[Federal Register Volume 71, Number 18 (Friday, January 27, 2006)]
[Proposed Rules]
[Pages 4648-4779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-665]



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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 Part 412



Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2007: Proposed Annual Payment Rate Updates, Policy 
Changes, and Clarification; Proposed Rule

Federal Register / Vol. 71, No. 18 / Friday, January 27, 2006 / 
Proposed Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1485-P]
RIN 0938-AO06


Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2007: Proposed Annual Payment Rate Updates, Policy 
Changes, and Clarification

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would update the annual payment rates for 
the Medicare prospective payment system (PPS) for inpatient hospital 
services provided by long-term care hospitals (LTCHs). The proposed 
payment amounts and factors used to determine the updated Federal rates 
that are described in this proposed rule were determined based on the 
LTCH PPS rate year July 1, 2006 through June 30, 2007. The annual 
update of the long-term care diagnosis-related group (LTC-DRG) 
classifications and relative weights remains linked to the annual 
adjustments of the acute care hospital inpatient diagnosis-related 
group system, and would continue to be effective each October 1. The 
proposed outlier threshold for July 1, 2006, through June 30, 2007, 
would also be derived from the LTCH PPS rate year calculations. We are 
also proposing to make policy changes and clarifications.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on March 20, 2006.

ADDRESSES: In commenting, please refer to file code CMS-1485-P. 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/. 
(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-1485-P, P.O. Box 8012, Baltimore, MD 
21244-8012.
    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-1485-P, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7197 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 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.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: 
Tzvi Hefter, (410) 786-4487 (General information).
Judy Richter, (410) 786-2590 (General information, payment adjustments 
for special cases, and onsite discharges and readmissions, interrupted 
stays, co-located providers, and short-stay outliers).
Michele Hudson, (410) 786-5490 (Calculation of the payment rates, LTC-
DRGs, relative weights and case-mix index, market basket, wage index, 
budget neutrality, and other payment adjustments).
Ann Fagan, (410) 786-5662 (Patient classification system).
Miechal Lefkowitz, (410) 786-5316 (High-cost outliers and cost-to-
charge ratios).
Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted stay, 
and transition period).
Nancy Kenly, (410) 786-7792 (Federal rate update and case-mix index).

SUPPLEMENTARY INFORMATION:
    Submission of Public 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-1485-P] 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. CMS posts all comments 
received before the close of the comment period on its public website 
as soon as possible after they are received. Comments received timely 
will be available for public inspection as they are received, generally 
beginning approximately 3 weeks after publication of a document, at the 
headquarters of the Centers for Medicare & Medicaid Services, 7500 
Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
public comments, phone 1-800-743-3951.

Table of Contents

I. Background
    A. Legislative and Regulatory Authority
    B. Criteria for Classification as a LTCH
    1. Classification as a LTCH
    2. Hospitals Excluded From the LTCH PPS
    C. Transition Period for Implementation of the LTCH PPS
    D. Limitation on Charges to Beneficiaries
    E. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
II. Summary of Major Contents of This Proposed Rule
III. Long-Term Care Diagnosis-Related Group (LTC-DRG) 
Classifications and Relative Weights
    A. Background
    B. Patient Classifications Into DRGs
    C. Organization of DRGs
    D. Update of LTC-DRGs
    E. ICD-9-CM Coding System
    1. Uniform Hospital Discharge Data Set (UHDDS) Definitions

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    2. Maintenance of the ICD-9-CM Coding System
    3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    F. Method for Updating the LTC-DRG Relative Weights
IV. Proposed Changes to the LTCH PPS Payment Rates for the 2007 LTCH 
PPS Rate Year
    A. Overview of the Development of the Payment Rates
    B. Proposed LTCH PPS Market Basket
    1. Overview of the RPL Market Basket
    2. Proposed Methodology for Determining the Operating Portion of 
the RPL LTCH PPS Market Basket
    3. Proposed Methodology for Determining the Capital Portion of 
the RPL Market Basket
    4. Proposed Market Basket Estimate for the 2007 LTCH PPS Rate 
Year
    C. Proposed Standard Federal Rate for the 2007 LTCH PPS Rate 
Year
    1. Background
    2. Description of a Preliminary Model of an Update Framework 
Under the LTCH PPS
    3. Proposed Update to the Standard Federal Rate for the 2007 
LTCH PPS Rate Year
    4. Proposed Standard Federal Rate for the 2007 LTCH PPS Rate 
Year
    D. Calculation of Proposed LTCH Prospective Payments for the 
2007 LTCH PPS Rate Year
    1. Proposed Adjustment for Area Wage Levels
    a. Background
    b. Geographic Classifications/Labor Market Area Definitions
    c. Proposed Labor-Related Share
    d. Proposed Wage Index Data
    2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii
    3. Proposed Adjustment for High-Cost Outliers
    a. Background
    b. Cost-to-charge ratios (CCRs)
    c. Establishment of the Proposed Fixed-Loss Amount
    d. Reconciliation of Outlier Payments Upon Cost Report 
Settlement
    e. Application of Outlier Policy to Short-Stay Outlier Cases
    4. Other Payment Adjustments
    5. Proposed Budget Neutrality Offset To Account for the 
Transition Methodology
    6. One-time Prospective Adjustment to the Standard Federal Rate.
V. Other Proposed Policy Changes for the 2007 LTCH PPS Rate Year
    A. Proposed Adjustments for Special Cases
    1. Adjustment of Short-Stay Outlier Cases
    a. Proposed Changes to the Method for Determining the Payment 
Amount for Short-Stay Outlier Cases
    b. Proposed Changes to the Determination for Cost-to-Charge 
Ratios (CCRs) and Reconciliation of Short-Stay Outlier Cases
    2. The 3-Day or Less Interruption of Stay
    B. Special payment provisions for LTCH Hospitals Within 
Hospitals (HwHs) and LTCH Satellites
VI. Computing the Proposed Adjusted Federal Prospective Payments for 
the 2007 LTCH PPS Rate Year
VII. Transition Period
VIII. Payments to New LTCHs
IX. Method of Payment
X. Monitoring
XI. RTI Report on MedPAC June 2004 LTCH Recommendations
    A. Overview of the Issues
    B. Describing the LTCH Universe Since FY 2003
    C. Patient, Facility, and Alternative Treatment Site Analysis
    D. Specific Findings From Claims Analysis
XII. Collection of Information Requirements
XIII. Regulatory Impact Analysis
Addendum--Tables
Appendix A--Description of a Preliminary Model of an Update 
Framework Under the LTCH PPS

Acronyms

    Because of the many terms to which we refer by acronym in this 
proposed rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:

3M 3M Health Information Systems
AHA American Hospital Association
AHIMA American Health Information Management Association
ALOS Average length of stay
APR All patient refined
ASCA Administrative Simplification Compliance Act of 2002 (Pub. L. 107-
105)
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
CBSA Core-based statistical area
CC Complications and comorbidities
CCR Cost-to-charge ratio
C&M Coordination and maintenance
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated metropolitan statistical area
COLA Cost of living adjustment
COPS Medicare conditions of participation
CPI Consumer Price Indexes
DSH Disproportionate share of low-income patients
DRGs Diagnosis-related groups
ECI Employment Cost Indexes
FI Fiscal intermediary
FY Federal fiscal year
HCRIS Hospital cost report information system
HHA Home health agency
HHS (Department of) Health and Human Services
HIPAA Health Insurance Portability and Accountability Act (Pub. L. 104-
191)
HIPC Health Information Policy Council
HwHs Hospitals Within Hospitals
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification (codes)
IME Indirect medical education
I-O Input-Output
IPF Inpatient psychiatric facility
IPPS Acute Care Hospital Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare code editor
MDC Major diagnostic categories
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review file
MMA Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (Pub. L. 108-173)
MSA Metropolitan statistical area
NCHS National Center for Health Statistics
NECMA New England County metropolitan area
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
PIP Periodic interim payment
PLI Professional liability insurance
PMSA Primary metropolitan statistical area
PPI Producer Price Indexes
PPS Prospective payment system
QIO Quality Improvement Organization (formerly Peer Review organization 
(PRO))
RPL Rehabilitation psychiatric long-term care (hospital)
RTI Research Triangle Institute, International
RY Rate year (July 1 through June 30)
SNF Skilled nursing facility
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-248)
UHDDS Uniform hospital discharge data set

I. Background

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

A. Legislative and Regulatory Authority

    Section 123 of the Medicare, Medicaid, and SCHIP (State Children's

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Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provide for payment for both the operating and 
capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals described in section 1886(d)(1)(B)(iv) of the Social 
Security Act (the Act), effective for cost reporting periods beginning 
on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in FY 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a per 
discharge system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs while maintaining budget neutrality.
    Section 307(b)(1) of BIPA, among other things, mandates that the 
Secretary shall examine, and may provide for, adjustments to payments 
under the LTCH PPS, including adjustments to DRG weights, area wage 
adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In a Federal Register document issued on August 30, 2002, we 
implemented the LTCH PPS authorized under BBRA and BIPA (67 FR 55954). 
This system uses information from LTCH patient records to classify 
patients into distinct long-term care diagnosis-related groups (LTC-
DRGs) based on clinical characteristics and expected resource needs. 
Payments are calculated for each LTC-DRG and provisions are made for 
appropriate payment adjustments. Payment rates under the LTCH PPS are 
updated annually and published in the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) 
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR Part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. For each cost reporting period, a hospital-specific 
ceiling on payments was determined by multiplying the hospital's 
updated target amount by the number of total current year Medicare 
discharges. The August 30, 2002 final rule further details the payment 
policy under the TEFRA system (67 FR 55954).
    In the August 30, 2002 final rule, we also presented an in-depth 
discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
budget neutrality requirements mandated by section 123 of the BBRA. The 
same final rule that established regulations for the LTCH PPS under 42 
CFR part 412, subpart O, also contained LTCH provisions related to 
covered inpatient services, limitation on charges to beneficiaries, 
medical review requirements, furnishing of inpatient hospital services 
directly or under arrangement, and reporting and recordkeeping 
requirements. We refer readers to the August 30, 2002 final rule for a 
comprehensive discussion of the research and data that supported the 
establishment of the LTCH PPS (67 FR 55954).
    On June 6, 2003, we published a final rule in the Federal Register 
(68 FR 34122) that set forth the 2004 annual update of the payment 
rates for the Medicare PPS for inpatient hospital services furnished by 
LTCHs. It also changed the annual period for which the payment rates 
are effective. The annual updated rates are now effective from July 1 
through June 30 instead of from October 1 through September 30. We 
refer to the July through June time period as a ``long-term care 
hospital rate year'' (LTCH PPS rate year). In addition, we changed the 
publication schedule for the annual update to allow for an effective 
date of July 1. The payment amounts and factors used to determine the 
annual update of the LTCH PPS Federal rate is based on a LTCH PPS rate 
year. While the LTCH payment rate update is effective July 1, the 
annual update of the LTC-DRG classifications and relative weights are 
linked to the annual adjustments of the acute care hospital inpatient 
DRGs and are effective each October 1.
    On May 6, 2005, we published the Prospective Payment System for 
Long-Term Care Hospitals: Annual Payment Rate Updates, Policy Changes, 
and Clarifications final rule (70 FR 24168) (hereinafter referred to as 
the RY 2006 LTCH PPS final rule). In this rule, we set forth the 2006 
LTCH PPS rate year annual update of the payment rates for the Medicare 
PPS for inpatient hospital services provided by LTCHs. We also 
discussed clarification of the notification policy for colocated LTCHs 
and satellite facilities. The RY 2006 LTCH PPS final rule also included 
a provision to extend the surgical DRG exception in the 3-day or less 
interruption of stay policy at Sec.  412.531 as well as a provision 
that clarified and modified existing notification requirements for the 
purpose of implementing Sec.  412.532.

B. Criteria for Classification as a LTCH

1. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient LOS of 
greater than 25 days. Alternatively, Sec.  412.23(e)(2)(ii) states that 
for cost reporting periods beginning on or after August 5, 1997, a 
hospital that was first excluded from the PPS in 1986 and can 
demonstrate that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in FY 1997 have 
a principal diagnosis that reflects a finding of neoplastic disease 
must have an average inpatient LOS for all patients, including both 
Medicare and non-Medicare inpatients, of greater than 20 days.
    Section 412.23(e)(3) provides that, subject to the provisions of 
paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, the average 
Medicare inpatient LOS, specified under Sec.  412.23(e)(2)(i) is 
calculated by dividing the total number of covered and noncovered days 
of stay of Medicare inpatients (less leave or pass days) by the number 
of total Medicare discharges for the hospital's most recent complete 
cost reporting

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period. Section 412.23 also provides that subject to the provisions of 
paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, the average 
inpatient LOS specified under Sec.  412.23(e)(2)(ii) is calculated by 
dividing the total number of days for all patients, including both 
Medicare and non-Medicare inpatients (less leave or pass days) by the 
number of total discharges for the hospital's most recent complete cost 
reporting period.
    In the RY 2005 LTCH PPS final rule (69 FR 25674), we specified the 
procedure for calculating a hospital's inpatient average length of stay 
(ALOS) for purposes of classification as a LTCH. That is, if a 
patient's stay includes days of care furnished during two or more 
separate consecutive cost reporting periods, the total days of a 
patient's stay would be reported in the cost reporting period during 
which the patient is discharged (69 FR 25705). Therefore, we revised 
the regulations at Sec.  412.23(e)(3)(ii) to specify that, effective 
for cost reporting periods beginning on or after July 1, 2004, in 
calculating a hospital's ALOS, if the days of an inpatient stay involve 
days of care furnished during two or more separate consecutive cost 
reporting periods, the total number of days of the stay are considered 
to have occurred in the cost reporting period during which the 
inpatient was discharged.
    Fiscal intermediaries (FIs) verify that LTCHs meet the ALOS 
requirements. We note that the inpatient days of a patient who is 
admitted to a LTCH without any remaining Medicare days of coverage, 
regardless of the fact that the patient is a Medicare beneficiary, will 
not be included in the above calculation. Because Medicare would not be 
paying for any of the patient's treatment, data on the patient's stay 
would not be included in the Medicare claims processing systems. As 
described in Sec.  409.61, in order for both covered and noncovered 
days of a LTCH hospitalization to be included, a patient admitted to 
the LTCH must have at least one remaining benefit day (68 FR 34123).
    The FI's determination of whether or not a hospital qualified as an 
LTCH is based on the hospital's discharge data from the hospital's most 
recent complete cost reporting period (Sec.  412.23(e)(3)) and is 
effective at the start of the hospital's next cost reporting period 
(Sec.  412.22(d)). However, if the hospital does not meet the ALOS 
requirement as specified in Sec.  412.23(e)(2)(i) and (ii), the 
hospital may provide the intermediary with data indicating a change in 
the ALOS by the same method for the period of at least 5 months of the 
immediately preceding 6-month period (69 FR 25676). Our interpretation 
of the current regulations at Sec.  412.23(e)(3) was to allow hospitals 
to submit data using a period of at least 5 months of the most recent 
data from the immediately preceding 6-month period.
    As we stated in the Inpatient Prospective Payment System (IPPS) 
final rule, published August 1, 2003, prior to the implementation of 
the LTCH PPS, we did rely on data from the most recently submitted cost 
report for purposes of calculating the ALOS. The calculation to 
determine whether an acute care hospital qualifies for LTCH status was 
based on total days and discharges for LTCH inpatients. However, with 
the implementation of the LTCH PPS, for the ALOS specified under Sec.  
412.23(e)(2)(i), we revised Sec.  412.23(e)(3)(i) to only count total 
days and discharges for Medicare inpatients (67 FR 55970 through 
55974). In addition, the ALOS specified under Sec.  412.23(e)(2)(ii) is 
calculated by dividing the total number of days for all patients, 
including both Medicare and non-Medicare inpatients (less leave or pass 
days) by the number of total discharges for the hospital's most recent 
complete cost reporting period. As we discussed in the August 1, 2003 
IPPS final rule, we are unable to capture the necessary data from our 
present cost reporting forms. Therefore, we have notified FIs and LTCHs 
that until the cost reporting forms are revised, for purposes of 
calculating the ALOS, we will be relying upon census data extracted 
from Medicare Provider Analysis and Review (MedPAR) files that reflect 
each LTCH's cost reporting period (68 FR 45464). Requirements for 
hospitals seeking classification as LTCHs that have undergone a change 
in ownership, as described in Sec.  489.18, are set forth in Sec.  
412.23(e)(3)(iv).
2. Hospitals Excluded From the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c) and, therefore, are not subject to the 
LTCH PPS rules:
    <bullet> Veterans Administration hospitals.
    <bullet> Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR part 403.
    <bullet> Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of the Social 
Security Amendments of 1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or 
section 222(a) of the Social Security Amendments of 1972 (Pub. L. 92-
603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer systems, subject 
to the rate-of-increase test at section 1814(b) of the Act).
    <bullet> Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.

C. Transition Period for Implementation of the LTCH PPS

    In the August 30, 2002 final rule, we provided for a 5-year 
transition period from reasonable cost-based reimbursement to a full 
Federal prospective payment based on 100 percent of the Federal rate 
for LTCHs (67 FR 56038). However, existing LTCHs and LTCHs that are not 
defined as new in Sec.  412.533(d) have the option to elect to be paid 
based on 100 percent of the Federal prospective payment. During the 5-
year period, two payment percentages are to be used to determine a 
LTCH's total payment under the PPS. The blend percentages are as shown 
in Table 1.

                                 Table 1
------------------------------------------------------------------------
                                                        Reasonable cost-
 Cost reporting periods beginning      Prospective           based
            on or after              payment federal     reimbursement
                                     rate percentage    rate  percentage
------------------------------------------------------------------------
October 1, 2002...................                 20                 80
October 1, 2003...................                 40                 60
October 1, 2004...................                 60                 40
October 1, 2005...................                 80                 20
October 1, 2006...................                100                  0
------------------------------------------------------------------------


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D. Limitation on Charges to Beneficiaries

    In the August 30, 2002 final rule, we presented an in-depth 
discussion of beneficiary liability under the LTCH PPS (67 FR 55974 
through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we 
clarified that the discussion of beneficiary liability in the August 
30, 2002 final rule was not meant to establish rates or payments for, 
or define Medicare-eligible expenses. Under Sec.  412.507, as 
consistent with other established hospital prospective payment systems, 
a LTCH may not bill a Medicare beneficiary for more than the deductible 
and coinsurance amounts as specified under Sec.  409.82, Sec.  409.83, 
and Sec.  409.87 and for items and services as specified under Sec.  
489.30(a), if the Medicare payment to the LTCH is the full LTC-DRG 
payment amount. However, under the LTCH PPS, Medicare will only pay for 
days for which the beneficiary has coverage until the short-stay 
outlier (SSO) threshold is exceeded. (See section V.A.1.a. of this 
preamble.) Therefore, if the Medicare payment was for a SSO case (Sec.  
412.529) that was less than the full LTC-DRG payment amount because the 
beneficiary had insufficient remaining Medicare days, the LTCH could 
also charge the beneficiary for services delivered on those uncovered 
days (Sec.  412.507).

E. Administrative Simplification Compliance Act and Health Insurance 
Portability and Accountability Act Compliance

    Claims submitted to Medicare must comply with both the 
Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), 
and Health Insurance Portability and Accountability Act (HIPAA) (Pub. 
L. 104-191). Section 3 of ASCA requires the Medicare Program, to deny 
payment under Part A or Part B for any expenses for items or services 
``for which a claim is submitted other than in an electronic form 
specified by the Secretary.'' Section 1862(h) of the Act (as added by 
section 3(a) of ASCA) provides that the Secretary shall waive such 
denial in two types of cases and may also waive such denial ``in such 
unusual cases as the Secretary finds appropriate.'' (Also, see 68 FR 
48805, August 15, 2003, implementing section 3 of ASCA.) Section 3 of 
ASCA operates in the context of the Administrative Simplification 
provisions of HIPAA, which include, among other provisions, the 
transactions and code sets standards requirements codified as 45 CFR 
parts 160 and 162, subparts A and I through R (generally known as the 
Transactions Rule). The Transactions Rule requires covered entities, 
including covered providers, to conduct covered electronic transactions 
according to the applicable transactions and code sets standards.

II. Summary of the Major Contents of This Proposed Rule

    In this proposed rule, we are setting forth the proposed annual 
update to the payment rates for the Medicare LTCH PPS, as well as, 
proposing other policy changes. The following is a summary of the major 
areas that we are addressing in this proposed rule:
    In section III of this preamble, we discuss the LTCH PPS patient 
classification and the relative weights which remain linked to the 
annual adjustments of the acute care hospital inpatient DRG system, and 
are based on the annual revisions to the International Classification 
of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes 
effective each October 1.
    In section IV.B. of this preamble, we propose to adopt the 
``Rehabilitation, Psychiatric, Long Term Care (RPL)'' market basket 
under the LTCH PPS in place of the excluded hospital with capital 
market basket.
    As discussed in section IV.C. of this preamble, we are proposing a 
zero percent update to the LTCH PPS Federal rate for the 2007 LTCH PPS 
rate year instead of the most recent estimate of the LTCH PPS market 
basket.
    Also in section IV.C. of this preamble, we discuss the proposed 
prospective payment rate for RY 2007, and in section IV.D. we discuss 
the applicable adjustments to the proposed payment rates, including the 
proposed revisions to the wage index, the proposed cost-of-living 
adjustment factors, the proposed outlier threshold, and the proposed 
transition period budget neutrality factor for the 2007 LTCH PPS rate 
year. We are also proposing revisions to the cost-to-charge ratio and 
reconciliation provisions as they apply to LTCH outlier payment 
policies.
    In section IV.D.1.c. of this preamble, we also discuss our proposal 
to revise the LTCH PPS labor-related share based on RPL market basket. 
Also in section IV.D. of this preamble, we are proposing to postpone 
the deadline for making the one-time prospective adjustment for the 
Federal rate at Sec.  412.523(d)(3).
    In section V.A. of this preamble, we are proposing to revise the 
existing payment adjustment for SSO cases by reducing the part of the 
current payment formula that is based on costs and adding a fourth 
component to the current payment formula. Also in section V.A. of this 
preamble, we are proposing to sunset the surgical DRG exception to the 
payment policy established under the 3-day or less interruption of stay 
regulations at Sec.  412.531(a)(1).
    In section V.B. of this preamble, for LTCH hospitals within 
hospitals (HwHs) and LTCH satellites, we are proposing to clarify at 
Sec.  412.534(c) that under the policy for adjusting the LTCH PPS 
payment based on the amount that would be determined under the IPPS 
payment methodology, we calculate the LTCH PPS payment amount that is 
equivalent to what would otherwise be paid under the IPPS. We are also 
proposing to codify in regulations the general formula we currently use 
to give affect to the regulations as they pertain to calculating an 
amount under subpart O that is equivalent to an amount that would be 
determined under Sec.  412.1(a).
    In section X. of this preamble, we will discuss our on-going 
monitoring protocols under the LTCH PPS.
    In section XI of this preamble, we will discuss the recommendations 
made by the Research Triangle Institute, International's (RTI) 
evaluation of the feasibility of adopting recommendations made in the 
June 2004 MedPAC Report.
    In section XIII of this preamble, we analyze the impact of the 
proposed changes presented in this proposed rule on Medicare 
expenditures, Medicare-participating LTCHs, and Medicare beneficiaries.
    In Appendix A of this proposed rule, we present a description of a 
preliminary model of an update framework under the LTCH PPS that we may 
propose to use in the future for purposes of the annual updating of the 
LTCH PPS Federal rate in future years.

III. Long-Term Care Diagnosis-Related Group (LTC-DRG) Classifications 
and Relative Weights

[If you choose to comment on issues in this section, please include the 
caption ``LTC-DRG CLASSIFICATIONS AND RELATIVE WEIGHTS'' at the 
beginning of your comments.]

A. Background

    Section 123 of the BBRA specifically requires that the PPS for 
LTCHs be a per discharge system with a DRG-based patient classification 
system reflecting the differences in patient resources and costs in 
LTCHs while maintaining budget neutrality. Section 307(b)(1) of BIPA 
modified the requirements of section 123 of the BBRA 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 DRGs that have been modified to account 
for different

[[Page 4653]]

resource use of LTCH patients as well as the use of the most recently 
available hospital discharge data.''
    In accordance with section 123 of the BBRA as amended by section 
307(b)(1) of BIPA and Sec.  412.515, we use information derived from 
LTCH PPS patient records to classify these cases into distinct LTC-DRGs 
based on clinical characteristics and estimated resource needs. The 
LTC-DRGs used as the patient classification component of the LTCH PPS 
correspond to the hospital inpatient DRGs in the IPPS. We assign an 
appropriate weight to the LTC-DRGs to account for the difference in 
resource use by patients exhibiting the case complexity and multiple 
medical problems characteristic of LTCHs.
    In a departure from the IPPS, we use low volume LTC-DRGs (less than 
25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
In order to manage the large number of low volume DRGs (all DRGs with 
fewer than 25 cases), we group low volume DRGs into 5 quintiles based 
on average charge per discharge. (A listing of the current composition 
of low volume quintiles used in determining the FY 2006 LTC-DRG 
relative weights appears in the FY 2006 IPPS final rule (70 FR 47329 
through 47332).) We also account for adjustments to payments for cases 
in which the stay at the LTCH is less than or equal to five-sixths of 
the geometric ALOS and classify these cases as SSO cases. (A detailed 
discussion of the application of the Lewin Group model that was used to 
develop the LTC-DRGs appears in the August 30, 2002 LTCH PPS final rule 
(67 FR 55978).)

B. Patient Classifications Into DRGs

    Generally, under the LTCH PPS, Medicare payment is made at a 
predetermined specific rate for each discharge; that payment varies by 
the LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into LTC-DRGs for payment based on the following six data 
elements:
    (1) Principal diagnosis.
    (2) Up to eight additional diagnoses.
    (3) Up to six procedures performed.
    (4) Age.
    (5) Sex.
    (6) Discharge status of the patient.
    As indicated in the August 30, 2002 LTCH PPS final rule, upon the 
discharge of the patient from a LTCH, the LTCH must assign appropriate 
diagnosis and procedure codes from the most current version of the ICD-
9-CM. HIPAA transactions and code sets standards regulations (45 CFR 
parts 160 and 162) require that no later than October 16, 2003, all 
covered entities must comply with the applicable requirements of 
subparts A and I through R of part 162. Among other requirements, those 
provisions direct covered entities that electronically transmit 
institutional health care claim or equivalent encounter information, 
for instance, to use the ASC X12N 837 Health Care Claim: Institutional, 
Volumes 1 and 2, version 4010, and the applicable standard medical data 
code sets. (See 45 CFR 162.1002 and 45 CFR 162.1102).
    Medicare FIs 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 DRG can be made. During this 
process, the following types of cases are selected for further 
development:
    <bullet> Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.6, Radical abdominal hysterectomy, would be an inappropriate code 
for a male.)
    <bullet> Cases including surgical procedures not covered under 
Medicare. (For example, organ transplant in a non-approved transplant 
center.)
    <bullet> Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262, 
Other severe protein-calorie malnutrition, contains all appropriate 
digits, but if it is reported with either fewer or more than 3 digits, 
the claim will be rejected by the MCE as invalid.)
    <bullet> Cases with principal diagnoses that do not usually justify 
admission to the hospital. (For example, code 437.9, unspecified 
cerebrovascular disease. While this code is valid according to the ICD-
9-CM coding scheme, a more precise code should be used for the 
principal diagnosis.)
    After screening through the MCE, each claim will be classified into 
the appropriate LTC-DRG by the Medicare LTCH GROUPER software. As 
indicated in August 30, 2002 LTCH PPS final rule, the Medicare GROUPER 
software, which is used under the LTCH PPS, is specialized computer 
software, and is the same GROUPER software program used under the IPPS. 
The GROUPER software was developed as a means of classifying each case 
into a DRG on the basis of diagnosis and procedure codes and other 
demographic information (age, sex, and discharge status). Following the 
LTC-DRG assignment, the Medicare FI determines the prospective payment 
by using the Medicare PRICER program, which accounts for hospital-
specific adjustments. Under the LTCH PPS, we provide an opportunity for 
the LTCH to review the LTC-DRG assignments made by the FI and to submit 
additional information within a specified timeframe as specified in 
Sec.  412.513(c).
    The GROUPER software is used both to classify past cases in order 
to measure relative hospital resource consumption to establish the 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 under both the IPPS (Sec.  412.60(e)) 
and the LTCH PPS (Sec.  412.517). As discussed in greater detail in 
sections III.D. and E. of this preamble, with the implementation of 
section 503(a) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (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 (FY) (October 1 and April 1) 
as required by the statute for the IPPS (69 FR 48954 through 48957). 
Specifically, as we discussed in the FY 2006 IPPS final rule, ICD-9 
diagnosis and procedure codes for new medical technology may be created 
and added to existing DRGs in the middle of the Federal FY on April 1 
(70 FR 47323). 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, published in 
accordance with HIPAA.

C. Organization of DRGs

    The 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. 
Surgical DRGs are assigned based on a surgical hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures

[[Page 4654]]

by resource intensity. The GROUPER software program does not recognize 
all ICD-9-CM procedure codes as procedures that affect DRG assignment, 
that is, procedures which are not surgical (for example, EKG), or minor 
surgical procedures (for example, 86.11, Biopsy of skin and 
subcutaneous tissue).
    The medical DRGs are generally differentiated on the basis of 
diagnosis. Both medical and surgical DRGs may be further differentiated 
based on age, sex, discharge status, and presence or absence of 
complications or comorbidities (CC). We note that CCs are defined by 
certain secondary diagnoses not related to, or not inherently a part 
of, the disease process identified by the principal diagnosis. (For 
example, the GROUPER software would not recognize a code from the 
800.0x series, Skull fracture, as a CC when combined with principal 
diagnosis 850.4, Concussion with prolonged loss of consciousness, 
without return to preexisting conscious level.) In addition, we note 
that the presence of additional diagnoses does not automatically 
generate a CC, as not all DRGs recognize a comorbid or complicating 
condition in their definition. (For example, DRG 466, Aftercare without 
History of Malignancy as Secondary Diagnosis, is based solely on the 
principal diagnosis, without consideration of additional diagnoses for 
DRG determination.)
    In its June 2000, Report to Congress, MedPAC recommended that the 
Secretary ``* * * improve the hospital inpatient prospective payment 
system by adopting, as soon as practicable, diagnosis-related group 
refinements that more fully capture differences in severity of illness 
among patients,'' (Recommendation 3A, p. 63). In response to that 
recommendation, we determined at that time that it was not practical to 
develop a refinement to inpatient hospital DRGs based on severity due 
to time and resource requirements. However, this does not preclude us 
from development of a severity-adjusted DRG refinement in the future. 
That is, a refinement to the list of CCs could be incorporated into the 
existing DRG structure. It is also possible that a more comprehensive 
severity adjusted structure may be created if a new code set is 
adopted. That is, if ICD-9-CM is replaced by ICD-10-CM (for diagnostic 
coding) and ICD-10-PCS (for procedure coding) or by other code sets, a 
severity concept may be built into the resulting DRG assignments. Of 
course, any change to the code set would be adopted through the process 
established in the HIPAA Administrative Simplification Standards 
provisions.
    In its March 2005 Report to Congress, ``Physician-Owned Specialty 
Hospitals,'' MedPAC recommended that the Secretary improve payment 
accuracy in the hospital IPPS by, among other things, ``refining the 
current DRGs to more fully capture differences in severity of illness 
among patients.'' (Recommendation 1, p. 93.) In the FY 2006 IPPS final 
rule (70 FR 47474 through 47479), we stated that we expected to make 
changes to the DRGs to better reflect severity of illness and we 
indicated that we plan to conduct a comprehensive review of the CCs 
list for FY 2007. We also indicated that we are considering the 
possibility of proposing to use the All Patient Refined (APR) DRGs 
under the IPPS for FY 2007. We explained that we did not propose to 
adopt the APR-DRGS under the IPPS for FY 2006 because it would 
represent a significant undertaking that could have a substantial 
effect on all hospitals and there was insufficient time to fully 
analyze a change of that magnitude. However, as an interim step to 
better recognize severity in the DRG system for FY 2006, until we can 
complete a more comprehensive analysis of the APR-DRG system and CC 
list as part of a complete analysis of the MedPAC recommendations that 
we plan to perform over the next year, we established cardiovascular 
DRGs 547 through 558 as described in the FY 2006 IPPS final rule (70 FR 
47474 through 47478).

D. Update of LTC-DRGs

    For FY 2006, the LTC-DRG patient classification system was based on 
LTCH data from the FY 2004 MedPAR file, which contained hospital bills 
data from the March 2005 update. The patient classification system 
consists of 526 DRGs that formed the basis of the FY 2006 LTCH PPS 
GROUPER program. The 526 LTC-DRGs included two ``error DRGs.'' As in 
the IPPS, we included two error DRGs in which cases that cannot be 
assigned to valid DRGs will be grouped. These two error DRGs are DRG 
469 (Principal Diagnosis Invalid as a Discharge Diagnosis) and DRG 470 
(Ungroupable). (See the FY 2006 IPPS final rule (70 FR 47323 through 
47341)). The other 524 LTC-DRGs are the same DRGs used in the IPPS 
GROUPER program for FY 2006 (Version 23.0).
    In the past, the annual update to the CMS DRGs was based on the 
annual revisions to the ICD-9-CM codes and was effective each October 
1. Recently, the ICD-9-CM coding update process was revised as 
discussed in greater detail in the FY 2005 IPPS final rule (69 FR 48954 
through 48957). Specifically, section 503(a) of the MMA includes a 
requirement for updating ICD-9-CM codes twice a year instead of the 
current process of annual updates on October 1 of each year. This 
requirement is included as part of the amendments to the Act relating 
to recognition of new medical technology under the IPPS. (For 
additional information on this provision, including its implementation 
and its impact on the LTCH PPS, refer to the FY 2005 IPPS final rule 
(69 FR 48952 through 48957) and the RY 2006 LTCH PPS final rule (70 FR 
24172 through 24177).)
    As discussed in the RY 2006 LTCH PPS final rule, with the 
implementation of section 503(a) of the MMA, there is the possibility 
that one feature of the GROUPER software program may be updated twice 
during a Federal FY (October 1 and April 1) as required by the statute 
for the IPPS (70 FR 24173 through 24175). Specifically, 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 FY on April 1. 
No new LTC-DRGs will be created or deleted. Consistent with our current 
practice, any changes to the DRGs or relative weights will be made at 
the beginning of the next Federal FY (October 1). Therefore, there will 
not 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, issued under HIPAA.
    As we explained in the FY 2006 IPPS final rule, 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 (70 
FR 47323). 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. The patient classification system used under the LTCH PPS 
(LTC-DRGs) is based on the DRG patient classification system used under 
the IPPS, which historically had been updated annually and effective 
for discharges occurring on or after October 1 through September 30 
each year. As we also mentioned, the ICD-9-CM coding update process was 
revised as a result of the implementation of section 503(a) of the MMA, 
which includes a requirement for updating ICD-9-CM codes as often as 
twice a year instead of the current process of annual updates on 
October 1 of each year. As discussed

[[Page 4655]]

in the FY 2005 IPPS final rule, this requirement is included as part of 
the amendments to the Act relating to recognition of new medical 
technology under the IPPS (69 FR 48954 through 48957). Section 503(a) 
of the MMA amended section 1886(d)(5)(K) of the Act by adding a new 
paragraph (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 FY that begins after such date.'' This requirement will 
improve 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.
    Despite the fact that aspects of the GROUPER software may be 
updated to recognize any new technology ICD-9-CM codes, 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.
    Updates to the GROUPER software for both the IPPS and the LTCH PPS 
(for 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 since we do not publish a midyear IPPS rule, 
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. Any coding updates will be available 
through the Web sites provided in section III.E. 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 the MMA, 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.
    Discharges between October 1, 2005, and September 30, 2006, 
(Federal FY 2006) are using Version 23.0 of the GROUPER software for 
both the IPPS and the LTCH PPS. Consistent with our current practice, 
any changes to the DRGs or relative weights will be made at the 
beginning of the Federal FY (October 1). We will notify LTCHs of any 
revised LTC-DRG relative weights based on the final DRGs and the 
applicable version of the GROUPER software program that will be 
effective October 1, 2006, in the annual IPPS proposed and final rules. 
At the September 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 will 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 next update to the LTC-DRGs 
and relative weights for FY 2007 will be presented in the FY 2007 IPPS 
proposed and final rules. Furthermore, we would notify LTCHs of any 
revisions to the GROUPER software used under the IPPS and LTCH PPS that 
would be implemented April 1, 2007.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    Because the assignment of a case to a particular LTC-DRG will help 
determine the amount that will be paid for the case, it is important 
that the coding is accurate. Classifications and terminology used in 
the LTCH PPS are consistent with the ICD-9-CM and the 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 HHS.
    We note 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 HIPAA Administrative Simplification Act of 1996 (45 
CFR part 162). Furthermore, the UHDDS was used as a standard for the 
development of policies and programs related to hospital discharge 
statistics by both governmental and nongovernmental sectors for over 30 
years. In addition, the following definitions (as described in the 1984 
Revision of the UHDDS, approved by the Secretary for use starting 
January 1986) are requirements of the ICD-9-CM coding system, and have 
been used as a standard for the development of the CMS DRGs:
    <bullet> Diagnoses are defined to include all diagnoses that affect 
the current hospital stay.
    <bullet> Principal diagnosis is defined as the condition 
established after study to be chiefly responsible for occasioning the 
admission of the patient to the hospital for care.
    <bullet> Other diagnoses (also called secondary diagnoses or 
additional diagnoses) are defined as all conditions that coexist at the 
time of admission, that develop subsequently, or that affect the 
treatment received or the LOS or both. Diagnoses that relate to an 
earlier episode of care that have no bearing on the current hospital 
stay are excluded.
    <bullet> All procedures performed will be reported. This includes 
those that are surgical in nature, carry a procedural risk, carry an 
anesthetic risk, or require specialized training.
    We provide LTCHs with a 60-day window after the date of the notice 
of the initial LTC-DRG assignment to request review of that assignment. 
Additional information may be provided by the LTCH to the FI as part of 
that review.
2. Maintenance of the ICD-9-CM Coding System
    The ICD-9-CM Coordination and Maintenance (C&M) Committee is a 
Federal interdepartmental committee, co-chaired by the National Center 
for Health Statistics (NCHS) and CMS, that is charged with maintaining 
and updating the ICD-9-CM system. The C&M Committee is jointly 
responsible for approving coding changes, and developing errata, 
addenda, and other modifications to the ICD-9-CM to

[[Page 4656]]

reflect newly developed procedures and technologies and newly 
identified diseases. The C&M 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 NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
we have the lead responsibility for the ICD-9-CM procedure codes 
included in the Tabular List and Alphabetic Index for Procedures. The 
C&M Committee encourages participation by health-related organizations 
in this process and holds public meetings for discussion of educational 
issues and proposed coding changes twice a year at the CMS Central 
Office located in Baltimore, Maryland. The agenda and dates of the 
meetings can be accessed on our Web site at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes.
    As discussed previously in this section of the preamble, section 
503(a) of the MMA includes a requirement for updating ICD-9-CM codes 
twice a year instead of the current process of annual updates on 
October 1 of each year. This requirement will improve the recognition 
of new technologies under the IPPS by accounting for them in the 
GROUPER software at an earlier date. Because this new statutory 
requirement could have a significant impact on health care providers, 
coding staff, publishers, system maintainers, and software systems, 
among others, we solicited comments on our proposed provisions to 
implement this requirement as part of the FY 2005 IPPS proposed rule 
(69 FR 28220 through 28221). We responded to comments and published our 
new policy regarding the updating of ICD-9-CM codes in the FY 2005 IPPS 
final rule (69 FR 48954 through 48957).
    While this new requirement states that the Secretary shall not 
adjust the payment of the DRG classification for any codes created for 
use on April 1, DRG software and other systems will have to be updated 
in order to recognize and accept the new codes. If any coding changes 
were implemented on April 1, the Medicare GROUPER software program used 
under both the IPPS and the LTCH PPS would need to be revised to 
reflect the new ICD-9-CM codes because the LTC-DRGs are the same DRGs 
used under the IPPS. Furthermore, although the GROUPER software used 
under both the IPPS and the LTCH PPS would need to be revised to 
accommodate the new codes effective April 1, there would be no 
additions or deletions of DRGs nor would the relative weights used 
under the IPPS and the LTCH PPS, respectively, be changed until the 
annual update October 1 (to the extent that those changes are 
warranted), just as they are historically updated. As the LTCH PPS is 
based on the IPPS, we adopted the same approach used under the IPPS for 
potential April 1 ICD-9-CM coding changes. That is, we will assign any 
new diagnosis codes or procedure codes to the same DRG in which its 
predecessor code was assigned, so there will be no DRG impact in terms 
of potential DRG assignment until the following October 1. We will 
maintain the current method of publicizing any new code changes, as 
noted below. Current addendum and code title information is published 
on the CMS Web page at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/04_addendum.asp. Summary tables showing new, revised, 
and deleted code titles are also posted on the following CMS Web page: 
http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/07_summarytables.asp. Information on ICD-9-CM diagnosis codes can be found 
at http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/. Information on 
new, revised, and deleted ICD-9-CM codes is also available in the 
American Hospital Association (AHA) publication Coding Clinic for ICD-
9-CM. AHA also distributes information to publishers and software 
vendors. We also send copies of all ICD-9-CM coding changes to our 
contractors for use in updating their systems and providing education 
to providers.
    If the April 1 changes are made to ICD-9-CM diagnosis or procedure 
codes, LTCHs will be required to obtain the new codes, coding books, or 
encoder updates, and make other system changes in order to capture and 
report the new codes. When we implemented section 503(a) of the MMA in 
the FY 2005 IPPS final rule, we indicated that we were aware of the 
additional burden this will have on health care providers.
    It should be noted 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 for discussing updates 
to the ICD-9-CM has been an open process through the ICD-9-CM C&M 
Committee since 1995. Any requestor who makes 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 will be 
given the opportunity to present the merits of their proposed new code.
    At the September 2005 C&M Committee meeting, no new codes were 
proposed for update on April 1, 2006. While no DRG additions or 
deletions or changes to relative weights will occur prior to the usual 
October 1 update, in the event any new codes were created to describe 
new technologies and medical services through an April 1, 2006 update, 
under our policy established in the RY 2006 final rule (70 FR 24176), 
LTCH systems would be expected to recognize and report those new codes 
through the channels as described in this section.
    The ICD-9-CM coding changes that have been adopted by the C&M 
Committee would become effective either at the beginning of each 
Federal FY (October 1) or, in the case of codes created to capture new 
technology, April 1 of each year. Coders will be expected to use the 
most current ICD-9-CM codes, as updated. Because we do not publish a 
mid-year IPPS rule, the currently accepted avenues of information 
dissemination will be used to inform all ICD-9-CM code users of any 
changes to the coding system. These avenues were described in section 
III.D. of this preamble and were discussed at length in the FY 2005 
IPPS final rule (69 FR 48956). Coders in LTCHs using the updated ICD-9-
CM coding system will be on the same schedule as the rest of the health 
care industry. In the past, the updated ICD-9-CM was not available for 
use until October 1 of each year.
    Therefore, because the LTCH PPS and the IPPS use the same GROUPER 
software, the LTCH PPS will be directly affected by the statutory 
mandates directed at the IPPS as amended by section 503(a) of the MMA. 
(We note that there is no statutory requirement in the LTCH PPS to make 
additional payments for new technology.) The practical effect of this 
provision is that the GROUPER software must accept new ICD-9-CM codes 
reflecting the incorporation of new technologies into inpatient 
treatment at an acute care hospital prior to the scheduled annual 
update of the GROUPER software. Despite the fact that there are no 
provisions for additional payments for new technology under the LTCH 
PPS as there are under the IPPS, statutory compliance requires an 
alteration of the GROUPER software used under the IPPS, and since the 
LTCH PPS uses the same GROUPER software that is used under the IPPS, 
this consequently means that the GROUPER software used under the LTCH 
PPS would change.''

[[Page 4657]]

While DRG assignments would not change from October 1 through September 
30, it is possible that there could be additional new ICD-9-CM 
diagnosis and procedure codes during that time, which would be assigned 
to predecessor DRGs. For both the IPPS and LTCH coders, it is possible 
that there will be ICD-9-CM codes in effect from October 1 through 
March 31, with additional ICD-9-CM codes in effect from April 1 through 
September 30. 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).
    Of particular note to LTCHs are the invalid diagnosis codes (Table 
6C) and the invalid procedure codes (Table 6D) located in the annual 
proposed and final rules for the IPPS. Claims with invalid codes are 
not processed by the Medicare claims processing system.
3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    We emphasize the need for proper coding by LTCHs. Inappropriate 
coding of cases can adversely affect the uniformity of cases in each 
LTC-DRG and produce inappropriate weighting factors at recalibration. 
We continue to urge LTCHs to focus on improved coding practices. 
Because of concerns raised by LTCHs concerning correct coding, we have 
asked the AHA to provide additional clarification or instruction on 
proper coding in the LTCH setting. The AHA will provide this 
instruction via their established process of addressing questions 
through their publication ``Coding Clinic for ICD-9-CM.'' Written 
questions or requests for clarification may be addressed to the Central 
Office on ICD-9-CM, American Hospital Association, One North Franklin, 
Chicago, IL 60606. A form for question(s) is available for download and 
can be mailed on AHA's Web site at: www.ahacentraloffice.org. In 
addition, current coding guidelines are available at the NCHS Web site: 
http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/ftpicd9.htm#conv.
    In conjunction with the cooperating parties (AHA, the American 
Health Information Management Association (AHIMA), and NCHS), we 
reviewed actual medical records and are concerned about the quality of 
the documentation under the LTCH PPS, as was the case at the beginning 
of the IPPS. We fully believe that, with experience, the quality of the 
documentation and coding will improve, as it did for the IPPS. The 
cooperating parties have plans to assist their members with improvement 
in documentation and coding issues for the LTCHs through specific 
questions and coding guidelines. The importance of good documentation 
is emphasized in the revised ICD-9-CM Official Guidelines for Coding 
and Reporting: ``A joint effort between the attending physician and 
coder is essential to achieve complete and accurate documentation, code 
assignment, and reporting of diagnoses and procedures. The importance 
of consistent, complete documentation in the medical record cannot be 
overemphasized. Without this documentation, the application of all 
coding guidelines is a difficult, if not impossible, task.'' (Coding 
Clinic for ICD-9-CM, Fourth Quarter 2002, page 115)
    To improve medical record documentation, LTCHs should be aware that 
if the patient is being admitted for continuation of treatment of an 
acute or chronic condition, guidelines at Section I.B.10 of the Coding 
Clinic for ICD-9-CM, Fourth Quarter 2002 (page 129) are applicable 
concerning selection of principal diagnosis. To clarify coding advice 
issued in the August 30, 2002 final rule (67 FR 55979), at Guideline 
I.B.12, Late Effects, we state that a late effect is considered to be 
the residual effect (condition produced) after the acute phase of an 
illness or injury has terminated (Coding Clinic for ICD-9-CM, Fourth 
Quarter 2002, page 129). Regarding whether a LTCH should report the 
ICD-9-CM code(s) for an unresolved acute condition instead of the 
code(s) for late effect of rehabilitation, we emphasize that each case 
must be evaluated on its unique circumstances and coded appropriately. 
Depending on the documentation in the medical record, either a code 
reflecting the acute condition or rehabilitation could be appropriate 
in a LTCH.
    Since implementation of the LTCH PPS, our Medicare FIs have 
conducted training and provided assistance to LTCHs in correct coding. 
We have also issued manuals containing procedures as well as coding 
instructions to LTCHs and FIs. We will continue to conduct training and 
provide guidance on an as-needed basis. We also refer readers to the 
detailed discussion on correct coding practices in the August 30, 2002 
LTCH PPS final rule (67 FR 55981 through 55983). Additional coding 
instructions and examples will be published in Coding Clinic for ICD-9-
CM.

F. Method for Updating the LTC-DRG Relative Weights

    As discussed in the August 30, 2002 LTCH PPS final rule that 
implemented the LTCH PPS, under the LTCH PPS, each LTCH will receive a 
payment that represents an appropriate amount for the efficient 
delivery of care to Medicare patients (67 FR 55984). The system must be 
able to account adequately for each LTCH's case-mix in order to ensure 
both a fair distribution of Medicare payments and access to adequate 
care for those Medicare patients whose care is more costly. Therefore, 
in Sec.  412.523(c), we adjust the standard Federal PPS rate by the 
LTC-DRG relative weights in determining payment to LTCHs for each case.
    Under this payment system, 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 as 
described in Sec.  412.515. To ensure that Medicare patients who are 
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.
    As we discussed in the FY 2006 IPPS final rule, the LTC-DRG 
relative weights effective under the LTCH PPS for Federal FY 2006 were 
calculated using the March 2005 update of FY 2004 MedPAR data and 
Version 23.0 of the GROUPER software (70 FR 47325). We use total days 
and total charges in the calculation of the LTC-DRG relative weights.
    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. 
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 
method to calculate relative weights. We believe this method removes 
this hospital-specific source of bias in measuring 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. (See the FY 2006 IPPS final rule for further 
information on the hospital-

[[Page 4658]]

specific relative value methodology (70 FR 47328 through 47329).)
    In order to account for LTC-DRGs with low volume (that is, with 
fewer than 25 LTCH cases), we grouped those low volume LTC-DRGs into 1 
of 5 categories (quintiles) based on average charges, for the purposes 
of determining relative weights. For FY 2006 based on the FY 2004 
MedPAR data, we identified 171 LTC-DRGs that contained between 1 and 24 
cases. This list of low volume LTC-DRGs was then divided into 1 of the 
5 low volume quintiles, each containing a minimum of 34 LTC-DRGs (171/5 
= 34 with 1 LTC-DRG as a remainder). Each of the low volume LTC-DRGs 
grouped to a specific quintile received the same relative weight and 
ALOS using the formula applied to the regular LTC-DRGs (25 or more 
cases). (See the FY 2006 IPPS final rule for further explanation of the 
development and composition of each of the 5 low volume quintiles for 
FY 2006 (70 FR 47329 through 47332).)
    After grouping the cases in the appropriate LTC-DRG, we calculated 
the relative weights by first removing statistical outliers and cases 
with a LOS of 7 days or less. Next, we adjusted the number of cases 
remaining in each LTC-DRG for the effect of short-stay outlier cases 
under Sec.  412.529. The short-stay adjusted discharges and 
corresponding charges were used to calculate ``relative adjusted 
weights'' in each LTC-DRG using the hospital-specific relative value 
method. We also adjusted the LTC-DRG relative weights to account for 
nonmonotonically increasing relative weights. That is, we made an 
adjustment if cases classified to the LTC-DRG ``with complications or 
comorbidities (CCs)'' of a ``with CC''/``without CC'' pair had a lower 
average charge than the corresponding LTC-DRG ``without CCs'' by 
assigning the same weight to both LTC-DRGs in the ``with CC''/``without 
CC'' pair. (See the FY 2006 IPPS final rule for further details on the 
steps for calculating the LTC-DRG relative weights (70 FR 47336 through 
47341).)
    In addition, of the 526 LTC-DRGs in the LTCH PPS for FY 2006, based 
on LTCH cases in the FY 2004 MedPAR files, we identified 196 LTC-DRGs 
for which there were no LTCH cases in the database. That is, no 
patients who would have been classified to those DRGs were treated in 
LTCHs during FY 2004 and, therefore, no charge data were reported for 
those DRGs. Thus, in the process of determining the relative weights of 
LTC-DRGs, we were unable to determine weights for these 196 LTC-DRGs 
using the method described in this section of the preamble. However, 
since patients with a number of the diagnoses under these LTC-DRGs may 
be treated at LTCHs beginning in FY 2006, we assigned relative weights 
to each of the 196 ``no volume'' LTC-DRGs based on clinical similarity 
and relative costliness to one of the remaining 330 (526 - 196 = 330) 
LTC-DRGs for which we were able to determine relative weights, based on 
the FY 2004 claims data. (A list of the current no-volume LTC-DRGs and 
further explanation of their FY 2006 relative weight assignment can be 
found in the FY 2006 IPPS final rule (70 FR 47337 through 47341).)
    Furthermore, for FY 2006, we established LTC-DRG relative weights 
of 0.0000 for heart, kidney, liver, lung, and simultaneous pancreas/
kidney transplants (LTC-DRGs 103, 302, 480, 495, 512 and 513, 
respectively) 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. If 
in the future, however, 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 propose 
appropriate weights for the LTC-DRGs affected. At the present time, we 
included these 6 transplant LTC-DRGs in the GROUPER software program 
for administrative purposes. As the LTCH PPS uses the same GROUPER 
software program for LTCHs as is used under the IPPS, removing these 
DRGs would be administratively burdensome.
    As we noted previously, there were no new ICD-9-CM code requests 
for an April 1, 2006 update. Therefore, Version 23.0 of the DRG GROUPER 
software established in the FY 2006 IPPS final rule (70 FR 47284 
through 47322) will continue to be effective until October 1, 2006. 
Moreover, the LTC-DRGs and relative weights for FY 2006 established in 
that same IPPS final rule (70 FR 47681 through 47689) will continue to 
be effective until October 1, 2006, (just as they would have been even 
if there had been any new ICD-9-CM code requests for an April 1, 2006 
update). Accordingly, Table 3 in the Addendum to this proposed rule 
lists the LTC-DRGs and their respective relative weights, geometric 
mean LOS, and five-sixths of the geometric mean LOS that we will 
continue to use for the period of July 1, 2006 through September 30, 
2006. (This table is the same as table 11 of the Addendum to the FY 
2006 IPPS final rule (70 FR 47681 through 47689). The next update to 
the ICD-9-CM coding system will be presented in the FY 2007 IPPS 
proposed rule (since there will be no April 1, 2006 updates to the ICD-
9-CM coding system). The final update to the ICD-9-CM coding system 
that would become effective October 1, 2006, and the final DRGs and 
GROUPER for FY 2007 that would be used for the IPPS and the LTCH PPS, 
effective October 1, 2006, will be presented in the IPPS FY 2007 
proposed and final rule in the Federal Register. At that time, we will 
also present the next annual update to the LTC-DRG relative weights 
based on the final DRGs and GROUPER software version that will be 
established for FY 2007.

IV. Proposed Changes to the LTCH PPS Payment Rates for the 2007 LTCH 
PPS Rate Year

[If you choose to comment on issues in this section, please include the 
caption ``PROPOSED CHANGES TO LTCH PPS PAYMENT RATES FOR THE 2007 LTCH 
PPS RATE YEAR'' at the beginning of your comments.]

A. Overview of the Development of the Payment Rates

    The LTCH PPS was effective for a LTCH's first cost reporting period 
beginning on or after October 1, 2002. Effective with that cost 
reporting period, LTCHs are paid, during a 5-year transition period, on 
the basis of an increasing proportion of the LTCH PPS Federal rate and 
a decreasing proportion of a hospital's payment under the reasonable 
cost-based payment system, unless the hospital makes a one-time 
election to receive payment based on 100 percent of the Federal rate 
(see Sec.  412.533). New LTCHs (as defined at Sec.  412.23(e)(4)) are 
paid based on 100 percent of the Federal rate, with no phase-in 
transition payments.
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth in the regulations at Sec.  412.515 through 
Sec.  412.532. Below we discuss the proposed factors that will be used 
to update the LTCH PPS standard Federal rate for the 2007 LTCH PPS rate 
year that would be effective for LTCHs discharges occurring on or after 
July 1, 2006 through June 30, 2007. When we implemented the LTCH PPS in 
the August 30, 2002 final rule (67 FR 56029 through 56031), we computed 
the LTCH PPS standard Federal payment rate for FY 2003 by updating the 
best available (FY 1998 or FY 1999) Medicare inpatient operating and 
capital costs per case data, using the excluded hospital market basket.
    Section 123(a)(1) of the BBRA requires that the PPS developed for 
LTCHs be budget neutral. Therefore, in

[[Page 4659]]

calculating the standard Federal rate under Sec.  412.523(d)(2), we set 
total estimated LTCH PPS payments equal to estimated payments that 
would have been made under the reasonable cost-based payment 
methodology had the PPS for LTCHs not been implemented. Section 307(a) 
of BIPA specified that the increases to the hospital-specific target 
amounts and cap on the target amounts for LTCHs for FY 2002 provided 
for by section 307(a)(1) of BIPA shall not be taken into account in the 
development and implementation of the LTCH PPS.
    Furthermore, as specified at Sec.  412.523(d)(1), the standard 
Federal rate is reduced by an adjustment factor to account for the 
estimated proportion of outlier payments under the LTCH PPS to total 
estimated LTCH PPS payments (8 percent). For further details on the 
development of the FY 2003 standard Federal rate, see the August 30, 
2002 LTCH PPS final rule (67 FR 56027 through 56037), and for 
subsequent updates to the LTCH PPS Federal rate, refer to the following 
final rules: RY 2004 LTCH PPS final rule (68 FR 34134 through 34140), 
RY 2005 LTCH PPS final rule (69 FR 25682 through 25684), and RY 2006 
LTCH PPS final rule (70 FR 24179 through 24180).

B. Proposed LTCH PPS Market Basket

    Historically, the Medicare program used a market basket to account 
for price increases of the services furnished by providers. The market 
basket used for the LTCH PPS includes both operating and capital-
related costs of LTCHs because the LTCH PPS uses a single payment rate 
for both operating and capital-related costs. The development of the 
LTCH PPS standard Federal rate is discussed in further detail in the 
August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56033).
    In the August 30, 2002 final rule (67 FR 56016 through 56017 and 
56030), which implemented the LTCH PPS, we established the use of the 
excluded hospital with capital market basket as the LTCH PPS market 
basket. The excluded hospital market basket was used to update the 
limits on LTCHs' operating costs for inflation under the former 
reasonable cost-based (TEFRA) payment system. We explained in that same 
final rule that we believe that the use of the excluded hospital market 
basket to update LTCHs' costs for inflation was appropriate because the 
excluded hospital market basket (with a capital component) measures 
price increases of the services furnished by excluded hospitals, 
including LTCHs. Since the costs of LTCHs are included in the excluded 
hospital market basket, this market basket index, in part, also 
reflects the costs of LTCHs. However, in order to capture the total 
costs (operating and capital-related) of LTCHs, we added a capital 
component to the excluded hospital market basket for use under the LTCH 
PPS. We refer to this index as the ``Excluded Hospital with Capital'' 
market basket. Currently, the excluded hospital with capital market 
basket used to update LTCH PPS payments is based on 1997 Medicare cost 
report data and includes Medicare participating psychiatric, 
rehabilitation, long term care, cancer, and childrens hospitals (68 FR 
34137). (For further details on the development of the FY 1997-based 
LTCH PPS market basket, see the RY 2004 LTCH PPS final rule (68 FR 
34134 through 34137)).
    In the RY 2006 LTCH PPS final rule (70 FR 24179), we noted that 
based on our research, we did not develop a market basket specific to 
LTCH services. Presently, we are still unable to create a separate 
market basket specifically for LTCHs due to the small number of 
facilities and the limited data that are provided (for instance, 
approximately 15 percent of LTCHs reported contract labor cost data for 
2002). We noted in that same final rule that we would discuss the use 
of the ``Rehabilitation, Psychiatric and Long-Term Care (RPL) market 
basket'' under the LTCH PPS, which is currently used under the IRF PPS. 
The RPL market basket is based on the operating and capital costs of 
inpatient rehabilitation facilities (IRFs), inpatient psychiatric 
facilities (IPFs) and LTCHs. Since all IRFs are now paid under the IRF 
PPS Federal payment rate, nearly all LTCHs are paid 100 percent of the 
Federal rate under the LTCH PPS, and most IPFs are transitioning to 
payment based on 100 percent of the Federal per diem payment amount 
under the IPF PPS (payments will be based on 100 percent of the Federal 
rate for cost reporting periods beginning on or after January 1, 2008), 
under broad authority conferred upon the Secretary by section 123 of 
the BBRA as amended by section 307(b) of BIPA to develop the LTCH PPS, 
we are proposing to adopt the RPL market basket as the appropriate 
market basket of goods and services under the LTCH PPS for discharges 
occurring on or after July 1, 2006. The RPL market basket would reflect 
the operating and capital cost structures for these hospitals. 
Specifically, beginning in the 2007 LTCH PPS rate year, we are 
proposing to adopt under the LTCH PPS the RPL market basket based on FY 
2002 cost report data as it is the best available data. We choose to 
use the FY 2002 Medicare cost reports because these are the most 
recent, relatively complete cost data for IRFs, IPF, and LTCHs serving 
Medicare beneficiaries.
    We propose to exclude childrens, cancer hospitals, and religious 
nonmedical healthcare institutions (RNHCIs) from the RPL market basket 
because their payments are based entirely on reasonable costs subject 
to rate-of-increase limits established under the authority of section 
1886(b) of the Act, and implemented in Sec.  413.40. Childrens and 
cancer hospitals are not reimbursed under a PPS. Also, based on FY 2002 
data, the cost structures for childrens and cancer hospitals are 
noticeably different than the cost structures of the IRFs, IPFs, and 
LTCHs. The services offered in IRFs, IPFs, and LTCHs are typically more 
labor-intensive than those offered in cancer and childrens hospitals. 
Therefore, the compensation cost weights for IRFs, IPFs, and LTCHs are 
larger than those in cancer and childrens hospitals. In addition, the 
depreciation cost weights for IRFs, IPFs, and LTCHs are noticeably 
smaller than those for childrens and cancer hospitals.
    Therefore, including the fact that IRFs, IPFs and LTCHs are subject 
to a PPS while childrens, cancer and RNCHIs continue to receive payment 
based on reasonable costs, we believe a market basket based on the data 
of IRFs, IPFs and LTCHs is appropriate to use under the LTCH PPS since 
it is the best available data that would reflect the cost structures of 
LTCHs. In the following discussion we provide a background on market 
baskets and describe the methodologies we propose to use under broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of BIPA to develop the LTCH PPS for purposes 
of determining the operating and capital portions of the FY 2002-based 
RPL market basket.
1. Overview of the RPL Market Basket
    The proposed RPL market basket is a fixed weight, Laspeyres-type 
price index that is constructed in three steps. First, a base period is 
selected (in this case, FY 2002) and total base period expenditures are 
estimated for a set of mutually exclusive and exhaustive spending 
categories based upon type of expenditure. Then the proportion of total 
operating costs that each category represents is determined. These 
proportions are called cost or expenditure weights. Second, each 
expenditure category is matched to an appropriate price or wage 
variable, referred to as a price proxy. In nearly every instance, these 
price proxies are price levels derived from publicly

[[Page 4660]]

available statistical series that are published on a consistent 
schedule, preferably at least on a quarterly basis. Finally, the 
expenditure weight for each cost category is multiplied by the level of 
its respective price proxy for a given period. The sum of these 
products (that is, the expenditure weights multiplied by their price 
levels) for all cost categories yields the composite index level of the 
market basket in a given period. Repeating this step for other periods 
produces a series of market basket levels over time. Dividing an index 
level for a given period by an index level for an earlier period 
produces a rate of growth in the input price index over that time 
period.
    A market basket is described as a fixed-weight index because it 
quantifies the cost, at another time, to purchase the same mix of goods 
and services purchased to provide hospital services in a base period. 
The effects on total expenditures resulting from changes in the 
quantity or mix of goods and services (intensity) purchased subsequent 
to the base period are not measured. In this manner, the market basket 
measures only pure price change. Only when the index is rebased would 
the quantity and intensity effects be captured in the cost weights. 
Therefore, we rebase the market basket periodically so that cost 
weights reflect changes in the mix of goods and services that hospitals 
purchase (hospital inputs) to furnish patient care between base 
periods.
    The terms rebasing and revising, while often used interchangeably, 
actually denote different activities. Rebasing means moving the base 
year for the structure of costs of an input price index (for example, 
shifting the base year cost structure from FY 1997 to FY 2002). 
Revising means changing data sources, methodology, or price proxies 
used in the input price index. In this proposed rule, we are proposing 
to rebase and revise the market basket used to update the LTCH PPS. 
Specifically, as noted above in this section, for the 2007 LTCH PPS 
rate year, we are proposing to use the FY 2002-based RPL market basket, 
which is described in greater detail below in this section.
2. Proposed Methodology for Operating Portion of the RPL Market Basket
    The proposed operating portion of the FY 2002-based RPL market 
basket consists of several major cost categories derived from the FY 
2002 Medicare cost reports for IRFs, IPFs, and LTCHs. We choose to use 
the FY 2002 Medicare cost reports because these are the most recent, 
relatively complete cost data for IRFs, IPFs, and LTCHs serving 
Medicare beneficiaries. Generally, if detailed cost data are not 
available for these Medicare cost reports, we prefer to use the PPS 
hospital (IPPS) Medicare cost reports to supplement IPF, IRF, and LTCH 
data because this is a comprehensive source of cost data for hospitals 
serving Medicare beneficiaries. When the IPPS Medicare cost report data 
are not available, we choose the best publicly available data source, 
such as the Bureau of Economic Analysis Input-Output Tables.
    We use the IRF, IPF, and LTCH Medicare cost reports to derive these 
major cost categories for the RPL market basket which include wages, 
drugs, professional liability insurance (PLI), and a residual ``all 
other.'' As stated above in this section, we propose to use FY 2002 as 
the base year because we believe this is the most recent, relatively 
complete year of Medicare cost report data. Due to insufficient 
Medicare cost report data for IRFs, IPFs, and LTCHs, we propose to 
develop cost weights for benefits, contract labor, and blood and blood 
products using the FY 2002-based IPPS market basket (70 FR 23384), 
which we explain in more detail later in this section. For example, 
less than 30 percent of IRF, IPF, and LTCH reported benefit cost data 
in FY 2002. We noticed an increase in the cost data for these expense 
categories over the last four years. (we note that in the future, there 
may be sufficient IRFs, IPFs, and LTCHs cost report data to develop the 
weights for these expenditure categories.
    Since the cost weights for the proposed RPL market basket are based 
on facility costs, we are proposing to limit our sample to hospitals 
with a Medicare average LOS within a comparable range of the total 
facility ALOS. We believe this provides a more accurate reflection of 
the structure of costs for Medicare treatments. Our goal is to measure 
cost shares that are reflective of case-mix and practice patterns 
associated with providing services to Medicare beneficiaries.
    We propose to use those cost reports for IRFs and LTCHs whose 
Medicare ALOS is within 15 percent (that is, 15 percent higher or 
lower) of the total facility ALOS for the hospital. This is the same 
edit applied to the FY 1992-based and FY 1997-based excluded hospital 
with capital market basket. Consistent with the development of the RPL 
market basket adopted under the IRF PPS in the FY 2006 IRF PPS final 
rule (70 FR 47909), we propose 15 percent because it includes those 
LTCHs and IRFs whose Medicare LOS is within approximately 5 days of the 
facility LOS. We believe this edit provides us with a representative 
sample of LTCHs and IRFs serving Medicare beneficiaries.
    We propose to use a less stringent measure of Medicare LOS for IPFs 
whose ALOS is within 30 or 50 percent (depending on the total facility 
ALOS) of the total facility ALOS. This less stringent edit allows us to 
increase our sample size by over 150 reports and produce a cost weight 
more consistent with the overall facility. When developing the FY 1997-
based excluded hospital with capital market basket, the edit we applied 
to IPFs was based on the best available data at the time.
    The detailed cost categories under the residual (that is, the 
remaining portion of the market basket after excluding wages and 
salaries, drugs, and professional liability cost weights) are derived 
from the FY 2002-based IPPS market basket and the 1997 Benchmark Input-
Output (I-O) Tables published by the Bureau of Economic Analysis, U.S. 
Department of Commerce. The FY 2002-based IPPS market basket was 
developed using FY 2002 Medicare hospital cost reports with the most 
recent and detailed cost data (70 FR 47388). The 1997 Benchmark I-O is 
the most recent, comprehensive source of cost data for all hospitals. 
The proposed RPL cost weights for benefits, contract labor, and blood 
and blood products were derived using the FY 2002-based IPPS market 
basket. For example, the ratio of the benefit cost weight to the wages 
and salaries cost weight in the FY 2002-based IPPS market basket was 
applied to the RPL wages and salaries cost weight to derive a benefit 
cost weight for the RPL market basket. The remaining proposed RPL 
operating cost categories were derived using the 1997 Benchmark I-O 
Tables, aged to 2002 using relative price changes. (The methodology we 
used to age the data involves applying the annual price changes from 
the price proxies to the appropriate cost categories. We repeat this 
practice for each year.) Therefore, using this methodology, roughly 59 
percent of the proposed RPL market basket is accounted for by wages, 
drugs, and PLI data from FY 2002 Medicare cost report data for IRFs, 
LTCHs, and IPFs.
    The following is a summary outlining the choice of the proxies we 
propose to use for the operating portion of the market basket. The 
price proxies for the capital portion are described in more detail in 
section IV.B.3. of this preamble. With the exception of the 
Professional Liability proxy, all the proposed price proxies for the 
operating portion of the proposed RPL market basket are based on Bureau 
of Labor

[[Page 4661]]

Statistics (BLS) data and are grouped into one of the following BLS 
categories:
    <bullet> Producer Price Indexes (PPIs) measure price changes for 
goods sold in other than retail markets. PPIs are preferable price 
proxies for goods that hospitals purchase as inputs in producing their 
outputs because the PPIs would better reflect the prices faced by 
hospitals. For example, we propose to use a special PPI for 
prescription drugs, rather than the Consumer Price Index (CPI) for 
prescription drugs because hospitals generally purchase drugs directly 
from the wholesaler. The PPIs that we propose to use measure price 
change at the final stage of production.
    <bullet> Consumer Price Indexes (CPIs) measure changes in the 
prices of final goods and services bought by the typical consumer. 
Because they may not represent the price faced by a producer, we use 
CPIs only if an appropriate PPI were not available, or if the 
expenditures were more similar to those of retail consumers in general 
rather than purchases at the wholesale level. For example, the CPI for 
food purchases away from home is used as a proxy for contracted food 
services.
    <bullet> Employment Cost Indexes (ECIs) measure the rate of change 
in employee wage rates and employer costs for employee benefits per 
hour worked. These indexes are fixed-weight indexes and strictly 
measure the change in wage rates and employee benefits per hour. 
Appropriately, they are not affected by shifts in employment mix.
    We evaluated the price proxies using the criteria of reliability, 
timeliness, availability, and relevance. Reliability indicates that the 
index is based on valid statistical methods and has low sampling 
variability. Widely accepted statistical methods ensure that the data 
were collected and aggregated in a way that can be replicated. Low 
sampling variability is desirable because it indicates that the sample 
reflects the typical members of the population. (Sampling variability 
is variation that occurs by chance because a sample was surveyed rather 
than the entire population.) Timeliness implies that the proxy is 
published regularly, preferably at least once a quarter.
    The market baskets are updated quarterly, and therefore, it is 
important that the underlying price proxies be up-to-date, reflecting 
the most recent data available. We believe that using proxies that are 
published regularly (at least quarterly, when possible) helps to ensure 
that we are using the most recent data available to update the market 
basket. We strive to use publications that are disseminated frequently 
because we believe that this is an optimal way to stay abreast of the 
most current data available. Availability means that the proxy is 
publicly available. We prefer that our proxies are publicly available 
because this will help ensure that our market basket updates are as 
transparent to the public as possible. In addition, this enables the 
public to be able to obtain the price proxy data on a regular basis.
    Finally, relevance means that the proxy is applicable and 
representative of the cost category weight to which it is applied. The 
CPIs, PPIs, and ECIs selected by us to be proposed in this regulation 
meet these criteria. Therefore, we believe that they continue to be the 
best measure of price changes for the cost categories to which they 
would be applied.
    We note that the proxies are the same as those used for the FY 
1997-based excluded hospital with capital market basket, which is 
currently used under the LTCH PPS, and are the same proxies as those 
used for the FY 2002-based excluded hospital market basket that is used 
to update the reasonable cost-based portion of LTCHs' blended 
transition payments (70 FR 47399 through 47403). Because these proxies 
meet our criteria of reliability, timeliness, availability, and 
relevance, we believe they continue to be the best measure of price 
changes for the cost categories. For further discussion on the FY 1997-
based excluded hospital with capital market basket, see the 2004 LTCH 
PPS rate year final rule (68 FR 34134 through 34136). For further 
discussion on the FY 2002-based excluded hospital market basket, see 
the FY 2006 IPPS final rule (70 FR 47400 through 47403).
    Table 2 sets forth the complete proposed 2002-based RPL market 
basket including cost categories, weights, and price proxies. For 
comparison purposes, the corresponding FY 1997-based excluded hospital 
with capital market basket, which is currently used under the LTCH PPS, 
is also listed.
    Wages and salaries are 52.895 percent of total costs for the 
proposed FY 2002-based RPL market basket compared to 47.335 percent for 
the FY 1997-based excluded hospital with capital market basket. 
Employee benefits are 12.982 percent for the proposed FY 2002-based RPL 
market basket compared to 10.244 percent for the FY 1997-based excluded 
hospital with capital market basket. As a result, compensation costs 
(wages and salaries plus employee benefits) for the proposed FY 2002-
based RPL market basket are 65.877 percent of costs compared to 57.579 
percent for the FY 1997-based excluded hospital with capital market 
basket. Of the 8 percentage-point difference between the compensation 
shares, approximately three percentage points are due to the proposed 
new base year (FY 2002 instead of FY 1997), three percentage points are 
due to revised LOS edit (that is, including only IRFs and LTCHs whose 
Medicare ALOS is within 15 percent of the total facility ALOS for the 
hospital and including only IPFs whose Medicare average LOS in within 
30 or 50 percent of the total facility ALOS), and the remaining two 
percentage points are due to the proposed exclusion of other types of 
IPPS-excluded hospitals (that is, only including IPFs, IRFs, and LTCHs 
in the market basket and excluding childrens, cancer hospitals and 
RNCHIs.).

   Table 2.--Proposed FY 2002-Based RPL Market Basket Cost Categories, Weights, and Proxies With FY 1997-Based
                        Excluded Hospital With Capital Market Basket Used for Comparison
----------------------------------------------------------------------------------------------------------------
                                                          FY 1997-based
                                                             excluded       Proposed FY     Proposed FY 2002 RPL
                   Expense categories                     hospital with    2002-based RPL   market basket price
                                                         capital  market   market basket          proxies
                                                              basket
----------------------------------------------------------------------------------------------------------------
Total..................................................          100.000          100.000
                                                        -----------------------------------
Compensation...........................................           57.579           65.877
    Wages and Salaries *...............................           47.335           52.895  ECI-Wages and
                                                                                            Salaries, Civilian
                                                                                            Hospital Workers.
    Employee Benefits *................................           10.244           12.982  ECI-Benefits,
                                                                                            Civilian Hospital
                                                                                            Workers.
Professional Fees, Non-Medical.........................            4.423            2.892  ECI-Compensation for
                                                                                            Professional,
                                                                                            Specialty &
                                                                                            Technical Workers.

[[Page 4662]]

 
Utilities..............................................            1.180            0.656
    Electricity........................................            0.726            0.351  PPI-Commercial
                                                                                            Electric Power.
    Fuel Oil, Coal, etc................................            0.248            0.108  PPI-Refined Petroleum
                                                                                            Products.
    Water and Sewage...................................            0.206            0.197  CPI-U--Water & Sewage
                                                                                            Maintenance
Professional Liability Insurance.......................            0.733            1.161  CMS Professional
                                                                                            Liability Premium
                                                                                            Index.
All Other Products and Services........................           27.117           19.265
    All Other Products.................................           17.914           13.323
    Pharmaceuticals....................................            6.318            5.103  PPI Prescription
                                                                                            Drugs.
    Food: Direct Purchase..............................            1.122            0.873  PPI Processed Foods &
                                                                                            Feeds.
    Food: Contract Service.............................            1.043            0.620  CPI-U Food Away From
                                                                                            Home.
    Chemicals..........................................            2.133            1.100  PPI Industrial
                                                                                            Chemicals.
    Blood and Blood Products **........................            0.748  ...............  .....................
    Medical Instruments................................            1.795            1.014  PPI Medical
                                                                                            Instruments &
                                                                                            Equipment.
    Photographic Supplies..............................            0.167            0.096  PPI Photographic
                                                                                            Supplies.
    Rubber and Plastics................................            1.366            1.052  PPI Rubber & Plastic
                                                                                            Products.
    Paper Products.....................................            1.110            1.000  PPI Converted Paper &
                                                                                            Paperboard Products.
    Apparel............................................            0.478            0.207  PPI Apparel.
    Machinery and Equipment............................            0.852            0.297  PPI Machinery &
                                                                                            Equipment.
    Miscellaneous Products.............................            0.783            1.963  PPI Finished Goods
                                                                                            less Food & Energy.
All Other Services.....................................            9.203            5.942
    Telephone..........................................            0.348            0.240  CPI-U Telephone
                                                                                            Services.
    Postage............................................            0.702            0.682  CPI-U Postage.
    All Other: Labor Intensive.........................            4.453            2.219  ECI-Compensation for
                                                                                            Private Service
                                                                                            Occupations.
    All Other: Non-labor Intensive.....................            3.700            2.800  CPI-U All Items.
Capital-Related Costs..................................            8.968           10.149
    Depreciation.......................................            5.586            6.186
    Fixed Assets.......................................            3.503            4.250  Boeckh Institutional
                                                                                            Construction 23-year
                                                                                            useful life.
    Movable Equipment..................................            2.083            1.937  WPI Machinery &
                                                                                            Equipment 11-year
                                                                                            useful life.
    Interest Costs.....................................            2.682            2.775
    Nonprofit..........................................            2.280            2.081  Average yield on
                                                                                            domestic municipal
                                                                                            bonds (source:
                                                                                            Moody's Aaa bonds
                                                                                            vintage).
    For Profit.........................................            0.402            0.694  Average yield on
                                                                                            Moody's AAA bonds
                                                                                            vintage weighted (23
                                                                                            years).
    Other Capital-Related Costs........................            0.699            1.187  CPI-U Residential
                                                                                            Rent.
----------------------------------------------------------------------------------------------------------------
* Labor-related
** Blood and blood-related products are included in miscellaneous products
Note: Due to rounding, weights may not sum to total.

    The following is an explanation of the proposed expense categories 
from Table 2.
a. Wages and Salaries
    For measuring the price growth of wages in the proposed FY 2002-
based RPL market basket, we propose to use the ECI for wages and 
salaries for civilian hospital workers as the proxy for wages in the 
RPL market basket.
b. Employee Benefits
    The proposed FY 2002-based RPL market basket uses the ECI for 
employee benefits for civilian hospital workers.
c. Nonmedical Professional Fees
    The ECI for compensation for professional and technical workers in 
private industry would be applied to this category since it includes 
occupations such as management and consulting, legal, accounting, and 
engineering services.
d. Fuel, Oil, Coal, and Gasoline.
    The percentage change in the price of gas fuels as measured by the 
PPI (Commodity Code <greek-i>0552) would be applied to this component.
e. Electricity
    The percentage change in the price of commercial electric power as 
measured by the PPI (Commodity Code <greek-i>0542) would be applied to 
this component.
f. Water and Sewerage
    The percentage change in the price of water and sewage maintenance 
as measured by the CPI for all urban consumers (CPI Code 
<greek-i>CUUR0000SEHG01) would be applied to this component.
g. Professional Liability Insurance (PLI)
    The proposed FY 2002-based RPL market basket would use the 
percentage change in hospital PLI premiums as estimated by the CMS 
Hospital Professional Liability Index for the proxy of this category. 
In the FY 1997-based excluded hospital with capital market basket, the 
same proxy was used. We continue to research options for improving our 
proxy for PLI. This research includes exploring various options for 
expanding our current survey, including the identification of another 
entity that would be willing to work with us to collect more complete 
and comprehensive data. We are also exploring other options such as 
third party or industry data that might assist us in creating a more 
precise measure of PLI premiums. At this time we have not identified a 
preferred option, therefore no change is proposed for the proxy in this 
proposed rule.
h. Pharmaceuticals
    The percentage change in the price of prescription drugs as 
measured by the PPI (PPI Code <greek-i>PPI32541DRX) would be used as a 
proxy for this cost category.

[[Page 4663]]

This is a special index produced by BLS as a proxy in the 1997-based 
excluded hospital with capital market basket.
i. Food: Direct Purchases
    The percentage change in the price of processed foods and feeds as 
measured by the PPI (Commodity Code <greek-i>02) would be applied to 
this component.
j. Food: Contract Service
    The percentage change in the price of food purchased away from home 
as measured by the CPI for all urban consumers (CPI Code 
<greek-i>CUUR0000SEFV) would be applied to this component.
k. Chemicals
    The percentage change in the price of industrial chemical products 
as measured by the PPI (Commodity Code <greek-i>061) would be applied 
to this component. While the chemicals hospitals purchase include 
industrial as well as other types of chemicals, the industrial 
chemicals component constitutes the largest proportion by far. Thus we 
believe that Commodity Code <greek-i>061 is the appropriate proxy.
l. Medical Instruments
    The percentage change in the price of medical and surgical 
instruments as measured by the PPI (Commodity Code <greek-i>1562) would 
be applied to this component.
m. Photographic Supplies
    The percentage change in the price of photographic supplies as 
measured by the PPI (Commodity Code <greek-i>1542) would be applied to 
this component.
n. Rubber and Plastics
    The percentage change in the price of rubber and plastic products 
as measured by the PPI (Commodity Code <greek-i>07) would be applied to 
this component.
o. Paper Products
    The percentage change in the price of converted paper and 
paperboard products as measured by the PPI (Commodity Code 
<greek-i>0915) would be used.
p. Apparel
    The percentage change in the price of apparel as measured by the 
PPI (Commodity Code <greek-i>381) would be applied to this component.
q. Machinery and Equipment
    The percentage change in the price of machinery and equipment as 
measured by the PPI (Commodity Code <greek-i>11) would be applied to 
this component.
r. Miscellaneous Products
    The percentage change in the price of all finished goods less food 
and energy as measured by the PPI (Commodity Code <greek-i>SOP3500) 
would be applied to this component. Using this index would remove the 
double-counting of food and energy prices, which are captured elsewhere 
in the market basket. The weight for this cost category is higher, in 
part, than in the 1997-based index because the weight for blood and 
blood products (1.188) is added to it. In the 1997-based excluded 
hospital with capital market basket we included a separate cost 
category for blood and blood products, using the BLS PPI for blood and 
derivatives as a price proxy. A review of recent trends in the PPI for 
blood and derivatives suggests that its movements may not be consistent 
with the trends in blood costs faced by hospitals. While this proxy did 
not match exactly with the product hospitals are buying, its trend over 
time appears to be reflective of the historical price changes of blood 
purchased by hospitals. However, an apparent divergence between the BLS 
PPI for blood and derivatives and trends in blood costs faced by 
hospitals over recent years led us to reevaluate whether the PPI for 
blood and derivatives was an appropriate measure of the changing price 
of blood. As discussed in both the FY 2006 IPPS and IRF PPS proposed 
rules, we ran test market baskets classifying blood into three separate 
cost categories: Blood and blood products; contained within chemicals 
as was done for the 1992-based excluded hospital with capital market 
basket; and, within miscellaneous products. These categories use as 
proxies the following PPIs: the PPI for blood and blood products, the 
PPI for chemicals, and the PPI for finished goods less food and energy, 
respectively. Of these three proxies, the PPI for finished goods less 
food and energy moved most like the recent blood cost and price trends. 
In addition, the impact on the overall market basket by using different 
proxies for blood was negligible, mostly due to the relatively small 
weight for blood in the market basket.
    Therefore, we are proposing to use the PPI for finished goods less 
food and energy for the blood proxy because we believe it more 
appropriately proxies price changes (not quantities or required tests) 
associated with blood purchased by hospitals because it moved most like 
the recent blood cost and price trends. (We note that we would continue 
to evaluate this proxy for its appropriateness and, if adopted, would 
explore the development of alternative price indexes to proxy the price 
changes associated with this cost for presentation in a future proposed 
rule.)
s. Telephone
    The percentage change in the price of telephone services as 
measured by the CPI for all urban consumers (CPI Code 
<greek-i>CUUR0000SEED) would be applied to this component.
t. Postage
    The percentage change in the price of postage as measured by the 
CPI for all urban consumers (CPI Code <greek-i>CUUR0000SEEC01) would be 
applied to this component.
u. All Other Services, Labor Intensive
    The percentage change in the ECI for compensation paid to service 
workers employed in private industry would be applied to this 
component.
v. All Other Services, Nonlabor Intensive
    The percentage change in the all items component of the CPI for all 
urban consumers (CPI Code <greek-i> CUUR0000SA0) would be applied to 
this component.
3. Proposed Methodology for Capital Portion of the RPL Market Basket
    Unlike for the operating costs of the proposed FY 2002-based RPL 
market basket, we did not have IRF, IPF, and LTCH FY 2002 Medicare cost 
report data for the capital cost weights, due to a change in the FY 
2002 reporting requirements. Rather, we propose to use these hospitals' 
expenditure data for the capital cost categories of depreciation, 
interest, and other capital expenses for FY 2001, and age the data to a 
FY 2002 base year using relevant price proxies. We believe this is the 
best approach since these data are the capital cost structures of those 
IRFs, IPFs and LTCHs serving Medicare beneficiaries that require 
inpatient hospital services.
    We calculated weights for the proposed RPL market basket capital 
costs using the same set of Medicare cost reports used to develop the 
operating share for IRFs, IPFS, and LTCHs in order to use consistent 
expense data in developing the proposed weights for both operating and 
capital costs. The resulting proposed capital weight for the FY 2002 
base year is 10.149 percent. This is based on FY 2001 Medicare cost 
report data for IRFs, IPFs, and LTCHs, aged to FY 2002 using relevant 
price proxies.
    Lease expenses are not a separate cost category in the proposed 
market basket, but are distributed among the cost categories of 
depreciation, interest, and

[[Page 4664]]

other, reflecting the assumption that the underlying cost structure of 
leases is similar to capital costs in general. We assumed 10 percent of 
lease expenses are overhead and assigned them to the other capital 
expenses cost category as overhead. We base this assignment of 10 
percent of lease expenses to overhead on the common assumption that 
overhead is 10 percent of costs. The remaining lease expenses were 
distributed to the three cost categories based on the weights of 
depreciation, interest, and other capital expenses not including lease 
expenses.
    Depreciation contains two subcategories: building and fixed 
equipment, and movable equipment. The proposed split between building 
and fixed equipment and movable equipment was determined using the FY 
2001 Medicare cost reports for IRFs, IPFs, and LTCHs. We believe this 
is the best available data source because it reflects the capital cost 
structures of those IRFs, IPFs and LTCHs serving Medicare 
beneficiaries. This methodology was also used to compute the 1997-based 
index (67 FR 50044).
    The proposed total interest expense cost category is split between 
the government/nonprofit and for-profit hospitals. The 1997-based 
excluded hospital with capital market basket allocated 85 percent of 
the total interest cost weight to the government nonprofit interest, 
proxied by average yield on domestic municipal bonds, and 15 percent to 
for-profit interest, proxied by average yield on Moody's Aaa bonds.
    We propose to derive the split using the relative FY 2001 Medicare 
cost report data for PPS hospitals on interest expenses for the 
government/nonprofit and for-profit hospitals. Due to insufficient 
Medicare cost report data for IPFs, IRFs, and LTCHs, we propose to use 
the same split used in the IPPS capital input price index, which is 75 
percent of the total interest cost weight of the government/non-profit 
interest and 25 percent of for-profit interest. We believe that this 
split reflects the latest relative cost structure of interest expenses 
for hospitals because it is based on the most recent complete hospital 
cost report data and, therefore, we propose to use a 75-25 split to 
allocate interest expenses to government/nonprofit and for-profit 
hospitals' interest (70 FR 47408).
    Since capital is acquired and paid for over time, capital expenses 
in any given year are determined by both past and present purchases of 
physical and financial capital. The vintage-weighted capital index is 
intended to capture the long-term consumption of capital, using vintage 
weights for depreciation (physical capital) and interest (financial 
capital). These vintage weights reflect the purchase patterns of 
building and fixed equipment and movable equipment over time. 
Depreciation and interest expenses are determined by the amount of past 
and current capital purchases. Therefore we are proposing to use the 
vintage weights to compute vintage-weighted price changes associated 
with depreciation and interest expense.
    Vintage weights are an integral part of the proposed FY 2002-based 
RPL market basket. Capital costs are inherently complicated and are 
determined by complex capital purchasing decisions, over time, based on 
factors such as interest rates and debt financing. In addition, capital 
is depreciated over time instead of being consumed in the same period 
it is purchased. The capital portion of the proposed FY 2002-based RPL 
market basket would reflect the annual price changes associated with 
capital costs, and would be a useful simplification of the actual 
capital investment process. By accounting for the vintage nature of 
capital, we are able to provide an accurate, stable annual measure of 
price changes. Annual nonvintage price changes for capital are unstable 
due to the volatility of interest rate changes. Therefore, they do not 
reflect the actual annual price changes for Medicare capital-related 
costs. The capital component of the proposed FY 2002-based RPL market 
basket would reflect the underlying stability of the capital 
acquisition process and provide hospitals with the ability to plan for 
changes in capital payments.
    To calculate the vintage weights for depreciation and interest 
expenses, we needed a time series of capital purchases for building and 
fixed equipment and movable equipment. We found no single source that 
provides the best time series of capital purchases by hospitals for all 
of the above components of capital purchases. The early Medicare Cost 
Reports were not sufficiently completed to have capital data to meet 
this need. While the AHA Panel Survey provided a consistent database 
back to 1963, it did not provide annual capital purchases. However, the 
AHA Panel Survey provided a time series of depreciation expenses 
through 1997 which could be used to infer capital purchases over time. 
From 1998 to 2001, hospital depreciation expenses were calculated by 
multiplying the AHA Annual Survey total hospital expenses by the ratio 
of depreciation to total hospital expenses from the Medicare cost 
reports. Beginning in 2001, the AHA Annual Survey began collecting 
depreciation expenses. We note that we hope to be able to propose to 
use these data in proposed rebasings that would be presented in future 
proposed rules.
    In order to estimate capital purchases from AHA data on 
depreciation and interest expenses, the expected life for each cost 
category (building and fixed equipment, movable equipment, and debt 
instruments) is needed. Due to insufficient Medicare cost report data 
for IPFs, IRFs, and LTCHs, we propose to use FY 2001 Medicare Cost 
Reports for IPPS hospitals to determine the expected life of building 
and fixed equipment and movable equipment. We believe this data source 
reflects the latest relative cost structure of depreciation expenses 
for all hospital types, including IPFs, IRFs, and LTCHs, and is the 
best available data at this time. The expected life of any piece of 
equipment can be determined by dividing the value of the asset 
(excluding fully depreciated assets) by its current year depreciation 
amount. This calculation yields the estimated useful life of an asset 
if depreciation were to continue at current year levels, assuming 
straight-line depreciation. From the FY 2001 Medicare cost reports for 
IPPS hospitals the expected life of building and fixed equipment was 
determined to be 23 years, and the expected life of movable equipment 
was determined to be 11 years.
    We also propose to use the fixed and movable weights derived from 
FY 2001 Medicare cost reports for IPFs, IRFs, and LTCHs to separate the 
depreciation expenses into annual amounts of building and fixed 
equipment depreciation and movable equipment depreciation because this 
is the best available data source. By multiplying the annual 
depreciation amounts by the expected life calculations from the FY 2001 
Medicare cost reports, year-end asset costs for building and fixed 
equipment and movable equipment were determined. Then, we calculated a 
time series back to 1963 of annual capital purchases by subtracting the 
previous year asset costs from the current year asset costs. From this 
capital purchase time series we are able to calculate the vintage 
weights for building and fixed equipment, movable equipment, and debt 
instruments. An explanation of each of these sets of vintage weights 
follows.
    For proposed building and fixed equipment vintage weights, the real 
annual capital purchase amounts for building and fixed equipment 
derived from the AHA Panel Survey were used. The real annual purchase 
amount was used to capture the actual amount of the physical 
acquisition, net of the effect of price inflation. This real annual

[[Page 4665]]

purchase amount for building and fixed equipment was produced by 
deflating the nominal annual purchase amount by the building and fixed 
equipment price proxy, the Boeckh Institutional Construction Index. 
This is the same proxy used for the FY 1997-based excluded hospital 
with capital market basket. We believe this proxy continues to meet our 
criteria of reliability, timeliness, availability, and relevance. Since 
building and fixed equipment has an expected life of 23 years, the 
vintage weights for building and fixed equipment are deemed to 
represent the average purchase pattern of building and fixed equipment 
over 23-year periods. With real building and fixed equipment purchase 
estimates back to 1963, 16 23-year periods could be averaged to 
determine the average vintage weights for building and fixed equipment 
that are representative of average building and fixed equipment 
purchase patterns over time. Vintage weights for each 23-year period 
are calculated by dividing the real building and fixed capital purchase 
amount in any given year by the total amount of purchases in the 23-
year period. This calculation is done for each year in the 23-year 
period, and for each of the 16 23-year periods. The average of each 
year across the 16 23-year periods is used to determine the 2002 
average building and fixed equipment vintage weights.
    For proposed movable equipment vintage weights, the real annual 
capital purchase amounts for movable equipment derived from the AHA 
Panel Survey were used to capture the actual amount of the physical 
acquisition, net of price inflation. This real annual purchase amount 
for movable equipment is calculated by deflating the nominal annual 
purchase amount by the movable equipment price proxy, the PPI for 
Machinery and Equipment. This is the same proxy used for the FY 1997-
based excluded hospital with capital market basket. We believe this 
proxy, which meets our criteria, is the best measure of price changes 
for this cost category. Since movable equipment has an expected life of 
11 years, the vintage weights for movable equipment are deemed to 
represent the average purchase pattern of movable equipment over an 11-
year period. With real movable equipment purchase estimates available 
back to 1963, 28 11-year periods could be averaged to determine the 
average vintage weights for movable equipment that are representative 
of average movable equipment purchase patterns over time. Vintage 
weights for each 11-year period are calculated by dividing the real 
movable capital purchase amount for any given year by the total amount 
of purchases in the 11-year period. This calculation is done for each 
year in the 11-year period, and for each of the 28 11-year periods. The 
average of the 28 11-year periods is used to determine the proposed FY 
2002 average movable equipment vintage weights.
    For proposed interest vintage weights, the nominal annual capital 
purchase amounts for total equipment (building and fixed and movable) 
derived from the AHA Panel and Annual Surveys were used. Nominal annual 
purchase amounts were used to capture the value of the debt instrument. 
Since hospital debt instruments have an expected life of 23 years, the 
vintage weights for interest are deemed to represent the average 
purchase pattern of total equipment over 23-year periods. With nominal 
total equipment purchase estimates available back to 1963, 16 23-year 
periods could be averaged to determine the average vintage weights for 
interest that are representative of average capital purchase patterns 
over time. Vintage weights for each 23-year period are calculated by 
dividing the nominal total capital purchase amount for any given year 
by the total amount of purchases in the 23-year period. This 
calculation is done for each year in the 23-year period and for each of 
the 16 23-year periods. The average of the 16 23-year periods is used 
to determine the proposed FY 2002 average interest vintage weights. The 
proposed vintage weights for the index are presented in Table 3.
    In addition to the proposed price proxies for depreciation and 
interest costs described above in the vintage weighted capital section, 
we propose to use the CPI-U for Residential Rent as a price proxy for 
other capital-related costs. Other capital-related costs are mainly 
composed of taxes and insurance. There is no price proxy for these 
specific costs; however, we believe the price changes associated with 
these costs would be reflected in the price changes of residential rent 
because rent is assumed to move with taxes and insurance on order to 
maintain profit margins. The price proxies for each of the capital cost 
categories are the same as those used for the IPPS final rule (67 FR 
50044) capital input price index.

                 Table 3.--Proposed CMS FY 2002-Based RPL Market Basket Capital Vintage Weights
----------------------------------------------------------------------------------------------------------------
                                                                                                   Interest:
                          Year                           Fixed assets  (23    Movable assets    capital-related
                                                           year weights)    (11 year weights)  (23 year weights)
----------------------------------------------------------------------------------------------------------------
1......................................................               .021               .065               .010
2......................................................               .022               .071               .012
3......................................................               .025               .077               .014
4......................................................               .027               .082               .016
5......................................................               .029               .086               .019
6......................................................               .031               .091               .023
7......................................................               .033               .095               .026
8......................................................               .035               .100               .029
9......................................................               .038               .106               .033
10.....................................................               .040               .112               .036
11.....................................................               .042               .117               .039
12.....................................................               .045  .................               .043
13.....................................................               .047  .................               .048
14.....................................................               .049  .................               .053
15.....................................................               .051  .................               .056
16.....................................................               .053  .................               .059
17.....................................................               .056  .................               .062
18.....................................................               .057  .................               .064
19.....................................................               .058  .................               .066
20.....................................................               .060  .................               .070
21.....................................................               .060  .................               .071

[[Page 4666]]

 
22.....................................................               .061  .................               .074
23.....................................................               .061  .................               .076
                                                        --------------------
    Total..............................................              1.000              1.000              1.000
----------------------------------------------------------------------------------------------------------------

4. Proposed Market Basket Estimate for the 2007 LTCH PPS Rate Year
    As discussed previously in this proposed rule, beginning in the 
2007 LTCH PPS rate year, we are proposing to adopt the FY 2002-based 
RPL market basket as the appropriate market basket of goods and 
services under the LTCH PPS. We are proposing a zero percent update to 
the LTCH PPS Federal rate for the 2007 LTCH PPS rate year rather than 
proposing an update based solely on the most recent estimate of the 
proposed LTCH PPS market basket as we have done in the past. However, 
as we discuss in section IV.D.1.c. of this preamble, we are proposing 
to revise the LTCH PPS labor-related share based on the proposed RPL 
market basket. In Table 4, we are presenting a comparison of the most 
recent estimates of the increase to the current LTCH PPS market basket 
(that is, the FY 1997-based excluded hospital with capital market 
basket) and the proposed FY 2002-based RPL market basket.
    Based on Global Insight's 3rd quarter 2005 forecast with history 
through the 2nd quarter of 2005, the most recent estimate of the RPL 
market basket for July 1, 2006 through June 30, 2007 (the 2007 LTCH PPS 
rate year) is 3.6 percent. Global Insight, Inc. is a nationally 
recognized economic and financial forecasting firm that contracts with 
CMS to forecast the components of the market baskets. Using the current 
FY 1997-based excluded hospital with capital market basket, Global 
Insight's 3rd quarter 2005 forecast, with history through the 2nd 
quarter of 2005, for the 2007 LTCH PPS rate year would also be 3.6 
percent. Table 4 compares the proposed FY 2002-based RPL market basket 
and the FY 1997-based excluded hospital with capital market basket 
percent changes. For both the historical and forecasted periods between 
FY 2000 and FY 2008, the difference between the two market baskets is 
minor with the exception of FY 2002, where the proposed FY 2002-based 
RPL market basket increased 3/10 of a percentage point higher than the 
FY 1997-based excluded hospital with capital market basket. This is 
primarily due to the proposed FY 2002-based RPL having a larger 
compensation (this is, the sum of wages and salaries and benefits) cost 
weight than the FY 1997-based index and the price changes associated 
with compensation costs increasing much faster than the prices of other 
market basket components. Also contributing is the ``all other nonlabor 
intensive'' cost weight, which is smaller in the proposed FY 2002-based 
RPL market basket than in the FY 1997-based index, as well as the 
slower price changes associated with these costs.

   Table 4.--Proposed FY 2002-Based RPL Market Basket and FY 1997-Based Excluded Hospital With Capital Market
                                       Basket, Percent Changes: 2000-2008
----------------------------------------------------------------------------------------------------------------
                                                                                                  FY 1997-based
                                                                              Proposed rebased      excluded
                              Fiscal year (FY)                                  FY 2002-based    hospital market
                                                                                 RPL market        basket with
                                                                                   basket            capital
----------------------------------------------------------------------------------------------------------------
Historical data:
    RY 2001.................................................................               3.8               3.9
    RY 2002.................................................................               4.1               3.8
    RY 2003.................................................................               3.8               3.7
    RY 2004.................................................................               3.6               3.6
    RY 2005.................................................................               3.8               3.9
Average RY 2001-2005........................................................               3.8               3.8
Forecast:
    RY 2006.................................................................               3.7               3.8
    RY 2007.................................................................               3.6               3.6
    RY 2008.................................................................               3.5               3.5
    RY 2009.................................................................               3.3               3.1
Average RY 2006-2009........................................................               3.5              3.5
----------------------------------------------------------------------------------------------------------------
Source: Global Insight, Inc. 3rd Qtr 2005, @USMACRO/CNTL0905 @CISSIM/TL0805.SIM.

C. Proposed Standard Federal Rate for the 2007 LTCH PPS Rate Year

1. Background
    Under the existing regulations at Sec.  412.523(c)(3)(ii), we 
update the standard Federal rate annually to adjust for the most recent 
estimate of the projected increases in prices for LTCH inpatient 
hospital services. We established this regulation in the August 30, 
2002 final rule (67 FR 56030), which implemented the LTCH PPS, because 
at that time we believed that was the most appropriate method for 
updating the LTCH PPS Standard Federal rate annually for years after FY 
2003. When we moved the date of the annual update of the LTCH PPS from 
October 1 to July 1 in the RY 2004 LTCH PPS final rule (68 FR 34138), 
we revised Sec.  412.523(c)(3) to specify that for LTCH PPS rate years 
beginning on or after July 1, 2003, the annual update to the standard 
Federal rate for the LTCH prospective payment system would be equal 
previous rate year's Federal rate updated by the most recent estimate 
of increases in the appropriate market basket of goods and services 
included in

[[Page 4667]]

covered inpatient LTCH services because, at that time, we continued to 
believe that was the most appropriate method for updating the LTCH PPS 
Standard Federal rate annually for years after RY 2004. As established 
in the RY 2006 LTCH PPS final rule (70 FR 24179), based on the most 
recent estimate of the excluded hospital with capital market basket, 
adjusted to account for the change in the LTCH PPS rate year update 
cycle, the current LTCH PPS standard Federal rate which is effective 
from July 1, 2005 through June 30, 2006 (the 2006 LTCH PPS rate year) 
is $38,086.04 (70 FR 24179). In the discussion that follows, we explain 
how we developed the proposed standard Federal rate for the 2007 LTCH 
PPS rate year. Specifically, we explain our rationale, which is based 
on our ongoing monitoring activities, for proposing a zero percent 
update to the standard Federal rate for the 2007 LTCH PPS rate year 
rather than proposing to solely use the most recent estimate of the 
proposed RPL market basket as the update factor for the Federal rate 
for the upcoming rate year. Thus, the proposed standard Federal rate 
for the 2007 LTCH PPS rate year would be $38,086.04.
2. Description of a Preliminary Model of an Update Framework Under the 
LTCH PPS
    In the August 30, 2002 final rule (67 FR 56087), which implemented 
the LTCH PPS, we stated that in the future we may propose to develop a 
framework to update payments to LTCHs that would account for other 
appropriate factors that affect the efficient delivery of services and 
care provided to Medicare patients. A conceptual basis for the proposal 
of developing an update framework in the future was presented in 
Appendix B of that same final rule (67 FR 56086). In subsequent final 
rules that updated the LTCH PPS standard Federal rate for years after 
FY 2003, we explained that we did not propose an update framework 
because we had not yet collected sufficient data to allow for the 
analysis and development of a framework under the LTCH PPS (see 68 FR 
34134, 69 FR 25682, and 70 FR 24179). Since the LTCH PPS was 
implemented just slightly over 3 years ago (for cost reporting periods 
beginning on or after October 1, 2002) and due to the time lag in the 
availability of Medicare data, we continue to believe that we still do 
not yet have sufficient data to develop an update framework upon which 
to base the proposed update to the standard Federal rate for the 2007 
LTCH PPS rate year.
    Although we do not have enough complete data at this time to 
propose an update for RY 2007 based on an update framework, we believe 
that the almost 2 full years of data generated under the LTCH PPS is 
sufficient data to begin the discussion of the development of a 
potential update framework that we may propose to use in the future 
under the LTCH PPS for the annual update to the LTCH standard Federal 
rate. Therefore, although we are not proposing to employ an analytical 
update framework in this proposed rule to determine the proposed 2007 
LTCH PPS rate year update to the standard Federal rate, in Appendix A 
of this proposed rule, we are presenting a preliminary model of an 
update framework, using the best available data and concepts, which we 
may propose to adopt at some time in the future.
    We are soliciting comments on this preliminary update framework 
methodology and its application that may be proposed in the future. 
Also, we would appreciate comments regarding recommendations to improve 
it. We note that this preliminary model of an update framework for the 
LTCH PPS is based on the conceptual discussion of a LTCH PPS update 
framework that was presented in the August 30, 2002 final rule (67 FR 
56086), and is similar to the update framework formerly used to develop 
the operating IPPS annual update recommendation (69 FR 28816 through 
28817) and that which is currently used under the capital IPPS for 
inpatient short-term acute-care hospitals set forth at Sec.  
412.308(c)(1)(ii).
3. Proposed Update to the Standard Federal Rate for the 2007 LTCH PPS 
Rate Year
    Currently, under Sec.  412.523, the annual update to the LTCH PPS 
standard Federal rate is equal to the most recent estimate of increases 
in the prices of an appropriate market basket of goods and services 
included in covered inpatient LTCH services (that is, presently, the 
excluded hospital with capital market basket). As we indicated in 
previous LTCH PPS final rules (67 FR 56014, 68 FR 34157, 69 FR 25712, 
and 70 FR 24209 through 24213), we have developed a monitoring system 
to assist us in evaluating the LTCH PPS. We have used the results of 
these monitoring efforts, along with the most recently available LTCH 
PPS data to assess current payment adequacy under the LTCH PPS. As we 
discuss in greater detail, because we believe that current payments are 
more than adequate to account for price increases in the services 
furnished by LTCHs during the 2007 LTCH PPS rate year, under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of BIPA to include appropriate adjustments in 
the establishment of the LTCH PPS, we are proposing to revise Sec.  
412.523(c)(3)(ii), to specify that, for discharges occurring on or 
after July 1, 2006 and on or before June 30, 2007, the standard Federal 
rate from the previous year would be updated by a factor of zero 
percent. That is, the standard Federal rate for the July 1, 2006 
through June 30, 2007 rate year would remain the same as the standard 
Federal rate in effect during the 2006 rate year (July 1, 2005 through 
June 30, 2006), that is, $38,086.04.
    In the August 30, 2002 final rule (67 FR 56014), we describe an on-
going monitoring component of the new LTCH PPS that would enable us to 
evaluate the impact of the new payment policies. We stated that if our 
data indicate that changes to the system might be warranted, we may 
consider proposing revisions to these policies in the future. Since the 
implementation of the LTCH PPS (for cost reporting periods beginning on 
or after October 1, 2002), there has been tremendous growth in the 
number of LTCHs reimbursed by Medicare. Specifically, the number of 
LTCHs has almost doubled over the past 3 years 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 (CMI) and margins under the LTCH PPS. 
Margins are defined as payment-to-cost ratios of LTCH inpatient 
Medicare payments to LTCH inpatient Medicare costs. We believe the 
proposed zero percent update factor for RY 2007 is supported by our 
findings regarding CMI, Medicare margins, and patient census based on 
the most recent complete LTCH data. The following is a discussion of 
our analysis of each of these factors.
    A LTCH's CMI is defined as its case weighted average LTC-DRG 
relative weight for all its discharges in a given period. Changes in 
CMI consist of two components: ``real'' CMI changes and ``apparent'' 
CMI changes. Real CMI increase is defined as the increase in the 
average LTC-DRG relative weights resulting from the hospital's 
treatment

[[Page 4668]]

of more resource intensive patients. Apparent CMI increase is defined 
as the increase in CMI due to changes in coding practices. Observed CMI 
increase is defined as real CMI increase plus the increase in computed 
CMI 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). If LTCH patients have more costly 
impairments, lower functional status, or increased comorbidities, and 
thus require more resources in the LTCH, we would 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 CMI increase), and should not be influenced by changes in coding 
practices (apparent CMI increase). Apparent CMI increase results in a 
case 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 
LTCH PPS payment that does not necessarily reflect the true cost of 
treating the patient. Therefore, under the broad discretionary 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of BIPA to include appropriate adjustments in 
the establishment of the LTCH PPS, we are proposing to revise 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. It is important to eliminate the effect of coding or 
classification changes because, as discussed above in this section, 
they do not reflect the true cost of treating patients. We believe that 
the adjustment we are proposing to eliminate the effect of coding or 
classification changes that do not reflect real changes in LTCHs' case-
mix would reduce the amount that RY 2007 LTCH PPS payments would have 
been absent this adjustment so that payments would become more aligned 
with the true costs of treating LTCH patients.
    As described in our August 30, 2002 final rule, we contracted with 
3M Health Information Systems (3M) to analyze LTCH data to support our 
efforts in developing the original LTCH PPS in 2002. We have continued 
our contract with 3M to assist CMS in developing potential refinements 
to the LTCH PPS, including some of the proposed changes presented in 
this proposed rule. As part of this research, we asked 3M to examine 
changes in case-mix and coding since the implementation of the LTCH PPS 
based on the most recently available data. As part of their analysis, 
3M compared FY 2003 LTCH claims data from the first year of 
implementation of the PPS with the FY 2001 claims data (generated prior 
to the implementation of the LTCH PPS), which is the same LTCH claims 
data used to develop the LTCH PPS.
    The analysis performed by 3M indicates that the observed case-mix 
in LTCHs increased by 5.6 percent between FY 2001 and FY 2003. The 
average annual CMI 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 is 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 CMI 
increase (that is, we assume that the increase in case-mix is not due 
to improvements in documentation or more complete coding of the medical 
record during this period). Using the average annual 2.75 percent 
observed CMI increase as a baseline, we can separate the CMI increase 
between FYs 2003 and 2004 into the real CMI increase, which is based on 
the treatment of more resource intensive patients, and the apparent CMI 
increase, which is due to improvements in documentation and coding 
practices.
    The calculated observed CMI increase between FYs 2003 and 2004 was 
6.75 percent. Assuming that the real CMI increase observed (on average) 
from FY 2001 to FY 2003 remained relatively constant into FY 2005, then 
the difference of 4.0 percent (6.75 percent minus 2.75 percent) 
represents the apparent CMI increase due to improvements in 
documentation and coding. This is considerably higher than the 0.34 
percent behavioral offset originally estimated by CMS actuaries, which 
was used in the development of the FY 2003 LTCH PPS standard Federal 
rate (67 FR 56033). We note that the 4.0 percent apparent CMI increase 
is a conservative estimate when compared to the 5.35 percent apparent 
CMI increase that would result if we applied the information from past 
studies on case-mix change. Based on past studies of IPPS 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)), we have assumed 
that real case-mix change for IPPS hospitals was a fairly steady 1.0 to 
1.4 percent per year. If we apply this same assumption to LTCHs, nearly 
5.35 percent (6.75 percent - 1.4 percent) of the change in case-mix 
during the first year of the LTCH PPS is apparent CMI and not real CMI.
    We recognize that the LTCH PPS may have increased incentives for 
LTCHs to take patients with greater impairment, lower function, or 
increased comorbidities because the more complicated the patient's 
principle diagnosis and accompanying comorbidities, the higher the 
relative weight for the LTC-DRG, and the higher the resulting LTCH PPS 
payment. Under TEFRA, LTCHs were paid on the basis of Medicare 
reasonable costs limited by a hospital-specific target amount per 
discharge, which were based on base-year cost per case. Thus, LTCHs may 
have greater incentives to admit more costly patients and therefore, we 
expected to see an increase in the observed CMI due to the 
implementation of the LTCH PPS. However, we believe a significant 
portion of the 6.75 percent increase in CMI between FY 2003 and FY 2004 
is due to changes in coding practices rather than the treatment of more 
resource intensive patients. In our analysis of cost per discharge, we 
found that while payments (revenue) per discharge increased 
approximately 17 percent from FY 2002 to FY 2003 (the first year of 
LTCH PPS), costs (expenses) per discharge increased by only 8 percent 
for the same period. Thus payments to LTCHs from FY 2002 to FY 2003 
increased more than 2 times as much as the increase of costs during the 
same period. We didn't observe a large increase in cost per discharge, 
which we would have expected to see if the observed CMI was due to 
``real'' CMI change (treating sicker patients). We would have expected 
to see a large increase in costs per discharge if the CMI was due to 
real CMI change because we expected LTCHs to admit more severely ill 
patients as described previously which we thought would have required 
more resources to treat these patients. Furthermore, review by a 
Medicare program safeguard contractor working with the FI sampled LTCH 
claims with specific diagnoses in one LTCH and determined that the 
majority of those patients were not ``hospital-

[[Page 4669]]

level'' patients. Rather, the level of care needed by these patients 
was more suitable for a Skilled Nursing Facility (SNF) than a LTCH. The 
QIO reviewed a sample of the claims that had been determined not to be 
hospital-level patients by the Medicare program safeguard contractor 
and concurred with its assessment of most of those cases. Anecdotally, 
we have heard of other investigations of LTCHs treating patients that 
do not require hospital-level care. This finding further supports the 
data showing that cost per discharge did not increase as rapidly as 
LTCHs' CMI and that the increase in LTCHs' CMI is primarily due to 
factors other than real CMI.
    In addition, an internal CMS analysis shows high Medicare margins 
among LTCHs since the implementation of the LTCH PPS in FY 2003. 
Specifically, 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 calculation, also utilized by MedPAC in its analyses, is used to 
evaluate the overall financial status of LTCHs. In an analysis of the 
latest available LTCH cost reports, we found that LTCH Medicare 
payments for FY 2003 (the first year of the LTCH PPS) were 8.8 percent 
higher than LTCHs' Medicare costs. Preliminary cost report data for FY 
2004 reveal an even higher Medicare margin of 11.7 percent. For the 
period prior to the implementation of the LTCH PPS (that is, FY 1996 
through FY 2002), we found that Medicare margins ranged between a 
minimum of -2.2 percent in FY 2002, and a maximum of 2.9 percent in FY 
1997.
    We note that MedPAC is presently engaged in an evaluation of 
payment adequacy for LTCHs, which upon completion, will be published in 
the Commission's 2006 Reports to the Congress. At the Commission's 
October 7, 2005 public meeting, the preliminary findings were 
presented. The report included the following:
    <bullet> The number of LTCHs increased rapidly since the 
implementation of the LTCH PPS; the increase in the volume of cases was 
even greater; and beneficiaries' access to care has also increased;
    <bullet> Medicare spending has increased more rapidly than volume.
    <bullet> LTCHs have access to capital and are rapidly expanding 
into market areas that had no LTCHs prior to the establishment of the 
LTCH PPS for FY 2003, as well as in areas that already had LTCHs.
    <bullet> Medicare payments under the LTCH PPS are ``attractive'' 
since despite the fact that LTCHs could opt to be phased-in to the 
fully Federal payments over 5 years, with a decreasing percentage of 
payments based on their former TEFRA payments, since 2004, 93 percent 
of LTCHs have opted to be paid 100 percent under the Federal rate.
    <bullet> In evaluating adequacy of payments, it can generally be 
assumed that if the payments are adequate, the volume of patients will 
increase. This was true under the LTCH PPS, where cases increased 12 
percent per year between 2001 and 2004, while Medicare spending 
increased 25 percent per year for the same period.
    <bullet> Medicare LTCH spending increased 28 percent from 2003 to 
2004.
    (The transcript of the discussion of LTCH payment adequacy from the 
October 7, 2005 MedPAC public meeting can be found at the following web 
address: http://www.medpac.gov/public_meetings/transcripts/1005_allcombined_transc.pdf (pages 256 through 298).)
    Consistent with MedPAC's most recent research, our margins analysis 
indicates 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. We believe this 
is because the large observed increase in LTCH case-mix was not 
accompanied by a corresponding increase in Medicare costs. This is 
consistent with our belief expressed earlier that a significant part of 
this observed increase in case-mix is ``apparent'' and not ``real.'' 
Therefore, under the broad discretionary authority conferred upon the 
Secretary in section 123(a) of the BBRA as amended by section 307(b)(1) 
of the BIPA to make appropriate adjustments, as explained previously, 
we believe that it is fiscally prudent and appropriate to propose to 
revise Sec.  412.523(c)(3)(iii) to specify that the standard Federal 
rate for the LTCH PPS rate year July 1, 2006 through June 30, 2007, 
would be the standard Federal rate from the previous year be updated by 
a factor of zero percent. A zero percent update factor would reflect an 
adjustment to the market basket update to account for the increase in 
the apparent case-mix in the prior period. Based on our analysis of the 
observed LTCH case-mix increase, we estimate that 4 percent of the 6.75 
percent calculated observed LTCH CMI increase is due to improvements in 
documentation and coding and not due to an increase in the severity of 
the patients being treated at LTCHs. As previously noted, the Federal 
payment rate was offset by 0.34 percent to reflect expected behavioral 
changes, including changes in coding. The recent estimate of apparent 
CMI increase (4 percent) indicates that an additional 3.66 percent 
adjustment (4 percent apparent CMI increase minus 0.34 percent 
behavioral offset) should be made to the Federal payment rate to 
account for improvements in coding. Accounting for the most recent 
estimate of the RPL market basket increase (3.6 percent) and the 
additional adjustment for improvements in coding (3.66 percent), the 
resulting update is within rounding error of zero percent. We are 
proposing a zero percent update for the 2007 LTCH PPS rate year, which 
would result in a proposed LTCH PPS standard Federal rate of $38,086.04 
for the 2007 LTCH PPS rate year. We believe that a zero percent update 
for the 2007 LTCH PPS rate year is appropriate to protect the integrity 
of the Medicare Trust Funds by ensuring that the LTCH PPS payment rates 
better reflect the true costs of treating LTCH patients. Furthermore, 
based on the sizeable Medicare margins among LTCHs, we believe that the 
proposed standard Federal rate for the 2007 LTCH PPS rate year would 
not affect beneficiary access to LTCH services since LTCHs would 
continue to be paid adequately to reflect the cost of resources needed 
to treat Medicare beneficiaries.
    As discussed in section IV.B.4. of this preamble, the most recent 
estimate of the proposed LTCH PPS market basket is 3.6 percent for the 
2007 LTCH PPS rate year. If we were not proposing to revise Sec.  
412.523(c)(3) to provide a zero percent update to the standard Federal 
rate for the 2007 LTCH PPS rate year to account for changes in coding 
that do not reflect real changes in the severity and cost of LTCH 
patients presented in this proposed rule, under existing Sec.  
412.523(c)(3)(ii) the proposed update would have been 3.6 percent.
    We note that the proposed revision to Sec.  412.525(c)(3) would 
only address an update to the LTCH PPS Federal rate through the 2007 
LTCH PPS rate year. We intend to propose future revisions to Sec.  
412.525(c)(3) to address future proposed updates to the LTCH PPS 
Federal rates in future rate years based on an analysis of the most 
recent available LTCH data that would be presented in upcoming LTCH 
proposed rules. As noted previously in this proposed rule and in the 
August 30, 2002 final rule (67 FR 56097), we are examining the 
potential for developing and implementing an update framework

[[Page 4670]]

under the LTCH PPS. We believe an update framework, used in combination 
with the market basket, would enhance the methodology for updating 
payments by addressing factors beyond changes in pure input prices 
(measured by the market basket) such as case-mix, intensity, and 
productivity. (As noted in section IV.C.2 of this proposed rule, a 
preliminary model of an update framework that may be proposed at some 
later date for future use under the LTCH PPS is presented in Appendix A 
of this proposed rule.) However, we are not proposing a specific annual 
update framework until we have collected sufficient complete LTCH PPS 
data to evaluate payments and costs under the LTCH PPS.
    In addition, currently as implemented in Sec.  412.523(d)(3), we 
have provided for the possibility of making a one-time prospective 
adjustment to the LTCH PPS rates so that any significant difference 
from actual payments and the estimated payments for the first year of 
the LTCH PPS is not perpetuated in the prospective payment rates for 
future years. As discussed in section IV.D.5. of this proposed rule, we 
are not proposing an adjustment to the LTCH PPS rates under Sec.  
412.523(d)(3) in this proposed rule; however, we intend to continue to 
collect and interpret new data to determine if an adjustment should be 
proposed in the future. In addition, as also discussed in section 
IV.D.5. of this proposed rule, we are proposing to postpone the 
deadline of the possible one-time prospective adjustment to the LTCH 
PPS rates provided for in Sec.  412.523(d)(3) to July 1, 2008 in order 
to maximize the availability of data used to conduct a comprehensive 
evaluation of the LTCH PPS. However, we note that the proposed zero 
percent update for the 2007 LTCH PPS rate year may make this one-time 
prospective adjustment to the LTCH PPS Federal rate unnecessary if our 
comprehensive analysis of the LTCH PPS determines that LTCH PPS 
payments and the costs for LTCH services become aligned as a result of 
this proposed change. We solicit comments on whether the proposed zero 
percent for the 2007 LTCH PPS rate year is appropriate or if an 
alternative percentage reduction should be applied to the standard 
Federal rate for the 2007 LTCH PPS rate year.
4. Proposed Standard Federal Rate for the 2007 LTCH PPS Rate Year
    In the RY 2006 LTCH PPS final rule (70 FR 24180), we established a 
standard Federal rate of $38,086.04 for the 2006 LTCH PPS rate year 
that was based on the best available data and policies established in 
that final rule. In this proposed rule, we would revise Sec.  
412.523(c)(3) to establish a standard Federal rate based on a zero 
percent update as discussed in section IV. B. of this proposed rule. 
Therefore, based on the proposed zero percent update, the proposed 
standard Federal rate for RY 2007 would be $38,086.04. As we stated in 
the RY 2006 LTCH PPS final rule, the standard Federal rate of 
$38,086.04 was already adjusted for differences in case-mix, wages, 
cost-of-living, and high cost outlier payments. Therefore, we made 
additional adjustments in the RY 2006 LTCH PPS standard Federal rate 
for those factors (70 FR 24180). Similarly, since the proposed standard 
Federal rate for the 2007 LTCH PPS rate year has already been adjusted 
for differences in case-mix, wages, cost-of-living, and high-cost 
outlier payments, we would not propose to make any additional 
adjustments in the proposed standard Federal rate for these factors.

D. Calculation of Proposed LTCH Prospective Payments for the 2007 LTCH 
PPS Rate Year

    The basic methodology for determining prospective payment rates for 
LTCH inpatient operating and capital-related costs is set forth in 
Sec.  412.515 through Sec.  412.532. In accordance with Sec.  412.515, 
we assign appropriate weighting factors to each LTC-DRG to reflect the 
estimated relative cost of hospital resources used for discharges 
within that group as compared to discharges classified within other 
groups. The amount of the prospective payment is based on the standard 
Federal rate, established under Sec.  412.523, and adjusted for the 
LTC-DRG relative weights, differences in area wage levels, cost-of-
living in Alaska and Hawaii, high-cost outliers, and other special 
payment provisions (short-stay outliers (SSO) under Sec.  412.529 and 
interrupted stays under Sec.  412.531).
    In accordance with Sec.  412.533, during the 5-year transition 
period, payment is based on the applicable transition blend percentage 
of the adjusted Federal rate and the reasonable cost-based payment rate 
unless the LTCH makes a one-time election to receive payment based on 
100 percent of the Federal rate. A LTCH defined as ``new'' under Sec.  
412.23(e)(4) is paid based on 100 percent of the Federal rate with no 
blended transition payments (Sec.  412.533(d)). As discussed in the 
August 30, 2002 final rule (67 FR 56038), and in accordance with Sec.  
412.533(a), the applicable transition blends are as shown in Table 5.

                                 Table 5
------------------------------------------------------------------------
                                                              Reasonable
                                                  Federal     cost-based
 Cost reporting periods beginning on or after       rate       payment
                                                 percentage      rate
                                                              percentage
------------------------------------------------------------------------
October 1, 2002...............................           20           80
October 1, 2003...............................           40           60
October 1, 2004...............................           60           40
October 1, 2005...............................           80           20
October 1, 2006...............................          100            0
------------------------------------------------------------------------

    Accordingly, for cost reporting periods beginning during FY 2005 
(that is, on or after October 1, 2004, and on or before September 30, 
2005), blended payments under the transition methodology are based on 
40 percent of the LTCH's reasonable cost-based payment rate and 60 
percent of the adjusted LTCH PPS Federal rate. For cost reporting 
periods that begin during FY 2006 (that is, on or after October 1, 2005 
and on or before September 30, 2006), blended payments under the 
transition methodology will be based on 20 percent of the LTCH's 
reasonable cost-based payment rate and 80 percent of the adjusted LTCH 
PPS Federal rate. For cost reporting periods beginning on or after 
October 1, 2006 (FY 2007), Medicare payment to LTCHs will be determined 
entirely (100 percent) under the LTCH PPS Federal rate.
1. Proposed Adjustment for Area Wage Levels
a. Background
    Under the authority of section 123 of the BBRA as amended by 
section 307(b) of the BIPA, we established an adjustment to the LTCH 
PPS Federal rate to account for differences in LTCH area wage levels at 
Sec.  412.525(c). The labor-related share of the LTCH PPS Federal rate, 
currently estimated by the excluded hospital with capital market 
basket, is adjusted to account for geographic differences in area wage 
levels by applying the applicable LTCH PPS wage index. The applicable 
LTCH PPS wage index is computed using wage data from inpatient acute 
care hospitals without regard to reclassification under sections 
1886(d)(8) or 1886(d)(10) of the Act. Furthermore, as we discussed in 
the August 30, 2002 LTCH PPS final rule (67 FR 56015), we established a 
5-year transition to the full wage adjustment. The applicable wage 
index phase-in percentages are based on the start of a LTCH's cost 
reporting period as shown in Table 6.

[[Page 4671]]



                                 Table 6
------------------------------------------------------------------------
  Cost reporting periods beginning on or     Phase-in percentage of the
                   after                           full wage index
------------------------------------------------------------------------
October 1, 2002...........................  1/5th (20 percent).
October 1, 2003...........................  2/5ths (40 percent).
October 1, 2004...........................  3/5ths (60 percent).
October 1, 2005...........................  4/5ths (80 percent).
October 1, 2006...........................  5/5ths (100 percent).
------------------------------------------------------------------------

    For example, for cost reporting periods beginning on or after 
October 1, 2004 and on or before September 30, 2005 (FY 2005), the 
applicable LTCH wage index value is three-fifths of the applicable full 
LTCH PPS wage index value. Similarly, for cost reporting periods 
beginning on or after October 1, 2005 and on or before September 30, 
2006 (FY 2006), the applicable LTCH wage index value will be four-
fifths of the applicable full LTCH PPS wage index value. The wage index 
adjustment will be completely phased-in beginning with cost reporting 
periods beginning in FY 2007, that is, for cost reporting periods 
beginning on or after October 1, 2006, the applicable LTCH wage index 
value will be the full (five-fifths) LTCH PPS wage index value. As we 
established in the August 30, 2002 LTCH PPS final rule (67 FR 56018), 
the applicable full LTCH PPS wage index value is calculated from acute-
care hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act.
    In that same final rule (67 FR 56018), we stated that we would 
continue to reevaluate LTCH data as they become available and would 
propose to adjust the phase-in if subsequent data support a change. As 
we discussed in the RY 2006 LTCH PPS final rule (70 FR 24181), because 
the LTCH PPS was only recently implemented (slightly over 2 years) and 
because of the time lag in availability of cost report data, sufficient 
new data have not been generated that would enable us to conduct a 
comprehensive reevaluation of the appropriateness of adjusting the 
phase-in. However, for this proposed rule, we have reviewed the most 
recent data (FY 2002-FY 2004) available and did not find any evidence 
to support a change in the 5-year phase-in of the wage index. 
Specifically, our statistical analysis still does not show a 
significant relationship between LTCHs' costs and their geographic 
location. Therefore, in this proposed rule, we are not proposing a 
change in the phase-in of the adjustment for area wage levels under 
Sec.  412.525(c).
b. Geographic Classifications/Labor Market Area Definitions
    As discussed in the August 30, 2002 LTCH PPS final rule, which 
implemented the LTCH PPS (67 FR 56015 through 56019), in establishing 
an adjustment for area wage levels under Sec.  412.525(c), the labor-
related portion of a LTCH's Federal prospective payment is adjusted by 
using an appropriate wage index based on the labor market area in which 
the LTCH is located. In the 2006 LTCH PPS rate year final rule (70 FR 
24184 through 24185), in Sec.  412.525(c), we revised the labor market 
area definitions used under the LTCH PPS effective for discharges 
occurring on or after July 1, 2005 based on the Office of Management 
and Budget's (OMB's) Core Based Statistical Area (CBSA) designations 
based on 2000 Census data because we believe that those new labor 
market area definitions will ensure that the LTCH PPS wage index 
adjustment most appropriately accounts for and reflects the relative 
hospital wage levels in the geographic area of the hospital as compared 
to the national average hospital wage level. As set forth in Sec.  
412.525(c)(2), a LTCH's wage index is determined based on the location 
of the LTCH in an urban or rural area as defined in Sec.  
412.64(b)(1)(ii)(A) through (C). An urban area under the LTCH PPS is 
defined as is defined at Sec.  412.64(b)(1)(ii)(A) and (B). In general, 
an urban area is defined as a Metropolitan Statistical Area (MSA) as 
defined by the OMB. (In addition, a few counties located outside of 
MSAs are considered urban as specified at Sec.  412.64(b)(1)(ii)(B).) 
Under Sec.  412.64(b)(1)(ii)(C), a rural area is defined as any area 
outside of an urban area. We note that these are the same CBSA-based 
designations implemented for acute care inpatient hospitals under the 
IPPS at Sec.  412.64(b) effective October 1, 2004 (69 FR 49026 through 
49034). For further discussion of the labor market area (geographic 
classification) definitions used under the LTCH PPS, see the 2006 LTCH 
PPS rate year final rule (70 FR 24182 through 24191).
c. Proposed Labor-Related Share
    In the August 30, 2002 LTCH PPS final rule (67 FR 56016), we 
established a labor-related share of 72.885 percent based on the 
relative importance of the labor-related share of operating costs 
(wages and salaries, employee benefits, professional fees, postal 
services, and all other labor-intensive services) and capital costs of 
the excluded hospital with capital market basket based on FY 1992 data. 
In the June 6, 2003 final rule (68 FR 34142), in conjunction with our 
revision and rebasing of the excluded hospital with capital market 
basket from a FY 1992 to a FY 1997 base year, we discussed revising the 
labor-related share based on the relative importance of the labor-
related share of operating and capital costs of the excluded hospital 
with capital market basket based on FY 1997 data. However, in the June 
6, 2003 final rule (68 FR 34142), while we adopted the revised and 
rebased FY 1997-based LTCH PPS market basket as the LTCH PPS update 
factor for the 2004 LTCH PPS rate year, we decided not to update the 
labor-related share under the LTCH PPS pending further analysis of the 
current labor share methodology.
    In LTCH PPS final rules subsequent to the FY 2003 LTCH PPS final 
rule in which we established the current labor-related share (68 FR 
34142, 69 FR 25685 through 25686 and 70 FR 24182), we explained that 
the primary reason that we did not update the LTCH PPS labor-related 
share for the 2004, 2005 and 2006 LTCH PPS rate years was because of 
data and methodological concerns, which was the same reason for not 
updating the labor-related share under the IPPS for FY 2004 (68 FR 
45467 through 45468) and FY 2005 (69 FR 49069), which are equally 
applicable to the LTCH PPS. We indicated that we would conduct further 
analysis to determine the most appropriate methodology and data for 
determining the labor-related share. We also stated that we would 
propose to update the IPPS and excluded hospital labor-related shares, 
if necessary, once our research is complete.
    In the FY 2006 IPPS final rule, the labor-related share under the 
IPPS that is ``estimated by the Secretary from time to time'' as 
specified in section 1886(d)(3)(E) of the Act was revised and rebased 
based on the FY 2002-based IPPS hospital market basket for discharges 
occurring on or after October 1, 2005 using our established methodology 
of defining the labor-related share as 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, the IPPS labor-related share ``estimated by the 
Secretary from time to time'' was calculated by adding the relative 
weights for these operating cost categories. In that same final rule we 
stated that we continue to believe, as we stated in the past, that 
these operating cost categories likely are related to, are influenced 
by, or vary with the local markets (70 FR 47392 through 47393). (We 
note that section 403 of the MMA

[[Page 4672]]

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 under the IPPS unless this employment ``would result in lower 
payments than would otherwise be made.'') In that same final rule, we 
also revised and rebased the excluded hospital market basket, which is 
used to update the reasonable cost-based portion of LTCHs' blended 
transition payments (70 FR 47399 through 47403).
    As we stated previously, once our research into the labor-related 
share methodology was complete, we would update the IPPS and excluded 
hospital labor-related shares based on that research and the best 
available data if necessary. In this proposed rule, we are proposing to 
update the LTCH PPS labor-related share based on the proposed RPL 
market basket as discussed in section IV.D.1.c. of this preamble. We 
are proposing to adopt the RPL market basket under the LTCH PPS because 
we believe that this market basket is developed based on the best 
available data that reflect the cost structures of LTCHs. Specifically, 
we are proposing to revise the LTCH PPS labor-related share from 72.885 
percent (as established in the August 30, 2002 final rule (67 FR 56016) 
based on the FY 1997-based excluded hospital with capital market 
basket) to 75.923 percent based on the relative importance of the 
labor-related share of operating costs (wages and salaries, employee 
benefits, professional fees, and all other labor-intensive services) 
and capital costs of the proposed RPL market basket based on FY 2002 
data, as discussed in greater detail below.
    Consistent with our historical practice, the labor-related share is 
determined by identifying the national average proportion of operating 
costs that are related to, influenced by, or varies with the local 
labor market. Using our current definition of labor-related, the labor-
related share is the sum of the relative importance of wages and 
salaries, fringe benefits, professional fees, labor-intensive services, 
and a portion of the capital share from an appropriate market basket. 
We are proposing to use the proposed FY 2002-based RPL market basket 
costs to determine the proposed labor-related share for the LTCH PPS 
effective for discharges occurring on or after July 1, 2006 as it is 
based on the most recent available data. The proposed labor-related 
share for the 2007 LTCH PPS rate year would be the sum of the relative 
importance of each labor-related cost category, and would reflect the 
different rates of price change for these cost categories between the 
base year (FY 2002) and the 2007 LTCH PPS rate year. Based on the most 
recent available data, the sum of the proposed relative importance for 
2007 LTCH PPS rate year for operating costs (wages and salaries, 
employee benefits, professional fees, and labor-intensive services) 
would be 71.845, as shown in Table 7. The portion of capital that is 
influenced by the local labor market is estimated to be 46 percent, 
which is the same percentage used in the 1997-based excluded hospital 
with capital market basket currently used under the LTCH PPS. Since the 
relative importance for capital would be 8.866 percent of the proposed 
FY 2002-based RPL market basket for the 2007 LTCH PPS rate year based 
on the latest available data, we are proposing to multiply the 
estimated portion of capital influenced by the local labor market (46 
percent) by the relative importance for capital of the proposed FY 
2002-based RPL market basket (8.866 percent) to determine the proposed 
labor-related share of capital for the 2007 LTCH PPS rate year. The 
result would be 4.078 percent (0.46 x 8.866 percent), which we propose 
to add to 71.845 percent for the operating cost amount to determine the 
total proposed labor-related share for the 2007 LTCH PPS rate year. 
Thus, based on the latest available data, we are proposing to use a 
labor-related share of 75.923 percent under the LTCH PPS for the 2007 
LTCH PPS rate year. This proposed labor-related share is determined 
using the same methodology as employed in calculating the current LTCH 
labor-related share (67 FR 56016). If more recent data become available 
before the publication of the final rule and if we revise the LTCH PPS 
labor-related share based on the proposed FY 2002-based RPL market 
basket, we propose that we would use that data to determine the labor-
related share for the 2007 LTCH PPS rate year in the final rule.
    Table 7 shows the proposed 2007 LTCH PPS rate year relative 
importance labor-related share using the proposed 2002-based RPL market 
basket and the current relative importance labor-related share using 
the FY 1997-based excluded hospital with capital market basket.

 Table 7.--Total Labor-Related Share-Relative Importance for the 2007 for the Proposed RPL Market Basket and the
                                  Excluded Hospital With Capital Market Basket
----------------------------------------------------------------------------------------------------------------
                                                                                          FY 1997-based excluded
                                                                 Proposed FY 2002-based   hospital with capital
                                                                   RPL market basket      market basket relative
                         Cost category                            relative importance      importance (percent
                                                                 (percent) for the 2007    currently used under
                                                                   LTCH PPS rate year         the LTCH PPS)
----------------------------------------------------------------------------------------------------------------
Wages and salaries............................................                   52.761                   50.381
Employee benefits.............................................                   14.008                   11.525
Professional fees.............................................                    2.903                    2.059
Postal Services*..............................................  .......................                    0.244
All other labor-intensive services**..........................                    2.173                    5.219
Subtotal......................................................                   71.845                   69.428
Labor-related share of capital costs..........................                    4.078                    3.457
                                                               --------------------------
    Total.....................................................                   75.923                  72.885
----------------------------------------------------------------------------------------------------------------
* No longer considered labor related.
** Other labor intensive services includes landscaping services, services to buildings, detective and protective
  services, repair services, laundry services, advertising, auto parking and repairs, physical fitness
  facilities, and other government enterprises.


[[Page 4673]]

d. Proposed Wage Index Data
    In the RY 2006 LTCH PPS final rule (70 FR 24190 through 24191), we 
established LTCH PPS wage index values for the 2006 LTCH PPS rate year 
calculated from the same data (generated in cost reporting periods 
beginning during FY 2000) used to compute the FY 2005 acute care 
hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act because that was the best available data at that time. The LTCH 
wage index values applicable for discharges occurring on or after July 
1, 2005 through June 30, 2006 are shown in Table 1 (for urban areas) 
and Table 2 (for rural areas) in the Addendum to the RY 2006 LTCH PPS 
final rule. Acute care hospital inpatient wage index data are also used 
to establish the wage index adjustment used in the IRF PPS, HHA PPS, 
and SNF PPS. As we discussed in the August 30, 2002 LTCH PPS final rule 
(67 FR 56019), since hospitals that are excluded from the IPPS are not 
required to provide wage-related information on the Medicare cost 
report and because we would need to establish instructions for the 
collection of this LTCH data in order to establish a geographic 
reclassification adjustment under the LTCH PPS, the wage adjustment 
established under the LTCH PPS is based on a LTCH's actual location 
without regard to the urban or rural designation of any related or 
affiliated provider.
    In this proposed rule, under the broad authority conferred upon the 
Secretary by section 123 of the BBRA as amended by section 307(b) of 
BIPA to determine appropriate adjustments under the LTCH PPS, we are 
proposing that, for the 2007 LTCH PPS rate year, the same data 
(generated in cost reporting periods beginning during FY 2002) used to 
compute the FY 2006 acute care hospital inpatient wage index data 
without taking into account geographic reclassification under sections 
1886(d)(8) and (d)(10) of the Act would be used to determine the 
applicable wage index values under the LTCH PPS because these data (FY 
2002) are the most recent complete data. We are proposing to continue 
to use IPPS wage data as a proxy to determine the proposed LTCH wage 
index values for the 2007 LTCH PPS rate year because both LTCHs and 
acute-care hospitals are required to meet the same certification 
criteria set forth in section 1861(e) of the Act to participate as a 
hospital in the Medicare program and they both compete in the same 
labor markets, and therefore experience similar wage-related costs. 
These data are the same FY 2002 acute care hospital inpatient wage data 
that were used to compute the FY 2006 wage indices currently used under 
the IPPS, SNF PPS and HHA PPS.
    The proposed LTCH wage index values that would be applicable for 
discharges occurring on or after July 1, 2006 through June 30, 2007, 
are shown in Table 1 (for urban areas) and Table 2 (for rural areas) in 
the Addendum to this proposed rule.
    As discussed above in section IV.D.1.a. of this preamble, the 
applicable wage index phase-in percentages are based on the start of a 
LTCH's cost reporting period beginning on or after October 1st of each 
year during the 5-year transition period. Thus, for cost reporting 
periods beginning on or after October 1, 2004 and before October 1, 
2005 (FY 2005), the labor portion of the standard Federal rate is 
adjusted by three-fifths of the applicable LTCH wage index value. For 
cost reporting periods beginning on or after October 1, 2005 and before 
October 1, 2006 (FY 2006), the labor portion of the standard Federal 
rate is adjusted by four-fifths of the applicable LTCH wage index 
value. Specifically, for a LTCH's cost reporting period beginning 
during FY 2006, for discharges occurring on or after July 1, 2006 
through June 30, 2007, the applicable wage index value would be four-
fifths of the full FY 2006 acute care hospital inpatient wage index 
data, without taking into account geographic reclassification under 
sections 1886(d)(8) and (d)(10) of the Act (shown in Tables 1 and 2 in 
the Addendum to this proposed rule).
    Because the phase-in of the wage index does not coincide with the 
LTCH PPS rate year (July 1st through June 30th), most LTCHs will 
experience a change in the wage index phase-in percentages during the 
LTCH PPS rate year. For example, during the 2007 LTCH PPS rate year, 
for a LTCH with a January 1st FY, the four-fifths wage index will be 
applicable for the first 6 months of the 2007 LTCH PPS rate year (July 
1, 2006 through December 31, 2006) and the full (five-fifths) wage 
index will be applicable for the second 6 months of the 2007 LTCH PPS 
rate year (January 1, 2007 through June 30, 2007). We also note that 
some providers will still be in the third year of the 5-year phase-in 
of the LTCH wage index (that is, those LTCHs who entered the 5-year 
phase-in during their cost reporting periods that began between July 1, 
2003 and September 30, 2003). For the remainder of those LTCHs' FY 2005 
cost reporting periods that will coincide with the first 3 months of RY 
2007, the applicable wage index value would be three-fifths of the full 
FY 2006 acute care hospital inpatient wage index data, without taking 
into account geographic reclassification under sections 1886(d)(8) and 
(d)(10) of the Act (as shown in Tables 1 and 2 in the Addendum to this 
proposed rule). Since there are no longer any LTCHs in their cost 
reporting period that began during FYs 2003 and 2004 (the first and 
second years of the 5-year wage index phase-in), we are no longer 
showing the \1/5\th and \2/5\ths wage index values in Tables 1 and 2 in 
the Addendum to this proposed rule.
2. Proposed Adjustment for Cost-of-Living in Alaska and Hawaii
    In the August 30, 2002 final rule (67 FR 56022), we established, 
under Sec.  412.525(b), a cost-of-living adjustment (COLA) for LTCHs 
located in Alaska and Hawaii to account for the higher costs incurred 
in those States. In the RY 2006 LTCH PPS final rule (70 FR 24191), for 
the 2006 LTCH PPS rate year, we established that we make a COLA to 
payments for LTCHs located in Alaska and Hawaii by multiplying the 
standard Federal payment rate by the appropriate factor listed in Table 
I. of that same final rule.
    Similarly, in this proposed rule, under broad authority conferred 
upon the Secretary by section 123 of the BBRA as amended by section 
307(b) of BIPA to determine appropriate adjustments under the LTCH PPS, 
for the 2007 LTCH PPS rate year we are proposing to make a COLA to 
payments to LTCHs located in Alaska and Hawaii by multiplying the 
proposed standard Federal payment rate by the proposed factors listed 
in Table 8 because these are currently the most recent available data. 
These proposed factors are obtained from the U.S. Office of Personnel 
Management (OPM) and are currently used under the IPPS. In addition, we 
propose that if OPM releases revised COLA factors before March 1, 2006, 
we would use them for the development of the payments for the 2007 LTCH 
rate year and publish them in the LTCH PPS final rule.

   Table 8.--Proposed Cost-of-Living Adjustment Factors for Alaska and
            Hawaii Hospitals for the 2007 LTCH PPS Rate Year
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Alaska:
  All areas...................................................      1.25
Hawaii:
  Honolulu County.............................................      1.25
  Hawaii County...............................................     1.165
  Kauai County................................................    1.2325

[[Page 4674]]

 
  Maui County.................................................    1.2375
  Kalawao County..............................................    1.2375
------------------------------------------------------------------------

3. Proposed Adjustment for High-Cost Outliers
a. Background
    Under the broad authority conferred upon the Secretary by section 
123 of the BBRA as amended by section 307(b) of BIPA, in the 
regulations at Sec.  412.525(a), we established an adjustment for 
additional payments for outlier cases that have extraordinarily high 
costs relative to the costs of most discharges. Providing additional 
payments for outliers strongly improves the accuracy of the LTCH PPS in 
determining resource costs at the patient and hospital level. These 
additional payments reduce the financial losses that would otherwise be 
caused by treating patients who require more costly care and, 
therefore, reduce the incentives to underserve these patients. We set 
the outlier threshold before the beginning of the applicable rate year 
so that total estimated outlier payments are projected to equal 8 
percent of total estimated payments under the LTCH PPS. Outlier 
payments under the LTCH PPS are determined consistent with the IPPS 
outlier policy.
    Under Sec.  412.525(a), we make outlier payments for any discharges 
if the estimated cost of a case exceeds the adjusted LTCH PPS payment 
for the LTC-DRG plus a fixed-loss amount. The fixed-loss amount is the 
amount used to limit the loss that a hospital will incur under the 
outlier policy for a case with unusually high costs. This results in 
Medicare and the LTCH sharing financial risk in the treatment of 
extraordinarily costly cases. Under the LTCH PPS 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 cost-to-
charge ratio (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).
    Under the LTCH PPS, we determine a fixed-loss amount, that is, the 
maximum loss that a LTCH can incur under the LTCH PPS for a case with 
unusually high costs before the LTCH will receive any additional 
payments. We calculate the fixed-loss amount by estimating aggregate 
payments with and without an outlier policy. The fixed-loss amount will 
result in estimated total outlier payments being projected to be equal 
to 8 percent of projected total LTCH PPS payments. Currently, MedPAR 
claims data and CCRs based on data from the most recent provider 
specific file (PSF) (or to the applicable Statewide average CCR if a 
LTCH's CCR data are faulty or unavailable) are used to establish a 
fixed-loss threshold amount under the LTCH PPS.
b. Cost-to-Charge Ratios (CCRs)
    In determining outlier payments, we calculate the estimated cost of 
the case by multiplying the LTCH's overall CCR by the Medicare 
allowable charges for the case.
    As we discussed in greater detail in the June 9, 2003 IPPS high 
cost outlier final rule (68 FR 34506 through 34516), because the LTCH 
PPS high-cost outlier policy (Sec.  412.525) is modeled after the IPPS 
outlier policy, we believed that it and the short-stay outlier (SSO) 
policy (Sec.  412.529) are susceptible to the same payment 
vulnerabilities that became evident under the IPPS and therefore, 
merited revision. Thus, we revised the high-cost outlier policy at 
Sec.  412.525(a) and short-stay policy at Sec.  412.529 in that same 
final rule for the determination of LTCHs' CCRs and the reconciliation 
of outlier payments.
    Under the LTCH PPS, a single prospective payment per discharge is 
made for both inpatient operating and capital-related costs, and 
therefore, we compute a single ``overall'' or ``total'' CCR for LTCHs 
based on the sum of their operating and capital costs (as described in 
Chapter 3, section 150.24, of the Medicare Claims Processing Manual 
(CMS Pub. 100-4) as compared to total charges. Specifically, a LTCH's 
CCR is calculated by dividing a LTCH's total Medicare costs (that is, 
the sum of its operating and capital inpatient routine and ancillary 
costs) divided 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 Transmittal A-03-058 (Change Request 2785; July 3, 2003).)
    As a result of the changes established in the June 9, 2003 IPPS 
high cost outlier final rule, as we discussed in previous LTCH PPS 
final rules ((RY 2004, 68 FR 34144 through 34146); (RY 2005, 69 FR 
25687 through 25690); and (RY 2006, 70 FR 24192 through 24194)), under 
our current policy a LTCH is assigned the applicable Statewide average 
CCR if, among other things, a LTCH's CCR is found to be in excess of 
the applicable maximum CCR threshold (that is, the combined IPPS 
operating and capital CCR ceiling). As we explained in that same final 
rule (68 FR 34507), 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. Thus, under our 
established policy, if a LTCH's CCR is above the applicable ceiling, 
the applicable combined IPPS Statewide average CCR is assigned to the 
LTCH instead of the CCR computed from its most recent (settled or 
tentatively settled) cost report data.
    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 
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 ALOS is greater than 25 days (see 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 ALOS of greater than 25 
days. In addition, since there are less than 400 LTCHs, which 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.
    As noted previously in this proposed rule, under the LTCH PPS, 
there is a single prospective payment per discharge for both inpatient 
operating and capital-related costs, and therefore, we compute a single 
``overall'' or ``total'' CCR for LTCHs based on the sum of their 
Medicare operating and capital costs and charges. However, under the 
IPPS, Medicare per discharge payments to acute-care hospitals for the 
costs of inpatient operating services are made under the ``Operating 
IPPS'' and per discharge payments to acute-care hospitals for inpatient 
capital-related

[[Page 4675]]

costs are made under the ``Capital IPPS.'' Because separate payments 
are made to acute-care hospitals under the IPPS for operating and 
capital costs, separate operating and capital CCRs are calculated and 
used in determining IPPS high cost outlier payments. Accordingly, under 
the IPPS a separate ``operating'' CCR ceiling and a ``capital'' CCR 
ceiling are determined annually. As we explained previously in this 
proposed rule and as stated in annual instructions (see Transmittal A-
02-093 (Change Request 2288; September 27, 2002); Transmittal A-03-073 
(Change Request 2891; August 22, 2003); Transmittal 309 (Change Request 
3459; October 1, 2004); and Transmittal 692 (Change Request 4046; 
September 30, 2005)), under our current policy, if a LTCH's CCR is 
above the applicable ``combined'' IPPS operating and capital ceiling 
(that is, adding the separate IPPS operating and capital CCR ceiling 
together), the applicable Statewide average CCR is assigned to the 
LTCH. 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, we are proposing to revise 
Sec.  412.525(a)(4) to specify that, for discharges occurring on or 
after October 1, 2006, if, among other things, 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 CCR), 
established and published annually by CMS), the FI may use a Statewide 
average CCR (also established annually by CMS).
    This proposed change is similar to our existing policy (established 
in the June 9, 2003 IPPS high cost outlier final rule as previously 
discussed in this proposed rule). Under proposed revised Sec.  
412.525(a)(4)(iv)(C)(2), for discharges occurring on or after October 
1, 2006, we are proposing that we would determine the single ``total'' 
CCR ceiling, based on IPPS CCR data, by first calculating the total 
(that is, operating and capital) CCR for each hospital and then 
determining the average total CCR for all hospitals. The ceiling would 
then be established at 3 standard deviations from the mean total CCR 
rather than determining the LTCH total CCR ceiling by adding the 
separate IPPS operating CCR and capital CCR ceilings as we do under our 
current policy. Specifically, 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) 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 costs.
    As explained previously in this proposed rule, there is a single 
LTCH PPS Federal rate rather than a separate operating standardized 
amount and a capital Federal rate, as there is under the IPPS. (We 
note, as discussed in greater detail below in this section, in 
conjunction with this proposed change in the calculation of the LTCH 
CCR ceiling, we are also proposing a change in our methodology for 
calculating the applicable Statewide average CCRs under the LTCH PPS to 
be based on hospital-specific ``total'' CCRs.) Our rationale for 
proposing to continue to use IPPS data to determine the LTCH CCR 
ceiling annually continues to be the same as the one stated above. We 
note that we are proposing that the proposed refinement to our 
methodology for determining the annual CCR ceiling under the LTCH PPS 
at proposed revised Sec.  412.525(a)(4)(iv)(C)(2) would be effective 
for discharges occurring on or after October 1, 2006 rather than July 
1, 2006 because, we are proposing 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. Since both the separate IPPS operating and capital CCRs 
ceilings and the 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 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, 2006 
(since, 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).
    Also in the June 9, 2003 IPPS high cost outlier final rule, we 
established our existing policy that, for discharges occurring on or 
after August 8, 2003, that in addition to assigning the applicable 
Statewide average CCR to a LTCH whose CCR is above the ceiling, the FI 
may use the applicable Statewide average CCR for LTCHs for whom data 
with which to calculate a CCR is not available (for example, missing or 
faulty data) or 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 of this chapter). 
(We note that consistent with our current policy, either CMS or the 
hospital may request the use of a different (higher or lower) CCR based 
on substantial evidence that such a CCR more accurately reflects the 
hospital's actual costs and charges. This applies to new (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 a new LTCH 
provider number). Rather, the cost and charge data from the IPPS 
hospital's cost report (even if it is more or less than a 12-month cost 
reporting period) would be used to determine the LTCH's CCR.)
    Thus, 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, we are also 
proposing to revise Sec.  412.525(a)(4), for discharges occurring on or 
after October 1, 2006, to codify in subpart O of part 42 of the CFR the 
remaining LTCH PPS high cost 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 are proposing 
these additional revisions to Sec.  412.525(a)(4), as discussed in 
greater detail below in this section, because we believe that a 
position such as this would more precisely describe the application of 
those policies as they relate to the determination of LTCH CCRs because 
these proposed changes would be consistent with the proposed changes to 
the calculation of the LTCH CCR ceiling

[[Page 4676]]

discussed above in this section. Specifically, similar to our current 
policy, we are proposing in Sec.  412.525(a)(4)(iv)(C) to specify that 
the FI 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 of this chapter); 
(2) LTCHs whose CCR is in excess of the LTCH CCR ceiling (that is, 3 
standard deviations above the corresponding national geometric mean 
total CCR, as discussed in greater previously in this proposed rule); 
and (3) other LTCHs for whom data with which to calculate a CCR is not 
available (for example, missing or faulty data). Also similar to our 
current practice, under proposed Sec.  412.525(a)(4)(iv)(C), for 
discharges occurring on or after October 1, 2006, we are proposing that 
we would annually establish Statewide average ``total'' CCRs (as 
explained below in this section) for use under the LTCH PPS based on 
IPPS data rather than assigning the combined (operating and capital) 
Statewide average CCRs (see Transmittal 692 (Change Request 4046; 
September 30, 2005)). 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 (that 
we add together under our current policy to determine the applicable 
``combined'' Statewide average CCR for LTCHs) to compute Statewide 
average total CCRs by first calculating the total (that is, operating 
and capital) CCR for each hospital and then determining the average 
total CCR for all hospitals in each State rather than adding together 
the separate applicable IPPS operating and capital Statewide average 
CCRs as we do under our current policy. We are also proposing 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 should 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, 2006 
(since, 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 proposed Sec.  412.525(a)(4)(iv)(C) 
is the same as the one stated above for proposing to use IPPS data to 
determine a ``total'' LTCH CCR ceiling.
    Similar to our current policy, we are also proposing to specify 
under proposed Sec.  412.525(a)(4)(iv)(B), 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 recent settled 
cost report or the most recent tentative settled cost report, whichever 
is from the latest cost reporting period. Furthermore, we are proposing 
under proposed Sec.  412.525(a)(4)(iv)(A) to state that CMS may specify 
an alternative to the CCR computed under proposed Sec.  
412.525(a)(4)(iv)(B), that is the CCR computed from the most recent 
settled cost report or the most recent tentative settled cost report, 
whichever is later, or a hospital may also request that its FI 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 
proposed revised Sec.  412.525(a)(4)(iv)(A) and (B) are similar to our 
existing policy established in the June 9, 2003 IPPS high cost outlier 
final rule (68 FR 34506 through 34513).
    In conjunction with the proposed revisions to Sec.  412.525(a)(4) 
concerning the determination of LTCHs' CCRs discussed above in this 
section, we are also proposing to revise Sec.  412.525(a)(4) to codify 
in subpart O of part 42 of the CFR the existing outlier reconciliation 
provisions, including the proposed editorial clarifications to those 
existing policies, which are discussed in greater detail below in 
section IV.D.3.d. of this preamble. Furthermore, because CCRs are also 
used in determining payments under the existing SSO policy (Sec.  
412.529), as discussed in greater detail in section VI.A.1. of this 
preamble, we are also proposing to revise Sec.  412.529(c), for 
discharges occurring on or after October 1, 2006, to make the same 
changes to the SSO policy. In addition, we are also proposing a 
technical correction to existing Sec.  412.525(a)(3) to change the 
plural reference from cost-to-charge ``ratios'' to the singular 
reference cost-to-charge ``ratio'' because under the LTCH PPS a single 
(total) CCR is computed for LTCHs.
c. Establishment of the Proposed Fixed-Loss Amount
    When we implemented the LTCH PPS, as discussed in the August 30, 
2002 final rule (67 FR 56022 through 56026), under the broad authority 
of section 123 of the BBRA as amended by section 307(b) of BIPA, we 
established a fixed-loss amount so that total estimated outlier 
payments are projected to equal 8 percent of total estimated payments 
under the LTCH PPS. To determine the fixed-loss amount, we estimate 
outlier payments and total LTCH PPS payments for each case using claims 
data from the MedPAR files. Specifically, to determine the outlier 
payment for each case, we estimate the cost of the case by multiplying 
the Medicare covered charges from the claim by the LTCH's hospital 
specific CCR. Under Sec.  412.525(a)(3), if the estimated cost of the 
case exceeds the outlier threshold (the sum of the adjusted Federal 
prospective payment for the LTC-DRG and the fixed-loss amount), we pay 
an outlier payment equal to 80 percent of the difference between the 
estimated cost of the case and the outlier threshold (the sum of the 
adjusted Federal prospective payment for the LTC-DRG and the fixed-loss 
amount).
    In the RY 2006 LTCH PPS final rule (70 FR 24194), in calculating 
the fixed-loss amount that would result in outlier payments projected 
to be equal to 8 percent of total estimated payments for the 2006 LTCH 
PPS rate year, we used claims data from the December 2004 update of the 
FY 2004 MedPAR files and CCRs from the December 2004 update of the PSF, 
as that was the best available data at that time. As we discussed in 
that same final rule (70 FR 24193 through 24194), we believe that CCRs 
from the PSF were the best available CCR data for determining LTCHs' 
LTCH PPS payments during the 2006 LTCH PPS rate year because they were 
the most recently available CCRs (at that time) actually used to make 
LTCH PPS payments.
    As we also discussed in the RY 2006 LTCH PPS rate year final rule 
(70 FR 24192 through 24193), we calculated a single fixed-loss amount 
for the 2006 LTCH PPS rate year based on the version 22.0 of the 
GROUPER, which was the version in effect as of the beginning of the 
LTCH PPS rate year (that is, July 1, 2005 for the 2006 LTCH PPS rate 
year). In addition, we applied the current outlier policy under Sec.  
412.525(a) in determining the fixed-loss amount for the 2006 LTCH PPS 
rate

[[Page 4677]]

year; that is, we assigned the applicable Statewide average CCR only to 
LTCHs whose CCRs exceeded the ceiling (and not when they fell below the 
floor). Accordingly, we used the FY 2005 IPPS combined operating and 
capital CCR ceiling of 1.409 (70 FR 24192). (Our rationale for using 
the FY 2005 combined IPPS operating and capital CCR ceiling for LTCHs 
stated in section IV.D.3.b. of this preamble.) As noted in that same 
final rule, in determining the fixed-loss amount for the 2006 LTCH PPS 
rate year using the CCRs from the PSF, there were no LTCHs with missing 
CCRs or with CCRs in excess of the current ceiling and, therefore, 
there was no need for us to independently assign the applicable 
Statewide average CCR to any LTCHs in determining the fixed-loss amount 
for the 2006 LTCH PPS rate year (as this may have already been done by 
the FI in the PSF in accordance with the established policy).
    Accordingly, in 2006 LTCH PPS rate year final rule (70 FR 24194), 
we established a fixed-loss amount of $10,501 for the 2006 LTCH PPS 
rate year. Thus, we pay an outlier case 80 percent of the difference 
between the estimated cost of the case and the outlier threshold (the 
sum of the adjusted Federal LTCH PPS payment for the LTC-DRG and the 
fixed-loss amount of $10,501).
    In this proposed rule, for the 2007 LTCH PPS rate year, we used the 
June 2005 update of the FY 2004 MedPAR claims data to determine a 
proposed fixed-loss amount that would result in outlier payments 
projected to be equal to 8 percent of total estimated payments, based 
on the policies described in this proposed rule, because these data are 
the most recent complete LTCH data available. Furthermore, as noted 
previously, we determined the proposed fixed-loss amount based on the 
version of the GROUPER that would be in effect as of the beginning of 
the 2007 LTCH PPS rate year (July 1, 2006), that is, Version 23.0 of 
the GROUPER (70 FR 47324).
    We also used CCRs from the June 2005 update of the Provider 
Specific File for determining the proposed fixed-loss amount for the 
2007 LTCH PPS rate year as they are currently the most recent complete 
available data. If more recent CCR data are available, we propose to 
use it for determining the fixed-loss amount for the 2007 LTCH PPS rate 
year in the final rule. As we discussed previously in this proposed 
rule, we are proposing a change to our methodology for our annual 
determination of the applicable LTCH CCR ceiling and applicable 
Statewide average CCRs that would be assigned in determining a LTCH's 
CCR effective for discharges occurring on or after October 1, 2006. As 
noted above in this section, under this proposal, the current LTCH CCR 
ceiling and applicable Statewide average CCRs, established for 
discharges occurring on or after October 1, 2005, would remain in 
effect for discharges occurring on or before September 30, 2006. In 
determining the proposed fixed-loss amount for the 2007 LTCH PPS rate 
year, we are proposing to use the current FY 2006 applicable IPPS 
combined operating and capital CCR ceiling of 1.423 and Statewide 
average CCRs (as discussed in the FY 2006 IPPS final rule (70 FR 47496) 
and established in Transmittal 692 (September 30, 2005)) such that the 
current applicable Statewide average CCR would be assigned if, among 
other things, a LTCH's CCR exceeded the current ceiling (1.423). Our 
reason for proposing to use the existing LTCH CCR ceiling and Statewide 
average CCRs to determine the proposed RY 2007 fixed-loss amount even 
though we are proposing to change our methodology for determining the 
CCR ceiling and Statewide average CCRs effective for discharges 
occurring on or after October 1, 2006, is because, based on our 
analysis of the data used to determine the FY 2006 LTCH CCR ceiling, we 
believe that this methodology change would result in a minor change in 
the numerical value of the LTCH CCR ceiling, and therefore, would have 
a negligible effect on the LTCHs' CCRs used to determine the proposed 
fixed-loss amount for the 2007 LTCH PPS rate year. Moreover, we note 
that in determining the proposed fixed-loss amount for the 2007 LTCH 
PPS rate year using the CCRs from the PSF, there was no need for us to 
independently assign the applicable Statewide average CCR to any LTCHs 
in determining the proposed fixed-loss amount for the 2007 LTCH PPS 
rate year (as this may have already been done by the FI in the PSF in 
accordance with our established policy). (Currently, the applicable FY 
2006 IPPS Statewide averages can be found in Tables 8A and 8B of the FY 
2006 IPPS final rule (70 FR 47672).)
    Accordingly, based on the data and policies described in this 
proposed rule, we are proposing a fixed-loss amount of $18,489 for the 
2007 LTCH PPS rate year. Thus, we would pay an outlier case 80 percent 
of the difference between the estimated cost of the case and the 
proposed outlier threshold (the sum of the adjusted proposed Federal 
LTCH payment for the LTC-DRG and the proposed fixed-loss amount of 
$18,489). We note that the proposed fixed-loss amount for the 2007 LTCH 
PPS rate year is significantly higher than the current fixed-loss 
amount of $10,501. This proposed change in the fixed-loss amount would 
primarily be due to the projected decrease in LTCH PPS payments 
resulting from the proposed change in the SSO policy under Sec.  
412.529 (discussed in greater detail in section V.A.1. of this 
preamble) and the changes to the LTC-DRG relative weights for FY 2006 
(as discussed in the FY 2006 IPPS final rule (70 FR 47355)). Because we 
are projecting approximately an 11 percent decrease in aggregate LTCH 
PPS payments in the 2007 LTCH PPS rate year (as discussed in section 
XIII. of this proposed rule), we believe that an increase in the 
proposed fixed-loss amount is appropriate and necessary to maintain the 
requirement that estimated outlier payments would equal 8 percent of 
estimated total LTCH PPS payments, as required under Sec.  412.525(a). 
Maintaining the fixed-loss amount at the current level would result in 
high cost outlier payments that significantly exceed the current 
regulatory requirement that estimated outlier payments would be 
projected to equal 8 percent of estimated total LTCH PPS payments. We 
note that in the August 30, 2002 final rule (67 FR 56022 through 
56024), based on our regression analysis, we established the outlier 
target at 8 percent of estimated total LTCH PPS payments to allow us to 
achieve a balance between the ``conflicting considerations of the need 
to protect hospitals with costly cases, while maintaining incentives to 
improve overall efficiency.'' In that same final rule (67 FR 56023), we 
also explained that our regression analysis showed that additional 
increments of outlier payments over 8 percent (that is, raising the 
outlier target to a larger percentage than 8 percent) would reduce 
financial risk, but by successively smaller amounts. Since outlier 
payments are included in budget neutrality calculations, outlier 
payments would be funded by prospectively reducing the non-outlier PPS 
payment rates by the proportion of projected outlier payments to 
projected total PPS payments in the absence of outlier payments; the 
higher the outlier target, the greater the (prospective) reduction to 
the base payment rate in order to maintain budget neutrality. As 
another alternative to the proposed reduction to the fixed-loss amount 
for RY 2007, we are soliciting comments on whether we should revisit 
the regression analysis discussed above in this section that was used 
to establish the existing 8 percent

[[Page 4678]]

outlier target, using the most recent available data to evaluate 
whether the current outlier target of 8 percent should be adjusted, and 
therefore may result in less of an increase in the fixed-loss amount 
for RY 2007. After revisiting this issue and an analysis of the most 
recent complete available data, due to the lag time in the availability 
of data, we now believe the most appropriate time to revisit a budget 
neutral policy change in the outlier policy (among other things), which 
would affect future LTCH PPS payment rates, would be after the 
conclusion of the 5-year transition period when we expect to have 
several years of data generated after the implementation of the LTCH 
PPS.
    As an alternative to proposing to raise the fixed-loss amount for 
FY 2007, we also examined adjusting the marginal cost factor (that is, 
the percentage that Medicare will pay of the estimated cost of a case 
that exceeds the sum of the adjusted Federal prospective payment for 
the LTC-DRG and the fixed-loss amount for LTCH PPS outlier cases as 
specified in Sec.  412.525(a)(3)), as a means of ensuring that 
estimated outlier payments would be projected to equal 8 percent of 
estimated total LTCH PPS payments. As we established in the August 30, 
2002 final rule (67 FR 56022 through 56026), under the LTCH PPS high-
cost outlier policy at Sec.  412.525(a)(3), the marginal cost factor is 
currently equal to 80 percent. A marginal cost factor equal to 80 
percent means that for an outlier case we pay the LTCH 80 percent of 
the difference between the estimated cost of the case and the outlier 
threshold (the sum of the adjusted Federal rate for the LTC-DRG PPS 
payment and the fixed-loss amount).
    In addition, as we discussed in the August 30, 2002 final rule (67 
FR 56023) that implemented the LTCH PPS, the marginal cost factor is 
designed to ensure ``a balance between the need to protect LTCHs 
financially, while encouraging them to treat expensive patients and 
maintaining the incentives of a prospective payment system to improve 
the efficient delivery of care.'' Decreasing the marginal cost factor 
from the established 80 percent, while maintaining the current fixed-
loss amount ($10,501), would decrease total estimated outlier payments 
because we would pay a smaller percentage of the estimated costs that 
exceed the outlier threshold (the sum of the adjusted Federal rate for 
the LTC-DRG and the fixed-loss amount). For example, if we were to 
decrease the marginal cost factor to 65 percent without raising the 
fixed-loss amount, we would pay outlier cases 15 percent less (80 
percent minus 65 percent) of the estimated costs that exceed the 
outlier threshold (the sum of the adjusted Federal rate for the LTC-DRG 
and the fixed-loss amount).
    While this alternative could ensure that outlier payments are 
projected to equal 8 percent of estimated total LTCH PPS payments by 
reducing estimated aggregate outlier payments, it may not maintain the 
existing balance between providing an incentive for LTCHs to treat 
expensive patients and improving the efficient delivery of care because 
a policy such as this would reduce the financial protection currently 
afforded to LTCHs under the current high cost outlier policy (with an 
80 percent marginal cost factor), which could result in LTCHs' 
inability to treat seriously ill and costly patients. This is because 
we believe it may be more financially difficult for LTCHs to absorb a 
greater share of the costs of a true high cost outlier case (that is, a 
case with an unusually high cost) than it would be to have a higher 
fixed-loss amount. Keeping the marginal cost factor at 80 percent while 
proposing to raise the fixed-loss amount would afford more financial 
protection to LTCHs than proposing to lower the fixed-loss amount and 
retain the current fixed loss amount. Because a relatively higher 
fixed-loss amount identifies fewer cases as high cost outlier cases 
(since the amount that the estimated cost of the case must exceed 
before the case qualifies as a high cost outlier case is higher), such 
a proposed policy better identifies LTCH patients that are truly 
unusually costly cases, which is consistent with our intent of the LTCH 
high cost outlier policy as stated when we implemented the LTCH PPS in 
the August 30, 2002 final rule (67 FR 56025). As we discussed in that 
same final rule (67 FR 56023 through 56024), our analysis of payment-
to-cost ratios for outlier cases showed that a marginal cost factor of 
80 percent appropriately addresses outlier cases that are significantly 
more expensive than nonoutlier cases, while simultaneously maintaining 
the integrity of the LTCH PPS.
    Although proposing to raise the fixed-loss amount from $10,501 to 
$18,489 (based on the policies presented in this proposed rule) would 
increase the amount of the loss that a LTCH must incur under the LTCH 
PPS for a case with unusually high costs before the LTCH would receive 
any additional Medicare payments, as we explained previously in this 
proposed rule, we believe the 80 percent marginal cost factor continues 
to adequately maintain the LTCHs' share of the financial risk in 
treating the most costly patients and ensure the efficient delivery of 
services. As we discussed in the August 30, 2002 final rule when we 
established the high cost outlier policy, our analysis showed that a 
marginal cost factor of 80 percent appropriately addresses outlier 
cases that are significantly more expensive than nonoutlier cases. 
Accordingly, we are not proposing to adjust the marginal cost factor 
under the LTCH PPS high-cost outlier policy; however, we are soliciting 
comments on whether we should revisit the regression analysis that was 
used to establish the existing 80 percent marginal cost factor, using 
the most recent available data to evaluate whether the current marginal 
cost factor of 8 percent in the current high cost outlier policy should 
be adjusted, and therefore may result in less of an increase in the 
fixed-loss amount for RY 2007.
    Furthermore, we note that the proposed fixed-loss amount of $18,489 
is lower than the FY 2003 fixed-loss amount of $24,450 (67 FR 56023) 
and the 2004 LTCH PPS rate year fixed-loss amount of $19,590 (68 FR 
34144), and only slightly higher than the 2005 LTCH PPS rate year 
fixed-loss amount of $17,864 (69 FR 25688), all of which were in effect 
during the time period that we are currently estimating positive 
Medicare margins (as discussed in greater detail in section IV.C.3 of 
this preamble). Therefore, we believe the proposed fixed-loss amount of 
$18,489 would appropriately identify unusually costly LTCH cases while 
maintaining the integrity of the LTCH PPS. Thus, under the broad 
authority of section 123(a)(1) of the BBRA and section 307(b)(1) of 
BIPA, we are proposing to establish a fixed-loss amount of $18,489 
based on the best available LTCH data and the policies presented in 
this proposed rule because, we believe a proposed increase in the 
fixed-loss amount is appropriate and necessary to maintain estimated 
outlier payments equal to 8 percent of estimated total LTCH PPS 
payments, as required under Sec.  412.525(a).
d. Reconciliation of Outlier Payments Upon Cost Report Settlement
    In the June 9, 2003 high-cost outlier final rule (68 FR 34508 
through 34512), we established a policy for LTCHs that provided that 
effective for 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 that, for discharges occurring on or after

[[Page 4679]]

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. (We note that, in 
that same final rule (68 FR 34513), we also established similar changes 
to the SSO policy under the LTCH PPS at Sec.  412.529(c)(5)(ii).) These 
changes regarding the reconciliation of outlier payments under the LTCH 
PPS were made in conjunction with the changes regarding the 
determination of LTCHs' CCRs that we established under Sec.  
412.525(a)(4) in the June 9, 2003 IPPS high cost outlier final rule, as 
discussed in greater detail in section IV.D.3.b. of this preamble. (We 
note that the instructions for implementing these regulations under 
both the IPPS and the LTCH PPS are discussed in further detail in 
Program Memorandum Transmittal A-03-058. Additional information on the 
administration of the reconciliation process under the IPPS is provided 
in CMS Program Transmittal 707 (October 12, 2005; Change Request 3966). 
We note that irrespective of the proposed changes to the high cost 
outlier and SSO policies presented in this proposed 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.)
    As discussed in section V.C.3.b. of this preamble, we are 
proposing, for discharges occurring on or after October 1, 2006, to 
codify into the LTCH PPS section of the regulations (subpart O of part 
42 of the CFR) 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. (We are also 
proposing to make those same changes under the SSO policy at Sec.  
412.529 as discussed in section V.A.1. of this preamble).
    In this proposed rule, under the broad authority of section 123 of 
the BBRA and section 307(b)(1) of BIPA, we are also proposing to revise 
Sec.  412.525(a)(4), for discharges occurring on or after October 1, 
2006, to codify in subpart O of part 42 of the CFR 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 note that we are also 
proposing to make the same changes concerning the reconciliation of 
outlier payments under (and the SSO provisions at Sec.  412.529(c)), as 
discussed below in section V.A.1.a. of this preamble.) We are proposing 
the additional revisions to Sec.  412.525(a)(4) concerning the 
reconciliation of outlier payments, which are discussed in greater 
detail 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, at Sec.  412.525(a)(4)(iv)(D), 
similar to our current policy, we are proposing 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, at Sec.  412.525(a)(4)(iv)(E), 
similar to our current policy, we are proposing 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. Also consistent with 
our current policy, we are proposing 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. We are proposing to make these 
additional revisions to Sec.  412.525(a)(4) because we believe that 
such proposed changes would be more consistent with the LTCH PPS single 
payment rate (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 outlier payments applicable under the LTCH PPS regulations 
in subpart O of part 42 of the CFR.
e. Application of Outlier Policy to Short-Stay Outlier (SSO) Cases
    As we discussed in the August 30, 2002 final rule (67 FR 56026), 
under some rare circumstances, a LTCH discharge could qualify as a SSO 
case (as defined under Sec.  412.529 and discussed in section V.B.4. of 
this preamble) and also as a high-cost outlier case. In this scenario, 
a patient could be hospitalized for less than five-sixths of the 
geometric ALOS for the specific LTC-DRG, and yet incur extraordinarily 
high treatment costs. If the costs exceeded the outlier threshold (that 
is, the SSO payment plus the fixed-loss amount), the discharge would be 
eligible for payment as a high-cost outlier. Thus, for a SSO case in 
the 2007 LTCH PPS rate year, the high-cost outlier payment would be 80 
percent of the difference between the estimated cost of the case and 
the proposed outlier threshold (the sum of the proposed fixed-loss 
amount of $18,489 and the amount paid under the SSO policy). (We note 
that in section V.A.1. of this preamble, we are also proposing changes 
to the SSO policy at Sec.  412.529, which are consistent with the 
proposed revisions to Sec.  412.525(a)(4) regarding our policies on the 
determination of LTCH CCRs and, the reconciliation of outlier 
payments.)
4. Other Payment Adjustments
    As indicated earlier, we have broad authority under section 
123(a)(1) of the BBRA as amended by section 307(b) of BIPA to determine 
appropriate adjustments under the LTCH PPS, including whether (and how) 
to provide for adjustments to reflect variations in the necessary costs 
of treatment among LTCHs. Thus, in the August 30, 2002 final rule (67 
FR 56014 through 56027), we discussed our extensive data analysis and 
rationale for not implementing an adjustment for geographic 
reclassification, rural location, treating a disproportionate share of 
low-income patients (DSH), or indirect medical education (IME) costs. 
In that same final rule, we stated that we would collect data and 
reevaluate the appropriateness of these adjustments in the future once 
more LTCH data become available after the LTCH PPS is implemented.
    Because the LTCH PPS has only been implemented for slightly over 3 
years and there is a time lag in data availability, sufficient new data 
has not been generated that would enable us to conduct a comprehensive 
reevaluation of these payment adjustments. We now believe that after 
the completion of the 5-year transition, sufficient new data that will 
be generated while LTCHs are subject to the LTCH PPS may be available 
for a comprehensive reevaluation of payment adjustments such as 
geographic reclassification, rural location, DSH, and IME. Nonetheless, 
we are reviewing the limited data that are available and find no 
evidence to support additional proposed policy changes. Therefore, in 
this proposed rule, we are not proposing to make any adjustments for 
geographic reclassification, rural location, DSH, or

[[Page 4680]]

IME. However, we will continue to collect and interpret new data as 
they become available in the future to determine if these data support 
proposing any additional payment adjustments. Specifically, as we 
discuss in greater detail in section IV.D.6. of this preamble, we have 
revisited the possible one-time prospective adjustment to the LTCH 
prospective payment system rates at Sec.  412.523(d)(3), and after 
further analysis and evaluation we now believe that it is appropriate 
to wait for the conclusion of the 5-year transition to 100 percent 
fully Federal payments under the LTCH PPS, to maximize the availability 
of data that are reflective of LTCH behavior in response to the 
implementation of the LTCH PPS to be used to conduct a comprehensive 
evaluation of the potential payment adjustment policies (such as rural 
location, DSH and IME) in conjunction with our evaluation of the 
possibility of making a one-time prospective adjustment to the LTCH 
prospective payment system rates provided for at Sec.  412.523(d)(3).
5. Proposed Budget Neutrality Offset To Account for the Transition 
Methodology
    Under Sec.  412.533, we implemented a 5-year transition, during 
which a LTCH is paid an increasing percentage of the LTCH PPS Federal 
prospective payment and a decreasing percentage of its payments based 
on the reasonable cost-based payment methodology for each discharge. 
Furthermore, we allow a LTCH (other than those defined as ``new'' under 
Sec.  412.23(e)(4) to elect to be paid based on 100 percent of the 
standard Federal rate in lieu of the blended methodology.
    The standard Federal rate was determined as if all LTCHs will be 
paid based on 100 percent of the standard Federal rate. As stated 
earlier, we provide for a 5-year transition period that allows LTCHs to 
receive payments based partially on the reasonable cost-based 
methodology. In order to maintain budget neutrality for FY 2003 as 
required by section 123(a)(1) of the BBRA during the 5-year transition 
period, we reduce all LTCH Medicare payments (whether a LTCH elects 
payment based on 100 percent of the Federal rate or whether a LTCH is 
being paid under the transition blend methodology) to account for the 
cost of the applicable transition period methodology in a given LTCH 
PPS rate year.
    Specifically, we reduce all LTCH Medicare payments during the 5-
year transition by a factor that is equal to 1 minus the ratio of the 
estimated TEFRA reasonable cost-based payments that would be made if 
the LTCH PPS was not implemented, to the projected total Medicare 
program PPS payments (that is, payments made under the transition 
methodology and the option to elect payment based on 100 percent of the 
Federal rate).
    In the RY 2006 LTCH PPS final rule (70 FR 24202), based on the best 
available data at that time, we projected that approximately 98 percent 
of LTCHs will be paid based on 100 percent of the standard Federal rate 
rather than receive payment under the transition blend methodology for 
the 2006 LTCH PPS rate year. Using the same methodology described in 
the August 30, 2002 final rule (67 FR 56034), this projection, which 
used updated data and inflation factors, was based on our estimate that 
either: (1) A LTCH has already elected payment based on 100 percent of 
the Federal rate prior to the start of the 2006 LTCH PPS rate year 
(July 1, 2005); or (2) a LTCH would receive higher payments based on 
100 percent of the 2006 LTCH PPS rate year standard Federal rate 
compared to the payments it would receive under the transition blend 
methodology. Similarly, we projected that the remaining 2 percent of 
LTCHs will choose to be paid based on the applicable transition blend 
methodology (as set forth under Sec.  412.533(a)) because they would 
receive higher payments than if they were paid based on 100 percent of 
the 2006 LTCH PPS rate year standard Federal rate.
    Also in the RY 2006 LTCH PPS final rule (70 FR 24202), based on the 
best available data at that time and policy revisions described in that 
same rule, we projected that the full effect of the remaining 2 years 
of the transition period (including the election option) would result 
in a cost to the Medicare program of approximately $1.675 million. 
Specifically, for the RY 2006 LTCH PPS, we estimated that the cost of 
the transition would be approximately $1 million. Because this amount 
is only a small percentage of total LTCH PPS payments for the 2006 LTCH 
PPS rate year (estimated at over $3 billion), the formula that we use 
to establish the budget neutrality offset to account for the additional 
costs of the transition period resulted in a factor of zero percent. 
Therefore, in that same final rule, we established a 0.0 percent 
reduction (a budget neutrality offset of 1.000) to all LTCH payments in 
the 2006 LTCH PPS rate year to account for the $1 million estimated 
cost of the transition period methodology (including the option to 
elect payment based on 100 percent of the Federal rate). We also 
indicated that we would use a budget neutrality offset for each of the 
remaining years of the transition period to account for the estimated 
costs for the respective LTCH PPS rate years. In that same final rule, 
we estimated that there would be a 0.0 percent budget neutrality offset 
to LTCH PPS payments during the remaining years of the transition 
period since, we estimated at that time that the additional cost to the 
Medicare program resulting from the transition period methodology would 
be so small that the budget neutrality factor determined under our 
established methodology would round to zero.
    In this proposed rule, based on the updated data using the same 
methodology established in the August 30, 2002 final rule (67 FR 
56034), we are projecting that approximately 97 percent of LTCHs would 
be paid based on 100 percent of the proposed standard Federal rate 
rather than receive payment under the transition blend methodology 
during the 2007 LTCH PPS rate year. This projection, which used updated 
data, is based on our estimate that either: (1) A LTCH has already 
elected payment based on 100 percent of the Federal rate prior to the 
beginning of the 2007 LTCH PPS rate year (July 1, 2006); or (2) a LTCH 
would receive higher payments based on 100 percent of the proposed 
standard Federal rate compared to the payments they would receive under 
the transition blend methodology. Similarly, we project that the 
remaining 3 percent of LTCHs would choose to be paid based on the 
transition blend methodology at Sec.  412.533 because those payments 
are estimated to be higher than if they were paid based on 100 percent 
of the proposed standard Federal rate. The applicable transition blend 
percentage is applicable for a LTCH's entire cost reporting period 
beginning on or after October 1 (unless the LTCH elects payment based 
on 100 percent of the Federal rate). We note that this projection is 
slightly lower than the projection that 98 percent of LTCHs would be 
paid based on 100 percent of the proposed standard Federal rate rather 
than receive payment under the transition blend methodology during the 
2006 LTCH PPS rate year discussed in the RY 2006 LTCH PPS final rule 
(70 FR 24202). The reason for this slight decrease is due to how our 
established methodology (described in this section) determines which 
LTCHs would be projected to receive payments based on 100 percent of 
the Federal rate in a given rate year. Specifically, under our 
established methodology, if a LTCH has not already elected payment 
based on 100 percent of the Federal rate then we evaluate whether a 
LTCH would receive

[[Page 4681]]

higher payments based on 100 percent of the proposed standard Federal 
rate or under the applicable transition blend methodology based on the 
most recent available data. Based on the best available data at that 
time, we projected that a few LTCHs that had not already elected 
payment based on 100 percent of the Federal rate would make such an 
election for RY 2006 because we projected that their payments based on 
100 percent of the Federal rate would exceed their payments under the 
applicable transition blend. Therefore, those LTCHs were counted in the 
number of LTCHS that would be paid based on 100 percent of the Federal 
rate in RY 2006. However, based on the most recent available data used 
for this proposed rule, those LTCHs have not elected to receive 
payments based on 100 percent of the Federal rate and are being paid 
under the applicable transition blend methodology. Under our 
methodology for determining the percentage of LTCHs paid based on 100 
percent of the federal rate, based on the most recent available data, 
we are projecting that for the RY 2007 LTCH PPS rate year, the 
applicable transition blend methodology payments to those LTCHs would 
be greater than payment based 100 percent of the Federal rate, and 
therefore, those LTCHs would not be included in the number of LTCHS 
that we estimate would be paid based on 100 percent of the Federal rate 
in RY 2007. Based on the policies presented in this proposed rule, we 
are projecting a decrease in their estimated payments based on 100 
percent of the Federal rate in RY 2007 payment as compared to their 
estimated payments based on 100 percent of the Federal rate in RY 2006 
primarily as a result of the proposed changes to the SSO policy (see 
section V.A.1. of this preamble) and the proposed increase in the 
outlier fixed-loss amount (see section IV.D.3.c. of this preamble). 
Because we are projecting a decrease in payments based on 100 percent 
of the Federal rate for these LTCHs, the estimated RY 2007 payments 
based on the applicable transition blend methodology are now higher 
than their estimated RY 2007 payments based on 100 percent of the 
Federal rate, we do not project that these LTCH would elect payment 
based on 100 percent of the Federal rate for RY 2007. Thus, the slight 
decrease in the our projection in the number of LTCHs that would be 
paid based on 100 percent of the Federal rate for the 2007 LTCH PPS 
rate year is appropriate.
    Based on the best available data and the proposed policies 
described in this proposed rule, we are projecting that in absence of a 
transition budget neutrality offset, the full effect of the final full 
year of the transition period (including the election option) as 
compared to payments as if all LTCHs would be paid based on 100 percent 
of the Federal rate would result in a cost to the Medicare program of 
approximately 2.8 million. (As discussed in the RY 2006 final rule (70 
FR 24201), we are no longer projecting a small cost for the 2008 LTCH 
PPS rate year (July 1, 2007 through June 30, 2008) even though some 
LTCH's will have a cost reporting period for the 5th year of the 
transition period which will be concluding in the first 3 months of the 
2008 LTCH PPS rate year because based on the most available data, we 
are projecting that the vast majority of LTCHs would have made the 
election to be paid based on 100 percent of the Federal rate rather 
than the transition blend which would result in a negligible cost to 
the Medicare program.)
    Accordingly, using the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 56034), based on updated data and the 
policies and rates presented in this proposed rule, we are proposing a 
0.1 percent reduction (a budget neutrality offset of 0.999) to all 
LTCHs' payments for discharges occurring on or after July 1, 2006 and 
through June 30, 2007, to account for the estimated cost of the 
transition period methodology (including the option to elect payment 
based on 100 percent of the Federal rate) of approximately $2.8 million 
for the 2007 LTCH PPS rate year. We note that this proposed offset for 
the 2007 LTCH PPS rate year is slightly larger than the 0.0 percent 
reduction (a budget neutrality offset of 1.000) established for the 
2006 LTCH PPS rate year (70 FR 24202). This is because we are now 
projecting that a few less LTCHs would elect payment based on 100 
percent of the Federal rate than we were projecting when we determined 
the transition period budget neutrality offset for the 2006 LTCH PPS 
rate year based on the most recent available data.
6. One-Time Prospective Adjustment to the Standard Federal Rate
    As we discussed in the August 30, 2002 final rule (67 FR 56036), 
consistent with the statutory requirement for budget neutrality in 
section 123(a)(1) of the BBRA, we intended that estimated aggregate 
payments under the LTCH PPS for FY 2003 equal the estimated aggregate 
payments that would be made if the LTCH PPS were not implemented. Our 
methodology for estimating payments for purposes of the budget 
neutrality calculations uses the best available data at the time and 
necessarily reflects assumptions. As the LTCH PPS progresses, we are 
monitoring payment data and will evaluate the ultimate accuracy of the 
assumptions used in the budget neutrality calculations (for example, 
inflation factors, intensity of services provided, or behavioral 
response to the implementation of the LTCH PPS) described in the August 
30, 2002 LTCH PPS final rule (67 FR 56027 through 56037). To the extent 
these assumptions significantly differ from actual experience, the 
aggregate amount of actual payments may turn out to be significantly 
higher or lower than the estimates on which the budget neutrality 
calculations were based.
    Section 123(a)(1) of the BBRA as amended by section 307(b) of BIPA 
provides broad authority to the Secretary in developing the LTCH PPS, 
including the authority for appropriate adjustments. Under this broad 
authority, as implemented in the existing regulations at Sec.  
412.523(d)(3), we have provided for the possibility of making a one-
time prospective adjustment to the LTCH PPS rates by October 1, 2006, 
so that the effect of any significant difference between actual 
payments and estimated payments for the first year of the LTCH PPS 
would not be perpetuated in the LTCH PPS rates for future years. (As 
discussed in greater detail below, we are proposing to extend the 
deadline for making this adjustment to July 1, 2008 to this proposed 
rule.
    In the RY 2006 LTCH PPS final (70 FR 24203), based on the best 
available data at that time, we estimated that total Medicare program 
payments for LTCH services over the next 5 LTCH PPS rate years would be 
$3.32 billion for the 2006 LTCH PPS rate year; $3.38 billion for the 
2007 LTCH PPS rate year; $3.48 billion for the 2008 LTCH PPS rate year; 
$3.63 billion for the 2009 LTCH PPS rate year; and $3.79 billion for 
the 2010 LTCH PPS rate year.
    In this proposed rule, consistent with the methodology established 
in the August 30, 2002 final rule (67 FR 56036), based on the most 
recent available data, we estimate that total Medicare program payments 
for LTCH services for the next 5 LTCH PPS rate years would be as shown 
in Table 9.

                                 Table 9
------------------------------------------------------------------------
                                                            Estimated
                   LTCH PPS rate year                    payments  ($ in
                                                            billions)
------------------------------------------------------------------------
2007...................................................            $5.27
2008...................................................             5.44
2009...................................................             5.64
2010...................................................             5.88

[[Page 4682]]

 
2011...................................................             6.15
------------------------------------------------------------------------

    In accordance with the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 56037), these estimates are based on 
the most recent available date, including the projection that 97 
percent of LTCHs would elect to be paid based on 100 percent of the 
2007 LTCH PPS rate year proposed standard Federal rate rather than the 
applicable transition blend and an estimated increase in the number of 
discharges from LTCHs. (We note that the 5-year spending estimates 
shown in Table 9 are significantly higher than the 5-year spending 
estimates presented in the RY 2006 LTCH PPS final rule (70 FR 24203). 
This is primarily due to an adjustment by our Office of the Actuary 
(OACT) to account for the significant increase in the expected number 
of LTCH discharges based on the most recent complete available LTCH 
discharge data.) These estimates are also based on our estimate of LTCH 
PPS rate year payments to LTCHs using OACT's most recent estimate of 
the excluded hospital with capital (currently used under the LTCH PPS) 
market basket of 3.6 percent for the 2007 LTCH PPS rate year, 3.5 
percent for the 2008 LTCH PPS rate year, 3.1 percent for the 2009 LTCH 
PPS rate year, 2.6 percent for the 2010 LTCH PPS rate year, and 3.0 
percent for the 2011 LTCH PPS rate year. (We note that, although we are 
proposing a zero percent update to the LTCH PPS Federal rate for RY 
2007 (as discussed in section IV.C.3. of this proposed rule) OACT 
develops its spending projections based on existing policy and 
therefore, changes that have not yet been implemented are not reflected 
in the spending projections shown in this section.) We also considered 
OACT's most recent projections of changes in Medicare beneficiary 
enrollment that there would be a change in Medicare fee-for-service 
beneficiary enrollment of -2.3 percent in the 2007 LTCH PPS rate year, 
-1.0 percent in the 2008 LTCH PPS rate year, 0.3 percent in the 2008 
and 2009 LTCH PPS rate years and, 0.6 percent in the 2010 LTCH PPS rate 
year. (We note that, based on the most recent available data, OACT is 
projecting a slight decrease in Medicare fee-for-service Part A 
enrollment for the 2007 and 2008 LTCH PPS rate years, in part, because 
they are projecting an increase in Medicare managed care enrollment as 
a result of the implementation of several provisions of the MMA of 
2003.)
    As we discussed in the RY 2006 LTCH PPS final rule (70 FR 24204), 
because the LTCH PPS was only recently implemented, sufficient new data 
has not been generated that would enable us to conduct a comprehensive 
reevaluation of our budget neutrality calculations. Accordingly, we did 
not make a one-time adjustment under Sec.  412.523(d)(3). At this time, 
we still do not have sufficient new data to enable us to conduct a 
comprehensive reevaluation of our budget neutrality calculations. 
Therefore, in this proposed rule, we are not proposing to make a one-
time adjustment under Sec.  412.523(d)(3) so that the effect of any 
significant difference between actual payments and estimated payments 
for the first year of the LTCH PPS is not perpetuated in the PPS rates 
for future years. However, as discussed in greater detail below, we 
will continue to collect and interpret new data as the data become 
available in the future to determine if this adjustment should be 
proposed. Additionally, as discussed in greater detail below, we 
believe that it is appropriate to propose postponement of the 
requirement established in Sec.  412.523(d)(3) due to the time lag in 
the availability of Medicare data upon which this adjustment would be 
based. Therefore, we propose to revise Sec.  412.523(d)(3) by 
postponing the October 1, 2006 deadline to July 1, 2008.
    In the August 30, 2002 final rule implementing the LTCH PPS (67 FR 
55954), we set forth the implementing regulations, based upon the broad 
authority granted to the Secretary, under section 123 of the BBRA as 
amended by section 307(b) of the BIPA. Section 123(a)(1) of the BBRA, 
required that the system ``maintain budget neutrality'' for FY 2003, 
that is, that estimated aggregate payments under the LTCH prospective 
payment system would equal the estimated aggregate payments that would 
be made if the LTCH prospective payment system would not be implemented 
for FY 2003. The methodology for determining the LTCH PPS standard 
Federal rate for FY 2003 that would ``maintain budget neutrality'' is 
described in considerable detail in the August 30, 2002 final rule (67 
FR 56027 through 56037). As we discussed in that same final rule, our 
methodology for estimating payments for the purposes of budget 
neutrality calculations used the best available data and necessarily 
reflects assumptions in estimating aggregate payments that would be 
made if the LTCH PPS was not implemented. We also stated our intentions 
to monitor LTCH PPS payment data to evaluate the ultimate accuracy of 
the assumptions used in the budget neutrality calculations (for 
example, inflation factors, intensity of services provided, or 
behavioral response to the implementation of the LTCH PPS). To the 
extent that those assumptions significantly differ from actual 
experience, the aggregate amount of actual payments during FY 2003 may 
turn out to be significantly higher or lower than the estimates upon 
which the budget neutrality calculations were based. (67 FR 56036) In 
that same final rule, the Secretary exercised his broad authority in 
establishing the LTCH PPS and provided for the possibility of a one-
time prospective adjustment to the LTCH prospective payment system 
rates by October 1, 2006 at Sec.  412.523(d)(3). The purpose of that 
provision was to prevent any significant difference between actual 
payments and estimated payments for the first year of the LTCH 
prospective payment system, when we established the budget neutral 
Federal rate, as required by the statute (discussed previously), from 
being perpetuated in the prospective payment system rates for future 
years.
    When we implemented the LTCH PPS, we established at Sec.  412.533 a 
5-year transition to full payments based on the LTCH PPS standard 
Federal rate. In addition, during that 5-year period, existing LTCHs 
(those that had their first cost reporting period as an LTCH prior to 
October 1, 2002), could elect for either full payment under the 
adjusted Federal rate payment determined under Sec.  412.523, or be 
phased-in to the full Federal rate payment over 5 years in annual 
increments of 20 percent, with the remainder of the payment amount 
being determined under the former cost-based reimbursement rules set 
forth in the TEFRA system, (under part 413 of the same subchapter). 
Thus, for LTCH cost reporting periods beginning on or after October 1, 
2006, the fifth year of the transition, payments to all LTCHs will be 
based fully (100 percent) on the LTCH PPS standard Federal rate.
    In addition to developing a LTCH PPS standard Federal rate that 
would ``maintain budget neutrality'' for FY 2003, under the LTCH PPS, 
Federal prospective payments are adjusted to account for various 
factors (as discussed below). As noted previously in this proposed 
rule, the Secretary was granted considerable discretion in the design 
of the payment system. Specifically, under section 307(b) of the BIPA, 
the Secretary shall ``examine and * * * may provide for appropriate 
adjustments to the long-term hospital payment system, including 
adjustments to DRG weights, area wage adjustments,

[[Page 4683]]

geographic reclassification, outliers, updates, and a disproportionate 
share adjustment.'' Thus, the Secretary was also given tremendous 
discretionary authority to determine which adjustments to include in 
the LTCH PPS. In developing the LTCH PPS, to evaluate whether the 
accuracy of the payment system would be enhanced by the inclusion of 
particular payment adjustments, and hence the appropriateness of those 
payment adjustments for the LTCH PPS, we contracted with 3M Health 
Information Systems to assist us with the analyses. These analyses 
include, among other techniques, the use of regression models and 
payment simulations to determine whether there was a correlation 
between an LTCH's cost per case and the inclusion of particular payment 
adjustments. We examined payment variables applicable to the inpatient 
acute-care hospital and IRF prospective payment systems, including the 
local wage variation (wage index), disproportionate share patient 
percentage (DSH), indirect medical education (IME), variables that 
account for location in a rural or large urban area, and a cost of 
living adjustment (COLA) for Alaska and Hawaii (67 FR 56015 through 
56027). We concluded, in that August 30, 2002 final rule, that based on 
the best available LTCH data and consistent with the broad legal 
authority afforded to the Secretary, the LTCH PPS would include payment 
adjustments featured in other prospective payment systems: payments for 
high cost outliers (Sec.  412.525(a)); an area wage adjustment which 
would be phased-in over 5-years (Sec.  412.525(c)); and a COLA (Sec.  
412.525(b)). Additionally, we established several adjustments specific 
to the LTCH PPS, such as adjusted payments for short'stay outliers 
(Sec.  412.529), interrupted stays (Sec.  412.531), and on-site 
discharges and readmittances (Sec.  412.532).
    In each final rule for the LTCH PPS subsequent to the 
implementation of the LTCH PPS for FY 2003, as new data from LTCHs 
generated under the LTCH PPS has become available, we have revisited 
our determinations regarding the inclusion of specific payment 
adjustments (68 FR 34140 through 34150, 69 FR 25684 through 25701, and 
70 FR 24190 through 24198). Although no additional payment adjustments 
were added since the initial implementation of the LTCH PPS in FY 2003, 
we stated that we would collect data and reevaluate the appropriateness 
of these adjustments in the future when more LTCH PPS data becomes 
available after the implementation of the LTCH PPS. After revisiting 
this issue and conducting extensive data analysis, we now believe that 
the current deadline of October 1, 2006, for making the one time 
adjustment to eliminate any significant difference between the actual 
payments and estimated payments for the first year of the PPS is too 
short. After the conclusion of the 5-year transition period (that is, 
after RY 2007), we now believe that sufficient new data will be 
generated by the LTCH PPS for a comprehensive reevaluation of these 
payment adjustments, including geographic reclassification, rural 
location, DSH, and IME.
    The final year of the 5-year transition to full payments for all 
LTCHs based on the adjusted Federal rate will begin for cost reporting 
periods beginning on or after October 1, 2006 (FY 2007) and end with 
cost reporting periods beginning before October 1, 2007 (FY 2008). 
After the conclusion of the 5-year transition period (October 1, 2007), 
we expect to have between 3 and 4 years (FYs 2003 through 2006) of LTCH 
data generated since the implementation of the LTCH PPS. We note that 
there is a lag time between the submission of claims data and cost 
report data, and the availability of that data in the MedPAR files and 
HCRIS, respectively. Based on a comprehensive analysis of that data, we 
may then propose to revise some LTCH PPS payment adjustments for future 
years for the LTCH PPS.
    Consistent with our intent to wait for the conclusion of the 5-year 
transition to 100 percent fully Federal payments under the LTCH PPS, to 
maximize the availability of data used to conduct a comprehensive 
evaluation of the payment adjustment policies issued at the inception 
of the LTCH PPS for FY 2003, we believe that it is appropriate to 
propose postponement of the requirement established by existing Sec.  
412.523(d)(3), described previously, which allowed for the possibility 
of making a one-time prospective adjustment to the LTCH prospective 
payment system rates from the current date of October 1, 2006 to an 
adjustment that would be effective on or before July 1, 2008. 
Currently, due to the time lag in the availability of Medicare data, 
the best available full year of LTCH claims data are from FY 2004 and 
the most complete full year of LTCH cost report data are from FY 2003. 
We believe that postponing the deadline of the possible one-time 
prospective adjustment to the LTCH PPS rates provided for in Sec.  
412.523(d)(3) to July 1, 2008 would result in the availability of 
additional data generated under the LTCH PPS and therefore our 
decisions regarding a possible adjustment would be based on more 
complete and up-to-date data. This data would be reflective of LTCH 
behavior in response to the implementation of the LTCH PPS. In 
addition, after further analysis, we believe that after the end of the 
transition may be the appropriate time to implement this one-time 
prospective adjustment, which was written to ensure that the effect of 
any significant difference between actual payments and estimated 
payments for the first year of the LTCH PPS would not be perpetuated in 
the prospective payment rates for future years. We note that we are 
proposing a July 1, 2008 rather than an October 1, 2007 date in keeping 
with the established rate year cycle. Although the LTCH PPS Federal 
rate was initially established with an October 1 through September 30th 
rate cycle, currently the LTCH PPS Federal rate is updated on a July 1 
through June 30 rate year cycle (68 FR 34125 through 34128).
    The final year of the 5-year phase-in of the LTCH PPS will begin 
for cost reporting periods beginning on or after October 1, 2006, 
during which payments will be 100 percent of the adjusted Federal rate 
for all LTCHs. Since the inception of the LTCH PPS, we have noted that 
we fully intend to review our payment adjustments when more LTCH PPS 
data become available after the implementation of the LTCH PPS because 
at that point we would have a sufficient amount of data with which to 
evaluate the impact of existing policy and to make informed decisions 
for the future of the payment system. After further consideration 
explained previously, we believe that after the end of the 5-year 
transition period it would be the appropriate time for both our planned 
reevaluation of the LTCH PPS payment adjustments as well as the 
possible ``one-time adjustment of the payment rates'' at Sec.  
412.525(d)(3). Therefore, we are proposing to revise Sec.  
412.523(d)(3) to change the deadline for the establishment of the 
possible one-time prospective adjustment from October 1, 2006 to July 
1, 2008 and to synchronize these interrelated data analyses for 
purposes of determining future proposed payment policies under the LTCH 
PPS.
    In section IV.C.3. of this proposed rule, where we discuss the 
proposed zero percent update factor to the standard Federal rate for 
the 2007 LTCH PPS rate year, we describe two aspects of our data 
monitoring activities, both of which impact continuing annual policy 
updates and determinations for the LTCH PPS which are the basis of our 
annual rule-making activities and Federal Register publications.

[[Page 4684]]

    For the on-going implementation of the payment system, which 
entails determining annual system updates for the LTCH PPS, we engage 
in data monitoring and analysis of patient and facility level data. The 
most recent claims and cost data are used for this rate-setting 
purpose. From the outset of the LTCH PPS, we established a monitoring 
component to the system directed by our Office of Research, 
Development, and Information (ORDI) with additional data analysis 
provided by 3M Health Information Systems. The purposes of this 
protocol, as described in section X. of this proposed rule was to 
evaluate the impact of the LTCH PPS on the LTCH universe and to provide 
on-going data analysis that would enable CMS to determine the 
effectiveness of various policies and to alert CMS to issues which 
could require further regulation. Frequently, reviews and analyses of 
the data utilized for the annual updates have suggested directions for 
future research, which have resulted in policy proposals. We have 
revised and formulated several significant policies since the outset of 
the LTCH PPS based on the data analyses, including the 3-day or fewer 
interruption of stay policy at Sec.  412.531 (69 FR 25690 through 
25700), the LTCH HwH and LTCH satellite payment adjustment at Sec.  
412.534 (69 FR 49191 through 49214), the proposed revisions to the SSO 
policy at Sec.  412.529 in section V.A.1. of this proposed rule, and 
the proposed zero percent update to the standard Federal rate, as 
described in section IV.C.3. of this proposed rule.
    In the previous discussion, we have noted that we intend to 
reevaluate the LTCH PPS at the end of the 5-year transition to full 
Federal payments, based upon a comprehensive analysis of data generated 
since the start of the payment system for cost reporting periods 
beginning during FY 2003, in order to determine whether further payment 
adjustments are warranted. We have also proposed to revise Sec.  
412.523(d)(3) to postpone the establishment of the possible one-time 
prospective adjustment from October 1, 2006 to July 1, 2008.
    Evaluating the appropriateness of this adjustment will entail a 
thorough review of the actual Medicare costs incurred by LTCHs during 
the first year of the LTCH PPS, that is, for LTCH cost reporting 
periods beginning on or after October 1, 2002 during which we were 
statutorily required to maintain budget neutrality as specified in 
section 123 of the BBRA. When we established the FY 2003 standard 
Federal rate, in order to meet this requirement, we used the most 
recent LTCH cost data available at that time, and trended that data 
forward to estimate what Medicare would have paid to LTCHS under the 
TEFRA payment system if the PPS were not implemented (67 FR 56033). 
(The methodology for determining the LTCH PPS standard Federal rate for 
FY 2003 that would ``maintain budget neutrality'' is described in 
considerable detail in the August 30, 2002 final rule (67 FR 56027 
through 56037).)
    As we discussed in that same final rule, our methodology for 
estimating payments for the purposes of budget neutrality calculations, 
utilized the best available data and necessarily reflected assumptions 
in estimating aggregate payments that would have been made had the LTCH 
PPS not been implemented. We also stated our intentions to monitor LTCH 
PPS data to evaluate the ultimate accuracy of the assumptions used in 
the budget neutrality calculations (for example, inflation factors, 
intensity of services provided, or behavioral response to the 
implementation of the LTCH PPS). To the extent that those assumptions 
significantly differed from actual experience, the aggregate amount of 
actual payments during FY 2003 could result as significantly higher or 
lower than the estimates upon which the budget neutrality calculations 
were based (67 FR 56036).
    At the outset of the LTCH PPS, we provided for the possibility of a 
one-time prospective adjustment at Sec.  412.523(d)(3). Among other 
things, we wanted the opportunity to adjust the standard Federal 
payment rate once accurate data was available that reflected the actual 
cost-based payments that would have been made under the Medicare 
program during FY 2003 if the LTCH PPS had not been implemented, rather 
than perpetuate any error in the Federal rate in future years.
    We are proposing to postpone the adjustment until July 1, 2008 
because by that time, given the lag time typically involved in the 
entire cost report settlement procedure, we will be able to utilize the 
most accurate data reflecting the actual costs incurred by LTCHs for 
cost reporting periods beginning during FY 2003. It is important to 
note that there are many LTCHs with cost reporting periods from 
September 1 through August 30 which first became subject to the LTCH 
PPS on September 1, 2003. Given the lag time required for typical cost 
report settlement involving submission, desk review, and in some cases 
an audit, which can take approximately 2 additional years to complete 
(and we expect to audit a number of LTCH cost reports for the purpose 
of this analysis), we do not believe that the October 1, 2006 deadline 
established Sec.  412.523(d)(3) is reasonable or realistic. In fact, we 
believe that for cost reports for providers on August 2004 fiscal year 
ending date, we would be in possession of the most reliable cost report 
data indicating the actual costs of the Medicare program of the LTCH 
PPS during the year in which we established the Federal payment rate by 
July 2007 and any proposed correction, if finalized could then be 
implemented on July 1, 2008.
    Therefore, we believe that postponing the deadline for this 
possible one-time prospective adjustment until July 1, 2008 would allow 
us to have the best available data from the first year of the LTCH PPS 
upon which to base an adjustment such as this.
    Specifically, we wish to emphasize the distinction between the 
sufficiency of the data utilized for the annual data analysis that 
resulted in our proposed zero percent update for RY 2007 and the 
proposed postponement of the possible one-time prospective adjustment 
to the standard Federal rate, at proposed Sec.  412.523(d)(3). We 
believe that the proposed annual adjustment of zero percent is based on 
the best data from FY 2004, including case-mix data which is derived 
from the MedPAR files, and data analysis coordinated by ORDI, assisted 
by 3M Health Information Services. The case-mix data used to make this 
adjustment is current and accurate and is not dependent upon the 
procedures of the cost report settlement. However, the data review that 
we believe necessary for the comprehensive analysis of the accuracy of 
the Federal payment rate under Sec.  412.523(d)(3), which would be 
applied prospectively (and therefore has the potential to affect all 
future LTCH PPS Federal rates), is dependent on Medicare data that will 
only be available by July, 2007. We believe that only through a 
thorough analysis of the most comprehensive and accurate data from the 
first year of the implementation of the LTCH PPS for FY 2003 (including 
settled and fully audited cost reports) will we be able to reliably 
determine whether the one-time prospective adjustment to the standard 
Federal rate, which if issued will have an impact on all future 
payments under the LTCH PPS, should be proposed.

[[Page 4685]]

V. Other Proposed Policy Changes for the 2007 LTCH PPS Rate Year

A. Proposed Adjustments for Special Cases

1. Adjustment for SSO Cases
a. Proposed Changes to the Method for Determining the Payment Amount 
for SSO Cases
    In the August 30, 2002 rule for the LTCH PPS, under Sec.  412.529, 
we established a special payment policy for SSO cases, that is LTCH PPS 
cases with a LOS of less than or equal to five-sixths of the geometric 
ALOS for each LTC-DRG. When we established the SSO policy, we explained 
that ``[a] short-stay outlier case may occur when a beneficiary 
receives less than the full course of treatment at the LTCH before 
being discharged. These patients may be discharged to another site of 
care or they may be discharged and not readmitted because they no 
longer require treatment. Furthermore, patients may expire early in 
their LTCH stay'' (67 FR 55995). Also in the August 30, 2002 final 
rule, we stated that when we first described the policy, in the March 
27, 2002 proposed rule, ``* * * we based the proposed policy on the 
belief that many of these patients could have been treated more 
appropriately in an acute hospital subject to the acute care hospital 
inpatient prospective payment system'' (67 FR 55995). Therefore, under 
the LTCH PPS, we implemented a special payment adjustment for SSO 
cases. Under the existing SSO policy at Sec.  412.529, for LTCH PPS 
discharges with a LOS of up to and including five-sixths the geometric 
ALOS for the LTC-DRG, in general, we adjust the per discharge payment 
under the LTCH PPS by the lesser of 120 percent of the estimated cost 
of the case, 120 percent of the LTC-DRG specific per diem amount 
multiplied by the LOS of that discharge, or the full LTC-DRG payment.
    As noted previously, generally LTCHs are defined by statute as 
having an ALOS of greater than 25 days. We stated that we believe that 
the SSO payment adjustment results in more appropriate payments, since 
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. Payment-to-cost ratios simulated for 
LTCHs, for the cases described above, indicated that if LTCHs received 
a full LTC-DRG payment for those cases, they were significantly 
``overpaid'' for the resources they have actually expended.
    In establishing the SSO policy we also believe that providing a 
reduced payment for SSO cases would discourage hospitals from admitting 
patients for whom they were unable to provide complete treatment in 
order to maximize payment. We also believed that the policy did not 
severely penalize providers that, in good faith, had admitted a patient 
and provided some services before realizing that the beneficiary could 
receive more appropriate treatment at another site of care. As we 
explained in the FY 2003 LTCH PPS final rule, establishing a SSO 
payment for these types of cases addressed the incentives inherent in a 
discharge-based prospective payment system for LTCHs for treating 
patients with a short LOS (67 FR 55995 through 56000).
    When we established the SSO adjustment at the outset of the LTCH 
PPS, we noted in the August 30, 2002 final rule that the regression 
analyses and simulations based on prior years' LTCH claims data 
generated under the former reasonable cost-based (TEFRA) based system, 
upon which we based many of our policy determinations regarding the 
design of the LTCH PPS for FY 2003, indicated that nearly half of LTCH 
cases would be paid on an adjusted per discharge amount based on the 
SSO payment policy established at existing Sec.  412.529 once the LTCH 
PPS was implemented. However, we did believe that ``* * * this data 
analysis does not necessarily predict the future behavior of LTCHs 
operating under a prospective payment system. The data used in the 
analysis are a product or reflection of the practice patterns of 
hospitals that operate under the mechanisms of the TEFRA payment 
system, which are different from the principles of a prospective 
payment system. However, these are the best data available upon which 
we can simulate LTCH behavior under the new LTCH prospective payment 
system. We believe that once the LTCH prospective payment system is 
implemented, the practice patterns of LTCHs will change. We anticipate 
that hospitals will alter their admission, treatment, and discharge 
patterns. Thus, we fully expect that an increasing majority of cases 
will be reimbursed on an unadjusted per discharge basis during the 
transition from reasonable cost-based reimbursement to prospective 
payments.'' (67 FR 55999)
    As we noted in the August 30, 2003 final rule, ``* * * [B]ased on 
our experience in implementing other Medicare prospective payment 
systems, we fully expect that as new data are received, we may revisit 
policy decisions described in this final rule. Furthermore, our Office 
of Research, Development, and Information [ORDI] will be tracking the 
impact of the prospective payments on LTCHs, other hospitals that treat 
long-term care patients, and other post-acute care providers, which 
will enable us to determine whether additional policy changes are 
warranted'' (67 FR 55999).
    A change in the SSO policy was published in the RY 2004 LTCH PPS 
final rule (68 FR 34148), following a thorough reexamination of the 
impact of the SSO policy on subclause (II) LTCHs, authorized by section 
1886(d)(1)(B)(iv)(II) of the Act which we implemented at Sec.  
412.23(e)(2)(ii). At that time, we revised certain aspects of the SSO 
policy in order to meet the specific needs of this type of LTCH. This 
provision provided an exception to the general definition of an LTCH 
set forth in section 1886(d)(1)(B)(iv)(I) of the Act, implemented at 
Sec.  412.23(e)(2)(i), specifying that to qualify as a LTCH, a hospital 
must have first been excluded as a LTCH in calendar year (CY) 1986, 
have an average inpatient LOS of greater than 20 days, and demonstrate 
that 80 percent or more of its annual Medicare inpatient discharges in 
the 12-month cost reporting period ending in FY 1997 have a principal 
diagnosis that reflects a finding of neoplastic disease (62 FR 46016 
and 46026). In the RY 2004 final rule, we particularly noted that the 
Congress recognized the existence and importance of a distinct category 
of LTCHs that might not otherwise warrant exclusion from the acute care 
inpatient PPS under subclause (I) but which nonetheless fulfilled a 
unique and vital role in serving a particular subset of Medicare 
patients. Consistent with existing policies that differentiated 
subclause (II) LTCHs from other LTCHs, we determined that it was 
reasonable for us to consider whether or not a policy that was designed 
for LTCHs designated under subclause (I) could reasonably and equitably 
be applied to a subclause (II) LTCH without some measure of adjustment. 
Therefore, in the RY 2004 LTCH PPS final rule, we provided an 
additional adjustment to the SSO policy for subclause (II) LTCHs. 
Specifically, in the RY 2004 LTCH PPS final rule (68 FR 34147 through 
34148), we made a temporary adjustment to the applicable percentages 
used in the SSO payment formula at Sec.  412.529(c) (applied to the 
cost of the SSO or the per diem LTCH DRG payment) used to calculate 
Medicare payments under the SSO policy. Specifically, at existing Sec.  
412.529(c)(4) for LTCHs designated under section 1886(d)(1)(B)(iv)(II) 
of the Act and Sec.  412.23(e)(2)(ii), we

[[Page 4686]]

established a temporary adjustment that will sunset upon their first 
cost reporting period beginning on or after October 1, 2006. Under 
existing policy, for SSOs from a subclause (I) LTCH, Medicare payment 
is the least of the following: 120 percent of the LTC-DRG per diem 
amount multiplied by the LOS of the discharge; 120 percent of the cost 
of the case; or the full LTC-DRG. Under this temporary Sec.  
412.529(c)(4) adjustment, we substitute the following percentages for 
the 120 percent figure used in the SSO payment formula at Sec.  
412.529(c) for subclause (I) hospitals. Therefore, for discharges from 
a subclause (II) LTCHs, occurring on or after July 1, 2003, for cost 
reporting periods beginning during the first year of the 5-year LTCH 
PPS transition period, the SSO percentage is 195 percent. For 
discharges occurring in the cost reporting periods beginning during the 
second year of the transition period, the applicable SSO percentage is 
193 percent; for discharges occurring in cost reporting periods 
beginning during the third year of the transition period, the 
applicable percentage is 165 percent; for discharges occurring in the 
cost reporting period beginning during the fourth year of the 
transition, the percentage is 136 percent; and for discharges occurring 
in cost reporting periods beginning during the fifth year of the 5-year 
transition, (and for discharges occurring in all future cost reporting 
periods), the SSO percentage for ``subclause (II)'' LTCHs, would be 120 
percent, that is, the same as it currently is for all other LTCHs under 
the LTCH PPS.
    As we continue to monitor the SSO policy, an analysis of LTCH 
claims data from the FY 2004 MedPAR files (using version 23 of the 
GROUPER), reveals that approximately 37 percent of LTCH discharges 
continue to be paid under the provisions of the existing SSO policy at 
Sec.  412.529. As noted previously, at the outset of the LTCH PPS, the 
data upon which we based our system indicated that 48.4 percent of 
patients admitted to LTCHs fell into the category of SSOs, a percentage 
that we believed to be inappropriately high, given that the category of 
LTCH was established to care for Medicare beneficiaries requiring long-
term hospital-level care. We believe our existing policy accounts for 
the fact that an LTCH in good faith could admit a patient and provide 
some services before realizing that the beneficiary would receive more 
appropriate treatment at another site of care. But in establishing the 
SSO policy, which provided a reduced payment for cases with a LOS that 
is up to and including five-sixths of the geometric ALOS for the LTC-
DRG, it was our intent to not encourage hospitals to admit patients for 
whom a long-term hospital stay was not medically necessary and 
therefore, for whom the LTCH would not be providing complete treatment. 
We were concerned that these inappropriate admissions could be made in 
order to maximize payment (67 FR 55995). As noted previously, when this 
policy was established, at the start of the LTCH PPS for cost reporting 
periods beginning on or after October 1, 2002, nearly one-half (48.4 
percent) of all LTCH cases would have been paid as SSOs. However, we 
believed that the percentage of short-stay outliers would drop 
significantly from 48.4 percent once the LTCH PPS was implemented. We 
believe that the 37 percent of LTCH discharges (that is, more than one-
third of all LTCH patients) that the FY 2004 MedPAR identified as SSO 
cases continues to be an inappropriate number of patients being treated 
in LTCHs who most likely do not require the full measure of resources 
available in a hospital that has been established to treat patients 
requiring long-stay hospital-level care. Generally, if these patients 
required the type of care associated with LTCHs, the patients would 
most likely be in the LTCH for the duration of the LOS associated with 
the particular LTC-DRG to which the case is assigned. Therefore, we are 
concerned that the existing SSO payment adjustment at Sec.  412.529, 
which generally will pay a per discharge amount based upon the least of 
120 percent of the specific LTC-DRG per diem amount (multiplied by the 
LOS); 120 percent of the estimated costs of the case; or the full LTC-
DRG payment as specified in existing Sec.  412.529(c)(1), may 
unintentionally provide a financial incentive for LTCHs to admit 
patients not requiring the level of care available in that setting.
    In the August 30, 2002 final rule, when first we presented our 
rationale for establishing the SSO policy, we noted that since LTCHs 
are defined by statute as generally having an ALOS greater than 25 
days, we had proposed payment adjustments to make appropriate payment 
for cases that may not necessarily require the type of services 
intended to be provided at a LTCH or may have been transferred from an 
acute hospital prematurely'' (67 FR 55999). We continue to have these 
concerns, and we believe that our data indicate that after more than 3 
years of the LTCH PPS, a policy reexamination is both necessary and 
appropriate, when more than one-third of LTCH PPS patients are paid 
under the SSO provision. In order to address these concerns, we are 
proposing two specific changes to the existing SSO payment methodology 
under Sec.  412.529. Under existing policy, in general, Medicare will 
pay for a SSO case at the least of the following: 120 percent of the 
estimated costs of the case, 120 percent of the per diem LTCH PPS 
payment amount for the specific LTC-DRG multiplied by the LOS of the 
discharge, or the full LTCH PPS payment for the LTC-DRG. We believe 
that the current payment adjustment for SSO cases appears to be 
providing a financial incentive to inappropriately admit short-stay 
patients to LTCHs as evidenced by the high percentage of SSO cases. 
Consistent with the Secretary's broad authority ``to provide for 
appropriate adjustments to the long-term hospital payment system * * * 
'' established under section 123 of the BBRA as amended by section 
307(b)(1) of BIPA, we are proposing to reduce the current adjustment at 
existing Sec.  412.529(c)(1)(ii) which is based on 120 percent of the 
costs of the case to 100 percent of the costs of the case for 
discharges occurring on or after July 1, 2006 at proposed Sec.  
412.529(c)(2)(ii). We believe that by reducing the Medicare payment to 
the LTCH for a specific SSO case so that it would be equal to but not 
exceed the estimated costs incurred for that case, we may be removing 
what we believe could be a financial incentive that the current policy 
has established to treat short stay cases in LTCHs. We are not 
proposing to change the payment option of 120 percent of the per diem 
for a specific LTC-DRG multiplied by the LOS for that case because of 
the specific calculations upon which we based this aspect of the SSO 
policy adjustment. As described in detail in the FY 2003 final rule 
LTCH PPS, when we first established the SSO policy, we found that five-
sixths of the geometric ALOS would be the SSO threshold where the full 
LTC-DRG payment would be made at 120 percent. That is, by adjusting the 
per discharge payment by paying at 120 percent of the per diem DRG 
payment, once a stay reaches five-sixths of the geometric ALOS for the 
LTC-DRG, the full DRG payment will have been made. We continue to 
believe that this specific methodology, described above in this 
section, which results in a gradual increase in payment as the LOS 
increases without producing a payment ``cliff'' at any one point, 
provides a reasonable payment option under the SSO policy. (67 FR 
55997, August 30, 2002)

[[Page 4687]]

    We believe it is inappropriate that more than one-third of Medicare 
patients treated in the special category of hospitals that was 
established by the Congress, under section 1886(d)(1)(B)(iv) of the Act 
to address the treatment of patients requiring extended hospital-level 
care are actually short-stay patients, as defined in Sec.  412.529(a), 
and do not receive such extended hospital-level care. Therefore, we are 
proposing reduce the current adjustment at existing Sec.  
412.529(c)(1)(ii) from 120 percent of the costs of the case to 100 
percent of the costs of the case for discharges occurring on or after 
July 1, 2006, for LTCHs described in Sec.  412.23(e)(2)(i) resulting in 
a LTCH PPS Medicare payment equivalent to but not exceeding the 
estimated costs of the case. We believe that the proposed revision to 
the SSO payment methodology further discourages inappropriate 
admissions of these patients to LTCHs because we would be removing the 
financial incentive to admit cases that do not typically belong in 
LTCHs but would be more appropriately treated in another setting (for 
example, an inpatient acute care hospital).
    Further, since the vast majority of LTCH patients are admitted 
directly from IPPS acute care hospitals, a fact verified by our patient 
data files (National Claims History Files), a recent MedPAC Report 
(June 2003, p. 79), and by research done by the Urban Institute at the 
outset of the LTCH PPS and RTI, we believe that the admission of short-
stay patients at LTCHs may indicate premature and even inappropriate 
discharges from the referring acute care hospitals. For example, if an 
acute care hospital patient required additional inpatient services, it 
would usually be most appropriate for the acute care hospital to 
continue to treat the patient rather than discharging and admitting the 
patient to an LTCH for a short-stay episode.
    We believe that in order to remove what may be an inappropriate 
financial incentive for a LTCH to admit a short-stay case, as well as, 
to discourage LTCHs from behaving like acute care hospitals by having a 
significant number of cases with lengths of stay commensurate with 
acute care hospitals and also to discourage LTCHs from admitting 
patients that could be premature discharges from acute care hospitals, 
we are proposing in Sec.  412.529(c)(2)(iv) to add a fourth payment 
method to the three alternatives under Sec.  412.529(c) for SSO cases. 
Specifically, we are proposing to revise Sec.  412.529 to provide that 
for discharges from LTCHs described in Sec.  412.23(e)(2)(i) occurring 
on or after July 1, 2006, payment for a SSO case would be the least of 
the following: 120 percent of the per diem amount for a specific LTC-
DRG multiplied by the LOS of the discharge; 100 percent of the 
estimated costs of the case (which we are proposing in this proposed 
rule as a change from the existing 120 percent of estimated costs); the 
full LTCH PPS payment for the LTC-DRG; or a LTCH PPS payment comparable 
to the payment that would otherwise be paid under the IPPS.
    We believe that this proposed additional component to the SSO 
payment formula is particularly appropriate because it reflects our 
concern that generally, LTCHs that admit SSO patients with lengths of 
stay more typical of an acute care hospital may be, in fact, behaving 
like acute care hospitals. Therefore, we are proposing to include an 
alternative payment method under the LTCH PPS SSO adjustment that could 
result in an LTCH PPS payment to the LTCH for a SSO stay that would be 
comparable to what Medicare would pay to an acute care hospital for the 
same case. Furthermore, since over 80 percent of all LTCH patients (FY 
2003 MedPAR) are admitted from acute care hospitals to an LTCH, of 
which many become a SSO, an acute care hospital's discharge of a 
patient who is still in need of acute-level care may indicate a 
premature and inappropriate discharge from the acute care hospital, an 
inappropriate admission to the LTCH, and result in a second, 
unnecessary Medicare payment to the LTCH. We originally established a 
similar payment adjustment under the LTCH PPS at Sec.  412.534 for LTCH 
HwHs and LTCH satellites for which greater than 25 percent of its 
patients were admitted from a host hospital (69 FR 49191 through 
49214). Under that policy, unless the patient reached high cost outlier 
status at the acute care hospital prior to discharge, Medicare payments 
to the LTCH HwH or satellite for those cases in excess of the threshold 
were based upon the lesser of a payment under the LTCH PPS or an LTCH 
PPS amount equivalent to what would otherwise have been paid under the 
IPPS. This payment adjustment reflected our belief that if patient-
shifting between a host hospital and its co-located LTCH exceeded a 
specific threshold, the onsite LTCH was functioning like a de facto 
unit of the acute care hospital, a configuration not permitted by 
section 1886(d)(1)(B) of the Act, which authorizes rehabilitation and 
psychiatric units but not LTCH units. We reasoned that if the patient 
was in effect, being treated in a ``unit'' of the acute care hospital, 
it was reasonable to issue a payment methodology that took this into 
account. For LTCH HwH or satellite discharges in excess of the 25 
percent (or appropriate percentage) threshold, therefore, as specified 
in Sec.  412.534, Medicare will make a payment based upon the lesser of 
the LTCH PPS payment otherwise payable under subpart O and an amount 
under this subpart that is equivalent to an amount that would be paid 
under the IPPS.
    We believe that adapting the underlying premise of the payment 
adjustment at Sec.  412.534 to a new payment adjustment method under 
the SSO policy is particularly appropriate, since we are concerned (and 
our data seems to confirm) that LTCHs may be admitting patients that 
should otherwise be treated in acute care hospitals, as evidenced by 
lengths of stay more in keeping with an acute care hospital stay than 
the considerably longer stays characteristic of LTCHs. We believe this 
additional proposed payment method, under the LTCH PPS for SSO patients 
under which, following the procedure set forth under Sec.  412.529, the 
LTCH could receive a Medicare payment comparable to that which would 
otherwise be paid under the IPPS, is an appropriate response to the 
fact that an LTCH treating such patients may, in fact, be functioning 
like an acute care hospital.
    We are also very concerned that acute care hospitals may be 
shifting their patients to LTCHs, resulting in a high incidence of 
SSOs. This pattern may indicate a premature discharge from the acute 
care hospital (where less than a full course of treatment was 
delivered) and an unnecessary admission to the LTCH. Despite the fact 
that the payment adjustment at Sec.  412.534, based on the 25 percent 
(or applicable percentage) threshold, focused on inappropriate patient 
movement between co-located providers (69 FR 49191 through 49214), we 
do not believe that co-location is a prerequisite to inappropriate 
patient-shifting between an acute care hospital and an LTCH. As we 
discuss in section V.B. of this proposed rule, with the explosive 
growth in the numbers of free-standing LTCHs since 2004, many of which 
receive patients from a single acute care hospital, we are monitoring 
patient shifting that is occurring with growing regularity. (This issue 
is discussed in depth in section X. of this proposed rule.)
    We believe that it is essential to guard the Medicare Trust Fund 
against admission and discharge practices that could result in more 
than one payment

[[Page 4688]]

for what was essentially one episode of patient care and, as we noted 
above in this section, we are concerned that there may be a correlation 
between the fact that one-third of LTCH discharges are SSO cases and 
what, in some cases, may be inappropriate admissions of patients who 
are prematurely discharged from acute care hospitals. We would also 
note that from the outset of the LTCH PPS, in our FY 2003 final rule 
for the LTCH PPS, we stated that ``many of these [SSO] patients could 
have been treated more appropriately in an acute care hospital subject 
to the acute care hospital inpatient prospective payment system'' (67 
FR 55995). Therefore, we are proposing a fourth alternative in the SSO 
payment formula at Sec.  412.529 that is similar to the existing 
payment adjustment at Sec.  412.534, discussed in section V.B. of this 
proposed rule.
    In the discussion that follows, for the sake of clarity, we use 
phrases such as ``IPPS DRG relative weights,'' and the ``IPPS labor-
related share,'' in describing features of the IPPS that we would use 
in calculating LTCH PPS payments under this proposed new alternative 
adjustment. We want to emphasize, however, that such a payment is not 
an IPPS payment but rather, a payment under the LTCH PPS that is 
generally derived from the IPPS payment methodology. Therefore, for 
Medicare payments for SSO cases under the LTCH PPS as specified in 
proposed Sec.  412.529(c)(2)(iv), we are proposing that ``an amount 
under subpart O that is comparable to an amount that otherwise would be 
paid under the IPPS'' would be calculated based on the sum of the 
applicable operating and capital IPPS rates in effect at the time of 
the discharge from the LTCH as established in the applicable IPPS final 
rule published annually in the Federal Register. This is necessary 
since, under the IPPS, there are separate Medicare rates for operating 
(subpart D of part 412) and capital (subpart M of part 412) costs to 
acute care hospitals; while, under the LTCH PPS, there is a single 
payment for the operating and capital costs of the inpatient hospital 
services provided to LTCH Medicare patients. We are also proposing that 
``an amount under subpart O that is comparable to an amount that 
otherwise would be paid under the IPPS'' would be calculated including 
the applicable differences in resource use (that is, IPPS DRG relative 
weights), differences in area wage levels (that is, wage index), a 
cost-of-living adjustment for hospitals located in Alaska and Hawaii, 
the treatment of a disproportionate share of low income patients (DSH), 
if applicable, and an adjustment for indirect medical education (IME), 
if applicable. (We would emphasize that under this proposed policy, 
Medicare payments, payable under subpart O, would be ``comparable'' to 
what would otherwise be paid under the IPPS, rather than ``equal'' to 
an IPPS payment because, as we explain, there are specific features of 
the IPPS that do not directly translate into the LTCH PPS, so would be 
no way to establish or evaluate whether the LTCH payments are ``equal'' 
to an amount that would be paid under the IPPS. In proposing to use the 
word ``comparable,'' to describe this payment alternative to the 
existing SSO policy, we intend to make clear that such payments would 
be calculated by applying IPPS principles to achieve a close 
approximation of payments that would be made under the IPPS, 
recognizing the fact that not all components of the IPPS can be carried 
out precisely in the LTCH PPS context.
    Specifically, under this proposed policy, for payments under the 
LTCH PPS, we would calculate an amount payable under subpart O 
comparable to what would otherwise be paid under the IPPS for the costs 
of inpatient operating services which would be based on the 
standardized amount determined under Sec.  412.64(c), adjusted by the 
applicable DRG weighting factors at Sec.  412.60 as set forth at Sec.  
412.64(g). This amount would be further adjusted for different area 
wage levels using the applicable IPPS labor-related share based on the 
CBSA where the LTCH is physically located set forth at Sec.  412.525(c) 
and the IPPS wage index for non-reclassified hospitals as shown in 
Tables 4A and 4B in the annual IPPS final rule. (In the RY 2006 LTCH 
PPS final rule (70 FR 24200), we discuss the inapplicability of 
geographic reclassification procedures for LTCHs.) For LTCHs located in 
Alaska and Hawaii, we propose that this amount would also be adjusted 
by the applicable proposed COLA factor used under the IPPS published 
annually in the IPPS final rule. (We note currently that the same COLA 
factors are used under both the IPPS and the LTCH PPS.)
    We are additionally proposing that this proposed revised payment 
adjustment alternative (an amount comparable to what would otherwise be 
paid under the IPPS for the costs of inpatient operating services) 
would also include a DSH adjustment (see Sec.  412.106), if applicable, 
for discharges governed by Sec.  412.529.
    Under this proposed revision to the LTCH PPS SSO payment adjustment 
at proposed Sec.  412.529(c)(2)(iv), we are proposing that in the case 
of a LTCH that is a teaching hospital, we would determine the IME 
payment for the LTCH by imputing a limit on the number of full-time 
equivalent (FTE) residents that may be counted for IME (IME cap) based 
on the LTCH's direct GME cap (which would already have been established 
for an LTCH which had residency programs as set forth at Sec.  
413.79(c)(2)), thus calculating an IME payment for this LTCH that is in 
accord with the IPPS payment formula set forth at Sec.  412.105. We are 
adapting this methodology from the payment adjustment established for 
LTCH HwHs and LTCH satellites under Sec.  412.534 where the applicable 
payment alternative is described as an amount ``equivalent'' to what 
would otherwise be paid under the IPPS. The use of a proxy for the IME 
cap is necessary because it would not be appropriate to apply the IPPS 
IME rules literally in the context of this LTCH PPS payment adjustment. 
Under the IPPS, IME payment regulations at Sec.  412.105, limits were 
established on the number of FTE residents a hospital is permitted to 
count for IME payments based on the hospital's 1996 cost report. This 
IME FTE resident cap under the IPPS would not translate appropriately 
to an LTCH since an LTCH would not have reported any FTE residents for 
IME on its 1996 cost report. Therefore, we believe the use of the 
LTCH's direct GME cap for the purpose of calculating the payment 
adjustment alternative under proposed Sec.  412.529(c)(2)(iv) is 
reasonable since it is based on the best available data on residency 
programs at LTCHs (which could be computed from direct GME data for 
LTCHs that had residency programs). Using an imputed GME cap would 
enable us to factor an adjustment for residency programs into a 
Medicare payment under the LTCH PPS for those SSO cases where the least 
of the payment alternatives results in an amount under the LTCH PPS 
comparable to what would otherwise be paid under the IPPS. Both a DSH 
adjustment and an IME adjustment, as necessary, could be computed from 
data already collected on the LTCH's cost report.
    Under this proposed LTCH PPS payment adjustment, an amount payable 
under subpart O comparable to what would otherwise be paid under the 
IPPS would also include payment for the costs of inpatient capital-
related costs based on the capital Federal rate at Sec.  412.308(c), 
which would be adjusted by the applicable IPPS DRG weighting factors at 
Sec.  412.60 as set forth at Sec.  412.312(b). This amount would be 
further adjusted by the applicable geographic adjustment factors set 
forth

[[Page 4689]]

at Sec.  412.316, including wage index, (based on the CBSA where a LTCH 
is physically located and derived from the IPPS wage index for non-
reclassified hospitals as shown in tables 4A and 4B of the annual IPPS 
final rule) large urban location, if applicable, and the IPPS COLA 
factor used under the IPPS for LTCHs located in Alaska and Hawaii. (The 
same COLA factors are used under both the IPPS and the LTCH PPS.).
    For LTCH discharges governed by the proposed revision of the SSO 
policy under the LTCH PPS, an amount comparable to what would be paid 
under the IPPS for the inpatient capital-related costs would also 
include a DSH adjustment (Sec.  412.320), if applicable and an IME 
adjustment (Sec.  412.322), if applicable. (As with IPPS payment for 
operating costs, a DSH or an IME adjustment for the purposes of this 
proposed policy could be computed from data already collected on the 
LTCH's cost report, as necessary.)
    Under this proposed policy, an amount payable under subpart O 
comparable to what would otherwise be paid under the IPPS would equal 
the sum of the amount comparable to what would otherwise be paid under 
the IPPS for the costs of inpatient operating services and the amount 
comparable to what would be paid under the IPPS for inpatient capital-
related costs (as described previously). We note that we are proposing 
that ``a LTCH PPS payment amount comparable to what would be paid under 
the IPPS'' would not include additional payments for extraordinarily 
high cost cases under the IPPS outlier policy (Sec.  412.80(a)) since, 
under existing LTCH PPS policy, a SSO case that meets the criteria for 
a LTCH PPS high cost outlier payment at Sec.  412.525(a)(1) (that is, 
if the estimated costs of the case exceed the adjusted LTC-DRG payment 
plus a fixed loss amount) would be receive an additional payment under 
the LTCH PPS high cost outlier policy at Sec.  412.525(a) (67 FR 56026, 
August 30, 2002). For purposes of high cost outliers under the SSO 
policy, we use a fixed loss amount calculated under Sec.  412.252(a) 
and not a fixed loss amount based on Sec.  412.80(a). We propose to use 
the term ``comparable'' in the fourth payment alternative so that the 
public would realize that this payment alternative is not exactly the 
same as the one that is similarly worded in Sec.  412.534(c)(2), 
(d)(1), and (e)(1), discussed in section V.B. of this proposed rule.
    Therefore, as noted previously in this proposed rule, we are 
proposing to add an additional method to the existing payment 
alternatives (that is, the least of 120 percent of the per diem LTC-DRG 
multiplied by the number of inpatient days as specified in Sec.  
412.529(c)(2)(i), 120 percent of the costs of the case as specified in 
Sec.  412.529(c)(2)(ii), or the full LTC-DRG payment as specified in 
Sec.  412.529(c)(2)(iii)). Specifically, we are proposing in Sec.  
412.529(c)(2)(iv) that Medicare would pay an amount comparable to the 
amount that would have been paid under the IPPS for a particular case 
if that amount is lower than the existing 3 payment alternatives. 
Medicare would pay the LTCH 80 percent of the costs of the case that 
exceed the sum of the applicable option and the fixed loss amount 
determined under Sec.  412.525(a). In addition, we are proposing a 
change to Sec.  412.529(c)(2)(ii) that decreases the 120 percent of the 
costs to 100 percent of costs.
    Under existing LTCH PPS SSO policy at Sec.  412.529(c), the payment 
is ultimately based on the least of: 120 percent of the LTC-DRG 
specific per diem amount multiplied by the LOS of the discharge; 120 
percent of the cost of the case; or the full LTC-DRG. A high cost 
outlier payment could be made for a SSO stay if the total costs of the 
case exceed the least of these three options, plus the appropriate 
fixed-loss amount under Sec.  412.525. In this proposed rule, for 
reasons described previously, we have proposed to lower the 120 percent 
of costs to 100 percent, and we have also proposed a fourth alternative 
method for this formula: An LTCH PPS payment comparable to what would 
otherwise have been paid under the IPPS. We would emphasize that under 
this proposed policy we are not proposing to change the basic payment 
determinations in the existing SSO payment policy for high cost 
outliers. Therefore, as noted previously in this proposed rule, if the 
costs of the case exceeded the payment resulting from this formula plus 
the LTCH PPS fixed loss amount, Medicare payment to the LTCH for this 
case, would include high cost outlier payment set forth at Sec.  
412.525.
    Accordingly, even with the proposed additional alternative to the 
SSO payment policy at proposed Sec.  412.529(c)(2)(iv), high cost 
outlier payments for a SSO discharge would continue to be paid under 
the existing SSO policy established at the start of the LTCH PPS (for 
cost reporting periods beginning during FY 2003) where high cost 
outlier payments, based upon the use of the LTCH PPS fixed loss amount, 
were governed by Sec.  412.525.
    We note that the approach taken under Sec.  412.534 for high cost 
outliers is different than the approach that has been taken for more 
than the last 3 years with short-stay outliers that are also high cost 
outliers (67 FR 56026, 68 FR 34145, 69 FR 25689, 70 FR 24197). 
Specifically, since the beginning of the LTCH PPS, a SSO that is also a 
high cost outlier has utilized the fixed loss amount calculated under 
Sec.  412.525. Accordingly, we are not aware of any reason at this time 
to change this policy, regardless of the fact that we are now proposing 
to add a fourth alternative payment method under the SSO policy (that 
is, a payment under subpart O that is comparable to an amount otherwise 
payable under Sec.  412.1(a)). Furthermore, we believe that it is 
beneficial from an administrative efficiency perspective to maintain 
our current policy for a SSO that also hits high cost outlier status.
    We have provided that under the LTCH HwH and satellite payment 
adjustment at Sec.  412.534, payment for discharges will be ``the 
lesser of the amount otherwise payable under this subpart [subpart O] 
or the amount that is otherwise payable under this subpart that is 
equivalent to the amount that would be otherwise payable under Sec.  
412.1(a) [the IPPS].'' We acknowledge that under this policy, if 
payment is based on the latter and the case is a high cost outlier, 
Sec.  412.80 will govern the LTCH PPS payment. Therefore, if the 
estimated coast of the case exceeds the DRG payment plus the fixed loss 
amount under Sec.  412.80(a), the LTCH would receive an additional 
payment based on the high cost outlier policy under the IPPS. If 
payment is based on an amount otherwise payable under Subpart O, and 
the case is a high cost outlier, Sec.  412.525 will govern. If the 
estimated cost of the case exceeds the adjusted LTCH-DRG payment plus a 
fixed loss amount under Sec.  412.525(a), the LTCH would receive an 
additional payment based on the LTCH PPS high cost outlier policy. We 
believe that proposing the additional alternative in Sec.  
412.529(c)(2)(iv) to the payment options under the SSO policy, which, 
if applicable, could result in a high cost outlier payment determined 
under Sec.  412.525, is consistent with our existing SSO high cost 
outlier policy and the proposed policy would maintain that consistency. 
However, we are specifically asking for comments on whether we should 
use a fixed loss amount derived from the IPPS high cost outlier policy 
at Sec.  412.80(a), where the least of the four options in the rate is 
comparable to the IPPS rate in the event that a SSO case also qualifies 
for a high cost outlier payment under the LTCH PPS.
    We established special provisions for the SSO policy for subclause 
(II) LTCHs in the RY 2004 LTCH PPS final rule (68

[[Page 4690]]

FR 34147). We are proposing to exempt subclause (II) LTCHs from the 
proposed additional revisions to the SSO policy discussed previously 
until the 5th year of the phase-in for such an LTCH of the LTCH PPS 
(that is, for discharges occurring during cost reporting periods 
beginning on or after October 1, 2006). This proposed approach is 
consistent with our existing policy as it applies to subclause (II) 
LTCHs in that these LTCHs do not become subject to the specific SSO 
percentages established for subclause (I) LTCHs until cost reporting 
periods beginning on or after October 1, 2006. Therefore, since the 
percentages applied under the SSO policy for subclause II LTCHs do not 
go to 120 percent until the fifth year of the transition, the proposed 
reduction from 120 percent of the estimated costs of the case to 100 
percent of the estimated costs would not apply to a subclause (II) LTCH 
until that time, nor would the proposed additional alternative, of an 
amount payable under Subpart O comparable to the amount that would 
otherwise be paid under the IPPS, apply to discharges from a subclause 
(II) LTCH until such an LTCH's cost reporting period beginning on or 
after October 1, 2006. Therefore, under our proposed policy, we are 
proposing that SSO discharges at a subclause (II) LTCH that had a cost 
reporting period beginning on January 1, for example, would be subject 
to all of the four payment alternatives (including the proposed 
reduction to 100 percent of costs and the proposed addition of option 
of ``a payment comparable to what would otherwise have been paid under 
the IPPS'') for discharges occurring on or after the start of its 5th 
year of the transition on January 1, 2007.
    Our proposal to exempt subclause (II) LTCHs from the proposed 
revisions to the SSO policy at Sec.  412.529(c)(2) until cost reporting 
periods beginning on or after October 1, 2006 is consistent with our 
understanding of Congressional intent in establishing this special 
category of LTCHs in section 4417(b) of the BBA, which states that 80 
percent of the annual Medicare inpatient discharges, in such a 
subclause (II) LTCH, in the 12-month reporting period ending in Federal 
FY 1997 would have had principal diagnosis that reflects a finding of 
neoplastic disease. The Congress, in enacting subclause II, provided an 
exception to the general definition of LTCHs under subclause I. In the 
RY 2004 LTCH PPS final rule (68 FR 34148), we evaluated the SSO policy 
for subclause II LTCHs, and we noted that the unique Congressional 
mandate set forth in section 1886(d)(1)(B)(iv)(II) of the Act 
circumscribes such a LTCHs' admission policies to the extent that it is 
being identified as a LTCH in order to provide a particular type of 
service (for which the ALOS is greater than 20 days) to a particular 
population (at least 80 percent have a principal diagnosis of 
neoplastic disease). We stated that we believed that a LTCH in this 
category might not be able to readily address the type of patients and 
the costs it incurs for those patients as would LTCHs described under 
subclause I. We believed that it is necessary to adjust the short stay 
policy for subclause (II) LTCHs during the 5-year transition period, so 
that a LTCH of this type could continue to serve its community, as 
intended by the Congress (68 FR 34148).
    We continue to believe that hospitals fitting this description 
fulfill a unique and vital service for certain Medicare beneficiaries. 
We further believe, as we discussed in significant detail in the RY 
2004 final rule, that it was necessary to temporarily adjust the short 
stay policy for subclause (II) LTCHs during the 5-year transition 
period, so that an LTCH of this type could continue to serve its 
community as they adjust their behavior. We also stated in the FY 2004 
final rule that we expected that during this 5-year period, the 
subclause (II) LTCHs will make every attempt to adopt the type of 
efficiency enhancing policies that generally result from the 
implementation of prospective payment systems in other health care 
settings (69 FR 34148). Therefore, we are proposing that hospitals that 
qualify as subclause (II) LTCHs would become subject to the new 
proposed payment options for SSO discharges, when a subclause (II) LTCH 
would also become fully subject to the general SSO policy at Sec.  
412.529, which would be for discharges occurring in the cost reporting 
period beginning on or after October 1, 2006.
b. Proposed Changes to the Determination of Cost-to-Charge Ratios 
(CCRs) and Reconciliation of SSO Cases
    In the June 9, 2003 IPPS outlier final rule (68 FR 34507), we 
revised the short-stay policy at Sec.  412.529 (and the high-cost 
outlier policy at Sec.  412.525(a)) because, as we discussed above in 
this section, we believed that the SSO (and high cost outlier) policy 
are susceptible to the same payment vulnerabilities that became evident 
under the IPPS, and therefore, merited revision. Therefore, in the 
regulations under existing Sec.  412.529(c)(5)(ii) and (iii), we 
established a policy for the determination of LTCH CCRs and the 
reconciliation of SSO payments, for discharges occurring on or after 
August 8, 2003 (Sec.  412.529(c)(5)(ii)) and October 1, 2003 (Sec.  
412.529(c)(5)(iii)), respectively. (As noted above in this section, in 
that same final rule, we established the same changes to the high-cost 
outlier policy at existing Sec.  412.525(a)(4)(ii) and (iii).)
    As we discuss in section IV.D.3.b. of this preamble, we are 
proposing to revise the existing regulations at Sec.  412.525(a)(4) to 
codify in subpart O of part 42 of the CFR 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, and the provisions governing the reconciliation of high 
cost outlier payments. We are proposing these changes, as we discuss in 
greater detail below in this section, because we believe that such 
proposed changes would be more consistent with the LTCH PPS single 
payment rate, and because we believe it would be more appropriate and 
administratively simpler to include the regulatory provisions that 
pertain only to LTCHs for the determination of LTCH PPS outlier 
payments applicable under the LTCH PPS regulations in subpart O of part 
42 of the CFR (as opposed to subpart A). Since CCRs are also used in 
determining SSO payments under Sec.  412.529, we are proposing, under 
the broad authority of section 123 of the BBRA and section 307(b)(1) of 
BIPA, to revise Sec.  412.529(c) consistent with the proposed changes 
to Sec.  412.525(a)(4) discussed in section IV.D.3. of this preamble.
    Specifically, we are proposing that in Sec.  
412.529(c)(4)(iv)(C)(2) would specify, that for discharges occurring on 
or after October 1, 2006, if, among other things, 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 CCR 
(established and published annually by CMS)), the FI may use a 
Statewide average CCR (also established annually by CMS). (We note 
that, similar to our current policy, we are also proposing under 
proposed Sec.  412.529(c)(4)(iv)(C) that the FI may use a Statewide 
average CCR in two other circumstances, which are discussed in greater 
detail below in this section.) This proposed change is similar to our 
existing policy (established in the June 9, 2003 IPPS high cost outlier 
final rule (68 FR 34494)) and the proposed change to the LTCH PPS high 
cost outlier policy discussed previously in this proposed rule. Under 
proposed Sec.  412.529(c)(4)(iv)(C)(2), for discharges

[[Page 4691]]

occurring on or after October 1, 2006, we are proposing that we would 
determine the single ``total'' CCR ceiling (as we proposed under the 
high cost outlier policy at proposed Sec.  412.525(a)(4)(iv)(C)(2), as 
explained in section IV.D.3.b. of this preamble) by first calculating 
the total (that is, operating and capital) CCR for each hospital and 
then determining the average total CCR for all hospitals. The total 
LTCH CCR ceiling would then be established at 3 standard deviations 
from that average total CCR rather than determining the LTCH CCR 
ceiling by adding together the separate IPPS operating CCR ceiling and 
IPPS capital CCR ceiling as we do under our current policy. (We note, 
as discussed in greater detail below in this section, in conjunction 
with this proposed change in the calculation of the LTCH CCR ceiling, 
we are also proposing a change in our methodology for calculating the 
applicable Statewide average CCRs under the LTCH PPS to be based on 
``total'' hospital-specific CCRs.) Specifically, we are proposing under 
the SSO policy at Sec.  412.529(c)(4)(iv)(C), to 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 the single LTCH ``total'' CCR ceiling based on IPPS hospital-
specific total (operating and capital) Medicare costs and charges, as 
explained above in this section. In addition, under this proposal, the 
total CCR ceiling would continue to be published annually in the IPPS 
proposed and final rules, and therefore, the public should continue to 
consult the annual IPPS proposed and final rules for changes to the 
applicable LTCH PPS Statewide average total CCRs that would be 
effective for discharges occurring on or after October 1, 2006 (since, 
under this proposal the current applicable combined Statewide average 
CCRs, 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.) The rationale for this 
proposed change to the SSO policy at proposed Sec.  
412.529(c)(4)(iv)(C) mirrors the rationale provided for the proposed 
changes to the high cost outlier policy at proposed Sec.  
412.525(a)(4)(iv)(C) discussed in section IV.D.3.b. of this preamble.
    Also consistent with the proposed changes to Sec.  
412.525(a)(4)(iv), under the broad authority of section 123 of the BBRA 
and section 307(b)(1) of BIPA, we are also proposing at Sec.  
412.529(c)(4)(iv)(A) through (C), for discharges occurring on or after 
October 1, 2006, to codify in subpart O of part 42 of the CFR the 
remaining LTCH PPS SSO policy changes concerning the determination of 
LTCHs' CCRs 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 in order to more precisely describe the 
application of those policies as they relate LTCHs. Specifically, 
similar to our current policy and consistent with the proposed changes 
to the high cost outlier policy at Sec.  412.525(a)(4) discussed 
previously in this proposed rule, we are proposing in Sec.  
412.529(c)(4)(iv)(C) to specify that the FI 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 of this chapter); (2) LTCHs whose CCR is in excess of 
the LTCH CCR ceiling (that is, 3 standard deviations above the 
corresponding national geometric mean total CCR); and (3) other LTCHs 
for whom data with which to calculate a CCR is not available (for 
example, missing or faulty data). (As we noted in section IV.D.3.b. of 
this preamble and consistent with our current regulations, either CMS 
or the hospital may request the use of a different (higher or lower) 
CCR based on substantial evidence that such a CCR more accurately 
reflects the hospital's actual costs and charges. This applies to new 
(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 a new 
LTCH provider number). Rather, the cost and charge data from the IPPS 
hospital's cost report (even if it is more or less than a 12-month cost 
reporting period) would be used to determine the LTCH's CCR.)
    Also similar to our current practice and consistent with the 
proposed change to the high cost outlier policy discussed previously in 
this proposed rule, under Sec.  412.525(c)(4)(iv)(C), for discharges 
occurring on or after October 1, 2006, we are proposing that we would 
annually establish Statewide average ``total'' CCRs for use under the 
LTCH PPS based on IPPS data by first calculating the total (that is, 
operating and capital) CCR for each hospital and then determining the 
average total CCR for all hospitals in each State rather than assigning 
the combined (operating and capital) Statewide average CCRs, as we do 
under our current policy. Specifically, in proposing to compute 
Statewide average total CCRs, we would use the same IPPS CCR data that 
we currently use to annually establish the separate IPPS operating 
Statewide average CCRs and capital Statewide CCRs (that we add together 
under our current policy to determine the applicable ``combined'' 
Statewide average CCR for LTCHs) to compute Statewide average total 
CCRs as explained above in this section. In addition, under this 
proposal, the Statewide average total CCRs would continue to be 
published annually in the IPPS proposed and final rules and therefore, 
the public should continue to consult the annual IPPS proposed and 
final rules for changes to the applicable LTCH PPS Statewide average 
total CCRs that would be effective for discharges occurring on or after 
October 1, 2006 (since, under this proposal, the current applicable 
combined Statewide average CCRs, 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).
    Our rationale for this proposed change to the SSO policy at 
proposed Sec.  412.529(c)(4)(iv)(C) mirrors the rationale provided for 
the proposed changes to the high cost outlier policy at proposed Sec.  
412.525(a)(4)(iv)(C) discussed in greater detail in section IV.D.3.b. 
of this preamble.
    In addition, we are proposing under Sec.  412.529(c)(4)(iv)(B), 
similar to our current policy and consistent with the proposed change 
to the high cost outlier policy discussed above, for discharges 
occurring on or after October 1, 2006, that the CCR applied at the time 
a claim is processed would be based on either the most recent settled 
cost report or the most recent tentative settled cost report, whichever 
is from the latest cost reporting period. Furthermore, we are proposing 
under Sec.  412.529(c)(4)(iv)(A) that CMS may specify an alternative to 
the CCR computed from the most recent settled cost report or the most 
recent tentative settled cost report, whichever is later, or a hospital 
may also request that its FI use a different (higher or lower) CCR 
based on substantial evidence presented by the hospital. As noted 
previously in this proposed rule, these proposed revisions to our 
policy

[[Page 4692]]

for determining a LTCH's CCR for discharges occurring on or after 
October 1, 2006 under proposed revised Sec.  412.529(c)(4)(iv)(A) and 
(B) are similar to our existing policy established in the June 9, 2003 
IPPS high cost outlier final rule (68 FR 34506 through 34513) and 
consistent with the proposed changes to the high cost outlier policy 
previously discussed in this proposed rule.
    Furthermore, similar to our current policy and consistent with the 
proposed change to the high cost outlier policy discussed previously in 
this proposed rule , under the broad authority under section 123 of the 
BBRA as amended by section 307(b) of BIPA, we are also proposing in 
under Sec.  412.529(c)(4)(iv), for discharges occurring on or after 
October 1, 2006, to codify in the LTCH PPS regulations (subpart O of 
part 42 of the CFR) the outlier reconciliation provisions that were 
established in the June 9, 2003 IPPS high cost outlier final rule (68 
FR 34506 through 34513) including proposed editorial clarifications to 
those provisions (which are the same as the proposed changes to the 
high cost outlier policy discussed above in section IV.D.3.d. of the 
preamble of this proposed rule). Specifically, under Sec.  
412.529(c)(4)(iv)(D), similar to our current policy and consistent with 
the proposed change to the high cost outlier policy, we are proposing 
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, at 
proposed Sec.  412.529(c)(4)(iv)(E), similar to our current policy and 
consistent with the proposed change to the high cost outlier policy, we 
are proposing 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. This adjustment would be based upon a widely available 
index that would be established in advance by the Secretary and would 
be applied from the midpoint of the cost reporting period to the date 
of reconciliation. Our rationale for these proposed changes to the SSO 
policy at proposed Sec.  412.529(c)(4)(iv)(D) and (E) mirrors the 
rationale provided for the proposed changes to the high cost outlier 
policy at proposed Sec.  412.525(a)(4)(iv)(D) and (E), discussed in 
greater detail in section IV.D.3.d. of this preamble.
2. The 3-Day or Less Interruption of Stay
    In the RY 2005 LTCH PPS final rule, we revised the definition of an 
``interruption of a stay'' at Sec.  412.531(a) by establishing two 
distinct categories, ``[a] 3-day or less interruption of stay'' and 
``[a] greater than 3-day interruption of stay'' at Sec.  412.531(a)(2). 
The payment features of the ``greater than 3-day'' policy itself apply 
beginning with day 4 once the ``3-day or less'' policy no longer 
applies.
    The 3-day or less interruption of stay policy is defined at Sec.  
412.531(a)(1) as ``a stay at a LTCH during which a Medicare inpatient 
is discharged from the LTCH to an acute care hospital, IRF, SNF, or the 
patient's home and readmitted to the same LTCH within 3 days of the 
discharge from the LTCH. The 3-day or less period begins with the date 
of discharge from the LTCH and ends not later than midnight of the 
third day.'' As discussed in detail in the RY 2005 LTCH PPS final rule 
(69 FR 25691 through 25700), there are several components to the 
payment for the 3-day or less interruption of stay.
    First, subject to Sec.  412.531(b)(1)(ii)(A)(1) and 
(b)(1)(ii)(A)(2), only one LTC-DRG payment will be made to the LTCH for 
the patient who is discharged from the LTCH to an acute care hospital, 
IRF, SNF, or patient's home and readmitted to the same LTCH within 3 
days. Secondly, under Sec.  412.531(b)(1)(ii)(A)(2), any off-site tests 
or medical treatment, either inpatient or outpatient, provided at an 
acute care hospital or an IRF, or care at a SNF and that are not 
otherwise excluded under Sec.  412.509(a), must be provided by the LTCH 
``under arrangements'' if the patient is readmitted to the LTCH within 
3 days. We established a time-limited specific exception to the ``under 
arrangements'' requirement during the RY 2005 LTCH PPS, at Sec.  
412.531(b)(1)(ii)(A)(1), in the event that the treatment was grouped to 
a surgical DRG under the IPPS at an acute care hospital (69 FR 25696 
through 25700).
    We also stated that in addition to having sufficient data to decide 
upon continuing the exception, we will evaluate whether additional 
refinements to the overall 3-day or less interruption of stay policy 
were warranted (69 FR 25697). In the RY 2006 LTCH PPS final rule, we 
extended the surgical-DRG exception to the 3-day or less interruption 
of stay policy because, as we stated, ``[t]he 3-day interruption of 
stay policy was first implemented on July 1, 2004, and, therefore, we 
do not yet have sufficient data to accomplish the above evaluations * * 
* '' We continued, ``we will be analyzing claims data over the next 
year to determine whether the surgical DRG exception to the `under 
arrangements' feature of the 3-day or less interrupted stay policy is 
actively accomplishing our goal of reducing unnecessary Medicare 
payments and to deter inappropriate Medicare payments while not 
compromising beneficiary access to medically necessary services. We 
believe that we will have sufficient data to evaluate continuation of 
the exception and also whether additional refinements to the overall 3-
day or less interruption of stay policy are warranted'' (70 FR 24206).
    We also specified that we were particularly interested in analyzing 
data from LTCHs to determine whether there was a significant increase 
in interruptions of 4 days since the establishment of the policy. To 
the extent interruption of stay had increased to at least 4 days (one 
day past the 3-day threshold that would prevent the 3-day or less 
policy from being triggered), we believed that this behavior could 
indicate inappropriate efforts to side-step the provisions of our 3-day 
or less interruption of stay policy.
    As part of our on-going monitoring program (as discussed in Section 
X. of this proposed rule), ORDI analyzed claims from the MedPAR files 
for LTCH discharges from July 1, 2004 through June 30, 2005 and 
performed the data analysis necessary for evaluating the impact of the 
surgical DRG exception to the 3-day or less interruption of stay 
policy. As shown in Table 10, the data revealed the following for RY 
2005 LTCH PPS.

                                Table 10
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Total LTCH discharges..........................                  120,895
Total covered charges..........................        $8,694,137,026.00
Average covered charge.........................               $71,855.00
Total cases assigned an IPPS Surgical DRG......                      459

[[Page 4693]]

 
Average covered charge for:
    Non-surgical DRGs..........................               $18,103.00
    Surgical DRGs..............................                  $22,429
Total covered charges for surgical stays were..              $10,294,925
------------------------------------------------------------------------

    --The 459 cases that were governed by the surgical DRG exception 
represented 0.003 percent of total LTCH discharges and the total 
covered charges for those surgical DRGs, $10,294,925, represented 0.1 
percent of covered charges to LTCHs for RY 2005. Furthermore, the data 
revealed that the median value of the covered charges for the surgical 
DRGs at the acute care hospitals were $14,900. In addition, for FY 
2004, 57 percent of the covered charges were below $21,720 and 90 
percent were below $33,679.
    These data do not convince us that a continuation of the surgical 
DRG exception to the 3 day or less interruption of stay policy is 
warranted. We believe that the numbers cited above support the 
following conclusions:
    <bullet> The surgical cases that fell within this exception are 
present in only a small fraction of LTCH hospitalizations and that 
therefore, they were neither numerous nor would they be significantly 
costly for LTCHs to cover under arrangements;
    <bullet> The surgical DRGs for which Medicare claims were submitted 
by the acute care hospital appear to support, in large part, our 
original hypothesis (that if a LTCH patient was discharged to an acute 
care hospital for only 1, 2, or 3 days, followed by a readmission to 
the LTCH, there could be reason to believe that the treatment 
delivered, even if it was grouped to a surgical DRG, was not a major 
procedure because of the relatively short LOS, and, therefore, should 
have been provided ``under arrangements.'') A reasonable and systematic 
examination of a subset of the above noted 459 surgical DRGs 
additionally revealed the following:
    <bullet> Of 47 cases governed by the exception and for which 
Medicare made an additional surgical DRG payment to the acute care 
hospital, in over half of these cases, the entire stay in the LTCH was 
also grouped to a surgical LTC-DRG. In 10 of these cases, the IPPS DRG 
and the LTC-DRG were the same. This indicates that at least in these 10 
cases, the LTCH claim included the procedure that was delivered at the 
acute care hospital (for which Medicare issued an additional payment to 
the IPPS) and is strongly suggestive of poor documentation in the 
medical record, poor coding, or gaming. Since LTCHs typically do not 
perform significant surgical procedures, three examples of additional 
irregularities are as follows:

--LTC-DRG 468, ``extensive OR procedures unrelated to principal 
diagnosis,'' with DRG 478, ``other vascular procedures w/cc'' at the 
acute care hospital;
--LTC-DRG 148, small and large bowel procedures w/cc at the LTCH and 
DRG 442 ``other OR procedures with injuries w/cc'' at the acute care 
hospital.
--LTC-DRG 76, other respiratory system OR procedures with CC at the 
LTCH and DRG 415, O.R. procedure for infectious and parasitic diseases 
at the acute care hospital.
    <bullet> The specific surgical DRGs into which the acute care 
treatments were grouped appear to arise directly from the principle 
diagnoses at the LTCH, a concern that we originally stated in the 
January 30, 2004 proposed rule for the LTCH PPS when we described the 
``under arrangements'' feature of the proposed 3-day or less 
interruption of stay policy (69 FR 4771).
    Table 11 shows examples drawn from the above cited subset of claims 
for July 1, 2004 through June 30, 2005.

                                Table 11
------------------------------------------------------------------------
                LTC-DRG                                DRGs
------------------------------------------------------------------------
182 (Esophagitis gastroenteritis, and    17 Other digestive system
 miscellaneous other digestive            operating room procedures.
 disorders >17 w/cc.
271 Skin ulcers........................  270 Other skin, subcutaneous
                                          tissue and breast procedures w/
                                          cc.
348 Prostatitis........................  336 Trans-urethral
                                          prostatectomy.
87 Pulmonary edema and respiratory       55 Miscellaneous ENT, mouth, or
 failure.                                 throat procedures.
418 Post-operative and post traumatic    415 Operating room procedure
 infections.                              for infectious or parasitic
                                          diseases.
144 Other circulatory system diagnosis   120 Other circulatory system
 w/cc.                                    operating room procedures.
------------------------------------------------------------------------

    The basic premise of a PPS recognizes that Medicare pays hospitals 
an amount per discharge based on the average costs of delivering care 
for that diagnosis (which is assigned a DRG), and some cases require 
more hospital resources to be expended, where others, require less. 
Therefore, in some cases, Medicare payments will be lower than the 
hospital's costs but in other cases, the payments will exceed the 
costs. In the January 30, 2004 LTCH PPS proposed rule, we stated that 
surgical treatment that is directly related to the principle diagnosis 
at the LTCH and which only required 3 days or less of care at the acute 
care hospital, should be provided by the LTCH either directly or 
``under arrangements'' since Medicare payment to the LTCH for this 
particular case was ``payment in full'' as specified in Sec.  
412.509(b) (69 FR 4771). It has been standard Medicare PPS policy for 
over two decades that the LTCH hospitalization, the surgical treatment 
arising from this hospitalization, and the post-operative stay at the 
LTCH are to be viewed as one episode of care and therefore, the LTC-DRG 
payment would be adequate compensation for the entire episode. (In 
fact, when LTCHs were paid under the reasonable-cost based TEFRA 
payment policy--subject to hospital-specific ceilings or `target 
amounts'--prior to the FY 2003 implementation of the LTCH PPS, the 
``under arrangements'' policy, enabled LTCHs to include the costs of 
these off-site treatments on Medicare claims, thereby resulting in 
higher TEFRA target amounts.) However, when we restated the ``under 
arrangements'' policy for the 3-day or less interruption of stay, and 
proposed its codification in the RY 2005 proposed rule for the LTCH 
PPS, in response to comments received on the January 30, 2004 proposed 
rule, we did agree to establish a 1-year exception to the ``under 
arrangements'' feature of the 3-day or less interruption of stay policy 
for cases that grouped to a surgical DRG

[[Page 4694]]

during an intervening acute care hospitalization. We subsequently 
extended this exception for an additional year in order to gather 
sufficient data with which to determine the value of retaining this 
exception to the general policy.
    Therefore, based on the above data analysis and under the broad 
discretionary authority granted by section 123 of the BBRA as amended 
by section 307(b) of the BIPA for the Secretary for the development and 
implementation of the LTCH PPS, (including the ability to make 
appropriate adjustments), we are proposing not to renew the surgical-
DRG exception to interrupted stay of 3 days or less policy for LTCH PPS 
RY 2007. Under Sec.  412.531, with the proposed sunsetting of this 
exception for LTCH PPS RY 2007, treatment at an acute care hospital 
that was grouped to a surgical DRG would be considered part of the LTCH 
stay and paid for by the LTCH ``under arrangements.'' (see Sec.  
412.509(c)). Our analytic sample of LTCH cases that included a 3 day or 
less interruption of stay that was governed by the surgical DRG-
exception, indicates that at least one-half of the LTCH claims 
themselves included surgical care, despite the patient's discharge to 
the acute care hospital for treatment that was grouped to a surgical 
DRG and for which a separate claim was submitted to Medicare by the 
acute care hospital. Since typically, LTCHs do not perform significant 
surgical procedures, upon analyzing the data, CMS coders have suggested 
that some of the LTCH claims may inappropriately be including the 
surgical procedure performed during the prior acute care stay, 
complications from which led to the LTCH admission. Alternatively, if 
LTCHs are presently coding for the surgical procedures that are being 
delivered in the acute care hospital during a 3-day or less 
interruption of stay, in many of these cases they should be paying for 
this treatment ``under arrangements.'' Furthermore, in the cases where 
both the same DRG is reported by both the LTCH and the acute care 
hospital treating the patient during the 3 day or less interruption, 
Medicare may be paying twice for the same treatment. In any event, the 
above scenarios are indicative of poor documentation in the medical 
record, poor coding, or gaming of the Medicare system.
    Therefore, we are proposing to discontinue this policy because we 
do not believe that the surgical exception to the 3-day or less 
interruption of stay policy is ``* * * actively accomplishing our goal 
of reducing unnecessary Medicare payments and * * * deter[ing] 
unnecessary inappropriate Medicare payments while not compromising 
beneficiary access to medically necessary services'' (70 FR 24206).
    However, there were cases among those that we reviewed, that may 
have been accurately coded, and that actually represented a LTCH 
patient whose LTCH treatment was interrupted by a surgery which 
entailed a 3-day or less inpatient stay at an acute care hospital for a 
problem unrelated to the on-going treatment at the LTCH. Once the 
proposed sunsetting of the surgical DRG exception goes into effect, an 
LTCH will be responsible for paying for surgical cases performed at an 
acute care hospital ``under arrangements'' but at that point, will also 
be able to include that surgical procedure on the claim that will be 
submitted to Medicare for the entire stay. Our coders tell us that the 
presence of a significant surgical procedure on the claim may impact 
the LTC-DRG to which a case is assigned by the GROUPER software used by 
the FI in determining the amount that Medicare will pay for that case. 
However, there may be situations where this does not occur and 
inclusion of the surgical procedure does not result in grouping the 
case to a higher-weighted LTC-DRG (and thus increase the Medicare 
payment). In these cases, we would emphasize, that, since, as noted 
previously, the ``under arrangements'' policy was a feature of the 
previous TEFRA payment policy, prior to the FY 2003 implementation of 
the LTCH PPS, and costs of off-site surgeries were typically included 
in LTCH claims, so that to the extent providers included those costs on 
their claims, that these costs were included in the establishment of 
the LTCH PPS base rate, which section 123(a)(1) of the BBRA required to 
be budget neutral for FY 2003, to what Medicare would pay had the PPS 
not been implemented.
    We would further note that we do not believe that the numbers of 
cases nationwide that would fall within the surgical DRG exception 
would represent a significant financial burden for LTCHs to absorb over 
a cost-reporting period, given the nature of the LTCH PPS.
    We also believe, that the LTCH PPS high cost outlier policy at 
Sec.  412.525(a) will provide somewhat of a financial cushion for the 
LTCH in those very few cases where a LTCH patient whose hospitalization 
at the LTCH was interrupted for 3 days or less for a very costly 
surgical treatment at an acute care hospital, in the same way that it 
presently does if costs for a costly non-surgical inpatient or 
outpatient treatment during a 3 day or less interrupted stay at an 
acute care hospital, an IRF, or for care at a SNF, result in high cost 
outlier status for that case at the LTCH. Accordingly, we are not 
proposing to extend this exception because we believe that our analysis 
of the data from the MedPAR files from LTCH discharges occurring from 
July 1, 2004 through June 30, 2005 indicates that the exception does 
not appear to have an overall beneficial effect on the program nor 
would its absence have a strong negative impact on LTCHs.
    Our further examination of the subset of the data indicates that 
the exception may be fostering confusion, perpetuating poor coding, and 
even encouraging gaming by creating a distinction within the well-
established Medicare ``under arrangements'' policy between surgical and 
non-surgical procedures and treatments delivered during an episode of 
hospital-level care. Moreover, we have discovered many LTCHs are 
including the surgical procedures performed at the acute care hospital 
during the interruption, in their claims and therefore the LTCH 
hospitalizations are being grouped to surgical DRGs while claims for 
what appear to be the same surgeries are also being submitted by acute 
care hospitals. Use of the same surgical DRG in both the LTCH's claim 
for the case and the acute care hospital's claims for the surgery in 
some of these cases indicates that Medicare may be paying twice for the 
exact same operation, a situation directly contravened by sections 
1862(a)(14) and 1861(w)(1) of the Act, Sec.  411.15, Sec.  412.509 and 
one that may involve fraud and abuse issues.
    In the RY 2006 LTCH PPS final rule (70 FR 24206), we also expressed 
concerns about the whether our data would reveal an increase in the 
numbers of interruptions of 4 days indicating an effort by certain 
LTCHs to side-step the ``under arrangements'' provisions of our 3-day 
or less interruption of stay policy. Our data revealed that there were 
1,076 4-day stays at acute care hospitals following a LTCH 
hospitalization during the 2005 rate year, of which 528 (just under 
half) returned for further treatment to the LTCH following the 4-day 
interruption. If the interruption in an LTCH patient's stay exceeds 3 
days, under existing policy at Sec.  412.531(b)(1)(ii)(B)and Sec.  
412.531(c), payment would be governed by the greater than 3-day or 
interruption of stay policy at Sec.  412.531(b) and Medicare would 
generate a separate payment to an intervening provider where the 
patient received treatment or care, thus discharging the LTCH from 
responsibility to pay for the acute care services ``under 
arrangements.''

[[Page 4695]]

Furthermore, an interruption in a LTCH stay in excess of 3 days, where 
the patient returns home but still receives outpatient treatment prior 
to returning to the LTCH, would result not only in separate Medicare 
payments for the outpatient care but would also in an additional 
discharge payment to the LTCH since the greater than 3-day interruption 
of stay policy only applies to intervening acute care hospital, IRF, or 
SNF stays. We will be evaluating data from RY 2004 and RY 2005 on 
Medicare payments for services or care delivered during LTCH 
interruptions of stay of 4 days that would otherwise have been governed 
by the ``under arrangements'' feature of the 3-day or less interruption 
of stay policy at Sec.  412.531(b)(1)(ii)(A)(2) to determine whether an 
additional day is being arbitrarily added to the interruption prior to 
readmittance to the LTCH for purposes of thwarting the goal of the 
policy. We believe it may be appropriate in the future to propose a 
revision to the 3-day interruption provision and to establish a 4-day 
threshold.

B. Special Payment Provisions for LTCH Hospitals Within Hospitals and 
LTCH Satellites

    In the IPPS final rule for FY 2005, when we established the special 
payment provisions at Sec.  412.534 for LTCHs that were HwHs or were 
satellites of LTCHs, we were seeking, in part, to address the on-going 
proliferation of LTCHs that were HwHs or satellites. (OSCAR files 
report that there were 105 LTCHs in 1993, of which 10 were HwHs. In 
October 2005, there are 373 LTCHs, many of which are HwHs.) We were 
particularly concerned with patient shifting between the host hospitals 
and the LTCH HwH or satellite for financial rather than for medical 
reasons (69 FR 49191) and with the resulting inappropriate increased 
cost to the Medicare system.
    In that PPS final rule, we quoted the FY 1995 IPPS final rule where 
we first discussed the concern that LTCH HwHs were, in effect, 
operating as step-down units of acute care hospitals. We explained that 
this was inconsistent with the statutory framework and that such a 
configuration could lead to two Medicare bills being submitted and paid 
(one from the acute care hospital and the other from the LTCH) for what 
was essentially one episode of care. (69 FR 49191, 59 FR 45389) When we 
established the separateness and control criteria for LTCH HwHs at 
Sec.  412.22(e) in the FY 1995 IPPS final rule, our main objective was 
to protect the integrity of the IPPS by ensuring that those costly, 
long-stay patients who could reasonably continue treatment in that 
setting would not be unnecessarily discharged to an onsite LTCH, a 
behavior that would skew and undermine the Medicare IPPS DRG system. We 
explained that the Federal standardized payment amount for the IPPS was 
based on the average cost of an acute care patient across all acute 
care hospitals. This assumes that, on average, both high-cost and low-
cost patients are treated at a hospital. Although Medicare might pay a 
hospital less than was expended for a particular case, over a period of 
time, the hospital would also receive more than was expended for other 
cases. However, an acute care hospital that consistently discharges 
higher cost patients to a post-acute care setting for the purpose of 
lowering its costs undercuts the foundation of the IPPS DRG system, 
which is based on averages. In this circumstance, the hospital 
inappropriately would have incurred lower costs under the IPPS because 
the course of acute treatment was not completed and the hospital did 
not incur those additional costs for the remainder of the patient's 
stay at the IPPS acute care hospital. Once that patient is discharged 
from the IPPS acute care hospital to the LTCH, the patient, still under 
active treatment for an acute illness, will be admitted to a LTCH, 
thereby generating a second admission and Medicare payment that would 
not have taken place but for the fact of co-location (59 FR 45389).
    As explained previously, there was and continues to be concern that 
the LTCH HwH/host configuration could result in patient admission, 
treatment, and discharge patterns that are guided more by attempts to 
maximize Medicare payments than by patient welfare. In order to 
establish clear division between a host hospital and an on-site LTCH 
where the linking of an IPPS hospital and a LTCH could lead to two 
Medicare payments for what was essentially one episode of patient care, 
we issued ``separateness and control'' regulations in that FY 1995 IPPS 
Final Rule at (former) Sec.  412.23(e), for LTCHs that were seeking to 
co-locate with acute care hospitals as HwHs (59 FR 45390). In the 
ensuing decade, we revisited the issue of HwHs several times (for 
example, 60 FR 45836, 62 FR 46012, 67 FR 56010, 68 FR 45462), during 
which we clarified and amplified the separateness and control 
requirements. In the FY 1998 IPPS final rule, we extended the 
application of these rules beyond LTCHs to include other classes of 
facilities that might seek exclusion from the IPPS as HwHs, such as 
IRFs (although the vast majority of HwHs have continued to be LTCHs) 
(62 FR 46014). Additionally, although our original regulations for HwHs 
focused solely on the relationship between a LTCH HwH and an acute care 
host, and this is still, by far, the most common configuration, nothing 
in the regulations precludes other types of hospitals, for example, an 
IRFs from establishing HwHs (69 FR 49198).
    In addition, in the FY 1998 final rule, we established a 
``grandfathering'' provision for HwHs in existence prior to September 
30, 1995 at Sec.  412.22(f), and in the FY 2004 IPPS final rule, we 
clarified and codified the requirements for ``grandfathered'' HwHs (68 
FR 45463). We believed at that time that these rules were sufficient 
solutions to our concerns about LTCH HwHs functioning as long-stay 
units of acute care hosts.
    Therefore, prior to FY 2005, a HwH was required to meet the 
separateness and control criteria set forth at Sec.  412.22(e). In 
order to be excluded from the IPPS, the HwH had to have a separate 
governing body, a separate chief medical officer, a separate medical 
staff, and a separate chief executive officer. Regarding the 
performance of basic hospital functions (former Sec.  412.22(e)(5)), 
the hospital had to meet at least one of the following criteria: (1) 
The hospital performs the basic functions through the use of employees 
or under contracts or other agreements with entities other than the 
hospital occupying space in the same building or on the same campus, or 
a third entity that controls both hospitals; (2) for the same period of 
at least 6 months immediately preceding the first cost reporting period 
for which exclusion is sought, the cost of the services that the 
hospital obtained under contracts or other agreements with the hospital 
occupying space in the same building or on the same campus, or with a 
third entity that controls both hospitals, is no more than 15 percent 
of the hospital's total inpatient operating costs, as defined in Sec.  
412.2(c) (that is, inpatient operating costs include operating costs 
for routine services, such as costs of room, board, and routine nursing 
services; operating costs for ancillary services such as laboratory or 
radiology; special care unit operating costs; malpractice insurance 
costs related to serving inpatients; and preadmission services); or (3) 
for the same period of at least 6 months immediately preceding the 
first cost reporting period for which exclusion is sought, the hospital 
had an inpatient population of whom at least 75 percent were referred 
to the hospital from a source other than another hospital occupying 
space in the same

[[Page 4696]]

building or on the same campus or with a third entity that controls 
both hospitals.
    It was our experience that the vast majority of HwHs elected to 
meet the second of the three criteria at Sec.  412.22(e)(5), that is, 
the cost of the services that the hospital obtained from the co-located 
hospital or with a third entity that controls both hospitals could be 
no more than 15 percent of its total inpatient operating costs.
    As detailed in the FY 2005 proposed rule and final rule for the 
IPPS (69 FR 28323 through 28327, 69 FR 49191 through 49214), with the 
noted explosive growth in the number of LTCHs, (and with LTCH HwHs, in 
particular) and concomitant costs to the Medicare program, we 
reevaluated the effectiveness of existing policies regarding HwHs 
insofar as whether they sufficiently protected the Medicare program 
from the problems that we envisioned in the FY 1995 IPPS final rule and 
subsequent rules. We also questioned the effectiveness of the 
``separateness and control'' requirements alone because entities have 
used complex arrangements among corporate affiliates, and obtained 
services from those affiliates, thereby impairing or diluting the 
separateness of the corporate entity. While technically remaining 
within the parameters of the rule, these arrangements were 
intermingling corporate interests so that the corporate distinctness 
has been lost.
    In accordance with notice and comment rule-making and following 
serious consideration of the public comments that we received on our 
proposed policy revisions for LTCH HwHs, regulatory changes were 
finalized for HwH separateness and control policies at Sec.  412.22(e) 
and a new payment adjustment at Sec.  412.534 was established for LTCH 
HwHs and satellites of LTCHs in our FY 2005 IPPS final rule (69 FR 
49191 through 49214).
    Specifically, for cost reporting periods beginning on or after 
October 1, 2004, for LTCHs we eliminated the 15 percent test under then 
existing Sec.  412.22(e)(5)(ii), the performance of basic hospital 
functions test under former Sec.  412.22(e)(5)(i) and the 75 percent of 
admissions from other than the host criteria at former Sec.  
412.22(e)(5)(iii) for LTCH HwHs. If a LTCH demonstrated compliance with 
the medical and administrative separateness, and control policies at 
Sec.  412.22(e)(1)(i) through (e)(1)(iv) under our finalized policy, it 
satisfied the LTCH HwH requirements. We additionally established a 
payment adjustment for LTCH HwHs (and also for satellites of LTCHs) at 
Sec.  412.534, which we believed addressed our on-going concerns 
regarding the relationship between LTCH discharges who were admitted 
from the host hospital. We included LTCH satellites in this payment 
adjustment because we believe that that the co-location of a host 
hospital and a LTCH satellite may result in the same incentives for 
inappropriate patient movement as exist for hosts and LTCH HwHs.
    The payment adjustment at Sec.  412.534, Special payment provisions 
for long-term care hospitals within hospitals and satellites of LTCHs, 
mandated that if a LTCH HwH or LTCH satellite's discharges that were 
admitted from its host hospital exceed 25 percent (or the applicable 
percentage) of its total Medicare discharges for the LTCH HwH or LTCH 
satellite's cost reporting period, an adjusted payment would be made. 
The adjustment would be the lesser of the otherwise payable amount 
under the LTCH PPS or the LTCH PPS amount that was equivalent to what 
Medicare would otherwise pay under the IPPS. In determining whether a 
hospital exceeded the 25 percent criterion, patients transferred from 
the host hospital that have already qualified for outlier payments at 
the host would not count as part of the host's 25 percent (or the 
applicable percentage) and therefore, the payment would not be subject 
to the adjustment. Those patients would be eligible for otherwise 
unadjusted payment under the LTCH PPS. Discharged Medicare patients 
that were admitted from the host before the LTCH HwH or LTCH satellite 
crosses the 25 percent threshold would be paid an otherwise unadjusted 
payment under the LTCH PPS.
    We also finalized additional adjustments to the 25 percent policy 
for specific circumstances. For LTCH HwHs or LTCH satellites located in 
a rural area, instead of the 25 percent criterion, the payment 
adjustment would be imposed if the majority (that is, more than 50 
percent) of the Medicare patients discharged from the LTCH HwH or LTCH 
satellite were admitted from the host. That is, for those LTCH HwH or 
satellite Medicare discharges in excess of the 50 percent threshold, 
the payment adjustment would be applied unless those cases had reached 
high cost outlier status at the host hospital prior to discharge, in 
which case, they would not be counted towards the 50 percent threshold. 
In addition, in determining the percentage of Medicare patients 
discharged from the LTCH HwH or LTCH satellite that were admitted from 
the rural host, any patients that had been Medicare outliers at the 
host and then discharged to the LTCH HwH or LTCH satellite would be 
considered as if they were admitted to the LTCH from a non-host 
hospital. For urban single or MSA dominant hospitals, we would allow 
the LTCH HwH or LTCH satellite to discharge Medicare patients that were 
admitted from the host up to the host's percentage of total Medicare 
discharges for like hospitals in the MSA. We would apply a floor of 25 
percent and a ceiling of 50 percent to this variation. In addition, in 
determining the percentage of discharged Medicare patients that were 
admitted to the LTCH HwH or LTCH satellite from the urban single or MSA 
dominant host hospital, any patients that had been Medicare outliers at 
the host and then transferred to the LTCH HwH or LTCH satellite would 
be considered as if they were admitted to the LTCH from a non-host 
hospital.
    We also provided a 4-year transition for existing LTCH HwHs or LTCH 
satellites for the purpose of providing a reasonable period during 
which the host and the LTCH HwH or LTCH satellite would be able to 
adapt to the requirements of the new policy. Also included in this 
transition policy were LTCHs-under-formation that satisfied the 
following two-prong requirement: (1) The hospital was paid under the 
provisions of subpart O of part 412 on October 1, 2005, and (2) whose 
qualifying period under Sec.  412.23(e) began on or before October 1, 
2004. For cost reporting periods beginning on or after October 1, 2004 
through September 30, 2005, these hospitals were to be grandfathered, 
with the first year as a ``hold harmless'.
    However, we required that even for grandfathered facilities, in the 
first cost reporting period, the hold harmless year, the percentage of 
Medicare discharges admitted from the host hospital to the LTCH HwH or 
LTCH satellite could not exceed the percentage of discharges admitted 
from the host hospital to the LTCH in its FY 2004 cost reporting 
period. Therefore, while we grandfathered existing LTCH HwHs and 
allowing for a 4-year transition, beginning on or after October 1, 2004 
and before October 1, 2005 (FY 2005), those hospitals could not 
increase the percentage of discharges admitted from the host in excess 
of the percentage that they had admitted in FY 2004.
    After the first grandfathered cost reporting period, these LTCH 
HwHs and LTCH satellites were required to meet a percentage transition 
over the 3 years beginning in FY 2006. For the second year (cost 
reporting periods beginning on or after October 1, 2005 but before 
October 1, 2006), the applicable percentage of discharges admitted from 
the host with no payment adjustment

[[Page 4697]]

would be the lesser of the percentage of their discharges admitted from 
their host for their FY 2004 cost reporting period or 75 percent. For 
the third year (cost reporting periods beginning on or after October 1, 
2006 but before October 1, 2007), the applicable percentage of 
discharges admitted from the host with no payment adjustment would be 
the lesser of the percentage of their discharges admitted from their 
host for their FY 2004 cost reporting period or 50 percent, and finally 
25 percent (or other applicable percentage) beginning with the third 
year (cost reporting periods beginning on or after October 1, 2008).
    These finalized payment policies and the concerns that they address 
echo concerns first expressed in the FY 1995 final rule for the IPPS, 
when we began to regulate new entities that we named ``hospitals within 
hospitals.'' As noted elsewhere in this preamble, the reason that we 
proposed the changes in the criteria for LTCH HwH qualification at 
Sec.  412.22(e) in the FY 2005 IPPS proposed rule (69 FR 28323 through 
28327) was the nexus between these concerns and the recent explosive 
growth in the numbers of LTCH HwHs. Furthermore, as detailed in the FY 
2005 IPPS final rule, (69 FR 49201), these regulations were grounded in 
a thorough review of the available data as well as exhaustive policy 
evaluations.
    The present 25 percent policy is being implemented in a location-
specific manner, which means that the computation of the percentage of 
LTCH HwH or LTCH satellite discharges admitted from a host is based 
solely on the admissions from the physically co-located host and not 
from other campuses or remote locations which may share a common 
Medicare Provider number with the host.
    However as a result of our monitoring efforts to date (see section 
X. of the preamble to this proposed rule), we have become increasingly 
aware that the intent of our existing policy is being thwarted by 
creative patient-shifting in some communities where there is more than 
one LTCH HwH or LTCH satellite. We have come to understand, based upon 
specific inquiries from LTCHs and their attorneys or agents, and also 
from questions posed by our fiscal intermediaries (FIs), that some host 
hospitals within the same community are arranging to cross-refer to 
another's co-located LTCH (HwH or satellite). This behavior circumvents 
the intent of the payment adjustment which was to hinder the de facto 
establishment of a LTCH unit of a host hospital, which is precluded by 
law, and to discourage inappropriate patient-shifting between a host 
and a LTCH HwH or satellite. This practice undermines the basic premise 
of the IPPS DRG classification system and generates inappropriate 
Medicare payments. Another attempt to circumvent the present regulation 
at Sec.  412.534 is a situation wherein a patient at a LTCH (that is 
co-located with a host as a HwH or satellite) admits a patient from the 
host, provides treatment, then transports the patient to another 
location of that LTCH (a free-standing hospital or another HwH or 
satellite not co-located with the host hospital) for special treatment 
after which the patient is discharged from that other location. Since 
the payment adjustment is being implemented in a location-specific 
basis, we believe that this ``transporting'' of the patient to another 
site is an attempt to side-step the location-specific feature of the 
existing payment adjustment. We have considerable concern about 
attempts to game Medicare by circumventing the intent of the 25 percent 
(or applicable percentage) patient threshold payment adjustment at 
Sec.  412.534.
    In addition, as a result of implementing the payment adjustment at 
Sec.  412.534 for patients exceeding the 25 percent (or applicable 
percentage) threshold for LTCH HwHs and satellites of LTCHs, the most 
recent growth in the LTCH universe is occurring with the development of 
free-standing LTCHs. Many of these facilities receive patients from one 
referring hospital and as is the case with host/HwH or satellite 
configurations, we are concerned about these non-co-located LTCHs may, 
in fact, be functioning like a long-stay unit of those referring 
hospitals.
    As we first stated in the FY 1995 IPPS final rule, ``we agree that 
the extent to which a facility accepts patients from outside sources 
can be an important indicator of its function as a separate facility, 
not merely a unit of another hospital. In general, a facility's 
functional separateness should be reflected in its ability to attract 
patients from sources other than the hospital that it serves. For 
example, if a facility receives all (or nearly all) of its admissions 
independently (that is, from outside sources), it can reasonably be 
assumed to be functioning separately from the host hospital (59 FR 
45391).'' In establishing the concept of ``functional separateness'' in 
the above quote from the FY 1995 IPPS final rule, we were identifying a 
broader phenomenon than just the relationship between a host acute care 
hospital and a LTCH HwH or satellite of a LTCH. As noted below, this 
concern has been communicated to us from a variety of sources.
    MedPAC's comments on the proposed payment adjustment for LTCH HwHs 
in the FY 2005 IPPS proposed rule focused directly on this issue and 
expressed concern that the 25 percent patient threshold policy would 
have a significant impact and could possibly lead to an inequitable 
situation for co-located LTCHs as compared to freestanding LTCHs. Among 
its concerns were the following: that freestanding LTCHs also have 
strong relationships with acute care hospitals, and that where on 
average LTCH HwHs receive 61 percent of their patients from their 
hosts, freestanding LTCHs receive 42 percent from their primary 
referring hospital; that a 25 percent rule that only applies to LTCH 
HwHs and not to freestanding LTCHs and may therefore be inequitable; 
and furthermore, this approach may be circumvented by an increase in 
the number of freestanding LTCHs instead of a LTCH HwH (69 FR 49211).
    We received comments on the FY 2005 IPPS proposed rule (69 FR 
28196) challenging a proposed policy to preclude common ownership of a 
host and a HwH (which we did not finalize). Two other commenters noted 
that the financial incentive to accept inappropriate patients from an 
acute care hospital can exist when the acute care hospital and the LTCH 
are commonly owned or when there is common governance, a situation that 
can exist even without co-location, that is, a freestanding LTCH, 
exempt from the requirements of Sec.  412.22(e) could be owned and 
governed by the hospital from which it receives the majority of its 
referrals (69 FR 49202).
    In discussion with a LTCH trade association, we were informed of a 
study that it commissioned from the Lewin Group that included a 
percentage breakdown of patients referred to free-standing (for 
example, non-co-located) LTCHs (and other post-acute providers) from 
``single-source acute hospitals.'' According to the association, the 
data indicated ``* * * that it is common practice for LTCHs * * * to 
admit patients from a single-source acute care hospital'' and that 71.2 
percent of free-standing LTCHs admit more than 25 percent of their 
patients from a single source acute-care hospital.
    We are also anecdotally aware of the existence of frequent 
``arrangements'' in many communities between Medicare acute and post-
acute hospital-level providers that may not have any ties of ownership 
or governance relating to patient shifting that are based on mutual 
financial advantage rather than on significant medical benefits for a 
patient.

[[Page 4698]]

    In our response to the MedPAC comment, we stated that ``[w]hile we 
also understand the reservations expressed in the comments, we want to 
emphasize that * * * we are establishing these revised payment policies 
in this final notice for LTCH HwHs or satellites and not freestanding 
LTCHs because of the considerable growth in the number of LTCH HwH and 
because, ever since we first became aware of the existence of LTCH HwHs 
in 1994, we have been mindful of the strong resemblance that they bore 
to LTCH units of acute care hospitals, a configuration precluded by 
statute (69 FR 49211).''
    Notwithstanding this response and the finalized payment adjustment 
at Sec.  412.534 which focused solely on LTCH HwHs and satellites of 
LTCHs, we took considerable note of these comments and the specific 
information that they included. Since the October 1, 2004 
implementation of the payment adjustment for LTCH HwHs and satellites 
of LTCHs at Sec.  412.534, through our LTCH PPS monitoring initiative 
(see Section X.), we have become aware that the growth in the LTCH 
universe is now occurring through the development of free-standing 
LTCHs. As of October 2005, there were 376 LTCHs in our OSCAR database, 
of which 201 are reported as freestanding (for example, not co-located 
with another Medicare hospital-level provider) and 175 of which are 
HwHs. But since October 1, 2004, of the 25 new LTCHs established, 22 
are free-standing. We have been informed directly that at least one 
particular LTCH chain that formerly specialized in the establishment of 
HwHs and satellites is now concentrating on the development of free-
standing LTCHs. Reviews of public documents posted at the corporate Web 
site and analysis of the expected consequences of the policy at other 
investor-oriented sites describe a focus on building free-standing 
LTCHs which we believe may imply a response to the payment adjustment 
for co-located LTCHs established under Sec.  412.534.
    We believe that this information indicates that the concerns that 
we expressed about the explosive growth in the number of LTCHs has 
shifted because of the implementation of the payment adjustment at 
Sec.  412.534 from the development of co-located LTCHs as HwHs or 
satellites of LTCHs to the establishment of free-standing LTCHs.
    We further conducted our own data analysis of sole-source (for 
example, one hospital referring to one LTCH) relationships between 
acute care hospitals and non-co-located LTCHs. The FY 2004 and FY 2005 
MedPAR files indicate 63.7 percent of the 201 free-standing LTCHs have 
at least 25 percent of their Medicare discharges admitted from a sole 
acute care hospital; for 23.9 percent of the freestanding LTCHs, the 
percentage is 50 percent or more; and for 6.5 percent, 75 percent or 
more of their Medicare discharges are admitted from a sole acute care 
hospital.
    We therefore believe that the danger of LTCHs functioning as 
``units'' appears to be occurring not only in LTCH HwHs and LTCH 
satellites but also with free-standing LTCHs and that in many cases, 
these non-co-located LTCHs and their sole referral source may be 
functioning in ways that appear to have erased the line of ``functional 
separateness'' between these LTCHs and their referring acute care 
hospitals. We are concerned about these situations and in this context, 
we continue to believe that ``* * * the extent to which a facility 
accepts patients from outside sources can be an important indicator of 
its function as a separate facility, not merely a unit of another 
hospital (59 FR 45391).''
    We believe that our analysis of the available data and our 
awareness of growth patterns and behavioral changes in the LTCH 
industry corroborate the concerns expressed in correspondence and 
comments, but particularly in MedPAC's comments on our proposed payment 
adjustment for co-located LTCHs in the FY 2004 IPPS final rule (69 FR 
49211). In addition, the spiked increase in the number of free-standing 
LTCHs and their admission patterns appear to confirm MedPAC's concerns 
that the industry may be circumventing the intent of the payment 
adjustment policy at Sec.  412.534 aimed at combating LTCHs functioning 
as ``units'' by creating free-standing LTCHs instead of LTCHs co-
located as HwHs or satellites.
    As we note previously in this proposed rule, we are keenly aware of 
the explosive growth in the number of free-standing LTCHs. 
Specifically, we are continuing to analyze patient claims data for 
acute care patients who are admitted to free-standing LTCHs for 
discharge and LOS information in order to evaluate whether Medicare is 
paying twice for what would essentially be one episode of care. We are 
considering appropriate adjustments to address this issue.
    Furthermore, we want to emphasize that we are closely monitoring 
patient shifting activities between host hospitals and LTCH HwHs or 
LTCH satellites, paying particular attention to evidence of 
inappropriate cross-referrals. We believe that a pattern of this 
behavior by hospitals would indicate an attempt to side-step the 
requirements of Sec.  412.534 and could warrant an investigation by 
HHS's Office of the Investigator General.
    Under Sec.  412.534 for LTCH cost reporting periods beginning on or 
after October 1, 2004, we published the existing payment adjustment 
detailed above, for LTCH HwHs and LTCH satellites that focused on the 
percentage of Medicare patients being shifted from host hospitals to 
co-located LTCHs. Under this provision, we specified that if greater 
than 25 percent (or the appropriate percentage) of a LTCH HwH's or LTCH 
satellite's discharges during any cost reporting year were admitted 
from a host hospital, a payment adjustment would be applied to those 
discharges that exceeded the applicable threshold percentage (unless 
those patients had reached high-cost outlier status at the host 
hospital as specified in Sec.  412.534(c)). (For LTCHs that qualified 
under Sec.  412.534(f), we established a 4-year transition to the full 
payment adjustment.) Specifically, this payment adjustment provides 
that Medicare will pay the lesser of the amount otherwise payable under 
the LTCH PPS or an LTCH PPS payment amount equivalent to what would be 
paid under the IPPS for discharges in excess of the threshold amount.
    It has come to our attention that the phrase ``an amount equivalent 
to the amount that would otherwise be determined under the rules at 
subpart A, Sec.  412.1(a)'', that is, the IPPS, in existing Sec.  
412.534(c)(2), (d)(1), and (e)(1) and our specific interpretation of 
its implementation may not be entirely apparent. Therefore, we are 
clarifying that, as explained below in this section, the use of the 
term ``equivalent'' does not necessarily mean precisely equal. We are 
also proposing to codify the formula that we currently use to give 
effect to this phrase in existing Sec.  412.534, described in this 
proposed rule, for purposes of administrative clarity.
    To clarify the meaning of the term ``equivalent,'' we want to 
emphasize that we chose that word rather than ``equal'' when referring 
to the amount payable under this subpart (the amount that is equivalent 
to the ``* * * amount that would be otherwise determined under the 
rules at subpart A, Sec.  412.1(a)). The term ``equivalent'' was used 
in this regulation because, although it was and continues to be our 
intent to include a payment adjustment under the LTCH PPS that closely 
replicates what an IPPS payment would have been for the same episode of 
care, several features of the IPPS cannot be translated directly into 
the LTCH PPS. Therefore, we believed that the term ``equivalent'' would

[[Page 4699]]

support the ultimate goals of the policy adjustment, while also 
allowing for a reasonable and equitable implementation. For example, 
under the IPPS, payments for IME are limited based on the hospital's 
IME cap. The hospital's IME cap is determined based on the number of 
IME FTE residents counted by the hospital for purposes of IME on its 
1996 cost report. In the case of a LTCH, since it necessarily would not 
have reported any FTE residents for IME on its 1996 cost report, it 
would not be appropriate to apply the IPPS IME rules literally in the 
context of this LTCH PPS payment adjustment.
    We are clarifying that we chose to use the term ``equivalent'' in 
Sec.  412.534(c)(2), (d)(1), and (e)(1) because we believe this 
language accurately reflects our intent to apply IPPS payment 
principles to develop a payment that approximates for LTCHs the payment 
for a particular case that would have been made under the IPPS. For 
example, in the case of a LTCH that is a teaching hospital, if a 
particular LTCH discharge is governed by the 25 percent payment policy 
adjustment set forth at Sec.  412.534, we would determine the IME 
payment under the LTCH PPS by imputing an IME cap based on the LTCH's 
direct GME cap (which would have been determined for an LTCH that has 
residency programs as set forth at Sec.  413.79(c)(2)) and using that 
imputed IME cap to calculate an IME payment for this LTCH. We believe 
this methodology is reasonable since it is based on the best available 
data on residency programs at LTCHs. Using an imputed IME cap could 
enable us to factor an adjustment for indirect costs of residency 
programs into a Medicare payment under the payment adjustment at Sec.  
412.534 for those cases in excess of the 25 percent (or applicable 
percentage) threshold where the Medicare payment would be based on an 
amount under the LTCH PPS equivalent to what would otherwise be paid 
under the IPPS.
    As explained previously, we are proposing to codify the formula we 
use to give affect to the phrase ``an amount under subpart O that is 
equivalent to what otherwise would be paid under the IPPS.'' The 
existing regulations at Sec.  412.534(c)(2), (d)(1), and (e)(1) 
establish the applicable payment adjustment for LTCH HwHs and 
satellites not subject to the transition established under Sec.  
412.534(f) for cost reporting periods beginning on or after October 1, 
2004 and for cost reporting periods beginning on or after October 1, 
2007 for those LTCH HwHs and LTCH satellites that will be transitioning 
to the full adjustment. Under those provisions, Medicare will pay for 
discharges from a LTCH HwH or LTCH satellite that were admitted from 
their host hospital in excess of the 25 percent (or applicable 
percentage) threshold based upon the lesser of the amount otherwise 
payable under [the LTCH PPS] or the amount payable under this subpart 
that is equivalent to the amount that would otherwise be payable under 
[the IPPS]. The paragraphs below detail the specific payment features 
of the IPPS that we use and are proposing to codify in regulation for 
administrative efficiency in order to allow Medicare to generate a fair 
and equitable ``equivalent'' IPPS payment under the LTCH PPS for those 
LTCH discharges governed by the payment adjustment at Sec.  412.534.
    In the discussion that follows, we use phrases such as ``IPPS DRG 
relative weights,'' the ``IPPS high cost outlier'' and the ``IPPS fixed 
loss amount'' in describing features of the IPPS that we use in 
calculating LTCH payments for LTCH HwHs and LTCH satellites. However, 
we want to emphasize that such a payment is not an IPPS payment but 
rather, a payment under the LTCH PPS that is generally derived from the 
IPPS payment methodology.
    Specifically, under Sec.  412.534, we are proposing to codify the 
formula that we use to give affect to the phrase, an amount payable 
under this subpart that is equivalent to what would be paid under the 
[IPPS]. This formula provides that an amount under subpart O that is 
equivalent to what would otherwise have been paid under the IPPS, would 
be calculated based on the sum of the applicable operating and capital 
IPPS rates in effect at the time of the discharge from the LTCH as 
established in the applicable IPPS final rule published annually in the 
Federal Register (since there is a single rate under the LTCH PPS to 
pay for the operating and capital costs of the inpatient hospitals 
services provided to LTCH Medicare patients) and applicable IPPS 
payment system adjustments for differences in resource use (that is, 
IPPS DRG relative weights); differences in area wage levels (that is, 
the IPPS wage index); cost-of-living adjustment, if applicable; the 
treatment of a disproportionate share of low income patients (DSH), if 
applicable; and indirect medical education (IME), if applicable. If the 
amount payable by Medicare for a specific discharge was the amount 
under subpart O that is equivalent to what would be otherwise payable 
under the IPPS and the case also qualified as an IPPS high cost outlier 
under this payment adjustment formula, payment would be based on the 
IPPS high cost outlier policy at Sec.  412.80(a) because the resulting 
payment would then be more equivalent to what would have been payable 
under the IPPS. (Similarly, if under this payment adjustment, the 
lesser amount resulted in an ``otherwise payable amount under the LTCH 
PPS,'' and the stay qualified as a high-cost outlier, Medicare would 
generate a high cost outlier payment governed by the LTCH PPS high cost 
outlier policy at Sec.  412.525(a).)
    Under this formula, we are proposing to codify in regulations, an 
amount payable under this subpart that is equivalent to what would 
otherwise be paid under the IPPS for the costs of inpatient operating 
services would be based on the standardized amount determined under 
Sec.  412.64(c), adjusted by the applicable IPPS DRG weighting factors 
as specified in Sec.  412.64(g). This amount would be further adjusted 
for area wage levels using the applicable IPPS labor-related share 
based on the CBSA where the LTCH is physically located set forth at 
Sec.  412.525(c) and the IPPS wage index for non-reclassified hospitals 
as shown in Tables 4A and 4B in the annual IPPS final rule. (In the RY 
2005 LTCH PPS final rule (70 FR 24200) we discuss the inapplicability 
of geographic reclassification procedures for LTCHs.) For LTCHs located 
in Alaska and Hawaii, this amount would also be adjusted by the 
applicable COLA factors used under the IPPS. Furthermore, for LTCH 
discharges governed by this payment adjustment, an amount payable under 
subpart O that is equivalent to what would otherwise be paid under the 
IPPS for the costs of inpatient operating services would also include, 
where applicable, a DSH adjustment (Sec.  412.106) and where 
applicable, an IME adjustment (as discussed at Sec.  413.79(c)(2)).
    Additionally, to arrive at an LTCH PPS payment amount equivalent to 
what would otherwise be payable under the IPPS, a LTCH would also be 
paid under the LTCH PPS for the costs of inpatient capital-related 
costs, using the capital Federal rate determined under Sec.  
412.308(c), adjusted by the applicable IPPS DRG weighting factors at 
Sec.  412.60. This amount would be further adjusted by the applicable 
geographic adjustment factors set forth at Sec.  412.316, including 
local cost variation (based on the IPPS wage index for non-reclassified 
hospitals in Tables 4A and 4B of the annual IPPS final rule), large 
urban location and COLA, if applicable, based on the IPPS geographic 
classifications published annually in the IPPS final rule.
    For discharges governed by this payment adjustment under the LTCH

[[Page 4700]]

PPS, an amount payable under subpart O that is equivalent to an amount 
that would otherwise be paid under the IPPS for the inpatient capital-
related costs would also include a DSH adjustment (Sec.  412.320), if 
applicable and an equivalent IME adjustment, (Sec.  412.322) if 
applicable.
    A LTCH PPS payment amount equivalent to what would be paid under 
the IPPS would be determined based on the sum of the amount equivalent 
to what would be paid under the IPPS inpatient operating services and 
the amount equivalent to what would be paid under the IPPS for 
inpatient capital-related costs. This is necessary since under the 
IPPS, there are separate Medicare rates for operating (subpart D of 
part 412) and capital (subpart M of part 412) costs to acute care 
hospitals while under the LTCH PPS, there is a single payment rate for 
the operating and capital costs of the inpatient hospitals services 
provided to LTCH Medicare patients.
    We note that in section V.A.1. of this proposed rule, we have 
proposed an additional component to the SSO payment adjustment at 
proposed Sec.  412.529(c)(2)(iv) that is based on an amount 
``comparable'' to what would otherwise be paid under the IPPS rather 
than an amount ``equivalent'' under the existing payment adjustment at 
Sec.  412.534. Although the proposed new payment adjustment option 
under the SSO policy was adapted from the existing LTCH HwH and LTCH 
satellite payment adjustment at Sec.  412.534, it also preserves a 
distinction in the existing SSO policy established at the start of the 
LTCH PPS for FY 2003: The use of the LTCH PPS fixed loss amount should 
a SSO case also qualify for high cost outlier payments after the SSO 
payment amount is determined. In contrast, as noted previously, under 
the payment adjustment for LTCH HwHs and LTCH satellites at Sec.  
412.534, if the amount payable by Medicare for a specific discharge was 
the amount under subpart O that is equivalent to what would be 
otherwise payable under the IPPS and the case also qualified as a high 
cost outlier, the outlier payment for this case under the LTCH PPS 
would be based on the IPPS high cost outlier policy at Sec.  412.80(a) 
because the resulting payment would then be more equivalent to what 
would have been payable under the IPPS. Similarly, if under this 
payment adjustment, the lesser amount resulted in an ``otherwise 
payable amount under the LTCH PPS,'' and the stay qualified as a high-
cost outlier, Medicare would generate a high cost outlier payment 
governed by the LTCH PPS fixed loss amount calculated under Sec.  
412.525(a). If the estimated cost of the case exceeds the adjusted LTC-
DRG plus a fixed loss amount under Sec.  412.525(a), the LTCH would 
receive an additional payment based on the LTCH PPS high cost outlier 
policy.
    Therefore, although there are significant similarities between the 
two payment adjustments, as detailed in section V.A.1 of this proposed 
rule, there is a distinction between them regarding the computation of 
any applicable high cost outlier payments. Under the LTCH HwH and 
satellite payment adjustment at Sec.  412.534, payment for discharges 
governed by the policy, will be ``the lesser of the amount otherwise 
payable under this subpart [subpart O] or the amount that is otherwise 
payable under this subpart that is equivalent to the amount that would 
be otherwise payable under Sec.  412.1(a) [the IPPS].'' From an 
implementation standpoint, Medicare would generate an applicable 
payment to the LTCH for this discharge (which could include a high cost 
outlier payment) but this payment would be subject to reconciliation at 
the end of the LTCH's cost reporting period when it would be determined 
whether or not the particular discharge was subject to the payment 
adjustment at Sec.  412.534, that is, whether the discharge exceeded 
the 25 percent (or applicable percentage) threshold. If this is the 
case, and the calculation of the lesser of the amounts for a specific 
discharge resulted in Medicare paying an amount under the LTCH PPS that 
was equivalent to what would otherwise have been paid under the IPPS, 
and that payment included a high cost outlier payment, this LTCH PPS 
payment would be governed by the regulations at Sec.  412.80(a), based 
on the IPPS high cost outlier policy. If the lesser of the two amounts 
is the otherwise payable amount under the LTCH PPS (which could be the 
case if the stay was a SSO, under Sec.  412.529) the original LTCH PPS 
Medicare payment which included the high cost outlier payment under 
Sec.  412.525 will be finalized by the FI.
    In contrast, under the existing LTCH PPS SSO policy at Sec.  
412.529(c), high cost outlier payments could be made for a SSO stay, 
regardless of whether the payment is ultimately based on: 120 percent 
of the LTC-DRG specific per diem amount multiplied by the LOS of the 
discharge; 120 percent of the cost of the case; or the full LTC-DRG, if 
the total costs of the case exceed the least of these three options, 
plus the appropriate fixed-loss amount under Sec.  412.525. In this 
proposed rule, for reasons described in section V.A.1, we have proposed 
to lower the 120 percent of costs to 100 percent, and we have also 
proposed the above noted additional alternative to this formula: An 
LTCH PPS payment comparable to what would otherwise have been paid 
under the IPPS. We have not proposed to change the existing SSO payment 
policy for high cost outliers, even though we are proposing this new 
alternative, and therefore, if the costs of the case exceeded the 
payment resulting from this formula by the fixed loss amount under the 
LTCH PPS, Medicare payment to the LTCH for this case, would include 
high cost outlier payment set forth at Sec.  412.525.
    Therefore, although there are significant similarities between the 
payment adjustment at existing Sec.  412.534, under which Medicare pays 
an amount equivalent to what would otherwise have been paid under the 
IPPS (which we are proposing to clarify and codify at Sec.  
412.534(f)(1)), and the proposed additional payment alternative under 
the SSO adjustment at proposed Sec.  412.529(c)(2)(iv), under which 
Medicare would pay an amount comparable to what would otherwise have 
been paid under the IPPS, we wish to emphasize the distinctions in 
applicable high cost outlier payments under these two payment 
adjustments.
    Consequently, we are clarifying the term ``equivalent'' at Sec.  
412.534(c)(2), (d)(1), and (e)(1) in our payment adjustment and 
proposing to codify the formula we use to give affect to these existing 
regulations.
    In Sec.  412.534, we established special payment provisions for 
long-term care hospitals within hospitals and satellites of LTCHs. (69 
FR 49206) At subparagraph (d), we set forth a further payment 
adjustment for LTCHs that were co-located as HwHs or as satellites of 
LTCHs with rural hospitals and we cited the definition of rural at 
Sec.  412.62(f). This cite was incorrect since beginning in FY 2005, we 
adopted OMB's revised standards for defining MSAs (69 FR 49026) and 
therefore, the definition of rural that we intended to cite in Sec.  
412.534(d) was Sec.  412.64(b)(1)(ii)(C). We are therefore proposing to 
correct Sec.  412.534(d) to correctly cite the revised definition of 
rural at Sec.  412.64(b)(1)(ii)(C).

VI. Computing the Proposed Adjusted Federal Prospective Payments for 
the 2007 LTCH PPS Rate Year

    In accordance with Sec.  412.525 and as discussed in section IV.C. 
of this proposed rule, the standard Federal rate is adjusted to account 
for differences in area wages by multiplying the labor-related share of 
the standard Federal rate by the appropriate LTCH PPS wage

[[Page 4701]]

index (as shown in Tables 1 and 2 of the Addendum to this proposed 
rule). The standard Federal rate is also adjusted to account for the 
higher costs of hospitals in Alaska and Hawaii by multiplying the 
nonlabor-related share of the standard Federal rate by the appropriate 
cost-of-living factor (shown in Table 7 in section IV.D.1.c. of this 
preamble). In the RY 2006 LTCH PPS final rule (70 FR 24180), we 
established a standard Federal rate of $38,086.04 for the 2006 LTCH PPS 
rate year. In this proposed rule, based on the best available data and 
the proposed policies described in this proposed rule, we are proposing 
that the standard Federal rate for the 2007 LTCH PPS rate year remain 
$38,086.04 as discussed in section IV.B. of this preamble. We 
illustrate the methodology used to adjust the proposed Federal 
prospective payments for the 2007 LTCH PPS rate year in the following 
examples:
    Example: During the 2007 LTCH PPS rate year, a Medicare patient is 
in a LTCH located in Chicago, Illinois (CBSA 16974). This LTCH is in 
the fourth year of the wage index phase-in, thus, the proposed four-
fifths wage index values are applicable. The proposed four-fifths wage 
index value for CBSA 16974 is 1.0632 (see Table 1 in the Addendum to 
this proposed rule). The Medicare patient is classified into LTC-DRG 9 
(Spinal Disorders and Injuries), which has a relative weight of 0.9720 
(see Table 3 of the Addendum to this proposed rule).
    To calculate the LTCH's total proposed adjusted Federal prospective 
payment for this Medicare patient, we compute the proposed wage-
adjusted Federal prospective payment amount by multiplying the proposed 
unadjusted standard Federal rate ($38,086.04) by the proposed labor-
related share (75.923 percent) and the proposed wage index value 
(1.0632). This proposed wage-adjusted amount is then added to the 
nonlabor-related portion of the proposed unadjusted standard Federal 
rate (24.077 percent; adjusted for cost of living, if applicable) to 
determine the adjusted Federal rate, which is then multiplied by the 
LTC-DRG relative weight (0.9720) to calculate the total proposed 
adjusted Federal prospective payment for the 2007 LTCH PPS rate year 
($38,795.95). Finally, as discussed in section IV.C.5. of this 
preamble, for the 2007 LTCH PPS rate year, we proposed a 0.0 percent 
reduction (a budget neutrality offset of 1.000) to the total proposed 
adjusted Federal prospective payment to account for the costs of the 
transition methodology.
    The following illustrates the components of the calculations in the 
example in Table 12.

                                Table 12
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Unadjusted Proposed Standard Federal Prospective Payment      $38,086.04
 Rate...................................................
Proposed Labor-Related Share............................       x 0.75923
                                                         ---------------
Proposed Labor-Related Portion of the Federal Rate......    = $28,916.06
Proposed \4/5\ths Wage Index (CBSA 16974)...............        x 1.0632
                                                         ---------------
Proposed Wage-Adjusted Labor Share of Federal Rate......    = $30,743.55
Proposed Nonlabor-Related Portion of the Federal Rate        + $9,169.98
 ($38,086.04 x 0.24077).................................
                                                         ---------------
Proposed Adjusted Federal Rate Amount...................    = $39,913.53
LTC-DRG 9 Relative Weight...............................        x 0.9720
                                                         ---------------
Total Proposed Adjusted Federal Prospective Payment         = $38,795.95
 (Before the Budget Neutrality Offset)..................
Proposed Budget Neutrality Offset.......................         x 0.999
                                                         ---------------
Total Proposed Federal Prospective Payment (Including       = $38,757.15
 the Budget Neutrality Offset)..........................
------------------------------------------------------------------------

VII. Transition Period

    To provide a stable fiscal base for LTCHs, under Sec.  412.533, we 
implemented a 5-year transition period whereby a LTCH (except those 
defined as ``new'' under Sec.  412.23(e)(4)) receives payment 
consisting of a portion based on reasonable cost-based reimbursement 
under the TEFRA system and a portion based on the Federal prospective 
payment rate (unless the LTCH elects payment based on 100 percent of 
the Federal rate). Under the average pricing system, payment is not 
based on the experience of an individual hospital. As discussed in the 
August 30, 2002 final rule (67 FR 56038), we believe that a 5-year 
phase-in provides LTCHs time to adjust their operations and capital 
financing to the LTCH PPS, which is based on prospectively determined 
Federal payment rates. Furthermore, we believe that the 5-year phase-in 
of the LTCH PPS also allows LTCH personnel to develop proficiency with 
the LTC-DRG coding system, which will result in improvement in the 
quality of the data used for generating our annual determination of 
relative weights and payment rates.
    Under Sec.  412.533, the 5-year transition period for all hospitals 
subject to the LTCH PPS begins with the hospital's first cost reporting 
period beginning on or after October 1, 2002 and extends through the 
hospital's last cost reporting period beginning before October 1, 2007. 
During the 5-year transition period, a LTCH's total payment under the 
LTCH PPS is based on two payment percentages--one based on reasonable 
cost-based (TEFRA) payments and the other based on the standard Federal 
prospective payment rate. The percentage of payment based on the LTCH 
PPS Federal rate increases by 20 percentage points each year, while the 
reasonable cost-based payment rate percentage decreases by 20 
percentage points each year, for the next 4 fiscal years. For cost 
reporting periods beginning on or after October 1, 2006, Medicare 
payment to LTCHs will be determined entirely under the Federal rate. 
The blend percentages as set forth in Sec.  412.533(a) are shown in 
Table 13.

                                Table 13
------------------------------------------------------------------------
                                                              Reasonable
                                                  Federal        cost
 Cost reporting periods beginning on or after       rate      principles
                                                 percentage      rate
                                                              percentage
------------------------------------------------------------------------
October 1, 2002...............................           20           80
October 1, 2003...............................           40           60
October 1, 2004...............................           60           40
October 1, 2005...............................           80           20
October 1, 2006...............................          100            0
------------------------------------------------------------------------

    For cost reporting periods that begin on or after October 1, 2005, 
and before October 1, 2006 (FY 2006), the total payment for an existing 
LTCH that has not elected payment under 100 percent of the Federal 
prospective payment rate

[[Page 4702]]

is 20 percent of the amount calculated under reasonable cost principles 
for that specific LTCH and 80 percent of the Federal prospective 
payment amount. For cost reporting periods that begin on or after 
October 1, 2006 (FY 2007), the total payment for a LTCH will be zero 
percent of the amount calculated under reasonable cost principles for 
that specific LTCH and 100 percent of the Federal prospective payment 
amount. As we noted in the June 6, 2003 final rule (68 FR 34155), the 
change in the effective date of the annual LTCH PPS rate update from 
October 1 to July 1 has no effect on the LTCH PPS transition period as 
set forth in Sec.  412.533(a). That is, LTCHs paid under the transition 
blend under Sec.  412.533(a) will receive those blend percentages for 
the entire 5-year transition period (unless they elect payments based 
on 100 percent of the Federal rate). Furthermore, LTCHs paid under the 
transition blend will receive the appropriate blend percentages of the 
Federal and reasonable cost-based rate for their entire cost reporting 
period as prescribed in Sec.  412.533(a)(1) through (a)(5).
    The reasonable cost-based rate percentage is a LTCH specific amount 
that is based on the amount that the LTCH would have been paid (under 
TEFRA) if the PPS were not implemented. Medicare FIs will continue to 
compute the LTCH reasonable cost-based payment amount according to 
Sec.  412.22(b) of the regulations and sections 1886(d) and (g) of the 
Act.
    In implementing the LTCH PPS, one of our goals is to transition 
hospitals to prospective payments based on 100 percent of the adjusted 
Federal prospective payment rate as soon as appropriate. Therefore, 
under Sec.  412.533(c), we allow an LTCH (other than new LTCHs defined 
at Sec.  412.23(e)(4)), which is subject to a blended rate, to elect 
payment based on 100 percent of the Federal rate at the start of any of 
its cost reporting periods during the 5-year transition period rather 
than incrementally shifting from reasonable cost-based payments to 
prospective payments. Once a LTCH elects to be paid based on 100 
percent of the Federal rate, it will not be able to revert to the 
transition blend. For cost reporting periods that began on or after 
December 1, 2002 through September 30, 2006, a LTCH must notify its FI 
in writing of its election on or before the 30th day prior to the start 
of the LTCH's next cost reporting period regardless of any postmarks or 
anticipated delivery dates. For example, a LTCH with a cost reporting 
period that begins on May 1, 2006, must notify its FI in writing of an 
election on or before April 1, 2006.
    Under Sec.  412.533(c)(2)(i), the notification by the LTCH to make 
the election must be made in writing to the Medicare FI. Under Sec.  
412.533 (c)(2)(iii), the FI must receive the request on or before the 
specified date (that is, on or before the 30th day before the 
applicable cost reporting period begins for cost reporting periods 
beginning on or after December 1, 2002 through September 30, 2006), 
regardless of any postmarks or anticipated delivery dates.
    Requests received, postmarked, or delivered by other means after 
the specified date in Sec.  412.533(c)(2)(iii) will not be accepted. If 
the specified date falls on a day that the postal service or other 
delivery sources are not open for business, the LTCH will be 
responsible for allowing sufficient time for the delivery of the 
request before the deadline. If a LTCH's request is not received 
timely, payment will be based on the transition period blend 
percentages.

VIII. Payments to New LTCHs

    Under Sec.  412.23(e)(4), for purposes of Medicare payment under 
the LTCH PPS, we define a new LTCH as a provider of inpatient hospital 
services that meets the qualifying criteria for LTCHs, set forth in 
Sec.  412.23(e)(1) and (e)(2), and under present or previous ownership 
(or both), has its first cost reporting period as a LTCH begins on or 
after October 1, 2002. We also specify in Sec.  412.500 that the LTCH 
PPS is applicable to LTCHs for cost reporting periods beginning on or 
after October 1, 2002. As we discussed in the August 30, 2002 final 
rule (67 FR 56040), this definition of new LTCHs should not be confused 
with those LTCHs first paid under the TEFRA payment system for 
discharges occurring on or after October 1, 1997, described in section 
1886(b)(7)(A) of the Act, as added by section 4416 of the Balanced 
Budget Act of 1997 (BBA) (Pub. L. 105-33). As stated in Sec.  
413.40(f)(2)(ii), for cost reporting periods beginning on or after 
October 1, 1997, the payment amount for a ``new'' (post-FY 1998) LTCH 
is the lower of the hospital's net inpatient operating cost per case or 
110 percent of the national median target amount payment limit for 
hospitals in the same class for cost reporting periods ending during FY 
1996, updated to the applicable cost reporting period (see 62 FR 46019, 
August 29, 1997). Under the LTCH PPS, those ``new'' LTCHs that meet the 
definition of ``new'' under Sec.  413.40(f)(2)(ii) and that have their 
first cost reporting period as a LTCH beginning prior to October 1, 
2002, will be paid under the transition methodology described in Sec.  
412.533.
    Under Sec.  412.533(d), new LTCHs will not participate in the 5-
year transition from reasonable cost-based reimbursement to prospective 
payment. As we discussed in the August 30, 2002 final rule (67 FR 
56040), the transition period is intended to provide existing LTCHs 
time to adjust to payment under the new system. Since these new LTCHs 
with their first cost reporting periods as LTCHs beginning on or after 
October 1, 2002, would not have received payment under reasonable cost-
based reimbursement for the delivery of LTCH services prior to the 
effective date of the LTCH PPS, we do not believe that those new LTCHs 
require a transition period in order to make adjustments to their 
operations and capital financing, as will LTCHs that have been paid 
under the reasonable cost-based methodology.

IX. Method of Payment

    Under Sec.  412.513, a Medicare LTCH patient is classified into a 
LTC-DRG based on the principal diagnosis, up to eight additional 
(secondary) diagnoses, and up to six procedures performed during the 
stay, as well as, age, sex, and discharge status of the patient. The 
LTC-DRG is used to determine the Federal prospective payment that the 
LTCH will receive for the Medicare-covered Part A services the LTCH 
furnished during the Medicare patient's stay. Under Sec.  412.541(a), 
the payment is based on the submission of the discharge bill. The 
discharge bill also provides data to allow for reclassifying the stay 
from payment at the full LTC-DRG rate to payment for a case as a SSO 
(under Sec.  412.529) or as an interrupted stay (under Sec.  412.531), 
or to determine if the case will qualify for a high-cost outlier 
payment (under Sec.  412.525(a)).
    Accordingly, the ICD-9-CM codes and other information used to 
determine if an adjustment to the full LTC-DRG payment is necessary 
(for example, LOS or interrupted stay status) are recorded by the LTCH 
on the Medicare patient's discharge bill and submitted to the Medicare 
FI for processing. The payment represents payment in full, under Sec.  
412.521(b), for inpatient operating and capital-related costs, but not 
for the costs of an approved medical education program, bad debts, 
blood clotting factors, anesthesia services by hospital-employed 
nonphysician anesthetists or obtained under arrangement, or the costs 
of photocopying and mailing medical records requested by a Quality 
Improvement Organization (QIO), which are costs paid outside the LTCH 
PPS.

[[Page 4703]]

    As under the previous reasonable cost-based payment system, under 
Sec.  412.541(b), a LTCH may elect to be paid using the periodic 
interim payment (PIP) method described in Sec.  413.64(h) and may be 
eligible to receive accelerated payments as described in Sec.  
413.64(g).
    For those LTCHs that are paid during the 5-year transition based on 
the blended transition methodology in Sec.  412.533(a) for cost 
reporting periods that began on or after October 1, 2002, and before 
October 1, 2006, the PIP amount is based on the transition blend. For 
those LTCHs that are paid based on 100 percent of the standard Federal 
rate, the PIP amount is based on the estimated prospective payment for 
the year rather than on the estimated reasonable cost-based 
reimbursement. We exclude high-cost outlier payments that are paid upon 
submission of a discharge bill from the PIP amounts. In addition, Part 
A costs that are not paid for under the LTCH PPS, including Medicare 
costs of an approved medical education program, bad debts, blood 
clotting factors, anesthesia services by hospital-employed nonphysician 
anesthetists or obtained under arrangement, and the costs of 
photocopying and mailing medical records requested by a QIO, are 
subject to the interim payment provisions (Sec.  412.541(c)).
    Under Sec.  412.541(d), LTCHs with unusually long lengths of stay 
that are not receiving payment under the PIP method may bill on an 
interim basis (60 days after an admission and at intervals of at least 
60 days after the date of the first interim bill) and ``should include 
any high cost outlier payment determined as of the last day for which 
the services have been billed.''

X. Monitoring

    In the August 30, 2002 final rule (67 FR 56014), we described an 
on-going monitoring component to the new LTCH PPS. Specifically, we 
discussed on-going analysis of the various policies that we believe 
would provide equitable payment for stays that reflect less than the 
full course of treatment and reduce the incentives for inappropriate 
admissions, transfers, or premature discharges of patients that are 
present in a discharge-based PPS. To this end, we have designed system 
features utilizing MedPAR data that will enable CMS and the FI to track 
beneficiary movement to and from a LTCH and to and from another 
Medicare provider. We also stated our intent to collect and interpret 
data on changes in average lengths of stay under the LTCH PPS for 
specific LTC-DRGs and the impact of these changes on the Medicare 
program. As a result of our data analysis, we have revisited a number 
of our original and even pre-LTCH PPS policies in order to address what 
we believe are behaviors by certain LTCHs that lead to inappropriate 
Medicare payments. In recent Federal Register publications, we have 
proposed and subsequently finalized revisions to the interruption of 
stay policy in the RY 2005 LTCH PPS final rule (69 FR 25690 through 
25700), and we established a payment adjustment for LTCH HwHs and 
satellites in the FY 2005 IPPS final rule (69 FR 49191 through 49214).
    On-going data analysis is also the basis for four of the policies 
that we are proposing in this notice. As noted in section V.A.2, we are 
proposing to ``sunset'' the surgical DRG exception to the 3 day or less 
interruption of stay policy at Sec.  412.531(b)(1)(ii)(A)(1). As we 
discuss in detail in section V.A.1., we have determined that 
eliminating this exception will not result in significant hardship for 
LTCHs. In section V.A.2., we have also revisited the payment adjustment 
established for short-stay outliers (Sec.  412.529) as a consequence of 
recent data analysis and have proposed additional options under that 
policy. In addition to these three proposed policies, as a result of 
our analysis and on-going monitoring protocols, we are also proposing a 
zero percent update to the Federal payment rate for RY 2007, which is 
explained in detail in section IV.B.4. of this proposed rule.
    As we discuss in section V.B.1., our monitoring of discharges 
between acute care hospitals and LTCHs reveals that a significant 
number of LTCHs that are ``free-standing'', that is, not colocated with 
other hospital-level providers (as defined in Sec.  412.22(e) and Sec.  
412.22(h)), also admit their patients from one specific acute care 
hospital. When we established the payment adjustment for LTCH HwHs and 
satellites of LTCHs at Sec.  412.534, we reiterated our concern that 
these on-site LTCHs could be functioning as units of their host 
(generally, an acute care hospital), a configuration that is not 
permitted in section 1886(d)(1)(B) of the Act. (The statute 
specifically allows only for IRF and IPF units in acute care hospitals 
but not for LTCH units.) Therefore, we note that in addition to 
monitoring compliance with the payment adjustment established under 
Sec.  412.534 for LTCH HwHs and satellites of LTCHs, we will also be 
monitoring admissions of patients to freestanding LTCHs from referring 
acute hospitals. We believe that on-going data analysis of this patient 
movement may enable us to determine whether these ``free-standing'' 
LTCHs are functioning, in a similar way as some LTCH HwHs and LTCH 
satellites, as step-down units of their referring hospitals and are 
considering additional payment adjustments to address this issue.
    As we discussed in the RY 2004 LTCH PPS final rule (68 FR 34157), 
the Medicare Payment Advisory Commission (MedPAC) endorsed our 
monitoring activity as a primary aspect of the design and on-going 
functioning of the LTCH PPS. Furthermore, the Commission pursued an 
independent research initiative that led to a section in the MedPAC 
Report entitled ``Defining long-term care hospitals'' published in the 
June, 2004 Report to Congress. This study included recommendations that 
we develop facility and patient criteria for LTCH admission and 
treatment and that we require a review by Quality Improvement 
Organizations (QIO) to evaluate whether LTCH admissions meet criteria 
for medical necessity once the recommended facility and patient 
criteria are established.
    Therefore, in addition to pursuing our on-going monitoring program 
under the direction of ORDI, existing QIO monitoring and studies 
described in the RY 2006 LTCH PPS final rule (70 FR 24211), and our 
considerations of expanding the QIO role in the LTCH PPS, we awarded a 
contract to Research Triangle Institute, International (RTI) in 
September 2004 for a thorough examination of the feasibility of 
implementing MedPAC's recommendations in the June 2004 Report to 
Congress (which we detail in section XI. of this proposed rule). In the 
RY 2005 LTCH PPS final rule, we noted that this research contract, 
which was funded for FY 2005 was presently being executed and 
therefore, we anticipated that we would be able to include some 
preliminary findings in the RY 2007 LTCH PPS final rule. In this 
proposed rule, as noted previously, we have included a section that 
describes RTI's analyses for the purpose of providing an opportunity 
for public comment prior to the finalizing of RTI's final report.

XI. RTI Report on MedPAC June 2004 LTCH Recommendations

    In the RY 2006 LTCH PPS final rule (70 FR 24209), we discussed 
Chapter 5 of MedPAC's June 2004 Report to Congress (RTC), ``Defining 
Long-Term Care Hospitals'' (LTCHs). In that Report, the Commission 
recommended that the Congress and the Secretary define LTCHs by 
facility and patient criteria to ensure that patients admitted to LTCH 
facilities are medically complex and have a good chance of improvement. 
In

[[Page 4704]]

addition, the Commission recommended expanding the statement of work 
for the Quality Improvement Organizations (QIOs) to enable them to 
monitor LTCH compliance with any newly-established hospital and patient 
criteria.
    As detailed in that same final rule, in response to the 
recommendation in MedPAC's June 2004 Report, on September 27, 2004, we 
awarded a contract to Research Triangle Institute, International (RTI) 
for a thorough examination of the feasibility of implementing the 
Commission's recommendations based on the performance of a wide variety 
of analytic tasks using CMS data files, and information RTI would 
collect from physicians, providers, and LTCH trade associations. This 
contract, ``Long Term Care Hospital (LTCH) Payment System Refinement/
Evaluation,'' will result in a report that will assist CMS in the 
development of criteria for assuring appropriate and cost-effective use 
of LTCHs in the Medicare program. With the recommendations of MedPAC's 
June 2004 Report to Congress as a point of departure, RTI began to 
evaluate the feasibility of developing patient and facility level 
characteristics for LTCHs in order to identify and distinguish the role 
of these hospitals as a Medicare provider.
    In that same final rule, we also described RTI's project plan which 
will be completed in two phases. Phase I focuses on an analysis of 
LTCHs within the current Medicare system: their history as 
participating providers; their case mix; the criteria currently used by 
QIOs to determine the appropriateness of treatment in LTCHs; and the 
site of care for patients treated in areas that lack LTCHs. RTI is 
reviewing prior analyses of these issues by MedPAC and other 
contractors (such as the Urban Institute, 3M Health Information 
Systems, and The Lewin Group) and is also having additional discussions 
with MedPAC, other researchers, and the QIOs. Building on the work of 
Phase I, Phase II addresses the feasibility of MedPAC's proposed 
criteria based on a three-pronged approach: Medicare claims analysis to 
examine patient differences across settings; interviews with QIOs and 
providers to examine level of care definitions currently being used or 
tested; and finally site visits to interview providers with the 
objective of distinguishing LTCHs from other inpatient settings for 
payment purposes. During October through December 2005, RTI scheduled 
and conducted site visits to LTCHs throughout the country that are 
representative of the various types of LTCHs. A team of RTI researchers 
and CMS analysts, including a physician, participated in these visits.

A. Overview of the Issues

    RTI's research is guided by a conceptual framework based upon 
several fundamental premises:
    <bullet> The goal of the Medicare program is the cost-effective 
delivery of the highest quality of medical services to beneficiaries.
    <bullet> LTCHs are the highest paid hospitals in the Medicare 
program. Despite the fact that their availability varies widely across 
the nation, they have increased in numbers exponentially over the last 
10 years. The research is to determine whether this increase is due to 
growing patient demand or industry response to generous payment 
policies.
    <bullet> In parts of the country that lack LTCHs, LTCH-type 
patients may receive hospital-level treatment at acute hospitals as 
outlier patients, at IRFs, or in some cases, IPFs with significantly 
lower payments per beneficiary discharge than at LTCHs. The research 
attempts to determine whether patient outcomes are equivalent across 
these sites.
    In order to evaluate the feasibility of developing patient and 
facility-level criteria specific to LTCHs, it must be determined 
whether there are identifiable differences in the care delivered at 
LTCHs as compared with other hospital-level providers for the same type 
of Medicare patient and if so, what distinguishes the services 
delivered by LTCHs from services at other settings. One clear and 
easily measurable difference is Medicare payments for services since 
payments for LTCH-type patients may differ dramatically depending on 
site of care due to the different base payment rates for each provider 
category. Determining whether there is a correlation between the higher 
payments at LTCHs and improved patient outcomes for the same types of 
patients in different treatment settings is the central question RTI 
will answer. Since there is a wide variation in the range of post-acute 
care available throughout the country, if payments are equivalent per 
case and patient outcomes are generally equal in different areas of the 
country, the variations may be explained as a reflection of variations 
in regional practices. However, if outcomes differ substantially for 
certain types of patients, indicating that LTCH patients have better 
outcomes, the recent growth of the LTCH industry could result in the 
availability of a better level of care for Medicare beneficiaries 
nationwide. Alternatively, if payments differ between provider types 
but patient outcomes are equivalent, one could question whether higher 
cost LTCH services are needed for all types of cases currently treated, 
or more specifically, which types of patients benefit from the higher 
cost LTCH services. Building on MedPAC's earlier work (May 2004, June 
2004), RTI researchers are examining differences in payments and 
outcomes for patients treated in these various settings.

B. Describing the LTCH Universe since FY 2003

    RTI is examining changes in the availability of LTCHs over time. 
The number of LTCHs has more than tripled from 105 in 1993 to 363 as of 
March 2005. Although the two States with the largest number of LTCHs 
are Texas and Louisiana, substantial growth is also occurring in States 
with large numbers of elderly populations including Pennsylvania, Ohio, 
Michigan, Georgia, Indiana, and Oklahoma.
    Using Geographic Information Services (GIS) software to spatially 
present the different types of inpatient post-acute services in acute 
care hospital referral regions (as defined by Dartmouth Atlas 2005), 
RTI is highlighting the regional variation in the availability of LTCHs 
and other substitute providers. The resulting maps indicate that while 
LTCHs are widely available in the northeast and southern States, in the 
western part of the nation they are localized in several small areas 
(for example, Nevada and Utah) and relatively few LTCHs exist on the 
west coast. IPFs and IRFs, in contrast, are more common in the west and 
north central parts of the U.S. where there are few, if any, LTCHs. 
Also, RTI is identifying significant changes in the LTCH universe in 
terms of their ownership. The draft report submitted to CMS notes the 
following facts:
    <bullet> For-profit hospitals entered the market during the 1990s 
and grew continuously until 2005 when they accounted for 58 percent of 
all LTCHs.
    <bullet> While the number of non-profit hospitals also grew 
rapidly, they continued to account for only one-third of all LTCHs 
through 2005.
    <bullet> The number of government-owned hospitals declined 
dramatically from 25 percent to only 8 percent of the LTCHs in 2005.
    There are generally three distinct types of LTCHs with the 
following basic characteristics and patients:
    <bullet> The majority of LTCHs specialize in what they consider to 
be medically complex patients (including many respiratory and 
ventilator-dependent

[[Page 4705]]

patients), and some of these have ICU-type units;
    <bullet> In some regions, LTCHs may focus on rehabilitation 
patients; and
    <bullet> In other areas, LTCHs may be primarily treating patients 
who could otherwise be in IPFs.
    LTCHs in these last two categories differ significantly from the 
first, because generally the patients are less medically complex.

C. Patient, Facility, and Alternative Treatment Site Analysis

    RTI is analyzing claims from the 100 percent MedPAR files for CY 
2003, including acute care, LTCH, IRF, IPF, and SNF records. Episodes 
are constructed to include 180 days of potential use beginning with 
admission to the index hospital and including payments and use of 
associated home health services. The fundamental goals of the analytic 
work are to identify differences between patient populations, 
utilization patterns, outcomes, Medicare program payments by site of 
care, and most significantly, to develop a profile of the LTCH 
admission in 2003. This profile is based on primary diagnoses and 
examines the use of other services prior and subsequent to the LTCH 
admission.
    RTI is also analyzing the data for the acute care hospital patients 
with multiple comorbidities who have reached outlier status at the 
acute care hospital with data for LTCH patients with similar profiles. 
Data on acute care patients who have reached outlier status prior to 
admission to an LTCH are evaluated to determine if there are: (1) Clear 
factors that predicted LTCH use, (2) differences in hospital 
readmission rates between those who use LTCHs and those who do not; and 
(3) program cost differences between the two types of patients.

D. Specific Findings From Claims Analysis

    The following is a summary of the specific issues that the RTI 
draft report will examine followed by a brief description of their 
draft findings from their review of 100 percent of CY 2003 MedPAR data.
1. LTCHs Population
    Table 14 lists the 50 most common DRGs admitted to LTCHs in 2003 as 
a result of the draft report findings and their relative ranking in 
various settings. The top five types of admissions illustrate the 
heterogeneity of the population treated in these facilities and their 
relative importance as admissions to other facilities. While the 
relative ranking in each facility may differ, the absolute number of 
cases admitted to LTCHs may be similar to other settings (Table 15). 
For example, DRG 012: Nervous System Disorders are almost as likely to 
go to an IRF facility for a non-outlier stay as to be admitted to an 
LTCH according to the draft report findings. While this DRG is ranked 
3rd among LTCH and 8th among IRF admissions, the number of cases 
admitted to LTCHs and non-outlier IRFs is fairly comparable (5,846 
compared to 5,508, respectively). Further, nearly five times as many 
cases are admitted to IPFs (28,911).

BILLING CODE 4120-01-P

[[Page 4706]]

[GRAPHIC] [TIFF OMITTED] TP27JA06.000


[[Page 4707]]


[GRAPHIC] [TIFF OMITTED] TP27JA06.001

BILLING CODE 4120-01-C

    Table 15 shows the variation in these admission rates to different 
sites of care. While LTCHs treat a wide range of DRGs, the majority of 
these cases are also treated in alternative settings. For example, 
LTCHs treat only 16 percent of the total DRG 012 cases while the IPFs 
treated 71 percent of these cases. It is interesting to note, in 
general, that LTCHs treat a relatively small proportion of all types of 
cases compared to other settings.
2. Similarities Between the Acute Outlier and LTCH Samples
    The most common admission to both the LTCHs and the subset of acute 
admissions with high-cost outlier payments are the respiratory 
patients. DRG 475 is the most common LTCH admission and the third most 
common in the acute outlier group, both admitting over 8,000 cases a 
year. Infection cases, such as DRG 416: Septicemia, are also quite 
common in the LTCH and acute outlier populations as are renal failure 
patients (DRG 316). These types of cases are frequently admitted as 
either a primary or secondary diagnosis in this population. While 
patients with skin conditions are common to both LTCHs and other 
hospitals, LTCHs appear to specialize in different subsets of the 
patients. LTCHs have a large number of DRG 271: Skin Ulcer patients 
(5,348 cases) while acute care hospitals are more likely to be treating 
DRG 217: Wound debridement cases. DRG 127: (Heart failure and shock) 
cases also are common across settings although the severity of illness 
may differ.
    The population treated in LTCHs is diverse and frequently found in 
alternative settings. As indicated in Table 15, the top 50 DRGs for 
LTCHs constitute 86 percent of all LTCH discharges. These same DRGs 
account for 40 percent of acute outlier discharges, 93 percent of IRF 
outliers and 81 percent of IRF non-outliers (majority due to 
rehabilitation), 87 percent of psychiatric discharges (with 72 percent 
due to psychoses) and 56 percent of SNFs/swing beds discharges.

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3. Differences in DRG-Specific Diagnoses Across Treatment Settings
    While certain DRGs may be common to multiple settings, the 
underlying diagnoses (ICD9-CM) may differ. Table 16 addresses whether 
facilities are specializing in certain subsets of patients within DRGs. 
As mentioned previously, the largest group of LTCH discharges are 
patients with respiratory system diagnosis with ventilator support (DRG 
475) but within this DRG the majority of discharges from LTCHs come 
from ``other lung diseases'' (89.2 percent). Pulmonary collapse, some 
emphysema, acute edema of lung and acute respiratory failure fall under 
this category. Only 41 percent of acute outlier patients within DRG 475 
were discharged with this ICD-9-CM code. Instead, the DRG 475 patients 
in the acute outlier setting had higher proportions admitted with 
pneumonia-related or chronic bronchitis diagnoses.
    The underlying diagnoses in DRG 012: Degenerative nervous system 
disorders varied extensively across settings. More than 80 percent of 
the LTCH admissions had late effects of cerebrovascular disease, as did 
74.5 percent of the IRF outliers; however, this dropped to 54.2 percent 
of the IRF non-outliers and 52.5 percent of those in SNF/swing beds. 
Psychiatric patients in this DRG were more likely to have cerebral 
degeneration (95.7 percent), which includes Alzheimer's disease. 
Parkinson's Disease is the third most common diagnoses in this group, 
accounting for 4.2 percent of the LTCH cases and over 26 percent of the 
non-outlier IRF cases.
    The primary diagnoses for DRG 249: Aftercare of musculoskeletal 
system and connective tissue (DRG 249) also differed across settings. 
Four-fifths of patients in LTCHs and SNF/swing beds (82.4 percent, 78.6 
percent, respectively) were there for ``other orthopedic aftercare,'' 
(which included, for example, the removal of fracture plate, pins, 
rods, screws) and the aftercare for healing traumatic or pathologic 
fractures. In contrast, in the acute outlier, IRF outlier, and IRF non-
outlier populations these patients were more likely to be treated for a 
replacement and graft-related complications.
    Among the 50 most frequent types of LTCH admissions, the most 
expensive case is DRG 076 (Other Respiratory System OR Procedures w/CC) 
which has an average Medicare episode payment of $120,806 (Table 17). 
While this case is ranked the 23rd most common type of LTCH admission, 
it is the most expensive type of episode due to its high acute and LTCH 
hospital payments. These cases have the second highest acute payments 
prior to LTCH admission ($60,612) and the second highest LTCH payment 
($58,357). The combined acute and LTCH LOS is 81 days, of which two-
thirds is LTCH days (55 days).
    The most common LTCH case, DRG 475: Respiratory System Diagnosis 
with Ventilator Support is the second most expensive LTCH episode. 
Medicare payments for these cases are $118,635 on average and the 
average length stay from hospital admission to LTCH discharge is 70 
days. These cases have the most expensive acute hospital stay and the 
fourth most expensive LTCH stay.
    DRG 462: Rehabilitation is the second most common type of LTCH 
admission, although it accounts for only one-third as many admissions 
as go to IRFs with outlier payments. These cases are ranked 35th in 
terms of episode payments with almost half of the payments ($20,311) 
related to the LTCH admission. The average length stay in the LTCH is 
27 days following 11 days in the acute hospital. This DRG is also the 
most common IRF admission and accounts for two-thirds of all IRF cases. 
In contrast to the LTCH, IRF payments range from $11,741 for the 
majority of cases to $23,104 for the small percent that receive IRF 
outlier adjustments. Little is known about the differences in severity 
across the different settings since Functional Independence Measures 
(FIM scores) are only collected in the IRF.
    The majority of LTCH cases are admitted from an acute hospital 
(79.2 percent), and has higher LTCH payments than acute care hospital 
payments. This is particularly true among the 20 most expensive LTCH 
cases, the exceptions being DRG 76, DRG 475, DRG 87, DRG 99, and DRG 
452 which have higher acute payments. The more common skin ailments, 
including DRG 263, DRG 217, and DRG 271, have LTCH payments two to 
three times greater than the preceding acute stay payment.
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4. Variation of Payment and Use Patterns by Regional Location
    Table 18 presents LTCH discharges by DRG and by census region to 
examine differences in the types of cases admitted to LTCHs across the 
regions. Use of these hospitals may vary because of the availability of 
alternative providers in certain parts of the country.
    The West South Central region by far has the largest number of 
discharges from LTCHs. Excluding this region, the number of discharges 
was lowest in the Western Mountain region and highest in the East North 
Central region.
    DRG 475 (respiratory with ventilator support) accounted for the 
highest number of discharges in most regions. These discharges were by 
far the most common among the 7 DRGs listed in the East North Central 
region and the South Atlantic. However, there were three regions where 
this DRG was not the most frequent type of discharge among those 
listed: New England, East South Central and West South Central. In the 
New England region, DRG 249 (Aftercare, Musculoskeletal System and 
Connective Tissues), DRG 012 (Degenerative Nervous System Disorders) 
and DRG 088 (COPD) were more common than DRG 475. In the East South 
Central and West South Central regions, DRG 462 (Rehabilitation) was 
the most common DRG.
5. Payment Variation Across Regions
    Despite the fact that the LTCH PPS, like all prospective payment 
systems is designed to provide a uniform Medicare payment for each LTC-
DRG, there are facility and patient level adjustments that may impact 
the payments for any specific case. Under the LTCH PPS, for example, 
there is an area wage adjustment (which is being phased-in over 5 
years) which would impact payments regionally. There may also be 
variations among LTCHs and across regions in the admission of short 
stay outliers, the number of interrupted stay cases, and on-site 
discharges and readmittances, all of which could affect Medicare per 
discharge payments.
    RTI examined Medicare payments and levels of use across different 
regions. Among the 20 most frequently admitted LTCH conditions, DRG 475 
was the highest cost DRG across all regions. In the West South Central, 
with its high volume of LTCH admissions, the second most expensive type 
of case is the DRG 263: Skin Graft and Debridement for Skin Ulcer which 
ranked 13th in volume across all LTCH admissions.
    Use levels also varied regionally. As with the payments, LOS for 
DRG 475 was highest in New England as compared to the shortest stays 
for these cases being in the West South Central region which had the 
highest number of these admissions. In general, New England lengths of 
stay were longer than in other parts of the nation for respiratory and 
infection cases as well as nervous system disorders. Skin ulcers, 
pulmonary edema, respiratory infections, skin graft and debridements, 
psychoses, and renal failure cases also tended to stay longer in the 
northeast.
6. Identifying LTCH Patients Relative to Other PAC Patients
    While the proportion of post acute patients entering LTCHs is 
relatively small compared to other post acute settings (only 1.8 
percent in 2002), the number of beneficiaries discharged from IPPS 
hospitals in 2002 into LTCHs more than doubled between 1996 and 2002. 
Thirty-six percent of the LTCH admissions were subsequently admitted to 
a SNF, IRF, or readmitted to an acute care hospital.
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    LTCH users tend to have a higher number of comorbidities relative 
to other types of post acute episodes. RTI also evaluated medical 
complexity by using Hierarchical Coexisting Condition (HCC) scores 
which are based on a patient's Medicare expenditures from the year 
preceding the index IPPS admission. ``LTCH only'' users had the highest 
average HCC score of any episode type.
7. Average Medicare Payments
    Several studies have shown that LTCH stays are more costly to the 
Medicare program on average than stays within other post acute settings 
(MedPAC 2003).
a. LTCH and Acute Outlier Episodes of Care
    RTI compared the resources, payments, and outcomes of LTCH patients 
with one of 50 common LTCH DRGs to those admitted to an acute care 
hospital and for whom the acute care hospital received an outlier 
payment (`Acute Outlier') (Table 19). These two samples are separate, 
yet somewhat overlapping. The LTCH sample provides a profile of all 
LTCH admissions and it includes the 80 percent of admissions who had a 
prior hospital stay, of which 12.4 percent had an outlier adjustment as 
well as the remaining 20 percent who may have been admitted from home, 
a SNF, IRF, or physician's office. The acute outlier sample includes 
all acute care cases that received an outlier payment for one of the 
top 50 LTCH DRGs. This sample contains both cases that did and did not 
use LTCHs and provides an overview of high cost, longer stay patients 
in the acute hospital who could have potentially been admitted to an 
LTCH. Episodes are defined as 180 day periods beginning with an index 
stay at either the LTCH or the acute setting.
    Using 2003 claims, the two sets of episodes were created based on 
the index, or qualifying, acute care hospital stay. An episode is 
defined as all Medicare services provided in an acute hospital, LTCH, 
IRF, SNF, IPF, or home health agency within 180 days of the index 
admission. Within the 100 percent of 2003 MedPAR files, 102,749 LTCH 
episodes were identified.
    The acute outlier episode sample has 54,023 cases that had a 
qualifying admission at an acute hospital with an outlier payment and 
an LTCH-like DRG. Only about 11 percent of these cases were discharged 
to an LTCH despite the sample being based on the top 50 DRGs commonly 
treated in an LTCH.
    Demographic Characteristics. The two samples differed in terms of 
their demographic characteristics. Compared to acute outlier episodes, 
LTCH admissions were older (73.1 years vs. 71.4 years), more likely to 
be female (55 percent vs. 50 percent) and living in a State with a 
higher concentration of LTCHs (57 percent vs. 23 percent). Acute 
outlier episodes had a higher proportion of deaths compared to LTCH 
cases (61 percent vs. 42 percent).
    Severity of Illness. Several measures of severity of illness were 
included and they are useful for understanding differences in the types 
of resources used in these two types of hospitals. The results show 
that both Acute Outlier (AO) and LTCH episodes had comparably high 
numbers of comorbid diagnosis on the index claim (8.8 vs. 8.1, 
respectively). The Charlson Comorbidity Index, a widely used severity 
and mortality measure in health services research, scores were also 
comparable but relatively low (1.6 vs. 1.5, respectively). However, 
there were substantially more procedures performed during the index AO 
stay (4.6 vs. 1.7 procedures). Both types of admissions had intensive 
care unit (ICU) stays and coronary care unit (CCU) stays, although 
these were longer in the acute outlier episodes compared to LTCH cases 
(21 days vs. 1 day, on average across all cases). Almost 22 percent of 
the acute outlier sample with ICU/CCU days had surgery during the 
outlier stay. These differences reflect differences in the types of 
procedures completed in an acute hospital compared to an LTCH.
    Regarding the most common conditions (that is, DRG) in both 
settings, LTCH episodes were more likely to have a DRG for respiratory 
conditions (DRG 079, 087, 088, 089), and ``Degenerative Nervous System 
Disorders.'' AO populations were more likely than LTCH admissions to be 
treated for ``Heart Failure & Shock.''. The following LTCH DRGs also 
accounted for a larger share of the LTCH sample than the acute outlier 
group: Aftercare, Musculoskeletal System & Connective Tissue; Aftercare 
w/o History of Malignancy As Secondary Diagnosis; Skin Ulcers; and a 
DRG for Rehabilitation. Interestingly, despite DRG 475 being the most 
common LTCH admission, they represent a higher share of the acute 
outlier episodes than the LTCH admissions (14 percent vs. 9 percent 
among LTCH episodes).
    Acute hospital readmission rates (Table 20) were somewhat higher in 
LTCH episodes (40 percent) than acute outlier episodes (36 percent). Of 
those readmitted from an LTCH episode, 2.3 percent received outlier 
adjustments for the subsequent acute stay. Subsequent service use also 
differed between the two populations. The LTCH sample was more likely 
to use home health care (33.2 percent v. 24.3 percent). However, they 
were less likely to use an IRF or SNF (5 percent vs. 7 percent and 26 
percent vs. 31 percent, respectively).
    Almost 80 percent of the LTCH admissions were admitted from an 
acute hospitalization within 5 days prior to the index LTCH admission. 
Among these episodes, 63 percent had surgery during this prior 
hospitalization and 12 percent of the acute stays included an outlier 
payment, with an average hospital payment of $24,790 per stay. Among 
these outlier episodes, almost all cases had surgery (99 percent) and 
required intensive or coronary care (93 percent) with lengthy stays in 
the acute hospital prior to the LTCH admission.

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b. Acute Outlier Episodes Compared to LTCH Episodes
    RTI has noted the differences between the LTCH population and the 
subset of acute admissions with a DRG commonly found in the LTCH 
admissions and for whom an outlier payment is made. The acute outlier 
sample is further broken out by whether the case resulted in an LTCH 
admission. Table 21 shows that only 10.5 percent of the acute outlier 
cases with these DRGs were discharged to an LTCH. As expected, the 
average episode payments for LTCH users were 87 percent greater than 
payments for outlier episodes that did not include LTCH admissions. 
About half the difference is due to the LTCH payment but the other half 
is largely due to substantially higher payments for the acute outlier 
stay ($80,380 for those discharged to an LTCH compared to $54,390 for 
outlier cases who did not use LTCHs). The average LTCH payment in the 
outlier sample is also higher than the average LTCH admission payment 
($34,990 compared to $26,786).
    The average hospitalization in the acute care hospital for an 
outlier stay is significantly longer than the average stay preceding an 
LTCH admission (25 to 28 days versus 14.5 days). While 79.2 percent of 
all LTCH admissions have an acute care stay in the 5 days preceding 
LTCH admission, only 12 percent of them are outlier cases. The majority 
of LTCH admissions are not acute outliers. Also, once in the LTCH, 
about 40 percent of all cases are discharged with a SSO adjustment. 
Despite this, the average length stay in the all LTCHs is 32.8 days.
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    The subsequent use of IRFs and SNFs is slightly lower in the LTCH 
universe than in the acute outlier sample. However, within the acute 
outliers, those who were first discharged to LTCHs were less likely to 
use IRFs and SNFs, although their payments were generally higher when 
they did use these services.
Determining and Evaluating Levels of Care
    A key issue in defining the distinct role of LTCHs in the Medicare 
provider continuum is the need to objectively define the service 
intensity level an LTCH should provide relative to other providers in 
the continuum. As part of this effort, RTI is examining the definitions 
currently used by the Medicare program, LTCH providers, potential 
substitute providers, and insurers regarding the relative role of acute 
hospitals, LTCHs, IRFs, and SNFs. Included are reviews of the Medicare 
conditions of participation governing each of these providers, the QIOs 
and insurance industry's guidelines for determining appropriate levels 
of care, and the post acute industry's definitions of their own and 
others levels of care as developed for Congressional testimony or 
internal discussions. In addition, RTI has conducted site visits to 
speak with the physicians and discharge planning staff at LTCHs 
regarding the types of cases they typically do or do not admit.
    First, because of the rising interest in better defining post acute 
care in all settings, several groups developed definitions of intensity 
for the post acute continuum either for Congressional testimony or as 
internal working documents of provider associations or in managed care 
organizations. These definitions were made available to RTI and 
compared across industries to understand the role each expects LTCHs 
and the alternative providers to serve in treating Medicare 
beneficiaries. These comparisons can be summarized in terms of the 
frequency of physician visits and nursing hours, as shown in Table 22. 
The LTCHs and IRFs also tend to differ by the primary diagnosis, with 
the LTCHs focusing on medical intensity and IRFs focusing on 
rehabilitation intensity.

                     Table 22.--Clinical Intensity Associated With Different Levels of Care
                                         [Based on the RTI Draft Report]
----------------------------------------------------------------------------------------------------------------
                                                 LTCH                     IRF                       SNF
----------------------------------------------------------------------------------------------------------------
Physician visits.....................  Daily 2-3/week.........  2-3/week Close med       General supervision at
                                                                 Supervision.             least every 14-30
                                                                                          days.
Consulting physician.................  2-3/week...............  Frequent...............  As needed.
Nursing hours........................  6-12 hr/day............  6.5 Rehab RN...........  2.5-4 hours/day.
----------------------------------------------------------------------------------------------------------------
RTI analyses of Medicare Administrative files, 2003.
Source: RTI analysis of PAC comparisons developed by the PAC industries.

    Second, RTI reviewed the Medicare certification and conditions of 
participation regulations for LTCHs and potential substitute providers. 
These certification regulations define: What constitutes a type of 
provider; their certification requirements; and the coverage criteria 
associated with each. Many of the requirements are common across the 
IPPS, IRF, IPF, and LTCHs. Each is providing inpatient acute care. In 
addition, the IRFs and IPFs have staffing requirements that include 
team-related management of their patients, professional specializations 
that reflect the respective services, and special provisions governing 
their units and satellite facilities. LTCHs lack most of these 
requirements. Instead, they must meet the same requirements as IPPS 
acute hospitals and then demonstrate that they meet the LOS 
requirement, that is, they treat Medicare patients for an average of 
greater than 25 days on an annual basis. They have additional 
requirements governing their ability to open HwHs. However, they lack 
many of the staffing and treatment requirements that Medicare requires 
for IRFs and IPFs to qualify as specialized inpatient hospitals.
    Third, RTI reviewed insurance and industry-based definitions of the 
level of care distinctions that are commonly applied to different 
Medicare providers. These standards are generally used by the Medicare 
QIOs and private insurance review entities to make coverage decisions. 
QIOs have statutory authority under section 1154(a) of the Act to: 
Review the necessity and reasonability of services delivered under 
Medicare; whether these services meet professionally recognized 
standards of health care; and whether these services, consistent with 
the provision of appropriate medical care, could be ``effectively 
provided more economically * * * in an inpatient health care facility 
of a different type.''
    Although QIOs are not required to utilize uniform criteria 
nationwide for these determinations, most of them rely on Interqual as 
a baseline screening tool with physician-level decision-making for 
cases that appear to fall outside the acceptable level of care 
guidelines. QIOs were interviewed regarding the specific strengths and 
weaknesses of the screening criteria they presently use and their 
applicability for CMS purposes.
    Phone interviews with QIOs in Connecticut, Louisiana Maryland/DC, 
Massachusetts, Michigan, Nevada/Utah, New York, Pennsylvania and Texas 
(nine QIOs that represent 11 States/districts) were conducted. In 
general, States were selected that had a high number or growing number 
of LTCHs and also those that had possible substitute providers, such as 
IRFs, IPFs or SNFs. RTI also selected States that had high numbers of 
LTCHs and at least one other type of provider to examine how the QIOs 
view similar cases and make determinations regarding appropriate use of 
LTCHs compared to potential substitutions.
    In general, most of the QIOs and many of the hospital chains used a 
variation of the Interqual definitions of level of care to determine 
appropriateness of admissions. These criteria measure a potential 
patient's severity of illness based on combinations of conditions and 
intensity of service based on expected resources needed to treat the 
patient if admitted. In addition, hospitals may use other criteria to 
determine if a patient is appropriate for treatment at their facility. 
Parts of the LTCH industry have proposed guidelines for their hospitals 
to use in determining appropriate admissions. These criteria are less 
specific than those used by the QIOs although all are used as 
guidelines with the final determinations made by physicians.
    Fourth, patient assessment tools, screening criteria, and intensity 
measures were collected from LTCHs through their associations and 
corporate entities. These tools are used by LTCHs to determine 
appropriateness of admissions, intensity of patients served,

[[Page 4726]]

and outcomes expected from the treatment. They provide information on 
items commonly used by LTCHs to track patient conditions, treatment 
needs, and determine staffing levels. In addition to information on 
patient demographics, insurance, and medical history, the forms contain 
items on patient acuity, including measures of their blood gas, glucose 
levels, oxygen saturation levels, respiratory rates, and functional 
levels, as well as, treatment needs (such as tube feeding, central 
lines, and IV medications, GI suctioning, dialysis (hemodialysis or 
peritoneal), ventilator weaning, pain management, wound measures, or 
telemetry monitoring.) These measures cover the range of special 
services provided by LTCHs and can be useful for measuring patient 
acuity differences. While they provide objective measures of patient 
intensity, much work remains to be done in setting the levels for 
determining whether a patient belongs in an LTCH or an alternative site 
of care. Proposed levels were already developed by Interqual and other 
private sector entities, as well as, parts of the industry. More 
discussion is needed to set specific levels of care determinations that 
include the range of specialists treating these patients. RTI is 
reviewing these proposed criteria along with existing criteria and 
patient assessment models used by QIOs, LTCHs, and incorporating input 
from clinicians with the objective of developing recommendations to CMS 
regarding a patient assessment instrument for LTCHs.
Site Visits
    RTI researchers, accompanied by CMS analysts (including a physician 
with clinical experience in LTCHs) visited LTCHs around the country. 
Sites were selected based on a breakdown of hospital referral regions 
(as defined by Dartmouth Atlas 2005) to select areas that vary in the 
availability of LTCHs, IRFs, IPFs, and SNFs across the U.S. and with 
the input and cooperation of LTCH industry groups.
    Facilities were selected to provide an overview of the range of 
populations typically treated in LTCHs and varying in geographic 
distribution, facility age, and medical specializations. Hospitals were 
selected to include free standing, HwHs, and satellites as well as 
LTCHs representing several different types of facilities such as: Older 
non-profit LTCHs specializing in specific types of cases; newer for-
profit chains, co-located LTCHs that are part of a medical system; and 
other providers that treat LTCH-type patients.
    These site visits are essential in providing an in-depth 
examination of LTCHs' populations and services relative to other types 
of facilities and under different models of care. Personnel at LTCHs 
were asked to contrast their level of care with that provided in other 
treatment settings, including acute care hospitals, IRFs, and SNFs.
    Interview materials were developed to ensure that the same 
questions were asked regarding the difference in intensity or level of 
care for patients treated in an LTCH versus other inpatient hospital-
level settings or SNFs. The following groups were interviewed from host 
hospitals: Discharge planners, medical directors, admissions directors, 
nursing/quality assurance directors, therapy directors, and in some 
cases, the finance directors. The focus was on the types of patients 
admitted, differences in expectations regarding outcomes and, relative 
payment to cost differences across differently certified beds.
    Although we expect the final RTI report on this project to have a 
substantial impact on future Medicare policy for LTCHs, we still 
believe that even with the development of defined patient and perhaps 
facility-level criteria, that the retention of many of the specific 
payment adjustment features of the LTCH PPS presently in place may 
still be both necessary and appropriate for purposes of protecting the 
integrity of the Medicare Trust Fund. We expect that the RTI's final 
report will be submitted to us in late Spring 2006.

XII. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
    <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.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements:

Section 412.525 Adjustments to the Federal Prospective Payment 
Provision for Short-Stay Outliers

    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 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 FI to substantiate its request for the use of a 
different CCR by their FI. For example, necessary documentation, as 
stipulated by CMS and the FI, 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.

Section 412.529 Special Payment Provision for Short-Stay Outliers

    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 FI to substantiate its request for the use of a 
different CCR by their FI. For example, necessary documentation, as 
stipulated by CMS and the FI, 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 will be submitting a copy of this proposed rule to OMB for its 
review of the information collection requirements described above. 
These requirements are not effective until they have been approved by 
OMB.

[[Page 4727]]

    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:
    Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development Group, Attn: 
William N. Parham, III, [CMS-1485-P], Room C4-26-05, 7500 Security 
Boulevard, Baltimore, MD 21244-1850; and
    Office of Information and Regulatory Affairs, Office of Management 
and Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Carolyn Lovett, CMS Desk Officer, [CMS-1485-P], <a href="/cdn-cgi/l/email-protection#b5d6d4c7dad9ccdbead9dac3d0c1c1f5dad8d79bd0dac59bd2dac3"><span class="__cf_email__" data-cfemail="6b080a19040712053407041d0e1f1f2b040609450e041b450c041d">[email protected]</span></a>. Fax (202) 395-6974.

XIII. Regulatory Impact Analysis

A. Introduction

    We have examined the impact of this proposed rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-
354), section 1102(b) of the Act, the Unfunded Mandates Reform Act of 
1995 (UMRA) (Pub. L. 104-4), and Executive Order 13132.
1. Executive Order 12866
    Executive Order 12866 (as amended by Executive Order 13258, which 
merely assigns 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 one 
year). We are using the proposed rates, factors and policies presented 
in this proposed rule, including updated proposed wage index values, 
and the best available claims data to estimate proposed payments for 
the 2007 LTCH PPS rate year. Based on the best available data for 259 
LTCHs, we estimate that the proposed change to the SSO policy (as 
discussed in section V.A.1. of this preamble) for the 2007 LTCH PPS 
rate year, in conjunction with the proposed changes to the area wage 
adjustment (discussed in section IV.D.1. of the preamble of this 
proposed rule) the proposed increase in the outlier fixed-loss amount 
(discussed in section IV.D.3.c. of this preamble) and the proposed 
slight increase in the budget neutrality offset to account for the 
transition methodology (as discussed in section IV.D.5. of this 
preamble), would result in a decrease in estimated payments from the 
2006 LTCH PPS rate year of approximately $362 million for the 259 
LTCHs. (An estimate of Medicare program payments for LTCH services for 
the next 5 years is shown in section XIII.B.5. of this proposed rule.) 
Because the combined distributional effects and costs to the Medicare 
program are greater than $100 million, this proposed rule is considered 
a major economic rule, as defined in this section.
2. Regulatory Flexibility Act (RFA)
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$26 million or less in any 1 year. For purposes of the RFA, all 
hospitals (and most other providers and suppliers) are considered small 
entities according to the Small Business Administration's latest size 
standards (for further information, see the Small Business 
Administration's regulation at 65 FR 69432, November 17, 2000). Because 
we lack data on individual hospital receipts, we cannot determine the 
number of small proprietary LTCHs. Therefore, we assume that all LTCHs 
are considered small entities for the purpose of the analysis that 
follows. Medicare fiscal intermediaries are not considered to be small 
entities. Individuals and States are not included in the definition of 
a small entity.
    Currently, our database of 259 LTCHs includes the data for 61 non-
profit (voluntary ownership control) LTCHs and 189 proprietary LTCHs. 
The remaining 9 LTCHs are Government-owned and operated (see Table 23). 
The impact of the proposed changes for the 2007 LTCH PPS rate year is 
discussed below in section XIII.B.4.c. of this proposed rule. The 
provisions of this proposed rule are estimated to result in 
approximately an 11 percent decrease in estimated payments per 
discharge in the 2007 LTCH PPS rate year on average to LTCHs (as shown 
in Table 23). As discussed in greater detail below in this section (and 
as shown in Table 23), the majority of the approximately 11 percent 
decrease in estimated payments in the 2007 LTCH PPS rate year as 
compared to the 2006 LTCH PPS rate year is due to the proposed change 
in the payment formula for SSO cases (discussed in section V.A.1.a. of 
the preamble of this proposed rule). We do not believe that this 
proposed change would result in an adverse impact on affected LTCHs for 
the reasons discussed below in this section. We believe that, if 
implemented, the proposed changes to the SSO policy would accomplish 
our stated goal of removing the incentive for LTCHs to admit patients 
for whom a long-term hospital stay is not necessary and therefore, for 
whom the LTCH would not be providing complete treatment.
    As we discuss in greater detail in section V.A.1.a. of the preamble 
of this proposed rule, currently about 37 percent of all LTCH cases are 
short-stay outliers, most of which were admitted to the LTCH directly 
from an acute-care hospital. Thus, many short-stay cases may be still 
in need of acute-level care at the time of admission to the LTCH, which 
may indicate a premature and inappropriate discharge from the acute 
care hospital. As we also discussed in the preamble above, we believe 
that the proposed changes to the SSO policy would result in a more 
appropriate payment for short-stay cases treated at LTCHs. We believe 
that by removing the financial incentive for LTCHs to admit such a 
larger percentage of short-stay cases by paying appropriately for these 
cases, LTCHs would change their admission patterns for these patients. 
Specifically, we believe that if the proposed changes to the SSO are 
implemented, most LTCHs would substantially reduce the number of short-
stay cases that they admit (and most of those patients would continue 
to receive treatment at the acute-care hospital from which they are 
typically discharged from immediately prior to their LTCH (short-stay) 
admission).
    The estimated 11.1 percent decrease in LTCH PPS payments for RY 
2007 was determined based on the current LTCH admission pattern of SSO 
cases (that is, currently about 37 percent of all LTCH cases). Thus, we 
believe that the estimated 11.1 percent decrease in LTCH payments per 
discharge for RY 2007 would only occur if LTCHs were to continue to 
admit the same number of SSO patients. Since the majority of the 
approximately 11 percent decrease in estimated payments is due to the 
proposed change in the SSO policy and since we anticipate that LTCHs 
would no longer admit such a large percentage of SSO patients if such 
proposed changes are implemented, we believe that the actual decrease 
in LTCHs' payments for RY 2007 would be considerably less than 11 
percent. (Although we expect LTCHs to admit fewer cases under this 
proposed change,

[[Page 4728]]

we believe that most LTCHs, which are HwHs, would not experience an 
increase in cost per discharge as a result of unoccupied beds. Rather, 
we expect that LTCHs would make a commensurate reduction in available 
beds. LTCHs would lease fewer beds, and therefore, the LTCHs' cost per 
discharge would not increase dramatically.)
    Furthermore, our Medicare margins analysis of the most recent LTCH 
cost report data, show that LTCH PPS payments for FY 2003 were 8.8 
percent higher than LTCHs' Medicare costs, and preliminary cost report 
data for FY 2004 reveal an even higher Medicare margin of 11.7 percent 
(as discussed in greater detail in section IV.C.3. of the preamble to 
this proposed rule). Since LTCH PPS payments appear to be more than 
adequate to cover the costs of the efficient delivery of care to 
patients at LTCHs, based on this margins analysis, we believe that even 
with an estimated decrease in LTCHs' payments per discharge for the 
2007 LTCH PPS rate year, which may result from, among other things, the 
continued treatment of some short-stay cases and the estimated slight 
decrease in payments due to the proposed changes to the area wage 
adjustment (see Table 23 below in this section) LTCH PPS payments in RY 
2007 would still be sufficient to compensate LTCHs for the costs of the 
efficient delivery of LTCH services to LTCH patients. Thus, we do not 
expect that the provisions of this proposed rule would result in an 
adverse financial impact on affected LTCHs nor would there be an effect 
on beneficiaries' access to care.
    For the reasons discussed above, we do not expect an estimated 
decrease of 11.1 percent to the LTCH PPS Medicare payment rates to have 
a significant adverse effect on the ability of most LTCHs to provide 
cost efficient services to Medicare patients. In addition, LTCHs 
provide some services to (and generate revenue from) patients other 
than Medicare beneficiaries. The revenue to LTCHs from treating those 
patients is not affected by this proposed rule. Accordingly, we certify 
that this proposed rule would not have a significant impact on a 
substantial number of small entities, in accordance with RFA.
3. Impact on Rural Hospitals
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a proposed or final rule may have a significant 
impact on the operations of a substantial number of small rural 
hospitals. This analysis must conform to the provisions of section 604 
of the RFA. For purposes of section 1102(b) of the Act, we define a 
small rural hospital as a hospital that is located outside of a 
Metropolitan Statistical Area and has fewer than 100 beds. As shown in 
Table 23, we are estimating an 11.3 percent decrease in payment per 
discharge for the 2007 LTCH PPS rate year as compared to the 2006 LTCH 
PPS rate year based on the data of the 9 rural hospitals in our 
database of 259 LTCHs for which complete data were available.
    As discussed above in this section, the majority of the 
approximately 11 percent decrease in estimated payments in the 2007 
LTCH PPS rate year as compared to the 2006 LTCH PPS rate year for rural 
LTCHs is due to the proposed change in the payment formula for SSO 
cases (discussed in section V.A.1.a of the preamble of this proposed 
rule). We do not believe that this proposed change would result in an 
adverse impact on rural LTCHs because, under this proposed change, we 
believe that LTCHs (including rural LTCHs) would significantly reduce 
the number of short-stay cases that they admit since such a policy 
would remove the financial incentive for LTCHs to treat short-stay 
cases by paying appropriately for them (as we discussed in greater 
detail above in section XIII.A.2. of this proposed rule). Furthermore, 
we believe that if the proposed changes to the SSO policy are 
implemented, although most LTCHs (including rural LTCHs) would admit 
fewer short-stay cases, most of those patients would continue to 
receive treatment at the acute-care hospital from which they are 
typically discharged from immediately prior to their LTCH (short-stay) 
admission, and most LTCHs (which are HwHs) would not experience an 
increase in cost per discharge as a result of unoccupied beds.
    The estimated 11.3 percent decrease in LTCH PPS payments for RY 
2007 for rural LTCHs was determined based on the current LTCH admission 
pattern of SSO cases (that is, currently about 37 percent of all LTCH 
cases). Thus, we believe that the estimated 11.3 percent decrease in 
LTCH payments per discharge for RY 2007 for rural LTCHs would only 
occur if rural LTCHs were to continue to admit the same percentage of 
SSO patients. Since the majority of the approximately 11 percent 
decrease in estimated payments for rural LTCHs is due to the proposed 
change in the SSO policy and since we anticipate that LTCHs (including 
rural LTCHs) would no longer admit such a large percentage of SSO 
patients if such proposed changes are implemented, we believe that the 
actual decrease in rural LTCHs' payments for RY 2007 would be 
considerably less than 11 percent. Therefore, we believe that the 
estimated 11.3 percent decrease in payments per discharge for the 2007 
LTCH PPS rate year for rural LTCHs would only occur if LTCHs maintain 
the same level of SSO patients.
    Moreover, as also discussed in greater detail above in section 
XIII.A.2. of this proposed rule, based on our Medicare margins analysis 
for LTCHs which shows payments in excess of costs for FYs 2003 and 
2004, we believe that even with an estimated decrease in LTCHs' 
payments per discharge for the 2007 LTCH PPS rate year, LTCH PPS 
payments to rural LTCHs would still be sufficient to compensate LTCHs 
for the costs of the efficient delivery of LTCH services to LTCH 
patients. (For additional information on the impact of the proposed 
changes on rural LTCHs presented in this proposed rule, refer to the 
discussion of the impact analysis in section XIII.B.4 of this proposed 
rule.)
    For the reasons discussed in this section, we do not expect that 
the provisions of this proposed rule would result in an adverse 
financial impact on rural LTCHs nor would there be an effect on 
beneficiaries' access to care. Therefore, we do not expect an estimated 
decrease of 11.3 percent to the LTCH PPS Medicare payment rates for 
rural LTCHs to have a significant adverse effect on the ability of most 
LTCHs to provide cost efficient services to Medicare patients. 
Accordingly, we substantiate that the rates and policies set forth in 
this proposed rule would not have an adverse impact on rural hospitals 
based on the data of the 9 rural hospitals in our database of 259 LTCHs 
for which data were available.
4. Unfunded Mandates
    Section 202 of the UMRA requires that agencies assess anticipated 
costs and benefits before issuing any rule that may result in 
expenditures in any one year by State, local, or tribal governments, in 
the aggregate, or by the private sector, of $120 million or more. This 
proposed rule would not mandate any requirements for State, local, or 
tribal governments, nor would it result in expenditures by the private 
sector of $110 million or more in any one year.
5. Federalism
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it publishes 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.
    We have examined this proposed rule under the criteria set forth in 
Executive

[[Page 4729]]

Order 13132 and have determined that this proposed rule would not have 
any significant impact on the rights, roles, and responsibilities of 
State, local, or tribal governments or preempt State law, based on the 
9 State and local LTCHs in our database of 259 LTCHs for which data 
were available.

B. Anticipated Effects of Proposed Payment Rate Changes

    We discuss the impact of the proposed changes to the payment rates, 
factors, and policies presented in this proposed rule in terms of their 
fiscal impact on the Medicare budget and on LTCHs.
1. Budgetary Impact
    Section 123(a)(1) of BBRA requires that the PPS developed for LTCHs 
``maintain budget neutrality.'' Therefore, in calculating the FY 2003 
standard Federal rate under Sec.  412.523(d)(2), we set total estimated 
payments for FY 2003 under the LTCH PPS so that aggregate payments 
under the LTCH PPS are estimated to equal the amount that would have 
been paid if the LTCH PPS had not been implemented. However, as 
discussed in greater detail in the August 30, 2002 final rule (67 FR 
56033 through 56036), the FY 2003 LTCH PPS standard Federal rate 
($34,956.15) was calculated based on all LTCHs being paid 100 percent 
of the standard Federal rate in FY 2003. As discussed in section 
IV.D.5. of this proposed rule, we would apply a proposed budget 
neutrality offset to payments to account for the monetary effect of the 
5-year transition period and the policy to permit LTCHs to elect to be 
paid based on 100 percent of the proposed standard Federal rate rather 
than a blend of proposed Federal prospective payments and reasonable 
cost-based payments during the transition. The amount of the proposed 
offset is equal to 1 minus the ratio of the estimated payments based on 
100 percent of the LTCH PPS Federal rate to the projected total 
Medicare program payments that would be made under the transition 
methodology and the option to elect payment based on 100 percent of the 
Federal prospective payment rate.
2. Impact on Providers
    The basic methodology for determining a LTCH PPS payment is set 
forth in Sec.  412.515 through Sec.  412.525. In addition to the basic 
LTC-DRG payment (standard Federal rate x LTC-DRG relative weight), we 
make adjustments for differences in area wage levels, cost-of-living 
adjustment for Alaska and Hawaii, and short-stay outliers. Furthermore, 
LTCHs may also receive high-cost outlier payments for those cases that 
qualify based on the threshold established each rate year. Section 
412.533 provides for a 5-year transition to payments based on 100 
percent of the Federal prospective payment rate. During the 5-year 
transition period, payments to LTCHs are based on an increasing 
percentage of the LTCH PPS Federal rate and a decreasing percentage of 
payment based on reasonable cost-based methodology. Section 412.533(c) 
provides for a one-time opportunity for LTCHs to elect payments based 
on 100 percent of the LTCH PPS Federal rate.
    In order to understand the impact of the proposed changes to the 
LTCH PPS discussed in this proposed rule on different categories of 
LTCHs for the 2007 LTCH PPS rate year, it is necessary to estimate 
payments per discharge under the LTCH PPS rates, factors and policies 
established for the RY 2006 LTCH PPS final rule and to estimate 
proposed payments per discharge that would be made under the proposed 
LTCH PPS rates, factors and policies for the 2007 LTCH PPS rate year 
(as discussed in the preamble of this proposed rule). We also evaluated 
the percent change in payments per discharge of estimated 2006 LTCH PPS 
rate year payments to estimated proposed 2007 LTCH PPS rate year 
payments for each category of LTCHs.
    Hospital groups were based on characteristics provided in the 
Online Survey Certification and Reporting (System) (OSCAR) data, FYs 
2001 through 2003 cost report data, and Provider Specific File data. 
Hospitals with incomplete characteristics were grouped into the 
``unknown'' category. Hospital groups include:
    <bullet> Location: Large Urban/Other Urban/Rural
    <bullet> Participation date
    <bullet> Ownership control
    <bullet> Census region
    <bullet> Bed size
    To estimate the impacts among the various categories of providers 
during the LTCH PPS transition period, it is necessary that reasonable 
cost-based methodology payments and prospective payments contain 
similar inputs. More specifically, in the impact analysis showing the 
impact reflecting the applicable transition blend percentages of 
prospective payments and reasonable cost-based methodology payments and 
the option to elect payment based on 100 percent of the proposed 
Federal rate (see Table 24), we estimated payments only for those 
providers for whom we are able to calculate payments based on 
reasonable cost-based methodology. For example, if we did not have at 
least 2 years of historical cost data for a LTCH, we were unable to 
determine an update to the LTCH's target amount to estimate payment 
under reasonable cost-based methodology.
    Using LTCH cases from the FY 2004 MedPAR file and cost data from 
FYs 1999 through 2003 to estimate payments under the current reasonable 
cost-based principles, we have obtained both case-mix and cost data for 
259 LTCHs. Thus, for the impact analyses reflecting the applicable 
transition blend percentages of proposed prospective payments and 
reasonable cost-based methodology payments and the option to elect 
payment based on 100 percent of the Federal rate (see Table 23), we 
used data from 259 LTCHs. While currently there are more than 375 
LTCHs, the most recent growth is predominantly in for-profit LTCHs that 
provide respiratory and ventilator-dependent patient care. We believe 
that the discharges from the FY 2004 MedPAR data for the 259 LTCHs in 
our database provide sufficient representation in the LTC-DRGs 
containing discharges for patients who received respiratory and 
ventilator-dependent care based on the relatively large number of LTCH 
cases in LTC-DRGs for these diagnoses. However, using cases from the FY 
2004 MedPAR file we had case-mix data for 337 LTCHs. Cost data to 
determine current payments under reasonable cost-based methodology 
payments are not needed to simulate payments based on 100 percent of 
the proposed Federal rate. Therefore, for the impact analyses 
reflecting fully phased-in prospective payments (see Table 24), we used 
data from 337 LTCHs.
    These impacts reflect the estimated ``losses'' or ``gains'' among 
the various classifications of LTCHs for the 2006 LTCH PPS rate year 
(July 1, 2005 through June 30, 2006) compared to the 2007 LTCH PPS rate 
year (July 1, 2006 through June 30, 2007). Prospective payments for the 
2006 LTCH rate year were based on the standard Federal rate of 
$38,086.04, the outlier fixed-loss amount of $10,501, and the 
hospitals' estimated case-mix based on FY 2004 LTCH claims data. 
Estimated proposed prospective payments for the 2007 LTCH PPS rate year 
would be based on the proposed standard Federal rate of $38,086.04 
(based on the proposed zero percent update discussed in section IV.C.3. 
of this proposed rule), the proposed outlier fixed-loss amount of 
$18,489, and the same FY 2004 LTCH claims data.
3. Calculation of Prospective Payments
    To estimate payments under the LTCH PPS, we simulated payments on a 
case-by-case basis by applying the

[[Page 4730]]

proposed payment policy for short-stay outliers (as described in 
section V.A.1. of this proposed rule), the proposed adjustments for 
area wage differences (as described in section IV.D.1. of this proposed 
rule), and for the cost-of-living for Alaska and Hawaii (as described 
in section IV.D.2. of this proposed rule). Additional payments would 
also be made for high-cost outlier cases (as described in section 
IV.D.3. of this proposed rule). As noted in section IV.D.4. of this 
proposed rule, we are not proposing to make adjustments for rural 
location, geographic reclassification, indirect medical education 
costs, or a disproportionate share of low-income patients because 
sufficient new data have not been generated that would enable us to 
conduct a comprehensive reevaluation of these payment adjustments. We 
adjusted for area wage differences for estimated 2006 LTCH PPS rate 
year payments by computing a weighted average of a LTCH's applicable 
wage index during the period from July 1, 2005 through June 30, 2006 
because some providers may experience a change in the wage index phase-
in percentage during that period. For cost reporting periods beginning 
on or after October 1, 2004 and before September 30, 2005 (FY 2005), 
the labor portion of the Federal rate was adjusted by three-fifths of 
the applicable LTCH PPS wage index. For cost reporting periods 
beginning on or after October 1, 2005 and before September 30, 2006 (FY 
2006), the labor portion of the Federal rate is adjusted by four-fifths 
of the applicable LTCH PPS wage index. Therefore, during RY 2006, a 
provider with a cost reporting period that began October 1, 2005 would 
have 3 months of payments under the three-fifths wage index value and 9 
months of payment under the four-fifths wage index value. For this 
provider, we computed a blended wage index of 25 percent (3 months/12 
months) of the three-fifths wage index value and 75 percent (9 months/
12 months) of the four-fifths wage index value. The applicable LTCH PPS 
wage index values for the 2006 LTCH PPS rate year are shown in Tables 1 
and 2 of the Addendum to the RY 2006 LTCH PPS final rule (70 FR 24224 
through 24247). We adjusted for area wage differences for estimated 
2006 LTCH PPS rate year payments using the current LTCH PPS labor-
related share of 72.885 percent (70 FR 241852).
    Similarly, we adjusted for area wage differences for estimated 
proposed 2007 LTCH PPS rate year payments by computing a weighted 
average of a LTCH's applicable wage index during the period from July 
1, 2006 through June 30, 2007 because some providers may experience a 
change in the wage index phase-in percentage during that period. For 
cost reporting periods that began on or after October 1, 2005 and on or 
before September 30, 2006 (FY 2006), the labor portion of the Federal 
rate is adjusted by four-fifths of the applicable LTCH PPS wage index. 
For cost reporting periods beginning on or after October 1, 2006, the 
labor portion of the Federal rate is adjusted by the full (five-fifths) 
applicable LTCH PPS wage index. The applicable proposed LTCH PPS wage 
index values for the 2007 LTCH PPS rate year are shown in Tables 1 and 
2 of the Addendum to this proposed rule. We adjusted for area wage 
differences for estimated proposed 2007 LTCH PPS rate year payments 
using the proposed LTCH PPS labor-related share of 75.923 percent (see 
section IV.D.1.c. of this proposed rule).
    For those providers projected to receive payment under the 
transition blend methodology, we also calculated payments using the 
applicable transition blend percentages. During the 2006 LTCH PPS rate 
year, based on the transition blend percentages set forth in Sec.  
412.533(a), some providers may experience a change in the transition 
blend percentage during the period from July 1, 2005 through June 30, 
2006. For example, during the period from July 1, 2005 through June 30, 
2006, a provider with a cost reporting period beginning on October 1, 
2004 (which is paid under the 40/60 transition blend (40 percent of 
payments based on reasonable cost-based methodology and 60 percent of 
payments under the LTCH PPS)) had 3 months (July 1, 2005 through 
September 30, 2005) under the 40/60 blend and 9 months (October 1, 2005 
through June 30, 2006) of payment under the 20/80-transition blend (20 
percent of payments based on reasonable cost-based methodology and 80 
percent of payments under the LTCH PPS). The 20/80 transition blend 
will continue until the provider's cost reporting period beginning on 
October 1, 2006 (FY 2007).
    Similarly, during the 2007 LTCH PPS rate year, based on the 
transition blend percentages set forth in Sec.  412.533(a), some of the 
providers that would be paid under the transition blend methodology may 
experience a change in the transition blend percentage during the 
period from July 1, 2006 through June 30, 2007. For example, during the 
period from July 1, 2006 through June 30, 2007, a provider with a cost 
reporting period beginning on October 1, 2005 (which is paid under the 
20/80 transition blend) would have 3 months (July 1, 2006 through 
September 30, 2006) under the 20/80 blend and 9 months (October 1, 2006 
through June 30, 2007) of payment based on 100 percent of Federal rate 
payments under the LTCH PPS (and zero percent based on reasonable cost-
based methodology). The provider will continue to receive payments 
based on 100 percent of the LTCH PPS Federal rate for its cost 
reporting period beginning on October 1, 2006 (FY 2007).
    In estimating blended transition payments, we estimated payments 
based on the reasonable cost-based methodology, in accordance with the 
requirements at section 1886(b) of the Act. For those providers who 
have not already made the election (as determined from PSF data) to be 
paid based on 100 percent of the Federal rate, we compared the 
estimated blended transition payment to the LTCH's estimated payment if 
it would elect payment based on 100 percent of the Federal rate. If we 
estimated that the LTCH would be paid more based on 100 percent of the 
Federal rate, we assumed that it would elect to bypass the transition 
methodology and would receive payments based on 100 percent of 
prospective payment.
    We applied the applicable budget neutrality offset to payments to 
account for the effect of the 5-year transition methodology and 
election of payment based on 100 percent of the Federal rate on 
Medicare program payments (established in the August 30, 2002 final 
rule (67 FR 56034)). In estimating 2006 LTCH PPS rate year payments, we 
applied the 0.0 percent (a budget neutrality factor of 1.0) budget 
neutrality offset to payments to account for the effect of the 5-year 
transition methodology and election of payment based on 100 percent of 
the Federal rate on Medicare program payments (see the RY 2006 LTCH PPS 
final rule (70 FR 24202)) to each LTCH's estimated payments under the 
LTCH PPS for the 2006 LTCH PPS rate year. Similarly, in estimating 
proposed 2007 LTCH PPS rate year payments, we applied the proposed 0.1 
percent (a budget neutrality factor of 0.999) budget neutrality offset 
to payments to account for the effect of the 5-year transition 
methodology and election of payment based on 100 percent of the Federal 
rate on Medicare program payments (see section IV.D.5. of this proposed 
rule) to each LTCH's estimated payments under the LTCH PPS for the 2007 
LTCH PPS rate year. The impact, based on our projection using the best 
available data for 259 LTCHs that approximately 3 percent of LTCHs 
would be paid based on the transition blend methodology and 97 percent 
of LTCHs would elect

[[Page 4731]]

payment based on 100 percent of the Federal rate is shown in Table 23.
    In Table 24, we also show the impact if all LTCHs would be paid 100 
percent of the Federal rate; that is, as if there were a mandatory 
immediate transition to fully Federal prospective payments under the 
LTCH PPS for the 2006 LTCH PPS rate year and the 2007 LTCH PPS rate 
year. In the impact analysis shown in Table 24, the respective budget 
neutrality adjustments to account for the 5-year transition methodology 
on LTCHs' Medicare program payments for the 2006 and 2007 LTCH PPS rate 
years (0.0 percent and the proposed 0.1 percent, respectively) were not 
applied to LTCHs' estimated payments under the LTCH PPS.
    Tables 23 and 24 illustrate the estimated aggregate impact of the 
payment system among various classifications of LTCHs.
    <bullet> The first column, LTCH Classification, identifies the type 
of LTCH.
    <bullet> The second column lists the number of LTCHs of each 
classification type.
    <bullet> The third column identifies the number of long-term care 
cases.
    <bullet> The fourth column shows the estimated payment per 
discharge for the 2006 LTCH PPS rate year.
    <bullet> The fifth column shows the estimated proposed payment per 
discharge for the 2007 LTCH PPS rate year.
    <bullet> The sixth column shows the estimated percent decrease in 
estimated payments per discharge from the 2006 LTCH PPS rate year to 
the 2007 LTCH PPS rate year for proposed changes to the area wage 
adjustment at Sec.  412.525(c) (as discussed in section IV.D.1. of the 
preamble of this proposed rule).
    <bullet> The seventh column shows the estimated percent change in 
estimated payments per discharge from the 2006 LTCH PPS rate year to 
the 2007 LTCH PPS rate year for proposed changes to the SSO policy at 
Sec.  412.529 (as discussed in section V.A.1.a. of the preamble of this 
proposed rule).
    <bullet> The eighth column shows the percent decrease in estimated 
payments per discharge from the 2006 LTCH PPS rate year to the 2007 
LTCH PPS rate year for all proposed changes (as discussed in the 
preamble of this proposed rule.)
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4. Results
    Based on the most recent available data (as described previously 
for 259 LTCHs), we have prepared the following summary of the impact 
(as shown above in Table 23) of the LTCH PPS set forth in this proposed 
rule. The impact analysis in Table 23 shows that estimated payments per 
discharge are expected to decrease approximately 11 percent on average 
for all LTCHs from the 2006 LTCH PPS rate year as compared to the 2007 
LTCH PPS rate year as a result of the proposed changes presented in 
this proposed rule. As noted previously, the estimated percent decrease 
in payments per discharge from the 2006 LTCH PPS rate year to the 2007 
LTCH PPS rate year is largely attributable to the proposed change in 
the payment formula for SSO cases (discussed in section V.A.1.a. of 
this proposed rule). Specifically, under the proposed changes to the 
SSO policy for RY 2007, approximately 96 percent of LTCH SSO cases 
(which is approximately 36 percent of all LTCH cases) would receive a 
lower payment than under the current SSO policy. We believe this 
proposed policy is appropriate given that many of these short-stay 
cases most likely do not belong in a LTCH, which in general are 
intended to treat patients with an ALOS of greater than 25 days. As we 
discussed in greater detail in section IV.D.3.c. of the preamble of 
this proposed rule), given the regulatory requirement at Sec.  
412.525(a) that estimated outlier payments equal to 8 percent of 
estimated total LTCH PPS payments, this estimated decrease in LTCH PPS 
payments for RY 2007 resulting from the proposed changes to the SSO 
policy would require a proposed increase in the high-cost outlier 
fixed-loss amount in order to maintain that estimated outlier payments 
at 8 percent of the reduced estimated total LTCH PPS payments 
(resulting from the proposed changes to the SSO policy). The proposed 
increase in the outlier fixed-loss amount and the proposed slight 
increase in the budget neutrality offset to account for the transition 
methodology (discussed in section IV.D.5. of this proposed rule) are 
also factors contributing to the proposed decrease in payments per 
discharge from the 2006 LTCH PPS rate year to the 2007 LTCH PPS rate 
year. For example, many LTCHs are expected to receive a decrease in 
high-cost outlier payments. A result of the proposed increase to the 
fixed-loss amount from the 2006 LTCH PPS rate year ($10,501) to the 
2007 LTCH PPS rate year ($18,489), fewer cases would qualify as outlier 
cases (that is, the estimated cost of the case exceeds the outlier 
threshold). Since, many LTCHs would receive fewer outlier payments, 
total estimated payments per discharge would discharge (as discussed in 
section IV.D.3. of this proposed rule).
a. Location
    Based on the most recent available data, the majority of LTCHs are 
in urban areas. Approximately 3.5 percent of the LTCHs are identified 
as being located in a rural area, and approximately 2.3 percent of all 
LTCH cases are treated in these rural hospitals. Impact analysis in 
Table 23 shows that the percent decrease in estimated payments per 
discharge for the 2006 LTCH PPS rate year compared to the 2007 LTCH PPS 
rate year for rural LTCHs would be -11.3 percent, and would be -11.1 
percent for urban LTCHs (see Table 23). While rural LTCHS are expected 
to experience a lower decrease in payments due to the proposed changes 
in the SSO policy because they treat a smaller percentage of SSO cases, 
they are projected to experience a higher decrease in payments per 
discharge as a result of the proposed changes to the area wage 
adjustment (discussed in section IV.D.1. of the preamble of this 
proposed rule). Specifically, rural LTCHs are expected to experience a 
higher decrease in payments per discharge as a result of the proposed 
changes to the area wage adjustment because the wage index for all 
rural LTCHs is less than 1.0, and therefore, they would experience a 
decrease in payments per discharge as a result of the proposed increase 
in the labor-related share and the progression of the 5-year phase-in 
of the wage index adjustment.
    Large urban LTCHs are projected to experience a 12.8 percent 
decrease in payments per discharge from the 2006 LTCH PPS rate year 
compared to the 2007 LTCH PPS rate year, while other urban LTCHs are 
projected to experience a 11.8 percent decrease in payments per 
discharge from the 2006 LTCH PPS rate year compared to the 2007 LTCH 
PPS rate year (see Table 23). Other urban LTCHs are projected to 
experience a higher than average decrease in payments per discharge 
primarily because of the proposed changes to the area wage adjustment 
(discussed in section IV.D.1. of the preamble of this proposed rule). 
Specifically, the majority of other urban LTCHs (over 80 percent) are 
located in urban areas that have a proposed wage index value of less 
than 1.0, and therefore, would experience a higher than average 
decrease in payments per discharge as a result of the proposed increase 
in the labor-related share and the progression of the 5-year phase-in 
of the wage index adjustment. In addition, other urban LTCHs have a 
slightly higher percentage of SSO cases and therefore are projected to 
experience a slightly higher than average decrease in payments per 
discharge as a result of the proposed changes to the SSO policy (as 
discussed in greater detail above in this section).
b. Participation Date
    LTCHs are grouped by participation date into three categories: (1) 
Before October 1983; (2) between October 1983 and September 1993; and 
(3) between October 1993 and September 2002. At this time, we do not 
have sufficient cost report data for any of the LTCHs that began 
participating in the Medicare program after October 2002 (the 
implementation of the LTCH PPS), and, therefore, they are not included 
in the impact analysis shown in Table 23.
    Based on the most recent available data, the majority, 
approximately 71 percent, of the LTCH cases are in hospitals that began 
participating between October 1993 and September 2002, and are 
projected to experience an 11.3 percent decrease in payments per 
discharge from the 2006 LTCH PPS rate year compared to the 2007 LTCH 
PPS rate year. Approximately 22 percent of the cases are in LTCHs that 
began participating in Medicare between October 1983 and September 
1993, and those LTCHs are projected to experience a 10.2 percent 
decrease in payments per discharge from the 2006 LTCH PPS rate year 
compared to the 2007 LTCH PPS rate year (see Table 23). We are 
projecting that LTCHs that began participating in Medicare between 
October 1983 and September 1993 would experience a lower than average 
decrease in payments for RY 2007 primarily because we are projecting 
that these LTCH would experience a slight increase (0.1 percent) in 
payments per discharge due to the proposed changes to the area wage 
adjustment. Specifically, many of the LTCHs that began participating in 
Medicare between October 1983 and September 1993 are located in areas 
where the proposed RY 2007 wage index value would be greater than the 
RY 2006 wage index value. In addition, several of these LTCH are 
located in areas that have a proposed wage index value of greater than 
1.0, and therefore, would experience a slight increase in payments per 
discharge as a result of the proposed increase in the labor-related 
share and the progression of the 5-year phase-in of the wage index 
adjustment.

[[Page 4737]]

    LTCHs that began participating before October 1983 are projected to 
experience a 12.0 percent decrease in payments per discharge from the 
2006 LTCH PPS rate year compared to the 2007 LTCH PPS rate year (see 
Table 23).
    We are projecting that LTCHs that began participating in Medicare 
before October 1983 would experience a higher than average decrease in 
payments for RY 2007 as compared to RY 2006 primarily because many of 
these LTCHs have a higher than average percentage of SSO cases, and 
therefore, we are projecting that they would experience a higher than 
average decrease in payments per discharge due to the proposed changes 
to the SSO policy.
c. Ownership Control
    LTCHs are grouped into three categories based on ownership control 
type: voluntary; proprietary; and government.
    Based on the most recent available data, approximately 3.5 percent 
of LTCHs are government owned and operated. We expect that for these 
government-owned and operated LTCHs, 2007 LTCH PPS rate year payments 
per discharge would decrease 14.3 percent in comparison to the 2006 
LTCH PPS rate year (see Table 23). We are projecting that government-
run LTCHs would experience a higher than average decrease in payment in 
RY 2007 as compared to RY 2006 primarily due to the proposed changes to 
the SSO policy, since many of these LTCHs have a higher than average 
percentage of SSO cases. Also contributing to the projected higher than 
average decrease in payments in RY 2007 as compared to RY 2006 for 
government-run LTCHs is the effect of the proposed changes to the area 
wage adjustment. Specifically, all but 1 of the 9 government-run LTCHs 
in our database are located in areas where the proposed wage index 
value for RY 2007 is less than 1.0, and therefore, would experience a 
higher than average decrease in payments per discharge as a result of 
the proposed increase in the labor-related share and the progression of 
the 5-year phase-in of the wage index adjustment.
    Similarly, we project that 2006 LTCH PPS rate year payments per 
discharge for voluntary LTCHs would decrease 13.2 percent in comparison 
to the 2006 LTCH PPS rate year (see Table 23). We are projecting that 
voluntary LTCHs would experience a higher than average decrease in 
payments in RY 2007 as compared to RY 2006 primarily due to the 
proposed changes to the SSO policy, since approximately two-thirds (40 
LTCHs) of the voluntary LTCHs have a higher than average percentage of 
SSO cases.
    The majority (approximately 73 percent) of LTCHs are proprietary. 
We project that 2007 LTCH PPS rate year payments per discharge for 
these proprietary LTCHs would decrease 10.4 percent in comparison to 
the 2006 LTCH PPS rate year (see Table 23). We are projecting that 
proprietary LTCHs would experience a lower than average decrease in 
payments in RY 2007 as compared to RY 2006 primarily due to our 
estimate that these LTCHs would experience a lower than average 
decrease in payments due to the proposed changes to the SSO policy, 
since many proprietary LTCHs have a lower than average percentage of 
SSO cases.
d. Census Region
    Payments per discharge for the 2007 LTCH PPS rate year are 
estimated to decrease for LTCHs located in all regions in comparison to 
the 2006 LTCH PPS rate year. As explained in greater detail above in 
this section, the estimated percent decrease in payments per discharge 
from the 2006 LTCH PPS rate year to the 2007 LTCH PPS rate year is 
largely attributable to the proposed change in the payment formula for 
SSO cases, the proposed changes in the area wage adjustment, the 
proposed increase in outlier fixed-loss amount, and the proposed slight 
decrease in the transition period budget neutrality offset.
    Of the 9 census regions, we project that the estimated decrease in 
proposed 2007 LTCH PPS rate year payments per discharge in comparison 
to the 2006 LTCH PPS rate year would have the largest impact on LTCHs 
in the New England region (12.7 percent; see Table 23). LTCHs located 
in New England are expected to experience an increase (0.8 percent) in 
payments due to the proposed changes in the area wage adjustment, since 
all New England LTCHs are located in areas where the proposed wage 
index value for RY 2007 is greater than 1.0, and therefore, would 
experience an increase in payments per discharge as a result of the 
proposed increase in the labor-related share and the progression of the 
5-year phase-in of the wage index adjustment. However, even with this 
projected increase in payments from the proposed changes in the area 
wage adjustment, because the vast majority of New England LTCH treat a 
higher than average percentage of SSO cases, we are projecting that 
these LTCHs would experience a higher than average decrease in payments 
in RY 2007 as a result of the proposed changes to the SSO policy.
    We project that proposed 2007 LTCH PPS rate year payments per 
discharge would decrease the least for LTCHs in the Pacific region in 
comparison to the 2006 LTCH PPS rate year (6.3 percent; see Table 23). 
We estimate that for LTCHs located in the Pacific region, the projected 
decrease in payments per discharge for the 2007 LTCH PPS rate year 
compared to the 2006 LTCH PPS rate year is less than the decreases 
projected for other regions, because all LTCHs in this region are 
located in areas where the proposed RY 2007 wage index value is greater 
than the RY 2006 wage index value. Furthermore, all of the LTCHs 
located in the Pacific region are located in areas where the proposed 
wage index value for RY 2007 is greater than 1.0, and therefore, would 
experience an increase in payments per discharge as a result of the 
proposed increase in the labor-related share and the progression of the 
5-year phase-in of the wage index adjustment. In addition, many of the 
Pacific LTCHs treat a lower than average percentage of SSO cases, and 
therefore, we are projecting that these LTCHs would experience a lower 
than average decrease in average payments as a result of the proposed 
changes to the SSO policy.
e. Bed Size
    LTCHs were grouped into six categories based on bed size: 0-24 
beds; 25-49 beds; 50-74 beds; 75-124 beds; 125-199 beds; and 200+ beds.
    We are projecting a decrease in 2007 LTCH PPS rate year payments 
per discharge in comparison to the 2006 LTCH PPS rate year for all bed 
size categories. Most LTCHs are in bed size categories where 2007 LTCH 
PPS rate year payments per discharge are projected to decrease by at 
least 10 percent in comparison to the 2006 LTCH PPS rate year. As 
discussed in greater detail above in this section, the estimated 
percent decrease in payments per discharge from the 2006 LTCH PPS rate 
year to the 2007 LTCH PPS rate year is largely attributable to the 
proposed change in the payment formula for SSO cases, the proposed 
changes in the area wage adjustment, the proposed increase in outlier 
fixed-loss amount, and the proposed slight increase in the transition 
period budget neutrality offset.
    We project that LTCHs with greater than 200 beds would have the 
smallest decrease in estimated 2007 LTCH PPS rate year payments per 
discharge in comparison to the 2006 LTCH PPS rate year (9.5 percent), 
followed by LTCHs with 75-124 beds (10.3 percent). This lower than 
average decrease in projected payments per discharge for LTCHs with

[[Page 4738]]

greater than 200 beds and for LTCHs with 75-124 beds is largely due to 
the proposed changes to the area wage adjustment. Specifically, for 
LTCHs with 75-124 beds, the majority of these LTCHs are located in 
areas where the proposed change in the wage index value from RY 2006 to 
RY 2007 would be very small, and therefore we are projecting that the 
proposed changes to the area wage adjustment would have a negligible 
impact on these LTCHs' RY 2007 payments (0.0 percent) rather than 
decreasing their RY 2007 payments (as we estimate would be the impact 
of such proposed changes for ``All Providers'' as shown in Table 23). 
For LTCHs with greater than 200 beds, the majority of these LTCHs are 
located in areas where the proposed RY 2007 wage index value is greater 
than the RY 2006 wage index value. In addition, the majority of LTCHs 
with greater than 200 beds are located in areas where the proposed RY 
2007 wage index value is greater than 1.0, and therefore, would 
experience an increase in payments per discharge as a result of the 
proposed increase in the labor-related share and the progression of the 
5-year phase-in of the wage index adjustment.
    Payments per discharge for the 2007 LTCH PPS rate year for LTCHs 
with 0-24 beds are projected to decrease the most in comparison to the 
2006 LTCH PPS rate year (13.5 percent; see Table 23), followed by LTCHs 
with 25-49 beds (11.8 percent; see Table 23). This higher than average 
decrease in projected payments per discharge for LTCHs with less than 
49 beds (that is, LTCHs in the 0-24 bed size category and LTCHs in the 
25-49 bed size category) is largely due to the proposed changes to the 
area wage adjustment. Specifically, the majority of LTCHs with 49 beds 
or less are located in areas where the proposed RY 2007 wage index 
value is less than the RY 2006 wage index value. In addition, the 
majority of LTCHs with 49 beds or less are located in areas where the 
proposed RY 2007 wage index is less than 1.0, and therefore, would 
experience a higher than average decrease in payments per discharge as 
a result of the proposed increase in the labor-related share and the 
progression of the 5-year phase-in of the wage index adjustment. 
Furthermore, many of LTCHs with 0-24 beds have a higher than average 
percent of SSO cases, and therefore, would experience a higher than 
average decrease in payments per discharge as a result of the proposed 
changes to the SSO policy.
5. Effect on the Medicare Program
    Based on actuarial projections, we estimate that Medicare spending 
(total estimated Medicare program payments) for LTCH services over the 
next 5 years would be as shown in Table 25:

                                Table 25
------------------------------------------------------------------------
                                                            Estimated
                   LTCH PPS rate year                     payments ($ in
                                                            billions)
------------------------------------------------------------------------
2007...................................................            $5.27
2008...................................................             5.44
2009...................................................             5.64
2010...................................................             5.88
2011...................................................             6.15
------------------------------------------------------------------------

    These estimates are based on the most recent and complete LTCH data 
available, including the projection that 97 percent of LTCHs would 
elect to be paid based on 100 percent of the 2007 LTCH PPS rate year 
proposed standard Federal rate rather than the applicable transition 
blend, and an estimated increase in the number of discharges from 
LTCHs. (We note that the 5-year spending estimates shown in above Table 
25 are significantly higher than the 5-year spending estimates 
presented in the 2006 LTCH PPS final rule (70 FR 24203). This is 
primarily due to an adjustment by our Office of the Actuary (OACT) to 
account for the significant increase in the expected number of LTCH 
discharges based on the most recent complete available LTCH discharge 
data.) These estimates are also based on the current estimate of the 
increase in the excluded hospital with capital market basket (currently 
used under the LTCH PPS) of 3.6 percent for the 2007 LTCH PPS rate 
year, 3.5 percent for the 2008 LTCH PPS rate year, 3.1 for the 2009 
LTCH PPS rate year, 2.6 percent for the 2010 LTCH PPS rate year and 3.0 
percent for the 2011 LTCH PPS rate year. (We note that, although we are 
proposing a zero percent update to the LTCH PPS Federal rate for RY 
2007 (as discussed in section IV.C.3. of this proposed rule), OACT 
develops its spending projections based on existing policy and 
therefore, changes that have not yet been implemented are not reflected 
in the spending projections shown in Table 25.) We estimate that there 
would be a change in Medicare fee-for service beneficiary enrollment of 
-2.3 percent in the 2007 LTCH PPS rate year, -1.0 percent in the 2008 
LTCH PPS rate year, 0.3 percent in 2009 and 2010 LTCH PPS rate years, 
and 0.6 percent in the 2011 LTCH PPS rate year, and an estimated 
increase in the total number of LTCHs. (We note that, based on the most 
recent available data, OACT is projecting a decrease in Medicare fee-
for-service Part A enrollment, in part, because they are projecting an 
increase in Medicare managed care enrollment as a result of the 
implementation of several provisions of the MMA.)
    Consistent with the statutory requirement for budget neutrality, as 
we discussed in the August 30, 2002 final rule that implemented the 
LTCH PPS, in developing the LTCH PPS, we intended for estimated 
aggregate payments under the LTCH PPS in FY 2003 would equal the 
estimated aggregate payments that would have been made if the LTCH PPS 
were not implemented. Our methodology for estimating payments for 
purposes of the budget neutrality calculations uses the best available 
data and necessarily reflects assumptions. As we collect data from 
LTCHs, we will monitor payments and evaluate the ultimate accuracy of 
the assumptions used to calculate the budget neutrality calculations 
(that is, inflation factors, intensity of services provided, or 
behavioral response to the implementation of the LTCH PPS). As 
discussed in section IV.D.6. of this proposed rule, we still do not 
have sufficient new cost report and claims data generated under the 
LTCH PPS to enable us to conduct a comprehensive reevaluation of our FY 
2003 budget neutrality calculation at this time.
    Section 123 of BBRA and section 307 of BIPA provide the Secretary 
with extremely broad authority in developing the LTCH PPS, including 
the authority for appropriate adjustments. In accordance with this 
broad authority, we may discuss in a future proposed rule a possible 
one-time prospective adjustment to the LTCH PPS rates under Sec.  
412.523(d)(3) to maintain budget neutrality so that the effect of the 
difference between actual payments and estimated payments for the first 
year of LTCH PPS is not perpetuated in the PPS rates for future years. 
As discussed in section IV.D.6. of this proposed rule, due to the lag 
time in the availability of Medicare data upon which this adjustment 
would be based, we believe that it is appropriate to propose a 
postponement of the requirement established in Sec.  412.523(d)(3) from 
the existing October 1, 2006 deadline to July 1, 2008.
6. Effect on Medicare Beneficiaries
    Under the LTCH PPS, hospitals receive payment based on the average 
resources consumed by patients for each diagnosis. We do not expect any 
changes in the quality of care or access to services for Medicare 
beneficiaries under the LTCH PPS, but we expect that

[[Page 4739]]

paying prospectively for LTCH services would enhance the efficiency of 
the Medicare program.

C. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 26, we have 
prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this proposed rule. 
Table 26 provides our best estimate of the proposed decrease in 
Medicare payments under the LTCH PPS as a result of the proposed 
changes presented in this proposed rule based on the data for 259 LTCHs 
in our database. All expenditures are classified as transfers to 
Medicare providers (that is, LTCHs).

      Table 26.--Accounting Statement: Classification of Estimated
       Expenditures, From the 2006 LTCH PPS Rate Year to the 2007
                   [LTCH PPS rate year (in millions)]
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  Negative transfer--Estimated
                                             decrease in expenditures:
                                             $362.
From Whom To Whom?                          Federal Government To LTCH
                                             Medicare Providers.
------------------------------------------------------------------------

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

List of Subjects in 42 CFR Part 412

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

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services would amend 42 CFR chapter IV as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

Subpart O--Prospective Payment System for Long-Term Care Hospitals

    2. Section 412.523 is amended by--
    A. Revising paragraph (c)(3)(ii).
    B. Adding new paragraph (c)(3)(iii).
    C. Revising paragraph (d)(3).
    The revisions and addition read as follows:


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

* * * * *
    (c) * * *
    (3) * * *
    (ii) For long-term care hospital prospective payment system rate 
years beginning on or after July 1, 2003 and ending on or before June 
30, 2006. The standard Federal rate for long-term care hospital 
prospective payment system rate years beginning on or after July 1, 
2003 and ending on or before June 30, 2006 is the standard Federal rate 
for the previous long-term care hospital prospective payment system 
rate year, updated by the increase factor described in paragraph (a)(2) 
of this section, and adjusted, as appropriate, as described in 
paragraph (d) of this section. For the rate year from July 1, 2003 
through June 30, 2004, the updated and adjusted standard Federal rate 
is offset by a budget neutrality factor to account for updating the FY 
2003 standard Federal rate on July 1 rather than October 1.
    (iii) For long-term care hospital prospective payment system rate 
year July 1, 2006 through June 30, 2007. The standard Federal rate for 
long-term care hospital prospective payment system rate year July 1, 
2006 through June 30, 2007 is the standard Federal rate for the 
previous long-term care hospital prospective payment system rate year, 
updated by an update factor of zero percent. The standard Federal rate 
is adjusted, as appropriate, as described in paragraph (d) of this 
section.
* * * * *
    (d) * * *
    (3) One-time prospective adjustment. The Secretary reviews payments 
under this prospective payment system and may make a one-time 
prospective adjustment to the long-term care hospital prospective 
payment system rates on or before July 1, 2008, so that the effect of 
any significant difference between actual payments and estimated 
payments for the first year of the long-term care hospital prospective 
payment system is not perpetuated in the prospective payment rates for 
future years.
* * * * *
    3. Section 412.525 is amended by--
    A. Revising paragraph (a)(3).
    B. Revising paragraph (a)(4)(ii).
    C. Revising paragraph (a)(4)(iii).
    D. Adding new paragraph (a)(4)(iv).
    The revisions and addition 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 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 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 (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 on either the most recent settled cost report or the 
most recent tentative 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) New hospitals that have not yet submitted their 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) Hospitals 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) Other hospitals for whom data with which to calculate a cost-
to-charge ratio is not available.
    (D) Any reconciliation of outlier payments is based on the cost-to-
charge

[[Page 4740]]

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.
* * * * *
    4. Section 412.529 is amended by--
    A. Revising paragraph (c).
    B. Adding new paragraph (d).
    The revision and addition read as follows:


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

* * * * *
    (c) Method for determining the payment amount. (1) For discharges 
from long-term care hospitals described under Sec.  412.23(e)(2)(i), 
occurring before July 1, 2006, the LTCH prospective payment system 
adjusted payment amount for a short-stay outlier case is the least of 
the following amounts:
    (i) 120 percent of the LTC-DRG specific per diem amount determined 
under paragraph (d)(1) of this section multiplied by the length of stay 
of the discharge;
    (ii) 120 percent of the cost of the case determined under paragraph 
(d)(2) of this section; or
    (iii) The Federal prospective payment for the LTC-DRG.
    (2) For discharges occurring on or after July 1, 2006, from long-
term care hospitals described under Sec.  412.23(e)(2)(i), and for 
discharges occurring in cost reporting periods beginning on or after 
October 1, 2006, from the long-term care hospitals described under 
Sec.  412.23(e)(2)(ii), the LTCH prospective payment system adjusted 
payment amount for a short-stay outlier case is the least of the 
following amounts:
    (i) 120 percent of the LTC-DRG specific per diem amount determined 
under paragraph (d)(1) of this section multiplied by the length of stay 
of the discharge;
    (ii) 100 percent of the cost of the case determined under paragraph 
(d)(2) of this section;
    (iii) The Federal prospective payment for the LTC-DRG; or
    (iv) An amount payable under subpart O that is comparable to an 
amount that is otherwise paid under the hospital inpatient prospective 
payment system determined under paragraph (d)(3) of this section.
    (3) The adjusted payment amount for discharges from long-term care 
hospitals described under Sec.  412.23(e)(2)(ii) that occur on or after 
October 1, 2002, through June 30, 2003, is determined under paragraph 
(c)(1) of this section. Effective for discharges occurring on or after 
July 1, 2003, subject to provisions of paragraph (c)(3)(v) of this 
section, for long-term care hospitals described under Sec.  
412.23(e)(2)(ii), the adjusted payment amount for a short-stay outlier 
is determined under the formulas set forth in paragraphs (c)(3)(i) 
through (iv) of this section.
    (i) For the first year of the transition period, as specified at 
Sec.  412.533(a)(1), under the formula set forth in paragraph (c)(1) of 
this section, the percentages specified for the LTC-DRG specific per 
diem amount and the cost of the case under paragraphs (c)(1)(i) and 
(c)(1)(ii) of this section are substituted with 195 percent.
    (ii) For the second year of the transition period, as specified at 
Sec.  412.533(a)(2), under the formula set forth in paragraph (c)(1) of 
this section, the percentages specified for the LTC-DRG specific per 
diem amount and the cost of the case under paragraphs (c)(1)(i) and 
(c)(1)(ii) of this section are substituted with 193 percent.
    (iii) For the third year of the transition period, as specified at 
Sec.  412.533(a)(3), under the formula set forth in paragraph (c)(1) of 
this section, the percentages specified for the LTC-DRG specific per 
diem amount and the cost of the case under paragraphs (c)(1)(i) and 
(c)(1)(ii) of this section are substituted with 165 percent.
    (iv) For the fourth year of the transition period, as specified at 
Sec.  412.533(a)(4), under the formula set forth in paragraph (c)(1) of 
this section, the percentages specified for the LTC-DRG specific per 
diem amount and cost of the case under paragraphs (c)(1)(i) and 
(c)(1)(ii) of this section are substituted with 136 percent.
    (v) For discharges occurring in cost reporting periods beginning on 
or after October 1, 2006 (beginning with the fifth year of the 
transition period), as specified at Sec.  412.533(a)(5)), short-stay 
outlier payments to long-term care hospitals described under Sec.  
412.23(e)(2)(ii) are made in accordance with the formula set forth in 
paragraph (c)(2) of this section.
    (4) Short-stay outlier payments. (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)(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. 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 tentative 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) New hospitals that have not yet submitted their 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) Hospitals 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) Other hospitals for whom data with which to calculate a cost-
to-charge ratio is 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)(4)(iv)(C)(4) 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

[[Page 4741]]

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) Calculation of costs. (1) CMS calculates a per diem amount for 
short-stay outliers for each LTC-DRG by dividing the product of the 
standard Federal payment rate and the LTC-DRG weight by the geometric 
mean length of stay of the specific LTC-DRG.
    (2) To determine the cost of a case, CMS uses the hospital-specific 
cost-to-charge ratio and the Medicare allowable charges for the case.
    (3) CMS calculates, under Subpart O, an amount comparable to what 
would otherwise be paid under the hospital Inpatient prospective 
payment system based on the sum of the applicable operating inpatient 
prospective payment system standardized amount and capital inpatient 
prospective payment system Federal rate in effect at the time of the 
LTCH discharge.
    (i) Operating inpatient prospective payment system standardized 
amount. The operating inpatient prospective payment system standardized 
amount--
    (A) Is adjusted for the applicable inpatient prospective payment 
system DRG weighting factors.
    (B) Is adjusted for different area wage levels based on the 
geographic classifications set forth at Sec.  412.64(b)(1)(ii)(A) 
through (C) and the applicable inpatient prospective payment system 
labor-related share, using the applicable inpatient prospective payment 
system wage index value for non-reclassified inpatient prospective 
payment system hospitals. For LTCHs located in Alaska and Hawaii, this 
amount is also adjusted by the applicable inpatient prospective payment 
system cost of living adjustment factors.
    (C) Includes, where applicable, adjustments for indirect medical 
education costs and the costs of serving a disproportionate share of 
low-income patients.
    (ii) Capital inpatient prospective payment system Federal rate. The 
capital inpatient prospective payment system Federal rate--
    (A) Is adjusted for the applicable inpatient prospective payment 
system DRG weighting factors.
    (B) Is adjusted for the applicable geographic adjustment factors, 
including local cost variation based on the geographic classifications 
set forth at Sec.  412.64(b)(1)(ii)(A) through (C) and the applicable 
full inpatient prospective payment system wage index value for non-
reclassified inpatient prospective payment system hospitals and, 
applicable large urban location cost of living adjustment factors for 
LTCHs in Alaska and Hawaii, if applicable.
    (C) Includes, where applicable, adjustments for indirect medical 
education costs and the costs of serving a disproportionate share of 
low-income patients.
    5. Section 412.531 is amended by--
    A. Revising paragraph (b)(1)(i)(C).
    B. Redesignating paragraph (b)(1)(ii)(A)(2) as (b)(1)(ii)(A)(3).
    C. Adding new paragraph (b)(1)(ii)(A)(2).
    The revisions and additions read as follows:


Sec.  412.531  Special payment provisions when an interruption of a 
stay occurs in a long-term care hospital.

* * * * *
    (b) * * *
    (1) * * *
    (i) * * *
    (C) Surgical DRG exception to the 3-day or less interruption of 
stay policy.
    (1) The number of days that a beneficiary spends away from a long-
term care hospital during a 3-day or less interruption of stay under 
paragraph (a)(1) of this section during which the beneficiary receives 
a procedure grouped to a surgical DRG under the inpatient prospective 
payment system in an acute care hospital during the 2005 and 2006 LTCH 
prospective payment system rate years are not included in determining 
the length of stay of the patient at the long-term care hospital.
    (2) For discharges occurring on or after July 1 2006, the number of 
days that a beneficiary spends away from a long-term care hospital 
during a 3-day or less interruption of stay under paragraph (a)(1) of 
this section during which the beneficiary receives a procedure grouped 
to a surgical DRG under the inpatient prospective payment system in an 
acute care hospital are included in determining the length of stay of 
the patient at the long-term care hospital.
* * * * *
    (ii) * * *
    (A) * * *
    (2) For discharges occurring on or after July 1, 2006, for a 3-day 
or less interruption of stay under paragraph (a)(1) of this section in 
which a long-term care hospital discharges a patient to an acute care 
hospital and the patient's treatment during the interruption is grouped 
into a surgical DRG under the acute care inpatient hospital prospective 
payment system, the services must be provided under arrangements in 
accordance with Sec.  412.509(c). CMS does not make a separate payment 
to the acute care hospital for the surgical treatment. The LTC-DRG 
payment made to the long-term care hospital is considered payment in 
full as specified in Sec.  412.521(b).
* * * * *
    6. Section 412.534 is amended by--
    A. Revising paragraph (c)(1).
    B. Revising paragraph (c)(2).
    C. Revising paragraph (d)(1).
    D. Revising paragraph (e)(1).
    E. Redesignating paragraph (f) as paragraph (g).
    F. Adding new paragraph (f).
    The revisions and addition read as follows:


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

* * * * *
    (c) * * *
    (1) Except as provided in paragraph (g) of this section, for any 
cost reporting period beginning on or after October 1, 2004 in which 
the long-term care hospital or its satellite facility has a discharged 
Medicare inpatient population of whom no more than 25 percent were 
admitted to the hospital or its satellite facility from the co-located 
hospital, payments are made under the rules at Sec.  412.500 through 
Sec.  412.541 in this subpart with no adjustment under this section.
    (2) Except as provided in paragraph (d), (e), or (g) of this 
section, for any cost reporting period beginning on or after October 1, 
2004 in which the long-term care hospital or satellite facility has a 
discharged Medicare inpatient population of whom more than 25 percent 
were admitted to the hospital or satellite facility from the co-located 
hospital, payments for the patients who are admitted from the co-
located hospital and who cause the long-term care hospital or satellite 
facility to exceed the 25 percent threshold for discharged patients who 
have been admitted from the co-located hospital are the lesser of the 
amount otherwise payable under this subpart or the amount payable under 
this subpart that is equivalent, as set forth in paragraph (f) of this 
section, to the amount that would be determined under the rules at 
Subpart A, Sec.  412.1(a). Payments for the remainder of the long-term 
care hospital's or satellite facility's patients are made under the 
rules in this subpart at Sec.  412.500 through Sec.  412.541 with no 
adjustment under this section.
* * * * *
    (d) * * *
    (1) Subject to paragraph (g) of this section, in the case of a 
long-term care hospital or satellite facility that is located in a 
rural area as defined in

[[Page 4742]]

Sec.  412.64(b)(1)(ii)(C) and is co-located with another hospital for 
any cost reporting period beginning on or after October 1, 2004 in 
which the long-term care hospital or satellite facility has a 
discharged Medicare inpatient population of whom more than 50 percent 
were admitted to the long-term care hospital or satellite facility from 
the co-located hospital, payments for the patients who are admitted 
from the co-located hospital and who cause the long-term care hospital 
or satellite facility to exceed the 50 percent threshold for discharged 
patients who were admitted from the co-located hospital are the lesser 
of the amount otherwise payable under this subpart or the amount 
payable under this subpart that is equivalent, as set forth in 
paragraph (f) of this section, to the amount that were otherwise 
payable under subpart A, Sec.  412.1(a). Payments for the remainder of 
the long-term care hospital's or satellite facility's patients are made 
under the rules in this subpart at Sec.  412.500 through Sec.  412.541 
with no adjustment under this section.
* * * * *
    (e) * * *
    (1) Subject to paragraph (g) of this section, In the case of a 
long-term care hospital or satellite facility that is co-located with 
the only other hospital in the MSA or with a MSA dominant hospital as 
defined in paragraph (e)(4) of this section, for any cost reporting 
period beginning on or after October 1, 2004 in which the long-term 
care hospital or satellite facility has a discharged Medicare inpatient 
population of whom more than the percentage calculated under paragraph 
(e)(2) of this section were admitted to the hospital from the co-
located hospital, payments for the patients who are admitted from the 
co-located hospital and who cause the long-term care hospital to exceed 
the applicable threshold for discharged patients who have been admitted 
from the co-located hospital are the lesser of the amount otherwise 
payable under this subpart or the amount under this subpart that is 
equivalent, as set forth in paragraph (f) of this section, to the 
amount that otherwise would be determined under Subpart A, Sec.  
412.1(a). Payments for the remainder of the long-term care hospital's 
or satellite facility's patients are made under the rules in this 
subpart with no adjustment under this section.
* * * * *
    (f) Calculation of rates. (1) Calculation of LTCH prospective 
payment system amount. CMS calculates an amount payable under subpart O 
equivalent to an amount that would otherwise be paid under the hospital 
inpatient prospective payment system based on the sum of the applicable 
operating inpatient prospective payment system standardized amount and 
capital inpatient prospective payment system Federal rate in effect at 
the time of the LTCH discharge.
    (2) Operating inpatient prospective payment system standardized 
amount. The operating inpatient prospective payment system standardized 
amount--
    (i) Is adjusted for the applicable inpatient prospective payment 
system DRG weighting factors;
    (ii) Is adjusted for different area wage levels based on the 
geographic classifications set forth at Sec.  412.64(b)(1)(ii)(A) 
through (C) and the applicable inpatient prospective payment system 
labor-related share, using the applicable inpatient prospective payment 
system wage index value for non-reclassified inpatient prospective 
payment system hospitals. For LTCHs located in Alaska and Hawaii, this 
amount is also adjusted by the applicable inpatient prospective payment 
system cost of living adjustment factors;
    (iii) Includes, where applicable, adjustments for indirect medical 
education costs and the costs of serving a disproportionate share of 
low-income patients.
    (3) Capital inpatient prospective payment system Federal rate. The 
capital inpatient prospective payment system Federal rate --
    (i) Is adjusted for the applicable inpatient prospective payment 
system DRG weighting factors;
    (ii) Is adjusted by the applicable geographic adjustment factors, 
including local cost variation based on the applicable geographic 
classifications set forth at Sec.  412.64(b)(1)(ii)(A) through (C) and 
the applicable full inpatient prospective payment system wage index 
value for non-reclassified inpatient prospective payment system 
hospitals, applicable large urban location and cost of living 
adjustment factors for LTCHs for Alaska and Hawaii, if applicable;
    (iii) Includes, where applicable, capital inpatient prospective 
payment system adjustments for indirect medical education costs and the 
costs of serving a disproportionate share of low-income patients.
    (4) High cost outlier. An additional payment for high cost outlier 
cases is based on the fixed loss amount paid under the inpatient 
prospective payment system if the estimated operating and capital costs 
exceed the applicable inpatient prospective payment system outlier 
threshold.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance)

    Dated: December 8, 2005.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: January 19, 2006.
Michael O. Leavitt,
Secretary.
    Editorial Note: The following appendix will not appear in the 
Code of Federal Regulations.

Appendix A--Description of a Preliminary Model of an Update Framework 
under the LTCH PPS

    Section 307(b) of BIPA requires that the Secretary shall examine 
and may provide for appropriate adjustments to the LTCH PPS, 
including updates. Updates are necessary to appropriately account 
for changes in the prices of goods and services used by a provider 
in furnishing care to patients. A market basket has historically 
been used under the Medicare program in setting update factors for 
services furnished by providers. When we established the LTCH PPS 
for FY 2003 in the August 30, 2002 final rule (67 FR 56030), we 
established under Sec.  412.523(c)(3)(ii) that for FYs after FY 
2003, the LTCH PPS Federal rate was to be the previous year's 
Federal rate updated by the most recent estimate of the LTCH PPS 
market basket. When we moved the date of the annual update of the 
LTCH PPS from October 1 to July 1, beginning with the RY 2004 LTCH 
PPS final rule (68 FR 34138), we revised Sec.  412.523(c)(3)(ii) to 
specify that for LTCH PPS rate years beginning on or after July 1, 
2003, the annual update to the standard Federal rate for the LTCH 
prospective payment system will be equal to the previous rate year's 
Federal rate updated by the most recent estimate of the LTCH PPS 
market basket. (Currently, the LTCH PPS market basket is the FY 
1997-based excluded hospital with capital market basket index (68 FR 
34134 through 34137); however, we are proposing to adopt the FY 
2002-based RPL market basket, as discussed in section IV.B. of this 
proposed rule.) As we discuss in section IV.C.3. of this proposed 
rule, based on our analysis of the best available LTCH case-mix and 
margins data, we are proposing to revise Sec.  412.523(c) to specify 
that for the 2007 LTCH PPS rate year, the standard Federal rate from 
the previous year would be updated by a factor of zero percent. 
However, in the future we may propose to develop an update framework 
to update payments to LTCHs that would account for other appropriate 
factors that affect the efficient delivery of services and care 
provided to Medicare patients. The update framework would be 
proposed in accordance with the notice and comment rulemaking 
process. While we are not implementing a specific update framework 
for the LTCH prospective payment system at this time in this 
proposed rule, we are providing a conceptual basis for developing 
such an update framework.

[[Page 4743]]

A. Need for an Update Framework

    Under the LTCH prospective payment system, Medicare payments to 
LTCHs are based on a predetermined national payment amount per 
discharge. Under section 123 of the BBRA and section 307(b) of the 
BIPA, the Secretary has broad discretionary authority to make 
appropriate adjustments to the LTCH payment system, including 
updates to the payment rates. Our goal is to develop a method for 
analyzing and comparing expected trends in the underlying cost per 
discharge to use in establishing these updates. However, as stated 
earlier, until an appropriate update framework is developed, future 
updates may be based on the increase in the applicable LTCH PPS 
market basket.
    The market basket for the LTCH PPS, developed by OACT, 
represents only one component in the measure of growth in LTCHs' 
costs per discharge. It captures only the pure price change of 
inputs (labor, materials, and capital) used by the hospital to 
produce a constant quantity and quality of care. However, other 
factors also contribute to the change in costs per discharge, 
including changes in case-mix, intensity, and productivity.
    Previously, under the acute care hospital IPPS for operating 
costs (the operating IPPS), we utilized an update framework to 
account for these other factors and to make annual recommendations 
to the Congress concerning the magnitude of the update. We continue 
to use a similar framework under the acute care hospital IPPS for 
capital costs (the capital IPPS) to determine the annual update to 
the capital PPS Federal rate. We also use a similar framework under 
the SNF PPS. Based on our experience in developing other update 
frameworks, we are currently examining these factors and exploring 
ways that they could be measured and incorporated into an update 
framework for the LTCH PPS. We are also examining additional 
conceptual and data issues that must be considered when the 
framework is constructed and applied.
    In the August 30, 2002 final rule (67 FR 56087), we pointed out 
that it is important to develop successively more refined models of 
an update framework based on our evaluation of public comments and 
recommendations submitted to us on this issue. We would then further 
study the potential adjustments using the best available data. To 
actively pursue the development of an analytical framework that 
would support the continued appropriateness and relevance of the 
payment rates for services provided to beneficiaries in LTCHs, in 
this proposed rule, we are soliciting comments concerning the use 
and feasibility of the conceptual approach outlined in section B of 
this Appendix. Specifically, we are requesting comments concerning 
which factors are appropriate and should be accounted for in the 
framework, and suggestions concerning potential data sources and 
analysis to support the model. As with the existing methodology used 
under both the capital IPPS and SNF PPS, the features of a LTCH-
specific update framework would need to be based on sound policy and 
methodology. Although we received no comments on the conceptual 
basis for a LTCH PPS update framework presented in the August 30, 
2002 final rule, we continue to be interested in comments concerning 
the potential development of an update framework for the LTCH 
prospective payment system. Therefore, in this proposed rule we are 
again presenting a conceptual basis for the framework along with an 
illustrative LTCH PPS framework for RY 2007 (shown in section E of 
this Appendix).

B. Factors Inherent in LTCH Payments Per Discharge

    In order to understand the factors that determine LTCH costs per 
discharge, it is first necessary to understand the factors that 
determine LTCH payments per discharge. Payments per discharge under 
the LTCH PPS are based on the cost and an implicit normal profit 
margin to the LTCH in providing an efficient level of care. We have 
developed a methodology to identify a mutually exclusive and 
exhaustive set of factors included in LTCH payments per discharge. 
The discussion here details a set of equations to identify these 
factors.
    In its simplest form, the average payment per discharge to a 
LTCH can be separated into a cost term and a profit term as shown in 
Equation 1.
[GRAPHIC] [TIFF OMITTED] TP27JA06.022

    This equation can be made multiplicative by converting profit 
per discharge into a profit rate as shown in Equation 2.
[GRAPHIC] [TIFF OMITTED] TP27JA06.023

    An output price term can be introduced into the equation by 
multiplying and dividing through by input prices and productivity. 
As shown in Equation 3, the term inside the brackets represents the 
output price, since an output price reflects the input price and 
profit margin adjusted for productivity.
[GRAPHIC] [TIFF OMITTED] TP27JA06.024

    The cost per discharge term can be further separated by 
accounting for real case-mix. Under the LTCH PPS, LTC-DRGs are used 
to classify patients. Based on accurate DRG classification data, 
average real case-mix per discharge can be incorporated, as shown in 
Equation 4.
[GRAPHIC] [TIFF OMITTED] TP27JA06.025


[[Page 4744]]


    The term ``real'' is imperative here because only true case-mix 
should be measured, not case-mix caused by improper coding behavior. 
We believe payment should be based on changes in ``real'' case mix 
(that is, the treatment of more resource intensive and costly 
patients) rather than case mix caused by improper coding behavior or 
changes in coding practice (that is, ``apparent'' case mix change) 
because ``apparent'' case mix increase does not result in an 
increase in a hospital's cost of treating those patients. By 
rearranging the terms in Equation 4, a set of mutually exclusive and 
exhaustive factors such as those shown in Equation 5 can be 
identified.
[GRAPHIC] [TIFF OMITTED] TP27JA06.026

    The term in brackets can be analyzed in two steps. First, 
excluding the productivity term results in case-mix adjusted real 
cost per discharge, which is input intensity per discharge. Second, 
multiplying input intensity by productivity results in case-mix 
adjusted real payment per discharge, or output intensity per 
discharge. The rationale behind this step is explained in detail in 
section C.
    The result of this exercise is that LTCH payment per discharge 
can be determined from the following factors as shown in Equation 6.
[GRAPHIC] [TIFF OMITTED] TP27JA06.027

    Thus, it holds that the change in LTCH payment per discharge is 
a function of the change in these factors as shown in Equation 6. In 
order to determine an annual update that most accurately reflects 
the underlying cost to the LTCH of efficiently providing care, the 
four factors related to cost must be accounted for when an update 
framework is developed. A brief discussion of each factor, including 
specific conceptual and data issues, is provided in section C.

C. Defining Each Factor Inherent in LTCH Costs Per Discharge

    Each cost factor from Equation 6 in section B is discussed here 
in detail. Because this is a basic conceptual discussion, it is 
likely that more detailed issues may be relevant that are not 
explored here.

1. Input Prices

    Input prices are the pure prices of inputs used by the LTCH in 
providing services. When we refer to inputs, we are referring to 
costs, which have both a price and a quantity component. The price 
is an input price, and the quantity component reflects real inputs 
or real costs. Similarly, when we refer to outputs, we are referring 
to payments, which also have both a price and a quantity component. 
The price component is the transaction output price, and the 
quantity component is the real output or real payment. The real 
inputs include labor, capital, and other materials, such as drugs. 
By definition, an input price reflects prices that LTCHs encounter 
in purchasing these inputs, whereas an output price reflects the 
prices that buyers encounter in purchasing LTCH services. We 
currently measure input prices using the excluded hospital with 
capital market basket; however, as discussed section IV.B. of this 
proposed rule, we are proposing to adopt the RPL market basket, 
which is based on the operating and capital costs of IRFs, IPFs and 
LTCHs. While not specific to LTCHs, we believe this index would 
adequately reflect the input prices faced by LTCHs.

2. Productivity

    Productivity measures the efficiency of the LTCH in producing 
outputs. It is the amount of real outputs, or real payments that can 
be produced from a given amount of real inputs or real costs. For 
LTCHs, these inputs are in the form of both labor and capital; thus, 
they represent multifactor productivity, as not just labor 
productivity is reflected. Equation 7 shows how multifactor 
productivity can be measured in terms of available data, such as 
payments, costs, and input prices:
[GRAPHIC] [TIFF OMITTED] TP27JA06.028

    Rearranging the terms, this multifactor productivity equation 
(Equation 7) was used as the basis for incorporating an output price 
term in Equation 3. This equation is the basis for understanding the 
relationship between input prices, output prices, profit margins, 
and productivity.
    Equation 6 shows that productivity is divided through the 
equation, offsetting other factors. The theory behind this offset is 
that if an efficient LTCH in a competitive market can produce more 
output with the same amount of inputs, the full increase in input 
costs does not have to be passed on by the provider to maintain a 
normal profit margin.

3. Real Case Mix Per Discharge

    Real case mix per discharge is the average overall mix of care 
provided by the LTCH, as measured using the LTC-DRG classification

[[Page 4745]]

system. Over time, a measure of real case mix will change as care is 
given in more or less complex LTC-DRGs. Changes in the level of care 
within a LTC-DRG classification group would not be reflected in a 
case-mix measure based on LTC-DRGs, but instead should be captured 
in the intensity factor of Equation 6. The important distinction 
here is the difference between real and nominal case-mix. Under the 
LTCH prospective payment system, LTCHs will submit claims using the 
LTC-DRG classification system. The case-mix reflected by the claims 
is considered ``nominal''. However, the reported classification can 
reflect the true level of care provided or improper coding behavior. 
An example of improper coding behavior would be the upcoding, or 
case-mix ``creep,'' that took place when the acute care hospital 
IPPS was implemented. (For further details, see ProPAC's March 1, 
1994 Report and Recommendations to Congress (pp. 73-74).) Any change 
in case-mix that is not associated with the actual level of care or 
a true change in the level of care provided must be excluded in 
order to determine real case-mix.

4. Case-Mix Constant Real Output Intensity Per Discharge

    Intensity is the true underlying nature of the product or 
service and can take the form of output or input intensity, or both. 
In the case of LTCHs, output intensity per discharge is associated 
with real payment per discharge, while input intensity per discharge 
is associated with real cost per discharge. For example, input 
intensity would be associated with a nurse's hours when providing 
treatment, whereas output intensity would be associated with the 
type and number of treatments a nurse provides. The underlying 
nature of LTCH services is determined by factors such as 
technological capabilities, increased utilization of inputs (such as 
labor or drugs), site of care, and practice patterns. Because these 
factors can be difficult to measure, intensity per discharge is 
usually calculated as a residual after the other factors from 
Equation 6 were accounted for.
    Accounting for output intensity associated with an efficient 
LTCH can be more accurately analyzed using a LTCH's costs rather 
than its payments. This analysis would also provide an alternative 
to developing or using a transaction output price index. Equation 8 
shows how to use the definition of an output price as defined 
earlier to convert the equation for output intensity per discharge 
to reflect costs instead of payments, as used in Equation 6.
[GRAPHIC] [TIFF OMITTED] TP27JA06.029

    The last equation in Equation 8 is identical to the term in 
brackets in Equation 5, case-mix constant real input intensity per 
discharge multiplied by productivity. Thus, output intensity per 
discharge can be defined in such a way that cost data from the LTCH 
are utilized. This equation can be broken down even further to 
account for different types of input intensity per discharge. We 
discuss this matter more fully in section D.

D. Applying the Factors That Affect LTCH Costs Per Discharge in an 
Update Framework

    As discussed earlier, payments per discharge under the LTCH PPS 
have been updated annually since the LTCH PPS was implemented for 
cost-reporting periods beginning on or after October 1, 2002. Under 
this proposed rule, the standard Federal rate from the previous year 
would be updated by a factor of zero percent based on our analysis 
of LTCH margins and case-mix using the best available data. The 
development of an update framework with a sound conceptual basis 
provides the capability to understand the underlying trends in LTCH 
costs per discharge for an efficient provider.
    Previously we identified factors inherent in LTCH costs per 
discharge. Changes in these factors determine the change in LTCH 
costs per discharge and fitting these factors into an appropriate 
framework would allow us to accurately reflect changes in the 
underlying costs for efficient LTCHs. The following explanation 
accounts for each of these factors from Equation 6 under the LTCH 
PPS:
    <bullet> Change in case-mix constant real output intensity per 
discharge would be accounted for in the update framework, reflecting 
the factors that affect not only case-mix constant real input 
intensity per discharge, but also productivity, which is determined 
separately. Factors that can cause changes in case-mix constant real 
input intensity per discharge include, but are not limited to, 
changes in site of service, changes in within-LTC-DRG case-mix, 
changes in practice patterns, changes in the use of inputs, and 
changes in technology available.
    <bullet> Changes in nominal case-mix are automatically included 
in the payment to the LTCH. Therefore, the update framework should 
include an adjustment to convert changes in nominal case-mix per 
discharge to changes in real case-mix per discharge, if they are 
different.
    <bullet> Change in multifactor productivity would be accounted 
for in the update framework. The availability of historical data

[[Page 4746]]

on input prices, payments, and costs are useful in the analysis of 
this factor.
    <bullet> Changes in input prices for labor, material, and 
capital would be accounted for in the update framework using an 
input price index, or market basket. To assist in updating payments 
for LTCH services, OACT currently has developed an input price 
index; this is currently the excluded hospital with capital market 
basket, and we are proposing to use the RPL market basket as 
discussed in section IV.B. of the preamble of this proposed rule.
    <bullet> In an update framework, a forecast error adjustment 
would be included to reflect that the updates are set prospectively 
and a forecast error for a given year should not be perpetuated in 
payments for future years. In the case of the acute care hospital 
IPPS, this prospective adjustment is made on a 2-year lag and only 
if the error exceeds a defined threshold (0.25 percentage points).

E. Illustrative LTCH Prospective Payment System Update Framework 
for the 2007 LTCH PPS Rate Year

    Table 27 shows an illustrative update framework for the LTCH PPS 
for RY 2007. Some of the factors in the LTCH framework are computed 
using Medicare cost report data, while others are determined based 
on policy considerations. This is consistent with the factors in the 
capital IPPS and SNF PPS update frameworks. This design for a LTCH 
update framework is for illustrative purposes only, as much more 
work needs to be done to determine the appropriate level of detail 
for each factor.
    MedPAC supported this for updating payments and applied a 
similar framework when it proposed updates to hospital payments in 
its annual Report to Congress (MedPAC, 2000). The appropriateness of 
this framework for updating hospital payments was also discussed in 
the article, ``Are PPS Payments Adequate? Issues for Updating and 
Assessing Rates'' (Health Care Financing Review, Winter 1992). We 
believe a similar framework would be useful for analyzing updates to 
LTCH payments.
    If we applied this update framework to determine the LTCH PPS 
standard Federal rate for RY 2007, the update factor for RY 2007 
would be -0.5 percent. This estimate is based on the best available 
data at this time. The estimated update factor is based on a 
projected 3.6 percent increase in the proposed RPL market basket, a 
0.0 adjustment for intensity, a -0.9 percent adjustment for 
productivity, a -4.0 percent adjustment for case-mix, and a forecast 
error correction of 0.8 percent. The following is a description of 
the policy adjustments that have been applied under the illustrative 
LTCH PPS update framework for RY 2007.
    The case-mix index is the measure of the average DRG weight for 
cases paid under the LTCH PPS. 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 (``apparent'' case-mix index).
    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.
    As discussed in section IV.C.3. of the preamble of this proposed 
rule, for RY 2007, we are estimating a 6.75 percent nominal increase 
in the case-mix index. We estimate that the real case-mix increase 
would equal 2.75 percent in RY 2007. The net adjustment for change 
in case-mix is the difference between the projected increase in real 
case-mix and the projected nominal increase in real case-mix. 
Therefore, the estimated adjustment for case-mix change would be -
4.0 percentage points (2.75 percent minus 6.75 percent).
    The framework also contains an adjustment for forecast error. 
The market basket 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 increases in prices and the forecast used in 
calculating the update factors. There is a 2-year lag between the 
forecast and the measurement of the forecast error. A forecast error 
of 0.8 percentage points was calculated for the RY 2005 update. That 
is, current historical data indicate that the forecasted RY 2005 
market basket (3.1 percent) understated the actual realized price 
increases (3.9 percent) by 0.8 percentage points. Therefore, a 0.8 
percent adjustment would be appropriate to account for the forecast 
error under the illustrative LTCH PPS update framework for RY 2007.
    Under this framework, we also make an adjustment for 
productivity, an efficiency measure. Productivity measures the 
ability of hospitals to reduce the quantity of inputs required to 
produce a unit of service while maintaining quality. MedPAC has 
recommended a productivity target based on the Bureau of Labor 
Statistics' estimate of the 10-year moving national average rate of 
productivity growth. The productivity target currently equals 0.9 
percent. This target is lower than the productivity estimate 
calculated using the latest available LTCH cost report data. 
Therefore, under the illustrative LTCH PPS update framework for RY 
2007, we would recommend a 0.9 percent adjustment for productivity.
    We also make an adjustment for changes in intensity. The 
intensity factor reflects how hospital services are utilized to 
produce the final product, that is, the discharge. This component 
accounts for changes in these types of factors, such as the use of 
quality-enhancing services, for changes in within-DRG severity, and 
for expected modification of practice patterns to remove non-cost 
effective services. Based on the latest available LTCH data, we 
calculated a negative intensity factor. As we have done in the past 
under the IPPS, when we have found that case-mix consistent 
intensity is declining, we believe that it would be appropriate to 
apply a zero intensity adjustment under the illustrative LTCH PPS 
update framework for RY 2007 (August 1, 2000, 65 FR 47119).
    Table 27 illustrates what a possible LTCH PPS update framework 
would be if we proposed to determine the annual update to the LTCH 
PPS Federal rate based on a framework model such as this for RY 
2007. This conceptual model of a LTCH PPS update framework is for 
illustrative purposes only. As we discuss in greater detail in 
section IV.C.3. of the preamble of this proposed rule, we are 
proposing a 0 percent update to the LTCH PPS standard Federal rate 
for RY 2007.

      Table 27.--Illustrative LTCH PPS Update Framework for RY 2007
------------------------------------------------------------------------
                                                               Percent
                          Factors                               change
------------------------------------------------------------------------
Price (+):
  Proposed RPL Market Basket...............................         3.6
  Forecast Error...........................................         0.8
Productivity (-)...........................................         0.9
Output Intensity (+).......................................         0.0
  Input Intensity
  Productivity.............................................         0.9
Case-mix Creep Adjustment (+)..............................        -4.0
  Nominal Case-Mix.........................................        -6.75
  Real Case-Mix............................................         2.75
Other factors (+)..........................................         0.0
                                                            ------------
    Total..................................................        -0.5
------------------------------------------------------------------------

F. Additional Conceptual and Data Issues

    Additional conceptual issues specific to the LTCH PPS include 
the relevance of a site-of-service substitution adjustment, the 
necessity of an adjustment for LTC-DRG reclassification, the 
handling of one-time factors, and consistency with other types of 
hospital updates since LTCHs are similar in structure to these other 
types of hospitals.
    Under the acute care hospital IPPS, a site-of-service 
substitution factor (captured as part of intensity) was necessary 
because of the incentive to shift care from inpatient hospital to 
other settings such as hospital outpatient departments, SNFs, or 
HHAs. For the LTCH PPS, it is not clear without additional research 
whether there is an incentive to shift care either into or out of 
the LTCH because of the changes in behavior created by the different 
Medicare payment systems.
    A reclassification and recalibration adjustment under the acute 
care hospital IPPS is necessary to account for changes in the case-
mix or the types of patients treated by hospitals resulting from the 
annual reclassification and recalibration of the DRGs. This 
adjustment for case-mix is applied to the current FY update, but 
reflects the effect of revisions in the FY that is 2 years before 
that fiscal year. Whether a LTC-DRG reclassification adjustment 
would be necessary in the update framework would depend on the data 
availability and the likelihood of revisions to LTC-DRG 
classifications on a periodic basis.

[[Page 4747]]

    There is also a question about how to handle one-time factors 
(an example of these could be the increased costs of converting 
computer systems to Year 2000 compliance). An update framework might 
be an appropriate mechanism to account for these items, but because 
of uncertainty surrounding their impact on costs, determining an 
appropriate adjustment amount may be difficult.
    LTCHs are heterogeneous and are designated as a separate payment 
category only because their patients have longer average lengths of 
stay. This raises the question of whether certain factors in an 
update framework for LTCHs should be consistent with the factors in 
an update framework for other types of hospitals since they face 
similar cost pressures. Additional research in this area would need 
to be conducted to determine the reasonableness of having consistent 
updates.
    The purpose of this conceptual discussion is not to determine 
how the identified factors of the update framework would be 
measured. We recognize that there are significant measurement issues 
in accurately determining the factors that would account for growth 
in costs per discharge for efficiently providing care. This is 
driven, in part, by the shift from a cost-based payment system with 
an upper payment limit to a PPS. Significant research and data 
collection would be necessary to accurately measure these factors 
over the historical period. One example of this would be to measure 
the distinction between real and nominal case-mix change. However, 
many of these same concerns were also encountered and successfully 
addressed in the hospital IPPS update framework.
    The discussion here provides the conceptual basis for developing 
an update framework for the LTCH PPS that reflects changes in the 
underlying costs of efficiently providing services. It is important 
to note that the framework would not handle distribution issues such 
as geographic wage variations. Due to some variations in technical 
methodologies for measuring the factors of an update framework, and 
because of some of the data concerns mentioned earlier, implementing 
an update framework for the LTCH PPS would involve making 
significant policy decisions on issues similar to those made for the 
hospital IPPS update framework. We invite comments on the type of 
data sources to use, what other factors (if any) we should consider 
in an update framework, and any additional comments concerning the 
issues discussed in this proposed rule regarding the update 
framework.
    The following addendum will not appear in the Code of Federal 
Regulations.

Addendum

    This addendum contains the tables referred to throughout the 
preamble to this proposed rule. The tables presented below are as 
follows:
    Table 1: Proposed Long-Term Care Hospital Wage Index for Urban 
Areas for Discharges Occurring from July 1, 2006 through June 30, 
2007.
    Table 2: Proposed Long-Term Care Hospital Wage Index for Rural 
Areas for Discharges Occurring from July 1, 2006 through June 30, 
2007.
    Table 3: FY 2006 LTC-DRG Relative Weights and Geometric Mean 
Length of Stay for Discharges Occurring from October 1, 2005 through 
September 30, 2006. (Note: This is the same information provided in 
Table 11 of the FY 2006 IPPS final rule (August 12, 2005; 70 FR 
47681 through 47690), which has been reprinted here for 
convenience.)

  Table 1.--Proposed Long-Term Care Hospital Wage Index for Urban Areas
  for Discharges Occurring From July 1, 2006 Through June 30, 2007 \1\
------------------------------------------------------------------------
                                                \3/5\    \4/5\     Full
                             Urban Area          Wage     Wage     Wage
      CBSA  Code       (Constituent Counties)   Index    Index    Index
                                                 \2\      \3\      \4\
------------------------------------------------------------------------
10180................  Abilene, TX...........
                        Callahan County, TX..
                        Jones County, TX.....
                        Taylor County, TX....   0.8738   0.8317   0.7896
10380................  Aguadilla-Isabela-San
                        Sebasti[aacute]n, PR.
                        Aguada Municipio, PR.
                        Aguadilla Municipio,
                        PR.
                        A<plus-minus>asco
                        Municipio, PR.
                        Isabela Municipio, PR
                        Lares Municipio, PR..
                        Moca Municipio, PR...
                        Rin[oacute]n
                        Municipio, PR.
                        San Sebasti[aacute]n    0.6843   0.5790   0.4738
                        Municipio, PR.
10420................  Akron, OH.............
                        Portage County, OH...
                        Summit County, OH....   0.9389   0.9186   0.8982
10500................  Albany, GA............
                        Baker County, GA.....
                        Dougherty County, GA.
                        Lee County, GA.......
                        Terrell County, GA...
                        Worth County, GA.....   0.9177   0.8902   0.8628
10580................  Albany-Schenectady-
                        Troy, NY.
                        Albany County, NY....
                        Rensselaer County, NY
                        Saratoga County, NY..
                        Schenectady County,
                        NY.
                        Schoharie County, NY.   0.9153   0.8871   0.8589
10740................  Albuquerque, NM.......
                        Bernalillo County, NM
                        Sandoval County, NM..
                        Torrance County, NM..
                        Valencia County, NM..   0.9810   0.9747   0.9684
10780................  Alexandria, LA........
                        Grant Parish, LA.....
                        Rapides Parish, LA...   0.8820   0.8426   0.8033
10900................  Allentown-Bethlehem-
                        Easton, PA-NJ.
                        Warren County, NJ....
                        Carbon County, PA....

[[Page 4748]]

 
                        Lehigh County, PA....
                        Northampton County,     0.9891   0.9854   0.9818
                        PA.
11020................  Altoona, PA...........
                        Blair County, PA.....   0.9366   0.9155   0.8944
11100................  Amarillo, TX..........
                        Armstrong County, TX.
                        Carson County, TX....
                        Potter County, TX....
                        Randall County, TX...   0.9494   0.9325   0.9156
11180................  Ames, IA..............
                        Story County, IA.....   0.9722   0.9629   0.9536
11260................  Anchorage, AK.........
                        Anchorage
                        Municipality, AK.
                        Matanuska-Susitna       1.1137   1.1516   1.1895
                        Borough, AK.
11300................  Anderson, IN..........
                        Madison County, IN...   0.9152   0.8869   0.8586
11340................  Anderson, SC..........
                        Anderson County, SC..   0.9398   0.9198   0.8997
11460................  Ann Arbor, MI.........
                        Washtenaw County, MI.   1.0515   1.0687   1.0859
11500................  Anniston-Oxford, AL...
                        Calhoun County, AL...   0.8609   0.8146   0.7682
11540................  Appleton, WI..........
                        Calumet County, WI...
                        Outagamie County, WI.   0.9573   0.9430   0.9288
11700................  Asheville, NC.........
                        Buncombe County, NC..
                        Haywood County, NC...
                        Henderson County, NC.
                        Madison County, NC...   0.9571   0.9428   0.9285
12020................  Athens-Clarke County,
                        GA.
                        Clarke County, GA....
                        Madison County, GA...
                        Oconee County, GA....
                        Oglethorpe County, GA   0.9913   0.9884   0.9855
12060................  Atlanta-Sandy Springs-
                        Marietta, GA.
                        Barrow County, GA....
                        Bartow County, GA....
                        Butts County, GA.....
                        Carroll County, GA...
                        Cherokee County, GA..
                        Clayton County, GA...
                        Cobb County, GA......
                        Coweta County, GA....
                        Dawson County, GA....
                        DeKalb County, GA....
                        Douglas County, GA...
                        Fayette County, GA...
                        Forsyth County, GA...
                        Fulton County, GA....
                        Gwinnett County, GA..
                        Haralson County, GA..
                        Heard County, GA.....
                        Henry County, GA.....
                        Jasper County, GA....
                        Lamar County, GA.....
                        Meriwether County, GA
                        Newton County, GA....
                        Paulding County, GA..
                        Pickens County, GA...
                        Pike County, GA......
                        Rockdale County, GA..
                        Spalding County, GA..
                        Walton County, GA....   0.9876   0.9834   0.9793
12100................  Atlantic City, NJ.....
                        Atlantic County, NJ..   1.0969   1.1292   1.1615
12220................  Auburn-Opelika, AL....
                        Lee County, AL.......   0.8860   0.8480   0.8100
12260................  Augusta-Richmond
                        County, GA-SC.

[[Page 4749]]

 
                        Burke County, GA.....
                        Columbia County, GA..
                        McDuffie County, GA..
                        Richmond County, GA..
                        Aiken County, SC.....
                        Edgefield County, SC.   0.9849   0.9798   0.9748
12420................  Austin-Round Rock, TX.
                        Bastrop County, TX...
                        Caldwell County, TX..
                        Hays County, TX......
                        Travis County, TX....
                        Williamson County, TX   0.9662   0.9550   0.9437
12540................  Bakersfield, CA.......
                        Kern County, CA......   1.0282   1.0376   1.0470
12580................  Baltimore-Towson, MD..
                        Anne Arundel County,
                        MD.
                        Baltimore County, MD.
                        Carroll County, MD...
                        Harford County, MD...
                        Howard County, MD....
                        Queen Anne's County,
                        MD.
                        Baltimore City, MD...   0.9938   0.9918   0.9897
12620................  Bangor, ME............
                        Penobscot County, ME.   0.9996   0.9994   0.9993
12700................  Barnstable Town, MA...
                        Barnstable County, MA   1.1560   1.2080   1.2600
12940................  Baton Rouge, LA.......
                        Ascension Parish, LA.
                        East Baton Rouge
                        Parish, LA.
                        East Feliciana
                        Parish, LA.
                        Iberville Parish, LA.
                        Livingston Parish, LA
                        Pointe Coupee Parish,
                        LA.
                        St. Helena Parish, LA
                        West Baton Rouge
                        Parish, LA.
                        West Feliciana          0.9156   0.8874   0.8593
                        Parish, LA.
12980................  Battle Creek, MI......
                        Calhoun County, MI...   0.9705   0.9606   0.9508
13020................  Bay City, MI..........
                        Bay County, MI.......   0.9606   0.9474   0.9343
13140................  Beaumont-Port Arthur,
                        TX.
                        Hardin County, TX....
                        Jefferson County, TX.
                        Orange County, TX....   0.9047   0.8730   0.8412
13380................  Bellingham, WA........
                        Whatcom County, WA...   1.1039   1.1385   1.1731
13460................  Bend, OR..............
                        Deschutes County, OR.   1.0472   1.0629   1.0786
13644................  Bethesda-Gaithersburg-
                        Frederick, MD.
                        Frederick County, MD.
                        Montgomery County, MD   1.0890   1.1186   1.1483
13740................  Billings, MT..........
                        Carbon County, MT....
                        Yellowstone County,     0.9300   0.9067   0.8834
                        MT.
13780................  Binghamton, NY........
                        Broome County, NY....
                        Tioga County, NY.....   0.9137   0.8850   0.8562
13820................  Birmingham-Hoover, AL.
                        Bibb County, AL......
                        Blount County, AL....
                        Chilton County, AL...
                        Jefferson County, AL.
                        St. Clair County, AL.
                        Shelby County, AL....
                        Walker County, AL....   0.9375   0.9167   0.8959
13900................  Bismarck, ND..........
                        Burleigh County, ND..
                        Morton County, ND....   0.8544   0.8059   0.7574
13980................  Blacksburg-
                        Christiansburg-
                        Radford, VA.

[[Page 4750]]

 
                        Giles County, VA.....
                        Montgomery County, VA
                        Pulaski County, VA...
                        Radford City, VA.....   0.8772   0.8363   0.7954
14020................  Bloomington, IN.......
                        Greene County, IN....
                        Monroe County, IN....
                        Owen County, IN......   0.9068   0.8758   0.8447
14060................  Bloomington-Normal, IL
                        McLean County, IL....   0.9445   0.9260   0.9075
14260................  Boise City-Nampa, ID..
                        Ada County, ID.......
                        Boise County, ID.....
                        Canyon County, ID....
                        Gem County, ID.......
                        Owyhee County, ID....   0.9431   0.9242   0.9052
14484................  Boston-Quincy, MA.....
                        Norfolk County, MA...
                        Plymouth County, MA..
                        Suffolk County, MA...   1.0935   1.1246   1.1558
14500................  Boulder, CO...........
                        Boulder County, CO...   0.9840   0.9787   0.9734
14540................  Bowling Green, KY.....
                        Edmonson County, KY..
                        Warren County, KY....   0.8927   0.8569   0.8211
14740................  Bremerton-Silverdale,
                        WA.
                        Kitsap County, WA....   1.0405   1.0540   1.0675
14860................  Bridgeport-Stamford-
                        Norwalk, CT.
                        Fairfield County, CT.   1.1555   1.2074   1.2592
15180................  Brownsville-Harlingen,
                        TX.
                        Cameron County, TX...   0.9882   0.9843   0.9804
15260................  Brunswick, GA.........
                        Brantley County, GA..
                        Glynn County, GA.....
                        McIntosh County, GA..   0.9587   0.9449   0.9311
15380................  Buffalo-Niagara Falls,
                        NY.
                        Erie County, NY......
                        Niagara County, NY...   0.9707   0.9609   0.9511
15500................  Burlington, NC........
                        Alamance County, NC..   0.9343   0.9124   0.8905
15540................  Burlington-South
                        Burlington, VT.
                        Chittenden County, VT
                        Franklin County, VT..
                        Grand Isle County, VT   0.9646   0.9528   0.9410
15764................  Cambridge-Newton-
                        Framingham, MA.
                        Middlesex County, MA.   1.0703   1.0938   1.1172
15804................  Camden, NJ............
                        Burlington County, NJ
                        Camden County, NJ....
                        Gloucester County, NJ   1.0310   1.0414   1.0517
15940................  Canton-Massillon, OH..
                        Carroll County, OH...
                        Stark County, OH.....   0.9361   0.9148   0.8935
15980................  Cape Coral-Fort Myers,
                        FL.
                        Lee County, FL.......   0.9614   0.9485   0.9356
16180................  Carson City, NV.......
                        Carson City, NV......   1.0140   1.0187   1.0234
16220................  Casper, WY............
                        Natrona County, WY...   0.9416   0.9221   0.9026
16300................  Cedar Rapids, IA......
                        Benton County, IA....
                        Jones County, IA.....
                        Linn County, IA......   0.9295   0.9060   0.8825
16580................  Champaign-Urbana, IL..
                        Champaign County, IL.
                        Ford County, IL......
                        Piatt County, IL.....   0.9756   0.9675   0.9594
16620................  Charleston, WV........
                        Boone County, WV.....

[[Page 4751]]

 
                        Clay County, WV......
                        Kanawha County, WV...
                        Lincoln County, WV...
                        Putnam County, WV....   0.9067   0.8756   0.8445
16700................  Charleston-North
                        Charleston, SC.
                        Berkeley County, SC..
                        Charleston County, SC
                        Dorchester County, SC   0.9547   0.9396   0.9245
16740................  Charlotte-Gastonia-
                        Concord, NC-SC.
                        Anson County, NC.....
                        Cabarrus County, NC..
                        Gaston County, NC....
                        Mecklenburg County,
                        NC.
                        Union County, NC.....
                        York County, SC......   0.9850   0.9800   0.9750
16820................  Charlottesville, VA...
                        Albemarle County, VA.
                        Fluvanna County, VA..
                        Greene County, VA....
                        Nelson County, VA....
                        Charlottesville City,   1.0112   1.0150   1.0187
                        VA.
16860................  Chattanooga, TN-GA....
                        Catoosa County, GA...
                        Dade County, GA......
                        Walker County, GA....
                        Hamilton County, TN..
                        Marion County, TN....
                        Sequatchie County, TN   0.9453   0.9270   0.9088
16940................  Cheyenne, WY..........
                        Laramie County, WY...   0.9265   0.9020   0.8775
16974................  Chicago-Naperville-
                        Joliet, IL.
                        Cook County, IL......
                        DeKalb County, IL....
                        DuPage County, IL....
                        Grundy County, IL....
                        Kane County, IL......
                        Kendall County, IL...
                        McHenry County, IL...
                        Will County, IL......   1.0474   1.0632   1.0790
17020................  Chico, CA.............
                        Butte County, CA.....   1.0307   1.0409   1.0511
17140................  Cincinnati-Middletown,
                        OH-KY-IN.
                        Dearborn County, IN..
                        Franklin County, IN..
                        Ohio County, IN......
                        Boone County, KY.....
                        Bracken County, KY...
                        Campbell County, KY..
                        Gallatin County, KY..
                        Grant County, KY.....
                        Kenton County, KY....
                        Pendleton County, KY.
                        Brown County, OH.....
                        Butler County, OH....
                        Clermont County, OH..
                        Hamilton County, OH..
                        Warren County, OH....   0.9769   0.9692   0.9615
17300................  Clarksville, TN-KY....
                        Christian County, KY.
                        Trigg County, KY.....
                        Montgomery County, TN
                        Stewart County, TN...   0.8970   0.8627   0.8284
17420................  Cleveland, TN.........
                        Bradley County, TN...
                        Polk County, TN......   0.8883   0.8511   0.8139
17460................  Cleveland-Elyria-
                        Mentor, OH.
                        Cuyahoga County, OH..
                        Geauga County, OH....
                        Lake County, OH......

[[Page 4752]]

 
                        Lorain County, OH....
                        Medina County, OH....   0.9528   0.9370   0.9213
17660................  Coeur d'Alene, ID.....
                        Kootenai County, ID..   0.9788   0.9718   0.9647
17780................  College Station-Bryan,
                        TX.
                        Brazos County, TX....
                        Burleson County, TX..
                        Robertson County, TX.   0.9340   0.9120   0.8900
17820................  Colorado Springs, CO..
                        El Paso County, CO...
                        Teller County, CO....   0.9681   0.9574   0.9468
17860................  Columbia, MO..........
                        Boone County, MO.....
                        Howard County, MO....   0.9007   0.8676   0.8345
17900................  Columbia, SC..........
                        Calhoun County, SC...
                        Fairfield County, SC.
                        Kershaw County, SC...
                        Lexington County, SC.
                        Richland County, SC..
                        Saluda County, SC....   0.9434   0.9246   0.9057
17980................  Columbus, GA-AL.......
                        Russell County, AL...
                        Chattahoochee County,
                        GA.
                        Harris County, GA....
                        Marion County, GA....
                        Muscogee County, GA..   0.9136   0.8848   0.8560
18020................  Columbus, IN..........
                        Bartholomew County,     0.9753   0.9670   0.9588
                        IN.
18140................  Columbus, OH..........
                        Delaware County, OH..
                        Fairfield County, OH.
                        Franklin County, OH..
                        Licking County, OH...
                        Madison County, OH...
                        Morrow County, OH....
                        Pickaway County, OH..
                        Union County, OH.....   0.9916   0.9888   0.9860
18580................  Corpus Christi, TX....
                        Aransas County, TX...
                        Nueces County, TX....
                        San Patricio County,    0.9130   0.8840   0.8550
                        TX.
18700................  Corvallis, OR.........
                        Benton County, OR....   1.0437   1.0583   1.0729
19060................  Cumberland, MD-WV.....
                        Allegany County, MD..
                        Mineral County, WV...   0.9590   0.9454   0.9317
19124................  Dallas-Plano-Irving,
                        TX.
                        Collin County, TX....
                        Dallas County, TX....
                        Delta County, TX.....
                        Denton County, TX....
                        Ellis County, TX.....
                        Hunt County, TX......
                        Kaufman County, TX...
                        Rockwall County, TX..   1.0137   1.0182   1.0228
19140................  Dalton, GA............
                        Murray County, GA....
                        Whitfield County, GA.   0.9447   0.9263   0.9079
19180................  Danville, IL..........
                        Vermilion County, IL.   0.9417   0.9222   0.9028
19260................  Danville, VA..........
                        Pittsylvania County,
                        VA.
                        Danville City, VA....   0.9093   0.8791   0.8489
19340................  Davenport-Moline-Rock
                        Island, IA-IL.
                        Henry County, IL.....
                        Mercer County, IL....
                        Rock Island County,
                        IL.
                        Scott County, IA.....   0.9234   0.8979   0.8724

[[Page 4753]]

 
19380................  Dayton, OH............
                        Greene County, OH....
                        Miami County, OH.....
                        Montgomery County, OH
                        Preble County, OH....   0.9438   0.9251   0.9064
19460................  Decatur, AL...........
                        Lawrence County, AL..
                        Morgan County, AL....   0.9081   0.8775   0.8469
19500................  Decatur, IL...........
                        Macon County, IL.....   0.8840   0.8454   0.8067
19660................  Deltona-Daytona Beach-
                        Ormond Beach, FL.
                        Volusia County, FL...   0.9579   0.9439   0.9299
19740................  Denver-Aurora, CO.....
                        Adams County, CO.....
                        Arapahoe County, CO..
                        Broomfield County, CO
                        Clear Creek County,
                        CO.
                        Denver County, CO....
                        Douglas County, CO...
                        Elbert County, CO....
                        Gilpin County, CO....
                        Jefferson County, CO.
                        Park County, CO......   1.0434   1.0578   1.0723
19780................  Des Moines-West Des
                        Moines, IA.
                        Dallas County, IA....
                        Guthrie County, IA...
                        Madison County, IA...
                        Polk County, IA......
                        Warren County, IA....   0.9801   0.9735   0.9669
19804................  Detroit-Livonia-
                        Dearborn, MI.
                        Wayne County, MI.....   1.0254   1.0339   1.0424
20020................  Dothan, AL............
                        Geneva County, AL....
                        Henry County, AL.....
                        Houston County, AL...   0.8633   0.8177   0.7721
20100................  Dover, DE.............
                        Kent County, DE......   0.9866   0.9821   0.9776
20220................  Dubuque, IA...........
                        Dubuque County, IA...   0.9414   0.9219   0.9024
20260................  Duluth, MN-WI.........
                        Carlton County, MN...
                        St. Louis County, MN.
                        Douglas County, WI...   1.0128   1.0170   1.0213
20500................  Durham, NC............
                        Chatham County, NC...
                        Durham County, NC....
                        Orange County, NC....
                        Person County, NC....   1.0146   1.0195   1.0244
20740................  Eau Claire, WI........
                        Chippewa County, WI..
                        Eau Claire County, WI   0.9521   0.9361   0.9201
20764................  Edison, NJ............
                        Middlesex County, NJ.
                        Monmouth County, NJ..
                        Ocean County, NJ.....
                        Somerset County, NJ..   1.0749   1.0999   1.1249
20940................  El Centro, CA.........
                        Imperial County, CA..   0.9344   0.9125   0.8906
21060................  Elizabethtown, KY.....
                        Hardin County, KY....
                        Larue County, KY.....   0.9281   0.9042   0.8802
21140................  Elkhart-Goshen, IN....
                        Elkhart County, IN...   0.9776   0.9702   0.9627
21300................  Elmira, NY............
                        Chemung County, NY...   0.8950   0.8600   0.8250
21340................  El Paso, TX...........
                        El Paso County, TX...   0.9386   0.9182   0.8977
21500................  Erie, PA..............
                        Erie County, PA......   0.9242   0.8990   0.8737

[[Page 4754]]

 
21604................  Essex County, MA......
                        Essex County, MA.....   1.0323   1.0430   1.0538
21660................  Eugene-Springfield, OR
                        Lane County, OR......   1.0491   1.0654   1.0818
21780................  Evansville, IN-KY.....
                        Gibson County, IN....
                        Posey County, IN.....
                        Vanderburgh County,
                        IN.
                        Warrick County, IN...
                        Henderson County, KY.
                        Webster County, KY...   0.9228   0.8970   0.8713
21820................  Fairbanks, AK.........
                        Fairbanks North Star    1.0845   1.1126   1.1408
                        Borough, AK.
21940................  Fajardo, PR...........
                        Ceiba Municipio, PR..
                        Fajardo Municipio, PR
                        Luquillo Municipio,     0.6492   0.5322   0.4153
                        PR.
22020................  Fargo, ND-MN..........
                        Cass County, ND......
                        Clay County, MN......   0.9092   0.8789   0.8486
22140................  Farmington, NM........
                        San Juan County, NM..   0.9105   0.8807   0.8509
22180................  Fayetteville, NC......
                        Cumberland County, NC
                        Hoke County, NC......   0.9650   0.9533   0.9416
22220................  Fayetteville-
                        Springdale-Rogers, AR-
                        MO.
                        Benton County, AR....
                        Madison County, AR...
                        Washington County, AR
                        McDonald County, MO..   0.9197   0.8929   0.8661
22380................  Flagstaff, AZ.........
                        Coconino County, AZ..   1.1255   1.1674   1.2092
22420................  Flint, MI.............
                        Genesee County, MI...   1.0393   1.0524   1.0655
22500................  Florence, SC..........
                        Darlington County, SC
                        Florence County, SC..   0.9368   0.9158   0.8947
22520................  Florence-Muscle
                        Shoals, AL.
                        Colbert County, AL...
                        Lauderdale County, AL   0.8963   0.8618   0.8272
22540................  Fond du Lac, WI.......
                        Fond du Lac County,     0.9784   0.9712   0.9640
                        WI.
22660................  Fort Collins-Loveland,
                        CO.
                        Larimer County, CO...   1.0073   1.0098   1.0122
22744................  Fort Lauderdale-
                        Pompano Beach-
                        Deerfield Beach, FL.
                        Broward County, FL...   1.0259   1.0346   1.0432
22900................  Fort Smith, AR-OK.....
                        Crawford County, AR..
                        Franklin County, AR..
                        Sebastian County, AR.
                        Le Flore County, OK..
                        Sequoyah County, OK..   0.8938   0.8584   0.8230
23020................  Fort Walton Beach-
                        Crestview-Destin, FL.
                        Okaloosa County, FL..   0.9323   0.9098   0.8872
23060................  Fort Wayne, IN........
                        Allen County, IN.....
                        Wells County, IN.....
                        Whitley County, IN...   0.9876   0.9834   0.9793
23104................  Fort Worth-Arlington,
                        TX.
                        Johnson County, TX...
                        Parker County, TX....
                        Tarrant County, TX...
                        Wise County, TX......   0.9692   0.9589   0.9486
23420................  Fresno, CA............
                        Fresno County, CA....   1.0323   1.0430   1.0538
23460................  Gadsden, AL...........
                        Etowah County, AL....   0.8763   0.8350   0.7938
23540................  Gainesville, FL.......
                        Alachua County, FL...

[[Page 4755]]

 
                        Gilchrist County, FL.   0.9633   0.9510   0.9388
23580................  Gainesville, GA.......
                        Hall County, GA......   0.9324   0.9099   0.8874
23844................  Gary, IN..............
                        Jasper County, IN....
                        Lake County, IN......
                        Newton County, IN....
                        Porter County, IN....   0.9637   0.9516   0.9395
24020................  Glens Falls, NY.......
                        Warren County, NY....
                        Washington County, NY   0.9135   0.8847   0.8559
24140................  Goldsboro, NC.........
                        Wayne County, NC.....   0.9265   0.9020   0.8775
24220................  Grand Forks, ND-MN....
                        Polk County, MN......
                        Grand Forks County,     0.8741   0.8321   0.7901
                        ND.
24300................  Grand Junction, CO....
                        Mesa County, CO......   0.9730   0.9640   0.9550
24340................  Grand Rapids-Wyoming,
                        MI.
                        Barry County, MI.....
                        Ionia County, MI.....
                        Kent County, MI......
                        Newaygo County, MI...   0.9634   0.9512   0.9390
24500................  Great Falls, MT.......
                        Cascade County, MT...   0.9431   0.9242   0.9052
24540................  Greeley, CO...........
                        Weld County, CO......   0.9742   0.9656   0.9570
24580................  Green Bay, WI.........
                        Brown County, WI.....
                        Kewaunee County, WI..
                        Oconto County, WI....   0.9690   0.9586   0.9483
24660................  Greensboro-High Point,
                        NC.
                        Guilford County, NC..
                        Randolph County, NC..
                        Rockingham County, NC   0.9462   0.9283   0.9104
24780................  Greenville, NC........
                        Greene County, NC....
                        Pitt County, NC......   0.9655   0.9540   0.9425
24860................  Greenville, SC........
                        Greenville County, SC
                        Laurens County, SC...
                        Pickens County, SC...   1.0016   1.0022   1.0027
25020................  Guayama, PR...........
                        Arroyo Municipio, PR.
                        Guayama Municipio, PR
                        Patillas Municipio,     0.5909   0.4545   0.3181
                        PR.
25060................  Gulfport-Biloxi, MS...
                        Hancock County, MS...
                        Harrison County, MS..
                        Stone County, MS.....   0.9357   0.9143   0.8929
25180................  Hagerstown-
                        Martinsburg, MD-WV.
                        Washington County, MD
                        Berkeley County, WV..
                        Morgan County, WV....   0.9693   0.9591   0.9489
25260................  Hanford-Corcoran, CA..
                        Kings County, CA.....   1.0022   1.0029   1.0036
25420................  Harrisburg-Carlisle,
                        PA.
                        Cumberland County, PA
                        Dauphin County, PA...
                        Perry County, PA.....   0.9588   0.9450   0.9313
25500................  Harrisonburg, VA......
                        Rockingham County, VA
                        Harrisonburg City, VA   0.9453   0.9270   0.9088
25540................  Hartford-West Hartford-
                        East Hartford, CT.
                        Hartford County, CT..
                        Litchfield County, CT
                        Middlesex County, CT.
                        Tolland County, CT...   1.0644   1.0858   1.1073
25620................  Hattiesburg, MS.......

[[Page 4756]]

 
                        Forrest County, MS...
                        Lamar County, MS.....
                        Perry County, MS.....   0.8561   0.8081   0.7601
25860................  Hickory-Lenoir-
                        Morganton, NC.
                        Alexander County, NC.
                        Burke County, NC.....
                        Caldwell County, NC..
                        Catawba County, NC...   0.9353   0.9137   0.8921
25980................  Hinesville-Fort
                        Stewart, GA.
                        Liberty County, GA...
                        Long County, GA......   0.8597   0.8130   0.7662
26100................  Holland-Grand Haven,
                        MI.
                        Ottawa County, MI....   0.9433   0.9244   0.9055
26180................  Honolulu, HI..........
                        Honolulu County, HI..   1.0728   1.0971   1.1214
26300................  Hot Springs, AR.......
                        Garland County, AR...   0.9403   0.9204   0.9005
26380................  Houma-Bayou Cane-
                        Thibodaux, LA.
                        Lafourche Parish, LA.
                        Terrebonne Parish, LA   0.8736   0.8315   0.7894
26420................  Houston-Sugar Land-
                        Baytown, TX.
                        Austin County, TX....
                        Brazoria County, TX..
                        Chambers County, TX..
                        Fort Bend County, TX.
                        Galveston County, TX.
                        Harris County, TX....
                        Liberty County, TX...
                        Montgomery County, TX
                        San Jacinto County,
                        TX.
                        Waller County, TX....   0.9998   0.9997   0.9996
26580................  Huntington-Ashland, WV-
                        KY-OH.
                        Boyd County, KY......
                        Greenup County, KY...
                        Lawrence County, OH..
                        Cabell County, WV....
                        Wayne County, WV.....   0.9686   0.9582   0.9477
26620................  Huntsville, AL........
                        Limestone County, AL.
                        Madison County, AL...   0.9488   0.9317   0.9146
26820................  Idaho Falls, ID.......
                        Bonneville County, ID
                        Jefferson County, ID.   0.9652   0.9536   0.9420
26900................  Indianapolis-Carmel,
                        IN.
                        Boone County, IN.....
                        Brown County, IN.....
                        Hamilton County, IN..
                        Hancock County, IN...
                        Hendricks County, IN.
                        Johnson County, IN...
                        Marion County, IN....
                        Morgan County, IN....
                        Putnam County, IN....
                        Shelby County, IN....   0.9952   0.9936   0.9920
26980................  Iowa City, IA.........
                        Johnson County, IA...
                        Washington County, IA   0.9848   0.9798   0.9747
27060................  Ithaca, NY............
                        Tompkins County, NY..   0.9876   0.9834   0.9793
27100................  Jackson, MI...........
                        Jackson County, MI...   0.9582   0.9443   0.9304
27140................  Jackson, MS...........
                        Copiah County, MS....
                        Hinds County, MS.....
                        Madison County, MS...
                        Rankin County, MS....
                        Simpson County, MS...   0.8987   0.8649   0.8311
27180................  Jackson, TN...........
                        Chester County, TN...

[[Page 4757]]

 
                        Madison County, TN...   0.9378   0.9171   0.8964
27260................  Jacksonville, FL......
                        Baker County, FL.....
                        Clay County, FL......
                        Duval County, FL.....
                        Nassau County, FL....
                        St. Johns County, FL.   0.9574   0.9432   0.9290
27340................  Jacksonville, NC......
                        Onslow County, NC....   0.8942   0.8589   0.8236
27500................  Janesville, WI........
                        Rock County, WI......   0.9723   0.9630   0.9538
27620................  Jefferson City, MO....
                        Callaway County, MO..
                        Cole County, MO......
                        Moniteau County, MO..
                        Osage County, MO.....   0.9032   0.8710   0.8387
27740................  Johnson City, TN......
                        Carter County, TN....
                        Unicoi County, TN....
                        Washington County, TN   0.8762   0.8350   0.7937
27780................  Johnstown, PA.........
                        Cambria County, PA...   0.9012   0.8683   0.8354
27860................  Jonesboro, AR.........
                        Craighead County, AR.
                        Poinsett County, AR..   0.8747   0.8329   0.7911
27900................  Joplin, MO............
                        Jasper County, MO....
                        Newton County, MO....   0.9149   0.8866   0.8582
28020................  Kalamazoo-Portage, MI.
                        Kalamazoo County, MI.
                        Van Buren County, MI.   1.0229   1.0305   1.0381
28100................  Kankakee-Bradley, IL..
                        Kankakee County, IL..   1.0433   1.0577   1.0721
28140................  Kansas City, MO-KS....
                        Franklin County, KS..
                        Johnson County, KS...
                        Leavenworth County,
                        KS.
                        Linn County, KS......
                        Miami County, KS.....
                        Wyandotte County, KS.
                        Bates County, MO.....
                        Caldwell County, MO..
                        Cass County, MO......
                        Clay County, MO......
                        Clinton County, MO...
                        Jackson County, MO...
                        Lafayette County, MO.
                        Platte County, MO....
                        Ray County, MO.......   0.9686   0.9581   0.9476
28420................  Kennewick-Richland-
                        Pasco, WA.
                        Benton County, WA....
                        Franklin County, WA..   1.0371   1.0495   1.0619
28660................  Killeen-Temple-Fort
                        Hood, TX.
                        Bell County, TX......
                        Coryell County, TX...
                        Lampasas County, TX..   0.9116   0.8821   0.8526
28700................  Kingsport-Bristol-
                        Bristol, TN-VA.
                        Hawkins County, TN...
                        Sullivan County, TN..
                        Bristol City, VA.....
                        Scott County, VA.....
                        Washington County, VA   0.8832   0.8443   0.8054
28740................  Kingston, NY..........
                        Ulster County, NY....   0.9553   0.9404   0.9255
28940................  Knoxville, TN.........
                        Anderson County, TN..
                        Blount County, TN....
                        Knox County, TN......
                        Loudon County, TN....

[[Page 4758]]

 
                        Union County, TN.....   0.9065   0.8753   0.8441
29020................  Kokomo, IN............
                        Howard County, IN....
                        Tipton County, IN....   0.9705   0.9606   0.9508
29100................  La Crosse, WI-MN......
                        Houston County, MN...
                        La Crosse County, WI.   0.9738   0.9651   0.9564
29140................  Lafayette, IN.........
                        Benton County, IN....
                        Carroll County, IN...
                        Tippecanoe County, IN   0.9242   0.8989   0.8736
29180................  Lafayette, LA.........
                        Lafayette Parish, LA.
                        St. Martin Parish, LA   0.9057   0.8742   0.8428
29340................  Lake Charles, LA......
                        Calcasieu Parish, LA.
                        Cameron Parish, LA...   0.8700   0.8266   0.7833
29404................  Lake County-Kenosha
                        County, IL-WI.
                        Lake County, IL......
                        Kenosha County, WI...   1.0257   1.0343   1.0429
29460................  Lakeland, FL..........
                        Polk County, FL......   0.9347   0.9130   0.8912
29540................  Lancaster, PA.........
                        Lancaster County, PA.   0.9816   0.9755   0.9694
29620................  Lansing-East Lansing,
                        MI.
                        Clinton County, MI...
                        Eaton County, MI.....
                        Ingham County, MI....   0.9876   0.9835   0.9794
29700................  Laredo, TX............
                        Webb County, TX......   0.8841   0.8454   0.8068
29740................  Las Cruces, NM........
                        Dona Ana County, NM..   0.9080   0.8774   0.8467
29820................  Las Vegas-Paradise, NV
                        Clark County, NV.....   1.0862   1.1150   1.1437
29940................  Lawrence, KS..........
                        Douglas County, KS...   0.9122   0.8830   0.8537
30020................  Lawton, OK............
                        Comanche County, OK..   0.8723   0.8298   0.7872
30140................  Lebanon, PA...........
                        Lebanon County, PA...   0.9075   0.8767   0.8459
30300................  Lewiston, ID-WA.......
                        Nez Perce County, ID.
                        Asotin County, WA....   0.9932   0.9909   0.9886
30340................  Lewiston-Auburn, ME...
                        Androscoggin County,    0.9599   0.9465   0.9331
                        ME.
30460................  Lexington-Fayette, KY.
                        Bourbon County, KY...
                        Clark County, KY.....
                        Fayette County, KY...
                        Jessamine County, KY.
                        Scott County, KY.....
                        Woodford County, KY..   0.9445   0.9260   0.9075
30620................  Lima, OH..............
                        Allen County, OH.....   0.9535   0.9380   0.9225
30700................  Lincoln, NE...........
                        Lancaster County, NE.
                        Seward County, NE....   1.0128   1.0171   1.0214
30780................  Little Rock-North
                        Little Rock, AR.
                        Faulkner County, AR..
                        Grant County, AR.....
                        Lonoke County, AR....
                        Perry County, AR.....
                        Pulaski County, AR...
                        Saline County, AR....   0.9248   0.8998   0.8747
30860................  Logan, UT-ID..........
                        Franklin County, ID..
                        Cache County, UT.....   0.9498   0.9331   0.9164
30980................  Longview, TX..........
                        Gregg County, TX.....

[[Page 4759]]

 
                        Rusk County, TX......
                        Upshur County, TX....   0.9238   0.8984   0.8730
31020................  Longview, WA..........
                        Cowlitz County, WA...   0.9747   0.9663   0.9579
31084................  Los Angeles-Long Beach-
                        Glendale, CA.
                        Los Angeles County,     1.1070   1.1426   1.1783
                        CA.
31140................  Louisville-Jefferson
                        County, KY-IN.
                        Clark County, IN.....
                        Floyd County, IN.....
                        Harrison County, IN..
                        Washington County, IN
                        Bullitt County, KY...
                        Henry County, KY.....
                        Jefferson County, KY.
                        Meade County, KY.....
                        Nelson County, KY....
                        Oldham County, KY....
                        Shelby County, KY....
                        Spencer County, KY...
                        Trimble County, KY...   0.9551   0.9401   0.9251
31180................  Lubbock, TX...........
                        Crosby County, TX....
                        Lubbock County, TX...   0.9270   0.9026   0.8783
31340................  Lynchburg, VA.........
                        Amherst County, VA...
                        Appomattox County, VA
                        Bedford County, VA...
                        Campbell County, VA..
                        Bedford City, VA.....
                        Lynchburg City, VA...   0.9215   0.8953   0.8691
31420................  Macon, GA.............
                        Bibb County, GA......
                        Crawford County, GA..
                        Jones County, GA.....
                        Monroe County, GA....
                        Twiggs County, GA....   0.9666   0.9554   0.9443
31460................  Madera, CA............
                        Madera County, CA....   0.9228   0.8970   0.8713
31540................  Madison, WI...........
                        Columbia County, WI..
                        Dane County, WI......
                        Iowa County, WI......   1.0395   1.0527   1.0659
31700................  Manchester-Nashua, NH.
                        Hillsborough County,
                        NH.
                        Merrimack County, NH.   1.0212   1.0283   1.0354
31900................  Mansfield, OH.........
                        Richland County, OH..   0.9935   0.9913   0.9891
32420................  Mayag[uuml]ez, PR.....
                        Hormigueros
                        Municipio, PR.
                        Mayag[uuml]ez           0.6412   0.5216   0.4020
                        Municipio, PR.
32580................  McAllen-Edinburg-
                        Mission, TX.
                        Hidalgo County, TX...   0.9360   0.9147   0.8934
32780................  Medford, OR...........
                        Jackson County, OR...   1.0135   1.0180   1.0225
32820................  Memphis, TN-MS-AR.....
                        Crittenden County, AR
                        DeSoto County, MS....
                        Marshall County, MS..
                        Tate County, MS......
                        Tunica County, MS....
                        Fayette County, TN...
                        Shelby County, TN....
                        Tipton County, TN....   0.9638   0.9518   0.9397
32900................  Merced, CA............
                        Merced County, CA....   1.0665   1.0887   1.1109
33124................  Miami-Miami Beach-
                        Kendall, FL.
                        Miami-Dade County, FL   0.9850   0.9800   0.9750
33140................  Michigan City-La
                        Porte, IN.
                        LaPorte County, IN...   0.9639   0.9519   0.9399

[[Page 4760]]

 
33260................  Midland, TX...........
                        Midland County, TX...   0.9708   0.9611   0.9514
33340................  Milwaukee-Waukesha-
                        West Allis, WI.
                        Milwaukee County, WI.
                        Ozaukee County, WI...
                        Washington County, WI
                        Waukesha County, WI..   1.0088   1.0117   1.0146
33460................  Minneapolis-St. Paul-
                        Bloomington, MN-WI.
                        Anoka County, MN.....
                        Carver County, MN....
                        Chisago County, MN...
                        Dakota County, MN....
                        Hennepin County, MN..
                        Isanti County, MN....
                        Ramsey County, MN....
                        Scott County, MN.....
                        Sherburne County, MN.
                        Washington County, MN
                        Wright County, MN....
                        Pierce County, WI....
                        St. Croix County, WI.   1.0645   1.0860   1.1075
33540................  Missoula, MT..........
                        Missoula County, MT..   0.9684   0.9578   0.9473
33660................  Mobile, AL............
                        Mobile County, AL....   0.8735   0.8313   0.7891
33700................  Modesto, CA...........
                        Stanislaus County, CA   1.1131   1.1508   1.1885
33740................  Monroe, LA............
                        Ouachita Parish, LA..
                        Union Parish, LA.....   0.8819   0.8425   0.8031
33780................  Monroe, MI............
                        Monroe County, MI....   0.9681   0.9574   0.9468
33860................  Montgomery, AL........
                        Autauga County, AL...
                        Elmore County, AL....
                        Lowndes County, AL...
                        Montgomery County, AL   0.9171   0.8894   0.8618
34060................  Morgantown, WV........
                        Monongalia County, WV
                        Preston County, WV...   0.9052   0.8736   0.8420
34100................  Morristown, TN........
                        Grainger County, TN..
                        Hamblen County, TN...
                        Jefferson County, TN.   0.8777   0.8369   0.7961
34580................  Mount Vernon-
                        Anacortes, WA.
                        Skagit County, WA....   1.0272   1.0363   1.0454
34620................  Muncie, IN............
                        Delaware County, IN..   0.9358   0.9144   0.8930
34740................  Muskegon-Norton
                        Shores, MI.
                        Muskegon County, MI..   0.9798   0.9731   0.9664
34820................  Myrtle Beach-Conway-
                        North Myrtle Beach,
                        SC.
                        Horry County, SC.....   0.9360   0.9147   0.8934
34900................  Napa, CA..............
                        Napa County, CA......   1.1586   1.2114   1.2643
34940................  Naples-Marco Island,
                        FL.
                        Collier County, FL...   1.0083   1.0111   1.0139
34980................  Nashville-Davidson--
                        Murfreesboro, TN.
                        Cannon County, TN....
                        Cheatham County, TN..
                        Davidson County, TN..
                        Dickson County, TN...
                        Hickman County, TN...
                        Macon County, TN.....
                        Robertson County, TN.
                        Rutherford County, TN
                        Smith County, TN.....
                        Sumner County, TN....
                        Trousdale County, TN.
                        Williamson County, TN

[[Page 4761]]

 
                        Wilson County, TN....   0.9874   0.9832   0.9790
35004................  Nassau-Suffolk, NY....
                        Nassau County, NY....
                        Suffolk County, NY...   1.1631   1.2175   1.2719
35084................  Newark-Union, NJ-PA...
                        Essex County, NJ.....
                        Hunterdon County, NJ.
                        Morris County, NJ....
                        Sussex County, NJ....
                        Union County, NJ.....
                        Pike County, PA......   1.1130   1.1506   1.1883
35300................  New Haven-Milford, CT.
                        New Haven County, CT.   1.1132   1.1510   1.1887
35380................  New Orleans-Metairie-
                        Kenner, LA.
                        Jefferson Parish, LA.
                        Orleans Parish, LA...
                        Plaquemines Parish,
                        LA.
                        St. Bernard Parish,
                        LA.
                        St. Charles Parish,
                        LA.
                        St. John the Baptist
                        Parish, LA.
                        St. Tammany Parish,     0.9397   0.9196   0.8995
                        LA.
35644................  New York-White Plains-
                        Wayne, NY-NJ.
                        Bergen County, NJ....
                        Hudson County, NJ....
                        Passaic County, NJ...
                        Bronx County, NY.....
                        Kings County, NY.....
                        New York County, NY..
                        Putnam County, NY....
                        Queens County, NY....
                        Richmond County, NY..
                        Rockland County, NY..
                        Westchester County,     1.1913   1.2550   1.3188
                        NY.
35660................  Niles-Benton Harbor,
                        MI.
                        Berrien County, MI...   0.9327   0.9103   0.8879
35980................  Norwich-New London, CT
                        New London County, CT   1.0807   1.1076   1.1345
36084................  Oakland-Fremont-
                        Hayward, CA.
                        Alameda County, CA...
                        Contra Costa County,    1.3208   1.4277   1.5346
                        CA.
36100................  Ocala, FL.............
                        Marion County, FL....   0.9355   0.9140   0.8925
36140................  Ocean City, NJ........
                        Cape May County, NJ..   1.0607   1.0809   1.1011
36220................  Odessa, TX............
                        Ector County, TX.....   0.9930   0.9907   0.9884
36260................  Ogden-Clearfield, UT..
                        Davis County, UT.....
                        Morgan County, UT....
                        Weber County, UT.....   0.9417   0.9223   0.9029
36420................  Oklahoma City, OK.....
                        Canadian County, OK..
                        Cleveland County, OK.
                        Grady County, OK.....
                        Lincoln County, OK...
                        Logan County, OK.....
                        McClain County, OK...
                        Oklahoma County, OK..   0.9419   0.9225   0.9031
36500................  Olympia, WA...........
                        Thurston County, WA..   1.0556   1.0742   1.0927
36540................  Omaha-Council Bluffs,
                        NE-IA.
                        Harrison County, IA..
                        Mills County, IA.....
                        Pottawattamie County,
                        IA.
                        Cass County, NE......
                        Douglas County, NE...
                        Sarpy County, NE.....
                        Saunders County, NE..
                        Washington County, NE   0.9736   0.9648   0.9560

[[Page 4762]]

 
36740................  Orlando-Kissimmee, FL.
                        Lake County, FL......
                        Orange County, FL....
                        Osceola County, FL...
                        Seminole County, FL..   0.9678   0.9571   0.9464
36780................  Oshkosh-Neenah, WI....
                        Winnebago County, WI.   0.9510   0.9346   0.9183
36980................  Owensboro, KY.........
                        Daviess County, KY...
                        Hancock County, KY...
                        McLean County, KY....   0.9268   0.9024   0.8780
37100................  Oxnard-Thousand Oaks-
                        Ventura, CA.
                        Ventura County, CA...   1.0973   1.1298   1.1622
37340................  Palm Bay-Melbourne-
                        Titusville, FL.
                        Brevard County, FL...   0.9903   0.9871   0.9839
37460................  Panama City-Lynn
                        Haven, FL.
                        Bay County, FL.......   0.8803   0.8404   0.8005
37620................  Parkersburg-Marietta-
                        Vienna, WV-OH.
                        Washington County, OH
                        Pleasants County, WV.
                        Wirt County, WV......
                        Wood County, WV......   0.8962   0.8616   0.8270
37700................  Pascagoula, MS........
                        George County, MS....
                        Jackson County, MS...   0.8894   0.8525   0.8156
37860................  Pensacola-Ferry Pass-
                        Brent, FL.
                        Escambia County, FL..
                        Santa Rosa County, FL   0.8858   0.8477   0.8096
37900................  Peoria, IL............
                        Marshall County, IL..
                        Peoria County, IL....
                        Stark County, IL.....
                        Tazewell County, IL..
                        Woodford County, IL..   0.9322   0.9096   0.8870
37964................  Philadelphia, PA......
                        Bucks County, PA.....
                        Chester County, PA...
                        Delaware County, PA..
                        Montgomery County, PA
                        Philadelphia County,    1.0623   1.0830   1.1038
                        PA.
38060................  Phoenix-Mesa-
                        Scottsdale, AZ.
                        Maricopa County, AZ..
                        Pinal County, AZ.....   1.0076   1.0102   1.0127
38220................  Pine Bluff, AR........
                        Cleveland County, AR.
                        Jefferson County, AR.
                        Lincoln County, AR...   0.9208   0.8944   0.8680
38300................  Pittsburgh, PA........
                        Allegheny County, PA.
                        Armstrong County, PA.
                        Beaver County, PA....
                        Butler County, PA....
                        Fayette County, PA...
                        Washington County, PA
                        Westmoreland County,    0.9307   0.9076   0.8845
                        PA.
38340................  Pittsfield, MA........
                        Berkshire County, MA.   1.0109   1.0145   1.0181
38540................  Pocatello, ID.........
                        Bannock County, ID...
                        Power County, ID.....   0.9611   0.9481   0.9351
38660................  Ponce, PR.............
                        Juana D[iacute]az
                        Municipio, PR.
                        Ponce Municipio, PR..
                        Villalba Municipio,     0.6963   0.5951   0.4939
                        PR.
38860................  Portland-South
                        Portland-Biddeford,
                        ME.
                        Cumberland County, ME
                        Sagadahoc County, ME.
                        York County, ME......   1.0229   1.0306   1.0382
38900................  Portland-Vancouver-
                        Beaverton, OR-WA.

[[Page 4763]]

 
                        Clackamas County, OR.
                        Columbia County, OR..
                        Multnomah County, OR.
                        Washington County, OR
                        Yamhill County, OR...
                        Clark County, WA.....
                        Skamania County, WA..   1.0760   1.1013   1.1266
38940................  Port St. Lucie-Fort
                        Pierce, FL.
                        Martin County, FL....
                        St. Lucie County, FL.   1.0074   1.0098   1.0123
39100................  Poughkeepsie-Newburgh-
                        Middletown, NY.
                        Dutchess County, NY..
                        Orange County, NY....   1.0535   1.0713   1.0891
39140................  Prescott, AZ..........
                        Yavapai County, AZ...   0.9921   0.9895   0.9869
39300................  Providence-New Bedford-
                        Fall River, RI-MA.
                        Bristol County, MA...
                        Bristol County, RI...
                        Kent County, RI......
                        Newport County, RI...
                        Providence County, RI
                        Washington County, RI   1.0580   1.0773   1.0966
39340................  Provo-Orem, UT........
                        Juab County, UT......
                        Utah County, UT......   0.9700   0.9600   0.9500
39380................  Pueblo, CO............
                        Pueblo County, CO....   0.9174   0.8898   0.8623
39460................  Punta Gorda, FL.......
                        Charlotte County, FL.   0.9553   0.9404   0.9255
39540................  Racine, WI............
                        Racine County, WI....   0.9398   0.9198   0.8997
39580................  Raleigh-Cary, NC......
                        Franklin County, NC..
                        Johnston County, NC..
                        Wake County, NC......   0.9815   0.9753   0.9691
39660................  Rapid City, SD........
                        Meade County, SD.....
                        Pennington County, SD   0.9392   0.9190   0.8987
39740................  Reading, PA...........
                        Berks County, PA.....   0.9812   0.9749   0.9686
39820................  Redding, CA...........
                        Shasta County, CA....   1.1322   1.1762   1.2203
39900................  Reno-Sparks, NV.......
                        Storey County, NV....
                        Washoe County, NV....   1.0589   1.0786   1.0982
40060................  Richmond, VA..........
                        Amelia County, VA....
                        Caroline County, VA..
                        Charles City County,
                        VA.
                        Chesterfield County,
                        VA.
                        Cumberland County, VA
                        Dinwiddie County, VA.
                        Goochland County, VA.
                        Hanover County, VA...
                        Henrico County, VA...
                        King and Queen
                        County, VA.
                        King William County,
                        VA.
                        Louisa County, VA....
                        New Kent County, VA..
                        Powhatan County, VA..
                        Prince George County,
                        VA.
                        Sussex County, VA....
                        Colonial Heights
                        City, VA.
                        Hopewell City, VA....
                        Petersburg City, VA..
                        Richmond City, VA....   0.9597   0.9462   0.9328
40140................  Riverside-San
                        Bernardino-Ontario,
                        CA.
                        Riverside County, CA.
                        San Bernardino          1.0616   1.0822   1.1027
                        County, CA.

[[Page 4764]]

 
40220................  Roanoke, VA...........
                        Botetourt County, VA.
                        Craig County, VA.....
                        Franklin County, VA..
                        Roanoke County, VA...
                        Roanoke City, VA.....
                        Salem City, VA.......   0.9024   0.8699   0.8374
40340................  Rochester, MN.........
                        Dodge County, MN.....
                        Olmsted County, MN...
                        Wabasha County, MN...   1.0679   1.0905   1.1131
40380................  Rochester, NY.........
                        Livingston County, NY
                        Monroe County, NY....
                        Ontario County, NY...
                        Orleans County, NY...
                        Wayne County, NY.....   0.9473   0.9297   0.9121
40420................  Rockford, IL..........
                        Boone County, IL.....
                        Winnebago County, IL.   0.9990   0.9987   0.9984
40484................  Rockingham County-
                        Strafford County, NH.
                        Rockingham County, NH
                        Strafford County, NH.   1.0224   1.0299   1.0374
40580................  Rocky Mount, NC.......
                        Edgecombe County, NC.
                        Nash County, NC......   0.9349   0.9132   0.8915
40660................  Rome, GA..............
                        Floyd County, GA.....   0.9648   0.9531   0.9414
40900................  Sacramento--Arden-
                        Arcade--Roseville, CA.
                        El Dorado County, CA.
                        Placer County, CA....
                        Sacramento County, CA
                        Yolo County, CA......   1.1781   1.2375   1.2969
40980................  Saginaw-Saginaw
                        Township North, MI.
                        Saginaw County, MI...   0.9453   0.9270   0.9088
41060................  St. Cloud, MN.........
                        Benton County, MN....
                        Stearns County, MN...   0.9979   0.9972   0.9965
41100................  St. George, UT........
                        Washington County, UT   0.9635   0.9514   0.9392
41140................  St. Joseph, MO-KS.....
                        Doniphan County, KS..
                        Andrew County, MO....
                        Buchanan County, MO..
                        DeKalb County, MO....   0.9711   0.9615   0.9519
41180................  St. Louis, MO-IL......
                        Bond County, IL......
                        Calhoun County, IL...
                        Clinton County, IL...
                        Jersey County, IL....
                        Macoupin County, IL..
                        Madison County, IL...
                        Monroe County, IL....
                        St. Clair County, IL.
                        Crawford County, MO..
                        Franklin County, MO..
                        Jefferson County, MO.
                        Lincoln County, MO...
                        St. Charles County,
                        MO.
                        St. Louis County, MO.
                        Warren County, MO....
                        Washington County, MO
                        St. Louis City, MO...   0.9372   0.9163   0.8954
41420................  Salem, OR.............
                        Marion County, OR....
                        Polk County, OR......   1.0265   1.0354   1.0442
41500................  Salinas, CA...........
                        Monterey County, CA..   1.2477   1.3302   1.4128
41540................  Salisbury, MD.........

[[Page 4765]]

 
                        Somerset County, MD..
                        Wicomico County, MD..   0.9438   0.9251   0.9064
41620................  Salt Lake City, UT....
                        Salt Lake County, UT.
                        Summit County, UT....
                        Tooele County, UT....   0.9653   0.9537   0.9421
41660................  San Angelo, TX........
                        Irion County, TX.....
                        Tom Green County, TX.   0.8963   0.8617   0.8271
41700................  San Antonio, TX.......
                        Atascosa County, TX..
                        Bandera County, TX...
                        Bexar County, TX.....
                        Comal County, TX.....
                        Guadalupe County, TX.
                        Kendall County, TX...
                        Medina County, TX....
                        Wilson County, TX....   0.9388   0.9184   0.8980
41740................  San Diego-Carlsbad-San
                        Marcos, CA.
                        San Diego County, CA.   1.0848   1.1130   1.1413
41780................  Sandusky, OH..........
                        Erie County, OH......   0.9411   0.9215   0.9019
41884................  San Francisco-San
                        Mateo-Redwood City,
                        CA.
                        Marin County, CA.....
                        San Francisco County,
                        CA.
                        San Mateo County, CA.   1.2996   1.3995   1.4994
41900................  San Germ[aacute]n-Cabo
                        Rojo, PR.
                        Cabo Rojo Municipio,
                        PR.
                        Lajas Municipio, PR..
                        Sabana Grande
                        Municipio, PR.
                        San Germ[aacute]n       0.6790   0.5720   0.4650
                        Municipio, PR.
41940................  San Jose-Sunnyvale-
                        Santa Clara, CA.
                        San Benito County, CA
                        Santa Clara County,     1.3059   1.4079   1.5099
                        CA.
41980................  San Juan-Caguas-
                        Guaynabo, PR.
                        Aguas Buenas
                        Municipio, PR.
                        Aibonito Municipio,
                        PR.
                        Arecibo Municipio, PR
                        Barceloneta
                        Municipio, PR.
                        Barranquitas
                        Municipio, PR.
                        Bayam[oacute]n
                        Municipio, PR.
                        Caguas Municipio, PR.
                        Camuy Municipio, PR..
                        Can[oacute]vanas
                        Municipio, PR.
                        Carolina Municipio,
                        PR.
                        Cata[ntilde]o
                        Municipio, PR.
                        Cayey Municipio, PR..
                        Ciales Municipio, PR.
                        Cidra Municipio, PR..
                        Comer[iacute]o
                        Municipio, PR.
                        Corozal Municipio, PR
                        Dorado Municipio, PR.
                        Florida Municipio, PR
                        Guaynabo Municipio,
                        PR.
                        Gurabo Municipio, PR.
                        Hatillo Municipio, PR
                        Humacao Municipio, PR
                        Juncos Municipio, PR.
                        Las Piedras
                        Municipio, PR.
                        Lo[iacute]za
                        Municipio, PR.
                        Manat[iacute]
                        Municipio, PR.
                        Maunabo Municipio, PR
                        Morovis Municipio, PR
                        Naguabo Municipio, PR
                        Naranjito Municipio,
                        PR.
                        Orocovis Municipio,
                        PR.
                        Quebradillas
                        Municipio, PR.
                        R[iacute]o Grande
                        Municipio, PR.
                        San Juan Municipio,
                        PR.

[[Page 4766]]

 
                        San Lorenzo
                        Municipio, PR.
                        Toa Alta Municipio,
                        PR.
                        Toa Baja Municipio,
                        PR.
                        Trujillo Alto
                        Municipio, PR.
                        Vega Alta Municipio,
                        PR.
                        Vega Baja Municipio,
                        PR.
                        Yabucoa Municipio, PR   0.6773   0.5697   0.4621
42020................  San Luis Obispo-Paso
                        Robles, CA.
                        San Luis Obispo         1.0809   1.1079   1.1349
                        County, CA.
42044................  Santa Ana-Anaheim-
                        Irvine, CA.
                        Orange County, CA....   1.0935   1.1247   1.1559
42060................  Santa Barbara-Santa
                        Maria, CA.
                        Santa Barbara County,   1.1016   1.1355   1.1694
                        CA.
42100................  Santa Cruz-
                        Watsonville, CA.
                        Santa Cruz County, CA   1.3100   1.4133   1.5166
42140................  Santa Fe, NM..........
                        Santa Fe County, NM..   1.0552   1.0736   1.0920
42220................  Santa Rosa-Petaluma,
                        CA.
                        Sonoma County, CA....   1.2096   1.2794   1.3493
42260................  Sarasota-Bradenton-
                        Venice, FL.
                        Manatee County, FL...
                        Sarasota County, FL..   0.9783   0.9711   0.9639
42340................  Savannah, GA..........
                        Bryan County, GA.....
                        Chatham County, GA...
                        Effingham County, GA.   0.9677   0.9569   0.9461
42540................  Scranton--Wilkes-
                        Barre, PA.
                        Lackawanna County, PA
                        Luzerne County, PA...
                        Wyoming County, PA...   0.9124   0.8832   0.8540
42644................  Seattle-Bellevue-
                        Everett, WA.
                        King County, WA......
                        Snohomish County, WA.   1.0946   1.1262   1.1577
42680................  Sebastian-Vero Beach,
                        FL.
                        Indian River County,    0.9660   0.9547   0.9434
                        FL.
43100................  Sheboygan, WI.........
                        Sheboygan County, WI.   0.9347   0.9129   0.8911
43300................  Sherman-Denison, TX...
                        Grayson County, TX...   0.9704   0.9606   0.9507
43340................  Shreveport-Bossier
                        City, LA.
                        Bossier Parish, LA...
                        Caddo Parish, LA.....
                        De Soto Parish, LA...   0.9256   0.9008   0.8760
43580................  Sioux City, IA-NE-SD..
                        Woodbury County, IA..
                        Dakota County, NE....
                        Dixon County, NE.....
                        Union County, SD.....   0.9629   0.9505   0.9381
43620................  Sioux Falls, SD.......
                        Lincoln County, SD...
                        McCook County, SD....
                        Minnehaha County, SD.
                        Turner County, SD....   0.9781   0.9708   0.9635
43780................  South Bend-Mishawaka,
                        IN-MI.
                        St. Joseph County, IN
                        Cass County, MI......   0.9873   0.9830   0.9788
43900................  Spartanburg, SC.......
                        Spartanburg County,     0.9503   0.9338   0.9172
                        SC.
44060................  Spokane, WA...........
                        Spokane County, WA...   1.0543   1.0724   1.0905
44100................  Springfield, IL.......
                        Menard County, IL....
                        Sangamon County, IL..   0.9275   0.9034   0.8792
44140................  Springfield, MA.......
                        Franklin County, MA..
                        Hampden County, MA...
                        Hampshire County, MA.   1.0149   1.0198   1.0248
44180................  Springfield, MO.......
                        Christian County, MO.

[[Page 4767]]

 
                        Dallas County, MO....
                        Greene County, MO....
                        Polk County, MO......
                        Webster County, MO...   0.8942   0.8590   0.8237
44220................  Springfield, OH.......
                        Clark County, OH.....   0.9038   0.8717   0.8396
44300................  State College, PA.....
                        Centre County, PA....   0.9014   0.8685   0.8356
44700................  Stockton, CA..........
                        San Joaquin County,     1.0784   1.1046   1.1307
                        CA.
44940................  Sumter, SC............
                        Sumter County, SC....   0.9026   0.8702   0.8377
45060................  Syracuse, NY..........
                        Madison County, NY...
                        Onondaga County, NY..
                        Oswego County, NY....   0.9744   0.9659   0.9574
45104................  Tacoma, WA............
                        Pierce County, WA....   1.0445   1.0594   1.0742
45220................  Tallahassee, FL.......
                        Gadsden County, FL...
                        Jefferson County, FL.
                        Leon County, FL......
                        Wakulla County, FL...   0.9213   0.8950   0.8688
45300................  Tampa-St. Petersburg-
                        Clearwater, FL.
                        Hernando County, FL..
                        Hillsborough County,
                        FL.
                        Pasco County, FL.....
                        Pinellas County, FL..   0.9540   0.9386   0.9233
45460................  Terre Haute, IN.......
                        Clay County, IN......
                        Sullivan County, IN..
                        Vermillion County, IN
                        Vigo County, IN......   0.8982   0.8643   0.8304
45500................  Texarkana, TX-
                        Texarkana, AR.
                        Miller County, AR....
                        Bowie County, TX.....   0.8970   0.8626   0.8283
45780................  Toledo, OH............
                        Fulton County, OH....
                        Lucas County, OH.....
                        Ottawa County, OH....
                        Wood County, OH......   0.9744   0.9659   0.9574
45820................  Topeka, KS............
                        Jackson County, KS...
                        Jefferson County, KS.
                        Osage County, KS.....
                        Shawnee County, KS...
                        Wabaunsee County, KS.   0.9352   0.9136   0.8920
45940................  Trenton-Ewing, NJ.....
                        Mercer County, NJ....   1.0500   1.0667   1.0834
46060................  Tucson, AZ............
                        Pima County, AZ......   0.9404   0.9206   0.9007
46140................  Tulsa, OK.............
                        Creek County, OK.....
                        Okmulgee County, OK..
                        Osage County, OK.....
                        Pawnee County, OK....
                        Rogers County, OK....
                        Tulsa County, OK.....
                        Wagoner County, OK...   0.9126   0.8834   0.8543
46220................  Tuscaloosa, AL........
                        Greene County, AL....
                        Hale County, AL......
                        Tuscaloosa County, AL   0.9187   0.8916   0.8645
46340................  Tyler, TX.............
                        Smith County, TX.....   0.9501   0.9334   0.9168
46540................  Utica-Rome, NY........
                        Herkimer County, NY..
                        Oneida County, NY....   0.9015   0.8686   0.8358
46660................  Valdosta, GA..........

[[Page 4768]]

 
                        Brooks County, GA....
                        Echols County, GA....
                        Lanier County, GA....
                        Lowndes County, GA...   0.9320   0.9093   0.8866
46700................  Vallejo-Fairfield, CA.
                        Solano County, CA....   1.2962   1.3949   1.4936
47020................  Victoria, TX..........
                        Calhoun County, TX...
                        Goliad County, TX....
                        Victoria County, TX..   0.8896   0.8528   0.8160
47220................  Vineland-Millville-
                        Bridgeton, NJ.
                        Cumberland County, NJ   0.9896   0.9862   0.9827
47260................  Virginia Beach-Norfolk-
                        Newport News, VA-NC.
                        Currituck County, NC.
                        Gloucester County, VA
                        Isle of Wight County,
                        VA.
                        James City County, VA
                        Mathews County, VA...
                        Surry County, VA.....
                        York County, VA......
                        Chesapeake City, VA..
                        Hampton City, VA.....
                        Newport News City, VA
                        Norfolk City, VA.....
                        Poquoson City, VA....
                        Portsmouth City, VA..
                        Suffolk City, VA.....
                        Virginia Beach City,
                        VA.
                        Williamsburg City, VA   0.9279   0.9039   0.8799
47300................  Visalia-Porterville,
                        CA.
                        Tulare County, CA....   1.0074   1.0098   1.0123
47380................  Waco, TX..............
                        McLennan County, TX..   0.9111   0.8814   0.8518
47580................  Warner Robins, GA.....
                        Houston County, GA...   0.9187   0.8916   0.8645
47644................  Warren-Troy-Farmington
                        Hills, MI.
                        Lapeer County, MI....
                        Livingston County, MI
                        Macomb County, MI....
                        Oakland County, MI...
                        St. Clair County, MI.   0.9923   0.9897   0.9871
47894................  Washington-Arlington-
                        Alexandria, DC-VA-MD-
                        WV.
                        District of Columbia,
                        DC.
                        Calvert County, MD...
                        Charles County, MD...
                        Prince George's
                        County, MD.
                        Arlington County, VA.
                        Clarke County, VA....
                        Fairfax County, VA...
                        Fauquier County, VA..
                        Loudoun County, VA...
                        Prince William
                        County, VA.
                        Spotsylvania County,
                        VA.
                        Stafford County, VA..
                        Warren County, VA....
                        Alexandria City, VA..
                        Fairfax City, VA.....
                        Falls Church City, VA
                        Fredericksburg City,
                        VA.
                        Manassas City, VA....
                        Manassas Park City,
                        VA.
                        Jefferson County, WV.   1.0556   1.0741   1.0926
47940................  Waterloo-Cedar Falls,
                        IA.
                        Black Hawk County, IA
                        Bremer County, IA....
                        Grundy County, IA....   0.9134   0.8846   0.8557
48140................  Wausau, WI............
                        Marathon County, WI..   0.9754   0.9672   0.9590
48260................  Weirton-Steubenville,
                        WV-OH.

[[Page 4769]]

 
                        Jefferson County, OH.
                        Brooke County, WV....
                        Hancock County, WV...   0.8691   0.8255   0.7819
48300................  Wenatchee, WA.........
                        Chelan County, WA....
                        Douglas County, WA...   1.0042   1.0056   1.0070
48424................  West Palm Beach-Boca
                        Raton-Boynton Beach,
                        FL.
                        Palm Beach County, FL   1.0040   1.0054   1.0067
48540................  Wheeling, WV-OH.......
                        Belmont County, OH...
                        Marshall County, WV..
                        Ohio County, WV......   0.8297   0.7729   0.7161
48620................  Wichita, KS...........
                        Butler County, KS....
                        Harvey County, KS....
                        Sedgwick County, KS..
                        Sumner County, KS....   0.9492   0.9322   0.9153
48660................  Wichita Falls, TX.....
                        Archer County, TX....
                        Clay County, TX......
                        Wichita County, TX...   0.8971   0.8628   0.8285
48700................  Williamsport, PA......
                        Lycoming County, PA..   0.9018   0.8691   0.8364
48864................  Wilmington, DE-MD-NJ..
                        New Castle County, DE
                        Cecil County, MD.....
                        Salem County, NJ.....   1.0283   1.0377   1.0471
48900................  Wilmington, NC........
                        Brunswick County, NC.
                        New Hanover County,
                        NC.
                        Pender County, NC....   0.9749   0.9666   0.9582
49020................  Winchester, VA-WV.....
                        Frederick County, VA.
                        Winchester City, VA..
                        Hampshire County, WV.   1.0128   1.0171   1.0214
49180................  Winston-Salem, NC.....
                        Davie County, NC.....
                        Forsyth County, NC...
                        Stokes County, NC....
                        Yadkin County, NC....   0.9366   0.9155   0.8944
49340................  Worcester, MA.........
                        Worcester County, MA.   1.0617   1.0822   1.1028
49420................  Yakima, WA............
                        Yakima County, WA....   1.0093   1.0124   1.0155
49500................  Yauco, PR.............
                        Gu[aacute]nica
                        Municipio, PR.
                        Guayanilla Municipio,
                        PR.
                        Pe[ntilde]uelas
                        Municipio, PR.
                        Yauco Municipio, PR..   0.6645   0.5526   0.4408
49620................  York-Hanover, PA......
                        York County, PA......   0.9608   0.9478   0.9347
49660................  Youngstown-Warren-
                        Boardman, OH-PA.
                        Mahoning County, OH..
                        Trumbull County, OH..
                        Mercer County, PA....   0.9162   0.8882   0.8603
49700................  Yuba City, CA.........
                        Sutter County, CA....
                        Yuba County, CA......   1.0553   1.0737   1.0921
49740................  Yuma, AZ..............
                        Yuma County, AZ......   0.9476   0.9301  0.9126
------------------------------------------------------------------------
\1\ As discussed in section IV.D.1.d. of the preamble of this proposed
  rule, because there will no longer be any LTCHs in their cost
  reporting periods that began during FYs 2003 or 2004 (the first and
  second years of the 5-year wage index phase-in, respectively), we are
  no longer showing the \1/5\ and \2/5\ wage index value. For further
  details on the 5-year phase-in of the wage index, see section IV.D.1.
  of this proposed rule.
\2\ Three-fifths of the proposed full wage index value, applicable for a
  LTCH's cost reporting period beginning on or after October 1, 2004
  through September 30, 2005 (Federal FY 2005). That is, for a LTCH's
  cost reporting period that begins during Federal FY 2005 and located
  in Chicago, Illinois (CBSA 16974), the proposed \3/5\ wage index value
  is computed as ((3*1.0790) + 2))/5 = 1.0474. For further details on
  the 5-year phase-in of the wage index, see section IV.D.1. of this
  proposed rule.

[[Page 4770]]

 
\3\ Four-fifths of the proposed full wage index value, applicable for a
  LTCH's cost reporting period beginning on or after October 1, 2005
  through September 30, 2006 (Federal FY 2006). That is, for a LTCH's
  cost reporting period that begins during Federal FY 2006 and located
  in Chicago, Illinois (CBSA 16974), the proposed \4/5\ wage index value
  is computed as ((4*1.0790) + 1))/5 = 1.0632. For further details on
  the 5-year phase-in of the wage index, see section IV.D.1. of this
  proposed rule.
\4\ The proposed wage index values are calculated using the same wage
  data used to compute the wage index used by acute care hospitals under
  the IPPS for Federal FY 2006 (that is, fiscal year 2002 audited acute
  care hospital inpatient wage data without regard to reclassification
  under section 1886(d)(8) or section 1886(d)(10) of the Act).


  Table 2.--Proposed Long-Term Care Hospital Wage Index for Rural Areas
  for Discharges Occurring From July 1, 2006 Through June 30, 2007 \1\
------------------------------------------------------------------------
                                                \3/5\    \4/5\     Full
                                                 Wage     Wage     Wage
     CBSA Code             Nonurban Area        Index    Index    Index
                                                 \2\      \3\      \4\
------------------------------------------------------------------------
01.................  Alabama.................   0.8468   0.7957   0.7446
02.................  Alaska..................   1.1186   1.1582   1.1977
03.................  Arizona.................   0.9261   0.9014   0.8768
04.................  Arkansas................   0.8480   0.7973   0.7466
05.................  California..............   1.0632   1.0843   1.1054
06.................  Colorado................   0.9628   0.9504   0.9380
07.................  Connecticut.............   1.1038   1.1384   1.1730
08.................  Delaware................   0.9747   0.9663   0.9579
10.................  Florida.................   0.9141   0.8854   0.8568
11.................  Georgia.................   0.8597   0.8130   0.7662
12.................  Hawaii..................   1.0331   1.0441   1.0551
13.................  Idaho...................   0.8822   0.8430   0.8037
14.................  Illinois................   0.8963   0.8617   0.8271
15.................  Indiana.................   0.9174   0.8899   0.8624
16.................  Iowa....................   0.9105   0.8807   0.8509
17.................  Kansas..................   0.8821   0.8428   0.8035
18.................  Kentucky................   0.8660   0.8213   0.7766
19.................  Louisiana...............   0.8447   0.7929   0.7411
20.................  Maine...................   0.9306   0.9074   0.8843
21.................  Maryland................   0.9612   0.9482   0.9353
22.................  Massachusetts \5\.......  .......  .......  .......
23.................  Michigan................   0.9337   0.9116   0.8895
24.................  Minnesota...............   0.9479   0.9306   0.9132
25.................  Mississippi.............   0.8604   0.8139   0.7674
26.................  Missouri................   0.8740   0.8320   0.7900
27.................  Montana.................   0.9257   0.9010   0.8762
28.................  Nebraska................   0.9194   0.8926   0.8657
29.................  Nevada..................   0.9439   0.9252   0.9065
30.................  New Hampshire...........   1.0490   1.0654   1.0817
31.................  New Jersey \5\..........  .......  .......  .......
32.................  New Mexico..............   0.9181   0.8908   0.8635
33.................  New York................   0.8892   0.8523   0.8154
34.................  North Carolina..........   0.9124   0.8832   0.8540
35.................  North Dakota............   0.8357   0.7809   0.7261
36.................  Ohio....................   0.9296   0.9061   0.8826
37.................  Oklahoma................   0.8549   0.8065   0.7581
38.................  Oregon..................   0.9896   0.9861   0.9826
39.................  Pennsylvania............   0.8975   0.8633   0.8291
40.................  Puerto Rico \5\.........  .......  .......  .......
41.................  Rhode Island \5\........  .......  .......  .......
42.................  South Carolina..........   0.9183   0.8910   0.8638
43.................  South Dakota............   0.9136   0.8848   0.8560
44.................  Tennessee...............   0.8737   0.8316   0.7895
45.................  Texas...................   0.8802   0.8402   0.8003
46.................  Utah....................   0.8871   0.8494   0.8118
47.................  Vermont.................   0.9898   0.9864   0.9830
49.................  Virginia................   0.8808   0.8410   0.8013
50.................  Washington..............   1.0306   1.0408   1.0510
51.................  West Virginia...........   0.8630   0.8174   0.7717
52.................  Wisconsin...............   0.9705   0.9607   0.9509
53.................  Wyoming.................   0.9554   0.9406  0.9257
------------------------------------------------------------------------
\1\ As discussed in section IV.D.1.d. of the preamble of this proposed
  rule, because there are no longer any LTCHs in their cost reporting
  periods that began during FYs 2003 and 2004 (the first and second
  years of the 5-year wage index phase-in, respectively), we are no
  longer showing the \1/5\ and \2/5\ wage index value. For further
  details on the 5-year phase-in of the wage index, see section IV.D.1.
  of this proposed rule.
\2\ The proposed wage index values are calculated using the same wage
  data used to compute the wage index used by acute care hospitals under
  the IPPS for Federal FY 2006 (that is, fiscal year 2002 audited acute
  care hospital inpatient wage data without regard to reclassification
  under section 1886(d)(8) or section 1886(d)(10) of the Act).
\3\ Three-fifths of the proposed full wage index value, applicable for a
  LTCH's cost reporting period beginning on or after October 1, 2004
  through September 30, 2005 (Federal FY 2005). That is, for a LTCH's
  cost reporting period that begins during Federal FY 2005 and located
  in rural Illinois, the proposed \3/5\ wage index value is computed as
  ((3*0.8271) + 2))/5 = 0.8963. For further details on the 5-year phase-
  in of the wage index, see section IV.D.1. of this proposed rule.

[[Page 4771]]

 
\4\ Four-fifths of the proposed full wage index value, applicable for a
  LTCH's cost reporting period beginning on or after October 1, 2005
  through September 30, 2006 (Federal FY 2006). That is, for a LTCH's
  cost reporting period that begins during Federal FY 2006 and located
  in rural Illinois, the proposed \4/5\ wage index value is computed as
  ((3*0.9271) + 2))/5 = 0.8617. For further details on the 5-year phase-
  in of the wage index, see section IV.D.1. of this proposed rule.
\5\ All counties within the State are classified as urban.


   Table 3.--FY 2006 LTC-DRGs, Relative Weights and Geometric Average
                             Length of Stay
 [Effective for discharges occurring on or after October 1, 2005 through
                           September 30, 2006]
------------------------------------------------------------------------
                                                               Geometric
                                                   Relative     Average
      LTC-DRG                Description            Weight     Length of
                                                                 Stay
------------------------------------------------------------------------
1.................  \5\ CRANIOTOMY AGE >17 W CC.      1.7034        38.5
2.................  \7\ CRANIOTOMY AGE > 17 W/O       1.7034        38.5
                     CC.
3.................  \7\ CRANIOTOMY AGE 0-17.....      1.7034        38.5
6.................  \7\ CARPAL TUNNEL RELEASE...      0.4499        19.0
7.................  PERIPH & CRANIAL NERVE &          1.3984        37.7
                     OTHER NERV SYST PROC W CC.
8.................  \3\ PERIPH & CRANIAL NERVE &      0.7637        24.8
                     OTHER NERV SYST PROC W/O CC.
9.................  SPINAL DISORDERS & INJURIES.      0.9720        33.7
10................  NERVOUS SYSTEM NEOPLASMS W        0.7554        24.5
                     CC.
11................  \2\ NERVOUS SYSTEM NEOPLASMS      0.5837        21.3
                     W/O CC.
12................  DEGENERATIVE NERVOUS SYSTEM       0.6851        25.5
                     DISORDERS.
13................  MULTIPLE SCLEROSIS &              0.6531        23.1
                     CEREBELLAR ATAXIA.
14................  INTERCRANIAL HEMORRHAGE OR        0.7783        26.0
                     STROKE WITH INFARCT.
15................  NONSPECIFIC CVA &                 0.7314        26.8
                     PRECEREBRAL OCCULUSION
                     WITHOUT INFARCT.
16................  NONSPECIFIC CEREBROVASCULAR       0.7471        23.5
                     DISORDERS W CC.
17................  \1\ NONSPECIFIC                   0.4499        19.0
                     CEREBROVASCULAR DISORDERS W/
                     O CC.
18................  CRANIAL & PERIPHERAL NERVE        0.7197        23.6
                     DISORDERS W CC.
19................  CRANIAL & PERIPHERAL NERVE        0.4773        21.2
                     DISORDERS W/O CC.
20................  NERVOUS SYSTEM INFECTION          1.0277        27.2
                     EXCEPT VIRAL MENINGITIS.
21................  \3\ VIRAL MENINGITIS........      0.7637        24.8
22................  \4\ HYPERTENSIVE                  1.1820        29.6
                     ENCEPHALOPATHY.
23................  NONTRAUMATIC STUPOR & COMA..      0.8054        25.4
24................  SEIZURE & HEADACHE AGE >17 W      0.6251        22.6
                     CC.
25................  \1\ SEIZURE & HEADACHE AGE        0.4499        19.0
                     >17 W/O CC.
26................  \7\ SEIZURE & HEADACHE AGE 0-     0.4499        19.0
                     17.
27................  TRAUMATIC STUPOR & COMA,          0.9444        27.1
                     COMA >1 HR.
28................  TRAUMATIC STUPOR & COMA,          0.8890        30.2
                     COMA <1 HR AGE >17 W CC.
29................  \2\ TRAUMATIC STUPOR & COMA,      0.5837        21.3
                     COMA <1 HR AGE >17 W/O CC.
30................  \7\ TRAUMATIC STUPOR & COMA,      0.5837        21.3
                     COMA <1 HR AGE 0-17.
31................  \3\ CONCUSSION AGE >17 W CC.      0.7637        24.8
32................  \7\ CONCUSSION AGE >17 W/O        0.4499        19.0
                     CC.
33................  \7\ CONCUSSION AGE 0-17.....      0.4499        19.0
34................  OTHER DISORDERS OF NERVOUS        0.8004        25.3
                     SYSTEM W CC.
35................  OTHER DISORDERS OF NERVOUS        0.5698        24.2
                     SYSTEM W/O CC.
36................  \7\ RETINAL PROCEDURES......      1.1820        29.6
37................  \7\ ORBITAL PROCEDURES......      1.1820        29.6
38................  \7\ PRIMARY IRIS PROCEDURES.      1.1820        29.6
39................  \7\ LENS PROCEDURES WITH OR       1.1820        29.6
                     WITHOUT VITRECTOMY.
40................  \4\ EXTRAOCULAR PROCEDURES        1.1820        29.6
                     EXCEPT ORBIT AGE >17.
41................  \7\ EXTRAOCULAR PROCEDURES        1.1820        29.6
                     EXCEPT ORBIT AGE 0-17.
42................  \7\ INTRAOCULAR PROCEDURES        1.1820        29.6
                     EXCEPT RETINA, IRIS & LENS.
43................  \7\ HYPHEMA.................      1.1820        29.6
44................  \2\ ACUTE MAJOR EYE               0.5837        21.3
                     INFECTIONS.
45................  \7\ NEUROLOGICAL EYE              1.1820        29.6
                     DISORDERS.
46................  \2\ OTHER DISORDERS OF THE        0.5837        21.3
                     EYE AGE >17 W CC.
47................  \7\ OTHER DISORDERS OF THE        1.1820        29.6
                     EYE AGE >17 W/O CC.
48................  \7\ OTHER DISORDERS OF THE        1.1820        29.6
                     EYE AGE 0-17.
49................  \7\ MAJOR HEAD & NECK             1.1820        29.6
                     PROCEDURES.
50................  S7 IALOADENECTOMY...........      1.1820        29.6
51................  \7\ SALIVARY GLAND                1.1820        29.6
                     PROCEDURES EXCEPT
                     SIALOADENECTOMY.
52................  \7\ CLEFT LIP & PALATE            1.1820        29.6
                     REPAIR.
53................  \7\ SINUS & MASTOID               1.1820        29.6
                     PROCEDURES AGE >17.
54................  \7\ SINUS & MASTOID               1.1820        29.6
                     PROCEDURES AGE 0-17.
55................  \7\ MISCELLANEOUS EAR, NOSE,      1.1820        29.6
                     MOUTH & THROAT PROCEDURES.
56................  \7\ RHINOPLASTY.............      1.1820        29.6
57................  \7\ T&A PROC, EXCEPT              0.4499        19.0
                     TONSILLECTOMY &/OR
                     ADENOIDECTOMY ONLY, AGE >17.
58................  \7\ T&A PROC, EXCEPT              0.4499        19.0
                     TONSILLECTOMY &/OR
                     ADENOIDECTOMY ONLY, AGE 0-
                     17.
59................  \7\ TONSILLECTOMY &/OR            0.4499        19.0
                     ADENOIDECTOMY ONLY, AGE >17.
60................  \7\ TONSILLECTOMY &/OR            0.4499        19.0
                     ADENOIDECTOMY ONLY, AGE 0-
                     17.
61................  \3\ MYRINGOTOMY W TUBE            0.7637        24.8
                     INSERTION AGE >17.
62................  \7\ MYRINGOTOMY W TUBE            0.4499        19.0
                     INSERTION AGE 0-17.
63................  \4\ OTHER EAR, NOSE, MOUTH &      1.1820        29.6
                     THROAT O.R. PROCEDURES.
64................  EAR, NOSE, MOUTH & THROAT         1.1480        26.2
                     MALIGNANCY.

[[Page 4772]]

 
65................  \1\ DYSEQUILIBRIUM..........      0.4499        19.0
66................  \7\ EPISTAXIS...............      0.4499        19.0
67................  \3\ EPIGLOTTITIS............      0.7637        24.8
68................  OTITIS MEDIA & URI AGE >17 W      0.5111        18.0
                     CC.
69................  \1\ OTITIS MEDIA & URI AGE        0.4499        19.0
                     >17 W/O CC.
70................  \7\ OTITIS MEDIA & URI AGE 0-     0.4499        19.0
                     17.
71................  \7\ LARYNGOTRACHEITIS.......      0.5837        21.3
72................  \7\ NASAL TRAUMA & DEFORMITY      0.7637        24.8
73................  OTHER EAR, NOSE, MOUTH &          0.7535        21.9
                     THROAT DIAGNOSES AGE >17.
74................  \7\ OTHER EAR, NOSE, MOUTH &      0.4499        19.0
                     THROAT DIAGNOSES AGE 0-17.
75................  \5\ MAJOR CHEST PROCEDURES..      1.7034        38.5
76................  OTHER RESP SYSTEM O.R.            2.5523        43.9
                     PROCEDURES W CC.
77................  \5\ OTHER RESP SYSTEM O.R.        1.7034        38.5
                     PROCEDURES W/O CC.
78................  PULMONARY EMBOLISM..........      0.6900        21.9
79................  RESPIRATORY INFECTIONS &          0.8280        22.9
                     INFLAMMATIONS AGE >17 W CC.
80................  RESPIRATORY INFECTIONS &          0.5986        21.7
                     INFLAMMATIONS AGE >17 W/O
                     CC.
81................  \7\ RESPIRATORY INFECTIONS &      0.4499        19.0
                     INFLAMMATIONS AGE 0-17.
82................  RESPIRATORY NEOPLASMS.......      0.7174        20.1
83................  \2\ MAJOR CHEST TRAUMA W CC.      0.5837        21.3
84................  \7\ MAJOR CHEST TRAUMA W/O        0.5837        21.3
                     CC.
85................  PLEURAL EFFUSION W CC.......      0.7264        21.2
86................  \1\ PLEURAL EFFUSION W/O CC.      0.4499        19.0
87................  PULMONARY EDEMA &                 1.0816        25.4
                     RESPIRATORY FAILURE.
88................  CHRONIC OBSTRUCTIVE               0.6585        19.6
                     PULMONARY DISEASE.
89................  SIMPLE PNEUMONIA & PLEURISY       0.6987        20.8
                     AGE >17 W CC.
90................  SIMPLE PNEUMONIA & PLEURISY       0.4970        17.8
                     AGE >17 W/O CC.
91................  \7\ SIMPLE PNEUMONIA &            0.4499        19.0
                     PLEURISY AGE 0-17.
92................  INTERSTITIAL LUNG DISEASE W       0.6704        20.2
                     CC.
93................  \2\ INTERSTITIAL LUNG             0.5837        21.3
                     DISEASE W/O CC.
94................  PNEUMOTHORAX W CC...........      0.5880        17.0
95................  \1\ PNEUMOTHORAX W/O CC.....      0.4499        19.0
96................  BRONCHITIS & ASTHMA AGE >17       0.6417        19.4
                     W CC.
97................  \2\ BRONCHITIS & ASTHMA AGE       0.5837        21.3
                     >17 W/O CC.
98................  \7\ BRONCHITIS & ASTHMA AGE       0.5837        21.3
                     0-17.
99................  RESPIRATORY SIGNS & SYMPTOMS      0.9219        23.2
                     W CC.
100...............  \3\ RESPIRATORY SIGNS &           0.7637        24.8
                     SYMPTOMS W/O CC.
101...............  OTHER RESPIRATORY SYSTEM          0.8147        21.1
                     DIAGNOSES W CC.
102...............  \1\ OTHER RESPIRATORY SYSTEM      0.4499        19.0
                     DIAGNOSES W/O CC.
103...............  \6\ HEART TRANSPLANT OR           0.0000         0.0
                     IMPLANT OF HEART ASSIST
                     SYSTEM.
104...............  \7\ CARDIAC VALVE & OTHER         0.7637        24.8
                     MAJOR CARDIOTHORACIC PROC W
                     CARDIAC CATH.
105...............  \7\ CARDIAC VALVE & OTHER         0.7637        24.8
                     MAJOR CARDIOTHORACIC PROC W/
                     O CARDIAC CATH.
106...............  \7\ CORONARY BYPASS W PTCA..      0.7637        24.8
108...............  \7\ OTHER CARDIOTHORACIC          0.7637        24.8
                     PROCEDURES.
110...............  \3\ MAJOR CARDIOVASCULAR          0.7637        24.8
                     PROCEDURES W CC.
111...............  \7\ MAJOR CARDIOVASCULAR          0.7637        24.8
                     PROCEDURES W/O CC.
113...............  AMPUTATION FOR CIRC SYSTEM        1.4887        39.3
                     DISORDERS EXCEPT UPPER LIMB
                     & TOE.
114...............  UPPER LIMB & TOE AMPUTATION       1.2389        33.2
                     FOR CIRC SYSTEM DISORDERS.
117...............  \4\ CARDIAC PACEMAKER             1.1820        29.6
                     REVISION EXCEPT DEVICE
                     REPLACEMENT.
118...............  \4\ CARDIAC PACEMAKER DEVICE      1.1820        29.6
                     REPLACEMENT.
119...............  \3\ VEIN LIGATION &               0.7637        24.8
                     STRIPPING.
120...............  OTHER CIRCULATORY SYSTEM          1.0979        31.7
                     O.R. PROCEDURES.
121...............  CIRCULATORY DISORDERS W AMI       0.8429        23.2
                     & MAJOR COMP, DISCHARGED
                     ALIVE.
122...............  \2\ CIRCULATORY DISORDERS W       0.5837        21.3
                     AMI W/O MAJOR COMP,
                     DISCHARGED ALIVE.
123...............  CIRCULATORY DISORDERS W AMI,      1.1811        20.4
                     EXPIRED.
124...............  \4\ CIRCULATORY DISORDERS         1.1820        29.6
                     EXCEPT AMI, W CARD CATH &
                     COMPLEX DIAG.
125...............  \3\ CIRCULATORY DISORDERS         0.7637        24.8
                     EXCEPT AMI, W CARD CATH W/O
                     COMPLEX DIAG.
126...............  ACUTE & SUBACUTE                  0.8386        25.3
                     ENDOCARDITIS.
127...............  HEART FAILURE & SHOCK.......      0.6857        21.2
128...............  \2\ DEEP VEIN                     0.5837        21.3
                     THROMBOPHLEBITIS.
129...............  \7\ CARDIAC ARREST,               0.7637        24.8
                     UNEXPLAINED.
130...............  PERIPHERAL VASCULAR               0.6741        23.2
                     DISORDERS W CC.
131...............  PERIPHERAL VASCULAR               0.4675        20.4
                     DISORDERS W/O CC.
132...............  ATHEROSCLEROSIS W CC........      0.6565        21.8
133...............  \1\ ATHEROSCLEROSIS W/O CC..      0.4499        19.0
134...............  HYPERTENSION................      0.6354        24.8
135...............  CARDIAC CONGENITAL &              0.7211        23.7
                     VALVULAR DISORDERS AGE >17
                     W CC.
136...............  \2\ CARDIAC CONGENITAL &          0.5837        21.3
                     VALVULAR DISORDERS AGE >17
                     W/O CC.
137...............  \7\ CARDIAC CONGENITAL &          0.5837        21.3
                     VALVULAR DISORDERS AGE 0-17.

[[Page 4773]]

 
138...............  CARDIAC ARRHYTHMIA &              0.6201        20.5
                     CONDUCTION DISORDERS W CC.
139...............  \2\ CARDIAC ARRHYTHMIA &          0.5837        21.3
                     CONDUCTION DISORDERS W/O CC.
140...............  \1\ ANGINA PECTORIS.........      0.4499        19.0
141...............  \8\ SYNCOPE & COLLAPSE W CC.      0.4271        18.3
142...............  \8\ SYNCOPE & COLLAPSE W/O        0.4271        18.3
                     CC.
143...............  \1\ CHEST PAIN..............      0.4499        19.0
144...............  OTHER CIRCULATORY SYSTEM          0.7413        21.7
                     DIAGNOSES W CC.
145...............  OTHER CIRCULATORY SYSTEM          0.4568        18.2
                     DIAGNOSES W/O CC.
146...............  \7\ RECTAL RESECTION W CC...      1.7034        38.5
147...............  \7\ RECTAL RESECTION W/O CC.      1.7034        38.5
148...............  MAJOR SMALL & LARGE BOWEL         1.8616        40.9
                     PROCEDURES W CC.
149...............  \7\ MAJOR SMALL & LARGE           0.7637        24.8
                     BOWEL PROCEDURES W/O CC.
150...............  \4\ PERITONEAL ADHESIOLYSIS       1.1820        29.6
                     W CC.
151...............  \2\ PERITONEAL ADHESIOLYSIS       0.5837        21.3
                     W/O CC.
152...............  \3\ MINOR SMALL & LARGE           0.7637        24.8
                     BOWEL PROCEDURES W CC.
153...............  \7\ MINOR SMALL & LARGE           0.7637        24.8
                     BOWEL PROCEDURES W/O CC.
154...............  \5\ STOMACH, ESOPHAGEAL &         1.7034        38.5
                     DUODENAL PROCEDURES AGE >17
                     W CC.
155...............  \7\ STOMACH, ESOPHAGEAL &         1.7034        38.5
                     DUODENAL PROCEDURES AGE >17
                     W/O CC.
156...............  \7\ STOMACH, ESOPHAGEAL &         1.7034        38.5
                     DUODENAL PROCEDURES AGE 0-
                     17.
157...............  \4\ ANAL & STOMAL PROCEDURES      1.1820        29.6
                     W CC.
158...............  \7\ ANAL & STOMAL PROCEDURES      1.1820        29.6
                     W/O CC.
159...............  \7\ HERNIA PROCEDURES EXCEPT      0.7637        24.8
                     INGUINAL & FEMORAL AGE >17
                     W CC.
160...............  \7\ HERNIA PROCEDURES EXCEPT      0.7637        24.8
                     INGUINAL & FEMORAL AGE >17
                     W/O CC.
161...............  \5\ INGUINAL & FEMORAL            1.7034        38.5
                     HERNIA PROCEDURES AGE >17 W
                     CC.
162...............  \7\ INGUINAL & FEMORAL            0.7637        24.8
                     HERNIA PROCEDURES AGE >17 W/
                     O CC.
163...............  \7\ HERNIA PROCEDURES AGE 0-      0.7637        24.8
                     17.
164...............  \1\ APPENDECTOMY W                1.7034        38.5
                     COMPLICATED PRINCIPAL DIAG
                     W CC.
165...............  \7\ APPENDECTOMY W                1.7034        38.5
                     COMPLICATED PRINCIPAL DIAG
                     W/O CC.
166...............  \7\ APPENDECTOMY W/O              1.7034        38.5
                     COMPLICATED PRINCIPAL DIAG
                     W CC.
167...............  \7\ APPENDECTOMY W/O              1.7034        38.5
                     COMPLICATED PRINCIPAL DIAG
                     W/O CC.
168...............  \4\ MOUTH PROCEDURES W CC...      1.1820        29.6
169...............  \7\ MOUTH PROCEDURES W/O CC.      0.7637        24.8
170...............  OTHER DIGESTIVE SYSTEM O.R.       1.6271        35.9
                     PROCEDURES W CC.
171...............  \1\ OTHER DIGESTIVE SYSTEM        0.4499        19.0
                     O.R. PROCEDURES W/O CC.
172...............  DIGESTIVE MALIGNANCY W CC...      0.8553        21.8
173...............  \2\ DIGESTIVE MALIGNANCY W/O      0.5837        21.3
                     CC.
174...............  G.I. HEMORRHAGE W CC........      0.7119        22.2
175...............  \1\ G.I. HEMORRHAGE W/O CC..      0.4499        19.0
176...............  COMPLICATED PEPTIC ULCER....      0.8426        21.5
177...............  \3\ UNCOMPLICATED PEPTIC          0.7637        24.8
                     ULCER W CC.
178...............  \3\ UNCOMPLICATED PEPTIC          0.7637        24.8
                     ULCER W/O CC.
179...............  INFLAMMATORY BOWEL DISEASE..      0.9675        24.0
180...............  G.I. OBSTRUCTION W CC.......      0.9375        23.5
181...............  \3\ G.I. OBSTRUCTION W/O CC.      0.7637        24.8
182...............  ESOPHAGITIS, GASTROENT &          0.7745        22.6
                     MISC DIGEST DISORDERS AGE
                     >17 W CC.
183...............  ESOPHAGITIS, GASTROENT &          0.3870        16.8
                     MISC DIGEST DISORDERS AGE
                     >17 W/O CC.
184...............  \7\ ESOPHAGITIS, GASTROENT &      0.4499        19.0
                     MISC DIGEST DISORDERS AGE 0-
                     17.
185...............  \3\ DENTAL & ORAL DIS EXCEPT      0.7637        24.8
                     EXTRACTIONS & RESTORATIONS,
                     AGE >17.
186...............  \7\ DENTAL & ORAL DIS EXCEPT      0.7637        24.8
                     EXTRACTIONS & RESTORATIONS,
                     AGE 0-17.
187...............  \7\ DENTAL EXTRACTIONS &          0.7637        24.8
                     RESTORATIONS.
188...............  OTHER DIGESTIVE SYSTEM            0.9952        24.0
                     DIAGNOSES AGE >17 W CC.
189...............  OTHER DIGESTIVE SYSTEM            0.4707        18.2
                     DIAGNOSES AGE >17 W/O CC.
190...............  \7\ OTHER DIGESTIVE SYSTEM        0.4499        19.0
                     DIAGNOSES AGE 0-17.
191...............  \4\ PANCREAS, LIVER & SHUNT       1.1820        29.6
                     PROCEDURES W CC.
192...............  \7\ PANCREAS, LIVER & SHUNT       1.1820        29.6
                     PROCEDURES W/O CC.
193...............  \3\ BILIARY TRACT PROC            0.7637        24.8
                     EXCEPT ONLY CHOLECYST W OR
                     W/O C.D.E. W CC.
194...............  \7\ BILIARY TRACT PROC            0.7637        24.8
                     EXCEPT ONLY CHOLECYST W OR
                     W/O C.D.E. W/O CC.
195...............  \3\ CHOLECYSTECTOMY W C.D.E.      0.7637        24.8
                     W CC.
196...............  \7\ CHOLECYSTECTOMY W C.D.E.      0.7637        24.8
                     W/O CC.
197...............  \3\ CHOLECYSTECTOMY EXCEPT        0.7637        24.8
                     BY LAPAROSCOPE W/O C.D.E. W
                     CC.
198...............  \7\ CHOLECYSTECTOMY EXCEPT        0.7637        24.8
                     BY LAPAROSCOPE W/O C.D.E. W/
                     O CC.
199...............  \7\ HEPATOBILIARY DIAGNOSTIC      1.7034        38.5
                     PROCEDURE FOR MALIGNANCY.
200...............  \5\ HEPATOBILIARY DIAGNOSTIC      1.7034        38.5
                     PROCEDURE FOR NON-
                     MALIGNANCY.
201...............  OTHER HEPATOBILIARY OR            2.0371        36.1
                     PANCREAS O.R. PROCEDURES.
202...............  CIRRHOSIS & ALCOHOLIC             0.6610        20.6
                     HEPATITIS.
203...............  MALIGNANCY OF HEPATOBILIARY       0.7896        19.5
                     SYSTEM OR PANCREAS.
204...............  DISORDERS OF PANCREAS EXCEPT      0.9441        22.7
                     MALIGNANCY.
205...............  DISORDERS OF LIVER EXCEPT         0.6642        20.5
                     MALIG, CIRR, ALC HEPA W CC.

[[Page 4774]]

 
206...............  \2\ DISORDERS OF LIVER            0.5837        21.3
                     EXCEPT MALIG, CIRR, ALC
                     HEPA W/O CC.
207...............  DISORDERS OF THE BILIARY          0.7570        21.5
                     TRACT W CC.
208...............  \2\ DISORDERS OF THE BILIARY      0.5837        21.3
                     TRACT W/O CC.
210...............  \5\ HIP & FEMUR PROCEDURES        1.7034        38.5
                     EXCEPT MAJOR JOINT AGE >17
                     W CC.
211...............  \4\ HIP & FEMUR PROCEDURES        1.1820        29.6
                     EXCEPT MAJOR JOINT AGE >17
                     W/O CC.
212...............  \7\ HIP & FEMUR PROCEDURES        1.7034        38.5
                     EXCEPT MAJOR JOINT AGE 0-17.
213...............  AMPUTATION FOR                    1.1948        34.0
                     MUSCULOSKELETAL SYSTEM &
                     CONN TISSUE DISORDERS.
216...............  \4\ BIOPSIES OF                   1.1820        29.6
                     MUSCULOSKELETAL SYSTEM &
                     CONNECTIVE TISSUE.
217...............  WND DEBRID & SKN GRFT EXCEPT      1.2927        38.0
                     HAND, FOR MUSCSKELET & CONN
                     TISS DIS.
218...............  \5\ LOWER EXTREM & HUMER          1.7034        38.5
                     PROC EXCEPT HIP, FOOT,
                     FEMUR AGE >17 W CC.
219...............  \1\ LOWER EXTREM & HUMER          0.4499        19.0
                     PROC EXCEPT HIP, FOOT,
                     FEMUR AGE >17 W/O CC.
220...............  \7\ LOWER EXTREM & HUMER          1.7034        38.5
                     PROC EXCEPT HIP, FOOT,
                     FEMUR AGE 0-17.
223...............  \3\ MAJOR SHOULDER/ELBOW          0.7637        24.8
                     PROC, OR OTHER UPPER
                     EXTREMITY PROC W CC.
224...............  \7\ SHOULDER, ELBOW OR            0.7637        24.8
                     FOREARM PROC, EXC MAJOR
                     JOINT PROC, W/O CC.
225...............  FOOT PROCEDURES.............      0.9869        28.4
226...............  SOFT TISSUE PROCEDURES W CC.      0.9443        29.5
227...............  \3\ SOFT TISSUE PROCEDURES W/     0.7637        24.8
                     O CC.
228...............  \4\ MAJOR THUMB OR JOINT          1.1820        29.6
                     PROC, OR OTH HAND OR WRIST
                     PROC W CC.
229...............  \7\ HAND OR WRIST PROC,           0.4499        19.0
                     EXCEPT MAJOR JOINT PROC, W/
                     O CC.
230...............  \5\ LOCAL EXCISION & REMOVAL      1.7034        38.5
                     OF INT FIX DEVICES OF HIP &
                     FEMUR.
232...............  \7\ ARTHROSCOPY.............      0.4499        19.0
233...............  OTHER MUSCULOSKELET SYS &         1.3522        34.6
                     CONN TISS O.R. PROC W CC.
234...............  \7\ OTHER MUSCULOSKELET SYS       0.4499        19.0
                     & CONN TISS O.R. PROC W/O
                     CC.
235...............  \3\ FRACTURES OF FEMUR......      0.7637        24.8
236...............  FRACTURES OF HIP & PELVIS...      0.6531        25.2
237...............  \1\ SPRAINS, STRAINS, &           0.4499        19.0
                     DISLOCATIONS OF HIP, PELVIS
                     & THIGH.
238...............  OSTEOMYELITIS...............      0.8278        28.3
239...............  PATHOLOGICAL FRACTURES &          0.6935        23.6
                     MUSCULOSKELETAL & CONN TISS
                     MALIGNANCY.
240...............  CONNECTIVE TISSUE DISORDERS       0.7310        24.8
                     W CC.
241...............  \1\ CONNECTIVE TISSUE             0.4499        19.0
                     DISORDERS W/O CC.
242...............  SEPTIC ARTHRITIS............      0.7864        26.5
243...............  MEDICAL BACK PROBLEMS.......      0.6061        23.4
244...............  BONE DISEASES & SPECIFIC          0.5259        22.2
                     ARTHROPATHIES W CC.
245...............  BONE DISEASES & SPECIFIC          0.4635        20.4
                     ARTHROPATHIES W/O CC.
246...............  \1\ NON-SPECIFIC                  0.4499        19.0
                     ARTHROPATHIES.
247...............  SIGNS & SYMPTOMS OF               0.5548        21.9
                     MUSCULOSKELETAL SYSTEM &
                     CONN TISSUE.
248...............  TENDONITIS, MYOSITIS &            0.6574        22.6
                     BURSITIS.
249...............  AFTERCARE, MUSCULOSKELETAL        0.6577        24.7
                     SYSTEM & CONNECTIVE TISSUE.
250...............  \2\ FX, SPRN, STRN & DISL OF      0.5837        21.3
                     FOREARM, HAND, FOOT AGE >17
                     W CC.
251...............  \1\ FX, SPRN, STRN & DISL OF      0.4499        19.0
                     FOREARM, HAND, FOOT AGE >17
                     W/O CC.
252...............  \7\ FX, SPRN, STRN & DISL OF      0.7637        24.8
                     FOREARM, HAND, FOOT AGE 0-
                     17.
253...............  FX, SPRN, STRN & DISL OF          0.6802        26.3
                     UPARM, LOWLEG EX FOOT AGE
                     >17 W CC.
254...............  \2\ FX, SPRN, STRN & DISL OF      0.5837        21.3
                     UPARM, LOWLEG EX FOOT AGE
                     >17 W/O CC.
255...............  \7\ FX, SPRN, STRN & DISL OF      0.7637        24.8
                     UPARM, LOWLEG EX FOOT AGE 0-
                     17.
256...............  OTHER MUSCULOSKELETAL SYSTEM      0.7924        25.3
                     & CONNECTIVE TISSUE
                     DIAGNOSES.
257...............  \7\ TOTAL MASTECTOMY FOR          0.7637        24.8
                     MALIGNANCY W CC.
258...............  \7\ TOTAL MASTECTOMY FOR          0.7637        24.8
                     MALIGNANCY W/O CC.
259...............  \2\ SUBTOTAL MASTECTOMY FOR       0.5837        21.3
                     MALIGNANCY W CC.
260...............  \7\ SUBTOTAL MASTECTOMY FOR       0.7637        24.8
                     MALIGNANCY W/O CC.
261...............  \7\ BREAST PROC FOR NON-          0.7637        24.8
                     MALIGNANCY EXCEPT BIOPSY &
                     LOCAL EXCISION.
262...............  \1\ BREAST BIOPSY & LOCAL         0.4499        19.0
                     EXCISION FOR NON-MALIGNANCY.
263...............  SKIN GRAFT &/OR DEBRID FOR        1.3222        39.5
                     SKN ULCER OR CELLULITIS W
                     CC.
264...............  SKIN GRAFT &/OR DEBRID FOR        0.9584        32.0
                     SKN ULCER OR CELLULITIS W/O
                     CC.
265...............  SKIN GRAFT &/OR DEBRID            1.0398        33.1
                     EXCEPT FOR SKIN ULCER OR
                     CELLULITIS W CC.
266...............  \3\ SKIN GRAFT &/OR DEBRID        0.7637        24.8
                     EXCEPT FOR SKIN ULCER OR
                     CELLULITIS W/O CC.
267...............  \7\ PERIANAL & PILONIDAL          0.7637        24.8
                     PROCEDURES.
268...............  \5\ SKIN, SUBCUTANEOUS            1.7034        38.5
                     TISSUE & BREAST PLASTIC
                     PROCEDURES.
269...............  OTHER SKIN, SUBCUT TISS &         1.3037        36.1
                     BREAST PROC W CC.
270...............  \3\ OTHER SKIN, SUBCUT TISS       0.7637        24.8
                     & BREAST PROC W/O CC.
271...............  SKIN ULCERS.................      0.8720        27.7
272...............  MAJOR SKIN DISORDERS W CC...      0.7420        22.6
273...............  \1\ MAJOR SKIN DISORDERS W/O      0.4499        19.0
                     CC.
274...............  \3\ MALIGNANT BREAST              0.7637        24.8
                     DISORDERS W CC.
275...............  \7\ MALIGNANT BREAST              0.7637        24.8
                     DISORDERS W/O CC.
276...............  \2\ NON-MALIGANT BREAST           0.5837        21.3
                     DISORDERS.
277...............  CELLULITIS AGE >17 W CC.....      0.6264        21.0
278...............  CELLULITIS AGE >17 W/O CC...      0.4420        17.8
279...............  \7\ CELLULITIS AGE 0-17.....      0.4499        19.0

[[Page 4775]]

 
280...............  TRAUMA TO THE SKIN, SUBCUT        0.6698        24.3
                     TISS & BREAST AGE >17 W CC.
281...............  \1\ TRAUMA TO THE SKIN,           0.4499        19.0
                     SUBCUT TISS & BREAST AGE
                     >17 W/O CC.
282...............  \7\ TRAUMA TO THE SKIN,           0.4499        19.0
                     SUBCUT TISS & BREAST AGE 0-
                     17.
283...............  MINOR SKIN DISORDERS W CC...      0.6935        23.9
284...............  \1\ MINOR SKIN DISORDERS W/O      0.4499        19.0
                     CC.
285...............  AMPUTAT OF LOWER LIMB FOR         1.3501        35.6
                     ENDOCRINE, NUTRIT, &
                     METABOL DISORDERS.
286...............  \7\ ADRENAL & PITUITARY           1.7034        38.5
                     PROCEDURES.
287...............  SKIN GRAFTS & WOUND DEBRID        1.1387        33.9
                     FOR ENDOC, NUTRIT & METAB
                     DISORDERS.
288...............  \4\ O.R. PROCEDURES FOR           1.1820        29.6
                     OBESITY.
289...............  \7\ PARATHYROID PROCEDURES..      1.1820        29.6
290...............  \5\ THYROID PROCEDURES......      1.7034        38.5
291...............  \7\ THYROGLOSSAL PROCEDURES.      1.1820        29.6
292...............  OTHER ENDOCRINE, NUTRIT &         1.3409        31.7
                     METAB O.R. PROC W CC.
293...............  \2\ OTHER ENDOCRINE, NUTRIT       0.5837        21.3
                     & METAB O.R. PROC W/O CC.
294...............  DIABETES AGE >35............      0.7293        25.0
295...............  \3\ DIABETES AGE 0-35.......      0.7637        24.8
296...............  NUTRITIONAL & MISC METABOLIC      0.7212        23.1
                     DISORDERS AGE >17 W CC.
297...............  NUTRITIONAL & MISC METABOLIC      0.5227        18.4
                     DISORDERS AGE >17 W/O CC.
298...............  \7\ NUTRITIONAL & MISC            0.5837        21.3
                     METABOLIC DISORDERS AGE 0-
                     17.
299...............  \4\ INBORN ERRORS OF              1.1820        29.6
                     METABOLISM.
300...............  ENDOCRINE DISORDERS W CC....      0.6376        21.2
301...............  \1\ ENDOCRINE DISORDERS W/O       0.4499        19.0
                     CC.
302...............  \6\ KIDNEY TRANSPLANT.......      0.0000         0.0
303...............  \4\ KIDNEY, URETER & MAJOR        1.1820        29.6
                     BLADDER PROCEDURES FOR
                     NEOPLASM.
304...............  \5\ KIDNEY, URETER & MAJOR        1.7034        38.5
                     BLADDER PROC FOR NON-NEOPL
                     W CC.
305...............  \1\ KIDNEY, URETER & MAJOR        0.4499        19.0
                     BLADDER PROC FOR NON-NEOPL
                     W/O CC.
306...............  \2\ PROSTATECTOMY W CC......      0.5837        21.3
307...............  \7\ PROSTATECTOMY W/O CC....      0.5837        21.3
308...............  \3\ MINOR BLADDER PROCEDURES      0.7637        24.8
                     W CC.
309...............  \7\ MINOR BLADDER PROCEDURES      0.7637        24.8
                     W/O CC.
310...............  \4\ TRANSURETHRAL PROCEDURES      1.1820        29.6
                     W CC.
311...............  \7\ TRANSURETHRAL PROCEDURES      1.1820        29.6
                     W/O CC.
312...............  \1\ URETHRAL PROCEDURES, AGE      0.4499        19.0
                     >17 W CC.
313...............  \7\ URETHRAL PROCEDURES, AGE      0.4499        19.0
                     >17 W/O CC.
314...............  \7\ URETHRAL PROCEDURES, AGE      0.4499        19.0
                     0-17.
315...............  OTHER KIDNEY & URINARY TRACT      1.4055        31.6
                     O.R. PROCEDURES.
316...............  RENAL FAILURE...............      0.8219        22.7
317...............  ADMIT FOR RENAL DIALYSIS....      0.9852        25.2
318...............  KIDNEY & URINARY TRACT            0.7586        20.2
                     NEOPLASMS W CC.
319...............  \1\ KIDNEY & URINARY TRACT        0.4499        19.0
                     NEOPLASMS W/O CC.
320...............  KIDNEY & URINARY TRACT            0.6179        22.2
                     INFECTIONS AGE >17 W CC.
321...............  KIDNEY & URINARY TRACT            0.4792        19.0
                     INFECTIONS AGE >17 W/O CC.
322...............  \7\ KIDNEY & URINARY TRACT        0.4499        19.0
                     INFECTIONS AGE 0-17.
323...............  \4\ URINARY STONES W CC, &/       1.1820        29.6
                     OR ESW LITHOTRIPSY.
324...............  \7\ URINARY STONES W/O CC...      0.4499        19.0
325...............  \2\ KIDNEY & URINARY TRACT        0.5837        21.3
                     SIGNS & SYMPTOMS AGE >17 W
                     CC.
326...............  \7\ KIDNEY & URINARY TRACT        0.4499        19.0
                     SIGNS & SYMPTOMS AGE >17 W/
                     O CC.
327...............  \7\ KIDNEY & URINARY TRACT        0.4499        19.0
                     SIGNS & SYMPTOMS AGE 0-17.
328...............  \1\ URETHRAL STRICTURE AGE        0.4499        19.0
                     >17 W CC.
329...............  \7\ URETHRAL STRICTURE AGE        0.4499        19.0
                     >17 W/O CC.
330...............  \7\ URETHRAL STRICTURE AGE 0-     0.4499        19.0
                     17.
331...............  OTHER KIDNEY & URINARY TRACT      0.8010        23.1
                     DIAGNOSES AGE >17 W CC.
332...............  \2\ OTHER KIDNEY & URINARY        0.5837        21.3
                     TRACT DIAGNOSES AGE >17 W/O
                     CC.
333...............  \7\ OTHER KIDNEY & URINARY        0.5837        21.3
                     TRACT DIAGNOSES AGE 0-17.
334...............  \2\ MAJOR MALE PELVIC             0.5837        21.3
                     PROCEDURES W CC.
335...............  \7\ MAJOR MALE PELVIC             1.7034        38.5
                     PROCEDURES W/O CC.
336...............  \2\ TRANSURETHRAL                 0.5837        21.3
                     PROSTATECTOMY W CC.
337...............  \7\ TRANSURETHRAL                 0.5837        21.3
                     PROSTATECTOMY W/O CC.
338...............  \7\ TESTES PROCEDURES, FOR        0.5837        21.3
                     MALIGNANCY.
339...............  \4\ TESTES PROCEDURES, NON-       1.1820        29.6
                     MALIGNANCY AGE >17.
340...............  \7\ TESTES PROCEDURES, NON-       1.1820        29.6
                     MALIGNANCY AGE 0-17.
341...............  \4\ PENIS PROCEDURES........      1.1820        29.6
342...............  \7\ CIRCUMCISION AGE >17....      1.1820        29.6
343...............  \7\ CIRCUMCISION AGE 0-17...      1.1820        29.6
344...............  \1\ OTHER MALE REPRODUCTIVE       0.4499        19.0
                     SYSTEM O.R. PROCEDURES FOR
                     MALIGNANCY.
345...............  \5\ OTHER MALE REPRODUCTIVE       1.7034        38.5
                     SYSTEM O.R. PROC EXCEPT FOR
                     MALIGNANCY.
346...............  MALIGNANCY, MALE                  0.6060        20.6
                     REPRODUCTIVE SYSTEM, W CC.
347...............  \2\ MALIGNANCY, MALE              0.5837        21.3
                     REPRODUCTIVE SYSTEM, W/O CC.

[[Page 4776]]

 
348...............  \2\ BENIGN PROSTATIC              0.5837        21.3
                     HYPERTROPHY W CC.
349...............  \7\ BENIGN PROSTATIC              1.1820        29.6
                     HYPERTROPHY W/O CC.
350...............  INFLAMMATION OF THE MALE          0.6798        21.9
                     REPRODUCTIVE SYSTEM.
351...............  \7\ STERILIZATION, MALE.....      1.1820        29.6
352...............  OTHER MALE REPRODUCTIVE           0.6375        23.4
                     SYSTEM DIAGNOSES.
353...............  \7\ PELVIC EVISCERATION,          1.1820        29.6
                     RADICAL HYSTERECTOMY &
                     RADICAL VULVECTOMY.
354...............  \7\ UTERINE,ADNEXA PROC FOR       1.1820        29.6
                     NON-OVARIAN/ADNEXAL MALIG W
                     CC.
355...............  \7\ UTERINE,ADNEXA PROC FOR       1.1820        29.6
                     NON-OVARIAN/ADNEXAL MALIG W/
                     O CC.
356...............  \7\ FEMALE REPRODUCTIVE           1.1820        29.6
                     SYSTEM RECONSTRUCTIVE
                     PROCEDURES.
357...............  \7\ UTERINE & ADNEXA PROC         1.1820        29.6
                     FOR OVARIAN OR ADNEXAL
                     MALIGNANCY.
358...............  \7\ UTERINE & ADNEXA PROC         1.1820        29.6
                     FOR NON-MALIGNANCY W CC.
359...............  \7\ UTERINE & ADNEXA PROC         1.1820        29.6
                     FOR NON-MALIGNANCY W/O CC.
360...............  \4\ VAGINA, CERVIX & VULVA        1.1820        29.6
                     PROCEDURES.
361...............  \7\ LAPAROSCOPY & INCISIONAL      0.7637        24.8
                     TUBAL INTERRUPTION.
362...............  \7\ ENDOSCOPIC TUBAL              0.7637        24.8
                     INTERRUPTION.
363...............  \7\ D&C, CONIZATION & RADIO-      0.7637        24.8
                     IMPLANT, FOR MALIGNANCY.
364...............  \5\ D&C, CONIZATION EXCEPT        1.7034        38.5
                     FOR MALIGNANCY.
365...............  \5\ OTHER FEMALE                  1.7034        38.5
                     REPRODUCTIVE SYSTEM O.R.
                     PROCEDURES.
366...............  MALIGNANCY, FEMALE                0.7072        20.3
                     REPRODUCTIVE SYSTEM W CC.
367...............  \7\ MALIGNANCY, FEMALE            0.7637        24.8
                     REPRODUCTIVE SYSTEM W/O CC.
368...............  INFECTIONS, FEMALE                0.6416        20.7
                     REPRODUCTIVE SYSTEM.
369...............  \3\ MENSTRUAL & OTHER FEMALE      0.7637        24.8
                     REPRODUCTIVE SYSTEM
                     DISORDERS.
370...............  \7\ CESAREAN SECTION W CC...      0.7637        24.8
371...............  \7\ CESAREAN SECTION W/O CC.      0.5837        21.3
372...............  \7\ VAGINAL DELIVERY W            0.7637        24.8
                     COMPLICATING DIAGNOSES.
373...............  \7\ VAGINAL DELIVERY W/O          0.7637        24.8
                     COMPLICATING DIAGNOSES.
374...............  \7\ VAGINAL DELIVERY W            0.7637        24.8
                     STERILIZATION &/OR D&C.
375...............  \7\ VAGINAL DELIVERY W O.R.       0.7637        24.8
                     PROC EXCEPT STERIL &/OR D&C.
376...............  \7\ POSTPARTUM & POST             0.7637        24.8
                     ABORTION DIAGNOSES W/O O.R.
                     PROCEDURE.
377...............  \7\ POSTPARTUM & POST             0.7637        24.8
                     ABORTION DIAGNOSES W O.R.
                     PROCEDURE.
378...............  \7\ ECTOPIC PREGNANCY.......      0.7637        24.8
379...............  \7\ THREATENED ABORTION.....      0.7637        24.8
380...............  \7\ ABORTION W/O D&C........      0.7637        24.8
381...............  \7\ ABORTION W D&C,               0.7637        24.8
                     ASPIRATION CURETTAGE OR
                     HYSTEROTOMY.
382...............  \7\ FALSE LABOR.............      0.7637        24.8
383...............  \7\ OTHER ANTEPARTUM              0.7637        24.8
                     DIAGNOSES W MEDICAL
                     COMPLICATIONS.
384...............  \7\ OTHER ANTEPARTUM              0.7637        24.8
                     DIAGNOSES W/O MEDICAL
                     COMPLICATIONS.
385...............  \7\ NEONATES, DIED OR             0.7637        24.8
                     TRANSFERRED TO ANOTHER
                     ACUTE CARE FACILITY.
386...............  \7\ EXTREME IMMATURITY......      1.1820        29.6
387...............  \7\ PREMATURITY W MAJOR           1.1820        29.6
                     PROBLEMS.
388...............  \7\ PREMATURITY W/O MAJOR         0.7637        24.8
                     PROBLEMS.
389...............  \7\ FULL TERM NEONATE W           1.1820        29.6
                     MAJOR PROBLEMS.
390...............  \7\ NEONATE W OTHER               1.1820        29.6
                     SIGNIFICANT PROBLEMS.
391...............  \7\ NORMAL NEWBORN..........      0.7637        24.8
392...............  \7\ SPLENECTOMY AGE >17.....      0.7637        24.8
393...............  \7\ SPLENECTOMY AGE 0-17....      0.7637        24.8
394...............  \5\ OTHER O.R. PROCEDURES OF      1.7034        38.5
                     THE BLOOD AND BLOOD FORMING
                     ORGANS.
395...............  RED BLOOD CELL DISORDERS AGE      0.6581        22.0
                     >17.
396...............  \7\ RED BLOOD CELL DISORDERS      0.5837        21.3
                     AGE 0-17.
397...............  COAGULATION DISORDERS.......      0.8675        22.9
398...............  RETICULOENDOTHELIAL &             0.8240        23.7
                     IMMUNITY DISORDERS W CC.
399...............  \2\ RETICULOENDOTHELIAL &         0.5837        21.3
                     IMMUNITY DISORDERS W/O CC.
401...............  \5\ LYMPHOMA & NON-ACUTE          1.7034        38.5
                     LEUKEMIA W OTHER O.R. PROC
                     W CC.
402...............  \7\ LYMPHOMA & NON-ACUTE          0.5837        21.3
                     LEUKEMIA W OTHER O.R. PROC
                     W/O CC.
403...............  LYMPHOMA & NON-ACUTE              0.8757        21.3
                     LEUKEMIA W CC.
404...............  \2\ LYMPHOMA & NON-ACUTE          0.5837        21.3
                     LEUKEMIA W/O CC.
405...............  \7\ ACUTE LEUKEMIA W/O MAJOR      0.5837        21.3
                     O.R. PROCEDURE AGE 0-17.
406...............  \4\ MYELOPROLIF DISORD OR         1.1820        29.6
                     POORLY DIFF NEOPL W MAJ
                     O.R. PROC W CC.
407...............  \7\ MYELOPROLIF DISORD OR         1.1820        29.6
                     POORLY DIFF NEOPL W MAJ
                     O.R. PROC W/O CC.
408...............  \4\ MYELOPROLIF DISORD OR         1.1820        29.6
                     POORLY DIFF NEOPL W OTHER
                     O.R. PROC.
409...............  RADIOTHERAPY................      0.8642        23.5
410...............  CHEMOTHERAPY W/O ACUTE            1.1684        26.4
                     LEUKEMIA AS SECONDARY
                     DIAGNOSIS.
411...............  \7\ HISTORY OF MALIGNANCY W/      0.7637        24.8
                     O ENDOSCOPY.
412...............  \7\ HISTORY OF MALIGNANCY W       0.7637        24.8
                     ENDOSCOPY.
413...............  OTHER MYELOPROLIF DIS OR          0.8920        20.5
                     POORLY DIFF NEOPL DIAG W CC.
414...............  \7\ OTHER MYELOPROLIF DIS OR      0.5837        21.3
                     POORLY DIFF NEOPL DIAG W/O
                     CC.
415...............  O.R. PROCEDURE FOR                1.4251        35.6
                     INFECTIOUS & PARASITIC
                     DISEASES.
416...............  SEPTICEMIA AGE >17..........      0.8241        23.5

[[Page 4777]]

 
417...............  \7\ SEPTICEMIA AGE 0-17.....      0.7637        24.8
418...............  POSTOPERATIVE & POST-             0.8252        24.7
                     TRAUMATIC INFECTIONS.
419...............  \4\ FEVER OF UNKNOWN ORIGIN       1.1820        29.6
                     AGE >17 W CC.
420...............  \7\ FEVER OF UNKNOWN ORIGIN       1.1820        29.6
                     AGE >17 W/O CC.
421...............  VIRAL ILLNESS AGE >17.......      0.9441        27.3
422...............  \7\ VIRAL ILLNESS & FEVER OF      0.4499        19.0
                     UNKNOWN ORIGIN AGE 0-17.
423...............  OTHER INFECTIOUS & PARASITIC      0.9505        21.8
                     DISEASES DIAGNOSES.
424...............  \3\ O.R. PROCEDURE W              0.7637        24.8
                     PRINCIPAL DIAGNOSES OF
                     MENTAL ILLNESS.
425...............  \2\ ACUTE ADJUSTMENT              0.5837        21.3
                     REACTION & PSYCHOLOGICAL
                     DYSFUNCTION.
426...............  DEPRESSIVE NEUROSES.........      0.4113        20.7
427...............  NEUROSES EXCEPT DEPRESSIVE..      0.4653        23.8
428...............  \1\ DISORDERS OF PERSONALITY      0.4499        19.0
                     & IMPULSE CONTROL.
429...............  ORGANIC DISTURBANCES &            0.5813        26.8
                     MENTAL RETARDATION.
430...............  PSYCHOSES...................      0.4330        24.2
431...............  \1\ CHILDHOOD MENTAL              0.4499        19.0
                     DISORDERS.
432...............  \2\ OTHER MENTAL DISORDER         0.5837        21.3
                     DIAGNOSES.
433...............  \2\ ALCOHOL/DRUG ABUSE OR         0.5837        21.3
                     DEPENDENCE, LEFT AMA.
439...............  SKIN GRAFTS FOR INJURIES....      1.3677        35.6
440...............  WOUND DEBRIDEMENTS FOR            1.3442        36.1
                     INJURIES.
441...............  \1\ HAND PROCEDURES FOR           0.4499        19.0
                     INJURIES.
442...............  OTHER O.R. PROCEDURES FOR         1.3937        33.4
                     INJURIES W CC.
443...............  \3\ OTHER O.R. PROCEDURES         0.7637        24.8
                     FOR INJURIES W/O CC.
444...............  TRAUMATIC INJURY AGE >17 W        0.7584        26.3
                     CC.
445...............  \1\ TRAUMATIC INJURY AGE >17      0.4499        19.0
                     W/O CC.
446...............  \7\ TRAUMATIC INJURY AGE 0-       0.4499        19.0
                     17.
447...............  \2\ ALLERGIC REACTIONS AGE        0.5837        21.3
                     >17.
448...............  \7\ ALLERGIC REACTIONS AGE 0-     0.5837        21.3
                     17.
449...............  \3\ POISONING & TOXIC             0.7637        24.8
                     EFFECTS OF DRUGS AGE >17 W
                     CC.
450...............  \7\ POISONING & TOXIC             0.7637        24.8
                     EFFECTS OF DRUGS AGE >17 W/
                     O CC.
451...............  \7\ POISONING & TOXIC             0.7637        24.8
                     EFFECTS OF DRUGS AGE 0-17.
452...............  COMPLICATIONS OF TREATMENT W      0.9265        25.3
                     CC.
453...............  COMPLICATIONS OF TREATMENT W/     0.5871        23.8
                     O CC.
454...............  \3\ OTHER INJURY, POISONING       0.7637        24.8
                     & TOXIC EFFECT DIAG W CC.
455...............  \7\ OTHER INJURY, POISONING       0.7637        24.8
                     & TOXIC EFFECT DIAG W/O CC.
461...............  O.R. PROC W DIAGNOSES OF          1.2245        34.0
                     OTHER CONTACT W HEALTH
                     SERVICES.
462...............  REHABILITATION..............      0.5787        22.4
463...............  SIGNS & SYMPTOMS W CC.......      0.6258        23.8
464...............  SIGNS & SYMPTOMS W/O CC.....      0.5554        24.1
465...............  AFTERCARE W HISTORY OF            0.6958        21.9
                     MALIGNANCY AS SECONDARY
                     DIAGNOSIS.
466...............  AFTERCARE W/O HISTORY OF          0.6667        21.9
                     MALIGNANCY AS SECONDARY
                     DIAGNOSIS.
467...............  \3\ OTHER FACTORS                 0.7637        24.8
                     INFLUENCING HEALTH STATUS.
468...............  EXTENSIVE O.R. PROCEDURE          2.1478        40.2
                     UNRELATED TO PRINCIPAL
                     DIAGNOSIS.
469...............  \6\ PRINCIPAL DIAGNOSIS           0.0000         0.0
                     INVALID AS DISCHARGE
                     DIAGNOSIS.
470...............  \6\ UNGROUPABLE.............      0.0000         0.0
471...............  \5\ BILATERAL OR MULTIPLE         1.7034        38.5
                     MAJOR JOINT PROCS OF LOWER
                     EXTREMITY.
473...............  ACUTE LEUKEMIA W/O MAJOR          0.8537        20.0
                     O.R. PROCEDURE AGE >17.
475...............  RESPIRATORY SYSTEM DIAGNOSIS      2.0831        34.6
                     WITH VENTILATOR SUPPORT.
476...............  \4\ PROSTATIC O.R. PROCEDURE      1.1820        29.6
                     UNRELATED TO PRINCIPAL
                     DIAGNOSIS.
477...............  NON-EXTENSIVE O.R. PROCEDURE      1.5836        35.3
                     UNRELATED TO PRINCIPAL
                     DIAGNOSIS.
479...............  \7\ OTHER VASCULAR                0.7637        24.8
                     PROCEDURES W/O CC.
480...............  \6\ LIVER TRANSPLANT........      0.0000         0.0
481...............  \7\ BONE MARROW TRANSPLANT..      1.7034        38.5
482...............  \5\ TRACHEOSTOMY FOR              1.7034        38.5
                     FACE,MOUTH & NECK DIAGNOSES.
484...............  \2\ CRANIOTOMY FOR MULTIPLE       0.5837        21.3
                     SIGNIFICANT TRAUMA.
485...............  \7\ LIMB REATTACHMENT, HIP        1.1820        29.6
                     AND FEMUR PROC FOR MULTIPLE
                     SIGNIFICANT TR.
486...............  \5\ OTHER O.R. PROCEDURES         1.7034        38.5
                     FOR MULTIPLE SIGNIFICANT
                     TRAUMA.
487...............  OTHER MULTIPLE SIGNIFICANT        0.8992        26.0
                     TRAUMA.
488...............  \5\ HIV W EXTENSIVE O.R.          1.7034        38.5
                     PROCEDURE.
489...............  HIV W MAJOR RELATED               0.8535        21.4
                     CONDITION.
490...............  HIV W OR W/O OTHER RELATED        0.4919        16.6
                     CONDITION.
491...............  \5\ MAJOR JOINT & LIMB            1.7034        38.5
                     REATTACHMENT PROCEDURES OF
                     UPPER EXTREMITY.
492...............  \7\ CHEMOTHERAPY W ACUTE          1.1820        29.6
                     LEUKEMIA AS SECONDARY
                     DIAGNOSIS.
493...............  \5\ LAPAROSCOPIC                  1.7034        38.5
                     CHOLECYSTECTOMY W/O C.D.E.
                     W CC.
494...............  \7\ LAPAROSCOPIC                  1.7034        38.5
                     CHOLECYSTECTOMY W/O C.D.E.
                     W/O CC.
495...............  \6\ LUNG TRANSPLANT.........      0.0000         0.0
496...............  \7\ COMBINED ANTERIOR/            1.1820        29.6
                     POSTERIOR SPINAL FUSION.
497...............  \4\ SPINAL FUSION W CC......      1.1820        29.6
498...............  \7\ SPINAL FUSION W/O CC....      1.1820        29.6

[[Page 4778]]

 
499...............  \5\ BACK & NECK PROCEDURES        1.7034        38.5
                     EXCEPT SPINAL FUSION W CC.
500...............  \4\ BACK & NECK PROCEDURES        1.1820        29.6
                     EXCEPT SPINAL FUSION W/O CC.
501...............  \5\ KNEE PROCEDURES W PDX OF      1.7034        38.5
                     INFECTION W CC.
502...............  \4\ KNEE PROCEDURES W PDX OF      1.1820        29.6
                     INFECTION W/O CC.
503...............  \2\ KNEE PROCEDURES W/O PDX       0.5837        21.3
                     OF INFECTION.
504...............  \7\ EXTENSIVE BURN OR FULL        1.7034        38.5
                     THICKNESS BURNS WITH MECH
                     VENT 96+ HOURS WITH SKIN
                     GRAFT.
505...............  \4\ EXTENSIVE BURN OR FULL        1.1820        29.6
                     THICKNESS BURNS WITH MECH
                     VENT 96+ HOURS WITHOUT SKIN
                     GRAFT.
506...............  \4\ FULL THICKNESS BURN W         1.1820        29.6
                     SKIN GRAFT OR INHAL INJ W
                     CC OR SIG TRAUMA.
507...............  \3\ FULL THICKNESS BURN W         0.7637        24.8
                     SKIN GRFT OR INHAL INJ W/O
                     CC OR SIG TRAUMA.
508...............  FULL THICKNESS BURN W/O SKIN      0.8367        29.4
                     GRFT OR INHAL INJ W CC OR
                     SIG TRAUMA.
509...............  \1\ FULL THICKNESS BURN W/O       0.4499        19.0
                     SKIN GRFT OR INH INJ W/O CC
                     OR SIG TRAUMA.
510...............  NON-EXTENSIVE BURNS W CC OR       0.7709        24.6
                     SIGNIFICANT TRAUMA.
511...............  \1\ NON-EXTENSIVE BURNS W/O       0.4499        19.0
                     CC OR SIGNIFICANT TRAUMA.
512...............  \6\ SIMULTANEOUS PANCREAS/        0.0000         0.0
                     KIDNEY TRANSPLANT.
513...............  \6\ PANCREAS TRANSPLANT.....      0.0000         0.0
515...............  \5\ CARDIAC DEFIBRILATOR          1.7034        38.5
                     IMPLANT W/O CARDIAC CATH.
518...............  \7\ PERCUTANEOUS                  0.7637        24.8
                     CARDIVASCULAR PROC W/O
                     CORONARY ARTERY STENT OR
                     AMI.
519...............  \5\ CERVICAL SPINAL FUSION W      1.7034        38.5
                     CC.
520...............  \7\ CERVICAL SPINAL FUSION W/     1.1820        29.6
                     O CC.
521...............  ALCOHOL/DRUG ABUSE OR             0.4457        19.4
                     DEPENDENCE W CC.
522...............  \7\ ALCOHOL/DRUG ABUSE OR         0.4499        19.0
                     DEPENDENCE W REHABILITATION
                     THERAPY W/O CC.
523...............  \7\ ALCOHOL/DRUG ABUSE OR         0.4499        19.0
                     DEPENDENCE W/O
                     REHABILITATION THERAPY W/O
                     CC.
524...............  TRANSIENT ISCHEMIA..........      0.5043        21.1
525...............  \7\ OTHER HEART ASSIST            1.7034        38.5
                     SYSTEM IMPLANT.
528...............  \7\ INTRACRANIAL VASCULAR         1.7034        38.5
                     PROC W PDX HEMORRHAGE.
529...............  \5\ VENTRICULAR SHUNT             1.7034        38.5
                     PROCEDURES W CC.
530...............  \7\ VENTRICULAR SHUNT             1.7034        38.5
                     PROCEDURES W/O CC.
531...............  \3\ SPINAL PROCEDURES WITH        0.7637        24.8
                     CC.
532...............  \3\ SPINAL PROCEDURES             0.7637        24.8
                     WITHOUT CC.
533...............  \5\ EXTRACRANIAL VASCULAR         1.7034        38.5
                     PROCEDURES WITH CC.
534...............  \7\ EXTRACRANIAL VASCULAR         1.1820        29.6
                     PROCEDURES WITHOUT CC.
535...............  \7\ CARDIAC DEFIB IMPLANT W       1.7034        38.5
                     CARDIAC CATH W AMI/HF/SHOCK.
536...............  \7\ CARDIAC DEFIB IMPLANT W       1.7034        38.5
                     CARDIAC CATH W/O AMI/HF/
                     SHOCK.
537...............  LOCAL EXCISION AND REMOVAL        1.1615        34.7
                     OF INTERNAL FIXATION
                     DEVICES EXCEPT HIP AND
                     FEMUR WITH CC.
538...............  \7\ LOCAL EXCISION AND            1.1820        29.6
                     REMOVAL OF INTERNAL
                     FIXATION DEVICES EXCEPT HIP
                     AND FEMUR WITHOUT CC.
539...............  \4\ LYMPHOMA AND LEUKEMIA         1.1820        29.6
                     WITH MAJOR O.R. PROCEDURE
                     WITH CC.
540...............  \7\ LYMPHOMA AND LEUKEMIA         0.5837        21.3
                     WITH MAJOR O.R. PROCEDURE
                     WITHOUT CC.
541...............  ECMO OR TRACH W MECH VENT         4.2287        65.6
                     96+ HRS OR PDX EXCEPT FACE,
                     MOUTH & NECK DIAG WITH
                     MAJOR OR.
542...............  TRACH W MECH VENT 96+ HRS OR      3.1869        48.2
                     PDX EXCEPT FACE, MOUTH &
                     NECK DIAG WITHOUT MAJOR OR.
543...............  \5\ CRANIOTOMY W IMPLANT OF       1.7034        38.5
                     CHEMO AGENT OR ACUTE
                     COMPLEX CNS PDX.
544...............  \5\ MAJOR JOINT REPLACEMENT       1.7034        38.5
                     OR REATTACHMENT OF LOWER
                     EXTREMITY.
545...............  \5\ REVISION OF HIP OR KNEE       1.7034        38.5
                     REPLACEMENT.
546...............  \7\ SPINAL FUSION EXCEPT          1.7034        38.5
                     CERVICAL WITH CURVATURE OF
                     SPINE OR MALIGNANCY.
547...............  \7\ CORONARY BYPASS WITH          1.7034        38.5
                     CARDIAC CATH WITH MAJOR CV
                     DIAGNOSIS.
548...............  \7\ CORONARY BYPASS WITH          1.7034        38.5
                     CARDIAC CATH WITHOUT MAJOR
                     CV DIAGNOSIS.
549...............  \7\ CORONARY BYPASS WITHOUT       1.7034        38.5
                     CARDIAC CATH WITH MAJOR CV
                     DIAGNOSIS.
550...............  \7\ CORONARY BYPASS WITHOUT       1.7034        38.5
                     CARDIAC CATH WITHOUT MAJOR
                     CV DIAGNOSIS.
551...............  \4\ PERMANENT CARDIAC             1.1820        29.6
                     PACEMAKER IMPLANT WITH
                     MAJOR CV DIAGNOSIS OR AICD
                     LEAD OR GNRTR.
552...............  \4\ OTHER PERMANENT CARDIAC       1.1820        29.6
                     PACEMAKER IMPLANT WITHOUT
                     MAJOR CV DIAGNOSIS.
553...............  \8\ OTHER VASCULAR                1.3255        30.6
                     PROCEDURES WITH CC WITH
                     MAJOR CV DIAGNOSIS.
554...............  \8\ OTHER VASCULAR                1.3255        30.6
                     PROCEDURES WITH CC WITHOUT
                     MAJOR CV DIAGNOSIS.
555...............  \4\ PERCUTANEOUS                  1.1820        29.6
                     CARDIOVASCULAR PROC WITH
                     MAJOR CV DIAGNOSIS.
556...............  \8\ PERCUTANEOUS                  1.1820        29.6
                     CARDIOVASCULAR PROC WITH
                     NON-DRUG-ELUTING STENT
                     WITHOUT MAJOR CV DIAGNOSIS.
557...............  \8\ PERCUTANEOUS                  1.1820        29.6
                     CARDIOVASCULAR PROC WITH
                     DRUG-ELUTING STENT WITH
                     MAJOR CV DIAGNOSIS.
558...............  \7\ PERCUTANEOUS                  1.1820        29.6
                     CARDIOVASCULAR PROC WITH
                     DRUG-ELUTING STENT WITHOUT
                     MAJOR CV DIAGNOSIS.
559...............  \7\ ACUTE ISCHEMIC STROKE         0.7637       24.8
                     WITH USE OF THROMBOLYTIC
                     AGENT.
------------------------------------------------------------------------
\1\ Relative weights for these LTC-DRGs were determined by assigning
  these cases to low-volume quintile 1.

[[Page 4779]]

 
\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.
\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 assigned a value of 0.0000.
 
\7\ Relative weights for these LTC-DRGs were determined by assigning
  these cases to the appropriate low volume quintile because there are
  no LTCH cases in the FY 2004 MedPAR file.
\8\ Relative weights for these LTC-DRGs were determined after adjusting
  to account for nonmonotonicity.

[FR Doc. 06-665 Filed 1-19-06; 4:05 pm]
BILLING CODE 4120-01-P


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