Tuesday, 

May 18, 2004

Book 2 of 2 Books 

Pages 28195–28818

Part II 

Department of 

Health and Human 

Services 

Centers for Medicare & Medicaid Services 

42 CRF Part 403, et al. 

Medicare Program; Proposed Changes to 

the Hospital Inpatient Prospective 

Payment Systems and Fiscal Year 2005 

Rates; Proposed Rule 

28196 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 403, 412, 413, 418, 460, 

480, 482, 483, 485, and 489 

[CMS–1428–P] 

RIN 0938–AM80 

Medicare Program; Proposed Changes 

to the Hospital Inpatient Prospective 

Payment Systems and Fiscal Year 2005 

Rates

AGENCY: Centers for Medicare and 

Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

SUMMARY: We are proposing to revise the 

Medicare hospital inpatient prospective 

payment systems (IPPS) for operating 

and capital-related costs to implement 

changes arising from our continuing 

experience with these systems; and to 

implement a number of changes made 

by the Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (Pub. L. 108–173), enacted on 

December 8, 2003. In addition, in the 

Addendum to this proposed rule, we 

describe the proposed changes to the 

amounts and factors used to determine 

the rates for Medicare hospital inpatient 

services for operating costs and capitalrelated costs. These proposed changes 

would be applicable to discharges 

occurring on or after October 1, 2004. 

We also are setting forth proposed rateof-increase limits as well as proposed 

policy changes for hospitals and 

hospital units excluded from the IPPS 

that are paid on a reasonable cost basis 

subject to these limits. 

Among the policy changes that we are 

proposing to make are: Changes to the 

classification of cases to the diagnosisrelated groups (DRGs); changes to the 

long-term care (LTC)-DRGs and relative 

weights; changes in the wage data, 

labor-related share of the wage index, 

and the geographic area designations 

used to compute the wage index; 

changes in the qualifying threshold 

criteria for and the proposed approval of 

new technologies and medical services 

for add-on payments; changes to the 

policies governing postacute care 

transfers; changes to payments to 

hospitals for the direct and indirect 

costs of graduate medical education; 

changes to the payment adjustment for 

disproportionate share rural hospitals; 

changes in requirements and payments 

to critical access hospitals (CAHs); 

changes to the disclosure of information 

requirements for Quality Improvement 

Organization (QIOs); and changes in the 

hospital conditions of participation for 

discharge planning and fire safety 

requirements for certain health care 

facilities.

DATES: Comments will be considered if 

received at the appropriate address, as 

provided below, no later than 5 p.m. on 

July 12, 2004.

ADDRESSES: 

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this proposed rule to assist 

in fully considering issues and 

developing policies. You can assist us 

by referencing the file code CMS–1428–

P and the specific ‘‘issue identifier’’ that 

precedes the section on which you 

choose to comment. 

Submit electronic comments to:

http://www.accessdata.fda.gov/scripts/

oc/dockets/

commentdocket.cfm?AGENCY=CMS or 

www.regulations.gov.

Mail written comments (an original 

and three copies) to the following 

address only: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS–1428–

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

1850. 

If you prefer, you may deliver, by 

hand or courier, your written comments 

(an original and three copies) to one of 

the following addresses: 

Room 443–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201, or Room 

C5–14–03, Central Building, 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

Humphrey Building is not readily 

available to persons without Federal 

Government identification, commenters 

are encouraged to leave their comments 

in the CMS drop slots located in the 

main lobby of the building. A stamp-in 

clock is available for commenters who 

wish to retain proof of filing by 

stamping in and keeping an extra copy 

of the comments being filed.) 

Comments mailed to those addresses 

specified as appropriate for courier 

delivery may be delayed and could be 

considered late. 

Because of staffing and resource 

limitations, we cannot accept comments 

by facsimile (FAX) transmission. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period will be available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. After the close of the 

comment period, CMS will post all 

electronic comments received before the 

close of the period on its public Web 

sites. Written comments received timely 

will be available for public inspection as 

they are received, generally beginning 

approximately 4 weeks after publication 

of a document, in room C5–12–08 of the 

Centers for Medicare & Medicaid 

Services, 7500 Security Blvd., 

Baltimore, MD, on Monday through 

Friday of each week from 8:30 a.m. to 

5 p.m. Please call (410) 786–7197 to 

schedule an appointment to view public 

comments. 

For comments that relate to 

information collection requirements, 

mail a copy of comments to the 

following addresses: 

Centers for Medicare & Medicaid 

Services, Office of Strategic Operations 

and Regulatory Affairs, Security and 

Standards Group, Office of Regulations 

Development and Issuances, Room C4–

24–02, 7500 Security Boulevard, 

Baltimore, Maryland 21244–1850. Attn: 

Dawn Willinghan, CMS–1428–P; and

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 3001, New Executive 

Office Building, Washington, DC 20503, 

Attn: Brenda Aguilar, CMS Desk Officer.

FOR FURTHER INFORMATION CONTACT: Jim 

Hart, (410) 786–9520, Operating 

Prospective Payment, Diagnosis-Related 

Groups (DRGs), Wage Index, New 

Medical Services and Technology, 

Standardized Amounts, Hospital 

Geographic Reclassifications, Postacute 

Care Transfers, and Disproportionate 

Share Hospital Issues. 

Tzvi Hefter, (410) 786–4487, Capital 

Prospective Payment, Excluded 

Hospitals, Graduate Medical Education, 

Critical Access Hospitals, and LongTerm Care (LTC)—DRGs Issues. 

Mary Collins, (410) 786–3189, CAH 

Bed Limits and Distinct Part Unit Issues. 

John Eppinger, (410) 786–4518, CAH 

Periodic Interim Payment Issues. 

Maria Hammel, (410) 786–1775, 

Quality Improvement Organization 

Issues. 

Siddhartha Mazumdar, (410) 786–

6673, Rural Community Hospital 

Demonstration Project Issues. 

Jeannie Miller, (410) 786–3164, 

Bloodborne Pathogens Standards, 

Hospital Conditions of Participation for 

Discharge Planning, and Fire Safety 

Requirements Issues. 

Dr. Mark Krushat, (410) 786–6809, 

and Dr. Anita Bhatia, (410) 786–7236 

Quality Data for Annual Payment 

Update Issues.

SUPPLEMENTARY INFORMATION:

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28197

Availability of Copies and Electronic 

Access 

Copies: To order copies of the Federal 

Register containing this document, send 

your request to: New Orders, 

Superintendent of Documents, P.O. Box 

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Specify the date of the issue requested 

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Documents, or enclose your Visa or 

Master Card number and expiration 

date. Credit card orders can also be 

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As an alternative, you can view and 

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document at most libraries designated 

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This Federal Register document is 

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required).

Acronyms 

ACGME—Accreditation Council on Graduate 

Medical Education 

AHIMA—American Health Information 

Management Association 

AHA—American Hospital Association 

AOA—American Osteopathic Association 

ASC—Ambulatory Surgical Center 

BBA—Balanced Budget Act of 1997, Public 

Law 105–33 

BIPA—Medicare, Medicaid, and SCHIP [State 

Children’s Health Insurance Program] 

Benefits Improvement and Protection 

Act of 2000, Public Law 106–554 

BLS—Bureau of Labor Statistics 

CAH—Critical access hospital 

CART—CMS Abstraction & Reporting Tool 

CBSAs—Core-Based Statistical Areas 

CC—Complication or comorbidity 

CMS—Centers for Medicare & Medicaid 

Services 

CMSA—Consolidated Metropolitan 

Statistical Area 

COBRA—Consolidated Omnibus 

Reconciliation Act of 1985, Public Law 

99–272 

CoP—Condition of Participation 

CPI—Consumer Price Index 

CRNA—Certified registered nurse anesthetist 

DRG—Diagnosis-related group 

DSH—Disproportionate share hospital 

ESRD—End-stage renal disease 

FDA—Food and Drug Administration 

FQHC—Federally qualified health center 

FSES—Fire Safety Evaluation System 

FTE—Full-time equivalent 

FY—Federal fiscal year 

GME—Graduate medical education 

HCRIS—Hospital Cost Report Information 

System 

HIPC—Health Information Policy Council 

HIPAA—Health Insurance Portability and 

Accountability Act of 1996, Public Law 

104–191 

HHA—Home health agency 

HPSA—Health Professions Shortage Area 

ICD–9–CM—International Classification of 

Diseases, Ninth Revision, Clinical 

Modification 

ICD–10–PCS—International Classification of 

Diseases, Tenth Edition, Procedure 

Coding System 

ICF/MRs—Intermediate care facilities for the 

mentally retarded 

IME—Indirect medical education 

IPPS—Acute care hospital inpatient 

prospective payment system 

IPF—Inpatient psychiatric facility 

IRF—Inpatient rehabilitation facility 

JCAHO—Joint Commission on the 

Accreditation of Healthcare 

Organizations 

LAMA—Left Against Medical Advice 

LTC–DRG—Long-term care diagnosis-related 

group 

LTCH—Long-term care hospital 

LSC—Life Safety Code 

MCE—Medicare Code Editor 

MCO—Managed care organization 

MDC—Major diagnostic category 

MDH—Medicare-dependent small rural 

hospital 

MedPAC—Medicare Payment Advisory 

Commission 

MedPAR—Medicare Provider Analysis and 

Review File 

MEI—Medicare Economic Index 

MGCRB—Medicare Geographic Classification 

Review Board 

MMA—Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003, Public Law 108–173 

MPFS—Medicare Physician Fee Schedule 

MSA—Metropolitan Statistical Area 

NECMA—New England County Metropolitan 

Areas

NCHS—National Center for Health Statistics 

NCVHS—National Committee on Vital and 

Health Statistics 

NFPA—National Fire Protection Association 

NPR—Notice of Program Reimbursement 

NQF—National Quality Forum 

NVHRI—National Voluntary Hospital 

Reporting Initiative 

OES—Occupational Employment Statistics 

OIG—Office of the Inspector General 

OMB—Executive Office of Management and 

Budget 

O.R.—Operating room 

OSCAR—Online Survey Certification and 

Reporting (System) 

OSHA—Occupational Safety and Health Act 

PACE—Programs of All-Inclusive Care for the 

Elderly 

PIP—Periodic interim payment 

PMS—Performance Measurement System 

PMSAs—Primary Metropolitan Statistical 

Areas 

PPS—Prospective payment system 

PRA—Per resident amount 

ProPAC—Prospective Payment Assessment 

Commission 

PRRB—Provider Reimbursement Review 

Board 

PS&R—Provider Statistical and 

Reimbursement System 

QIO—Utilization and Quality Control Quality 

Improvement Organization 

RHC—Rural health clinic 

RHQDAPU—Reporting Hospital Quality Data 

for Annual Payment Update 

RRC—Rural referral center 

SCH—Sole community hospital 

SNF—Skilled nursing facility 

SOCs—Standard occupational classifications 

SOM—State Operations Manual 

SSA—Social Security Administration 

SSI—Supplemental Security Income 

TEFRA—Tax Equity and Fiscal 

Responsibility Act of 1982, Public Law 

97–248 

UHDDS—Uniform Hospital Discharge Data 

Set 

Table of Contents 

I. Background 

A. Summary 

1. Acute Care Hospital Inpatient 

Prospective Payment System (IPPS) 

2. Hospitals and Hospital Units Excluded 

from the IPPS 

a. IRFs 

b. LTCH 

c. IPFs 

3. Critical Access Hospitals (CAHs) 

4. Payments for Graduate Medical 

Education (GME) 

B. Provisions of the Medicare Prescription 

Drug, Improvement, and Modernization 

Act of 2003 

C. Major Contents of this Proposed Rule 

1. Proposed Changes to the DRG 

Reclassifications and Recalibrations of 

Relative Weights 

2. Proposed Changes to the Hospital Wage 

Index 

3. Other Decisions and Proposed Changes 

to the PPS for Inpatient Operating and 

GME Costs 

4. Proposed Changes to the PPS for CapitalRelated Costs 

5. Proposed Changes for Hospitals and 

Hospital Units Excluded from the IPPS 

6. Proposed Changes to QIO Disclosure of 

Information Requirements 

7. Proposed Changes Relating to Medicare 

Provider Agreements: Bloodborne 

Pathogens Standards, Hospital 

Conditions of Participation for Discharge 

Planning, and Fire Safety Requirements 

for Certain Health Care Facilities 

8. Determining Prospective Payment 

Operating and Capital Rates and Rate-ofIncrease Limits 

9. Impact Analysis 

10. Recommendation of Update Factor for 

Hospital Inpatient Operating Costs 

11. Discussion of Medicare Payment 

Advisory Commission Recommendations 

II. Proposed Changes to DRG Classifications 

and Relative Weights

28198 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

A. Background 

B. DRG Reclassification 

1. General 

2. MDC 1 (Diseases and Disorders of the 

Nervous System): Intracranial 

Hemorrhage and Stroke with Infarction 

3. MDC 5 (Diseases and Disorders of the 

Circulatory System) 

a. Heart Assist System Transplant 

b. Cardiac Resynchronization Therapy and 

Heart Failure 

c. Combination Cardiac Pacemaker Devices 

and Lead Codes 

4. MDC 6 (Diseases and Disorders of the 

Digestive System): Artificial Anal 

Sphincter 

5. MDC 8 (Diseases and Disorders of the 

Musculoskeletal System and Connective 

Tissue) 

a. 360 Spinal Fusion 

b. Multiple Level Spinal Fusion 

6. MDC 15 (Newborns and Other Neonates 

with Conditions Originating in the 

Perinatal Period) 

7. MDC 20 (Alcohol/Drug Use and 

Alcohol/Drug Induced Organic Mental 

Disorders): Drug-Induced Dementia 

8. MDC 22 (Burns): Burn Patients on 

Mechanical Ventilation 

9. Pre-MDC: Tracheostomy 

10. Medicare Code Editor (MCE) Changes 

11. Surgical Hierarchies 

12. Refinement of Complications and 

Comorbidities (CC) List 

13. Review of Procedure Codes in DRGs 

468, 476, and 477 

a. Moving Procedure Codes from DRG 468 

or DRG 477 to MDCs 

b. Reassignment of Procedures among 

DRGs 468, 476, and 477 

c. Adding Diagnosis or Procedure Codes to 

MDCs 

14. Pancreatic Islet Cell Transplantation in 

Clinical Trials 

15. Changes to the ICD–9–CM Coding 

System 

16. Other Issues 

a. Craniotomy Procedures 

(1) Unruptured Cerebral Aneurysms 

(2) GLIADEL Chemotherapy Wafers 

(3) DRG 3 (Craniotomy Age 0–17) 

b. Coronary Stent Procedures 

c. Severe Sepsis 

d. Implantable Cardiac Defibrillators 

C. Recalibration of DRG Weights 

D. Proposed LTC–DRG Reclassifications 

and Relative Weights for LTCHs for FY 

2005 

1. Background 

2. Proposed Changes in the LTC–DRG 

Classifications 

a. Background 

b. Patient Classifications into DRGs 

3. Development of the Proposed FY 2005 

LTC–DRG Relative Weights

a. General Overview of Development of the 

LTC–DRG Relative Weights 

b. Data 

c. Hospital-Specific Relative Value 

Methodology 

d. Low-Volume LTC–DRGs 

4. Steps for Determining the Proposed FY 

2005 LTC–DRG Relative Weights 

E. Proposed Add-On Payments for New 

Services and Technologies 

1. Background 

2. Other Provisions of Section 503 of 

Public Law 108–173 

3. FY 2005 Status of Technology Approved 

for FY 2004 Add-On Payments 

a. Drotrecogin Alfa (Activated)—Xigris

b. InFUSETM (Bone Morphogenetic 

Proteins (BMPs) for Spinal Fusions) 

4. Reevaluation of FY 2004 Applications 

That Were Not Approved 

5. FY 2005 Applicants for New Technology 

Add-On Payments 

a. InFUSETM Bone Graft (Bone 

Morphogenetic Proteins (BMPs) for Tibia 

Fractures) 

b. Norian Skeletal Repair System(SRS)

Bone Void Filler 

c. InSync Defibrillator System (Cardiac 

Resynchronization Therapy with 

Defibrillation (CRT–D)) 

d. GliaSite Radiation Therapy System 

(RTS) 

e. Natrecor—Human B–Type Natriuretic 

Peptide (hBNP) 

f. Kinetra Implantable Neurostimulator 

for Deep Brain Stimulation 

g. Intramedullary Skeletal Kinetic 

Distractor (ISKD) 

h. ActiconTM Neosphincter 

i. TandemHeartTM Percutaneous Left 

Ventricular Assist System 

j. AquadexTM System 100 Fluid Removal 

System (System 100) 

III. Proposed Changes to the Hospital Wage 

Index 

A. Background 

B. Revised OMB Definitions for 

Geographical Statistical Areas 

1. Current Labor Market Areas Based on 

MSAs 

2. Core-Based Statistical Areas 

3. Revised Labor Market Areas 

a. New England MSAs 

b. Metropolitan Divisions 

c. Micropolitan Areas 

d. Transition Period 

C. Proposed Occupational Mix Adjustment 

to Proposed FY 2005 Index 

1. Development of Data for the 

Occupational Mix Adjustment 

2. Proposed Calculation of the 

Occupational Mix Adjustment Factor 

and the Proposed Occupational Mix 

Adjusted Wage Index 

D. Worksheet S–3 Wage Data for the 

Proposed FY 2005 Wage Index Update 

E. Verification of Worksheet S–3 Wage 

Data 

F. Computation of the Unadjusted Wage 

Index 

G. Computation of the Proposed FY 2005 

Blended Wage Index 

H. Proposed Revisions to the Wage Index 

Based on Hospital Redesignation 

1. General 

2. Effects of Reclassification 

3. FY 2005 Issues 

a. FY 2005 MGCRB Reclassifications 

b. Implementation of New MSAs 

c. Redesignations under Section 

1886(d)(8)(B) of the Act 

d. Reclassifications Under Section 508 of 

Public Law 108–173 

e. Proposed Wage Index Adjustment Based 

on Commuting Patterns of Hospital 

Employees 

(1) Data 

(2) Qualifying Counties 

(3) The Adjustment 

(4) Automatic Adjustments 

4. Proposed FY 2005 Reclassifications 

I. Process for Requests for Wage Index Data 

Corrections 

1. Worksheet S–3 Wage Data 

2. Occupational Mix Data 

3. All FY 2005 Wage Index Data 

J. Proposed Revision of the Labor-Related 

Share of the Wage Index 

IV. Other Decisions and Proposed Changes to 

the IPPS for Operating Costs and GME 

Costs 

A. Postacute Care Transfer Payment Policy 

1. Background 

2. Proposed Changes to DRGs Subject to 

the Postacute Care Transfer Policy 

B. Payments for Inpatient Care in Providers 

That Change Classification Status During 

a Patient Stay 

C. Geographic Reclassifications—

Definitions of Urban and Rural Areas 

D. Equalization of Urban and Rural 

Standardized Amounts 

E. Reporting of Hospital Quality Data for 

Annual Hospital Payment Update 

1. Background 

2. Requirements for Hospital Reporting of 

Quality Data 

3. Submission of Hospital Data for FYs 

2006 and 2007 

4. Proposed Regulation Change 

F. Proposed Revision of the Labor-Related 

Share of the Hospital Wage Index 

G. Wage Index Adjustment for Commuting 

Patterns of Hospital Employees 

H. Additional Payments for New Medical 

Services and Technology: Proposed 

Policy Changes 

I. Rural Referral Centers 

1. Case-Mix Index 

2. Discharges 

J. Additional Payments to Hospitals with 

High Percentage of End-Stage Renal 

Disease (ESRD) Discharges 

K. Indirect Medical Education (IME) 

Adjustment 

1. IME Adjustment Factor Formula 

Multipliers

2. IME Adjustment Formula Multiplier for 

Redistributed FTE Resident Slots 

3. Technical Changes 

L. Payment to Disproportionate Share 

Hospitals 

1. Enhanced DSH Adjustment for Rural 

Hospitals and Urban Hospitals with 

Fewer Than 100 Beds 

2. Proposals Relating to Available Beds and 

Patient Days for the DSH Adjustment 

M. Payment Adjustments for Low-Volume 

Hospitals 

N. Medicare Geographic Classification 

Review Board (MGCRB) Reclassifications 

1. Background 

2. Standardized Amount Reclassification 

Provisions 

3. Reclassification of Urban Rural Referral 

Centers 

4. Special Circumstances of Sole 

Community Hospitals (SCHs) in Low 

Population Density States 

5. Possible Reclassifications for Dominant 

Hospitals and Hospitals in SingleHospital MSAs 

6. Special Circumstances of Hospitals in 

All-Urban States 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28199

O. Payment for Direct Graduate Medical 

Education 

1. Background 

2. Reductions of and Increases in 

Hospitals’ FTE Resident Caps for GME 

Payment Purposes under Section 422 of 

Public Law 108–173 

a. General Background on Methodology for 

Determining the FTE Resident Count 

b. Reduction of Hospitals’ FTE Resident 

Caps under the Provisions of Section 422 

of Public Law 108–173 

c. Hospitals Subject to the FTE Resident 

Cap Reduction 

d. Exemption from FTE Resident Cap 

Reduction for Certain Rural Hospitals 

e. Determining the Estimated Number of 

FTE Resident Slots Available for 

Redistribution 

f. Determining the Possible Reduction to a 

Hospital’s FTE Resident Cap 

(1) Reference Resident Level—General 

(2) Expansion of an Existing Program 

(3) Audits of the Reference Cost Reporting 

Periods 

(4) Expansions Under Newly Approved 

Programs 

(5) Affiliations 

g. Criteria for Determining Hospitals That 

Will Receive Increases in Their FTE 

Resident Caps 

h. Application Process for the Increases in 

Hospitals’ FTE Resident Caps 

i. CMS Evaluation of Applications for 

Increases in FTE Resident Caps 

j. Application of Locality-Adjusted 

National Average Per Resident Amount 

(PRA) 

k. Application of Section 422 to Hospitals 

That Participate in Demonstration 

Projects or Voluntary Reduction 

Programs 

l. Application of Section 422 to Hospitals 

That File Low Utilization Medicare Cost 

Reports 

m. Specific Solicitation for Public 

Comment on the Proposals 

n. CMS Evaluation Form 

o. CMS Central and CMS Regional Office 

Mailing Addresses for Applications for 

Increases in FTE Resident Caps 

3. Direct GME Initial Residency Period 

a. Background 

b. Direct GME Initial Residency Period 

Limitation: Simultaneous Match Issue 

c. Exception to Initial Residency Period for 

Geriatric Residency or Fellowship 

Programs 

4. Per Resident Amount: Extension of 

Update Limitation on High-Cost 

Programs 

5. Residents Training in Nonhospital 

Settings 

a. Background 

b. Moratorium on Disallowances of 

Allopathic or Osteopathic Family 

Practice Residents Training Time in 

Nonhospital Settings 

(1) Cost Reports That Are Settled Between 

January 1, 2004 and December 31, 2004 

(2) Family Practice Residents That Are 

Training in Nonhospital Settings 

Between January 1, 2004 and December 

31, 2004 

c. Requirements for Written Agreements for 

Residency Training in Nonhospital 

Settings 

P. Rural Community Hospital 

Demonstration Program 

Q. Special Circumstances of Hospitals 

Facing High Malpractice Insurance Rate 

Increases 

V. Proposed Changes to the PPS for CapitalRelated Costs 

A. Background 

B. Payments to Hospitals Located in Puerto 

Rico 

C. Exception Payment for Extraordinary 

Circumstances 

A. Treatment of Hospitals Previously 

Reclassified for the Operating PPS 

E. Definition of Large Urban Area 

Standardized Amounts 

VI. Proposed Changes for Hospitals and 

Hospital Units Excluded from the IPPS 

A. Payments to Excluded Hospitals and 

Hospital Units 

1. Payments to Existing Excluded Hospitals 

and Hospital Units 

2. Updated Caps for New Excluded 

Hospitals and Units 

3. Implementation of a PPS for IRFs 

4. Implementation of a PPS for LTCHs 

5. Development of a PPS for IPFs 

6. Technical Changes Related to 

Establishment of Payments for Excluded 

Hospitals 

B. Criteria for Classification of HospitalsWithin-Hospitals

C. Critical Access Hospitals (CAHs) 

1. Background 

2. Payment Amounts for Inpatient CAH 

Services 

3. Condition for Application of Special 

Professional Service Payment 

Adjustment 

4. Coverage of Costs for Certain Emergency 

Room On-Call Providers 

5. Authorization of Periodic Interim 

Payments for CAHs 

6. Revision of the Bed Limit for CAHs 

7. Authority to Establish Psychiatric and 

Rehabilitation Distinct Part Units of 

CAHs 

8. Waiver Authority for Designation of a 

CAH as a Necessary Provider 

9. Payment for Clinical Diagnostic 

Laboratory Tests 

10. Proposed Technical Changes in Part 

489 

VII. Proposed Changes to the Disclosure of 

Information Requirements for Quality 

Improvement Organizations (QIOs) 

A. Background 

B. Provisions of the Proposed Regulations 

C. Technical Changes 

VIII. Proposed Policy Changes Relating to 

Medicare Provider Agreements for 

Compliance with Bloodborne Pathogens 

Standards, Hospital Conditions of 

Participation for Discharge Planning, and 

Fire Safety Requirements for Certain 

Health Care Facilities 

A. Conditions of Participation for 

Discharge Planning 

1. Background 

2. Implementation 

B. Compliance with Bloodborne Pathogens 

Standards 

C. Fire Safety Requirements for Certain 

Health Care Facilities 

1. Background 

2. Proposed Changes to the Regulations 

IX. MedPAC Recommendations 

X. Other Required Information 

A. Requests for Data from the Public 

1. CMS Wage Data 

2. CMS Hospital Wage Indices (Formerly: 

Urban and Rural Wage Index Values 

Only) 

3. PPS SSA/FIPS MSA State and County 

Crosswalk 

4. Reclassified Hospitals New Wage Index 

(Formerly: Reclassified Hospitals by 

Provider Only) 

5. PPS–IV to PPS–XII Minimum Data Set 

6. PPS–IX to PPS–XII Capital Data Set 

7. PPS–XIII to PPS–XIX Hospital Data Set 

8. Provider-Specific File 

9. CMS Medicare Case-Mix Index File 

10. DRG Relative Weights (Formerly Table 

5 DRG) 

11. PPS Payment Impact File 

12. AOR/BOR Tables 

13. Prospective Payment System (PPS) 

Standardizing File 

B. Collection of Information Requirements 

C. Public Comments 

Regulation Text 

Addendum—Proposed Schedule of 

Standardized Amounts Effective with 

Discharges Occurring On or After October 

1, 2004 and Update Factors and Rate-ofIncrease Percentages Effective With Cost 

Reporting Periods Beginning On or After 

October 1, 2004 

Tables 

Table 1A—National Adjusted Operating 

Standardized Amounts, Labor/Nonlabor 

(71.1 Percent Labor Share/28.9 Percent 

Nonlabor Share If Wage Index Is Greater 

Than 1) 

Table 1B—National Adjusted Operating 

Standardized Amounts, Labor/Nonlabor 

(62 Percent Labor Share/38 Percent 

Nonlabor Share If Wage Index Is Less 

Than or Equal to 1) 

Table 1C—Adjusted Operating Standardized 

Amounts for Puerto Rico, Labor/

Nonlabor 

Table 1D—Capital Standard Federal Payment 

Rate 

Table 2—Hospital Case-Mix Indexes for 

Discharges Occurring in Federal Fiscal 

Year 2003; Hospital Average Hourly 

Wage for Federal Fiscal Years 2003 (1999 

Wage Data), 2004 (2000 Wage Data), and 

2005 (2001 Wage Data) Wage Indexes 

and 3-Year Average of Hospital Average 

Hourly Wages 

Table 3A—3-Year Average Hourly Wage for 

Urban Areas 

Table 3B—3-Year Average Hourly Wage for 

Rural Areas 

Table 4A—Wage Index and Capital 

Geographic Adjustment Factor for Urban 

Areas 

Table 4B—Wage Index and Capital 

Geographic Adjustment Factor for Rural 

Areas 

Table 4C—Wage Index and Capital 

Geographic Adjustment Factor for 

Hospitals That Are Reclassified 

Table 4F—Puerto Rico Wage Index and 

Capital Geographic Adjustment Factor 

Table 4G—Pre-Reclassified Wage Index for 

Urban Areas 

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Table 4H—Pre-Reclassified Wage Index for 

Rural Areas 

Table 4J—Wage Index Adjustment for 

Commuting Hospital Employees (OutMigration) In Qualifying Counties—FY 

2005 

Table 5—List of Diagnosis-Related Groups 

(DRGs), Relative Weighting Factors, and 

Geometric and Arithmetic Mean Length 

of Stay (LOS) 

Table 6A—New Diagnosis Codes 

Table 6B—New Procedure Codes 

Table 6C—Invalid Diagnosis Codes 

Table 6D—Invalid Procedure Codes 

Table 6E—Revised Diagnosis Code Titles 

Table 6F—Revised Procedure Code Titles 

Table 6G—Additions to the CC Exclusions 

List

Table 6H—Deletions from the CC Exclusions 

List 

Table 7A—Medicare Prospective Payment 

System Selected Percentile Lengths of 

Stay: FY 2003 MedPAR Update 

December 2003 GROUPER V21.0 

Table 7B—Medicare Prospective Payment 

System Selected Percentile Lengths of 

Stay: FY 2003 MedPAR Update 

December 2003 GROUPER V22.0 

Table 8A—Statewide Average Operating 

Cost-to-Charge Ratios for Urban and 

Rural Hospitals (Case-Weighted) 

Table 8B—Statewide Average Capital Cost-toCharge Ratios (Case-Weighted) 

Table 9A—Hospital Reclassifications and 

Redesignations by Individual Hospital—

FY 2004 

Table 9B—Hospital Reclassifications and 

Redesignation by Individual Hospital 

Under Section 508 of Public Law 108–

173—FY 2004 

Table 10—Geometric Mean Plus the Lesser of 

.75 of the National Adjusted Operating 

Standardized Payment Amount 

(Increased to Reflect the Difference 

Between Costs and Charges) or .75 of 

One Standard Deviation of Mean Charges 

by Diagnosis-Related Groups (DRGs)—

March 2004 

Table 11—Proposed FY 2005 LTC–DRGs, 

Relative Weights, Geometric Average 

Length of Stay, and 5/6ths of the 

Geometric Average Length of Stay 

Appendix A—Regulatory Impact Analysis 

Appendix B—Recommendation of Update 

Factors for Operating Cost Rates of 

Payment for Inpatient Hospital Services

I. Background 

A. Summary 

1. Acute Care Hospital Inpatient 

Prospective Payment System (IPPS) 

Section 1886(d) of the Social Security 

Act (the Act) sets forth a system of 

payment for the operating costs of acute 

care hospital inpatient stays under 

Medicare Part A (Hospital Insurance) 

based on prospectively set rates. Section 

1886(g) of the Act requires the Secretary 

to pay for the capital-related costs of 

hospital inpatient stays under a 

prospective payment system (PPS). 

Under these PPSs, Medicare payment 

for hospital inpatient operating and 

capital-related costs is made at 

predetermined, specific rates for each 

hospital discharge. Discharges are 

classified according to a list of 

diagnosis-related groups (DRGs). 

The base payment rate is comprised of 

a standardized amount that is divided 

into a labor-related share and a 

nonlabor-related share. The laborrelated share is adjusted by the wage 

index applicable to the area where the 

hospital is located; and if the hospital is 

located in Alaska or Hawaii, the 

nonlabor-related share is adjusted by a 

cost-of-living adjustment factor. This 

base payment rate is multiplied by the 

DRG relative weight. 

If the hospital treats a high percentage 

of low-income patients, it receives a 

percentage add-on payment applied to 

the DRG-adjusted base payment rate. 

This add-on payment, known as the 

disproportionate share hospital (DSH) 

adjustment, provides for a percentage 

increase in Medicare payments to 

hospitals that qualify under either of 

two statutory formulas designed to 

identify hospitals that serve a 

disproportionate share of low-income 

patients. For qualifying hospitals, the 

amount of this adjustment may vary 

based on the outcome of the statutory 

calculations. 

If the hospital is an approved teaching 

hospital, it receives a percentage add-on 

payment for each case paid under the 

IPPS (known as the indirect medical 

education (IME) adjustment). This 

percentage varies, depending on the 

ratio of residents to beds. 

Additional payments may be made for 

cases that involve new technologies or 

medical services that have been 

approved for special add-on payments. 

To qualify, a new technology or medical 

service must demonstrate that it is a 

substantial clinical improvement over 

technologies or services otherwise 

available, and that, absent an add-on 

payment, it would be inadequately paid 

under the regular DRG payment. 

The costs incurred by the hospital for 

a case are evaluated to determine 

whether the hospital is eligible for an 

additional payment as an outlier case. 

This additional payment is designed to 

protect the hospital from large financial 

losses due to unusually expensive cases. 

Any outlier payment due is added to the 

DRG-adjusted base payment rate, plus 

any DSH, IME, and new technology or 

medical service add-on adjustments. 

Although payments to most hospitals 

under the IPPS are made on the basis of 

the standardized amounts, some 

categories of hospitals are paid the 

higher of a hospital-specific rate based 

on their costs in a base year (the higher 

of FY 1982, FY 1987, or FY 1996) or the 

IPPS rate based on the standardized 

amount. For example, sole community 

hospitals (SCHs) are the sole source of 

care in their areas, and Medicaredependent, small rural hospitals 

(MDHs) are a major source of care for 

Medicare beneficiaries in their areas. 

Both of these categories of hospitals are 

afforded this special payment protection 

in order to maintain access to services 

for beneficiaries (although MDHs 

receive only 50 percent of the difference 

between the IPPS rate and their 

hospital-specific rates if the hospitalspecific rate is higher than the IPPS 

rate). 

Section 1886(g) of the Act requires the 

Secretary to pay for the capital-related 

costs of inpatient hospital services ‘‘in 

accordance with a prospective payment 

system established by the Secretary.’’

The basic methodology for determining 

capital prospective payments is set forth 

in our regulations at 42 CFR 412.308 

and 412.312. Under the capital PPS, 

payments are adjusted by the same DRG 

for the case as they are under the 

operating IPPS. Similar adjustments are 

also made for IME and DSH as under the 

operating IPPS. In addition, hospitals 

may receive an outlier payment for 

those cases that have unusually high 

costs. 

The existing regulations governing 

payments to hospitals under the IPPS 

are located in 42 CFR Part 412, Subparts 

A through M. 

2. Hospitals and Hospital Units 

Excluded From the IPPS 

Under section 1886(d)(1)(B) of the 

Act, as amended, certain specialty 

hospitals and hospital units are 

excluded from the IPPS. These hospitals 

and units are: psychiatric hospitals and 

units; rehabilitation hospitals and units; 

long-term care hospitals (LTCHs); 

children’s hospitals; and cancer 

hospitals. Various sections of the 

Balanced Budget Act of 1997 (Pub. L. 

105–33), the Medicare, Medicaid and 

SCHIP [State Children’s Health 

Insurance Program] Balanced Budget 

Refinement Act of 1999 (Pub. L. 106–

113), and the Medicare, Medicaid, and 

SCHIP Benefits Improvement and 

Protection Act of 2000 (Pub. L. 106–554) 

provide for the implementation of PPSs 

for rehabilitation hospitals and units 

(referred to as inpatient rehabilitation 

facilities (IRFs)), psychiatric hospitals 

and units (referred to as inpatient 

psychiatric facilities (IPFs)), and LTCHs, 

as discussed below. Children’s hospitals 

and cancer hospitals continue to be paid 

under reasonable cost-based 

reimbursement. 

The existing regulations governing 

payments to excluded hospitals and 

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hospital units are located in 42 CFR 

Parts 412 and 413. 

a. IRFs 

Under section 1886(j) of the Act, as 

amended, rehabilitation hospitals and 

units (IRFs) have been transitioned from 

payment based on a blend of reasonable 

cost reimbursement subject to a 

hospital-specific annual limit under 

section 1886(b) of the Act and 

prospective payments for cost reporting 

periods beginning January 1, 2002 

through September 30, 2002, to payment 

on a full prospective payment system 

basis effective for cost reporting periods 

beginning on or after October 1, 2002 

(66 FR 41316, August 7, 2001; 67 FR 

49982, August 1, 2002; and 68 FR 

45674, August 1, 2003). The existing 

regulations governing payments under 

the IRF PPS are located in 42 CFR Part 

412, Subpart P. 

b. LTCHs 

Under the authority of sections 123(a) 

and (c) of Public Law 106–113 and 

section 307(b)(1) of Public Law 106–

554, LTCHs are being transitioned from 

being paid for inpatient hospital 

services based on a blend of reasonable 

cost-based reimbursement under section 

1886(b) of the Act to fully Federal 

prospective rates during a 5-year period, 

beginning with cost reporting periods 

that start on or after October 1, 2002. For 

cost reporting periods beginning on or 

after October 1, 2006, LTCHs will be 

paid under the fully Federal prospective 

payment rate (the June 6, 2003 LTCH 

PPS final rule (68 FR 34122)). LTCHs 

may elect to be paid based on full PPS 

payments instead of a blended payment 

in any year during the 5-year transition 

period. The existing regulations 

governing payment under the LTCH PPS 

are located in 42 CFR part 412, Subpart 

O. 

c. IPFs 

Sections 124(a) and (c) of Public Law 

106–113 provide for the development of 

a per diem PPS for payment for 

inpatient hospital services furnished in 

IPFs under the Medicare program, 

effective for cost reporting periods 

beginning on or after October 1, 2002. 

This system must include an adequate 

patient classification system that reflects 

the differences in patient resource use 

and costs among these hospitals and 

maintains budget neutrality. We 

published a proposed rule to implement 

the PPS for IPFs on November 28, 2003 

(68 FR 66920). The November 28, 2003 

proposed rule proposed an April 1, 2004 

effective date for purposes of ratesetting 

and calculating impacts. However, the 

proposed rule was unusually complex 

because it proposed a completely new 

payment system for inpatient hospital 

services furnished by psychiatric 

hospitals and units and the public 

requested additional time to comment. 

As a result, we extended the comment 

period for the proposed rule. Thus, we 

are still in the process of analyzing 

public comments and developing a final 

rule for publication. Consequently, an 

April 1, 2004 effective date for the IPF 

PPS is no longer possible.

3. Critical Access Hospitals (CAHs) 

Under sections 1814, 1820, and 

1834(g) of the Act, payments are made 

to critical access hospitals (CAHs) (that 

is, rural hospitals or facilities that meet 

certain statutory requirements) for 

inpatient and outpatient services on a 

reasonable cost basis. Reasonable cost is 

determined under the provisions of 

section 1861(v)(1)(A) of the Act and 

existing regulations under 42 CFR Parts 

413 and 415. 

4. Payments for Graduate Medical 

Education (GME) 

Under section 1886(a)(4) of the Act, 

costs of approved educational activities 

are excluded from the operating costs of 

inpatient hospital services. Hospitals 

with approved graduate medical 

education (GME) programs are paid for 

the direct costs of GME in accordance 

with section 1886(h) of the Act; the 

amount of payment for direct GME costs 

for a cost reporting period is based on 

the hospital’s number of residents in 

that period and the hospital’s costs per 

resident in a base year. The existing 

regulations governing payments to the 

various types of hospitals are located in 

42 CFR part 413. 

On August 1, 2003, we published a 

final rule in the Federal Register (68 FR 

45346) that implemented changes to the 

Medicare hospital inpatient prospective 

payment systems for both operating cost 

and capital-related costs, as well as 

changes addressing payments for 

excluded hospitals and payments for 

GME costs. Generally these changes 

were effective for discharges occurring 

on or after October 1, 2003. On October 

6, 2003, we published a document in 

the Federal Register (68 FR 57731) that 

corrected technical errors made in the 

August 1, 2003 final rule. 

B. Provisions of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 

On December 8, 2003, the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA), 

Public Law 108–173, was enacted. 

Public Law 108–173 made a number of 

changes to the Act relating to 

prospective payments to hospitals for 

inpatient services, payments to 

excluded hospitals and units, and 

payments to CAHs. This proposed rule 

would implement amendments made by 

the following sections of Public Law 

108–173: 

Section 401, which provides that, for 

discharges occurring in a fiscal year 

beginning with FY 2004 under the IPPS, 

Medicare will pay hospitals in rural and 

small urban areas in the 50 States using 

the standardized amount (computed for 

the previous fiscal year) that would be 

used to pay hospitals in large urban 

areas (or beginning with FY 2005, for all 

hospitals in the previous fiscal year), 

increased by the appropriate market 

basket percentage increase. One 

standardized amount for hospitals in 

Puerto Rico would be established that 

would equal the amount for hospitals in 

large urban areas in Puerto Rico. 

Section 402, which provides that for 

discharges occurring on or after April 1, 

2004, the DSH payment adjustment for 

a hospital that is not a large urban or 

large rural hospital will be calculated 

using the current DSH adjustment 

formula for large urban hospitals, 

subject to a limit of 12 percent for any 

of these hospitals that are not rural 

referral centers. (There is no limit on the 

DSH payment percentage for rural 

referral centers.) 

Section 403, which provides that, for 

discharges occurring on or after October 

1, 2004, a hospital’s labor-related share 

to which the wage index is applied will 

be decreased to 62 percent of the 

standardized amount when such a 

change will result in higher total 

payments to the hospital. This provision 

also applies to the labor-related share of 

the standardized amount for hospitals in 

Puerto Rico. 

Section 405(a), which provides that 

inpatient, outpatient, and covered SNF 

services provided by a CAH will be 

reimbursed at 101 percent of reasonable 

costs for services furnished to Medicare 

beneficiaries. This provision is 

applicable to payments for services 

furnished during cost reporting periods 

beginning on or after January 1, 2004. 

Section 405(b), which expands 

coverage of the costs associated with 

covered Medicare services furnished by 

on-call emergency room providers in 

CAHs to include services furnished by 

physician assistants, nurse practitioners, 

and clinical nurse specialists, effective 

for costs incurred for services furnished 

on or after January 1, 2005. 

Section 405(c), which provides that 

eligible CAHs may receive payments for 

their inpatient services on a periodic 

interim payment (PIP) basis, effective 

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with payments made on or after July 1, 

2004. 

Section 405(d), which allows CAHs to 

elect to receive payments under the 

optional payment method (a payment 

encompassing both inpatient CAH 

services and physician and practitioner 

services to outpatients) even if some 

practitioners do not reassign to the CAH 

their rights to bill for professional 

services to CAH outpatients. This 

provision applies to cost reporting 

periods occurring on or after July 1, 

2004, except that in the case of a CAH 

that made an election of the optional 

payment method before November 1, 

2003, the provision applies to cost 

reporting periods beginning on or after 

July 1, 2001. 

Section 405(e), which increases the 

limit on the number of beds that a CAH 

may have for acute care from 15 to 25 

beds. This provision applies to CAH 

designations made before, on, or after 

January 1, 2004. Any election made in 

accordance to the regulations 

promulgated to implement this 

provision will only apply prospectively. 

Section 405(g), which provides that a 

CAH may establish psychiatric and 

rehabilitation distinct part units and 

limits the number of beds in each unit 

to no more than 10. Services in these 

distinct part units will be paid under 

the reasonable cost-based methodology. 

This provision applies to cost reporting 

periods beginning on or after October 1, 

2004. 

Section 405(h), which terminates a 

State’s authority to waive the location 

requirement for a CAH by designating 

the CAH as the necessary provider, 

effective January 1, 2006. A 

grandfathering provision is included for 

CAHs that are certified as necessary 

providers prior to January 1, 2006, 

which allows any CAH that is 

designated as a necessary provider in its 

State’s rural health plan prior to January 

1, 2006, to maintain its necessary 

provider designation. 

Section 406, which provides for a 

graduated adjustment to the inpatient 

prospective payment rates to account for 

the higher costs associated with 

hospitals described under section 

1886(d) of the Act that are located more 

than 25 road miles from another 

subsection (d) hospital and that have 

less than 800 discharges during a fiscal 

year, effective for discharges occurring 

on or after October 1, 2004. The increase 

in these payments may not be greater 

than 25 percent and the determination 

of the percentage payment increase is 

not subject to administrative or judicial 

review. 

Section 410A, which authorizes the 

Secretary to establish a demonstration 

program to test the feasibility and 

advisability of the establishment of rural 

community hospitals to furnish covered 

inpatient hospital services to Medicare 

beneficiaries. The Secretary must select 

up to 15 rural community hospitals to 

participate in the demonstration. The 

Secretary must implement the 

demonstration program not later than 

January 1, 2005, but may not implement 

the program before October 1, 2004. 

Section 422(a), which provides that a 

hospital’s GME FTE resident cap will be 

reduced, and the reduction will be 

redistributed among other hospitals if 

the hospital’s resident count is less than 

its resident cap (rural hospitals with less 

than 250 acute care inpatient beds will 

be exempt) in a particular reference 

period. This provision is effective for 

cost reporting periods occurring on or 

after July 1, 2005. 

Section 422(b), which specifies that 

the formula multiplier for the IME 

adjustment is 0.66 for FTE residents 

attributable to redistributed resident 

positions, effective for discharges 

occurring on or after July 1, 2005. 

Section 501, which provides the 

update factor for payments for the 

hospital inpatient operating costs for FY 

2005 and subsequent fiscal years is the 

market basket percentage increase. For 

FYs 2005 through 2007, the update 

factor will be the market basket 

percentage increase minus 0.4 

percentage points for any ‘‘subsection 

(d) hospital’’ that does not submit 

hospital quality data on 10 measures as 

specified by the Secretary.

Section 502, which modifies the IME 

formula multiplier to be used in the 

calculation of the IME adjustment for 

midway through FY 2004 and provides 

a new schedule of formula multipliers 

for FYs 2005 and thereafter. 

Section 503(a), which includes a 

requirement for updating the ICD–9–CM 

diagnosis and procedure codes in April 

1 of each year, in addition to the current 

process of annual updates on October 1 

of each year. This change will not affect 

Medicare payments or DRG 

classifications until the fiscal year that 

begins after that date. 

Section 503(b), which provides for 

changes to the threshold amount for 

determining eligibility of new 

technologies or medical services for 

add-on payments; provides for public 

input on applications for new 

technology or medical service add-on 

payments prior to the publication of a 

proposed rule; provides for 

reconsideration of applications received 

for FY 2004 that were denied; provides 

for preference in the use of DRG 

adjustments; and provides that new 

technology or medical service payments 

shall not be budget neutral. This 

provision is effective for fiscal years 

beginning in FY 2005. 

Section 504, which increases the 

national portion of the operating PPS 

payment rate for hospitals in Puerto 

Rico from 50 percent of the Federal rate 

to 75 percent of the Federal rate and 

decreases the Puerto Rico portion of the 

operating PPS payment from 50 percent 

to 25 percent, effective for discharges 

occurring on or after October 1, 2004. 

For the period of April 1, 2004 through 

September 30, 2004, payments for 

hospitals in Puerto Rico will be based 

on 62.5 percent Federal rate and 37.5 

percent of the Puerto Rico rate. 

Section 505, which provides for an 

increase in a hospital’s wage index 

value to take into consideration a 

commuter wage adjustment for hospital 

employees who reside in a county and 

work in a different area with a higher 

wage index. 

Section 508, which provides for the 

establishment of a one-time process for 

a hospital to appeal its geographic 

classification for wage index purposes. 

By law, any reclassification resulting 

from this one-time appeal applies for a 

3-year period to discharges occurring on 

or after April 1, 2004. 

Section 711, which freezes the annual 

CPI-U updates to hospital-specific per 

resident amount (PRAs) for GME 

payments for those PRAs that exceed 

the ceiling, effective for cost reporting 

periods beginning FY 2004 through FY 

2013. 

Section 712, which provides for an 

exception to the initial residency period 

for purposes of direct GME payments for 

geriatric residency or fellowship 

programs that allows the 2 years spent 

in an approved geriatric program to be 

counted as part of the resident’s initial 

training period, but not to count against 

any limitation on the initial residency 

period. This provision is effective for 

cost reporting periods beginning on or 

after October 1, 2003. 

Section 713, which, during a 1-year 

moratorium period of January 1, 2004 

through December 31, 2004, allows 

hospitals to count allopathic or 

osteopathic family practice residents 

training in nonhospital settings for IME 

and direct GME purposes, without 

regard to the financial arrangement 

between the hospital and the teaching 

physician practicing in the nonhospital 

setting to which the resident is assigned.

Section 733, which provides for the 

Medicare payment of routine costs, as 

well as costs relating to the 

transplantation and appropriate related 

items and services, for Medicare 

beneficiaries participating in a clinical 

trial involving pancreatic islet cell 

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transplantation, beginning no earlier 

than October 1, 2004. 

Section 926, which requires the 

Secretary to make information publicly 

available that enables hospital discharge 

planners, Medicare beneficiaries, and 

the public to identify skilled nursing 

facilities (SNFs) that are participating in 

the Medicare program, and requires a 

hospital, as part of its discharge 

planning, to evaluate a patient’s need 

for SNF care. 

Section 947, which requires that, by 

July 1, 2004, hospitals not otherwise 

subject to the Occupational Safety and 

Health Act (OSHA) (or a State 

occupational safety and health plan that 

is approved under section 18(b) of that 

Act) must comply with the OSHA 

bloodborne pathogens (BBP) standard as 

part of their Medicare provider 

agreements. 

C. Major Contents of This Proposed Rule 

In this proposed rule, we are setting 

forth proposed changes to the Medicare 

IPPS for operating costs and for capitalrelated costs under the IPPS for FY 

2005. We also are setting forth proposed 

changes relating to payments for GME 

costs, payments to certain hospitals and 

units that continue to be excluded from 

the IPPS and paid on a reasonable cost 

basis, payments for DSH, requirements 

and payments for CAHs, conditions of 

participation for hospitals relating to 

discharge planning and fire safety 

requirements, requirements for 

Medicare provider agreements relating 

to bloodborne pathogen standards, and 

QIO disclosure of information 

requirements. The changes being 

proposed would be effective for 

discharges occurring on or after October 

1, 2004, unless otherwise noted. 

The following is a summary of the 

major changes that we are proposing to 

make: 

1. Proposed Changes to the DRG 

Reclassifications and Recalibrations of 

Relative Weights 

As required by section 1886(d)(4)(C) 

of the Act, we are proposing annual 

adjustments to the DRG classifications 

and relative weights. Based on analyses 

of Medicare claims data, in section II. of 

this preamble, we are proposing to 

establish a number of new DRGs and 

make changes to the designation of 

diagnosis and procedure codes under 

other existing DRGs. Our proposed 

changes for FY 2005 are set forth in 

section II. of this preamble. 

Among the proposed changes 

discussed are: 

• Restructuring and retitling of 

several DRGs to reflect expanded 

coverage of heart assist systems such as 

ventricular assist devices (VAD) or left 

ventricular assist devices (LVAD) as 

destination (or permanent) therapy for 

end-stage heart failure patients who are 

not candidates for heart transplantation: 

DRG 103 (Heart Transplant or Implant 

of Heart Assist System) (proposed title 

change), DRG 104 (Cardiac Valve and 

Other Major Cardiothoracic Procedures 

with Cardiac Catheterization) and DRG 

105 (Cardiac Valve and Other Major 

Cardiothoracic Procedures Without 

Cardiac Catheterization), and DRG 525 

(Other Heart Assist System Implant) 

(proposed title change). 

• Addition of pacemaker device and 

lead procedure code combinations that 

could lead to the assignment of DRG 115 

(Permanent Cardiac Pacemaker Implant 

with Acute Myocardial Infarction, Heart 

Failure, or Shock or ACID Lead or 

Generator Procedures) and DRG 116 

(Other Permanent Cardiac Pacemaker 

Implant). 

• Movement of the procedure code 

for 360 spinal fusion from DRG 496 

(Combined Anterior/Posterior Spinal 

Fusion) to DRG 497 (Spinal Fusion 

Except Cervical With CC) and DRG 498 

(Spinal Fusion Except Cervical Without 

CC). 

• Addition of combination codes, 

which also include heart failure, to the 

list of major problems under DRG 387 

(Prematurity With Major Problems) and 

DRG 389 (Full-Term Neonate With 

Major Problems). 

• Modification of DRGs 504 through 

509 under MDC 22 (Burns) to recognize 

the impact of long-term mechanical 

ventilation on burn cases and renaming 

DRG 504 as proposed title ‘‘Extensive 

Burns or Full Thickness Burns With 

Mechanical Ventilation 96+ Hours With 

Skin Graft’’ and DRG 505 as proposed 

title ‘‘Extensive Burns or Full Thickness 

Burns With Mechanical Ventilation 96+ 

Hours Without Skin Graft.’’

• Deletion of DRG 483 (Tracheostomy 

for Face, Mouth, and Neck Diagnoses) 

and splitting the assignment of cases to 

two proposed new DRGs on the basis of 

the performance of a major operating 

room procedure: proposed new DRGs 

541 and 542 (Tracheostomy With 

Mechanical Ventilation 96+ Hours or 

Principal Diagnosis Except Face, Mouth, 

and Neck Diagnosis With and Without 

Major Operating Room Procedure, 

respectively). 

We also are presenting our 

reevaluation of FY 2004 applicants for 

add-on payments for high-cost new 

medical services and technologies, and 

our analysis of FY 2005 applicants 

(including public input, as directed by 

Public Law 108–173, obtained in a town 

meeting). 

We are proposing the annual update 

of the long-term care diagnosis-related 

group (LTC–DRG) classifications and 

relative weights for use under the LTCH 

PPS for FY 2005. 

2. Proposed Changes to the Hospital 

Wage Index 

In section III. of this preamble, we are 

proposing revisions to the wage index 

and the annual update of the wage data. 

Specific issues addressed in this section 

included the following: 

• The proposed FY 2005 wage index 

update, using wage data from cost 

reporting periods that began during FY 

2001. 

• Proposed revised labor market areas 

as a result of OMB revised definitions of 

geographical statistical areas. 

• A discussion of the collection of 

occupational mix data and the proposed 

occupational mix adjustment to the 

wage index that we are proposing to 

apply beginning October 1, 2004. 

• The proposed revisions to the wage 

index based on hospital redesignations 

and reclassifications, including changes 

that reflect the new OMB standards for 

assignment of hospitals to geographic 

areas. 

• The proposed adjustment to the 

wage index based on commuting 

patterns of hospital employees who 

reside in a county and work in a 

different area with a higher wage index, 

to implement section 505 of Public Law 

108–173.

• A discussion of eligible hospitals 

reclassified under the one-time appeals 

process under section 508 of Public Law 

108–173. 

• Proposed changes to the laborrelated share to which the wage index 

is applied in determining the PPS rate 

for hospitals located in specific 

geographic areas, to implement section 

403 of Public Law 108–173. 

• The revised timetable for reviewing 

and verifying the wage data that is in 

effect for the proposed FY 2005 wage 

index. 

3. Other Decisions and Proposed 

Changes to the PPS for Inpatient 

Operating and GME Costs 

In section IV. of this preamble, we 

discuss a number of provisions of the 

regulations in 42 CFR Parts 412 and 413 

and set forth proposed changes 

concerning the following: 

• Proposed expansion of the current 

postacute care transfer policy. 

• Payments for inpatient care in 

providers that change classification 

status during a patient stay. 

• Proposed changes in the definitions 

of urban and rural areas for geographic 

reclassifications purposes. 

28204 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

• Equalization of the standardized 

amount for urban and rural hospitals. 

• The reporting of hospital quality 

data as a condition for receiving the full 

annual payment update increase. 

• Proposed revision of the regulations 

to reflect the revision of the labor share 

of the wage index. 

• Proposed revision of the regulations 

to reflect the wage index adjustment for 

commuting patterns of hospital 

employees who live in one county and 

commute to work in other areas with 

higher level wages. 

• Proposed changes in the threshold 

amount for eligibility for new medical 

services and technology add-on 

payments. 

• Proposed revision to our policy on 

additional payments to hospitals with 

high percentages of ESRD discharges. 

• Proposed changes to the IME 

adjustment formula multipliers, and the 

formula multiplier applicable to 

redistribution of unused numbers of 

FTE residents slots. 

• Proposed changes in DSH 

adjustment payments to rural and small 

urban hospitals. 

• Proposed payment adjustments for 

low-volume hospitals. 

• Proposed changes in policy 

affecting hospitals that apply as a group 

for reclassification and a discussion of 

possible reclassifications for dominant 

hospitals and hospitals in singlehospital MSAs. 

• Proposed changes in policies 

governing payments for direct GME, 

including the redistribution of unused 

FTE resident slots; changes in the GME 

initial residency period; extension of the 

update limitation on hospital-specific 

per resident amounts; and changes in 

the policies on residents training in 

nonhospital settings, including written 

agreements for teaching physician 

compensation. 

• An announcement of the rural 

community hospital demonstration to 

be established under section 410A of 

Public Law 108–173 and the 

opportunity for eligible hospitals to 

apply for participation in the 

demonstration program. 

• A solicitation of public comments 

on the effect of increases in malpractice 

insurance premiums on hospitals 

participating in the Medicare program 

and beneficiary access of services. 

4. Proposed Changes to the PPS for 

Capital-Related Costs 

In section V. of this preamble, we 

discuss the payment requirements for 

capital-related costs and propose 

changes relating to capital payments to 

hospitals located in Puerto Rico, 

changes in the policies on exception 

payments for extraordinary 

circumstances, treatment of hospitals 

previously reclassified for the operating 

standardized amounts, and capital 

payment adjustments based on the 

proposed changes in geographic 

classifications. 

5. Proposed Changes for Hospitals and 

Hospital Units Excluded From the IPPS 

In section VI. of this preamble, we 

discuss the following proposed 

revisions and clarifications concerning 

excluded hospitals and hospital units 

and CAHs: 

• Proposed changes in the payment 

rate for new excluded hospitals. 

• Proposed changes to the criteria for 

determining payments to hospitalswithin-hospitals. 

• Proposed changes to the policies 

governing payment to CAHs, including 

a change in the payment percentage for 

services furnished by CAHs; changes in 

the rules governing the election by a 

CAH of the optional method of 

payment; expansion of the payment to 

emergency room on-call providers to 

include physician assistants, nurse 

practitioners, and clinical nurse 

specialists; authorization for the making 

of periodic interim payments (PIPs) for 

CAHs for inpatient services furnished; 

revision of the bed count limit for CAHs 

from 15 to 25 acute care beds; proposed 

requirements for establishing 

psychiatric and rehabilitation distinct 

part units in CAHs; and termination of 

the location requirement for a CAH by 

designating the CAH as a necessary 

provider. 

6. Proposed Changes to QIO Disclosure 

of Information Requirements 

In section VII. of this preamble, we 

discuss our proposed clarification of the 

requirements for disclosure by QIOs of 

information on institutions and 

practitioners collected in the course of 

the QIO’s quality improvement 

activities. 

7. Proposed Changes Relating to 

Medicare Provider Agreements, Hospital 

Conditions of Participation, and Fire 

Safety Requirements for Certain Health 

Care Facilities 

In section VIII. of this preamble, we 

are proposing to—

• Require hospitals, as part of the 

discharge planning standard under the 

Medicare hospital conditions of 

participation, to furnish a list of 

Medicare-participating home health 

agencies to patients who receive home 

health services after discharge and to 

provide information on Medicarecertified SNFs to patients who are likely 

to need posthospital extended care 

services. 

• Require that Medicare provider 

agreements include provisions that 

would ensure that all hospital 

employees who may come into contact 

with human blood in the course of their 

duties are provided proper protection 

from bloodborne pathogens.

• Correct a technical error relating to 

the application of the 2000 edition of 

the Life Safety Code as the fire safety 

requirements for certain health care 

facilities; and clarify the effective date 

for the prohibition on the use of roller 

latches in these facilities. 

8. Determining Prospective Payment 

Operating and Capital Rates and Rate-ofIncrease Limits 

In the Addendum to this proposed 

rule, we set forth proposed changes to 

the amounts and factors for determining 

the FY 2005 prospective payment rates 

for operating costs and capital-related 

costs. We also establish the proposed 

threshold amounts for outlier cases. In 

addition, we address proposed update 

factors for determining the rate-ofincrease limits for cost reporting periods 

beginning in FY 2005 for hospitals and 

hospital units excluded from the PPS. 

9. Impact Analysis 

In Appendix A of the proposed rule, 

we set forth an analysis of the impact 

that the proposed changes would have 

on affected hospitals. 

10. Recommendation of Update Factor 

for Hospital Inpatient Operating Costs 

In Appendix B of this proposed rule, 

as required by sections 1886(e)(4) and 

(e)(5) of the Act, we provide our 

recommendations of the appropriate 

percentage changes for FY 2005 for the 

following: 

• A single average standardized 

amount for all areas for hospital 

inpatient services paid under the IPPS 

for operating costs (and hospital-specific 

rates applicable to SCHs and MDHs). 

• Target rate-of-increase limits to the 

allowable operating costs of hospital 

inpatient services furnished by hospitals 

and hospital units excluded from the 

IPPS. 

11. Discussion of Medicare Payment 

Advisory Commission 

Recommendations 

Under section 1805(b) of the Act, the 

Medicare Payment Advisory 

Commission (MedPAC) is required to 

submit a report to Congress, no later 

than March 1 of each year, that reviews 

and makes recommendations on 

Medicare payment policies. MedPAC’s 

March 2004 recommendation 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28205

concerning hospital inpatient payment 

policies addressed only the update 

factor for inpatient hospital operating 

costs and capital-related costs under the 

IPPS and for hospitals and distinct part 

hospital units excluded from the IPPS. 

This recommendation is addressed in 

Appendix B. For further information 

relating specifically to the MedPAC 

March 1 report or to obtain a copy of the 

report, contact MedPAC at (202) 220–

3700 or visit MedPAC’s Web site at: 

www.medpac.gov.

II. Proposed Changes to DRG 

Classifications and Relative Weights 

A. Background 

Section 1886(d) of the Act specifies 

that the Secretary shall establish a 

classification system (referred to as 

DRGs) for inpatient discharges and 

adjust payments under the IPPS based 

on appropriate weighting factors 

assigned to each DRG. Therefore, under 

the IPPS, we pay for inpatient hospital 

services on a rate per discharge basis 

that varies according to the DRG to 

which a beneficiary’s stay is assigned. 

The formula used to calculate payment 

for a specific case multiplies an 

individual hospital’s payment rate per 

case by the weight of the DRG to which 

the case is assigned. Each DRG weight 

represents the average resources 

required to care for cases in that 

particular DRG, relative to the average 

resources used to treat cases in all 

DRGS. 

Congress recognized that it would be 

necessary to recalculate the DRG 

relative weights periodically to account 

for changes in resource consumption. 

Accordingly, section 1886(d)(4)(C) of 

the Act requires that the Secretary 

adjust the DRG classifications and 

relative weights at least annually. These 

adjustments are made to reflect changes 

in treatment patterns, technology, and 

any other factors that may change the 

relative use of hospital resources. The 

proposed changes to the DRG 

classification system and the proposed 

recalibration of the DRG weights for 

discharges occurring on or after October 

1, 2004, are discussed below. 

B. DRG Reclassifications 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘DRG Reclassifications’’ at the 

beginning of your comment.] 

1. General 

Cases are classified into DRGs for 

payment under the IPPS based on the 

principal diagnosis, up to eight 

additional diagnoses, and up to six 

procedures performed during the stay. 

In a small number of DRGs, 

classification is also based on the age, 

sex, and discharge status of the patient. 

The diagnosis and procedure 

information is reported by the hospital 

using codes from the International 

Classification of Diseases, Ninth 

Revision, Clinical Modification (ICD–9–

CM). 

For FY 2004, cases are assigned to one 

of 522 DRGs in 25 major diagnostic 

categories (MDCs). Most MDCs are 

based on a particular organ system of 

the body. For example, MDC 6 is 

Diseases and Disorders of the Digestive 

System. This approach is used because 

clinical care is generally organized in 

accordance with the organ system 

affected. However, some MDCs are not 

constructed on this basis because they 

involve multiple organ systems (for 

example, MDC 22 (Burns)). The table 

below lists the 25 MDCs.

Major diagnostic categories (MDCs). 

1—Diseases and Disorders of the Nervous System. 

2—Diseases and Disorders of the Eye. 

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

4—Diseases and Disorders of the Respiratory System. 

5—Diseases and Disorders of the Circulatory System. 

6—Diseases and Disorders of the Digestive System. 

7—Diseases and Disorders of the Hepatobiliary System and Pancreas. 

8—Diseases and Disorders of the Musculoskeletal System and Connective Tissue. 

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

10—Endocrine, Nutritional and Metabolic Diseases and Disorders. 

11—Diseases and Disorders of the Kidney and Urinary Tract. 

12—Diseases and Disorders of the Male Reproductive System. 

13—Diseases and Disorders of the Female Reproductive System. 

14—Pregnancy, Childbirth, and the Puerperium. 

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

16—Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders. 

17—Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms. 

18—Infectious and Parasitic Diseases (Systemic or Unspecified Sites). 

19—Mental Diseases and Disorders. 

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

21—Injuries, Poisonings, and Toxic Effects of Drugs. 

22—Burns. 

23—Factors Influencing Health Status and Other Contacts with Health Services. 

24—Multiple Significant Trauma. 

25—Human Immunodeficiency Virus Infections 

In general, cases are assigned to an 

MDC based on the patient’s principal 

diagnosis before assignment to a DRG. 

However, for FY 2004, there are eight 

DRGs to which cases are directly 

assigned on the basis of ICD–9–CM 

procedure codes. These DRGs are for 

heart, liver, bone marrow, lung, 

simultaneous pancreas/kidney, and 

pancreas transplants and for 

tracheostomies. Cases are assigned to 

these DRGs before they are classified to 

an MDC. The table below lists the 

current eight pre-MDCs.

Pre-Major Diagnostic Categories (Pre-MDCs) 

DRG 103—Heart Transplant. 

DRG 480—Liver Transplant. 

28206 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

Pre-Major Diagnostic Categories (Pre-MDCs) 

DRG 481—Bone Marrow Transplant. 

DRG 482—Tracheostomy for Face, Mouth, and Neck Diagnoses. 

DRG 483—Tracheostomy with Mechanical Ventiliation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnoses. 

DRG 495—Lung Transplant. 

DRG 512—Simultaneous Pancreas/Kidney Transplant. 

DRG 513—Pancreas Transplant 

Within most MDCs, cases are then 

divided into surgical DRGs and medical 

DRGs. Surgical DRGs are based on a 

hierarchy that orders operating room 

(O.R.) procedures or groups of O.R. 

procedures by resource intensity. 

Medical DRGs generally are 

differentiated on the basis of diagnosis 

and age (less than or greater than 17 

years of age). Some surgical and medical 

DRGs are further differentiated based on 

the presence or absence of a 

complication or a comorbidity (CC). 

Generally, nonsurgical procedures 

and minor surgical procedures that are 

not usually performed in an operating 

room are not treated as O.R. procedures. 

However, there are a few non-O.R. 

procedures that do affect DRG 

assignment for certain principal 

diagnoses, for example, extracorporeal 

shock wave lithotripsy for patients with 

a principal diagnosis of urinary stones.

Patient’s diagnosis, procedure, 

discharge status, and demographic 

information is fed into the Medicare 

claims processing systems and subjected 

to a series of automated screens called 

the Medicare Code Editor (MCE). The 

MCE screens are designed to identify 

cases that require further review before 

classification into a DRG. 

After patient information is screened 

through the MCE and any further 

development of the claim is conducted, 

the cases are classified into the 

appropriate DRG by the Medicare 

GROUPER software program. The 

GROUPER program was developed as a 

means of classifying each case into a 

DRG on the basis of the diagnosis and 

procedure codes and, for a limited 

number of DRGs, demographic 

information (that is, sex, age, and 

discharge status). 

After cases are screened through the 

MCE and assigned to a DRG by the 

GROUPER, a base DRG payment is 

calculated by the PRICER software. The 

PRICER calculates the payments for 

each case covered by the IPPS based on 

the DRG relative weight and additional 

factors associated with each hospital, 

such as IME and DSH adjustments. 

These additional factors increase the 

payment amount to hospitals above the 

base DRG payment. 

The records for all Medicare hospital 

inpatient discharges are maintained in 

the Medicare Provider Analysis and 

Review (MedPAR) file. The data in this 

file are used to evaluate possible DRG 

classification changes and to recalibrate 

the DRG weights. However, in the July 

30, 1999 IPPS final rule (64 FR 41500), 

we discussed a process for considering 

non-MedPAR data in the recalibration 

process. In order for us to consider 

using particular non-MedPAR data, we 

must have sufficient time to evaluate 

and test the data. The time necessary to 

do so depends upon the nature and 

quality of the non-MedPAR data 

submitted. Generally, however, a 

significant sample of the non-MedPAR 

data should be submitted by midOctober for consideration in 

conjunction with the next year’s 

proposed rule. This allows us time to 

test the data and make a preliminary 

assessment as to the feasibility of using 

the data. Subsequently, a complete 

database should be submitted by early 

December for consideration in 

conjunction with the next year’s 

proposed rule. 

Many of the changes to the DRG 

classifications are the result of specific 

issues brought to our attention by 

interested parties. We encourage 

individuals with concerns about DRG 

classifications to bring those concerns to 

our attention in a timely manner so they 

can be carefully considered for possible 

inclusion in the next proposed rule and 

so any proposed changes may be 

subjected to public review and 

comment. Therefore, similar to the 

timetable for interested parties to submit 

non-MedPAR data for consideration in 

the DRG recalibration process, concerns 

about DRG classification issues should 

be brought to our attention no later than 

early December in order to be 

considered and possibly included in the 

next annual proposed rule updating the 

IPPS. 

The changes we are proposing to the 

DRG classification system for the FY 

2005 GROUPER version 22.0 and to the 

methodology used to recalibrate the 

DRG weights are set forth below. Unless 

otherwise noted in this proposed rule, 

our DRG analysis is based on data from 

the December 2003 update of the FY 

2003 MedPAR file, which contains 

hospital bills received through 

December 31, 2003 for discharges in FY 

2003. 

2. MDC 1 (Diseases and Disorders of the 

Nervous System): Intracranial 

Hemorrhage and Stroke With Infarction 

It has come to our attention that the 

title of DRG 14 (Intracranial Hemorrhage 

and Stroke With Infarction) may be 

misleading because it implies that a 

combination of conditions exists when 

the DRG is assigned. When we 

developed this title, we did not intend 

to imply that a combination of 

conditions exists. Therefore, we are 

proposing to change the title of DRG 14 

to read ‘‘Intracranial Hemorrhage or 

Cerebral Infarction’’. 

3. MDC 5 (Diseases and Disorders of the 

Circulatory System) 

a. Heart Assist System Implant 

Circulatory support devices, also 

known as heart assist systems, 

ventricular assist devices (VADs) or left 

ventricular assist devices (LVADs), offer 

a surgical alternative for end-stage heart 

failure patients. This type of device is 

often implanted near a patient’s native 

heart and assumes the pumping 

function of the weakened heart’s left 

ventricle. In many cases, heart 

transplantation would be the treatment 

of choice for this type of patient. 

However, the low number of donor 

hearts limits this treatment option. 

We have reviewed the payment and 

DRG assignment for this type of device 

many times in the past. The reader is 

referred to the August 1, 2002 IPPS final 

rule (67 FR 49989) for a complete listing 

of those discussions. 

In the August 1, 2002 final rule (67 FR 

49990), we attempted to clinically and 

financially align VAD procedures by 

creating new DRG 525 (Heart Assist 

System Implant). We also noted that 

cases in which a heart transplant also 

occurred during the same 

hospitalization episode would continue 

to be assigned to DRG 103 (Heart 

Transplant). At that time, we announced 

that DRG 525 would consist of any 

principal diagnosis in MDC 5, plus one 

of the following surgical procedure 

codes:

• 37.62, Insertion of nonimplantable 

heart assist system 

• 37.63, Repair of heart assist system 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28207

• 37.65, Implant of external heart assist 

system 

• 37.66, Insertion of implantable heart 

assist system

(To avoid confusion, we note that the 

titles of codes 37.62, 37.63, 37.65, and 

37.66 have been revised for FY 2005 

through the ICD–9–CM Coordination 

and Maintenance Committee process as 

reflected in Table 6F, Revised Procedure 

Code Titles in the Addendum to this 

proposed rule.) 

Commenters on the May 19, 2003 

proposed rule that preceded the August 

1, 2003 IPPS (FY 2004) final rule 

notified us that procedure code 37.66 

was neither a clinical nor a financial 

match to the rest of the procedure codes 

now assigned to DRG 525. We did not 

modify DRG 525 for FY 2004. We agreed 

that we would continue to evaluate 

whether to make further changes to DRG 

525. After publication of the August 1, 

2003 final rule, we again reviewed the 

MedPAR data concerning DRG 525, and 

came to the conclusion that procedure 

code 37.62 is different in terms of 

clinical procedures and resource 

utilization from the other procedure 

codes assigned to DRG 525. Therefore, 

in a correction to the August 1, 2003 

IPPS (FY 2004) final rule, published on 

October 6, 2003 (68 FR 57733), we 

revised the composition of DRG 525 by 

correcting the assignment of procedures 

to DRG 525 in light of the lower charges 

associated with procedure code 37.62. 

We moved code 37.62 into DRG 104 

(Cardiac Valve and Other Major 

Cardiothoracic Procedures With Cardiac 

Catheterization) and DRG 105 (Cardiac 

Valve and Other Major Cardiothoracic 

Procedures Without Cardiac 

Catheterization), and left procedure 

codes 37.63, 37.65, and 37.66 in DRG 

525. 

In addition, we have evaluated a 

request for expanded coverage for VADs 

and LVADs as destination (or 

permanent) therapy for end-stage heart 

failure patients who are not candidates 

for heart transplantation. VADs and 

LVADs had been approved for support 

of blood circulation post-cardiotomy 

(effective for services performed on or 

after October 18, 1993) and as a bridge 

to heart transplant (effective for services 

performed on or after January 22, 1996) 

to assist a damaged or weakened heart 

in pumping blood. The criteria that 

must be fulfilled in order for Medicare 

coverage to be provided for these 

purposes have been previously 

discussed in the August 1, 2000 final 

rule (65 FR 47058), and can also be 

accessed online at: www.cms.gov/

manuals/pm_trans/r2ncd1.pdf.

As a result of that review, effective for 

services performed on or after October 

1, 2003, VADs have been approved as 

destination therapy for patients 

requiring permanent mechanical cardiac 

support. Briefly, VADs used for 

destination therapy are covered only if 

they have received approval from the 

FDA for that purpose, and the device is 

used according to the FDA-approved 

labeling instructions. VADs are covered 

for patients who have chronic end-stage 

heart failure (New York Heart 

Association Class IV end-stage left 

ventricular failure for at least 90 days 

with a life expectancy of less than 2 

years). Implanting facilities as well as 

patients must also meet all of the 

additional conditions that are listed in 

the national coverage determination for 

artificial hearts and related devices, 

which is posted on the above CMS Web 

site.

In light of the new indication of 

destination therapy, we again reviewed 

the FY 2003 MedPAR data for all cases 

in which a VAD had been implanted, 

using the criterion of any case 

containing a procedure code of 37.66. 

We found a total of 65 cases in 3 DRGs: 

DRG 103 (Heart Transplant); DRG 483 

(Tracheostomy With Mechanical 

Ventilation 96+ Hours or Principal 

Diagnosis Except Face, Mouth, and 

Neck Diagnoses); and DRG 525 (Heart 

Assist System Implant). The following 

table displays our findings:

DRG with code 37.66 reported Count Average 

length of stay 

Average 

charges 

103 ............................................................................................................................................... 14 77.36 $836,011

483 ............................................................................................................................................... 6 100.50 1,400,706

525 ............................................................................................................................................... 45 38.93 308,725

The remaining 354 cases in DRG 103 

that did not report code 37.66 had 

average charges of $282,578. The 

remaining 171 cases in DRG 525 that 

did not contain code 37.66 had an 

average length of stay of 12.39 days and 

average charges of $168,388. The 45 

cases in DRG 525 with code 37.66 

accounted for 26 percent of the cases. 

However, the average charges for these 

cases are approximately $140,340 higher 

than the average charges for cases in 

DRG 525 that did not report code 37.66. 

Commenters on the FY 2004 final rule 

suggested adding code 37.66 to DRG 

103. We were concerned with the timing 

of that comment, as it was received after 

publication of the proposed rule. We 

noted that the commenter’s suggestions 

on the structure of the DRGs involved 

were significant, and that change of that 

magnitude should be subject to public 

review and comment. We also noted 

that we would evaluate the suggestion 

further. (68 FR 45370) However, as one 

of the indications for this device has 

become destination therapy, and as this 

new indication is more clinically 

aligned with DRG 103, we are proposing 

to remove procedure code 37.66 from 

DRG 525 and assign it to DRG 103. We 

also are proposing to change the title of 

DRG 103 to ‘‘Heart Transplant or 

Implant of Heart Assist System’’. The 

proposed restructured DRG 103 would 

include any principal diagnosis in MDC 

5, plus one of the following surgical 

procedure codes:

• 33.6, Combined heart-lung 

transplantation 

• 37.51, Heart transplantation 

• 37.66, Insertion of implantable heart 

assist system

In addition to the proposed changes to 

DRG 103, we are proposing to change 

the title of DRG 525 to ‘‘Other Heart 

Assist System Implant’’. 

In conjunction with the above data 

review, we also looked at DRGs 104 and 

105. 

DRGs 104 and 105 had been 

restructured in FY 2003 by assigning 

code 37.62 to them. (Note: The code title 

for 37.62 has been revised, effective FY 

2005, as reflected in Table 6F of the 

Addendum to this proposed rule). We 

examined the MedPAR data and found 

that the average charges were $113,667 

and $82,899, respectively, for DRGs 104 

and 105 for cases not reporting code 

37.62, while cases containing code 

37.62 had average charges of $124,559 

and $166,129, respectively. 

The removal of code 37.66 from DRG 

525 would have the effect of clinically 

realigning that DRG to be more 

coherent. As a result of the proposal to 

remove code 37.66 from DRG 525 and 

assign it to DRG 103, we also are 

proposing to remove code 37.62 from 

DRGs 104 and 105 and assign it back 

into DRG 525. In addition, the average 

28208 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

charges for code 37.62 shown above in 

DRGs 104 and 105 ($124,559 and 

$166,129) more closely match the 

average charges reported for the 171 

cases in DRG 525, absent code 37.66 

($168,388). 

The proposed restructured DRG 525 

would include any principal diagnosis 

in MDC 5, plus the following surgical 

procedure codes:

• 37.52, Implantation of total 

replacement heart system* 

• 37.53, Replacement or repair of 

thoracic unit of total replacement 

heart system* 

• 37.54, Replacement or repair of other 

implantable component of total 

replacement heart system* 

• 37.62, Insertion of nonimplantable 

heart assist system 

• 37.63, Repair of heart assist system 

• 37.65, Implant of external heart assist 

system 

*These codes represent noncovered 

services for Medicare beneficiaries. 

However, it is our longstanding practice 

to assign every code in the ICD–9–CM 

classification to a DRG. Therefore, they 

have been assigned to DRG 525. 

b. Cardiac Resychronization Therapy 

and Heart Failure 

We received a request from a 

manufacturer of a Cardiac 

Resynchronization Therapy Defibrillator 

(CRT–D) device for a modification to 

DRG 535 (Cardiac Defibrillator Implant 

With Cardiac Catheterization With 

Acute Myocardial Infarction/Heart 

Failure/Shock) and DRG 536 (Cardiac 

Defibrillator Implant With Cardiac 

Catheterization Without Acute 

Myocardial Infarction/Heart Failure/

Shock). The commenter pointed out that 

defibrillator device implantations, 

including the CRT–D type of 

defibrillator, are assigned to DRG 535 

when the patient also has a cardiac 

catheterization and has either an acute 

myocardial infarction, heart failure, or 

shock as a principal diagnosis. If the 

patient receiving the defibrillator 

implant and cardiac catheterization 

does not have a principal diagnosis of 

acute myocardial infarction, heart 

failure, or shock, the cases are assigned 

to DRG 536. 

The commenter requested that cases 

be assigned to DRG 535 when the 

patient has heart failure as either a 

principal diagnosis or a secondary 

diagnosis. The commenter stated that 

patients receive a CRT–D (as opposed to 

other types of defibrillators) when they 

have both heart failure and arrhythmia. 

The commenter was concerned that 

some coders may sequence the heart 

failure as a secondary diagnosis, which 

would result in the patient being 

assigned to DRG 536. 

As stated earlier, DRGs 535 and 536 

are split based on the principal 

diagnosis of acute myocardial 

infarction, heart failure, or shock. Cases 

are not assigned to DRG 535 when heart 

failure is a secondary diagnosis. 

The commenter described a scenario 

where a patient was admitted with heart 

failure for an evaluation of the need for 

a CRT–D implantation. The 

hospitalization studies indicated that 

the patient had a ventricular 

tachycardia. The commenter indicated 

that coders would be confused as to 

which code should be listed as the 

principal diagnosis. 

CMS’ review of this scenario as 

described would be that the heart failure 

led to the admission and would be the 

principal diagnosis. This case would 

properly be assigned to DRG 535. 

Furthermore, when two conditions are 

considered to be equally responsible for 

the admission, either one of the two 

conditions may be selected as the 

principal diagnosis. 

The commenter also stated that its 

own study shows CRT–D patients have 

significantly higher charges than do 

other patients in DRGs 535 and 536 who 

receive an implantable defibrillator. 

This was the case whether heart failure 

was used as a principal or secondary 

diagnosis. 

A cardiac catheterization is a 

diagnostic procedure generally 

performed to establish the nature of the 

patient’s cardiac problem and determine 

if implantation of a cardiac defibrillator 

is appropriate. Generally, the cardiac 

catheterization can be done on an 

outpatient basis. Patients who are 

admitted with acute myocardial 

infarction, heart failure, or shock and 

have a cardiac catheterization are 

generally acute patients who require 

emergency implantation of the 

defibrillator. Thus, there are very high 

costs associated with these patients. 

We examined the MedPAR file for all 

cases in DRGs 535 and 536 and only 

cases in DRG 536 in which acute 

myocardial infarction or heart failure 

was listed as a secondary diagnosis. The 

following chart illustrates the results of 

our findings:

DRGs Count Average length of 

stay 

Average

charges 

535 ............................................................................................................................. 6,801 9.50 $110,663.57 

536—All cases ........................................................................................................... 17,454 5.47 89,493.85 

536—Cases With Secondary Diagnosis of Cardiac Defibrillator Implant With Cardiac Catheterization Without Acute Myocardial Infarction/Heart Failure/Shock .... 8,562 6.5 94,832.14 

The data show that cases with a 

secondary diagnosis of acute myocardial 

infarction or heart failure have average 

charges ($94,832.14) closer to the 

overall average charges for DRG 536 

($89,493.85) where they are currently 

assigned. Overall charges for DRG 535 

were $110,663.57. We do not believe 

these data support modifying DRG 535 

and DRG 536 as requested. Many of the 

CRT–D patients who are admitted for 

heart failure would be assigned into 

DRG 535. Furthermore, modifying the 

DRG logic for one specific type of 

defibrillator (CRT–D) is not consistent 

with our overall policy of grouping 

similar types of patients together in the 

same DRG. In addition, to modify the 

DRG logic for the small percentage of 

cases where there might be confusion 

concerning the selection of the principal 

diagnosis does not seem prudent. 

Therefore, we are not proposing a 

modification to DRG 535 or 536 for 

CRT–Ds. 

c. Combination Cardiac Pacemaker 

Devices and Lead Codes 

We received a comment that 

recommended that we include 

additional combination procedure codes 

representing cardiac pacemaker device 

and lead codes under DRG 115 

(Permanent Cardiac Pacemaker Implant 

With Acute Myocardial Infarction, Heart 

Failure, or Shock or ACID Lead or 

Generator Procedures) and DRG 116 

(Other Permanent Cardiac Pacemaker 

Implant). DRGs 115 and 116 are 

assigned when a complete pacemaker 

unit with leads is implanted. 

Combinations of pacemaker devices and 

lead codes that would lead to the DRG 

assignment are listed under DRGs 115 

and 116. The commenter recommended 

that the following pacemaker device and 

lead procedure code combinations be 

added to these two DRGs:

• 00.53 & 37.70

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28209

• 00.53 & 37.71

• 00.53 & 37.72

• 00.53 & 37.73

• 00.53 & 37.74

• 00.53 & 37.76

These codes are defined as follows:

• 00.53, Implantation or replacement of 

cardiac resynchronization pacemaker, 

pulse generator only [CRT–P] 

• 37.70, Initial insertion of pacemaker 

lead [electrode], not otherwise 

specified 

• 37.71, Initial insertion of transvenous 

lead [electrode] into ventricle 

• 37.72, Initial insertion of transvenous 

lead [electrode] into atrium and 

ventricle 

• 37.73, Initial insertion of transvenous 

lead [electrode] into atrium 

• 37.74, Initial insertion or replacement 

of epicardial lead [electrode] into 

epicadium 

• 37.76, Replacement of transvenous 

atrial and/or ventricular lead(s) 

[electrode] 

We have consulted our medical 

advisors and they agree that these 

recommended procedure code 

combinations also describe pacemaker 

device and lead implantations and 

should be included under DRGs 115 and 

116. Therefore, we are proposing to add 

the recommended procedure code 

combinations to the list of procedure 

code combinations under DRGs 115 and 

116. 

4. MDC 6 (Diseases and Disorders of the 

Digestive System): Artificial Anal 

Sphincter 

In the FY 2003 IPPS final rule (67 FR 

50242), we created two new codes for 

procedures involving an artificial anal 

sphincter, effective for discharges 

occurring on or after October 1, 2002: 

code 49.75 (Implantation or revision of 

artificial anal sphincter) that is used to 

identify cases involving implantation or 

revision of an artificial anal sphincter 

and code 49.76 (Removal of artificial 

anal sphincter) that is used to identify 

cases involving the removal of the 

device. In Table 6B of that final rule, we 

assigned both codes to one of four 

MDCs, based on principal diagnosis, 

and one of six DRGs within those MDCs. 

In the August 1, 2003 IPPS final rule (68 

FR 45372), we discussed the assignment 

of these codes in response to a request 

we had received to consider 

reassignment of these two codes to 

different MDCs and DRGs. The requester 

believed that the average charges 

($44,000) for these codes warranted 

reassignment. In the August 1, 2003 

IPPS final rule, we stated that we did 

not have sufficient MedPAR data 

available on the reporting of codes 49.75 

and 49.76 to make a determination on 

DRG reassignment of these codes. We 

agreed that, if warranted, we would give 

further consideration to the DRG 

assignments of these codes because it is 

our customary practice to review DRG 

assignment(s) for newly created codes to 

determine clinical coherence and 

similar resource consumption after we 

have had the opportunity to collect 

MedPAR data on utilization, average 

length of stay charges, and distribution 

throughout the system. 

Therefore, we reviewed the FY 2003 

MedPAR data for the presence of codes 

49.75 and 49.76. We then arrayed the 

results by DRG, count, average length of 

stay, charges, and the presence or 

absence of a secondary diagnosis that 

could be classified as a CC. We found 

that there were a total of 13 cases in 5 

total DRGs with CCs, and 9 cases in 4 

total DRGs without CCs, for a total of 22 

cases that reported these procedure 

codes. We had anticipated that the 

majority of cases would have been 

found in DRGs 157 (Anal and Stomal 

Procedures With CC) and 158 (Anal and 

Stomal Procedures Without CC), but 

found only 2 cases grouped to DRG 157 

and 4 cases grouped to DRG 158. Our 

data showed average charges of $22,374 

for the cases with CC, and average 

charges of $20,831 for the cases without 

CC. Average charges for DRG 157 were 

$18,196, while average charges for DRG 

158 were $9,348. 

Our medical advisors also reviewed 

the contents of DRGs 157 and 158. The 

consensus was that codes 49.75 and 

49.76 are not a clinical match to the 

other procedure codes found in these 

two DRGs. The other procedure codes in 

DRGs 157 and 158 are for simpler and 

less invasive procedures. In some 

circumstances, these procedures could 

potentially be performed in an 

outpatient setting or in a physician’s 

office. Our medical advisors determined 

that clinical coherence was not 

demonstrated and recommended that 

we move these codes to DRGs 146 

(Rectal Resection With CC) and 147 

(Rectal Resection Without CC), as these 

anal sphincter procedures more closely 

resemble the procedures in these DRGs. 

In addition, the average charges for 

paired DRG 146 ($33,853) and DRG 147 

($21,747) more closely resemble the 

actual average charges found in the 

MedPAR data for these cases. 

Even though there are few reports of 

codes 49.75 and 49.76 in the MedPAR 

data and we do not anticipate a 

significant increase in utilization of 

these procedures, we are proposing that 

these two codes would only be removed 

from paired DRG 157 and 158 and 

reassigned to paired DRG 146 and 147 

under MDC 6 (Diseases and Disorders of 

the Digestive System). All other MDC 

and DRG assignments for codes 49.75 

and 49.76 would remain the same. 

5. MDC 8 (Diseases and Disorders of the 

Musculoskeletal System and Connective 

Tissue) 

a. 360 Spinal Fusions 

We received a comment that 

suggested procedure code 81.61 (360 

Spinal fusion) should not be included in 

DRG 496 (Combined Anterior/Posterior 

Spinal Fusion). The commenter stated 

that code 81.61 does not represent the 

same types of cases as other codes 

included in DRG 496. The commenter 

indicated that cases reported with code 

81.61 involve making only one incision, 

and then fusing both the anterior and 

posterior portion of the spine. All other 

cases in DRG 496 involve two separate 

surgical approaches used to reach the 

site of the spinal fusion. For these other 

patients, an incision is made into the 

patient, and a fusion is made in part of 

the spine. The patient is then turned 

over and a separate incision is made so 

that a fusion can be made in another 

part of the spine. The commenter added 

that these two separate incisions and 

fusions are more time consuming than 

the single incision used for code 81.61. 

The commenter also stated that patients 

receiving the two surgical approaches 

have a longer recovery period and use 

more hospital resources. 

We examined data in the MedPAR file 

for cases assigned to DRG 496 and found 

the following:

DRG Count Average 

length of stay 

Average 

charges 

496—All Cases ............................................................................................................................ 2,706 8.0 $74,967.33

496—Cases with code 81.61 ...................................................................................................... 829 4.7 50,659.69

496—Cases with code 81.61 with CC ........................................................................................ 451 5.4 55,639.50

496—Cases with code 81.61 without CC ................................................................................... 378 3.8 44,718.16

496—Cases without 81.61 .......................................................................................................... 1877 9.4 85,703.09

28210 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

We also examined cases in related 

DRG 497 (Spinal Fusion Except Cervical 

With CC) and DRG 498 (Spinal Fusion 

Except Cervical Without CC) in which 

code 81.61 was not reported. The chart 

below reflects our findings.

DRG Count Average 

length of stay 

Average 

charges 

497 ............................................................................................................................................... 16,965 6.19 $49,315.27

498 ............................................................................................................................................... 11,598 3.95 37,450.68

These data clearly show that cases 

with code 81.61 have significantly less 

average charges than other cases in DRG 

496 that have two surgical approaches. 

Cases with code 81.61 are more closely 

aligned with cases in DRG 497 and DRG 

498. Furthermore, including code 81.61 

will have the effect of lowering the 

relative weights for DRG 496 in future 

years. Therefore, we are proposing to 

remove code 81.61 from DRG 496 and 

reassign it to DRGs 497 and 498. 

b. Multiple Level Spinal Fusion 

On October 1, 2003 (68 FR 45596), the 

following new ICD–9–CM procedure 

codes were created to identify the 

number of levels of vertebra fused 

during a spinal fusion procedure:

• 81.62, Fusion or refusion of 2–3 

vertebrae 

• 81.63, Fusion or refusion of 4–8 

vertebrae 

• 81.64, Fusion or refusion of 9 or more 

vertebrae

Prior to the creation of these new 

codes, we received a comment 

recommending the establishment of new 

DRGs that would differentiate between 

the number of levels of vertebrae 

involved in a spinal fusion procedure. 

In the August 1, 2003 final rule, we 

discussed the creation of these new 

codes and the lack of sufficient MedPAR 

data with the new multiple level spinal 

fusion codes (68 FR 45369). The 

commenter had conducted an analysis 

and submitted data to support 

redefining the spinal fusion DRGs. The 

analysis found that increasing the levels 

fused from 1 to 2 levels to 3 levels or 

more levels increased the mean 

standardized charges by 38 percent for 

lumbar/thoracic fusions, and by 47 

percent for cervical fusions. 

The following current spinal fusion 

DRGs separate cases based on whether 

or not a CC is present: DRG 497 (Spinal 

Fusion Except Cervical With CC) and 

DRG 498 (Spinal Fusion Except Cervical 

Without CC); DRG 519 (Cervical Spinal 

Fusion With CC) and DRG 520 (Cervical 

Spinal Fusion Without CC). However, 

the difference in charges associated with 

the current CC split was only slightly 

greater than the difference attributable 

to the number of levels fused as found 

by the commenter’s analysis. In 

addition, adopting the commenter’s 

recommendation would have 

necessitated adjusting the DRG relative 

weights using non-MedPAR data 

because Medicare claims data with the 

new ICD–9–CM codes would not have 

been available until the FY 2003 

MedPAR file. Therefore, at that time, we 

did not redefine the spinal fusion DRGs 

to differentiate on the basis of the 

number of levels of vertebrae involved 

in a spinal fusion procedure. 

We did not yet have any reported 

cases utilizing the new multilevel spinal 

fusion codes in our data. We stated that 

we would wait until sufficient data with 

the new multilevel spinal fusion codes 

were available before making a final 

determination on whether multilevel 

spinal fusions should be incorporated 

into the spinal fusion DRG structure. 

The codes went into effect on October 

1, 2003 and we have not received any 

data using these codes. Spinal surgery is 

an area of rapid changes. In addition, we 

have created a series of new procedure 

codes that describe a new type of spinal 

surgery, spinal disc replacement. (See 

codes 84.60 through 84.69 in Table 6B 

in the Addendum to this proposed rule 

that will go into effect on October 1, 

2004.) Our medical advisors describe 

this new surgical procedure as a more 

conservative approach for back pain 

than the spinal fusion surgical 

procedure. With only limited data 

concerning multiple level spinal fusion 

and the rapid changes in spinal surgery, 

we believe it is more prudent not to 

propose the establishment of new DRGs 

based on the number of levels of 

vertebrae involved in a spinal fusion 

procedure at this time. 

In addition, no other surgical DRG is 

split based on the number of procedures 

performed. For instance, the same DRG 

is assigned whether one or more 

angioplasties are performed on a 

patient’s arteries. The insertion of 

multiple stents within an artery does 

not result in a different DRG 

assignment. Similarly, the excision of 

neoplasms from multiple sites does not 

lead to a different DRG assignment. To 

begin splitting DRGs based on the 

number of procedures performed or 

devices inserted could set a new and 

significant precedent for DRG policy. 

Therefore, while we will continue to 

study this area, we are not proposing to 

redefine the spinal fusion DRGs based 

on the number of levels of vertebrae 

fused at this time. 

6. MDC 15 (Newborns and Other 

Neonates With Conditions Originating 

in the Perinatal Period) 

We continue to receive comments that 

MDC 15 (Newborn and Other Neonates 

With Conditions Originating in the 

Perinatal Period) does not adequately 

capture care provided for newborns and 

neonates by hospitals. The commenters 

point out that we have not updated the 

DRGs within MDC 15 as we have for 

other parts of the DRG system. 

Our primary focus of updates to the 

Medicare DRG classification system is 

on changes relating to the Medicare 

patient population, not the pediatric or 

neonatal patient populations. However, 

we acknowledge the Medicare DRGs are 

sometimes used to classify other patient 

populations. Over the years, we have 

received comments about aspects of the 

Medicare newborn DRGs that appear 

problematic, and we have responded to 

these on an individual basis. In the May 

9, 2002 IPPS proposed rule (67 FR 

31413), we proposed extensive changes 

to multiple DRGs within MDC 15. 

Because of our limited data and 

experience with newborn cases under 

Medicare, we contacted the National 

Association of Children’s Hospitals and 

Related Institutions (NACHRI) to obtain 

proposals for possible revisions of the 

DRG categories within MDC 15. We 

received extensive comments opposing 

these revisions. Therefore, we did not 

implement the proposals.

We advise those non-Medicare 

systems that need a more up-to-date 

system to choose from other systems 

that are currently in use in this country, 

or to develop their own modifications. 

As previously stated, we do not have the 

data or the expertise to develop more 

extensive newborn and pediatric DRGs. 

Our mission in maintaining the 

Medicare DRGs is to serve the Medicare 

population. Therefore, we will make 

only minor corrections of obvious errors 

to the DRGs within MDC 15. At this 

time, we do not plan to conduct a more 

extensive analysis involving major 

revisions to these DRGs. 

In the IPPS final rule for FY 2004 (68 

FR 45360), we added heart failure 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28211

diagnosis codes 428.20 through 428.43 

to the list of secondary diagnosis of 

major problem under DRG 387 

(Prematurity With Major Problems) and 

DRG 389 (Full-Term Neonate With 

Major Problems). We received a 

comment after the August 1, 2003 final 

rule stating that we should add the 

following list of combination codes, 

which also include heart failure, to the 

list of major problems under DRGs 387 

and 389:

• 398.91, Rheumatic heart failure 

(congestive) 

• 402.01, Malignant hypertensive heart 

disease, with heart failure 

• 402.11, Benign hypertensive heart 

disease, with heart failure 

• 402.91, Unspecified hypertensive 

heart disease, with heart failure 

• 404.01, Malignant hypertensive heart 

and renal disease, with heart failure 

• 404.03, Malignant hypertensive heart 

and renal disease, with heart failure 

and renal failure 

• 404.11, Benign hypertensive heart and 

renal disease, with heart failure 

• 404.13, Benign hypertensive heart and 

renal disease, with heart failure and 

renal failure 

• 404.91, Unspecified hypertensive 

heart and renal disease, with heart 

failure 

• 404.93, Unspecified hypertensive 

heart and renal disease, with heart 

failure and renal failure. 

• 428.9, Heart failure, unspecified 

We agree that the codes listed above 

also include heart failure and should 

also be added to DRGs 387 and 389 as 

major problems. Therefore, we are 

proposing to add the heart failure codes 

listed above to DRGs 387 and 389 as 

major problems. 

7. MDC 20 (Alcohol/Drug Use and 

Alcohol/Drug Induced Organic Mental 

Disorders): Drug-Induced Dementia 

We received a request from a 

commenter that we remove the 

principal diagnosis code 292.82 (Druginduced dementia) from MDC 20 

(Alcohol/Drug Use and Alcohol/Drug 

Induced Organic Mental Disorders) and 

the following DRGs under MDC 20:

• DRG 521 (Alcohol/Drug Abuse or 

Dependence With CC) 

• DRG 522 (Alcohol/Drug Abuse or 

Dependence With Rehabilitation 

Therapy Without CC) 

• DRG 523 (Alcohol/Drug Abuse or 

Dependence Without Rehabilitation 

Therapy Without CC) 

The commenter indicated that a 

patient who has a drug-induced 

dementia should not be classified to an 

alcohol/drug DRG. However, the 

commenter did not propose a new DRG 

assignment for code 292.82. 

Our medical advisors have evaluated 

the request and determined that the 

most appropriate DRG classification for 

a patient with drug-induced dementia 

would be within MDC 20. The medical 

advisors indicated that because this 

mental condition is drug induced, it is 

appropriately classified to DRGs 521 

through 523 in MDC 20. Therefore, we 

are not proposing a new DRG 

classification for the principal diagnosis 

code 292.82. 

8. MDC 22 (Burns): Burn Patients on 

Mechanical Ventilation 

We have received concerns raised by 

hospitals treating burn patients that the 

current DRG payment for burn patients 

on mechanical ventilation is not 

adequate. The DRG assignment for these 

cases depends on whether the hospital 

performed the tracheostomy or the 

tracheostomy was performed prior to 

transfer to the hospital. If the hospital 

does not actually perform the 

tracheostomy, the case is assigned to 

one of the burn DRGs in MDC 22 

(Burns). If the hospital performs a 

tracheostomy, the case is assigned to 

Pre-MDC DRG 482 (Tracheostomy for 

Face, Mouth, and Neck Diagnoses) or 

DRG 483 (Tracheostomy With 

Mechanical Ventilation 96+ Hours or 

Principal Diagnosis Except Face, Mouth 

and Neck Diagnoses). 

In the August 1, 2002 final rule, we 

modified DRGs 482 and 483 to 

recognize code 96.72 (Continuous 

mechanical ventilation for 96+ hours) 

for the first time in the DRG assignment 

(67 FR 49996). The modification was 

partially in response to concerns that 

hospitals could omit diagnosis codes 

indicating face, mouth, or neck 

diagnoses in order to have cases 

assigned to DRG 483 rather than the 

much lower paying DRG 482 (the 

payment for DRG 483 is more than four 

times greater than the DRG 482 payment 

weight). In addition, we noted that 

many patients assigned to DRG 483 did 

not have code 96.72 recorded. We 

believed this was due, in part, to the 

limited number of procedure codes (six) 

that can be submitted on the current 

billing form and the fact that code 96.72 

did not affect the DRG assignment prior 

to FY 2003. The modification was the 

first attempt to refine DRGs 482 and 483 

so that patients who receive long-term 

mechanical ventilation for more than 96 

hours are differentiated from those who 

receive mechanical ventilation for less 

than 96 hours. The modification was 

intended to ensure that patients who 

have a tracheostomy and continuous 

mechanical ventilation greater than 96 

hours (code 96.72) would be assigned to 

DRG 483. By making the GROUPER 

recognize long-term mechanical 

ventilation and assigning those patients 

to the higher weighted DRG 483, we 

encouraged hospitals to be more aware 

of the importance of reporting code 

96.72 and to increase reporting of code 

96.72 when, in fact, patients had been 

on the mechanical ventilator for greater 

than 96 hours. We stated in the August 

1, 2002 final rule that, once we received 

more accurate data, we would give 

consideration to further modifying 

DRGs 482 and 483 based on the 

presence of code 96.72. 

To assess the DRG payments for burn 

patients on mechanical ventilation, we 

analyzed FY 2003 MedPAR data for 

burn cases in the following DRGs to 

determine the frequency for which these 

burn cases were treated with continuous 

mechanical ventilation for 96 or more 

consecutive hours (code 96.72):

• DRG 483 (Tracheostomy With 

Mechanical Ventilation 96+ Hours or 

Principal Diagnosis Except Face, 

Mouth, and Neck Diagnoses) 

• DRG 504 (Extensive 3rd Degree Burns 

With Skin Graft) 

• DRG 505 (Extensive 3rd Degree Burns 

Without Skin Graft) 

• DRG 506 (Full Thickness Burn With 

Skin Graft or Inhalation Injury With 

CC or Significant Trauma) 

• DRG 507 (Full Thickness Burn With 

Skin Graft or Inhalation Injury 

Without CC or Significant Trauma) 

• DRG 508 (Full Thickness Burn 

Without Skin Graft or Inhalation 

Injury With CC or Significant Trauma) 

• DRG 509 (Full Thickness Burn 

Without Skin Graft or Inhalation 

Injury Without CC or Significant 

Trauma) 

• DRG 510 (Nonextensive Burns With 

CC or Significant Trauma) 

• DRG 511 (Nonextensive Burns 

Without CC or Significant Trauma)

The following chart summarizes those 

findings:

DRG Count Average 

length of stay 

Average 

charges 

483—All cases ............................................................................................................................. 31,754 37.68 $210,631.94 

483—Cases with code 96.72 reported ........................................................................................ 19,669 36.54 195,171.66 

28212 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

DRG Count Average 

length of stay 

Average 

charges 

483—Cases without code 96.72 reported ................................................................................... 12,085 39.52 235,794.39 

504—All cases ............................................................................................................................. 98 30.54 191,645.49 

504—Cases with code 97.62 reported ........................................................................................ 19 25.79 264,095.16 

504—Cases without code 96.72 reported ................................................................................... 79 31.68 174,220.89 

505—All cases ............................................................................................................................. 119 2.96 18,619.78 

505—Cases with code 96.72 reported ........................................................................................ 20 7.70 42,613.00 

505—Cases without code 96.72 reported ................................................................................... 99 2.00 13,772.67 

506—All cases ............................................................................................................................. 754 16.15 61,370.63 

506—Cases with code 96.72 reported ........................................................................................ 54 20.13 138,272.46 

506—Cases without code 96.72 reported ................................................................................... 700 15.85 55,438.20 

507—All cases ............................................................................................................................. 236 8.78 25,891.89 

507—Cases with code 96.72 reported ........................................................................................ 1 38.00 137,132.00 

507—Cases without code 96.72 reported ................................................................................... 235 8.66 25,418.53 

508—All cases ............................................................................................................................. 448 7.02 18,332.46 

508—Cases with code 96.72 reported ........................................................................................ 5 10.40 83,171.80 

508—Cases without code 96.72 reported ................................................................................... 443 6.98 17,600.64 

509—All cases ............................................................................................................................. 117 4.32 8,994.71 

509—Cases with code 96.72 reported ........................................................................................ 0 0 0 

509—Cases without code 96.72 reported ................................................................................... 117 4.32 8,994.71 

510—All cases ............................................................................................................................. 1,209 6.90 18,457.21 

510—Cases with code 96.72 reported ........................................................................................ 21 20.52 93,925.62 

510—Cases without code 96.72 reported ................................................................................... 1,188 6.66 17,123.18 

511—All cases ............................................................................................................................. 413 4.18 10,046.89 

511—Cases with code 96.72 reported ........................................................................................ 0 0 0 

511—Cases without code 96.72 reported ................................................................................... 413 4.18 10,046.89 

We found 120 cases that reported 

code 96.72 within the 3,394 burn DRG 

cases (DRGs 504 through 511). Cases 

reporting code 96.72 have significantly 

longer average lengths of stay and 

average charges. The majority (54) of 

these cases that reported code 96.72 

were in DRG 506. The cases with code 

96.72 reported had average charges 

approximately 1.5 times higher than 

other cases in DRG 506 without code 

96.72. 

We noted that there were 21 cases that 

reported code 96.72 within DRG 510. 

Since the 21 patients were on 

continuous mechanical ventilation for 

96 consecutive hours or more, it seems 

surprising that the principal diagnosis 

was listed as one of the nonextensive 

burn codes included in DRG 510. A 

closer review of these cases shows some 

questionable coding and reporting of 

information. It would appear that 

hospitals did not always correctly select 

the principal diagnosis (the reason after 

study that led to the hospital 

admission). For instance, one admission 

was for a second-degree burn of the ear. 

This patient was on a ventilator for over 

96 hours. It would appear that the 

reason for the admission was a 

diagnosis other than the burn of the ear. 

Other cases where the patient received 

long-term mechanical ventilation 

included those with a principal 

diagnosis of first degree burn of the face, 

second degree burn of the nose, second 

degree burn of the lip, and an 

unspecified burn of the foot. These four 

cases reported average charges ranging 

from $48,551 to $186,824 and had 

lengths of stay ranging from 8 to 36 

days. 

The impact of long-term mechanical 

ventilation is quite clear on burn cases 

as was shown by the data above. 

Therefore, we are proposing to modify 

the burn DRGs 504 through 509 under 

MDC 22 to recognize this impact. We 

are proposing to modify DRG 504 and 

DRG 505 so that code 96.72 will be 

assigned to these DRGs when there is a 

principal diagnosis of extensive third 

degree burns or full thickness burns 

(those cases currently assigned to DRGs 

504 through 509). In other words, when 

cases currently in DRGs 506 through 

509 also have code 96.72 reported, they 

would now be assigned to DRGs 504 or 

505. We are proposing to modify the 

titles of DRGs 504 and 505 to reflect the 

proposed changes in reporting code 

96.72 as follows:

• Proposed DRG 504 (Extensive Burns 

or Full Thickness Burns With 

Mechanical Ventilation 96+ Hours 

With Skin Graft) 

• Proposed DRG 505 (Extensive Burns 

or Full Thickness Burns With 

Mechanical Ventilation 96+ Hours 

Without Skin Graft)

Cases currently assigned to DRGs 504 

and 505 that do not entail 96+ hours of 

mechanical ventilation will continue to 

be assigned to DRGs 504 and 505 

because they would have extensive 

burns, as required by the DRG logic. 

We are not proposing to include DRG 

510 and DRG 511 within this revised 

DRG logic. Cases currently assigned to 

DRG 510 or DRG 511 that also report 

code 96.72 would not be reassigned to 

DRGs 504 and 505. We recommend that 

hospitals examine cases that are 

assigned to DRG 510 or DRG 511 and 

that have code 96.72 to determine if 

there are possible coding problems or 

other issues. As stated earlier, in 

examining reported cases within DRG 

510, we noted several cases with code 

96.72 that appear to have an incorrect 

principal diagnosis. It would appear 

that the principal diagnosis may more 

appropriately be related to an inhalation 

injury, if the injury was present at the 

time of admission. 

We are specifically seeking comments 

on our proposal to move cases reporting 

code 96.72 from DRGs 506 through 509 

and assign them to DRGs 504 and 505. 

We also are seeking comments on our 

proposal not to include DRGs 510 and 

511 in this proposed revision. 

9. Pre-MDC: Tracheostomy 

In the August 1, 2002 IPPS final rule 

(67 FR 49996), for FY 2003, we modified 

DRG 482 (Tracheostomy for Face, 

Mouth, and Neck Diagnoses) and DRG 

483 (Tracheostomy With Mechanical 

Ventilation 96+ Hours or Principal 

Diagnosis Except Face, Mouth, and 

Neck Diagnoses) to recognize procedure 

code 96.72 (Continuous mechanical 

ventilation 96+ hours) in the DRG 483 

assignment. As discussed earlier, we 

were concerned about an 

underreporting of code 96.72 and 

wanted to encourage increased reporting 

of this code.

We examined cases in the MedPAR 

file in which code 96.72 was reported 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28213

within DRGs 482 and 483. The 

following chart illustrates the average 

charges and lengths of stays for cases 

within DRGs 482 and 483 with and 

without code 96.72 reported:

DRG Count Average 

length of stay 

Average 

charges 

482—All cases ............................................................................................................................. 3,557 11.77 $45,419.10 

482—Cases with code 96.72 ...................................................................................................... 22 31.64 137,880.41 

482—Cases without code 96.72 ................................................................................................. 3,535 11.64 44,843.67 

483—All cases ............................................................................................................................. 31,754 37.68 210,631.94 

483—Cases with code 96.72 ...................................................................................................... 19,669 36.54 195,171.66 

483—Cases without code 96.72 ................................................................................................. 12,085 39.52 235,794.39 

Of the 3,557 cases reported in DRG 

482, only 22 cases reported code 96.72. 

These 22 cases did not have a 

tracheostomy performed. All 22 cases 

reported code 30.4 (Laryngectomy), 

which also leads to an assignment of 

DRG 482. It would appear that the longterm mechanical ventilation was 

performed through an endotracheal tube 

instead of through a tracheostomy. 

While the average charges for DRG 482 

cases with code 96.72 reported were 

significantly higher than the average 

charges for other cases in the DRG, we 

do not believe that the very limited 

number of cases (22) warrants proposing 

a DRG modification. Therefore, we are 

not proposing any modification for DRG 

482 at this time. We will continue to 

monitor cases assigned to this DRG. 

In DRG 483, 19,669 cases were 

reported with code 96.72. However, the 

data were counter-intuitive. While one 

would expect to find higher average 

charges for cases reported with code 

96.72, the opposite is the case. Cases in 

DRG 483 reported with code 96.72 had 

average charges that were $40,623 lower 

than those not reported with code 96.72. 

Clearly, the presence or absence of code 

96.72 does not explain differences in 

charges for patients within DRG 483. 

As stated earlier, we are concerned 

that hospitals may not always report 

code 96.72 because of space limitations. 

The electronic billing system limits the 

number of procedure codes that can be 

reported to six codes. We then looked at 

whether or not another major O.R. 

procedure is performed in addition to a 

tracheostomy. The DRG 483 logic 

requires that all patients assigned to 

DRG 483 have a tracheostomy. We 

examined cases in DRG 483 in the 

MedPAR file and discovered that those 

patients in DRG 483 who have a major 

procedure performed in addition to the 

tracheostomy have higher charges. A 

major procedure is a procedure whose 

code is included on the list that would 

be assigned to DRG 468 (Extensive O.R. 

Procedure Unrelated to Principal 

Diagnosis), except for tracheostomy 

codes 31.21 and 31.29. Currently, this 

additional O.R. procedure does not 

affect the DRG assignment for cases 

assigned to DRG 483. The following 

chart reflects our findings.

DRG Count Average 

length of stay 

Average 

Charges 

483—All Cases ............................................................................................................................ 31,754 37.68 $210,631.94 

483—Cases with major O.R. procedure ..................................................................................... 15,664 42.70 255,914.00 

483—Cases without major O.R. procedure ................................................................................ 12,867 32.7 168,890.20 

We found that cases of patients 

assigned to DRG 483 who had a major 

procedure (in addition to the required 

tracheostomy) had average charges that 

were $87,023 higher than the average 

charges for cases without a major O.R. 

procedure and an average length of stay 

of 5 days more than those without a 

major O.R. procedure. We found that the 

performance of an additional major O.R. 

procedure helps to identify the more 

expensive patients within DRG 483. 

Therefore, as a result of our findings, 

we are proposing to modify DRG 483 by 

dividing these cases into two new DRGs 

depending on whether or not there is a 

major O.R. procedure reported (in 

addition to the tracheostomy). We are 

proposing to delete DRG 483 and create 

two new DRGs as follows:

• Proposed new DRG 541 

(Tracheostomy With Mechanical 

Ventilation 96+ Hours or Principal 

Diagnosis Except Face, Mouth, and 

Neck Diagnoses With Major O.R. 

Procedure) 

• Proposed new DRG 542 

(Tracheostomy With Mechanical 

Ventilation 96+ Hours or Principal 

Diagnosis Except Face, Mouth and 

Neck Diagnoses Without Major O.R. 

Procedure)

We are specifically seeking comments 

on our proposal to delete DRG 483 and 

replace it with two proposed new DRGs 

by splitting the assignment of cases on 

the basis of the performance of a major 

O.R. procedure (in addition to the 

tracheostomy). 

10. Medicare Code Editor (MCE) 

Changes 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Medicare Code Editor’’ at the 

beginning of your comment.] 

As explained under section II.B.1. of 

this preamble, the Medicare Code Editor 

(MCE) is a software program that detects 

and reports errors in the coding of 

Medicare claims data. In this proposed 

rule, we are proposing to make changes 

to three of the edits in the MCE.

a. Edit 11 (Noncovered Procedures) in 

the MCE contains codes that describe 

procedures for which Medicare does not 

provide reimbursement. We received a 

request to remove procedure codes 

relating to stem cell transplants from 

Edit 11 to conform the MCE edit to our 

published coverage decisions in the 

Medicare Coverage Issues Manual. In 

accordance with chapter 13, section 4 of 

the Program Integrity Manual (PIM), 

contractor discretion exists to cover 

diagnoses that are not explicitly stated 

in a national coverage decision as 

noncovered. Specifically this section 

states: that ‘‘a local medical review 

policy (LMRP)’’ must be clear, concise, 

properly formatted and not restrict or 

conflict with NCDs or coverage 

provision in interpretive manuals. If an 

NCD or coverage provision in an 

interpretive manual states that a given 

28214 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

item is ‘‘covered for diagnoses/

conditions A, B, and C,’’ contractors 

may not use that as a basis to develop 

LMRP to cover only ‘‘diagnosis/

conditions A, B, C’’. When an NCD or 

coverage provision in an interpretive 

manual does not exclude coverage for 

other diagnoses/conditions, contractors 

must allow for individual consideration 

unless the LMRP supports automatic 

denial for some or all of those other 

diagnoses/conditions.’’

The national coverage decision on 

stem cell transplantation provides for 

coverage of certain diagnoses and 

excludes coverage for other diagnoses. 

However, the vast majority of diagnoses 

are not mentioned as either covered or 

noncovered. In accordance with the 

above-cited provision of the PIM, 

contractors must allow for individual 

consideration of these diagnoses. Thus, 

they are not appropriate for inclusion in 

the edit for noncovered procedures. 

We agree that we need to make 

conforming changes relating to stem cell 

transplants. Therefore, we are proposing 

the following restructure of Edit 11: 

This list contains ICD–9–CM 

procedure codes identified as 

‘‘Noncovered Procedures’’ that are 

always considered noncovered 

procedures:

• 11.71, Keratomileusis 

• 11.72, Keratophakia 

• 11.75, Radial keratotomy 

• 11.76, Epikeratophakia 

• 36.32, Other transmyocardial 

revascularization 

• 37.35, Partial ventriculectomy 

• 37.52, Implantation of total 

replacement heart system 

• 37.53, Replacement or repair of 

thoracic unit of total replacement 

heart system 

• 37.54, Replacement or repair of other 

implantable component of total 

replacement heart system 

• 39.28, Extracranial-intracranial (EC–

IC) vascular bypass 

• 44.93, Insertion of gastric bubble 

(balloon) 

• 50.51, Auxiliary liver transplant 

• 52.83, Heterotransplant of pancreas 

• 57.96, Implantation of electronic 

bladder stimulator 

• 57.97, Replacement of electronic 

bladder stimulator 

• 63.70, Male sterilization procedure, 

not otherwise specified 

• 63.71, Ligation of vas deferens 

• 63.72, Ligation of spermatic cord 

• 63.73, Vasectomy 

• 64.5, Operations for sex 

transformation, not elsewhere 

classified 

• 66.21, Bilateral endoscopic ligation 

and crushing of fallopian tubes 

• 66.22, Bilateral endoscopic ligation 

and division of fallopian tubes 

• 66.29, Other bilateral endoscopic 

destruction or occlusion of fallopian 

tubes 

• 66.31, Other bilateral ligation and 

crushing of fallopian tubes 

• 66.32, Other bilateral ligation and 

division of fallopian tubes 

• 66.39, Other bilateral destruction or 

occlusion of fallopian tubes 

• 98.52, Extracorporeal shockwave 

lithotripsy [ESWL] of the gallbladder 

and/or bile duct 

• 98.59, Extracorporeal shockwave 

lithotripsy of other sites

The following list contains ICD–9–CM 

procedure codes identified as 

‘‘Noncovered Procedures’’ only when 

any of the following diagnoses are 

present as either a principal or 

secondary diagnosis. 

Procedure List 

• 41.01, Autologous bone marrow 

transplant without purging 

• 41.04, Autologous hematopoietic stem 

cell transplant without purging 

• 41.07, Autologous hematopoietic stem 

cell transplant with purging 

• 41.09, Autologous bone marrow 

transplant with purging 

Principal or Secondary Diagnosis List 

• 204.00, Acute lymphoid leukemia, 

without mention of remission 

• 205.00, Acute myeloid leukemia, 

without mention of remission 

• 206.00, Acute monocytic leukemia, 

without mention of remission 

• 207.00, Acute erythremia and 

erythroleukemia, without mention of 

remission 

• 208.00, Acute leukemia of unspecified 

cell type, without mention of 

remission 

• 205.10, Acute myeloid leukemia, in 

remission 

• 205.11, Chronic myeloid leukemia, in 

remission

The following list contains ICD–9–CM 

procedure codes identified as 

‘‘Noncovered Procedures’’ only when 

any of the following diagnoses are 

present as either a principal or 

secondary diagnosis. 

Procedure List 

• 41.02, Allogeneic bone marrow 

transplant with purging 

• 41.03, Allogeneic bone marrow 

transplant without purging 

• 41.05, Allogeneic hematopoietic stem 

cell transplant without purging 

• 41.08, Allogeneic hematopoietic stem 

cell transplant with purging 

Principal or Secondary Diagnosis List 

• 203.00, Multiple myeloma, without 

mention of remission

• 203.01, Multiple myeloma, in 

remission

The following list contains ICD–9–CM 

procedure codes identified as ‘‘NonCovered Procedures’’ except when there 

is at least one principal or secondary 

diagnosis code present from both list 1 

and list 2.

Procedure List 

• 52.80, Pancreatic transplant, not 

otherwise specified 

• 52.82, Homotransplant of pancreas 

Procedure List 1

• 250.00, Diabetes mellitus without 

mention of complication, type II [noninsulin dependent type] [NIDDM 

type] [adult-onset type] or unspecified 

type, not stated as uncontrolled 

• 250.01, Diabetes mellitus without 

mention of complication, type I 

[insulin dependent type] [IDDM] 

[juvenile type], not stated as 

uncontrolled 

• 250.02, Diabetes mellitus without 

mention of complication, type II [noninsulin dependent type] [NIDDM 

type] [adult-onset type] or unspecified 

type, uncontrolled 

• 250.03, Diabetes mellitus without 

mention of complication, type I 

[insulin dependent type] [IDDM type] 

[juvenile type], uncontrolled 

• 250.10, Diabetes with ketoacidosis, 

type II [non-insulin dependent type] 

[NIDDM type] [adult-onset type] or 

unspecified type, not stated as 

uncontrolled 

• 250.11, Diabetes with ketoacidosis, 

type I [insulin dependent type] 

[IDDM] [juvenile type], not stated as 

uncontrolled 

• 250.12, Diabetes with ketoacidosis, 

type II [non-insulin dependent type] 

[NIDDM type] [adult-onset type] or 

unspecified type, uncontrolled 

• 250.13, Diabetes with ketoacidosis, 

type I [insulin dependent type] [IDDM 

type] [juvenile type], uncontrolled 

• 250.20, Diabetes with 

hyperosmolarity, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, not 

stated as uncontrolled 

• 250.21, Diabetes with 

hyperosmolarity, type I [insulin 

dependent type] [IDDM] [juvenile 

type], not stated as uncontrolled 

• 250.22, Diabetes with 

hyperosmolarity, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, 

uncontrolled 

• 250.23, Diabetes with 

hyperosmolarity, type I [insulin 

dependent type] [IDDM] [juvenile 

type], uncontrolled 

• 250.30, Diabetes with other coma, 

type II [non-insulin dependent type] 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28215

[NIDDM type] [adult-onset type] or 

unspecified type, not stated as 

uncontrolled 

• 250.31, Diabetes with other coma, 

type I [insulin dependent type] 

[IDDM] [juvenile type], not stated as 

uncontrolled 

• 250.32, Diabetes with other coma, 

type II [non-insulin dependent type] 

[NIDDM type] [adult-onset type] or 

unspecified type, uncontrolled 

• 250.33, Diabetes with other coma, 

type I [insulin dependent type] 

[IDDM] [juvenile type], uncontrolled, 

type I [insulin dependent type] [IDDM 

type] [juvenile type], uncontrolled 

• 250.40, Diabetes with renal 

manifestation, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, not 

stated as uncontrolled 

• 250.41, Diabetes with renal 

manifestation, type I [insulin 

dependent type] [IDDM] [juvenile 

type], not stated as uncontrolled 

• 250.42, Diabetes with renal 

manifestation, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, 

uncontrolled 

• 250.43, Diabetes with renal 

manifestation, type I [insulin 

dependent type] [IDDM type] 

[juvenile type], uncontrolled 

• 205.50, Diabetes with ophthalmic 

manifestations, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, not 

stated as uncontrolled 

• 205.51, Diabetes with ophthalmic 

manifestations, type I [insulin 

dependent type] [IDDM] [juvenile 

type], not stated as uncontrolled 

• 205.52, Diabetes with ophthalmic 

manifestations, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, 

uncontrolled 

• 205.53, Diabetes with ophthalmic 

manifestations, type I [insulin 

dependent type] [IDDM type] 

[juvenile type], uncontrolled 

• 250.60, Diabetes with neurological 

manifestations, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, not 

stated as uncontrolled 

• 250.61, Diabetes with neurological 

manifestations, type I [insulin 

dependent type] [IDDM] [juvenile 

type], not stated as uncontrolled 

• 250.62, Diabetes with neurological 

manifestations, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, 

uncontrolled 

• 250.63, Diabetes with neurological 

manifestations, type I [insulin 

dependent type] [IDDM type] 

[juvenile type], uncontrolled

• 250.70, Diabetes with peripheral 

circulatory disorders, type II [noninsulin dependent type] [NIDDM 

type] [adult-onset type] or unspecified 

type, not stated as uncontrolled 

• 250.71, Diabetes with peripheral 

circulatory disorders type I [insulin 

dependent type] [IDDM] [juvenile 

type], not stated as uncontrolled 

• 250.72, Diabetes with peripheral 

circulatory disorders, type II [noninsulin dependent type] [NIDDM 

type] [adult-onset type] or unspecified 

type, uncontrolled 

• 250.73, Diabetes with peripheral 

circulatory disorders, type I [insulin 

dependent type] [IDDM type] 

[juvenile type], uncontrolled 

• 250.80, Diabetes with other specified 

manifestations, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, not 

stated as uncontrolled 

• 250.81, Diabetes with other specified 

manifestations, type I [insulin 

dependent type] [IDDM] [juvenile 

type], not stated as uncontrolled 

• 250.82, Diabetes with other specified 

manifestations, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, 

uncontrolled 

• 250.83, Diabetes with other specified 

manifestations, type I [insulin 

dependent type] [IDDM] [juvenile 

type], uncontrolled 

• 250.90, Diabetes with unspecified 

complication, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, not 

stated as uncontrolled 

• 250.91, Diabetes with unspecified 

complication, type I [insulin 

dependent type] [IDDM] [juvenile 

type], not stated as uncontrolled 

• 250.92, Diabetes with unspecified 

complication, type II [non-insulin 

dependent type] [NIDDM type] [adultonset type] or unspecified type, 

uncontrolled 

• 250.93, Diabetes with unspecified 

complication, type I [insulin 

dependent type] [IDDM] [juvenile 

type], uncontrolled 

Diagnosis List 2 

• 403.01, Malignant hypertensive renal 

disease, with renal failure 

• 403.11, Benign hypertensive renal 

disease, with renal failure 

• 403.91, Unspecified hypertensive 

renal disease, with renal failure 

• 404.02, Malignant hypertensive heart 

and renal disease, with renal failure 

• 404.03, Malignant hypertensive heart 

and renal disease, with heart failure 

and renal failure 

• 404.12, Benign hypertensive heart and 

renal disease, with renal failure 

• 404.13, Benign hypertensive heart and 

renal disease, with heart failure and 

renal failure 

• 404.92, Unspecified hypertensive 

heart and renal disease, with renal 

failure 

• 404.93, Unspecified hypertensive 

heart and renal disease, with heart 

failure and renal failure 

• 585, Chronic renal failure 

• V42.0, Organ or tissue replaced by 

transplant, kidney 

• V43.89, Organ or tissue replaced by 

other means, other

b. Edit 6 (Manifestations Not Allowed 

As Principal Diagnosis) in the MCE 

contains codes that describe the 

manifestation of an underlying disease, 

not the disease itself, and therefore, 

should not be used as a principal 

diagnosis. The following codes describe 

manifestations of an underlying disease; 

they should not be used as a principal 

diagnosis according to ICD–9–CM 

coding convention. Therefore, we are 

proposing to add the following 

diagnosis codes to Edit 6:

• 289.52, Splenic sequestration 

• 571.3, Acute chest syndrome 

• 785.52, Septic shock

Coding conventions in the ICD–9–CM 

Diagnostic Tabular List specify that 

etiologic conditions be coded first. 

c. Edit 9 (Unacceptable Principal 

Diagnoses) contains codes ‘‘that 

describe a circumstance which 

influences an individual’s health status 

but is not a current illness of injury; 

therefore, these codes are considered 

unacceptable as a principal diagnosis.’’

(This definition can be found on page 

1094 of the DRG Definitions Manual, 

Version 21.0). Therefore, these codes are 

considered unacceptable as a principal 

diagnosis. Last year, we became aware 

that two codes should be removed from 

this list, as they can be legitimate causes 

for inpatient admission. However, we 

were made aware of this too late in the 

process to make a change to this edit 

prior to FY 2004. We will now be able 

to make the necessary system changes 

before the start of FY 2005. Therefore, 

in this proposed rule, we are proposing 

to remove the following codes from Edit 

9:

• V53.01, Adjustment of cerebral 

ventricular (communicating) shunt 

• V53.02, Adjustment of 

neuropacemaker (brain) (peripheral 

nerve) (spinal cord)

11. Surgical Hierarchies 

[If you choose to comment on the 

issues in this section, please include the 

caption ‘‘Surgical Hierarchies’’ at the 

beginning of your comment.] 

28216 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

Some inpatient stays entail multiple 

surgical procedures, each one of which, 

occurring by itself, could result in 

assignment of the case to a different 

DRG within the MDC to which the 

principal diagnosis is assigned. 

Therefore, it is necessary to have a 

decision rule within the GROUPER by 

which these cases are assigned to a 

single DRG. The surgical hierarchy, an 

ordering of surgical classes from most 

resource-intensive to least resourceintensive, performs that function. 

Application of this hierarchy ensures 

that cases involving multiple surgical 

procedures are assigned to the DRG 

associated with the most resourceintensive surgical class. 

Because the relative resource intensity 

of surgical classes can shift as a function 

of DRG reclassification and 

recalibrations, we reviewed the surgical 

hierarchy of each MDC, as we have for 

previous reclassifications and 

recalibrations, to determine if the 

ordering of classes coincides with the 

intensity of resource utilization. 

A surgical class can be composed of 

one or more DRGs. For example, in 

MDC 11, the surgical class ‘‘kidney 

transplant’’ consists of a single DRG 

(DRG 302) and the class ‘‘kidney, ureter 

and major bladder procedures’’ consists 

of three DRGs (DRGs 303, 304, and 305). 

Consequently, in many cases, the 

surgical hierarchy has an impact on 

more than one DRG. The methodology 

for determining the most resourceintensive surgical class involves 

weighting the average resources for each 

DRG by frequency to determine the 

weighted average resources for each 

surgical class. For example, assume 

surgical class A includes DRGs 1 and 2 

and surgical class B includes DRGs 3, 4, 

and 5. Assume also that the average 

charge of DRG 1 is higher than that of 

DRG 3, but the average charges of DRGs 

4 and 5 are higher than the average 

charge of DRG 2. To determine whether 

surgical class A should be higher or 

lower than surgical class B in the 

surgical hierarchy, we would weight the 

average charge of each DRG in the class 

by frequency (that is, by the number of 

cases in the DRG) to determine average 

resource consumption for the surgical 

class. The surgical classes would then 

be ordered from the class with the 

highest average resource utilization to 

that with the lowest, with the exception 

of ‘‘other O.R. procedures’’ as discussed 

below. 

This methodology may occasionally 

result in assignment of a case involving 

multiple procedures to the lowerweighted DRG (in the highest, most 

resource-intensive surgical class) of the 

available alternatives. However, given 

that the logic underlying the surgical 

hierarchy provides that the GROUPER 

search for the procedure in the most 

resource-intensive surgical class, this 

result is unavoidable. 

We note that, notwithstanding the 

foregoing discussion, there are a few 

instances when a surgical class with a 

lower average charge is ordered above a 

surgical class with a higher average 

charge. For example, the ‘‘other O.R. 

procedures’’ surgical class is uniformly 

ordered last in the surgical hierarchy of 

each MDC in which it occurs, regardless 

of the fact that the average charge for the 

DRG or DRGs in that surgical class may 

be higher than that for other surgical 

classes in the MDC. The ‘‘other O.R. 

procedures’’ class is a group of 

procedures that are only infrequently 

related to the diagnoses in the MDC but 

are still occasionally performed on 

patients in the MDC with these 

diagnoses. Therefore, assignment to 

these surgical classes should only occur 

if no other surgical class more closely 

related to the diagnoses in the MDC is 

appropriate. 

A second example occurs when the 

difference between the average charges 

for two surgical classes is very small. 

We have found that small differences 

generally do not warrant reordering of 

the hierarchy because, as a result of 

reassigning cases on the basis of the 

hierarchy change, the average charges 

are likely to shift such that the higherordered surgical class has a lower 

average charge than the class ordered 

below it. 

Based on the preliminary 

recalibration of the DRGs, we are 

proposing modifications of the surgical 

hierarchy as set forth below. 

At this time, we are proposing to 

revise the surgical hierarchy for the preMDC DRGs and MDC 8 (Diseases and 

Disorders of the Musculoskeletal System 

and Connective Tissue). 

In the pre-MDC DRGs, we are 

proposing to reorder DRG 541 

(Tracheostomy With Mechanical 

Ventilation 96+ Hours or Principal 

Diagnosis Except Face, Mouth, and 

Neck Diagnoses With Major O.R. 

Procedure) and DRG 542 (Tracheostomy 

With Mechanical Ventilation 96+ Hours 

or Principal Diagnosis Except Face, 

Mouth, and Neck Diagnoses Without 

Major O.R. Procedure) above DRG 480 

(Liver Transplant). 

In MDC 8, we are proposing to—

• Reorder DRG 496 (Combined 

Anterior/Posterior Spinal Fusion), DRG 

497 (Spinal Fusion Except Cervical 

With CC), and DRG 498 (Spinal Fusion 

Except Cervical Without CC) above DRG 

471 (Bilateral or Multiple Major Joint 

Procedures of the Lower Extremity).

• Reorder DRG 519 (Cervical Spinal 

Fusion With CC) and DRG 520 (Cervical 

Spinal Fusion Without CC) above DRG 

216 (Biopsies of the Musculoskeletal 

System and Connective Tissue). 

• Reorder DRG 213 (Amputation for 

the Musculoskeletal System and 

Connective Tissue Disorders) above 

DRG 210 (Hip and Femur Procedures 

Except Major Joint Age > 17 With CC), 

DRG 211 (Hip and Femur Procedures 

Except Major Joint Age > 17 Without 

CC), and DRG 212 (Hip and Femur 

Procedures Except Major Joint Age 0–

17). 

• Reorder DRG 499 (Back and Neck 

Procedures Except Spinal Fusion With 

CC) and DRG 500 (Back and Neck 

Procedures Except Spinal Fusion 

Without CC) above DRG 218 (Lower 

Extremity and Humerus Procedures 

Except Hip, Foot, and Femur Age > 17 

With CC), DRG 219 (Lower Extremity 

and Humerus Procedures Except Hip, 

Foot, and Femor Age > 17 Without CC), 

and DRG 220 (Lower Extremity and 

Humerus Procedures Except Hip, Foot, 

and Femur Age 0–17). 

12. Refinement of Complications and 

Comorbidities (CC) List 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘CC List’’ at the beginning of 

your comment.] 

In the September 1, 1987 final notice 

(52 FR 33143) concerning changes to the 

DRG classification system, we modified 

the GROUPER logic so that certain 

diagnoses included on the standard list 

of CCs would not be considered valid 

CCs in combination with a particular 

principal diagnosis. We created the CC 

Exclusions List for the following 

reasons: (1) To preclude coding of CCs 

for closely related conditions; (2) to 

preclude duplicative or inconsistent 

coding from being treated as CCs; and 

(3) to ensure that cases are appropriately 

classified between the complicated and 

uncomplicated DRGs in a pair. We 

developed this list of diagnoses, using 

physician panels, to include those 

diagnoses that, when present as a 

secondary condition, would be 

considered a substantial complication or 

comorbidity. In previous years, we have 

made changes to the list of CCs, either 

by adding new CCs or deleting CCs 

already on the list. At this time, we are 

not proposing to delete any of the 

diagnosis codes on the CC list. 

In the May 19, 1987 proposed notice 

(52 FR 18877) and the September 1, 

1987 final notice (52 FR 33154), we 

explained that the excluded secondary 

diagnoses were established using the 

following five principles: 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28217

1See the September 30, 1988 final rule (53 FR 

38485) for the revision made for the discharges 

occurring in FY 1989; the September 1, 1989 final 

rule (54 FR 36552) for the FY 1990 revision; the 

September 4, 1990 final rule (55 FR 36126) for the 

FY 1991 revision; the August 30, 1991 final rule (56 

FR 43209) for the FY 1992 revision; the September 

1, 1992 final rule (57 FR 39753) for the FY 1993 

revision; the September 1, 1993 final rule (58 FR 

46278) for the FY 1994 revisions; the September 1, 

1994 final rule (59 FR 45334) for the FY 1995 

revisions; the September 1, 1995 final rule (60 FR 

45782) for the FY 1996 revisions; the August 30, 

1996 final rule (61 FR 46171) for the FY 1997 

revisions; the August 29, 1997 final rule (62 FR 

45966) for the FY 1998 revisions; the July 31, 1998 

final rule (63 FR 40954) for the FY 1999 revisions, 

the August 1, 2000 final rule (65 FR 47064) for the 

FY 2001 revisions; the August 1, 2001 final rule (66 

FR 39851) for the FY 2002 revisions; the August 1, 

2002 final rule (67 FR 49998) for the FY 2003 

revisions; and the August 1, 2003 final rule (68 FR 

45364) for the FY 2004 revisions.) In the July 30, 

1999 final rule (64 FR 41490), we did not modify 

the CC Exclusions List for FY 2000 because we did 

not make any changes to the ICD–9–CM codes for 

FY 2000.

2 In the August 1, 2003 final rule (68 FR 45365) 

we moved several procedures from DRG 468 to 

DRGs 476 and 477 because the procedures are 

nonextensive. The original list of the ICD–9–CM 

Continued

• Chronic and acute manifestations of 

the same condition should not be 

considered CCs for one another. 

• Specific and nonspecific (that is, 

not otherwise specified (NOS)) 

diagnosis codes for the same condition 

should not be considered CCs for one 

another. 

• Codes for the same condition that 

cannot coexist, such as partial/total, 

unilateral/bilateral, obstructed/

unobstructed, and benign/malignant, 

should not be considered CCs for one 

another. 

• Codes for the same condition in 

anatomically proximal sites should not 

be considered CCs for one another. 

• Closely related conditions should 

not be considered CCs for one another. 

The creation of the CC Exclusions List 

was a major project involving hundreds 

of codes. We have continued to review 

the remaining CCs to identify additional 

exclusions and to remove diagnoses 

from the master list that have been 

shown not to meet the definition of a 

CC.1

We are proposing a limited revision of 

the CC Exclusions List to take into 

account the proposed changes that will 

be made in the ICD–9-CM diagnosis 

coding system effective October 1, 2004. 

(See section II.B.15. of this preamble for 

a discussion of ICD–9–CM changes.) We 

are proposing these changes in 

accordance with the principles 

established when we created the CC 

Exclusions List in 1987. 

Tables 6G and 6H in the Addendum 

to this proposed rule contain the 

proposed revisions to the CC Exclusions 

List that would be effective for 

discharges occurring on or after October 

1, 2004. Each table shows the principal 

diagnoses with changes to the excluded 

CCs. Each of these principal diagnoses 

is shown with an asterisk, and the 

additions or deletions to the CC 

Exclusions List are provided in an 

indented column immediately following 

the affected principal diagnosis. 

CCs that are added to the list are in 

Table 6G—Additions to the CC 

Exclusions List. Beginning with 

discharges on or after October 1, 2004, 

the indented diagnoses would not be 

recognized by the GROUPER as valid 

CCs for the asterisked principal 

diagnosis.

CCs that are deleted from the list are 

in Table 6H—Deletions from the CC 

Exclusions List. Beginning with 

discharges on or after October 1, 2004, 

the indented diagnoses would be 

recognized by the GROUPER as valid 

CCs for the asterisked principal 

diagnosis. 

Copies of the original CC Exclusions 

List applicable to FY 1988 can be 

obtained from the National Technical 

Information Service (NTIS) of the 

Department of Commerce. It is available 

in hard copy for $152.50 plus shipping 

and handling. A request for the FY 1988 

CC Exclusions List (which should 

include the identification accession 

number (PB) 88–133970) should be 

made to the following address: National 

Technical Information Service, United 

States Department of Commerce, 5285 

Port Royal Road, Springfield, VA 22161; 

or by calling (800) 553–6847. 

Users should be aware of the fact that 

all revisions to the CC Exclusions List 

(FYs 1989, 1990, 1991, 1992, 1993, 

1994, 1995, 1996, 1997, 1998, 1999, 

2001, 2002, 2003, and 2004) and those 

in Tables 6G and 6H of this proposed 

rule for FY 2005 must be incorporated 

into the list purchased from NTIS in 

order to obtain the CC Exclusions List 

applicable for discharges occurring on 

or after October 1, 2004. (Note: There 

was no CC Exclusions List in FY 2000 

because we did not make changes to the 

ICD–9–CM codes for FY 2000.) 

Alternatively, the complete 

documentation of the GROUPER logic, 

including the current CC Exclusions 

List, is available from 3M/Health 

Information Systems (HIS), which, 

under contract with CMS, is responsible 

for updating and maintaining the 

GROUPER program. The current DRG 

Definitions Manual, Version 21.0, is 

available for $225.00, which includes 

$15.00 for shipping and handling. 

Version 22.0 of this manual, which 

includes the final FY 2004 DRG 

changes, is available for $225.00. These 

manuals may be obtained by writing 

3M/HIS at the following address: 100 

Barnes Road, Wallingford, CT 06492; or 

by calling (203) 949–0303. Please 

specify the revision or revisions 

requested. 

13. Review of Procedure Codes in DRGs 

468, 476, and 477

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘DRGs 468, 476, and 477’’ at the 

beginning of your comment.] 

Each year, we review cases assigned 

to DRG 468 (Extensive O.R. Procedure 

Unrelated to Principal Diagnosis), DRG 

476 (Prostatic O.R. Procedure Unrelated 

to Principal Diagnosis), and DRG 477 

(Nonextensive O.R. Procedure Unrelated 

to Principal Diagnosis) to determine 

whether it would be appropriate to 

change the procedures assigned among 

these DRGs. 

DRGs 468, 476, and 477 are reserved 

for those cases in which none of the 

O.R. procedures performed are related 

to the principal diagnosis. These DRGs 

are intended to capture atypical cases, 

that is, those cases not occurring with 

sufficient frequency to represent a 

distinct, recognizable clinical group. 

DRG 476 is assigned to those discharges 

in which one or more of the following 

prostatic procedures are performed and 

are unrelated to the principal diagnosis:

• 60.0, Incision of prostate 

• 60.12, Open biopsy of prostate 

• 60.15, Biopsy of periprostatic tissue 

• 60.18, Other diagnostic procedures on 

prostate and periprostatic tissue 

• 60.21, Transurethral prostatectomy 

• 60.29, Other transurethral 

prostatectomy 

• 60.61, Local excision of lesion of 

prostate 

• 60.69, Prostatectomy, not elsewhere 

classified 

• 60.81, Incision of periprostatic tissue 

• 60.82, Excision of periprostatic tissue 

• 60.93, Repair of prostate 

• 60.94, Control of (postoperative) 

hemorrhage of prostate 

• 60.95, Transurethral balloon dilation 

of the prostatic urethra 

• 60.96, Transurethral destruction of 

prostate tissue by microwave 

thermotherapy 

• 60.97, Other transurethral destruction 

of prostate tissue by other 

thermotherapy 

• 60.99, Other operations on prostate

All remaining O.R. procedures are 

assigned to DRGs 468 and 477, with 

DRG 477 assigned to those discharges in 

which the only procedures performed 

are nonextensive procedures that are 

unrelated to the principal diagnosis.2

28218 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

procedure codes for the procedures we consider 

nonextensive procedures, if performed with an 

unrelated principal diagnosis, was published in 

Table 6C in section IV. of the Addendum to the 

September 30, 1988 final rule (53 FR 38591). As 

part of the final rules published on September 4, 

1990 (55 FR 36135), August 30, 1991 (56 FR 43212), 

September 1, 1992 (57 FR 23625), September 1, 

1993 (58 FR 46279), September 1, 1994 (59 FR 

45336), September 1, 1995 (60 FR 45783), August 

30, 1996 (61 FR 46173), and August 29, 1997 (62 

FR 45981), we moved several other procedures from 

DRG 468 to DRG 477, and some procedures from 

DRG 477 to DRG 468. No procedures were moved 

in FY 1999, as noted in the July 31, 1998 final rule 

(63 FR 40962); in FY 2000, as noted in the July 30, 

1999 final rule (64 FR 41496); in FY 2001, as noted 

in the August 1, 2000 final rule (65 FR 47064); or 

in FY 2002, as noted in the August 1, 2001 final 

rule (66 FR 39852). In the August 1, 2002 final rule 

(67 FR 49999), we did not move any procedures 

from DRG 477. However, we did move procedures 

codes from DRG 468 and placed them in more 

clinically coherent DRGs.

a. Moving Procedure Codes From DRG 

468 or DRG 477 to MDCs 

We annually conduct a review of 

procedures producing assignment to 

DRG 468 or DRG 477 on the basis of 

volume, by procedure, to see if it would 

be appropriate to move procedure codes 

out of these DRGs into one of the 

surgical DRGs for the MDC into which 

the principal diagnosis falls. The data 

are arrayed two ways for comparison 

purposes. We look at a frequency count 

of each major operative procedure code. 

We also compare procedures across 

MDCs by volume of procedure codes 

within each MDC. 

We identify those procedures 

occurring in conjunction with certain 

principal diagnoses with sufficient 

frequency to justify adding them to one 

of the surgical DRGs for the MDC in 

which the diagnosis falls. Based on this 

year’s review, we did not identify any 

procedures in DRG 477 that should be 

removed. Therefore, we are not 

proposing to move any procedures from 

DRG 477 to one of the surgical DRGs. 

b. Reassignment of Procedures Among 

DRGs 468, 476, and 477 

We also annually review the list of 

ICD–9–CM procedures that, when in 

combination with their principal 

diagnosis code, result in assignment to 

DRGs 468, 476, and 477, to ascertain if 

any of those procedures should be 

reassigned from one of these three DRGs 

to another of the three DRGs based on 

average charges and the length of stay. 

We look at the data for trends such as 

shifts in treatment practice or reporting 

practice that would make the resulting 

DRG assignment illogical. If we find 

these shifts, we would propose to move 

cases to keep the DRGs clinically similar 

or to provide payment for the cases in 

a similar manner. Generally, we move 

only those procedures for which we 

have an adequate number of discharges 

to analyze the data. Based on a comment 

we received in response to last year’s 

proposed rule (68 FR 45366), we are 

proposing to move procedure code 

51.23 (Laparoscopic cholecystectomy) 

from DRG 468 (Extensive O.R. 

Procedure Unrelated to Principal 

Diagnosis) into DRG 477 (Nonextensive 

O.R. Procedure Unrelated to Principal 

Diagnosis). 

The commenter suggested that a 

laparoscopic procedure was probably 

not an extensive O.R. procedure; it was 

more likely a nonextensive O.R. 

procedure. We agree and, therefore, are 

proposing this change. In addition, we 

are proposing to add several new 

procedure codes to DRGs 476 and 477. 

These procedures are also listed on 

Table 6B—New Procedure Codes in the 

Addendum to this proposed rule. 

However, DRGs 476 and 477 are not 

limited to one MDC, so the new codes 

are also included here for nonextensive 

cases in which the procedures are 

unrelated to the principal diagnosis:

• 44.67, Laparoscopic procedures for 

creation of esophagogastric 

sphincteric competence 

• 44.68, Laparoscopic gastroplasty 

• 44.95, Laparoscopic gastric restrictive 

procedure 

• 44.96, Laparoscopic revision of gastric 

restrictive procedure 

• 44.97, Laparoscopic removal of gastric 

restrictive device(s) 

• 44.98, Laparoscopic adjustment of 

size of adjustable gastric restrictive 

device

In DRG 476, the above codes are to be 

added to the section ‘‘With or Without 

Operating Room Procedures’’ in the 

GROUPER logic. 

We are not proposing to move any 

procedure codes from DRG 476 to DRGs 

468 or 477, or from DRG 477 to DRGs 

468 or 476. 

c. Adding Diagnosis or Procedure Codes 

to MDCs 

Based on our review this year, we are 

not proposing to add any diagnosis 

codes to MDCs. 

14. Pancreatic Islet Cell Transplantation 

in Clinical Trials 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Pancreatic Islet Cell 

Transplantation’’ at the beginning of 

your comment.] 

Section 733(a) of Public Law 108–173 

directs the Secretary, acting through the 

National Institute of Diabetes and 

Digestive and Kidney Disorders 

(NIDDKD) to conduct a clinical 

investigation of pancreatic islet cell 

transplantation that includes Medicare 

beneficiaries. Section 733(b) provides 

for Medicare payments, beginning no 

earlier than October 1, 2004, for the 

routine costs as well as the costs of the 

transplantation and appropriate related 

items and services for Medicare 

beneficiaries who are participating in a 

clinical trial as if such transplantation 

were covered under Medicare Part A or 

Part B. Routine costs are defined as 

reasonable and necessary routine 

patient care costs (as defined in the 

CMS Coverage Issues Manual, Section 

30–1) including immunosuppressive 

drugs and other followup care. Section 

733(c)(2) defines transplantation and 

appropriate related items and services 

as items and services related to the 

acquisition and delivery of the 

pancreatic islet cell transplantation, 

notwithstanding any national 

noncoverage determination contained in 

the CMS Coverage Issues Manual. 

While the DRG payment will cover 

the transplant injection and the 

subsequent hospital stay, we are 

considering establishing an add-on 

payment to the DRG payment amount to 

reimburse the acquisition costs 

associated with islet cell procurement. 

Historically, organ acquisition costs 

have been reimbursed as a cost passthrough. However, islet cell transplants 

are not exactly the same as solid organ 

transplants. While solid pancreata are 

procured, islet cells are not transplanted 

in the solid organ state as are other 

types of organs. Rather, the pancreata 

are procured by an organ procurement 

organization (OPO) and are then sent to 

an islet cell resource center that extracts 

the islet cells from the pancreata and 

sends the cells on to the transplant 

center. Since the procurement and 

processing system for islet cell 

transplants is not the same as for solid 

organ transplants, we do not intend to 

pay for these costs as a pass through. 

With the anticipated small number of 

beneficiaries in the clinical trial and the 

Medicare program’s unfamiliarity with 

the isolation process, we believe it is 

most appropriate at this time to have a 

set payment rate for acquisition costs, 

rather than attempting a case-by-case 

determination of the reasonableness of 

these costs in each institution. We note 

there is precedent to exclude acquisition 

costs from the pass-through payment 

process. For example, stem cell 

transplants and corneal transplants do 

not have acquisition costs reimbursed as 

a cost pass-through payment. 

The add-on payment would be a 

single amount that includes pretransplant tests and services, pancreas 

procurement, and islet isolation 

services. We are proposing to use an 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28219

add-on as opposed to increasing the 

DRG amount because the DRGs at issue 

are also applied in cases involving a 

variety of other procedures that do not 

include the costly islet cell acquisition 

required for this procedure. Thus, 

including these costs in the DRGs would 

have the potential of skewing the 

weights for all other DRGs. We are 

asking for specific comments on 

whether an add-on payment amount is 

the appropriate way to reimburse islet 

cell acquisition costs, or whether 

another methodology may be more 

appropriate.

In addition, while we have some data 

available regarding the cost of pancreas 

procurement, we are specifically asking 

for any other data that support the costs 

of acquisition and the costs of isolation 

cell resource centers. 

Because we do not yet have enough 

data, we are unable to publish a 

proposed acquisition amount in this 

proposed rule. After analyzing data 

submitted during the comment period, 

other data acquired by CMS, and any 

suggested changes from the 

methodology proposed, we will issue 

the final organ acquisition payment 

amount in the IPPS final rule. 

Pancreatic islet cell transplantation 

during the clinical trial will be 

performed to decrease or eliminate the 

need for insulin in patients with Type 

I diabetes. Islet cells are acquired from 

a cadaveric pancreas donor (islet 

allotransplantation). 

As described in II.B.1. of this 

preamble, ICD–9–CM diagnosis and 

procedure codes are used to determine 

DRG assignments. In 1996, CMS (then 

HCFA) created codes for islet cell 

transplantation:

• 52.84, Autotransplantation of cells of 

islets of Langerhans 

• 52.85, Allotransplantation of cells of 

islets of Langerhans

The Medicare GROUPER does not 

consider codes 52.84 and 52.85 as O.R. 

procedures and, therefore, these codes 

do not move the case from a medical 

DRG into a surgical DRG unless another 

procedure is performed. Based on the 

circumstances noted above under which 

pancreatic islet cell transplantation 

would be performed, we identified the 

three most logical DRGs to which we 

believe cases would be assigned. If a 

patient has Type I diabetes mellitus 

with ESRD and a pancreatectomy is 

performed, the case would group to 

DRG 468 (Extensive O.R. Procedure 

Unrelated to Principal Diagnosis). If a 

patient has Type I diabetes mellitus 

with ESRD and is also receiving a 

kidney transplant (simultaneous kidney 

and islet transplantation), the case 

would group to DRG 302 (Kidney 

Transplant). If a patient has Type I 

diabetes mellitus with ESRD and a 

history of a kidney transplant and then 

has the islet cells inserted via an open 

approach, the case would group to DRG 

315 (Other Kidney and Urinary Tract 

O.R. Procedures). 

As each case is assigned to a DRG 

based on all of the ICD–9–CM codes 

reported, cases could also be assigned to 

DRGs other than those mentioned 

above. In fact, our review of FY 2003 

MedPAR data revealed that codes 52.84 

and 52.85 were present in only four 

cases, and that each case was assigned 

to a different DRG. We found one case 

each in DRG 18 (Cranial and Peripheral 

Nerve Disorders With CC), DRG 192 

(Pancreas, Liver, and Shunt Procedures 

Without CC), DRG 207 (Disorders of the 

Biliary Tract With CC), and DRG 302 

(Kidney Transplant). 

We are reluctant to propose assigning 

the islet cell codes to one specific DRG, 

as the islet cell infusion will have 

different indications depending on the 

merits of each case, as is shown from 

the MedPAR data mentioned above. In 

addition, we do not currently have 

accurate cost data or charges for patients 

in this type of clinical trial, which 

makes it difficult to determine an 

appropriate DRG weight. As a result, 

assignment of cases to a specific DRG 

might have the consequence of either 

overpaying or underpaying the cases. 

We believe that both of these 

consequences are unacceptable. 

Therefore, we are not proposing that 

cases involved in the clinical trials be 

assigned to one specific DRG for 

payment purposes. As we believe that 

these cases will be assigned to DRGs 

302, 315, and 468, we are proposing to 

establish an add-on payment for cases in 

these three DRGs containing procedure 

codes 52.84 or 52.85. As stated earlier, 

we will not be able to establish the 

amount of this add-on until we have 

determined procurement costs for the 

islet cells. We are soliciting information 

from transplant centers and organ 

procurement organizations on costs for 

these types of transplantations. 

15. Changes to the ICD–9–CM Coding 

System 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘ICD–9–CM Coding’’ at the 

beginning of your comment.] 

As described in section II.B.1. of this 

preamble, the ICD–9–CM is a coding 

system that is used for the reporting of 

diagnoses and procedures performed on 

a patient. In September 1985, the ICD–

9–CM Coordination and Maintenance 

Committee was formed. This is a 

Federal interdepartmental committee, 

co-chaired by the National Center for 

Health Statistics (NCHS) and CMS, 

charged with maintaining and updating 

the ICD–9–CM system. The Committee 

is jointly responsible for approving 

coding changes, and developing errata, 

addenda, and other modifications to the 

ICD–9–CM to reflect newly developed 

procedures and technologies and newly 

identified diseases. The Committee is 

also responsible for promoting the use 

of Federal and non-Federal educational 

programs and other communication 

techniques with a view toward 

standardizing coding applications and 

upgrading the quality of the 

classification system.

The ICD–9–CM Manual contains the 

list of valid diagnosis and procedure 

codes. (The ICD–9–CM Manual is 

available from the Government Printing 

Office on CD–ROM for $25.00 by calling 

(202) 512–1800.) The NCHS has lead 

responsibility for the ICD–9–CM 

diagnosis codes included in the Tabular 

List and Alphabetic Index for Diseases, 

while CMS has lead responsibility for 

the ICD–9–CM procedure codes 

included in the Tabular List and 

Alphabetic Index for Procedures. 

The Committee encourages 

participation in the above process by 

health-related organizations. In this 

regard, the Committee holds public 

meetings for discussion of educational 

issues and proposed coding changes. 

These meetings provide an opportunity 

for representatives of recognized 

organizations in the coding field, such 

as the American Health Information 

Management Association (AHIMA), the 

American Hospital Association (AHA), 

and various physician specialty groups, 

as well as individual physicians, 

medical record administrators, health 

information management professionals, 

and other members of the public, to 

contribute ideas on coding matters. 

After considering the opinions 

expressed at the public meetings and in 

writing, the Committee formulates 

recommendations, which then must be 

approved by the agencies. 

The Committee presented proposals 

for coding changes for implementation 

in FY 2005 at public meetings held on 

April 3, 2003 and December 4–5, 2003, 

and finalized the coding changes after 

consideration of comments received at 

the meetings and in writing by January 

12, 2004. Those coding changes are 

announced in Tables 6A through 6F in 

the Addendum to this proposed rule. 

Copies of the minutes of the procedure 

codes discussions at the Committee’s 

2003 meetings can be obtained from the 

CMS Web site: http://www.cms.gov/

paymentsystems/icd9/. The minutes of 

28220 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

the diagnoses codes discussions at the 

2003 meetings are found at: http://www.

cdc.gov/nchs/icd9.htm. Paper copies of 

these minutes are no longer available 

and the mailing list has been 

discontinued. 

For a report of procedure topics 

discussed at the April 1–2, 2004 

meeting, see the Summary Report at: 

http://www.cms.hhs.gov/payment

systems/icd9/. For a report of the 

diagnosis topics discussed at the April 

1–2, 2004 meeting, see the Summary 

Report at: http:/www.cdc.gov/nchs/icd9.

htm.

We encourage commenters to address 

suggestions on coding issues involving 

diagnosis codes to: Donna Pickett, CoChairperson, ICD–9–CM Coordination 

and Maintenance Committee, NCHS, 

Room 2404, 3311 Toledo Road, 

Hyattsville, MD 20782. Comments may 

be sent by E-mail to: dfp4@cdc.gov.

Questions and comments concerning 

the procedure codes should be 

addressed to: Patricia E. Brooks, CoChairperson, ICD–9–CM Coordination 

and Maintenance Committee, CMS, 

Center for Medicare Management, 

Hospital and Ambulatory Policy Group, 

Division of Acute Care, C4–08–06, 7500 

Security Boulevard, Baltimore, MD 

21244–1850. Comments may be sent by 

E-mail to: 

Patricia.Brooks1@cms.hhs.gov.

The ICD–9–CM code changes that 

have been approved will become 

effective October 1, 2004. The new ICD–

9–CM codes are listed, along with their 

DRG classifications, in Tables 6A and 

6B (New Diagnosis Codes and New 

Procedure Codes, respectively) in the 

Addendum to this proposed rule. As we 

stated above, the code numbers and 

their titles were presented for public 

comment at the ICD–9–CM 

Coordination and Maintenance 

Committee meetings. Both oral and 

written comments were considered 

before the codes were approved. In this 

proposed rule, we are only soliciting 

comments on the proposed DRG 

classification of these new codes. 

For codes that have been replaced by 

new or expanded codes, the 

corresponding new or expanded 

diagnosis codes are included in Table 

6A. New procedure codes are shown in 

Table 6B. Diagnosis codes that have 

been replaced by expanded codes or 

other codes or have been deleted are in 

Table 6C (Invalid Diagnosis Codes). 

These invalid diagnosis codes will not 

be recognized by the GROUPER 

beginning with discharges occurring on 

or after October 1, 2004. Table 6D 

usually contains invalid procedure 

codes, however, for FY 2005, there are 

no invalid procedure codes. Revisions 

to diagnosis code titles are in Table 6E 

(Revised Diagnosis Code Titles), which 

also includes the DRG assignments for 

these revised codes. Table 6F includes 

revised procedure code titles for FY 

2005. 

The first of the 2004 public meetings 

was held on April 1–2, 2004. In the 

September 7, 2001 final rule 

implementing the IPPS new technology 

add-on payments (66 FR 46906), we 

indicated we would attempt to include 

proposals for procedure codes that 

would describe new technology 

discussed and approved at the April 

meeting as part of the code revisions 

effective the following October. 

Section 503(a) of Public Law 108–173 

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 technology under the 

IPPS. Section 503(a) amended section 

1886(d)(5)(K) of the Act by adding a 

new clause (vii) which states that the 

‘‘Secretary shall provide for the addition 

of new diagnosis and procedure codes 

in April 1 of each year, but the addition 

of such codes shall not require the 

Secretary to adjust the payment (or 

diagnosis-related group classification) 

* * * until the fiscal year that begins 

after such date.’’ Because this new 

statutory requirement will have a 

significant impact on health care 

providers, coding staff, publishers, 

system maintainers, software systems, 

among others, we are soliciting 

comments on our proposals described 

below to implement this requirement. 

This new requirement will improve the 

recognition of new technologies under 

the IPPS system by providing 

information on these new technologies 

at an earlier date. Data would be 

available 6 months earlier than would 

be possible with updates occurring only 

once a year on October 1. Many coding 

changes apply to longstanding medical 

issues.

While the new requirement states that 

the Secretary shall not adjust the 

payment of the DRG classification for 

the April 1 new codes, the Department 

will have to update its DRG software 

and other systems in order to recognize 

and accept the new codes. We will also 

have to publicize the code changes and 

the need for a mid-year systems update 

by providers to capture the new codes. 

Hospitals will have to obtain the new 

code books and encoder updates, and 

make other system changes in order to 

capture and report the new codes. We 

are aware of the additional burden this 

will have on health care providers. 

The ICD–9–CM Coordination and 

Maintenance Committee has held its 

meetings in April and December of each 

year in order to update the codes and 

the applicable payment and reporting 

systems by October 1 of each year. Items 

are placed on the agenda for the ICD–

9–CM Coordination and Maintenance 

Committee meeting if the request is 

received at least 2 months prior to the 

meeting. This requirement allows time 

for staff to review and research the 

coding issues and prepare material for 

discussion at the meeting. It also allows 

time for the topic to be publicized in 

meeting announcements in the Federal 

Register as well as on the CMS Web site. 

The public decides whether or not to 

attend the meeting based on the topics 

listed on the agenda. In order to provide 

an update on April 1, it became clear 

that a December Committee meeting 

would not provide time to finalize and 

publicize these code revisions. Final 

decisions on code title revisions are 

currently made by March 1 so that these 

titles can be included in the IPPS 

proposed rule. A complete addendum 

describing details of all changes to ICD–

9–CM, both tabular and index, are 

publicized on CMS and NCHS web 

pages in May of each year. Publishers of 

coding books and software companies 

use this information to modify their 

products that are used by health care 

providers. This 5-month time period has 

proved to be necessary for hospitals and 

other providers to update their systems. 

A discussion of this timeline and the 

need for changes are included in the 

December 4–5, 2003 ICD–9–CM 

Coordination and Maintenance 

Committee minutes. The public 

provided comment that additional time 

would be needed to update hospital 

systems and obtain new code books and 

coding software. There was considerable 

concern expressed about the impact this 

new update would have on providers. 

Therefore, we are rescheduling the 

second Committee meeting for 2004. We 

have scheduled this meeting for October 

7–8, 2004. Those who wish to have a 

coding issue discussed at the October 

Committee meeting would be required 

to submit their request by August 7, 

2004. The Department will continue this 

process to accommodate all requestors 

who submit appropriate requests in a 

timely manner. 

We are proposing to implement 

section 503(a) by developing a 

mechanism for approving, in time for 

the April update, diagnoses and 

procedure code revisions needed to 

describe new technologies and medical 

services for purposes of the new 

technology add-on payment process. We 

are proposing the following process for 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28221

making these determinations. Topics 

considered during the October ICD–9–

CM Coordination and Maintenance 

Committee meeting would be 

considered for an April 1 update if a 

strong and convincing case is made by 

the requestor at the Committee’s public 

meeting. The request must identify the 

reason why a new code is needed in 

April for purposes of the new 

technology process. The participants at 

the meeting and those reviewing the 

Committee meeting summary report 

would be provided the opportunity to 

comment on this expedited request. All 

other topics would be considered for the 

October 1 update. Participants at the 

Committee meeting would be 

encouraged to comment on all such 

requests. 

We believe that this proposal captures 

the intent of section 503(a). This 

requirement was included in the 

provision revising the standards and 

process for recognizing new technology 

under the IPPS. In addition, the need for 

approval of new codes outside the 

existing cycle (October 1) arises most 

frequently and most acutely where the 

new codes would capture new 

technologies that are (or will be) under 

consideration for new technology addon payments. Thus, we believe this 

provision was intended to expedite data 

collection through the assignment of 

new ICD–9–CM codes for new 

technologies seeking higher payments. 

Our proposal is designed to carry out 

that intention, while minimizing the 

additional administrative costs 

associated with mid-year changes to the 

ICD–9–CM codes. 

The Department of Health and Human 

Services has been actively working on 

the development of new coding systems 

to replace the ICD–9–CM. In December 

1990, the National Committee on Vital 

and Health Statistics (NCVHS) issued a 

report noting that, while the ICD–9–CM 

classification system had been 

responsive to changing technologies and 

identifying new diseases, there was 

concern that the ICD classification 

might be stressed to a point where the 

quality of the system would soon be 

compromised. The ICD–10–CM (for 

diagnoses) and the ICD–10–PCS (for 

procedures) were developed in response 

to these concerns. These efforts have 

become increasingly important because 

of the growing number of problems with 

the ICD–9–CM, which was implemented 

25 years ago. 

In November 2003, the NCVHS 

recommended that the Secretary prepare 

a notice of proposed rulemaking for the 

implementation of ICD–10–CM and 

ICD–10–PCS. A complete report on the 

activities of this committee can be found 

at: http://www.ncvhs.hhs.gov. The 

Department is studying these 

recommendations. 

16. Other Issues 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Other DRG Issues’’ at the 

beginning of your comments.] 

a. Craniotomy Procedures

As discussed in the August 1, 2003 

IPPS final rule (68 FR 45353), for FY 

2004 we conducted an analysis of the 

charges for various procedures and 

diagnoses within DRG 1 (Craniotomy 

Age > 17 With CC) and DRG 2 

(Craniotomy Age > 17 Without CC) to 

determine whether further changes to 

these DRGs were warranted. Based on 

our analysis and consideration of public 

comments received on our May 19, 2003 

IPPS proposed rule (68 FR 27161), in 

the August 1, 2003 IPPS final rule, we 

created three new DRGs: DRG 528 

(Intracranial Vascular Procedures With a 

Principal Diagnosis of Hemorrhage) for 

patients with an intracranial vascular 

procedure and an intracranial 

hemorrhage; and DRGs 529 (Ventricular 

Shunt Procedures With CC) and 530 

(Ventricular Shunt Procedures Without 

CC) for patients with only a vascular 

shunt procedure. 

As discussed below, we have received 

further comments regarding the 

composition of DRGs 1 and 2 that relate 

to the appropriate DRG assignment of 

unruptured cerebral aneurysm cases and 

cases involving implantation of 

GLIADEL chemotherapy wafers. We 

have also received comments on 

possible revisions to DRG 3 (Craniotomy 

Age 0–17). 

(1) Unruptured Cerebral Aneurysms 

In the August 1, 2003 final rule (68 FR 

45354), in response to a comment that 

suggested we create a companion DRG 

to DRG 528 for intracranial vascular 

procedures for unruptured cerebral 

aneurysms, we evaluated cases in the 

MedPAR file involving unruptured 

cerebral aneurysm and determined that 

the average charges for unruptured 

cerebral aneurysm cases were consistent 

with the variation of charges found in 

DRGs 1 and 2. Therefore, we did not 

propose a change in the DRG 

classification. We indicated that we 

would continue to monitor cases 

involving unruptured cerebral 

aneurysms. 

We now have examined cases in the 

FY 2003 MedPAR file that reported 

unruptured cerebral aneurysms. We 

found 657 unruptured aneurysm cases 

assigned to DRG 1 and 481 unruptured 

cerebral aneurysm cases assigned to 

DRG 2. The average charges for these 

unruptured cerebral aneurysm cases in 

DRG 1 ($50,879) are slightly lower than 

the overall charges for all cases in that 

DRG ($51,300). For unruptured cerebral 

aneurysm cases assigned to DRG 2, we 

found the average charges of 

approximately $29,524 are consistent 

with the overall average charges of that 

DRG of approximately $28,416. 

Based on the results of our analysis, 

we still do not believe a proposal to 

modify the DRG assignment of 

unruptured cerebral aneurysm cases is 

warranted. 

(2) GLIADEL Chemotherapy Wafers 

In the August 1, 2003 final rule (68 FR 

45354), we stated that we had received 

comments requesting a change to the 

DRG assignment of cases involving 

implantation of GLIADEL

chemotherapy wafers to treat brain 

tumors. One of the commenters had 

offered two options: (1) Create a new 

DRG for cases involving implantation of 

GLIADEL chemotherapy wafers; and 

(2) reassign these cases to DRG 484 

(Craniotomy for Multiple Significant 

Trauma). 

At that time, we had analyzed data in 

the March 2003 update of the FY 2003 

MedPAR file and found a total of 61 

cases in which procedure code 00.10 

(Implantation of a chemotherapy agent) 

was reported for cases assigned to DRGs 

1 and 2. There were 38 cases assigned 

to DRG 1 and 23 cases assigned to DRG 

2. The GROUPER logic for these DRGs 

assigns cases with CCs to DRG 1 and 

those without CCs to DRG 2. Consistent 

with the GROUPER logic for these 

DRGs, we had found that the average 

standardized charges in DRGs 1 and 2 

were approximately $64,864 and 

$42,624, respectively. However, while 

the estimated average charges for 

GLIADEL wafer cases of $50,394 may 

have been higher than the average 

standardized charges for DRG 2, they 

were within the normal variation of 

overall charges within each DRG. In 

addition, the volume of cases in these 

two DRGs was too small to warrant the 

establishment of a separate new DRG for 

this technology. Therefore, we stated 

that we wanted to review a full year of 

data and take the time to consider 

alternative options that might appear 

warranted before proposing a change. 

We have now examined more 

complete MedPAR data (December 2003 

update for FY 2003) on cases reporting 

GLIADEL chemotherapy wafers. We 

found a total of 127 cases in which 

procedure code 00.10 was reported for 

cases assigned to DRGs 1 and 2. There 

were 80 cases assigned to DRG 1 and 47 

cases assigned to DRG 2. The average 

28222 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

charges for these cases in DRGs 1 and 

2 were approximately $61,866 and 

$47,189, respectively. The average 

charges for these cases are higher than 

the overall charges of DRGs 1 and 2 of 

approximately $51,300 and $28,416, 

respectively. Although the average 

charges for the GLIADEL wafer cases 

within these DRGs are higher than the 

average charges of all cases in these 

DRGs, they remain within the range of 

average charges for other procedures 

included in these DRGs. The majority of 

the GLIADEL wafer cases are assigned 

to the second highest weighted DRG in 

MDC 1 behind DRG 528 (Intracranial 

Vascular Procedure With a Principal 

Diagnosis of Hemorrhage) in which the 

weights were derived from average 

charges of approximately $113,884. In 

DRG 1, there are 10 procedures that 

have higher average charges than the 

GLIADEL wafer cases. However, in 

DRG 2, the charges associated with 

GLIADEL wafer cases are the highest 

of the procedures included within the 

DRG. 

DRGs are based on the principal 

diagnosis, secondary diagnosis, and 

procedures performed on the patient. 

DRGs are not generally created to 

recognize the presence or absence of 

specific technologies for each patient. In 

the past, we have made one exception 

to this rule. The exception was the 

creation of two new DRGs for drugeluting stents: DRG 526 (Percutaneous 

Cardiovascular Procedure With DrugEluting Stent With Acute Myocardial 

Infarction) and DRG 527 (Percutaneous 

Cardiovascular Procedure With DrugEluting Stent Without Acute Myocardial 

Infarction) (67 FR 50003). We took this 

unprecedented approach in response to 

the unique circumstances surrounding 

the potential breakthrough nature of this 

technology. We currently have 59,613 

drug-eluting cases annually, far more 

cases than the volume for GLIADEL

wafers. We believe that the volume of 

GLIADEL wafer cases remains too 

small to warrant the taking of the 

exceptional step of establishing a 

separate new DRG for this technology. 

Commenters also have proposed the 

reassignment of GLIADEL wafer cases 

to other existing DRGs, such as DRG 484 

(Craniotomy for Multiple Significant 

Trauma), DRG 528 (Intracranial 

Vascular Procedures With Principal 

Diagnosis of Hemorrhage), DRG 492 

(Chemotherapy With Acute Leukemia as 

a Secondary Diagnoses or With Use of 

a High Dose Chemotherapeutic Agent), 

or DRG 481 (Bone Marrow Transplant). 

We have examined these alternatives, 

and have come to the conclusion that 

none of these alternatives meets the 

standard of clinical coherence under the 

DRG system. For example, reconfiguring 

DRG 484 to include GLIADEL wafer 

cases would not produce a clinically 

coherent DRG because DRG 484 

contains cases where craniotomy is 

performed in the setting of multiple 

significant trauma. Similarly, assigning 

GLIADEL wafer cases to DRG 528 

would not produce a clinically coherent 

DRG because DRG 528 contains cases 

where craniotomy is performed as part 

of a vascular procedure with a primary 

diagnosis of hemorrhage, as in the case 

of a ruptured aneurysm. DRG 492 is 

clinically inappropriate because it 

contains cases of acute leukemia treated 

with chemotherapy, and DRG 481 is 

clinically inappropriate because it 

contains cases involving bone marrow 

transplant. None of these DRGs contains 

cases of glioblastoma multiforme or 

other primary brain tumors. Therefore, 

we are not proposing to adopt any of 

these changes at this time.

We also considered several other 

approaches to reassigning GLIADEL

wafer cases in a manner that is 

appropriate both in terms of clinical 

coherence and resource use. For 

example, we considered the creation of 

a new DRG that includes GLIADEL

wafer cases along with other types of 

local therapy for intracerebral malignant 

disease. Specifically, we considered the 

creation of a new DRG that includes 

GLIADEL wafers and a Gliasite 

Radiation Therapy System, a relatively 

new form of intracavitary 

brachytherapy. Such a DRG would be 

clinically coherent because it would 

contain cases of malignant brain tumors 

treated with local therapy. However, our 

analysis of existing MedPAR data 

suggests that such a DRG would 

probably not provide enhanced 

reimbursement for the GLIADEL wafer 

cases, and that, in fact, decreased 

reimbursement for GLIADEL wafer 

cases is a more likely result. Therefore, 

we are not proposing a change at this 

time. However, we will continue to 

monitor our data to determine whether 

a change is warranted in the future. 

We recognize that the implantation of 

chemotherapeutically active wafers for 

local therapy of malignant brain tumors 

represents a significant medical 

technology that currently offers clinical 

benefits to patients and holds out the 

promise of future innovation in the 

treatment of these brain tumors. 

Therefore, we invite further comments 

and suggestions regarding the 

appropriate DRG assignment for this 

technology. (3) DRG 3 (Craniotomy Age 

0–17) 

We received a comment stating 

concern that DRG 3 has not been 

reviewed, while DRGs 1 and 2 have had 

some revisions. The commenter 

believed that, particularly with the 

removal of major trauma cases, age 

distinctions may no longer be 

significant for craniotomies and the 

other intracranial procedures classified 

in DRGs 1 through 3. The commenter 

stated that it may be more consistent, 

from both a clinical and resource 

perspective, to simply eliminate DRG 3 

and redistribute the pediatric and 

juvenile cases to DRGs 1 and 2 based on 

the procedures performed and the 

complication or comorbidities present, 

instead. This analysis would require 

supplemental data from non-MedPAR 

sources. 

We note that the primary focus of 

updates to the Medicare DRG 

classification system is for changes 

relating to the Medicare patient 

population, not the pediatric patient 

population. In the FY 2003 data, there 

were only two cases assigned to DRG 3. 

Therefore, we do not believe a proposal 

to address the commenter’s request is 

warranted at this time. We are aware 

that the Medicare DRGs are sometimes 

used to classify other patient 

populations. We advise those nonMedicare systems that need a more upto-date system to consider choosing 

from other systems that are currently in 

use in this country, or developing their 

own modifications. 

b. Coronary Stent Procedures 

We have received comments and 

recommendations from several industry 

representatives about the DRG 

assignments for coronary artery stents. 

These representatives expressed 

concern about whether the 

reimbursement for stents is adequate, 

especially for insertion of multiple 

stents. They also expressed concern 

about whether the current DRG 

structure represents the most clinically 

coherent classification of stent cases. 

We received two comprehensive 

recommendations for refinement and 

restructuring of the current coronary 

stent DRGs. The current DRG structure 

incorporates stent cases into the 

following two pairs of DRGs, depending 

on whether bare metal or drug-eluting 

stents are used and whether acute 

myocardial infarction (AMI) is present:

• DRG 516 (Percutaneous 

Cardiovascular Procedures With AMI) 

• DRG 517 (Percutaneous 

Cardiovascular Procedures With 

Nondrug-Eluting Stent Without AMI) 

• DRG 526 (Percutaneous 

Cardiovascular Procedures With DrugEluting Stent With AMI) 

• DRG 527 (Percutaneous 

Cardiovascular Procedures With DrugEluting Stent Without AMI)

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28223

One of the recommendations involved 

restructuring these DRGs to create two 

additional stent DRGs that are closely 

patterned after these existing pairs and 

that would reflect insertion of multiple 

stents with and without AMI. The 

manufacturer recommended 

incorporating either stenting code 36.06 

(Insertion of nondrug-eluting coronary 

artery stent(s)) or code 36.07 (Insertion 

of drug-eluting coronary artery stent(s)) 

when they are reported along with code 

36.05 (Multiple vessel percutaneous 

transluminal coronary angioplasty 

[PTCA] or coronary atherectomy 

performed during the same operation, 

with or without mention of 

thrombolytic agent). The manufacturer 

expressed concern that hospitals are 

steering patients toward coronary artery 

bypass graft surgery in place of stenting 

in order to avoid significant financial 

losses due to what it considered the 

inadequate reimbursement for inserting 

multiple stents. 

We appreciate receiving the 

manufacturer’s recommendation, and 

agree that the DRG classification of 

cases involving coronary stents must be 

clinically coherent and provide for 

adequate reimbursement, including 

adequate reimbursement of cases 

requiring multiple stents. We also agree 

that the recommendation has some 

merits and deserves further study. 

However, we believe that it is premature 

to act on this recommendation for two 

reasons. One reason is that the current 

coding structure for coronary artery 

stents cannot distinguish cases in which 

multiple stents are inserted from cases 

in which only a single stent is inserted. 

Current codes are able to identify 

performance of PTCA in more than one 

vessel by use of code 36.05. However, 

while this code indicates that PTCA was 

performed in more than one vessel, its 

use does not reflect the exact number of 

procedures performed or the exact 

number of vessels treated. Similarly, 

when codes 36.06 and 36.07 are used, 

they document the insertion of at least 

one stent. However, these stenting codes 

do not identify how many stents were 

inserted in a procedure, nor distinguish 

insertion of a single stent from insertion 

of multiple stents. Even the use of one 

of the stenting codes in conjunction 

with multiple-PTCA code 36.05 does 

not distinguish insertion of a single 

stent from insertion of multiple stents. 

The use of code 36.05 in conjunction 

with code 36.06 or code 36.07 indicates 

only performance of PTCA in more than 

one vessel, along with insertion of at 

least one stent. The precise numbers of 

PTCA-treated vessels, the number of 

vessels into which stents were inserted, 

and the total number of stents inserted 

in all treated vessels cannot be 

determined. Therefore, the capabilities 

of the current coding structure do not 

permit the distinction between single 

vessel stenting and multiple vessel 

stenting that would be required under 

the recommended restructuring of the 

stenting DRGs. 

In addition, because the FDA 

approved drug-eluting stents for use in 

April 2003, the distinct DRGs for drugeluting stents have only been effective 

for payment in the last year. The 

MedPAR file thus does not contain a 

full year of data with which to conduct 

the requisite analysis to evaluate the 

adequacy of the current structure of four 

stenting DRGs. Therefore, we believe 

that it is still premature to undertake 

such a thorough restructuring of the 

stent DRGs. Nevertheless, we will 

consider this recommendation as we 

evaluate the current DRG structure once 

adequate data on the current stenting 

DRGs become available. 

The second recommendation was that 

we transform the current structure of 

stenting DRGs into two new pairs of 

DRGs, reclassifying stenting cases 

according to whether bare metal or 

drug-eluting stents are used (as with the 

present DRGs) and whether the cases are 

‘‘complex’’ or ‘‘noncomplex.’’ The 

manufacturer indicated that complex 

cases are those that include certain 

comorbid conditions or procedural 

factors such as hypertensive renal 

failure, diabetes, AMI, and multivessel 

PCI. The manufacturer further indicated 

that this structure would provide an 

improvement in both clinical and 

resource coherence over the current 

structure that classifies cases according 

to the type of stent inserted and the 

presence or absence of AMI alone, 

without considering other complicating 

conditions. Specifically, the 

manufacturer recommended replacing 

the current structure with the following 

four DRGs:

• Recommended restructured DRG 516 

(Complex percutaneous 

cardiovascular procedures with 

nondrug-eluting stents) 

• Recommended restructured DRG 517 

(Noncomplex percutaneous 

cardiovascular procedures with 

nondrug-eluting stents) 

• Recommended restructured DRG 526 

(Complex percutaneous 

cardiovascular procedures with drugeluting stents) 

• Recommended restructured DRG 527 

(Noncomplex percutaneous 

cardiovascular procedures with drugeluting stents)

The manufacturer presented an 

analysis based on FY 2002 MedPAR 

data, in which it evaluated charges and 

lengths of stay for cases with expected 

high resource use, and reclassified cases 

into the recommended new structure of 

paired ‘‘complex’’ and ‘‘noncomplex’’

DRGs. The analysis shows some 

evidence of clinical and resource 

coherence in the recommended DRG 

structure. However, the analysis does 

not yet provide a convincing case for 

adopting the recommended restructure. 

First, the analysis does not reveal 

significant gains in resource coherence 

compared to previous DRGs for stenting 

cases. Second, the analysis is limited in 

assessing the feasibility of using the 

recommended DRG restructure versus 

the current DRG structure for 

classification of stent cases. Because the 

manufacturer used FY 2002 MedPAR 

data in its analysis, it was not able to 

compare the resource coherence of the 

recommended structure with the current 

structure of four DRGs, but only with 

the two DRGs that preceded the 

approval of drug-eluting stents. While 

the manufacturer asserted that ‘‘similar 

results would be expected’’ from a 

comparison between its recommended 

DRG restructure and the current DRG 

structure, we do not believe that it is 

advisable to undertake a critical DRG 

restructuring without examining the 

recommendation against actual 

experience under the current structure. 

Nevertheless, we believe that this 

recommendation may have merit, and 

we will conduct a full analysis of the 

recommendation in comparison to the 

current DRG structure once adequate 

data become available. 

The drug-eluting stents had not yet 

been FDA approved when we calculated 

the relative weights for DRGs 526 and 

527 for the FY 2003 IPPS final rule. 

Therefore, in the absence of MedPAR 

data, we based our FY 2003 relative 

weight calculations on prices in 

countries where drug-eluting stents 

were already being used. A full 

discussion of this process can be found 

in the FY 2004 IPPS final rule (68 FR 

45370). For computation of the 

proposed relative weights for FY 2005 

for this proposed rule, we are using the 

December update of FY 2003 MedPAR 

data. There have been a total of 42,356 

cases in DRG 526, and 33,179 cases in 

DRG 527, with adjustments made for 

transfers to other facilities. For 

computation of the final FY 2005 

relative weights, we will use the latest 

update of the MedPAR data file for cases 

in these two DRGs. No foreign data will 

be used to compute the relative weights 

for DRGs 526 and 527 in FY 2005. 

28224 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

c. Severe Sepsis 

We received a comment that 

recommended a separate DRG be 

assigned to the diagnosis of severe 

sepsis. Patients admitted with sepsis 

currently are assigned to DRG 416 

(Septicemia Age > 17) and DRG 417 

(Septicemia Age 0–17) in MDC 18 

(Infectious and Parasitic Diseases, 

Systemic or Unspecified Sites). The 

commenter contended that the costs of 

caring for patients with severe sepsis 

exceed those costs associated with other 

types of sepsis. Therefore, the 

commenter indicated, severe sepsis 

should be given a separate, unique DRG. 

Furthermore, the commenter requested 

that all cases in which severe sepsis is 

present on admission, as well as those 

cases in which it develops after 

admission (which are currently 

classified elsewhere) be included in this 

new DRG. The commenter suggested 

using various coexisting conditions and 

their corresponding ICD–9–CM codes 

(for example, respiratory failure or 

hypotension and renal failure) to 

identify patients with severe sepsis. The 

conditions suggested do not describe a 

clinically coherent set of patients that 

have severe sepsis. Using this list of 

conditions would erroneously identify 

patients as having severe sepsis. 

We acknowledge the high costs of 

caring for seriously ill patients with 

sepsis. However, we do not find, from 

a clinical perspective, that a subset of 

patients with severe sepsis exists to the 

degree that a separate DRG classification 

is justified. Sepsis in all forms is quite 

common across many DRGs in the 

Medicare population. In addition, we do 

not believe that the commenter’s 

suggested defining criteria for severe 

sepsis are specific, accurate, or unique 

enough to warrant a new DRG 

classification. Therefore, at this time, we 

are not proposing any change to the 

current DRG structure for sepsis. 

d. Implantable Cardiac Defibrillators 

There is a range of implantable 

cardiac defibrillators (ICDs) available on 

the market from extremely complex 

devices with multiple leads, settings, 

and functions to simpler models with a 

single lead and simpler functions. ICDs 

deliver electrical shocks to the heart to 

eliminate the life-threatening abnormal 

rhythms such as ventricular fibrillation 

or ventricular tachycardia. 

We have received a coverage request 

to expand the indications for 

implantable defibrillators to include the 

population studied in the Sudden 

Cardiac Death in Heart Failure Trial 

(SCD–HeFT) sponsored by the National 

Institutes of Health. SCD–HeFT treated 

heart failure patients with conventional 

therapy and randomized them to one of 

three additional treatment strategies: (1) 

Placebo; (2) amiodarone (drug therapy); 

or (3) single lead implantable 

defibrillator. The SCD–HeFT 

investigators presented results at the 

American College of Cardiology annual 

meeting that the basic single-lead 

implantable defibrillator is effective for 

saving lives in a population at lowmoderate risk for sudden cardiac death. 

The requestor indicated that, as part of 

CMS’ coverage decisions, CMS could 

expand the population eligible for 

implantable defibrillators. The requestor 

further added that CMS could restrict 

use of complex defibrillators to patients 

for whom they are medically necessary, 

that is, in the population at lowmoderate risk for sudden cardiac death. 

Given the potential increase of 

implantable defibrillator use in our 

population, we are soliciting input on 

how to encourage physicians to use the 

simpler, less costly device when 

advanced devices are not medically 

preferred. We are also soliciting input 

on the appropriate measures within the 

payment systems to accommodate 

payment for classes of defibrillators 

with very different costs. Ideally, we 

would like not only to align payments 

with relative costs, but also to align the 

incentives within the payment system 

with medically appropriate uses of 

different technologies. 

We believe that, within the PPS for 

inpatient hospital operating costs, there 

are several ways to deal with the 

expanding use of simpler, lower cost 

defibrillators. One possibility is to 

maintain the current DRG configuration, 

under which complex, expensive 

devices and simpler, less costly devices 

would remain within the same DRGs 

and receive the same payment rates. 

This approach would encourage use of 

the simpler devices, which would 

receive relatively higher reimbursement 

because their lower charges would be 

averaged in with the higher charges for 

the more complex devices in setting the 

DRG weights. However, it could lead to 

complaints that the program is 

underpaying for the more complex, 

expensive devices as the lower charges 

for simpler, less expensive devices 

begin to affect (lower) the DRG weights. 

Another approach would be to 

recognize the cost differences between 

various classes of defibrillators by 

establishing separate DRGs for basic 

single-lead implantable defibrillators as 

opposed to more complex, expensive 

models. This approach would prevent 

payments for the use of more expensive 

defibrillators (where medically 

necessary) from being diluted by the 

effect of the lower charges for basic 

single-lead implantable defibrillators on 

the weights within common DRGs. 

However, this policy would arguably 

provide less incentive for use of the 

lower cost devices: the weights for the 

DRGs containing the less expensive 

devices would be driven solely by their 

relatively lower charges, without being 

lifted by the higher charges for the more 

expensive models. This approach might 

also be criticized for departing from the 

averaging principle within the DRG 

system by basing too much on the cost 

differential alone in reconfiguring these 

DRGs. 

We welcome comments on these and 

other approaches to paying for 

defibrillators under the IPPS. We 

discuss an application for new 

technology add-on payments for a 

Cardiac Resynchronization Therapy 

with Defibrillator (CRT–D) in section 

II.E.4.c. of this proposed rule.

C. Recalibration of DRG Weights 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘DRG Weights’’ at the beginning 

of your comment.] 

We are proposing to use the same 

basic methodology for the FY 2005 

recalibration as we did for FY 2004 

(August 1, 2003 IPPS final rule (68 FR 

45373)). That is, we are proposing to 

recalibrate the DRG weights based on 

charge data for Medicare discharges 

using the most current charge 

information available (the FY 2003 

MedPAR file). 

The MedPAR file is based on fully 

coded diagnostic and procedure data for 

all Medicare inpatient hospital bills. 

The FY 2003 MedPAR data used in this 

proposed rule include discharges 

occurring between October 1, 2002 and 

September 30, 2003, based on bills 

received by CMS through December 31, 

2003, from all hospitals subject to the 

IPPS and short-term acute care hospitals 

in Maryland (which is under a waiver 

from the IPPS under section 1814(b)(3) 

of the Act). The FY 2003 MedPAR file 

includes data for approximately 

11,717,744 Medicare discharges. 

Discharges for Medicare beneficiaries 

enrolled in a Medicare+Choice managed 

care plan are excluded from this 

analysis. The data excludes CAHs, 

including hospitals that subsequently 

became CAHs after the period from 

which the data were taken. 

The proposed methodology used to 

calculate the DRG relative weights from 

the FY 2003 MedPAR file is as follows: 

• To the extent possible, all the 

claims were regrouped using the DRG 

classification revisions discussed in 

section II.B. of this preamble. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28225

• The transplant cases that were used 

to establish the relative weight for heart 

and heart-lung, liver, and lung 

transplants (DRGs 103, 480, and 495) 

were limited to those Medicareapproved transplant centers that have 

cases in the FY 2001 MedPAR file. 

(Medicare coverage for heart, heart-lung, 

liver, and lung transplants is limited to 

those facilities that have received 

approval from CMS as transplant 

centers.) 

• Organ acquisition costs for kidney, 

heart, heart-lung, liver, lung, pancreas, 

and intestinal (or multivisceral organs) 

transplants continue to be paid on a 

reasonable cost basis. Because these 

acquisition costs are paid separately 

from the prospective payment rate, it is 

necessary to subtract the acquisition 

charges from the total charges on each 

transplant bill that showed acquisition 

charges before computing the average 

charge for the DRG and before 

eliminating statistical outliers. 

• Charges were standardized to 

remove the effects of differences in area 

wage levels, indirect medical education 

and disproportionate share payments, 

and, for hospitals in Alaska and Hawaii, 

the applicable cost-of-living adjustment. 

• The average standardized charge 

per DRG was calculated by summing the 

standardized charges for all cases in the 

DRG and dividing that amount by the 

number of cases classified in the DRG. 

A transfer case is counted as a fraction 

of a case based on the ratio of its transfer 

payment under the per diem payment 

methodology to the full DRG payment 

for nontransfer cases. That is, a transfer 

case receiving payment under the 

transfer methodology equal to half of 

what the case would receive as a 

nontransfer would be counted as 0.5 of 

a total case. 

• Statistical outliers were eliminated 

by removing all cases that are beyond 

3.0 standard deviations from the mean 

of the log distribution of both the 

charges per case and the charges per day 

for each DRG. 

• The average charge for each DRG 

was then recomputed (excluding the 

statistical outliers) and divided by the 

national average standardized charge 

per case to determine the relative 

weight. 

The proposed new weights are 

normalized by a proposed adjustment 

factor of 1.46899 so that the average case 

weight after recalibration is equal to the 

average case weight before recalibration. 

This proposed adjustment is intended to 

ensure that recalibration by itself 

neither increases nor decreases total 

payments under the IPPS. 

When we recalibrated the DRG 

weights for previous years, we set a 

threshold of 10 cases as the minimum 

number of cases required to compute a 

reasonable weight. We are proposing to 

use that same case threshold in 

recalibrating the proposed DRG weights 

for FY 2005. Using the FY 2003 

MedPAR data set, there are 42 DRGs 

that contain fewer than 10 cases. We are 

proposing to compute the weights for 

these low-volume DRGs by adjusting the 

FY 2004 weights of these DRGs by the 

percentage change in the average weight 

of the cases in the other DRGs. 

Section 1886(d)(4)(C)(iii) of the Act 

requires that, beginning with FY 1991, 

reclassification and recalibration 

changes be made in a manner that 

assures that the aggregate payments are 

neither greater than nor less than the 

aggregate payments that would have 

been made without the changes. 

Although normalization is intended to 

achieve this effect, equating the average 

case weight after recalibration to the 

average case weight before recalibration 

does not necessarily achieve budget 

neutrality with respect to aggregate 

payments to hospitals because payments 

to hospitals are affected by factors other 

than average case weight. Therefore, as 

we have done in past years and as 

discussed in section II.A.4.a. of the 

Addendum to this proposed rule, we are 

proposing to make a budget neutrality 

adjustment to ensure that the 

requirement of section 1886(d)(4)(C)(iii) 

of the Act is met. 

D. Proposed LTC–DRG Reclassifications 

and Relative Weights for LTCHs for FY 

2005 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘LTC–DRGs’’ at the beginning 

of your comment.] 

1. Background 

In the June 6, 2003 LTCH PPS final 

rule (68 FR 34122), we changed the 

LTCH PPS annual payment rate update 

cycle to be effective July 1 through June 

30 instead of October 1 through 

September 30. In addition, since the 

patient classification system utilized 

under the LTCH PPS is based directly 

on the DRGs used under the IPPS for 

acute care hospitals, in that same final 

rule, we explained that the annual 

update of the long-term care diagnosisrelated group (LTC–DRG) classifications 

and relative weights will continue to 

remain linked to the annual 

reclassification and recalibration of the 

CMS–DRGs under the IPPS. 

The annual update to the IPPS DRGs 

is based on the annual revisions to the 

ICD–9–CM codes and is effective each 

October 1. In the health care industry, 

annual changes to the ICD–9–CM codes 

are effective for discharges occurring on 

or after October 1 each year. The use of 

the ICD–9-CM coding system is also 

compliant with the requirements of the 

Health Insurance Portability and 

Accountability Act (HIPAA), Public Law 

104–191, under 45 CFR Parts 160 and 

162. Therefore, the manual and 

electronic versions of the GROUPER 

software, which are based on the ICD–

9–CM codes, are also revised annually 

and effective for discharges occurring on 

or after October 1 each year. Because the 

LTC–DRGs are based on the patient 

classification system used under the 

IPPS (CMS–DRGs), which is updated 

annually and effective for discharges 

occurring on or after October 1 through 

September 30 each year, in the June 6, 

2003 LTCH PPS final rule (68 FR 

34128), we specified that we will 

continue to update the LTC–DRG 

classifications and relative weights to be 

effective for discharges occurring on or 

after October 1 through September 30 

each year. Furthermore, we stated that 

we will publish the annual update of 

the LTC–DRGs in the proposed and final 

rules for the IPPS.

In this proposed rule, we are 

proposing revisions to the LTC–DRG 

classifications and relative weights and 

will finalize them in the IPPS final rule, 

to be effective October 1, 2004 through 

September 30, 2005. The proposed 

LTC–DRGs and relative weights for FY 

2005 in this proposed rule are based on 

the IPPS DRGs (GROUPER version 22.0) 

discussed in section II. of this proposed 

rule. 

2. Proposed Changes in the LTC–DRG 

Classifications 

a. Background 

Section 123 of Public Law 106–113 

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 Public Law 106–554 

modified the requirements of section 

123 of Public Law 106–113 by 

specifically requiring that the Secretary 

examine ‘‘the feasibility and the impact 

of basing payment under such a system 

[the LTCH PPS] on the use of existing 

(or refined) hospital diagnosis-related 

groups (DRGs) that have been modified 

to account for different resource use of 

long-term care hospital patients as well 

as the use of the most recently available 

hospital discharge data.’’

In accordance with section 307(b)(1) 

of Public Law 106–554 and § 412.515 of 

our existing regulations, the LTCH PPS 

uses information from LTCH patient 

28226 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

records to classify patient cases into 

distinct LTC–DRGs based on clinical 

characteristics and expected resource 

needs. The LTC–DRGs used as the 

patient classification component of the 

LTCH PPS correspond to the DRGs 

under the IPPS for acute care hospitals. 

Thus, in this proposed rule, we are 

proposing to use the IPPS version 22.0 

GROUPER for FY 2005 to process LTCH 

PPS claims. The proposed changes to 

the IPPS DRG classification system for 

FY 2005 (Grouper 22.0) are discussed in 

section II.B. of this preamble. 

Under the LTCH PPS, we determine 

relative weights for each of the CMS 

DRGs to account for the difference in 

resource use by patients exhibiting the 

case complexity and multiple medical 

problems characteristic of LTCH 

patients. In a departure from the IPPS, 

as we discussed in the August 30, 2002 

final rule (67 FR 55985), which 

implemented the LTCH PPS, and the 

August 1, 2003 IPPS final rule (68 FR 

45374), we use low-volume quintiles in 

determining the LTC–DRG weights for 

LTC–DRGs with less than 25 LTCH 

cases, since LTCHs do not typically treat 

the full range of diagnoses as do acute 

care hospitals. Specifically, we group 

those low-volume LTC–DRGs (LTC–

DRGs with fewer than 25 cases) into 5 

quintiles based on average charge per 

discharge. (A listing of the composition 

of low-volume quintiles for the FY 2004 

LTC–DRGs (based on FY 2002 MedPAR 

data) appears in section II.D.3. of the 

August 1, 2003 IPPS final rule (68 FR 

45377—45380).) We also adjust for cases 

in which the stay at the LTCH is less 

than or equal to five-sixths of the 

geometric average length of stay; that is, 

short-stay outlier cases (§ 412.529), as 

discussed below in section II.D.4. of this 

preamble. 

b. Patient Classifications Into DRGs 

Generally, under the LTCH PPS, 

Medicare payment is made at a 

predetermined specific rate for each 

discharge; that is, payment varies by the 

LTC–DRG to which a beneficiary’s stay 

is assigned. Similar to case classification 

for acute care hospitals under the IPPS 

(see section II.B. of this preamble), cases 

are classified into LTC–DRGs for 

payment under the LTCH PPS based on 

the principal diagnosis, up to eight 

additional diagnoses, and up to six 

procedures performed during the stay, 

as well as age, sex, and discharge status 

of the patient. The diagnosis and 

procedure information is reported by 

the hospital using codes from the ICD–

9–CM. 

As discussed above in section II.B. of 

this preamble, the CMS DRGs are 

organized into 25 major diagnostic 

categories (MDCs), most of which are 

based on a particular organ system of 

the body; the remainder involve 

multiple organ systems (such as MDC 

22, Burns). Accordingly, the principal 

diagnosis determines MDC assignment. 

Within most MDCs, cases are then 

divided into surgical DRGs and medical 

DRGs. Some surgical and medical DRGs 

are further differentiated based on the 

presence or absence of CCs. (See section 

II.B. of this preamble for further 

discussion of surgical DRGs and 

medical DRGs.) 

Because the assignment of a case to a 

particular LTC–DRG will help 

determine the amount that is paid for 

the case, it is important that the coding 

is accurate. As used under the IPPS, 

classifications and terminology used 

under the LTCH PPS are consistent with 

the ICD–9–CM and the Uniform 

Hospital Discharge Data Set (UHDDS), 

as recommended to the Secretary by the 

National Committee on Vital and Health 

Statistics (‘‘Uniform Hospital Discharge 

Data: Minimum Data Set, National 

Center for Health Statistics, April 

1980’’) and as revised in 1984 by the 

Health Information Policy Council 

(HIPC) of the U.S. Department of Health 

and Human Services. We wish to point 

out again that the ICD–9–CM coding 

terminology and the definitions of 

principal and other diagnoses of the 

UHDDS are consistent with the 

requirements of the Administrative 

Simplification Act of 1996 of the HIPAA 

(45 CFR Parts 160 and 162). 

The emphasis on the need for proper 

coding cannot be overstated. 

Inappropriate coding of cases can 

adversely affect the uniformity of cases 

in each LTC–DRG and produce 

inappropriate weighting factors at 

recalibration and result in inappropriate 

payments under the LTCH PPS. LTCHs 

are to follow the same coding guidelines 

used by the acute care hospitals to 

ensure accuracy and consistency in 

coding practices. There will be only one 

LTC–DRG assigned per long-term care 

hospitalization; it will be assigned at the 

discharge. Therefore, it is mandatory 

that the coders continue to report the 

same principal diagnosis on all claims 

and include all diagnostic codes that 

coexist at the time of admission, that are 

subsequently developed, or that affect 

the treatment received. Similarly, all 

procedures performed during that stay 

are to be reported on each claim. 

Upon the discharge of the patient 

from a LTCH, the LTCH must assign 

appropriate diagnosis and procedure 

codes from the ICD–9–CM. As of 

October 16, 2002, a LTCH that was 

required to comply with the HIPAA 

Administrative Simplification 

Standards and that had not obtained an 

extension in compliance with the 

Administrative Compliance Act (Public 

Law 107–105) is obligated to comply 

with the standards at 45 CFR 162.1002 

and 45 CFR 162.1102. Completed claim 

forms are to be submitted to the LTCH’s 

Medicare fiscal intermediary. Medicare 

fiscal intermediaries enter the clinical 

and demographic information into their 

claims processing systems and subject 

this information to a series of automated 

screening processes called the Medicare 

Code Editor (MCE). These screens are 

designed to identify cases that require 

further review before assignment into an 

LTC–DRG can be made. 

After screening through the MCE, 

each LTCH claim will be classified into 

the appropriate LTC–DRG by the 

Medicare LTCH GROUPER. The LTCH 

GROUPER is specialized computer 

software based on the same GROUPER 

used under the IPPS. After the LTC–

DRG is assigned, the Medicare fiscal 

intermediary determines the prospective 

payment by using the Medicare LTCH 

PPS PRICER program, which accounts 

for LTCH hospital-specific adjustments. 

As provided for under the IPPS, we 

provide an opportunity for the LTCH to 

review the LTC–DRG assignments made 

by the fiscal intermediary and to submit 

additional information within a 

specified timeframe (§ 412.513(c)).

The GROUPER is used both to classify 

past cases in order to measure relative 

hospital resource consumption to 

establish the LTC–DRG weights and to 

classify current cases for purposes of 

determining payment. The records for 

all Medicare hospital inpatient 

discharges are maintained in the 

MedPAR file. The data in this file are 

used to evaluate possible DRG 

classification changes and to recalibrate 

the DRG weights during our annual 

update (as discussed in section II. of this 

preamble). The LTC–DRG relative 

weights are based on data for the 

population of LTCH discharges, 

reflecting the fact that LTCH patients 

represent a different patient mix than 

patients in short-term acute care 

hospitals. 

3. Development of the Proposed FY 

2005 LTC–DRG Relative Weights 

a. General Overview of Development of 

the LTC–DRG Relative Weights 

As we stated in the August 30, 2002 

LTCH PPS final rule (67 FR 55981), one 

of the primary goals for the 

implementation of the LTCH PPS is to 

pay each LTCH an appropriate amount 

for the efficient delivery of care to 

Medicare patients. The system must be 

able to account adequately for each 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28227

LTCH’s case-mix in order to ensure both 

fair distribution of Medicare payments 

and access to adequate care for those 

Medicare patients whose care is more 

costly. To accomplish these goals, we 

adjust the LTCH PPS standard Federal 

prospective payment system rate by the 

applicable LTC–DRG relative weight in 

determining payment to LTCHs for each 

case. 

Under the LTCH PPS, relative weights 

for each LTC–DRG are a primary 

element used to account for the 

variations in cost per discharge and 

resource utilization among the payment 

groups (§ 412.515). To ensure that 

Medicare patients classified to each 

LTC–DRG have access to an appropriate 

level of services and to encourage 

efficiency, we calculate a relative weight 

for each LTC–DRG that represents the 

resources needed by an average 

inpatient LTCH case in that LTC–DRG. 

For example, cases in a LTC–DRG with 

a relative weight of 2 will, on average, 

cost twice as much as cases in a LTC–

DRG with a weight of 1. 

b. Data 

To calculate the proposed LTC–DRG 

relative weights for FY 2005 in this 

proposed rule, we obtained total 

Medicare allowable charges from FY 

2003 Medicare hospital bill data from 

the December 2003 update of the 

MedPAR file, and we used the proposed 

Version 22.0 of the CMS GROUPER for 

IPPS, as discussed in section II.B. of this 

preamble, to classify cases. Consistent 

with the methodology under the IPPS, 

we are proposing to recalculate the FY 

2005 LTC–DRG relative weights based 

on the best available data for the final 

rule. 

As we discussed in the August 1, 

2003 final rule (68 FR 45376), we have 

excluded the data from LTCHs that are 

all-inclusive rate providers and LTCHs 

that are reimbursed in accordance with 

demonstration projects authorized 

under section 402(a) of Public Law 90–

248 (42 U.S.C. 1395b–1) or section 

222(a) of Public Law 92–603 (42 U.S.C. 

1395b–1). Therefore, in the 

development of the proposed FY 2005 

LTC–DRG relative weights, we have 

excluded the data of the 22 all-inclusive 

rate providers and the 3 LTCHs that are 

paid in accordance with demonstration 

projects that had claims in the FY 2003 

MedPAR file. 

In the August 1, 2003 final rule (68 FR 

45367), we discussed coding 

inaccuracies that were found in claims 

data for a large chain of LTCHs in the 

FY 2002 MedPAR file used to determine 

the LTC–DRG relative weights for FY 

2004. Specifically, the principal 

diagnosis was not reported correctly on 

many of those LTCHs’ claims, which 

resulted in those claims being 

incorrectly assigned to a LTC–DRG. As 

we explained in that same final rule, we 

were able to determine the correct 

diagnoses and procedure codes for the 

claims that contained the coding errors, 

and we used them to group each LTCH 

case to the appropriate LTC–DRG for 

determining the LTC–DRG relative 

weights for FY 2004. In addition, we 

stated that since the LTCH PPS was 

implemented for cost reporting periods 

beginning on or after October 1, 2002 

(FY 2003), we believe that this problem 

will be self-correcting as LTCHs submit 

more completely coded data in the 

future. 

As we discussed in the May 7, 2004 

LTCH PPS final rule (69 FR 25673), an 

analysis of LTCH claims data from the 

September 2003 update of the FY 2003 

MedPAR file contained coding errors. 

Specifically, a large hospital chain of 

LTCHs continued to consistently code 

diagnoses inaccurately on the claims it 

submitted, and these coding errors were 

reflected in the September 2003 update 

of the FY 2003 MedPAR file. Upon 

discovering the coding errors, we 

notified the large chain of LTCHs whose 

claims contained the coding 

inaccuracies to request that they 

resubmit those claims with the correct 

diagnoses codes by December 31, 2003, 

so that those corrected claims would be 

contained in the December 2003 update 

of the FY 2003 MedPAR file. As we 

discussed in that same final rule, it 

appears that those claims were 

submitted timely with the correct 

diagnoses codes. Therefore, it was not 

necessary to correct the FY 2003 

MedPAR data for the development of 

the rates and factors established in the 

May 7, 2004 LTCH PPS final rule. 

Accordingly, we are proposing to use 

LTCH claims data from the December 

2003 update of the FY 2003 MedPAR 

file for the determination of the 

proposed FY 2005 LTC–DRG relative 

weights in this proposed rule. 

c. Hospital-Specific Relative Value 

Methodology 

By nature LTCHs often specialize in 

certain areas, such as ventilatordependent 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. Such nonarbitrary 

distribution of cases with relatively high 

(or low) charges in specific LTC–DRGs 

has the potential to inappropriately 

distort the measure of average charges. 

To account for the fact that cases may 

not be randomly distributed across 

LTCHs, we use a hospital-specific 

relative value method to calculate the 

LTC–DRG relative weights instead of the 

methodology used to determine the DRG 

relative weights under the IPPS 

described above in section II.C. of this 

preamble. We believe this method will 

remove this hospital-specific source of 

bias in measuring LTCH average 

charges. Specifically, we reduce the 

impact of the variation in charges across 

providers on any particular LTC–DRG 

relative weight by converting each 

LTCH’s charge for a case to a relative 

value based on that LTCH’s average 

charge. 

Under the hospital-specific relative 

value method, we standardize charges 

for each LTCH by converting its charges 

for each case to hospital-specific relative 

charge values and then adjusting those 

values for the LTCH’s case-mix. The 

adjustment for case-mix is needed to 

rescale the hospital-specific relative 

charge values (which, by definition, 

averages 1.0 for each LTCH). The 

average relative weight for a LTCH is its 

case-mix, so it is reasonable to scale 

each LTCH’s average relative charge 

value by its case-mix. In this way, each 

LTCH’s relative charge value is adjusted 

by its case-mix to an average that 

reflects the complexity of the cases it 

treats relative to the complexity of the 

cases treated by all other LTCHs (the 

average case-mix of all LTCHs). 

In accordance with the methodology 

established under § 412.523, we 

standardize charges for each case by 

first dividing the adjusted charge for the 

case (adjusted for short-stay outliers 

under § 412.529 as described in section 

II.D.4. (step 3) of this preamble) by the 

average adjusted charge for all cases at 

the LTCH in which the case was treated. 

Short-stay outliers under § 412.529 are 

cases with a length of stay that is less 

than or equal to five-sixths the average 

length of stay of the LTC–DRG. The 

average adjusted charge reflects the 

average intensity of the health care 

services delivered by a particular LTCH 

and the average cost level of that LTCH. 

The resulting ratio is multiplied by that 

LTCH’s case-mix index to determine the 

standardized charge for the case. 

Multiplying by the LTCH’s case-mix 

index accounts for the fact that the same 

relative charges are given greater weight 

in a LTCH with higher average costs 

than they would at a LTCH with low 

average costs which is needed to adjust 

each LTCH’s relative charge value to 

reflect its case-mix relative to the 

average case-mix for all LTCHs. Because 

we standardize charges in this manner, 

we count charges for a Medicare patient 

at a LTCH with high average charges as 

less resource intensive than they would 

28228 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

be at a LTCH with low average charges. 

For example, a $10,000 charge for a case 

in a LTCH with an average adjusted 

charge of $17,500 reflects a higher level 

of relative resource use than a $10,000 

charge for a case in a LTCH with the 

same case-mix, but an average adjusted 

charge of $35,000. We believe that the 

adjusted charge of an individual case 

more accurately reflects actual resource 

use for an individual LTCH because the 

variation in charges due to systematic 

differences in the markup of charges 

among LTCHs is taken into account.

d. Low-Volume LTC–DRGs 

In order to account for LTC–DRGs 

with low-volume (that is, with fewer 

than 25 LTCH cases), in accordance 

with the methodology discussed in the 

August 1, 2002 final rule (67 FR 55984), 

we group those low-volume LTC–DRGs 

into one of five categories (quintiles) 

based on average charges, for the 

purposes of determining relative 

weights. For this proposed rule, using 

LTCH cases from the December 2003 

update of the FY 2003 MedPAR file, we 

identified 171 LTC–DRGs that contained 

between 1 and 24 cases. This list of 

proposed LTC–DRGs was then divided 

into one of the five low-volume 

quintiles, each containing a minimum of 

34 LTC–DRGs (171/5 = 34 with 1 LTC–

DRG as the remainder). For FY 2005, we 

are proposing to make an assignment to 

a specific low-volume quintile by 

sorting the 171 low-volume proposed 

LTC–DRGs in ascending order by 

average charge. Since the number of 

LTC–DRGs with less than 25 LTCH 

cases is not evenly divisible by five, the 

average charge of the proposed lowvolume LTC–DRG was used to 

determine which low-volume quintile 

received the proposed additional LTC–

DRG. After sorting the 171 low-volume 

proposed LTC–DRGs in ascending 

order, we are proposing that the first 

fifth (34) of low-volume LTC–DRGs with 

the lowest average charge would be 

grouped into Quintile 1. The highest 

average charge cases would be grouped 

into Quintile 5. Since the average charge 

of the proposed 69th LTC–DRG in the 

sorted list is closer to the previous 

proposed LTC–DRG’s average charge 

(assigned to Quintile 2) than to the 

average charge of the proposed 70th 

LTC–DRG in the sorted list (to be 

assigned to Quintile 3), we are 

proposing to place it into Quintile 2. 

This process was repeated through the 

remaining low-volume proposed LTC–

DRGs so that 4 proposed low-volume 

quintiles contain 34 proposed LTC–

DRGs and 1 proposed low-volume 

quintile contains 35 proposed LTC–

DRGs. 

In order to determine the proposed 

relative weights for the proposed LTC–

DRGs with low volume for FY 2005, in 

accordance with the methodology 

described in the August 1, 2002 final 

rule (67 FR 55984), we are proposing to 

use the five proposed low-volume 

quintiles described above. The 

composition of each of the five 

proposed low-volume quintiles shown 

below in Table 1 would be used in 

determining the proposed LTC–DRG 

relative weights for FY 2005. We would 

determine a proposed relative weight 

and (geometric) average length of stay 

for each of the five proposed lowvolume quintiles using the formula that 

we are proposing to apply to the regular 

proposed LTC–DRGs (25 or more cases), 

as described below in section II.D.4. of 

this preamble. We are proposing to 

assign the same proposed relative 

weight and proposed average length of 

stay to each of the proposed LTC–DRGs 

that make up that proposed low-volume 

quintile. We note that as this system is 

dynamic, it is possible that the number 

and specific type of LTC–DRGs with a 

low volume of LTCH cases will vary in 

the future. We use the best available 

claims data in the MedPAR file to 

identify low-volume LTC–DRGs and to 

calculate the relative weights based on 

our methodology.

TABLE 1.—PROPOSED COMPOSITION OF LOW-VOLUME QUINTILES

Proposed 

LTC–DRG Description 

QUINTILE 1

11 ............. NERVOUS SYSTEM NEOPLASMS W/O CC. 

43 ............. HYPHEMA. 

45 ............. NEUROLOGICAL EYE DISORDERS. 

47 ............. OTHER DISORDERS OF THE EYE AGE >17 W/O CC. 

84 ............. MAJOR CHEST TRAUMA W/O CC. 

95 ............. PNEUMOTHORAX W/O CC. 

110 ........... MAJOR CARDIOVASCULAR PROCEDURES W CC. 

119 ........... VEIN LIGATION & STRIPPING. 

143 ........... CHEST PAIN. 

149 ........... MAJOR SMALL & LARGE BOWEL PROCEDURES W/O CC. 

178 ........... UNCOMPLICATED PEPTIC ULCER W/O CC. 

193 ........... BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O C.D.E. W CC. 

208 ........... DISORDERS OF THE BILIARY TRACT W/O CC. 

229 ........... HAND OR WRIST PROC, EXCEPT MAJOR JOINT PROC, W/O CC. 

241 ........... CONNECTIVE TISSUE DISORDERS W/O CC. 

260 ........... SUBTOTAL MASTECTOMY FOR MALIGNANCY W/O CC. 

273 ........... MAJOR SKIN DISORDERS W/O CC. 

284 ........... MINOR SKIN DISORDERS W/O CC. 

301 ........... ENDOCRINE DISORDERS W/O CC. 

323 ........... URINARY STONES W CC, &/OR ESW LITHOTRIPSY. 

324 ........... URINARY STONES W/O CC. 

326 ........... KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W/O CC . 

339 ........... TESTES PROCEDURES, NON-MALIGNANCY AGE >17. 

347 ........... MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W/O CC. 

367 ........... MALIGNANCY, FEMALE REPRODUCTIVE SYSTEM W/O CC. 

404 ........... LYMPHOMA & NON-ACUTE LEUKEMIA W/O CC. 

414 ........... OTHER MYELOPROLIF DIS OR POORLY DIFF NEOPL DIAG W/O CC. 

433 ........... ALCOHOL/DRUG ABUSE OR DEPENDENCE, LEFT AMA. 

450 ........... POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W/O CC. 

479 ........... OTHER VASCULAR PROCEDURES W/O CC. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28229

TABLE 1.—PROPOSED COMPOSITION OF LOW-VOLUME QUINTILES—Continued

Proposed 

LTC–DRG Description 

500 ........... BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W/O CC. 

509 ........... FULL THICKNESS BURN W/O SKIN GRFT OR INH INJ W/O CC OR SIG TRAUMA. 

522 ........... ALC/DRUG ABUSE OR DEPEND W REHABILITATION THERAPY W/O CC 

523 ........... ALC/DRUG ABUSE OR DEPEND W/O REHABILITATION THERAPY W/O CC 

QUINTILE 2

8 ............... PERIPH & CRANIAL NERVE & OTHER NERV SYST PROC W/O CC. 

22 ............. HYPERTENSIVE ENCEPHALOPATHY. 

25 ............. SEIZURE & HEADACHE AGE >17 W/O CC. 

31 ............. CONCUSSION AGE >17 W CC. 

69* ............ OTITIS MEDIA & URI AGE >17 W/O CC. 

109 ........... CORONARY BYPASS W/O PTCA OR CARDIAC CATH. 

128 ........... DEEP VEIN THROMBOPHLEBITIS. 

129 ........... CARDIAC ARREST, UNEXPLAINED. 

140 ........... ANGINA PECTORIS. 

175 ........... G.I. HEMORRHAGE W/O CC. 

177 ........... UNCOMPLICATED PEPTIC ULCER W CC. 

181 ........... G.I. OBSTRUCTION W/O CC. 

227 ........... SOFT TISSUE PROCEDURES W/O CC. 

228 ........... MAJOR THUMB OR JOINT PROC, OR OTH HAND OR WRIST PROC W CC. 

234 ........... OTHER MUSCULOSKELET SYS & CONN TISS O.R. PROC W/O CC. 

237 ........... SPRAINS, STRAINS, & DISLOCATIONS OF HIP, PELVIS & THIGH. 

250 ........... FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17 W CC. 

251 ........... FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17 W/O CC . 

276 ........... NON-MALIGANT BREAST DISORDERS. 

295 ........... DIABETES AGE 0–35. 

305 ........... KIDNEY,URETER & MAJOR BLADDER PROC FOR NON-NEOPL W/O CC. 

307 ........... PROSTATECTOMY W/O CC. 

325 ........... KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W CC. 

328 ........... URETHRAL STRICTURE AGE >17 W CC. 

348 ........... BENIGN PROSTATIC HYPERTROPHY W CC. 

349 ........... BENIGN PROSTATIC HYPERTROPHY W/O CC. 

399 ........... RETICULOENDOTHELIAL & IMMUNITY DISORDERS W/O CC. 

420 ........... FEVER OF UNKNOWN ORIGIN AGE >17 W/O CC. 

427 ........... NEUROSES EXCEPT DEPRESSIVE. 

441 ........... HAND PROCEDURES FOR INJURIES. 

447 ........... ALLERGIC REACTIONS AGE >17. 

449 ........... POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W CC. 

467 ........... OTHER FACTORS INFLUENCING HEALTH STATUS. 

511 ........... NON-EXTENSIVE BURNS W/O CC OR SIGNIFICANT TRAUMA 

532 ........... SPINAL PROCEDURES W/O CC 

QUINTILE 3

17 ............. NONSPECIFIC CEREBROVASCULAR DISORDERS W/O CC. 

21 ............. VIRAL MENINGITIS. 

29 ............. TRAUMATIC STUPOR & COMA, COMA <1 HR AGE >17 W/O CC. 

44 ............. ACUTE MAJOR EYE INFECTIONS. 

53 ............. SINUS & MASTOID PROCEDURES AGE >17. 

83 ............. MAJOR CHEST TRAUMA W CC. 

122 ........... CIRCULATORY DISORDERS W AMI W/O MAJOR COMP, DISCHARGED ALIVE. 

124 ........... CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH & COMPLEX DIAG. 

136 ........... CARDIAC CONGENITAL & VALVULAR DISORDERS AGE >17 W/O CC. 

159 ........... HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17 W CC. 

185 ........... DENTAL & ORAL DIS EXCEPT EXTRACTIONS & RESTORATIONS, AG >17. 

200 ........... HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR NON-MALIGNANCY. 

262 ........... BREAST BIOPSY & LOCAL EXCISION FOR NON- MALIGNANCY. 

266 ........... SKIN GRAFT &/OR DEBRID EXCEPT FOR SKIN ULCER OR CELLULITIS W/O CC. 

270 ........... OTHER SKIN, SUBCUT TISS & BREAST PROC W/O CC. 

275 ........... MALIGNANT BREAST DISORDERS W/O CC. 

288 ........... O.R. PROCEDURES FOR OBESITY. 

299 ........... INBORN ERRORS OF METABOLISM. 

306 ........... PROSTATECTOMY W CC. 

319* .......... KIDNEY & URINARY TRACT NEOPLASMS W/O CC 

336 ........... TRANSURETHRAL PROSTATECTOMY W CC. 

352 ........... OTHER MALE REPRODUCTIVE SYSTEM DIAGNOSES. 

369 ........... MENSTRUAL & OTHER FEMALE REPRODUCTIVE SYSTEM DISORDERS. 

394 ........... OTHER O.R. PROCEDURES OF THE BLOOD AND BLOOD FORMING ORGANS. 

410 ........... CHEMOTHERAPY W/O ACUTE LEUKEMIA AS SECONDARY DIAGNOSIS. 

476 ........... PROSTATIC O.R. PROCEDURE UNRELATED TO PRINCIPAL DIAGNOSIS. 

28230 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

TABLE 1.—PROPOSED COMPOSITION OF LOW-VOLUME QUINTILES—Continued

Proposed 

LTC–DRG Description 

493 ........... LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W CC. 

496 ........... COMBINED ANTERIOR/POSTERIOR SPINAL FUSION. 

497 ........... SPINAL FUSION EXCEPT CERVICAL W CC. 

502 ........... KNEE PROCEDURES W PDX OF INFECTION W/O CC. 

517 ........... PERC CARDIO PROC W NON-DRUG ELUTING STENT W/O AMI. 

518 ........... PERC CARDIO PROC W/O CORONARY ARTERY STENT OR AMI. 

538 ........... LOCAL EXCIS & REMOV OF INT FIX DEV EXCEPT HIP & FEMUR W/O CC 

539 ........... LYMPHOMA & LEUKEMIA W MAJOR OR PROCEDURE W CC 

QUINTILE 4

1 ............... CRANIOTOMY AGE >17 W CC. 

63 ............. OTHER EAR, NOSE, MOUTH & THROAT O.R. PROCEDURES. 

86* ............ PLEURAL EFFUSION W/O CC. 

102* .......... OTHER RESPIRATORY SYSTEM DIAGNOSES W/O CC. 

108 ........... OTHER CARDIOTHORACIC PROCEDURES. 

115 ........... PRM CARD PACEM IMPL W AMI/HR/SHOCK OR AICD LEAD OR GNRTR. 

116 ........... OTHER PERMANENT CARDIAC PACEMAKER IMPLANT. 

157 ........... ANAL & STOMAL PROCEDURES W CC. 

168 ........... MOUTH PROCEDURES W CC. 

201 ........... OTHER HEPATOBILIARY OR PANCREAS O.R. PROCEDURES. 

216 ........... BIOPSIES OF MUSCULOSKELETAL SYSTEM & CONNECTIVE TISSUE. 

218 ........... LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE >17 W CC. 

224 ........... SHOULDER, ELBOW OR FOREARM PROC,EXC MAJOR JOINT PROC, W/O CC. 

226 ........... SOFT TISSUE PROCEDURES W CC. 

268 ........... SKIN, SUBCUTANEOUS TISSUE & BREAST PLASTIC PROCEDURES. 

292 ........... OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W CC. 

303 ........... KIDNEY, URETER & MAJOR BLADDER PROCEDURES FOR NEOPLASM. 

304 ........... KIDNEY, URETER & MAJOR BLADDER PROC FOR NON-NEOPL W CC. 

308 ........... MINOR BLADDER PROCEDURES W CC. 

310 ........... TRANSURETHRAL PROCEDURES W CC. 

312 ........... URETHRAL PROCEDURES, AGE >17 W CC. 

345 ........... OTHER MALE REPRODUCTIVE SYSTEM O.R. PROC EXCEPT FOR MALIGNANCY. 

401 ........... LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC W CC. 

408 ........... MYELOPROLIF DISORD OR POORLY DIFF NEOPL W OTHER O.R. PROC. 

419 ........... FEVER OF UNKNOWN ORIGIN AGE >17 W CC. 

455 ........... OTHER INJURY, POISONING & TOXIC EFFECT DIAG W/O CC. 

485 ........... LIMB REATTACHMENT, HIP AND FEMUR PROC FOR MULTIPLE SIGNIFICANT TRA . 

487 ........... OTHER MULTIPLE SIGNIFICANT TRAUMA. 

501 ........... KNEE PROCEDURES W PDX OF INFECTION W CC. 

503 ........... KNEE PROCEDURES W/O PDX OF INFECTION. 

505 ........... EXTENSIVE BURNS OF FULL THICKNESS BURNS WITH MECH VENT 96+HRS WITHOUT SKIN GRAFT. 

506 ........... FULL THICKNESS BURN W SKIN GRAFT OR INHAL INJ W CC OR SIG TRAUMA. 

519 ........... CERVICAL SPINAL FUSION W CC 

529 ........... VENTRICULAR SHUNT PROCEDURES W CC 

QUINTILE 5

46 ............. OTHER DISORDERS OF THE EYE AGE >17 W CC. 

55 ............. MISCELLANEOUS EAR, NOSE, MOUTH & THROAT PROCEDURES. 

77 ............. OTHER RESP SYSTEM O.R. PROCEDURES W/O CC. 

117 ........... CARDIAC PACEMAKER REVISION EXCEPT DEVICE REPLACEMENT. 

118 ........... CARDIAC PACEMAKER DEVICE REPLACEMENT. 

125 ........... CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH W/O COMPLEX DIAG. 

150 ........... PERITONEAL ADHESIOLYSIS W CC. 

152 ........... MINOR SMALL & LARGE BOWEL PROCEDURES W CC. 

154 ........... STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE >17 W CC. 

161 ........... INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W CC. 

171* .......... OTHER DIGESTIVE SYSTEM O.R. PROCEDURES W/O CC. 

191 ........... PANCREAS, LIVER & SHUNT PROCEDURES W CC. 

197 ........... CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O C.D.E. W CC. 

206* .......... DISORDERS OF LIVER EXCEPT MALIG,CIRR,ALC HEPA W/O CC. 

209 ........... MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF LOWER EXTREMITY. 

210 ........... HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE >17 W CC. 

230 ........... LOCAL EXCISION & REMOVAL OF INT FIX DEVICES OF HIP & FEMUR. 

261 ........... BREAST PROC FOR NON-MALIGNANCY EXCEPT BIOPSY & LOCAL EXCISION. 

267 ........... PERIANAL & PILONIDAL PROCEDURES. 

338 ........... TESTES PROCEDURES, FOR MALIGNANCY. 

341 ........... PENIS PROCEDURES. 

365 ........... OTHER FEMALE REPRODUCTIVE SYSTEM O.R. PROCEDURES. 

406 ........... MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ O.R. PROC W CC. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28231

TABLE 1.—PROPOSED COMPOSITION OF LOW-VOLUME QUINTILES—Continued

Proposed 

LTC–DRG Description 

424 ........... O.R. PROCEDURE W PRINCIPAL DIAGNOSES OF MENTAL ILLNESS. 

443* .......... OTHER O.R. PROCEDURES FOR INJURIES W/O CC. 

454 ........... OTHER INJURY, POISONING & TOXIC EFFECT DIAG W CC. 

486 ........... OTHER O.R. PROCEDURES FOR MULTIPLE SIGNIFICANT TRAUMA. 

488 ........... HIV W EXTENSIVE O.R. PROCEDURE. 

499 ........... BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W CC. 

515 ........... CARDIAC DEFIBRILLATOR IMPLANT W/O CARDIAC CATH. 

531 ........... SPINAL PROCEDURES W CC. 

533 ........... EXTRACRANIAL PROCEDURES W CC. 

535 ........... CARDIAC DEFIB IMPLANT W CARDIAC CATH W AMI/HF/SHOCK. 

536 ........... CARDIAC DEFIB IMPLANT W CARDIAC CATH W/O AMI/HF/SHOCK. 

* One of the original 171 proposed low-volume LTC–DRGs initially assigned to this low-volume quintile; removed from the low-volume quintiles 

in addressing nonmonotonicity (see step 5 below). 

4. Steps for Determining the Proposed 

FY 2005 LTC–DRG Relative Weights 

As we noted previously, the proposed 

FY 2005 LTC–DRG relative weights are 

determined in accordance with the 

methodology described in the August 1, 

2003 final rule (68 FR 45380). In 

summary, LTCH cases must be grouped 

in the appropriate LTC–DRG, while 

taking into account the low-volume 

LTC–DRGs as described above, before 

the proposed FY 2005 LTC–DRG 

relative weights can be determined. 

After grouping the cases in the 

appropriate proposed LTC–DRG, we are 

proposing to calculate the proposed 

relative weights for FY 2005 in this 

proposed rule by first removing 

statistical outliers and cases with a 

length of stay of 7 days or less. Next, we 

are proposing to adjust the number of 

cases in each proposed LTC–DRG for 

the effect of short-stay outlier cases 

under § 412.529. The short-stay adjusted 

discharges and corresponding charges 

would be used to calculate ‘‘relative 

adjusted weights’’ in each proposed 

LTC–DRG using the hospital-specific 

relative value method described above. 

Below we discuss in detail the steps 

for calculating the proposed FY 2005 

LTC–DRG relative weights. 

Step 1—Remove statistical outliers.

The first step in the calculation of the 

proposed FY 2005 LTC-DRG relative 

weights is to remove statistical outlier 

cases. We define statistical outliers as 

cases that are outside of 3.0 standard 

deviations from the mean of the log 

distribution of both charges per case and 

the charges per day for each LTC–DRG. 

These statistical outliers would be 

removed prior to calculating the 

proposed relative weights. We believe 

that they may represent aberrations in 

the data that distort the measure of 

average resource use. Including those 

LTCH cases in the calculation of the 

proposed relative weights could result 

in an inaccurate proposed relative 

weight that does not truly reflect 

relative resource use among the 

proposed LTC–DRGs. 

Step 2—Remove cases with a length of 

stay of 7 days or less.

The proposed FY 2005 LTC–DRG 

relative weights should reflect the 

average of resources used on 

representative cases of a specific type. 

Generally, cases with a length of stay 7 

days or less do not belong in a LTCH 

because such stays do not fully receive 

or benefit from treatment that is typical 

in a LTCH stay, and full resources are 

often not used in the earlier stages of 

admission to a LTCH. If we were to 

include stays of 7 days or less in the 

computation of the proposed FY 2005 

LTC–DRG relative weights, the value of 

many proposed relative weights would 

decrease and, therefore, payments 

would decrease to a level that may no 

longer be appropriate. 

We do not believe that it would be 

appropriate to compromise the integrity 

of the payment determination for those 

LTCH cases that actually benefit from 

and receive a full course of treatment at 

a LTCH, in order to include data from 

these very short-stays. Thus, in 

determining the proposed FY 2005 

LTC–DRG relative weights, we remove 

LTCH cases with a length of stay of 7 

days or less. 

Step 3—Adjust charges for the effects 

of short-stay outliers.

The third step in the calculation of 

the proposed FY 2005 LTC–DRG 

relative weights is to adjust each LTCH’s 

charges per discharge for short-stay 

outlier cases (that is, a patient with a 

length of stay that is less than or equal 

to five-sixths the average length of stay 

of the LTC–DRG).

We make this adjustment by counting 

a short-stay outlier as a fraction of a 

discharge based on the ratio of the 

length of stay of the case to the average 

length of stay for the proposed LTC–

DRG for nonshort-stay outlier cases. 

This has the effect of proportionately 

reducing the impact of the lower 

charges for the short-stay outlier cases 

in calculating the average charge for the 

proposed LTC–DRG. This process 

produces the same result as if the actual 

charges per discharge of a short-stay 

outlier case were adjusted to what they 

would have been had the patient’s 

length of stay been equal to the average 

length of stay of the proposed LTC–

DRG. 

As we explained in the August 1, 

2003 final rule (68 FR 45380), counting 

short-stay outlier cases as full 

discharges with no adjustment in 

determining the proposed LTC–DRG 

relative weights would lower the 

proposed LTC–DRG relative weight for 

affected proposed LTC–DRGs because 

the relatively lower charges of the shortstay outlier cases would bring down the 

average charge for all cases within a 

proposed LTC–DRG. This would result 

in an ‘‘underpayment’’ to nonshort-stay 

outlier cases and an ‘‘overpayment’’ to 

short-stay outlier cases. Therefore, in 

this proposed rule, we adjust for shortstay outlier cases under § 412.529 in this 

manner since it results in more 

appropriate payments for all LTCH 

cases. 

Step 4—Calculate the Proposed FY 

2005 LTC–DRG relative weights on an 

iterative basis.

The process of calculating the 

proposed LTC–DRG relative weights 

using the hospital specific relative value 

methodology is iterative. First, for each 

LTCH case, we calculate a hospitalspecific relative charge value by 

dividing the short-stay outlier adjusted 

charge per discharge (see step 3) of the 

LTCH case (after removing the statistical 

outliers (see step 1)) and LTCH cases 

with a length of stay of 7 days or less 

(see step 2) by the average charge per 

discharge for the LTCH in which the 

case occurred. The resulting ratio is 

then multiplied by the LTCH’s case-mix

28232 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

index to produce an adjusted hospitalspecific relative charge value for the 

case. An initial case-mix index value of 

1.0 is used for each LTCH. 

For each proposed LTC–DRG, the 

proposed FY 2005 LTC–DRG relative 

weight is calculated by dividing the 

average of the adjusted hospital-specific 

relative charge values (from above) for 

the proposed LTC–DRG by the overall 

average hospital-specific relative charge 

value across all cases for all LTCHs. 

Using these recalculated proposed LTC–

DRG relative weights, each LTCH’s 

average proposed relative weight for all 

of its cases (case-mix) is calculated by 

dividing the sum of all the LTCH’s 

proposed LTC–DRG relative weights by 

its total number of cases. The LTCHs’

hospital-specific relative charge values 

above are multiplied by these hospital 

specific case-mix indexes. These 

hospital-specific case-mix adjusted 

relative charge values are then used to 

calculate a new set of proposed LTC–

DRG relative weights across all LTCHs. 

In this proposed rule, this iterative 

process is continued until there is 

convergence between the weights 

produced at adjacent steps, for example, 

when the maximum difference is less 

than 0.0001. 

Step 5—Adjust the proposed FY 2005 

LTC–DRG relative weights to account for 

nonmonotonically increasing relative 

weights.

As explained in section II.B. of this 

preamble, the proposed FY 2005 CMS 

DRGs, upon which the proposed FY 

2005 LTC–DRGs are based, contain 

‘‘pairs’’ that are differentiated based on 

the presence or absence of CCs. The 

proposed LTC–DRGs with CCs are 

defined by certain secondary diagnoses 

not related to or inherently a part of the 

disease process identified by the 

principal diagnosis, but the presence of 

additional diagnoses does not 

automatically generate a CC. As we 

discussed in the August 1, 2003 final 

rule (68 FR 45381), the value of 

monotonically increasing relative 

weights rises as the resource use 

increases (for example, from 

uncomplicated to more complicated). 

The presence of CCs in a proposed LTC–

DRG means that cases classified into a 

‘‘without CC’’ proposed LTC–DRG are 

expected to have lower resource use 

(and lower costs). In other words, 

resource use (and costs) are expected to 

decrease across ‘‘with CC’’/’’without 

CC’’ pairs of proposed LTC–DRGs. 

For a case to be assigned to a 

proposed LTC–DRG with CCs, more 

coded information is called for (that is, 

at least one relevant secondary 

diagnosis), than for a case to be assigned 

to a proposed LTC–DRG ‘‘without CCs’’

(which is based on only one principal 

diagnosis and no relevant secondary 

diagnoses). Currently, the LTCH claims 

data include both accurately coded 

cases without complications and cases 

that have complications (and cost more) 

but were not coded completely. Both 

types of cases are grouped to a proposed 

LTC–DRG ‘‘without CCs’’ since only one 

principal diagnosis was coded. Since 

the LTCH PPS was only implemented 

for cost reporting periods beginning on 

or after October 1, 2002 (FY 2003) and 

LTCHs were previously paid under costbased reimbursement, which is not 

based on patient diagnoses, coding by 

LTCHs for these cases may not have 

been as detailed as possible. 

Thus, in developing the FY 2003 

LTC–DRG relative weights for the LTCH 

PPS based on FY 2001 claims data, as 

we discussed in the August 30, 2002 

LTCH PPS final rule (67 FR 55990), we 

found on occasion that the data 

suggested that cases classified to the 

LTC–DRG ‘‘with CCs’’ of a ‘‘with CC’’/

‘‘without CC’’ pair had a lower average 

charge than the corresponding LTC–

DRG ‘‘without CCs.’’ Similarly, based on 

FY 2003 claims data, we also found on 

occasion that the data suggested that 

cases classified to the proposed LTC–

DRG ‘‘with CCs’’ of a ‘‘with CC’’/

‘‘without CC’’ pair have a lower average 

charge than the corresponding proposed 

LTC–DRG ‘‘without CCs’’ for FY 2005. 

We believe this anomaly may be due 

to coding that may not have fully 

reflected all comorbidities that were 

present. Specifically, LTCHs may have 

failed to code relevant secondary 

diagnoses, which resulted in cases that 

actually had CCs being classified into a 

‘‘without CC’’ LTC–DRG. It would not 

be appropriate to pay a lower amount 

for the ‘‘with CC’’ LTC–DRG. Therefore, 

in this proposed rule, we grouped both 

the cases ‘‘with CCs’’ and ‘‘without 

CCs’’ together for the purpose of 

calculating the proposed FY 2005 LTC–

DRG relative weights in this proposed 

rule. As we stated in the August 30, 

2002 LTCH PPS final rule (67 FR 

55990), we will continue to employ this 

methodology to account for 

nonmonotonically increasing relative 

weights until we have adequate data to 

calculate appropriate separate weights 

for these anomalous LTC–DRG pairs. 

We expect that, as was the case when 

we first implemented the IPPS, this 

problem will be self-correcting, as 

LTCHs submit more completely coded 

data in the future. 

There are three types of ‘‘with CC’’

and ‘‘without CC’’ pairs that could be 

nonmonotonic, that is, where the 

‘‘without CC’’ proposed LTC–DRG 

would have a higher average charge 

than the ‘‘with CC’’ proposed LTC–DRG. 

For this proposed rule, using the LTCH 

cases in the December 2003 update of 

the FY 2003 MedPAR file, we identified 

two of the three types of nonmonotonic 

LTC–DRG pairs. 

The first category of 

nonmonotonically increasing proposed 

relative weights for FY 2005 LTC–DRG 

pairs ‘‘with and without CCs’’ contains 

2 pairs of proposed LTC–DRGs in which 

both the proposed LTC–DRG ‘‘with 

CCs’’ and the proposed LTC–DRG 

‘‘without CCs’’ had 25 or more LTCH 

cases and, therefore, did not fall into 

one of the 5 low-volume quintiles. For 

those nonmonotonic LTC–DRG pairs, 

we would combine the LTCH cases and 

compute a new proposed relative weight 

based on the case-weighted average of 

the combined LTCH cases of the 

proposed LTC–DRGs. The caseweighted average charge is determined 

by dividing the total charges for all 

LTCH cases by the total number of 

LTCH cases for the combined proposed 

LTC–DRG. This new proposed relative 

weight would then be assigned to both 

of the proposed LTC–DRGs in the pair. 

In this proposed rule, we are proposing 

that, for FY 2005, proposed LTC–DRGs 

144 and 145 and LTC–DRGs 444 and 

445 are in this category. 

The second category of 

nonmonotonically increasing relative 

weights for proposed LTC–DRG pairs 

with and without CCs consists of zero 

pairs of proposed LTC–DRGs that has 

fewer than 25 cases, and each proposed 

LTC–DRG would be grouped to different 

proposed low-volume quintiles in 

which the ‘‘without CC’’ proposed LTC–

DRG would be in a higher-weighted 

proposed low-volume quintile than the 

‘‘with CC’’ proposed LTC–DRG. For 

those pairs, we would combine the 

LTCH cases and determine the caseweighted average charge for all LTCH 

cases. The case-weighted average charge 

is determined by dividing the total 

charges for all LTCH cases by the total 

number of LTCH cases for the combined 

proposed LTC–DRG. Based on the caseweighted average LTCH charge, we 

determine which low-volume quintile 

the ‘‘combined LTC–DRG’’ would be 

grouped. Both proposed LTC–DRGs in 

the pair would then be grouped into the 

same proposed low-volume quintile, 

and thus would have the same proposed 

relative weight. For FY 2005, in this 

proposed rule, there are no proposed 

LTC–DRGs that fall into this category. 

The third category of 

nonmonotonically increasing relative 

weights for proposed LTC–DRG pairs 

with and without CCs consists of 7 pairs 

of proposed LTC–DRGs where one of 

the proposed LTC–DRGs has fewer than 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28233

25 LTCH cases and is grouped to a 

proposed low-volume quintile and the 

other proposed LTC–DRG has 25 or 

more LTCH cases and has its own 

proposed LTC–DRG relative weight, and 

the proposed LTC–DRG ‘‘without CCs’’

has the higher proposed relative weight. 

We remove the proposed low-volume 

LTC–DRG from the proposed lowvolume quintile and combine it with the 

other proposed LTC–DRG for the 

computation of a new proposed relative 

weight for each of these proposed LTC–

DRGs. This new proposed relative 

weight is assigned to both proposed 

LTC–DRGs, so they each have the same 

proposed relative weight. For FY 2005, 

in this proposed rule, we are proposing 

the following proposed LTC–DRGs 

would be in this category: LTC–DRGs 68 

and 69; LTC–DRGs 85 and 86; LTC–

DRGs 101 and 102; LTC–DRGs 170 and 

171; LTC–DRGs 205 and 206; LTC–

DRGs 318 and 319; and LTC–DRGs 442 

and 443.

Step 6—Determine a proposed FY 

2005 LTC-DRG relative weight for 

proposed LTC–DRGs with no LTCH 

cases.

As we stated above, we determine the 

proposed relative weight for each 

proposed LTC–DRG using charges 

reported in the December 2003 update 

of the FY 2003 MedPAR file. Of the 519 

proposed LTC–DRGs for FY 2005, we 

identified 170 proposed LTC–DRGs for 

which there were no LTCH cases in the 

database. That is, based on data from the 

FY 2003 MedPAR file used in this 

proposed rule, no patients who would 

have been classified to those proposed 

LTC–DRGs were treated in LTCHs 

during FY 2003 and, therefore, no 

charge data were reported for those 

proposed LTC–DRGs. Thus, in the 

process of determining the proposed 

LTC–DRG relative weights, we are 

unable to determine proposed weights 

for these 170 proposed LTC–DRGs using 

the methodology described in steps 1 

through 5 above. However, since 

patients with a number of the diagnoses 

under these proposed LTC–DRGs may 

be treated at LTCHs beginning in FY 

2005, we assign proposed relative 

weights to each of the 170 ‘‘no volume’’

proposed LTC–DRGs based on clinical 

similarity and relative costliness to one 

of the remaining 349 (519¥170 = 349) 

proposed LTC–DRGs for which we are 

able to determine proposed relative 

weights, based on FY 2003 claims data. 

As there are currently no LTCH cases 

in these ‘‘no volume’’ proposed LTC–

DRGs, we determine proposed relative 

weights for the 170 proposed LTC–DRGs 

with no LTCH cases in the FY 2003 

MedPAR file used in this proposed rule 

by grouping them to the appropriate 

proposed low-volume quintile. This 

methodology is consistent with our 

methodology used in determining 

proposed relative weights to account for 

the proposed low-volume LTC–DRGs 

described above. 

Our methodology for determining 

proposed relative weights for the ‘‘no 

volume’’ proposed LTC–DRGs is as 

follows: First, we crosswalk the 

proposed no volume LTC–DRGs by 

matching them to other similar 

proposed LTC–DRGs for which there 

were LTCH cases in the FY 2003 

MedPAR file based on clinical similarity 

and intensity of use of resources as 

determined by care provided during the 

period of time surrounding surgery, 

surgical approach (if applicable), length 

of time of surgical procedure, postoperative care, and length of stay. We 

assign the proposed relative weight for 

the applicable proposed low-volume 

quintile to the proposed no volume 

LTC–DRG if the proposed LTC–DRG to 

which it is crosswalked is grouped to 

one of the proposed low-volume 

quintiles. If the proposed LTC–DRG to 

which the proposed no volume LTC–

DRG is crosswalked is not one of the 

proposed LTC–DRGs to be grouped to 

one of the proposed low-volume 

quintiles, we compare the proposed 

relative weight of the proposed LTC–

DRG to which the proposed no volume 

LTC–DRG is crosswalked to the 

proposed relative weights of each of the 

five quintiles and we assign the 

proposed no volume LTC–DRG the 

proposed relative weight of the 

proposed low-volume quintile with the 

closest proposed weight. For this 

proposed rule, a list of the proposed no 

volume FY 2005 LTC–DRGs and the 

proposed FY 2005 LTC–DRG to which 

it is crosswalked in order to determine 

the appropriate proposed low-volume 

quintile for the assignment of a 

proposed relative weight for FY 2005 is 

shown below in Table 2.

TABLE 2.—PROPOSED NO VOLUME LTC–DRG CROSSWALK AND PROPOSED QUINTILE ASSIGNMENT FOR FY 2005 

Proposed 

LTC–DRG Description 

Proposed 

cross-walked 

LTC–DRG 

Proposed lowvolume quintile 

assigned. 

2 ............... CRANIOTOMY AGE >17 W/O CC .................................................................................................... 1 Quintile 4. 

3 ............... CRANIOTOMY AGE 0–17 ................................................................................................................. 1 Quintile 4.

6 ............... CARPAL TUNNEL RELEASE ........................................................................................................... 251 Quintile 2. 

26 ............. SEIZURE & HEADACHE AGE 0–17 ................................................................................................. 25 Quintile 2. 

30 ............. TRAUMATIC STUPOR & COMA, COMA <1 HR AGE 0–17 ............................................................ 29 Quintile 3. 

32 ............. CONCUSSION AGE >17 W/O CC .................................................................................................... 25 Quintile 2. 

33 ............. CONCUSSION AGE 0–17 ................................................................................................................. 25 Quintile 2. 

36 ............. RETINAL PROCEDURES ................................................................................................................. 47 Quintile 1. 

37 ............. ORBITAL PROCEDURES ................................................................................................................. 47 Quintile 1. 

38 ............. PRIMARY IRIS PROCEDURES ........................................................................................................ 47 Quintile 1. 

39 ............. LENS PROCEDURES WITH OR WITHOUT VITRECTOMY ........................................................... 47 Quintile 1. 

40 ............. EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE >17 .......................................................... 47 Quintile 1. 

41 ............. EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE 0–17 ........................................................ 47 Quintile 1. 

42 ............. INTRAOCULAR PROCEDURES EXCEPT RETINA, IRIS & LENS ................................................. 47 Quintile 1.

48 ............. OTHER DISORDERS OF THE EYE AGE 0–17 ............................................................................... 47 Quintile 1. 

49 ............. MAJOR HEAD & NECK PROCEDURES .......................................................................................... 64 Quintile 4. 

50 ............. SIALOADENECTOMY ....................................................................................................................... 63 Quintile 4. 

51 ............. SALIVARY GLAND PROCEDURES EXCEPT SIALOADENECTOMY ............................................ 63 Quintile 4. 

52 ............. CLEFT LIP & PALATE REPAIR ........................................................................................................ 63 Quintile 4. 

54 ............. SINUS & MASTOID PROCEDURES AGE 0–17 .............................................................................. 53 Quintile 3. 

56 ............. RHINOPLASTY .................................................................................................................................. 53 Quintile 3. 

57 ............. T&A PROC, EXCEPT TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE >17 ................. 69 Quintile 2. 

58 ............. T&A PROC, EXCEPT TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE 0–17 ............... 69 Quintile 2. 

59 ............. TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE >17 ...................................................... 69 Quintile 2. 

60 ............. TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE 0–17 .................................................... 69 Quintile 2. 

28234 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

TABLE 2.—PROPOSED NO VOLUME LTC–DRG CROSSWALK AND PROPOSED QUINTILE ASSIGNMENT FOR FY 2005—

Continued

Proposed 

LTC–DRG Description 

Proposed 

cross-walked 

LTC–DRG 

Proposed lowvolume quintile 

assigned. 

61 ............. MYRINGOTOMY W TUBE INSERTION AGE >17 ........................................................................... 69 Quintile 2. 

62 ............. MYRINGOTOMY W TUBE INSERTION AGE 0–17 ......................................................................... 69 Quintile 2. 

66 ............. EPISTAXIS ........................................................................................................................................ 69 Quintile 2. 

67 ............. EPIGLOTTITIS ................................................................................................................................... 63 Quintile 4. 

70 ............. OTITIS MEDIA & URI AGE 0–17 ...................................................................................................... 69 Quintile 2. 

71 ............. LARYNGOTRACHEITIS .................................................................................................................... 97 Quintile 1. 

72 ............. NASAL TRAUMA & DEFORMITY ..................................................................................................... 53 Quintile 3. 

74 ............. OTHER EAR, NOSE, MOUTH & THROAT DIAGNOSES AGE 0–17 .............................................. 69 Quintile 2. 

81 ............. RESPIRATORY INFECTIONS & INFLAMMATIONS AGE 0–17 ...................................................... 69 Quintile 2. 

91 ............. SIMPLE PNEUMONIA & PLEURISY AGE 0–17 .............................................................................. 90 Quintile 2. 

98 ............. BRONCHITIS & ASTHMA AGE 0–17 ............................................................................................... 97 Quintile 1. 

104 ........... CARDIAC VALVE & OTH MAJOR CARDIOTHORACIC PROC W CARD CATH ........................... 110 Quintile 1. 

105 ........... CARDIAC VALVE & OTH MAJOR CARDIOTHORACIC PROC W/O CARD CATH ........................ 110 Quintile 1. 

106 ........... CORONARY BYPASS W PTCA ....................................................................................................... 110 Quintile 1. 

107 ........... CORONARY BYPASS W CARDIAC CATH ...................................................................................... 110 Quintile 1. 

111 ........... MAJOR CARDIOVASCULAR PROCEDURES W/O CC .................................................................. 110 Quintile 1. 

137 ........... CARDIAC CONGENITAL & VALVULAR DISORDERS AGE 0–17 .................................................. 136 Quintile 3. 

146 ........... RECTAL RESECTION W CC ............................................................................................................ 148 Quintile 5. 

147 ........... RECTAL RESECTION W/O CC ........................................................................................................ 148 Quintile 5. 

151 ........... PERITONEAL ADHESIOLYSIS W/O CC .......................................................................................... 150 Quintile 5. 

153 ........... MINOR SMALL & LARGE BOWEL PROCEDURES W/O CC ......................................................... 152 Quintile 5. 

155 ........... STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE >17 W/O CC ............................ 154 Quintile 5. 

156 ........... STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE 0–17 ......................................... 154 Quintile 5. 

158 ........... ANAL & STOMAL PROCEDURES W/O CC ..................................................................................... 157 Quintile 4. 

160 ........... HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17 W/O CC ............................ 159 Quintile 3. 

162 ........... INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W/O CC ............................................ 178 Quintile 1. 

163 ........... HERNIA PROCEDURES AGE 0–17 ................................................................................................. 178 Quintile 1. 

164 ........... APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W CC .................................................... 148 Quintile 5.

165 ........... APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W/O CC ................................................ 148 Quintile 5. 

166 ........... APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W CC ................................................ 148 Quintile 5. 

167 ........... APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W/O CC ............................................ 148 Quintile 5. 

169 ........... MOUTH PROCEDURES W/O CC .................................................................................................... 53 Quintile 3. 

184 ........... ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE 0–17 ..................................... 183 Quintile 2. 

186 ........... DENTAL & ORAL DIS EXCEPT EXTRACTIONS & RESTORATIONS, AGE 0–17 ........................ 185 Quintile 3. 

187 ........... DENTAL EXTRACTIONS & RESTORATIONS ................................................................................. 185 Quintile 3. 

190 ........... OTHER DIGESTIVE SYSTEM DIAGNOSES AGE 0–17 ................................................................. 189 Quintile 3. 

192 ........... PANCREAS, LIVER & SHUNT PROCEDURES W/O CC ................................................................ 191 Quintile 5. 

194 ........... BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O C.D.E. W/O CC ..................... 193 Quintile 1. 

195 ........... CHOLECYSTECTOMY W C.D.E. W CC .......................................................................................... 197 Quintile 5. 

196 ........... CHOLECYSTECTOMY W C.D.E. W/O CC ...................................................................................... 197 Quintile 5. 

198 ........... CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O C.D.E. W/O CC ................................. 197 Quintile 5. 

199 ........... HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR MALIGNANCY ............................................. 200 Quintile 3. 

211 ........... HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE >17 W/O CC ................................. 210 Quintile 5. 

212 ........... HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE 0–17 .............................................. 210 Quintile 5. 

219 ........... LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE >17 W/O CC ] ............. 218 Quintile 4. 

220 ........... LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE 0–17 ............................ 218 Quintile 4. 

223 ........... MAJOR SHOULDER/ELBOW PROC, OR OTHER UPPER EXTREMITY PROC W CC ................ 224 Quintile 4. 

232 ........... ARTHROSCOPY ............................................................................................................................... 234 Quintile 2. 

252 ........... FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE 0–17 ............................................. 234 Quintile 2. 

255 ........... FX, SPRN, STRN & DISL OF UPARM, LOWLEG EX FOOT AGE 0–17 ........................................ 234 Quintile 2. 

257 ........... TOTAL MASTECTOMY FOR MALIGNANCY W CC ........................................................................ 275 Quintile 3. 

258 ........... TOTAL MASTECTOMY FOR MALIGNANCY W/O CC .................................................................... 275 Quintile 3. 

259 ........... SUBTOTAL MASTECTOMY FOR MALIGNANCY W CC ................................................................. 275 Quintile 3. 

279 ........... CELLULITIS AGE 0–17 ..................................................................................................................... 273 Quintile 1. 

282 ........... TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0–17 .................................................... 281 Quintile 3. 

286 ........... ADRENAL & PITUITARY PROCEDURES ........................................................................................ 53 Quintile 3. 

289 ........... PARATHYROID PROCEDURES ...................................................................................................... 53 Quintile 3. 

290 ........... THYROID PROCEDURES ................................................................................................................ 53 Quintile 3. 

291 ........... THYROGLOSSAL PROCEDURES ................................................................................................... 53 Quintile 3. 

293 ........... OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W/O CC .................................................... 292 Quintile 2. 

298 ........... NUTRITIONAL & MISC METABOLIC DISORDERS AGE 0–17 ....................................................... 297 Quintile 2. 

309 ........... MINOR BLADDER PROCEDURES W/O CC ................................................................................... 308 Quintile 4. 

311 ........... TRANSURETHRAL PROCEDURES W/O CC .................................................................................. 310 Quintile 4. 

313 ........... URETHRAL PROCEDURES, AGE >17 W/O CC ............................................................................. 312 Quintile 4. 

314 ........... URETHRAL PROCEDURES, AGE 0–17 .......................................................................................... 305 Quintile 2. 

322 ........... KIDNEY & URINARY TRACT INFECTIONS AGE 0–17 .................................................................. 326 Quintile 1. 

327 ........... KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE 0–17 .................................................... 326 Quintile 1. 

329 ........... URETHRAL STRICTURE AGE >17 W/O CC ................................................................................... 305 Quintile 2. 

330 ........... URETHRAL STRICTURE AGE 0–17 ................................................................................................ 305 Quintile 2. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28235

TABLE 2.—PROPOSED NO VOLUME LTC–DRG CROSSWALK AND PROPOSED QUINTILE ASSIGNMENT FOR FY 2005—

Continued

Proposed 

LTC–DRG Description 

Proposed 

cross-walked 

LTC–DRG 

Proposed lowvolume quintile 

assigned. 

333 ........... OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE 0–17 ..................................................... 332 Quintile 2. 

334 ........... MAJOR MALE PELVIC PROCEDURES W CC ................................................................................ 345 Quintile 4. 

335 ........... MAJOR MALE PELVIC PROCEDURES W/O CC ............................................................................ 345 Quintile 4. 

337 ........... TRANSURETHRAL PROSTATECTOMY W/O CC ........................................................................... 306 Quintile 3. 

340 ........... TESTES PROCEDURES, NON-MALIGNANCY AGE 0–17 ............................................................. 339 Quintile 1. 

342 ........... CIRCUMCISION AGE >17 ................................................................................................................ 339 Quintile 1. 

343 ........... CIRCUMCISION AGE 0–17 .............................................................................................................. 339 Quintile 1.

344 ........... OTHER MALE REPRODUCTIVE SYSTEM O.R. PROCEDURES FOR MALIGNANCY ................. 345 Quintile 4. 

351 ........... STERILIZATION, MALE .................................................................................................................... 339 Quintile 1. 

353 ........... PELVIC EVISCERATION, RADICAL HYSTERECTOMY & RADICAL VULVECTOMY ................... 365 Quintile 5. 

354 ........... UTERINE, ADNEXA PROC FOR NON-OVARIAN/ADNEXAL MALIG W CC .................................. 365 Quintile 5. 

355 ........... UTERINE, ADNEXA PROC FOR NON-OVARIAN/ADNEXAL MALIG W/O CC .............................. 365 Quintile 5. 

356 ........... FEMALE REPRODUCTIVE SYSTEM RECONSTRUCTIVE PROCEDURES .................................. 303 Quintile 4. 

357 ........... UTERINE & ADNEXA PROC FOR OVARIAN OR ADNEXAL MALIGNANCY ................................ 303 Quintile 4. 

358 ........... UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W CC ...................................................... 303 Quintile 4. 

359 ........... UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W/O CC .................................................. 303 Quintile 4. 

360 ........... VAGINA, CERVIX & VULVA PROCEDURES ................................................................................... 303 Quintile 4. 

361 ........... LAPAROSCOPY & INCISIONAL TUBAL INTERRUPTION .............................................................. 149 Quintile 1. 

362 ........... ENDOSCOPIC TUBAL INTERRUPTION .......................................................................................... 149 Quintile 1. 

363 ........... D&C, CONIZATION & RADIO-IMPLANT, FOR MALIGNANCY ....................................................... 367 Quintile 1. 

364 ........... D&C, CONIZATION EXCEPT FOR MALIGNANCY .......................................................................... 367 Quintile 1. 

370 ........... CESAREAN SECTION W CC ........................................................................................................... 369 Quintile 3. 

371 ........... CESAREAN SECTION W/O CC ....................................................................................................... 367 Quintile 1. 

372 ........... VAGINAL DELIVERY W COMPLICATING DIAGNOSES ................................................................. 367 Quintile 1. 

373 ........... VAGINAL DELIVERY W/O COMPLICATING DIAGNOSES ............................................................. 367 Quintile 1. 

374 ........... VAGINAL DELIVERY W STERILIZATION &/OR D&C ..................................................................... 367 Quintile 1. 

375 ........... VAGINAL DELIVERY W O.R. PROC EXCEPT STERIL &/OR D&C ............................................... 367 Quintile 1.

376 ........... POSTPARTUM & POST ABORTION DIAGNOSES W/O O.R. PROCEDURE ................................ 367 Quintile 1. 

377 ........... POSTPARTUM & POST ABORTION DIAGNOSES W O.R. PROCEDURE ................................... 367 Quintile 1. 

378 ........... ECTOPIC PREGNANCY ................................................................................................................... 369 Quintile 3. 

379 ........... THREATENED ABORTION ............................................................................................................... 367 Quintile 1. 

380 ........... ABORTION W/O D&C ....................................................................................................................... 367 Quintile 1. 

381 ........... ABORTION W D&C, ASPIRATION CURETTAGE OR HYSTEROTOMY ........................................ 367 Quintile 1. 

382 ........... FALSE LABOR .................................................................................................................................. 367 Quintile 1. 

383 ........... OTHER ANTEPARTUM DIAGNOSES W MEDICAL COMPLICATIONS ......................................... 367 Quintile 1. 

384 ........... OTHER ANTEPARTUM DIAGNOSES W/O MEDICAL COMPLICATIONS ..................................... 367 Quintile 1. 

385 ........... NEONATES, DIED OR TRANSFERRED TO ANOTHER ACUTE CARE FACILITY ....................... 367 Quintile 1. 

386 ........... EXTREME IMMATURITY OR RESPIRATORY DISTRESS SYNDROME, NEONATE .................... 367 Quintile 1. 

387 ........... PREMATURITY W MAJOR PROBLEMS .......................................................................................... 367 Quintile 1. 

388 ........... PREMATURITY W/O MAJOR PROBLEMS ...................................................................................... 367 Quintile 1. 

389 ........... FULL TERM NEONATE W MAJOR PROBLEMS ............................................................................. 367 Quintile 1. 

390 ........... NEONATE W OTHER SIGNIFICANT PROBLEMS .......................................................................... 367 Quintile 1. 

391 ........... NORMAL NEWBORN ........................................................................................................................ 367 Quintile 1. 

392 ........... SPLENECTOMY AGE >17 ................................................................................................................ 197 Quintile 5. 

393 ........... SPLENECTOMY AGE 0–17 .............................................................................................................. 197 Quintile 5.

396 ........... RED BLOOD CELL DISORDERS AGE 0–17 ................................................................................... 399 Quintile 2. 

402 ........... LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC W/O CC ................................... 395 Quintile 4. 

405 ........... ACUTE LEUKEMIA W/O MAJOR O.R. PROCEDURE AGE 0–17 .................................................. 404 Quintile 1. 

407 ........... MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ O.R. PROC W/O CC ..................... 408 Quintile 4. 

411 ........... HISTORY OF MALIGNANCY W/O ENDOSCOPY ........................................................................... 367 Quintile 1. 

412 ........... HISTORY OF MALIGNANCY W ENDOSCOPY ............................................................................... 367 Quintile 1. 

417 ........... SEPTICEMIA AGE 0–17 ................................................................................................................... 416 Quintile 3. 

422 ........... VIRAL ILLNESS & FEVER OF UNKNOWN ORIGIN AGE 0–17 ..................................................... 426 Quintile 1. 

432 ........... OTHER MENTAL DISORDER DIAGNOSES .................................................................................... 427 Quintile 2. 

446 ........... TRAUMATIC INJURY AGE 0–17 ...................................................................................................... 445 Quintile 3. 

448 ........... ALLERGIC REACTIONS AGE 0–17 ................................................................................................. 447 Quintile 2. 

451 ........... POISONING & TOXIC EFFECTS OF DRUGS AGE 0–17 ............................................................... 455 Quintile 4. 

471 ........... BILATERAL OR MULTIPLE MAJOR JOINT PROCS OF LOWER EXTREMITY ............................ 236 Quintile 2. 

481 ........... BONE MARROW TRANSPLANT ...................................................................................................... 394 Quintile 3. 

482 ........... TRACHEOSTOMY FOR FACE, MOUTH & NECK DIAGNOSES .................................................... 63 Quintile 4. 

484 ........... CRANIOTOMY FOR MULTIPLE SIGNIFICANT TRAUMA ............................................................... 1 Quintile 4. 

491 ........... MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF UPPER EXTREMITY ................... 209 Quintile 5. 

492 ........... CHEMOTHERAPY W ACUTE LEUKEMIA OR W USE OF HI DOSE CHEMOAGENT .................. 410 Quintile 3. 

494 ........... LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W/O CC ..................................................... 493 Quintile 3. 

498 ........... SPINAL FUSION EXCEPT CERVICAL W/O CC .............................................................................. 497 Quintile 3. 

504 ........... EXTENSIVE BURNS OF FULL THICKNESS BURNS WITH MECH VENT 96+HRS WITH SKIN 

GRAFT.

468 Quintile 5. 

507 ........... FULL THICKNESS BURN W SKIN GRFT OR INHAL INJ W/O CC OR SIG TRAUMA .................. 508 Quintile 3. 

516 ........... PERCUTANEOUS CARDIOVASC PROC W AMI ............................................................................ 518 Quintile 3. 

28236 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

TABLE 2.—PROPOSED NO VOLUME LTC–DRG CROSSWALK AND PROPOSED QUINTILE ASSIGNMENT FOR FY 2005—

Continued

Proposed 

LTC–DRG Description 

Proposed 

cross-walked 

LTC–DRG 

Proposed lowvolume quintile 

assigned. 

520 ........... CERVICAL SPINAL FUSION W/O CC ............................................................................................. 497 Quintile 3. 

525 ........... OTHER HEART ASSIST SYSTEM IMPLANT .................................................................................. 468 Quintile 5. 

526 ........... PERCUTNEOUS CARDIOVASULAR PROC W DRUG ELUTING STENT W AMI .......................... 517 Quintile 3. 

527 ........... PERCUTNEOUS CARDIOVASULAR PROC W DRUG ELUTING STENT W/O AMI ...................... 517 Quintile 3. 

528 ........... INTRACRANIAL VASCULAR PROC W PDX HEMORRHAGE ........................................................ 1 Quintile 4. 

530 ........... VENTRICULAR SHUNT PROCEDURES W/O CC ........................................................................... 529 Quintile 4. 

534 ........... EXTRACRANIAL PROCEDURES W/O CC ...................................................................................... 500 Quintile 1. 

540 ........... LYMPHOMA & LEUKEMIA W MAJOR OR PROCEDURE W/O CC ............................................... 399 Quintile 2. 

To illustrate this methodology for 

determining the proposed relative 

weights for the 170 proposed LTC–DRGs 

with no LTCH cases, we are providing 

the following examples, which refer to 

the no volume proposed LTC–DRGs 

crosswalk information for FY 2005 

provided above in Table 2:

Example 1: There were no cases in the FY 

2003 MedPAR file used for this proposed 

rule for proposed LTC–DRG 163 (Hernia 

Procedures Age 0–17). Since the procedure is 

similar in resource use and the length and 

complexity of the procedures and the length 

of stay are similar, we determined that 

proposed LTC–DRG 178 (Uncomplicated 

Peptic Ulcer Without CC), which is assigned 

to proposed low-volume quintile 1 for the 

purpose of determining the proposed FY 

2005 relative weights, would display similar 

clinical and resource use. Therefore, we 

assign the same proposed relative weight of 

proposed LTC–DRG 178 of 0.4964 (Quintile 

1) for FY 2005 (Table 11 in the Addendum 

to this proposed rule) to LTC–DRG 163.

Example 2: There were no LTCH cases in 

the FY 2003 MedPAR file used in this 

proposed rule for proposed LTC–DRG 91 

(Simple Pneumonia and Pleurisy Age 0–17). 

Since the severity of illness in patients with 

bronchitis and asthma is similar in patients 

regardless of age, we determined that 

proposed LTC–DRG 90 (Simple Pneumonia 

and Pleurisy Age >17 Without CC) would 

display similar clinical and resource use 

characteristics and have a similar length of 

stay to LTC–DRG 91. There were over 25 

cases in proposed LTC–DRG 90. Therefore, it 

would not be assigned to a low-volume 

quintile for the purpose of determining the 

LTC–DRG relative weights. However, under 

our established methodology, proposed LTC–

DRG 91, with no LTCH cases, would need to 

be grouped to a low-volume quintile. We 

identified that the proposed low-volume 

quintile with the closest weight to proposed 

LTC–DRG 90 (0.7368; see Table 11 in the 

Addendum to this proposed rule) would be 

proposed low-volume quintile 2 (0.6685; see 

Table 11 in the Addendum to this proposed 

rule). Therefore, we assign proposed LTC–

DRG 91 a proposed relative weight of 0.6885 

for FY 2005. 

Furthermore, we are proposing LTC–DRG 

relative weights of 0.0000 for heart, kidney, 

liver, lung, pancreas, and simultaneous 

pancreas/kidney transplants (LTC–DRGs 103, 

302, 480, 495, 512, and 513, respectively) for 

FY 2005 because Medicare will only cover 

these procedures if they are performed at a 

hospital that has been certified for the 

specific procedures by Medicare and 

presently no LTCH has been so certified. 

Based on our research, we found that most 

LTCHs only perform minor surgeries, such as 

minor small and large bowel procedures, to 

the extent any surgeries are performed at all. 

Given the extensive criteria that must be met 

to become certified as a transplant center for 

Medicare, we believe it is unlikely that any 

LTCHs would become certified as a 

transplant center. In fact, in the nearly 20 

years since the implementation of the IPPS, 

there has never been a LTCH that even 

expressed an interest in becoming a 

transplant center. 

However, if in the future a LTCH applies 

for certification as a Medicare-approved 

transplant center, we believe that the 

application and approval procedure would 

allow sufficient time for us to determine 

appropriate weights for the LTC–DRGs 

affected. At the present time, we would only 

include these six transplant LTC–DRGs in the 

GROUPER program for administrative 

purposes. Since we use the same GROUPER 

program for LTCHs as is used under the IPPS, 

removing these LTC–DRGs would be 

administratively burdensome. 

Again, we note that as this system is 

dynamic, it is entirely possible that the 

number of proposed LTC–DRGs with a zero 

volume of LTCH cases based on the system 

will vary in the future. We used the best most 

recent available claims data in the MedPAR 

file to identify zero volume LTC–DRGs and 

to determine the proposed relative weights in 

this proposed rule. 

Table 11 in the Addendum to this 

proposed rule lists the proposed LTC–DRGs 

and their respective proposed relative 

weights, geometric mean length of stay, and 

five-sixths of the geometric mean length of 

stay (to assist in the determination of shortstay outlier payments under § 412.529) for FY 

2005.

E. Proposed Add-On Payments for New 

Services and Technologies 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘New Technology Applications’’ at the 

beginning of your comment.] 

1. Background 

Sections 1886(d)(5)(K) and (L) of the 

Act establish a process of identifying 

and ensuring adequate payment for new 

medical services and technologies under 

the IPPS. Section 1886(d)(5)(K)(vi) of 

the Act specifies that a medical service 

or technology will be considered new if 

it meets criteria established by the 

Secretary after notice and opportunity 

for public comment. Section 

1886(d)(5)(K)(ii)(I) of the Act specifies 

that the process must apply to a new 

medical service or technology if, ‘‘based 

on the estimated costs incurred with 

respect to discharges involving such 

service or technology, the DRG 

prospective payment rate otherwise 

applicable to such discharges under this 

subsection is inadequate.’’

The regulations implementing this 

provision establish three criteria for 

special treatment. First, § 412.87(b)(2) 

defines when a specific medical service 

or technology will be considered new 

for purposes of new medical service or 

technology add-on payments. The 

statutory provision contemplated the 

special payment treatment for new 

medical services or technologies until 

such time as data are available to reflect 

the cost of the technology in the DRG 

weights through recalibration. There is 

a lag of 2 to 3 years from the point a new 

medical service or technology is first 

introduced on the market and when 

data reflecting the use of the medical 

service or technology are used to 

calculate the DRG weights. For example, 

data from discharges occurring during 

FY 2003 are used to calculate the 

proposed FY 2005 DRG weights in this 

proposed rule. Section 412.87(b)(2) 

provides that a ‘‘medical service or 

technology may be considered new 

within 2 or 3 years after the point at 

which data begin to become available 

reflecting the ICD–9–CM code assigned 

to the new medical service or 

technology (depending on when a new 

code is assigned and data on the new 

medical service or technology become

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28237

available for DRG recalibration). After 

CMS has recalibrated the DRGs, based 

on available data, to reflect the costs of 

an otherwise new medical service or 

technology, the medical service or 

technology will no longer be considered 

‘new’ under the criterion for this 

section.’’

The 2-year to 3-year period would 

ordinarily begin with FDA approval, 

unless there was some documented 

delay in bringing the product onto the 

market after that approval (for instance, 

component production or drug 

production had been postponed until 

FDA approval due to shelf life 

concerns). After the DRGs have been 

recalibrated to reflect the costs of an 

otherwise new medical service or 

technology, the special add-on payment 

for new medical services or technology 

ceases (§ 412.87(b)(2)). For example, an 

approved new technology that received 

FDA approval in October 2003 and 

entered the market at that time may be 

eligible to receive add-on payments as a 

new technology until FY 2006 

(discharges occurring before October 1, 

2005), when data reflecting the costs of 

the technology would be used to 

recalibrate the DRG weights. Because 

the FY 2006 DRG weights will be 

calculated using FY 2004 MedPAR data, 

the costs of such a new technology 

would likely be reflected in the FY 2006 

DRG weights. 

Section 412.87(b)(3) further provides 

that, to receive special payment 

treatment, new medical services or 

technologies must be inadequately paid 

otherwise under the DRG system. To 

assess whether technologies would be 

inadequately paid under the DRGs, we 

establish thresholds to evaluate 

applicants for new technology add-on 

payments. In the August 1, 2003 final 

rule (68 FR 45385), we established the 

threshold at the geometric mean 

standardized charge for all cases in the 

DRG plus 75 percent of 1 standard 

deviation above the geometric mean 

standardized charge (based on the 

logarithmic values of the charges and 

transformed back to charges) for all 

cases in the DRG to which the new 

medical service or technology is 

assigned (or the case-weighted average 

of all relevant DRGs, if the new medical 

service or technology occurs in many 

different DRGs). Table 10 in the 

Addendum to the August 1, 2003 final 

rule (68 FR 45648) listed the qualifying 

threshold by DRG, based on the 

discharge data that we used to calculate 

the FY 2004 DRG weights. 

However, section 503(b)(1) of Public 

Law 108–173 amended section 

1886(d)(5)(K)(ii)(I) of the Act to provide 

for ‘‘applying a threshold* * *that is 

the lesser of 75 percent of the 

standardized amount (increased to 

reflect the difference between cost and 

charges) or 75 percent of one standard 

deviation for the diagnosis-related group 

involved.’’ The provisions of section 

503(b)(1) apply to classification for 

fiscal years beginning with FY 2005. We 

have updated Table 10 from the October 

6, 2003 Federal Register correction 

document, which contains the 

thresholds that we are using to evaluate 

applications for new service or 

technology add-on payments for FY 

2005, using the section 503(b)(1) 

measures stated above, and posted these 

new thresholds on our Web site at: 

www.cms.hhs.gov/providers/hipps/

newtech.asp. The thresholds published 

in this FY 2005 proposed rule are 

preliminary thresholds for FY 2006. The 

final thresholds published in the FY 

2005 final rule will be used to evaluate 

applicants for new technology add-on 

payments during FY 2006. (Refer to 

section IV. D. of this preamble for a 

discussion of a revision of the 

regulations to incorporate the change 

made by section 503(b)(1) of Public Law 

108–173.) 

Section 412.87(b)(1) of our existing 

regulations provides that a new 

technology is an appropriate candidate 

for an additional payment when it 

represents an advance in medical 

technology that substantially improves, 

relative to technologies previously 

available, the diagnosis or treatment of 

Medicare beneficiaries. For example, a 

new technology represents a substantial 

clinical improvement when it reduces 

mortality, decreases the number of 

hospitalizations or physician visits or 

reduces recovery time compared to the 

technologies previously available. (See

the September 7, 2001 final rule (66 FR 

46902) for a complete discussion of this 

criterion.) 

The new medical service or 

technology add-on payment policy 

provides additional payments for cases 

with high costs involving eligible new 

medical services or technologies while 

preserving some of the incentives under 

the average-based payment system. The 

payment mechanism is based on the 

cost to hospitals for the new medical 

service or technology. Under § 412.88, 

Medicare pays a marginal cost factor of 

50 percent for the costs of a new 

medical service or technology in excess 

of the full DRG payment. If the actual 

costs of a new medical service or 

technology case exceed the DRG 

payment by more than the 50-percent 

marginal cost factor of the new medical 

service or technology, Medicare 

payment is limited to the DRG payment 

plus 50 percent of the estimated costs of 

the new technology. 

The report language accompanying 

section 533 of Public Law 106–554 

indicated Congressional intent that the 

Secretary implement the new 

mechanism on a budget neutral basis 

(H.R. Conf. Rep. No. 106–1033, 106th 

Cong., 2nd Sess. at 897 (2000)). Section 

1886(d)(4)(C)(iii) of the Act requires that 

the adjustments to annual DRG 

classifications and relative weights must 

be made in a manner that ensures that 

aggregate payments to hospitals are not 

affected. Therefore, in the past, we 

accounted for projected payments under 

the new medical service and technology 

provision during the upcoming fiscal 

year at the same time we estimated the 

payment effect of changes to the DRG 

classifications and recalibration. The 

impact of additional payments under 

this provision was then included in the 

budget neutrality factor, which was 

applied to the standardized amounts 

and the hospital-specific amounts.

Section 503(d)(2) of Public Law 108–

173 amended section 

1886(d)(5)(K)(ii)(III) of the Act to 

provide that there shall be no reduction 

or adjustment in aggregate payments 

under the IPPS due to add-on payments 

for new medical services and 

technologies. Therefore, add-on 

payments for new medical services or 

technologies for FY 2005 and later years 

will not be budget neutral. We discuss 

the regulation change necessary to 

implement this provision in section 

IV.H. of this proposed rule. 

Applicants for add-on payments for 

new medical services or technologies for 

FY 2006 must submit a formal request, 

including a full description of the 

clinical applications of the medical 

service or technology and the results of 

any clinical evaluations demonstrating 

that the new medical service or 

technology represents a substantial 

clinical improvement, along with a 

significant sample of data to 

demonstrate the medical service or 

technology meets the high-cost 

threshold, no later than early October 

2004. Applicants must submit a 

complete database no later than midDecember 2004. Complete application 

information, along with final deadlines 

for submitting a full application, will be 

available at our Web site after 

publication of the FY 2005 final rule at: 

www.cms.hhs.gov/providers/hipps/

default.asp. To allow interested parties 

to identify the new medical services or 

technologies under review before the 

publication of the proposed rule for FY 

2006, the Web site will also list the 

tracking forms completed by each 

applicant. 

28238 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

2. Other Provisions of Section 503 of 

Public Law 108–173 

Section 503(b)(2) of Public Law 108–

173 amended section 1886(d)(5)(K) of 

the Act by adding a new clause (viii) to 

provide for a mechanism for public 

input before publication of a notice of 

proposed rule making regarding 

whether a medical service or technology 

represents a substantial improvement or 

advancement. The revised process for 

evaluating new medical service and 

technology applications requires the 

Secretary to—

• Provide, before publication of a 

proposed rule, for public input 

regarding whether a new service or 

technology represents an advance in 

medical technology that substantially 

improves the diagnosis or treatment of 

Medicare beneficiaries. 

• Make public and periodically 

update a list of the services and 

technologies for which an application 

for add-on payments is pending. 

• Accept comments, 

recommendations, and data from the 

public regarding whether a service or 

technology represents a substantial 

improvement. 

• Provide, before publication of a 

proposed rule, for a meeting at which 

organizations representing hospitals, 

physicians, manufacturers, and any 

other interested party may present 

comments, recommendations, and data 

regarding whether a new service or 

technology represents a substantial 

clinical improvement to the clinical 

staff of CMS. 

In order to satisfy the requirements of 

this last provision, we published a 

notice in the Federal Register on 

February 27, 2004, and held a town 

meeting at the CMS Headquarters Office 

in Baltimore, MD, on March 15, 2004. In 

the announcement notice for the 

meeting, we stated that the opinions and 

alternatives provided during the 

meeting would assist us in our 

evaluations of applications by allowing 

public discussions of the substantial 

clinical improvement criteria for each of 

the FY 2005 new medical service and 

technology add-on payment 

applications before the publication of 

this FY 2005 IPPS proposed rule. 

Approximately 70 participants 

registered and attended in person, while 

additional participants listened over an 

open telephone line. The participants 

focused on presenting data on the 

substantial clinical improvement aspect 

of their products, as well as the need for 

additional payments to ensure access to 

Medicare beneficiaries. In addition, we 

also received many written comments 

regarding the substantial clinical 

improvement criterion for the 

applicants. We have considered these 

comments in our evaluation of each new 

application for FY 2005 in this proposed 

rule. We have summarized these 

comments, or if applicable, indicated 

that no comments were received, at the 

end of the discussion of the individual 

applications. 

Section 503(c) of Public Law 108–173 

amended section 1886(d)(5)(K) of the 

Act by adding a new clause (ix) 

requiring that before establishing any 

add-on payment for a new medical 

service or technology, that the Secretary 

shall seek to identify one or more DRGs 

associated with the new technology, 

based on similar clinical or anatomical 

characteristics and the costs of the 

technology and assign the new 

technology into a DRG where the 

average costs of care most closely 

approximate the costs of care using the 

new technology. No add-on payment 

shall be made with respect to such a 

new technology. 

At the time an application is 

submitted, the DRGs associated with the 

new technology are identified. We only 

determine that a new technology add-on 

payment is appropriate when the 

reimbursement under these DRGs is not 

adequate for this new technology. The 

criterion for this determination is the 

cost threshold, which we discuss below. 

We discuss the assignments of several 

new technologies within the DRG 

payment system in section II.B. of this 

preamble. 

In this proposed rule, we evaluate 

whether new technology add-on 

payments will continue in FY 2005 for 

the two technologies that currently 

receive such payments. In accordance 

with section 503(e)(2) of Public Law 

108–173, we also reconsider one 

application for new technology add-on 

payments that was denied last year. 

Finally, we present our evaluations of 

10 new applications for add-on 

payments in FY 2005. 

3. FY 2005 Status of Technology 

Approved for FY 2004 Add-On 

Payments 

a. Drotrecogin Alfa (Activated)—

Xigris

Xigris, a biotechnology product that 

is a recombinant version of naturally 

occurring Activated Protein C (APC), 

was approved by the FDA on November 

21, 2001. In the August 1, 2002 IPPS 

final rule (67 FR 50013), we determined 

that cases involving the administration 

of Xigris, (as identified by the 

presence of code 00.11 (Infusion of 

drotrecogin alfa (activated)) were 

eligible for additional payments in FY 

2003. (The August 1, 2002 final rule 

contains a detailed discussion of this 

technology.) 

In the August 1, 2003 final IPPS rule 

(68 FR 45387), we indicated that, for FY 

2004, we would continue to make addon payments for cases involving the 

administration of Xigris as identified 

by the presence of code 00.11. This was 

because we determined that Xigris was 

still within the 2-year to 3-year period 

before the costs of this new technology 

would be reflected in the DRG weights. 

Xigris became available on the 

market at the time of its FDA licensure 

on November 21, 2001. Early in FY 

2005, Xigris will be beyond the 2-year 

to 3-year period during which a 

technology can be considered new. 

Therefore, we are proposing that 

Xigris will not continue to receive new 

technology add-on payments in FY 

2005. During the period of 2 years and 

6 months since it came onto the market, 

Xigris has been used frequently in the 

appropriate DRGs. For FY 2005, we 

analyzed the number of cases involving 

this technology in the FY 2003 MedPAR 

file. We found 4,243 cases that received 

Xigris, the majority of which fell 

appropriately into DRGs 415, 416, 475, 

and 483, with by far the most cases in 

DRG 416 (Septicemia Age >17). 

Accordingly, the costs of Xigris are 

now well-represented in those DRGs. 

Therefore, we are proposing that FY 

2004 will be the final year for Xigris

to receive add-on payments. 

We received no public comments 

regarding the continuation of add-on 

payments for Xigris. 

The manufacturer also asked us to 

consider creating a DRG specifically for 

severe sepsis. We discuss this request in 

section II.B.16.c. of this proposed rule. 

b. InFUSETM (Bone Morphogenetic 

Proteins (BMPs) for Spinal Fusions) 

InFUSETM was approved by FDA for 

use on July 2, 2002, and became 

available on the market immediately 

thereafter. In the August 1, 2003 IPPS 

final rule (68 FR 45388), we approved 

InFUSETM for add-on payments under 

§ 412.88, effective for FY 2004. This 

approval was on the basis of using 

InFUSETM for single-level, lumbar 

spinal fusion, consistent with the FDA’s 

approval and the data presented to us by 

the applicant. Therefore, we limited the 

add-on payment to cases using this 

technology for anterior lumbar fusions 

in DRGs 497 (Spinal Fusion Except 

Cervical With CC) and 498 (Spinal 

Fusion Except Cervical Without CC). 

Cases involving InFUSETM that are 

eligible for the new technology add-on 

payment are identified by assignment to 

DRGs 497 and 498 as a lumbar spinal 

fusion, with the combination of ICD–9-

CM procedure codes 84.51 (Insertion of 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28239

interbody spinal fusion device) and 

84.52 (Insertion of recombinant bone 

morphogenetic protein). 

Because InFUSETM was approved by 

the FDA for use on July 2, 2003, it is still 

within the 2-year to 3-year period 

during which a technology can be 

considered new under the regulations. 

Therefore, we are proposing to continue 

add-on payments for FY 2005 for cases 

receiving InFUSETM for spinal fusions 

in DRGs 497 (Spinal Fusion Except 

Cervical With CC) and 498 (Spinal 

Fusion Except Cervical Without CC). We 

are also proposing to continue limiting 

the add-on payment for cases receiving 

InFUSETM, to those cases identified by 

the presence of procedure codes 84.51 

and 84.52. However, we are proposing 

to eliminate add-on payment for the 

interbody fusion device that is used in 

combination with this recombinant 

human bone morphogenetic protein 

(rhBMP) product (procedure code 

84.52). We note that currently add-on 

payments for InFUSETM include costs 

for the interbody fusion device (the LT 

cage, identified by procedure code 

84.51), used in the spinal fusion 

procedure with the InFUSETM product. 

Because this device is not a new 

technology, but in fact has been in use 

for 9 years for spinal fusions, we believe 

that it is inappropriate to pay for this 

device in conjunction with the 

genuinely new rhBMP technology. 

Therefore, we are proposing no longer to 

pay for the interbody fusion device as 

bundled in the current maximum addon payment amount of $4,450 for cases 

that qualify for additional payment. 

This proposal would reduce the add-on 

payment to account for no longer paying 

for the LT cage. This would reduce the 

cost of this new technology by $4,990, 

which results in a total cost of $3,910 

for InFUSETM. Therefore, we are 

proposing a maximum add-on amount 

of $1,955 for cases that qualify for 

additional payment. Although we are 

proposing to eliminate payment for the 

LT cage, we would still require the 

presence of procedure code 84.51 (in 

combination with procedure code 84.52) 

when making add-on payments for new 

technology for InFUSETM. This is due to 

the fact that the LT cage is still required 

by the FDA when InFUSETM is used for 

single level spinal fusions. 

We received the following public 

comments in accordance with section 

503(b)(2) of Public Law 108–173 

regarding the continuation of add-on 

payments for this technology. 

Comment: Several commenters wrote 

expressing support for continued addon payments for this technology. Many 

of these commenters were physicians 

who use the device. These commenters 

noted that the hospitals for which they 

work did not allow use of the device 

until the new technology add-on 

payments began on October 1, 2003. 

Therefore, they encouraged the 

continued add-on payment to ensure 

continued access of the device to 

patients. They also argued that, because 

utilization remained low in FY 2003, 

the DRG recalibration for FY 2005 

would not supply adequate payment 

data for the cases using the device, 

further jeopardizing patient access to 

the technology. 

Response: As discussed above, we are 

proposing to continue payments 

because this technology is still within 

the 2-year to 3-year period during which 

a technology can be considered new 

under the regulation.

4. Reevaluation of FY 2004 Applications 

That Were Not Approved 

Section 503(e)(2) of Public Law 108–

173 requires us to reconsider all 

applications for new medical service or 

technology add-on payments that were 

denied for FY 2004. We received two 

applications for new technologies to be 

designated eligible for add-on payments 

for new technology for FY 2004. We 

approved InFUSE for use in spinal 

fusions for new technology add-on 

payments in FY 2004. We denied the 

application for new technology add-on 

payments for the GLIADEL wafer. 

GLIADEL Wafer 

Gliablastoma Multiforme (GBM) is a 

very aggressive primary brain tumor. 

Standard care for patients diagnosed 

with GBM includes surgical resection 

followed by radiation and, in some 

cases, systemic chemotherapy. 

According to the manufacturer, the 

GLIADEL wafer is indicated for use at 

the time of surgery in order to prolong 

survival in patients with GBM. 

Implanted directly into the cavity that is 

created when a brain tumor is surgically 

removed, the GLIADEL wafer delivers 

chemotherapy directly to the site where 

the tumor is most likely to recur. 

The FDA gave initial approval for the 

GLIADEL wafer on September 23, 

1996, for use as an adjunct to surgery to 

prolong survival in patients with 

recurrent GBM for whom surgical 

resection is indicated. In 2003, Guilford 

Pharmaceuticals submitted an 

application for approval of the 

GLIADEL wafer for add-on payments 

and stated that the technology should 

still be considered new for FY 2004, 

despite its approval by the FDA on 

September 23, 1996. The manufacturer 

argued that the technology was still new 

because it had not been possible to 

specifically identify cases involving use 

of the GLIADEL wafer in the MedPAR 

data prior to the adoption of a new ICD–

9–CM code 00.10 (Implantation of a 

chemotherapeutic agent) on October 1, 

2002. However, as discussed in the 

September 7, 2001 final rule (66 FR 

46914), the determination concerning 

whether a technology meets this 

criterion depends on the date of its 

availability for use in the Medicare 

population rather than the date a 

specific code may be assigned. A 

technology can be considered new for 2 

or 3 years after data reflecting the costs 

of the technology begin to become 

available. Data on the costs of this 

technology began to become available in 

September 1996. As a result, the costs 

of this technology are currently reflected 

in the DRG weights. As discussed in the 

final rule for FY 2004 (68 FR 45391), on 

February 26, 2003, the FDA approved 

the GLIADEL wafer for use in newly 

diagnosed patients with high-grade 

malignant glioma as an adjunct to 

surgery and radiation. However, our 

understanding is that many newly 

diagnosed patients were already 

receiving this therapy. To the extent that 

this is true, the charges associated with 

this use of the GLIADEL wafer were 

also reflected in the DRG relative 

weights. Therefore, the GLIADEL

wafer did not meet this criterion for FY 

2004. 

Section 503(e)(2) of Public Law 108–

173 required us to reconsider this 

application, but did not revise the 

criterion for determining whether a 

medical service or technology is new. 

As stated above, the FDA originally 

approved the GLIADEL wafer on 

September 23, 1996. Therefore, this 

technology is beyond the period in 

which it can be considered new. 

Accordingly, we are proposing to deny 

this application for new technology addon payments for FY 2005. 

We received no public comments 

regarding our reconsideration of this 

application for add-on payments. 

Guilford also asked us to consider 

reclassifying this device into another 

DRG. We discuss issues relating to the 

DRG assignment of the GLIADEL

wafer in section II.B.16.c. of this 

preamble. 

5. FY 2005 Applicants for New 

Technology Add-On Payments 

a. InFUSETM Bone Graft (Bone 

Morphogenetic Proteins (BMPs) for 

Tibia Fractures) 

Bone Morphogenetic Proteins (BMPs) 

have been shown to have the capacity 

to induce new bone formation and, 

therefore, to enhance healing. Using 

recombinant techniques, some BMPs 

28240 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

(referred to as rhBMPs) can be produced 

in large quantities. This has cleared the 

way for their potential use in a variety 

of clinical applications such as in 

delayed unions and nonunions of 

fractured bones and spinal fusions. One 

such product, rhBMP–2, is developed 

for use instead of a bone graft with 

spinal fusions. 

Medtronic Sofamor Danek submitted 

an application for the InFUSETM Bone 

Graft for use in tibia fractures for 

approval as a new technology eligible 

for add-on payments in FY 2005. 

Medtronic submitted a similar 

application for new technology add-on 

payments in FY 2004 for InFUSETM

Bone Graft/LT–CAGE Lumbar Tapered 

Fusion Device. As discussed above, we 

approved this application for FY 2004, 

and we are proposing to continue to 

make new technology payments for FY 

2005 for InFUSETM when used in spinal 

fusions (refer to section III.E.3.b. of this 

preamble). 

In cases of open tibia fractures, 

InFUSETM is applied using an 

absorbable collagen sponge, which is 

then applied to the fractured bone in 

order to promote new bone formation. 

This use currently represents an offlabel use of InFUSETM. The 

manufacturer contends that this use is 

severely limited due to the greatly 

increased costs for treating these cases 

with InFUSETM at the time of wound 

debridement and closure. The 

manufacturer has conducted a clinical 

trial and is awaiting FDA approval for 

the use of InFUSETM for open tibia 

fractures. According to the 

manufacturer, this approval is expected 

before publication of the final rule. The 

application for add-on payments for the 

use of InFUSE for open tibia fractures 

proposes that such payment would 

encourage the use of InFUSETM for 

treatment of these fractures of grade II 

or higher (up to and including grade III, 

which often must be amputated due to 

the severity of injury). The additional 

payment, according to the applicant, 

would encourage more hospitals to use 

the technology at the time of initial 

wound closure and would result in 

reduced rates of infection and nonunion 

currently associated with the treatment 

of these injuries. 

The manufacturer submitted data on 

315 cases using InFUSETM for open tibia 

fractures in the FY 2002 MedPAR file, 

as identified by procedure code 79.36 

(Reduction, fracture, open, internal 

fixation, tibia and fibula) and diagnosis 

codes of either 823.30 (Fracture of tibia 

alone, shaft, open) or 823.32 (Fracture of 

fibula and tibia, shaft, open). The 

applicant also submitted data for a 

hospital sample that included 63 cases 

using the same identifying codes. Based 

on the data submitted by the applicant, 

InFUSETM would be used in four 

different DRGs: 217 (Wound 

Debridement and Skin Graft Except 

Hand, for Musculoskeletal and 

Connective Tissue Disorders), 218 and 

219 (Lower Extremity and Humerus 

Procedures Except Hip, Foot, Femur 

Age > 17, With and Without CCs, 

respectively) and 486 (Other O.R. 

Procedures for Multiple Significant 

Trauma). The analysis performed by the 

applicant resulted in a case-weighted 

cost threshold of $27,111 for these four 

DRGs. The average case-weighted 

standardized charge for cases using 

InFUSE in these four DRGs would be 

$46,468. Therefore, the applicant 

maintains that InFUSETM for open tibia 

fractures meets the cost criterion. 

InFUSETM was approved by the FDA 

for use in open tibia fractures on April 

30, 2004. Because FDA approval was 

not received in time for full 

consideration of the application in this 

proposed rule, we are not presenting our 

full analysis of this application in this 

proposed rule. However, we have 

already determined that this technology 

still qualifies as new in the context of 

proposing to extend new technology 

add-on payments for InFUSETM for 

single-level spinal fusions. We must still 

determine whether it is appropriate to 

approve add-on payments for InFUSETM

in cases of open tibia fractures in light 

of the cost and substantial improvement 

criteria. Therefore, we invite comments 

on whether use of InFUSETM for open 

tibia fractures should qualify for add-on 

payments under these criteria. 

We note that, in the September 7, 

2001 final rule (66 FR 46915), we stated 

that if an existing technology was 

assigned to different DRGs than those in 

which the technology was initially used, 

the new use may be considered for new 

technology add-on payments if it also 

meets the substantial clinical 

improvement and inadequacy of 

payment criteria. Under the policy 

suggested in that rule, approval of 

InFUSETM for tibia fractures would start 

a new period of add-on payments for the 

new use of this technology. However, 

we have some reservations about 

whether this result would be 

appropriate. It might be possible, under 

the policy described in the September 7, 

2001 final rule, for a technology to 

receive new technology add-on 

payments for many years after it is 

introduced, provided that use of the 

technology is continually expanded to 

treatment of new conditions. We invite 

comment on whether it would be more 

appropriate merely to extend the 

existing approval of InFUSETM for 

spinal fusions to cases where InFUSETM

is used for open tibia fractures, without 

extending the time period during which 

the technology will qualify for add-on 

payments.

We note that as part of its application, 

the applicant submitted evidence on the 

substantial clinical improvement 

criterion. The applicant cited data from 

a prospective, controlled study 

published on December 12, 2002 in The 

Journal of Bone and Joint Surgery

(Govender, S., Crismma, C., Genant, 

H.K., Valentin-Opran, V., ‘‘Recombinant 

Human Bone Morphogenetic Protein-2 

for Treatment of Open Tibia Fractures,’’

Vol. 84–A, No. 12. p. 2123). The study, 

also known as BESTT study group, 

involved 49 trauma centers in 11 

countries. The study enrolled 450 

patients who had sustained an open 

tibia shaft fracture that normally would 

be treated by intramedullary nail 

fixation and soft tissue management. 

The patients were randomly and blindly 

assigned to one of three groups: the 

standard of care as stated above, the 

standard of care plus implantation an 

absorbable collagen sponge soaked with 

.75 mg/ml of rhBmP–2, or the standard 

of care plus implantation of an 

absorbable collagen sponge soaked with 

1.50 mg/ml of rhBMP–2. The study 

followed up with 421 (94 percent) of all 

patients. The applicant stated that the 

study found that patients who received 

the standard of care plus an absorbable 

collagen sponge soaked with 1.50 mg/ml 

of rhBMP–2 achieved the following 

results compared to the standard of care 

without the rhBMP: a 44-percent 

reduction in the rate of secondary 

surgery, an average of 39 days reduction 

in time of clinical healing and lower 

infection rates. As a result, the applicant 

maintains that InFUSETM in tibia 

fractures represents a substantial 

clinical improvement over previously 

available technologies. 

We are not presenting a full analysis 

of this application under the substantial 

clinical improvement criterion because 

the technology had not yet received 

FDA approval for this use in time for 

consideration in this proposed rule. 

However, we note that although the 

cited study does provide some evidence 

of clinical efficacy, we have some 

concerns about whether the study 

conclusively demonstrates substantial 

clinical improvement over previously 

available technologies because of its 

design. (It is important to note, as we 

stated in the August 1, 2002 Federal 

Register (67 FR 50015), that we do not 

employ FDA guidelines to determine 

what drugs, devices, or technologies 

qualify for new technology add-on 

payments under Medicare. Our criteria 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28241

do not depend on the standard of safety 

and efficacy that the FDA sets for 

general use, but on a demonstration of 

substantial clinical improvement in the 

Medicare population, particularly 

patients over age 65.) We will present 

our full analysis of the evidence 

regarding clinical improvement in the 

final rule. 

We received no public comments 

regarding this application for add-on 

payments. 

b. Norian Skeletal Repair System 

(SRS) Bone Void Filler 

Brigham and Women’s Hospital 

submitted an application for approval of 

the Norian Skeletal Repair System 

(SRS) Bone Void Filler (Norian SRS

Cement), manufactured by Synthes for 

new technology add-on payments for FY 

2005. Synthes has been assisting the 

applicant with supplemental 

information and data to help the 

applicant with the application process. 

According to the manufacturer, Norian 

SRS Cement is an injectable, fastsetting carbonated apatite cement used 

to fill defects in areas of compromised 

cancellous bone during restoration or 

augmentation of the skeleton. The 

product provides a bone void filler that 

resorbs and is replaced with bone 

during the healing process. 

On December 23, 1998, the FDA 

approved Norian SRS for use as an 

adjunct for fracture stabilization in the 

treatment of low impact, unstable, 

metaphyseal distal radius fractures, in 

cases where early mobilization is 

indicated. On December 20, 2001, the 

FDA approved Norian SRS Cement for 

use in bony voids or defects that are not 

intrinsic to the stability of the bony 

structure. Norian SRS Cement is 

intended to be placed or injected into 

bony voids or gaps in the skeletal 

system. These defects may be surgically 

created osseous defects or osseous 

defects caused by traumatic injury to the 

bone. 

Despite the time that has elapsed 

since FDA approval, the manufacturer 

contends that Norian SRS Cement 

should still be considered new for 

several reasons. First, until April 2002, 

Norian SRS Cement was hand mixed 

using a mortar and pestle. Once Norian 

SRS Cement was approved by the FDA 

in December 2001 (for the indication of 

use in bony voids or defects that are not 

intrinsic to the stability of the bony 

structure), the manufacturer issued a 

new pneumatic mixer. According to the 

manufacturer, this new pneumatic 

mixer allows for better preparation, 

reliability, and ease of use. In addition, 

a new injection syringe mechanism was 

developed and made available in May 

2002 and replaced the ‘‘Norian Delivery 

Device’’. The manufacturer believes 

these new procedures for mixing and 

delivery of the product to the patient 

should be considered new services as 

stated in section 1886(d)(5)(k)(ii) of the 

Act and § 412.87(b)(1) of the regulations. 

Second, the manufacturer contends that 

the cement should still be considered 

new because there is no ICD–9–CM code 

to uniquely identify Norian SRS

Cement within the DRGs. 

Although there have been changes in 

the way Norian SRS Cement is mixed 

and delivered to the patient, we do not 

believe these changes are significant 

enough to regard the technology as new. 

While these changes may enhance the 

ease with which the technology is used, 

the product remains substantially the 

same as when it was initially developed. 

As we have indicated previously, 

technology can be considered new only 

for 2 to 3 years after data reflecting the 

costs of the technology begin to become 

available. Data on the costs of this 

technology began to become available 

after FDA approval in 1998, and these 

costs are currently reflected in the DRG 

weights. As we discussed in the 

September 7, 2001 final rule (66 FR 

46914), the determination concerning 

whether a technology meets this 

criterion depends on the date of its 

availability for use in the Medicare 

population rather than the date a 

specific code may be assigned. 

Therefore, we are proposing that Norian 

SRS Cement does not meet the 

criterion that a medical service or 

technology be considered new. 

Although we are not proposing to 

approve this application for add-on 

payments because the technology does 

not meet the newness criterion, we note 

that the manufacturer submitted 

information on the cost criterion and the 

substantial clinical improvement 

criterion. The manufacturer submitted 

52 Medicare and non-Medicare cases 

using Norian SRS Cement. There are 

currently no ICD–9–CM codes that can 

distinctly identify Norian SRS Cement 

within the MedPAR data; therefore, we 

cannot track this technology with our 

own analysis of MedPAR data. Based on 

the data submitted by the manufacturer, 

cases using Norian SRS’’ Cement were 

found in 12 DRGs, with 71.1 percent of 

the cases in DRGs 210, 218, 219, and 

225. Based on the 52 cases submitted by 

the applicant, the case-weighted 

threshold across all DRGs was $22,493. 

The average case-weighted standardized 

charge was $29,032. As a result, the 

applicant and manufacturer maintain 

that Norian SRS Cement meets the 

cost criterion. 

According to the manufacturer, 

Norian SRS Cement represents a 

substantial clinical improvement for the 

following reasons: It enhances shortterm and long-term structural support, 

improves the rate and durability of 

healing, decreases donor site morbidity, 

decreases risk of infection at graft site, 

lowers the risk of operative 

complications from shorter operative 

procedures, lowers the rate of posttreatment hospitalizations and 

physician visits, and finally, reduces 

pain. 

However, we are not presenting a full 

evaluation of the application for add-on 

payments for Norian SRS Cement 

under these criteria because the 

technology does not meet the newness 

criterion. Therefore, we are proposing to 

deny add-on payments for this 

technology. 

We received no public comments on 

this application for add-on payments.

c. InSync Defibrillator System (Cardiac 

Resynchronization Therapy with 

Defibrillation (CRT–D))

Cardiac Resynchronization Therapy 

(CRT), also known as bi-ventricular 

pacing, is a therapy for chronic heart 

failure. A CRT implantable system 

provides electrical stimulation to the 

right atrium, right ventricle, and left 

ventricle to recoordinate or 

resynchronize ventricular contractions 

and improve the oxygenated blood flow 

to the body (cardiac output). 

Medtronic submitted an application 

for approval of the InSync Defibrillator 

System, a cardiac resynchronization 

therapy with defibrillation system 

(CRT–D), for new technology add-on 

payments for FY 2005. This technology 

combines resynchronization therapy 

with defibrillation for patients with 

chronic, moderate-to-severe heart failure 

who meet the criteria for an implantable 

cardiac defibrillator. Unlike 

conventional implantable cardiac 

defibrillators, which treat only 

arrhythmias, CRT- devices have a dual 

therapeutic nature intended to treat two 

aspects of a patient’s heart disease 

concurrently: (1) The symptoms of 

moderate to severe heart failure (that is, 

the ventricular dysynchrony); and (2) 

cardiac arrhythmias, as documented by 

an electrophysiologic testing or clinical 

history or both, which would cause 

sudden cardiac arrest. 

InSync Defibrillation System 

received FDA approval on June 26, 

2002. However, another manufacturer, 

Guidant, received FDA approval for its 

CRT–D device on May 2, 2002. Guidant, 

and another competitor that has yet to 

receive FDA approval for its CRT–D 

device, have requested that their devices 

28242 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

3The formula is n=4 s/B2, where s the standard 

deviation of the population, and B is the bound on 

the error of the estimate (the range within which the 

sample means can reliably predict the population 

mean). See Statistics for Management and 

Economics, Fifth Edition, by Mendenhall, W., 

Reinmuth, J., Beaver, R., and Duhan, D.

be included in any approval of CRT–D 

for new technology add-on payments. 

As we discussed in the September 7, 

2001 final rule (66 FR 46915), an 

approval of a new technology for special 

payment should extend to all 

technologies that are substantially 

similar. Otherwise, our payment policy 

would bestow an advantage to the first 

applicant to receive approval for a 

particular new technology. 

The applicant contends that, despite 

the approval of a similar device in May 

2002, the InSync Defibrillator System 

should still be considered new for 

several reasons: First, an ICD–9–CM 

code was only issued in FY 2003, which 

falls within the 2-year to 3-year range 

provided in the regulations. Second, the 

utilization of CRT–Ds is still growing 

and has not reached full utilization and, 

therefore, CRT–Ds remain 

underreported within the FY 2003 

MedPAR data that will be used to 

recalibrate the DRG weights for FY 

2005. Finally, the applicant believes 

reporting of CRT–Ds may be insufficient 

to accurately recalibrate the DRGs 

because the new ICD–9–CM codes for 

CRT–Ds are unlikely to be used 

consistently and accurately by hospitals 

in the first year. 

We have discussed the relationship 

between existence of a specific ICD–9–

CM code for a technology and our 

determination of its status as a new 

technology. As discussed in the 

September 7, 2001 final rule (66 FR 

46914), the determination of whether a 

technology is new depends on the date 

of its availability for use in the Medicare 

population, rather than the date a 

specific code may be assigned. Because 

CRT–Ds were available upon the initial 

FDA approval in May 2002, we consider 

the technology to be new from this date 

and not the date a code was assigned. 

Using the December 2003 update file 

to the FY 2003 MedPAR file, we have 

identified 10,950 cases using CRT–D in 

the FY 2003 MedPAR database. Of 

these, 10,694 cases were reported in 

DRGs 514 and 515 (then Cardiac 

Defibrillator Implant With and Without 

Cardiac Catheter, respectively). In DRG 

515, we found 3,948 cases with 

procedure code 00.51 (Implantation of 

cardiac resynchronization defibrillator, 

total system (CRT–D)) and 6,746 cases 

in DRG 514. DRG 514 is no longer valid, 

effective in FY 2004. In FY 2004, we 

assigned new cases of defibrillator 

implants with cardiac catheters from 

DRG 514 to new DRGs 535 (Cardiac 

Defibrillator Implant with Cardiac 

Catheter With Acute Myocardial 

Infarction (AMI) Heart Failure/Shock) 

and 536 (Cardiac Defibrillator Implant 

with Cardiac Catheter Without Acute 

Myocardial Infarction (AMI) Heart 

Failure/Shock). Using the 6,746 cases 

from the FY 2003 MedPAR found in 

DRG 514, we examined the primary 

diagnosis codes necessary for 

assignment to DRG 535 along with 

procedure code 00.51 and found 3,396 

cases of CRT–D for DRG 535. The 

remaining 3,350 CRT–D cases found in 

DRG 514 using procedure code 00.51 

fall into DRG 536. For FY 2003, the total 

number of cases of CRT–D found in the 

FY 2003 MedPAR data for DRGs 514 

and 515 were 48,486. Cases reporting 

CRT–Ds thus represent 22 percent of all 

cases for these DRGs. 

A medical service or technology can 

no longer be considered new after 2 to 

3 years, when data reflecting the costs 

of the technology begin to become 

available. Data on the costs of this 

technology began to become available in 

May 2002. Our analysis of data from the 

FY 2003 MedPAR file also shows that 

the costs of CRT–D are represented by 

a substantial number of cases within the 

DRGs. However, as discussed above, the 

technology still remains within the 2-

year to 3-year period during which it 

can be considered new. Therefore, we 

are considering whether the CRT–D 

technology still meets the newness 

criterion. We welcome comments on 

this issue as we analyze whether to 

approve this technology (which would 

included the InSync application) in 

the final rule. 

We note that the applicant submitted 

information on the cost and substantial 

clinical improvement criteria. The 

applicant commissioned Navigant 

Consulting, Inc. to collect charge data 

on CRT–D. Navigant found 354 

Medicare cases among 30 hospitals. 

Cases were identified using ICD–9–CM 

procedure code 00.51. Of these 354 

cases, 44.1 percent were reported in 

DRG 515, 23.7 percent were reported in 

DRG 535, and 32.2 percent were 

reported in DRG 536. These DRGs result 

in a case-weighted threshold of $78,674. 

The average case-weighted standardized 

charge for the 354 cases mentioned 

above was $79,163. Based on these data, 

the manufacturer contends that InSync

Defibrillator System would meet the 

cost criterion. 

In the September 7, 2001 final rule, 

we stated that the data submitted must 

be of a sufficient sample size to 

demonstrate a significant likelihood that 

the sample mean approximates the true 

mean across all cases likely to receive 

the new technology. Using a standard 

statistical methodology for determining 

the needed (random) sample size based 

on the standard deviations of the DRGs 

identified by the applicant as likely to 

include cases receiving a CRT–D, we 

have determined that a random sample 

size of 354 cases can be reasonably 

expected to produce an estimate within 

$3,500 of the true mean.3 Of course, the 

data submitted do not represent a 

random sample of all cases in these 

DRGs across all hospitals.

The manufacturer also contends that 

the added capability of the InSync

Defibrillator System device provides 

significant benefits over and above a 

conventional defibrillator. The InSync

Defibrillator System device treats both 

the comorbid conditions of ventricular 

arrhythmias and moderate to severe 

heart failure, and takes the place of the 

existing treatment of drug therapy for 

heart failure plus a conventional 

implantable cardiac defibrillator for 

ventricular arrhythmia. The applicant 

states this CRT–D is a substantial 

clinical improvement for patients who 

remain symptomatic despite drug 

therapy and have the comorbid 

condition of heart failure. According to 

the applicant, some of the improved 

outcomes that result from using a CRT–

D device instead of existing treatments 

include: improved quality of life, 

improved exercise tolerance, improved 

homodynamic performance, and 

reduced hospitalizations and mortality 

due to chronic heart failure. 

We welcome comments on whether 

this technology meets these criteria, but 

especially about whether it meets the 

newness criterion in the light of the 

extent to which it is represented cases 

within the relevant DRGs. We will 

determine whether to approve this 

technology in the light of these 

comments and our continuing analysis.

We received the following public 

comments in accordance with section 

503(b)(2) of Public Law 108–173 

regarding this application for add-on 

payments: 

Comment: One commenter noted that 

CRT–D has had positive clinical 

outcomes by reversing remodeling of the 

heart and improving the heart’s ability 

to pump more efficiently. The 

commenter added that CRT-D has 

helped decrease hospitalizations and 

length of stay. 

Response: We appreciate the 

commenters’ input on this criterion. We 

will consider these comments regarding 

the substantial clinical improvement 

criterion if we determine that the 

technology meets the other two criteria. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28243

d. GliaSite Radiation Therapy 

System (RTS) 

The Pinnacle Health Group submitted 

an application for approval of GliaSite

Radiation Therapy System (RTS) for 

new technology add-on payments. 

GliaSite RTS was approved by the 

FDA for use on April 15, 2001. The 

system involves several components, 

including a drug called Iotrex and a 

GliaSite catheter. Iotrex is an 

organically bound liquid form of 

Iodine 125 used in intracavitary 

brachytherapy with GliaSite RTS. 

Iotrex is a single nonencapsulated 

(liquid) radioactive source. The liquid is 

a solution of sodium 3-(I125) iodo-4-

hydroxybenzenesulfonate and is used to 

deliver brachytherapy for treatment of 

brain cancer. 

The delivery system for Iotrex is the 

GliaSite RTS catheter. Iotrex is 

administered via injection through a 

self-sealing port into the primary lumen 

of the barium-impregnated catheter that 

leads to the balloon reservoir. After a 

malignant brain tumor has been 

resected, the balloon catheter 

(GliaSite) is implanted temporarily 

inside the cavity. The patient is released 

from the hospital. After a period of 3 

days to 3 weeks, the patient is 

readmitted. During the second 

admission, the appropriate dose (200 to 

600 millicuries) of radiation is then 

administered. Iotrex is infused into the 

GliaSite catheter and intracavitary 

radiation is delivered to the target area. 

The gamma radiation emitted by Iotrex 

is delivered directly to the margins of 

the tumor bed. After 3 to 7 days, the 

Iotrex is removed. 

GliaSite RTS was approved by the 

FDA for use on April 15, 2001. 

Technology is no longer considered new 

2 to 3 years after data reflecting the costs 

of the technology begin to become 

available. Because data regarding this 

technology began to become available in 

2001, we have determined that 

GliaSite RTS does not meet the 

criterion that a medical service or 

technology be considered new. 

Therefore, we are proposing to deny 

approval of GliaSite RTS for new 

technology add-on payments. 

Although we are proposing not to 

approve this application because 

GliaSite does not meet the newness 

criterion, we note that the applicant 

submitted information on the cost 

criterion and substantial clinical 

improvement criterion. The applicant 

stated that the number of cases in DRG 

7 for FY 2004 was projected to be 

14,782, and estimated that 10 percent 

(or about 1,478) of those patients would 

be candidates for GliaSite RTS. The 

applicant estimated that the 

standardized charge for all cases using 

the technology in DRG 7 was $49,406. 

Based on this calculation, the 

manufacturer stated in its application 

that this figure is greater than the cost 

threshold of $32,115 for DRG 7. 

Therefore, according to the 

manufacturer, it appears that GliaSite

would meet the cost criterion. 

The applicant also claims this way of 

delivering brachytherapy to the brain is 

significantly more patient friendly. The 

use of a single intracavitary applicator 

positioned inside the resection cavity 

during the initial surgery in place of an 

interstitial-seed implant removes the 

need for additional invasive procedures 

and the need for multiple puncture sites 

(up to 20). In addition, the manufacturer 

claims that the approach used in the 

GliaSite RTS system improves dosedelivery and provides a more practical 

means of delivering the brachytherapy. 

However, as discussed above, 

GliaSite does not meet the newness 

criterion. Therefore, we are proposing to 

deny add-on payments for this 

technology in FY 2005. 

We received no public comments on 

this application for add-on payments. 

e. Natrecor—Human B-Type 

Natriuretic Peptide (hBNP) 

Scios, Inc. submitted an application 

for approval of Natrecor for new 

technology add-on payments. Natrecor 

is a member of a new class of drugs, 

Human B-type Natriuretic Peptide 

(hBNP), and it is manufactured from E. 

coli with recombinant DNA technology. 

It binds to the particulate guanylate 

cyclase receptor of vascular smooth 

muscle endothelial cells, leading to 

increased intracellular concentrations of 

guanosine 3′5′-cyclic monophosphate, 

and therefore to enhance smooth muscle 

cell relaxation, ultimately causing 

dilation of arteries and veins. The 

applicant states that Natrecor is more 

potent and relieves symptoms of heart 

failure more rapidly, while also causing 

less hemodynamic instability than 

intravenous nitroglycerin, the most 

commonly used vasodilator for heart 

failure.

Natrecor was approved by the FDA 

for the treatment of acute congestive 

heart failure on August 10, 2001. It is 

indicated for the intravenous treatment 

of patients with acutely decompensated 

congestive heart failure (dyspnea). 

Congestive heart failure is the result of 

impaired pumping capacity of the heart. 

It causes a variety of clinical 

consequences, including water 

retention, sodium retention, pulmonary 

congestion, and diminished perfusion of 

blood to all parts of the body. 

The applicant concedes that the FY 

2003 MedPAR file includes hospital 

charge information for patients 

receiving Natrecor. The manufacturer 

contends that Natrecor should still be 

considered new for several reasons. The 

first reason is that these data will not 

provide an accurate representation of 

hospital utilization of this product nor 

an adequate reimbursement rate for 

hospitals treating acute congestive heart 

failure patients with Natrecor in FY 

2005. The FY 2003 MedPAR file 

represents the first full year in which 

the ICD–9–CM procedure code 00.13 

(Injection or infusion of nesiritide) was 

in effect. Therefore, the manufacturer 

anticipates a slow increase in the 

accuracy of coding and billing in FY 

2003. In addition, the manufacturer 

stated that market penetration for this 

product was 3 percent for FY 2003, but 

is expected to be significantly higher for 

FY 2005. 

However, technology is no longer 

considered new 2 to 3 years after data 

reflecting its costs begin to become 

available. Because data reflecting the 

costs of Natrecor began to become 

available in 2001, these costs are 

currently reflected in the DRG weights. 

In addition, as discussed in the 

September 7, 2001 final rule (66 FR 

46914), the determination of whether a 

technology is new depends on the date 

of its availability for use in the Medicare 

population rather than the date a 

specific code was assigned. Because 

Natrecor was available upon FDA 

approval, it does not meet the criterion 

that a medical service or technology be 

considered new. 

Although we are proposing not to 

approve this application because 

Natrecor does not meet the newness 

criterion, we note that the applicant 

submitted information on the cost 

criterion and substantial clinical 

improvement criterion. Scios 

commissioned Premier, Inc. to search its 

database of 196 hospitals for cases in FY 

2003 that used Natrecor. Premier 

identified 9,811 cases across many 

DRGs using National Drug Codes from 

pharmacy databases. The majority of 

cases (approximately 42 percent) were 

found in DRG 127 (Heart Failure and 

Shock), while the remaining cases were 

found in other DRGs that individually 

had a maximum of 8 percent of the 

9,811 cases identified by Premier. The 

case-weighted threshold across all DRGs 

for Natrecor, using data provided by 

Premier, was $26,509. (DRGs with less 

than 25 discharges were not included in 

this analysis.) The average charge for 

cases with Natrecor was $70,137. The 

average case-weighted standardized 

charge across all DRGs was $43,422.

28244 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

Because the average standardized charge 

is greater than the case-weighted 

threshold, the applicant stated that 

Natrecor meets the cost criterion. 

The manufacturer stated that 

Natrecor represents a substantial 

clinical improvement over existing 

treatments for decompensated 

congestive heart failure because it 

provides novel clinical effects, leads to 

fewer complications, and improves 

overall clinical outcomes. Specifically, 

Natrecor reduces left ventricular 

preload, afterload, and pulmonary 

capillary wedge pressure without 

inducing tachyphylaxis, and it causes a 

balanced vasodilation of veins, arteries, 

and coronary arteries that increases 

cardiac output. It has also been shown 

to significantly reduce dyspnea, and it 

blocks the rennin-aldosteroneangiotensin system, thereby reducing 

sodium retention and enhancing 

diuresis and natriuresis. In addition, 

Natrecor is not pro-arrhythmic; it does 

not increase cardiac work by causing 

tachycardia, and it does not cause 

electrolyte imbalances. 

However, as discussed above, 

Natrecor does not meet the newness 

criterion. Therefore, we are proposing to 

deny add-on payments for this 

technology in FY 2005. 

We received no public comments on 

this application for add-on payments. 

f. Kinetra Implantable Neurostimulator 

for Deep Brain Stimulation 

Medtronic, Inc. submitted an 

application for approval of the Kinetra

implantable neurostimulator device for 

new technology add-on payments. The 

Kinetra device was approved by the 

FDA on December 16, 2003. The 

Kinetra implantable neurostimulator is 

designed to deliver electrical 

stimulation to the subthalamic nucleus 

(STN) or internal globus pallidus (GPi) 

in order to ameliorate symptoms caused 

by abnormal neurotransmitter levels 

that lead to abnormal cell-to-cell 

electrical impulses in Parkinson’s 

Disease and essential tremor. Before the 

development of Kinetra, treating 

bilateral symptoms of patients with 

these disorders required the 

implantation of two neurostimulators 

(in the form of a product called 

SoletraTM manufactured by Medtronic): 

One for the right side of the brain (to 

control symptoms on the left side of the 

body), the other for the left side of the 

brain (to control symptoms on the right 

side of the body). Additional procedures 

are required to create pockets in the 

chest cavity to place the two generators 

required to run the individual leads. 

The Kinetra neurostimulator 

generator, implanted in the pectoral 

area, is designed to eliminate the need 

for two devices by accommodating two 

leads that are placed in both the left and 

right sides of the brain to deliver the 

necessary impulses. The manufacturer 

argues that the development of a single 

neurostimulator that treats bilateral 

symptoms provides a less invasive 

treatment option for patients, and for 

simpler implantation, followup, and 

programming procedures for physicians. 

The device was approved by the FDA 

in December 2003. Therefore, it 

qualifies under the first criterion 

because it is not yet reflected in the DRG 

weights. Because there are no data 

available to evaluate costs associated 

Kinetra, we conducted the cost 

analysis using SoletraTM, the 

predecessor technology used to treat 

this condition, as a proxy for Kinetra. 

The pre-existing technology provides 

the closest means to track cases that 

have actually used similar technology 

and serves to identify the need and use 

of the new device. The manufacturer 

informed us that the cost of the 

Kinetra device is twice the price of a 

single SoletraTM device. Since most 

patients would receive two SoletraTM

devices if the Kinetra device is not 

implanted, data regarding the cost of 

SoletraTM give a good measure of the 

actual costs that will be incurred. 

Medtronic submitted data for 104 cases 

that involved the SoletraTM device (26 

cases in DRG 1 (Craniotomy Age > 17 

With CC), and 78 cases in DRG 2 

(Craniotomy Age > 17 Without CC)). 

These cases were identified from the FY 

2002 MedPAR file using procedure 

codes 02.93 (Implantation, intracranial 

neurostimulator) and 86.09 (Other 

incision of skin and subcutaneous 

tissue). In the analysis presented by the 

applicant, the mean standardized 

charges for cases involving SoletraTM in 

DRGs 1 and 2 were $69,018 and 

$44,779, respectively. The mean 

standardized charge for these SoletraTM

cases according to Medtronic’s data was 

$50,839. 

We used the same procedure codes to 

identify 187 cases involving the 

SoletraTM device in DRGs 1 and 2 in the 

FY 2003 MedPAR file. Similar to the 

Medtronic data, 53 of the cases were 

found in DRG 1, and 134 cases were 

found in DRG 2. The average 

standardized charges for these cases in 

DRGs 1 and 2 were $51,163 and 

$44,874, respectively. Therefore, the 

case-weighted average standardized 

charge for cases that included 

implantation of the SoletraTM device 

was $46,656. The new cost thresholds 

established under the revised criteria in 

Public Law 108–173 for DRGs 1 and 2 

are $43,245 and $30,129, respectively. 

Accordingly, the case-weighted 

threshold to qualify for new technology 

add-on payment using the data we 

identified would be $33,846. Under this 

analysis, Kinetra would qualify for the 

cost threshold. 

We note that an ICD–9–CM code was 

approved for dual array pulse generator 

devices, effective October 1, 2004, for 

IPPS tracking purposes. The new ICD–

9–CM code that will be assigned to this 

device is 86.95 (Insertion or 

replacement of dual array 

neurostimulator pulse generator), which 

includes dual array and dual channel 

generators for intracranial, spinal, and 

peripheral neurostimulators. The code 

will not identify cases with this specific 

device and will only be used to 

distinguish single versus dual channelpulse generator devices. 

The manufacturer claims that 

Kinetra provides a range of substantial 

improvements beyond previously 

available technology. These include a 

reduced rate of device-related 

complications and hospitalizations or 

physician visits and less surgical trauma 

because only one generator implantation 

procedure is required. Kinetra has a 

reed switch disabling function that 

physicians can use to prevent 

inadvertent shutoff of the device, as 

occurs when accidentally tripped by 

electromagnetic inference (caused by 

common products such as metal 

detectors and garage door openers). 

Kinetra also provides significant 

patient control, allowing patients to 

monitor whether the device is on or off, 

to monitor battery life, and to fine-tune 

the stimulation therapy within 

clinician-programmed parameters. 

While Kinetra provides the ability for 

patients to better control their 

symptoms and reduce the complications 

associated with the existing technology, 

it does not eliminate the necessity for 

two surgeries. Because the patients who 

receive the device are often frail, the 

implantation generally occurs in two 

phases: The brain leads are implanted in 

one surgery, and the generator is 

implanted in another surgery, typically 

on another day. However, implanting 

Kinetra does reduce the number of 

potential surgeries compared to its 

predecessor (which requires two 

surgeries to implant the two single-lead 

arrays to the brain). 

Despite the improvement Kinetra

represents over its immediate 

predecessor, SoletraTM, we have some 

concerns about whether the device is 

significantly different in terms of how it 

achieves its desired clinical result. The 

stimulation mechanism by which it 

treats patient symptoms remains 

substantially the same as the 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28245

predecessor device. The enhancements 

cited by the manufacturer are primarily 

to features such as control, power, 

monitoring, and reliability. 

Nevertheless, these improvements, 

along with the reduced number of 

surgeries required, may be sufficient to 

warrant a determination that the device 

represents a substantial clinical 

improvement. We welcome further 

public comment on the issue of whether 

the device is sufficiently different from 

the previously used technology to 

qualify as a substantially improved 

treatment of the same patient symptoms.

We also invite comments concerning 

the cost of the device. If the new device, 

at twice the cost of the existing 

technology, merely replaces the costs of 

two of the previous devices, then the 

charges for Kinetra are not 

substantially different from current 

charges resulting from the use of either 

device alone. Because the costs for the 

predecessor device meet the statutory 

cost criterion, the successor technology 

would meet the criterion as well, at least 

under the manufacturer’s assumption 

that a single Kinetra costs twice as 

much as each of the two SoletrasTM

required to perform the same function. 

However, since there should be less 

surgery involved, more patient control, 

less risk of complications, and fewer 

office visits as a result of using 

Kinetra, the costs for patients who 

receive the new device would be 

expected to drop. This suggests that it 

may not be appropriate to base the cost 

analysis for Kinetra on the 

manufacturer’s assumption that total 

costs for SoletraTM and Kinetra are 

substantially the same. 

In addition, we also invite public 

comment concerning the approval of the 

device for add-on payment, given the 

uncertainty over the frequency with 

which the patients receiving the device 

have the generator implanted in a 

second hospital stay, and the frequency 

with which this implantation occurs in 

an outpatient setting. Any hospital 

performing the implantation in two 

separate patient stays, whether they are 

both inpatient or whether one is 

inpatient and the second is outpatient, 

would be paid double for the single 

device. Therefore, we have some 

concern about the appropriateness of 

approving add-on payments for a device 

that may already receive payment at a 

nonbundled rate for a high percentage of 

patients who receive the device. We are 

currently investigating whether a 

second hospital stay is needed for 

implantation of Kinetra. 

Despite these issues, we are still 

considering whether it is appropriate to 

approve add-on status for Kinetra for 

FY 2005. If approved for add-on 

payments, the device would be 

reimbursed up to half of the costs for the 

device. Since the manufacturer has 

stated that the cost for Kinetra would 

be $16,570, the maximum add-on 

payment for the device would be 

$8,285. We will make a final 

determination in the light of public 

comments and our continuing analysis. 

We received no public comments on 

this application for add-on payments. 

We note that the manufacturer of 

Kinetra also submitted an application 

for pass-through payments under the 

hospital outpatient payment system 

(OPPS). This application was denied for 

pass-through payment in OPPS because 

the item was already described by a 

previously existing category of devices 

for pass-through payment (C1767, 

Generator, neurostimulator 

(implantable)). Therefore, no substantial 

improvement determination was made 

for that application, although one would 

have been required for approval if it had 

met all other criteria. The manufacturer 

subsequently applied for assignment of 

deep brain stimulation with Kinetra

neurostimulator to a new technology 

ambulatory payment classification 

(APC) under the OPPS. This application 

is currently under consideration. These 

special APCs were initiated in OPPS to 

expedite recognition of and payment for 

innovative new technologies that do not 

qualify for pass-through payment. In 

contrast to the annual decisionmaking 

under the IPPS, applications for new 

technology APCs of the OPPS are 

accepted on an ongoing basis and 

updates are made quarterly. 

g. Intramedullary Skeletal Kinetic 

Distractor (ISKD) 

Orthofix, Inc. submitted an 

application for approval of the 

Intramedullary Skeletal Kinetic 

Distractor (ISKD) Internal Limb 

Lengthener for new technology add-on 

payments for FY 2005. The device 

received FDA marketing approval on 

May 2, 2001. The ISKD System is a 

‘‘closed’’ lengthening system. There are 

no fixation pins exiting the skin, thus 

eliminating this portal for entry of 

infectious organisms. The device is 

implanted in the intramedullary canal. 

This provides mechanical stability and 

support to the bone segments during the 

distraction, regeneration and 

consolidation phases, thus reducing the 

opportunity for misalignment. 

We reviewed the application and 

technology, and we have determined 

that the device is not new and cannot 

be approved for new technology add-on 

payments because it came on the market 

on May 2, 2001. The costs of the device 

are thus reflected in the FY 2001 

MedPAR file, as acknowledged by the 

manufacturer’s data. As a result, the 

costs of the device are already reflected 

in the DRG weights. 

The manufacturer submitted charge 

data for cases found in the FY 2001 

MedPAR file, as well as data from 

several hospitals that have used the 

device. The manufacturer identified 

cases using ICD–9–CM codes 78.35 

(Limb lengthening procedure, femur) 

and 78.37 (Limb lengthening, tibia/

fibula). These procedure codes occur in 

four DRGs: DRGs 210 and 211 (Hip and 

Femur Procedures Except Major Joint 

Procedures Age > 17, With and Without 

CC, respectively) and DRGs 218 and 219 

(Lower Extremity and Humerus 

Procedures Except Hip, Foot and Femur 

Age > 17, With and Without CC). The 

average charges for cases involving 

these procedure codes identified by the 

applicant were not standardized. The 

average charges provided for DRGs 210, 

211, 218, and 219 were $26,692, 

$18,187, $32,959 and $20,228, 

respectively. The manufacturer then 

added the cost of the device, which the 

manufacturer states is $6,750. The 

manufacturer projects that, in FY 2005, 

there will be 9 cases in DRG 210, 4 cases 

in DRG 211, 28 cases in DRG 218, and 

19 cases in DRG 219, which results in 

a case-weighted threshold of $22,347. 

Thus, according to the manufacturer’s 

data, because the case-weighted average 

standardized charges of $27,003 for the 

technology are greater than the cost 

threshold of $22,347 for these projected 

60 cases, the ISKD would qualify for 

new technology add-on payments. 

The manufacturer also asserted that 

the ISKD met the substantial clinical 

improvement criteria because, in 

addition to the improvements 

mentioned above (reduces infection 

rates and provides mechanical stability), 

lengthening with the ISKD occurs 

gradually and with no soft tissue 

impingement, reducing two factors 

commonly associated with pain during 

distraction. The manufacturer also 

pointed out that with the ISKD, the 

lengthening procedure is discreet 

because there are no external pins. 

There is no cumbersome external frame 

that may hinder the patient’s activities 

of daily living, or draw further attention 

to the discrepant limb. In addition, the 

patient may have partial weight bearing 

during the lengthening process and 

resume some activities of normal living. 

However, because the device is 

already captured in our DRG weights, 

we are proposing to deny the 

application for the ISKD device for new 

technology add-on payments for FY 

2005. 

28246 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

We received no public comments on 

this application for add-on payments. 

h. ActiconTM Neosphincter 

American Medical Systems submitted 

an application for approval of the 

ActiconTM Neosphincter for new 

technology add-on payments for FY 

2005. The ActiconTM Neosphincter is a 

small, fluid-filled prosthesis that is 

completely implanted within the body. 

The ActiconTM Neosphincter prosthesis 

has been developed to treat severe fecal 

incontinence (the accidental loss of 

solid or liquid stool at least weekly). It 

is designed to mimic the natural process 

of bowel control and bowel movements. 

The prosthesis consists of three 

components: a occlusive cuff implanted 

around the anal canal, a pressureregulating balloon implanted in the 

prevesical space, and a control pump 

with septum implanted in the scrotum. 

All components are connected with 

color-coded, kink-resistant tubing. 

The FDA approved the Acticon 

Neosphincter for use on December 18, 

2001. A technology can be considered 

new only 2 to 3 years after data 

reflecting the costs of the technology 

begin to become available. Data on the 

costs of this technology began to become 

available after the December 2001 FDA 

approval. As a result, the costs of this 

technology are currently reflected in the 

DRG weights. Therefore, we have 

determined that ActiconTM

Neosphincter does not meet this 

criterion.

Although we are proposing not to 

approve this application because 

ActiconTM Neosphincter does not meet 

the newness criterion, we note that the 

applicant submitted information on the 

cost criterion and substantial clinical 

improvement criterion. The applicant 

submitted 23 cases (that are 

indistinguishable as to whether they are 

Medicare or non-Medicare) using ICD–

9–CM procedure codes 49.75 

(Implantation or revision of artificial 

anal sphincter) and 49.76 (Removal of 

artificial anal sphincter) in order to 

identify cases where the ActiconTM

Neosphincter was used. Of these cases, 

9 were in DRG 157 (Anal and Stomal 

Procedures With CC), and 14 were in 

DRG 158 (Anal and Stomal Procedures 

Without CC). The average standardized 

charge per case was $16,758. The caseweighted threshold for DRGs 157 and 

158 (39.1 percent of cases in DRG 157 

and 60.1 percent of cases in DRG 158) 

for this technology is $14, 426. 

Therefore, according to the applicant, 

the ActiconTM Neosphincter meets the 

cost criterion. 

The applicant states in its application 

that the ActiconTM Neosphincter 

represents a substantial clinical 

improvement for the following reasons: 

First, there is no other existing device in 

the United States that can be used to 

treat severe fecal incontinence. Second, 

self-treatment for severe fecal 

incontinence has proven to be largely 

unsuccessful and surgical options have 

historically been more limited, 

including sphincteroplasty or muscle 

transposition. 

However, since ActiconTM

Neosphincter does not meet the 

newness criterion, we are proposing to 

deny add-on payments for this new 

technology. The applicant also 

requested a DRG reclassification for this 

technology. In section II.B.4 of the 

preamble of this proposed rule, we are 

proposing, in MDC 6 (Diseases and 

Disorders of the Digestive System) only, 

to remove codes 49.75 and 49.76 from 

DRGs 157 and 158, and reassign them to 

DRGs 146 (Rectal Resection With CC) 

and 147 (Rectal Resection Without CC). 

All other MDC and DRG assignments for 

codes 49.75 and 49.76 would remain the 

same. 

We received the following public 

comments in accordance with section 

50(b)(2) of Pub. L. 108–173 regarding 

this application for add-on payments. 

Comment: One commenter noted that 

the implant of the ActiconTM

Neosphincter avoids the life-altering 

and disfiguring consequences of a 

permanent stoma. Another commenter 

noted that the implant of the ActiconTM

Neosphincter avoids the need for a 

colostomy, which limits a patient’s 

ability to travel and work due to the fact 

they could have a fecal accident at any 

time. 

Response: We appreciate the 

commenters’ input on this criterion. 

However, as stated above, the ActiconTM

Neosphincter is no longer new. 

Therefore, we are proposing that it is 

not eligible for add-on payments for 

new technologies. 

i. TandemHeartTM Percutaneous Left 

Ventricular Assist System 

Brigham and Women’s Hospital 

submitted an application for approval of 

the TandemHeartTM Percutaneous 

Ventricular Assist System (PVTA) 

manufactured by Cardiac Assists, Inc., 

for new technology add-on payments for 

FY 2005. Cardiac Assists, Inc. has been 

assisting the applicant with 

supplemental information and data to 

support the application process. 

According to the manufacturer, the 

device contains a controller, arterial and 

venous cannulae and the 

TandemHeartTM Percutaneous 

Ventricular Assist Device (pVAD) that 

works parallel with the left ventricle to 

provide left ventricular circulatory 

support. The device is intended for 

extracorporeal circulatory support using 

an extracorporeal bypass circuit. The 

duration of use approved by the FDA is 

for periods of up to 6 hours. 

On November 11, 2000, FDA 

approved the AB–180 XC Blood Pump 

(also known as the TandemHeartTM

pVAD) as a single use, disposable 

centrifugal blood pump designed to 

circulate blood through an 

extracorporeal circuit. On May 23, 2003, 

FDA approved the CardiacAssist 

Transseptal Cannula Set for transseptal 

catherization of the left atrium via the 

femoral vein for the purpose of 

providing a means for temporary (6 

hours or less) left ventricular bypass 

when connected to a suitable 

extracorporeal blood pump unit that 

returns blood to the patient via the 

femoral artery or other appropriate site. 

The manufacturer stated that, although 

the TandemHeartTM pVAD was 

approved in November 2000, this device 

should still be considered new because 

the device was not marketed and sold to 

hospitals until the CardiacAssist 

Transseptal Cannula Set was approved 

by FDA in May 2003. We have received 

confirmation from hospitals that the 

TandemHeartTM pVAD was indeed not 

marketed until FDA approved the 

CardiacAssist Transseptal Cannula Set. 

Also, only half of a year’s worth of data 

containing the TandemHeartTM pVAD is 

reflected within the FY 2003 MedPAR 

file. The manufacturer stated that 

approximately 60 TandemHeartTM

pVADs have been used since FDA 

approved the Cardiac Arrest Transseptal 

Cannula Set in May 2003. Therefore, the 

costs of the TandemHeartTM pVAD are 

not adequately reflected within the 

DRGs. As a result, we consider the 

TandemHeartTM pVAD to be new under 

our criterion. 

As stated above, according to the 

manufacturer, approximately 60 

TandemHeartTM pVADs have been used 

since FDA approved the Cardiac Assist 

Transseptal Cannula Set in May 2003 

(not all of these have been used in 

Medicare beneficiaries). However, only 

two actual cases were submitted by the 

applicant with an ICD–9–CM code of 

37.65 (Implant of an external pulsatile 

heart assist system) used to identify the 

device. As stated in the September 7, 

2001 final rule (66 FR 46916), data 

submitted by the applicant must be of 

a sufficient sample size to demonstrate 

a significant likelihood that the true 

mean across all cases likely to receive 

the technology will exceed the 

threshold established by CMS. Because 

we lack a significant sample of data 

reflecting the costs of this technology, 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28247

we cannot accurately determine the 

average charge per case for the 

TandemHeartTM pVAD. Neither can we 

determine whether this technology 

meets our cost criterion. If we receive 

sufficient data to complete our analysis 

in time for inclusion in the final rule, 

we will assess whether this technology 

meets the cost criterion. 

Although we are not proposing to 

approve this application because we 

have insufficient data to determine 

whether TandemHeartTM pVAD meets 

the cost criterion, we note that the 

applicant submitted information on the 

substantial clinical improvement 

criterion. The applicant stated in its 

application that the TandemHeartTM

pVAD represents a substantial clinical 

improvement because, at present, the 

only alternative to intra-aortic balloon 

pump support is the surgical 

implantation of a ventricular assist 

device. The TandemHeartTM pVAD is 

the only therapeutic intervention that is 

capable of achieving effective 

circulatory support to stabilize 

cardiogenic shock patients that could be 

placed via a percutaneous approach. We 

will present a full analysis of this 

technology under the significant 

improvement criterion if we receive 

sufficient data in time for the final rule 

to evaluate whether the technology 

meets the cost criterion. 

The applicant also requested an ICD–

9–CM code for this technology. We 

discuss this request in section II.B.3. of 

the preamble of this proposed rule. 

We received no public comments on 

this application for add-on payments. 

j. AquadexTM System 100 Fluid 

Removal System (System 100) 

CHF Solutions, Inc. submitted an 

application for the approval of the 

System 100 for new technology add-on 

payments for FY 2005. The System 100 

is designed to remove excess fluid 

(primarily excess water) from patients 

suffering from severe fluid overload 

through the process of ultrafiltration. 

Fluid retention, sometimes to an 

extreme degree, is a common symptom 

of patients with chronic congestive 

heart failure. This technology removes 

excess fluid without causing 

hemodynamic instability. It also avoids 

the inherent nephrotoxicity and 

tachyphylaxis associated with 

aggressive diuretic therapy, the 

mainstay of current therapy for fluid 

overload in congestive heart failure. 

The System 100 consists of: (1) An S–

100 console; (2) a UF 500 blood circuit; 

(3) an extended length catheter (ELC); 

and (4) a catheter extension tubing. The 

System 100 is designed to monitor the 

extracorporeal blood circuit and to alert 

the user to abnormal conditions. 

Vascular access is established via the 

peripheral venous system, and up to 4 

liters of excess fluid can be removed in 

an 8-hour period. 

On June 3, 2002, FDA approved the 

System 100 for use with peripheral 

venous access. On November 20, 2003, 

FDA approved the System 100 for 

expanded use with central venous 

access and catheter extension use for 

infusion or withdrawal circuit line with 

other commercial applicable venous 

catheters. According to the applicant, 

although the System 100 was first 

approved by FDA in June 2002, the 

System 100 was not used by hospitals 

until August 2002 because it took a 

substantial amount of time to market 

and sell the device to hospitals. As a 

result, the applicant believes that the 

System 100 should still be considered 

new. The applicant has presented data 

and evidence demonstrating that the 

System 100 was not marketed until 

August 2002. Therefore, we also believe 

August 1, 2002 is the relevant date for 

determining the availability of the 

System 100. 

The applicant estimates that 308 

patients (approximately 120 cases per 

year) have used the System 100 since its 

inception and the potential population 

for use of the device is 60,000 cases per 

year. These 308 cases represent a small 

percentage of the potential number of 

cases that can utilize the System 100. 

Therefore, the System 100 is not 

adequately reflected within the DRG 

weights (as discussed in the September 

7, 2001 final rule (66 FR 46914)). In 

addition, the System 100 is within the 

2 to 3 year period contemplated under 

§ 412.87(b)(2) of the regulations. 

Therefore, the System 100 could be 

considered new. However, the 

ultrafiltration process that the System 

100 employs can also be considered to 

be a type of hemodialysis, which is an 

old and well-established technology. We 

have concerns about whether new 

technology add-on payments should be 

extended to a well-established 

technology, even when a new clinical 

application is developed for that 

technology. As discussed above, in the 

September 7, 2001 final rule (66 FR 

46915), we noted that if an existing 

technology is used for treating patients 

not expected to be assigned to the same 

DRG as the patients already receiving 

the technology, it may be considered for 

approval if it also meets the other cost 

and clinical improvement criteria. In 

this case, the device does treat a 

different patient population of 

congestive heart failure than the patient 

population for renal dialysis. Under the 

policy described in the September 7, 

2001 final rule, this technology may be 

considered new for the purposes of 

determining whether it qualifies for 

add-on payments. However, we have 

some concerns about whether this is an 

appropriate result, and about whether 

technologies that have been in use for 

many years, in some cases decades, 

should be able to qualify for add-on 

payments for new technologies. 

Therefore, we invite comments on 

whether this technology should be 

considered new, and on the general 

issue of whether existing technologies 

should be approved for add-on 

payments when new applications are 

developed for these technologies and 

whether special standards regarding, for 

example, clinical improvement, should 

be applied in such cases.

The applicant submitted five sets of 

data to demonstrate that the System 100 

meets the cost criterion. Of these five, 

three sets of data were flawed in the 

analysis of the cost criterion. Therefore, 

we will discuss only the data that are 

most accurate and relevant. It is 

important to note at the outset of the 

cost analysis that the console is reusable 

and is, therefore, a capital cost. Only the 

circuits and catheters are components 

that represent operating expenses. 

Section 1886(d)(K)(i) of the Act requires 

that the Secretary establish a 

mechanism to recognize the costs of 

new medical services or technologies 

under the payment system established 

under that subsection, which establishes 

the system for paying for the operating 

costs of inpatient hospital services. The 

system of payment for capital costs is 

established under section 1886(g) of the 

Act, which makes no mention of any 

add-on payments for a new medical 

service or technology. Therefore, it is 

not appropriate to include capital costs 

in the add-on payments for a new 

medical service or technology and these 

costs should also not be considered in 

evaluating whether a technology meets 

the cost criterion. The applicant has 

applied for add-on payments only for 

the circuits and catheter, which 

represent the operating expenses of the 

device. However, catheters cannot be 

considered new technology in any 

sense. As a result, only the UF 500 

disposable blood circuit is relevant to 

the evaluation of the cost criterion. 

The applicant commissioned Covance 

to search the FY 2002 MedPAR file. The 

applicant used a combination of 

diagnosis codes to determine which 

cases could potentially use the System 

100. Covance found 27,589 cases with 

the following combination of ICD–9–CM 

diagnosis codes: 428.0 through 428.9 

(Heart Failure), 402.91 (Unspecified 

with Heart Failure), or 402.11 

28248 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

(Hypertensive Heart Disease with Heart 

Failure), in combination with 276.6 

(Fluid Overload) and 782.3 (Edema). 

The 27,589 cases were found among 281 

DRGs with 49.4 percent of cases 

mapped across DRGs 88, 89, 127, 277 

and 316. The applicant eliminated those 

DRGs with less than 150 cases, which 

resulted in a total of 22,024 cases that 

could potentially use the System 100. 

The case-weighted average standardized 

charge across all DRGs was $14,534. The 

case-weighted threshold across all DRGs 

was $17,789. Although the caseweighted threshold is greater than the 

case-weighted standardized charge, it is 

necessary to include the standardized 

charge for the circuits used in each case. 

In order to establish the charge per 

circuit, the manufacturer submitted data 

regarding 51 actual cases that used the 

System 100. Based on these 51 cases, 

the standardized charge per circuit was 

$2,209. The manufacturer also stated 

that an average of two circuits are used 

per case. Therefore, adding $4,418 for 

the charge of the two circuits to the 

case-weighted average standardized 

charge of $14,534 results in a total caseweighted standardized charge of 

$18,952. This is greater than the caseweighed threshold of $17,789. We 

welcome comments from the public on 

the charge information submitted by the 

applicant for the circuits. 

Using the FY 2003 MedPAR file, we 

used the same combination of diagnosis 

codes to identify 28,660 cases across all 

DRGs. As in the applicant’s analysis, we 

eliminated those DRGs with less than 

150 cases, which resulted in 22,395 

cases. The case-weighted average 

standardized charge for these cases is 

$15,447. The case-weighted threshold to 

qualify for new technology add-on 

payment using the data we identified 

would then be $18,029. Again, as in the 

applicant’s analysis, it was necessary to 

include in the charge of $4,418 for the 

circuits. This results in a total caseweighted average standardized charge of 

$19,865, which is also greater than the 

case-weighted threshold of $18,029. 

Based on these two analyses, the System 

100 meets the cost criterion. 

The applicant contends that the 

System 100 represents a substantial 

clinical improvement for the following 

reasons: It removes excess fluid without 

the use of diuretics; it does not lead to 

electrolyte imbalance, hemodynamic 

instability or worsening renal function; 

it can restore diuretic responsiveness; it 

does not adversely affect the reninangiotensin system; it reduces hospital 

length of stay for the treatment of 

congestive heart failure; and it requires 

only peripheral venous access. 

Although we lack data from a large, 

multicenter, randomized, prospective 

clinical trial, we believe the applicant 

has submitted data that demonstrate the 

use of this technology in achieving the 

clinical benefits cited. We believe that 

there is some basis for concluding that 

the System 100 represents a substantial 

clinical improvement over current 

standard treatment of fluid overload in 

congestive heart failure. However, we 

invite comment on whether the data 

submitted are indeed adequate to 

demonstrate significant clinical 

improvement. 

Based on the criteria, we believe that 

the System 100 could be approved for 

new technology add-on payments for FY 

2005. However, we invite comments on 

this application, and especially on 

whether the System 100 is really new 

and on whether it represents a new 

technology within the meaning of the 

statute and regulations. If approved for 

add-on payments, the device would be 

reimbursed up to half of the costs for the 

disposable portion of the device. The 

manufacturer has stated that the cost for 

the disposable blood circuit and filter 

would be $900. As stated above, an 

average two circuits are used per case, 

which results in a total cost of $1,800 

per case. Therefore, the maximum addon payment for the disposable parts of 

the device would be $900 per case. We 

will determine whether to approve this 

application in the light of the comments 

we receive and our continuing analysis. 

We received the following public 

comments in accordance with section 

503(b)(2) of Pub. L. 108–173 regarding 

this application for add-on payments. 

Comment: Several commenters noted 

that the System 100 provides physicians 

a new treatment option for patients with 

fluid overload who are unresponsive to 

diuretics and has been documented in 

clinical studies and other published 

articles to effectively treat fluid 

overload. Another commenter noted 

that patients who have been treated 

with the System 100 seem to have 

improved health versus those who have 

lingered on diuretic therapy or have 

been treated by hemodialysis. The 

commenter also noted that the system 

100 reduces hospital stays. Other 

commenters noted that the System 100 

is safer for those patients in terms of 

reduced electrolyte imbalance and renal 

dysfunction and is a major step forward 

in the treatment of decompensated heart 

failure. 

Response: As we stated above, we 

believe that there is some basis for 

concluding that the System 100 offers 

substantial clinical improvement. We 

will consider these comments as we 

continue to evaluate whether the 

System 100 meets this criterion. 

III. Proposed Changes to the Hospital 

Wage Index 

A. Background 

Section 1886(d)(3)(E) of the Act 

requires that, as part of the methodology 

for determining prospective payments to 

hospitals, the Secretary must adjust the 

standardized amounts ‘‘for area 

differences in hospital wage levels by a 

factor (established by the Secretary) 

reflecting the relative hospital wage 

level in the geographic area of the 

hospital compared to the national 

average hospital wage level.’’ In 

accordance with the broad discretion 

conferred under the Act, we currently 

define hospital labor market areas based 

on the definitions of statistical areas 

established by the Office of Management 

and Budget (OMB). A detailed 

discussion of the proposed FY 2005 

hospital wage index based on the 

statistical areas, including OMB’s 

revised definitions of Metropolitan 

Areas, appears under section III.B of this 

preamble.

Beginning October 1, 1993, section 

1886(d)(3)(E) of the Act requires that we 

update the wage index annually. 

Furthermore, this section provides that 

the Secretary base the update on a 

survey of wages and wage-related costs 

of short-term, acute care hospitals. The 

survey should measure, to the extent 

feasible, the earnings and paid hours of 

employment by occupational category, 

and must exclude the wages and wagerelated costs incurred in furnishing 

skilled nursing services. This provision 

also requires us to make any updates or 

adjustments to the wage index in a 

manner that ensures that aggregate 

payments to hospitals are not affected 

by the change in the wage index. The 

adjustment we are proposing for FY 

2005 is discussed in section II.B. of the 

Addendum to this proposed rule. 

As discussed below in section III.G. of 

this preamble, we also take into account 

the geographic reclassification of 

hospitals in accordance with sections 

1886(d)(8)(B) and 1886(d)(10) of the Act 

when calculating the wage index. Under 

section 1886(d)(8)(D) of the Act, the 

Secretary is required to adjust the 

standardized amounts so as to ensure 

that aggregate payments under the IPPS 

after implementation of the provisions 

of sections 1886(d)(8)(B) and (C) and 

1886(d)(10) of the Act are equal to the 

aggregate prospective payments that 

would have been made absent these 

provisions. The budget neutrality 

adjustment we are proposing for FY 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28249

2005 is discussed in section II.B. of the 

Addendum to this proposed rule. 

Section 1886(d)(3)(E) of the Act also 

provides for the collection of data every 

3 years on the occupational mix of 

employees for short-term, acute care 

hospital participating in the Medicare 

program, in order to construct an 

occupational mix adjustment to the 

wage index. A discussion of the initial 

collection of these data and the 

occupational mix adjustment that we 

are proposing to apply beginning 

October 1, 2004 (the FY 2005 wage 

index) appears under section III.C. of 

this preamble. 

B. Revised OMB Definitions for 

Geographical Statistical Areas 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Revised MSAs’’ at the beginning of 

your comment.] 

1. Current Labor Market Areas Based on 

MSAs 

The wage index is calculated and 

assigned to hospitals on the basis of the 

labor market area in which the hospital 

is located. In accordance with the broad 

discretion under section 1886(d)(3)(E) of 

the Act, we currently define hospital 

labor market areas based on the 

definitions of Metropolitan Statistical 

Areas (MSAs), Primary MSAs (PMSAs), 

and New England County Metropolitan 

Areas (NECMAs) issued by OMB. OMB 

also designates Consolidated MSAs 

(CMSAs). A CMSA is a metropolitan 

area with a population of one million or 

more, comprising two or more PMSAs 

(identified by their separate economic 

and social character). For purposes of 

the hospital wage index, we use the 

PMSAs rather than CMSAs because they 

allow a more precise breakdown of labor 

costs. If a metropolitan area is not 

designated as part of a PMSA, we use 

the applicable MSA. 

These different designations use 

counties as the building blocks upon 

which they are based. Therefore, 

hospitals are assigned to either an MSA, 

PMSA, or NECMA based on whether the 

county in which the hospital is located 

is part of that area. For purposes of the 

IPPS wage index, we combine all of the 

counties in a State outside a designated 

MSA, PMSA, or NECMA together to 

calculate a statewide rural wage index. 

2. Core-Based Statistical Areas 

OMB reviews its Metropolitan Area 

(MA) definitions preceding each 

decennial census. In the fall of 1998, 

OMB chartered the Metropolitan Area 

Standards Review Committee to 

examine the MA standards and develop 

recommendations for possible changes 

to those standards. Three notices related 

to the review of the standards were 

published on the following dates in the 

Federal Register, providing an 

opportunity for public comment on the 

recommendations of the Committee: 

December 21, 1998 (63 FR 70526); 

October 20, 1999 (64 FR 56628), and 

August 22, 2000 (65 FR 51060). 

In the December 27, 2000 Federal 

Register (65 FR 82228 through 82238), 

OMB announced its new standards. 

According to that notice, OMB defines 

a Core-Based Statistical Area (CBSA), 

beginning in 2003, as ‘‘a geographic 

entity associated with at least one core 

of 10,000 or more population, plus 

adjacent territory that has a high degree 

of social and economic integration with 

the core as measured by commuting ties. 

The standards designate and define two 

categories of CBSAs: Metropolitan 

Statistical Areas and Micropolitan 

Statistical Areas.’’ (65 FR 82235) 

According to OMB, MSAs are based 

on urbanized areas of 50,000 or more 

population, and Micropolitan Statistical 

Areas (referred to in this discussion as 

Micropolitan Areas) are based on urban 

clusters of at least 10,000 population but 

less than 50,000 population. Counties 

that do not fall within CBSAs are 

deemed ‘‘Outside CBSAs.’’ In the past, 

OMB defined MSAs around areas with 

a minimum core population of 50,000, 

and smaller areas were ‘‘Outside 

MSAs.’’

The general concept of the CBSAs is 

that of an area containing a recognized 

population nucleus and adjacent 

communities that have a high degree of 

integration with that nucleus. The 

purpose of the standards is to provide 

nationally consistent definitions for 

collecting, tabulating, and publishing 

Federal statistics for a set of geographic 

areas. CBSAs include adjacent counties 

that have a minimum of 25 percent 

commuting to the central counties of the 

area. This is an increase over the 

minimum commuting threshold for 

outlying counties applied in the 

previous MSA definition of 15 percent. 

On June 6, 2003, OMB announced the 

new CBSAs, comprised of MSAs and 

the new Micropolitan areas based on 

Census 2000 data. (A copy of the 

announcement may be obtained at the 

following Internet address: http://

www.whitehouse.gov/omb/bulletins/

fy04/b04–03.html.) The new definitions 

recognize 49 new MSAs and 565 new 

Micropolitan Areas, and extensively 

revise the construct of many of the 

existing MSAs. There are 1,090 counties 

in MSAs under these new definitions 

(previously, there were 848 counties in 

MSAs). Of these 1,090 counties, 737 are 

in the same MSA as they were prior to 

the changes, 65 are in a different MSA, 

and 288 were not previously designated 

to any MSA. There are 674 counties in 

Micropolitan Areas. Of these, 41 were 

previously in an MSA, while 633 were 

not previously designated to an MSA. 

There are five counties that previously 

were designated to an MSA but are no 

longer designated to either an MSA or 

a new Micropolitan Area: Carter County, 

KY; St. James Parish, LA; Kane County, 

UT; Culpepper County, VA; and King 

George County, VA. 

3. Revised Labor Market Areas 

In its June 6, 2003 announcement, 

OMB cautioned that these new 

definitions ‘‘should not be used to 

develop and implement Federal, State, 

and local nonstatistical programs and 

policies without full consideration of 

the effects of using these definitions for 

such purposes. These areas should not 

serve as a general-purpose geographic 

framework for nonstatistical activities, 

and they may or may not be suitable for 

use in program funding formulas.’’

We have previously examined 

alternatives to the use of MSAs for the 

purpose of establishing labor market 

areas for the Medicare wage index. In 

the May 27, 1994, proposed rule (59 FR 

27724), we presented our latest research 

concerning possible future refinements 

to the labor market areas. Specifically, 

we discussed and solicited comment on 

the proposal by the Prospective 

Payment Assessment Commission 

(ProPAC, a predecessor organization to 

the Medicare Payment Advisory 

Commission (MedPAC)) for hospitalspecific labor market areas based on 

each hospital’s nearest neighbors, and 

our research and analysis on alternative 

labor market areas. Even though we 

found that none of the alternative labor 

market areas that we studied provided 

a distinct improvement over the use of 

MSAs, we presented an option using the 

MSA-based wage index but generally 

giving a hospital’s own wages a higher 

weight than under the current system. 

We also described for comment a State 

labor market option, under which 

hospitals would be allowed to design 

labor market areas within their own 

State boundaries.

We described the comments we 

received in the June 2, 1995 proposed 

rule (60 FR 29219). There was no 

consensus among the commenters on 

the choice for new labor market areas. 

Many individual hospitals that 

commented expressed dissatisfaction 

with all of the proposals. However, 

several State hospital associations 

commented that the options merited 

further study. Therefore, we contacted 

the association representatives that

28250 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

participated in our November 1993 

meeting on labor market issues in which 

we solicited ideas for additional types of 

labor market research to conduct. None 

of the individuals we contacted 

suggested any ideas for further research. 

Consequently, we have continued to 

use MSAs to define labor market areas 

for purposes of the wage index. While 

we recognize MSAs are not designed 

specifically to define labor market areas, 

we believe they do represent a useful 

proxy for this purpose, and our analysis 

and discussion here are focused on 

issues related to adopting the new 

CBSAs to define labor market areas. 

a. New England MSAs 

As stated above, we currently use 

NECMAs to define labor market areas in 

New England, because these are countybased designations rather than the 1990 

MSA definitions for New England, 

which used minor civil divisions such 

as cities and towns. Under the previous 

MSA definitions, NECMAs provided 

more consistency in labor market 

definitions for New England compared 

with the rest of the country, where 

MSAs are county-based. Under the new 

CBSAs, OMB has defined the MSAs and 

Micropolitan Areas in New England on 

the basis of counties. OMB also 

established New England City and 

Town Areas, which are similar to the 

previous New England MSAs. 

Therefore, to maintain consistency in 

the definition of labor market areas 

between New England and the rest of 

the country, we are proposing to use the 

New England MSAs under the new 

CBSA definition. 

b. Metropolitan Divisions 

A Metropolitan Division is a county 

or group of counties within a CBSA that 

contains a core population of at least 2.5 

million, representing an employment 

center, plus adjacent counties associated 

with the main county or counties 

through commuting ties. A county 

qualifies as a main county if 65 percent 

or more of its employed residents work 

within the county and the ratio of the 

number of jobs located in the county to 

the number of employed residents is at 

least .75. A county qualifies as a 

secondary county if 50 percent or more, 

but less than 65 percent, of its employed 

residents work within the county and 

the ratio of the number of jobs located 

in the county to the number of 

employed residents is at least .75. After 

all the main and secondary counties are 

identified and grouped, each additional 

county that already has qualified for 

inclusion in the MSA falls within the 

Metropolitan Division associated with 

the main/secondary county or counties 

with which the county at issue has the 

highest employment interchange 

measure. Counties in a Metropolitan 

Division must be contiguous. (65 FR 

82236) 

As noted above, in the past, OMB 

designated CMSAs as Metropolitan 

Areas with a population of one million 

or more and comprising two or more 

PMSAs. We currently use the PMSAs 

rather than CMSAs to define labor 

market areas because they comprise a 

smaller geographic area with potentially 

varying labor costs due to different local 

economies. Similarly, we are proposing 

to use the Metropolitan Divisions where 

applicable under the CBSA definitions. 

Under the CBSA definitions, there are 

11 MSAs containing Metropolitan 

Divisions: Boston; Chicago; Dallas; 

Detroit; Los Angeles; Miami; New York; 

Philadelphia; San Francisco; Seattle; 

and Washington, D.C. Although these 

MSAs were also CMSAs under the prior 

definitions, in some cases their areas 

have been significantly altered. Under 

the prior definitions, Boston was a 

single NECMA. It is now comprised of 

4 Divisions. Los Angeles went from 4 

PMSAs to 2 Divisions because 2 MSAs 

became separate MSAs. The New York 

CMSA went from 15 MSAs down to 

only 4 Divisions. Five PMSAs in 

Connecticut now become separate 

MSAs, and the number of PMSAs in 

New Jersey goes from 5 to 2, with the 

consolidation of 2 New Jersey PMSAs 

(Bergen-Passaic and Jersey City) into the 

New York-Wayne-White Plains, NY–NJ 

Division. In San Francisco, only 2 

Divisions remain where there were once 

6 PMSAs, some of which are now 

separate MSAs. 

Previously, Cincinnati, Cleveland, 

Denver, Houston, Milwaukee, Portland, 

Sacramento, and San Juan were all 

previously designated as CMSAs, but 

are not any longer. As noted previously, 

the population threshold to be 

designated a CMSA was one million. In 

most of these cases, counties formerly in 

a PMSA have become a separate, 

independent MSA, leaving only the 

MSA for the core area under the new 

CBSA definitions. 

c. Micropolitan Areas 

One of the major issues with respect 

to the new definitions is whether to use 

Micropolitan Areas to define labor 

market areas for the purpose of the IPPS 

wage index. Because the new 

Micropolitan Areas are essentially a 

third area definition made up mostly of 

currently rural areas, but also some or 

all of current MSAs, how these areas are 

treated will have significant impacts on 

the calculation and application of the 

wage index. Treating Micropolitan 

Areas as separate and distinct labor 

market areas would affect both the wage 

indexes of the hospitals in the 

Micropolitan Areas and the hospitals in 

the labor market areas where those 

hospitals are currently located (both 

positively and negatively). 

Because we currently use MSAs to 

define urban labor market areas and we 

group all the hospitals in counties 

within each State that are not assigned 

to an MSA together into a statewide 

rural labor market area, we have used 

the terms ‘‘urban’’ and ‘‘rural’’ wage 

indexes in the past for ease of reference. 

However, the introduction of 

Micropolitan Areas complicates this 

terminology because these areas include 

so many hospitals that are currently 

included in the statewide rural labor 

market areas. In order to facilitate the 

discussion below, we use the term 

‘‘rural’’ hospitals to describe hospitals 

in counties that are not assigned to 

either an MSA or a Micropolitan Area. 

This should not be taken to indicate that 

hospitals in Micropolitan Areas are no 

longer ‘‘rural’’ hospitals. In fact, we are 

proposing that hospitals in Micropolitan 

Areas are included in the statewide 

rural labor market areas, for the reasons 

outlined below. The reader is referred to 

section IV.B. of the preamble of this 

proposed rule for a more specific 

discussion of the implications of these 

changes for defining urban and rural 

areas under § 412.62(f).

Chart 1 below demonstrates the 

distributions of hospitals by their 

current and new designations. 

Approximately 50 percent of hospitals 

currently designated rural are now in 

either Micropolitan Areas (691 

hospitals) or MSAs (197 hospitals). The 

vast majority of hospitals currently in 

MSAs remain in an MSA (2,478, 

although in some cases the MSAs have 

been reconfigured), while 2 are now in 

rural areas and 65 are now in 

Micropolitan Areas.

CHART 1.—DISTRIBUTION OF HOSPITALS BY CURRENT AND NEW DESIGNATION

Statistical area Currently 

rural 

Currently 

MSA. 

Rural ..................... 861 2

Micropolitan .......... 691 65 

MSA ...................... 197 2,478

Totals ............. 1,749 2,545 

In order to evaluate the impact of 

these changes, we grouped hospitals 

based on the county where they are 

located according to the new MSA and 

Micropolitan areas using the definitions 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28251

on the Census Bureau’s Web site:

http://www.census.gov/population/

www/estimates/metrodef.html. We then 

compared the proposed FY 2004 wage 

indexes (using data from hospitals’ FY 

2001 cost reports) calculated based on 

the current MSAs, without any effects of 

hospital geographic reclassifications. 

Consistent with current policy, we 

applied the rural floor in the case where 

the statewide rural wage index is greater 

than the wage index for a particular 

urban area. We excluded Indian Health 

Service hospitals from the analysis due 

to the special characteristics of the 

prospective payment system for these 

hospitals. Hospitals in Maryland were 

excluded from the analysis because they 

remain excluded from the IPPS under 

the waiver at section 1814(b)(3) of the 

Act. Our analysis also does not reflect 

any changes to the Puerto Rico-specific 

wage index, which is applicable only to 

the Puerto Rico standardized amounts 

(the analysis does include the national 

wage index values for Puerto Rico 

hospitals). 

Chart 2 below shows the impact on 

hospitals’ wage indexes of recalculating 

new wage indexes based on the new 

MSAs, and treating the new 

Micropolitan Areas as separate labor 

market areas. Specifically, the table 

shows the impact of treating the new 

MSA and Micropolitan Areas as labor 

market areas and calculating a wage 

index for each one. The most dramatic 

impact of this change would be on 

hospitals that are currently classified as 

rural. Only 10 currently rural hospitals 

would experience no changes in their 

wage indexes after applying the new 

MSA definitions. Five of these hospitals 

are in Delaware and Connecticut (three 

and two hospitals respectively), where 

the only counties in the State currently 

considered rural are now part of 

Micropolitan Areas. 

Approximately 62 percent (1,092 out 

of 1,749) of currently rural hospitals 

experience decreases in their wage 

indexes under this change. Among 

hospitals that remain rural after 

separately recognizing Micropolitan 

Areas (those hospitals in counties 

‘‘outside CBSAs’’), rural hospitals in six 

States (Arizona, Florida, Idaho, Indiana, 

Minnesota, and Missouri) experience a 

positive impact after applying the new 

MSA definitions. These hospitals 

benefit because the net effect on their 

wage index of other hospitals moving 

into Micropolitan Areas is positive. The 

majority of the currently rural hospitals 

(762 out of 1,092) that experience 

decreases in their wage indexes are 

hospitals that would remain rural under 

the new definitions. Moreover, among 

the 646 rural hospitals whose wage 

indexes would increase under the new 

definitions, 547 would now be in an 

MSA or Micropolitan Area. 

Furthermore, in many cases, the 

magnitude of the changes is quite large. 

Nearly one-half of all rural hospitals 

would experience payment changes of 

at least 5.0 percent, either negatively or 

positively, if we were to adopt labor 

market areas based in part on the new 

Micropolitan Areas. 

In contrast, there are 938 currently 

urban hospitals (37 percent) with wage 

indexes that are unaffected by the new 

MSA definitions. These hospitals are in 

MSAs or PMSAs that are either 

unchanged (for example, the Austin, 

Buffalo, Milwaukee, Oakland, Phoenix, 

San Diego, and Tampa-St. Petersburg 

MSAs are all unchanged) or include 

new counties without any hospitals in 

those counties that are now part of the 

existing MSA (for example, Atlanta, 

Denver, Little Rock, Omaha, Portland, 

Richmond, Toledo, Virginia BeachNorfolk added counties but not 

hospitals). 

The most significant negative impact 

(more than a 20-percent decrease) 

among hospitals currently in an MSA is 

on those located in counties that 

become Micropolitan areas or rural 

areas. Among hospitals with the largest 

positive impacts (more than a 20-

percent increase), the changes appear to 

be largely due to changes in the counties 

that are now included (under the 

CBSAs) in the MSA labor market area.

CHART 2.—IMPACT ON WAGE INDEXES OF NEW MSA, MICROPOLITAN AREAS, AND RURAL LABOR MARKET AREAS

Percent change in area wage index 

Number of 

currently 

rural

hospitals 

Number of 

currently 

MSA

hospitals 

Total

number of

hospitals. 

Decrease Greater Than 10.0 ................................................................................................................... 99 36 135

Decrease Between 5.0 and 10.0 ............................................................................................................. 420 77 497

Decrease Between 2.0 and 5.0 ............................................................................................................... 238 95 333

Decrease Between 0 and 02.0 ................................................................................................................ 335 585 920

No Change ............................................................................................................................................... 10 938 948

Increase Between 0 and 2.0 ................................................................................................................... 168 495 663

Increase Between 2.0 and 5.0 ................................................................................................................ 138 145 283

Increase Between 5.0 and 10.0 .............................................................................................................. 203 139 342 

Increase Greater Than 10.0 .................................................................................................................... 138 35 173

Total .................................................................................................................................................. 1,749 2,545 4,294 

One of the reasons Micropolitan Areas 

have such a dramatic impact on the 

wage index is, because Micropolitan 

Areas encompass smaller populations 

than MSAs, they tend to include fewer 

hospitals per Micropolitan Area. 

Currently, there are only 25 MSAs with 

one hospital in the MSA. However, 

under the new definitions, there are 373 

Micropolitan Areas with one hospital, 

and 49 MSAs with only one hospital. 

This large number of labor market 

areas with only one hospital and the 

increased potential for dramatic shifts in 

the wage indexes from one year to the 

next is a problem for several reasons. 

First, it creates instability in the wage 

index from year to year for a large 

number of hospitals. Second, it reduces 

the averaging effect of the wage index, 

lessening some of the efficiency 

incentive inherent in a system based on 

the average hourly wages for a large 

number of hospitals. In labor market 

areas with a single hospital, high wage 

costs are passed directly into the wage 

index with no counterbalancing 

averaging with lower wages paid at 

nearby competing hospitals. Third, it 

creates an arguably inequitable system 

when so many hospitals have wage 

indexes based solely on their own 

wages, while other hospitals’ wage 

indexes are based on an average hourly 

wage across many hospitals. 

For these reasons, we are proposing 

not to adopt Micropolitan Areas as 

independent labor market areas. 

Although we considered alternative 

28252 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

approaches that would aggregate 

Micropolitan Areas in order to reduce 

the number of one-hospital labor market 

areas, these approaches created 

geographically disconnected labor 

market areas, an undesirable outcome. 

Therefore, we are proposing to maintain 

our current policy of defining labor 

market areas based on the new MSAs 

(and Divisions, where they exist) using 

OMB’s new criteria and the 2000 Census 

data. 

Chart 3 displays the impacts on 

hospital wage indexes of this proposed 

approach. The most apparent difference 

comparing this chart to Chart 2 is the 

reduction in the numbers of currently 

rural hospitals impacted by more than 

2.0 percent. Recognizing Micropolitan 

Areas as independent labor market areas 

results in negative impacts of more than 

2.0 percent for 757 currently rural 

hospitals, while the comparative 

number, when recognizing only MSAs, 

is 256. Conversely, the number of 

currently rural hospitals positively 

impacted by more than 2.0 percent 

declines from 479 to 154. 

The greatest negative impacts among 

hospitals currently designated rural are 

in Idaho, where the statewide rural 

wage index falls 6.7 percent as a result 

of 6 formerly rural hospitals now being 

included in either new or redefined 

MSAs. The wage index for rural Utah 

hospitals declines by 5.7 percent, for 

similar reasons. Conversely, formerly 

rural hospitals that are not part of an 

MSA generally experience positive 

impacts. 

Among hospitals that are currently in 

MSAs, the number of hospitals with 

decreases in their wage indexes of at 

least 10 percent increases under this 

proposal from 35 to 45. These are 

primarily hospitals that are now located 

in Micropolitan Areas that are included 

in the statewide labor market area. 

There are 46 counties with 72 hospitals 

that are currently in an MSA that would 

be treated as rural under our proposal.

CHART 3.—IMPACT ON WAGE INDEXES OF NEW MSA AND RURAL LABOR MARKET AREAS

Percent change in area wage index 

Number of 

currently 

rural

hospitals 

Number of 

currently 

MSA

hospitals 

Total

number of

hospitals. 

Decrease Greater Than 10.0 ................................................................................................................... 0 45 45

Decrease Between 5.0 and 10.0 ............................................................................................................. 122 60 182

Decrease Between 2.0 and 5.0 ............................................................................................................... 134 73 207

Decrease Between 0 and 2.0 .................................................................................................................. 588 615 1,203

No Change ............................................................................................................................................... 160 1,015 1,175

Increase Between 0 and 2.0 ................................................................................................................... 591 574 1,165

Increase Between 2.0 and 5.0 ................................................................................................................ 32 103 135

Increase Between 5.0 and 10.0 .............................................................................................................. 64 25 89 

Increase Greater Than 10.0 .................................................................................................................... 58 35 93

Total .................................................................................................................................................. 1,749 2,545 4,294 

d. Transition Period 

We have in the past provided for 

transition periods when adopting 

changes that have significant payment 

implications, particularly large negative 

impacts. When we recently removed the 

wage costs of teaching physicians and 

residents from the wage index data of 

teaching hospitals, we spread out the 

impact over 3 years by blending the 

hospitals’ average hourly wages with 

and without the data. Similarly, the 

regulations at § 412.102 provide for a 3-

year transition to the standardized 

amount and DSH adjustment payments 

to a hospital redesignated from urban to 

rural. 

Given the significant payment 

impacts upon some hospitals of these 

changes, we considered options to 

transition from the current MSAs to the 

new MSAs. As noted above, the most 

dramatic negative impacts are among 

hospitals currently located in an MSA 

but would become rural under our 

proposal. Some negative impacts also 

occur among urban hospitals that 

remain in MSAs that have been 

reconfigured. However, these impacts 

are generally smaller than those among 

currently urban hospitals that would 

become rural. To help alleviate the 

decreased payments for currently urban 

hospitals that would become rural, we 

are proposing to allow them to maintain 

their assignment to the MSA where they 

are currently located for the 3-year 

period FY 2005, FY 2006, and FY 2007. 

Beginning in FY 2008, these hospitals 

would receive their statewide rural 

wage index, although they would be 

eligible to apply for reclassification by 

the MGCRB, both during this transition 

period as well as subsequent years. 

We also considered the option of 

allowing a transition to the new MSAs 

for all hospitals, such as a blend of wage 

indexes based on the old and new MSAs 

for some specified period of time. 

Although this would help some 

hospitals that are negatively impacted 

by the changes to the MSAs, it would 

dampen the payment increases for those 

hospitals that are positively impacted by 

the changes. However, we are not 

proposing a blended transition. We note 

that OMB in the past has announced 

MSA changes on an annual basis due to 

population changes, and we have not 

transitioned these changes.

C. Proposed Occupational Mix 

Adjustment to Proposed FY 2005 Index 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Occupational Mix’’ at the 

beginning of your comment.] 

As stated earlier, section 1886(d)(3)(E) 

of the Act provides for the collection of 

data every 3 years on the occupational 

mix of employees for each short-term, 

acute care hospital participating in the 

Medicare program, in order to construct 

an occupational mix adjustment to the 

wage index, for application beginning 

October 1, 2004 (the FY 2005 wage 

index). The purpose of the occupational 

mix adjustment is to control for the 

effect of hospitals’ employment choices 

on the wage index. For example, 

hospitals may choose to employ 

different combinations of registered 

nurses, licensed practical nurses, 

nursing aides, and medical assistants for 

the purpose of providing nursing care to 

their patients. The varying labor costs 

associated with these choices reflect 

hospital management decisions rather 

than geographic differences in the costs 

of labor. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28253

1. Development of Data for the 

Occupational Mix Adjustment 

In the September 19, 2003 Federal 

Register (68 FR 54905), we published a 

final notice of intent to collect 

occupational mix data from hospitals 

using the Medicare Wage Index 

Occupational Mix Survey, Form CMS–

10079. (The survey and instructions 

may be accessed at the Web site:

http://cms.hhs.gov/providers/hipps/

ippswage.asp.) The survey requires 

hospitals to report the number of total 

paid hours for directly hired and 

contract employees in occupations that 

provide the following services: Nursing, 

physical therapy, occupational therapy, 

respiratory therapy, medical and 

clinical laboratory, dietary, and 

pharmacy. These services each include 

several standard occupational 

classifications (SOCs), as defined by the 

Bureau of Labor Statistics (BLS) on its 

Occupational Employment Statistics 

(OES) survey (http://www.bls.gov/oes/

2001/oes_tec.htm), that may be used by 

hospitals in different mixes to provide 

specific aspects of patient care. CMS 

decided to use BLS’s SOCs to categorize 

employees for the occupational mix 

survey in an effort to ease hospitals’

reporting burden; most hospitals have 

had experience with collecting and 

reporting their employment data 

according to the SOC definitions. The 

survey includes a total of 19 SOCs that 

provide services for the above 7 

categories and an ‘‘all other 

occupations’’ category. The hours 

collected on the survey would be used 

to determine the proportion of a general 

service category total that is attributable 

to each of the category’s SOCs, that is, 

the category’s occupational mix. 

In order to accurately reflect a 

hospital’s employment, we initially 

planned to require all hospitals to 

provide occupational mix data collected 

from a 1-year period. Several hospitals 

and their representatives advised us that 

a 1-year reporting period was feasible 

because salary and wage data are 

maintained quarterly for revenue and 

tax reporting purposes. However, 

several hospitals expressed concern that 

their payroll and other personnel 

accounting systems are typically not set 

up to collect data on hours for contract 

employees. The hospitals and their 

representatives advised us that the 

approximately 2-month timeframe (see

dates below) for collecting and 

submitting the occupational mix data to 

the fiscal intermediaries would not 

allow hospitals enough time to develop 

a year’s worth of hours data for contract 

workers. Therefore, given the short 

timeframe for collecting the 

occupational mix data, and to reduce 

hospitals’ reporting burden associated 

with the initial collection of the data, 

we decided to allow hospitals the 

option of providing their hours data for 

the 19 SOCs either prospectively for a 

4-week period beginning on or between 

December 28, 2003 and January 11, 

2004, and ending no later than February 

7, 2004, or retrospectively for a 12-

month period, that is, calendar year 

2003. Although we recognize that using 

data from only a 4-week period 

increases our risk of obtaining results 

that reflect seasonal rather than normal 

employment trends, we believe that the 

4-week prospective reporting period 

should enable hospitals to plan and 

provide more accurate data according to 

our survey instructions and definitions. 

(See the discussion below on the 

verification and validity of our 

occupational mix survey results.) 

An advance copy of the occupational 

mix survey was provided to hospitals in 

mid-December 2003 so that hospitals 

could begin gathering their data and 

documentation necessary to complete 

the survey. The official survey was 

published as a CMS One-Time 

Notification (Pub. 100–20, R47OTN) on 

January 23, 2004. We instructed our 

fiscal intermediaries to distribute and 

collect completed occupational mix 

surveys from any hospital that is subject 

to IPPS, or any hospital that would be 

subject to IPPS if not granted a waiver. 

If a hospital was not an IPPS provider 

during FY 2001 or, otherwise, did not 

submit a FY 2001 cost report, the 

hospital was not required to submit 

occupational mix data. Consistent with 

the wage data, CAHs were excluded 

from the occupational mix survey. In 

addition, the FY 2005 wage index does 

not include occupational mix data for 

hospitals that submitted FY 2001 wage 

data, but terminated participation in the 

Medicare program as IPPS providers 

before calendar year 2003. For such 

terminated hospitals, there would be no 

occupational mix data to collect for our 

survey period. 

Hospitals were to submit their 

completed occupational mix surveys to 

their fiscal intermediaries by February 

16, 2004. Our initial collection of these 

data was completed by March 1, 2004, 

the deadline for fiscal intermediaries to 

submit hospitals’ survey data to CMS. 

We released a public use file containing 

the data on March 8, 2004 (through the 

Internet on our Web site at: http://cms/

hhs.gov/providers/hipps/ippswage.asp. 

In a memorandum also dated March 8, 

2004, we instructed all fiscal 

intermediaries to inform the IPPS 

hospitals they service of the availability 

of the occupational mix data file and the 

process and timeframe for requesting 

corrections and revisions. If a hospital 

wished to request a change to its data as 

shown in that file, the hospital had to 

submit the changes to its fiscal 

intermediary by March 22, 2004. In 

addition, as this was hospitals’ first 

experience with the occupational mix 

survey, we provided hospitals another 

opportunity, if they missed the February 

16 filing deadline, to submit their 

completed surveys. The deadline for 

this one-time, final opportunity to 

submit occupational mix data to fiscal 

intermediaries for the FY 2005 wage 

index was also March 22, 2004. The 

final deadline for fiscal intermediaries 

to submit hospitals’ data to CMS was 

April 16, 2004. (From April 16 until the 

final rule is published, the process, 

criteria, and timetable for correcting 

occupational mix data is the same as for 

Worksheet S–3 wage data, under 

Section H.) Occupational mix survey 

data received by us through March 15, 

2004, are used in computing the 

proposed wage index in this proposed 

rule. Data received from intermediaries 

after March 15 through April 16, 2004 

will be included in the final rule. 

The response rate for the occupational 

mix survey, as of March 15, 2004, was 

89.4 percent. We received occupational 

mix data from 3,593 hospitals. We 

expected to receive completed survey 

data from 4,018 hospitals that submitted 

cost report wage data for FY 2001 and 

were still IPPS hospitals during 

calendar year 2003 or on January 1, 

2004. For any hospital that was 

expected to provide occupational mix 

data but did not, we are considering 

using proxy occupational mix data to 

adjust the hospital’s wage data in the 

final wage index. One option would be 

to assume that the hospital only has 

employees in the highest level SOC for 

each of the general service categories 

included on the occupational mix 

survey. Another option would be to 

assume that such hospitals have the 

national SOC mix for each general 

service category. We invite public 

comment to this proposal. We note that 

the wage index in this proposed rule 

does not include proxy data for 

hospitals that did not complete and 

submit the occupational mix survey. 

As this was the first administration of 

the occupational mix survey, we did not 

provide fiscal intermediaries an 

extensive program for reviewing the 

hours of data collected. However, 

hospitals were required to be able to 

provide any documentation that could 

be used by the fiscal intermediaries to 

verify the survey data. In addition, after 

reviewing the compiled survey data, we 

contacted fiscal intermediaries to 

28254 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

request corrections from a few hospitals 

that provided data for reporting periods 

that were out of range with our specified 

12-month or 4-week data collection 

periods. As the wage index is a relative 

measure of labor costs across geographic 

areas, it is important that the data 

collected from hospitals reflects a 

common period. We also tested the 

validity of our occupational mix survey 

data by comparing our results to those 

of the 2001 BLS OES survey. As shown 

in Charts 4 and 5 below, the results of 

our survey are consistent with the 

findings of the BLS OES survey. 

In addition, to compute the 

occupational mix adjustment, we 

collected data on the average hourly 

rates for the 19 SOCs so that we could 

derive a weighted average hourly rate 

for each labor market area. (More details 

about the occupational mix calculation 

are included in section III.C.2. of this 

preamble.) To decrease hospital’s 

reporting burden for this initial 

collection of the occupational mix data, 

and to facilitate the timely collection of 

the data, we did not require hospitals to 

report data on their total wages or 

average hourly rates associated with the 

19 SOCs. Instead, we used national 

average hourly rates from the BLS OES 

2001 National Industry—Specific 

Occupational Employment and Wage 

Estimates, SIC—Hospitals (accessible at 

Web site: http://www.bls.gov/oes/2001/

oesi3_806.htm), as reflected in Chart 4 

below.

CHART 4.—BLS NATIONAL OCCUPATIONAL EMPLOYMENT AND WAGE ESTIMATES FOR HOSPITALS

General service categories 

Number of 

hospital employees 

Percent of 

service category 

Percent of 

total employees 

National average hourly 

wage $ 

Nursing Services and Medical Assistant Services

Registered Nurses ........................................................................................... 1,307,960 68.8 25.88 23.62

Licensed Practical Nurses ............................................................................... 194,900 10.2 3.86 14.65

Nursing Aides, Orderlies, & Attendants ........................................................... 351,910 18.5 6.96 10.01 

Medical Assistants ........................................................................................... 47,250 2.5 0.93 11.79

Total .......................................................................................................... 1,902,020 100.0 37.63 

Physical Therapy Services

Physical Therapists .......................................................................................... 46,290 61.0 0.92 27.80

Physical Therapist Assistants .......................................................................... 17,610 23.2 0.35 17.11 

Physical Therapist Aides ................................................................................. 12,020 15.8 0.24 10.40 

Total .......................................................................................................... 75,920 100.0 1.50

Occupational Therapy Services

Occupation Therapists ..................................................................................... 24,110 75.3 0.48 25.62

Occupation Therapist Assistants ..................................................................... 5,690 17.8 0.11 16.81 

Occupation Therapist Aides ............................................................................ 2,220 6.9 0.04 11.60 

Total .......................................................................................................... 32,020 100.0 0.63 

Respiratory Therapy Services

Respiratory Therapists ..................................................................................... 68,920 72.8 1.36 19.26 

Respiratory Therapy Technicians .................................................................... 25,710 27.2 0.51 16.96 

Total .......................................................................................................... 94,630 100.0 1.87 

Pharmacy Services

Pharmacists ..................................................................................................... 48,630 48.8 0.96 34.58

Pharmacy Technicians .................................................................................... 44,270 44.4 0.88 12.30 

Pharmacy Assistants/Aides ............................................................................. 6,810 6.8 0.13 11.52 

Total .......................................................................................................... 99,710 100.0 1.97 

Dietary Services

Dieticians ......................................................................................................... 16,820 56.4 0.33 20.02

Dietetic Technicians ......................................................................................... 13,020 43.6 0.26 11.64 

Total .......................................................................................................... 29,840 100.0 0.59 

Medical & Clinical Lab Services

Medical & Clinical Lab Technologists .............................................................. 87,380 57.8 1.73 20.74 

Medical & Clinical Lab Technicians ................................................................. 63,900 42.2 1.26 14.90 

Total .......................................................................................................... 151,280 100.0 2.99 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28255

CHART 4.—BLS NATIONAL OCCUPATIONAL EMPLOYMENT AND WAGE ESTIMATES FOR HOSPITALS—Continued

General service categories 

Number of 

hospital employees 

Percent of 

service category 

Percent of 

total employees 

National average hourly 

wage $ 

Total Nursing, Therapy, Pharmacy, Dietary, and Medical & Clinical Occupations ............................................................................................... 2,385,420 47.19 

All Other Occupations .............................................................................. 2,669,400 52.81

Total Hospital Employees ......................................................................... 5,054,820 100.0 

Source: BLS, OES, 2001 National Industry-Specific Occupational Employment and Wage Estimates, http://www.bls.gov/oes/2001

CHART 5.—MEDICARE OCCUPATIONAL MIX SURVEY RESULTS

General Service Categories Number of employee 

hours 

Percent of 

service category hours 

Percent of 

total employee 

hours 

Nursing Services and Medical Assistant Services

Registered Nurses ....................................................................................................... 1,349,683,706.61 70.38 26.23

Licensed Practical Nurses ........................................................................................... 148,480,984.66 7.74 2.89

Nursing Aides, Orderlies, & Attendants ....................................................................... 349,482,222.23 18.22 6.79 

Medical Assistants ....................................................................................................... 70,155,219.44 3.66 1.36 

Total ...................................................................................................................... 1,917,802,132.94 100.00 37.27 

Physical Therapy Services

Physical Therapists ...................................................................................................... 42,728,556.90 60.87 0.83

Physical Therapist Assistants ...................................................................................... 16,278,842.28 23.19 0.32 

Physical Therapist Aides ............................................................................................. 11,192,122.93 15.94 0.22 

Total ...................................................................................................................... 70,199,522.11 100.00 1.36 

Occupational Therapy Services

Occupation Therapists ................................................................................................. 18,016,924.74 76.46 0.35

Occupation Therapist Assistants ................................................................................. 3,912,014.51 16.60 0.08 

Occupation Therapist Aides ........................................................................................ 1,635,953.90 6.94 0.03 

Total ...................................................................................................................... 23,564,893.16 100.00 0.46 

Respiratory Therapy Services

Respiratory Therapists ................................................................................................. 79,768,909.24 79.96 1.55 

Respiratory Therapy Technicians ................................................................................ 19,993,236.90 20.04 0.39 

Total ...................................................................................................................... 99,762,146.14 100.00 1.94 

Pharmacy Services

Pharmacists ................................................................................................................. 52,574,888.83 48.35 1.02

Pharmacy Technicians ................................................................................................ 51,947,662.82 47.77 1.01 

Pharmacy Assistants/Aides ......................................................................................... 4,219,798.43 3.88 0.08 

Total ...................................................................................................................... 108,742,350.08 100.00 2.11 

Dietary Services

Dieticians ..................................................................................................................... 18,221,465.33 42.23 0.35

Dietetic Technicians ..................................................................................................... 24,929,864.59 57.77 0.48 

Total ...................................................................................................................... 43,151,329.92 100.00 0.84 

Medical & Clinical Lab Services

Medical & Clinical Lab Technologists .......................................................................... 109,938,139.37 52.07 2.14 

Medical & Clinical Lab Technicians ............................................................................. 101,208,507.21 47.93 1.97 

Total ...................................................................................................................... 211,146,646.58 100.00 4.10 

Total Nursing, Therapy, Pharmacy, Dietary, and Medical & Clinical Occupations ....................................................................................................... 2,474,369,020.92 ........................ 48.08 

28256 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

CHART 5.—MEDICARE OCCUPATIONAL MIX SURVEY RESULTS—Continued

General Service Categories Number of employee 

hours 

Percent of 

service category hours 

Percent of 

total employee 

hours 

All Other Occupations ................................................................................... 2,671,751,872.61 ........................ 51.92

Total Hospital Employees ...................................................................... 5,146,120,893.53 ........................ 100.00 

Source: Medicare Wage Index Occupational Mix Survey, Form CMS–10079 

2. Proposed Calculation of the 

Occupational Mix Adjustment Factor 

and the Proposed Occupational Mix 

Adjusted Wage Index 

The method used to calculate the 

proposed occupational mix adjusted 

wage index follows: 

Step 1—For each hospital, the 

percentage of the general service 

category attributable to an SOC is 

determined by dividing the SOC hours 

by the general service category’s total 

hours. Repeat this calculation for each 

of the 19 SOCs. 

Step 2—For each hospital, the 

weighted average hourly rate for an SOC 

is determined by multiplying the 

percentage of the general service 

category (from Step 1) by the national 

average hourly rate for that SOC from 

the 2001 BLS OES survey (see Chart 4 

above). Repeat this calculation for each 

of the 19 SOCs. 

Step 3—For each hospital, the 

hospital’s adjusted average hourly rate 

for a general service category is 

computed by summing the weighted 

hourly rate for each SOC within the 

general category. Repeat this calculation 

for each of the 7 general service 

categories. 

Step 4—For each hospital, the 

occupational mix adjustment factor for 

a general service category is calculated 

by dividing the national adjusted 

average hourly rate for the category by 

the hospital’s adjusted average hourly 

rate for the category. (The national 

adjusted average hourly rate is 

computed in the same manner as Steps 

1 through 3, using instead, the total SOC 

and general service category hours for 

all hospitals in the occupational mix 

survey database.) Repeat this calculation 

for each of the 7 general service 

categories. If the hospital’s adjusted rate 

is less than the national adjusted rate 

(indicating the hospital employs a less 

costly mix of employees within the 

category), the occupational mix 

adjustment factor will be greater than 

1.0000. If the hospital’s adjusted rate is 

greater than the national adjusted rate, 

the occupational mix adjustment factor 

will be less than 1.0000. 

Step 5—For each hospital, the 

occupational mix adjusted salaries and 

wage-related costs for a general service 

category is calculated by multiplying 

the hospital’s total salaries and wagerelated costs (from Step 5 of the 

unadjusted wage index calculation in 

section F) by the national percentage of 

total hospital workers attributable to the 

general service category (from the 

occupational mix survey data; see Chart 

5 above) and by the general service 

category’s occupational mix adjustment 

factor (from Step 4 above). Repeat this 

calculation for each of the 7 general 

service categories. The remaining 

portion of the hospital’s total salaries 

and wage-related costs that is 

attributable to all other employees of the 

hospital is not adjusted for occupational 

mix. 

Step 6—For each hospital, the total 

occupational mix adjusted salaries and 

wage-related costs for a hospital are 

calculated by summing the occupational 

mix adjusted salaries and wage-related 

costs for the 7 general service categories 

(from Step 5) and the unadjusted 

portion of the hospital’s salaries and 

wage-related costs for all other 

employees. To compute a hospital’s 

occupational mix adjusted average 

hourly wage, divide the hospital’s total 

occupational mix adjusted salaries and 

wage-related costs by the hospital’s total 

hours (from Step 4 of the unadjusted 

wage index calculation in Section F). 

Step 7—To compute the occupational 

mix adjusted average hourly wage for an 

urban or rural area, sum the total 

occupational mix adjusted salaries and 

wage-related costs for all hospitals in 

the area, then sum the total hours for all 

hospitals in the area. Next, divide the 

area’s occupational mix adjusted 

salaries and wage-related costs by the 

area’s hours. 

Step 8—To compute the national 

occupational mix adjusted average 

hourly wage, sum the total occupational 

mix adjusted salaries and wage-related 

costs for all hospitals in the nation, then 

sum the total hours for all hospitals in 

the nation. Next, divide the national 

occupational mix adjusted salaries and 

wage-related costs by the national 

hours. The proposed national 

occupational mix adjusted average 

hourly wage is 26.2566. 

Step 9—To compute the occupational 

mix adjusted wage index, divide each 

area’s occupational mix adjusted 

average hourly wage (Step 7) by the 

proposed national occupational mix 

adjusted average hourly wage (Step 8). 

Step 10—To compute the proposed 

Puerto Rico specific occupational mix 

adjusted wage index, follow the Steps 1 

through 9 above. The proposed Puerto 

Rico occupational mix adjusted average 

hourly wage is 12.2035.

EXAMPLE OF OCCUPATIONAL MIX ADJUSTMENT

General service categories/SOCs 

Number of

employee

hours 

Percent of

service

category

hours 

Percent of

total

employee

hours 

BLS

national

average

hourly

wage 

NATIONAL—Nursing and Medical Assistant Services

Registered Nurses ................................................................................. 1,349,683,707 70.38 26.23 $23.62. 

Licensed Practical Nurses ..................................................................... 148,480,985 7.74 2.89 14.65. 

Nursing Aides, Orderlies, & Attendants ................................................. 349,482,222 18.22 6.79 10.01 

Medical Assistants ................................................................................. 70,155,219 3.66 1.36 11.79 . 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28257

EXAMPLE OF OCCUPATIONAL MIX ADJUSTMENT—Continued

General service categories/SOCs 

Number of

employee

hours 

Percent of

service

category

hours 

Percent of

total

employee

hours 

BLS

national

average

hourly

wage 

Total ................................................................................................ 1,917,802,133 100.00 37.27 20.01. 

Hospital A: 

Registered Nurses .......................................................................... 1,642,116 79.84 .......................... 18.86. 

Licensed Practical Nurses .............................................................. 67,860 3.30 .......................... 0.48. 

Nursing Aides, Orderlies, & Attendants ......................................... 259,177 12.60 .......................... 1.26 

Medical Assistants .......................................................................... 87,622 4.26 .......................... 0.50. 

Total ................................................................................................ 2,056,774 100.00 .......................... 21.11

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 0.9481

Hospital B: 

Registered Nurses .......................................................................... 1,510,724 64.44 .......................... 0.31

Licensed Practical Nurses .............................................................. 159,795 6.82 .......................... 0.09

Nursing Aides, Orderlies, & Attendants ......................................... 391,201 16.69 .......................... 0.08 

Medical Assistants .......................................................................... 282,728 12.06 .......................... 2.55

Total ......................................................................................... 2,344,449 100.00 .......................... 19.31 

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 1.0362 

NATIONAL—Physical Therapy Services

Physical Therapists ................................................................................ 42,728,557 60.87 0.83 27.80

Physical Therapist Assistants ................................................................ 16,278,842 23.19 0.32 17.11 

Physical Therapist Aides ....................................................................... 11,192,123 15.94 0.22 10.40

Total ................................................................................................ 70,199,522 100.00 1.36 22.55

Hospital A: 

Physical Therapists ........................................................................ 94,987 61.40 .......................... 17.07

Physical Therapist Assistants ......................................................... 36,254 23.43 .......................... 4.01 

Physical Therapist Aides ................................................................ 23,460 15.16 .......................... 1.58

Total ......................................................................................... 154,701 100.00 .......................... 22.66 

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 0.9953

Hospital B: 

Physical Therapists ........................................................................ 60,337 57.37 .......................... 15.95

Physical Therapist Assistants ......................................................... 22,391 21.29 .......................... 3.64 

Physical Therapist Aides ................................................................ 22,444 21.34 .......................... 2.22

Total ......................................................................................... 105,173 100.00 .......................... 21.81 

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 1.0339 

NATIONAL—Occupational Therapy Services

Occupation Therapists ........................................................................... 18,016,925 76.46 0.35 25.62

Occupation Therapist Assistants ........................................................... 3,912,015 16.60 0.08 16.81 

Occupation Therapist Aides .................................................................. 1,635,954 6.94 0.03 11.60

Total ................................................................................................ 23,564,893 100.00 0.46 23.18. 

Hospital A: 

Occupation Therapists .................................................................... 40,366 90.06 23.07

Occupation Therapist Assistants .................................................... 0 0.00 .......................... 0.00 

Occupation Therapist Aides ........................................................... 4,454 9.94 .......................... 1.15

Total ......................................................................................... 44,820 100.00 .......................... 24.23 

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 0.9568

Hospital B: 

Occupation Therapists .................................................................... 26,547 79.48 .......................... 20.36

Occupation Therapist Assistants .................................................... 1,610 4.82 .......................... 0.81 

Occupation Therapist Aides ........................................................... 5,242 15.70 .......................... 1.82

Total ......................................................................................... 33,399 100.00 .......................... 22.99 

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 1.0081 

NATIONAL—Respiratory Therapy Services

Respiratory Therapists ........................................................................... 79,768,909 79.96 1.55 19.26 

Respiratory Therapy Technicians .......................................................... 19,993,237 20.04 0.39 16.96

Total ................................................................................................ 99,762,146 100.00 1.94 18.80

28258 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

EXAMPLE OF OCCUPATIONAL MIX ADJUSTMENT—Continued

General service categories/SOCs 

Number of

employee

hours 

Percent of

service

category

hours 

Percent of

total

employee

hours 

BLS

national

average

hourly

wage 

Hospital A: 

Respiratory Therapists ................................................................... 75,339 97.40 .......................... 18.76 

Respiratory Therapy Technicians ................................................... 2,008 2.60 .......................... 0.44

Total ......................................................................................... 77,347 100.00 .......................... 19.20

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 0.9792

Hospital B: 

Respiratory Therapists ................................................................... 73,592 65.62 .......................... 12.64 

Respiratory Therapy Technicians ................................................... 38,549 34.38 .......................... 5.83

Total ......................................................................................... 112,141 100.00 .......................... 18.47 

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 1.0179 

NATIONAL—Pharmacy Services

Pharmacists ........................................................................................... 52,574,889 48.35 1.02 34.58

Pharmacy Technicians .......................................................................... 51,947,663 47.77 1.01 12.30 

Pharmacy Assistants/Aides ................................................................... 4,219,798 3.88 0.08 11.52

Total ................................................................................................ 108,742,350 100.00 2.11 23.04

Hospital A: 

Pharmacists .................................................................................... 65,863 48.65 .......................... 16.82

Pharmacy Technicians ................................................................... 69,525 51.35 .......................... 6.32 

Pharmacy Assistants/Aides ............................................................ 0 0.00 .......................... 0.00 

Total ......................................................................................... 135,388 100.00 .......................... 23.14

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 0.9957

Hospital B: 

Pharmacists .................................................................................... 45,856 39.23 .......................... 13.57

Pharmacy Technicians ................................................................... 64,986 55.60 .......................... 6.84 

Pharmacy Assistants/Aides ............................................................ 6,039 5.17 .......................... 0.60 

Total ......................................................................................... 116,881 100.00 .......................... 21.00 

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 1.0971 

NATIONAL—Dietary Services

Dieticians ............................................................................................... 18,221,465 42.23 0.35 20.02

Dietetic Technicians ............................................................................... 24,929,865 57.77 0.48 11.64 

Total ................................................................................................ 43,151,330 100.00 0.84 15.18

Hospital A: 

Dieticians ........................................................................................ 13,943 100.00 .......................... 20.02 

Dietetic Technicians ....................................................................... 0 0.00 .......................... 0.00 

Total ......................................................................................... 13,943 100.00 .......................... 20.02

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 0.7582

Hospital B: 

Dieticians ........................................................................................ 27,458 16.29 .......................... 3.26 

Dietetic Technicians ....................................................................... 141,148 83.71 .......................... 9.74

Total ......................................................................................... 168,606 100.00 .......................... 13.00 

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 1.1676 

NATIONAL—Medical & Clinical Lab Services

Medical & Clinical Lab Technologists .................................................... 109,938,139 52.07 2.14 20.74 

Medical & Clinical Lab Technicians ....................................................... 101,208,507 47.93 1.97 14.90. 

Total ................................................................................................ 211,146,647 100.00 4.10 17.94

Hospital A: 

Medical & Clinical Lab Technologists ............................................ 166,522 90.82 .......................... 18.84 

Medical & Clinical Lab Technicians ............................................... 16,841 9.18 .......................... 1.37

Total ......................................................................................... 183,363 100.00 .......................... 20.20

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 0.8880

Hospital B: 

Medical & Clinical Lab Technologists ............................................ 295,516 47.34 .......................... 9.82 

Medical & Clinical Lab Technicians ............................................... 328,716 52.66 .......................... 7.85

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28259

EXAMPLE OF OCCUPATIONAL MIX ADJUSTMENT—Continued

General service categories/SOCs 

Number of

employee

hours 

Percent of

service

category

hours 

Percent of

total

employee

hours 

BLS

national

average

hourly

wage 

Total ......................................................................................... 624,232 100.00 .......................... 17.66 

Occupational Mix Adjustment ......................................................... ............................ .......................... .......................... 1.0156

Total Nursing, Therapy, Pharmacy, Dietary, and Medical & Clinical 

Occupations ....................................................................................... 2,474,369,021 .......................... 48.08 ..........................

All Other Occupations ............................................................................ 2,671,751,873 .......................... 51.92 ..........................

Total Hospital Employees ...................................................................... 5,146,120,894 .......................... 100.00 ..........................

In implementing an occupational mix 

adjusted wage index based on the above 

calculation, the wage index values for 

18 rural areas (36.7 percent) and 166 

urban areas (51.2 percent) would 

decrease as a result of the adjustment. 

Nine (9) rural areas (18.4 percent) and 

89 urban areas (27.5 percent) would 

experience a decrease of 1 percent or 

greater in their wage index values. The 

largest negative impact for a rural area 

would be 2.2 percent and for an urban 

area, 4.5 percent. Meanwhile, 31 rural 

areas (63.3 percent) and 158 urban areas 

(48.8 percent) would experience an 

increase in their wage index values. 

Although these results show that rural 

hospitals would gain the most from an 

occupational mix adjustment to the 

wage index, their gains may not be as 

great as might have been expected. 

Further, it might not have been 

anticipated that over one-third of rural 

hospitals would actually fare worse 

under the adjustment. Overall, a fully 

implemented occupational mix adjusted 

wage index would have a redistributive 

effect on Medicare payments to 

hospitals.

D. Worksheet S–3 Wage Data for the 

Proposed FY 2005 Wage Index Update 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Wage Data’’ at the beginning of your 

comment.] 

The proposed FY 2005 wage index 

values (effective for hospital discharges 

occurring on or after October 1, 2004 

and before October 1, 2005) in section 

VI. of the Addendum to this proposed 

rule are based on the data collected from 

the Medicare cost reports submitted by 

hospitals for cost reporting periods 

beginning in FY 2001 (the FY 2004 wage 

index was based on FY 2000 wage data). 

The proposed FY 2005 wage index 

includes the following categories of data 

associated with costs paid under the 

IPPS (as well as outpatient costs): 

• Salaries and hours from short-term, 

acute care hospitals (including paid 

lunch hours and hours associated with 

military leave and jury duty). 

• Home office costs and hours. 

• Certain contract labor costs and 

hours (which includes direct patient 

care, certain top management, 

pharmacy, laboratory, and nonteaching 

physician Part A services). 

• Wage-related costs (The September 

1, 1994 Federal Register included a list 

of core wage-related costs that are 

included in the wage index, and 

discussed criteria for including other 

wage-related costs (59 FR 45356)). 

Consistent with the wage index 

methodology for FY 2004, the proposed 

wage index for FY 2005 also excludes 

the direct and overhead salaries and 

hours for services not subject to IPPS 

payment, such as SNF services, home 

health services, costs related to GME 

(teaching physicians and residents) and 

certified registered nurse anesthetists 

(CRNAs), and other subprovider 

components that are not paid under the 

IPPS. The proposed FY 2005 wage index 

also excludes the salaries, hours, and 

wage-related costs of hospital-based 

rural health clinics (RHCs), and 

Federally qualified health centers 

(FQHCs) because Medicare pays for 

these costs outside of the IPPS (68 FR 

45395). In addition, salaries, hours and 

wage-related costs of CAHs are excluded 

from the wage index, for the reasons 

explained in the FY 2004 IPPS final rule 

(68 FR 45397). 

Data collected for the IPPS wage 

index are also currently used to 

calculate wage indexes applicable to 

other providers, such as SNFs, home 

health agencies, and hospices. In 

addition, they are used for prospective 

payments to rehabilitation, psychiatric, 

and long-term care hospitals, and for 

hospital outpatient services. 

E. Verification of Worksheet S–3 Wage 

Data 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Wage Data’’ at the beginning of your 

comment.] 

The wage data for the proposed FY 

2005 wage index were obtained from 

Worksheet S–3, Parts II and III of the FY 

2001 Medicare cost reports. Instructions 

for completing the Worksheet S–3, Parts 

II and III are in the Provider 

Reimbursement Manual, Part I, sections 

3605.2 and 3605.3. The data file used to 

construct the proposed wage index 

includes FY 2001 data submitted to us 

as of March 15, 2004. As in past years, 

we performed an intensive review of the 

wage data, mostly through the use of 

edits designed to identify aberrant data. 

We asked our fiscal intermediaries to 

revise or verify data elements that 

resulted in specific edit failures. Some 

unresolved data elements are included 

in the calculation of the proposed FY 

2005 wage index, pending their 

resolution before calculation of the final 

FY 2005 index. We instructed the fiscal 

intermediaries to complete their data 

verification of questionable data 

elements and to transmit any changes to 

the wage data no later than April 16, 

2004. We believe all unresolved data 

elements will be resolved by the date 

the final rule is issued. The revised data 

will be reflected in the final rule. 

In addition, as part of our editing 

process, we removed data for 222 

hospitals from our database: 147 

hospitals became critical access 

hospitals by the time we published the 

February public use file, and 75 

hospitals were low Medicare utilization 

hospitals or failed edits that could not 

be corrected because the hospitals 

terminated the program or changed 

ownership. In addition, we removed the 

wage data for 15 hospitals with 

incomplete or inaccurate data resulting 

in zero or negative, or otherwise 

aberrant, average hourly wages. We have 

notified the fiscal intermediaries of 

these hospitals and will continue to 

work with the fiscal intermediaries to 

correct these data until we finalize our 

database to compute the final wage 

index. As a result, the proposed FY 

2005 wage index is calculated based on 

FY 2001 wage data for 3,954 hospitals. 

28260 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

In constructing the proposed FY 2005 

wage index, we include the wage data 

for facilities that were IPPS hospitals in 

FY 2001, even for those facilities that 

have terminated their participation in 

the program as hospitals, as long as 

those data do not fail any of our edits 

for reasonableness. We believe that 

including the wage data for these 

hospitals is, in general, appropriate to 

reflect the economic conditions in the 

various labor market areas during the 

relevant past period. However, we 

exclude the wage data for CAHs (as 

discussed in 68 FR 45397). The 

proposed wage index in this proposed 

rule excludes hospitals that are 

designated as CAHs by February 24, 

2004, the date of the latest available 

Medicare CAH listing at the time we 

released the proposed wage index 

public use file on February 27, 2004. 

F. Computation of the Unadjusted Wage 

Index 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Wage Index’’ at the beginning of your 

comment.] 

The method used to compute the 

proposed FY 2005 wage index without 

an occupational mix adjustment 

follows: 

Step 1—As noted above, we based the 

proposed FY 2005 wage index on wage 

data reported on the FY 2001 Medicare 

cost reports. We gathered data from each 

of the non-Federal, short-term, acute 

care hospitals for which data were 

reported on the Worksheet S–3, Parts II 

and III of the Medicare cost report for 

the hospital’s cost reporting period 

beginning on or after October 1, 2000 

and before October 1, 2001. In addition, 

we included data from some hospitals 

that had cost reporting periods 

beginning before October 2000 and 

reported a cost reporting period 

covering all of FY 2001. These data were 

included because no other data from 

these hospitals would be available for 

the cost reporting period described 

above, and because particular labor 

market areas might be affected due to 

the omission of these hospitals. 

However, we generally describe these 

wage data as FY 2001 data. We note 

that, if a hospital had more than one 

cost reporting period beginning during 

FY 2001 (for example, a hospital had 

two short cost reporting periods 

beginning on or after October 1, 2000 

and before October 1, 2001), we 

included wage data from only one of the 

cost reporting periods, the longer, in the 

wage index calculation. If there was 

more than one cost reporting period and 

the periods were equal in length, we 

included the wage data from the later 

period in the wage index calculation. 

Step 2—Salaries—The method used to 

compute a hospital’s average hourly 

wage excludes certain costs that are not 

paid under the IPPS. In calculating a 

hospital’s average salaries plus wagerelated costs, we subtracted from Line 1 

(total salaries) the GME and CRNA costs 

reported on lines 2, 4.01, 6, and 6.01, 

the Part B salaries reported on Lines 3, 

5 and 5.01, home office salaries reported 

on Line 7, and excluded salaries 

reported on Lines 8 and 8.01 (that is, 

direct salaries attributable to SNF 

services, home health services, and 

other subprovider components not 

subject to the IPPS). We also subtracted 

from Line 1 the salaries for which no 

hours were reported. To determine total 

salaries plus wage-related costs, we 

added to the net hospital salaries the 

costs of contract labor for direct patient 

care, certain top management, 

pharmacy, laboratory, and nonteaching 

physician Part A services (Lines 9 and 

10), home office salaries and wagerelated costs reported by the hospital on 

Lines 11 and 12, and nonexcluded area 

wage-related costs (Lines 13, 14, and 

18). 

We note that contract labor and home 

office salaries for which no 

corresponding hours are reported were 

not included. In addition, wage-related 

costs for nonteaching physician Part A 

employees (Line 18) are excluded if no 

corresponding salaries are reported for 

those employees on Line 4.

Step 3—Hours—With the exception of 

wage-related costs, for which there are 

no associated hours, we computed total 

hours using the same methods as 

described for salaries in Step 2. 

Step 4—For each hospital reporting 

both total overhead salaries and total 

overhead hours greater than zero, we 

then allocated overhead costs to areas of 

the hospital excluded from the wage 

index calculation. First, we determined 

the ratio of excluded area hours (sum of 

Lines 8 and 8.01 of Worksheet S–3, Part 

II) to revised total hours (Line 1 minus 

the sum of Part II, Lines 2, 3, 4.01, 5, 

5.01, 6, 6.01, 7, and Part III, Line 13 of 

Worksheet S–3). We then computed the 

amounts of overhead salaries and hours 

to be allocated to excluded areas by 

multiplying the above ratio by the total 

overhead salaries and hours reported on 

Line 13 of Worksheet S–3, Part III. Next, 

we computed the amounts of overhead 

wage-related costs to be allocated to 

excluded areas using three steps: (1) We 

determined the ratio of overhead hours 

(Part III, Line 13) to revised hours (Line 

1 minus the sum of Lines 2, 3, 4.01, 5, 

5.01, 6, 6.01, and 7); (2) we computed 

overhead wage-related costs by 

multiplying the overhead hours ratio by 

wage-related costs reported on Part II, 

Lines 13, 14, and 18; and (3) we 

multiplied the computed overhead 

wage-related costs by the above 

excluded area hours ratio. Finally, we 

subtracted the computed overhead 

salaries, wage-related costs, and hours 

associated with excluded areas from the 

total salaries (plus wage-related costs) 

and hours derived in Steps 2 and 3. 

Step 5—For each hospital, we 

adjusted the total salaries plus wagerelated costs to a common period to 

determine total adjusted salaries plus 

wage-related costs. To make the wage 

adjustment, we estimated the percentage 

change in the employment cost index 

(ECI) for compensation for each 30-day 

increment from October 14, 2000 

through April 15, 2002 for private 

industry hospital workers from the 

Bureau of Labor Statistics’

Compensation and Working Conditions.

We use the ECI because it reflects the 

price increase associated with total 

compensation (salaries plus fringes) 

rather than just the increase in salaries. 

In addition, the ECI includes managers 

as well as other hospital workers. This 

methodology to compute the monthly 

update factors uses actual quarterly ECI 

data and assures that the update factors 

match the actual quarterly and annual 

percent changes. The factors used to 

adjust the hospital’s data were based on 

the midpoint of the cost reporting 

period, as indicated below.

MIDPOINT OF COST REPORTING

PERIOD

After Before Adjustment

factor. 

10/14/2000 11/15/2000 1.07771

11/14/2000 12/15/2000 1.07273

12/14/2000 1/15/2001 1.06767

01/14/2001 02/15/2001 1.06245

02/14/2001 03/15/2001 1.05706

03/14/2001 04/15/2001 1.05168

04/14/2001 05/15/2001 1.04645

05/14/2001 06/15/2001 1.04139

06/14/2001 07/15/2001 1.03638

07/14/2001 08/15/2001 1.03134

08/14/2001 09/15/2001 1.02627

09/14/2001 10/15/2001 1.02133

10/14/2001 11/15/2001 1.01665

11/14/2001 12/15/2001 1.01224

12/14/2001 01/15/2002 1.00803

01/14/2002 02/15/2002 1.00395

02/14/2002 03/15/2002 1.00000

03/14/2002 04/15/2002 0.99610

For example, the midpoint of a cost 

reporting period beginning January 1, 

2001 and ending December 31, 2001 is 

June 30, 2001. An adjustment factor of 

1.03638 would be applied to the wages 

of a hospital with such a cost reporting 

period. In addition, for the data for any 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28261

cost reporting period that began in FY 

2001 and covered a period of less than 

360 days or more than 370 days, we 

annualized the data to reflect a 1-year 

cost report. Dividing the data by the 

number of days in the cost report and 

then multiplying the results by 365 

accomplish annualization. 

Step 6—Each hospital was assigned to 

its appropriate urban or rural labor 

market area before any reclassifications 

under section 1886(d)(8)(B) or section 

1886(d)(10) of the Act. Within each 

urban or rural labor market area, we 

added the total adjusted salaries plus 

wage-related costs obtained in Step 5 for 

all hospitals in that area to determine 

the total adjusted salaries plus wagerelated costs for the labor market area. 

Step 7—We divided the total adjusted 

salaries plus wage-related costs obtained 

under both methods in Step 6 by the 

sum of the corresponding total hours 

(from Step 4) for all hospitals in each 

labor market area to determine an 

average hourly wage for the area. 

Step 8—We added the total adjusted 

salaries plus wage-related costs obtained 

in Step 5 for all hospitals in the nation 

and then divided the sum by the 

national sum of total hours from Step 4 

to arrive at a national average hourly 

wage. Using the data as described above, 

the proposed national average hourly 

wage is $26.2939. 

Step 9—For each urban or rural labor 

market area, we calculated the hospital 

wage index value by dividing the area 

average hourly wage obtained in Step 7 

by the national average hourly wage 

computed in Step 8. 

Step 10—Following the process set 

forth above, we developed a separate 

Puerto Rico-specific wage index for 

purposes of adjusting the Puerto Rico 

standardized amounts. (The national 

Puerto Rico standardized amount is 

adjusted by a wage index calculated for 

all Puerto Rico labor market areas based 

on the national average hourly wage as 

described above.) We added the total 

adjusted salaries plus wage-related costs 

(as calculated in Step 5) for all hospitals 

in Puerto Rico and divided the sum by 

the total hours for Puerto Rico (as 

calculated in Step 4) to arrive at an 

overall proposed average hourly wage of 

12.2038 for Puerto Rico. For each labor 

market area in Puerto Rico, we 

calculated the Puerto Rico-specific wage 

index value by dividing the area average 

hourly wage (as calculated in Step 7) by 

the overall Puerto Rico average hourly 

wage. 

Step 11—Section 4410 of Public Law 

105–33 provides that, for discharges on 

or after October 1, 1997, the area wage 

index applicable to any hospital that is 

located in an urban area of a State may 

not be less than the area wage index 

applicable to hospitals located in rural 

areas in that State. Furthermore, this 

wage index floor is to be implemented 

in such a manner as to ensure that 

aggregate IPPS payments are not greater 

or less than those that would have been 

made in the year if this section did not 

apply. For FY 2005, this change affects 

195 hospitals in 51 MSAs. The MSAs 

affected by this provision are identified 

by a footnote in Table 4A in the 

Addendum of this proposed rule. 

G. Computation of the Proposed FY 

2005 Blended Wage Index 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Wage Index’’ at the beginning of your 

comment.] 

For the FY 2005 wage index, we are 

proposing a blend of the occupational 

mix adjusted wage index and the 

unadjusted wage index, in order to 

minimize the redistributive impact of 

the occupational mix adjustment (as 

discussed in section III.C.2. of this 

preamble) for the first year of its 

implementation. Specifically, we are 

proposing to base the FY 2005 wage 

index on a blend of 10 percent of an 

average hourly wage, adjusted for 

occupational mix, and 90 percent of an 

average hourly wage, unadjusted for 

occupational mix. Using this blend, the 

national average hourly wage is 26.2902 

and the Puerto Rico specific average 

hourly wage is 12.2038. We chose this 

blend for FY 2005 in recognition that 

this was the first time, for the 

administration of the occupational mix 

survey, hospitals had a short timeframe 

for collecting their occupational mix 

survey data and documentation, and we 

could not collect optimum data (that is, 

wages and hours data from a 1-year 

period for all hospitals) within the 

mandatory timeframe for implementing 

the adjustment, and we had no baseline 

data to use in developing a desk review 

program that could ensure the accuracy 

of the occupational mix survey data. 

In addition, we are moving cautiously 

with implementing the occupational 

mix adjustment in recognition of 

changing trends in the hiring of nurses, 

the largest group in our survey. Since 

the enactment of section 304(c) of 

Public Law 106–554, the law requiring 

the occupational mix adjustment to the 

wage index, some States have 

implemented laws that establish floors 

on the minimum level of registered 

nurse staffing that hospitals must 

maintain in order to continue to be 

licensed and certified by the State. In 

addition, some rural areas that are 

facing a shortage of physicians may be 

hiring more registered nurses as 

extenders or substitutes for physicians. 

Such trends may explain why the 

occupational mix impacts in section 

III.C.2. of this preamble are not as 

expected for rural areas in particular. 

Further, we are proposing this blend 

because, although we want to minimize 

the immediate impact of the 

occupational mix adjustment on 

hospitals’ wage index values, we do not 

want to nullify the value and intent of 

the occupational mix adjustment. We 

believe that the blended wage index we 

are proposing satisfies both of these 

goals. With only 10 percent of the wage 

index adjusted for occupational mix, the 

wage index values for 17 rural areas 

(34.7 percent) and 159 urban areas (49.1 

percent) would decrease as a result of 

the adjustment. However, the decreases 

would be minimum; the largest negative 

impact for a rural area would be only 

0.22 percent and for an urban area, 0.45 

percent. Conversely, 32 rural areas (65.3 

percent) and 165 urban areas (50.9 

percent) would benefit from this 

adjustment, but each area’s gain would 

be less than 1 percent. Overall, a wage 

index that has only 10 percent of the 

salaries adjusted for occupational mix 

would have a minimal redistributive 

effect on Medicare payments to 

hospitals. (See Appendix A to this 

proposed rule for further analyses of the 

impact of the proposed occupational 

mix adjustment on the FY 2005 wage 

index.)

The wage index values in Tables 4A, 

4B, 4C, 4F, 4G, and 4H and the average 

hourly wages in Tables 2, 3A, and 3B in 

the Addendum to this proposed rule 

include the occupational mix 

adjustment as proposed. We note that, 

although we are proposing a blended 

wage index for FY 2005, at this time we 

are not proposing an incremental phasein of the occupational mix adjustment 

beyond FY 2005. The application of the 

occupational mix adjustment beyond FY 

2005 will be determined and discussed 

in subsequent IPPS updates. 

H. Proposed Revisions to the Wage 

Index Based on Hospital Redesignation 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Hospital Redesignations’’ at the 

beginning of your comment.] 

1. General 

Under section 1886(d)(10) of the Act, 

the Medicare Geographic Classification 

Review Board (MGCRB) considers 

applications by hospitals for geographic 

reclassification for purposes of payment 

under the IPPS. Hospitals must apply to 

the MGCRB to reclassify by September 

1 of the year preceding the year during 

which reclassification is sought. 

28262 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

4Although section 1886(d)(8)(C)(iv)(I) of the Act 

also provides that the wage index for an urban area 

may not decrease as a result of redesignated 

hospitals if the urban area wage index is below the 

wage index for rural areas in the State in which the 

urban area is located, this was effectively made 

moot by section 4410 of Public Law 105–33, which 

provides that the area wage index applicable to any 

hospital that is located in an urban area of a State 

may not be less than the area wage index applicable 

to hospitals located in rural areas in that State. 

Also, section 186(d)(8)(C)(iv)(II) of the Act 

provides that an urban area’s wage index may not 

decrease as a result of redesignated hospitals if the 

urban area is located in a State that is composed 

of a single urban area.

Generally, hospitals must be proximate 

to the labor market area to which they 

are seeking reclassification and must 

demonstrate characteristics similar to 

hospitals located in that area. The 

MGCRB issues its decisions by the end 

of February for reclassification to 

become effective for the following fiscal 

year (beginning October 1). The 

regulations applicable to 

reclassifications by the MGCRB are 

located in §§ 412.230 through 412.280. 

Section 1886(d)(10)(D)(v) of the Act 

provides that, beginning with FY 2001, 

a MGCRB decision on a hospital 

reclassification for purposes of the wage 

index is effective for 3 fiscal years, 

unless the hospital elects to terminate 

the reclassification. Section 

1886(d)(10)(D)(vi) of the Act provides 

that the MGCRB must use the 3 most 

recent years’ average hourly wage data 

in evaluating a hospital’s 

reclassification application for FY 2003 

and any succeeding fiscal year. 

Section 304(b) of Public Law 106–554 

provides that the Secretary must 

establish a mechanism under which a 

statewide entity may apply to have all 

of the geographic areas in the State 

treated as a single geographic area for 

purposes of computing and applying a 

single wage index, for reclassifications 

beginning in FY 2003. The 

implementing regulations for this 

provision are located at § 412.235. 

Section 1886(d)(8)(B) of the Act 

requires the Secretary to treat a hospital 

located in a rural county adjacent to one 

or more urban areas as being located in 

the MSA to which the greatest number 

of workers in the county commute if: 

The rural county would otherwise be 

considered part of an urban area under 

the standards for designating MSAs if 

the commuting rates used in 

determining outlying counties were 

determined on the basis of the aggregate 

number of resident workers who 

commute to (and, if applicable under 

the standards, from) the central county 

or counties of all contiguous MSAs. In 

light of the new CBSA definitions and 

the Census 2000 data, we undertook to 

identify those counties meeting these 

criteria. The eligible counties are 

identified below, as well as a discussion 

of counties that no longer meet the 

criteria under this provision. 

2. Effects of Reclassification 

Section 1886(d)(8)(C) of the Act 

provides that the application of the 

wage index to redesignated hospitals is 

dependent on the hypothetical impact 

that the wage data from these hospitals 

would have on the wage index value for 

the area to which they have been 

redesignated. These requirements for 

determining the wage index values for 

redesignated hospitals is applicable 

both to the hospitals located in rural 

counties deemed urban under section 

1886(d)(8)(B) of the Act and hospitals 

that were reclassified as a result of the 

MGCRB decisions under section 

1886(d)(10) of the Act. Therefore, as 

provided in section 1886(d)(8)(C) of the 

Act,4 the wage index values were 

determined by considering the 

following:

• If including the wage data for the 

redesignated hospitals would reduce the 

wage index value for the area to which 

the hospitals are redesignated by 1 

percentage point or less, the area wage 

index value determined exclusive of the 

wage data for the redesignated hospitals 

applies to the redesignated hospitals. 

• If including the wage data for the 

redesignated hospitals reduces the wage 

index value for the area to which the 

hospitals are redesignated by more than 

1 percentage point, the area wage index 

determined inclusive of the wage data 

for the redesignated hospitals (the 

combined wage index value) applies to 

the redesignated hospitals.

• If including the wage data for the 

redesignated hospitals increases the 

wage index value for the urban area to 

which the hospitals are redesignated, 

both the area and the redesignated 

hospitals receive the combined wage 

index value. Otherwise, the hospitals 

located in the urban area receive a wage 

index excluding the wage data of 

hospitals redesignated into the area. 

• The wage data for a reclassified 

urban hospital is included in both the 

wage index calculation of the area to 

which the hospital is reclassified 

(subject to the rules described above) 

and the wage index calculation of the 

urban area where the hospital is 

physically located. 

• Rural areas whose wage index 

values would be reduced by excluding 

the wage data for hospitals that have 

been redesignated to another area 

continue to have their wage index 

values calculated as if no redesignation 

had occurred (otherwise, redesignated 

rural hospitals are excluded from the 

calculation of the rural wage index). 

• The wage index value for a 

redesignated rural hospital cannot be 

reduced below the wage index value for 

the rural areas of the State in which the 

hospital is located. 

3. FY 2005 Issues 

Recent policies and decisions that 

will affect hospitals’ geographic 

classifications for FY 2005 are discussed 

below. First, we describe decisions by 

the MGCRB on applications received in 

accordance with the ongoing 

reclassification process described in the 

regulations at §§ 412.230 through 

412.280. Second, we describe the 

implications for reclassification 

decisions by the MGCRB to be effective 

during FY 2005 of our proposal to adopt 

new MSA definitions for the FY 2005 

wage index. Third, we discuss the new 

counties identified under the standards 

at section 1886(d)(8)(B) of the Act, based 

on the new CBSAs and the Census 2000 

data. Fourth, we discuss the interactions 

of these changes with reclassifications 

approved under the one-time appeal 

process for hospital wage index 

reclassifications at section 508 of Public 

Law 108–173. Fifth, we discuss our 

proposed implementation of section 505 

of Public Law 108–173. Under this 

provision, the Secretary must establish 

a new process, similar to the current 

wage index reclassification process, to 

make adjustments to the hospital wage 

index, based on commuting patterns of 

hospital employees. 

a. FY 2005 MGCRB Reclassifications 

In the August 1, 2003 IPPS final rule, 

we indicated that hospitals submitting 

applications for reclassification by the 

MGCRB for FY 2005 should base those 

applications on the current (for 

Medicare payment purposes) MSAs (68 

FR 45401). At the time this proposed 

rule was constructed, the MGCRB had 

completed its review of FY 2005 

reclassification requests. There were 339 

hospitals approved for wage index 

reclassifications by the MGCRB for FY 

2005. Because MGCRB wage index 

reclassifications are effective for 3 years, 

hospitals reclassified during FY 2003 or 

FY 2004 are eligible to continue to be 

reclassified based on prior 

reclassifications to current MSAs during 

FY 2005. There were 55 hospitals 

reclassified for wage index in FY 2003 

and 102 hospitals reclassified for wage 

index in FY 2004. 

In the past, hospitals have been able 

to apply to be reclassified for purposes 

of either the wage index or the 

standardized amount. Existing 

regulations at § 412.230(a)(5)(ii) state 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28263

that, after 2002, a hospital may not be 

reclassified for purposes of the 

standardized amount if the area to 

which the hospital seeks reclassification 

does not have a higher standardized 

amount than the standardized amount 

the hospital currently receives. 

Standardized amount reclassifications 

are only effective for 1 year, so hospitals 

must reapply every year. At the time the 

FY 2005 reclassification applications 

were due, hospitals applied on the basis 

that the law still provided for a higher 

standardized amount for hospitals in 

large urban areas. However, section 401 

of Public Law 108–173 established that 

all hospitals would be paid on the basis 

of the large urban standardized amount 

beginning with FY 2004. Consequently, 

all hospitals will be paid on the basis of 

the same standardized amount, which 

effectively makes standardized amount 

reclassifications moot, at least for 

purposes of the standardized amount. 

As a result, the MGCRB denied all 

applications for standardized amount 

reclassifications for FY 2005. In light of 

the fact that all hospitals are now paid 

on the basis of the same standardized 

amount, we are proposing to eliminate 

standardized amount reclassifications (a 

discussion appears under section IV.C. 

of this preamble). Although there could 

still be some benefit in terms of 

payments for some hospitals under the 

DSH adjustment for operating IPPS, 

section 402 of Public Law 108–173 

equalized DSH payments for rural and 

urban hospitals, with the exception that 

the rural DSH adjustment is capped at 

12 percent (except that rural referral 

centers have no cap) (a detailed 

discussion appears in section IV.H. of 

this preamble). 

b. Implementation of New MSAs 

As discussed above, we are proposing 

to implement the new CBSAs for FY 

2005. Under these new CBSAs 

definitions, many existing MSAs are 

reconfigured. Therefore, because 

hospitals applied for reclassification 

during FY 2005 on the basis of the 

MSAs currently used to define labor 

market areas for FY 2004, the definition 

of the MSA to which they have been 

reclassified, or the area where they are 

located, may have changed under our 

proposed implementation. Hospitals 

that have been reclassified for FY 2005 

should verify that the reclassified wage 

index for the labor market area into 

which they have been reclassified (in 

Table 4C or 4D in the Addendum to this 

proposed rule) exceeds the wage index 

of the labor market area where they are 

located (in Table 4A or 4B in the 

Addendum of this proposed rule) after 

our proposed implementation of the 

new MSAs. Hospitals may withdraw 

their FY 2005 reclassifications within 45 

days of the publication of this proposed 

rule. 

In some cases, the new CBSA 

definitions result in previously existing 

MSAs being divided into two or more 

separate MSAs. In these situations, we 

are proposing to assign the hospital to 

the nearest county in the current MSA, 

and the hospital’s FY 2005 

reclassification would be to the new 

MSA (under the CBSA definitions) that 

includes that county to which it has 

been assigned. 

For example, the Ann Arbor, MI MSA 

currently includes the counties of 

Lenawee, MI; Livingston, MI; and 

Washtenaw, MI. Under the new CBSA 

definitions, the Ann Arbor, MI MSA is 

comprised solely of the county of 

Washtenaw, MI. Lenawee, MI now 

comprises the Adrian, MI Micropolitan 

Area, and Livingston, MI is now in the 

Warren-Farmington Hills-Troy, MI 

Metropolitan Division of Detroit. 

Therefore, a hospital that was 

reclassified by the MGCRB into Ann 

Arbor for either FY 2003, FY 2004, or 

FY 2005, would be assigned to either 

the Ann Arbor, MI MSA or the WarrenFarmington Hills-Troy, MI Metropolitan 

Division, depending on whether the 

hospital was closer to Washtenaw or 

Livingston (a reclassified hospital 

located closest to Lenawee County 

would be assigned to the Ann Arbor 

MSA, based on Lenawee County’s prior 

inclusion in this MSA). 

Reclassified hospitals that have been 

assigned to a new MSA on this 

proposed basis are identified in Table 9 

in the Addendum of this proposed rule 

by the identification of the county used 

to designate them. We have determined 

the hospital is in closest proximity to 

the county listed based on mapping data 

available to us at the time of the 

preparation of this proposed rule. 

Hospitals that disagree with our 

determination of the closest proximate 

county on which to assign them to a 

new MSA must submit a comment (as 

specified under the ‘‘Comment Period’’

and ADDRESSES sections at the beginning 

of this proposed rule) indicating the 

basis for their disagreement. Changes to 

a hospital’s MSA assignment on the 

basis of a hospital’s disagreement will 

be announced in the final rule. 

c. Redesignations Under Section 

1886(d)(8)(B) of the Act 

Beginning October 1, 1988, section 

1886(d)(8)(B) of the Act required us to 

treat a hospital located in a rural county 

adjacent to one or more urban areas as 

being located in the MSA to which the 

greatest number of workers in the 

county commute, if the rural county 

would otherwise be considered part of 

an urban area under the standards 

published in the Federal Register on 

January 3, 1980 (45 FR 956) for 

designating MSAs (and for designating 

NECMAs), and if the commuting rates 

used in determining outlying counties 

(or, for New England, similar recognized 

areas) were determined on the basis of 

the aggregate number of resident 

workers who commute to (and, if 

applicable under the standards, from) 

the central county or counties of all 

contiguous MSAs (or NECMAs). 

Hospitals that met the criteria using the 

January 3, 1980 version of these OMB 

standards were deemed urban for 

purposes of the standardized amounts 

and for purposes of assigning the wage 

data index. 

Section 402 of Public Law 106–113 

provides that, with respect to FYs 2001 

and 2002, a hospital may elect to have 

the 1990 standards applied to it for 

purposes of section 1886(d)(8)(B) of the 

Act and that, beginning with FY 2003, 

hospitals will be required to use the 

standards published in the Federal 

Register by the Director of OMB based 

on the most recent decennial census. 

We implemented section 402 in the 

August 1, 2001 Federal Register (66 FR 

39868). However, at that time, updated 

standards based on the Census 2000 

data were not available. 

We have used OMB’s 2000 CBSA 

standards and the Census 2000 data to 

identify counties qualifying under 

section 1886(d)(8)(B) of the Act for FY 

2005. The number of qualifying 

counties, shown in the following chart, 

increases from 28 to 97. On the basis of 

the evaluation of these data, we are 

proposing that, effective for discharges 

on or after October 1, 2004, hospitals 

located in the rural counties listed in 

the first column of the following table 

will be redesignated for purposes of 

assigning the wage index to the urban 

area listed in the second column.

28264 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

CHART 6.—COUNTIES REDESIGNATED AS URBAN UNDER SECTION 1886(D)(8)(B) OF THE ACT

[Based on CBSAs and Census 2000 Data] 

Rural county MSA. 

Cherokee, AL .......................................................................................................................................... Rome, GA. 

Macon, AL ............................................................................................................................................... Auburn, AL. 

Talladega, AL .......................................................................................................................................... Anniston, AL. 

Hot Spring, AR ........................................................................................................................................ Hot Spring, AR. 

Litchfield, CT ........................................................................................................................................... Hartford, CT. 

Windham, CT .......................................................................................................................................... Hartford, CT. 

Bradford, FL ............................................................................................................................................ Gainesville, FL. 

Flagler, FL ............................................................................................................................................... Deltona-Daytona Beach-Ormond Beach, 

FL. 

Hendry, FL ............................................................................................................................................... Miami, FL. 

Levy, FL ................................................................................................................................................... Gainesville, FL. 

Walton, FL ............................................................................................................................................... Ft. Walton Beach, FL. 

Banks, GA ............................................................................................................................................... Gainesville, FL. 

Chattooga, GA ......................................................................................................................................... Chattanooga, TN–GA. 

Jackson, GA ............................................................................................................................................ Atlanta, GA. 

Lumpkin, GA ............................................................................................................................................ Atlanta, GA. 

Morgan, GA ............................................................................................................................................. Atlanta, GA. 

Peach, GA ............................................................................................................................................... Macon, GA. 

Polk, GA .................................................................................................................................................. Atlanta, GA. 

Talbot, GA ............................................................................................................................................... Columbus, GA–AL. 

Bingham, ID ............................................................................................................................................. Idaho Falls, ID. 

Christian, IL ............................................................................................................................................. Springfield, IL. 

DeWitt, IL ................................................................................................................................................. Bloomington-Normal, IL. 

Iroquois, IL ............................................................................................................................................... Kankakee, IL. 

Logan, IL ................................................................................................................................................. Springfield, IL. 

Mason, IL ................................................................................................................................................. Peoria, IL. 

Ogle, IL .................................................................................................................................................... Rockford, IL. 

Clinton, IN ................................................................................................................................................ Lafayette, IN. 

Henry, IN ................................................................................................................................................. Indianapolis, IN. 

Spencer, IN ............................................................................................................................................. Evansville, IN–KY. 

Starke, IN ................................................................................................................................................ Chicago, IL–IN. 

Warren, IN ............................................................................................................................................... Lafayette, IN. 

Boone, IA ................................................................................................................................................. Ames, IA. 

Buchanan, IA ........................................................................................................................................... Waterloo, IA. 

Cedar, IA ................................................................................................................................................. Iowa City, IA. 

Allen, KY .................................................................................................................................................. Bowling Green, KY. 

Assumption Parish, LA ............................................................................................................................ Baton Rouge, LA. 

St. James Parish, LA .............................................................................................................................. Baton Rouge, LA. 

Allegan, MI .............................................................................................................................................. Holland, MI. 

Montcalm, MI ........................................................................................................................................... Grand Rapids, MI. 

Oceana, MI .............................................................................................................................................. Muskegon, MI. 

Shiawassee, MI ....................................................................................................................................... Lansing, MI. 

Tuscola, MI .............................................................................................................................................. Saginaw, MI. 

Fillmore, MN ............................................................................................................................................ Rochester, MN. 

Dade, MO ................................................................................................................................................ Springfield, MO. 

Pearl River, MS ....................................................................................................................................... Biloxi-Gulfport, MS. 

Caswell, NC ............................................................................................................................................. Burlington, NC. 

Granville, NC ........................................................................................................................................... Durham, NC. 

Harnett, NC ............................................................................................................................................. Raleigh, NC. 

Lincoln, NC .............................................................................................................................................. Charlotte NC–SC. 

Polk, NC .................................................................................................................................................. Spartanburg, NC. 

Los Alamos, NM ...................................................................................................................................... Sante Fe, NM. 

Lyon, NV .................................................................................................................................................. Carson City, NV. 

Cayuga, NY ............................................................................................................................................. Syracuse, NY. 

Columbia, NY .......................................................................................................................................... Albany, NY. 

Genesee, NY ........................................................................................................................................... Rochester, NY. 

Greene, NY ............................................................................................................................................. Albany, NY. 

Schuyler, NY ........................................................................................................................................... Ithaca, NY. 

Sullivan, NY ............................................................................................................................................. Poughkeepsie-Newburgh, NY. 

Wyoming, NY .......................................................................................................................................... Buffalo, NY. 

Ashtabula, OH ......................................................................................................................................... Cleveland, OH. 

Champaign, OH ....................................................................................................................................... Springfield, OH. 

Columbiana, OH ...................................................................................................................................... Youngstown, OH–PA. 

Cotton, OK ............................................................................................................................................... Lawton, OK. 

Linn, OR .................................................................................................................................................. Corvalis, OR. 

Adams, PA .............................................................................................................................................. York, PA. 

Clinton, PA .............................................................................................................................................. Williamsport, PA. 

Greene, PA .............................................................................................................................................. Pittsburgh, PA. 

Monroe, PA ............................................................................................................................................. New York-Newark, NY–NJ–CT. 

Schuylkill, PA ........................................................................................................................................... Reading, PA. 

Susquehanna, PA ................................................................................................................................... Binghamton, NY–PA. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28265

CHART 6.—COUNTIES REDESIGNATED AS URBAN UNDER SECTION 1886(D)(8)(B) OF THE ACT—Continued

[Based on CBSAs and Census 2000 Data] 

Rural county MSA. 

Clarendon, SC ......................................................................................................................................... Sumter, SC. 

Lee, SC ................................................................................................................................................... Sumter, SC. 

Oconee, SC ............................................................................................................................................. Greenville, SC. 

Union, SC ................................................................................................................................................ Spartanburg, SC. 

Meigs, TN ................................................................................................................................................ Cleveland, TN. 

Bosque, TX .............................................................................................................................................. Waco, TX. 

Falls, TX .................................................................................................................................................. Waco, TX. 

Fannin, TX ............................................................................................................................................... Dallas-Fort Worth-Arlington, TX. 

Grimes, TX .............................................................................................................................................. College Station-Bryan, TX. 

Harrison, TX ............................................................................................................................................ Longview, TX. 

Henderson, TX ........................................................................................................................................ Dallas-Fort Worth-Arlington, TX. 

Milam, TX ................................................................................................................................................ Austin, TX. 

Van Zandt, TX ......................................................................................................................................... Dallas-Fort Worth-Arlington, TX. 

Willacy, TX .............................................................................................................................................. Brownsville, TX. 

Buckingham, VA ...................................................................................................................................... Charlottesville, VA. 

Floyd, VA ................................................................................................................................................. Blacksburg, VA. 

Middlesex, VA ......................................................................................................................................... Virginia Beach, VA. 

Page, VA ................................................................................................................................................. Harrisonburg, VA. 

Shenandoah, VA ..................................................................................................................................... Winchester, VA. 

Island, WA ............................................................................................................................................... Seattle, WA. 

Mason, WA .............................................................................................................................................. Olympia-Lacey, WA. 

Wahkiakum, WA ...................................................................................................................................... Longview, WA–OR. 

Jackson, WV ........................................................................................................................................... Charleston, WV. 

Roane, WV .............................................................................................................................................. Charleston, WV. 

Green, WI ................................................................................................................................................ Madison, WI. 

Green Lake, WI ....................................................................................................................................... Fond du Lac, WI. 

Jefferson, WI ........................................................................................................................................... Milwaukee, WI. 

Walworth, WI ........................................................................................................................................... Chicago, IL–IN. 

As in the past, hospitals redesignated 

under section 1886(d)(8)(B) of the Act 

are also eligible to be reclassified to a 

different area by the MGCRB. Affected 

hospitals should compare the 

reclassified wage index for the labor 

market area in Table 4C or 4D in the 

Addendum of this proposed rule into 

which they have been reclassified by the 

MGCRB to the wage index for the area 

to which they are redesignated under 

section 1886(d)(8)(B) of the Act. 

Hospitals may withdraw from an 

MGCRB reclassification within 45 days 

of the publication of this proposed rule. 

When we apply the OMB 2000 CBSA 

standards, 16 rural counties no longer 

meet the qualifying criteria, either 

because they are now included in a 

metropolitan area (with the exception of 

Barry, MI and Cass, MI, most of the 

counties are now in the metropolitan 

area in which they were grouped in 

accordance with section 402) or they fail 

to meet the 25-percent cumulative outmigration threshold when we apply the 

new OMB standards. Counties that are 

now identified as metropolitan are:

Chilton, AL 

Macoupin, IL 

Piatt, IL 

Brown, IN 

Carroll, IN 

Jefferson, KS 

Barry, MI 

Cass, MI 

Ionia, MI 

Hartnett, NC 

Preble, PA

Counties that failed to meet the 25-

percent threshold are: Marshall, AL; 

Putnam, FL; Wilson, NC; Van Wert, OH; 

and Lawrence, PA. 

d. Reclassifications Under Section 508 

of Public Law 108–173

Under section 508 of Public Law 108–

173, a qualifying hospital may appeal 

the wage index classification otherwise 

applicable to the hospital and apply for 

reclassification to another area of the 

State in which the hospital is located 

(or, at the discretion of the Secretary, to 

an area within a contiguous State). 

Hospitals were required to submit their 

applications by February 15, 2004. We 

implemented this process through 

notices published in the Federal 

Register on January 6, 2004 (69 FR 661) 

and February 13, 2004 (69 FR 7340). 

Such reclassifications are applicable to 

discharges occurring during the 3-year 

period beginning April 1, 2004 and 

ending March 31, 2007. Under section 

508(b), reclassifications under this 

process do not affect the wage index 

computation for any area or for any 

other hospital and cannot be effected in 

a budget neutral manner. 

The applications submitted under this 

process were reviewed and decided 

upon by the MGCRB. The MGCRB 

issued notifications of its decisions on 

April 16, 2004. Reclassifications under 

this one-time appeal process interact 

with: FY 2005 MGCRB reclassification 

decisions under the ongoing 

reclassification process described in the 

regulations at §§ 412.230 through 

412.280; the proposed implementation 

of the new MSA definitions; and the 

new redesignations under section 

1886(d)(8)(B) of the Act. 

In the notices implementing this 

process, we indicated that, with limited 

exceptions, hospitals eligible for 

reclassification under section 508 of 

Public Law 108–173 are not otherwise 

reclassified, effective for discharges on 

or after October 1, 2004. Therefore, 

aside from the exceptions specified in 

the notices, hospitals reclassified under 

this one-time appeal process are not 

otherwise reclassified by the MGCRB for 

FY 2005. For those hospitals that were 

exempted from this requirement and 

that were granted reclassification under 

this one-time appeal process, the 

reclassification under the one-time 

appeal process takes precedence over 

any other MGCRB reclassification. We 

show the reclassifications effective 

under the one-time appeal process in 

Table 9B, in the Addendum to this 

proposed rule.

With regard to the proposed 

implementation of the new MSAs, we 

are proposing to apply the reclassified

28266 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

wage indexes on the basis of the new 

MSAs. Hospitals reclassified under the 

one-time appeal process may terminate 

their reclassifications that would 

otherwise be effective on or after 

October 1, 2004, under the normal 

termination and withdrawal process at 

§ 412.273 (these reclassifications may 

not be terminated prior to October 1, 

2004). Table 9B in the Addendum to 

this proposed rule shows the areas to 

which hospitals have been reclassified 

under the one-time appeal process. 

Therefore, similar to other hospitals 

reclassified by the MGCRB under the 

ongoing reclassification process for FY 

2005, hospitals reclassified under the 

one-time appeal process should verify 

that the reclassified wage index for the 

labor market area into which they have 

been reclassified (in Table 4C or 4D in 

the Addendum to this proposed rule) 

exceeds the wage index of the labor 

market area where they are located (in 

Table 4A or 4B in the Addendum to this 

proposed rule) after our proposed 

implementation of the new MSAs. 

Affected hospitals may withdraw their 

one-time appeal process 

reclassifications within 45 days of the 

publication of this proposed rule. 

As we have discussed above, in some 

cases, the new CBSA definitions result 

in the division of previously existing 

MSAs into two or more separate MSAs. 

(See the example in section III.H.3.b of 

this preamble.) In these situations, we 

are proposing to assign a hospital 

reclassified under the one-time appeal 

process to the nearest county in the 

current MSA, and the hospital’s FY 

2005 reclassification would be to the 

new MSA (under the CBSA definitions) 

that includes that county to which it has 

been assigned. Hospitals reclassified 

under the one-time appeals process that 

have been assigned to a new MSA on 

this proposed basis are identified in 

Table 9B, column 7, in the Addendum 

of this proposed rule. We have 

determined the county to which a 

hospital is in closest proximity based on 

mapping data available to us at the time 

of the preparation of this proposed rule. 

Hospitals that disagree with our 

determination of the closest proximate 

county must submit a comment (as 

specified under the ‘‘Comment Period’’

and ‘‘Addresses’’ sections at the 

beginning of this proposed rule) 

indicating the basis for their 

disagreement. Changes to a hospital’s 

MSA assignment on the basis of a 

hospital’s disagreement will be 

announced in the final rule. 

Similarly, hospitals reclassified under 

the section 508 one-time appeal process 

that are also in counties identified 

under the redesignation process in 

accordance with section 1886(d)(8)(B) of 

the Act should compare the wage index 

applicable to the area to which they 

were reclassified under section 508 with 

the wage index applicable to the area to 

which they are redesignated under 

section 1886(d)(8)(B) of the Act, if those 

areas are different. Again, affected 

hospitals may withdraw their one-time 

appeal process reclassifications within 

45 days of the publication of this 

proposed rule. 

e. Proposed Wage Index Adjustment 

Based on Commuting Patterns of 

Hospital Employees (Section 505 of Pub. 

L. 108–173) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Out-Migration of Hospital Employees’’

at the beginning of your comment.] 

Section 505 of Public Law 108–173 

established new section 1886(d)(13) of 

the Act. The new section 1886(d)(13) 

requires that the Secretary establish a 

new process to make adjustments to the 

hospital wage index based on 

commuting patterns of hospital 

employees. The process provides for an 

increase in the wage index for hospitals 

located in certain counties that have a 

relatively high percentage of hospital 

employees who reside in the county but 

work in a different county with a higher 

wage index. Such adjustments to the 

wage index are effective for 3 years 

beginning with discharges occurring on 

or after October 1, 2004. Adjustments 

under this provision are not subject to 

the budget neutrality requirements at 

section 1886(d)(3)(E) or section 

1886(d)(8)(D) of the Act. 

The Secretary is required to establish 

criteria to identify ‘‘qualifying 

counties,’’ and hospitals located in such 

qualifying counties are to receive an 

adjustment to their wage index. Section 

1886(d)(13)(B)(i) of the Act directs the 

Secretary to establish a threshold 

percentage difference between the 

county’s wage index and the weighted 

average of the wage indexes of the 

surrounding higher wage index area(s) 

to which hospital employees commute 

that must be met in order for the county 

to qualify. Section 1886(d)(13)(B)(ii) of 

the Act specifies that the Secretary is 

also to establish the minimum outmigration threshold in order to qualify, 

which may not be less than 10 percent. 

Section 1886(d)(13)(iii) of the Act 

requires that the average hourly wage 

for all hospitals in the county must be 

equal to or exceed the average hourly 

wage for all hospitals in the labor 

market area. Section 1886(d)(13)(E) of 

the Act indicates this process may be 

based on the process used by the 

MGCRB. This section also gives the 

Secretary the authority to require 

hospitals to submit data necessary to 

implement this provision, or to use 

other data sources as available.

Hospitals located in counties that 

qualify for the payment adjustment are 

to receive an increase in the wage index 

that is equal to a weighted average of the 

differences between the wage indexes of 

the MSA(s) with higher wage indexes 

and the wage index of the resident 

county, weighted by the overall 

percentage of hospital workers residing 

in the qualifying county who are 

employed in any MSA with a higher 

wage index. As discussed below, we 

have employed the prereclassified wage 

indexes in making these calculations. 

The wage index increase is effective for 

3 years, unless a hospital requests to 

waive the application of the payment 

adjustment. Hospitals that receive this 

payment adjustment are not eligible for 

reclassification under section 1886(d)(8) 

or section 1886(d)(10) of the Act. 

(1) Data 

To implement this provision, we 

analyzed commuting data compiled by 

the U.S. Census Bureau. The data derive 

from a special tabulation of Census 2000 

journey-to-work data, compiled from 

responses to the long-form (sample) 

census survey questions on where 

people worked. When the Census 

conducts its decennial survey, each 

household receives either a short form 

or a long form. On average, about 1 in 

every 6 households receive the long 

form. The results from the long form are 

used to formulate descriptive 

population estimates. Thus, the data set 

is based on the Census 2000 sample and 

represents estimates of the actual figures 

that would be obtained from a complete 

count. 

The data provide information about 

commuting patterns of workers at the 

county level for residents of the 50 

States and the District of Columbia. 

Each record within the dataset 

represents a combination of a particular 

resident county, a workplace county, 

and a particular industry category. 

Thus, the record shows the county-ofresidence by county-of-work commuter 

flows. The resident county represents 

the county where the worker resides, 

while the workplace county represents 

the county where the worker works. The 

industry category associated with 

workers is based on the 108 Industrial 

Structure codes developed by the 

Bureau of Economic Analysis. These 

Industrial Structure codes break down 

economic activities by defining 

industries (such as ‘‘fabricated metal 

product manufacturing,’’ ‘‘legal 

services,’’ and ‘‘gasoline stations’’). We 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28267

limited the data set to those employees 

working in the category designated 

‘‘hospitals’’ (BEA code 622000). 

Using these data, we are able to 

identify the total number of hospital 

workers who live in each county and 

the number of workers within that 

county who commute to hospitals in 

other counties. For example, the data 

can be used to determine that, from a 

sample of 100 hospital employees who 

live in County A, 50 commute to work 

at hospitals within County A, 20 

commute to work at hospitals within 

County B, and 30 commute to work at 

hospitals within County C. 

There are some intrinsic limitations to 

the data. The file shows the weighted 

worker estimate for flows using a 

threshold or minimum size of 50 

unweighted worker (from all industry 

codes) records. This means that only 

county-to-county flows that are 

comprised of at least 50 unweighted 

worker records are shown in this file. 

The Census Bureau omitted all other 

county-to-county flows from the file for 

confidentiality reasons. While this 

could eliminate the workflows of some 

hospital residents, we believe the 

eliminations would not have a major 

impact on the policy. 

When Census calculated this special 

tabulation, the estimates of workers 

numbering from 1 through 7 have been 

rounded to 4. Values of 8 or greater have 

been rounded to the nearest multiple of 

5, unless the estimate already ended in 

5 or 0, in which case it was not changed. 

In addition, in this special tabulation, 

workers are defined as people 16 years 

and older who were employed and at 

work during the Census long form 

reference week. This is the week prior 

to when the questionnaire was filled 

out, which was the last week of March 

2000 for most people. 

In addition, because these data derive 

from the decennial census, the data file 

will not change until the census is taken 

again in 2010. This does not mean that 

the list of qualifying counties will not 

change from year to year. The outmigration percentage for each county is 

a function both of the commuting data 

and changes in the wage index values. 

Because the wage indices associated 

with each work and resident county 

change each year, a county’s outmigration percentages can still vary 

each year because a higher wage index 

area in one year, might not be a higher 

wage index area in the next year. For 

example, if 100 hospital employees 

living in County A (wage index 1.00 in 

FY 2004) commute to County B (wage 

index 1.10 in FY 2004), then County B 

would be a higher wage index area for 

2004. If in FY 2005, County A’s wage 

index increases to 1.02 and County B’s 

wage index decreases to 1.01, those 100 

workers commuting from County A to 

County B will not be commuting to a 

higher wage index area for 2005. 

Consequentially, County A’s outmigration percentage would decrease 

from 100 percent in 2004 to 0 percent 

in 2005. These normal changes in wage 

index values could also result in a 

county not deemed a qualifying county 

for FY 2005, becoming a qualifying 

county in FY 2006 or later. 

We believe these data provide a 

useable data source to implement this 

provision. However, we welcome and 

encourage comments on the availability 

and value of alternative data sources. 

Although the statute authorizes the 

Secretary to require all hospitals to 

submit data on the commuting patterns 

of their employees, such a requirement 

would be a major undertaking for the 

hospital industry and CMS. It was not 

possible to pursue this approach in time 

to implement the provision by FY 2005. 

However, in addition to welcoming 

comments on the merits of relying on 

the Census data, we welcome comments 

on the feasibility of surveying hospitals 

on the residence and commuting 

patterns of all their hospital employees 

for purposes of developing future year 

adjustments. 

(2) Qualifying Counties 

As noted previously, section 

1886(d)(13)(B)(iii) of the Act requires 

that, to qualify for this commuting wage 

index adjustment, the average hourly 

wage for all hospitals in the county 

must be equal to or exceed the average 

hourly wage for all hospitals in the labor 

market area in which the county is 

located. To determine which counties 

meet this requirement, we calculated 

the average of hospitals’ 3-year average 

hourly wages for all hospitals in a given 

county. We compared this county 

average 3-year average hourly wage to 

the 3-year average hourly wage for the 

labor market area where the county is 

located. We chose to use the 3-year 

average hourly wage because we believe 

it provides a more accurate and stable 

estimate for the wages paid by a given 

hospital over a period of time. This 

statutory requirement limits the number 

of eligible counties, as counties with a 

3-year average hourly wage less than the 

3-year average hourly wage of the MSA 

where the county is located were not 

considered to meet this requirement. 

Some resident counties do not have 

average hourly wages because either 

there is no hospital located in the 

county, or the only hospital in the 

county is new and has not yet submitted 

wage data. We did not consider these 

counties to have met the average hourly 

wage criteria and thus hospitals in these 

counties are not yet eligible to receive 

an increase in wage index. This is 

consistent with our regulations at 42 

CFR 412.230(e)(2)(iii), which require a 

new hospital to accumulate at least 1 

year of wage data, before it is eligible to 

apply for reclassification. 

As noted previously, section 

1886(d)(13)(B)(ii) of the Act specifies 

that the Secretary is to establish the 

minimum out-migration threshold in 

order to qualify, which may not be less 

than 10 percent. To determine the outmigration percentage for each county, 

we identified higher wage index areas, 

by comparing 2005 prereclassified wage 

index of a resident county with the 2005 

prereclassified wage index of the MSA 

or rural statewide area where the work 

county is located. We use the 

prereclassified wage index so that 

hospitals in the county are not 

disadvantaged by reclassification of 

other hospitals into the county. 

Once we limited the dataset to those 

county-to-county flows where hospital 

employees were commuting to a higher 

wage index area, we calculated the outmigration percentage for resident 

counties. To calculate the out-migration 

percentage, we calculated the total 

number of hospital employees in a 

resident county who were commuting to 

a higher wage area as a percentage of the 

total number of hospital employees 

residing in the resident county. For 

example, there are 100 hospital 

employees who live in County A (wage 

index 1.0). Of those 100 employees, 50 

commute to County B (wage index 1.10), 

20 commute to County C (wage index 

1.05), and 30 work within County A. 

Because 70 out of 100 people commute 

to higher wage areas (assuming County 

C also qualifies as a higher wage area), 

County A’s out-migration percentage is 

equal to 70 percent.

To implement section 

1886(d)(13)(B)(ii) of the Act, we are 

proposing that the out-migration 

threshold to qualify for this adjustment 

would be the statutory minimum of 10 

percent. We believe that this threshold 

provides an opportunity for a reasonable 

number of hospitals that would not have 

recourse to the normal reclassification 

process to receive an appropriate 

adjustment to their wage index. We 

welcome comments on this proposed 

threshold. 

As noted previously, section 

1886(d)(13)(B)(i) of the Act directs the 

Secretary to establish a threshold 

percentage difference between the 

county’s wage index and the weighted 

average wage indexes of the higher wage 

index areas to which hospital 

28268 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

employees commute. However, unlike 

the threshold for the level of outmigration, the statute does not designate 

a minimum level for this threshold. 

Because of the nature of the adjustment 

provided under this provision, we are 

proposing to establish that the 

minimum difference in the wage 

indexes between the resident county 

and the work county can be any 

percentage greater than zero. We are 

proposing this threshold because the 

wage index increment for hospitals in 

qualifying counties under the statutory 

formula is a function of the differences 

between that county’s wage index and 

the wage indices of the areas into which 

resident hospital workers of that county 

are commuting. In those cases where 

that difference is very small, the 

adjustment to the wage index will also 

be very small. (See the discussion of the 

statutory formula in section III.H.3.e.(3) 

of this preamble.) Therefore, we believe 

that a threshold of anything greater than 

zero is justifiable and consistent with 

the purposes of this provision. 

Our analysis indicates that 224 

counties qualify under these proposed 

criteria. There are 411 hospitals located 

in these qualifying counties. Hospitals 

located in qualifying counties are 

identified in Table 4J in the Addendum 

to this proposed rule. 

(3) The Adjustment 

Hospitals located in the qualifying 

counties identified in Table 4J in the 

Addendum to this proposed rule that 

have not already been reclassified for 

purposes of the wage index would 

receive the wage index adjustment 

listed in the table. This increase is equal 

to the percentage of the hospital 

employees residing in the qualifying 

county who are employed in any higher 

wage area, multiplied by the sum of: the 

products, for each higher wage index 

area, of the difference between the wage 

index for such higher wage index area 

and the wage index of the qualifying 

county, and the percentage of hospital 

employees residing in the qualifying 

county who are employed in any higher 

wage index area who are employed in 

such higher wage index area. This 

increase in wage index is depicted using 

the following equation:

Adjustment = A * S[(B ¥ C) * (D/E)]

A is the percentage of hospital 

employees residing in a qualifying 

county who are employed in any higher 

wage index area. B represents the wage 

index of the higher wage index area. C 

represents the wage index of the 

qualifying resident county. D represents 

the number of hospital employees 

residing in the qualifying county 

involved who are employed in such 

higher wage index area. E represents the 

total number of hospital employees 

residing in qualifying county who are 

employed in any higher wage index 

area. 

For example, County A is identified 

as a qualifying county. As illustrated 

before, if 100 hospital employees live in 

County A (wage index = 1.00), 50 

commute to County B (wage index = 

1.10), 20 commute to County C (wage 

index = 1.05); and 30 commute within 

County A, the out-migration percentage 

is equal to 70 percent. 

The adjustment for hospitals in 

County A would be:

= .70 * (((1.10 ¥ 1.00)*(50/70)) + ((1.05 

¥ 1.00)*(20/70))) 

= .70 * ((.10 * .714) + (.05 * .285)) 

= .70 * (0.0714 + 0.01428) 

= .70 * (0.0856) 

= 0.05998

So, hospitals in County A could 

receive a new wage index of 1.05998, 

instead of 1.000. 

The proposed adjustments calculated 

for qualifying hospitals are listed in 

Table 4J in the Addendum to this 

proposed rule. These proposed 

adjustments are effective for each 

county for a period of 3 fiscal years 

beginning with discharges occurring on 

or after October 1, 2004. The commuting 

adjustments for each county will remain 

static for the 3-year period, after which 

the county’s status as a qualifying 

county and the adjustment will be 

recalculated. 

(4) Automatic Adjustments 

Section 1886(d)(13)(A) of the Act 

allows the Secretary to establish the 

process for receiving this increase in 

wage index through application or 

otherwise. Listed in Table 4J in the 

Addendum to this proposed rule are the 

counties and corresponding hospitals 

that qualify for an increase in wage 

index through our proposed 

implementation of the section. We are 

proposing that all hospitals located in 

qualifying counties will automatically 

receive the increase in wage index, 

unless the hospital has already been 

reclassified to another geographic area 

for purposes of the wage index amount 

(including reclassifications under 

section 508 of Pub. L. 108–173). This 

commuting wage index adjustment will 

be effective for the county for a period 

of 3 fiscal years, FY 2005 through FY 

2007. As discussed previously, yearly 

changes in the wage indices associated 

with areas could result in changes in the 

out-migration percentage for a given 

county. Irrespective of these changes, a 

county will not lose its status as a 

qualifying county due to wage index 

changes during the 3-year period, and 

counties will receive the same wage 

index increase for those 3 years. 

However, a county that qualifies in FY 

2005 may no longer qualify in FY 2008, 

or it may qualify but receive a different 

adjustment level. 

We encourage comments on the 

automatic application of such a wage 

index adjustment, and whether an 

application process should be 

developed under which individual 

hospitals would have to apply in order 

to receive the adjustment. We note that, 

given the short timeframe before 

implementation of this provision on 

October 1, 2004, we believe that there is 

no practical alternative to providing for 

an automatic adjustment for FY 2005. 

However, one possibility is to employ 

an automatic adjustment process this 

year, and to replace the automatic 

process with an application process for 

future years. We invite comments on 

whether to establish the automatic 

process permanently, or to devise an 

application process for future years. We 

also invite comments on whether any 

application process should be the 

responsibility of the MGCRB or some 

other entity. 

Hospitals receiving this wage index 

increase under section 1886(d)(13)(F) of 

the Act are not eligible for 

reclassification under section 1886(d)(8) 

or section 1886(d)(10) of the Act. As 

previously noted, the wage index 

increase is effective for 3 years, unless 

a hospital elects to waive the 

application of the wage index 

adjustment. Hospitals that wish to 

waive the application of this wage index 

adjustment must notify CMS within 45 

days of the publication of this proposed 

rule. Waiver notifications should be sent 

to the following address: Centers for 

Medicare & Medicaid Services, Center 

for Medicare Management, Attention: 

Wage Index Adjustment Waivers, 

Division of Acute Care, C4–08–06, 7500 

Security Boulevard, Baltimore, MD 

21244–1850. However, consistent with 

§ 412.273, hospitals that have been 

reclassified by the MGCRB are 

permitted to withdraw their 

applications within 45 days of the 

publication of this proposed rule in the 

Federal Register. Hospitals that have 

been reclassified by the MGCRB 

(including reclassifications under 

section 508 of the MMA) may terminate 

an existing 3-year reclassification within 

45 days of the publication of this 

proposed rule in order to receive the 

wage index adjustment under this 

provision. Hospitals that are eligible for 

this adjustment and that withdraw their 

application for reclassification will then 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28269

automatically receive the wage index 

adjustment listed in Table 4J in the 

Addendum of this proposed rule. The 

request for withdrawal of an application 

for reclassification or termination of an 

existing 3-year reclassification that 

would be effective in FY 2005 must be 

received by the MGCRB within 45 days 

of the publication of this proposed rule. 

Hospitals should carefully review the 

wage index adjustment that they would 

receive under this provision (as listed in 

Table 2 in the Addendum to this 

proposed rule) in comparison with the 

wage index that they would receive 

under MGCRB reclassification (Table 9 

in the Addendum to this proposed rule). 

4. Proposed FY 2005 Reclassifications 

The proposed wage index values for 

FY 2005 (except those for hospitals 

receiving wage index adjustments under 

section 505 of Pub. L. 108–173) are 

shown in Tables 4A, 4B, 4C, and 4F in 

the Addendum to this proposed rule. 

Hospitals that are redesignated will be 

required to use the wage index values 

shown in Table 4C. Areas in Table 4C 

may have more than one wage index 

value because the wage index value for 

a redesignated urban or rural hospital 

cannot be reduced below the wage 

index value for the rural areas of the 

State in which the hospital is located. 

Therefore, those areas with more than 

one wage index shown have hospitals 

from more than one State reclassified 

into them, and the rural wage index for 

a State in which at least one hospital is 

physically located is higher than the 

wage index for the area to which the 

hospital is reclassified.

Tables 3A and 3B in the Addendum 

to this proposed rule list the 3-year 

average hourly wage for each labor 

market area before the redesignation of 

hospitals, based on FYs 1999, 2000, and 

2001 cost reporting periods. Table 3A 

lists these data for urban areas and 

Table 3B lists these data for rural areas. 

In addition, Table 2 in the Addendum 

to this proposed rule includes the 

adjusted average hourly wage for each 

hospital from the FY 1999 and FY 2000 

cost reporting periods, as well as the FY 

2001 period used to calculate the 

proposed FY 2005 wage index. The 3-

year averages are calculated by dividing 

the sum of the dollars (adjusted to a 

common reporting period using the 

method described previously) across all 

3 years, by the sum of the hours. If a 

hospital is missing data for any of the 

previous years, its average hourly wage 

for the 3-year period is calculated based 

on the data available during that period. 

At the time this proposed wage index 

was constructed, the MGCRB had 

completed its review of FY 2005 

reclassification requests. We are 

including in the Addendum of this 

proposed rule Table 9A, which shows 

hospitals that have been reclassified 

under either section 1886(d)(8) or 

section 1886(d)(10)(D) of the Act. This 

table includes 400 hospitals reclassified 

for FY 2005 by the MGCRB (for wage 

index purposes), as well as hospitals 

that were reclassified for the wage index 

in either FY 2003 53 or FY 2004 102 and 

are, therefore, in either the second or 

third year of their 3-year 

reclassification. This table also includes 

hospitals located in urban areas that 

have been redesignated rural in 

accordance with section 1886(d)(8)(E) of 

the Act (17). In addition, it includes 

rural hospitals redesignated to urban 

areas under section 1886(d)(8)(B) of the 

Act for purposes of the wage index (98). 

Under § 412.273, hospitals that have 

been reclassified by the MGCRB are 

permitted to withdraw their 

applications within 45 days of the 

publication of this proposed rule. The 

request for withdrawal of an application 

for reclassification or termination of an 

existing 3-year reclassification that 

would be effective in FY 2004 must be 

received by the MGCRB within 45 days 

of the publication of this proposed rule. 

If a hospital elects to withdraw its wage 

index application after the MGCRB has 

issued its decision but prior to the above 

date, it may later cancel its withdrawal 

in a subsequent year and request the 

MGCRB to reinstate its wage index 

reclassification for the remaining fiscal 

year(s) of the 3-year period 

(§ 412.273(b)(2)(i)). The request to 

cancel a prior withdrawal must be made 

in writing to the MGCRB no later than 

the deadline for submitting 

reclassification applications for the 

following fiscal year (§ 412.273(d)). For 

further information about withdrawing, 

terminating, or canceling a previous 

withdrawal or termination of a 3-year 

reclassification for wage index 

purposes, we refer the reader to 

§ 412.273, as well as the August 1, 2002 

IPPS final rule (67 FR 50065) and the 

August 1, 2001 IPPS final rule (66 FR 

39887). 

Any changes to the wage index that 

result from withdrawals of requests for 

reclassification, wage index corrections, 

appeals, and the Administrator’s review 

process will be incorporated into the 

wage index values published in the final 

rule following this proposed rule. 

Therefore, the final wage indexes will 

likely be different from those published 

in this proposed rule, and in some 

cases, they may be quite different. 

Although, as described above, the 

statute provides that a reclassified rural 

hospital may not have a lower wage 

index after reclassification than before, 

there is not similar protection for urban 

hospitals. Therefore, hospitals should 

carefully evaluate the impacts of their 

reclassifications prior to the deadline for 

withdrawing from an approved 

reclassification. 

Applications for FY 2006 

reclassifications are due to the MGCRB 

by September 1, 2004. We note that this 

is also the deadline for canceling a 

previous wage index reclassification 

withdrawal or termination under 

§ 412.273(d). Applications and other 

information about MCGRB 

reclassifications may be obtained, 

beginning in mid-July 2004, via the 

CMS Internet Web site at: http://

cms.hhs.gov/providers/prrb/

mgcinfo.asp, or by calling the MCGRB at 

(410) 786–1174. The mailing address of 

the MGCRB is: 2520 Lord Baltimore 

Drive, Suite L, Baltimore, MD 21244–

2670. 

I. Process for Requests for Wage Index 

Data Corrections 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Wage Data Corrections’’ at the 

beginning of your comment.] 

1. Worksheet S–3 Wage Data 

In the August 1, 2003 final rule (68 FR 

27194), we revised the process and 

timetable for application for 

development of the wage index, 

beginning with the FY 2005 wage index. 

The preliminary and unaudited 

Worksheet S–3 wage data file was made 

available on October 8, 2003 through the 

Internet on CMS’s Web site at: http://

cms.hhs.gov/providers/hipps/

ippswage.asp. In a memorandum dated 

October 10, 2003, we instructed all 

Medicare fiscal intermediaries to inform 

the IPPS hospitals they service of the 

availability of the wage data file and the 

process and timeframe for requesting 

revisions (including the specific 

deadlines listed below). We also 

instructed the fiscal intermediaries to 

advise hospitals that these data are also 

made available directly through their 

representative hospital organizations. 

If a hospital wished to request a 

change to its data as shown in that wage 

data file, the hospital was to submit 

corrections along with complete, 

detailed supporting documentation to 

its intermediary by November 24, 2003. 

Hospitals were notified of this deadline 

and of all other possible deadlines and 

requirements, including the requirement 

to review and verify their data as posted 

on the preliminary wage data file on the 

Internet, through the October 10, 2003 

memorandum referenced above. 

28270 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

The fiscal intermediaries notified the 

hospitals in early February of any 

changes to the wage data as a result of 

the desk reviews and the resolution of 

the hospitals’ early November change 

requests. The fiscal intermediaries also 

submitted the revised data to CMS in 

early February. CMS published the 

proposed wage index public use file that 

included hospitals’ revised wage data 

on February 27, 2004. In a 

memorandum also dated March 1, 2004, 

we instructed fiscal intermediaries to 

notify all hospitals regarding the 

availability of the proposed wage index 

public use file and the criteria and 

process for requesting corrections and 

revisions to the wage data. Hospitals 

had until March 12, 2004 to submit 

requests to the fiscal intermediaries for 

reconsideration of adjustments made by 

the fiscal intermediaries as a result of 

the desk review, and to correct errors 

due to CMS’s or the intermediary’s 

mishandling of the wage data. Hospitals 

were also required to submit sufficient 

documentation to support their 

requests. 

After reviewing requested changes 

submitted by hospitals, fiscal 

intermediaries are to submit additional 

revisions resulting from the hospitals’

reconsideration requests by April 16, 

2004. The deadline for hospitals to 

request CMS intervention in cases 

where the hospital disagrees with the 

fiscal intermediary’s policy 

interpretations is April 23, 2004. 

Hospitals should also examine Table 

2 in the Addendum to this proposed 

rule. Table 2 contains each hospital’s 

adjusted average hourly wage used to 

construct the wage index values for the 

past 3 years, including the FY 2001 data 

used to construct the proposed FY 2005 

wage index. We note that the hospital 

average hourly wages shown in Table 2 

only reflect changes made to a hospital’s 

data and transmitted to CMS by March 

15, 2004. 

We will release a final wage data file 

in early May to hospital associations 

and the public on the Internet at http:/

/www.cms.hhs.gov/providers/hipps/

ippswage.asp. The May 2004 public use 

file will be made available solely for the 

limited purpose of identifying any 

potential errors made by CMS or the 

fiscal intermediary in the entry of the 

final wage data that result from the 

correction process described above 

(revisions submitted to CMS by the 

fiscal intermediaries by April 16, 2004). 

If, after reviewing the May 2004 final 

file, a hospital believes that its wage 

data are incorrect due to a fiscal 

intermediary or CMS error in the entry 

or tabulation of the final wage data, it 

should send a letter to both its fiscal 

intermediary and CMS that outlines 

why the hospital believes an error exists 

and provide all supporting information, 

including relevant dates (for example, 

when it first became aware of the error).

CMS and the fiscal intermediaries 

must receive these requests no later than 

June 11, 2004. Requests mailed to CMS 

should be sent to: Centers for Medicare 

& Medicaid Services, Center for 

Medicare Management, Attention: Wage 

Index Team, Division of Acute Care, 

C4–08–06, 7500 Security Boulevard, 

Baltimore, MD 21244–1850. Each 

request also must be sent to the 

hospital’s fiscal intermediary. The 

intermediary will review requests upon 

receipt and contact CMS immediately to 

discuss its findings. 

At this point in the process, that is, 

after the release of the May 2004 wage 

index file, changes to the hospital wage 

data will only be made in those very 

limited situations involving an error by 

the intermediary or CMS that the 

hospital could not have known about 

before its review of the final wage data 

file. Specifically, neither the 

intermediary nor CMS will approve the 

following types of requests: 

• Requests for wage data corrections 

that were submitted too late to be 

included in the data transmitted to CMS 

by fiscal intermediaries on or before 

April 16, 2004. 

• Requests for correction of errors 

that were not, but could have been, 

identified during the hospital’s review 

of the March 1, 2004 wage data file (or 

the March 8 occupational mix data; see 

section III.H.2. of this preamble). 

• Requests to revisit factual 

determinations or policy interpretations 

made by the intermediary or CMS 

during the wage index data correction 

process. 

2. Occupational Mix Data 

The process and criteria for requesting 

corrections to the occupational mix 

survey data are described in section 

III.C.1 of this preamble. As stated in that 

section, from April 16, 2004 forward, 

the process for correcting the final 

occupational mix survey data is the 

same, and on the same schedule, as 

described above for correcting the final 

Worksheet S–3 wage data. 

3. All FY 2005 Wage Index Data 

Verified corrections to the wage index 

received timely (that is, by June 11, 

2004) will be incorporated into the final 

wage index in the final rule to be 

published by August 1, 2004, and to be 

effective October 1, 2004. 

We created the processes described 

above to resolve all substantive wage 

index data correction disputes before we 

finalize the wage and occupational mix 

data for the FY 2005 payment rates. 

Accordingly, hospitals that did not meet 

the procedural deadlines set forth above 

will not be afforded a later opportunity 

to submit wage data corrections or to 

dispute the intermediary’s decision with 

respect to requested changes. 

Specifically, our policy is that hospitals 

that do not meet the procedural 

deadlines set forth above will not be 

permitted to challenge later, before the 

Provider Reimbursement Review Board, 

the failure of CMS to make a requested 

data revision (See W. A. Foote Memorial 

Hospital v. Shalala, No. 99–CV–75202–

DT (E.D. Mich. 2001), also Palisades 

General Hospital v. Thompson, No. 99–

1230 (D.D.C. 2003)). 

Again, we believe the wage index data 

correction process described above 

provides hospitals with sufficient 

opportunity to bring errors in their wage 

data to the fiscal intermediaries’

attention. Moreover, because hospitals 

will have access to the final wage index 

data by early May 2004, they will have 

the opportunity to detect any data entry 

or tabulation errors made by the fiscal 

intermediary or CMS before the 

development and publication of the FY 

2005 wage index by August 1, 2004, and 

the implementation of the FY 2005 wage 

index on October 1, 2004. If hospitals 

avail themselves of this opportunity, the 

wage index implemented on October 1 

should be accurate. Nevertheless, in the 

event that errors are identified after that 

date, we retain the right to make 

midyear changes to the wage index 

under very limited circumstances. 

Specifically, in accordance with 

§ 412.63(x)(2) of our existing 

regulations, we make midyear 

corrections to the wage index for an area 

only if a hospital can show: (1) That the 

intermediary or CMS made an error in 

tabulating its data; and (2) that the 

requesting hospital could not have 

known about the error or did not have 

an opportunity to correct the error, 

before the beginning of FY 2005 (that is, 

by the June 11, 2004 deadline). This 

provision is not available to a hospital 

seeking to revise another hospital’s data 

that may be affecting the requesting 

hospital’s wage index. As described 

earlier, the requesting hospital must 

show that it could not have known 

about the error, or that it did not have 

the opportunity to correct the error, 

before the publication of the FY 2005 

wage index. As indicated earlier, since 

a hospital will have the opportunity to 

verify its data, and the fiscal 

intermediary will notify the hospital of 

any changes, we do not expect that 

midyear corrections will be necessary. 

However, if the correction of a data error 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28271

changes the wage index value for an 

area, the revised wage index value will 

be effective prospectively from the date 

the correction is approved.

J. Proposed Revision of the LaborRelated Share of the Wage Index 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Labor-Related Share’’ at the beginning 

of your comment.] 

Section 1886(d)(3)(E) of the Act 

directs the Secretary to adjust the 

proportion of the national prospective 

payment system base payment rates that 

are attributable to wages and wagerelated costs by a factor that reflects the 

relative differences in labor costs among 

geographic areas. It also directs the 

Secretary to estimate from time to time 

the proportion of hospital costs that are 

labor-related: ‘‘The Secretary shall 

adjust the proportion (as estimated by 

the Secretary from time to time) of 

hospitals’ costs which are attributable to 

wages and wage-related costs of the 

DRG prospective payment rates.***’’

The portion of hospital costs 

attributable to wages and wage-related 

costs is referred to as the labor-related 

share. The labor-related share of the 

prospective payment rate is adjusted by 

an index of relative labor costs, which 

is referred to as the wage index. In the 

past, we have defined the labor-related 

share for prospective payment acute 

care hospitals as the national average 

proportion of operating costs that are 

related to, influenced by, or vary with 

the local labor market. The labor-related 

share for the acute care hospital 

inpatient prospective payment system 

has been calculated as the sum of the 

weights for wages and salaries, fringe 

benefits, nonmedical professional fees, 

contract labor, postage, and laborintensive services. 

In its June 2001 Report to Congress, 

MedPAC recommended that the 

Secretary ‘‘should reevaluate current 

assumptions about the proportion of 

providers’’ costs that reflect resources 

purchased in local and national 

markets.’’ (Report to the Congress: 

Medicare in Rural America, 

Recommendation 4D, page 80.) MedPAC 

recommended that the labor-related 

share include the weights for wages and 

salaries, fringe benefits, contract labor, 

and other labor-related costs for locally 

purchased inputs only. MedPAC noted 

that this would likely result in a lower 

labor share, which would decrease the 

amount of the national base payment 

amount adjusted by the wage index. As 

a result, hospitals located in low-wage 

markets (those with a wages index less 

than 1.0) would receive higher 

payments, while those located in highwage labor markets would receive lower 

payments. 

In our proposed and final regulations 

updating the IPPS for FY 2003 (67 FR 

31404, May 9, 2002 and 67 FR 49982, 

August 1, 2002), we discussed the 

methodology that we have used to 

determine the labor-related share. We 

noted that, at that time, the results of 

employing that methodology suggested 

that an increase in the labor-related 

share (from 71.066 percent to 72.495 

percent) was warranted. However, we 

decided not to propose such an increase 

in the labor-related share until we 

conducted further research to determine 

whether a different methodology for 

determining the labor-related share 

should be adopted. The labor-related 

share has thus remained 71.066 percent. 

Section 403 of Pub. L. 108–173 

amended sections 1886(d)(3)(E) of the 

Act to provide that the Secretary must 

employ 62 percent as the labor-related 

share unless this ‘‘would result in lower 

payments than would otherwise be 

made.’’ However, this provision of Pub. 

L. 108–173 did not the change the legal 

requirement that the Secretary estimate 

‘‘from time to time’’ the proportion of 

hospitals’’ costs that are ‘‘attributable to 

wages and wage-related costs.’’ In fact, 

section 404 of Pub. L. 108–173 requires 

the Secretary to develop a frequency for 

revising the weights used in the hospital 

market basket, including the labor share, 

to reflect the most current data more 

frequently than once every 5 years. This 

reflects Congressional intent that 

hospitals will receive payment based on 

a 62-percent labor share, or the labor 

share estimated from time to time by the 

Secretary, whichever is higher. 

Section 404 further requires us to 

include in the final IPPS rule for FY 

2006 an explanation of the reasons for, 

and options considered, in determining 

the frequency for revising the weights 

used in the hospital market basket, 

including the labor share. In the 

meantime, we are also continuing our 

research into the assumptions employed 

in calculating the labor-related share. 

Our research involves analyzing the 

compensation share separately for urban 

and rural hospitals, using regression 

analysis to determine the proportion of 

costs influenced by the area wage index, 

and exploring alternative methodologies 

to determine whether all or only a 

portion of professional fees and 

nonlabor intensive services should be 

considered labor-related. We will 

present our analysis and conclusions 

regarding the frequency and 

methodology for updating the labor 

share in the proposed and final rules for 

FY 2006. 

In section IV.F. of this preamble, we 

discuss our proposal to incorporate the 

requirements of section 403 of Pub. L. 

108–173 in a new § 412.64(h) of the 

regulations. 

As discussed above, the Secretary had 

determined, prior to the enactment of 

Pub. L. 108–173, that the labor-related 

share would be 71.066 percent. As a 

result, application of a 62-percent labor 

share would result in lower payments 

for any hospital with a wage index 

greater than 1.0. Therefore, we are 

modifying our payment system software 

for FY 2005 to apply wage indexes 

greater than 1.0 to 71.066 percent of the 

standardized amount, and to apply wage 

indexes less than or equal to 1.0 to 62 

percent of the standardized amount. 

IV. Other Decisions and Proposed 

Changes to the IPPS for Operating Costs 

and GME Costs 

A. Postacute Care Transfer Payment 

Policy (§ 412.4) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Postacute Care Transfers’’ at the 

beginning of your document.] 

1. Background 

Existing regulations at § 412.4(a) 

define discharges under the IPPS as 

situations in which a patient is formally 

released from an acute care hospital or 

dies in the hospital. Section 412.4(b) 

defines transfers from one acute care 

hospital to another, and § 412.4(c) 

defines transfers to certain postacute 

care providers. Our policy provides that, 

in transfer situations, full payment is 

made to the final discharging hospital 

and each transferring hospital is paid a 

per diem rate for each day of the stay, 

not to exceed the full DRG payment that 

would have been made if the patient 

had been discharged without being 

transferred. 

The per diem rate paid to a 

transferring hospital is calculated by 

dividing the full DRG payment by the 

geometric mean length of stay for the 

DRG. Based on an analysis that showed 

that the first day of hospitalization is the 

most expensive (60 FR 45804), our 

policy provides for payment that is 

double the per diem amount for the first 

day (§ 412.4(f)(1)). Transfer cases are 

also eligible for outlier payments. The 

outlier threshold for transfer cases is 

equal to the fixed-loss outlier threshold 

for nontransfer cases, divided by the 

geometric mean length of stay for the 

DRG, multiplied by the length of stay for 

the case, plus one day. 

Medicare adopted its IPPS transfer 

policy because, if the program were to 

pay the full DRG payment regardless of 

28272 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

whether a patient is transferred or 

discharged, there would be a strong 

incentive for hospitals to transfer 

patients to another IPPS hospital early 

in the patients’ stay in order to 

minimize costs while still receiving the 

full DRG payment. The transfer policy 

adjusts the payments to approximate the 

reduced costs of transfer cases. 

Previously, when a patient chose to 

depart from a hospital against the 

medical opinion of treating physicians, 

the case was treated as a left against 

medical advice (LAMA) discharge and 

coded as discharge status ‘‘07-Left 

Against Medical Advice (LAMA)’’ on 

the inpatient billing claim form. 

Because, by definition, LAMA 

discharges were assumed not to involve 

the active participation of the hospital 

administration, our policy had been to 

treat LAMA cases as discharges. This 

policy applied even if the patient was 

admitted to another hospital on the date 

of the LAMA discharge. Consequently, 

until FY 2004, we made a full DRG 

payment for any discharge coded as a 

LAMA case. 

Last year, in response to an Office of 

Inspector General (OIG) report issued in 

March 2002 (A–06–99–00045), we 

became concerned that some hospitals 

were incorrectly coding transfers as 

LAMA cases. Therefore, in the August 1, 

2003 final IPPS rule (68 FR 45405), we 

expanded our definition of a transfer 

under § 412.4(b) to include all patients 

who are admitted to another IPPS 

hospital on the same day that the 

patient is discharged from an IPPS 

hospital, unless the first (transferring) 

hospital can demonstrate that the 

patient’s treatment was completed at the 

time of discharge from that hospital. In 

other words, unless the same-day 

readmission is to treat a condition that 

is unrelated to the condition treated 

during the original admission (for 

example, the beneficiary is in a car 

accident later that day), any situation 

where the beneficiary is admitted to 

another IPPS hospital on the same date 

that he or she is discharged from an 

IPPS hospital would be considered a 

transfer, even if the patient left against 

medical advice from the first hospital.

Hospitals are now allowed to report a 

patient as left against medical advice 

only if they have no knowledge that the 

patient has been admitted to another 

hospital on the same day. If a hospital 

later leans that a patient was admitted 

to another facility on the same day, the 

hospital must resubmit the claim and 

correctly code the patient as a 

‘‘transfer.’’ This change prohibits 

payment of two claims for the same 

patient on the same day. Therefore, if a 

hospital believes a claim has been 

wrongly denied, the original discharging 

hospital must resubmit the claim with 

documentation that the discharge was 

appropriate and unrelated to the 

subsequent same-day admission. 

2. Proposed Changes to DRGs Subject to 

the Postacute Care Transfer Policy 

(§§ 412.4(c) and (d)) 

Under section 1886(d)(5)(J) of the Act, 

a ‘‘qualified discharge’’ from one of 10 

DRGs selected by the Secretary to a 

postacute care provider is treated as a 

transfer case beginning with discharges 

on or after October 1, 1998. This section 

required the Secretary to define and pay 

as transfers all cases assigned to one of 

10 DRGs selected by the Secretary, if the 

individuals are discharged to one of the 

following postacute care settings: 

• A hospital or hospital unit that is 

not a subsection 1886(d) hospital. 

(Section 1886(d)(1)(B) of the Act 

identifies the hospitals and hospital 

units that are excluded from the term 

‘‘subsection (d) hospital’’ as psychiatric 

hospitals and units, rehabilitation 

hospitals and units, children’s hospitals, 

long-term care hospitals, and cancer 

hospitals.) 

• A SNF (as defined at section 

1819(a) of the Act). 

• Home health services provided by a 

home health agency, if the services 

relate to the condition or diagnosis for 

which the individual received inpatient 

hospital services, and if the home health 

services are provided within an 

appropriate period (as determined by 

the Secretary). 

In the July 31, 1998 IPPS final rule (63 

FR 40975 through 40976), we specified 

the appropriate time period during 

which we would consider a discharge to 

postacute home health services to 

constitute a transfer as within 3 days 

after the date of discharge. In addition, 

in the July 31, 1998 final rule, we did 

not include in the definition of 

postacute care transfer cases patients 

transferred to a swing-bed for skilled 

nursing care (63 FR 40977). 

Section 1886(d)(5)(J) of the Act 

directed the Secretary to select 10 DRGs 

based upon a high volume of discharges 

to postacute care and a disproportionate 

use of postacute care services. As 

discussed in the July 31, 1998 final rule, 

these 10 DRGs were selected in 1998 

based on the MedPAR data from FY 

1996. Using that information, we 

identified and selected the first 20 DRGs 

that had the largest proportion of 

discharges to postacute care (and at least 

14,000 such transfer cases). In order to 

select 10 DRGs from the 20 DRGs on our 

list, we considered the volume and 

percentage of discharges to postacute 

care that occurred before the mean 

length of stay and whether the 

discharges occurring early in the stay 

were more likely to receive postacute 

care. We identified 10 DRGs to be 

subject to the postacute care transfer 

rule starting in FY 1999. 

Section 1886(d)(5)(J)(iv) of the Act 

authorizes the Secretary to expand the 

postacute care transfer policy beyond 10 

DRGs for FY 2001 or subsequent fiscal 

years. In the FY 2004 IPPS final rule (68 

FR 45412), we expanded the postacute 

care transfer policy to include 

additional DRGs. We established the 

following criteria that a DRG must meet, 

for both of the 2 most recent years for 

which data are available, in order to be 

added to the postacute care transfer 

policy: 

• At least 14,000 postacute care 

transfer cases; 

• At least 10 percent of its postacute 

care transfers occurring before the 

geometric mean length of stay; 

• A geometric mean length of stay of 

at least 3 days; and 

• If a DRG is not already included in 

the policy, a decline in its geometric 

mean length of stay during the most 

recent 5 year period of at least 7 percent. 

We identified 21 new DRGs that met 

these criteria. We also determined that 

one DRG from the original group of 10 

DRGs (DRG 263) no longer met the 

volume criterion of 14,000 transfer 

cases. Therefore, we removed DRGs 263 

and 264 (DRG 264 is paired with DRG 

263) from the policy and the postacute 

care transfer policy to include payments 

for transfer cases in the new 21 DRGs, 

effective October 1, 2003. As a result, a 

total of 29 DRGs were subject to the 

postacute care transfer policy in FY 

2004. 

We indicated in last year’s rule that 

we would review and update this list 

periodically to assess whether 

additional DRGs should be added or 

existing DRGs should be removed. We 

have analyzed the available data from 

the FY 2003 MedPAR file. For the 2 

most recent years of available data (FY 

2002 and FY 2003), we have found that 

no additional DRGs qualify under the 

four criteria set forth in the IPPS final 

rule for FY 2004. We have also analyzed 

the DRGs included under the policy for 

FY 2004 to determine if they still meet 

the criteria to remain under the policy. 

In addition, we have analyzed the 

special circumstances arising from a 

change to one of the DRGs included 

under the policy in FY 2004. 

As discussed in section II.B.9. of this 

preamble, we are proposing to eliminate 

DRG 483. The cases that would have 

been placed into DRG 483 would now 

be split into two proposed new DRGs, 

541 (Tracheostomy With Mechanical 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28273

Ventilation 96+ Hours or Principal 

Diagnosis Except Face, Mouth and Neck 

Diagnoses With Major O.R. Procedure) 

and 542 (Tracheostomy with 

Mechanical Ventilation 96+ Hours or 

Principal Diagnosis Except Face, Mouth 

and Neck Diagnoses Without Major O.R. 

Procedure). This would be done by 

subdividing the cases in the existing 

DRG 483 based on the presence of a 

major O.R. procedure, in addition to the 

tracheotomy code that is currently 

required to be assigned to this DRG. 

Therefore, if the patient’s case involves 

a major O.R. procedure (a procedure 

whose code is included on the list that 

is assigned to DRG 468 (Extensive O.R. 

Procedure Unrelated to Principal 

Diagnosis), except for tracheostomy 

codes 31.21 and 31.29), the case would 

be assigned to the proposed new DRG 

541. If the patient does not have an 

additional major O.R. procedure (that is, 

there is only a tracheotomy code 

assigned to the case), the case would be 

assigned to proposed new DRG 542. 

Neither of the proposed new DRGs 

541 and 542 would have enough cases 

to meet the first criterion for inclusion 

in the postacute care transfer policy. 

DRG 483 had 44,788 total cases with 

15,520 transfer cases in FY 2002, and 

44,618 total cases with 20,034 transfer 

cases in FY 2003. These cases would 

now split between proposed new DRG 

541 (20,812 total cases) and proposed 

new DRG 542 (23,387 total cases). As a 

result, neither of these proposed new 

DRGs would meet the existing threshold 

of 14,000 transfer cases (6,779 projected 

transfer cases for proposed DRG 541, 

and 8,570 projected transfer cases for 

proposed DRG 542). Nevertheless, we 

believe the cases that would now be 

incorporated into these two proposed 

new DRGs remain appropriate 

candidates for application of the 

postacute care transfer policy. The 

proposed new DRGs 541 and 542 would 

contain the same cases that were 

included in existing DRG 483, which 

qualified for inclusion in the postacute 

care transfer policy. Furthermore, many 

of the cases in the proposed new DRGs 

541 and 542 would continue to require 

postacute care. 

When we analyzed the cases that we 

projected would fall into the two 

proposed new DRGs in the FY 2003 

GROUPER Version 22.0, we found that 

a high proportion of cases in both the 

proposed new DRGs are projected to be 

transfer cases: 33 percent of all cases in 

proposed DRG 541, and 37 percent in 

proposed DRG 542. In addition, a high 

proportion of the transfer cases in these 

proposed new DRGs, based on the data 

from cases in DRG 483 in the FY 2003 

MedPAR file, are projected to fall into 

the short-stay transfer category: 41 

percent of transfer cases in proposed 

new DRG 541 and 42 percent of transfer 

cases in proposed new DRG 542 are 

projected to occur before the geometric 

mean length of stay for these proposed 

new DRGs. By contrast, among all DRGs, 

approximately 15 percent of transfer 

cases are short-stay transfer cases. The 

percentage of transfer cases that are 

short-stay cases that would be in both 

proposed new DRGs 541 and 542 would 

be more than 2 standard deviations 

above the mean percentage of short-stay 

cases across all DRGs. (Two standard 

deviations above the mean across all 

DRGs is 37 percent for FY 2005.) 

Therefore, we believe this proposed 

subdivision of DRG 483 should not 

change the original application of the 

postacute care transfer policy to the 

cases once included in that DRG. We do 

not believe that it is appropriate for 

these cases to fall outside the scope of 

this policy solely because of the 

proposed revision to the DRG structure 

that was driven by policy reasons 

unrelated to the postacute care transfer 

provision. The high proportion of 

transfer cases among all cases that 

would be assigned to these proposed 

new DRGs, along with the unusually 

high proportion of short-stay cases 

among those transfer cases, provide 

solid reasons for considering whether 

alternate criteria might better address 

the special circumstances that can arise 

from changes in DRGs unrelated to the 

postacute care transfer policy.

Therefore, we are proposing alternate 

criteria to be applied in cases where 

DRGs do not satisfy the existing criteria, 

for discharges occurring on or after 

October 1, 2004. These proposed new 

criteria are designed to address 

situations such as those posed by the 

proposed split of DRG 483, where there 

remain substantial grounds for inclusion 

of cases within the postacute care 

transfer policy, although one or more of 

the original criteria may no longer 

apply. Therefore, we are proposing to 

examine DRGs for inclusion within the 

policy against two sets of criteria, first, 

the original four criteria, and then, the 

proposed alternate set of criteria. DRGs 

that do not satisfy the first set of criteria 

would still be included if they satisfy 

the second set. Specifically, a DRG 

would still be subject to the postacute 

care transfer policy under the 

alternative set of criteria if, for the 2 

most recent years for which data are 

available, there are at least 5,000 total 

transfers to postacute care among the 

cases included in the DRG, and if, 

among the cases included in the DRG, 

the percentage of transfer cases that are 

short-stay transfer cases is at least 2 

standard deviations above the geometric 

mean length of stay across all DRGs 

(which is 37 percent for FY 2005). We 

would also continue to require a 

geometric mean length of stay of at least 

3 days among the cases included in the 

DRG. Finally, we would require that, if 

a DRG is not already included in the 

policy, it either experienced a decline in 

its geometric mean length of stay during 

the most recent 5 year period of at least 

7 percent or contains only cases that 

would have been included in a DRG to 

which the policy applied in the prior 

year. 

Under these proposed alternate 

criteria, DRGs 430, 541, and 542 would 

qualify for inclusion in the postacute 

care transfer policy. DRG 430 meets the 

proposed threshold of 5,000 transfer 

cases in both of the 2 most recent years, 

with 11,973 transfer cases and 46 

percent short-stay transfer cases in FY 

2002, and 12,202 transfer cases and 38 

percent short-stay transfers in FY 2003. 

In addition, DRG 430 experienced a 7-

percent decline in length of stay from 

FY 2000 to FY 2004. DRG 430 also had 

a 5.8 day average length of stay during 

those years. As discussed above, the 

cases that would be included in 

proposed new DRGs 541 and 542 

contain a sufficient number of transfers 

to meet the first alternate criterion, and 

among the cases that would be included 

in these DRGs, the percentages of 

transfer cases occurring before the 

geometric mean length of stay for these 

two proposed new DRGs exceed 2 

standard deviations above the geometric 

mean length of stay for all DRGs. The 

average lengths of stay for the cases that 

would be included in proposed new 

DRGs 541 and 542 are 37.7 days and 

28.9 days, respectively. 

We are proposing to revise the 

regulations governing the postacute 

transfer policy to include the alternative 

criteria described above (§ 412.4(d)). We 

are also proposing that DRG 430 and 

proposed new DRGs 541 and 542 would 

be included in the postacute care 

transfer policy. 

We would also like to call attention to 

the data concerning DRG 263, which 

was subject to the postacute care 

transfer policy until FY 2004. We 

removed DRG 263 from the postacute 

care transfer policy last year because it 

did not have the minimum number of 

cases (14,000) transferred to postacute 

care (13,588 transfer cases in FY 2002, 

with more than 50 percent of transfer 

cases being short-stay transfers). The FY 

2003 MedPAR data show that there 

were 15,602 transfer cases in the DRG in 

FY 2003, of which 46 percent were 

short-stay transfers. Because we 

28274 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

removed the DRG from the postacute 

care transfer policy in FY 2004, it must 

meet all criteria to be included under 

the policy in subsequent fiscal years. 

Because the geometric mean length of 

stay for DRG 263 shows only a 6-percent 

decrease since 1999, DRG 263 does not 

qualify to be added to the policy for FY 

2005 under the existing criterion that 

was included in last year’s rule. 

However, DRG 263 would qualify under 

the volume threshold and percent of 

short-stay transfer cases under the 

proposed new alternate criteria in this 

proposed rule, but it still does not meet 

the proposed required decline in length 

of stay to qualify to be added to the 

policy in FY 2005. 

The table below displays the 31 DRGs 

that we are proposing to include in the 

postacute care transfer policy, effective 

for discharges occurring on or after 

October 1, 2004. These 31 DRGs include 

the effects of dropping DRG 483, which 

we are proposing to delete from the DRG 

list, and adding the two proposed new 

DRGs 541 and 542 that would now 

incorporate the cases formerly assigned 

to DRG 483. They also include the 

proposed addition of DRG 430 to the 

list. These DRGs meet the criteria 

specified above during both of the 2 

most recent years available prior to the 

publication of the FY 2005 IPPS 

proposed rule (FYs 2002 and 2003), as 

well as their paired-DRG if one of the 

DRGs meeting the criteria includes a 

CC/no-CC split.

DRG DRG title. 

12 .................................................... Degenerative Nervous System Disorders. 

14 .................................................... Intracranial Hemorrhage and Stroke with Infarction. 

24 .................................................... Seizure and Headache Age > 17 With CC. 

25 .................................................... Seizure and Headache Age > 17 Without CC. 

88 .................................................... Chronic Obstructive Pulmonary Disease. 

89 .................................................... Simple Pneumonia and Pleurisy Age > 17 With CC. 

90 .................................................... Simple Pneumonia and Pleurisy Age > 17 Without CC. 

113 .................................................. Amputation for Circulatory System Disorders Except Upper Limb and Toe. 

121 .................................................. Circulatory Disorders With AMI and Major Complication, Discharged Alive. 

122 .................................................. Circulatory Disorders With AMI Without Major Complications Discharged Alive. 

127 .................................................. Heart Failure & Shock. 

130 .................................................. Peripheral Vascular Disorders With CC. 

131 .................................................. Peripheral Vascular Disorders Without CC. 

209 .................................................. Major Joint and Limb Reattachment Procedures of Lower Extremity. 

210 .................................................. Hip and Femur Procedures Except Major Joint Age > 17 With CC. 

211 .................................................. Hip and Femur Procedures Except Major Joint Age > 17 Without CC. 

236 .................................................. Fractures of Hip and Pelvis. 

239 .................................................. Pathological Fractures and Musculoskeletal and Connective Tissue Malignancy. 

277 .................................................. Cellulitis Age > 17 With CC. 

278 .................................................. Cellulitis Age > 17 Without CC. 

294 .................................................. Diabetes Age > 35. 

296 .................................................. Nutritional and Miscellaneous Metabolic Disorders Age > 17 With CC. 

297 .................................................. Nutritional and Miscellaneous Metabolic Disorders Age > 17 Without CC. 

320 .................................................. Kidney and Urinary Tract Infections Age > 17 With CC. 

321 .................................................. Kidney and Urinary Tract Infections Age > 17 Without CC. 

395 .................................................. Red Blood Cell Disorders Age > 17. 

429 .................................................. Organic Disturbances and Mental Retardation. 

430 .................................................. Psychoses. 

468 .................................................. Extensive O.R. Procedure Unrelated to Principal Diagnosis. 

Proposed 541 .................................. Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck 

Diagnoses With Major O.R. Procedure. 

Proposed 542 .................................. Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck 

Diagnoses Without Major O.R. Procedure. 

Section 1886(d)(5)(J)(i) of the Act 

recognizes that, in some cases, a 

substantial portion of the costs of care 

is incurred in the early days of the 

inpatient stay. Similar to the policy for 

transfers between two acute care 

hospitals, the transferring hospital in a 

postacute care transfer receives twice 

the per diem rate for the first day of 

treatment and the per diem rate for each 

following day of the stay before the 

transfer, up to the full DRG payment. 

However, three of the DRGs subject to 

the postacute care transfer policy 

exhibit a disproportionate share of costs 

very early in the hospital stay in 

postacute care transfer situations. For 

these DRGs, hospitals receive 50 percent 

of the full DRG payment plus the single 

per diem (rather than double the per 

diem) for the first day of the stay and 

50 percent of the per diem for the 

remaining days of the stay, up to the full 

DRG payment. 

In previous years, we determined that 

DRGs 209 and 211 met this cost 

threshold and qualified to receive this 

special payment methodology. Because 

DRG 210 is paired with DRG 211, we 

include payment for cases in that DRG 

for the same reason we include paired 

DRGs in the postacute care transfer 

policy (to eliminate any incentive to 

code incorrectly in order to receive 

higher payment for those cases). The FY 

2003 MedPAR data show that DRGs 209 

and 211 continue to have charges on the 

first day of the stay that are higher than 

50 percent of the average charges in the 

DRGs. Therefore, we are proposing to 

continue the special payment 

methodology for DRGs 209, 210, and 

211 for FY 2005. 

B. Payments for Inpatient Care in 

Providers That Change Classification 

Status During a Patient Stay 

(§§ 412.2(b)(3) and 412.521(e)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Crossover Patients’’ at the beginning of 

your document.] 

Different Medicare payment systems 

apply to care furnished to Medicare 

beneficiaries during inpatient stays, 

depending on the classification status of 

the provider. For example, payments 

made to an acute care hospital for 

inpatient services are made under the 

IPPS on a per discharge basis, using a 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28275

DRG classification system. Payments to 

LTCHs that are classified under section 

1886(d)(1)(B)(iv)(I) and (II) of the Act are 

made under the LTCH PPS on a per 

discharge basis, using a LTC–DRG 

classification system. The main 

difference between a LTCH that is 

classified under section 

1886(d)(1)(B)(iv)(I) of the Act and an 

acute care hospital is the average length 

of stay at the hospital. Specifically, 

section 1886(d)(1)(B)(iv)(I) hospitals 

must have a greater than 25 day average 

Medicare inpatient length of stay. 

(section 1886(d)(1)(B)(iv)(II) hospitals, 

among other requirements, must have a 

greater than 20 day Medicare and nonMedicare inpatient length of stay to 

qualify as LTCHs.) Situations occur in 

hospital inpatient care settings in which 

a Medicare provider changes its 

Medicare payment classification status 

during a patient’s stay, for example, an 

acute care hospital changes to a LTCH. 

(We refer to the patients in these 

situations as ‘‘crossover patients.’’) 

Questions have arisen as to how 

Medicare should pay for an inpatient 

stay in a hospital when the hospital 

changes its classification status during 

the course of the beneficiary’s single 

hospital stay. Specifically, how should 

Medicare pay for an inpatient stay when 

a patient is in an acute care hospital and 

the acute care hospital changes to a 

LTCH during the beneficiary’s 

hospitalization. In other words, how 

does Medicare pay for the first part of 

the stay that occurs before the change in 

classification status and how does 

Medicare pay for the part of the stay that 

occurs after the change in classification 

status. Although the situation may occur 

in other settings, this payment issue is 

most prevalent for services furnished to 

crossover patients in a newly 

established LTCH. This is because all 

new LTCHs begin as other provider 

types, generally as acute care hospitals, 

and generally after at least 5 months of 

experience showing an average length of 

stay in excess of 25 days, and are then 

paid as LTCHs. Therefore, as explained 

further below, we are currently 

addressing this problem in the context 

of crossover patients discharged from 

LTCHs. 

To address payment for inpatient care 

for such crossover patients, we had 

issued instructions for hospital billing 

purposes (paper-based manual, Hospital 

Manual, HCFA Pub. 10, section 404, 

which has been replaced by the 

Medicare Claims Processing Manual, 

Pub. 100–4, Chapter 3, section 100.4.1) 

that were in effect prior to the 

implementation of the PPS for LTCHs 

(that is, prior to October 1, 2002). The 

manual instructed hospitals as follows: 

‘‘The hospital must submit a discharge 

bill with the old provider number and 

an admission notice with the new 

provider number. The date of discharge 

and the date of admission are the same 

date, which is the first day of the new 

fiscal period. All subsequent billings are 

submitted under the new provider 

number.’’

It is important to note that at the time 

this manual provision was written, 

IPPS-excluded hospitals, including 

LTCHs, were reimbursed under the 

reasonable cost-based (TEFRA) payment 

system, not under other PPSs that pay 

on a per discharge basis. Thus, under 

the manual instructions, if a patient was 

in an acute care hospital and the 

hospital converted to a LTCH during the 

patient’s stay, Medicare would then 

make payment for what was, in reality, 

only one episode of care as if it were 

two episodes. Specifically, the days of 

the stay while the facility was certified 

as an acute care hospital generate a full 

DRG payment under the IPPS; and the 

services provided from the time the 

facility was certified as a LTCH were 

reimbursed under the reasonable costbased payment system. We are 

proposing to revisit the issue of 

Medicare payment for crossover patients 

now that there has been a fundamental 

change in the Medicare payment system 

for LTCHs. LTCHs are now paid under 

the discharge-based LTCH PPS which 

was effective for LTCHs for cost 

reporting periods beginning on or after 

October 1, 2002.

Under the LTCH PPS for crossover 

patients, under the existing manual 

instructions, Medicare makes a full DRG 

payment under the IPPS to the acute 

care hospital for the ‘‘first portion’’ of 

the inpatient stay, and when the acute 

care hospital converts to an LTCH, 

Medicare makes a second PPS payment 

under the LTCH PPS for the ‘‘second 

portion’’ of the stay. We believe that this 

results in excessive Medicare payments 

and results in the inappropriate use of 

the Medicare Trust Fund. We believe 

the results described above are contrary 

to a basic premise of a PPS, which is 

that a single discharge-based PPS 

payment is adequate and appropriate 

reimbursement for the entire bundle of 

services that a hospital provides during 

the course of a patient’s stay. We believe 

the care provided prior to and after the 

conversion to a LTCH is really one 

bundle of services provided during a 

single hospitalization. The ‘‘discharge’’

from the acute care hospital and 

‘‘admission’’ to the LTCH has only been 

a ‘‘paper discharge’’ that was triggered 

solely by a change in the Medicare 

payment classification of the hospital 

treating the inpatient. In the instant 

case, the beneficiary, by mere 

coincidence, just happened to be an 

inpatient of the acute care hospital 

when it changed status—the acute care 

hospital does not drastically change the 

medical care it provides a beneficiary 

during his or her single hospitalization 

because its classification as an acute 

care hospital ends on one day and 

changes to LTCH classification on the 

next day, nor does the ‘‘discharge’’

signify the completion of a discrete 

period of care. Under the existing 

manual instructions, the hospital is 

receiving not one payment, but two PPS 

payments for a bundle of services that, 

in fact, was furnished during a single 

inpatient hospital stay and should have 

been adequately and properly 

reimbursed by a single PPS payment. 

In addition, presently, if the DRG 

assigned to the ‘‘discharge’’ from the 

acute care hospital for a crossover 

patient falls within one of the DRGs 

covered by the postacute care transfer 

policy at § 412.4(c), the provider will 

receive a payment under the postacute 

care transfer policy as if the patient, 

who in fact has not moved, was 

transferred to a postacute care provider. 

Payment under the postacute care 

transfer policy is triggered when a 

discharge bill with the old provider 

number and an admission notice with 

the new provider number is submitted 

and processed by the Medicare standard 

bill processing systems as a transfer. 

Because the patient is, in reality, at the 

‘‘same’’ facility (an acute care hospital 

that had met the LTCH designation 

criteria) and is in one episode of care, 

we do not believe the application of the 

existing transfer policy is the 

appropriate methodology for dealing 

with this situation. Under the postacute 

care transfer policy, the payment to the 

transferring hospital is only affected if 

the patient is discharged prior to the day 

before the geometric mean length of stay 

for the DRG. Where the patient is 

discharged by the day before the 

geometric mean length of stay, the 

‘‘discharging’’ acute care hospital will 

receive the equivalent of the full IPPS 

DRG payment and the LTCH hospital 

will also receive a full LTCH PPS 

payment. 

Accordingly, we are proposing to 

revise our regulations to provide for 

only one Medicare program payment for 

LTCH crossover patients. After 

reconsidering the current payment 

policy for crossover patients, we do not 

believe it is appropriate to make two 

separate discharge-based payments 

under Medicare for what, in reality, is 

a single inpatient hospital stay. In fact, 

when a patient under existing policy is 

deemed discharged from an acute care 

28276 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

hospital that has met the LTCH 

designation requirements during the 

patient’s stay and has now changed its 

classification to LTCH status, we believe 

the patient has been receiving one 

consistent course of treatment 

throughout his or her stay. An acute 

care hospital that has become a LTCH 

prior to being paid as a LTCH has been 

admitting and treating patients with the 

multi-cormorbidities that result in 

longer hospital stays that are 

characteristic of the patient census at a 

LTCH, as required by § 412.23(e). 

Invariably, at the time the acute care 

hospital becomes a LTCH, there will be 

patients who were admitted to the acute 

care hospital and who remain in the 

facility when it converts to a LTCH and 

are ultimately discharged from the 

LTCH. An acute care hospital’s change 

in payment classification status to a 

LTCH at the start of its first cost 

reporting period should have no impact 

on the course of treatment that is 

already underway for the patient in 

what is now a LTCH and not an acute 

care hospital. Accordingly, we believe 

that only one Medicare payment should 

be made for the entire stay. 

Therefore, we are proposing a more 

appropriate payment policy for 

crossover patients that would provide 

one Medicare payment for what has 

been treated, for payment purposes 

under Medicare, to be two stays, but is, 

in reality, one continuous and 

uninterrupted period of inpatient 

hospital care. Consistent with the 

authority granted to the Secretary in 

both section 123 of the BBRA (Pub. L. 

106–113) and section 307 of the BIPA 

(Pub. L. 106–554) to develop a LTCH 

PPS DRG-based system, we are 

proposing, effective for a patient stay in 

which a patient is in an acute care 

hospital and that hospital is designated 

as a LTCH on or after October 1, 2004, 

to make only one LTCH payment based 

on the PPS of the facility that is actually 

discharging the patient. Under this 

approach, we would include those days 

of care and costs incurred by the 

hospital for the crossover patient before 

the facility met the LTCH status criteria, 

in determining payments to the LTCH 

for that patient under the LTCH PPS. 

Under this proposed policy, for 

example, if an acute care hospital 

admits a patient on December 28 and 

the hospital converts to a LTCH on 

January 1 when its cost reporting period 

begins, and the patient is physically 

discharged from the LTCH on February 

5, a single Medicare payment would be 

made for this entire stay (December 28 

through February 5), and payment 

would be made to the LTCH based on 

the LTCH–DRGs under the LTCH PPS. 

We are proposing to count the crossover 

patient’s entire hospitalization (that is, 

all days and costs of the patient stay in 

the facility that occurred prior to and 

after conversion) in determining the 

applicable payment under the LTCH 

PPS. This proposed provision would 

also count all the days of the inpatient 

stay, that is, prior to and after 

conversion, as LTCH days for purposes 

of determining whether the facility 

continues to meet the average length of 

stay regulations for LTCH. We believe 

that this proposed policy is consistent 

with the discretionary authority granted 

to the Secretary at section 

1886(d)(1)(B)(iv)(I) of the Act for 

determining average lengths of stay for 

LTCHs. Specifically, section 

1886(d)(1)(B)(iv)(I) of the Act provides 

that a LTCH is a hospital that has an 

average length of stay (as determined by 

the Secretary) of greater than 25 days. 

Thus, the Secretary determines how a 

LTCH’s average length of stay is to be 

determined. 

We are also using the broad 

discretionary authority provided in 

section 1871 of the Act to not count the 

days of the patient’s stay in the acute 

care hospital prior to conversion as 

acute care days. In addition, we are 

using the broad authority in section 

1871 of the Act to not pay for the days 

of the patient’s stay in the acute care 

hospital as acute days. Section 1871 of 

the Act authorizes the Secretary to 

promulgate regulations that are 

necessary to carry on the administration 

of the Medicare program. 

In addition, we believe counting all 

days for the patient’s stay is consistent 

with the policy at recently revised 

§ 412.23(e)(3), which provides that if a 

LTCH patient is admitted in one cost 

reporting period and discharged in a 

second cost reporting period, all of the 

days of the patient’s stay, even those 

from prior fiscal years, are counted in 

the cost reporting period in which the 

patient is discharged. In the example of 

a crossover patient cited above, 

including the days in December may 

result in a full LTC–DRG payment rather 

than the lower payment under the shortstay outlier policy (§ 412.529) based on 

the length of the stay. (Under the shortstay policy, we would adjust (lower) the 

Federal prospective payment if the 

payment is for a length of stay that is up 

to and including five-sixths of the 

geometric average length of stay for the 

LTC–DRG assigned to the case.) 

Accordingly, we are proposing to add 

a new § 412.2(b)(3), applicable to acute 

care hospitals, and a new § 412.521(e), 

applicable to LTCHs, that specify that 

Medicare would make only one LTCH 

PPS payment for a crossover patient to 

the LTCH that is discharging the patient 

based on the entire stay, both prior to 

the change to LTCH status and after the 

change. Medicare considers all days of 

the patient stay in the facility (days 

prior to and after conversion to the 

LTCH status) to be a single episode of 

LTCH care. Medicare will not make any 

payment under 42 CFR Part 412, 

Subpart H for any part of the 

hospitalization. In addition, for 

purposes of determining the beneficiary 

LTCH length of stay, the days prior to 

and after conversion to LTCH status are 

included. In order to implement the 

proposed policy, we would create 

systems adjustments that would enable 

the single claim generated by the 

discharging provider to include patient 

days under the initial provider number. 

We note that our proposal to define and 

pay for crossover patient stays as one 

episode of care based on the PPS of the 

discharging provider is consistent with 

existing regulations that establish that 

payment under the per discharge PPS 

constitutes ‘‘payment in full’’ for acute 

care hospitals at § 412.2(b) under the 

IPPS and for LTCHs, at § 412.521(b) 

under the LTCH PPS.

In this proposal, we have specifically 

addressed only the situation of a 

crossover patient that was in an acute 

care hospital that meets the 

requirements to be paid as a LTCH. 

However, we believe the policy may be 

equally applicable to other crossover 

situations. For example, an acute care 

hospital may meet the requirements to 

be paid as an inpatient rehabilitation 

facility (under the IRF PPS) and there 

could be rehabilitation patients who 

were admitted to the acute care hospital 

who were not discharged from the 

hospital until after the facility was 

designated as an IRF. At this time, we 

are not proposing to make a change to 

the existing payment policy in 

situations other than the LTCH 

crossover patient. We have only 

addressed the LTCH crossover patient 

because, based on the statutory and 

regulatory qualifying criteria, every 

LTCH must first be certified as a 

hospital before it can meet the LTCH 

criteria. However, the same is not true 

for other hospital certifications. For 

example, an inpatient rehabilitation 

hospital can be certified as an IRF 

without first being certified and paid as 

an acute care hospital for inpatient 

services. However, we intend to revisit 

the existing crossover policy as it affects 

other crossover situations in the future. 

We also welcome comments on how 

Medicare payment policy should 

address those situations. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28277

C. Geographic Reclassifications—

Definitions of Urban and Rural Areas 

(§ 412.63(b) and Proposed New 

§ 412.64(b)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Urban and Rural Areas Definitions’’ at 

the beginning of your document.] 

As discussed in section III.B. and 

III.G. of this proposed rule, we are 

proposing how we would implement 

OMB’s revised standards for defining 

MSAs and our plan to use the New 

England MSAs established by OMB. 

These proposals relate to our policies in 

established regulations under 

§ 412.63(b) governing geographic 

classification of hospitals for purposes 

of the wage index and the standardized 

amounts in determining the Federal 

rates for inpatient operating costs. In 

this section, we define the geographic 

areas for purposes of reclassification of 

hospitals. Therefore, consistent with our 

proposed changes to reflect the new 

definitions of CBSAs based on the 

Census 2000 data, effective for 

discharges occurring on or after October 

1, 2004, we are proposing to revise 

§ 412.63(b) and add a new § 412.64(b) to 

reflect the existing geographic 

classification definitions. 

D. Equalization of Urban and Rural 

Standardized Amounts (§ 412.63(c) and 

Proposed New § 412.64) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Standardized Amounts’’ at the 

beginning of your document.] 

Sections 1886(d)(2)(D) and (d)(3) of 

the Act previously required the 

Secretary to compute two average 

standardized amounts for discharges 

occurring in a fiscal year: one for 

hospitals located in large urban areas 

and one for hospitals located in other 

areas. In addition, under sections 

1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the 

Act, the average standardized amount 

per discharge was determined for 

hospitals located in large urban and 

other areas in Puerto Rico. In 

accordance with section 1886(b)(3)(B)(i) 

of the Act, prior to April 1, 2003, the 

large urban average standardized 

amount was 1.6 percent higher than the 

other area average standardized amount. 

The two standardized amounts are 

currently equal, as discussed in the 

following paragraphs. 

Section 402(b) of Pub. L. 108–7 

required that, effective for discharges 

occurring on or after April 1, 2003, and 

before October 1, 2003, the Federal rate 

for all IPPS hospitals would be based on 

the large urban standardized amount. 

Subsequently, Pub. L. 108–89 extended 

section 402(b) of Pub. L. 108–7 to 

discharges occurring on or after October 

1, 2003, and before April 1, 2004. 

Finally, section 401(a) of Pub. L. 108–

173 required that, beginning with FY 

2004 and thereafter, an equal 

standardized amount is to be computed 

for all hospitals at the level computed 

for large urban hospitals during FY 

2003, updated by the applicable 

percentage update. This provision in 

effect makes permanent the equalization 

of the standardized amounts at the level 

of the previous standardized amount for 

large urban hospitals. Section 401(c) 

also equalizes the Puerto Rico-specific 

urban and other area rates. 

Accordingly, we are providing in this 

proposed rule for a single national 

standardized amount and a single 

Puerto Rico standardized amount for FY 

2005 and thereafter, as discussed in 

detail in the Addendum to this 

proposed rule. We are proposing to 

revise existing § 412.63 that includes the 

provisions related to computation of the 

standardized amount to make it 

applicable to fiscal years through FY 

2004 and to establish a new § 412.64 

that will include the provisions 

applicable to the single national 

standardized amount applicable for FY 

2005 and subsequent years. Similarly, 

we are proposing to revise existing 

§ 412.210 for Puerto Rico to make it 

applicable to fiscal years through FY 

2004 and adding a new § 412.211 for FY 

2005 and subsequent years for the 

Puerto Rico standardized amount. We 

are also proposing to make conforming 

changes to various other sections of the 

regulations to reflect the single 

standardized amount for the States and 

for Puerto Rico. 

E. Reporting of Hospital Quality Data 

for Annual Hospital Payment Update 

(Proposed New § 412.64(d)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Hospital Quality Data’’ at the 

beginning of your document.] 

1. Background 

Section 501(b) of Pub. L. 108–173 

amended section 1886(b)(3)(B) of the 

Act to add a new subclause (vii) to 

revise the mechanism used to update 

the standardized amount for payment 

for inpatient hospital operating costs. 

Specifically, the amendment provides 

that the update percentage increase (also 

known as the market basket update) for 

each of FYs 2005 through 2007 will be 

reduced by 0.4 percentage point for any 

‘‘subsection (d) hospital’’ that does not 

submit data on a set of 10 quality 

indicators established by the Secretary 

as of November 1, 2003. (The statutory 

reference to a ‘‘subsection (d) hospital’’

restricts the application of this 

provision to hospitals paid under the 

IPPS. Therefore, the provision does not 

apply to hospitals and hospital units 

excluded from the IPPS, nor to 

payments to hospitals under other 

systems such as the outpatient hospital 

PPS.) The statute also provides that any 

reduction will apply only to the fiscal 

year involved, and will not be taken into 

account in computing the applicable 

percentage increase for a subsequent 

fiscal year. This measure establishes an 

incentive for IPPS hospitals to submit 

data on the quality measures established 

by the Secretary. 

We are proposing to implement the 

provisions of section 501(b) as described 

at the CMS Web site: http://

www.cms.hhs.gov/quality/hospital.

At a press conference on December 

12, 2002, the Secretary of HHS 

announced a series of steps that HHS 

and its collaborators are taking for 

public reporting of hospital quality 

information. These collaborators 

include the American Hospital 

Association, the Federation of American 

Hospitals, the Association of American 

Medical Colleges, the Joint Commission 

on Accreditation of Healthcare 

Organizations, the National Quality 

Forum, the American Medical 

Association, the Consumer-Purchaser 

Disclosure Project, the American 

Association of Retired Persons, the 

American Federation of Labor-Congress 

of Industrial Organizations and the 

Agency for Healthcare Research and 

Quality, as well as CMS, QIOs, and 

others. 

CMS began the public reporting 

initiative in July 2003 with a 

professional Web site that provides data 

intended for health care professionals. 

The professional Web site will be 

followed by a consumer Web site. The 

information on the consumer Web site 

will include the data from the 

professional Web site but in an easy-touse format for consumers. It is intended 

to be an important tool for individuals 

to use in making decisions about their 

health care coverage. This information 

will assist beneficiaries by providing 

comparison information for consumers 

who need to select a hospital. It will 

also serve as a way of encouraging 

hospitals to adopt quality improvement 

strategies. 

The 10 measures that were employed 

in this voluntary initiative as of 

November 1, 2003, are:

• Heart Attack (Acute Myocardial 

Infarction) 

Was aspirin given to the patient upon 

arrival to the hospital? 

28278 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

Was aspirin prescribed when the 

patient was discharged? 

Was a beta-blocker given to the 

patient upon arrival to the hospital? 

Was a beta-blocker prescribed when 

the patient was discharged? 

Was an ACE inhibitor given for the 

patient with heart failure? 

• Heart Failure 

Did the patient get an assessment of 

his or her heart function? 

Was an ACE inhibitor given to the 

patient? 

• Pneumonia 

Was an antibiotic given to the patient 

in a timely way? 

Had a patient received a 

pneumococcal vaccination? 

Was the patient’s oxygen level 

assessed?

These measures have been endorsed 

by the National Quality Forum (NQF) 

and are a subset of the same measures 

currently collected for the JCAHO by its 

accredited hospitals. Many hospitals are 

currently participating in the 

Department’s National Voluntary 

Hospital Reporting Initiative (NVHRI) 

and are already submitting data to the 

QIO Clinical Warehouse. The Secretary 

adopted collection of data on these 10 

quality measures in order to: (1) Provide 

useful and valid information about 

hospital quality to the public; (2) 

provide hospitals a sense of 

predictability about public reporting 

expectations; (3) begin to standardize 

data and data collection mechanisms; 

and (4) foster hospital quality 

improvement. 

2. Requirements for Hospital Reporting 

of Quality Data 

For the hospital reporting initiative 

for the Medicare annual payment 

update provided for under section 

501(b) of Public Law 108–173, we will 

be collecting data on the 10 clinical 

measures for all patients. We refer to 

this program as the Reporting Hospital 

Quality Data for the Annual Payment 

Update (RHQDAPU) program to 

distinguish it from the continuing 

NVHRI. 

The procedures for participating in 

the RHQDAPU can be found on the 

QualityNet Exchange at the Web site: 

http://qnetexchange.org in the 

‘‘Reporting Hospital Quality Data for 

Annual Payment Update Reference 

Checklist.’’ This checklist also contains 

all of the forms to be completed by 

hospitals participating in the program. 

In order to participate in the RHQDAPU, 

hospitals must follow the following 

steps: 

• The hospital must identify a 

QualityNet Exchange administrator who 

follows the registration process and 

submits the information through the 

QIO. This must be done, regardless of 

whether the hospital uses a vendor for 

transmission of data. 

• All participants must first register 

with the QualityNet Exchange, 

regardless of the method used for data 

submission. If a hospital is currently 

participating in the voluntary reporting 

initiative, re-registration on the 

QualityNet Exchange is unnecessary. 

However, registration includes 

completion of the RHQDAPU Notice of 

Participation form. All hospitals must 

send the RHQDAPU form to their QIOs 

no later than August 1, 2004, for the FY 

2005 update. 

• The hospital must collect data for 

all 10 measures and submit the data to 

the QIO Clinical Warehouse either using 

the CMS Abstraction & Reporting Tool 

(CART), the JCAHO Oryx Core Measures 

Performance Measurement System 

(PMS), or another third-party vendor 

who has met the measurement 

specification requirements for data 

transmission to the QualityNet 

Exchange. The QIO Clinical Warehouse 

will submit the data to CMS on behalf 

of the hospitals. The submission will be 

done through QualityNet Exchange, 

which is a secure site that voluntarily 

meets or exceeds all current Health 

Insurance Portability and 

Accountability Act (HIPAA) 

requirements, while maintaining QIO 

confidentiality as required by law. The 

information in the Clinical Warehouse 

is considered QIO data, and therefore, is 

subject to the stringent confidentiality 

regulations in 42 CFR part 480. 

Hospitals must begin the submission 

of data under the provisions of section 

1886(b)(3)(B)(vii)(II) of the Act, as added 

by section 501(b) of Public Law 108–

173, by July 1, 2004. Because section 

501(b) of Public Law 108–173 grants a 

30-day grace period for submission of 

data with respect to FY 2005, we are 

proposing to allow hospitals until 

August 1, 2004, for completed 

submissions to be successfully accepted 

into the QIO Clinical Warehouse. 

Hospitals would be required to submit 

data for the first calendar quarter of 

2004 discharges in order to meet the 

requirements for the FY 2005 payment 

update. Hospitals participating in the 

NVHRI that submit the required 10 

measures for the fourth calendar quarter 

of 2003 by the CMS-established 

deadline of May 15, 2004, and that meet 

the registration requirements for the 

market basket update, would be given 

until August 15, 2004, to submit data for 

the first calendar quarter of 2004. There 

will be no chart-audit validation criteria 

in place for the FY 2005 payment 

update beyond the CART edits, 

currently in force, applied to data 

entering the QIO Clinical Warehouse. In 

addition, we will estimate the minimum 

number of discharges anticipated to be 

submitted by a hospital using Medicare 

administrative data. We will use this 

anticipated minimum number to 

establish our expectations of the number 

of cases for each hospital. Hospitals that 

do not treat a condition or have very few 

discharges would not be penalized and 

would receive the full annual payment 

update if they submit all the data they 

do possess. New hospitals should begin 

collecting and reporting data 

immediately and complete the 

registration requirements for the market 

basket update. The same standards that 

are applied to established hospitals will 

be applied to new hospitals when 

determining the expected number of 

discharges for the calendar quarters 

covered for each fiscal year. 

The annual payment updates will be 

based on the successful submission of 

data to CMS via the QIO Clinical 

Warehouse by the established deadlines. 

Hospitals may withdraw from 

RHQDAPU at any time up to August 1, 

2004. Hospitals withdrawing from the 

program will not receive the full market 

basket update. Instead, they will receive 

a 0.4 percentage point reduction in the 

update. By law, a hospital’s actions each 

fiscal year will not affect its update in 

a subsequent fiscal year. Therefore, a 

hospital must meet the requirements for 

RHQDAPU each fiscal year the program 

is in effect, and failure to receive the full 

update in one fiscal year will not affect 

its update in a succeeding fiscal year. 

3. Submission of Hospital Data for FYs 

2006 and 2007

For FYs 2006 and 2007, we will 

require hospitals to submit data 

quarterly, starting August 15, 2004. 

Eligibility for the full annual payment 

update will be based on the most recent 

four quarters of data. These data would 

be submitted on the same schedule for 

data transmission currently in force for 

CART data. That is, data must be 

submitted to the QIO Clinical 

warehouse no later than 15 calendar 

days after the fourth month following 

the end of the calendar quarter. This 

schedule is available at http://

www.qnetexchange.org. We will 

establish validation requirements for 

submitted data for FYs 2006 and 2007. 

Submissions would, at a minimum, 

need to be accurate, timely, and 

complete. That is—

• The hospital-submitted data must 

meet minimum levels of reliability 

through chart audit re-abstractions over 

all topics. At the data element level, 

there must be an 80 percent agreement 

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between the original abstraction and the 

re-abstraction using the CART tool. 

• The submitted data must be on 

schedule, pass all warehouse edits, and 

be successfully accepted into the 

warehouse. 

• Completeness of submitted data 

will be assessed to ensure the number 

of submitted cases corresponds to the 

number of bills submitted by the 

hospital to CMS. 

We are planning to publish the most 

recent 12 months of discharge data (4 

quarters) for all data accepted into the 

warehouse and passing all validation 

requirements. For FY 2005, we will 

publish as much data as we have 

available. Hospitals will have the 

opportunity to review the information 

prior to posting on the CMS Web site. 

However, there will be no opportunity 

to withhold the publication of the 

information. The preview will only be 

to correct obvious errors. 

4. Proposed Regulation Change 

We are proposing to establish a new 

§ 412.64(d)(2) to provide that, for FYs 

2005, 2006, and 2007, the applicable 

percentage change is reduced by 0.4 

percentage point in the case of any 

subsection (d) hospital that does not 

submit data to CMS on the 10 quality 

indicators established by the Secretary 

as of November 1, 2003. Any reduction 

will apply only to the fiscal year 

involved, and will not be taken into 

account in computing the applicable 

percentage increase for a subsequent 

fiscal year. We will be modifying our 

payment software to apply the correct 

updates to hospitals, depending on 

whether they submit the requisite data 

on the 10 quality indicators. We show 

the different standardized amounts that 

apply to hospitals that submit the 

requisite quality data, and to hospitals 

that do not, in the Addendum to this 

proposed rule.

F. Proposed Revision of the LaborRelated Share for the Hospital Wage 

Index (§ 412.64(h)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Labor-Related Share’’ at the beginning 

of your document.] 

As discussed in section III. of the 

preamble of this proposed rule, section 

1886(d)(3)(E) of the Act directs the 

Secretary to adjust the proportion of the 

national prospective payment system 

base payment rates that are attributable 

to wages and wage-related costs by a 

factor that reflects the relative 

differences in labor costs among 

geographic areas. It also directs the 

Secretary to estimate from time to time 

the proportion of hospital costs that are 

labor-related. The portion of hospital 

costs attributable to wages and wagerelated costs is referred to as the laborrelated share. The labor-related share of 

the prospective payment rate is adjusted 

by an index of relative labor costs, 

which is referred to as the wage index. 

In the past, we have defined the laborrelated share for prospective payment 

acute care hospitals as the national 

average proportion of operating costs 

that are related to, influenced by, or 

vary with the local labor market. The 

labor-related share for the acute care 

hospital inpatient prospective payment 

system has been calculated as the sum 

of the weights for wages and salaries, 

fringe benefits, nonmedical professional 

fees, contract labor, postage, and laborintensive services. For FY 2004, the 

labor share of the hospital wage index 

was established at 71.066 percent. 

Section 403 of Pub. L. 108–173 

amended section 1886(d)(3)(E) of the 

Act to provide that the Secretary must 

use 62 percent as the labor-related share 

unless application of this percentage 

‘‘would result in lower payments than 

would otherwise be made.’’ However, 

this provision of Pub. L. 108–173 did 

not change the legal requirement that 

the Secretary estimate ‘‘from time to 

time’’ the proportion of hospitals’ costs 

that are ‘‘attributable to wages and 

wage-related costs.’’ In fact, section 404 

of Pub. L. 108–173 requires the 

Secretary to develop a frequency for 

revising the weights used in the hospital 

market basket, including the labor share, 

to reflect the most current data more 

frequently than once every 5 years. 

Section 404 further requires us to 

include in the final IPPS rule for FY 

2006 an explanation of the reasons for, 

and options considered, in determining 

such frequency. 

Under section III. of this preamble, we 

discuss our proposed implementation of 

section 1886(d)(3)(E) of the Act, as 

amended by section 403, as it applies to 

the development of the proposed FY 

2005 wage index. In this section IV.F. of 

the preamble, we are proposing to 

incorporate the provisions of section 

403 of Pub. L. 108–173 under a new 

§ 412.64(h). Specifically, we are 

proposing to specify that CMS will 

adjust the proportion of the Federal rate 

for inpatient operating costs that are 

attributable to wages and labor-related 

costs for area differences in hospital 

wage levels by a factor (established by 

CMS based on survey data) reflecting 

the relative level of hospital wages and 

wage-related costs in the geographic 

area (that is, urban or rural area as 

determined the regulations) of the 

hospital compared to the national 

average level of hospital wages and 

wage-related costs. The wage index 

would continue to be updated annually. 

In addition, we are proposing to specify 

that CMS will determine the proportion 

of the Federal rate that is attributable to 

wages and labor-related costs from time 

to time, employing a methodology that 

is described in the annual regulation 

updating the system of payment for 

inpatient hospital operating costs. 

However, CMS would employ 62 

percent as the proportion of the rate that 

is adjusted for the relative level of 

hospital wages and wage-related costs, 

unless employing that percentage would 

result in lower payments for the 

hospital than employing the proportion 

determined under the methodology 

described in the preceding sentence. 

G. Wage Index Adjustment for 

Commuting Patterns of Hospital 

Employees (Proposed New § 412.64(i)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Out-Migration of Hospital Employees’’

at the beginning of your document.] 

As discussed in section III.G.2.e. of 

this preamble, section 505 of Pub. L. 

108–173 established new section 

1886(d)(13) of the Act. The new section 

1886(d)(13) requires that the Secretary 

establish a new process to make 

adjustments to the hospital wage index 

based on commuting patterns of 

hospital employees. The process 

provides for an increase in the wage 

index for hospitals located in certain 

counties that have a high percentage of 

hospital employees who reside in the 

county but work in a different area with 

a higher wage index. These adjustments 

to the wage index are effective for 3 

years beginning with discharges 

occurring on or after October 1, 2004. 

Adjustments under this provision are 

not subject to the budget neutrality 

requirements at section 1886(d)(3)(E) or 

section 1886(d)(8)(D) of the Act. 

Under section III.G.3.e of this 

preamble, we discuss the proposed 

implementation of the provisions of 

section 505 in developing the proposed 

FY 2005 wage index and the proposed 

applicable adjustments to that index. 

We are proposing in this section IV.G. 

of the preamble to incorporate the 

provisions of section 505 in the 

regulations by adding a new § 412.64(i). 

The Secretary is required to establish 

criteria to identify ‘‘qualifying 

counties,’’ and hospitals located in the 

qualifying counties are to receive an 

adjustment to their wage index. To 

implement this provision, we are 

proposing to use commuting data 

compiled by the U.S. Census Bureau 

based on a special tabulation of Census 

2000 journey-to-work data. This 

28280 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

information is gathered from responses 

to the Census long-form (sample) 

questions on where people worked. The 

resulting county-of-residence by countyof-work commuter flow file uses 108 

Industrial Structure codes, developed by 

the Bureau of Economic Analysis. Using 

these data, we are able to identify the 

total number of hospital workers who 

live in each county and the number of 

workers within that county who 

commute to hospitals in other counties. 

Section 1886(d)(13)(B)(i) of the Act 

directs the Secretary to establish a 

threshold percentage difference between 

the county’s wage index and a weighted 

wage index of the surrounding higher 

wage index areas that must be met in 

order for the county to qualify. We are 

proposing to establish this threshold at 

any percentage greater than zero, such 

that any increase in the wage index 

resulting from this provision that is 

greater than zero percent would be 

recognized. Section 1886(d)(13)(B)(ii) of 

the Act specifies that the Secretary is to 

establish the minimum out-migration 

threshold in order to qualify, which may 

not be less than 10 percent. We are 

proposing to establish the out-migration 

threshold at the minimum 10 percent. 

Section 1886(d)(13)(B)(iii) of the Act 

requires that the average hourly wage 

for all hospitals in the county must be 

equal to or exceed the average hourly 

wage for all hospitals in the labor 

market area. Section 1886(d)(13)(E) of 

the Act indicates this process may be 

based on the process used by the 

MGCRB. This section also gives the 

Secretary the authority to require 

hospitals to submit data necessary to 

implement this provision, or to use 

other data sources as available. To 

compute this requirement, we are 

proposing to determine the average of 

hospitals’ 3-year average hourly wage 

for all hospitals in a given county. We 

would compare this county average 

hourly wage to the 3-year average 

hourly wage for the labor market area 

where the county is located. We are 

proposing to use the 3-year average 

hourly wage because we believe it gives 

a better estimate for the wages paid by 

a given hospital over a period of time. 

This statutory requirement limits the 

number of eligible counties. 

Section 1886(d)(13)(A) of the Act 

allows the Secretary to establish the 

process through application or 

otherwise for this adjustment to the 

wage index. We are proposing not to use 

an application process. Rather, all 

hospitals located in qualifying counties 

would automatically receive the 

increase in wage index, unless the 

hospital has already been reclassified to 

another geographic area for purposes of 

wage index or standardized amount. 

This wage index increase would be 

effective for a period of 3 fiscal years, 

FY 2005 through FY 2007.

Hospitals receiving this wage index 

increase under section 1886(d)(13)(F) of 

the Act are not eligible for 

reclassification under section 1886(d)(8) 

or section 1886(d)(10) of the Act. 

Therefore, consistent with § 412.273, 

hospitals that have been reclassified by 

the MGCRB are permitted to withdraw 

their applications within 45 days of the 

publication of this proposed rule in the 

Federal Register. Similarly, hospitals 

may terminate an existing 3-year 

reclassification within 45 days of the 

publication of this proposed rule. 

Hospitals that withdraw their 

application for reclassification would 

then automatically receive the 

commuting wage index adjustment. The 

request for withdrawal of an application 

for reclassification or termination of an 

existing 3-year reclassification that 

would be effective in FY 2005 must be 

received by the MGCRB within 45 days 

of the publication of this proposed rule. 

H. Additional Payments for New 

Medical Services and Technology: 

Proposed Policy Changes (§§ 412.87 and 

412.88) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘New Technology Threshold’’ at the 

beginning of your document.] 

As discussed in section II.D. of this 

proposed rule, sections 1886(d)(5)(K) 

and (L) of the Act establish a process of 

identifying and ensuring adequate 

payment for new medical services and 

technologies under the IPPS, effective 

for discharges beginning on or after 

October 1, 2001. Section 

1886(d)(5)(K)(ii)(I) of the Act specifies 

that the process must apply to a new 

medical service or technology if, ‘‘based 

on the estimated costs incurred with 

respect to discharges involving such 

service or technology, the DRG 

prospective payment rate otherwise 

applicable to such discharges under this 

subsection is inadequate.’’ Section 

1886(d)(5)(K)(vi) of the Act specifies 

that a medical service or technology will 

be considered ‘‘new’’ if it meets criteria 

established by the Secretary after notice 

and opportunity for public comment. 

Sections 1886(d)(5)(K)(ii) through 

(d)(5)(K)(vi) of the Act further provide—

• For an additional payment for new 

medical services and technology in an 

amount beyond the DRG prospective 

payment system payment rate that 

adequately reflects the estimated 

average costs of the service or 

technology. 

• That the requirement for an 

additional payment for a new service or 

technology may be satisfied by means of 

a new technology group (described in 

section 1886(d)(5)(L) of the Act), an addon payment, a payment adjustment, or 

any other similar mechanism for 

increasing the amount otherwise 

payable with respect to a discharge. 

• For the collection of data relating to 

the cost of a new medical service or 

technology for not less than 2 years and 

no more than 3 years after an 

appropriate inpatient hospital services 

code is issued. The statute further 

provides that discharges involving new 

services or technology that occur after 

the collection of these data will be 

classified within a new or existing DRG 

group with a weighting factor derived 

from cost data collected for discharges 

occurring during such period. 

Section 412.87(b)(1) of our existing 

regulations provides that a new 

technology will be an appropriate 

candidate for an additional payment 

when it represents an advance in 

medical technology that substantially 

improves, relative to technologies 

previously available, the diagnosis or 

treatment of Medicare beneficiaries (see 

the September 7, 2001 final rule (66 FR 

46902)). Section 412.87(b)(3) provides 

that, to receive special payment 

treatment, new technologies meeting 

this clinical definition must be 

demonstrated to be inadequately paid 

otherwise under the DRG system. 

In the August 1, 2003 final IPPS rule, 

we revised the threshold amount for 

determining if payment for a new 

technology or medical service is 

inadequate, effective for FY 2005 and 

subsequent fiscal years (68 FR 45392). 

We lowered the previously established 

threshold of 1 standard deviation to 75 

percent of 1 standard deviation (based 

on the logarithmic values of the charges) 

beyond the geometric mean 

standardized charges for all cases in the 

DRG to which the new technology is 

assigned (or the case-weighted average 

of all relevant DRGs, if the new 

technology occurs in many different 

DRGs), transformed back to charges. 

Section 503(b) of Pub. L. 108–173 

amended section 1886(d)(5)(K)(ii)(I) of 

the Act to specify that in determining 

whether payments for a new technology 

or medical service are inadequate, the 

Secretary is to determine and apply a 

threshold amount that is the ‘‘lesser of 

75 percent of the standardized amount 

(increased to reflect the difference 

between cost and charges) or 75 percent 

of 1 standard deviation for the DRG 

involved.’’ As a result of enactment of 

section 503(b), we are proposing to 

revise our regulations at § 412.87(b)(3) 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28281

to incorporate the revised threshold 

amount. 

The report language accompanying 

section 533 of Pub. L. 106–554 indicated 

Congressional intent that the Secretary 

implement the new mechanism on a 

budget neutral basis (H.R. Conf. Rep. 

No. 106–1033, 106th Cong., 2nd Sess., at 

897 (2000)). Section 1886(d)(4)(C)(iii) of 

the Act requires that the adjustments to 

annual DRG classifications and relative 

weights must be made in a manner that 

ensures that aggregate payments to 

hospitals are not affected. Therefore, in 

the past, we accounted for projected 

payments under the new medical 

service and technology provision during 

the upcoming fiscal year at the same 

time we estimated the payment effect of 

changes to the DRG classifications and 

recalibration. The impact of additional 

payments under this provision was then 

included in the budget neutrality factor, 

which was applied to the standardized 

amounts and the hospital-specific 

amounts. 

To balance appropriately the 

Congressional intent to increase 

Medicare payments for eligible new 

technologies with concern that the total 

size of those payments not result in 

significantly reduced payments for other 

cases, we set a target limit for estimated 

add-on payments for new technology 

under the provisions of sections 

1886(d)(5)(K) and (L) of the Act at 1.0 

percent of estimated total operating 

prospective payments. In accordance 

with § 412.88(c) of the regulations, if the 

target limit was exceeded, we would 

reduce the level of payments for 

approved technologies across the board, 

to ensure estimated payments did not 

exceed the limit. 

Section 503(d)(1) of Pub. L. 108–173 

amended section 1886(d)(5)(K)(ii)(III) of 

the Act to remove the budget neutrality 

provision for add-on payments for a 

new medical service or technology. 

Section 503(d)(2) specifies that ‘‘There 

shall be no reduction or other 

adjustment to payments under section 

1886 of the Social Security Act because 

an additional payment is provided’’ for 

new technology. Accordingly, as a result 

of the enactment of section 503(d) of 

Pub. L. 108–173, we will no longer 

include the impact of additional 

payments for new medical services and 

technologies in the budget neutrality 

factor. In addition, we are proposing to 

delete § 412.88(c) of the regulations. 

I. Rural Referral Centers (§ 412.96) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Rural Referral Centers’’ at the 

beginning of your document.] 

Under the authority of section 

1886(d)(5)(C)(i) of the Act, the 

regulations at § 412.96 set forth the 

criteria that a hospital must meet in 

order to qualify under the IPPS as a 

rural referral center. For discharges 

occurring before October 1, 1994, rural 

referral centers received the benefit of 

payment based on the other urban 

standardized amount rather than the 

rural standardized amount. Although 

the other urban and rural standardized 

amounts are the same for discharges 

occurring on or after October 1, 1994, 

rural referral centers continue to receive 

special treatment under both the DSH 

payment adjustment and the criteria for 

geographic reclassification. 

Section 402 of Pub. L. 108–173 raised 

the DSH adjustment for other rural 

hospitals with less than 500 beds and 

rural referral centers. Other rural 

hospitals with less than 500 beds are 

subject to a 12–percent cap on DSH 

payments. Rural referral centers are not 

subject to the 12.0 percent cap on DSH 

payments that is applicable to other 

rural hospitals (with the exception of 

rural hospitals with 500 or more beds). 

Rural referral centers are not subject to 

the proximity criteria when applying for 

geographic reclassification, and they do 

not have to meet the requirement that a 

hospital’s average hourly wage must 

exceed 106 percent of the average 

hourly wage of the labor market area 

where the hospital is located. 

As discussed in Federal Register

documents at 62 FR 45999 and 63 FR 

26325, under section 4202 of Pub. L. 

105–33, a hospital that was classified as 

a rural referral center for FY 1991 is to 

be considered as a rural referral center 

for FY 1998 and later years so long as 

that hospital continues to be located in 

a rural area and does not voluntarily 

terminate its rural referral center status. 

Effective October 1, 2000, if a hospital 

located in what is now an urban area 

was ever a rural referral center, it is 

reinstated to rural referral center status 

(65 FR 47089). Otherwise, a hospital 

seeking rural referral center status must 

satisfy the applicable criteria. 

One of the criteria under which a 

hospital may qualify as a rural referral 

center is to have 275 or more beds 

available for use (§ 412.96(b)(1)(ii)). A 

rural hospital that does not meet the bed 

size requirement can qualify as a rural 

referral center if the hospital meets two 

mandatory prerequisites (a minimum 

case-mix index and a minimum number 

of discharges) and at least one of three 

optional criteria (relating to specialty 

composition of medical staff, source of 

inpatients, or referral volume) 

(§ 412.96(c)(1) through (c)(5)). (See also 

the September 30, 1988 Federal Register

(53 FR 38513)). With respect to the two 

mandatory prerequisites, a hospital may 

be classified as a rural referral center 

if—

• The hospital’s case-mix index is at 

least equal to the lower of the median 

case-mix index for urban hospitals in its 

census region, excluding hospitals with 

approved teaching programs, or the 

median case-mix index for all urban 

hospitals nationally; and

• The hospital’s number of discharges 

is at least 5,000 per year, or, if fewer, the 

median number of discharges for urban 

hospitals in the census region in which 

the hospital is located. (The number of 

discharges criterion for an osteopathic 

hospital is at least 3,000 discharges per 

year, as specified in section 

1886(d)(5)(C)(i) of the Act.) 

1. Case-Mix Index 

Section 412.96(c)(1) provides that 

CMS will establish updated national 

and regional case-mix index values in 

each year’s annual notice of prospective 

payment rates for purposes of 

determining rural referral center status. 

The methodology we use to determine 

the proposed national and regional casemix index values is set forth in 

regulations at § 412.96(c)(1)(ii). The 

proposed national median case-mix 

index value for FY 2005 includes all 

urban hospitals nationwide, and the 

proposed regional values for FY 2005 

are the median values of urban hospitals 

within each census region, excluding 

those hospitals with approved teaching 

programs (that is, those hospitals 

receiving indirect medical education 

payments as provided in § 412.105). 

These proposed values are based on 

discharges occurring during FY 2003 

(October 1, 2002 through September 30, 

2003) and include bills posted to CMS’

records through December 2003. 

We are proposing that, in addition to 

meeting other criteria, if they are to 

qualify for initial rural referral center 

status for cost reporting periods 

beginning on or after October 1, 2004, 

rural hospitals with fewer than 275 beds 

must have a case-mix index value for FY 

2003 that is at least—

• 1.3550; or 

• The median case-mix index value 

(not transfer-adjusted) for urban 

hospitals (excluding hospitals with 

approved teaching programs as 

identified in § 412.105) calculated by 

CMS for the census region in which the 

hospital is located. 

The proposed median case-mix index 

values by region are set forth in the 

following table:

28282 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

Region Case-mix

index value. 

1. New England (CT, ME, MA, NH, RI, VT) ........................................................................................................................................ 1.2400

2. Middle Atlantic (PA, NJ, NY) ........................................................................................................................................................... 1.2387

3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV) ............................................................................................................... 1.3249

4. East North Central (IL, IN, MI, OH, WI) .......................................................................................................................................... 1.2661

5. East South Central (AL, KY, MS, TN) ............................................................................................................................................. 1.2777

6. West North Central (IA, KS, MN, MO, NE, ND, SD) ...................................................................................................................... 1.1787

7. West South Central (AR, LA, OK, TX) ............................................................................................................................................ 1.3043

8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY) ............................................................................................................................... 1.3527

9. Pacific (AK, CA, HI, OR, WA) ......................................................................................................................................................... 1.3095 

The preceding numbers will be 

revised in the final rule to the extent 

required to reflect the updated FY 2001 

MedPAR file, which will contain data 

from additional bills received through 

March 31, 2002. 

Hospitals seeking to qualify as rural 

referral centers or those wishing to 

know how their case-mix index value 

compares to the criteria should obtain 

hospital-specific case-mix index values 

(not transfer-adjusted) from their fiscal 

intermediaries. Data are available on the 

Provider Statistical and Reimbursement 

(PS&R) System. In keeping with our 

policy on discharges, these case-mix 

index values are computed based on all 

Medicare patient discharges subject to 

DRG-based payment.

2. Discharges 

Section 412.96(c)(2)(i) provides that 

CMS will set forth the national and 

regional numbers of discharges in each 

year’s annual notice of prospective 

payment rates for purposes of 

determining rural referral center status. 

As specified in section 1886(d)(5)(C)(ii) 

of the Act, the national standard is set 

at 5,000 discharges. We are proposing to 

update the regional standards based on 

discharges for urban hospitals’ cost 

reporting periods that began during FY 

2001 (that is, October 1, 2000 through 

September 30, 2001), which is the latest 

available cost report data we have at this 

time. In last year’s final rule we 

inadvertently indicated that we relied 

upon data regarding discharges 

occurring during FY 2002. However, we 

have now determined that our values 

were based upon data regarding 

discharges occurring during FY 2000. 

Therefore, we are proposing that, in 

addition to meeting other criteria, a 

hospital, if it is to qualify for initial 

rural referral center status for cost 

reporting periods beginning on or after 

October 1, 2004, must have as the 

number of discharges for its cost 

reporting period that began during FY 

2001 a figure that is at least—

• 5,000 (3,000 for an osteopathic 

hospital); or 

• The median number of discharges 

for urban hospitals in the census region 

in which the hospital is located, as 

indicated in the following table:

Region Number of

discharges. 

1. New England (CT, ME, MA, NH, RI, VT) ........................................................................................................................................ 8,212

2. Middle Atlantic (PA, NJ, NY) ........................................................................................................................................................... 9,574

3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV) ............................................................................................................... 10,303

4. East North Central (IL, IN, MI, OH, WI) .......................................................................................................................................... 8,684

5. East South Central (AL, KY, MS, TN) ............................................................................................................................................. 7,624

6. West North Central (IA, KS, MN, MO, NE, ND, SD) ...................................................................................................................... 6,789

7. West South Central (AR, LA, OK, TX) ............................................................................................................................................ 6,485

8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY) ............................................................................................................................... 8,489

9. Pacific (AK, CA, HI, OR, WA) ......................................................................................................................................................... 6,274 

These numbers will be revised in the 

final rule based on the latest available 

cost report data. 

We reiterate that if an osteopathic 

hospital is to qualify for rural referral 

center status for cost reporting periods 

beginning on or after October 1, 2004, 

the hospital would be required to have 

at least 3,000 discharges for its cost 

reporting period that began during FY 

2001. 

J. Additional Payments to Hospitals 

With High Percentage of End-Stage 

Renal Disease (ESRD) Discharges 

(§ 412.104) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘ESRD Discharges’’ at the beginning of 

your document.] 

Under existing regulations at 

§ 412.104(a), CMS provides for 

additional Medicare payments to a 

hospital for inpatient dialysis provided 

to Medicare beneficiaries with end-stage 

renal disease (ESRD) if the hospital’s 

ESRD Medicare beneficiary discharges 

are 10 percent or more of its total 

Medicare discharges. This provision 

states that discharges classified into 

DRG 302 (Kidney Transplant), DRG 316 

(Renal Failure), or DRG 317 (Admit for 

Renal Dialysis) are excluded for 

purposes of determining a hospital’s 

eligibility for this special payment. We 

have been informed that, under this 

provision, hospitals may be counting all 

discharges of ESRD Medicare 

beneficiaries towards determining the 

10 percent factor rather than counting 

only those discharges where the ESRD 

beneficiary received inpatient dialysis. 

When we established this regulation 

in the August 31, 1984 final rule (49 FR 

34747), we stated that this special 

payment was intended to ameliorate 

those circumstances in which the 

concentration of ESRD beneficiaries 

receiving inpatient dialysis may be such 

that the hospital would not be able to 

absorb the entire expense with revenue 

from other less costly cases. We further 

stated that we believed those few 

hospitals most extremely impacted by 

the ESRD beneficiary population should 

be afforded some protection against the 

chance of encountering inpatient 

dialysis expenses that could not be 

offset by revenue from cases in which 

the DRG payment was greater than the 

hospital’s cost. Because this special 

payment is intended to limit the adverse 

impact on hospitals delivering inpatient 

dialysis services to ESRD beneficiaries, 

we firmly believe that only those 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28283

discharges of beneficiaries who receive 

dialysis services during an inpatient 

stay should be counted in determining 

a hospital’s eligibility for the additional 

payment. After a careful review of 

§ 412.104(a), we acknowledge that 

hospitals may require additional 

guidance in appropriately determining 

their eligibility for this special payment. 

Therefore, we are proposing to revise 

§ 412.104(a) to make it clear that, in 

determining a hospital’s eligibility for 

the additional Medicare payment, only 

discharges involving ESRD Medicare 

beneficiaries who have received a 

dialysis treatment during an inpatient 

hospital stay are to be counted. This 

proposed change would be applied 

prospectively, effective for cost 

reporting periods beginning on or after 

October 1, 2004. 

K. Indirect Medical Education (IME) 

Adjustment (§ 412.105) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘IME Adjustment’’ at the beginning of 

your document.] 

1. IME Adjustment Factor Formula 

Multipliers (Section 502(a) of Public 

Law 108–173 and Existing 

§ 412.105(d)(3)(vii) and Proposed 

§ 412.105(d)(3)(viii) Through (d)(3)(xii) 

of the Regulations) 

Section 1886(d)(5)(B) of the Act 

provides that prospective payment 

hospitals that have residents in an 

approved graduate medical education 

(GME) program receive an additional 

payment to reflect the higher indirect 

costs of teaching hospitals relative to 

nonteaching hospitals. The regulations 

regarding the calculation of this 

additional payment, known as the 

indirect medical education (IME) 

adjustment, are located at § 412.105. 

The IME adjustment is based in part on 

the applicable IME adjustment factor. 

The IME adjustment factor is calculated 

using a hospital’s ratio of residents to 

beds, which is represented as r, and a 

formula multiplier, which is 

represented as c, in the following 

equation: c × [{1 + r} .405 ¥1]. The 

formula is traditionally described in 

terms of a certain percentage increase in 

payment for every 10-percent increase 

in the resident-to-bed ratio. 

Section 502(a) of Pub. L. 108–173 

modified the formula multiplier c to be 

used in the calculation of the IME 

adjustment. Prior to enactment of Pub. 

L. 108–173, the formula multiplier was 

fixed at 1.35 for discharges occurring 

during FY 2003 and thereafter. Section 

502(a) modifies the formula multiplier 

beginning midway through FY 2004 and 

provides for a new schedule of formula 

multipliers for FYs 2005 and thereafter 

as follows: 

• For discharges occurring on or after 

April 1, 2004, and before October 1, 

2004, the formula multiplier is 1.47. 

• For discharges occurring during FY 

2005, the formula multiplier is 1.42. 

• For discharges occurring during FY 

2006, the formula multiplier is 1.37. 

• For discharges occurring during FY 

2007, the formula multiplier is 1.32. 

• For discharges occurring during FY 

2008 and fiscal years thereafter, the 

formula multiplier is 1.35. 

We are proposing to revise 

§ 412.105(d)(3)(vii) and add 

§ 412.105(d)(3)(viii) through (d)(3)(xii) 

to incorporate these changes in the 

formula multipliers. 

2. IME Adjustment Formula Multiplier 

for Redistributed FTE Resident Slots 

(Section 422(b)(1)(C) of Pub. L. 108–173) 

Under new section 1886(h)(7)(B) of 

the Act, added by section 422(a) of Pub. 

L. 108–173, a hospital may receive an 

increase in its FTE resident cap as a 

result of the agency’s redistribution of 

unused resident positions. (This 

provision is discussed in detail in 

section IV.J.2. of the preamble of this 

proposed rule.) Section 422(b)(1)(C) of 

Pub. L. 108–173 amended section 

1886(d)(5)(B) of the Act to add a new 

subclause (ix) to provide that, for 

discharges occurring on or after July 1, 

2005, for a hospital whose FTE resident 

cap is increased as a result of a 

redistribution of unused resident 

positions, the IME adjustment factor is 

to be calculated using a formula 

multiplier of 0.66 with respect to any 

additional residents counted by the 

hospital as a result of that increase in 

the hospital’s FTE resident cap. Thus, 

we are proposing that a hospital that 

counts additional residents as a result of 

an increase in its FTE resident cap 

under section 1886(h)(7)(B) of the Act 

would receive IME payments based on 

the sum of two different IME adjustment 

factors: (1) An IME adjustment factor 

that is calculated using the schedule of 

formula multipliers described in section 

IV.G.1. of this preamble established by 

section 502(a) of Pub. L. 108–173, and 

which also uses the hospital’s number 

of FTE residents, not including 

residents attributable to an FTE cap 

increase under section 1886(h)(7)(B) of 

the Act, in the numerator of the 

resident-to-bed ratio; and (2) an IME 

adjustment factor that is calculated 

using the formula multiplier of 0.66, 

and the additional number of FTE 

residents that are attributable to the 

increase in the hospital’s FTE resident 

cap under section 1886(h)(7)(B) of the 

Act in the numerator of the resident-tobed ratio. (The number of available beds 

used in the denominator would be the 

same for both IME adjustments.)

We note that section 422(b) of Pub. L. 

108–173, which addresses the 

application of the IME adjustment to the 

residents counted as a result of an 

increase in a hospital’s FTE resident cap 

under section 422(a), makes no 

reference to section 1886(d)(5)(B)(vi) of 

the Act. That is, the statute does not 

provide for an exclusion from 

application of the cap on the residentto-bed ratio at section 

1886(d)(5)(B)(vi)(I) of the Act or from 

application of the rolling average count 

at section 1886(d)(5)(B)(vi)(II) of the Act 

for residents added as a result of FTE 

cap increases under section 

1886(h)(7)(B). There is no specific 

pronouncement in section 422 

exempting residents counted as a result 

of the FTE resident cap increases under 

section 422(a) from the cap on the 

resident-to-bed ratio and the rolling 

average, and we see no apparent reason 

to treat those residents differently for 

purposes of these two provisions. 

Therefore, we are proposing to require 

that if a hospital increases its IME FTE 

count of residents as a result of section 

1886(h)(7)(B) of the Act, those FTE 

residents are immediately subject to the 

cap on the resident-to-bed ratio and the 

rolling average calculation. 

Furthermore, we believe that, given 

potentially significant shifts of FTE 

positions among hospitals as a result of 

the new section 1886(h)(7) of the Act, 

the inclusion of FTE residents added as 

a result of section 1886(h)(7)(B) of the 

Act in the cap on the resident-to-bed 

ratio and in the rolling average 

introduces a measure of stability and 

predictability, and mitigates radical 

shifts in IME payments from period to 

period. Thus, a hospital’s increase in 

IME payment may be delayed for one 

year to the extent that the resident-tobed ratio for the current cost reporting 

period is capped by the resident-to-bed 

ratio for the previous cost reporting 

period. Further, the additional FTE 

residents would be phased in over a 3-

year period in the hospital’s FTE count 

because they are immediately included 

in the rolling average calculation. 

The following illustrates how the IME 

payment would be calculated for a 

hospital that receives an increase to its 

FTE resident cap as a result of section 

1886(h)(7)(B) of the Act. For example, 

Hospital A has a fiscal year end (FYE) 

of September 30, and a 1996 IME FTE 

cap of 20 FTEs. During its FYEs 

September 30, 2003, September 30, 

2004, and September 30, 2005, Hospital 

A trains 25 FTE residents. Effective July 

1, 2005, under section 1886(h)(7)(B) of 

28284 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

the Act, Hospital A receives an increase 

to its IME 1996 cap of 5 FTEs, for a total 

adjusted IME cap of 25 FTEs. Hospital 

A has maintained an available bed 

count of 200 beds in FYE September 30, 

2004 and throughout FYE September 30, 

2005. For the FYE September 30, 2005 

cost report, the IME adjustment factor is 

calculated as follows: 

Step 1. For discharges occurring on 

October 1, 2004, through September 30, 

2005 for residents NOT counted 

pursuant to section 1886(d)(5)(B)(ix) of 

the Act: 

• Rolling average count of FTE 

residents: 20+20+20/3 = 20. 

• Current year resident-to-bed ratio: 

20/200 = .10. 

• Cap on resident-to-bed ratio (from 

prior year): 20/200 = .10. 

• Compare, and use the lower of, 

prior year resident-to-bed ratio and 

current year resident-to-bed ratio: .10 = 

.10. 

• Compute IME adjustment factor: 

1.42 × [{1 + .10} .405 ¥1] = 0.0559. 

Step 2. For discharges occurring on 

July 1, 2005 through September 30, 2005 

for residents counted pursuant to 

section 1886(d)(5)(B)(ix) of the Act: 

• Rolling average count of FTE 

residents: 25+20+20/3 = 21.7. 

• Resident-to-bed ratio for 7/1/05–9/

30/05: 21.7/200 = .11. 

• Cap on resident-to-bed ratio (from 

prior year): 20/200 = .10. 

• Compare, and use the lower of, 

prior year resident-to-bed ratio and 

resident-to-bed ratio for 7/1/05–9/30/05: 

.10 < .11. Capped by prior year ratio of 

.10. 

• Compute IME adjustment factor: 

0.66 × [{1 + 0} .405 ¥1] = 0.0. 

In this example, the addition of 5 FTE 

residents under section 1886(h)(7)(B) 

caused Hospital A’s resident-to-bed 

ratio for discharges occurring on July 1, 

2005, through September 30, 2005, to 

exceed the resident-to-bed ratio of .10 

from the prior year. Since the multiplier 

of 0.66 is to be used for determining 

IME payment ‘‘insofar as an additional 

payment amount * * * is attributable to 

resident positions redistributed to a 

hospital * * *’’ under section 

1886(d)(5)(B)(v) of the Act, as amended 

by section 422(b)(1)(C) of Pub. L. 108–

173, Hospital A does not receive any 

IME payment attributable to the 5 FTE 

residents added as a result of section 

1886(h)(7)(B) of the Act for discharges 

occurring on July 1, 2005, through 

September 30, 2005. As shown under 

the fifth bullet point in Step 2 of the 

example above, a resident-to-bed ratio of 

zero is used to compute the IME 

adjustment for FTE residents 

attributable to increases in the FTE 

resident cap under section 1886(h)(7)(B) 

of the Act for discharges occurring on or 

after July 1, 2005 and on or before 

September 30, 2005. The ratio of .10 

would not be used to compute the IME 

adjustment for FTE residents 

attributable to an increase in the FTE 

resident cap under section 1886(h)(7)(B) 

because the ratio of .10 is attributable to 

the 20 FTE residents from the prior year, 

and is not related to residents added 

under section 1886(h)(7)(B) of the Act. 

(We note that a hospital’s resident-tobed ratio in the current year might 

decrease despite residents added as a 

result of section 1886(h)(7)(B) of the 

Act, due to an increase in the number 

of available beds in the denominator of 

the current year resident-to-bed ratio. In 

such a case, because the current year 

ratio would be less than the prior year 

ratio, the hospital’s resident-to-bed ratio 

would not be capped by the prior year 

resident-to-bed ratio, and, therefore, the 

hospital could receive an IME payment 

in the current year (that is, there would 

not be a 1-year delay) relating to 

residents added under section 

1886(h)(7)(B) of the Act). 

However, an increase in the residentto-bed ratio in the current period may 

establish a higher cap for the following 

period, and, all other things being equal, 

a hospital could then receive IME 

payment for FTE residents added as a 

result of section 1886(h)(7)(B) of the Act 

after a 1-year lag. In the example above, 

Hospital A would receive an IME 

payment for residents added as a result 

of section 1886(h)(7)(B) of the Act in its 

cost reporting period ending September 

30, 2006, as follows: 

Step 1. For residents NOT counted 

pursuant to section 1886(d)(5)(B)(ix) of 

the Act: 

• Rolling average count of FTE 

residents: 20+20+20/3 = 20. 

• Current year resident-to-bed ratio: 

20/200 = .10. 

• Cap on resident-to-bed ratio (from 

prior year): 20/200 = .10. 

• Compare, and use the lower of, 

prior year resident-to-bed ratio and 

current year resident-to-bed ratio: .10 = 

.10. 

• Compute IME adjustment factor: 

1.37 × [{1 + .10} .405 ¥1] = 0.0559. 

Step 2. For 5 FTE residents counted 

pursuant to with section 

1886(d)(5)(B)(ix) of the Act: 

• Rolling average count of FTE 

residents: 25+25+20/3 = 23.3. 

• Resident-to-bed ratio for FYE 9/30/

06: 23.3/200 = .12. 

• Cap on resident-to-bed ratio (from 

prior year): 25/200 = .13.

• Compare, and use the lower of, 

prior year resident-to-bed ratio and 

current year resident-to-bed ratio: .13 

>.12. Current year ratio of .12 is the 

lower of the two. 

• Take the difference between the 

rolling average count of FTE residents 

counted as a result of section 

1886(h)(7)(B) of the Act, and the rolling 

average count of FTE residents not

counted as a result of section 

1886(h)(7)(B) of the Act, (rolling average 

count under step 2 minus rolling 

average count under step 1): 23.3¥20 = 

3.3. 

• Compute current year resident-tobed ratio attributable to residents added 

under section 1886(h)(7)(B): 3.3/200 = 

0.02. 

• Compute IME adjustment factor: 

0.66 × [{1 + .02} .405 ¥1] = 0.0053. 

Step 3. Compute IME payment for 

FYE September 30, 2006: [Total DRG 

payments for discharges occurring on 

October 1, 2005 through September 30, 

2006] × [0.0592] (that is, 0.0539 + 

0.0053). 

We are proposing to revise § 412.105 

to incorporate these changes under 

proposed new paragraph (d)(4), 

proposed new paragraph (e)(2), 

proposed new paragraph (f)(1)(iv)(B), 

and proposed added new last sentence 

of paragraph (f)(1)(v). 

3. Technical Changes 

• In § 412.105(a)(1), introductory text, 

we include a cross-reference to 

‘‘paragraph (f) and (h)’’ of § 412.105. 

Paragraph (h) no longer exists in this 

section. Therefore, we are proposing to 

remove the cross-reference to paragraph 

(h). 

• In § 412.105(f)(1)(i)(A), we reference 

national organizations listed in 

§ 415.200(a). The cross-reference to 

§ 415.200(a) is incorrect. We are 

proposing to correct the cross-reference 

to read ‘‘§ 415.152.’’

• In section IV.O. of this preamble, 

we discuss our proposal to redesignate 

existing § 413.86 governing payments 

for direct costs of GME to nine separate 

sections. Many of the paragraphs in the 

existing § 413.86 are cited in § 412.105 

governing the IME adjustment. We are 

proposing to make changes to the crossreference in § 412.105 to conform them 

to these proposed redesignated separate 

sections. 

L. Payment to Disproportionate Share 

Hospitals (DSHs) (Section 402 of Pub. L. 

108–173 and § 412.106 of Existing 

Regulations) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘DSH Adjustment’’ at the beginning of 

your document.] 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28285

1. Enhanced DSH Adjustment for Rural 

Hospitals and Urban Hospitals With 

Fewer Than 100 Beds 

Section 1886(d)(5)(F) of the Act 

provides for additional payments to 

subsection (d) hospitals that serve a 

disproportionate share of low-income 

patients. The Act specifies two methods 

for a hospital to qualify for the Medicare 

disproportionate share hospital (DSH) 

adjustment. Under the first method, 

hospitals that are located in an urban 

area and have 100 or more beds may 

receive a DSH payment adjustment if 

the hospital can demonstrate that, 

during its cost reporting period, more 

than 30 percent of its net inpatient care 

revenues are derived from State and 

local government payments for care 

furnished to indigent patients. These 

hospitals are commonly known as 

‘‘Pickle hospitals.’’ The second method, 

which is also the most commonly used 

method for a hospital to qualify, is 

based on a complex statutory formula 

under which payment adjustments are 

based on the level of the hospital’s DSH 

patient percentage, which is the sum of 

two computations. The first 

computation includes the number of 

patient days that are furnished to 

patients who were entitled to both 

Medicare Part A and Supplemental 

Security Income (SSI) benefits. This 

number is divided by the total number 

of patient days that are associated with 

patients entitled to benefits under 

Medicare Part A. The second 

computation includes hospital patient 

days that are furnished to patients who, 

for those days, were eligible for 

Medicaid but were not entitled to 

benefits under Medicare Part A. This 

number is divided by the number of 

total hospital inpatient days in the same 

period. 

Hospitals whose DSH patient 

percentage exceeds 15 percent are 

eligible for a DSH payment adjustment 

(prior to April 1, 2001, the qualifying 

DSH patient percentage varied, in part, 

by the number of beds (66 FR 39882)). 

The DSH payment adjustment may vary 

based on the DSH patient percentage 

and the type of hospital. The statute 

provides for different payment 

adjustments for urban hospitals with 

100 or more beds and rural hospitals 

with 500 or more beds, hospitals that 

qualify as RRCs or SCHs, and other 

hospitals. 

Effective April 1, 2004, section 402 of 

Public Law 108–173 amended section 

1886(d)(5)(F) of the Act to revise the 

formulae used to calculate DSH 

payment adjustments for certain 

hospitals that qualify for the 

adjustments under the second method. 

Specifically, under the new section 

1886(d)(5)(F)(xiv), added by section 402, 

for hospitals that are not large urban or 

large rural hospitals, DSH payments are 

calculated using the same DSH 

adjustment formula used for large urban 

hospitals. However, the DSH payment 

adjustment for most of these categories 

of hospitals, except for hospitals 

classified as RRCs, including RRCs that 

are also SCHs, is capped at 12 percent. 

In addition, the formula for large urban 

hospitals with 100 beds or more, and 

large rural hospitals with 500 beds or 

more, has not been revised by section 

402. Finally, Pickle hospitals are not 

affected by this change; they will 

continue to receive a DSH adjustment 

under the alternative formula. 

Effective for discharges occurring on 

or after April 1, 2004, the following DSH 

payment adjustment formulae apply for 

the following specified categories of 

hospitals: 

• For urban hospitals with fewer than 

100 beds and whose disproportionate 

patient percentage is equal to or greater 

than 15 percent and less than or equal 

to 20.2 percent: (Disproportionate 

patient percentage ¥15 percent) (65 

percent) + 2.5 percent. 

• For urban hospitals with fewer than 

100 beds and whose disproportionate 

patient percentage is greater than 20.2: 

(Disproportionate patient percentage 

¥20.2 percent) (82.5 percent) + 5.88 

percent. 

For urban hospitals with fewer than 

100 beds, the maximum DSH payment 

adjustment is 12 percent. 

• For rural hospitals that are SCHs 

and are not RRCs and whose 

disproportionate patient percentage is 

equal to or greater than 15 percent and 

less than or equal to 20.2 percent: 

(Disproportionate patient percentage 

¥15 percent) (65 percent) + 2.5 percent. 

• For rural hospitals that are SCHs 

and are not RRCs and whose 

disproportionate patient percentage is 

greater than 20.2 percent: 

(Disproportionate patient percentage 

¥20.2 percent) (82.5 percent) + 5.88 

percent. 

For rural hospitals that are SCHs and 

are not RRCs, the maximum DSH 

payment adjustment is 12 percent. 

• For RRCs whose disproportionate 

patient percentage is greater than or 

equal to 15 percent and less than or 

equal to 20.2 percent: (Disproportionate 

patient percentage ¥15 percent) (65 

percent) + 2.5 percent. 

• For RRCs whose disproportionate 

patient percentage is greater than 20.2 

percent: (Disproportionate patient 

percentage ¥20.2 percent) (82.5 

percent) + 5.88 percent. 

• For rural hospitals that are both 

RRCs and SCHs and whose 

disproportionate patient percentage is 

greater than or equal to 15 percent and 

less than or equal to 20.2 percent: 

(Disproportionate patient percentage 

¥15 percent) (65 percent) + 2.5 percent. 

• For rural hospitals that are both 

RRCs and SCHs whose disproportionate 

patient percentage is greater than 20.2 

percent: (Disproportionate patient 

percentage ¥20.2 percent) (82.5 

percent) + 5.88 percent. 

• For rural hospitals with fewer than 

500 beds and whose disproportionate 

patient percentage is equal to or greater 

than 15 percent and less than or equal 

to 20.2 percent: (Disproportionate 

patient percentage ¥15 percent) (65 

percent) + 2.5 percent. 

• For rural hospitals with fewer than 

500 beds and whose disproportionate 

patient percentage is greater than 20.2 

percent: (Disproportionate patient 

percentage ¥20.2 percent) (82.5 

percent) + 5.88 percent.

For rural hospitals with fewer than 

500 beds, the maximum DSH payment 

adjustment is 12 percent. 

These revised formulae, which 

became effective for discharges 

occurring on or after April 1, 2004, were 

implemented through a CMS One-Time 

Notification (CR 3158), issued on March 

26, 2004. The notice describes the 

changes required by section 402 of 

Public Law 108–173. In this proposed 

rule, we are proposing to revise 

§§ 412.106 (d)(2)(ii), (d)(2)(iii), and 

(d)(2)(iv) of the regulations to reflect 

these statutory revisions. 

The following DSH formulae were not 

affected by the changes made by section 

402 of Pub. L. 108–173 and remain in 

effect: 

• For urban hospitals with 100 beds 

or more and whose disproportionate 

patient percentage is equal to or greater 

than 15 percent and less than or equal 

to 20.2 percent: (Disproportionate 

patient percentage ¥15 percent) (65 

percent) + 2.5 percent. 

• For urban hospitals with 100 beds 

or more and whose disproportionate 

patient percentage is greater than 20.2 

percent: (Disproportionate patient 

percentage ¥20.2 percent) (82.5 

percent) + 5.88 percent. 

• For rural hospitals with 500 beds or 

more and whose disproportionate 

patient percentage is equal to or greater 

than 15 percent and less than or equal 

to 20.2 percent: (Disproportionate 

patient percentage ¥15 percent) (65 

percent) + 2.5 percent. 

• For rural hospitals with 500 beds or 

more and whose disproportionate 

patient percentage is greater than 20.2 

percent: (Disproportionate patient 

28286 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

percentage ¥20.2 percent) (82.5 

percent) + 5.88 percent. 

2. Proposals for Available Beds and 

Patient Days for the DSH Adjustment 

In our May 19, 2003 IPPS proposed 

rule for FY 2004 (68 FR 27201), we 

proposed changes to our policy on 

counting available beds and patient 

days for the purposes of the DSH 

adjustment. For the available beds 

policy we proposed changes to counting 

unoccupied beds and observation beds. 

In regard to patient days, we proposed 

changes to counting dual-eligible and 

Medicare+Choice (M+C) days. Due to 

the number and nature of the public 

comments received, we did not respond 

to the public comments on these 

proposals in the final rule for FY 2004 

(68 FR 45415). We indicated that we 

would address those public comments 

in a separate document. We plan to 

address the comments regarding 

unoccupied beds, observation beds, 

dual eligible days, and M+C days in the 

IPPS final rule for FY 2005. 

M. Payment Adjustments for LowVolume Hospitals (Proposed New 

§ 412.101) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Low-Volume Hospital Adjustment’’ at 

the beginning of your document.] 

Section 406 of Pub. L. 108–173 

amended section 1886(d) of the Act to 

add a new subclause (12) to provide for 

a new payment adjustment to account 

for the higher costs per discharge of 

low-volume hospitals under the IPPS. 

Section 1886(d)(12)(C)(i) of the Act, as 

added by section 406, defines a lowvolume hospital as a ‘‘subsection (d) 

hospital . . . that the Secretary 

determines is located more than 25 road 

miles from another subsection (d) 

hospital and that has less than 800 

discharges during the fiscal year.’’

Section 1886(d)(12)(C)(ii) of the Act 

further stipulates that the term 

‘‘discharge’’ refers to total discharges, 

and not merely to Medicare discharges. 

Specifically, the term refers to the 

‘‘inpatient acute care discharge of an 

individual regardless of whether the 

individual is entitled to benefits under 

part A.’’ Finally, the provision requires 

the Secretary to determine an applicable 

percentage increase for these lowvolume hospitals based on the 

‘‘empirical relationship’’ between ‘‘the 

standardized cost-per-case for such 

hospitals and the total number of 

discharges of these hospitals and the 

amount of the additional incremental 

costs (if any) that are associated with 

such number of discharges.’’ The statute 

thus mandates the Secretary to develop 

an empirically justifiable adjustment 

formula based on the relationship 

between costs and discharges for these 

low-volume hospitals. The statute also 

limits the adjustment to no more than 

25 percent. 

MedPAC has published an analysis of 

the financial performance and cost 

profiles of low-volume hospitals 

(MedPAC June 2001 Report to Congress, 

page 66). Its analysis indicated that 

hospitals with 500 discharges or less 

generally have negative Medicare 

margins. Specifically, hospitals with 

200 discharges or less have margins of 

¥16.4 percent, and hospitals with 201 

to 500 discharges have margins of ¥2.1 

percent. MedPAC’s analysis further 

revealed that hospitals with a small 

volume of discharges have higher costs 

per discharge than larger facilities, after 

controlling for the other cost factors 

recognized in the payment system. 

MedPAC’s analysis thus indicates that 

low-volume providers are 

disadvantaged by payment rates based 

on average volume. In analyzing the 

relationship between costs per case and 

discharges, MedPAC also found that this 

relationship begins to level off and 

reaches zero variation at around 500 

discharges. Therefore, MedPAC 

recommended an adjustment formula in 

the form of:

1.25 = (.0005*D), if D<500 discharges

Where 1.25 represents the maximum 

25-percent add-on, .0005 is the payment 

adjustment per case (derived by 

dividing .25 by 500 discharges) and ‘‘D’’

is the number of discharges. 

Using FY 2001 cost report data, we 

found an even larger disparity than 

MedPAC found between low-volume 

providers and their higher-volume 

counterparts. Although Medicare 

margins remain healthy overall at 9.32 

percent, the Medicare margin for 

providers with 200 or less discharges is 

¥46.26 percent, and the margin for 

providers with 201 to 500 discharges is 

¥11.74 percent. We employed a 

bivariate regression analysis to 

determine the fit between total hospital 

discharges and operating costs from FY 

2001. For the final rule, we plan to 

conduct more detailed multivariate 

analyses. We have some concerns about 

whether we have sufficient information 

(for example, total hospital case-mix) to 

support valid multivariate analyses. We 

are continuing to examine this in 

preparation for the final rule. 

We found a very strong correlation 

between costs and the total number of 

discharges. We then examined the 

variation in cost-per-case among 

subsection (d) hospitals, using both log 

and nonlog functions. When the 

analysis was limited to hospitals with 

fewer than 1,000 discharges, we found 

a strong relationship between cost per 

case and low volume. We found that the 

greatest variation from the mean costs 

per case exists between 1 and 150 

discharges, indicating (as MedPAC also 

found) that hospitals with the lowest 

case volume generally experience 

greater costs per case than hospitals 

with higher volume. However, after 

about 150 discharges, the trend line 

begins to level off rapidly. The trend 

line reaches zero variation from mean 

cost per case at approximately 450 

discharges (cost per case in log form) or 

500 discharges (nonlog form). 

Immediately after that point, the trend 

line in both forms becomes negative, 

while still maintaining a very smooth 

line. Both because of where the trend 

line crosses zero and because there is 

very little variation from the mean after 

this point, we believe that 500 

discharges is the appropriate cutoff for 

an add-on payment under this 

provision. 

Based on these results, we are 

proposing to adopt a slightly revised 

version of MedPAC’s recommended 

formula for an add-on payment to lowvolume hospitals:

Adjustment = 1.25 ¥ (.0005*D), if 0<D≤

500 discharges

Where 1.25 represents the maximum 

25 percent add-on, .0005 is the payment 

adjustment per case (derived by 

dividing .25 by 500 discharges) and ‘‘D’’

is the number of discharges. We are 

proposing to revise the MedPAC 

recommended formula by adding the 

condition that ‘‘D>0’’ in order to avoid 

the anomalous result that a hospital 

without any discharges would qualify 

for the maximum 25-percent 

adjustment. 

We note that, under this formula, 

some hospitals that meet the statutory 

definition of low-volume hospital 

would receive no adjustment. 

Specifically, hospitals with more than 

500 but fewer than 800 total discharges 

for the year would receive no 

adjustment under this formula. Despite 

the statutory definition of a low-volume 

hospital as a subsection (d) hospital that 

has less than 800 discharges during the 

fiscal year, the statutory provision 

mandating this adjustment also requires 

the Secretary to determine the empirical 

relationship between the standardized 

cost-per-case, the total number of 

discharges, and the amount of 

incremental costs associated with the 

number of discharges. In addition, the 

provision requires that the applicable 

percentage increase shall be ‘‘based 

upon such relationship in a manner that 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28287

reflects * * * such incremental costs.’’

We believe that the statutory language 

thus gives the Secretary the flexibility to 

set the percentage increase at zero for a 

given number of discharges if the 

empirical evidence shows that hospitals 

experience no higher incremental costs 

when they reach that number of 

discharges. In other words, the statute 

does not require the Secretary to 

provide an adjustment in the absence of 

empirical evidence that an adjustment is 

warranted by higher incremental costs. 

While the statute defines low-volume 

hospitals in terms of total inpatient 

acute care discharges and mandates that 

the adjustment be based upon the 

amount of incremental costs associated 

with the number of discharges, it does 

not specify whether the count of 

discharges, either for purposes of the 

definition or the payment adjustment 

formula, should be based on the 

payment year or some previous year. 

Specifically, the statute defines lowvolume hospital as ‘‘for a fiscal year, a 

subsection (d) hospital * * * [that] has 

less than 800 discharges during the 

fiscal year’’ (emphasis added).

We believe that this statutory 

language gives us the flexibility to 

define which fiscal year to use in 

determining the number of discharges, 

both for purposes of the definition of 

‘‘low-volume hospital’’ and the payment 

adjustment formula. Prospective 

payment systems place substantial value 

on providing hospitals with 

predictability regarding payments. If the 

determination of whether hospitals 

qualify for low-volume payment 

adjustments and the computation of the 

payment adjustment amount are based 

on the number of discharges in the 

current fiscal year, neither CMS nor the 

hospital will know with certainty 

whether a hospital qualifies for the 

adjustment, or what the amount of the 

adjustment would be, until after the end 

of the payment year (probably not until 

the time of final cost report settlement 

for the year). In such circumstances, 

CMS could be faced with the prospect 

of recouping large overpayments in 

some cases or reimbursing for large 

underpayments in others. Hospitals 

would face similar uncertainties. On the 

other hand, if these determinations are 

based on discharge counts from a prior 

fiscal year, hospitals will know in 

advance whether they will be receiving 

a payment adjustment and what the size 

of the adjustment will be. Both hospitals 

and CMS will be able to plan 

accordingly. 

Therefore, we are proposing to base 

the count of discharges, for purposes 

both of meeting the qualifying definition 

and determining the amount of the 

payment adjustment, on the number of 

inpatient acute care discharges 

occurring during the cost reporting 

period for the most recent submitted 

cost report. We recognize that this 

policy may temporarily disadvantage 

certain hospitals. For example, a 

hospital that had more than 500 

discharges in its most recent submitted 

cost report may have fewer than 500 

discharges during the first fiscal year in 

which this low-volume payment 

adjustment is available. Such a hospital 

would not qualify for the low-volume 

adjustment during the first fiscal year of 

the adjustment under the policy that we 

are proposing, but it would qualify 

under alternative policy of basing the 

discharge count on the fiscal year for 

which payment is made. However, even 

in such cases, the hospital would not be 

certain about whether it would receive 

an adjustment until its cost report for 

the payment year is settled. In addition, 

under the policy we are now proposing, 

the hospital would still be certain of 

receiving a low-volume adjustment for 

any fiscal year in which it had 500 or 

fewer discharges. The hospital would 

receive the adjustment during the fiscal 

year after the cost report is submitted for 

any fiscal year in which the hospital 

had 500 discharges or less. 

A further implication of this proposed 

policy is that a new hospital would not 

receive an adjustment during its first 

year of operation, even if it has fewer 

than 500 total discharges during that 

year. While this approach is somewhat 

disadvantageous for hospitals in their 

first year of existence, we believe that it 

is justified in order to avoid setting up 

a settlement process to finalize 

payments under this new proposed 

adjustment. Therefore, we are proposing 

that new hospitals that meet the 

distance requirement would not be 

eligible for the adjustment until data 

become available to determine that the 

annual number of discharges is 500 or 

less. Under this approach, new hospitals 

would not receive a low-volume 

adjustment during at least the first 2 

years of their existence. (This is 

generally the amount of time that 

elapses before submission of a cost 

report.) This treatment is consistent 

with the treatment of some existing 

hospitals, for example, hospitals that 

have declining numbers of discharges, 

and would not be eligible for the 

adjustment until their data show 500 or 

fewer discharges. 

As we noted above, the statute defines 

a low-volume hospital as a subsection 

(d) hospital that the Secretary 

determines is located more than 25 road 

miles from another subsection (d) 

hospital and that has less than 800 

discharges during the fiscal year. In 

order to enforce the requirement that a 

qualifying hospital must be located 

more than 25 miles from another PPS 

hospital, we are proposing that a 

hospital that wishes to qualify for the 

adjustment must provide its fiscal 

intermediary with evidence that it meets 

this distance requirement. The 

intermediary will then certify, on the 

basis of the evidence presented by the 

hospital and any other relevant 

evidence that it may be able to develop, 

that the hospital meets this requirement. 

Other relevant evidence may include 

maps, mapping software, and inquiries 

to State and local police, transportation 

officials, or other government officials. 

We are proposing to add a new 

§ 412.101 to incorporate the provisions 

of section 406 of Public Law 108–173. 

N. Medicare Geographic Classification 

Review Board (MGCRB) 

Reclassifications (§§ 412.230, 412.234, 

and 412.236) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Hospital Reclassifications’’ at the 

beginning of your document.] 

1. Background 

With the creation of the MGCRB, 

beginning in FY 1991, under section 

1886(d)(10) of the Act, hospitals could 

request reclassification from one 

geographic location to another for the 

purpose of using the other area’s 

standardized amount for inpatient 

operating costs or the wage index value, 

or both (September 6, 1990 interim final 

rule with comment period (55 FR 

36754), June 4, 1991 final rule with 

comment period (56 FR 25458), and 

June 4, 1992 proposed rule (57 FR 

23631)). Implementing regulations in 

Subpart L of Part 412 (§§ 412.230 et 

seq.) set forth criteria and conditions for 

redesignations for purposes of the wage 

index or the average standardized 

amount, or both, from rural to urban, 

rural to rural, or from an urban area to 

another urban area, with special rules 

for SCHs and rural referral centers.

Effective with reclassifications for FY 

2003, section 1886(d)(10)(D)(vi)(II) of 

the Act provides that the MGCRB must 

use the average of the 3 years of hourly 

wage data from the most recently 

published data for the hospital when 

evaluating a hospital’s request for 

reclassification. The regulations at 

§ 412.230(e)(2)(ii) stipulate that the 

wage data are taken from the CMS 

hospital wage survey used to construct 

the wage index in effect for prospective 

payment purposes. To evaluate 

applications for wage index 

reclassifications for FY 2005, the 

28288 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

MGCRB used the 3-year average hourly 

wages published in Table 2 of the 

August 1, 2003 IPPS final rule (68 FR 

50135). These average hourly wages are 

taken from data used to calculate the 

wage indexes for FY 2002, FY 2003, and 

FY 2004, based on cost reporting 

periods beginning during FY 1998, FY 

1999, and FY 2000, respectively. 

2. Standardized Amount 

Reclassification Provisions 

As specified in § 412.230(d)(1), to be 

reclassified to an adjacent area for the 

purpose of using that area’s 

standardized amount, an individual 

hospital seeking redesignation must 

demonstrate that its incurred costs are 

comparable to hospital costs in the 

adjacent area (that is, hospitals must 

demonstrate that their costs exceed their 

current payments by 75 percent of the 

additional payments they would receive 

through reclassification) and that it has 

the necessary close proximity to that 

area (that is, an urban hospital must be 

no more than 15 miles and a rural 

hospital no more than 35 miles from the 

adjacent area; or at least 50 percent of 

the hospital’s employees must reside in 

the adjacent area). 

Under section 402(b) of Public Law 

108–7, Congress provided that all 

inpatient PPS hospitals be paid at the 

large urban average standardized 

amount for discharges occurring on or 

after April 1, 2003 and before October 

1, 2003. Under Public Law 108–89, 

Congress extended section 402(b) of 

Public Law 108–7 to discharges 

occurring through March 31, 2004. 

Section 401 of Public Law 108–173 

further extended the equalization of 

urban and rural operating standardized 

payment amounts. (See section IV.B. of 

this preamble for a more detailed 

discussion.) Section 401 also equalized 

the Puerto Rico-specific urban and other 

area rates by requiring that the Puerto 

Rico-specific urban and other area rates 

be made retroactive to October 1, 2003. 

The Puerto Rico-specific equalization of 

the urban and rural operating 

standardized amounts became effective 

for discharges beginning on or after 

April 1, 2004. 

As a result of these legislative 

changes, the standardized amount 

reclassification criterion is no longer 

necessary or appropriate. Therefore, we 

are proposing to revise § 412.230 and 

§ 412.234 to remove all standardized 

amount criteria provisions. We are 

proposing to remove the provisions of 

‘‘§ 412.230(d)’’ (existing paragraph (e) 

would be redesignated as paragraph (d)), 

and to remove § 412.234(c) and (d)(2) 

(existing paragraph (d)(1) would be 

redesignated as paragraph (c) and 

revised), which contain the criterion 

requiring individual hospitals and 

urban hospital groups to demonstrate 

that their costs are more comparable to 

the average amount they would be paid 

if they were reclassified than the 

amount they would be paid under their 

current classification. 

With the implementation of the 

equalization of the national adjusted 

operating standardized amount for large 

urban and other areas provision of 

Public Law 108–173, we also are 

proposing the following technical 

revisions to several sections under 

Subpart L of Part 412, which set forth 

the criteria and conditions for 

redesignations. 

• We are proposing to delete the 

cross-reference to ‘‘§ 412.230(d)(2)’’

cited in § 412.230(a)(4) and to make 

redesignation changes for the existing 

cross-reference changes to paragraph (e), 

which is proposed to be redesignated as 

paragraph (d). 

• We are proposing to delete 

§ 412.230(a)(5)(ii) (the existing 

paragraphs (a)(5)(iii), (a)(5)(iv), and 

(a)(5)(v) would be redesignated as 

paragraphs (a)(5)(ii), (a)(5)(iii), and 

(a)(5)(iv), respectively. Under existing 

§ 412.230(a)(5)(ii), we defined, for fiscal 

years 1997, 1998, and 2002, the 

limitation for redesignation for purposes 

of the standardized amount. Our policy 

has been that a hospital may not be 

redesignated for purposes of the 

standardized amount to an area that 

does not have a higher standardized 

amount than the standardized amount 

the hospital currently receives. 

We are proposing to delete existing 

§ 412.236. Section 412.236 sets forth the 

redesignation criteria for hospitals in a 

NECMA. Under the new CBSAs, OMB 

has defined the MSAs and Micropolitan 

areas in New England on the basis of 

counties. As discussed in section III.B. 

of this proposed rule, to maintain 

consistency in the definition of labor 

market areas between New England and 

the rest of the country, we are proposing 

to use the New England MSAs under the 

new CBSA definition. Proposing to 

adopt the New England MSAs requires 

not only that we delete the reference to 

NECMAs in existing definitions, but 

that we also delete reference to criteria 

applicable to hospitals located in a 

NECMA that apply for reclassification. 

In keeping with the proposal to define 

labor market areas as MSAs, including 

those in New England, the criteria and 

conditions for redesignation set forth in 

§ 412.230 will be applicable to New 

England hospitals seeking to reclassify. 

In an effort to refine the 

reclassification guidelines, we 

established §§ 412.234 and 412.236 in 

the existing guidelines to allow for 

reclassification of urban groups and 

New England groups, respectively (56 

FR 25458). Under § 412.232(a) and 

§ 412.234(a), we set forth similar criteria 

for rural and urban hospitals to be 

reclassified as a group, respectively. 

Prior to the implementation of 

legislation to eliminate the differential 

in the standardized amount, urban 

county groups that were interested in 

applying for purposes of the wage index 

submitted applications to the MGCRB 

for consideration. Many urban county 

group applications were unable to 

reclassify solely because they failed to 

meet the standardized amount criteria. 

In light of the fact that the standardized 

amount criteria are no longer 

appropriate, we believe it would be 

appropriate to make an adjustment to 

the hospital’s wage index by assigning, 

to hospitals that were unable to 

reclassify in applications for both FY 

2004 and FY 2005, the wage index for 

the MSA requested in the FY 2004 and 

FY 2005 group application. Section 

1886(d)(5)(I)(i) of the Act provides the 

Secretary with broad authority to make 

adjustments and exceptions under the 

IPPS. Specifically, the section provides 

that the ‘‘Secretary shall provide by 

regulation for such other exceptions and 

adjustments to such payment amounts 

under this subsection as the Secretary 

deems appropriate.’’ Under this unique 

circumstance, we are proposing to 

exercise the broad authority under 

section 1886(d)(5)(I)(i) of the Act, to 

make an exception to the assignment of 

wage index value for certain hospitals 

that failed to reclassify as a group under 

§ 412.234 for FY 2004 and FY 2005. 

Specifically, effective with discharges 

occurring during the 3-year period 

beginning October 1, 2004 through 

September 30, 2007, any hospital whose 

urban county group application under 

§ 412.234 would have been approved by 

the MGCRB but for the failure to meet 

the requirements in § 412.234(c), would 

be assigned the wage index for the MSA 

identified in the FY 2004 and FY 2005 

group application (in cases where the 

group identified more than one 

preference, the hospital would be 

assigned the wage index that is most 

advantageous). Hospitals that wish to 

receive the wage index of the area 

identified in their FY 2004 and FY 2005 

group applications under this provision 

need only notify CMS in writing, at the 

address provided under the Addresses 

section of this proposed rule, before the 

close of the comment period. The 

notification should only contain: 

• The hospital’s name and street 

address. 

• The hospital’s provider number. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28289

• The name, title, and telephone 

number of a contact person for 

communications. 

• The area (name and MSA number) 

identified in their FY 2005 group 

application. 

• Copies of any and all MGCRB 

decision notification letters for FY 2004 

and FY 2005. 

3. Reclassification of Urban Rural 

Referral Centers 

Under existing regulations at 

§ 412.230(e)(3), rural referral centers 

(RRCs) (including hospitals that were 

ever RRCs) are exempt from one of the 

average hourly wage criteria that apply 

to other hospitals seeking 

reclassification. Specifically, an RRC is 

exempt from the requirement under 

§ 412.230(e)(1)(iii) that the hospital’s 3-

year average hourly wage meet a 

threshold percentage in relation to the 

average hourly wage of all the hospitals 

in the area in which the hospital is 

located. These threshold percentages are 

108 percent for hospitals located in 

urban areas, and 106 percent for 

hospitals located in rural areas. 

However, an RRC is not exempt from 

another threshold requirement, namely 

the requirement under 

§ 412.230(e)(1)(iv) that the hospital’s 3-

year average hourly wage must meet a 

threshold percentage of the 3-year 

average hourly wage of the hospitals 

located in the area to which the hospital 

seeks reclassification. As in the case of 

the first threshold, this threshold 

percentage is different for urban and 

rural hospitals. An urban hospital’s 3-

year average hourly wage must be at 

least 84 percent of the average hourly 

wage of the hospitals located in the area 

to which the hospital seeks 

reclassification, while a rural hospital’s 

3-year average hourly wage must be at 

least 82 percent of the average hourly 

wage of the hospitals located in the area 

to which the hospital seeks 

reclassification.

It has come to our attention that the 

requirement of § 412.230(e)(1)(iv) places 

RRCs located in urban areas on a 

different footing than RRCs located in 

rural areas. In some cases, urban RRCs 

that have been denied reclassification 

because they failed to meet the 84-

percent threshold would have been able 

to meet the 82-percent threshold that 

would have applied if they were located 

in a rural area. RRCs play a significant 

role in treating Medicare beneficiaries 

from rural areas, whether or not a 

particular RRC is physically located in 

a rural area or an urban area. Thus, we 

believe that it would be more 

appropriate for all RRCs, whether they 

are actually located in urban or rural 

areas, to be treated on an equal basis 

with respect to the qualifications for 

geographic reclassification. Therefore, 

we are proposing to revise 

§ 412.230(e)(1)(iii) of the regulations to 

provide that RRCs, including RRCs 

located in urban areas, must meet the 

82-percent threshold that applies to 

rural hospitals rather than the 84-

percent threshold that applies to urban 

hospitals. 

Furthermore, we are aware of at least 

one case in which an RRC was 

reclassified by the MGCRB for FY 2004, 

but upon applying to the MGCRB for FY 

2005, was found to be ineligible for 

reclassification because its 3-year 

average hourly wage was now less than 

84 percent of the hospitals located in 

the MSA to which it applied for 

reclassification. In this case, the 

hospital’s 3-year average hourly wage 

was still greater than 82 percent of the 

MSA to which it had applied for 

reclassification. In such a case, we 

believe that it would be appropriate to 

make an accommodation for one year, 

so that the hospital is not subjected to 

the financial strain that may be caused 

by receiving a lower wage index for one 

year until it qualifies to apply for 

reclassification under the revised 

threshold criterion that we are 

proposing here. Therefore, we are 

proposing that, in such a case, we 

would exercise our authority under 

section 1886(d)(5)(I)(i) of the Act to 

make an exception by assigning to the 

hospitals for one additional year the 

wage index that applied to the hospital 

in FY 2004 through FY 2005. We are 

proposing to use this authority to 

provide, under this unique 

circumstance, special protection to a 

small number of hospitals that would 

otherwise be subject to a temporary, but 

serious, disadvantage. Specifically, we 

would assign an RRC that meets the 

conditions described above, the wage 

index value of the MSA to which it was 

reclassified by the MGCRB in FY 2004. 

In order to be eligible for this exception, 

the hospital may not qualify for any 

geographic reclassification for 

discharges effective October 1, 2004 

(under the regular rules or the special 

one-time appeal provision). This 

assignment would be valid only for FY 

2005, after which the hospital would 

have the opportunity to apply for 

reclassification under the new threshold 

for all RRCs that we are proposing in 

this rule. 

We are proposing to revise proposed 

redesignated § 412.230(d)(3) and add a 

new § 412.64(j) to incorporate this 

proposal. 

4. Special Circumstances of Sole 

Community Hospitals (SCHs) in Low 

Population Density States 

Medicare program policy has long 

provided special treatment for hospitals 

in rural areas. For many years, rural 

hospitals have experienced lower 

margins than other hospitals, and 

Congress has created several special 

measures to address the unique issues of 

hospitals in rural areas. For example, 

Congress created the CAH program in 

1997 to ensure that beneficiaries in 

isolated areas had access to emergency 

services and certain essential inpatient 

services. To qualify for CAH 

designation, a hospital must be located 

more than 35 miles from the nearest 

similar hospital and have an average 

length of stay not exceeding 4 days. A 

CAH must provide 24-hour emergency 

care services and have no more than 25 

acute care beds. CAHs are currently 

paid 101 percent of their current 

Medicare allowable costs for inpatient 

and outpatient services. Similarly, the 

SCH program has long served to 

maintain access to needed health 

services for beneficiaries in isolated 

communities. SCHs are paid based on 

whichever of the following rates yields 

the greatest aggregate payment: the 

Federal national rate; the updated 

hospital-specific rate based on FY 1982 

costs per discharge; the updated 

hospital-specific rate based on FY 1987 

costs per discharge; or the updated 

hospital-specific rate based on FY 1996 

costs per discharge. 

Many rural hospitals have taken 

advantage of the opportunity to 

participate in the CAH program in 

recent years. We expect the number of 

hospitals to increase because of the 

changes made to the CAH program 

under recently enacted Public Law 108–

173 (for example, increasing the 

reasonable cost payment rate from 100 

percent to 101 percent and increasing 

the qualifying bed size limitation from 

15 to 25). Because CAHs are paid on the 

basis of their reasonable costs, the wage 

index is not a factor in their payments, 

and geographic reclassification is thus 

not an issue for these hospitals. 

However, for many rural hospitals that 

cannot qualify for CAH status, the wage 

index remains an important factor in 

their payment, even in the case of SCHs 

paid on their hospital-specific rate, for 

which the only impact of the wage 

index may be on their inpatient capital 

and outpatient payments. The 

regulations governing reclassifications 

by the MGCRB provide special 

treatment for SCHs by exempting them 

from the normal rules that require 

hospitals to demonstrate a close 

28290 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

proximity (15 miles in the case of urban 

hospitals; 35 miles for rural hospitals), 

and allowing these hospitals to 

reclassify to the urban area or the rural 

area that is the closest to the hospital. 

Wage index assignment is an 

especially pressing issue for hospitals in 

States with low population densities. In 

such States, employees are likely to 

commute greater distances to work. 

More distant areas are thus likely to 

compete for labor than is the case in 

more densely populated States. Because 

of this concern, and the program’s 

longstanding recognition of these 

hospitals, we exercised our discretion in 

implementing the special one-time wage 

index reclassification appeal provision 

of section 508 of Pub. L. 108–173 to 

provide special consideration for SCHs 

in States with fewer than 10 people per 

square mile, based on 2000 census data 

(Alaska, Montana, North Dakota, South 

Dakota, and Wyoming). Specifically, we 

provided that SCHs in such a State 

could reclassify to an MSA within its 

State. More than 20 SCHs in those States 

were able to reclassify under this 

provision. 

However, a number of SCHs from 

those States were precluded from 

reclassifying under the terms of section 

508. We are concerned that these 

hospitals could now be placed at a 

serious disadvantage in comparison to 

other SCHs in their States and regions. 

Under the authority of section 

1886(d)(5)(I)(i) of the Act, we are 

proposing to provide, under these 

unique and temporary circumstances, 

special protection to a small number of 

hospitals that would otherwise be 

subject to a temporary, but serious, 

disadvantage. Specifically, we are 

proposing to allow an SCH in one of the 

States with fewer than 10 people per 

square mile (Alaska, Montana, North 

Dakota, South Dakota, and Wyoming) to 

adopt the wage index of another 

geographic area within its State for 3 

years. 

Such wage index assignments would 

become effective for FY 2005 through 

FY 2007. Because the wage index 

assignments would be made in order to 

remedy a temporary disadvantage, the 

assignments would be for the 3-year 

period only and would not be available 

thereafter. In order to receive the wage 

index of another area under this 

proposal, a SCH may not qualify for 

reclassification (under the regular rules 

or the special one-time appeal 

provision) effective for discharges on or 

after October 1, 2004. SCHs in the 

identified States will not be required to 

meet proximity or access requirements 

similar to those required for 

reclassification in order to qualify for 

change in wage index under this 

provision. SCHs that wish to receive the 

wage index of another area within their 

State under this provision need only 

notify CMS in writing, at the address in 

the ‘‘Addresses’’ section provided for 

comments on this proposed rule, before 

the close of the comment period. The 

notification should contain:

• The hospital’s name and street 

address. 

• The hospital’s provider number. 

• The name, title, and telephone 

number of a contact person for 

communications. 

• A statement certifying the SCH 

status. 

• The name of the area within the 

State whose wage index the hospital 

wishes to adopt. 

5. Possible Reclassifications for 

Dominant Hospitals and Hospitals in 

Single-Hospital MSAs 

Representatives of individual 

hospitals have expressed concern about 

the special circumstances of dominant 

hospitals and hospitals in singlehospital MSAs in relation to the wage 

index and the rules governing 

geographic reclassification. The term 

‘‘dominant hospital’’ generally refers to 

a hospital that pays a substantial 

proportion of all the wages paid by 

hospitals geographically located in the 

hospital’s area. A dominant hospital 

necessarily has a preponderate 

influence on the wage index calculation 

for the area in which it is located. As a 

result, dominant hospitals find it 

difficult to meet the threshold 

requirements for wage index 

reclassification; for example, the 

requirement that an urban hospital’s 

average hourly wage is at least 108 

percent of the average hourly wage of 

hospitals in the area in which the 

hospital is located 

(§ 412.230(e)(1)(iii)(B)). Indeed, a 

dominant hospital would find it 

difficult to meet any threshold based on 

the ratio of the hospital’s average hourly 

wage to the average hourly wage of 

hospitals in the area, unless the 

dominant hospital’s wage data were 

removed from the denominator for 

purposes of the comparison. Dominant 

hospitals have argued that this places 

them in an unfair situation. While the 

lower wages of other, smaller hospitals 

in the area can still have the effect of 

holding down their wage index, their 

dominant position makes it difficult, or 

even impossible, to reclassify to another 

area where the wage index may more 

closely reflect their costs. 

Hospitals in single-hospital MSAs 

face a situation that is similar in certain 

respects, but quite different in others. 

By definition, the wage index for the 

sole hospital in an MSA is based 

completely on that hospital’s wage data. 

Such a hospital receives, in effect, its 

own unique wage index, reflecting the 

hospital’s exact position in relation to 

the national average hourly wage. As a 

result, these hospitals cannot qualify for 

reclassification, unless they are exempt 

from the wage threshold requirements 

due to rural referral center status. By 

definition, the ratio of such a hospital’s 

average hourly wages to the area average 

hourly wage is always 100 percent, and 

these hospitals thus cannot meet either 

the 108 percent threshold for urban 

hospitals or the 106 percent threshold 

for rural hospitals 

(§ 412.230(e)(1)(iii)(B)). Unlike 

dominant hospitals, hospitals in singlehospital MSAs cannot argue that they 

are disadvantaged by the effect that 

lower wage hospitals can have on the 

area wage index. However, these 

hospitals have contended that they are 

sometimes in the position of competing 

for labor with hospitals in nearby MSAs 

with higher wage indexes. Under these 

circumstances, these hospitals cannot 

reclasssify to the higher wage index area 

even if they meet the relevant distance 

requirements. These hospitals also 

contend that they cannot afford to 

compete with hospitals that are paid 

under a higher wage index, and the 3-

year lag in the data used to compute the 

wage index can place them in a 

permanent position of playing catchup. 

On the other hand, it is also true that 

such a disadvantage may be only 

temporary because increasing wages 

may eventually equalize wage index 

values despite the temporary financial 

disadvantage that would accrue to these 

hospitals during the 3-year lag period. 

We are inviting comment on the 

concerns raised by hospitals in these 

two situations and on possible methods 

of addressing these concerns. A number 

of measures might be considered to 

address the concerns of these hospitals. 

In the case of dominant hospitals, the 

threshold requirements for 

reclassification could be revised to 

provide that a hospital’s average hourly 

wage is at least 108 percent (in the case 

of urban hospitals) or 106 percent (in 

the case of rural hospitals) of the 

average hourly wages of all other

hospitals in the area. Removing a 

dominant hospital’s wages from the 

denominator of the ratio would remove 

the current disadvantage imposed by 

their dominant status, and make it more 

realistic for a dominant hospital to meet 

the threshold requirement. An existing 

provision under § 412.230(e)(4) provides 

this treatment for certain dominant 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28291

hospitals, specifically those that were 

approved for reclassification each year 

from 1992 through 1997. We could 

develop a parallel provision that applies 

to dominant hospitals generally. The 

use of this revised ratio could be 

restricted to the special circumstances 

of dominant hospitals, or extended to all 

hospitals. We could also adopt a revised 

threshold for dominant hospitals, as we 

did in the notice setting forth the 

criteria for reclassification under the 

one-time wage index appeal provision 

of section 508 of Public Law 108–173 

(69 FR 7342). Consistent with the 

criteria from that notice, a dominant 

hospital might be defined for this 

purpose as a hospital that pays at least 

40 percent of all the wages paid by 

hospitals geographically located in the 

hospital’s area. We are considering 

adopting one of these measures in the 

final rule, and welcome comments on 

the advisability of doing so. 

In the case of hospitals in singlehospital MSAs, one new provision that 

we are proposing to implement in this 

proposed rule may address some of their 

concerns (see section III.G.3.2. of this 

preamble). Section 505 of Public Law 

108–173 provides for a new wage index 

adjustment for hospitals in lower wage 

areas in cases where significant 

numbers of hospital workers commute 

from the lower wage area to higher wage 

areas nearby. The statute requires that at 

least 10 percent of the hospital workers 

in a county must be commuting to a 

higher wage area, or areas, in order for 

the hospitals in the county to receive 

the adjustment. The adjustment formula 

provides for an increase to the wage 

index for hospitals in the county, based 

on the differences between the wage 

index that applies to the county and the 

higher wage indexes of nearby areas, in 

proportion to the percentages of hospital 

workers commuting to the higher wage 

index areas. To the degree that hospitals 

in single-hospital MSAs experience 

disadvantages in competing for hospital 

workers with hospitals in higher wage 

index areas, we expect that the counties 

in which these hospitals are located 

would qualify for this adjustment. We 

are actively considering whether to 

address the concerns of these hospitals 

more directly. At the same time, we 

intend to analyze the extent to which 

this provision would alleviate the 

concerns of these hospitals. We 

welcome comments on the special 

circumstances of hospitals in singlehospital MSAs and whether their 

special circumstances should be 

addressed by revisions to the 

regulations governing reclassification, or 

other measures. 

6. Special Circumstances of Hospitals in 

All-Urban States 

Section 4410 of Public Law 105–33 

(BBA) provides that, for the purposes of 

section 1886(d)(3)(E) of the Act, for 

discharges occurring on or after October 

1, 1997, the area wage index applicable 

to any hospital that is located in an 

urban area of a State may not be less 

than the area wage index applicable to 

hospitals located in rural areas in the 

State. This provision, commonly 

referred to as the ‘‘rural floor,’’ currently 

affects the payments received by 150 

hospitals in 49 MSAs. For these 150 

hospitals, the applicable wage index 

and overall payment amounts under the 

IPPS are higher than they would be if 

their wage indexes were computed 

solely on the basis of the wage data from 

their MSAs. The wage index floor is 

applied in a budget neutral manner, so 

that aggregate IPPS payments each year 

are not greater or less than those that 

would have been made in the absence 

of this provision. 

The ‘‘rural floor’’ under section 4410 

of Public Law 105–33 does not apply in 

the two States that have no rural areas 

under the labor market definitions that 

apply within the IPPS. Hospitals in 

these two States have commented that 

the absence of a rural floor 

disadvantages them for wage index 

purposes compared to hospitals in 

States where the ‘‘rural floor’’ provision 

can apply. Specifically, some hospitals 

contend that they would have higher 

wage indexes, and higher payments 

overall, if there were a rural area in their 

State to set a floor under the wage 

indexes within the State.

We are considering whether it would 

be appropriate to adopt some measure to 

address the concerns of these hospitals. 

For example, we are examining the 

ratios between the lowest and highest 

wage index values in States where the 

‘‘rural floor’’ affects the wage indexes of 

some hospitals. We might consider 

employing the average ratio of highestto-lowest wage indexes in those States 

to set an imputed ‘‘rural floor’’ for allurban States. For example, assume the 

average ‘‘lowest-to-highest’’ ratio of 

States with rural floors is 0.9500. 

Assume further that the lowest wage 

index in an all-urban State is 1.0000, 

and the highest is 1.1000. The ‘‘lowestto-highest’’ ratio for that State is 0.9091. 

If we apply the average ‘‘lowest-tohighest’’ ratio to the highest wage index 

in the all-urban State, we would 

multiply 0.9500 by 1.1000, which yields 

1.0450. The imputed analogue to the 

‘‘rural floor’’ for the all-urban State 

would then be 1.0450. Any hospital 

with a regular wage index value less 

than 1.0450 would then receive the new 

imputed floor. 

We welcome comments on the 

position of hospitals in all-urban States 

relative to hospitals that receive the 

‘‘rural floor’’ in other States. We also 

welcome comments on whether it 

would be advisable to adopt an imputed 

floor measure or some alternative 

measure to address the concerns of 

hospitals in these States. We note that, 

in order to be consistent with the 

statutory provision establishing the 

rural floor, we would apply any such 

measure in budget neutral manner, that 

is, we would adjust the standardized 

amount so that aggregate IPPS payments 

each year are not greater or less than 

those that would have been made in the 

absence of this provision. 

O. Payment for Direct Graduate Medical 

Education (Existing § 413.86) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Graduate Medical Education’’ at the 

beginning of your comment.] 

1. Background 

Section 1886(h) of the Act, as added 

by section 9202 of the Consolidated 

Omnibus Budget Reconciliation Act 

(COBRA) of 1985 (Pub. L. 99–272) and 

implemented in regulations at existing 

§ 413.86, establishes a methodology for 

determining payments to hospitals for 

the costs of approved GME programs. 

Section 1886(h)(2) of the Act, as added 

by COBRA, sets forth a payment 

methodology for the determination of a 

hospital-specific, base-period per 

resident amount (PRA) that is calculated 

by dividing a hospital’s allowable costs 

of GME for a base period by its number 

of residents in the base period. The base 

period is, for most hospitals, the 

hospital’s cost reporting period 

beginning in FY 1984 (that is, the period 

of October 1, 1983 through September 

30, 1984). The PRA is multiplied by the 

weighted number of full-time equivalent 

(FTE) residents working in all areas of 

the hospital (and nonhospital sites, 

when applicable), and the hospital’s 

Medicare share of total inpatient days to 

determine Medicare’s direct GME 

payments. In addition, as specified in 

section 1886(h)(2)(D)(ii) of the Act, for 

cost reporting periods beginning on or 

after October 1, 1993, through 

September 30, 1995, each hospitalspecific PRA for the previous cost 

reporting period is not updated for 

inflation for any FTE residents who are 

not either a primary care or an obstetrics 

and gynecology resident. As a result, 

hospitals that train primary care and 

obstetrics and gynecology residents, as 

well as nonprimary care residents in FY 

28292 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

1994 or FY 1995, have two separate 

PRAs: one for primary care and 

obstetrics and gynecology and one for 

nonprimary care. 

The BBRA (Pub. L. 106–113) amended 

section 1886(h)(2) of the Act to establish 

a methodology for the use of a national 

average PRA in computing direct GME 

payments for cost reporting periods 

beginning on or after October 1, 2000, 

and on or before September 30, 2005. 

The BBRA established a ‘‘floor’’ for 

hospital-specific PRAs equal to 70 

percent of the locality-adjusted national 

average PRA. In addition, the BBRA 

established a ‘‘ceiling’’ that limited the 

annual adjustment to a hospital-specific 

PRA if the PRA exceeded 140 percent of 

the locality-adjusted national average 

PRA. Section 511 of the BIPA (Pub. L. 

106–554) increased the floor established 

by the BBRA to equal 85 percent of the 

locality-adjusted national average PRA. 

Existing regulations at § 413.86(e)(4) 

specify that, for purposes of calculating 

direct GME payments, each hospitalspecific PRA is compared to the floor 

and the ceiling to determine whether a 

hospital-specific PRA should be revised. 

Section 1886(h)(4)(F) of the Act 

established caps on the number of 

allopathic and osteopathic residents that 

hospitals may count for purposes of 

calculating direct GME payments. For 

most hospitals, the caps were the 

number of allopathic and osteopathic 

FTE residents training in the most 

recent cost reporting period ending on 

or before December 31, 1996.

Note to Readers: This proposed rule 

includes a major redesignation of the 

contents of § 413.86. As a result of the 

numerous amendments we have made over 

the years, the size of § 413.86 has become 

voluminous and difficult to follow because of 

the multiple levels of coding. We are taking 

a first step to split the one section (§ 413.86) 

into nine individual sections (§§ 413.75 

through 413.83). We are proposing to 

designate each first level paragraph under 

existing § 413.86 as a separate new section 

and vacate § 413.86. At this time, we are not 

proposing to make any changes in the 

language of these new redesignated sections, 

except for the changes that are discussed in 

section IV.O. of this preamble (which would 

conform to the existing language of § 413.86) 

and any appropriate cross-reference and 

conforming changes. We are providing a 

detailed crosswalk of the existing paragraphs 

of § 413.86 to the proposed new §§ 413.75 

through 413.83. In addition, in any 

discussion of changes we are proposing to 

make, we are providing both the existing 

citation under § 413.86 and the proposed 

redesignated section and paragraph. At a 

later date, we may further refine the contents 

of the redesignated sections to improve 

readability.

2. Reductions of and Increases in 

Hospitals’ FTE Resident Caps for GME 

Payment Purposes Under Section 422 of 

Public Law 108–173 (Proposed 

Redesignated § 413.79 (a Proposed 

Redesignation of § 413.86(g)) 

a. General Background on Methodology 

for Determining the FTE Resident Count 

As we explain earlier in this 

preamble, Medicare makes both direct 

and indirect GME payments to hospitals 

that train residents in approved medical 

residency training programs. Direct 

GME payments are made in accordance 

with section 1886(h) of the Act, based 

generally on hospital-specific PRAs, the 

number of FTE residents a hospital 

trains, and the hospital’s Medicare 

patient share. IME payments are made 

in accordance with section 1886(d)(5)(B) 

of the Act, based generally on the ratio 

of the hospital’s FTE residents to the 

number of hospital beds. Accordingly, 

the calculation of both direct GME and 

IME payments is affected by the number 

of FTE residents that a hospital is 

allowed to count; generally, the greater 

the number of FTE residents a hospital 

counts, the greater the amount of 

Medicare direct GME and IME payments 

the hospital will receive. In an attempt 

to end the implicit incentive for 

hospitals to increase the number of FTE 

residents, Congress instituted a cap on 

the number of allopathic and 

osteopathic residents a hospital is 

allowed to count for direct GME and 

IME purposes under the provisions of 

section 1886(h)(4)(F) of the Act for 

direct GME and section 1886(d)(5)(B)(v) 

of the Act for IME. Dental and podiatric 

residents were not included in this 

statutorily mandated cap. 

b. Reduction of Hospitals’ FTE Resident 

Caps Under the Provisions of Section 

422 of Public Law 108–173

Medicare makes direct GME and IME 

payments based only on the number of 

FTE residents that is within a hospital’s 

FTE resident cap. Some hospitals have 

trained a number of allopathic and 

osteopathic residents in excess of their 

FTE resident caps. Other hospitals have 

reduced their resident counts to some 

level below their FTE resident caps. 

Section 422 of Public Law 108–173 

added a new section 1886(h)(7) to the 

Act to provide for reductions in the 

statutory resident caps under Medicare 

for certain hospitals and authorize a 

‘‘redistribution’’ of the FTE resident 

slots resulting from the reduction in the 

FTE resident caps to other hospitals. 

The new section 1886(h)(7)(A) of the 

Act provides that a hospital’s FTE 

resident cap will be reduced if its 

reference resident level, as described 

below, is less than its otherwise 

applicable FTE resident cap. Rural 

hospitals with less than 250 acute care 

inpatient beds are exempt from these 

reductions. For other hospitals, the 

reduction will be equal to 75 percent of 

the difference between the hospital’s 

otherwise applicable FTE resident cap 

and its reference resident level. 

(We note that the remainder of this 

section IV.O. of this preamble addresses 

the provisions of section 1886(h)(7) of 

the Act, as added by section 422 of 

Public Law 108–173, as it relates to 

hospitals’ FTE resident caps for direct 

GME and IME payment purposes. We 

address the provisions of section 

1886(h)(7) of the Act as it relates 

specifically to the IME adjustment 

under section IV.K.2. of this preamble.) 

Under the new section 1886(h)(7)(B) 

of the Act, the Secretary is authorized to 

increase the otherwise applicable FTE 

resident caps for certain categories of 

hospitals for portions of cost reporting 

periods occurring on or after July 1, 

2005, by an aggregate number that does 

not exceed the estimated overall 

reduction in FTE resident caps for all 

hospitals under section 1886(h)(7)(A). A 

single hospital may receive an increase 

in its FTE resident cap of no more than 

25 additional FTEs. In determining 

which hospitals would receive an 

increase in their FTE resident caps, 

section 1886(h)(7)(B) of the Act directs 

us to—

• Take into account the demonstrated 

likelihood of the hospital filling the 

additional positions within the first 

three cost reporting periods beginning 

on or after July 1, 2005. 

• Establish a priority order to 

distribute resident slots first to programs 

in hospitals located in rural areas; 

second, to urban hospitals that are not 

in large urban areas; and third, to other 

hospitals operating a training program 

in a State where there is no other 

training program for a particular 

specialty in the State. 

In summary, section 422 of Public 

Law 108–173 added a new section 

1886(h)(7) of the Act that prescribes a 

methodology for determining reductions 

to certain hospitals’ FTE resident caps 

based on unused FTE resident slots, 

provides for certain exceptions to the 

FTE resident cap reductions, and 

includes general criteria that CMS must 

consider in the redistribution, to other 

hospitals, of the estimated number of 

FTE resident slots resulting from the 

reductions in the FTE resident caps. In 

this proposed rule, we are proposing 

procedures for determining whether, 

and by what amount, a hospital’s FTE 

resident cap is subject to a reduction 

under section 1886(h)(7) of the Act. We 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28293

also are proposing an application 

process for hospitals that seek to receive 

increases in their FTE resident caps and 

the specific criteria that we would use 

to determine which hospitals will 

receive the increases in their FTE 

resident caps under section 

1886(h)(7)(B) of the Act. 

c. Hospitals Subject to the FTE Resident 

Cap Reduction 

As indicated earlier, section 

1886(h)(7)(A) of the Act, as added by 

section 422 of Public Law 108–173, 

provides that if a hospital’s ‘‘reference 

resident level’’ is less than its 

‘‘otherwise applicable resident limit,’’

its ‘‘otherwise applicable resident limit’’

will be reduced by 75 percent of the 

difference between its ‘‘otherwise 

applicable resident limit’’ and its 

‘‘reference resident level.’’ Under the 

amendments made by section 422, the 

‘‘reference resident level’’ generally 

refers to the number of unweighted 

allopathic and osteopathic FTE 

residents who are training at a hospital 

in a given cost reporting period. The 

‘‘otherwise applicable resident limit’’

refers to a hospital’s FTE resident cap 

established under sections 

1886(h)(4)(F)(i) and (h)(4)(H) of the Act. 

A hospital’s permanent FTE cap under 

section 1886(h)(4)(F)(i) of the Act is 

based on (1) for an urban hospital, the 

number of unweighted allopathic or 

osteopathic FTE residents in the 

hospital’s most recent cost reporting 

period ending on or before December 

31, 1996 (the ‘‘1996 cap’’), as specified 

under existing regulations at 

§ 413.86(g)(4) (proposed redesignated 

§ 413.79(c)(2)), and, if applicable, the 

1996 cap adjusted for new programs as 

specified under existing § 413.86(g)(6) 

(proposed redesignated § 413.79(e)); or 

(2) for a rural hospital, 130 percent of 

the 1996 cap increased, as specified 

under existing § 413.86(g)(4) and, if 

applicable, the 1996 cap adjusted for 

new programs as specified under 

§ 413.86(g)(6), or the 1996 cap with both 

adjustments. We also note that a 

hospital’s 1996 cap may be adjusted in 

other instances (such as temporary 

adjustments for program or hospital 

closure) if the hospital is a member of 

a Medicare GME affiliated group under 

existing § 413.86(b) (proposed 

redesignated § 413.75(b)), but we will 

discuss the applicability of affiliations 

under section 1886(h)(7)(A) of the Act 

in more detail at section IV.O.2.f.(5) of 

this preamble. 

In our discussion of the provisions of 

section 422 of Public Law 108–173 

under this section of this proposed rule, 

we will generally refer to a hospital’s 

number of unweighted allopathic and 

osteopathic FTE residents in a particular 

period as a hospital’s ‘‘resident level.’’

We will also refer to a hospital’s 

resident level in the applicable 

‘‘reference period,’’ as explained further 

below, as the hospital’s ‘‘reference 

resident level.’’ In addition, we will 

refer to the ‘‘otherwise applicable 

resident cap’’ as the hospital’s FTE 

resident cap that is applicable during a 

particular cost reporting period. Thus, 

we are proposing that if a hospital’s 

resident level is less than the hospital’s 

otherwise applicable resident cap in the 

‘‘reference period’’ (as explained below), 

effective for portions of cost reporting 

periods occurring on or after July 1, 

2005, we would permanently reduce the 

hospital’s FTE resident cap by 75 

percent of the difference between a 

reference resident level and the 

otherwise applicable FTE resident cap. 

For example, if a hospital’s otherwise 

applicable FTE resident cap for the 

reference period is 100, and its resident 

level for that period is 80 FTEs, we 

would reduce the hospital’s FTE 

resident cap by 15 FTEs [0.75 (100¥80)] 

= 15). (Proposed redesignated 

§ 413.79(c)(3)). 

d. Exemption From FTE Resident Cap 

Reduction for Certain Rural Hospitals 

Section 1886(h)(7)(A)(i)(II) of the Act, 

as added by section 422 of Public Law 

108–173, specifically exempts rural 

hospitals (as defined in section 

1886(d)(2)(D)(ii) of the Act) with less 

than 250 acute care inpatient beds from 

the possible 75 percent reduction to 

their FTE resident caps. Section 

1886(d)(2)(D)(ii) of the Act defines a 

rural area as any area outside a 

Metropolitan Statistical Area (MSA). 

Under the existing regulations at 

§ 413.62(f)(ii), an ‘‘urban area’’ means 

(1) a Metropolitan Statistical Area 

(MSA) or New England County 

Metropolitan Area (NECMA); or (2) the 

following New England counties: 

Litchfield County, Connecticut; York 

County, Maine; Sagadahoc County, 

Maine; Merrimack County, New 

Hampshire; and Newport County, 

Rhode Island. Under existing 

§ 413.62(f)(iii), a ‘‘rural area’’ means any 

area outside an urban area. In addition, 

we note that under section III. of this 

preamble, which discusses wage areas, 

we are proposing to no longer recognize 

NECMAs as a distinct category of wage 

areas. Thus, for purposes of the 

amendments made by section 422, we 

are proposing that any hospital located 

in an area that is not in a MSA is a rural 

hospital, regardless of any 

reclassification under § 412.102 or 

§ 412.103. We note that this definition 

of ‘‘rural’’ is consistent with our 

proposal under section III. of this 

preamble concerning designation of 

wage index areas. 

A hospital’s bed size is based on its 

number of available beds, as determined 

for IME payment purposes under 

§ 412.105 of the regulations. For 

purposes of determining whether a rural 

hospital has less than 250 beds, we are 

proposing to use data from the rural 

hospital’s most recent cost reporting 

period ending on or before September 

30, 2002. (This information may be 

found on Worksheet S–3, Part I of the 

Medicare cost report, CMS–2552–96, 

column 2, the sum of lines 1 and 6 

through 10, divided by the number of 

days in the cost reporting period.) This 

is the cost reporting period under 

section 1886(h)(7)(A)(ii)(I) of the Act 

that is to be used in determining a 

hospital’s reference resident level (the 

unweighted allopathic and osteopathic 

FTE resident count) (unless a hospital 

makes and CMS grants a timely request 

under section 1886(h)(7)(A)(ii)(II) of the 

Act). We are proposing that if a rural 

hospital has less than 250 beds in its 

most recent cost reporting period ending 

on or before September 30, 2002, it 

would not be subject to a possible 

reduction to its FTE resident cap under 

section 1886(h)(7)(A) of the Act. 

However, if a rural hospital has at least 

250 beds in its most recent cost 

reporting period ending on or before 

September 30, 2002, we are proposing 

that the rural hospital would be subject 

to a possible reduction to its FTE 

resident cap. (Proposed redesignated 

§ 413.79(c)(3)(i)). 

e. Determining the Estimated Number of 

FTE Resident Slots Available for 

Redistribution 

Under section 1886(h)(7)(A) of the 

Act, we will determine the number of 

resident positions available for 

redistribution by estimating possible 

reductions to hospitals’ FTE resident 

caps. We believe that section 422 allows 

us to distinguish between the FTE 

counts that are used to determine the 

number of FTE resident slots that are 

available for redistribution (that is, the 

‘‘resident pool’’), and the actual number 

of FTE residents by which hospitals’

FTE resident caps are ultimately 

reduced. We are proposing to estimate 

the reduction to a hospital’s FTE 

resident cap under section 1886(h)(7)(A) 

of the Act for purposes of determining 

the number of FTEs that a hospital 

might contribute to the resident pool. 

This proposed interpretation is based on 

the language at section 1886(h)(7)(B)(i) 

of the Act, as added by section 422(a)(3), 

which states that the ‘‘aggregate number 

of increases in the otherwise applicable 

28294 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

resident limits under this subparagraph 

may not exceed the Secretary’s estimate

of the aggregate reduction in such limits 

***’’ (emphasis added). We are 

proposing to interpret this language to 

mean that we would have complied 

with the statute as long as the aggregate 

number of FTE residents by which we 

increase the FTE resident caps of 

qualifying hospitals under section 

1886(h)(7)(B) of the Act is not more than 

the estimate of the aggregate number of 

FTE residents by which we would 

reduce the FTE resident caps of 

hospitals whose reference resident 

levels are less than their otherwise 

applicable FTE resident caps. However, 

we could subsequently perform an 

audit, as described further in section 

IV.O.2.f.(3) of this preamble, in order to 

make a final determination regarding 

any reductions to a hospital’s FTE 

resident cap.

To ensure that we will begin making 

payments for most hospitals based on 

the revised FTE resident caps by July 1, 

2005, we are proposing to set a date by 

which we will have estimated a 

hospital’s resident level and compared 

it to the hospital’s otherwise applicable 

resident cap to estimate whether, and by 

how much, the hospital’s FTE resident 

cap would be reduced. We are not 

proposing to commit to make a final 

determination as to whether, and by 

how much, a particular hospital’s FTE 

resident cap should be reduced as of 

this date, nor are we proposing to 

commit to inform any hospital that it 

will receive an increase to its FTE 

resident cap by this date. Rather, we are 

only proposing to use this date as an 

internal ‘‘deadline’’ to ensure that we 

will have sufficient time to distribute 

the resident pool and begin making 

payments for most hospitals based on 

the revised FTE resident caps by July 1, 

2005. We are proposing that this date be 

May 1, 2005, and that date would apply 

for all hospitals for purposes of 

determining an estimate of whether and 

by how much their FTE resident caps 

should be reduced. 

Accordingly, in the event that the 

fiscal intermediaries have not 

completed an audit (explained further 

under section IV.O.2.f.(3) of this 

preamble) by May 1, 2005, we are 

proposing that CMS may estimate the 

number of FTE residents by which a 

hospital’s FTE resident cap should be 

reduced by May 1, 2005. For example, 

a fiscal intermediary may estimate by 

May 1, 2005, that Hospital A’s FTE 

resident cap should be reduced by 10 

FTEs. Thus, we would place 10 FTEs 

into the resident pool. It is possible that 

even after May 1, 2005, the fiscal 

intermediary may continue to audit 

Hospital A’s relevant cost report(s) to 

determine if, in fact, 10 FTEs is the 

appropriate amount by which to reduce 

Hospital A’s FTE resident cap, and 

could ultimately conclude that Hospital 

A’s FTE resident cap should only be 

reduced by 8 FTEs. If the fiscal 

intermediary makes this final 

determination by May 1, 2005, we 

would change the number of FTE 

residents in the resident pool 

attributable to Hospital A from 10 FTEs 

to 8 FTEs. If the fiscal intermediary does 

not make this determination by May 1, 

2005, based on the audit, we would only 

reduce Hospital A’s FTE resident cap by 

8 FTEs effective July 1, 2005, but the 

number of FTE residents in the resident 

pool attributable to Hospital A would 

remain at 10 FTEs (the estimated 

number as of May 1, 2005). Similarly, if 

the fiscal intermediary ultimately 

concluded that Hospital A’s FTE 

resident cap should be reduced by 12 

FTEs, but this final determination is not 

made by May 1, 2005, Hospital A’s FTE 

resident cap would be reduced by 12 

FTEs effective July 1, 2005, but the 

number of FTE residents in the resident 

pool attributable to Hospital A would 

remain at 10 FTEs. 

As we stated above, because we 

believe that section 422 allows us to 

distinguish between the FTE counts that 

are used to determine the size of the 

resident pool, and the actual number of 

FTE residents by which hospitals’ FTE 

resident caps are ultimately reduced, we 

are proposing, in certain instances, to 

use estimated information to determine 

possible reductions to hospitals’ FTE 

resident caps. As described further 

below, sections 1886(h)(7)(A)(ii) and 

(h)(7)(A)(iii) of the Act direct CMS to 

adjust a hospital’s reference resident 

level in certain instances, due to an 

expansion of an existing program that is 

not reflected on the most recent settled 

cost report, or to include the number of 

residents for which a new program was 

accredited, or for hospitals that are 

members of a Medicare GME affiliated 

group as of July 1, 2003. We note that, 

in adjusting the reference resident level 

in these instances, the number of FTE 

residents by which we adjust the 

reference resident level for purposes of 

determining possible reductions to a 

hospital’s FTE resident cap may not be 

the actual or audited number of FTE 

residents that we would otherwise use 

for direct GME or IME payment 

purposes. For example, for expansions 

under newly approved programs (as 

explained in more detail in section 

IV.O.2.f.(3) of this preamble), we are 

proposing to adjust the reference 

resident level to include the number of 

residents for which a new program was 

accredited at a hospital, even though at 

the time the fiscal intermediary is 

determining possible reductions to a 

hospital’s FTE resident cap, the hospital 

may not be training the full complement 

of residents for which the program was 

accredited. Thus, the number of FTE 

residents (including those training in 

the newly accredited program) for 

purposes of IME and direct GME 

payment would be dependent upon the 

actual number of FTEs the hospital is 

permitted to count in a particular cost 

reporting period, as determined in 

accordance with the regulations at 

§ 412.105 for IME and § 413.86 for direct 

GME. 

In addition, we realize that there may 

be instances where a hospital’s FTE 

resident cap or a hospital’s FTE resident 

count for the reference cost reporting 

period might be under appeal. We 

believe that appeals related to these 

issues should be resolved through the 

normal course of business. In the event 

that an appeal that may affect 

determinations made under section 

1886(h)(7)(A) of the Act is not resolved 

by May 1, 2005, we are proposing that 

we would estimate the number of FTE 

residents by which a hospital’s FTE 

resident cap should be reduced (or not 

reduced, as applicable) by May 1, 2005. 

f. Determining the Possible Reduction to 

a Hospital’s FTE Resident Cap 

(1) Reference Resident Level—General 

In order to determine if a hospital’s 

resident level is less than the hospital’s 

otherwise applicable FTE resident cap, 

section 1886(h)(7)(A)(ii) of the Act, as 

added by section 422 of Public Law 

108–173, directs the Secretary to use 

one of two reference cost reporting 

periods. Section 1886(h)(7)(A)(ii)(I) of 

the Act directs CMS to use a hospital’s 

most recent cost reporting period ending 

on or before September 30, 2002, ‘‘for 

which a cost report has been settled (or, 

if not, submitted (subject to audit)), as 

determined by the Secretary,’’ as the 

reference period, unless we grant the 

hospital’s timely request to use a later 

cost report under section 

1886(h)(7)(A)(ii)(II) of the Act, as 

described under section IV.O.2.f.(2) of 

this preamble. Generally, if the 

hospital’s resident level for either direct 

GME or IME is less than the hospital’s 

otherwise applicable resident cap for 

direct GME or IME, respectively, for the 

most recent cost reporting period ending 

on or before September 30, 2002, the 

hospital’s FTE resident cap for direct 

GME or IME will be reduced by 75 

percent of the difference between the 

resident level and the otherwise 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28295

applicable FTE resident cap. On April 

30, 2004, we issued a One-Time 

Notification (OTN) (Transmittal 77, CR 

3247), ‘‘Redistribution of Unused 

Resident Positions, Section 422 of the 

Medicare Modernization Act of 2003 

(MMA), Public Law 108–173, for 

Purposes of Graduate Medical 

Education (GME) Payments’’ that 

prescribed certain requirements related 

to the implementation of section 422 

and established a deadline by which a 

hospital must exercise its option to 

request that we use of later cost report 

as the reference cost report. If the 

hospital’s cost report for the most recent 

cost reporting period ending on or 

before September 30, 2002, is settled by 

April 30, 2004, the date on which the 

OTN was issued, we are proposing to 

use that cost report to determine if, and 

by how much, a hospital’s FTE resident 

cap should be reduced. We note that the 

‘‘settled’’ cost report does not 

necessarily mean the initial cost report 

settlement. The fiscal intermediary may 

have previously settled the cost report, 

reopened it to audit it, and then settled 

the cost report again, issuing a revised 

Notice of Program Reimbursement 

(NPR). Thus, we would refer to the more 

recently issued NPR. When a hospital’s 

cost report for the most recent cost 

reporting period ending on or before 

September 30, 2002, has been settled by 

April 30, 2004, we are proposing to use 

the most recently settled cost report as 

of April 30, 2004, to determine any 

reduction to the hospital’s FTE resident 

cap under section 1886(h)(7)(A)(ii)(I) of 

the Act (unless we grant the hospital’s 

timely request under section 

1886(h)(7)(A)(ii)(II) of the Act to use a 

later cost report, as described in section 

IV.O.2.f.(2) of this preamble). If the 

hospital’s cost report for the most recent 

cost reporting period ending on or 

before September 30, 2002 has not yet 

been settled as of April 30, 2004, the assubmitted cost report would be used to 

determine any reduction in the FTE 

resident cap, subject to audit by the 

fiscal intermediary. If the cost report 

was initially settled, but then reopened, 

and the fiscal intermediary has not 

issued a revised NPR prior to April 30, 

2004, the data from the initially settled 

cost report will be used to determine the 

possible reductions to the FTE resident 

caps. 

(2) Expansion of an Existing Program 

Section 1886(h)(7)(A)(ii)(II) of the Act, 

as added by section 422(a) of Public 

Law 108–173, provides that if a 

hospital’s resident level increased due 

to an expansion of an existing program, 

and that expansion is not reflected on 

the hospital’s most recent settled cost 

report, a hospital may make a timely 

request to CMS that, rather than using 

its most recent cost reporting period 

ending on or before September 30, 2002, 

to determine if its FTE resident cap 

should be reduced, CMS should use the 

cost report for the hospital’s cost 

reporting period that includes July 1, 

2003. For example, assume a hospital’s 

most recent settled cost report is 

September 30, 2000 (that is, no NPRs 

were issued for subsequent year cost 

reports). The hospital increased its 

resident level due to an expansion of an 

existing program in its fiscal year 

ending September 30, 2001. The 

hospital may submit a timely request 

that CMS use its cost report that 

includes July 1, 2003 (which would be 

its cost report for the fiscal year ending 

September 30, 2003), to determine if 

and by how much the hospital’s FTE 

resident cap should be reduced. 

(Proposed redesignated 

§ 413.79(c)(3)(ii)(A)(2)). As explained on 

page 3 of the OTN, to be considered a 

timely and proper request, a hospital’s 

request to use its cost reporting period 

that includes July 1, 2003, must be 

signed and dated by the hospital’s chief 

financial officer (or equivalent) and 

submitted to its fiscal intermediary on 

or before June 4, 2004. In its timely 

request, the hospital must include the 

following:

(1) The FTE resident caps for direct 

GME and IME and the number of 

unweighted allopathic and osteopathic 

FTE residents for direct GME and IME 

in its most recently settled cost report 

(that is, its cost report that is more 

recently settled as of April 30, 2004). 

(2) The FTE resident caps for direct 

GME and IME and the unweighted 

allopathic and osteopathic FTE 

residents for direct GME and IME for 

each cost report after its most recently 

settled cost report, up to and including 

its cost reporting period that includes 

July 1, 2003. If the cost reporting period 

that includes July 1, 2003, has not 

ended as of June 4, 2004, the hospital 

must report the estimated number of 

unweighted allopathic and osteopathic 

residents for that cost reporting period. 

(3) If not already reported in 

accordance with steps 1 and 2 above, 

the FTE resident caps for direct GME 

and IME and the number of unweighted 

allopathic and osteopathic FTE 

residents for direct GME and IME in its 

most recent cost reporting period ending 

on or before September 30, 2002. 

In addition, as we stated in the OneTime Notification (OTN), (Transmittal 

77, CR 3247), ‘‘Redistribution of Unused 

Resident Positions, Section 422 of the 

Medicare Modernization Act of 2003 

(MMA), Public Law 108–173, for 

Purposes of Graduate Medical 

Education a hospital should refer to its 

most recently settled cost report as of 

the issuance of the OTN (that is, April 

30, 2004) to determine whether the 

hospital believes it has expanded an 

existing program in a cost reporting 

period subsequent to the one for the 

most recently settled cost report. 

We also are proposing that, for 

purposes of this provision, an 

‘‘expansion of an existing program’’

means that, except for expansions due 

to newly approved programs, as 

described below in section IV.O.2.f.(4) 

of this preamble, the hospital’s total 

number of unweighted allopathic and 

osteopathic FTE residents training in 

existing programs in a cost reporting 

period up to and including the 

hospital’s cost report that includes July 

1, 2003, is greater than the resident level 

in the hospital’s most recent settled cost 

report. (Proposed redesignated 

§ 413.79(c)(3)(ii)(A)(3)). In other words, 

generally, as long as a hospital trained 

more unweighted allopathic and 

osteopathic FTE residents in a cost 

reporting period after its most recent 

settled cost report in programs that were 

existing during the cost reporting period 

for the most recently settled cost report, 

it may submit a timely request that its 

cost report that includes July 1, 2003, be 

used for purposes of determining any 

FTE resident cap reduction under 

section 1886(h)(7)(A)(i) of the Act. We 

note that if a hospital expanded an 

existing program after its most recent 

settled cost report, and then 

subsequently reduced its FTE resident 

count to the extent that it actually 

trained fewer unweighted allopathic 

and osteopathic FTE residents in its cost 

report that includes July 1, 2003, than 

in its most recent cost reporting period 

ending on or before September 30, 2002, 

the hospital would not benefit from, and 

would likely not make, a timely request 

that its cost report that includes July 1, 

2003, be used for purposes of 

determining a possible reduction to its 

FTE resident cap. 

(3) Audits of the Reference Cost 

Reporting Periods 

As mentioned under section 

IV.O.2.f.(1) of this preamble, to 

determine a possible reduction to a 

hospital’s FTE resident cap, section 

1886(h)(7)(A)(ii)(I) of the Act, as added 

by section 422(a) of Public Law 108–

173, directs CMS to use a hospital’s 

most recent cost reporting period ending 

on or before September 30, 2002, ‘‘for 

which a cost report has been settled (or, 

if not, submitted (subject to audit), as 

determined by the Secretary’’ (emphasis 

added). We are proposing to interpret 

28296 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

this language to mean that, if a 

hospital’s cost report for the most recent 

cost reporting period ending on or 

before September 30, 2002, has been 

settled, then, unless the hospital 

submits a timely request to use the cost 

reporting period that includes July 1, 

2003, we would use the hospital’s 

settled cost report without further audit 

to determine possible reductions to the 

FTE resident caps. We also are 

proposing to interpret this language to 

mean that if a hospital’s cost report for 

the most recent cost reporting period 

ending on or before September 30, 2002, 

has not been settled, the hospital’s assubmitted cost report for the most recent 

cost reporting period ending on or 

before September 30, 2002, would be 

subject to audit by the fiscal 

intermediary. In addition, as stated 

under section 1886(h)(7)(A)(ii)(II) of the 

Act, use of a hospital’s cost report that 

includes July 1, 2003 is made ‘‘after 

audit and subject to the discretion of the 

Secretary.’’ A hospital’s cost report that 

includes July 1, 2003 may be at various 

stages of settlement, or may not even be 

submitted at the time this proposed rule 

is published. For example, if a hospital 

has a fiscal year end of June 30, its cost 

reporting period that includes July 1, 

2003 would not end until June 30, 2004. 

This cost report is not required to be 

submitted until 5 months after the cost 

reporting period closes, which would be 

by December 1, 2004. In any case, the 

fiscal intermediary would need to make 

a determination as to whether a hospital 

has actually increased its resident level 

due to an expansion of an existing 

program that is not reflected on the most 

recent settled cost report. Further, the 

FTE resident counts that are included 

(or would be included) in the cost report 

that includes July 1, 2003, are subject to 

audit by the fiscal intermediary to 

ensure that an appropriate 

determination is made as to whether, 

and by how much, a hospital’s FTE 

resident cap will be reduced. To 

facilitate these determinations, we are 

proposing that the fiscal intermediaries 

may audit the FTE resident counts as 

necessary in the most recently settled 

cost reports and in the cost reports up 

to and including the cost report for the 

cost reporting period that includes July 

1, 2003. 

Fiscal intermediaries will perform 

desk or onsite audits related to section 

422, using instructions that will be 

issued in a separate document. As we 

explained in the OTN, Transmittal No. 

77, CR 3247, in the interest of time and 

the most efficient use of audit resources, 

we have required that if a hospital 

would like CMS to use its cost report 

that includes July 1, 2003, as its 

reference period due to an expansion of 

an existing program, the hospital must 

notify the fiscal intermediary in 

accordance with the instructions 

provided in the OTN by June 4, 2004. 

If a hospital submits a timely request 

that its cost report that includes July 1, 

2003, be used, the fiscal intermediary 

would audit that cost report and 

previous cost reports as necessary to 

determine if the hospital increased its 

resident level due to an expansion of an 

existing program that is not reflected on 

the most recent settled cost report. If a 

hospital does not submit a timely 

request to the fiscal intermediary that its 

cost report that includes July 1, 2003, be 

used, the fiscal intermediary would use 

the cost report for the most recent cost 

reporting period ending on or before 

September 30, 2002, to determine if, and 

by how much, a hospital’s FTE resident 

cap should be reduced, as specified 

under section 1886(h)(7)(A)(ii)(I) of the 

Act. If the cost report that is used to 

determine the possible reduction to a 

hospital’s FTE resident count is for a 

period of less than or more than 12 

months, we are proposing that the fiscal 

intermediary would prorate the FTE 

resident caps and unweighted FTE 

residents to equal 12-month counts. 

(4) Expansions Under Newly Approved 

Programs 

Under section 1886(h)(7)(ii)(III) of the 

Act, as added by section 422(a)(3) of 

Public Law 108–173, a hospital may 

request that its reference resident level 

be adjusted to include residents in 

certain newly approved programs. 

Specifically, if a hospital’s new program 

was accredited by the appropriate 

accrediting body (that is, the 

Accreditation Council on Graduate 

Medical Education (ACGME) or the 

American Osteopathic Association 

(AOA)) before January 1, 2002, but was 

not in operation during the hospital’s 

reference period, the hospital may 

submit a timely request that we adjust 

the reference resident level to include 

the number of residents for which a new 

program was accredited at a hospital(s). 

For a hospital that requests an 

adjustment due to a newly approved 

program, we are proposing to determine 

a hospital’s reference period as we 

otherwise would. If a hospital received 

accreditation for a new medical 

residency training program before 

January 1, 2002, but the program was 

not in operation (that is, the hospital did 

not begin training residents in that 

program) during its reference period 

(which will be either the most recent 

cost reporting period ending on or 

before September 30, 2002, or the cost 

reporting period that includes July 1, 

2003), the hospital may submit a timely 

request by June 4, 2004, as explained in 

the OTN, that its resident level for its 

reference period be adjusted to reflect 

the number of accredited slots for which 

that new medical residency training 

program was approved. We note that 

section 1886(h)(7)(A)(ii)(III) of the Act 

does not require that CMS include the 

number of residents for which the new 

program is accredited in the hospital’s 

reference cost reporting period for 

purposes of determining direct GME 

and IME payment in that reference cost 

reporting period. Rather, CMS is only 

required to include the number of 

residents for which a new program was 

accredited in the resident level for 

purposes of determining if, and by how 

much, a hospital’s FTE resident cap 

should be reduced.

For example, assume a hospital that 

has a fiscal year end of June 30 received 

accreditation in October 2001 to train 10 

residents in a new surgery program. The 

hospital does not have an expansion of 

an existing program not reflected on its 

most recent settled cost report, so its 

reference period is the most recent cost 

reporting period ending on or before 

September 30, 2002. The hospital first 

begins to train residents in the new 

surgery program on July 1, 2002. The 

new surgery residents are not reflected 

on the hospital’s June 30, 2002 cost 

report, which is the hospital’s most 

recent cost reporting period ending on 

or before September 30, 2002. Thus, the 

hospital may submit a timely request 

that we increase its resident level for the 

cost report ending June 30, 2002, by 10 

FTE residents to reflect the residents 

approved for the new surgery program 

for purposes of determining if the 

hospital’s reference resident level is 

below its otherwise applicable resident 

cap. However, we note that if the 

hospital’s fiscal year end in this 

example was September 30, a program 

accredited in October 2001 and begun 

on July 1, 2002, would be in operation 

during the hospital’s cost reporting 

period ending on September 30, 2002, 

and the hospital could not receive an 

increase to its resident level for its cost 

reporting period ending September 30, 

2002, to include the total number of 

accredited resident positions in the new 

surgery program. If the new program 

was accredited for a range of residents 

(for example, a hospital receives 

accreditation to train 6 to 8 residents in 

a new internal medicine program), we 

are proposing that the hospital may 

request that its resident level for its 

most recent cost reporting period ending 

on or before September 30, 2002 be 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28297

adjusted to reflect the maximum 

number of accredited positions (which, 

in this example, would be 8 internal 

medicine residents). We also are 

proposing that at the time the hospital 

makes the timely request to have its 

resident level adjusted to include the 

number of accredited resident positions, 

the new program need not be training 

the full complement of residents for 

which the program was accredited. 

(Proposed redesignated 

413.79(c)(3)(A)(3)(ii)). In addition, if 

more than one hospital was approved as 

a training site for the residents in the 

newly accredited program (that is, more 

than one hospital sponsors the program 

or there are other participating 

institutions that serve as training sites 

for the residents in the program), we are 

proposing that the adjustment to a 

requesting hospital’s reference resident 

level would reflect the appropriate 

portions of the FTE residents in the new 

program that would be training at that 

hospital. 

Similarly, if, in addition to having 

accreditation for a new program, a 

hospital has an expansion of an existing 

program that is not reflected on the most 

recent settled cost report, that hospital 

may submit a timely request that its 

resident level for the cost reporting 

period that includes July 1, 2003, be 

adjusted to include the number of 

resident positions for which a new 

program was accredited. We are 

proposing that a hospital whose 

reference period is the one that includes 

July 1, 2003, may only request that its 

reference resident level be adjusted to 

include the accredited number of 

residents for a new program if, in 

accordance with section 

1886(h)(7)(A)(ii)(III) of the Act, the new 

program was approved by the 

appropriate accrediting body before 

January 1, 2002, but was not in 

operation during the cost reporting 

period that includes July 1, 2003. This 

proposal is based on our interpretation 

of the statutory language, which states 

that ‘‘the Secretary shall adjust the 

reference resident level specified under 

subclause (I) or (II) to include the 

number of residents that were approved 

* * * for a medical residency program 

* * * but which was not in operation 

during the cost reporting period used 

under subclause (I) or (II) ***’’

(emphasis added). Because the statute 

provides for an adjustment to the 

reference resident level ‘‘specified 

under subclause I or II,’’ as mentioned 

above, for hospitals that request an 

adjustment under section 

1886(h)(7)(A)(ii)(III) of the Act, we are 

proposing to identify the applicable 

reference period as we otherwise would 

under section 1886(h)(7)(A)(ii)(I) and (II) 

of the Act. That is, we are proposing to 

use the hospital’s most recent cost 

reporting period ending on or before 

September 30, 2002, as the reference 

cost reporting period, unless the 

hospital submits a timely request to use 

the cost reporting period that includes 

July 1, 2003, due to an expansion of an 

existing program that is not reflected on 

the most recent settled cost report. We 

also note that, as mentioned above, 

subclause (III) requires that the program 

be accredited before January 1, 2002, but 

not be in operation during the hospital’s 

reference cost reporting period, or in 

this case, the period that includes July 

1, 2003. This means that, in order for 

the hospital to receive an adjustment to 

its reference resident level under section 

1886(h)(7)(A)(ii)(III) of the Act for the 

cost reporting period that includes July 

1, 2003, the new program also cannot be 

in operation in the cost reporting period 

that includes July 1, 2003. Thus, while 

we believe it is possible for a hospital 

to qualify for this adjustment because 

the hospital started a new program that 

is not reflected on its most recent cost 

reporting period ending on or before 

September 30, 2002, we believe that 

few, if any, hospitals will qualify for 

this adjustment for a new program that 

was not in operation in the cost report 

that includes July 1, 2003, because it is 

unlikely that a program would receive 

its accreditation prior to January 1, 

2002, and still not be in operation by 

July 1, 2003. 

(5) Affiliations 

Section 1886(h)(7)(A)(iii) of the Act, 

as added by section 422(a)(3) of Public 

Law 108–173, directs the Secretary to 

consider whether a hospital is a member 

of a Medicare GME affiliated group (as 

defined under § 413.86(b)) as of July 1, 

2003, in determining whether a 

hospital’s FTE resident cap should be 

reduced. As described above, some 

hospitals that have reduced their 

resident levels below their FTE resident 

caps may have affiliated with other 

hospitals that would otherwise exceed 

their FTE resident caps. Thus, while 

some hospitals were below their FTE 

resident caps prior to entering into a 

Medicare GME affiliation agreement, 

upon affiliating, their FTE resident caps 

were temporarily reduced because some 

or all of their excess FTE slots were 

temporarily added to the FTE caps of 

other hospitals as part of the affiliation 

agreement. Under the Medicare GME 

affiliation agreement, these otherwise 

‘‘excess’’ FTE slots have been 

transferred for use by other hospitals, 

and, therefore, CMS would take into 

account the revised caps under the 

affiliation agreement for both the 

hospital that would otherwise be below 

its FTE resident cap and the revised 

caps of the other hospital(s) that are part 

of an affiliated group. In determining 

whether hospitals’ FTE resident caps 

should be reduced under section 

1886(h)(7)(A)(i) of the Act, section 

1886(h)(7)(A)(iii) of the Act directs CMS 

to consider hospitals ‘‘which are 

members of the same affiliated group 

* * * as of July 1, 2003.’’ We are 

proposing that hospitals that are 

affiliated ‘‘as of July 1, 2003’’ means 

hospitals that have in effect a Medicare 

GME affiliation agreement, as defined in 

existing § 413.86(b), for the program 

year July 1, 2003 through June 30, 2004, 

and have submitted a Medicare GME 

affiliation agreement by July 1, 2003 to 

their fiscal intermediaries with a copy to 

CMS. These hospitals may have already 

been affiliated prior to July 1, 2003, or 

may have affiliated for the first time on 

July 1, 2003. In either case, in 

determining possible reductions to a 

hospital’s FTE resident cap, we are 

proposing to use a hospital’s cap as 

revised by the July 1, 2003 Medicare 

GME affiliation agreement. We believe 

this interpretation is consistent with the 

intent of section 1886(h)(7)(A)(iii) of the 

Act, as added by section 422(a)(3) of 

Public Law 108–173, in that a hospital’s 

FTE resident cap should not be reduced 

if some or all of its excess resident slots 

have been transferred for use by 

hospitals with which it is affiliated (that 

is, the hospital is training at least as 

many FTE residents as are in its 

‘‘affiliated’’ FTE resident cap). 

Although hospitals in an affiliated 

group base the FTE cap adjustments on 

an aggregate FTE resident cap, we are 

proposing that we would determine 

whether a hospital’s FTE resident cap 

should be reduced on a hospital-specific 

basis. Section 1886(h)(7)(A)(iii) of the 

Act states that ‘‘the provisions of clause 

(i) shall be applied to hospitals which 

are members of the same affiliated group 

***’’ (emphasis added). Clause (i) of 

section 1886(h)(7)(A), as described 

above, requires the reduction of 

hospitals’ FTE resident caps under 

certain circumstances, based on the 

otherwise applicable FTE resident cap 

and the resident level in the applicable 

reference period, as described above 

(which would be either a hospital’s 

most recent cost reporting period ending 

on or before September 30, 2002, or the 

cost reporting period that includes July 

1, 2003). We are proposing to interpret 

this reference to clause (i) to mean that 

the Secretary is to use a hospital’s July 

1, 2003 ‘‘affiliated’’ FTE resident cap as 

28298 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

the otherwise applicable FTE resident 

cap when determining a possible 

reduction to the FTE resident cap. In 

other words, if a hospital is affiliated as 

of July 1, 2003, we are proposing to 

superimpose the ‘‘affiliated’’ FTE 

resident cap onto the hospital’s 

reference cost reporting period.

Specifically, as we stated under 

section IV.O.2.f.(1) of this preamble, 

consistent with section 

1886(h)(7)(A)(ii)(I) of the Act, to 

determine possible reductions to a 

hospital’s FTE resident cap, we would 

use a hospital’s most recent cost 

reporting period ending on or before 

September 30, 2002. If a hospital is part 

of a Medicare affiliated group for the 

program year beginning July 1, 2003, we 

are proposing to compare the hospital’s 

July 1, 2003 ‘‘affiliated’’ FTE resident 

cap to its resident level on the most 

recent cost report ending on or before 

September 30, 2002. If the hospital’s 

resident level from its most recent cost 

report ending on or before September 

30, 2002, is below its July 1, 2003 

‘‘affiliated’’ FTE resident cap, we are 

proposing to permanently reduce the 

hospital’s FTE resident cap, that is, the 

hospital’s FTE resident cap without the 

temporary adjustment under the July 1, 

2003 affiliation agreement, by 75 

percent of the difference between the 

hospital’s resident level and the July 1, 

2003 ‘‘affiliated’’ FTE resident cap. 

Alternatively, as stated above under 

section IV.O.2.f.(2) of this preamble, 

consistent with section 

1886(h)(7)(A)(ii)(II) of the Act, a hospital 

may submit a timely request to CMS 

that its cost report that includes July 1, 

2003, be used as the reference period to 

determine possible FTE resident cap 

reductions because of an expansion of 

an existing program that is not reflected 

on the hospital’s most recent settled cost 

report. If a hospital is affiliated for the 

program year beginning July 1, 2003, 

and we grant the hospital’s timely 

request to use the cost reporting period 

that includes July 1, 2003, because its 

expansion of an existing program(s) is 

not reflected on the most recent settled 

cost report, we are proposing to 

compare the hospital’s July 1, 2003 

‘‘affiliated’’ FTE resident cap to its 

resident level on the cost report that 

includes July 1, 2003. If the hospital’s 

resident level from its cost report that 

includes July 1, 2003 is below its July 

1, 2003 ‘‘affiliated’’ FTE resident cap, 

we are proposing to permanently reduce 

the hospital’s FTE resident cap, that is, 

the hospital’s FTE resident cap without 

the temporary adjustment under the July 

1, 2003 affiliation agreement, by 75 

percent of the difference between the 

hospital’s resident level and the July 1, 

2003 ‘‘affiliated’’ FTE resident cap. 

For example, Hospital A’s most recent 

cost report ending on or before 

September 30, 2002 is FYE December 

31, 2001. Hospital A has a direct GME 

FTE resident cap (unadjusted for an 

affiliation) of 100, and an IME FTE 

resident cap (unadjusted for an 

affiliation) of 90. Hospital A did not 

have an expansion of an existing 

program that was not reflected on its 

most recent settled cost report, and 

therefore, its FYE December 31, 2001 

cost report is being used as the reference 

period for purposes of determining a 

possible reduction to its FTE resident 

caps. Hospital A’s unweighted direct 

GME count of allopathic and 

osteopathic FTE residents on its 

December 31, 2001 cost report is 60. 

Hospital A’s IME count of allopathic 

and osteopathic FTE residents on its 

December 31, 2001 cost report is 55. 

Hospital B, with a FYE of September 

30, expanded an existing program, and 

that expansion is not reflected on its 

most recent settled cost report. Hospital 

B has submitted, and we have granted, 

a timely request that its cost report that 

includes July 1, 2003 (that is, its FYE 

September 30, 2003 cost report) be used 

for purposes of determining a possible 

reduction to its FTE resident caps. 

Hospital B has a direct GME FTE 

resident cap (unadjusted for an 

affiliation) of 100, and an IME FTE 

resident cap (unadjusted for an 

affiliation) of 95. Hospital B’s direct 

GME unweighted count of allopathic 

and osteopathic FTE residents on its 

September 30, 2003 cost report is 120, 

and its IME count of allopathic and 

osteopathic FTE residents for the same 

period is 110. 

On July 1, 2003, Hospital A and 

Hospital B entered into a Medicare GME 

affiliation agreement. Under the 

affiliation agreement, the hospitals’ FTE 

resident caps are revised as follows:

AFFILIATION YEAR JULY 1, 2003 THROUGH JUNE 30, 2004 

Direct GME

FTE resident

cap 

Direct GME

affiliated

cap 

IME FTE

resident

cap 

IME

affiliated

cap. 

Hospital A ........................................................................................................ 100 60 90 55

Hospital B ........................................................................................................ 100 140 95 130 

To apply section 1886(h)(7)(A)(i) of 

the Act, Hospital A’s affiliated FTE 

resident caps as of July 1, 2003, are 

compared to its direct GME and IME 

allopathic and osteopathic FTE resident 

counts from its FYE December 31, 2001 

cost report, and Hospital B’s affiliated 

FTE resident caps as of July 1, 2003, are 

compared to its direct GME and IME 

allopathic and osteopathic FTE resident 

counts from its FYE September 30, 2003 

cost report, as follows:

Affiliated direct 

GME cap 

Unweighted

allopathic and

osteopathic FTE 

count 

Unweighted

count below affiliated cap? 

If yes, reduce actual FTE 

resident cap by 75 percent 

of difference between affiliated cap and 

unweighted count. 

Hospital A .......................................... 60 1 60 No.

Hospital B .......................................... 140 2 120 Yes .................................................... 100¥[.75(140¥120)] = 85 

1From FYE 12/31/01. 

2From FYE 9/30/03. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28299

Affiliated IME 

cap 

Allopathic and

osteopathic FTE 

count 

Count below affiliated cap? 

If yes, reduce actual FTE 

resident cap by 75 percent 

of difference between affiliated cap and 

unweighted count. 

Hospital A .......................................... 55 1 55 No.

Hospital B .......................................... 130 2 110 Yes .................................................... 95¥[.75(130¥110)] = 80 

From FYE 12/31/01. 

From FYE 9/30/03. 

Effective for portions of cost reporting 

periods beginning on or after July 1, 

2005, Hospital A’s FTE resident caps for 

direct GME and IME will remain at 100 

and 90, respectively, while Hospital B’s 

FTE resident caps for direct GME and 

IME will be reduced to 85 and 80, 

respectively. 

We also note that there are hospitals 

that may have been members of a 

Medicare GME affiliated group in 

program years that coincide with or 

overlap the reference cost reporting 

periods, but these hospitals were not 

affiliated as of July 1, 2003. As such, 

they are not subject to the proposed 

policy described above applicable to 

section 1886(h)(7)(A)(iii) of the Act, as 

added by section 422(a)(3). For such 

hospitals, we are proposing to compare 

the resident level in the applicable 

reference period to the FTE resident cap 

as adjusted by the affiliation agreement 

applicable to that reference period. If a 

hospital’s resident level is below its 

otherwise applicable FTE resident cap 

for that reference period cost report, we 

are proposing to permanently reduce the 

hospital’s FTE resident cap, that is, the 

hospital’s FTE resident cap without the 

temporary adjustment under the 

affiliation agreement for that period, by 

75 percent of the difference between the 

hospital’s resident level and the 

otherwise applicable FTE resident cap. 

(Proposed redesignated 

§ 413.79(c)(3)(iv)(B)). For example, 

assume a hospital with a June 30 fiscal 

year end affiliated for one program year 

from July 1, 2001, through June 30, 

2002. On its June 30, 2002 cost report 

(that is, its most recent cost report 

ending on or before September 30, 

2002), its FTE resident cap is 20, its cap 

as revised by the affiliation agreement is 

25, and its resident level is 21 FTEs. 

Because this hospital’s resident level of 

21 is below its otherwise applicable FTE 

resident cap of 25, the hospital’s FTE 

resident cap of 20 will be reduced as 

follows: 20¥[(.75(25¥21)] = 17. We are 

proposing to apply the same 

methodology described above in the 

event that the reference period is a 

hospital’s cost report that includes July 

1, 2003 (that is, for a hospital that had 

an expansion of a program that is not 

reflected on its most recent settled cost 

report and that made a timely request to 

use the period that includes July 1, 

2003), if that hospital is not affiliated as 

of July 1, 2003, but its cost report that 

includes July 1, 2003 overlaps with a 

program year for which the hospital was 

affiliated. In other words, section 

1886(h)(7)(A)(i) of the Act will be 

applied by comparing a hospital’s 

reference resident level to the otherwise 

applicable FTE resident cap, as adjusted 

for any affiliation agreement for the 

reference period. 

g. Criteria for Determining Hospitals 

That Will Receive Increases in Their 

FTE Resident Caps 

Generally, under section 1886(h)(7) of 

the Act, as added by section 422(a)(3) of 

Public Law 108–173, CMS is to reduce 

by 75 percent the ‘‘unused’’ resident 

slots from hospitals that were below 

their FTE resident caps in a specific 

reference period, and ‘‘redistribute’’ the 

FTE slots for use by other hospitals. 

Under section 1886(h)(7)(B) of the Act, 

as added by section 422 of Public Law 

108–173, the Secretary is authorized to 

increase the otherwise applicable FTE 

resident cap for each qualifying hospital 

that submits a timely application by a 

number that the Secretary may approve, 

for portions of cost reporting periods 

occurring on or after July 1, 2005. In 

implementing section 1886(h)(7)(B) of 

the Act, we note the difficulty in 

deciding which teaching hospitals are 

more ‘‘deserving’’ than others to receive 

the redistributed unused resident slots. 

Therefore, we are proposing a decision 

making process that is an objective 

process. In addition, we note that 

section 422 does not provide detailed 

guidance to the Secretary for deciding 

which hospitals should receive the 

unused resident slots, but rather gives 

the Secretary discretion in making the 

choice of which hospitals should 

qualify. 

Section 1886(h)(7)(B) of the Act, as 

added by section 422, does establish 

certain parameters in the statutory 

language for hospitals to qualify to 

receive increases in their FTE resident 

caps. First, section 1886(h)(7)(B)(i) of 

the Act states that the aggregate number 

of increases in the otherwise applicable 

resident limits (caps) may not exceed 

the estimate of the aggregate reduction 

in the resident limits determined under 

section 1886(h)(7)(A) of the Act (as 

specified in section IV.O.2.e. of this 

preamble). Section 1886(h)(7)(B)(iv) of 

the Act states that in no case will any 

hospital receive an FTE cap increase of 

more than 25 FTE additional residency 

slots as a result of the redistribution. 

(Proposed redesignated 413.79(c)(4)). In 

addition, section 1886(h)(7)(B)(ii) of the 

Act specifies that in determining which 

hospitals will receive the increases in 

their FTE resident caps, the Secretary is 

required to take into account the 

demonstrated likelihood that the 

hospital would be able to fill the 

position(s) within the first three cost 

reporting periods beginning on or after 

July 1, 2005. 

In setting up an application process 

for hospitals to apply for the unused 

resident slots discussed in section 

IV.O.2.h. of this preamble, we are 

proposing to implement this 

‘‘demonstrated likelihood’’ requirement 

as an eligibility criterion that a hospital 

must meet in order for CMS to further 

consider the hospital’s application for 

an increase in its FTE resident cap. 

Thus, we are proposing that, in order to 

be eligible for consideration for an 

increase under section 1886(h)(7)(B) of 

the Act, a hospital must first 

demonstrate the likelihood that it will 

able to fill the slots within the first three 

cost reporting periods beginning on or 

after July 1, 2005, by meeting at least 

one of the following four criteria and by 

providing documentation that it meets 

that criterion in its application for an 

increase in its FTE resident cap: 

Demonstrated Likelihood Criterion 1.

The applying hospital intends to use the 

additional FTEs to establish a new 

residency program(s) on or after July 1, 

2005 (that is, a newly approved program 

that begins training residents on or after 

July 1, 2005). 

The hospital must meet the 

requirements in provisions (1) and (2) 

below: 

(1) In order to demonstrate that the 

hospital is, in fact, establishing a new 

residency program, the hospital must—

28300 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

• Submit an application for approval 

of a new residency program to the 

ACGME or the AOA by December 1, 

2004, and include a copy of that 

application with the application for an 

increase in its FTE resident cap; or 

• Submit an application for approval 

of a new residency program to the 

ACGME or the AOA by December 1, 

2004, and, if establishing an allopathic 

program, include a copy of the 

hospital’s institutional review document 

or program information form concerning 

the new program with the application 

for the unused FTE resident slots; or 

• Submit an application for approval 

of a new residency program to the 

ACGME or the AOA by December 1, 

2004, and include written 

correspondence from the ACGME or 

AOA acknowledging receipt of the 

application for the new program, or 

other types of communication from the 

accrediting bodies concerning the new 

program approval process (such as 

notification of site visit).

(2) To demonstrate that the hospital 

will be likely to fill the slots requested, 

the hospital must comply with one of 

the following: 

• If the hospital has other previously 

established programs, submit 

documentation that each of the 

hospital’s existing residency programs 

had a resident fill rate of at least 95 

percent in each of program years 2001 

through 2003; or 

• If the hospital has other previously 

established residency programs, submit 

copies of the cover page of the hospital’s 

employment contracts with the 

residents who are or will be 

participating in the new residency 

program (resident specific information 

may be redacted); or 

• If the hospital is establishing a new 

residency program in a particular 

specialty, submit documentation 

indicating that the specialty has a 

resident fill rate nationally, across all 

hospitals, of at least 95 percent. 

Demonstrated Likelihood Criterion 2.

The applying hospital intends to use the 

additional FTEs to expand an existing 

residency training program (that is, to 

increase the number of FTE resident 

slots in the program) on or after July 1, 

2005, and before July 1, 2008. 

The hospital must comply with the 

requirements in provisions (1) and (2) 

below: 

(1) To demonstrate that the hospital 

intends to expand an existing program, 

the hospital must comply with one of 

the following: 

• Document that the appropriate 

accrediting body (the ACGME or the 

AOA) has approved the hospital’s 

expansion of the number of FTE 

residents in the program; or 

• Document that the National 

Residency Match Program or the 

American Osteopathic Association 

Residency Match Program has accepted 

or will be accepting the hospital’s 

participation in the match for the 

existing program that will include 

additional resident slots in that 

residency training program; or 

• If expanding an allopathic program, 

submit a copy of the hospital’s 

institutional review document or 

program information form for the 

expansion of the existing residency 

training program. 

(2) To demonstrate that the hospital 

will be likely to fill the slots of the 

expanded residency program, the 

hospital must comply with one of the 

following: 

• Submit copies of the cover page of 

the hospital’s employment contracts 

with the residents who are or will be 

participating in the expanded program 

(resident specific information may be 

redacted) and copies of the cover page 

of the hospital’s employment contracts 

with the residents participating in the 

program prior to the expansion of the 

program. 

• If the hospital has other previously 

established residency programs, submit 

documentation that each of the 

residency programs had a resident fill 

rate of at least 95 percent in each of 

program years 2001 through 2003. 

• If the hospital is expanding an 

existing program in a particular 

specialty, submit documentation that 

the specialty has a resident fill rate 

nationally, across all hospitals, of at 

least 95 percent. 

• If the hospital is expanding a 

program in order to train residents that 

need a program because another 

hospital in the State has closed a similar 

program, and the applying hospital 

received a temporary adjustment to its 

FTE cap(s) (under the requirements of 

§ 413.86(g)(9)), submit documentation of 

this action. 

Demonstrated Likelihood Criterion 3.

The hospital is applying for an increase 

in its FTE resident cap because the 

hospital is already training residents in 

an existing residency training 

program(s) in excess of its direct GME 

FTE cap or IME FTE cap, or both. 

The hospital must submit, with its 

application, each of the following: 

• Copies of the most recent assubmitted Medicare cost reports 

documenting on Worksheet E, Part A 

and Worksheet E3, Part IV the resident 

counts and FTE resident caps for both 

direct GME and IME for the relevant 

cost reporting periods. 

• Copies of the 2004 residency match 

information concerning the number of 

residents the hospital intends to have in 

its existing programs. 

• Copies of the most recent 

accreditation letters on all of the 

hospital’s training programs in which 

the hospital trains and counts FTE 

residents for direct GME and IME. 

Demonstrated Likelihood Criterion 4.

The hospital is applying for the unused 

FTE resident slots because the hospital 

is at risk of losing accreditation of a 

residency training program if the 

hospital does not increase the number of 

FTE residents in the program on or after 

July 1, 2005. 

The hospital must submit, with its 

application for an increase in its FTE 

resident cap, documentation from the 

appropriate accrediting body of the 

hospital’s risk of lost accreditation as a 

result of an insufficient number of 

residents in the program. 

We are proposing that each hospital 

must meet at least one of the above 

criteria in order to demonstrate the 

likelihood that it will be able to fill the 

additional slots associated with any 

increase in the hospital’s FTE resident 

cap within the first three cost reporting 

periods beginning on or after July 1, 

2005. In other words, each hospital that 

wishes to apply for an increase in its 

FTE resident cap must, as a preliminary 

matter, meet the eligibility requirement 

of demonstrating the likelihood that it 

will fill the additional positions, in 

order for CMS to further consider the 

hospital’s application for an increase in 

its FTE resident cap. 

h. Application Process for the Increases 

in Hospitals’ FTE Resident Caps 

As stated above, we are proposing an 

objective decision making process for 

determining how hospitals will be 

prioritized when identifying the 

hospitals that will receive increases in 

their FTE resident caps. In order for 

hospitals to be considered for increases 

in their FTE resident caps, section 

1886(h)(7)(B)(i) of the Act, as added by 

section 422(a)(3) of Public Law 108–173, 

requires that each ‘‘qualifying hospital’’

submit a ‘‘timely application.’’ We are 

proposing that each hospital must 

submit the following information on its 

application for an increase in its FTE 

resident cap: 

• The name and Medicare provider 

number of the hospital. 

• The total number of requested FTE 

resident slots (for all residency 

programs at the hospital) for direct GME 

or IME, or both (up to 25 FTEs). 

• A completed copy of the CMS 

Evaluation Form (as described below) 

for each residency program for which 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28301

the applicant hospital intends to use the 

requested increase in the number of FTE 

residents and source documentation to 

support the assertions made by the 

hospital on the Evaluation Form. (For 

example, if the hospital checks off on 

the Evaluation Form that the hospital is 

located in a geographic Health 

Professions Shortage Area (HPSA), the 

hospital would include documentation 

to support that assertion.) A copy of the 

blank proposed CMS Evaluation Form 

appears at the end of this section of the 

preamble. 

• FTE resident counts for direct GME 

and IME and FTE resident caps for 

direct GME and IME reported by the 

hospital in the most recent as-filed cost 

report. 

• An attestation, signed and dated by 

an officer or administrator of the 

hospital who signs the hospital’s 

Medicare cost report, of the following 

information in the hospital’s application 

for an increase in its FTE resident cap: 

‘‘I hereby certify that I understand 

that misrepresentation or falsification of 

any information contained in this 

application may be punishable by 

criminal, civil, and administrative 

action, fine and/or imprisonment under 

federal law. Furthermore, I understand 

that if services identified in this 

application were provided or procured 

through payment directly or indirectly 

of a kickback or where otherwise illegal, 

criminal, civil, and administrative 

action, fines and/or imprisonment may 

result. I also certify that, to the best of 

my knowledge and belief, it is a true, 

correct, and complete application 

prepared from the books and records of 

the hospital in accordance with 

applicable instructions, except as noted. 

I further certify that I am familiar with 

the laws and regulations regarding 

Medicare payment to hospitals for the 

training of interns and residents.’’

We are further proposing that any 

hospital that wishes to receive an 

increase in its FTE resident cap(s) must 

submit a copy of its completed 

application (as described above) to the 

CMS Central Office and to the CMS 

Regional Office for the region in which 

the applicant hospital is located, and 

that the application must be received on 

or before December 1, 2004. (The 

mailing addresses for the CMS offices 

are indicated at the end of this section 

of the preamble.) We note that some 

hospitals’ FTE counts will be subject to 

audit for purposes of section 

1886(h)(7)(B) of the Act, and those 

audits may not be completed by 

December 1, 2004. Because the results of 

such an audit may be a factor in a 

hospital’s decision whether to request 

an increase in its FTE resident cap 

under section 1886(h)(7)(B) of the Act, 

we are proposing to allow a later date 

for those hospitals to apply for increases 

in their FTE resident caps. Therefore, if 

a hospital’s resident level is audited for 

purposes of section 1886(h)(7)(A) of the 

Act, and that hospital also wishes to 

apply for an increase in its FTE resident 

cap(s) available through section 

1886(h)(7)(B) of the Act, we are 

proposing that such a hospital must 

submit a completed application to CMS 

and that the application must be 

received on or before March 1, 2005. We 

are proposing that all completed 

applications that are timely received 

according to the above deadlines will be 

evaluated by CMS according to the 

criteria described under section IV.O.2.i. 

of this preamble for determining the 

priority distribution of FTE resident 

slots. Hospitals that satisfy at least one 

of the ‘‘demonstrated likelihood’’

criteria will be further evaluated by the 

evaluation criteria described below. 

Those hospitals that are chosen to 

receive an increase in their FTE resident 

caps would be notified by CMS by July 

1, 2005. 

i. CMS Evaluation of Applications for 

Increases in FTE Resident Caps 

As noted in section IV.O.2.h. of this 

preamble, we are proposing to require 

hospitals to submit, with their 

applications for increases in their FTE 

resident caps, a completed copy of the 

CMS Evaluation Form. As we have 

stated, we are proposing to make the 

process of evaluating the applications as 

objective as possible. Therefore, we are 

proposing to use a CMS Evaluation 

Form that the hospital must complete 

and submit as part of its application. 

The CMS Evaluation Form will ask the 

hospital to check off which of the 

‘‘demonstrated likelihood’’ criteria 

(described above in section IV.O.2.g. of 

this preamble) the hospital meets. We 

also are proposing to require the 

hospital to provide the documentation 

that supports the ‘‘demonstrated 

likelihood’’ criteria it has checked off on 

the Evaluation Form. 

Assuming that hospitals interested in 

applying for the increase in their FTE 

caps meet the eligibility criterion of 

‘‘demonstrated likelihood,’’ we are 

proposing that applicant hospitals 

indicate on the CMS Evaluation Form 

the category(ies) for which it believes it 

will qualify. CMS will use this 

indication to prioritize the applications. 

Such prioritization is derived from 

section 1886(h)(7)(B) of the Act, as 

added by section 422 of Public Law 

108–173. That section established the 

following priority order to determine 

the hospitals that will receive increases 

in their FTE caps: 

First, to hospitals that are ‘‘located in 

rural areas, as defined in section 

1886(d)(2)(D)(ii) of the Act’’ (section 

1886(h)(7)(B)(iii)(I) of the Act). Section 

1886(d)(2)(D)(ii) of the Act defines a 

rural area as any area outside a 

Metropolitan Statistical Area (MSA). 

Under the existing implementing 

regulations at § 413.62(f)(ii), an ‘‘urban 

area’’ means (1) a Metropolitan 

Statistical Area (MSA) or New England 

County Metropolitan Area (NECMA); or 

(2) the following New England counties: 

Litchfield County, Connecticut; York 

County, Maine; Sagadahoc County, 

Maine; Merrimack County, New 

Hampshire; and Newport County, 

Rhode Island. Under existing 

§ 413.62(f)(iii), a ‘‘rural area’’ means any 

area outside an urban area. However, we 

note that under section III. of this 

preamble, which discusses proposed 

changes in wage areas for FY 2005, we 

are proposing to no longer recognize 

NECMAs as a distinct category of wage 

areas. Thus, for purposes of the 

amendments made by section 422, we 

are proposing that any hospital located 

in an area that is not in a MSA is a rural 

hospital, regardless of any 

reclassification under § 412.102 or 

§ 412.103. We note that this definition 

of ‘‘rural’’ is consistent with our 

proposal under section III. of this 

preamble concerning designation of 

wage index areas. 

Second, to hospitals that are located 

in urban areas that are not large urban 

areas, as defined for purposes of section 

1886(d) of the Act (section 

1886(h)(7)(B)(iii)(II) of the Act). Section 

1886(d)(2)(D) of the Act defines ‘‘large

urban area’’ as an ‘‘urban area which the 

Secretary determines * * * has a 

population of more than 1,000,000.’’

Existing implementing regulations at 

§ 412.63(c)(6) state generally that the 

term ‘‘large urban area’’ means an MSA 

with a population of more than 

1,000,000. Again, we note that we are 

proposing changes to the definition of 

‘‘urban area’’ to reflect the new 

geographic areas designated by the 

Office of Management and Budget under 

section III. of the preamble of this 

proposed rule. Therefore, if the eligible 

hospital applying for an increase in its 

FTE resident cap is an urban hospital 

that is located in the proposed redefined 

MSA area with a population of less than 

1,000,000, CMS will give such a 

hospital second priority (after all rural 

hospitals in the first priority category 

under the statute) in deciding which 

hospitals should receive an increase in 

their FTE resident caps. 

28302 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

Third, hospitals that currently 

operate, or will operate, a residency 

training program in a specialty for 

which there are not other residency 

training programs in the State (section 

1886(h)(7)(B)(iii)(III) of the Act). We are 

proposing to interpret ‘‘a specialty for 

which there are not other residency 

training programs in the State’’ to mean 

the only specialty in either allopathy or 

osteopathy in a particular State. For 

example, if in State X, Hospital A would 

like to use the additional FTE residents 

in order to establish a new osteopathic 

emergency medicine program (which 

would be the first osteopathic 

emergency medicine program in State 

X), and Hospital B has already 

established an allopathic emergency 

medicine program in State X, Hospital 

A’s application for an increase in its 

FTE resident cap(s) would be put in the 

third priority category because Hospital 

A would be establishing a new 

osteopathic emergency medicine 

program, a specialty for which there are 

not other osteopathic emergency 

medicine programs in the State. We 

believe that a more ‘‘expansive’’

interpretation of ‘‘a specialty for which 

there are not other residency programs’’

allows more hospitals to fit into this 

third priority category. In addition, it is 

our understanding that allopathic and 

osteopathic programs are, at least, 

nominally different disciplines in 

medicine. As a result, we believe that 

this more ‘‘expansive’’ interpretation for 

‘‘a specialty for which there are not 

other residency programs’’ is the more 

appropriate interpretation. 

As we described above, we are 

proposing that applicant hospitals 

indicate on the CMS Evaluation Form 

the category(ies) for which it believes it 

will qualify; we will use this indication 

to prioritize the applications. Each of 

the categories (described below) is 

derived from the priorities established 

by section 1886(h)(7)(B) of the Act, as 

added by section 422 of Public Law 

108–173. We would use the following 

categories to determine the order in 

which hospitals would be eligible to 

receive increases in their FTE resident 

caps: 

First Level Priority Category: The 

hospital is a rural hospital and has the 

only specialty training program in the 

State. 

Second Level Priority Category: The 

hospital is a rural hospital only. 

Third Level Priority Category: The 

hospital is a ‘‘small’’ urban hospital 

(that is, an urban hospital that is located 

in a ‘‘not large urban area’’) and has the 

only specialty program in the State. 

Fourth Level Priority Category: The 

hospital is a ‘‘small’’ urban hospital 

only. 

Fifth Level Priority Category: The 

hospital has the only specialty training 

program in the State. 

Sixth Level Priority Category: The 

hospital meets none of the statutory 

priority criteria. 

We believe the proposed first and 

third level categories are appropriate for 

CMS evaluation purposes (which is 

explained further below) because some 

hospitals that apply for the additional 

resident slots may fit into more than one 

of the three statutory priority categories 

listed in section 1886(h)(7)(B) of the 

Act. In addition, we are proposing to 

give consideration first to those 

hospitals that meet more than one of the 

statutory priority categories over those 

hospitals that meet only one of the 

statutory priorities (see second, fourth, 

and fifth level priority categories.) We 

also are proposing a sixth level priority 

category to identify those section 

1886(d) hospitals that apply for 

additional resident slots, but do not fit 

into any of the priority categories listed 

in section 1886(h)(7)(B) of the Act (for 

example, hospitals in large urban areas).

As specified by the statute, we are 

proposing to put each hospital’s 

application for an increase in its FTE 

resident cap (based on how the hospital 

describes itself on the CMS Evaluation 

Form) into one of the ‘‘level priority 

categories’’ for evaluation purposes, 

giving first and second priority to the 

rural hospitals, as defined above. In 

addition, we note that we are proposing 

that hospital applicants provide 

residency specialty program information 

as part of the application for the 

increase to the cap(s), as well as a CMS 

Evaluation Form for each residency 

program for which the applicant 

hospital intends to use the increased 

FTE resident slots. Our intention in 

proposing these requirements is for 

CMS to be able to discern within which 

level priority category the applicant 

hospital’s application should be placed 

based on the residency specialty 

program for which the FTE cap increase 

is being requested. In other words, it is 

possible that a hospital will apply for an 

increase in its FTE caps for more than 

one residency program at the hospital. 

It is possible that applications for the 

programs would fall within different 

level priority categories, for example, if 

a hospital is applying for an increase in 

its cap(s) for one program that is the 

‘‘only specialty training program in the 

State’’ (which would place the 

hospital’s application in the fifth level 

priority category on the CMS Evaluation 

Form) and for another program that is 

NOT the only program in the State 

(which, assuming the hospital is an 

urban hospital, would place the hospital 

on that Evaluation Form in the sixth 

level priority category). Therefore, we 

are proposing that hospitals complete an 

Evaluation Form for each residency 

program for which it is requesting an 

increase in its FTE resident cap. 

We note that section 1886(h)(7)(B)(iii) 

of the Act states that ‘‘increases of 

residency limits within the same 

priority category * * * shall be 

determined by the Secretary.’’

Therefore, we are proposing to use the 

following criteria for evaluating the 

applications for increases in hospitals’

FTE resident caps within each of the six 

level priority categories described 

above: 

Evaluation Criterion One. The 

hospital that is requesting the increase 

in its FTE resident cap(s) has a Medicare 

inpatient utilization over 60 percent, as 

reflected in at least two of the hospital’s 

last three most recent audited cost 

reporting periods for which there is a 

settled cost report. We have selected 60 

percent utilization because it will 

identify hospitals where Medicare 

beneficiaries will benefit the most from 

the presence of a residency program, 

and it is consistent with the utilization 

percentage required for Medicaredependent, small rural hospitals 

(MDHs) as specified in § 412.108. In 

addition, it identifies a type of hospital 

that warrants atypical treatment by the 

Medicare program because it is so 

reliant on Medicare funding. 

Evaluation Criterion Two. The 

hospital will use the additional slots to 

establish a new geriatrics residency 

program, or to add residents to an 

existing geriatrics program. We believe 

that, of all the medical specialties, 

geriatrics is the one specialty that is 

devoted primarily to the care of 

Medicare beneficiaries. In addition, we 

note that encouraging residency training 

in geriatrics is consistent with 

Congressional intent as expressed, 

among other places, in section 712 of 

Public Law 108–173. 

Evaluation Criterion Three. The 

hospital does not qualify for an 

adjustment to its FTE caps under 

existing § 413.86(g)(12) (proposed to be 

redesignated as § 413.79(k) in this 

proposed rule) for a rural track 

residency program, but is applying for 

an increase in its FTE resident cap(s) 

under section 1886(h)(7)(B) of the Act 

because it rotates (or in the case of a 

new program, will rotate) residents for 

at least 25 percent of the duration of the 

residency program to any combination 

of the following: A rural area, as defined 

in section 1886(d)(2)(D)(ii) of the Act 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28303

and § 412.62(f)(1)(iii) of the regulations; 

a rural health clinic (RHC), as defined 

in section 1861(aa)(1) of the Act and 

§ 491.2 of the regulations; or a Federally 

Qualified Health Center (FQHC), as 

defined in section 1861(aa)(3) of the Act 

and § 405.2401(b) of the regulations. We 

believe that Congress intended that the 

Secretary use section 422 to encourage 

resident training in rural areas, and we 

believe this criterion furthers this 

intention. We are proposing to include 

residency training in FQHCs in this 

criterion because we understand that 

some FQHCs are located in rural areas. 

In addition, we would like to encourage 

residency training at FQHCs because we 

believe that, similar to rural providers 

and RHCs, FQHCs provide services for 

medically underserved areas or 

populations, or both. 

Evaluation Criterion Four. In portions 

of cost reporting periods prior to July 1, 

2005, the hospital qualified for a 

temporary adjustment to its FTE cap 

under existing § 413.86(g)(9) (proposed 

to be redesignated as § 413.79(h) in this 

proposed rule) because it was training 

displaced residents from either a closed 

program or a closed hospital, and, even 

after the temporary adjustment, the 

hospital continues to train residents in 

the specialty(ies) of the displaced 

residents and is training residents in 

excess of the hospital’s direct GME FTE 

cap or IME FTE cap, or both, for that 

reason. We believe this criterion is 

appropriate because it will help to 

sustain the level of residency training in 

the community. 

Evaluation Criterion Five. The 

hospital is above its FTE caps because 

it was awaiting accreditation of a new 

program from the ACGME or the AOA 

during the base period for its FTE 

cap(s), but was not eligible to receive a 

new program adjustment as stated under 

existing § 413.86(g)(6)(ii) (proposed to 

be redesignated as § 413.79(e)(2) in this 

proposed rule). Under existing 

§ 413.86(g)(6)(ii) and § 413 .86(g)(13) 

(proposed to be redesignated as 

§ 413.79(l) in this proposed rule), a 

hospital that had allopathic or 

osteopathic residents in its most recent 

cost reporting period ending on or 

before December 31, 1996 could receive 

an adjustment to its unweighted FTE 

cap for a new medical residency 

training program that either received its 

initial accreditation or began training 

residents on or after January 1, 1995 and 

on or before August 5, 1997. If a hospital 

failed to meet those deadlines, it was 

not eligible to have its cap(s) adjusted to 

include residents in a new program. 

Under this proposed criterion, a 

hospital would apply for additional FTE 

residents if the hospital had submitted 

its application for a new program to the 

accrediting body before August 5, 1997, 

and received its accreditation after 

August 5, 1997 but before August 5, 

1998. This would allow some hospitals 

to receive increases in their FTE 

resident caps in cases in which, in good 

faith, the hospital had submitted an 

application for accreditation for a new 

program prior to the date of enactment 

of FTE resident caps under the BBA, but 

because of the timing of the 

implementation of the FTE resident 

cap(s), had not yet received direct GME 

and IME payment for residents in the 

newly accredited program during the 

base period for the hospital’s FTE 

resident cap(s). 

Evaluation Criterion Six. The hospital 

is training residents in excess of its FTE 

resident caps because, despite 

qualifying for an FTE cap adjustment for 

a new program under § 413.86(g)(6)(i) or 

(g)(6)(ii) (proposed to be redesignated as 

§ 413.79(e)(1) and (e)(2) in this proposed 

rule), it was unable to ‘‘grow’’ its 

program to the full complement of 

residents for which the program was 

accredited before the hospital’s FTE 

resident cap was permanently set 

beginning with the fourth program year 

of the new program. Similar to 

evaluation criterion five above, this 

criterion would allow some hospitals 

that had, in good faith, started up a new 

residency program as required in the 

regulations but could not completely fill 

the new program within the allowed 

regulatory period, to receive increases in 

their FTE resident caps. For instance, 

this could have occurred because the 

program was a program of long duration 

(such as a 5-year general surgery 

program), and the hospital did not have 

the opportunity to ‘‘grow’’ the program 

to its full complement of residents 

because the regulations at 

§§ 413.86(g)(6)(i) or (g)(6)(ii) allow a 

program to grow for only 3 years before 

the hospital’s FTE resident cap is 

permanently adjusted for the new 

program. 

Evaluation Criterion Seven. The 

hospital is located in any one (or a 

combination) of the following: a 

geographic HPSA, as defined in 42 CFR 

5.2; a population HPSA, (also defined at 

42 CFR 5.2); or a Medicare physician 

scarcity county, as defined under 

section 413 of Public Law 108–173. We 

are proposing to use this 3-part criterion 

in order to capture, as objectively as 

possible, medically underserved areas 

or patient populations (many of which 

are Medicare beneficiaries), or both. We 

understand that if a particular 

community has been designated a HPSA 

(either a geographic or population 

HPSA), the designation information is 

available to hospitals from the Health 

Resources and Services Administration 

(HRSA) HPSA database at the Web site: 

http://belize.hrsa.gov/newhpsa/

newhpsa.cfm. In addition, hospitals will 

be able to determine whether they are 

located in a Medicare physician scarcity 

county (consistent with section 413 of 

Pub. L. 108–173) on the CMS Internet 

Web site at www.cms.hhs.gov or upon 

publication of the annual final rule 

setting forth the Medicare physician fee 

schedule (which is generally published 

by November 1 of each year). We note 

that if Medicare does not publish the 

final rule setting forth the Medicare 

physician fee schedule in time for the 

application deadline for increases in 

FTE resident caps (December 1, 2004, or 

March 1, 2005, depending on the 

hospital), we are proposing that we will 

not use the Medicare physician scarcity 

county designations (as defined under 

section 413 of Pub. L. 108–173) for 

purposes of this criterion. 

Evaluation Criterion Eight. The 

hospital is in a rural area (as defined 

under section 1886(d)(2)(D)(ii) of the 

Act) and is a training site for a rural 

track residency program (as specified 

under § 413.86(g)(12) (proposed to be 

redesignated as § 413.79(k) in this 

proposed rule)), but is unable to count 

all of the FTE residents training at the 

rural hospital in the rural track because 

the rural hospital’s FTE cap is lower 

than the hospital’s unweighted count of 

allopathic or osteopathic FTE residents 

beginning with portions of cost 

reporting periods on or after July 1, 

2005.

Evaluation Criterion Nine. The 

hospital is affiliated with a historically 

Black medical college. According to the 

language in the Conference Report for 

Public Law 108–173 (pages 204–205), 

the Conference agreement on section 

422 generally restated the three 

statutory priority categories described 

above (rural, ‘‘small’’ urban, and only 

specialty program in the State) in terms 

of giving guidance to the Secretary for 

deciding which hospitals should receive 

the redistributed FTE resident slots. 

However, there was one additional cited 

criterion that the Conference indicated 

the Secretary should use in evaluating 

the hospital applications. Specifically, 

the Conference agreement states that the 

Secretary should consider whether the 

hospital is a ‘‘historically large medical 

college’’ (emphasis added). Upon 

consideration of this particular 

terminology, which, on its face, seems 

to contradict the three statutory priority 

categories (that is, rural, ‘‘small’’ urban, 

and only specialty program in the State), 

we are proposing to view the reference 

to ‘‘historically large medical colleges’’

28304 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

as a scrivener’s error, and to read this 

language to refer to ‘‘historically Black

medical colleges.’’ This proposed 

interpretation accomplishes two goals: 

first, we believe this interpretation 

serves the greater policy goal of 

encouraging residency training for the 

benefit of medically underserved 

populations. Second, we believe that 

this interpretation reflects the 

Conferees’ intent in the language in the 

Conference Report. In addition, we are 

proposing to identify ‘‘historically Black 

medical colleges’’ as Howard University 

College of Medicine, Morehouse School 

of Medicine, Meharry Medical College, 

and Charles R. Drew University of 

Medicine and Science. These four 

medical schools are identified as 

‘‘historically Black medical colleges’’ by 

the American Medical Association (see 

http://www.ama–assn.org/ama/pub/

category/7952.html). We are proposing 

that the hospital will meet this criterion 

if it intends to use an increase in its FTE 

resident cap(s) under section 

1886(h)(7)(B) of the Act to count 

residents in residency programs 

sponsored by a historically Black 

medical college listed above. 

Evaluation Criterion Ten. The 

hospital is training residents in 

residency program(s) sponsored by a 

medical school(s) that is designated as 

a Center of Excellence for Underserved 

Minorities (COE) under section 736 of 

the Public Health Service Act in FY 

2003. We understand that the COE 

program was established to be a catalyst 

for institutionalizing a commitment to 

underserved students and faculty, and 

to serve as a national resource and 

educational center for diversity and 

minority health issues. Therefore, we 

believe that it is appropriate to 

encourage hospitals to train residents in 

residency programs sponsored by 

medical schools that are designated as 

COEs. A hospital can verify whether it 

is training residents in programs 

sponsored by a medical school that is a 

COE. Medical schools that are COEs in 

FY 2003 are listed at the following Web 

site: http://bhpr.hrsa.gov/diversity/coe/

grantees2003.htm. We note that, in FY 

2003, there were 28 medical schools 

that were designated to be COEs. 

We are proposing to use the above set 

of criteria to evaluate the applications 

by hospitals for increases in their FTE 

resident caps that fall within each of the 

six level priority categories. We would 

place each application in the 

appropriate priority level category based 

on the information the hospitals check 

off on the proposed CMS Evaluation 

Form for each allopathic and 

osteopathic specialty program requested 

by the applicant hospital, and the 

corresponding requested FTE cap 

increase (see the proposed form below). 

We are proposing to place all of these 

evaluation criteria on the Evaluation 

Form and to ask the hospital to check 

off on the form which criteria apply for 

each specialty program for which an 

FTE cap increase is requested. Based on 

the assertions checked off on the form, 

CMS would score each CMS Evaluation 

Form (one point per criterion checked 

off). The higher scoring CMS Evaluation 

Form(s) for each applicant hospital 

within each level priority category 

would be awarded the FTE resident cap 

increases first. As we described above, 

we are proposing to award the cap 

increases in the order of the six 

specified level priority categories 

because, as a general rule, we believe 

hospitals that meet more than one of the 

statutory priorities should be awarded 

the increases in their FTE resident caps 

first before other hospitals. However, we 

also believe that hospitals that meet a 

higher statutory priority category should 

receive first consideration by CMS over 

hospitals that meet lower statutory 

priorities. That is the reason, for 

instance, we are proposing the first level 

(rural hospital + only specialty program 

in the State) and second level (rural 

only) priority categories to give all rural 

hospitals first consideration by CMS 

before any small urban hospital, as 

required by the statute. 

Thus, first level priority category 

hospitals that score highest on the 

evaluation criteria on the CMS 

Evaluation Form for a particular 

specialty program would receive the 

increases in their FTE resident caps 

first. For example, if Hospital D is a 

rural hospital and is establishing the 

first osteopathic internal medicine 

residency program in State Y, thereby 

falling within the first level priority 

category, and Hospital D checks off on 

the CMS Evaluation Form that it has a 

Medicare utilization of 60 percent, is 

located in a geographic HPSA, and is 

affiliated with a historically Black 

medical college, Hospital D would 

receive a score of 3 points on the 

completed CMS Evaluation Form for the 

osteopathic internal medicine residency 

program and accompanying application. 

We are proposing that we would first 

award FTE cap increases to hospitals 

whose CMS Evaluation Forms for a 

particular program receive 10 points 

based on the number of evaluation 

criteria checked off by the hospital for 

the program (if there are any) and then 

to those with successively fewer points 

within the level priority category. 

Hospital D would receive the increase in 

its FTE resident cap(s) requested on its 

application after all the hospitals in the 

first level priority category whose 

applications receive 10 through 4 points 

are awarded their requests first. 

We are proposing that we would 

award the increases in FTE resident 

caps to all those hospitals that are in the 

first level priority category (rural 

hospitals + only specialty program in 

the State) before evaluating those 

hospitals in the second level priority 

category (rural hospital), and would 

award the FTE resident slots to all those 

hospitals in the second level priority 

category before evaluating those 

hospitals in the third level priority 

category (‘‘small’’ urban hospital + only 

specialty in the State), and so on. Once 

we reach an aggregate number of FTE 

resident cap increases from the 

aggregate estimated pool of FTE resident 

positions under section 1886(h)(7)(A) of 

the Act, but are unable, based on the 

number of remaining slots, to meet all 

of the requests at the next level priority 

category at the next score level, we are 

proposing to prorate any remaining 

estimated FTE resident slots among all 

the applicant hospitals within that level 

priority category and with the same 

score on the hospital’s application.

For example, assume all applicant 

hospitals in the first through fourth 

level priority categories receive the 

requested increases in their FTE 

resident caps by CMS, and CMS next 

evaluates hospital applications and 

accompanying CMS Evaluation Forms 

in the fifth level priority category (only 

specialty program in the State). At the 

point that CMS has awarded cap 

increases for all the fourth level priority 

category hospitals that scored 5 or above 

on their CMS Evaluation Forms for each 

residency program, CMS finds that there 

is only a sufficient number of resident 

slots remaining in the estimated pool to 

grant half of the requests for slots from 

hospitals that scored 4 points. We are 

proposing that we would prorate all of 

the remaining FTEs among the 4-point 

CMS Evaluation Forms and 

accompanying applications in the fourth 

level priority category. Thus, if CMS 

could have awarded a total of 200 FTE 

slots for direct GME and 185 FTE slots 

for IME to only the first 50 percent of 

the 4-point CMS Evaluation Forms in 

the fourth level priority category at the 

point that the estimated pool of FTE 

slots is spent, we are proposing to 

prorate all of the 200 FTE slots for direct 

GME and 185 FTE slots for IME among 

all of the 4-point CMS Evaluation Forms 

and accompanying applications in that 

fourth priority category, no matter what 

level of FTE resident cap increase was 

requested on the individual hospital’s 

application. 

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We recognize the complexity of this 

proposed evaluation process for the 

award of increases in hospital’s FTE 

resident caps under section 

1886(h)(7)(B) of the Act. Therefore, we 

are including some further examples 

depicting the proposed procedures:

Example 1: Hospital M in State Z is an 

urban hospital located in an MSA that has a 

population of less than 1 million. Hospital M 

can demonstrate the likelihood that it will fill 

the requested five FTEs resident slots for 

direct GME and IME because it is currently 

training a number of FTE residents in 

geriatrics that exceeds both of its FTE caps, 

and has attached to its application for an 

increase in its FTE resident caps a copy of 

Hospital M’s past three Medicare cost reports 

(as filed or audited, whichever is most recent 

and available), which documents on 

Worksheet E, Part A and Worksheet E3, Part 

IV that, according to the resident counts and 

the FTE resident caps, Hospital M is training 

residents in excess of its caps. Hospital M has 

taken on residents from a teaching hospital 

in the community that closed, and is also 

located in a Medicare physician scarcity 

county. 

Hospital M’s application would be 

evaluated by CMS accordingly: Fourth level 

priority category (‘‘small’’ urban hospital); 

score of 3 (expanding geriatrics program, 

Medicare physician scarcity area, residents 

from a closed hospital).

Example 2: Hospital K is a large academic 

medical center located in an MSA with a 

population of greater than 1,000,000 and is 

in a population HPSA. Hospital K regularly 

trains residents in programs sponsored by 

Meharry Medical College, and wishes to add 

more residents from Meharry, and therefore, 

has requested accreditation from the ACGME 

to expand the number of Meharry residents 

training in both allopathic surgery and 

osteopathic pediatrics programs. Hospital K 

is above both its direct GME and IME FTE 

caps. 

Hospital K’s CMS Evaluation Forms for 

allopathic surgery and osteopathic pediatrics 

would be evaluated (separately) by CMS 

accordingly: Sixth level priority category 

(large urban hospital); can demonstrate 

likelihood of filling the slots (because 

Hospital K can document both that the 

hospital is above its caps and that it has 

requested ACGME accreditation to expand 

the programs); and a score of 2 (population 

HPSA, historically Black medical college).

Example 3: Hospital E is a rural hospital 

located in a Medicare physician scarcity area 

and a geographic HPSA. It is a rural training 

site for a rural track residency program that 

has only been a training site since 2002. 

Therefore, Hospital E has an FTE resident 

cap of zero FTEs for direct GME and IME. 

Hospital E’s CMS Evaluation Form for the 

rural track family practice program and 

accompanying application would be 

evaluated CMS accordingly: Second level 

priority category (rural hospital); can 

demonstrate the likelihood of filling slots 

(because Hospital E can document that it is 

both over its cap of zero FTEs, and that it is 

a training site for an accredited rural track 

residency program; and a score of 2 (a 

training site for a rural track, and a Medicare 

physician scarcity area, and a geographic 

HPSA).

Example 4: Hospital W is a rural hospital 

that has FTE caps of 15 FTEs for both direct 

GME and IME. Hospital W requests an FTE 

cap adjustment of 25 FTEs for both direct 

GME and IME; 5 FTEs to expand an existing 

geriatric fellowship; 20 FTEs to establish the 

first osteopathic emergency medicine 

program in State K, in which Hospital W is 

located. Hospital W can document that it is 

at its FTE caps with existing residency 

programs. CMS would make the following 

assessment for Hospital W’s Evaluation Form 

for the geriatric fellowship: Hospital W falls 

into the second level priority category for 

being a rural hospital; can demonstrate the 

likelihood that it will fill the 5 FTE slots of 

the geriatric program by documenting that it 

has requested additional slots in the 

accreditation of the geriatrics program and 

that Hospital W is above its caps. Hospital W 

would receive a score of 1 on its CMS 

Evaluation Form for the geriatrics program. 

CMS would make the following assessment 

for Hospital W’s CMS Evaluation Form for 

the new osteopathic emergency medicine 

program: Hospital W would meet the first 

level priority category for this Evaluation 

Form because, not only is it a rural hospital, 

but it is also requesting 20 FTEs for the only 

osteopathic emergency medicine program in 

the State; can demonstrate the likelihood that 

it will fill the 20 osteopathic emergency 

medicine FTEs by documenting the 

accreditation request and that it is over its 

FTE caps. Hospital W would receive a score 

of zero, because it did not meet any of the 

10 evaluation criteria on the CMS Evaluation 

Form. 

j. Application of Locality-Adjusted 

National Average Per Resident Amount 

(PRA) 

Section 1886(h)(7)(B)(v) of the Act, as 

added by section 422 of Public Law 

108–173, provides that, with respect to 

additional residency slots attributable to 

the increase in the hospital’s FTE 

resident cap as a result of redistribution 

of resident positions, the approved FTE 

resident amount, or PRA, is deemed to 

be equal to the locality-adjusted 

national average per resident amount 

computed for that hospital. In other 

words, section 1886(h)(7)(B)(v) of the 

Act requires that, for purposes of 

determining direct GME payments for 

portions of cost reporting periods 

occurring on or after July 1, 2005, a 

hospital that receives an increase in its 

direct GME FTE resident cap under 

section 1886(h)(7)(B) of the Act will 

receive direct GME payments with 

respect to those additional FTE 

residents using the locality-adjusted 

national average PRA. Thus, we are 

proposing that a hospital that receives 

an increase in its FTE resident cap 

under section 1886(h)(7)(B) of the Act 

would receive direct GME payments 

based on the sum of two different direct 

GME calculations: one that is calculated 

using the hospital’s actual PRAs 

(primary care PRA or nonprimary care 

PRA) applicable under existing 

§ 413.86(e)(4) (proposed to be 

redesignated as § 413.77(d) in this 

proposed rule) and the hospital’s 

number of FTE residents not attributable 

to an FTE cap increase under section 

1886(h)(7)(B) of the Act; and another 

that is calculated using the localityadjusted national average PRA under 

existing § 413.86(e)(4)(ii)(B) (proposed 

to be redesignated as § 413.77(d)(2)(ii) in 

this proposed rule) inflated to a 

hospital’s current cost reporting period, 

and the hospital’s number of FTE 

residents that is attributable to the 

increase in the hospital’s FTE resident 

cap under section 1886(h)(7)(B). 

Section 422(a) of Public Law 108–173 

contains a cross-reference in the new 

section 1886(h)(7)(B)(v) of the Act to the 

locality adjusted national average PRA 

‘‘computed under paragraph (4)(E).’’

However, section 1886(h)(4)(E) of the 

Act does not relate to the localityadjusted national average PRA. Rather, 

it relates to the circumstances under 

which a hospital may count FTE 

resident time spent training in 

nonhospital sites.

We have concluded that the crossreference to section 1886(h)(4)(E) of the 

Act is a legislative drafting error, or 

scrivener’s error. Instead, we believe 

Congress intended to refer to section 

1886(h)(2)(E), which explicitly provides 

for the determination of localityadjusted national average PRAs. 

Because the drafting error is apparent, 

and a literal reading of the crossreference as specified in the statute 

would produce absurd results, we are 

proposing to interpret the crossreference to section 1886(h)(4)(E) of the 

Act in the new section 1886(h)(7)(B)(v) 

of the Act as if the reference were to 

section 1886(h)(2)(E) of the Act. 

We note that section 1886(h)(7)(B)(v) 

of the Act, which addresses the 

applicability of the locality-adjusted 

national average PRAs with respect to 

redistributed slots for the direct GME 

payment, makes no reference to section 

1886(h)(4)(G) of the Act, which is the 

provision concerning the rolling average 

count of FTE residents. That is, the 

statute does not provide for an 

exclusion from application of the rolling 

average for residents counted as a result 

of FTE cap increases under section 

1886(h)(7)(B) of the Act. In light of the 

absence of a specific pronouncement in 

section 1886(h)(7)(B) of the Act 

exempting those residents from 

application of the rolling average, and 

with no apparent reason to treat 

residents counted as a result of the FTE 

28306 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

cap increases under section 

1886(h)(7)(B) of the Act differently for 

purposes of the rolling average, we are 

proposing to require that if a hospital 

increases its direct GME FTE count of 

residents as a result of an FTE resident 

cap increase under section 1886(h)(7)(B) 

of the Act, those FTE residents are 

immediately subject to the rolling 

average calculation. Furthermore, we 

believe that, given potentially 

significant shifts of FTE slots among 

hospitals as a result of section 

1886(h)(7) of the Act, the inclusion of 

FTE residents counted as a result of 

section 1886(h)(7)(B) of the Act in the 

rolling average introduces a measure of 

stability and predictability, and 

mitigates radical shifts in direct GME 

payments from period to period. Thus, 

any increase in a hospital’s direct GME 

payment relating to an FTE cap increase 

under section 1886(h)(7)(B) of the Act 

will be phased-in over a 3-year period 

because the additional FTE residents are 

immediately included in the rolling 

average calculation and would only 

gradually be included in the hospital’s 

FTE count. 

Following is an example of how direct 

GME payment would be determined for 

a hospital that received an increase in 

its direct GME FTE cap under section 

1886(h)(7)(B) of the Act. Hospital A has 

a fiscal year end (FYE) of June 30, and 

a direct GME FTE resident cap of 20 

FTEs. During its FYEs June 30, 2004 and 

June 30, 2005, Hospital A trained 20 

nonprimary care residents. During FYE 

June 30, 2006, Hospital A trains 25 

nonprimary care FTE residents. Hospital 

A’s FYE June 30, 2006 nonprimary care 

PRA is $100,000. The FYE June 30, 2006 

locality-adjusted national average PRA 

for Hospital A is $84,000. Hospital A’s 

Medicare utilization is 35 percent. 

Effective July 1, 2005, under section 

1886(h)(7)(B) of the Act, Hospital A 

receives an increase to its direct GME 

FTE resident cap of 5 FTEs, for a total 

adjusted direct GME FTE resident cap of 

25 FTEs. For the FYE June 30, 2006 cost 

report, the direct GME payment is 

calculated as follows: 

Step 1. For residents NOT counted 

pursuant to section 1886(h)(7)(B) of the 

Act—

For July 1, 2005 through June 30 2006:

• Rolling average count: 20 + 20 + 20/

3 = 20. 

• Direct GME computation: $100,000 

× 20 × .35 = $700,000.

Step 2. For residents counted 

pursuant to section 1886(h)(7)(B) of the 

Act—

For July 1, 2005 through June 30, 2006:

• Rolling average count: 25 + 20 + 20/

3 = 21.7

• Difference between rolling average 

count for residents counted 

pursuant to section 1886(h)(7)(B) of 

the Act and rolling average count 

for residents counted not pursuant 

to section 1886(h)(7)(B) of the Act 

(rolling average count under step 2 

minus rolling average count under 

step 1): 21.7 ¥ 20 = 1.7. 

• Direct GME computation: $84,000 ×

1.7 × .35 = $49,980.

Step 3. Direct GME payment for FYE 

June 30, 2006: $700,000 + $49,980 = 

$749,980. 

k. Application of Section 422 to 

Hospitals That Participate in 

Demonstration Projects or Voluntary 

Reduction Programs 

Section 1886(h)(7)(B)(vi) of the Act, as 

amended by section 422(a)(3) of Public 

Law 108–173, states that ‘‘Nothing in 

this subparagraph shall be construed as 

permitting the redistribution of 

reductions in residency positions 

attributable to voluntary reduction 

programs * * * under a demonstration 

project approved as of October 31, 

2003.’’ This language is referring to the 

New York Medicare GME 

Demonstration Project and the 

Voluntary Resident Reduction Project 

(VRRP) under section 402 of Public Law 

90–248. In July 1997, 42 New York 

teaching hospitals participated in the 

demonstration project. As there were 

two entry points for this demonstration, 

an additional seven hospitals joined the 

program in July 1998. The purpose of 

the demonstration project was to test 

reimbursement changes associated with 

residency training to determine whether 

hospitals could use time-limited 

transition funding to replace and 

reengineer the services provided by a 

portion of their residency trainees. In 

exchange for reducing its count of 

residents by 20 to 25 percent over a 5-

year period, while maintaining or 

increasing its primary care-to-specialty 

ratio of residents, a participating 

hospital (or consortium of hospitals) 

would receive ‘‘hold harmless 

payments’’ for 6 years. These payments 

represented a declining percentage of 

the Medicare GME reimbursement the 

participating hospitals would have 

received had their number of residents 

not been reduced. 

For hospitals that successfully 

completed the demonstration project, 

the Balanced Budget Act of 1997 states 

that if a hospital increases the number 

of full-time equivalent residents 

permitted under its reduction plan as of 

the completion of the plan, it is liable 

for repayment of the total amounts paid 

under the demonstration. Following the 

demonstration’s period of performance, 

which ended June 30, 2003, if a hospital 

exceeds its post-demonstration cap and 

trains residents in excess of the FTE 

levels achieved under the 

demonstration, the hospital is not 

permitted to count those excess 

residents for purposes of Medicare GME 

payments until such time as the hold 

harmless funds paid under the 

demonstration project have been repaid 

in full. 

Similarly, with the VRPP, hospitals 

could use time-limited transition 

funding to replace the services provided 

by a portion of their residents. In 

exchange for reducing its count of 

residents by 20 to 25 percent over a 5-

year period, while maintaining or 

increasing its primary care-to-specialty 

ratio of residents, a VRRP participating 

hospital would receive ‘‘hold harmless 

payments’’ for 5 years. These payments 

represented a declining percentage of 

the Medicare GME reimbursement the 

VRRP participating hospital would have 

received had its number of residents not 

been reduced. 

We believe that the language of 

section 1886(h)(7)(B)(vi) of the Act 

precludes the Secretary from 

redistributing residency positions that 

are unused due to a hospital’s 

participation in a demonstration project 

or the VRRP to other hospitals that seek 

to increase their FTE resident caps 

under section 1886(h)(7)(B)(i) of the Act. 

That is, if we were to propose that 

hospitals that participated in a 

demonstration project or the VRRP are 

subject to possible reductions to their 

FTE resident caps under section 

1886(h)(7)(A)(i) of the Act, any excess 

slots resulting from reductions made 

under section 1886(h)(7)(A)(i) of the Act 

attributable to the demonstration or the 

voluntary reduction program at these 

hospitals would not be allocated to the 

resident pool and redistributed to other 

hospitals. We also believe that section 

1886(h)(7)(B)(vi) of the Act is silent as 

to whether the Secretary should apply 

the possible reductions under section 

1886(h)(7)(A)(i) of the Act to the FTE 

resident caps of these hospitals. 

Congress recognized the unique status 

of reductions in FTE resident counts 

made by these hospitals that 

participated in a demonstration project 

under the authority of section 402 of 

Public Law 90–248, or a VRRP under 

section 1886(h)(6) of the Act, in which 

these hospitals received hold-harmless 

payments from Medicare for reducing 

the number of residents that they were 

training. Accordingly, we are proposing 

to recognize the unique status of FTE 

reductions made by these hospitals, and 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28307

are applying the discretion that 

Congress has granted the Secretary 

under section 1886(h)(7)(A)(ii) of the 

Act in determining the reference 

resident level applicable to these 

hospitals, to determine the extent to 

which section 1886(h)(7)(A)(i) of the Act 

applies to these hospitals.

We note that section 1886(h)(7)(B)(vi) 

of the Act only applies to these 

hospitals to the extent that a hospital’s 

‘‘reductions in residency positions’’

were ‘‘attributable’’ to its participation 

in the demonstration project or the 

VRRP. In determining the reference 

resident level for these hospitals, we are 

proposing to adjust the reference 

resident level for ‘‘reductions in 

residency positions attributable’’ to 

participation in the demonstration 

project or the VRRP. We are proposing 

to define ‘‘reductions in residency 

positions attributable’’ to participation 

in the demonstration project or the 

VRRP as the difference between the 

number of unweighted allopathic and 

osteopathic residents training at the 

hospital at the start of a hospital’s 

participation in the demonstration 

project or the VRRP, (that is, the base 

number of residents as defined by the 

terms of the demonstration project and 

the VRRP,) and the number of such 

residents training at the hospital in the 

hospital’s most recent cost reporting 

period ending on or before September 

30, 2002. We are proposing that, in 

determining any possible adjustments to 

the reference resident level for hospitals 

that participated in the demonstration 

project or the VRRP, we would 

differentiate between hospitals that 

withdrew from participation prior to the 

beginning of the most recent cost 

reporting period ending on or before 

September 30, 2002, and hospitals that 

either have not withdrawn from 

participation, or withdrew sometime 

during or after the most recent cost 

reporting period ending on or before 

September 30, 2002. 

Specifically, we are proposing that, if 

a hospital was participating in the 

demonstration project or the VRRP at 

any time during the hospital’s most 

recent cost reporting period ending on 

or before September 30, 2002, for 

purposes of determining possible 

reductions to the FTE resident caps, we 

would compare the higher of the 

hospital’s base number of residents, and 

the resident level in the hospital’s most 

recent cost reporting period ending on 

or before September 30, 2002, to the 

hospital’s otherwise applicable FTE 

resident cap. If the higher of the base 

number of residents or the resident level 

in the hospital’s most recent cost 

reporting period ending on or before 

September 30, 2002, is still less than the 

otherwise applicable FTE resident cap, 

we are proposing to reduce the 

hospital’s FTE resident cap amount by 

75 percent of the difference, effective 

July 1, 2005. We would also use those 

slots in the redistribution process under 

section 1886(h)(7)(B) of the Act since 

those slots are not ‘‘attributable’’ to 

participation in the demonstration 

project or the VRRP. 

Under section 1886(h)(7)(A)(ii)(II) of 

the Act, a hospital may submit a timely 

request to use its cost report that 

includes July 1, 2003, for purposes of 

determining the reference resident level 

if the hospital has an expansion of an 

existing program that is not reflected on 

the hospital’s most recent settled cost 

report. If a hospital that was still 

participating in the demonstration 

project or the VRRP at some time during 

its most recent cost reporting period 

ending on or before September 30, 2002, 

had an expansion of an existing program 

that is not reflected on its most recent 

settled cost report, and the resident 

level for its cost reporting period that 

includes July 1, 2003, is higher than the 

resident level for the most recent cost 

reporting period ending on or before 

September 30, 2002, and is higher than 

the base number of residents, we 

anticipate that the hospital would 

submit a timely request that its resident 

level from its cost reporting period that 

includes July 1, 2003, be compared to its 

otherwise applicable FTE resident cap, 

for purposes of determining a possible 

reduction to the hospital’s FTE resident 

cap. We believe that under the proposed 

policy discussed above, a hospital 

would only request that we utilize its 

cost reporting period that includes July 

1, 2003, if the number of allopathic and 

osteopathic residents it trained in that 

cost reporting period is higher than its 

base number of residents and its base 

number of residents is less than its FTE 

resident cap. If we grant the hospital’s 

request that we utilize its cost reporting 

period that includes July 1, 2003, and 

the resident level for that period is less 

than the FTE resident cap, we would 

reduce the FTE resident cap by 75 

percent of the difference between the 

two numbers. We would also use those 

slots in the redistribution process under 

section 1886(h)(7)(B) of the Act, since 

those slots are not ‘‘attributable’’ to 

participation in the demonstration 

project or the VRRP. 

If a hospital withdrew from 

participation in the demonstration 

project or the VRRP prior to its most 

recent cost reporting period ending on 

or before September 30, 2002, we are 

proposing that such a hospital would be 

subject to the procedures applicable to 

all other hospitals for determining 

possible reductions to the FTE resident 

caps. However, we note that such a 

hospital may still apply for an increase 

to its FTE caps as specified under 

section 1886(h)(7)(B) of the Act (the 

proposals for applying for the increase 

are described above).

l. Application of Section 422 to 

Hospitals That File Low Utilization 

Medicare Cost Reports 

In general, section 422 of Public Law 

108–173 applies to hospitals that are 

Medicare-participating providers and 

that train residents in approved 

residency programs. However, because 

Medicare-participating children’s 

hospitals primarily serve a nonMedicare population and, therefore, 

receive minimal Medicare payments 

relative to other Medicare-participating 

hospitals, some children’s hospitals 

choose (with approval from their fiscal 

intermediaries) to submit low utilization 

(abbreviated) Medicare cost reports. 

Typically, such low utilization cost 

reports do not include the information 

that would be necessary for us to 

calculate Medicare GME payments, such 

as FTE resident counts and caps. Thus, 

children’s hospitals that submit these 

low utilization cost reports do not 

receive Medicare GME payments. 

Under section 1886(h)(7)(A) of the 

Act, as added by section 422(a) of Public 

Law 108–173, we are proposing that 

determinations as to whether, and by 

how much, a children’s hospital’s FTE 

resident cap will be reduced will be 

made using the same methodology (that 

is, utilizing the same reference cost 

reporting periods and the same 

reference resident levels) that we are 

proposing for other Medicareparticipating teaching hospitals. We 

note that the low utilization cost reports 

may be filed with or without Worksheet 

E–3, Part IV (the worksheet on which 

the Medicare direct GME payment is 

calculated). If a children’s hospital files 

a low utilization cost report in a given 

cost reporting period, and does not file 

the Worksheet E–3, Part IV, for 

Medicare purposes, that hospital is not 

considered by Medicare to be a teaching 

hospital in that cost reporting period. 

(We realize that a children’s hospital 

that files a low utilization cost report 

may have a ‘‘resident cap’’ that is 

applicable for payment purposes under 

the Children’s Hospital Graduate 

Medical Education (CHGME) Payment 

Program, administered by the Health 

Resources and Services Administration 

(HRSA), but this resident cap is not the 

Medicare FTE resident cap.) As stated in 

the One-Time Notification published on 

April 30, 2004 (Transmittal 77, CR 

28308 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

3247), if a children’s hospital filed a low 

utilization cost report in its most recent 

cost reporting period ending on or 

before September 30, 2002, and did not 

file the Worksheet E–3, Part IV, there 

could be no reduction under section 

1886(h)(7)(A) of the Act because there is 

no reference resident level for such a 

hospital. This would be the case even in 

instances where such a children’s 

hospital has a FTE resident cap (for 

example, from 1996) that is recognized 

for Medicare purposes, because there 

would still be no reference resident 

level for its most recent cost reporting 

period ending on or before September 

30, 2002, on which to determine a 

possible reduction to the children’s 

hospital FTE resident cap. 

Although section 1886(h)(7)(A) of the 

Act does not apply to children’s 

hospitals that filed a low utilization cost 

report (and no Worksheet E–3, Part IV) 

for the most recent cost reporting period 

ending on or before September 30, 2002, 

we are proposing that, regardless of how 

a children’s hospital has previously 

filed its Medicare cost report (that is, a 

full cost report or an abbreviated one), 

or how it is treated for CHGME payment 

purposes, a children’s hospital would be 

eligible to apply for an increase in its 

FTE resident cap under section 

1886(h)(7)(B) of the Act, subject to the 

same demonstrated likelihood and 

evaluation criteria proposed above for 

all hospitals. However, we are 

proposing that, in order to receive an 

increase in its FTE resident cap under 

section 1886(h)(7)(B) of the Act, 

effective July 1, 2005, in addition to 

complying with the proposed 

application requirements described 

above, the hospital must file Worksheet 

E–3, Part IV, with its Medicare cost 

report for its cost reporting period that 

includes July 1, 2005. We are proposing 

that the children’s hospital comply with 

this requirement because section 422 is 

intended to allow a hospital to increase 

its FTE counts for purposes of Medicare 

GME payments. We do not believe it 

would be appropriate to grant an 

increase in a hospital’s FTE resident cap 

under section 1886(h)(7)(B) of the Act if 

the hospital does not use the slots for 

Medicare purposes (but only for 

purposes of the CHGME Payment 

Program) as would be evidenced by not 

filing a Worksheet E–3, Part IV. 

m. Specific Solicitation for Public 

Comment on the Proposals 

We specifically solicit public 

comment on the proposals in this 

section IV.O.2. In particular, in section 

IV.O.2.g. of this preamble on the 

determination of the hospitals that will 

receive increases in their FTE resident 

caps, we have considered many possible 

alternatives to evaluate hospital 

applications. We specifically solicit 

public comments on how hospitals 

should ‘‘demonstrate the likelihood’’ of 

filling the additional residency slots, 

and in a way that is documentable for 

all hospitals and verifiable by CMS. We 

also specifically solicit public 

comments on the criteria we have 

proposed for evaluating the hospital 

applications and are open to suggestions 

from the public on what other criteria 

we should use to determine which 

hospitals should receive the increases in 

their FTE resident caps. We ask the 

public to keep in mind that criteria 

should be documentable for all 

hospitals and verifiable by CMS. 

n. CMS Evaluation Form

CMS Evaluation Form as Part of the Application for the Increase in a Hospital’s FTE Cap(s) Under Section 422 of the Medicare 

Modernization Act of 2003

Directions: Please fill out the information below for each residency program for which the applicant hospital intends to use the increase 

in its FTE cap(s). CMS notes that the applicant hospital is responsible for complying with the other requirements listed in the FY 2005 

hospital inpatient prospective payment system proposed rule in order to complete its application for the increase in its FTE cap(s) under 

section 422 of Public Law 108–173. 

NAME OF HOSPITAL: llllllllllllllllllllllllllllllllllllllllllllllllllllll

MEDICARE PROVIDER NUMBER: lllllllllllllllllllllllllllllllllllllllllllllllll

NAME OF SPECIALTY TRAINING PROGRAM: lllllllllllllllllllllllllllllllllllllllllll

(Check one): b Allopathic Program b Osteopathic Program 

NUMBER OF FTE SLOTS REQUESTED FOR PROGRAM: 

Direct GME:lllll IME:lllll

llllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllll

Section A: Demonstrated Likelihood of Filling the FTE Slots 

(Place an ‘‘X’’ in the box for the applicable criterion and subcriteria.)

b A1: Demonstrated Likelihood Criterion 1. The hospital intends to use the additional FTEs to establish a new residency program (listed 

above) on or after July 1, 2005 (that is, a newly approved program that begins training residents on or after July 1, 2005).

b (1) Hospital is establishing this newly approved residency program. (Check one of the following.)

b Application for approval of the new residency program has been submitted to the ACGME or the AOA by December 1, 2004. (Copy 

attached.)

b The hospital has submitted an institutional review document or program information form concerning the new program in an application 

for approval of the new program by December 1, 2004. (Copy attached.)

b The hospital has received written correspondence from the ACGME or AOA acknowledging receipt of the application for the new program, 

or other types of communication from the accrediting bodies concerning the new program approval process (such as notification of site 

visit). (Copy attached.)

b (2) Hospital will likely fill the slots requested. (Check one of the following.)

b The hospital s existing residency programs had a resident fill rate of at least 95 percent in each of program years 2001 through 2003. 

(Documentation attached.)

b The hospital has the cover page of its employment contracts with the residents who are or will be participating in the new residency 

program (resident specific information may be redacted). (Copies attached.)

b The specialty program (listed above) has a resident fill rate nationally, across all hospitals, of at least 95 percent. (Documentation attached.)

b A2: Demonstrated Likelihood Criterion 2. The applying hospital intends to use the additional FTEs to expand an existing residency 

training program that is listed above (that is, to increase the number of FTE resident slots in the program) on or after July 1, 2005, and 

before July 1, 2008.

b (1) Hospital intends to expand an existing program. (Check one of the following.)

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28309

b The appropriate accrediting body (the ACGME or the AOA) has approved the hospital s expansion of the number of FTE residents 

in the program. (Documentation attached.)

b The National Residency Match Program or the American Osteopathic Association Residency Match Program has accepted or will be 

accepting the hospital s participation in the match for the existing program that will include additional resident slots in that residency 

training program. (Documentation attached.)

b The hospital has institutional review document or program information form for the expansion of the existing residency training program. 

(Copy attached.)

b (2) Hospital will likely fill the slots of the expanded residency program. (Check one of the following.)

b Hospital has employment contracts with the residents who are or will be participating in the expanded program (resident specific 

information may be redacted) and employment contracts with the residents participating in the program prior to the expansion of the 

program. (Copy of the cover page of both documents attached.)

b Hospital has other previously established residency programs. (Documentation attached evidencing that each of the residency programs 

had a resident fill rate of at least 95 percent in each of program years 2001 through 2003.)

b Hospital is expanding an existing program in a particular specialty. (Documentation attached evidencing that the specialty has a resident 

fill rate nationally, across all hospitals, of at least 95 percent.)

b Hospital is expanding a program in order to train residents that need a program because another hospital in the State has closed a 

similar program, and the applying hospital received a temporary adjustment to its FTE cap(s) (under the requirements of § 413.86(g)(9)). 

(Documentation attached.)

b A3: Demonstrated Likelihood Criterion 3. Hospital is applying for an increase in its FTE resident cap because the hospital is already 

training residents in an existing residency training program(s) in excess of its direct GME FTE cap or IME FTE cap, or both. (Copies of 

EACH of the following attached.)

• Copies of the most recent as-submitted Medicare cost reports documenting on Worksheet E, Part A and Worksheet E3, Part IV the 

resident counts and FTE resident caps for both direct GME and IME for the relevant cost reporting periods. 

• Copies of the 2004 residency match information concerning the number of residents the hospital intends to have in its existing programs.

• Copies of the most recent accreditation letters on all of the hospital s training programs in which the hospital trains and counts FTE 

residents for direct GME and IME.

b A4: Demonstrated Likelihood Criterion 4. The hospital is applying for the unused FTE resident slots because the hospital is at risk 

of losing accreditation of a residency training program if the hospital does not increase the number of FTE residents in the program on 

or after July 1, 2005. (Documentation attached from the appropriate accrediting body of the hospital’s risk of lost accreditation as a result 

of an insufficient number of residents in the program.) 

Section B. Level Priority Category 

b (Place an ‘‘X’’ in the appropriate box that is applicable to the level priority category that describes the applicant hospital.)

b B1: First Level Priority Category: The hospital is a rural hospital and has the only specialty training program in the State (for the program 

requested on page 1 of this CMS Evaluation Form).

b B2: Second Level Priority Category: The hospital is a rural hospital only.

b B3: Third Level Priority Category: The hospital is a small urban hospital (that is, an urban hospital that is located in a ‘‘not large urban 

area’’ ) and has the only specialty program in the State (for the program requested on this CMS Evaluation Form).

b B4: Fourth Level Priority Category: The hospital is a ‘‘small’’ urban hospital only.

b B5: Fifth Level Priority Category: The hospital has the only specialty training program in the State (for the program requested on page 

1 of this CMS Evaluation Form).

b B6: Sixth Level Priority Category: The hospital meets none of the statutory priority criteria. 

Section C. Evaluation Criteria 

(Place an X in the box for each criterion that is appropriate for the applicant hospital and for the program for which the increase in the 

FTE cap is requested.)

b C1: Evaluation Criterion One. The hospital that is requesting the increase in its FTE resident cap(s) has a Medicare inpatient utilization 

over 60 percent, as reflected in at least two of the hospital s last three most recent audited cost reporting periods for which there is a 

settled cost report.

b C2: Evaluation Criterion Two. The hospital needs the additional slots to establish a new geriatrics residency program, or adding residents 

to an existing geriatrics program.

b C3: Evaluation Criterion Three. The hospital does not qualify for an adjustment to its FTE caps under existing § 413.86(g)(12) for a 

rural track residency program, but is applying for an increase in its FTE resident cap(s) under section 1886(h)(7)(B) of the Act because 

it rotates (or in the case of a new program, will rotate) residents for at least 25 percent of the duration of the residency program to any 

one (or in combination thereof) of the following: a rural area, as defined in section 1886(d)(2)(D)(ii) of the Act and § 412.62(f)(1)(iii) of 

the regulations; a rural health clinic (RHC), as defined in section 1861(aa)(1) of the Act and § 491.2 of the regulations; or a Federally Qualified 

Health Center (FQHC), as defined in section 1861(a)(3) of the Act and § 405.2401(b) of the regulations.

b C4: Evaluation Criterion Four. In portions of cost reporting periods prior to July 1, 2005, the hospital qualified for a temporary adjustment 

to its FTE cap under existing § 413.86(g)(9) because it was training displaced residents from either a closed program or a closed hospital, 

and, even after the temporary adjustment, the hospital continues to train residents in the specialty(ies) of the displaced residents and is 

above the hospital’s direct GME FTE cap or IME FTE cap, or both, for that reason.

b C5: Evaluation Criterion Five. The hospital is above its FTE caps because it was awaiting accreditation of a new program from the 

ACGME or the AOA during the base period for its FTE cap(s) but was not eligible to receive a new program adjustment as stated under 

existing § 413.86(g)(6)(ii).

b C6: Evaluation Criterion Six. The hospital is above its FTE resident caps because, despite qualifying for an FTE cap adjustment for 

a new program under § 413.86(g)(6)(i) or (g)(6)(ii), it was unable to ‘‘grow’’ its program to the full complement of residents for which the 

program was accredited before the hospital’s FTE resident cap was permanently set beginning with the fourth program year of the new 

program.

b C7: Evaluation Criterion Seven. The hospital is located in any one (or in combination thereof) of the following: a geographic HPSA, 

as defined in 42 CFR 5.2; a population HPSA (also defined at 42 CFR 5.2); or a Medicare physician scarcity county, as defined under 

section 413 of Public Law 108–173.

28310 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

b C8: Evaluation Criterion Eight. The hospital is in a rural area (as defined under section 1886(d)(2)(D)(ii) of the Act) and is a training 

site for a rural track residency program (as specified under § 413.86(g)(12), but is unable to count all of the FTE residents training at the 

rural hospital in the rural track because the rural hospital’s FTE cap is lower than the hospital’s unweighted count of allopathic or osteopathic 

FTE residents beginning with portions of cost reporting periods on or after July 1, 2005.

b C9: Evaluation Criterion Nine. The hospital is affiliated with a historically Black medical college.

b C10: Evaluation Criterion Ten: The hospital is training residents in residency program(s) sponsored by a medical school(s) that is 

designated as a Center of Excellence for Underserved Minorities (COE) under section 736 of the Public Health Service Act in FY 2003.

o. CMS Central and CMS Regional 

Office Mailing Addresses for 

Applications for Increases in FTE 

Resident Caps

Central Office 

Centers for Medicare and Medicaid Services 

(CMS), Director, Division of Acute Care, 

7500 Security Boulevard, Mail Stop C4–

08–06, Baltimore, Maryland 21244. 

Region I (Connecticut, Maine, Massachusetts, 

New Hampshire, Rhode Island, and Vermont) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Management, Region I, JFK Federal 

Building, Room 2325, Boston, MA 02203, 

Phone: (617) 565–1185. 

Region II (New York, New Jersey, U.S. Virgin 

Islands, and Puerto Rico) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Management, Region II, 26 Federal Plaza, 

38th Floor, New York, NY 10278, Phone: 

(212) 264–3657. 

Region III (Delaware, Maryland, 

Pennsylvania, Virginia and West Virginia, 

and the District of Columbia) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Management, Region III, Public Ledger 

Building, Suite 216, 150 South 

Independence Mall West, Philadelphia, PA 

19106, Phone: (215) 861–4140. 

Region IV (Alabama, North Carolina, South 

Carolina, Florida, Georgia, Kentucky, 

Mississippi, and Tennessee) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Management, Region IV, Atlanta Federal 

Center, 61 Forsyth Street, SW., Suite 4T20, 

Atlanta, GA 30303–8909, Phone: (404) 

562–7500. 

Region V (Illinois, Indiana, Michigan, 

Minnesota, Ohio, and Wisconsin) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Management, Region V, 233 North 

Michigan Avenue, Suite 600, Chicago, IL 

60601, Phone: (312) 886–6432. 

Region VI (Arkansas, Louisiana, New Mexico, 

Oklahoma, and Texas) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Management, Region VI, 1301 Young 

Street, Suite 714, Dallas, TX 75202, Phone: 

(214) 767–6423. 

Region VII (Iowa, Kansas, Missouri, and 

Nebraska) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Management, Region VII, Richard Bolling 

Federal Building, Room 235, 601 East 12th 

Street, Kansas City, MO 64106. 

Region VIII (Colorado, Montana, North 

Dakota, South Dakota, Utah and Wyoming) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Managment, Region VIII, Colorado State 

Bank Building, 1600 Broadway, Suite 700, 

Denver, CO 80202, Phone: (303) 844–2111. 

Region IX (Arizona, California, Hawaii, and 

Nevada and Territories of American Samoa, 

Guam and the Commonwealth of the 

Northern Mariana Islands) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Management, Region IX, 75 Hawthorne St., 

Suite 408, San Francisco, CA 94105, 

Phone: (415) 744–3501. 

Region X (Alaska, Idaho, Oregon, and 

Washington) 

Centers for Medicare and Medicaid Services 

(CMS), Associate Regional Administrator, 

Division of Medicare Financial 

Management, Region X, 2201 Sixth 

Avenue, MS–40, Seattle, WA 98121, 

Phone: (206) 615–2306.

3. Direct GME Initial Residency Period 

(Proposed New § 413.79, a Proposed 

Redesignation of Existing § 413.86(g)) 

a. Background 

As we have generally described 

above, the amount of direct GME 

payment to a hospital is based in part 

on the number of FTE residents who are 

training at the hospital during a year. 

The number of FTE residents training at 

a hospital, and thus the amount of direct 

GME payment to a hospital, is directly 

affected by CMS policy on how ‘‘initial 

residency periods’’ are determined for 

residents. 

Section 1886(h)(5)(A) of the Act 

defines ‘‘approved medical residency 

training program’’ as ‘‘a residency or 

other postgraduate medical training 

program, participation in which may be 

counted toward certification in a 

specialty or subspecialty.’’ This 

provision is implemented in regulations 

at existing § 413.86(b). In accordance 

with section 1886(h)(5)(I) of the Act, the 

term ‘‘resident’’ is defined to include 

‘‘an intern or other participant in an 

approved medical residency training 

program.’’ Existing § 413.86(b) defines 

‘‘resident’’ as an ‘‘intern, resident, or 

fellow who participates in an approved 

medical residency training program 

* * * as required in order to become 

certified by the appropriate specialty 

board.’’

Section 1886(h)(4)(C)(ii) of the Act 

provides that while a resident is in the 

‘‘initial residency period,’’ the resident 

is weighted at 1.00 (existing 

§ 413.86(g)(2) of the regulations). 

Section 1886(h)(4)(C)(iii) of the Act 

requires that if a resident is ‘‘not in the 

resident’s initial residency period,’’ the 

resident is weighted as .50 FTE resident 

(existing § 413.86(g)(3) of the 

regulations). 

Section 1886(h)(5)(F) of the Act 

defines ‘‘initial residency period’’ as the 

‘‘period of board eligibility,’’ and, 

subject to specific exceptions, limits the 

initial residency period to an ‘‘aggregate 

period of formal training’’ of no more 

than 5 years for any individual. Section 

1886(h)(5)(G) of the Act generally 

defines ‘‘period of board eligibility’’ for 

a resident as ‘‘the minimum number of 

years of formal training necessary to 

satisfy the requirements for initial board 

eligibility in the particular specialty for 

which the resident is training.’’ Existing 

§ 413.86(g)(1) of the regulations 

generally defines ‘‘initial residency 

period’’ as the ‘‘minimum number of 

years required for board 

eligibility.’’Existing § 413.86(g)(1)(iv) 

provides that ‘‘time spent in residency 

programs that do not lead to 

certification in a specialty or 

subspecialty, but that otherwise meet 

the definition of approved programs 

. . . is counted toward the initial 

residency period limitation.’’ Section 

1886(h)(5)(F) of the Act further provides 

that ‘‘the initial residency period shall 

be determined, with respect to a 

resident, as of the time the resident 

enters the residency training program.’’

The initial residency period is 

determined as of the time the resident 

enters the ‘‘initial’’ or first residency 

training program and is based on the 

period of board eligibility associated 

with that medical specialty. Thus, this 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28311

5 $82,249 is the estimated national average per 

resident amount for FY 2005.

6 .35 is the estimated average Medicare 

utilization.

provision limits the amount of direct 

GME that Medicare pays a hospital for 

a resident who switches specialties to a 

program with a longer period of board 

eligibility or completes training in a 

specialty and then continues training in 

a subspecialty (for example, cardiology 

and gastroenterology are subspecialties 

of internal medicine). 

b. Direct GME Initial Residency Period 

Limitation: Simultaneous Match Issue 

CMS understands there are numerous 

programs, including anesthesiology, 

dermatology, psychiatry, and radiology, 

that require a year of generalized 

clinical training to be used as a 

prerequisite for the subsequent training 

in the particular specialty. For example, 

in order to become board eligible in 

anesthesiology, a resident must first 

complete a generalized training year and 

then complete 3 years of training in 

anesthesiology. This first year of 

generalized residency training is 

commonly known as the ‘‘clinical base 

year.’’ Commonly, the clinical base year 

requirement is fulfilled by completing 

either a preliminary year in internal 

medicine (although the preliminary year 

can also be in other specialties such as 

general surgery or family practice), or a 

transitional year program (which is not 

associated with any particular medical 

specialty). 

In many cases, during the final year 

of medical school, medical students 

apply for training in specialty programs. 

Typically, a medical student who wants 

to train to become a specialist is 

‘‘matched’’ to both the clinical base year 

program and the residency training 

specialty program at the same time. For 

example, the medical student who 

wants to become an anesthesiologist 

will apply and ‘‘match’’ simultaneously 

for a clinical base year in an internal 

medicine program for year 1 and for an 

anesthesiology training program in years 

2, 3, and 4. 

Based on our interpretation of the 

statute, CMS’ policy is that the initial 

residency period is determined for a 

resident based on the program in which 

he or she participates in the resident’s 

first year of training, without regard to 

the specialty in which the resident 

ultimately seeks board certification. 

Therefore, for example, a resident that 

chooses to fulfill the clinical base year 

requirement for an anesthesiology 

program with a preliminary year in an 

internal medicine program will be 

‘‘labeled’’ with the initial residency 

period associated with internal 

medicine, or 3 years (3 years of training 

are required to become board eligible in 

internal medicine), even though the 

resident may seek board certification in 

anesthesiology, which requires a 

minimum of 4 years of training to 

become board eligible. As a result, this 

resident would be weighted at 0.5 FTE 

in his or her fourth year of training for 

purposes of direct GME payment.

We understand that some hospitals 

have been assigning residents that 

complete a clinical base year in a 

different specialty from the one in 

which they ultimately train an initial 

residency period and a weighting factor 

based on the specialty associated with 

second program year in which the 

residents train. As a result, some 

residents have been assigned a 

weighting factor of 1.0 FTE for years 

beyond their initial residency periods, 

rather than the applicable 0.5 FTE 

weighting factor. This error results in 

Medicare overpayments, the size of 

which is dependent upon the hospital’s 

direct GME PRA and its Medicare 

utilization. In addition, we have 

received numerous requests from the 

health care industry to revise our policy 

concerning the initial residency period 

for residency programs that require a 

clinical base year because some entities 

in the industry believe that our current 

policy is unfair to those individuals 

who ‘‘match’’ simultaneously for both a 

preliminary year (for example, the 

clinical base year in internal medicine) 

and the longer specialty residency 

program (for example, anesthesiology, 

dermatology, or radiology). 

To address these concerns, we are 

considering making a change in policy 

that addresses these ‘‘simultaneous 

match’’ residents. Specifically, we are 

considering a policy that, if a hospital 

can document that a particular resident 

matches simultaneously for a first year 

of training in a clinical base year in one 

medical specialty, and for additional 

year(s) of training in a different 

specialty program, the resident’s initial 

residency period would be based on the 

period of board eligibility associated 

with the specialty program in which the 

resident matches for the subsequent 

year(s) of training and not on the period 

of board eligibility associated with the 

clinical base year program, for purposes 

of direct GME payment. In addition, we 

are considering a new definition of 

‘‘residency match’’ to mean, for 

purposes of direct GME, a national 

process by which applicants to 

approved medical residency programs 

are paired with programs on the basis of 

preferences expressed by both the 

applicants and the program directors. 

This policy could apply regardless of 

whether the resident completes the first 

year of training in a separately 

accredited transitional year program or 

in a preliminary (or first) year in another 

residency training program such as 

internal medicine. 

Under such a policy, hospitals would 

apply a weight of 1.0 FTE (instead of 

0.5) for an additional year or two to 

some residents who, as a prerequisite 

for training in a specialty program, 

complete a first year of training in a 

different specialty program. This would 

probably cause an increase in direct 

GME payments. This provision would 

apply to such programs as 

anesthesiology, dermatology, radiology, 

and physical medicine and 

rehabilitation. In 2004, there were 

approximately 1,840 residents in these 

specialties that would be affected by 

this proposal, as compared to the 

approximately 83,000 residents in total 

for whom Medicare makes direct GME 

payments. Under current policy, these 

1,840 residents would be weighted at 

0.5 FTE in their 4th year (and 5th year, 

if applicable) of training. Therefore, 

direct GME spending for these 1,840 

residents should currently be $26.5 

million (1,840 × 0.5 × 82,249 5 × .35 6). 

Under the policy CMS is considering, 

direct GME spending would be twice 

that amount at $53 million (1,840 ×

$82,249 × .35). However, because we 

believe a number of fiscal 

intermediaries may have been applying 

current policy incorrectly and instead 

have been weighting approximately 920 

residents at 1.0 in their 4th year (and 

5th year, if applicable) of training, the 

cost of this change would be expected 

to be closer to $13.25 million (920 × 0.5 

× $82,249 × .35). We are providing this 

cost impact analysis to the public for its 

information in consideration of any 

such proposed change.

We note that in the Conference 

Committee report that accompanied 

Public Law 108–173, the Committee 

stated: ‘‘The conferees also clarify that 

under section 1886 (h)(5)(F), the initial 

residency period for any residency for 

which the ACGME requires a 

preliminary or general clinical year of 

training is to be determined in the 

resident’s second year of training.’’

(Conference Committee Agreement 

Accompanying Public Law 108–173, 

108 Cong., 2d Sess., 276 (2003)) The 

Conference Committee included this 

language as part of its explanation of 

section 712 of Public Law 108–173, 

which clarifies an exception to the 

initial residency period for geriatric 

fellowship programs (see section 

IV.O.3.c. of this preamble). We are

28312 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

considering making a policy change for 

determining the initial residency period 

for a resident who participates in a 

clinical base year program based on the 

resident’s second year of training, as the 

Conference Committee suggests. 

However, we understand that not all 

residents who participate in the clinical 

base year programs simultaneously 

match in specialty training programs 

before the residents’ first year of 

training. Thus, if we were to propose a 

‘‘second year’’ policy, there would be no 

way to distinguish in the second year of 

training among those residents who 

simultaneously matched in a specialty 

program prior to their first year of 

training; those residents who did not 

match simultaneously, but participated 

in a clinical base year and then 

continued on to train in a different 

specialty; and those residents who 

simply switched specialties in their 

second year. As we have stated earlier, 

the initial residency period is to be 

determined based on the ‘‘initial’’ or 

first program in which a resident trains. 

Section 1886(h)(5)(F) of the Act 

provides that ‘‘the initial residency 

period shall be determined, with respect 

to a resident, as of the time the resident 

enters the residency training program.’’

(Emphasis added.) 

Therefore, we believe it is appropriate 

for us to consider changes to the 

‘‘simultaneous match’’ policy that 

would allow for documentation that the 

residents’ training program is arranged 

to continue in another medical specialty 

after the resident completes the clinical 

base year. However, we also specifically 

solicit comments concerning the issue 

of how to establish the initial residency 

period for a resident who does not 

match simultaneously for the first and 

second year, completes the first year in 

a preliminary program in one specialty, 

and then continues his or her training 

in a different specialty program that 

requires completion of a clinical base 

year. 

We note that if we were to propose 

such a change in the initial residency 

period policy, the change, if finalized, 

could result in an adjustment to the 

PRA applicable for the direct GME 

payments made to the hospital for a 

resident in a clinical base year. By 

treating the first year as part of a 

nonprimary care specialty program (for 

example, anesthesiology), the hospital 

would be paid at the lower nonprimary 

care PRA rather than the higher primary 

care PRA, which would be used for 

residents training in a clinical base year 

in a primary care program (for example, 

internal medicine). We note in 

conjunction with our proposal that the 

initial residency period would be 

established based upon the period of 

board eligibility for the specialty 

program for residents who 

simultaneously match with a clinical 

base year and a specialty program that 

we believe all of the programs that 

require a clinical base year are 

nonprimary care specialties. Because we 

are considering a policy change that the 

initial residency period would be based 

upon the period of board eligibility for 

the specialty program rather than the 

clinical base year, we would also 

consider a policy change that the 

nonprimary care PRA would apply for 

the duration of their initial residency 

period. 

Thus, we are considering making the 

above policy changes to address the 

clinical base year initial residency 

period issue. We specifically solicit 

comments on the changes we are 

considering to the existing initial 

residency period policy and other 

approaches to address this issue, 

particularly those that do not increase 

Medicare expenditures. 

c. Exception to Initial Residency Period 

for Geriatric Residency or Fellowship 

Programs (Section 712 of Public Law 

108–173 and Proposed Redesignated 

§ 413.79(a) (a proposed redesignation of 

existing § 413.86(g)(1)) 

As explained further below, under 

Medicare direct GME payment rules, the 

initial residency period is generally 

defined as the minimum number of 

years of training required for a resident 

to become board eligible in a specialty 

(not to exceed 5 years) and is 

established at the time the resident 

enters his or her first training program. 

For purposes of direct GME payments, 

a resident’s full-time equivalent (FTE) 

training time is weighted at 1.0 during 

the initial residency period and 0.5 for 

training that continues beyond the 

initial residency period. Section 

1886(h)(5)(F) of the Act generally limits 

a resident’s initial residency period to 

no longer than 5 years. That section also 

provides an exception that allows FTE 

training time spent by residents in an 

approved geriatric residency program to 

be treated as part of the resident’s initial 

residency period, that is, weighted at 1.0 

FTE for up to an additional 2 years after 

conclusion of the otherwise applicable 

initial residency period.

We understand, based on information 

provided by the American Geriatric 

Society (AGS), that in 1998, the 

American Board of Internal Medicine 

and the American Board of Family 

Physicians (hereinafter ‘‘the Boards’’) 

reduced the minimum number of years 

of formal training required for residents 

to become board eligible in geriatrics 

from 2 years to 1 year. As a result, the 

initial residency period, and full direct 

GME funding for residents in geriatric 

training programs, would be limited to 

1 year. 

However, we understand that many 

teaching hospitals continue to run 

geriatric residency or fellowship 

programs of at least 2 years in length 

(some are even 3 years). We also 

understand that, despite the decrease in 

the minimum requirements for board 

eligibility, the Accreditation Council for 

Graduate Medicare Education (ACGME) 

continues to accredit some geriatric 

training programs for the full duration 

of the fellowships. For example, if a 

hospital’s geriatric fellowship is 3 years 

in length, the program may continue to 

be accredited by the ACGME for the full 

3 years, but the FTE time spent by a 

resident training in the geriatric 

program would be weighted at 1.0 for 

the first year of the resident’s training 

and at 0.50 for the second and third year 

of the fellowship. (However, we note 

that FTE residents’ time is not weighted 

for purposes of IME payments.) 

Effective October 1, 2003, section 712 

(a) of Public Law 108–173 clarified that 

Congress intended to provide an 

exception to the initial residency period 

for purposes of direct GME payments for 

geriatric residency or fellowship 

programs such that ‘‘where a particular 

approved geriatric training program 

requires a resident to complete 2 years 

of training to initially become board 

eligible in the geriatric specialty, the 2 

years spent in the geriatric training 

program are treated as part of the 

resident’s initial residency period, but 

are not counted against any limitation 

on the initial residency period.’’

Therefore, we are proposing that, 

effective for cost reporting periods 

beginning on or after October 1, 2003, if 

a resident is training in an accredited 

geriatric residency or fellowship 

program of 2 (or more) years in 

duration, hospitals may treat training 

time spent during the first 2 years of the 

program as part of the resident’s initial 

residency period and weight the 

resident’s FTE time at 1.0 during that 

period, regardless of the fact that the 

minimum number of years of training 

required for board eligibility in 

geriatrics is only 1 year. We note that 

the statutory language quoted above 

does not allow a hospital to treat time 

spent by a resident in the second year 

of geriatric training as part of the 

resident’s initial residency period in the 

case where the resident trained in a 

geriatric residency or fellowship 

program that is accredited as a 1-year 

program because, in that case, the 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28313

resident could be board eligible after 

only 1 year of training. Even though Congress gave the 

Secretary authority to implement 

section 712 of Public Law 108–173 

through an interim final rule with 

comment period, we chose to provide 

instructions in a One-Time Notification 

(OTN) to fiscal intermediaries and 

providers (Transmittal 61, CR 3071), 

‘‘Changes to the FY 2004 Graduate 

Medical Education (GME) Payments as 

Required by the Medicare 

Modernization Act of 2003 (MMA), P.L. 

108–173,’’ issued on March 12, 2004, 

and are implementing the statutory 

provision in our regulations through 

this notice and comment rulemaking 

process. We are proposing to revise 

proposed redesignated § 413.79(a) (a 

proposed redesignation of 

§ 413.86(g)(1)) to incorporate the 

provision of section 712(a) of Public 

Law 108–173. 

4. Per Resident Amount: Extension of 

Update Limitation on High-Cost 

Programs 

(Section 711 of Public Law 108–173 

and § 413.77(d)(2)(iii)(B)(3) (a proposed 

redesignation of existing 

§ 413.86(e)(4)(ii)(C)(2)(iii))) 

Section 1886(h)(2) of the Act, as 

amended by section 311 of the Balanced 

Budget Refinement Act (BBRA) of 1999 

(Pub. L. 106–113), establishes a 

methodology for the use of a national 

average per resident amount (PRA) in 

computing direct GME payments for 

cost reporting periods beginning on or 

after October 1, 2000, and on or before 

September 30, 2005. Generally, section 

1886(h)(2)(D)(ii) of the Act establishes a 

‘‘floor’’ for hospital-specific PRAs at 70 

percent of the locality-adjusted national 

average PRA. In addition, section 

1886(h)(2)(D)(iv) of the Act establishes a 

‘‘ceiling’’ that limits the annual 

adjustment of a hospital-specific PRA if 

the PRA exceeded 140 percent of the 

locality-adjusted national average PRA. 

Section 511 of the Benefits 

Improvement and Protection Act (BIPA) 

of 2000 (Pub. L. 106–554) further 

amended section 1886 (h)(2) of the Act 

to increase the floor that was established 

by the BBRA to 85 percent of the 

locality-adjusted national average PRA. 

For purposes of calculating direct GME 

payments, each hospital-specific PRA is 

compared to the floor and ceiling to 

determine whether the hospital-specific 

PRA should be revised. (We direct 

readers to Program Memorandum A–01–

38, March 21, 2001 for historical 

reference on calculating the floor and 

ceiling.) Section 711 of Public Law 108–173 

amended section 1886 (h)(2)(D)(iv) of 

the Act to freeze the annual CPI-U 

updates to hospital-specific PRAs for 

those PRAs that exceed the ceiling for 

FYs 2004 through 2013. Therefore, we 

are proposing that, for cost reporting 

periods beginning during FY 2004 

through FY 2013, we would calculate a 

ceiling that is equal to 140 percent of 

the locality-adjusted national average 

PRA for each hospital and compare it to 

each hospital-specific PRA. If the 

hospital-specific PRA for the preceding 

year is greater than 140 percent of the 

locality-adjusted national average PRA 

‘‘ceiling’’ in the current fiscal year, the 

hospital-specific PRA for the current 

year is frozen at the preceding fiscal 

year’s hospital-specific PRA and is not 

updated by the CPI-U factor. We note 

that a hospital may have more than one 

PRA. Each of a hospital’s PRAs must be 

separately compared to the ‘‘ceiling’’

PRA to determine whether that PRA 

should be frozen at the level for the 

previous year or updated by the CPI-U 

factor. 

For example, to determine the 

applicable PRA for a cost reporting 

period beginning during FY 2004, we 

would compare the hospital-specific 

PRA from the cost reporting period that 

began during FY 2003 to the FY 2004 

locality-adjusted national average PRA 

for that hospital. If the FY 2003 

hospital-specific PRA exceeds 140 

percent of the FY 2004 locality-adjusted 

national average PRA, the FY 2004 

hospital-specific PRA is frozen at the 

level of the FY 2003 hospital-specific 

PRA and is not updated by the CPI–U 

factor for FY 2004. 

Due to the effective date of the 

statutory provision of section 711 of 

Public Law 108–173, we issued a 

notification to fiscal intermediaries and 

providers regarding the provision in the 

OTN issued on March 12, 2004 

(Transmittal 61, CR 3071). In this 

proposed rule, to incorporate the 

changes made by section 711 of Public 

Law 108–173 in our regulations 

regarding the determination of PRAs, we 

are proposing to: (1) revise proposed 

redesignated § 413.77(d)(2)(iii)(B)(3) (a 

proposed redesignation of existing 

§ 413.86(e)(4)(ii)(C)(2)(iii)) to make it 

applicable only to FY 2003; (2) further 

redesignate proposed newly 

redesignated § 413.77(d)(2)(iii)(B)(4) (the 

proposed redesignation of existing 

§ 413.86(e)(4)(ii)(C)(2)(iv)) as 

§ 413.77(d)(2)(iii)(B)(4); and (3) add a 

proposed new § 413.77(d)(2)(iii)(B)(4). 

5. Residents Training in Nonhospital 

Settings 

a. Background 

With respect to reimbursement of 

direct GME costs, since July 1, 1987, 

hospitals have been allowed to count 

the time residents spend training in 

sites that are not part of the hospital 

(referred to as ‘‘nonprovider’’ or 

‘‘nonhospital sites’’) under certain 

conditions. Section 1886(h)(4)(E) of the 

Act requires that the Secretary’s rules 

concerning computation of FTE 

residents for purposes of direct GME 

payments ‘‘provide that only time spent 

in activities relating to patient care shall 

be counted and that all the time so spent 

by a resident under an approved 

medical residency training program 

shall be counted towards the 

determination of full-time equivalency, 

without regard to the setting in which 

the activities are performed, if the 

hospital incurs all, or substantially all, 

of the costs for the training program in 

that setting.’’ (Section 1886(h)(4)(E) of 

the Act, as added by section of 9314 of 

the Omnibus Budget Reconciliation Act 

of 1986, Pub. L. 99–509.)

Regulations regarding time spent by 

residents training in nonhospital sites 

for purposes of direct GME payment 

were first implemented in the 

September 29, 1989 final rule (54 FR 

40286). We stated in that rule (under 

§ 413.86(f)(3)) that a hospital may count 

the time residents spend in nonprovider 

settings for purposes of direct GME 

payment if the residents spend their 

time in patient care activities and there 

is a written agreement between the 

hospital and the nonprovider entity 

stating that the hospital will incur all or 

substantially all of the costs of the 

program. The regulations at that time 

defined ‘‘all or substantially all’’ of the 

costs to include the residents’

compensation for the time spent at the 

nonprovider setting. 

Prior to October 1, 1997, for IME 

payment purposes, hospitals could only 

count the time residents spend training 

in areas subject to the IPPS and 

outpatient areas of the hospital. Section 

4621(b)(2) of the Balanced Budget Act of 

1997 (Pub. L. 105–33) revised section 

1886(d)(5)(B) of the Act to allow 

providers to count time residents spend 

training in nonprovider sites for IME 

purposes, effective for discharges 

occurring on or after October 1, 1997. 

Specifically, section 1886(d)(5)(B)(iv) of 

the Act was amended to provide that 

‘‘all the time spent by an intern or 

resident in patient care activities under 

an approved medical residency program 

at an entity in a nonhospital setting 

shall be counted towards the 

determination of full-time equivalency 

if the hospital incurs all, or substantially 

all, of the costs for the training program 

in that setting.’’

In the regulations at 

§§ 412.105(f)(1)(ii)(c) and 413.86(f)(4)

28314 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

(as issued in the July 31, 1998 Federal 

Register), we specify the requirements a 

hospital must meet in order to include 

the time spent by a resident training in 

a nonhospital site in its FTE count for 

Medicare reimbursement for portions of 

cost reporting periods occurring on or 

after January 1, 1999 for both direct 

GME and for IME payments. The 

regulations at § 413.86(b) redefine ‘‘all 

or substantially all of the costs for the 

training program in the nonhospital 

setting’’ as the residents’ salaries and 

fringe benefits (including travel and 

lodging where applicable), and the 

portion of the cost of teaching 

physicians’ salaries and fringe benefits 

attributable to direct GME. A written 

agreement between the hospital and the 

nonhospital site is required before the 

hospital may begin to count residents 

training at the nonhospital site; the 

agreement must provide that the 

hospital will incur the costs of the 

resident’s salary and fringe benefits 

while the resident is training in the 

nonhospital site. The hospital must also 

provide reasonable compensation to the 

nonhospital site for supervisory 

teaching activities, and the written 

agreement must specify that 

compensation amount. 

b. Moratorium on Disallowances of 

Allopathic or Osteopathic Family 

Practice Residents Training Time in 

Nonhospital Settings (Section 713 of 

Pub. L. 108–173 and Proposed 

Redesignated § 413.78 (a proposed 

redesignation of existing § 413.86(f)) 

As we mentioned above, under 

existing § 413.86(f)(4), for portions of 

cost reporting periods occurring on or 

after January 1, 1999, the time residents 

spend in nonhospital settings such as 

freestanding clinics, nursing homes, and 

physicians’ offices in connection with 

approved programs may be included in 

determining the hospital’s number of 

FTE residents for purposes of 

calculating both direct GME and IME 

payments, if the following conditions 

are met: 

(1) The resident spends his or her 

time in patient care activities.

(2) There is a written agreement 

between the hospital and the 

nonhospital site that indicates that the 

hospital will incur the costs of the 

resident’s salary and fringe benefits 

while the resident is training in the 

nonhospital site, and the hospital is 

providing reasonable compensation to 

the nonhospital site for supervisory 

teaching activities. The agreement must 

indicate the compensation the hospital 

is providing to the nonhospital site for 

supervisory teaching activities. 

(3) The hospital incurs ‘‘all or 

substantially all’’ of the costs for the 

training program in the nonhospital 

setting. ‘‘All or substantially all’’ means 

the residents’’ salaries and fringe 

benefits (including travel and lodging 

where applicable) and the portion of 

teaching physicians’ salaries and fringe 

benefits attributable to direct graduate 

medical education. 

In order for the hospital to incur ‘‘all 

or substantially all’’ of the costs in 

accordance with the regulations, the 

actual cost of the time spent by teaching 

physicians in supervising residents in 

the nonhospital setting must be 

compensated by the hospital. The 

amount of supervisory GME costs is 

dependent upon the teaching 

physician’s salary and the percentage of 

time that he or she devotes to activities 

related to the residency program at the 

nonhospital site. As long as there are 

supervisory costs associated with the 

nonhospital training, the hospital must 

reimburse the nonhospital setting for 

those costs in order to count FTE 

resident time spent in the nonhospital 

site for purposes of IME and direct GME 

payments. 

Many hospitals have entered into 

written agreements with teaching 

physicians that state that the teaching 

physician is ‘‘volunteering’’ his or her 

time in the nonhospital site, and, 

therefore, the hospital is not providing 

any compensation to the teaching 

physician. Other hospitals have paid 

only a nominal amount of compensation 

for the supervisory teaching physicians’

time in the nonhospital setting. Because 

the existing regulations at § 413.86(f)(4) 

state that the hospital must incur all or 

substantially all of the direct GME costs, 

including those costs associated with 

the teaching physician, regardless of 

whether the written agreement states 

that the teaching physician is 

‘‘volunteering,’’ we have required that 

the hospital must pay these costs in 

order to count FTE residents training in 

the nonhospital site, as long as these 

teaching physician costs exist. 

However, during the 1-year period 

from January 1, 2004 through December 

31, 2004, section 713 of Public Law 

108–173, through a moratorium, allows 

hospitals to count allopathic or 

osteopathic family practice residents 

training in nonhospital settings for IME 

and direct GME purposes, without 

regard to the financial arrangement 

between the hospital and the teaching 

physician practicing in the nonhospital 

setting to which the resident is assigned. 

We implemented section 713 in the 

One-Time Notification (OTN), ‘‘Changes 

to the FY 2004 Graduate Medical 

Education (GME) Payments as Required 

by the Medicare Modernization Act of 

2003 (MMA)’’ (CR 3071, Transmittal 61, 

issued on March 12, 2004). Generally, to 

implement the provisions of section 

713, we stated in the OTN that, when 

settling prior year cost reports during 

this 1-year period, or for family practice 

residents actually training in 

nonhospital settings during this 1-year 

period, the fiscal intermediaries should 

allow the hospitals to count allopathic 

and osteopathic family practice 

residents training in the nonhospital 

setting for direct GME and IME payment 

purposes without regard to the financial 

arrangement between the hospital and 

the nonhospital site pertaining to the 

teaching physicians’ costs associated 

with the residency program. 

(1) Cost Reports That Are Settled 

Between January 1, 2004 and December 

31, 2004. 

When fiscal intermediaries settle cost 

reports during January 1, 2004 through 

December 31, 2004 (Calendar Year (CY) 

2004), a hospital that seeks to count 

allopathic or osteopathic family practice 

FTE residents training in a nonhospital 

setting(s) is allowed to count those FTEs 

for IME and direct GME purposes, even 

in instances where the written 

agreement between the hospital and a 

teaching physician or a nonhospital site 

does not mention teaching physician 

compensation, specifies only a nominal 

amount of compensation, or states that 

the teaching physician is ‘‘volunteering’’

his or her time training the residents. 

For example, when a fiscal intermediary 

is settling a cost report during CY 2004 

that has a fiscal year end of June 30, 

2001, the fiscal intermediary will allow 

the hospital to count family practice 

FTE residents that trained in a 

nonhospital setting during the period 

covered by the June 30, 2001 cost report, 

regardless of the financial arrangement 

in place between the hospital and the 

teaching physician at the nonhospital 

site during the period covered by the 

June 30, 2001 cost report. 

We note that this moratorium does 

not apply to cost reports that are not

settled during January 1 through 

December 31, 2004, that do not coincide 

with, or overlap, the January 1 through 

December 31, 2004 period. For example, 

if a cost report for fiscal year ended 

December 31, 2003 (or June 30, 2003, or 

others) is not settled during the January 

1 through December 31, 2004 period, 

the moratorium would not apply. 

(2) Family Practice Residents That 

Are Training in Nonhospital Settings 

Between January 1, 2004 and December 

31, 2004. 

In addition to allowing family 

practice residents that trained in 

nonhospital settings to be counted in 

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cost reports that the fiscal 

intermediaries settle during the period 

of January 1, 2004 through December 31, 

2004, without regard to the financial 

arrangements between the hospital and 

the teaching physician at the 

nonhospital site, the fiscal 

intermediaries are to allow family 

practice residents that actually are or 

will be training in nonhospital settings 

during January 1, 2004 through 

December 31, 2004, without regard to 

the financial arrangements between the 

hospital and the teaching physician at 

the nonhospital site. That is, when fiscal 

intermediaries settle cost reports that 

cover service periods of January 1, 2004 

through December 31, 2004, a hospital 

that seeks to count allopathic or 

osteopathic family practice FTE 

residents training in a nonhospital 

setting(s) would be allowed to count 

those FTEs, even in instances where the 

written agreement between the hospital 

and a teaching physician or a 

nonhospital site does not mention 

teaching physician compensation, 

specifies only a nominal amount of 

compensation, or states that the 

teaching physician is ‘‘volunteering’’ his 

or her time training the residents. If a 

hospital has a fiscal year that is other 

than a calendar year, the hospital may 

count the family practice residents 

training in the nonhospital setting 

during those portions of its fiscal years 

that fall within the January 1, 2004 and 

December 31, 2004 period. For example, 

when a fiscal intermediary is settling a 

hospital’s June 30, 2004 cost report, the 

hospital would be allowed to count 

family practice FTE residents that 

trained in a nonhospital setting during 

the period of January 1, 2004 through 

June 30, 2004, regardless of the financial 

arrangement between the hospital and 

the teaching physician at the 

nonhospital site from January 1 through 

June 30, 2004. Similarly, when a fiscal 

intermediary settles the hospital’s June 

30, 2005 cost report, the hospital would 

be allowed to count family practice FTE 

residents that trained in a nonhospital 

setting during the period of July 1, 2004 

through December 31, 2004, regardless 

of the financial arrangement between 

the hospital and the teaching physician 

at the nonhospital site from July 1 

through December 31, 2004. (However, 

we note that family practice residents 

that train in nonhospital settings 

beginning January 1, 2005, and after are 

not subject to the moratorium provided 

under section 713 of Pub. L. 108–173.) 

Because we are interpreting this 

moratorium to apply to prior period cost 

reports that are settled during calendar 

year (CY) 2004, and to cost reports that 

are settled after CY 2004 that cover 

training that occurred during the period 

of January 1, 2004 through December 31, 

2004, a gap in applicability of the 

moratorium may result for family 

practice residents training in 

nonhospital settings. For example, a 

hospital might be permitted to count 

certain FTE family practice residents 

that are included in its FY 2001 cost 

report in accordance with the 

moratorium because that cost report is 

settled during CY 2004. However, the 

hospital might not be permitted to count 

certain FTE family practice residents in 

its FY 2002 and FY 2003 cost reports 

because these cost reports would not be 

settled during CY 2004 and the 

moratorium would not apply. The 

hospital then could be permitted to 

count certain FTE family practice 

residents in its FY 2004 cost report in 

accordance with the moratorium, 

because the FY 2004 cost report would 

contain family practice residents who 

actually trained in a nonhospital setting 

during CY 2004.

Regardless of whether the fiscal 

intermediaries are settling prior period 

cost reports during CY 2004, or settling 

cost reports after CY 2004 that cover 

training during the period of January 1, 

2004 through December 31, 2004, we 

emphasize that the moratorium 

provided in section 713 of Public Law 

108–173 only applies for purposes of 

counting FTE residents in allopathic 

and osteopathic general family practice 

programs that were in existence (that is, 

training residents) as of January 1, 2002 

and where the requirement to incur the 

teaching physician compensation 

related to direct GME may not have 

been met. Therefore, for residents 

training in nonhospital settings, we are 

proposing that the moratorium applies 

only: (1) To FTE residents in general 

family practice programs (and not to 

dental, podiatric, or other allopathic or 

osteopathic specialty programs); (2) to 

family practice programs that were in 

existence as of January 1, 2002; and (3) 

with the exception of teaching 

physician compensation, to training in 

nonhospital settings that meet the 

requirements in the existing regulations 

at § 413.86(f)(4) (proposed to be 

redesignated as § 413.78(d)). 

We are not proposing any regulation 

text changes to address this provision at 

this time. We note that section 713(b) of 

Public Law 108–173 directs the 

Inspector General of the Department of 

Health and Human Services to conduct 

a study of the appropriateness of 

alternative methodologies for payment 

of residency training in nonhospital 

settings and to submit a report to 

Congress on the results of the study, 

along with recommendations, as 

appropriate, by December 8, 2004. We 

will await the release of the Inspector 

General’s report and may consider 

additional policy and regulation 

changes at that time if they are 

warranted. 

c. Requirements for Written Agreements 

for Residency Training in Nonhospital 

Settings (Proposed redesignated 

§ 413.78 (a proposed redesignation of 

existing § 413.86(f)). 

As mentioned above, under section 

1886(h)(4)(E) of the Act, a hospital may 

count residents training in nonhospital 

settings for direct GME purposes (and 

under section 1886(d)(5)(B)(iv) of the 

Act, for IME purposes), if the residents 

spend their time in patient care 

activities and if ‘‘* * * the hospital 

incurs all, or substantially all, of the 

costs for the training program in that 

setting.’’ We believe Congress intended 

to facilitate residency training in 

nonhospital settings by requiring 

hospitals to commit to incur, and 

actually incur, all or substantially all of 

the costs of the training programs in the 

nonhospital sites. Accordingly, in 

implementing section 1886(h)(4)(E) of 

the Act, first in the regulations at 

§ 413.86(f)(3), effective July 1, 1987, and 

later at § 413.86(f)(4), effective January 

1, 1999, we required that, in addition to 

incurring all or substantially all of the 

costs of the program at the nonhospital 

setting, there must be a written 

agreement between the hospital and the 

nonhospital site stating that the hospital 

will incur all or substantially all of the 

costs of training in the nonhospital 

setting. The later regulations further 

specify that the written agreement must 

indicate the amount of compensation 

provided by the hospital to the 

nonhospital site for supervisory 

teaching activities. (We note that, in this 

proposed rule, § 413.86(f)(3) is proposed 

to be redesignated as § 413.78(c), and 

§ 413.86(f)(4) is proposed to be 

redesignated as § 413.78(d).) 

We required the written agreements in 

regulations in order to provide an 

administrative tool for use by the fiscal 

intermediaries to assist in determining 

whether hospitals would incur all or 

substantially all of the costs of the 

training in the nonhospital setting in 

accordance with Congressional intent. 

Furthermore, CMS policy has required 

that the written agreement between the 

hospital and the nonhospital site be in 

place prior to the time that the hospital 

begins to count the FTE residents 

training in the nonhospital site. A 

written agreement signed before the 

time the residents begin training at the 

nonhospital site that states that the 

28316 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

hospital will incur the costs of the 

training program at the nonhospital site 

indicates the hospital’s ongoing 

commitment to incur the costs of 

training at that site. 

In settling cost reports where 

hospitals have included residents 

training at nonhospital sites in their FTE 

count, the fiscal intermediaries have 

encountered numerous situations where 

hospitals have complied with the 

requirement to incur all or substantially 

all of the costs of training in nonhospital 

settings. However, despite our 

longstanding regulations that state the 

requirement for a written agreement, 

these hospitals have not met the 

regulatory requirements related to 

written agreements. For example, some 

hospitals had no written agreement in 

place during the training in the 

nonhospital setting, or written 

agreements were not timely (that is, they 

were prepared after the residents began 

or, in some cases, finished training at 

the nonhospital site), or the agreements 

did not include a specific amount of 

compensation to be provided by the 

hospital to the nonhospital site for 

supervisory teaching activities. As a 

result, hospitals have faced 

disallowances of direct GME and IME 

payments relating to FTE residents 

training in nonhospital settings because 

the hospitals did not comply with the 

regulatory requirements concerning 

written agreements.

In retrospect, we believe the 

regulatory requirements concerning the 

written agreements may not have been 

the most efficient aid to fiscal 

intermediaries in determining whether 

hospitals would actually incur all or 

substantially all of the costs of the 

training programs in nonhospital 

settings. The fiscal intermediaries have 

been required to ensure that hospitals 

are complying with the regulations 

regarding written agreements, in 

addition to determining whether a 

hospital actually incurred the 

appropriate costs. We believe it would 

be more appropriate and less 

burdensome for both fiscal 

intermediaries and hospitals if we 

instead focus the fiscal intermediaries’

reviews on the statutory requirement 

that hospitals must incur all or 

substantially all of the costs of the 

program in the nonhospital setting. 

Therefore, we are proposing to revise 

the regulations under proposed new 

§ 413.78 (a proposed redesignation of 

existing § 413.86(f)) to remove the 

requirement for a written agreement 

between the hospital and the 

nonhospital setting as a precondition for 

a hospital to count residents training in 

nonhospital settings for purposes of 

direct GME and IME payments. 

However, consistent with our belief that 

Congress intended that hospitals 

commit to incur, and actually incur, all 

or substantially all of the costs of the 

training programs in the nonhospital 

sites in order to facilitate training at 

nonhospital sites, we are also proposing 

that, in order for the hospital to count 

residents training in a nonhospital 

setting, the hospital must pay for the 

nonhospital site training costs 

concurrently with the training that 

occurs during the cost reporting period. 

We understand that residents’

rotations, including those to 

nonhospital settings, are generally in 

discrete blocks of time (for example, 4-

week or 6-week rotations). Therefore, to 

account for various rotation lengths, we 

are proposing under the new proposed 

§ 413.78(e) that, in order to count 

residents training in a nonhospital 

setting, a hospital must pay all or 

substantially all of the costs of the 

training in a nonhospital setting(s) by 

the end of the month following a month 

in which the training in the nonhospital 

site occurred. If a hospital is counting 

residents training in a nonhospital 

setting for direct GME and IME 

purposes in any month of its cost 

reporting period, the hospital must 

make payment by the end of the 

following month to cover all or 

substantially all of the costs of training 

in that setting attributable to the 

preceding month. If the residents are 

employed by the hospital, and receive 

their salary payments (and fringe 

benefits) every 2 weeks, the hospital 

may continue to pay the residents’

salaries every 2 weeks during the 

residents’ rotation to the nonhospital 

setting. This should still result in 

payment being made for residents’ time 

spent in nonhospital settings by the end 

of the following month. (We also note 

that the hospital must pay travel and 

lodging expenses, if applicable.) We are 

proposing that the hospital would be 

required to pay the nonhospital site for 

the portion of the cost of teaching 

physicians’ salaries and fringe benefits 

attributable to direct GME by the end of 

the month following the month in 

which the training in the nonhospital 

setting occurred. We are proposing that 

if a hospital does not pay for all or 

substantially all of the costs of the 

program in the nonhospital setting by 

the end of the month following the 

month in which the training occurred, 

the hospital could not count those FTE 

residents in the month that the training 

occurred. Therefore, we are proposing to 

determine if residents training in 

nonhospital sites should be counted on 

a month-to-month basis, depending on 

whether a hospital paid for the training 

costs of those residents by the end of the 

month following the month in which 

the training occurred. 

Following are examples of how a 

hospital that sends residents to train in 

nonhospital sites would make payments 

concurrently with the nonhospital site 

training:

Example 1. Hospital A, with a fiscal year 

end (FYE) of December 31, trains 10 internal 

medicine residents and 6 family practice 

residents. Each January, April, July, and 

October, Hospital A sends 5 internal 

medicine FTE residents to the Physicians’

Clinic for 4 weeks. Each month, Hospital A 

sends 2 family practice FTE residents to the 

Family Clinic. The residents are employed by 

Hospital A, and the residents receive fringe 

benefits from and are paid every 2 weeks by 

Hospital A, regardless of whether they are 

training in Hospital A or at a nonhospital 

site. In order to make payments concurrently 

with the training that is occurring in the 

nonhospital sites, Hospital A must pay the 

Physicians’ Clinic by the end of February, 

May, August, and November, respectively, of 

each cost reporting year, to cover the costs of 

teaching physician compensation and fringe 

benefits attributable to direct GME. Similarly, 

because residents are training at the Family 

clinic each month, Hospital A must pay the 

Family Clinic by the end of each month for 

the previous month’s costs of teaching 

physician compensation and fringe benefits 

attributable to direct GME. There are no 

travel and lodging costs associated with these 

rotations to nonhospital sites.

Example 2. University A will sponsor an 

ophthalmology program with eight residents 

beginning on July 1, 2005. The residents will 

be on the payroll of the University, but they 

will train at Hospital B and at the 

University’s Eye Clinic, which is a 

nonhospital setting. Hospital B has a June 30 

FYE. Four of the residents will train in the 

Eye Clinic from August 1 to October 15, and 

the other four residents will train in the Eye 

Clinic from February 15 to April 30. Thus, 

residents are training in the Eye Clinic during 

the months of August, September, October, 

February, March, and April. If Hospital B 

wishes to count these FTE residents for IME 

and direct GME purposes in its cost reporting 

year ending June 30, 2006, and onward, it 

must pay the Eye Clinic at the end of 

September, October, November, March, 

April, and May, respectively, for the previous 

month’s cost of the residents’ salaries and 

fringe benefits, and the teaching physician 

compensation and fringe benefits attributable 

to direct GME.

Example 3. Hospital C sends a resident to 

train at a nonhospital site from January 28 to 

February 20. The resident was employed by 

the nonhospital site during this time. 

Hospital C paid the nonhospital site for the 

cost of the resident’s salary and fringe 

benefits and the teaching physician 

compensation and fringe benefits attributable 

to direct GME by February 28 to account for 

the training that occurred from January 28 

through January 31. However, Hospital C did 

not pay the nonhospital site by March 31 to 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28317

account for the training that occurred in 

February. Therefore, Hospital C could not 

count the resident’s time in the nonhospital 

setting from February 1 through February 20 

for direct GME and IME purposes.

We note that our proposal to require 

hospitals to pay for the nonhospital site 

training costs concurrently with the 

training that occurs in the nonhospital 

site is a departure from our current 

policy concerning the timeframe in 

which a hospital must make payment 

for the training costs. Currently, we 

apply the existing regulations at 

§ 413.100(c)(2)(i), which state that a 

short-term liability (such as the 

hospital’s obligation to pay the 

nonhospital site for the residency 

training costs) must be liquidated 

within 1 year after the end of the cost 

reporting period in which the liability is 

incurred. However, because we are 

proposing to no longer require that a 

written agreement between the hospital 

and the nonhospital site be in place 

prior to the time that the hospital begins 

to count the FTE residents training in 

the nonhospital site, we believe that a 

reasonable alternative to ensure that a 

hospital is facilitating the training at the 

nonhospital site through its ongoing 

commitment to incur all or substantially 

all of the costs is to require the hospital 

to make payments concurrently with the 

training that occurs in the nonhospital 

site in order to count the FTE residents 

for purposes of direct GME and IME 

payments. 

We are aware that there are situations 

where, rather than providing direct 

financial compensation to the 

nonhospital site for supervisory 

teaching activities, the hospital is 

incurring all or substantially all of the 

teaching physician costs through 

nonmonetary, in-kind arrangements. We 

are proposing that, in order to be 

considered concurrent with the 

nonhospital site training, in-kind 

arrangements must be provided or made 

available to the teaching physician at 

least quarterly, to the extent that there 

are residents training in a nonhospital 

setting(s) in a quarter. 

We are proposing to revise § 413.86(f) 

(proposed to be redesignated as § 413.78 

in this proposed rule) to add a new 

paragraph (§ 413.78 (e)) to state that a 

hospital must incur all or substantially 

all of the costs of training in a 

nonhospital setting by the end of the 

month following a month in which the 

training in the nonhospital site 

occurred, to the extent that there are 

residents training in a nonhospital 

setting in a month. This proposed 

change would be effective for portions 

of cost reporting periods occurring on or 

after October 1, 2004. We would revise 

paragraph (d) of the proposed 

redesignated § 413.78 to reflect the 

effective cost reporting periods of the 

provisions under the new paragraph (e).

P. Rural Community Hospital 

Demonstration Program 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Rural Community Hospital 

Demonstration’’ at the beginning of your 

comment.] 

Section 410A(a) of Public Law 108–173 

requires the Secretary to establish a 

demonstration to test the feasibility and 

advisability of establishing ‘‘rural 

community hospitals’’ for Medicare 

payment purposes for covered inpatient 

hospital services furnished to Medicare 

beneficiaries. A rural community 

hospital, as defined in section 

410A(f)(1), is a hospital that—

• Is located in a rural area (as defined 

in section 1886(d)(8)(E) of the Act) or 

treated as being so located under section 

1886(d)(5)(F) of the Act; 

• Has fewer than 51 beds (excluding 

beds in a distinct part psychiatric or 

rehabilitation unit) as reported in its 

most recent cost report; 

• Provides 24-hour emergency care 

services; and 

• Is not designated or eligible for 

designation as a CAH. 

Section 410A(a)(3) of Public Law 108–

173 specifies that the Secretary is to 

select for participation not more than 15 

rural community hospitals in rural areas 

of States that the Secretary identifies as 

having low population densities. Using 

2003 data from the U.S. Census Bureau, 

we have identified 10 States with the 

lowest population density in which 

rural community hospitals must be 

located to participate in the 

demonstration: Alaska, Idaho, Montana, 

Nebraska, Nevada, New Mexico, North 

Dakota, South Dakota, Utah, and 

Wyoming. (Source: U.S. Census Bureau 

Statistical Abstract of the United States: 

2003) 

Under the demonstration, 

participating hospitals will be paid the 

reasonable costs of providing covered 

inpatient hospital services (other than 

services furnished by a psychiatric or 

rehabilitation unit of a hospital that is 

a distinct part), applicable for 

discharges occurring in the first cost 

reporting period beginning on or after 

implementation of the demonstration 

program. For discharges occurring in 

subsequent cost reporting periods, 

payment is the lesser of reasonable cost 

or a target amount, which is the prior 

year’s cost or, after the second cost 

reporting period, the prior year’s target 

amount, adjusted by the inpatient 

prospective payment update factor. 

Covered inpatient hospital services 

means inpatient hospital services 

(defined in section 1861(b) of the Act) 

and includes extended care services 

furnished under an agreement under 

section 1883 of the Act. 

Sections 410A(a)(5) and (a)(6) require 

the demonstration to be implemented 

not later than January 1, 2005, but not 

before October 1, 2004. The 

demonstration is to operate for 5 years. 

We intend to implement the payment 

change for a participating hospital 

under this demonstration with the 

hospital’s first cost reporting period 

beginning on or after October 1, 2004. 

Section 410A of Public Law 108–173 

requires that ‘‘in conducting the 

demonstration program under this 

section, the Secretary shall ensure that 

the aggregate payments made by the 

Secretary do not exceed the amount 

which the Secretary would have paid if 

the demonstration program under this 

section was not implemented.’’

Generally, when CMS implements a 

demonstration on a budget neutral basis, 

the demonstration is budget neutral in 

its own terms; in other words, aggregate 

payments to the participating providers 

do not exceed the amount that would be 

paid to those same providers in the 

absence of the demonstration. This form 

of budget neutrality is viable when, by 

changing payments or aligning 

incentives to improve overall efficiency, 

or both, a demonstration may reduce the 

use of some services or eliminate the 

need for others, resulting in reduced 

expenditures for the demonstration 

participants. These reduced 

expenditures offset increased payments 

elsewhere under the demonstration, 

thus ensuring that the demonstration as 

a whole is budget neutral or yields 

savings. However, the small scale of this 

demonstration, in conjunction with the 

payment methodology, makes it 

extremely unlikely that this 

demonstration could be viable under the 

usual form of budget neutrality. 

Specifically, cost-based payments to 15 

small rural hospitals is likely to increase 

Medicare outlays without producing 

any offsetting reduction in Medicare 

expenditures elsewhere. Therefore, a 

rural community hospital’s 

participation in this demonstration is 

unlikely to yield benefits to the 

participant if budget neutrality were to 

be implemented by reducing other 

payments for these providers. 

In order to achieve budget neutrality, 

we are proposing to adjust national 

inpatient PPS rates by an amount 

sufficient to account for the added costs 

of this demonstration. In other words, 

we are proposing to apply budget 

neutrality across the payment system as 

28318 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

a whole rather than merely across the 

participants of this demonstration. We 

believe that the language of the statutory 

budget neutrality requirement permits 

the agency to implement the budget 

neutrality provision in this manner. 

This is because the statutory language 

refers merely to ensuring that ‘‘aggregate 

payments made by the Secretary do not 

exceed the amount which the Secretary 

would have paid if the demonstration 

* * * was not implemented,’’ and does 

not identify the range across which 

aggregate payments must be held equal. 

We invite public comment on this 

proposal. We discuss the payment rate 

adjustment that would be required to 

ensure the budget neutrality of this 

demonstration in the Addendum of this 

proposed rule. 

To participate in this demonstration, 

a hospital must be located in one of the 

identified States and meet the criteria 

for a rural community hospital. Eligible 

hospitals that desire to participate in the 

demonstration must submit an 

application to CMS. Information about 

the demonstration and details on how to 

apply can be found on the CMS Web 

site: www.cms.hhs.gov/researchers/

demos/rch.asp.

This demonstration has been 

approved by OMB under the title 

‘‘Medicare Waiver Demonstration 

Application,’’ under OMB approval 

number 0938–0880, with a current 

expiration date of July 30, 2006. 

Q. Special Circumstances of Hospitals 

Facing High Malpractice Insurance Rate 

Increases 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Malpractice Insurance’’ at the 

beginning of your comment.] 

We have received comments from 

several hospitals about the effects of 

rapidly escalating malpractice insurance 

premiums on hospital financial 

performance and continued access for 

Medicare beneficiaries to high quality 

inpatient hospital services. We are 

aware that malpractice insurance 

premiums have increased at a high rate 

in some areas of the country during the 

last few years. While we are not aware 

of any specific situations in which 

malpractice premiums have created 

issues of access to inpatient hospital 

services for Medicare beneficiaries, 

some hospitals have expressed concern 

that they may be compelled to curtail 

their current operations by the rate of 

increase in their malpractice premiums. 

Therefore, we are inviting comments on 

the effect of increases in malpractice 

insurance premiums on hospitals 

participating in the Medicare program, 

and whether increasing malpractice 

costs may pose access problems for 

Medicare beneficiaries. 

V. Proposed Changes to the PPS for 

Capital-Related Costs 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Capital PPS’’ at the beginning of your 

comment.] 

A. Background 

Section 1886(g) of the Act requires the 

Secretary to pay for the capital-related 

costs of inpatient acute hospital services 

‘‘in accordance with a PPS established 

by the Secretary.’’ Under the statute, the 

Secretary has broad authority in 

establishing and implementing the PPS 

for capital-related costs. We initially 

implemented the PPS for capital-related 

costs in the August 30, 1991 IPPS final 

rule (56 FR 43358), in which we 

established a 10-year transition period 

to change the payment methodology for 

Medicare hospital inpatient capitalrelated costs from a reasonable costbased methodology to a prospective 

methodology (based fully on the Federal 

rate).

Federal fiscal year (FY) 2001 was the 

last year of the 10-year transition period 

established to phase in the PPS for 

hospital inpatient capital-related costs. 

For cost reporting periods beginning in 

FY 2002, capital PPS payments are 

based solely on the Federal rate for the 

acute care hospitals (other than certain 

new hospitals and hospitals receiving 

certain exception payments). The basic 

methodology for determining capital 

prospective payments using the Federal 

rate is set forth in § 412.312. For the 

purpose of calculating payments for 

each discharge, the standard Federal 

rate is adjusted as follows: 

(Standard Federal Rate) × (DRG 

Weight) x (Geographic Adjustment 

Factor (GAF)) × (Large Urban Add-on, if 

applicable) × (COLA Adjustment for 

hospitals located in Alaska and Hawaii) 

× (1 + Capital DSH Adjustment Factor + 

Capital IME Adjustment Factor, if 

applicable) 

Hospitals also may receive outlier 

payments for those cases that qualify 

under the thresholds established for 

each fiscal year as specified in 

§ 412.312(c) of the existing regulations. 

The regulations at § 412.348(f) 

provide that a hospital may request an 

additional payment if the hospital 

incurs unanticipated capital 

expenditures in excess of $5 million due 

to extraordinary circumstances beyond 

the hospital’s control. This policy was 

originally established for hospitals 

during the 10-year transition period, but 

as we discussed in the August 1, 2002 

IPPS final rule (67 FR 50102), we 

revised the regulations at § 412.312 to 

specify that payments for extraordinary 

circumstances are also made for cost 

reporting periods after the transition 

period (that is, cost reporting periods 

beginning on or after October 1, 2001). 

During the transition period, under 

§§ 412.348(b) through (e), eligible 

hospitals could receive regular 

exception payments. These exception 

payments guaranteed a hospital a 

minimum payment percentage of its 

Medicare allowable capital-related costs 

depending on the class of hospital 

(§ 412.348(c)), but were available only 

during the transition period. After the 

end of the transition period, eligible 

hospitals can no longer receive this 

exception payment. However, even after 

the transition period, hospitals receive 

additional payments under the special 

exceptions provisions at § 412.348(g), 

which guarantees all eligible hospitals a 

minimum payment of 70 percent of its 

Medicare allowable capital-related costs 

provided that special exceptions 

payments do not exceed 10 percent of 

total capital IPPS payments. Special 

exceptions payments may be made only 

for the 10 years from the cost reporting 

year in which the hospital completes its 

qualifying project, and the hospital must 

have completed the project no later than 

the hospital’s cost reporting period 

beginning before October 1, 2001. Thus, 

an eligible hospital may receive special 

exceptions payments for up to 10 years 

beyond the end of the capital PPS 

transition period. Hospitals eligible for 

special exceptions payments were 

required to submit documentation to the 

intermediary indicating the completion 

date of their project. (For more detailed 

information regarding the special 

exceptions policy under § 412.348(g), 

refer to the August 1, 2001 IPPS final 

rule (66 FR 39911 through 39914) and 

the August 1, 2002 IPPS final rule (67 

FR 50102).) 

Under the PPS for capital-related 

costs, § 412.300(b) of the regulations 

defines a new hospital as a hospital that 

has operated (under current or previous 

ownership) for less than 2 years (56 FR 

43418, August 30, 1991). During the 10-

year transition period, a new hospital 

was exempt from the capital PPS for its 

first 2 years of operation and was paid 

85 percent of its reasonable costs during 

that period. Originally, this provision 

was effective only through the transition 

period and, therefore, ended with cost 

reporting periods beginning in FY 2002. 

Because we believe that special 

protection to new hospitals is also 

appropriate even after the transition 

period, as discussed in the August 1, 

2002 IPPS final rule (67 FR 50101), we 

revised the regulations at § 412.304(c)(2) 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28319

to provide that, for cost reporting 

periods beginning on or after October 1, 

2002, a new hospital (defined under 

§ 412.300(b)) is paid 85 percent of its 

allowable Medicare inpatient hospital 

capital-related costs through its first 2 

years of operation, unless the new 

hospital elects to receive fully 

prospective payment based on 100 

percent of the Federal rate. (Refer to the 

August 1, 2001 IPPS final rule (66 FR 

39910) for a detailed discussion of the 

statutory basis for the system, the 

development and evolution of the 

system, the methodology used to 

determine capital-related payments to 

hospitals both during and after the 

transition period, and the policy for 

providing exception payments.) 

B. Payments to Hospitals Located in 

Puerto Rico 

As explained in section III.G. of this 

preamble, operating PPS and capital 

PPS payments to hospitals located in 

Puerto Rico are currently paid based on 

a blend of 50 percent of the Federal rate 

and 50 percent of the Puerto Rico rate. 

The Puerto Rico capital rate is derived 

from the costs of Puerto Rico hospitals 

only, while the capital Federal rate is 

derived from the costs of all acute care 

hospitals participating in the IPPS 

(including Puerto Rico). As also 

described in the section III.G. of this 

preamble, section 504 of Public Law 

108–173 increases the national portion 

of the operating IPPS payment for 

Puerto Rico hospitals from 50 percent to 

75 percent and decreases the Puerto 

Rico portion of the operating IPPS 

payments from 50 percent to 25 percent 

for discharges occurring on or after 

October 1, 2004. Under the broad 

authority of section 1886(g) of the Act, 

for the PPS, for capital-related costs we 

are proposing to revise the calculations 

of capital IPPS payments to hospitals 

located in Puerto Rico, as well, to 

parallel the change in operating IPPS 

payments to hospitals located in Puerto 

Rico, for discharges occurring on or after 

October 1, 2004. Accordingly, we are 

proposing to revise § 412.374 of the 

regulations to provide that, for 

discharges occurring on or after October 

1, 2004, payments under the PPS for 

capital-related costs to hospitals located 

in Puerto Rico would be based on a 

blend of 25 percent of the Puerto Rico 

capital rate and 75 percent of the capital 

Federal rate. This proposed change 

would increase capital IPPS payments 

to hospitals located in Puerto Rico 

because the proposed Federal capital 

rate is higher than the proposed Puerto 

Rico capital rate. In addition, we note 

that this proposed change is similar to 

the change in capital IPPS payments 

made to hospitals located in Puerto Rico 

beginning in FY 1998 that had 

paralleled the statutory change in the 

Puerto Rico blended payment amount 

required for operating IPPS payments to 

hospitals located in Puerto Rico as 

mandated by section 4406 of Public Law 

105–33 (62 FR 46012 and 46048, August 

29, 1997). 

C. Exception Payment for Extraordinary 

Circumstances 

During the transition period, hospitals 

were guaranteed a minimum payment of 

a percentage of their Medicare allowable 

capital-related costs, depending on the 

class of hospital; that is, the minimum 

payment level for sole community 

hospitals was no greater than 90 

percent, for urban hospitals with at least 

100 beds meeting particular 

disproportionate share criteria, the 

minimum payment level was 80 

percent, and for all other hospitals, the 

minimum payment level was 70 percent 

(§§ 412.348(c)(i) through (iii)). Regular 

exception payments provided the means 

to ensure that hospitals received the 

minimum levels of capital payment. 

However, any amount by which a 

hospital’s cumulative capital payments 

exceeded its cumulative minimum 

payment levels was deducted from the 

additional exception payment the 

hospital was eligible to receive 

(§ 412.348(e)). This type of exception 

payment ended with the end of the 

transition period. 

In the August 1, 2002 IPPS final rule 

(67 FR 50102), we specified that 

payments to hospitals that incur capital 

expenditures in excess of $5 million due 

to extraordinary circumstances beyond 

the hospital’s control would be made for 

cost reporting periods after the 

transition period, that is, cost reporting 

periods beginning on or after October 1, 

2001, as established at § 412.312(e). 

Generally, the exception payments for 

extraordinary circumstances are 85 

percent of Medicare’s share of allowable 

capital-related costs attributed to the 

extraordinary circumstances (100 

percent for sole community hospitals). 

This amount is offset by any amount by 

which a hospital’s cumulative payments 

exceed its cumulative minimum 

payment levels (adjusted for the 

extraordinary circumstances) under the 

PPS for capital-related costs. The 

minimum payment levels and the 

offsetting amounts were the same as 

those established for regular exceptions 

as indicated at § 412.348(f)(4). The 

regulation refers to the regular exception 

minimum payment levels at 

§ 412.348(c)(1) and the offsetting 

amounts at § 412.348(e)(2).

Because the regulations governing the 

regular exception payments, which 

include the minimum payment levels 

regulations at § 412.348(c) and the 

offsetting amounts at § 412.348(e), were 

effective during the transition period 

only, we had not previously addressed 

whether or not the minimum payment 

levels under § 412.348(c) and the 

offsetting amounts at § 412.348(e) 

remain applicable for extraordinary 

circumstances exceptions in the posttransition period. In the August 1, 2002 

IPPS final rule (67 FR 50102), we 

clarified our policy at a new 

§ 412.312(e) that exception payments for 

extraordinary circumstances continued 

to apply to periods beginning on or after 

October 1, 2001. When we added 

§ 412.312(e), we did not believe it was 

necessary to explain in the preamble 

that the minimum payment levels in 

§ 412.348(c) or the offsetting amounts in 

§ 412.348(e) were incorporated into 

§ 412.312(e). However, in order to avoid 

any confusion, in this proposed rule, we 

are clarifying our current policy that 

although the minimum payment levels 

established at § 412.348(c)(1) are no 

longer in effect, they continue to be 

relevant in order to calculate the 

extraordinary circumstances exception 

payments after the end of the transition 

period. The extraordinary exception 

payment calculation incorporates the 

minimum payment levels as well as the 

offsetting deduction for cumulative 

payments. Thus, although the regular 

exception payments themselves have 

expired, it has always been our policy 

that the minimum payment levels will 

continue to be part of the formula for 

calculating extraordinary exception 

payments after the end of the transition 

period. In this proposed rule, we are 

proposing to amend § 412.312(e) to 

reflect our current policy that, for cost 

reporting periods beginning on or after 

October 1, 2001, the minimum payment 

levels established at § 412.348(c)(1) are 

part of the formula for calculating 

extraordinary circumstances exception 

payments. 

Similarly, in this proposed rule, we 

clarify our current policy that the 

offsetting amounts established at 

§ 412.348(e)(2) also are part of the 

formula for determining extraordinary 

circumstances exception payments after 

the end of the transition period, in spite 

of the fact that the regular exception 

payment provision that included the 

offsetting amounts at § 412.348(e)(2) 

expired at the end of the transition 

period. Accordingly, we are proposing 

to revise § 412.348(e) to clarify that, for 

cost reporting periods beginning on or 

after October 1, 2001, the offsetting 

28320 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

amounts established at § 412.348(e)(2) 

remain in effect for extraordinary 

circumstances exception payments. 

In addition, we also are proposing to 

revise the period of time used to 

determine the offsetting amounts in 

§ 412.348(e)(2). Under existing 

regulations, the additional payment for 

extraordinary circumstances is offset by 

any amount by which a hospital’s 

cumulative payments exceed its 

cumulative minimum payment levels 

under the PPS for capital-related costs. 

In order to determine this offsetting 

amount, a hospital must keep a record 

of the difference between its cumulative 

capital payments and its cumulative 

minimum payment levels since it 

became subject to the PPS for capitalrelated costs. For instance, under 

existing regulations, if a hospital would 

be eligible for an additional payment for 

extraordinary circumstances in FY 2005 

and the hospital had been subject to the 

PPS for capital-related cost since that 

PPS was implemented in FY 1992, the 

offsetting amount would be the 

difference in the hospital’s cumulative 

capital payments and its cumulative 

minimum payment levels for the past 13 

years. Similarly, under existing 

regulations, if a hospital would be 

eligible for an additional payment for 

extraordinary circumstances in FY 2012 

and the hospital had been subject to the 

capital PPS since it was implemented in 

FY 1992, the offsetting amount would 

be the difference in the hospital’s 

cumulative capital payments and its 

cumulative minimum payment levels 

for the past 20 years. 

We believe that when the provisions 

for exception payments were originally 

implemented with the start of capital 

IPPS in FY 1992, it was anticipated that 

the offsetting amounts at § 412.348(e)(2) 

would be determined based on a period 

of no longer than 10 years. However, 

under existing regulations, exception 

payments for extraordinary 

circumstances are offset by the 

difference in the hospital’s cumulative 

payments and its cumulative minimum 

payment levels since it became subject 

to the PPS for capital-related-costs, 

which for most hospitals is over 13 

years. Therefore, in this proposed rule, 

for cost reporting periods beginning 

during FY 2005 and thereafter, we are 

proposing to revise § 412.312(e) to 

specify that the offsetting amounts in 

§ 412.348(e)(2) would be based on the 

hospital’s capital payments and 

minimum payment levels from the most 

recent 10 years rather than from the 

entire period of time the hospital has 

been subject to the PPS for capitalrelated costs. If a hospital has been paid 

under the PPS for capital-related costs 

for less than 10 years, the offsetting 

amounts would be based on the 

hospital’s capital payments and 

minimum payment levels beginning 

with the date the hospital became 

subject to the PPS for capital-related 

costs. For example, if a hospital would 

be eligible for an additional payment for 

extraordinary circumstances in FY 2005 

and the hospital had been subject to the 

PPS for capital-related costs since FY 

1992 (13 years), the offsetting amounts 

used in the calculation of the 

extraordinary circumstances exception 

payment would be based on the 

hospital’s cumulative capital PPS 

payments and cumulative minimum 

payment levels for the hospital’s cost 

reporting period beginning during FY 

1995 through FY 2004. Similarly, if a 

hospital would be eligible for an 

additional payment for extraordinary 

circumstances in FY 2005 and the 

hospital had only been subject to the 

PPS for capital-related costs since FY 

2000 (5 years), the offsetting amounts 

used in the calculation of the 

extraordinary circumstances exception 

payment would be based on the 

hospital’s cumulative capital PPS 

payments and cumulative minimum 

payment levels for the hospital’s cost 

reporting periods beginning during FY 

2000 through FY 2004. 

D. Treatment of Hospitals Previously 

Reclassified for the Operating PPS 

Standardized Amounts 

As we discussed in section IV.C. of 

this preamble, prior to April 1, 2003, the 

standardized amounts varied under the 

operating IPPS based on a hospital’s 

geographic location (large urban versus 

other urban and rural areas). 

Furthermore, previously, a hospital 

could be reclassified to a large urban 

area by the MGCRB for the purpose of 

the standardized amount if certain 

criteria were met (as described in Part 

412, Subpart L of the Medicare 

regulations). 

Similarly, the standard capital Federal 

rate under the PPS for capital-related 

costs is adjusted to reflect the higher 

costs incurred by hospitals located in 

large urban areas (large urban add-on at 

§ 412.316), as well as for hospitals in 

urban areas with at least 100 beds 

serving low-income patients (capital 

disproportionate share (DSH) 

adjustment at § 412.320). In the past, if 

a rural or other urban hospital was 

reclassified to a large urban area for 

purposes of the operating IPPS 

standardized amount under § 412.63, 

the hospital also was then eligible for a 

large urban add-on payment, as well as 

a DSH payment, under the PPS for 

capital-related costs. 

Section 402(b) of the Consolidated 

Appropriations Resolution, 2003, Public 

Law 108–7, and section 402 of Public 

Law 108–89, (a Welfare Reform Act), 

provide that, for discharges occurring on 

or after April 1, 2003 and before March 

31, 2004, under the operating IPPS, all 

hospitals are paid based on the large 

urban standardized amount, regardless 

of geographic location or MGCRB 

redesignation. Section 401(a) of Public 

Law 108–173 amended section 

1886(d)(5)(A)(iv) by adding a subsection 

(II) that permanently equalizes the 

standardized amounts for large urban 

areas and for other urban and rural areas 

for discharges occurring on or after 

April 1, 2004. 

In addition, under section 1886(d) of 

the Act, a hospital may reclassify under 

the operating IPPS only for the purpose 

of either its standardized amount or its 

wage index adjustment, or both. As 

further specified in regulations at 

§ 412.230, a hospital may be reclassified 

for purposes of the standardized amount 

only if the area to which the hospital 

seeks redesignation has a higher 

standardized amount than the hospital 

currently receives. Because there are no 

longer differences in standardized 

amounts due to geographic 

classification as a result of the section 

401 amendment, hospitals are no longer 

eligible to reclassify solely for 

standardized amount purposes. 

Accordingly, the MGCRB has denied all 

FY 2005 standardized amount 

reclassification requests. We note that 

although Public Law 108–7 and Public 

Law 108–89 also equalized the 

standardized amounts for all hospitals 

in FY 2004, because these laws were not 

enacted until after the MGCRB had 

already made its reclassification 

determinations for FY 2004, eligible 

hospitals received reclassification 

approval for the purposes of the 

standardized amount for FY 2004. 

However, in this case, Public Law 108–

173 was enacted before the MGCRB 

issued its reclassification decisions for 

FY 2005. Therefore, no hospitals will be 

reclassified for the purpose of the 

standardized amounts in FY 2005.

The changes to the operating IPPS 

described above, has an effect on 

payments under the PPS for capitalrelated costs. Rural and other urban 

hospitals that were previously eligible 

to receive the large urban add-on and 

DSH payments under the PPS for 

capital-related costs if they reclassified 

to a large urban area for the purpose of 

the standardized amount under the 

operating IPPS, will no longer be 

reclassified, and therefore, will not be 

eligible to receive those additional 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28321

payments under the PPS for capitalrelated costs. 

Our analysis indicates that rural and 

other urban hospitals will gain 

approximately $0.5 billion in FY 2005 

in operating PPS payments due to the 

equalization of the standardized 

amounts compared to a relatively small 

adjustment to payments for capitalrelated costs under the IPPS. We 

understand that Congress was aware of 

the effect of the equalization of the 

standardized amounts on the rural and 

other urban hospitals’ adjustments 

under the PPS for capital-related costs. 

This approach is consistent with section 

4203 of the BBA, which prevented 

hospitals from reclassifying to a 

different area to get an additional 

payment solely for DSH purposes under 

the operating IPPS. The restriction at 

section 4203 clearly indicates Congress’

intent to maintain the principle that 

reclassifications under section 1886(d) 

of the Act are only intended to be made 

for purposes of either the standardized 

amount or the wage index adjustment. 

Therefore, in this proposed rule, we 

are clarifying that, beginning in FY 

2005, only hospitals geographically 

located in a large urban area (as defined 

in proposed revised § 412.63(c)(6)) 

would be eligible for large urban add-on 

payments under the PPS for capitalrelated costs under § 412.312(b)(2)(ii) 

and § 412.316(b). Beginning in FY 2005, 

only hospitals serving low-income 

patients that are geographically located 

in an urban area (as defined in proposed 

new § 412.64 and discussed in section 

IV.D. of this preamble) with 100 or more 

beds (or that meet the criteria in 

§ 412.106(c)(2)) would be eligible for 

DSH payments under the PPS for 

capital-related costs under § 412.320. 

E. Geographic Classification and 

Definition of Large Urban Area 

1. Core-Based Statistical Areas 

As we discuss in greater detail in 

section III.B. of this preamble, we are 

proposing to adopt changes to the MSA 

criteria used to define hospital labor 

market areas based on the new CoreBased Statistical Areas (CBSA) 

definitions announced by OMB on June 

6, 2003, which are based on 2000 

Census data. We currently define 

hospital labor market areas based on the 

definitions of Metropolitan Statistical 

Areas (MSAs), Primary MSAs (PMSAs), 

and New England County Metropolitan 

Areas (NECMAs) under standards 

issued by OMB in 1990. In addition, 

OMB designates Consolidated MSAs 

(CMSAs). A CMSA is a metropolitan 

area with a population of one million or 

more, comprised of two or more PMSAs 

(identified by their separate economic 

and social character). Under the 

operating PPS, the wage index is 

calculated and assigned to hospitals on 

the basis of the labor market area in 

which the hospital is located. For 

purposes of the hospital wage index, we 

use the PMSAs rather than CMSAs 

because they allow a more precise 

breakdown of labor costs. However, if a 

metropolitan area is not designated as 

part of a PMSA, we use the applicable 

MSA. 

As we discuss in sections III.B.3. and 

IV.C. of this preamble, we are proposing 

to adopt OMB’s new CBSA designations 

to define labor market areas for 

discharges occurring on or after October 

1, 2004, which would be set forth in 

regulations under a proposed new 

§ 412.64. Currently, the large urban 

location adjustment under § 412.316(b) 

and the DSH adjustment for certain 

urban hospitals under § 412.320 for 

payments for capital related costs rely 

on the existing geographic 

classifications set forth at § 412.63. 

Because we are proposing to adopt 

OMB’s new CBSA designations for FY 

2005 and thereafter under proposed new 

§ 412.64, we are proposing to revise 

§ 412.316(b) and § 412.320(a)(1) to 

specify that, for discharges on or after 

October 1, 2004, the payment 

adjustments under these sections, 

respectively, would be based on the 

geographic classifications at proposed 

new § 412.64. 

2. Metropolitan Divisions 

Under the revised MSA criteria based 

on CBSAs, a Metropolitan Division is a 

county or group of counties located 

within an MSA with a core population 

of at least 2.5 million, representing an 

employment center, plus adjacent 

counties associated with the main 

county or counties through commuting 

ties (see section III.B.3.b. of this 

preamble for further details). Under the 

proposed changes to the MSA criteria 

discussed in section III.B. of this 

preamble, we are proposing to use the 

Metropolitan Divisions where 

applicable under the CBSA definitions. 

Thus, similar to our treatment of PMSAs 

as labor market areas where applicable, 

we would use the Metropolitan 

Divisions rather than MSAs to define 

labor market areas. 

Currently, under the existing MSA 

criteria, a large urban area is defined at 

existing § 412.63(c)(6) as an MSA with 

a population of more than 1.000,000 or 

a NECMA with a population of more 

than 970,000 based on the most recent 

available population data published by 

the Bureau of the Census. As noted 

above, we currently use the PMSAs 

rather than CMSAs to define labor 

market areas. Accordingly, we currently 

determine large urban areas under 

existing § 412.63(c)(6) based on the most 

recent available population data for 

each PMSA rather than the CMSA. 

Similarly, because we are proposing to 

treat Metropolitan Divisions of MSAs as 

labor market areas, under the proposed 

changes based on CBSA designations, 

we would designate large urban areas 

based on the most recent available 

population data for each Metropolitan 

Division, rather than the MSA. 

As discussed in section III.B.3.b., 

under the CBSA definitions, there are 11 

MSAs containing Metropolitan 

Divisions: Boston; Chicago; Dallas; 

Detroit; Los Angeles; Miami; New York; 

Philadelphia; San Francisco; Seattle; 

and Washington, D.C. There are a total 

of 29 Metropolitan Divisions, which 

would be treated as MSAs. Of those 29 

MSAs, 23 meet the definition of large 

urban area under § 412.63(c)(6) (as 

denoted in Tables 4A and 4B in the 

Addendum to this proposed rule). 

Under the proposed changes to the MSA 

criteria, there are a total of 62 large 

urban areas, including those 23 

Metropolitan Divisions, as denoted in 

Tables 4A and 4B in the Addendum to 

this proposed rule. 

In this section, we are proposing to 

clarify that the current definition of 

large urban area at existing 

§ 412.63(c)(6) would remain in effect for 

the purpose of the large urban add-on 

adjustment to the Federal rate under the 

PPS for capital-related costs under 

§§ 412.312(b)(2)(ii) and 412.316(b). With 

the equalization of the operating 

standardized amounts (as discussed in 

section IV.D. of this preamble), we are 

proposing to revise the regulations 

under § 412.63(c), and making them 

effective for FYs 1984 through 2004, and 

to add a new § 412.64 that would be 

applicable for FYs 2005 and thereafter. 

Because CMS would compute a single 

standardized amount for hospitals 

located in all areas beginning in FY 

2005, the term ‘‘large urban area’’ is no 

longer applicable under the operating 

PPS and therefore, a definition of large 

urban area would not be included under 

the proposed new § 412.64. However, 

the term ‘‘large urban area’’ continues to 

be applicable under the capital PPS for 

the large urban add-on adjustment at 

§§ 412.312(b)(2)(ii) and 412.316(b). 

Therefore, we are proposing to revise 

§§ 412.312(b)(2)(ii) and 412.316(b) to 

state that the definition of large urban 

area set forth at § 412.63(c)(6) would 

continue to be in effect under the capital 

PPS for discharges occurring on or after 

September 30, 2004.

28322 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

VI. Proposed Changes for Hospitals and 

Hospital Units Excluded From the IPPS 

A. Payments to Excluded Hospitals and 

Hospital Units (§§ 413.40(c), (d), and (f)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Excluded Hospitals and Units’’ at the 

beginning of your comment.] 

1. Payments to Existing Excluded 

Hospitals and Hospital Units 

Section 1886(b)(3)(H) of the Act (as 

amended by section 4414 of Public Law 

105–33) established caps on the target 

amounts for certain existing hospitals 

and hospital units excluded from the 

IPPS for cost reporting periods 

beginning on or after October 1, 1997 

through September 30, 2002. For this 

period, the caps on the target amounts 

applied to the following three classes of 

excluded hospitals or units: psychiatric 

hospitals and units, rehabilitation 

hospitals and units, and LTCHs. In 

accordance with section 1886(b)(3)(H)(i) 

of the Act and effective for cost 

reporting periods beginning on or after 

October 1, 2002, payments to these 

classes of existing excluded hospitals or 

hospital units are no longer subject to 

caps on the target amounts. 

In accordance with existing 

§§ 413.40(c)(4)(ii) and (d)(1)(i) and (ii), 

where applicable, excluded psychiatric 

hospitals and units continue to be paid 

on a reasonable cost basis, and 

payments are based on their Medicare 

inpatient operating costs, not to exceed 

the ceiling, up to the date that the 

inpatient psychiatric facility PPS 

described in section VII.A. of this 

preamble becomes effective. The ceiling 

is computed using the hospital’s or 

unit’s target amount from the previous 

cost reporting period, updated by the 

rate-of-increase specified in 

§ 413.40(c)(3)(viii) of the regulations, 

and then multiplying this figure by the 

number of Medicare discharges. 

Effective for cost reporting periods 

beginning on or after October 1, 2002, 

rehabilitation hospitals and units are 

paid in accordance with the IRF PPS at 

100 percent of the Federal rate. In 

addition, effective for cost reporting 

periods beginning on or after October 1, 

2002, LTCHs are no longer paid on a 

reasonable cost basis, but are paid under 

a DRG-based PPS. However, as part of 

the PPS for LTCHs, we have established 

a 5-year transition period from 

reasonable cost-based reimbursement to 

a fully Federal PPS. Under the LTCH 

PPS, a LTCH that is subject to the blend 

methodology may elect to be paid based 

on a 100 percent of the Federal 

prospective rate. We have proposed, but 

not finalized, an inpatient psychiatric 

facility (IPF) prospective payment 

system under which psychiatric 

hospitals and psychiatric units would 

no longer be paid on a reasonable cost 

basis but would be paid on a 

prospective per diem basis. (Sections 

VI.A.3, 4, and 5 of this preamble contain 

a more detailed discussion of the IRF 

PPS and the LTCH PPS and the 

proposed IPF PPS.) 

2. Updated Caps for New Excluded 

Hospitals and Units 

Section 1886(b)(7) of the Act 

established a payment limitation for 

new hospitals and units that fell within 

one of three classes of hospitals or unitspsychiatric, rehabilitation, and longterm care that first receives payment as 

a hospital or unit excluded from the 

IPPS on or after October 1, 1997. A 

discussion of how the payment 

limitation was calculated can be found 

in the August 29, 1997 final rule with 

comment period (62 FR 46019); the May 

12, 1998 final rule (63 FR 26344); the 

July 31, 1998 final rule (63 FR 41000); 

and the July 30, 1999 final rule (64 FR 

41529). Under the statute, a ‘‘new’’

hospital or unit is a hospital or unit that 

falls within one of the three classes of 

hospitals or units (psychiatric, 

rehabilitation or long-term care) that 

first receives payment as a hospital or 

unit excluded from the IPPS on or after 

October 1, 1997. 

The amount of payment for a ‘‘new’’

psychiatric hospital or unit (as defined 

at 42 CFR 413.40(f)(2)(ii) would be 

determined as follows: 

• Under existing § 413.40(f)(2)(ii), for 

the first two 12-month cost reporting 

periods, the amount of payment is the 

lesser of: (1) The operating costs per 

case; or (2) 110 percent of the national 

median (as estimated by the Secretary) 

of the target amounts for the same class 

of hospital or unit for cost reporting 

periods ending during FY 1996, updated 

by the hospital market basket increase 

percentage to the fiscal year in which 

the hospital or unit first receives 

payments under section 1886 of the Act, 

as adjusted for differences in area wage 

levels. 

• Under existing § 413.40(c)(4)(v), for 

cost reporting periods following the 

hospital’s or unit’s first two 12-month 

cost reporting periods, the target amount 

is equal to the amount determined 

under section 1886(b)(7)(A)(i) of the Act 

for the preceding cost reporting period, 

updated by the applicable hospital 

market basket increase percentage to the 

third cost reporting period. 

The proposed amounts included in 

the following table reflect the proposed 

updated 110 percent of the national 

median target amounts of new excluded 

psychiatric hospitals and units for cost 

reporting periods beginning during FY 

2005. These figures are updated with 

the most recent data available to reflect 

the proposed projected market basket 

increase percentage of 3.3 percent. This 

projected percentage change in the 

market basket reflects the average 

change in the price of goods and 

services purchased by hospitals to 

furnish inpatient hospital services (as 

projected by the Office of the Actuary of 

CMS based on its historical experience 

with the IPPS). For a new provider, the 

labor-related share of the target amount 

is multiplied by the appropriate 

geographic area wage index, without 

regard to IPPS reclassifications, and 

added to the nonlabor-related share in 

order to determine the per case limit on 

payment under the statutory payment 

methodology for new providers.

Class of excluded hospital or unit 

Proposed

FY 2005

labor-related 

share 

Proposed FY 

2005

nonlabor-related 

share. 

Psychiatric ........................................................................................................................................................ $7,534.70 $2,994.67 

Effective for cost reporting periods 

beginning on or after October 1, 2002, 

this payment limitation was no longer 

applicable to new LTCHs because they 

are paid 100 percent of the Federal rate. 

Accordingly, it is no longer necessary to 

publish an updated cap for new LTCHs. 

Effective for cost reporting periods 

beginning on or after October 1, 2002, 

this payment limitation is also no longer 

applicable to new rehabilitation 

hospitals and units because they are 

paid 100 percent of the Federal 

prospective rate under the IRF PPS. 

Therefore, it is also no longer necessary 

to update the payment limitation for 

new rehabilitation hospitals or units. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28323

3. Implementation of a PPS for IRFs 

Section 1886(j) of the Act, as added by 

section 4421(a) of Public Law 105–33, 

provided for the phase-in of a case-mix 

adjusted PPS for inpatient hospital 

services furnished by a rehabilitation 

hospital or a rehabilitation hospital unit 

(referred to in the statute as 

rehabilitation facilities) for cost 

reporting periods beginning on or after 

October 1, 2000, and before October 1, 

2002, with a fully implemented PPS for 

cost reporting periods beginning on or 

after October 1, 2002. Section 1886(j) of 

the Act was amended by section 125 of 

Public Law 106–113 to require the 

Secretary to use a discharge as the 

payment unit under the PPS for 

inpatient hospital services furnished by 

rehabilitation facilities and to establish 

classes of patient discharges by 

functional-related groups. Section 305 

of Public Law 106–554 further amended 

section 1886(j) of the Act to allow 

rehabilitation facilities, subject to the 

blend methodology, to elect to be paid 

the full Federal prospective payment 

rather than the transitional period 

payments specified in the Act. 

On August 7, 2001, we issued a final 

rule in the Federal Register (66 FR 

41316) establishing the PPS for 

inpatient rehabilitation facilities, 

effective for cost reporting periods 

beginning on or after January 1, 2002. 

There was a transition period for cost 

reporting periods beginning on or after 

January 1, 2002 and ending before 

October 1, 2002. For cost reporting 

periods beginning on or after October 1, 

2002, payments are based entirely on 

the Federal prospective payment rate 

determined under the IRF PPS. 

4. Implementation of a PPS for LTCHs 

In accordance with the requirements 

of section 123 of Public Law 106–113, 

as modified by section 307(b) of Public 

Law 106–554, we established a per 

discharge, DRG-based PPS for LTCHs as 

described in section 1886(d)(1)(B)(iv) of 

the Act for cost reporting periods 

beginning on or after October 1, 2002, in 

a final rule issued on August 30, 2002 

(67 FR 55954). The LTCH PPS uses 

information from LTCH hospital patient 

records to classify patients into distinct 

LTC-DRGs based on clinical 

characteristics and expected resource 

needs. Separate payments are calculated 

for each LTC-DRG with additional 

adjustments applied.

We published in the Federal Register

on May 7, 2004, a final rule (69 FR 

25673) that updated the payment rates 

for the LTCH PPS and made policy 

changes effective for a new LTCH PPS 

rate year of July l, 2004 through June 30, 

2005. The 5-year transition period from 

reasonable cost-based reimbursement to 

the fully Federal prospective rate will 

end with cost reporting periods 

beginning on or after October 1, 2005 

and before October 1, 2006. 

5. Development of a PPS for IPFs 

Section 124 of the Medicare, 

Medicaid and SCHIP Balanced Budget 

Refinement Act of 1999 (BBRA) requires 

the development of a per diem 

prospective payment system (PPS) for 

payment of inpatient hospital services 

furnished in psychiatric hospitals and 

psychiatric units of acute care hospitals 

(inpatient psychiatric facilities (IPFs)). 

We published a proposed rule to 

implement the IPF PPS on November 

28, 2003 (68 FR 66920). On January 30, 

2004, we published a proposed rule to 

implement the IPF PPS on November 

28, 2003 (68 FR 66920). On January 30, 

2004, we published a notice to extend 

the comment period for 30 additional 

days (69 FR 4464). The comment period 

closed on March 26, 2004. 

Under the proposed rule, we would 

compute a Federal per diem base rate to 

be paid to all IPFs based on the sum of 

the average routine operating, ancillary, 

and capital costs for each patient day of 

psychiatric care in an IPF adjusted for 

budget neutraility. The Federal per diem 

base rate would be adjusted to reflect 

certain characteristics such as age, 

specified DRGs, and selected high-cost 

comorbidities, and certain facility 

characteristics such as wage index 

adjustment, rural location, and indirect 

teaching costs. 

The November 28, 2003 proposed rule 

assumed an April 1, 2004 effective date 

for the purpose of ratesetting and 

calculating impacts. However, we are 

still in the process of analyzing public 

comments and developing a final rule 

for publication. The effective date of the 

IPF PPS would occur 5 months 

following publication of the final rule. 

6. Technical Changes Related to 

Establishment of Payments for Excluded 

Hospitals 

We have become aware of a number 

of technical errors in the existing 

regulations governing how we 

determine payments to hospitals that 

are excluded from the IPPS. The 

existing regulations under § 413.40 set 

forth requirements for establishing the 

ceiling on the rate of increase in 

operating costs per case for hospital 

inpatient services furnished to Medicare 

beneficiaries that will be recognized as 

reasonable for purposes of determining 

the amount of Medicare payments. The 

rate-of-increase ceiling applicable to 

cost reporting periods has been adjusted 

a number of times since it was first 

applied for hospital cost reporting 

periods beginning on or after October 1, 

1982. In revising the regulations over 

the years to reflect the different 

applicable adjustments for cost 

reporting periods for specific providers, 

we have inadvertently overlooked 

updating or conforming § 413.40 to 

reflect various statutory changes. We 

note that, although we erroneously 

omitted the technical changes in the 

regulation text, we did, in fact comply 

with the changes required by the statute 

when determining the rate-of-increase 

ceiling. Therefore, we are proposing to 

make several changes to 

§ 413.40(c)(4)(iii) in order to conform it 

to section 1886(b)(3)(J) of the Act. These 

proposed changes are as follows: (1) In 

§ 413.40(c)(4)(iii)(A)(1) and 

(c)(4)(iii)(B)(4)(i), the phrase ‘‘on or after 

October 1, 2001’’, should read ‘‘during 

FY 2001’’; and in 

§ 413.40(c)(4)(iii)(A)(2), the phrase ‘‘on 

or after October 1, 2000’’ should read 

‘‘during FY 2001’’. In order to include 

pertinent changes that were erroneously 

omitted from the regulatory text and to 

conform the text to section 1886(b)(2)(A) 

of the Act, we are proposing to delete 

the phrase ‘‘and ending before October 

1, 2000’’ in § 413.40(d)(4)(i) because, in 

section 1886(b)(2)(A) of the Act, there is 

no ending date for the continuous 

improvement bonus payment. In 

addition, at § 413.40(d)(4)(ii), we 

propose to delete the word ‘‘ending’’

from the introductory phrase so that the 

phrase would read, ‘‘For cost reporting 

periods beginning on or after October 1, 

2000 and before September 30, 2001.’’

The word ‘‘ending’’ in the existing 

language at best limits the provision to 

cost reporting periods beginning on 

October 1, 2000. The provision was 

intended to apply to cost reporting 

periods beginning during all of FY 2001. 

B. Criteria for Classification of 

Hospitals-Within-Hospitals 

[If you choose to comment on the issues 

in this section, please include the 

caption ‘‘Hospitals-Within-Hospitals’’ at 

the beginning of your comment.] 

Existing regulations at § 412.22(e) 

define a hospital-within-a-hospital as a 

hospital that occupies space in a 

building as another hospital, or in one 

or more separate buildings located on 

the same campus as buildings used by 

another hospital. Moreover, existing 

§ 412.22(f) provides for the 

grandfathering of hospitals-withinhospitals that were in existence on or 

before September 30, 1995. 

One of the goals of our hospitalwithin-hospital regulations at 

§ 412.22(e) has been to prevent a LTCH 

28324 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

co-located with an acute care hospital to 

function as a unit of that hospital, a 

situation precluded under section 

1886(d)(1)(B) of the Act. This policy 

protects the integrity of the IPPS by 

ensuring that 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. Further, there is concern that 

the hospital-within-hospital 

configuration could result in patient 

admission, treatment, and discharge 

patterns that are guided more by 

attempts to maximize Medicare 

payments than by patient welfare. We 

believe that the unregulated linking of 

an IPPS hospital and a hospital 

excluded from the IPPS could lead to 

two Medicare payments for what was 

essentially one episode of patient care. 

In the September 1, 1994 IPPS final 

rule (59 FR 45389), we first discussed 

hospitals-within-hospitals, describing 

them as entities that were manipulating 

the conditions of participation (COPs) 

for hospitals under Medicare, set forth 

in regulations at 42 CFR Part 482, to 

permit them to receive exclusion from 

the prospective payment systems. 

Specifically, these hospitals have begun 

to organize what they themselves refer 

to as the ‘‘hospital-within-a-hospital’’

model. Under this model, an entity may 

operate in space leased from a hospital, 

and have most or all services furnished 

under arrangements by employees of the 

lessor hospital. The newly organized 

entity may be operated by a corporation 

formed and controlled by the lessor 

hospital, or by a third entity that 

controls both. In either case, the new 

entity seeks State licensure and 

Medicare participation as a hospital, 

demonstrates that it has an average 

length of stay of over 25 days, and 

obtains an exclusion from the IPPS. The 

effect of this process is to extend the 

long-term care hospital exclusion to 

what is, for all practical purposes, a 

‘‘long-term care unit.’’ We noted that the 

averaging concept that underlies the 

IPPS recognizes that some patients will 

stay longer and consume more resources 

than expected, while others will have 

shorter, less costly stays. We envisioned 

that abuse of the PPSs could result if an 

acute care hospital under the IPPS 

‘‘diverted all long-stay cases to the 

excluded unit, leaving only shorter, less 

costly cases to be paid for under the 

IPPS. In such cases, hospitals would 

profit inappropriately from prospective 

payments.’’ Further, we stated that we 

believed that the ‘‘exclusion of longterm care ‘units’ was inconsistent with 

the statutory scheme.’’ Section 

1886(d)(1)(B) of the Act clearly provides 

for an exclusion of LTCHs from the 

acute care IPPS. While the statute also 

provides for an exclusion for psychiatric 

units and rehabilitation units, it does 

not provide for an exclusion of longterm care units. (59 FR 45389) 

In addition, in that September 1, 1994 

final rule, we proceeded to establish 

‘‘separateness and control’’ regulations 

at (then) § 412.23(e) that required the 

two hospitals to have separate medical 

and administrative governance and 

decisionmaking and also ensured that 

each hospital operated as a separate 

facility. We believed at that time that 

such rules were sufficient solutions to 

our concerns about these new entities 

and, therefore, we did not preclude 

common ownership of the host and the 

LTCH at that time.

In the ensuing decade, we have 

revisited the issue of hospitals-withinhospitals several times (for example, 60 

FR 45836, September 1, 1995; 62 FR 

46012, August 29, 1997; 67 FR 56010, 

August 30, 2002; 67 FR 45463, August 

1, 2003) during which we clarified and 

amplified the separateness and control 

requirements. In the August 29, 1997 

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 hospitals-within-hospitals, 

such as IRFs. In addition, in the August 

29, 1997 final rule, we also established 

a ‘‘grandfathering’’ provision for 

hospitals-within-hospitals in existence 

prior to September 30, 1995, at 

§ 412.22(f), and in the August 1, 2003 

IPPS final rule, we clarified and 

codified the requirements for 

‘‘grandfathered’’ hospitals-withinhospitals (68 FR 45463). 

As stated earlier, presently, a hospitalwithin-a-hospital must meet the 

separateness and control criteria set 

forth at § 412.22(a). In order to be 

excluded from the IPPS, the hospitalwithin-a-hospital must 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 (§ 412.22(e)(5)), 

currently, the hospital must meet at 

least one of the following criteria: (i) 

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; (ii) 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 § 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 (iii) for the same period of 

at least 6 months immediately preceding 

the first cost reporting period for which 

exclusion is sought, the hospital has 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 

building or on the same campus or with 

a third entity that controls both 

hospitals. 

It is our experience that the vast 

majority of hospitals-within-hospitals 

have elected to meet the second of the 

three criteria at § 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 is no more than 15 percent of 

its total inpatient operating costs. In 

establishing the 15-percent rule, we 

originally believed that we would be 

able to detect a true corporate identity 

and actual function and to guard against 

an arrangement that could undermine 

the statutory preclusion of long-term 

care units. We sought to distinguish 

admissions to independently operating 

facilities from what were, in effect, 

transfers of patients from one unit of the 

corporation to another unit of the 

corporation without a truly distinct and 

separate corporate identity. Our 

underlying policy rationale was that, if 

an entity could not be separately 

identified, it effectively would be 

functioning as a mere unit of the parent 

entity in violation of the statutory 

prohibition on long-term care units. We 

explained in the September 1, 1994 rule 

(59 FR 45390) that ‘‘if an entity is 

effectively part of another hospital and 

the principles of the prospective 

payment system do apply well to the 

organization as a whole, then it would 

not be appropriate to exclude part of 

that organization from the prospective 

payment system.’’

Although we have periodically 

revisited the phenomenon of hospitalswithin-hospitals in our rules and we 

have revised or clarified some related 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28325

issues, we have not proposed significant 

changes in our policies in this area for 

some time. This is despite the 

significant changes that have been made 

in the payment systems for Medicarecertified, excluded hospitals and units. 

Medicare payments to two types of 

IPPS-excluded hospitals, LTCHs and 

IRFs, are now made on a prospective 

basis. We believe that, in part, the new 

LTCH PPS is one of the reasons for the 

rapidly increasing number of LTCH 

hospitals-within-hospitals. In its June 

2003 Report to the Congress, MedPAC 

identified hospitals-within-hospitals as 

the fastest growing type of LTCHs, and 

specified that the number had grown 

from 10 in 1993 to 114 in 2002, an 

average annual increase of 

approximately 30 percent (p. 85). In the 

August 30, 2002 final rule that 

implemented the PPS for LTCHs, we 

noted that ‘‘* * * we remain extremely 

concerned about rapid growth in LTCH 

hospitals-within-hospitals and will be 

collecting data on the relationship 

among host hospitals, hospitals-withinhospitals, and parent corporations in 

order to determine the need for 

additional regulation’’ (67 FR 56010). 

We indicated that if, as a consequence 

of these monitoring activities, we 

determine the need to revisit existing 

regulations dealing with ownership and 

control of hospitals-within-hospitals, we 

would follow the notice and comment 

rulemaking process (67 FR 56011). 

The LTCH PPS was implemented for 

cost reporting periods beginning on or 

after October 1, 2002. We have gathered 

considerable anecdotal information 

from inquiries from the provider 

community, fiscal intermediaries, and, 

particularly, from the survey and 

certification divisions of our CMS 

Regional Offices. 

We believe that existing policies 

regarding hospitals-within-hospitals do 

not sufficiently protect the Medicare 

program from the problems that we 

envisioned in the September 1, 1994 

final rule. We also question 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 have intermingled 

corporate interests so that the corporate 

distinctness has been lost. 

In corporate law, several standards are 

used to determine how much 

separateness is sufficient for a corporate 

autonomy to be recognized. The courts 

have applied a number of tests and 

considered a number of factors in 

determining when a parent corporate 

autonomy is liable for the acts of its 

subsidiary, including the parent 

corporate autonomy’s exercise of control 

over the decisionmaking of the 

subsidiary; the subsidiary’s actions as 

an alter ego of the parent corporate 

autonomy, such that recognition of a 

distinct corporate entity would lead to 

fraud or an injustice or would defeat 

public policy and the interrelatedness of 

operations. While we do not believe that 

it is necessary to apply any single test 

that might be used in the context of 

assigning liability, we believe that some 

of the same considerations apply when 

trying to determine whether there is 

functional separateness among related 

or affiliated organizations. 

The requirement for separate 

governing bodies, separate medical 

boards, separate medical officers, and 

separate chief executive officers in colocated hospitals under the same 

ownership does not prevent, on a 

practical level, the establishment of 

admission, treatment, and discharge 

policies that maximize payments. Some 

of these co-located facilities are under 

common ownership, either nonprofit or 

for profit, and, therefore, the payments 

generated from care delivered at both 

settings affect their mutual interests. 

Even when the hospital-within-ahospital and the host hospital are 

separately owned, we believe that there 

may be incentives to prematurely 

discharge patients to a postacute care 

setting in spite of the fact that the acute 

care hospital could continue to provide 

the appropriate level of care. We find 

this situation even more troubling 

regarding LTCHs, in particular, because 

LTCHs are certified as acute care 

hospitals and the sole statutory and 

regulatory distinction between LTCHs 

and acute care hospitals is the greater 

than 25-day average length of stay 

criterion at § 412.23(e)(2). In many parts 

of the country, there are no LTCHs and 

appropriate care for patients who could 

otherwise be treated in LTCHs is being 

delivered in acute care hospitals, often 

followed by postacute care at SNFs. 

Because a similar level of care is often 

available in either an acute care hospital 

or a LTCH, we believe that, when an 

acute care hospital and a LTCH are colocated, there are significant 

inducements for patients to be moved to 

the provider setting that generates the 

highest Medicare payments.

This movement of patients is 

facilitated by the fact of co-location 

because, rather than arranging for the 

patient to be admitted to another offsite 

facility and transporting the patient by 

ambulance to another hospital, all that 

may actually be required to ‘‘discharge’’

the patient from one hospital and admit 

the patient to another is wheeling the 

patient down the hall or on and off an 

elevator. 

Although co-location of Medicare 

providers, at best, may embody the 

positive economic benefits of sharing 

expensive medical equipment and 

provide a measure of convenience for 

patient families, at worst, co-location 

and patient-shifting can serve to 

undermine the basic premise of the IPPS 

DRG classification system and generate 

inappropriate Medicare payments. This 

is the case because payment for specific 

diagnoses is determined by setting DRG 

weights that represent a national 

averaging of hospital costs for each 

diagnosis. In addition, the Federal 

standardized payment amount was 

based on the average cost of a patient 

across all 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 a higher cost patient to a 

postacute 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 would 

recoup larger payments from the 

Medicare system than is intended under 

the DRG system because the course of 

acute treatment has not been completed. 

At the same time, 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 colocation. 

We believe that the 15-percent policy 

is being sidestepped through creative 

corporate reconfigurations. Therefore, if 

the LTCH is nominally complying with 

the 15-percent requirement, it has not 

been required to meet the basic hospital 

function requirements at existing 

§ 412.22(e)(5)(iii). Thus, it is free to 

accept even 100 percent of patients from 

the onsite host, and share the same basic 

hospital functions as the host. Reliance 

on meeting the 15-percent criterion has 

enabled the creation of LTCH hospitalswithin-hospitals that rely upon 

affiliated entities both for their 

operations and for their patient referrals. 

This results in a situation very similar 

to the hospital-within-hospital serving 

as a LTCH unit of the acute care 

hospital, which is precluded by the 

statute. 

28326 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

One of the reasons we are proposing 

revisions to the existing criteria for 

hospitals-within-hospital is because we 

believe that determining whether a 

hospital has complied with the 15-

percent criterion is burdensome for a 

fiscal intermediary on an ongoing basis. 

Presently, review of corporate 

arrangements represents a snapshot in 

time that may assess a particular set of 

business transactions but does not 

provide relevant details to reveal the 

extent of the unity of interests between 

the parties over time. Further, the 

widespread existence of such complex 

configurations, as well as the ongoing 

creation of new business arrangements, 

convinces us that a hospital-within-ahospital’s compliance with 

§ 412.22(e)(5)(ii) may be fluid, 

unreliable, or, in some cases, 

nonexistent. 

Another reason we are proposing 

revisions to the existing criteria for 

hospitals-within-hospitals because the 

concerns that we expressed in 1994 and 

1995, when excluded hospitals were 

paid under the reasonable cost-based 

TEFRA system, are even more 

compelling with the implementation of 

PPSs for LTCHs and IRFs, because now 

one episode of care for a beneficiary 

could generate two full Medicare 

prospective payments, one under the 

IPPS, and another under the applicable 

excluded hospital PPS. In addition, the 

substantial increase in the number of 

hospitals-within-hospitals adds further 

urgency to reevaluation of the existing 

hospital-within-a-hospital policies. 

Therefore, it is incumbent upon us to 

revise our regulations in order to offer 

the greatest possible protection against 

potential abuses. 

Accordingly, for qualification 

purposes, we are proposing to delete the 

15-percent criterion at § 412.22(e)(5)(i) 

and the rarely elected criterion at 

§ 412.22(e)(5)(i) that requires the 

hospital-within-a-hospital to perform 

basic hospital functions, which includes 

nursing services, medical records, 

pharmacy services, radiology, laboratory 

services, infection control, and 

discharge planning, through the use of 

employees or under contracts or other 

agreements with entities other than the 

host hospital or a third entity that 

controls them both. Because we believe 

that efficient use of excess space at a 

hospital and the sharing of medical 

facilities and services may represent the 

strongest argument for the existence of 

hospitals-within-hospitals, from the 

standpoint of efficiency and cost 

reduction, we do not believe that these 

criteria should be maintained. 

We are proposing that all hospitalswithin-hospitals would be required to 

comply only with the criterion set forth 

at the existing § 412.22(e)(5)(iii), which 

requires that at least 75 percent of the 

admissions to the hospital-within-ahospital be referred from a source other 

than the host hospital. We believe that 

this ‘‘functional separateness’’ test (62 

FR 46014, August 29, 1997) directly 

addresses our concern that the excluded 

hospital not function either as a vehicle 

to generate more favorable Medicare 

reimbursement for each provider or as a 

de facto unit. Compliance with the 75-

percent criterion is a requirement that 

we can verify without the involvement 

of corporate attorneys and a yearly 

reevaluation of corporate documents 

and transactions. The goal of the 

proposed provisions is to diminish the 

possibility that a hospital-within-ahospital could actually be functioning 

as a unit of an acute care hospital and 

generating unwarranted payments under 

the much more costly LTCH PPS. 

Therefore, under our proposed policy, 

a hospital must demonstrate that it has 

a separate governing body, a separate 

chief medical officer, and a separate 

chief executive officer, and that at least 

75 percent of its admissions originate 

from a source other than its host 

hospital, in order to be totally excluded 

from the IPPS. Fiscal intermediaries 

would reevaluate compliance with these 

regulations annually. In implementing 

our belief that separation and control 

can best be objectively determined by 

limiting compliance to the 75-percent 

criterion as the single ‘‘performance of 

hospital functions’’ test, we are 

proposing several policy options that 

are detailed below that, if not met, 

notwithstanding compliance with the 

separate governance and control 

requirements under existing 

§ 412.22(e)(1) through (4), could result 

in the either total discontinuance of 

IPPS-exclusion payment status or 

Medicare payment adjustments for 

hospital-within-a-hospital patients from 

the host hospitals.

As noted above, DRG weights and 

hence payments under the IPPS are 

established annually based on the 

average concept that recognizes that, for 

patients with a particular diagnosis, 

some will stay longer and consume 

more hospital resources than expected, 

while others will have shorter, less 

costly stays. Under the IPPS, a full DRG 

payment is triggered on the first day of 

admission to the acute care hospital. 

Medicare adopted an IPPS transfer 

policy at § 412.4(b) in order to pay 

appropriately for cases that were 

discharged to other IPPS hospitals prior 

to the hospitals delivering full treatment 

to a beneficiary. We also promulgated 

the postacute care transfer policy at 

§§ 412.4(c) and (d) to discourage 

premature transfers or discharges from 

IPPS hospitals for particular DRGs to 

postacute care settings, including 

LTCHs (63 FR 40977, July 31, 1998, 68 

FR 45469, August 1, 2003). The issues 

that we addressed in formulating the 

acute and postacute care transfer 

policies are similar to those we are 

raising as our present concerns: that the 

incentives of the IPPS could result in 

acute care hospitals shifting a portion of 

the cost of services that should 

reasonably be treated in that setting to 

other providers; that the acute care 

hospitals would still collect a full DRG 

payment under the IPPS for less than a 

full course of treatment; and that an 

additional and unnecessary Medicare 

payment would be made to the second 

provider. We believe that the potential 

for linking clinical decisions to the 

highest Medicare payments is even 

stronger when the acute care hospital 

and a postacute care provider are colocated and, even more so, if they are 

also under common ownership. 

Therefore, we are also proposing to 

revise § 412.22(e), effective October 1, 

2004, to preclude common ownership 

(wholly or in part) of hospitals-withinhospitals and host hospitals (proposed 

new § 412.22(e)(2)(ii)). However, we are 

also proposing to ‘‘grandfather’’ those 

hospitals-within-hospitals that were 

under common ownership with their 

host hospitals prior to June 30, 2004, 

and to continue to pay them as hospitals 

excluded from the IPPS, as long as they 

comply with the existing control criteria 

at § 412.22(e)(1) through (4) (as set forth 

in proposed new § 412.22(e)(2)(i)) and 

with the proposed mandatory 75-

percent criterion (as set forth in 

proposed new § 412.22(e)(2)(iii)). 

In addition, in this proposed rule, we 

are presenting, for public comment, 

three payment options that we believe 

would diminish the possibility of a 

hospital-within-a-hospital actually 

functioning as a unit of an acute care 

hospital and at the same time generating 

unwarranted payments under the more 

costly LTCH PPS. 

Option 1. Under the first option, as 

discussed earlier, in order for a hospitalwithin-a-hospital to receive payment as 

an IPPS-excluded hospital, we are 

proposing to retain as the only 

qualifying criterion that the hospitalwithin-a-hospital have at least 75 

percent of its admissions from a source 

other than the host hospital (existing 

§ 412.22(e)(5)(iii)). The hospital-withina-hospital would still be required to 

demonstrate that it meets the 

separateness and control criteria at 

§ 412.22(a). Under this option, a 

hospital-within-hospital that admitted 

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more than 25 percent of its patients 

from the host hospital would not be 

paid as an IPPS-excluded hospital for 

any of its patients. The hospital or unit 

that does not meet the criteria under 

this option would receive payment as an 

acute care hospital for all of its patients. 

As stated earlier, we believe that 

compliance with the 75-percent 

criterion under this option is a 

requirement that fiscal intermediaries 

would be able to evaluate annually in an 

efficient manner without the 

involvement of corporate attorneys and 

a yearly reevaluation of corporate 

documents and transactions. Further, 

we believe that this option would 

ensure increased protections to the 

Medicare program and greatly diminish 

opportunities for maximizing Medicare 

payments under the PPS. 

Option 2. Under the second option, as 

proposed earlier, we would require the 

hospital to meet the existing qualifying 

75-percent criterion under 

§ 412.22(e)(5)(iii). However, under this 

option, we would allow a hospitalwithin-a-hospital that failed to meet the 

75-percent criterion to be excluded from 

the IPPS to be paid as a PPS-excluded 

hospital only for the patients admitted 

to the hospital-within-a-hospital from 

providers other than the host hospital. 

For example, no payments would be 

made to a LTCH for those patients that 

had been transferred to the LTCH from 

the host hospital because it failed to 

meet this criterion. Payments for 

patients referred from the host acute 

care hospital would only be paid to the 

host under the IPPS. We would treat 

services provided by the hospitalwithin-a-hospital as services furnished 

‘‘under arrangement.’’ Therefore, in 

keeping with our existing policy at 

§ 411.15(m) that restricts separate 

Medicare payment to hospital services 

furnished under arrangements, we 

would make payment only to the acute 

care hospital from which the patients 

were referred for ‘‘under arrangements’’

furnished by the hospital-within-ahospital. 

Option 3. Under the third option, as 

proposed earlier, we would require that 

the hospital-within-a-hospital must 

meet the existing qualifying 75-percent 

criterion under § 412.22(e)(iii). 

However, under this option, we would 

pay the hospital-within-a-hospital 

directly for services, even for services 

provided to patients admitted to the 

hospital-within-a-hospital from the colocated acute care hospital. However, 

the payment to the hospital-within-ahospital for those patients would be the 

lesser of what would be paid under the 

IPPS for that DRG, or what would be 

paid to the hospital-within-a-hospital 

under the applicable excluded hospital 

payment system. Payments to the 

hospital-within-a-hospital for patients 

admitted to the hospital-within-ahospital from another hospital that was 

not the co-located hospital would be 

made under the hospital-within-ahospital payment system with no 

adjustment. Therefore, for example, a 

LTCH that was a hospital-within-ahospital and failed to meet the 75-

percent criterion would be paid the 

lesser of the IPPS payment or the LTCH 

PPS payment for its patients that were 

admitted from its host hospital. 

However, for patients admitted from 

other hospitals, the LTCH hospitalwithin-a-hospital would be paid under 

the LTCH PPS with no adjustment. 

We believe that adoption of any of 

these three options is within the broad 

discretion conferred on the Secretary by 

section 123 of Public Law 106–113 

(BBRA) and by section 307 of Public 

Law 106–554 (BIPA), which grant the 

Secretary the authority to develop a per 

discharge PPS for payment of inpatient 

hospital services by LTCHs and to 

provide for appropriate adjustments to 

the LTCH PPS. 

We are proposing to revise the 

existing separateness and control 

regulations at § 412.22(e) for hospitalswithin-hospitals and to require that in 

order to be excluded from the IPPS, all 

hospitals-within-hospitals must admit 

no more than 25 percent of their 

patients from the onsite host hospital. 

We are also proposing to preclude 

common ownership of host hospitals 

and excluded hospitals, while 

grandfathering existing hospitalswithin-hospitals and hosts that are 

under common ownership, as long as 

they comply with the proposed 

mandatory 75-percent criterion. We are 

further seeking comments on the 

options presented if the hospital-withina-hospital fails to meet the 75-percent 

criterion that would either require that 

all of the hospital’s Medicare payment 

would be made under the IPPS or, 

alternatively, to allow a hospital-withina-hospital to still be paid as an excluded 

hospital for its admissions from onsite 

providers while applying specific 

payment adjustments for patients 

admitted from the host hospital. 

We are soliciting comments on the 

three options presented and whether 

they provide sufficient protection 

against the phenomenon of inadequate 

separateness and control as described in 

this proposed rule. We want to 

emphasize that, under any of the 

options, nowhere is a change in 

physician clinical decisionmaking or a 

change in the manner in which a 

physician or hospital practices medicine 

intended. The policy options outlined 

in this proposed rule would simply 

address the appropriate level of 

payments once those decisions have 

been made. 

Technical Change. In § 412.22(e) of 

our regulations, we refer to a hospitalwithin-a-hospital as a hospital that 

‘‘occupies space in a building also used 

by another hospital, or in one or more 

entire buildings located on the same 

campus as buildings used by another 

hospital’’ (emphasis added). The 

reference to ‘‘entire’’ buildings is 

incorrect. We should have referred to 

‘‘separate’’ buildings. Therefore, we are 

proposing to correct this error.

C. Critical Access Hospitals (CAHs) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Critical Access Hospitals’’ at the 

beginning of your comment.] 

1. Background 

Section 1820 of the Act provides for 

the establishment of Medicare Rural 

Hospital Flexibility Programs, under 

which individual States may designate 

certain facilities as critical access 

hospitals (CAHs). Facilities that are so 

designated and meet the CAH 

conditions of participation in 42 CFR 

Part 485, Subpart F, will be certified as 

CAHs by CMS. Regulations governing 

payments to CAHs for services to 

Medicare beneficiaries are located in 42 

CFR Part 413. 

2. Payment Amounts for Inpatient CAH 

Services (Section 405(a) of Public Law 

108–173 and §§ 413.70 and 413.114 of 

the Regulations) 

Prior to the enactment of Public Law 

108–173, section 1814(l) of the Act 

provides that the Medicare payment 

amount for inpatient services furnished 

by a CAH is the reasonable costs of the 

CAH in providing the services. Section 

1834(g)(1) of the Act provides that the 

Medicare amount of payment for 

outpatient services furnished by a CAH 

is made on a reasonable cost basis, 

unless the CAH makes an election, 

under section 1834(g) of the Act, to 

receive a payment amount that is the 

sum of the reasonable cost of hospital 

outpatient facility services plus 115 

percent of the amount otherwise paid 

for professional services. Section 

1883(a)(3) of the Act provides for 

payment to a CAH for covered skilled 

nursing facility services furnished under 

an agreement entered into under section 

1883 of the Act on the basis of the 

reasonable costs of such services. 

Regulations implementing these 

provisions are set forth in § 413.70(a), 

for inpatient CAH services; in 

28328 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

§ 413.70(b), for payment under the 

standard method for the reasonable 

costs of facility services, and outpatient 

CAH services; in § 413.70(b)(3), for the 

optional method of payment for 

outpatient services (reasonable costs for 

facility services plus fee schedule for 

professional services); and in § 413.114, 

for SNF services of a CAH with a swingbed agreement. 

Section 405(a) of Public Law 108–173 

amended sections 1814(l), 1834(g)(1), 

and 1883(a)(3) of the Act to provide 

that, effective for services furnished 

during cost reporting periods beginning 

on or after January 1, 2004, the amount 

of the payment for inpatient, outpatient, 

and SNF services, respectively, 

furnished by a CAH is equal to 101 

percent of the reasonable cost of the 

CAH in providing these services. 

We are proposing to revise 

§§ 413.70(a)(1), (b)(2), and (b)(3) and 

§ 413.114 of our regulations to 

incorporate the change in the payment 

percentage made by section 405(a) of 

Public Law 180–173. We also are 

proposing to make a technical 

correction to § 413.70(b)(2)(i) to remove 

paragraphs (b)(2)(i)(C) and (D). We are 

proposing to delete these paragraphs to 

conform the regulations to provisions of 

the outpatient hospital PPS. 

We note that in the IPPS final rule 

published in the Federal Register on 

August 1, 2001 (66 FR 39936), we added 

a new paragraph (a)(1)(iv) to § 413.70. 

However, when the change was 

incorporated into the Code of Federal 

Regulations, paragraphs (a)(1)(i), 

(a)(1)(ii), and (a)(1)(iii) were 

inadvertently omitted. Our proposed 

revision of § 413.70(a)(1) would correct 

the omission of these three paragraphs. 

3. Condition for Application of Special 

Professional Service Payment 

Adjustment (Section 405(d) of Public 

Law 108–173 and § 413.70(b) of the 

Regulations) 

As stated earlier, section 1834(g) of 

the Act provides for two methods of 

payment for outpatient CAH services. 

Under the provisions of section 1834(g) 

of the Act, a CAH will be paid under a 

reasonable cost method unless it elects 

payment under an optional method. 

Under the reasonable cost payment 

method, facility services are paid on a 

reasonable cost payment basis by the 

fiscal intermediary to the CAH, and 

physician and other professional 

services to CAH outpatients are paid for 

under the physician fee schedule, with 

payments being made by the carrier. 

Under the optional method (frequently 

referred to as ‘‘method 2’’), CAHs 

submit bills for both facility and 

professional services to the fiscal 

intermediary. If a CAH elects the 

optional method of billing for outpatient 

services, Medicare payment for its 

facility services are made at the same 

level as would apply under the 

reasonable cost reimbursement method, 

but services of professionals to 

outpatients are paid for at 115 percent 

of the amounts that would otherwise be 

paid for under the physician fee 

schedule. To make the optional method 

election feasible and to help prevent 

possible duplicate billing, we require 

practitioners furnishing services to 

outpatients of a CAH to agree to reassign 

to the CAH their rights to bill the 

Medicare program for those services. 

Existing regulations at § 413.70(b) set 

forth these payment options and specify 

that an election of the optional method, 

once made for a cost reporting period, 

remains in effect for all of that period 

and applies to all services furnished to 

CAH outpatients during that period. 

This means that, under existing 

regulations, a CAH may elect the 

optional method payment only if all of 

its practitioners agree to reassign their 

billing rights for outpatient services to 

the CAH. 

Section 405(d)(1) of Public Law 108–

173 amended section 1834(g)(2) of the 

Act by adding a sentence after 

paragraph (B) to specify that the 

Secretary may not require, as a 

condition for a CAH to make an election 

of the optional method of payment, that 

each physician or other practitioner 

providing professional services in the 

CAH must assign billing rights with 

respect to the services. However, the 

optional payment method does not 

apply to those physicians and 

practitioners who have not assigned 

such billing rights. In other words, 

section 405(d) amended the Medicare 

law to authorize CAHs to elect the 

optional payment method even if some 

practitioners do not reassign to the CAH 

their rights to bill for professional 

services to CAH outpatients. However, it 

also specifies that the 15-percent 

increase in payment for those services is 

not available for professional services 

for which billing rights are not 

reassigned. 

The provisions of section 405(d)(1) of 

Public Law 108–173 are effective for 

cost reporting periods beginning on or 

after July 1, 2004. However, section 

405(d)(2)(B) also states, in a special rule 

of application, that in the case of a CAH 

that made an election before November 

1, 2003, the provisions of section 

405(d)(1) are effective for cost periods 

beginning on or after July 1, 2001. 

Consistent with section 405(d)(2)(B), 

we do not intend to attempt recovery of 

certain amounts paid improperly in the 

past to CAHs for professional services 

that the CAHs billed under the optional 

payment method, even though the CAHs 

had not obtained reassignments of 

billing rights from all physicians and 

other practitioners furnishing 

professional services to their 

outpatients, as required by § 413.70 as 

in effect at that time. However, we are 

proposing to clarify that the special rule 

of application in section 405(d)(2)(B) is 

not to be interpreted to permit a CAH 

to obtain payment under the optional 

payment method for any cost reporting 

period based on an election made for a 

prior period or on an optional payment 

method election that was withdrawn or 

revoked prior to the start of the cost 

reporting period for which it was made. 

To illustrate the application of section 

405(d)(2)(B), assume that on October 1, 

2002, a CAH elected method 2 for its 

cost reporting period starting on January 

1, 2003, but did not obtain 

reassignments from all physicians 

treating its outpatients, as required by 

regulations in effect at that time. Under 

section 405(d)(2)(B), CMS would not 

recover any amounts from the CAH for 

payments for services furnished during 

that cost reporting period (January 1, 

2003, through December 31, 2004) that 

are attributable to that election, even 

though the election was inappropriate at 

the time it was made. Assume further 

that the same CAH recognized its error 

and did not make a method 2 election 

for its cost reporting period beginning 

January 1, 2004, thus receiving payment 

under method 1. The fact that the 

election of October 1, 2002, was made 

prior to November 1, 2003, is not 

material in this case and cannot be 

interpreted to justify method 2 payment 

for the cost reporting period beginning 

January 1, 2004, because that method 2 

election related to an earlier cost 

reporting period and not to the cost 

reporting period beginning January 1, 

2004. The same result would occur if 

the CAH had elected method 2 on 

October 1, 2003, but subsequently 

revoked that election on October 15, 

2004.

We are proposing to revise 

§§ 413.70(b)(3)(i) to reflect the changes 

made by section 405(d) of Public Law 

108–173. We would specify in 

§ 413.70(b)(3)(i) that a CAH may elect to 

be paid for outpatient services in any 

cost reporting period beginning on or 

after July 1, 2004, under the method 

described in §§ 413.70(b)(3)(ii) and 

(b)(3)(iii). In § 413.70(b)(3)(i)(A), we 

would clarify that such an election is to 

be made at least 30 days before the start 

of the cost reporting period for which 

the election is made. In 

§ 413.70(b)(3)(i)(B), we would specify 

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that the provision applies to all services 

furnished to outpatients during that cost 

reporting period by a physician or other 

practitioner who has reassigned his or 

her rights to bill for those services to the 

CAH in accordance with the 

reassignment regulations under 42 CFR 

part 424, Subpart F. In that paragraph, 

we also would specify that if a 

physician or other practitioner does not 

reassign his or her billing rights to the 

CAH in accordance with 42 CFR Part 

424, Subpart F, payment for the 

physician’s or practitioner’s services to 

CAH outpatients will be made on a fee 

schedule or other applicable basis 

specified in 42 CFR Part 414, Subpart B. 

We would also add a new paragraph (C) 

to § 413.70(b)(3)(i) to state that, in case 

of a CAH that made an election under 

§ 413.70(b)(3) before November 1, 2003, 

for a cost reporting period beginning 

before December 1, 2004, the rules in 

paragraph (b)(3)(i)(B) are effective for 

cost reporting periods beginning on or 

after July 1, 2001. We are also proposing 

in § 413.70(b)(3)(i)(B) to clarify that an 

election effective only for any cost 

reporting period for which it was made 

for the optional method does not apply 

to an election that was withdrawn or 

revoked before the start of the cost 

reporting period for which it was made. 

4. Coverage of Costs for Certain 

Emergency Room On-Call Providers 

(Section 405(b) of Public Law 108–173 

and §§ 413.70(b)(4) and 485.618 of the 

Regulations) 

Under existing regulations at 

§ 413.70(b)(4), which implement section 

1834(g)(5) of the Act, Medicare 

payments to a CAH may include the 

costs of compensation and related costs 

of on-call emergency room physicians 

who are not present on the premises of 

a CAH, are not otherwise furnishing 

services, and are not on-call at any other 

provider or facility when determining 

the reasonable cost of outpatient CAH 

services. 

Section 405(b) of Public Law 108–173 

amended section 1834(g)(5) of the Act to 

expand the reimbursement of on-call 

emergency room providers beyond 

physicians to include physician 

assistants, nurse practitioners, and 

clinical nurse specialists for the costs 

associated with covered Medicare 

services furnished on or after January 1, 

2005. 

We are proposing to revise 

§ 413.70(b)(4)(i) and (ii) to include the 

expanded list of emergency room oncall providers for whom reimbursement 

for reasonable compensation and related 

costs in a CAH would be available. We 

also are making a conforming change to 

§ 485.618(d) governing the standard for 

emergency room personnel who are on 

call under the CAH conditions of 

participation. 

5. Authorization of Periodic Interim 

Payments for CAHs (Section 405(c) of 

Public Law 108–173 and Proposed 

§ 413.64(h)(2)(vi) and § 413.70(d) of the 

Regulations) 

Section 1815(e)(2) of the Act provides 

that payments may be made on a 

periodic interim payment (PIP) basis for 

specified covered Medicare services. 

Section 405(c)(1) of Public Law 108–173 

amended section 1815(e)(2) by adding a 

new subsection (E) to provide for 

payments for inpatient services 

furnished by CAHs on a PIP basis, 

effective for payments made on or after 

July 1, 2004. Section 405(c)(2) of Public 

Law 108–173 directs the Secretary to 

develop alternative methods for the 

timing of the payments under the PIP 

method. 

We have already established in 

existing regulations under § 413.64(h) 

provisions for making payments under 

the PIP method to providers for certain 

Medicare covered services. The 

principles and rules of § 413.64 have 

been incorporated into regulations 

governing payment on a PIP basis to 

acute care IPPS hospitals as well as to 

other providers, such as SNFs and 

LTCHs, that are paid on a prospective 

basis. We believe these principles and 

rules could be equally applied to CAHs. 

Therefore, in this proposed rule, to 

implement the provisions of section 

405(c) of Public Law 108–173, we are 

proposing to add a new 

§ 413.64(h)(2)(vi) to specify inpatient 

services furnished by CAHs as an 

additional type of covered service for 

which PIP is available, effective for 

payments made on or after July 1, 2004. 

It has been our longstanding policy 

under § 413.64(h)(6) that payment will 

be made biweekly under the PIP 

method, unless the provider requests a 

longer fixed interval (not to exceed 1 

month) between payments. We believe 

that this provision grants adequate 

flexibility for the timing of payments 

under the PIP method to all qualifying 

providers, including CAHs. Under our 

proposed policy for CAHs, if a CAH 

chooses to receive its payments less 

frequently than biweekly, it could 

inform its Medicare fiscal intermediary. 

Section 413.64(h)(6) does not provide 

for the payments to be made more 

frequently than biweekly to providers 

for which PIP is currently available. We 

believe this is equally appropriate for 

the payments for inpatient services 

furnished by CAHs.

In summary, we are proposing to 

apply the same rules and procedures for 

payments under the PIP method that we 

apply to acute care hospitals and certain 

other Medicare providers. Therefore, 

CAHs, in applying for and receiving 

payments for inpatient services under 

the PIP provision, would be operating 

under the same rules as other providers 

for which PIP is available under 

§ 413.64(h), including the flexibility 

discussed above of the timing of their 

payments as provided for under 

§ 413.64(h)(6). We also are proposing to 

establish a new paragraph (d) under 

§ 413.70 to provide that, for payments 

on or after July l, 2004, a CAH may elect 

to receive PIP for inpatient services 

furnished by CAHs, subject to the 

provisions of § 413.64(h). The new 

§ 413.70(d) summarizes the application 

of the PIP provisions under 

§ 413.64(h)(6) for CAH inpatient 

services and notes the availability of 

accelerated payments for CAHs that are 

not receiving PIPs. 

Technical Changes to § 413.64. We are 

proposing to use this opportunity to 

remove §§ 413.64(h)(3)(iv) and 

413.64(h)(4), which contain an outdated 

requirement that a provider must repay 

any outstanding current financing 

payments before being permitted to be 

paid under the PIP method. Current 

financing payments have not been 

available since 1973. 

6. Revision of the Bed Limit for CAHs 

(Section 405(e) of Public Law 108–173 

and §§ 485.620(a) and 485.645(a)(2) of 

the Regulations) 

Prior to the enactment of Public Law 

108–173, sections 1820(c)(2)(B)(iii) and 

1820(f) of the Act restricted CAHs to 15 

acute care beds and a total of 25 beds 

if the CAH had been granted swing-bed 

approval. The number of beds used at 

any time for acute care inpatient 

services could not exceed 15 beds. 

Section 405(e) of Public Law 108–173 

amended sections 1820(c)(2)(B)(iii) and 

1820(f) of the Act to allow CAHs a 

maximum of 25 acute care beds for 

inpatient services, regardless of the 

swing-bed approval. This amendment is 

effective on January 1, 2004 and applies 

to CAHs designated before, on, or after 

this date. However, section 405(e)(3) of 

Public Law 108–173 also notes that any 

election made in accordance with the 

regulations promulgated to carry out the 

bed size amendments only applies 

prospectively. 

We interpret this provision to mean 

that the increased bed size limitation is 

to be applied prospectively after April 1, 

2004, regardless of when the CAH was 

designated. Accordingly, we 

implemented this provision via a survey 

and certification letter on January 1, 

2004. (See Survey and Certification 

28330 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

Letter No. 0414, issued December 11, 

2003.) Therefore, effective January 1, 

2004, this provision allows any 

currently participating CAH, or 

applicant for CAH approval, to maintain 

up to 25 inpatient beds. If swing-bed 

approval has been granted, all 25 beds 

can be used interchangeably for acute 

care or swing-bed services. However, no 

CAH will be considered to have had 25 

acute care beds prior to January 1, 2004. 

We are proposing to amend our 

regulations at §§ 485.620(a) and 

485.645(a)(2) to reflect the increase in 

the number of beds permitted in a CAH, 

in accordance with the amendments 

made by section 405(e) of Public Law 

108–173. 

7. Authority To Establish Psychiatric 

and Rehabilitation Distinct Part Units of 

CAHs (Section 405(g)(1) of Public Law 

108–173 and Proposed New § 485.646 of 

the Regulations) 

As stated earlier, sections 

1820(c)(2)(B) and 1861(mm) of the Act 

set forth the criteria for designating a 

CAH. Under this authority, the 

Secretary has established in regulations 

the minimum requirements a CAH must 

meet to participate in Medicare (42 CFR 

Part 485, Subpart F). The CAH 

designation is targeted to small rural 

hospitals with a low patient census and 

short patient stays. 

Under the law in effect prior to Public 

Law 108–173, CAHs are excluded from 

operating distinct part units (that is, 

separate sections of hospitals that are 

dedicated to providing inpatient 

rehabilitation or psychiatric care and are 

paid under payment methods different 

from those used for the acute care areas 

of the hospitals). The statute (section 

1886(d)(l)(B) of the Act) and 

implementing regulations under 42 CFR 

Part 412, Subpart B require distinct part 

units to be units of ‘‘subsection (d) 

hospitals,’’ which are hospitals paid 

under the IPPS. Because CAHs are not 

‘‘subsection (d) hospitals’’ paid under 

IPPS, but instead are paid for inpatient 

care on a reasonable cost basis under 

section 1814(l) of the Act, they are 

effectively prohibited from having 

distinct part units. 

Section 405(g)(1) of Public Law 108–

173 modified the statutory requirements 

for CAHs under section 1814(l) and 

section 1820(c)(2) of the Act to allow 

CAHs to establish distinct part 

rehabilitation and psychiatric units of 

up to 10 beds each, which will not be 

included in the revised total 25 CAH 

bed count under section 405(e) of Public 

Law 108–173 (discussed in detail in 

section VI.D.6. of this preamble. In 

addition, as explained more fully below, 

the average 96-hour stay does not apply 

to the 10 beds in the distinct part units 

and inpatient admissions; days of 

inpatient care in these distinct part 

units are not taken into account in 

determining the facility’s compliance 

with the requirement for a facility-wide 

average length of stay that does not 

exceed 96 hours. 

Section 405(g)(1) of Public Law 108–

173 provides under section 

1820(c)(2)(E)(i) of the Act that a distinct 

part rehabilitation or psychiatric unit of 

a CAH must meet the conditions of 

participation that would otherwise 

apply to the distinct part unit of a 

hospital if the distinct part unit were 

established by a subsection (d) hospital 

in accordance with the matter following 

clause (v) of section 1886(d)(1)(B) of the 

Act, including any applicable 

regulations adopted by the Secretary. 

CAHs will now be permitted to operate 

distinct-part psychiatric and 

rehabilitation units, and it is clear that 

the law, consistent with this change, 

requires the same level of health and 

safety protection for patients in distinct 

part units of a CAH that is currently 

required for patients in distinct part 

units operated by an acute care hospital. 

The amendments to section 405(g)(1) 

are effective for the cost reporting 

periods beginning on or after October 1, 

2004. 

As CAHs were excluded from 

operating distinct part units prior to the 

enactment of section 405(g), the CAH 

conditions of participation did not 

address the necessary requirements and 

standards for operating such units. As 

noted previously, section 

1820(c)(2)(E)(i) of the Act makes it clear 

that the requirements, including 

conditions of participation, for 

operating these units in a CAH are to be 

the same as is currently required for 

these units operated by an acute care 

hospital. Accordingly, we are proposing 

that, in accordance with the 

requirements of section 405(g), a 

rehabilitation or psychiatric distinct 

part unit of a CAH must meet all of the 

hospital conditions of participation at 

42 CFR Part 482, Subparts A, B, C, and 

D and the criteria for exclusion from the 

IPPS at 42 CFR Part 412 as described 

below. These requirements will only 

apply to the services provided in the 

distinct part unit of a CAH and not the 

entire CAH.

Currently, psychiatric distinct part 

units of hospitals are subject to specific 

Medicare regulations established in 42 

CFR 412.27 regarding the types of 

patients admitted, the scope of services 

furnished, and the qualifications of staff. 

For example, psychiatric distinct part 

units may admit only patients whose 

condition requires inpatient hospital 

care for a psychiatric principal 

diagnosis. The regulations at § 412.27(b) 

further requires a hospital that wishes to 

establish a psychiatric distinct part unit 

to furnish, through the use of qualified 

personnel, psychological services, social 

work services, psychiatric nursing, and 

occupational and recreational therapy. 

The hospital must maintain medical 

records for the unit that permit 

determination of the degree and 

intensity of services to individuals 

treated in the unit. Inpatient psychiatric 

services must be under the supervision 

of a clinical director, service chief, or 

equivalent who is qualified to provide 

the leadership required for an intensive 

treatment program, and who is board 

certified in psychiatry (42 CFR 

412.27(d)(2)). The distinct part unit 

must have a director of social services, 

a qualified director of psychiatric 

nursing services who is a registered 

nurse with a master’s degree in 

psychiatric or mental health nursing, or 

its equivalent from an accredited school 

of nursing, or is qualified by education 

and experience in the care of 

individuals with mental illness. There 

must also be an adequate number of 

registered nurses to provide 24-hour 

coverage as well as licensed practical 

nurses and mental health workers. 

These and other applicable 

requirements are set forth in greater 

detail in § 412.27. 

Rehabilitation distinct part units of 

hospitals are currently subject to criteria 

in 42 CFR 412.29. This section specifies 

that such a unit must meet either the 

requirements for new units (§ 412.30(a)) 

or those for existing units (§ 412.30(c)). 

In addition, the units must furnish 

through qualified personnel 

rehabilitation nursing, physical and 

occupational therapy, and as needed, 

speech therapy and social services or 

psychological services, and orthotics 

and prosthetics. The unit must have a 

director of rehabilitation services who is 

trained or experienced in medical 

management of inpatients who require 

rehabilitation services and is a doctor of 

medicine or a doctor of osteopathy. 

Rehabilitation distinct part units may 

treat only patients likely to benefit 

significantly from an intensive inpatient 

program, utilizing services such as 

physical, occupational, or speech 

therapy. These and other applicable 

requirements are set forth in greater 

detail in §§ 412.29 and 412.30. 

To implement the requirements of 

section 1820(c)(2)(E)(i) of the Act, as 

added by section 405(g)(1) of Public 

Law 108–173, we are proposing to add 

a new § 485.647 to 42 CFR Part 485, 

Subpart F. In proposed § 485.647(a)(1), 

we would specify that if a CAH provides 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28331

inpatient psychiatric services in a 

distinct part unit, the services provided 

in that unit must comply with the 

hospital requirements specified in 

Subparts A, B, C, and D of Part 482, 

with the common requirements for 

IPPS-excluded units in § 412.25(a)(2) 

through (f), and with the additional 

requirements of § 412.27 for psychiatric 

units excluded from the IPPS. In 

proposed § 485.647(a)(2), we would 

specify that if a CAH provides inpatient 

rehabilitation services in a distinct part 

unit, the services provided in that unit 

must comply with the hospital 

requirements specified in Subparts A, B, 

C, and D of Part 482, with the common 

requirements for IPPS-excluded units in 

§ 412.25(a)(2) through (f), and with the 

additional requirements of §§ 412.29 

and 412.30, which relate specifically to 

rehabilitation units excluded from the 

IPPS. To provide for consistent 

application of section 405(g)(1) and 

avoid any confusion, we also are 

proposing to revise § 412.22, which 

contains the common requirements for 

excluded hospital units, to state that, for 

purposes of 42 CFR Part 412, Subpart B, 

the term ‘‘hospital’’ includes a CAH. 

As noted earlier, sections 

1820(c)(2)(E)(ii) and (c)(2)(E)(iii) of the 

Act, as added by section 405(g)(1) of the 

MMA, provide that each distinct part 

unit of a CAH may have up to 10 beds 

and that, in determining the number of 

beds a CAH has for purposes of 

compliance with the 25-bed limit 

described earlier, the beds in a distinct 

part unit are not to be taken into 

account. We interpret the exclusion of 

these beds from consideration for 

purposes of the 25-bed limit as also 

indicating that the admissions and 

lengths of stay in distinct part unit beds 

are not to be considered in determining 

the facility-wide average length stay of 

a CAH for purposes of the 96-hour 

limitation on CAH’s average length of 

inpatient stay. These rules would be 

codified in paragraphs (b)(1) through 

(b)(3) of proposed § 485.647. 

Section 1820(c)(2)(E)(iv) of the Act, as 

added by section 405(g)(1) of Public 

Law 108–173, imposes severe sanctions 

on CAHs that fail to operate their 

distinct part units in compliance with 

applicable requirements. That section 

states that if a psychiatric or 

rehabilitation unit of a CAH does not 

meet the requirements of section 

1820(c)(2)(E)(i) with respect to a cost 

reporting period, no payment may be 

made to the CAH for services furnished 

in that unit for that period. Payment to 

the CAH for services in the unit may 

resume only after the unit has 

demonstrated to CMS that the unit 

meets the requirements of § 485.645. We 

are proposing to codify this requirement 

by adding a new paragraph (g) to 

§ 412.25.70, which contains the 

common requirements for excluded 

units. 

Section 405(g)(1) of Public Law 108–

173 amended section 1814(l) of the Act 

by adding a new paragraph (2) to that 

provision. New section 1814(l)(2) states 

that, in the case of a distinct-part 

psychiatric or rehabilitation unit of a 

CAH, the amount of payment for 

inpatient CAH services of such a unit is 

to equal the amount that would be paid 

if these services were inpatient hospital 

services of a psychiatric or 

rehabilitation unit, respectively, of the 

kind described in the matter following 

clause (v) of section 1886(d)(1)(B) of the 

Act. To implement the requirements of 

section 1814(1)(2) of the Act, we are 

proposing that, for CAHs that establish 

rehabilitation or psychiatric distinct 

part units, or both, in their facility, 

Medicare payment for inpatient services 

provided in those units would be made 

under the applicable existing payment 

methodology described below for IRFs 

and IPFs. 

Presently, IRFs are paid under a per 

discharge PPS that became effective for 

cost reporting periods beginning on or 

after January 1, 2002. The regulations 

governing the IRF PPS are located under 

42 CFR Part 412, Subpart P (§§ 412.600 

through 412.632). 

At this time psychiatric hospitals and 

units that are excluded from the IPPS 

are paid for their inpatient operating 

costs on a reasonable cost basis, subject 

to a hospital-specific limit. However, as 

required by statute, a per diem PPS for 

Medicare payments for inpatient 

hospital services furnished in 

psychiatric hospitals and units (referred 

to as inpatient psychiatric facilities 

(IPFs)) was proposed in the Federal 

Register on November 28, 2003 (68 FR 

66920). We are in the process of 

developing the final rule for this 

proposed rule. When finalized, the IPF 

PPS will replace the reasonable cost 

based payment system currently in 

effect. 

To clarify the requirements of section 

1814(1)(2) of the Act regarding payment 

for inpatient CAH services of a distinct 

part psychiatric or rehabilitation unit of 

a CAH, we are proposing to revise the 

title and first sentence of paragraph 

(a)(1) of § 413.70, and to add a new 

paragraph (a)(4) to that section, to 

clarify that payment for inpatient 

services of a CAH distinct part unit is 

not made in accordance with the 

otherwise applicable rules for payment 

for inpatient CAH services, but under 

other rules described in new § 413.70(e). 

We propose also in new paragraph 

§ 413,70(e), that payment for inpatient 

services of distinct part rehabilitation 

units of CAHs is made in accordance 

with regulations governing the IRF PPS 

at 42 CFR Part 412, Subpart F 

(§§ 412.600 through 412.632). We also 

would state that payment for inpatient 

services of distinct part psychiatric 

units of CAHs is made in accordance 

with regulations governing IPPSexcluded psychiatric units of hospitals 

at 42 CFR 413.40. 

8. Waiver Authority for Designation of 

a CAH as a Necessary Provider 

Section 405(h) of Public Law 108–173 

amended section 1820(c)(B)(i)(II) of the 

Act by adding language that terminates 

a State’s authority to waive the location 

requirement for a CAH by designating 

the CAH as a necessary provider, 

effective January 1, 2006. Currently, a 

CAH is required to be located more than 

a 35-mile drive (or in the case of 

mountainous terrain or secondary roads, 

a 15-mile drive) from a hospital or 

another CAH, unless the CAH is 

certified by the State as a necessary 

provider of health care services to 

residents in the area. Under this 

provision, after January 1, 2006, States 

will no longer be able to designate a 

CAH based upon a determination it is a 

necessary provider of health care. 

In addition, section 405(h) of Public 

Law 108–173 amended section 1820(h) 

of the Act to include a grandfathering 

provision for CAHs that are certified as 

necessary providers prior to January 1, 

2006. Under this provision, any CAH 

that is designated as a necessary 

provider in its State’s rural health plan 

prior to January 1, 2006, will be 

permitted to maintain its necessary 

provider designation.

In this proposed rule, we are 

proposing to revise our regulations at 

§ 485.610(c) to incorporate the 

amendments made by section 405(h) of 

Public Law 108–173. 

9. Payment for Clinical Diagnostic 

Laboratory Tests 

Medicare payment for clinical 

diagnostic laboratory tests provided to 

the outpatients of CAHs was established 

through the regulatory process and 

published in the Federal Register as 

part of the FY 2004 IPPS final rule (68 

FR 45346, August 1, 2003). Payment to 

a CAH for clinical diagnostic laboratory 

tests for outpatients is made on a 

reasonable cost basis only if the 

individuals for whom the tests are 

performed are outpatients of the CAH 

and are physically present at the CAH 

at the time specimens are collected. 

Otherwise, payment for these tests is 

made on a fee schedule basis. 

28332 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

We published this final rule to clarify 

our policy in this area and ensure that 

all relevant issues were publicly noted. 

For reasons which are set forth in detail 

in the FY 2004 IPPS final rule, we do 

not agree that providing reasonable cost 

payment to individuals who are not 

present at the CAH when the specimen 

is collected is appropriate. We believe 

that extending reasonable cost payment 

in these instances is inconsistent with 

Medicare law and regulations and 

duplicates existing coverage. It also 

creates confusion for beneficiaries and 

others by blurring the distinction 

between CAHs and other types of 

providers (for example, SNFs and 

HHAs) and increases the costs of 

providing care to Medicare patients 

without enhancing either the quality or 

the availability of that care. 

Following publication of the FY 2004 

IPPS final rule, we received a number of 

letters and statements in Open Door 

Calls indicating that some commenters 

continue to believe that this policy will 

impose a hardship on Medicare 

beneficiaries in rural areas. Several of 

these commenters argued that it might 

cause frail elderly nursing home 

patients to have to be moved to a CAH 

to have blood drawn or other specimen 

collection performed instead of sending 

a laboratory technician to the patient’s 

bedside for the same purpose. We agree 

with the commenters that this would 

not be an appropriate result. However, 

we would note that there are also 

alternative ways in which specimen 

collection and travel are payable under 

Medicare (for example, the laboratory 

benefit under Part B or HAAs that have 

laboratory provider numbers). 

Therefore, we do not expect 

beneficiaries to face reduced access to 

services under this policy. 

In response to continuing claims of 

potential access problems, we invited 

commenters to submit further, more 

specific comments that provide specific 

information on actual, rather than 

merely potential or anticipated access 

problems. In response, we received 

many communications asserting that 

these problems would occur, but no 

credible documentation that they 

actually are occurring. As a result of 

these responses, we are not proposing 

any further change in policy on this 

issue at this time. We would like to 

renew our request for specific, verifiable 

documentation as to any actual access 

problems being generated by this policy, 

and will review carefully any such 

documentation we receive to determine 

whether current policy should be 

reconsidered. 

10. Proposed Technical Changes in Part 

489

In several sections of Part 489, we 

have discovered a need to update crossreferences to conform them to the 

redesignation of the Medicare transfer 

rules from § 489.24(d) to § 489.24(d). 

Specifically, we are proposing to correct 

the cross-reference to ‘‘§ 489.24(d)’’ in 

§§ 489.20(m) and 489.53(b)(2) to read 

‘‘§ 489.24(e)’’. 

VII. Proposed Changes to the Disclosure 

of Information Requirements for 

Quality Improvement Organizations 

(QIOs) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Quality Improvement Organizations’’

at the beginning of your comment.] 

A. Background 

Section 1152 of the Act defines a 

utilization and quality control peer 

review organization (now referred to as 

a quality improvement organization 

(QIO)). Section 1153 provides for 

contracts with such organizations to 

review items and services furnished by 

physicians, other practitioners, and 

providers to Medicare patients to verify 

that the items and services are 

reasonable, medically necessary, and 

allowable under the Act; meet 

professionally recognized standards of 

health care; and are furnished in the 

appropriate setting. Section 1154 of the 

Act outlines the functions of a QIO, 

which include responsibility for: (1) 

Collecting and maintaining information 

necessary to carry out its 

responsibilities; (2) examining pertinent 

records maintained by the practitioner 

or provider verifying the medical 

necessity and quality of services 

provided by any practitioner or provider 

of health care services to Medicare 

patients; (3) ensuring that health care 

practitioners and providers maintain 

evidence of medical necessity and 

quality of health care services provided 

to Medicare patients; and (4) exchanging 

information with intermediaries, 

carriers, and other public or private 

review organizations as appropriate. 

Section 1160 of the Act provides that 

information acquired by QIOs in the 

exercise of their duties and functions 

must be held in confidence. Information 

cannot be disclosed except as allowed 

under section 1160 of the Act and the 

existing regulations governing the 

release of QIO peer review information 

in 42 CFR Part 480. Specifically, Part 

480 sets forth the policies and 

procedures for disclosure of information 

collected, acquired, or generated by a 

QIO (or the review component of a QIO 

subcontractor) in the performance of its 

responsibilities under the Act and the 

Medicare regulations, as well as the 

acquisition and maintenance of 

information needed by a QIO to comply 

with its responsibilities under the Act. 

QIOs assist institutions and 

practitioners seeking to improve the 

quality of care given to Medicare 

beneficiaries. CMS aims to ensure that 

adequate protections of information 

collected by QIOs are in place and, at 

the same time, to ensure that the quality 

improvement activities of these 

institutions and practitioners are not 

unnecessarily hindered by regulations. 

It has come to our attention that the 

existing regulations omit information 

disclosure procedures that would allow 

for the effective and efficient exchange 

of information that is an essential part 

of quality improvement activities. In 

addition, it has come to our attention 

that, although the QIO does not need the 

consent of the institution to release 

nonconfidential information, the 

existing 30-day advance notice 

requirement to an institution prior to 

releasing public information or any 

other nonconfidential information that 

identifies an institution, when an 

institution consents to or requests the 

release of information, impedes the 

ability of QIOs to conduct quality 

improvement work. If the institution 

requests or consents to the release of the 

information, the institution is already 

aware of the QIO’s intention to disclose 

the nonconfidential information. 

Therefore, we see no reason to require 

the additional 30-day advance notice. 

Likewise, there is no reason to require 

a 30-day notice for practitioners who 

request the release of information for 

quality improvement activities or other 

permissible releases under the 

regulations. 

B. Provisions of the Proposed 

Regulations 

We are proposing to make several 

changes in the regulations in Part 480 to 

expedite the exchange of information 

and minimize delays and expenditures 

currently required of QIOs, institutions, 

and practitioners as discussed below. 

Existing § 480.105(a) requires that a 

QIO must notify an identified 

institution of its intent to disclose 

nonconfidential information about the 

institution and provide a copy of the 

information at least 30 calendar days 

before the disclosure. Section 480.105 

also includes certain notice 

requirements a QIO must meet before 

disclosing confidential information that 

identifies practitioners and physicians. 

Section 480.106 presently includes 

several exceptions to these notice 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28333

requirements. We are proposing to 

revise § 480.106 to establish additional 

exceptions to the notice requirements in 

§ 480.105(a) and (b)(2). We are 

proposing to specify that the notice 

requirements in § 480.105(a) and (b)(2) 

would not apply if (1) the institution or 

practitioner has requested, in writing, 

that the QIO make the disclosure; (2) the 

institution or practitioner has provided 

written consent for the disclosure; or (3) 

the information is public information as 

defined in § 480.101 and specified in 

§ 480.120. 

Existing § 480.133(a)(2)(iii) specifies 

that a QIO may disclose to any person, 

agency, or organization confidential 

information on a particular practitioner 

or reviewer with the consent of that 

practitioner or reviewer, provided that 

the information does not identify other 

individuals. We are proposing to revise 

§ 480.133(a)(2)(iii) to allow for the 

release of information at the written 

request of the practitioner or reviewer, 

in addition to information releasable 

with the consent of the practitioner or 

reviewer under the existing provision. 

Specifically, the proposed revised 

§ 480.133(a)(2)(iii) would provide that a 

QIO may disclose confidential 

information about a particular 

practitioner or reviewer at the written 

request of, or with the written consent 

of that practitioner or reviewer. The 

recipient of the information would have 

the same redisclosure rights and 

responsibilities as the requesting or 

consenting practitioner or reviewer 

would, under the authority of Subpart B 

of Part 480. We are proposing a similar 

revision to § 480.140 relating to the 

release of quality review study 

information. Specifically, we are 

proposing to revise § 480.140 by adding 

a new paragraph (d) (the existing 

paragraphs (d) and (e) would be 

redesignated as paragraphs (e) and (f), 

respectively) to provide that a QIO may 

disclose quality review study 

information with identifiers of 

particular practitioners or institutions at 

the written request of, or with the 

written consent of, the identified 

practitioner(s) or institution(s). The 

recipient of the information would have 

the same redisclosure rights and 

responsibilities as the requesting or 

consenting practitioner or reviewer 

would, under the authority of Subpart B 

of Part 480. We believe that these 

proposed revisions would reduce the 

existing burden on practitioners, 

institutions, and QIOs and, at the same 

time, ensure that necessary protections 

on information remain in place. These 

proposed revisions would allow QIOs, 

institutions, and practitioners to share 

vital information in an effective manner 

and further our efforts to ensure the 

highest quality of care possible for 

Medicare beneficiaries. 

C. Technical Changes 

We are proposing to revise the title of 

Part 480 under Subchapter F of Chapter 

IV of 42 CFR to conform it to a previous 

regulatory change in the name of the 

organization conducting medical 

reviews under Medicare from a peer 

review organization to a quality 

improvement organization. The 

proposed new title is ‘‘Part 480—

Acquisition, Protection, and Disclosure 

of Quality Improvement Organization 

Information’’. 

In a final rule published in the 

Federal Register on November 24, 1999 

(64 FR 66279), we redesignated Part 476 

as Part 480. However, as part of the 

redesignation process, we inadvertently 

failed to make appropriate changes to 

the cross-references in various sections 

under the redesignated Part 480. In this 

proposed rule, we are proposing to 

correct those cross-references.

VIII. Proposed Policy Changes Relating 

to Medicare Provider Agreements for 

Compliance With Bloodborne 

Pathogens Standards, Hospital 

Conditions of Participation, and Fire 

Safety Requirements for Certain Health 

Care Facilities 

A. Conditions of Participation for 

Discharge Planning 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Discharge Planning’’ at the beginning 

of your comment.] 

1. Background 

As part of the definition of ‘‘hospital,’’

sections 1861(e)(1) through (e)(8) of the 

Act set forth specific requirements that 

a hospital must meet to participate in 

the Medicare program. Section 

1861(e)(9) of the Act specifies that a 

hospital also must meet other 

requirements as the Secretary finds 

necessary in the interest of the health 

and safety of individuals who are 

furnished services in hospitals. 

Implementing regulations for section 

1861(c) of the Act, setting forth the 

conditions of participation (CoPs) that a 

hospital must meet to participate in the 

Medicare program, are located in 42 

CFR Part 482. 

The purposes of these CoPs are to 

protect patient health and safety and to 

ensure that high quality care is 

furnished to all patients in Medicareparticipating hospitals. In accordance 

with section 1864 of the Act, State 

survey agencies conduct surveys of 

hospitals to determine compliance with 

the Medicare CoPs, using interpretive 

guidelines and survey procedures found 

in the State Operations Manual (SOM), 

CMS Publication No. 7. In accordance 

with section 1865 of the Act and the 

implementing regulations at 42 CFR 

488.5 and 488.6, hospitals accredited by 

the Joint Commission on Accreditation 

of Healthcare Organizations (JCAHO), 

the American Osteopathic Association 

(AOA), or other national accreditation 

organizations are not routinely surveyed 

by States for compliance with the CoPs, 

but are deemed to meet most of the 

hospital CoPs based on their 

accreditation. However, all hospitals 

that participate in the Medicare program 

are required to be in compliance with 

the CoPs, regardless of their 

accreditation status. Under section 

1905(a) of the Act, the hospital CoPs 

also apply to hospitals participating in 

Medicaid (§ 440.10(a)(3)(iii) and 

§ 482.1(a)(5)). 

Under § 489.10(d), a Medicare 

provider agreement is subject to the 

State survey agency’s determination of 

whether a hospital meets the CoPs. The 

State survey agency makes 

corresponding recommendations to 

CMS about the hospital’s certification; 

that is, whether the hospital has met the 

standards or requirements necessary to 

provide Medicare and Medicaid services 

and receives Federal and State 

reimbursement. 

Section 4321(a) of Public Law 105–33 

(BBA) amended section 1861(ee)(2) of 

the Act to require that Medicareparticipating hospitals, as part of the 

discharge planning process, share with 

each patient, as appropriate, a list of 

available home health services through 

individuals and entities, including 

Medicare-certified home health agencies 

(HHAs) that participate in Medicare, 

serve the geographic area in which the 

patient resides, and request to be listed 

by the hospital as available. In addition, 

section 4321(a) prohibits hospitals from 

limiting or steering patients to any 

specific HHA or qualified provider that 

may provide posthospital home health 

services and requires hospitals to 

identify (in a form and manner specified 

by the Secretary) any HHA or other 

entity to whom the individual is 

referred in which the hospital has a 

disclosable financial interest consistent 

with section 1866(a)(1)(S) of the Act or 

which has a financial interest in the 

hospital if the patient is referred to that 

entity. 

Congress enacted section 4321 of 

Public Law 105–33 to protect patient 

choice and enable Medicare 

beneficiaries to make more informed 

choices about the providers from which 

28334 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

they receive certain Medicare services. 

We believe that this provision was 

intended to address concerns that some 

hospitals were referring patients only to 

HHAs in which they had a financial 

interest, and that shared financial 

relationships were influencing referrals 

to other entities. Hospitals essentially 

have a captive patient population and, 

through the discharge planning process, 

can influence a patient’s choice 

regarding who provides 

posthospitalization services. 

Congress also enacted section 926 of 

Public Law 108–173 (MMA) to improve 

the administration of the Medicare 

program by protecting patient choice 

and enabling Medicare beneficiaries to 

make more informed choices about the 

providers from which they receive 

Medicare services. Section 926(a) of 

Public Law 108–173 requires the 

Secretary to publicly provide 

information that enables hospital 

discharge planners, Medicare 

beneficiaries, and the public to identify 

SNFs that are participating in the 

Medicare program. Section 926(b) of 

Public Law 108–173 amended section 

1861(ee)(2)(D) of the Act to require 

Medicare-participating hospitals, as part 

of the discharge planning process, to 

include a discharge planning evaluation 

of a patient’s likely need for 

posthospital extended care services and 

the availability of these services through 

facilities that participate in the 

Medicare program and that serve the 

geographic area in which the patient 

resides. The amendments to the Act 

made by section 926(b) of Public Law 

108–173 apply to discharge plans made 

on or after a date specified by the 

Secretary, which may be no later than 

6 months after the Secretary provides 

for the availability of information 

required by section 926(a) of Public Law 

108–173. 

2. Implementation 

We implemented the requirements of 

section 4321(a) of Public Law 105–33 

relating to information on HHAs 

through a HCFA (now CMS) directive 

that was issued to the Regional Offices 

and State survey agencies on October 

31, 1997. Enforcement has been carried 

out through the State agency survey and 

certification process. We note that even 

though it was not a requirement under 

section 4321(a) to provide currently 

available information on HHAs to the 

public (as now required under section 

1861(ee)(2)(D) of the Act, as amended), 

we have established a ‘‘Home Health 

Compare’’ link on the CMS Web site, 

www.medicare.gov, that identifies HHAs 

that are currently participating in the 

Medicare or Medicaid program. 

We are now proposing to incorporate 

in our regulations under § 482.43 the 

requirements of section 4321(a) of 

Public Law 105–53 relating to providing 

information on HHAs to hospital 

patients as part of the discharge 

planning process. We note that we had 

previously issued a proposed rule on 

December 19, 1997 (62 FR 66726) to 

implement the provisions of section 

4321(a) of Public Law 105–33. However, 

section 902 of Public Law 108–173 now 

requires us to finalize rules within 3 

years after publication of the proposed 

rule, except under ‘‘exceptional 

circumstances.’’ While it is not clear 

whether Congress intended this policy 

to apply retroactively, out of an 

abundance of caution, we are issuing a 

new proposed rule because of the length 

of time that has elapsed since the 

issuance of the 1997 proposed rule. 

Moreover, the provisions of Public Law 

108–173 contain information 

requirements for SNFs substantially 

similar to the ones required for HHAs. 

In developing this second proposed 

rule, we have taken into consideration 

the issues raised in the public 

comments we received on the December 

19, 1997 proposed rule relating to 

HHAs. 

Information on SNFs related to the 

requirement imposed by section 926(a) 

of Public Law 108–173 is currently 

available to the public and can be 

accessed at the CMS Web site, 

www.medicare.gov, by clicking on the 

‘‘Nursing Home Compare’’ link or by 

calling 1–800–MEDICARE (800–633–

4227). Nursing Home Compare, 

launched in November 2002, meets the 

statutory requirement of section 926(a) 

by enabling hospital discharge planners, 

Medicare beneficiaries, and the public 

to identify the 17,000 nursing homes 

that participate in the Medicare or 

Medicaid program. Nursing Home 

Compare can be used to locate a nursing 

home by State and county, by proximity 

(city or zip code), or by name. In 

addition, Nursing Home Compare 

provides detailed information about the 

past performance of every Medicarecertified and Medicaid-certified nursing 

home in the country. The data on this 

Web site describe nursing home 

characteristics, quality measures, 

inspection results, and nursing staff 

information. The Nursing Home 

Compare tool received 9.3 million page 

views in 2003 and was the most popular 

tool on www.medicare.gov. If an 

interested individual does not have 

access to the Internet, the individual can 

call 1–800–MEDICARE (800–633–4227) 

and request a printout of the nursing 

homes in a designated area.

We are proposing to amend the 

regulations at § 482.43 to incorporate 

the provisions of section 4321(a) of 

Public Law 105–33 and section 926(b) of 

Public Law 108–173 into the hospital 

CoPs. Specifically, we are proposing to 

add new paragraphs (c)(6), (c)(7), and 

(c)(8) to include the requirement for 

hospitals to provide lists of Medicarecertified HHAs and SNFs as part of the 

discharge planning process. The 

discharge planning evaluation would be 

required to include a list of Medicarecertified HHAs that have requested to be 

placed on the list as available to the 

patient and that serve the geographic 

area in which the patient resides. We 

are proposing to require the SNF list to 

include Medicare-certified SNFs located 

in the geographic area in which the 

patient requests. We are not requiring 

that the list of Medicare-certified SNFs 

contain those SNFs that are just located 

in the area in which the patient resides. 

Because many available Medicarecertified SNFs are not located in 

proximity to where the patient resides, 

especially in rural areas, we believe that 

a requirement that restricts a patient to 

SNFs in areas where the patient resides 

is too restrictive and would limit the 

availability of posthospital extended 

care services to Medicare beneficiaries. 

Section 4321(a) of Public Law 105–33 

requires listing the availability of home 

health services through individuals and 

entities. We have received inquiries 

regarding the identity of those 

individuals and entities. We are 

proposing that, because section 1861(m) 

of the Act identifies home health 

services as ‘‘specific items or services 

furnished to an individual, who is 

under the care of a physician, by an 

HHA, or by others under arrangements 

with an HHA,’’ section 4321(a) is 

referring to Medicare-participating 

HHAs. 

We are proposing that the hospital 

present the list of HHAs or SNFs only 

to patients for whom home health care 

or posthospital extended care services 

are indicated as appropriate, as 

determined by the discharge planning 

evaluation. We do not expect that 

patients without a need for home health 

care or posthospital extended care 

services would receive the list. In 

addition, we are proposing to require 

the hospital to document in the patient’s 

medical record that a list of HHAs or 

SNFs was presented to the patient or an 

individual acting on the patient’s behalf. 

Hospitals would not have to duplicate 

the list in the patient’s medical record. 

The information in the medical record 

would serve as documentation that the 

requirement was met. The hospital 

would have the flexibility to determine 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28335

exactly how and where in the patient’s 

medical record this information would 

be documented. 

We are proposing that a hospital have 

the flexibility to implement the 

requirement to present the lists in a 

manner that is most efficient and least 

burdensome in its particular setting. A 

hospital can simply print a list from the 

Home Health Compare or Nursing Home 

Compare site on the CMS Web site, 

www.medicare.gov or develop and 

maintain its own list of HHAs and 

SNFs. When the patient requires home 

health services, the CMS Web site list 

would be printed based on the 

geographic area in which the patient 

resides. When the patient requires 

posthospital extended care services, the 

CMS Web site list would be printed 

based on the geographic area requested 

by the patient. Or, in the rare instance 

when a hospital does not have Internet 

access, the hospital can call 1–800–

MEDICARE (1–800–633–4227) to 

request a printout of a list of HHAs or 

SNFs in the desired geographic area. 

Information on this Web site should not 

be construed as an endorsement or 

advertisement for any particular HHA or 

SNF. 

If a hospital chooses to develop its 

own list of HHAs or SNFs, the hospital 

would have the flexibility of designing 

the format of the list. However, the list 

should be utilized neither as a 

recommendation nor endorsement by 

the hospital of the quality of care of any 

particular HHA or SNF. If a HHA or 

SNF does not meet all of the criteria, 

(Medicare-certified and is located in the 

geographic area in which the patient 

resides or in the geographic area 

requested by the patient) for inclusion 

on the list, we are not proposing to 

require the hospital to place that HHA 

or SNF on the list. In addition, in 

accordance with the provisions of the 

Act, we are proposing that HHAs must 

request to be listed by the hospital as 

available. Also, we are proposing that 

the list must be legible and current 

(updated at least annually), and that the 

listed information be shared with the 

patient or an individual acting on the 

patient’s behalf at least once during the 

discharge planning process. However, 

we would specify that information 

regarding the availability of HHAs or 

SNFs may need to be presented more 

than once during the discharge planning 

process to meet the patient’s need for 

additional information or as the 

patient’s needs and condition change. 

We are proposing to require that, as 

part of the discharge planning process, 

the hospital must inform the patient or 

the patient’s family of their freedom to 

choose among participating Medicare 

providers of posthospital services and 

must, when possible, respect patient 

and family preferences when they are 

expressed (proposed § 482.43(c)(7)). In 

addition, the hospital may not use the 

discharge plan to specify or otherwise 

limit the patient’s choice of qualified 

providers that may provide home health 

care or posthospital extended care 

services. The intent of this proposed 

provision is to provide the patient with 

the freedom of choice to determine 

which HHA or SNF will provide care in 

accordance with section 1802 of the Act, 

which states that beneficiaries may 

obtain health services from any 

Medicare-participating provider. 

Finally, we are proposing to require 

the hospital to identify in each 

discharge plan those HHAs or SNFs to 

which the patient is referred that the 

hospital has a disclosable financial 

interest or HHAs or SNFs that have a 

financial interest in the hospital 

(proposed § 482.43(c)(8)). For the 

purposes of implementing section 

4321(a) of Public Law 105–33, we are 

proposing to define a disclosable 

‘‘financial interest’’ as any financial 

interest that a hospital is required to 

report according to the provider 

enrollment process, which is governed 

by section 1124 of the Act and 

implementing regulations located in 42 

CFR Part 420, Subpart C, and manual 

provisions. If a hospital refers patients 

about to be discharged and in need of 

posthospital services only to entities it 

owns or controls, the hospital would be 

infringing on the rights of the patient to 

choose the facility he or she would like 

to go to for services. The proposed 

disclosable financial interest 

requirement is an effort to increase the 

beneficiary’s awareness of the actual or 

potential financial incentives for a 

hospital as a result of the referral. To 

allow hospitals the flexibility of 

determining how these financial 

interests are disclosed to the patient, we 

are not requiring a specific form or 

manner in which the hospital must 

disclose financial interest. The hospital 

could simply highlight or otherwise 

identify those entities in which a 

financial interest exists directly on the 

HHA and SNF lists. Or, the hospital 

could choose to maintain a separate list 

of those entities in which a financial 

interest exists. 

Hospitals and managed care 

organizations (MCOs) have expressed 

concern as to whether the change made 

by section 4321(a) of Public Law 105–

33 was intended to apply to patients in 

managed care plans. MCO members are 

limited as to what services they may 

obtain from sources other than through 

the MCO. We believe that providing 

MCO members with a standardized list 

of all HHAs or SNFs in the requested 

geographic area could be misleading 

and potentially financially harmful 

because MCO enrollees may be liable for 

services that they obtain from providers 

other than the MCO, and patients may 

interpret a list of HHAs or SNFs that are 

not available to them under their health 

plan to mean that they are authorized by 

the MCO. This does not mean that 

Medicare MCO members in particular 

are denied the freedom of choice they 

are entitled to under section 1802 of the 

Act. Medicare beneficiaries exercise 

their freedom of choice when they 

voluntarily enroll in the MCO and agree 

to adhere to the plan’s coverage 

provisions. 

The list provided to MCO patients 

should include available and accessible 

HHAs or SNFs in a network of the 

patient’s MCO. Hospitals also have the 

option, in the course of discussing 

discharge planning with patients, to 

determine whether the beneficiary has 

agreed to excluded services or benefits 

or coverage limitations through 

enrollment in a MCO. If this is the case, 

the hospital could inform the patient of 

the potential consequences of going 

outside the plan for services. 

We also have received many inquiries 

about how the requirements contained 

in section 4321(a) of Public Law 105–33 

are monitored and enforced. Once 

codified in the hospital CoPs, a 

hospital’s obligations under both section 

4321(a) of Public Law 105–33 and 

section 926(b) of Public Law 108–173 

would be monitored as part of the 

hospital survey and certification 

process. Anyone aware of instances in 

which patients are inappropriately 

influenced or steered toward a 

particular HHA or SNF in a way that 

violated the regulation would have the 

opportunity to file a complaint with the 

State survey agency. The State survey 

agency would then investigate and 

follow up with the complainant. 

Noncompliance with the hospital CoPs 

may result in a hospital losing its ability 

to participate in the Medicare program. 

Requiring hospitals to provide a list of 

Medicare-certified HHAs or SNFs would 

provide patients with more options and 

assist them in making informed 

decisions about the providers from 

which they receive Medicare services. 

Specifically, the intent of the proposed 

modifications to the discharge planning 

CoPs is to provide the patient with the 

freedom of choice to determine which 

HHA or SNF available in the geographic 

area in which the patient resides or the 

geographic area requested by the 

patient, would provide them care in 

accordance with section 1802 of the Act, 

28336 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

which states that beneficiaries may 

obtain health services from any 

Medicare participating provider. 

B. Compliance With Bloodborne 

Pathogens Standards 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Bloodborne Pathogens Standards’’ at 

the beginning of your comment.] 

Section 1866(a)(1) of the Act sets forth 

provider agreement requirements that 

Medicare-participating hospitals must 

meet. Implementing regulations for 

these requirements are set forth at 42 

CFR 489.20.

Section 947 of Public Law 108–173 

amended section 1866(a)(1) of the Act to 

require that, by July 1, 2004, hospitals 

not otherwise subject to the 

Occupational Safety and Health Act 

(OSHA) (or a State occupational safety 

and health plan that is approved under 

section 18(b) of that Act) must comply 

with the OSHA bloodborne pathogens 

(BBP) standards at 29 CFR 1910.1030 as 

part of their Medicare provider 

agreements. These OSHA standards can 

be found on OSHA’s Web site at http:/

/www.osha.gov/SLTC/

bloodbornepathogens/. Section 947, 

which applies to hospitals participating 

in Medicare as of July 1, 2004, was 

enacted to ensure that all hospital 

employees who may come into contact 

with human blood or other potentially 

infectious materials in the course of 

their duties are provided proper 

protection from bloodborne pathogens. 

Section 947 further provides that a 

hospital that fails to comply with 

OSHA’s BBP standards may be subject 

to a civil money penalty. The civil 

money penalty will be imposed and 

collected in the same manner that civil 

money penalties are imposed and 

collected under section 1128A(a) of the 

Act. However, failure to comply with 

the BBP standards will not lead to 

termination of a hospital’s provider 

agreement. 

Currently, most hospitals are subject 

either to the OSHA BBP standards or to 

other BBP standards (generally, State 

standards) that meet or exceed the 

OSHA standards. However, non-Federal 

public hospitals located in States that 

do not have their own BBP standards 

are not subject to OSHA standards, 

including the OSHA BBP standards. 

Twenty-six States and the District of 

Columbia, and Guam do not have their 

own BBP standards under an OSHAapproved State plan. Therefore, an 

estimated 600,000 employees of 

hospitals located in those 26 States, the 

District of Columbia, and Guam are not 

afforded the same protections from 

BBPs as employees of all other hospitals 

in the United States. The States and 

territories that would be affected by the 

change made by section 947 of Public 

Law 108–173 are Alabama, Arkansas, 

Colorado, Delaware, Florida, Georgia, 

Idaho, Illinois, Kansas, Louisiana, 

Maine, Massachusetts, Mississippi, 

Missouri, Montana, Nebraska, New 

Hampshire, North Dakota, Ohio, 

Oklahoma, Pennsylvania, Rhode Island, 

South Dakota, Texas, West Virginia, 

Wisconsin, District of Columbia, and 

Guam. 

We are proposing to incorporate the 

provisions of Public Law 108–173 in 

§ 489.20 of the Medicare regulations 

governing provider agreements by 

adding a new paragraph (t). Paragraph 

(t) would specify that hospitals not 

otherwise subject to the OSHA BBP 

standards must comply with the OSHA 

BBP standards at 29 CFR 1910.1030 as 

part of their Medicare provider 

agreement. The proposed regulations 

would further specify that if a hospital 

fails to comply with OSHA’s BBP 

standards, the hospital may be subject to 

a civil money penalty. The civil money 

penalty would be imposed and collected 

in the same manner that civil money 

penalties are imposed and collected 

under section 1128A(a) of the Act. 

However, failure to comply with the 

BBP standards would not lead to 

termination of a hospital’s provider 

agreement. The proposed regulations 

would also refer to the Federal Civil 

Penalties Inflation Adjustment Act. This 

reference is intended to alert the reader 

that the civil money penalty amounts 

under section 1128A(a) of the Act may, 

under the Federal Civil Penalties 

Inflation Adjustment Act, be increased 

to adjust for inflation. 

C. Fire Safety Requirements for Certain 

Health Care Facilities 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Life Safety Code’’ at the beginning of 

your comment.] 

1. Background 

On January 10, 2003, we published a 

final rule in the Federal Register (68 FR 

1374) that adopted the 2000 edition of 

the Life Safety Code (LSC) published by 

the National Fire Protection Association 

(NFPA) as the fire safety requirements 

(with specified exceptions) that we are 

applying to the following types of 

providers participating in the Medicare 

and Medicaid programs: long-term care 

facilities, hospitals, intermediate care 

facilities for the mentally retarded (ICF/

MRs), ambulatory surgical centers 

(ASCs), hospices that provide inpatient 

services, religious nonmedical health 

care institutions, CAHs, and Programs of 

All-Inclusive Care for the Elderly 

(PACE). 

In addition to adopting the 2000 

edition of the LSC, we stated our intent 

to delete references to all previous 

editions of the LSC. However, as a result 

of a technical error, the reference to 

previous editions of the LSC in 

§ 483.70(a)(1) of the regulations for longterm care facilities was not deleted. 

Allowing long-term care facilities to 

comply with the 1967, 1973, and 1981 

editions of the LSC would not 

adequately protect long-term care 

facility patients from the threat of fire 

and other emergencies. These editions 

do not recognize newer technology, nor 

the advances in fire safety that have 

been developed in the ensuing years. In 

addition, the existing conflicting 

regulatory language is confusing and 

contrary to the best interests of longterm care facilities and their patients. 

Therefore, in this proposed rule, we are 

proposing to correct this technical error. 

We are not proposing to make any 

substantive policy change. 

In the January 10, 2003 final rule, we 

also specified that we were not adopting 

the provisions of Chapter 19.3.6.3.2, 

exception number 2 of the LSC 

regarding the use of roller latches for 

application to religious nonmedical 

health care institutions, hospices, 

hospitals, long-term care facilities, 

PACE programs, ICF/MRs and CAHs. 

We prohibit the use of roller latches in 

existing and new buildings, except for 

ASCs under Chapter 20 and Chapter 21 

of the LSC, and provide for the 

replacement of existing roller latches, 

phased in over a 3-year period 

beginning March 11, 2003. We indicated 

that allowing health care facilities to 

continue using roller latches would not 

adequately protect patients in those 

facilities. Through fire investigations, 

roller latches have proven to be an 

unreliable door latching mechanism 

requiring extensive on-going 

maintenance to operate properly. Many 

roller latches in fire situations failed to 

provide adequate protection to patients 

in their room during an emergency. 

Roller latches that are not maintained 

pose a threat to the health and safety of 

patients and staff. We added that we 

had found through our online survey, 

certification, and reporting (OSCAR) 

system data that doors that include 

roller latches are consistently one of our 

most cited deficiencies. In fact, in SNFs, 

roller latches in corridor doors are 

consistently the number one cited 

deficiency under the life safety 

requirements. 

We have learned that the language 

regarding the date when these facilities 

must be in compliance with the 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28337

prohibition on the use of roller latch 

may be misinterpreted and needs to be 

clarified. In this proposed rule, we are 

proposing to clarify our intent by 

revising the regulations as discussed 

under section VIII.C.2. of this preamble. 

We are not proposing to make any 

substantive policy changes. 

The flexibility of the January 10, 2003 

final rule would remain the same. The 

Secretary has broad authority to grant 

waivers to facilities under section 

1819(d)(2)(B) and section 1919(d)(2)(B) 

of the Act. The proposed amendments 

in this proposed rule would continue to 

allow the Secretary to grant waivers on 

a case-by-case basis if the safety of the 

patients would not be compromised and 

if specific provisions of the LSC would 

result in unreasonable hardship on the 

provider. The Secretary also may accept 

a State’s fire and safety code instead of 

the LSC if the State’s fire and safety 

code adequately protects patients. 

Further, the NFPA’s Fire Safety 

Evaluation System (FSES), an 

equivalency system, provides 

alternatives to meeting various 

provisions of the LSC, thereby achieving 

the same level of fire protection as the 

LSC. 

2. Proposed Changes to the Regulations 

We are proposing to revise § 483.70(a) 

to delete references to the 1967, 1973, 

and 1981 editions of the LSC. 

We are proposing to revise the 

following regulations applicable to the 

specified facilities to clarify that the 

facility must be in compliance with 

Chapter 19.2.9, Emergency Lighting, 

beginning March 13, 2006. In addition, 

we would also specify that, beginning 

March 13, 2006, Chapter 19.3.6.3.2, 

exception number 2 (concerning roller 

latches), does not apply to the facility. 

a. For religious nonmedical health 

care institutions: § 403.744(a) and (c). 

b. For hospices, § 418.100(d)(1), (d)(4), 

and new (d)(5).

c. For PACE programs, 

§ 460.72(b)(1)(i), (b)(3), and new (b)(4). 

d. For hospitals, § 482.41(b). 

e. For long-term care facilities, 

§ 483.70(a). 

f. For ICF/MRs, § 483.470(j). 

g. For CAHs, § 485.623(d)(1), (d)(5), 

and new (d)(6). 

IX. MedPAC Recommendations 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘MedPAC Recommendations’’ at the 

beginning of your comment.] 

We are required by section 

1886(e)(4)(B) of the Act to respond to 

MedPAC’s IPPS recommendations in 

our annual proposed IPPS rule. We have 

reviewed MedPAC’s March 1, 2004 

‘‘Report to the Congress: Medicare 

Payment Policy’’ and have given it 

careful consideration in conjunction 

with the proposals set forth in this 

document. For further information 

relating specifically to the MedPAC 

report or to obtain a copy of the report, 

contact MedPAC at (202) 653–7220, or 

visit MedPAC’s Web site at: 

www.medpac.gov.

We note that MedPAC’s 

recommendations in its March 1, 2004 

report included only one 

recommendation concerning Medicare 

inpatient hospital payment policies. 

MedPAC’s Recommendation 3A–1 

states that Congress should increase 

payment rates for the IPPS by the 

projected rate of increase in the hospital 

market basket for FY 2005. We note that 

section 501(a)(3) of Public Law 108–173 

requires that the payment rates for the 

IPPS be increased by the market basket 

percentage increase for all hospitals 

during FYs 2005, 2006, and 2007, 

except that it also provides for reducing 

the update by 0.4 percentage points for 

any hospital that fails to submit data on 

a list of 10 quality indicators. We 

discuss this recommendation further in 

Appendix B of this proposed rule in the 

context of our recommendation 

concerning the update factor for 

inpatient hospital operating costs and 

for hospitals and hospital distinct-part 

units excluded from the IPPS. 

X. Other Required Information 

A. Requests for Data From the Public 

In order to respond promptly to 

public requests for data related to the 

prospective payment system, we have 

established a process under which 

commenters can gain access to raw data 

on an expedited basis. Generally, the 

data are available in computer tape or 

cartridge format; however, some files are 

available on diskette as well as on the 

Internet at http://www.hcfa.gov/stats/

pufiles.htm. Data files and the cost for 

each file, if applicable, are listed below. 

Anyone wishing to purchase data tapes, 

cartridges, or diskettes should submit a 

written request along with a company 

check or money order (payable to CMS–

PUF) to cover the cost to the following 

address: Centers for Medicare & 

Medicaid Services, Public Use Files, 

Accounting Division, P.O. Box 7520, 

Baltimore, MD 21207–0520, (410) 786–

3691. Files on the Internet may be 

downloaded without charge. 

1. CMS Wage Data 

This file contains the hospital hours 

and salaries for FY 2001 used to create 

the proposed FY 2005 prospective 

payment system wage index. The file 

will be available by the beginning of 

February for the NPRM and the 

beginning of May for the final rule.

Processing 

year 

Wage data 

year PPS fiscal year 

2004 2001 2005

2003 2000 2004

2002 1999 2003

2001 1998 2002

2000 1997 2001

1999 1996 2000

1998 1995 1999

1997 1994 1998

1996 1993 1997

1995 1992 1996

1994 1991 1995

1993 1990 1994

1992 1989 1993

1991 1988 1992

These files support the following: 

• NPRM published in the Federal 

Register. 

• Final Rule published in the Federal 

Register. 

Media: Diskette/most recent year on 

the Internet. 

File Cost: $165.00 per year. 

Periods Available: FY 2005 PPS 

Update. 

2. CMS Hospital Wages Indices 

(Formerly: Urban and Rural Wage Index 

Values Only) 

This file contains a history of all wage 

indices since October 1, 1983. 

Media: Diskette/most recent year on 

the Internet. 

File Cost: $165.00 per year. 

Periods Available: FY 2005 PPS 

Update. 

3. PPS SSA/FIPS MSA State and County 

Crosswalk 

This file contains a crosswalk of State 

and county codes used by the Social 

Security Administration (SSA) and the 

Federal Information Processing 

Standards (FIPS), county name, and a 

historical list of Metropolitan Statistical 

Areas (MSAs). 

Media: Diskette/Internet. 

File Cost: $165.00 per year. 

Periods Available: FY 2005 PPS 

Update. 

4. Reclassified Hospitals New Wage 

Index (Formerly: Reclassified Hospitals 

by Provider Only) 

This file contains a list of hospitals 

that were reclassified for the purpose of 

assigning a new wage index. Two 

versions of these files are created each 

year. They support the following: 

• NPRM published in the Federal 

Register. 

• Final Rule published in the Federal 

Register. 

Media: Diskette/Internet. 

28338 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

File Cost: $165.00 per year. 

Periods Available: FY 2005 PPS 

Update. 

5. PPS–IV to PPS–XII Minimum Data 

Set 

The Minimum Data Set contains cost, 

statistical, financial, and other 

information from Medicare hospital cost 

reports. The data set includes only the 

most current cost report (as submitted, 

final settled, or reopened) submitted for 

a Medicare participating hospital by the 

Medicare fiscal intermediary to CMS. 

This data set is updated at the end of 

each calendar quarter and is available 

on the last day of the following month. 

Media: Tape/Cartridge. 

File Cost: $770.00 per year.

Periods beginning on or 

after 

and before 

PPS–IV ........ 10/01/86 10/01/87

PPS–V ......... 10/01/87 10/01/88

PPS–VI ........ 10/01/88 10/01/89

PPS–VII ....... 10/01/89 10/01/90

PPS–VIII ...... 10/01/90 10/01/91

PPS–IX ........ 10/01/91 10/01/92

PPS–X ......... 10/01/92 10/01/93

PPS–XI ........ 10/01/93 10/01/94

PPS–XII ....... 10/01/94 10/01/95

(Note: The PPS–XIII, PPS–XIV, PPS–

XV, PPS–XVI, PPS–XVII, PPS–XVIII, 

and PPS–XIX Minimum Data Sets are 

part of the PPS–XIII, PPS–XIV, PPS–XV, 

PPS–XVI, PPS–XVII, PPS–XVIII, and 

PPS–XIX Hospital Data Set Files (refer 

to item 7 below).) 

6. PPS–IX to PPS–XII Capital Data Set 

The Capital Data Set contains selected 

data for capital-related costs, interest 

expense and related information and 

complete balance sheet data from the 

Medicare hospital cost report. The data 

set includes only the most current cost 

report (as submitted, final settled or 

reopened) submitted for a Medicare 

certified hospital by the Medicare fiscal 

intermediary to CMS. This data set is 

updated at the end of each calendar 

quarter and is available on the last day 

of the following month. 

Media: Tape/Cartridge. 

File Cost: $770.00 per year.

Periods beginning on or 

after 

and before. 

PPS–IX ........ 10/01/91 10/01/92. 

PPS–X ......... 10/01/92 10/01/93. 

PPS–XI ........ 10/01/93 10/01/94. 

PPS–XII ....... 10/01/94 10/01/95 

(Note: The PPS–XIII, PPS–XIV, PPS–

XV, PPS–XVI, PPS–XVII, PPS–XVIII, 

and PPS–XIX Capital Data Sets are part 

of the PPS–XIII, PPS–XIV, PPS–XV, 

PPS–XVI, PPS–XVII, PPS–XVIII, and 

PPS–XIX Hospital Data Set Files (refer 

to item 7 below).) 

7. PPS–XIII to PPS–XIX Hospital Data 

Set 

The file contains cost, statistical, 

financial, and other data from the 

Medicare Hospital Cost Report. The data 

set includes only the most current cost 

report (as submitted, final settled, or 

reopened) submitted for a Medicarecertified hospital by the Medicare fiscal 

intermediary to CMS. The data set is 

updated at the end of each calendar 

quarter and is available on the last day 

of the following month. 

Media: Diskette/Internet. 

File Cost: $2,500.00.

Periods beginning on or 

after 

and before. 

PPS–XIII ...... 10/01/95 10/01/96. 

PPS–XIV ..... 10/01/96 10/01/97. 

PPS–XV ...... 10/01/97 10/01/98. 

PPS–XVI ..... 10/01/98 10/01/99. 

PPS–XVII .... 10/01/99 10/01/00. 

PPS–XVIII ... 10/01/00 10/01/01. 

PPS–XIX ..... 10/01/01 10/01/02 

8. Provider-Specific File 

This file is a component of the 

PRICER program used in the fiscal 

intermediary’s system to compute DRG 

payments for individual bills. The file 

contains records for all prospective 

payment system eligible hospitals, 

including hospitals in waiver States, 

and data elements used in the 

prospective payment system 

recalibration processes and related 

activities. Beginning with December 

1988, the individual records were 

enlarged to include pass-through per 

diems and other elements. 

Media: Diskette/Internet. 

File Cost: $265.00. 

Periods Available: FY 2005 PPS 

Update. 

9. CMS Medicare Case-Mix Index File 

This file contains the Medicare casemix index by provider number as 

published in each year’s update of the 

Medicare hospital inpatient prospective 

payment system. The case-mix index is 

a measure of the costliness of cases 

treated by a hospital relative to the cost 

of the national average of all Medicare 

hospital cases, using DRG weights as a 

measure of relative costliness of cases. 

Two versions of this file are created 

each year. They support the following: 

• NPRM published in the Federal 

Register. 

• Final rule published in the Federal 

Register. 

Media: Diskette/most recent year on 

Internet. 

Price: $165.00 per year/per file. 

Periods Available: FY 1985 through 

FY 2005. 

10. DRG Relative Weights (Formerly 

Table 5 DRG) 

This file contains a listing of DRGs, 

DRG narrative descriptions, relative 

weights, and geometric and arithmetic 

mean lengths of stay as published in the 

Federal Register. The hard copy image 

has been copied to diskette. There are 

two versions of this file as published in 

the Federal Register:

• NPRM. 

• Final rule. 

Media: Diskette/Internet. 

File Cost: $165.00. 

Periods Available: FY 2005 PPS 

Update. 

11. PPS Payment Impact File 

This file contains data used to 

estimate payments under Medicare’s 

hospital inpatient prospective payment 

systems for operating and capital-related 

costs. The data are taken from various 

sources, including the Provider-Specific 

File, Minimum Data Sets, and prior 

impact files. The data set is abstracted 

from an internal file used for the impact 

analysis of the changes to the 

prospective payment systems published 

in the Federal Register. This file is 

available for release 1 month after the 

proposed and final rules are published 

in the Federal Register. 

Media: Diskette/Internet. 

File Cost: $165.00. 

Periods Available: FY 2005 PPS 

Update. 

12. AOR/BOR Tables 

This file contains data used to 

develop the DRG relative weights. It 

contains mean, maximum, minimum, 

standard deviation, and coefficient of 

variation statistics by DRG for length of 

stay and standardized charges. The BOR 

tables are ‘‘Before Outliers Removed’’

and the AOR is ‘‘After Outliers 

Removed.’’ (Outliers refers to statistical 

outliers, not payment outliers.) 

Two versions of this file are created 

each year. They support the following: 

• NPRM published in the Federal 

Register. 

• Final rule published in the Federal 

Register. 

Media: Diskette/Internet. 

File Cost: $165.00. 

Periods Available: FY 2005 PPS 

Update. 

13. Prospective Payment System (PPS) 

Standardizing File 

This file contains information that 

standardizes the charges used to 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28339

calculate relative weights to determine 

payments under the prospective 

payment system. Variables include wage 

index, cost-of-living adjustment (COLA), 

case-mix index, disproportionate share, 

and the Metropolitan Statistical Areas 

(MSAs). The file supports the following: 

• NPRM published in the Federal 

Register. 

• Final rule published in the Federal 

Register. 

Media: Internet. 

File Cost: No charge. 

Periods Available: FY 2005 PPS 

Update. 

For further information concerning 

these data tapes, contact the CMS Public 

Use Files Hotline at (410) 786–3691. 

Commenters interested in obtaining or 

discussing any other data used in 

constructing this rule should contact 

James Hart at (410) 786–9520. 

B. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995 (PRA), we are required to 

provide 60-day notice in the Federal 

Register and solicit public comment 

before a collection of information 

requirement is submitted to the Office of 

Management and Budget (OMB) for 

review and approval. In order to 

evaluate fairly whether an information 

collection should be approved by OMB, 

section 3506(c)(2)(A) of the Paperwork 

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

Therefore, we are soliciting public 

comments on each of these issues for 

the information collection requirements 

discussed below. 

The following information collection 

requirements in this proposed rule and 

the associated burdens are subject to the 

PRA.

Section 412.22 Excluded Hospitals 

and Hospital Units: General Rules 

In summary, this section outlines the 

requirements for excluded hospitals and 

hospital units. This section states that a 

LTCH that occupies space in a building 

used by another hospital, or in one or 

more separate buildings located on the 

same campus as buildings used by 

another hospital must notify its fiscal 

intermediary and CMS in writing of its 

co-location. 

The collection requirement has not 

changed. While this requirement is 

subject to the PRA, this requirement is 

currently approved in OMB No. 0938–

0897, with a current expiration date of 

July 31, 2006. 

Section 412.25 Excluded Hospital 

Units: Common Requirements 

In summary, this section proposes to 

apply the excluded hospital unit 

requirements to psychiatric or 

rehabilitation CAH units that are now 

permitted under the provisions of 

Public Law 108–173. This section states 

that if a psychiatric rehabilitation unit 

of a CAH does not meet the applicable 

requirements, payment will not be made 

and will resume only after the unit has 

demonstrated to CMS that it meets the 

applicable requirements. 

We believe the collection 

requirements are exempt as defined in 

5 CFR 1320.4, information collections 

conducted or sponsored during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action or investigation, or audit. We also 

believe the collection requirements to be 

exempt as defined in 5 CFR 1320.3(c)(4) 

because we believe this would affect 

less than 10 persons. 

Section 412.64 Federal Rates for 

Inpatient Operating Costs for Federal 

Fiscal Years 2005 and Subsequent 

Fiscal Years 

In summary, this section outlines the 

proposed requirements and process for 

determining the adjustment of the wage 

index to account for the commuting 

patterns of hospital workers. This 

section states that a hospital may waive 

the application of the wage index 

adjustment by notifying CMS in writing 

within 45 days after the publication of 

the annual notice of proposed 

rulemaking for the IPPS. 

The burden associated with this 

requirement is the time and effort for 

the hospital to prepare a written notice 

asking to waive the application of the 

wage index adjustment and send the 

notice to CMS. 

The burden associated with this 

requirement is estimated to be 30 

minutes per hospital. Therefore, we 

estimate it would take 5 total annual 

hours (30 minutes × 10 hospitals 

seeking a waiver). 

Section 412.103 Special Treatment: 

Hospitals Located in Urban Areas and 

That Apply for Reclassification as Rural 

In summary, this section outlines the 

requirements and process for a rural 

hospital to become reclassified. This 

section states that a prospective 

payment hospital that is located in an 

urban area may be reclassified as a rural 

hospital if it submits an application in 

accordance with this section. 

We are proposing to revise this 

section; however, the collection 

requirement remains the same. While 

this requirement is subject to the PRA, 

this requirement is currently approved 

in OMB No. 0938–0573, with a current 

expiration date of October 31, 2005. 

Section 412.101 Special Treatment: 

Inpatient Hospital Payment Adjustment 

for Low-Volume Hospitals 

In summary, this section outlines the 

proposed requirements for determining 

a payment adjustment for low-volume 

hospitals. This section states that in 

order to qualify for the higher 

incremental costs adjustment, the 

hospital must provide its fiscal 

intermediary with evidence that it meets 

the distance requirement to make a 

determination that the hospital meets 

the distance requirement specified in 

this section. 

The burden associated with this 

requirement is the time and effort for 

the hospital to provide the fiscal 

intermediary with evidence that it meets 

the specified distance requirement. 

The burden associated with this 

requirement is estimated to be 1 hour 

per hospital. Therefore, we estimate it 

would take 500 total annual hours (1 

hour × 500 hospitals seeking the 

incremental costs adjustment). 

Section 412.211 Puerto Rico Rates for 

Federal Fiscal Year 2004 and 

Subsequent Fiscal Years 

In summary, this section outlines the 

requirements and process for 

determining the adjusted prospective 

payment rate for inpatient hospital 

services in Puerto Rico. This section 

states that a hospital may waive the 

application of the proposed wage index 

adjustment for commuting hospital 

employees by notifying CMS in writing 

within 45 days after the publication of 

the annual notice of proposed 

rulemaking for the inpatient prospective 

payment system. 

The burden associated with this 

requirement is the time and effort for 

the hospital to prepare a written notice 

asking to waive the application of the 

wage index adjustment and send the 

notice to CMS. 

The burden associated with this 

requirement is estimated to be 30 

minutes per hospital. Therefore, we 

estimate it would take 5 total annual 

hours (30 minutes × 10 hospitals 

seeking a waiver). 

28340 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

Section 412.234 Criteria for All 

Hospitals in an Urban County Seeking 

Redesignation to Another Urban Area 

In summary, this section outlines the 

requirements for determining an urban 

hospital’s redesignation to another 

urban area. This section states that 

hospitals must submit appropriate wage 

data to the fiscal intermediary as 

outlined. 

We are proposing to revise this 

section. However, the collection 

requirement remains the same. While 

this requirement is subject to the PRA, 

this requirement is currently approved 

in OMB No.0938–0907, with a current 

expiration date of December 31, 2005. 

Section 413.70 Payment for Services of 

a CAH 

In summary, this section outlines the 

requirements for a CAH to make an 

election to be paid for outpatient facility 

services plus the fee schedule for 

professional services under an optional 

single payment method. This section 

states that a CAH may make this 

election in any cost reporting period. 

This election must be made in writing, 

made on an annual basis, and delivered 

to the fiscal intermediary servicing the 

CAH at least 30 days before the start of 

each affected cost reporting period.

We are proposing to revise this 

section. However, the collection 

requirement remains the same. While 

this requirement is subject to the PRA, 

this requirement is currently approved 

in OMB No. 0938–0050, with a current 

expiration date of November 30, 2005. 

Section 413.78 Direct GME Payments: 

Determinations of the Total Number of 

FTE Residents 

In summary, this section outlines the 

requirements for the determination of 

the total number of FTE residents in 

determining direct GME payments to 

hospitals. Currently, this section states 

that, for residents who spend time in 

nonprovider settings, there must be a 

written agreement between the hospital 

and the outside entity that states that 

the resident’s compensation for training 

time spent outside of the hospital 

setting is to be paid by the hospital. This 

section proposes to remove the written 

agreement requirement. 

This requirement is exempt from the 

PRA in accordance with Public Law 99–

272 or Public Law 108–173, or both. 

Section 413.79 Direct GME Payments: 

Determination of the Weighted Number 

of FTE Residents 

In summary, this section outlines the 

requirements for the determination of 

the weighted number of FTE residents 

for direct GME payments to hospitals. 

This section proposes that a hospital 

seeking an adjustment to the limit on its 

unweighted resident count under 

section 422 of Public Law 108–173 must 

provide documentation justifying the 

adjustment. In addition, the section 

states that a hospital wishing to receive 

a temporary adjustment to its FTE 

resident cap because it is participating 

in a Medicare GME affiliated group 

must submit the Medicare GME 

affiliation agreement to the CMS fiscal 

intermediary and to CMS’s Central 

Office. This section specifies the 

information that a request must contain. 

These requirements are exempt from 

the PRA in accordance with Public Law 

99–272 or Public Law 108–173, or both. 

Section 413.80 Determination of 

Weighting Factors for Foreign Medical 

Graduates 

In summary, this section specifies the 

information that a hospital must submit 

to the fiscal intermediary to include 

foreign medical graduates in its FTE 

count for a particular cost reporting 

period. 

This requirement is exempt from the 

PRA in accordance with Public Law 99–

272 or Public Law 108–173, or both. 

Section 413.83 Adjustment of a 

Hospital’s Target Amount or Prospective 

Payment Hospital-Specific Rate 

In summary, this section outlines the 

requirements for seeking an adjustment 

to the hospital’s target amount or 

hospital-specific rate. This section states 

that a hospital may request that the 

intermediary review the classification of 

operating costs that were previously 

misclassified for purposes of adjusting 

the hospital’s target amount or hospitalspecific rate. A hospital’s request for 

review must include sufficient 

documentation demonstrating that an 

adjustment is warranted. This section 

also specifies the terms in which the 

information should be provided. 

This requirement is exempt from the 

PRA in accordance with Public Law 99–

272 or Public Law 108–173, or both. 

Section 480.106 Exceptions to QIO 

Notice Requirements 

In summary, we are proposing to 

revise this section to add exceptions to 

the notice requirements for disclosure of 

QIO information to any person, agency, 

or organization. The notice 

requirements would not apply if the 

institution or practitioner has requested, 

in writing, that the QIO make the 

disclosure; the institution or 

practitioner has provided, in writing, 

consent for the disclosure; or the 

information is public information. 

The burden associated with these 

requirements is the time and effort for 

the institution or practitioner to provide 

a written request that the QIO make the 

disclosure or consent to the disclosure. 

We believe the collection 

requirements are exempt as defined in 

5 CFR 1320.4, information collections 

conducted or sponsored during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action or investigation, or audit. We also 

believe the collection requirements to be 

exempt as defined in 5 CFR 1320.3(c)(4) 

because we believe this would affect 

less than 10 persons. 

Section 480.133 Disclosure of 

Information about Practitioners, 

Reviewers and Institutions 

In summary, this section outlines the 

requirements concerning the disclosure 

of QIO information about practitioners, 

reviewers, and institutions. This section 

states that a QIO may disclose 

information on a particular practitioner 

or reviewer at the written request of or 

with the written consent of that 

practitioner or reviewer, with the 

recipient subject to the same rights and 

responsibilities on redisclosure as the 

requesting or consenting practitioner or 

reviewer. 

We believe the collection 

requirements are exempt as defined in 

5 CFR 1320.4, information collections 

conducted or sponsored during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action or investigation, or audit. We also 

believe the collection requirements to be 

exempt as defined in 5 CFR 1320.3(c)(4) 

because we believe this would affect 

less than 10 persons. 

Section 480.140 Disclosure of Quality 

Review Study Information 

In summary, this section outlines the 

requirements concerning the disclosure 

of quality review study information. 

This section states that a QIO may 

disclose quality review study 

information with identifiers of 

particular practitioners or institutions, 

or both, at the written request of, or with 

the written consent of, the identified 

practitioner(s) or institution(s). The 

consent or request must specify the 

information that is to be disclosed and 

the intended recipient of the 

information. The recipient would be 

subject to the same rights and 

responsibilities on redisclosure as the 

requesting or consenting practitioner or 

institution. 

We believe the collection 

requirements are exempt as defined in 

5 CFR 1320.4, information collections 

conducted or sponsored during the 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28341

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action or investigation, or audit. We also 

believe the collection requirements to be 

exempt as defined in 5 CFR 1320.3(c)(4) 

because we believe this would affect 

less than 10 persons.

Section 482.43 Condition of 

Participation: Discharge Planning 

In summary, this section outlines the 

requirements of the discharge planning 

process. This section states that the 

hospital must include in the discharge 

plan, a list of HHAs or SNFs that are 

available to the patient, that participate 

in the Medicare program, that serve the 

geographic area, and that request to be 

listed by the hospital as available and to 

maintain documentation. This section 

also specifies other information that the 

discharge plan must contain. 

The burden associated with these 

requirements is the time and effort for 

the hospital to provide a list to 

beneficiaries, for whom home health 

care or posthospital extended care 

services are necessary, and document 

the patient’s medical record. 

The burden associated with these 

requirements is estimated to be 5 

minutes per hospital per discharge. 

Therefore, we estimate the total national 

burden to be 327,684 hours annually to 

comply with these requirements (652 

discharges per hospital per year × 6,031 

hospitals × 5 minutes each). 

We have submitted 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. 

If you comment on any of these 

information collection and record 

keeping requirements, please mail 

copies directly to the following: 

Centers for Medicare & Medicaid 

Services, Office of Strategic Operations 

and Regulatory Affairs, Regulations 

Development and Issuances Group, 

Attn: Dawn Willinghan, CMS–1428–P, 

Room C5–14–03, 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: Brenda 

Aguilar, CMS Desk Officer. 

Comments submitted to OMB may 

also be e-mailed to the following 

address: e-mail: baguilar@omb.eop.gov,

or faxed to OMB at (202) 395–6974. 

C. Public Comments 

Because of the large number of items 

of correspondence we normally receive 

on a proposed rule, we are not able to 

acknowledge or respond to them 

individually. However, in preparing the 

final rule, we will consider all 

comments concerning the provisions of 

this proposed rule that we receive by 

the date and time specified in the DATES

section of this preamble and respond to 

those comments in the preamble to that 

rule.

CROSSWALK OF CONTENTS OF § 413.86 

Existing section Proposed new section. 

§ 413.86(a) ................................................................................................ § 413.75(a). 

§ 413.86(a)(1) ............................................................................................ § 413.75(a)(1). 

§ 413.86(a)(2) ............................................................................................ § 413.75(a)(2). 

§ 413.86(b) ................................................................................................ § 413.75(b). 

§ 413.86(c) ................................................................................................ § 413.75(c). 

§ 413.86(d) ................................................................................................ § 413.76. 

§ 413.86(d), introductory text .................................................................... § 413.76, introductory text. 

§ 413.86(d)(1) ............................................................................................ § 413.76(a). 

§ 413.86(d)(2) ............................................................................................ § 413.76(b). 

§ 413.86(d)(3) ............................................................................................ § 413.76(c). 

§ 413.86(d)(3)(i) ......................................................................................... § 413.76(c)(1). 

§ 413.86(d)(3)(ii) ........................................................................................ § 413.76(c)(2). 

§ 413.86(d)(3)(iii) ....................................................................................... § 413.76(c)(3). 

§ 413.86(d)(3)(iv) ....................................................................................... § 413.76(c)(4). 

§ 413.86(d)(3)(v) ........................................................................................ § 413.76(c)(5). 

§ 413.86(d)(4) ............................................................................................ § 413.76(d). 

§ 413.86(d)(5) ............................................................................................ § 413.76(e). 

§ 413.86(d)(5)(i) ......................................................................................... § 413.76(e)(1). 

§ 413.86(d)(5)(ii) ........................................................................................ § 413.76(e)(2). 

§ 413.86(d)(6) ............................................................................................ § 413.76(f). 

§ 413.86(e) ................................................................................................ § 413.77. 

§ 413.86(e)(1) ............................................................................................ § 413.77(a). 

§ 413.86(e)(1)(i) ......................................................................................... § 413.77(a)(1). 

§ 413.86(e)(1)(i)(A) .................................................................................... § 413.77(a)(1)(i). 

§ 413.86(e)(1)(i)(B) .................................................................................... § 413.77(a)(1)(ii). 

§ 413.86(e)(1)(ii) ........................................................................................ § 413.77(a)(2). 

§ 413.86(e)(1)(ii)(A) ................................................................................... § 413.77(a)(2)(i). 

§ 413.86(e)(1)(ii)(B) ................................................................................... § 413.77(a)(2)(ii). 

§ 413.86(e)(1)(ii)(C) ................................................................................... § 413.77(a)(2)(iii). 

§ 413.86(e)(1)(iii) ....................................................................................... § 413.77(a)(3). 

§ 413.86(e)(1)(iv) ....................................................................................... § 413.77(a)(4). 

§ 413.86(e)(1)(v) ........................................................................................ § 413.77(a)(5). 

§ 413.86(e)(2), introductory text ................................................................ § 413.77(b), introductory text. 

§ 413.86(e)(2)(i) ......................................................................................... § 413.77(b)(1). 

§ 413.86(e)(2)(ii) ........................................................................................ § 413.77(b)(2). 

§ 413.86(e)(3), introductory text ................................................................ § 413.77(c), introductory text. 

§ 413.86(e)(3)(i) ......................................................................................... § 413.77(c)(1). 

§ 413.86(e)(3)(ii) ........................................................................................ § 413.77(c)(2). 

§ 413.86(e)(4), introductory text ................................................................ § 413.77(d), introductory text—NEW. 

§ 413.86(e)(4)(i), introductory text ............................................................. § 413.77(d)(1), introductory text. 

§ 413.86(e)(4)(i)(A), introductory text ........................................................ § 413.77(d)(1)(i), introductory text. 

§ 413.86(e)(4)(i)(A)(1) ............................................................................... § 413.77(d)(1)(i)(A). 

28342 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

CROSSWALK OF CONTENTS OF § 413.86—Continued

Existing section Proposed new section. 

§ 413.86(e)(4)(i)(A)(2) ............................................................................... § 413.77(d)(1)(i)(B). 

§ 413.86(e)(4)(i)(A)(3) ............................................................................... § 413.77(d)(1)(i)(C). 

§ 413.86(e)(4)(i)(B) .................................................................................... § 413.77(d)(1)(ii). 

§ 413.86(e)(4)(ii), introductory text ............................................................ § 413.77(d)(2), introductory text—NEW. 

§ 413.86(e)(4)(ii)(A) ................................................................................... § 413.77(d)(2)(i). 

§ 413.86(e)(4)(ii)(B) ................................................................................... § 413.77(d)(2)(ii). 

§ 413.86(e)(4)(ii)(C), introductory text ....................................................... § 413.77(d)(2)(iii), introductory text. 

§ 413.86(e)(4)(ii)(C)(1) .............................................................................. § 413.77(d)(2)(iii)(A). 

§ 413.86(e)(4)(ii)(C)(1)(i) ........................................................................... § 413.77(d)(2)(iii)(A)(1). 

§ 413.86(e)(4)(ii)(C)(1)(ii) .......................................................................... § 413.77(d)(2)(iii)(A)(2). 

§ 413.86(e)(4)(ii)(C)(1)(iii) .......................................................................... § 413.77(d)(2)(iii)(A)(3). 

§ 413.86(e)(4)(ii)(C)(2), introductory text .................................................. § 413.77(d)(2)(iii)(B), introductory text—NEW. 

§ 413.86(e)(4)(ii)(C)(2)(i) ........................................................................... § 413.77(d)(2)(iii)(B)(1). 

§ 413.86(e)(4)(ii)(C)(2)(ii) .......................................................................... § 413.77(d)(2)(iii)(B)(2). 

§ 413.86(e)(4)(ii)(C)(2)(iii) .......................................................................... § 413.77(d)(2)(iii)(B)(3)—NEW. 

§ 413.86(e)(4)(ii)(C)(2)(iv) ......................................................................... § 413.77(d)(2)(iii)(B)(4)—NEW. 

§ 413.77(d)(2)(iiii)(B)(5)—NEW. 

§ 413.86(e)(4)(ii)(C)(3) .............................................................................. § 413.77(d)(2)(iii)(C)—NEW. 

§ 413.86(e)(5) ............................................................................................ § 413.77(e). 

§ 413.86(e)(5)(i) ......................................................................................... § 413.77(e)(1). 

§ 413.86(e)(5)(i)(A) .................................................................................... § 413.77(e)(1)(i). 

§ 413.86(e)(5)(i)(B), introductory text ........................................................ § 413.77(e)(1)(ii), introductory text. 

§ 413.86(e)(5)(i)(B)(1) ............................................................................... § 413.77(e)(1)(ii)(A). 

§ 413.86(e)(5)(i)(B)(2) ............................................................................... § 413.77(e)(1)(ii)(B). 

§ 413.86(e)(5)(i)(C) .................................................................................... § 413.77(e)(1)(iii). 

§ 413.86(e)(5)(ii) ........................................................................................ § 413.77(e)(2). 

§ 413.86(e)(5)(iii) ....................................................................................... § 413.77(e)(3). 

§ 413.77(f)—NEW. 

§ 413.86(f) ................................................................................................. § 413.78. 

§ 413.86(f), introductory text ..................................................................... § 413.78, introductory text. 

§ 413.86(f)(1) ............................................................................................. § 413.78(a). 

§ 413.86(f)(2) ............................................................................................. § 413.78(b). 

§ 413.86(f)(3), introductory text ................................................................. § 413.78(c), introductory text. 

§ 413.86(f)(3)(i) .......................................................................................... § 413.78(c)(1). 

§ 413.86(f)(3)(ii) ......................................................................................... § 413.78(c)(2). 

§ 413.86(f)(4), introductory text ................................................................. § 413.78(d), introductory text. 

§ 413.86(f)(4)(i) .......................................................................................... § 413.78(d)(1). 

§ 413.86(f)(4)(ii) ......................................................................................... § 413.78(d)(2). 

§ 413.86(f)(4)(iii) ........................................................................................ § 413.78(d)(3). 

§ 413.86(f)(4)(iv) ........................................................................................ § 413.78(d)(4). 

§ 413.78(e), introductory text—NEW. 

§ 413.78(e)(1)—NEW. 

§ 413.78(e)(2)—NEW. 

§ 413.78(e)(3)—NEW. 

§ 413.86(g), introductory text .................................................................... § 413.79. 

§ 413.86(g), introductory text .................................................................... § 413.79, introductory text. 

§ 413.86(g)(1) ............................................................................................ § 413.79(a). 

§ 413.86(g)(1) ............................................................................................ § 413.79(a) introductory text—NEW. 

§ 413.86(g)(1) ............................................................................................ § 413.79(a)(1)—NEW. 

§ 413.86(g)(1) ............................................................................................ § 413.79(a)(2)—NEW. 

§ 413.86(g)(1) ............................................................................................ § 413.79(a)(3)—NEW. 

§ 413.86(g)(1) ............................................................................................ § 413.79(a)(4)—NEW. 

§ 413.86(g)(1) ............................................................................................ § 413.79(a)(5)—NEW. 

§ 413.86(g)(1)(i) ......................................................................................... § 413.79(a)(6). 

§ 413.86(g)(1)(ii) ........................................................................................ § 413.79(a)(7). 

§ 413.86(g)(1)(iii), introductory text ........................................................... § 413.79(a)(8), introductory text. 

§ 413.86(g)(1)(iii)(A) .................................................................................. § 413.79(a)(8)(i). 

§ 413.86(g)(1)(iii)(B) .................................................................................. § 413.79(a)(8)(ii). 

§ 413.86(g)(1)(iv) ....................................................................................... § 413.79(a)(9). 

§ 413.86(g)(2) ............................................................................................ § 413.79(b)(1). 

§ 413.86(g)(3) ............................................................................................ § 413.79(b)(2). 

§ 413.79(c)(1), introductory text—NEW. 

§ 413.79(c)(1)(i) through (iii)—NEW. 

§ 413.86(g)(4), introductory text ................................................................ § 413.79(c)(2), introductory text. 

§ 413.86(g)(4)(i) ......................................................................................... § 413.79(c)(2)(i). 

§ 413.86(g)(4)(ii) ........................................................................................ § 413.79(c)(2)(ii). 

§ 413.86(g)(4)(iii) ....................................................................................... § 413.79(c)(2)(iii). 

§ 413.86(g)(4)(iv) ....................................................................................... § 413.79(c)(2)(iv). 

§ 413.86(g)(4)(v) ........................................................................................ § 413.79(c)(2)(v). 

§ 413.79(c)(3)(i) through (ii)—NEW. 

§ 413.79(c)(4)—NEW. 

§ 413.79(c)(5)—NEW. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28343

CROSSWALK OF CONTENTS OF § 413.86—Continued

Existing section Proposed new section. 

§ 413.86(g)(5), introductory text ................................................................ § 413.79(d), introductory text. 

§ 413.86(g)(5)(i) ......................................................................................... § 413.79(d)(1). 

§ 413.86(g)(5)(ii) ........................................................................................ § 413.79(d)(2). 

§ 413.86(g)(5)(iii) ....................................................................................... § 413.79(d)(3). 

§ 413.86(g)(5)(iv) ....................................................................................... § 413.79(d)(4). 

§ 413.86(g)(5)(v) ........................................................................................ § 413.79(d)(5). 

§ 413.86(g)(5)(vi) ....................................................................................... § 413.79(d)(6). 

§ 413.86(g)(5)(vii) ...................................................................................... § 413.79(d)(7). 

§ 413.86(g)(6), introductory text ................................................................ § 413.79(e), introductory text. 

§ 413.86(g)(6)(i) ......................................................................................... § 413.79(e)(1). 

§ 413.86(g)(6)(i)(A) .................................................................................... § 413.79(e)(1)(i). 

§ 413.86(g)(6)(i)(B) .................................................................................... § 413.79(e)(1)(ii). 

§ 413.86(g)(6)(i)(C) .................................................................................... § 413.79(e)(1)(iii). 

§ 413.86(g)(6)(i)(D) .................................................................................... § 413.79(e)(1)(iv). 

§ 413.86(g)(6)(i)(E) .................................................................................... § 413.79(e)(1)(v). 

§ 413.86(g)(6)(ii), introductory text ............................................................ § 413.79(e)(2), introductory text. 

§ 413.86(g)(6)(ii)(A) ................................................................................... § 413.79(e)(2)(i). 

§ 413.86(g)(6)(ii)(B) ................................................................................... § 413.79(e)(2)(ii). 

§ 413.86(g)(6)(iii) ....................................................................................... § 413.79(e)(3). 

§ 413.86(g)(6)(iv) ....................................................................................... § 413.79(e)(4). 

§ 413.86(g)(7) ............................................................................................ § 413.79(f). 

§ 413.86(g)(7)(i) ......................................................................................... § 413.79(f)(1). 

§ 413.86(g)(7)(ii) ........................................................................................ § 413.79(f)(2). 

§ 413.86(g)(7)(iii) ....................................................................................... § 413.79(f)(3). 

§ 413.86(g)(7)(iv) ....................................................................................... § 413.79(f)(4). 

§ 413.86(g)(7)(v) ........................................................................................ § 413.79(f)(5). 

§ 413.86(g)(8), introductory text ................................................................ § 413.79(g), introductory text. 

§ 413.86(g)(8)(i), introductory text ............................................................. § 413.79(g)(1), introductory text. 

§ 413.86(g)(8)(i)(A) .................................................................................... § 413.79(g)(1)(i). 

§ 413.86(g)(8)(i)(B) .................................................................................... § 413.79(g)(1)(ii). 

§ 413.86(g)(8)(ii) ........................................................................................ § 413.79(g)(2). 

§ 413.86(g)(8)(iii) ....................................................................................... § 413.79(g)(3). 

§ 413.86(g)(8)(iv) ....................................................................................... § 413.79(g)(4). 

§ 413.86(g)(8)(v) ........................................................................................ § 413.79(g)(5). 

§ 413.86(g)(9) ............................................................................................ § 413.79(h). 

§ 413.86(g)(9)(i), introductory text ............................................................. § 413.79(h)(1), introductory text. 

§ 413.86(g)(9)(i)(A) .................................................................................... § 413.79(h)(1)(i). 

§ 413.86(g)(9)(i)(B) .................................................................................... § 413.79(h)(1)(ii). 

§ 413.86(g)(9)(ii), introductory text ............................................................ § 413.79(h)(2), introductory text. 

§ 413.86(g)(9)(ii)(A) ................................................................................... § 413.79(h)(2)(i). 

§ 413.86(g)(9)(ii)(B) ................................................................................... § 413.79(h)(2)(ii). 

§ 413.86(g)(9)(iii), introductory text ........................................................... § 413.79(h)(3), introductory text. 

§ 413.86(g)(9)(iii)(A), introductory text ...................................................... § 413.79(h)(3)(i), introductory text. 

§ 413.86(g)(9)(iii)(A)(1) .............................................................................. § 413.79(h)(3)(i)(A). 

§ 413.86(g)(9)(iii)(A)(2) .............................................................................. § 413.79(h)(3)(i)(B). 

§ 413.86(g)(9)(iii)(B), introductory text ...................................................... § 413.79(h)(3)(ii), introductory text. 

§ 413.86(g)(9)(iii)(B)(1) .............................................................................. § 413.79(h)(3)(ii)(A). 

§ 413.86(g)(9)(iii)(B)(2) .............................................................................. § 413.79(h)(3)(ii)(B). 

§ 413.86(g)(10), introductory text .............................................................. § 413.79(i), introductory text. 

§ 413.86(g)(10)(i) ....................................................................................... § 413.79(i)(1). 

§ 413.86(g)(10)(ii) ...................................................................................... § 413.79(i)(2). 

§ 413.86(g)(10)(iii) ..................................................................................... § 413.79(i)(3). 

§ 413.86(g)(11), introductory text .............................................................. § 413.79(j), introductory text. 

§ 413.86(g)(11)(i) ....................................................................................... § 413.79(j)(1). 

§ 413.86(g)(11)(ii) ...................................................................................... § 413.79(j)(2). 

§ 413.86(g)(11)(iii) ..................................................................................... § 413.79(j)(3). 

§ 413.86(g)(12), introductory text .............................................................. § 413.79(k), introductory text. 

§ 413.86(g)(12)(i), introductory text ........................................................... § 413.79(k)(1), introductory text. 

§ 413.86(g)(12)(i)(A) .................................................................................. § 413.79(k)(1)(i). 

§ 413.86(g)(12)(i)(B) .................................................................................. § 413.79(k)(1)(ii). 

§ 413.86(g)(12)(ii), introductory text .......................................................... § 413.79(k)(2), introductory text. 

§ 413.86(g)(12)(ii)(A) ................................................................................. § 413.79(k)(2)(i). 

§ 413.86(g)(12)(ii)(B), introductory text ..................................................... § 413.79(k)(2)(ii), introductory text. 

§ 413.86(g)(12)(ii)(B)(1), introductory text ................................................. § 413.79(k)(2)(ii)(A), introductory text. 

§ 413.86(g)(12)(ii)(B)(1)(i) ......................................................................... § 413.79(k)(2)(ii)(A)(1). 

§ 413.86(g)(12)(ii)(B)(1)(ii) ......................................................................... § 413.79(k)(2)(ii)(A)(2). 

§ 413.86(g)(12)(ii)(B)(2) ............................................................................. § 413.79(k)(2)(ii)(B). 

§ 413.86(g)(12)(iii) ..................................................................................... § 413.79(k)(3). 

§ 413.86(g)(12)(iv), introductory text ......................................................... § 413.79(k)(4), introductory text. 

§ 413.86(g)(12)(iv)(A) ................................................................................ § 413.79(k)(4)(i). 

§ 413.86(g)(12)(iv)(B), introductory text .................................................... § 413.79(k)(4)(ii), introductory text. 

§ 413.86(g)(12)(iv)(B)(1) ............................................................................ § 413.79(k)(4)(ii)(A). 

28344 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

CROSSWALK OF CONTENTS OF § 413.86—Continued

Existing section Proposed new section. 

§ 413.86(g)(12)(iv)(B)(2) ............................................................................ § 413.79(k)(4)(ii)(B). 

§ 413.86(g)(12)(v), introductory text .......................................................... § 413.79(k)(5), introductory text. 

§ 413.86(g)(12)(v)(A) ................................................................................. § 413.79(k)(5)(i). 

§ 413.86(g)(12)(v)(B) ................................................................................. § 413.79(k)(5)(ii). 

§ 413.86(g)(12)(v)(C) ................................................................................. § 413.79(k)(5)(iii). 

§ 413.86(g)(12)(vi) ..................................................................................... § 413.79(k)(6). 

§ 413.86(g)(13) .......................................................................................... § 413.79(l). 

§ 413.86(h) ................................................................................................ § 413.80. 

§ 413.86(h)(1), introductory text ................................................................ § 413.80(a), introductory text. 

§ 413.86(h)(1)(i) ......................................................................................... § 413.80(a)(1). 

§ 413.86(h)(1)(ii) ........................................................................................ § 413.80(a)(2). 

§ 413.86(h)(2) ............................................................................................ § 413.80(b). 

§ 413.86(h)(3) ............................................................................................ § 413.80(c). 

§ 413.86(h)(4) ............................................................................................ § 413.80(d). 

§ 413.86(h)(5) ............................................................................................ § 413.80(e). 

§ 413.86(h)(6) ............................................................................................ § 413.80(f). 

§ 413.86(i) ................................................................................................. § 413.81. 

§ 413.86(i)(1), introductory text ................................................................. § 413.81(a), introductory text. 

§ 413.86(i)(1)(i) .......................................................................................... § 413.81(a)(1). 

§ 413.86(i)(1)(ii) ......................................................................................... § 413.81(a)(2). 

§ 413.86(i)(2) ............................................................................................. § 413.81(b). 

§ 413.86(i)(3)(i) .......................................................................................... § 413.81(c)(1). 

§ 413.86(i)(3)(ii) ......................................................................................... § 413.81(c)(2). 

§ 413.86(j), introductory text ..................................................................... § 413.80(g), introductory text. 

§ 413.86(j)(1) ............................................................................................. § 413.80(g)(1). 

§ 413.86(j)(2) ............................................................................................. § 413.80(g)(2). 

§ 413.86(j)(3) ............................................................................................. § 413.80(g)(3). 

§ 413.86(j)(4) ............................................................................................. § 413.80(g)(4). 

§ 413.86(j)(5) ............................................................................................. § 413.80(g)(5). 

§ 413.86(j)(6) ............................................................................................. § 413.80(g)(6). 

§ 413.86(j)(7) ............................................................................................. § 413.80(g)(7). 

§ 413.86(k) ................................................................................................ § 413.82. 

§ 413.86(k)(1) ............................................................................................ § 413.82(a). 

§ 413.86(k)(2) ............................................................................................ § 413.82(b). 

§ 413.86(k)(3) ............................................................................................ § 413.82(c). 

§ 413.86(l) ................................................................................................. § 413.83. 

§ 413.86(l)(1) ............................................................................................. § 413.83(a). 

§ 413.86(l)(1)(i) .......................................................................................... § 413.83(a)(1). 

§ 413.86(l)(1)(ii) ......................................................................................... § 413.83(a)(2). 

§ 413.86(l)(2)(iii) ........................................................................................ § 413.83(a)(3). 

§ 413.86(l)(2) ............................................................................................. § 413.83(b). 

§ 413.86(l)(2)(i) .......................................................................................... § 413.83(b)(1). 

§ 413.86(l)(2)(ii) ......................................................................................... § 413.83(b)(2). 

§ 413.86(l)(2)(iii) ........................................................................................ § 413.83(b)(3). 

Note to Readers: Proposed redesignated 

§§ 413.77, 413.78 and 413.79 are the only 

three sections of the proposed redesignated 

§§ 413.75 through 413.83 that contain 

proposed policy changes, as discussed in 

section IV. O. of the preamble of this 

proposed rule. Therefore, we will only 

consider public comments on the following 

paragraphs of the proposed redesignated 

sections: 

• Sections 413.77(d) introductory text, 

(d)(2), (d)(2)(iii)(B), (d)(2)(iii)(B)(3), 

(d)(2)(iii)(B)(4), (d)(2)(iii)(B)(5), (d)(2)(iii)(C), 

and (f). 

• Sections 413.78(e), (e)(1), (e)(2), and 

(e)(3). 

• Section 413.79(a), (c)(1), (c)(2), (c)(3), 

(c)(4), and (c)(5). 

The remaining portions of the proposed 

redesignated §§ 413.75 through 413.83 

contain only coding, cross-reference, and 

conforming redesignation changes. For these 

remaining portions, we will consider 

comments on redesignation, coding, and 

cross-reference changes only.

List of Subjects 

42 CFR Part 403

Health insurance, Hospitals, 

Incorporation by reference, 

Intergovernmental relations, Medicare, 

Reporting and recordkeeping 

requirements. 

2 CFR Part 412

Administrative practice and 

procedure, Health facilities, Medicare, 

Puerto Rico, Reporting and 

recordkeeping requirements. 

42 CFR Part 413

Health facilities, Kidney diseases, 

Medicare, Puerto Rico, Reporting and 

recordkeeping requirements. 

42 CFR Part 418

Health facilities, Hospice care, 

Incorporation by reference, Medicare, 

Reporting and recordkeeping 

requirements. 

42 CFR Part 460

Aged, Health, Incorporation by 

reference, Medicare, Medicaid, 

Reporting and recordkeeping 

requirements. 

42 CFR Part 480

Medicare Program; Utilization and 

quality control, Quality Improvement 

Organizations (QIOs). 

42 CFR Part 482

Grant program-health, Hospitals, 

Medicaid, Medicare, Reporting and 

recordkeeping requirements. 

42 CFR Part 483

Grant program-health, Health 

facilities, Health professions, Health 

records, Medicaid, Medicare, Nursing

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28345

homes, Nutrition, Reporting and 

recordkeeping requirements, Safety. 

42 CFR Part 485

Grant programs-health, Health 

facilities, Medicaid, Medicare, 

Reporting and record keeping 

requirements. 

42 CFR Part 489

Health facilities, Medicare, Reporting 

and record keeping requirements.

For the reasons stated in the preamble 

of this proposed rule, the Centers for 

Medicare & Medicaid Services is 

proposing to amend 42 CFR chapter IV 

as follows: 

A. Part 403 is amended as follows:

PART 403—SPECIAL PROGRAMS AND 

PROJECTS 

1. The authority citation for part 403 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh).

2. Section 403.744 is amended by—

A. Revising paragraph (a)(1). 

B. Revising paragraph (c). 

C. Removing paragraph (c)(1) and 

paragraph (c)(2). 

The revision reads as follows:

§ 403.744 Condition of Participation: Life 

safety from fire. 

(a) General. An RNHCI must meet the 

following conditions: 

(1) Except as otherwise provided in 

this section—

(i) The RNHCI must meet the 

applicable provisions of the 2000 

edition of the Life Safety Code of the 

National Fire Protection Association. 

The Director of the Office of the Federal 

Register has approved the NFPA 101

2000 edition of the Life Safety Code, 

issued January 14, 2000, for 

incorporation by reference in 

accordance with 5 U.S.C. 552(a) and 1 

CFR part 51. A copy of the Code is 

available for inspection at the CMS 

Information Resource Center, 7500 

Security Boulevard, Baltimore, MD and 

at the National Archives and Records 

Administration (NARA). For 

information on the availability of this 

material at NARA, call 202–741–6030, 

or go to: http://www.archives.gov/

federal_register/

code_of_federal_regulations/

ibr_locations.html. Copies may be 

obtained from the National Fire 

Protection Association, 1 Batterymarch 

Park, Quincy, MA 02269. If any changes 

in this edition of the Code are 

incorporated by reference, CMS will 

publish notice in the Federal Register to 

announce the changes. 

(ii) Chapter 19.3.6.3.2, exception 

number 2 of the adopted Life Safety 

Code does not apply to an RNHCI.

* * * * *

(c) Phase-in period. Beginning March 

13, 2006, an RNHCI must be in 

compliance with Chapter 19.2.9, 

Emergency Lighting. Beginning March 

13, 2006, Chapter 19.3.6.3.2, exception 

number 2 does not apply to RNHCIs. 

B. Part 412 is amended as follows:

PART 412—PROSPECTIVE PAYMENT 

SYSTEMS FOR INPATIENT HOSPITAL 

SERVICES 

1. The authority citation for part 412 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh).

2. Section 412.2 is amended by 

adding a new paragraph (b)(3) to read as 

follows:

§ 412.2 Basis for payment.

* * * * *

(b) Payment in full.

* * * * *

(3) If a patient is admitted to an acute 

care hospital and then the acute care 

hospital meets the criteria at § 412.23(e) 

to be paid as a LTCH, during the course 

of the patient’s hospitalization, 

Medicare considers all the days of the 

patient stay in the facility (days prior to 

and after the designation of LTCH 

status) to be a single episode of LTCH 

care. Medicare will not make payment 

under subpart H for any part of the 

hospitalization. Payment for the entire 

patient stay (days prior to and after the 

designation of LTCH status) will be 

made in accordance with the 

requirements specified in § 412.521. The 

requirements of this paragraph (b)(3) 

apply only to a patient stay in which a 

patient is in an acute care hospital and 

that hospital is designated as a LTCH on 

or after October 1, 2004.

* * * * *

3. Section 412.4 is amended by 

revising paragraph (d) to read as 

follows:

§ 412.4 Discharges and transfers.

* * * * *

(d) Qualifying DRGs.

(1) For purposes of paragraph (c) of 

this section, and subject to the 

provisions of paragraph (d)(2) of this 

section, the qualifying DRGs must meet 

the following criteria for both of the 2 

most recent fiscal years for which data 

are available: 

(i) The DRG must have a geometric 

mean length of stay of at least 3 days. 

(ii) The DRG must have at least 14,000 

cases identified as postacute care 

transfer cases. 

(iii) The DRG must have at least 10 

percent of the postacute care transfers 

occurring before the geometric mean 

length of stay for the DRG. 

(iv) If the DRG is one of a paired DRG 

based on the presence or absence of a 

comorbidity or complication, one of the 

DRGs meets the criteria specified under 

paragraphs (d)(1)(i) through (d)(1)(iii) of 

this section. 

(v) To initially qualify, the DRG must 

meet the criteria specified in 

paragraphs(d)(1)(i) through (d)(1)(iv) of 

this section and must have a decline in 

the geometric mean length of stay for 

the DRG during the most recent 5-year 

period of at least 7 percent. Once a DRG 

initially qualifies, the DRG is subject to 

the criteria specified under paragraphs 

(d)(1)(i) through (d)(1)(iv) of this section 

for each subsequent fiscal year. 

(2) Effective October 1, 2004, if a DRG 

fails to meet the qualifying criteria 

under paragraph (d)(1) of this section, 

the qualifying DRG must meet the 

following criteria for both of the 2 most 

recent fiscal years for which data are 

available: 

(i) The DRG must have a geometric 

mean length stay of at least 3 days. 

(ii) The DRG must have at least 5,000 

cases identified as postacute care 

transfer cases. 

(iii) The DRG must have a percentage 

of the postacute care transfer cases 

occurring before the geometric mean 

length of stay of at least 2 standard 

deviations above the geometric mean 

length of stay across all DRGs. 

(iv) If the DRG is one of a paired DRG 

based on the presence or absence of a 

comorbidity or complication, one of the 

DRGs meets the criteria specified under 

paragraph (d)(2)(i) through (d)(2)(iii) of 

this section. 

(v) To initially qualify, the DRG meets 

the criteria specified in paragraph 

(d)(2)(i) through (d)(2)(iv) of this section 

and must either have experienced a 

decline in its geometric mean length of 

stay during the most recent 5-year 

period of at least 7 percent, or contain 

only cases that would have been 

included in a DRG to which the policy 

applied in the prior year. Once a DRG 

initially qualifies, the DRG is subject to 

the criteria specified under paragraphs 

(d)(2)(i) through (d)(2)(iv) for each 

subsequent fiscal year.

* * * * *

4. Section 412.22 is amended by—

A. Adding a sentence at the end of 

paragraph (a). 

B. Revising paragraph (e). 

The addition and revision read as 

follows:

28346 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

§ 412.22 Excluded hospitals and hospital 

units: General rules. 

(a) Criteria. * * * For purposes of this 

subpart, the term ‘‘hospital’’ includes a 

critical access hospital (CAH).

* * * * *

(e) Hospitals-within-hospitals. Except 

as provided in paragraph (f) of this 

section, a hospital that occupies space 

in a building also used by another 

hospital, or in one or more separate 

buildings located on the same campus 

as buildings used by another hospital, 

must meet the following criteria in order 

to be excluded from the prospective 

payment systems specified in 

§ 412.1(a)(1): 

(1) For cost reporting periods 

beginning on or after October 1, 1987, 

and before October 1, 2004—

(i) Separate governing body. The 

hospital has a governing body that is 

separate from the governing body of the 

hospital occupying space in the same 

building or on the same campus. The 

hospital’s governing body is not under 

the control of the hospital occupying 

space in the same building or on the 

same campus, or of any third entity that 

controls both hospitals. 

(ii) Separate chief medical officer.

The hospital has a single chief medical 

officer who reports directly to the 

governing body and who is responsible 

for all medical staff activities of the 

hospital. The chief medical officer of the 

hospital is not employed by or under 

contract with either the hospital 

occupying space in the same building or 

on the same campus or any third entity 

that controls both hospitals. 

(iii) Separate medical staff. The 

hospital has a medical staff that is 

separate from the medical staff of the 

hospital occupying space in the same 

building or on the same campus. The 

hospital’s medical staff is directly 

accountable to the governing body for 

the quality of medical care provided in 

the hospital, and adopts and enforces by 

laws governing medical staff activities, 

including criteria and procedures for 

recommending to the governing body 

the privileges to be granted to 

individual practitioners. 

(iv) Chief executive officer. The 

hospital has a single chief executive 

officer through whom all administration 

authority flows, and who exercises 

control and surveillance over all 

administrative activities of the hospital. 

The chief executive officer is not 

employed by, or under contract with, 

either the hospital occupying space in 

the same building or on the same 

campus or any third entity that controls 

both hospitals. 

(v) Performance of basic hospital 

functions. The hospital meets one of the 

following criteria: 

(A) The hospital performs the basic 

functions specified in §§ 482.21 through 

482.27, 482.30, 482.42, 482.43, and 

482.45 of this chapter 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. 

Food and dietetic services and 

housekeeping, maintenance, and other 

services necessary to maintain a clean 

and safe physical environment could be 

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. 

(B) For the same period of at least 6 

months used to determine compliance 

with the criterion regarding the age of 

patients in § 412.23(d)(2) or the lengthof-stay criterion in § 412.23(e)(2), or for 

hospitals other than children’s or longterm care hospitals, for a 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 obtains 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 § 412.2(c). For 

purposes of this paragraph (e)(1)(v)(B), 

however, the costs of preadmission 

services are those specified under 

§ 413.40(c)(2) rather than those specified 

under § 412.2(c)(5). 

(C) For the same period of at least 6 

months used to determine compliance 

with the criterion regarding the age of 

inpatients in § 412.23(d)(2) or the 

length-of-stay criterion in § 412.23(e)(2), 

or for hospitals other than children’s or 

long-term care hospitals, for the period 

of at least 6 months immediately 

preceding the first cost reporting period 

for which exclusion is sought, the 

hospital has 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 building or on the same campus. 

(2) Effective for cost reporting periods 

beginning on or after October 1, 2004, 

the hospital must meet the following: 

(i) Governance and control 

requirements. The hospital meets the 

criteria under paragraphs (e)(1)(i) 

through (e)(1)(iv) of this section. 

(ii) Ownership interest and control.

The hospital must not be owned, wholly 

or in part, by a person or party that has 

any ownership interest in the hospital 

occupying space in the same building or 

on the same campus, or of any third 

party entity that controls both hospitals. 

However, hospitals that were excluded 

from the prospective payment systems 

specified in § 412.1(a) as of June 30, 

2004, will be deemed to these criteria. 

(iii) Admissions criteria. For the same 

period of at least 6 months used to 

determine compliance with the criterion 

regarding the age of inpatients in 

§ 412.23(d)(2) or the length-of-stay 

criterion in § 412.23(e)(2), or for 

hospitals other than children’s or longterm care hospitals, for the period of at 

least 6 months immediately preceding 

the first cost reporting period for which 

exclusion is sought, the hospital has 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 

building or on the same campus. 

(3) Notification of co-located status. A 

long-term care hospital that occupies 

space in a building used by another 

hospital, or in one or more separate 

buildings located on the same campus 

as buildings used by another hospital 

that meets the criteria of (e)(1) or (e)(2) 

of this section must notify its fiscal 

intermediary and CMS in writing of its 

co-location within 60 days of its first 

cost reporting period that begins on or 

after October 1, 2002.

* * * * *

5. Section 412.25 is amended by 

adding a new paragraph (g), to read as 

follows:

§ 412.25 Excluded hospital units: Common 

requirements.

* * * * *

(g) CAH units not meeting applicable 

requirements. If a psychiatric or 

rehabilitation unit of a CAH does not 

meet the requirements of § 485.645 with 

respect to a cost reporting period, no 

payment may be made to the CAH for 

services furnished in that unit for that 

period. Payment to the CAH for services 

in the unit may resume only after the 

unit has demonstrated to CMS that the 

unit meets the requirements of 

§ 485.645. 

6. Section 412.63 is amended by—

A. Revising the heading of the section. 

B. Revising paragraph (a). 

C. Adding introductory text to 

paragraph (b). 

D. Revising paragraph (c)(1), (c)(5), 

and (c)(6) 

E. Revising paragraph (u). 

The revisions and addition read as 

follow:

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28347

§ 412.63 Federal rates for inpatient 

operating costs for Federal fiscal years 

1984 through 2004. 

(a) General rule. (1) CMS determines 

a national adjusted prospective payment 

rate for inpatient operating costs for 

each inpatient hospital discharge in 

Federal fiscal years 1985 through 2004 

involving inpatient hospital service of a 

hospital in the United States, subject to 

the PPS, and determines a regional 

adjusted PPS rate for operating costs for 

such discharges in each region for 

which payment may be made under 

Medicare Part A. 

(2) Each such rate is determined for 

hospitals located in urban or rural areas 

within the United States and within 

each such region, respectively, as 

described under paragraphs (b) through 

(u) of this section.

* * * * *

(b) Geographic classifications.

Effective for fiscal years 1985 through 

2004, the following rules apply.

* * * * *

(c) Updating previous standardized 

amounts. (1) For discharges occurring in 

fiscal year 1985 through fiscal year 

2003, CMS computes average 

standardized amounts for hospitals in 

urban areas and rural areas within the 

United States, and in urban areas and 

rural areas within each region. For 

discharges occurring in fiscal year 2004, 

CMS computes an average standardized 

amount for hospitals located in all areas.

* * * * *

(5) For fiscal years 1987 through 2004, 

CMS standardizes the average 

standardized amounts by excluding an 

estimate of indirect medical education 

payments. 

(6) For fiscal years 1988 through 2003, 

CMS computes average standardized 

amounts for hospitals located in large 

urban areas, other urban areas, and rural 

areas. The term large urban area means 

an MSA with a population of more than 

1,000,000 or an NECMA, with a 

population of more than 970,000 based 

on the most recent available population 

data published by the Census Bureau. 

For fiscal year 2004, CMS computes an 

average standardized amount for 

hospitals located in all areas.

* * * * *

(u) Applicable percentage change for 

fiscal year 2004. The applicable 

percentage change for fiscal year 2004 is 

the percentage increase in the market 

basket index for prospective payment 

hospitals (as defined in § 413.40(a) of 

this subchapter) for hospitals in all 

areas.

* * * * *

7. A new § 412.64 is added to Subpart 

D to read as follows:

§ 412.64 Federal rates for inpatient 

operating costs for Federal fiscal year 2005 

and subsequent fiscal years. 

(a) General rule. CMS determines a 

national adjusted prospective payment 

rate for inpatient operating costs for 

each inpatient hospital discharge in 

Federal fiscal year 2005 and subsequent 

fiscal years involving inpatient hospital 

services of a hospital in the United 

States subject to the prospective 

payment system for which payment may 

be made under Medicare Part A. 

(b) Geographic classifications. (1) For 

purposes of this section, the following 

definitions apply: 

(i) The term region means one of the 

9 metropolitan divisions comprising the 

50 States and the District of Columbia, 

established by the Executive Office of 

Management and Budget for statistical 

and reporting purposes. 

(ii) The term urban area means—

(A) A Metropolitan Statistical Area, as 

defined by the Executive Office of 

Management and Budget; or 

(B) The following New England 

counties, which are deemed to be parts 

of urban areas under section 601(g) of 

the Social Security Amendments of 

1983 (Public Law 98–21, 42 U.S.S. 

1395ww (note)): Litchfield County, 

Connecticut; York County, Maine; 

Sagadahoc County, Maine; Merrimack 

County, New Hampshire; and Newport 

County, Rhode Island. 

(C) The term rural area means any 

area outside an urban area. 

(D) The phrase hospital reclassified as 

rural means a hospital located in a 

county that, in FY 2004, was part of an 

MSA, but was redesignated as rural after 

September 30, 2004, as a result of the 

most recent census data and 

implementation of the new MSA 

definitions announced by OMB on June 

6, 2003. 

(2) For hospitals within an MSA that 

crosses census division boundaries, the 

MSA is deemed to belong to the census 

division in which most of the hospitals 

within the MSA are located. 

(3) For discharges occurring on or 

after October 1, 2004, a hospital located 

in a rural county adjacent to one or 

more urban areas is deemed to be 

located in an urban area and receives 

the Federal payment amount for the 

urban area to which the greater number 

of workers in the county commute if the 

rural county would otherwise be 

considered part of an urban area, under 

the standards for designating MSAs if 

the commuting rates used in 

determining outlying counties were 

determined on the basis of the aggregate 

number of resident workers who 

commute to (and, if applicable under 

the standards, from) the central county 

or central counties of all adjacent MSAs. 

These EOMB standards are set forth in 

the notice of final revised standards for 

classification of MSAs published in the 

Federal Register on December 27, 2000 

(65 FR 82228), announced by EOMB on 

June 6, 2003, and available from CMS, 

7500 Security Boulevard, Baltimore, 

Maryland 21244. 

(4) For purposes of this section, any 

change in an MSA designation is 

recognized on October 1 following the 

effective date of the change. Such a 

change in MSA designation may occur 

as a result of redesignation of an MSA 

by the Executive Office of Management 

and Budget. 

(c) Computing the standardized 

amount. CMS computes an average 

standardized amount that is applicable 

to all hospitals located in all areas, 

updated by the applicable percentage 

increase specified in paragraph (d) of 

this section. 

(d) Applicable percentage change for 

fiscal year 2005 and for subsequent 

fiscal years.

(1) Subject to the provisions of 

paragraph (d)(2) of this section, the 

applicable percentage change for fiscal 

year 2005 and for subsequent years for 

updating the standardized amount is the 

percentage increase in the market basket 

index for prospective payment hospitals 

(as defined in § 413.40(a) of this 

subchapter) for hospitals in all areas. 

(2) For fiscal years 2005, 2006, and 

2007, the applicable percentage change 

specified in paragraph (d)(1) of this 

section is reduced by 0.4 percentage 

points in the case of a ‘‘subsection (d) 

hospital,’’ as defined under section 

1886(d)(1)() of the Act, that does not 

submit quality data on a quarterly basis 

to CMS, as specified by CMS. Any 

reduction of the percentage change will 

apply only to the fiscal year involved 

and will not be taken into account in 

computing the applicable percentage 

increase for a subsequent fiscal year. 

(e) Maintaining budget neutrality. (1) 

CMS makes an adjustment to the 

standardized amount to ensure that—

(i) Changes to the DRG classifications 

and recalibrations of the DRG relative 

weights are made in a manner so that 

aggregate payments to hospitals are not 

affected; and 

(ii) The annual updates and 

adjustments to the wage index under 

paragraph (h) of this section are made in 

a manner that ensures that aggregate 

payments to hospitals are not affected. 

(2) CMS also makes an adjustment to 

the rates to ensure that aggregate 

payments after implementation of 

reclassifications under subpart L of this 

part are equal to the aggregate 

prospective payments that would have 

28348 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

been made in the absence of these 

provisions. 

(f) Adjustment for outlier payments.

CMS reduces the adjusted average 

standardized amount determined under 

paragraph (c) through (e) of this section 

by a proportion equal to the proportion 

estimated by CMS) to the total amount 

of payments based on DRG prospective 

payment rates that are additional 

payments for outlier cases under 

subpart F of this part. 

(g) Computing Federal rates for 

inpatient operating costs for hospitals 

located in all areas. For each discharge 

classified within a DRG, CMS 

establishes for the fiscal year a national 

prospective payment rate for inpatient 

operating costs based on the 

standardized amount for the fiscal year 

and the weighting factor determined 

under § 412.60(b) for that DRG. 

(h) Adjusting for different area wage 

levels. CMS adjusts the proportion of the 

Federal rate for inpatient operating costs 

that are attributable to wages and laborrelated costs for area differences in 

hospital wage levels by a factor 

(established by CMS based on survey 

data) reflecting the relative level of 

hospital wages and wage-related costs in 

the geographic area (that is, urban or 

rural area as determined under the 

provisions of paragraph (b) of this 

section) of the hospital compared to the 

national average level of hospital wages 

and wage-related costs. The adjustment 

described in this paragraph (h) also 

takes into account the earnings and paid 

hours of employment by occupational 

category. 

(1) The wage index is updated 

annually. 

(2) CMS determines the proportion of 

the Federal rate that is attributable to 

wages and labor-related costs from time 

to time, employing a methodology that 

is described in the annual regulation 

updating the system of payment for 

inpatient hospital operating costs. 

(3) For discharges occurring on or 

after October 1, 2004, CMS employs 62 

percent as the proportion of the rate that 

is adjusted for the relative level of 

hospital wages and wage-related costs, 

unless employing that percentage would 

result in lower payments for the 

hospital than employing the proportion 

determined under the methodology 

described in paragraph (h)(2) of this 

section. 

(i) Adjusting the wage index to 

account for commuting patterns of 

hospital workers.

(1) General criteria. For discharges 

occurring on or after October 1, 2004, 

CMS adjusts the hospital wage index for 

hospitals located in qualifying counties 

to recognize the commuting patterns of 

hospital employees. A qualifying county 

is a county that meets all of the 

following criteria: 

(i) Hospital employees in the county 

commute to work in an MSA (or MSAs) 

with a wage index (or wage indices) 

higher than the wage index of the MSA 

or rural statewide area in which the 

county is located. 

(ii) At least 10 percent of the county’s 

hospital employees commute to an MSA 

(or MSAs) with a higher wage index (or 

wage indices). 

(iii) The 3-year average hourly wage of 

the hospital(s) in the county equals or 

exceeds the 3-year average hourly wage 

of all hospitals in the MSA or rural 

statewide area in which the county is 

located. 

(2) Amount of adjustment. A hospital 

located in a county that meets the 

criteria under paragraphs (i)(l)(i) 

through (i)(1)(iii) of this section will 

receive an increase in its wage index 

that is equal to a weighted average of the 

difference between the prereclassified 

wage index of the MSA (or MSAs) with 

the higher wage index (or wage indices) 

and the prereclasssified wage index of 

the MSA or rural statewide area in 

which the qualifying county is located, 

weighted by the overall percentage of 

the hospital employees residing in the 

qualifying county who are employed in 

any MSA with a higher wage index.

(3) Process for determining the 

adjustment.

(i) CMS will use the most accurate 

data available, as determined by CMS, 

to determine the out-migration 

percentage for each county. 

(ii) CMS will include, in its annual 

proposed and final notices of updates to 

the hospital inpatient prospective 

payment system, a listing of qualifying 

counties and the hospitals that are 

eligible to receive the adjustment to 

their wage indexes for commuting 

hospital employees, and the wage index 

increase applicable to each qualifying 

county. 

(iii) Any wage index adjustment made 

under this paragraph (i) is effective for 

a period of 3 fiscal years, except that 

hospitals in a qualifying county may 

elect to waive the application of the 

wage index adjustment. A hospital may 

waive the application of the wage index 

adjustment by notifying CMS in writing 

within 45 days after the publication of 

the annual notice of proposed 

rulemaking for the hospital inpatient 

prospective payment system. 

(iv) A hospital in a qualifying county 

that receives a wage index adjustment 

under this paragraph (g) is not eligible 

for reclassification under Subpart L of 

this part. 

(j) Wage index assignment for rural 

referral centers for FY 2005.

(1) CMS makes an exception to the 

wage index assignment of a rural 

referral center for FY 2005 if the rural 

referral center meets the following 

conditions: 

(i) The rural referral center was 

reclassified for FY 2004 by the MGCRB 

to another MSA, but, upon applying to 

the MGCRB for FY 2005, was found to 

be ineligible for reclassification because 

its average hourly wage was less than 84 

percent (but greater than 82 percent) of 

the average hourly wage of the hospitals 

geographically located in the MSA to 

which the rural referral center applied 

for reclassification for FY 2005. 

(ii) The hospital may not qualify for 

any geographic reclassification under 

subpart L of this part, effective for 

discharges occurring on or after October 

1, 2004. 

(2) CMS will assign a rural referral 

center that meets the conditions of 

paragraph (j)(1) of this section the wage 

index value of the MSA to which it was 

reclassified by the MGCRB in FY 2004. 

(k) Midyear corrections to the wage 

index.

(1) CMS makes a midyear correction 

to the wage index for an area only if a 

hospital can show that—

(i) The intermediary or CMS made an 

error in tabulating its data; and 

(ii) The hospital could not have 

known about the error, or did not have 

the opportunity to correct the error, 

before the beginning of the Federal 

fiscal year. 

(2) A midyear correction to the wage 

index is effective prospectively from the 

date the change is made to the wage 

index. 

(l) Judicial decision. If a judicial 

decision reverses a CMS denial of a 

hospital’s wage data revision request, 

CMS pays the hospital by applying a 

revised wage index that reflects the 

revised wage data as if CMS’s decision 

had been favorable rather than 

unfavorable. 

8. Section 412.87 is amended by 

revising paragraph (b)(3) to read as 

follows:

§ 412.87 Additional payment for new 

medical services and technologies: General 

provisions.

* * * * *

(b) Eligibility criteria. ***

(3) The DRG prospective payment rate 

otherwise applicable to discharges 

involving the medical service or 

technology is determined to be 

inadequate, based on application of a 

threshold amount to estimated charges 

incurred with respect to such 

discharges. To determine whether the 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28349

payment would be adequate, CMS will 

determine whether the charges of the 

cases involving a new medical service 

or technology will exceed a threshold 

amount that is the lesser of 75 percent 

of the standardized amount (increased 

to reflect the difference between cost 

and charges) or 75 percent of one 

standard deviation beyond the 

geometric mean standardized charge for 

all cases in the DRG to which the new 

medical service or technology is 

assigned (or the case-weighted average 

of all relevant DRGs if the new medical 

service or technology occurs in many 

different DRGs). Standardized charges 

reflect the actual charges of a case 

adjusted by the prospective payment 

system payment factors applicable to an 

individual hospital, such as the wage 

index, the indirect medical education 

adjustment factor, and the 

disproportionate share adjustment 

factor.

§ 412.88 [Amended] 

9. Section 412.88 is amended by 

removing paragraph (c). 

10. A new § 412.101 is added to read 

as follows:

§ 412.101 Special treatment: Inpatient 

hospital payment adjustment for lowvolume hospitals. 

(a) General considerations.

(1) CMS provides an additional 

payment to a qualifying hospital for the 

higher incremental costs associated with 

a low volume of discharges. The amount 

of any additional payment for a 

qualifying hospital is calculated in 

accordance with paragraph (b) of this 

section. 

(2) In order to qualify for this 

adjustment, a hospital must have 500 or 

fewer discharges during the fiscal year, 

as reflected in its cost report specified 

in paragraph (a)(3) of this section, and 

be located more than 25 road miles from 

the nearest inpatient acute care 

prospective payment system hospital. 

(3) The fiscal intermediary makes the 

determination of the discharge count for 

purposes of determining a hospital’s 

qualification for the adjustment and the 

amount of the adjustment based on the 

hospital’s most recent submitted cost 

report. 

(4) In order to qualify for the 

adjustment, a hospital must provide its 

fiscal intermediary with sufficient 

evidence that it meets the distance 

requirement specified under paragraph 

(a)(2) of this section. The fiscal 

intermediary will base its determination 

of whether the distance requirement is 

satisfied upon the evidence presented 

by the hospital and other relevant 

evidence, such as maps, mapping 

software, and inquiries to State and 

local police, transportation officials, or 

other government officials. 

(b) Determination of the adjustment 

amount. The maximum low-volume 

adjustment is 25 percent. Each 

qualifying hospital’s low-volume 

adjustment is calculated as follows: 

1.25–(.0005*D), where 0<D≤500 

discharges, and 1.25 represents the 

maximum 25 percent add-on amount, 

.0005 is the payment adjustment per 

case (derived by dividing .25 by 500 

discharges) and ‘‘D’’ is the number of 

discharges determined under paragraph 

(a)(3) of this section. 

(c) Eligibility of new hospitals for the 

adjustment. A new hospital will be 

eligible for a low-volume adjustment 

under this section once it has submitted 

a cost report for a cost reporting period 

that indicates that it meets the number 

of discharge requirement during the 

fiscal year, as specified in paragraph (a) 

of this section. 

11. Section 412.102 is amended by 

revising the introductory text to read as 

follows:

§ 412.102 Special treatment: Hospitals 

located in areas that are reclassified from 

urban to rural as a result of a geographic 

redesignation. 

Effective on or after October 1, 1983, 

a hospital reclassified as rural, as 

defined in subpart D of this part, may 

receive an adjustment to its rural 

Federal payment amount for operating 

costs for two successive fiscal years.

* * * * *

12. Section 412.103 is amended by 

revising paragraph (a) introductory text 

to read as follows:

§ 412.103 Special treatment: Hospitals 

located in urban areas and that apply for 

reclassification as rural. 

(a) General criteria. A prospective 

payment hospital that is located in an 

urban area (as defined in subpart D of 

this part) may be reclassified as a rural 

hospital if it submits an application in 

accordance with paragraph (b) of this 

section and meets any of the following 

conditions:

* * * * *

13. Section 412.104 is amended by 

revising paragraph (a) to read as follows:

§ 412.104 Special treatment: Hospitals 

with high percentage of ESRD discharges. 

(a) Criteria for classification. CMS 

provides an additional payment to a 

hospital for inpatient services provided 

to ESRD beneficiaries who receive a 

dialysis treatment during a hospital 

stay, if the hospital has established that 

ESRD beneficiary discharges, excluding 

discharges classified into DRG 302 

(Kidney Transplant, DRG 316 (Renal 

Failure), or DRG 317 (Admit for Renal 

Dialysis), where the beneficiary received 

dialysis services during the inpatient 

stay, constitute 10 percent or more of its 

total Medicare discharges.

* * * * *

14. Section 412.105 is amended by—

A. Revising paragraph (d)(3)(vii). 

B. Adding new paragraphs (d)(3)(viii) 

through (xii). 

C. Adding a new paragraph (d)(4). 

D. Redesignating the contents of 

paragraph (e) as paragraph (e)(1) and 

adding a new paragraph (e)(2). 

E. Redesignating the contents of 

paragraph (f)(1)(iv) as paragraph 

(f)(1)(iv)(A) and adding new paragraphs 

(f)(1)(iv)(B) and (f)(1)(iv(C). 

F. Adding a sentence at the end of 

paragraph (f)(1)(v). 

Cross-Reference Changes 

G. In paragraphs (a), (f), and (g) as 

indicated in the left column of the table 

below, remove the cross-reference 

indicated in the middle column from 

wherever it appears, and add the crossreference in the right column:

Section Remove cross-reference Add cross-reference. 

412.105(a)(1), introductory text ......................... paragraph (f) and (h) of this section ................ paragraph (f) of this section.. 

412.105(f)(1)(i)(A) .............................................. § 415.200(a) ..................................................... § 415.152.. 

412.105(f)(1)(ii)(C) ............................................. § 413.86(f)(3) or § 413.86(f)(4) ......................... § 413.78(c) or § 413.78(d). 

412.105(f)(1)(vi) ................................................. § 413.86(b) ....................................................... § 413.75(b).. 

412.105(f)(1)(vi) ................................................. § 413.86(g)(7) ................................................... § 413.79(f).. 

412.105(f)(1)(vii) ................................................. § 413.86(g)(13) ................................................. § 413.79(l).. 

412.105(f)(1)(vii) ................................................. §§ 413.86(g)(6)(i) through (iv) .......................... §§ 413.79(e)(1) through (e)(4).. 

412.105(f)(1)(viii) ................................................ § 413.86(g)(8) ................................................... § 413.79(g).. 

412.105(f)(1)(ix) ................................................. §§ 413.86(g)(9)(i) and (g)(9)(ii) ......................... §§ 413.79(h)(1) and (h)(2).. 

28350 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

Section Remove cross-reference Add cross-reference. 

412.105(f)(1)(ix) ................................................. §§ 413.86(g)(9)(i) and (g)(9)(iii)(B) ................... §§ 413.79(h)(1) and (h)(3)(ii).. 

412.105(f)(1)(ix) ................................................. §§ 413.86(g)(9)(i) and (g)(9)(iii)(A) ................... §§ 413.79(h)(1) and (h)(3)(i).. 

412.105(f)(1)(x) .................................................. § 413.86(g)(13) ................................................. § 413.79(l).. 

412.105(f)(1)(x) .................................................. § 413.86(g)(12) ................................................. § 413.79(k).. 

412.105(f)(1)(xi) ................................................. § 413.86(g)(10) ................................................. § 413.79(i).. 

412.105(f)(1)(xii) ................................................. § 413.86(g)(11) ................................................. § 413.79(j).. 

412.105(g) .......................................................... §§ 413.86(d)(3)(i) through (d)(3)(v) .................. §§ 413.76(c)(1) through (c)(5). 

The revisions and additions read as 

follows:

§ 412.105 Special treatment: Hospitals that 

incur indirect costs for graduate medical 

education programs.

* * * * *

(d) Determination of education 

adjustment factor.

* * * * *

(3) Step three. ***

(vii) For discharges occurring on or 

after October 1, 2002 and before April 

1, 2004, 1.35. 

(viii) For discharges occurring on or 

after April l, 2004 and before October l, 

2004, 1.47. 

(ix) For discharges occurring during 

fiscal year 2005, 1.42. 

(x) For discharges occurring during 

fiscal year 2006, 1.37. 

(xi) For discharges occurring during 

fiscal year 2007, 1.32. 

(xii) For discharges occurring during 

fiscal year 2008 and thereafter, 1.35. 

(4) For discharges occurring on or 

after July 1, 2005, with respect to FTE 

residents added as a result of increases 

in the FTE resident cap under paragraph 

(f)(1)(iv)(C) of this section, the factor 

derived from completing steps one and 

two is multiplied by ‘c’, where ‘c’ is 

equal to 0.66. 

(e) Determination of payment amount.

(1) * * *

(2) For discharges occurring on or 

after July 1, 2005, a hospital that counts 

additional residents as a result of an 

increase in its FTE resident cap under 

paragraph (f)(1)(iv)(C) of this section 

will receive indirect medical education 

payments based on the sum of the 

following two indirect medical 

education adjustment factors: 

(i) An adjustment factor that is 

calculated using the schedule of formula 

multipliers in paragraph (d)(3) of this 

section and the hospital’s FTE resident 

count, not including residents 

attributable to an increase in its FTE cap 

under paragraph (f)(1)(iv)(C) under this 

section; and 

(ii) An adjustment factor that is 

calculated using the applicable formula 

multiplier under paragraph (d)(4) of this 

section, and the additional number of 

FTE residents that are attributable to the 

increase in the hospital’s FTE resident 

cap under paragraph (f)(1)(iv)(C) in this 

section. 

(f) Determining the total number of 

full-time equivalent residents for cost 

reporting periods beginning on or after 

July 1, 1991.

(1) * * *

(iv)(A) * * *

(B) Effective for portions of cost 

reporting periods beginning on or after 

July l, 2005, a hospital’s otherwise 

applicable FTE resident cap may be 

reduced if its reference resident level is 

less than its otherwise applicable FTE 

resident cap in a reference cost 

reporting period, in accordance with the 

provisions of § 413.79(c)(3) of this 

subchapter. The reduction is 75 percent 

of the difference between the otherwise 

applicable FTE resident cap and the 

reference resident level. 

(C) Effective for portions of cost 

reporting periods beginning on or after 

July 1, 2005, a hospital may qualify to 

receive an increase in its otherwise 

applicable FTE resident cap (up to 25 

additional FTE slots) if the criteria 

specified in § 413.79(c)(4) of this 

subchapter are met. 

(v) * * * If a hospital increases its 

FTE count of residents as a result of 

paragraph (f)(1)(iv)(C) of this section, 

effective for cost reporting periods 

beginning on or after July 1, 2005, the 

FTE residents are included in the 

hospital’s rolling average calculation 

described in this paragraph (f)(1)(v).

* * * * *

15. Section 412.106 is amended by—

A. In paragraph (a)(1)(iii), removing 

the cross-reference ‘‘§ 412.62(f)’’ and 

adding in its place ‘‘§ 412.62(f) or 

§ 412.64’’. 

B. Revising paragraphs (d)(2)(ii), 

(d)(2)(iii), and (d)(2)(iv) to read as 

follows:

§ 412.106 Special treatment: Hospitals that 

serve a disproportionate share of lowincome patients.

* * * * *

(d) Payment adjustment factor.

* * * * *

(2) Payment adjustment factors.

* * * * *

(ii) If the hospital meets the criteria of 

paragraph (c)(1)(ii) of this section, the 

payment adjustment factor is equal to 

one of the following: 

(A) If the hospital is classified as a 

rural referral center—

(1) For discharges occurring before 

April 1, 2001, the payment adjustment 

factor is 4 percent plus 60 percent of the 

difference between the hospital’s 

disproportionate patient percentage and 

30 percent. 

(2) For discharges occurring on or 

after April 2, 2001, and before April 1, 

2004, the following applies: 

(i) If the hospital’s disproportionate 

patient percentage is less than 19.3 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between 15 

percent and the hospital’s 

disproportionate patient percentage. 

(ii) If the hospital’s disproportionate 

patient percentage is greater than 19.3 

percent and less than 30 percent, the 

applicable payment adjustment factor is 

5.25 percent. 

(iii) If the hospital’s disproportionate 

patient percentage is greater than or 

equal to 30 percent, the applicable 

payment adjustment factor is 5.25 

percent plus 60 percent of the difference 

between 30 percent and the hospital’s 

disproportionate patient percentage. 

(3) For discharges occurring on or 

after April 1, 2004, the following 

applies: 

(i) If the hospital’s disproportionate 

patient percentage is less than 20.2 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between 15 

percent and the hospital’s 

disproportionate patient percentage. 

(ii) If the hospital’s disproportionate 

patient percentage is greater than 20.2 

percent, the applicable payment 

adjustment factor is 5.88 percent plus 

82.5 percent of the difference between 

20.2 percent and the hospital’s 

disproportionate patient percentage. 

(B) If the hospital is classified as a 

sole community hospital—

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28351

(1) For discharges occurring before 

April 1, 2001, the payment adjustment 

factor is 10 percent. 

(2) For discharges occurring on or 

after April 1, 2001 and before April 1, 

2004, the following applies: 

(i) If the hospital’s disproportionate 

patient percentage is less than 19.3 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between 15 

percent and the hospital’s 

disproportionate patient percentage. 

(ii) If the hospital’s disproportionate 

patient percentage is equal to or greater 

than 19.3 percent and less than 30 

percent, the applicable payment 

adjustment factor is 5.25 percent. 

(iii) If the hospital’s disproportionate 

patient percentage is equal to or greater 

than 30 percent, the applicable payment 

adjustment factor is 10 percent. 

(3) For discharges occurring on or 

after April 1, 2004, the following 

applies: 

(i) If the hospital’s disproportionate 

patient percentage is less than 20.2 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between 15 

percent and the hospital’s 

disproportionate patient percentage. 

(ii) If the hospital’s disproportionate 

patient percentage is greater than 20.2 

percent, the applicable payment 

adjustment factor is 5.88 percent plus 

82.5 percent of the difference between 

20.2 percent and the hospital’s 

disproportionate patient percentage. 

(iii) The maximum payment 

adjustment factor is 12 percent. 

(C) If the hospital is classified as both 

a rural referral center and a sole 

community hospital, the payment 

adjustment is—

(1) For discharges occurring before 

April 1, 2001, the greater of—

(i) 10 percent; or 

(ii) 4 percent plus 60 percent of the 

difference between the hospital’s 

disproportionate patient percentage and 

30 percent.

(2) For discharges occurring on or 

after April 1, 2001 and before April 1, 

2004, the greater of the adjustments 

determined under paragraphs 

(d)(2)(ii)(A) or (d)(2)(ii)(B) of this 

section. 

(3) For discharges occurring on or 

after April 1, 2004, the following 

applies: 

(i) If the hospital’s disproportionate 

patient percentage is less than 20.2 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between 15 

percent and the hospital’s 

disproportionate patient percentage. 

(ii) If the hospital’s disproportionate 

patient percentage is greater than 20.2 

percent, the applicable payment 

adjustment factor is 5.88 percent plus 

82.5 percent of the difference between 

20.2 percent and the hospital’s 

disproportionate patient percentage. 

(D) If the hospital is classified as a 

rural hospital and is not classified as 

either a sole community hospital or a 

rural referral center, and has 100 or 

more beds—

(1) For discharges occurring before 

April 1, 2001, the payment adjustment 

factor is 4 percent. 

(2) For discharges occurring on or 

after April 1, 2001 and before April 1, 

2004, the following applies: 

(i) If the hospital’s disproportionate 

patient percentage is less than 19.3 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between the 

hospital’s disproportionate patient 

percentage and 15 percent. 

(ii) If the hospital’s disproportionate 

patient percentage is equal to or greater 

than 19.3 percent, the applicable 

payment adjustment factor is 5.25 

percent. 

(3) For discharges occurring on or 

after April 1, 2004, the following 

applies: 

(i) If the hospital’s disproportionate 

patient percentage is less than 20.2 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between 15 

percent and the hospital’s 

disproportionate patient percentage. 

(ii) If the hospital’s disproportionate 

patient percentage is greater than 20.2 

percent, the applicable payment 

adjustment factor is 5.88 percent plus 

82.5 percent of the difference between 

20.2 percent and the hospital’s 

disproportionate patient percentage. 

(iii) The maximum payment 

adjustment factor is 12 percent. 

(iii) If the hospital meets the criteria 

of paragraph (c)(1)(iii) of this section—

(A) For discharges occurring before 

April 1, 2001, the payment adjustment 

factor is 5 percent. 

(B) For discharges occurring on or 

after April 1, 2001 and before April 1, 

2004, the following applies: 

(1) If the hospital’s disproportionate 

patient percentage is less than 19.3 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between the 

hospital’s disproportionate patient 

percentage and 15 percent. 

(2) If the hospital’s disproportionate 

patient percentage is equal to or greater 

than 19.3 percent, the applicable 

payment adjustment factor is 5.25 

percent. 

(C) For discharges occurring on or 

after April 1, 2004, the following 

applies: 

(1) If the hospital’s disproportionate 

patient percentage is less than 20.2 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between 15 

percent and the hospital’s 

disproportionate patient percentage. 

(2) If the hospital’s disproportionate 

patient percentage is greater than 20.2 

percent, the applicable payment 

adjustment factor is 5.88 percent plus 

82.5 percent of the difference between 

20.2 percent and the hospital’s 

disproportionate patient percentage. 

(3) The maximum payment 

adjustment factor is 12 percent. 

(iv) If the hospital meets the criteria 

of paragraph (c)(1)(iv) of this section—

(A) For discharges occurring before 

April 1, 2001, the payment adjustment 

factor is 4 percent. 

(B) For discharges occurring on or 

after April 1, 2001 and before April 1, 

2004, the following applies: 

(1) If the hospital’s disproportionate 

patient percentage is less than 19.3 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between the 

hospital’s disproportionate patient 

percentage and 15 percent. 

(2) If the hospital’s disproportionate 

patient percentage is equal to or greater 

than 19.3 percent, the applicable 

payment adjustment factor is 5.25 

percent. 

(C) For discharges occurring on or 

after April 1, 2004, the following 

applies: 

(1) If the hospital’s disproportionate 

patient percentage is less than 20.2 

percent, the applicable payment 

adjustment factor is 2.5 percent plus 65 

percent of the difference between 15 

percent and the hospital’s 

disproportionate patient percentage. 

(2) If the hospital’s disproportionate 

patient percentage is greater than 20.2 

percent, the applicable payment 

adjustment factor is 5.88 percent plus 

82.5 percent of the difference between 

20.2 percent and the hospital’s 

disproportionate patient percentage. 

(3) The maximum payment 

adjustment factor is 12 percent.

* * * * *

16. Section 412.108 is amended by 

revising paragraph (a)(1) introductory 

text to read as follows:

§ 412.108 Special treatment: Medicaredependent, small rural hospitals. 

(a) Criteria for classification as a 

Medicare-dependent, small rural 

hospital.

(1) General considerations. For cost 

reporting periods beginning on or after 

28352 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

April 1, 1990 and ending before October 

1, 1994, or beginning on or after October 

1, 1997 and ending before October 1, 

2006, a hospital is classified as a 

Medicare-dependent, small rural 

hospital if it is located in a rural area (as 

defined in subpart D of this part) and 

meets all of the following conditions:

* * * * *

17. Section 412.204 is amended by—

A. Revising the introductory text of 

paragraph (a). 

B. Revising the title and introductory 

text of paragraph (b). 

C. Adding new paragraphs (c) and (d). 

The revision and addition read as 

follows:

§ 412.204 Payment to hospitals in Puerto 

Rico. 

(a) FY 1988 through FY 1997. For 

discharges occurring on or after October 

1, 1987 and before October 1, 1997, 

payments for inpatient operating costs 

to hospitals located in Puerto Rico that 

are paid under the prospective payment 

system are equal to the sum of—

* * * * *

(b) FY 1998 through March 31, 2004.

For discharges occurring on or after 

October 1, 1997 and before April 1, 

2004, payments for inpatient operating 

costs to hospitals located in Puerto Rico 

that are paid under the prospective 

payment system are equal to the sum 

of—

* * * * *

(c) Period of April 1, 2004 through 

September 31, 2004. For discharges 

occurring on or after April 1, 2004 and 

before October 1, 2004, payment for 

inpatient operating costs to hospitals 

located in Puerto Rico that are paid 

under the prospective payment system 

are equal to the sum of—

(1) 37.5 percent of the Puerto Rico 

prospective payment rate for inpatient 

operating costs, as determined under 

§ 412.208 or § 412.210; and 

(2) 62.5 percent of the national 

prospective payment rate for inpatient 

operating costs, as determined under 

§ 412.212. 

(d) FY 2005 and thereafter. For 

discharges occurring on or after October 

1, 2004, payments for inpatient 

operating costs to hospitals located in 

Puerto Rico that are paid under the 

prospective payment system are equal to 

the sum of—

(1) 25 percent of the Puerto Rico 

prospective payment rate for inpatient 

operating costs, as determined under 

§ 412.208 or § 412.211; and 

(2) 75 percent of a national 

prospective payment rate for inpatient 

operating costs, as determined under 

§ 412.212. 

18. Section 412.210 is amended by—

A. Revising the title of the section.

B. Revising paragraph (a)(1).

§ 412.210 Puerto Rico rates for Federal 

fiscal years 1989 through 2003. 

(a) General rule. (1) CMS determines 

the Puerto Rico adjusted prospective 

payment rate for inpatient operating 

costs for each inpatient hospital 

discharge occurring in Federal fiscal 

years 1989 through 2003 that involves 

inpatient hospital services of a hospital 

in Puerto Rico subject to the prospective 

payment system for which payment may 

be made under Medicare Part A.

* * * * *

19. New § 412.211 is added to read as 

follows:

§ 412.211 Puerto Rico rates for Federal 

fiscal year 2004 and subsequent fiscal 

years. 

(a) General rule. CMS determines the 

Puerto Rico adjusted prospective 

payment rate for inpatient operating 

costs for each inpatient hospital 

discharge occurring in Federal fiscal 

year 2004 and subsequent fiscal years 

that involves inpatient hospital services 

of a hospital in Puerto Rico subject to 

the prospective payment system for 

which payment may be made under 

Medicare Part A. 

(b) Geographic classifications. (1) For 

purposes of this section, the following 

definitions apply 

(i) The term urban area means a 

Metropolitan Statistical Area (MSA) as 

defined by the Executive Office of 

Management and Budget. 

(ii) The term rural area means any 

area outside of an urban area. 

(2) For discharges occurring on or 

after October 1, 2004, a hospital located 

in a rural county adjacent to one or 

more urban areas is deemed to be 

located in an urban area and receives 

the Federal payment amount for the 

urban area to which the greater number 

of workers in the county commute if the 

rural county would otherwise be 

considered part of an urban area, under 

the standards for designating MSAs if 

the commuting rates used in 

determining outlying counties were 

determined on the basis of the aggregate 

number of resident workers who 

commute to (and, if applicable under 

the standards, from) the central county 

or central counties of all adjacent MSAs. 

These EOMB standards are set forth in 

the notice of final revised standards for 

classification of MSAs published in the 

Federal Register on December 27, 2000 

(65 FR 82228), announced by EOMB on 

June 6, 2003, and available from CMS, 

7500 Security Boulevard, Baltimore, 

Maryland 21244. 

(c) Computing the standardized 

amount. CMS computes a Puerto Rico 

standardized amount that is applicable 

to all hospitals located in all areas, 

increased by the applicable percentage 

change specified in § 412.64(d)(1). 

(d) Computing Puerto Rico Federal 

rates for inpatient operating costs for 

hospitals located in all areas. For each 

discharge classified within a DRG, CMS 

establishes for the fiscal year a Puerto 

Rico prospective payment rate for 

inpatient operating costs equal to the 

product of—

(1) The average standardized amount 

for the fiscal year for hospitals located 

in all areas; and 

(2) The weighting factor determined 

under § 412.60(b) for that DRG. 

(e) Adjusting for different area wage 

levels. CMS adjusts the proportion of the 

Puerto Rico rate for inpatient operating 

costs that are attributable to wages and 

labor-related costs for area differences in 

hospital wage levels by a factor 

(established by CMS based on survey 

data) reflecting the relative level of 

hospital wages and wage-related costs in 

the geographic area (that is, urban or 

rural area as determined under the 

provisions of paragraph (b) of this 

section) of the hospital compared to the 

Puerto Rico average level of hospital 

wages and wage-related costs. The 

adjustment specified in this paragraph 

(e) also takes into account the earnings 

and paid hours of employment by 

occupational category. 

(1) The wage index is updated 

annually. 

(2) CMS determines the proportion of 

the Puerto Rico rate that is attributable 

to wages and labor-related costs from 

time to time, employing a methodology 

that is described in the annual update 

of the prospective payment system for 

payment of inpatient hospital operating 

costs published in the Federal Register. 

(3) For discharges occurring on or 

after October 1, 2004, CMS employs 62 

percent as the proportion of the rate that 

is adjusted for the relative level of 

hospital wages and wage-related costs, 

unless employing that percentage would 

result in lower payments for the 

hospital than employing the proportion 

determined under the methodology 

described in paragraph (e)(2) of this 

section. 

(f) Adjusting the wage index to 

account for commuting patterns of 

hospital workers. (1) General criteria.

For discharges occurring on or after 

October 1, 2004, CMS adjusts the 

hospital wage index for hospitals 

located in qualifying areas to recognize 

the commuting patterns of hospital 

employees. A qualifying area is an area 

that meets all of the following criteria:

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28353

(i) Hospital employees in the area 

commute to work in an MSA (or MSAs) 

with a wage index (or wage indices) 

higher than the wage index of the area. 

(ii) At least 10 percent of the county’s 

hospital employees commute to an MSA 

(or MSAs) with a higher wage index (or 

wage indices). 

(iii) The 3-year average hourly wage of 

the hospital(s) in the area equals or 

exceeds the 3-year average hourly wage 

of all hospitals in the MSA or rural area 

in which the county is located. 

(2) Amount of adjustment. A hospital 

located in an area that meets the criteria 

under paragraphs (f)(l)(i) through 

(f)(1)(iii) of this section will receive an 

increase in its wage index that is equal 

to a weighted average of the difference 

between the prereclassified wage index 

of the MSA (or MSAs) with the higher 

wage index (or wage indices) and the 

prereclassified wage index of the 

qualifying area, weighted by the overall 

percentage of the hospital employees 

residing in the qualifying area who are 

employed in any MSA with a higher 

wage index. 

(3) Process for determining the 

adjustment.

(i) CMS will use the most accurate 

data available, as determined by CMS, 

to determine the out-migration 

percentage for each area. 

(ii) CMS will include, in its annual 

proposed and final notices of updates to 

the hospital inpatient prospective 

payment system, a listing of qualifying 

areas and the hospitals that are eligible 

to receive the adjustment to their wage 

indexes for commuting hospital 

employees, and the wage index increase 

applicable to each qualifying area. 

(iii) Any wage index adjustment made 

under this paragraph (f) is effective for 

a period of 3 fiscal years, except that 

hospitals in a qualifying county may 

elect to waive the application of the 

wage index adjustment. A hospital may 

waive the application of the wage index 

adjustment by notifying CMS in writing 

within 45 days after the publication in 

the Federal Register of the annual 

notice of proposed rulemaking for the 

hospital inpatient prospective payment 

system. 

(iv) A hospital in a qualifying area 

that receives a wage index adjustment 

under this paragraph (f) is not eligible 

for reclassification under Subpart L of 

this part. 

20. Section 412.212 is amended by 

revising paragraph (b) to read as follows:

§ 412.212 National rate.

* * * * *

(b) Computing Puerto Rico 

standardized amounts. (1) For Federal 

fiscal years before FY 2004, CMS 

computes a discharge-weighted average 

of the—

(i) National urban adjusted 

standardized amount determined under 

§ 412.63(j)(1); and 

(ii) National rural adjusted average 

standardized amount determined under 

§ 412.63(j)(2)(i). 

(2) For fiscal years 2004 and 

subsequent fiscal years, CMS computes 

a discharge-weighted average of the 

national adjusted standardized amount 

determined under § 412.64(e).

* * * * *

21. Section 412.230 is amended by—

A. Revising paragraph (a)(1). 

B. Revising paragraph (a)(4). 

C. Removing paragraph (a)(5)(ii) and 

redesignating paragraphs (a)(5)(iii), 

(a)(5)(iv), and (a)(5)(v) as paragraphs 

(a)(5)(ii), (a)(5)(iii), and (a)(5)(iv), 

respectively. 

D. Removing paragraph (d). 

E. Removing paragraph (e)(2)(i)(C). 

F. Redesignating paragraph (e) as 

paragraph (d). 

G. In redesignated paragraph (d)(1), 

removing the cross-reference 

‘‘paragraphs (e)(3) and (e)(4)’’ and 

adding in its place ‘‘paragraphs (d)(3) 

and (d)(4)’’. 

H. In redesignated paragraph 

(d)(2)(iii), removing the cross-reference 

‘‘paragraph (e)(2)’’ and adding in its 

place ‘‘paragraph (d)(2)’’. 

I. Revising redesignated paragraph 

(d)(3). 

J. In redesignated paragraph (d)(4), 

removing the cross-reference 

‘‘paragraphs (e)(1)(i) and (e)(1)(iii)’’ and 

adding in its place ‘‘paragraph (d)(1)(i) 

and (d)(1)(iii)’’. 

K. In redesignated paragraph 

(d)(4)(iii), removing the cross-reference 

‘‘paragraph (e)’’ and adding in its place 

‘‘paragraph (d)’’.

§ 412.230 Criteria for an individual hospital 

seeking redesignation to another rural area 

or an urban area. 

(a) General. (1) Purposes. Except as 

specified in paragraph (a)(5)—

(i) For fiscal years prior to fiscal year 

2005, an individual hospital may be 

redesignated from a rural area to an 

urban area, from a rural area to another 

rural area, or from a rural area to 

another urban area for the purposes of 

using the other area’s standardized 

amount for inpatient operating costs, the 

wage index value, or both. 

(ii) Effective for fiscal year 2005 and 

subsequent fiscal years, an individual 

hospital may be redesignated from a 

rural area to an urban area, from a rural 

area to another rural area, or from a 

rural area to another urban area for the 

purposes of using the other area’s wage 

index value. 

(4) Application of criteria. In applying 

the numeric criteria contained in 

paragraphs (b)(1), (b)(2), (d)(1)(iii), 

(d)(1)(iv)(A), and (d)(1)(iv)(B) of this 

section, rounding of numbers to meet 

the mileage or qualifying percentage 

standards is not permitted.

* * * * *

(d) Use of urban or other rural area’s 

wage index. ***

* * * * *

(3) Rural referral center exceptions.

(i) If a hospital was ever a rural 

referral center, it does not have to 

demonstrate that it meets the criterion 

set forth in paragraph (d)(1)(iii) of this 

section concerning its average hourly 

wage. 

(ii) If a hospital was ever a rural 

referral center, it is required to meet 

only the criterion that applies to rural 

hospitals under paragraph (d)(1)(iv) of 

this section, whether or not it is actually 

located in an urban or rural area.

* * * * *

22. Section 412.232 is amended by—

A. Revising paragraph (a)(1). 

B. Revising paragraph (a)(4). 

C. Revising paragraph (b).

§ 412.232 Criteria for all hospitals in a rural 

county seeking urban redesignation. 

(a) Criteria. ***

(1) The county in which the hospitals 

are located—

(i) For fiscal years prior to fiscal year 

2005, must be adjacent to the MSA or 

NECMA to which they seek 

redesignation. 

(ii) For fiscal years beginning with 

fiscal years 2005, must be adjacent to 

the MSA to which they seek 

redesignation.

* * * * *

(4) The hospital may be redesignated 

only if one of the following conditions 

is met: 

(i) The prereclassified average hourly 

wage for the area to which they seek 

redesignation is higher than the 

prereclassified average hourly wage for 

the area in which they are currently 

located. 

(ii) For fiscal years prior to fiscal year 

2005, the standardized amount for the 

area to which they seek redesignation is 

higher than the standardized amount for 

the area in which they are located. 

(b) Metropolitan character. (1) For 

fiscal years prior to FY 2005, the group 

of hospitals must demonstrate that the 

county in which the hospitals are 

located meets the standards for 

redesignation to an MSA or an NECMA 

as an outlying county that were 

published in the Federal Register on 

March 30, 1990 (55 FR 12154) using 

Bureau of the Census data or Bureau of 

Census estimates made after 1990. 

28354 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

(2) For fiscal years beginning with FY 

2005, the group of hospitals must 

demonstrate that the county in which 

the hospitals are located meets the 

standards for redesignation to an MSA 

as an outlying county that were 

published in the Federal Register on 

December 27, 2000 (65 FR 82228) using 

Census Bureau data or Census Bureau 

estimates made after 2000.

* * * * *

23. Section 412.234 is amended by—

A. Revising paragraph (a)(3). 

B. Revising paragraph (a)(4). 

C. Removing paragraph (c). 

D. Redesignating paragraph (d) as 

paragraph (c) and revising the 

redesignated paragraph (c). 

The revisions read as follows.

§ 412.234 Criteria for all hospitals in an 

urban county seeking redesignation to 

another urban area. 

(a) General criteria. * * *

(3) The county in which the hospital 

is located must be part of the CBSA that 

includes the urban area to which they 

seek redesignation. 

(4) The hospital may be redesignated 

only if one of the following conditions 

is met: 

(i) The prereclassified average hourly 

wage for the area to which they seek 

redesignation is higher than the 

prereclassified average hourly wage for 

the area in which they are currently 

located. 

(ii) For fiscal years prior to fiscal year 

2005, the standardized amount for the 

area to which they seek redesignation is 

higher than the standardized amount for 

the area in which they are located.

* * * * *

(c) Appropriate wage data. The 

hospitals must submit appropriate wage 

data as provided for in § 412.230(d)(2).

§ 412.236 [Removed] 

24. Section 412.236 is removed.

§ 412.252 [Amended] 

25. In § 412.252, paragraph (b), the 

phrase ‘‘or in a NECMA’’ is removed. 

26. Section 412.274 is amended by 

revising paragraph (b)(1) to read as 

follows:

§ 412.274 Scope and effect of an MGCRB 

decision.

* * * * *

(b) Effective date and term of the 

decision.

(1) For reclassifications prior to fiscal 

year 2005, a standardized amount 

classification change is effective for 1 

year beginning with discharges 

occurring on the first day (October 1) of 

the second Federal fiscal year following 

the Federal fiscal year in which the 

complete application is filed and ending 

effective at the end of that Federal fiscal 

year (the end of the next September 30).

* * * * *

27. Section 412.312 is amended by—

A. Revising paragraph (b)(2)(ii). 

B. Revising paragraph (e). 

The revisions read as follows.

§ 412.312 Payment based on the Federal 

rate. 

(b) Payment adjustment. ***

(2) Geographic adjustment factor.

***

(ii) Large urban add-on. An additional 

adjustment is made for hospitals located 

in a large urban area to reflect the higher 

costs incurred by hospitals located in 

those areas. For purposes of the 

payment adjustment under this 

paragraph, the definition of large urban 

area set forth at § 412.63(c)(6) continues 

to be in effect for discharges occurring 

on or after September 30, 2004.

* * * * *

(e) Payment for extraordinary 

circumstances. For cost reporting 

periods beginning on or after October 1, 

2001—

(1) Payment for extraordinary 

circumstances is made as provided for 

in § 412.348(f). 

(2) Although no longer independently 

in effect, the minimum payment levels 

established under § 412.348(c) continue 

to be used in the calculation of 

exception payments for extraordinary 

circumstances, according to the formula 

in § 412.348(f). 

(3) Although no longer independently 

in effect, the offsetting amounts 

established under § 412.348(c) continue 

to be used in the calculation of 

exception payments for extraordinary 

circumstances. However, for cost 

reporting periods beginning during FY 

2005 and subsequent fiscal years, the 

offsetting amounts in § 412.348(c) are 

determined based on the lesser of—

(i) The preceding 10-year period; or 

(ii) The period of time under which 

the hospital is subject to the prospective 

payment system for capital-related 

costs. 

26. Section 412.316 is amended by 

revising paragraph (b) to read as follows:

§ 412.316 Geographic adjustment factors.

* * * * *

(b) Large urban location. CMS 

provides an additional payment to a 

hospital located in a large urban area 

equal to 3.0 percent of what would 

otherwise be payable to the hospital 

based on the Federal rate. 

(1) For discharges occurring on or 

before September 30, 2004, the payment 

adjustment under this section is based 

on a hospital’s location for the purpose 

of receiving payment under § 412.63(a). 

The term ‘‘large urban area’’ is defined 

under § 412.63(c)(6). 

(2) For discharges occurring on or 

after October 1, 2004, the definition of 

large urban area under § 412.63(c)(6) 

continues to be in effect for purposes of 

the payment adjustment under this 

section, based on the geographic 

classification under § 412.64.

* * * * *

27. Section 412.320 is amended by 

revising paragraph (a)(1) to read as 

follows:

§ 412.320 Disproportionate share 

adjustment factor. 

(a) Criteria for classification.

* * * * *

(1) The hospital is located in an urban 

area, has 100 or more beds as 

determined in accordance with 

§ 412.105(b), and serves low-income 

patients as determined under 

§ 412.106(b). 

(i) For discharges occurring on or 

before September 30, 2004, the payment 

adjustment under this section is based 

on a hospital’s location, for the purpose 

of receiving payment, under § 412.63(a). 

(ii) For discharges occurring on or 

after October 1, 2004, the payment 

adjustment under this section is based 

on the geographic classifications 

specified under § 412.64.

* * * * *

28. Section 412.374 is amended by—

A. Revising paragraph (a). 

B. Redesignating paragraphs (b) and 

(c) as paragraphs (c) and (d), 

respectively. 

C. Adding a new paragraph (b). 

The revisions and addition read as 

follows:

§ 412.374 Payments to hospitals located in 

Puerto Rico. 

(a) FY 1998 through FY 2004.

Payments for capital-related costs to 

hospitals located in Puerto Rico that are 

paid under the prospective payment 

system are equal to the sum of the 

following: 

(1) 50 percent of the Puerto Rico 

capital rate based on data from Puerto 

Rico hospitals only, which is 

determined in accordance with 

procedures for developing the Federal 

rate; and 

(2) 50 percent of the Federal rate, as 

determined under § 412.308. 

(b) FY 2005 and FYs thereafter. For 

discharges occurring on or after October 

1, 2004, payments for capital-related 

costs to hospitals located in Puerto Rico 

that are paid under the prospective 

payment system are equal to the sum of 

the following: 

(1) 25 percent of the Puerto Rico 

capital rate based on data from Puerto 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28355

Rico hospitals only, which is 

determined in accordance with 

procedures for developing the Federal 

rate; and 

(2) 75 percent of the Federal rate, as 

determined under § 412.308.

* * * * *

29. Section 412.521 is amended by 

adding a new paragraph (e) to read as 

follows:

§ 412.521 Basis for payment.

* * * * *

(e) Special payment provisions for 

patients in acute care hospitals that 

change classification status to LTCH 

status during a patient stay. (1) If a 

patient is admitted to an acute care 

hospital and then the acute care hospital 

meets the criteria at § 412.23(e) to be 

paid as a LTCH during the course of the 

patient’s hospitalization, Medicare 

considers all the days of the patient stay 

in the facility (days prior to and after the 

designation of LTCH status) to be a 

single episode of LTCH care. Payment 

for the entire patient stay (days prior to 

and after the designation of LTCH 

status) will include the day and cost 

data for that patient at both the acute 

care hospital and the LTCH in 

determining the payment to the LTCH 

under this subpart. The requirements of 

this paragraph (e)(1) apply only to a 

patient stay in which a patient is in an 

acute care hospital and that hospital is 

designated as a LTCH on or after 

October 1, 2004.

(2) The days of the patient’s stay prior 

to and after the hospital’s designation as 

a LTCH as specified in paragraph (e)(1) 

of this section are included for purposes 

of determining the beneficiary’s length 

of stay. 

C. Part 413 is amended as follows:

PART 413—PRINCIPLES OF 

REASONABLE COST 

REIMBURSEMENT; PAYMENT FOR 

END-STAGE RENAL DISEASE 

SERVICES; OPTIONAL 

PROSPECTIVELY DETERMINED 

PAYMENT RATES FOR SKILLED 

NURSING FACILITIES 

1. The authority citation for part 413 

is revised to read as follows:

Authority: Secs. 1102, 1812(d), 1814(b), 

1815, 1833(a), (i), and (n), 1871, 1881, 1883, 

and 1886 of the Social Security Act (42 

U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 

1395l(a), (i), and (n), 1395hh, 1395rr, 1395tt, 

and 1395ww).

2. Section 413.40 is amended by—

A. Republishing the introductory text 

of paragraphs (c)(4) and (c)(4)(iii) and 

revising paragraphs (c)(4)(iii)(A)(1) and 

(c)(4)(iii)(A)(2). 

B. Republishing the introductory text 

of paragraph (c)(4)(iii)(B) and revising 

paragraph (c)(4)(iii)(B)(4)(i). 

C. Revising the introductory text of 

paragraphs (d)(4)(i) and (d)(4)(ii). 

The revisions read as follows:

§ 413.40 Ceiling on the rate of increase in 

hospital inpatient costs.

* * * * *

(c) Costs subject to the ceiling.

* * * * *

(4) Target amounts. The intermediary 

will establish a target amount for each 

hospital. The target amount for a cost 

reporting period is determined as 

follows:

* * * * *

(iii) In the case of a psychiatric 

hospital or unit, rehabilitation hospital 

or unit, or long-term care hospital, the 

target amount is the lower of the 

amounts specified in paragraph 

(c)(4)(iii)(A) or (c)(4)(iii)(B) of this 

section. 

(A) The hospital-specific target 

amount. 

(1) In the case of all hospitals and 

units, except long-term care hospitals 

for cost reporting periods beginning 

during FY 2001, the hospital-specific 

target amount is the net allowable costs 

in a base period increased by the 

applicable update factors. 

(2) In the case of long-term care 

hospitals, for cost reporting periods 

beginning during FY 2001, the hospitalspecific target amount is the net 

allowable costs in a base period 

increased by the applicable update 

factors multiplied by 1.25. 

(B) One of the following for the 

applicable cost reporting period—

* * * * *

(4) For cost reporting periods 

beginning during fiscal years 2001 and 

2002—

(i) The amounts determined under 

paragraph (c)(4)(iii)(B)(3)(i) of this 

section are: increased by the market 

basket percentage up through the 

subject period; or in the case of a longterm care hospital for cost reporting 

periods beginning during FY 2001, the 

amounts determined under paragraph 

(c)(4)(iii)(B)(3)(i) of this section, 

increased by the market basket 

percentage up through the subject 

period and further increased by 2 

percent.

* * * * *

(d) Application of the target amount 

in determining the amount of payment.

* * * * *

(4) Continuous improvement bonus 

payments. (i) For cost reporting periods 

beginning on or after October 1, 1997, 

eligible hospitals (as defined in 

paragraph (d)(5) of this section) receive 

payments in addition to those in 

paragraph (d)(2) of this section, as 

applicable. These payments are equal to 

the lesser of—

* * * * *

(ii) For cost reporting periods 

beginning on or after October 1, 2000, 

and before September 30, 2001, eligible 

psychiatric hospitals and units and 

long-term care hospitals (as defined in 

paragraph (d)(5) of this section) receive 

payments in addition to those in 

paragraph (d)(2) of this section, as 

applicable. These payments are equal to 

the lesser of—

* * * * *

3. Section 413.64 is amended by—

A. Revising the introductory text of 

paragraph (h)(2) and adding a new 

paragraph (h)(2)(vi). 

B. Removing paragraph (h)(3)(iv). 

C. Removing and reserving paragraph 

(h)(4). 

The additions and revisions read as 

follows:

§ 413.64 Payments to providers: Specific 

rules.

* * * * *

(h) Periodic interim payment method 

of reimbursement.

* * * * *

(2) Covered services furnished on or 

after July 1, 1987. Effective with claims 

received on or after July l, 1987, or as 

otherwise specified, the periodic 

interim payment (PIP) method is 

available for the following:

* * * * *

(vi) Effective for payments made on or 

after July l, 2004, inpatient CAH 

services furnished by a CAH as 

specified in § 413.70. Payment on a PIP 

basis is described in § 413.70(d).

* * * * *

(4) [Reserved]

* * * * *

4. Section 413.70 is amended by—

A. Revising the heading of paragraph 

(a) and paragraph (a)(1). 

B. Adding a new paragraph (a)(4). 

C. Revising paragraph (b)(2)(i) 

introductory text, paragraph (b)(2)(i)(A), 

and paragraph (b)(2)(i)(B). 

D. Removing paragraphs (b)(2)(i)(C) 

and (b)(2)(i)(D). 

E. In paragraph (b)(2)(iii), remove the 

phrase ‘‘on a reasonable cost basis’’ and 

add in its place ‘‘at 101 percent of 

reasonable cost’’. 

F. Revising the heading of paragraph 

(b)(3) and the contents of paragraphs 

(b)(3)(i) and (b)(3)(ii). 

G. Revising paragraph (b)(4). 

H. Adding a new paragraph (d). 

I. Adding a new paragraph (e). 

The revisions and additions read as 

follows:

28356 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

§ 413.70 Payment for services of a CAH. 

(a) Payment for inpatient services 

furnished by a CAH (other than services 

of distinct part units). (1) Effective for 

cost reporting periods beginning on or 

after January 1, 2004, payment for 

inpatient services of a CAH, other than 

services of a distinct part unit of the 

CAH, is 101 percent of the reasonable 

costs of the CAH in providing CAH 

services to its inpatients, as determined 

in accordance with section 

1861(v)(1)(A) of the Act and the 

applicable principles of cost 

reimbursement in this part and in Part 

415 of this chapter, except that the 

following payment principles are 

excluded when determining payment 

for CAH inpatient services: 

(i) Lesser of cost or charges; 

(ii) Ceilings on hospital operating 

costs; 

(iii) Reasonable compensation 

equivalent (RCE) limits for physician 

services to providers; and 

(iv) The payment window provisions 

for preadmission services, specified in 

§ 412.2(c)(5) of this subchapter and 

§ 413.40(c)(2).

* * * * *

(4) Payment for inpatient services of 

distinct part psychiatric or 

rehabilitation units is described in 

paragraph (e) of this section. 

(b) Payment for outpatient services 

furnished by a CAH.

* * * * *

(2) Reasonable costs for facility 

services. (i) Effective for cost reporting 

periods beginning on or after January 1, 

2004, payment for outpatient services of 

a CAH is 101 percent of the reasonable 

costs of the CAH in providing CAH 

services to its outpatients, as 

determined in accordance with section 

1861(v)(1)(A) of the Act and the 

applicable principles of cost 

reimbursement in this part and in Part 

415 of this chapter, except that the 

following payment principles are 

excluded when determining payment 

for CAH outpatient services: 

(A) Lesser of cost or charges; and 

(B) RCE limits.

* * * * *

(3) Election to be paid 101 percent of 

reasonable costs for facility services 

plus fee schedule for professional 

services.

(i) A CAH may elect to be paid for 

outpatient services in any cost reporting 

period beginning on or after July 1, 2004 

under the method described in 

paragraphs (b)(3)(ii) and (b)(3)(iii) of this 

section. 

(A) The election must be made in 

writing, made on an annual basis, and 

delivered to the fiscal intermediary 

servicing the CAH at least 30 days 

before the start of the cost reporting 

period for which the election is made.

(B) An election of this payment 

method, once made for a cost reporting 

period, remains in effect for all of that 

period and, effective for cost reporting 

periods beginning on or after July 1, 

2004, applies to all services furnished to 

outpatients during that period by a 

physician or other practitioner who has 

reassigned his or her rights to bill for 

those services to the CAH in accordance 

with 42 CFR Part 424, Subpart F of this 

chapter. If a physician or other 

practitioner does not reassign his or her 

billing rights to the CAH in accordance 

with 42 CFR Part 424, payment for the 

physician’s or practitioner’s services to 

CAH outpatients will be made on a fee 

schedule or other applicable basis as 

specified in Subpart B of part 414 of this 

subchapter. 

(C) In the case of a CAH that made an 

election under this section before 

November 1, 2003, for a cost reporting 

period beginning before December 1, 

2003, the rules in paragraph (b)(3)(i)(B) 

of this section are effective for cost 

reporting periods beginning on or after 

July 1, 2001. 

(D) An election made under paragraph 

(b)(3)(i)(B) or paragraph (b)(3)(i)(C) of 

this section is effective only for a period 

for which it was made and does not 

apply to an election that was withdrawn 

or revoked prior to the start of the cost 

reporting period for which it was made. 

(ii) If the CAH elects payment under 

this method, payment to the CAH for 

each outpatient visit will be the sum of 

the following: 

(A) For facility services not including 

any services for which payment may be 

made under paragraph (b)(3)(ii)(B) of 

this section, 101 percent of the 

reasonable costs of the services as 

determined under paragraph (b)(2)(i) of 

this section; and 

(B) For professional services that are 

furnished by a physician or other 

practitioner who has reassigned his or 

her rights to bill for those services to the 

CAH in accordance with Part 424, 

Subpart F of this chapter, and that 

would otherwise be payable to the 

physician or other practitioner if the 

rights to bill for them had not been 

reassigned, 115 percent of the amounts 

that otherwise would be paid for the 

service if the CAH had not elected 

payment under this method.

* * * * *

(4) Costs of certain emergency room 

on-call providers. (i) Effective for cost 

reporting periods beginning on or after 

October 1, 2001, the reasonable costs of 

outpatient CAH services under 

paragraph (b) of this section may 

include amounts for reasonable 

compensation and related costs for an 

emergency room physician who is on 

call but who is not present on the 

premise of the CAH involved, is not 

otherwise furnishing physicians’

services, and is not on call at any other 

provider or facility. Effective for costs 

incurred for services furnished on or 

after January 1, 2005, the payment 

amount of 101 percent of the reasonable 

costs of outpatient CAH services may 

also include amounts for reasonable 

compensation and related costs for the 

following emergency room providers 

who are on call but who are not present 

on the premise of the CAH involved, are 

not otherwise furnishing physicians’

services, and are not on call at any other 

provider or facility: physician assistants, 

nurse practitioners, and clinical nurse 

specialists. 

(ii) For purposes of this paragraph 

(b)(4)—

(A) ‘‘Amounts for reasonable 

compensation and related costs’’ means 

all allowable costs of compensating 

emergency room physicians, physician 

assistants, nurse practitioners, and 

clinical nurse specialists who are on call 

to the extent that the costs are found to 

be reasonable under the rules specified 

in paragraph (b)(2) of this section and 

the applicable sections of Part 413. 

Costs of compensating these specified 

medical emergency room staff are 

allowable only if the costs are incurred 

under written contracts that require the 

physician, physician assistant, nurse 

practitioner, or clinical nurse specialist 

to come to the CAH when the 

physician’s or other practitioner’s 

presence is medically required. 

(B) Effective for costs incurred on or 

after January 1, 2005, an ‘‘emergency 

room physician, physician assistant, 

nurse practitioner, or clinical nurse 

specialist who is on call’’ means a 

doctor of medicine or osteopathy, a 

physician assistant, a nurse practitioner, 

or a clinical nurse specialist with 

training or experience in emergency 

care who is immediately available by 

telephone or radio contact, and is 

available onsite within the timeframes 

specified in § 485.618(d) of this chapter.

* * * * *

(d) Periodic interim payments. Subject 

to the provisions of § 413.64(h), a CAH 

receiving payments under this section 

may elect to receive periodic interim 

payments (PIP) for Part A inpatient CAH 

services, effective for payments made on 

or after July l, 2004. Payment is made 

biweekly under the PIP method unless 

the CAH requests a longer fixed interval 

(not to exceed one month) between 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28357

payments. The biweekly interim 

payment amount is based on the total 

estimated Medicare payment (after 

estimated beneficiary deductibles and 

coinsurance) for the cost reporting 

period. Each payment is made 2 weeks 

after the end of a biweekly period of 

service, as described in § 413.64(h)(6). 

These PIP provisions are further 

described in § 413.64(h)(6). Under 

certain circumstances that are described 

in § 413.64(g), a CAH that is not 

receiving PIP may request an 

accelerated payment. 

(e) Payment for services of distinct 

part psychiatric and rehabilitation units 

of CAHs. Payment for inpatient services 

of distinct part psychiatric units of 

CAHs is made in accordance with 

regulations governing IPPS-excluded 

psychiatric units of hospitals at 

§ 413.40. Payment for inpatient services 

of distinct part rehabilitation units of 

CAHs is made in accordance with 

regulations governing the IRF PPS at 

Subpart F (§§ 412.600 through 412.632) 

of Part 412 of this subchapter.

§ 413.80 [Redesignated as § 413.89] 

5. Section 413.80 is redesignated as 

§ 413.89.

§ 413.85 [Amended] 

6. In § 413.85—

A. In paragraph (b)(2), the crossreference ‘‘§ 413.86’’ is removed and the 

cross-reference ‘‘§§ 413.75 through 

413.83’’ is added in its place. 

B. In paragraph (c)(3), in the 

definition ‘‘Redistribution of costs,’’ the 

cross-reference ‘‘§ 413.86’’ is removed 

and ‘‘§ 413.75 through 413.83’’ is added 

in its place. 

7. Section 413.86 is removed and 

§§ 413.75 through 413.83 are added to 

Subpart F to read as follows:

Subpart F—Specific Categories of Costs 

413.75 Direct GME payments: General 

requirements. 

413.76 Direct GME payments: Calculation 

of payments for GME costs. 

413.77 Direct GME payments: 

Determination of per resident amounts. 

413.78 Direct GME payments: 

Determination of the total number of FTE 

residents. 

413.79 Direct GME payments: 

Determination of the weighted number of 

FTE residents. 

413.80 Direct GME payments: 

Determination of weighting factors for 

foreign medical graduates. 

413.81 Direct GME payments: Application 

of community support and redistribution 

of costs in determining FTE resident 

counts. 

413.82 Direct GME payments: Special rules 

for States that formerly had a waiver 

from Medicare reimbursement 

principles. 

413.83 Direct GME payments: Adjustment 

of a hospital’s target amount or 

prospective payment hospital-specific 

rate.

§ 413.75 Direct GME payments: General 

requirements. 

(a) Statutory basis and scope— (1) 

Basis. This section and §§ 413.76 

through 413.83 implement section 

1886(h) of the Act by establishing the 

methodology for Medicare payment of 

the cost of direct graduate medical 

educational activities. 

(2) Scope. This section and §§ 413.76 

through 413.83 apply to Medicare 

payments to hospitals and hospitalbased providers for the costs of 

approved residency programs in 

medicine, osteopathy, dentistry, and 

podiatry for cost reporting periods 

beginning on or after July 1, 1985. 

(b) Definitions. For purposes of this 

section and §§ 413.76 through 413.83, 

the following definitions apply: 

‘‘All or substantially all of the costs 

for the training program in the 

nonhospital setting’’ means the 

residents’ salaries and fringe benefits 

(including travel and lodging where 

applicable) and the portion of the cost 

of teaching physicians’ salaries and 

fringe benefits attributable to direct 

graduate medical education (GME). 

Approved geriatric program means a 

fellowship program of one or more years 

in length that is approved by one of the 

national organizations listed in 

§ 415.152 of this chapter under that 

respective organization’s criteria for 

geriatric fellowship programs. 

Approved medical residency program

means a program that meets one of the 

following criteria: 

(1) Is approved by one of the national 

organizations listed in § 415.152 of this 

chapter. 

(2) May count towards certification of 

the participant in a specialty or 

subspecialty listed in the current edition 

of either of the following publications: 

(i) The Directory of Graduate Medical 

Education Programs published by the 

American Medical Association, and 

available from American Medical 

Association, Department of Directories 

and Publications, 515 North State Street, 

Chicago, Illinois 60610; or

(ii) The Annual Report and Reference 

Handbook published by the American 

Board of Medical Specialties, and 

available from American Board of 

Medical Specialties, One Rotary Center, 

Suite 805, Evanston, Illinois 60201. 

(3) Is approved by the Accreditation 

Council for Graduate Medical Education 

(ACGME) as a fellowship program in 

geriatric medicine. 

(4) Is a program that would be 

accredited except for the accrediting 

agency’s reliance upon an accreditation 

standard that requires an entity to 

perform an induced abortion or require, 

provide, or refer for training in the 

performance of induced abortions, or 

make arrangements for such training, 

regardless of whether the standard 

provides exceptions or exemptions. 

Base period means a cost reporting 

period that began on or after October 1, 

1983 but before October 1, 1984. 

Community support means funding 

that is provided by the community and 

generally includes all non-Medicare 

sources of funding (other than payments 

made for furnishing services to 

individual patients), including State and 

local government appropriations. 

Community support does not include 

grants, gifts, and endowments of the 

kind that are not to be offset in 

accordance with section 1134 of the Act. 

CPI–U stands for the Consumer Price 

Index for All Urban Consumers as 

compiled by the Bureau of Labor 

Statistics. 

Foreign medical graduate means a 

resident who is not a graduate of a 

medical, osteopathy, dental, or podiatry 

school, respectively, accredited or 

approved as meeting the standards 

necessary for accreditation by one of the 

following organizations: 

(1) The Liaison Committee on Medical 

Education of the American Medical 

Association. 

(2) The American Osteopathic 

Association. 

(3) The Commission on Dental 

Accreditation. 

(4) The Council on Podiatric Medical 

Education. 

FMGEMS stands for the Foreign 

Medical Graduate Examination in the 

Medical Sciences (Part I and Part II). 

FTE stands for full-time equivalent. 

GME stands for graduate medical 

education. 

Medicare GME affiliated group

means—

(1) Two or more hospitals that are 

located in the same urban or rural area 

(as those terms are defined in § 412.62(f) 

of this subchapter) or in a contiguous 

area and meet the rotation requirements 

in § 413.79(g)(2). 

(2) Two or more hospitals that are not 

located in the same or in a contiguous 

urban or rural area, but meet the 

rotation requirement in § 413.79(g)(2), 

and are jointly listed—

(i) As the sponsor, primary clinical 

site, or major participating institution 

for one or more programs as these terms 

are used in the most current publication 

of the Graduate Medical Education 

Directory; or 

(ii) As the sponsor or is listed under 

‘‘affiliations and outside rotations’’ for 

28358 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

one or more programs in operation in 

Opportunities, Directory of Osteopathic 

Postdoctoral Education Programs. 

(3) Two or more hospitals that are 

under common ownership and, effective 

for all Medicare GME affiliation 

agreements beginning July 1, 2003, meet 

the rotation requirement in 

§ 413.79(g)(2). 

Medicare GME affiliation agreement

means a written, signed, and dated 

agreement by responsible 

representatives of each respective 

hospital in a Medicare GME affiliated 

group, as defined in this section, that 

specifies—

(1) The term of the Medicare GME 

affiliation agreement (which, at a 

minimum is 1 year), beginning on July 

1 of a year; 

(2) Each participating hospital’s direct 

and indirect GME FTE caps in effect 

prior to the Medicare GME affiliation; 

(3) The total adjustment to each 

hospital’s FTE caps in each year that the 

Medicare GME affiliation agreement is 

in effect, for both direct GME and IME, 

that reflects a positive adjustment to one 

hospital’s direct and indirect FTE caps 

that is offset by a negative adjustment to 

the other hospital’s (or hospitals’) direct 

and indirect FTE caps of at least the 

same amount; 

(4) The adjustment to each 

participating hospital’s FTE counts 

resulting from the FTE resident’s (or 

residents’) participation in a shared 

rotational arrangement at each hospital 

participating in the Medicare GME 

affiliated group for each year the 

Medicare GME affiliation agreement is 

in effect. This adjustment to each 

participating hospital’s FTE count is 

also reflected in the total adjustment to 

each hospital’s FTE caps (in accordance 

with paragraph (3) of this definition); 

and 

(5) The names of the participating 

hospitals and their Medicare provider 

numbers. 

Medicare patient load means, with 

respect to a hospital’s cost reporting 

period, the total number of hospital 

inpatient days during the cost reporting 

period that are attributable to patients 

for whom payment is made under 

Medicare Part A divided by total 

hospital inpatient days. In calculating 

inpatient days, inpatient days in any 

distinct part of the hospital furnishing a 

hospital level of care are included and 

nursery days are excluded. 

Primary care resident is a resident 

enrolled in an approved medical 

residency training program in family 

medicine, general internal medicine, 

general pediatrics, preventive medicine, 

geriatric medicine or osteopathic 

general practice. 

Redistribution of costs occurs when a 

hospital counts FTE residents in 

medical residency programs and the 

costs of the program had previously 

been incurred by an educational 

institution. 

Resident means an intern, resident, or 

fellow who participates in an approved 

medical residency program, including 

programs in osteopathy, dentistry, and 

podiatry, as required in order to become 

certified by the appropriate specialty 

board. 

Rural track FTE limitation means the 

maximum number of residents (as 

specified in § 413.79(l)) training in a 

rural track residency program that an 

urban hospital may include in its FTE 

count and that is in addition to the 

number of FTE residents already 

included in the hospital’s FTE cap. 

Rural track or integrated rural track

means an approved medical residency 

training program established by an 

urban hospital in which residents train 

for a portion of the program at the urban 

hospital and then rotate for a portion of 

the program to a rural hospital(s) or a 

rural nonhospital site(s). 

Shared rotational arrangement means 

a residency training program under 

which a resident(s) participates in 

training at two or more hospitals in that 

program. 

(c) Payment for GME costs—General 

rule. Beginning with cost reporting 

periods starting on or after July 1, 1985, 

hospitals, including hospital-based 

providers, are paid for the costs of 

approved GME programs as described in 

§§ 413.76 through 413.83.

§ 413.76 Direct GME payments: 

Calculation of payments for GME costs. 

A hospital’s Medicare payment for the 

costs of an approved residency program 

is calculated as follows: 

(a) Step one. The hospital’s updated 

per resident amount (as determined 

under § 413.77) is multiplied by the 

actual number of FTE residents (as 

determined under § 413.79). This result 

is the aggregate approved amount for the 

cost reporting period. 

(b) Step two. The product derived in 

step one is multiplied by the hospital’s 

Medicare patient load. 

(c) Step three. For portions of cost 

reporting periods occurring on or after 

January 1, 1998, the product derived in 

step one is multiplied by the proportion 

of the hospital’s inpatient days 

attributable to individuals who are 

enrolled under a risk-sharing contract 

with an eligible organization under 

section 1876 of the Act and who are 

entitled to Medicare Part A or with a 

Medicare+Choice organization under 

Title XVIII, Part C of the Act. This 

amount is multiplied by an applicable 

payment percentage equal to—

(1) 20 percent for 1998; 

(2) 40 percent for 1999; 

(3) 60 percent in 2000; 

(4) 80 percent in 2001; and 

(5) 100 percent in 2002 and 

subsequent years. 

(d) Step four. Effective for portions of 

cost reporting periods occurring on or 

after January 1, 2000, the product 

derived from step three is reduced by a 

percentage equal to the ratio of the 

Medicare+Choice nursing and allied 

health payment ‘‘pool’’ for the current 

calendar year as described at § 413.87(f), 

to the projected total Medicare+Choice 

direct GME payments made to all 

hospitals for the current calendar year. 

(e) Step five. (1) For portions of cost 

reporting periods beginning on or after 

January 1, 1998 and before January 1, 

2000, add the results of steps two and 

three. 

(2) Effective for portions of cost 

reporting periods beginning on or after 

January 1, 2000, add the results of steps 

two and four. 

(f) Step six. The product derived in 

step two is apportioned between Part A 

and Part B of Medicare based on the 

ratio of Medicare’s share of reasonable 

costs excluding GME costs attributable 

to each part as determined through the 

Medicare cost report.

§ 413.77 Direct GME payments: 

Determination of per resident amounts.

(a) Per resident amount for the base 

period—(1) Except as provided in 

paragraph (d) of this section, the 

intermediary determines a base-period 

per resident amount for each hospital as 

follows: 

(i) Determine the allowable GME costs 

for the cost reporting period beginning 

on or after October 1, 1983 but before 

October 1, 1984. In determining these 

costs, GME costs allocated to the 

nursery cost center, research and other 

nonreimbursable cost centers, and 

hospital-based providers that are not 

participating in Medicare are excluded 

and GME costs allocated to distinct-part 

hospital units and hospital-based 

providers that participate in Medicare 

are included. 

(ii) Divide the costs calculated in 

paragraph (a)(1)(i) of this section by the 

average number of FTE residents 

working in all areas of the hospital 

complex (including those areas whose 

costs were excluded under paragraph 

(a)(1)(i) of this section) for its cost 

reporting period beginning on or after 

October 1, 1983 but before October 1, 

1984. 

(2) In determining the base-period per 

resident amount under paragraph (a)(1) 

of this section, the intermediary—

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(i) Verifies the hospital’s base-period 

GME costs and the hospital’s average 

number of FTE residents; 

(ii) Excludes from the base-period 

GME costs any nonallowable or 

misclassified costs, including those 

previously allowed under 

§ 412.113(b)(3) of this chapter; and 

(iii) Upon a hospital’s request, 

includes GME costs that were 

misclassified as operating costs during 

the hospital’s prospective payment base 

year and were not allowable under 

§ 412.113(b)(3) of this chapter during 

the GME base period. These costs may 

be included only if the hospital requests 

an adjustment of its prospective 

payment hospital-specific rate or target 

amount as described in § 413.82(a) of 

this chapter. 

(3) If the hospital’s cost report for its 

GME base period is no longer subject to 

reopening under § 405.1885 of this 

chapter, the intermediary may modify 

the hospital’s base-period costs solely 

for purposes of computing the per 

resident amount. 

(4) If the intermediary modifies a 

hospital’s base-period GME costs as 

described in paragraph (a)(2)(ii) of this 

section, the hospital may request an 

adjustment of its prospective payment 

hospital-specific rate or target amount as 

described in § 413.82(a) of this chapter. 

(5) The intermediary notifies each 

hospital that either had direct GME 

costs or received indirect education 

payment in its cost reporting period 

beginning on or after October 1, 1984, 

and before October 1, 1985, of its baseperiod average per resident amount. A 

hospital may appeal this amount within 

180 days of the date of that notice. 

(b) Per resident amount for cost 

reporting periods beginning on or after 

July 1, 1985, and before July 1, 1986. For 

cost reporting periods beginning on or 

after July 1, 1985, and before July 1, 

1986, a hospital’s base-period per 

resident amount is adjusted as follows: 

(1) If a hospital’s base period began on 

or after October 1, 1983, and before July 

1, 1984, the amount is adjusted by the 

percentage change in the CPI–U that 

occurred between the hospital’s base 

period and the first cost reporting 

period to which the provisions of this 

section apply. The adjusted amount is 

then increased by one percent. 

(2) If a hospital’s base period began on 

or after July 1, 1984 and before October 

1, 1984, the amount is increased by one 

percent. 

(c) Per resident amount for cost 

reporting periods beginning on or after 

July 1, 1986. Subject to the provisions of 

paragraph (d) of this section, for cost 

reporting periods beginning on or after 

July 1, 1986, a hospital’s base-period per 

resident amount is adjusted as follows: 

(1) Except as provided in paragraph 

(c)(2) of this section, each hospital’s per 

resident amount for the previous cost 

reporting is adjusted by the projected 

change in the CPI–U for the 12-month 

cost reporting period. This adjustment is 

subject to revision during the settlement 

of the cost report to reflect actual 

changes in the CPI–U that occurred 

during the cost reporting period. 

(2) For cost reporting periods 

beginning on or after October 1, 1993 

through September 30, 1995, each 

hospital’s per resident amount for the 

previous cost reporting period will not 

be adjusted for any resident FTEs who 

are not either a primary care resident or 

an obstetrics and gynecology resident. 

(d) Per resident amount for cost 

reporting periods beginning on or after 

October 1, 2000 and ending on or before 

September 30, 2013. For cost reporting 

periods beginning on or after October 1, 

2000 and ending on or before September 

30, 2013, a hospital’s per resident 

amount for each fiscal year is adjusted 

in accordance with the following 

provisions: 

(1) General provisions. For purposes 

of this § 413.77—

(i) Weighted average per resident 

amount. The weighted average per 

resident amount is established as 

follows: 

(A) Using data from hospitals’ cost 

reporting periods ending during FY 

1997, CMS calculates each hospital’s 

single per resident amount by adding 

each hospital’s primary care and 

nonprimary care per resident amounts, 

weighted by its respective FTEs, and 

dividing by the sum of the FTEs for 

primary care and nonprimary care 

residents. 

(B) Each hospital’s single per resident 

amount calculated under paragraph 

(d)(1)(i)(A) of this section is 

standardized by the 1999 geographic 

adjustment factor for the physician fee 

schedule area (as determined under 

§ 414.26 of this chapter) in which the 

hospital is located. 

(C) CMS calculates an average of all 

hospitals’ standardized per resident 

amounts that are determined under 

paragraph (d)(1)(i)(B) of this section. 

The resulting amount is the weighted 

average per resident amount. 

(ii) Primary care/obstetrics and 

gynecology and nonprimary care per 

resident amounts. A hospital’s per 

resident amount is an amount inclusive 

of any CPI–U adjustments that the 

hospital may have received since the 

hospital’s base year, including any CPI–

U adjustments the hospital may have 

received because the hospital trains 

primary care/obstetrics and gynecology 

residents and nonprimary care residents 

as specified under paragraph (c)(2) of 

this section. 

(2) Adjustment beginning in FY 2001 

and ending in FY 2013. For cost 

reporting periods beginning on or after 

October 1, 2000, and ending on or 

before September 30, 2013, a hospital’s 

per resident amount is adjusted in 

accordance with paragraphs (d)(2)(i) 

through (d)(2)(iv) of this section, in that 

order: 

(i) Updating the weighted average per 

resident amount for inflation. The 

weighted average per resident amount 

(as determined under paragraph (d)(1)(i) 

of this section) is updated by the 

estimated percentage increase in the 

CPI–U during the period beginning with 

the month that represents the midpoint 

of the cost reporting periods ending 

during FY 1997 (that is, October 1, 

1996) and ending with the midpoint of 

the hospital’s cost reporting period that 

begins in FY 2001. 

(ii) Adjusting for locality. The 

updated weighted average per resident 

amount determined under paragraph 

(d)(2)(i) of this section (the national 

average per resident amount) is adjusted 

for the locality of each hospital by 

multiplying the national average per 

resident amount by the 1999 geographic 

adjustment factor for the physician fee 

schedule area in which each hospital is 

located, established in accordance with 

§ 414.26 of this chapter. 

(iii) Determining necessary revisions 

to the per resident amount. The localityadjusted national average per resident 

amount, as calculated in accordance 

with paragraph (d)(2)(ii) of this section, 

is compared to the hospital’s per 

resident amount and is revised, if 

appropriate, according to the following 

three categories: 

(A) Floor. (1) For cost reporting 

periods beginning on or after October 1, 

2000, and before October 1, 2001, if the 

hospital’s per resident amount would 

otherwise be less than 70 percent of the 

locality-adjusted national average per 

resident amount for FY 2001 (as 

determined under paragraph (d)(2)(ii) of 

this section), the per resident amount is 

equal to 70 percent of the localityadjusted national average per resident 

amount for FY 2001. 

(2) For cost reporting periods 

beginning on or after October 1, 2001, 

and before October 1, 2002, if the 

hospital’s per resident amount would 

otherwise be less than 85 percent of the 

locality-adjusted national average per 

resident amount for FY 2002 (as 

determined under paragraph (d)(2)(ii) of 

this section), the per resident amount is 

equal to 85 percent of the localityVerDate jul<14>2003 17:21 May 17, 2004 Jkt 203001 PO 00000 Frm 00165 Fmt 4701 Sfmt 4700 C:\18MYP2.SGM 18MYP2
28360 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

adjusted national average per resident 

amount for FY 2002. 

(3) For subsequent cost reporting 

periods beginning on or after October 1, 

2002, the hospital’s per resident amount 

is updated using the methodology 

specified under paragraph (c)(1) of this 

section. 

(B) Ceiling. If the hospital’s per 

resident amount is greater than 140 

percent of the locality-adjusted national 

average per resident amount, the per 

resident amount is adjusted as follows 

for FY 2001 through FY 2013: 

(1) FY 2001. For cost reporting 

periods beginning on or after October 1, 

2000 and on or before September 30, 

2001, if the hospital’s FY 2000 per 

resident amount exceeds 140 percent of 

the FY 2001 locality-adjusted national 

average per resident amount (as 

calculated under paragraph (d)(2)(ii) of 

this section), subject to the provision 

stated in paragraph (d)(2)(iii)(B)(5) of 

this section, the hospital’s per resident 

amount is frozen at the FY 2000 per 

resident amount and is not updated for 

FY 2001 by the CPI–U factor. 

(2) FY 2002. For cost reporting 

periods beginning on or after October 1, 

2001, and on or before September 30, 

2002, if the hospital’s FY 2001 per 

resident amount exceeds 140 percent of 

the FY 2002 locality-adjusted national 

average per resident amount, subject to 

the provision stated in paragraph 

(d)(2)(iii)(B)(5) of this section, the 

hospital’s per resident amount is frozen 

at the FY 2001 per resident amount and 

is not updated for FY 2002 by the CPI–

U factor. 

(3) FY 2003. For cost reporting 

periods beginning on or after October 1, 

2002, and on or before September 30, 

2003, if the hospital’s per resident 

amount for the previous cost reporting 

period is greater than 140 percent of the 

locality-adjusted national average per 

resident amount for that same previous 

cost reporting period (for example, for 

cost reporting periods beginning in FY 

2003, compare the hospital’s per 

resident amount from the FY 2002 cost 

report to the hospital’s locality-adjusted 

national average per resident amount 

from FY 2002), subject to the provision 

stated in paragraph (d)(2)(iii)(B)(5) of 

this section, the hospital’s per resident 

amount is adjusted using the 

methodology specified in paragraph 

(c)(1) of this section, except that the 

CPI–U applied for a 12-month period is 

reduced (but not below zero) by 2 

percentage points. 

(4) FY 2004 through FY 2013. For cost 

reporting periods beginning on or after 

October 1, 2003, and on or before 

September 30, 2013, if the hospital’s 

preceding year per resident amount 

exceeds 140 percent of the current 

year’s locality-adjusted national average 

per resident amount (as calculated 

under paragraph (d)(2)(ii) of this 

section), subject to the provision stated 

in paragraph (d)(2)(iii)(B)(5) of this 

section, the hospital-specific per 

resident amount is frozen for the current 

year at the preceding year’s hospitalspecific per resident amount and is not 

updated by the CPI–U factor. 

(5) General rule for hospitals that 

exceed the ceiling. For cost reporting 

periods beginning on or after October 1, 

2000, and on or before September 30, 

2013, if a hospital’s per resident amount 

exceeds 140 percent of the hospital’s 

locality-adjusted national average per 

resident amount and it is adjusted under 

any of the criteria under paragraphs 

(d)(2)(iii)(B)(1) through (d)(2)(iii)(B)(3) 

of this section, the current year per 

resident amount cannot be reduced 

below 140 percent of the localityadjusted national average per resident 

amount. 

(C) Per resident amounts greater than 

or equal to the floor and less than or 

equal to the ceiling. For cost reporting 

periods beginning on or after October 1, 

2000 and on or before September 30, 

2013, if a hospital’s per resident amount 

is greater than or equal to 70 percent 

and less than or equal to 140 percent of 

the hospital’s locality-adjusted national 

average per resident amount for each 

respective fiscal year, the hospital’s per 

resident amount is updated using the 

methodology specified in paragraph 

(c)(1) of this section. 

(e) Exceptions—(1) Base period for 

certain hospitals. If a hospital did not 

have any approved medical residency 

training programs or did not participate 

in Medicare during the base period, but 

either condition changes in a cost 

reporting period beginning on or after 

July 1, 1985, the intermediary 

establishes a per resident amount for the 

hospital using the information from the 

first cost reporting period during which 

the hospital participates in Medicare 

and the residents are on duty during the 

first month of that period. Any GME 

program costs incurred by the hospital 

before that cost reporting period are 

reimbursed on a reasonable cost basis. 

The per resident amount is based on the 

lower of the amount specified in 

paragraph (e)(1)(i) or in paragraph 

(e)(1)(ii) of this section, subject to the 

provisions of paragraph (e)(1)(iii) of this 

section. 

(i) The hospital’s actual costs, 

incurred in connection with the GME 

program for the hospital’s first cost 

reporting period in which residents 

were on duty during the first month of 

the cost reporting period. 

(ii) Except as specified in paragraph 

(e)(1)(iii)of this section—

(A) For base periods that begin before 

October 1, 2002, the updated weighted 

mean value of per resident amounts of 

all hospitals located in the same 

geographic wage area, as that term is 

used in the prospective payment system 

under Part 412 of this chapter. 

(B) For base periods beginning on or 

after October 1, 2002, the updated 

weighted mean value of per resident 

amounts of all hospitals located in the 

same geographic wage area is calculated 

using all per resident amounts 

(including primary care and obstetrics 

and gynecology and nonprimary care) 

and FTE resident counts from the most 

recently settled cost reports of those 

teaching hospitals. 

(iii) If, under paragraph (e)(1)(ii)(A) or 

paragraph (e)(1)(ii)(B) of this section, 

there are fewer than three existing 

teaching hospitals with per resident 

amounts that can be used to calculate 

the weighted mean value per resident 

amount, for base periods beginning on 

or after October 1, 1997, the per resident 

amount equals the updated weighted 

mean value of per resident amounts of 

all hospitals located in the same census 

region as that term is used in 

§ 412.62(f)(1)(i) of this chapter.

(2) Short or long base-period cost 

reporting periods. If a hospital’s baseperiod cost reporting period reflects 

GME costs for a period that is shorter 

than 50 weeks or longer than 54 weeks, 

the intermediary converts the allowable 

costs for the base period into a daily 

figure. The daily figure is then 

multiplied by 365 or 366, as 

appropriate, to derive the approved per 

resident amount for a 12-month baseperiod cost reporting period. If a 

hospital has two cost reporting periods 

beginning in the base period, the later 

period serves as the base-period cost 

reporting period. 

(3) Short or long cost reporting 

periods beginning on or after July 1, 

1985. If a hospital’s cost reporting 

period is shorter than 50 weeks or 

longer than 54 weeks, the hospital’s 

intermediary should contact CMS 

Central Office to receive a special CPI–

U adjustment factor. 

(f) Special use of locality-adjusted 

national average per resident amount.

Effective for portions of cost reporting 

periods beginning on or after July 1, 

2005, a hospital that counts additional 

residents as a result of an increase in its 

FTE resident cap under § 413.79(c)(4) 

will receive direct GME payments based 

on those additional FTE residents using 

the locality-adjusted national average 

per resident amount, as determined 

under paragraph (d)(2)(ii) of this 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28361

section. The hospital will receive direct 

GME payments based on the sum of the 

following two direct GME calculations: 

(1) A calculation using the hospital’s 

per resident amount(s) as determined 

under paragraph (d) of this section and 

the hospital’s number of FTE residents 

that are not attributable to an FTE 

resident cap increase under 

§ 413.79(c)(4); and 

(2) A calculation using the localityadjusted national average per resident 

amount, as determined under paragraph 

(d)(2)(ii) of this section, inflated to the 

hospital’s current cost reporting period, 

and the hospital’s number of FTE 

residents that is attributable to the 

increase in the hospital’s FTE resident 

cap under § 413.79(c)(4).

§ 413.78 Direct GME payments: 

Determination of the total number of FTE 

residents. 

Subject to the weighting factors in 

§§ 413.79 and 413.80, and subject to the 

provisions of § 413.81, the count of FTE 

residents is determined as follows: 

(a) Residents in an approved program 

working in all areas of the hospital 

complex may be counted. 

(b) No individual may be counted as 

more than one FTE. A hospital cannot 

claim the time spent by residents 

training at another hospital. Except as 

provided in paragraphs (c), (d), and (e) 

of this section, if a resident spends time 

in more than one hospital or in a 

nonprovider setting, the resident counts 

as partial FTE based on the proportion 

of time worked at the hospital to the 

total time worked. A part-time resident 

counts as a partial FTE based on the 

proportion of allowable time worked 

compared to the total time necessary to 

fill a full-time internship or residency 

slot. 

(c) On or after July 1, 1987, and for 

portions of cost reporting periods 

occurring before January 1, 1999, the 

time residents spend in nonprovider 

settings such as freestanding clinics, 

nursing homes, and physicians’ offices 

in connection with approved programs 

is not excluded in determining the 

number of FTE residents in the 

calculation of a hospital’s resident count 

if the following conditions are met—

(1) The resident spends his or her 

time in patient care activities. 

(2) There is a written agreement 

between the hospital and the outside 

entity that states that the resident’s 

compensation for training time spent 

outside of the hospital setting is to be 

paid by the hospital. 

(d) For portions of cost reporting 

periods occurring on or after January 1, 

1999, and before October 1, 2004, the 

time residents spend in nonprovider 

settings such as freestanding clinics, 

nursing homes, and physicians’ offices 

in connection with approved programs 

may be included in determining the 

number of FTE residents in the 

calculation of a hospital’s resident count 

if the following conditions are met—

(1) The resident spends his or her 

time in patient care activities. 

(2) The written agreement between 

the hospital and the nonhospital site 

must indicate that the hospital will 

incur the cost of the resident’s salary 

and fringe benefits while the resident is 

training in the nonhospital site and the 

hospital is providing reasonable 

compensation to the nonhospital site for 

supervisory teaching activities. The 

agreement must indicate the 

compensation the hospital is providing 

to the nonhospital site for supervisory 

teaching activities. 

(3) The hospital must incur all or 

substantially all of the costs for the 

training program in the nonhospital 

setting in accordance with the definition 

in § 413.75(b). 

(4) The hospital is subject to the 

principles of community support and 

redistribution of costs as specified in 

§ 413.81. 

(e) For portions of cost reporting 

periods occurring on or after October 1, 

2004, the time residents spend in 

nonprovider settings such as 

freestanding clinics, nursing homes, and 

physicians’ offices in connection with 

approved programs may be included in 

determining the number of FTE 

residents in the calculation of a 

hospital’s resident count if the following 

conditions are met—

(1) The resident spends his or her 

time in patient care activities. 

(2) The hospital must incur all or 

substantially all of the costs of the 

training program in a nonhospital 

setting(s) (in accordance with the 

definition under § 413.75(b)) 

attributable to training that occurs 

during a month by the end of the month 

following the month in which the 

training in the nonhospital site 

occurred. 

(3) The hospital is subject to the 

principles of community support and 

redistribution of costs as specified in 

§ 413.81.

§ 413.79 Direct GME payments: 

Determination of the weighted number of 

FTE residents. 

Subject to the provisions in § 413.80, 

CMS determines a hospital’s number of 

FTE residents by applying a weighting 

factor to each resident and then 

summing the resulting numbers that 

represent each resident. The weighting 

factor is determined as follows: 

(a) Initial residency period. Generally, 

for purposes of this section, effective 

July 1, 1995, an initial residency period 

is defined as the minimum number of 

years required for board eligibility. 

(1) Prior to July 1, 1995, the initial 

residency period equals the minimum 

number of years required for board 

eligibility in a specialty or subspecialty 

plus 1 year. An initial residency period 

may not exceed 5 years in order to be 

counted toward determining FTE status 

except in the case of a resident in an 

approved geriatric program whose 

initial residency period may last up to 

2 additional years. 

(2) Effective October 1, 2003, for a 

resident who trains in an approved 

geriatric program that requires the 

residents to complete 2 years of training 

to initially become board eligible in the 

geriatric specialty, the 2 years spent in 

the geriatrics program are treated as part 

of the resident’s initial residency period. 

(3) Effective July 1, 2000, for 

residency programs that began before, 

on, or after November 29, 1999, the 

period of board eligibility and the initial 

residency period for a resident in an 

approved child neurology program is 

the period of board eligibility for 

pediatrics plus 2 years. 

(4) Effective August 10, 1993, 

residents or fellows in an approved 

preventive medicine residency or 

fellowship program also may be counted 

as a full FTE resident for up to 2 

additional years beyond the initial 

residency period limitations. 

(5) For combined residency programs, 

an initial residency period is defined as 

the time required for individual 

certification in the longer of the 

programs. If the resident is enrolled in 

a combined medical residency training 

program in which all of the individual 

programs (that are combined) are for 

training primary care residents (as 

defined in § 413.75(b)) or obstetrics and 

gynecology residents, the initial 

residency period is the time required for 

individual certification in the longer of 

the programs plus 1 year. 

(6) For residency programs other than 

those specified in paragraphs (a)(2) 

through (a)(4) of this section, the initial 

residency period is the minimum 

number of years of formal training 

necessary to satisfy the requirements for 

initial board eligibility in the particular 

specialty for which the resident is 

training, as specified in the most 

recently published edition of the 

Graduate Medical Education Directory. 

(7) For residency programs in 

osteopathy, dentistry, and podiatry, the 

minimum requirement for certification 

in a specialty or subspecialty is the 

minimum number of years of formal 

28362 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

training necessary to satisfy the 

requirements of the appropriate 

approving body listed in § 415.152 of 

this chapter. 

(8) For residency programs in geriatric 

medicine, accredited by the appropriate 

approving body listed in § 415.152 of 

this chapter, these programs are 

considered approved programs on the 

later of—

(i) The starting date of the program 

within a hospital; or 

(ii) The hospital’s cost reporting 

periods beginning on or after July 1, 

1985. 

(9) The time spent in residency 

programs that do not lead to 

certification in a specialty or 

subspecialty, but that otherwise meet 

the definition of approved programs, as 

described in § 413.75(b), is counted 

toward the initial residency period 

limitation. 

(b) Weighting factor—(1) If the 

resident is in an initial residency 

period, the weighting factor is one.

(2) If the resident is not in an initial 

residency period, the weighting factor is 

1.00 during the period beginning on or 

after July 1, 1985 and before July 1, 

1986, .75 during the period beginning 

on or after July 1, 1986 and before July 

1, 1987, and .50 thereafter without 

regard to the hospital’s cost reporting 

period. 

(c) Unweighted FTE counts.

(1) Definitions. As used in this 

paragraph (c): 

(i) Otherwise applicable resident cap

refers to a hospital’s FTE resident cap 

that is determined for a particular cost 

reporting period under paragraph (c)(2) 

of this section. 

(ii) Reference resident level refers to a 

hospital’s resident level in the 

applicable reference period specified 

under paragraph (c)(3)(ii) of this section. 

(iii) Resident level refers to the 

number of unweighted allopathic and 

osteopathic FTE residents who are 

training in a hospital in a particular cost 

reporting period. 

(2) Determination of the FTE resident 

cap. Subject to the provisions of 

paragraphs (c)(3) and (c)(4) of this 

section and § 413.81, for purposes of 

determining direct GME payment—

(i) For cost reporting periods 

beginning on or after October 1, 1997, a 

hospital’s resident level may not exceed 

the hospital’s unweighted FTE count 

(or, effective for cost reporting periods 

beginning on or after April 1, 2000, 130 

percent of the unweighted FTE count for 

a hospital located in a rural area) for 

these residents for the most recent cost 

reporting period ending on or before 

December 31, 1996. 

(ii) If a hospital’s number of FTE 

residents in a cost reporting period 

beginning on or after October 1, 1997, 

and before October 1, 2001, exceeds the 

limit described in this section, the 

hospital’s total weighted FTE count 

(before application of the limit) will be 

reduced in the same proportion that the 

number of FTE residents for that cost 

reporting period exceeds the number of 

FTE residents for the most recent cost 

reporting period ending on or before 

December 31, 1996. 

(iii) If the hospital’s number of FTE 

residents in a cost reporting period 

beginning on or after October 1, 2001 

exceeds the limit described in this 

section, the hospital’s weighted FTE 

count (before application of the limit) 

for primary care and obstetrics and 

gynecology residents and nonprimary 

care residents, respectively, will be 

reduced in the same proportion that the 

number of FTE residents for that cost 

reporting period exceeds the number of 

FTE residents for the most recent cost 

reporting period ending on or before 

December 31, 1996. 

(iv) Hospitals that are part of the same 

Medicare GME affiliated group (as 

described under § 413.75(b)) may elect 

to apply the limit on an aggregate basis 

as described under paragraph (f) of this 

section. 

(v) The fiscal intermediary may make 

appropriate modifications to apply the 

provisions of this paragraph (c) of this 

section based on the equivalent of a 12-

month cost reporting period. 

(3) Determination of the reduction to 

the FTE resident cap due to unused FTE 

resident slots. If a hospital’s reference 

resident level is less than its otherwise 

applicable FTE resident cap as 

determined under paragraph (c)(2) of 

this section or paragraph (e) of this 

section in the reference cost reporting 

period (as described under paragraph 

(c)(3)(ii) of this section), for portions of 

cost reporting periods beginning on or 

after July 1, 2005, the hospital’s 

otherwise applicable FTE resident cap is 

reduced by 75 percent of the difference 

between the otherwise applicable FTE 

resident cap and the reference resident 

level. Under this provision—

(i) Exemption for certain rural 

hospitals. Rural hospitals, as defined at 

§ 412.62(f)(iii), with less than 250 beds 

(as determined at § 412.105(b)) in its 

most recent cost reporting period ending 

on or before September 30, 2002, are 

exempt from the reduction to the 

otherwise applicable FTE resident cap 

limit under paragraph (c)(3) of this 

section. 

(ii) Reference cost reporting periods.

(A) To determine a hospital’s 

reference resident level, CMS uses one 

of the following periods: 

(1) A hospital’s most recent cost 

reporting period ending on or before 

September 30, 2002, for which a cost 

report has been settled or if the cost 

report has not been settled, the assubmitted cost report (subject to audit); 

or 

(2) A hospital’s cost reporting period 

that includes July 1, 2003 if the hospital 

increased its resident level due to an 

expansion of an existing program and 

that expansion is not reflected on the 

hospital’s most recent settled cost 

report; and if the hospital makes a 

request to use that cost reporting period 

within a timeframe designated by CMS. 

An expansion of an existing program 

means that, except for expansions due 

to newly approved programs under 

paragraph (c)(3)(ii)(A)(3) of this section, 

the number of unweighted allopathic 

and osteopathic FTE residents, 

regardless of specialty, in any cost 

reporting period after the hospital’s 

most recent settled cost report, up to 

and including the hospital’s cost report 

that includes July 1, 2003, is greater 

than the number of unweighted 

allopathic and osteopathic FTE 

residents in the hospital’s most recent 

settled cost report. 

(3) A hospital may submit a request, 

within the timeframe designated by 

CMS, that CMS adjust the resident level 

for purposes of determining any 

reduction under paragraph (c)(3) of this 

section. 

(i) In the hospital’s reference cost 

reporting period under paragraph 

(c)(3)(ii)(A)(1) of this section, to include 

the number of FTE residents for which 

a new program was accredited by the 

appropriate allopathic or osteopathic 

accrediting body (listed under § 415.152 

of this chapter) before January 1, 2002, 

if the program was not in operation 

during the reference cost reporting 

period under paragraph (c)(3)(ii)(A)(1) 

or (c)(3)(ii)(A)(2) of this section; or 

(ii) In the hospital’s reference cost 

reporting period under paragraph 

(c)(3)(ii)(A)(2) of this section, to include 

the number of FTE residents for which 

a new program was accredited by the 

appropriate allopathic or osteopathic 

accrediting body (listed under § 415.152 

of this chapter) before January 1, 2002, 

if the program was not in operation 

during the cost reporting period that 

includes July 1, 2003, and if the hospital 

also qualifies to use its cost report under 

paragraph (c)(3)(ii)(A)(2) of this section 

due to an expansion of an existing 

program. 

(B) If the cost report that is used to 

determine a hospital’s otherwise 

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applicable FTE resident cap in the 

reference period is not equal to 12 

months, the fiscal intermediary may 

make appropriate modifications to 

apply the provisions of paragraph 

(c)(3)(i)(A) of this section based on the 

equivalent of a 12-month cost reporting 

period. 

(iii) If the new program described in 

paragraph (c)(3)(ii)(A)(3)(i) or paragraph 

(c)(3)(ii)(A)(ii) was accredited for a 

range of residents, the hospital may 

request that its reference resident level 

in its applicable reference cost reporting 

period under paragraph (c)(3)(ii)(A)(1) 

or (c)(3)(ii)(A)(2) of this section be 

adjusted to reflect the maximum 

number of accredited slots. 

(iv) Consideration of Medicare GME 

affiliated group agreements. For 

hospitals that are members of the same 

affiliated group for the program year 

July 1, 2003 through June 30, 2004, in 

determining whether a hospital’s 

otherwise applicable resident FTE 

resident cap is reduced under paragraph 

(c)(3) of this section, CMS utilizes a 

hospital’s otherwise applicable FTE 

resident cap as revised by a Medicare 

GME affiliation agreement for hospitals 

that are members of the same affiliated 

group (as described under § 413.75(b)) 

for the program year July 1, 2003 

through June 30, 2004. Possible 

reductions to a hospital’s otherwise 

applicable FTE resident cap are made 

on a hospital-specific basis. If the 

hospital’s reference resident level is 

below its otherwise applicable FTE 

resident cap as adjusted by the July 1, 

2003 Medicare GME affiliation 

agreement, the hospital’s otherwise 

applicable FTE resident cap is reduced 

by 75 percent of the difference between 

the hospital’s reference resident level 

and the otherwise applicable FTE 

resident cap as adjusted by the July 1, 

2003 Medicare GME affiliation 

agreement. 

(4) Determination of an increase in 

otherwise applicable resident cap. For 

portions of cost reporting periods 

beginning on or after July 1, 2005, a 

hospital may receive an increase in its 

otherwise applicable FTE resident cap 

up to an additional 25 FTEs (as 

determined by CMS) if the hospital 

meets the requirements and qualifying 

criteria of section 1886(h)(7) of the Act 

and implementing instructions issued 

by CMS and if the hospital submits an 

application to CMS within the 

timeframe specified by CMS. 

(5) Special rules for hospitals that 

participate in demonstration projects or 

voluntary resident reduction plans.

(i) If a hospital was participating in a 

demonstration project under section 402 

of Public Law 90–248 or the voluntary 

reduction plan under § 413.88 at any 

time during the hospital’s most recent 

cost reporting period ending on or 

before September 30, 2002, for purposes 

of determining a possible reduction to 

the FTE resident caps under paragraph 

(c)(3) of this section, CMS compares the 

higher of the hospital’s base number of 

residents or the hospital’s reference 

resident level to the hospital’s otherwise 

applicable resident cap determined 

under paragraph (c)(2) of this section. 

(ii) If a hospital withdrew its 

participation in the demonstration 

project or the voluntary resident 

reduction plan prior to its most recent 

cost reporting period ending on or 

before September 30, 2002, the special 

rules in paragraph(c)(5)(i) do not apply, 

and the hospital is subject to the 

procedures applicable to all other 

hospitals for determining possible 

reductions to the FTE resident caps 

under paragraph (c)(3) of this section. 

(iii) CMS will not redistribute 

residency positions that are attributable 

to a hospital’s participation in a 

demonstration project or a voluntary 

resident reduction plan to other 

hospitals that seek to increase their FTE 

resident caps under paragraph (c)(4) of 

this section. 

(d) Weighted FTE counts. Subject to 

the provisions of § 413.81, for purposes 

of determining direct GME payment—

(1) For the hospital’s first cost 

reporting period beginning on or after 

October 1, 1997, the hospital’s weighted 

FTE count is equal to the average of the 

weighted FTE count for the payment 

year cost reporting period and the 

preceding cost reporting period. 

(2) For cost reporting periods 

beginning on or after October 1, 1998, 

and before October 1, 2001, the 

hospital’s weighted FTE count is equal 

to the average of the weighted FTE 

count for the payment year cost 

reporting period and the preceding two 

cost reporting periods. 

(3) For cost reporting periods 

beginning on or after October 1, 2001, 

the hospital’s weighted FTE count for 

primary care and obstetrics and 

gynecology residents is equal to the 

average of the weighted primary care 

and obstetrics and gynecology counts 

for the payment year cost reporting 

period and the preceding two cost 

reporting periods, and the hospital’s 

weighted FTE count for nonprimary 

care residents is equal to the average of 

the weighted nonprimary care FTE 

counts for the payment year cost 

reporting period and the preceding two 

cost reporting periods. 

(4) The fiscal intermediary may make 

appropriate modifications to apply the 

provisions of this paragraph (d) based 

on the equivalent of 12-month cost 

reporting periods.

(5) If a hospital qualifies for an 

adjustment to the limit established 

under paragraph (c)(2) of this section for 

new medical residency programs 

created under paragraph (e) of this 

section, the count of the residents 

participating in new medical residency 

training programs above the number 

included in the hospital’s FTE count for 

the cost reporting period ending during 

calendar year 1996 is added after 

applying the averaging rules in this 

paragraph (d), for a period of years. 

Residents participating in new medical 

residency training programs are 

included in the hospital’s FTE count 

before applying the averaging rules after 

the period of years has expired. For 

purposes of this paragraph (d), for each 

new program started, the period of years 

equals the minimum accredited length 

for each new program. The period of 

years begins when the first resident 

begins training in each new program. 

(6) Subject to the provisions of 

paragraph (h) of this section, FTE 

residents that are displaced by the 

closure of either another hospital or 

another hospital’s program are added to 

the FTE count after applying the 

averaging rules in this paragraph (d), for 

the receiving hospital for the duration of 

the time that the displaced residents are 

training at the receiving hospital. 

(7) Subject to the provisions under 

paragraph (k) of this section, effective 

for cost reporting periods beginning on 

or after April 1, 2000, FTE residents in 

a rural track program at an urban 

hospital are included in the urban 

hospital’s rolling average calculation 

described in this paragraph (d). 

(8) Subject to the provisions under 

paragraph(c)(4) of this section, effective 

for portions of cost reporting periods 

beginning on or after July 1, 2005, FTE 

residents added by a hospital as a result 

of an increase in a hospital’s FTE 

resident cap under paragraph (c)(4) of 

this section are included in the 

hospital’s rolling average calculation 

described in this paragraph (d). 

(e) New medical residency training 

programs. If a hospital establishes a new 

medical residency training program as 

defined in paragraph (l) of this section 

on or after January 1, 1995, the 

hospital’s FTE cap described under 

paragraph (c) of this section may be 

adjusted as follows: 

(1) If a hospital had no allopathic or 

osteopathic residents in its most recent 

cost reporting period ending on or 

before December 31, 1996, and it 

establishes a new medical residency 

training program on or after January 1, 

1995, the hospital’s unweighted FTE 

28364 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

resident cap under paragraph (c) of this 

section may be adjusted based on the 

product of the highest number of 

residents in any program year during 

the third year of the first program’s 

existence for all new residency training 

programs and the number of years in 

which residents are expected to 

complete the program based on the 

minimum accredited length for the type 

of program. The adjustment to the cap 

may not exceed the number of 

accredited slots available to the hospital 

for the new program. 

(i) If the residents are spending an 

entire program year (or years) at one 

hospital and the remainder of the 

program at another hospital, the 

adjustment to each respective hospital’s 

cap is equal to the product of the 

highest number of residents in any 

program year during the third year of 

the first program’s existence and the 

number of years the residents are 

training at each respective hospital. 

(ii) Prior to the implementation of the 

hospital’s adjustment to its FTE cap 

beginning with the fourth year of the 

hospital’s residency program(s), the 

hospital’s cap may be adjusted during 

each of the first 3 years of the hospital’s 

new residency program using the actual 

number of residents participating in the 

new program. The adjustment may not 

exceed the number of accredited slots 

available to the hospital for each 

program year. 

(iii) Except for rural hospitals, the cap 

will not be adjusted for new programs 

established more than 3 years after the 

first program begins training residents. 

(iv) An urban hospital that qualifies 

for an adjustment to its FTE cap under 

paragraph (e)(1) of this section is not 

permitted to be part of a Medicare GME 

affiliated group for purposes of 

establishing an aggregate FTE cap. 

(v) A rural hospital that qualifies for 

an adjustment to its FTE cap under 

paragraph (e)(1) of this section is 

permitted to be part of a Medicare GME 

affiliated group for purposes of 

establishing an aggregate FTE cap. 

(2) If a hospital had allopathic or 

osteopathic residents in its most recent 

cost reporting period ending on or 

before December 31, 1996, the hospital’s 

unweighted FTE cap may be adjusted 

for new medical residency training 

programs established on or after January 

1, 1995 and on or before August 5, 1997. 

The adjustment to the hospital’s FTE 

resident limit for the new program is 

based on the product of the highest 

number of residents in any program year 

during the third year of the newly 

established program and the number of 

years in which residents are expected to 

complete each program based on the 

minimum accredited length for the type 

of program.

(i) If the residents are spending an 

entire program year (or years) at one 

hospital and the remainder of the 

program at another hospital, the 

adjustment to each respective hospital’s 

cap is equal to the product of the 

highest number of residents in any 

program year during the third year of 

the first program’s existence and the 

number of years the residents are 

training at each respective hospital. 

(ii) Prior to the implementation of the 

hospital’s adjustment to its FTE cap 

beginning with the fourth year of the 

hospital’s residency program, the 

hospital’s cap may be adjusted during 

each of the first 3 years of the hospital’s 

new residency program, using the actual 

number of residents in the new 

programs. The adjustment may not 

exceed the number of accredited slots 

available to the hospital for each 

program year. 

(3) If a hospital with allopathic or 

osteopathic residents in its most recent 

cost reporting period ending on or 

before December 31, 1996, is located in 

a rural area (or other hospitals located 

in rural areas that added residents under 

paragraph (e)(1) of this section), the 

hospital’s unweighted FTE limit may be 

adjusted in the same manner described 

in paragraph (e)(2) of this section to 

reflect the increase for residents in the 

new medical residency training 

programs established after August 5, 

1997. For these hospitals, the limit will 

be adjusted for additional new programs 

but not for expansions of existing or 

previously existing programs. 

(4) A hospital seeking an adjustment 

to the limit on its unweighted resident 

count policy must provide 

documentation to its fiscal intermediary 

justifying the adjustment. 

(f) Medicare GME affiliated group. A 

hospital may receive a temporary 

adjustment to its FTE cap, which is 

subject to the averaging rules under 

paragraph (e)(3) of this section, to reflect 

residents added or subtracted because 

the hospital is participating in a 

Medicare GME affiliated group (as 

defined under § 413.75(b)). Under this 

provision—

(1) Each hospital in the Medicare 

GME affiliated group must submit the 

Medicare GME affiliation agreement, as 

defined under § 413.75(b) of this 

section, to the CMS fiscal intermediary 

servicing the hospital and send a copy 

to CMS’s Central Office no later than 

July 1 of the residency program year 

during which the Medicare GME 

affiliation agreement will be in effect. 

(2) Each hospital in the Medicare 

GME affiliated group must have a 

shared rotational arrangement, as 

defined in § 413.75(b), with at least one 

other hospital within the Medicare GME 

affiliated group, and all of the hospitals 

within the Medicare GME affiliated 

group must be connected by a series of 

such shared rotational arrangements. 

(3) During the shared rotational 

arrangements under a Medicare GME 

affiliation agreement, as defined in 

§ 413.75(b), more than one of the 

hospitals in the Medicare GME affiliated 

group must count the proportionate 

amount of the time spent by the 

resident(s) in its FTE resident counts. 

No resident may be counted in the 

aggregate as more than one FTE. 

(4) The net effect of the adjustments 

(positive or negative) on the Medicare 

GME affiliated hospitals’ aggregate FTE 

cap for each Medicare GME affiliation 

agreement must not exceed zero. 

(5) If the Medicare GME affiliation 

agreement terminates for any reason, the 

FTE cap of each hospital in the 

Medicare GME affiliated group will 

revert to the individual hospital’s preaffiliation FTE cap that is determined 

under the provisions of paragraph (c) of 

this section. 

(g) Newly constructed hospitals. A 

hospital that began construction of its 

facility prior to August 5, 1997, and 

sponsored new medical residency 

training programs on or after January 1, 

1995, and on or before August 5, 1997, 

that either received initial accreditation 

by the appropriate accrediting body or 

temporarily trained residents at another 

hospital(s) until the facility was 

completed, may receive an adjustment 

to its FTE cap. 

(1) The newly constructed hospital’s 

FTE cap is equal to the lesser of—

(i) The product of the highest number 

of residents in any program year during 

the third year of the newly established 

program and the number of years in 

which residents are expected to 

complete the programs based on the 

minimum accredited length for each 

type of program; or 

(ii) The number of accredited slots 

available to the hospital for each year of 

the programs. 

(2) If the new medical residency 

training programs sponsored by the 

newly constructed hospital have been in 

existence for 3 years or more by the time 

the residents begin training at the newly 

constructed hospital, the newly 

constructed hospital’s cap will be based 

on the number of residents training in 

the third year of the programs begun at 

the temporary training site. 

(3) If the new medical residency 

training programs sponsored by the 

newly constructed hospital have been in 

existence for less than 3 years by the 

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time the residents begin training at the 

newly constructed hospital, the newly 

constructed hospital’s cap will be based 

on the number of residents training at 

the newly constructed hospital in the 

third year of the programs (including 

the years at the temporary training site). 

(4) A hospital that qualifies for an 

adjustment to its FTE cap under this 

paragraph (g) may be part of an affiliated 

group for purposes of establishing an 

aggregate FTE cap. 

(5) The provisions of this paragraph 

(g) are applicable during portions of cost 

reporting periods occurring on or after 

October 1, 1999. 

(h) Closure of hospital or hospital 

residency program. 

(1) Definitions. For purposes of this 

section—

(i) Closure of a hospital means the 

hospital terminates its Medicare 

agreement under the provisions of 

§ 489.52 of this chapter. 

(ii) Closure of a hospital residency 

training program means the hospital 

ceases to offer training for residents in 

a particular approved medical residency 

training program. 

(2) Closure of a hospital. A hospital 

may receive a temporary adjustment to 

its FTE cap to reflect residents added 

because of another hospital’s closure if 

the hospital meets the following criteria: 

(i) The hospital is training additional 

residents from a hospital that closed on 

or after July 1, 1996. 

(ii) No later than 60 days after the 

hospital begins to train the residents, 

the hospital submits a request to its 

fiscal intermediary for a temporary 

adjustment to its FTE cap, documents 

that the hospital is eligible for this 

temporary adjustment by identifying the 

residents who have come from the 

closed hospital and have caused the 

hospital to exceed its cap, and specifies 

the length of time the adjustment is 

needed. 

(3) Closure of a hospital’s residency 

training program. If a hospital that 

closes its residency training program 

voluntarily agrees to temporarily reduce 

its FTE cap according to the criteria 

specified in paragraph (h)(3)(ii) of this 

section, another hospital(s) may receive 

a temporary adjustment to its FTE cap 

to reflect residents added because of the 

closure of the residency training 

program if the criteria specified in 

paragraph (h)(3)(i) of this section are 

met. 

(i) Receiving hospital(s). A hospital 

may receive a temporary adjustment to 

its FTE cap to reflect residents added 

because of the closure of another 

hospital’s residency training program 

if—

(A) The hospital is training additional 

residents from the residency training 

program of a hospital that closed a 

program; and 

(B) No later than 60 days after the 

hospital begins to train the residents, 

the hospital submits to its fiscal 

intermediary a request for a temporary 

adjustment to its FTE cap, documents 

that it is eligible for this temporary 

adjustment by identifying the residents 

who have come from another hospital’s 

closed program and have caused the 

hospital to exceed its cap, specifies the 

length of time the adjustment is needed, 

and submits to its fiscal intermediary a 

copy of the FTE reduction statement by 

the hospital that closed its program, as 

specified in paragraph (h)(3)(ii)(B) of 

this section.

(ii) Hospital that closed its 

program(s). A hospital that agrees to 

train residents who have been displaced 

by the closure of another hospital’s 

program may receive a temporary FTE 

cap adjustment only if the hospital with 

the closed program—

(A) Temporarily reduces its FTE cap 

based on the FTE residents in each 

program year training in the program at 

the time of the program’s closure. This 

yearly reduction in the FTE cap will be 

determined based on the number of 

those residents who would have been 

training in the program during that year 

had the program not closed; and 

(B) No later than 60 days after the 

residents who were in the closed 

program begin training at another 

hospital, submit to its fiscal 

intermediary a statement signed and 

dated by its representative that specifies 

that it agrees to the temporary reduction 

in its FTE cap to allow the hospital 

training the displaced residents to 

obtain a temporary adjustment to its 

cap; identifies the residents who were in 

training at the time of the program’s 

closure; identifies the hospitals to 

which the residents are transferring 

once the program closes; and specifies 

the reduction for the applicable program 

years. 

(i) Additional FTEs for residents on 

maternity or disability leave or other 

approved leave of absence. Effective for 

cost reporting periods beginning on or 

after November 29, 1999, a hospital may 

receive an adjustment to its FTE cap of 

up to three additional resident FTEs, if 

the hospital meets the following criteria: 

(1) The additional residents are 

residents of a primary care program that 

would have been counted by the 

hospital as residents for purposes of the 

hospital’s FTE cap but for the fact that 

the additional residents were on 

maternity or disability leave or a similar 

approved leave of absence during the 

hospital’s most recent cost reporting 

period ending on or before December 

31, 1996; 

(2) The leave of absence was approved 

by the residency program director to 

allow the residents to be absent from the 

program and return to the program after 

the leave of absence; and 

(3) No later than 6 months after 

August 1, 2000, the hospital submits to 

the fiscal intermediary a request for an 

adjustment to its FTE cap, and provides 

contemporaneous documentation of the 

approval of the leave of absence by the 

residency director, specific to each 

additional resident that is to be counted 

for purposes of the adjustment. 

(j) Residents previously trained at VA 

hospitals. For cost reporting periods 

beginning on or after October 1, 1997, a 

non-Veterans Affairs (VA) hospital may 

receive a temporary adjustment to its 

FTE cap to reflect residents who had 

previously trained at a VA hospital and 

were subsequently transferred to the 

non-VA hospital, if that hospital meets 

the following criteria: 

(1) The transferred residents had been 

training previously at a VA hospital in 

a program that would have lost its 

accreditation by the ACGME if the 

residents continued to train at the VA 

hospital; 

(2) The residents were transferred to 

the hospital from the VA hospital on or 

after January 1, 1997, and before July 31, 

1998; and 

(3) The hospital submits a request to 

its fiscal intermediary for a temporary 

adjustment to its FTE cap, documents 

that it is eligible for this temporary 

adjustment by identifying the residents 

who have come from the VA hospital, 

and specifies the length of time those 

residents will be trained at the hospital. 

(k) Residents training in rural track 

programs. Subject to the provisions of 

§ 413.81, an urban hospital that 

establishes a new residency program, or 

has an existing residency program, with 

a rural track (or an integrated rural 

track) may include in its FTE count 

residents in those rural tracks, in 

addition to the residents subject to its 

FTE cap specified under paragraph (c) 

of this section. An urban hospital with 

a rural track residency program may 

count residents in those rural tracks up 

to a rural track FTE limitation if the 

hospital complies with the conditions 

specified in paragraphs (k)(2) through 

(k)(6) of this section. 

(1) If an urban hospital rotates 

residents to a separately accredited rural 

track program at a rural hospital(s) for 

two-thirds of the duration of the 

program for cost reporting periods 

beginning on or after April 1, 2000, and 

before October 1, 2003, or for more than 

28366 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

one-half of the duration of the program 

for cost reporting periods beginning on 

or after October 1, 2003, the urban 

hospital may include those residents in 

its FTE count for the time the rural track 

residents spend at the urban hospital. 

The urban hospital may include in its 

FTE count those residents in the rural 

track training at the urban hospital, not 

to exceed its rural track FTE limitation, 

determined as follows: 

(i) For the first 3 years of the rural 

track’s existence, the rural track FTE 

limitation for each urban hospital will 

be the actual number of FTE residents, 

subject to the rolling average at 

paragraph (d)(7) of this section, training 

in the rural track at the urban hospital. 

(ii) Beginning with the fourth year of 

the rural track’s existence, the rural 

track FTE limitation is equal to the 

product of the highest number of 

residents, in any program year, who 

during the third year of the rural track’s 

existence are training in the rural track 

at the urban hospital or the rural 

hospital(s) and are designated at the 

beginning of their training to be rotated 

to the rural hospital(s) for at least twothirds of the duration of the program for 

cost reporting periods beginning on or 

after April 1, 2000, and before October 

1, 2002, or for more than one-half of the 

duration of the program effective for 

cost reporting periods beginning on or 

after October 1, 2003, and the number 

of years those residents are training at 

the urban hospital. 

(2) If an urban hospital rotates 

residents to a separately accredited rural 

track program at a rural nonhospital 

site(s) for two-thirds of the duration of 

the program for cost reporting periods 

beginning on or after April 1, 2000, and 

before October 1, 2003, or for more than 

one-half of the duration of the program 

for cost reporting periods beginning on 

or after October 1, 2003, the urban 

hospital may include those residents in 

its FTE count, subject to the 

requirements under § 413.78(d). The 

urban hospital may include in its FTE 

count those residents in the rural track, 

not to exceed its rural track FTE 

limitation, determined as follows: 

(i) For the first 3 years of the rural 

track’s existence, the rural track FTE 

limitation for each urban hospital will 

be the actual number of FTE residents, 

subject to the rolling average specified 

in paragraph (d)(7) of this section, 

training in the rural track at the urban 

hospital and the rural nonhospital 

site(s). 

(ii) Beginning with the fourth year of 

the rural track’s existence, the rural 

track FTE limitation is equal to the 

product of—

(A) The highest number of residents 

in any program year who, during the 

third year of the rural track’s existence, 

are training in the rural track at—

(1) The urban hospital and are 

designated at the beginning of their 

training to be rotated to a rural 

nonhospital site(s) for at least two-thirds 

of the duration of the program for cost 

reporting periods beginning on or after 

April 1, 2000 and before October 1, 

2003, or for more than one-half of the 

duration of the program for cost 

reporting periods beginning on or after 

October 1, 2003; and 

(2) The rural nonhospital site(s); and 

(B) The number of years in which the 

residents are expected to complete each 

program based on the minimum 

accredited length for the type of 

program. 

(3) If an urban hospital rotates 

residents in the rural track program to 

a rural hospital(s) for less than twothirds of the duration of the program for 

cost reporting periods beginning on or 

after April 1, 2000, and before October 

1, 2003, or for one-half or less than onehalf of the duration of the program for 

cost reporting periods beginning on or 

after October 1, 2003, the rural hospital 

may not include those residents in its 

FTE count (if the rural track is not a new 

program under paragraph (e)(3) of this 

section, or if the rural hospital’s FTE 

count exceeds that hospital’s FTE cap), 

nor may the urban hospital include 

those residents when calculating its 

rural track FTE limitation. 

(4) If an urban hospital rotates 

residents in the rural track program to 

a rural nonhospital site(s) for period of 

time is less than two-thirds of the 

duration of the program for cost 

reporting periods beginning on or after 

April 1, 2000 and before October 1, 

2003, or for one-half or less than onehalf of the duration of the program for 

cost reporting periods beginning on or 

after October 1, 2003, the urban hospital 

may include those residents in its FTE 

count, subject to the requirements under 

§ 413.78(d). The urban hospital may 

include in its FTE count those residents 

in the rural track, not to exceed its rural 

track limitation, determined as follows: 

(i) For the first 3 years of the rural 

track’s existence, the rural track FTE 

limitation for the urban hospital will be 

the actual number of FTE residents, 

subject to the rolling average specified 

in paragraph (d)(7) of this section, 

training in the rural track at the rural 

nonhospital site(s). 

(ii) Beginning with the fourth year of 

the rural track’s existence, the rural 

track FTE limitation is equal to the 

product of—

(A) The highest number of residents 

in any program year who, during the 

third year of the rural track’s existence, 

are training in the rural track at the rural 

nonhospital site(s) or are designated at 

the beginning of their training to be 

rotated to the rural nonhospital site(s) 

for a period that is less than two-thirds 

of the duration of the program for cost 

reporting periods beginning on or after 

April 1, 2002, and before October 1, 

2003, or for one-half or less than onehalf of the duration of the program for 

cost reporting periods beginning on or 

after October 1, 2003; and 

(B) The length of time in which the 

residents are being training at the rural 

nonhospital site(s) only.

(5) All urban hospitals that wish to 

count FTE residents in rural tracks, not 

to exceed their respective rural track 

FTE limitation, must also comply with 

all of the following conditions: 

(i) An urban hospital may not include 

in its rural track FTE limitation or 

(assuming the urban hospital’s FTE 

count exceeds its FTE cap) FTE count 

residents who are training in a rural 

track residency program that were 

already included as part of the 

hospital’s FTE cap. 

(ii) The hospital must base its count 

of residents in a rural track on written 

contemporaneous documentation that 

each resident enrolled in a rural track 

program at the hospital intends to rotate 

for a portion of the residency program 

to a rural area. 

(iii) All residents that are included by 

the hospital as part of its rural track FTE 

count (not to exceed its rural track FTE 

limitation) must train in the rural area. 

However, where a resident begins to 

train in the rural track program at the 

urban hospital but leaves the program 

before completing the total required 

portion of training in the rural area, the 

urban hospital may count the time the 

resident trained in the urban hospital if 

another resident fills the vacated FTE 

slot and completes the training in the 

rural portion of the rural track program. 

An urban hospital may not receive GME 

payment for the time the resident 

trained at the urban hospital if another 

resident fills the vacated FTE slot and 

first begins to train at the urban 

hospital. 

(6) If CMS finds that residents who 

are included by the urban hospital as 

part of its FTE count did not actually 

complete the training in the rural area, 

CMS will reopen the urban hospital’s 

cost report within the 3-year reopening 

period as specified in § 405.1885 of this 

chapter and adjust the hospital’s 

Medicare GME payments (and, where 

applicable, the hospital’s rural track 

FTE limitation). 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28367

(l) For purposes of this section, a new 

medical residency training program 

means a medical residency that receives 

initial accreditation by the appropriate 

accrediting body or begins training 

residents on or after January 1, 1995.

§ 413.80 Direct GME payments: 

Determination of weighting factors for 

foreign medical graduates. 

(a) The weighting factor for a foreign 

medical graduate is determined under 

the provisions of § 413.79 if the foreign 

medical graduate—

(1) Has passed FMGEMS; or 

(2) Before July 1, 1986, received 

certification from, or passed an 

examination of, the Educational 

Committee for Foreign Medical 

Graduates. 

(b) Before July 1, 1986, the weighting 

factor for a foreign medical graduate is 

1.0 times the weight determined under 

the provisions of § 413.79. On or after 

July 1, 1986, and before July 1, 1987, the 

weighting factor for a graduate of a 

foreign medical school who was in a 

residency program both before and after 

July 1, 1986 but who does not meet the 

requirements set forth in paragraph (a) 

of this section is .50 times the weight 

determined under the provisions of 

§ 413.79. 

(c) On or after July 1, 1987, these 

foreign medical graduates are not 

counted in determining the number of 

FTE residents. 

(d) During the cost reporting period in 

which a foreign medical graduate passes 

FMGEMS, the weighting factor for that 

resident is determined under the 

provisions of § 413.79 for the part of the 

cost reporting period beginning with the 

month the resident passes the test. 

(e) On or after September 1, 1989, the 

National Board of Medical Examiners 

Examination, Parts I and II, may be 

substituted for FMGEMS for purposes of 

the determination made under 

paragraphs (a) and (d) of this section. 

(f) On or after June 1, 1992, the United 

States Medical Licensing Examination 

may be substituted for the FMGEMS for 

purposes of the determination made 

under paragraphs (a) and (d) of this 

section. On or after July 1, 1993, only 

the results of steps I and II of the United 

States Medical Licensing Examination 

will be accepted for purposes of making 

this determination. 

(g) To include a resident in the FTE 

count for a particular cost reporting 

period, the hospital must furnish the 

following information. The information 

must be certified by an official of the 

hospital and, if different, an official 

responsible for administering the 

residency program. 

(1) The name and social security 

number of the resident. 

(2) The type of residency program in 

which the individual participates and 

the number of years the resident has 

completed in all types of residency 

programs. 

(3) The dates the resident is assigned 

to the hospital and any hospital-based 

providers. 

(4) The dates the resident is assigned 

to other hospitals, or other freestanding 

providers, and any nonprovider setting 

during the cost reporting period, if any. 

(5) The name of the medical, 

osteopathic, dental, or podiatric school 

from which the resident graduated and 

the date of graduation. 

(6) If the resident is an FMG, 

documentation concerning whether the 

resident has satisfied the requirements 

of this section. 

(7) The name of the employer paying 

the resident’s salary.

§ 413.81 Direct GME payments: 

Application of community support and 

redistribution of costs in determining FTE 

resident counts. 

(a) For purposes of determining direct 

GME payments, the following principles 

apply: 

(1) Community support. If the 

community has undertaken to bear the 

costs of medical education through 

community support, the costs are not 

considered GME costs to the hospital for 

purposes of Medicare payment. 

(2) Redistribution of costs. The costs 

of training residents that constitute a 

redistribution of costs from an 

educational institution to the hospital 

are not considered GME costs to the 

hospital for purposes of Medicare 

payment. 

(b) Application. A hospital must 

continuously incur costs of direct GME 

of residents training in a particular 

program at a training site since the date 

the residents first began training in that 

program in order for the hospital to 

count the FTE residents in accordance 

with the provisions of §§ 413.78, 413.79 

(c) through (e), and 413.79(k). This rule 

also applies to providers that are paid 

for direct GME in accordance with 

§ 405.2468 of this chapter, § 422.270 of 

this subchapter, and § 413.70.

(c)(1) Effective date. Subject to the 

provisions of paragraph (c)(2) of this 

section, payments made in accordance 

with determinations made under the 

provisions of paragraphs (a) and (b) of 

this section will be effective for portions 

of cost reporting periods occurring on or 

after October 1, 2003. 

(2) Applicability for certain hospitals.

With respect to an FTE resident who 

begins training in a residency program 

on or before October 1, 2003, and with 

respect to whom there has been a 

redistribution of costs or community 

support determined under the 

provisions of paragraphs (a) and (b) of 

this section, the hospital may continue 

to count the FTE resident until the 

resident has completed training in that 

program, or until 3 years after the date 

the resident began training in that 

program, whichever comes first.

§ 413.82 Direct GME payments: Special 

rules for States that formerly had a waiver 

from Medicare reimbursement principles. 

(a) Effective for cost reporting periods 

beginning on or after January 1, 1986, 

hospitals in States that, prior to 

becoming subject to the prospective 

payment system, had a waiver for the 

operation of a State reimbursement 

control system under section 1886(c) of 

the Act, section 402 of the Social 

Security Amendments of 1967 (42 

U.S.C. 1395b–1 or section 222(a) of the 

Social Security Amendment of 1972 (42 

U.S.C. 1395b–1 (note)) are permitted to 

change the order in which they allocate 

administrative and general costs to the 

order specified in the instructions for 

the Medicare cost report. 

(b) For hospitals making this election, 

the base-period costs for the purpose of 

determining the per resident amount are 

adjusted to take into account the change 

in the order by which they allocate 

administrative and general costs to 

interns and residents in approved 

program cost centers. 

(c) Per resident amounts are 

determined for the base period and 

updated as described in § 413.77. For 

cost reporting periods beginning on or 

after January 1, 1986, payment is made 

based on the methodology described in 

§ 413.76.

§ 413.83 Direct GME payments: 

Adjustment of a hospital’s target amount or 

prospective payment hospital-specific rate. 

(a) Misclassified operating costs—(1) 

General rule. If a hospital has its baseperiod GME costs reduced under 

§ 413.77(a) of this section because those 

costs included misclassified operating 

costs, the hospital may request that the 

intermediary review the classification of 

the affected costs in its rate-of-increase 

ceiling or prospective payment base 

year for purposes of adjusting the 

hospital’s target amount or hospitalspecific rate. For those cost reports that 

are not subject to reopening under 

§ 405.1885 of this chapter, the hospital’s 

reopening request must explicitly state 

that the review is limited to this one 

issue. 

(2) Request for review. The hospital 

must request review of the classification 

28368 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

of its rate-of-increase ceiling or 

prospective payment base year costs no 

later than 180 days after the date of the 

notice by the intermediary of the 

hospital’s base-period average per 

resident amount. A hospital’s request 

for review must include sufficient 

documentation to demonstrate to the 

intermediary that adjustment of the 

hospital’s hospital-specific rate or target 

amount is warranted. 

(3) Effect of intermediary’s review. If 

the intermediary, upon review of the 

hospital’s costs, determines that the 

hospital’s hospital-specific rate or target 

amount should be adjusted, the 

adjustment of the hospital-specific rate 

or the target amount is effective for the 

hospital’s cost reporting periods subject 

to the prospective payment system or 

the rate-of-increase ceiling that are still 

subject to reopening under § 405.1885 of 

this chapter. 

(b) Misclassification of GME costs—(1) 

General rule. If costs that should have 

been classified as GME costs were 

treated as operating costs during both 

the GME base period and the rate-ofincrease ceiling base year or prospective 

payment base year and the hospital 

wishes to receive benefit for the 

appropriate classification of these costs 

as GME costs in the GME base period, 

the hospital must request that the 

intermediary review the classification of 

the affected costs in the rate-of-increase 

ceiling or prospective payment base 

year for purposes of adjusting the 

hospital’s target amount or hospitalspecific rate. For those cost reports that 

are not subject to reopening under 

§ 405.1885 of this chapter, the hospital’s 

reopening request must explicitly state 

that the review is limited to this one 

issue. 

(2) Request for review. The hospital 

must request review of the classification 

of its costs no later than 180 days after 

the date of the intermediary’s notice of 

the hospital’s base-period average per 

resident amount. A hospital’s request 

for review must include sufficient 

documentation to demonstrate to the 

intermediary that modification of the 

adjustment of the hospital’s hospitalspecific rate or target amount is 

warranted. 

(3) Effect of intermediary’s review. If 

the intermediary, upon review of the 

hospital’s costs, determines that the 

hospital’s hospital-specific rate or target 

amount should be adjusted, the 

adjustment of the hospital-specific rate 

and the adjustment of the target amount 

is effective for the hospital’s cost 

reporting periods subject to the 

prospective payment system or the rateof-increase ceiling that are still subject 

to reopening under § 405.1885 of this 

chapter.

§ 413.87 [Amended] 

8. In § 413.87—

A. In paragraph (e), the crossreference ‘‘§ 413.86(d)(4)’’ is removed 

and the cross-reference ‘‘413.76(d)’’ is 

added in its place. 

B. In paragraph (f)(1)(i), the crossreference ‘‘413.86(d)(3)’’ is removed and 

the cross-reference ‘‘413.76(c)’’ is added 

in its place.

§ 413.88 [Amended] 

9. In § 413.88—

A. In paragraph (b)(1), the crossreference ‘‘413.86(b)’’ is removed and 

the cross-reference ‘‘§ 413.75(b)’’ is 

added in its place. 

B. In paragraph (b)(2), the crossreference ‘‘§ 413.86(b)’’ is removed and 

the cross-reference ‘‘§ 413.75(b)’’ is 

added in its place. 

C. In paragraph (d)(7), the reference 

‘‘413.86(b)’’ is removed and the crossreference ‘‘§ 413.75(b)’’ is added in its 

place. 

D. In paragraphs (g)(1)(i)(A) and (B), 

the cross-reference ‘‘§ 413.86(g)’’ is 

removed and the cross-reference 

‘‘§ 413.79’’ is added in its place, 

wherever it appears.

E. In paragraph (h)(1)(i), the crossreference ‘‘§ 413.86(d)’’ (2 times) is 

removed and the cross-reference 

‘‘§ 413.76’’ (2 times) is added in its 

place. 

10. Section 413.114 is amended by 

revising the last sentence of paragraph 

(a)(2) to read as follows:

§ 413.114 Payment for posthospital SNF 

care furnished by a swing-bed hospital. 

(a) * * *

(2) Services furnished in cost 

reporting periods beginning on and after 

July 1, 2002. * * * Posthospital SNF 

care furnished in general routine 

inpatient beds in CAHs is paid based on 

reasonable cost for cost reporting 

periods beginning on and after July l, 

2002 and before January 1, 2004, and is 

paid based on 101 percent of reasonable 

cost for cost reporting periods beginning 

on and after January 1, 2004, in 

accordance with the provisions of 

subparts A through G of this part (other 

than paragraphs (c) and (d) of this 

section).

* * * * *

11. Section 413.302 is amended by 

revising the definition of ‘‘Urban area’’

to read as follows:

§ 413.302 Definitions. 

For purposes of this subpart I—

* * * * *

Urban area means—

(1) Prior to October 1, 2004, a 

Metropolitan Statistical Area (MSA), or 

New England County Metropolitan Area 

(NECMA), as defined by the Office of 

Management and Budget, or a New 

England county deemed to be an urban 

area as listed in § 412.62(f)(1)(ii)(B) of 

this chapter. 

(2) Effective October 1, 2004, a 

Metropolitan Statistical Area (MSA), as 

defined by the Office of Management 

and Budget, or a New England county 

deemed to be an urban area as specified 

under § 412.64. 

D. Part 418 is amended as follows:

PART 418—HOSPICE CARE 

1. The authority citation for part 418 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh).

Section 418.100 is amended as 

follows: 

A. Revising paragraph (d)(1). 

B. Revising paragraph (d)(4). 

C. Adding a new paragraph (d)(5). 

The revision and addition read as 

follows:

§ 418.100 Condition of Participation: 

Hospices that provide inpatient care 

directly.

* * * * *

(d) Standard: Fire protection. (1) 

Except as otherwise provided in this 

section—

(i) The hospice must meet the 

provisions applicable to nursing homes 

of the 2000 edition of the Life Safety 

Code of the National Fire Protection 

Association. The Director of the Office 

of the Federal Register has approved the 

NFPA 101 2000 edition of the Life 

Safety Code, issued January 14, 2000, 

for incorporation by reference in 

accordance with 5 U.S.C. 552(a) and 1 

CFR part 51. A copy of the Code is 

available for inspection at the CMS 

Information Resource Center, 7500 

Security Boulevard, Baltimore, MD and 

at the National Archives and Records 

Administration (NARA). For 

information on the availability of this 

material at NARA, call 202–741–6030, 

or go to: http://www.archives.gov./

federal_register/

code_of_federal_regulations/

ibr_locations.html. Copies may be 

obtained from the National Fire 

Protection Association, 1 Batterymarch 

Park, Quincy, MA 02269. If any changes 

in this edition of the Code are 

incorporated by reference, CMS will 

publish notice in the Federal Register to 

announce the changes. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28369

(ii) Chapter 19.3.6.3.2, exception 

number 2 of the adopted edition of the 

LSC does not apply to a hospice.

* * * * *

(4) Beginning March 13, 2006, a 

hospice must be in compliance with 

Chapter 9.2.9, Emergency Lighting. 

(5) Beginning March 13, 2006, 

Chapter 19.3.6.3.2, exception number 2 

does not apply to hospices.

* * * * *

E. Part 460 is amended as follows:

PART 460—PROGRAMS OF ALLINCLUSIVE CARE FOR THE ELDERLY 

(PACE) 

1. The authority citation for part 460 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395).

Subpart E—PACE Administrative 

Requirements 

2. Section 460.72 is amended by—

A. Revising paragraph (b)(1). 

B. Revising paragraph (b)(3). 

C. Adding paragraph (b)(4). 

The revision and addition read as 

follows:

§ 460.72 Physical environment.

* * * * *

(b) Fire safety. (1) General rule. Except 

as otherwise provided in this section—

(i) A PACE center must meet the 

applicable provisions of the 2000 

edition of the Life Safety Code (LSC) of 

the National Fire Protection Association 

that apply to the type of setting in 

which the center is located. The 

Director of the Office of the Federal 

Register has approved the NFPA 101

2000 edition of the Life Safety Code, 

issued January 14, 2000, for 

incorporation by reference in 

accordance with 5 U.S.C. 552(a) and 1 

CFR part 51. A copy of the Code is 

available for inspection at the CMS 

Information Resource Center, 7500 

Security Boulevard, Baltimore, MD and 

at the National Archives and Records 

Administration (NARA). For 

information on the availability of this 

material at NARA, call 202–741–6030, 

or go to: http://www.archives.gov./

federal_register/

code_of_federal_regulations/

ibr_locations.html. Copies may be 

obtained from the National Fire 

Protection Association, 1 Batterymarch 

Park, Quincy, MA 02269. If any changes 

in this edition of the Code are 

incorporated by reference, CMS will 

publish notice in the Federal Register to 

announce the changes. 

(ii) Chapter 19.3.6.3.2, exception 

number 2 of the adopted edition of the 

LSC does not apply to PACE centers.

* * * * *

(3) Beginning March 13, 2006, a PACE 

center must be in compliance with 

Chapter 9.2.9, Emergency Lighting. 

(4) Beginning March 13, 2006, 

Chapter 19.3.6.3.2, exception number 2 

does not apply to PACE centers.

* * * * *

F. The title of Part 480 under 

Subchapter F is revised to read as 

follows:

PART 480—ACQUISITION, 

PROTECTION, AND DISCLOSURE OF 

QUALITY IMPROVEMENT 

ORGANIZATION INFORMATION 

G. Part 480 is amended as follows: 

1. The authority citation for Part 480 

continues to read:

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh).

2. Section 480.106 is amended by 

adding a new paragraph (c) to read as 

follows:

§ 480.106 Exceptions to QIO notice 

requirements.

* * * * *

(c) Other. The notification 

requirements in § 480.105(a) and (b)(2) 

do not apply if: 

(1) The institution or practitioner has 

requested, in writing, that the QIO make 

the disclosure; 

(2) The institution or practitioner has 

provided, in writing, consent for the 

disclosure; or

(3) The information is public 

information as defined in § 480.101(b) 

and specified under § 480.120. 

3. Section 480.133 is amended by 

revising paragraph (a)(2)(iii) to read as 

follows:

§ 480.133 Disclosure of information about 

practitioners, reviewers and institutions. 

(a) * * *

(2) Disclosure to others. ***

(iii) A QIO may disclose to any 

person, agency, or organization 

information on a particular practitioner 

or reviewer at the written request of or 

with the written consent of that 

practitioner or reviewer. The recipient 

of the information has the same 

redisclosure rights and responsibilities 

as the requesting or consenting 

practitioner or reviewer as provided 

under this Subpart B.

* * * * *

4. Section 480.140 is amended by 

redesignating paragraphs (d) and (e) as 

paragraphs (e) and (f), respectively, and 

adding a new paragraph (d) to read as 

follows:

§ 480.140 Disclosure of quality review 

study information.

* * * * *

(d) A QIO may disclose quality review 

study information with identifiers of 

particular practitioners or institutions, 

or both, at the written request of, or with 

the written consent of, the identified 

practitioner(s) or institution(s). 

(1) The consent or request must 

specify the information that is to be 

disclosed and the intended recipient of 

the information. 

(2) The recipient of the information 

has the same redisclosure rights and 

responsibilities as the requesting or 

consenting practitioner or reviewer as 

provided under this Subpart B.

* * * * *

5. Cross-Reference Changes

§§ 480.101, 480.104, 480.105, 480.106, 

480.120, 480.121, 480.130, 480.132, 480.133, 

480.136, 480.137, 480.138, 480.141, 480.142

[Amended] 

In the table below, for each section 

indicated in the left column, remove the 

cross-reference indicated in the middle 

column from wherever it appears in the 

section, and add the cross-reference in 

the right column:

Section Remove Add. 

480.101(b), under the definition ‘‘Patient representative’’ § 476.132(c)(3) ................................................................. § 480.132(c)(3). 

§ 480.104(a)(1) ................................................................. § 476.105 ......................................................................... § 480.105. 

§ 480.104(a)(2) ................................................................. § 476.106 ......................................................................... § 480.106. 

§ 480.104(a)(2) ................................................................. § 476.107 ......................................................................... § 480.107. 

§ 480.104(d) ...................................................................... § 476.120(a)(6) ................................................................. § 480.120(a)(6). 

§ 480.105(a) ...................................................................... § 476.106 ......................................................................... § 480.106. 

§ 480.105(b)(1) ................................................................. § 476.132 ......................................................................... § 480.132. 

§ 480.105(b)(2) ................................................................. §§ 476.137 and 476.138 .................................................. §§ 480.137 and 480.138. 

§ 480.105(b)(2) ................................................................. § 476.106 ......................................................................... § 480.106. 

§ 480.106(a) ...................................................................... § 476.105 ......................................................................... § 480.105. 

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Section Remove Add. 

§ 480.106(b) ...................................................................... § 476.105 ......................................................................... § 480.105. 

§ 480.120, introductory text .............................................. §§ 476.104 and 476.105 .................................................. §§ 480.104 and 480.105. 

§ 480.120(a)(5) ................................................................. § 476.139 ......................................................................... § 480.139. 

§ 480.121 .......................................................................... § 476.105 ......................................................................... § 480.105. 

§ 480.121 .......................................................................... § 476.120 ......................................................................... § 480.120. 

§ 480.130 .......................................................................... §§ 476.139(a) and 476.140 .............................................. §§ 480.139(a) and 480.140. 

§ 480.132(b)(2) ................................................................. § 476.139(a) ..................................................................... § 480.139(a). 

§ 480.132(b)(3) ................................................................. § 476.140 ......................................................................... § 480.140. 

§ 480.133(a)(2)(ii) ............................................................. §§ 476.137 and 476.138 .................................................. §§ 480.137 and 480.138. 

§ 480.133(b)(2) ................................................................. § 476.139(a) ..................................................................... § 480.139(a). 

§ 480.133(b)(3) ................................................................. § 476.140 ......................................................................... § 480.140. 

§ 480.136(a), introductory text .......................................... §§ 476.139(a) and 476.140 .............................................. §§ 480.139(a) and 480.140. 

§ 480.137(a), introductory text .......................................... §§ 476.139(a) and 476.140 .............................................. §§ 480.139(a) and 480.140. 

§ 480.138(b)(2) ................................................................. §§ 476.139(a) and 476.140 ............................................. §§ 480.139(a) and 480.140. 

§ 480.141 .......................................................................... §§ 476.104 and 476.105 .................................................. §§ 480.104 and 480.105. 

§ 480.142(b) ...................................................................... § 476.137 ......................................................................... § 480.137 

H. Part 482 is amended as follows:

PART 482—CONDITIONS OF 

PARTICIPATION FOR HOSPITALS 

1. The authority citation for part 482 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

Social Security Act, unless otherwise noted 

(42 U.S.C. 1302 and 1395hh).

2. Section 482.41 is amended byrevising paragraph (b).

§ § 482.41 Conditions of participation: 

Physical environment.

* * * * *

(b) Standard: Life safety from fire. (1) 

Except as otherwise provided in this 

section—

(i) The hospital must meet the 

applicable provisions of the 2000 

edition of the Life Safety Code of the 

National Fire Protection Association. 

The Director of the Office of the Federal 

Register has approved the NFPA 101

2000 edition of the Life Safety Code, 

issued January 14, 2000, for 

incorporation by reference in 

accordance with 5 U.S.C. 552(a) and 1 

CFR part 51. A copy of the Code is 

available for inspection at the CMS 

Information Resource Center, 7500 

Security Boulevard, Baltimore, MD and 

at the National Archives and Records 

Administration (NARA). For 

information on the availability of this 

material at NARA, call 202–741–6030, 

or go to: http://www.archives.gov/

federal_register/

code_of_federal_regulations/

ibr_locations.html. Copies may be 

obtained from the National Fire 

Protection Association, 1 Batterymarch 

Park, Quincy, MA 02269. If any changes 

in this edition of the Code are 

incorporated by reference, CMS will 

publish notice in the Federal Register to 

announce the changes. 

(ii) Chapter 19.3.6.3.2, exception 

number 2 of the adopted edition of the 

LSC does not apply to hospitals. 

(2) After consideration of State survey 

agency findings, CMS may waive 

specific provisions of the Life Safety 

Code which, if rigidly applied, would 

result in unreasonable hardship upon 

the facility, but only if the waiver does 

not adversely affect the health and 

safety of the patients. 

(3) The provisions of the Life Safety 

Code do not apply in a State where CMS 

finds that a fire and safety code imposed 

by State law adequately protects 

patients in hospitals. 

(4) Beginning March 13, 2006, a 

hospital must be in compliance with 

Chapter 19.2.9, Emergency Lighting. 

(5) Beginning March 13, 2006, 

Chapter 19.3.6.3.2, exception number 2 

does not apply to hospitals. 

(6) The hospital must have procedures 

for the proper routine storage and 

prompt disposal of trash.

(7) The hospital must have written 

fire control plans that contain 

provisions for prompt reporting of fires; 

extinguishing fires; protection of 

patients, personnel and guests; 

evacuation; and cooperation with fire 

fighting authorities. 

(8) The hospital must maintain 

written evidence of regular inspection 

and approval by State or local fire 

control agencies.

* * * * *

3. Section 482.43 is amended by 

adding new paragraphs (c)(6), (c)(7), and 

(c)(8) to read as follows:

§ 482.43 Conditions of participation: 

Discharge planning.

* * * * *

(c) * * *

(6) The hospital must include in the 

discharge plan a list of HHAs or SNFs 

that are available to the patient, that are 

participating in the Medicare program, 

and that serve the geographic area (as 

defined by the HHA) in which the 

patient resides, or in the case of a SNF, 

in the geographic area requested by the 

patient. HHAs must request to be listed 

by the hospital as available. 

(i) This list must only be presented to 

patients for whom home health care or 

post-hospital extended care services are 

indicated and appropriate as 

determined by the discharge planning 

evaluation. 

(ii) The hospital must document in 

the patient’s medical record that the list 

was presented to the patient or to the 

individual acting on the patient’s behalf. 

(7) The hospital, as part of the 

discharge planning process, must 

inform the patient or the patient’s 

family of their freedom to choose among 

participating Medicare providers of 

home health services and posthospital 

extended care services and must, when 

possible, respect patient and family 

preferences when they are expressed. 

The hospital must not exclude qualified 

providers that are available to the 

patient. 

(8) The discharge plan must identify 

any HHA or SNF to which the patient 

is referred in which the hospital has a 

disclosable financial interest, as 

specified by the Secretary, and any HHA 

or SNF that has a disclosable financial 

interest in a hospital under Medicare. 

Financial interests that are disclosable 

under Medicare are determined in 

accordance with the provisions of Part 

420, Subpart C, of this chapter. 

I. Part 483 is amended as follows:

PART 483—REQUIREMENTS FOR 

STATES AND LONG TERM CARE 

FACILITIES 

The authority citation for part 483 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh).

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28371

2. Section 483.70 is amended by 

revising paragraph (a) to read as follows.

§ 483.70 Physical environment.

* * * * *

(a) Life safety from fire.

(1) Except as otherwise provided in 

this section—

(i) The facility must meet the 

applicable provisions of the 2000 

edition of the Life Safety Code of the 

National Fire Protection Association. 

The Director of the Office of the Federal 

Register has approved the NFPA 101

2000 edition of the Life Safety Code, 

issued January 14, 2000, for 

incorporation by reference in 

accordance with 5 U.S.C. 552(a) and 1 

CFR part 51. A copy of the Code is 

available for inspection at the CMS 

Information Resource Center, 7500 

Security Boulevard, Baltimore, MD and 

at the National Archives and Records 

Administration (NARA). For 

information on the availability of this 

material at NARA, call 202–741–6030, 

or go to: http://www.archives.gov./

federal_register/

code_of_federal_regulations/

ibr_locations.html. Copies may be 

obtained from the National Fire 

Protection Association, 1 Batterymarch 

Park, Quincy, MA 02269. If any changes 

in this edition of the Code are 

incorporated by reference, CMS will 

publish notice in the Federal Register to 

announce the changes. 

(ii) Chapter 19.3.6.3.2, exception 

number 2 of the adopted edition of the 

LSC does not apply to long-term care 

facilities. 

(2) After consideration of State survey 

agency findings, CMS may waive 

specific provisions of the Life Safety 

Code which, if rigidly applied, would 

result in unreasonable hardship upon 

the facility, but only if the waiver does 

not adversely affect the health and 

safety of the patients. 

(3) The provisions of the Life Safety 

Code do not apply in a State where CMS 

finds, in accordance with applicable 

provisions of sections 1819(d)(2)(B)(ii) 

and 1919(d)(2)(B)(ii) of the Act, that a 

fire and safety code imposed by State 

law adequately protects patients, 

residents and personnel in long term 

care facilities. 

(4) Beginning March 13, 2006, a longterm care facility must be in compliance 

with Chapter 19.2.9, Emergency 

Lighting. 

(5) Beginning March 13, 2006, 

Chapter 19.3.6.3.2, exception number 2 

does not apply to long-term care 

facilities.

* * * * *

3. Section 483.470 is amended by 

revising paragraph (j) to read as follows:

§ 483.470 Condition of participation: 

Physical environment.

* * * * *

(j) Standard: Fire protection.

(1) General. Except as otherwise 

provided in this section—

(i) The facility must meet the 

applicable provisions of either the 

Health Care Occupancies Chapters or 

the Residential Board and Care 

Occupancies Chapter of the 2000 

edition of the Life Safety Code of the 

National Fire Protection Association. 

The Director of the Office of the Federal 

Register has approved the NFPA 101

2000 edition of the Life Safety Code, 

issued January 14, 2000, for 

incorporation by reference in 

accordance with 5 U.S.C. 552(a) and 1 

CFR part 51. A copy of the Code is 

available for inspection at the CMS 

Information Resource Center, 7500 

Security Boulevard, Baltimore, MD and 

at the National Archives and Records 

Administration (NARA). For 

information on the availability of this 

material at NARA, call 202–741–6030, 

or go to: http://www.archives.gov./

federal_register/

code_of_federal_regulations/

ibr_locations.html. Copies may be 

obtained from the National Fire 

Protection Association, 1 Batterymarch 

Park, Quincy, MA 02269. If any changes 

in this edition of the Code are 

incorporated by reference, CMS will 

publish notice in the Federal Register to 

announce the changes. 

(ii) Chapter 19.3.6.3.2, exception 

number 2 of the adopted LSC does not 

apply to a facility. 

(2) The State survey agency may 

apply a single chapter of the LSC to the 

entire facility or may apply different 

chapters to different buildings or parts 

of buildings as permitted by the LSC. 

(3) A facility that meets the LSC 

definition of a residential board and 

care occupancy must have its 

evacuation capability evaluated in 

accordance with the Evacuation 

Difficulty Index of the Fire Safety 

Evaluation System for Board and Care 

facilities (FSES/BC). 

(4) If CMS finds that the State has a 

fire and safety code imposed by State 

law that adequately protects a facility’s 

clients, CMS may allow the State survey 

agency to apply the State’s fire and 

safety code instead of the LSC. 

(5) Beginning March 13, 2006, a 

facility must be in compliance with 

Chapter 19.2.9, Emergency Lighting. 

(6) Beginning March 13, 2006, 

Chapter 19.3.6.3.2, exception number 2 

does not apply to a facility. 

(7) Facilities that meet the LSC 

definition of a health care occupancy.

After consideration of State survey 

agency recommendations, CMS may 

waive, for appropriate periods, specific 

provisions of the Life Safety Code if the 

following requirements are met: 

(i) The waiver would not adversely 

affect the health and safety of the 

clients. 

(ii) Rigid application of specific 

provisions would result in an 

unreasonable hardship for the facility.

* * * * *

J. Part 485 is amended as follows:

PART 485—CONDITIONS OF 

PARTICIPATION: SPECIALIZED 

PROVIDERS 

1. The authority citation for Part 485 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh).

2. Section 485.610 is amended by 

revising paragraph (c) to read as follows:

§ 485.610 Condition of participation: 

Status and location.

* * * * *

(c) Standard: Location relative to 

other facilities or necessary provider 

certification. The CAH is located more 

than a 35-mile drive (or, in the case of 

mountainous terrain or in areas with 

only secondary roads available, a 15-

mile drive) from a hospital or another 

CAH, or before January 1, 2006, the 

CAH is certified by the State as being a 

necessary provider of health care 

services to residents in the area. A CAH 

that is designated as a necessary 

provider as of January 1, 2006, will 

maintain its necessary provider 

designation after January 1, 2006. 

3. Section 485.618 is amended by—

A. Revising paragraph (d)(1) 

introductory text. 

B. In paragraph (d)(2)(iv), removing 

the cross-reference ‘‘paragraph 

(d)(2)(ii)’’ and adding in its place the 

cross-reference ‘‘paragraph (d)(2)(iii)’’. 

C. In paragraph (d)(3), removing the 

cross-reference ‘‘paragraph (d)(2)(ii)’’

and adding in its place the crossreference ‘‘paragraph (d)(2)(iii)’’. 

The revision reads as follows:

§ 485.618 Condition of participation: 

Emergency services.

* * * * *

(d) Standard: Personnel. (1) Except as 

specified in paragraph (d)(2) of this 

section, there must be a doctor of 

medicine or osteopathy, a physician 

assistant, a nurse practitioner, or a 

clinical nurse specialist with training or 

experience in emergency care on call 

and immediately available by telephone 

28372 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

or radio contact, and available onsite 

within the following timeframes:

* * * * *

4. Section 485.620 is amended by 

revising paragraph (a) to read as follows:

§ 485.620 Condition of participation: 

Number of beds and average length of stay. 

(a) Standard: Number of beds. Except 

as permitted for CAHs having distinct 

part units under § 485.646, the CAH 

maintains no more than 25 inpatient 

beds after January 1, 2004, that can be 

used for either inpatient or swing-bed 

services.

* * * * *

5. Section 485.623 is amended by—

A. Revising paragraph (d)(1) 

B. Revising paragraph (d)(5). 

C. Adding a new paragraph (d)(6). 

The revisions and addition read as 

follows.

§ 485.623 Condition of participation: 

Physical plant and environment.

* * * * *

(d) Standard: Life safety from fire.

(1) Except as otherwise provided in 

this section—

(i) The CAH must meet the applicable 

provisions of the 2000 edition of the 

Life Safety Code of the National Fire 

Protection Association. The Director of 

the Office of the Federal Register has 

approved the NFPA 101 2000 edition 

of the Life Safety Code, issued January 

14, 2000, for incorporation by reference 

in accordance with 5 U.S.C. 552(a) and 

1 CFR part 51. A copy of the Code is 

available for inspection at the CMS 

Information Resource Center, 7500 

Security Boulevard, Baltimore, MD and 

at the National Archives and Records 

Administration (NARA). For 

information on the availability of this 

material at NARA, call 202–741–6030, 

or go to: http://www.archives.gov./

federal_register/

code_of_federal_regulations/

ibr_locations.html. Copies may be 

obtained from the National Fire 

Protection Association, 1 Batterymarch 

Park, Quincy, MA 02269. If any changes 

in this edition of the Code are 

incorporated by reference, CMS will 

publish notice in the Federal Register to 

announce the changes. 

(ii) Chapter 19.3.6.3.2, exception 

number 2 of the adopted edition of the 

Life Safety Code does not apply to a 

CAH.

* * * * *

(5) Beginning March 13, 2006, a 

critical access hospital must be in 

compliance with Chapter 9.2.9, 

Emergency Lighting. 

(6) Beginning March 13, 2006, 

Chapter 19.3.6.3.2, exception number 2 

does not apply to critical access 

hospitals. 

6. Section 485.645 is amended by 

republishing the introductory text of 

paragraph (a) and revising paragraph 

(a)(2) to read as follows:

§ 485.645 Special requirements for CAH 

providers of long-term care services 

(‘‘swing-beds’’).

* * * * *

(a) Eligibility. A CAH must meet the 

following eligibility requirements:

* * * * *

(2) The facility provides not more 

than 25 inpatient beds. Any bed of a 

unit of the facility that is licensed as a 

distinct-part SNF at the time the facility 

applies to the State for designation as a 

CAH is not counted under paragraph (a) 

of this section.

* * * * *

7. A new § 485.647 is added in 

subpart F to read as follows:

§ 485.647 Condition of participation: 

psychiatric and rehabilitation distinct part 

units. 

(a) Conditions.

(1) If a CAH provides inpatient 

psychiatric services in a distinct part 

unit, the services furnished by the 

distinct part unit must comply with the 

hospital requirements specified in 

Subparts A, B, C, and D of Part 482 of 

this subchapter, the common 

requirements of § 412.25(a)(2) through 

(f) of Part 412 of this chapter for hospital 

units excluded from the prospective 

payment systems, and the additional 

requirements of § 412.27 of Part 412 of 

this chapter for excluded psychiatric 

units. 

(2) If a CAH provides inpatient 

rehabilitation services in a distinct part 

unit, the services furnished by the 

distinct part unit must comply with the 

hospital requirements specified in 

Subparts A, B, C, and D of Part 482 of 

this subchapter, the common 

requirements of § 412.25(a)(2) through 

(f) of Part 412 of this chapter for hospital 

units excluded from the prospective 

payments systems, and the additional 

requirements of §§ 412.29 and § 412.30 

of Part 412 of this chapter related 

specifically to rehabilitation units. 

(b) Eligibility requirements.

(1) To be eligible to receive Medicare 

payments for psychiatric or 

rehabilitation services as a distinct part 

unit, the facility provides no more than 

10 beds in the distinct part unit. 

(2) The beds in the distinct part are 

excluded from the 25 inpatient-bed 

count limit specified in § 485.620(a). 

(3) The average annual 96-hour length 

of stay requirement specified under 

§ 485.620(b) does not apply to the 10 

beds in the distinct part units specified 

in paragraph (b)(1) of this section, and 

admissions and days of inpatient care in 

the distinct part units are not taken into 

account in determining the CAH’s 

compliance with the limits on the 

number of beds and length of stay in 

§ 485.620. 

K. Part 489 is amended as follows:

PART 489—PROVIDER AGREEMENT 

AND SUPPLIER APPROVAL 

1. The authority citation for part 489 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh).

2. Section 489.20 is amended as 

follows: 

A. In paragraph (m), the crossreference ‘‘§ 489.24(d)’’ is removed and 

the cross-reference ‘‘§ 489.24(e)’’ is 

added in its place. 

B. A new paragraph (t) is added.

§ 489.20 Basic commitments.

* * * * *

(t) Hospitals that are not otherwise 

subject to the Occupational Safety and 

Health Act of 1970 (or a State 

occupational safety and health plan that 

is approved under section 18(b) of the 

Occupational Safety and Health Act) 

must comply with the bloodborne 

pathogens (BBP) standards under 29 

CFR 1910.1030. A hospital that fails to 

comply with the BBP standards may be 

subject to a civil money penalty in 

accordance with section 17 of the 

Occupational Safety and Health Act of 

1970, including any adjustments of the 

civil money penalty amounts under the 

Federal Civil Penalties Inflation 

Adjustment Act, for a violation of the 

BBP standards. A civil money penalty 

will be imposed and collected in the 

same manner as civil money penalties 

under section 1128A(a) of the Social 

Security Act.

§ 489.53 [Amended] 

3. In § 489.53 (b)(2), the crossreference ‘‘489.24 (d)’’ is removed and 

the cross-reference ‘‘489.24 (e)’’ is added 

in its place.

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program)

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program)

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28373

Dated: May 4, 2004. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services 

Dated: May 7, 2004. 

Tommy G. Thompson, 

Secretary.

[Editorial Note: The following Addendum 

and appendixes will not appear in the Code 

of Federal Regulations.]

Addendum—Proposed Schedule of 

Standardized Amount Effective With 

Discharges Occurring on or After 

October 1, 2004 and Update Factors 

and Rate-of-Increase Percentages 

Effective With Cost Reporting Periods 

Beginning On or After October 1, 2004

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Operating Payment Rates’’ at the 

beginning of your comment.] 

I. Summary and Background 

In this Addendum, we are setting 

forth the proposed amounts and factors 

for determining prospective payment 

rates for Medicare hospital inpatient 

operating costs and Medicare hospital 

inpatient capital-related costs. We are 

also setting forth proposed rate-ofincrease percentages for updating the 

target amounts for hospitals and 

hospital units excluded from the IPPS. 

For discharges occurring on or after 

October 1, 2004, except for SCHs, 

MDHs, and hospitals located in Puerto 

Rico, each hospital’s payment per 

discharge under the IPPS will be based 

on 100 percent of the Federal national 

rate, which will be based on the 

national adjusted standardized amount. 

This amount reflects the national 

average hospital costs per case from a 

base year, updated for inflation. 

SCHs are paid based on whichever of 

the following rates yields the greatest 

aggregate payment: the Federal national 

rate; the updated hospital-specific rate 

based on FY 1982 costs per discharge; 

the updated hospital-specific rate based 

on FY 1987 costs per discharge; or the 

updated hospital-specific rate based on 

FY 1996 costs per discharge. 

Under section 1886(d)(5)(G) of the 

Act, MDHs are paid based on the 

Federal national rate or, if higher, the 

Federal national rate plus 50 percent of 

the difference between the Federal 

national rate and the updated hospitalspecific rate based on FY 1982 or FY 

1987 costs per discharge, whichever is 

higher. MDHs do not have the option to 

use their FY 1996 hospital-specific rate. 

For hospitals in Puerto Rico, the 

payment per discharge is based on the 

sum of 25 percent of a Puerto Rico rate 

that reflects base year average costs per 

case of Puerto Rico hospitals and 75 

percent of the Federal national rate. (See 

section II.D.3. of this Addendum for a 

complete description.) 

As discussed below in section II. of 

this Addendum, we are proposing to 

make changes in the determination of 

the prospective payment rates for 

Medicare inpatient operating costs for 

FY 2005. The proposed changes, to be 

applied prospectively effective with 

discharges occurring on or after October 

1, 2004, affect the calculation of the 

Federal rates. In section III. of this 

Addendum, we discuss our proposed 

changes for determining the prospective 

payment rates for Medicare inpatient 

capital-related costs for FY 2005. 

Section IV. of this Addendum sets forth 

our proposed changes for determining 

the rate-of-increase limits for hospitals 

excluded from the IPPS for FY 2004. 

Section V. of this Addendum sets forth 

policies on payment for blood clotting 

factor administered to hemophilia 

patients. The tables to which we refer in 

the preamble of this proposed rule are 

presented in section VI. of this 

Addendum.

II. Proposed Changes to Prospective 

Payment Rates for Hospital Inpatient 

Operating Costs for FY 2005

The basic methodology for 

determining prospective payment rates 

for hospital inpatient operating costs is 

set forth at existing § 412.63 and 

proposed new § 412.64. The basic 

methodology for determining the 

prospective payment rates for hospital 

inpatient operating costs for hospitals 

located in Puerto Rico is set forth at 

existing §§ 412.210 and 412.212 and 

proposed new § 412.211. Below, we 

discuss the factors used for determining 

the prospective payment rates. 

In summary, the proposed 

standardized amounts set forth in 

Tables 1A, 1B, 1C, and 1D of section VI. 

of this Addendum reflect—

• The requirements of section 401 of 

Public Law 108–173, equalizing the 

standardized amounts for urban and 

other areas at the level computed for 

urban hospitals during FY 2004, 

updated by the applicable percentage 

increase required under section 501(a) 

of Public Law 108–173; 

• The requirements of section 403 of 

Public Law 108–173, establishing two 

labor-related shares that are applicable 

to the standardized amounts depending 

on whether the hospital’s payments 

would be higher with a lower (in the 

case of a wage index below 1.0000) or 

higher (in the case of a wage index 

above 1.0000) labor share; 

• Updates of 3.3 percent for all areas 

(that is, the full market basket 

percentage increase of 3.3 percent, as 

required by section 501(a) of Public Law 

108–173), and reflecting the 

requirements of section 501(b) of Public 

Law 108–173, to reduce the applicable 

percentage increase by 0.4 percentage 

points for hospitals that fail to submit 

data in a form and manner specified by 

the Secretary, relating to the quality of 

inpatient care furnished by the hospital; 

• An adjustment to ensure the 

proposed DRG recalibration and wage 

index update and changes are budget 

neutral, as provided for under sections 

1886(d)(4)(C)(iii) and (d)(3)(E) of the 

Act, by applying new budget neutrality 

adjustment factors to the standardized 

amount; 

• An adjustment to ensure the effects 

of geographic reclassification are budget 

neutral, as provided for in section 

1886(d)(8)(D) of the Act, by removing 

the FY 2004 budget neutrality factor and 

applying a revised factor; 

• An adjustment to apply the new 

outlier offset by removing the FY 2004 

outlier offsets and applying a new offset; 

• An adjustment to ensure the effects 

of the rural community hospital 

demonstration required under section 

410A of Public Law 108–173 are budget 

neutral, as required under section 

410A(c)(2) of Public Law 108–173. 

A. Calculation of the Adjusted 

Standardized Amount 

1. Standardization of Base-Year Costs or 

Target Amounts 

The national standardized amount is 

based on per discharge averages of 

adjusted hospital costs from a base 

period (section 1886(d)(2)(A) of the Act) 

or, for Puerto Rico, adjusted target 

amounts from a base period (section 

1886(d)(9)(B)(i) of the Act), updated and 

otherwise adjusted in accordance with 

the provisions of section 1886(d) of the 

Act. The preamble to the September 1, 

1983 interim final rule (48 FR 39763) 

contained a detailed explanation of how 

base-year cost data (from cost reporting 

periods ending during FY 1981) were 

established in the initial development of 

standardized amounts for the IPPS. The 

September 1, 1987 final rule (52 FR 

33043, 33066) contains a detailed 

explanation of how the target amounts 

were determined, and how they are 

used in computing the Puerto Rico rates. 

Sections 1886(d)(2)(B) and (d)(2)(C) of 

the Act require us to update base-year 

per discharge costs for FY 1984 and 

then standardize the cost data in order 

to remove the effects of certain sources 

of cost variations among hospitals. 

These effects include case-mix, 

differences in area wage levels, cost-ofliving adjustments for Alaska and 

Hawaii, indirect medical education 

28374 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

costs, and costs to hospitals serving a 

disproportionate share of low-income 

patients. 

Under sections 1886(d)(2)(H) and 

(d)(3)(E) of the Act, the Secretary 

estimates from time-to-time the 

proportion of costs that are wages and 

wage-related costs. The standardized 

amount is divided into labor-related and 

nonlabor-related amounts; only the 

proportion considered the labor-related 

amount is adjusted by the wage index. 

The current labor-related share is 71.1 

percent. The current labor-related share 

in Puerto Rico is 71.3 percent. 

Section 403 of Public Law 108–173 

revises the proportion of the 

standardized amount that is considered 

labor-related. Specifically, section 403 

requires that 62 percent of the 

standardized amount be adjusted by the 

wage index, unless doing so would 

result in lower payments to a hospital 

than would otherwise be made (section 

403(b) extends this provision to the 

Puerto Rico standardized amounts). As 

a consequence, we are adjusting 62 

percent of the national and Puerto Rico 

standardized amount by the wage index 

for all hospitals whose wage indexes are 

less than or equal to 1.0000; otherwise, 

the wage index is applied to 71.1 

percent of the standardized amount. 

2. Computing the Average Standardized 

Amount 

Sections 1886(d)(2)(D) and (d)(3) of 

the Act previously required the 

Secretary to compute two average 

standardized amounts for discharges 

occurring in a fiscal year: one for 

hospitals located in large urban areas 

and one for hospitals located in other 

areas. In addition, under sections 

1886(d)(9)(B)(iii) and (d)(9)(C)(i) of the 

Act, the average standardized amount 

per discharge was determined for 

hospitals located in large urban and 

other areas in Puerto Rico. In 

accordance with section 1886(b)(3)(B)(i) 

of the Act, the large urban average 

standardized amount was 1.6 percent 

higher than the other area average 

standardized amount. 

Section 402(b) of Public Law 108–7 

required that, effective for discharges 

occurring on or after April 1, 2003, and 

before October 1, 2003, the Federal rate 

for all IPPS hospitals would be based on 

the large urban standardized amount. 

Subsequently, Public Law 108–89, 

extended section 402(b) of Public Law 

108–7 beginning with discharges on or 

after October 1, 2003 and before March 

31, 2004. Finally, section 401(a) of 

Public Law 108–173 requires that, 

beginning with fiscal year 2004 and 

thereafter, an equal standardized 

amount is to be computed for all 

hospitals at the level computed for large 

urban hospitals during FY 2003, 

updated by the applicable percentage 

update. This provision in effect makes 

permanent the equalization of the 

standardized amounts at the level of the 

previous standardized amount for large 

urban hospitals. Section 401(c) also 

equalizes the Puerto Rico-specific urban 

and other area rates. Accordingly, we 

are providing in this proposed rule for 

a single national standardized amount, 

and a single Puerto Rico standardized 

amount, for FY 2005 and thereafter. 

3. Updating the Average Standardized 

Amount 

In accordance with section 

1886(d)(3)(A)(iv) of the Act, we are 

proposing to update the equalized 

standardized amount for FY 2005 by the 

full estimated market basket percentage 

increase for hospitals in all areas, as 

specified in section 1886(b)(3)(B)(i)(XIX) 

of the Act, as amended by section 501 

of Public Law 108–173. The percentage 

change in the market basket reflects the 

average change in the price of goods and 

services purchased by hospitals to 

furnish inpatient care. The most recent 

forecast of the hospital market basket 

increase for FY 2005 is 3.3 percent. 

Thus, for FY 2005, the proposed update 

to the average standardized amount 

equals 3.3 percent for hospitals in all 

areas. 

As discussed above in section IV.E. of 

this proposed rule, section 501(b) of 

Public Law 108–173 amended section 

1886(b)(3)(B) of the Act to add a new 

subclause (vii) to revise the mechanism 

used to update the standardized amount 

for payment for inpatient hospital 

operating costs. Specifically, the 

amendment provides for a reduction of 

0.4 percentage points to the update 

percentage increase (also known as the 

market basket update) for each of FYs 

2005 through 2007 for any ‘‘subsection 

(d) hospital’’ that does not submit data 

on a set of 10 quality indicators 

established by the Secretary as of 

November 1, 2003. The statute also 

provides that any reduction will apply 

only to the fiscal year involved, and will 

not be taken into account in computing 

the applicable percentage increase for a 

subsequent fiscal year. This measure 

establishes an incentive for hospitals to 

submit data on quality measures 

established by the Secretary. The 

standardized amount in Tables 1A 

through 1D of section VI. of this 

addendum reflect these differential 

amounts. 

Although the update factors for FY 

2005 are set by law, we are required by 

section 1886(e)(3) of the Act to report to 

the Congress our initial 

recommendation of update factors for 

FY 2005 for both IPPS hospitals and 

hospitals excluded from the IPPS. Our 

recommendation on the update factors 

(which is required by sections 

1886(e)(4)(A) and (e)(5)(A) of the Act) is 

set forth as Appendix B of this proposed 

rule.

4. Other Adjustments to the Average 

Standardized Amount 

As in the past, we are proposing to 

adjust the FY 2005 standardized amount 

to remove the effects of the FY 2004 

geographic reclassifications and outlier 

payments before applying the FY 2005 

updates. We then apply the new offsets 

for outliers and geographic 

reclassifications to the standardized 

amount for FY 2005. 

We do not remove the prior year’s 

budget neutrality adjustments for 

reclassification and recalibration of the 

DRG weights and for updated wage data 

because, in accordance with section 

1886(d)(4)(C)(iii) of the Act, estimated 

aggregate payments after the changes in 

the DRG relative weights and wage 

index should equal estimated aggregate 

payments prior to the changes. If we 

removed the prior year adjustment, we 

would not satisfy this condition. 

Budget neutrality is determined by 

comparing aggregate IPPS payments 

before and after making the changes that 

are required to be budget neutral (for 

example, reclassifying and recalibrating 

the DRGs, updating the wage data, and 

geographic reclassifications). We 

include outlier payments in the 

payment simulations because outliers 

may be affected by changes in these 

payment parameters. 

We are also proposing to adjust the 

standardized amount this year by an 

amount estimated to ensure that 

aggregate IPPS payments do not exceed 

the amount of payments that would 

have been made in the absence of the 

rural community hospital 

demonstration required under section 

410A of Public Law 108–173. This 

demonstration is required to be budget 

neutral under section 410A(c)(2) of 

Public Law 108–173. 

a. Recalibration of DRG Weights and 

Updated Wage Index—Budget 

Neutrality Adjustment 

Section 1886(d)(4)(C)(iii) of the Act 

specifies that, beginning in FY 1991, the 

annual DRG reclassification and 

recalibration of the relative weights 

must be made in a manner that ensures 

that aggregate payments to hospitals are 

not affected. As discussed in section II. 

of the preamble, we normalized the 

recalibrated DRG weights by an 

adjustment factor, so that the average 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28375

case weight after recalibration is equal 

to the average case weight prior to 

recalibration. However, equating the 

average case weight after recalibration to 

the average case weight before 

recalibration does not necessarily 

achieve budget neutrality with respect 

to aggregate payments to hospitals 

because payments to hospitals are 

affected by factors other than average 

case weight. Therefore, as we have done 

in past years, we are proposing to make 

a budget neutrality adjustment to ensure 

that the requirement of section 

1886(d)(4)(C)(iii) of the Act is met. 

Section 1886(d)(3)(E) of the Act 

requires us to update the hospital wage 

index on an annual basis beginning 

October 1, 1993. This provision also 

requires us to make any updates or 

adjustments to the wage index in a 

manner that ensures that aggregate 

payments to hospitals are not affected 

by the change in the wage index. For FY 

2005, we are proposing to apply an 

occupational mix adjustment to the 

wage index. We describe our proposed 

occupational mix adjustment in section 

III.C. of this proposed rule. Since 

section 1886(d)(3)(E) of the Act requires 

us to update the wage index on a budget 

neutral basis, we are including the 

effects of this proposed occupational 

mix adjustment on the wage index in 

our budget neutrality calculations. 

Section 4410 of Public Law 105–33 

provides that, for discharges on or after 

October 1, 1997, the area wage index 

applicable to any hospital that is not 

located in a rural area may not be less 

than the area wage index applicable to 

hospitals located in rural areas in that 

State. This provision is required by 

section 4410(b) of Public Law 105–33 to 

be budget neutral. Therefore, we include 

the effects of this provision in our 

calculation of the wage update budget 

neutrality factor. 

Section 1886(d)(5)(K)(ii)(III) of the Act 

previously required that we adjust the 

rates to ensure that any add-on 

payments for new technology under 

section 1886(d)(5)(K) of the Act be 

budget neutral. However, section 

503(d)(2) of Public Law 108–173 has 

repealed this requirement. We discuss 

this provision in section II.E. of this 

proposed rule. In accordance with this 

provision, we are proposing no budget 

neutrality adjustment to account for 

approval of new technologies for add-on 

payments in FY 2005. 

To comply with the requirement that 

DRG reclassification and recalibration of 

the relative weights be budget neutral, 

and the requirement that the updated 

wage index be budget neutral, we used 

FY 2003 discharge data to simulate 

payments and compared aggregate 

payments using the FY 2004 relative 

weights and wage index to aggregate 

payments using the proposed FY 2005 

relative weights and wage index. The 

same methodology was used for the FY 

2004 budget neutrality adjustment 

(although the FY 2004 adjustment 

included the effects of new technology 

add-on payments). 

Based on this comparison, we 

computed a proposed budget neutrality 

adjustment factor equal to 0.998969. We 

also are proposing to adjust the Puerto 

Rico-specific standardized amount for 

the effect of DRG reclassification and 

recalibration. We computed a proposed 

budget neutrality adjustment factor for 

Puerto Rico-specific standardized 

amount equal to 0.999326. These budget 

neutrality adjustment factors are applied 

to the standardized amounts without 

removing the effects of the FY 2004 

budget neutrality adjustments. 

In addition, we are proposing to apply 

these same adjustment factors to the 

hospital-specific rates that are effective 

for cost reporting periods beginning on 

or after October 1, 2004. (See the 

discussion in the September 4, 1990 

final rule (55 FR 36073)). 

b. Reclassified Hospitals—Budget 

Neutrality Adjustment 

Section 1886(d)(8)(B) of the Act 

provides that, effective with discharges 

occurring on or after October 1, 1988, 

certain rural hospitals are deemed 

urban. In addition, section 1886(d)(10) 

of the Act provides for the 

reclassification of hospitals based on 

determinations by the MGCRB. Under 

section 1886(d)(10) of the Act, a hospital 

may be reclassified for purposes of the 

wage index. 

Under section 1886(d)(8)(D) of the 

Act, the Secretary is required to adjust 

the standardized amount to ensure that 

aggregate payments under the IPPS after 

implementation of the provisions of 

sections 1886(d)(8)(B) and (C) and 

1886(d)(10) of the Act are equal to the 

aggregate prospective payments that 

would have been made absent these 

provisions. (Neither the wage index 

reclassifications provided under section 

508 of Public Law 108–173, nor the 

wage index adjustments provided under 

section 505 of Public Law 108–173, are 

budget neutral. Section 508(b) provides 

that the wage index reclassifications 

approved under section 508(a) ‘‘shall 

not be effected in a budget neutral 

manner.’’ Section 505(a) similarly 

provides that any increase in a wage 

index under that section shall not be 

taken into account ‘‘in computing any 

budget neutrality adjustment with 

respect to such index under’’ section 

1886(d)(8)(D) of the Act.) To calculate 

this budget neutrality factor, we used 

FY 2003 discharge data to simulate 

payments, and compared total IPPS 

payments prior to any reclassifications 

under sections 1886(d)(8)(B) and (C) and 

1886(d)(10) of the Act to total IPPS 

payments after such reclassifications. 

Based on these simulations, we are 

proposing to apply an adjustment factor 

of 0.994295 to ensure that the effects of 

this reclassification are budget neutral. 

The proposed adjustment factor is 

applied to the standardized amount 

after removing the effects of the FY 2004 

budget neutrality adjustment factor. We 

note that the proposed FY 2005 

adjustment reflects proposed FY 2005 

wage index reclassifications approved 

by the MGCRB or the Administrator, 

and the effects of MGCRB 

reclassifications approved in FY 2003 

and FY 2004 (section 1886(d)(10)(D)(v) 

of the Act makes wage index 

reclassifications effective for 3 years). 

c. Outliers 

Section 1886(d)(5)(A) of the Act 

provides for payments in addition to the 

basic prospective payments, for 

‘‘outlier’’ cases involving extraordinarily 

high costs. To qualify for outlier 

payments, a case must have costs above 

a fixed-loss cost threshold amount (a 

dollar amount by which the costs of a 

case must exceed payments in order to 

qualify for outlier payment). To 

determine whether the costs of a case 

exceed the fixed-loss threshold, a 

hospital’s cost-to-charge ratio is applied 

to the total covered charges for the case 

to convert the charges to costs. 

Payments for eligible cases are then 

made based on a marginal cost factor, 

which is a percentage of the costs above 

the threshold. 

Under section 1886(d)(5)(A)(iv) of the 

Act, outlier payments for any year must 

be projected to be not less than 5 

percent nor more than 6 percent of total 

operating DRG payments plus outlier 

payments. Section 1886(d)(3)(B) of the 

Act requires the Secretary to reduce the 

average standardized amount by a factor 

to account for the estimated proportion 

of total DRG payments made to outlier 

cases. Similarly, section 

1886(d)(9)(B)(iv) of the Act requires the 

Secretary to reduce the average 

standardized amounts applicable to 

hospitals in Puerto Rico to account for 

the estimated proportion of total DRG 

payments made to outlier cases. 

i. Proposed FY 2005 outlier fixed-loss 

cost threshold. In the August 1, 2003 

IPPS final rule (68 FR 45476–45478), we 

established a threshold for FY 2004 that 

was equal to the prospective payment 

rate for the DRG, plus any IME and DSH 

payments and any additional payments 

28376 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

7These figues represent 3.0 standard deviations 

from the mean of the log distribution of cost-tocharge ratios for all hospitals.

for new technology, plus $31,000. The 

marginal cost factor (the percent of costs 

paid after costs for the case exceed the 

threshold) was 80 percent.

To calculate the proposed FY 2005 

outlier thresholds, we simulated 

payments by applying proposed FY 

2005 rates and policies using cases from 

the FY 2003 MedPAR file. Therefore, in 

order to determine the appropriate 

proposed FY 2005 threshold, it was 

necessary to inflate the charges on the 

MedPAR claims by 2 years, from FY 

2003 to FY 2005. We are proposing to 

use a 2-year average annual rate of 

change in charges per case to inflate FY 

2003 charges to approximate FY 2005 

charges. The 2-year average annual rate 

of change in charges per case from FY 

2000 to FY 2001, and from FY 2001 to 

FY 2002, was 12.5978 percent annually 

or 26.8 percent over 2 years. 

We are proposing to continue to use 

the 2-year average annual rate of change 

in charges per case to establish the 

proposed FY 2005 threshold. The 2-year 

average annual rate of change in charges 

per case from FY 2001 to FY 2002, and 

from FY 2002 to FY 2003, was 14.5083 

percent annually, or 31.1 percent over 2 

years. As we have done in the past, we 

are using hospital cost-to-charge ratio 

from the most recently Provider Specific 

File, in this case the December 2003 

update. This file includes cost-to-charge 

ratios reflecting implementation of 

changes we made last year to the policy 

affecting the applicable cost-to-charge 

ratios (68 FR 34494). As of October 1, 

2003, fiscal intermediaries use either the 

most recent settled or the most recent 

tentative settled cost report, whichever 

is from the latest reporting period. 

Because in the past cost-to-charge ratios 

were taken from the latest settled cost 

reports and for some hospitals there 

were delays in settling their cost reports, 

the cost-to-charge ratios on the Provider 

Specific File may have been from cost 

reporting periods that were several years 

prior. This change results in more upto-date and, generally, lower cost-tocharge ratios. 

Using this methodology, we are 

proposing to establish a fixed-loss cost 

outlier threshold equal to the 

prospective payment rate for the DRG, 

plus any IME and DSH payments, and 

any add-on payments for new 

technology, plus $35,085. This single 

threshold would be applicable to qualify 

for both operating and capital outlier 

payments. We also are proposing to 

maintain the marginal cost factor for 

cost outliers at 80 percent. 

This proposed outlier threshold for 

FY 2005 may be higher than might have 

been anticipated on the basis of the 

more up-to-date and, generally, lower 

cost-to-charge ratios that we are now 

employing. We believe that a significant 

factor in this result may be the 2-year 

average annual rates of change that we 

are employing to update charges in the 

MedPAR data from FY 20003 to FY 

2005. As we discussed above, we are 

employing the 2-year average annual 

rate of change in charges per case from 

FY 2001 to FY 2002, and from FY 2002 

to FY 2003, which is 14.5083 percent 

annually, or 31.1 percent over 2 years. 

These rates of increase derive from the 

period before the changes we made last 

year to the policy affecting the 

applicable cost-to-charge ratios (68 FR 

34494). In fact, they derive from the 

years just prior to the adoption of the 

policy changes, when some hospitals 

were increasing charges at a rapid rate 

in order to increase their outlier 

payments. Therefore, they represent 

rates of increase that may be higher than 

the rates of increase under our new 

policy. We have always used actual data 

from prior years, rather than projections, 

to update charges for purposes of 

determining the outlier threshold. In 

light of the increase in the proposed 

outlier threshold for FY 2005, compared 

to the threshold previously in effect, we 

welcome comments on the data we are 

using to update charges for purposes of 

computing the threshold. We especially 

encourage commenters to provide any 

recommendations for data that might 

better reflect current trends in charge 

increases. 

ii. Other changes concerning outliers. 

As stated in the September 1, 1993 final 

rule (58 FR 46348), we establish outlier 

thresholds that are applicable to both 

hospital inpatient operating costs and 

hospital inpatient capital-related costs. 

When we modeled the combined 

operating and capital outlier payments, 

we found that using a common set of 

thresholds resulted in a lower 

percentage of outlier payments for 

capital-related costs than for operating 

costs. We project that the proposed 

thresholds for FY 2005 would result in 

outlier payments equal to 5.10 percent 

of operating DRG payments and 5.03 

percent of capital payments based on 

the Federal rate. 

In accordance with section 

1886(d)(3)(B) of the Act, we reduced the 

proposed FY 2005 standardized amount 

by the same percentage to account for 

the projected proportion of payments 

paid to outliers. 

The proposed outlier adjustment 

factors to be applied to the standardized 

amount for FY 2005 are as follows:

Operating 

standardized 

amounts 

Capital Federal rate 

National ..... 0.948994 0.949706

Puerto Rico 0.974692 0.9747329

We apply the outlier adjustment 

factors after removing the effects of the 

FY 2004 outlier adjustment factors on 

the standardized amount. 

To determine whether a case qualifies 

for outlier payments, we apply hospitalspecific cost-to-charge ratios to the total 

covered charges for the case. Operating 

and capital costs for the case are 

calculated separately by applying 

separate operating and capital cost-tocharge ratios. These costs are then 

combined and compared with the fixedloss outlier threshold. 

The June 9, 2003 outlier final rule (68 

FR 34494) eliminated the application of 

the statewide average for hospitals 

whose cost-to-charge ratios fall below 3 

standard deviations from the national 

mean cost-to-charge ratio. However, for 

those hospitals for which the fiscal 

intermediary computes operating costto-charge ratios greater than 1.460 or 

capital cost-to-charge ratios greater than 

0.173, or hospitals for whom the fiscal 

intermediary is unable to calculate a 

cost-to-charge ratio (as described at 

§ 412.84(i)(3)), we are still using 

statewide average ratios to calculate 

costs to determine whether a hospital 

qualifies for outlier payments.7 Table 

8A in section VI. of this Addendum 

contains the statewide average operating 

cost-to-charge ratios for urban hospitals 

and for rural hospitals for which the 

fiscal intermediary is unable to compute 

a hospital-specific cost-to-charge ratio 

within the above range. These statewide 

average ratios would replace the ratios 

published in the August 1, 2003 IPPS 

final rule (68 FR 45637). Table 8B in 

section VI. of this Addendum contains 

the proposed comparable statewide 

average capital cost-to-charge ratios. 

Again, the proposed cost-to-charge 

ratios in Tables 8A and 8B would be 

used during FY 2005 when hospitalspecific cost-to-charge ratios based on 

the latest settled cost report are either 

not available or are outside the range 

noted above.

iii. FY 2003 and FY 2004 outlier 

payments. In the August 1, 2003 IPPS 

final rule (68 FR 45478), we stated that, 

based on available data, we estimated 

that actual FY 2003 outlier payments 

would be approximately 6.5 percent of 

actual total DRG payments. This 

estimate was computed based on 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28377

simulations using the FY 2002 MedPAR 

file (discharge data for FY 2002 bills). 

That is, the estimate of actual outlier 

payments did not reflect actual FY 2003 

bills, but instead reflected the 

application of FY 2003 rates and 

policies to available FY 2002 bills. 

Our current estimate, using available 

FY 2003 bills, is that actual outlier 

payments for FY 2003 were 

approximately 5.7 percent of actual total 

DRG payments. Thus, the data indicate 

that, for FY 2003, the percentage of 

actual outlier payments relative to 

actual total payments is higher than we 

projected before FY 2003 (and, thus, 

exceeds the percentage by which we 

reduced the standardized amounts for 

FY 2003). Nevertheless, consistent with 

the policy and statutory interpretation 

we have maintained since the inception 

of the IPPS, we do not plan to make 

retroactive adjustments to outlier 

payments to ensure that total outlier 

payments for FY 2003 are equal to 5.1 

percent of total DRG payments. 

We currently estimate that actual 

outlier payments for FY 2004 will be 

approximately 4.4 percent of actual total 

DRG payments, 0.7 percentage points 

lower than the 5.1 percent we projected 

in setting outlier policies for FY 2004. 

This estimate is based on simulations 

using the FY 2003 MedPAR file 

(discharge data for FY 2003 bills). We 

used these data to calculate an estimate 

of the actual outlier percentage for FY 

2004 by applying FY 2004 rates and 

policies, including an outlier threshold 

of $31,000 to available FY 2003 bills. 

d. Section 410A Rural Community 

Hospital Demonstration Program 

Adjustment 

Section 410A of Public Law 108–173 

requires the Secretary to establish a 

demonstration that will modify 

reimbursement for inpatient services for 

up to fifteen small rural hospitals. 

Section 410A(c)(2) requires that ‘‘in 

conducting the demonstration program 

under this section, the Secretary shall 

ensure that the aggregate payments 

made by the Secretary do not exceed the 

amount which the Secretary would have 

paid if the demonstration program 

under this section was not 

implemented.’’ As discussed in section 

IV.P. of this proposed rule, we are 

proposing to satisfy this requirement by 

adjusting national IPPS rates by a factor 

that is sufficient to account for the 

added costs of this demonstration. We 

estimate that the average additional 

annual payment that will be made to 

each participating hospital under the 

demonstration will be approximately 

$1,120,000. We based this estimate on 

the recent historical experience of the 

difference between inpatient cost and 

payment for hospitals that would be 

eligible for the demonstration. For 15 

participating hospitals, the total annual 

impact of the demonstration program is 

estimated to be $16,820,148. We 

estimate that there will be an average 

decrease in payment per discharge of 

approximately $0.83. The required 

adjustment as a result of the 

demonstration to the Federal rate in 

calculating Medicare inpatient 

prospective payments is 0.999818. 

In order to achieve budget neutrality, 

we are proposing to adjust national IPPS 

rates by an amount sufficient to account 

for the added costs of this 

demonstration. We are proposing, in 

other words, to apply budget neutrality 

across the payment system as a whole 

rather than merely across the 

participants of this demonstration. We 

believe that the language of the statutory 

budget neutrality requirement permits 

the agency to implement the budget 

neutrality provision in this manner. 

This is because the statutory language 

requires ‘‘aggregate payments made by 

the Secretary do not exceed the amount 

which the Secretary would have paid if 

the demonstration * * * was not 

implemented,’’ but does not identify the 

range across which aggregate payments 

must be held equal. We invite public 

comment on this proposal. 

5. Proposed FY 2005 Standardized 

Amount 

The adjusted standardized amount is 

divided into labor and nonlabor 

portions. Tables 1A and 1B in section 

VI. of this Addendum contain the 

national standardized amount that we 

are proposing to apply to all hospitals, 

except hospitals in Puerto Rico. The 

amounts shown in the two tables differ 

only in that the labor-related share 

applied to the standardized amounts in 

Table 1A is 71.1 percent, and the laborrelated share applied to the 

standardized amounts in Table 1B is 62 

percent. As described in section II.A.1. 

of this Addendum, we are proposing to 

implement section 403 of Public Law 

108–173, which provides that the laborrelated share is 62 percent, unless the 

application of that percentage would 

result in lower payments to a hospital 

than would otherwise be made. The 

effect of this provision is that the laborrelated share of the standardized 

amount is 62 percent for all hospitals 

whose wage indexes are less than or 

equal to 1.0000. However, the laborrelated share of the standardized 

amount remains 71.1 percent (reflecting 

the Secretary’s current estimate of the 

proportion of costs that are wages and 

wage-related costs) for hospitals whose 

wage indexes are greater than 1.0000. In 

addition, both tables include 

standardized amounts reflecting the full 

3.3 percent update for FY 2005, and 

standardized amounts reflecting the 0.4 

percentage point reduction to the 

update applicable for hospitals that fail 

to submit quality data consistent with 

section 501(b) of Public Law 108–173. 

(Tables 1C and 1D show the new 

standardized amounts for Puerto Rico, 

reflecting the different labor shares that 

apply, that is, 71.3 percent or 62 

percent.) 

The following tables illustrate the 

proposed changes from the FY 2004 

national average standardized amount. 

The first column shows the proposed 

changes from the 2004 standardized 

amounts for hospitals that satisfy the 

quality data submission requirement for 

receiving the full update (3.3 percent). 

The second column shows the proposed 

changes for hospitals receiving the 

reduced update (2.9 percent). The first 

row in the table shows the updated 

(through FY 2003) average standardized 

amount after restoring the FY 2004 

offsets for outlier payments and 

geographic reclassification budget 

neutrality. The DRG reclassification and 

recalibration and wage index budget 

neutrality factor is cumulative. 

Therefore, the FY 2004 factor is not 

removed from the amount in the table. 

We have added separate rows to this 

table to reflect the different labor-related 

shares that apply to hospitals.

COMPARISON OF FY 2004 STANDARDIZED AMOUNTS TO PROPOSED FY 2005 SINGLE STANDARDIZED AMOUNT WITH FULL

UPDATE AND REDUCED UPDATE

Full update

(3.3 percent) 

Reduced update

(2.9 percent). 

FY 2004 Base Rate (after removing reclassification budget neutrality and 

outlier offset).

Labor: $3,331.33 ..................................

Nonlabor: $1,354.09 ............................

Labor: $3,331.33 

Nonlabor: $1,354.09. 

Proposed FY 2005 Update Factor ...................................................................... 1.033 .................................................... 1.029. 

28378 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

COMPARISON OF FY 2004 STANDARDIZED AMOUNTS TO PROPOSED FY 2005 SINGLE STANDARDIZED AMOUNT WITH FULL

UPDATE AND REDUCED UPDATE—Continued

Full update

(3.3 percent) 

Reduced update

(2.9 percent). 

Proposed FY 2005 DRG Recalibrations and Wage Index Budget Neutrality 

Factor.

0.998969 .............................................. 0.998969. 

Proposed FY 2005 Reclassification Budget Neutrality Factor ............................ 0.994295 .............................................. 0.994295. 

Adjusted for Blend of FY 2004 DRG Recalibration and Wage Index Budget 

Neutrality Factors*.

Labor: $3,418.04 ..................................

Nonlabor: $1,389.33 ............................

Labor: $3,404.81 

Nonlabor: $1,383.95. 

Proposed FY 2005 Outlier Factor ....................................................................... 0.948994 .............................................. 0.948994. 

Proposed Rural Demo Budget Neutrality Factor ................................................ 0.999818 .............................................. 0.999818. 

Proposed Rate for FY 2005 (after multiplying FY 2004 base rate by above 

factors) where the wage index is less than or equal to 1.0000.

Labor: $2,828.03 ..................................

Nonlabor: $1,733.30 ............................

Labor: $2,817.08 

Nonlabor: $1,726.59. 

Proposed Rate for FY 2005 (after multiplying FY 2004 base rate by above 

factors) where the wage index is greater than 1.0000.

Labor: $3,243.10 ..................................

Nonlabor: $1,318.22 ............................

Labor: $3,230.55 

Nonlabor: $1,313.12 

*In order to calculate this adjustment correctly, it is necessary to multiply on the DRG recalibration and wage index budget neutrality factor of 

1.002608 (1.002588 from October 1, 2003 through March 31, 2004; 1.002628 from April 1, 2004 through September 30, 2004) and divide off the 

factor of 1.002628 from the second half of FY 2004. This is to account for the fact that it was necessary to employ different budget neutrality adjustments for the first and second halves of FY 2004 due to the extension of the extension of the standardized amount equalization, effective 

April 1, 2004. 

Under section 1886(d)(9)(A)(ii) of the 

Act, the Federal portion of the Puerto 

Rico payment rate is based on the 

discharge-weighted average of the 

national large urban standardized 

amount (as set forth in Table 1A). The 

labor and nonlabor portions of the 

national average standardized amounts 

for Puerto Rico hospitals are set forth in 

Table 1C of section VI. of this 

Addendum. This table also includes the 

Puerto Rico standardized amounts. The 

labor share applied to the Puerto Rico 

standardized amount is 71.3 percent, or 

62 percent, depending on which is more 

advantageous to the hospital. (Section 

403(b) of Public Law 108–173 provides 

that the labor-related share for hospitals 

in Puerto Rico will be 62 percent, unless 

the application of that percentage would 

result in lower payments to the 

hospital.) 

B. Adjustments for Area Wage Levels 

and Cost-of-Living 

Tables 1A through 1D, as set forth in 

section VI. of this Addendum, contain 

the labor-related and nonlabor-related 

shares that we are proposing to use to 

calculate the prospective payment rates 

for hospitals located in the 50 States, the 

District of Columbia, and Puerto Rico. 

This section addresses two types of 

adjustments to the standardized 

amounts that are made in determining 

the proposed prospective payment rates 

as described in this Addendum. 

1. Adjustment for Area Wage Levels 

Sections 1886(d)(3)(E) and 

1886(d)(9)(C)(iv) of the Act require that 

we make an adjustment to the laborrelated portion of the national and 

Puerto Rico prospective payment rates, 

respectively, to account for area 

differences in hospital wage levels. This 

adjustment is made by multiplying the 

labor-related portion of the adjusted 

standardized amounts by the 

appropriate wage index for the area in 

which the hospital is located. In section 

III. of the preamble to this proposed 

rule, we discuss the data and 

methodology for the proposed FY 2005 

wage index. The proposed FY 2005 

wage index is set forth in Tables 4A, 4B, 

4C, and 4F of section VI. of this 

Addendum. 

2. Adjustment for Cost-of-Living in 

Alaska and Hawaii 

Section 1886(d)(5)(H) of the Act 

authorizes an adjustment to take into 

account the unique circumstances of 

hospitals in Alaska and Hawaii. Higher 

labor-related costs for these two States 

are taken into account in the adjustment 

for area wages described above. For FY 

2005, we are proposing to adjust the 

payments for hospitals in Alaska and 

Hawaii by multiplying the nonlabor 

portion of the standardized amount by 

the appropriate adjustment factor 

contained in the table below. If the 

Office of Personnel Management 

releases revised cost-of-living 

adjustment factors before July 1, 2004, 

we will publish them in the final rule 

and use them in determining FY 2005 

payments.

TABLE OF COST-OF-LIVING ADJUSTMENT FACTORS, ALASKA AND HAWAII

HOSPITALS

Area 

Cost of

living

adjustment

factor. 

Alaska-All areas .................. 1.25. 

Hawaii: . 

County of Honolulu ......... 1.25. 

TABLE OF COST-OF-LIVING ADJUSTMENT FACTORS, ALASKA AND HAWAII

HOSPITALS—Continued

Area 

Cost of

living

adjustment

factor. 

County of Hawaii ............. 1.165. 

County of Kauai .............. 1.2325. 

County of Maui ................ 1.2375. 

County of Kalawao .......... 1.2375 

(The above factors are based on data obtained from the U.S. Office of Personnel 

Management.) 

C. DRG Relative Weights 

As discussed in section II. of the 

preamble, we have developed a 

classification system for all hospital 

discharges, assigning them into DRGs, 

and have developed relative weights for 

each DRG that reflect the resource 

utilization of cases in each DRG relative 

to Medicare cases in other DRGs. Table 

5 of section VI. of this Addendum 

contains the relative weights that we are 

proposing to use for discharges 

occurring in FY 2005. These factors 

have been recalibrated as explained in 

section II. of the preamble of this 

proposed rule. 

D. Calculation of Proposed Prospective 

Payment Rates for FY 2005

General Formula for Calculation of 

Proposed Prospective Payment Rates for 

FY 2005

The proposed operating prospective 

payment rate for all hospitals paid 

under the IPPS located outside of Puerto 

Rico, except SCHs and MDHs, equals 

the Federal rate based on the 

corresponding amounts in Table 1A or 

Table 1B in section VI. of this 

Addendum. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28379

The proposed prospective payment 

rate for SCHs equals the higher of the 

applicable Federal rate (from Table 1A 

or Table 1B) or the hospital-specific rate 

as described below. The proposed 

prospective payment rate for MDHs 

equals the higher of the Federal rate, or 

the Federal rate plus 50 percent of the 

difference between the Federal rate and 

the hospital-specific rate as described 

below. The proposed prospective 

payment rate for Puerto Rico equals 25 

percent of the Puerto Rico rate plus 75 

percent of the applicable national rate 

from Table 1C or Table 1D in section VI. 

of this Addendum. 

1. Federal Rate 

For discharges occurring on or after 

October 1, 2004 and before October 1, 

2005, except for SCHs, MDHs, and 

hospitals in Puerto Rico, payment under 

the IPPS is based exclusively on the 

Federal rate. 

The Federal rate is determined as 

follows:

Step 1—Select the appropriate 

average standardized amount 

considering the applicable wage index 

(Table 1A for wage indexes greater than 

1.0000 and Table 1B for wage indexes 

less than or equal to 1.0000) and 

whether the hospital has submitted 

qualifying quality data (full update for 

qualifying hospitals, update minus 0.4 

percent for nonqualifying hospitals). 

Step 2—Multiply the labor-related 

portion of the standardized amount by 

the applicable wage index for the 

geographic area in which the hospital is 

located or the area to which the hospital 

is reclassified (see Tables 4A, 4B, and 

4C of section VI. of this Addendum). 

Step 3—For hospitals in Alaska and 

Hawaii, multiply the nonlabor-related 

portion of the standardized amount by 

the appropriate cost-of-living 

adjustment factor. 

Step 4—Add the amount from Step 2 

and the nonlabor-related portion of the 

standardized amount (adjusted, if 

appropriate, under Step 3). 

Step 5—Multiply the final amount 

from Step 4 by the relative weight 

corresponding to the appropriate DRG 

(see Table 5 of section VI. of this 

Addendum). 

The Federal rate as determined in 

Step 5 may then be further adjusted if 

the hospital qualifies for either the IME 

or DSH adjustment. 

2. Hospital-Specific Rate (Applicable 

Only to SCHs and MDHs) 

a. Calculation of Hospital-Specific Rate 

Section 1886(b)(3)(C) of the Act 

provides that SCHs are paid based on 

whichever of the following rates yields 

the greatest aggregate payment: the 

Federal rate; the updated hospitalspecific rate based on FY 1982 costs per 

discharge; the updated hospital-specific 

rate based on FY 1987 costs per 

discharge; or the updated hospitalspecific rate based on FY 1996 costs per 

discharge. 

Section 1886(d)(5)(G) of the Act 

provides that MDHs are paid based on 

whichever of the following rates yields 

the greatest aggregate payment: the 

Federal rate or the Federal rate plus 50 

percent of the difference between the 

Federal rate and the greater of the 

updated hospital-specific rates based on 

either FY 1982 or FY 1987 costs per 

discharge. MDHs do not have the option 

to use their FY 1996 hospital-specific 

rate. 

Hospital-specific rates have been 

determined for each of these hospitals 

based on either the FY 1982 costs per 

discharge, the FY 1987 costs per 

discharge or, for SCHs, the FY 1996 

costs per discharge. For a more detailed 

discussion of the calculation of the 

hospital-specific rates, we refer the 

reader to the September 1, 1983 interim 

final rule (48 FR 39772); the April 20, 

1990 final rule with comment (55 FR 

15150); the September 4, 1990 final rule 

(55 FR 35994); and the August 1, 2000 

final rule (65 FR 47082). In addition, for 

both SCHs and MDHs, the hospitalspecific rate is adjusted by the proposed 

budget neutrality adjustment factor (that 

is, by 0.998969) as discussed in section 

II.A.4.a. of this Addendum. The 

resulting rate would be used in 

determining the payment rate an SCH or 

MDH would receive for its discharges 

beginning on or after October 1, 2004. 

b. Updating the FY 1982, FY 1987, and 

FY 1996 Hospital-Specific Rates for FY 

2005

We are proposing to increase the 

hospital-specific rates by 3.3 percent 

(the hospital market basket percentage 

increase) for SCHs and MDHs for FY 

2005. Section 1886(b)(3)(C)(iv) of the 

Act provides that the update factor 

applicable to the hospital-specific rates 

for SCHs is equal to the update factor 

provided under section 1886(b)(3)(B)(iv) 

of the Act, which, for SCHs in FY 2005, 

is the market basket rate of increase. 

Section 1886(b)(3)(D) of the Act 

provides that the update factor 

applicable to the hospital-specific rates 

for MDHs also equals the update factor 

provided under section 1886(b)(3)(B)(iv) 

of the Act, which, for FY 2005, is the 

market basket rate of increase. 

3. General Formula for Calculation of 

Proposed Prospective Payment Rates for 

Hospitals Located in Puerto Rico 

Beginning On or After October 1, 2004 

and Before October 1, 2005

Section 504 of Public Law 108–173 

changes the current blend of 50 percent 

the Puerto Rico national prospective 

payment rate and 50 percent of the 

Puerto Rico-specific prospective 

payment rate to 62.5 percent Puerto 

Rico national and 37.5 percent Puerto 

Rico-specific effective for discharges 

occurring on or after April 1, 2004 and 

before October 1, 2004. Effective for 

discharges occurring on or after October 

1, 2004, the effective blend is 75 percent 

of the Puerto Rico national prospective 

payment rate and 25 percent of the 

Puerto Rico-specific rate. 

a. Puerto Rico Rate 

The Puerto Rico prospective payment 

rate is determined as follows: 

Step 1—Select the appropriate 

average standardized amount 

considering the applicable wage index 

(Table 1C for wage indexes greater than 

1.0000 and Table 1D for wage indexes 

less than or equal to 1.0000). 

Step 2—Multiply the labor-related 

portion of the standardized amount by 

the appropriate Puerto Rico-specific 

wage index (see Table 4F of section VI. 

of the Addendum). 

Step 3—Add the amount from Step 2 

and the nonlabor-related portion of the 

standardized amount. 

Step 4—Multiply the result in Step 3 

by 25 percent. 

Step 5—Multiply the amount from 

Step 4 by the appropriate DRG relative 

weight (see Table 5 of section VI. of the 

Addendum). 

b. National Rate 

The national prospective payment 

rate is determined as follows: 

Step 1—Select the appropriate 

average standardized amount 

considering the applicable wage index 

(Table 1C for wage indexes greater than 

1.0000 and Table 1D for wage indexes 

less than or equal to 1.0000). 

Step 2—Add the amount from Step 1 

and the nonlabor-related portion of the 

national average standardized amount. 

Step 3—Multiply the result in Step 2 

by 75 percent. 

Step 4—Multiply the amount from 

Step 3 by the appropriate DRG relative 

weight (see Table 5 of section VI. of the 

Addendum). 

The sum of the Puerto Rico rate and 

the national rate computed above equals 

the prospective payment for a given 

discharge for a hospital located in 

Puerto Rico. This rate may then be 

28380 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

further adjusted if the hospital qualifies 

for either the IME or DSH adjustment.

III. Proposed Changes to Payment Rates 

for Acute Care Hospital Inpatient 

Capital-Related Costs for FY 2005

The PPS for acute care hospital 

inpatient capital-related costs was 

implemented for cost reporting periods 

beginning on or after October 1, 1991. 

Effective with that cost reporting period, 

hospitals were paid during a 10-year 

transition period (which extended 

through FY 2001) to change the 

payment methodology for Medicare 

acute care hospital inpatient capitalrelated costs from a reasonable costbased methodology to a prospective 

methodology (based fully on the Federal 

rate). 

The basic methodology for 

determining Federal capital prospective 

rates is set forth in regulations at 

§§ 412.308 through 412.352. Below we 

discuss the factors that we are proposing 

to use to determine the capital Federal 

rate for FY 2005, which would be 

effective for discharges occurring on or 

after October 1, 2004. The 10-year 

transition period ended with hospital 

cost reporting periods beginning on or 

after October 1, 2001 (FY 2002). 

Therefore, for cost reporting periods 

beginning in FY 2002, all hospitals 

(except ‘‘new’’ hospitals under 

§§ 412.304(c)(2) and 412.324(b)) are 

paid based on 100 percent of the capital 

Federal rate. 

For FY 1992, we computed the 

standard Federal payment rate for 

capital-related costs under the IPPS by 

updating the FY 1989 Medicare 

inpatient capital cost per case by an 

actuarial estimate of the increase in 

Medicare inpatient capital costs per 

case. Each year after FY 1992, we 

update the capital standard Federal rate, 

as provided at § 412.308(c)(1), to 

account for capital input price increases 

and other factors. The regulations at 

§ 412.308(c)(2) provides that the capital 

Federal rate is adjusted annually by a 

factor equal to the estimated proportion 

of outlier payments under the capital 

Federal rate to total capital payments 

under the capital Federal rate. In 

addition, § 412.308(c)(3) requires that 

the capital Federal rate be reduced by an 

adjustment factor equal to the estimated 

proportion of payments for (regular and 

special) exception under § 412.348. 

Section 412.308(c)(4)(ii) requires that 

the capital standard Federal rate be 

adjusted so that the effects of the annual 

DRG reclassification and the 

recalibration of DRG weights and 

changes in the geographic adjustment 

factor are budget neutral. 

For FYs 1992 through 1995, § 412.352 

required that the capital Federal rate 

also be adjusted by a budget neutrality 

factor so that aggregate payments for 

inpatient hospital capital costs were 

projected to equal 90 percent of the 

payments that would have been made 

for capital-related costs on a reasonable 

cost basis during the fiscal year. That 

provision expired in FY 1996. Section 

412.308(b)(2) describes the 7.4 percent 

reduction to the capital rate that was 

made in FY 1994, and § 412.308(b)(3) 

describes the 0.28 percent reduction to 

the capital rate made in FY 1996 as a 

result of the revised policy of paying for 

transfers. In FY 1998, we implemented 

section 4402 of Public Law 105–33, 

which requires that, for discharges 

occurring on or after October 1, 1997, 

and before October 1, 2002, the 

unadjusted capital standard Federal rate 

is reduced by 17.78 percent. As we 

discussed in the August 1, 2002 IPPS 

final rule (67 FR 50102) and 

implemented in § 412.308(b)(6)), a small 

part of that reduction was restored 

effective October 1, 2002. 

To determine the appropriate budget 

neutrality adjustment factor and the 

regular exceptions payment adjustment 

during the 10-year transition period, we 

developed a dynamic model of 

Medicare inpatient capital-related costs; 

that is, a model that projected changes 

in Medicare inpatient capital-related 

costs over time. With the expiration of 

the budget neutrality provision, the 

capital cost model was only used to 

estimate the regular exceptions payment 

adjustment and other factors during the 

transition period. As we explained in 

the August 1, 2001 IPPS final rule (66 

FR 39911), beginning in FY 2003, an 

adjustment for regular exception 

payments is no longer necessary 

because regular exception payments 

were only made for cost reporting 

periods beginning on or after October 1, 

1991, and before October 1, 2001 (see 

§ 412.348(b)). Because, effective with 

cost reporting periods beginning in FY 

2002, payments are no longer being 

made under the regular exception 

policy, we no longer use the capital cost 

model. The capital cost model and its 

application during the transition period 

are described in Appendix B of the 

August 1, 2001 IPPS final rule (66 FR 

40099). 

In accordance with section 

1886(d)(9)(A) of the Act, under the IPPS 

for acute care hospital operating costs, 

hospitals located in Puerto Rico are paid 

for operating costs under a special 

payment formula. Prior to FY 1998, 

hospitals in Puerto Rico were paid a 

blended capital rate that consisted of 75 

percent of the applicable standardized 

amount specific to Puerto Rico hospitals 

and 25 percent of the applicable 

national average standardized amount. 

However, effective October 1, 1997, in 

accordance with section 4406 of Public 

Law 105–33, operating payments to 

hospitals in Puerto Rico are based on a 

blend of 50 percent of the applicable 

standardized amount specific to Puerto 

Rico hospitals and 50 percent of the 

applicable national average 

standardized amount. In conjunction 

with this change to the operating blend 

percentage, effective with discharges on 

or after October 1, 1997, we also revised 

the methodology for computing capital 

payments to hospitals in Puerto Rico 

and computing capital payments based 

on a blend of 50 percent of the Puerto 

Rico capital rate and 50 percent of the 

capital Federal rate. 

As we discuss in section VI. of this 

Addendum to the proposed rule, section 

504 of Public Law 108–173 increases the 

national portion of the operating IPPS 

payment for Puerto Rico hospitals from 

50 percent to 62.5 percent and decreases 

the Puerto Rico portion of the operating 

IPPS payments from 50 percent to 37.5 

percent for discharges occurring on or 

after April 1, 2004 through September 

30, 2004 (see the March 26, 2004 OneTime Notification (Change Request 

3158)). In addition, section 504 of 

Public Law 108–173 provides that the 

national portion of operating IPPS 

payments for Puerto Rico hospitals is 

equal to 75 percent and the Puerto Rico 

portion of operating IPPS payments is 

equal to 35 percent for discharges 

occurring on or after October 1, 2004. 

Consistent with this change in operating 

IPPS payment to hospitals in Puerto 

Rico for FY 2005, as we discuss in 

section V.B. of this Addendum to this 

proposed rule, we are proposing to 

revise methodology for computing 

capital IPPS payments to hospitals 

located in Puerto Rico. We are 

proposing that we would compute 

capital payments to hospitals located in 

Puerto Rico based on a blend of 25 

percent of the Puerto Rico capital rate 

and 75 percent of the capital Federal 

rate for discharges occurring on or after 

October 1, 2004. 

Section 412.374 provides for the use 

of a blended payment system for 

payments to Puerto Rico hospitals under 

the PPS for acute care hospital inpatient 

capital-related costs. Accordingly, under 

the capital IPPS, we compute a separate 

payment rate specific to Puerto Rico 

hospitals using the same methodology 

used to compute the national Federal 

rate for capital-related costs. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28381

A. Determination of Proposed Federal 

Hospital Inpatient Capital-Related 

Prospective Payment Rate Update 

In the final IPPS rule published in the 

Federal Register on August 1, 2003 (68 

FR 45346), we established a capital 

Federal rate of $415.47 for FY 2004. 

However, a correction notice to the FY 

2004 IPPS final rule issued in the 

Federal Register on October 6, 2003 (68 

FR 57731) contains corrections and 

revisions to the wage index and 

geographic adjustment factor (GAF). In 

conjunction with the change to the wage 

index and GAF corrections, we 

established a revised capital PPS 

standard Federal rate of $414.18 

effective for discharges occurring in FY 

2004. Furthermore, the One-Time 

Notification (Change Request 3158), 

issued on March 26, 2004, implemented 

various changes in operating IPPS 

payments required by sections 401, 402 

and 504 of Public Law 108–173. As a 

result of these changes to payments 

under the operating IPPS, the fixed loss 

amount for determining the cost outlier 

threshold was revised effective for 

discharges occurring on or after April 1, 

2004, through September 30, 2004. 

Because the regulations at § 412.312(c) 

establish a unified outlier methodology 

for inpatient operating and capitalrelated costs, a single set of thresholds 

are used to identify outlier cases under 

both the operating IPPS and the capital 

IPPS. As a result of the revision to the 

fixed loss amount used for determining 

the cost outlier threshold effective for 

discharges occurring on or after April 1, 

2004, through September 30, 2004, we 

established a new capital IPPS standard 

Federal rate of $413.48 effective for 

discharges occurring on or after April 1, 

2004, through September 30, 2004. 

Because there are two capital IPPS 

standard Federal rates in effect during 

FY 2004 ($414.18 from October 2003 

through March 2004 and $413.48 from 

April 2004 through September 2004), 

we are proposing to use an average of 

the rates effective for the first half of FY 

2004 (October 1, 2003 through March 

31, 2004) ($414.18) and the second half 

FY 2004 (April 1, 2004 through 

September 30, 2004) ($413.48) to 

determine the proposed FY 2005 capital 

Federal rate. (The proposed average is 

$413.83 (($414.18 + $413.48)/2.) As a 

result of the changes that we are 

proposing to the factors used to 

determine the proposed capital Federal 

rate that are explained in this 

Addendum, the proposed FY 2005 

capital standard Federal rate is $416.59. 

In the discussion that follows, we 

explain the factors that were used to 

determine the proposed FY 2005 capital 

Federal rate. In particular, we explain 

why the proposed FY 2005 capital 

Federal rate has increased 0.67 percent 

compared to the FY 2004 capital Federal 

rate. We also estimate aggregate capital 

payments will remain constant from FY 

2004 to FY 2005. We are projecting 

aggregate capital PPS to remain 

unchanged primarily due to a projected 

decrease in Medicare Part A (fee-forservice) admissions. We are projecting a 

decrease in Medicare Part A enrollment, 

in part, because we are projecting an 

increase in Medicare managed care 

(M+C) enrollment as a result of 

implementing several sections of Public 

Law 108–173. 

Total payments to hospitals under the 

IPPS are relatively unaffected by 

changes in the capital prospective 

payments. Since capital payments 

constitute about 10 percent of hospital 

payments, a 1-percent change in the 

capital Federal rate yields only about 

0.1 percent change in actual payments 

to hospitals. Aggregate payments under 

the capital PPS are estimated to increase 

in FY 2005 compared to FY 2004. 

1. Proposed Capital Standard Federal 

Rate Update 

a. Description of the Update Framework 

Under § 412.308(c)(1), the capital 

standard Federal rate is updated on the 

basis of an analytical framework that 

takes into account changes in a capital 

input price index (CIPI) and several 

other policy adjustment factors. 

Specifically, we have adjusted the 

projected CIPI rate of increase as 

appropriate each year for case-mix 

index-related changes, for intensity, and 

for errors in previous CIPI forecasts. The 

proposed update factor for FY 2005 

under that framework is 0.7 percent 

based on the best data available at this 

time. The proposed update factor is 

based on a projected 0.7 percent 

increase in the CIPI, a 0.0 percent 

adjustment for intensity, a 0.0 percent 

adjustment for case-mix, a 0.0 percent 

adjustment for the FY 2003 DRG 

reclassification and recalibration, and a 

forecast error correction of 0.0 percent. 

We explain the basis for the FY 2005 

CIPI projection in section III.C. of this 

Addendum. Below we describe the 

proposed policy adjustments that have 

been applied. 

The case-mix index is the measure of 

the average DRG weight for cases paid 

under the IPPS. Because the DRG weight 

determines the prospective payment for 

each case, any percentage increase in 

the case-mix index corresponds to an 

equal percentage increase in hospital 

payments. 

The case-mix index can change for 

any of several reasons:

• The average resource use of 

Medicare patients changes (‘‘real’’ casemix change); 

• Changes in hospital coding of 

patient records result in higher weight 

DRG assignments (‘‘coding effects’’); and 

• The annual DRG reclassification 

and recalibration changes may not be 

budget neutral (‘‘reclassification 

effect’’). 

We define real case-mix change as 

actual changes in the mix (and resource 

requirements) of Medicare patients as 

opposed to changes in coding behavior 

that result in assignment of cases to 

higher weighted DRGs but do not reflect 

higher resource requirements. In the 

update framework for the PPS for 

operating costs, we adjust the update 

upwards to allow for real case-mix 

change, but remove the effects of coding 

changes on the case-mix index. We also 

remove the effect on total payments of 

prior year changes to the DRG 

classifications and relative weights, in 

order to retain budget neutrality for all 

case-mix index-related changes other 

than patient severity. (For example, we 

adjusted for the effects of the FY 2003 

DRG reclassification and recalibration as 

part of our update for FY 2005.) We 

have adopted this case-mix index 

adjustment in the capital update 

framework as well. 

For FY 2005, we are projecting a 1.0 

percent total increase in the case-mix 

index. We estimate that the real casemix increase would equal 1.0 percent in 

FY 2005. The net adjustment for change 

in case-mix is the difference between 

the projected total increase in case-mix 

and the projected increase in real casemix change. Therefore, the net 

adjustment for case-mix change in FY 

2005 is 0.0 percentage points. 

We estimate that FY 2003 DRG 

reclassification and recalibration would 

result in a 0.0 percent change in the 

case-mix when compared with the casemix index that would have resulted if 

we had not made the reclassification 

and recalibration changes to the DRGs. 

Therefore, we are making a 0.0 percent 

adjustment for DRG reclassification and 

recalibration in the update for FY 2005 

to maintain budget neutrality. 

The capital update framework 

contains an adjustment for forecast 

error. The input price index forecast is 

based on historical trends and 

relationships ascertainable at the time 

the update factor is established for the 

upcoming year. In any given year, there 

may be unanticipated price fluctuations 

that may result in differences between 

the actual increase in prices and the 

forecast used in calculating the update 

28382 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

factors. In setting a prospective payment 

rate under the framework, we make an 

adjustment for forecast error only if our 

estimate of the change in the capital 

input price index for any year is off by 

0.25 percentage points or more. There is 

a 2-year lag between the forecast and the 

measurement of the forecast error. A 

forecast error of 0.0 percentage points 

was calculated for the FY 2003 update. 

That is, current historical data indicate 

that the forecasted FY 2003 CIPI used in 

calculating the FY 2003 update factor 

(0.7 percent) slightly overstated the 

actual realized price increases (0.6 

percent) by 0.1 percentage points. This 

slight overprediction was mostly due to 

an underestimation of the interest rate 

cuts by the Federal Reserve Board in 

2003, which impacted the interest 

component of the CIPI. However, since 

this estimation of the change in the CIPI 

is less than 0.25 percentage points, it is 

not reflected in the update 

recommended under this framework. 

Therefore, we are making a 0.0 percent 

adjustment for forecast error in the 

update for FY 2005. 

Under the capital PPS system 

framework, we also make an adjustment 

for changes in intensity. We calculate 

this adjustment using the same 

methodology and data that are used in 

the framework for the operating PPS. 

The intensity factor for the operating 

update framework reflects how hospital 

services are utilized to produce the final 

product, that is, the discharge. This 

component accounts for changes in the 

use of quality-enhancing services, for 

changes in within-DRG severity, and for 

expected modification of practice 

patterns to remove noncost-effective 

services. 

We calculate case-mix constant 

intensity as the change in total charges 

per admission, adjusted for price level 

changes (the CPI for hospital and related 

services) and changes in real case-mix. 

The use of total charges in the 

calculation of the intensity factor makes 

it a total intensity factor, that is, charges 

for capital services are already built into 

the calculation of the factor. Therefore, 

we have incorporated the intensity 

adjustment from the operating update 

framework into the capital update 

framework. Without reliable estimates 

of the proportions of the overall annual 

intensity increases that are due, 

respectively, to ineffective practice 

patterns and to the combination of 

quality-enhancing new technologies and 

within-DRG complexity, we assume, as 

in the operating update framework, that 

one-half of the annual increase is due to 

each of these factors. The capital update 

framework thus provides an add-on to 

the input price index rate of increase of 

one-half of the estimated annual 

increase in intensity, to allow for 

within-DRG severity increases and the 

adoption of quality-enhancing 

technology.

We have developed a Medicarespecific intensity measure based on a 5-

year average. Past studies of case-mix 

change by the RAND Corporation (‘‘Has 

DRG Creep Crept Up? Decomposing the 

Case Mix Index Change Between 1987 

and 1988’’ by G. M. Carter, J. P. 

Newhouse, and D. A. Relles, R–4098–

HCFA/ProPAC (1991)) suggest that real 

case-mix change was not dependent on 

total change, but was usually a fairly 

steady 1.0 to 1.4 percent per year. We 

use 1.4 percent as the upper bound 

because the RAND study did not take 

into account that hospitals may have 

induced doctors to document medical 

records more completely in order to 

improve payment. 

We calculate case-mix constant 

intensity as the change in total charges 

per admission, adjusted for price level 

changes (the CPI for hospital and related 

services), and changes in real case-mix. 

As we noted above, in accordance with 

§ 412.308(c)(1)(ii), we began updating 

the capital standard Federal rate in FY 

1996 using an update framework that 

takes into account, among other things, 

allowable changes in the intensity of 

hospital services. For FYs 1996 through 

2001, we found that case-mix constant 

intensity was declining and we 

established a 0.0 percent adjustment for 

intensity in each of those years. For FYs 

2001 and 2002, we found that case-mix 

constant intensity was increasing and 

we established a 0.3 percent adjustment 

and 1.0 percent adjustment for intensity, 

respectively. 

Using the methodology described 

above, for FY 2005 we examined the 

change in total charges per admission, 

adjusted for price level changes (the CPI 

for hospital and related services), and 

changes in real case-mix for FYs 1999 

through 2003. We found that, over this 

period and in particular the last 4 years 

of this period (FYs 2000 through 2003), 

the charge data appear to be skewed. 

More specifically, we found a dramatic 

increase in hospital charges for FYs 

2000 through 2003 without a 

corresponding increase in hospital casemix index. These findings are similar to 

the considerable increase in hospitals 

charges we found when we were 

determining the intensity factor in the 

FY 2004 update recommendation as 

discussed in the August 1, 2003 final 

rule (69 FR 45482). If hospitals were 

treating new or different types of cases, 

which would result in an appropriate 

increase in charges per discharge, then 

we would expect hospitals’ case-mix to 

increase proportionally. 

As we discussed in the August 1, 

2003 final rule (68 FR 45482), because 

our intensity calculation relies heavily 

upon charge data and we believe that 

this charge data may be inappropriately 

skewed, we established a 0.0 percent 

adjustment for intensity for FY 2004. In 

that same final rule, we stated that we 

believe that it is appropriate to propose 

a zero intensity adjustment until we 

believe that any increase in charges can 

be tied to intensity rather then to 

attempts to maximize outlier payments. 

As discussed above, based on the most 

recent available data, we believe that the 

charge data used to make this 

determination may still be 

inappropriately skewed. Since our 

intensity calculation relies heavily upon 

charge data (which may be 

inappropriately skewed), we are 

proposing a 0.0 percent adjustment for 

intensity for FY 2005 in this proposed 

rule. We note that, in past FYs (1996 

through 2000) when we found intensity 

to be declining, we believed a zero 

(rather then negative) intensity 

adjustment was appropriate. Similarly, 

we believe that it is appropriate to 

propose a zero intensity adjustment for 

FY 2005 until we believe that any 

increase in charges can be tied to 

intensity rather than to attempts to 

maximize outlier payments. 

Above we described the basis of the 

components used to develop the 

proposed 0.7 percent capital update 

factor for FY 2005 as shown in the table 

below.

CMS’S PROPOSED FY 2005 UPDATE

FACTOR TO THE CAPITAL FEDERAL

RATE

Capital Input Price Index .................. 0.7. 

Intensity ............................................ 0.0. 

Case-Mix Adjustment Factors:. 

Projected Case-Mix Change ......... 1.0 

Real Across DRG Change ............ ¥1.0. 

Subtotal ..................................... 0.0. 

Effect of FY 2003 Reclassification 

and Recalibration .......................... 0.0 

Forecast Error Correction ................. 0.0. 

Total Proposed Update ................. 0.7 

b. Comparison of CMS and MedPAC 

Update Recommendation 

In the past, MedPAC has included 

update recommendations for capital 

PPS in a Report to Congress. In its 

March 2004 Report to Congress, 

MedPAC did not make an update 

recommendation for capital PPS 

payments for FY 2005. However, in that 

same report, MedPAC made an update 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28383

recommendation for hospital inpatient 

and outpatient services (page 87). 

MedPAC reviews inpatient and 

outpatient services together since they 

are so closely interrelated. MedPAC’s 

recommendation of the full market 

basket update for both the inpatient and 

outpatient PPSs is based on their 

assessment of beneficiaries’ access to 

care, volume growth, access to capital, 

quality, and the relationship of 

Medicare payments to costs in the 

hospital sector.

2. Outlier Payment Adjustment Factor 

Section 412.312(c) establishes a 

unified outlier methodology for 

inpatient operating and inpatient 

capital-related costs. A single set of 

thresholds is used to identify outlier 

cases for both inpatient operating and 

inpatient capital-related payments. 

Section 412.308(c)(2) provides that the 

standard Federal rate for inpatient 

capital-related costs be reduced by an 

adjustment factor equal to the estimated 

proportion of capital related outlier 

payments to total inpatient capitalrelated PPS payments. The outlier 

thresholds are set so that operating 

outlier payments are projected to be 5.1 

percent of total operating DRG 

payments. 

In the August 1, 2003 IPPS final rule 

(68 FR 45482), we estimated that outlier 

payments for capital in FY 2004 would 

equal 4.79 percent of inpatient capitalrelated payments based on the FY 2004 

capital Federal rate. Accordingly, we 

applied an outlier adjustment factor of 

0.9521 to the FY 2004 capital Federal 

rate. However, as we noted above, we 

published a correction notice in the 

Federal Register on October 6, 2003 (68 

FR 57731), which established revised 

rates and factors for FY 2004. In that 

same correction notice (68 FR 57734), 

we estimated that outlier payments for 

capital in FY 2004 would equal 4.77 

percent of inpatient capital-related 

payments based on the FY 2004 capital 

Federal rate. Accordingly, we 

established a revised outlier adjustment 

of 0.9523 for use in determining the FY 

2004 capital Federal rate. In addition, as 

we noted above, a One-Time 

Notification (Change Request 3158) 

issued on March 26, 2004, implemented 

various changes in operating IPPS 

payments required by sections 401, 402, 

and 504 of Public Law 108–173, 

effective for discharges on or after April 

1, 2004, through September 30, 2004. As 

a result of changes made to payments 

under the operating IPPS, the rates and 

some of the factors, including the outlier 

adjustment, under the capital IPPS were 

also revised effective for discharges on 

or after April 1, 2004, through 

September 30, 2004. The revised outlier 

adjustment effective for the second half 

of FY 2004 (April 2004 through 

September 2004) is 0.9508. 

Based on the thresholds as set forth in 

section II.A.4.c. of this Addendum, we 

estimate that outlier payments for 

capital would equal 5.03 percent of 

inpatient capital-related payments based 

on the proposed capital Federal rate in 

FY 2005. Therefore, we are proposing an 

outlier adjustment factor of 0.9497 to 

the capital Federal rate. Thus, the 

percentage of capital outlier payments 

to total capital standard payments for 

FY 2005 is higher than the percentages 

estimated for the first half (4.77 percent 

for October 2003 through March 2004) 

and the second half (4.92 percent for 

April 2004 through September 2004) of 

FY 2004. 

The outlier reduction factors are not 

built permanently into the capital rates; 

that is, they are not applied 

cumulatively in determining the capital 

Federal rate. As we discussed above, 

there were two outlier adjustment 

factors applied during FY 2004 (0.9523 

from October 2003 through March 2004 

and 0.9508 from April 2004 through 

September 2004). The proposed FY 

2005 outlier adjustment of 0.9497 is a 

–0.19 percent change from the average 

FY 2004 outlier adjustment of 0.9515 

(the mean of the factors for the first half 

of FY 2004 (0.9523) and the second half 

of FY 2004 (0.9508) calculated from 

unrounded numbers). The proposed net 

change in the outlier adjustment to the 

capital Federal rate for FY 2005 is 

0.9981 (0.9497/0.9515). Thus, the 

proposed outlier adjustment decreases 

the FY 2005 capital Federal rate by 0.19 

percent compared with the average FY 

2004 outlier adjustment. 

3. Budget Neutrality Adjustment Factor 

for Changes in DRG Classifications and 

Weights and the Geographic Adjustment 

Factor 

Section 412.308(c)(4)(ii) requires that 

the capital Federal rate be adjusted so 

that aggregate payments for the fiscal 

year based on the capital Federal rate 

after any changes resulting from the 

annual DRG reclassification and 

recalibration and changes in the 

geographic adjustment factor (GAF) are 

projected to equal aggregate payments 

that would have been made on the basis 

of the capital Federal rate without such 

changes. 

Since we implemented a separate 

geographic adjustment factor for Puerto 

Rico, we apply separate budget 

neutrality adjustments for the national 

geographic adjustment factor and the 

Puerto Rico geographic adjustment 

factor. We apply the same budget 

neutrality factor for DRG 

reclassifications and recalibration 

nationally and for Puerto Rico. Separate 

adjustments were unnecessary for FY 

1998 and earlier fiscal years since the 

geographic adjustment factor for Puerto 

Rico was implemented in FY 1998. 

In the past, we used the actuarial 

capital cost model (described in 

Appendix B of the August 1, 2001 IPPS 

final rule (66 FR 40099)) to estimate the 

aggregate payments that would have 

been made on the basis of the capital 

Federal rate with and without changes 

in the DRG classifications and weights 

and in the GAF to compute the 

adjustment required to maintain budget 

neutrality for changes in DRG weights 

and in the GAF. During the transition 

period, the capital cost model was also 

used to estimate the regular exception 

payment adjustment factor. As we 

explain in section III.A.4. of this 

Addendum, beginning in FY 2002, an 

adjustment for regular exception 

payments is no longer necessary. 

Therefore, we are no longer using the 

capital cost model. Instead, we are using 

historical data based on hospitals’ actual 

cost experiences to determine the 

exceptions payment adjustment factor 

for special exceptions payments. 

To determine the proposed factors for 

FY 2005, we compared (separately for 

the national capital rate and the Puerto 

Rico capital rate) estimated aggregate 

capital Federal rate payments based on 

the FY 2004 DRG relative weights and 

the average FY 2004 GAF (that is, the 

mean of the GAFs applied from October 

2003 through March 2004 and the GAFs 

applied from April 2004 through 

September 2004) to estimated aggregate 

capital Federal rate payments based on 

the proposed FY 2005 relative weights 

and the proposed FY 2005 GAF. For the 

first half of FY 2004 (October 1, 2003 

through March 31, 2004), the budget 

neutrality adjustment factors were 

0.9908 for the national capital rate and 

0.9974 for the Puerto Rico capital rate 

(see the October 6, 2003 correction 

notice). For the second half of FY 2004 

(April 1, 2004 through September 30, 

2004), the budget neutrality adjustment 

factor was revised to 0.9907 for the 

national capital rate. The budget 

neutrality factor for the Puerto Rico 

capital rate remained unchanged 

(0.9974). In making the comparison, we 

set the regular and special exceptions 

reduction factors to 1.00. 

To achieve budget neutrality for the 

changes in the national GAF, based on 

calculations using updated data, we are 

proposing to apply an incremental 

budget neutrality adjustment of 1.0018 

for FY 2005 to the average of the 

previous cumulative FY 2004 

28384 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

adjustments of 0.9908 ((0.99083 + 

0.99072)/2), yielding a proposed 

cumulative adjustment of 0.9925 

through FY 2005 (calculations were 

done with unrounded numbers). For the 

Puerto Rico GAF, we are proposing to 

apply an incremental budget neutrality 

adjustment of 0.9989 for FY 2005 to the 

average of the previous cumulative FY 

2004 adjustment of 0.9974, yielding a 

proposed cumulative adjustment of 

0.9963 through FY 2005. 

We then compared estimated 

aggregate capital Federal rate payments 

based on the FY 2004 DRG relative 

weights and the average FY 2004 GAF 

to estimated aggregate capital Federal 

rate payments based on the proposed FY 

2005 DRG relative weights and the 

proposed FY 2005 GAF. The proposed 

incremental adjustment for DRG 

classifications and changes in relative 

weights is 0.9997 both nationally and 

for Puerto Rico. The proposed 

cumulative adjustments for DRG 

classifications and changes in relative 

weights and for changes in the GAF 

through FY 2005 are 0.9922 nationally 

and 0.9960 for Puerto Rico. The 

following table summarizes the 

adjustment factors for each fiscal year: 

BILLING CODE 4120–03–U

BILLING CODE 4120–03–C 

The methodology used to determine 

the proposed recalibration and 

geographic (DRG/GAF) budget 

neutrality adjustment factor for FY 2005 

is similar to that used in establishing 

budget neutrality adjustments under the 

PPS for operating costs. One difference 

is that, under the operating PPS, the 

budget neutrality adjustments for the 

effect of geographic reclassifications are 

determined separately from the effects 

of other changes in the hospital wage 

index and the DRG relative weights. 

Under the capital PPS, there is a single 

DRG/GAF budget neutrality adjustment 

factor (the national capital rate and the 

Puerto Rico capital rate are determined 

separately) for changes in the GAF 

(including geographic reclassification) 

and the DRG relative weights. In 

addition, there is no adjustment for the 

effects that geographic reclassification 

has on the other payment parameters, 

such as the payments for serving lowincome patients, indirect medical 

education payments, or the large urban 

add-on payments. 


EP18MY04.407</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28385

In the August 1, 2003 IPPS final rule 

(68 FR 45346), we calculated a GAF/

DRG budget neutrality factor of 1.00591 

for FY 2004. As we noted above, as a 

result of the revisions to the GAF 

effective for FY 2004 in the October 6, 

2003 correction notice, we calculated a 

GAF/DRG budget neutrality factor of 

1.00256 for discharges occurring in FY 

2004. As we also noted above, as a 

result of implementing sections 401, 

402, and 504 of Public Law 108–173, we 

calculated a GAF/DRG budget neutrality 

factor of 1.00245 for discharges 

occurring on or after April 1, 2004 

through September 30, 2004. 

Furthermore, as noted above, the 

average of capital rates and factors in 

effect for the first half (October 2003 

through March 2004) and second half 

(April 2004 through September 2004) of 

FY 2004 was used in determining the 

FY 2005 capital rates. 

For FY 2005, we are proposing a GAF/

DRG budget neutrality factor of 1.0015. 

The GAF/DRG budget neutrality factors 

are built permanently into the capital 

rates; that is, they are applied 

cumulatively in determining the capital 

Federal rate. This follows from the 

requirement that estimated aggregate 

payments each year be no more or less 

than they would have been in the 

absence of the annual DRG 

reclassification and recalibration and 

changes in the GAF. The proposed 

incremental change in the adjustment 

from FY 2004 to FY 2005 is 1.0015. The 

proposed cumulative change in the 

capital Federal rate due to this 

adjustment is 0.9922 (the product of the 

incremental factors for FY 1993, FY 

1994, FY 1995, FY 1996, FY 1997, FY 

1998, FY 1999, FY 2000, FY 2001, FY 

2002, FY 2003, average FY 2004 and the 

proposed incremental factor for FY 

2005: 0.9980 × 1.0053 × 0.9998 × 0.9994 

× 0.9987 × 0.9989 × 1.0028 × 0.9985 ×

0.9979 × 0.9934 × 0.9956 × 1.0025 ×

1.0015=0.9922). 

This proposed factor accounts for 

DRG reclassifications and recalibration 

and for changes in the GAF. It also 

incorporates the effects on the GAF of 

FY 2005 geographic reclassification 

decisions made by the MGCRB 

compared to FY 2004 decisions. 

However, it does not account for 

changes in payments due to changes in 

the DSH and IME adjustment factors or 

in the large urban add-on. 

4. Exceptions Payment Adjustment 

Factor 

Section 412.308(c)(3) requires that the 

capital standard Federal rate be reduced 

by an adjustment factor equal to the 

estimated proportion of additional 

payments for both regular exceptions 

and special exceptions under § 412.348 

relative to total capital PPS payments. In 

estimating the proportion of regular 

exception payments to total capital PPS 

payments during the transition period, 

we used the actuarial capital cost model 

originally developed for determining 

budget neutrality (described in 

Appendix B of the August 1, 2001 IPPS 

final rule (66 FR 40099)) to determine 

the exceptions payment adjustment 

factor, which was applied to both the 

Federal and hospital-specific capital 

rates. 

An adjustment for regular exception 

payments is no longer necessary in 

determining the FY 2005 capital Federal 

rate because, in accordance with 

§ 412.348(b), regular exception 

payments were only made for cost 

reporting periods beginning on or after 

October 1, 1991 and before October 1, 

2001. Accordingly, as we explained in 

the August 1, 2001 IPPS final rule (66 

FR 39949), in FY 2002 and subsequent 

fiscal years, no payments will be made 

under the regular exceptions provision. 

However, in accordance with 

§ 412.308(c), we still need to compute a 

budget neutrality adjustment for special 

exception payments under § 412.348(g). 

We describe our methodology for 

determining the special exceptions 

adjustment used in calculating the FY 

2005 capital Federal rate below. 

Under the special exceptions 

provision specified at § 412.348(g)(1), 

eligible hospitals include SCHs, urban 

hospitals with at least 100 beds that 

have a disproportionate share 

percentage of at least 20.2 percent or 

qualify for DSH payments under 

§ 412.106(c)(2), and hospitals with a 

combined Medicare and Medicaid 

inpatient utilization of at least 70 

percent. An eligible hospital may 

receive special exceptions payments if it 

meets (1) a project need requirement as 

described at § 412.348(g)(2), which, in 

the case of certain urban hospitals, 

includes an excess capacity test as 

described at § 412.348(g)(4); (2) an age of 

assets test as described at 

§ 412.348(g)(3); and (3) a project size 

requirement as described at 

§ 412.348(g)(5). 

Based on information compiled from 

our fiscal intermediaries, six hospitals 

have qualified for special exceptions 

payments under § 412.348(g). Since we 

have cost reports ending in FY 2003 for 

all of these hospitals, we calculated the 

proposed adjustment based on actual 

cost experience. Using data from cost 

reports ending in FY 2003 from the 

March 2004 update of the HCRIS data, 

we divided the capital special 

exceptions payment amounts for the six 

hospitals that qualified for special 

exceptions by the total capital PPS 

payment amounts (including special 

exception payments) for all hospitals. 

Based on the data from cost reports 

ending in FY 2003, this ratio is rounded 

to 0.0004. Because we have not received 

all cost reports ending in FY 2003, we 

also divided the FY 2003 special 

exceptions payments by the total capital 

PPS payment amounts for all hospitals 

with cost reports ending in FY 2002. 

This ratio also rounds to 0.0004. 

Because special exceptions are budget 

neutral, we are proposing to offset the 

capital Federal rate by 0.04 percent for 

special exceptions payments for FY 

2005. Therefore, the proposed 

exceptions adjustment factor is equal to 

0.9996 (1–0.0004) to account for special 

exceptions payments in FY 2005. 

In the August 1, 2003 IPPS final rule 

(68 FR 45384) for FY 2004, we estimated 

that total (special) exceptions payments 

would equal 0.05 percent of aggregate 

payments based on the capital Federal 

rate. Therefore, we applied an 

exceptions adjustment factor of 0.9995 

(1–0.0005) in determining the FY 2004 

capital Federal rate. (We note that the 

special exceptions adjustment factor for 

FY 2004 was not revised in either the 

October 6, 2003 correction notice or the 

March 26, 2004 One-Time Notification.) 

As we stated above, we estimate that 

exceptions payments in FY 2005 would 

equal 0.04 percent of aggregate 

payments based on the FY 2005 capital 

Federal rate. Therefore, we are 

proposing to apply an exceptions 

payment adjustment factor of 0.9996 to 

the capital Federal rate for FY 2005. The 

proposed exceptions adjustment factor 

for FY 2005 is 0.01 percent higher than 

the factor for FY 2004 published in the 

August 1, 2003 IPPS final rule (68 FR 

45346). The exceptions reduction 

factors are not built permanently into 

the capital rates; that is, the factors are 

not applied cumulatively in 

determining the capital Federal rate. 

Therefore, the proposed net change in 

the exceptions adjustment factor used in 

determining the proposed FY 2005 

capital Federal rate is 1.0001 (0.9996/

0.9995). 

5. Proposed Capital Standard Federal 

Rate for FY 2005

In the August 1, 2003 IPPS final rule 

(68 FR 45346) we established a capital 

Federal rate of $415.47 for FY 2004. As 

we noted above, as a result of the 

revisions to the GAF for FY 2004, in the 

October 6, 2003 correction notice, we 

established a capital Federal rate of 

$414.18 for discharges occurring in FY 

2004. As we also discussed above, a 

One-Time Notification issued on March 

26, 2004, which implemented various 

28386 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

changes in operating IPPS payments 

required by sections 401, 402, and 504 

of Public Law 108–173, resulted in a 

revised capital Federal rate of $413.48 

effective for discharges occurring on or 

after April 1, 2004 through September 

30, 2004. Because there are two capital 

IPPS standard Federal rates in effect 

during FY 2004 ($414.18 from October 

2003 through March 2004 and $413.48 

from April 2004 through September 

2004), we are proposing to use an 

average of the rates effective for the first 

half ($414.18) and the second half 

($413.48) of FY 2004 of $413.83 

(($414.18 + $413.48)/2) in determining 

the proposed FY 2005 capital Federal 

rate. In this proposed rule, we are 

proposing to establish a capital Federal 

rate of $416.59 for FY 2005. The 

proposed capital Federal rate for FY 

2005 was calculated as follows:

• The proposed FY 2005 update 

factor is 1.007; that is, the update is 0.7 

percent. 

• The proposed FY 2005 budget 

neutrality adjustment factor that is 

applied to the capital standard Federal 

payment rate for changes in the DRG 

relative weights and in the GAF is 

1.0015. 

• The proposed FY 2005 outlier 

adjustment factor is 0.9497. 

• The proposed FY 2005 (special) 

exceptions payment adjustment factor is 

0.9996. 

Because the proposed capital Federal 

rate has already been adjusted for 

differences in case-mix, wages, cost-ofliving, indirect medical education costs, 

and payments to hospitals serving a 

disproportionate share of low-income 

patients, we are proposing to make no 

additional adjustments in the capital 

standard Federal rate for these factors, 

other than the budget neutrality factor 

for changes in the DRG relative weights 

and the GAF. 

We are providing a chart that shows 

how each of the proposed factors and 

adjustments for FY 2005 affected the 

computation of the proposed FY 2005 

capital Federal rate in comparison to the 

average FY 2004 capital Federal rate. 

The proposed FY 2005 update factor has 

the effect of increasing the capital 

Federal rate by 0.70 percent compared 

to the average FY 2004 Federal rate. The 

proposed GAF/DRG budget neutrality 

factor has the effect of increasing the 

capital Federal rate by 0.15 percent. The 

proposed FY 2005 outlier adjustment 

factor has the effect of decreasing the 

capital Federal rate by 0.19 percent 

compared to the average FY 2004 capital 

Federal rate and the proposed FY 2005 

exceptions payment adjustment factor 

has the effect of increasing the capital 

Federal rate by 0.01 percent compared 

to the exceptions payment adjustment 

factor for the FY 2004 capital Federal 

rate. The combined effect of all the 

proposed changes is to increase the 

capital Federal rate by 0.67 percent 

compared to the average FY 2004 capital 

Federal rate.

COMPARISON OF FACTORS AND ADJUSTMENTS: FY 2004 CAPITAL FEDERAL RATE 1 AND PROPOSED FY 2005 CAPITAL

FEDERAL RATE

FY 2004 1 Proposed FY 

2005 Change Percent change 

Update factor 2 ............................................................................................................. 1.0070 1.0070 1.0070 0.70

GAF/DRG Adjustment Factor 2 .................................................................................... 1.0025 1.0015 1.0015 0.15

Outlier Adjustment Factor 3 .......................................................................................... 0.9515 0.9497 0.9981 ¥0.19

Exceptions Adjustment Factor 3 ................................................................................... 0.9995 0.9996 1.0001 0.01

Capital Federal Rate .................................................................................................... $413.83 $416.59 1.0067 0.67

1Because there are two capital IPPS standard Federal rates in effect during FY 2004 ($414.18 from October 2003 through March 2004 and 

$413.48 from April 2004 through September 2004), an average of the rates and factors effective for the first half (October 2003 through March 

2004) and the second half (April 2004 through September 2004)) of FY 2004 were used. 2The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates. Thus, for example, the incremental 

change from FY 2004 to FY 2005 resulting from the application of the proposed 1.0015 GAF/DRG budget neutrality factor for FY 2005 is 1.0015. 3The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital rates; that is, these factors are not 

applied cumulatively in determining the capital rates. Thus, for example, the net change resulting from the application of the proposed FY 2005 

outlier adjustment factor is 0.9497/0.9515, or 0.9981. 

6. Special Capital Rate for Puerto Rico 

Hospitals 

As discussed above, beginning in FY 

1998, hospitals in Puerto Rico are 

currently paid based on 50 percent of 

the Puerto Rico capital rate and 50 

percent of the capital Federal rate. The 

Puerto Rico capital rate is derived from 

the costs of Puerto Rico hospitals only, 

while the capital Federal rate is derived 

from the costs of all acute care hospitals 

participating in the PPS (including 

Puerto Rico). Section 504 of Public Law 

108–173 increases the national portion 

of the operating IPPS payment for 

Puerto Rico hospitals from 50 percent to 

75 percent and decreases the Puerto 

Rico portion of the operating IPPS 

payments for hospitals located in Puerto 

Rico from 50 percent to 37.5 percent for 

discharges occurring on or after April 1, 

2004, through September 30, 2004. In 

addition, section 504 of Public Law 

108–173 provides that the national 

portion of operating IPPS payments for 

Puerto Rico hospitals is equal to 75 

percent and the Puerto Rico portions of 

the operating IPPS payments is equal to 

37.5 percent for discharges occurring on 

or after October 1, 2004. As discussed in 

section V.B. of the preamble of this 

proposed rule, under the broad 

authority of section 1886(g) of the Act, 

we are proposing for FY 2005 to 

increase the national portion of the 

capital IPPS payment to hospitals 

located in Puerto Rico from 50 percent 

to 75 percent, as well. Therefore, for 

discharges occurring on or after October 

1, 2004, capital payments to hospitals in 

Puerto Rico would be based on a blend 

of 25 percent of the Puerto Rico capital 

rate and 75 percent of the capital 

Federal rate. 

To adjust hospitals’ capital payments 

for geographic variations in capital 

costs, we apply a GAF to both portions 

of the blended capital rate. The GAF is 

calculated using the operating PPS wage 

index and varies, depending on the 

MSA or rural area in which the hospital 

is located. We use the Puerto Rico wage 

index to determine the GAF for the 

Puerto Rico part of the capital-blended 

rate and the national wage index to 

determine the GAF for the national part 

of the blended capital rate. 

Because we implemented a separate 

GAF for Puerto Rico in FY 1998, we also 

apply separate budget neutrality 

adjustments for the national GAF and 

for the Puerto Rico GAF. However, we 

apply the same budget neutrality factor 

for DRG reclassifications and 

recalibration nationally and for Puerto 

Rico. As we stated above in section 

III.A.4. of this Addendum, for Puerto 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28387

Rico the proposed GAF budget 

neutrality factor is 0.9989, while the 

proposed DRG adjustment is 0.9997, for 

a proposed combined cumulative 

adjustment of 0.9960. 

In computing the payment for a 

particular Puerto Rico hospital, the 

Puerto Rico portion of the capital rate 

(currently 50 percent; 25 percent 

proposed for FY 2005 and thereafter) is 

multiplied by the Puerto Rico-specific 

GAF for the MSA in which the hospital 

is located, and the national portion of 

the capital rate (currently 50 percent; 75 

percent proposed for FY 2005 and 

thereafter) is multiplied by the national 

GAF for the MSA in which the hospital 

is located (which is computed from 

national data for all hospitals in the 

United States and Puerto Rico). In FY 

1998, we implemented a 17.78 percent 

reduction to the Puerto Rico capital rate 

as a result of Public Law 105–33. In FY 

2003, a small part of that reduction was 

restored. 

For FY 2004, before application of the 

GAF, the special capital rate for Puerto 

Rico hospitals was $203.17 for 

discharges occurring on or after October 

1, 2003 through March 31, 2004 (see the 

October 6, 2003 correction notice) and 

$202.96 for discharges occurring on or 

after April 1, 2004 through September 

30, 2004 (see the March 26, 2004 OneTime Notification). With the changes we 

are proposing to the factors used to 

determine the capital rate, the proposed 

FY 2005 special capital rate for Puerto 

Rico is $200.52. 

B. Calculation of Inpatient CapitalRelated Prospective Payments for FY 

2005

Because the 10-year capital PPS 

transition period ended in FY 2001, all 

hospitals (except ‘‘new’’ hospitals under 

§ 412.324(b) and under § 412.304(c)(2)) 

are paid based on 100 percent of the 

capital Federal rate in FY 2005. The 

applicable proposed capital Federal rate 

was determined by making adjustments 

as follows: 

• For outliers, by dividing the 

proposed capital standard Federal rate 

by the proposed outlier reduction factor 

for that fiscal year; and 

• For the payment adjustments 

applicable to the hospital, by 

multiplying the hospital’s proposed 

GAF, disproportionate share adjustment 

factor, and IME adjustment factor, when 

appropriate. 

For purposes of calculating payments 

for each discharge during FY 2005, the 

capital standard Federal rate is adjusted 

as follows: (Standard Federal Rate) ×

(DRG weight) × (GAF) × (Large Urban 

Add-on, if applicable) × (COLA 

adjustment for hospitals located in 

Alaska and Hawaii) × (1 + 

Disproportionate Share Adjustment 

Factor + IME Adjustment Factor, if 

applicable). The result is the adjusted 

capital Federal rate. 

Hospitals also may receive outlier 

payments for those cases that qualify 

under the thresholds established for 

each fiscal year. Section 412.312(c) 

provides for a single set of thresholds to 

identify outlier cases for both inpatient 

operating and inpatient capital-related 

payments. The proposed outlier 

thresholds for FY 2005 are in section 

II.A.4.c. of this Addendum. For FY 

2005, a case qualifies as a cost outlier if 

the cost for the case plus the IME and 

DSH payments is greater than the 

prospective payment rate for the DRG 

plus $35,085. 

An eligible hospital may also qualify 

for a special exceptions payment under 

§ 412.348(g) for up through the 10th 

year beyond the end of the capital 

transition period if it meets: (1) a project 

need requirement described at 

§ 412.348(g)(2), which in the case of 

certain urban hospitals includes an 

excess capacity test as described at 

§ 412.348(g)(4); and (2) a project size 

requirement as described at 

§ 412.348(g)(5). Eligible hospitals 

include sole community hospitals, 

urban hospitals with at least 100 beds 

that have a DSH patient percentage of at 

least 20.2 percent or qualify for DSH 

payments under § 412.106(c)(2), and 

hospitals that have a combined 

Medicare and Medicaid inpatient 

utilization of at least 70 percent. Under 

§ 412.348(g)(8), the amount of a special 

exceptions payment is determined by 

comparing the cumulative payments 

made to the hospital under the capital 

PPS to the cumulative minimum 

payment level. This amount is offset by: 

(1) Any amount by which a hospital’s 

cumulative capital payments exceed its 

cumulative minimum payment levels 

applicable under the regular exceptions 

process for cost reporting periods 

beginning during which the hospital has 

been subject to the capital PPS; and (2) 

any amount by which a hospital’s 

current year operating and capital 

payments (excluding 75 percent of 

operating DSH payments) exceed its 

operating and capital costs. Under 

§ 412.348(g)(6), the minimum payment 

level is 70 percent for all eligible 

hospitals.

During the transition period, new 

hospitals (as defined under § 412.300) 

were exempt from the capital PPS for 

their first 2 years of operation and were 

paid 85 percent of their reasonable costs 

during that period. Effective with the 

third year of operation through the 

remainder of the transition period, 

under § 412.324(b) we paid the hospital 

under the appropriate transition 

methodology. If the hold-harmless 

methodology were applicable, the holdharmless payment for assets in use 

during the base period would extend for 

8 years, even if the hold-harmless 

payments extend beyond the normal 

transition period. As discussed in 

section VI.A. of the preamble of this 

proposed rule, under § 412.304(c)(2), for 

cost reporting periods beginning on or 

after October 1, 2002, we pay a new 

hospital 85 percent of their reasonable 

costs during the first 2 years of 

operation unless it elects to receive 

payment based on 100 percent of the 

capital Federal rate. Effective with the 

third year of operation, we pay the 

hospital based on 100 percent of the 

capital Federal rate (that is, the same 

methodology used to pay all other 

hospitals subject to the capital PPS). 

C. Capital Input Price Index 

1. Background 

Like the operating input price index, 

the capital input price index (CIPI) is a 

fixed-weight price index that measures 

the price changes associated with 

capital costs during a given year. The 

CIPI differs from the operating input 

price index in one important aspect—

the CIPI reflects the vintage nature of 

capital, which is the acquisition and use 

of capital over time. Capital expenses in 

any given year are determined by the 

stock of capital in that year (that is, 

capital that remains on hand from all 

current and prior capital acquisitions). 

An index measuring capital price 

changes needs to reflect this vintage 

nature of capital. Therefore, the CIPI 

was developed to capture the vintage 

nature of capital by using a weightedaverage of past capital purchase prices 

up to and including the current year. 

We periodically update the base year 

for the operating and capital input 

prices to reflect the changing 

composition of inputs for operating and 

capital expenses. The CIPI was last 

rebased to FY 1997 in the August 1, 

2002 final rule (67 FR 50044). 

2. Forecast of the CIPI for Federal Fiscal 

Year 2005

Based on the latest forecast by Global 

Insight, Inc. (first quarter of 2004), we 

are forecasting the CIPI to increase 0.7 

percent in FY 2005. This reflects a 

projected 1.2 percent increase in 

vintage-weighted depreciation prices 

(building and fixed equipment, and 

movable equipment) and a 3.0 percent 

increase in other capital expense prices 

in FY 2005, partially offset by a 2.5 

percent decline in vintage-weighted 

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interest expenses in FY 2005. The 

weighted average of these three factors 

produces the 0.7 percent increase for the 

CIPI as a whole in FY 2005. 

IV. Proposed Changes to Payment Rates 

for Excluded Hospitals and Hospital 

Units: Rate-of-Increase Percentages 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Excluded Hospitals Rate of Increase’’ at 

the beginning of your comment.] 

As discussed in section VI. of the 

preamble of this proposed rule, in 

accordance with section 1886(b)(3)(H)(i) 

of the Act and effective for cost 

reporting periods beginning on or after 

October 1, 2002, payments to existing 

psychiatric hospitals and units, 

rehabilitation hospitals and units, and 

long-term care hospitals excluded from 

the IPPS are no longer subject to limits 

on a hospital-specific target amount 

(expressed in terms of the inpatient 

operating cost per discharge) that are set 

for each hospital, based on the 

hospital’s own historical cost 

experience trended forward by the 

applicable rate-of-increase percentages 

(update factors). 

Effective for cost reporting periods 

beginning on or after October 1, 2002, 

rehabilitation hospitals and units are 

paid 100 percent of the IRF PPS Federal 

rate. Effective for cost reporting periods 

beginning on or after October 1, 2002, 

LTCHs also are no longer paid on a 

reasonable cost basis, but are paid under 

a LTCH DRG-based PPS. As part of the 

payment process for LTCHs, we 

established a 5-year transition period 

from reasonable cost-based 

reimbursement to a fully Federal PPS. 

However, a LTCH may elect to be paid 

based on 100 percent of the Federal 

prospective payment rate. We have 

proposed, but not finalized, an IPF PPS 

under which psychiatric hospitals and 

units would no longer be paid on a 

reasonable cost basis but would be paid 

on a prospective per diem basis. (68 FR 

66920, November 28, 2003) 

In accordance with existing 

§§ 413.40(c)(4)(ii) and (d)(1)(i) and (ii), 

where applicable, excluded psychiatric 

hospitals and units continue to be paid 

on a reasonable cost basis, payments are 

based on their Medicare inpatient 

operating costs, not to exceed the ceiling 

(as defined in § 413.40(a)(3)). In 

addition, LTCHs that are paid under a 

blend methodology will have the 

TEFRA portion subject to the ceiling as 

well. 

Section 1886(b)(7) of the Act had 

established a payment limitation for 

new rehabilitation hospitals and units, 

psychiatric hospitals and units, and 

long-term care hospitals that first 

received payment as a hospital or unit 

excluded from the IPPS on or after 

October 1, 1997. However, effective for 

cost reporting periods beginning on or 

after October 1, 2002, this payment 

limitation is no longer applicable to new 

rehabilitation hospitals or units because 

they are paid 100 percent of the Federal 

prospective rate under the IRF PPS. 

Also, effective for cost reporting periods 

beginning on or after October 1, 2002, 

new LTCHs are paid based on 100 

percent of the fully Federal prospective 

rate. In contrast, those ‘‘new’’ LTCHs 

that meet the definition of ‘‘new’’ under 

§ 412.40(f)(2)(ii) and that have their first 

cost reporting periods beginning on or 

after October 1, 1997 and before October 

1, 2002, may be paid under the LTCH 

PPS transition methodology. Since those 

hospitals by definition would have been 

considered new before October 1, 2002, 

they would have been subject to the 

updated payment limitation on new 

hospitals that was published in the FY 

2003 IPPS final rule (67 FR 50103). A 

discussion of how the payment 

limitation was calculated can be found 

in the August 29, 1997 final rule with 

comment period (62 FR 46019); the May 

12, 1998 final rule (63 FR 26344); the 

July 31, 1998 final rule (63 FR 41000); 

and the July 30, 1999 final rule (64 FR 

41529).

The amount of payment for a ‘‘new’’

psychiatric hospital or unit would be 

determined as follows: 

• Under existing § 413.40(f)(2)(ii), for 

the first 12-month cost reporting periods 

beginning on or after October 1, 1997, 

the amount of payment for a new 

hospital or unit that was not paid as an 

excluded hospital or unit before October 

1, 1997, is the lower of: (1) The 

hospital’s net inpatient operating costs 

per case; or (2) 110 percent of the 

national median of the target amounts 

for the same class of excluded hospitals 

and units, adjusted for differences in 

wage levels and updated to the first cost 

reporting period in which the hospital 

receives payment. The second 12-month 

cost reporting period is subject to the 

same target amount applied to the first 

cost reporting period. 

• In the case of a hospital that 

received payments under 

§ 413.40(f)(2)(ii) as a newly created 

hospital or unit, to determine the 

hospital’s or unit’s target amount for the 

hospital’s or unit’s third 12-month cost 

reporting period, the payment amount 

determined under § 413.40(f)(2)(ii)(A) 

for the preceding cost reporting period 

is updated to the third cost reporting 

period. 

The amounts included in the 

following table reflect the proposed 

updated 110 percent of the national 

median target amounts of new excluded 

psychiatric hospitals and units for cost 

reporting periods beginning during FY 

2005. These figures are updated with 

the most recent data available to reflect 

the projected market basket increase 

percentage of 3.3 percent. This projected 

percentage change in the market basket 

reflects the average change in the price 

of goods and services purchased by 

hospitals to furnish inpatient hospital 

services (as projected by CMS’ Office of 

the Actuary based on its historical 

experience with the IPPS). For a new 

provider, the labor-related share of the 

target amount is multiplied by the 

appropriate geographic area wage index, 

without regard to IPPS reclassifications, 

and added to the nonlabor-related share 

in order to determine the per case limit 

on payment under the statutory 

payment methodology for new 

providers.

Class of excluded hospital or unit 

Proposed

FY 2005

labor-related 

share 

Proposed

FY 2005

nonlabor-related 

share. 

Psychiatric ........................................................................................................................................................ $7,534.70 $2,994.67 

This payment limitation is no longer 

applicable to new LTCHs that meet the 

definition of § 412.23(e)(4) since they 

will be paid 100 percent of the Federal 

rate. (Section 412.23(e)(4) states that for 

purposes of payment under the LTCH 

PPS, a new LTCH is a provider of 

inpatient services that meets the 

qualifying criteria in paragraphs (e)(1) 

and (e)(2) of this section and, under 

present or previous ownership (or both), 

its first cost reporting period as a LTCH 

begins on or after October 1, 2002). 

Under the LTCH PPS, new LTCHs are 

based on 100 percent of the fully 

Federal prospective rate (they may not 

participate in the 5-year transition from 

cost-based reimbursement to 

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prospective payment). In contrast, those 

‘‘new’’ LTCHs that meet the definition 

of ‘‘new’’ under § 413.40(f)(2)(ii) and 

that have their first cost reporting 

periods beginning on or after October 1, 

1997, and before October 1, 2002, may 

be paid under the LTCH PPS transition 

methodology. Because those hospitals 

by definition would have been 

considered new before October 1, 2002, 

they would have been subject to the 

updated payment limitation on new 

hospitals that was published in the FY 

2003 IPPS final rule (67 FR 50103). 

Under existing regulations at 

§ 413.40(f)(2)(ii), the ‘‘new’’ hospital 

would be subject to the same cap in its 

second cost reporting period; this cap 

would not be updated for the new 

hospital’s second cost reporting year. 

Thus, since the same cap is to be used 

for the ‘‘new’’ LTCH’s first two cost 

reporting periods, it is no longer 

necessary to publish an updated cap. 

V. Payment for Blood Clotting Factor 

Administered to Hemophilia Inpatients 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Payment for Blood Clotting Factor’’ at 

the beginning of your comment.] 

In December 2002, the Department 

implemented a policy that established 

the Single Drug Pricer (SDP) to correct 

identified discrepancies, further the 

legislative goal of establishing a uniform 

payment allowance as a reflection of the 

average wholesale price (AWP), and 

otherwise apply the existing stature and 

regulation more accurately and 

efficiently (CMS Program Memorandum 

AB–02–174, December 3, 2002, which 

can be accessed at: http://

www.cms.hhs.gov/manuals). Under the 

SDP, CMS will establish prices 

centrally, thereby resulting in greater 

consistency in drug pricing nationally. 

The SDP instruction applies to blood 

clotting factors furnished to hospital 

inpatients. The payment allowance for 

the single national drug price for each 

Medicare covered drug is based on 95 

percent of the AWP, except for drugs 

billed to durable medical equipment 

regional carriers (DMERCs) and hospital 

outpatient drugs billed to fiscal 

intermediaries. We are publishing this 

notice here because we previously have 

addressed the add-on payment for the 

costs of administering blood clotting 

factor in the IPPS annual rule (see the 

August 1, 2000 IPPS final rule (65 FR 

47116). 

On a quarterly basis, CMS will furnish 

three SDP files to all fiscal 

intermediaries. Each fiscal intermediary 

must accept the SDP files and process 

claims for any drug identified on the 

files on the basis of the price shown on 

the applicable file. Previously, the fiscal 

intermediary performed annual update 

calculations based on the most recent 

AWP data available to the carrier. The 

fiscal intermediary should use the SDP 

to price the blood clotting factors.

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28522 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.132</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28523


EP70AD04.133</GPH>
28524 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.134</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28525


EP70AD04.135</GPH>
28526 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.136</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28527


EP70AD04.137</GPH>
28528 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.138</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28529


EP70AD04.139</GPH>
28530 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.140</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28531


EP70AD04.141</GPH>
28532 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.142</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28533


EP70AD04.143</GPH>
28534 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.144</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28535


EP70AD04.145</GPH>
28536 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.146</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28537


EP70AD04.147</GPH>
28538 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.148</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28539


EP70AD04.149</GPH>
28540 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.150</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28541


EP70AD04.151</GPH>
28542 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.152</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28543


EP70AD04.153</GPH>
28544 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.154</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28545


EP70AD04.155</GPH>
28546 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.156</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28547


EP70AD04.157</GPH>
28548 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.158</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28549


EP70AD04.159</GPH>
28550 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.160</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28551


EP70AD04.161</GPH>
28552 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.162</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28553


EP70AD04.163</GPH>
28554 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.164</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28555


EP70AD04.165</GPH>
28556 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.166</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28557


EP70AD04.167</GPH>
28558 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.168</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28559


EP70AD04.169</GPH>
28560 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.170</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28561


EP70AD04.171</GPH>
28562 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.172</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28563


EP70AD04.173</GPH>
28564 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.174</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28565


EP70AD04.175</GPH>
28566 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.176</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28567


EP70AD04.177</GPH>
28568 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.178</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28569


EP70AD04.179</GPH>
28570 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.180</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28571


EP70AD04.181</GPH>
28572 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.182</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28573


EP70AD04.183</GPH>
28574 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.184</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28575


EP70AD04.185</GPH>
28576 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.186</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28577


EP70AD04.187</GPH>
28578 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.188</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28579


EP70AD04.189</GPH>
28580 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.190</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28581


EP70AD04.191</GPH>
28582 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.192</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28583


EP70AD04.193</GPH>
28584 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.194</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28585


EP70AD04.195</GPH>
28586 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.196</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28587


EP70AD04.197</GPH>
28588 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.198</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28589


EP70AD04.199</GPH>
28590 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.200</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28591


EP70AD04.201</GPH>
28592 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.202</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28593


EP70AD04.203</GPH>
28594 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.204</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28595


EP70AD04.205</GPH>
28596 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.206</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28597


EP70AD04.207</GPH>
28598 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.208</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28599


EP70AD04.209</GPH>
28600 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.210</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28601


EP70AD04.211</GPH>
28602 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.212</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28603


EP70AD04.213</GPH>
28604 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.214</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28605


EP70AD04.215</GPH>
28606 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.216</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28607


EP70AD04.217</GPH>
28608 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.218</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28609


EP70AD04.219</GPH>
28610 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.220</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28611


EP70AD04.221</GPH>
28612 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.222</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28613


EP70AD04.223</GPH>
28614 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.224</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28615


EP70AD04.225</GPH>
28616 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.226</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28617


EP70AD04.227</GPH>
28618 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.228</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28619


EP70AD04.229</GPH>
28620 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.230</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28621


EP70AD04.231</GPH>
28622 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.232</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28623


EP70AD04.233</GPH>
28624 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.234</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28625


EP70AD04.235</GPH>
28626 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.236</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28627


EP70AD04.237</GPH>
28628 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.238</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28629


EP70AD04.239</GPH>
28630 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.240</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28631


EP70AD04.241</GPH>
28632 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.242</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28633


EP70AD04.243</GPH>
28634 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.244</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28635


EP70AD04.245</GPH>
28636 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.246</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28637


EP70AD04.247</GPH>
28638 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.248</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28639


EP70AD04.249</GPH>
28640 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.250</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28641


EP70AD04.251</GPH>
28642 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.252</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28643


EP70AD04.253</GPH>
28644 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.254</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28645


EP70AD04.255</GPH>
28646 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.256</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28647


EP70AD04.257</GPH>
28648 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.258</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28649


EP70AD04.259</GPH>
28650 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.260</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28651


EP70AD04.261</GPH>
28652 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.262</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28653


EP70AD04.263</GPH>
28654 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.264</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28655


EP70AD04.265</GPH>
28656 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.266</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28657


EP70AD04.267</GPH>
28658 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.268</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28659


EP70AD04.269</GPH>
28660 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.270</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28661


EP70AD04.271</GPH>
28662 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.272</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28663


EP70AD04.273</GPH>
28664 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.274</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28665


EP70AD04.275</GPH>
28666 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.276</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28667


EP70AD04.277</GPH>
28668 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.278</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28669


EP70AD04.279</GPH>
28670 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.280</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28671


EP70AD04.281</GPH>
28672 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.282</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28673


EP70AD04.283</GPH>
28674 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.284</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28675


EP70AD04.285</GPH>
28676 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.286</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28677


EP70AD04.287</GPH>
28678 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.288</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28679


EP70AD04.289</GPH>
28680 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.290</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28681


EP70AD04.291</GPH>
28682 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.292</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28683


EP70AD04.293</GPH>
28684 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.294</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28685


EP70AD04.295</GPH>
28686 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.296</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28687


EP70AD04.297</GPH>
28688 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.298</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28689


EP70AD04.299</GPH>
28690 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.300</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28691


EP70AD04.301</GPH>
28692 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.302</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28693


EP70AD04.303</GPH>
28694 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.304</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28695


EP70AD04.305</GPH>
28696 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.306</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28697


EP70AD04.307</GPH>
28698 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.308</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28699


EP70AD04.309</GPH>
28700 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.310</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28701


EP70AD04.311</GPH>
28702 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.312</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28703


EP70AD04.313</GPH>
28704 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.314</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28705


EP70AD04.315</GPH>
28706 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.316</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28707


EP70AD04.317</GPH>
28708 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.318</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28709


EP70AD04.319</GPH>
28710 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.320</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28711


EP70AD04.321</GPH>
28712 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.322</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28713


EP70AD04.323</GPH>
28714 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.324</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28715


EP70AD04.325</GPH>
28716 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.326</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28717


EP70AD04.327</GPH>
28718 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.328</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28719


EP70AD04.329</GPH>
28720 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.330</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28721


EP70AD04.331</GPH>
28722 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.332</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28723


EP70AD04.333</GPH>
28724 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.334</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28725


EP70AD04.335</GPH>
28726 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.336</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28727


EP70AD04.337</GPH>
28728 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.338</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28729


EP70AD04.339</GPH>
28730 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.340</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28731


EP70AD04.341</GPH>
28732 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.342</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28733


EP70AD04.343</GPH>
28734 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.344</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28735


EP70AD04.345</GPH>
28736 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 


EP70AD04.346</GPH>
Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28737


EP70AD04.347</GPH>
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Appendix A—Regulatory Analysis of 

Impacts 

[If you choose to comment on issues in this 

section, please include the caption ‘‘Impact 

Analyses’’ at the beginning of your 

comment.] 

I. Background and Summary 

We have examined the impacts of this 

proposed rule as required by Executive Order 

12866 (September 1993, Regulatory Planning 

and Review) and the Regulatory Flexibility 

Act (RFA) (September 19, 1980, Pub. L. 96–

354), section 1102(b) of the Social Security 

Act, the Unfunded Mandates Reform Act of 

1995 (Pub. L. 104–4), and Executive Order 

13132. 

Executive Order 12866 directs agencies to 

assess all costs and benefits of available 

regulatory alternatives and, if regulation is 

necessary, to select regulatory approaches 

that maximize net benefits (including 

potential economic, environmental, public 

health and safety effects, distributive 

impacts, and equity). A regulatory impact 

analysis (RIA) must be prepared for major 

rules with economically significant effects 

($100 million or more in any 1 year). 

We have determined that this proposed 

rule is a major rule as defined in 5 U.S.C. 

804(2). Based on the overall percentage 

change in payments per case estimated using 

our payment simulation model (a 4.9 percent 

increase), we estimate that the total impact of 

these proposed changes for FY 2005 

payments compared to FY 2004 payments to 

be approximately a $4.3 billion increase. As 

a result, total IPPS payments will increase 

from approximately $100 billion to 

approximately $104.3 billion. This amount 

does not reflect changes in hospital 

admissions or case-mix intensity, which 

would also affect overall payment changes. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of the RFA, small 

entities include small businesses, nonprofit 

organizations, and government agencies. 

Most hospitals and most other providers and 

suppliers are small entities, either by 

nonprofit status or by having revenues of $5 

million to $25 million in any 1 year. For 

purposes of the RFA, all hospitals and other 

providers and suppliers are considered to be 

small entities. Individuals and States are not 

included in the definition of a small entity. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory impact 

analysis for any proposed rule that may have 

a significant impact on the operations of a 

substantial number of small rural hospitals. 

This analysis must conform to the provisions 

of section 603 of the RFA. With the exception 

of hospitals located in certain New England 

counties, for purposes of section 1102(b) of 

the Act, we previously defined a small rural 

hospital as a hospital with fewer than 100 

beds that is located outside of a Metropolitan 

Statistical Area (MSA) or New England 

County Metropolitan Area (NECMA). 

However, under the new labor market 

definitions that we are proposing to adopt, 

we no longer employ NECMAs to define 

urban areas in New England. Therefore, we 

now define a small rural hospital as a 

hospital with fewer than 100 beds that is 

located outside of an MSA. Section 601(g) of 

the Social Security Amendments of 1983 

(Pub. L. 98–21) designated hospitals in 

certain New England counties as belonging to 

the adjacent NECMA. Thus, for purposes of 

the IPPS, we continue to classify these 

hospitals as urban hospitals. 

Section 202 of the Unfunded Mandates 

Reform Act of 1995 (Pub. L. 104–4) also 

requires that agencies assess anticipated costs 

and benefits before issuing any proposed rule 

(or a final rule that has been preceded by a 

proposed rule) that may result in an 

expenditure in any 1 year by State, local, or 

tribal governments, in the aggregate, or by the 

private sector, of $100 million. This proposed 

rule would not mandate any requirements for 

State, local, or tribal governments. 

Executive Order 13132 establishes certain 

requirements that an agency must meet when 

it promulgates a proposed rule (and 

subsequent final rule) that imposes 

substantial direct requirement costs on State 

and local governments, preempts State law, 

or otherwise has Federalism implications. 

We have reviewed this proposed rule in light 

of Executive Order 13132 and have 

determined that it would not have any 

negative impact on the rights, roles, and 

responsibilities of State, local, or tribal 

governments. 

In accordance with the provisions of 

Executive Order 12866, this proposed rule 

was reviewed by the Office of Management 

and Budget. 

The following analysis, in conjunction 

with the remainder of this document, 

demonstrates that this proposed rule is 

consistent with the regulatory philosophy 

and principles identified in Executive Order 

12866, the RFA, and section 1102(b) of the 

Act. The proposed rule would affect 

payments to a substantial number of small 

rural hospitals as well as other classes of 

hospitals, and the effects on some hospitals 

may be significant. 

II. Objectives 

The primary objective of the IPPS is to 

create incentives for hospitals to operate 

efficiently and minimize unnecessary costs 

while at the same time ensuring that 

payments are sufficient to adequately 

compensate hospitals for their legitimate 

costs. In addition, we share national goals of 

preserving the Medicare Trust Fund. 

We believe the changes in this proposed 

rule would further each of these goals while 

maintaining the financial viability of the 

hospital industry and ensuring access to high 

quality health care for Medicare 

beneficiaries. We expect that these proposed 

changes would ensure that the outcomes of 

this payment system are reasonable and 

equitable while avoiding or minimizing 

unintended adverse consequences. 

III. Limitations of Our Analysis 

The following quantitative analysis 

presents the projected effects of our proposed 

policy changes, as well as statutory changes 

effective for FY 2005, on various hospital 

groups. We estimate the effects of individual 

policy changes by estimating payments per 

case while holding all other payment policies 

constant. We use the best data available, but 

we do not attempt to predict behavioral 

responses to our proposed policy changes, 

and we do not make adjustments for future 

changes in such variables as admissions, 

lengths of stay, or case-mix. As we have done 

in previous proposed rules, we are soliciting 

comments and information about the 

anticipated effects of these proposed changes 

on hospitals and our methodology for 

estimating them. Any comments that we 

receive in response to this proposed rule will 

be addressed in the final rule.

IV. Hospitals Included in and Excluded 

From the IPPS 

The prospective payment systems for 

hospital inpatient operating and capitalrelated costs encompass nearly all general 

short-term, acute care hospitals that 

participate in the Medicare program. There 

were 39 Indian Health Service hospitals in 

our database, which we excluded from the 

analysis due to the special characteristics of 

the prospective payment method for these 

hospitals. Among other short-term, acute care 

hospitals, only the 47 such hospitals in 

Maryland remain excluded from the IPPS 

under the waiver at section 1814(b)(3) of the 

Act. 

As of April 2004, there are 3,904 IPPS 

hospitals to be included in our analysis. This 

represents about 65 percent of all Medicareparticipating hospitals. The majority of this 

impact analysis focuses on this set of 

hospitals. There are also approximately 898 

critical access hospitals (CAHs). These small, 

limited service hospitals are paid on the basis 

of reasonable costs rather than under the 

IPPS. There are also 1,194 specialty hospitals 

and units that are excluded from the IPPS. 

These specialty hospitals include psychiatric 

hospitals and units, rehabilitation hospitals 

and units, long-term care hospitals, 

children’s hospitals, and cancer hospitals. 

The impacts of our proposed policy changes 

on these hospitals are discussed below. 

V. Impact on Excluded Hospitals and 

Hospital Units 

As of April 2004, there were 1,194 

specialty hospitals excluded from the IPPS. 

Of these 1,194 specialty hospitals, 478 

psychiatric hospitals, 80 children’s, 11 

cancer hospitals, and less than 10 percent of 

the LTCHs are being paid on a reasonable 

cost basis subject to the rate-of-increase 

ceiling under § 413.40. The remaining 

providers—216 rehabilitation, and 

approximately 90 percent of the 331 LTCHs 

are paid 100 percent of the Federal rate under 

the IRF and LTCH PPS’, respectively. In 

addition, there were 1,381 psychiatric units 

(paid on a reasonable cost basis) and 999 

rehabilitation units (paid under the IRF PPS) 

in hospitals otherwise subject to the IPPS. 

Under § 413.40(a)(2)(i)(A), the rate-ofincrease ceiling is not applicable to the 47 

specialty hospitals and units in Maryland 

that are paid in accordance with the waiver 

at section 1814(b)(3) of the Act. 

In the past, hospitals and units excluded 

from the IPPS have been paid based on their 

reasonable costs subject to limits as 

established by the Tax Equity and Fiscal 

Responsibility Act of 1982 (TEFRA). 

Hospitals that continue to be paid based on 

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their reasonable costs are subject to TEFRA 

limits for FY 2005. For these hospitals, the 

proposed update is the percentage increase in 

the excluded hospital market basket, 

currently estimated at 3.3 percent. 

Inpatient rehabilitation facilities (IRFs) are 

paid under a prospective payment system 

(IRF PPS) for cost reporting periods 

beginning on or after January 1, 2002. For 

cost reporting periods beginning during FY 

2005, the IRF PPS is based on 100 percent 

of the adjusted Federal IRF prospective 

payment amount, updated annually. 

Therefore, these hospitals would not be 

impacted by this proposed rule. 

Effective for cost reporting periods 

beginning on or after October 1, 2002, LTCHs 

are paid under an LTCH PPS, based on the 

adjusted Federal prospective payment 

amount, updated annually. LTCHs will 

receive a blended payment (Federal 

prospective payment and a reasonable costbased payment) over a 5-year transition 

period. However, under the LTCH PPS, an 

LTCH may also elect to be paid at 100 

percent of the Federal prospective rate at the 

beginning of any of its cost reporting periods 

during the 5-year transition period. For 

purposes of the update factor, the portion of 

the LTCH PPS transition blend payment 

based on reasonable costs for inpatient 

operating services would be determined by 

updating the LTCH’s TEFRA limit by the 

estimate of the excluded hospital market 

basket (or 3.3 percent). 

Section 124 of the Medicare, Medicaid and 

SCHIP Balanced Budget Refinement Act of 

1999 (BBRA) requires the development of a 

per diem prospective payment system (PPS) 

for payment of inpatient hospital services 

furnished in psychiatric hospitals and 

psychiatric units of acute care hospitals 

(inpatient psychiatric facilities (IFPs)). We 

published a proposed rule to implement the 

IPF PPS on November 28, 2003 (68 FR 

66920). On January 30, 2004, we published 

a notice to extend the comment period for 30 

additional days (69 FR 4464). The comment 

period closed on March 26, 2004. 

Under the proposed rule, CMS would 

compute a Federal per diem base rate to be 

paid to all IPFs based on the sum of the 

average routine operating, ancillary, and 

capital costs for each patient day of 

psychiatric care in an IPF adjusted for budget 

neutrality. The Federal per diem base rate 

would be adjusted to reflect certain patient 

characteristics such as age, specified DRGs, 

and selected high-cost comorbidities, and 

certain facility characteristics such as a wage 

index adjustment, rural location, and indirect 

teaching costs. 

The November 28, 2003 proposed rule 

assumed an April 1, 2004 effective date for 

the purpose of ratesetting and calculating 

impacts. However, we are still in the process 

of analyzing public comments and 

developing a final rule for publication. The 

effective date of the IPF PPS would occur 5 

months following publication of the final 

rule. 

The impact on excluded hospitals and 

hospital units of the update in the rate-ofincrease limit depends on the cumulative 

cost increases experienced by each excluded 

hospital or unit since its applicable base 

period. For excluded hospitals and units that 

have maintained their cost increases at a 

level below the rate-of-increase limits since 

their base period, the major effect is on the 

level of incentive payments these hospitals 

and hospital units receive. Conversely, for 

excluded hospitals and hospital units with 

per-case cost increases above the cumulative 

update in their rate-of-increase limits, the 

major effect is the amount of excess costs that 

will not be reimbursed. 

We note that, under § 413.40(d)(3), an 

excluded hospital or unit whose costs exceed 

110 percent of its rate-of-increase limit 

receives its rate-of-increase limit plus 50 

percent of the difference between its 

reasonable costs and 110 percent of the limit, 

not to exceed 110 percent of its limit. In 

addition, under the various provisions set 

forth in § 413.40, certain excluded hospitals 

and hospital units can obtain payment 

adjustments for justifiable increases in 

operating costs that exceed the limit. At the 

same time, however, by generally limiting 

payment increases, we continue to provide 

an incentive for excluded hospitals and 

hospital units to restrain the growth in their 

spending for patient services.

VI. Quantitative Impact Analysis of the 

Proposed Policy Changes Under the IPPS for 

Operating Costs 

A. Basis and Methodology of Estimates 

In this proposed rule, we are announcing 

policy changes and payment rate updates for 

the IPPS for operating and capital-related 

costs. Based on the overall percentage change 

in payments per case estimated using our 

payment simulation model (a 4.9 percent 

increase), we estimate the total impact of 

these proposed changes for FY 2005 

payments compared to FY 2004 payments to 

be approximately a $4.3 billion increase. This 

amount does not reflect changes in hospital 

admissions or case-mix intensity, which 

would also affect overall payment changes. 

We have prepared separate impact analyses 

of the proposed changes to each system. This 

section deals with proposed changes to the 

operating prospective payment system. Our 

payment simulation model relies on the most 

recent available data to enable us to estimate 

the impacts on payments per case of certain 

changes we are proposing in this proposed 

rule. However, there are other changes we are 

proposing for which we do not have data 

available that would allow us to estimate the 

payment impacts using this model. For those 

proposed changes, we have attempted to 

predict the payment impacts of those 

proposed changes based upon our experience 

and other more limited data. 

The data used in developing the 

quantitative analyses of changes in payments 

per case presented below are taken from the 

FY 2003 MedPAR file and the most current 

Provider-Specific File that is used for 

payment purposes. Although the analyses of 

the changes to the operating PPS do not 

incorporate cost data, data from the most 

recently available hospital cost report were 

used to categorize hospitals. Our analysis has 

several qualifications. First, we do not make 

adjustments for behavioral changes that 

hospitals may adopt in response to the 

proposed policy changes, and we do not 

adjust for future changes in such variables as 

admissions, lengths of stay, or case-mix. 

Second, due to the interdependent nature of 

the IPPS payment components, it is very 

difficult to precisely quantify the impact 

associated with each proposed change. Third, 

we draw upon various sources for the data 

used to categorize hospitals in the tables. In 

some cases, particularly the number of beds, 

there is a fair degree of variation in the data 

from different sources. We have attempted to 

construct these variables with the best 

available source overall. However, for 

individual hospitals, some 

miscategorizations are possible. 

Using cases in the FY 2003 MedPAR file, 

we simulated payments under the operating 

IPPS given various combinations of payment 

parameters. Any short-term, acute care 

hospitals not paid under the IPPSs (Indian 

Health Service hospitals and hospitals in 

Maryland) were excluded from the 

simulations. The impact of payments under 

the capital IPPS, or the impact of payments 

for costs other than inpatient operating costs, 

are not analyzed in this section. Estimated 

payment impacts of proposed FY 2005 

changes to the capital IPPS are discussed in 

section VIII. of this Appendix. 

The proposed changes discussed separately 

below are the following: 

• The effects of the proposed annual 

reclassification of diagnoses and procedures 

and the recalibration of the DRG relative 

weights required by section 1886(d)(4)(C) of 

the Act. 

• The effects of applying a lower laborrelated share for hospitals with wage indexes 

less than or equal to 1.0, as required under 

section 403 of Public Law 108–173. 

• The effects of the proposed adoption of 

the new MSAs as announced by OMB in June 

2003. 

• The effects of the proposed changes in 

hospitals’ wage index values reflecting wage 

data from hospitals’ cost reporting periods 

beginning during FY 2001, compared to the 

FY 2000 wage data. 

• The effects of adjusting hospitals’ wage 

data to reflect the occupational mix based on 

our survey of hospitals. 

• The effect of the proposed wage and DRG 

recalibration budget neutrality factors. 

• The effects of geographic 

reclassifications by the MGCRB that will be 

effective in FY 2005. 

• The effects of the proposed 

implementation of section 505 of Public Law 

108–173, which provides for an increase in 

a hospital’s wage index if the hospital 

qualifies by meeting a threshold percentage 

of residents of the county where the hospital 

is located who commute to work at hospitals 

in areas with higher wage indexes. 

• The total change in payments based on 

proposed FY 2005 policies and MMAimposed changes relative to payments based 

on FY 2004 policies. 

To illustrate the impacts of the proposed 

FY 2005 changes, our analysis begins with an 

FY 2005 baseline simulation model using: 

the proposed update of 3.3 percent; the FY 

2004 DRG GROUPER (version 21.0); the MSA 

designations for hospitals based on OMB’s 

MSA definitions prior to June 2003; the FY 

2004 wage index; and no MGCRB 

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reclassifications. Outlier payments are set at 

5.1 percent of total operating DRG and outlier 

payments. 

The baseline simulation model also reflects 

changes enacted by Public Law 108–173 to 

the IME and DSH adjustments. Section 402 

provides that, for discharges occurring on or 

after April 1, 2004, all hospitals that qualify 

will receive DSH payments using the prior 

(before April 1, 2004) DSH adjustment 

formula for urban hospitals with 100 or more 

beds. Except for urban hospitals with 100 or 

more beds and rural referral centers, the DSH 

adjustment is capped at 12 percent. Section 

502 modifies the IME adjustment for midway 

through FY 2004 and provides a new 

schedule of formula multipliers for FYs 2005 

and thereafter. 

Section 501(b) provides that, for FYs 2005 

through 2007, the update factors will be 

reduced by 0.4 percentage point for any 

hospital that does not submit quality data. 

For purposes of the FY 2005 simulations in 

this proposed impact analysis, we are 

assuming all hospitals will qualify for the full 

update. Hospitals are not required to begin 

submitting these data in order to qualify for 

a full update until July 2004, and we are 

therefore unable to determine the rate of 

compliance with this requirement of 

receiving the full update. 

Each proposed and statutory policy change 

is then added incrementally to this baseline 

model, finally arriving at an FY 2005 model 

incorporating all of the proposed changes. 

This allows us to isolate the effects of each 

proposed change.

Our final comparison illustrates the 

percent change in payments per case from FY 

2004 to FY 2005. Five factors not discussed 

separately above have significant impacts 

here. The first is the update to the 

standardized amount. In accordance with 

section 1886(b)(3)(B)(i) of the Act, we are 

proposing to update the standardized amount 

for FY 2005 using the most recently 

forecasted hospital market basket increase for 

FY 2005 of 3.3 percent. (Hospitals that fail to 

comply with the quality data submission 

requirement to receive the full update will 

receive an update reduced by 0.4 percentage 

points to 2.9 percent.) Under section 

1886(b)(3)(B)(iv) of the Act, the updates to 

the hospital-specific amounts for sole 

community hospitals (SCHs) and for 

Medicare-dependent small rural hospitals 

(MDHs) are also equal to the market basket 

increase, or 3.3 percent. 

A second significant factor that impacts 

changes in hospitals’ payments per case from 

FY 2004 to FY 2005 is the change in MGCRB 

status from one year to the next. That is, 

hospitals reclassified in FY 2004 that are no 

longer reclassified in FY 2005 may have a 

negative payment impact going from FY 2004 

to FY 2005; conversely, hospitals not 

reclassified in FY 2004 that are reclassified 

in FY 2005 may have a positive impact. In 

some cases, these impacts can be quite 

substantial, so if a relatively small number of 

hospitals in a particular category lose their 

reclassification status, the percentage change 

in payments for the category may be below 

the national mean. However, this effect is 

alleviated by section 1886(d)(10)(D)(v) of the 

Act, which provides that reclassifications for 

purposes of the wage index are for a 3-year 

period. 

A third significant factor is that we 

currently estimate that actual outlier 

payments during FY 2004 will be 4.4 percent 

of total DRG payments. When the FY 2004 

final rule was published, we projected FY 

2004 outlier payments would be 5.1 percent 

of total DRG plus outlier payments; the 

average standardized amounts were offset 

correspondingly. The effects of the lower 

than expected outlier payments during FY 

2004 (as discussed in the Addendum to this 

proposed rule) are reflected in the analyses 

below comparing our current estimates of FY 

2004 payments per case to estimated FY 2005 

payments per case (with outlier payments 

projected to equal 5.1 percent of total DRG 

payments). 

Fourth, as noted above, sections 402 and 

502 of Public Law 108–173 establish higher 

DSH and IME payments, respectively. As a 

result, payments for these factors will be 

higher in FY 2005 than in FY 2004. 

Fifth, section 508 of Public Law 108–173 

established a one-time appeal process for 

hospitals to be reclassified in order to receive 

a higher wage index for a period of 3 years 

beginning with discharges on or after April 

1, 2004. 

B. Analysis of Table I 

Table I displays the results of our analysis. 

The table categorizes hospitals by various 

geographic and special payment 

consideration groups to illustrate the varying 

impacts on different types of hospitals. The 

top row of the table shows the overall impact 

on the 3,904 hospitals included in the 

analysis. This number is 145 fewer hospitals 

than were included in the impact analysis in 

the FY 2004 final rule (68 FR 45661). There 

are 94 new CAHs that were excluded from 

this year’s analysis. The remaining 51 cases 

represent hospitals that have closed or 

hospitals for which we have no data. 

The next four rows of Table I contain 

hospitals categorized according to their 

geographic location: all urban, which is 

further divided into large urban and other 

urban; and rural. We previously defined a 

small rural hospital as a hospital with fewer 

than 100 beds that is located outside of an 

MSA or NECMA. However, under the new 

labor market definitions that we are 

proposing to adopt, we no longer employ 

NECMAs to define urban areas in New 

England. Therefore, we will now define a 

small rural hospital as a hospital with fewer 

than 100 beds that is located outside of an 

MSA. There are 2,696 hospitals located in 

urban areas (MSAs or NECMAs) included in 

our analysis. Among these, there are 1,424 

hospitals located in large urban areas 

(populations over 1 million), and 1,272 

hospitals in other urban areas (populations of 

1 million or fewer). In addition, there are 

1,208 hospitals in rural areas. The next two 

groupings are by bed-size categories, shown 

separately for urban and rural hospitals. The 

final groupings by geographic location are by 

census divisions and are also shown 

separately for urban and rural hospitals. 

The second part of Table I shows hospital 

groups based on hospitals’ FY 2005 payment 

classifications, including any 

reclassifications under section 1886(d)(10) of 

the Act. For example, the rows labeled urban, 

large urban, other urban, and rural show that 

the number of hospitals paid based on these 

categorizations after consideration of 

geographic reclassifications are 2,624, 1,405, 

1,219, and 1,280, respectively. 

The next three groupings examine the 

impacts of the final changes on hospitals 

grouped by whether or not they have GME 

residency programs (teaching hospitals that 

receive an IME adjustment) or receive DSH 

payments, or some combination of these two 

adjustments. There are 2,787 nonteaching 

hospitals in our analysis, 916 teaching 

hospitals with fewer than 100 residents, and 

201 teaching hospitals with 100 or more 

residents. 

In the DSH categories, hospitals are 

grouped according to their DSH payment 

status, and whether they are considered 

urban or rural for DSH purposes. Previously, 

hospitals in the rural DSH categories in the 

impact table represented hospitals that were 

not reclassified for purposes of the 

standardized amount. (However, they may 

have been reclassified for purposes of the 

wage index.) However, reclassification for 

purposes of the standardized amount has 

been terminated as a result of the 

equalization of the standardized amounts. As 

a result, there are no longer cases in which 

reclassifications change the status of rural 

hospitals for DSH purposes. There is little or 

no impact from the termination of 

standardized amount reclassification under 

the operating IPPS, since there are few 

concrete cases in which change from rural to 

urban status now would have any effect 

under the revised DSH payment formulas. 

The next category groups hospitals 

considered urban after geographic 

reclassification, in terms of whether they 

receive the IME adjustment, the DSH 

adjustment, both, or neither. 

The next five rows examine the impacts of 

the proposed changes on rural hospitals by 

special payment groups (SCHs, rural referral 

centers (RRCs), and Medicare dependant 

hospitals (MDHs)), as well as rural hospitals 

not receiving a special payment designation. 

There were 137 RRCs, 454 SCHs, 211 MDHs, 

and 73 hospitals that are both SCH and RRC. 

The next two groupings are based on type 

of ownership and the hospital’s Medicare 

utilization expressed as a percent of total 

patient days. These data are taken primarily 

from the FY 2001 Medicare cost report files, 

if available (otherwise FY 2000 data are 

used). Data needed to determine ownership 

status were unavailable for 68 hospitals. 

Similarly, the data needed to determine 

Medicare utilization were unavailable for 173 

hospitals. The next two rows compare the 

impacts on those hospitals that converted 

from urban MSAs to rural CBSAs and for the 

hospitals that converted from rural MSAs to 

urban CBSAs. 

The next series of groupings concern the 

geographic reclassification status of 

hospitals. The first grouping displays all 

hospitals that were reclassified by the 

MGCRB for FY 2005. The next two groupings 

separate the hospitals in the first group by 

urban and rural status. The final row in Table 

I contains hospitals located in rural counties 

28800 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

but deemed to be urban under section 

1886(d)(8)(B) of the Act.

TABLE I.—IMPACT ANALYSIS OF PROPOSED CHANGES FOR FY 2005 OPERATING PROSPECTIVE PAYMENT SYSTEM

[Percent Changes in Payments per Case] 

No. of

hosps.1

DRG

recal 2

Labor

share

split 3

Core

based

stat.

areas 4

New

wage

data 5

Occupational

mix 6

DRG &

wage

index

changes 7

MGCRB

reclassification 8

Outmigration

data 9

All

FY 2005

changes 10

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 

By Geographic Location: 

All hospitals .................................. 3,904 0.1 0.5 0.0 0.0 0.0 0.0 0.0 0.0 4.9

Urban hospitals ............................ 2,696 0.0 0.5 0.1 0.0 0.0 0.0 ¥0.3 0.0 4.7

Large urban areas (populations 

over 1 million) ........................... 1,424 0.0 0.3 0.1 0.0 0.0 ¥0.1 ¥0.4 0.0 4.5

Other urban areas (populations of 

1 million or fewer) ..................... 1,272 0.1 0.7 0.1 0.0 0.0 0.1 ¥0.2 0.1 5.0

Rural hospitals ............................. 1,208 0.2 1.1 ¥0.2 0.0 0.0 0.2 1.9 0.0 6.0

Bed Size (Urban): 

0–99 beds .................................... 684 0.2 0.5 0.4 0.0 0.0 0.3 ¥0.4 0.1 5.7

100–199 beds .............................. 966 0.1 0.5 ¥0.1 0.0 0.0 0.0 ¥0.3 0.1 4.6

200–299 beds .............................. 500 0.0 0.4 0.1 ¥0.2 0.0 ¥0.2 ¥0.2 0.0 4.4

300–499 beds .............................. 415 0.0 0.5 0.1 0.1 0.0 0.1 ¥0.3 0.0 4.8

500 or more beds ........................ 131 0.0 0.3 0.0 ¥0.1 0.0 ¥0.1 ¥0.4 0.0 4.9

Bed Size (Rural): 

0–49 beds .................................... 549 0.4 1.0 ¥0.1 0.2 0.0 0.5 0.4 0.1 6.3

50–99 beds .................................. 393 0.3 0.9 ¥0.2 0.1 0.0 0.3 1.0 0.1 6.1

100–149 beds .............................. 163 0.2 1.2 ¥0.3 0.1 0.1 0.3 2.6 0.1 6.0

150–199 beds .............................. 57 0.2 1.3 ¥0.3 ¥0.1 0.1 0.0 3.2 0.0 5.9

200 or more beds ........................ 46 0.1 1.1 ¥0.1 ¥0.1 0.0 ¥0.1 2.9 0.0 5.6

Urban by Region: 

New England ................................ 137 0.2 0.0 ¥0.4 ¥0.2 0.0 ¥0.2 ¥0.3 0.0 3.6

Middle Atlantic .............................. 397 0.0 0.3 0.2 ¥0.7 0.0 ¥0.8 ¥0.1 0.1 3.7

South Atlantic ............................... 419 0.1 0.5 0.2 0.1 0.0 0.1 ¥0.3 0.0 5.0

East North Central ....................... 450 0.0 0.3 0.0 0.1 0.0 0.1 ¥0.3 0.0 4.7

East South Central ....................... 175 0.1 1.2 0.2 0.1 0.0 0.2 ¥0.3 0.1 5.5

West North Central ...................... 160 0.1 0.6 0.1 0.2 0.0 0.2 ¥0.5 0.0 5.1

West South Central ...................... 346 0.0 0.9 0.0 0.5 0.0 0.5 ¥0.5 0.0 5.7

Mountain ...................................... 140 0.0 0.2 0.2 ¥0.4 0.0 ¥0.4 ¥0.1 0.0 3.8

Pacific ........................................... 421 0.1 0.0 0.1 0.1 0.0 0.2 ¥0.3 0.1 4.9

Puerto Rico .................................. 51 ¥0.4 6.2 ¥0.1 ¥0.2 0.0 ¥0.7 ¥0.5 0.0 14.3

Rural by Region: 

New England ................................ 34 0.2 0.3 0.3 0.3 0.0 0.3 1.3 0.0 3.9

Middle Atlantic .............................. 57 0.3 1.0 ¥0.4 ¥0.2 0.0 0.0 1.8 0.0 4.2

South Atlantic ............................... 176 0.2 1.1 ¥0.7 ¥0.1 0.1 0.1 2.0 0.0 5.8

East North Central ....................... 160 0.2 0.8 ¥0.1 0.1 0.0 0.2 1.4 0.0 4.5

East South Central ....................... 192 0.2 2.0 0.0 ¥0.3 0.1 ¥0.1 2.8 0.1 9.4

West North Central ...................... 206 0.3 0.8 ¥0.1 0.3 0.0 0.5 1.3 0.0 5.7

West South Central ...................... 228 0.2 1.7 0.0 0.1 0.1 0.4 3.0 0.1 7.2

Mountain ...................................... 93 0.3 0.4 ¥0.2 0.2 0.0 0.4 0.5 0.1 4.4

Pacific ........................................... 62 0.2 0.0 0.0 0.3 0.0 0.5 0.8 0.1 4.5

By Payment Classification: 

Urban hospitals ............................ 2,624 0.0 0.5 0.1 0.0 0.0 0.0 ¥0.3 0.0 4.7

Large urban areas (populations 

over 1 million) ........................... 1,405 0.0 0.3 0.1 0.0 0.0 ¥0.1 ¥0.4 0.0 4.5

Other urban areas (populations of 

1 million or fewer) ..................... 1,219 0.1 0.7 0.1 0.0 0.0 0.1 ¥0.2 0.1 5.0

Rural areas .................................. 1,280 0.3 1.0 ¥0.2 0.0 0.0 0.2 1.7 0.0 5.9

Teaching Status: 

Non-teaching ................................ 2,787 0.1 0.7 0.1 0.0 0.0 0.1 0.3 0.1 5.2

Fewer than 100 Residents ........... 916 0.0 0.5 0.1 0.1 0.0 0.0 ¥0.2 0.0 4.8

100 or more Residents ................ 201 0.0 0.2 ¥0.1 ¥0.2 0.0 ¥0.3 ¥0.3 0.0 4.5

Urban DSH: 

Non-DSH ...................................... 1,156 0.1 0.4 0.1 0.0 0.0 0.0 ¥0.1 0.0 4.7

100 or more beds ........................ 1,465 0.0 0.5 0.0 0.0 0.0 ¥0.1 ¥0.3 0.0 4.7

Less than 100 beds ..................... 335 0.3 0.7 0.9 0.0 0.0 0.4 ¥0.4 0.1 7.0

Rural DSH: 

Sole Community (SCH) ............... 482 0.3 0.6 ¥0.1 0.1 0.0 0.3 0.4 0.0 4.9

Referral Center (RRC) ................. 157 0.2 1.3 ¥0.2 ¥0.1 0.1 0.0 3.6 0.0 6.1

Other Rural: 

100 or more beds ................. 68 0.3 1.7 0.2 ¥0.2 0.1 0.1 1.1 0.1 8.9

Less than 100 beds .............. 241 0.4 1.8 ¥0.3 ¥0.1 0.1 0.2 1.2 0.1 10.1

Urban teaching and DSH: 

DSH .............................................. 800 0.0 0.4 0.0 0.0 0.0 ¥0.1 ¥0.3 0.0 4.6

Teaching and no DSH .......... 250 0.1 0.3 0.0 0.1 0.0 0.0 ¥0.3 0.1 4.8

No teaching and DSH ........... 1,000 0.1 0.6 0.2 0.0 0.0 0.1 ¥0.2 0.1 5.1

No teaching and no DSH ..... 574 0.1 0.4 0.2 ¥0.1 0.0 0.0 ¥0.3 0.0 4.6

Rural Hospital Types: 

Non special status hospitals ........ 400 0.4 1.6 ¥0.1 0.0 0.1 0.3 1.1 0.1 8.6

RRC ............................................. 137 0.2 1.7 ¥0.3 ¥0.1 0.1 0.0 4.6 0.0 6.4

SCH .............................................. 454 0.2 0.4 ¥0.1 0.1 0.0 0.2 0.2 0.0 4.0

Medicare-dependent hospitals 

(MDH) ....................................... 211 0.4 1.6 ¥0.2 0.3 0.1 0.6 0.9 0.1 8.1

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28801

TABLE I.—IMPACT ANALYSIS OF PROPOSED CHANGES FOR FY 2005 OPERATING PROSPECTIVE PAYMENT SYSTEM—

Continued

[Percent Changes in Payments per Case] 

No. of

hosps.1

DRG

recal 2

Labor

share

split 3

Core

based

stat.

areas 4

New

wage

data 5

Occupational

mix 6

DRG &

wage

index

changes 7

MGCRB

reclassification 8

Outmigration

data 9

All

FY 2005

changes 10

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 

SCH and RRC ............................. 73 0.1 0.5 ¥0.2 0.1 0.0 0.1 1.4 0.0 4.5

Type of Ownership: 

Voluntary ...................................... 2,343 0.1 0.5 0.1 0.0 0.0 0.0 0.0 0.0 4.7

Proprietary .................................... 717 0.0 0.7 ¥0.1 0.1 0.0 0.1 0.0 0.0 5.3

Government ................................. 776 0.1 0.7 0.1 ¥0.1 0.0 0.0 0.2 0.1 5.4

Unknown ...................................... 68 ¥0.1 0.7 0.0 0.1 0.0 0.1 ¥0.5 0.0 5.1

Medicare Utilization as a Percent of 

Inpatient Days: 

0–25 ............................................. 227 ¥0.1 0.2 0.1 ¥0.1 0.0 ¥0.3 ¥0.2 0.0 4.4

25–50 ........................................... 1,122 0.0 0.4 0.0 0.1 0.0 0.0 ¥0.3 0.0 4.7

50–65 ........................................... 1,445 0.1 0.7 0.1 0.0 0.0 0.1 0.2 0.1 5.1

Over 65 ........................................ 937 0.1 0.7 0.0 ¥0.1 0.0 0.0 0.3 0.0 4.9

Unknown ...................................... 173 0.0 0.4 0.1 ¥0.1 0.0 ¥0.2 ¥0.2 0.0 4.8

Rural Converted to Urban ................... 164 0.2 1.2 3.6 ¥0.3 0.0 0.0 1.2 0.0 6.4

Urban Converted to Rural ................... 69 0.2 0.7 ¥0.2 ¥0.1 0.0 0.1 0.3 0.0 4.8

Hospitals Reclassified by the Medicare Geographic Classification Review Board: FY 2005 Reclassifications: 

All Reclassified Hospitals ............. 485 0.2 0.9 0.3 0.0 0.0 0.1 3.7 0.0 5.2

Nonreclassified Hospitals ............. 3,326 0.1 0.5 0.0 0.0 0.0 0.0 ¥0.5 0.0 4.8

All Reclassified Urban Hospitals .. 118 0.1 0.6 1.1 0.0 0.0 0.0 3.8 0.0 14.3

Urban Nonreclassified Hospitals .. 2,486 0.0 0.4 0.0 0.0 0.0 0.0 ¥0.5 0.0 4.7

All Reclassified Rural Hospitals ... 367 0.2 1.1 ¥0.2 0.0 0.0 0.2 3.7 0.0 5.9

Rural Nonreclassified Hospitals ... 840 0.3 1.0 ¥0.2 0.1 0.0 0.3 ¥0.3 0.1 6.2

Other Reclassified Hospitals 

(Section 1886(D)(8)(B)) ............ 93 0.2 0.5 0.4 ¥0.3 0.0 ¥0.1 ¥0.3 0.0 4.4 

1Because data necessary to classify some hospitals by category were missing, the total number of hospitals in each category may not equal the national total. Discharge data are from FY 2003, and hospital cost report data are from reporting periods beginning in FY 2001 and FY 2000. 2This column displays the payment impact of the recalibration of the DRG weights based on FY 2003 MedPAR data and the DRG reclassification changes, in accordance with section 1886(d)(4)(C) of the Act. 3This column displays the payment impact of applying a lower labor-related share for hospitals with wage indexes less than or equal to 1.0, as required under section 403 of Public Law 108–173. 4This column displays the impact of the proposed adoption of the new MSAs as announced by OMB in June 2003. 

5This column displays the impact of updating the wage index with wage data from hospitals’ FY 2001 cost reports. 6This column displays the effects of adjusting hospitals’ wage data to reflect the occupational mix based on our survey of hospitals. 7This column shows the payment impact of the budget neutrality adjustment factor for DRG and wage index changes, in accordance with sections 1886(d)(4)(C)(iii) 

and 1886(d)(3)(E) of the Act. Thus, it represents the combined impacts shown in columns 2, 3, 4 and 5, and the proposed FY 2005 budget neutrality factor of 

0.994295 (the change to the labor-related share shown in column 3 is not included in the budget neutrality calculation). 8Shown here are the effects of geographic reclassifications by the Medicare Geographic Classification Review Board (MGCRB). The effects demonstrate the FY 

2005 payment impact of going from no reclassifications to the reclassifications scheduled to be in effect for FY 2005. Reclassification for prior years has no bearing 

on the payment impacts shown here. 9This column displays the impact of the proposed implementation of section 505 of Public Law 108–173, which provides for an increase in a hospital’s wage index 

if the hospital qualifies by meeting a threshold percentage of residents of the county where the hospital is located who commute to work at hospitals in counties with 

higher wage indexes. 10This column shows changes in payments from FY 2004 to FY 2005. It incorporates all of the changes displayed in columns 3, 7, 8 and 9 (the changes displayed 

in columns 2, 4, 5 and 6 are included in column 7). It also reflects the impact of the FY 2005 update, changes in hospitals’ reclassification status in FY 2005 compared to FY 2004, and the changes in payments as a result of implementing Section 508 of the MMA. The sum of these impacts may be different from the percentage changes shown here due to rounding and interactive effect. 

C. Impact of the Proposed Changes to the 

DRG Reclassifications and Recalibration of 

Relative Weights (Column 2) 

In column 2 of Table I, we present the 

combined effects of the DRG reclassifications 

and recalibration, as discussed in section II. 

of the preamble to this proposed rule. Section 

1886(d)(4)(C)(i) of the Act requires us 

annually to make appropriate classification 

changes and to recalibrate the DRG weights 

in order to reflect changes in treatment 

patterns, technology, and any other factors 

that may change the relative use of hospital 

resources. 

We compared aggregate payments using 

the FY 2004 DRG relative weights (GROUPER 

version 21.0) to aggregate payments using the 

proposed FY 2005 DRG relative weights 

(GROUPER version 22.0). We note that, 

consistent with section 1886(d)(4)(C)(iii) of 

the Act, we have applied a budget neutrality 

factor to ensure that the overall payment 

impact of the DRG changes (combined with 

the wage index changes) is budget neutral. 

This proposed budget neutrality factor of 

0.994295 is applied to payments in Column 

7. Because this is a combined DRG 

reclassification and recalibration and wage 

index budget neutrality factor, it is not 

applied to payments in this column. 

The major DRG classification changes we 

are proposing include: reassigning the 

procedure code for left ventricular assist 

devices (LVADs) from DRG 525 to DRG 103 

(now titled ‘‘Heart Transplant or Implant of 

Heart Assist System’’); reassigning the 

procedure codes involving artificial anal 

sphincters from DRGs 157 and 158 to DRGs 

146 (Rectal Resection With CC) and 147 

(Rectal Resection Without CC); modifying the 

ventilation by reassigning all those cases to 

DRGs 504 and 505; splitting the DRG 483 into 

two new DRGs based on the presence or 

absence of major OR procedures, DRG 541 

(Tracheostomy with Mechanical Ventilation 

96+ Hours or Principal Diagnosis Except 

Face, Mouth and Neck Diagnoses With Major 

Operating Room Procedure) and 542 

(Tracheostomy with Mechanical Ventilation 

96+ Hours or Principal Diagnosis Except 

Face, Mouth and Neck Diagnoses Without 

Major Operating Room Procedure). In the 

aggregate, these proposed changes would 

result in 0.1 percent change in overall 

payments to hospitals. On average, the 

impacts of these changes on any particular 

hospital group are very small. The largest 

impact is a 0.2 percent increase among rural 

hospitals. This is likely primarily attributable 

to a 1.46 percent increase in DRG 127 (Heart 

Failure and Shock). This high-volume DRG 

comprises a disproportionate percentage of 

cases in small rural hospitals. Ten Puerto 

Rico hospitals also experience case mix 

declines of greater than 1 percent in this 

28802 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

column, leading to a 0.4 percent decrease 

overall for this row. 

D. Impact of the Change in the Labor-Related 

Share 

Section 403 of the MMA provides that, for 

discharges occurring on or after October 1, 

2004, a hospital’s labor-related share of the 

standardized amount will be decreased to 62 

percent of the standardized amount unless 

such a change will result in lower total 

payments to the hospital. This provision also 

applies to the labor-related share of the 

standardized amount for hospitals in Puerto 

Rico. The overall impact of implementing 

this provision is a 0.5 percent payment 

increase to all hospitals (approximately $500 

million). Large urban hospitals would 

experience a 0.3 percent increase while other 

urban hospitals would experience a 0.7 

percent increase. Rural hospitals are 

expected to benefit from this provision with 

a 1.1 percent increase in payments in FY 

2005. 

Among regions, hospitals in Puerto Rico 

experience the largest increase of 6.2 percent 

(due to the relatively low national wage 

index levels in Puerto Rico). The smallest 

change among urban hospitals is in the New 

England and Pacific regions with a 0.0 

percent change. The largest increase among 

rural regions is expected to be East South 

Central, with a 2.0 percent increase in 

payments. 

E. Impact of Changing to New Labor Market 

Areas (Core Based Statistical Areas) From 

MSAs (Column 4) 

In accordance with the broad discretion 

under section 1886(d)(3)(E) of the Act, we 

currently define hospital labor market areas 

based on the definitions of Metropolitan 

Statistical Areas (MSAs), Primary MSAs 

(PMSAs), and New England County 

Metropolitan Areas (NECMAs) issued by 

OMB. On June 6, 2003, OMB announced new 

Core Based Statistical Areas (CBSAs), 

comprised of MSAs and the new 

Micropolitan Statistical Areas based on 

Census 2000 data. CMS is proposing to adopt 

the new MSA definitions, including the 49 

new Metropolitan areas designated under the 

new definitions. We are also proposing to 

adopt MSA definitions in New England in 

place of NECMAs. We are not adopting the 

newly defined Micropolitan Statistical Areas 

for use in the payment system: as a result, 

Micropolitan Statistical Areas will remain 

part of the statewide rural areas for purposes 

of IPPS payments. (However, as discussed in 

section III.B.1.d. of the preamble to this 

proposed rule, we are proposing a special 

transition policy for hospitals that were 

formerly in urban areas, but are now in areas 

considered rural or Micropolitan under the 

OMB definitions.) There are 46 counties with 

72 hospitals that are currently in an MSA 

that would be treated as rural under our 

proposal to update the MSA definitions using 

only the new MSAs. To help alleviate the 

decreased payments for currently urban 

hospitals that would become rural, we are 

proposing to allow them to maintain their 

assignment to the MSA where they are 

currently located for the 3-year period 

including FY 2005, FY 2006, and FY 2007. 

The impact of these changes to the new 

CBSAs is isolated in column 4 by holding the 

other payment parameters constant in this 

simulation. That is, column 4 shows the 

percentage changes in payments when going 

from a model using the current MSA 

designations to a model using the new CBSA 

designations (for Metropolitan areas only). 

Overall, the new CBSAs would lead to a zero 

percent change. Urban hospitals’ wage 

indexes would increase by 0.1 percent. Rural 

hospitals would experience a 0.2 percent 

decrease in overall payments as a result of 

this provision. Among regions, the largest 

impact of updating the wage data is seen in 

the rural South Atlantic region (a 0.7 percent 

decrease). Rural hospitals in the Middle 

Atlantic would experience the next largest 

impact, with a 0.4 percent decrease. 

Among urban hospitals, New England 

would experience a 0.4 percent decrease. 

These impacts result primarily from dividing 

the previously amalgamated Boston NECMA 

into four Metropolitan Divisions and several 

other small Metropolitan Statistical Areas. 

The counties that previously comprised the 

Boston MSA now form all or part of the 

Boston-Quincy, MA Metropolitan Division, 

the Cambridge-Newton-Framingham, MA 

Metropolitan Division, the Essex County, MA 

Metropolitan Division, the Rockingham 

County-Strafford County Metropolitan 

Division, the Manchester-Nashua 

Metropolitan Statistical Area, the 

Providence-New Bedford-Fall River, RI-MA 

Metropolitan Statistical Area, and the 

Worcester, MA Metropolitan Statistical Area. 

The Rockingham County-Strafford County 

Metropolitan Division, Manchester-Nashua 

MSA, and Boston-Quincy Metropolitan 

Division experience 9.4, 6.9, and 5.7 percent 

decreases, respectively. 

As described in section III of the preamble 

to this proposed rule, to help alleviate the 

decreased payments for currently urban 

hospitals that would become rural, we are 

proposing to allow them to maintain their 

assignment to the MSA where they are 

currently located for the 3-year period 

including FY 2005, FY 2006, and FY 2007. 

The impact upon these hospitals is shown in 

the row labeled ‘‘Urban to Rural Hospitals.’’

Conversely, the row labeled ‘‘Rural to Urban 

Hospitals’’ displays formerly rural hospitals 

that are now in MSAs under the new 

definitions. 

F. Impact of Proposed Wage Index Changes 

(Columns 5 and 6) 

Section 1886(d)(3)(E) of the Act requires 

that, beginning October 1, 1993, we annually 

update the wage data used to calculate the 

wage index. In accordance with this 

requirement, the proposed wage index for FY 

2005 is based on data submitted for hospital 

cost reporting periods beginning on or after 

October 1, 2000 and before October 1, 2001. 

The impact of the new data on hospital 

payments is isolated in column 5 by holding 

the other payment parameters constant in 

this simulation. That is, column 5 shows the 

percentage changes in payments when going 

from a model using the FY 2004 wage index, 

based on FY 2000 wage data, to a model 

using the FY 2005 pre-reclassification wage 

index, based on FY 2001 wage data. The 

wage data collected on the FY 2001 cost 

report is the same as the FY 2000 wage data 

that were used to calculate the FY 2004 wage 

index. However, for the FY 2005 wage index, 

we added an occupational mix adjustment to 

the wage index. The occupational mix 

adjustment is based on data collected on the 

Medicare Wage Index Occupational Mix 

Survey, Form–CMS–10079. The data 

collection period for the survey was calendar 

year 2003 through February 7, 2004. The 

effects of the occupational mix adjustment 

are shown in the next column (6).

Column 5 shows the impacts of updating 

the wage data using FY 2001 cost reports. 

Overall, the new wage data would lead to a 

0.0 percent change. Urban hospitals’ wage 

indexes would not change (0.0 percent), and 

rural hospitals’ wage indexes would also 

remain the same (0.0 percent). Among 

regions, the largest declines from updating 

the wage data are seen in urban Middle 

Atlantic and Mountain regions (a 0.7 and 0.4 

percent decreases, respectively). In the 

Middle Atlantic, there are 352 hospitals (New 

York, Pennsylvania, and New Jersey) that are 

experiencing a drop in their wage index 

relative to last year with the introduction of 

the new wage data. Kingston, NY experiences 

a drop of 5.8 percent, while Buffalo sees a 2.8 

percent drop. Additionally, two of the areas 

are divisions of New York City, including the 

Manhattan area (New York-Wayne-White 

Plains, NY) and Suffolk-Nassau, NY. While 

these areas do not necessarily experience a 

significant drop (2.5 and 1.5 percent), they 

include a large number of inpatient hospitals. 

Pittsburgh, PA, Rochester, NY, and 

Allentown, PA also see decreases due to this 

change. We note that this is due to below 

average increases in their average hourly 

wage and not as a result of real average 

hourly wage declines. Urban hospitals in the 

West South Central region would experience 

the next largest impact, with a 0.5 percent 

increase. The rural East South Central and 

Middle Atlantic regions experience 0.3 and 

0.2 percent decreases, respectively while the 

Pacific, West South Central, and New 

England regions each experience a 0.3 

percent increase. 

The national average hourly wage 

increased 6.41 percent compared to FY 2004. 

Therefore, the only manner in which to 

maintain or exceed the previous year’s wage 

index was to match the national 6.41 increase 

in average hourly wage. Of the 3,887 

hospitals with wage index values in both FYs 

2004 and 2005, 1,937, or 49.8 percent, also 

experienced an average hourly wage increase 

of 6.41 percent or more. 

The following chart compares the shifts in 

wage index values for hospitals for FY 2005 

relative to FY 2004. Among urban hospitals, 

89 would experience an increase of between 

5 percent and 10 percent and 45 would 

experience an increase of more than 10 

percent. A total of 7 rural hospitals would 

experience increases greater than 5 percent, 

but none would experience increases of 

greater than 10 percent. On the negative side, 

36 urban hospitals would experience 

decreases in their wage index values of at 

least 5 percent, but less than 10 percent. Two 

urban hospitals would experience decreases 

in their wage index values greater than 10 

percent. 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28803

The following chart shows the projected 

impact for urban and rural hospitals.

Percentage change in 

area wage index values 

No. of

hospitals 

Urban Rural. 

Increase more than 10 

percent .......................... 45 0. 

Increase more than 5 percent and less than 10 

percent .......................... 89 7. 

Increase or decrease less 

than 5 percent ............... 2,625 1,609. 

Decrease more than 5 

percent and less than 

10 percent ..................... 36 0. 

Decrease more than 10 

percent .......................... 2 1 

The next column (6) shows the impacts on 

the calculation of the FY 2005 wage index of 

adjusting for occupational mix. Section 

1886(d)(3)(E) of the Act provides for the 

collection of data every 3 years on the 

occupational mix of employees for each 

short-term, acute care hospital participating 

in the Medicare program, in order to 

construct an occupational mix adjustment to 

the wage index, beginning with the FY 2005 

wage index. A complete discussion of the 

initial collection of these data and the 

occupational mix adjustment that we are 

proposing to apply, beginning October 1, 

2004 (the FY 2005 wage index), appears 

under section III.C. of this preamble. The 

calculation of the wage index now includes 

a blended rate of 90 percent of an unadjusted 

wage index and 10 percent of a wage index 

adjusted for occupational mix. We project an 

overall change increase of 0.0 percent for all 

hospitals. The biggest change is in the rural 

urban hospitals in the South Atlantic, East 

South Central, and West South Central 

regions, which are projected to experience a 

0.1 percent increase for FY 2005.

G. Combined Impact of Proposed DRG and 

Wage Index Changes, Including Budget 

Neutrality Adjustment (Column 7) 

The impact of the DRG reclassifications 

and recalibration on aggregate payments is 

required by section 1886(d)(4)(C)(iii) of the 

Act to be budget neutral. In addition, section 

1886(d)(3)(E) of the Act specifies that any 

updates or adjustments to the wage index are 

to be budget neutral. As noted in the 

Addendum to this proposed rule, we 

compared simulated aggregate payments 

using the FY 2004 DRG relative weights and 

wage index to simulated aggregate payments 

using the proposed FY 2005 DRG relative 

weights and blended wage index. 

We computed a proposed wage and 

recalibration budget neutrality factor of 

0.994295. The 0.0 percent impact for all 

hospitals demonstrates that these proposed 

changes, in combination with the budget 

neutrality factor, are budget neutral. In Table 

I, the combined overall impacts of the effects 

of both the DRG reclassifications and 

recalibration and the updated wage index are 

shown in column 7. The proposed changes 

in this column are the sum of the final 

changes in columns 2, 5, and 6 combined 

with the budget neutrality factor and the 

wage index floor for urban areas required by 

section 4410 of Pub. L. 105–33, to be budget 

neutral (the change to the labor share in 

column 3 is not subject to budget neutrality. 

There also may be some variation of plus or 

minus 0.1 percentage point due to rounding. 

Among urban regions, the largest impacts 

are in the Middle Atlantic and Puerto Rico, 

with 0.8 and 0.7 percent declines, 

respectively. The West South Central region 

experiences the largest increase of 0.5 

percent. Among rural regions, the West North 

Central and Pacific regions benefit the most 

with 0.5 percent increases, while East South 

Central is the only region to experience a 

decline (0.1 percent). 

H. Impact of MGCRB Reclassifications 

(Column 8) 

Our impact analysis to this point has 

assumed hospitals are paid on the basis of 

their actual geographic location (with the 

exception of ongoing policies that provide 

that certain hospitals receive payments on 

bases other than where they are 

geographically located, such as hospitals in 

rural counties that are deemed urban under 

section 1886(d)(8)(B) of the Act). The changes 

in column 8 reflect the per case payment 

impact of moving from this baseline to a 

simulation incorporating the MGCRB 

decisions for FY 2005. These decisions affect 

hospitals’ standardized amount and wage 

index area assignments. 

By February 28 of each year, the MGCRB 

makes reclassification determinations that 

will be effective for the next fiscal year, 

which begins on October 1. The MGCRB may 

approve a hospital’s reclassification request 

for the purpose of using another area’s wage 

index value. The proposed FY 2005 wage 

index values incorporate all of the MGCRB’s 

reclassification decisions for FY 2005. The 

wage index values also reflect any decisions 

made by the CMS Administrator through the 

appeals and review process through February 

28, 2004. Additional changes that result from 

the Administrator’s review of MGCRB 

decisions or a request by a hospital to 

withdraw its application will be reflected in 

the final rule for FY 2005. 

The overall effect of geographic 

reclassification is required by section 

1886(d)(8)(D) of the Act to be budget neutral. 

Therefore, we applied an adjustment of 

0.994295 to ensure that the effects of 

reclassification are budget neutral. (See

section II.A.4.b. of the Addendum to this 

proposed rule.) 

As a group, rural hospitals benefit from 

geographic reclassification. Their payments 

would rise 1.9 percent in column 8. 

Payments to urban hospitals would decline 

0.3 percent. Hospitals in other urban areas 

would experience an overall decrease in 

payments of 0.2 percent, while large urban 

hospitals would also lose 0.4 percent. Among 

urban hospital groups (that is, bed size, 

census division, and special payment status), 

payments generally would decline. 

A positive impact is evident among most 

of the rural hospital groups. The smallest 

increases among the rural census divisions 

are 0.5 percent in the Mountain region and 

1.3 percent each for the New England and 

West North Central regions. The largest 

increases are in the rural East South Central 

region, with an increase of 2.8 percent and 

in the West South Central region that would 

experience an increase of 3.0 percent. 

Among all the hospitals that were 

reclassified for FY 2005 (including hospitals 

that received wage index reclassifications in 

FY 2003 or FY 2004 that extend for 3 years), 

the MGCRB changes are estimated to provide 

a 3.7 percent increase in payments. Urban 

hospitals reclassified for FY 2005 are 

expected to receive an increase of 3.8 

percent, while rural reclassified hospitals are 

expected to benefit from the MGCRB changes 

with a 3.7 percent increase in payments. 

Payments to urban and rural hospitals that 

did not reclassify are expected to decrease 

slightly due to the MGCRB changes, 

decreasing by 0.5 percent for urban hospitals 

and 0.3 percent for rural hospitals.

I. Impacts of Implementing the Wage Index 

Adjustment for Out-Migration (Column 9) 

Section 505 of Public Law 108–173 

established new section 1886(d)(13) of the 

Act. Section 1886(d)(13) requires that the 

Secretary establish a new process to make 

adjustments to the hospital wage index based 

on commuting patterns of hospital 

employees. The process provides for an 

increase in the wage index for hospitals 

located in certain counties that have a 

relatively high percentage of hospital 

employees who reside in the county but work 

in a different area with a higher wage index. 

Hospitals located in counties that qualify for 

the payment adjustment would receive an 

increase in the wage index that is equal to 

a weighted average of the difference between 

the wage index of the resident county and the 

higher wage index work area(s) weighted by 

the overall percentage of workers who are 

employed in an area with a higher wage 

index. Using our proposed criteria, 224 

counties and 411 hospitals qualify to receive 

a commuting adjustment. 

Due to the statutory formula to calculate 

the adjustment and the small number of 

counties that qualify, the impact on hospitals 

would be minimal, with an overall impact on 

all hospitals of 0.0 percent. However, some 

regions would experience a discernible 

impact. For example, urban hospitals in the 

Middle Atlantic region would experience a 

0.1 percent increase due to this provision. 

This is due in part to the fact that a hospital 

in that region would experience the largest 

increase for any hospital under this 

provision. A hospital located in Ulster 

County, New York would receive an increase 

in its wage index value of 0.1014. Hospital 

employees living in Ulster County commute 

to Albany, Columbia, Dutchess, Greene, New 

York, Orange, Rockland, Sullivan, and 

Westchester counties. Dutchess, New York, 

Orange, Rockland and Westchester counties 

are located in higher wage index areas. Thus, 

for FY 2005, this hospital’s wage index 

would increase from 0.8874 to 0.9888. 

J. All Changes (Column 10) 

Column 10 compares our estimate of 

payments per case, incorporating all changes 

reflected in this proposed rule for FY 2005 

(including statutory changes), to our estimate 

of payments per case in FY 2004. This 

28804 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

column includes all of the proposed policy 

changes. Because the reclassifications shown 

in column 8 do not reflect FY 2004 

reclassifications, the impacts of FY 2005 

reclassifications only affect the impacts from 

FY 2004 to FY 2005 if the reclassification 

impacts for any group of hospitals are 

different in FY 2005 compared to FY 2004. 

Column 10 reflects all FY 2005 changes 

relative to FY 2004, shown in columns 2 

through 9 and those not applied until the 

final rates are calculated. The average 

increase for all hospitals is approximately 4.9 

percent. This increase includes the effects of 

the 3.3 percent market basket update. It also 

reflects the 0.7 percentage point difference 

between the projected outlier payments in FY 

2004 (5.1 percent of total DRG payments) and 

the current estimate of the percentage of 

actual outlier payments in FY 2004 (4.4 

percent), as described in the introduction to 

this Appendix and the Addendum to this 

proposed rule. As a result, payments are 

projected to be 0.7 percent lower in FY 2004 

than originally estimated resulting in a 0.7 

percent higher increase for FY 2005 than 

would otherwise occur. It also includes the 

impact of adjusting the labor share, shown in 

column 3, of approximately 0.5 percent. The 

remaining 0.4 percent increase is attributable 

to the indirect medical education formula 

changes for teaching hospitals; changes in 

payments due to the wage reclassifications 

under section 508 of the MMA, in effect for 

the whole year; and increased payments to 

Puerto Rico hospitals as a result of section 

504 of the MMA, which changed the mix of 

the Federal standardized amount and the 

Puerto Rico-specific standardized amount. 

The overall increase also reflects changes to 

payments that resulted from implementing 

other changes as required by Public Law 

108–173. These changes are discussed in 

other rules and in many sections of the 

preamble to this proposed rule. 

Section 213 of Public Law 106–554 

provides that all SCHs may receive payment 

on the basis of their costs per case during 

their cost reporting period that began during 

1996. For FY 2005, eligible SCHs receive 100 

percent of their 1996 hospital-specific rate. 

The impact of this provision is modeled in 

column 10 as well. Additionally, section 402 

of Public Law 108–173 increases the 

disproportionate share hospital (DSH) 

adjustment for certain hospitals that serve a 

disproportionate share of low-income 

Medicare and Medicaid patients, which 

includes rural hospitals and urban hospitals 

with fewer than 100 beds, sole community 

hospitals, rural referral centers, and rural 

hospitals with less than 500 beds. The 

increase in DSH payments became effective 

for discharges occurring on or after April 1, 

2004. As provided in the new Medicare law, 

the cap on DSH payment adjustments 

increase from 5.25 percent to 12 percent for 

urban hospitals fewer than 100 beds, sole 

community hospitals, and rural hospitals 

with less than 500 beds. There is no cap on 

rural referral centers, large urban hospitals 

over 100 beds, or rural hospitals over 500 

beds. 

We are no longer required to ensure that 

any add-on payments for new technology 

under section 1886(d)(5)(K) of the Act are 

budget neutral. However, we are still 

providing an estimate of the payment 

increases here, as they will have a significant 

impact on total payments made in FY 2005. 

As discussed in section II.E. of the preamble 

of this proposed rule, we are proposing to 

maintain the new technology status of the 

InFUSETM Bone Graft/LT-CAGETM Lumbar 

Tapered Fusion Device for spinal fusions. We 

estimate the total add-on payments 

associated with cases involving this new 

device for FY 2005 would be $4.7 million. In 

addition, several other technologies may 

receive approval if we receive appropriate 

supplemental data from the applicants (as 

discussed in the preamble) and after public 

comments are taken into consideration for 

approval or denial of the technologies for FY 

2005. If we receive the necessary 

supplemental data for all of the devices that 

could be approved were to be approved, the 

total estimated increase in payments for FY 

2005 could be $369 million. 

There might also be interactive effects 

among the various factors comprising the 

payment system that we are not able to 

isolate. For these reasons, the values in 

column 10 may not equal the sum of the 

changes described above. 

The overall change in payments per case 

for hospitals in FY 2005 would increase by 

4.9 percent. Hospitals in urban areas would 

experience a 4.7 percent increase in 

payments per case compared to FY 2004. 

Hospitals in rural areas, meanwhile, would 

experience a 6.0 percent payment increase. 

Hospitals in large urban areas would 

experience a 4.5 percent increase in 

payments and hospitals in other urban areas 

would experience a 5.0 percent increase in 

payments. 

Among urban census divisions, the largest 

payment increase would be 14.3 percent in 

Puerto Rico. This is due largely to the change 

in calculation of their payment rate to 75 

percent of the National amount and the 

increase to the standardized amount to large 

urban hospitals. Additionally, the change to 

CBSAs makes all hospitals in Puerto Rico 

classify as urban hospitals instead of rural. 

(Because of these changes, we have deleted 

from Table I, the column included in prior 

years that shows the impacts on rural Puerto 

Rico hospitals.) Hospitals in the urban East 

South Central and West South Central 

regions would experience overall increases of 

5.5 percent and 5.7 percent, respectively. The 

smallest increase would occur in the New 

England region, with an increase of 3.6 

percent. 

Among rural regions in column 10, no 

hospital category would experience overall 

payment decreases. The East South Central 

and West South Central regions would 

benefit the most, with 9.4 and 7.2 percent 

increases, respectively. The smallest increase 

would occur in the New England region, with 

3.9 percent increases in payments. 

Among special categories of rural hospitals 

in column 10, those hospitals receiving 

payment under the hospital-specific 

methodology (SCHs, MDHs, and SCH/RRCs) 

would experience payment increases of 4.0 

percent, 8.1 percent, and 4.5 percent, 

respectively. This outcome is primarily 

related to the fact that, for hospitals receiving 

payments under the hospital-specific 

methodology, there were several increases to 

payments made in relation to 

implementation of the Public Law 108–173. 

Hospitals that were reclassified for FY 

2005 are estimated to receive a 5.2 percent 

increase in payments. Urban hospitals 

reclassified for FY 2005 are anticipated to 

receive an increase of 4.3 percent, while rural 

reclassified hospitals are expected to benefit 

from reclassification with a 5.9 percent 

increase in payments. Those hospitals 

located in rural counties but deemed to be 

urban under section 1886(d)(8)(B) of the Act 

are expected to receive an increase in 

payments of 4.4 percent.

TABLE II.—IMPACT ANALYSIS OF PROPOSED CHANGES FOR FY 2005 OPERATING PROSPECTIVE PAYMENT SYSTEM

[Payments per Case] 

Number of

hospitals 

Average

FY 2004

payment

per case 1

Average

FY 2005

payment

per case 1

All FY 2005

changes 

(1) (2) (3) (4). 

By Geographic Location:. 

All hospitals .............................................................................................. 3,904 7812 8193 4.9. 

Urban hospitals ......................................................................................... 2,696 8121 8504 4.7. 

Large urban areas (populations over 1 million) ....................................... 1,424 8513 8896 4.5. 

Other urban areas (populations of 1 million of fewer) ............................. 1,272 7684 8067 5.0. 

Rural hospitals .......................................................................................... 1,208 6110 6475 6.0. 

Bed Size (Urban):. 

0–99 beds ................................................................................................. 684 5812 6142 5.7. 

100–199 beds ........................................................................................... 966 6914 7233 4.6. 

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TABLE II.—IMPACT ANALYSIS OF PROPOSED CHANGES FOR FY 2005 OPERATING PROSPECTIVE PAYMENT SYSTEM—

Continued

[Payments per Case] 

Number of

hospitals 

Average

FY 2004

payment

per case 1

Average

FY 2005

payment

per case 1

All FY 2005

changes 

(1) (2) (3) (4). 

200–299 beds ........................................................................................... 500 7967 8316 4.4. 

300–499 beds ........................................................................................... 415 8839 9266 4.8. 

500 or more beds ..................................................................................... 131 10221 10718 4.9. 

Bed Size (Rural):. 

0–49 beds ................................................................................................. 549 5199 5527 6.3. 

50–99 beds ............................................................................................... 393 5751 6100 6.1. 

100–149 beds ........................................................................................... 163 6048 6412 6.0. 

150–199 beds ........................................................................................... 57 6636 7027 5.9. 

200 or more beds ..................................................................................... 46 7837 8275 5.6. 

Urban by Region:. 

New England ............................................................................................ 137 8688 8997 3.6. 

Middle Atlantic .......................................................................................... 397 8809 9136 3.7. 

South Atlantic ........................................................................................... 419 7762 8147 5.0. 

East North Central .................................................................................... 450 7830 8195 4.7. 

East South Central ................................................................................... 175 7482 7896 5.5. 

West North Central ................................................................................... 160 8008 8416 5.1. 

West South Central .................................................................................. 346 7632 8063 5.7. 

Mountain ................................................................................................... 140 8066 8376 3.8. 

Pacific ....................................................................................................... 421 9612 10080 4.9. 

Puerto Rico ............................................................................................... 51 3525 4028 14.3. 

Rural by Region:. 

New England ............................................................................................ 34 8037 8354 3.9. 

Middle Atlantic .......................................................................................... 57 6138 6398 4.2. 

South Atlantic ........................................................................................... 176 6087 6439 5.8. 

East North Central .................................................................................... 160 5998 6266 4.5. 

East South Central ................................................................................... 192 5241 5735 9.4. 

West North Central ................................................................................... 206 6514 6883 5.7. 

West South Central .................................................................................. 228 5514 5913 7.2. 

Mountain ................................................................................................... 93 6918 7219 4.4. 

Pacific ....................................................................................................... 62 8934 9336 4.5. 

By Payment Classification:. 

Urban hospitals ......................................................................................... 2,624 8148 8533 4.7. 

Large urban areas (populations over 1 million) ....................................... 1,405 8530 8915 4.5. 

Other urban areas (populations of 1 million of fewer) ............................. 1,219 7716 8101 5.0. 

Rural areas ............................................................................................... 1,280 6104 6462 5.9. 

Teaching Status:. 

Non-teaching ............................................................................................ 2,787 6542 6880 5.2. 

Fewer than 100 Residents ....................................................................... 916 8172 8561 4.8. 

100 or more Residents ............................................................................. 201 12131 12672 4.5. 

Urban DSH:. 

Non-DSH .................................................................................................. 1,156 7020 7347 4.7. 

100 or more beds ..................................................................................... 1,465 8695 9101 4.7. 

Less than 100 beds .................................................................................. 335 5540 5927 7.0. 

Rural DSH: 482 6592 6914 4.9. 

Sole Community (SCH)..

Referral Center (RRC) .............................................................................. 157 6735 7147 6.1. 

Other Rural:. 

100 or more beds .............................................................................. 68 5131 5588 8.9. 

Less than 100 beds ........................................................................... 241 4483 4937 10.1. 

Urban teaching and DSH: 800 9558 9997 4.6. 

Both teaching and DSH..

Teaching and no DSH .............................................................................. 250 8015 8399 4.8. 

No teaching and DSH .............................................................................. 1,000 6963 7315 5.1. 

No teaching and no DSH ......................................................................... 574 6512 6810 4.6. 

Rural Hospital Types:. 

Non special status hospitals ..................................................................... 400 4754 5163 8.6. 

RRC .......................................................................................................... 137 6179 6572 6.4. 

SCH .......................................................................................................... 454 7181 7467 4.0. 

Medicare-dependent hospitals (MDH) ...................................................... 211 4434 4792 8.1. 

SCH and RRC .......................................................................................... 73 7676 8019 4.5. 

Type of Ownership:. 

Voluntary ................................................................................................... 2,343 7926 8298 4.7. 

Proprietary ................................................................................................ 717 7125 7503 5.3. 

Government .............................................................................................. 776 7958 8385 5.4. 

Unknown ................................................................................................... 68 7853 8256 5.1. 

28806 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

TABLE II.—IMPACT ANALYSIS OF PROPOSED CHANGES FOR FY 2005 OPERATING PROSPECTIVE PAYMENT SYSTEM—

Continued

[Payments per Case] 

Number of

hospitals 

Average

FY 2004

payment

per case 1

Average

FY 2005

payment

per case 1

All FY 2005

changes 

(1) (2) (3) (4). 

Medicare Utilization as a Percent of Inpatient Days:. 

0–25 .......................................................................................................... 227 10405 10866 4.4. 

25–50 ........................................................................................................ 1,122 8578 8985 4.7. 

50–65 ........................................................................................................ 1,445 6956 7307 5.1. 

Over 65 ..................................................................................................... 937 6900 7240 4.9. 

Unknown ................................................................................................... 173 9887 10358 4.8. 

Rural Converted to Urban ........................................................................ 164 6473 6888 6.4. 

Urban Converted to Rural ........................................................................ 69 6097 6387 4.8. 

Hospitals Reclassified by the Medicare Geographic Classification Review 

Board: FY 2005 Reclassifications:. 

All Reclassified Hospitals ......................................................................... 485 7316 7699 5.2. 

All Nonreclassified Hospitals .................................................................... 3,326 7909 8291 4.8. 

All Reclassified Urban Hospitals .............................................................. 118 8258 8612 4.3. 

Urban Nonreclassified Hospitals .............................................................. 2,486 8151 8538 4.7. 

All Reclassified Rural Hospitals ................................................................ 367 6816 7215 5.9. 

Rural Nonreclassified Hospitals ................................................................ 840 5402 5734 6.2. 

Other Reclassified Hospitals (Section 1886(d)(8)(B)) .............................. 93 5971 6237 4.4 

1These payment amounts per case do not reflect any estimates of annual case-mix increase. 

Table II presents the projected impact of 

the proposed changes for FY 2005 for urban 

and rural hospitals and for the different 

categories of hospitals shown in Table I. It 

compares the estimated payments per case 

for FY 2004 with the average estimated per 

case payments for FY 2005, as calculated 

under our models. Thus, this table presents, 

in terms of the average dollar amounts paid 

per discharge, the combined effects of the 

changes presented in Table I. The percentage 

changes shown in the last column of Table 

II equal the percentage changes in average 

payments from column 10 of Table I. 

VII. Impact of Other Proposed Policy 

Changes 

In addition to those proposed changes 

discussed above that we are able to model 

using our IPPS payment simulation model, 

we are proposing various other changes in 

this proposed rule. Generally, we have 

limited or no specific data available with 

which to estimate the impacts of these 

proposed changes. Our estimates of the likely 

impacts associated with these other proposed 

changes are discussed below. 

A. Impact of Proposed Change to Postacute 

Care Transfer Payment Policy 

Existing regulations at § 412.4(b) define 

transfers from one acute care hospital to 

another, and § 412.4(c) defines transfers to 

certain postacute care providers. The per 

diem rate paid to a transferring hospital is 

calculated by dividing the full DRG payment 

by the geometric mean length of stay for the 

DRG. The transferring hospital receives a per 

diem payment for cases that are transferred 

prior to the geometric mean length of stay for 

the DRG (§ 412.4(f)(1)). Under section IV.A. 

of the preamble of this proposed rule, we 

discuss our proposal to provide alternate 

criteria for determining which DRGs are 

included within the scope of the postacute 

care transfer policy. The occasion for this 

proposed revision is our decision to delete 

DRG 483, and to assign the cases that 

previously were included within DRG 483 to 

two new DRGs, 541 and 542. As a result of 

these proposed revised criteria, three 

additional DRGs would fall within the scope 

of the policy. These are the two proposed 

new DRGs, 541 and 542, along with DRG 430. 

We estimate that the net effect of these 

proposed changes will be to reduce Medicare 

program payments by approximately $25 

million per year. The proposed change is 

entirely due to the effect of adding DRG 430 

to the policy. The proposed inclusion of 

proposed new DRGs 541 and 542 will have 

no effect on payments, because all of the 

cases included within those proposed DRGs 

were previously included within DRG 483 

and, thus, already fall within the policy. 

B. Impact of Proposed LTC-DRG 

Reclassifications and Relative Weights for 

LTCHs 

In section II.D. of the preamble of this 

proposed rule, we discuss the proposed 

changes in the LTC-DRG relative weights for 

FY 2005 on the proposed version 22.0 of the 

CMS GROUPER. We estimate that the 

proposed changes would result in an 

aggregate decrease in LTCH payments of 

approximately a $55 million based on LTCH 

cases in the FY 2003 MedPAR file. As we 

discuss in further detail in the 2005 LTCH 

PPS rate year final rule published on May 7, 

2004, based on an analysis of LTCH claims 

data in the FY 2003 MedPAR file. We have 

found that the average LTC-DRG relative 

weight has increased due to an increase of 

cases being assigned to LTC-DRGs with 

higher relative weights. This increase may be 

attributable to a number of factors, including 

improvements in coding practices, which are 

typically found when moving from a 

reasonable cost-based payment system to a 

PPS. The impact of including cases with 

relatively lower charges into LTC-DRGs that 

have a relatively higher relative weight in the 

GROUPER version 21.0 (FY 2004) is a 

decrease in the average relative weight for 

those LTC-DRGs in proposed GROUPER 

version 22.0. We believe that the proposed 

changes in the LTC-DRG relative weights, 

which include a number of proposed LTCDRGs with lower proposed relative weights, 

would result in a slight decrease in LTCH 

PPS payments. 

C. Impact of Proposed Policy on Payments for 

Inpatient Care in Providers That Change 

Classification Status During a Patient Stay 

In section IV.B. of the preamble to this 

proposed rule, we discuss our proposal to 

change our policy to preclude making more 

than one payment under Medicare for cases 

in which a Medicare provider changes its 

Medicare payment classification during a 

patient’s stay. Although this situation may 

occur in other settings, this payment issue is 

most prevalent for services furnished to 

cross-over patients in a newly established 

LTCH. Currently, when this situation arises, 

Medicare makes two payments for what is 

essentially only one beneficiary episode of 

care, one under the IPPS and one under the 

LTCH PPS. The intent of this proposed 

policy is to eliminate the Medicare payments 

for the single episode of care of such patients. 

While we believe that this proposed policy 

may generate savings for the Medicare 

program, we do not have readily available 

data to precisely estimate the effect of this 

proposed change. Because these proposed 

revisions would only affect new hospitals, 

we are unable to estimate the number of 

hospitals that would be affected. 

Furthermore, we cannot estimate the specific 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28807

DRGs that would be affected at those 

hospitals. 

D. Impact on Proposed Policy Reporting of 

Hospital Quality Data for Annual Hospital 

Payment Update 

In section IV.E. of the preamble to this 

proposed rule, we discuss the 

implementation of section 501(a) of Public 

Law 108–173, which provides that, the 

update factor for the operating payments for 

FY 2005 and subsequent fiscal years is the 

market basket percentage increase. Section 

501(b) also provides that, for FYs 2005 

through 2007, the update factor will be the 

market basket percentage increase minus 0.4 

percentage points for any hospital that does 

not submit quality data as specified in the 

law. We are unable to precisely estimate the 

effect of this provision because, while 

receiving the full update for those years is 

conditional upon the submission of quality 

data by a hospital, submission of the data is 

not mandated unconditionally. Furthermore, 

hospitals will not begin to submit the quality 

data until very late in the process of 

developing the final rule for FY 2005. The 

Congressional Budget Office, in its analysis 

of Public Law 108–173, assumed that a 

significant number of hospitals would not 

provide the data required for a full payment 

update, and therefore estimated savings to 

the Medicare program of approximately $100 

million per year. However, there has been a 

steady increase in the number of hospitals 

that are voluntarily submitting the specified 

quality data under the National Voluntary 

Hospital Reporting Initiative. We have also 

made efforts to ensure that QIOs provide 

assistance to all hospitals that wish to submit 

data. Therefore, we believe that a high 

proportion of hospitals will respond to the 

incentive provided by section 501(b) and 

submit quality data in order to receive the 

full update. For purposes of this proposed 

rule, we are assuming that no appreciable 

savings will result from this provision.

E. Impact of Proposed Policy on Threshold 

Criteria for Add-On Payments for New 

Technology and Medical Services 

In section IV.H. of the preamble of this 

proposed rule, we discuss our proposal to 

revise the threshold amount for determining 

whether a new technology or medical service 

is an appropriate candidate for an add-on 

payment if it is inadequately paid otherwise 

under the DRG system. Furthermore, we are 

no longer required to ensure that any add-on 

payments for new technology under section 

1886(d)(5)(K) of the Act are budget neutral. 

However, these payments will have a 

significant impact on total payments made in 

FY 2005. As discussed in section II.E. of the 

preamble of this proposed rule, we are 

proposing to maintain the new technology 

status of the INFUSE TM Bone Graft/LTCAGE TM Lumbar Tapered Fusion Device for 

spinal fusions. We estimate the total add-on 

payments associated with cases involving 

this new device for FY 2005 would be $4.7 

million. In addition, several other 

technologies may receive approval if we 

receive appropriate supplemental data from 

the applicants (as discussed in the preamble) 

and other interested parties. Therefore, if we 

approve all the devices that may warrant 

approval, the total estimated increase in 

payments for FY 2005 could be $369 million. 

F. Impact of Proposed Policy on Additional 

Payments to Hospitals With High Percentage 

of End-Stage Renal Disease Discharge 

In section IV.J. of the preamble of this 

proposed rule, we discuss our proposal to 

revise our regulations to state that, in 

determining whether a hospital qualifies for 

additional Medicare payments for hospitals 

with high percentages of ESRD discharges, 

only discharges involving ESRD Medicare 

beneficiaries who have received a dialysis 

treatment during an inpatient hospital stay 

are to be counted. 

This proposed revision to the policy would 

reduce the number of hospitals that will 

qualify for this additional payment. 

Specifically, discharges of Medicare ESRD 

beneficiaries who have not received dialysis 

treatment during the course of their hospital 

stays will no longer be counted in 

determining whether hospitals meet the 

threshold for receiving this additional 

payment. Some hospitals that have 

previously qualified for this extra payment 

would not qualify under this proposed 

revised policy. Therefore, the effect of this 

change would be a reduction in Medicare 

program expenditures. However, we are 

unable to quantify the level of program 

savings because we lack data on the 

proportion of the discharges previously 

counted toward the threshold determination 

under this provision that involved Medicare 

ESRD beneficiaries who did not receive 

dialysis services during their hospital stays. 

Overall program expenditures under this 

provision have been approximately $15 

million annually to approximately 41 

hospitals. We estimate that, the savings due 

to this policy change will only be some 

proportion of that figure since some portion 

of these hospitals, which currently qualify for 

the adjustment, will no longer qualify for 

these payments under the revised criteria. 

G. Impact of Proposed Policy on Payment 

Adjustments for Low-Volume Hospitals 

In section IV.M. of the preamble of this 

proposed rule, we discuss our proposal to 

implement section 406 of Public Law 108–

173, which provides for a new payment 

adjustment to account for the higher costs per 

discharge of low-volume hospitals under the 

IPPS. 

Based on the empirical analysis, we are 

limiting the adjustment to hospitals with 500 

or fewer discharges. It is difficult to estimate 

precisely the impact of this provision. While 

there were approximately 400 hospitals with 

500 or fewer total discharges in the most 

recent year for which we have data, many of 

these hospitals may qualify for CAH status 

under the revised bed count threshold (under 

section 405(e) of Pub. L. 108–173). 

Furthermore, we have not yet determined 

which hospitals satisfy the requirement that 

the hospital be located more than 25 road 

miles from another subsection (d) hospital. 

We are proposing to require that a hospital 

that wishes to qualify for the adjustment 

must provide its fiscal intermediary with 

evidence that it meets this distance 

requirement. Until intermediaries are able to 

make these determinations, we are unable to 

determine how many hospitals qualify for the 

adjustment. 

However, the aggregate impact of this 

provision is likely to be relatively small. 

Hospitals with fewer than 500 total 

discharges in a year are likely to have 

correspondingly few Medicare discharges, 

perhaps 200 Medicare discharges or fewer. 

The largest percentage adjustments under the 

proposed formula that we have developed 

would be realized by the smallest hospitals. 

For example, a hospital with 50 total 

discharges will receive an adjustment on 

each Medicare discharge (probably 20 to 25 

Medicare discharges annually) of 22.5 

percent. A hospital with 499 total discharges 

would receive an adjustment of only 0.05 

percent on each Medicare discharge. The 

Congressional Budget Office’s estimated that 

this provision would increase Medicare 

program expenditures by less than $50 

million annually. In the absence of a more 

precise estimate for the reasons indicated 

above, we agree with the Congressional 

Budget Office’s determination. 

H. Impact of Proposed Policy on MGCRB 

Hospital Reclassifications 

Sections 1886(d)(2)(D) and (d)(3) of the Act 

previously required the Secretary to compute 

two average standardized amounts for 

discharges occurring in a fiscal year: one for 

hospitals located in large urban areas and one 

for hospitals located in other areas. In 

addition, under sections 1886(d)(9)(B)(iii) 

and (d)(9)(C)(i) of the Act, the average 

standardized amount per discharge was 

determined for hospitals located in large 

urban and other areas in Puerto Rico. In 

accordance with section 1886(b)(3)(B)(i) of 

the Act, the large urban average standardized 

amount was 1.6 percent higher than the other 

area average standardized amount. 

Section 402(b) of Public Law 108–7 

required that, effective for discharges 

occurring on or after April 1, 2003, and 

before October 1, 2003, the Federal rate for 

all IPPS hospitals would be based on the 

large urban standardized amount. 

Subsequently, Public Law 108–89, extended 

section 402(b) of Public Law 108–7 beginning 

with fiscal year 2004 and thereafter, and 

equal standardized amount is to be computed 

for all hospitals at the level computed for 

large urban hospitals during FY 2003, 

updated by the applicable percentage update. 

This provision in effect makes permanent the 

equalization of the standardized amounts at 

the level of the previous standardized 

amount for large urban hospitals. As a result 

of this legislative change, the standardized 

amount reclassification criterion is no longer 

necessary or appropriate. Therefore, as 

discussed in section IV.N. of this proposed 

rule, we are proposing to remove all 

standardize amount criteria provisions from 

the regulations governing geographic 

reclassification. Specifically, we are 

proposing to remove the provisions that 

contain the criterion requiring individual 

hospitals and urban hospital groups to 

demonstrate that their costs are more 

comparable to the average amount they 

would be paid if they were reclassified than

28808 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

the amount they would be paid if they were 

reclassified than the amount they would be 

paid under their current classification. 

In conjunction with this change, we are 

proposing under the Secretary’s general 

authority to make exceptions that any 

hospital whose urban county group 

application under § 412.234 would have been 

approved by the MGCRB for FY 2004 and FY 

2005, but for the failure to meet the 

requirements in § 412.234(c), will be assigned 

the wage index for the MSA identified in the 

FY 2004 and FY 2005 group application (in 

cases where the group identified more than 

one preference, the hospital will be assigned 

the wage index that is most advantageous). 

For our proposal to remove all 

standardized amount criteria provisions from 

the regulations, we are unable to quantify the 

impact of this change precisely. The deletion 

of the standardized amount criterion may 

allow more hospital group applications to 

qualify for reclassification. However, we 

cannot determine how many groups would 

be affected by this change, and, of those, how 

many groups would actually organize to 

apply under the revised standard. This 

change would not affect the aggregate level 

of Medicare expenditures since 

reclassification decisions are budget neutral 

under section 1886(d)(8)(B) of the Act. 

However, the exercise of the Secretary’s 

exception authority to assign a new wage 

index to certain hospitals that failed to be 

approved for reclassification in FY 2004 and 

FY 2005 is not budget neutral. Our review of 

the group reclassification applications for 

those years indicates that only a very small 

number of hospitals would qualify for a new 

wage index assignment under this proposed 

exception. While we are unable to be certain 

about the exact number of hospitals that 

would qualify, we believe that the aggregate 

impact on program payments would be in the 

range of $10 million to $20 million annually 

for the three years during which this 

exception would be in place.

In addition, we are unable to quantify the 

precise impact of the proposed change 

precisely to the average hourly wage 

threshold for rural referral centers. Only a 

limited number of rural referral centers are 

actually located in urban areas. Effective 

October 1, 2000, if a hospital located in what 

is now an urban area was ever a rural referral 

center, it is reinstated to rural referral center 

status (65 FR 47089). We are unable to 

determine how many of these rural referral 

centers that would not otherwise have 

qualified for reclassification would now be 

able to meet the 82 percent threshold. 

However, this change would not affect the 

aggregate level of Medicare expenditures 

since reclassification decisions are budget 

neutral under section 1886(d)(8)(B) of the 

Act. The exercise of the Secretary’s exception 

authority to assign a new wage index to 

certain rural referral centers that failed to be 

approved for reclassification in FY 2005 is 

not budget neutral. Our review of the 

reclassification applications indicates that 

only a very small number of hospitals would 

qualify for a new wage index assignment 

under this proposed exception. While we are 

unable to be certain about the exact number 

of hospitals that would qualify, we believe 

that the aggregate impact on program 

payments would be in the range of $10 

million to $20 million for the one-year during 

which this exception would be in effect. 

Further, we anticipate that our proposed 

use of the authority in section 1886(d)(5)(I)(i) 

of the statute, to provide special protection 

to a small number of hospitals in States with 

fewer than 10 people per square mile (as 

determined using 2000 census data) would 

only increase Medicare program 

expenditures by $3 million to $5 million at 

the maximum. We believe that Medicare 

expenditures associated with this change 

would not exceed this level because many of 

the SCHs in the States where the exception 

would be applied have already qualified for 

reclassification effective for discharges on or 

after October 1, 2004. Furthermore, these 

hospitals are relatively small, and some of 

them are paid under their hospital specific 

rates, which restricts the gain from 

reclassification in most cases to capital PPS 

payments and payments for outpatient 

services. 

I. Impact of Proposed Policy on Payment for 

Direct Costs of Graduate Medical Education 

1. Redistribution of Unused Resident Slots 

As discussed in section IV.O.2.b. of this 

preamble, section 422 of Public Law 108–173 

added a new section 1886(h)(7) to the Act 

that provides for reductions in the statutory 

FTE resident caps under Medicare for certain 

hospitals and authorizes a ‘‘redistribution’’ of 

the FTE resident slots resulting from the 

reduction in the FTE resident caps to other 

hospitals. 

For purposes of this proposed rule, we 

have estimated the impact of section 422 on 

hospitals for FY 2005, making assumptions 

about update factors, geographic (locality) 

adjustment factors, and the number of 

unused residency positions for each hospital. 

For purposes of calculating the impact for 

direct GME payments, we used the projected 

national average per resident amount (PRA) 

for FY 2005 of $82,249, as determined in 

accordance with existing § 413.86(e)(4)(ii)(B) 

(proposed to be redesignated as 

§ 413.77(d)(2)(ii) in this proposed rule), since 

section 1886(h)(7)(B)(v) of the Act requires 

that a hospital that receives an increase in its 

direct GME FTE resident cap under section 

1886(h)(7)(B) of the Act will receive direct 

GME payments with respect to those 

additional FTE residents using the localityadjusted national average PRA. Based on our 

analysis of hospitals’ FTE resident caps and 

FTE resident counts from the Hospital Cost 

Report Information System (HCRIS) for the 

most recent cost reporting periods ending on 

or before September 30, 2002, and making 

assumptions for hospitals that submit a 

timely request to use their cost report that 

includes July 1, 2003, we estimate that 

approximately 2,600 FTE resident slots that 

were previously unfilled (and therefore, no 

direct GME or IME payments were made for 

those slots) would be redistributed to and 

filled by hospitals that request an increase to 

their FTE residents caps under section 

1886(h)(7)(B). (We note that this estimate of 

2,600 slots is not necessarily the same as the 

estimate we would ultimately use to 

redistribute resident positions under section 

1886(h)(7)(B)). Since payments for direct 

GME are determined based on a hospital’s 

Medicare inpatient utilization, for purposes 

of this impact, we have applied a factor of 

.35 as the average Medicare inpatient 

utilization. Accordingly, for FY 2005, we 

estimate an increase of $75.6 million in 

direct GME payments. 

For purposes of estimating the impact on 

IME payments, we used an IME formula 

multiplier of 0.66, since section 

1886(d)(5)(B)(ix) states that for a hospital 

whose FTE resident cap is increased as a 

result of a redistribution of unused resident 

positions, the IME adjustment factor is to be 

calculated using a formula multiplier of 0.66 

with respect to any additional residents 

counted by the hospital as a result of that 

increase in the hospital’s FTE resident cap. 

Based on an estimate of unused resident 

positions using FTE resident data from 

HCRIS for the most recent cost reporting 

periods ending on or before September 30, 

2002, and making assumptions for hospitals 

that submit a timely request to use their cost 

report that includes July 1, 2003, we estimate 

that for FY 2005, IME payments would 

increase by approximately $66.5 million. 

Thus, since section 422 is not effective until 

the fourth quarter of FY 2005 (that is, July 1, 

2005), the estimated total increase in 

Medicare payments for FY 2005 attributable 

to section 422 is $35.53 million ([$75.6 

million + $66.5 million] divided by 4). 

2. Per Resident Amount: Extension of Update 

Limitation on High-Cost Programs 

In section IV.O.4. of the preamble of this 

proposed rule, we discuss our proposal to 

implement section 711 of Public Law 108–

173, which freezes the annual CPI–U 

inflation factors to hospital-specific PRAs for 

direct GME payments for those PRAs that 

exceed the established ceiling for FYs 2004 

through 2013. Under existing regulations, for 

FY 2005, if a hospital’s PRA for the previous 

cost reporting period would be greater than 

140 percent of the locality-adjusted national 

average PRA for that same previous cost 

reporting period, the hospital’s PRA would 

be updated for inflation, except that the CPI–

U applied for a 12-month period is reduced 

by 2 percentage points. Under the new 

provisions of section 711 of Pub. L. 108–173 

for FY 2005, if a hospital-specific PRA for the 

previous cost period would be greater than 

140 percent of the locality-adjusted national 

average PRA for that same previous cost 

reporting period, the hospital-specific PRA 

would be frozen at the FY 2004 PRA, and not 

updated for inflation. Therefore, the impact 

in direct GME payments for FY 2005 

(attributable to section 711 of the Public Law 

108–173) is the difference between updating 

the PRAs by the applicable CPI–U inflation 

factor minus 2 percentage points, and not 

updating the PRAs by any CPI–U inflation 

factor. We have calculated an impact for this 

provision, but the resulting savings are 

negligible (less than $100,000). 

3. Residents Training in Nonhospital Settings 

In section IV.O.5. of the preamble of this 

proposed rule, we discuss our proposal to 

implement section 713 of Public Law 108–

173, which, through a moratorium, allows 

hospitals to count allopathic or osteopathic 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28809

family practice residents training in 

nonhospital settings for IME and direct GME 

without regard to the financial arrangements 

between the hospital and the teaching 

physician practicing in the nonhospital 

setting in which the resident is assigned. We 

are unable to quantify the impact of these 

provisions because we do not know the 

number of residents or programs that are 

affected by these changes. 

In addition, under IV.O.5. of this preamble, 

we discuss our proposed changes related to 

requirements for written agreements for 

residency training in nonhosital settings. We 

are proposing to revise the regulations to 

remove the requirement for a written 

agreement between the hospital and the 

nonhospital setting as a precondition for a 

hospital to count residents training in 

nonhospital settings for purposes of direct 

GME and IME payments. We are also 

proposing that, in order for the hospital to 

count residents training in a nonhospital 

setting, the hospital must pay for the 

nonhospital site training costs concurrently 

with the training that occurs during the cost 

reporting period. There is no monetary 

impact related to this proposed change 

because this proposal is administrative in 

nature, and does not affect a hospital’s direct 

GME or IME payments.

J. Impact of Proposed Policy on Rural 

Community Hospital Demonstration Program 

In section IV.P. of the preamble of this 

proposed rule, we discuss our proposal to 

implement section 410A of Public Law 108–

173 requiring the Secretary to establish a 

demonstration that will modify 

reimbursement for inpatient services for up 

to 15 small rural hospitals. Section 

410A(c)(2) requires that ‘‘in conducting the 

demonstration program under this section, 

the Secretary shall ensure that the aggregate 

payments made by the Secretary do not 

exceed the amount which the Secretary 

would have paid if the demonstration 

program under this section was not 

implemented.’’ As discussed in section IV.P. 

of this proposed rule, we are proposing to 

satisfy this requirement by adjusting national 

IPPS rates by a factor that is sufficient to 

account for the added costs of this 

demonstration. We estimate that the average 

additional annual payment that would be 

made to each participating hospital under the 

demonstration would be approximately 

$1,120,000. We based this estimate on the 

recent historical experience of the difference 

between inpatient cost and reasonable cost 

payment for hospitals that would be eligible 

for the demonstration. For 15 participating 

hospitals, the total annual impact of the 

demonstration program is estimated to be 

$16,820,148. We estimate that there will be 

an average decrease in payment per discharge 

of approximately $0.83 in order to achieve 

budget neutrality. We describe the budget 

neutrality adjustment required for this 

purpose in the Addendum to this proposed 

rule. 

K. Impact of Proposed Criteria for HospitalsWithin-Hospitals 

In section VI.B. of the preamble of this 

proposed rule, we discuss three options for 

revising and strengthening the criteria to be 

used to classify hospitals-within-hospitals for 

purposes of payments that are excluded from 

the IPPS. The intent of our policies requiring 

separateness of administrative and medical 

governance and decision-making between the 

hospital-within-a-hospital and its host has 

been to discourage patient shifting between 

the excluded hospital-within-a-hospital and 

its host for financial rather than medical 

purposes. In 2002, there were 114 hospitalswithin-hospitals, and these entities are 

increasing at an average annual rate of 30 

percent (MedPAC, June 2003, p.85). To the 

extent that these proposed revisions would 

eliminate hospital-within-hospital 

arrangements that circumvented our existing 

requirements, the Medicare program would 

avoid making unnecessary payments under 

the more costly excluded hospital PPSs. We 

cannot estimate the numbers of existing 

entities that would be affected by these 

proposed revisions, nor can we estimate the 

specific DRGs that would be affected at those 

hospitals. In addition, we do not know the 

number of new applications for this status 

that would be subject to review under these 

new proposed standards. Therefore, we are 

unable to quantify the effect these propose 

changes would have upon Medicare 

expenditures. However, we believe that this 

proposed change in policy would likely 

result in a savings to the Medicare program. 

L. Impact of Proposed Policy Changes 

Related to CAHs 

In section VI.C.2. through VI.C.5. of the 

preamble of this proposed rule, we discuss 

our proposal to implement provisions in 

section 405 of Public Law 108–173 relating 

to payments to CAHs which include the 

percentage of change in the reasonable cost 

payment amount for certain services; the 

revised condition for a CAH’s election of the 

optional payment method; the availability to 

CAHs of the periodic interim payment 

method (PIP); and expansion of types of 

emergency room providers who may be on 

call at CAHs. 

These changes, taken together with the 

increase in the number of beds permitted to 

CAHs for acute care inpatient services 

discussed below, increase the incentive for 

conversion to CAH status by allowing larger 

rural hospitals and those with specialized 

units to become CAHs without materially 

reducing the size and scope of their 

activities. The added 1 percent 

reimbursement and flexibility to allow some 

physicians to opt out of method 2 for CAH 

billing should also increase the rate of 

conversion, while at the same time increasing 

the cost of CAHs to the Medicare program. 

The two payment methods are described in 

detail in section V.I.D.3. of the preamble and 

at § 413.70(b). The Congressional Budget 

Office’s official estimate was that section 405 

of Public Law 108–173 would increase 

Medicare program expenditures by 

approximately $100 million annually. We do 

not have the information to quantify the 

extent of the anticipated increase more 

precisely or to determine how much each 

provision of section 405 might contribute to 

that increase. 

In section VI.C.6. of this preamble, we 

discuss our proposal to our regulations to 

reflect the provisions of section 405(e) of 

Pub. L. 108–173, which provides for an 

increase in the number of beds permitted to 

CAHs for acute care inpatient services, from 

15 to 25 beds. We anticipate that both 

Medicare providers and beneficiaries would 

welcome this change. The increase in the 

number of beds would benefit CAHs that 

experience seasonal increases in patient 

census due to weather conditions and 

tourism. With the increase, more Medicare 

beneficiaries may have access to health care 

in their communities without the need to be 

transferred to another hospital because the 

CAH is at capacity for acute care beds. In 

addition, the bed size increase would 

eliminate an obstacle for some small rural 

hospitals that, except for the bed size 

restriction of 15 acute care beds, could 

qualify for CAH status. Although we 

anticipate that these changes would increase 

the rate at which hospitals convert to CAH 

status we do not have the information needed 

to make quantitative estimates of the extent 

of this increase. 

In section VI.C.7. of the preamble of this 

proposed rule, we discuss our proposal to 

implement section 405(g) of Public Law 108–

173, which grants authority for CAHs to 

establish psychiatric and rehabilitation 

distinct part units. This proposed rule would 

allow CAHs the option of providing 

rehabilitation and psychiatric services in 

such units. 

Although we view the anticipated results 

of the proposed regulations as beneficial to 

the Medicaid and Medicare programs as well 

as to Medicare and Medicaid beneficiaries 

and State governments, we recognize that 

some of the provisions could be controversial 

and that some affected entities may respond 

unfavorably. We also recognize that not all of 

the potential effects of these provisions can 

definitely be anticipated, especially in view 

of their interaction with other Federal, State, 

and local activities regarding outpatient 

services. In particular, considering the effects 

of our simultaneous efforts to improve the 

delivery of outpatient services, it is 

impossible to quantify meaningfully a 

projection of the future effect of these 

provisions on a CAH’s operating costs or on 

the frequency of substantial noncompliance 

and termination procedures. 

We estimate that only those facilities that 

have the capabilities to operate a distinct part 

unit prior to becoming a CAH will elect to 

operate such a unit. Hospitals that currently 

operate a distinct part unit and wish to 

continue providing psychiatric and 

rehabilitation services to the community can 

continue to do so after converting to a CAH. 

Allowing a facility that converts to a CAH to 

continue providing inpatient rehabilitation 

and psychiatric services in rural areas would 

help to ensure availability of services that are 

disproportionately located in urban areas. 

Distinct-part units may be less common in 

rural areas due to the challenge of finding the 

resources needed to operate a distinct part 

unit. The United States General Accounting 

Office (GAO), in its September 2003 Report 

to Congress, entitled ‘‘Modest Eligibility 

Expansion for Critical Access Hospital 

Program Should Be Considered,’’ reported 

that a distinct part unit might provide a 

28810 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

8 Information from United States General 

Accounting Office’s Report to Congress, ‘‘Modest 

Eligibility Expansion for Critical Access Hospital Program Should be Considered,’’ GAO–03–948, 

September 2003.

financial benefit to the hospital because it 

enables the hospital to spread its fixed costs 

over more services. CAHs potentially can 

experience a net gain on their Medicare 

payments.

Among the existing CAHs, 25 previously 

operated a distinct part unit but had to close 

it as part of becoming a CAH. GAO identified 

683 rural hospitals as ‘‘potential CAHs’’

based on their having an annual average of 

no more than 15 acute care patients per day. 

About 14 percent (93) of these potential 

CAHs operate an inpatient psychiatric or 

rehabilitation distinct part unit, which they 

previously would have had to close to 

convert to CAH status. Among the potential 

CAHs that operate a distinct part, about half 

had a net loss on Medicare services, 

indicating they might benefit from CAH 

conversion.8

Based on the GAO data, we estimate that 

approximately 50 hospitals that currently 

operate distinct part units would not incur 

any additional expense to convert to a CAH 

and, in fact, may increase their revenue. 

Therefore, we are only estimating burden for 

current CAHs (approximately 27) that might 

want to operate a distinct part unit due to 

their previous experience in operating a 

distinct part unit. 

Inpatient psychiatric services in a CAH’s 

distinct-part unit must be under the 

supervision of a clinical director, service 

chief, or equivalent who is qualified to 

provide the leadership required for an 

intensive treatment program, and who is 

board certified in psychiatry. The distinct 

part unit must also have a director of nursing 

services who is a registered nurse with a 

master’s degree in psychiatric or mental 

health nursing or its equivalent from a school 

of accreditation by the National League of 

Nursing, who is qualified by education and 

experience in the care of persons with mental 

illness, and a director of social services. 

There must also be an adequate number of 

registered nurses to provide 24-hour coverage 

as well as licensed practical nurses and 

mental health workers. 

A rehabilitation distinct-part unit of a CAH 

would be required to provide rehabilitation 

nursing, physical and occupational therapy, 

and, as needed, speech therapy, social 

services or psychological services and 

orthotics and prosthetics. The distinct part 

unit also must have a director of 

rehabilitation who, among other 

requirements, is experienced in rehabilitation 

and is a doctor of medicine or a doctor of 

osteopathy. 

In addition, a CAH must comply with the 

common requirements for excluded units at 

§ 412.25. Therefore, both psychiatric and 

rehabilitation distinct part units would be 

required to meet those requirements, 

including written admission criteria that are 

applied uniformly to both Medicare and nonMedicare having patients and have 

admission and discharge records that are 

separately identified from those of the CAH 

in which it is located and are readily 

available. Both of these distinct part units 

also must have policies specifying that 

necessary clinical information be transferred 

to the unit and have utilization review 

standards applicable for the type of care 

offered in the unit. Psychiatric distinct part 

units would also have to meet requirements 

of § 412.22, including maintenance of 

medical records that permit determination of 

the degree and intensity of the treatment 

provided to individuals who are furnished 

services in the unit. Each patient must also 

have an individual comprehensive treatment 

plan. Section 412.29 requires individuals 

having rehabilitation distinct part units to 

also have to meet the criteria of a 

preadmission screening procedure under 

which each prospective patient’s condition 

and medical history are reviewed to 

determine whether the patient is likely to 

benefit significantly from an inpatient 

program. The unit must have also a plan of 

treatment for each inpatient. 

Notwithstanding the above discussion, we 

are not attributing burden for these 

requirements because they are industry 

standards for providing quality care and are 

already required conditions for both 

rehabilitation and psychiatric units.

Hours/estimated salary/number of CAHs Annual cost 

Estimated Costs for Psychiatric Distinct Part Units

Clinical Director or service chief; annual salary of $75,000 × 27 CAHs ............................................................................................. $2,025,000

24-hours nursing coverage—1 RN per 12 hour shift (2 RNs total) = Annual salary of $52,120 × 2; ................................................ 2,814,480

One LPN per 12 hour shift = Annual salary of $32,500 × 2 = $65,000 × 27 CAHs; ......................................................................... 1,755,000

Director of nursing—Annual salary of $60,000 × 27 = $1,620,000 .................................................................................................... 1,620,000

Director of social services—Annual salary of $53,000 × 27 = $1,431,000 ......................................................................................... 1,431,000 

Psychiatric aides—Annual salary of $25,650 x 2=$51,300 × 27 CAHs ............................................................................................. 1,385,100 

Total .............................................................................................................................................................................................. 11,050,580 

Estimated Costs for Rehabilitation Distinct Part Units

Director of Rehabilitation—Annual salary $75,000 × 27 = $2,025,000 .............................................................................................. 2,025,000

Occupational Therapist—Annual salary $53,300 × 27 = $1,439,100 ................................................................................................. 1,439,100

Physical Therapist—Annual salary $55,800 × 27 = $1,506,600 ......................................................................................................... 1,506,600

Speech Therapist—Annual salary $52,800 × 27 = $1,425,600 .......................................................................................................... 1,425,600 

Rehabilitation nurse—Annual salary $32,500 × 27 = ......................................................................................................................... 877,500

Total .............................................................................................................................................................................................. 7,273,800 

In section VI.C.8. of the preamble of this 

proposed rule, we are proposing to 

implement section 405(h) of Public Law 108–

173 which terminates a State’s authority to 

waive the location requirement of more than 

a 35-mile drive (or in the case of 

mountainous terrain or secondary roads, a 

15-mile drive) for a CAH by designating the 

CAH as a necessary provider. We do not have 

the information to quantify the extent of the 

anticipated increase more precisely or to 

determine how much this provision might 

contribute to that increase. 

M. Impact of Proposed Policy Change 

Regarding Disclosure of Information by QIOs. 

In section VII.A. of this proposed rule, we 

are proposing to revise our regulations to add 

provisions to allow QIOs to disclose 

information about practitioners and 

institutions and information from quality 

review studies if the practitioner or 

institution consents to or requests the 

disclosure of the information in writing. This 

disclosure would be in addition to the 

existing disclosure previously based on 

written consent of the institution or 

practitioner. In addition, we are proposing 

exceptions to the 30-day advance notice 

requirement to an institution or practitioner 

by a QIO of its intent to disclose confidential 

and nonconfidential information on a 

practitioner or an institution is at the request 

of or consent of the institution or 

practitioner. We are proposing to specify that 

the notification requirements would not 

apply if the institution or practitioner has 

requested in writing that the QIO make the 

disclosure, has provided written consent for 

the disclosure, or the information is public 

information.

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28811

We believe that these proposed revisions 

would reduce the existing burden on 

practitioners, institutions, and QIOs and, at 

the same time, ensure that necessary 

protections on information are retained. 

These provisions would allow QIOs, 

institutions, and practitioners to share vital 

information in an effective manner and 

further our efforts to ensure the highest 

quality of care for Medicare beneficiaries. 

N. Impact of Policy Change for Medicare 

Hospital Conditions of Participation for 

Discharge Planning 

In section VIII.A. of the preamble of this 

proposed rule, we discuss our proposal to 

amend the regulations at § 482.43 to 

incorporate the provisions of section 4321(a) 

of Public Law 105–33 and section 926(b) of 

Public Law 108–173 into the hospital 

conditions of participation. We are proposing 

to include the requirement for hospitals to 

provide lists of Medicare-certified HHAs and 

SNFs to patients or their representatives as 

part of the discharge planning process. We 

are proposing to require the SNF list to 

include Medicare-certified SNFs located in a 

geographic area chosen by the patient. We are 

not requiring that the list of Medicarecertified SNFs contain only those SNFs that 

are located in the area in which the patient 

resides. Because many available Medicarecertified SNFs are not located near where the 

patient resides, especially in rural areas, we 

believe that a requirement that restricts a 

patient to SNFs in areas where the patient 

resides is too restrictive and would limit the 

choices of posthospital extended care 

services for Medicare beneficiaries. 

The nature of the proposed regulatory 

provision is such that this minimal 

regulatory burden would be placed upon 

hospitals, HHAs and SNFs exclusively. 

Therefore, we did not consider any 

regulatory relief options. We also certify that 

this proposed provision would not have a 

significant economic impact on a substantial 

number of small entities or a significant 

impact on the operations of a substantial 

number of small rural hospitals.

Compliance with section 4321(a) of the 

BBA and section 926(b) of Public Law 108–

173 requires a hospital to collect on an initial 

and ongoing basis information to develop 

and maintain a current list of HHAs and 

SNFs available to Medicare beneficiaries. We 

anticipate that this effort would be minimal 

because hospitals currently access this 

information as an essential component of the 

discharge planning process. We do not 

anticipate that the operations of a substantial 

number of small rural hospitals would be 

significantly impacted. The impact would be 

even further minimized if a hospital chooses 

to access this information via the Home 

Health Compare or Nursing Home Compare 

tools on the CMS Web site, http://

www.medicare.gov, or if the hospital calls 1–

800–MEDICARE (1–800–633–4227) to 

request a printout of the HHAs or SNFs in 

the desired geographic area. 

The anticipated effects on patients would 

be an enhanced ability to make informed 

choices about the care they receive from 

HHAs or SNFs upon discharge from a 

hospital. Based on 2003 CMS data, there are 

approximately 6,000 Medicare-certified 

hospitals, 6,900 Medicare-certified HHAs, 

and 17,000 SNFs. 

The requirements set forth in this proposed 

provision would place minimal burdens on 

hospitals, HHAs, and SNFs. A possible 

outcome of the implementation of all parts of 

the rule may be to influence hospital referral 

patterns, thus having an impact on HHAs and 

SNFs receiving post-hospitalization referrals. 

The information made available to maintain 

compliance with the statute and this 

proposed provision might impact patient 

choices about who furnishes Medicare 

services to them and, in turn, may have an 

indeterminable impact on entities that 

provide, or do not provide services to 

Medicare beneficiaries as a result. 

This proposed provision would improve 

our information campaign to assist 

beneficiaries in making informed choices for 

health care delivery. Patient choice under the 

Medicaid program may be similarly affected 

if the providers on these lists also participate 

in that program. 

We considered developing a standardized 

process, format, and timeframe for all 

hospitals to use in developing, maintaining, 

and updating a current list of HHAs and 

SNFs. Instead, we have chosen a less 

prescriptive approach. Hospitals have the 

flexibility to define a process for developing, 

maintaining, and updating their list of HHAs 

or SNFs in a manner that makes the most 

sense for both the hospital and the patients 

they serve. The hospital would have the 

flexibility to develop and maintain their own 

list of HHAs and SNFs, or simply print a list 

from the Home Health Compare or Nursing 

Home Compare site at the CMS Web site, 

http://www.medicare.gov, based on the 

geographic area requested by the patient. Or, 

in the rare instance when a hospital does not 

have Internet access, the hospital can call 1–

800–MEDICARE (1–800–633–4227) to 

request a printout of the list of HHAs or SNFs 

in the desired geographic area. In this way, 

hospitals would be able to develop and 

implement systems and processes that are the 

most effective and efficient in providing 

quality care and meeting the needs of their 

patients, as well as complying with the 

requirements of the proposed regulation. 

In summary, this proposed provision 

would establish a process for implementing 

the statutory requirements under section 

4321(a) of the BBA and section 926(b) of the 

MMA. This approach would enhance the 

information made available to Medicare 

beneficiaries and place minimal burdens on 

all entities that may be directly or indirectly 

affected. 

O. Impact of Proposed Policy Changes 

Relating to Medicare Provider Agreements for 

Compliance with Bloodborne Pathogens 

Standards for Medicare-Participating 

Hospitals 

In section VIII.B. of the preamble to this 

proposed rule, we discuss our proposal to 

implement section 947 of Public Law 108–

173 under which hospitals not otherwise 

subject to the Occupational Safety and Health 

Act (OSHA) (or a State occupational safety 

and health plan that is approved under 

section 18(b) of that Act) must comply with 

the OSHA bloodborne pathogens standard as 

part of their Medicare provider agreements, 

effective July l, 2004. 

Given that the Occupational Safety and 

Health Administration (OSHA) has already 

prepared a Regulatory Impact and Regulatory 

Flexibility Analysis for the Bloodborne 

Pathogens standard that was published 

December 6, 1991 (56 FR 64004), we have 

included relevant portions of their analyses 

in our estimate. However, we have pulled out 

the numbers that are relevant to this 

regulation and up-dated the numbers to make 

them current as of January, 2004. Thus, the 

impact of this proposed rule on the public 

hospitals included in the 26 States without 

state plans, as well as the District of 

Columbia, and Guam has been assessed. 

OSHA noted that most hospitals perform a 

great variety of services, and there are many 

different exposure scenarios. One frequently 

reported exposure was needlestick, with the 

greatest potential for exposure occurring 

during needle recapping. Other hospital 

procedures that are associated with frequent 

exposure include phlebotomy, IV line 

placement, bronchoscopy, intubation, airway 

suction, endoscopy, colonoscopy, and 

proctosigmoidoscopy. Areas with the greatest 

potential for exposure include the emergency 

room, surgical suite, hemodialysis center, 

and intensive care unit. Laundry workers and 

janitors may also be exposed, particularly 

when handling soiled linen or refuse. 

OSHA’s standard for reducing worker 

exposure to bloodborne pathogens is based 

on the adoption of universal precautions as 

a method of infection control. This approach, 

which is fundamentally different from 

traditional procedures that isolate known 

infectious individuals and materials in the 

health care setting, assumes that all human 

blood and body fluids are potentially 

infectious for HIV, HBV, and other 

bloodborne pathogens. The rationale for this 

approach is that carriers of these diseases are 

not always identifiable in the health care 

setting, and that contaminated materials are 

not always properly labeled. Thus, the 

exposed worker can be at great risk without 

warning. 

OSHA estimated that 6,197 hospitals with 

a total of 2,386,165 employees would be 

affected by the BBP standards. However, 

OSHA found that most hospitals had already 

implemented measures to protect workers 

from occupational exposure to blood and 

other potentially infectious materials, and 

that many were very close to full compliance 

with the standard. OSHA’s estimates of the 

number of affected hospitals and the number 

of employees did not include state and local 

government hospitals located in states 

without occupational safety and health plans 

in place, that is, the hospitals that would be 

affected by our proposed rule.

Net compliance costs were estimated for 

each provision of the standard based on 

OSHA surveys and information submitted in 

response to the rulemaking docket. The costs 

represented the additional costs of fully 

complying with the requirements of the 

standard, after deducting from total cost the 

current baseline activities that already 

voluntarily occurred at affected facilities. 

Personal protective equipment accounted for 

28812 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

the largest amount of net compliance costs. 

Training, vaccine and post-exposure followup, and housekeeping were also found to be 

significant cost components. One-time costs 

were annualized to reflect the opportunity 

cost of capital. OSHA estimated the total 

annual costs to the affected hospitals to be 

approximately $321,913,697 or $51,947 per 

hospital annually. 

The magnitude of cost increases associated 

with the standard was estimated to be 

relatively small, and OSHA stated that they 

should not create significant economic 

hardship for most affected hospitals. OSHA 

predicted that the costs would be passed 

through the system, with resultant minor 

price increases to patients, customers and 

other downstream recipients of health 

services. However, OSHA noted that without 

the BBP standards, the economic impact of 

inadequate protections from BBP would fall 

on hospital employees and the general 

public. 

OSHA stated that, in general, the economic 

impacts of the standard were not judged to 

be of sufficient magnitude to threaten the 

existence of any affected sector, nor were 

impacts judged sufficient to disrupt or 

otherwise adversely alter industry structure. 

OSHA did not believe that productivity of 

hospital employees would be significantly 

affected by the BBP requirements. OSHA 

stated that it believed familiarization with 

the requirements and techniques would 

restrict time lost and that any decrease in 

productivity would be offset by the peace of 

mind associated with a safer work setting. 

Based on OSHA’S conclusions, we did not 

deem it necessary to update the 1989 cost 

data used in their analysis. Although the 

costs of meeting the BBP standards would 

have increased over time, we note that at the 

time, OSHA found most hospitals had 

already implemented measures to protect 

workers from exposure to blood and other 

potentially infectious materials and that 

many hospitals were very close to full 

compliance. We expect that hospitals not 

covered under the BBP standards (that is, 

hospitals that would be affected by our 

proposed rule) also had implemented 

measures to protect their employees from 

exposure to blood and other potentially 

infectious materials and that many hospitals 

were already close to full compliance with 

the BBP standards. We also expect that in the 

intervening years, hospitals that would be 

affected by this proposed rule would have 

further increased their worker protections. It 

is likely that many of the hospitals that 

would be affected by this proposed rule are 

already very close to full compliance with 

the BBP standards. 

While smaller hospitals’ limited ability to 

diversify could be a potential disadvantage in 

their attempts to pass compliance costs 

forward, OSHA concluded that it did not 

appear that they would lag behind larger 

hospitals to any significant extent in their 

ability to provide employees with protection 

against infectious hazards. 

On January 18, 2001, OSHA published a 

final rule that added two new recordkeeping 

requirements to the BBP standards (66 FR 

48250). First, the amended standard requires 

employers to ‘‘establish and maintain a 

sharps injury log for the recording of 

percutaneous injuries’’. Second, any 

employer ‘‘who is required to establish an 

Exposure Control Plan’’ must ‘‘solicit input 

from non-managerial employees responsible 

for direct patient care who are potentially 

exposed to injuries from contaminated sharps 

in the identification, evaluation, and 

selection of effective engineering and work 

practice controls and shall document the 

solicitation in the exposure-control plan. 

According to OSHA’s analysis, the 

maximum total annual cost of the two 

requirements would be $33,892,653, 

consisting of $1,294,352 associated with 

maintaining a sharps injury log and 

$32,598,300 associated with soliciting and 

documenting employee input into the 

Exposure Control Plan. This would amount 

to $67 per hospital annually, which would 

not cause significant economic impact on 

either large or small affected establishments. 

The requirements set forth in this proposed 

rule would place minimal burden on 

hospitals. A possible outcome of the 

implementation of all parts of the rule may 

be to influence hospitals’ use of proper 

mechanisms and supplies necessary to 

ensure employee protection from BBPs. 

The anticipated effects on employees 

would be the assurance that provisions are 

made to reduce the potential for contact with 

BBPs when performing work-related duties. 

Based on 2003 CMS data, there are 

approximately 6,000 Medicare-certified 

hospitals of which 849 are non-federal, 

government-owned hospitals located in states 

that do not have their own health and safety 

standards.

This proposed rule would improve the 

quality of working conditions for employees 

who care for Medicare beneficiaries in these 

non-federal, government-owned hospitals 

and would ensure hospital employee safety 

while performing their duties in Medicare 

participating hospitals while placing 

minimal burden on all affected entities 

directly and on entities that may be 

indirectly affected. 

P. Impact of Proposed Fire Safety 

Requirements for Certain Health Care 

Facilities. 

In section VIII. of the preamble of this 

proposed rule, we discuss our proposal to 

clarify that long-term care facilities must be 

in compliance with Chapter 19.2.9, 

Emergency Lighting, beginning March 13, 

2006. In addition, we also specify that 

beginning March 13, 2006, Chapter 

19.3.6.3.2, exception number 2 will no longer 

apply to these facilities. 

In the January 10, 2003 final rule adopting 

the 2000 edition of the Life Safety Code, we 

examined the overall economic impact and 

the impact on small entities and rural 

hospitals as required by Executive Order 

12866 (September 1993, Regulatory Planning 

and Review), the Regulatory Flexibility Act 

(RFA) (September 16, 1980 Pub. L. 96–354), 

section 1102(b) of the Social Security Act, the 

Unfunded Mandates Reform Act of 1995 

(Pub. L. 104–4) and Executive Order 13132. 

We also examined the anticipated effects of 

the rule. We determined that the 2003 final 

rule did not meet the criteria to be 

considered economically significant or to be 

a major rule. Furthermore, we examined the 

Federalism implication of the 2003 final rule 

and determined that the rule would not have 

a substantial effect on State, local, or tribal 

governments. The correcting amendments in 

this proposed rule would merely bring the 

Code of Federal Regulations language into 

conformity with the analyses that we have 

already conducted and described in the 

Regulatory Impact Statement section of the 

2003 final rule. (See 68 FR 1374, January 10, 

2003). 

VIII. Impact of Proposed Changes in the 

Capital PPS 

A. General Considerations 

Fiscal year 2001 was the last year of the 10-

year transition period established to phase in 

the PPS for hospital capital-related costs. 

During the transition period, hospitals were 

paid under one of two payment 

methodologies: fully prospective or hold 

harmless. Under the fully prospective 

methodology, hospitals were paid a blend of 

the capital Federal rate and their hospitalspecific rate (see § 412.340). Under the holdharmless methodology, unless a hospital 

elected payment based on 100 percent of the 

capital Federal rate, hospitals were paid 85 

percent of reasonable costs for old capital 

costs (100 percent for SCHs) plus an amount 

for new capital costs based on a proportion 

of the capital Federal rate (see § 412.344). As 

we state in section V. of the preamble of this 

proposed rule, with the 10-year transition 

period ending with hospital cost reporting 

periods beginning on or after October 1, 2001 

(FY 2002), beginning in FY 2002 capital 

prospective payment system payments for 

most hospitals are based solely on the capital 

Federal rate. Therefore, we no longer include 

information on obligated capital costs or 

projections of old capital costs and new 

capital costs, which were factors needed to 

calculate payments during the transition 

period, for our impact analysis. 

In accordance with § 412.312, the basic 

methodology for determining a capital 

prospective payment system payment is:

(Standard Federal Rate) × (DRG weight) ×

(Geographic Adjustment Factor (GAF)) ×

(Large Urban Add-on, if applicable) × (COLA 

adjustment for hospitals located in Alaska 

and Hawaii) × (1 + Disproportionate Share 

(DSH) Adjustment Factor + Indirect Medical 

Education (IME) Adjustment Factor, if 

applicable). 

In addition, hospitals may also receive 

outlier payments for those cases that qualify 

under the threshold established for each 

fiscal year. 

The data used in developing the impact 

analysis presented below are taken from the 

December 2003 update of the FY 2003 

MedPAR file and the December 2003 update 

of the Provider Specific File that is used for 

payment purposes. Although the analyses of 

the changes to the capital prospective 

payment system do not incorporate cost data, 

we used the December 2003 update of the 

most recently available hospital cost report 

data (FY 2001) to categorize hospitals. Our 

analysis has several qualifications. First, we 

do not make adjustments for behavioral 

changes that hospitals may adopt in response 

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28813

to policy changes. Second, due to the 

interdependent nature of the PPS, it is very 

difficult to precisely quantify the impact 

associated with each change. Third, we draw 

upon various sources for the data used to 

categorize hospitals in the tables. In some 

cases (for instance, the number of beds), there 

is a fair degree of variation in the data from 

different sources. We have attempted to 

construct these variables with the best 

available sources overall. However, for 

individual hospitals, some 

miscategorizations are possible. 

Using cases from the December 2003 

update of the FY 2003 MedPAR file, we 

simulated payments under the capital PPS 

for FY 2004 and FY 2005 for a comparison 

of total payments per case. Any short-term, 

acute care hospitals not paid under the 

general IPPS (Indian Health Service Hospitals 

and hospitals in Maryland) are excluded 

from the simulations. 

As we explain in section III.A.4. of the 

Addendum of this proposed rule, payments 

will no longer be made under the regular 

exceptions provision under §§ 412.348(b) 

through (e). Therefore, we are no longer using 

the actuarial capital cost model (described in 

Appendix B of the August 1, 2001 final rule 

(66 FR 40099)). We modeled payments for 

each hospital by multiplying the capital 

Federal rate by the GAF and the hospital’s 

case-mix. We then added estimated payments 

for indirect medical education, 

disproportionate share, large urban add-on, 

and outliers, if applicable. For purposes of 

this impact analysis, the model includes the 

following assumptions: 

• We estimate that the Medicare case-mix 

index would increase by 1.0 percent in both 

FY 2004 and FY 2005. 

• We estimate that the Medicare 

discharges will be 14.5 million in FY 2004 

and 14.0 million in FY 2005 for a 3.4 percent 

decrease from FY 2004 to FY 2005. (We are 

projecting a decrease in Medicare Part A feefor-service admissions, in part, because we 

are projecting an increase in Medicare 

managed care enrollment as a result of the 

implementation of several provisions of 

Public Law 108–173. 

• The capital Federal rate was updated 

beginning in FY 1996 by an analytical 

framework that considers changes in the 

prices associated with capital-related costs 

and adjustments to account for forecast error, 

changes in the case-mix index, allowable 

changes in intensity, and other factors. The 

proposed FY 2005 update is 0.7 percent (see

section III.A.1.a. of the Addendum to this 

proposed rule).

• In addition to the proposed FY 2005 

update factor, the proposed FY 2005 capital 

Federal rate was calculated based on a GAF/

DRG budget neutrality factor of 1.0015, an 

outlier adjustment factor of 0.9497, and a 

(special) exceptions adjustment factor of 

0.9996. 

Results 

In the past, in this impact section we 

presented the redistributive effects that were 

expected to occur between ‘‘hold-harmless’’

hospitals and ‘‘fully prospective’’ hospitals 

and a cross-sectional summary of hospital 

groupings by the capital PPS transition 

period payment methodology. We are no 

longer including this information because all 

hospitals (except new hospitals under 

§ 412.324(b) and under § 412.304(c)(2)) are 

paid 100 percent of the capital Federal rate 

in FY 2005. 

We used the actuarial model described 

above to estimate the potential impact of our 

proposed changes for FY 2005 on total 

capital payments per case, using a universe 

of 3,871 hospitals. As described above, the 

individual hospital payment parameters are 

taken from the best available data, including 

the December 2003 update of the FY 2003 

MedPAR file, the December 2003 update to 

the Provider-Specific File, and the most 

recent cost report data from the December 

2003 update of HCRIS. In Table III, we 

present a comparison of total payments per 

case for FY 2004 compared to FY 2005 based 

on the proposed FY 2005 payment policies. 

Column 2 shows estimates of payments per 

case under our model for FY 2004. Column 

3 shows estimates of payments per case 

under our model for FY 2005. Column 4 

shows the total percentage change in 

payments from FY 2004 to FY 2005. The 

change represented in Column 4 includes the 

0.7 percent update to the capital Federal rate, 

a 1.0 percent increase in case-mix, changes 

in the adjustments to the capital Federal rate 

(for example, the effect of the new hospital 

wage index on the geographic adjustment 

factor), and reclassifications by the MGCRB, 

as well as changes in special exception 

payments. The comparisons are provided by: 

(1) Geographic location; (2) region; and (3) 

payment classification. 

The simulation results show that, on 

average, capital payments per case can be 

expected to increase 4.3 percent in FY 2005. 

In addition to the 0.7 percent increase due to 

the capital market basket update, this 

projected increase in capital payments per 

case is largely attributable to the proposed 

changes in the GAF values (which include 

the increase to hospital wage index values 

provided for by sections 505 and 508 of Pub. 

L. 108–173) and estimated increase in outlier 

payments in FY 2005. Our comparison by 

geographic location shows that urban 

hospitals are expected to experience a 4.6 

percent increase in capital payments per 

case, while rural hospitals are only expected 

to experience a 2.1 percent increase in capital 

payments per case. This difference is mostly 

due to a projection that urban hospitals will 

experience a larger increase in payments due 

to changes in the proposed GAF values and 

larger projected increase in outlier payments 

from FY 2004 to FY 2005 compared to rural 

hospitals. 

Most regions are estimated to receive an 

increase in total capital payments per case. 

Changes by region vary from a minimum 

increase of 0.7 percent (South Atlantic rural 

region) to a maximum increase of 5.5 percent 

(Pacific urban region). This relatively small 

increase in projected capital payments per 

discharge for hospitals located in the South 

Atlantic rural region is largely attributable to 

the proposed changes in the GAF values (that 

is, the proposed GAFs for most of these 

hospitals for FY 2005 are lower than the 

average of the GAFs for FY 2004) and a 

projected decrease in DSH payments (mostly 

because the rural hospitals that previously 

qualified for capital DSH payments because 

they reclassified for the purpose of the 

operating IPPS standardized amounts would 

no longer be eligible to receive capital DSH 

payments with the equalization of the 

operating IPPS standardized amounts, as 

discussed in section IV.D. of the preamble of 

this proposed rule). The relatively large 

increase in capital payments per discharge 

for hospitals located in the Pacific urban 

region is largely due to the proposed changes 

in the GAF values (that is, the proposed 

GAFs for most of these hospitals for FY 2005 

are higher than the average of the GAFs for 

FY 2004) and an increase in projected outlier 

payments. 

Hospitals located in Puerto Rico are 

expected to experience an increase in total 

capital payments per case of 8.0 percent. This 

relatively large increase in payment per case 

for hospitals located in Puerto Rico is largely 

due to the proposed change in the Federal 

portion (from 50 percent to 75 percent) of the 

blended payments to Puerto Rico hospitals 

beginning in FY 2005. 

By type of ownership, proprietary hospitals 

are projected to have the largest rate of 

increase of total payment changes (4.7 

percent). Similarly, payments to voluntary 

and government hospitals are expected to 

increase 4.3 percent. As noted above, this 

slightly larger projected increase in capital 

payments per case for proprietary hospitals is 

mostly due to the proposed changes in the 

GAF values for FY 2005. 

Section 1886(d)(10) of the Act established 

the MGCRB. Previously, hospitals could 

apply for reclassification for purposes of the 

standardized amount, wage index, or both. 

Section 401(c) of Public Law 108–173 

equalized the standardized amounts under 

the operating IPPS. Therefore, beginning in 

FY 2005, there is no longer reclassification 

for the purposes of the standardized 

amounts; hospitals may apply for 

reclassification for purposes of the wage 

index in FY 2005. Reclassification for wage 

index purposes also affects the geographic 

adjustment factor because that factor is 

constructed from the hospital wage index. 

To present the effects of the hospitals being 

reclassified for FY 2005 compared to the 

effects of reclassification for FY 2004, we 

show the average payment percentage 

increase for hospitals reclassified in each 

fiscal year and in total. The reclassified 

groups are compared to all other 

nonreclassified hospitals. These categories 

are further identified by urban and rural 

designation. 

Hospitals reclassified for FY 2005 as a 

whole are projected to experience a 2.8 

percent increase in payments. Payments to 

nonreclassified hospitals in FY 2005 are 

expected to increase 4.5 percent. Hospitals 

reclassified during both FY 2004 and FY 

2005 are projected to experience a slight 

increase in payments of 2.6 percent. 

Hospitals reclassified during FY 2005 only 

are projected to receive an increase in 

payments of 4.9 percent. This increase is 

primarily due to proposed changes in the 

GAF (wage index).

28814 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

TABLE III.—COMPARISON OF TOTAL PAYMENTS PER CASE

[FY 2004 Payments Compared to Proposed FY 2005 Payments] 

Number of

hospitals 

Average

FY 2004

payments/

case 

Average

FY 2005

payments/

case 

Change. 

By Geographic Location:. 

All hospitals .............................................................................................................. 3,871 709 740 4.3

Large urban areas (populations over 1 million) ....................................................... 1,411 790 838 6.1

Other urban areas (populations of 1 million of fewer) ............................................. 1,253 704 723 2.7

Rural areas ............................................................................................................... 1,207 485 495 2.1

Urban hospitals ......................................................................................................... 2,664 750 784 4.6

0–99 beds .......................................................................................................... 674 540 563 4.4

100–199 beds .................................................................................................... 945 642 670 4.2

200–299 beds .................................................................................................... 499 736 766 4.2

300–499 beds .................................................................................................... 415 812 851 4.8

500 or more beds .............................................................................................. 131 934 982 5.2

Rural hospitals .......................................................................................................... 1,207 485 495 2.1

0–49 beds .......................................................................................................... 548 406 416 2.5

50–99 beds ........................................................................................................ 393 452 462 2.2

100–149 beds .................................................................................................... 163 492 501 1.9

150–199 beds .................................................................................................... 57 536 545 1.6

200 or more beds .............................................................................................. 46 610 622 2.0

By Region: 

Urban by Region ...................................................................................................... 2,664 750 784 4.6

New England ..................................................................................................... 134 815 839 2.9

Middle Atlantic ................................................................................................... 390 813 848 4.2

South Atlantic .................................................................................................... 407 720 752 4.4

East North Central ............................................................................................. 442 742 777 4.8

East South Central ............................................................................................ 175 677 709 4.7

West North Central ............................................................................................ 160 752 786 4.5

West South Central ........................................................................................... 344 698 734 5.2

Mountain ............................................................................................................ 140 746 772 3.5

Pacific ................................................................................................................ 421 850 897 5.5

Puerto Rico ........................................................................................................ 51 321 346 8.0

Rural by Region ........................................................................................................ 1,207 485 495 2.1

New England ..................................................................................................... 34 618 629 1.9

Middle Atlantic ................................................................................................... 57 511 516 1.0

South Atlantic .................................................................................................... 176 479 483 0.7

East North Central ............................................................................................. 160 514 522 1.4

East South Central ............................................................................................ 192 446 457 2.6

West North Central ............................................................................................ 206 500 517 3.3

West South Central ........................................................................................... 228 434 446 2.7

Mountain ............................................................................................................ 92 486 500 2.9

Pacific ................................................................................................................ 62 558 578 3.6

By Payment Classification: 

All hospitals .............................................................................................................. 3,871 709 740 4.3

Large urban areas (populations over 1 million) ....................................................... 1,399 791 839 6.1

Other urban areas (populations of 1 million or fewer) ............................................. 1,216 707 726 2.7

Rural areas ............................................................................................................... 1,256 484 494 2.0

Teaching Status: 

Non-teaching ..................................................................................................... 2,759 588 610 3.8

Fewer than 100 Residents ................................................................................ 911 750 782 4.3

100 or more Residents ...................................................................................... 201 1,090 1,151 5.6

Urban DSH: 

100 or more beds ....................................................................................... 1,457 786 822 4.7

Less than 100 beds ................................................................................... 335 494 517 4.7

Rural DSH: 

Sole Community (SCH/EACH) ................................................................... 478 440 451 2.4

Referral Center (RRC/EACH) .................................................................... 149 548 558 1.8

Other Rural: 

100 or more beds ............................................................................... 64 464 470 1.3

Less than 100 beds ............................................................................ 241 411 419 1.9

Urban teaching and DSH: 

Both teaching and DSH .................................................................................... 800 862 903 4.9

Teaching and no DSH ....................................................................................... 250 773 808 4.5

No teaching and DSH ....................................................................................... 992 631 658 4.3

No teaching and no DSH .................................................................................. 573 642 669 4.3

Rural Hospital Types: 

Non special status hospitals ............................................................................. 394 439 446 1.6

RRC/EACH ........................................................................................................ 129 559 565 1.2

SCH/EACH ........................................................................................................ 451 454 465 2.5

Medicare-dependent hospitals (MDH) .............................................................. 209 408 419 2.7

SCH, RRC and EACH ....................................................................................... 70 551 566 2.9

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28815

TABLE III.—COMPARISON OF TOTAL PAYMENTS PER CASE—Continued

[FY 2004 Payments Compared to Proposed FY 2005 Payments] 

Number of

hospitals 

Average

FY 2004

payments/

case 

Average

FY 2005

payments/

case 

Change. 

Hospitals Reclassified by the Medicare Geographic Classification Review Board: 

Reclassification Status During FY 2004 and FY 2005: 

Reclassified During Both FY 2004 and FY 2005 .............................................. 423 615 631 2.6

Reclassified During FY 2005 Only ............................................................. 62 547 574 4.9

Reclassified During FY 2004 Only ............................................................. 186 672 687 2.2

FY 2005 Reclassifications: 

All Reclassified Hospitals ........................................................................... 485 610 627 2.8

All Nonreclassified Hospitals ...................................................................... 3,325 724 757 4.5

All Urban Reclassified Hospitals ................................................................ 118 748 773 3.4

Urban Nonreclassified Hospitals ................................................................ 2,486 752 787 4.7

All Reclassified Rural Hospitals ................................................................. 367 536 548 2.3

Rural Nonreclassified Hospitals ................................................................. 839 433 441 1.8

Other Reclassified Hospitals (Section 1886(D)(8)(B)) 61 487 490 0.7

Type of Ownership: 

Voluntary ........................................................................................................... 2,322 727 758 4.3

Proprietary ......................................................................................................... 717 647 677 4.7

Government ....................................................................................................... 764 676 705 4.3

Medicare Utilization as a Percent of Inpatient Days: 

0–25 ................................................................................................................... 226 888 939 5.7

25–50 ................................................................................................................. 1,122 772 809 4.8

50–65 ................................................................................................................. 1,428 630 654 3.8

Over 65 .............................................................................................................. 922 630 654 3.7 

Appendix B: Recommendation of 

Update Factors for Operating Cost 

Rates of Payment for Inpatient Hospital 

Services 

[If you choose to comment on issues in this 

section, please include the caption ‘‘Update 

Factors’’ at the beginning of your comment.] 

I. Background 

Section 1886(e)(4)(A) of the Act requires 

that the Secretary, taking into consideration 

the recommendations of the Medicare 

Payment Advisory Commission (MedPAC), 

recommend update factors for inpatient 

hospital services for each fiscal year that take 

into account the amounts necessary for the 

efficient and effective delivery of medically 

appropriate and necessary care of high 

quality. Under section 1886(e)(5) of the Act, 

we are required to publish the proposed 

update factors recommended by the Secretary 

in the proposed rule, and the final update 

factors recommended by the Secretary in the 

final rule. Accordingly, this Appendix 

provides the recommendations of appropriate 

update factors for the IPPS standardized 

amount, the hospital-specific rates for SCHs 

and MDHs, and the rate-of-increase limits for 

hospitals and hospital units excluded from 

the IPPS. We also discuss our update 

framework and respond to MedPAC’s 

recommendations concerning the update 

factors. 

II. Secretary’s Recommendations 

Section 1886(b)(3)(B)(i)(XIX) of the Act sets 

the FY 2005 percentage increase in the 

operating cost standardized amount equal to 

the rate of increase in the hospital market 

basket for IPPS hospitals in all areas. Based 

on the Office of the Actuary’s first quarter 

2004 forecast of the FY 2005 market basket 

increase, the proposed update to the 

standardized amount is 3.3 percent (that is, 

the market basket rate of increase) for 

hospitals in all areas. 

Section 1886(b)(3)(B)(iv) of the Act sets the 

FY 2005 percentage increase in the hospitalspecific rates applicable to SCHs and MDHs 

equal to the rate set forth in section 

1886(b)(3)(B)(i) of the Act (that is, the same 

update factor as all other hospitals subject to 

the IPPS, or the rate of increase in the market 

basket). Therefore, the proposed update to 

the hospital-specific rate applicable to SCHs 

and MDHs is also 3.3 percent. 

Section 1886(b)(3)(B)(ii) of the Act sets the 

FY 2005 percentage increase in the rate-ofincrease limits for hospitals and hospital 

units excluded from the IPPS (psychiatric 

hospitals and units (now referred to as 

inpatient psychiatric facilities (IPFs)), 

rehabilitation hospitals and units (now 

referred to as IRFs), LTCHs, cancer hospitals, 

and children’s hospitals) equal to the market 

basket percentage increase. In the past, 

hospitals and hospital units excluded from 

the IPPS have been paid based on their 

reasonable costs subject to limits as 

established by TEFRA. However, some of 

these categories of excluded hospitals and 

units have begun to be paid under their own 

prospective payment systems. Hospitals and 

units that receive any hospital-specific 

payments will have those payments subject 

to TEFRA limits for FY 2005. For these 

hospitals, the proposed update is the 

percentage increase in the excluded hospital 

market basket (currently estimated at 3.3 

percent). 

IRFs are paid under the IRF PPS for cost 

reporting periods beginning on or after 

January 1, 2002. For cost reporting periods 

beginning during FY 2004, the Federal 

prospective payment for IRFs is based on 100 

percent of the adjusted Federal IRF 

prospective payment amount, updated 

annually. 

Effective for cost reporting periods 

beginning during FY 2003, LTCHs are paid 

under the LTCH PPS under which they 

receive payment based on a 5-year transition 

period (see the August 30, 2002 final rule (67 

FR 55954)). A LTCH may elect to be paid on 

100 percent of the Federal prospective rate at 

the start of any of its cost reporting periods 

during the 5-year transition period. For 

purposes of the update factor, the portion of 

the LTCH PPS transition blend payment 

based on reasonable costs for inpatient 

operating services is determined by updating 

the LTCH’s TEFRA limit by the current 

estimate of the excluded hospital market 

basket (or 3.3 percent). 

CMS recently published a proposed 

regulation regarding inpatient psychiatric 

facilities (IPFs) in which CMS would 

compute a Federal per diem base rate to be 

paid to all IPFs based on the sum of the 

average routine operating, ancillary, and 

capital costs for each patient day of 

psychiatric care in an IPF adjusted for budget 

neutrality. The Federal per diem base rate 

would be adjusted to reflect certain patient 

characteristics such as age, specified DRGs, 

and selected high-cost comorbidities, and 

certain facility characteristics such as a wage 

index adjustment, rural location, and indirect 

teaching costs. The November 28, 2003 

proposed rule assumed an April 1, 2004 

effective date for the purpose of ratesetting 

and calculating impacts. However, we are 

still in the process of analyzing public 

comments and developing a final rule for 

publication. The effective date of the IPF PPS 

would occur 5 months following publication 

of the final rule.

28816 Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 

III. Update Framework 

Consistent with current law, we are 

proposing an update recommendation equal 

to the full market basket percentage increase 

for the IPPS operating cost standardized 

amounts for FY 2005. We also have analyzed 

changes in hospital productivity, scientific 

and technological advances, practice pattern 

changes, changes in case-mix, the effect of 

reclassification on recalibration, and forecast 

error correction. A discussion of this analysis 

is below. 

A. Productivity 

Service level labor productivity is defined 

as the ratio of total service output to full-time 

equivalent employees (FTEs). While we 

recognize that productivity is a function of 

many variables (for example, labor, nonlabor 

material, and capital inputs), we use the 

portion of productivity attributed to direct 

labor since this update framework applies to 

operating payment. To recognize that we are 

apportioning the short-run output changes to 

the labor input and not considering the 

nonlabor inputs, we weight our productivity 

measure by the share of direct labor services 

in the market basket to determine the 

expected effect on cost per case. 

Our recommendation for the service 

productivity component is based on 

historical trends in productivity and total 

output for both the hospital industry and the 

general economy, and projected levels of 

future hospital service output. MedPAC’s 

predecessor, the Prospective Payment 

Assessment Commission (ProPAC), estimated 

cumulative service productivity growth to be 

4.9 percent from 1985 through 1989 or 1.2 

percent annually. At the same time, ProPAC 

estimated total output growth at 3.4 percent 

annually, implying a ratio of service 

productivity growth to output growth of 0.35. 

Absent a productivity measure specific to 

Medicare patients, we examined productivity 

(output per hour) and output (gross domestic 

product) for the economy. Depending on the 

exact time period, annual changes in 

productivity range from 0.30 to 0.35 percent 

of the change in output (that is, a 1.0 percent 

increase in output would be correlated with 

a 0.30 percent to a 0.35 percent change in 

output per hour). 

Under our framework, the recommended 

update is based in part on expected 

productivity—that is, projected service 

output during the year, multiplied by the 

historical ratio of service productivity to total 

service output, multiplied by the share of 

direct labor in total operating inputs, as 

calculated in the hospital market basket. This 

method estimates an expected productivity 

improvement in the same proportion to 

expected total service growth that has 

occurred in the past and assumes that, at a 

minimum, growth in FTEs changes 

proportionally to the growth in total service 

output. Thus, the recommendation allows for 

unit productivity to be smaller than the 

historical averages in years during which 

output growth is relatively low and larger in 

years during which output growth is higher 

than the historical averages. Based on the 

above estimates from both the hospital 

industry and the economy, we have chosen 

to employ the range of ratios of productivity 

change to output change of 0.30 to 0.35. 

The expected change in total hospital 

service output is the product of projected 

growth in total admissions (adjusted for 

outpatient usage), projected real case-mix 

growth, expected quality-enhancing intensity 

growth, and net of expected decline in 

intensity due to reduction of cost-ineffective 

practice. Case-mix growth and intensity 

numbers for Medicare are used as proxies for 

those of the total hospital, since case-mix 

increases (used in the intensity measure as 

well) are unavailable for non-Medicare 

patients. Normally, the expected FY 2005 

hospital output growth would be simply the 

sum of the expected change in intensity (zero 

percent), projected admissions change (0.9 

percent), and projected real case-mix growth 

(1.0 percent—a definition of real case mix 

growth appears below), or 1.9 percent. As 

discussed below and in relation to the 

proposed capital update, we believe our 

intensity estimate is skewed by hospitals’

charge data. We are including only the 

projected changes in admissions and real 

case-mix in our calculation of productivity 

gains. However, the expected change in 

intensity is zero. Therefore, excluding the 

intensity estimate has no effect on the result. 

This results in an estimate of 1.9 percent. 

The share of direct labor services in the 

market basket (consisting of wages, salaries, 

and employee benefits) is 61.7 percent. 

Multiplying the expected change in total 

hospital service output (1.9 percent) by the 

ratio of historical service productivity change 

to total service growth of 0.30 to 0.35 and by 

the direct labor share percentage of 61.7 

provides our productivity standard of ¥0.8 

to ¥0.7 percent. Because productivity gains 

hold down the rate of increase in hospitals’

costs, this factor is applied as a negative 

offset to the market basket increase. 

B. Intensity 

The intensity factor for the operating 

update framework reflects how hospital 

services are utilized to produce the final 

product, that is, the discharge. This 

component accounts for changes in the use 

of quality-enhancing services, changes in 

within-DRG severity, and expected 

modification of practice patterns to remove 

non-cost-effective services. Under the capital 

IPPS framework, we also make an adjustment 

for changes in intensity. We calculate this 

adjustment using the same methodology and 

data that are used in the framework for the 

operating IPPS.

We calculate case-mix constant intensity as 

the change in total Medicare charges per 

admission, adjusted for price level changes 

(the Consumer Price Index (CPI) for hospital 

and related services) and changes in real 

case-mix. The use of total charges in the 

calculation of the intensity factor makes it a 

total intensity factor, that is, charges for both 

operating and capital services are already 

built into the calculation of the factor. 

However, as discussed above in relation to 

the proposed capital update, because our 

intensity calculation relies heavily upon 

charge data and we believe that this charge 

data may be inappropriately inflated due to 

manipulation of charges to maximize outlier 

payments, we are proposing a zero percent 

adjustment for intensity in FY 2005. In past 

fiscal years (1996 through 2000) when we 

found intensity to be declining, we believed 

a zero (rather than negative) intensity 

adjustment was appropriate. Similarly, we 

believe that it is appropriate to propose a 

zero intensity adjustment for FY 2005 until 

we determine that any increase in charges 

can be tied to intensity, rather than to 

attempts to maximize outlier payments. 

C. Change in Case-Mix 

Our analysis takes into account projected 

changes in real case-mix, less the changes 

attributable to improved coding practices. 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 greater resource requirements. For our 

FY 2005 update recommendation, we are 

projecting a 1.0 percent increase in the casemix index. We do not believe changes in 

coding behavior will impact the overall casemix in FY 2005. As such, for FY 2005, we 

estimate that real case-mix is equal to 

projected change in case-mix. Thus, we are 

recommending a 1.0 percent adjustment for 

case-mix. 

D. Effect of FY 2003 DRG Reclassification 

and Recalibration 

We estimate that DRG reclassification and 

recalibration for FY 2003 (GROUPER version 

20.0) resulted in a zero percent change in the 

case-mix index when compared with the 

case-mix index that would have resulted if 

we had not made the reclassification and 

recalibration changes to the GROUPER 

(version 19.0). Therefore, we are 

recommending a zero percent adjustment for 

the effect of FY 2003 DRG reclassification 

and recalibration. 

E. Forecast Error Correction 

We make a forecast error correction if the 

actual market basket changes differ from the 

forecasted market basket by 0.25 percentage 

points or more. There is a 2-year lag between 

the forecast and the measurement of forecast 

error. The estimated market basket 

percentage increase used to update the FY 

2003 payment rates was 3.5 percent. Our 

most recent data indicates the actual FY 2003 

increase was 3.9 percent. The resulting 

forecast error in the FY 2003 market basket 

rate of increase is 0.4 percentage points. This 

underestimate was due largely to an 

underestimation of increases in the 

compensation components in the market 

basket. More specifically, the burden for 

benefit costs was expected to shift more to 

workers, given the soft job market. However, 

not as much of a shift occurred as was 

expected, and the measure for benefits 

increased faster than originally forecast. In 

addition, higher than expected growth in 

natural gas prices, mainly due to higher than 

expected demand last winter that depleted 

surplus reserves, caused the energy 

component to be underestimated. 

The following is a summary of the update 

range supported by our analyses:

Federal Register / Vol. 69, No. 96 / Tuesday, May 18, 2004 / Proposed Rules 28817

HHS’S FY 2005 UPDATE RECOMMENDATION

Projected FY 2005 Market Basket Increase ..................................................................................................................................... 3.3. 

Policy Adjustment Factors ................................................................................................................................................................. 0.0. 

Productivity ................................................................................................................................................................................. ¥0.8 to ¥0.7 

Intensity ...................................................................................................................................................................................... 0.0. 

Subtotal ............................................................................................................................................................................... ¥0.8 to ¥0.7. 

Case-Mix Adjustment Factors:. 

Projected Case-Mix Change ...................................................................................................................................................... 1.0 

Real Across DRG Change ......................................................................................................................................................... ¥1.0. 

Subtotal ............................................................................................................................................................................... 0.0. 

Effect of FY 2003 DRG Reclassification and Recalibration .............................................................................................................. 0.0. 

Forecast Error Correction .................................................................................................................................................................. 0.4. 

Total Recommendation Update ......................................................................................................................................................... 2.9 to 3.0 

IV. MedPAC Recommendations for 

Assessing Payment Adequacy and Updating 

Payments in Traditional Medicare 

In the past, MedPAC has suggested specific 

adjustments to its update recommendation 

for each of the factors discussed under 

section III. of this Appendix. In its March 

2004 Report to Congress, MedPAC assesses 

the adequacy of current payments and costs 

and the relationship between payments and 

an appropriate cost base, utilizing an 

established methodology used by the 

Commission in the past few years. MedPAC 

stresses that the issue at hand is whether 

payments are too high or too low, and not 

how they became either too high or too low. 

In the first portion of MedPAC’s analysis 

on the assessment of payment adequacy, the 

Commission reviews the relationship 

between costs and payments (typically 

represented as a margin). Based on the latest 

cost report data available, MedPAC estimated 

an inpatient hospital Medicare operating 

margin for FY 2002 of 4.7 percent (down 

from 8.1 percent and 10.7 percent for FY 

2001 and FY 2000, respectively). 

MedPAC also projects margins through FY 

2003, making certain assumptions about 

changes in payments and costs. On the 

payment side, MedPAC applied the annual 

payment updates (as specified by law for FYs 

2001 through 2003) and then modeled the 

effects of other policy changes that have 

affected the level of payments. On the cost 

side, MedPAC estimated the increases in cost 

per unit of output over the same time period 

at the rate of inflation as measured by the 

applicable market basket index generated by 

CMS, adjusted downward, anticipating 

improvements in productivity. 

In addition to considering the relationship 

between estimated payments and costs, 

MedPAC also considered the following three 

factors to assess whether current payments 

are adequate: 

• Changes in access to or quality of care, 

• Changes in the volume of services or 

number of providers; and 

• Change in providers access to capital. 

MedPAC s assessment of aggregate 

Medicare payments finds that payments were 

at least adequate as of FY 2004. 

MedPAC’s recommendation is to update 

payments under the IPPS by the full rate of 

increase in the hospital market basket for FY 

2005. MedPAC focuses on the fact that it is 

extremely difficult to determine the status of 

cost growth among hospitals, given the 

complexity of ascertaining the impact of the 

implementation of provisions of Pub. L. 108–

173. MedPAC believes it is sensible to refrain 

from applying their expected net effect based 

on their standard model, as there is a great 

deal of uncertainty regarding the costs and 

payments faced by providers. MedPAC is not 

abandoning its methodology regarding the 

update framework, but it has concluded that, 

under the circumstances, the current market 

conditions and factors that determine the 

cost behavior and outcomes of hospitals are 

too uncertain to rely on current trends for 

estimation. 

Response: As described above, we are 

recommending a full market basket update 

for FY 2005 consistent with current law. We 

believe this will appropriately balance 

incentives for hospitals to operate efficiently 

with the need to provide sufficient payments 

to maintain access to quality care for 

Medicare beneficiaries. 

Because the operating and capital 

prospective payment systems remain 

separate, CMS continues to use separate 

updates for operating and capital payments. 

The proposed update to the capital payment 

rate is discussed in section III. of the 

Addendum to this proposed rule.

[FR Doc. 04–10932 Filed 5–11–04; 1:00 pm] 

BILLING CODE 4120–01–P