25602 Federal Register / Vol. 72, No. 86 / Friday, May 4, 2007 / Notices 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

[CMS–1479–N] 

RIN 0938–AO40 

Medicare Program; Inpatient 

Psychiatric Facilities Prospective 

Payment System Payment Update for 

Rate Year Beginning July 1, 2007 (RY 

2008) 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Notice. 

SUMMARY: This notice updates the 

prospective payment rates for Medicare 

inpatient psychiatric hospital services 

provided by inpatient psychiatric 

facilities (IPFs). These changes are 

applicable to IPF discharges occurring 

during the rate year beginning July 1, 

2007 through June 30, 2008. 

EFFECTIVE DATE: The updated IPF 

prospective payment rates are effective 

for discharges occurring on or after July 

1, 2007 through June 30, 2008. 

FOR FURTHER INFORMATION CONTACT:

Dorothy Myrick or Jana Lindquist, 

(410) 786–4533 (for general 

information). 

Heidi Oumarou, (410) 786–7942 (for 

information regarding the market basket 

and labor-related share). 

Theresa Bean, (410) 786–2287 (for 

information regarding the regulatory 

impact analysis). 

Matthew Quarrick, (410) 786–9867 

(for information on the wage index). 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

To assist readers in referencing sections 

contained in this document, we are providing 

the following table of contents. 

I. Background 

A. Annual Requirements for Updating the 

IPF PPS 

B. Overview of the Legislative 

Requirements of the IPF PPS 

C. IPF PPS-General Overview 

II. Transition Period for Implementation of 

the IPF PPS 

III. Updates to the IPF PPS for RY Beginning 

July 1, 2007 

A. Determining the Standardized BudgetNeutral Federal Per Diem Base Rate 

1. Standardization of the Federal Per Diem 

Base Rate and Electroconvulsive Therapy 

Rate 

2. Calculation of the Budget Neutrality 

Adjustment 

a. Outlier Adjustment 

b. Stop-Loss Provision Adjustment 

c. Behavioral Offset 

B. Update of the Federal Per Diem Base 

Rate and Electroconvulsive Therapy Rate 

1. Market Basket for IPFs Reimbursed 

under the IPF PPS 

a. Market Basket Index for the IPF PPS 

b. Overview of the RPL Market Basket 

2. Labor-Related Share 

3. IPFs Paid Based on a Blend of the 

Reasonable Cost-based Payments 

IV. Update of the IPF PPS Adjustment 

Factors 

A. Overview of the IPF PPS Adjustment 

Factors 

B. Patient-Level Adjustments 

1. Adjustment for DRG Assignment 

2. Payment for Comorbid Conditions 

3. Patient Age Adjustments 

4. Variable Per Diem Adjustments 

C. Facility-Level Adjustments 

1. Wage Index Adjustment 

2. Adjustment for Rural Location 

3. Teaching Adjustment 

4. Cost of Living Adjustment for IPFs 

located in Alaska and Hawaii 

5. Adjustment for IPFs With a Qualifying 

Emergency Department (ED) 

D. Other Payment Adjustments and 

Policies 

1. Outlier Payments 

a. Update to the Outlier Fixed Dollar Loss 

Threshold Amount 

b. Statistical Accuracy of Cost-to-Charge 

Ratios 

2. Stop-Loss Provision 

V. Waiver of Proposed Rulemaking 

VI. Collection of Information Requirements 

VII. Regulatory Impact Analysis 

Addenda 

Acronyms 

Because of the many terms to which we 

refer by acronym in this notice, we are listing 

the acronyms used and their corresponding 

terms in alphabetical order below: 

BBRA Medicare, Medicaid and SCHIP 

[State Children’s Health Insurance 

Program] Balanced Budget Refinement 

Act of 1999, (Pub. L. 106–113) 

CBSA Core-Based Statistical Area 

CCR Cost-to-charge ratio 

CMSA Consolidated Metropolitan 

Statistical Area 

DSM–IV–TR Diagnostic and Statistical 

Manual of Mental Disorders Fourth 

Edition—Text Revision 

DRGs Diagnosis-related groups 

FY Federal fiscal year 

ICD–9–CM International Classification of 

Diseases, 9th Revision, Clinical 

Modification 

IPFs Inpatient psychiatric facilities 

IRFs Inpatient rehabilitation facilities 

LTCHs Long-term care hospitals 

MedPAR Medicare provider analysis and 

review file 

MSA Metropolitan Statistical Area 

RY Rate Year 

TEFRA Tax Equity and Fiscal 

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

248) 

I. Background 

A. Annual Requirements for Updating 

the IPF PPS 

In November 2004, we implemented 

the IPF PPS in a final rule that appeared 

in the November 15, 2004 Federal 

Register (69 FR 66922). In developing 

the IPF PPS, in order to ensure that the 

IPF PPS is able to account adequately 

for each IPF’s case-mix, we performed 

an extensive regression analysis of the 

relationship between the per diem costs 

and certain patient and facility 

characteristics to determine those 

characteristics associated with 

statistically significant cost differences 

on a per diem basis. For characteristics 

with statistically significant cost 

differences, we used the regression 

coefficients of those variables to 

determine the size of the corresponding 

payment adjustments. 

In that final rule, we explained that 

we believe it is important to delay 

updating the adjustment factors derived 

from the regression analysis until we 

have IPF PPS data that includes as 

much information as possible regarding 

the patient-level characteristics of the 

population that each IPF serves. 

Therefore, we indicated that we did not 

intend to update the regression analysis 

and recalculate the Federal per diem 

base rate and the patient- and facilitylevel adjustment until we complete that 

analysis. Until that analysis is complete, 

we stated our intention to publish a 

notice in the Federal Register each 

spring to update the IPF PPS (71 FR 

27041). 

Updates to the IPF PPS as specified in 

42 CFR 412.428 include: 

• A description of the methodology 

and data used to calculate the updated 

Federal per diem base payment amount. 

• The rate of increase factor as 

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

is based on the excluded hospital with 

capital market basket under the update 

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

of the Act for each year. 

• For discharges occurring on or after 

July 1, 2006, the rate of increase factor 

for the Federal portion of the IPF’s 

payment, which is based on the 

rehabilitation, psychiatric, and longterm care (RPL) market basket. 

• For discharges occurring on or after 

October 1, 2005, the rate of increase 

factor for the reasonable cost portion of 

the IPF’s payment, which is based on 

the 2002-based excluded hospital 

market with capital basket. 

• The best available hospital wage 

index and information regarding 

whether an adjustment to the Federal 

per diem base rate, which is needed to 

maintain budget neutrality. 

• Updates to the fixed dollar loss 

threshold amount in order to maintain 

the appropriate outlier percentage. 

• Describe the ICD–9–CM coding and 

DRG classification changes discussed in 

the annual update to the hospital 


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inpatient prospective payment system 

(IPPS) regulations. 

• Update to the electroconvulsive 

therapy (ECT) payment by a factor 

specified by CMS. 

• Update to the national urban and 

rural cost to charge ratio medians and 

ceilings. 

• Update to the cost of living 

adjustment factors for IPFs located in 

Alaska and Hawaii if appropriate. 

Our most recent annual update 

occurred in a final rule (71 FR 27040, 

May 9, 2006) that set forth updates to 

the IPF PPS payment rates for RY 2007. 

We subsequently published a correction 

notice (71 FR 37505, June 30, 2006) with 

respect to those payment rate updates. 

This notice does not initiate any 

policy changes with regard to the IPF 

PPS; rather, it simply provides an 

update to the rates for RY 2008 (that is, 

the prospective payment rates 

applicable for discharges beginning July 

1, 2007 through June 30, 2008). In 

establishing these payment rates, we 

update the IPF per diem payment rates 

that were published in the May 2006 

IPF PPS final rule in accordance with 

our established polices. 

B. Overview of the Legislative 

Requirements for the IPF PPS 

Section 124 of the BBRA required 

implementation of the IPF PPS. 

Specifically, section 124 of the BBRA 

mandated that the Secretary develop a 

per diem PPS for inpatient hospital 

services furnished in psychiatric 

hospitals and psychiatric units that 

includes in the PPS an adequate patient 

classification system that reflects the 

differences in patient resource use and 

costs among psychiatric hospitals and 

psychiatric units. 

Section 405(g)(2) of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173) extended the IPF PPS to 

distinct part psychiatric units of critical 

access hospitals (CAHs). 

To implement these provisions, we 

published various proposed and final 

rules in the Federal Register. For more 

information regarding these rules, see 

the CMS websites http:// 

www.cms.hhs.gov/ 

InpatientPsychFacilPPS/ and 

www.cms.hhs.gov/ 

InpatientpsychfacilPPS/ 

02_regulations.asp. 

C. IPF PPS—General Overview 

The November 2004 IPF PPS final 

rule (69 FR 66922) established the IPF 

PPS, as authorized under section 124 of 

the BBRA and codified at subpart N of 

part 412 of the Medicare regulations. 

The November 2004 IPF PPS final rule 

set forth the per diem Federal rates for 

the implementation year (that is, the 18- 

month period from January 1, 2005 

through June 30, 2006) that provided 

payment for the inpatient operating and 

capital costs to IPF’s for covered 

psychiatric services they furnish (that is, 

routine, ancillary, and capital costs), but 

not costs of approved educational 

activities, bad debts, and other services 

or items that are outside the scope of the 

IPF PPS. Covered psychiatric services 

include services for which benefits are 

provided under the fee-for-service Part 

A (Hospital Insurance Program) 

Medicare program. 

The IPF PPS established the Federal 

per diem base rate for each patient day 

in an IPF derived from the national 

average daily routine operating, 

ancillary, and capital costs in IPFs in FY 

2002. The average per diem cost was 

updated to the midpoint of the first year 

under the IPF PPS, standardized to 

account for the overall positive effects of 

the IPF PPS payment adjustments, and 

adjusted for budget neutrality. 

The Federal per diem payment under 

the IPF PPS is comprised of the Federal 

per diem base rate described above and 

certain patient- and facility-level 

payment adjustments that were found in 

the regression analysis to be associated 

with statistically significant per diem 

cost differences. 

The patient-level adjustments include 

age, DRG assignment, comorbidities, 

and variable per diem adjustments to 

reflect a higher per diem cost in the 

early days of a psychiatric stay. Facilitylevel adjustments include adjustments 

for the IPF’s wage index, rural location, 

teaching status, a cost of living 

adjustment for IPFs located in Alaska 

and Hawaii, and presence of a 

qualifying emergency department (ED). 

The IPF PPS provides additional 

payments for: outlier cases; stop-loss 

protection (which is applicable only 

during the IPF PPS transition period); 

interrupted stays; and a per treatment 

adjustment for patients who undergo 

ECT. 

A complete discussion of the 

regression analysis appears in the 

November 2004 IPF PPS final rule (69 

FR 66933 through 66936). 

Section 124 of Medicare, Medicaid 

and SCHIP (State Children’s Health 

Insurance Program) Balanced Budget 

Refinement Act of 1999, (Pub. L. 106– 

113) (BBRA) does not specify an annual 

update rate strategy for the IPF PPS and 

is broadly written to give the Secretary 

discretion in establishing an update 

methodology. Therefore, in the 

November 2004 IPF PPS final rule (69 

FR 66966), we implemented the IPF PPS 

using the following update strategy— (1) 

Calculate the final Federal per diem 

base rate to be budget neutral for the 18- 

month period of January 1, 2005 

through June 30, 2006; (2) use a July 1 

through June 30 annual update cycle; 

and (3) allow the IPF PPS first update 

to be effective for discharges on or after 

July 1, 2006 through June 30, 2007. 

II. Transition Period for 

Implementation of the IPF PPS 

In the November 2004 IPF PPS final 

rule, we established § 412.426 to 

provide for a 3-year transition period 

from reasonable cost-based 

reimbursement to full prospective 

payment for IPFs. The purpose of the 

transition period is to allow existing 

IPFs time to adjust their cost structures 

and to integrate the effects of changing 

to the IPF PPS. 

New IPFs, as defined in § 412.426(c), 

are paid 100 percent of the Federal per 

diem payment amount. For those IPFs 

that are transitioning to the new system, 

payment is based on an increasing 

percentage of the PPS payment and a 

decreasing percentage of each IPF’s 

facility-specific Tax Equity and Fiscal 

Responsibility Act of 1982 (TEFRA) 

reimbursement rate. 

TABLE 1.—IPF PPS TRANSITION BLEND FACTORS

Transition year Cost reporting periods beginning on or after TEFRA rate 

percentage 

IPF PPS federal rate percentage 

1 .................................................................................... January 1, 2005 ............................................................ 75 25 

2 .................................................................................... January 1, 2006 ............................................................ 50 50 

3 .................................................................................... January 1, 2007 ............................................................ 25 75 

January 1, 2008 ............................................................ 0 100 


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Changes to the blend percentages 

occur at the beginning of an IPF’s cost 

reporting period. However, regardless of 

when an IPF’s cost reporting year 

begins, the payment update will be 

effective for discharges occurring on or 

after July 1, 2007 through June 30, 2008. 

We are currently in the third year of 

the transition period. As a result, for 

discharges occurring during IPF cost 

reporting periods beginning in calendar 

year (CY) 2007, IPFs would receive a 

blended payment consisting of 25 

percent of the facility-specific TEFRA 

payment and 75 percent of the IPF PPS 

payment amount. 

For RY 2008, we are not making any 

changes to the transition period 

established in the November 2004 IPF 

PPS final rule. 

III. Updates to the IPF PPS for RY 

Beginning July 1, 2007 

The IPF PPS is based on a 

standardized Federal per diem base rate 

calculated from FY 2002 IPF average 

costs per day and adjusted for budgetneutrality and updated to the midpoint 

of the implementation year. The Federal 

per diem base rate is used as the 

standard payment per day under the IPF 

PPS and is adjusted by the applicable 

wage index factor and the patient-level 

and facility-level adjustments that are 

applicable to the IPF stay. 

A detailed explanation of how we 

calculated the average per diem cost 

appears in the November 2004 IPF PPS 

final rule (69 FR 66926). 

A. Determining the Standardized 

Budget-Neutral Federal Per Diem Base 

Rate 

Section 124(a)(1) of the BBRA 

requires that we implement the IPF PPS 

in a budget neutral manner. In other 

words, the amount of total payments 

under the IPF PPS, including any 

payment adjustments, must be projected 

to be equal to the amount of total 

payments that would have been made if 

the IPF PPS were not implemented. 

Therefore, we calculated the budgetneutrality factor by setting the total 

estimated IPF PPS payments to be equal 

to the total estimated payments that 

would have been made under the 

TEFRA methodology had the IPF PPS 

not been implemented. 

For the IPF PPS methodology, we 

calculated the final Federal per diem 

base rate to be budget neutral during the 

IPF PPS implementation period (that is, 

the 18-month period from January 1, 

2005 through June 30, 2006) using a July 

1 update cycle. 

We updated the average cost per day 

to the midpoint of the IPF PPS 

implementation period (that is, October 

1, 2005), and this amount was used in 

the payment model to establish the 

budget-neutrality adjustment. 

A step-by-step description of the 

methodology used to estimate payments 

under the TEFRA payment system 

appears in the November 2004 IPF PPS 

final rule (69 FR 66926). 

1. Standardization of the Federal Per 

Diem Base Rate and Electroconvulsive 

Therapy Rate 

In the November 2004 IPF PPS final 

rule, we describe how we standardized 

the IPF PPS Federal per diem base rate 

in order to account for the overall 

positive effects of the IPF PPS payment 

adjustment factors. To standardize the 

IPF PPS payments, we compared the IPF 

PPS payment amounts calculated from 

the FY 2002 Medicare Provider Analysis 

and Review (MedPAR) file to the 

projected TEFRA payments from the FY 

2002 cost report file updated to the 

midpoint of the IPF PPS 

implementation period (that is, October 

2005). The standardization factor was 

calculated by dividing total estimated 

payments under the TEFRA payment 

system by estimated payments under 

the IPF PPS. The standardization factor 

was calculated to be 0.8367. 

As described in detail in the May 

2006 IPF PPS final rule (71 FR 27045), 

in reviewing the methodology used to 

simulate the IPF PPS payments used for 

the November 2004 IPF PPS final rule, 

we discovered that due to a computer 

code error, total IPF PPS payments were 

underestimated by about 1.36 percent. 

Since the IPF PPS payment total should 

have been larger than the estimated 

figure, the standardization factor should 

have been smaller (0.8254 vs. 0.8367). In 

turn, the Federal per diem base rate and 

the ECT rate should have been reduced 

by 0.8254 instead of 0.8367. 

To resolve this issue, in RY 2007, we 

amended the Federal per diem base rate 

and the ECT payment rate 

prospectively. Using the standardization 

factor of 0.8254, the average cost per day 

was effectively reduced by 17.46 

percent (100 percent minus 82.54 

percent = 17.46 percent). 

2. Calculation of the Budget Neutrality 

Adjustment 

To compute the budget neutrality 

adjustment for the IPF PPS, we 

separately identified each component of 

the adjustment, that is, the outlier 

adjustment, stop-loss adjustment, and 

behavioral offset. 

A complete discussion of how we 

calculate each component of the budget 

neutrality adjustment appears in the 

November 2004 IPF PPS final rule (69 

FR 66932 through 66933) and the May 

2006 IPF PPS final rule (71 FR 27044 

through 27046). 

a. Outlier Adjustment 

Since the IPF PPS payment amount 

for each IPF includes applicable outlier 

amounts, we reduced the standardized 

Federal per diem base rate to account 

for aggregate IPF PPS payments 

estimated to be made as outlier 

payments. The outlier adjustment was 

calculated to be 2 percent. As a result, 

the standardized Federal per diem base 

rate was reduced by 2 percent to 

account for projected outlier payments. 

b. Stop-Loss Provision Adjustment 

As explained in the November 2004 

IPF PPS final rule, we provide a stoploss payment to ensure that an IPF’s 

total PPS payments are no less than a 

minimum percentage of their TEFRA 

payment, had the IPF PPS not been 

implemented. We reduced the 

standardized Federal per diem base rate 

by the percentage of aggregate IPF PPS 

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

standardized Federal per diem base rate 

was reduced by 0.39 percent to account 

for stop-loss payments. 

c. Behavioral Offset 

As explained in the November 2004 

IPF PPS final rule, implementation of 

the IPF PPS may result in certain 

changes in IPF practices especially with 

respect to coding for comorbid medical 

conditions. As a result, Medicare may 

make higher payments than assumed in 

our calculations. Accounting for these 

effects through an adjustment is 

commonly known as a behavioral offset. 

Based on accepted actuarial practices 

and consistent with the assumptions 

made in other PPSs, we assumed in 

determining the behavioral offset that 

IPFs would regain 15 percent of 

potential ‘‘losses’’ and augment payment 

increases by 5 percent. We applied this 

actuarial assumption, which is based on 

our historical experience with new 

payment systems, to the estimated 

‘‘losses’’ and ‘‘gains’’ among the IPFs. The 

behavioral offset for the IPF PPS was 

calculated to be 2.66 percent. As a 

result, we reduced the standardized 

Federal per diem base rate by 2.66 

percent to account for behavioral 

changes. As indicated in the November 

2004 IPF PPS final rule, we do not plan 

to change adjustment factors or 

projections, including the behavioral 

offset, until we analyze IPF PPS data. At 

that time, we will re-assess the accuracy 

of the behavioral offset along with the 

other factors impacting budget 

neutrality. 


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If we find that an adjustment is 

warranted, the percent difference may 

be applied prospectively to the 

established PPS rates to ensure the rates 

accurately reflect the payment level 

intended by the statute. In conducting 

this analysis, we will be interested in 

the extent to which improved 

documentation and coding of patients’ 

primary and other diagnoses, which 

may not reflect real increases in 

underlying resource demands, has 

occurred under the PPS. 

B. Update of the Federal Per Diem Base 

Rate and Electroconvulsive Therapy 

Rate 

1. Market Basket for IPFs Reimbursed 

Under the IPF PPS 

As described in the November 2004 

IPF PPS final rule, the average per diem 

cost was updated to the midpoint of the 

implementation year (69 FR 66931). 

This updated average per diem cost of 

$724.43 was reduced by 17.46 percent 

to account for standardization to 

projected TEFRA payments for the 

implementation period, by 2 percent to 

account for outlier payments, by 0.39 

percent to account for stop-loss 

payments, and by 2.66 percent to 

account for the behavioral offset. The 

Federal per diem base rate in the 

implementation year was $575.95, and 

for RY 2007, it was $595.09. 

Applying the market basket increase 

of 3.2 percent and the wage index 

budget neutrality factor of 1.0014 yields 

a Federal per diem base rate of $614.99 

for RY 2008. Similarly, applying the 

market basket increase and wage index 

budget neutrality factor to the RY 2007 

ECT rate yields an ECT rate of $264.77 

for RY 2008. 

a. Market Basket Index for the IPF PPS 

The market basket index that was 

used to develop the IPF PPS was the 

excluded hospital with capital market 

basket. The market basket was based on 

1997 Medicare cost report data and 

included data for Medicare participating 

IPFs, inpatient rehabilitation facilities 

(IRFs), long-term care hospitals 

(LTCHs), cancer, and children’s 

hospitals. 

We are presently unable to create a 

separate market basket specifically for 

psychiatric hospitals due to the 

following two reasons: (1) There is a 

very small sample size for free-standing 

psychiatric facilities; and (2) there are 

limited expense data for some categories 

on the free-standing psychiatric cost 

reports (for example, approximately 4 

percent of free-standing psychiatric 

facilities reported contract labor cost 

data for FY 2002). However, since all 

IRFs, LTCHs, and IPFs are now paid 

under a PPS, we are updating PPS 

payments made under the IRF PPS, the 

LTCH PPS, and the IPF PPS using a 

market basket reflecting the operating 

and capital cost structures for IRFs, 

IPFs, and LTCHs (hereafter referred to as 

the rehabilitation, psychiatric, long-term 

care (RPL) market basket). 

We have excluded cancer and 

children’s hospitals from the RPL 

market basket because their payments 

are based entirely on reasonable costs 

subject to rate-of-increase limits 

established under the authority of 

section 1886(b) of the Act, which are 

implemented in regulations at § 413.40. 

They are not reimbursed under a PPS. 

Also, the FY 2002 cost structures for 

cancer and children’s hospitals are 

noticeably different than the cost 

structures of the IRFs, IPFs, and LTCHs. 

The services offered in IRFs, IPFs, and 

LTCHs are typically more laborintensive than those offered in cancer 

and children’s hospitals. Therefore, the 

compensation cost weights for IRFs, 

IPFs, and LTCHs are larger than those in 

cancer and children’s hospitals. In 

addition, the depreciation cost weights 

for IRFs, IPFs, and LTCHs are noticeably 

smaller than those for cancer and 

children’s hospitals. 

A complete discussion of the RPL 

market basket appears in the May 2006 

IPF PPS final rule (71 FR 27046 through 

27054). 

b. Overview of the RPL Market Basket 

The RPL market basket is a fixed 

weight, Laspeyres-type price index. A 

market basket is described as a fixedweight index because it answers the 

question of how much it would cost, at 

another time, to purchase the same mix 

of goods and services purchased to 

provide hospital services in a base 

period. The effects on total expenditures 

resulting from changes in the quantity 

or mix of goods and services (intensity) 

purchased subsequent to the base period 

are not measured. In this manner, the 

market basket measures only pure price 

change. Only when the index is rebased 

would the quantity and intensity effects 

be captured in the cost weights. 

Therefore, we rebase the market basket 

periodically so that cost weights reflect 

changes in the mix of goods and 

services that hospitals purchase 

(hospital inputs) to furnish patient care 

between base periods. 

The terms rebasing and revising, 

while often used interchangeably, 

actually denote different activities. 

Rebasing means moving the base year 

for the structure of costs of an input 

price index (for example, shifting the 

base year cost structure from FY 1997 to 

FY 2002). Revising means changing data 

sources, methodology, or price proxies 

used in the input price index. In 2006 

we rebased and revised the market 

basket used to update the IPF PPS. 

Table 2 below sets forth the 

completed 2002-based RPL market 

basket including the cost categories, 

weights, and price proxies. 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

For RY 2008, we evaluated the price 

proxies using the criteria of reliability, 

timeliness, availability, and relevance. 

Reliability indicates that the index is 

based on valid statistical methods and 

has low sampling variability. Timeliness 

implies that the proxy is published 

regularly, preferably at least once a 

quarter. Availability means that the 

proxy is publicly available. Finally, 

relevance means that the proxy is 

applicable and representative of the cost 

category weight to which it is applied. 

The Consumer Price Indexes (CPIs), 

Producer Price Indexes (PPIs), and 

Employment Cost Indexes (ECIs) used as 

proxies in this market basket meet these 

criteria. 

We note that the proxies are the same 

as those used for the FY 1997-based 

excluded hospital with capital market 

basket. Because these proxies meet our 

criteria of reliability, timeliness, 

availability, and relevance, we believe 

they continue to be the best measure of 

price changes for the cost categories. For 

further discussion on the FY 1997-based 

excluded hospital with capital market 

basket, see the August 1, 2002 IPPS final 

rule (67 FR at 50042). 

The RY 2008 (that is, beginning July 

1, 2007) update for the IPF PPS using 


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the FY 2002-based RPL market basket 

and Global Insight’s 1st quarter 2007 

forecast for the market basket 

components is 3.2 percent. This 

includes increases in both the operating 

section and the capital section for the 

12-month RY period (that is, July 1, 

2007 through June 30, 2008). Global 

Insight, Inc. is a nationally recognized 

economic and financial forecasting firm 

that contracts with CMS to forecast the 

components of the market baskets. 

2. Labor-Related Share 

Due to the variations in costs and 

geographic wage levels, we believe that 

payment rates under the IPF PPS should 

continue to be adjusted by a geographic 

wage index. This wage index applies to 

the labor-related portion of the Federal 

per diem base rate, hereafter referred to 

as the labor-related share. 

The labor-related share is determined 

by identifying the national average 

proportion of operating costs that are 

related to, influenced by, or vary with 

the local labor market. Using our current 

definition of labor-related, the laborrelated share is the sum of the relative 

importance of wages and salaries, fringe 

benefits, professional fees, laborintensive services, and a portion of the 

capital share from an appropriate 

market basket. We used the FY 2002- 

based RPL market basket costs to 

determine the labor-related share for the 

IPF PPS. 

The labor-related share for RY 2008 is 

the sum of the RY 2008 relative 

importance of each labor-related cost 

category, and reflects the different rates 

of price change for these cost categories 

between the base year (FY 2002) and RY 

2008. The sum of the relative 

importance for the RY 2008 operating 

costs (wages and salaries, employee 

benefits, professional fees, and laborintensive services) is 71.767, as shown 

in Table 3 below. The portion of capital 

that is influenced by the local labor 

market is estimated to be 46 percent, 

which is the same percentage used in 

the FY 1997-based IRF and IPF payment 

systems. 

Since the relative importance for 

capital is 8.742 percent of the FY 2002- 

based RPL market basket in RY 2008, we 

are taking 46 percent of 8.742 percent to 

determine the labor-related share of 

capital for RY 2008. The result is 4.021 

percent, which we added to 71.767 

percent for the operating cost amount to 

determine the total labor-related share 

for RY 2008. Thus, the labor-related 

share that we are using for IPF PPS in 

RY 2008 is 75.788 percent. Table 3 

below shows the RY 2008 relative 

importance of labor-related shares using 

the FY 2002-based RPL market basket. 

We note that this labor-related share is 

determined by using the same 

methodology as employed in calculating 

all previous IPF labor-related shares. 

A complete discussion of the IPF 

labor-related methodology appears in 

the November 2004 IPF PPS final rule 

(69 FR 66952 through 66954). 

TABLE 3.—TOTAL LABOR-RELATED SHARE—RELATIVE IMPORTANCE FOR RY 2008 

Cost category 

FY 2002- 

based RPL 

market basket 

relative importance (Percent) RY 2007 

FY 2002 RPL 

market basket 

relative importance (Percent) RY 2008 

Wages and salaries ................................................................................................................................................. 52.506 52.588 

Employee benefits ................................................................................................................................................... 14.042 14.127 

Professional fees ..................................................................................................................................................... 2.886 2.907 

All other labor-intensive services ............................................................................................................................. 2.152 2.145 

Subtotal ............................................................................................................................................................. 71.586 71.767 

Labor-related share of capital costs ........................................................................................................................ 4.079 4.021 

Total .................................................................................................................................................................. 75.665 75.788 

3. IPFs Paid Based on a Blend of the 

Reasonable Cost-Based Payments 

As stated in the FY 2006 IPPS final 

rule (70 FR 47399), for IPFs that are 

transitioning to the fully Federal 

prospective payment rate, we are now 

using the rebased and revised FY 2002- 

based excluded hospital market basket 

to update the reasonable cost-based 

portion of their payments. 

We chose FY 2002 as the base year for 

the excluded hospital market basket 

because this was the most recent, 

complete year of Medicare cost report 

data. 

The reasonable cost-based payments, 

subject to TEFRA limits, are determined 

on a FY basis. The FY 2008 update 

factor for the portion of the IPF PPS 

transitional blend payment based on 

reasonable costs will be published in 

the FY 2008 IPPS proposed and final 

rules. 

IV. Update of the IPF PPS Adjustment 

Factors 

A. Overview of the IPF PPS Adjustment 

Factors 

The IPF PPS payment adjustments 

were derived from a regression analysis 

of 100 percent of the FY 2002 MedPAR 

data file, which contained 483,038 

cases. We used the same results of this 

regression analysis to implement the 

November 2004 and May 2006 IPF PPS 

final rules. We also use the same results 

of this regression analysis to update the 

IPF PPS for RY 2008. 

As previously stated, we do not plan 

to update the regression analysis until 

we analyze IPF PPS data. We plan to 

monitor claims and payment data 

independently from cost report data to 

assess issues, or whether changes in 

case-mix or payment shifts have 

occurred between free standing 

governmental, non-profit, and private 

psychiatric hospitals, and psychiatric 

units of general hospitals, and other 

issues of importance to psychiatric 

facilities. 

A complete discussion of the data file 

used for the regression analysis appears 

in the November 2004 IPF PPS final rule 

(69 FR 66935 through 66936). 

B. Patient-Level Adjustments 

In the May 2006 IPF PPS final rule (71 

FR 27040) for RY 2007, we provided 

payment adjustments for the following 

patient-level characteristics: DRG 

assignment of the patient’s principal 

diagnosis; selected comorbidities; 

patient age; and the variable per diem 

adjustments. As previously stated in the 

November 2004 IPF PPS final rule, we 

do not intend to update the adjustment 

factors derived from the regression 

analysis until we have IPF PPS data that 

includes as much information as 

possible regarding the patient-level 


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characteristics of the population that 

each IPF serves. 

1. Adjustment for DRG Assignment 

The IPF PPS includes payment 

adjustments for the psychiatric DRG 

assigned to the claim based on each 

patient’s principal diagnosis. In the May 

2006 IPF PPS final rule (71 FR 27040), 

we explained that the IPF PPS includes 

15 diagnosis-related group (DRG) 

adjustment factors. The adjustment 

factors were expressed relative to the 

most frequently reported psychiatric 

DRG in FY 2002, that is, DRG 430 

(psychoses). The coefficient values and 

adjustment factors were derived from 

the regression analysis. 

In accordance with § 412.27, payment 

under the IPF PPS is made for claims 

with a principal diagnosis included in 

the Diagnostic and Statistical Manual of 

Mental Disorder-Fourth Edition-Text 

Revision (DSM–IV–TR) or Chapter Five 

of the International Classification of 

Diseases-9th Revision-Clinical 

Modifications (ICD–9–CM). 

The Standards for Electronic 

Transaction final rule published in the 

Federal Register on August 17, 2000 (65 

FR 50312), adopted the ICD–9–CM as 

the designated code set for reporting 

diseases, injuries, impairments, other 

health related problems, their 

manifestations, and causes of injury, 

disease, impairment, or other health 

related problems. 

IPF claims with a principal diagnosis 

included in Chapter Five of the ICD–9– 

CM or the DSM–IV–TR will be paid the 

Federal per diem base rate under the IPF 

PPS, all other applicable adjustments, 

and a DRG adjustment. Psychiatric 

principal diagnoses that do not group to 

one of the 15 designated DRGs receive 

the Federal per diem base rate and all 

other applicable adjustments, but the 

payment would not include a DRG 

adjustment. 

We continue to believe that it is vital 

to maintain the same diagnostic coding 

and DRG classification for IPFs that is 

used under the IPPS for providing the 

same psychiatric care. All changes to 

the ICD–9–CM coding system that 

would impact the IPF PPS are addressed 

in the IPPS proposed and final rules 

published each year. The updated codes 

are effective October 1 of each year and 

must be used to report diagnostic or 

procedure information. 

The official version of the ICD–9–CM 

is available on CD–ROM from the U.S. 

Government Printing Office. The FY 

2007 version can be ordered by 

contacting the Superintendent of 

Documents, U.S. Government Printing 

Office, Department 50, Washington, DC 

20402–9329, telephone number (202) 

512–1800. Questions concerning the 

ICD–9–CM should be directed to 

Patricia E. Brooks, Co-Chairperson, ICD– 

9–CM Coordination and Maintenance 

Committee, CMS, Center for Medicare 

Management, Hospital and Ambulatory 

Policy Group, Division of Acute Care, 

Mailstop C4–08–06, 7500 Security 

Boulevard, Baltimore, Maryland 21244– 

1850. 

Further information concerning the 

official version of the ICD–9–CM can be 

found in the IPPS final regulation, 

‘‘Revision to Hospital Inpatient 

Prospective Payment Systems—2007 FY 

Occupational Mix Adjustment to Wage 

Index Implementation; Final Rule,’’ in 

the August 18, 2006 Federal Register 

(71 FR 47870) and at http:// 

www.cms.hhs.gov/ 

QuarterlyProviderUpdates/Downloads/ 

CMS1488F.pdf. 

The three tables below list the FY 

2007 new ICD–9–CM diagnosis codes, 

the one FY 2007 revised diagnosis code 

title, and the one invalid FY 2007 ICD 

diagnosis code, respectively, that group 

to one of the 15 DRGs for which the IPF 

PPS provides an adjustment. These 

tables are only a listing of FY 2007 

changes and do not reflect all of the 

currently valid and applicable ICD–9– 

CM codes classified in the DRGs. 

Table 4 below lists the new FY 2007 

ICD–9–CM diagnosis codes that are 

classified to one of the 15 DRGs that are 

provided a DRG adjustment in the IPF 

PPS. When coded as a principal code or 

diagnosis, these codes receive the 

correlating DRG adjustment. 

TABLE 4.—FY 2007 NEW DIAGNOSIS

CODES

Diagnosis 

code Description DRG 

331.83 .......... Mild cognitive impairment.12 

333.71 .......... Althetoid cerebral 

palsy.

12 

Table 5 below lists the ICD–9–CM 

diagnosis code whose title has been 

modified in FY 2007. Title changes do 

not impact the DRG adjustment. When 

used as a principal diagnosis, these 

codes still receive the correlating DRG 

adjustment. 

TABLE 5.—REVISED DIAGNOSIS CODE

TITLE

Diagnosis 

code Description DRG 

333.6 ............ Genetic torsion 

dystonia.

12 

Table 6 below lists the invalid ICD– 

9–CM diagnosis code no longer 

applicable for the DRG adjustment in FY 

2007. 

TABLE 6.—INVALID DIAGNOSIS CODE

TITLE

Diagnosis 

code Description DRG 

333.7 ............ Symptomatic torsion 

dystonia.

12 

Since we do not plan to update the 

regression analysis until we analyze IPF 

PPS data, the DRG adjustments factors, 

shown in Table 7 below, will continue 

to be paid for RY 2008. 

2. Payment for Comorbid Conditions 

The intent of the comorbidity 

adjustment is to recognize the increased 

cost associated with comorbid 

conditions by providing additional 

payments for certain concurrent medical 

or psychiatric conditions that are 

expensive to treat. 

In the May 2006 IPF PPS final rule, 

we established 17 comorbidity 

categories and identified the ICD–9–CM 

diagnosis codes that generate a payment 

adjustment under the IPF PPS. 

Comorbidities are specific patient 

conditions that are secondary to the 

patient’s principal diagnosis, and that 

require treatment during the stay. 

Diagnoses that relate to an earlier 

episode of care and have no bearing on 

the current hospital stay are excluded 

and should not be reported on IPF 

claims. Comorbid conditions must exist 

at the time of admission or develop 

subsequently, and affect the treatment 

received, affect the length of stay (LOS) 

or affect both treatment and LOS. 

For each claim, an IPF may receive 

only one comorbidity adjustment per 

comorbidity category, but it may receive 

an adjustment for more than one 

comorbidity category. Billing 

instructions require that IPFs must enter 

the full ICD–9–CM codes for up to 8 

additional diagnoses if they co-exist at 

the time of admission or develop 

subsequently. 

The comorbidity adjustments were 

determined based on the regression 

analysis using the diagnoses reported by 

hospitals in FY 2002. The principal 

diagnoses were used to establish the 

DRG adjustment and were not 

accounted for in establishing the 

comorbidity category adjustments, 

except where ICD–9–CM ‘‘code first’’ 

instructions apply. As we explained in 

the May 2006 IPF PPS final rule (71 FR 

27040), the code first rule applies when 

a condition has both an underlying 


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etiology and a manifestation due to the 

underlying etiology. For these 

conditions, the ICD–9–CM has a coding 

convention that requires the underlying 

conditions to be sequenced first 

followed by the manifestation. 

Whenever a combination exists, there is 

a ‘‘use additional code’’ note at the 

etiology code and a ‘‘code first’’ note at 

the manifestation code. 

Although we are updating the IPF PPS 

to reflect updates to the ICD–9–CM 

codes, the comorbidity adjustment 

factors currently in effect will remain in 

effect for RY 2008. As previously stated, 

we do not plan to update the regression 

analysis until we analyze IPF PPS data. 

The comorbidity adjustments are shown 

in Table 8 below. 

As previously discussed in the DRG 

section, we believe it is essential to 

maintain the same diagnostic coding set 

for IPFs that is used under the IPPS for 

providing the same psychiatric care. 

Therefore, in this update notice, we are 

continuing to use the most current FY 

2007 ICD codes. They are reflected in 

the FY 2007 GROUPER, version 24.0 

and are effective for discharges 

occurring on or after October 1, 2006. 

Table 8 below lists the FY 2007 new 

ICD diagnosis codes that impact the 

comorbidity adjustments under the IPF 

PPS, Table 9 lists the revised ICD codes, 

and Table 10 lists the invalid ICD codes 

no longer applicable for the comorbidity 

adjustment. Table 11 lists all of the 

currently valid ICD codes applicable for 

the IPF PPS comorbidity adjustments. 

BILLING CODE 4120–01–P 


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Table 9 below, which lists the FY 

2007 revised ICD codes, does not reflect 

all of the currently valid ICD codes applicable for the IPF PPS comorbidity 

adjustments. 


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In Table 10 below, we list the FY 2007 

invalid ICD diagnosis code 238.7. 


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TABLE 10.—FY 2007 INVALID ICD CODES NO LONGER APPLICABLE FOR THE COMORBIDITY ADJUSTMENTS

Diagnosis 

code Description DR Comorbidity category 

238.7 ........ Other lymphatic and hematopoietic tissues ........................ 413–414 Oncology Treatment. 

The seventeen comorbidity categories 

for which we are providing an 

adjustment, their respective codes, 

including the new FY 2007 ICD codes, 

and their respective adjustment factors, 

are listed below in Table 11. 

BILLING CODE 4120–01–C 

3. Patient Age Adjustments 

As explained in the November 2004 

IPF PPS final rule, we analyzed the 

impact of age on per diem cost by 

examining the age variable (that is, the 

range of ages) for payment adjustments. 

In general, we found that the cost per 

day increases with increasing age. The 

older age groups are more costly than 

the under 45 age group, the differences 

in per diem cost increase for each 

successive age group, and the 

differences are statistically significant. 

We do not plan to update the 

regression analysis until we analyze IPF 

PPS data. For RY 2008, we are 

continuing to use the patient age 

adjustments currently in effect and as 

shown in Table 12 below. 

TABLE 12.—AGE GROUPINGS AND

ADJUSTMENT FACTORS

Age Adjustment 

factor 

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

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

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

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

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

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


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TABLE 12.—AGE GROUPINGS AND

ADJUSTMENT FACTORS—Continued 

Age Adjustment 

factor 

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

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

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

4. Variable Per Diem Adjustments 

We explained in the November 2004 

IPF PPS final rule that a regression 

analysis indicated that per diem cost 

declines as the LOS increases (69 FR 

66946). The variable per diem 

adjustments to the Federal per diem 

base rate account for ancillary and 

administrative costs that occur 

disproportionately in the first days after 

admission to an IPF. 

We used a regression analysis to 

estimate the average differences in per 

diem cost among stays of different 

lengths. As a result of this analysis, we 

established variable per diem 

adjustments that begin on day 1 and 

decline gradually until day 21 of a 

patient’s stay. For day 22 and thereafter, 

the variable per diem adjustment 

remains the same each day for the 

remainder of the stay. However, the 

adjustment applied to day 1 depends 

upon whether the IPF has a qualifying 

ED. If an IPF has a qualifying ED, it 

receives a 1.31 adjustment factor for day 

1 of each patient stay. If an IPF does not 

have a qualifying ED, it receives a 1.19 

adjustment factor for day 1 of the stay. 

The ED adjustment is explained in more 

detail in section IV.C.5 of this notice. 

As previously stated, we do not plan 

to make changes to the regression 

analysis until we analyze IPF PPS data. 

Therefore, for RY 2008, we are 

continuing to use the variable per diem 

adjustment factors currently in effect as 

shown in Table 13 below. 

A complete discussion of the variable 

per diem adjustments appears in the 

November 2004 IPF PPS final rule (69 

FR 66946). 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

C. Facility-Level Adjustments 

The IPF PPS includes facility-level 

adjustments for the wage index, IPFs 

located in rural areas, teaching IPFs, 

cost of living adjustments for IPFs 

located in Alaska and Hawaii, and IPFs 

with a qualifying ED. 

1. Wage Index Adjustment 

As discussed in the May 2006 IPF PPS 

final rule, in providing an adjustment 

for area wage levels, the labor-related 

portion of an IPF’s Federal prospective 

payment is adjusted using an 

appropriate wage index. An IPF’s area 

wage index value is determined based 

on the actual location of the IPF in an 

urban or rural area as defined in 

§ 412.64(b)(1)(ii)(A) through (C). 

Since the inception of a PPS for IPFs, 

we have used hospital wage data in 

developing a wage index to be applied 

to IPFs. We are continuing that practice 

for RY 2008. We apply the wage index 

adjustment to the labor-related portion 

of the Federal rate, which is 75.788 

percent. This percentage reflects the 

labor-related relative importance of the 

RPL market basket for RY 2008. The IPF 

PPS uses the pre-floor, pre-reclassified 

hospital wage index. Changes to the 


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wage index are made in a budget neutral 

manner, so that updates do not increase 

expenditures. 

For RY 2008, we are applying the 

most recent hospital wage index using 

the hospital wage data, and applying an 

adjustment in accordance with our 

budget neutrality policy. This policy 

requires us to estimate the total amount 

of IPF PPS payments in RY 2007 and 

divide that amount by the total 

estimated IPF PPS payments in RY 

2008. The estimated payments are based 

on FY 2005 IPF claims, inflated to the 

appropriate RY. This quotient is the 

wage index budget neutrality factor, and 

it is applied in the update of the Federal 

per diem base rate for RY 2008. The 

wage index budget neutrality factor for 

RY 2008 is 1.0014. 

The wage index applicable for RY 

2008 appears in Table 1 and Table 2 in 

the Addendum of this notice. As 

explained in the May 2006 IPF PPS final 

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

PPS applies the hospital wage index 

without a hold-harmless policy, and 

without an out-commuting adjustment 

or out-migration adjustment because we 

feel these policies apply only to the 

IPPS. 

In the May 2006 IPF PPS final rule for 

RY 2007 (71 FR 27061), we adopted the 

changes discussed in the Office of 

Management and Budget (OMB) 

Bulletin No. 03–04 (June 6, 2003), 

which announced revised definitions 

for Metropolitan Statistical Areas 

(MSAs), and the creation of 

Micropolitan Statistical Areas and 

Combined Statistical Areas. In adopting 

the OMB Core-Based Statistical Area 

(CBSA) geographic designations, since 

the IPF PPS is already in a transition 

period from TEFRA payments to PPS 

payments, we did not provide a separate 

transition for the wage index. 

As was the case in RY 2007, for RY 

2008, we will be using the full CBSAbased wage index values as presented in 

Tables 1 and 2 in the Addendum of this 

notice. 

Finally, we continue to use the same 

methodology discussed in the IPF PPS 

proposed rule for RY 2007 (71 FR 3633) 

and finalized in the May 2006 IPF PPS 

final rule for RY 2007 (71 FR 27061) to 

address those geographic areas where 

there are no hospitals and, thus, no 

hospital wage index data on which to 

base the calculation of the RY 2008 IPF 

PPS wage index. For RY 2008, those 

areas consist of rural Massachusetts, 

rural Puerto Rico and urban CBSA 

(25980) Hinesville-Fort Stewart, GA. 

A complete discussion of the CBSA 

labor market definitions appears in the 

May 2006 IPF PPS final rule (71 FR 

27061 through 27067). 

2. Adjustment for Rural Location 

In the November 2004 IPF PPS final 

rule, we provided a 17 percent payment 

adjustment for IPFs located in a rural 

area. This adjustment was based on the 

regression analysis which indicated that 

the per diem cost of rural facilities was 

17 percent higher than that of urban 

facilities after accounting for the 

influence of the other variables included 

in the regression. As previously stated, 

we do not intend to update the 

regression analysis until we analyze the 

IPF PPS data. At that time, we can 

compare rural and urban IPFs to 

determine how much more costly rural 

facilities are on a per diem basis under 

the IPF PPS. 

For RY 2008, we are applying a 17 

percent payment adjustment for IPFs 

located in a rural area as defined at 

§ 412.64(b)(1)(ii)(C). 

A complete discussion of the 

adjustment for rural locations appears in 

the November 2004 IPF PPS final rule 

(69 FR 66954). 

3. Teaching Adjustment 

In the November 2004 IPF PPS final 

rule, we implemented regulations at 

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

part of, teaching institutions. The 

teaching status adjustment accounts for 

the higher indirect operating costs 

experienced by facilities that participate 

in graduate medical education (GME) 

programs. Payments are made based on 

the number of full-time equivalent 

interns and residents training in the IPF. 

Medicare makes direct GME payments 

(for direct costs such as resident and 

teaching physician salaries, and other 

direct teaching costs) to all teaching 

hospitals including those paid under the 

IPPS, and those that were once paid 

under the TEFRA rate-of-increase limits 

but are now paid under other PPSs. 

These direct GME payments are made 

separately from payments for hospital 

operating costs and are not part of the 

PPSs. The direct GME payments do not 

address the higher indirect operating 

costs experienced by teaching hospitals. 

For teaching hospitals paid under the 

TEFRA rate-of-increase limits, Medicare 

did not make separate medical 

education payments because payments 

to these hospitals were based on the 

hospitals’ reasonable costs. Since 

payments under TEFRA were based on 

hospitals’ reasonable costs, the higher 

indirect costs that might be associated 

with teaching programs would 

automatically have been factored into 

the TEFRA payments. 

The results of the regression analysis 

of FY 2002 IPF data established the 

basis for the payment adjustments 

included in the November 2004 IPF PPS 

final rule. The results showed that the 

indirect teaching cost variable is 

significant in explaining the higher 

costs of IPFs that have teaching 

programs. We calculated the teaching 

adjustment based on the IPF’s ‘‘teaching 

variable,’’ which is one plus the ratio of 

the number of full-time equivalent (FTE) 

residents training in the IPF (subject to 

limitations described below) to the IPF’s 

average daily census (ADC). 

In the regression analysis, the 

logarithm of the teaching variable had a 

coefficient value of 0.5150. We 

converted this cost effect to a teaching 

payment adjustment by treating the 

regression coefficient as an exponent 

and raising the teaching variable to a 

power equal to the coefficient value. We 

note that the coefficient value of 0.5150 

was based on the regression analysis 

holding all other components of the 

payment system constant. 

As with other adjustment factors 

derived through the regression analysis, 

we do not plan to rerun the regression 

analysis until we analyze IPF PPS data. 

Therefore, for RY 2008, we are retaining 

the coefficient value of 0.5150 for the 

teaching status adjustment to the 

Federal per diem base rate. 

A complete discussion of how the 

teaching status adjustment was 

calculated appears in the November 

2004 IPF PPS final rule (69 FR 66954 

through 66957) and the May 2006 IPF 

PPS final rule (71 FR 27067 through 

27070). 

4. Cost of Living Adjustment for IPFs 

Located in Alaska and Hawaii 

The IPF PPS includes a payment 

adjustment for IPFs located in Alaska 

and Hawaii based upon the county in 

which the IPF is located. As we 

explained in the November 2004 IPF 

PPS final rule, the FY 2002 data 

demonstrated that IPFs in Alaska and 

Hawaii had per diem costs that were 

disproportionately higher than other 

IPFs. Other Medicare PPSs (for example, 

the IPPS and IRF PPS) have adopted a 

cost of living adjustment (COLA) to 

account for the cost differential of care 

furnished in Alaska and Hawaii. 

We analyzed the effect of applying a 

COLA to payments for IPFs located in 

Alaska and Hawaii. The results of our 

analysis demonstrated that a COLA for 

IPFs located in Alaska and Hawaii 

would improve payment equity for 

these facilities. As a result of this 

analysis, we provided a COLA in the 

November 2004 IPF PPS final rule. 

In general, the COLA accounts for the 

higher costs in the IPF and eliminates 

the projected loss that IPFs in Alaska 


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and Hawaii would experience absent 

the COLA. A COLA factor for IPFs 

located in Alaska and Hawaii is made 

by multiplying the non-labor share of 

the Federal per diem base rate by the 

applicable COLA factor based on the 

COLA area in which the IPF is located. 

As previously stated, we will update 

the COLA factors if applicable, as 

updated by OPM. On August 2, 2006, 

the U.S. Office of Personnel 

Management (OPM) issued a final rule 

to change COLA rates effective 

September 1, 2006. 

The COLA factors are published on 

the OPM Web site at (http:// 

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

We note that the COLA areas for 

Alaska are not defined by county as are 

the COLA areas for Hawaii. In 5 CFR 

§ 591.207, the OPM established the 

following COLA areas: 

(a) City of Anchorage, and 80- 

kilometer (50-mile) radius by road, as 

measured from the Federal courthouse; 

(b) City of Fairbanks, and 80- 

kilometer (50-mile) radius by road, as 

measured from the Federal courthouse; 

(c) City of Juneau, and 80-kilometer 

(50-mile) radius by road, as measured 

from the Federal courthouse; 

(d) Rest of the State of Alaska. 

In the November 2004 and May 2006 

IPF PPS final rules, we showed only one 

COLA for Alaska because all four areas 

were the same amount (1.25). Effective 

September 1, 2006, the OPM updated 

the COLA amounts and there are now 

two different amounts for the Alaska 

COLA areas (1.24 and 1.25). 

For RY 2008, IPFs located in Alaska 

and Hawaii will receive the updated 

COLA factors based on the COLA area 

in which the IPF is located and as 

shown in Table 14 below. 

TABLE 14.—COLA FACTORS FOR

ALASKA AND HAWAII IPFS

Location COLA 

Alaska 

Anchorage ......................... 1.24 

Fairbanks ........................... 1.24 

Juneau ............................... 1.24 

Rest of Alaska ................... 1.25 

Hawaii 

Honolulu County ................ 1.25 

Hawaii County ................... 1.17 

Kauai County ..................... 1.25 

Maui County ...................... 1.25 

Kalawao County ................ 1.25 

5. Adjustment for IPFs With a 

Qualifying Emergency Department (ED) 

Currently, the IPF PPS includes a 

facility-level adjustment for IPFs with 

qualifying EDs. We provide an 

adjustment to the standardized Federal 

per diem base rate to account for the 

costs associated with maintaining a fullservice ED. The adjustment is intended 

to account for ED costs allocated to the 

hospital’s distinct part psychiatric unit 

for preadmission services otherwise 

payable under the Medicare Outpatient 

Prospective Payment System (OPPS) 

furnished to a beneficiary during the 

day immediately preceding the date of 

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

and the overhead cost of maintaining 

the ED. This payment is a facility-level 

adjustment that applies to all IPF 

admissions (with the one exception as 

described below), regardless of whether 

a particular patient receives 

preadmission services in the hospital’s 

ED. 

The ED adjustment is incorporated 

into the variable per diem adjustment 

for the first day of each stay for IPFs 

with a qualifying ED. That is, IPFs with 

a qualifying ED receive an adjustment 

factor of 1.31 as the variable per diem 

adjustment for day 1 of each stay. If an 

IPF does not have a qualifying ED, it 

receives an adjustment factor of 1.19 as 

the variable per diem adjustment for day 

1 of each patient stay. 

The ED adjustment is made on every 

qualifying claim except as described 

below. As specified in 

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

is not made where a patient is 

discharged from an acute care hospital 

or CAH and admitted to the same 

hospital’s or CAH’s psychiatric unit. An 

ED adjustment is not made in this case 

because the costs associated with ED 

services are reflected in the DRG 

payment to the acute care hospital or 

through the reasonable cost payment 

made to the CAH. If we provided the ED 

adjustment in these cases, the hospital 

would be paid twice for the overhead 

costs of the ED (69 FR 66960). 

Therefore, when patients are 

discharged from an acute care hospital 

or CAH and admitted to the same 

hospital’s or CAH’s psychiatric unit, the 

IPF receives the 1.19 adjustment factor 

as the variable per diem adjustment for 

the first day of the patient’s stay in the 

IPF. As previously stated, we do not 

intend to conduct a new regression 

analysis for this IPF PPS update. Rather, 

we plan to wait until we analyze IPF 

PPS data. 

For RY 2008, we are retaining the 1.31 

adjustment factor for IPFs with 

qualifying EDs. 

A complete discussion of the steps 

involved in the calculation of the ED 

adjustment factor appears in the 

November 2004 IPF PPS final rule (69 

FR 66959 through 66960) and the May 

2006 IPF PPS final rule (71 FR 27070 

through 27072). 

D. Other Payment Adjustments and 

Policies 

For RY 2008, the IPF PPS includes the 

following payment adjustments: an 

outlier adjustment to promote access to 

IPF care for those patients who require 

expensive care and to limit the financial 

risk of IPFs treating unusually costly 

patients, and a stop-loss provision, 

applicable during the transition period, 

to reduce financial risk to IPFs projected 

to experience substantial reductions in 

Medicare payments under the IPF PPS. 

1. Outlier Payments 

In the November 2004 IPF PPS final 

rule, we implemented regulations at 

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

payment for IPF stays that are 

extraordinarily costly. Providing 

additional payments for outlier cases to 

IPFs that are beyond the IPF’s control 

strongly improves the accuracy of the 

IPF PPS in determining resource costs at 

the patient and facility level because 

facilities receive additional 

compensation over and above the 

adjusted Federal prospective payment 

amount for uniquely high-cost cases. 

These additional payments reduce the 

financial losses that would otherwise be 

caused by treating patients who require 

more costly care and, therefore, reduce 

the incentives to under-serve these 

patients. 

We make outlier payments for 

discharges in which an IPF’s estimated 

total cost for a case exceeds a fixed 

dollar loss threshold amount 

(multiplied by the IPF’s facility-level 

adjustments) plus the Federal per diem 

payment amount for the case. 

In instances when the case qualifies 

for an outlier payment, we pay 80 

percent of the difference between the 

estimated cost for the case and the 

adjusted threshold amount for days 1 

through 9 of the stay (consistent with 

the median LOS for IPFs in FY 2002), 

and 60 percent of the difference for day 

10 and thereafter. We established the 80 

percent and 60 percent loss sharing 

ratios because we were concerned that 

a single ratio established at 80 percent 

(like other Medicare PPSs) might 

provide an incentive under the IPF per 

diem payment system to increase LOS 

in order to receive additional payments. 

After establishing the loss sharing ratios, 

we determined the current fixed dollar 

loss threshold amount of $6,200 through 

payment simulations designed to 

compute a dollar loss beyond which 

payments are estimated to meet the 2 

percent outlier spending target. 


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a. Update to the Outlier Fixed Dollar 

Loss Threshold Amount 

In accordance with the update 

methodology described in § 412.428(d), 

we are updating the fixed dollar loss 

threshold amount used under the IPF 

PPS outlier policy. Based on the 

regression analysis and payment 

simulations used to develop the IPF 

PPS, we established a 2 percent outlier 

policy which strikes an appropriate 

balance between protecting IPFs from 

extraordinarily costly cases while 

ensuring the adequacy of the Federal 

per diem base rate for all other cases 

that are not outlier cases. 

We believe it is necessary to update 

the fixed dollar loss threshold amount 

because analysis of the latest available 

data (that is, FY 2005 IPF claims) and 

rate increases indicates adjusting the 

fixed dollar loss amount is necessary in 

order to maintain an outlier percentage 

that equals 2 percent of total estimated 

IPF PPS payments. 

In the May 2006 IPF PPS Final Rule 

(71 FR 27072), we describe the process 

by which we calculate the outlier fixed 

dollar loss threshold amount. We will 

continue to use this process for RY 

2008. We begin by simulating aggregate 

payments with and without an outlier 

policy, and applying an iterative process 

to a fixed dollar loss amount that will 

result in outlier payments being equal to 

2 percent of total estimated payments 

under the simulation. 

Based on this process, for RY 2008, 

the IPF PPS will use $6,488 as the fixed 

dollar loss threshold amount in the 

outlier calculation in order to maintain 

the 2 percent outlier policy. 

b. Statistical Accuracy of Cost-to-Charge 

Ratios 

As previously stated, under the IPF 

PPS, an outlier payment is made if an 

IPF’s cost for a stay exceeds a fixed 

dollar loss threshold amount. In order to 

establish an IPF’s cost for a particular 

case, we multiply the IPF’s reported 

charges on the discharge bill by its 

overall cost to charge ratio (CCR). This 

approach to determining an IPF’s cost is 

consistent with the approach used 

under the IPPS and other PPSs. In FY 

2004, we implemented changes to the 

IPPS outlier policy used to determine 

CCRs for acute care hospitals because 

we became aware that payment 

vulnerabilities resulted in inappropriate 

outlier payments. Under the IPPS, we 

established a statistical measure of 

accuracy for CCRs in order to ensure 

that aberrant CCR data did not result in 

inappropriate outlier payments. 

As we indicated in the November 

2004 IPF PPS final rule, because we 

believe that the IPF outlier policy is 

susceptible to the same payment 

vulnerabilities as the IPPS, we adopted 

an approach to ensure the statistical 

accuracy of CCRs under the IPF PPS (69 

FR 66961). Therefore, we adopted the 

following procedure in the November 

2004 IPF PPS final rule: 

• We calculated two national ceilings, 

one for IPFs located in rural areas and 

one for IPFs located in urban areas. We 

computed the ceilings by first 

calculating the national average and the 

standard deviation of the CCR for both 

urban and rural IPFs. 

To determine the rural and urban 

ceilings, we multiplied each of the 

standard deviations by 3 and added the 

result to the appropriate national CCR 

average (either rural or urban). The 

upper threshold CCR for IPFs in RY 

2008 is 1.7255 for rural IPFs, and 1.7947 

for urban IPFs, based on CBSA-based 

geographic designations. If an IPF’s CCR 

is above the applicable ceiling, the ratio 

is considered statistically inaccurate 

and we assign the appropriate national 

(either rural or urban) median CCR to 

the IPF. 

We are applying the national CCRs to 

the following situations: 

++ New IPFs that have not yet 

submitted their first Medicare cost 

report. 

++ IPFs whose operating or capital 

CCR is in excess of 3 standard 

deviations above the corresponding 

national geometric mean (that is, above 

the ceiling). 

++ Other IPFs for whom the Medicare 

contractor obtains inaccurate or 

incomplete data with which to calculate 

either an operating or capital CCR or 

both. 

For new IPFs, we are using these 

national CCRs until the facility’s actual 

CCR can be computed using the first 

tentatively settled or final settled cost 

report, which will then be used for the 

subsequent cost report period. 

We are not making any changes to the 

procedures for ensuring the statistical 

accuracy of CCRs in RY 2008. However, 

we are updating the national urban and 

rural CCRs (ceilings and medians) for 

IPFs for RY 2008 based on the CCRs 

entered in the latest available IPF PPS 

Provider Specific File. 

The national CCRs for RY 2008 are 

0.71 for rural IPFs and 0.55 for urban 

IPFs and will be used in each of the 

three situations listed above. These 

calculations are based on the IPF’s 

location (either urban or rural) using the 

CBSA-based geographic designations. 

A complete discussion regarding the 

national median CCRs appears in the 

November 2004 IPF PPS final rule (69 

FR 66961 through 66964). 

2. Stop-Loss Provision 

In the November 2004 IPF PPS final 

rule, we implemented a stop-loss policy 

that reduces financial risk to IPFs 

expected to experience substantial 

reductions in Medicare payments 

during the period of transition to the IPF 

PPS. This stop-loss policy guarantees 

that each facility receives total IPF PPS 

payments that are no less than 70 

percent of its TEFRA payments, had the 

IPF PPS not been implemented. 

This policy is applied to the IPF PPS 

portion of Medicare payments during 

the 3-year transition. During the first 

year, for transitioning IPFs, threequarters of the payment was based on 

TEFRA and one-quarter on the IPF PPS 

payment amount. In the second year, 

one-half of the payment is based on 

TEFRA and one-half on the IPF PPS 

payment amount. In the third year, onequarter of the payment is based on 

TEFRA and three-quarters on the IPF 

PPS. For cost report periods beginning 

on or after January 1, 2008, payments 

will be based 100 percent on the IPF 

PPS. 

The combined effects of the transition 

and the stop-loss policies ensure that 

the total estimated IPF PPS payments 

are no less than 92.5 percent in the first 

year, 85 percent in the second year, and 

77.5 percent in the third year. Under the 

70 percent policy, in the third year, 25 

percent of an IPF’s payment is TEFRA 

payments, and 75 percent is IPF PPS 

payments, which are guaranteed to be at 

least 70 percent of the TEFRA 

payments. The resulting 77.5 percent of 

TEFRA payments is the sum of 25 

percent and 75 percent times 70 percent 

(which equals 52.5 percent). 

In the implementation year, the 70 

percent of TEFRA payment stop-loss 

policy required a reduction in the 

standardized Federal per diem and ECT 

base rates of 0.39 percent in order to 

make the stop-loss payments budget 

neutral. 

For the RY 2008, we are not making 

any changes to the stop-loss policy. We 

will continue to monitor expenditures 

under this policy to evaluate its 

effectiveness in targeting stop-loss 

payments to IPFs facing the greatest 

financial risk. 

V. Waiver of Proposed Rulemaking 

We ordinarily publish a notice of 

proposed rulemaking in the Federal 

Register to provide a period for public 

comment before the provisions of a rule 

take effect. We can waive this 

procedure, however, if we find good 

cause that a notice-and-comment 

procedure is impracticable, 

unnecessary, or contrary to the public 


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interest and we incorporate a statement 

of finding and its reasons in the notice. 

We find it is unnecessary to undertake 

notice and comment rulemaking for the 

update in this notice because the update 

does not make any substantive changes 

in policy, but merely reflects the 

application of previously established 

methodologies. Therefore, under 5 

U.S.C. § 553(b)(3)(B), for good cause, we 

waive notice and comment procedures. 

VI. Collection of Information 

Requirement 

This document does not impose 

information collection and 

recordkeeping requirements. 

Consequently, it need not be reviewed 

by the Office of Management and 

Budget under the authority of the 

Paperwork Reduction Act of 1995. 

VII. Regulatory Impact Analysis 

A. Overall Impact 

We have examined the impacts of this 

notice as required by Executive Order 

12866 (September 1993, Regulatory 

Planning and Review), the Regulatory 

Flexibility Act (RFA) (September 19, 

1980, Pub. L. 96–354), section 1102(b) of 

the Social Security Act, the Unfunded 

Mandates Reform Act of 1995 (UMRA) 

(Pub. L. 104–4), and Executive Order 

13132. 

Executive Order 12866 (as amended 

by Executive Order 13258, which 

merely reassigns responsibility of 

duties) directs agencies to assess all 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

($100 million or more in any 1 year). 

For purposes of Title 5, United States 

Code, section 804(2), we treat this notice 

as a major rule because we estimate that 

the total impact of these changes would 

be an increase in payments of 

approximately $130 million. 

The updates to the IPF labor-related 

share and wage indices are made in a 

budget neutral manner and thus have no 

effect on estimated costs to the Medicare 

program. Therefore, the estimated 

increased cost to the Medicare program 

is due to the update to the payment 

rates, which results in an increase of 

approximately $130 million in overall 

IPF payments from RY 2007 to RY 2008. 

The transition blend has a minimal 

impact on overall IPF payments in RY 

2008. The distribution of these impacts 

is summarized in Table 15. The effect of 

the updates described in this notice 

result in an overall $130 million 

increase in payments from RY 2007 to 

RY 2008. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

entities. For purposes of the RFA, small 

entities include small businesses, 

nonprofit organizations, and small 

governmental jurisdictions. Most IPFs 

and most other providers and suppliers 

are considered small entities, either by 

nonprofit status or by having revenues 

of $6.5 million to $31.5 million in any 

1 year. (For details, see the Small 

Business Administration’s Interim final 

rule that set forth size standards at 70 

FR 72577, December 6, 2005.) Because 

we lack data on individual hospital 

receipts, we cannot determine the 

number of small proprietary IPFs or the 

proportion of IPFs’ revenue that is 

derived from Medicare payments. 

Therefore, we assume that all IPFs are 

considered small entities. As shown in 

Table 15, we estimate that the net 

revenue impact of this notice on all IPFs 

is to increase payments by about 3.1 

percent. Thus, we anticipate that this 

notice may have a significant impact on 

a substantial number of small entities. 

However, the estimated impact of this 

notice is a net increase in revenues 

across all categories of IPFs, so we 

believe that this notice would not 

impose a significant burden on small 

entities. Medicare contractors are not 

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 if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 604 of the 

RFA. With the exception of hospitals 

located in certain New England 

counties, for purposes of section 1102(b) 

of the Act, we previously defined a 

small rural hospital as a hospital with 

fewer than 100 beds that is located 

outside of a Metropolitan Statistical 

Area (MSA) or New England County 

Metropolitan Area (NECMA). However, 

under the new labor market definitions, 

we no longer employ NECMAs to define 

urban areas in New England. Therefore, 

for purposes of this analysis, we now 

define a small rural hospital as a 

hospital with fewer than 100 beds that 

is located outside of an MSA. 

We have determined that this notice 

will have a substantial impact on 

hospitals classified as located in rural 

areas. As discussed earlier in this 

preamble, we will continue to provide 

a payment adjustment of 17 percent for 

IPFs located in rural areas. In addition, 

we have established a 3-year transition 

to the new system to allow IPFs an 

opportunity to adjust to the new system. 

Therefore, the impacts shown in Table 

15 below reflect the adjustments that are 

designed to minimize or eliminate any 

potentially significant negative impact 

that the IPF PPS may otherwise have on 

small rural IPFs. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 also 

requires that agencies assess anticipated 

costs and benefits before issuing any 

final rule whose mandates require 

spending in any 1 year of $100 million 

in 1995 dollars, updated annually for 

inflation. That threshold level is 

currently approximately $120 million. 

This notice will not mandate any 

requirements for State, local, or tribal 

governments, nor would it affect private 

sector costs. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 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 notice under 

the criteria set forth in Executive Order 

13132 and have determined that the 

notice will not have any substantial 

impact on the rights, roles, and 

responsibilities of State, local, or tribal 

governments. 

B. Anticipated Effects of the Notice 

We discuss below the historical 

background of the IPF PPS and the 

impact of this notice on the Federal 

Medicare budget and on IPFs. 

1. Budgetary Impact 

As discussed in the November 2004 

and May 2006 IPF PPS final rules, we 

applied a budget neutrality factor to the 

Federal per diem and ECT base rates to 

ensure that total estimated payments 

under the IPF PPS in the 

implementation period would equal the 

amount that would have been paid if the 

IPF PPS had not been implemented. The 

budget neutrality factor includes the 

following components: Outlier 

adjustment, stop-loss adjustment, and 

the behavioral offset. We do not plan to 

change any of these adjustment factors 

or projections until we analyze IPF PPS 

data. In accordance with 

§ 412.424(c)(3)(ii), we will evaluate the 

accuracy of the budget neutrality 

adjustment within the first 5 years after 

implementation of the payment system. 

We may make a one-time prospective 

adjustment to the Federal per diem and 

ECT base rates to account for differences 


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

budget neutrality adjustment) and 

estimates of TEFRA payments based on 

actual data from the first year of the IPF 

PPS. As part of that process, we will reassess the accuracy of all of the factors 

impacting budget neutrality. 

In addition, as discussed in section 

IV.C.1. of this notice, we are adopting 

the wage index and labor market share 

in a budget neutral manner by applying 

a wage index budget neutrality factor to 

the Federal per diem and ECT base 

rates. Thus, the budgetary impact to the 

Medicare program by the update of the 

IPF PPS will be due to the market basket 

updates (see section III.B. of this notice) 

and the planned update of the payment 

blend discussed below. 

2. Impacts on Providers 

To understand the impact of the 

changes to the IPF PPS discussed in this 

notice on providers, it is necessary to 

compare estimated payments under the 

IPF PPS rates and factors for RY 2008 to 

estimated payments under the IPF PPS 

rates and factors for RY 2007. The 

estimated payments for RY 2007 are a 

blend of: 50 percent of the facilityspecific TEFRA payment and 50 percent 

of the IPF PPS payment with stop-loss 

payment. The estimated payments for 

the RY 2008 IPF PPS are a blend of: 25 

percent of the facility-specific TEFRA 

payment and 75 percent of the IPF PPS 

payment with stop-loss payment. We 

determined the percent change of 

estimated RY 2008 IPF PPS payments to 

estimated RY 2007 IPF PPS payments 

for each category of IPFs. In addition, 

for each category of IPFs, we have 

included the estimated percent change 

in payments resulting from the wage 

index changes for the RY 2008 IPF PPS, 

the market basket update to IPF PPS 

payments, and the transition blend for 

the RY 2008 IPF PPS payment and the 

facility-specific TEFRA payment. 

To illustrate the impacts of the final 

RY 2008 changes, our analysis begins 

with a RY 2007 baseline simulation 

model based on FY 2005 IPF payments 

inflated to the midpoint of RY 2007 

using Global Insight’s most recent 

forecast of the market basket update (see 

section III.B. of this notice); the 

estimated outlier payments in RY 2007; 

the estimated stop-loss payments in RY 

2007; the CBSA designations for IPFs 

based on OMB’s MSA definitions after 

June 2003; the FY 2006 pre-floor, prereclassified hospital wage index; the RY 

2007 labor-market share; and the RY 

2007 percentage amount of the rural 

adjustment. During the simulation, the 

outlier payment is maintained at the 

target of 2 percent of total PPS 

payments. 

Each of the following changes is 

added incrementally to this baseline 

model in order for us to isolate the 

effects of each change: 

• The FY 2007 pre-floor, prereclassified hospital wage index and RY 

2008 final labor-related share. 

• A blended market basket update of 

3.2 percent resulting in an update to the 

hospital-specific TEFRA payment 

amount and an update to the IPF PPS 

base rates. 

• The transition to 75 percent IPF 

PPS payment and 25 percent facilityspecific TEFRA payment. 

• Our final comparison illustrates the 

percent change in payments from RY 

2007 (that is, July 1, 2006 to June 30, 

2007) to RY 2008 (that is, July 1, 2007 

to June 30, 2008). 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

3. Results 

Table 15 above displays the results of 

our analysis. The table groups IPFs into 

the categories listed below based on 

characteristics provided in the Provider 

of Services (POS) file, the IPF provider 

specific file, and cost report data from 

HCRIS: 

• Facility Type 

• Location 

• Teaching Status Adjustment 

• Census Region 

• Size 

The top row of the table shows the 

overall impact on the 1,712 IPFs 

included in the analysis. 

In column 3, we present the effects of 

the budget-neutral update to the laborrelated share and the wage index 

adjustment under the CBSA geographic 

area definitions announced by OMB in 

June 2003. This is a comparison of the 

simulated RY 2008 payments under the 

FY 2007 hospital wage index under 

CBSA classification and associated 

labor-related share to the simulated RY 

2007 payments under the FY 2006 

hospital wage index under CBSA 

classifications and associated laborrelated share. There is no projected 

change in aggregate payments to IPFs, as 

indicated in the first row of column 3. 

There would, however, be small 

distributional effects among different 

categories of IPFs. For example, rural 

non-profit IPFs will experience a 0.3 

percent decrease in payments. IPFs 

located in the Mountain region will 

receive the largest increase of 0.5 

percent. 

In column 4, we present the effects of 

the market basket update to the IPF PPS 

payments by applying the TEFRA and 

PPS updates to payments under the 

revised budget neutrality factor and 

labor-related share and wage index 

under CBSA classification. In the 

aggregate this update is projected to be 

a 3.2 percent increase in overall 

payments to IPFs. 

In column 5, we present the effects of 

the payment change in transition blend 

percentages to the third year of the 

transition (TEFRA Rate Percentage = 25 

percent, IPF PPS Federal Rate 

Percentage = 75 percent) from the 

second year of the transition (TEFRA 

Rate Percentage = 50 percent, IPF PPS 

Federal Rate Percentage = 50 percent) of 

the IPF PPS under the revised budget 

neutrality factor, labor-related share and 

wage index under CBSA classification, 

and TEFRA and PPS updates to RY 

2007. The overall aggregate effect, across 

all hospital groups, is projected to be a 

0.1 percent decrease in payments to 

IPFs. There are distributional effects of 

these changes among different 

categories of IPFs. Government 

psychiatric hospitals will receive the 

largest increase, with urban government 

hospitals receiving an 8.7 percent 

increase and rural government hospitals 

receiving an 8.8 percent increase. 

Alternatively, psychiatric units with 

fewer than 12 beds will receive the 

largest decrease of 4.4 percent. 

Column 6 compares our estimates of 

the changes reflected in this notice for 

RY 2008, to our estimates of payments 

for RY 2007 (without these changes). 

This column reflects all RY 2008 

changes relative to RY 2007 (as shown 

in columns 3 through 5). The average 

increase for all IPFs is approximately 

3.1 percent. This increase includes the 

effects of the market basket updates 

resulting in a 3.2 percent increase in 

total RY 2008 payments and a 0.1 

percent decrease in RY 2008 payments 

for the transition blend. 

Overall, the largest payment increase 

is projected to be among government 

IPFs. Urban and rural government 

psychiatric hospitals will receive a 12.4 

percent increase. Rural non-profit IPFs 

will receive a 0.1 percent decrease and 

psychiatric units with fewer than 12 

beds will receive a 1.3 percent decrease. 

It is important to note that the 

projected impact on government IPFs 

has decreased from last year even 

though they are receiving a greater 

percentage of PPS payments in their 

transition blend. We believe the primary 

reason for this decrease is that the first 

‘‘year’’ under the IPF PPS was actually 

18 months in order to move the update 

for the IPF PPS to July 1 each year. As 

a result, the market basket increase and 

payments were projected to be greater. 

Subsequent updates are for a 12-month 

period and are of a smaller magnitude. 

In addition, the basis of payment 

under the TEFRA payment system was 

an IPF’s fixed average cost per 

discharge. Thus, when the cost of a 

patient’s care exceeded the average cost 

per discharge, psychiatric units of acute 

care hospitals that were not generally 

set up for patients with long-term 

psychiatric care needs often transferred 

these patients to government IPFs. Also, 

government and other freestanding IPFs 

that were not usually staffed to 

accommodate patients with comorbid 

medical conditions typically transferred 

these patients to psychiatric units of 

acute care hospitals. The IPF PPS, 

which provides comorbidity 

adjustments and is a per diem system, 

eliminates certain incentives to transfer. 

We believe that certain categories of 

IPFs are projected to receive increases in 

payment based on their ability to 

manage their longer-term patients as 

well as treat their more medically 

intensive cases. 

4. Effect on the Medicare Program 

Based on actuarial projections 

resulting from our experience with other 

PPSs, we estimate that Medicare 

spending (total Medicare program 

payments) for IPF services over the next 

5 years would be as follows: 

TABLE 16.—ESTIMATED PAYMENTS

Rate year Dollars in 

millions 

July 1, 2007 to June 30, 2008 ... $4,245 

July 1, 2008 to June 30, 2009 ... 4,440 

July 1, 2009 to June 30, 2010 ... 4,606 

July 1, 2010 to June 30, 2011 ... 4,803 

July 1, 2011 to June 30, 2012 ... 5,032 

These estimates are based on the 

current estimate of increases in the RPL 

market basket as follows: 

• 3.2 percent for RY 2008; 

• 3.2 percent for RY 2009; 

• 2.8 percent for RY 2010; 

• 3.1 percent for RY 2011; and 

• 3.2 percent for RY 2012. 

We estimate that there would be a 

change in fee-for-service Medicare 

beneficiary enrollment as follows: 

• ¥0.1 percent in RY 2008; 

• 0.7 percent in RY 2009; 

• 0.3 percent in RY 2010; 

• 0.6 percent in RY 2011; and 

• 1.1 percent in RY 2012. 

5. Effect on Beneficiaries 

Under the IPF PPS, IPFs will receive 

payment based on the average resources 

consumed by patients for each day. We 

do not expect changes in the quality of 

care or access to services for Medicare 

beneficiaries under the RY 2008 IPF 

PPS. In fact, we believe that access to 

IPF services will be enhanced due to the 

patient and facility level adjustment 

factors, all of which are intended to 

adequately reimburse IPFs for expensive 

cases. Finally, the stop-loss policy is 

intended to assist IPFs during the 

transition. 

C. Accounting Statement 

As required by OMB Circular A–4 

(available at http:// 

www.whitehouse.gov/omb/circulars/ 

a004/a-4.pdf), in Table 17 below, we 

have prepared an accounting statement 

showing the classification of the 

expenditures associated with the 

provisions of this notice. This table 

provides our best estimate of the 

increase in Medicare payments under 

the IPF PPS as a result of the changes 

presented in this notice based on the 

data for 1,712 IPFs in our database. All 

expenditures are classified as transfers 

to Medicare providers (that is, IPFs). 


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TABLE 17.— ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM THE

2007 IPF PPS RY TO THE 2008 

IPF PPS RY 

[In millions] 

Category Transfers 

Annualized Monetized 

Transfers.

$130. 

From Whom To 

Whom? 

Federal Government 

To IPFs Medicare 

Providers. 

D. Conclusion 

This notice does not initiate any 

policy changes with regard to the IPF 

PPS; rather, it simply provides an 

update to the rates for RY 2008 using 

established methodologies. In 

accordance with the provisions of 

Executive Order 12866, this rule was 

previously reviewed by OMB. 

(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) 

Dated: March 8, 2007. 

Leslie V. Norwalk, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: March 29, 2007. 

Michael O. Leavitt, 

Secretary. 

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Addendum B—RY 2008 CBSA Wage 

Index Tables 

In this addendum, we provide Tables 

1 and 2 which indicate the CBSA-based 

wage index values for urban and rural 

providers. 


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[FR Doc. 07–2172 Filed 4–30–07; 4:00 pm] 

BILLING CODE 4120–01–C 


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