006 IPPS final rule (70 FR 47473), we amended our 
regulations at Sec. Sec.  412.2(f)(8) and 412.115(b) to state that, for 
discharges occurring on or after October 1, 2005, we make payment for 
blood clotting factor administered to hospital inpatients using the 
Medicare Part B payment amounts for blood clotting factor as determined 
under Subpart K of 42 CFR Part 414 and for the furnishing fee as 
determined under Sec.  410.63.
    On November 21, 2005, we issued regulations in the Federal Register 
(70 FR 70225) updating the furnishing fee payment amount for CY 2006. 
We announced that the increase in the CPI for medical care for the 12 
months ending June 30, 2005 was 4.2 percent. Consequently, the 
furnishing fee for CY 2006, initially established effective January 1, 
2005, at $0.14 per unit of clotting factor, for CY 2006 was set at 
$0.146 per individual unit (I.U.) for blood clotting factor. We 
indicated in the preamble to that rule that while ``the furnishing fee 
payment rate is calculated at 3 digits, the actual amount paid to 
providers and suppliers is rounded to 2 digits.''
    The fiscal intermediaries continue to use the Medicare Part B Drug 
Pricing File to make payments for blood clotting factor. The furnishing 
fee is included in the ASP price per unit sent with the Medicare Part B 
Drug Pricing File that is updated annually. By using the Medicare Part 
B Drug Pricing File, Medicare will be making consistent payments for 
blood clotting factor provided to inpatients and outpatients. For 
further updates on pricing, we refer readers to the Medicare Part B 
drug pricing regulations.
    Comment: Two commenters addressed the blood clotting policy in 
response to the proposed rule. One commenter supported CMS in its quest 
for a uniform approach for drug payment. Both commenters recommended 
that CMS continue to provide the additional payment for blood clotting 
factor administered to hemophiliac inpatients in the future even if 
severity-adjusted DRGs are implemented.
    Response: We appreciate the commenters' support. The blood clotting 
factor policy will remain unchanged even if there are changes to the 
DRG system. CMS will continue to provide the additional payment for 
blood clotting factor administered to hemophilia inpatients. As we 
stated in our proposed rule (79 FR 24136) and restated in this final 
rule, by fiscal intermediaries utilizing the Medicare Part B Drug 
Pricing File, Medicare will be making consistent payments for blood 
clotting factor provided to inpatients and outpatients. For further 
updates on pricing, readers should refer to the Medicare Part B drug 
pricing regulations.

IX. Limitation on Payments to Skilled Nursing Facilities for Bad Debt

A. Background

    Under section 1861(v)(1) of the Act and Sec.  413.89 of our 
existing regulations, Medicare may pay some or all of the uncollectible 
deductible and coinsurance amounts to those entities paid under a 
reasonable cost payment methodology that are eligible to receive 
payment for bad debt. Under our existing regulations, Medicare 
generally pays 100 percent of allowable bad debt amounts to most 
entities eligible to receive bad debt payment, including SNFs, CAHs, 
rural health clinics, federally qualified health clinics, community 
mental health clinics, health maintenance organizations reimbursed on a 
cost basis, competitive medical plans, and health care prepayment 
plans. To determine if bad debt amounts are allowable, the requirements 
at Sec.  413.89 and the Provider Reimbursement Manual (PRM) (CMS Pub. 
15 Part 1, Chapter 3) must be met.
    However, under section 1861(v)(1)(T)(iv) of the Act and our 
existing regulations, Medicare payments for allowable bad debt amounts 
for hospitals are reduced by 30 percent. Moreover, under our existing 
regulations, Medicare does not pay for bad debt amounts arising from 
anesthetists' services paid under a fee schedule (Sec.  413.89(i)). In 
addition, although Medicare pays end-stage renal disease (ESRD) 
facilities 100 percent of allowable bad debt claims, these payments are 
capped at facilities' unrecovered cost (Sec.  413.178 of the 
regulations).

B. Changes Made by Section 5004 of Pub. L. 109-171

    Section 5004 of Pub. L. 109-171 (DRA of 2005) amended section 
1861(v)(1) of the Act to mandate that, for cost reporting periods 
beginning on or after October 1, 2005, Medicare payments to SNFs for 
certain allowable bad debt amounts be reduced. Specifically, for 
Medicare beneficiaries who are not dual eligible individuals (as 
defined in section 1935(c)(6)(A)(ii) of the Act), allowable bad debt 
amounts attributable to the coinsurance amounts under the Medicare 
program are reduced by 30 percent (deductibles are not applicable to 
patients in SNFs). Allowable bad debt

[[Page 48126]]

amounts for Medicare beneficiaries who are dual eligible individuals 
(as defined in section 1935(c)(6)(A)(ii) of the Act) will continue to 
be paid at 100 percent.

C. Proposed Regulation Changes

    In the FY 2007 IPPS proposed rule (71 FR 24137), we proposed to 
conform the Medicare regulations under Sec.  413.89 to the provisions 
of section 5004 of Pub. L. 109-171. Specifically, we proposed to revise 
paragraph (h) by redesignating the existing contents as paragraph 
(h)(1) and add a new paragraph (h)(2) to reflect this payment 
limitation. We proposed to include in paragraph (h)(2) a cross-
reference to the definition of ``full-benefit dual eligible 
individual'' found at Sec.  423.772 of our regulations. In addition, we 
proposed to revise Sec.  413.89(a) to add a cross-reference to the 
existing limitations on payments to hospitals and the proposed new 
limitations on payments to SNFs found in paragraph (h), and to correct 
the cross-reference to the exception for payments for bad debts arising 
from anesthetists' services paid under a fee schedule from ``paragraph 
(h)'' to ``paragraph (i).''
    Comment: One commenter expressed concern that under the proposed 
definition of a ``full benefit dual eligible individual'' found at 
Sec.  423.772 of our regulations, SNFs will not only have to document 
that the patient is eligible for both Medicare and Medicaid services 
but also will now have to document that the patient has coverage under 
a prescription drug plan under Part D of Title XVIII of the Act or 
under an MA-PD plan under Part C of Title XVIII of the Act. The 
commenter stated that the additional documentation will increase the 
burden on SNFs to provide documentation.
    Response: After reviewing the legislative background associated 
with section 5004 of Pub. L. 109-171, we determined that it was not the 
Congress' intent to reduce bad debt payments to SNFs for individuals 
who are eligible for both Medicare and Medicaid, also known as dual 
eligible individuals. Section 5004 defines ``dual eligible 
individuals'' as individuals who are entitled to benefits under Part A 
of Medicare and are described in section 1935(c)(6)(A)(ii) of the Act.
    The definition of a ``full-benefit dual eligible individual'' at 
section 1935(c)(6)(A) of the Act is codified at Sec.  423.772 of the 
regulations. Specifically, section 1935(c)(6)(A) of the Act defines a 
``full-benefit dual eligible individual'' in terms of both clause (i) 
and (ii). Section 1935(c)(6)(A)(i) of the Act (and paragraph (1) under 
the definition of ``full-benefit dual eligible individual'' at Sec.  
423.772) states that the individual must have coverage for the month 
for covered Part D drugs under a prescription drug plan under Part D of 
Title XVUIII of the Act or under an MA-PD plan under Part C of title 
XVIII of the Act. Section 1935(c)(6)(A)(ii) of the Act (and paragraph 
(2) under the definition of ``full-benefit dual eligible individual'' 
at Sec.  423.772) states the individual must be determined eligible by 
the State for medical assistance for full benefits under Title XIX of 
the Act under section 1902(a)(10)(A) or section 1902(a)(10)(C), by 
reason of section 1902(f) of the Act, or under any other category of 
eligibility for medical assistance for full benefits under Title XIX of 
the Act. Clearly, the Congress did not include the criterion at section 
1935(c)(6)(A)(i) of the Act (and, thus, paragraph (1) under the 
definition of ``full-benefit dual eligible individual'' at Sec.  
423.772) for defining dual eligible individuals to determine the 
applicability of the reduction of bad debt payments under section 5004 
of Pub. L. 109-171.
    Accordingly, for this final rule, we are revising the proposed 
regulation text at new Sec.  413.89(h)(2) to better conform with the 
language of the statute by defining a dual eligible individual as an 
individual who is entitled to benefits under Part A of Medicare and is 
determined eligible by the State for medical assistance under title XIX 
as described under paragraph (2) of the definition of a full-benefit 
dual eligible individual at Sec.  423.772. We believe that this 
revision addresses the concerns expressed by the commenter.
    Comment: One commenter stated that, in April 2006, CMS issued 
revisions to the freestanding SNF Medicare cost reporting Form 2540-96 
and instructions to implement the provisions of section 5004 of Pub. L. 
109-171 but has not issued similar revisions to the hospital-based 
(distinct part) SNF Medicare cost reporting Form 2552-96. The commenter 
requested that CMS clarify whether the provisions of section 5004 will 
or will not apply to both freestanding and hospital-based SNFs.
    Response: Section 5004 of Pub. L. 109-171 applies to both 
freestanding and hospital-based SNFs. We are currently preparing 
revisions to the hospital-based SNF Medicare cost reporting Form 2552-
96 and instructions to implement the provisions of section 5004. We 
anticipate that the revisions will be issued in a Transmittal to the 
Provider Reimbursement Manual--Part 2 (Pub. <greek-i>15-2) prior to the 
publication of this final rule.
    After consideration of the public comments received, we are 
adopting as final, with one modification, the amendments needed to 
conform our regulations to the provisions of section 5004 of Pub. L. 
109-171, and to add and correct the cross-references, as described 
above.

X. MedPAC Recommendations

    We are required by section 1886(e)(4)(B) of the Act to respond to 
MedPAC's IPPS recommendations in our annual proposed IPPS rule. We have 
reviewed MedPAC's March 2006 ``Report to the Congress: Medicare Payment 
Policy'' and have given it careful consideration in conjunction with 
the proposed policies set forth in this document. MedPAC's 
Recommendation 2A states that ``The Congress should increase payment 
rates for the acute inpatient and outpatient prospective payment 
systems in 2007 by the projected increase in the hospital market basket 
index less half of the Commission's expectation for productivity 
growth.'' This recommendation is discussed in Appendix B to this final 
rule.
    In section II.C. of the preamble of this final rule, we further 
address MedPAC's 2005 recommendations included in Recommendation 1 in 
the March 2005 Report to Congress on Physician-Owned Specialty 
Hospitals as well as Recommendation 3, which recommended that the 
Secretary implement MedPAC's recommended policies over a transition 
period. The recommendations in Recommendation 1 relate to refining the 
DRGs used under the IPPS to more fully capture differences in severity 
of illness among patients; basing the DRG relative weights on the 
estimated cost of providing care rather than on charges; and basing the 
weights on the national average of hospitals'' relative values in each 
DRG. In section II.E. of the preamble to this final rule, we also 
further address Recommendation 2 of the March 2005 Report on Physician-
Owned Specialty Hospitals, which recommended adjusting the DRG relative 
weights to account for differences in the prevalence of high-cost 
outlier cases.
    For further information relating specifically to the MedPAC reports 
or to obtain a copy of the reports, contact MedPAC at (202) 653-7220, 
or visit MedPAC's Web site at: www.medpac.gov.

[[Page 48127]]

XI. Health Care Infrastructure Improvement Program: Selection Criteria 
for Loan Program for Qualifying Hospitals Engaged in Cancer-Related 
Health Care and Forgiveness of Indebtedness

A. Background

    Section 1016 of the Medicare Prescription Drug, Improvement and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173) amended the Act to 
add section 1897, which establishes the Health Care Infrastructure 
Improvement Program. Section 1897 of the Act authorizes the Secretary 
to establish a loan program that provides loans to qualifying hospitals 
for payment of the capital costs of eligible projects. Section 1897(d) 
of the Act specifies that an eligible project is a project of a 
qualifying hospital that is designed to improve the health care 
infrastructure of the hospital, including construction, renovation, or 
other capital improvements. Section 1897(b) of the Act requires the 
Secretary to establish the application process, the terms and 
conditions, and other requirements for the loan program. The statute 
was subsequently amended by section 6045 of the Emergency Supplemental 
Appropriations Act for Defense, the Global War on Terror, and Tsunami 
Relief, 2005 (the Tsunami Relief Act of 2005) (Pub. L. 109-13) to also 
provide that any determination made by the Secretary under section 1897 
of the Act is not subject to any administrative or judicial review.
    Section 1897(c)(2) of the Act defines a ``qualifying hospital'' as 
a hospital or entity that is engaged in research in the causes, 
prevention, and treatment of cancer; and is designated as a cancer 
center by the National Cancer Institute (NCI) or is designated by the 
State legislature as the official cancer institute of the State and 
such designation by the State legislature occurred prior to December 8, 
2003. Section 1897(c)(3) of the Act, as added by Pub. L. 109-13, 
specifies that an ``entity'' has the same meaning as specified in 
section 501(c)(3) of the Internal Revenue Code of 1986 and is exempt 
from tax under section 501(a) of the Code; has at least one existing 
memorandum of understanding or affiliation agreement with a hospital 
located in the State in which the entity is located; and retains 
clinical outpatient treatment for cancer on site as well as laboratory 
research and education and outreach for cancer in the same facility. 
Section 1897(c)(3) of the Act is effective as if included in the 
enactment of Pub. L. 108-173.
    Section 1897(f) of the Act provides that the Secretary may forgive 
a loan provided to a qualifying hospital, under terms and conditions 
that are analogous to the loan forgiveness provision for student loans 
under part D of title IV of the Higher Education Act of 1965 (20 
U.S.C.1087a et seq.). However, the Secretary must condition such 
forgiveness on the establishment by the hospital of (1) an outreach 
program for cancer prevention, early diagnosis, and treatment that 
provides services to a substantial majority of the residents of the 
State or region, including residents of rural areas; (2) an outreach 
program for cancer prevention, early diagnosis, and treatment that 
provides services to multiple Indian tribes; and (3) unique research 
resources (such as population databases), or an affiliation with an 
entity that has unique research resources.
    In addition, section 1897(h) of the Act requires the Secretary to 
submit to Congress within 4 years after enactment of Pub. L. 108-173 a 
report on the projects for which loans are provided under section 1897 
of the Act and a recommendation as to whether the Congress should 
authorize the Secretary to continue loans under this section beyond FY 
2008.
    Prior to the enactment of Pub. L. 109-13, section 1897(g) (1) of 
the Act provided for the appropriation of $200,000,000 to carry out the 
loan program. The funds allocated for the loan program are to remain 
available during the period beginning on July 1, 2004, and ending on 
September 30, 2008. However, the Congress rescinded $58,000,000, 
through Pub. L. 109-13, leaving $142,000,000 available for the loan 
program. Section 1897(g) of the Act also states that, of the 
$142,000,000, not more than $2,000,000 can be used for the 
administration of the loan program for each fiscal year from FY 2004 
through FY 2008). (We note that no administrative funding was used in 
FY 2004.)

B. Issuance of an Interim Final Rule With Comment Period and a Proposed 
Regulation

    On September 30, 2005, we published two rules in the Federal 
Register (an interim final rule with comment period (70 FR 57368) and a 
proposed rule (70 FR 57376)) to establish the loan program to improve 
certain hospital infrastructure, including capital improvement, as 
provided for under the Health Care Infrastructure Improvement Program 
established under section 1897 of the Act. In the September 30, 2005 
interim final rule with comment period, we set forth, under a new 42 
CFR Chapter IV, Subchapter H, Part 505, the Federal regulations 
established by the Secretary governing requirements for qualifying 
hospitals or entities, the application process, and the criteria and 
conditions for selecting eligible projects under the loan program. In 
the September 30, 2005 proposed rule, we proposed to establish the loan 
forgiveness criteria for qualifying hospitals that receive loans under 
the Health Care Infrastructure Improvement Program.

C. Provisions of the Interim Final Rule With Comment Period

1. Loan Qualifying Criteria (Sec. Sec.  505.3, 505.5(a), and 505.11)
    In order to receive a loan under the Health Care Infrastructure 
Improvement Program, an applicant must meet the statutory definition of 
a qualifying hospital as defined in sections 1897(c)(2) and (c)(3) of 
the Act. We incorporated these definitions in the regulations at Sec.  
505.3.
    We specified in the regulations at Sec.  505.11 that a qualifying 
hospital must submit an application to CMS by a specified date to 
request a loan for the capital costs of an eligible project. We 
specified the requirements and procedures for submittal of the 
application.
    In Sec.  505.5(a), we provided that the capital costs for which a 
qualifying hospital may obtain a loan are limited to the reasonable 
costs incurred by the hospital, and capitalized on the Medicare cost 
report, for any facility or item of equipment that it has acquired the 
possession or use of at the time the loan funding is awarded.
2. Selection Criteria (Sec.  505.5(b) and (c))
    We established the criteria under which qualifying hospitals are 
prioritized for the loan program. We specified that we prioritize 
applicants that meet the following conditions:
    (a) The hospital is located in a State that, based on population 
density, is defined as a rural State.
    (2) The hospital is located in a State with multiple Indian tribes.
    We indicated that CMS will send written notice to qualifying 
hospitals that have been selected to participate in the loan program.
3. Terms of the Loan (Sec. Sec.  505.7 and 505.9)
    Under the terms of the loan program, we specified that we require 
an authorized official of each qualifying hospital to execute a 
promissory note, loan agreement, or any other approved form that we may 
designate, to ensure compliance with the terms of the loan program. In 
the interim final rule, we

[[Page 48128]]

indicated that each loan recipient receives a lump sum distribution for 
which payment of principal and interest is deferred for 60 months 
beginning with the day of official notification to the qualifying 
hospital of loan award. The loan repayment period is 20 years. 
(However, as discussed in section XI.B. of this preamble, in the 
September 30, 2005 proposed rule, we further proposed forgiveness 
criteria for loans, as directed by the statute.)
    In accordance with the loan criteria, the loan recipient must agree 
to make payments every month for 20 years until the loan, including 
interest, is repaid. A loan recipient may make full prepayment or 
partial prepayment without paying any prepayment charge. When a 
prepayment is made, the qualifying hospital must provide CMS with 
written notice.
    Furthermore, the loan recipient must agree that the provisions of a 
loan under section 1897 of the Act does not--
    <bullet> Relieve the hospital of any obligation to obtain any 
required State or local permit or approval with respect to the project;
    <bullet> Limit the right of any unit of State or local government 
to approve or regulate any rate of return on private equity invested in 
the project; or
    <bullet> Otherwise supersede any State or local law (including any 
regulation) applicable to the construction or operation of the project.
4. Public Comments Received on the Interim Final Rule With Comment 
Period
    We received seven public comments on the September 30, 2005 interim 
final rule.
    Comment: In general, commenters expressed concern that many 
qualifying hospitals providing cancer care to rural areas and Native 
populations throughout the country may not qualify to participate in 
the loan program since the regulatory criteria require that qualifying 
hospitals be located in one of the ten states listed. Moreover, one 
commenter was concerned that CMS may have misconstrued Congressional 
intent in establishing the selection criteria based on the statutory 
terms for loan forgiveness. The commenter noted that the proposed 
selection criteria relied on location and population rather than the 
merits of the application in order to award loans. Some commenters 
expressed concern that the selection criteria were too restrictive 
because preference was conferred to the 10 least populated states with 
the greatest numbers of Indian tribes in the country. Some commenters 
suggested that CMS expand the selection criteria to allow all 
qualifying hospitals that serve rural and Indian tribe populations to 
be considered for loan funds. In addition, one commenter suggested that 
in order to maximize the benefit to a greater number of applicants, CMS 
limit the amount of available loan funds to $10 million per State.
    Response: The statute instructs the Secretary to establish criteria 
for selecting among qualifying hospitals that apply for a loan under 
this section. The criteria are to consider the extent to which the 
project for which the loan is sought is nationally or regionally 
significant, in terms of expanding or improving the healthcare 
infrastructure of the United States or the region or in terms of the 
medical benefit that the project will have. Section 1897 of the Act 
also provides for loan forgiveness and, in setting conditions for loan 
forgiveness, requires that qualifying hospitals establish certain 
outreach programs that include rural areas and Indian tribe 
populations. Therefore, we continue to believe it is appropriate to 
prioritize qualifying hospitals for purposes of making loans to 
qualifying hospitals based on rural and Indian tribe criteria as 
previously discussed in the interim final rule. We stated in the 
interim final rule that, ``Since the statute outlines specific criteria 
in which to forgive loans, we believe that it is consistent with the 
Congressional intent to give priority to qualifying hospitals that meet 
at least some of the statutory conditions for loan forgiveness when 
selecting qualifying hospitals for the loan program'' (70 FR 57369). We 
note that there are many outstanding hospitals providing cancer care in 
the country and we believe the selection criteria will allow us to 
select from applicants that both demonstrate merit and meet the 
priorities that are indicated in the statutory language for this loan 
program.
    In response to the comment regarding State limits on available loan 
funds, we disagree that a $10 million limit per State would be in the 
best interests of qualifying hospitals. Section 1897(d) of the Act 
directs that loan funds are to be used for qualifying projects, defined 
in statute as ``designed to improve the healthcare infrastructure of 
the hospital, including construction, renovation, or other capital 
improvements.'' We note that construction, renovation, or other capital 
improvement projects for qualifying hospitals providing cancer care are 
likely to be costly and require large expenditures. We believe limiting 
the loan amount to a total of $10 million for all applicants within a 
State could inadvertently cause some qualifying hospitals to receive 
insufficient funding for their eligible project. Insufficient funding 
may also hinder a qualifying hospital's ability to establish the 
outreach programs and unique research resources that are required for 
loan forgiveness and intended to benefit the community through the 
qualifying hospital's participation in this loan program.
    Comment: One commenter noted that the statutory language did not 
limit qualifying hospitals to entities that file cost reports and 
suggested that the regulations be modified to allow a state university/
cancer research center that is not an entity described at section 
501(c)(3) of the Internal Revenue Code of 1986, but that meets all 
other requirements, to be considered a qualifying hospital under this 
loan program. In addition, the commenter asked why CMS proposed that a 
qualifying hospital that had not acquired the possession and use of 
assets which it intends as a qualifying project under this loan program 
must have entered into a contractual obligation for those projects 
before December 8, 2003, the date of enactment of Pub. L. 108-173.
    Response: We are not requiring that qualifying hospitals be 
entities that file cost reports. Since CMS is administering the 
program, we believe that it is appropriate to apply our reasonable cost 
methodology to determine the capital costs of an eligible project where 
applicable. We note that it is the statute that defines qualifying 
hospitals to include an entity described at section 501(c)(3) of the 
Internal Revenue Code of 1986 and not a definition established through 
regulations. Finally, we believe it is appropriate to specify a 
deadline for which qualifying hospitals must have had a written 
commitment of assets intended as eligible projects. A deadline allows 
CMS to make a determination that the requested loan amount is 
reasonable and appropriate for the eligible project. Without a deadline 
we would not be able to determine the parameters of the eligible 
project. We chose December 8, 2003, because that was the date Pub. L. 
108-173 was enacted.
5. Provisions of This Final Rule
    This final rule finalizes the provisions set forth in the September 
30, 2005 interim final rule with comment, without modification.

D. Proposed Rule on Forgiveness of Indebtedness

    In the September 30, 2005 proposed rule, we proposed to establish 
the loan forgiveness criteria for qualifying hospitals that are 
selected to participate

[[Page 48129]]

in the loan program under the Health Care Infrastructure Improvement 
Program.
1. Conditions for Loan Forgiveness (Sec.  505.13)
    As specified in section 1897(f) of the Act, we proposed to forgive 
a loan provided to a qualifying hospital under terms and conditions 
that are analogous to the loan forgiveness provision for student loans 
under part D of title IV of the Higher Education Act of 1965 (20 U.S.C. 
1087a et seq.). The student loan program specifies that in order to be 
eligible for loan forgiveness, borrowers are required to satisfy 
certain conditions, such as completing a service obligation that 
satisfies certain terms and conditions as determined by the Secretary. 
Therefore, we proposed that, to fulfill the service obligation, 
borrowers must meet the loan forgiveness conditions based on the 
provisions of section 1897(f) of the Act. Section 1897(f) of the Act 
provides that the Secretary shall condition such forgiveness on the 
establishment by the hospital of (1) an outreach program for cancer 
prevention, early diagnosis, and treatment that provides services to a 
substantial majority of the residents of a State or region, including 
residents of rural areas; (2) an outreach program for cancer 
prevention, early diagnosis, and treatment that provides services to 
multiple Indian tribes; and (3) unique research resources (such as 
population databases), or an affiliation with an entity that has unique 
research resources.
    In addition, we proposed that the qualifying hospital must submit a 
written request for loan forgiveness to CMS by the effective date of 
the final rule (that is, October 1, 2006).
2. Plan Criteria for Meeting the Conditions for Loan Forgiveness (Sec.  
505.15)
    In the September 30, 2005 proposed rule, we proposed to specify the 
loan forgiveness criteria under three domains, as outlined in section 
XI.C.1 of this preamble, that are consistent with the sections 
1897(f)(A), (f)(B), and (f)(C) of the Act: (a) Domain 1--Outreach 
program for cancer prevention, early diagnosis, and treatment that 
provides services to a substantial majority of the residents of a State 
or region, including residents of rural areas; (b) Domain 2--Outreach 
program for cancer prevention, early diagnosis, and treatment that 
provides services to multiple Indian tribes; and (c) Domain 3--Unique 
research resources (such as population databases), or an affiliation 
with an entity that has unique research resources.
    Specifically, we proposed to add Sec. Sec.  505.13, 505.15, and 
505.17 to provide that the qualifying hospital must designate in its 
plan to CMS--
    <bullet> The population(s) for which it would target its outreach 
programs.
    <bullet> Sufficient detail to clearly describe how it would 
designate its targeted populations and that the populations designated 
should be in accordance with the provisions of the statute.
    <bullet> A detailed description of how it would identify the cancer 
types that it is targeting.
    <bullet> A detailed description of the approaches it would be 
conducting or implementing, including the reasons why the intervention 
approaches were selected and why they may make a difference in 
improving cancer care for the targeted population.
    <bullet> Improvement goals for the prevention, early diagnosis, and 
treatment, for each cancer type identified in its outreach programs.
    <bullet> At least one measure (for example, either an outcome 
measure or a process measure) used to track its progress in achieving 
the goals it has established for each area of prevention, early 
diagnosis, and treatment, for each cancer type identified in its plan.
    <bullet> A description of how it would establish or maintain 
existing unique research resources or how it would establish or 
maintain existing unique research resources or an affiliation with 
another entity that has unique research resources.
    We proposed at Sec.  505.13(c) that the qualifying hospital must 
submit to CMS by the timeframe specified by the Secretary the 
following: (1) A written request for loan forgiveness; (2) a plan 
describing how the qualifying hospital would establish, implement or 
maintain existing outreach programs for its targeted populations; and 
(3) how it would establish or maintain existing unique research 
resources or an affiliation with an entity that has unique research 
resources over the loan deferment period. We proposed to make that 
timeframe 60 days after the publication of the final rule.
    In proposed Sec.  505.3, we proposed to define ``outreach 
programs'' as formal cancer programs for teaching, diagnostic 
screening, therapy or treatment, prevention, or interventions to 
enhance the health and knowledge of their designated population(s). 
Likewise, we proposed to define ``unique research resources'' as 
resources that are used for the purpose of discovering or testing 
options related to the causes, prevention, and treatment of cancer.
    We invited specific public comments on the type of information that 
must be included in the plan and the timeframe for a qualifying 
hospital to submit its plan to CMS. We also solicited comments on 
whether we should provide more specific criteria for the qualifying 
hospital to use in defining its targeted populations.
    We believed that 60 days after the final rule publication date is 
reasonable time for qualifying hospitals intending to apply for loan 
forgiveness to prepare and submit their initial plan, since the loan 
deferment period is up to 60 months after notification of acceptance in 
the program and the qualifying hospital would be assessed on its 
performance during the loan deferment period.
    Furthermore, we believed that requiring the qualifying hospitals to 
submit a plan in which they would determine the targeted population, 
the types of cancers (that is, the cancer types to be considered), 
goals for improving prevention, diagnosis, and treatment, and the 
measures to track their progress in reaching the goals provides 
flexibility to the qualifying hospitals as they develop, implement, or 
maintain their outreach programs.
    We also believed that it is appropriate to request this level of 
detail from the qualifying hospitals because section 1897(h) of the Act 
requires the Secretary to submit a report to the Congress before fiscal 
year 2008. The report must indicate the projects for which loans are 
provided under this section and recommend whether the Congress should 
authorize the Secretary to continue loans under this section beyond 
fiscal year 2008. Receiving this information from the qualifying 
hospitals is necessary for the Secretary to make a fully informed 
recommendation to the Congress.
    Under Sec.  505.17, we proposed that the qualifying hospital must 
submit annual progress reports to CMS describing its progress in 
achieving its plan or any changes to the initial plan and a final 
annual report at least 6 months before the end of the 60-month loan 
deferment period.
    Further, we proposed under Sec.  505.19 that, if a qualifying 
hospital meets the conditions, plan criteria, and reporting 
requirements for loan forgiveness specified in Sec.  505.13, Sec.  
505.15, and Sec.  505.17, the loan would be forgiven. We proposed that 
if the loan is forgiven, we would send written notification for the 
loan forgiveness approval to the loan recipient at least 90 days before 
the end of the loan deferment period. If the loan recipient does not 
meet the conditions, plan criteria, or reporting requirements

[[Page 48130]]

for the loan forgiveness specified in Sec.  505.13, Sec.  505.15, and 
Sec.  505.17, we proposed that we would send written notification for 
the denial of the loan forgiveness.
3. Public Comments Received on the Proposed Rule and Our Responses
    We received one public comment on the September 30, 2005 proposed 
rule.
    Comment: One commenter suggested that the proposed loan deferment 
period of 60 months, during which the qualifying hospital is to 
establish outreach programs and unique research resources in accordance 
with the statutory conditions for loan forgiveness, is unnecessarily 
and excessively protracted. The commenter noted that the statute does 
not dictate the duration of the loan deferment period and that the 
statutory conditions for loan forgiveness can and should be 
accomplished with appropriate speed. The commenter urged CMS to shorten 
the deferment period, suggesting that 36 months is sufficient time for 
qualifying hospitals to satisfy the statutory conditions for loan 
forgiveness. In fact, the commenter believed that the most meaningful 
steps toward satisfaction of the conditions for loan forgiveness should 
be accomplished within the first twelve months of the program. The 
commenter noted that the shortened time period would spur qualifying 
hospitals to establish the outreach programs and unique research 
resources more quickly thereby maximizing the benefit to the community 
and making the most out of the funding.
    Response: The proposed loan deferment period of 60 months was 
intended to ensure that qualifying hospitals had sufficient time to 
establish the outreach programs and unique research resources to 
achieve loan forgiveness. In the proposed rule, we specifically 
requested comments from the public regarding the timeframe in order to 
assess whether the proposed period was appropriate. We appreciate the 
commenter's input that it is possible to establish the outreach 
programs and unique research resources as specified in the proposed 
rule within 36 months and possibly as early as 12 months, the shortest 
timeframe for which the commenter suggested the most meaningful steps 
could be accomplished. While the commenter suggested that 36 months is 
sufficient time for qualifying hospitals to satisfy the statutory 
conditions for loan forgiveness, we find that the commenter's 
additional argument that delaying loan forgiveness could inadvertently 
and unnecessarily delay providing intended benefits to the public to be 
compelling. Therefore, considering that a qualifying hospital may be 
well on the way to satisfying the conditions for loan forgiveness 
within 12 months, and in order to motivate loan recipients intending to 
strive for loan forgiveness to provide this benefit to the public as 
soon as feasible, we are changing the time period in which a qualifying 
hospital may be assessed and approved for loan forgiveness to as early 
as 12 months from the date that CMS notifies the qualifying hospital of 
the award of the loan. We note that, while 60 months was likely an 
overestimate of the time needed to satisfy the terms for loan 
forgiveness, we are reluctant to limit all qualifying hospitals to 12 
months to accomplish the initiatives required for loan forgiveness 
based on the submission of one comment. Therefore, we believe it is 
more appropriate to provide for consideration of loan forgiveness as 
early as 12 months from the date CMS notifies the qualifying hospital 
of the awarding of the loan and require that all evaluations for loan 
forgiveness must conclude no later than 60 months from the date CMS 
notifies the qualifying hospital of the awarding of the loan.
4. Provisions of the Final Rule
    We are adopting as final the proposed changes to Sec.  505.3 and 
the addition of Sec. Sec.  505.13 and 505.15, with only minor editorial 
changes. To accommodate the option in which qualifying hospitals may 
establish the outreach programs and unique research resources to 
achieve loan forgiveness as early as 12 months after loan notification, 
we are modifying Sec.  505.17(b) as proposed to specify that CMS will 
use the annual report to assess the qualifying hospital's loan 
forgiveness status and if the annual report shows that the qualifying 
hospital has fulfilled the conditions, plan criteria, and reporting 
requirements for loan forgiveness specified in Sec. Sec.  505.13, 
505.15, and Sec.  505.17, CMS will notify the qualifying hospital in 
writing that the loan is forgiven. We note that at Sec.  505.17(c), we 
specify that the qualifying hospital's final annual report is due to 
CMS at least 6 months before the end of the loan deferment period 
specified in Sec.  505.7(b). We are also modifying Sec.  505.19 to 
specify that CMS will send a written notification of approval for loan 
forgiveness to the qualifying hospital by the earlier of (1) 30 days 
from the date of receipt of the annual report that shows the qualifying 
hospital has satisfied the requirements for loan forgiveness; or (2) 90 
days before the end of the loan deferment period defined in Sec.  
505.7(b).

E. Statutory Requirements for Issuance of Regulations

    Section 902 of Pub. L. 108-173 (MMA) amended section 1871(a) of the 
Act and requires the Secretary, in consultation with the Director of 
the Office of Management and Budget, to establish and publish timelines 
for the publication of Medicare final regulations based on the previous 
publication of a Medicare proposed or interim final regulation. Section 
902 of the MMA also states that the timelines for these regulations may 
vary but shall not exceed 3 years after publication of the preceding 
proposed or interim final regulation except under exceptional 
circumstances.
    This final rule finalizes provisions set forth in the September 30, 
2005 interim final rule with comment (70 FR 57368) and the September 
30, 2005 proposed rule (70 FR 57376). In addition, this final rule is 
being published within the 3-year time limit imposed by section 902 of 
the MMA. Therefore, we believe that the final rule is in accordance 
with the Congress' intent to ensure timely publication of final 
regulations.

XII. Exclusion of Vendor Purchases Made Under the Competitive 
Acquisition Program (CAP) for Outpatient Drugs and Biologicals Under 
Part B for the Purpose of Calculating the Average Sales Price (ASP)

[If you choose to comment on issues in this section, please include the 
caption ``Exclusion of CAP from the ASP Calculation'' at the beginning 
of your comments.]

A. Background

1. Average Sales Price (ASP)
    Section 303(c) of Pub. L. 108-173 (the MMA) revised the drug 
payment methodology by creating a new pricing system based on the ASP 
of a drug or biological. Effective January 2005, Medicare pays for the 
vast majority of Part B covered drugs and biologicals using a drug 
payment methodology based on the ASP. (Please note that information on 
covered outpatient drugs and biologicals can be found at: http://www.cms.hhs.gov/McrPartBDrugAvgSalesPrice/.) In accordance with 
sections 1847A and 1927(b)(3)(A) of the Act, manufacturers submit the 
ASP data for their products to us on a quarterly basis, at the 11-digit 
National Drug Code (NDC) level.
    These data include each manufacturer's total sales (in dollars) and 
number of units of a drug to all purchasers in the United States in a 
calendar quarter (excluding certain sales exempted by statute), with 
limited

[[Page 48131]]

exceptions, and other data elements pertaining to the NDC. The sales 
price is net of discounts such as volume discounts, prompt pay 
discounts, cash discounts, free goods that are contingent on any 
purchase requirement, chargebacks, and rebates (other than rebates 
under section 1927 of the Act). The Medicare payment rate is based on 
106 percent of the ASP, less applicable deductible and coinsurance 
amounts, and is updated quarterly.
2. Competitive Acquisition Program (CAP)
    Section 303(d) of Pub. L. 108-173 added a new section 1847B to the 
Act. This section provides for an alternative payment methodology to 
the ASP for certain Part B covered drugs and biologicals that are not 
paid on a cost or prospective payment basis by establishing a CAP for 
the acquisition of and payment for competitively-biddable Part B 
covered drugs and biologicals. This program began on July 1, 2006. 
Physicians now have a choice between--(1) obtaining these drugs from 
approved CAP vendors; and (2) acquiring and billing for Part B covered 
drugs under the ASP system. In the March 4, 2005 Federal Register (70 
FR 10746), we proposed regulations to establish provisions for 
acquiring and billing for drugs and biologicals through the CAP . 
(Please note that information on the CAP can be found at: http://www.cms.hhs.gov/CompetitiveAcquisforBios/.)
3. Regulatory History
    In response to the March 4, 2005 proposed rule, many commenters 
requested clarification about whether the prices determined under the 
CAP are taken into account in computing the ASP under section 1847A of 
the Act. Most commenters recommended that purchases made under the CAP 
be excluded from the ASP calculation. However, one commenter suggested 
that, because the CAP was not included in the list of sales that are 
exempt from the ASP calculation set forth in section 1847A(c)(2) of the 
Act, prices under the CAP could not be excluded. In our July 6, 2005 
interim final rule with comment period (70 FR 39022), we responded that 
because the CAP was not included in the section 1847A(c)(2) of the Act 
list of sales that are exempt from the ASP calculation, we believed 
that sales to vendors made under the CAP must be included in the ASP.
    Commenters on the July 6, 2005 interim final rule with comment 
period reiterated their objections to including purchases made by 
vendors under the CAP in the ASP calculations. These commenters 
requested that we change our interpretation of our statutory authority. 
Several commenters provided detailed legal arguments supporting the 
exclusion of purchases by vendors made under the CAP from the 
calculation of ASP.
    Some commenters stated that we could use our demonstration 
authority to exclude CAP prices from ASP. Other commenters took the 
position that we could use our authority to establish CAP drug 
categories to establish a category of drugs and biologicals that would 
be excluded from the ASP calculation. Several commenters stated that 
sales to approved CAP vendors should be considered excluded from the 
determination of ``best price'' under section 1927(c)(1)(C) of the Act. 
These commenters maintained that by virtue of this exclusion, prices of 
CAP drugs and biologicals could be excluded from the calculation of 
ASP. One commenter contended that sales to CAP vendors are excluded 
from best price because CAP vendors do not fit squarely into the list 
of entities contained in the definition of ``best price'' in section 
1927(c)(1)(C)(i) of the Act. Another commenter suggested that approved 
CAP vendors, as Medicare contractors, should be considered Federal 
purchasers exempt from the determination of best price under sections 
1927(c)(1)(C)(i)(I) through (II) of the Act.
    Finally, several commenters stated that the intent of Congress was 
to create two different and separate structures, with separate pricing, 
in order to provide physicians with a choice of programs. These 
commenters referenced the language contained in sections 1847A(a)(2) 
and 1847B(a)(1)(A) of the Act in support of their contentions. Section 
1847A(a)(2) of the Act states that section 1847A ``shall not apply in 
the case of a physician who elects under subsection (a)(1)(A)(ii) of 
section 1847B for that section to apply instead of this section for the 
payment for drugs and biologicals.'' Section 1847B(a)(1)(A) of the Act 
states that ``this section shall not apply in the case of a physician 
who elects section 1847A to apply.'' These commenters stated that this 
language, which is contained in both the ASP and CAP statutory 
provisions, clearly indicates that Congress intended the two programs 
to operate independently. These commenters asserted that as independent 
programs, the pricing methodologies under ASP and the CAP should not be 
linked. These commenters further believed that including CAP prices in 
the calculation of ASP would undermine the CAP program by virtually 
eliminating any incentive that a manufacturer might have to offer 
discounts to CAP vendors.
    In response to the comments that we received on this issue, we 
revisited our analysis of our statutory authority. In the November 21, 
2005 Federal Register (70 FR 70477), we published an interim final rule 
with comment in which we stated that we did not find entirely 
persuasive the commenters' arguments regarding demonstration authority, 
best price, or the definition of categories as a legal basis for 
revising our interpretation. However, we recognized the commenters' 
concerns about the effect of including CAP prices in the calculation of 
ASP and agreed that the best outcome for both the ASP methodology and 
the CAP programs would be one in which prices under CAP did not affect 
payment amounts under the ASP methodology. In addition, we found 
compelling the commenters' statements about the separation of the ASP 
and CAP programs and that the two programs are intended to be 
alternatives to each other. We acknowledged the possibility that 
Congress intended the programs to be completely independent of each 
other.
    Therefore, as a result of our reassessment, and in accordance with 
our statutory authority, including our authority under section 
1847A(b)(2)(B) of the Act to establish methods for counting units, we 
decided to exclude, for the initial 3-year contract period under the 
CAP, units of CAP drugs that are administered to beneficiaries by 
participating CAP physicians. We revised Sec.  414.802 (definition of 
unit) to reflect the exclusion of units of CAP drugs administered to 
beneficiaries by participating CAP physicians. We further stated that 
we intend to examine the effect of this exclusion and, if necessary, 
revisit our decision at the end of the initial 3-year period of the 
CAP. We also clarified that manufacturers must exclude rebates and 
lagged price concessions attributable to units of CAP drugs 
administered to a beneficiary by a participating CAP physician when 
using the estimation methodology specified in Sec.  414.804.
    On April 21, 2006, we announced the selection of the approved CAP 
vendor for the initial phase of the CAP. The approved CAP vendor is 
required to provide manufacturers, upon request, with information 
necessary to determine which sales to the approved CAP vendor are sales 
of CAP drugs that are excluded from the ASP calculation.
    We did not receive any timely comments on the November 21, 2005 
interim final rule with comment period. In a March 3, 2006 Federal 
Register

[[Page 48132]]

notice (71 FR 10975), we published a PRA notice soliciting comment on 
our proposed modification of the OMB-approved ASP information 
collection requirements, regarding the collection of the number of CAP 
units excluded from the ASP calculation. In response to this notice, a 
commenter stated that, in certifying the accuracy of the submitted ASP 
data, manufacturers must rely on approved CAP vendors to provide the 
number of units of CAP drugs that are administered to beneficiaries by 
participating CAP physicians. The commenter noted that CAP vendors are 
the only entities with direct information on CAP units sold. Because of 
this circumstance, the commenter believed that the requirement to 
exclude units of CAP drugs administered to beneficiaries by 
participating CAP physicians places the manufacturer in the untenable 
position of reporting ASP and certifying reports of ASP based on 
second-hand information. Further, the commenter noted that 
manufacturers may not have timely access to this information and they 
cannot independently confirm its accuracy. The commenter suggested that 
we consider an alternative approach.

B. Regulation Change

    Existing Sec.  414.802 requires that, during the first 3 years of 
the CAP, the method for counting units excludes units of CAP drugs (as 
defined in Sec.  414.902) administered to a beneficiary by a 
participating CAP physician (as defined in Sec.  414.902). As a result 
of comments received on our March 3, 2006 PRA notice and our ongoing 
work with manufacturers, we learned that manufacturers were concerned 
that they would have difficulty obtaining the information necessary to 
accurately exclude CAP units (as currently defined in Sec.  414.802) 
from the ASP calculation. We have reexamined our current definition of 
unit based on the manufacturers concerns.
    After reexamination of the issues, we have determined that we did 
not fully consider that the current definition of unit may have 
unintended results. For example, an unintended result occurs when, as 
permitted by the statute in certain emergency situations under the CAP, 
the participating CAP physician administers a drug from his or her 
stock and orders a replacement from the approved CAP vendor. Our 
existing regulations specify a unit qualifies as a CAP unit when it is 
administered to a beneficiary by a participating CAP physician. 
However, in this instance, the drug that was administered was obtained 
outside the CAP, and the drug supplied by the approved CAP vendor was 
not administered to the beneficiary. Therefore, under our current 
definition of ``unit,'' under the CAP, the manufacturer could not 
exclude the units of CAP drugs that participating CAP physicians obtain 
from approved CAP vendors in accordance with the resupply provisions of 
Sec.  414.906(e).
    This result would have the effect of inappropriately including the 
sales of units of CAP drugs in the ASP calculation. Moreover, this 
result is inconsistent with our intended policy. In addition, requiring 
manufacturers to track administration of units of CAP drugs that 
approved CAP vendors supply to participating CAP physicians to resupply 
the physician's stock (in order to determine whether such drugs are 
ever administered to a Medicare beneficiary for purposes of excluding 
them from the calculation of ASP) would be burdensome for manufacturers 
and participating CAP physicians. These burdens are caused by the fact 
that manufacturers would have to rely on data from the participating 
CAP physicians to identify such units. However, our regulations and CAP 
participation agreement do not require participating CAP physicians to 
track the administration of drugs from their private stock.
    Our decision to exclude CAP units from the ASP was based on our 
concerns about the effect of including CAP prices in the calculation of 
ASP. The decision also was based on our belief that the best outcome 
for both the ASP methodology and the CAP programs would be one in which 
prices under CAP did not affect payment amounts under the ASP 
methodology. To remedy this unintended result and to better effectuate 
our intent in excluding CAP units, we are revising the definition of 
``unit'' at Sec.  414.802 for ASP purposes during the first 3 years of 
the CAP. We are persuaded by the commenters and by our review of the 
current regulation that: (1) the current definition of unit does not 
achieve the policy goal of establishing methods of counting units so 
that the payment amounts under the ASP methodology are not affected by 
the CAP; and (2) an alternative definition of unit will be 
significantly less burdensome on manufacturer, CAP vendors, and 
participating CAP physicians.
    Therefore, as a result of our reexamination, and in accordance with 
our authority under section 1847A(b)(2)(B) of the Act to establish 
methods for counting units, we have decided to revise our definition of 
``unit'' in our regulations to exclude, for the initial 3-year contract 
period under the CAP, units of CAP drugs sold to an approved CAP vendor 
for use under the CAP. We note that the revised definition is 
consistent with suggestions made by commenters in response to the March 
4, 2005 proposed rule. Many commenters suggested that ``sales to'' or 
``purchases by'' approved CAP vendors be excluded from the calculation 
of ASP. However, we are clarifying, that only those units of CAP drugs 
sold to an approved CAP vendor for use under the CAP are excluded from 
the calculation of ASP.
    In implementing this revised definition of unit, it is our intent 
to facilitate the start up of the CAP and reduce complexities and 
burdens associated with identifying units of CAP drugs excluded from 
the calculation of ASP. We believe the revised definition of unit 
establishes a method for counting units so that the payment amounts 
under the ASP methodology are not affected by the CAP. Further, we 
believe that manufacturers can more readily verify excluded units of 
CAP drugs in accordance with the revised definition.
    Manufacturers must continue to exclude rebates and lagged price 
concessions attributable to units of CAP drugs sold to approved CAP 
vendors for use under the CAP.
    We welcome comments on the exclusion of CAP drug units from the 
calculation of the ASP. We also seek comments on accounting for this 
exclusion when estimating lagged price concessions. We will address 
comments received in a subsequent Federal Register document.
    After the initial 3-year period of the CAP, we will evaluate the 
impact on approved CAP vendors, manufacturers, and others of excluding 
units sold to approved CAP vendors for use under the CAP from the 
calculation of ASP. If there appears to be a reason not to continue to 
exclude units of CAP drugs sold to approved CAP vendors for use under 
the CAP from the calculation of ASP, we will undertake rulemaking to 
describe our findings and conclusions and to seek public comment.

XIII. 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 available in computer tape or cartridge format; 
however, some files are available on diskette as well as on the 
Internet at: http://www.cms.hhs.gov/providers/hipps. In the FY 2007 
IPPS proposed rule (71 FR 24137 through 24139), we published a list of 
data files

[[Page 48133]]

that are available for purchase from CMS or that may be downloaded from 
the Internet without charge.

B. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comment on the following issues:
     <bullet>The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     <bullet>The accuracy of our estimate of the information collection 
burden.
     <bullet>The quality, utility, and clarity of the information to be 
collected.
     <bullet>Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    The following information collection requirements are included in 
this final rule and their associated burdens are subject to the PRA:
Section 412.64 Federal Rates for Inpatient Operating Costs for Federal 
Fiscal Year 2005 and Subsequent Fiscal Years (Reporting of Hospital 
Quality Data for Annual Hospital Payment Update)
    In the FY 2007 IPPS proposed rule (71 FR 23996), we outlined the 
requirements for this section and we are restating those requirements 
and burden estimates as part of this final rule. Section 412.64(d)(2) 
requires hospitals, in order to qualify for the full annual market 
basket update, to submit quality data on a quarterly basis to CMS, as 
specified by CMS.
    As discussed in the section IV.A. of this preamble, section 5001(a) 
of Pub. L. 109-171 sets forth new requirements for the Reporting of 
Hospital Quality Data for Annual Payment Update (RHQDAPU) program. New 
sections 1886(b)(3)(B)(viii)(III) and (IV) of the Act require that we 
expand the ``starter'' set of 10 measures that we currently use. In 
accordance with section 238(b) of Pub. L. 108-173, effective for all 
payments beginning with FY 2007, the set of measures will expand from 
10 to 21 measures, as we adopt the baseline set of performance measures 
set forth in a 2005 report issued by the Institute of Medicine (IOM) of 
the National Academy of Sciences.
    The burden estimate has been updated based on increased number of 
collected measures and the anticipated levels of participation by 
hospitals. We estimate that there will be approximately 3,700 
respondents per year. Of this number, approximately 3,100 hospitals are 
JCAHO accredited and are currently collected measures and submitting 
data to the JCAHO on a quarterly basis. Of the JCAHO accredited 
hospitals, approximately 1,080 are collecting the same measures CMS 
will be collecting for public reporting and there is no additional 
burden for these hospitals. Approximately 1,940 of the JCAHO-accredited 
hospitals will need to collect SCIP in addition to the data already 
collected for maintaining JCAHO accreditation. Approximately 60 
accredited hospitals do not submit for the three starter set topics and 
must begin collecting and submitting data on all four topics. In 
addition, there are approximately 600 hospitals that do not participate 
in the JCAHO accreditation process. These non-JCAHO hospitals will have 
the additional burden of collecting data on all four topics.
    For JCAHO hospitals, we estimate it will take 25 hours per quarter 
per topic for collection. We expect the burden for hospitals to total 
238,560 hours per year, including time allotted for overhead. For non-
JCAHO accredited hospitals, we estimate the burden to be 246,000 hours 
per year including overhead. The total number of burden hours for all 
hospitals is 485,560 hours. The number of respondents will vary 
according to the level of voluntary participation. One hundred percent 
of the data may be collected electronically. There will be no 
additional burden placed on hospitals that submit this data in response 
to section 5001(b) of Pub. L. 109-171.
    We are revising this collection to include the burden associated 
with the collection of the additional quality measures. However, the 
burden associated with the requirements under Sec.  412.64(d) is 
currently approved under OMB Number 0938-0918, with an expiration date 
of December 31, 2008.
Section 412.92 Special Treatment: Sole Community Hospitals
    In the FY 2007 proposed rule (71 FR 23996), we outlined the 
requirements for Sec.  412.92. We are restating those requirements and 
burden estimates as part of this final rule. Section 412.92(b)(3) 
requires an approved sole community hospital (SCH) to notify the 
appropriate fiscal intermediary of any change which would affect its 
classification as an SCH.
    The burden associated with this requirement is the time and effort 
it would take for the SCH to provide such notification to the fiscal 
intermediary. We estimate that on an annual basis it would take an SCH 
1 hour to provide notification. While this requirement is subject to 
the PRA, we believe the requirement is exempt because it impacts less 
than 10 SCHs.
Section 412.108 Special Treatment: Medicare-Dependent, Small Rural 
Hospitals
    In the FY 2007 IPPS proposed rule (71 FR 23996), we outlined the 
requirements for this section. We are restating those requirements and 
burden estimates as part of this final rule. Section 412.108(b)(4) 
requires an approved MDH to notify the appropriate fiscal intermediary 
of any change which would affect its status as an MDH.
    The burden associated with this requirement is the time and effort 
it would take for the MDH to provide such notification to the fiscal 
intermediary. We estimate that on an annual basis it would take an MDH 
1 hour to provide notification. While this requirement is subject to 
the PRA, we believe the requirement is exempt because it impacts less 
than 10 MDHs.
Section 412.525 Adjustments to the Federal Prospective Payment
    In the RY 2007 LTCH PPS proposed rule (71 FR 4648), we outlined the 
collection of information requirements associated with Sec.  412.525 
and we are restating those requirements and burden estimates as part of 
this final rule. Section 412.525(a)(4)(iv)(A) states that CMS may 
specify an alternative to the cost-to-charge ratio otherwise applicable 
under paragraph (a)(4)(iv)(B) of this section. In addition, a hospital 
may also request that its fiscal intermediary use a different (higher 
or lower) CCR based on substantial evidence provided by the hospital.
    The burden associated with this requirement is the time and effort 
necessary for a hospital to gather, process, and submit the necessary 
documentation to its fiscal intermediary to substantiate its request 
for the use of a different CCR by its fiscal intermediary. For example, 
necessary documentation, as stipulated by CMS and the fiscal 
intermediary, may include but not be limited to financial records 
documenting the hospital's cost and charges.
    The estimated burden for this requirement is 8 hours per hospital. 
Therefore, we estimate that it would require 80 annual hours (8 hours x 
10

[[Page 48134]]

facilities), to comply with this requirement.
    We initiated the OMB approval process by publishing a 60-day 
Federal Register notice on July 21, 2006 (71 FR 41448).
Section 412.529 Special Payment Provision for Short-Stay Outliers
    In the RY 2007 LTCH PPS proposed rule (71 FR 4648), we also 
outlined the collection of information requirements associated with 
Sec.  412.529 and we are restating these requirements and burden 
estimates as part of this final rule. Section 412.529(c)(4)(iv)(A) 
states that CMS may specify an alternative to the CCR otherwise 
applicable under paragraph (c)(4)(iv)(B) of this section. In addition, 
a hospital may also request that its FI use a different (higher or 
lower) CCR based on substantial evidence provided by the hospital.
    The burden associated with this requirement is the time and effort 
necessary for a hospital to gather, process, and submit the necessary 
documentation to its fiscal intermediary to substantiate its request 
for the use of a different CCR by its fiscal intermediary. For example, 
necessary documentation, as stipulated by CMS and the fiscal 
itnermediary, may include but not be limited to financial records 
documenting the hospital's cost and charges.
    The estimated burden for this requirement is 8 hours per hospital. 
Therefore, we estimate that it would require 80 annual hours (8 hours x 
10 facilities), to comply with this requirement.
    We initiated the OMB approval process by publishing a 60-day 
Federal Register notice on July 21, 2006 (71 FR 41448).
Section 505.13 Conditions for Loan Forgiveness
    In the September 30, 2005 Federal Register (70 FR 57376), we 
published a proposed rule that outlined the requirements for Sec.  
505.13 and we are restating those requirements and evaluation of the 
burden as part of this final rule. Section 505.13(d) requires a 
hospital seeking loan forgiveness to submit to CMS, within the 
timeframe specified by the Secretary, a written request for loan 
forgiveness and a loan forgiveness plan that meets the criteria 
specified in Sec.  505.15.
    The burden associated with this requirement is the time and effort 
needed to draft and submit the written request of forgiveness and the 
time and effort to develop and submit a loan forgiveness plan. While 
these requirements are subject to the PRA, we believe they are exempt 
as defined in 5 CFR 1320.3(c)(4). These requirements will impact less 
than 10 hospitals.
    This final rule imposes collection of information requirements as 
outlined in the regulation text and specified above. However, this 
final rule also makes reference to several associated information 
collections that are not discussed in the regulation text. The 
following is a discussion of these collections, which have received the 
Office of Management and Budget's (OMB) approval:

Occupational Mix Adjustment to the FY 2007 Index (Hospital Wage Index 
Occupational Mix Survey)

    As stated in section III.C. and III.G. of this preamble, for FY 
2007 in order to comply with the Bellevue decision, CMS will base the 
occupational mix adjustment on data collected from the 2006 survey. CMS 
submitted a revised information collection request to the Office of 
Management and Budget (OMB) that contained the existing burden and the 
additional burden associated with collecting new occupational mix data 
from hospitals to determine the occupational mix adjustment by 
September 30, 2006.
    The burden associated with this information collection request is 
the time and effort required to collect and submit the data in the 
Hospital Wage Index Occupational Mix Survey to CMS. While this burden 
is subject to the PRA, it is already approved under OMB control number 
0938-0907, with an expiration date of May 31, 2009.

Revisions to the Wage Index Based on Hospital Redesignations (Medicare 
Geographic Classification Review Board)

    As noted in section III.H of this preamble, section 1886(d)(10) of 
the Act established the MGCRB, an entity that has the authority to 
accept IPPS hospital applications requesting geographic 
reclassification for wage index or standardized payment amounts and to 
issue decisions on these requests. It is important for CMS to ensure 
the accuracy of the MGCRB decisions and remain apprised of potential 
payment impacts. Our regulations at Sec.  412.256 require a hospital to 
submit a copy of its MGCRB application to CMS.
    The burden associated with this requirement is the time and effort 
associated with a hospital compiling and submitting a copy of its MGCRB 
application to CMS. While this requirement is subject to the PRA, it is 
currently approved under OMB control number 0938-0573, with an 
expiration date of November 30, 2008.

Exclusion of Vendor Purchases Made Under the Competitive Acquisition 
Program (CAP) for Outpatient Drugs and Biologicals Under Part B for the 
Purpose of Calculating the Average Sales Price (ASP)

    Section XII.A.1 of this preamble provides background information 
pertaining to the use of the average sales price (ASP) as the basis for 
our drug payment methodology. In accordance with section 1847A of the 
Act, most Medicare Part B covered drugs and biologicals not paid on a 
cost or prospective payment basis are paid based on the average sales 
price of the drug or biological, beginning in CY 2005. The ASP data 
reporting requirements are specified in Section 1927 of the Act. The 
reported ASP data are used to establish the Medicare payment amounts.
    Section XII.A.2 and XII.A.3 of this preamble discuss the ASP 
payment methodology, the CAP for certain Part B covered drugs, and the 
regulatory history of ASP and CAP. The CAP program began on July 1, 
2006. The program provides physicians with a choice between obtaining 
Part B covered drugs from approved CAP vendors, or acquiring and 
billing for Part B drugs under the ASP system.
    As discussed in a November 21, 2005 (70 FR 70478) interim final 
rule with comment period and a March 3, 2006 (71 FR 10975) 30-day PRA 
Federal Register notice, the collection of ASP data imposes information 
collection requirements on the public. The burden associated with ASP 
information collection requirements is the time and effort required by 
manufacturers of Medicare Part B drugs and biologicals to prepare and 
submit the required data to CMS. While these requirements are subject 
to the PRA, they are currently approved under OMB control number 0938-
0921, with an expiration date of May 31, 2009.
    As required by section 3504(h) of the Paperwork Reduction Act of 
1995, we have submitted a copy of this document to the Office of 
Management and Budget (OMB) for its review of these information 
collection requirements.

C. Waiver of Proposed Rulemaking and Delay in the Effective Date

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register and invite public comment on the proposed rule. The 
notice of proposed rulemaking includes a reference to the legal 
authority under which the rule is proposed, and the terms and 
substances of the proposed rule or a description of the subjects and

[[Page 48135]]

issues involved. This procedure can be waived, however, if an agency 
finds good cause that a notice-and-comment procedure is impracticable, 
unnecessary, or contrary to the public interest and incorporates a 
statement of the finding and its reasons in the rule issued.
    We find good cause to waive the requirement for publication of a 
notice of proposed rulemaking and public comment for the provisions of 
section XII. of this preamble on the grounds that it is necessary to 
implement this change immediately in order to ensure that a more 
accurate, and less burdensome, implementation of our policy is in place 
in time for it to be effective for the next ASP reporting period. We 
believe that revising the definition of ``unit'' as described in this 
rule will best ensure that the payment amounts under the ASP 
methodology are not affected by the CAP, consistent with our stated 
policy. Without an immediate revision to the definition of ``unit,'' 
the regulation requires a level of complexity in determining how to 
exclude CAP prices that we did not intend and places unintended burdens 
on participating CAP physicians. Further, unless the revised definition 
of ``unit'' is implemented immediately, it would not be effective in 
time for manufacturers to accurately exclude units of CAP drugs sold to 
approved CAP vendors for use under the CAP during the third calendar 
quarter of 2006 and certify their reports.
    We also ordinarily provide a 60-day delay in the effective date of 
the provisions of a rule in accordance with the Administrative 
Procedure Act, which normally requires a 30-day delay in the effective 
date of a final rule, and the Congressional Review Act, which requires 
a 60-day delay in the effective date of a major rule. However, we can 
waive the delay in effective date if the Secretary finds, for good 
cause, that the delay is impracticable, unnecessary or contrary to the 
public interest, and incorporates a statement of the finding and the 
reasons in the rule issued (5 U.S.C. 553(d)(3); 5 U.S.C. 808(2)).
    We find that good cause exists to waive the 60-day delay in 
effectiveness for the provisions of section XII. of this preamble and 
Sec.  414.802 so that these portions of this rule take effect 
immediately upon publication in the Federal Register. Unless the 
revised definition of ``unit'' is implemented immediately, it would not 
be effective in time for manufacturers to accurately exclude units of 
CAP drugs sold to approved CAP vendors for use under the CAP during the 
third calendar quarter of 2006. As noted above, a delay in 
implementation of this refinement would impose costs burdens on 
manufacturers and participating CAP physicians that we did not intend. 
Further, without this refinement, manufacturers may be unable to 
certify the accuracy of their ASPs. Because manufactures must certify 
their ASPs, this refinement must be in place before the beginning of 
the next ASP reporting period. For these reasons, we find good cause to 
waive the 60-day delay in the effective date and these regulations will 
be effective on August 18, 2006.
    Moreover, in section II.c.iv. of the Addendum to this final rule, 
we discuss a technical correction that we are making to remove the 
second sentence from Sec.  412.116(e) of our regulations. We find it 
unnecessary to undertake notice-and-comment rulemaking with respect to 
removing this sentence because this correction merely removes a 
sentence that previously was struck from our regulations, but was 
inadvertently reinstated. We note that this change to the regulations 
underwent notice-and-comment rulemaking when it was initially removed 
from the regulations (68 FR 34515). Thus, because the public already 
had opportunity to comment on this policy, additional comment would be 
unnecessary.

D. Response to Comments

    Because of the large number of comments we normally receive on 
Federal Register documents, we are not able to acknowledge or respond 
to them individually. We will consider all comments on the CAP ASP 
provisions 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 409

    Health Facilities, Medicare.

42 CFR Part 410

    Health facilities, Health professions, Kidney diseases, 
Laboratories, Medicare, Rural areas, X-rays.

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 414

    Administrative practice and procedure, Health facilities, Health 
professions, Kidney diseases, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 424

    Emergency medical services, Health facilities, Health professions, 
Medicare.

42 CFR Part 485

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

42 CFR Part 489

    Health facilities, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 505

    Administrative practice and procedure, Health facilities, Loan 
programs, Infrastructure improvement program, Reporting and 
recordkeeping, and Rural areas.

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

PART 409--HOSPITAL INSURANCE BENEFITS

0
1. The authority citation for part 409 continues to read as follows:

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

0
2. Section 409.3 is amended by revising paragraph (e) under the 
definition of ``Qualified hospital'' to read as follows:


Sec.  409.3  Definitions.

* * * * *
    Qualified hospital means a facility that--* * *
    (e) If it is a foreign hospital, is licensed, or approved as 
meeting the standard for licensing, by the appropriate foreign 
licensing agency, and for purposes of furnishing nonemergency services 
to U.S. residents, is accredited by the Joint Commission on 
Accreditation of Healthcare Organizations (JCAHO), or by a foreign 
program under standards that CMS finds to be equivalent to those of 
JCAHO.

0
3. Section 409.5 is revised to read as follows:


Sec.  409.5  General description of benefits.

    Hospital insurance (Part A of Medicare) helps pay for inpatient 
hospital or inpatient CAH services and posthospital SNF care. It also 
pays for

[[Page 48136]]

home health services and hospice care. There are limitations on the 
number of days of care that Medicare can pay for and there are 
deductible and coinsurance amounts for which the beneficiary is 
responsible. For each type of service, certain conditions must be met 
as specified in the pertinent sections of this subpart and in part 418 
of this chapter regarding hospice care. Conditions for payment of 
emergency inpatient services furnished by a nonparticipating U.S. 
hospital and for services furnished in a foreign country are set forth 
in subparts G and H of part 424 of this chapter.

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

0
4. The authority citation for part 410 continues to read as follows:

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

0
5. Section 410.66 is revised to read as follows:


Sec.  410.66  Emergency outpatient services furnished by a 
nonparticipating hospital and services furnished in a foreign country.

    Conditions for payment of emergency inpatient services furnished by 
a nonparticipating U.S. hospital and for services furnished in a 
foreign country are set forth in subparts G and H of part 424 of this 
chapter.

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

0
6. The authority citation for part 412 is revised 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).

0
7. Section 412.8 is amended by--
0
a. Revising paragraph (b)(2).
0
b. Adding a new paragraph (c).
    The revision and addition read as follows:


Sec.  412.8  Publication of schedules for determining prospective 
payment rates.

* * * * *
    (b) * * *
    (2) Except as provided in paragraph (c) of this section, CMS 
publishes a Federal Register document setting forth final methods, 
amounts, and factors for determining inpatient prospective payment 
rates not later than the August 1 before the Federal fiscal year in 
which the rates would apply.
    (c) Publication schedule for FY 2007. For FY 2007, not later than 
August 1, 2006, CMS publishes a Federal Register document setting forth 
a description of the methodology and data used in computing the 
inpatient prospective payment rates for that year.

0
8. Section 412.22 is amended by--
0
a. Revising the introductory text of paragraph (f).
0
b. Adding a new paragraph (f)(3).
0
c. Revising paragraph (h)(1).
0
d. In paragraph (h)(2), removing the phrase ``(h)(3), (h)(6), and 
(h)(7) of this section'' and adding the phrase ``(h)(3), (h)(4), 
(h)(5), (h)(7), and (h)(8) of this section'' in its place.
0
e. Redesignating paragraphs (h)(5), (h)(6), and (h)(7) as paragraphs 
(h)(6), (h)(7), and (h)(8), respectively.
0
f. Revising paragraph (h)(3).
0
g. Revising paragraph (h)(4).
0
h. Adding a new paragraph (h)(5).
0
i. In newly redesignated paragraph (h)(6), removing the phrase ``(h)(1) 
through (h)(4) of this section'' and adding the phrase ``(h)(1) through 
(h)(5) of this section'' in its place.
    The revisions and addition read as follows:


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

* * * * *
    (f) Application for certain hospitals. Except as provided in 
paragraph (f)(3) of this section, if a hospital was excluded from the 
prospective payment systems under the provisions of this section on or 
before September 30, 1995, and at that time occupied space in a 
building also used by another hospital, or in one or more buildings 
located on the same campus as buildings used by another hospital, the 
criteria in paragraph (e) of this section do not apply to the hospital 
as long as the hospital--
* * * * *
    (3) For cost reporting periods beginning on or after October 1, 
2006, in applying the provisions of paragraph (f)(1) or (f)(2) of this 
section, any hospital that was excluded from the prospective payment 
systems under the provisions of this section on or before September 30, 
1995, and at that time occupied space in a building also used by 
another hospital, or in one or more buildings located on the same 
campus as buildings used by another hospital may increase or decrease 
the square footage or decrease the number of beds considered to be part 
of the hospital at any time without affecting the provisions of 
paragraph (f)(1) or (f)(2) of this section.
    (i) If a hospital to which the provisions of paragraph (f)(1) of 
this section applies decreases its number of beds below the number of 
beds considered to be part of the hospital on September 30, 1995, it 
may subsequently increase the number of beds at any time as long as the 
resulting total number of beds considered to be part of the hospital 
does not exceed the number of beds at the hospital on September 30, 
1995.
    (ii) If a hospital to which the provisions of paragraph (f)(2) of 
this section applies decreases its number of beds below the number of 
beds considered to be part of the hospital on September 30, 2003, it 
may subsequently increase the number of beds at any time as long as the 
resulting total number of beds considered to be part of the hospital 
does not exceed the number of beds at the hospital on September 30, 
2003.
* * * * *
    (h) Satellite facilities. (1) For purposes of paragraphs (h)(2) 
through (h)(5) of this section, a satellite facility is a part of a 
hospital that provides inpatient services in a building also used by 
another hospital, or in one or more entire buildings located on the 
same campus as buildings used by another hospital.
* * * * *
    (3) Except as provided in paragraphs (h)(4) and (h)(5) of this 
section, the provisions of paragraph (h)(2) of this section do not 
apply to--
* * * * *
    (4) For cost reporting periods beginning before October 1, 2006, in 
applying the provisions of paragraph (h)(3) of this section, any 
hospital structured as a satellite facility on September 30, 1999, may 
increase or decrease the square footage of the satellite facility or 
may decrease the number of beds in the satellite facility if these 
changes are made necessary by relocation of a facility--
    (i) To permit construction or renovation necessary for compliance 
with changes in Federal, State, or local law; or
    (ii) Because of catastrophic events such as fires, floods, 
earthquakes, or tornadoes.
    (5) For cost reporting periods beginning on or after October 1, 
2006, in applying the provisions of paragraph (h)(3) of this section--
    (i) Any hospital structured as a satellite facility on September 
30, 1999, may increase or decrease the square footage or decrease the 
number of beds considered to be part of the satellite facility at any 
time without affecting the provisions of paragraph (h)(3) of this 
section; and
    (ii) If the satellite facility decreases its number of beds below 
the number of beds considered to be part of the satellite facility on 
September 30, 1999,

[[Page 48137]]

it may subsequently increase the number of beds at any time as long as 
the resulting total number of beds considered to be part of the 
satellite facility does not exceed the number of beds at the satellite 
facility on September 30, 1999.
* * * * *

0
9. Section 412.25 is amended by--
0
a. In paragraph (e) introductory text, remove the cross-reference 
``paragraph (e)(2) and (e)(4)'' and add the cross-reference ``paragraph 
(e)(2) and (e)(5)'' in its place.
0
b. In paragraph (e)(2) introductory text, remove the cross-reference 
``paragraph (e)(3) and (e)(5)'' and add the cross-reference ``paragraph 
(e)(3) and (e)(6)'' in its place.
0
c. Revising paragraph (e)(3).
0
d. Revising paragraph (e)(4) introductory text.
0
e. Redesignating paragraph (e)(5) as (e)(6).
0
f. Adding a new paragraph (e)(5).
    The revisions and addition read as follows:


Sec.  412.25  Excluded hospital units: Common requirements.

* * * * *
    (e) * * *
    (3) Except as specified in paragraphs (e)(4) and (e)(5) of this 
section, the provisions of paragraph (e)(2) of this section do not 
apply to any unit structured as a satellite facility on September 30, 
1999, and excluded from the prospective payment systems on that date, 
to the extent the unit continues operating under the same terms and 
conditions, including the number of beds and square footage considered 
to be part of the unit at the satellite facility on September 30, 1999.
    (4) In applying the provisions of paragraph (e)(3) of this section, 
any unit structured as a satellite facility on September 30, 1999, may 
increase or decrease the square footage of the satellite facility or 
may decrease the number of beds in the satellite facility considered to 
be part of the satellite facility at any time, if these changes are 
made by the relocation of a facility--
* * * * *
    (5) For cost reporting periods beginning on or after October 1, 
2006, in applying the provisions of paragraph (e)(3) of this section--
    (i) Any unit structured as a satellite facility on September 30, 
1999, may increase the square footage of the unit only at the beginning 
of a cost reporting period or decrease the square footage or number of 
beds considered to be part of the satellite facility subject to the 
provisions of paragraph (b)(2) of this section, without affecting the 
provisions of paragraph (e)(3) of this section; and
    (ii) If the unit structured as a satellite facility decreases its 
number of beds below the number of beds considered to be part of the 
satellite facility on September 30, 1999, subject to the provisions of 
paragraph (b)(2) of this section, it may subsequently increase the 
number of beds at the beginning or a cost reporting period as long as 
the resulting total number of beds considered to be part of the 
satellite facility does not exceed the number of beds at the satellite 
facility on September 30, 1999.
* * * * *


Sec.  412.42  [Amended]

0
10. In paragraph (d) of Sec.  412.42, the cross-reference ``Sec.  
405.310(k)'' is removed, and the cross-reference ``Sec.  411.15(k)'' is 
added in its place.


Sec.  412.48  [Amended]

0
11. In paragraph (b) of Sec.  412.48, the cross-reference ``Sec. Sec.  
405.330 through 405.332'' is removed and the cross-reference ``Sec.  
411.400 and Sec.  411.402'' is added in its place.

0
12. Section 412.64 is amended by--
0
a. Revising paragraph (d)(2).
0
b. Adding a new paragraph (h)(6).
    The revision and addition read as follows:


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

* * * * *
    (d) * * *
    (2)(i) In the case of a ``subsection (d) hospital,'' as defined 
under section 1886(d)(1)(B) of the Act, that does not submit quality 
data on a quarterly basis to CMS, in the form and manner specified by 
CMS, the applicable percentage change specified in paragraph (d)(1) of 
this section is reduced--
    (A) For fiscal years 2005 and 2006, by 0.4 percentage points; and
    (B) For fiscal year 2007 and subsequent fiscal years, by 2.0 
percentage points.
    (ii) Any reduction of the percentage change will apply only to the 
fiscal year involved and will not be taken into account in computing 
the applicable percentage change for a subsequent fiscal year.
* * * * *
    (h) * * *
    (6) If a new rural hospital that is subject to the hospital 
inpatient prospective payment system opens in a State that has an 
imputed rural floor and has rural areas, CMS uses the imputed floor as 
the hospital's wage index until the hospital's first cost report as an 
inpatient prospective payment system provider is contemporaneous with 
the cost reporting period being used to develop a given fiscal year's 
wage index.
* * * * *

0
13. A new Sec.  412.79 is added to Subpart E to read as follows:


Sec.  412.79  Determination of the hospital-specific rate for inpatient 
operating costs for Medicare-dependent, small rural hospitals based on 
a Federal fiscal year 2002 base period.

    (a) Base-period costs--(1) General rule. Except as provided in 
paragraph (a)(2) of this section, for each MDH, the intermediary 
determines the MDH's Medicare Part A allowable inpatient operating 
costs, as described in Sec.  412.2(c), for the 12-month or longer cost 
reporting period beginning on or after October 1, 2001, and before 
October 1, 2002.
    (2) Exceptions. (i) If the MDH's last cost reporting period 
beginning before October 1, 2002, is for less than 12 months, the base 
period is the MDH's most recent 12-month or longer cost reporting 
period beginning before that short cost reporting period.
    (ii) If the MDH does not have a cost reporting period beginning on 
or after October 1, 2001, and before October 1, 2002, and does have a 
cost reporting period beginning on or after October 1, 2000, and before 
October 1, 2001, that cost reporting period is the base period unless 
the cost reporting is for less than 12 months. In that case, the base 
period is the MDH's most recent 12-month or longer cost reporting 
period beginning before that short cost reporting period.
    (b) Costs on a per discharge basis. The intermediary determines the 
MDH's average base-period operating cost per discharge by dividing the 
total operating costs by the number of discharges in the base period. 
For purposes of this section, a transfer as described in Sec.  412.4(b) 
is considered to be a discharge.
    (c) Case-mix adjustment. The intermediary divides the average base-
period cost per discharge by the MDH's case-mix index for the base 
period.
    (d) Updating base period costs. For purposes of determining the 
updated base-period costs for cost reporting periods beginning in 
Federal fiscal year 2002, the update factor is determined using the 
methodology set forth in Sec.  412.73(c)(14) and (c)(15).
    (e) DRG adjustment. The applicable hospital-specific cost per 
discharge is multiplied by the appropriate DRG weighting factor to 
determine the hospital-specific base payment amount

[[Page 48138]]

(target amount) for a particular covered discharge.
    (f) Notice of hospital-specific rate. The intermediary furnishes 
the MDH a notice of its hospital-specific rate which contains a 
statement of the hospital's Medicare Part A allowable inpatient 
operating costs, number of Medicare discharges, and case-mix index 
adjustment factor used to determine the hospital's cost per discharge 
for the Federal fiscal year 2002 base period.
    (g) Right to administrative and judicial review. An intermediary's 
determination of the hospital-specific rate for a hospital is subject 
to administrative and judicial review. Review is available to an MDH 
upon receipt of the notice of the hospital-specific rate. The notice is 
treated as a final intermediary determination of the amount of program 
reimbursement for purposes of subpart R of Part 405 of this chapter, 
governing provider reimbursement determinations and appeals.
    (h) Modification of hospital-specific rate. (1) The intermediary 
recalculates the hospital-specific rate to reflect the following:
    (i) Any modifications that are determined as a result of 
administrative or judicial review of the hospital-specific rate 
determinations; or
    (ii) Any additional costs that are recognized as allowable costs 
for the MDH's base period as a result of administrative or judicial 
review of the base-period notice of amount of program reimbursement.
    (2) With respect to either the hospital-specific rate determination 
or the amount of program reimbursement determination, the actions taken 
on administrative or judicial review that provide a basis for 
recalculations of the hospital-specific rate include the following:
    (i) A reopening and revision of the MDH's base-period notice of 
amount of program reimbursement under Sec. Sec.  405.1885 through 
405.1889 of this chapter.
    (ii) A prehearing order or finding issued during the provider 
payment appeals process by the appropriate reviewing authority under 
Sec.  405.1821 or Sec.  405.1853 of this chapter that resolved a matter 
at issue in the MDH's base-period notice of amount of program 
reimbursement.
    (iii) An affirmation, modification, or reversal of a Provider 
Reimbursement Review Board decision by the Administrator of CMS under 
Sec.  405.1875 of this chapter that resolved a matter at issue in the 
hospital's base-period notice of amount of program reimbursement.
    (iv) An administrative or judicial review decision under Sec. Sec.  
405.1831, 405.1871, or 405.1877 of this chapter that is final and no 
longer subject to review under applicable law or regulations by a 
higher reviewing authority, and that resolved a matter at issue in the 
hospital's base-period notice of amount of program reimbursement.
    (v) A final, nonappealable court judgment relating to the base-
period costs.
    (3) The adjustments to the hospital-specific rate made under 
paragraphs (h)(1) and (2) of this section are effective retroactively 
to the time of the intermediary's initial determination of the rate.
    (i) Maintaining budget neutrality. CMS makes an adjustment to the 
hospital-specific rate to ensure that changes to the DRG 
classifications and recalibrations of the DRG relative weights are made 
in a manner so that aggregate payments to section 1886(d) hospitals are 
not affected.


Sec.  412.84  [Amended]

0
14. In paragraph (m) of Sec.  412.84, the cross-reference ``paragraph 
(h)(3)'' is removed and the cross-reference ``paragraph (i)(4)'' is 
added in its place.

0
15. Section 412.90 is amended by revising paragraph (j) to read as 
follows:


Sec.  412.90  General rules.

* * * * *
    (j) Medicare-dependent, small rural hospitals. For cost reporting 
periods beginning on or after April 1, 1990, and before October 1, 
1994, and for discharges occurring on or after October 1, 1997, and 
before October 1, 2011, CMS adjusts the prospective payment rates for 
inpatient operating costs determined under subparts D and E of this 
part if a hospital is classified as a Medicare-dependent, small rural 
hospital.
* * * * *

0
16. Section 412.92 is amended by--
0
a. In paragraph (b)(2)(iv) of Sec.  412.92, the word ``djustment'' is 
removed and the word ``adjustment'' is added in its place.
0
b. Revising paragraph (b)(3) to read as follows:


Sec.  412.92  Special treatment: Sole community hospitals.

* * * * *
    (b) * * *
    (3) Duration of classification.
    (i) An approved classification as a sole community hospital remains 
in effect without need for reapproval unless there is a change in the 
circumstances under which the classification was approved. An approved 
sole community hospital must notify the fiscal intermediary if any 
change that is specified in paragraph (b)(3)(ii) of this section 
occurs. If CMS determines that a sole community hospital failed to 
comply with this requirement, CMS will cancel the hospital's 
classification as a sole community hospital effective with the date 
that the hospital no longer met the criteria for such classification, 
consistent with the provisions of Sec.  405.1885 of this chapter.
    (ii) A sole community hospital must report the following to the 
fiscal intermediary within 30 days of the event:
    (A) The opening of a new hospital in its service area.
    (B) The opening of a new road between itself and a like provider 
within 35 miles.
    (C) An increase in the number of beds to more than 50 if the 
hospital qualifies as a sole community hospital under paragraph 
(a)(1)(ii) of this section.
    (D) Its geographic classification changes.
    (E) Any changes to the driving conditions that result in a decrease 
in the amount of travel time between itself and a like provider if the 
hospital qualifies as a sole community hospital under paragraph (a)(3) 
of this section.
    (iii) A sole community hospital must report to the fiscal 
intermediary if it becomes aware of any change that would affect its 
classification as a sole community hospital beyond the events listed in 
paragraph (b)(3)(ii) of this section within 30 days of the event. If 
CMS determines that a sole community hospital has failed to comply with 
this requirement, CMS will cancel the hospital's classification as a 
sole community hospital effective with the date the hospital became 
aware of the event that resulted in the sole community hospital no 
longer meeting the criteria for such classification, consistent with 
the provisions of Sec.  405.1885 of this chapter.
* * * * *
0
17. Section 412.96 is amended by--
0
a. Revising paragraph (c)(2)(i) introductory text.
0
b. Revising paragraph (c)(2)(ii).
0
c. Revising paragraph (i)(3).
    The revisions read as follows:


Sec.  412.96  Special Treatment: Referral centers.

* * * * *
    (c) * * *
    (2) Number of discharges. (i) CMS sets forth the national and 
regional number of discharges in each year's annual notice of 
prospective payment rates

[[Page 48139]]

published under Sec.  412.8(b). The methodology CMS uses to calculate 
these criteria is described in paragraph (i) of this section. Except as 
provided in paragraph (c)(2)(ii) of this section for an osteopathic 
hospital, for the hospital's cost reporting period that began during 
the same fiscal year as the cost reporting periods used to compute the 
regional median discharges under paragraph (i) of this section, its 
number of discharges (not including discharges from units excluded from 
the prospective payments system under subpart B of this part or from 
newborn units) is at least equal to--
* * * * *
    (ii) For cost reporting periods beginning on or after January 1, 
1986, an osteopathic hospital, recognized by the American Osteopathic 
Healthcare Association (or any successor organization), that is located 
in a rural area must have at least 3,000 discharges during its cost 
reporting period that began during the same fiscal year as the cost 
reporting periods used to compute the regional median discharges under 
paragraph (i) of this section to meet the number of discharges 
criterion.
* * * * *
    (i) * * *
    (3) Annual notice. CMS sets forth the national and regional 
criteria in the annual notice of prospective payment rates published 
under Sec.  412.8(b). These criteria are compared to an applying 
hospital's number of discharges for the same cost reporting period used 
to develop the regional criteria in this section in determining if the 
hospital qualifies for referral center status for cost reporting 
periods beginning on or after October 1 of the Federal fiscal year to 
which the notice applies.

0
18. Section 412.105 is amended by--
0
a. Revising paragraph (f)(1)(ii)(C).
0
b. Adding a new paragraph (f)(1)(iii)(C).
    The addition reads as follows:


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

* * * * *
    (f) * * *
    (1) * * *
    (ii) * * *
    (C) Effective for discharges occurring on or after October 1, 1997, 
the time spent by a resident in a nonhospital setting in patient care 
activities, as defined in Sec.  413.75(b) of this subchapter, under an 
approved medical residency training program is counted towards the 
determination of full-time equivalency if the criteria set forth in 
Sec.  413.78(c), Sec.  413.78(d), or Sec.  413.78(e) of this 
subchapter, as applicable, are met.
    (iii) * * *
    (C) In order to be counted, a resident must be spending time in 
patient care activities, as defined in Sec.  413.75(b) of this 
subchapter.
* * * * *

0
19. Section 412.106 is amended by--
0
a. Revising paragraph (a)(1)(iii).
0
b. Republishing the introductory text of paragraph (d)(2)(iv).
0
c. Revising paragraph (d)(2)(iv)(C)(3).
0
d. Adding a new paragraph (d)(2)(iv)(D).
0
e. Adding a new paragraph (d)(2)(v).
    The revision and additions read as follows:


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

    (a) * * *
    (1) * * *
    (iii) The hospital's location, in an urban or rural area, is 
determined in accordance with the definitions in Sec.  412.64, except 
that a reclassification that results from an urban hospital 
reclassified as rural as set forth in Sec.  412.103 is classified as 
rural.
* * * * *
    (d) * * *
    (2) * * *
    (iv) If the hospital meets the criteria of paragraph (c)(1)(iv) of 
this section--
* * * * *
    (C) * * *
    (3) Except as provided in paragraph (d)(2)(iv)(D) of this section, 
the maximum payment adjustment factor is 12 percent.
    (D) Effective for discharges occurring on or after October 1, 2006, 
for a hospital that is classified as a Medicare-dependent, small rural 
hospital under Sec.  412.108, the payment adjustment factor limitation 
specified in paragraph (d)(2)(iv)(C)(3) does not apply.
    (v) If the hospital meets the criteria of paragraph (c)(2) of this 
section, the payment adjustment factor is as follows:
    (A) 30 percent for discharges occurring on or after April 1, 1990, 
and before October 1, 1991.
    (B) 35 percent for discharges occurring on or after October 1, 
1991.
* * * * *

0
20. Section 412.108 is amended by--
0
a. Revising paragraph (a)(1) introductory text.
0
b. Revising paragraph (b)(4).
0
c. Adding a new paragraph (c)(2)(iii).
    The revisions and addition read as follows:


Sec.  412.108  Special Treatment: Medicare-dependent, small rural 
hospitals.

    (a) Criteria for classification as a Medicare-dependent, small 
rural hospital. (1) General considerations. For cost reporting periods 
beginning on or after April 1, 1990, and ending before October 1, 1994, 
or for discharges occurring on or after October 1, 1997, and before 
October 1, 2011, a hospital is classified as a Medicare-dependent, 
small rural hospital if it is located in a rural area (as defined in 
subpart D of this part) and meets all of the following conditions:
* * * * *
    (b) * * *
    (4) A determination of MDH status made by the fiscal intermediary 
is effective 30 days after the date the fiscal intermediary provides 
written notification to the hospital. An approved MDH status 
determination remains in effect unless there is a change in the 
circumstances under which the status was approved.
    (i) An approved MDH must notify the fiscal intermediary if any 
change occurs that is specified in paragraph (b)(4)(ii) of this section 
occurs. If CMS determines that an MDH failed to comply with this 
requirement, CMS will cancel the hospital's classification as an MDH 
effective with the date that the hospital no longer met the criteria 
for such status, consistent with the provisions of Sec.  405.1885 of 
this chapter.
    (ii) An MDH must report the following to the fiscal intermediary 
within 30 days of the event:
    (A) The number of beds increases to more than 100.
    (B) Its geographic classification changes.
    (iii) An MDH must report to the fiscal intermediary if it becomes 
aware of any change that would affect its classification as an MDH 
beyond the events listed in paragraph (b)(4)(ii) of this section within 
30 days of the event. If CMS determines that an MDH has failed to 
comply with this requirement, CMS will cancel the hospital's 
classification as an MDH effective with the date the hospital became 
aware of the event that resulted in the MDH no longer meeting the 
criteria for such classification, consistent with the provisions of 
Sec.  405.1885 of this chapter.
* * * * *
    (c) * * *
    (2) * * *
    (iii) For discharges occurring during cost reporting periods (or 
portions thereof) beginning on or after October 1, 2006, and before 
October 1, 2011, 75 percent of the amount that the Federal rate 
determined under paragraph (c)(1) of this section is exceeded by the 
highest of the following:
    (A) The hospital-specific rate as determined under Sec.  412.73.

[[Page 48140]]

    (B) The hospital-specific rate as determined under Sec.  412.75.
    (C) The hospital-specific rate as determined under Sec.  412.79.
* * * * *


Sec.  412.116  [Amended]

0
21. In Sec.  412.116(e), the second sentence is removed.
0
22. Section 412.234 is amended by--

0
a. In paragraph (a)(3)(ii), removing the term ``fiscal year'' and 
adding the term ``Federal fiscal year'' in its place.
0
b. Revising paragraph (a)(3)(iii).
0
c. Adding a new paragraph (a)(3)(iv).
    The revisions and addition read as follows:


Sec.  412.234  Criteria for all hospitals in an urban county seeking 
redesignation to another urban area.

    (a) * * *
    (3) * * *
    (iii) For Federal fiscal year 2007, hospitals located in counties 
that are in the same Combined Statistical Area (CSA) (under the MSA 
definitions announced by the OMB on June 6, 2003) as the urban area to 
which they seek redesignation qualify as meeting the proximity 
requirement for reclassification to the urban area to which they seek 
redesignation.
    (iv) For Federal fiscal year 2008 and thereafter, hospitals located 
in counties that are in the same Combined Statistical Area (CSA) or 
Core-Based Statistical Area (CBSA) (under the MSA definitions announced 
by the OMB on June 6, 2003) 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.
* * * * *

0
23. Section 412.316 is amended by--
0
a. Revising paragraph (a).
0
b. Revising paragraph (b)(2).
0
c. Adding a new paragraph (b)(3).
0
d. Revising paragraph (c).
    The revisions and addition read as follows:


Sec.  412.316  Geographic adjustment factors.

    (a) Local cost variation. CMS adjusts for local cost variation 
based on the hospital wage index value that is applicable to the 
hospital under subpart D of this part. The adjustment factor equals the 
hospital wage index value applicable to the hospital raised to the 
.6848 power and is applied to 100 percent of the Federal rate.
    (b) * * *
    (2) For discharges occurring on or after October 1, 2004, the 
definition of large urban area under Sec.  412.63(c)(6) continues to be 
in effect for purposes of the payment adjustment under this section, 
based on the geographic classification under Sec.  412.64, except as 
provided for in paragraph (b)(3) of this section.
    (3) For purposes of this section, the geographic classifications 
specified under Sec.  412.64 apply, except that, effective for 
discharges occurring on or after October 1, 2006, for an urban hospital 
that is reclassified as rural as set forth in Sec.  412.103, the 
geographic classification is rural.
    (c) Cost-of-living adjustment. CMS provides an additional payment 
to a hospital located in Alaska and Hawaii equal to [0.3152 x (the 
cost-of-living adjustment factor used to determine payments under 
subpart D of this part--1)] percent.
    24. Section 412.320 is amended by--

0
a. Revising paragraph (a)(1)(ii).
0
b. Adding a new paragraph (a)(1)(iii).
    The revision and addition read as follows:


Sec.  412.320  Disproportionate share adjustment factor.

    (a) * * *
    (1) * * *
    (ii) For discharges occurring on or after October 1, 2004, the 
payment adjustment under this section is based on the geographic 
classifications specified under Sec.  412.64, except as provided for in 
paragraph (a)(1)(iii) of this section.
    (iii) For purposes of this section, the geographic classifications 
specified under Sec.  412.64 apply, except that, effective for 
discharges occurring on or after October 1, 2006, for an urban hospital 
that is reclassified as rural as set forth in Sec.  412.103, the 
geographic classification is rural.
* * * * *

0
25. Section 412.505 is amended by revising paragraph (b)(1) to read as 
follows:


Sec.  412.505  Conditions for payment under the prospective payment 
system for long-term care hospitals.

* * * * *
    (b) General requirements. (1) Effective for cost reporting periods 
beginning on or after October 1, 2002, a long-term care hospital must 
meet the conditions for payment of this section, Sec.  412.22(e)(3) and 
(h)(6), if applicable, and Sec.  412.507 through Sec.  412.511 to 
receive payment under the prospective payment system described in this 
subpart for inpatient hospital services furnished to Medicare 
beneficiaries.
* * * * *


Sec.  412.508  [Amended]

0
26. In paragraph (c)(3) of Sec.  412.508, the cross-reference ``Sec.  
1001.301'' is removed and the cross-reference ``1001.201'' is added in 
its place.

0
27. Section 412.511 is revised to read as follows:


Sec.  412.511  Reporting and recordkeeping requirements.

    A long-term care hospital participating in the prospective payment 
system under this subpart must meet the requirement of Sec. Sec.  
412.22(e)(3) and 412.22(h)(6) to report co-located status, if 
applicable, and the recordkeeping and cost reporting requirements of 
Sec. Sec.  413.20 and 413.24 of this subchapter.

0
28. Section 412.525 is amended by--
0
a. Revising paragraph (a)(3).
0
b. Revising paragraph (a)(4)(ii).
0
c. Revising paragraph (a)(4)(iii).
0
d. Adding a new paragraph (a)(4)(iv).
0
e. Adding a new paragraph (d)(3).
0
f. Adding a new paragraph (d)(4).
    The revisions and additions read as follows:


Sec.  412.525  Adjustments to the Federal prospective payment.

    (a) * * *
    (3) The additional payment equals 80 percent of the difference 
between the estimated cost of the patient's care (determined by 
multiplying the hospital-specific cost-to-charge ratio by the Medicare 
allowable covered charge) and the sum of the adjusted LTCH PPS Federal 
prospective payment and the fixed-loss amount.
    (4) * * *
    (ii) For discharges occurring on or after August 8, 2003, and 
before October 1, 2006, high-cost outlier payments are subject to the 
provisions of Sec.  412.84(i)(1), (i)(3), and (i)(4) and (m) for 
adjustments of cost-to-charge ratios.
    (iii) For discharges occurring on or after October 1, 2003, and 
before October 1, 2006, high-cost outlier payments are subject to the 
provisions of Sec.  412.84(i)(2) for adjustments to cost-to-charge 
ratios.
    (iv) For discharges occurring on or after October 1, 2006, high-
cost outlier payments are subject to the following provisions:
    (A) CMS may specify an alternative to the cost-to-charge ratio 
otherwise applicable under paragraph (a)(4)(iv)(B) of this section. A 
hospital may also request that its fiscal intermediary use a different 
(higher or lower) cost-to-charge ratio based on substantial evidence 
presented by the hospital. A request must be approved by the CMS 
Regional Office.
    (B) The cost-to-charge ratio applied at the time a claim is 
processed is based

[[Page 48141]]

on either the most recent settled cost report or the most recent 
tentatively settled cost report, whichever is from the latest cost 
reporting period.
    (C) The fiscal intermediary may use a statewide average cost-to-
charge ratio, which CMS establishes annually, if it is unable to 
determine an accurate cost-to-charge ratio for a hospital in one of the 
following circumstances:
    (1) A new hospital that has not yet submitted its first Medicare 
cost report. (For this purpose, a new hospital is defined as an entity 
that has not accepted assignment of an existing hospital's provider 
agreement in accordance with Sec.  489.18 of this chapter.)
    (2) A hospital whose cost-to-charge ratio is in excess of 3 
standard deviations above the corresponding national geometric mean 
cost-to-charge ratio. CMS establishes and publishes this mean annually.
    (3) Any other hospital for which data to calculate a cost-to-charge 
ratio are not available.
    (D) Any reconciliation of outlier payments is based on the cost-to-
charge ratio calculated based on a ratio of costs to charges computed 
from the relevant cost report and charge data determined at the time 
the cost report coinciding with the discharge is settled.
    (E) At the time of any reconciliation under paragraph (a)(4)(iv)(D) 
of this section, outlier payments may be adjusted to account for the 
time value of any underpayments or overpayments. Any adjustment is 
based upon a widely available index to be established in advance by the 
Secretary, and is applied from the midpoint of the cost reporting 
period to the date of reconciliation.
* * * * *
    (d) * * *
    (3) Patients who are transferred to onsite providers and readmitted 
to a long-term care hospital, as provided for in Sec.  412.532.
    (4) Long-term care hospitals-within-hospitals and satellites of 
long-term care hospitals as provided in Sec.  412.534.

0
29. Section 412.529 is amended by revising paragraph (c)(3) to read as 
follows:


Sec.  412.529  Special payment provision for short-stay outliers.

* * * * *
    (c) * * *
    (3)(i) For discharges occurring on or after October 1, 2002, and 
before August 8, 2003, no reconciliations are made to short-stay 
outlier payments upon cost report settlement to account for differences 
between cost-to-charge ratio and the actual cost-to-charge ratio of the 
case.
    (ii) For discharges occurring on or after August 8, 2003, and 
before October 1, 2006, short-stay outlier payments are subject to the 
provisions of Sec.  412.84(i)(1), (i)(3), and (i)(4) and (m) for 
adjustments of cost-to-charge ratios.
    (iii) For discharges occurring on or after October 1, 2003, and 
before October 1, 2006, short-stay outlier payments are subject to the 
provisions of Sec.  412.84(i)(2) for adjustments to cost-to-charge 
ratios.
    (iv) For discharges occurring on or after October 1, 2006, short-
stay outlier payments are subject to the following provisions:
    (A) CMS may specify an alternative to the cost-to-charge ratio 
otherwise applicable under paragraph (c)(3)(iv)(B) of this section. A 
hospital may also request that its fiscal intermediary use a different 
(higher or lower) cost-to-charge ratio based on substantial evidence 
presented by the hospital. This request must be approved by the CMS 
Regional Office.
    (B) The cost-to-charge ratio applied at the time a claim is 
processed is based on either the most recent settled cost report or the 
most recent tentatively settled cost report, whichever is from the 
latest cost reporting period.
    (C) The fiscal intermediary may use a statewide average cost-to-
charge ratio, which CMS establishes annually, if it is unable to 
determine an accurate cost-to-charge ratio for a hospital in one of the 
following circumstances:
    (1) A new hospital that has not yet submitted its first Medicare 
cost report. (For this purpose, a new hospital is defined as an entity 
that has not accepted assignment of an existing hospital's provider 
agreement in accordance with Sec.  489.18 of this chapter.)
    (2) A hospital whose cost-to-charge ratio is in excess of 3 
standard deviations above the corresponding national geometric mean. 
CMS establishes and publishes this mean annually.
    (3) Any other hospital for which data to calculate a cost-to-charge 
ratio are not available.
    (D) Any reconciliation of outlier payments is based on the cost-to-
charge ratio calculated based on a ratio of costs to charges computed 
from the relevant cost report and charge data determined at the time 
the cost report coinciding with the discharge is settled.
    (E) At the time of any reconciliation under paragraph (c)(3)(iv)(D) 
of this section, outlier payments may be adjusted to account for the 
time value of any underpayments or overpayments. Any adjustment is 
based upon a widely available index to be established in advance by the 
Secretary, and is applied from the midpoint of the cost reporting 
period to the date of reconciliation.

0
30. Section 412.532 is amended by--
0
a. Revising paragraph (a)(2).
0
b. Revising paragraph (b).
    The revisions read as follows:


Sec.  412.532  Special payment provisions for patients who are 
transferred to onsite providers and readmitted to a long-term care 
hospital.

    (a) * * *
    (2) A satellite facility, as defined in Sec.  412.22(h), that is 
co-located with the long-term care hospital.
* * * * *
    (b) As used in this section, ``co-located'' or ``onsite'' facility 
means a hospital, satellite facility, unit, or SNF that occupies space 
in a building also used by another hospital or unit or in one or more 
buildings on the same campus, as defined in Sec.  413.65(a)(2) of this 
subchapter, as buildings used by another hospital or unit.
* * * * *


Sec.  412.541  [Amended]

0
31. In Sec.  412.541, paragraph (b)(2)(i), remove the cross-reference 
``Sec.  412.533(b)'' and add in its place ``Sec.  412.533(a)(5) and 
Sec.  412.533(c)''.

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

0
32. The authority citation for part 413 is revised 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).

0
33. Section 413.74 is amended by revising paragraph (a) to read as 
follows:


Sec.  413.74  Payment to a foreign hospital.

    (a) Principle. Section 1814(f) of the Act provides for the payment 
of emergency and nonemergency inpatient hospitals services furnished by 
foreign hospitals to Medicare beneficiaries. Subpart H of part 424 of 
this chapter, together with this section, specifies the conditions for 
payment.
* * * * *

0
34. Section 413.75 is amended by--
0
a. In paragraph (b), revising paragraph (1) under the definition of 
``Medicare GME affiliated group''.

[[Page 48142]]

0
b. In paragraph (b), removing the cross-reference ``Sec.  
413.79(g)(2)'' under paragraph (2) of the definition of ``Medicare GME 
affiliated group'' and adding the cross-reference ``Sec.  
413.79(f)(2)'' in its place.
0
c. In paragraph (b), removing the cross-reference ``Sec.  
413.79(g)(2)'' under paragraph (3) of the definition of ``Medicare GME 
affiliated group'' and adding the cross-reference ``Sec.  
413.79(f)(2)'' in its place.
0
d. In paragraph (b), adding in alphabetical order the definition of 
``Patient care activities''.
    The addition and revision read as follows:


Sec.  413.75  Direct GME payments: General requirements.

* * * * *
    (b) * * *
    Medicare GME affiliated group means--
    (1) Two or more hospitals that are located in the same urban or 
rural area (as those terms are defined in subpart D of Part 412 of this 
subchapter) or in a contiguous area and meet the rotation requirements 
in Sec.  413.79(f)(2).
* * * * *
    Patient care activities means the care and treatment of particular 
patients, including services for which a physician or other 
practitioner may bill.
* * * * *

0
35. Section 413.77 is amended by--
0
a. Revising paragraph (e)(1) introductory text.
0
b. Revising paragraph (e)(1)(i).
0
c. Adding a new paragraph (h).
    The revisions and addition read as follows:


Sec.  413.77  Direct GME payments: Determination of per resident 
amounts.

* * * * *
    (e) Exceptions--(1) Base period for certain hospitals. If a 
hospital did not have any approved medical residency training programs 
or did not participate in Medicare during the base period, but either 
condition changes in a cost reporting period beginning on or after July 
1, 1985, the fiscal intermediary establishes a per resident amount for 
the hospital using the information from the first cost reporting period 
during which the hospital participates in Medicare and the residents 
are on duty during the first month of that period. Effective for cost 
reporting periods beginning on or after October 1, 2006, if a hospital 
did not have any approved medical residency training programs or did 
not participate in Medicare during the base period, but either 
condition changes in a cost reporting period beginning on or after 
October 1, 2006, and the residents are not on duty during the first 
month of that period, the fiscal intermediary establishes a per 
resident amount for the hospital using the information from the first 
cost reporting period immediately following the cost reporting period 
during which the hospital participates in Medicare and residents began 
training at the hospital. The per resident amount is based on the lower 
of the amount specified in paragraph (e)(1)(i) or paragraph (e)(1)(ii) 
of this section, subject to the provisions of paragraph (e)(1)(iii) of 
this section. Any GME costs incurred by the hospital during the cost 
reporting period prior to the base period used for calculating the PRA 
are reimbursed on a reasonable cost basis.
    (i) The hospital's actual cost per resident incurred in connection 
with the GME program(s) based on the cost and resident data from the 
hospital's base year cost reporting period as established in paragraph 
(e)(1) of this section.
* * * * *
    (h) Hospital mergers. Effective for cost reporting periods 
beginning on or after October 1, 2006, when multiple hospitals merge, a 
primary care and obstetrics and gynecology weighted average per 
resident amount and a nonprimary care weighted average per resident 
amount is calculated, if applicable, for the surviving hospital, using 
FTE resident data and per resident amount data from the most recently 
settled cost reports of the respective hospitals prior to the merger.

0
36. Section 413.78 is amended by--
0
a. Revising paragraph (c)(1).
0
b. Revising paragraph (d)(1).
0
c. Revising paragraph (e)(1).
    The revisions read as follows:


Sec.  413.78  Direct GME payments: Determinations of the total number 
of FTE residents.

* * * * *
    (c) * * *
    (1) The resident spends his or her time in patient care activities, 
as defined in Sec.  413.75(b).
* * * * *
    (d) * * *
    (1) The resident spends his or her time in patient care activities, 
as defined in Sec.  413.75(b).
    (e) * * *
    (1) The resident spends his or her time in patient care activities, 
as defined in Sec.  413.75(b).
* * * * *

0
37. Section 413.79 is amended by--
0
a. Revising paragraph (e)(1)(iv).
0
b. In the introductory text of paragraph (f), removing the cross-
reference ``paragraph (e)(3) of this section'' and adding the cross-
reference ``paragraph (d) of this section'' in its place.
    The revision reads as follows:


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

* * * * *
    (e) * * *
    (1) * * *
    (iv) Effective for affiliation agreements entered into on or after 
October 1, 2005, an urban hospital that qualifies for an adjustment to 
its FTE cap under paragraph (e)(1) of this section is permitted to be 
part of a Medicare GME affiliated group for purposes of establishing an 
aggregate FTE cap only if the adjustment that results from the 
affiliation is an increase to the urban hospital's FTE cap.
* * * * *

0
38. Section 413.85 is amended by revising paragraph (h)(3) to read as 
follows:


Sec.  413.85  Costs of approved nursing and allied health education 
activities.

* * * * *
    (h) * * *
    (3) Educational seminars, workshops, and continuing education 
programs in which the employees or trainees participate that enhance 
the quality of medical care or operating efficiency of the provider 
and, effective October 1, 2003, do not lead to the ability to practice 
and begin employment in a nursing or allied health specialty.
* * * * *

0
39. Section 413.89 is amended by--
0
a. Revising paragraph (a).
0
b. Revising paragraph (h).
    The revisions read as follows:


Sec.  413.89  Bad debts, charity, and courtesy allowances.

    (a) Principle. Bad debts, charity, and courtesy allowances are 
deductions from revenue and are not to be included in allowable cost. 
However, subject to the limitations described under paragraph (h) of 
this section and the exception for anesthetists' services described 
under paragraph (i) of this section, bad debts attributable to the 
deductibles and coinsurance amounts are reimbursable under the program.
* * * * *
    (h) Limitations on bad debts. (1) Hospitals. In determining 
reasonable costs for hospitals, the amount of bad debt otherwise 
treated as allowable costs (as defined in paragraph (e) of this 
section) is reduced--
    (i) For cost reporting periods beginning during fiscal year 1998, 
by 25 percent;

[[Page 48143]]

    (ii) For cost reporting periods beginning during fiscal year 1999, 
by 40 percent;
    (iii) For cost reporting periods beginning during fiscal year 2000, 
by 45 percent; and
    (iv) For cost reporting periods beginning during a subsequent 
fiscal year, by 30 percent.
    (2) Skilled nursing facilities. For cost reporting periods 
beginning during fiscal year 2006 or during a subsequent fiscal year, 
the amount of skilled nursing facility bad debts for coinsurance 
otherwise treated as allowable costs (as defined in paragraph (e) of 
this section) for services furnished to a patient who is not a dual 
eligible individual is reduced by 30 percent. A dual eligible 
individual is defined for this section as an individual that is 
entitled to benefits under Part A of Medicare and is determined 
eligible by the State for medical assistance under Title XIX of the Act 
as described under paragraph (2) of the definition of a ``full-benefit 
dual eligible individual'' at Sec.  423.772 of this chapter.
* * * * *

PART 414--PAYMENT FOR PART B MEDICAL AND OTHER HEALTH SERVICES

0
40. The authority citation for part 414 continues to read as follows:

    Authority: Secs. 1102, 1871, and 1881(b)(1) of the Social 
Security Act (42 U.S.C. 1302, 1395hh, and 1395rr(b)(1)).

0
41. Section 414.802 is amended by revising the definition of ``unit'' 
to read as follows:


Sec.  414.802  Definitions.

* * * * *
    Unit means the product represented by the 11-digit National Drug 
Code. During the first 3 years of the CAP (as defined in Sec.  
414.902), the method of counting units excludes units of CAP drugs (as 
defined in Sec.  414.902) sold to an approved CAP vendor (as defined in 
Sec.  414.902) for use under the CAP (as defined in Sec.  414.902).

PART 424--CONDITIONS FOR MEDICARE PAYMENT

0
42. The authority citation for part 424 continues to read as follows:

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


Sec.  424.32  [Amended]

0
43. In Sec.  424.32, in paragraph (b), the phrase ``CMS-1490U--Request 
for Medicare Payment by Organization. (For use by an organization 
requesting payment for medical services.)'' is removed and the phrase 
``CMS-1491--Request for Medicare Payment--Ambulance. (For use by an 
organization requesting payment for ambulance services.)'' is removed.


Sec.  424.121  [Amended]

0
44. In Sec.  424.121, paragraph (c) is amended by removing the cross-
reference ``Sec.  405.313'' and adding the cross-reference ``Sec.  
411.9'' in its place.

0
45. Section 424.123 is amended by revising paragraph (c)(2) to read as 
follows:


Sec.  424.123  Conditions for payment for nonemergency inpatient 
hospital services furnished by a hospital closer to the individual's 
residence.

* * * * *
    (c) * * *
    (2) Accredited by the Joint Commission on Accreditation of 
Healthcare Organizations (JCAHO) or accredited or approved by a program 
of the country where it is located under standards the CMS finds to be 
essentially equivalent to those of the JCAHO.
* * * * *

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

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

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


Sec.  485.610  [Amended]

0
47. In paragraph (c) of Sec.  485.610, the phrase ``as of October 1, 
2006'' is removed and the phrase ``on or before December 31, 2005'' is 
added in its place.

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

0
48. The authority citation for part 489 continues to read as follows:

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

0
49. Section 489.24 is amended by--
0
a. Revising the definition of ``Labor'' under paragraph (b).
0
b. Revising paragraph (f).
    The revisions read as follows:


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

* * * * *
    (b) * * *
    Labor means the process of childbirth beginning with the latent or 
early phase of labor and continuing through the delivery of the 
placenta. A woman experiencing contractions is in true labor unless a 
physician, certified nurse-midwife, or other qualified medical person 
acting within his or her scope of practice as defined in hospital 
medical staff bylaws and State law, certifies that, after a reasonable 
time of observation, the woman is in false labor.
* * * * *
    (f) Recipient hospital responsibilities. A participating hospital 
that has specialized capabilities or facilities (including, but not 
limited to, facilities such as burn units, shock-trauma units, neonatal 
intensive care units, or (with respect to rural areas) regional 
referral centers, which, for purposes of this subpart, means hospitals 
meeting the requirements of referral centers found at Sec.  412.96 of 
this chapter) may not refuse to accept from a referring hospital within 
the boundaries of the United States an appropriate transfer of an 
individual who requires such specialized capabilities or facilities if 
the receiving hospital has the capacity to treat the individual. This 
requirement applies to any participating hospital with specialized 
capabilities, regardless of whether the hospital has a dedicated 
emergency department.
* * * * *

SUBCHAPTER H--HEALTH CARE INFRASTRUCTURE IMPROVEMENT PROGRAM

PART 505--ESTABLISHMENT OF THE HEALTH CARE INFRASTRUCTURE 
IMPROVEMENT PROGRAM

0
50. The authority citation for part 505 continues to read as follows:

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

0
51. In Sec.  505.3, the introductory text is republished and 
definitions of ``Outreach programs'' and ``Unique research resources'' 
are added in alphabetical order to read as follows:


Sec.  505.3  Definitions.

    For purposes of this subpart, the following definitions apply:
* * * * *
    Outreach programs mean formal cancer programs for teaching, 
diagnostic screening, therapy or treatment, prevention, or 
interventions to enhance the health and knowledge of their designated 
population(s).
* * * * *
    Unique research resources means resources that are used for the 
purpose of discovering or testing options related

[[Page 48144]]

to the causes, prevention, and treatment of cancer.

0
52. A new Subpart B, containing Sec. Sec.  505.13, 505.15, 505.17, and 
505.19, is added to Part 505 to read as follows:
Subpart B--Forgiveness of Indebtedness
Secs.
505.13 Conditions for loan forgiveness.
505.15 Plan criteria for meeting the conditions for loan 
forgiveness.
505.17 Reporting requirements for meeting the conditions for loan 
forgiveness.
505.19 Approval or denial of loan forgiveness.

Subpart B--Forgiveness of Indebtedness


Sec.  505.13  Conditions for loan forgiveness.

    The Secretary may forgive a loan provided under this part if the 
qualifying hospital--
    (a) Has been selected to participate in the loan program specified 
in Sec.  505.5(c).
    (b) Has established the following in accordance with a plan that 
meets the criteria specified in Sec.  505.15:
    (1) An outreach program for cancer prevention, early diagnosis, and 
treatment that provides services to a substantial majority of the 
residents of a State or region, including residents of rural areas;
    (2) An outreach program for cancer prevention, early diagnosis, and 
treatment that provides services to multiple Indian tribes; and
    (3) Unique research resources (such as population databases) or an 
affiliation with an entity that has unique research resources.
    (c) Submits to CMS, within the timeframe specified by the 
Secretary, a--
    (1) Written request for loan forgiveness; and
    (2) Loan forgiveness plan that meets the criteria specified in 
Sec.  505.15 of this subpart.


Sec.  505.15  Plan criteria for meeting the conditions for loan 
forgiveness.

    The qualifying hospital requesting loan forgiveness must submit to 
CMS a plan specifying how it will develop, implement, or maintain an 
existing outreach program for cancer prevention, early diagnosis, and 
treatment for a substantial majority of the residents of a State or 
region, including residents of rural areas and for multiple Indian 
tribes and specifying how the qualifying hospital will establish or 
maintain existing unique research resources or an affiliation with an 
entity that has unique research resources.
    (a) Outreach programs. The initial plan must specify how the 
hospital will establish or develop, implement, or maintain existing 
outreach programs. The plan must--
    (1) Address cancer prevention for cancers that are prevalent in the 
designated populations or cancers that are targeted by the qualifying 
hospital, interventions, and goals for decreasing the targeted cancer 
rates during the loan deferment program; and
    (2) Address early diagnosis of cancers that are prevalent in the 
designated populations or cancers that are targeted by the qualifying 
hospital, interventions, and goals for improving early diagnosis rates 
for the targeted cancer(s) during the loan deferment period;
    (3) Address cancer treatment for cancers that are prevalent in the 
designated populations or cancers that are targeted by the qualifying 
hospital, interventions, and goals for improving cancer treatment rates 
for the targeted cancer(s) during the loan deferment; and
    (4) Identify the measures that will be used to determine the 
qualifying hospital's annual progress in meeting the initial goals 
specified in paragraphs (a)(1) through (a)(3) of this section.
    (b) Unique research resources. The plan must specify how the 
qualifying hospital will establish or maintain existing unique research 
resources or an affiliation with an entity that has unique research 
resources.


Sec.  505.17  Reporting requirements for meeting the conditions for 
loan forgiveness.

    (a) Annual reporting requirements. On an annual basis, beginning 
one year from the date that CMS notified the qualifying hospital of the 
loan award, the qualifying hospital must submit a report to CMS that 
updates the plan specified in Sec.  505.15 by--
    (1) Describing the qualifying hospital's progress in meeting its 
initial plan goals;
    (2) Describing any changes to the qualifying hospital's initial 
plan goals; and
    (3) Including at least one measure used to track the qualifying 
hospital's progress in meeting its plan goals.
    (b) Review of annual reports. CMS will review each qualifying 
hospital's annual report to provide the hospital with feedback 
regarding its loan forgiveness status. If CMS determines that the 
annual report shows that the qualifying hospital has fulfilled the 
conditions, plan criteria, and reporting requirements for loan 
forgiveness specified in Sec. Sec.  505.13, 505.15, and Sec.  505.17, 
CMS will notify the qualifying hospital in writing that the loan is 
forgiven.
    (c) Final annual reporting requirements. A qualifying hospital must 
submit its final report to CMS at least 6 months before the end of the 
loan deferment period specified in Sec.  505.7(b).


Sec.  505.19  Approval or denial of loan forgiveness.

    (a) Approval of loan forgiveness. If CMS determines that a 
qualifying hospital has met the conditions, plan criteria, and 
reporting requirements for loan forgiveness specified in Sec.  505.13, 
Sec.  505.15, and Sec.  505.17, CMS will send a written notification of 
approval for loan forgiveness to the qualifying hospital by the earlier 
of--
    (1) 30 days from the date of receipt of the annual report that 
shows the qualifying hospital has satisfied the requirements for loan 
forgiveness; or
    (2) 90 days before the end of the loan deferment period defined in 
Sec.  505.7(b).
    (b) Denial of loan forgiveness. If CMS determines that a qualifying 
hospital has not met the conditions, plan criteria, or reporting 
requirements for loan forgiveness specified in Sec.  505.13, Sec.  
505.15, or Sec.  505.17 of this part, CMS will send a written 
notification of denial of loan forgiveness to the qualifying hospital 
at least 30 days before the end of the loan deferment period defined in 
Sec.  505.7(b).

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: July 27, 2006.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: July 31, 2006.
Michael O. Leavitt,
Secretary.

    [Editorial Note:  The following Addendum and appendixes will not 
appear in the Code of Federal Regulations.]

Addendum--Schedule of Tentative Standardized Amounts, Tentative Update 
Factors and Rate-of-Increase Percentages Effective With Cost Reporting 
Periods Beginning On or After October 1, 2006

I. Summary and Background

    Due to the unusual circumstances imposed by the order of the Court 
of Appeals for the Second Circuit in the decision in Bellevue Hospital 
Center v. Leavitt, discussed in detail in section III.C. of the 
preamble of this final rule, we are not able to provide the final FY 
2007 occupational mix adjusted wage index tables, payment rates, or 
impacts in this final rule. Because the wage data affect the 
calculation of the outlier threshold as well as the outlier offset and 
budget neutrality factors that are

[[Page 48145]]

applied to the standardized amounts, we are only able to provide 
tentative figures at this time. These tentative amounts will be revised 
once the occupational mix adjusted wage index is finalized. Subsequent 
to this final rule, we will publish a Federal Register document listing 
the final standardized amounts, outlier offsets, and budget neutrality 
factors that are effective October 1, 2006 for FY 2007. The final data 
also will be published on the CMS Web site.
    In this Addendum, we are setting forth a final description of the 
methods and data we are using to determine the prospective payment 
rates for Medicare hospital inpatient operating costs and Medicare 
hospital inpatient capital-related costs. We are also setting forth the 
final rate-of-increase percentages for updating the target amounts for 
hospitals and hospital units excluded from the IPPS. We note that, 
because hospitals excluded from the IPPS are paid on a cost basis (and 
not by the IPPS), these hospitals are not affected by the tentative 
figures for standardized amounts, offsets, and budget neutrality 
factors. Therefore, in this final rule, we are finalizing the rate-of-
increase percentages for updating the target amounts for hospitals and 
hospital units excluded from the IPPS that are effective October 1, 
2006.
    In general, except for SCHs, MDHs, and hospitals located in Puerto 
Rico, each hospital's payment per discharge under the IPPS is based on 
100 percent of the Federal national rate, which is based on the 
national adjusted standardized amount. This amount reflects the 
national average hospital cost per case from a base year, updated for 
inflation.
    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; or 
the updated hospital-specific rate based on FY 1996 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 is higher. (MDHs did not have 
the option to use their FY 1996 hospital-specific rate.) Section 
5003(a)(1) of Pub. L. 109-171 extended and modified the MDH special 
payment provision which was previously set to expire on October 1, 
2006, to discharges occurring on or after October 1, 2006, but before 
October 1, 2011. Under section 5003(b) of Pub. L. 109-171, if the 
change results in an increase to its target amount, an MDH must rebase 
its hospital-specific rates to its FY 2002 cost report. In addition, 
under section 5003(c) of Pub. L. 109-171, MDHs will now 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 upon section 5003(d) 
of Pub. L. 109-171, MDHs will no longer be subject to the 12-percent 
cap on their DSH payment adjustment factor.
    For hospitals in Puerto Rico, the payment per discharge is based on 
the sum of 25 percent of a Puerto Rico rate that reflects base year 
average costs per case of Puerto Rico hospitals and 75 percent of the 
Federal national rate. (See section II.D.3. of this Addendum for a 
complete description.)
    As discussed below in section II. of this Addendum, we are making 
changes in the determination of the prospective payment rates for 
Medicare inpatient operating costs for FY 2007. In section III. of this 
Addendum, we discuss our changes for determining the prospective 
payment rates for Medicare inpatient capital-related costs for FY 2007. 
Section IV. of this Addendum sets forth our final changes for 
determining the rate-of-increase limits for hospitals excluded from the 
IPPS for FY 2007. Section V. of this Addendum sets forth policies on 
payment for blood clotting factors administered to hemophilia 
inpatients. The tables to which we refer in the preamble of this final 
rule are presented in section VI. of this Addendum of this final rule. 
Some of these tables are based upon tentative data, and the final 
tables will be presented in a separate document that will be published 
on the CMS Web site, as well as in the Federal Register after 
publication of this final rule but prior to October 1, 2006.

II. Changes To Prospective Payment Rates for Hospital Inpatient 
Operating Costs

    The basic methodology for determining prospective payment rates for 
hospital inpatient operating costs for FY 2005 and subsequent fiscal 
years is set forth at Sec.  412.64. The basic methodology for 
determining the prospective payment rates for hospital inpatient 
operating costs for hospitals located in Puerto Rico for FY 2005 and 
subsequent fiscal years is set forth at Sec. Sec.  412.211 and 412.212. 
Below we discuss the factors used for determining the prospective 
payment rates.
    In summary, the tentative standardized amounts set forth in Tables 
1A, 1B, 1C, and 1D of section VI. of this Addendum reflect--
    <bullet> Equalization of the standardized amounts for urban and 
other areas at the level computed for large urban hospitals during FY 
2004 and onward, as provided for under section 1886(d)(3)(A)(iv) of the 
Act, updated by the applicable percentage increase required under 
sections 1886(b)(3)(B)(i)(XX) and 1886(b)(3)(B)(viii) of the Act.
    <bullet> The labor-related share that is applied to the tentative 
standardized amounts and tentative Puerto Rico-specific standardized 
amounts to give the hospital the highest payment, as provided for under 
sections 1886(d)(3)(E), and 1886(d)(9)(C)(iv) of the Act.
    <bullet> Final updates of 3.4 percent for all areas (that is, the 
full market basket percentage increase of 3.4 percent), as required by 
section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 
5001(a)(1) of Pub. L. 109-171, and reflecting the requirements of 
section 1886(b)(3)(B)(viii) of the Act, as added by section 5001(a)(3) 
of Pub. L. 109-171, to reduce the applicable percentage increase by 2.0 
percentage points for a hospital that fails to submit data, in a form 
and manner specified by the Secretary, relating to the quality of 
inpatient care furnished by the hospital.
    <bullet> An adjustment to ensure the DRG recalibration, as provided 
for under section 1886(d)(4)(C)(iii) of the Act, by applying a final 
budget neutrality adjustment factor to the standardized amount.
    <bullet> An adjustment to ensure the wage index update and changes 
are budget neutral, as provided for under section 1886(d)(3)(E) of the 
Act.
    <bullet> An adjustment to ensure the effects of the special 
transition measures adopted in relation to the implementation of new 
labor market areas are budget neutral.
    <bullet> 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 2006 budget neutrality 
factor and applying a revised factor.
    <bullet> An adjustment to remove the FY 2006 outlier offset and 
apply an offset for FY 2007.
    <bullet> An adjustment to ensure the effects of the rural community 
hospital demonstration required under section 410A of Pub. L. 108-173 
are budget neutral, as required under section 410A(c)(2) of Pub. L. 
108-173.

[[Page 48146]]

A. Calculation of the Tentative 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) or, for Puerto Rico, 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) 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 in the initial development of standardized amounts for the 
IPPS. The September 1, 1987 final rule (52 FR 33043 and 33066) contains 
a detailed explanation of how the target amounts were determined, and 
how they are used in computing the Puerto Rico rates.
    Sections 1886(d)(2)(B) and (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, 
indirect medical education 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 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 2007, we are not changing the national and Puerto Rico-
specific labor-related and nonlabor-related shares from the percentages 
established for FY 2006. Therefore, the labor-related share will 
continue to be 69.7 percent for the national standardized amounts and 
58.7 percent for the Puerto Rico specific standardized amount. 
Consistent with section 1886(d)(3)(E) of the Act, we are applying the 
wage index to a labor-related share of 62 percent for all non-Puerto 
Rico hospitals whose wage indexes are less than or equal to 1.0000. For 
all non-Puerto Rico hospitals whose wage indices are greater than 
1.0000, we are applying the wage index to a labor share of 69.7 percent 
of the national standardized amount. For a Puerto Rico hospital, we 
will apply a labor share of 58.7 percent if its Puerto Rico-specific 
wage index is less than or equal to 1.0000. For Puerto Rico hospitals 
whose Puerto Rico-specific wage index values are greater than 1.0000, 
we will apply a labor share of 62 percent.
    The tentative standardized amounts appear in Table 1A, 1B, and 1C 
of the Addendum to this final rule.
    Comment: Several commenters recommended that CMS raise the labor 
share from 69.7 percent to the previous level of 71.1 percent for 
hospitals with a wage index greater than one. The commenters explained 
that a reduced labor share has a negative impact and severe financial 
strain on their hospitals.
    Response: We thank the commenters for their comments. We refer the 
commenters to the FY 2006 final rule (70 FR 47392-47396) where a full 
discussion (including comments and responses) on the labor share 
percentage can be found. As we indicated, our analysis in last year's 
rule showed that the labor-related share should equal 69.7 percent 
nationally based on the latest available data.
2. Computing the Tentative Average Standardized Amount
    Section 1886(d)(3)(A)(iv) of the Act requires that, beginning with 
FY 2004 and thereafter, an equal standardized amount is to 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) of the Act equalizes the Puerto Rico-specific urban and 
rural area rates. Accordingly, we will calculate FY 2007 national and 
Puerto Rico standardized amounts, irrespective of whether a hospital is 
located in an urban or rural location.
3. Updating the Tentative Average Standardized Amount
    In accordance with section 1886(d)(3)(A)(iv)(II) of the Act, we are 
updating the equalized standardized amount for FY 2007 by the full 
estimated market basket percentage increase for hospitals in all areas, 
as specified in section 1886(b)(3)(B)(i)(XX) of the Act, as amended by 
section 5001(a)(1) of Pub. L. 109-171. The percentage change in the 
market basket reflects the average change in the price of goods and 
services purchased by hospitals to furnish inpatient care. The most 
recent forecast of the hospital market basket increase for FY 2007 is 
3.4 percent. Thus, for FY 2007, the update to the average standardized 
amount is 3.4 percent for hospitals in all areas.
    Section 1886(b)(3)(B) of the Act specifies the mechanism used to 
update the standardized amount for payment for inpatient hospital 
operating costs. Section 1886(b)(3)(B)(viii) of the Act, as added by 
section 5001(a)(3) of Pub. L. 109-171, provides for a reduction of 2.0 
percentage points to the update percentage increase (also known as the 
market basket update) for FY 2007 and each subsequent fiscal year for 
any ``subsection (d) hospital'' that does not submit quality data as 
discussed in section IV.A. of the preamble of this final rule. The 
tentative standardized amounts in Tables 1A through 1C of section VI. 
of this Addendum reflect these differential amounts.
    Although the update factors for FY 2007 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 
2007 for both IPPS hospitals and hospitals and hospital units excluded 
from the IPPS. Our recommendation on the update factors (which is 
required by sections 1886(e)(4)(A) and (e)(5)(A) of the Act) is set 
forth in Appendix B of this final rule.
    We note that the occupational mix wage index data will have no 
affect on the market basket increase factor of 3.4 percent. Therefore, 
the update factors of 3.4 and 1.4 percent are final and not tentative. 
These update factors (3.4 and 1.4 percent) are one element that will be 
used to determine the FY 2007 standardized amounts. Other factors, such 
as the outlier offset and budget neutrality adjustments for wage index 
and reclassification that are applied to the standardized amounts, are 
yet to be determined pending the calculation of the occupational mix 
adjustment. The market basket increase of 3.4 percent is based on the 
second quarter forecast of the hospital market basket increase by the 
Office of the Actuary (as discussed in Appendix B of this final rule).
4. Other Adjustments to the Average Standardized Amount
    As in the past, we are adjusting the FY 2007 standardized amount to 
remove the effects of the FY 2006 geographic reclassifications and 
outlier payments before applying the FY 2007 updates. We then apply 
budget neutrality offsets

[[Page 48147]]

for outliers and geographic reclassifications to the standardized 
amount based on FY 2007 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 the 
changes in the DRG relative weights and wage index should equal 
estimated aggregate payments prior to the changes. If we removed the 
prior year adjustment, we would not satisfy these conditions.
    Budget neutrality is determined by comparing aggregate IPPS 
payments before and after making the changes that are required to be 
budget neutral (for example, reclassifying and recalibrating the DRGs, 
updating the wage data, and geographic reclassifications). We include 
outlier payments in the simulations because they may be affected by 
changes in these parameters.
    We are also adjusting the standardized amount this year by an 
estimated amount to ensure that aggregate IPPS payments do not exceed 
the amount of payments that would have been made in the absence of the 
rural community hospital demonstration required under section 410A of 
Pub. L. 108-173. This demonstration is required to be budget neutral 
under section 410A(c)(2) of Pub. L. 108-173.
a. Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment
    Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning in 
FY 1991, the annual DRG reclassification and recalibration of the 
relative weights must be made in a manner that ensures that aggregate 
payments to hospitals are not affected. As discussed in section II. of 
the preamble of this final rule, we normalized the recalibrated DRG 
weights by an adjustment factor, so that the average case weight after 
recalibration is equal to the average case weight prior to 
recalibration. However, equating the average case weight after 
recalibration to the average case weight before recalibration does not 
necessarily achieve budget neutrality with respect to aggregate 
payments to hospitals because payments to hospitals are affected by 
factors other than average case weight. Therefore, as we have done in 
past years, we are making a budget neutrality adjustment to ensure that 
the requirement of section 1886(d)(4)(C)(iii) of the Act is met.
    As noted above, due to the decision of the Bellevue court, we are 
unable to finalize the wage data used in establishing the FY 2007 IPPS 
payment factors at this time. We use the wage data to standardize the 
charges when recalibrating the DRG weights, and therefore, we will 
recalculate the final DRG weights when the occupational mix adjusted 
wage data become available. Since the DRG relative weights are not yet 
final, at this time we are only able to provide the tentative DRG 
reclassification and recalibration budget neutrality adjustment. 
Subsequent to this final rule and prior to October 1, 2006, the 
recalculated DRG weights and the final DRG reclassification and 
recalibration budget neutrality adjustment will be published in a 
Federal Register notice.
    Section 1886(d)(3)(E) 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. For FY 2007, we are adjusting 
100 percent of the wage index factor for occupational mix. We describe 
the occupational mix adjustment in section III.C. of the preamble to 
this final rule. However, the data to compute the 100 percent 
occupational mix adjustment are not available to us at this time. 
Although section 1886(d)(3)(E) of the Act requires us to update the 
wage index on a budget neutral basis, we cannot include the effects of 
the occupational mix adjustment on the wage index in our budget 
neutrality calculations at this time. Therefore, the budget neutrality 
adjustment to the standardized amounts that we calculated below is 
tentative pending the calculation of the occupational mix adjusted wage 
indices that will be provided on the CMS Web site and in a Federal 
Register notice prior to October 1.
    In FY 2005, those urban hospitals that became rural under the new 
labor market area definitions were assigned the wage index of the urban 
area in which they were located under the previous labor market 
definitions for a 3-year period of FY 2005, FY 2006, and FY 2007. 
Because we are in the third year of this 3-year transition, we are 
adjusting the standardized amounts for FY 2007 to ensure budget 
neutrality for this policy. We discuss this adjustment in section 
III.B. of the preamble to this final rule. Again, the adjustment for 
this factor will be affected by the occupational mix adjusted wage 
indices that will be recalculated prior to October 1. For this reason, 
the adjustment for previously urban hospitals that become rural under 
the new labor market area definitions is tentative pending final 
calculation of the occupational mix adjusted wage indices.
    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 not located in a rural area may not be less than the area wage 
index applicable to hospitals located in rural areas in that State. 
This provision is required by section 4410(b) of Pub. L. 105-33 to be 
budget neutral. Therefore, we include the effects of this provision in 
our calculation of the wage update budget neutrality factor. As 
discussed in the FY 2006 IPPS final rule (70 FR 47493), FY 2007 is the 
third and final year of the 3-year provision that uses an imputed wage 
index floor for States that have no rural areas and States that have 
geographic rural areas, but that have no hospitals actually classified 
as rural. We are also adjusting for the effects of this provision in 
our calculation of the wage update budget neutrality factor. This 
figure will also be updated pending calculation of the occupational mix 
adjusted wage indices.
    To comply with the requirement that DRG reclassification and 
recalibration of the relative weights and the updated wage index be 
budget neutral, we used FY 2005 discharge data to simulate payments and 
compared aggregate payments using the FY 2006 relative weights and wage 
indexes to aggregate payments using the FY 2007 relative weights and 
wage indexes. The same methodology was used for the FY 2006 budget 
neutrality adjustment.
    Based on this comparison, we computed a tentative budget neutrality 
adjustment factor equal to 0.997030. We also are adjusting the Puerto 
Rico-specific standardized amount for the effect of DRG 
reclassification and recalibration. We computed a tentative budget 
neutrality adjustment factor for the Puerto Rico-specific standardized 
amount equal to 0.997968. These budget neutrality adjustment factors 
are applied to the standardized amounts without removing the effects of 
the FY 2006 budget neutrality adjustments. In addition, as discussed in 
section IV.E. of the preamble to this final rule, we are applying the 
same tentative DRG reclassification and recalibration budget neutrality 
factor of 0.997968 to the hospital-specific rates that are to be 
effective for cost reporting periods beginning on or after October 1, 
2006.
    Using the same data, we calculated a tentative transition budget 
neutrality

[[Page 48148]]

adjustment to account for the ``hold harmless'' policy under which 
urban hospitals that became rural under the new labor market area 
definitions were assigned the wage index of the urban area in which 
they were located under the previous labor market area definitions for 
a 3-year period of FY 2005, FY 2006, and FY 2007. Using the pre-
reclassified wage index, we simulated payments under the new labor 
market area definitions and compared them to simulated payments under 
the ``hold harmless'' policy. Based on this comparison, we computed a 
tentative transition budget neutrality adjustment of 0.999605.
    Comment: Several commenters addressed CMS'' policy of excluding 
data from CAHs when computing the wage index. The commenters believed 
that the artificial increase in the national average hourly wage has 
lowered the budget neutrality adjustment by an estimated $1.52 billion 
over 5 years (2003 through 2007). The commenters stated that CMS should 
apply a one-time positive budget neutrality adjustment in FY 2007 to 
compensate for the prior underpayments. They did not believe similar 
future adjustments would be necessary since very few hospitals are 
expected ``to convert to CAH status now that the necessary provider 
designation is no longer an option.''
    Response: We do not believe that the elimination of these data has 
resulted in an overstated national average hourly wage, nor has the 
budget neutrality adjustment been inappropriately reduced. Section 
1886(d)(3)(E) of the Act requires that wage index adjustments be made 
in a manner that assures that aggregate payments in a fiscal year are 
not greater or less than those that would have been made without the 
wage index adjustment. We calculate the budget neutrality adjustment 
for the wage index by comparing simulated payments under our current 
wage index adjustment policies with simulated payments with no wage 
index adjustment. Our current policy is to exclude CAH data from our 
calculation of the IPPS wage index, so we believe this policy should be 
taken into account when we calculate the budget neutrality adjustment 
for the wage index. Consequently, we will not apply a one-time positive 
budget neutrality adjustment in FY 2007. We note that a full discussion 
on the wage index can be found in section III. of the preamble to this 
final rule.
b. Reclassified Hospitals--Tentative Budget Neutrality Adjustment
    Section 1886(d)(8)(B) of the Act provides that, effective with 
discharges occurring on or after October 1, 1988, certain rural 
hospitals are deemed urban. In addition, section 1886(d)(10) of the Act 
provides for the reclassification of hospitals based on determinations 
by the MGCRB. Under section 1886(d)(10) of the Act, a hospital may be 
reclassified for purposes of the wage index.
    Under section 1886(d)(8)(D) of the Act, the Secretary is required 
to adjust the standardized amount to ensure that aggregate payments 
under the IPPS after implementation of the provisions of sections 
1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the 
aggregate prospective payments that would have been made absent these 
provisions. We note that neither the wage index reclassifications 
provided under section 508 of Pub. L. 108-173 nor the wage index 
adjustments provided under section 1886(d)(13) of the Act are budget 
neutral. Section 508(b) of Pub. L. 108-173 provides that the wage index 
reclassifications approved under section 508(a) of Pub. L. 108-173 
``shall not be effected in a budget neutral manner.'' Section 
1886(d)(13)(H) of the Act similarly 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 
tentative budget neutrality factor, we used FY 2005 discharge data to 
simulate payments, and compared total IPPS payments prior to any 
reclassifications under sections 1886(d)(8)(B) and (C) and 1886(d)(10) 
of the Act to total IPPS payments after such reclassifications. Based 
on these simulations, we calculated a tentative adjustment factor of 
0.991850 to ensure that the effects of this reclassification are budget 
neutral.
    The tentative adjustment factor is applied to the standardized 
amount after removing the effects of the FY 2006 budget neutrality 
adjustment factor. We note that the FY 2007 tentative adjustment 
reflects FY 2007 wage index reclassifications approved by the MGCRB or 
the Administrator, and the effects of MGCRB reclassifications approved 
in FY 2005 and FY 2006 (section 1886(d)(10)(D)(v) of the Act makes wage 
index reclassifications effective for 3 years). As we note earlier in 
this final rule, CMS will make a FY 2007 reclassification determination 
for a hospital based on what we believe will be most advantageous to 
the hospital using the fully occupational mix adjusted wage index. We 
will calculate the final budget neutrality adjustments for geographic 
reclassification subsequent to this final rule, but prior to October 1, 
and will make this information available with the occupational mix 
adjusted wage indices and final IPPS rates.
c. Outliers
    Section 1886(d)(5)(A) of the Act provides for payments in addition 
to the basic prospective payments for ``outlier'' cases involving 
extraordinarily high costs. To qualify for outlier payments, a case 
must have costs greater than the sum of the prospective payment rate 
for the DRG, any IME and DSH payments, any new technology add-on 
payments, and the ``outlier threshold'' or ``fixed loss'' amount (a 
dollar amount by which the costs of a case must exceed payments in 
order to qualify for an outlier payment). We refer to the sum of the 
prospective payment rate for the DRG, any IME and DSH payments, any new 
technology add-on payments, and the outlier threshold as the outlier 
``fixed-loss cost threshold.'' To determine whether the costs of a case 
exceed the fixed-loss cost threshold, a hospital's CCR is applied to 
the total covered charges for the case to convert the charges to costs. 
Payments for eligible cases are then made based on a marginal cost 
factor, which is a percentage of the costs above the fixed-loss cost 
threshold. The marginal cost factor for FY 2007 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. Section 1886(d)(3)(B) of the Act requires the Secretary to 
reduce the average standardized amount by a factor to account for the 
estimated proportion of total DRG payments made to outlier cases. 
Similarly, section 1886(d)(9)(B)(iv) of the Act requires the Secretary 
to reduce the average standardized amount applicable to hospitals 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.
    i. FY 2007 tentative outlier fixed-loss cost threshold.
    As stated above, the wage index tables, rates, and impacts will not 
be final in this final rule because we are yet

[[Page 48149]]

to determine occupational mix adjusted wage indices. Therefore, we are 
only able to provide tentative standardized amounts, relative weights, 
offsets, and budget neutrality factors in this final rule. Once we have 
the final occupational mix data, we will recalculate these amounts to 
reflect the final occupational mix adjusted wage indices. The same 
circumstances apply to the outlier threshold. Without final wage index 
data, final standardized amounts, final offsets and final budget 
neutrality factors, we are only able to provide a tentative fixed loss 
outlier threshold in this final rule. Subsequent to this final rule, we 
will publish a final fixed loss outlier threshold that will be 
effective for discharges on and after October 1, 2006 for FY 2007. 
However, in this final rule, we are adopting as final the methodology 
we will use to calculate the final outlier fixed-loss cost threshold.
    For FY 2007, we proposed to use the same methodology used for FY 
2006 (70 FR 47493) to calculate the outlier threshold. As we have done 
in the past, to calculate the proposed FY 2007 outlier threshold, we 
simulated payments by applying FY 2007 rates and policies using cases 
from the FY 2005 MedPAR files. Therefore, in order to determine the FY 
2007 outlier threshold, we inflate the charges on the MedPAR claims by 
2 years, from FY 2005 to FY 2007.
    In certain years in the past, we have inflated MedPAR claims by 
calculating a 2-year average annual rate-of-change in charges-per-case 
using the charge data for the two most recent years for which we had 
relatively complete MedPAR data. As discussed in the FY 2006 IPPS final 
rule (70 FR 47494), however, we believe that charge data from FY 2003 
may be distorted due to the atypically high rate of hospital charge 
inflation during FY 2003. Therefore, we are not inflating charges using 
a 2-year average annual rate-of-change from FY 2003 to FY 2004 and FY 
2004 to FY 2005.
    Instead, we proposed to continue using a refined methodology that 
takes into account the lower inflation in hospital charges that is 
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 and accurate CCRs. Our refined 
methodology uses more recent data that reflects the rate-of-change in 
hospital charges under the new outlier policy. Specifically, we 
proposed to establish the FY 2007 outlier threshold as follows: Using 
the latest data available, we would calculate the 1-year average 
annualized rate-of-change in charges-per-case from the last quarter of 
FY 2004 in combination with the first quarter of FY 2005 (July 1, 2004 
through December 31, 2004) to the last quarter of FY 2005 in 
combination with the first quarter of FY 2006 (July 1, 2005 through 
December 31, 2005). This rate of change was 7.57 percent (1.0757) or 
15.15 percent (1.1515) over 2 years.
    As we have done in the past, we proposed to establish the FY 2007 
outlier threshold using hospital CCRs from the March 2006 update to the 
Provider-Specific File--the most recent available at the time of this 
final rule. This file includes CCRs that reflect implementation of the 
changes to the policy for determining the applicable CCRs that became 
effective August 8, 2003 (68 FR 34494).
    Using this methodology, we proposed to establish an outlier fixed-
loss cost threshold for FY 2007 equal to the prospective payment rate 
for the DRG, plus any IME and DSH payments, and any add-on payments for 
new technology, plus $25,530.
    We noted that the case-weighted national average CCR declined by 
approximately 1 percent from the March 2005 to the March 2006 update of 
the Provider-Specific File. Hospital charges continue to increase at a 
steady rate of growth between 7 and 8 percent over each of the last 2 
years, resulting in a decline to the CCRs that are used to compute the 
outlier threshold. Using lower CCRs from the March 2006 Provider-
Specific File, in combination with the FY 2005 MedPAR claims and 
inflated charges, contributes to a higher outlier threshold for FY 2007 
compared to FY 2006.
    As we did in establishing the FY 2006 outlier threshold (70 FR 
47494), in our projection of FY 2007 outlier payments, we proposed not 
to make an adjustment for the possibility that hospitals' CCRs and 
outlier payments may be reconciled upon cost report settlement. We 
stated that we continue to believe that, due to the policy implemented 
in the June 9, 2003 outlier final rule, 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 which specific hospitals will have CCRs and 
outlier payments reconciled in their cost reports in any given year. We 
also noted that reconciliation occurs because hospitals' actual CCRs 
for the cost reporting period are different than the interim CCRs used 
to calculate outlier payments when a bill is processed. Our simulations 
assume that CCRs accurately measure hospital costs and, therefore, are 
more indicative of post-reconciliation than pre-reconciliation outlier 
payments. As a result, we proposed to continue to omit any assumptions 
about the effects of reconciliation from the outlier threshold 
calculation.
    Comment: Many commenters, including two major hospital 
associations, were concerned that the proposed outlier threshold for FY 
2007 remains too high and CMS will have removed over $300 million from 
the IPPS rates that were not paid back as outliers. The commenters 
noted that total estimated outlier payments in FY 2004 and FY 2005 were 
well under the 5.1 percent target. As a result, the commenters 
recommended further refining the outlier methodology so that, in their 
view, it will be more likely that CMS projects a threshold that meets 
the 5.1 target. The commenters explained that aside from inflating the 
claim charges, CMS should also use an adjustment factor to project 
CCRs. The commenters believed that the use of more than one indicator 
will make the threshold calculation more reliable and accurate.
    The commenters used data from the March 31, 2006 HCRIS update to 
determine hospitals' CCRs (instead of using CCRs from the PSF per CMS's 
methodology). The commenters accounted for a nine month time lag from 
the end of a cost reporting period until the fiscal intermediary is 
able to update the CCR to project the CCRs expected to be used for 
outlier calculations in FY 2007. The commenters then calculated a cost 
inflation factor of 5.69 percent by determining the 2002-2004 aggregate 
annual rate of increase in cost per discharge. The commenters used this 
cost inflation factor along with CMS' charge inflation factor of 7.57 
percent to project CCRs. These projected CCRs were applied to projected 
FY 2007 charges to simulate the determination of costs for FY 2007 
outlier payments. Using this methodology, the commenters determined and 
recommended an outlier threshold of $24,000 that they assert would 
result in 5.1 percent outlier payments. The commenters also indicated 
that CMS would have paid 5.1 percent of total IPPS payments as outliers 
in FY 2006 using a threshold of $21,275 instead of $23,600. In 
addition, the commenters asserted that CMS removed a total of $3 
billion more from the IPPS rates than it spent on outlier payments over 
FY 2004, 2005, and 2006. Therefore, the commenters urged CMS to adopt a 
better methodology of projecting the

[[Page 48150]]

CCRs, regardless of the DRG refinements being adopted for FY 2007.
    One commenter argued that using CMS' previous methodology with 
costs instead of charges resulted in an outlier threshold of $23,055 
for FY 2007 that would be more likely to result in 5.1 percent of total 
IPPS payments being paid as outliers. Using a methodology with costs 
and data from HCRIS (to determine hospital CCRs), the commenter 
computed a threshold of $22,645. The commenter asserted that 
projections using a cost threshold for FY 2004-2006 would have been 
much closer to the ultimate threshold needed to achieve the 5.1 percent 
target. Because the commenter believed there is now 3 years of data 
demonstrating that a cost methodology is a better predictor of the 
threshold, the commenter recommended that CMS adopt a threshold of 
$22,645.
    MedPAC also commented that CMS should adjust the outlier 
methodology and apply an adjustment to project CCRs. MedPAC explained 
that using CCRs that are too high will overstate costs resulting in a 
fixed loss threshold that is too high. Therefore, MedPAC recommended 
that CMS project the average costs and charge per case to project 
hospitals' CCRs using the charge inflation factor already determined by 
CMS and the cost inflation factor using the market basket when 
projecting the CCRs.
    Another commenter stated that it is inappropriate to use a 
methodology that ignores cost inflation. The commenter argued that the 
threshold is a ``cost outlier threshold'' and therefore an adjustment 
for cost should be incorporated into the outlier threshold methodology.
    One commenter asked CMS to strongly reconsider the increase to the 
outlier threshold and implement a reduction that is consistent with the 
trends for FY 2005 and FY 2006 in outlier payments. Another commenter 
recommended that CMS calculate what the outlier threshold would need to 
be for the current fiscal year (2006) to enable outlier payments to 
meet the 5.1 percent target and apply that threshold for FY 2007.
    Response: As the commenters noted, the outlier thresholds we have 
projected in the last several years have resulted in payments below the 
5.1 percent target. However, we have been hesitant to change our model 
because, in the early years of this decade, outlier payments were 
significantly higher than the 5.1 percent target we projected because 
the charging practices of some hospitals resulted in overestimation of 
hospitals' cost-per-case. However, now that data for later years in 
which charging practices were stabilized are available, after careful 
consideration, we agree that a refinement to the proposed methodology 
to account for the rate of change in the relationship between costs and 
charges would likely increase the precision of our model and we believe 
this would be an appropriate refinement to adopt in determining the FY 
2007 outlier threshold.
    For FY 2007, we are using the same methodology we proposed, except 
that we are using more recent data to determine the charge inflation 
factor (as explained below). In addition, we are applying an adjustment 
factor to the CCRs to account for cost and charge inflation (as 
explained below). As we proposed, for this final rule, we simulated 
payments by applying FY 2007 rates and policies using cases from the FY 
2005 MedPAR files. Therefore, as stated above, in order to determine 
the FY 2007 outlier threshold, we inflated the charges on the MedPAR 
claims by 2 years, from FY 2005 to FY 2007.
    As noted above, the commenters supported our charge inflation 
methodology. Therefore, using the most recent data available (updated 
from the proposed rule), we calculated the 1-year average annualized 
rate-of-change in charges-per-case from the first quarter of FY 2005 in 
combination with the second quarter of FY 2005 (October 1, 2004 through 
March 31, 2005) to the first quarter of FY 2006 in combination with the 
second quarter of FY 2006 (October 1, 2005 through March 31, 2006). 
This rate of change was 7.9 percent (1.079) or 16.42 percent (1.1642) 
over 2 years.
    As we have done in the past, we are establishing the FY 2007 
outlier threshold using hospital CCRs from the March 2006 update to the 
Provider-Specific File--the most recent data available at the time of 
this final rule.
    However, as noted above, many commenters believe an adjustment to 
the CCRs would be appropriate in projecting a threshold that meets the 
5.1 percent target. The commenters referenced above used cost report 
data from HCRIS and applied a cost inflation factor based on the annual 
rate of increase in the cost per discharge from 2002 through 2004. 
However, we still believe the best source of hospital's operating and 
capital CCRs are those that come from the Provider-Specific File. As 
noted in the FY 2006 final rule (70 FR 47495), fiscal intermediaries 
will determine actual outlier payment amounts using some of the same 
CCRs that are in the March 2006 PSF. Fiscal intermediaries will begin 
using an updated CCR to calculate the outlier payments for a hospital 
only after a more recent cost report of the hospital has been 
tentatively settled. Nevertheless, we now agree with the commenters 
that it is appropriate to apply an adjustment factor to the CCRs so 
that the CCRs we are using in our simulation more closely reflect the 
CCRs that will be used in FY 2007.
    We worked with our actuarial office in deriving the methodology 
described below to develop the CCR adjustment factor. Specifically, we 
used the operating cost per discharge increase in combination with the 
final updated market basket increase determined by Global Insight, 
Inc., as well as the charge inflation factor described above to 
estimate the adjustment to the CCRs. By using the market basket rate-
of-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 2007, we determined the adjustment by taking the 
percentage increase in the operating costs per discharge from FY 2003 
to FY 2004 (1.0645) from the cost report and dividing it by the final 
market basket increase from FY 2004 (1.039) We repeated this 
calculation for 2 prior years to determine the 3-year average of the 
rate of adjusted change in costs between the market basket rate-of-
increase and the increase in cost per case from the cost report (FY 
2001 to FY 2002 percentage increase of operating costs per discharge of 
1.0836 divided by FY 2002 final market basket increase of 1.04, FY 2002 
to FY 2003 percentage increase of operating costs per discharge of 
1.0698 divided by FY 2003 final market basket increase of 1.04). For FY 
2007, we averaged the differentials calculated for FY 2002, FY 2003, 
and FY 2004 which resulted in a mean ratio of 1.0327. We multiplied the 
3-year average of 1.0327 by the 2005 market basket percentage increase 
of 1.0420, which resulted in an operating cost inflation factor of 7.61 
percent or 1.0761. We then divided the operating cost inflation factor 
by the 1-year average change in charges (1.079) and applied an 
adjustment factor of 0.9973 to the operating CCRs from the Provider-
Specific File.
    We believe it is appropriate to apply only a one year adjustment 
factor to the CCRs. On average, it takes approximately 9 months for 
fiscal intermediaries 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 
inserts the CCR in the PSF until the beginning of FY 2007 is 
approximately 1 year. Therefore, as stated above, we believe a

[[Page 48151]]

one year adjustment to the CCRs is appropriate.
    We used the same methodology for the capital CCRs and applied an 
adjustment factor of 0.9574 (cost inflation factor of 1.0303 divided by 
a charge inflation factor of 1.0761) to the capital CCRs. We are using 
the same charge inflation factor for the capital CCRs that was used for 
the operating CCRs. The charge inflation factor is based on the overall 
billed charges and therefore we believe it is appropriate to apply the 
charge factor to both the operating and capital CCRs.
    We believe this calculation of an adjustment to the CCRs is more 
accurate and stable than the commenters' methodology because it takes 
into account the costs per discharge and the market basket percentage 
increase when determining a cost adjustment factor.
    Using this methodology, we are establishing a tentative outlier 
fixed-loss cost threshold for FY 2007 equal to the prospective payment 
rate for the DRG, plus any IME and DSH payments, and any add-on 
payments for new technology, plus $24,475. The tentative outlier 
threshold that we calculated for this final rule is $1,055 lower than 
the $25,530 threshold from the proposed rule. We anticipate that a 
threshold based on the methodology above will reach the target of 5.1 
percent. We note that, in this final rule, we are adopting this 
methodology to compute the final outlier fixed-loss cost threshold for 
FY 2007, although the final dollar amount of the outlier threshold will 
be published in a subsequent Federal Register document.
    We also note, that the case-weighted national average CCR declined 
by approximately an additional 1 percent from the December 2005 to the 
March 2006 update of the Provider-Specific File. We further reduced the 
CCRs by applying an adjustment to reflect the differential increase 
between costs and charges. As noted above, using lower CCRs from the 
March 2006 Provider-Specific File, in combination with the FY 2005 
MedPAR claims and inflated charges, contributes to a lower outlier 
threshold for FY 2007 in this final rule compared to the proposed rule.
    Finally, charges are a key influence over outlier payments. 
Therefore, we continue to believe it is appropriate to use a 
methodology based on charges instead of costs. Please refer to our 
response to a similar comment in the FY 2006 final rule (70 FR 47495) 
for a more detailed discussion of this issue.
    Comment: One commenter suggested that CMS consider making mid-year 
adjustments to the outlier threshold if it appears that outlier 
payments are going to be significantly above or below the 5.1 percent 
target. The commenter believed that a mid-year adjustment would aid CMS 
in reaching the 5.1 percent target irrespective of the methodology CMS 
uses to determine the threshold. However, the commenter did note that a 
mid-year correction will be of less need if CMS were to adopt a 
methodology based on cost or the CMS model that projects CCRs. Another 
commenter recommended that CMS evaluate the practicality and effects of 
a correction error similar to the update forecast error adjustment used 
in recommending an update for the market basket rate of increase.
    One commenter urged CMS to publicly account for the amount of 
unspent outlier payments over the last 3 years and to establish a 
policy whereby the unspent money is returned to the base rate for 
inpatient spending.
    Response: We appreciate the commenters suggestions for improving 
payment accuracy for outliers. However, we have already responded to 
similar comments in the FY 2006 final rule (70 FR 47495).
    Furthermore, we believe that a policy whereby the standardized 
amounts would be adjusted to reflect differences between the 5.1 
percent removed from the rates and the amounts actually paid as 
outliers would be inconsistent with the purpose of the statute relating 
to outlier payments and the prospective payment system. Section 
1886(d)(3)(B) of the Act requires that we reduce the standardized 
amounts by a factor equal to the proportion of outlier payments ``as 
estimated by the Secretary.'' Therefore, we believe that the statute 
does not contemplate adjustments to the standardized amounts in an 
upcoming year because actual outlier payments in past years were more 
or less than we had estimated.
    Comment: One commenter was concerned that CMS has not met the 5.1 
percent target in previous years and suggested that CMS project the 
outlier threshold at 5.5 percent of total payments to ensure it meets 
the 5.1 percent target.
    Another commenter was concerned about the impact that the DRG 
refinement will have on outlier payments. The commenter recommended 
that CMS maintain the threshold at $23,600 for FY 2007 while hospitals 
adjust to the other PPS payment changes that will occur.
    One commenter supported eliminating outlier payments in its 
entirety and recommended a more equitable approach by simply increasing 
the standardized amounts by 5.1 percent. The commenter explained that 
this method would remove the ability to game the system and would be 
more desirable to deserving providers that do not abuse the system.
    Response: As noted above, section 1886(d)(5)(A)(iv) of the Act 
requires outlier payments to be not less than 5 percent nor more than 6 
percent of total estimated or projected payments. Therefore, we cannot 
eliminate outlier payments as suggested by one commenter or set a 
threshold that is based on the current fiscal year for the coming 
fiscal year. Although we are refining the DRGs, the statute requires us 
to set an outlier threshold so that estimated total outlier payments 
are between 5 and 6 percent of total IPPS payments. If we failed to 
project a new outlier threshold for FY 2007, but rather simply 
continued to use the outlier threshold for FY 2006, we would not meet 
the mandate of the statute.
    We also note that we project outlier payments at 5.1 percent to 
ensure that we offset the minimum amount necessary from the 
standardized amounts to meet our statutory obligation. Although CMS 
could legally project an outlier threshold so that 5.5 percent of total 
IPPS payments are paid as outliers, the law would also require us to 
remove 5.5 percent from the standardized amounts to finance the outlier 
pool, which would reduce funds available for typical cases. As a 
result, we believe setting the outlier threshold so that 5.1 percent of 
total IPPS payments are paid as outliers is more equitable to all 
hospitals, as less money is withdrawn from the standardized amounts due 
to the outlier offset and it allows proportionally greater payment for 
typical cases. Therefore, we are adopting as final our proposal to set 
the outlier threshold so that 5.1 percent of estimated total IPPS 
payments are paid as outliers.
    ii. Other changes concerning outliers.
    As stated in the FY 1994 IPPS final rule (58 FR 46348, September 1, 
1993), we establish outlier thresholds that are 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 set of thresholds 
resulted in a lower percentage of outlier payments for capital-related 
costs than for operating costs. We project that the thresholds for FY 
2007 will result in outlier payments equal to 5.1 percent of operating 
DRG payments and 4.87 percent of capital payments based on the Federal 
rate.
    In accordance with section 1886(d)(3)(B) of the Act, we are 
reducing the FY 2007 standardized amount by the same percentage to

[[Page 48152]]

account for the projected proportion of payments paid to outliers.
    The tentative outlier adjustment factors that will be applied to 
the standardized amount for FY 2007 are as follows:

------------------------------------------------------------------------
                                             Operating
                                           standardized       Capital
                                              amounts      federal  rate
------------------------------------------------------------------------
National................................        0.948966        0.956763
Puerto Rico.............................        0.967415        0.967670
------------------------------------------------------------------------

    We are applying the tentative outlier adjustment factors to the 
tentative FY 2007 rates after removing the effects of the FY 2006 
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. 
Operating and capital costs for the case are calculated separately by 
applying separate operating and capital CCRs. These costs are then 
combined and compared with the outlier fixed-loss cost threshold.
    The outlier final rule (68 FR 34494) eliminated the application of 
the statewide average CCRs for hospitals whose CCRs fall below 3 
standard deviations from the national mean CCR. However, for those 
hospitals for which the fiscal intermediary computes operating CCRs 
greater than 1.26 or capital CCRs greater than 0.154, or hospitals for 
whom the fiscal intermediary is unable to calculate a CCR (as described 
at Sec.  412.84(i)(3) of our regulations), we are still using statewide 
average CCRs to determine whether a hospital qualifies for outlier 
payments.\31\ Table 8A in section VI. of this Addendum contains the 
statewide average operating CCRs for urban hospitals and for rural 
hospitals for which the fiscal intermediary is unable to compute a 
hospital-specific CCR within the above range. Effective for discharges 
occurring on or after October 1, 2006, these statewide average ratios 
will replace the ratios published in the IPPS final rule for FY 2006 
(70 FR 47672). Table 8B in section VI. of this Addendum contains the 
comparable statewide average capital CCRs. Again, the CCRs in Tables 8A 
and 8B will be used during FY 2007 when hospital-specific CCRs based on 
the latest settled cost report are either not available or are outside 
the range noted above. For an explanation of Table 8C, please see 
section VI. of this Addendum.
---------------------------------------------------------------------------

    \31\ These figures represent 3.0 standard deviations from the 
mean of the log distribution of CCRs for all hospitals.
---------------------------------------------------------------------------

    We finally note that we published a manual update (Change Request 
3966) to outliers on October 12, 2005. The manual update covered an 
array of topics, including CCRs, reconciliation, and the time value of 
money. To download and view the manual update, please visit http://www.cms.hhs.gov/transmittals/downloads/R707CP.pdf.
    iii. FY 2005 and FY 2006 outlier payments.
    In the FY 2006 IPPS final rule (70 FR 47496), we stated that, based 
on available data, we estimated that actual FY 2005 outlier payments 
would be approximately 4.1 percent of actual total DRG payments. This 
estimate was computed based on simulations using the FY 2004 MedPAR 
file (discharge data for FY 2004 bills). That is, the estimate of 
actual outlier payments did not reflect actual FY 2005 bills, but 
instead reflected the application of FY 2005 rates and policies to 
available FY 2004 bills.
    Our current estimate, using available FY 2005 bills, is that actual 
outlier payments for FY 2005 were approximately 3.96 percent of actual 
total DRG payments. Thus, the data indicate that, for FY 2005, the 
percentage of actual outlier payments relative to actual total payments 
is lower than we projected before FY 2005 (and, thus, is less than the 
percentage by which we reduced the standardized amounts for FY 2005). 
We note that, for FY 2006, the outlier threshold was lowered to $23,600 
compared to $25,800 for FY 2005. The outlier threshold was lower in FY 
2006 than FY 2005 as a result of slower growth in hospital charge 
inflation following implementation of the outlier final rule that went 
into effect on August 9, 2003. Nevertheless, 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 2005 are equal to 
5.1 percent of total DRG payments.
    We currently estimate that actual outlier payments for FY 2006 will 
be approximately 4.62 percent of actual total DRG payments, 0.48 
percentage points lower than the 5.1 percent we projected in setting 
the outlier policies for FY 2006. This estimate is based on simulations 
using the FY 2005 MedPAR file (discharge data for FY 2005 bills). We 
used these data to calculate an estimate of the actual outlier 
percentage for FY 2006 by applying FY 2006 rates and policies, 
including an outlier threshold of $23,600 to available FY 2005 bills. 
Even though we are estimating payments below the 5.1 percent threshold 
for FY 2006, our simulations using FY 2005 Medicare data show 
consistent levels of charge inflation and a need to increase the 
threshold for FY 2007 to ensure that 5.1 percent of total IPPS payments 
are paid as outliers.
    iv. Technical changes.
    Subpart F of Part 412 of the existing regulations discusses payment 
for outlier cases and special payment for new technology. We have 
become aware of an inadvertent mistake in Sec.  412.84(m). Currently, 
Sec.  412.84(m) discusses the application of the time value of money 
when a hospital's outlier payments are reconciled. When referencing 
reconciliation, the section mistakenly references paragraph (h)(3) 
instead of paragraph (i)(4). We received no comments on this change and 
therefore are finalizing our proposal to revise Sec.  412.84(m) to 
reference the current policy under paragraph (i)(4).
    In addition, in the June 9, 2003 outlier final rule, we amended 
Sec.  412.116(e) to remove the second sentence, which stated that 
payments for outliers ``are made based on submitted bills and represent 
final payment.'' It was necessary to remove this sentence, as we added 
a provision to the regulations that provides that outlier payments are 
subject to reconciliation when hospitals' cost reports are settled. In 
the FY 2004 IPPS final rule (68 FR 45393), we again amended Sec.  
412.116(e) to provide that new technology add-on payments are made on a 
case-by-case basis, rather than on an interim basis. However, it has 
come to our attention that, in the FY 2004 IPPS final rule, we 
inadvertently reinserted the sentence that we had struck in the June 9, 
2003 outlier final rule. We never intended to reinsert this sentence, 
and our policy since the implementation of the outlier final rule has 
always been the same (that outlier payments are subject to 
reconciliation when hospitals' cost reports are settled). Therefore, in 
order to correct the regulations to reflect our current policy, we are 
removing the second sentence from Sec.  412.116(e). Although we did not 
propose this technical correction, as further discussed in section 
XIII.C. of this final rule, we find it unnecessary to undertake notice 
and comment rulemaking with respect to this technical correction.
d. Tentative Rural Community Hospital Demonstration Program Adjustment 
(Section 410A of Pub. L. 108-173)
    Section 410A of Pub. L. 108-173 requires the Secretary to establish 
a demonstration that will modify reimbursement for inpatient services 
for up to 15 small rural hospitals. Section 410A(c)(2) of Pub. L. 108-
173 requires that ``in conducting the demonstration

[[Page 48153]]

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.M. of the 
preamble to this final rule, we are satisfying this requirement by 
adjusting national IPPS rates by a factor that is sufficient to account 
for the added costs of this demonstration. We estimate that the average 
additional annual payment that will be made to each participating 
hospital under the demonstration will be approximately $1,021,985. We 
based this estimate on the recent historical experience of the 
difference between inpatient cost and payment for hospitals that are 
participating in the demonstration. For 9 participating hospitals, the 
total annual impact of the demonstration program is estimated to be 
$9,197,870. The required tentative adjustment to the Federal rate used 
in calculating Medicare inpatient prospective payments as a result of 
the demonstration is 0.999905.
    In order to achieve budget neutrality, we are adjusting the 
tentative national IPPS rates by a tentative amount sufficient to 
account for the added costs of this demonstration. In other words, we 
are applying budget neutrality across the payment system as a whole 
rather than merely across the participants of this demonstration. We 
believe that the language of the statutory budget neutrality 
requirement permits the agency to implement the budget neutrality 
provision in this manner. The statutory language requires that 
``aggregate payments made by the Secretary do not exceed the amount 
which the Secretary would have paid if the demonstration * * * was not 
implemented,'' but does not identify the range across which aggregate 
payments must be held equal.
5. Tentative FY 2007 Standardized Amount
    The tentative adjusted standardized amount is divided into labor-
related and nonlabor-related portions. Tables 1A and 1B in section VI. 
of this Addendum contain the tentative national standardized amount 
that we are applying to all hospitals, except hospitals in Puerto Rico. 
The tentative Puerto Rico-specific amounts are shown in Table 1C. The 
tentative amounts shown in Tables 1A and 1B differ only in that the 
labor-related share applied to the tentative standardized amounts in 
Table 1A is 69.7 percent, and the labor-related share applied to the 
tentative standardized amounts in 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 the labor-related share of 62 percent, unless the application 
of that percentage would result in lower payments to a hospital than 
would otherwise be made. The effect of this application is that the 
labor-related share of the tentative standardized amount is 62 percent 
for all hospitals (other than those in Puerto Rico) whose wage indexes 
are less than or equal to 1.0000.
    In addition, Tables 1A and 1B include tentative standardized 
amounts reflecting the full 3.4 percent update for FY 2007, and 
tentative standardized amounts reflecting the 2.0 percentage point 
reduction to the update (a 1.4 percent update) applicable for hospitals 
that fail to submit quality data consistent with section 
1886(b)(3)(B)(viii) of the Act.
    We note that in this final rule we are not supplying a table that 
illustrates the changes from the FY 2006 national average standardized 
amount. Because we are only setting the standardized amounts 
tentatively, we do not believe it is appropriate to include this table 
in this final rule. However, we will publish a table in the subsequent 
notice to this final rule that details the calculation of the final 
standardized amounts.
    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 tentative amount 
is set forth in Table 1A). The tentative labor-related and nonlabor-
related portions of the national average standardized amounts for 
Puerto Rico hospitals for FY 2007 are set forth in Table 1C of section 
VI. of this Addendum. This table also includes the tentative Puerto 
Rico standardized amounts. The labor-related share applied to the 
tentative Puerto Rico specific standardized amount is 58.7 percent, or 
62 percent, depending on which is more advantageous to the hospital. 
(Section 1886(d)(9)(C)(iv) of the Act, as amended by section 403(b) of 
Pub. L. 108-173, provides that the labor-related share for hospitals in 
Puerto Rico will be 62 percent, unless the application of that 
percentage would result in lower payments to the hospital.)

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

    Tables 1A through 1C, as set forth in section VI. of this Addendum, 
contain the tentative labor-related and tentative nonlabor-related 
shares of the standardized amount that we are using to calculate the 
prospective payment rates for hospitals located in the 50 States, the 
District of Columbia, and Puerto Rico for FY 2007. This section 
addresses two types of adjustments to the tentative standardized 
amounts that are made in determining the prospective payment rates as 
described in this Addendum.
1. Tentative 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 to this final 
rule, we discuss the data and methodology for the FY 2007 wage index. 
We note that because the occupational mix adjusted wage index data will 
not be finalized until after this final rule, we will not be publishing 
Tables 4A-1, 4A-2, 4B, 4C-1, 4C-2, and 4F in this final rule. However, 
we will publish these tables in the Federal Register and on the CMS Web 
site once all the data is finalized and prior to October 1, 2006.
2. Final Adjustment for Cost-of-Living in Alaska and Hawaii
    Section 1886(d)(5)(H) of the Act authorizes an adjustment to take 
into account the unique circumstances of hospitals in Alaska and 
Hawaii. Higher labor-related costs for these two States are taken into 
account in the adjustment for area wages described above. For FY 2007, 
we are adjusting the payments for hospitals in Alaska and Hawaii by 
multiplying the nonlabor-related portion of the standardized amount by 
the appropriate adjustment factor contained in the table below.

 Table of Cost-of-Living Adjustment Factors: Alaska and Hawaii Hospitals
------------------------------------------------------------------------
                                                          Cost of living
                          Area                              adjustment
                                                              factor
------------------------------------------------------------------------
Alaska--All areas.......................................          1.25
Hawaii:
  County of Honolulu....................................          1.25
  County of Hawaii......................................          1.165
  County of Kauai.......................................          1.2325
  County of Maui........................................          1.2375
  County of Kalawao.....................................          1.2375 
------------------------------------------------------------------------
 (The above factors are based on data obtained from the U.S. Office of
  Personnel Management.)


[[Page 48154]]

C. DRG Relative Weights

    As discussed in section II. of the preamble of this final rule, we 
have developed a classification system for all hospital discharges, 
assigning them into DRGs, and have developed relative weights for each 
DRG that reflect the resource utilization of cases in each DRG relative 
to Medicare cases in other DRGs. Table 5 of section VI. of this 
Addendum contains the relative weights that we are using for discharges 
occurring in FY 2007. These factors have been recalibrated as explained 
in section II. of the preamble of this final rule.

D. Calculation of the Prospective Payment Rates

General Formula for Calculation of Prospective Payment Rates for FY 
2007
    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 2007 equals the Federal rate.
    The prospective payment rate for SCHs for FY 2007 equals the higher 
of the applicable Federal rate or the hospital-specific rate as 
described below. The prospective payment rate for MDHs for FY 2007 
equals the higher of the Federal rate, or the Federal rate plus 75 
percent of the difference between the Federal rate and the hospital-
specific rate as described below. The prospective payment rate for 
Puerto Rico for FY 2007 equals 25 percent of the Puerto Rico rate plus 
75 percent of the applicable national rate.
    As noted above, we are not able to provide the final FY 2007 
occupational mix adjusted wage index tables. Although Tables 4A-1, 4A-
2, 4B, 4C-1, and 4C-2 will be published on the CMS Web site and in a 
subsequent Federal Register document to this final rule, any reference 
to these tables below refers to these future tables.
1. Federal Rate
    The Federal rate is determined as follows:
    Step 1--Select the appropriate average standardized amount 
considering the applicable wage index and whether the hospital has 
submitted qualifying quality data (full update for qualifying 
hospitals, update minus 2.0 percentage points for nonqualifying 
hospitals).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located or the area to which the hospital is 
reclassified.
    Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related portion 
of the standardized amount (adjusted, if appropriate, under Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative 
weight corresponding to the appropriate DRG (see Table 5 of section VI. 
of this Addendum).
    The Federal rate as determined in Step 5 may then be further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment. In addition, for hospitals that qualify for a low-volume 
payment adjustment under section 1886(d)(12) of the Act, the payment in 
Step 5 would be increased by 25 percent.
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
a. Calculation of Hospital-Specific Rate
    Section 1886(b)(3)(C) of the Act provides that 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; or the updated hospital-specific rate 
based on FY 1996 costs per discharge.
    As discussed previously, MDHs are required to rebase their 
hospital-specific rates to their FY 2002 cost reports if doing so 
results in higher payments. In addition, effective for discharges 
occurring on or after October 1, 2006, MDHs are to be paid based on the 
Federal national rate or, if higher, the Federal national rate plus 75 
percent (changed from 50 percent) of the difference between the Federal 
national rate and the greater of the updated hospital-specific rates 
based on either FY 1982, FY 1987 or FY 2002 costs per discharge. 
Further, MDHs will no longer be subject to the 12-percent cap on their 
DSH payment adjustment factor.
    Hospital-specific rates have been determined for each of these 
hospitals based on the FY 1982 costs per discharge, the FY 1987 costs 
per discharge, or, for SCHs, the FY 1996 costs per discharge 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 (55 FR 15150); the FY 1991 IPPS final rule (55 
FR 35994); and the FY 2001 IPPS final rule (65 FR 47082). In addition, 
for both SCHs and MDHs, the hospital-specific rate is adjusted by the 
budget neutrality adjustment factor as discussed in section IV.C. of 
the preamble to this final rule. The resulting rate will be used in 
determining the payment rate an SCH or MDH will receive for its 
discharges beginning on or after October 1, 2006.
b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-
Specific Rates for FY 2007
    We are increasing the hospital-specific rates by 3.4 percent (the 
hospital market basket percentage increase) for SCHs and MDHs for FY 
2007. Section 1886(b)(3)(C)(iv) of the Act provides that the update 
factor applicable to the hospital-specific rates for SCHs is equal to 
the update factor provided under section 1886(b)(3)(B)(iv) of the Act, 
which, for SCHs in FY 2007, is the market basket rate-of-increase. 
Section 1886(b)(3)(D) of the Act provides that the update factor 
applicable to the hospital-specific rates for MDHs also equals the 
update factor provided under section 1886(b)(3)(B)(iv) of the Act, 
which, for FY 2007, is the market basket rate-of-increase.
3. General Formula for Calculation of Prospective Payment Rates for 
Hospitals Located in Puerto Rico Beginning On or After October 1, 2006, 
and Before October 1, 2007
    Section 1886(d)(9)(E)(iv) of the Act provides that, effective for 
discharges occurring on or after October 1, 2004, hospitals located in 
Puerto Rico are paid based on a blend of 75 percent of the national 
prospective payment rate and 25 percent of the Puerto Rico-specific 
rate.
a. Puerto Rico Rate
    The Puerto Rico prospective payment rate is determined as follows:
    Step 1--Select the appropriate average standardized amount 
considering the applicable wage index (see Table 1C).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the appropriate 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 appropriate DRG 
relative weight (see Table 5 of section IV. of the Addendum).
    Step 5--Multiply the result in Step 4 by 25 percent.

[[Page 48155]]

b. National Rate
    The national prospective payment rate is determined as follows:
    Step 1--Select the appropriate average standardized amount 
considering the applicable wage index.
    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 appropriate DRG 
relative weight (see Table 5 of section VI. of the Addendum).
    Step 5--Multiply the result in Step 4 by 75 percent.
    The sum of the Puerto Rico rate and the national rate computed 
above equals the prospective payment for a given discharge for a 
hospital located in Puerto Rico. This rate may then be further adjusted 
if the hospital qualifies for either the IME or DSH adjustment.

III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2007

    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 regulations at Sec. Sec.  412.308 through 
412.352. Below we discuss the factors that we are using to determine 
the tentative capital Federal rate for FY 2007, which will be effective 
for discharges occurring on or after October 1, 2006. As discussed in 
section I. of the Addendum of this final rule, we are not able to 
provide the final FY 2007 capital Federal prospective rates in this 
rule due to requirements imposed by the Second Circuit Court's order 
regarding wage index information as collected for the inpatient Federal 
rates. This affects the Federal capital payment rates, as well, because 
wage index information is used to determine the GAF/DRG budget 
neutrality factor, the GAF, and outlier adjustment factor that are used 
in arriving at the capital Federal rates. We are providing tentative 
amounts, where applicable, as proxies for these rates and factors until 
the occupational mix adjusted wage index is finalized. Subsequent to 
this final rule, we will publish in a Federal Register document a 
listing the capital Federal rates, offsets and budget neutrality 
factors that are effective October 1, 2006 for FY 2007.
    The 10-year transition period ended with hospital cost reporting 
periods beginning on or after October 1, 2001 (FY 2002). Therefore, for 
cost reporting periods beginning in FY 2002, all hospitals (except 
``new'' hospitals under Sec.  412.304(c)(2)) are paid based on 100 
percent of the capital Federal rate. For FY 1992, we computed the 
standard Federal payment rate for capital-related costs under the IPPS 
by updating the FY 1989 Medicare inpatient capital cost per case by an 
actuarial estimate of the increase in Medicare inpatient capital costs 
per case. Each year after FY 1992, we update the capital standard 
Federal rate, as provided at Sec.  412.308(c)(1), to account for 
capital input price increases and other factors. The regulations at 
Sec.  412.308(c)(2) provide that the capital Federal rate is adjusted 
annually by a factor equal to the estimated proportion of outlier 
payments under the capital Federal rate to total capital payments under 
the capital Federal rate. In addition, Sec.  412.308(c)(3) requires 
that the capital Federal rate be reduced by an adjustment factor equal 
to the estimated proportion of payments for (regular and special) 
exceptions under Sec.  412.348. Section 412.308(c)(4)(ii) requires that 
the capital standard Federal rate be adjusted so that the effects of 
the annual DRG reclassification and the recalibration of DRG weights 
and changes in the geographic adjustment factor are budget neutral.
    For FYs 1992 through 1995, Sec.  412.352 required that the capital 
Federal rate also be adjusted by a budget neutrality factor so that 
aggregate payments for inpatient hospital capital costs were projected 
to equal 90 percent of the payments that would have been made for 
capital-related costs on a reasonable cost basis during the fiscal 
year. That provision expired in FY 1996. Section 412.308(b)(2) 
describes the 7.4 percent reduction to the capital rate that was made 
in FY 1994, and Sec.  412.308(b)(3) describes the 0.28 percent 
reduction to the capital rate made in FY 1996 as a result of the 
revised policy of 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, and before October 1, 2002, the 
unadjusted capital standard Federal rate is reduced by 17.78 percent. 
As we discussed in the FY 2003 IPPS final rule (67 FR 50102) and 
implemented in Sec.  412.308(b)(6), a small part of that reduction was 
restored effective October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor 
and the regular exceptions payment adjustment during the 10-year 
transition period, we developed a dynamic model of Medicare inpatient 
capital-related costs; that is, a model that projected changes in 
Medicare inpatient capital-related costs over time. With the expiration 
of the budget neutrality provision, the capital cost model was only 
used to estimate the regular exceptions payment adjustment and other 
factors during the transition period. As we explained in the FY 2002 
IPPS final rule (66 FR 39911), beginning in FY 2002, an adjustment for 
regular exception payments is no longer necessary because regular 
exception payments were only made for cost reporting periods beginning 
on or after October 1, 1991, and before October 1, 2001 (see Sec.  
412.348(b)). Because payments are no longer being made under the 
regular exception policy effective with cost reporting periods 
beginning in FY 2002, we no longer use 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 the use of a blended payment system 
for payments to Puerto Rico hospitals under the PPS for acute care 
hospital inpatient capital-related costs. Accordingly, under the 
capital PPS, we compute a separate payment rate specific to Puerto Rico 
hospitals using the same methodology used to compute the national 
Federal rate for capital-related costs. In accordance with section 
1886(d)(9)(A) of the Act, under the PPS 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 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 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, 
operating payments to hospitals in Puerto Rico were revised to be based 
on a blend of 50 percent of the applicable standardized amount specific 
to Puerto

[[Page 48156]]

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 in Puerto Rico to be based on a blend of 50 
percent of the Puerto Rico capital rate and 50 percent of the 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 Puerto Rico hospitals from 50 percent to 
62.5 percent and decreased the Puerto Rico portion of the operating 
IPPS payments from 50 percent to 37.5 percent for discharges occurring 
on or after April 1, 2004 through September 30, 2004 (see 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 Puerto Rico hospitals is equal to 75 percent and the 
Puerto Rico 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 in Puerto Rico, for 
FY 2005 (as we discussed in the FY 2005 IPPS final rule), we revised 
the methodology for computing capital payments to hospitals located in 
Puerto Rico to be based on a blend of 25 percent of the Puerto Rico 
capital rate and 75 percent of the capital Federal rate for discharges 
occurring on or after October 1, 2004.

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

    In the FY 2006 IPPS final rule (70 FR 47503), we established a 
capital Federal rate of $420.65 for FY 2006. In the discussion that 
follows, we explain the factors that we are using to determine the 
tentative FY 2007 capital Federal rate. In particular, we explain why 
the tentative FY 2007 capital Federal rate will increase approximately 
1.60 percent compared to the FY 2006 capital Federal rate. However, we 
estimate aggregate capital payments will decrease by 0.2 percent during 
this same period. This decrease is due to a decrease in the estimated 
total number of Medicare fee-for-service discharges for FY 2007 as 
compared to the estimated total number of Medicare fee-for-service 
discharges in FY 2006. We are estimating a decrease in Medicare fee-
for-service discharges in FY 2007 as compared to FY 2006, in part 
because we are projecting an increase in beneficiary Medicare managed 
care enrollment as a result of the implementation of several provisions 
of Pub. L. 108-173. Therefore, although we are projecting that capital 
PPS payments per discharge will increase slightly from FY 2006 to FY 
2007, we project that aggregate capital PPS payments will decrease for 
the same period.
    Total payments to hospitals under the IPPS are relatively 
unaffected by changes in the capital prospective payments. Because 
capital payments constitute about 10 percent of hospital payments, a 1-
percent change in the capital Federal rate yields only about 0.1 
percent change in actual payments to hospitals. As noted above, 
aggregate payments under the capital IPPS are estimated to decrease 
slightly in FY 2007 compared to FY 2006.
1. Projected Capital Standard Federal Rate Update
a. Description of the Update Framework
    Under Sec.  412.308(c)(1), the capital standard Federal rate is 
updated on the basis of an analytical framework that takes into account 
changes in a capital input price index (CIPI) and several other policy 
adjustment factors. Specifically, we have adjusted the projected CIPI 
rate-of-increase as appropriate each year for case-mix index-related 
changes, for intensity, and for errors in previous CIPI forecasts. The 
update factor for FY 2007 under that framework is 1.10 percent based on 
the best data available at this time. The update factor is based on a 
projected 1.1 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 2005 DRG reclassification and recalibration, and 
a forecast error correction of 0.0 percent. As discussed below in 
section III.C. of this Addendum, we 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 
2007 CIPI projection in that same section of this Addendum. Below we 
describe the policy adjustments that have been applied.
    The case-mix index is the measure of the average DRG weight for 
cases paid under the IPPS. Because the DRG weight determines the 
prospective payment for each case, any percentage increase in the case-
mix index corresponds to an equal percentage increase in hospital 
payments.
    The case-mix index can change for any of several reasons:
    <bullet> The average resource use of Medicare patients changes 
(``real'' case-mix change);
    <bullet> Changes in hospital coding of patient records result in 
higher weight DRG assignments (``coding effects''); and
    <bullet> The annual DRG reclassification and recalibration changes 
may not be budget neutral (``reclassification effect'').
    We define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients as opposed to changes in 
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, 
2005 IPPS proposed rule for FY 2005 (69 FR 28816)). (We are no longer 
using an update framework in making 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 2007, we are projecting a 1.0 percent total increase in the 
case-mix index. We estimate that the real case-mix increase will also 
equal 1.0 percent in FY 2007. The net adjustment for change in case-mix 
is the difference between the projected increase in case-mix and the 
projected total increase in case-mix. Therefore, the net adjustment for 
case-mix change in FY 2007 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 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 are adjusting for the effects of the FY 2005 DRG reclassification 
and recalibration as part of our update for FY 2007. We estimate that 
FY 2005 DRG reclassification and recalibration will result in a 0.0 
percent change in the case-mix when compared with the case-mix index 
that would have resulted if we had not made the reclassification and 
recalibration changes to the DRGs. Therefore, we are making a 0.0 
percent adjustment for DRG reclassification and recalibration in the 
update for FY 2007 to maintain budget neutrality.

[[Page 48157]]

    The capital update framework also contains an adjustment for 
forecast error. The input price index forecast is based on historical 
trends and relationships ascertainable at the time the update factor is 
established for the upcoming year. In any given year, there may be 
unanticipated price fluctuations that may result in differences between 
the actual increase in prices and the forecast used in calculating the 
update factors. In setting a prospective payment rate under the 
framework, we make an adjustment for forecast error only if our 
estimate of the change in the capital input price index for any year is 
off by 0.25 percentage points or more. There is a 2-year lag between 
the forecast and the measurement of the forecast error. A forecast 
error of 0.1 percentage point was calculated for the FY 2005 update. 
That is, current historical data indicate that the forecasted FY 2005 
CIPI used in calculating the FY 2005 update factor (0.7 percent) 
slightly understated the actual realized price increases (0.8 percent) 
by 0.1 percentage point. This slight underprediction was mostly due to 
the incorporation of newly available source data for fixed asset prices 
into the market basket. However, because this estimation of the change 
in the CIPI is less than 0.25 percentage points, it is not reflected in 
the update recommended under this framework. Therefore, we are making a 
0.0 percent adjustment for forecast error in the update for FY 2007.
    Under the capital IPPS update framework, we also make an adjustment 
for changes in intensity. We calculate this adjustment using the same 
methodology and data that were used in the framework used in the past 
under the operating IPPS. The intensity factor for the operating update 
framework reflects how hospital services are utilized to produce the 
final product, that is, the discharge. This component accounts for 
changes in the use of quality-enhancing services, for changes in 
within-DRG severity, and for expected modification of practice patterns 
to remove noncost-effective services.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI for 
hospital and related services) and changes in real case-mix. The use of 
total charges in the calculation of the intensity factor makes it a 
total intensity factor; that is, charges for capital services are 
already built into the calculation of the factor. Therefore, we have 
incorporated the intensity adjustment from the operating update 
framework into the capital update framework. Without reliable estimates 
of the proportions of the overall annual intensity increases that are 
due, respectively, to ineffective practice patterns and to the 
combination of quality-enhancing new technologies and within-DRG 
complexity, we assume, as in the operating update framework, 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 within-DRG severity increases and the adoption 
of quality-enhancing technology.
    We have developed a Medicare-specific intensity measure based on a 
5-year average. Past studies of case-mix change by the RAND Corporation 
(Has DRG Creep Crept Up? Decomposing the Case Mix Index Change Between 
1987 and 1988'' by G. M. Carter, J. P. Newhouse, and D. A. Relles, R-
4098-HCFA/ProPAC (1991)) suggest that real case-mix change was not 
dependent on total change, but was usually a fairly steady 1.0 to 1.4 
percent per year. We use 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.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI for 
hospital and related services), and changes in real case-mix. As we 
noted above, in accordance with Sec.  412.308(c)(1)(ii), we began 
updating the capital standard Federal rate in FY 1996 using an update 
framework that takes into account, among other things, allowable 
changes in the intensity of hospital services. For FYs 1996 through 
2001, we found that case-mix constant intensity was declining and we 
established a 0.0 percent adjustment for intensity in each of those 
years. For FYs 2002 and 2003, we found that case-mix constant intensity 
was increasing and we established a 0.3 percent adjustment and 1.0 
percent adjustment for intensity, respectively. For FYs 2004 and 2005, 
we found that the charge data appeared to be skewed (as discussed in 
greater detail below) and we established a 0.0 percent adjustment in 
each of those years. Furthermore, we stated that we would continue to 
apply a 0.0 percent adjustment for intensity until any increase in 
charges can be tied to intensity rather than attempts to maximize 
outlier payments.
    As noted above, our intensity measure is based on a 5-year average, 
and therefore, the intensity adjustment for FY 2007 is based on data 
from the 5-year period FY 2001 through FY 2005. We found a dramatic 
increase in hospital charges for each of those 5 years without a 
corresponding increase in the hospital case-mix index. These findings 
are similar to the considerable increase in hospitals' charges, which 
we found when we were determining the intensity factor in the FY 2004, 
FY 2005 and FY 2006 update recommendations as discussed in the FY 2004 
IPPS final rule (68 FR 45482), the FY 2005 IPPS final rule (69 FR 
49285) and the FY 2006 IPPS final rule (70 FR 47500), respectively. If 
hospitals were treating new or different types of cases, which would 
result in an appropriate increase in charges per discharge, then we 
would expect hospitals' case-mix to increase proportionally.
    As we discussed in the FY 2006 IPPS final rule (70 FR 47500), 
because our intensity calculation relies heavily upon charge data and 
we believe that these charge data may be inappropriately skewed, we 
established a 0.0 percent adjustment for intensity for FY 2006.
    On June 9, 2003, we published revisions to our outlier policy for 
determining the additional payment for extraordinarily high-cost cases 
(68 FR 34494 through 34515). These revised policies were effective on 
August 8, 2003, and October 1, 2003. While it does appear that a 
response to these policy changes is beginning to occur, that is, the 
change in charges for FYs 2004 and 2005 are somewhat less than the 
previous 4 years, they still show a significant annual increase in 
charges without a corresponding increase in hospital case-mix. The 
increase in charges in FY 2004, for example, is approximately 12 
percent, which, while less than the increase in the previous 3 years, 
is still much higher than increases in years prior to FY 2001. In 
addition, this approximate 12-percent increase in charges for FY 2004 
significantly exceeds the case-mix increase for the same period. Based 
on the approximate 12-percent increase in charges for FY 2004, we 
believe residual effects of hospitals' charge practices prior to the 
implementation of the outlier policy revisions established in the June 
9, 2003 final rule continue to appear in the data because hospitals may 
not have had enough time to adopt changes in their behavior in response 
to the new outlier policy. Thus, we believe that the FY 2004 and FY 
2005 charge data may still be skewed. Because the intensity adjustment 
is based on a 5-year average, and although the new outlier policy was 
generally effective in FY 2004, we believe it still will be several 
years before all the effects of hospitals attempting to maximize 
outlier

[[Page 48158]]

payments are removed from the intensity calculation. Therefore, as 
proposed, we are making a 0.0 percent adjustment for intensity for FY 
2007. In the past (FYs 1996 through 2001) when we found intensity to be 
declining, we believed a zero (rather than negative) intensity 
adjustment was appropriate. Similarly, we believe that it is 
appropriate to apply a zero intensity adjustment for FY 2007 until any 
increase in charges can be tied to intensity rather than to attempts to 
maximize outlier payments.
    Above, we described the basis of the components used to develop the 
1.1 percent capital update factor for FY 2007 as shown in the table 
below.

          CMS FY 2007 Update Factor to the Capital Federal Rate
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Capital Input Price Index......................................      1.1
Intensity......................................................      0.0
Case-Mix Adjustment Factors:
  Real Across DRG Change.......................................      1.0
  Projected Case-Mix Change....................................     -1.0
                                                                --------
    Subtotal...................................................      0.0
                                                                ========
Effect of FY 2005 Reclassification and Recalibration...........      0.0
Forecast Error Correction......................................      0.0
                                                                --------
    Total Update...............................................      1.1
------------------------------------------------------------------------

 b. Comparison of CMS and MedPAC Update Recommendation
    In the past, MedPAC has included update recommendations for capital 
PPS in a Report to Congress. In its March 2006 Report to Congress, 
MedPAC did not make an update recommendation for capital PPS payments 
for FY 2007. However, in that same report, MedPAC made an update 
recommendation for hospital inpatient and outpatient services (page 
46). MedPAC reviews inpatient and outpatient services together because 
they are so closely interrelated. For FY 2007, MedPAC recommended an 
increase in the payment rate for the operating IPPS by the projected 
increase in the hospital market basket index, less half of MedPAC's 
expectation for productivity growth (or 0.45 percent, based on its 
assessment of beneficiaries' access to care and changes in hospital 
capacity, volume of services, access to capital, quality of care, and 
the relationship of Medicare payments and hospitals' costs.) In 
addition, MedPAC recommended combining the annual rate update with an 
incentive payment policy for quality. (MedPAC's Report to the Congress: 
Medicare Payment Policy, March 2006, Section 2A.)
2. Outlier Payment Adjustment Factor
    Section 412.312(c) establishes a unified outlier 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 DRG payments.
    In the FY 2006 IPPS final rule (70 FR 47501), we estimated that 
outlier payments for capital would equal 4.85 percent of inpatient 
capital-related payments based on the capital Federal rate in FY 2006. 
Based on the tentative thresholds as set forth in section II.A.4.c. of 
this Addendum, we estimate that tentative outlier payments for capital-
related costs would equal 4.32 percent for inpatient capital-related 
payments based on the tentative Federal rate in FY 2007. Therefore, we 
are applying a tentative outlier adjustment factor of 0.9568 to the 
tentative capital Federal rate. Thus, we estimate that the percentage 
of capital outlier payments to total capital standard payments for FY 
2007 will be slightly lower than the percentages for FY 2006.
    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 tentative FY 2007 outlier 
adjustment of 0.9568 is a 0.56 percent change from the FY 2006 outlier 
adjustment of 0.9515. Therefore, the net change in the tentative 
outlier adjustment to the tentative capital Federal rate for FY 2007 is 
1.0056 (0.9568/0.9915). Thus, the outlier adjustment increases the 
tentative FY 2007 capital Federal rate by 0.56 percent compared with 
the FY 2006 outlier adjustment.
3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the GAF
    Section 412.308(c)(4)(ii) requires that the capital Federal rate be 
adjusted so that aggregate payments for the fiscal year based on the 
capital Federal rate after any changes resulting from the annual DRG 
reclassification and recalibration and changes in the GAF are projected 
to equal aggregate payments that would have been made on the basis of 
the capital Federal rate without such changes. Because we implemented a 
separate GAF for Puerto Rico, we apply separate budget neutrality 
adjustments for the national GAF and the Puerto Rico GAF. We apply the 
same budget neutrality factor for DRG reclassifications and 
recalibration nationally and for Puerto Rico. Separate adjustments were 
unnecessary for FY 1998 and earlier because the GAF for Puerto Rico was 
implemented in FY 1998.
    In the past, we used the actuarial capital cost model (described in 
Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to estimate 
the aggregate payments that would have been made on the basis of the 
capital Federal rate with and without changes in the DRG 
classifications and weights and in the GAF to compute the adjustment 
required to maintain budget neutrality for changes in DRG weights and 
in the GAF. During the transition period, the capital cost model was 
also used to estimate the regular exception payment adjustment factor. 
As we explain in section III.A.4. of this Addendum, beginning in FY 
2002, an adjustment for regular exception payments is no longer 
necessary. Therefore, we are no longer using the capital cost model. 
Instead, we are using historical data based on hospitals' actual cost 
experiences to determine the exceptions payment adjustment factor for 
special exceptions payments.
    To determine the tentative factors for FY 2007, we compared 
(separately for the national capital rate and the Puerto Rico capital 
rate) estimated aggregate capital Federal rate payments based on the FY 
2006 DRG relative weights and the FY 2006 GAF to estimated aggregate 
capital Federal rate payments based on the FY 2007 relative weights and 
the tentative FY 2007 GAF. As we established in the FY 2006 IPPS final 
rule (70 FR 47503), the budget neutrality factors were 0.9920 for the 
national capital rate and 0.9959 for the Puerto Rico capital rate. In 
making the comparison, we set the exceptions reduction factor to 1.00. 
To achieve budget neutrality for the changes in the national GAF, based 
on calculations using updated data, we are applying a tentative 
incremental budget neutrality adjustment of 1.0003 for FY 2007 to the 
previous cumulative FY 2006 adjustments of 0.9920, yielding a tentative 
adjustment of 0.9923, through FY 2007 (calculations done on unrounded 
numbers). For the Puerto Rico GAF, we are applying a tentative 
incremental budget neutrality

[[Page 48159]]

adjustment of 1.0021 for FY 2007 to the previous cumulative FY 2006 
adjustment of 0.9959, yielding a tentative cumulative adjustment of 
0.9980 through FY 2007.
    We then compared estimated aggregate capital Federal rate payments 
based on the FY 2006 DRG relative weights and the FY 2006 GAF to 
estimated aggregate capital Federal rate payments based on the FY 2007 
DRG relative weights and the tentative FY 2007 GAF. The incremental 
adjustment for DRG classifications and changes in relative weights is 
0.9992 both nationally and for Puerto Rico. The cumulative adjustments 
for DRG classifications and changes in relative weights and for changes 
in the tentative GAF through FY 2007 are 0.9914 nationally and 0.9972 
for Puerto Rico. The following table summarizes the adjustment factors 
for each fiscal year:

[[Page 48160]]



                                         Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     National                                                       Puerto Rico
                                                                 ------------------------------------------------                ------------------------------------------------
                                                                              Incremental adjustment                                          Incremental adjustment
                           Fiscal year                           ------------------------------------------------   Cumulative   ------------------------------------------------   Cumulative
                                                                    Geographic     DRG reclassi-                                    Geographic     DRG reclassi-
                                                                    adjustment     fications and     Combined                       adjustment     fications and     Combined
                                                                      factor       recalibration                                      factor       recalibration
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1992............................................................  ..............  ..............  ..............         1.00000  ..............  ..............  ..............  ..............
1993............................................................  ..............  ..............         0.99800         0.99800  ..............  ..............  ..............  ..............
1994............................................................  ..............  ..............         1.00531         1.00330  ..............  ..............  ..............  ..............
1995............................................................  ..............  ..............         0.99980         1.00310  ..............  ..............  ..............  ..............
1996............................................................  ..............  ..............         0.99940         1.00250  ..............  ..............  ..............  ..............
1997............................................................  ..............  ..............         0.99873         1.00123  ..............  ..............  ..............  ..............
1998............................................................  ..............  ..............         0.99892         1.00015  ..............  ..............  ..............         1.00000
1999............................................................         0.99944         1.00335         1.00279         1.00294         0.99898         1.00335         1.00233         1.00233
2000............................................................         0.99857         0.99991         0.99848         1.00142         0.99910         0.99991         0.99901         1.00134
 2001\1\........................................................         0.99782         1.00009         0.99791         0.99933         1.00365         1.00009         1.00374         1.00508
2001 \2\........................................................     \3\ 0.99771     \3\ 1.00009     \3\ 0.99780         0.99922     \3\ 1.00365     \3\ 1.00009     \3\ 1.00374         1.00508
2002............................................................     \4\ 0.99666     \4\ 0.99668     \4\ 0.99335         0.99268     \4\ 0.98991     \4\ 0.99668     \4\ 0.99662         0.99164
2003 \5\........................................................         0.99915         0.99662         0.99577         0.98848         1.00809         0.99662         1.00468         0.99628
2003 \6\........................................................     \7\ 0.99896     \7\ 0.99662     \7\ 0.99558         0.98830         1.00809         0.99662         1.00468         0.99628
2004 \8\........................................................     \9\ 1.00175     \9\ 1.00081     \9\ 1.00256         0.99083         1.00028         1.00081         1.00109         0.99736
2004 \10\.......................................................     \9\ 1.00164     \9\ 1.00081     \9\ 1.00245         0.99072         1.00028         1.00081         1.00109         0.99736
2005 \11\.......................................................    \12\ 0.99967         1.00094    \12\ 1.00061         0.99137         0.99115         1.00094         0.99208         0.98946
2005 \13\.......................................................    \12\ 0.99946         1.00094    \12\ 1.00040         0.99117         0.99115         1.00094         0.99208         0.98946
2006............................................................    \14\ 1.00185         0.99892    \14\ 1.00076         0.99198         1.00762         0.99892         1.00653         0.99592
2007............................................................    \15\ 1.00029       0.999\15\    \15\ 0.99943    \15\ 0.99142    \15\ 1.00213         0.99915    \15\ 1.00128    \15\ 0.99719
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Factors effective for the first half of FY 2001 (October 2000 through March 2001).
\2\ Factors effective for the second half of FY 2001 (April 2001 through September 2001).
\3\ Incremental factors are applied to FY 2000 cumulative factors.
\4\ Incremental factors are applied to the cumulative factors for the first half of FY 2001.
\5\ Factors effective for the first half of FY 2003 (October 2002 through March 2003).
\6\ Factors effective for the second half of FY 2003 (April 2003 through September 2003).
\7\ Incremental factors are applied to FY 2002 cumulative factors.
\8\ Factors effective for the first half of FY 2004 (October 2003 through March 2004).
\9\ Incremental factors are applied to the cumulative factors for the second half of FY 2003.
\10\ Factors effective for the second half of FY 2004 (April 2004 through September 2004).
\11\ Factors effective for the first quarter of FY 2005 (September 2004 through December 2004).
\12\ Incremental factors are applied to average of the cumulative factors for the first half (October 1, 2003 through March 31, 2004) and second half (April 1, 2004 through September 30, 2004)
  of FY 2004.
\13\ Factors effective for the last three quarters of FY 2005 (January 2005 through September 2005).
\14\ Incremental factors are applied to average of the cumulative factors for 2005.
\15\ Tentative factors for FY 2007, as discussed above in section III. of this Addendum.


[[Page 48161]]

    The methodology used to determine the recalibration and geographic 
(DRG/GAF) budget neutrality adjustment factor is similar to that used 
in establishing budget neutrality adjustments under the PPS for 
operating costs. One difference is that, under the operating PPS, 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 PPS, there is a single DRG/GAF budget neutrality adjustment 
factor (the national capital rate and the Puerto Rico capital rate are 
determined separately) for changes in the GAF (including geographic 
reclassification) and the DRG relative weights. In addition, there is 
no adjustment for the effects that geographic reclassification has on 
the other payment parameters, such as the payments for serving low-
income patients, indirect medical education payments, or the large 
urban add-on payments.
    In the FY 2006 IPPS final rule (70 FR 47503), we calculated a GAF/
DRG budget neutrality factor of 1.0008 for FY 2006. For FY 2007, we are 
establishing a tentative GAF/DRG budget neutrality factor of 0.9994. 
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 from 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 GAF. The tentative incremental change 
in the adjustment from FY 2006 to FY 2007 is 0.9994. The tentative 
cumulative change in the capital Federal rate due to this adjustment is 
0.9914 (the product of the incremental factors for FYs 1993 though 2006 
and the tentative incremental factor of 0.9994 for FY 2007). (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 
tentative cumulative adjustment of 0.9994 for FY 2007.)
    This factor accounts for DRG reclassifications and recalibration 
and for changes in the GAF. It also incorporates the effects on the 
tentative GAF of FY 2007 geographic reclassification decisions made by 
the MGCRB compared to FY 2006 decisions. However, it does not account 
for changes in payments due to changes in the DSH and IME adjustment 
factors or in the large urban add-on.
4. Exceptions Payment Adjustment Factor
    Section 412.308(c)(3) requires that the capital standard Federal 
rate be reduced by an adjustment factor equal to the estimated 
proportion of additional payments for both regular exceptions and 
special exceptions under Sec.  412.348 relative to total capital PPS 
payments. In estimating the proportion of regular exception payments to 
total capital PPS payments during the transition period, we used the 
actuarial capital cost model originally developed for determining 
budget neutrality (described in Appendix B of the FY 2002 IPPS final 
rule (66 FR 40099)) to determine the exceptions payment adjustment 
factor, which was applied to both the Federal and hospital-specific 
capital rates.
    An adjustment for regular exception payments is no longer necessary 
in determining the FY 2007 capital Federal rate because, in accordance 
with Sec.  412.348(b), regular exception payments were only made for 
cost reporting periods beginning on or after October 1, 1991 and before 
October 1, 2001. Accordingly, as we explained in the FY 2002 IPPS final 
rule (66 FR 39949), in FY 2002 and subsequent fiscal years, no payments 
will be made under the regular exceptions provision. However, in 
accordance with Sec.  412.308(c), we still need to compute a budget 
neutrality adjustment for special exception payments under Sec.  
412.348(g). We describe our methodology for determining the exceptions 
adjustment used in calculating the FY 2007 capital Federal rate below.
    Under the special exceptions provision specified at Sec.  
412.348(g)(1), eligible hospitals include SCHs, urban hospitals with at 
least 100 beds that have a disproportionate share percentage of at 
least 20.2 percent or qualify for DSH payments under Sec.  
412.106(c)(2), and hospitals with a combined Medicare and Medicaid 
inpatient utilization of at least 70 percent. An eligible hospital may 
receive special exceptions payments if it meets: (1) A project need 
requirement as described at Sec.  412.348(g)(2), which, in the case of 
certain urban hospitals, includes an excess capacity test as described 
at Sec.  412.348(g)(4); (2) an age of assets test as described at Sec.  
412.348(g)(3); and (3) a project size requirement as described at Sec.  
412.348(g)(5).
    Based on information compiled from our fiscal intermediaries, six 
hospitals have qualified for special exceptions payments under Sec.  
412.348(g). Because we have cost reports ending in FY 2005 for all of 
these hospitals, we calculated the adjustment based on actual cost 
experience. Using data from cost reports ending in FY 2005 from the 
December 2005 update of the HCRIS data, we divided the capital special 
exceptions payment amounts for the six hospitals that qualified for 
special exceptions by the total capital PPS payment amounts (including 
special exception payments) for all hospitals. Based on the data from 
cost reports ending in FY 2005, this ratio is rounded to 0.0003. 
Because we have not received all cost reports ending in FY 2005, we 
also divided the FY 2005 special exceptions payments by the total 
capital PPS payment amounts for all hospitals with cost reports ending 
in FY 2004. This ratio also rounds to 0.0003. Because special 
exceptions are budget neutral, we are offsetting the tentative capital 
Federal rate by 0.03 percent for special exceptions payments for FY 
2007. Therefore, the exceptions adjustment factor is equal to 0.9997 
(1--0.0003) to account for special exceptions payments in FY 2007.
    In the FY 2006 IPPS final rule (70 FR 47503), we estimated that 
total (special) exceptions payments for FY 2006 would equal 0.03 
percent of aggregate payments based on the capital Federal rate. 
Therefore, we applied an exceptions adjustment factor of 0.9997 (1--
0.0003) in determining the FY 2006 capital Federal rate. As we stated 
above, we estimate that exceptions payments in FY 2007 will equal 0.03 
percent of aggregate payments based on the tentative FY 2007 capital 
Federal rate. Therefore, we are applying an exceptions payment 
adjustment factor of 0.9997 to the capital Federal rate for FY 2007. 
The exceptions adjustment factor for FY 2007 is the same as the factor 
used in determining the FY 2006 capital Federal rate in the FY 2006 
IPPS final rule (70 FR 47503). The exceptions reduction factors are not 
built permanently into the capital rates; that is, the factors are not 
applied cumulatively in determining the capital Federal rate. 
Therefore, the net change in the exceptions adjustment factor used in 
determining the tentative FY 2007 capital Federal rate is 1.0000 
(0.9997/0.9997).
5. Capital Standard Federal Rate for FY 2007
    In the FY 2006 IPPS final rule (70 FR 47503), we established a 
capital Federal rate of $420.65 for FY 2006. In this final rule, we are 
establishing a tentative capital Federal rate of $427.38 for FY 2007. 
The tentative capital Federal rate for FY 2007 was calculated as 
follows:
    <bullet> The FY 2007 update factor is 1.0110; that is, the update 
is 1.1 percent.

[[Page 48162]]

    <bullet> The tentative FY 2007 budget neutrality adjustment factor 
that is applied to the capital standard Federal payment rate for 
changes in the DRG relative weights and in the GAF is 0.9994.
    <bullet> The tentative FY 2007 outlier adjustment factor is 0.9568.
    <bullet> The FY 2007 (special) exceptions payment adjustment factor 
is 0.9997.
    Because the tentative 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 making 
additional adjustments in the capital standard Federal rate for these 
factors, other than the tentative budget neutrality factor for changes 
in the DRG relative weights and the GAF.
    We are providing a chart that shows how each of the factors and 
adjustments for FY 2007 affected the computation of the tentative FY 
2007 capital Federal rate in comparison to the average FY 2006 capital 
Federal rate. The FY 2007 update factor has the effect of increasing 
the tentative capital Federal rate by 1.1 percent compared to the 
average FY 2006 Federal rate. The tentative GAF/DRG budget neutrality 
factor has the effect of decreasing the tentative capital Federal rate 
by 0.06 percent. The tentative FY 2007 outlier adjustment factor has 
the effect of increasing the tentative capital Federal rate by 0.56 
percent compared to the average FY 2006 capital Federal rate. The FY 
2007 exceptions payment adjustment factor remains unchanged from the FY 
2006 exceptions payment adjustment factor, and therefore, has a 0.0 
percent net effect on the tentative FY 2007 capital Federal rate. The 
combined effect of all the changes is to tentatively increase the 
capital Federal rate by 1.6 percent compared to the average FY 2006 
capital Federal rate.

      Comparison of Factors and Adjustments: FY 2006 Capital Federal Rate and FY 2007 Capital Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                      FY 2006         FY 2007         Change      Percent change
----------------------------------------------------------------------------------------------------------------
Update Factor \1\...............................          1.0080          1.0110          1.0110          1.10
GAF/DRG Adjustment Factor \1\...................          1.0008      \3\ 0.9994          0.9994         -0.06
Outlier Adjustment Factor \2\...................          0.9515      \3\ 0.9568          1.0056          0.56
Exceptions Adjustment Factor \2\................          0.9997          0.9997          0.0000          0.00
Capital Federal Rate............................       $420.65     \3\ $427.38            1.0160          1.60
----------------------------------------------------------------------------------------------------------------
\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 2006 to FY 2007 resulting from the application of the
  tentative 0.9994 GAF/DRG budget neutrality factor for FY 2007 is 0.9994.
\2\ The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital
  rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for
  example, the net change resulting from the application of the tentative FY 2007 outlier adjustment factor
  would be 0.9568/0.9515, or 1.0056.
\3\ Tentative factors for FY 2007, as discussed above in section III. of this Addendum.

    We are also providing a chart that shows how the tentative final FY 
2007 capital Federal rate differs from the proposed FY 2007 capital 
Federal rate presented in the FY 2007 IPPS proposed rule (71 FR 24158-
24159).

Comparison of Factors and Adjustments: Proposed FY 2007 Capital Federal Rate and Tentative Final FY 2007 Capital
                                                  Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                   Proposed  FY                                       Percent
                                                       2007       Final  FY 2007      Change          change
----------------------------------------------------------------------------------------------------------------
Update factor...................................          1.0080          1.0110          1.0030          0.30
GAF/DRG Adjustment Factor.......................          1.0012         *0.9994          0.9982         -0.18
Outlier Adjustment Factor.......................          0.9513         *0.9568          1.0058          0.58
Exceptions Adjustment Factor....................          0.9997          0.9997          0.0000          0.00
Capital Federal Rate............................       $424.42        *$427.38            1.0070          0.70
----------------------------------------------------------------------------------------------------------------
* Tentative factors for FY 2007, as discussed above in section III. of this Addendum.

6. Special Capital Rate for Puerto Rico Hospitals
    Section 412.374 provides for the use of a blended payment system 
for payments to Puerto Rico hospitals under the PPS for acute care 
hospital inpatient capital-related costs. Accordingly, under the 
capital PPS, we compute a separate payment rate specific to Puerto Rico 
hospitals using the same methodology used to compute the national 
Federal rate for capital-related costs. Under the broad authority of 
section 1886(g) of the Act, as discussed in section VI. of the preamble 
of this final rule, beginning with discharges occurring on or after 
October 1, 2004, capital payments to hospitals in Puerto Rico are based 
on a blend of 25 percent of the Puerto Rico capital rate and 75 percent 
of the capital Federal rate. The Puerto Rico capital rate is derived 
from the costs of Puerto Rico hospitals only, while the capital Federal 
rate is derived from the costs of all acute care hospitals 
participating in the IPPS (including Puerto Rico).
    To adjust hospitals' capital payments for geographic variations in 
capital costs, we apply a GAF to both portions of the blended capital 
rate. The GAF is calculated using the operating IPPS wage index and 
varies, depending on the labor market area or rural area in which the 
hospital is located. We use the Puerto Rico wage index to determine the 
GAF for the Puerto Rico part of the capital-blended rate and the 
national wage index to determine the GAF for the national part of the 
blended capital rate.
    Because we implemented a separate GAF for Puerto Rico in FY 1998, 
we also apply separate budget neutrality adjustments for the national 
GAF and for the Puerto Rico GAF. However, we apply the same budget 
neutrality factor for DRG reclassifications and recalibration 
nationally and for Puerto Rico. As we stated above in section III.A.4. 
of this Addendum, for Puerto Rico, the tentative GAF budget neutrality 
factor is 1.0021, while the DRG adjustment is 0.9992, for a

[[Page 48163]]

combined tentative cumulative adjustment of 0.9972.
    In computing the payment for a particular Puerto Rico hospital, the 
Puerto Rico portion of the capital rate (25 percent) is multiplied by 
the Puerto Rico-specific GAF for the labor market area in which the 
hospital is located, and the national portion of the capital rate (75 
percent) is multiplied by the national GAF for the labor market area in 
which the hospital is located (which is computed from national data for 
all hospitals in the United States and Puerto Rico). In FY 1998, we 
implemented a 17.78 percent reduction to the Puerto Rico capital rate 
as a result of Pub. L. 105-33. In FY 2003, a small part of that 
reduction was restored.
    For FY 2006, before application of the GAF, the special capital 
rate for Puerto Rico hospitals was $201.93 for discharges occurring on 
or after October 1, 2005 through September 30, 2006. With the changes 
we are making to the factors used to determine the capital rate, the 
tentative FY 2007 special capital rate for Puerto Rico is $203.13.

B. Calculation of the Inpatient Capital-Related Prospective Payments 
for FY 2007

    Because the 10-year capital PPS transition period ended in FY 2001, 
all hospitals (except ``new'' hospitals under Sec.  412.324(b) and 
under Sec.  412.304(c)(2)) are paid based on 100 percent of the capital 
Federal rate in FY 2006. The applicable capital Federal rate was 
determined by making adjustments as follows:
    <bullet> For outliers, by dividing the capital standard Federal 
rate by the outlier reduction factor for that fiscal year; and
    <bullet> For the payment adjustments applicable to the hospital, by 
multiplying the hospital's GAF, disproportionate share adjustment 
factor, and IME adjustment factor, when appropriate.
    For purposes of calculating payments for each discharge during FY 
2007, the capital standard Federal rate is adjusted as follows: 
(Standard Federal Rate) x (DRG weight) x (GAF) x (Large Urban Add-on, 
if applicable) x (COLA for hospitals located in Alaska and Hawaii) x (1 
+ Disproportionate Share 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 tentative outlier thresholds for FY 2007 are in section 
II.A.4.c. of this Addendum. For FY 2007, a case qualifies as a cost 
outlier if the cost for the case plus the IME and DSH payments is 
greater than the prospective payment rate for the DRG plus the 
tentative fixed-loss amount of $24,475.
    An eligible hospital may also qualify for a special exceptions 
payment under Sec.  412.348(g) for up through the 10th year beyond the 
end of the capital transition period if it meets: (1) A project need 
requirement described at Sec.  412.348(g)(2), which in the case of 
certain urban hospitals includes an excess capacity test as described 
at Sec.  412.348(g)(4); and (2) a project size requirement as described 
at Sec.  412.348(g)(5). Eligible hospitals include SCHs, urban 
hospitals with at least 100 beds that have a DSH patient percentage of 
at least 20.2 percent or qualify for DSH payments under Sec.  
412.106(c)(2), and hospitals that have a combined Medicare and Medicaid 
inpatient utilization of at least 70 percent. Under Sec.  
412.348(g)(8), the amount of a special exceptions payment is determined 
by comparing the cumulative payments made to the hospital under the 
capital PPS to the cumulative minimum payment level. This amount is 
offset by: (1) Any amount by which a hospital's cumulative capital 
payments exceed its cumulative minimum payment levels applicable under 
the regular exceptions process for cost reporting periods beginning 
during which the hospital has been subject to the capital PPS; and (2) 
any amount by which a hospital's current year operating and capital 
payments (excluding 75 percent of operating DSH payments) exceed its 
operating and capital costs. Under Sec.  412.348(g)(6), the minimum 
payment level is 70 percent for all eligible hospitals.
    During the transition period, new hospitals (as defined under Sec.  
412.300) were exempt from the capital PPS for their first 2 years of 
operation and were paid 85 percent of their reasonable costs during 
that period. Effective with the third year of operation through the 
remainder of the transition period, under Sec.  412.324(b), we paid the 
hospitals under the appropriate transition methodology (if the hold-
harmless methodology were applicable, the hold-harmless payment for 
assets in use during the base period would extend for 8 years, even if 
the hold-harmless payments extend beyond the normal transition period).
    Under Sec.  412.304(c)(2), for cost reporting periods beginning on 
or after October 1, 2002, we pay a new hospital 85 percent of its 
reasonable costs during the first 2 years of operation unless it elects 
to receive payment based on 100 percent of the capital Federal rate. 
Effective with the third year of operation, we pay the hospital based 
on 100 percent of the capital Federal rate (that is, the same 
methodology used to pay all other hospitals subject to the capital 
PPS).

C. Capital Input Price Index

1. Background
    Like the operating input price index, the capital input price index 
(CIPI) is a fixed-weight price index that measures the price changes 
associated with capital costs during a given year. The CIPI differs 
from the operating input price index in one important aspect--the CIPI 
reflects the vintage nature of capital, which is the acquisition and 
use of capital over time. Capital expenses in any given year are 
determined by the stock of capital in that year (that is, capital that 
remains on hand from all current and prior capital acquisitions). An 
index measuring capital price changes needs to reflect this vintage 
nature of capital. Therefore, the CIPI was developed to capture the 
vintage nature of capital by using a weighted-average of past capital 
purchase prices up to and including the current year.
    We periodically update the base year for the operating and capital 
input prices to reflect the changing composition of inputs for 
operating and capital expenses. The CIPI was last rebased to FY 2002 in 
the FY 2006 IPPS final rule (70 FR 47387).
2. Forecast of the CIPI for FY 2007
    Based on the latest forecast by Global Insight, Inc. (second 
quarter of 2006), we are forecasting the CIPI to increase 1.1 percent 
in FY 2007. This reflects a projected 1.7 percent increase in vintage-
weighted depreciation prices (building and fixed equipment, and movable 
equipment) and a 3.1 percent increase in other capital expense prices 
in FY 2007, partially offset by a 2.1 percent decline in vintage-
weighted interest expenses in FY 2007. The weighted average of these 
three factors produces the 1.1 percent increase for the CIPI as a whole 
in FY 2007.
    The CIPI forecast of 1.1 percent is higher than the CIPI forecast 
of 0.8 percent that appeared in the proposed rule. This is mainly due 
to a change in the forecast of vintage-weighted depreciation prices 
from a 1.4 percent to a 1.7 percent increase and a change in vintage-
weighted interest expenses from a 2.3 to a 2.1 percent decline. The 
change in the forecast for depreciation

[[Page 48164]]

prices reflects the incorporation of newly available source data for 
fixed asset prices into the market basket, while the change in the 
forecast for interest expenses reflects the incorporation of recent 
increases in interest rates.

IV. Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-
Increase Percentages

A. Payments to Existing Excluded Hospitals and Units

    As discussed in section VI. of the preamble of this final rule, the 
inpatient operating costs of children's hospitals and cancer hospitals 
that are excluded from the IPPS are paid on the basis of reasonable 
cost subject to the rate-of-increase ceiling established under the 
authority of sections 1886(b)(3)(A)(i) and (ii) of the Act and Sec.  
413.40 of the regulations. The ceiling is based on a target amount per 
discharge under TEFRA. In addition, in accordance with Sec.  403.752(a) 
of the regulations, RNHCIs also are paid under Sec.  413.40 which uses 
section 1886(b)(3)(B)(ii) of the Act to update the percentage increase 
in the rate of increase limits. The most recent projected forecast of 
the market basket percentage increase for FY 2007 for children's 
hospitals, cancer hospitals, and RNHCIs using the IPPS market basket 
(70 FR 47396 through 47405) is 3.4 percent (the same as we proposed).
    LTCHs, rehabilitation hospitals and units, and psychiatric 
hospitals and units, historically, were excluded from the IPPS and 
subject to the rate-of-increase limits under Sec.  413.40, as well. 
However, prospective payment systems have been developed for each of 
the three types of hospitals, and each kind of hospital is currently 
paid under its own PPS, either at 100 percent of the Federal rate or 
according to a transition period methodology, if applicable. (For more 
detailed discussion of these payment methodologies, see 69 FR 49190; 69 
FR 66922; 68 FR 45674; and 67 FR 55954.)
    For cost reporting periods beginning on or after October 1, 2002, 
to the extent a LTCH or a psychiatric hospital or unit has all or a 
portion of its payment determined under reasonable cost principles, the 
target amounts for the reasonable cost-based portion of the blended 
payment are determined in accordance with sections 1886(b)(3)(A)(i) and 
1886(b)(3)(B)(ii) of the Act and the regulations at Sec.  
413.40(c)(4)(ii). Section 413.40(c)(4)(ii) states, ``Subject to the 
provisions of [Sec.  413.40], paragraph (c)(4)(iii) of this section, 
for subsequent cost reporting periods, the target amount equals the 
hospital's target amount for the previous cost reporting period 
increased by the update factor for the subject cost reporting period, 
unless the provisions of [Sec.  413.40] paragraph (c)(5)(ii) of this 
section apply.'' Thus, because Sec.  413.40(c)(4)(ii) indicates that 
the provisions of that paragraph are subject to the provisions of Sec.  
413.40(c)(4)(iii), which are applicable only for cost reporting periods 
beginning on or after October 1, 1997 through September 30, 2002, the 
target amount for FY 2003 is determined by updating the target amount 
for FY 2002 by the applicable update factor. For example, if a provider 
was paid the cap amount for FY 2002 (Sec.  413.40(c)(4)(iii)), the 
target amount for FY 2003 would be the amount paid in FY 2002, updated 
to FY 2003 (that is, the target amount from the previous year increased 
by the applicable update factor).
    Effective for cost reporting periods beginning on or after October 
1, 2002, IRFs are paid 100 percent of the adjusted Federal prospective 
payment rate under the IRP PPS.
    Effective for cost reporting periods beginning on or after October 
1, 2002, LTCHs also are no longer paid on a reasonable cost basis, but 
are paid under a LTCH DRG-based PPS. In implementing the LTCH PPS, an 
existing LTCH (that is, not defined as new under Sec.  412.23(e)(4)) 
could have elected to be paid based on 100 percent of the standard 
Federal prospective payment rate during the transition period. However, 
we also established a 5-year transition period from reasonable cost-
based payments (subject to the TEFRA limit) to fully Federal 
prospective payment amounts during which an existing LTCH could receive 
a PPS-blended payment consisting of two payment components--one based 
on reasonable cost under the TEFRA payment system, and the other based 
on the standard Federal prospective payment rate.
    Effective for cost reporting periods that will begin on or after 
October 1, 2006, the LTCHs that receive payment based on a blended 
payment amount will no longer receive a portion of their payment that 
is based, in part, on reasonable cost subject to the rate-of-increase 
ceiling under Sec.  413.40. This is because, in accordance with Sec.  
412.533, LTCHs are paid 100 percent of the adjusted Federal prospective 
payment amount and zero percent of the amount calculated under 
reasonable cost principles for cost reporting periods beginning on or 
after October 1, 2006.
    As part of the PPS for existing IPFs, we have established a 3-year 
transition period during which existing IPFs will be paid based on a 
blend of reasonable cost-based payment (subject to the TEFRA limit) and 
the prospective per diem payment rate. IPFs that are paid under a 
blended methodology will have the reasonable cost-based portion of 
their payment subject to a hospital target amount. The most recent 
projected forecast of the market basket percentage increase for FY 2007 
for the reasonable cost-based portion of an IPF's payment using the 
excluded hospital market basket (70 FR 47396 through 47405) is 3.4 
percent. For cost reporting periods beginning on or after January 1, 
2008, IPFs will be paid 100 percent of the Federal prospective per diem 
amount.
    The market basket percentage increases for FY 2007 are made by CMS' 
Office of the Actuary and reflect the average change in the price of 
goods and services purchased by hospitals to furnish inpatient hospital 
care. They are based on the best available data. As discussed in 
section III.L. of the preamble of this FY 2006 IPPS final rule, we use 
the IPPS market basket for children's hospitals, cancer hospitals, and 
RNHCIs, and the excluded hospital market basket for LTCHs, and IPFs for 
the reasonable cost portion of its payment to the extent a portion of 
its PPS payment is based on reasonable costs. We did not propose any 
changes to our method of calculating the hospital market basket for 
IPPS or for excluded hospitals for FY 2007. Consistent with our current 
methodology of calculating the hospital market basket for IPPS and 
excluded hospitals, we use updated data for our final rule to the 
extent it is available. As we indicated above, based on updated data, 
the projected IPPS market basket increase is 3.4 percent (the same as 
we proposed) and the projected excluded hospital market basket increase 
is 3.4 percent (as opposed to 3.6 percent in the proposed rule) for FY 
2007.

B. New Excluded Hospitals and Units

    Section 1886(b)(7) of the Act established a payment methodology for 
new (cost reporting periods beginning on or after October 1, 1997) 
rehabilitation hospitals and units, psychiatric hospitals and units, 
and LTCHs. For the first two 12-month cost reporting periods, payment 
was based on the lower of the hospital's net inpatient operating costs 
or 110 percent of the national median of target amounts for the 
particular class of hospital for FY 1996, updated to the applicable 
cost reporting period, and adjusted for differences in area wage 
levels. Consequently, beginning with the FY 1998 IPPS final rule, we 
published

[[Page 48165]]

annually in the Federal Register, the updated 110 percent median of the 
wage-neutral national target amounts, divided into the labor and 
nonlabor-related share, for each of the three classes of providers 
affected by the payment limitation. As explained in the FY 2006 IPPS 
final rule (70 FR 47466 through 47467), the charts containing the 
updated 110 percent median payment amount information are no longer 
needed and are discontinued.

V. Payment for Blood Clotting Factor Administered to Inpatient With 
Hemophilia

    As discussed in section VIII. of the preamble to this final rule, 
in the FY 2006 IPPS final rule (70 FR 47473), we amended our 
regulations at Sec. Sec.  412.2(f)(8) and 412.115(b) to state that, for 
discharges occurring on or after October 1, 2005, we make payment for 
blood clotting factor administered to hospital inpatients using the 
Medicare Part B payment amounts for blood clotting factor as determined 
under Subpart K of 48 CFR Part 414 and for the furnished fee as 
determined under Sec.  410.63.
    In accordance with Sec.  410.63(c)(2) and our November 21, 2005 
regulations (70 FR 70225), the furnishing fee for blood clotting factor 
for CY 2006 was determined to be $0.146 per individual unit (I.U.). 
Although the furnishing fee payment rate is calculated at 3 digits, the 
actual amount paid to providers and suppliers is rounded to 2 digits. 
In section VIII of the preamble to this final rule, we are providing 
that fiscal intermediaries continue to make payment amounts for blood 
clotting factor administered to hemophilia inpatients using the 
Medicare Part B payment amounts determined under Subpart K of 42 CFR 
Part 414 and that payment amounts for the furnishing fee for the blood 
clotting factor be calculated at 3 digits, currently at $0.146 per I.U. 
of blood clotting factor.
    The fiscal intermediaries continue to use the Medicare Part B Drug 
Pricing File to make payments for blood clotting factors. The 
furnishing fee is included in the ASP price per unit sent with the 
Medicare Part B Drug Pricing File that is updated quarterly. By using 
the Medicare Part B Drug Pricing File, Medicare will be making 
consistent payments for blood clotting factor provided to inpatients 
and outpatients. For further updates on pricing, we refer reader to the 
Medicare Part B drug pricing regulations.

VI. Tables

    This section includes a majority of the tables referred to 
throughout the preamble to this final rule and in this Addendum.
    The following tables, which contain data relating to the FY 2007 
wage indices and the hospital reclassifications and payment amounts for 
operating and capital-related costs that are affected by the new 
occupational mix survey data discussed in section III.C. of this final 
rule, will be published on the CMS Web site and in a subsequent Federal 
Register notice between August 1 and October 1, 2006.

Table 2--Hospital Case-Mix Indexes for Discharges Occurring in 
Federal Fiscal Year 2005; Hospital Wage Indexes for Federal Fiscal 
Year 2007; Hospital Average Hourly Wage for Federal Fiscal Years 
2005 (2001 Wage Data), 2006 (2002 Wage Data), and 2007 (2003 Wage 
Data); Wage Indexes and 3-Year Average of Hospital Average Hourly 
Wages
Table 3A--FY 2007 and 3-Year Average Hourly Wage for Urban Areas by 
CBSA
Table 3B--FY 2007 and 3-Year Average Hourly Wage for Rural Areas by 
CBSA
Table 4A-1--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Urban Areas by CBSA--FY 2007
Table 4A-2--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Certain Urban Areas by CBSA for the Period April 1 through 
September 30, 2007
Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF) 
for Rural Areas by CBSA--FY 2007
Table 4C-1--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Hospitals That Are Reclassified by CBSA--FY 2007
Table 4C-2--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Certain Hospitals That Are Reclassified by CBSA for the 
Period April 1 through September 30, 2007
Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment 
Factor (GAF) by CBSA--FY 2007

    The following tables are included in this final rule as tentative 
tables and do not reflect decisions that are yet to be made by CMS 
pending the final calculation of the occupational mix adjusted wage 
index. Additional information appears with each table. Revised tables 
reflecting CMS' decisions on behalf of hospitals using occupational mix 
adjusted wage indices will be published on the CMS Web site, as well as 
in a subsequent Federal Register notice between August 1 and October 1, 
2006.

Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share if 
Wage Index Is Greater Than 1)
Table 1B--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share if Wage 
Index Is Less Than or Equal To 1)
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, 
Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 4J--Out-Migration Adjustment--FY 2007
Table 5--List of Diagnosis-Related Groups (DRGs), Relative Weighting 
Factors, and Geometric and Arithmetic Mean Length of Stay (LOS)
Table 9A--Hospital Reclassifications and Redesignations by 
Individual Hospitals and CBSA for FY 2007
Table 9B--Hospital Reclassifications and Redesignations by 
Individual Hospital Under Section 508 of Pub. L. 108-173 for FY 2007
Table 9C--Hospitals Redesignated as Rural under Section 
1886(d)(8)(E) of the Act for FY 2007
Table 10--Tentative 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 Diagnosis-Related Group 
(DRG)--July 2006

    The following tables are final and not subject to revision based on 
the final calculation of the occupational mix adjusted wage index.

Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes
Table 6E--Revised Diagnosis Code Titles
Table 6F--Revised Procedure Code Titles
Table 6G--Additions to the CC Exclusions List
Table 6H--Deletions from the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2005 MedPAR Update March 2006 GROUPER V23.0
Table 7B--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2005 MedPAR Update March 2006 GROUPER V24.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios--July 
2006
Table 8B--Statewide Average Capital Cost-to-Charge Ratios--July 2006
Table 8C--Statewide Average Total Cost-to-Charge Ratios for LTCHs--
July 2006
Table 11--FY 2007 LTC-DRGs, Relative Weights, Geometric Average 
Length of Stay, and 5/6ths of the Geometric Average Length of Stay

[[Page 48166]]



    Table 1A.--National Adjusted Operating Standardized Amounts, 69.7
  Percent Labor Share/30.3 Percent Nonlabor Share if Wage Index Greater
                                 Than 1
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Full Update (3.4 percent)..............  *Note: Subsequent to this final
                                          rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Labor Related Share:
     $3,400.13*
    Tentative Nonlabor Related Share:
     $1,478.10*
Reduced Update (1.4 percent)...........  *Note: Subsequent to this final
                                          rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Labor Related Share:
     $3,334.36*
    Tentative Nonlabor Related Share:
     $1,449.51*
------------------------------------------------------------------------


 Table 1B.--National Adjusted Operating Standardized Amounts, 62 Percent
 Labor Share/38 Percent Nonlabor Share if Wage Index Less Than or Equal
                                  to 1
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Full Update (3.4 percent)..............  *Note: Subsequent to this final
                                          rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Labor Related Share:
     $3,024.51*
    Tentative Nonlabor Related Share:
     $1,853.72*
Reduced Update (1.4 percent)...........  *Note: Subsequent to this final
                                          rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Labor Related Share:
     $2,966.00*
    Tentative Nonlabor Related Share:
     $1,817.87*
------------------------------------------------------------------------


   Table 1C.--Adjusted Operating Standardized Amounts for Puerto Rico,
                             Labor/Nonlabor
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Rates if wage index greater than one     *Note: Subsequent to this final
 (National).                              rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Labor Related Share:
     $3,400.13*
    Tentative Nonlabor Related Share:
     $1,478.10*
Rates if wage index greater than one     *Note: Subsequent to this final
 (Puerto Rico).                           rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Labor Related Share:
     $1,436.25*
    Tentative Nonlabor Related Share:
     $880.28*
Rates if wage index less than one        *Note: Subsequent to this final
 (National).                              rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Labor Related Share:
     $3,024.51*
    Tentative Nonlabor Related Share:
     $1,853.72*
Rates if wage index less than one        *Note: Subsequent to this final
 (Puerto Rico).                           rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Labor Related Share:
     $1,359.80*
    Tentative Nonlabor Related Share:
     $956.72*
------------------------------------------------------------------------


            Table 1D.--Capital Standard Federal Payment Rate
------------------------------------------------------------------------
 
------------------------------------------------------------------------
National...............................  *Note: Subsequent to this final
                                          rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Capital Payment Rate:
     $427.38*
Puerto Rico............................  *Note: Subsequent to this final
                                          rule, we will publish the
                                          final standardized amounts
                                          based on the final
                                          occupational mix adjustment.
    Tentative Capital Payment Rate:
     $203.13*
------------------------------------------------------------------------

BILLING CODE 4120-01-P

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    Note: The following Table 5 is a tentative table. The final 
Table 5 will be published in a subsequent Federal Register notice.

BILLING CODE 4120-01-P

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[[Page 48226]]


[GRAPHIC] [TIFF OMITTED] TR18AU06.074

BILLING CODE 4120-01-C

[[Page 48227]]

[CCs that are added to the list are in this Table 6G--Additions to the 
CC Exclusions List. Each of the principal diagnoses is shown with an 
asterisk, and the revisions to the CC Exclusions List are provided in 
an indented column immediately following the affected principal 
diagnosis.]

             Table 6G.--Additions to the CC Exclusions List
 
 
 
*0519
0522
*0522
0520
0521
0522
0527
0528
0529
05314
05474
*0527
0522
*0528
0522
*0529
0522
*0530
05314
*05310
05314
*05311
05314
*05312
05314
*05313
05314
*05314
0522
0530
05310
05311
05312
05313
05314
05319
05379
0538
05474
5319
05314
*05379
05314
*0538
05314
*0539
05314
*05472
05314
*05474
0522
0530
05310
05311
05312
05313
05314
05319
05379
0538
0543
0545
05471
05472
05474
05479
0548
*05479
05314
05474
*0548
05314
05474
*0549
05314
05474
*07888
0522
05314
05474
*07889
0522
05314
05474
*07981
0522
05314
05474
*07988
0522
05314
05474
*07989
0522
05314
05474
*07998
0522
05314
05474
*07999
0522
05314
05474
*1398
0522
05314
05474
*28401
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
*28409
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
*2841
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
*2842
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
*28800
2881
28981
28982
*28801

[[Page 48228]]

 
2881
28981
28982
*28802
2881
28981
28982
*28803
2881
28981
28982
*28804
2881
28981
28982
*28809
2881
28981
28982
*2884
2881
28981
28982
*28850
2881
28981
28982
*28851
2881
28981
28982
*28859
2881
28981
28982
*28860
2881
28981
28982
*28861
2881
28981
28982
*28862
2881
28981
28982
*28863
2881
28981
28982
*28864
2881
28981
28982
*28865
2881
28981
28982
*28869
2881
28981
28982
*28953
2881
28981
28982
*28983
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
2860
2861
2862
2863
2864
2865
2866
2867
2869
2870
2871
2872
28730
28731
28732
28733
28739
2874
2875
2878
2879
2881
28981
28982
*32301
0522
05314
05474
34982
*32302
0522
05314
05474
34982
*32341
0522
05314
05474
34982
*32342
0522
05314
05474
34982
*32351
0522
05314
05474
34982
*32352
0522
05314
05474
34982
*32361
0522
05314
05474
34982
*32362
0522
05314
05474
34982
*32363
0522
05314
05474
34982
*32371
0522
05314
05474
34982
*32372
0522
05314
05474
34982
*32381
0522
05314
05474
34982
*32382
0522
05314
05474
34982
*33183
3314
*33371
7817
*33372
7817
*33379
7817
*33385
7817
*3380
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33811
04082
44024

[[Page 48229]]

 
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33812
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33818
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33819
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33821
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33822
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33828
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33829
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*3383
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552

[[Page 48230]]

 
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*3384
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*34120
0522
05314
05474
34982
*34121
0522
05314
05474
34982
*34122
0522
05314
05474
34982
*34500
78032
*34501
78032
*34510
78032
*34511
78032
*3452
78032
*3453
78032
*34540
78032
*34541
78032
*34550
78032
*34551
78032
*34560
78032
*34561
78032
*34570
78032
*34571
78032
*34580
78032
*34581
78032
*34590
78032
*34591
78032
*3488
78032
*3489
78032
*34989
78032
*3499
78032
*37960
37700
37701
37702
*37961
37700
37701
37702
*37962
37700
37701
37702
*37963
37700
37701
37702
*5187
5187
9973
*51911
51900
51901
51902
51909
*51919
51900
51901
51902
51909
*52800
5283
*52801
5283
*52802
5283
*52809
5283
*538
5273
5274
53021
53100
53101
53110
53111
53120
53121
53131
53140
53141
53150
53151
53160
53161
53171
53191
53200
53201
53210
53211
53220
53221
53231
53240
53241
53250
53251
53260
53261
53271
53291
53300
53301
53310
53311
53320
53321
53331
53340
53341
53350
53351
53360
53361
53371
53391
53400
53401
53410
53411
53420
53421
53431
53440
53441
53450
53451
53460
53461
53471
53491
5400
5401
5409
55000
55001
55002
55003
55010
55011
55012
55013
55100
55101
55102
55103
5511
55120
55121
55129
5518
5519

[[Page 48231]]

 
55200
55201
55202
55203
*61681
6140
6143
6145
6150
6163
6164
*61689
6140
6143
6145
6150
6163
6164
*62929
6140
6143
6145
6150
6163
6164
6207
*62981
6140
6143
6145
6150
6163
6164
6207
*62989
6140
6143
6145
6150
6163
6164
6207
*64900
63400
63401
63402
63410
63411
63412
63420
63421
63422
63430
63431
63432
63440
63441
63442
63450
63451
63452
63460
63461
63462
63470
63471
63472
63480
63481
63482
63490
63491
63492
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[[Page 48270]]

 
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*95891
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[[Page 48271]]

 
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[[Page 48272]]

 
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[[Page 48273]]

 
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[[Page 48274]]

 
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[[Page 48275]]

 
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[[Page 48276]]

 
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[[Page 48277]]

 
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[[Page 48278]]

 
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[[Page 48282]]

 
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[[Page 48283]]

 
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[[Page 48284]]

 
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[[Page 48285]]

 
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[[Page 48286]]

 
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86811
86812
86813
86814
86819
8690
8691
8703
8704
8708
8709
8710
8711
8712
8713
8714
8719
87272
87273
87274
87333
8739
87400
87401
87402
87410
87411
87412
8743
8745
8750
8751
8870
8871
8872
8873
8874
8875
8876
8877
8960
8961
8962
8963
8970
8971
8972
8973
8974
8975
8976
8977
90000
90001
90002
90003
9001
90081
90082
90089
9009
9010
9011
9012
9013
90141
90142
90183
9020
90210
90211
90219
90220
90222
90223
90224
90225
90226
90227
90229
90231
90232
90233
90234
90239
90240
90241
90242
90249
90250
90251
90252
90253
90254
90259
90287
9251
9252
9290
95200
95201
95202
95203
95204
95205
95206
95207
95208
95209
95210
95211
95212
95213
95214
95215
95216
95217
95218
95219
9522
9523
9524
9528
9529
9530
9531
9532
9533
9534
9535
9538
9539
9580
9581
9582
9583
9584
9585
9587
*9973
5187
*99791
5187
*99799
5187

[[Page 48287]]

 
*99881
5187
*99883
5187
*99889
5187
*9989
5187
 


            Table 6H.--Deletions From the CC Exclusions List
 [CCs that are deleted from the list are in this Table 6H--Deletions to
the CC Exclusions List. Each of the principal diagnoses is shown with an
asterisk, and the revisions to the CC Exclusions List are provided in an
indented column immediately following the affected principal diagnosis.]
 
 
 
*2800
 2840
*2801
 2840
*2808
 2840
*2809
 2840
*2810
 2840
*2811
 2840
*2812
 2840
*2813
 2840
*2814
 2840
*2818
 2840
*2819
 2840
*2820
 2840
*2821
 2840
*2822
 2840
*2823
 2840
*28241
 2840
*28242
 2840
*28249
 2840
*2825
 2840
*28260
 2840
*28261
 2840
*28262
 2840
*28263
 2840
*28264
 2840
*28268
 2840
*28269
 2840
*2827
 2840
*2828
 2840
*2829
 2840
*2830
 2840
*28310
 2840
*28311
 2840
*28319
 2840
*2832
 2840
*2839
 2840
*2840
 2800
 2814
 2818
 28241
 28242
 28249
 28260
 28261
 28262
 28263
 28264
 28268
 28269
 2830
 28310
 28311
 28319
 2832
 2839
 2840
 2848
 2849
 2850
 2851
*2848
 2840
*2849
 2840
*2850
 2840
*2851
 2840
*28521
 2840
*28522
 2840
*28529
 2840
*2858
 2840
*2859
 2840
*2880
 2880
 2881
 28981
 28982
*2881
 2880
*2882
 2880
*2883
 2880
*2888
 2880
*2889
 2880
*28981
 2840
 2880
*28982
 2840
 2880
*28989
 2840
 2880
*2899
 2840
 2880
*3230
 34982
*3234
 34982
*3235
 34982
*3236
 34982
*3237
 34982
*3238
 34982
*3337
 7817
*5173
 2840
*5191
 51900
 51901
 51902
 51909
*5280
 5283
*6168
 6140
 6143
 6145
 6150
 6163
 6164
*6298
 6140
 6143
 6145
 6150
 6163
 6164
 6207
*7758
 00841
 00842
 00843
 00844
 00845
 00846
 00847

[[Page 48288]]

 
 00849
 7751
 7752
 7753
 7754
 7755
 7756
 7757
 


            Table 7A.--Medicare Prospective Payment System Selected Percentile Lengths of Stay FY 2005 MedPAR Update March 2006 Grouper V23.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Number     Arithmetic      10th         25th         50th         75th         90th
                             DRG                                discharge     mean LOS    percentile   percentile   percentile   percentile   percentile
--------------------------------------------------------------------------------------------------------------------------------------------------------
1............................................................       24,464       9.6076            2            4            7           12           19
2............................................................       10,338       4.3927            1            2            3            6            8
3............................................................            3      11.0000            4            4            8           21           21
6............................................................          288       3.0833            1            1            2            3            7
7............................................................       15,034       9.2559            2            4            7           12           19
8............................................................        3,441       2.7629            1            1            2            3            6
9............................................................        1,775       6.0248            1            3            4            7           11
10...........................................................       19,639       5.9172            2            3            4            7           11
11...........................................................        3,074       3.5501            1            2            3            5            7
12...........................................................       56,196       5.3631            2            3            4            6           10
13...........................................................        7,529       4.8515            2            3            4            6            8
14...........................................................      278,864       5.3705            2            3            4            7           10
15...........................................................       20,004       4.0156            1            2            3            5            7
16...........................................................       17,310       6.3008            2            3            5            8           12
17...........................................................        2,967       3.0334            1            1            2            4            6
18...........................................................       33,512       5.1525            2            3            4            6            9
19...........................................................        8,422       3.3749            1            2            3            4            6
20...........................................................        6,409       9.8313            3            5            8           12           18
21...........................................................        2,220       6.1752            2            3            5            8           12
22...........................................................        3,169       5.0104            2            2            4            6           10
23...........................................................       10,671       3.8995            1            2            3            5            7
24...........................................................       63,246       4.6433            1            2            3            6            9
25...........................................................       27,218       3.1280            1            2            2            4            6
26...........................................................           25       3.8000            1            1            2            5            9
27...........................................................        5,974       4.7370            1            1            3            6           10
28...........................................................       19,919       5.5701            1            2            4            7           11
29...........................................................        6,517       3.2118            1            1            3            4            6
31...........................................................        5,043       3.9038            1            2            3            5            7
32...........................................................        1,900       2.2716            1            1            2            3            4
34...........................................................       27,478       4.7063            1            2            4            6            9
35...........................................................        7,843       3.0360            1            1            3            4            5
36...........................................................        1,045       1.7962            1            1            1            1            1
37...........................................................        1,219       4.1132            1            1            3            5            8
38...........................................................           50       2.8000            1            1            2            3            6
39...........................................................          328       2.1220            1            1            1            2            3
40...........................................................        1,188       4.2315            1            1            3            4            6
42...........................................................          901       3.0844            1            1            2            3            5
43...........................................................          125       2.9600            1            1            2            4            5
44...........................................................        1,291       4.7506            2            3            4            6            8
45...........................................................        2,771       3.0278            1            2            2            4            6
46...........................................................        3,930       4.1913            1            2            3            5            8
47...........................................................        1,308       3.0145            1            1            2            4            6
49...........................................................        2,416       4.5219            1            2            3            5            9
50...........................................................        2,026       1.8638            1            1            1            2            3
51...........................................................          193       2.6684            1            1            1            3            5
52...........................................................          316       1.6962            1            1            1            2            3
53...........................................................        2,147       4.0051            1            1            2            5            9
55...........................................................        1,370       2.8832            1            1            1            3            6
56...........................................................          451       2.6785            1            1            2            3            5
57...........................................................          888       3.1543            1            1            2            3            7
59...........................................................          126       2.3730            1            1            2            3            5
60...........................................................            3       1.6667            1            1            1            3            3
61...........................................................          222       6.0541            1            1            4            8           13
62...........................................................            4       1.5000            1            1            1            1            3
63...........................................................        2,827       4.5313            1            1            3            6           10
64...........................................................        3,234       6.2004            1            2            4            8           13

[[Page 48289]]

 
65...........................................................       40,495       2.7634            1            1            2            3            5
66...........................................................        8,197       3.1080            1            1            2            4            6
67...........................................................          379       3.6834            1            2            3            5            8
68...........................................................       18,963       3.8500            1            2            3            5            7
69...........................................................        5,104       2.9414            1            2            2            4            5
70...........................................................           25       2.4000            1            1            2            3            4
71...........................................................           70       4.3429            1            2            3            5            7
72...........................................................        1,326       3.3205            1            2            3            4            6
73...........................................................        9,961       4.2979            1            2            3            5            8
74...........................................................            3       3.3333            3            3            3            4            4
75...........................................................       46,867       9.5747            3            5            7           12           19
76...........................................................       48,182      10.4832            3            5            8           13           20
77...........................................................        2,096       4.4938            1            2            4            6            9
78...........................................................       49,708       6.0925            2            4            5            7           10
79...........................................................      160,452       8.0513            3            4            7           10           15
80...........................................................        7,128       5.2173            2            3            4            6            9
81...........................................................            6       6.1667            2            3            5            8            8
82...........................................................       63,222       6.6658            2            3            5            9           13
83...........................................................        7,154       5.1918            2            3            4            6           10
84...........................................................        1,402       3.1284            1            2            3            4            5
85...........................................................       22,231       6.1082            2            3            5            8           12
86...........................................................        1,714       3.4568            1            2            3            4            7
87...........................................................       96,725       6.3706            2            3            5            8           12
88...........................................................      427,153       4.8563            2            3            4            6            9
89...........................................................      554,440       5.5245            2            3            5            7           10
90...........................................................       43,208       3.7030            1            2            3            5            6
91...........................................................           53       3.4151            1            1            2            4            6
92...........................................................       16,523       5.9402            2            3            5            7           11
93...........................................................        1,436       3.7632            1            2            3            5            7
94...........................................................       13,657       5.9022            2            3            5            8           12
95...........................................................        1,576       3.3839            1            2            3            4            6
96...........................................................       59,742       4.2995            2            2            4            5            7
97...........................................................       26,592       3.3652            1            2            3            4            6
98...........................................................           13       3.0769            2            2            2            4            6
99...........................................................       21,402       3.0982            1            1            2            4            6
100..........................................................        6,406       2.1071            1            1            2            3            4
101..........................................................       23,399       4.1820            1            2            3            5            8
102..........................................................        4,907       2.5345            1            1            2            3            5
103..........................................................          884      35.1640            8           11           22           46           78
104..........................................................       20,125      14.6458            6            8           12           18           26
105..........................................................       32,635       9.9310            4            6            8           11           18
106..........................................................        3,440      10.9392            5            7            9           13           18
108..........................................................        8,759      10.7132            4            6            9           13           19
110..........................................................       57,721       8.0026            1            3            6           10           16
111..........................................................       10,783       3.1055            1            1            2            4            6
113..........................................................       34,750      12.5640            4            6           10           15           24
114..........................................................        7,960       8.3485            2            4            7           11           16
117..........................................................        5,350       4.2781            1            1            2            5            9
118..........................................................        7,634       3.0183            1            1            2            4            7
119..........................................................          963       5.3998            1            1            3            7           13
120..........................................................       33,561       8.9647            1            3            6           12           19
121..........................................................      150,085       6.1981            2            3            5            8           11
122..........................................................       54,555       3.2992            1            1            3            4            6
123..........................................................       29,576       4.7318            1            1            3            6           11
124..........................................................      120,562       4.3876            1            2            3            6            9
125..........................................................       92,475       2.7008            1            1            2            3            5
126..........................................................        5,424      10.6875            3            6            9           13           19
127..........................................................      667,522       5.0851            2            3            4            6            9
128..........................................................        4,213       5.1899            2            3            5            6            9
129..........................................................        3,527       2.5373            1            1            1            2            5
130..........................................................       87,554       5.3511            1            3            4            7           10
131..........................................................       22,885       3.6965            1            2            3            5            6
132..........................................................      101,433       2.8006            1            1            2            3            5
133..........................................................        5,845       2.1384            1            1            2            3            4
134..........................................................       39,838       3.1001            1            2            2            4            6
135..........................................................        7,171       4.2924            1            2            3            5            8
136..........................................................          939       2.6944            1            1            2            3            5
138..........................................................      206,296       3.8764            1            2            3            5            7
139..........................................................       73,965       2.4267            1            1            2            3            4
140..........................................................       31,123       2.4049            1            1            2            3            4

[[Page 48290]]

 
141..........................................................      123,214       3.4307            1            2            3            4            6
142..........................................................       49,069       2.4897            1            1            2            3            4
143..........................................................      237,871       2.0978            1            1            2            3            4
144..........................................................      104,970       5.8254            1            2            4            7           11
145..........................................................        5,698       2.5470            1            1            2            3            5
146..........................................................       10,278       9.7685            4            6            8           11           17
147..........................................................        2,613       5.5427            2            4            5            7            8
148..........................................................      133,146      11.9344            5            6            9           15           22
149..........................................................       19,525       5.6364            3            4            5            7            8
150..........................................................       22,987      10.7225            4            6            9           13           19
151..........................................................        5,401       5.0224            1            2            4            7            9
152..........................................................        5,016       7.9314            3            5            7            9           14
153..........................................................        1,953       4.8669            2            3            5            6            7
154..........................................................       27,071      12.9678            3            6           10           16           25
155..........................................................        6,015       3.9583            1            2            3            6            8
156..........................................................            4       9.2500            7            7            8            8           14
157..........................................................        8,329       5.6899            1            2            4            7           11
158..........................................................        3,716       2.6453            1            1            2            3            5
159..........................................................       19,241       5.0838            1            2            4            6           10
160..........................................................       11,945       2.6548            1            1            2            3            5
161..........................................................       10,158       4.5026            1            2            3            6            9
162..........................................................        4,952       2.0889            1            1            1            3            4
163..........................................................            5       2.4000            1            1            2            3            5
164..........................................................        6,003       7.6838            3            4            7            9           13
165..........................................................        2,457       3.9935            2            2            4            5            7
166..........................................................        5,157       4.3198            1            2            3            5            8
167..........................................................        4,922       2.1260            1            1            2            3            4
168..........................................................        1,538       4.8563            1            2            3            6           10
169..........................................................          774       2.7661            1            1            2            3            5
170..........................................................       17,939      10.6904            2            5            8           13           21
171..........................................................        1,404       4.1660            1            2            3            5            8
172..........................................................       33,099       6.7836            2            3            5            8           13
173..........................................................        2,192       3.4995            1            1            3            4            7
174..........................................................      261,557       4.6848            2            3            4            6            8
175..........................................................       29,879       2.8529            1            2            2            4            5
176..........................................................       14,653       5.0912            2            3            4            6            9
177..........................................................        7,659       4.4332            2            2            4            5            8
178..........................................................        2,559       3.0770            1            2            3            4            5
179..........................................................       14,734       5.7800            2            3            4            7           11
180..........................................................       91,464       5.2570            2            3            4            6           10
181..........................................................       25,262       3.3086            1            2            3            4            6
182..........................................................      297,116       4.4864            1            2            3            5            8
183..........................................................       81,577       2.8984            1            1            2            4            5
184..........................................................           79       4.2911            1            2            3            4            8
185..........................................................        6,254       4.4915            1            2            3            6            9
186..........................................................            7       3.1429            1            2            2            3            5
187..........................................................          647       4.1468            1            2            3            6            8
188..........................................................       93,711       5.4548            1            2            4            7           10
189..........................................................       13,047       3.0530            1            1            2            4            6
190..........................................................           65       4.8000            1            2            3            6            8
191..........................................................       10,595      12.3655            3            6            9           15           25
192..........................................................        1,380       5.5087            1            3            5            7            9
193..........................................................        4,044      12.5321            5            7           10           15           23
194..........................................................          461       6.2603            2            4            6            8           11
195..........................................................        2,846      10.5569            4            6            9           13           19
196..........................................................          595       5.3345            2            3            5            7            9
197..........................................................       16,435       9.0254            3            5            7           11           16
198..........................................................        4,114       4.2859            2            3            4            5            7
199..........................................................        1,484       8.9892            2            4            7           12           19
200..........................................................        1,017      10.3520            1            3            7           13           21
201..........................................................        2,717      13.5628            3            6           10           17           27
202..........................................................       27,516       6.1264            2            3            5            7           12
203..........................................................       32,434       6.4368            2            3            5            8           12
204..........................................................       69,460       5.3914            2            3            4            6           10
205..........................................................       32,822       5.8530            2            3            4            7           11
206..........................................................        2,051       3.8035            1            2            3            5            7
207..........................................................       38,329       5.2350            1            2            4            7           10
208..........................................................        9,427       2.9434            1            1            2            4            5
210..........................................................      126,884       6.6228            3            4            5            8           11
211..........................................................       25,813       4.5833            3            3            4            5            7

[[Page 48291]]

 
212..........................................................           10       2.5000            1            2            2            4            4
213..........................................................        9,511       8.9931            2            4            7           11           18
216..........................................................       19,925       5.3298            1            1            3            7           12
217..........................................................       15,693      12.1157            3            5            8           15           24
218..........................................................       30,213       5.3787            2            3            4            7           10
219..........................................................       21,194       3.1641            1            2            3            4            5
220..........................................................            2       4.0000            1            1            7            7            7
223..........................................................       12,689       3.2720            1            1            2            4            6
224..........................................................        9,927       1.9411            1            1            1            2            3
225..........................................................        6,275       5.2709            1            2            4            7           11
226..........................................................        6,776       6.3719            1            3            4            8           13
227..........................................................        4,855       2.6360            1            1            2            3            5
228..........................................................        2,683       4.2046            1            1            3            5            9
229..........................................................        1,117       2.5004            1            1            2            3            5
230..........................................................        2,474       5.4321            1            2            4            7           11
232..........................................................          572       2.7395            1            1            2            3            6
233..........................................................       18,500       6.3363            1            2            5            8           13
234..........................................................        9,052       2.6740            1            1            1            3            6
235..........................................................        4,763       4.6431            1            2            4            6            8
236..........................................................       41,789       4.4010            1            3            4            5            8
237..........................................................        1,925       3.7844            1            2            3            5            7
238..........................................................        9,693       7.9706            2            4            6            9           14
239..........................................................       40,343       6.0356            2            3            5            7           11
240..........................................................       12,933       6.4411            2            3            5            8           12
241..........................................................        2,818       3.6427            1            2            3            4            6
242..........................................................        2,725       6.4499            2            3            5            8           12
243..........................................................      100,998       4.4968            1            2            4            6            8
244..........................................................       16,946       4.4343            1            2            4            5            8
245..........................................................        5,798       3.0942            1            1            3            4            5
246..........................................................        1,393       3.5635            1            2            3            4            6
247..........................................................       21,356       3.2905            1            2            3            4            6
248..........................................................       16,406       4.8154            2            3            4            6            8
249..........................................................       13,490       3.9493            1            1            3            5            8
250..........................................................        4,165       3.8363            1            2            3            5            7
251..........................................................        2,059       2.7936            1            1            3            3            5
252..........................................................            1       1.0000            1            1            1            1            1
253..........................................................       24,816       4.5259            2            3            4            5            8
254..........................................................       10,019       3.0639            1            2            3            4            5
255..........................................................            1       1.0000            1            1            1            1            1
256..........................................................        7,606       4.9471            1            2            4            6            9
257..........................................................       13,128       2.5517            1            1            2            3            5
258..........................................................       11,400       1.6964            1            1            1            2            3
259..........................................................        2,660       2.8173            1            1            1            3            7
260..........................................................        2,431       1.4048            1            1            1            1            2
261..........................................................        1,571       2.2037            1            1            1            2            4
262..........................................................          602       4.6561            1            2            3            6            9
263..........................................................       22,544      10.4724            3            5            7           13           20
264..........................................................        3,912       6.2150            2            3            5            7           11
265..........................................................        4,036       6.5347            1            2            4            8           14
266..........................................................        2,230       3.0296            1            1            2            4            6
267..........................................................          276       4.2428            1            1            3            5            8
268..........................................................        1,007       3.6495            1            1            2            4            7
269..........................................................       11,070       7.9865            2            3            6           10           15
270..........................................................        2,573       3.5876            1            1            3            5            7
271..........................................................       21,579       6.7917            2            3            5            8           12
272..........................................................        6,079       5.8195            2            3            4            7           11
273..........................................................        1,256       3.7070            1            2            3            5            7
274..........................................................        2,222       6.1787            1            3            5            7           11
275..........................................................          173       3.2081            1            1            2            4            6
276..........................................................        1,611       4.6096            1            2            4            6            8
277..........................................................      119,184       5.4238            2            3            4            7            9
278..........................................................       33,737       3.9926            2            2            3            5            7
279..........................................................            6       4.1667            1            2            3            5            5
280..........................................................       19,335       3.9854            1            2            3            5            7
281..........................................................        6,583       2.7961            1            1            2            3            5
283..........................................................        6,770       4.5786            1            2            3            6            8
284..........................................................        1,845       2.9176            1            1            2            4            5
285..........................................................        8,079       9.8267            3            5            8           12           18
286..........................................................        2,869       5.1921            2            2            4            6           10
287..........................................................        5,462       9.5002            3            5            7           11           18

[[Page 48292]]

 
288..........................................................       11,463       3.7000            1            2            3            4            6
289..........................................................        6,352       2.3909            1            1            1            2            5
290..........................................................       11,894       2.0268            1            1            1            2            3
291..........................................................           60       1.4833            1            1            1            1            2
292..........................................................        7,592       9.9870            2            4            8           12           19
293..........................................................          317       4.7192            1            2            3            6            8
294..........................................................       96,836       4.2502            1            2            3            5            8
295..........................................................        4,384       3.7003            1            2            3            4            7
296..........................................................      247,467       4.6444            1            2            4            6            9
297..........................................................       42,523       3.0312            1            2            3            4            5
298..........................................................          111       3.5405            1            1            2            4            6
299..........................................................        1,529       5.0680            1            2            4            6            9
300..........................................................       21,700       5.8032            2            3            5            7           11
301..........................................................        3,909       3.3592            1            2            3            4            6
302..........................................................       10,499       7.9355            4            5            6            9           13
303..........................................................       24,646       7.2778            3            4            6            8           14
304..........................................................       14,090       8.3271            2            3            6           10           17
305..........................................................        3,012       3.1016            1            2            3            4            6
306..........................................................        5,818       5.5734            1            2            3            8           13
307..........................................................        1,950       2.0292            1            1            2            2            3
308..........................................................        6,684       6.1339            1            2            4            8           14
309..........................................................        3,266       1.9801            1            1            1            2            4
310..........................................................       25,386       4.4935            1            2            3            6           10
311..........................................................        5,890       1.8514            1            1            1            2            3
312..........................................................        1,328       4.9315            1            2            3            6           10
313..........................................................          505       2.3921            1            1            2            3            5
314..........................................................            2      89.0000            5            5          173          173          173
315..........................................................       34,911       6.7495            1            1            4            9           16
316..........................................................      204,550       6.1591            2            3            5            8           12
317..........................................................        2,716       3.5044            1            1            2            4            7
318..........................................................        5,914       5.9731            1            3            4            7           12
319..........................................................          384       2.5651            1            1            2            3            5
320..........................................................      225,069       4.9879            2            3            4            6            9
321..........................................................       31,860       3.5371            1            2            3            4            6
322..........................................................           67       3.5821            2            2            3            4            6
323..........................................................       20,427       3.1029            1            1            2            4            6
324..........................................................        4,637       1.8462            1            1            1            2            3
325..........................................................        9,930       3.7407            1            2            3            5            7
326..........................................................        2,586       2.5607            1            1            2            3            5
327..........................................................           11       2.0000            1            1            2            2            3
328..........................................................          574       3.4146            1            1            3            4            6
329..........................................................           54       1.6852            1            1            1            2            3
331..........................................................       57,039       5.4034            1            2            4            7           10
332..........................................................        4,145       3.0625            1            1            2            4            6
333..........................................................          247       5.3320            1            2            4            6            9
334..........................................................        9,532       4.0415            1            2            3            5            7
335..........................................................       12,203       2.4946            1            2            2            3            4
336..........................................................       28,202       3.2201            1            1            2            4            7
337..........................................................       21,501       1.8442            1            1            2            2            3
338..........................................................          674       5.7953            1            2            4            8           13
339..........................................................        1,237       5.1924            1            2            3            7           12
340..........................................................            1       2.0000            2            2            2            2            2
341..........................................................        3,131       3.2031            1            1            1            3            7
342..........................................................          457       3.0394            1            1            2            3            6
344..........................................................        2,343       2.7222            1            1            1            3            7
345..........................................................        1,390       5.4324            1            2            3            7           12
346..........................................................        3,963       5.9066            2            3            4            7           11
347..........................................................          234       2.7094            1            1            2            3            5
348..........................................................        4,262       4.0082            1            2            3            5            7
349..........................................................          554       2.6408            1            1            2            3            5
350..........................................................        7,281       4.5187            2            2            4            5            8
352..........................................................        1,177       4.1623            1            2            3            5            9
353..........................................................        3,092       6.0155            2            3            4            7           11
354..........................................................        7,572       5.5539            2            3            4            6           10
355..........................................................        5,006       3.0224            2            2            3            3            4
356..........................................................       22,278       1.8696            1            1            2            2            3
357..........................................................        5,543       8.0319            3            4            6           10           15
358..........................................................       20,961       3.8545            2            2            3            4            7
359..........................................................       28,665       2.3497            1            2            2            3            3
360..........................................................       14,282       2.5518            1            1            2            3            4

[[Page 48293]]

 
361..........................................................          287       2.9303            1            1            2            3            6
362..........................................................            2       1.0000            1            1            1            1            1
363..........................................................        1,981       4.0848            1            2            2            4            9
364..........................................................        1,380       4.1754            1            2            3            5            8
365..........................................................        1,617       7.8411            2            3            5           10           16
366..........................................................        4,654       6.2426            1            3            5            8           12
367..........................................................          438       2.9612            1            1            2            3            5
368..........................................................        4,145       6.4068            2            3            5            8           12
369..........................................................        3,727       3.2659            1            1            2            4            6
370..........................................................        2,251       4.9964            2            3            4            5            7
371..........................................................        2,715       3.3908            2            3            3            4            4
372..........................................................        1,377       3.4415            2            2            2            3            5
373..........................................................        5,284       2.2470            1            2            2            3            3
374..........................................................          153       2.9739            2            2            2            3            4
375..........................................................           12       6.5000            1            2            3            6            8
376..........................................................          476       3.2815            1            2            2            4            7
377..........................................................          109       4.4954            1            2            3            6            8
378..........................................................          202       2.1782            1            1            2            3            4
379..........................................................          500       3.2960            1            1            2            3            6
380..........................................................          111       2.0180            1            1            1            2            4
381..........................................................          170       2.4647            1            1            1            2            4
382..........................................................           48       1.4792            1            1            1            1            2
383..........................................................        2,806       3.6433            1            1            2            4            7
384..........................................................          151       2.5960            1            1            1            3            4
387..........................................................            1       9.0000            9            9            9            9            9
389..........................................................            3       8.6667            1            1            2            3            3
392..........................................................        2,140       8.8757            2            4            6           11           19
394..........................................................        2,761       7.3032            1            2            5            9           16
395..........................................................      115,607       4.2768            1            2            3            5            8
396..........................................................           20       2.9500            1            2            3            3            4
397..........................................................       16,443       5.1098            1            2            4            6           10
398..........................................................       18,696       5.7191            2            3            4            7           11
399..........................................................        1,643       3.3603            1            2            3            4            6
401..........................................................        6,462      11.0371            2            5            8           14           22
402..........................................................        1,348       3.8858            1            1            3            5            9
403..........................................................       31,551       7.8595            2            3            6           10           16
404..........................................................        3,624       3.9914            1            2            3            5            8
406..........................................................        2,304       9.3859            2            4            7           12           20
407..........................................................          616       3.4935            1            2            3            5            7
408..........................................................        1,949       8.2104            1            2            5           10           19
409..........................................................        1,750       6.0383            2            3            4            6           12
410..........................................................       29,067       3.7654            1            2            3            4            6
411..........................................................            5       2.0000            1            1            1            3            4
412..........................................................            9       1.5556            1            1            2            2            2
413..........................................................        5,748       6.7189            2            3            5            9           13
414..........................................................          481       4.0146            1            2            3            5            7
415..........................................................       55,992      14.0950            4            6           11           17           27
416..........................................................      288,502       7.4508            2            3            6            9           14
417..........................................................           33       6.5455            2            3            5            8           12
418..........................................................       29,991       6.0675            2            3            5            7           11
419..........................................................       17,719       4.3438            1            2            3            5            8
420..........................................................        3,023       3.1667            1            2            3            4            5
421..........................................................       13,262       4.0156            1            2            3            5            7
422..........................................................           79       3.6456            1            2            2            4            7
423..........................................................        8,970       8.0750            2            3            6           10           15
424..........................................................        1,041      11.5053            2            4            8           14           23
425..........................................................       13,101       3.4571            1            1            3            4            6
426..........................................................        4,237       4.3099            1            2            3            5            8
427..........................................................        1,579       4.6390            1            2            3            5            9
428..........................................................          845       7.2769            1            2            4            8           14
429..........................................................       23,941       5.4509            2            3            4            6           10
430..........................................................       75,545       7.7573            2            3            6            9           15
431..........................................................          333       6.6667            1            2            4            7           11
432..........................................................          402       4.0199            1            1            3            4            8
433..........................................................        4,472       2.8233            1            1            2            3            4
439..........................................................        1,759       8.3337            1            3            5            9           17
440..........................................................        5,216       8.1532            2            3            5            9           16
441..........................................................          686       3.4125            1            1            2            4            6
442..........................................................       18,608       8.6730            2            3            6           10           17
443..........................................................        3,590       3.5279            1            1            3            5            7

[[Page 48294]]

 
444..........................................................        6,014       4.0328            1            2            3            5            7
445..........................................................        2,243       2.8270            1            1            2            3            5
447..........................................................        6,324       2.5745            1            1            2            3            5
449..........................................................       40,869       3.6910            1            1            3            4            7
450..........................................................        7,453       1.9804            1            1            1            2            4
451..........................................................            2      10.5000            8            8           13           13           13
452..........................................................       28,831       4.9369            1            2            3            6           10
453..........................................................        5,388       2.7572            1            1            2            3            5
454..........................................................        4,741       4.1080            1            2            3            5            8
455..........................................................          885       2.2802            1            1            2            3            4
461..........................................................        2,290       5.5782            1            1            3            7           12
462..........................................................        7,891       9.5516            4            5            7           10           13
463..........................................................       32,925       3.8763            1            2            3            5            7
464..........................................................        7,635       2.8998            1            1            2            4            5
465..........................................................          163       3.4724            1            1            2            4            6
466..........................................................        1,204       4.9086            1            1            2            4            7
467..........................................................        1,028       2.6722            1            1            2            3            5
468..........................................................       52,062      12.5395            3            6           10           16           24
471..........................................................       16,780       4.8545            3            3            4            5            8
473..........................................................        8,582      12.4204            2            3            7           17           32
475..........................................................      119,965      10.6382            2            5            9           14           20
476..........................................................        2,851       9.9056            1            4            8           14           20
477..........................................................       28,211       8.5081            1            3            7           11           17
479..........................................................       27,660       2.5490            1            1            2            3            5
480..........................................................          908      19.1013            6            8           13           23           39
481..........................................................        1,199      22.0025           12           16           20           24           33
482..........................................................        5,084      11.1810            4            6            9           13           20
484..........................................................          472      12.7564            2            5           10           17           26
485..........................................................        3,714       9.4715            4            5            7           11           18
486..........................................................        2,712      12.1962            2            5           10           16           24
487..........................................................        5,017       6.8405            1            3            5            9           14
488..........................................................          828      17.6437            4            7           12           21           33
489..........................................................       13,555       8.1669            2            3            6           10           15
490..........................................................        5,255       5.3115            1            2            4            6            9
491..........................................................       22,688       3.0224            1            2            2            3            5
492..........................................................        3,924      13.8081            3            5            6           23           32
493..........................................................       61,129       6.0304            2            3            5            8           11
494..........................................................       24,558       2.6900            1            1            2            4            5
495..........................................................          342      17.3421            8           10           13           20           33
496..........................................................        3,727       8.7631            3            4            6           10           17
497..........................................................       31,236       5.6849            3            3            5            6            9
498..........................................................       21,296       3.6794            2            3            3            4            5
499..........................................................       35,261       4.1633            1            2            3            5            8
500..........................................................       46,497       2.1981            1            1            2            3            4
501..........................................................        3,203       9.8392            4            5            8           12           18
502..........................................................          762       5.6995            2            3            5            7           10
503..........................................................        5,916       3.9238            1            2            3            5            7
504..........................................................          192      28.0260            8           13           24           36           51
505..........................................................          180       6.8889            1            1            2            6           13
506..........................................................          964      15.1432            3            7           12           20           30
507..........................................................          322       7.7112            1            3            6           10           14
508..........................................................          655       7.3542            1            3            5            9           14
509..........................................................          155       5.2323            1            2            3            6           11
510..........................................................        1,783       6.0432            1            2            4            7           12
511..........................................................          627       3.6364            1            1            2            4            7
512..........................................................          550      13.6200            6            8           10           14           25
513..........................................................          216      10.7407            5            7            8           11           17
515..........................................................       58,668       3.8406            1            1            1            5            9
518..........................................................       23,803       2.4598            1            1            1            3            5
519..........................................................       12,597       4.6702            1            1            3            6           11
520..........................................................       16,544       1.9403            1            1            1            2            3
521..........................................................       29,404       5.2599            1            2            4            6            8
522..........................................................        3,423      10.2875            3            4            5            7            8
523..........................................................       14,428       3.7573            1            2            3            4            5
524..........................................................      109,116       3.1429            1            2            3            4            6
525..........................................................          206      14.2718            1            3            7           17           35
528..........................................................        1,845      16.3252            6            9           14           21           29
529..........................................................        5,115       7.2502            1            2            4            9           16
530..........................................................        3,391       2.9451            1            1            2            3            6
531..........................................................        4,910       8.9709            2            4            7           11           18

[[Page 48295]]

 
532..........................................................        2,849       3.6413            1            1            3            5            7
533..........................................................       46,773       3.6548            1            1            2            4            8
534..........................................................       42,812       1.7223            1            1            1            2            3
535..........................................................        8,822       9.2409            2            4            8           12           18
536..........................................................        8,260       7.2738            2            3            6            9           14
537..........................................................        8,986       6.5032            1            3            5            8           13
538..........................................................        5,461       2.9145            1            1            2            4            6
539..........................................................        4,978      10.5552            2            4            7           14           23
540..........................................................        1,501       3.5097            1            1            3            4            7
541..........................................................       25,114      41.6431           16           23           34           50           72
542..........................................................       23,126      30.3529           11           17           25           37           52
543..........................................................        5,507      11.7066            2            5            9           16           23
544..........................................................      446,467       4.3995            3            3            4            5            7
545..........................................................       43,772       5.0362            3            3            4            6            8
546..........................................................        2,364       8.7657            3            4            7           10           16
547..........................................................       32,723      12.1254            6            8           10           14           20
548..........................................................       32,268       8.7755            5            6            8           10           13
549..........................................................       13,145      10.0860            5            6            8           12           18
550..........................................................       34,583       6.7752            4            5            6            8           10
551..........................................................       53,960       6.0685            1            2            5            8           12
552..........................................................       82,137       3.4766            1            1            2            5            7
553..........................................................       39,301       9.0530            1            3            7           12           19
554..........................................................       77,365       5.5722            1            2            4            7           12
555..........................................................       37,404       4.8144            1            2            3            6           10
556..........................................................       19,008       2.0085            1            1            1            2            4
557..........................................................      124,278       4.1023            1            2            3            5            8
558..........................................................      193,170       1.8108            1            1            1            2            4
559..........................................................        2,895       6.8370            2            3            5            8           13
                                                              -------------
                                                                 12,150,46
--------------------------------------------------------------------------------------------------------------------------------------------------------


            Table 7A.--Medicare Prospective Payment System Selected Percentile Lengths of Stay FY 2005 MedPAR Update March 2006 Grouper V24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  Number     Arithmetic      10th         25th         50th         75th         90th
                             DRG                                discharge     mean LOS    percentile   percentile   percentile   percentile   percentile
--------------------------------------------------------------------------------------------------------------------------------------------------------
1............................................................       24,403       9.6172            2            4            7           12           19
2............................................................       10,188       4.4271            1            2            4            6            8
3............................................................            3      11.0000            4            4            8           21           21
6............................................................          288       3.0833            1            1            2            3            7
7............................................................       15,033       9.2561            2            4            7           12           19
8............................................................        3,442       2.7638            1            1            2            3            6
9............................................................        1,775       6.0248            1            3            4            7           11
10...........................................................       19,628       5.9178            2            3            4            7           11
11...........................................................        3,085       3.5546            1            2            3            5            7
12...........................................................       55,972       5.3686            2            3            4            6           10
13...........................................................        7,529       4.8515            2            3            4            6            8
14...........................................................      278,864       5.3705            2            3            4            7           10
15...........................................................       20,004       4.0156            1            2            3            5            7
16...........................................................       17,302       6.3015            2            3            5            8           12
17...........................................................        2,975       3.0376            1            1            2            4            6
18...........................................................       33,467       5.1537            2            3            4            6            9
19...........................................................        8,467       3.3795            1            2            3            4            6
21...........................................................        2,220       6.1752            2            3            5            8           12
22...........................................................        3,169       5.0104            2            2            4            6           10
23...........................................................       10,671       3.8995            1            2            3            5            7
26...........................................................           25       3.8000            1            1            2            5            9
27...........................................................        5,974       4.7370            1            1            3            6           10
28...........................................................       19,912       5.5699            1            2            4            7           11
29...........................................................        6,524       3.2149            1            1            3            4            6
31...........................................................        5,039       3.9036            1            2            3            5            7
32...........................................................        1,904       2.2757            1            1            2            3            4
34...........................................................       27,632       4.7034            1            2            4            6            9
35...........................................................        7,913       3.0404            1            1            3            4            5
36...........................................................          308       1.9156            1            1            1            1            2
37...........................................................        1,219       4.1132            1            1            3            5            8
38...........................................................           50       2.8000            1            1            2            3            6
39...........................................................          328       2.1220            1            1            1            2            3

[[Page 48296]]

 
40...........................................................        1,188       4.2315            1            1            3            4            6
42...........................................................        1,638       2.4823            1            1            1            2            3
43...........................................................          125       2.9600            1            1            2            4            5
44...........................................................        1,291       4.7506            2            3            4            6            8
45...........................................................        2,771       3.0278            1            2            2            4            6
46...........................................................        3,929       4.1917            1            2            3            5            8
47...........................................................        1,309       3.0145            1            1            2            4            6
49...........................................................        2,416       4.5219            1            2            3            5            9
50...........................................................        2,026       1.8638            1            1            1            2            3
51...........................................................          193       2.6684            1            1            1            3            5
52...........................................................          235       1.5149            1            1            1            2            2
53...........................................................        2,147       4.0051            1            1            2            5            9
55...........................................................        1,370       2.8832            1            1            1            3            6
56...........................................................          451       2.6785            1            1            2            3            5
57...........................................................          742       3.2520            1            1            2            3            7
59...........................................................          126       2.3730            1            1            2            3            5
60...........................................................            3       1.6667            1            1            1            3            3
61...........................................................          222       6.0541            1            1            4            8           13
62...........................................................            4       1.5000            1            1            1            1            3
63...........................................................        2,827       4.5313            1            1            3            6           10
64...........................................................        3,234       6.2004            1            2            4            8           13
65...........................................................       40,495       2.7634            1            1            2            3            5
66...........................................................        8,197       3.1080            1            1            2            4            6
67...........................................................          379       3.6834            1            2            3            5            8
68...........................................................       18,918       3.8500            1            2            3            5            7
69...........................................................        5,149       2.9493            1            2            2            4            5
70...........................................................           25       2.4000            1            1            2            3            4
71...........................................................           70       4.3429            1            2            3            5            7
72...........................................................        1,326       3.3205            1            2            3            4            6
73...........................................................        9,961       4.2979            1            2            3            5            8
74...........................................................            3       3.3333            3            3            3            4            4
75...........................................................       46,867       9.5747            3            5            7           12           19
76...........................................................       48,166      10.4844            3            5            8           13           20
77...........................................................        2,112       4.5123            1            2            4            6            9
78...........................................................       49,708       6.0925            2            4            5            7           10
79...........................................................      160,420       8.0517            3            4            7           10           15
80...........................................................        7,160       5.2197            2            3            4            6            9
81...........................................................            6       6.1667            2            3            5            8            8
82...........................................................       63,222       6.6658            2            3            5            9           13
83...........................................................        7,153       5.1922            2            3            4            6           10
84...........................................................        1,403       3.1276            1            2            3            4            5
85...........................................................       22,228       6.1087            2            3            5            8           12
86...........................................................        1,717       3.4549            1            2            3            4            6
87...........................................................       96,725       6.3706            2            3            5            8           12
88...........................................................      427,153       4.8563            2            3            4            6            9
89...........................................................      554,136       5.5251            2            3            5            7           10
90...........................................................       43,512       3.7080            2            2            3            5            6
91...........................................................           53       3.4151            1            1            2            4            6
92...........................................................       16,519       5.9408            2            3            5            7           11
93...........................................................        1,440       3.7625            1            2            3            5            7
94...........................................................       13,656       5.9023            2            3            5            8           12
95...........................................................        1,577       3.3843            1            2            3            4            6
96...........................................................       59,631       4.3002            2            2            4            5            7
97...........................................................       26,703       3.3674            1            2            3            4            6
98...........................................................           13       3.0769            2            2            2            4            6
99...........................................................       21,392       3.0989            1            1            2            4            6
100..........................................................        6,416       2.1061            1            1            2            3            4
101..........................................................       23,370       4.1822            1            2            3            5            8
102..........................................................        4,936       2.5432            1            1            2            3            5
103..........................................................          886      35.2641            8           11           22           46           78
104..........................................................       20,125      14.6458            6            8           12           18           26
105..........................................................       32,635       9.9310            4            6            8           11           18
106..........................................................        3,440      10.9392            5            7            9           13           18
108..........................................................        8,758      10.7099            4            6            9           13           19
110..........................................................       57,710       8.0024            1            3            6           10           16
111..........................................................       10,785       3.1058            1            1            2            4            6
113..........................................................       34,750      12.5640            4            6           10           15           24
114..........................................................        7,959       8.3465            2            4            7           11           16
117..........................................................        5,350       4.2781            1            1            2            5            9
118..........................................................        7,634       3.0183            1            1            2            4            7

[[Page 48297]]

 
119..........................................................          963       5.3998            1            1            3            7           13
120..........................................................       33,561       8.9647            1            3            6           12           19
121..........................................................      150,085       6.1981            2            3            5            8           11
122..........................................................       54,555       3.2992            1            1            3            4            6
123..........................................................       29,576       4.7318            1            1            3            6           11
124..........................................................      120,562       4.3876            1            2            3            6            9
125..........................................................       92,475       2.7008            1            1            2            3            5
126..........................................................        5,424      10.6875            3            6            9           13           19
127..........................................................      667,522       5.0851            2            3            4            6            9
128..........................................................        4,213       5.1899            2            3            5            6            9
129..........................................................        3,527       2.5373            1            1            1            2            5
130..........................................................       87,480       5.3514            1            3            4            7           10
131..........................................................       22,959       3.7009            1            2            3            5            6
132..........................................................      101,418       2.8006            1            1            2            3            5
133..........................................................        5,860       2.1410            1            1            2            3            4
134..........................................................       39,838       3.1001            1            2            2            4            6
135..........................................................        7,167       4.2931            1            2            3            5            8
136..........................................................          943       2.6957            1            1            2            3            5
138..........................................................      206,188       3.8769            1            2            3            5            7
139..........................................................       74,073       2.4274            1            1            2            3            4
140..........................................................       31,123       2.4049            1            1            2            3            4
141..........................................................      123,116       3.4312            1            2            3            4            6
142..........................................................       49,167       2.4904            1            1            2            3            4
143..........................................................      237,871       2.0978            1            1            2            3            4
144..........................................................      104,925       5.8262            1            2            4            7           11
145..........................................................        5,743       2.5581            1            1            2            3            5
146..........................................................       10,276       9.7688            4            6            8           11           17
147..........................................................        2,615       5.5449            2            4            5            7            8
149..........................................................       19,545       5.6387            3            4            5            7            8
150..........................................................       22,981      10.7232            4            6            9           13           19
151..........................................................        5,407       5.0255            1            2            4            7            9
152..........................................................        5,016       7.9314            3            5            7            9           14
153..........................................................        1,953       4.8669            2            3            5            6            7
155..........................................................        6,019       3.9621            1            2            3            6            8
156..........................................................            4       9.2500            7            7            8            8           14
157..........................................................        8,321       5.6913            1            2            4            7           11
158..........................................................        3,724       2.6488            1            1            2            3            5
159..........................................................       19,233       5.0843            1            2            4            6           10
160..........................................................       11,953       2.6555            1            1            2            3            5
161..........................................................       10,152       4.5036            1            2            3            6            9
162..........................................................        4,958       2.0896            1            1            1            3            4
163..........................................................            5       2.4000            1            1            2            3            5
164..........................................................        5,999       7.6861            3            4            7            9           13
165..........................................................        2,461       3.9939            2            2            4            5            7
166..........................................................        5,156       4.3200            1            2            3            5            8
167..........................................................        4,923       2.1261            1            1            2            3            4
168..........................................................        1,640       4.7726            1            2            3            6           10
169..........................................................          899       2.6151            1            1            2            3            4
170..........................................................       17,935      10.6919            2            5            8           13           21
171..........................................................        1,408       4.1648            1            2            3            5            8
172..........................................................       33,065       6.7846            2            3            5            8           13
173..........................................................        2,226       3.5341            1            1            3            4            7
174..........................................................      253,265       4.6853            2            3            4            6            8
175..........................................................       29,252       2.8605            1            2            2            4            5
176..........................................................       14,653       5.0912            2            3            4            6            9
177..........................................................        7,656       4.4327            2            2            4            5            8
178..........................................................        2,562       3.0800            1            2            3            4            5
179..........................................................       14,734       5.7800            2            3            4            7           11
180..........................................................       91,370       5.2580            2            3            4            6           10
181..........................................................       25,356       3.3125            1            2            3            4            6
182..........................................................      255,772       4.0692            1            2            3            5            7
183..........................................................       79,046       2.8475            1            1            2            4            5
184..........................................................           72       3.7361            1            1            2            4            7
185..........................................................        6,254       4.4915            1            2            3            6            9
186..........................................................            7       3.1429            1            2            2            3            5
187..........................................................          647       4.1468            1            2            3            6            8
188..........................................................       87,040       5.3291            1            2            4            6           10
189..........................................................       12,406       2.9703            1            1            2            4            5
190..........................................................           10       3.0000            1            1            2            6            6
191..........................................................       10,592      12.3671            3            6            9           15           25

[[Page 48298]]

 
192..........................................................        1,380       5.5087            1            3            5            7            9
193..........................................................        4,042      12.5339            5            7           10           15           23
194..........................................................          463       6.2721            2            4            6            8           11
195..........................................................        2,846      10.5569            4            6            9           13           19
196..........................................................          595       5.3345            2            3            5            7            9
197..........................................................       16,432       9.0256            3            5            7           11           16
198..........................................................        4,117       4.2888            2            3            4            5            7
199..........................................................        1,484       8.9892            2            4            7           12           19
200..........................................................        1,017      10.3520            1            3            7           13           21
201..........................................................        2,717      13.5628            3            6           10           17           27
202..........................................................       27,516       6.1264            2            3            5            7           12
203..........................................................       32,434       6.4368            2            3            5            8           12
204..........................................................       69,460       5.3914            2            3            4            6           10
205..........................................................       32,803       5.8542            2            3            4            7           11
206..........................................................        2,070       3.8024            1            2            3            5            7
207..........................................................       38,305       5.2356            1            2            4            7           10
208..........................................................        9,451       2.9471            1            1            2            4            5
210..........................................................      126,867       6.6230            3            4            5            8           11
211..........................................................       25,830       4.5839            3            3            4            5            7
212..........................................................           10       2.5000            1            2            2            4            4
213..........................................................        9,553       9.0206            2            4            7           11           18
216..........................................................       19,883       5.3088            1            1            3            7           12
217..........................................................       15,724      12.1410            3            5            8           15           24
218..........................................................       30,210       5.3789            2            3            4            7           10
219..........................................................       21,197       3.1642            1            2            3            4            5
220..........................................................            2       4.0000            1            1            7            7            7
223..........................................................       12,688       3.2719            1            1            2            4            6
224..........................................................        9,928       1.9413            1            1            1            2            3
225..........................................................        6,275       5.2709            1            2            4            7           11
226..........................................................        6,771       6.3738            1            3            4            8           13
227..........................................................        4,860       2.6372            1            1            2            3            5
228..........................................................        2,679       4.2027            1            1            3            5            9
229..........................................................        1,121       2.5112            1            1            2            3            5
230..........................................................        2,474       5.4321            1            2            4            7           11
232..........................................................          572       2.7395            1            1            2            3            6
233..........................................................       18,493       6.3374            1            2            5            8           13
234..........................................................        9,059       2.6746            1            1            1            3            6
235..........................................................        4,763       4.6431            1            2            4            6            8
236..........................................................       41,789       4.4010            1            3            4            5            8
237..........................................................        1,925       3.7844            1            2            3            5            7
238..........................................................        9,693       7.9706            2            4            6            9           14
239..........................................................       40,343       6.0356            2            3            5            7           11
240..........................................................       12,896       6.4472            2            3            5            8           12
241..........................................................        2,855       3.6515            1            2            3            4            6
242..........................................................        2,725       6.4499            2            3            5            8           12
243..........................................................      100,998       4.4968            1            2            4            6            8
244..........................................................       16,933       4.4351            1            2            4            5            8
245..........................................................        5,811       3.0950            1            1            3            4            5
246..........................................................        1,393       3.5635            1            2            3            4            6
247..........................................................       21,356       3.2905            1            2            3            4            6
248..........................................................       16,406       4.8154            2            3            4            6            8
249..........................................................       13,490       3.9493            1            1            3            5            8
250..........................................................        4,164       3.8365            1            2            3            5            7
251..........................................................        2,060       2.7937            1            1            3            3            5
252..........................................................            1       1.0000            1            1            1            1            1
253..........................................................       24,805       4.5258            2            3            4            5            8
254..........................................................       10,030       3.0656            1            2            3            4            5
255..........................................................            1       1.0000            1            1            1            1            1
256..........................................................        7,606       4.9471            1            2            4            6            9
257..........................................................       13,126       2.5519            1            1            2            3            5
258..........................................................       11,402       1.6964            1            1            1            2            3
259..........................................................        2,660       2.8173            1            1            1            3            7
260..........................................................        2,431       1.4048            1            1            1            1            2
261..........................................................        1,571       2.2037            1            1            1            2            4
262..........................................................          602       4.6561            1            2            3            6            9
263..........................................................       22,532      10.4725            3            5            7           13           20
264..........................................................        3,924       6.2273            2            3            5            7           11
265..........................................................        4,036       6.5347            1            2            4            8           14
266..........................................................        2,230       3.0296            1            1            2            4            6
267..........................................................          276       4.2428            1            1            3            5            8

[[Page 48299]]

 
268..........................................................        1,007       3.6495            1            1            2            4            7
269..........................................................       11,061       7.9889            2            3            6           10           15
270..........................................................        2,582       3.5930            1            1            3            5            7
271..........................................................       21,579       6.7917            2            3            5            8           12
272..........................................................        6,067       5.8218            2            3            4            7           11
273..........................................................        1,268       3.7161            1            2            3            5            7
274..........................................................        2,214       6.1847            1            3            5            7           11
275..........................................................          181       3.2652            1            1            2            4            6
276..........................................................        1,611       4.6096            1            2            4            6            8
277..........................................................      119,041       5.4248            2            3            4            7            9
278..........................................................       33,880       3.9954            2            2            3            5            7
279..........................................................            6       4.1667            1            2            3            5            5
280..........................................................       19,329       3.9844            1            2            3            5            7
281..........................................................        6,589       2.8001            1            1            2            3            5
283..........................................................        6,755       4.5760            1            2            3            6            8
284..........................................................        1,860       2.9403            1            1            2            4            5
285..........................................................        8,082       9.8285            3            5            8           12           18
286..........................................................        2,869       5.1921            2            2            4            6           10
287..........................................................        5,462       9.5002            3            5            7           11           18
288..........................................................       11,460       3.6971            1            2            3            4            6
289..........................................................        6,352       2.3909            1            1            1            2            5
290..........................................................       11,894       2.0268            1            1            1            2            3
291..........................................................           60       1.4833            1            1            1            1            2
292..........................................................        7,590       9.9858            2            4            8           12           19
293..........................................................          318       4.7673            1            2            3            6            8
294..........................................................       96,836       4.2502            1            2            3            5            8
295..........................................................        4,384       3.7003            1            2            3            4            7
296..........................................................      247,119       4.6457            1            2            4            6            9
297..........................................................       42,871       3.0365            1            2            3            4            5
298..........................................................          111       3.5405            1            1            2            4            6
299..........................................................        1,529       5.0680            1            2            4            6            9
300..........................................................       21,678       5.8044            2            3            5            7           11
301..........................................................        3,931       3.3666            1            2            3            4            6
302..........................................................       10,496       7.9354            4            5            6            9           13
303..........................................................       19,984       6.3149            2            3            5            7           12
304..........................................................       13,649       8.1660            2            3            6           10           17
305..........................................................        2,690       3.0331            1            2            2            4            5
306..........................................................        5,818       5.5734            1            2            3            8           13
307..........................................................        1,950       2.0292            1            1            2            2            3
308..........................................................        5,454       5.2913            1            2            3            7           12
309..........................................................        2,964       1.7190            1            1            1            2            3
310..........................................................       25,380       4.4933            1            2            3            6           10
311..........................................................        5,896       1.8552            1            1            1            2            3
312..........................................................        1,328       4.9315            1            2            3            6           10
313..........................................................          505       2.3921            1            1            2            3            5
314..........................................................            2      89.0000            5            5          173          173          173
315..........................................................       34,913       6.7494            1            1            4            9           16
316..........................................................      205,633       6.1505            2            3            5            8           12
317..........................................................        2,716       3.5044            1            1            2            4            7
318..........................................................        5,912       5.9738            1            3            4            7           12
319..........................................................          386       2.5725            1            1            2            3            5
320..........................................................      224,944       4.9886            2            3            4            6            9
321..........................................................       31,985       3.5383            1            2            3            4            6
322..........................................................           67       3.5821            2            2            3            4            6
323..........................................................       20,425       3.1030            1            1            2            4            6
324..........................................................        4,639       1.8463            1            1            1            2            3
325..........................................................        9,924       3.7401            1            2            3            5            7
326..........................................................        2,592       2.5656            1            1            2            3            5
327..........................................................           11       2.0000            1            1            2            2            3
328..........................................................          574       3.4146            1            1            3            4            6
329..........................................................           54       1.6852            1            1            1            2            3
331..........................................................       56,139       5.4124            1            2            4            7           10
332..........................................................        3,963       3.0636            1            1            2            4            6
333..........................................................          244       5.3648            1            2            4            6           10
334..........................................................        9,529       4.0421            1            2            3            5            7
335..........................................................       12,206       2.4946            1            2            2            3            4
336..........................................................       28,193       3.2206            1            1            2            4            7
337..........................................................       21,510       1.8441            1            1            2            2            3
338..........................................................          674       5.7953            1            2            4            8           13
339..........................................................        1,237       5.1924            1            2            3            7           12

[[Page 48300]]

 
340..........................................................            1       2.0000            2            2            2            2            2
341..........................................................        3,131       3.2031            1            1            1            3            7
342..........................................................          457       3.0394            1            1            2            3            6
344..........................................................        2,343       2.7222            1            1            1            3            7
345..........................................................        1,390       5.4324            1            2            3            7           12
346..........................................................        3,962       5.9079            2            3            4            7           11
347..........................................................          235       2.7021            1            1            2            3            5
348..........................................................        4,262       4.0082            1            2            3            5            7
349..........................................................          554       2.6408            1            1            2            3            5
350..........................................................        7,281       4.5187            2            2            4            5            8
352..........................................................        1,177       4.1623            1            2            3            5            9
353..........................................................        3,092       6.0155            2            3            4            7           11
354..........................................................        7,572       5.5539            2            3            4            6           10
355..........................................................        5,006       3.0224            2            2            3            3            4
356..........................................................       22,085       1.8693            1            1            2            2            3
357..........................................................        5,543       8.0319            3            4            6           10           15
358..........................................................       20,947       3.8543            2            2            3            4            7
359..........................................................       28,679       2.3506            1            2            2            3            3
360..........................................................       13,879       2.5012            1            1            2            3            4
361..........................................................          287       2.9303            1            1            2            3            6
362..........................................................            2       1.0000            1            1            1            1            1
363..........................................................        2,157       4.2165            1            2            3            5            9
364..........................................................        1,800       3.8100            1            1            3            5            8
365..........................................................        1,617       7.8411            2            3            5           10           16
366..........................................................        4,645       6.2474            1            3            5            8           12
367..........................................................          447       2.9776            1            1            2            4            5
368..........................................................        4,145       6.4068            2            3            5            8           12
369..........................................................        3,727       3.2659            1            1            2            4            6
370..........................................................        2,251       4.9964            2            3            4            5            7
371..........................................................        2,715       3.3908            2            3            3            4            4
372..........................................................        1,377       3.4415            2            2            2            3            5
373..........................................................        5,284       2.2470            1            2            2            3            3
374..........................................................          153       2.9739            2            2            2            3            4
375..........................................................           12       6.5000            1            2            3            6            8
376..........................................................          476       3.2815            1            2            2            4            7
377..........................................................          109       4.4954            1            2            3            6            8
378..........................................................          202       2.1782            1            1            2            3            4
379..........................................................          500       3.2960            1            1            2            3            6
380..........................................................          111       2.0180            1            1            1            2            4
381..........................................................          170       2.4647            1            1            1            2            4
382..........................................................           48       1.4792            1            1            1            1            2
383..........................................................        2,806       3.6433            1            1            2            4            7
384..........................................................          151       2.5960            1            1            1            3            4
387..........................................................            1       9.0000            9            9            9            9            9
389..........................................................            3       8.6667            1            1            2            3            3
392..........................................................        2,140       8.8757            2            4            6           11           19
394..........................................................        2,761       7.3032            1            2            5            9           16
395..........................................................      101,519       4.0933            1            2            3            5            8
396..........................................................           18       3.0556            1            2            3            3            4
397..........................................................       16,443       5.1098            1            2            4            6           10
398..........................................................        6,708       5.4499            1            2            4            7           10
399..........................................................        1,084       3.2260            1            1            3            4            6
401..........................................................        6,451      11.0460            2            5            8           14           22
402..........................................................        1,359       3.9014            1            1            3            5            9
403..........................................................       31,351       7.8732            2            3            6           10           16
404..........................................................        3,824       4.0811            1            2            3            5            8
406..........................................................        2,304       9.3859            2            4            7           12           20
407..........................................................          616       3.4935            1            2            3            5            7
408..........................................................        1,949       8.2104            1            2            5           10           19
409..........................................................        1,750       6.0383            2            3            4            6           12
410..........................................................       29,067       3.7654            1            2            3            4            6
411..........................................................            5       2.0000            1            1            1            3            4
412..........................................................            9       1.5556            1            1            2            2            2
413..........................................................        5,742       6.7180            2            3            5            9           13
414..........................................................          487       4.0575            1            2            3            5            7
417..........................................................           33       6.5455            2            3            5            8           12
418..........................................................       29,991       6.0675            2            3            5            7           11
419..........................................................       17,640       4.3459            1            2            3            5            8
420..........................................................        3,102       3.1847            1            2            3            4            6
421..........................................................       13,262       4.0156            1            2            3            5            7

[[Page 48301]]

 
422..........................................................           79       3.6456            1            2            2            4            7
423..........................................................        8,970       8.0750            2            3            6           10           15
424..........................................................        1,041      11.5053            2            4            8           14           23
425..........................................................       13,101       3.4571            1            1            3            4            6
426..........................................................        4,237       4.3099            1            2            3            5            8
427..........................................................        1,579       4.6390            1            2            3            5            9
428..........................................................          845       7.2769            1            2            4            8           14
429..........................................................       23,941       5.4509            2            3            4            6           10
430..........................................................       75,545       7.7573            2            3            6            9           15
431..........................................................          333       6.6667            1            2            4            7           11
432..........................................................          402       4.0199            1            1            3            4            8
433..........................................................        4,472       2.8233            1            1            2            3            4
439..........................................................        1,759       8.3337            1            3            5            9           17
440..........................................................        5,216       8.1532            2            3            5            9           16
441..........................................................          686       3.4125            1            1            2            4            6
442..........................................................       18,606       8.6736            2            3            6           10           17
443..........................................................        3,592       3.5276            1            1            3            5            7
444..........................................................        6,013       4.0331            1            2            3            5            7
445..........................................................        2,244       2.8266            1            1            2            3            5
447..........................................................        6,324       2.5745            1            1            2            3            5
449..........................................................       40,859       3.6912            1            1            3            4            7
450..........................................................        7,463       1.9812            1            1            1            2            4
451..........................................................            2      10.5000            8            8           13           13           13
452..........................................................       28,822       4.9372            1            2            3            6           10
453..........................................................        5,397       2.7589            1            1            2            3            5
454..........................................................        4,739       4.1087            1            2            3            5            8
455..........................................................          887       2.2807            1            1            2            3            4
461..........................................................        2,290       5.5782            1            1            3            7           12
462..........................................................        7,891       9.5516            4            5            7           10           13
463..........................................................       32,894       3.8764            1            2            3            5            7
464..........................................................        7,666       2.9032            1            1            2            4            5
465..........................................................          163       3.4724            1            1            2            4            6
466..........................................................        1,204       4.9086            1            1            2            4            7
467..........................................................        1,028       2.6722            1            1            2            3            5
468..........................................................       52,050      12.5411            3            6           10           16           24
471..........................................................       15,677       4.5470            3            3            4            5            7
473..........................................................        8,582      12.4204            2            3            7           17           32
476..........................................................        2,851       9.9056            1            4            8           14           20
477..........................................................       28,205       8.5083            1            3            7           11           17
479..........................................................       27,673       2.5493            1            1            2            3            5
480..........................................................          908      19.1013            6            8           13           23           39
481..........................................................        1,199      22.0025           12           16           20           24           33
482..........................................................        5,084      11.1810            4            6            9           13           20
484..........................................................          472      12.7564            2            5           10           17           26
485..........................................................        3,714       9.4715            4            5            7           11           18
486..........................................................        2,712      12.1962            2            5           10           16           24
487..........................................................        5,017       6.8405            1            3            5            9           14
488..........................................................          828      17.6437            4            7           12           21           33
489..........................................................       13,555       8.1669            2            3            6           10           15
490..........................................................        5,255       5.3115            1            2            4            6            9
491..........................................................       22,688       3.0224            1            2            2            3            5
492..........................................................        3,924      13.8081            3            5            6           23           32
493..........................................................       61,105       6.0306            2            3            5            8           11
494..........................................................       24,582       2.6927            1            1            2            4            5
495..........................................................          342      17.3421            8           10           13           20           33
496..........................................................        3,727       8.7631            3            4            6           10           17
497..........................................................       31,227       5.6855            3            3            5            6            9
498..........................................................       21,305       3.6795            2            3            3            4            5
499..........................................................       35,251       4.1635            1            2            3            5            8
500..........................................................       46,507       2.1984            1            1            2            3            4
501..........................................................        3,201       9.8416            4            5            8           12           18
502..........................................................          764       5.7003            2            3            5            7           10
503..........................................................        5,916       3.9238            1            2            3            5            7
504..........................................................          192      28.0260            8           13           24           36           51
505..........................................................          180       6.8889            1            1            2            6           13
506..........................................................          963      15.1547            3            7           12           20           30
507..........................................................          323       7.6997            1            3            6           10           14
508..........................................................          655       7.3542            1            3            5            9           14
509..........................................................          155       5.2323            1            2            3            6           11
510..........................................................        1,783       6.0432            1            2            4            7           12

[[Page 48302]]

 
511..........................................................          627       3.6364            1            1            2            4            7
512..........................................................          550      13.6200            6            8           10           14           25
513..........................................................          226      10.6327            5            7            8           11           17
515..........................................................       58,749       3.8459            1            1            2            5            9
518..........................................................       23,803       2.4598            1            1            1            3            5
519..........................................................       12,589       4.6711            1            1            3            6           11
520..........................................................       16,552       1.9409            1            1            1            2            3
521..........................................................       29,368       5.2609            1            2            4            6            8
522..........................................................        3,425      10.2908            3            4            5            7            8
523..........................................................       14,462       3.7574            1            2            3            4            5
524..........................................................      109,116       3.1429            1            2            3            4            6
525..........................................................          205      13.7366            1            3            7           17           35
528..........................................................        1,845      16.3252            6            9           14           21           29
529..........................................................        5,027       7.1317            1            2            4            9           16
530..........................................................        3,362       2.9140            1            1            2            3            5
531..........................................................        4,994       9.0631            2            4            7           12           18
532..........................................................        2,882       3.6724            1            1            3            5            7
533..........................................................       43,722       3.6996            1            1            2            4            9
534..........................................................       40,255       1.7365            1            1            1            2            3
535..........................................................        8,831       9.2481            2            4            8           12           18
536..........................................................        8,262       7.2781            2            3            6            9           14
537..........................................................        8,985       6.5037            1            3            5            8           13
538..........................................................        5,462       2.9143            1            1            2            4            6
539..........................................................        4,974      10.5589            2            4            7           14           23
540..........................................................        1,505       3.5163            1            1            3            4            7
541..........................................................       25,113      41.6433           16           23           34           50           72
542..........................................................       23,126      30.3529           11           17           25           37           52
543..........................................................        5,718      11.3902            2            4            9           16           23
544..........................................................      446,467       4.3995            3            3            4            5            7
545..........................................................       44,844       5.1255            3            3            4            6            9
546..........................................................        2,364       8.7657            3            4            7           10           16
547..........................................................       32,721      12.1244            6            8           10           14           20
548..........................................................       32,268       8.7755            5            6            8           10           13
549..........................................................       13,144      10.0859            5            6            8           12           18
550..........................................................       34,583       6.7752            4            5            6            8           10
551..........................................................       53,881       6.0660            1            2            5            8           12
552..........................................................       82,137       3.4766            1            1            2            5            7
553..........................................................       39,303       9.0525            1            3            7           12           19
554..........................................................       77,366       5.5730            1            2            4            7           12
555..........................................................       37,404       4.8144            1            2            3            6           10
556..........................................................       19,008       2.0085            1            1            1            2            4
557..........................................................      124,278       4.1023            1            2            3            5            8
558..........................................................      193,170       1.8108            1            1            1            2            4
559..........................................................        2,895       6.8370            2            3            5            8           13
560..........................................................        3,457      10.2242            3            5            8           13           19
561..........................................................        2,952       9.3713            2            5            8           12           18
562..........................................................       52,973       4.8176            1            2            4            6            9
563..........................................................       21,161       3.1806            1            2            3            4            6
564..........................................................       16,330       3.4475            1            2            3            4            6
565..........................................................       46,864      15.3640            6            9           13           19           26
566..........................................................       73,101       7.6086            1            3            6           10           15
567..........................................................       10,369      15.6256            6            8           12           19           29
568..........................................................       16,698      11.3181            2            5            9           14           22
569..........................................................       60,835      14.2697            6            8           12           17           26
570..........................................................       72,291       9.9702            4            6            8           12           18
571..........................................................       11,162       4.7775            2            2            4            6            9
572..........................................................       49,006       6.9624            2            3            5            8           13
573..........................................................        6,687      10.9047            5            6            8           12           19
574..........................................................       26,637       5.6791            2            3            4            7           11
575..........................................................       10,982      15.6028            6            8           13           19           27
576..........................................................      277,520       7.1282            2            3            6            9           14
577..........................................................        5,608       2.3229            1            1            1            2            5
578..........................................................       35,320      15.9644            5            8           13           20           30
579..........................................................       20,672      10.9008            3            5            8           13           22
                                                              -------------
                                                                12,150,466
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 48303]]


Table 8A.-- Statewide Average Operating Cost-to-Charge Ratios--July 2006
------------------------------------------------------------------------
                       State                          Urban      Rural
------------------------------------------------------------------------
 Alabama..........................................      0.263      0.336
Alaska............................................      0.407        0.7
Arizona...........................................      0.284       0.36
Arkansas..........................................      0.336      0.356
California........................................      0.238      0.342
Colorado..........................................      0.308      0.508
Connecticut.......................................      0.427      0.501
Delaware..........................................      0.496      0.462
District of Columbia..............................      0.357  .........
Florida...........................................      0.251      0.295
Georgia...........................................      0.351      0.403
Hawaii............................................      0.366      0.447
Idaho.............................................      0.474      0.541
Illinois..........................................      0.327      0.417
Indiana...........................................      0.417      0.453
Iowa..............................................      0.376      0.458
Kansas............................................      0.299      0.443
Kentucky..........................................      0.381      0.386
Louisiana.........................................      0.301      0.361
Maine.............................................      0.496      0.457
Maryland..........................................      0.763      0.882
Massachusetts.....................................      0.476  .........
Michigan..........................................      0.373       0.47
Minnesota.........................................       0.39      0.523
Mississippi.......................................      0.327      0.376
Missouri..........................................      0.329      0.381
Montana...........................................      0.427      0.497
Nebraska..........................................      0.365      0.477
Nevada............................................      0.229      0.455
New Hampshire.....................................      0.455      0.448
New Jersey........................................      0.181  .........
New Mexico........................................      0.382      0.384
New York..........................................      0.362      0.526
North Carolina....................................      0.441       0.43
North Dakota......................................      0.438      0.456
Ohio..............................................      0.372      0.543
Oklahoma..........................................      0.317      0.402
Oregon............................................      0.472       0.43
Pennsylvania......................................      0.277      0.436
Puerto Rico.......................................      0.457  .........
Rhode Island......................................      0.409  .........
South Carolina....................................      0.291      0.298
South Dakota......................................      0.354      0.447
Tennessee.........................................      0.317      0.383
Texas.............................................      0.278      0.353
Utah..............................................      0.423      0.588
Vermont...........................................      0.556      0.627
Virginia..........................................      0.363      0.377
Washington........................................      0.424      0.469
West Virginia.....................................      0.484      0.466
Wisconsin.........................................      0.431       0.48
 Wyoming..........................................        0.4      0.562
------------------------------------------------------------------------


 Table 8B.-- Statewide Average Capital Cost-to-Charge Ratios-- July 2006
------------------------------------------------------------------------
                             State                               Ratio
------------------------------------------------------------------------
Alabama......................................................      0.025
Alaska.......................................................       0.04
Arizona......................................................      0.025
Arkansas.....................................................      0.026
California...................................................      0.016
Colorado.....................................................      0.029
Connecticut..................................................      0.031
Delaware.....................................................      0.037
District of Columbia.........................................      0.024
Florida......................................................      0.023
Georgia......................................................       0.03
Hawaii.......................................................      0.032
Idaho........................................................      0.036
Illinois.....................................................      0.026
Indiana......................................................      0.037
Iowa.........................................................      0.028
Kansas.......................................................      0.032
Kentucky.....................................................       0.03
Louisiana....................................................      0.029
Maine........................................................      0.035
Maryland.....................................................      0.013
Massachusetts................................................      0.034
Michigan.....................................................      0.031
Minnesota....................................................      0.029
Mississippi..................................................      0.029
Missouri.....................................................      0.028
Montana......................................................      0.036
Nebraska.....................................................      0.039
Nevada.......................................................      0.022
New Hampshire................................................      0.036
New Jersey...................................................      0.013
New Mexico...................................................      0.033
New York.....................................................       0.03
North Carolina...............................................      0.037
North Dakota.................................................      0.041
Ohio.........................................................       0.03
Oklahoma.....................................................       0.03
Oregon.......................................................      0.032
Pennsylvania.................................................      0.023
Puerto Rico..................................................      0.034
Rhode Island.................................................      0.023
South Carolina...............................................      0.026
South Dakota.................................................      0.033
Tennessee....................................................      0.032
Texas........................................................      0.027
Utah.........................................................      0.038
Vermont......................................................      0.043
Virginia.....................................................      0.037
Washington...................................................      0.034
West Virginia................................................      0.034
Wisconsin....................................................      0.039
Wyoming......................................................      0.047
------------------------------------------------------------------------


Table 8C.--Statewide Average Total Cost-to-Charge Ratios For LTCHS--July
                                  2006
------------------------------------------------------------------------
                       State                          Urban      Rural
------------------------------------------------------------------------
 Alabama..........................................      0.287      0.366
 Alaska...........................................      0.441      0.764
 Arizona..........................................      0.308      0.394
 Arkansas.........................................      0.367      0.389
 California.......................................      0.252      0.363
 Colorado.........................................      0.332      0.573
 Connecticut......................................      0.458      0.540
 Delaware.........................................      0.532      0.505
 District of Columbia*............................      0.388  .........
 Florida..........................................      0.272      0.336
 Georgia..........................................      0.380      0.437
 Hawaii...........................................      0.397      0.484
 Idaho............................................      0.510      0.582
 Illinois.........................................      0.351      0.456
 Indiana..........................................      0.454      0.499
 Iowa.............................................      0.397      0.497
 Kansas...........................................      0.326      0.486
 Kentucky.........................................      0.411      0.418
 Louisiana........................................      0.331      0.392
 Maine............................................      0.533      0.473
 Maryland**.......................................      0.450      0.360
 Massachusetts*...................................      0.505  .........
 Michigan.........................................      0.406      0.506
 Minnesota........................................      0.418      0.552
 Mississippi......................................      0.356      0.400
 Missouri.........................................      0.355      0.415
 Montana..........................................      0.459      0.543
 Nebraska.........................................      0.400      0.526
 Nevada...........................................      0.250      0.525
 New Hampshire....................................      0.492      0.481
 New Jersey*......................................      0.194  .........
 New Mexico.......................................      0.415      0.417
 New York.........................................      0.390      0.561
 North Carolina...................................      0.482      0.471
 North Dakota.....................................      0.476      0.503
 Ohio.............................................      0.398      0.587
 Oklahoma.........................................      0.345      0.439
 Oregon...........................................      0.504      0.454
 Pennsylvania.....................................      0.296      0.469
 Puerto Rico*.....................................      0.489  .........
 Rhode Island*....................................      0.432  .........
 South Carolina...................................      0.315      0.326
 South Dakota.....................................      0.384      0.487
 Tennessee........................................      0.348      0.417
 Texas............................................      0.303      0.384
 Utah.............................................      0.459      0.650
 Vermont..........................................      0.601      0.667
 Virginia.........................................      0.398      0.415
 Washington.......................................      0.459      0.516
 West Virginia....................................      0.517      0.499
 Wisconsin........................................      0.473      0.519
 Wyoming..........................................      0.440      0.615
------------------------------------------------------------------------
* All counties in the State or Territory are classified as urban, with
  the exception of Massachusetts, which has areas designated as rural.
  However, no short-term acute care IPPS hospitals or LTCHs are located
  in those areas as of July 2006.
** National average IPPS total cost-to-charge ratios, as discussed in
  section II.E. of this final rule.

    Note: The following Table 9A is a tentative table and does not 
reflect decisions that are yet to be made by CMS pending the final 
calculation of the occupationa l mix adjusted wage index. The 
information about reclassifie d CBSAs reflects the latest information 
available to CMS regarding MGCRB and Administrat or reclassific ation 
decisions for FY 2007. A revised Table 9A reflecting CMS' decisions on 
behalf of hospitals using occupationa l mix adjusted wage indices will 
be published in a subsequent Federal Register notice between August 1 
and October 1, 2006, as well as on CMS' Web site. Hospitals will then 
have 30 days from the date the data appears on the CMS Web site to 
revise a decision made by CMS on their behalf. (See section III.H. of 
the preamble (Revisions to the Wage Index Based on Hospital 
Redesignations).)

[[Page 48304]]



       Table 9A.--Hospital Reclassifications and Redesignations By Individual Hospitals and CBSA--FY 2007
----------------------------------------------------------------------------------------------------------------
                                                           Reclassified    Reclassified
                                            Geographic      CBSA  10/1/   CBSA  4/1/2007-
              Provider No.                     CBSA         2006- 3/31/      9/30/2007             LUGAR
                                                               2007
----------------------------------------------------------------------------------------------------------------
010005..................................              01           13820           13820
010008..................................              01           33860           33860
010009..................................           19460           26620           26620
010012..................................              01           16860           16860
010022..................................              01           40660           40660  LUGAR
010025..................................              01           17980           17980
010029..................................           12220           17980           17980
010035..................................              01           13820           13820
010044..................................              01           13820           13820
010045..................................              01           13820           13820
010054..................................           19460           26620           26620
010059..................................           19460           26620           26620
010065..................................              01           33860           33860
010072..................................              01           11500           11500  LUGAR
010083..................................              01           37860           37860
010085..................................           19460           26620           26620
010100..................................              01           37860           37860
010101..................................              01           11500           11500  LUGAR
010118..................................              01           46220           46220
010126..................................              01           33860           33860
010143..................................              01           13820           13820
010150..................................              01           33860           33860
010158..................................              01           19460           19460
010164..................................              01           11500           11500  LUGAR
020008..................................              02           11260           11260
030007..................................              03           22380           22380
030033..................................              03           22380           22380
040014..................................              04           30780           30780
040017..................................              04           22220           22220
040019..................................              04           32820           32820
040020..................................           27860           32820           32820
040027..................................              04           44180           44180
040039..................................              04              26              26
040041..................................              04           30780           30780
040047..................................              04              26              26
040069..................................              04           32820           32820
040071..................................           38220           30780           30780
040076..................................              04           30780           30780
040078..................................           26300           30780           30780
040080..................................              04           27860           27860
040088..................................              04           43340           43340
040091..................................              04           45500           45500
040100..................................              04           30780           30780
040119..................................              04           30780           30780
050006..................................              05           39820           39820
050009..................................           34900           46700           46700
050013..................................           34900           46700           46700
050014..................................              05           40900           40900
050022..................................           40140           42044           42044
050042..................................              05           39820           39820
050046..................................           37100  ..............           31084
050054..................................           40140           42044           42044
050065..................................           42044           31084           31084
050069..................................           42044           31084           31084
050071..................................           41940           36084           36084
050073..................................           46700           36084           36084
050076..................................           41884           36084           36084
050082..................................           37100  ..............           31084
050089..................................           40140           31084           31084
050090..................................           42220           41884           41884
050099..................................           40140           31084           31084
050101..................................           46700           36084           36084
050102..................................           40140           42044           42044
050118..................................           44700           33700           33700
050129..................................           40140           31084           31084
050136..................................           42220           41884           41884
050140..................................           40140           31084           31084
050150..................................              05           40900           40900
050159..................................           37100  ..............           31084

[[Page 48305]]

 
050168..................................           42044           31084           31084
050173..................................           42044           31084           31084
050174..................................           42220           41884           41884
050193..................................           42044           31084           31084
050197..................................           41884           36084           36084
050224..................................           42044           31084           31084
050226..................................           42044           31084           31084
050228..................................           41884           36084           36084
050230..................................           42044           31084           31084
050236..................................           37100  ..............           31084
050243..................................           40140           42044           42044
050245..................................           40140           31084           31084
050251..................................              05           39900           39900
050272..................................           40140           31084           31084
050279..................................           40140           31084           31084
050291..................................           42220           41884           41884
050292..................................           40140           42044           42044
050298..................................           40140           31084           31084
050300..................................           40140           31084           31084
050327..................................           40140           31084           31084
050329..................................           40140           42044           42044
050348..................................           42044           31084           31084
050367..................................           46700           36084           36084
050385..................................           42220           41884           41884
050390..................................           40140           42044           42044
050394..................................           37100  ..............           31084
050423..................................           40140           42044           42044
050426..................................           42044           31084           31084
050430..................................              05           39900           39900
050510..................................           41884           36084           36084
050517..................................           40140           31084           31084
050526..................................           42044           31084           31084
050534..................................           40140           42044           42044
050535..................................           42044           31084           31084
050541..................................           41884           36084           36084
050543..................................           42044           31084           31084
050547..................................           42220           41884           41884
050548..................................           42044           31084           31084
050549..................................           37100  ..............           31084
050550..................................           42044           31084           31084
050551..................................           42044           31084           31084
050567..................................           42044           31084           31084
050569..................................              05           42220           42220
050570..................................           42044           31084           31084
050573..................................           40140           42044           42044
050580..................................           42044           31084           31084
050584..................................           40140           31084           31084
050585..................................           42044           31084           31084
050586..................................           40140           31084           31084
050589..................................           42044           31084           31084
050592..................................           42044           31084           31084
050594..................................           42044           31084           31084
050603..................................           42044           31084           31084
050609..................................           42044           31084           31084
050616..................................           37100  ..............           31084
050667..................................           34900           46700           46700
050678..................................           42044           31084           31084
050680..................................           46700           36084           36084
050684..................................           40140           42044           42044
050686..................................           40140           42044           42044
050690..................................           42220           41884           41884
050693..................................           42044           31084           31084
050694..................................           40140           42044           42044
050701..................................           40140           42044           42044
050709..................................           40140           31084           31084
050718..................................           40140           42044           42044
050720..................................           42044           31084           31084
050728..................................           42220           41884           41884

[[Page 48306]]

 
050749..................................           37100  ..............           31084
060001..................................           24540           19740           19740
060003..................................           14500           19740           19740
060023..................................           24300           19740           19740
060027..................................           14500           19740           19740
060044..................................              06           19740           19740
060049..................................              06           22660           22660
060075..................................              06           24300           24300
060096..................................              06           19740           19740
060103..................................           14500           19740           19740
070001..................................           35300  ..............           35004
070003..................................              07           25540           25540  LUGAR
070005..................................           35300  ..............           35004
070006..................................           14860  ..............           35644
070010..................................           14860  ..............           35644
070016..................................           35300  ..............           35004
070017..................................           35300  ..............           35004
070018..................................           14860  ..............           35644
070019..................................           35300  ..............           35004
070021..................................              07           25540           25540  LUGAR
070022..................................           35300  ..............           35004
070028..................................           14860  ..............           35644
070031..................................           35300  ..............           35004
070033..................................           14860           35644           35644
070034..................................           14860  ..............           35644
070036..................................           25540           35300           35300
070038..................................           35300  ..............           35004
070039..................................           35300  ..............           35004
080004..................................           20100           48864           48864
080006..................................              08           20100           20100
080007..................................              08           36140           36140
090001..................................           47894           13644           13644
100022..................................           33124           22744           22744
100023..................................              10           36740           36740
100024..................................              10           33124           33124
100045..................................           19660           36740           36740
100049..................................              10           29460           29460
100081..................................              10           23020           23020  LUGAR
100109..................................              10           36740           36740
100118..................................              10           27260           27260
100139..................................              10           23540           23540  LUGAR
100150..................................              10           33124           33124
100157..................................           29460           45300           45300
100176..................................           48424           38940           38940
100217..................................           42680           38940           38940
100232..................................              10           27260           27260
100239..................................           45300           42260           42260
100249..................................              10           45300           45300
100252..................................              10           38940           38940
100258..................................           48424           22744           22744
100292..................................              10           23020           23020  LUGAR
110001..................................           19140           12060           12060
110002..................................              11           12060           12060
110003..................................              11           27260           27260
110023..................................              11           12060           12060
110025..................................           15260           27260           27260
110029..................................           23580           12060           12060
110038..................................              11           46660           46660
110040..................................              11           12060           12060  LUGAR
110041..................................              11           12020           12020
110052..................................              11           16860           16860  LUGAR
110054..................................           40660           12060           12060
110069..................................           47580           31420           31420
110075..................................              11           42340           42340
110088..................................              11           12060           12060  LUGAR
110095..................................              11           46660           46660
110117..................................              11           12060           12060  LUGAR
110122..................................           46660           45220           45220

[[Page 48307]]

 
110125..................................              11           31420           31420
110128..................................              11           42340           42340
110150..................................              11           12060           12060
110153..................................           47580           31420           31420
110168..................................           40660           12060           12060
110187..................................              11           12060           12060  LUGAR
110189..................................              11           12060           12060
110205..................................              11           12060           12060
120028..................................              12           26180           26180
130002..................................              13              29              29
130003..................................           30300           28420           28420
130018..................................              13           38540           38540
130049..................................           17660           44060           44060
130067..................................              13           26820           26820  LUGAR
140012..................................              14           16974           16974
140015..................................              14           41180           41180
140032..................................              14           41180           41180
140033..................................           29404           16974           16974
140034..................................              14           41180           41180
140040..................................              14           37900           37900
140043..................................              14           40420           40420
140046..................................              14           41180           41180
140058..................................              14           41180           41180
140064..................................              14           37900           37900
140084..................................           29404           16974           16974
140093..................................           19180           16580           16580
140100..................................           29404           16974           16974
140110..................................              14           16974           16974
140130..................................           29404           16974           16974
140143..................................              14           37900           37900
140160..................................              14           40420           40420
140161..................................              14           16974           16974
140164..................................              14           41180           41180
140189..................................              14           16580           16580
140202..................................           29404           16974           16974
140233..................................           40420           16974           16974
140234..................................              14           37900           37900
140236..................................              14           28100           28100  LUGAR
140291..................................           29404           16974           16974
150002..................................           23844           16974           16974
150004..................................           23844           16974           16974
150006..................................           33140           43780           43780
150008..................................           23844           16974           16974
150011..................................              15           26900           26900
150015..................................           33140           16974           16974
150030..................................              15           26900           26900  LUGAR
150034..................................           23844           16974           16974
150048..................................              15           17140           17140
150051..................................           14020           26900           26900
150065..................................              15           26900           26900
150069..................................              15           17140           17140
150076..................................              15           43780           43780
150088..................................           11300           26900           26900
150090..................................           23844           16974           16974
150102..................................              15           23844           23844  LUGAR
150112..................................           18020           26900           26900
150113..................................           11300           26900           26900
150122..................................              15           26900           26900
150125..................................           23844           16974           16974
150126..................................           23844           16974           16974
150133..................................              15           23060           23060
150146..................................              15           23060           23060
150147..................................           23844           16974           16974
160001..................................              16           19780           19780
160016..................................              16           19780           19780
160057..................................              16           26980           26980
160064..................................              16              24              24
160080..................................              16           19340           19340

[[Page 48308]]

 
160089..................................              16           19780           19780
160147..................................              16           19780           19780
170006..................................              17           27900           27900
170010..................................              17           46140           46140
170012..................................              17           48620           48620
170013..................................              17           48620           48620
170020..................................              17           48620           48620
170023..................................              17           48620           48620
170033..................................              17           48620           48620
170058..................................              17           28140           28140
170068..................................              17           11100           11100
170120..................................              17           27900           27900
170142..................................              17           45820           45820
170175..................................              17           48620           48620
170190..................................              17           45820           45820
170193..................................              17           48620           48620
180005..................................              18           26580           26580
180011..................................              18           30460           30460
180012..................................           21060           31140           31140
180013..................................           14540           34980           34980
180017..................................              18           21060           21060
180018..................................              18           30460           30460
180019..................................              18           17140           17140
180024..................................              18           31140           31140
180027..................................              18           17300           17300
180029..................................              18           28700           28700
180044..................................              18           26580           26580
180048..................................              18           31140           31140
180066..................................              18           34980           34980
180069..................................              18           26580           26580
180075..................................              18           14540           14540  LUGAR
180078..................................              18           26580           26580
180080..................................              18           28940           28940
180093..................................              18           21780           21780
180102..................................              18           17300           17300
180104..................................              18           17300           17300
180116..................................              18              14              14
180124..................................           14540           34980           34980
180127..................................              18           31140           31140
180132..................................              18           30460           30460
180139..................................              18           30460           30460
190001..................................              19           35380           35380
190003..................................              19           29180           29180
190015..................................              19           35380           35380
190086..................................              19           33740           33740
190099..................................              19           12940           12940
190106..................................              19           10780           10780
190131..................................           12940           35380           35380
190155..................................              19           12940           12940  LUGAR
190164..................................              19           10780           10780
190191..................................              19           12940           12940
190208..................................              19               4               4
190218..................................              19           43340           43340
190223..................................              19           12940           12940  LUGAR
200020..................................           38860           40484           40484
200024..................................           30340           38860           38860
200034..................................           30340           38860           38860
200039..................................              20           38860           38860
200050..................................              20           12620           12620
200063..................................              20           38860           38860
220001..................................           49340           14484           14484
220002..................................           15764           14484           14484
220008..................................           39300           14484           14484
220010..................................           21604           14484           14484
220011..................................           15764           14484           14484
220019..................................           49340           14484           14484
220020..................................           38860           40484           40484
220025..................................           49340           14484           14484

[[Page 48309]]

 
220028..................................           49340           14484           14484
220029..................................           21604           14484           14484
220033..................................           21604           14484           14484
220035..................................           21604           14484           14484
220049..................................           15764           14484           14484
220058..................................           49340           14484           14484
220060..................................           14484           12700           12700
220062..................................           49340           14484           14484
220063..................................           15764           14484           14484
220070..................................           15764           14484           14484
220073..................................           39300           14484           14484
220077..................................           44140           25540           25540
220080..................................           21604           14484           14484
220082..................................           15764           14484           14484
220084..................................           15764           14484           14484
220090..................................           49340           14484           14484
220095..................................           49340           14484           14484
220098..................................           15764           14484           14484
220101..................................           15764           14484           14484
220105..................................           15764           14484           14484
220133..................................           15764           14484           14484
220163..................................           49340           14484           14484
220171..................................           15764           14484           14484
220174..................................           21604           14484           14484
230002..................................           19804  ..............           11460
230003..................................           26100  ..............           34740
230013..................................           47644  ..............           19804
230019..................................           47644  ..............           19804
230020..................................           19804  ..............           11460
230022..................................              23           29620           29620
230024..................................           19804  ..............           11460
230029..................................           47644  ..............           19804
230030..................................              23           40980           40980
230035..................................              23           24340           24340  LUGAR
230036..................................              23           13020           13020
230037..................................              23           11460           11460
230047..................................           47644           19804           19804
230053..................................           19804  ..............           11460
230054..................................              23           24580           24580
230065..................................           19804  ..............           11460
230069..................................           47644           11460           11460
230071..................................           47644  ..............           19804
230072..................................           26100  ..............           34740
230077..................................           40980           22420           22420
230080..................................              23           40980           40980
230089..................................           19804  ..............           11460
230092..................................           27100           29620           29620
230093..................................              23           24340           24340
230096..................................              23           28020           28020
230097..................................              23           24340           24340
230099..................................           33780           11460           11460
230104..................................           19804  ..............           11460
230105..................................              23           13020           13020
230119..................................           19804  ..............           11460
230121..................................              23           29620           29620  LUGAR
230130..................................           47644  ..............           19804
230134..................................              23           26100           26100  LUGAR
230135..................................           19804  ..............           11460
230142..................................           19804  ..............           11460
230146..................................           19804  ..............           11460
230151..................................           47644  ..............           19804
230165..................................           19804  ..............           11460
230174..................................           26100  ..............           34740
230176..................................           19804  ..............           11460
230195..................................           47644           19804           19804
230204..................................           47644           19804           19804
230207..................................           47644  ..............           19804
230208..................................              23           24340           24340  LUGAR

[[Page 48310]]

 
230217..................................           12980           29620           29620
230223..................................           47644  ..............           19804
230227..................................           47644           19804           19804
230244..................................           19804  ..............           11460
230254..................................           47644  ..............           19804
230257..................................           47644           19804           19804
230264..................................           47644           19804           19804
230269..................................           47644  ..............           19804
230270..................................           19804  ..............           11460
230273..................................           19804  ..............           11460
230277..................................           47644  ..............           19804
230279..................................           47644           11460           11460
230293..................................           19804  ..............           11460
230295..................................              23           26100           26100  LUGAR
240018..................................              24           33460           33460
240030..................................              24           41060           41060
240036..................................           41060           33460           33460
240064..................................              24           20260           20260
240069..................................              24           40340           40340
240071..................................              24           40340           40340
240075..................................              24           41060           41060
240088..................................              24           41060           41060
240093..................................              24           33460           33460
240105..................................              24           40340           40340  LUGAR
240150..................................              24           40340           40340  LUGAR
240187..................................              24           33460           33460
240211..................................              24           33460           33460
250002..................................              25           22520           22520
250004..................................              25           32820           32820
250006..................................              25           32820           32820
250009..................................              25           27180           27180
250023..................................              25           25060           25060  LUGAR
250031..................................              25           27140           27140
250034..................................              25           32820           32820
250040..................................           37700           25060           25060
250042..................................              25           32820           32820
250044..................................              25           22520           22520
250069..................................              25           46220           46220
250079..................................              25           27140           27140
250081..................................              25           46220           46220
250082..................................              25           38220           38220
250094..................................           25620           25060           25060
250097..................................              25           12940           12940
250099..................................              25           27140           27140
250100..................................              25           46220           46220
250104..................................              25           27140           27140
250117..................................              25           25060           25060  LUGAR
260009..................................              26           28140           28140
260011..................................           27620           17860           17860
260015..................................              26           27860           27860
260017..................................              26           41180           41180
260022..................................              26              16              16
260025..................................              26           41180           41180
260049..................................              26           44180           44180  LUGAR
260050..................................              26           41140           41140
260064..................................              26           17860           17860
260074..................................              26           17860           17860
260094..................................              26           44180           44180
260110..................................              26           41180           41180
260113..................................              26              14              14
260116..................................              26              14              14
260119..................................              26           27860           27860
260175..................................              26           28140           28140
260183..................................              26           41180           41180
260186..................................              26           17860           17860
270003..................................              27           24500           24500
270011..................................              27           24500           24500
270017..................................              27           33540           33540

[[Page 48311]]

 
270051..................................              27           33540           33540
280009..................................              28           30700           30700
280023..................................              28           30700           30700
280032..................................              28           30700           30700
280061..................................              28              53              53
280065..................................              28           24540           24540
280077..................................              28           36540           36540
280125..................................              28           43580           43580
290002..................................              29           16180           16180  LUGAR
290006..................................              29           39900           39900
290008..................................              29           41620           41620
290019..................................           16180           39900           39900
300005..................................              30           31700           31700
300011..................................           31700           15764           15764
300012..................................           31700           15764           15764
300014..................................           40484           31700           31700
300017..................................           40484           21604           21604
300018..................................           40484           31700           31700
300019..................................              30           49340           49340
300020..................................           31700           15764           15764
300023..................................           40484           21604           21604
300029..................................           40484           21604           21604
300034..................................           31700           15764           15764
310002..................................           35084           35644           35644
310009..................................           35084           35644           35644
310013..................................           35084           35644           35644
310014..................................           15804           37964           37964
310015..................................           35084           35644           35644
310017..................................           35084           35644           35644
310018..................................           35084           35644           35644
310021..................................           45940           35084           35084
310031..................................           15804           20764           20764
310038..................................           20764           35644           35644
310039..................................           20764           35644           35644
310048..................................           20764           35084           35084
310050..................................           35084           35644           35644
310054..................................           35084           35644           35644
310070..................................           20764           35644           35644
310076..................................           35084           35644           35644
310078..................................           35084           35644           35644
310081..................................           15804           37964           37964
310083..................................           35084           35644           35644
310093..................................           35084           35644           35644
310096..................................           35084           35644           35644
310108..................................           20764           35644           35644
310119..................................           35084           35644           35644
320005..................................           22140           10740           10740
320006..................................              32           42140           42140
320013..................................              32           42140           42140
320014..................................              32           29740           29740
320033..................................              32           42140           42140  LUGAR
320063..................................              32           36220           36220
320065..................................              32           36220           36220
330004..................................           28740           39100           39100
330008..................................              33           15380           15380  LUGAR
330027..................................           35004           35644           35644
330038..................................              33           40380           40380  LUGAR
330073..................................              33           40380           40380  LUGAR
330079..................................              33              47              47
330085..................................              33           45060           45060
330094..................................              33           28740           28740
330103..................................              33              39              39
330106..................................           35004  ..............           35644
330136..................................              33           45060           45060
330157..................................              33           45060           45060
330167..................................           35004  ..............           35644
330181..................................           35004  ..............           35644
330182..................................           35004           35644           35644

[[Page 48312]]

 
330191..................................           24020           10580           10580
330198..................................           35004  ..............           35644
330224..................................           28740           39100           39100
330225..................................           35004  ..............           35644
330229..................................           27460           21500           21500
330235..................................              33           45060           45060  LUGAR
330239..................................           27460           21500           21500
330250..................................              33           15540           15540
330259..................................           35004           35644
330277..................................              33           27060           27060
330331..................................           35004  ..............           35644
330332..................................           35004  ..............           35644
330359..................................              33           39100           39100  LUGAR
330372..................................           35004  ..............           35644
330386..................................              33           39100           39100
340004..................................           24660           49180           49180
340008..................................              34           16740           16740
340010..................................           24140           39580           39580
340013..................................              34           24860           24860
340014..................................           49180           24660           24660
340021..................................              34           16740           16740
340023..................................           11700           24860           24860
340027..................................              34           24780           24780
340039..................................              34           16740           16740
340047..................................           49180           24660           24660
340050..................................              34           22180           22180
340051..................................              34           25860           25860
340068..................................              34           48900           48900
340069..................................           39580           20500           20500
340070..................................           15500           24660           24660
340071..................................              34           39580           39580  LUGAR
340073..................................           39580           20500           20500
340091..................................           24660           49180           49180
340109..................................              34           47260           47260
340114..................................           39580           20500           20500
340115..................................              34           20500           20500
340124..................................              34           39580           39580  LUGAR
340126..................................              34           39580           39580
340127..................................              34           20500           20500
340129..................................              34           16740           16740
340131..................................              34           24780           24780
340136..................................              34           20500           20500  LUGAR
340138..................................           39580           20500           20500
340144..................................              34           16740           16740
340145..................................              34           16740           16740  LUGAR
340147..................................           40580           39580           39580
340148..................................           49180           24660           24660
340173..................................           39580           20500           20500
350003..................................              35           13900           13900
350006..................................              35           13900           13900
350009..................................              35           22020           22020
360008..................................              36           26580           26580
360010..................................              36           10420           10420
360011..................................              36           18140           18140
360013..................................              36           30620           30620
360014..................................              36           18140           18140
360019..................................           10420           17460           17460
360020..................................           10420           17460           17460
360025..................................           41780           17460           17460
360027..................................           10420           17460           17460
360036..................................              36           17460           17460
360039..................................              36           18140           18140
360054..................................              36           26580           26580
360065..................................              36           17460           17460
360078..................................           10420           17460           17460
360079..................................           19380           17140           17140
360084..................................           15940           10420           10420
360086..................................           44220           19380           19380

[[Page 48313]]

 
360095..................................              36           45780           45780
360096..................................              36           49660           49660  LUGAR
360107..................................              36           45780           45780
360121..................................              36           11460           11460
360150..................................           10420           17460           17460
360159..................................              36           18140           18140
360175..................................              36           18140           18140
360185..................................              36           49660           49660  LUGAR
360187..................................           44220           19380           19380
360197..................................              36           18140           18140
360211..................................           48260           38300           38300
360238..................................              36           49660           49660  LUGAR
360241..................................           10420           17460           17460
360245..................................              36           17460           17460  LUGAR
360253..................................           19380           17140           17140
370004..................................              37           27900           27900
370006..................................              37              17              17
370014..................................              37           43300           43300
370015..................................              37           46140           46140
370016..................................              37           36420           36420
370018..................................              37           46140           46140
370022..................................              37           30020           30020
370025..................................              37           46140           46140
370026..................................              37           36420           36420
370034..................................              37           22900           22900
370047..................................              37           43300           43300
370049..................................              37           36420           36420
370099..................................              37           46140           46140
370103..................................              37              45              45
370113..................................              37           22220           22220
380001..................................              38           38900           38900
380022..................................              38           18700           18700  LUGAR
380027..................................              38           21660           21660
380050..................................              38           32780           32780
380090..................................              38           21660           21660
390006..................................              39           25420           25420
390013..................................              39           25420           25420
390030..................................              39           10900           10900
390031..................................              39           39740           39740  LUGAR
390046..................................           49620           29540           29540
390048..................................              39           25420           25420
390052..................................              39           11020           11020
390065..................................              39           47894           47894
390066..................................           30140           25420           25420
390071..................................              39           48700           48700  LUGAR
390079..................................              39           13780           13780
390081..................................           37964           48864           48864
390086..................................              39           44300           44300
390091..................................              39           38300           38300
390093..................................              39           38300           38300
390110..................................           27780           38300           38300
390113..................................              39              36              36
390133..................................           10900           37964           37964
390138..................................              39           47894           47894
390150..................................              39           38300           38300  LUGAR
390151..................................              39           13644           13644
390156..................................           37964           48864           48864
390180..................................           37964           48864           48864
390222..................................           37964           48864           48864
390246..................................              39           48700           48700
400048..................................           25020           41980           41980
410010..................................           39300           14484           14484
410012..................................           39300           14484           14484
410013..................................           39300           35980           35980
420007..................................           43900           24860           24860
420009..................................              42           24860           24860  LUGAR
420020..................................              42           16700           16700
420027..................................           11340           24860           24860

[[Page 48314]]

 
420028..................................              42           44940           44940  LUGAR
420030..................................              42           16700           16700
420036..................................              42           16740           16740
420039..................................              42           43900           43900  LUGAR
420067..................................              42           42340           42340
420068..................................              42           12260           12260
420069..................................              42           44940           44940  LUGAR
420070..................................           44940           17900           17900
420071..................................              42           24860           24860
420080..................................              42           42340           42340
420083..................................           43900           24860           24860
420085..................................           34820           48900           48900
430012..................................              43           43620           43620
430014..................................              43           22020           22020
430094..................................              43              53              53
440002..................................           27180           32820           32820
440008..................................              44           27180           27180
440020..................................              44           26620           26620
440024..................................           17420           16860           16860
440025..................................              44              34              34
440035..................................           17300           34980           34980
440050..................................              44           11700           11700
440056..................................           34100           28940           28940
440058..................................              44           16860           16860
440059..................................              44           34980           34980
440060..................................              44           27180           27180
440067..................................           34100           28940           28940
440068..................................              44           16860           16860
440072..................................              44           32820           32820
440073..................................              44           34980           34980
440148..................................              44           34980           34980
440151..................................              44           34980           34980
440175..................................              44           34980           34980
440180..................................              44           28940           28940
440185..................................           17420           16860           16860
440192..................................              44           34980           34980
450007..................................              45           41700           41700
450032..................................              45           43340           43340
450039..................................           23104           19124           19124
450059..................................           41700           12420           12420
450064..................................           23104           19124           19124
450073..................................              45           10180           10180
450080..................................              45           30980           30980
450087..................................           23104           19124           19124
450099..................................              45           11100           11100
450121..................................           23104           19124           19124
450135..................................           23104           19124           19124
450137..................................           23104           19124           19124
450144..................................              45           36220           36220
450148..................................           23104           19124           19124
450187..................................              45           26420           26420
450192..................................              45           19124           19124
450194..................................              45           19124           19124
450196..................................              45           19124           19124
450211..................................              45           26420           26420
450214..................................              45           26420           26420
450224..................................              45           46340           46340
450283..................................              45           19124           19124  LUGAR
450286..................................              45           17780           17780  LUGAR
450324..................................           43300           19124           19124
450347..................................              45           26420           26420
450351..................................              45           23104           23104
450389..................................              45           19124           19124  LUGAR
450393..................................           43300           19124           19124
450395..................................              45           26420           26420
450400..................................              45           47380           47380
450419..................................           23104           19124           19124
450438..................................              45           26420           26420

[[Page 48315]]

 
450447..................................              45           19124           19124
450451..................................              45           23104           23104
450469..................................           43300           19124           19124
450484..................................              45           30980           30980
450508..................................              45           46340           46340
450547..................................              45           19124           19124
450563..................................           23104           19124           19124
450639..................................           23104           19124           19124
450653..................................              45           33260           33260
450656..................................              45           46340           46340
450672..................................           23104           19124           19124
450675..................................           23104           19124           19124
450677..................................           23104           19124           19124
450694..................................              45           26420           26420
450747..................................              45           19124           19124
450755..................................              45           31180           31180
450770..................................              45           12420           12420  LUGAR
450779..................................           23104           19124           19124
450813..................................              45           41700           41700
450830..................................              45           36220           36220
450839..................................              45           43340           43340
450858..................................           23104           19124           19124
450872..................................           23104           19124           19124
450880..................................           23104           19124           19124
460004..................................           36260           41620           41620
460005..................................           36260           41620           41620
460007..................................              46           41100           41100
460011..................................              46           39340           39340
460021..................................           41100           29820           29820
460039..................................              46           36260           36260
460041..................................           36260           41620           41620
460042..................................           36260           41620           41620
470001..................................              47              30              30
470011..................................              47           15764           15764
470012..................................              47           38340           38340
490004..................................           25500           16820           16820
490005..................................           49020           47894           47894
490013..................................              49           31340           31340
490018..................................              49           16820           16820
490042..................................           13980           40220           40220
490048..................................           40220           31340           31340
490079..................................              49           24660           24660
490092..................................              49           40060           40060
490105..................................              49           28700           28700
490106..................................              49           16820           16820
490109..................................           47260           40060           40060
500002..................................              50           28420           28420
500003..................................           34580           42644           42644
500016..................................           48300           42644           42644
500021..................................           45104           42644           42644
500024..................................           36500           45104           45104
500039..................................           14740           42644           42644
500041..................................           31020           38900           38900
500072..................................              50           42644           42644
500079..................................           45104           42644           42644
500108..................................           45104           42644           42644
500129..................................           45104           42644           42644
500139..................................           36500           45104           45104
500143..................................           36500           45104           45104
510001..................................           34060           38300           38300
510002..................................              51           40220           40220
510006..................................              51           38300           38300
510018..................................              51           16620           16620  LUGAR
510024..................................           34060           38300           38300
510030..................................              51           34060           34060
510046..................................              51           16620           16620
510047..................................              51           38300           38300
510062..................................              51           16620           16620

[[Page 48316]]

 
510070..................................              51           16620           16620
510071..................................              51           16620           16620
510077..................................              51           26580           26580
520002..................................              52           48140           48140
520021..................................           29404           16974           16974
520028..................................              52           31540           31540
520037..................................              52           48140           48140
520059..................................           39540           29404           29404
520060..................................              52           22540           22540  LUGAR
520066..................................           27500           31540           31540
520071..................................              52           33340           33340  LUGAR
520076..................................              52           31540           31540
520088..................................           22540           33340           33340
520094..................................           39540           33340           33340
520095..................................              52           31540           31540
520096..................................           39540           33340           33340
520102..................................              52           33340           33340  LUGAR
520107..................................              52           24580           24580
520113..................................              52           24580           24580
520116..................................              52           33340           33340  LUGAR
520173..................................              52           20260           20260
520189..................................           29404           16974           16974
530015..................................              53           26820           26820
530025..................................              53           22660           22660
----------------------------------------------------------------------------------------------------------------

    Note: The following Table 9B is a tentative table and does not 
reflect decisions that are yet to be made by CMS pending the final 
calculation of the occupational mix adjusted wage index. The 
information about reclassified CBSAs reflects the latest information 
available to CMS regarding MGCRB and Administrator reclassification 
decisions for FY 2007. A revised Table 9B reflecting CMS' decisions on 
behalf of hospitals using occupational mix adjusted wage indices will 
be published in a subsequent Federal Register notice between August 1 
and October 1, 2006, as well as on CMS' Web site. Hospitals will then 
have 30 days from the date the data appears on the CMS Web site to 
revise a decision made by CMS on their behalf. (See section III.H. of 
the preamble (Revisions to the Wage Index Based on Hospital 
Redesignations)).

              Table 9B.--Hospital Reclassifications and Redesignations by Individual Hospital Under Section 508 of Pub. L. 108-173--FY 2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Wage index      Wage Index
              Provider No.                          Note              Geograraphic   CBSA-- 10/1/06- CBSA-- 4/1/07-    Own wage index-- 10/1/06-3/31/07
                                                                          CBSA           3/31/07        9/30/07*
--------------------------------------------------------------------------------------------------------------------------------------------------------
050494.................................  ..........................              05           42220
050549.................................  ..........................           37100           42220
070001.................................  ..........................           35300           35004
070005.................................  ..........................           35300           35004
070006.................................  *                                    14860           35644
070010.................................  ..........................           14860           35644
070016.................................  ..........................           35300           35004
070017.................................  ..........................           35300           35004
070018.................................  *                                    14860           35644
070019.................................  ..........................           35300           35004
070022.................................  ..........................           35300           35004
070028.................................  ..........................           14860           35644
070031.................................  ..........................           35300           35004
070034.................................  *                                    14860           35644
070039.................................  ..........................           35300           35004
140155.................................  *                                    28100           16974           16974
140186.................................  *                                    28100           16974           16974
160040.................................  ..........................           47940           16300
160067.................................  ..........................           47940           16300
160110.................................  ..........................           47940           16300
220046.................................  ..........................           38340           14484
230003.................................  ..........................           26100           28020
230004.................................  ..........................           34740           28020

[[Page 48317]]

 
230013.................................  ..........................           47644           22420
230019.................................  ..........................           47644           22420
230020.................................  ..........................           19804           11460
230024.................................  ..........................           19804           11460
230029.................................  ..........................           47644           22420
230038.................................  ..........................           24340           28020
230053.................................  ..........................           19804           11460
230059.................................  ..........................           24340           28020
230066.................................  ..........................           34740           28020
230071.................................  ..........................           47644           22420
230072.................................  ..........................           26100           28020
230089.................................  ..........................           19804           11460
230104.................................  ..........................           19804           11460
230106.................................  ..........................           24340           28020
230119.................................  ..........................           19804           11460
230130.................................  ..........................           47644           22420
230135.................................  ..........................           19804           11460
230146.................................  ..........................           19804           11460
230151.................................  ..........................           47644           22420
230165.................................  ..........................           19804           11460
230174.................................  ..........................           26100           28020
230176.................................  ..........................           19804           11460
230207.................................  ..........................           47644           22420
230223.................................  ..........................           47644           22420
230236.................................  ..........................           24340           28020
230254.................................  ..........................           47644           22420
230269.................................  ..........................           47644           22420
230270.................................  ..........................           19804           11460
230273.................................  ..........................           19804           11460
230277.................................  ..........................           47644           22420
250078.................................  *                                    25620           25060           25060
250122.................................  ..........................              25           25060
270002.................................  *                                       27           33540           33540
270012.................................  *                                    24500           33540           33540
270023.................................  ..........................           33540           13740
270032.................................  ..........................              27           13740
270057.................................  ..........................              27           13740
310028.................................  ..........................           35084           35644
310051.................................  ..........................           35084           35644
310060.................................  ..........................           10900           35644
310115.................................  ..........................           10900           35644
310120.................................  ..........................           35084           35644
330023.................................  *                                    39100           35644           35644
330049.................................  ..........................           39100           35644
330067.................................  *                                    39100           35644           35644
330106.................................  ..........................           35004  ..............  ..............  To be determined
330126.................................  ..........................           39100           35644
330135.................................  ..........................           39100           35644
330205.................................  ..........................           39100           35644
330209.................................  ..........................           39100           35004
330264.................................  ..........................           39100           35004
340002.................................  ..........................           11700           16740
350002.................................  ..........................           13900           22020
350010.................................  ..........................              35           22020
350014.................................  ..........................              35           22020
350015.................................  ..........................           13900           22020
350017.................................  ..........................              35           22020
350019.................................  *                                    24220           22020           22020
350030.................................  ..........................              35           22020
390001.................................  ..........................           42540           10900
390003.................................  ..........................              39           10900
390044.................................  ***                                     39           37964           37964
390045.................................  **                                      39           10900
390096.................................  ***                                     39           37964           37964
390054.................................  ..........................           42540           29540
390072.................................  ..........................              39           10900
390095.................................  ..........................           42540           10900
390119.................................  ..........................           42540           10900

[[Page 48318]]

 
390137.................................  ..........................           42540           10900
390169.................................  ..........................           42540           10900
390185.................................  ..........................           42540           29540
390192.................................  ..........................           42540           10900
390237.................................  ..........................           42540           10900
390270.................................  ..........................           42540           29540
430005.................................  ..........................              43           39660
430008.................................  *                                       43           43620           43620
430013.................................  *                                       43           43620           43620
430015.................................  ..........................              43           43620
430048.................................  ..........................              43           43620
430060.................................  ..........................              43           43620
430064.................................  ..........................              43           43620
430077.................................  ..........................           39660           43620
430091.................................  ..........................           39660           43620
450010.................................  ..........................           48660           32580
450072.................................  ..........................           26420           26420
450591.................................  ..........................           26420           26420
470003.................................  ..........................           15540           14484
490001.................................  ..........................              49           31340
490024.................................  ..........................           40220           19260
530008.................................  *                                       53           16220           16220
530010.................................  *                                       53           16220           16220
--------------------------------------------------------------------------------------------------------------------------------------------------------
* These hospitals are assigned a wage index value under a special exceptions policy (see the FY 2005 IPPS final rule, 69 FR 49105).
** This hospital has been assigned a wage index for the 1st half of FY 2007 under a special exceptions policy. (See section IV.G.6. of the preamble).
*** These hospitals are receiving the same wage index for FY 2007 as hospitals reclassified to the wage index CBSA under a special exceptions policy.
  (See section IV.G.7. of the preamble). NOTE: The following Table 9C is a tentative table. The final Table 9C will be published in a subsequent Federal
  Register notice.


 Table 9C.--Hospitals Redesignated as Rural Under Section 1886(D)(8)(e)
                           of the Act--FY 2007
------------------------------------------------------------------------
                                            Geographic     Redesignated
              Provider No.                     CBSA         rural area
------------------------------------------------------------------------
050192..................................           23420              05
050469..................................           40140              05
050528..................................           32900              05
050618..................................           40140              05
070004..................................           25540              07
100048..................................           37860              10
100134..................................           27260              10
140167..................................              14              14
170137..................................           29940              17
230078..................................           35660              23
250126..................................           32820              25
260006..................................           41140              26
260047..................................           27620              26
260195..................................           44180              26
330044..................................           46540              33
330245..................................           46540              33
330268..................................           10580              33
360125..................................              36              36
370054..................................           36420              37
380040..................................           13460              38
390181..................................              39              39
390183..................................              39              39
390201..................................              39              39
440135..................................           34980              44
440144..................................              44              44
450052..................................              45              45
450078..................................           10180              45
450243..................................           10180              45
450348..................................              45              45
500148..................................           48300              50
520060..................................              52              52
------------------------------------------------------------------------


   Table 10.--*Tentative 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 Diagnosis-Related Group (DRG) July 2006\1\
------------------------------------------------------------------------
                                             Number of
                   DRG                         cases         Threshold
------------------------------------------------------------------------
1.......................................          24,393         $53,859
2.......................................          10,183         $37,071
3.......................................               3         $58,210
6.......................................             288         $16,764
7.......................................          15,032         $41,272
8.......................................           3,441         $31,202
9.......................................           1,775         $25,427
 10.....................................          19,625         $25,060
11......................................           3,083         $18,954
12......................................          55,941         $18,864
13......................................           7,525         $17,686
14......................................         278,664         $24,952
15......................................          19,988         $20,852
16......................................          17,297         $26,470
17......................................           2,973         $15,671
18......................................          33,442         $21,265
19......................................           8,461         $15,788
21......................................           2,220         $26,884
22......................................           3,168         $23,889
23......................................          10,670         $17,034
26......................................              25         $20,742
27......................................           5,971         $25,126
28......................................          19,909         $25,472
29......................................           6,522         $15,804
31......................................           5,039         $21,114
32......................................           1,903         $14,176
34......................................          27,626         $21,155
35......................................           7,908         $14,353
36......................................             307         $17,756

[[Page 48319]]

 
37......................................           1,219         $24,755
38......................................              50         $12,318
39......................................             328         $14,729
40......................................           1,187         $22,468
42......................................           1,636         $17,058
43......................................             125         $12,886
44......................................           1,290         $14,781
45......................................           2,770         $16,499
46......................................           3,929         $16,766
47......................................           1,309         $12,103
49......................................           2,415         $31,272
50......................................           2,024         $19,196
51......................................             193         $19,075
52......................................             234         $14,080
53......................................           2,145         $26,675
55......................................           1,368         $20,084
56......................................             451         $19,390
57......................................             742         $20,308
59......................................             126         $14,929
60......................................               3         $18,786
61......................................             222         $28,823
62......................................               4          $7,163
63......................................           2,827         $26,792
64......................................           3,234         $23,219
65......................................          40,485         $13,493
66......................................           8,195         $12,916
67......................................             379         $17,186
68......................................          18,914         $14,138
69......................................           5,147         $10,697
70......................................              25          $7,437
71......................................              70         $15,616
72......................................           1,326         $16,659
73......................................           9,957         $18,043
74......................................               3          $8,024
75......................................          46,851         $48,022
76......................................          48,157         $43,553
77......................................           2,111         $25,956
78......................................          49,690         $26,233
79......................................         160,369         $29,354
80......................................           7,158         $18,880
81......................................               6         $25,916
82......................................          63,189         $26,608
83......................................           7,153         $21,595
84......................................           1,403         $12,778
85......................................          22,221         $25,180
86......................................           1,717         $15,470
87......................................          96,689         $26,951
88......................................         427,043         $19,077
89......................................         553,984         $21,998
90......................................          43,488         $13,140
91......................................              53         $11,541
92......................................          16,513         $24,878
93......................................           1,440         $16,320
94......................................          13,655         $23,750
95......................................           1,577         $12,584
96......................................          59,616         $15,882
97......................................          26,688         $11,788
98......................................              13         $12,310
99......................................          21,386         $15,711
100.....................................           6,410         $12,191
101.....................................          23,368         $18,513
102.....................................           4,930         $12,459
103.....................................             886        $234,602
104.....................................          20,120        $123,729
105.....................................          32,625         $93,408
106.....................................           3,440        $110,994
108.....................................           8,757         $89,200
110.....................................          57,708         $59,122
111.....................................          10,783         $45,058
113.....................................          34,727         $45,309
114.....................................           7,959         $30,170
117.....................................           5,349         $25,612
118.....................................           7,618         $33,293
119.....................................             963         $25,956
120.....................................          33,555         $36,437
121.....................................         150,046         $29,682
122.....................................          54,522         $20,932
123.....................................          29,562         $25,715
124.....................................         120,510         $29,669
125.....................................          92,404         $23,736
126.....................................           5,422         $40,901
127.....................................         667,290         $21,942
128.....................................           4,210         $15,608
129.....................................           3,521         $21,829
130.....................................          87,465         $20,048
131.....................................          22,952         $12,056
132.....................................         101,372         $13,633
133.....................................           5,853         $12,293
134.....................................          39,815         $13,564
135.....................................           7,164         $19,603
136.....................................             943         $14,059
138.....................................         206,126         $17,760
139.....................................          74,038         $11,503
140.....................................          31,103         $11,146
141.....................................         123,082         $16,534
142.....................................          49,143         $13,230
143.....................................         237,807         $12,604
144.....................................         104,877         $24,605
145.....................................           5,742         $12,881
146.....................................          10,269         $45,041
147.....................................           2,614         $31,225
149.....................................          19,523         $30,188
150.....................................          22,971         $44,974
151.....................................           5,403         $27,702
152.....................................           5,011         $33,350
153.....................................           1,951         $23,250
155.....................................           6,015         $27,694
156.....................................               4         $42,508
157.....................................           8,316         $25,981
158.....................................           3,718         $14,389
159.....................................          19,221         $28,296
160.....................................          11,939         $18,822
161.....................................          10,145         $25,544
162.....................................           4,950         $15,299
163.....................................               5         $14,048
164.....................................           5,996         $38,818
165.....................................           2,457         $25,554
166.....................................           5,154         $29,280
167.....................................           4,909         $19,591
168.....................................           1,640         $25,296
169.....................................             895         $16,736
170.....................................          17,929         $44,476
171.....................................           1,408         $26,705
172.....................................          33,047         $26,380
173.....................................           2,225         $17,045
174.....................................         253,126         $21,911
175.....................................          29,235         $12,602
176.....................................          14,648         $23,944
177.....................................           7,654         $20,572
178.....................................           2,557         $15,461
179.....................................          14,727         $22,980
180.....................................          91,335         $20,871
181.....................................          25,350         $12,528
182.....................................         255,693         $17,100
183.....................................          79,005         $13,059
184.....................................              72         $12,775
185.....................................           6,251         $18,862
186.....................................               7          $5,729
187.....................................             646         $18,324
188.....................................          87,004         $22,789
189.....................................          12,389         $12,993
190.....................................              10         $13,793
191.....................................          10,586         $54,694
192.....................................           1,379         $32,567
193.....................................           4,040         $51,607
194.....................................             461         $32,138
195.....................................           2,846         $50,174
196.....................................             594         $32,425
197.....................................          16,420         $41,918
198.....................................           4,109         $26,021
199.....................................           1,481         $37,144
200.....................................           1,017         $39,787
201.....................................           2,717         $52,741
202.....................................          27,495         $25,140
203.....................................          32,423         $26,174
204.....................................          69,425         $23,010
205.....................................          32,781         $23,351
206.....................................           2,069         $16,166
207.....................................          38,288         $24,720
208.....................................           9,444         $15,527
210.....................................         126,728         $36,053
211.....................................          25,766         $26,659
212.....................................              10         $18,683
213.....................................           9,549         $33,765
216.....................................          19,882         $35,362
217.....................................          15,719         $41,753
218.....................................          30,181         $32,729
219.....................................          21,168         $23,440
220.....................................               2         $23,903
223.....................................          12,681         $25,312
224.....................................           9,900         $18,601
225.....................................           6,275         $26,110
226.....................................           6,770         $29,333
227.....................................           4,857         $18,593
228.....................................           2,678         $24,524
229.....................................           1,121         $15,634
230.....................................           2,473         $26,447

[[Page 48320]]

 
232.....................................             570         $20,883
233.....................................          18,488         $34,629
234.....................................           9,054         $27,553
235.....................................           4,763         $16,190
236.....................................          41,769         $15,355
237.....................................           1,924         $13,823
238.....................................           9,693         $26,230
239.....................................          40,335         $23,007
240.....................................          12,890         $24,447
241.....................................           2,848         $14,324
242.....................................           2,722         $22,524
243.....................................         100,967         $16,980
244.....................................          16,921         $15,376
245.....................................           5,808         $10,439
246.....................................           1,393         $13,417
247.....................................          21,347         $12,715
248.....................................          16,397         $18,868
249.....................................          13,487         $15,452
250.....................................           4,164         $15,019
251.....................................           2,060         $10,708
253.....................................          24,800         $16,458
254.....................................          10,027         $10,209
256.....................................           7,605         $17,958
257.....................................          13,112         $19,571
258.....................................          11,381         $15,394
259.....................................           2,660         $21,525
260.....................................           2,419         $15,097
261.....................................           1,569         $20,644
262.....................................             602         $20,936
263.....................................          22,523         $32,381
264.....................................           3,924         $22,357
265.....................................           4,035         $28,309
266.....................................           2,229         $19,597
267.....................................             276         $20,106
268.....................................           1,007         $25,612
269.....................................          11,061         $30,462
270.....................................           2,581         $17,761
271.....................................          21,573         $21,481
272.....................................           6,062         $20,880
273.....................................           1,268         $12,695
274.....................................           2,214         $22,743
275.....................................             181         $13,374
276.....................................           1,611         $15,518
277.....................................         118,989         $18,380
278.....................................          33,858         $11,743
279.....................................               6          $9,028
280.....................................          19,325         $16,053
281.....................................           6,587         $11,088
283.....................................           6,751         $15,599
284.....................................           1,860          $9,705
285.....................................           8,075         $35,308
286.....................................           2,868         $34,849
287.....................................           5,460         $31,315
288.....................................          11,449         $36,434
289.....................................           6,342         $19,683
290.....................................          11,870         $18,835
291.....................................              60         $12,847
292.....................................           7,589         $41,562
293.....................................             318         $27,393
294.....................................          96,811         $16,300
295.....................................           4,383         $16,230
296.....................................         247,069         $17,299
297.....................................          42,864         $10,800
298.....................................             111         $11,190
299.....................................           1,529         $21,390
300.....................................          21,669         $23,232
301.....................................           3,928         $13,530
302.....................................          10,492         $53,266
303.....................................          19,976         $35,819
304.....................................          13,647         $37,422
305.....................................           2,957         $25,305
306.....................................           5,818         $25,921
307.....................................           1,947         $13,760
308.....................................           5,453         $27,129
309.....................................           2,964         $19,731
310.....................................          25,376         $25,322
311.....................................           5,889         $14,252
312.....................................           1,328         $24,325
313.....................................             505         $16,679
314.....................................               2         $63,693
315.....................................          34,913         $34,732
316.....................................         205,567         $24,393
317.....................................           2,713         $17,231
318.....................................           5,910         $24,031
319.....................................             386         $13,806
320.....................................         224,861         $18,200
321.....................................          31,967         $12,268
322.....................................              67         $13,265
323.....................................          20,412         $18,194
324.....................................           4,635         $11,389
325.....................................           9,919         $14,495
326.....................................           2,592          $9,794
327.....................................              11          $4,294
328.....................................             574         $15,404
329.....................................              54         $11,795
331.....................................          56,121         $22,457
332.....................................           3,962         $13,793
333.....................................             244         $18,788
334.....................................           9,525         $29,865
335.....................................          12,194         $23,947
336.....................................          28,187         $18,026
337.....................................          21,481         $12,476
338.....................................             674         $26,938
339.....................................           1,237         $24,409
341.....................................           3,131         $26,307
342.....................................             457         $16,760
344.....................................           2,341         $26,248
345.....................................           1,390         $24,261
346.....................................           3,961         $22,447
347.....................................             235         $12,285
348.....................................           4,262         $15,649
349.....................................             554         $10,003
350.....................................           7,277         $16,400
352.....................................           1,177         $16,558
353.....................................           3,089         $31,178
354.....................................           7,566         $29,684
355.....................................           4,987         $19,221
356.....................................          22,033         $16,309
357.....................................           5,537         $37,740
358.....................................          20,928         $24,238
359.....................................          28,580         $17,269
360.....................................          13,854         $18,919
361.....................................             287         $23,680
362.....................................               2          $6,876
363.....................................           2,155         $23,016
364.....................................           1,799         $19,187
365.....................................           1,617         $32,690
366.....................................           4,645         $23,871
367.....................................             446         $12,997
368.....................................           4,145         $23,493
369.....................................           3,723         $14,329
370.....................................           2,249         $17,536
371.....................................           2,705         $12,708
372.....................................           1,376         $10,820
373.....................................           5,273          $7,551
374.....................................             153         $13,095
375.....................................              12         $22,605
376.....................................             476         $12,906
377.....................................             109         $24,239
378.....................................             201         $16,324
379.....................................             499          $8,220
380.....................................             111          $9,315
381.....................................             169         $15,169
382.....................................              48          $3,953
383.....................................           2,806         $10,556
384.....................................             151          $7,391
389.....................................               3         $46,615
392.....................................           2,139         $45,751
394.....................................           2,759         $31,094
395.....................................         101,471         $16,872
396.....................................              18         $13,668
397.....................................          16,393         $23,048
398.....................................           6,706         $23,192
399.....................................           1,080         $14,880
401.....................................           6,450         $43,894
402.....................................           1,356         $25,221
403.....................................          31,326         $29,940
404.....................................           3,820         $20,305
406.....................................           2,303         $42,371
407.....................................             615         $24,760
408.....................................           1,948         $33,871
409.....................................           1,748         $25,028
410.....................................          29,054         $23,858
411.....................................               5          $9,758
412.....................................               9          $9,301
413.....................................           5,741         $25,510
414.....................................             487         $16,429
417.....................................              33         $28,208
418.....................................          29,977         $22,175
419.....................................          17,634         $18,485
420.....................................           3,099         $12,971
421.....................................          13,255         $16,146
422.....................................              79         $11,674
423.....................................           8,963         $28,718
424.....................................           1,041         $36,310
425.....................................          13,096         $13,576
426.....................................           4,235         $10,358

[[Page 48321]]

 
427.....................................           1,579         $11,150
428.....................................             845         $13,754
429.....................................          23,937         $16,826
430.....................................          75,524         $13,556
431.....................................             333         $12,627
432.....................................             402         $13,998
433.....................................           4,471          $6,847
439.....................................           1,759         $29,659
440.....................................           5,216         $29,541
441.....................................             686         $20,435
442.....................................          18,596         $37,577
443.....................................           3,589         $22,629
444.....................................           6,012         $16,302
445.....................................           2,242         $11,469
447.....................................           6,323         $11,513
449.....................................          40,846         $18,238
450.....................................           7,446          $9,442
451.....................................               2         $19,193
452.....................................          28,815         $21,741
453.....................................           5,394         $11,421
454.....................................           4,738         $17,849
455.....................................             887         $10,666
461.....................................           2,290         $27,945
462.....................................           7,872         $17,133
463.....................................          32,884         $15,084
464.....................................           7,661         $11,312
465.....................................             163         $12,726
466.....................................           1,204         $14,603
467.....................................           1,026         $10,034
468.....................................          52,034         $57,083
470.....................................             128         $25,336
471.....................................          15,629         $55,462
473.....................................           8,578         $38,317
476.....................................           2,850         $35,279
477.....................................          28,196         $34,210
479.....................................          27,646         $30,664
480.....................................             908        $128,168
481.....................................           1,198         $88,802
482.....................................           5,081         $49,179
484.....................................             472         $75,098
485.....................................           3,713         $51,983
486.....................................           2,712         $69,277
487.....................................           5,016         $32,011
488.....................................             828         $63,276
489.....................................          13,547         $28,578
490.....................................           5,252         $21,783
491.....................................          22,663         $35,757
492.....................................           3,924         $44,444
493.....................................          61,082         $34,552
494.....................................          24,547         $22,715
495.....................................             342        $121,068
496.....................................           3,726         $96,376
497.....................................          31,199         $62,663
498.....................................          21,280         $52,014
499.....................................          35,237         $28,340
500.....................................          46,422         $19,794
501.....................................           3,200         $42,436
502.....................................             764         $29,393
503.....................................           5,910         $26,641
504.....................................             192        $146,326
505.....................................             180         $28,322
506.....................................             963         $50,293
507.....................................             323         $31,953
508.....................................             654         $23,720
509.....................................             155         $16,128
510.....................................           1,782         $21,239
511.....................................             627         $13,459
512.....................................             550         $90,167
513.....................................             226         $67,279
515.....................................          58,660         $86,655
518.....................................          23,763         $34,494
519.....................................          12,586         $44,219
520.....................................          16,525         $35,867
521.....................................          29,364         $15,459
522.....................................           3,423         $12,513
523.....................................          14,462          $8,492
524.....................................         109,013         $16,146
525.....................................             205        $156,053
528.....................................           1,845        $107,773
529.....................................           5,026         $36,123
530.....................................           3,360         $25,556
531.....................................           4,993         $45,570
532.....................................           2,882         $28,122
533.....................................          43,711         $29,882
534.....................................          40,198         $21,414
535.....................................           8,826        $119,398
536.....................................           8,259        $108,963
537.....................................           8,983         $32,586
538.....................................           5,459         $22,310
539.....................................           4,973         $44,568
540.....................................           1,504         $25,469
541.....................................          25,104        $250,678
542.....................................          23,115        $151,096
543.....................................           5,718         $64,315
544.....................................         445,785         $39,430
545.....................................          44,802         $44,809
546.....................................           2,360         $83,370
547.....................................          32,709         $97,710
548.....................................          32,245         $79,387
549.....................................          13,141         $80,448
550.....................................          34,565         $63,344
551.....................................          53,869         $51,334
552.....................................          82,060         $40,475
553.....................................          39,292         $46,776
554.....................................          77,351         $36,869
555.....................................          37,378         $42,650
556.....................................          18,974         $37,645
557.....................................         124,154         $51,129
558.....................................         192,632         $42,278
559.....................................           2,894         $40,715
560.....................................           3,457         $44,371
561.....................................           2,952         $35,689
562.....................................          52,955         $22,123
563.....................................          21,145         $13,990
564.....................................          16,327         $15,294
565.....................................          46,822         $78,211
566.....................................          73,082         $39,116
567.....................................          10,363         $72,688
568.....................................          16,695         $48,792
569.....................................          60,815         $63,221
570.....................................          72,246         $44,142
571.....................................          11,153         $23,679
572.....................................          48,982         $25,169
573.....................................           6,682         $51,652
574.....................................          26,619         $24,475
575.....................................          10,977         $85,769
576.....................................         277,472         $28,296
577.....................................           5,596         $35,303
578.....................................          35,311         $64,885
579.....................................          20,665         $39,571
------------------------------------------------------------------------
* As noted in section II.G.5 of the preamble to this final rule, the
  final national adjusted operating standardized amounts as well as the
  final version of this table will be published in a subsequent Federal
  Register notice between August 1 and October 1, 2006.
\1\ Cases taken from the FY 2005 MedPAR file; DRGs are from GROUPER
  Version 24.0.


 Table 11.--FY 2007 LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and \5/6\ths of the Geometric
                                             Average Length of Stay
----------------------------------------------------------------------------------------------------------------
                                                                                                    \5/6\ths of
                                                                     Relative        Geometric     the geometric
            LTC-DRG                        Description                weight      average length  average length
                                                                                      of stay         of stay
----------------------------------------------------------------------------------------------------------------
1.............................  \5\ CRANIOTOMY AGE >17 W CC.....          1.6835            37.1            30.9
2.............................  \6\ CRANIOTOMY AGE >17 W/O CC...          1.6835            37.1            30.9
3.............................  \6\ CRANIOTOMY AGE 0-17.........          1.6835            37.1            30.9

[[Page 48322]]

 
6.............................  \6\ CARPAL TUNNEL RELEASE.......          0.4175            17.0            14.2
7.............................  PERIPH & CRANIAL NERVE & OTHER            1.2052            36.1            30.1
                                 NERV SYST PROC W CC.
8.............................  \2\ PERIPH & CRANIAL NERVE &              0.5594            21.0            17.5
                                 OTHER NERV SYST PROC W/O CC.
9.............................  SPINAL DISORDERS & INJURIES.....          1.0424            34.0            28.3
10............................  NERVOUS SYSTEM NEOPLASMS W CC...          0.6971            22.1            18.4
11............................  \2\ NERVOUS SYSTEM NEOPLASMS W/O          0.5594            21.0            17.5
                                 CC.
12............................  DEGENERATIVE NERVOUS SYSTEM               0.6788            25.1            20.9
                                 DISORDERS.
13............................  MULTIPLE SCLEROSIS & CEREBELLAR           0.6003            23.1            19.3
                                 ATAXIA.
14............................  INTRACRANIAL HEMORRHAGE OR                0.6772            24.9            20.8
                                 CEREBRAL INFARCTION.
15............................  NONSPECIFIC CVA & PRECEREBRAL             0.7705            26.1            21.8
                                 OCCLUSION W/O INFARCT.
16............................  NONSPECIFIC CEREBROVASCULAR               0.6978            23.1            19.3
                                 DISORDERS W CC.
17............................  \2\ NONSPECIFIC CEREBROVASCULAR           0.5594            21.0            17.5
                                 DISORDERS W/O CC.
18............................  CRANIAL & PERIPHERAL                      0.7503            25.4            21.2
                                 NERVEDISORDERS W CC.
19............................  CRANIAL & PERIPHERAL                      0.4512            19.5            16.3
                                 NERVEDISORDERS W/O CC.
21............................  \3\ VIRAL MENINGITIS............          0.7819            23.9            19.9
22............................  \3\ HYPERTENSIVE ENCEPHALOPATHY.          0.7819            23.9            19.9
23............................  NONTRAUMATIC STUPOR & COMA......          1.0118            29.4            24.5
26............................  \6\ SEIZURE & HEADACHE AGE 0-17.          0.5594            21.0            17.5
27............................  TRAUMATIC STUPOR & COMA, COMA >1          0.9978            30.6            25.5
                                 HR.
28............................  TRAUMATIC STUPOR & COMA, COMA <1          0.7983            25.8            21.5
                                 HR AGE >17 W CC.
29............................  \1\ TRAUMATIC STUPOR & COMA,              0.4175            17.0            14.2
                                 COMA <1 HR AGE >17 W/O CC.
30............................  \6\ TRAUMATIC STUPOR & COMA,              0.4175            17.0            14.2
                                 COMA <1 HR AGE 0-17.
31............................  \1\ CONCUSSION AGE >17 W CC.....          0.4175            17.0            14.2
32............................  \6\ CONCUSSION AGE >17 W/O CC...          0.4175            17.0            14.2
33............................  \6\ CONCUSSION AGE 0-17.........          0.4175            17.0            14.2
34............................  OTHER DISORDERS OF NERVOUS                0.7029            23.4            19.5
                                 SYSTEM W CC.
35............................  OTHER DISORDERS OF NERVOUS                0.5080            21.1            17.6
                                 SYSTEMW/O CC.
36............................  \6\ RETINAL PROCEDURES..........          0.5594            21.0            17.5
37............................  \6\ ORBITAL PROCEDURES..........          0.5594            21.0            17.5
38............................  \6\ PRIMARY IRIS PROCEDURES.....          0.5594            21.0            17.5
39............................  \6\ LENS PROCEDURES WITH OR               0.5594            21.0            17.5
                                 WITHOUT VITRECTOMY.
40............................  \6\ EXTRAOCULAR PROCEDURES                0.5594            21.0            17.5
                                 EXCEPT ORBIT AGE >17.
41............................  \6\ EXTRAOCULAR PROCEDURES                0.5594            21.0            17.5
                                 EXCEPT ORBIT AGE 0-17.
42............................  \6\ INTRAOCULAR PROCEDURES                0.5594            21.0            17.5
                                 EXCEPT RETINA, IRIS & LENS.
43............................  \6\ HYPHEMA.....................          0.4175            17.0            14.2
44............................  \3\ ACUTE MAJOR EYE INFECTIONS..          0.7819            23.9            19.9
45............................  \1\ NEUROLOGICAL EYE DISORDERS..          0.4175            17.0            14.2
46............................  \2\ OTHER DISORDERS OF THE EYE            0.5594            21.0            17.5
                                 AGE >17 W CC.
47............................  \6\ OTHER DISORDERS OF THE EYE            0.4175            17.0            14.2
                                 AGE >17 W/O CC.
48............................  \6\ OTHER DISORDERS OF THE EYE            0.4175            17.0            14.2
                                 AGE 0-17.
49............................  \6\ MAJOR HEAD & NECK PROCEDURES          1.1625            29.5            24.6
50............................  \6\ SIALOADENECTOMY.............          1.1625            29.5            24.6
51............................  \6\ SALIVARY GLAND PROCEDURES             1.1625            29.5            24.6
                                 EXCEPT SIALOADENECTOMY.
52............................  \6\ CLEFT LIP & PALATE REPAIR...          1.1625            29.5            24.6
53............................  \6\ SINUS & MASTOID PROCEDURES            1.1625            29.5            24.6
                                 AGE >17.
54............................  \6\ SINUS & MASTOID PROCEDURES            1.1625            29.5            24.6
                                 AGE 0-17.
55............................  \4\ MISCELLANEOUS EAR, NOSE,              1.1625            29.5            24.6
                                 MOUTH & THROAT PROCEDURES.
56............................  \6\ RHINOPLASTY.................          1.1625            29.5            24.6
57............................  \6\ T&A PROC, EXCEPT                      0.4175            17.0            14.2
                                 TONSILLECTOMY &/OR
                                 ADENOIDECTOMY ONLY, AGE >17.
58............................  \6\ T&A PROC, EXCEPT                      0.4175            17.0            14.2
                                 TONSILLECTOMY &/OR
                                 ADENOIDECTOMY ONLY, AGE 0-17.
59............................  \6\ TONSILLECTOMY &/OR                    0.4175            17.0            14.2
                                 ADENOIDECTOMY ONLY, AGE >17.
60............................  \6\ TONSILLECTOMY &/OR                    0.4175            17.0            14.2
                                 ADENOIDECTOMYONLY, AGE 0-17.
61............................  \6\ MYRINGOTOMY W TUBE INSERTION          0.4175            17.0            14.2
                                 AGE >17.
62............................  \6\ MYRINGOTOMY W TUBE INSERTION          0.4175            17.0            14.2
                                 AGE 0-17.
63............................  \4\ OTHER EAR, NOSE, MOUTH &              1.1625            29.5            24.6
                                 THROATO.R. PROCEDURES.
64............................  EAR, NOSE, MOUTH & THROAT                 1.1797            26.2            21.8
                                 MALIGNANCY.
65............................  \1\ DYSEQUILIBRIUM..............          0.4175            17.0            14.2
66............................  \6\ EPISTAXIS...................          0.4175            17.0            14.2
67............................  \3\ EPIGLOTTITIS................          0.7819            23.9            19.9
68............................  OTITIS MEDIA & URI AGE >17 W CC.          0.6211            20.3            16.9
69............................  \1\ OTITIS MEDIA & URI AGE >17 W/         0.4175            17.0            14.2
                                 O CC.
70............................  \6\ OTITIS MEDIA & URI AGE 0-17.          0.4175            17.0            14.2
71............................  \6\ LARYNGOTRACHEITIS...........          0.5594            21.0            17.5
72............................  \3\ NASAL TRAUMA & DEFORMITY....          0.7819            23.9            19.9
73............................  OTHER EAR, NOSE, MOUTH & THROAT           0.7745            22.9            19.1
                                 DIAGNOSES AGE >17.
74............................  \6\ OTHER EAR, NOSE, MOUTH &              0.4175            17.0            14.2
                                 THROAT DIAGNOSES AGE 0-17.

[[Page 48323]]

 
75............................  MAJOR CHEST PROCEDURES..........          1.9944            33.5            27.9
76............................  OTHER RESP SYSTEM O.R.                    2.3982            42.5            35.4
                                 PROCEDURES W CC.
77............................  \2\ OTHER RESP SYSTEM O.R.                0.5594            21.0            17.5
                                 PROCEDURES W/O CC.
78............................  PULMONARY EMBOLISM..............          0.6746            22.6            18.8
79............................  RESPIRATORY INFECTIONS &                  0.8182            22.8            19.0
                                 INFLAMMATIONS AGE >17 W CC.
80............................  RESPIRATORY INFECTIONS &                  0.6485            20.9            17.4
                                 INFLAMMATIONS AGE >17 W/O CC.
81............................  \6\ RESPIRATORY INFECTIONS &              0.4175            17.0            14.2
                                 INFLAMMATIONS AGE 0-17.
82............................  RESPIRATORY NEOPLASMS...........          0.8242            21.4            17.8
83............................  \1\ MAJOR CHEST TRAUMA W CC.....          0.4175            17.0            14.2
84............................  \6\ MAJOR CHEST TRAUMA W/O CC...          0.4175            17.0            14.2
85............................  PLEURAL EFFUSION W CC...........          0.6956            21.4            17.8
86............................  \6\ PLEURAL EFFUSION W/O CC.....          0.4175            17.0            14.2
87............................  PULMONARY EDEMA & RESPIRATORY             1.0295            24.8            20.7
                                 FAILURE.
88............................  CHRONIC OBSTRUCTIVE PULMONARY             0.6411            19.3            16.1
                                 DISEASE.
89............................  SIMPLE PNEUMONIA & PLEURISY AGE           0.6802            20.6            17.2
                                 >17 W CC.
90............................  SIMPLE PNEUMONIA & PLEURISY AGE           0.4958            17.8            14.8
                                 >17 W/O CC.
91............................  \6\ SIMPLE PNEUMONIA & PLEURISY           0.5594            21.0            17.5
                                 AGE 0-17.
92............................  INTERSTITIAL LUNG DISEASE W CC..          0.6638            19.6            16.3
93............................  \1\ INTERSTITIAL LUNG DISEASE W/          0.4175            17.0            14.2
                                 O CC.
94............................  PNEUMOTHORAX W CC...............          0.6785            21.3            17.8
95............................  \8\ PNEUMOTHORAX W/O CC.........          0.6785            21.3            17.8
96............................  BRONCHITIS & ASTHMA AGE >17 W CC          0.6230            18.9            15.8
97............................  \8\ BRONCHITIS & ASTHMA AGE >17           0.6230            18.9            15.8
                                 W/O CC.
98............................  \6\ BRONCHITIS & ASTHMA AGE 0-17          0.5594            21.0            17.5
99............................  RESPIRATORY SIGNS & SYMPTOMS W            0.9381            24.6            20.5
                                 CC.
100...........................  \3\ RESPIRATORY SIGNS & SYMPTOMS          0.7819            23.9            19.9
                                 W/O CC.
101...........................  OTHER RESPIRATORY SYSTEM                  0.8147            22.2            18.5
                                 DIAGNOSES W CC.
102...........................  \1\ OTHER RESPIRATORY SYSTEM              0.4175            17.0            14.2
                                 DIAGNOSES W/O CC.
103...........................  \7\ HEART TRANSPLANT OR IMPLANT           0.0000             0.0             0.0
                                 OF HEART ASSIST SYSTEM.
104...........................  \6\ CARDIAC VALVE & OTHER MAJOR           1.1625            29.5            24.6
                                 CARDIOTHORACIC PROC W CARDIAC
                                 CATH.
105...........................  \6\ CARDIAC VALVE & OTHER MAJOR           1.1625            29.5            24.6
                                 CARDIOTHORACIC PROC W/O CARDIAC
                                 CATH.
106...........................  \6\ CORONARY BYPASS W PTCA......          1.1625            29.5            24.6
108...........................  \6\ OTHER CARDIOTHORACIC                  1.1625            29.5            24.6
                                 PROCEDURES.
110...........................  \4\ MAJOR CARDIOVASCULAR                  1.1625            29.5            24.6
                                 PROCEDURES W CC.
111...........................  \6\ MAJOR CARDIOVASCULAR                  1.1625            29.5            24.6
                                 PROCEDURES W/O CC.
113...........................  AMPUTATION FOR CIRC SYSTEM                1.3942            36.1            30.1
                                 DISORDERS EXCEPT UPPER LIMB &
                                 TOE.
114...........................  UPPER LIMB & TOE AMPUTATION FOR           1.2425            33.0            27.5
                                 CIRC SYSTEM DISORDERS.
117...........................  \2\ CARDIAC PACEMAKER REVISION            0.5594            21.0            17.5
                                 EXCEPT DEVICE REPLACEMENT.
118...........................  \3\ CARDIAC PACEMAKER DEVICE              0.7819            23.9            19.9
                                 REPLACEMENT.
119...........................  \3\ VEIN LIGATION & STRIPPING...          0.7819            23.9            19.9
120...........................  OTHER CIRCULATORY SYSTEM O.R.             1.0893            31.4            26.2
                                 PROCEDURES.
121...........................  CIRCULATORY DISORDERS W AMI &             0.7451            22.4            18.7
                                 MAJOR COMP, DISCHARGED ALIVE.
122...........................  \2\ CIRCULATORY DISORDERS W AMI           0.5594            21.0            17.5
                                 W/O MAJOR COMP, DISCHARGED
                                 ALIVE.
123...........................  CIRCULATORY DISORDERS W AMI,              0.7858            17.0            14.2
                                 EXPIRED.
124...........................  \4\ CIRCULATORY DISORDERS EXCEPT          1.1625            29.5            24.6
                                 AMI, W CARD CATH & COMPLEX DIAG.
125...........................  \1\ CIRCULATORY DISORDERS EXCEPT          0.4175            17.0            14.2
                                 AMI, W CARD CATH W/O COMPLEX
                                 DIAG.
126...........................  ACUTE & SUBACUTE ENDOCARDITIS...          0.8867            26.3            21.9
127...........................  HEART FAILURE & SHOCK...........          0.6832            21.2            17.7
128...........................  \2\ DEEP VEIN THROMBOPHLEBITIS..          0.5594            21.0            17.5
129...........................  \1\ CARDIAC ARREST, UNEXPLAINED.          0.4175            17.0            14.2
130...........................  PERIPHERAL VASCULAR DISORDERS W           0.6484            22.8            19.0
                                 CC.
131...........................  PERIPHERAL VASCULAR DISORDERS W/          0.5267            21.0            17.5
                                 O CC.
132...........................  ATHEROSCLEROSIS W CC............          0.6621            20.7            17.3
133...........................  \2\ ATHEROSCLEROSIS W/O CC......          0.5594            21.0            17.5
134...........................  HYPERTENSION....................          0.4909            21.7            18.1
135...........................  CARDIAC CONGENITAL & VALVULAR             0.8014            23.8            19.8
                                 DISORDERS AGE >17 W CC.
136...........................  \1\ CARDIAC CONGENITAL &                  0.4175            17.0            14.2
                                 VALVULAR DISORDERS AGE >17 W/O
                                 CC.
137...........................  \6\ CARDIAC CONGENITAL &                  0.4175            17.0            14.2
                                 VALVULAR DISORDERS AGE 0-17.
138...........................  CARDIAC ARRHYTHMIA & CONDUCTION           0.6618            21.9            18.3
                                 DISORDERS W CC.
139...........................  \2\ CARDIAC ARRHYTHMIA &                  0.5594            21.0            17.5
                                 CONDUCTION DISORDERS W/O CC.
140...........................  \1\ ANGINA PECTORIS.............          0.4175            17.0            14.2
141...........................  SYNCOPE & COLLAPSE W CC.........          0.5891            22.1            18.4

[[Page 48324]]

 
142...........................  \8\ SYNCOPE & COLLAPSE W/O CC...          0.5891            22.1            18.4
143...........................  \1\ CHEST PAIN..................          0.4175            17.0            14.2
144...........................  OTHER CIRCULATORY SYSTEM                  0.7715            22.1            18.4
                                 DIAGNOSESW CC.
145...........................  OTHER CIRCULATORY SYSTEM                  0.4292            17.0            14.2
                                 DIAGNOSES W/O CC.
146...........................  \5\ RECTAL RESECTION W CC.......          1.6835            37.1            30.9
147...........................  \6\ RECTAL RESECTION W/O CC.....          0.7819            23.9            19.9
149...........................  \6\ MAJOR SMALL & LARGE BOWEL             0.7819            23.9            19.9
                                 PROCEDURES W/O CC.
150...........................  \5\ PERITONEAL ADHESIOLYSIS W CC          1.6835            37.1            30.9
151...........................  \6\ PERITONEAL ADHESIOLYSIS W/O           0.4175            17.0            14.2
                                 CC.
152...........................  \5\ MINOR SMALL & LARGE BOWEL             1.6835            37.1            30.9
                                 PROCEDURES W CC.
153...........................  \6\ MINOR SMALL & LARGE BOWEL             1.6835            37.1            30.9
                                 PROCEDURES W/O CC.
155...........................  \6\ STOMACH, ESOPHAGEAL &                 1.6835            37.1            30.9
                                 DUODENAL PROCEDURES AGE >17 W/O
                                 CC.
156...........................  \6\ STOMACH, ESOPHAGEAL &                 1.6835            37.1            30.9
                                 DUODENAL PROCEDURES AGE 0-17.
157...........................  \3\ ANAL & STOMAL PROCEDURES W            0.7819            23.9            19.9
                                 CC.
158...........................  \6\ ANAL & STOMAL PROCEDURES W/O          0.7819            23.9            19.9
                                 CC.
159...........................  \5\ HERNIA PROCEDURES EXCEPT              1.6835            37.1            30.9
                                 INGUINAL & FEMORAL AGE >17 W CC.
160...........................  \1\ HERNIA PROCEDURES EXCEPT              0.4175            17.0            14.2
                                 INGUINAL& FEMORAL AGE >17 W/O
                                 CC.
161...........................  \6\ INGUINAL & FEMORAL HERNIA             0.4175            17.0            14.2
                                 PROCEDURES AGE >17 W CC.
162...........................  \6\ INGUINAL & FEMORAL HERNIA             0.4175            17.0            14.2
                                 PROCEDURES AGE >17 W/O CC.
163...........................  \6\ HERNIA PROCEDURES AGE 0-17..          0.4175            17.0            14.2
164...........................  \6\ APPENDECTOMY W COMPLICATED            0.7819            23.9            19.9
                                 PRINCIPAL DIAG W CC.
165...........................  \6\ APPENDECTOMY W COMPLICATED            0.7819            23.9            19.9
                                 PRINCIPAL DIAG W/O CC.
166...........................  \6\ APPENDECTOMY W/O COMPLICATED          0.7819            23.9            19.9
                                 PRINCIPAL DIAG W CC.
167...........................  \6\ APPENDECTOMY W/O COMPLICATED          0.7819            23.9            19.9
                                 PRINCIPAL DIAG W/O CC.
168...........................  \5\ MOUTH PROCEDURES W CC.......          1.6835            37.1            30.9
169...........................  \6\ MOUTH PROCEDURES W/O CC.....          0.5594            21.0            17.5
170...........................  OTHER DIGESTIVE SYSTEM                    1.6163            35.8            29.8
                                 O.R.PROCEDURES W CC.
171...........................  \3\ OTHER DIGESTIVE SYSTEM O.R.           0.7819            23.9            19.9
                                 PROCEDURES W/O CC.
172...........................  DIGESTIVE MALIGNANCY W CC.......          0.8497            21.8            18.2
173...........................  \2\ DIGESTIVE MALIGNANCY W/O CC.          0.5594            21.0            17.5
174...........................  G.I. HEMORRHAGE W CC............          0.7149            22.9            19.1
175...........................  \2\ G.I. HEMORRHAGE W/O CC......          0.5594            21.0            17.5
176...........................  COMPLICATED PEPTIC ULCER........          0.9514            24.8            20.7
177...........................  \2\ UNCOMPLICATED PEPTIC ULCER W          0.5594            21.0            17.5
                                 CC.
178...........................  \6\ UNCOMPLICATED PEPTIC ULCER W/         0.4175            17.0            14.2
                                 O CC.
179...........................  INFLAMMATORY BOWEL DISEASE......          0.8157            23.3            19.4
180...........................  G.I. OBSTRUCTION W CC...........          0.9126            22.8            19.0
181...........................  \1\ G.I. OBSTRUCTION W/O CC.....          0.4175            17.0            14.2
182...........................  ESOPHAGITIS, GASTROENT & MISC             0.7866            21.8            18.2
                                 DIGEST DISORDERS AGE >17 W CC.
183...........................  \1\ ESOPHAGITIS, GASTROENT &              0.4175            17.0            14.2
                                 MISC DIGEST DISORDERS AGE >17 W/
                                 O CC.
184...........................  \6\ ESOPHAGITIS, GASTROENT &              0.4175            17.0            14.2
                                 MISC DIGEST DISORDERS AGE 0-17.
185...........................  DENTAL & ORAL DIS EXCEPT                  0.6634            23.2            19.3
                                 EXTRACTIONS & RESTORATIONS, AGE
                                 >17.
186...........................  \6\ DENTAL & ORAL DIS EXCEPT              0.5594            21.0            17.5
                                 EXTRACTIONS & RESTORATIONS, AGE
                                 0-17.
187...........................  \6\ DENTAL EXTRACTIONS &                  0.5594            21.0            17.5
                                 RESTORATIONS.
188...........................  OTHER DIGESTIVE SYSTEM DIAGNOSES          0.9596            24.4            20.3
                                 AGE >17 W CC.
189...........................  \2\ OTHER DIGESTIVE SYSTEM                0.5594            21.0            17.5
                                 DIAGNOSES AGE >17 W/O CC.
190...........................  \6\ OTHER DIGESTIVE SYSTEM                0.5594            21.0            17.5
                                 DIAGNOSESAGE 0-17.
191...........................  \5\ PANCREAS, LIVER & SHUNT               1.6835            37.1            30.9
                                 PROCEDURES W CC.
192...........................  \6\ PANCREAS, LIVER & SHUNT               1.6835            37.1            30.9
                                 PROCEDURES W/O CC.
193...........................  \4\ BILIARY TRACT PROC EXCEPT             1.1625            29.5            24.6
                                 ONLY CHOLECYST W OR W/O C.D.E.
                                 W CC.
194...........................  \6\ BILIARY TRACT PROC EXCEPT             1.1625            29.5            24.6
                                 ONLY CHOLECYST W OR W/O C.D.E.
                                 W/O CC.
195...........................  \5\ CHOLECYSTECTOMY W C.D.E. W            1.6835            37.1            30.9
                                 CC.
196...........................  \6\ CHOLECYSTECTOMY W C.D.E. W/O          1.1625            29.5            24.6
                                 CC.
197...........................  \4\ CHOLECYSTECTOMY EXCEPT BY             1.1625            29.5            24.6
                                 LAPAROSCOPE W/O C.D.E. W CC.
198...........................  \6\ CHOLECYSTECTOMY EXCEPT BY             1.1625            29.5            24.6
                                 LAPAROSCOPE W/O C.D.E. W/O CC.
199...........................  \3\ HEPATOBILIARY DIAGNOSTIC              0.7819            23.9            19.9
                                 PROCEDURE FOR MALIGNANCY.
200...........................  \5\ HEPATOBILIARY DIAGNOSTIC              1.6835            37.1            30.9
                                 PROCEDURE FOR NON-MALIGNANCY.
201...........................  OTHER HEPATOBILIARY OR PANCREAS           1.5802            28.8            24.0
                                 O.R. PROCEDURES.
202...........................  CIRRHOSIS & ALCOHOLIC HEPATITIS.          0.6011            20.2            16.8
203...........................  MALIGNANCY OF HEPATOBILIARY               0.7466            19.6            16.3
                                 SYSTEM OR PANCREAS.
204...........................  DISORDERS OF PANCREAS EXCEPT              0.8853            22.1            18.4
                                 MALIGNANCY.
205...........................  DISORDERS OF LIVER EXCEPT                 0.6933            23.1            19.3
                                 MALIG,CIRR,ALC HEPA W CC.

[[Page 48325]]

 
206...........................  \8\ DISORDERS OF LIVER EXCEPT             0.6933            23.1            19.3
                                 MALIG, CIRR, ALC HEPA W/O CC.
207...........................  DISORDERS OF THE BILIARY TRACT W          0.7295            21.5            17.9
                                 CC.
208...........................  \1\ DISORDERS OF THE BILIARY              0.4175            17.0            14.2
                                 TRACT W/O CC.
210...........................  HIP & FEMUR PROCEDURES EXCEPT             1.4826            41.9            34.9
                                 MAJOR JOINT AGE >17 W CC.
211...........................  \6\ HIP & FEMUR PROCEDURES                1.6835            37.1            30.9
                                 EXCEPT MAJOR JOINT AGE >17 W/O
                                 CC.
212...........................  \6\ HIP & FEMUR PROCEDURES                1.6835            37.1            30.9
                                 EXCEPT MAJOR JOINT AGE 0-17.
213...........................  AMPUTATION FOR MUSCULOSKELETAL            1.1871            33.5            27.9
                                 SYSTEM & CONN TISSUE DISORDERS.
216...........................  BIOPSIES OF MUSCULOSKELETAL               1.2147            37.6            31.3
                                 SYSTEM& CONNECTIVE TISSUE.
217...........................  WND DEBRID & SKN GRFT EXCEPT              1.2414            36.5            30.4
                                 HAND, FOR MUSCSKELET & CONN
                                 TISS DIS.
218...........................  \5\ LOWER EXTREM & HUMER PROC             1.6835            37.1            30.9
                                 EXCEPT HIP, FOOT, FEMUR AGE >17
                                 W CC.
219...........................  \6\ LOWER EXTREM & HUMER PROC             1.6835            37.1            30.9
                                 EXCEPT HIP, FOOT, FEMUR AGE >17
                                 W/O CC.
220...........................  \6\ LOWER EXTREM & HUMER PROC             1.6835            37.1            30.9
                                 EXCEPT HIP, FOOT, FEMUR AGE 0-
                                 17.
223...........................  \4\ MAJOR SHOULDER/ELBOW PROC,            1.1625            29.5            24.6
                                 OR OTHER UPPER EXTREMITY PROC W
                                 CC.
224...........................  \1\ SHOULDER, ELBOW OR FOREARM            0.4175            17.0            14.2
                                 PROC, EXC MAJOR JOINT PROC, W/O
                                 CC.
225...........................  FOOT PROCEDURES.................          0.9550            30.6            25.5
226...........................  SOFT TISSUE PROCEDURES W CC.....          1.0626            34.3            28.6
227...........................  \3\ SOFT TISSUE PROCEDURES W/O            0.7819            23.9            19.9
                                 CC.
228...........................  \3\ MAJOR THUMB OR JOINT PROC,            0.7819            23.9            19.9
                                 OR OTH HAND OR WRIST PROC W CC.
229...........................  \6\ HAND OR WRIST PROC, EXCEPT            0.4175            17.0            14.2
                                 MAJOR JOINT PROC, W/O CC.
230...........................  \5\ LOCAL EXCISION & REMOVAL OF           1.6835            37.1            30.9
                                 INT FIX DEVICES OF HIP & FEMUR.
232...........................  \5\ ARTHROSCOPY.................          1.6835            37.1            30.9
233...........................  OTHER MUSCULOSKELET SYS & CONN            1.1724            32.4            27.0
                                 TISS O.R. PROC W CC.
234...........................  \6\ OTHER MUSCULOSKELET SYS &             0.4175            17.0            14.2
                                 CONN TISS O.R. PROC W/O CC.
235...........................  \3\ FRACTURES OF FEMUR..........          0.7819            23.9            19.9
236...........................  FRACTURES OF HIP & PELVIS.......          0.6802            28.9            24.1
237...........................  \1\ SPRAINS, STRAINS, &                   0.4175            17.0            14.2
                                 DISLOCATIONS OF HIP, PELVIS &
                                 THIGH.
238...........................  OSTEOMYELITIS...................          0.8589            28.4            23.7
239...........................  PATHOLOGICAL FRACTURES &                  0.6031            20.6            17.2
                                 MUSCULOSKELETAL & CONN TISS
                                 MALIGNANCY.
240...........................  CONNECTIVE TISSUE DISORDERS W CC          0.7134            22.4            18.7
241...........................  \1\ CONNECTIVE TISSUE DISORDERS           0.4175            17.0            14.2
                                 W/O CC.
242...........................  SEPTIC ARTHRITIS................          0.7700            26.2            21.8
243...........................  MEDICAL BACK PROBLEMS...........          0.6028            22.3            18.6
244...........................  BONE DISEASES &                           0.5516            22.0            18.3
                                 SPECIFICARTHROPATHIES W CC.
245...........................  BONE DISEASES & SPECIFIC                  0.4463            19.4            16.2
                                 ARTHROPATHIES W/O CC.
246...........................  \2\ NON-SPECIFIC ARTHROPATHIES..          0.5594            21.0            17.5
247...........................  SIGNS & SYMPTOMS OF                       0.4582            17.6            14.7
                                 MUSCULOSKELETAL SYSTEM & CONN
                                 TISSUE.
248...........................  TENDONITIS, MYOSITIS & BURSITIS.          0.7328            23.2            19.3
249...........................  AFTERCARE, MUSCULOSKELETAL                0.6370            24.0            20.0
                                 SYSTEM & CONNECTIVE TISSUE.
250...........................  \1\ FX, SPRN, STRN & DISL OF              0.4175            17.0            14.2
                                 FOREARM, HAND, FOOT AGE >17 W
                                 CC.
251...........................  \6\ FX, SPRN, STRN & DISL OF              0.4175            17.0            14.2
                                 FOREARM, HAND, FOOT AGE >17 W/O
                                 CC.
252...........................  \6\ FX, SPRN, STRN & DISL OF              0.5594            21.0            17.5
                                 FOREARM, HAND, FOOT AGE 0-17.
253...........................  FX, SPRN, STRN & DISL OF UPARM,           0.5609            24.0            20.0
                                 LOWLEG EX FOOT AGE >17 W CC.
254...........................  \1\ FX, SPRN, STRN & DISL OF              0.4175            17.0            14.2
                                 UPARM, LOWLEG EX FOOT AGE >17 W/
                                 O CC.
255...........................  \6\ FX, SPRN, STRN & DISL OF              0.5594            21.0            17.5
                                 UPARM, LOWLEG EX FOOT AGE 0-17.
256...........................  OTHER MUSCULOSKELETAL SYSTEM &            0.7132            23.6            19.7
                                 CONNECTIVE TISSUE DIAGNOSES.
257...........................  \5\ TOTAL MASTECTOMY FOR                  1.6835            37.1            30.9
                                 MALIGNANCY W CC.
258...........................  \6\ TOTAL MASTECTOMY FOR                  0.7819            23.9            19.9
                                 MALIGNANCY W/O CC.
259...........................  \3\ SUBTOTAL MASTECTOMY FOR               0.7819            23.9            19.9
                                 MALIGNANCY W CC.
260...........................  \6\ SUBTOTAL MASTECTOMY FOR               0.7819            23.9            19.9
                                 MALIGNANCY W/O CC.
261...........................  \2\ BREAST PROC FOR NON-                  0.5594            21.0            17.5
                                 MALIGNANCY EXCEPT BIOPSY &
                                 LOCAL EXCISION.
262...........................  \4\ BREAST BIOPSY & LOCAL                 1.1625            29.5            24.6
                                 EXCISION FOR NON-MALIGNANCY.
263...........................  SKIN GRAFT &/OR DEBRID FOR SKN            1.2748            38.0            31.7
                                 ULCER OR CELLULITIS W CC.
264...........................  SKIN GRAFT &/OR DEBRID FOR SKN            0.8507            29.9            24.9
                                 ULCER OR CELLULITIS W/O CC.
265...........................  SKIN GRAFT &/OR DEBRID EXCEPT             1.1019            30.2            25.2
                                 FORSKIN ULCER OR CELLULITIS W
                                 CC.
266...........................  \3\ SKIN GRAFT &/OR DEBRID                0.7819            23.9            19.9
                                 EXCEPT FOR SKIN ULCER OR
                                 CELLULITIS W/O CC.

[[Page 48326]]

 
267...........................  \6\ PERIANAL & PILONIDAL                  0.7819            23.9            19.9
                                 PROCEDURES.
268...........................  \4\ SKIN, SUBCUTANEOUS TISSUE             1.1625            29.5            24.6
                                 &BREAST PLASTIC PROCEDURES.
269...........................  OTHER SKIN, SUBCUT TISS & BREAST          1.2075            34.7            28.9
                                 PROC W CC.
270...........................  \3\ OTHER SKIN, SUBCUT TISS &             0.7819            23.9            19.9
                                 BREASTPROC W/O CC.
271...........................  SKIN ULCERS.....................          0.8269            26.9            22.4
272...........................  MAJOR SKIN DISORDERS W CC.......          0.6584            23.0            19.2
273...........................  \1\ MAJOR SKIN DISORDERS W/O CC.          0.4175            17.0            14.2
274...........................  MALIGNANT BREAST DISORDERS W CC.          0.7231            21.8            18.2
275...........................  \6\ MALIGNANT BREAST DISORDERS W/         0.7819            23.9            19.9
                                 O CC.
276...........................  \2\ NON-MALIGNANT BREAST                  0.5594            21.0            17.5
                                 DISORDERS.
277...........................  CELLULITIS AGE >17 W CC.........          0.6089            20.9            17.4
278...........................  CELLULITIS AGE >17 W/O CC.......          0.4254            18.0            15.0
279...........................  \6\ CELLULITIS AGE 0-17.........          0.4175            17.0            14.2
280...........................  TRAUMA TO THE SKIN, SUBCUT TISS           0.7148            24.1            20.1
                                 & BREAST AGE >17 W CC.
281...........................  \2\ TRAUMA TO THE SKIN, SUBCUT            0.5594            21.0            17.5
                                 TISS & BREAST AGE >17 W/O CC.
282...........................  \6\ TRAUMA TO THE SKIN, SUBCUT            0.5594            21.0            17.5
                                 TISS & BREAST AGE 0-17.
283...........................  MINOR SKIN DISORDERS W CC.......          0.6876            23.1            19.3
284...........................  \2\ MINOR SKIN DISORDERS W/O CC.          0.5594            21.0            17.5
285...........................  AMPUTAT OF LOWER LIMB FOR                 1.2418            31.6            26.3
                                 ENDOCRINE,NUTRIT,& METABOL
                                 DISORDERS.
286...........................  \6\ ADRENAL & PITUITARY                   1.1625            29.5            24.6
                                 PROCEDURES.
287...........................  SKIN GRAFTS & WOUND DEBRID FOR            1.0402            33.0            27.5
                                 ENDOC, NUTRIT & METAB DISORDERS.
288...........................  \4\ O.R. PROCEDURES FOR OBESITY.          1.1625            29.5            24.6
289...........................  \6\ PARATHYROID PROCEDURES......          1.1625            29.5            24.6
290...........................  \6\ THYROID PROCEDURES..........          1.1625            29.5            24.6
291...........................  \6\ THYROGLOSSAL PROCEDURES.....          1.1625            29.5            24.6
292...........................  OTHER ENDOCRINE, NUTRIT & METAB           1.1549            32.0            26.7
                                 O.R. PROC W CC.
293...........................  \8\ OTHER ENDOCRINE, NUTRIT &             1.1549            32.0            26.7
                                 METAB O.R. PROC W/O CC.
294...........................  DIABETES AGE >35................          0.6958            23.9            19.9
295...........................  \2\ DIABETES AGE 0-35...........          0.5594            21.0            17.5
296...........................  NUTRITIONAL & MISC METABOLIC              0.7092            22.3            18.6
                                 DISORDERS AGE >17 W CC.
297...........................  NUTRITIONAL & MISC METABOLIC              0.4596            19.3            16.1
                                 DISORDERS AGE >17 W/O CC.
298...........................  \6\ NUTRITIONAL & MISC METABOLIC          0.4175            17.0            14.2
                                 DISORDERS AGE 0-17.
299...........................  \3\ INBORN ERRORS OF METABOLISM.          0.7819            23.9            19.9
300...........................  ENDOCRINE DISORDERS W CC........          0.7004            23.7            19.8
301...........................  \2\ ENDOCRINE DISORDERS W/O CC..          0.5594            21.0            17.5
302...........................  \7\ KIDNEY TRANSPLANT...........          0.0000             0.0             0.0
303...........................  \6\ KIDNEY AND URETER PROCEDURES          0.7819            23.9            19.9
                                 FOR NEOPLASM.
304...........................  \4\ KIDNEY AND URETER PROCEDURES          1.1625            29.5            24.6
                                 FOR NON-NEOPLASM W CC.
305...........................  \6\ KIDNEY AND URETER PROCEDURES          0.7819            23.9            19.9
                                 FOR NON-NEOPLASM W/O CC.
306...........................  \4\ PROSTATECTOMY W CC..........          1.1625            29.5            24.6
307...........................  \6\ PROSTATECTOMY W/O CC........          1.1625            29.5            24.6
308...........................  \4\ MINOR BLADDER PROCEDURES W            1.1625            29.5            24.6
                                 CC.
309...........................  \6\ MINOR BLADDER PROCEDURES W/O          1.1625            29.5            24.6
                                 CC.
310...........................  \4\ TRANSURETHRAL PROCEDURES W            1.1625            29.5            24.6
                                 CC.
311...........................  \6\ TRANSURETHRAL PROCEDURES W/O          1.1625            29.5            24.6
                                 CC.
312...........................  \3\ URETHRAL PROCEDURES, AGE >17          0.7819            23.9            19.9
                                 W CC.
313...........................  \6\ URETHRAL PROCEDURES, AGE >17          0.7819            23.9            19.9
                                 W/O CC.
314...........................  \6\ URETHRAL PROCEDURES, AGE 0-           0.7819            23.9            19.9
                                 17.
315...........................  OTHER KIDNEY & URINARY TRACT              1.4016            33.9            28.3
                                 PROCEDURES.
316...........................  RENAL FAILURE...................          0.8321            22.9            19.1
317...........................  ADMIT FOR RENAL DIALYSIS........          0.9102            24.4            20.3
318...........................  KIDNEY & URINARY TRACT NEOPLASMS          0.7565            21.0            17.5
                                 WCC.
319...........................  \6\ KIDNEY & URINARY TRACT                0.7819            23.9            19.9
                                 NEOPLASMSW/O CC.
320...........................  KIDNEY & URINARY TRACT                    0.6200            21.7            18.1
                                 INFECTIONS AGE >17 W CC.
321...........................  KIDNEY & URINARY TRACT                    0.4450            18.5            15.4
                                 INFECTIONS AGE >17 W/O CC.
322...........................  \6\ KIDNEY & URINARY TRACT                0.4175            17.0            14.2
                                 INFECTIONS AGE 0-17.
323...........................  \1\ URINARY STONES W CC, &/OR             0.4175            17.0            14.2
                                 ESW LITHOTRIPSY.
324...........................  \1\ URINARY STONES W/O CC.......          0.4175            17.0            14.2
325...........................  \2\ KIDNEY & URINARY TRACT SIGNS          0.5594            21.0            17.5
                                 & SYMPTOMS AGE >17 W CC.
326...........................  \6\ KIDNEY & URINARY TRACT SIGNS          0.4175            17.0            14.2
                                 & SYMPTOMS AGE >17 W/O CC.
327...........................  \6\ KIDNEY & URINARY TRACT SIGNS          0.4175            17.0            14.2
                                 & SYMPTOMS AGE 0-17.
328...........................  \6\ URETHRAL STRICTURE AGE >17 W          0.5594            21.0            17.5
                                 CC.
329...........................  \6\ URETHRAL STRICTURE AGE >17 W/         0.5594            21.0            17.5
                                 O CC.
330...........................  \6\ URETHRAL STRICTURE AGE 0-17.          0.5594            21.0            17.5
331...........................  OTHER KIDNEY & URINARY TRACT              0.7773            22.5            18.8
                                 DIAGNOSES AGE >17 W CC.
332...........................  \1\ OTHER KIDNEY & URINARY TRACT          0.4175            17.0            14.2
                                 DIAGNOSES AGE >17 W/O CC.

[[Page 48327]]

 
333...........................  \6\ OTHER KIDNEY & URINARY TRACT          0.4175            17.0            14.2
                                 DIAGNOSES AGE 0-17.
334...........................  \6\ MAJOR MALE PELVIC PROCEDURES          0.4175            17.0            14.2
                                 W CC.
335...........................  \1\ MAJOR MALE PELVIC PROCEDURES          0.4175            17.0            14.2
                                 W/OCC.
336...........................  \4\ TRANSURETHRAL PROSTATECTOMY           1.1625            29.5            24.6
                                 W CC.
337...........................  \6\ TRANSURETHRAL PROSTATECTOMY           1.1625            29.5            24.6
                                 W/O CC.
338...........................  \3\ TESTES PROCEDURES, FOR                0.7819            23.9            19.9
                                 MALIGNANCY.
339...........................  \3\ TESTES PROCEDURES, NON-               0.7819            23.9            19.9
                                 MALIGNANCY AGE >17.
340...........................  \6\ TESTES PROCEDURES, NON-               0.7819            23.9            19.9
                                 MALIGNANCY AGE 0-17.
341...........................  \5\ PENIS PROCEDURES............          1.6835            37.1            30.9
342...........................  \6\ CIRCUMCISION AGE >17........          0.7819            23.9            19.9
343...........................  \6\ CIRCUMCISION AGE 0-17.......          0.7819            23.9            19.9
344...........................  \3\ OTHER MALE REPRODUCTIVE               0.7819            23.9            19.9
                                 SYSTEM O.R. PROCEDURES FOR
                                 MALIGNANCY.
345...........................  \4\ OTHER MALE REPRODUCTIVE               1.1625            29.5            24.6
                                 SYSTEM O.R. PROC EXCEPT FOR
                                 MALIGNANCY.
346...........................  \3\ MALIGNANCY, MALE                      0.7819            23.9            19.9
                                 REPRODUCTIVE SYSTEM, W CC.
347...........................  \1\ MALIGNANCY, MALE                      0.4175            17.0            14.2
                                 REPRODUCTIVE SYSTEM, W/O CC.
348...........................  \2\ BENIGN PROSTATIC HYPERTROPHY          0.5594            21.0            17.5
                                 W CC.
349...........................  \6\ BENIGN PROSTATIC HYPERTROPHY          0.7819            23.9            19.9
                                 W/O CC.
350...........................  INFLAMMATION OF THE MALE                  0.5606            21.0            17.5
                                 REPRODUCTIVE SYSTEM.
351...........................  \6\ STERILIZATION, MALE.........          0.7819            23.9            19.9
352...........................  OTHER MALE REPRODUCTIVE SYSTEM            0.8209            27.5            22.9
                                 DIAGNOSES.
353...........................  \6\ PELVIC EVISCERATION, RADICAL          1.1625            29.5            24.6
                                 HYSTERECTOMY & RADICAL
                                 VULVECTOMY.
354...........................  \6\ UTERINE,ADNEXA PROC FOR NON-          1.1625            29.5            24.6
                                 OVARIAN/ADNEXAL MALIG W CC.
355...........................  \6\ UTERINE,ADNEXA PROC FOR NON-          1.1625            29.5            24.6
                                 OVARIAN/ADNEXAL MALIG W/O CC.
356...........................  \6\ FEMALE REPRODUCTIVE SYSTEM            1.1625            29.5            24.6
                                 RECONSTRUCTIVE PROCEDURES.
357...........................  \6\ UTERINE & ADNEXA PROC FOR             1.1625            29.5            24.6
                                 OVARIAN OR ADNEXAL MALIGNANCY.
358...........................  \6\ UTERINE & ADNEXA PROC FOR             1.1625            29.5            24.6
                                 NON-MALIGNANCY W CC.
359...........................  \6\ UTERINE & ADNEXA PROC FOR             1.1625            29.5            24.6
                                 NONMALIGNANCY W/O CC-.
360...........................  \6\ VAGINA, CERVIX & VULVA                1.1625            29.5            24.6
                                 PROCEDURES.
361...........................  \6\ LAPAROSCOPY & INCISIONAL              0.4175            17.0            14.2
                                 TUBAL INTERRUPTION.
362...........................  \6\ ENDOSCOPIC TUBAL                      0.4175            17.0            14.2
                                 INTERRUPTION.
363...........................  \6\ D&C, CONIZATION & RADIO-              0.4175            17.0            14.2
                                 IMPLANT, FOR MALIGNANCY.
364...........................  \6\ D&C, CONIZATION EXCEPT FOR            0.4175            17.0            14.2
                                 MALIGNANCY.
365...........................  \4\ OTHER FEMALE REPRODUCTIVE             1.1625            29.5            24.6
                                 SYSTEM O.R. PROCEDURES.
366...........................  MALIGNANCY, FEMALE REPRODUCTIVE           0.9106            21.6            18.0
                                 SYSTEM W CC.
367...........................  \1\ MALIGNANCY, FEMALE                    0.4175            17.0            14.2
                                 REPRODUCTIVE SYSTEM W/O CC.
368...........................  INFECTIONS, FEMALE REPRODUCTIVE           0.7846            21.3            17.8
                                 SYSTEM.
369...........................  \3\ MENSTRUAL & OTHER FEMALE              0.7819            23.9            19.9
                                 REPRODUCTIVE SYSTEM DISORDERS.
370...........................  \6\ CESAREAN SECTION W CC.......          0.4175            17.0            14.2
371...........................  \6\ CESAREAN SECTION W/O CC.....          0.4175            17.0            14.2
372...........................  \6\ VAGINAL DELIVERY W                    0.4175            17.0            14.2
                                 COMPLICATING DIAGNOSES.
373...........................  \6\ VAGINAL DELIVERY W/O                  0.4175            17.0            14.2
                                 COMPLICATING DIAGNOSES.
374...........................  \6\ VAGINAL DELIVERY W                    0.4175            17.0            14.2
                                 STERILIZATION &/OR D&C.
375...........................  \6\ VAGINAL DELIVERY W O.R. PROC          0.4175            17.0            14.2
                                 EXCEPT STERIL &/OR D&C.
376...........................  \4\ POSTPARTUM & POST ABORTION            1.1625            29.5            24.6
                                 DIAGNOSES W/O O.R. PROCEDURE.
377...........................  \6\ POSTPARTUM & POST ABORTION            0.4175            17.0            14.2
                                 DIAGNOSES W O.R. PROCEDURE.
378...........................  \6\ ECTOPIC PREGNANCY...........          0.4175            17.0            14.2
379...........................  \6\ THREATENED ABORTION.........          0.4175            17.0            14.2
380...........................  \6\ ABORTION W/O D&C............          0.4175            17.0            14.2
381...........................  \6\ ABORTION W D&C, ASPIRATION            0.4175            17.0            14.2
                                 CURETTAGE OR HYSTEROTOMY.
382...........................  \6\ FALSE LABOR.................          0.4175            17.0            14.2
383...........................  \1\ OTHER ANTEPARTUM DIAGNOSES W          0.4175            17.0            14.2
                                 MEDICAL COMPLICATIONS.
384...........................  \6\ OTHER ANTEPARTUM DIAGNOSES W/         0.4175            17.0            14.2
                                 O MEDICAL COMPLICATIONS.
385...........................  \6\ NEONATES, DIED OR                     0.4175            17.0            14.2
                                 TRANSFERRED TO ANOTHER ACUTE
                                 CARE FACILITY.
386...........................  \6\ EXTREME IMMATURITY OR                 0.4175            17.0            14.2
                                 RESPIRATORY DISTRESS SYNDROME,
                                 NEONATE.
387...........................  \6\ PREMATURITY W MAJOR PROBLEMS          0.4175            17.0            14.2
388...........................  \6\ PREMATURITY W/O MAJOR                 0.4175            17.0            14.2
                                 PROBLEMS.
389...........................  \6\ FULL TERM NEONATE W MAJOR             0.4175            17.0            14.2
                                 PROBLEMS.
390...........................  \6\ NEONATE W OTHER SIGNIFICANT           0.4175            17.0            14.2
                                 PROBLEMS.
391...........................  \6\ NORMAL NEWBORN..............          0.4175            17.0            14.2
392...........................  \6\ SPLENECTOMY AGE >17.........          1.1625            29.5            24.6
393...........................  \6\ SPLENECTOMY AGE 0-17........          1.1625            29.5            24.6
394...........................  \4\ OTHER O.R. PROCEDURES OF THE          1.1625            29.5            24.6
                                 BLOOD AND BLOOD FORMING ORGANS.

[[Page 48328]]

 
395...........................  RED BLOOD CELL DISORDERS AGE >17          0.6651            21.9            18.3
396...........................  \6\ RED BLOOD CELL DISORDERS AGE          0.4175            17.0            14.2
                                 0-17.
397...........................  COAGULATION DISORDERS...........          0.8276            20.4            17.0
398...........................  RETICULOENDOTHELIAL & IMMUNITY            0.6278            20.8            17.3
                                 DISORDERS W CC.
399...........................  \1\ RETICULOENDOTHELIAL &                 0.4175            17.0            14.2
                                 IMMUNITY DISORDERS W/O CC.
401...........................  \4\ LYMPHOMA & NON-ACUTE                  1.1625            29.5            24.6
                                 LEUKEMIA WOTHER O.R. PROC W CC.
402...........................  \6\ LYMPHOMA & NON-ACUTE                  0.5594            21.0            17.5
                                 LEUKEMIA W OTHER O.R. PROC W/O
                                 CC.
403...........................  LYMPHOMA & NON-ACUTE LEUKEMIA W           0.8846            23.9            19.9
                                 CC.
404...........................  \3\ LYMPHOMA & NON-ACUTE                  0.7819            23.9            19.9
                                 LEUKEMIA W/OCC.
405...........................  \6\ ACUTE LEUKEMIA W/O MAJOR              0.7819            23.9            19.9
                                 O.R. PROCEDURE AGE 0-17.
406...........................  \5\ MYELOPROLIF DISORD OR POORLY          1.6835            37.1            30.9
                                 DIFF NEOPL W MAJ O.R.PROC W CC.
407...........................  \6\ MYELOPROLIF DISORD OR POORLY          1.1625            29.5            24.6
                                 DIFF NEOPL W MAJ O.R.PROC W/O
                                 CC.
408...........................  \4\ MYELOPROLIF DISORD OR POORLY          1.1625            29.5            24.6
                                 DIFF NEOPL W OTHER O.R.PROC.
409...........................  RADIOTHERAPY....................          0.8416            23.2            19.3
410...........................  CHEMOTHERAPY W/O ACUTE LEUKEMIA           1.2527            28.7            23.9
                                 ASSECONDARY DIAGNOSIS.
411...........................  \6\ HISTORY OF MALIGNANCY W/O             0.5594            21.0            17.5
                                 ENDOSCOPY.
412...........................  \6\ HISTORY OF MALIGNANCY W               0.5594            21.0            17.5
                                 ENDOSCOPY.
413...........................  OTHER MYELOPROLIF DIS OR POORLY           0.8429            21.4            17.8
                                 DIFF NEOPL DIAG W CC.
414...........................  \3\ OTHER MYELOPROLIF DIS OR              0.7819            23.9            19.9
                                 POORLY DIFF NEOPL DIAG W/O CC.
417...........................  \6\ SEPTICEMIA AGE 0-17.........          0.7819            23.9            19.9
418...........................  POSTOPERATIVE & POST-TRAUMATIC            0.7961            24.1            20.1
                                 INFECTIONS.
419...........................  \2\ FEVER OF UNKNOWN ORIGIN AGE           0.5594            21.0            17.5
                                 >17 W CC.
420...........................  \2\ FEVER OF UNKNOWN ORIGIN AGE           0.5594            21.0            17.5
                                 >17 W/O CC.
421...........................  VIRAL ILLNESS AGE >17...........          0.7065            20.4            17.0
422...........................  \6\ VIRAL ILLNESS & FEVER OF              0.4175            17.0            14.2
                                 UNKNOWN ORIGIN AGE 0-17.
423...........................  OTHER INFECTIOUS & PARASITIC              1.0426            23.2            19.3
                                 DISEASES DIAGNOSES.
424...........................  \5\ O.R. PROCEDURE W PRINCIPAL            1.6835            37.1            30.9
                                 DIAGNOSES OF MENTAL ILLNESS.
425...........................  \1\ ACUTE ADJUSTMENT REACTION &           0.4175            17.0            14.2
                                 PSYCHOSOCIAL DYSFUNCTION.
426...........................  DEPRESSIVE NEUROSES.............          0.4038            22.5            18.8
427...........................  \2\ NEUROSES EXCEPT DEPRESSIVE..          0.5594            21.0            17.5
428...........................  DISORDERS OF PERSONALITY &                0.5183            24.5            20.4
                                 IMPULSE CONTROL.
429...........................  ORGANIC DISTURBANCES & MENTAL             0.5326            24.0            20.0
                                 RETARDATION.
430...........................  PSYCHOSES.......................          0.4024            23.1            19.3
431...........................  \2\ CHILDHOOD MENTAL DISORDERS..          0.5594            21.0            17.5
432...........................  \1\ OTHER MENTAL DISORDER                 0.4175            17.0            14.2
                                 DIAGNOSES.
433...........................  \6\ ALCOHOL/DRUG ABUSE OR                 0.4175            17.0            14.2
                                 DEPENDENCE, LEFT AMA.
439...........................  SKIN GRAFTS FOR INJURIES........          1.2203            36.0            30.0
440...........................  WOUND DEBRIDEMENTS FOR INJURIES.          1.2248            34.4            28.7
441...........................  \2\ HAND PROCEDURES FOR INJURIES          0.5594            21.0            17.5
442...........................  OTHER O.R. PROCEDURES FOR                 1.3670            34.9            29.1
                                 INJURIES W CC.
443...........................  \6\ OTHER O.R. PROCEDURES FOR             0.5594            21.0            17.5
                                 INJURIES W/O CC.
444...........................  TRAUMATIC INJURY AGE >17 W CC...          0.6598            23.2            19.3
445...........................  \2\ TRAUMATIC INJURY AGE >17 W/O          0.5594            21.0            17.5
                                 CC.
446...........................  \6\ TRAUMATIC INJURY AGE 0-17...          0.5594            21.0            17.5
447...........................  \2\ ALLERGIC REACTIONS AGE >17..          0.5594            21.0            17.5
448...........................  \6\ ALLERGIC REACTIONS AGE 0-17.          0.5594            21.0            17.5
449...........................  \3\ POISONING & TOXIC EFFECTS OF          0.7819            23.9            19.9
                                 DRUGS AGE >17 W CC.
450...........................  \2\ POISONING & TOXIC EFFECTS OF          0.5594            21.0            17.5
                                 DRUGS AGE >17 W/O CC.
451...........................  \6\ POISONING & TOXIC EFFECTS OF          0.7819            23.9            19.9
                                 DRUGS AGE 0-17.
452...........................  COMPLICATIONS OF TREATMENT W CC.          0.9275            25.7            21.4
453...........................  COMPLICATIONS OF TREATMENT W/O            0.5790            21.6            18.0
                                 CC.
454...........................  \3\ OTHER INJURY, POISONING &             0.7819            23.9            19.9
                                 TOXIC EFFECT DIAG W CC.
455...........................  \6\ OTHER INJURY, POISONING &             0.7819            23.9            19.9
                                 TOXIC EFFECT DIAG W/O CC.
461...........................  O.R. PROC W DIAGNOSES OF OTHER            1.1466            32.7            27.3
                                 CONTACT W HEALTH SERVICES.
462...........................  REHABILITATION..................          0.5823            22.1            18.4
463...........................  SIGNS & SYMPTOMS W CC...........          0.6082            22.9            19.1
464...........................  SIGNS & SYMPTOMS W/O CC.........          0.5831            24.3            20.3
465...........................  AFTERCARE W HISTORY OF                    0.6877            21.2            17.7
                                 MALIGNANCY AS SECONDARY
                                 DIAGNOSIS.
466...........................  AFTERCARE W/O HISTORY OF                  0.6700            21.7            18.1
                                 MALIGNANCY AS SECONDARY
                                 DIAGNOSIS.
467...........................  \3\ OTHER FACTORS INFLUENCING             0.7819            23.9            19.9
                                 HEALTHSTATUS.
468...........................  EXTENSIVE O.R. PROCEDURE                  2.1478            40.5            33.8
                                 UNRELATED TO PRINCIPAL
                                 DIAGNOSIS.
469...........................  \7\ PRINCIPAL DIAGNOSIS INVALID           0.0000             0.0             0.0
                                 AS DISCHARGE DIAGNOSIS.
470...........................  \7\ UNGROUPABLE.................          0.0000             0.0             0.0
471...........................  \5\ BILATERAL OR MULTIPLE MAJOR           1.6835            37.1            30.9
                                 JOINT PROCS OF LOWER EXTREMITY.

[[Page 48329]]

 
473...........................  ACUTE LEUKEMIA W/O MAJOR O.R.             0.9917            25.3            21.1
                                 PROCEDURE AGE >17.
476...........................  \5\ PROSTATIC O.R. PROCEDURE              1.6835            37.1            30.9
                                 UNRELATED TO PRINCIPAL
                                 DIAGNOSIS.
477...........................  NON-EXTENSIVE O.R. PROCEDURE              1.5119            35.9            29.9
                                 UNRELATED TO PRINCIPAL
                                 DIAGNOSIS.
479...........................  \2\ OTHER VASCULAR PROCEDURES W/          0.5594            21.0            17.5
                                 O CC.
480...........................  \7\ LIVER TRANSPLANT AND/                 0.0000             0.0             0.0
                                 ORINTESTINAL TRANSPLANT.
481...........................  \6\ BONE MARROW TRANSPLANT......          1.1625            29.5            24.6
482...........................  \5\ TRACHEOSTOMY FOR FACE, MOUTH          1.6835            37.1            30.9
                                 & NECK DIAGNOSES;.
484...........................  \6\ CRANIOTOMY FOR MULTIPLE               1.6835            37.1            30.9
                                 SIGNIFICANT TRAUMA.
485...........................  \6\ LIMB REATTACHMENT, HIP &              1.1625            29.5            24.6
                                 FEMUR PROC FOR MULTIPLE
                                 SIGNIFICANTTRAUMA.
486...........................  \3\ OTHER O.R. PROCEDURES FOR             0.7819            23.9            19.9
                                 MULTIPLE SIGNIFICANT TRAUMA.
487...........................  \4\ OTHER MULTIPLE SIGNIFICANT            1.1625            29.5            24.6
                                 TRAUMA.
488...........................  \4\ HIV W EXTENSIVE O.R.                  1.1625            29.5            24.6
                                 PROCEDURE.
489...........................  HIV W MAJOR RELATED CONDITION...          0.9436            22.1            18.4
490...........................  HIV W OR W/O OTHER RELATED                0.6456            20.3            16.9
                                 CONDITION.
491...........................  \5\ MAJOR JOINT & LIMB                    1.6835            37.1            30.9
                                 REATTACHMENT PROCEDURES OF
                                 UPPER EXTREMITY.
492...........................  \2\ CHEMO W ACUTE LEUKEMIA AS             0.5594            21.0            17.5
                                 SDX OR W USE OF HIGH DOSE CHEMO
                                 AGENT.
493...........................  \4\ LAPAROSCOPIC CHOLECYSTECTOMY          1.1625            29.5            24.6
                                 W/O C.D.E. W CC.
494...........................  \6\ LAPAROSCOPIC CHOLECYSTECTOMY          1.1625            29.5            24.6
                                 W/O C.D.E. W/O CC.
495...........................  \7\ LUNG TRANSPLANT.............          0.0000             0.0             0.0
496...........................  \4\ COMBINED ANTERIOR/POSTERIOR           1.1625            29.5            24.6
                                 SPINAL FUSION.
497...........................  \5\ SPINAL FUSION EXCEPT                  1.6835            37.1            30.9
                                 CERVICAL WCC.
498...........................  \6\ SPINAL FUSION EXCEPT                  1.6835            37.1            30.9
                                 CERVICAL W/O CC.
499...........................  \5\ BACK & NECK PROCEDURES                1.6835            37.1            30.9
                                 EXCEPT SPINAL FUSION W CC.
500...........................  \4\ BACK & NECK PROCEDURES                1.1625            29.5            24.6
                                 EXCEPT SPINAL FUSION W/O CC.
501...........................  KNEE PROCEDURES W PDX OF                  1.2164            33.3            27.8
                                 INFECTION W CC.
502...........................  \3\ KNEE PROCEDURES W PDX OF              0.7819            23.9            19.9
                                 INFECTION W/O CC.
503...........................  \4\ KNEE PROCEDURES W/O PDX               1.1625            29.5            24.6
                                 OFINFECTION.
504...........................  \5\ EXTENSIVE BURNS OR FULL               1.6835            37.1            30.9
                                 THICKNESS BURNS W MV 96+ HRS W
                                 SKIN GRAFT.
505...........................  \5\ EXTENSIVE BURNS OR FULL               1.6835            37.1            30.9
                                 THICKNESS BURNS W MV 96+ HRS W/
                                 O SKIN GRAFT.
506...........................  \4\ FULL THICKNESS BURN W SKIN            1.1625            29.5            24.6
                                 GRAFTOR INHAL INJ W CC OR SIG
                                 TRAUMA.
507...........................  \6\ FULL THICKNESS BURN W SKIN            0.4175            17.0            14.2
                                 GRFT OR INHAL INJ W/O CC OR SIG
                                 TRAUMA.
508...........................  FULL THICKNESS BURN W/O SKIN              0.7588            25.6            21.3
                                 GRFT OR INHAL INJ W CC OR SIG
                                 TRAUMA.
509...........................  \1\ FULL THICKNESS BURN W/O SKIN          0.4175            17.0            14.2
                                 GRFTOR INH INJ W/O CC OR SIG
                                 TRAUMA.
510...........................  NON-EXTENSIVE BURNS W CC OR               0.6720            22.6            18.8
                                 SIGNIFICANT TRAUMA.
511...........................  \1\ NON-EXTENSIVE BURNS W/O CC            0.4175            17.0            14.2
                                 OR SIGNIFICANT TRAUMA.
512...........................  \7\ SIMULTANEOUS PANCREAS/                0.0000             0.0             0.0
                                 KIDNEYTRANSPLANT.
513...........................  \7\ PANCREAS TRANSPLANT.........          0.0000             0.0             0.0
515...........................  \4\ CARDIAC DEFIBRILLATOR                 1.1625            29.5            24.6
                                 IMPLANT W/O CARDIAC CATH.
518...........................  \6\ PERCUTANEOUS CARDIOVASC PROC          0.4175            17.0            14.2
                                 W/O CORONARY ARTERY STENT OR
                                 AMI.
519...........................  \4\ CERVICAL SPINAL FUSION W CC.          1.1625            29.5            24.6
520...........................  \6\ CERVICAL SPINAL FUSION W/O            1.6835            37.1            30.9
                                 CC.
521...........................  \2\ ALCOHOL/DRUG ABUSE OR                 0.5594            21.0            17.5
                                 DEPENDENCE W CC.
522...........................  \6\ ALCOHOL/DRUG ABUSE OR                 0.5594            21.0            17.5
                                 DEPENDENCE W REHABILITATION
                                 THERAPY W/O CC.
523...........................  \1\ ALCOHOL/DRUG ABUSE OR                 0.4175            17.0            14.2
                                 DEPENDENCE W/O REHABILITATION
                                 THERAPY W/O CC.
524...........................  \2\ TRANSIENT ISCHEMIA..........          0.5594            21.0            17.5
525...........................  \6\ OTHER HEART ASSIST SYSTEM             1.6835            37.1            30.9
                                 IMPLANT.
528...........................  \6\ INTRACRANIAL VASCULAR                 1.6835            37.1            30.9
                                 PROCEDURES W PDX HEMORRHAGE.
529...........................  \5\ VENTRICULAR SHUNT PROCEDURES          1.6835            37.1            30.9
                                 W CC.
530...........................  \6\ VENTRICULAR SHUNT PROCEDURES          1.6835            37.1            30.9
                                 W/O CC.
531...........................  \5\ SPINAL PROCEDURES W CC......          1.6835            37.1            30.9
532...........................  \3\ SPINAL PROCEDURES W/O CC....          0.7819            23.9            19.9
533...........................  \4\ EXTRACRANIAL PROCEDURES W CC          1.1625            29.5            24.6
534...........................  \6\ EXTRACRANIAL PROCEDURES W/O           1.1625            29.5            24.6
                                 CC.
535...........................  \5\ CARDIAC DEFIB IMPLANT W               1.6835            37.1            30.9
                                 CARDIAC CATH W AMI/HF/SHOCK.
536...........................  \6\ CARDIAC DEFIB IMPLANT W               1.1625            29.5            24.6
                                 CARDIACCATH W/O AMI/HF/SHOCK.

[[Page 48330]]

 
537...........................  LOCAL EXCISION & REMOVAL INT FIX          1.4672            39.9            33.3
                                 DEVICES EXCEPT HIP & FEMUR W CC.
538...........................  \4\ LOCAL EXCISION & REMOVAL INT          1.1625            29.5            24.6
                                 FIX DEVICES EXCEPT HIP & FEMUR
                                 W/O CC.
539...........................  \4\ LYMPHOMA & LEUKEMIA W MAJOR           1.1625            29.5            24.6
                                 O.R. PROCEDURE W CC.
540...........................  \6\ LYMPHOMA & LEUKEMIA W MAJOR           0.4175            17.0            14.2
                                 O.R. PROCEDURE W/O CC.
541...........................  ECMO OR TRACH W MV 96+ HRS OR             3.8893            58.1            48.4
                                 PDX EXC FACE, MOUTH & NECK W
                                 MAJ O.R..
542...........................  TRACH W MV 96+ HRS OR PDX EXC             2.8689            45.1            37.6
                                 FACE, MOUTH & NECK W/O MAJ O.R..
543...........................  \5\ CRANIOTOMY W MAJOR DEVICE             1.6835            37.1            30.9
                                 IMPLANT OR ACUTE COMPLEX CNS
                                 PDX.
544...........................  \5\ MAJOR JOINT REPLACEMENT OR            1.6835            37.1            30.9
                                 REATTACHMENT OF LOWER EXTREMITY.
545...........................  \5\ REVISION OF HIP OR KNEE               1.6835            37.1            30.9
                                 REPLACEMENT.
546...........................  \6\ SPINAL FUSION EXC CERV WITH           1.6835            37.1            30.9
                                 CURVATURE OF THE SPINE OR MALIG.
547...........................  \6\ CORONARY BYPASS W CARDIAC             1.1625            29.5            24.6
                                 CATH W MAJOR CV DX.
548...........................  \6\ CORONARY BYPASS W CARDIAC             1.1625            29.5            24.6
                                 CATHW/O MAJOR CV DX.
549...........................  \6\ CORONARY BYPASS W/O CARDIAC           1.1625            29.5            24.6
                                 CATH W MAJOR CV DX.
550...........................  \6\ CORONARY BYPASS W/O CARDIAC           1.1625            29.5            24.6
                                 CATH W/O MAJOR CV DX.
551...........................  PERMANENT CARDIAC PACEMAKER IMPL          1.6035            29.5            24.6
                                 W MAJ CV DX OR AICD LEAD OR
                                 GNRTR.
552...........................  \4\ OTHER PERMANENT CARDIAC               1.1625            29.5            24.6
                                 PACEMAKER IMPLANT W/O MAJOR CV
                                 DX.
553...........................  OTHER VASCULAR PROCEDURES W CC W          1.5837            32.5            27.1
                                 MAJOR CV DX.
554...........................  OTHER VASCULAR PROCEDURES W CC W/         1.2817            31.6            26.3
                                 O MAJOR CV DX.
555...........................  \3\ PERCUTANEOUS CARDIOVASCULAR           0.7819            23.9            19.9
                                 PROC W MAJOR CV DX.
556...........................  \6\ PERCUTANEOUS CARDIOVASC PROC          0.4175            17.0            14.2
                                 W NON-DRUG-ELUTING STENT W/O
                                 MAJ CV DX.
557...........................  \4\ PERCUTANEOUS CARDIOVASCULAR           1.1625            29.5            24.6
                                 PROC W DRUG-ELUTING STENT W
                                 MAJOR CV DX.
558...........................  \6\ PERCUTANEOUS CARDIOVASCULAR           0.4175            17.0            14.2
                                 PROC W DRUG-ELUTING STENT W/O
                                 MAJ CV DX.
559...........................  \6\ ACUTE ISCHEMIC STROKE WITH            0.7819            23.9            19.9
                                 USE OTHROMBOLYTIC AGENT F.
560...........................  BACTERIAL & TUBERCULOUS                   0.9308            25.5            21.3
                                 INFECTIONS OF NERVOUS SYSTEM.
561...........................  NON-BACTERIAL INFECTIONS OF               0.8145            22.3            18.6
                                 NERVOUS SYSTEM EXCEPT VIRAL
                                 MENINGITIS.
562...........................  SEIZURE AGE >17 W CC............          0.6844            23.2            19.3
563...........................  \2\ SEIZURE AGE >17 W/O CC......          0.5594            21.0            17.5
564...........................  HEADACHES AGE >17...............          0.7565            24.1            20.1
565...........................  RESPIRATORY SYSTEM DIAGNOSIS              2.0557            34.7            28.9
                                 WITH VENTILATOR SUPPORT 96+
                                 HOURS.
566...........................  RESPIRATORY SYSTEM DIAGNOSIS              1.5445            27.4            22.8
                                 WITH VENTILATOR SUPPORT < 96
                                 HOURS.
567...........................  \5\ STOMACH, ESOPHAGEAL &                 1.6835            37.1            30.9
                                 DUODENAL PROC AGE >17 W CC W
                                 MAJOR GI DX.
568...........................  \5\ STOMACH, ESOPHAGEAL &                 1.6835            37.1            30.9
                                 DUODENAL PROC AGE >17 W CC W/O
                                 MAJOR GI DX.
569...........................  \5\ MAJOR SMALL & LARGE BOWEL             1.6835            37.1            30.9
                                 PROCEDURES W CC W MAJOR GI DX.
570...........................  \5\ MAJOR SMALL & LARGE BOWEL             1.6835            37.1            30.9
                                 PROCEDURES W CC W/O MAJOR GI DX.
571...........................  MAJOR ESOPHAGEAL DISORDERS......          0.8214            21.9            18.3
572...........................  MAJOR GASTROINTESTINAL DISORDERS          0.8505            23.3            19.4
                                 AND PERITONEAL INFECTIONS.
573...........................  \5\ MAJOR BLADDER PROCEDURES....          1.6835            37.1            30.9
574...........................  MAJOR HEMATOLOGIC/IMMUNOLOGIC             0.8106            19.7            16.4
                                 DIAG EXC SICKLE CELL CRISIS &
                                 COAGUL.
575...........................  SEPTICEMIA W MV 96+ HOURS AGE             1.6583            27.8            23.2
                                 >17.
576...........................  SEPTICEMIA W/O MV 96+ HOURS AGE           0.7925            23.0            19.2
                                 >17.
577...........................  \6\ CAROTID ARTERY STENT                  1.1625            29.5            24.6
                                 PROCEDURE.
578...........................  O. R. PROCEDURE W PDX EXC                 1.4849            35.7            29.8
                                 POSTOPERATIVE OR POST-TRAUMATIC
                                 INFECTION.
579...........................  O. R. PROCEDURE W PDX OF                  1.2978            35.2            29.3
                                 POSTOPERATIVE OR POST-TRAUMATIC
                                 INFECTION.
----------------------------------------------------------------------------------------------------------------
\1\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 1.
\2\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 2.
\3\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 3.
\4\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 4.

[[Page 48331]]

 
\5\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 5.
\6\ Relative weights for these LTC-DRGs were determined by assigning these cases to the appropriate low volume
  quintile because they had no LTCH cases in the FY 2005 MedPAR file.
\7\ Relative weights for these LTC-DRGs were assigned a value of 0.0000.
\8\ Relative weights for these LTC-DRGs were determined after adjusting to account for nonmonotonicity (see step
  5 above).

Appendix A--Regulatory Impact Analysis

I. Overall Impact

    We have examined the impacts of this final rule, this interim 
final rule with comment period, and this notice with comment period 
as required by Executive Order 12866 (September 1993, Regulatory 
Planning and Review) and the Regulatory Flexibility Act (RFA) 
(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social 
Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4), and Executive Order 13132.
    Executive Order 12866 (as amended by Executive Order 13258, 
which merely reassigns responsibility of duties) directs agencies to 
assess all costs and benefits of available regulatory alternatives 
and, if regulation is necessary, to select regulatory approaches 
that maximize net benefits (including potential economic, 
environmental, public health and safety effects, distributive 
impacts, and equity). A regulatory impact analysis (RIA) must be 
prepared for major rules with economically significant effects ($100 
million or more in any 1 year).
    We have determined that these rules are a major rule as defined 
in 5 U.S.C. 804(2). We estimate that the changes for FY 2007 
operating and capital payments will redistribute in excess of $100 
million among different types of inpatient cases. The market basket 
update to the IPPS rates required by the statute, in conjunction 
with other payment changes finalized in this rule, will result in an 
approximate $3.4 billion increase in FY 2007 operating and capital 
payments. This amount does not reflect changes in hospital 
admissions or case-mix intensity in operating PPS payments, which 
would also affect overall payment changes. The $142 million in funds 
for the loan program for cancer center costs under the Health Care 
Infrastructure Improvement Program is appropriated specifically for 
the loan program and not more than $2 million may be used for the 
administration costs of the program.
    The RFA requires agencies to analyze options for regulatory 
relief of small businesses. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and government 
agencies. Most hospitals and most other providers and suppliers are 
considered to be small entities, either by nonprofit status or by 
having revenues of $6 million to $29 million in any 1 year. (For 
details, see the Small Business Administration's final rule that 
sets forth size standards for health care industries at 65 FR 69432, 
November 17, 2000.) 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 this proposed rule will have a significant 
impact on small entities as explained in this Appendix. Because we 
acknowledge that many of the affected entities are small entities, 
the analysis discussed throughout the preamble of this proposed rule 
constitutes our initial regulatory flexibility analysis. Therefore, 
in the proposed rule, we solicited comments on our estimates and 
analysis of the impact of the proposed rule on those small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis for any proposed 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 previously defined a small rural hospital as a hospital 
with fewer than 100 beds that is located outside of a Metropolitan 
Statistical Area (MSA) or New England County Metropolitan Area 
(NECMA). However, under the new labor market definitions, we no 
longer employ NECMAs to define urban areas in New England. 
Therefore, we now define a small rural hospital as a hospital that 
is located outside of an MSA 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 NECMA. Thus, for purposes of the IPPS, we continue to 
classify these hospitals as urban hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any rule whose mandates require spending in 
any 1 year of $100 million in 1995 dollars, updated annually for 
inflation. That threshold level is currently approximately $120 
million. This proposed rule will not mandate any requirements for 
State, local, or tribal governments, nor will it affect private 
sector costs.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on 
State and local governments, preempts State law, or otherwise has 
Federalism implications. As stated above, this rule will not have a 
substantial effect on State and local governments.
    The following analysis, in conjunction with the remainder of 
this document, demonstrates that this rule is consistent with the 
regulatory philosophy and principles identified in Executive Order 
12866, the RFA, and section 1102(b) of the Act. The rule will affect 
payments to a substantial number of small rural hospitals, as well 
as other classes of hospitals, and the effects on some hospitals may 
be significant.

II. Objectives

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

III. Limitations of Our Analysis

    The following quantitative analysis presents the projected 
effects of our policy changes, as well as statutory changes 
effective for FY 2007, 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 predict 
behavioral responses to our policy changes, and we do not make 
adjustments for future changes in such variables as admissions, 
lengths of stay, or case-mix. As we have done in the previous rules, 
we solicited comments and information about the anticipated effects 
of these changes on hospitals and our methodology for estimating 
them. Any timely comments we have received in response to the FY 
2007 IPPS proposed rule are addressed below under the appropriate 
subject heading in this final rule.

IV. Hospitals Included In and Excluded From the IPPS

    The prospective payment systems for hospital inpatient operating 
and capital-related costs encompass nearly all general short-term, 
acute care hospitals that participate in the Medicare program. There 
were 36 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 under the waiver at section 
1814(b)(3) of the Act.
    As of July 2006, there are 3,595 IPPS hospitals to be included 
in our analysis. This represents about 60 percent of all Medicare-
participating hospitals. The majority of this impact analysis 
focuses on this set of hospitals. There are also approximately 1,282 
critical access hospitals (CAHs). These small, limited service 
hospitals are paid on the basis of reasonable costs rather than 
under the IPPS. There are also 1,254 excluded hospitals

[[Page 48332]]

and 2,305 excluded units that are excluded from the IPPS. These 
excluded hospitals include psychiatric hospitals and units (now 
referred to as IPFs), rehabilitation hospitals and units (now 
referred to as IRFs), long-term care hospitals (now referred to as 
LTCHs), children's hospitals, and cancer hospitals. Religious Non-
Medical Health Care Institutions (RNHCIs) are also included. The 
impacts of our policy changes on these hospitals and institutions 
are discussed below.

V. Effects on Excluded Hospitals and Hospital Units

    As of July 2006, there were 1,254 hospitals excluded from the 
IPPS. Of these 1,254 hospitals, 482 IPFs, 81 children's hospitals, 
11 cancer hospitals, and 17 RNHCIs are being paid, in whole or in 
part, on a reasonable cost basis subject to the rate-of-increase 
ceiling under Sec.  413.40. The remaining providers, 271 IRFs and 
392 LTCHs, are paid 100 percent of the Federal prospective rate 
under the IRF PPS and the LTCH PPS, respectively. We note that, 
currently, there are 16 LTCHs that are being paid under the LTCH PPS 
transition blend methodology, which is based in part on a reasonable 
cost that is subject to a rate-of-increase ceiling under Sec.  
413.40. Effective for cost reporting periods beginning on or after 
October 1, 2006 (FY 2007), these LTCHs will no longer receive a 
portion of their payment that is based, in part, on a reasonable 
cost subject to a rate-of-increase ceiling. Rather, in accordance 
with Sec.  412.533, for FY 2007, all LTCHs are to be paid 100 
percent of the adjusted Federal prospective payment amount. In 
addition, there are 1,293 IPFs (paid on a blend of the IPF PPS per 
diem payment and the TEFRA reasonable cost-based payment) and 1,012 
IRFs (paid under the IRF PPS) co-located in hospitals otherwise 
subject to the IPPS. Under Sec.  413.40(a)(2)(i)(A), the rate-of-
increase ceiling is not applicable to the 93 IPPS excluded hospitals 
and units in Maryland that are paid in accordance with the waiver at 
section 1814(b)(3) of the Act.
    In the past, 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). Hospitals that continue to be paid fully on a reasonable 
cost basis are subject to TEFRA limits for FY 2007. For these 
hospitals (cancer and children's hospitals), consistent with section 
1886(b)(3)(B)(ii) of the Act, as was proposed the final update will 
be the percentage increase in the FY 2007 IPPS operating market 
basket, currently estimated to be 3.4 percent. In addition, in 
accordance with Sec.  403.752(a) of the regulations, RNHCIs are paid 
under Sec.  413.40, which also uses section 1886(b)(3)(B)(ii) of the 
Act to update the percentage increase in the rate-of-increase 
limits. For RNHCIs, the update will be the percentage increase in 
the FY 2007 IPPS operating market basket increase, currently 
estimated to be 3.4 percent.
    IRFs are paid under a prospective payment system (IRF PPS) for 
cost reporting periods beginning on or after January 1, 2002. For 
cost reporting periods beginning during FY 2007, the IRF PPS is 
based on 100 percent of the adjusted Federal IRF prospective payment 
amount, updated annually. Therefore, these hospitals are not 
affected by this final rule.
    Effective for cost reporting periods beginning on or after 
October 1, 2002, LTCHs are paid under a LTCH PPS, based on a Federal 
prospective payment amount that is updated annually. Existing LTCHs 
receive a blended payment that consists of the Federal prospective 
payment rate and a reasonable cost-based payment rate over a 5-year 
transition period, unless the LTCH elects to be paid at 100 percent 
of the Federal prospective rate at the beginning of any of its cost 
reporting periods during the 5-year transition period. Under Sec.  
412.533, the 5-year transition period for all existing LTCHs subject 
to the LTCH PPS began with the LTCH's first cost reporting period 
beginning on or after October 1, 2002, and is extended through the 
LTCH's cost reporting period beginning on or after October 1, 2006. 
In accordance with Sec.  412.533, for cost reporting periods 
beginning on or after October 1, 2006, the LTCH PPS transition blend 
percentages are 100 percent of the Federal prospective payment 
amount and zero percent of the amount calculated under reasonable 
cost principles. Therefore, even though FY 2007 is the fifth year of 
the 5-year transition period established under Sec.  412.533, 
because the reasonable cost principles amount is zero percent for 
cost reporting periods beginning during FY 2007, LTCHs will no 
longer receive a portion of their payment that is based in part on a 
reasonable cost subject to the rate-of-increase ceiling. Thus, there 
is no longer a need for an update factor for LTCH's TEFRA target 
amount for FY 2007 and beyond.
    Section 124 of the Medicare, Medicaid, and SCHIP Balanced Budget 
Refinement Act of 1999 (BBRA) required the development of a per diem 
prospective payment system (PPS) for payment of inpatient hospital 
services furnished in IPFs. The final rule implementing the IPF PPS 
(69 FR 66922) established a 3-year transition to the IPF PPS during 
which some providers will receive a blend of the IPF PPS per diem 
payment and the TEFRA reasonable cost-based payment. For purposes of 
determining what the TEFRA payment to the IPF will be, we updated 
the IPF's TEFRA target amount by the excluded hospital market basket 
percentage increase of 3.4 percent.
    The impact on excluded hospitals and hospital units of the 
update in the rate-of-increase limit depends on the cumulative cost 
increases experienced by each excluded hospital or unit since its 
applicable base period. For excluded hospitals and units 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 hospitals and hospital units 
receive. Conversely, for excluded hospitals and hospital units with 
per-case cost increases above the cumulative update in their rate-
of-increase limits, the major effect is the amount of excess costs 
that will not be reimbursed.
    We note that, under Sec.  413.40(d)(3), an excluded hospital or 
unit whose costs exceed 110 percent of its rate-of-increase limit 
receives its rate-of-increase limit plus 50 percent of the 
difference between its reasonable costs and 110 percent of the 
limit, not to exceed 110 percent of its limit. In addition, under 
the various provisions set forth in Sec.  413.40, certain excluded 
hospitals and hospital units can obtain payment adjustments for 
justifiable increases in operating costs that exceed the limit. 
However, at the same time, by generally limiting payment increases, 
we continue to provide an incentive for excluded hospitals and 
hospital units to restrain the inappropriate spending for patient 
services.

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

A. Basis and Methodology of Estimates

    In this final rule, we are announcing policy changes and payment 
rate updates for the IPPS for operating costs. Changes to the 
capital payments are discussed in section VIII. of this Appendix. We 
note that due to the decision in Bellevue Hosp. Center v. Leavitt, 
in which the Court of Appeals for the Second Circuit (the Court) 
ordered CMS to apply the occupational mix adjustment to 100 percent 
of the wage index effective for FY 2007 (see section III.C. of this 
final rule for more details of this Court decision), we are unable 
to finalize the FY 2007 wage index data at this time. Therefore, we 
are also unable to finalize the relative weights, budget neutrality 
calculations, the outlier threshold, the outlier offsets and the 
standardized payment amounts. We have calculated tentative amounts 
for all of these factors and have based the impacts shown in the 
following pages on these tentative amounts. When the final 100 
percent occupational mix adjusted wage data is available, we will 
recalculate impacts and publish them in a separate Federal Register 
notice prior to October 1, 2006.
    Based on the overall percentage change in payments per case 
estimated using our payment simulation model, we estimate that total 
FY 2007 operating payments will increase 3.5 percent compared to FY 
2006 largely due to the statutorily mandated update to the IPPS 
rates. This amount does not reflect changes in hospital admissions 
or case-mix intensity, which would also affect overall payment 
changes.
    We have prepared separate impact analyses of the changes to each 
system. This section deals with changes to the operating prospective 
payment system. Our payment simulation model relies on the most 
recent available data to enable us to estimate the impacts on 
payments per case of certain changes in this rule. However, there 
are other changes for which we do not have data available that would 
allow us to estimate the payment impacts using this model. For those 
changes, we have attempted to predict the payment impacts based upon 
our experience and other more limited data.
    The data used in developing the quantitative analyses of changes 
in payments per case presented below are taken from the FY 2005 
MedPAR file and the most current Provider-Specific File that is used 
for payment purposes. Although the analyses of the changes to the 
operating PPS do not incorporate cost data, data from the most

[[Page 48333]]

recently available hospital cost report were used to categorize 
hospitals. Our analysis has several qualifications. First, in this 
analysis, we do not make adjustments for behavioral changes that 
hospitals may adopt in response to the policy changes, and we do not 
adjust for future changes in such variables as admissions, lengths 
of stay, or case-mix. Second, due to the interdependent nature of 
the IPPS payment components, it is very difficult to precisely 
quantify the impact associated with each change. Third, we use 
various sources for the data used to categorize hospitals in the 
tables. In some cases, particularly the number of beds, there is a 
fair degree of variation in the data from different sources. We have 
attempted to construct these variables with the best available 
source overall. However, for individual hospitals, some 
miscategorizations are possible.
    Using cases from the FY 2005 MedPAR file, we simulated payments 
under the operating IPPS given various combinations of payment 
parameters. Any short-term, acute care hospitals not paid under the 
IPPS (Indian Health Service hospitals and hospitals in Maryland) 
were excluded from the simulations. The impact of payments under the 
capital IPPS, or the impact of payments for costs other than 
inpatient operating costs, are not analyzed in this section. 
Estimated payment impacts of FY 2007 changes to the capital IPPS are 
discussed in section VIII. of this Appendix.
    The changes discussed separately below are the following:
    <bullet> The effect of a reduced update to the standardized 
amount for hospitals that do not comply with section 
1886(b)(3)(B)(viii) of the Act by submitting quality data in 
accordance with our requirements.
    <bullet> The effects of the MDH payment changes set forth in 
section 5003 of Pub. L. 109-171.
    <bullet> The effects of the revisions we are adopting to our 
methodology for calculating DRG relative weights.
    <bullet> The effects of the annual reclassification of diagnoses 
and procedures and the recalibration of the DRG relative weights 
required by section 1886(d)(4)(C) of the Act. The relative weights 
used in estimating this impact are not yet final as the wage data 
used in the relative weight computation is not available at this 
time.
    <bullet> The effects of the changes in hospitals' wage index 
values reflecting wage data from hospitals' cost reporting periods 
beginning during FY 2003, compared to the FY 2002 wage data are 
shown in this impact but are not yet final because the occupational 
mix wage data that will be used to calculate the FY 2007 wage 
indices are not available at this time.
    <bullet> The effects of the wage and recalibration budget 
neutrality factors are shown in this impact but are not yet final 
because occupational mix adjusted wage indices are yet to be 
calculated.
    <bullet> The effects of the remaining labor market area 
transition for those hospitals that were urban under the old labor 
market area designations and are now considered rural hospitals are 
shown in this impact but are not yet final pending calculation of 
the final occupational mix adjusted wage indices.
    <bullet> The effects of geographic reclassifications by the 
MGCRB that will be effective in FY 2007 are shown in this impact but 
are not yet final because we will be making reclassification 
decisions for hospitals subsequent to this final rule prior to 
October 1, 2006, based on the final occupational mix adjusted wage 
indices.
    <bullet> 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 residents of the 
county where the hospital is located who commute to work at 
hospitals in counties with higher wage indexes, are shown in this 
impact but are not yet final because the final occupational mix 
adjusted wage data are not available at this time.
    <bullet> The total estimated change in payments based on FY 2007 
policies and MMA and DRA-imposed changes relative to payments based 
on FY 2006 policies.
    To illustrate the impacts of the FY 2007 changes, our analysis 
begins with a FY 2006 baseline simulation model using: the FY 2007 
market basket update of 3.4 percent; the FY 2006 DRG GROUPER 
(version 23.0); the CBSA designations for hospitals based on OMB's 
June 2003 MSA definitions; the FY 2006 wage index; and no MGCRB 
reclassifications. Outlier payments are set at 5.1 percent of total 
operating DRG and outlier payments.
    Section 1886(b)(3)(B)(vii) of the Act, as added by section 
501(b) of Pub. L. 108-173, and amended by section 5001(a) of Pub. L. 
109-171, provides that, for FYs 2005 through 2006, the update 
factors will be reduced by 0.4 percentage points for any hospital 
that does not submit quality data. Section 5001(a) of Pub. L. 109-
171 provides that for FY 2007 and subsequent years, the update 
factor will be reduced by 2.0 percentage points for any hospital 
that does not submit quality data or that fails the quality data 
validation process. At the time this impact was prepared, 117 
providers did not receive the full market basket rate-of-increate 
for FY 2006 because they failed the quality data submission process. 
For purposes of the simulations shown below, we modeled the payment 
changes for FY 2007 using a reduced update for these 117 hospitals. 
However, we do not have enough information to determine which 
hospitals will not receive the full market basket rate-of-increase 
for FY 2007 at this time.
    Each final and statutory policy change is then added 
incrementally to this baseline, finally arriving at an FY 2007 model 
incorporating all of the changes. This simulation allows us to 
isolate the effects of each change.
    Our final comparison illustrates the percent change in payments 
per case from FY 2006 to FY 2007. Three factors not discussed 
separately have significant impacts here. The first is the update to 
the standardized amount. In accordance with section 1886(b)(3)(B)(i) 
of the Act, we have updated standardized amounts for FY 2007 using 
the most recently forecasted hospital market basket increase for FY 
2007 of 3.4 percent. (Hospitals that fail to comply with the quality 
data submission requirement to receive the full update will receive 
an update reduced by 2.0 percentage points to 1.4 percent.) Under 
section 1886(b)(3)(B)(iv) of the Act, the updates to the hospital-
specific amounts for sole community hospitals (SCHs) and for 
Medicare-dependent small rural hospitals (MDHs) are also equal to 
the market basket increase, or 3.4 percent.
    A second significant factor that affects changes in hospitals' 
payments per case from FY 2006 to FY 2007 is the change in MGCRB 
status from one year to the next. That is, payments may be reduced 
for hospitals reclassified in FY 2006 that are no longer 
reclassified in FY 2007. Conversely, payments may increase for 
hospitals not reclassified in FY 2006 that are reclassified in FY 
2007. In some cases, these impacts can be quite substantial, so if a 
relatively small number of hospitals in a particular category lose 
their reclassification status, the percentage change in payments for 
the category may be below the national mean. However, this effect is 
alleviated by section 1886(d)(10)(D)(v) of the Act, which provides 
that reclassifications for purposes of the wage index are for a 3-
year period.
    A third significant factor is that we currently estimate that 
actual outlier payments during FY 2006 will be 4.6 percent of total 
DRG payments. When the FY 2006 final rule was published, we 
projected FY 2006 outlier payments would be 5.1 percent of total DRG 
plus outlier payments; the average standardized amounts were offset 
correspondingly. The effects of the lower than expected outlier 
payments during FY 2006 (as discussed in the Addendum to this final 
rule) are reflected in the analyses below comparing our current 
estimates of FY 2006 payments per case to estimated FY 2007 payments 
per case (with outlier payments projected to equal 5.1 percent of 
total DRG payments).

B. Analysis of Table I

    Table I displays the results of our analysis of changes for FY 
2007. The table categorizes hospitals by various geographic and 
special payment consideration groups to illustrate the varying 
impacts on different types of hospitals. The top row of the table 
shows the overall impact on the 3,595 hospitals included in the 
analysis. There are 149 fewer hospitals than were included in the 
impact analysis in the FY 2006 final rule (70 FR 47690).
    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 2,590 
hospitals located in urban areas included in our analysis. Among 
these, there are 1,441 hospitals located in large urban areas 
(populations over 1 million), and 1,149 hospitals in other urban 
areas (populations of 1 million or fewer). In addition, there are 
1,005 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 2007 payment classifications, including any

[[Page 48334]]

reclassifications under section 1886(d)(10) of the Act. For example, 
the rows labeled urban, large urban, other urban, and rural show 
that the number of hospitals paid based on these categorizations 
after consideration of geographic reclassifications (including 
reclassifications under 1886(d)(8)(B) and 1886(d)(8)(E) which have 
implications for capital payments) are 2,608, 1,450, 1,158, and 987, 
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 
2,511 nonteaching hospitals in our analysis, 843 teaching hospitals 
with fewer than 100 residents, and 241 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 after geographic reclassification, 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 (sole community hospitals 
(SCHs), rural referral centers (RRCs), and Medicare dependent 
hospitals (MDHs)), as well as rural hospitals not receiving a 
special payment designation. There were 187 RRCs, 376 SCHs, 146 
MDHs, 98 hospitals that are both SCHs and RRCs, and 8 hospitals that 
are both MDHs and RRCs.
    The next two groupings are based on type of ownership and the 
hospital's Medicare utilization expressed as a percent of total 
patient days. These data are taken primarily from the FY 2004 
Medicare cost reports, if available (otherwise FY 2003 data are 
used).
    The next series of groupings concern the geographic 
reclassification status of hospitals. The first grouping displays 
all urban hospitals that were reclassified by the MGCRB for FY 2007. 
The next grouping shows the MGCRB rural reclassifications. The final 
three rows in Table I contain hospitals located in urban counties, 
but deemed to be rural under section 1886(d)(8)(E) of the Act, 
hospitals located in rural counties but deemed to be urban under 
section 1886(d)(8)(B) of the Act, and hospitals currently 
reclassified under section 508 of Pub. L. 108-173, which expires on 
March 31, 2007.

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C. Effects on the Hospitals That Failed the Quality Data Submission 
Process (Column 2)

    Column 2 of Table I shows the effect of assigning a reduced 
update to the standardized amount to hospitals that either fail to 
submit quality data or fail the data validation requirements. This 
column shows the effect of paying these providers based on an update 
of market basket, less 2.0 percentage points (1.4 percent) relative 
to a full market basket update (3.4 percent), for FY 2007. There are 
117 hospitals in this analysis that did not receive the full market 
basket update for FY 2006. Most of these hospitals are either small 
rural or small urban hospitals. For purposes of simulation only, we 
used these same hospitals to simulate the effects on IPPS payments 
receiving a reduced FY 2007 update. However, at this time, 
information is not available to determine the hospitals that do not 
meet the requirements for the full hospital market increase for FY 
2007. If the same hospitals were to fail to meet the requirements 
for the full market basket rate-of-increase for FY 2007 as in FY 
2006, we project that hospitals in the small urban and rural 
hospital categories (0-99 beds) will receive an overall decrease in 
payments of 0.1 percent.

D. Effects of the DRA Provision Related to MDHs (Column 3)

    In Column 3 of Table I, we show the effects of implementing 
section 5003 of Pub. L. 109-171 for MDHs. Section 5003(b) requires 
MDHs to rebase their hospital-specific rate to the FY 2002 cost 
reporting period, if doing so increases their target amount. Section 
5003(c) increases the hospital-specific payment amount from the 
Federal rate plus 50 percent of the difference between the Federal 
rate and the hospital-specific amount (presuming the hospital-
specific amount exceeds the Federal amount) to the Federal rate plus 
75 percent of the difference. In addition, MDHs are no longer 
subject to the 12-percent cap on their DSH payments, effective FY 
2007.
    This column compares the FY 2007 payment rates under the section 
5003 provisions to payments under the FY 2006 MDH provisions. (The 
MDH provisions were set to expire at the end of FY 2006 but were 
extended by section 5003(a)(1).) Overall, hospitals experience a 0.1 
percent increase. This is primarily due to the substantial increase 
in payments to MDH providers; MDH providers experience a 4.7 percent 
increase, while MDH/RRC combination providers experience an 11.5 
percent increase.

E. Effects of the Changes to the DRG Reclassifications and Relative 
Cost-Based Weights (Column 4)

    In Column 4 of Table I, we present the combined effects of the 
DRG reclassifications and recalibration, as discussed in section II. 
of the preamble to this final rule. Section 1886(d)(4)(C)(i) of the 
Act requires us annually to make appropriate classification changes 
in order to reflect changes in treatment patterns, technology, and 
any other factors that may change the relative use of hospital 
resources.
    As discussed in the preamble of this final rule, we are changing 
the relative weight calculation methodology from a charge-based 
method to a cost-based method. Further, we are implementing the new 
methodology under a 3-year transition such that weights in FY 2007 
are \1/3\ cost-based and \2/3\ charge-based. In this column, we 
compare aggregate payments using the FY 2007 blended relative 
weights(GROUPER Version 24) to the FY 2006 DRG relative charge 
weights (GROUPER Version 23.0) so the percentages shown here 
illustrate the effect of changes to the DRGs and relative weights. 
The method of calculating the relative weights and the 
reclassification changes to the GROUPER are described in more detail 
in section II. of the preamble to this final rule. We note that, 
consistent with section 1886(d)(4)(C)(iii) of the Act, we have 
applied a budget neutrality factor to ensure that the overall 
payment impact of the DRG changes (combined with the wage index 
changes) is budget neutral. This tentative budget neutrality factor 
of 0.997968 is applied to payments in Column 6 and not Column 4 
because it is a combined DRG reclassification and recalibration and 
wage index budget neutrality factor.
    In general, surgical DRGs tend to have charges concentrated in 
ancillary cost center groups while medical DRGs tend to have charges 
concentrated in routine or intensive care unit (ICU) cost center 
groups. As discussed in the preamble of this final rule, the CCRs 
for ancillary cost center groups are lower than the cost to charge 
ratios for routine and ICU cost center groups, indicating that the 
charge markups for ancillary services are higher. Because the 
standardized cost-based relative weight methodology adjusts the 
weights to remove differential mark-ups in charges, the FY 2007 
cost-based weights are redistributed among medical and surgical 
DRGs, which will result in a redistribution of payments among 
hospitals according to the types of cases they provide. For 
instance, hospitals that perform more surgical procedures are likely 
to experience decreases in payments while hospitals with heavy 
concentrations of medical DRGs are expected to experience increases 
in payments. Hospitals with a case-mix that is equal to average will 
see little or no change in payment.
    Due to the fact that we significantly modified our proposal and 
are adopting cost weights without the hospital-specific portion of 
the methodology, the impacts for the final rule are much smaller 
than those we proposed. The payment impacts are further moderated 
because we are implementing the change to the relative weights over 
a 3-year transition period. Therefore, the impacts shown in this 
column are generally smaller than those for the proposed rule. Rural 
DSH hospitals with less than 100 beds and small rural hospitals (0-
49 beds) have payment increases of 0.6 percent and 0.7 percent, 
respectively. Cardiac specialty hospitals experience the greatest 
decline in payments of 2.2 percent and rural hospitals with more 
than 200 beds and urban hospitals in the East South Central Region 
have the next largest decreases of 0.1 percent.

F. Effects of Wage Index Changes (Column 5)

    Section 1886(d)(3)(E) of the Act requires that, beginning 
October 1, 1993, we annually update the wage data used to calculate 
the wage index. In accordance with this requirement, the wage index 
for FY 2007 is based on data submitted for hospital cost reporting 
periods beginning on or after October 1, 2002 and before October 1, 
2003. However, we note that this impact is calculated on wage data 
with no occupational mix adjustment due to the decision in Bellevue 
Hosp. Center v. Leavitt, in which the Court of Appeals for the 
Second Circuit ordered CMS to apply the occupational mix adjustment 
to 100 percent of the wage index effective for FY 2007 (see section 
III.C. of this final rule for more details of this Court decision). 
Because the effects of the wage index data are dependent, in part, 
upon the occupational mix adjusted wage index, and due to the short 
timeframe for implementing the Court's order, we are not able to 
provide the final occupational mix adjusted wage data impacts with 
this FY 2007 IPPS final rule. We will include the FY 2007 
occupational mix adjusted wage index and related impacts in a 
separate Federal Register notice to be published prior to October 1, 
2006. We believe these procedures comply with section 1886(d)(6) of 
the Act because, by August 1, we will have described our data and 
methods for calculating the wage index and IPPS rates in this FY 
2007 IPPS final rule, but the actual impacts concerning the wage 
index will not be issued until a later date.
    The estimated impact of the new wage data (with no occupational 
mix applied) 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 changes in payments when going from a 
model using the FY 2006 wage index, based on FY 2002 wage data and 
having a 10-percent occupational mix adjustment applied, to a model 
using the FY 2007 pre-reclassification wage index, based on FY 2003 
wage data with no occupational mix applied. The wage data collected 
on the FY 2003 cost report are the same as the FY 2002 wage data 
that were used to calculate the FY 2006 wage index. The impacts 
shown in Column 5 are likely to change with the application of the 
occupational mix adjustment to 100 percent of the wage index. The 
final impacts will be shown and discussed in a subsequent Federal 
Register notice to be published prior to October 1, 2006.

G. Combined Effects of DRG and Wage Index Changes, Including Budget 
Neutrality Adjustment (Column 6)

    Section 1886(d)(4)(C)(iii) of the Act requires that changes to 
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. As noted in the Addendum to this final 
rule, in determining the budget neutrality factor, we equated 
simulated aggregate payments for FY 2006 and FY 2007 using the FY 
2005 Medicare utilization data after applying the changes to

[[Page 48340]]

the DRG relative weights and the wage index. However, we note that 
the payment impact and budget neutrality factors are calculated by 
applying an occupational mix adjustment to 10 percent of the FY 2006 
wage index and zero percent of the FY 2007 wage index due to the 
decision in Bellevue Hosp. Center v. Leavitt, as stated previously.
    We computed a tentative wage and DRG recalibration budget 
neutrality factor of 0.997030. The 0.0 percent impact for all 
hospitals demonstrates that these changes, in combination with the 
budget neutrality factor, are budget neutral. In Table I, the 
combined overall impacts of the effects of both the DRG 
reclassifications and the updated wage index are shown in Column 6. 
The changes in this column are the sum of the changes in Columns 4 
and 5, combined with the budget neutrality factor for the wage 
index, including the wage index floor for urban areas required by 
section 4410 of Pub. L. 105-33. There also may be some variation of 
plus or minus 0.1 percentage point due to rounding.
    Currently, we project that large urban hospitals will show a 0.1 
percent increase, other urban hospitals will experience a 0.1 
percent decrease, and rural hospitals will not be affected. We are 
not able to provide the final DRG and wage index budget neutrality 
impacts with this FY 2007 IPPS final rule due to the short 
timeframes for implementing the Court's order for implementation of 
the occupational mix adjustment. However, we will recalculate the 
budget neutrality factor to include the effects of the 100 percent 
occupational mix adjustment when the data become available, and we 
will publish updated payment impacts in a subsequent Federal 
Register notice document prior to October 1, 2006.

H. Effects of the 3-Year Provision Allowing Urban Hospitals That 
Were Converted to Rural as a Result of the FY 2005 Labor Market 
Area Changes To Maintain the Wage Index of the Urban Labor Market 
Area in Which They Were Formerly Located (Column 7)

    To help alleviate the decreased payments for urban hospitals 
that became rural under the new labor market area definitions, for 
purposes of the wage index, we adopted a policy in FY 2005 to allow 
them to maintain the wage index assignment of the MSA where they 
were located for the 3-year period FY 2005, FY 2006, and FY 2007. 
Column 7 shows the impact of the remaining labor market area 
transition, for those hospitals that were urban under the old labor 
market area designations and are now considered rural hospitals. 
Section 1886(d)(3)(E) of the Act specifies that any updates or 
adjustments to the wage index are to be budget neutral. Therefore, 
we applied a tentative adjustment of 0.999605 to ensure that the 
effects of reclassification are budget neutral as indicated by the 
zero effect on payments to hospitals overall. However, we note that 
this budget neutrality factor and this impact are both calculated 
using FY 2007 wage data with no occupational mix adjustment due to 
the decision in Bellevue Hosp. Center v. Leavitt. We are not able to 
provide the final urban to rural hold harmless budget neutrality 
impacts with this FY 2007 IPPS final rule. This information will 
also be include in a separate Federal Register notice to be 
published prior to October 1, 2006. Currently, the rural hospital 
row shows a 0.3 percent benefit from this provision as these hold 
harmless hospitals are now considered geographically rural.

I. Effects of MGCRB Reclassifications (Column 8)

    Our impact analysis to this point has assumed 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, 
such as hospitals in rural counties that are deemed urban under 
section 1886(d)(8)(B) of the Act). The changes in Column 8 reflect 
the per case payment impact of moving from this baseline to a 
simulation incorporating the MGCRB decisions for FY 2007 which 
affect hospitals' wage index area assignments.
    By February 28 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. The FY 2007 wage index values incorporate all of 
the MGCRB's reclassification decisions for FY 2007. The wage index 
values also reflect any decisions made by the CMS Administrator 
through the appeals and review process through February 28, 2006.
    For FY 2007, as stated in the FY 2006 IPPS final rule (70 FR 
47382, August 12, 2005), we established procedural rules under 
section 1886(d)(10)(D)(v) of the Act to address specific 
circumstances where individual and group reclassifications involve a 
section 508 hospital. The rules were designed to recognize the 
special circumstances of section 508 hospital reclassifications 
ending mid-year during FY 2007 and were intended to allow previously 
approved reclassifications to continue through March 31, 2007, and 
new section 1886(d)(10) reclassifications to begin April 1, 2007, 
upon the conclusion of the section 508 reclassifications. Under 
these procedural rules, some section 1886(d)(10) hospital 
reclassifications are only in effect for the second half of the 
fiscal year.
    The first and second half fiscal year section 1886(d)(10) 
reclassifications permitted under these procedural rules have 
implications for the calculation of the reclassified wage indices 
and the reclassification budget neutrality factor. Section 
1886(d)(8)(c) of the Act provides requirements for determining the 
wage index values for hospitals that were reclassified as a result 
of the MGCRB decisions under 1886(d)(10) of the Act. As provided in 
the statute, we are required to calculate a separate wage index for 
hospitals reclassified to an area if including the wage data for the 
reclassified hospitals would reduce the area wage index by more than 
1 percent.
    Because of the half-year reclassifications permitted under the 
procedural rules, in this final rule, we are issuing two separate 
wage indexes for affected areas (one effective from October 1, 2006, 
through March 31, 2007 and a second reclassified wage index 
effective April 1, 2007, through September 30, 2007). The FY 2007 
wage index values are calculated based on the wage data for 
hospitals reclassified to the area in the respective half of the 
fiscal year. The impact of this policy is modeled in Column 8 of 
Table I above.
    The overall effect of geographic reclassification is required by 
section 1886(d)(8)(D) of the Act to be budget neutral. In this final 
rule, we are calculating one budget neutrality adjustment that 
reflects the average of the adjustments required for first and 
second half fiscal year reclassifications, respectively. Therefore, 
we applied a tentative adjustment of 0.991850 to ensure that the 
effects of the section 1886(d)(10) reclassifications are budget 
neutral. (See section II.A. of the Addendum to this final rule.) 
However, we note that this budget neutrality factor and this impact 
are both calculated using wage adjustment applied due to the 
decision in Bellevue Hosp. Center v. Leavitt. As noted earlier, CMS 
will apply a reclassification decision for FY 2007 on behalf of 
hospitals to give them the highest wage index. Hospitals will then 
have 30 days from the date of public display of the separate notice 
to be published prior to October 1, 2006 at the Office of the 
Federal Register to revise the decision that CMS made on their 
behalf. We are unable to state with certainty that all of the 
reclassified providers shown in Table 9A in the Addendum to this 
final rule will retain their approved reclassifications for FY 2007 
once the final occupational mix adjusted wage indices are known. We 
will include the FY 2007 occupational mix adjusted wage index 
related impacts and our reclassification decisions made on behalf of 
hospitals in a separate Federal Register notice document to be 
published prior to October 1, 2006.

J. Effects of the Wage Index Adjustment for Out-Migration (Column 
9)

    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 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. We 
note that this impact is based on the section 505 wage index 
adjustments in place as of FY 2006. As the FY 2007 adjustments must 
be calculated using wage data with an occupational mix adjustment 
and because we do not yet have these data due to the decision in 
Bellevue Hosp. Center v. Leavitt, we were unable to assess whether 
any new counties would qualify for section 505 adjustments for FY 
2007 prior to the publication of this final rule. In the notice that 
we publish in the

[[Page 48341]]

Federal Register notice prior to October 1, 2006, we will show any 
new counties that qualify for the section 505 adjustment for FY 2007 
and any related impacts that result from application of the out-
migration adjustment to the revised occupational mix adjusted wage 
indices.

K. Effects of All Changes (Column 10)

    Column 10 compares our estimate of payments per case between FY 
2006 and FY 2007, incorporating all changes reflected in this final 
rule for FY 2007 (including statutory changes). This column includes 
all of the policy changes. We note that this impact is calculated 
using standardized amounts, outlier estimates, and budget neutrality 
factors based on wage data with no occupational mix adjustment 
applied due to the decision in Bellevue Hosp. Center v. Leavitt.
    Currently, Column 10 reflects the impact of all FY 2007 changes 
(other than the final occupational mix adjusted wage indices) 
relative to FY 2006, including those shown in Columns 2 through 9 as 
well as other factors that are not applied until the final rates are 
calculated. The average increase for all hospitals is approximately 
3.5 percent. This increase includes the effects of the 3.4 percent 
market basket update. It also reflects the 0.5 percentage point 
difference between the projected outlier payments in FY 2006 (5.1 
percent of total DRG payments) and the current estimate of the 
percentage of actual outlier payments in FY 2006 (4.6 percent), as 
described in the introduction to this Appendix and the Addendum to 
this final rule. As a result, payments are projected to be 0.5 
percentage points lower in FY 2006 than originally estimated, 
resulting in a 0.5 percentage point greater increase for FY 2007 
than would otherwise occur. In addition, the impact of section 505 
adjustments accounted for a 0.1 percent increase. Indirect medical 
education formula changes for teaching hospitals under section 502 
of Pub. L. 108-173, changes in payments due to the difference 
between the FY 2006 and FY 2007 wage index values assigned to 
providers reclassified under section 508 of Pub. L. 108-173, and 
changes in the incremental increase in payments from section 505 of 
Pub. L. 108-173 out-migration adjustments account for the remaining 
-0.6 percent.
    There might also be interactive effects among the various 
factors comprising the payment system that we are not able to 
isolate. For these reasons, the values in Column 10 may not equal 
the product of the percentage changes described above.
    The overall change in payments per case for hospitals in FY 2007 
would increase by 3.5 percent. Hospitals in urban areas would 
experience a 3.4 percent increase in payments per case compared to 
FY 2006. Hospitals in large urban areas would experience a 3.5 
percent increase in payments and hospitals in other urban areas 
would experience a 3.3 percent increase in payments. Hospitals in 
rural areas, meanwhile, would experience a 3.7 percent payment 
increase.
    Among urban census divisions, the largest payment increases 
would be 4.5 percent in the Pacific region and 4.3 percent in the 
Mountain region. The smallest urban increase is 2.2 percent in 
Puerto Rico.
    Among rural regions in Column 10, no hospital category would 
experience overall payment decreases. The New England and Middle 
Atlantic regions would benefit the most, with 5.6 and 5 percent 
increases, respectively. The smallest increase would occur in the 
Mountain region, with a 3.0 percent increases in payments.
    Among special categories of rural hospitals in Column 10, MDH/
RRC providers receive an increase in payments of 11.5 percent and 
MDH providers receive an increase of 4.7 percent, primarily due to 
the changes to MDH payments set forth in section 5003 of Pub. L. 
109-171.
    Urban hospitals reclassified for the first half of FY 2007 are 
anticipated to receive an increase of 3.6 percent, while urban 
hospitals that reclassified for the second half of FY 2007 are 
expected to receive an increase of 3.4 percent. The same set of 
rural hospitals is reclassified for the first and second half of FY 
2007. Rural hospitals reclassifying for the entire year of FY 2007 
are anticipated to receive a 3.5 percent payment increase. Those 
hospitals located in rural counties, but deemed to be urban under 
section 1886(d)(8)(B) of the Act are expected to receive an increase 
in payments of 4.4 percent. Hospitals that were reclassified under 
section 508 of Pub. L. 108-173, which is only effective through 
March 31, 2007, are expected to receive an increase of 1.7 percent. 
This lower estimated increase in payment is due to the expiration of 
the higher section 508 wage indices in effect for 6 months of FY 
2007. We caution that all of these impacts will be revised prior to 
October 1, 2006 when the occupational mix wage indices are 
calculated for FY 2007.

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

    For FY 2007, we are continuing to apply the volume adjustment 
criteria we specified in the FY 2005 IPPS final rule (69 FR 49099). 
We expect that two providers would receive the low-volume adjustment 
for FY 2007. We included these additional payments to providers in 
the impact table shown above and we estimate the impact of these 
providers receiving the additional 25-percent payment increase to be 
approximately $89,000.

M. Impact Analysis of Table II

    Table II presents the projected impact of the changes for FY 
2007 for urban and rural hospitals and for the different categories 
of hospitals shown in Table I. It compares the estimated payments 
per case for FY 2006 with the average estimated per case payments 
for FY 2007, as calculated under our models. Thus, this table 
presents, in terms of the average dollar amounts paid per discharge, 
the combined effects of the changes presented in Table I. The 
percentage changes shown in the last column of Table II equal the 
percentage changes in average payments from Column 10 of Table I.

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VII. Effects of Other Policy Changes

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

A. Effects of LTC-DRG Reclassifications and Relative Weights for 
LTCHs

    In section II.F. of the preamble to this final rule, we discuss 
the changes in the LTC-DRG relative weights for FY 2007, which are 
based on the Version 24.0 of the CMS GROUPER (including the changes 
in the classifications, relative weights and geometric mean length 
of stay for each LTC-DRG). As also discussed in that same section of 
this final rule, currently, there is no statutory or regulatory 
requirement that the annual update to the LTC-DRG classifications 
and relative weights be done in a budget neutral manner. As 
discussed above in section II.F. of the preamble of this final rule, 
the LTCH PPS is still in the midst of a transition from a reasonable 
cost-based payment system to fully Federal PPS payments, during 
which time LTCH treatment patterns and coding practices, which are 
reflected in the LTCH claims data, appear to continue to change as 
LTCHs adapt to this new payment system.
    The LTCH PPS was implemented for cost reporting periods 
beginning on or after October 1, 2002 (FY 2003). Therefore, the FY 
2005 MedPAR data used to compute the FY 2007 LTC-DRG relative 
weights in this final rule are based on LTCH claims data taken from 
only the second full year of the LTCH PPS. Based on LTCH cases in 
the March 2006 update of the FY 2005 MedPAR files, we estimate that 
the changes to the LTC-DRG classifications and relative weights for 
FY 2007 would result in an aggregate decrease in LTCH PPS payments 
of approximately 1.3 percent based on the data from the 369 LTCHs in 
our database. (We note that this estimated aggregate decrease in 
LTCH PPS payments of approximately 1.3 percent was determined based 
on the current payment

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rates and policies established in the RY 2007 LTCH PPS final rule 
(71 FR 27798 through 27939) and the revised LTC-DRG classifications, 
relative weights and average lengths of stay established for FY 2007 
in this final rule).
    When we compared the GROUPER Version 23.0 (FY 2006) LTC-DRG 
relative weights to the GROUPER Version 24.0 (FY 2007) LTC-DRG 
relative weights, we found that approximately 68 percent of the LTC-
DRGs would have a higher relative weight under Version 23.0, while 
the remaining approximately 32 percent of the LTC-DRGs would have a 
higher relative weight under Version 24.0. We also found that, based 
on FY 2005 LTCH cases, the GROUPER Version 23.0 LTC-DRG relative 
weights were, on average, approximately 3.3 percent higher than the 
GROUPER Version 24.0 LTC-DRG relative weights. In addition, based on 
an analysis of the most recent available LTCH claims data from the 
FY 2005 MedPAR file, we continue to observe that the average LTC-DRG 
relative weight decreases due to an increase of relatively lower 
charge cases being assigned to LTC-DRGs with higher relative weights 
in the prior year.
    Contributing to this increase in these relatively lower charge 
cases being assigned to LTC-DRGs with higher relative weights in the 
prior year are improvements in coding practices, which are typical 
when moving from a reasonable cost-based payment system to a PPS. 
The impact of including additional cases with relatively lower 
charges into LTC-DRGs that had a relatively higher relative weight 
in the GROUPER Version 23.0 (FY 2006) is a decrease in the average 
relative weight for those LTC-DRGs in the GROUPER Version 24.0. As 
noted above in section II.F. of the preamble to this final rule, 
LTCHs are a specialized provider type that typically do not treat a 
broad spectrum of patients in their facilities with many different 
diagnoses. While there are 538 valid GROUPER Version 24.0 LTC-DRGs, 
183 LTC-DRGs have no LTCH cases. In addition, another 180 LTC-DRGs 
are categorized as ``low volume'' (that is, have less than 25 cases 
annually). Consequently, only about 175 LTC-DRGs are used by most 
LTCHs on a ``regular basis'' (that is, nationally LTCHs discharge, 
in total, an average of 25 or more of these cases annually).
    Of these 175 LTC-DRGs that are used on a ``regular basis,'' we 
found that approximately 65 percent of the LTC-DRGs would have 
higher relative weights under GROUPER Version 23.0 in comparison to 
GROUPER Version 24.0, and the remaining 35 percent of the 175 LTC-
DRGs that are used on a ``regular basis'' would have higher relative 
weights under GROUPER Version 24.0 in comparison to GROUPER Version 
23.0. In addition, about 30 percent of the 175 LTC-DRGs that are 
used on a ``regular basis'' would experience a decrease in the 
average charge per case as compared to the average charge per case 
in that DRG based on FY 2004 data, which generally results in a 
lower relative weight. Moreover, of the 175 LTC-DRGs that are used 
on a ``regular basis,'' approximately 62 percent of those LTC-DRGs 
would experience a change in the average charge per case from FY 
2004 LTCH data as compared to FY 2005 LTCH data that is less than 
the increase in overall average LTCH charges across all LTC-DRGs 
from FY 2004 to FY 2005 of about 8.3 percent. Accordingly, those 
LTC-DRGs would also have a reduction in their relative weight as 
compared to the relative weight in FY 2006. For those LTC-DRGs in 
which the average charge within the LTC-DRG increase is less than 
8.3 percent, the relative weights for those LTC-DRGs would decrease 
because the average charge for each of those LTC-DRGs is being 
divided by a larger number (that is, the average charge across all 
LTC-DRGs). For the reasons discussed above, we believe that the 
changes in the LTC-DRG relative weights for FY 2007, which include a 
significant number of LTC-DRGs with lower relative weights, would 
result in approximately a 1.3 percent decrease in estimated 
aggregate LTCH PPS payments.

B. Effects of New Technology Add-On Payments

    In section II.G. of the preamble to this final rule, we discuss 
add-on payments for new medical services and technologies. As 
explained in that section, we are no longer required to ensure that 
any add-on payments for new technology under section 1886(d)(5)(K) 
of the Act are budget neutral. However, we are still providing an 
estimate of the payment increases here, as they will have an impact 
on total payments made in FY 2007. New technology add-on payments 
are limited to the lesser of 50 percent of the costs of the 
technology, or 50 percent of the costs in excess of the DRG payment 
for the case. Because it is difficult to predict the actual new 
technology add-on payment for each case, we are estimating the 
increase in payment for FY 2007 as if every claim with these add-on 
payments will receive the maximum add-on payment. As discussed in 
section II.G. of the preamble to this final rule, we are approving 
the X STOP Interspinous Process Decompression System for new 
technology add-on payments. As stated in the proposed rule, the 
applicant estimated that there would be a total of 2,124 patients 
(424 in DRG 499 and 1,700 in DRG 500) eligible to receive the device 
in FY 2007. Therefore, we estimate that payments for this technology 
will increase overall FY 2007 payments by $9.35 million.
    In addition, we are continuing to make add-on payments in FY 
2007 for two technologies that were approved for FY 2006 new 
technology add-on payments: Restore[supreg] Rechargeable Implantable 
Neurostimulator and GORE TAG. We estimate these payments for these 
technologies will increase overall FY 2007 payments by $6.01 million 
and $16.61 million, respectively.
    The total increase in payments for these three new technologies, 
approximately $31.97 million, is not reflected in the tables.

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

    In section IV.A. of the preamble to this final rule, we discuss 
new requirements for hospital reporting of quality data based on our 
continuing experience with this program and recent legislation. 
Section 5001(a) of Pub. L. 109-171 (DRA) sets out extensive new 
requirements for the Reporting Hospital Quality Data for Annual 
Payment Update (RHQDAPU) program. The RHQDAPU program was 
established to implement section 501(b) of Pub. L. 108-173 (MMA). 
Section 5001(a) of Pub. L. 109-171 revised the mechanism used to 
update the standardized amount for payment for hospital inpatient 
operating costs. New sections 1886(b)(3)(B)(viii)(I) and (II) of the 
Act provide that the payment update for FY 2007 and each subsequent 
fiscal year will be reduced by 2.0 percentage points for any 
``subsection (d) hospital'' that does not submit certain quality 
data in a form and manner, and at a time, specified by the 
Secretary.
    We have modeled the payment impact of this change in Table 1 of 
this Appendix, and discussed it in section VI. of this Appendix. We 
discuss other policy changes we are making to the RHQDAPU program in 
section IV.A. of the preamble to this final rule.
    We also note that, for the FY 2007 payment update, hospitals 
must pass our validation requirement of a minimum of 80 percent 
reliability, based upon our chart-audit validation process, for the 
first three quarters of data from CY 2005. These data were due to 
the QIO Clinical Warehouse by July 15, 2005 (first quarter CY 2005 
discharges), November 15, 2005 (second quarter CY 2005 discharges), 
and February 15, 2005 (third quarter CY 2005 discharges). We have 
continued our efforts to ensure that QIOs provide assistance to all 
hospitals that wish to submit data. In the preamble of this final 
rule, we are providing additional validation criteria to ensure that 
the quality data being sent to CMS are accurate. The requirement of 
5 charts per hospital will result in approximately 19,000 charts per 
quarter total submitted to the agency. We reimburse hospitals for 
the cost of sending charts to the Clinical Data Abstraction Center 
(CDAC) 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 at the CDAC is approximately 140 pages. 
Thus, the agency will have expenditures of approximately $380,000 
per quarter to collect the charts. Given that we reimburse for the 
data collection effort, we believe that a requirement for five 
charts per hospital per quarter represents a minimal burden to the 
participating hospital.

D. Effects of Other Policy Changes Affecting Sole Community 
Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals 
(MDHs)

    In section IV.C. of the preamble to this final rule, we discuss 
the payment changes for MDHs made by section 5003 of Pub. L. 109-
171. We modeled the payment impact of these changes in Table 1 of 
this Appendix and discussed them in section VI. of this Appendix.
    In addition, in section IV.C.2. of the preamble to this final 
rule, we discussed changes to the data source and methodology that 
we will use to compute the volume decrease adjustment for MDHs and 
SCHs. If certain requirements are met, this adjustment may be made 
if the hospital's total discharges

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decrease by more than 5 percent from one cost reporting period to 
the next. We do not believe that these changes will have any 
significant impact on Medicare payment to these hospitals.

E. Effects of Policy on Payment for Direct Costs of Graduate 
Medical Education

1. Determination of Weighted Average GME PRAs for Merged Teaching 
Hospitals

    In section IV.H.2. of the preamble to this final rule, we 
discuss our changes related to determining the weighted average GME 
PRA for a merged teaching hospital. Our current policy is that when 
two or more teaching hospitals merge, we determine a weighted PRA 
for the surviving merged hospital using GME costs and resident data 
from the base year cost report for each teaching hospital in the 
merger. We are revising our policy to determine a merged teaching 
hospital's PRA by using PRA data and FTE resident data from the most 
recent settled cost reports of the merging hospitals, rather than 
using the direct GME cost data from the hospitals' base year cost 
report. This policy revision is administrative in nature, and we do 
not foresee that the revision will result in payment increases to 
merged teaching hospitals.

2. Determination of PRAs for New Teaching Hospitals

    In section IV.H.3. of the preamble to this final rule, we 
discuss the methodology for determining the hospital-specific PRA 
for new teaching hospitals and we make a change to the existing 
regulations at Sec.  413.77(e) in order to specify a base period for 
certain situations, that is, for new teaching hospitals that did not 
have residents on duty during the first month of the cost reporting 
period in which the hospital became a new teaching hospital. The 
base period for these hospitals would be the next cost reporting 
period following the cost reporting period where any residents were 
on duty at the new teaching hospital. Because this change is 
administrative in nature, we do not foresee that it will result in a 
financial impact for FY 2007.

3. Requirements for Counting and Appropriate Documentation of FTE 
Residents

    In section IV.H.4. of the preamble to this final rule, we are 
clarifying the policies that apply in determining hospitals' FTE 
resident counts for Medicare GME payment purposes. Because this is a 
clarification of existing policy, there is no financial impact for 
FY 2007.

4. Resident Time Spent in Nonpatient Care Activities as Part of an 
Approved Residency Program

    In section IV.H.5. of the preamble to this final rule, we are 
clarifying our policy that, with respect to residency training in 
nonhospital settings, only the time residents spend in patient care 
activities may be counted for purposes of direct GME and IME 
payments; and with respect to training in the hospital, residents 
training in all areas of the hospital complex may be counted for 
direct GME purposes, but may only be counted for IME purposes if the 
residents are furnishing patient care. Because we are clarifying 
existing policy, there is no financial impact of this clarification 
for FY 2007.

F. Effects of Policy Changes Relating to Emergency Services Under 
EMTALA

    In section IV.J. of the preamble to this final rule, we discuss 
several policy changes under the EMTALA requirements. We are 
clarifying that any participating hospital with specialized 
capabilities or facilities, even if it does not have a dedicated 
emergency department, may not refuse to accept an appropriate 
transfer if the hospital has the capacity to treat the individual. 
We note that this proposed revision does not reflect any change in 
current CMS policy. We further note that the revision will not 
require hospitals without dedicated emergency departments to open 
dedicated emergency departments nor will it impose any EMTALA 
obligation on these hospitals with respect to individuals who come 
to the hospital as their initial point of entry into the medical 
system seeking a medical screening examination or treatment for a 
medical condition. Thus, there will be no impact on Medicare payment 
policies or practices.
    In addition, we are modifying the definition of ``labor'' to 
state that a woman experiencing contractions is in true labor unless 
a physician, certified nurse-midwife, or other qualified medical 
person acting within his or her scope of practice as defined in 
hospital medical staff bylaws and State law, certifies that, after a 
reasonable time of observation, the woman is in false labor. The 
effect of this change will be to have a single, uniform policy on 
the personnel who are authorized to make a determination as to 
whether an individual has an emergency medical condition. This 
change will have a Medicare payment effect, if any, only on payments 
to physicians and nonphysician practitioners under the physician fee 
schedule. The amount of any impact will be negligible because only a 
very small number of Medicare beneficiaries are women of 
childbearing age.

G. Effects of Policy on Rural Community Hospital Demonstration 
Program

    In section IV.L. of the preamble to this final rule, we discuss 
our implementation of section 410A of Pub. L. 108-173 that required 
the Secretary to establish a demonstration that will modify 
reimbursement for inpatient services for up to 15 small rural 
hospitals. Section 410A(c)(2) requires that ``in conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' As discussed in 
section IV.L. of the preamble to this final rule, we are satisfying 
this requirement by adjusting national IPPS rates by a factor that 
is sufficient to account for the added costs of this demonstration. 
We estimate that the average additional annual payment for FY 2007 
that will be made to each participating hospital under the 
demonstration will be approximately $1,021,985. We based this 
estimate on the recent historical experience of the difference 
between inpatient cost and payment for hospitals that are 
participating in the demonstration. For the 9 participating 
hospitals, the total annual impact of the demonstration program is 
estimated to be $9,197,870. The adjustment factor to the Federal 
rate used in calculating Medicare inpatient prospective payments as 
a result of the demonstration is 0.999905.

H. Effects of Policy on Hospitals-Within-Hospitals and Satellite 
Facilities

    In section VI.A.5. of the preamble to this final rule, we 
discuss our revision of the regulations for grandfathered HwHs, 
grandfathered hospital satellites and grandfathered satellite units 
at Sec. Sec.  412.22(f), 412.22(h), and 412.25(e), respectively, to 
allow these facilities to increase or decrease their square footage 
or decrease the number of beds without jeopardizing their 
grandfathered status.
    We estimate that there will be no net effect on the treatment of 
such hospitals as a result of this final rule. Payments to most HwHs 
and satellites are made on a prospective rate basis. For these 
facilities, our policy of allowing either increases or decreases in 
square footage would have no cost impact, since the prospective 
rates are not affected by a facility's changes in square footage. 
However, if grandfathered HwHs and satellites facilities were to 
decrease their number of beds, as provided by the policy revision 
that we are finalizing, the effect of this change will likely be a 
reduction in Medicare payments to such hospitals and satellite 
facilities because they will probably have fewer discharges.
    A small number of grandfathered HwHs and satellite facilities, 
specifically children's and cancer hospitals and satellites of these 
facilities, are paid on a cost-related basis under the TEFRA system. 
Under that system, increases or decreases in square footage may 
cause corresponding increases or decreases in the costs on which 
payments to the facilities are based. However, any increases in 
costs caused by increased square footage may be offset by other 
factors. For example, under our policy a grandfathered HwH or 
satellite facility could reduce its number of beds and the decreased 
utilization flowing from this change may offset any added costs 
resulting from an increase in the square footage of a grandfathered 
hospital or satellite facility paid under the TEFRA system. 
Moreover, an increase in facility square footage to modernize a 
physical facility or to accommodate new equipment or technology may 
also result in improved efficiency, leading to reduced operating 
costs. The cost savings resulting from these increases in efficiency 
could also partially or entirely offset any cost increases. Because 
we cannot predict which grandfathered HwHs or satellite facilities 
will opt to increase or decrease their size or to decrease their bed 
numbers, we are unable to quantify the impact of these changes. (We 
are only aware of one cancer hospital and three children's hospitals 
that are HwHs.) However, overall we expect that there will be 
offsetting cost increases and reductions, with no net change in 
costs.

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I. Effects of Policy Changes to the Methodology for Determining 
LTCH CCRs and the Reconciliation of LTCH PPS Outlier Payments

    In section VI.A.6. of the preamble to this final rule, we 
discuss our revision and clarification of the existing policies 
governing the determination of LTCHs' CCRs and the reconciliation of 
high-cost and short-stay outlier payments under the LTCH PPS. Under 
the LTCH PPS high-cost outlier and short-stay outlier policies, CCRs 
are used to determine the estimated cost of the case by multiplying 
the LTCH's overall CCR by the Medicare allowable charges for the 
case.
    In that section, specifically, we present a revision of our 
methodology for determining the annual LTCH CCR ceiling. Based on 
the most recent complete IPPS total CCR data, we are establishing a 
total CCR ceiling of 1.321 under the LTCH PPS effective October 1, 
2006. This ceiling was determined based on the same data used to 
determine the separate IPPS operating CCR ceiling (1.26) and IPPS 
capital CCR ceiling (0.154). The LTCH CCR ceiling determined under 
our current ``combined'' methodology will result in a slightly 
higher LTCH CCR ceiling (that is, 1.26 + 0.154 = 1.414) for FY 2007 
compared to the ``total'' CCR ceiling of 1.321 for FY 2007. However, 
we note that, based on the most recent complete IPPS and LTCH CCR 
data, there are no LTCHs that currently have a CCR that is greater 
than the ceiling of 1.321 (the highest LTCH CCR in the database of 
392 LTCHs is 1.1277). Therefore, based on these data, because no 
LTCHs currently have a CCR that is in excess of the LTCH CCR ceiling 
we are establishing for FY 2007 in this final rule, we believe that 
there will be no significant impact on LTCH PPS payments based on 
this policy.
    Also in section VI.A.6. of the preamble to this final rule, we 
discuss our revision of our methodology for determining the 
applicable statewide average LTCH CCRs. Based on the most recent 
complete IPPS total CCR data, the LTCH PPS statewide average CCRs 
that would be effective October 1, 2006, are presented in Table 8C 
of the Addendum to this final rule. A comparison of the statewide 
average total CCRs in Table 8C of the Addendum to this final rule to 
the ``combined'' statewide average CCRs that would be calculated 
under our existing methodology from the operating PPS statewide 
average CCRs in Table 8A of the Addendum to this final rule and the 
capital PPS statewide average CCRs in Table 8B of the Addendum to 
this final rule shows that the changes to our methodology for 
determining LTCH statewide average CCRs will result in minor changes 
in the average CCR for each state. In particular, the largest 
decrease in a statewide average CCR (with the exception of Maryland, 
which will be assigned the national average total CCR as discussed 
in section VI.A.6 of the preamble of this final rule) will be in 
urban Wyoming (-0.7 percent), and there is currently only one LTCH 
located in Wyoming. The largest increase in a statewide average CCR 
will be in urban District of Columbia (0.7 percent), and there are 
currently only two LTCHs located in the District of Columbia. Thus, 
we believe that the change in the methodology for determining the 
applicable statewide average LTCH CCRs established in this final 
rule will result in no significant impact on LTCH PPS payments.
    In addition, in section VI.A.6 of the preamble of this final 
rule we discussed our codification in Subpart O of 42 CFR Part 412 
the provisions governing the determination of LTCHs' CCRs and the 
reconciliation of high cost and short-stay outlier payments under 
the LTCH PPS, including modifications and editorial clarifications 
to our existing methodology. These changes are similar or almost 
identical (except for the minor clarifications and modifications) to 
our current policy governing the determination of LTCHs' CCRs and 
the reconciliation of high cost and short-stay outlier payments 
under the LTCH PPS, and therefore, there will be no expected impact 
if such policies were codified.

J. Effects of Policy on Payment for Services Furnished Outside the 
United States

    In section VII. of the preamble to this final rule, we discuss 
our clarification of our regulations regarding payment for Medicare 
services furnished outside the United States. The clarification 
revises references in our regulations that could be read to limit 
Medicare payment for certain services furnished outside the United 
States to services furnished in Canada or Mexico, contrary to the 
provisions of the Act. Only a small fraction of Medicare claims are 
paid as a result of services furnished outside of the United States. 
Moreover, we are unaware of any claims for payment that would 
otherwise satisfy the requirements under the Act that have not been 
paid due to the language in our current regulations. Therefore, 
because we are clarifying existing policy, this clarification has 
little or no financial impact for FY 2007.

K. Effects of Policy on Limitation on Payments to SNFs

    In section IX. of the preamble to this final rule, we discuss 
the implementation of section 5004 of Pub. L. 109-171, which 
mandated that, for cost reporting periods beginning on or after 
October 1, 2005, Medicare payments to SNFs for certain otherwise 
allowable debt amounts attributable to the coinsurance amounts for 
patients who are not certain specified dual eligible individuals be 
reduced by 30 percent. We anticipate that the provisions of section 
5004 of Pub. L. 109-171 will result in a savings to the Medicare 
program of $490 million over the 5-year period from FY 2006 to FY 
2010.

L. Effects of Policy on CAP for Outpatient Drugs and Biologicals 
Under Part B for the Purpose of Calculating the Average Sales Price

    We have reviewed the effects of the provisions of XII. of this 
final rule as required by Executive Order 12866, the RFA, section 
1102(b) of the Social Security Act, the Unfunded Mandates Reform Act 
of 1995, and Executive Order 13132. We believe the change to the 
definition of ``unit'' will be beneficial to CAP drug vendors, as 
they will be able to exclude from the ASP calculation, for the 
initial 3-year contract period under the CAP, units of CAP drugs 
sold to an approved CAP vendor for use under the CAP drug program.

VIII. Impact of Changes in the Capital PPS

A. General Considerations

    Fiscal year (FY) 2001 was the last year of the 10-year 
transition period established to phase in the PPS for hospital 
capital-related costs. During the transition period, hospitals were 
paid under one of two payment methodologies: fully prospective or 
hold harmless. Under the fully prospective methodology, hospitals 
were paid a blend of the capital Federal rate and their hospital-
specific rate (see Sec.  412.340). Under the hold-harmless 
methodology, unless a hospital elected payment based on 100 percent 
of the capital Federal rate, hospitals were paid 85 percent of 
reasonable costs for old capital costs (100 percent for SCHs) plus 
an amount for new capital costs based on a proportion of the capital 
Federal rate (see Sec.  412.344). As we state in section V. of the 
preamble of this final rule, with the 10-year transition period 
ending with hospital cost reporting periods beginning on or after 
October 1, 2001 (FY 2002), beginning in FY 2002 capital prospective 
payment system payments for most hospitals are based solely on the 
capital Federal rate. Therefore, we no longer include information on 
obligated capital costs or projections of old capital costs and new 
capital costs, which were factors needed to calculate payments 
during the transition period, for our impact analysis.
    In accordance with Sec.  412.312, the basic methodology for 
determining a capital PPS payment is:
    (Standard Federal Rate) x (DRG weight) x (Geographic Adjustment 
Factor (GAF)) x (Large Urban Add-on, if applicable) x (COLA for 
hospitals located in Alaska and Hawaii) x (1 + Disproportionate 
Share (DSH) Adjustment Factor + Indirect Medical Education (IME) 
Adjustment Factor, if applicable).
    In addition, hospitals may also receive outlier payments for 
those cases that qualify under the threshold established for each 
fiscal year.
    The data used in developing the impact analysis presented below 
are taken from the March 2006 update of the FY 2005 MedPAR file and 
the March 2006 update of the Provider-Specific File that is used for 
payment purposes. Although the analyses of the changes to the 
capital prospective payment system do not incorporate cost data, we 
used the March 2006 update of the most recently available hospital 
cost report data (FYs 2003 and 2004) to categorize hospitals. Our 
analysis has several qualifications. First, we do not make 
adjustments for behavioral changes that hospitals may adopt in 
response to policy changes. Second, due to the interdependent nature 
of the IPPS, it is very difficult to precisely quantify the impact 
associated with each change. Third, we draw upon various sources for 
the data used to categorize hospitals in the tables. In some cases 
(for instance, the number of beds), there is a fair degree of 
variation in the data from different sources. We have attempted to 
construct these variables with the best available sources overall. 
However, for

[[Page 48347]]

individual hospitals, some miscategorizations are possible.
    Using cases from the March 2006 update of the FY 2005 MedPAR 
file, we simulated payments under the capital PPS for FY 2006 and FY 
2007 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.
    As we explain in section III.A. of the Addendum to this final 
rule, payments are no longer made under the regular exceptions 
provision under Sec. Sec.  412.348(b) through (e). Therefore, we no 
longer use the actuarial capital cost model (described in Appendix B 
of the August 1, 2001 proposed rule (66 FR 40099)). We modeled 
payments for each hospital by multiplying the capital Federal rate 
by the GAF and the hospital's case-mix. We then added estimated 
payments for indirect medical education, disproportionate share, 
large urban add-on, and outliers, if applicable. For purposes of 
this impact analysis, the model includes the following assumptions:
    <bullet> We estimate that the Medicare case-mix index will 
increase by 1.0 percent in both FYs 2006 and 2007.
    <bullet> We estimate that the Medicare discharges will be 13.5 
million in FY 2006 and 13.1 million in FY 2007 for a 3.0 percent 
decrease from FY 2006 to FY 2007.
    <bullet> The capital Federal rate was updated beginning in FY 
1996 by an analytical framework that considers changes in the prices 
associated with capital-related costs and adjustments to account for 
forecast error, changes in the case-mix index, allowable changes in 
intensity, and other factors. The FY 2007 update is 1.1 percent (see 
section III.A.1.of the Addendum to this final rule).
    <bullet> In addition to the FY 2007 update factor, the tentative 
FY 2007 capital Federal rate was calculated based on a tentative 
GAF/DRG budget neutrality factor of 0.9994, a tentative outlier 
adjustment factor of 0.9568, and an exceptions adjustment factor of 
0.9997.

B. Results

    We used the actuarial model described above to estimate the 
potential impact of our changes for FY 2007 on total capital 
payments per case, using a universe of 3,595 hospitals. As described 
above, the individual hospital payment parameters are taken from the 
best available data, including the March 2006 update of the FY 2005 
MedPAR file, the March 2006 update to the Provider-Specific File, 
and the most recent cost report data from the March 2006 update of 
HCRIS. In Table III, we present a comparison of total payments per 
case for FY 2006 compared to FY 2007 based on the FY 2007 payment 
policies. Column 2 shows estimates of payments per case under our 
model for FY 2006. Column 3 shows estimates of payments per case 
under our model for FY 2007. Column 4 shows the total percentage 
change in payments from FY 2006 to FY 2007. The change represented 
in Column 4 includes the 1.1 percent update to the capital Federal 
rate, a 0.0 percent increase in case-mix, changes in the adjustments 
to the capital Federal rate (for example, the effect of the hospital 
wage index on the GAF), and reclassifications by the MGCRB. The 
comparisons are provided by: (1) Geographic location; (2) region; 
and (3) payment classification.
    The simulation results show that, on average, capital payments 
per case can be expected to increase 2.3 percent in FY 2007. In 
addition to the 1.1 percent increase due to the capital market 
basket update, this projected increase in capital payments per case 
is largely attributable to the change in the DRG recalibration 
process methodology for FY 2007 as discussed in section II.C. of the 
preamble. The tentative GAF and tentative outlier factor impose 
equal but opposite effects on capital payments (-0.2 percent and 0.2 
percent, respectively), and therefore have a zero net effect on 
capital payments per case.
    The results of our comparisons by geographic location and by 
region are consistent with the results we expected after applying 
the changes to the DRG recalibration methodology. The geographic 
comparison shows that urban hospitals are expected to experience a 
2.3 percent increase in IPPS capital payments per case, while rural 
hospitals are expected to experience a 2.1 percent increase in 
capital payments per case. This difference is mostly due to the 
changes to the methodology used to recalibrate DRGs discussed in 
section II.C. of the preamble of this final rule. As discussed in 
greater detail in that section of this final rule, analysis of our 
current methodology for setting DRG weights (using gross charges) 
indicates that bias is introduced into the weighting process. 
Specifically, we have also observed that ancillary service cost 
centers, in general, have higher charge markups than routine and ICU 
service cost centers, and therefore, higher weights for DRGs that 
use more ancillary services as opposed to DRGs that use more routine 
services. Surgical DRGs tend to have charges concentrated in 
ancillary cost center groups while medical DRGs tend to have charges 
concentrated in routine or ICU cost center groups. The bias in our 
current methodology results in artificially higher DRG relative 
weights for hospitals that are generally more expensive, such as 
teaching hospitals and specialty hospitals. Hospitals with these 
characteristics are generally found in urban locations.
    The redistributive impact of our proposals to reform the current 
DRG system was evident in the capital impact analysis as discussed 
in the proposed rule. Consequently, the proposed rule impact 
analysis showed greater capital increases per case for rural 
hospitals, as expected, than for hospitals in urban locations. In 
response to comments on the proposed rule, significant modifications 
were made to our DRG proposals. The modifications made in this final 
rule to our proposed changes to the DRG system are intended to 
moderate the payment redistribution, and the capital impact analysis 
reflects those modifications accordingly. Further mitigating the 
effects of the changes is moving to a 3-year transition period to 
apply the new methodology. The capital impact was also somewhat 
affected by the wage-index changes from the proposed rule to the 
final rule because the GAF values are derived from the wage index. 
The wage index used in the proposed rule included an occupational 
mix component. Due to circumstances as described in section III.C. 
of the preamble to this final rule, the wage index used in these 
calculations is tentative, and will be updated in a future Federal 
Register document, as well as on the CMS Web site.
    All regions are estimated to receive an increase in total 
capital payments per case from FY 2006 to FY 2007. Changes vary by 
region from a minimum increase of 0.4 percent (Puerto Rico) urban to 
a maximum increase of 3.2 percent (Pacific) urban. The change in 
payments per case for all hospitals is 2.3 percent and is similar to 
the change indicated in the proposed rule. However, the differences 
between urban and rural hospitals in this final rule are noticeably 
less than the differences observed in the proposed rule. As 
previously discussed, the increases in payments are largely 
attributable to changes in the DRG recalibration methodology, and 
the lesser degree of difference between rural and urban hospitals'' 
capital payment increases from the proposed rule and this final rule 
is due to the modifications made to the proposed DRG reforms. By 
type of ownership, the increases in payment are similar among all 
three types. Government hospitals and proprietary hospitals are both 
projected to have a 2.4 percent increase in total payments, while 
payments to voluntary hospitals are expected to increase 2.3 
percent.
    Section 1886(d)(10) of the Act established the MGCRB. Before FY 
2005, hospitals could apply to the MGCRB for reclassification for 
purposes of the standardized amount, wage index, or both. Section 
401(c) of Pub. L. 108-173 equalized the standardized amounts under 
the operating IPPS. Therefore, beginning in FY 2005, there is no 
longer reclassification for the purposes of the standardized 
amounts; however, hospitals still may apply for reclassification for 
purposes of the wage index for FY 2007. Reclassification for wage 
index purposes also affects the GAF because that factor is 
constructed from the hospital wage index.
    As discussed in section III.H.5. of the preamble of this final 
rule, procedural rules were established in the FY 2006 final rule 
(70 FR 47382) to recognize the special circumstances of section 508 
hospital reclassifications ending mid-year during FY 2007. Under 
these procedural rules, some section 1886(d)(10) hospital 
reclassifications are only in effect for the second half of the 
fiscal year. These half fiscal year reclassifications have 
implications for the calculation of reclassified wage indices and 
therefore, affect capital payments because GAF values are calculated 
from the hospital wage index.
    To present the effects of the hospitals being reclassified for 
FY 2007, we show the average payments per case for reclassified 
hospitals for each half of FY 2007 compared to the average payments 
per case for the same time period in FY 2006. The reclassified 
groups are compared to all other nonreclassified hospitals for the 
same time period. These categories are further identified by urban 
and rural designation. In general, the average payments per case in 
the first half of FY 2007

[[Page 48348]]

is the same as the average payments per case in the second half of 
FY 2007 with the exception of urban reclassifications, which 
decreases by 0.1 percent (2.5 percent to 2.4 percent) for the second 
half of FY 2007. Rural nonreclassified hospitals are expected to 
have the largest increases in payments (2.5 percent in both halves), 
as compared to the 2.0 percent increase for rural reclassified 
hospitals (for both halves of FY 2007). Falling between the 
percentage increase for rural non-reclassified hospitals and the 
increase for rural reclassified hospitals are the urban hospitals. 
Reclassified (urban) hospitals are projected to have increases of 
2.5 percent and 2.4 percent in the first and second halves of FY 
2007, respectively, while nonreclassified (urban) hospitals are 
projected to have a slightly lesser increase of 2.3 percent.
    As discussed in section VI.B. of the preamble of this final 
rule, we are making a technical revision to Sec.  412.316(b) and 
Sec.  412.320 to clarify that hospitals reclassified as rural under 
Sec.  412.103 are not eligible for the large urban add-on or for 
capital DSH to reflect our historic policy that hospitals 
reclassified as rural under Sec.  412.103 also are considered rural 
under capital PPS regulations. Currently, there are 38 hospitals 
that reclassified under this regulation and only 12 of these 
hospitals (about 0.3 percent of all IPPS hospitals) will be affected 
by the technical revisions to sections Sec.  412.316(b) and Sec.  
412.320 concerning the treatment of hospitals reclassified as rural 
under section Sec.  412.103. Based on the most recent available 
data, we estimate that the impact of these changes will be a less 
than 0.00001 percent decrease in aggregate IPPS payments.

                                Table III.--Comparison of Total Payments Per Case
                                 [FY 2006 payments compared to FY 2007 payments]
----------------------------------------------------------------------------------------------------------------
                                                                              Average FY  Average FY
                                                                   Number of     2006        2007
                                                                   hospitals   payments/   payments/    Change
                                                                                 case        case
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
    All hospitals...............................................       3,595         753         771         2.3
    Large urban areas (populations over 1 million)..............       1,441         849         870         2.5
    Other urban areas (populations of 1 million of fewer).......       1,149         731         746         2.1
    Rural areas.................................................       1,005         513         524         2.1
    Urban hospitals.............................................       2,590         796         814         2.3
        0-99 beds...............................................         651         617         632         2.4
        100-199 beds............................................         867         673         691         2.7
        200-299 beds............................................         492         751         769         2.4
        300-499 beds............................................         413         827         845         2.2
        500 or more beds........................................         167       1,005       1,027         2.1
    Rural hospitals.............................................       1,005         513         524         2.1
        0-49 beds...............................................         348         422         433         2.5
        50-99 beds..............................................         370         469         481         2.5
        100-149 beds............................................         174         516         526         2.0
        150-199 beds............................................          68         564         574         1.8
        200 or more beds........................................          45         642         652         1.6
By Region:
    Urban by Region.............................................       2,590         796         814         2.3
        New England.............................................         128         853         870         2.0
        Middle Atlantic.........................................         357         873         893         2.3
        South Atlantic..........................................         388         755         770         2.0
        East North Central......................................         395         782         802         2.6
        East South Central......................................         165         720         733         1.8
        West North Central......................................         157         783         799         2.1
        West South Central......................................         374         740         755         2.0
        Mountain................................................         149         787         811         3.1
        Pacific.................................................         424         920         949         3.2
        Puerto Rico.............................................          53         347         349         0.4
    Rural by Region.............................................       1,005         513         524         2.1
        New England.............................................          19         686         699         1.9
        Middle Atlantic.........................................          72         518         532         2.6
        South Atlantic..........................................         176         497         509         2.2
        East North Central......................................         125         547         558         2.0
        East South Central......................................         180         476         486         2.2
        West North Central......................................         116         540         550         2.0
        West South Central......................................         193         464         473         1.9
        Mountain................................................          81         535         544         1.6
        Pacific.................................................          43         616         631         2.4
By Payment Classification:
    All hospitals...............................................       3,595         753         771         2.3
    Large urban areas (populations over 1 million)..............       1,450         848         869         2.5
    Other urban areas (populations of 1 million of fewer).......       1,158         730         746         2.1
    Rural areas.................................................         987         515         526         2.1
    Teaching Status:
        Non-teaching............................................       2,511         630         645         2.5
        Fewer than 100 Residents................................         843         765         782         2.2
        100 or more Residents...................................         241       1,100       1,125         2.2
        Urban DSH:
            100 or more beds....................................       1,520         821         840         2.3
            Less than 100 beds..................................         347         543         558         2.7
        Rural DSH:
            Sole Community (SCH/EACH)...........................         385         464         475         2.2
            Referral Center (RRC/EACH)..........................         199         569         580         1.9

[[Page 48349]]

 
            Other Rural:
                100 or more beds................................          55         475         485         2.0
                Less than 100 beds..............................         183         423         433         2.5
    Urban teaching and DSH:
        Both teaching and DSH...................................         815         902         922         2.2
        Teaching and no DSH.....................................         201         816         834         2.3
        No teaching and DSH.....................................       1,052         667         684         2.6
        No teaching and no DSH..................................         540         700         717         2.4
    Rural Hospital Types:
        Non special status hospitals............................         288         451         461         2.4
        RRC/EACH................................................         142         577         590         2.2
        SCH/EACH................................................         339         477         487         2.2
        Medicare-dependent hospitals (MDH)......................         127         433         445         2.7
        SCH, RRC and EACH.......................................          83         580         588         1.3
Hospitals Reclassified by the Medicare Geographic Classification
 Review Board:
     FY2007 Reclassifications:
        All Urban Reclassified 1st Half.........................         325         775         795         2.5
        All Urban Non-Reclassified 1st Half.....................       2,240         800         819         2.3
        All Rural Reclassified 1st Half.........................         375         558         569         2.0
        All Rural Non-Reclassified 1st Half.....................         569         450         462         2.5
        All Urban Reclassified 2nd Half.........................         385         800         819         2.4
        All Urban Non-Reclassified 2nd Half.....................       2,180         796         815         2.3
        All Rural Reclassified 2nd Half.........................         375         558         569         2.0
        All Rural Non-Reclassified 2nd Half.....................         569         450         462         2.5
        All Section 401 Reclassified Hospitals..................          33         548         554         1.1
        Other Reclassified Hospitals (Section 1886(d)(8)(B))....          53         516         527         2.2
    Type of Ownership:
        Voluntary...............................................       2,102         771         789         2.3
        Proprietary.............................................         880         679         696         2.4
        Government..............................................         603         740         757         2.4
     Medicare Utilization as a Percent of Inpatient Days:
        0-25....................................................         243         999       1,030         3.0
        25-50...................................................       1,328         855         875         2.3
        50-65...................................................       1,478         663         679         2.3
        Over 65.................................................         462         597         609         2.1
----------------------------------------------------------------------------------------------------------------

IX. Impact of Changes Relating to the Loan Program for Capital Cost 
Under the Health Care Infrastructure Improvement Program

    In section XI. of the preamble to this final rule, we finalize 
the provisions of a September 30, 2005 interim final rule with 
comment period and the proposed changes in a September 30, 2005 
proposed rule relating to the selection criteria and the forgiveness 
of indebtedness for loans made to certain hospitals engaged in 
research in the causes, prevention, and treatment of cancer under 
the Health Care Infrastructure Improvement Program. This section of 
this final rule affects qualifying hospitals as defined in section 
1897 of the Act that have been selected to receive funds under the 
loan program.
    This provision will have little impact on the Medicare Trust 
Fund. The Congress provided $142 million for the loan program 
effective July 1, 2004, through September 30, 2008, and of the $142 
million, not more than $2 million may be used for the administration 
of the loan program for each of the fiscal years (that is, 2004 
through 2008).

X. Alternatives Considered

    This final rule contains a range of policies, including some 
changes related to specific DRA and MMA provisions. The preamble of 
this final rule provides descriptions of the statutory provisions 
that are addressed, identifies those policies when discretion has 
been exercised, presents rationale for our decisions and, where 
relevant, alternatives that were considered.
    In addition, we did not consider any alternatives to the 
policies we are implementing in this final rule relating to the 
implementation of the loan program under the Health Care 
Infrastructure Improvement Program because the statute specifically 
authorized the conditions under which the Secretary may forgive a 
loan provided under the program.

XI. Overall Conclusion

    The changes in this final rule will affect all classes of 
hospitals. Some hospitals are expected to experience significant 
gains and others less significant gains, but overall hospitals are 
projected to experience positive updates in IPPS payments in FY 
2007. Table I of section VI of this Appendix demonstrates the 
estimated distributional impact of the IPPS budget neutrality 
requirements for DRG and wage index changes, for the hold harmless 
transition for rural hospitals formerly classified as urban, and for 
the wage index reclassifications under the MGCRB. Table I also shows 
an overall increase of 3.4 percent in operating payments, which, in 
conjunction with the estimated 2.0 percent increase in capital 
payments to IPPS providers shown in Table III of section VIII of 
this Appendix, should result in a net increase of $3.33 billion to 
IPPS providers. The discussions presented in the previous pages, in 
combination with the rest of this final rule, constitute a 
regulatory impact analysis.

XII. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehousegov/omb/circulars/a004/a-4.pdf), in Table IV below, we 
have prepared an accounting statement showing the classification of 
the expenditures associated with the provisions of this final rule. 
This table provides our best estimate of the increase in Medicare 
payments on providers as a result of the changes to the IPPS, the 
LTCH case-mix, and the limitation on payments to SNFs for bad debt 
presented in this rule. All expenditures are classified as transfers 
to Medicare providers.
    The Congress provided $142 million for the loan program, 
effective July 1, 2004,

[[Page 48350]]

through September 30, 2008. Of the $142 million, not more than $2 
million may be used for the administration of the loan program for 
each of the fiscal years (that is FY 2004 through FY 2008).

      Table IV.--Accounting Statement: Classification of Estimated
                  Expenditures From FY 2006 to FY 2007
------------------------------------------------------------------------
                                              Transfers $3.889  billion
  Category annualized monetized transfers    federal government to IPPS
             from whom to whom               medicare providers, LTCHs,
                                                      and SNFs
------------------------------------------------------------------------
Total.....................................  $3.889 Billion.
------------------------------------------------------------------------

XIII. Executive Order 12866

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

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

I. Background

    Section 1886(e)(4)(A) of the Act requires that the Secretary, 
taking into consideration the recommendations of the Medicare 
Payment Advisory Commission (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)(B) of the Act, we are required to 
publish factors recommended by the Secretary in the final IPPS rule. 
Accordingly, we are publishing our final recommendations for the 
appropriate update factors for the IPPS standardized amount, the 
hospital-specific rates for SCHs and MDHs, and the rate-of-increase 
limits for hospitals and hospital units excluded from the IPPS.
    Section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 
5001(a) of Pub. L. 109-171, sets the FY 2007 percentage increase in 
the operating cost standardized amount equal to the rate-of-increase 
in the hospital market basket for IPPS hospitals in all areas, 
subject to the hospital submitting quality information under rules 
established by the Secretary under section 1886(b)(3)(B)(viii) of 
the Act. For hospitals that do not provide these data, the update is 
equal to the market basket percentage increase less 2.0 percentage 
points.
    Consistent with current law, based on the Office of the 
Actuary's second quarter 2006 forecast of the FY 2007 market basket 
increase of 3.4 percent, the FY 2007 update to the standardized 
amount for hospitals subject to the acute inpatient prospective 
payment system is 3.4 percent (that is, the market basket rate-of-
increase) for hospitals in all areas, provided the hospital submits 
quality data in accordance with our rules. For hospitals that do not 
submit quality data, the update to the standardized amount is 1.4 
percent (that is, the market basket rate-of-increase minus 2.0 
percentage points). (In the proposed rule, the most recent estimate 
of the market basket increase was also 3.4 percent.)
    Section 1886(b)(3)(B)(iv) of the Act sets the FY 2007 percentage 
increase in the hospital-specific rates applicable to SCHs and MDHs 
equal to the rate set forth in section 1886(b)(3)(B)(i) of the Act 
(that is, the same update factor as for all other hospitals subject 
to the IPPS, or the rate-of-increase in the market basket). 
Therefore, the update to the hospital-specific rates applicable to 
SCHs and MDHs is also 3.4 percent.
    Section 1886(b)(3)(B)(ii) of the Act is used for purposes of 
determining the percentage increase in the rate-of-increase limits 
for children's and cancer hospitals. Section 1886(b)(3)(B)(ii) of 
the Act sets the percentage increase in the rate-of-increase limits 
equal to the market basket percentage increase for years after FY 
2002. In accordance with Sec.  403.752(a) of the regulations, RNHCIs 
are paid under Sec.  413.40, which also uses section 
1886(b)(3)(B)(ii) of the Act to update the percentage increase in 
the rate-of-increase limits. Section 1886(j)(3)(C) of the Act 
addresses the increase factor for the Federal prospective payment 
rate of IRFs. Section 123 of Pub. L. 106-113, as amended by section 
307(b) of Pub. L. 106-554, provides the statutory authority for 
updating payment rates under the LTCH PPS.
    Some LTCHs and IPFs are transitioning to 100 percent of the 
Federal rate and currently receive a blend of reasonable cost-based 
payments computed under the TEFRA methodology and their respective 
Federal payment rates. As discussed below, the transition ends for 
LTCHs (not defined as new and that have not elected to be paid under 
100 percent of the Federal rate) for cost reporting periods 
beginning on or after October 1, 2006. Therefore, because no portion 
of LTCHs' prospective payments will be based on reasonable costs for 
cost reporting periods beginning on or after October 1, 2006, we are 
not providing an FY 2007 rate-of-increase adjustment under section 
1886(b)(3)(B)(ii) of the Act for LTCHs.
    Currently, children's hospitals, cancer hospitals and RNHCIs are 
the remaining three types of hospitals still reimbursed fully under 
reasonable costs. As we discuss in section IV. of the Addendum to 
this final rule, we are providing the FY 2007 IPPS operating market 
basket percentage increase (3.4 percent) that is being used to 
update the target limits for children's hospitals, cancer hospitals, 
and RNHCIs. (In the proposed rule, the most recent estimate of the 
market basket increase was also 3.4 percent for children's 
hospitals, cancer hospitals, and RNHCIs.)
    Effective since cost reporting periods beginning FY 2003, LTCHs 
have been paid under the LTCH PPS, which was implemented with a 5-
year transition period for LTCHs not defined as new under Sec.  
412.23(e)(4) (hereafter referred to as ``existing''). (Refer to 67 
FR 55954, August 30, 2002.) An existing LTCH could have elected to 
be paid on 100 percent of the Federal prospective rate at the start 
of any of its cost reporting periods during the 5-year transition 
period. During this transition period, if an existing LTCH did not 
elect to be paid 100 percent of the Federal prospective payment 
rate, it received a payment which consisted of a blend of its 
reasonable cost-based payment (subject to the TEFRA rate-of-increase 
limits) and the Federal prospective payment rate. Because the 
transition period ends with LTCH cost reporting periods beginning on 
or after October 1, 2006, those LTCHs who now receive blended 
payments will be paid based on 100 percent of the Federal 
prospective rate.
    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 based on 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. During a transition period between January 1, 2005 and 
January 1, 2008, existing IPFs are paid based on a blend of the 
reasonable cost-based payments, subject to the TEFRA limit, and the 
Federal per diem base rate. For cost reporting periods beginning on 
or after January 1, 2008, IPFs will be paid based on 100 percent of 
the Federal per diem rate. For purposes of the update factor for FY 
2007, the portion of the IPF PPS transitional blend payment based on 
reasonable costs would be determined by updating the IPF's TEFRA 
limit by the current estimate of the excluded hospital market 
basket, which is estimated to be 3.4 percent. The update factor of 
4.3 percent to the Federal per diem rate for July 1, 2006, through 
June 30, 2007, was provided in the RY 2007 IPF final rule (71 FR 
27046).
    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. 
(Refer to the IRF final rule (69 FR 45721).) In the FY 2007 IRF PPS 
proposed rule (71 FR 28106 and 28125), we proposed an update factor 
of 3.4 percent to the IRF PPS for FY 2007. The final update factor 
for the FY 2007 IRF PPS will be published in the FY 2007 IRF PPS 
final rule.
    Comment: One commenter believed the market basket update of 3.4 
percent is inadequate. The commenter claimed that data for 1998 
through 2006 indicate that hospital costs increased 37.9 percent, 
while Medicare payments increased 19.7 percent, resulting in a 
shortfall of $4.4 billion. The commenter noted that continual 
underfunding by CMS will further threaten the financial viability of 
not-for-profit hospitals in Michigan, thus limiting their ability to 
provide service to Medicare beneficiaries and others.
    Response: The current market basket forecast update of 3.4 
percent is based on Global Insight, Inc.'s (GII) 2006 second quarter 
forecast with historical data through the first quarter of 2006. GII 
is a nationally recognized economic and financial forecasting firm 
that contracts with CMS to forecast the components of the market 
baskets. In the FY 2006 IPPS rule, we noted that over the last 
several years, dramatic fluctuations in the price of certain costs

[[Page 48351]]

(mainly energy costs) have made it difficult to forecast the IPPS 
market basket. With our input and consultation, GII recently 
evaluated and modified its forecasting models to help enhance their 
accuracy. GII's latest forecast is based on these improved models 
and takes into account national and global economic trends.
    We will continue to monitor both the accuracy of our market 
basket updates and the profitability of IPPS hospitals, as well as 
work with GII to ensure the most accurate updates possible.
    Comment: One commenter was concerned that GII's methodology has 
a built-in bias of under projecting during the period when the 
overall economy is transitioning from a high growth and low 
inflation era to a low growth and high inflation period. The 
commenter explained that, during a transition period, the 
extrapolation of historical data tends to have larger projection 
variances and therefore adjustments should be made to correct these 
systematic projection biases during the time of major business cycle 
reversals. As a result, the commenter recommended that CMS include 
an adjustment in its projection methodology to correct for this 
systematic bias or adjust the projection error in its subsequent 
years' payments.
    Response: CMS and GII recognize the complexities associated with 
projecting prices during times of major business cycle reversals. 
GII includes adjustments in their forecasts to account for these 
systematic biases. GII employs a simultaneous equation approach to 
solve both macro and micro simulation models for the underlying 
components of the hospital market basket. Using this simultaneous 
approach facilitates the accurate inclusion of broader economic 
conditions, such as economy-wide growth and inflationary pressures, 
to be more accurately reflected in the micro level components that 
comprise the market basket. In addition, as part of these micro 
models, underlying businesses cycles, seasonal changes, and market 
fluctuations are incorporated to ensure forecasts accurately control 
for these market conditions during forecast cycles.
    Comment: One commenter was concerned that it is consistently 
disproportionately negatively affected by Medicare rate policies. 
The commenter recommended that no hospital receive less payments in 
the current year than the previous year or optimally CMS should 
provide a minimum payment increase of 2 percent.
    Response: We thank the commenter for its comments. However, as 
noted above, section 1886(b)(3)(B)(i)(XX) of the Act, as amended by 
section 5001(a) of Pub. L. 109-171, ties the FY 2007 percentage 
increase in the operating cost standardized amount equal to the 
rate-of-increase in the hospital market basket for IPPS hospitals in 
all areas. Therefore, we do not have the statutory authority to 
implement the changes to the update factors that the commenter is 
requesting.

II. Secretary's Final Recommendation for Updating the Prospective 
Payment System Standardized Amounts

    In recommending an update, the Secretary takes into account the 
factors such as the recommendations of MedPAC, the long-term 
solvency of the Medicare Trust Funds, and the capacity of the 
hospital industry to continually provide access to high quality care 
to Medicare beneficiaries through adequate payment to health care 
providers. In years prior to FY 2006, in making a recommendation, we 
included an update framework that analyzed hospital productivity, 
scientific and technological advances, practice pattern changes, 
changes in case-mix, the effects of reclassification on 
recalibration and forecast error correction. As we stated in the FY 
2007 proposed rule, we are no longer including this analysis in our 
recommendation for the update (71 FR 24420).
    In the FY 2007 IPPS proposed rule, we proposed to recommend an 
update of 2.95 percent, which reflected the CMS Office of the 
Actuary's most recent forecast of the FY 2007 market basket increase 
minus an adjustment factor of 0.45 percentage points based on the FY 
2007 President's budget. We did not receive any public comments 
regarding this issue. In this final rule, we are also recommending 
an update for IPPS hospitals based on the forecasted market basket 
increase of 3.4 percent from the Office of the Actuary's most recent 
(second quarter) 2006 forecast of the FY 2007 market basket increase 
minus an adjustment factor of 0.45 percentage points based on the FY 
2007 President's budget. Thus, the Secretary's final recommendation 
for the update to the IPPS standardized amount for all hospitals is 
2.95 percentage points for hospitals that provide the required 
quality data.
    In addition to making a recommendation for IPPS hospitals, in 
accordance with section 1886(e)(4)(A) of the Act, we are also 
recommending update factors for all other types of hospitals. Using 
the 2006 second quarter forecast from the Office of the Actuary of 
the FY 2007 market basket increase and an adjustment factor based on 
the FY 2007 President's budget, for FY 2007, for SCHs and MDHs, we 
are also recommending an update of 2.95 percent.

III. Secretary's Final Recommendation for Updating the Rate-of-Increase 
Limits for Excluded Hospitals and Hospital Units

    We did not receive any public comments concerning our proposed 
recommendations for updating the rate-of-increase for FY 2007 for 
cancer hospitals, RNHCIs, and children's hospitals. Our final 
recommendation does not differ from the proposed recommendation. The 
second quarter forecast from the Office of the Actuary of the FY 
2007 market basket increase is also 3.4 percent for these excluded 
hospitals and hospital units. Thus, using an adjustment factor based 
on the FY 2007 President's budget, the Secretary's final 
recommendation is for a 2.95 percent increase to the target limits 
for cancer hospitals, RNHCIs, and children's hospitals.
    Further, we did not receive any public comments concerning our 
proposed recommendations for the update factors for IPFs. For IPFs 
that are currently paid a blend of reasonable cost-based (subject to 
the TEFRA limits) and Federal prospective payment amounts, based on 
the estimate from the Office of the Actuary and an adjustment factor 
from the FY 2007 President's budget, in the proposed rule, we 
recommended an update factor of 3.15 percent for the portion of the 
payment that is based on reasonable costs, subject to the TEFRA 
limits. Based on second quarter data from the Office of the Actuary 
and an adjustment factor from the FY 2007 President's budget, we are 
recommending a final update of 2.95 percent for the portion of the 
payment that is based on reasonable costs, subject to the TEFRA 
limits.
    Consistent with the RY 2007 LTCH PPS proposed rule (71 FR 4648), 
in the FY 2007 IPPS proposed rule, we recommended that the Federal 
rate remain unchanged for FY 2007. In this final rule, consistent 
with the RY 2007 LTCH final rule (71 FR 27826), we are recommending 
that the Federal rate to the LTCH PPS remain unchanged for FY 2007.
    In the RY 2007 IPF PPS proposed rule (71 FR 3620) and in the FY 
2006 IPPS proposed rule, we proposed an update factor of 4.5 percent 
to the IPF PPS for RY 2007. The proposed update reflected an 
increase from the 18-month period beginning January 1, 2005, when 
the IPF PPS was first adopted. However, in the RY 2007 IPF final 
rule (71 FR 27040), we recommended an update factor of 4.3 percent. 
Consistent with the RY 2007 IPF final rule, in this IPPS final rule, 
we are recommending an update factor of 4.3 percent for IPFs.
    In the FY 2007 IPPS proposed rule, consistent with the 
President's FY 2007 budget, we recommended the Federal rate to the 
IRF PPS remain unchanged for FY 2007. We note, as mentioned above, 
in the FY 2007 IRF PPS proposed rule (71 FR 281206 and 28125), we 
proposed an update factor of 3.4 percent to the IRF PPS for FY 2007. 
The final update factor for the FY 2007 IRF PPS will be published in 
the FY 2007 IRF PPS final rule. Therefore, in this final rule, 
consistent with FY 2007 IRF PPS final rule, we are recommending the 
update factor that will be published in the FY 2007 IRF PPS final 
rule. We refer readers to the FY 2007 IRF PPS final rule to view the 
update factor.

IV. Secretary's Recommendation for Updating the Capital Prospective 
Payment Amounts

    Because the operating and capital prospective payment systems 
remain separate, we are continuing to use separate updates for 
operating and capital payments. The final update to the capital 
payment rates is discussed in section III. of the Addendum to this 
final rule.

[FR Doc. 06-6692 Filed 8-1-06; 4:00 pm]
BILLING CODE 4120-01-P


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